Capital III, Chapter 32 - Part 8

Considering the analysis of the movement of the rate of interest over the longer term cycle, given earlier, it was seen that the average rate of interest is determined by the average rate of profit. Not in the sense that a high rate of profit equates to a high rate of interest, it was seen this is not the case, but in the sense that the rate of profit determines both the demand and supply of money-capital.

The rate of interest may spike higher during periods of crisis, when the rate of profit is low, because of an urgent need for money-capital by businesses to stay afloat. The rate of interest may be low when the rate of profit is high, because the high rate of profit increases the supply of money-capital above even its higher level of demand. But, if the rate of interest stays high for long periods, this is an indication that the rate of profit is high, because it means that this high rate of profit is creating an increased demand for money-capital, to finance accumulation.

The rate of interest here is not at the levels it reaches in a crisis, but is above its minimum level. It reflects the fact that the rate of profit is high, but may be past its peak, so that it is no longer providing increasing supplies of money-capital, but the demand for money-capital remains high. This is the condition that would be typical of the Summer phase of the long wave.

“The possibility of a high rate of interest of long duration is present when the rate of profit is high; this does not refer, however, to the phase of actual squeeze. But it is possible that this high rate of profit may leave only a low rate of profit of enterprise, after the high rate of interest has been deducted. The rate of profit of enterprise may shrink, while the high rate of profit continues. This is possible because the enterprises must be continued, once they have been started. During this phase, operations are carried on to a large extent with pure credit capital (capital of other people); and the high rate of profit may be partly speculative and prospective. A high rate of interest can be paid with a high rate of profit but decreasing profit of enterprise. It can be paid (and this is done in part during times of speculation), not out of the profit, but out of the borrowed capital itself, and this can continue for a while.” (p 512-3)

A rise in wages, or an increased demand for labour-power, does not lead to higher rates of profit. However, the higher demand for labour-power, and consequent higher wages, would normally be a consequence of a higher rate of profit. So, the demand for money-capital then rises as a result of the accumulation of productive-capital, which may then cause interest rates to rise.

“If the money-capitalist, instead of lending the money, should transform himself into an industrial capitalist, the fact that he has to pay more for labour-power would not increase his profit but would rather decrease it correspondingly. The state of business may be such that his profit may nevertheless rise, but it would never be so because he pays more for labour. The latter circumstance, in so far as it increases the demand for money-capital, is, however, sufficient to raise the rate of interest. If wages should rise for some reason during an otherwise unfavourable state of business, the rise in wages would lower the rate of profit, but raise the rate of interest to the extent that it increased the demand for money-capital.” (p 513-4)

Again, this is the condition that exists in the Summer and more particularly the Autumn phase of the long wave cycle. The rate of profit is falling, but, because reserves of labour have been consumed, and productivity is no longer rising rapidly, additional demand for labour-power, for additional accumulation causes a proportionally greater rise in wages, squeezing profits. A greater demand for money-capital thereby arises, causing interest rates to rise faster. This was witnessed in the later 1960's, but more specifically in the Autumn phase that ran from around 1974 to 1987.

“Leaving labour aside, the thing called "demand for capital" by Overstone consists only in a demand for commodities. The demand for commodities raises their price, either because it rises above average, or because the supply of commodities falls below average. If the industrial capitalist or merchant must now pay, e.g., £150 for the same amount of commodities for which he used to pay £100, he would now have to borrow £150 instead of the former £100, and if the rate of interest were 5%, he would now have to pay an interest of £7½ as compared with £5 formerly. The amount of interest to be paid by him would rise because he now has to borrow more capital.” (p 514)

Again, this is seen in the above period as input costs rose. In part, at this stage of the cycle, the cause is again sluggish productivity growth, which prevents these rising costs being absorbed, so that unit costs rise.

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