## Wednesday, 11 May 2016

### The Rate of Interest - Part 1 of 4

The rate of interest is the market price for the use value of money-capital. That use value is the potential of capital to produce the average rate of profit. In discussing the rate of interest, therefore, Marx makes clear that money-capital here should also be understood as meaning the money equivalent of any other capital that is loaned. For example, a machine with a money value of £1,000 might be loaned, and this loan is the equivalent of loaning £1,000 of money-capital.

If £1,000 of money-capital is used to buy machines, material and labour-power, and the average rate of profit is 10%, then this £1,000 has the use value of being able to produce £100 of profit. But, a machine with a value of £1,000, if loaned to be used as capital, has the same capacity. All such loans of capital have to be considered in terms of a money equivalent, because it is only on that basis that a rational calculation of potential profit can be made, and its only on that basis that a rational calculation of the rate of interest can be made.

The difference where capital is loaned in the form of say a machine, is that unlike money, a machine will suffer wear and tear, over the period of its use. The borrower of a machine, therefore, would not only pay an amount of interest, as the price of obtaining the use value of capital here to produce £100 of profit, but would also have to recompense the machine owner for the wear and tear of the machine. For example, if the rate of interest is 4%, and the machine suffers £20 of wear and tear over the period of the loan, the productive-capitalist would pay to the lender £40 in interest, and £20 to cover the wear and tear, when they hand the machine back to its owner. That would leave the productive-capitalist with £40 of profit of enterprise.

If there were no money-lending capitalists, Marx says, then capital could only be loaned in the shape of physical commodities, such as buildings, machines and so on. In that case, the demand for loanable capital would be determined by the prices of the commodities that comprise that capital. In other words, if the price of steel rose, more capital would be needed to cover the quantity of steel consumed in production. The consequence would be a rise in the demand for capital, which would cause interest rates to rise.

However, there are money-lending capitalists, and they lend money-capital for purposes other than just the purchase of commodities to be used as capital. For example, a money lending capitalist may lend money-capital to someone who requires a mortgage to buy a house. For the owner of the money-capital, the money-capital they own could be used to acquire productive or commodity-capital, and thereby to produce the average profit. Because they are foregoing that ability, and selling that use value, they expect to receive in exchange payment, as though the money they have loaned has actually been used as capital.

But, also, because money-capital necessarily takes the form of money, a demand for money itself becomes a demand for money-capital. During a crisis, firms want money not to invest in additional capital, but simply to stay afloat, to pay their bills for the things they have previously bought, and to make up for the fact that they either do not get paid themselves, or the prices of the things they sell are falling and not covering the value of the capital they have consumed. They want money, because, also, in such conditions, other firms restrict or stop giving commercial credit, requiring cash payment. At such times, the demand for money rises sharply, causing the rate of interest to rise sharply, and yet, during such times, the prices of commodities are falling, including the prices of all those commodities that comprise the elements of capital.

Yet, for the owner of money-capital who comes to lend it, again it makes no difference whether the borrower wants to borrow this money to use as money-capital, or simply as money as means of payment. To the lender, they are lending money-capital, and giving up its use value to produce the average rate of profit, and so demand its market price.

This is no different to the sale of any other commodity. If a commodity owner sells a hammer to a customer, they are not interested why the buyer acquires it. The buyer may want it to use for DIY, or they may want it to see how far they can throw it into a nearby lake, or they may want it, as part of their capital to be used in a small business. Whichever is the case, the seller of the hammer will want to be paid the same price for it.

The same thing applies with the sale of the use value of money-capital. The money-lending capitalist who sells this use value to a borrower is not interested whether they want this money to cover their weekly shopping bill, to finance an extravagant lifestyle, to buy a house, or to be metamorphosed into productive or commodity-capital. The seller of the use value will want to obtain its market price whatever the borrower wants the loan for, and who consequently must pay the market price, the rate of interest, for it.

Consequently, Marx says, the rate of interest is not determined by the prices of commodities, but by the demand and supply of money-capital.

Forward To Part 2