However, the effect of the rate of profit, and the phase of the industrial cycle, on the rate of interest, is fairly clear to see. In times of low economic activity and investment, the demand for money-capital will be low, and interest rates will be low. As economic activity increases and the rate and mass of profit rises, the demand for money-capital rises, but so too does the supply, so interest rates will remain low. As economic activity becomes more frenetic, the demand for money-capital rises, relative to the supply, and interest rates rise. When these high rates and masses of profit cause investment to overshoot, causing crises of overproduction, the demand for money-capital increases dramatically, to keep businesses afloat, and interest rates rise to very high levels.
“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.
It is possible, however, for low interest to go along with stagnation, and for moderately rising interest to go along with revived activity.
The rate of interest reaches its peak during crises, when money is borrowed at any cost to meet payments.” (p 360-1)
The more developed an economy, or the older it is, so that the more there has developed a class of people that have a stock of money-capital, as stated earlier, the more this stock of money-capital can press on the money-market as a potential supply. Marx quotes George Ramsay in this regard.
“For, as a nation advances in the career of wealth, a class of men springs up and increases more and more, who by the labours of their ancestors find themselves in the possession of funds sufficiently ample to afford a handsome maintenance from the interest alone. Very many also who during youth and middle age were actively engaged in business, retire in their latter days' to live quietly on the interest of the sums they have themselves accumulated. This class, as well as the former, has a tendency to increase with the increasing riches of the country, for those who begin with a tolerable stock are likely to make an independence sooner than they who commence with little. Thus it comes to pass, that in old and rich countries, the amount of national capital belonging to those who are unwilling to take the trouble of employing it themselves, bears a larger proportion to the whole productive stock of the society, than in newly settled and poorer districts. How much more numerous in proportion to the population is the class of rentiers ... in England! As the class of rentiers increases, so also does that of lenders of capital, for they are one and the same." (Ramsay, An Essay on the Distribution of Wealth, pp. 201-02.)” (p 361-2)
But, this is not the only reservoir of potential money-capital available as a result of development. Although productive-capital produces surplus value, which assumes the form of money-capital, the major part of these hoards are deposited by productive-capital in banks, awaiting use. The bank amasses all these deposits, as well as all of the small deposits of workers and the middle class, and it is then the bank, as collective lender, which confronts the mass of individual borrowers.
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