Money for Nothing
In the Sunday Times on January 29th, Mr. George Schwartz used his column to put his views about high and low interest rates and about some of those who have theorised on the matter. He recalled the late Lord Dalton, Labour Government Chancellor of the Exchequer, who believed that it was a simple matter for a government to keep interest rates at a very low level, and an American Secretary of the Treasury who shared that view. The idea is not dead: “Even at this moment there is an assumption that the Finance Ministers of the leading countries have only to put their heads together to cheapen money all round. The higher economics refuses to regard the rate of interest as a simple function of the demand for and the supply of loanable funds . . .”.
Schwartz commented on the Bank Rate:
“It is fashionable to talk of the Bank Rate as an antiquated weapon, but the antiquated thinking is in the minds of the critics. Bank rate is not a weapon but an index. It registers the going level of interest rates which is determined by all the forces operating upon saving and borrowing.”
Marx long ago described the factors which immediately determine the rate of interest in about the same words as those used by Schwartz. (Perhaps Schwartz had been looking up what Marx wrote?). “. . . the relation between the supply of loanable capital on the one side and the demand for it on the other, decide at any time the market level of interest”. (Capital, Vol. 3, p. 430.)
Marx described how capitalist profit derives from the unpaid labour of the working class and how, if the capitalist is using borrowed funds, he has to pay away part of this profit in the form of interest, the amount depending on the prevailing interest rates:
“… 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 maximum of interest to up to a point of extreme usury to the period of crisis. … It may happen, however, that low interest is found in times of stagnation, and moderately rising interest in times of increasing activity. The rate of interest reaches its highest point during crises, when money must be borrowed in order to meet payments at any cost.” (Capital, Vol. 3).
Particular interest rates vary according to the class of security, and the length of the time for which the money is borrowed, but the average rate of interest, like the average rate of profit, shows long periods of stability, apart from the ups and downs referred to above.
“The average rate of interest appears in every country for long periods as a constant magnitude, because the general rate of profit ― in spite of the continual variation of the particular rates of profit, in which a variation in one sphere is offset by an opposing variation in another sphere― varies only in long intervals.”
In our day there is continual argument between those economists who expect the average rate of interest to remain high for many years and those who expect it to fall.
It follows from the way in which interest rates are determined that, as Schwartz points out, a government cannot determine those rates simply by exhortation or by monetary manipulation but would have to control all the economic factors which combine to affect the supply and demand for loanable funds. Schwartz recalled the belief some people held in the years before the war that there was a tendency for interest rates to go on falling till they reached zero. It was at that time that the theories of Silvio Gesell had some vogue, in particular his scheme of “free money” which, he claimed would do away with interest payments.
But the will o’ the wisp of very low or zero interest rates on loans was much older than Gesell, whose works were first translated into English in 1929 ― the year before his death. Gesell had been influenced by Proudhon, and Proudhon had been preceded by John Gray, who was writing in the first half of the nineteenth century.
Gesell proposed that money should be issued in a form which depreciated with every week from the date of issue, his suggestion being that each note should lose one-tenth of one per cent of its face value each week. This, he thought, would deter people from holding on to money, they would want to get rid of it quickly and this would keep the level of investment up and the rate of interest down and would also obviate depressions.
The basic economic fallacies of Proudhon and John Gray were examined by Marx in his Critique of Political Economy and Capital (Vol. 3, chapter XXI). Both Proudhon and Gray wanted capitalism, but not the features which inescapably belong to it. They wanted products to be bought and sold but not to conform to the economic laws of commodity production. Products were to have their price determined directly by a National Bank which would issue certificates related to the amount of labour it required to produce them. Those certificates were then to circulate as money: no-one would need to pay high interest rates for loans or indeed any interest at all.
Gesell’s particular scheme has not caught on although Keynes, who combined a low opinion of Marx with a high opinion of Gesell, expressed the view that “the future will learn more from the spirit of Gesell than that of Marx”. (General Theory of Employment).
But we have had quite a good test of the Gesell theory, even if not in the form he proposed.
For a quarter of a century money in this country has been more or less steadily depreciating but far from interest rates falling to zero, Bank rate has recently been up to a peak 7 per cent and one of the government’s complaints at the present time is that manufacturers have been slowing down their rate of investment.
As befits followers of Keynes low interest rates have been an article of faith with the Labour Party. Their publication Twelve Wasted Years (1963) had scathing criticisms of the Tory government for failing to keep interest rates down.
In the election campaign in 1964, Labour were promising lower interest rates generally, including the hope of very low rates on house mortgage loans. Events soon overtook them, as shown by the rise in the Bank rate to the same level as under the Tories and by mortgage rates at the end of 1966 more than double their promised three per cent. Like Gray, Proudhon, Gesell and Keynes, Labour are trying to have capitalism without its inherent consequences.