Movement and Determination of The Rate of Interest
Marx describes how the movement of the rate of interest in these different phases of the cycle is far more complex than the picture presented by Roberts.
“If we observe the cycles in which modern industry moves — state of inactivity, mounting revival, prosperity, over-production, crisis, stagnation, state of inactivity, etc., which fall beyond the scope of our analysis — we shall find that a low rate of interest generally corresponds to periods of prosperity or extra profit, a rise in interest separates prosperity and its reverse, and a maximum of interest up to a point of extreme usury corresponds to the period of crisis. The summer of 1843 ushered in a period of remarkable prosperity; the rate of interest, still 4½% in the spring of 1842, fell to 2% in the spring and summer of 1843; in September it fell as low as 1½% (Gilbart, I, p. 166); whereupon it rose to 8% and higher during the crisis of 1847.
It is possible, however, for low interest to go along with stagnation, and for moderately rising interest to go along with revived activity.
The rate of interest reaches its peak during crises, when money is borrowed at any cost to meet payments. Since a rise in interest implies a fall in the price of securities, this simultaneously offers a fine opportunity to people with available money-capital, to acquire at ridiculously low prices such interest-bearing securities as must, in the course of things, at least regain their average price as soon as the rate of interest falls again.
However, the rate of interest also has a tendency to fall quite independently of the fluctuations in the rate of profit.”
(Capital III, Chapter 22)
Marx explains the reason for this. In a period of prosperity, as the economy expands, a higher rate of profit means that the main source of the supply of new money-capital, i.e. realised profits, expands at a faster rate. This increased supply of loanable money-capital, thereby, offsets the increased demand for money-capital created by the needs of capital accumulation in an expanding economy. But, also, in such a period of expansion, the capitalists themselves expand the mutual provision of commercial credit, which means they have less reliance on resort to either cash or bank credit. That reduced demand for bank credit, puts downward pressure on the market rate of interest.
"The low rate of interest that accompanies the "improvement" shows that the commercial credit requires bank credit only to a slight extent because it is still self-supporting.”
“When we examine this credit detached from banker’s credit, it is evident that it grows with an increasing volume of industrial capital itself. Loan capital and industrial capital are identical here.”
“A large quantity of credit within the reproductive circuit (banker’s credit excepted) does not signify a large quantity of idle capital, which is being offered for loan and is seeking profitable investment. It means rather a large employment of capital in the reproduction process. Credit, then, promotes here 1) as far as the industrial capitalists are concerned, the transition of industrial capital from one phase into another, the connection of related and dovetailing spheres of production; 2) as far as the merchants are concerned, the transportation and transition of commodities from one person to another until their definite sale for money or their exchange for other commodities.”
“As long as the reproduction process is continuous and, therefore, the return flow assured, this credit exists and expands, and its expansion is based upon the expansion of the reproduction process itself.”
(Capital III, Chapter 30)
The movement of the economy from the Prosperity phase, or the Spring Phase of the Long Wave cycle, to the Boom or Summer Phase of the Long Wave, is the point where the rate of interest rises to its average level, and that because, at this point, the demand for money-capital, to finance accumulation, begins to rise, relative to the supply of loanable money-capital, derived, primarily, from realised profits, but also from mobilised savings, the use of other money reserves for replacement of fixed capital, and so on.
“After the reproduction process has again reached that state of prosperity which precedes that of over-exertion, commercial credit becomes very much extended; this forms, indeed, the "sound" basis again for a ready flow of returns and extended production. In this state the rate of interest is still low, although it rises above its minimum. This is, in fact, the only time that it can be said a low rate of interest, and consequently a relative abundance of loanable capital, coincides with a real expansion of industrial capital. The ready flow and regularity of the returns, linked with extensive commercial credit, ensures the supply of loan capital in spite of the increased demand for it, and prevents the level of the rate of interest from rising. On the other hand, those cavaliers who work without any reserve capital or without any capital at all and who thus operate completely on a money credit basis begin to appear for the first time in considerable numbers. To this is now added the great expansion of fixed capital in all forms, and the opening of new enterprises on a vast and far-reaching scale. The interest now rises to its average level. 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.
On the whole, then, the movement of loan capital, as expressed in the rate of interest, is in the opposite direction to that of industrial capital. The phase wherein a low rate of interest, but above the minimum, coincides with the "improvement" and growing confidence after a crisis, and particularly the phase wherein the rate of interest reaches its average level, exactly midway between its minimum and maximum, are the only two periods during which an abundance of loan capital is available simultaneously with a great expansion of industrial capital. But at the beginning of the industrial cycle, a low rate of interest coincides with a contraction, and at the end of the industrial cycle, a high rate of interest coincides with a superabundance of industrial capital. The low rate of interest that accompanies the "improvement" shows that the commercial credit requires bank credit only to a slight extent because it is still self-supporting.”
(Capital III, Chapter 30)
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