Both of them expend the same sum of money as capital, the lender and the borrower. But only in the hands of the latter does it serve as capital. The profit is doubled by the double existence of the same sum of money as a capital for "two persons. It can serve as a capital for both of them only by^ dividing the profit. That portion, which falls to the share of the lender, is called interest.
It is our assumption, that this entire transaction takes place between two kinds of capitalists, the money-capitalist and the industrial or the merchant capitalist.
It should never be forgotten, that capital as such is here a commodity, or that the commodity, which is here in ques- tion, is capital. All the relations, which become manifest here, would be irrational from the point of view of a simple commodity, or even from the point of view of capital serving as a commodity-capital in its process of reproduction. Lend- ing and borrowing, instead of selling and buying, is here a distinction arising from the specific nature of the commodity, of capital; also that it is interest, not the price of the com- modity, which is paid here. If interest is to be called the price of money-capital, it will be an irrational form of price, which is quite at variance with the conception of the price of commodities.®^ The price is then reduced to its purely '""The expression 'value' applied to cutrency lias three meanings...secondly, currency actually in hand, compared with the same amount of currency.
abstract and meaningless form, signifying a certain sum of money paid for some thing, -which, serves in some manner as a use-value. On the other hand, the concept of price really signifies the value of some use-value expressed in money.
To call interest the price of capital is to use at the outset an irrational exj)ression. A commodity has here a double value, namely first a real value, and secondly a price differing from this value, while ordinarily price signifies the expression of the value in money. Money-capital is primarily but a sum of money, or the value of a certain quantity of commodities incorporated in a sum of money. If a commodity is loaned as capital, then it is only the disguised form of a sum of money. For that which is loaned as capital is not so and so many pounds of cotton, but so much money existing in the form of cotton as its value. The price of capital, therefore, refers to it as a sum of money, even if not a currency, as Mr. Torrens thinks (see above note 60). How, then, can a sum of values have a price beside its own price, that is, aside from the price expressed in their own money-fonn? Price is precisely the value of commodities (and this holds good also of the market-price, whose difference from value is not one of quality, but only one of quantity, since it refers only to the magnitude of the value) as distinguished from their use-value. A price which is different in quality from value is an absurd contradiction.^^ Capital manifests itself as capital by its employment. The degree of its self-expansion expresses the quantitative ratio, in which it realises itself as capital. The surplus-value or profit produced by it — its rate or magnitude — is measur- able only by its comparison with the value of the advanced capital. The greater or lesser self-expansion of interestwhich will come in at some later day. Then its value is measured by the rate of interest, and the rate of interest determined by the ratio between the amount of loanable capital and the demand for it." (Colonel R. Torrens: On the Oper- ation of the Bank Charter Act of 1844, etc., 2nd. ed., 1847.)
" " The ambiguity of the term ' value of money ' or 'of the currency,' when employed indiscriminately as it is, to signify both value in exchange for com- modities and value in use of capital, is a constant source of confusion." (Tooke: Inquiry into the Currency Principle, p. 77.) The main o infusion (implied by the question itself) that value as such (interest) should be considered as the use- value of capital, has escaped Tooke.
bearing capital is, therefore, only measurable by a comparison of the amount of interest, its share in the total profits, Avith the value of the advanced capital. While the price expresses the value of commodities, the interest expresses the self- expansion of money-capital and thus appears as the price, which the lender receives for it. This shows how absurd it is at the start to apply indiscriminately to this question the sim- ple relations of exchange through buying and selling, as Proudhon does. For the basic premise is here that money serves as capital and may thus be transferred as capital itself, as potential capital, to another person.
Capital itself appears here as a commodity, inasmuch as it is offered on the market as the use-value of money actually handed over as capital. Its use-value consists in producing profits. The value of money or of commodities employed in the capacity of capital is not determined by their value as money or commodities, but by the quantity of surplus-valuf, wdiich they produce for their owner. The product of capital is profit. On the basis of capitalist production it is merely a difference in the employment of money, whether it is ex- pended as money or advanced as capital. Money, or com- modities, are in themselves, potentially, capital, just as labor- power is potential capital. For in the first i^lace, money may be converted into elements of production and is to that extent only an abstract expression of them, personifying their ex- istence a3 values; in the second place, the material elements of wealth have the capacity of being even potentially capital, because tho opposite supplement, which makes capital of them, namely wage-labor, is present on the basis of capitalist pro- duction.
The opposing social peculiarities of material wealth, its antagonism to labor in the form of wage-labor, considered apart from the process of production, are expressed even in capitalist property as such. This particular fact, when sep- arated from the process of capitalist production itself, of which it is a constant result and, being its constant result, is its constant prerequisite, expresses itself in such a way that money and commodities alike become latent, potential, capital.
Inicrcst-B caring Capital. 419 so that they may be sold as capital, and that they represent in this form a command over the labor of others, a claim to the appropriation of the labor of others, so that they become self-expanding values. In this way it also becomes clearly apparent that this relation supplies the title and means for the appropriation of the labor of others, and that this is not due to any labor offered as an equivalent on the part of the capitalist.
Capital appears furthermore as a commodity, inasmuch as the division of profit into interest and profit proper is reg- ulated by demand and supply, that is, by competition, just as are tlie market-prices of commodities. But in the present case the difference becomes quite as apparent as the analogy. If demand and supply balance, the market-price of commodities corresponds to their price of production. In other words, their price is then seen to be regulated by the internal laws of capitalist production, independently of competition, since the fluctuations of supply and demand do not explain any- thing but the deviations of market-prices from the prices of production. These deviations balance mutually, so that in the course of long periods the average market-prices corre- spond to the prices of production. As soon as these prices coincide, these forces cease to operate, they compensate one another, and the general law determining prices then applies also to individual cases. The market-price then corresponds even in its immediate form, and without the help of averages drawn from the movements of market-prices, to the price of production, which is regulated by the immanent laws of the mode of production itself. The same is then true of wages.
If supply and demand balance, they neutralise each other's effects, and wages are then equal to the value of labor-power. But it is different with the interest on money-capital. Com- petition does not, in this case, determine the deviations from the rule, but there is rather no law of division except that enforced by competition, because no such thing as a " natural " rate of interest exists, as we shall see presently. By the nat- ural rate of interest people merely mean the rate fixed by free competition. There are no " natural " limits for the rate 420 Capitalist Production.
of inters?!. Whenever competition does not merely deter- mine the deviations and fluctuations, in other words, when- ever a neutralisation of the opnosing forces of competition puts a stop to all determination, the thing to be determined becomes a matter of arbitrary and lawless estimation. We shall dwell on this further in the next chapter.
In the case of interest-bearing capital, everything is out- ward appearance: The advance of capital seems a mere transfer from the lender to the borrower; the reflux of real- ised capital a more transfer back to its o^vner, a return pay- ment with interest.■^rom the borrower to the lender. The same holds good of the fact, due to the capitalist mode of production, that the rate of profit is not merely determined by the relation of the profit made in one single turn-over to the advanced capital-A'alue, but also by the length of the time of turn-over itself, so that it is a question of a profit realised on the industrial capital in definite periods of time. This likewise appears in the case of interest-bearing capital in the outward fact, that a definite interest is paid to the lender for a definite period of fime.
With his customary insight into the internal connection of things, th^ romantic Adam, Miil^ei" says C^' Elemente der Staatsku7ist" Berlin, 1809, p. 37): "In determining the prices of things, time is not consider>ed; while in the deter- mination of interest, it is principally time which is taken into account." He does not see that the lime of production and the time of circulation enter into the determination of the price of commodities, and that this is precisely what de- termines the rate of profit for a given time of tj^rn-over of capital, while the determination of profit for a certain time in its turn determines that of interest. His sagacity con- sists here, as it always does, in seeing the clouds of dust on the surface and having the presumption to declare ^In's dust to be something mysterious and important.
Division of Profit. 421 CHAPTER XXII.
DIVISION OF PROFIT. KATE OF INTEREST. JMATUKAL RATE OF INTEREST.
The object of this chapter, and in general all other phe- nomena of credit requiring our consideration later on, can- not here be analysed in detail. The competition between lenders and borrowers and the resulting minor fluctuations of the money-market fall outside of the scope of our inquiry. The circle described by the rate of interest during the indus- trial cycle requires for its presentation the analysis of this cycle itself, but this is likewise beyond our intentions for the present. The same is true of the greater or lesser approximate equalisation of the rate of interest in the world market. We merely intend here to analyse the independent form of interest- bearing capital and the individualisation of interest as differ- entiated from profit.
Since interest is merely a part of profit, paid according to our assumption by the industrial capitalist to the money- capitalist, the maximum limit of interest is marked by profit itself, and in that case the portion pocketed by the productive capitalist would be equal to zero. Aside from exceptional cases, in which interest might be actually larger than profit and could not be paid out of profit, one might consider as the maximum limit of interest the entire profit minus that por- tion (to be subsequently analysed), which resolves itself into wages of superintendence. The minimum limit of interest is wholly undefinable. It may fall to any depth. But counter- acting circumstances will always appear and lift it again above this relative minimum.
" The relation between the amount paid for the use of some capital and this capital itself expresses the rate of interest, measured in money." "The rate of interest depends, 1), on the rate of profit; 2), on the proportion in which the total 422 Capitalist Production.
profit is divided between the lender and the borrower." {Economist, January 22nd, 1853.) " Since that which is paid as interest for the use of that which is borrowed is a part of the profit, which the borrowed is able to produce, this interest must always be regulated by that profit." (Massie, Let us first assume, that a fixed relation exists between the lotal profit and that one of its parts, which has to be paid as interest to the money-capitalist. In this case it is evident, ;hat the interest will rise or fall with the total profit, and this profit is determined by the general rate of profit and its fluctuations. For instance, if the average rate of profit were 20% and the interest one-quarter of the profit, then the rate of interest would be 5%; if the rate of profit were only 16%, the rate of interest w^ould be 4%. With a rate of profit of 20%, the rate of interest might rise to 8%, and yet the in- dustrial capitalist would still make the same profit as he would with the rate of profit at 16% and the rate of interest at 4%, namely 12%. If the interest should rise only to 6 or 7%, he would keep a still larger share of the profit. If the inter- est amounted to a constant quota of the average profit, it would follow, that to the extent that the general rate of profit would rise, the absolute difference between the total profit and the interest would increase, and to the same extent would that portion of the total profit increase, which the productive capi- talist would pocket, and vice versa. Take it that the interest amounts to one-fifth of the average profit. One-fifth of 10 is 2; difference between total profit and interest 8. One-fifth of 20 is 4; difference 20 — 4 = 16. One-fifth of 25 is 5; difference 25 — 5 = 20. One-fifth of 30 is 6; difference 30 — 6 = 24. One-fifth of 35 is 7; difference 35 — 7 = 28. The different rates of interest of 4, 5, 6, 7% would in this case always represent one-fifth of the total profit. If the rates of profit are different, then 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 be so much greater, the II Rate of Interest. 423 higher the average rate of profit would be, and vice versa.
Assuming all other conditions to be equal, in other words, assuming the proportion between interest and total profit to be more or less constant, the productive capitalist will be able and willing to pay a higher or lower interest directly propor- tional to the level of the rate of profit.^ ^ Since we have seen, that the height of the rate of profit is inversely propor- tional to the development of capitalist production, it follows that the high or low rate of interest in a certain country is to the same extent inversely proportional to the degree of indus- trial development, at least so far as differences in tlie rate of interest actually expresses differences in the rates of profit. And this mode of regulating interest applies even to its aver- age.
In any event the average rate of profit is the ultimate limit determining the maximum limit of interest.
The fact that the rate of interest is related to the average profit will be considered more at length immediately. When- ever a certain whole, such as j)rofit, is to be divided between two parties, the first thing to be considered is the magnitude of the whole. The magnitude of the profit is determined by its average rate. Assuming the average rate of profit, and thus the magnitude of profit, for a capital of a certain size, to be given (for instance 100), it is evident that the vari- ations of interest will be inversely proportional to those of the profit remaining in the hands of the capitalist working with a borrowed capital. And the circumstances, which de- termine the amount of profit to be divided (the values pro- duced by unpaid labor), differ widely from those, which determine its distribution between these two kinds of capital- ists, and frequently produce effects in opposite directions.^ ^ If we observe the cycles of variation, in which modern in- *' " The natural rate of interest is governed by the profits of trade to particulars."
«'At this place the manuscript contains the following statement: "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 quanti- ties becomes one of quality. In order to make a transition to this end from the preceding chapter, nothing is needed but the provisional assumption, that interest is a certain indefinite portion of the profit.
424 Capitalist Production.
dustry moves along — condition of rest, increasing activity, prosperity, overproduction, crisis, stagnation, condition of rest, etc., which fall outside of the scope of our analysis — we shall find, that a low rate of interest generally corresponds to periods of prosperity, or of extra profit, a rise of interest to the transition between prosperity and its reverse, and a maxi- mum of interest up to a point of extreme usury to the period of crises.^* With the summer of 1843 came a period of re- markable prosperity; the rate of interest, which had still been 4^% in the spring of 1842, fell to 2% in the spring and sum- mer of 1843; 6^ in September it fell even to U%. (Gil- bart, I, p. 166); whereupon it rose to 8% and more during the crisis of 1847.
It may happen, however, that low interest is found in times of stagnation, and moderately rising interest in times of in- creasing activity.
The rate of interest reaches its highest point during crises, when money must be borrowed in order to meet payments at any cost. Since a rise of interest implies a fall in the price of securities, this offers at the same time a fine opportunity to people with available money-capital, who may acquire posses- sion at cut-rate prices of such interest-bearing securities as must at least regain their average price in the regular course of things, as soon as the rate of interest falls again.*^''' However, there is also a tendency of the rate of interest to fall, quite independently of the fluctuations of the rate of profit. This is due to two main causes.
I. " Let us assume that capital were never borrowed for ^* " In the first period, immediately after a time of depression, money is plentiful without any speculation; in the second period money is plentiful and speculation flourishing; in the third period speculation begins to let up and money is in demand; in the fourth period money is scarce and the depression starts in."
"^ Tooke explains this by " the accumulation of surplus capital necessarily accom- panying the scarcity of profitable employment for it in previous years, by the release of hoiirds, and by the revival of confidence in commercial prospects." (History of Prkes from 1839 till 1847. London, 1848, p. 54.)
^ " An old customer of a banker was refused a loan upon a 200,000 pounds sterlinj bond; when about to leave to make known his suspension of payment, he was tiild there was no necessity for the step, under the circumstances the banker would buy the bond at 150,000 pounds sterling." {The Theory of the Exchanges, The ijank Charttr Act of 1844, etc. London, 1869, p. 80.)
Rate of Interest. 425 any other but productive investments, it is nevertheless pos- sible, that the rate of interest may vary without any change in the rate of gross profits. For, as a people progresses in the development of wealth, there arises and grows more and more a class of people, who find themselves possessed of funds through the labors of their ancestors, and who can live on the mere interest on them. Many, having actively participated in business in their youth and prime, retire, in order to live quietly in their old age on the interest of the sums accumu- lated by them. These two classes have a tendency to in- crease with the growing wealth of the country; for those who start out with a moderate capital acquire more easily an in- dependent fortune than those, who start out with little. In old and rich countries, therefore, that portion of the national capital, whose owners do not care to invest it themselves, makes up a larger proportion of the total productive capital of society than in newly settled and poor countries. How numerous is not the class of annuity-holders in England! In proportion as the class of annuity-holders increases, that of the capital loaners increases also, for they are both the same." (Eamsay, Essay on the Distribution of Wealth, p. 201) II. The development of tlie credit system, and with it the continually growing control of the industrials and merchants over the money savings of all classes of society by the co-op- eration of bankers, and the progressive concentration of these savings into such volumes as will enable them to serve as money-capital, must also depress the rate of interest some- what. We shall discuss this more at length later.
With reference to the determination of the rate of interest, Ramsay says that it " depends in part on the rate of gross profits, in part on the proportion in which this is divided into interest and profits of enterprise. This proportion depends on the competition between lenders and borrowers of capital. This competition is influenced, but not exclusively regulated, by the prospective rate of gross profits.^''^ Competition is •"■ Since the rate of interest is on the whole determined by the average rate of profit, extraordinary swindling may often go hand in hand with a low rate of interest. Instance the railroad swindle in the summer of 1844. The rate of interest of the Bank of England was not raised to 3% until October 16th, 1844.
426 Capitalist Production.
not exclusively regulated thereby, because on one side many are borrowing without any intention of productive invest- ment, and because on the other the magnitude of the total loanable capital changes with the wealth of the country, in- dependently of any change in the gross profits." (Ramsay, In order to find the average rate of interest, it is necessary, 1), to calculate the average rate of interest during its varia- tions in the great industrial cycles; 2), to find the rate of interest in such investments as require loans of capital for a long time.
The average rate of interest prevailing in a certain coun- try — as differentiated from the continually fluctuating mar- ket rates — ■ cannot be determined by any law. In this sense there is no such thing as a natural rate of interest, such as economists speak of when mentioning a natural rate of profit and a natural rate of wages. Massie has justly said with ref- erence to this (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 determin- ing 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 balancing of demand and supply — assuming the average rate of profit to be a fact — does not signify anything here. Wherever else this formula serves as an excuse (and is then practically correct) it is used to find the fundamental rule, which is independent of competition and rather determines it, this rule indicating the regulating limits, or the limiting magnitudes, of competition; this for- mula serves particularly as a help to those, who are bounded by tlie horizon of practical competition, its phenomena, and the conceptions arising from them, and who try tliereby to get a rather shallow grasp of the internal connections of economic conditions within the sphere of competition. It is a method by which to pass from the variations that go with competition to the limits of these variations. This is not so in the case of the average rate of interest. There is no reason Rate of Interest. 427 by wliich the idea could be justified, that the average con- ditions of competition, a balance between lenders and borrow- ers, should secure for the lender a rate of interest of 3, 4, 5%, etc., on his capital, or a certain percentage of the gross profits, say 20% or 50%. Whenever competition as such deter- mines anything in this matter, its determination is a matter of accident, purely empirical, and only pedantry or fantas- ticalness can attempt to represent this accidental character as something necessary.^^ Nothing is more amusing than to listen in the reports of Parliament of 1857 and 1858 con- cerning bank legislation and commercial crises to the rambling twaddle of directors of the Bank of England, London bankers, provincial bankers, and theoretical professionals, when re- ferring to *' the real rate produced." They never get beyond such commonplaces as that " the price paid by loanable cap- ital probably varies with tlie supply of such capital," that *' a high rate of interest and a low rate of profit cannot exist together in the long run," and similar specious platitudes.*"^ Custom, legal tradition, etc., have as much to do with the de- termination of the average rate of interest as competition it- self, so far as this rate exists not merely as an average figure,