Capital III, Chapter 35 - Part 12

Marx summarises the situation.

“What we are here concerned with is the value of money-capital, i.e., the interest rate. Wilson would like to identify money-capital with capital in general. The simple fact is essentially that 12 million were subscribed in England for Indian railways. This is a matter which has nothing directly to do with the rates of exchange, and the designation of the £12 million is also the same to the money-market. If the money-market is in good shape, it need not produce any effect at all on it, just as the English railway subscriptions in 1844 and 1845 left the money-market unaffected. If the money-market is already in somewhat difficult straits, the interest rate might indeed be affected by it, but certainly only in an upward direction, and this, according to Wilson's theory, would favourably affect the rates of exchange for England, that is, it would work against the tendency to export precious metal; if not to India, then to some other country.” (p 580-1)

In other words, what Marx is actually setting out, the more his analysis moves away from having established the underlying value relations, to actually analysing the phenomenal form of those relations, is closer to a marginal analysis. Previously, in his comments on demand, for example, he went from the simplifying assumptions, used in Capital I, that supply always finds adequate demand, to the reality that demand is a function of use value, and so supply faces the problem of elasticity of demand. He develops that even more in Theories of Surplus Value.

His explanation of the rate of interest, as wholly determined by supply and demand for money-capital, also notes the effect to which the degree and necessity of demand can have a greater effect on causing a rise in the rate. For example, in a crisis, the fact that firms must have money-capital (in the form of money, liquidity) to stay afloat, causes them to be prepared to pay much higher rates than during those times when high rates of profit cause them to demand more money-capital in order to expand.

Later, this approach finds its ultimate form in Marx’s theory of Differential Rent, which expresses this marginalism clearly. The thought expressed here that, if the money-market is in good shape, increased demand for money-capital may have no effect, is no different to his previous analysis of market prices for commodities, under conditions where either demand was in excess of supply, equal to it, or below it. It is the same as his analysis later, in relation to rent, as to whether demand for wheat is above, at or below, the level of supply.

In the same way,

“The interest rate may affect the rates of exchange, and the rates of exchange may affect the interest rate, but the latter can be stable while the rates of exchange fluctuate, and the rates of exchange can be stable while the interest rate fluctuates.” (p 581)

In other words, a rise in the interest rate will tend to cause the exchange rate to rise, and vice versa, because a higher rate of interest will draw in money-capital. Similarly, a fall in the exchange rate will tend to cause a rise in interest rates, because it will be associated with an outflow of money-capital. But, neither of these things necessarily occur, because they depend on general conditions. A rise in the rate of interest may be an indication of strong economic growth and high rates of profit, causing increased demand for money-capital. So, firms may actually be reducing costs, becoming more competitive and exporting more, thereby creating the conditions for the exchange rate to rise. On the other hand, high interest rates may be an indication that the exchange rate is falling, and that there is an increased demand for external funding. It could be an indication of a failing economy, in which there is falling levels of confidence.

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