Take a piece of land that produces £1,000 of rent per year for its owner. It doesn't matter whether this rent is the result of the land being used to grow potatoes, to graze cattle, or upon which leasehold houses have been built. The owner of the land has capital tied up in the ownership of the land, and the £1,000 of rent is the yield obtained on this capital, the same as if it was capital they had tied up in a bond providing them with a given amount of coupon each year, or in shares, providing them with dividends each year. Similarly, the owners of any of these assets can sell them, and buy some other asset, where the yield produced by it is higher. If a £10,000 government bond, also produces a coupon of £1,000 a year, then assuming no difference in risk between owning such a bond, as against owning land, then we would expect that the price of the land would then be, also, £10,000, so that both produce a yield of 10%. The same would be true of shares that produced a dividend of £1,000 a year.
Of course, in practice, this is not true, because different degrees of risk attach to owning these different assets. The state in developed economies, is not likely to default on its debts, so if you buy its bonds, you can expect to get your money back when the bond matures, though its real value may have declined, as a result of inflation. If you buy shares, however, the company may go bust, so that the money you paid for the shares is lost, or it may not make anticipated profits in any given year, meaning it pays out less in dividends. Consequently, you would expect to receive a higher yield on shares to compensate for this higher risk. With land, rents are fixed over several years, so even though a tenant may fail to make surplus profits from its use, the landlord still obtains the rent, unless, of course, the tenant goes bust. Moreover, unlike the market for bonds and shares, the market for land is illiquid. Bonds and shares can be bought and sold at the press of a computer key, but land can take months to buy or sell, and when prices move significantly either everyone wants to sell at the same time, or everyone wants to buy at the same time.
So, rising interest rates mean that yields rise. As Marx points out, the yield on government bonds is not the relevant measure of market rates of interest, because, as seen with QE, the price of the bond, which is a determinant of its yield, can be inflated as a result of central banks printing money tokens to buy them, or else to lend to commercial banks, so that they buy them. Rather Marx says, the relevant rate of interest is what businesses charge each other for the loan of capital. For example, a machine hire company, does not just lend machines, i.e. the use value of the machine as a machine, but also loans out capital, i.e. the money equivalent of the value of the machine. In determining how much it will charge, it seeks compensation for both of these elements.
Firstly, if the machine has a value of say, £1,000, this is what the buyer pays for the use value of the machine over its lifespan, of say 10 years. To put it another way, it loses 10% of its use value, and so also of its value, each year, equal to £100 per year. But, the machine hire company does not sell the machine. It loans it for, say, a year. At the end of the year, it gets the machine back, but its value is now, only £900, and so they seek to recoup the £100 of wear and tear from the borrower. Its like they sold a tenth of the machine to the borrower. But, in lending the machine, they also loaned it as capital, i.e. £1,000, whose use value is to be able to produce the average annual rate of profit, of say 20%, i.e. £200. Had they used the machine themselves, they would have expected to have made this £200 of profit. Therefore, they seek compensation for having foregone that profit, and for the fact that the borrower is now enabled to make this £200 of profit instead. The machine as commodity has a value of £1,000, but as capital, it has a value of £1,200.
The lender will not lend the machine for nothing, whilst the borrower will not pay the whole £200 of potential profit as interest either, so that the actual amount of interest is somewhere between these two extremes, and itself determined by the demand and supply for capital. If this market rate of interest is, then 5%, the borrower will pay £50 in interest, but the total amount to them for the year will be £150, including the £100 for wear and tear. This latter, they get back in the value of the commodity they produce and sell, as with every other producer using such a machine, but the £50 of interest is not transferred to the value of the commodity, and is, instead, deducted from their profit. It is this market rate of interest that, Marx says, is determinant. As the demand for capital rises, because capital accumulation increases, as the economy expands, so this rate of interest rises, and that is the case whatever manipulations central banks make of bond yields, or their own policy rates. The supply of additional money-capital comes mostly from realised profits, with some also coming from mobilised savings, and, again, if realised profits start to be relatively squeezed by rising wages, this supply of money-capital falls relative to the demand for it, causing interest rates to rise.
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