The Crack-Up Boom (and Bust)
Roberts says,
“But without one natural rate of interest, you cannot claim the government is forcing rates too low - and therefore the theory crumbles. Yes, the central bank controls a component of the interest rate that helps determine the spread at which banks can lend, but the central bank does not determine the rates at which banks lend to customers. It merely influences the spread.”
This is both somewhat naïve, and besides the point. Firstly, when Marx says that there is no “natural rate of interest”, what he means by that is that there is no natural price for capital as a commodity in the same way that there is a “natural price” for any other commodity, determined by its price of production. In other words, the natural price for other commodities is objectively determined, and it is that which stands behind the determination of supply. But, Marx certainly argues that the market price for capital is the result of a similar struggle between demand and supply for money-capital, which results in the establishment of an equilibrium price for that capital, determined, at any time, by the amount of supply and demand for that capital. Indeed, he sets out at length in Capital and in Theories of Surplus Value that, unlike the average rate of profit, this market price for capital, can be seen each day, in the published rates of interest in the financial press and elsewhere! So, whatever that equilibrium price would be can certainly be influenced by the actions of the central bank, if it puts its own thumb on the scales on one side or the other.
Where the Austrians are wrong, as Marx's analysis above shows, is thinking that such periods of speculation, gambling and over-exertion are only the result of action by the state. The actions of the capitalist economy itself, via the economic cycle, create the conditions in which interest rates fall to very low levels, and so encourage that gambling, asset price bubbles and busts, as well as overexertion, maverick activity and overproduction.
The central bank has far more influence in being able to raise that market rate of interest than it does in being able to lower it. Loanable money-capital, necessarily takes the form of money, money tokens or bank credit. By reducing the amount of currency in circulation, a central bank can cause businesses to reduce their own provision of commercial credit, so as to preserve their own cash balances, required for payments. In other words, it creates a demand for both money/tokens, and for bank credit. In doing so, it raises the demand for loanable money-capital, causing interest rates to rise. This is what happened in 1847, as a result of the Bank Act, when the Bank of England reduced the amount of currency in circulation.
“The power of the Bank of England is revealed by its regulation of the market rate of interest. In times of normal activity, it may happen that the Bank cannot prevent a moderate drain of gold from its bullion reserve by raising the discount rate because the demand for means of payment is satisfied by private banks, stock banks and bill-brokers, who have gained considerably in capital power during the last thirty years. In such case, the Bank of England must have recourse to other means...
But it is a serious event in business life nevertheless when, in time of stringency, the Bank of England puts on the screw, as the saying goes, that is, when it raises still higher the interest rate which is already above average.”
(Capital III, Chapter 33)
But, money is not money-capital, less still are money tokens or credit money-capital. And, so this relation between the amount of currency and interest rates is not symmetrical. The restriction of liquidity may be offset in periods of strong economic activity by an increase in commercial credit, and in highly banked economies, a restriction on the issue of actual notes and coins may have little effect. But, there will be some effect, because balances still have to be paid. An increase in liquidity, however, does not result in a fall in interest rates. Rather, what it causes is an inflation of prices.
But, Roberts' account is naïve, because, in reality, what the Austrians describe, in relation to the crack up boom, is indeed such an inflation of prices, but of specific prices, i.e. asset prices. They equate the financial markets with the real economy, and, their analysis is essentially that easy money leads to a misallocation of capital, via speculation in stock and bond markets. As such, this description is not, in itself, wrong. Marx and Engels described the same phenomenon in relation to the financial bubbles that were the cause of financial crashes in previous times, as well as resulting in the stock market bubble of 1847. These financial crashes can then affect the real economy, but there is no necessary reason why they should.
“As regards the fall in the purely nominal capital, State bonds, shares etc.—in so far as it does not lead to the bankruptcy of the state or of the share company, or to the complete stoppage of reproduction through undermining the credit of the industrial capitalists who hold such securities—it amounts only to the transfer of wealth from one hand to another and will, on the whole, act favourably upon reproduction, since the parvenus into whose hands these stocks or shares fall cheaply, are mostly more enterprising than their former owners.”
(Theories of Surplus Value, Chapter 17)
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