At the height of the crisis, Marx points out, interest rates reach their highest point.
“It reaches its maximum again as soon as the new crisis sets in. Credit suddenly stops then, payments are suspended, the reproduction process is paralysed, and with the previously mentioned exceptions, a superabundance of idle industrial capital appears side by side with an almost absolute absence of loan capital.”
(Capital III, Chapter 30)
The reason is simple. The rate of interest is the market price for money-capital. Because capital has no value, as it is not the product of labour, this market price is purely the result of the interaction of demand and supply. The owners of loanable money-capital will not lend it for free, because they could otherwise have used it as capital themselves, whilst those who demand it to use as capital, will not pay so much for it that it would wipe out the profit they could obtain by its application in production. It is the interaction between these two opposing forces that determines the rate of interest. However, during a crisis, money-capital is demanded not to use as capital, but to be used simply as currency.
In more normal times, businesses conduct their activities between each other on the basis of commercial credit, i.e. they allow each other to buy goods and services, whilst only paying for them later. This commercial credit, usually afforded to each other for free on a reciprocal basis, is also supplemented with the use of bank credit, whereby the banks may discount Bills of Exchange, or else provide loans at interest. When business becomes more restricted, and firms need more cash, they will tend to reduce the amount of commercial credit they offer to each other, by reducing the time allowed before payment is due, and so on. In turn, that means that each firm turns more to the use of bank credit, and this increased demand for bank credit, increases the rate of interest that the banks themselves charge for it.
For the owners of loanable money-capital it always exists as money-capital. That is it always appears to them as self-expanding value, because they always expect, when they lend it, to get a larger amount of money-capital back, equal to the interest on it. But, in fact, as Marx sets out, it is really fictitious capital. It only self expands, only produces interest, because the borrower of the money-capital uses it to acquire real productive-capital, machines, materials, labour-power etc., which they use to produce profits, a part of which they then pay to the lender as interest, dividends etc. But, the owner of loanable money-capital, like the seller of any other commodity, is not bothered what the buyer of that commodity wants it for. They simply demand its market price in exchange. The owner of loanable money-capital, therefore, isn't bothered whether the borrower wants it to use actually as money-capital, to metamorphose into real productive-capital, to produce profits; whether they want it to use to sustain a lavish lifestyle, as was the case with the old landed aristocracy that borrowed against their large estates; whether they want it in order to pay their bills, and stop their business going under; or indeed whether it is a worker who wants it, because their wages do not suffice to sustain them to the end of the week.
At the height of a crisis, businesses stop giving commercial credit, and so they increase their demand for bank credit. As some businesses have to sell their commodities at a loss, or their customers fail to pay them, they must borrow more, just in order to pay their own bills, so as to stay afloat. And workers too, put on short-time, or thrown out of work, have to fall back on borrowing so as to survive. At the same time, the profits of companies, having been squeezed, fail to provide them with the internal resources required to meet their needs; the money profits they put into their bank accounts, and which the banks have available to lend out, are also reduced, or stop. The small savings of the workers, and small business people, also stop being put into the bank, as they instead drain those savings to pay their way. So, the supply of loanable money-capital gets reduced significantly, at the same time that the demand for this money-capital, not to be used as money-capital, but merely as money, as currency, rises sharply, and so the rate of interest rises to its highest point.
That was the situation that existed in the 1970's, and into the 1980's. The UK Bank of England Interest Rate reached a peak of 17% in November 1979. The US Federal Reserve's Interest Rate peaked at 20%, in March 1980 . In the early 1980's, as the crisis phase of the long wave approached its end, and as it began to transition into the stagnation phase, the demand for money-capital as money-capital remained subdued, but as the effects of the introduction of labour-saving technologies, began to replace labour, and raise the rate of surplus value, so it began to increase the mass of profits/supply of money-capital, available. The consequence was that the rate of interest began to fall from its peak. By the late 1980's, and into the 1990's, as the rise in productivity raised the rate and mass of surplus value, and cheapened the value of constant capital, so the rate of profit rose, and made available large supplies of loanable money-capital, that caused interest rates to continue to fall faster. But, these falling interest rates, along with increased revenues in the form of higher dividends, and rents created the perfect condition for asset prices to rise, and rise they did in abundance.
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