“"4963. I have also no hesitation in saying that I do not think it is a proper condition of things that the money-market should be under the power of any individual capitalist (such as does exist in London), to create a tremendous scarcity and pressure, when we have a very low state of circulation out. That is possible ... there is more than one capitalist, who can withdraw from the circulating medium £1,000,000 or £2,000,000 of notes, if they have an object to attain by it." — 4965. [In the German 1894 edition this reads: 4995. —Ed. ] A big speculator can sell £1,000,000 or £2,000,000 of consols and thus take the money out of the market. Something similar to this has happened quite recently, "it creates a very violent pressure."” (p 528)
The kind of expansion or contraction of the circulation described earlier, that arises because of the need to provide currency for the payment of interest on the public debt, or conversely the receipt of currency as taxes are paid in, is really just a temporary displacement of the circulation. The interest paid out, flows back into deposits, for example.
“In the one case, there is merely a temporary displacement of circulating medium, which the Bank of England balances by short-term loans at low interest shortly before the quarterly taxes and also before the quarterly dividends on the national debt become due; the issue of these supernumerary notes first fills up the gap caused by the payment of taxes, while their return payment to the Bank soon thereafter brings back the excess of notes obtained by the public through the payment of dividends.” (p 529)
Marx illustrates that, contrary to the arguments of Overstone and others, the rate of interest had nothing to do with the state of demand for commodities, or its effect on their prices.
“If the circulation is full because of business expansion (which may take place even though prices are relatively low), then the rate of interest can be relatively high because of the demand for loan capital as a result of rising profits and increased new investments. If it is low, because of business contraction, or perhaps because credit is very plentiful, the rate of interest can be low even though prices are high.” (p 529)
Marx also argues that it is not the absolute amount of circulation that affects the level of interest rates, other than during a credit crunch.
“The demand for full circulation can either reflect merely a demand for a hoarding medium (disregarding the reduced velocity of the money circulation and the continuous conversion of the same identical pieces of money into loan capital) owing to lack of credit, as was the case in 1847 when the suspension of the Bank Act did not cause any expansion of the circulation, but sufficed to draw forth the hoarded notes and to channel them into circulation; or it may be that more means of circulation are actually required under the circumstances, as was the case in 1857 when the circulation actually expanded for some time after the suspension of the Bank Act.” (p 530)
It is not the supply of money that determines the rate of interest, but the interaction of the demand for and supply of money-capital. It is only because money-capital takes the form of money that an absolute shortage of money, as happens during a credit crunch, leads to higher interest rates. But, contrary to the arguments of the proponents of QE, the opposite does not apply. Simply putting more money tokens into circulation does not reduce interest rates precisely because what has been supplied are money tokens, and not money-capital.
“... the absolute quantity of circulation has no influence whatever upon the rate of interest, since — assuming the economy and velocity of currency to be constant — it is determined in the first place by commodity-prices and the quantity of transactions (whereby one of these generally neutralises the effect of the other), and finally by the state of credit, whereas it by no means exerts the reverse effect upon the latter; and, secondly, since commodity-prices and interest do not necessarily stand in any direct correlation to each other.” (530)
Illustrating this point, Marx writes,
“During the life of the Bank Restriction Act (1797-1819) a surplus of currency existed and the rate of interest was always much higher than after the resumption of cash payments. Later, it fell rapidly with the restriction of the note issue and rising bill quotations. In 1822, 1823, and 1832, the general circulation was low, and so was the rate of interest. In 1824, 1825, and 1836, the circulation was full and the rate of interest rose. In the summer of 1830 the circulation was full and the rate of interest low. Since the gold discoveries, money circulation throughout Europe has expanded, and the rate of interest risen. Therefore, the rate of interest does not depend upon the quantity of circulating money.” (p 530)
Rather, what the circulation may effect is the level of prices, where it represents either a fall in the value of money (new gold deposits in California and Australia, for example) or else an excessive printing of money tokens, which thereby depreciates those tokens.
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