Now that the British economy is in recession, capitalism's economic gurus are busying themselves trying to find a cure. The Labour Party, ever free with its opinions on how governments can run capitalism efficiently and painlessly, has hit on a policy which, they hope, can stimulate investment and growth. Like so many of the cures for capitalism's ills it is not in fact a new policy, and amounts to saying that the present economic downturn has been caused by government policies, primarily with regard to high interest rates.
The Shadow Chancellor, John Smith, argues that investment in manufacturing industry has dipped because firms cannot borrow at an acceptable rate of interest. The government, he says, should cut interest rates as a way of encouraging investment and halting the recession.
This idea has been receiving support from some unexpected quarters. For instance, Sir Alan Walters, formerly chief economic adviser to Thatcher, recently wrote:
Interest rates should have been brought down long ago from the 15 per cent year-long high to 11 per cent or less. And, if we bring interest rates down within a few weeks, I suspect that we can still avoid a savage slump. (London Evening Standard, 22 February).
This view that banks have been charging a rate of interest that is not “acceptable" was put by the Labour Party during the slump which started in 1929. Similarly, a major reason why Labour nationalised the Bank of England in 1946 was to ensure that governments could intervene to bring down interest rates in a bid to avoid any threatening recession. The argument that governments can smooth out capitalism’s booms and slumps via manipulation of interest rates is as erroneous now as it was then.
The anarchy of production inherent to the capitalist system ensures that periods of prosperity and boom are not everlasting and that a slump is always somewhere around the corner. In any period of boom some industries will inevitably over-expand their production in relation to market demand and have to curtail output and lay off workers as a consequence. This has a knock-on effect for other sectors of industry, resulting in falling output and increasing unemployment for the economy as a whole.
Supply and demand
It is not the ease that high interest rates come along and turn a booming economy into a stagnant one by discouraging investment when further growth and expansion is still possible. Rather it is the other way round: high interest rates are not the cause of a capitalist crisis of over-expansion and overproduction (in relation to the market), but arc a symptom of its initial stages.
The rate of interest charged by banks is determined by competition between buyers of capital (the borrowers) and sellers of capital (the lenders). When faced with the onset of an economic crisis many capitalist enterprises will be prepared to borrow money capital at higher rates of interest just so that they can meet their obligations and stay in business, so pushing the rate up. At other times the situation is different, as Marx explained in Capital:
If we consider the turnover cycles in which modern industry moves—inactivity, growing animation, prosperity, overproduction. crash, stagnation, inactivity, etc . . . —we find that a low rate of interest corresponds to periods of prosperity or high profit, a rise in interest comes between prosperity and its collapse, while maximum interest up to extreme usury corresponds to a period of crisis. (Vol 3. Penguin edition, page 482).
Interest rates are not arbitrarily fixed on the whim of governments: they reflect the market conditions affecting money capital
A complicating factor today which was absent in Marx's time is that interest rates are now permanently higher than they would otherwise be because of the continuing government policy of printing an excess issue of inconvertible (that is. not backed by gold) paper currency. This inflationary policy leads to constantly rising prices. With interest rates being the price of borrowing money capital, these too are affected. High interest rates are needed by lenders to protect their assets, which would otherwise be eroded year after year by inflation. Lenders have to be concerned with the return they get after rising prices are taken into account: the so-called “real" rate of interest (the actual rate charged less the rate of price increases).
Clutching at straws
Banks, like other capitalist enterprises, are in the business of making a profit. They do this by paying depositors a rate of interest to attract capital in, and then by lending it out again to borrowers at a higher rate of interest. A major cut in interest rates would mean a fall in deposits as lenders and savers were discouraged by lower returns on their investments—so restricting the amount that banks can lend out to industry and others (banks can only lend out what has been deposited with them and cannot “create credit with the stroke of a pen" as many of capitalism's economists seem to think). Such a cut in interest rates at the present time would be likely to adversely effect the already reduced profitability of the banking sector. Lloyds Bank has already cut 5,000 jobs in the last 18 months, with the other three major British banks in a similar situation. The Guardian (26 February) has reported that Lloyds expects 50,000 jobs to be lost soon in the financial services sector as a whole.
In any case, any attempt to finance industrial capital at the expense of the banks overlooks one crucially important factor. If cheaper loans are provided for industry this doesn't automatically mean they will be invested in order to expand production. The rationale behind capitalist production is the expectation of profit, and if market conditions dictate that commodities cannot be sold at a profit, then firms will not employ more workers and expand production The whole idea that large-scale cuts in interest rates can, as if by magic, turn a stagnant economy into a booming one is a myth. It is another example of reformist politicians clutching at straws.
The present high interest rates are a product of both the continuing process of inflation. and of the onset of the recession, and will eventually fall of their own accord as the recession continues. Any attempt to manipulate interest rates (or other prices) so as to control the operation of the capitalist economy is entirely futile and can only represent another doomed policy initiative to ameliorate a social system that fails to match the high hopes of its politicians with monotonous regularity.
Dave Perrin
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