Interest-bearing capital and fictitious capital

How does money itself become a commodity?

Under capitalism a sum of money, used to buy plant and labour-power, yields the average profit. Marx assumes an average rate of profit of 20 percent (his own illustrative figure). Whoever holds £100 then holds the power to turn it into £120 by using it as capital. So besides its use-value as money, money "acquires an additional use-value, namely that of serving as capital." If its owner does not use this power himself but lends it to someone else for a time, money becomes a peculiar commodity: not sold but lent, returning after the agreed term together with interest.

Where does interest come from?

Suppose an industrial capitalist organises production with the borrowed £100 and makes a profit of £20, of which he hands, say, £5 to the owner of the money. "The part of the profit paid to the owner is called interest, which is just another name, or special term, for a part of the profit given up by capital in the process of functioning to the owner of the capital." Interest is not an income arising separately; it is a share split off from the surplus-value extracted in production. The remaining £15 becomes profit of enterprise.

Marx writes the movement as "M — M — C — M' — M'". Money passes from lender to borrower, the borrower buys commodities, means of production and labour-power, obtains more money, and returns part of it to the lender as interest. Unlike the rate of profit, the rate of interest has no natural level: the proportion in which profit is divided is settled by competition between lenders and borrowers on the money market.

Why is interest-bearing capital the most fetishistic form?

Seen from the lender's side, money grows by itself and comes back after a while without passing through any factory or worker, and the formula shrinks to M — M'. Marx held that here "the relations of capital assume their most externalised and most fetish-like form": "In interest-bearing capital, therefore, this automatic fetish, self-expanding value, money generating money, are brought out in their pure state and in this form it no longer bears the birth-marks of its origin." Money seems to bear interest as a pear tree bears pears, and the trace of interest's origin in workers' surplus labour is effaced.

What is fictitious capital?

Once interest-bearing capital is general, people begin to reason backwards: every regular income is treated as the interest on some capital, and the size of that capital is calculated. In Marx's words, "The formation of a fictitious capital is called capitalisation." In his example, "if the annual income is £100 and the rate of interest 5%, then the £100 would represent the annual interest on £2,000, and the £2,000 is regarded as the capital-value of the legal title of ownership on the £100 annually." The calculation is simple: price = income ÷ rate of interest (100 ÷ 0.05 = 2,000).

Shares work the same way. If a company that issued shares of £100 "pays 10% instead of 5%, then its market-value, everything else remaining equal, rises to £200, as long as the rate of interest is 5%". The money actually put into the company is still £100, but the price of the paper has doubled; if dividends fall or the rate of interest rises, the price falls although the real capital is unchanged. In the terms of mainstream finance, fictitious capital is the net present value of expected future cash flows.

Why are government bonds and shares "fictitious"?

The holder of a government bond receives interest that the state pays every year out of taxes, but the principal he lent has long been spent, on war or other outlays. However often the bond changes hands, "the capital of the state debt remains purely fictitious, and, as soon as the promissory notes become unsaleable, the illusion of this capital disappears." Shares are a little different, since behind them stands capital really invested in railways or mines. But, Marx notes, "this capital does not exist twice, once as the capital-value of titles of ownership (stocks) on the one hand and on the other hand as the actual capital invested, or to be invested, in those enterprises. It exists only in the latter form"; the share is a title to part of the surplus-value that capital will produce.

The price of such paper therefore moves independently of the value of real capital. Marx cites the fall of British public stocks and canal and railway shares by more than £114 million in the crisis of 1847 and observes that, unless this reflected a real stoppage of production, "the nation did not grow one cent poorer by the bursting of this soap bubble of nominal money-capital." "All this paper actually represents nothing more than accumulated claims, or legal titles, to future production."

How has the concept been used since?

How credit, banks and joint-stock companies transform capitalism was taken up systematically by Rudolf Hilferding in Finance Capital (1910). As the financial sector grew from the 1970s, the concept of fictitious capital returned as a tool for explaining financialisation, bubbles and financial crises. François Chesnais examined historical and contemporary empirical research on the "fictitious capital" side of crisis theory, and Cédric Durand argued in Fictitious Capital: How Finance Is Appropriating Our Future (2017) that government intervention lets fictitious capital "assume proportions incompatible with the real production potential of economies", leading to crises such as the Great Recession. Part V of Volume III is also among the least finished of Marx's manuscripts, and many of its passages were heavily reworked by Engels, which is worth bearing in mind when reading it.