The Rate of Interest - Summary

Summary

• The rate of interest is the market price for the use value of capital.

• The use value of capital is its ability to produce the average rate of profit.

• It is then the price of capital itself sold as a commodity.

• This should not be confused with the price of the commodities that comprise the elements of capital, for example, the price of buildings, machines, materials, or labour-power.

• The market price, or “natural price”, “equilibrium price” and so on, of commodities, including those that comprise these elements of capital, is determined by their exchange value, or, under capitalism, their price of production.

• Capital has no exchange-value or price of production, because it is not the product of labour, and so has no value. There is then no natural rate of interest.

• If the market price of commodities rises above their price of production, surplus profits are made, and so supply increases until the market price falls to the price of production. Capital has no price of production, and so that cannot happen.

• The market price of capital is determined purely on the basis of supply and demand for capital. The suppliers of capital, lenders, will not give it away for free, and so the minimum rate of interest is zero; those that demand capital, borrowers, will not borrow it if the rate of interest is greater than the average rate of profit they expect to obtain from its use, and so that sets the maximum rate they will be prepared to pay.

• The demand for capital rises when the rate of profit rises, but the supply of capital from realised profits is also highest at that point. So interest rates may not rise. The demand for capital rises further when the economy enters a period of boom, and, at this point, profits may start to be squeezed from rising wages, so that the supply of new capital does not grow as quickly as demand, causing interest rates to rise.

• The demand and supply for capital is always measured in money terms, even when what is borrowed is, for example, a machine. Money is always potentially money-capital, and the lenders of money always lend it on that basis, whatever the borrower uses it for.

• The greatest demand for money-capital arises in the period of crisis, when it is required not as money-capital, but simply as currency and means of payment. Borrowers require it to pay their bills and stay in business. The supply of new money-capital is most restricted during such periods, causing interest rates to rise to their highest level. The demand for money-capital falls to its lowest levels during periods of stagnation and slump following a period of crisis. The rate of profit rises during such periods, creating an increase in the supply of new money-capital. The rate of interest falls to its lowest levels during these periods.

• When talking about the market rate of interest, this is not to be understood as the yield on government or corporate bonds, or the policy rates set by central banks, both of which are manipulated, and divorced from the real market rates of interest.

• “For instance, if we wish to compare the English interest rate with the Indian, we should not take the interest rate of the Bank of England, but rather, e.g., that charged by lenders of small machinery to small producers in domestic industry.” (Capital III, Chapter 36, p 597)

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