Capital III, Chapter 26 - Part 5

Using the Report of the Select Committee on Bank Acts, 1857, Marx then examines the evidence given by G.W. Norman, a director of the Bank of England and others, to illustrate the general confusion about the nature of interest, money and capital that was held and which lay behind the Bank Act.

Under interrogation, Norman states correctly that the rate of interest “depends, not upon the amount of notes, but upon the supply and demand of capital.” ((p 417) But, when questioned about what he defines as capital, Norman goes to pieces. Norman says,

“I believe that the ordinary definition of 'capital' is commodities or services used in production." — "3636. Do you mean to include all commodities in the word 'capital' when you speak of the rate of interest? — All commodities used in production."” (p 417)

And, elaborating on this, he describes how a cotton manufacturer borrows money not because they want money, but because they want to buy raw cotton, or to pay the wages of their workers and so on.

But, as Marx points out, these commodities – raw cotton, labour-power – are not in themselves capital. Moreover, even if they were, its impossible to determine the rate of interest on the basis of the demand and supply for them, as Norman originally stated. All the demand and supply for raw cotton determines is the market price of raw cotton, just as the demand and supply for labour-power determines the market rate of wages.

“However, very different rates of interest are compatible with the same market-prices of commodities.” (p 418)

As Marx points out, Norman is confronted in questioning by the correct remark, "But interest is paid for the money,". To this, Norman responds,

“It is, in the first instance; but take another case. Supposing he buys the cotton on credit, without going to the bank for an advance, then the difference between the ready-money price and the credit price at the time at which he is to pay for it is the measure of the interest. Interest would exist if there was no money at all.” (p 417)

But, Marx points out the interest here does not create a difference in the price of the commodity to be bought. That remains the same at time A as at time B. The interest is rather a payment for the use of money-capital between time A and time B, and that is true whether this money-capital is loaned by a bank for the purpose of making the purchase, or whether it is advanced via the value of the commodities by the seller, who only demands payment at some later date.

“First the cotton is to be sold at its cash price, and this is determined by the market-price, itself regulated by the state of supply and demand. Say the price £1,000. This concludes the transaction between the manufacturer and the cotton broker so far as buying and selling is concerned. Now comes a second transaction. This is one between lender and borrower. The value of £1,000 is advanced to the manufacturer in cotton, and he has to repay it in money, say, in three months. And three months' interest for £1000, determined by the market rate of interest, makes up the extra charge over and above the cash price. The price of cotton is determined by supply and demand. But the price of the advanced value of cotton, of £1,000 advanced for three months, is determined by the rate of interest.” (p 418-9)

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