It is instructive to follow Marx as he makes a close analysis of the commercial crisis of 1847 in a text written in 1850 with Engels as co-author.[i] The later sections of this account deal with the 1847 crisis in Europe as a trigger for the revolutions of 1848. Here I focus on the discussion of the economic collapse of 1847, which it seems was written by Marx himself.
What is striking in his account is its complexity. In Marx’s explanation of the causes and evolution of the crisis in England, there is an interplay between many dimensions: crop failure, industrial over-production, swings in international demand for British goods, over-stretched credit both in industry and finance, the collapse of speculative booms, and a strong emphasis on the monetary policy of the Bank of England which initially deepened and generalised the crisis, but eventually helped to alleviate it. He also emphasises the mechanisms of trade and finance through which the crisis was transmitted between England and a number of countries in Europe, North America and Asia. It should be noted, however, that the falling rate of profit plays no role in Marx’s account.
His narrative can be summarised as follows. (Unless indicated, all quotations are from Marx and Engels Collected Works Vol. 10). Marx starts by stressing that the crisis of 1847 was the latest phase in a recurrent pattern of boom and slump in the first half of the 19th century. There had been an industrial depression in England in the period after 1837, which came to an end toward the end of 1842 when a sharp boom began. This was driven by a large increase in foreign demand for English industrial goods (especially textiles). Here a particular factor was that in 1842 victory in the Opium War had prised open markets in China. In Lancashire the result was a surge in investment in the spinning and weaving industries.
At the same time, an ongoing and already large boom in railway investment rose to even greater heights. In 1845 alone, 1,035 new railway companies were registered in London, to operate either in Britain or Europe. On the stock exchange, railway share prices soared in response to heavy speculative demand.[ii] A vast number of shares in the railway companies were sold to the public on margin – usually 10 per cent.
Share prices rose continuously, and the speculators’ profits soon drew every class of society into the whirlpool … Anyone who had a penny in savings, or who had the merest glimmer of credit to dispose of, speculated in railway shares. (p.491).
Based on the real expansion of the British and Continental railway system and the speculation which was bound up with it, there gradually arose in this period a superstructure reminiscent of the time of Law and of the South Sea Company [in the 1720s ]. There were projects for hundreds of railway lines which had not the slightest chance of success, which their authors never had any intention of carrying out, and whose sole purpose was to enable the directors to squander the deposits and to make fraudulent profits from the sale of the shares.[iii]
In Marx’s account it was the end of the bubble in railway shares which was the immediate trigger of the 1847 crisis. This collapse started in October 1845, and deepened through the following year. As the prices of railway stock tumbled, speculators who had bought shares with a down-payment of only 10 per cent found themselves facing margin calls forcing them to come up with more cash. Hundreds of railway companies folded, and bankruptcy spread among thousands of people who had borrowed to invest in railway shares, sometimes using their own businesses as collateral.
The railway crisis dragged on into the autumn of 1848, prolonged by successive bankruptcies, even of less unsound projects, as these were gradually affected by a general pressure and as invested money was gradually called in, and accentuated by the spreading of the crisis to other areas of speculation, trade and industry (p.492).
The fall in real investment in railways had a large knock-on effect on the iron industries. ‘Iron production, inflated to an enormous degree by the railway bubble of 1845, naturally suffered in proportion as the outlets diminished for the excess quantity of iron produced’. (p.493).
The cotton industry – another key sector – was badly hit by over-optimism about demand in major markets such as India and China, and by the poor cotton harvest in 1846 which raised cotton prices and reduced domestic demand. Marx notes also that raw cotton prices were distorted by speculation. In the early months of 1847 production was cut back considerably in Lancashire and unemployment rose.
Behind the 1847 crisis lay other crop failures. There was a devastating blight of potatoes in Ireland in 1845. In the same year, the corn harvest in England was poor, and was followed by an even more serious harvest failure in 1846.[iv] English imports of corn rose, but because the countries exporting the corn could absorb English industrial exports only to a limited degree, settlement was made in gold to those countries. As the gold reserves fell in the Bank of England, a wider shortage of credit ensued. This, superimposed on the railway crisis, resulted in a financial panic which went critical in the spring of 1847. The bank rate soared to an excruciating level of 7 per cent. ‘Businesses survived by enormous interest payments and forced sales of stocks, government securities etc. at ruinous prices’.[v] The shortage of credit was intensified by the operation of the Bank Act which had been passed in 1844 and which limited the issue of notes by the Bank of England to a ceiling set by the size of the gold reserve.
Some temporary relief came during the summer of 1847 as the rise in interest rates led to an inflow of gold from abroad and a limited recovery in the size of the gold reserve of the Bank of England. This, in turn, allowed interest rates to fall and the credit famine eased. But in the autumn, ‘the crisis broke out with redoubled fury throughout commerce’ and there was a series of bankruptcies affecting major mercantile companies which had made excessive imports of colonial products, and had been weakened during the earlier phase of crisis. In October came a further and deeper phase of general financial crisis. Insolvency now began to threaten the commercial banks. By November the bank rate had soared to 10 per cent. Bankruptcies in commerce and in the banking system, and the contraction of credit, undermined demand for industrial goods, and Marx noted, in a later text, that, ‘after the crisis of 1847 production in the English industrial districts was cut by one third’ (Capital Vol. 3 p.616).
In another later passage, in which he considers some of the ways in which the development of the crisis reflected the interaction of industrial and financial factors, Marx writes:
The increased demand for money capital had its origins in the course of the production process itself – overproduction in industry, as well as underproduction in agriculture… There was a dearth of money capital brought about by the excessive size of operations in relation to the means available and brought to a head by a disturbance in the reproduction process that resulted from the harvest failure, the over-investment in railways, over-production particularly in cotton goods, [based on the false hope that India and China could absorb all of the extra produced] swindling in the Indian and Chinese trade, speculation, excessive imports of sugar, and so on (Capital Vol. 3, p.550).
The October phase of the crisis was overcome when the government suspended the Bank Act, and by assurances that the Bank of England would discount [lend] freely, though at a penal discount rate of 8 per cent. Confidence began to return to the credit system, and businesses stopped stock-piling banknotes.
In Britain, there was a cyclical upturn in industrial production in 1848-50. There were good harvests in those three years. An abundant cotton harvest in the United States allowed a large increase in cotton manufacturing in Britain. Recovery was helped, Marx writes, by the fact that the three main outlets for speculation were blocked – railway construction by the earlier crash, grain by the good harvests, and, ‘the revolutions [of 1848] which had deprived government stock of its characteristic reliability, which is a prerequisite for the large-scale speculative turnover of stock.[vi] Marx suggests that the additional capital, left free by the absence of outlets for speculation, was injected into industry, and thus increased production even more rapidly.
But as confidence returned to financial markets in England, combined with a high interest rate attracts an inflow of gold from Russia, America and Europe to England. This exported the crisis by raising interest rates, undermining commerce and the banking system in the countries from which the gold came.
In the 1850 account there is no mention of falling rates of profit. It might be claimed however that in that year Marx was only beginning his intensive studies in political economy and had not yet realised the fundamental importance of the falling profits law. But there are many comments on the 1847 crisis scattered in the 1864-5 Economic Manuscripts from which Engels carved out the falling rate of profit sections in his edition of Capital Vol. 3. There is no reference to a falling rate of profit tendency in any of these discussions of the 1847 crisis. Obviously profits would have fallen in the businesses undermined during the commercial and financial crisis. But Marx has no interest in making this obvious point. His attention is focused on explaining the economic dynamics which cause businesses to fail in a crisis. The fall in the rate of profit of these businesses is only a transmission mechanism. What matters are the causes of bankruptcy and business collapse.
Marx wrote a summary account of the 1847 crisis, in his 1864-5 manuscript (p.576), and this was published as follows, in a tidied-up form, by Engels in his edition of Capital Vol. 3:
As long as the reproduction process is fluid, so that returns remain assured, credit persists and extends, and its extension is based on the extension of the reproduction process itself. As soon as any stagnation occurs, as a result of delayed returns, overstocked markets, or fallen prices, there is a surplus of industrial capital, but in a form in which it cannot accomplish its functions. A great deal of commodity capital; but unsaleable. A great deal of fixed capital; but in large measure unemployed as a result of the stagnation in reproduction. Credit contracts, (1) because this capital is unoccupied, i.e. congealed in one of its phases of reproduction because it cannot complete its metamorphosis; (2) because confidence in the fluidity of the reproduction process is broken; (3) because the demand for this commercial credit declines. The spinner who restricts his production and has a lot of unsold yarn in store does not need to buy cotton on credit … Capital already invested is in fact massively unemployed since the reproduction process is stagnant. Factories stand idle, raw materials pile up, finished products flood the market as commodities (Capital Vol. 3, p. 614).
What can we learn from Marx’s account of the 1847 crisis?
Marx’s analysis is of course open to criticism. For example, given the level of widespread bankruptcy which he describes, the recovery process appears to follow rather magically from nothing more than a suspension of the Bank Act of 1844, and a resumption of Bank of England lending, though still at very high rates of interest. Modern historians would probably question much in his explanation. But there are lessons to be learnt from Marx’s discussion – which, by the way, should be better known. It is a lively read, with lots of fascinating detail.
Marx spends no time in debating whether crises are caused by developments in the productive sector or in the financial system. Because by necessity they involve credit, industrial enterprises are seen as inherently financial as well as productive operations. Fragility in the financial system impacts on industry via a credit famine and high interest rates. Marx’s argument is that a major crisis, such as that of 1847, would involve a combination of over-capacity in the productive circuits, together with fragility in both the industrial and the financial sectors, and an unfolding pattern of destabilising feedback between finance and industry. The drastic crop failures in potatoes, corn and cotton deepened the dislocation.
The specifics of 1847 are very different from those which operated in the 2008 crisis. This was not a crisis of potato blight or over-speculation in railway equities. However the point is that, in all crises, historical specificity matters. The 2008 debacle started as a crisis of housing and the construction industries, and of mortgage indebtedness in the US. It did not morph into a ‘financial crisis’ in some vague and general way – but into a banking crisis with specific dynamics arising from the vast and dangerous creation by the banks of securities based on household mortgages in the US. Crises in mortgage finance and in banking were not just triggers, but causal in their own right. They should not be set aside as secondary, in some quest for a simple general cause of all capitalist crises
Note how Marx’s analysis of 1847 has an exemplary richness of international reference, combined with close attention to the linkages between sectors of the domestic economy. Lancashire as affected by raw cotton production in America, or by market demand in China and India. English industry as exposed to the effects of financial speculation in the City, or of gold flows between London and St Petersburg. In a previous post I showed that much of the recent debate about the US rate of profit has been based on data for the American domestic economy only.
In a recent guest post on this blog, Pete Green urges us to rethink the discussions of the rate of profit and of finance in Capital Vol. 3 in the light of the concept of capital as value in motion through time and space. It is this vision of capital which is central to the argument of Capital Vol. 2 and Pete rightly commends David Harvey’s perceptive commentary on this often neglected book.
Harvey’s own substantive work has, with good reason, been criticised as over-pluralistic in its explanatory frameworks. The rate of profit and the forces which determine it should remain central in our analysis. Marx’s own account of the 1847 crisis would surely have been strengthened by attention to profitability and its conflicting trends. We need to trace the many ways in which the law of value asserts itself – often in displaced and distorted forms. But also recognise, and give due weight to, the role of contingent factors in any crisis we examine.
Bryer, R. A. 1991, ‘Accounting for the “Railway Mania” of 1845 – a great railway swindle?’ Accounting, Organisations and Society, 16: 439-486.
Harvey, David 2013, A Companion to Marx’s Capital Volume 2, London: Verso.
Kindleberger, Charles B. 1978, Manias, Panics and Crashes, London: Macmillan.
Marx, Karl and Frederick Engels 1978, Collected Works Vol. 10, London: Lawrence and Wishart. [MECW]
Marx, Karl 2016, Economic Manuscripts of 1864-1865, edited by Fred Moseley, Chicago: Haymarket Books.
Perelman, Michael 1987, Marx’s Crisis Theory: Scarcity, Labour and Finance, New York: Praeger.
[i] For the history of this 1850 text, see MECW Vol. 10, p. 695.
[ii] Capital Vol. 3, pp.538, 550. See also the vivid and meticulously researched account in Bryer 1991.
[iii] MECW Vol. 10, p.492. Kindleberger 1978, p.91 comments on the railway swindles of George Hudson and others.
[iv] Perelman 1987, Ch. 2 has a useful summary of Marx’s various accounts of this crop failure.
[v] MECW Vol. 10, p.494.
[vi] MECW vol. 10, p.498.