Capital: A Critique of Political Economy, Vol. III. The Process of Capitalist Production as a Whole
THE object of this chapter, and in general all other phenomena of credit requiring our consideration later on, cannot here be analysed in detail. The competition between lenders and borrowers and the resulting minor fluctuations of the money-market fall outside of the scope of our inquiry. The circle described by the rate of interest during the industrial cycle requires for its presentation the analysis of this cycle itself, but this is likewise beyond our intentions for the present. The same is true of the greater or lesser approximate equalisation of the rate of interest in the world market. We merely intend here to analyse the independent form of interest-bearing capital and the individualisation of interest as differentiated from profit.
Since interest is merely a part of profit, paid according to our assumption by the industrial capitalist to the money-capitalist, the maximum limit of interest is marked by profit itself, and in that case the portion pocketed by the productive capitalist would be equal to zero. Aside from exceptional cases, in which interest might be actually larger than profit and could not be paid out of profit, one might consider as the maximum limit of interest the entire profit minus that portion (to be subsequently analysed), which resolves itself into wages of superintendence. The minimum limit of interest is wholly undefinable. It may fall to any depth. But counteracting circumstances will always appear and lift it again above this relative minimum.
"The relation between the amount paid for the use of some capital and this capital itself expresses the rate of interest, measured in money." "The rate of interest depends, 1), on the rate of profit; 2), on the proportion in which the total profit is divided between the lender and the borrower." (Economist, January 22nd, 1853.) "Since that which is paid as interest for the use of that which is borrowed is a part of the profit, which the borrowed is able to produce, this interest must always be regulated by that profit." (Massie, l. c., p. 49.)
Let us first assume, that a fixed relation exists between the total profit and that one of its parts, which has to be paid as interest to the money-capitalist. In this case it is evident, that the interest will rise or fall with the total profit, and this profit is determined by the general rate of profit and its fluctuations. For instance, if the average rate of profit were 20% and the interest one-quarter of the profit, then the rate of interest would be 5%; if the rate of profit were only 16%, the rate of interest would be 4%. With a rate of profit of 20%, the rate of interest might rise to 8%, and yet the industrial capitalist would still make the same profit as he would with the rate of profit at 16% and the rate of interest at 4%, namely 12%. If the interest should rise only to 6 or 7%, he would keep a still larger share of the profit. If the interest amounted to a constant quota of the average profit, it would follow, that to the extent that the general rate of profit would rise, the absolute difference between the total profit and the interest would increase, and to the same extent would that portion of the total profit increase, which the productive capitalist would pocket, and vice versa. Take it that the interest amounts to one-fifth of the average profit. One-fifth of 10 is 2; difference between total profit and interest 8. One-fifth of 20 is 4; difference 20-4 = 16. One-fifth of 25 is 5; difference 25-5 = 20. One-fifth of 30 is 6; difference 30-6 = 24. One-fifth of 35 is 7; difference 35-7 = 28. The different rates of interest of 4, 5, 6, 7% would in this case always represent one-fifth of the total profit. If the rates of profit are different, then different rates of interest may represent the same aliquot parts of the total profit, or the same percentage of the total profit. With such constant proportions of interest, the industrial profit (the difference between the total profit and the interest) would be so much greater, the higher the average rate of profit would be, and vice versa.
Assuming all other conditions to be equal, in other words, assuming the proportion between interest and total profit to be more or less constant, the productive capitalist will be able and willing to pay a higher or lower interest directly proportional to the level of the rate of profit.*62 Since we have seen, that the height of the rate of profit is inversely proportional to the development of capitalist production, it follows that the high or low rate of interest in a certain country is to the same extent inversely proportional to the degree of industrial development, at least so far as differences in the rate of interest actually expresses differences in the rates of profit. And this mode of regulating interest applies even to its average.
In any event the average rate of profit is the ultimate limit determining the maximum limit of interest.
The fact that the rate of interest is related to the average profit will be considered more at length immediately. Whenever a certain whole, such as profit, is to be divided between two parties, the first thing to be considered is the magnitude of the whole. The magnitude of the profit is determined by its average rate. Assuming the average rate of profit, and thus the magnitude of profit, for a capital of a certain size, to be given (for instance 100), it is evident that the variations of interest will be inversely proportional to those of the profit remaining in the hands of the capitalist working with a borrowed capital. And the circumstances, which determine the amount of profit to be divided (the values produced by unpaid labor), differ widely from those, which determine its distribution between these two kinds of capitalists, and frequently produce effects in opposite directions.*63
If we observe the cycles of variation, in which modern industry moves along—condition of rest, increasing activity, prosperity, overproduction, crisis, stagnation, condition of rest, etc., which fall outside of the scope of our analysis—we shall find, that a low rate of interest generally corresponds to periods of prosperity, or of extra profit, a rise of interest to the transition between prosperity and its reverse, and a maximum of interest up to a point of extreme usury to the period of crises.*64 With the summer of 1843 came a period of remarkable prosperity; the rate of interest, which had still been 4½% in the spring of 1842, fell to 2% in the spring and summer of 1843;*65 in September it fell even to 1½%. (Gilbart, I, p. 166); whereupon it rose to 8% and more during the crisis of 1847.
It may happen, however, that low interest is found in times of stagnation, and moderately rising interest in times of increasing activity.
The rate of interest reaches its highest point during crises, when money must be borrowed in order to meet payments at any cost. Since a rise of interest implies a fall in the price of securities, this offers at the same time a fine opportunity to people with available money-capital, who may acquire possession at cut-rate prices of such interest-bearing securities as must at least regain their average price in the regular course of things, as soon as the rate of interest falls again.*66
However, there is also a tendency of the rate of interest to fall, quite independently of the fluctuations of the rate of profit. This is due to two main causes.
I. "Let us assume that capital were never borrowed for any other but productive investments, it is nevertheless possible, that the rate of interest may vary without any change in the rate of gross profits. For, as a people progresses in the development of wealth, there arises and grows more and more a class of people, who find themselves possessed of funds through the labors of their ancestors, and who can live on the mere interest on them. Many, having actively participated in business in their youth and prime, retire, in order to live quietly in their old age on the interest of the sums accumulated by them. These two classes have a tendency to increase with the growing wealth of the country; for those who start out with a moderate capital acquire more easily an independent fortune than those, who start out with little. In old and rich countries, therefore, that portion of the national capital, whose owners do not care to invest it themselves, makes up a larger proportion of the total productive capital of society than in newly settled and poor countries. How numerous is not the class of annuity-holders in England! In proportion as the class of annuity-holders increases, that of the capital loaners increases also, for they are both the same." (Ramsay, Essay on the Distribution of Wealth, p. 201)
II. The development of the credit system, and with it the continually growing control of the industrials and merchants over the money savings of all classes of society by the co-operation of bankers, and the progressive concentration of these savings into such volumes as will enable them to serve as money-capital, must also depress the rate of interest some-what. We shall discuss this more at length later.
With reference to the determination of the rate of interest, Ramsay says that it "depends in part on the rate of gross profits, in part on the proportion in which this is divided into interest and profits of enterprise. This proportion depends on the competition between lenders and borrowers of capital. This competition is influenced, but not exclusively regulated, by the prospective rate of gross profits.*67 Competition is not exclusively regulated thereby, because on one side many are borrowing without any intention of productive investment, and because on the other the magnitude of the total loanable capital changes with the wealth of the country, independently of any change in the gross profits." (Ramsay, 1. c., p. 206, 207.)
In order to find the average rate of interest, it is necessary, 1), to calculate the average rate of interest during its variations in the great industrial cycles; 2), to find the rate of interest in such investments as require loans of capital for a long time.
The average rate of interest prevailing in a certain country—as differentiated from the continually fluctuating market rates—cannot be determined by any law. In this sense there is no such thing as a natural rate of interest, such as economists speak of when mentioning a natural rate of profit and a natural rate of wages. Massie has justly said with reference to this (p. 49): "The only thing which any man can be in doubt about on this occasion, is, what proportion of these profits do of right belong to the borrower, and what to the lender; and this there is no other method of determining than by the opinions of borrowers and lenders in general; for right and wrong, in this respect, are only what common consent makes so." The balancing of demand and supply—assuming the average rate of profit to be a fact—does not signify anything here. Wherever else this formula serves as an excuse (and is then practically correct) it is used to find the fundamental rule, which is independent of competition and rather determines it, this rule indicating the regulating limits, or the limiting magnitudes, of competition; this formula serves particularly as a help to those, who are bounded by the horizon of practical competition, its phenomena, and the conceptions arising from them, and who try thereby to get a rather shallow grasp of the internal connections of economic conditions within the sphere of competition. It is a method by which to pass from the variations that go with competition to the limits of these variations. This is not so in the case of the average rate of interest. There is no reason by which the idea could be justified, that the average conditions of competition, a balance between lenders and borrowers, should secure for the lender a rate of interest of 3, 4, 5%, etc., on his capital, or a certain percentage of the gross profits, say 20% or 50%. Whenever competition as such determines anything in this matter, its determination is a matter of accident, purely empirical, and only pedantry or fantasticalness can attempt to represent this accidental character as something necessary.*68 Nothing is more amusing than to listen in the reports of Parliament of 1857 and 1858 concerning bank legislation and commercial crises to the rambling twaddle of directors of the Bank of England, London bankers, provincial bankers, and theoretical professionals, when referring to "the real rate produced." They never get beyond such commonplaces as that "the price paid by loanable capital probably varies with the supply of such capital," that "a high rate of interest and a low rate of profit cannot exist together in the long run," and similar specious platitudes.*69 Custom, legal tradition, etc., have as much to do with the determination of the average rate of interest as competition itself, so far as this rate exists not merely as an average figure, but as an actual magnitude. An average rate of profit has to be assumed as a legal rate even in many law disputes, in which interest has to be calculated. Now, if we press the inquiry, why the limits of an average rate of interest cannot be deduced from general laws, we find the answer simply in the nature of interest. It is merely a portion of the average profit. The same capital appears in two roles, as a loanable capital in the hands of the lender, and as an industrial capital, or commercial capital, in the hands of the investing capitalist. But it performs its function as capital only once, and produces profit only once. In the process of production itself, the loanable nature of this capital does not play any role. To what extent the two parties divide the profit, in which they both share, is in itself as much a purely empirical fact belonging to the realm of accident as the division of the shares of common profit of some corporative business among different share holders by percentages. In the division between surplus-value and wages, on which the determination of the rate of profit essentially rests, the decision is made by two very different elements, labor-power and capital; these are functions of two independent variables, which limit one another; and their qualitative difference is the source of the quantitative division of the produced value. We shall see later that the same takes place in the division of surplus-value between rent and profit. But nothing of the kind occurs in the case of interest. In this case the qualitative differentiation, as we shall see immediately, proceeds rather from the purely quantitative division of the same lot of surplus-value.
From what has gone before it follows that there is no such thing as a "natural" rate of interest. But while, in distinction from the general rate of profit, there is on one side no general law, by which the limits of the average interest, or average rate of interest, may be determined and differentiated from the continually fluctuating market rates of interest, because it is merely a question of dividing the gross profit between two possessors of capital under different titles, there is on the other side the fact that the rate of interest, whether it be the average or the prevalent market rate, appears as a uniform, definite and tangible magnitude in a very different way from the general rate of profit.*70
The rate of interest holds a similar relation to the rate of profit as the market price of a commodity does to its value. To the extent that the rate of interest is determined by the rate of profit, it is so always by the general rate of profit, not by any specific rates of profit, which may prevail in some particular lines of industry, and still less by any extra profit, which some individual capitalist may make in some particular line of business.*71 It is a fact, then, that the general rate of profit re-appears as an empirical, given, reality in the average rate of interest, although the latter is not a pure or reliable expression of the former.
It is true, that the rate of interest itself differs according to the different classes of securities offered by the borrowers and according to the length of time for which the money is borrowed; but it is uniform within every one of these classes at a given moment. This distinction, then, does not militate against a fixed and uniform shape of the rate of interest.*72
The average rate of interest appears in every country for long epochs as a constant magnitude, because the general rate of profit—in spite of the continual variation of the particular rates of profit, in which a variation in one sphere is offset by an opposite variation in another sphere—varies only in long intervals. Its relative constancy is revealed in this more or less constant nature of the average rate, or common rate, of interest.
As concerns the continually fluctuating market rate of interest, it exists at any moment as a fixed magnitude, the same as the market price of commodities, because all the loanable capital as an aggregate mass is continually facing the invested capital, so that the relation between the supply of loanable capital on one side, and the demand for it on the other, decide at any time the market level of interest. This is so much more the case, the more the development and simultaneous concentration of the credit system impregnates the loanable capital with a general social character, and throws it all at one time on the market. On the other hand, the general rate of profit always exists as a mere tendency, as a movement to compensate specific rates of profit. The competition between capitalists—which is itself this movement toward an equilibrium—consists in this case in their activity of gradually withdrawing capital from spheres, in which the profit stays for a long time below the average, and in the same way taking capital into spheres, in which the profit is above the average. Or it may also consist in their distributing additional capital gradually and in varying proportions between these spheres. It is always a matter of a continual variation between supply and demand of capital with reference to different spheres, never a simultaneous mass effect, as it is in the determination of the rate of interest.
We have seen that interest-bearing capital, although a category absolutely different from a commodity, becomes a peculiar commodity, so that interest becomes its price, which is fixed at any time by supply and demand, just as the market price of an ordinary commodity is fixed. The market rate of interest, while continually oscillating, appears therefore at any moment just as constantly fixed and uniform as the prevailing market price of commodities. The money-capitalists offer this commodity, and the investing capitalists buy it and make a demand for it. This does not take place in the equalisation of profits toward a general rate of profit. If the prices of commodities in a certain sphere are below or above the price of production (leaving aside any oscillations, which are found in every business and are due to fluctuations of the industrial cycles), a balance is effected by an expansion or restriction of production. This signifies an expansion or restriction of the quantities of commodities thrown on the market by industrial capitalists, by means of immigration or emigration of capital to and from particular spheres. It is by such a compensation of the average market prices of commodities to prices of production that the deviations of specific rates of profit from the general, or average, rate of profit are corrected. This process does not, and cannot, at any time assume the appearance as though the industrial or mercantile capital as such were commodities seeking a buyer, but it does in the case of interest-bearing capital. To the extent that this process is perceptible, it is so only in the oscillations and compensations of the market prices of commodities to prices of production, not in any direct fixation of the average profit. The general rate of profit is actually determined, 1), by the surplus-value produced by the capital; 2), by the proportion of this surplus-value to the value of the total capital; and, 3), by competition, but only to the extent that this is a movement, by which capitals invested in particular spheres seek to draw equal dividends out of this surplus-value in proportion to their relative magnitudes. The general rate of profit, then, derives its determination actually from causes, which are quite different and far more profound than those of the market rate of interest, which is directly and immediately determined by the proportion between supply and demand. It is, therefore, not such a tangible and obvious fact as the rate of interest. The particular rates of interest in the different spheres of production are themselves more or less unsettled; but so far as they are perceptible, it is not their uniformity, but their differences, which appear. The general rate of profit itself appears only as the minimum limit of profit, not as the empirical and directly visible shape of the actual rate of profit.
In emphasizing this difference between the rate of interest and the rate of profit, we still leave out of consideration the following two circumstances, which favor the consolidation of the rate of interest: 1), The historical pre-existence of interest-bearing capital and the existence of a traditionally sanctioned general rate of interest; 2), the far greater direct influence exerted by the world market on the fixation of the rate of interest, independently of the economic conditions of a certain country, compared to its influence on the rate of profit.
The average profit does not appear as a directly existing fact, but merely as a final result of the compensation of opposite fluctuations, to be ascertained by analysis. Not so the rate of interest. It is, at least in its local validity, a daily fixed thing, a fact which serves even to industrial and mercantile capitals as a prerequisite and figure in their calculations. It becomes a general faculty of every sum of money of 100 pounds sterling to yield 2, 3, 4, 5%. Meteorological reports do not register the stand of the barometer and thermometer more accurately than the reports of the Bourse do the stand of the rate of interest, not for this or that capital, but for the money-capital on the market, for the available loanable capital in general.
On the money market only lenders and borrowers face one another. The commodity has the same form, money. All specific forms of capital according to its investment in particular spheres of production or circulation are here blotted out. It exists here in the undifferentiated, homogenous, form of independent value, money. The competition of the individual spheres ceases here. They are all thrown together as borrowers of money, and capital likewise faces all of them in a form, in which it is as yet indifferent to its definite investment in this or that specific manner. The character worn by industrial capital only in its movement and competition between individual spheres, the character of a common capital of a class comes into evidence here in full force by the demand and supply of capital. On the other hand, money-capital on the money market has actually that form, in which it may be distributed as a common element among the capitalists in the various spheres, regardless of its specific employment, as the requirements of production in each individual sphere may dictate. Add to this that with the development of large scale industry money-capital, so far as it appears on the market, is not represented by some individual capitalist, not by the owner of this or that fraction of the capital on the market, but assumes more and more the character of an organised mass, which is far more directly subject to the control of the representatives of social capital, the bankers, than actual production is. Under these circumstances, not only the demand for loanable capital is expressed with the full force of a class, but also its supply appears as loanable capital in masses.
These are some of the reasons, why the general rate of profit appears as a vanishing shape of mist compared to the definite rate of interest, which, while fluctuating in its magnitude, yet faces all borrowers as a fixed fact, because it varies uniformly for all of them. In like manner the variations in the value of money do not prevent it from having the same value for all commodities. In like manner the market prices of commodities fluctuate daily, yet this does not prevent them from being reported daily. In like manner, the rate of interest is regularly reported as "the price of money." It is so for the reason that capital itself is here offered in the form of money as a commodity. The fixation of its price is thus a fixation of its market price, as it is with all other commodities. Thus the rate of interest always appears as the general rate of interest, as so much for so much money, as a definite quantity. Not so the rate of profit. It may vary even within the same sphere for commodities with the same price, according to the different conditions under which different capitals produce the same commodity. For the rate of profit of the individual capital is determined, not by the market price of a commodity, but by the difference between the market-price and the cost-price. And these different rates of profit, first within the same sphere and then between different spheres themselves, can be balanced only by continual fluctuations.
(Note for later elaboration): A specific form of credit. It is known that when money serves as a means of payment instead of as a means of purchase, the commodity is transferred, but its value is not realised until later. If payment is not made until after the commodity has again been sold, then this sale does not seem to be the result of the purchase, but it is by this sale that the purchase is realised. In other words, the sale becomes a means of purchase.—Secondly; Titles to debts, bills of exchange, etc., become means of payment for the creditor.—Thirdly: The compensation of titles to debts replaces the money.
Notes for this chapter
"The natural rate of interest is governed by the profits of trade to particulars." (Massie, l. c., p. 51.)
At this place the manuscript contains the following statement: "The course of this chapter shows, that it is preferable, before analysing the laws of the distribution of profits, to ascertain first the way in which the division of quantities becomes one of quality. In order to make a transition to this end from the preceding chapter, nothing is needed but the provisional assumption, that interest is a certain indefinite portion of the profit.
"In the first period, immediately after a time of depression, money is plentiful without any speculation; in the second period money is plentiful and speculation flourishing; in the third period speculation begins to let up and money is in demand; in the fourth period money is scarce and the depression starts in." (Gilbart, l. c., p. 144.)
Tooke explains this by "the accumulation of surplus capital necessarily accompanying the scarcity of profitable employment for it in previous years, by the release of hoards, and by the revival of confidence in commercial prospects." (History of Prices from 1839 till 1847. London, 1848, p. 54.)
"An old customer of a banker was refused a loan upon a 200,000 pounds sterling bond; when about to leave to make known his suspension of payment, he was told there was no necessity for the step, under the circumstances the banker would buy the bond at 150,000 pounds sterling." (The Theory of the Exchanges. The Bank Charter Act of 1844, etc. London, 1869, p. 80.)
Since the rate of interest is on the whole determined by the average rate of profit, extraordinary swindling may often go hand in hand with a low rate of interest. Instance the railroad swindle in the summer of 1844. The rate of interest of the Bank of England was not raised to 3% until October 16th, 1844.
For instance, J. G. Opdyke, in his "Treatise on Political Economy" (New York, 1851) makes a very unsuccessful attempt to explain the general extension of a rate of interest of 5% by eternal laws. Still more naively proceeds Mr. Karl Arnd in "Die naturgemässe Volkswirthschaft gegenüber dem Monopoliengeist und dem Kommunismus, etc., Hanau, 1845." There we may read: "In the natural course of the production of goods there is only one phenomenon, which, in the fully settled countries, seems to be destined to regulate in some measure the rate of interest; this is the proportion, in which the quantities of wood of the European forests increase through their annual new growth. This new growth takes place, quite independently of their exchange value, at the rate of 3 or 4 to 100." (How queer that the trees should arrange for their new growth independently of their exchange value!) "According to this a fall of the rate of interest below its present level in the richest countries cannot be expected." Page 124. (He means, because the new growth of the trees is independent of their exchange value, even though their exchange value may depend on their new growth.) This deserves to be called "the primordial rate of forest interest." Its discoverer has made further meritorious contributions in this work to "our science" as the "philosopher of the dog tax."
The Bank of England raises and lowers the rate of its discount, always, of course, with due consideration of the rate prevailing in the open market, according to the imports and exports of gold. "By which gambling in discounts, by anticipation of the alterations in the bank rate, has now become half the trade of the great heads of the money centre"—that is, of the London money market. (The Theory of the Exchanges, etc., p. 113.)
"'The price of commodities fluctuates' continually; they are all made for different uses; the money serves for all purposes. The commodities, even those of the same kind, differ according to quality; cash money is always of the same value, or at least is assumed to be so. Thus it happens that the price of money, which we designate by the term interest, has a greater stability and uniformity than that of any other thing." (J. Steuart, Principles of Political Economy, French translation, 1789, IV, p. 27.)
"This rule of dividing profits is not, however, to be applied particularly to every lender and borrower, but to lenders and borrowers in general...remarkably great and small gains are the reward of skill and the want of understanding, which lenders have nothing at all to do with; for as they will not suffer by the one, they ought not to benefit by the other. What has been said of particular men in the same business is applicable to particular sorts of business; if the merchants and tradesmen employed in any one branch of trade get more by what they borrow than the common profits made by other merchants and tradesmen of the same country, the extraordinary gain is theirs, though it required only common skill and understanding to get it; and not the lenders,' who supplied them with money...for the lenders would not have lent their money to carry on any business or trade upon lower terms than would admit of paying so much as the common rate of interest; and therefore they ought not to receive more than that, whatever advantage may be made by their money." (Massie, 1. c., p. 50, 51.)
[Bank rate 5%. Market rate of discount 60 days' drafts, 5 3/8%. The same for 3 months' drafts 3½%. The same for 6 months' drafts 3 5/16%. Loans to bill brokers, day to day, 1 to 2%. The same for one week 3%. Last rate for fortnightly loans to stockholders 4¾ to 5%. Deposit allowance (banks) 3½%. The same (discount houses) 3 to 3¼%. How large this difference may be for one and the same day is shown by the preceding figures of the rate of interest of the London money market on December 9th, 1889, taken from the city article of the Daily News of December 10th. The minimum is 1%, the maximum 5%. F. E.]
Part V, Chapter XXIII.
End of Notes
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