Engels turns, now, to the related question of the rate of interest and the supply of money. As I have set out, elsewhere, the confusion extends not only to a failure to distinguish between money and money tokens/currency, but also money-capital. The rate of interest is a function of the demand for and supply of money-capital, and neither an increase in the supply of money nor money tokens equates to an increase in the supply of money-capital, which is largely a function of the rate of profit, and consequent mass of realised profit.
“Hume's arguments, expressly directed against Locke that the rate of interest is not regulated by the amount of money available but by the rate of profit, and his other explanations of the causes determining the high or low level of the rate of interest, are all to be found, much more exactly though less brilliantly stated, in An Essay on the Governing Causes of the Natural Rate of Interest; wherein the sentiments of Sir W. Petty and Mr. Locke, on that head, are considered. This work appeared in 1750, two years before Hume's essay; its author was J. Massie, a writer active in various fields, who had a wide public, as can be seen from contemporary English literature. Adam Smith's discussion of the rate of interest is closer to Massie than to Hume. Neither Massie nor Hume knows or says anything regarding the nature of “profit”, which plays a role with both.” (p 305-6)
Marx discusses these ideas in Theories of Surplus Value. The argument that a rise in the supply of money, i.e. of the money commodity, such as gold or silver, cannot bring about a rise in prices, unless that increased supply is a consequence of a fall in the value of that money commodity, was set out above. However, a fall in the value of the money commodity does bring about both an increase in the quantity of it required to act as money, and to be thrown into circulation as currency, and, also, a rise in prices.
As Marx sets out in "A Contribution To The Critique Of Political Economy", the same is true if the quantity of gold represented by the standard of prices, e.g. the Pound, is reduced. In other words, if the value of gold remains constant, but a Pound, now, represents only 1/8 ounce of gold, rather than ¼ ounce of gold, i.e. each Pound, represents only half the amount of social labour-time it did previously, more £'s must be thrown into circulation, and prices double.
But, in any of these cases, the increased supply of money, or of money tokens does not represent an increase in the supply of money-capital. If the value of money falls, requiring more money to be thrown into circulation, or if the value of money tokens falls, because the value of money remains constant, but additional tokens are thrown into circulation, the effect is a rise in prices, not a change in interest rates. If on one side of a balance there is 6 potatoes, and on the other side there is a 5 kg weight, it does not change anything if, instead, of the one 5 kg. weight there is 5 1 kg. weights. If the demand for money-capital is £1 million to buy commodities, if prices rise as a result of inflation, so that those commodities cost £2 million, then, the demand for money-capital will rise to £2 million, and this £2 million will have only the same value as previously was represented by £1 million, i.e. will buy only the same quantity of commodities.
There would be no effect on the rate of interest. If it was 10% before, it will be 10% after. Before, the £100,000 of interest bought a certain quantity of commodities, but, now, the same quantity of commodities are bought with the £200,000 of interest. All that has changed is the price labels.
