Banking Capital and the Theory of Interest
Marx’s analysis of merchant’s capital, explained in the previous chapter, is predicated upon the role of money as means of exchange, that is, money as money (even if it is employed in the circulation of commodities for profit). In contrast, Marx’s theory of interest-bearing capital (IBC) is based on the role of money as capital. This theory concerns the borrowing and lending taking place between the money capitalists and industrial or merchant capitalists. For Marx, it is not the act of borrowing from a bank or the payment of interest that characterises IBC, but the use to which the loan is put. The loan must be used to embark on a circuit of industrial capital, that is, it must be advanced as money capital. Therefore, to be able to use IBC is to be able to be a capitalist rather than simply to be able to borrow.
As the subject of borrowing and lending in this relationship, money capital becomes a special type of commodity. It provides the use value of self-expansion for the lender and the borrower simultaneously, the former realising the interest and the latter the profit of enterprise that remains to industrial capital, after the payment of interest, from the surplus value produced through the use of the borrowed money capital. Marx emphasises that the price of this unique commodity (the interest rate) is ‘irrational’, since it is unrelated to the conditions of production. It depends entirely upon the competitive relations between borrowers and lenders. These issues are explored below.
Two features distinguish IBC from industrial and merchant’s capital. The first concerns the use of borrowing and lending (i.e. credit relations) specifically for the purpose of advancing money capital for the appropriation of surplus value. These credit relations involve the two most important fractions of the capitalist class: the money capitalists, who control the supply of IBC, and the industrial capitalists, who borrow IBC to use as capital in production and are responsible for the functioning of capital over the industrial circuit, supervising production and, often, sale. To this division of the capitalist class corresponds a division of the surplus value it extracts. As explained above, whereas the money capitalists receive interest, the industrial capitalists appropriate the profit of enterprise left over after the payment of interest (the determination of the rate of interest is discussed below).
Second, for its existence IBC draws upon the money capital accumulated through the sale of commodity capital, as well as the hoards of temporarily idle money of the industrial and commercial capitalists, workers, the state or anyone else. These hoards and savings are collected and centralised in the financial institutions, and transformed into potential money capital available to industrial capital. IBC therefore performs the ownership and control functions of money capital on behalf of capital as a whole. IBC is not, however, the juridical property of these institutions, and depositors are entitled to withdraw their funds (though different types of financial investment may incur temporary restrictions on the ability to make withdrawals). Banks normally extend credit over and above their levels of deposits, and such credit can be used to initiate fresh circuits of capital.
The differences between industrial capital and IBC are starkly illustrated by their respective circuits. It was shown in Chapter 4 that industrial capital is expressed by M – C – M’, for which money intervenes in the processes of production and exchange. In contrast, IBC is represented by M – M’, where money stands apart from these processes.
It is a constant theme throughout the three volumes of Capital that access to IBC holds the key to rapid accumulation. Increase in the size of capital, often achieved through borrowing, is one of the most important means of competitive accumulation. For example, the process of centralisation can be financed by bank loans, as with mergers and acquisitions, and the size of capital plays a critical role in the pursuit of productivity increases through the introduction of more advanced machinery. It is through the detailed analysis of these relations and processes that Marx explains the structure of the financial system and its relationship with industrial capital.
Money Capital and the Financial System
Marx’s distinction between industrial capital and IBC does not always translate neatly into empirical analysis, as exemplified in the previous chapter for the ‘hybrids’ attached to merchant’s capital. This is so for two main reasons.
On the one hand, the functions of money as money can be undertaken by various financial instruments – a credit card, for example, can serve as means of payment, but it cannot settle all accounts once and for all. As a result, there exists a complex and overlapping cascade of monetary instruments serving across all functions and circumstances, with ‘money proper’ – whether the US dollar or something else that is as good as gold – at its pinnacle. By the same token, the activities associated with money-dealing capital (MDC), such as bookkeeping, the calculation and safeguarding of a money reserve, and the role of cashier, can be performed in various ways; for example, in-house (when firms hire specialised staff to speculate over risky assets or exchange-rate movements, or in futures and options markets), by specialist firms outside the banking system, or by financial institutions. In analytical terms, even if these activities are performed in-house by industrial capital they are a function of merchant’s capital and attract the normal rate of profit even though they do not produce surplus value (see Chapter 11).
Three analytical distinctions separate MDC from IBC. First, MDC advances credit in general (for example, consumer credit, including credit cards), whereas IBC advances money capital so the borrower can appropriate surplus value. Second, MDC draws on industrial profit (in the same way as commercial capital), whereas IBC induces the structural division of surplus value into interest and profit of enterprise. Third, the return on MDC tends to equal the general profit rate. In contrast, the rate of return on IBC does not involve this tendency, as it arises out of the division of surplus value between interest and profit of enterprise (see below). In spite of these differences, in contemporary society the functions of MDC (for example, issuing credit cards) are normally undertaken by the banking system, so the resources involved become part of IBC. Consequently, it can be difficult to classify firms and the resources they control as belonging to one or other of the categories of industrial, commercial, money-dealing or interest-bearing capital, and there is considerable scope for the existence of ‘hybrids’ in practice.
IBC can be party to various operations targeted at producing or appropriating surplus value, either independently or in association with industrial capital. The credit system extends the limits of the reproduction process and accelerates the development of the productive forces and the world market. The returns on these operations may vary according to the fortunes of specific investments as well as of the capitalist macroeconomy, as with shares, derivatives or venture capital; or these returns may be designated in advance. Whatever the form and conditions taken by these transactions, IBC attaches itself through them to the reproduction of capital as a whole, representing a claim on surplus value that has yet to be produced. This claim can be expressed through transactions involving payments yet to be made, or the transformation of these claims into tradable assets in a number of ways, ranging from bully-boy debt collection to government bonds, futures contracts, collateralised debt obligations, and so on. In turn, these markets breed upon one another, with financial services being sold in connection to portfolios of assets, as in pension funds and investment trusts. Each of these is a paper claim to property that may or may not include productive capital that, in turn, may or may not generate or appropriate surplus value. This is what Marx terms ‘fictitious capital’: paper claims on surplus value that may or may not be realised, but which are not necessarily fraudulent.
In this light, it is hardly surprising that the financial sector should be capable of financing overproduction and generating speculative bubbles and spectacular crashes. Nor is it surprising that fraud is ever present. The distinction between finance and industry and the shifting balance between them are dramatically illustrated by the developments in world finance and national financial systems over the past 40 years. The bloated and heavily rewarded international financial system has benefited at the expense of real accumulation and, over the past decades, has been subject to severe instability and costly crises. In Volume 3 of Capital, Marx investigates the circumstances in which the accumulation of IBC and the assets and markets built upon it can be validated by the accumulation of real capital. He concludes that no answer can be given in advance, because there can be no guarantee of future production and appropriation of surplus value (see Chapter 7). For example, the owner of IBC might advance to an industrialist who is corrupt, incompetent or thwarted by domestic or foreign competition, or to a consumer who is, or becomes, unable to pay back, or who ultimately refuses to do so. In either case, the circuit of IBC can be interrupted, with potentially severe implications for the reproduction of both interest-bearing and industrial capital.
In conclusion, the relationship between industrial capital and IBC is based on an intermingling of circuits of capital without predetermined outcomes in terms of real accumulation. For this basic reason, neither the functioning of the financial system nor its interaction with real accumulation can be subject to control in the mainstream sense of fixing the supply of money or tying it (or its cost) to the level of economic activity. In case of fictitious capital, for example, this might correspond to a real accumulation of capital, with successful investment underpinned. But it might equally reflect the securitisation of a stream of income unrelated to accumulations as such – as with mortgage payments, which then become subject to speculation through derivatives formed out of them (as is universally acknowledged to have occurred with US subprime).
This is not to suggest that private or public regulation of the financial system, including monetary policy, cannot have an effect on outcomes. But the idea that fictitious capital can be fully aligned with real accumulation through regulation is misguided, because fictitious capital has become increasingly necessary for real accumulation, but cannot guarantee it. By the same token, the nature and structure of the financial system and the modalities of its interaction with real accumulation cannot be determined by abstract analysis. Rather, they evolve together, establishing particular structures of financial and industrial activity, as well as specific outcomes during the course of crises.
Interest as an Economic Category
Drawing upon the analysis above, it is possible to identify the distinguishing features of Marx’s theory of finance and interest. Marx divides the capital functioning within exchange into merchant (commercial) capital and interest-bearing capital. Merchant capital typically involves trading, such as retailing and wholesaling, and, apart from its location within the sphere of exchange, it is logically defined by its not producing (surplus) value, whilst being subject to competitive entry and exit just like industrial capital. Consequently, merchant capital is subject to the tendency towards equalised profit rates. Merchant capital also involves a variety of non-trading credit and other monetary relations and functions, which, for convenience, we have called money-dealing capital, along with Marx. MDC is a general category defined by the necessity of monetary circulation for capitalist reproduction. The corresponding tasks of handling reserves, and so on, may be assigned to specialised capitalists or retained within individual firms.
In contrast, IBC involves the borrowing and lending of money capital either to produce surplus value, or to appropriate it through merchant capital. IBC potentially earns interest as a result, leading to a division of surplus value between such interest and profit of enterprise, with the latter distributed across competing industrial capitals and subject to rate of profit equalisation. The operation of IBC shows that the accumulation of capital is mediated by the differential access of competing capitalists to money capital.
The division between profit of enterprise and interest is not predetermined by the value system. Rather, it is the outcome of the accumulation process, both in terms of how much surplus value is realised (as the advance of money capital is a precondition but not a guarantee of profitability), and how it is divided amongst IBC, industrial and merchant capitalists. This division bears no exact relationship to the rate of interest. Nonetheless, differences between rates of interest in borrowing and lending, bank fees and other charges are significant mechanisms through which IBC appropriates part of the surplus value produced.
This does not mean that the division between interest and profit of enterprise is not subject to systematic forces and determinations. But the capacity to appropriate surplus value as interest derives from the role of IBC as the lever of competition in capital accumulation, where IBC is differentially situated in relation to industrial and merchant capital. For example, a bank may be willing to lend to an industrialist to compete with another in the same sector, but is less likely to lend to support the growth of a rival financial institution. Of course, this does not mean there is no competition within the financial sector, or that inter-bank lending is absent, only that such competitive (and other) relations are of a different nature than for the rest of the economy. This is precisely why the interest attached to IBC is not competed away to nothing, or to the normal rate of profit on the use of finance’s own capital advanced. Indeed, although an extreme example, consider a bank that borrows and lends money (on a margin) whilst using minimal capital of its own. Its rate of return on its own capital would be extremely high!
Crucial, then, to Marx’s theory is the simple and abstract separation between IBC and other forms of capital and the appropriation of interest by IBC out of surplus value. But, in the accumulation and circulation of capital as a whole, the role of interest payments and money markets is much more complex and mixed-up in practice, with receipt of interest, dividends or other forms of revenue constituting the mechanisms by which either profit is equalised across some (industrial and commercial) capitals or surplus value is appropriated by IBC. This is further complicated by the extent to which IBC itself is embedded in other types of commercial activities in hybrid form, by analogy with hybrids across industrial and merchant capital.
Nor is this of purely academic interest. For the current era of financialisation is precisely one in which there has been a disproportionate expansion of capital in exchange, not only through the proliferation of financial derivatives, but also through the extension of finance into more and more areas of economic and social reproduction, of which personal finance is a leading example (along with mortgages, pensions and health care). These processes can be understood through the application of Marx’s method and the categories outlined above, which suggest that there has been an increasing shift of capitalist activity along the productive, commercial, money-dealing and interest-bearing continuum, as well as hybridity across these categories. In other words, an increasing range of activities has come under the auspices of IBC – not least housing finance, as was dramatically illustrated by the rise and collapse of sub-prime mortgages in the United States – not so much in the selling of mortgages to homeowners as the selling on of such mortgage payment obligations as financial derivatives (i.e. fictitious capital). But this is to anticipate our final chapter.
Marx’s ability to construct a theory of interest as opposed to profit is a distinguishing feature of his analysis. In classical political economy, for example, interest is a category introduced with little if any explanation, and the rate of interest oscillates around an arbitrary ‘natural’ rate for which there are no determinants other than supply of and demand for money. Equally, within neoclassical economics, most notably in the Fisherian theory of inter-temporal consumption and production, the rates of interest and profit are conceptually identical, and quantitatively equal in equilibrium. Even in Keynesian economics (and for Keynes himself), where monetary factors are specifically introduced, the rate of profit – represented by the marginal efficiency of capital – is equal to the rate of interest. While short-term expectations may lead to a disequilibrium value of the rate of interest, underlying Keynesianism is the idea that there is a natural or equilibrium full-employment interest rate. This significant divergence from Marx’s theory is intimately connected to the failure of Keynesian theory to differentiate between demand, and hence credit, for accumulation and for consumption, except for the impact of multipliers on effective demand.
In contrast, Marx not only categorises interest distinctively, he also locates it within the analytical structure of his economic thought, deriving interest from the competitive relations between two clearly distinguished fractions of the capitalist class. He does so by reference to the abstract tendencies and structures that he has identified for the capitalist economy; for example, for the rate of profit to be equalised between competing industrial and money-dealing capitals, for the credit system to become a key mechanism of competition and lever of accumulation, for money as capital to stand apart from other commodities, for idle hoards to be centralised in the banking system, and so on. These abstract considerations can be brought to bear on Marxist historical and empirical analyses of IBC and the specific financial structures in which it is embedded. Marx had much to say on these issues, especially in his study of the British financial system in Volume 3 of Capital, but this complex material cannot be reviewed here.
In spite of their enormous importance for contemporary capitalism, Marxian studies of money and finance have progressed relatively slowly, with little generally being said about the more fundamental issues of the nature of finance and the relationship between financial and industrial capital (except with reference to the increasing prominence of the former, especially in the historical epoch of neoliberalism).
Marxists have frequently debated whether commodity money is an abstraction for Marx, and whether this is a legitimate abstraction, or – something rather stronger – a necessity for capitalism. Our view is that Marx’s theory of money demonstrates how its material presence is increasingly displaced by symbols, not least paper and credit money (see, for example, Marx 1981b, 1987). More important than the residual role of gold as such as a world money, for the purposes of hoarding, for example, are the monetary relations attached to accumulation and how these evolve over time (which is examined in Chapter 14). See the debate between Jim Kincaid (2007, 2008, 2009) and Ben Fine and Alfredo Saad-Filho (2008, 2009) for the related but separate issue of the role of money in the development and presentation of Marx’s theory of value.
Marx’s theory of IBC and interest is outlined in Marx (1981b and, especially, 1981a, pt.5). This chapter draws upon Ben Fine (1985–6). Different aspects of Marx’s theory of money and credit are explained by Suzanne de Brunhoff (1976 and 2003), Duncan Foley (1986, ch.7), David Harvey (1999, chs 9–10), Rudolf Hilferding (1981), Makoto Itoh and Costas Lapavitsas (1999), Costas Lapavitsas (2000a, 2000b, 2003a, 2003b, 2013), Costas Lapavitsas and Alfredo Saad-Filho (2000), Roman Rosdolsky (1977, ch.27) and John Weeks (2010, ch.5).