How The Storms Reduce The Rate of Profit and Raise The Rate of Interest - Part 3

In Part 2, I showed how a capital loss can only be made good out of the surplus value. It means using it immediately to replace the capital lost, which implies a big one-off hit, or else it means borrowing money-capital, to buy the required productive-capital, which implies a reduction in the surplus value drawn out over a longer period of time.

What is true for the individual capital is true for the aggregate capital. If we take ourselves out of the mystifying realm of money relations, and look at things in their real physical relations, this becomes clearer. Suppose, instead of supplying the firm with money to buy productive-capital, the money-capitalist instead owned the material needed for production, and owned the wage goods needed for the firms workers to live. Or better still imagine several such capitalists own this capital, and lend it out to a number of productive-capitalists. They charge these productive-capitalists interest on the loan, paid again in the form of a part of the physical product, which the productive-capitalists hand over out of their surplus product.

It then becomes clear that the rate of interest the productive-capitalists are prepared to pay for this capital from the money-capitalists depends upon two things. Firstly, it depends upon how large the surplus is that they produce. If they produce a large surplus, they will be able to meet some of their requirements for the following year out of their own surplus production, without borrowing it. If the productive-capitalists, therefore, reduce their demand for what they require, the money-capitalists, with the same amount of materials and wage goods to try to lend out, will have to charge a lower rate of interest. But, secondly, it depends upon how much the productive-capitalists want to expand their production. If they think that times are looking up, and they will be able to sell more of their products, they will want to expand their production faster, they will demand more physical capital to be able to do so. In that case, this increased demand for the physical capital (the materials and wage goods) in the hands of the money-capitalists will mean that they can charge a higher rate of interest for it.

In 1857, a decline in US agricultural exports to Europe, at the end
of the Crimean War, meant the volume of US profits fell, as the
demand for money-capital increased.  Interest rates rose sharply
causing a money crisis that destroyed many financial organisations.
In 1847, the agricultural failures in Britain and Ireland caused a similar
sharp increase in the demand for money-capital, as prices rose.  It caused
 a spike in interest rates, which burst the bubble of the Railway Mania.

In other words, the rate of interest is really determined by the demand for and supply of the physical capital. If productive-capital wants to expand faster, then the competition for the physical surplus product becomes greater. If the physical surplus product shrinks or grows more slowly, then its supply relative to the demand for it falls, so again competition for it rises. But, in a capitalist economy, everything is bought with money. The competition for this physical surplus product, therefore, assumes the form of a competition for money-capital, to be able to purchase this physical product, which itself assumes the form of money-capital, so as to be able to expand. In other words, as Marx says, the rate of interest is determined by the demand for and supply of money-capital. If capitalists seek to expand faster – or simply have to obtain additional money-capital to make good capital losses, suffered in flood, fire, famine and war, or indeed because they overproduced – this will increase the demand for money-capital, which will cause interest rates to rise. If the volume of profits increases at a faster rate, this will mean that productive-capital can meet its requirements more easily from its own resources, whilst the money it deposits in the banks, increases the supply of available money-capital, which thereby reduces the rate of interest.

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