Moreover, as workers' living standards begin to rise, at certain times, they have small amounts of savings. They begin to accumulate reserves through their trades unions, friendly societies, and via the savings banks and other mutuals. These tiny amounts that cannot act as money-capital, on their own, can be used as money-capital by the banks, who amalgamate these small amounts for that purpose.
“As long as the scale of production remains the same, this expansion leads only to an abundance of loanable money-capital as compared with the productive. Hence the low rate of interest.” (p 488)
As the cycle moves into the second stage of upswing, commercial credit becomes much more widely available, which both reduces the demand for money, and facilitates even more extended reproduction.
“In this state the rate of interest is still low, although it rises above its minimum. This is, in fact, the only time that it can be said a low rate of interest, and consequently a relative abundance of loanable capital, coincides with a real expansion of industrial capital. The ready flow and regularity of the returns, linked with extensive commercial credit, ensures the supply of loan capital in spite of the increased demand for it, and prevents the level of the rate of interest from rising. On the other hand, those cavaliers who work without any reserve capital or without any capital at all and who thus operate completely on a money credit basis begin to appear for the first time in considerable numbers.” (p 488)
These are the conditions which create that plethora of small capital that Marx discusses in Chapter 15, and which form the mass of overproduced capital that is destroyed with the outbreak of crises.
“To this is now added the great expansion of fixed capital in all forms, and the opening of new enterprises on a vast and far-reaching scale. The interest now rises to its average level. It reaches its maximum again as soon as the new crisis sets in. Credit suddenly stops then, payments are suspended, the reproduction process is paralysed, and with the previously mentioned exceptions, a superabundance of idle industrial capital appears side by side with an almost absolute absence of loan capital.” (p 488)
Contrary to the argument of the Currency School, therefore, that the interest rate is determined by the rate of profit, in general, the opposite is the case.
“On the whole, then, the movement of loan capital, as expressed in the rate of interest, is in the opposite direction to that of industrial capital. The phase wherein a low rate of interest, but above the minimum, coincides with the "improvement" and growing confidence after a crisis, and particularly the phase wherein the rate of interest reaches its average level, exactly midway between its minimum and maximum, are the only two periods during which an abundance of loan capital is available simultaneously with a great expansion of industrial capital. But at the beginning of the industrial cycle, a low rate of interest coincides with a contraction, and at the end of the industrial cycle, a high rate of interest coincides with a superabundance of industrial capital. The low rate of interest that accompanies the "improvement" shows that the commercial credit requires bank credit only to a slight extent because it is still self-supporting.” (p 489)
This process creates the business cycle, which is the basis of periodic crises of overproduction.
“During a period of slack, production sinks below the level, which it had attained in the preceding cycle and for which the technical basis has now been laid. During prosperity — the middle period — it continues to develop on this basis. In the period of over-production and swindle, it strains the productive forces to the utmost, until it exceeds the capitalistic limits of the production process.” (p 489-90)
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