Thursday, 18 February 2016

Capital III, Chapter 26 - Part 14

Marx sets out what is wrong with the notion that also resides behind QE, as a means of reducing interest rates. Interest rates are a function of the demand and supply of money-capital. The supply of money-capital is a function of the existing stock of money-capital, plus the addition to it, resulting from the realisation of surplus value. The demand for money-capital is a function of the requirement of industrial and merchant capital for capital in its money form, which may rise because of the need to invest, prompted by the potential for higher profit, but may also be prompted by the need for money-capital to stay afloat in times of crisis or contraction.

But, QE can only supply additional money tokens and credit money, not additional money-capital. Because it cannot provide additional money-capital, it cannot act to reduce interest rates. Ensuring sufficient liquidity to prevent a credit crunch is one thing, but simply producing more and more liquidity in the mistaken belief that it is additional supply of capital is another. Nor can additional liquidity resolve a problem that is really a problem of insolvency, i.e. insufficiency of capital.

QE can only increase the supply of money tokens and credit money, not money-capital. The value of any money commodity is determined, as with any other commodity, and its exchange value in relation to all other commodities flows from that. But, as Marx sets out, in “A Contribution to The Critique of Political Economy”, the value of money tokens is a function of their quantity in relation to the money commodity they represent. By increasing this quantity, QE simply devalues the money tokens in relation to all other commodities. Consequently, it can have no impact on the average rate of interest.

This is set out by Marx in his comments relating to the evidence provided by Overstone.

“"3805. When the money in the country is diminished by a drain, its value increases, and the Bank of England must conform to that alteration in the value of money"

(hence, the value of money as capital; in other words, the rate of interest, for the value of money as money, compared with commodities, remains the same),

"which is meant by the technical term of raising the rate of interest."

"3819. I never confound those two."

Meaning money and capital, and for the simple reason that he never differentiated between them.” (p 432)

Overstone explains the change in the rate of interest by a change in the supply of money. But, Marx comments,

“But this statement is wrong. The reserve may shrink because the circulating money in the country increases. This is the case when the public takes more notes and the hoard of metal does not decrease. But in such case the interest rate rises, because then the banking capital of the Bank of England is limited by the Act of 1844. But he dare not mention this, because due to this law the two departments have nothing to do with one another.” (p 433)

Overstone continues his testimony and says that a high rate of profit will create a great demand for capital. Marx points out that in 1844-5 profits were high, because there was a high level of demand for textiles, whilst the cost of raw cotton was cheap. Overstone's confusion over what is capital has had him confusing on the one hand the value of such commodities, with the value of capital, and on the other that money was capital. Marx points out that the low price of cotton meant that the value of capital for manufacturers was thereby certainly not raised.

“The high rate of profit may have induced some cotton manufacturer to obtain money on credit for the purpose of expanding his business. Thereby his demand rose for money-capital, but for nothing else.” (p 433)

Marx returns to Overstone's confusion later in Chapter 32.

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