The Rate Of Interest (1)
(Quoted by Marx in Capital Vol III, Chapter 22, Note 63)
“If we observe the cycles in which modern industry moves — state of inactivity, mounting revival, prosperity, over-production, crisis, stagnation, state of inactivity, etc., which fall beyond the scope of our analysis — we shall find that a low rate of interest generally corresponds to periods of prosperity or extra profit, a rise in interest separates prosperity and its reverse, and a maximum of interest up to a point of extreme usury corresponds to the period of crisis. The summer of 1843 ushered in a period of remarkable prosperity; the rate of interest, still 4½% in the spring of 1842, fell to 2% in the spring and summer of 1843; in September it fell as low as 1½% (Gilbart, I, p. 166); whereupon it rose to 8% and higher during the crisis of 1847.”
When Marx is talking about interest rates here, he is not talking about specific interest rates, but about the general rate of interest applying within the money market. The fact that both then, and now we find some people in particular conditions paying astronomical rates of interest to usurers is a specific phenomenon, similar to the fact that at any one time, the market price of any particular commodity may vary widely from its price of production due to the specific conditions of supply and demand for it.
The reason that this general rate of interest tends, though it is not mechanical, to follow the rate of profit in the kind of sequence, described by Marx and Gilbart above, is that I have set out previously. “After pressure”, i.e. after some period of depression, interest rates will tend to be low, because capital is reluctant to invest, not knowing whether that period has yet ended. The demand for capital is low relative to supply, in this case because there is a lack of demand. In the next period, when the rate of profit rises the rate of interest is low, because although the demand for capital rises the increase in the rate of profit means that the supply of capital rises faster, so in this period the demand for capital is low relative to supply, because the supply has risen.
These conditions apply to the situation in the Long Wave Winter and Spring respectively, though there is an overlap between the two. In other words, even whilst the Winter Phase is in place, although new investments begin to occur in the new dynamic areas of production, they remain muted compared to the Spring Phase. It is the rise of the rate of profit during this phase alongside the still relatively low demand for capital that brings about the lower interest rates. But, in the Spring Phase, as demand for capital rises, as investment increases sharply, it is the combination of a rising rate of profit, and sharply higher volumes of profit, that creates the excess supply of capital relative to demand. But, Gilbart's comment that it is in this phase that “ speculations abound” is also what we have seen in this previous period. In Marx and Engels day, it was the Railway Mania, in this previous period, it has been the Technology Bubble, and the Buy To Let Mania
Marx and Engels also here deal with a confusion held by some in relation to this mass of surplus-value accumulated as a result of this increase in the rate and mass of surplus value. It was no part of their theory that this had to be immediately invested as new capital. On the contrary, these kinds of speculative activity are a normal response to a situation where this huge volume of surplus value cannot immediately be invested productively for practical purposes. It does not in any sense represent a crisis of capitalism, or an overproduction of capital, but the very reverse, it is a sign that the system at this point is in rude health and generating huge amounts of surplus!
But, the development of large scale capital, of socialised capital as opposed to private capital, means that it is not just individual capitals that confront each other here as lender and borrower.
“It is indeed only the separation of capitalists into money-capitalists and industrial capitalists that transforms a portion of the profit into interest, that generally creates the category of interest; and it is only the competition between these two kinds of capitalists which creates the rate of interest.”
The development of money-capital now means that all of the available money hoards come under the control of the bankers.
“Moreover, with the development of large-scale industry money-capital, so far as it appears on the market, is not represented by some individual capitalist, not the owner of one or another fraction of the capital in the market, but assumes the nature of a concentrated, organised mass, which, quite different from actual production, is subject to the control of bankers, i.e., the representatives of social capital. So that, as concerns the form of demand, loanable capital is confronted by the class as a whole, whereas in the province of supply it is loanable capital which obtains en masse.”
Describing the way this huge amount of surplus value production and rising rate and mass of profit results in low interest rates that then lead to speculation, Engels writes,
“At the close of 1842 the pressure which English industry suffered almost uninterruptedly since 1837, began to lift. During the following two years foreign demand for English manufactured goods increased still more; 1845 and 1846 marked a period of greatest prosperity. In 1843 the Opium War had opened China to English commerce. The new market gave a new impetus to the further expansion of an expanding industry, particularly the cotton industry. "How can we ever produce too much? We have to clothe 300 million people," a Manchester manufacturer said to this writer at the time. But all the newly erected factory buildings, steam-engines, and spinning and weaving machines did not suffice to absorb the surplus-value pouring in from Lancashire. With the same zeal as was shown in expanding production, people engaged in building railways. The thirst for speculation of manufacturers and merchants at first found gratification in this field, and as early as in the summer of 1844, stock was fully underwritten, i.e., so far as there was money to cover the initial payments. As for the rest, time would show! But when further payments were due — Question 1059, C. D. 1848/57, indicates that the capital invested in railways in 1846-47 amounted to £75 million — recourse had to be taken to credit, and in most cases the basic enterprises of the firm had also to bleed.
And in most cases these basic enterprises were already over-burdened. The enticingly high profits had led to far more extensive operations than justified by the available liquid resources. Yet there was credit-easy to obtain and cheap. The bank discount rate stood low: 1¾ to 2¾% in 1844, less than 3% until October 1845, rising to 5% for a while (February 1846), then dropping again to 3¼% in December 1846. The Bank of England had an unheard-of supply of gold in its vaults. All inland quotations were higher than ever before.”
This is almost identical to the situation we have seen over the last 15 years or so. A rising rate and volume of profit has brought about a significant rise in capital accumulation, and yet the size of that increase in profits has been such that even that was unable to absorb it all. The result was sharply falling global interest rates, and the use of that cheap money for speculation, blowing up asset bubbles in stocks, bonds and property.
In the next part I will examine how the shift to the Summer Phase leads to rising interest rates consistent with the description above by Marx and Gilbart.