Thursday, 28 April 2016

Capital III, Chapter 32 - Part 12

In the relations between two individuals, if one is a creditor to the other, then reciprocally the latter is a debtor to the former. But, things are not so straightforward in the relations between nations. Country A may have a trade surplus with country B. yet, country A may have a Balance of Payments deficit with country B. That is because the two balances measure different things. The Balance of Trade measures the value of goods and services exported to country B compared with the value of goods and services imported from country B. But, the Balance of Payments compares the flow of capital between the two countries. Although country B may make a payment to country A in gold to cover the deficit on the Balance of Trade, country A may send capital to country B, for other purposes.

Country A may make loans to country B; it may buy shares or bonds, issued by companies or the government of country B, for example.

“The balance of payments differs from the balance of trade in that it is a balance of trade which must be settled at a definite time. What the crises now accomplish is to narrow the difference between the balance of payments and the balance of trade to a short interval; and the specific conditions which develop in the nation suffering from a crisis and, therefore, having its payments become due — these conditions already lead to such a contraction of the time of settlement. First, shipping away precious metals; then selling consigned commodities at low prices; exporting commodities to dispose of them or to obtain money advances on them at home; increasing the rate of interest, recalling credit, depreciating securities, disposing of foreign securities, attracting foreign capital for investment in these depreciated securities, and finally bankruptcy, which settles a mass of claims. At the same time, metal is still often sent to the country where a crisis has broken out, because the drafts drawn on it are insecure and payment in specie is most trustworthy.” (p 517)

Marx then returns to Overstone's claim that the supply and demand for money-capital is synonymous with the demand and supply of productive-capital. If this were true, then the rate of interest would be high when the price of commodities used as productive-capital was high, and vice versa. Marx gives examples of times when the price of cotton was low, in 1845, which did coincide with a period of low interest rates.

“But to judge by the yarn, the rate of interest should have been high, for the prices were relatively high and the profits absolutely high.” (p 518)

The only time Overstone's claim could be correct, Marx says, is if there were no money lenders. Then, all capital that was loaned, would have to be in the form of actual commodities, required as productive-capital.

“Under such circumstances, the supply of loan capital would be identical with the supply of elements of production for the industrial capitalist and commodities for the merchant. But it is clear that the division of profit between the lender and borrower would then, to begin with, completely depend on the relation of the capital which is lent to that which is the property of the one who employs it.” (p 518-9)

In fact, the rate of interest is determined by the demand and supply of money-capital, as described earlier, and this demand and supply can move in different directions at different points in the cycle. To the extent that the Bank of England possesses actual money-capital – a fact that Overstone denied, saying 'it is no place for capital' – it can act to reduce interest rates by lending out a greater portion of it.

“Thus the same Mr. Weguelin says that the Bank of England exerts great influence upon the rate of interest in times, when "we" [the Bank of England] "are holders of the greater portion of the unemployed capital".” (p 519)

But, this is a loan of existing money-capital, and not the same as attempts, via QE, or money printing, to reduce interest rates. Such attempts do not increase the amount of money-capital, thrown into supply, but only represent an increase in money-tokens. Rather than reducing interest rates, all such measures can do is to reduce the value of the money tokens themselves, and thereby cause inflation, which if anything will cause longer term interest rates to rise above where they would otherwise have been.

Measures like QE may be used to manipulate some interest rates, e.g. by buying 10 Year Treasuries, thereby raising their price and reducing the yield. But, this manipulation only means that other interest rates rise. In a global economy, this may not mean that it is US interest rates that are raised as a result of this policy, as money moves from other countries bonds into US bonds, as they are seen to have been underpinned by the central bank. This is no different to the way Marx explains that the 1844 Bank Act had implications internationally, and not just in Britain.

So, even where the supply of potential money-capital was adequate to meet the demand, an artificial restriction of the supply of money itself necessarily causes an artificial restriction of money-capital, because it cannot take any other form but the money form. The 1844 Bank Act, required that when the Bank of England bullion reserve contracted, it reduced the quantity of notes in circulation. This artificial reduction in the money-supply, thereby caused an artificial reduction in the supply of money-capital, causing a credit crunch, a spike in interest rates, followed by an economic crisis.

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