The object of this chapter, like the various phenomena of credit that we shall be dealing with later, cannot be investigated in detail. Competition between lenders and borrowers, and the resulting short-term fluctuations in the money market, fall outside the scope of our discussion. The circuit which the rate of interest describes during the industrial cycle can only be dealt with after the cycle itself. Nor can we go into the latter here. The same applies for the approximate equalization of the rate of interest, more or less, on the world market. All that we are concerned with here is the independent form of interest-bearing capital and the way that interest acquires autonomy vis-à-vis profit
Since interest is simply a part of profit, a part which we have assumed the industrial capitalist has to pay to the money capitalist, the maximum limit of interest would seem to be the profit itself, in which case the share that accrues to the functioning capitalist would be zero. Leaving aside those special cases where interest is actually greater than profit, so that it cannot all be paid out of the profit, we might perhaps consider the maximum limit of interest as the whole profit minus the part of it reducible to ‘wages of superintendence’, to be developed later. The minimum limit of interest is completely indeterminate. It could fall to any level, however low. But countervailing circumstances constantly enter to raise it above this relative minimum.
‘The relation between the sum paid for the use of capital and the capital expresses the rate of interest as measured in money.’ ‘The rate of interest depends (1) on the rate of profit; (2) on the proportion in which the entire profit is divided between the lender and borrower’ (The Economist, 22 January 1853). ‘If that which men pay as interest for the use of what they borrow, be a part of the profits it is capable of producing, this interest must always be governed by those profits’ (Massie, op. cit., p. 49).
We shall start by assuming a fixed ratio between the total profit and the part of it paid to the money capitalist as interest. Then it is clear that the interest will rise or fall with the total profit, and the latter is determined by the general rate of profit and its fluctuations. If the average profit rate is 20 per cent, for example, and interest a quarter of the profit, the interest rate will be 5 per cent; if profit is 16 per cent, interest will be 4 per cent. Given a rate of profit of 20 per cent, interest could rise to 8 per cent and the industrial capitalist would still make the same profit as with a profit rate of 16 per cent and an interest rate of 4 per cent; i.e. 12 per cent. If interest were to rise to 6 or 7 per cent, he would in fact retain a greater part of the profit. But if interest is a constant proportion of the average profit, it will follow that the higher the general rate of profit, the greater is the absolute difference between total profit and interest, and the greater therefore the total profit that accrues to the functioning capitalist, and vice versa. Let us assume that interest is one-fifth of the average profit. 1/5 of 10 is 2;the difference between the total profit and the interest is 8. 1/5 of 20 is 4. The difference = 20 — 4 = 16; 1/5 of 25 is 5; difference = 25 — 5 = 20; 1/5 of 30 is 6; difference = 30 — 6 = 24; 1/5 of 35 is 7; difference = 35 — 7 = 28. The various interest rates of 4,5,6 and 7 per cent would here always be one-fifth or 20 per cent of the total profit. As the rate of profit varies, so different rates of interest can express the same aliquot part of the total profit or the same percentage share in it. With interest such a constant proportion, the industrial profit (the difference between the total profit and the interest) would be greater, the higher the general rate of profit, and vice versa.
All other circumstances taken as equal, i.e. taking the ratio between interest and total profit as more or less constant, the functioning capitalist will be able and willing to pay a higher or lower interest in direct proportion to the level of his profit rate.61 Since we have seen that the level of the profit rate stands in inverse proportion to the development of capitalist production, it follows that the higher or lower rate of interest in a country stands in the same inverse proportion to the level of industrial development, particularly in so far as the variation in the rate of interest expresses an actual variation in the profit rate. We shall see later on that this need by no means always be the case. In this sense one can say that interest is governed by profit, and more precisely by the general rate of profit. And this kind of regulation applies even to its average.
At all events, the average rate of profit should be considered as ultimately determining the maximum limit of the interest.
We shall immediately go on to consider more closely this circumstance that interest is to be related to the average profit. Where a given whole such as profit is to be divided in two, the first thing that matters is of course the size of the whole to be divided, and this, the magnitude of profit, is determined by the average rate of profit. Once the general rate of profit is given, i.e. the amount of profit on a capital of given size, which we can take as 100, then interest evidently varies in inverse proportion to the part of profit that remains to the functioning capitalist who operates with borrowed capital. And the circumstances that determine the magnitude of the profit to be divided, the value product of unpaid labour, are very different from those that determine its distribution among these two kinds of capitalist, and often operate in completely opposite directions.62
If we consider the turnover cycles in which modern industry moves – inactivity, growing animation, prosperity, overproduction, crash, stagnation, inactivity, etc., cycles which it falls outside the scope of our argument to analyse further – we find that a low level of interest generally corresponds to periods of prosperity or especially high profit, a rise in interest comes between prosperity and its collapse, while maximum interest up to extreme usury corresponds to a period of crisis.63 From summer 1843 onwards there was a period of marked prosperity. The rate of interest, which in spring 1842 was still 4 1/2 per cent, fell in spring and summer 1843 to 2 per cent;64 in September it even fell to 1 1/2 per cent (Gilbart [op. cit.], I, p. 166). During the crisis of 1847, it rose to 8 per cent and more.
Yet low interest can also be accompanied by stagnation, and a moderate rise in interest by growing animation.
The rate of interest reaches its highest level during crises, when people have to borrow in order to pay, no matter what the cost. And since a rise in interest corresponds to a fall in the price of securities, this is at the same time a very suitable opportunity for people with available money capital to buy up such interest-bearing securities at ridiculously low prices, and in the regular course of events these securities are bound to reach at least their average price again as soon as the interest rate falls.65
But there is also a tendency for the rate of interest to fall, quite independently of fluctuations in the rate of profit. And there are two major reasons for this.
(1) ‘Were we even to suppose that capital was never borrowed with any view but to productive employment, I think it very possible that interest might vary without any change in the rate of gross profits. For as a nation advances in the career of wealth, a class of men springs up and increases more and more, who by the labours of their ancestors find themselves in the possession of funds sufficiently ample to afford a handsome maintenance from the interest alone. Very many also who during youth and middle age were actively engaged in business, retire in their latter days to live quietly on the interest of the sums they have themselves accumulated. This class, as well as the former, has a tendency to increase with the increasing riches of the country, for those who begin with a tolerable stock are likely to make an independence sooner than they who commence with little. Thus it comes to pass, that in old and rich countries, the amount of national capital belonging to those who are unwilling to take the trouble of employing it themselves, bears a larger proportion to the whole productive stock of the society, than in newly settled and poorer districts. How much more numerous in proportion to the population is the class of rentiers… in England! As the class of rentiers increases, so also does that of lenders of capital, for they are one and the same’ (Ramsay, An Essay on the Distribution of Wealth, pp. 201–2).
(2) The development of the credit system, the ever growing control this gives industrialists and merchants over the monetary savings of all classes of society through the mediation of the bankers, as well as the progressive concentration of these savings on a mass scale, so that they can function as money capital, must also press down the rate of interest. More on this later.
As far as the determination of the rate of interest is concerned, Ramsay says it ‘depends partly upon the rate of gross profits, partly on the proportion in which these are separated into profits of capital and those of enterprise. This proportion again depends upon the competition between the lenders of capital and the borrowers; which competition is influenced, though by no means entirely regulated, by the rate of gross profit expected to be realized.66 And the reason why competition is not exclusively regulated by this cause, is, because on the one hand many borrow without any view to productive employment; and, on the other, because the proportion of the whole capital to be lent, varies with the riches of the country independently of any change in gross profits’ (Ramsay, op. cit., pp. 206–7).
In order to find the average rate of interest, we have to calculate (1) the average interest rate as it varies over the major industrial cycles; (2) the rate of interest in those investments where capital is lent for longer periods.
The prevailing average rate of interest in a country, as distinct from the constantly fluctuating market rate, cannot be determined by any law. There is no natural rate of interest, therefore, in the sense that economists speak of a natural rate of profit and a natural rate of wages. Massie was already completely correct when he noted (op. cit., 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 coincidence of demand and supply means nothing at all here, even taking the average rate of profit as given. Where this formula is resorted to in other cases (and this is then correct for practical purposes), it serves as a formula for finding basic rules which are independent of competition and, instead, determine it (regulating limits or limiting quantities); i.e. it is a formula for those caught up in the practice of competition, in its manifestations and in the ideas that develop out of these. With it they can arrive at some idea, even if still a superficial one, of the inner connection of economic relations that presents itself within competition. It is a method of getting from the variations that accompany competition to the limits of these variations. This is not the case with the average rate of interest. There is no reason at all why the average conditions of competition, of equilibrium between lender and borrower, should give the lender an interest of 3, 4, 5 per cent, etc. on his capital, or alternatively a certain percentage, 20 per cent or 50 per cent, of the gross profit. Where, as here, it is competition as such that decides, the determination is inherently accidental, purely empirical, and only pedantry or fantasy can seek to present this accident as something necessary.67 Nothing is more amusing in the parliamentary reports of 1857 and 1858 concerning bank legislation and the commercial crisis than when directors of the Bank of England, London and country bankers and professional theorists chatter back and forth about the ‘real rate produced’, without getting any further than such commonplaces as, for example, that ‘the price paid for the use of loanable capital should vary with the supply of such capital’, that ‘a high rate and a low profit cannot permanently exist’, and other platitudes of the same kind.68 Custom, legal tradition, etc. are just as much involved in the determination of the average rate of interest as is competition itself, in so far as this average rate exists not only as an average number but as an actual magnitude. An average interest must be assumed in many legal contexts where interest has to be reckoned. If we go on to ask why the limits of the average interest rate cannot be derived from general laws, the answer simply lies in the nature of interest. It is merely a part of the average profit. The same capital appears in a double capacity, as capital for loan in the hands of the lender, and as industrial or commercial capital in the hands of the functioning capitalist. But it functions only once, and produces profit only once. In the production process itself, the character of capital as loan capital does not play any role. How the two parties who have claims on this profit actually share it between them is as it stands a purely empirical fact, pertaining to the realm of chance, just as the respective shares in the common profit of a business partnership are distributed among its various members. With the division between surplus-value and wages, on which the determination of the profit rate essentially depends, two quite different elements are involved, labour-power and capital. It is the functions of two independent variables which set limits to one another, and the quantitative division of the value produced emerges from their qualitative distinction. We shall see later on that the same thing takes place with the division of surplus-value between rent and profit. With interest, there is nothing of the kind. Here, on the contrary, the qualitative distinction proceeds from the purely quantitative division of the same piece of surplus-value, as we shall immediately go on to see.
From what has already been developed, it follows that there is no ‘natural’ rate of interest. But if on the one hand the average or middling rate of interest, as distinct from the constantly fluctuating market rate, cannot be given limits by a general law, since what is involved is simply a distribution of the gross profit between two persons who possess capital under different titles, the rate of interest, conversely, whether it is the average rate or the market rate of the time, appears as something quite different from the general rate of profit, as a uniform, definite and palpable magnitude.69
The rate of interest is related to the profit rate in a similar way as the market price of a commodity is to its value. In so far as the rate of interest is determined by the profit rate, this is always through the general rate of profit and not through the specific profit rates that may prevail in particular branches of industry, still less by the extra profit that the individual capitalist might make in a particular sphere of business.70 The general rate of profit, in fact, reappears in the average rate of interest as an empirical, given fact, even though the latter is not a pure or reliable expression of the former.
It is certainly true that the interest rate itself is always different according to the class of security provided by the borrowers, and according to the duration of the loan as well; but for each of these categories, it is uniform at a given moment of time. This distinction, therefore, does not militate against the fixed and uniform character of the rate of interest.71
In any given country, the average rate of interest is constant over long periods, because the general rate of profit changes only in the long run – despite constant change in the particular rates of profit, a change in one sphere being offset by an opposite change in another. And the relative constancy of the profit rate is precisely reflected in this more or less constant character of the average or common rate of interest.
As far as the permanently fluctuating market rate of interest is concerned, this is a fixed magnitude at any given moment, just like the market price of commodities, because on the money market all capital for loan confronts the functioning capital as an overall mass; i.e. the relationship between the supply of loan capital on the one hand, and the demand for it on the other, is what determines the market level of interest at any given time. This is all the more true, the more the development and associated concentration of the credit system gives loan capital a general social character, and puts it on the money market all at once, simultaneously. The general rate of profit, on the other hand, only ever exists as a tendency, as a movement of equalization between particular rates of profit. The competition between capitalists – which is itself this movement of equalization – consists here in their withdrawing capital bit by bit from those spheres where profit is below the average for a long period, and similarly injecting it bit by bit into spheres where it is above this; or, alternatively, in their dividing additional capital between these spheres in varying proportions.
There is a constant variation in the injection and withdrawal of capital vis-à-vis these various spheres, never a simultaneous effect on a mass scale as with the determination of the interest rate.
We have seen that although it is a category absolutely different from the commodity, interest-bearing capital becomes a commodity sui generis with interest as its price, and this price, just like the market price of an ordinary commodity, is fixed at any given time by demand and supply. The market rate of interest, though in constant flux, thus appears at any given moment as every bit as fixed and uniform as the momentary market price of any commodity. The money capitalists supply this commodity, and the functioning capitalists buy it; they constitute the demand for it. This process of fixing the rate by supply and demand does not apply to the equalization that produces the general rate of profit. If the prices of commodities in one sphere are below or above their price of production (and in this connection we ignore the fluctuations connected with the industrial cycle, or those that simply bear on the individual business), an equalization takes place by the expansion or contraction of production, i.e. an increase or decrease in the quantity of commodities that these industrial capitals put on the market, mediated by the immigration or emigration of capital with respect to these particular spheres of production. It is the equalization brought about in this way, whereby the average market prices of commodities are reduced to their prices of production, that corrects divergences between the particular rates of profit and the general or average profit rate. This process never appears and never can appear as if industrial or commercial capital as such were a commodity vis-à-vis a buyer, in the way that interest-bearing capital is. It appears only in the fluctuations and equalizations that reduce the market prices of commodities to their production prices; not as the direct establishment of an average profit. The general rate of profit is determined in fact (1) by the surplus-value that the total capital produces; (2) by the ratio of this surplus-value to the value of the total capital; and (3) by competition, but only in so far as this is the movement through which the capitals invested in particular spheres of production seek to draw equal dividends from this surplus-value in proportion to their relative size. The general rate of profit, in other words, obtains its determination in quite different and far more complicated ways than does the market rate of interest, which is directly and immediately determined by the relation of supply and demand, and it is therefore not a palpable and given fact in the way that the interest rate is. The particular profit rates in the various spheres of production are themselves more or less uncertain; but in so far as they do show themselves, it is not their uniformity that is apparent but rather their variation. The general rate of profit itself simply appears as the minimum limit of profit, not as an empirical and directly visible form of the actual profit rate.
In stressing this distinction between the interest rate and the profit rate, we have so far left aside the following two factors, which favour the consolidation of the interest rate: (1) the historical pre-existence of interest-bearing capital and the existence of a general rate of interest handed down by tradition; (2) the far stronger direct influence that the world market exerts on the establishment of the interest rate, independently of the conditions of production in a country, as compared with its influence on the profit rate.
Average profit does not appear as a directly given fact, but rather as the end-product of an equalization of opposing tendencies that can only be established by investigation. With the interest rate it is different. Where it is a universal governing rule, which occurs at least locally, it is a fact fixed every day, a fact that even serves industrial and commercial capital as a presupposition and postulate in their operating calculations. It becomes a general property of any sum of £100 that it will yield 2, 3, 4, 5 per cent. Meteorological reports do not show more precisely the level of the barometer and thermometer than do stock-market reports the level of the interest rate, not for this capital or that, but rather for the generality of loan capital to be found on the money market.
On the money market it is only lenders and borrowers who face one another. The commodity has the same form, money. All particular forms of capital, arising from its investment in particular spheres of production or circulation, are obliterated here. It exists in the undifferentiated, self-identical form of independent value, of money. Competition between particular spheres now ceases; they are all thrown together as borrowers of money, and capital confronts them all in a form still indifferent to the specific manner and mode of its application. Here capital really does emerge, in the pressure of its demand and supply, as the common capital of the class, whereas industrial capital appears like this only in the movement and competition between the particular spheres. Money capital on the money market, moreover, really does possess the form in which it is distributed as a common element among these various spheres, among the capitalist class, quite irrespective of its particular application, according to the production requirements of each particular sphere. On top of this, with the development of large-scale industry money capital emerges more and more, in so far as it appears on the market, as not represented by the individual capitalist, the proprietor of this or that fraction of the mass of capital on the market, but rather as a concentrated and organized mass, placed under the control of the bankers as representatives of the social capital in a quite different manner to real production. The result is that, as far as the form of demand goes, capital for loan is faced with the entire weight of a class, while, as far as supply goes, it itself appears en masse as loan capital.
These are some of the reasons why the general rate of profit presents a blurred and hazy picture compared with the sharply defined rate of interest, which although its level fluctuates always confronts the borrowers as fixed and given, because it fluctuates in the same way for them all. In the same way, changes in the value of money do not prevent it from having the same value in relation to every commodity, and market prices of commodities fluctuate daily, although this does not prevent them from being noted every day in the reports. It is just the same with the rate of interest, which is noted just as regularly as the ‘price of money’. This is because capital itself is offered here as a commodity in the money form. The establishment of its price is therefore the establishment of its market price, just as with all other commodities; and so the rate of interest presents itself always as a general rate of interest, as so much for so much money, as quantitatively determined. The rate of profit, on the other hand, can vary even within the same sphere, given the same market price, according to the different conditions in which individual capitals produce the same commodity; for the profit rate on an individual capital is not determined simply by the market price of the commodity, but rather by the difference between market price and cost price. And these various rates of profit, firstly within the same sphere and then within the various different spheres, can be equalized only through constant fluctuations.
*
(Note for later elaboration.) A particular form of credit. We know that when money functions as means of payment instead of means of purchase, the commodity is alienated first and its value realized only later. If payment takes place only after the commodity has been re-sold, this sale does not appear as a consequence of the purchase, but rather it is by the sale that the purchase is realized. Sale, in other words, becomes a means of purchase. – Secondly, certificates of debt, bills, etc. become means of payment for the creditor. – Thirdly, money is replaced by the settlement of outstanding debt certificates.