Sunday, 14 February 2016

Capital III, Chapter 26 - Part 10

As a consequence of his confusion, Overstone sees a rise in the rate of interest as equivalent to a rise in the value of capital, even though the value of capital in 1847 was being massively depreciated. Questioned on his view that higher interest rates had no material impact on productive and merchant capital, Overstone replied,

"In the first place parties will not pay a rate of discount which seriously interrupts their profits; they will discontinue their business rather than do that."

"What is the meaning of discount? Why does a person discount a bill? ... Because he wants to obtain the command of a greater quantity of capital."

"And why does he want to obtain the command of a greater quantity of capital? Because he wants to employ that capital; and why does he want to employ that capital? Because it is profitable to him to do so; it would not be profitable to him to do so if the discount destroyed his profit." (p 424-5)

But, as Marx points out, businesses do not and cannot simply discontinue their operations because interest rates are high. For a small business, it may represent the owners livelihood, which they will not wish to give up. For a large business, they cannot simply abandon huge amounts of fixed capital. They may reduce their investments in new capital, as a result of the higher rate of interest, but even that may be dependent upon the need to invest to remain competitive.

In fact, as Marx says, the industrial and merchant capitalist does not get their bills discounted as a means of getting more capital. They do so in order to obtain credit to meet their payments and thereby keep the business running smoothly and continuously, just as they provide credit to their own customers.

“He demands more capital only when business is good, or when he speculates on another's capital, though business may be bad. The discount is by no means simply a device to expand business.” (p 425)

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