The Rate of Interest & Profit of Enterprise

The credit system splits surplus value between interest & profit.
What determines this relative split?

The rate of profit establishes an upper limit to the rate of interest.
The lower limit is 0% as at this level there is no incentive to loan money.

Marx did not think there was a ‘natural rate of interest’, unlike Monetarists.
Competition between industrial & financial capitalists determines it.
Their relative strengths are determined by the amount of real capital relative to money capital.
Not any money form, but the metallic (commodity) form.
If the quantity of real capital grows relative to the quantity of metallic money, the rate of interest will tend to rise. If, in contrast, the rate of growth of metallic money is greater than the growth of real capital, the rate of interest will tend to fall.

This law is illustrated by the behaviour of the rate of interest in the course of the industrial cycle. During the boom, when capitalist expanded reproduction is in a flourishing state, the growth rate of real capital is high relative to the growth of metallic money. This is the fundamental reason why interest rates rise during periods of prosperity.
During the crisis, on the other hand, the quantity of real capital contracts but the growth of metallic money—the world gold hoard—keeps on expanding as gold continues to be produced. Gold bullion is not, after all, consumed, and therefore is not destroyed, but simply keeps piling up as capitalism develops. Therefore, during the downward phase of the industrial cycle, the rate of interest declines.

A factor that can raise the rate of interest independently of the stage of the industrial cycle is the depreciation of token money.
Rising gold prices in terms of token money are usually followed by rising interest rates, while declining prices of gold bullion in terms of token money—the appreciation of the token money—is generally followed by a decline in interest rates.
A depreciating token currency causes money capitalists to defend themselves by charging higher interest.
They are more powerful than the central banks.
If token currency is expected to appreciate then interest rates will fall.

1997 Asian Crisis witnessed capital flight from developing countries to the US$.
As the $ appreciated against gold interest rates fell.

Central banks control neither the quantity of metallic money, the quantity of real capital, nor the rate of profit.
Therefore, the ability of the central banks to influence interest rates is far less than many believe.
They only control the quantity of token money.
The business cycle determines the rate of interest, central bankers merely follow the market trend.

By increasing the quantity of token money to try & force down the rate of interest to stimulate investment the central bankers devalue the currency against gold which causes the money capitalists to demand higher interest.
Token currency depreciation tends to cut real wages if wage increases don’t keep pace with price rises.
Real wage cuts mean a higher rate of surplus value & so rate of profit.
Hence token money depreciation can hurt works in two ways:
1.       Higher interest/mortgage rates
2.       Lower real wages

Due to the depression of the 1930’s & WWII, expanded reproduction came to a virtual halt whilst the accumulation of money capital continued (gold production rose). As a result interest rates fell.
So after WWII, low interest rates & a high rate of profit (due to the previous years capital devaluation/destruction) meant industrial capitalist had the upper-hand over financial capitalists.
Expanded reproduction began & we had the post-war boom, high demand for labour power strengthened unions & gold production slowed.
With new technology (‘automation’) the organic composition of capital increased & the rate of profit began to decline at the same time interest rates were rising.
Excessive $ creation resulted in the $ decoupling from gold in an attempt to avoid a severe tightening of monetary policy & a depression at the height of the Cold War.
The price of gold rose from $35 to $875 in January 1980.
Inflation increased.
The Volcker Shock rose interest rates to stabilise the $ system.
Now the financial capitalists had the edge over industrial capitalists & the era of neo-liberalism began (the ideology of the financial capitalist), with financialisation & deindustrialisation in the West. as production shifted to developing countries like China with lower wages.
The recessions of the early 1980’s & 1990’s didn’t see price falls as prices continued to increase in terms of token money due to the fiat money regime.

Gibson’s Paradox

Alfred Gibson noted in a 1923 article for Banker’s Magazine that the rate of interest and the general level of prices appeared to be correlated.

Keynes coined the term ‘Gibson’s Paradox’ in his 1930 book “A Treatise on Monetary Reform”.

The marginalists confuse the rate of interest, which is only a fraction of the total profit, with the rate of profit. They falsely claim that if the economy is in equilibrium, there will be only interest & no profit.

According to traditional marginalism—not the marginalism of Keynes in his “General Theory”—there is a natural (long-term) rate of interest whose purpose is to equalize investment and savings.

Interest arises because capital is scarce. The scarcer capital is, the higher will be the rate of interest.

Irving Fisher & the Quantity Theory of Money:
Fisher made a distinction between the money (long-term) rate of interest and the real (long-term) rate of interest.

This long-term money rate of interest is determined by the natural rate of interest plus the expected rate of inflation. Therefore, Fisher’s theory predicts that the nominal long-term rate of interest should fluctuate in line with changes in the rate of change in the general price level. For example, assuming a natural rate of interest of 3% & a rate of deflation of 1%, the money rate of interest should be 2%. But what is deflation was 5%, that would mean the interest rate should be -2%.

If Fisher was right, under a gold standard interest rates should be at their highest when prices are rising at their fastest rate & lowest when prices are falling at the fastest rate. But the concrete history of long-term interest rates & prices under the gold standard shows that they reach their highest point at the peak of the industrial cycle when the general price level also peaks. Long-term interest rates moved in sympathy with the absolute level of the general price level and not the rate of change in the general price. This is why Keynes called the relationship of long-term interest rates and the general price level that was observed empirically a paradox.

No Paradox From a Marxist Perspective.
According to Marx there is no such thing as a natural rate of interest. Interest is merely a subset of the total profit. The rate of interest reflects the balance of forces in the market between the money capitalists on one side & the industrial & commercial capitalists on the other.

This balance of forces is largely determined by the amount of money capital—ultimately the total quantity of gold—relative to real capital—productive capital plus commodity capital. The scarcer gold is relative to real capital, the stronger the money capitalists will be relative to the industrial & commercial capitalists & therefore the higher the rate of interest will be.

We would expect at the peak of the industrial cycle when the general price level is at its highest, the rate of interest, including long-term interest rates, would be at its peak.

Therefore, what is a paradox for marginalist theory is simply a consequence of Marx’s theory of value, surplus value, profit, money & interest.

Post 1971 (the End of the Gold Standard).
Under the post-1971 dollar standard prices in terms of currency never actually peak but pretty much rise continuously. If Gibson’s paradox applied under the post-1971 dollar standard, interest rates would also rise continuously. This is hardly possible, because in that case the interest would soon swallow up the entire profit of enterprise.

Two factors determine the long-term rate of interest—in terms of paper money but also in terms of commodities as well as in terms of real money, or gold: One is the relative abundance or scarcity of gold relative to real capital; the other is the perceived chance that the paper currency will be either devalued or revalued against real money—gold.

Under a regime of paper money such as we have had since 1971, big changes in the gold value of currency are not only possible but quite likely. Major rises in the dollar price of gold have been followed by rising long-term interest rates, first in terms of paper money but then in real—commodity—terms as well.

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