Capital III, Chapter 35 - Part 15

Wilson seeks to demonstrate that a change in the interest rate must bring about a change in the exchange rate and vice versa. In fact, this is far more likely in today's world of freely floating currencies, but even today rises, for example, in the yield on the US 10 year Treasury, often go along with falls in the $ relative to other currencies. Given the confusion previously outlined, between capital and money-capital, Wilson then tries to show that a surplus of capital implies a fall in interest rates, resulting in a fall in the exchange rate.

At the time, Wilson was editor of “The Economist”, and Marx quotes his comments in the magazine from May 22nd 1847.

"No doubt, however, such abundance of capital as is indicated by large stocks of commodities of all kinds, including bullion, would necessarily lead, not only to low prices of commodities in general, but also to a lower rate of interest for the use of capital. If we have a stock of commodities on hand, which is sufficient to serve the country for two years to come, a command over those commodities would be obtained for a given period, at a much lower rate than if the stocks were barely sufficient to last us two months. All loans of money, in whatever shape they are made, are simply a transfer of a command over commodities from one to another. Whenever, therefore, commodities are abundant, the interest of money must be low, and when they are scarce, the interest of money must be high. As commodities become abundant, the number of sellers, in proportion to the number of buyers, increases, and, in proportion as the quantity is more than is required for immediate consumption, so must a larger portion be kept for future use. Under these circumstances, the terms on which a holder becomes willing to sell for a future payment, or on credit, become lower than if he were certain that his whole stock would be required within a few weeks". (p 585-6)

Marx explains - see, for example, TOSV 2 - that when there is a permanent shift in demand, that provokes increased supply, this usually results in lower rather than higher equilibrium prices, as orthodox theory assumes.  The reason is that the increased supply results in economies of scale, and falling marginal costs. As Marx says, no capitalist introduces new machines or techniques that are LESS efficient than the ones they already have.  Just simply improvements in technology and rising productivity means that even the existing machines are produced more cheaply, and are more efficient, and he says this causes a moral depreciation of the existing fixed capital stock.  New types of technology magnify such processes, and thereby continually reduce the value of the consumed constant capital, and fixed capital stock, reducing the value of commodities, and raising the rate of profit.

  The opposite applies when the scale of production is contracted due to low levels of economic activity, and lack of demand.  At lower levels of production, fixed capital is not fully utilised, so wear and tear costs rise per unit of output, economies of scale are lost and so unit costs of production rise. 

We see similar comments today, both in relation to interest rates and inflation. Yet, in relation to both, it is effectively to argue that prices are a function only of demand. In a period of stagnation, it may well be the case that inflation may at first be low, because an overhang of supply must be cleared from the market. But, suppliers will likewise respond by cutting back production and supply. Once the initial excess of supply is cleared, prices may rise, above their previous level, because at this reduced level of production, unit costs rise.

What is forgotten is the specifically capitalist nature of production for profit. Its true that in times of exuberance and high profits, capital itself bursts through the limitation resulting in a crisis of overproduction.  So, commodity prices may rise without provoking any immediate supply response. Similarly, in such conditions, interests rates may rise, firstly because of what has been said previously, about the need for money-capital by failing businesses, but also because of higher rates of inflation.  But, in a period of stagnation, the opposite occurs. Capital will only invest if high masses of profit are assured from it. The rate of profit rises during such periods of stagnation, but inadequate increases in aggregate demand mean that ant large rise in capital accumulation and production will meet a barrier of realising those profits. 

In other words, during a period of stagflation, nominal interest rates may rise, precisely because of the inflation. If I borrow at 5%, and my prices are rising at 2% p.a., I am really only paying 3%, because the money I repay has lost 2% of its value. However, if I borrow at 7%, and my prices are rising at 5%, I only pay 2% interest.

But, equally, as Marx points out, in a period after a crisis, the price of inputs may be low, leading to a high rate of profit. But, this may result in a low rate of interest, not because the value of this “capital” is low, but because the demand for money-capital is low, as firms are able to finance themselves directly from these high profits.

“... in other words, because loan capital has a movement different from industrial capital. What the Economist wants to prove is exactly the reverse, namely, that the movements of loan capital are identical with those of industrial capital.” (p 586)

Back To Part 14

Forward To Part 16