Friday, 13 May 2016

The Rate of Interest - Part 3 of 4

But, its also clear from this why the rate of interest cannot be determined by the price of commodities. Suppose I am a steel producer, and require 10 tons of iron ore. If the price of iron ore is £10 per ton, I then have a demand for £100 of money-capital to buy it. If the price of iron ore drops to £8 per ton, I only have a demand for £80 of money capital, and so this lower demand might be thought to act to reduce the rate of interest. But, at £8 per ton, the rate of profit on steel production will be higher than when the price of iron ore was £10 per ton. As a consequence of this higher rate of profit, there will be an incentive to increase steel production. I may then require 15 tons of iron ore, at a cost of £120, and that will mean a higher demand for money-capital, which will result in a higher rate of interest.

It is this interplay between the demand for and supply of money-capital which determines the rate of interest, and, as Marx sets out, this interplay is influenced by a number of different factors at different phases of the economic cycle. The supply of potential money-capital, for example, is itself a function of the rate and mass of profit. During a period of stagnation, the rate of profit is likely to rise, because wages will fall, raising the rate of surplus value. In addition, such periods are likely to be associated with periods when new types of labour saving technologies are introduced, which raise productivity, and reduce the value of labour-power, and the value of constant capital.

There may not be a significant rise in the mass of profit during such periods, because capital itself, only expands slowly, but the rise in the rate of profit means that the mass of profit expands more rapidly in relative terms, i.e. less of it is required to bring about a given degree of expansion. The consequence is that the supply of money-capital rises relative to the demand. Firms are able to more easily fund their own expansion from reinvesting their profits, and to the extent that they have surplus funds, they can be thrown into the money market, so interest rates fall.

That can be affected by other factors. For example, the recipients of others forms or revenue such as interest and rent, may find during such times that their yields fall, but lower commodity prices mean that the cost of living for these classes falls too, so they need less revenue to cover their own reproduction. That may mean that they have surplus revenues which they throw into the money market, again increasing the supply of money-capital, and so pushing down interest rates.

Marx and Engels also refer to a similar situation where older societies, which have a larger number of such rentiers, who have accumulated wealth, tend to have lower interest rates, because this accumulated money wealth is thereby thrown into the money market, and pushes down rates. Similarly, Marx points out that, at times, scattered smaller amounts of savings which individually cannot act as money-capital can be drawn together by the banks, and once agglomerated, can then be thrown into money markets, increasing the supply of money-capital.

In more recent times, workers savings built up in times of higher wages, can be so used, before they are drawn down in times of lower wages. Workers pensions are merely deferred wages, required to cover the reproduction of the worker in old age. The money in these pension funds also thereby becomes potential money-capital thrown into the money market, and acts to push down interest rates. But, there comes a limit at which all of these scattered savings have already been mobilised. The biggest source of new potential money-capital, is therefore, realised profits. As profits rise, so the potential supply of money-capital rises with it. Whether this causes interest rates to fall, depends upon whether this same rise in profits causes an even bigger rise in the demand for money-capital.

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