Capital Vol. III Part V
Division of Profit into Interest and Profit of Enterprise. Interest-Bearing
Capital
The subject of this chapter, like all the other phenomena of credit we shall come across later on, cannot be analysed here in detail. The competition between lenders and borrowers and the resultant minor fluctuations of the money-market fall outside the scope of our inquiry. The circuit described by the rate of interest during the industrial cycle requires for its presentation the analysis of this cycle itself, but this likewise cannot be given here. The same applies to the greater or lesser approximate equalisation of the rate of interest in the world-market. We are here concerned with the independent form of interest-bearing capital and the individualisation of interest, as distinct from profit.
Since interest is merely a part of profit paid, according to our earlier assumption, by the industrial capitalist to the money-capitalist, the maximum limit of interest is the profit itself, in which case the portion pocketed by the productive capitalist would = 0. Aside from exceptional cases, in which interest might actually be larger than profit, but then could not be paid out of the profit, one might consider as the maximum limit of interest the total profit minus the portion (to be subsequently analysed) which resolves itself into wages of superintendence. The minimum limit of interest is altogether indeterminable. It may fall to any low. Yet in that case there will always be counteracting influences to raise it again 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." (Economist, January 22, 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, 1.c., p.49.)
Let us first assume that there is a fixed relation between the total profit and that part of it which has to be paid as interest to the money-capitalist. It is then 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. For instance, if the average rate of profit were = 20% and the interest = ¼ of the profit, the rate of interest would = 5%; if the average rate of profit were = 16%, the rate of interest would = 4%. With the rate of profit at 20%, the rate of interest might rise to 8%, and the industrial capitalist would still make the same profit as he would at a rate of profit = 16% and a rate of interest = 4%, namely 12%. Should interest rise only to 6% or 7%, he would still keep a larger share of the profit. If the interest amounted to a constant quota of the average profit, it would follow that the higher the general rate of profit, the greater the absolute difference between the total profit and the interest, and the greater the portion of the total profit pocketed by the productive capitalist, and vice versa. Take it that interest = 1/5 of the average profit. One-fifth of 10 is 2; the difference between total profit and interest = 8. One-fifth of 20 = 4; difference = 20 - 4 = 16; 1/5 of 25 = 5; difference = 25 - 5 = 20; 1/5 of 30 = 6; difference = 30 - 6 = 24; 1/5 of 35 = 7; difference = 35 - 7 = 28. The different rates of interest of 4, 5, 6, 7% would here always represent no more than 1/5, or 20% of the total profit. If the rates of profit are different, therefore, 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 rise proportionately to the general rate of profit, and conversely.
All other conditions taken as equal, i.e., assuming the proportion between interest and total profit to be more or less constant, the functioning capitalist is able and willing to pay a higher or lower interest directly proportional to the level of the rate of profit.[1]
Since we have seen that the rate of profit is inversely proportional to the development of capitalist production, it follows that the higher or lower rate of interest in a country is in the same inverse proportion to the degree of industrial development, at least in so far as the difference in the rate of interest actually expresses the difference in the rates of profit. It shall later develop that this need not always be the case. In this sense it may be said that interest is regulated through profit, or, more precisely, the general rate of profit. And this mode of regulating interest applies even to its average.
In any event the average rate of profit is to be regarded as the ultimate determinant of the maximum limit of interest.
The fact that interest is to be related to average profit will be considered presently at greater length. Whenever a specified entity, such as profit, is to be divided between two parties, the matter naturally hinges above all on the magnitude of the entity which is to be divided, and this, the magnitude of the profit, is determined by its average rate. Suppose the general rate of profit, hence the magnitude of profit, for a capital of given size, say, = 100, is assumed as given. Then the variations of interest will obviously be inversely proportional to those of the part of profit remaining in the hands of the producing capitalist, working with a borrowed capital. And the circumstances determining the amount of profit to be distributed, of the value produced by unpaid labour, differ widely from those which determine its distribution between these two kinds of capitalists, and frequently produce entirely opposite effects. [2]
If we observe the cycles in which modern industry moves — state of inactivity, mounting revival, prosperity, over-production, crisis, stagnation, state of inactivity, etc., which fall beyond the scope of our analysis — we shall find that a low rate of interest generally corresponds to periods of prosperity or extra profit, a rise in interest separates prosperity and its reverse, and a maximum of interest up to a point of extreme usury corresponds to the period of crisis.[3] The summer of 1843 ushered in a period of remarkable prosperity; the rate of interest, still 4½% in the spring of 1842, fell to 2% in the spring and summer of 1843;[4] in September it fell as low as 1½% (Gilbart, I, p. 166); whereupon it rose to 8% and higher during the crisis of 1847.
It is possible, however, for low interest to go along with stagnation, and for moderately rising interest to go along with revived activity.
The rate of interest reaches its peak during crises, when money is borrowed at any cost to meet payments. Since a rise in interest implies a fall in the price of securities, this simultaneously offers a fine opportunity to people with available money-capital, to acquire at ridiculously low prices such interest-bearing securities as must, in the course of things, at least regain their average price as soon as the rate of interest falls again.[5]
However, the rate of interest also has a tendency to fall quite independently of the fluctuations in the rate of profit. And, indeed, due to two main causes:
I. "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. 201-02.)
II. The development of the credit system and the attendant ever-growing control of industrialists and merchants over the money savings of all classes of society that is effected through the bankers, and the progressive concentration of these savings in amounts which can serve as money-capital, must also depress the rate of interest. More about this later.
With reference to the determination of the rate of interest, Ramsay says that 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 realised.[6] 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, 1. c., pp. 206-07.)
To determine the average rate of interest we must 1) calculate the average rate of interest during its variations in the major industrial cycles; and 2) find the rate of interest for investments which require long-term loans of capital.
The average rate of interest prevailing in a certain country — as distinct from the continually fluctuating market rates — cannot be determined by any law. In this sphere there is no such thing as a natural rate of interest in the sense in which economists speak of a natural rate of profit and a natural rate of wages. Massie has rightly said in this respect (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."
Equating supply and demand — assuming the average rate of profit as given — means nothing. Wherever else this formula is resorted to (and this is then practically correct), it serves as a formula to find the fundamental rule (the regulating limits or limiting magnitudes) which is independent of, and rather determines, competition; notably as a formula for those who are held captive by the practice of competition, and by its phenomena and the conceptions arising out of them, to arrive at what is again but a superficial idea of the inner connection of economic relations obtaining within competition. It is a method to pass from the variations that go with competition to the limits of these variations. This is not the case with the average rate of interest. There is no good reason why average conditions of competition, the balance between lender and borrower, should give the lender an interest rate of 3, 4, 5%, etc., or else a certain percentage of the gross profits, say 20% or 50%, on his capital. Wherever it is competition as such which determines anything, the determination is accidental, purely empirical, and only pedantry or fantasy would seek to represent this accident as a necessity.[7] Nothing is more amusing in the reports of Parliament for 1857 and 1858 concerning bank legislation and commercial crises than to hear of "the real rate produced" as the directors of the Bank of England, London bankers, country bankers, and professional theorists chatter back and forth, never getting beyond such commonplaces as 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 similar specious platitudes.[8] Customs, juristic tradition, etc., have as much to do with determining the average rate of interest as competition itself, in so far as it exists not merely as an average, but rather as actual magnitude. In many law disputes, where interest has to be calculated, an average rate of interest has to be assumed as the legal rate. If we inquire further as to why the limits of a mean rate of interest cannot be deduced from general laws, we find the answer lies simply in the nature of interest. It is merely a part of the average profit. The same capital appears in two roles — as loanable capital in the lender's hands and as industrial, or commercial, capital in the hands of the functioning capitalist. But it functions just once, and produces profit just once. In the production process itself the nature of capital as loanable capital plays no role. How the two parties who have claim to it divide the profit is in itself just as purely empirical a matter belonging to the realm of accident as the distribution of percentage shares of a common profit in a business partnership. Two entirely different elements — labour-power and capital — act as determinants in the division between surplus-value and wages, which division essentially determines the rate of profit; these are functions of two independent variables, which limit one another; and it is their qualitative difference that is the source of the quantitative division of the produced value. We shall see later that the same occurs in the splitting of surplus-value into rent and profit. Nothing of the kind occurs in the case of interest. Here the qualitative differentiation as we shall presently see, proceeds rather from the purely quantitative division of the same sum of surplus-value.
It follows from the aforesaid that there is no such thing as a "natural" rate of interest. But if, unlike the general rate of profit, there is on the one hand no general law to determine the limits of the average interest, or average rate of interest as distinct from the continually fluctuating market rates of interest, because it is merely a question of dividing the gross profit between two owners of capital under different title; on the other hand, the rate of interest — be it the average or the market rate prevalent in each particular case — appears as a uniform, definite and tangible magnitude in a quite different way from the general rate of profit. [9]
The rate of interest is similarly related to the rate of profit as the market-price of a commodity is to its value. In so far as the rate of interest is determined by the rate of profit, this is always the general rate of profit and not any specific rate of profit prevailing in some particular branch of industry, and still less any extra profit which an individual capitalist may make in a particular sphere of business.[10] It is a fact, therefore, that the general rate of profit 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 indeed true that the rate of interest itself varies in accordance with the different classes of securities offered by borrowers, and in accordance with the length of time for which the money is borrowed; but it is uniform in each of these classes at a given moment. This distinction, then, does not militate against a fixed and uniform appearance of the rate of interest. [11]
The average rate of interest appears in every country over fairly long periods as a constant magnitude, because the general rate of profit varies only at longer intervals — in spite of constant variations in specific rates of profit, in which a change in one sphere is offset by an opposite change in another. And its relative constancy is revealed precisely in this more or less constant nature of the average, or common, rate of interest.
As concerns the perpetually fluctuating market rate of interest, however, it exists at any moment as a fixed magnitude, just as the market-price of commodities, because in the money-market all loanable capital continually faces functioning capital as an aggregate mass, so that the relation between the supply of loanable capital on one side, and the demand for it on the other, decides the market level of interest at any given time. This is all the more so, the more the development, and the attendant concentration, of the credit system gives to loanable capital a general social character and throws it all at once on the money-market. On the other hand, the general rate of profit is never anything more than a tendency, a movement to equalise specific rates of profit. The competition between capitalists — which is itself this movement toward equilibrium — consists here of their gradually withdrawing capital from spheres in which profit is for an appreciable length of time below average, and gradually investing capital into spheres in which profit is above average. Or it may also consist in additional capital distributing itself gradually and in varying proportions among these spheres. It is continual variation in supply and withdrawal of capital in regard to these different spheres, and never a simultaneous mass effect, as in the determination of the rate of interest.
We have seen that interest-bearing capital, although a category which differs absolutely from a commodity, becomes a commodity sui generis, so that interest becomes its price, fixed at all times by supply and demand like the market-price of an ordinary commodity. The market rate of interest, while fluctuating continually, appears therefore at any given moment just as constantly fixed and uniform as the market-price of a commodity prevailing in each individual case. Money-capitalists supply this commodity, and functioning capitalists buy it, creating the demand for it. This does not occur when equalisation creates a general rate of profit. If prices of commodities in one sphere are below or above the price of production (wherein we deliberately leave aside the fluctuations attendant upon the various phases of the industrial cycle in each and every enterprise) the balance is effected through the expansion or curtailment of production, i.e., the expansion or curtailment of the masses of commodities thrown on the market by industrial capitals — caused by inflow or outflow of capital to and from individual spheres of production. It is by this equalisation of the average market-prices of commodities to prices of production that deviations of specific rates of profit from the general, or average, rate of profit are corrected. It cannot be that in this process industrial or mercantile capital as such should ever assume the appearance of commodities vis-à-vis the buyer, as in the case of interest-bearing capital. If perceptible at all, this process is so only in the fluctuations and equalisations of market-prices of commodities to prices of production, not as a direct fixation of the average profit. The general rate of profit is, indeed, determined 1) by the surplus-value produced by the total capital, 2) by the proportion of this surplus-value to the value of the total capital, and 3) by competition, but only in so far as this is a movement whereby capitals invested in particular production spheres seek to draw equal dividends out of this surplus-value in proportion to their relative magnitudes. The general rate of profit, therefore, derives actually from causes far different and far more complicated than the market rate of interest, which is directly and immediately determined by the proportion between supply and demand, and hence is not as tangible and obvious a fact as the rate of interest. The individual rates of profit in various spheres of production are themselves more or less uncertain; but in so far as they appear, it is not their uniformity but their differences which are perceptible. The general rate of profit, however, appears only as the lowest limit of profit, not as an empirical, directly visible form of the actual rate of profit.
In emphasising this difference between the rate of interest and the rate of profit, we still omit the following two points, which favour consolidation of the rate of interest: 1) the historical pre-existence of interest-bearing capital and the existence of a traditional general rate of interest; 2) the far greater direct influence exerted by the world-market on establishing the rate of interest, irrespective of the economic conditions of a country, as compared with its influence on the rate of profit.
The average profit does not obtain as a directly established fact, but rather is to be determined as an end result of the equalisation of opposite fluctuations. Not so with the rate of interest. It is a thing fixed daily in its general, at least local, validity — a thing which serves industrial and mercantile capitals even as a prerequisite and a factor in the calculation of their operation. It becomes the general endowment of every sum of money of £100 to yield £2, 3, 4, 5. Meteorological reports never denote the readings of the barometer and thermometer with greater accuracy than stock exchange reports denote the rate of interest, not for one or another capital, but for capital in the money-market, i.e., for loanable capital generally.
In the money-market only lenders and borrowers face one another. The commodity has the same form-money. All specific forms of capital in accordance with its investment in particular spheres of production or circulation are here obliterated. It exists in the undifferentiated homogeneous form of independent value-money. The competition of individual spheres does not affect it. They are all thrown together as borrowers of money, and capital confronts them all in a form, in which it is as yet indifferent to the prospective manner of its investment. It obtains most emphatically in the supply and demand of capital as essentially the common capital of a class — something industrial capital does only in the movement and competition of capital between the various individual spheres. On the other hand, money-capital in the money-market actually possesses the form, in which, indifferent to its specific employment, it is divided as a common element among the various spheres, among the capitalist class, as the requirements of production in each individual sphere may dictate. Moreover, 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 the owner of one or another fraction of the capital in the market, but assumes the nature of a concentrated, organised mass, which, quite different from actual production, is subject to the control of bankers, i.e., the representatives of social capital. So that, as concerns the form of demand, loanable capital is confronted by the class as a whole, whereas in the province of supply it is loanable capital which obtains en masse.
These are some of the reasons why the general rate of profit appears blurred and hazy alongside the definite interest rate, which may fluctuate in magnitude, but always confronts borrowers as given and fixed because it varies uniformly for all of them. Just as variations in the value of money do not prevent it from having the same value vis-à-vis all commodities. Just as the daily fluctuations in market-prices of commodities do not prevent them from being daily reported in the papers. So the rate of interest is regularly reported as "the price of money." It is so, because capital itself is being offered here in the form of money as a commodity. The fixation of its price is thus a fixation of its market-price, as with all other commodities. The rate of interest, therefore, always appears as the general rate of interest, as so much money for so much money, as a definite quantity. The rate of profit, on the other hand, may vary even within the same sphere for commodities with the same price, depending on different conditions under which different capitals produce the same commodity, because the rate of profit of an individual capital is not determined by the market-price of a commodity, but rather by the difference between market-price and cost-price. And these different rates of profit can strike a balance — first within the same sphere and then between different spheres — only through continual fluctuation.
(Note for later elaboration.) A specific form of credit: It is known that when money serves as a means of payment instead of a means of purchase, the commodity is alienated, but its value is realised only later. If payment is not made until after the commodity has again been sold, this sale does not appear as the result of the purchase; rather it is through 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 money.
1. "The natural rate of interest is governed by the profits of trade to particulars." (Massie, l. c., p. 51.)
2. At this point the manuscript contains the following remark: "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 quantity becomes one of quality. To make a transition from the previous chapter, we need but assume that interest is a certain indefinite portion of profit."
3. "In the first period, immediately after pressure, money is abundant without speculation; in the second period, money is abundant and speculations abound; in the third period, speculation begins to decline and money is in demand, in the fourth period, money is scarce and a pressure arrives." (Gilbart, A Practical Treatise on Banking, 5th ed., Vol. I, London, 1849, p. 149.)
4. 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.
5. "An old customer of a banker was refused a loan upon a £200,000 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 £50,000." ([H. Roy] The Theory of the Exchanges. The Bank Charter Act of 1844, etc., London, 1869, p. 50.)
6. Since the rate of interest is on the whole determined by the average rate of profit, inordinate swindling is often bound up with a low rate of interest. For instance, the railway swindle in the summer of 1844. The rate of interest of the Bank of England was not raised to 3% until 16th October, 1844.
7. J G. Opdyke, for instance, in his Treatise on Political Economy (New York, 1851) makes a very unsuccessful attempt to explain the universality of a 5% rate of interest by eternal laws. Mr. Karl Arnd is still more naive in Die naturgemässe Volkswirtschaft gegenüber dem Monopoltengeist und dem Kommunismus, etc., Hanau, 1845. It is stated there: "In the natural course of goods production there is just one phenomenon, which, in the fully settled countries, seems in some measure to regulate the rate of interest; this is the proportion, in which the timber in European forests is augmented through their annual growth. This new growth occurs quite independently of their exchange-value, at the rate of 3 or 4 to 100." (How queer that trees should see to their new growth independently of their exchange-value!) "According to this a drop in the rate of interest below its present level in the richest countries cannot be expected" (p. 124). (He means, because the new growth of the trees is independent of their exchange-value, however much their exchange-value may depend on their new growth.) This deserves to be called "the primordial forest rate of interest." Its discoverer makes a further laudable contribution in this work to "our science" as the "philosopher of the dog tax." [Marx ironically calls K. Arnd the "philosopher of the dog tax" because in a special paragraph in his book (§ 88, 5.420-24) he advocated that tax. — Ed.]
8. 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, in accordance with 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" — i.e., of the London money-market. ([H. Roy] The Theory of the Exchanges, etc. , p. 113.)
9. "'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 is 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.)
10. "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 branch of trade up on 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 advantages may be made by their money." (Massie, 1. c., pp. 50, 51.)
11. Bank-rate 5%
Market rate of discount, 60 days' drafts 3 5/8%
Ditto, 8 months' 3½%
Ditto, 6 months' 3 5/16%
Loans to bill-brokers, day to day 1 to 2%
Ditto, for one week 3%
Last rate for fortnight, loans to stockbrokers 4¾ to 5%
Deposit allowance (banks) 3½%
Ditto (discount houses) 3 to 3¼ %
How large this difference may be for one and the same day is shown in the
preceding figures of the rate of interest of the London money-market on
December 9, 1889, taken from the City article of the Daily News of
December 10.
The minimum is 1%, the maximum 5%. [F.E.]