I will turn now to the question of inflation and interest rates. Martin says,
“In the 1980s, interest rates were pushed high to tighten credit in a more slippery system with much faster-moving and more extensive bank activity, and thus restrain money-creation.”
In fact, looking at real interest rates, as against nominal interest rates, a quite different picture emerges, as the following World Bank chart of US and UK real interest rates between 1961-2021 demonstrate.
Looking at real, i.e. adjusted for inflation, interest rates, in the US, they rose steadily from the mid 1970's, as the squeeze on profits, was manifest in a need to finance a greater proportion of capital accumulation from borrowing, in conditions where that same growing wage share, which squeezed profits meant that there was growing consumer demand fuelling aggregate demand, and a consequent need of firms to accumulate capital to meet it.
The same is seen in Britain. In the US, real interest rates peaked in 1981 at 8.6%, and then fell progressively to 3.5% in 1993, before rising again until they reached 6.8% in 2000. In the aftermath of the financial crisis of 2000, they then fell until 2003, but, confirming the analysis above, as the new long wave expansion, begun in 1999, reasserted itself, they rose again, reaching 5.2%, in 2007, ahead of the global financial crisis. Even so, by 2011, the US real interest rate was rising again until 2019, when the effects of lockdowns brought about a sharp fall, but 2022 has seen the long wave and laws of economics reassert themselves, as not only has inflation risen massively, but bond markets have seen their biggest falls in prices in history, with a corresponding rise in bond yields, which is now also being manifest in rising real interest rates.
As I have set out elsewhere, real interest rates do not rise as a consequence of inflation. The reason for that is simple. The rate of interest is determined by the supply of, and demand for money-capital. The supply of additional money-capital comes from realised profits, and some from mobilising additional savings, such as money reserves for the replacement of worn out fixed capital, or for future consumption and so on. The demand comes from firms to finance capital accumulation, but also from governments to finance budget deficits and capital projects, and from households to fund purchase of durable goods, houses etc.
As Marx sets out in Theories of Surplus Value, basing himself on Hume and Massie, if the general level of prices rises, due to inflation, then, as the money prices of commodities rise, so money profits will rise, and the nominal money value of money reserves will rise, so that the supply of money-capital rises nominally. But, the same higher commodity prices mean that firms face higher prices for constant and variable-capital, so that their demand for money-capital rises nominally by the same amount. If demand and supply rise by the same nominal amount, then there is no basis for a change in the rate of interest.
“Massie laid down more categorically than did Hume, that interest is merely a part of profit. Hume is mainly concerned to show that the value of money makes no difference to the rate of interest, since, given the proportion between interest and money-capital—6 per cent for example, that is, £6, rises or falls in value at the same time as the value of the £100 (and. therefore, of one pound sterling) rises or falls, but the proportion 6 is not affected by this.” (p 373)
However, it clearly makes a difference if I lend £100 at today's prices, and get back the same £100 capital sum, in a year's time, when inflation has caused prices to rise by 10%. In effect, I would have lost 10% of my capital. Nominal, as opposed to real, interest rates rise accordingly, as lenders seek to cover themselves for such depreciation of their capital, in the same way that a machine hire company seeks to obtain an amount to cover the wear and tear of the machinery, during the period of lease, in addition to charging interest on the loan of the capital. The real situation is shown by looking at, for example, inflation protected securities. If you had put your money in the UK NS&I's inflation protected bonds, for example, over the last year, you would have received a tiny 0.25% rate of interest, but you would have received a whacking 10% to cover the inflation adjustment during the year.
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