The Value of Capital and the Interest on Capital (continued). IV-- Change in the Rate of Interest It has just been shown that, when the value of the service of any individual form of capital -- e.g. a raw material, or a machine -- rises or falls, the fact expresses itself in a corresponding elevation or depreciation in its capital value. The net return imputed is, of course, altered at the same time, but only in so far as will bring it again into that relation with the capital value which corresponds with the ordinary rate of interest.
In order that the general percentage of increment -- the rate of interest -- may fall or rise, there must be changes of an extensive kind in the return to the great mass of capitals --brought about through changes in supply, in demand, in technique, in a word, in any of the factors of imputation. A general rise in the gross return to capital, brought about by a great and universally effective invention, would cause a general rise in the net return to capital, and its relation to capital value, --that is to say, in the rate of interest. The capital value might in this instance remain entirely unaltered. Only those capitals which had no part in the effects of the invention, and were in this respect individually separated from the general mass of capital, must necessity be affected. Where the amount of their services had remained unaltered in the midst of the general increase, in estimating the value of those capitals a greater discount from that amount would require to be made, corresponding to the increased rate of interest. Suppose the rate of interest to rise suddenly from 3% to 6%, the value of all capital whose interest remains unaltered at 3% must be appraised at a correspondingly lower rate.
We have discussed the effect which the individual factors of imputation produce upon the contributions of capital, in sufficient detail to make the derivation of the rules which govern the change in the rate of interest a matter of no difficulty.
One single remark may be added. It is quite a hackneyed proposition that the increase of capital causes a decline in the rate of interest. This proposition is true only with a certain limitation; it holds only when, by increase of capital, is understood increase in amount, without a simultaneous increase in the variety of the forms of capital. Increased variety in capital is synonymous with an advance in technique; it is one of those facts of economic history to which special attention must be drawn, when it is desired to show clearly the difference between primitive and developed production. Thus to it is due what we know to be the effect of every technical advance; namely, a rise in the value of the services of capital, as regards individual businesses, and, when comprehensive enough, a rise in the rate of interest. Not until the qualitative advance has been quantitatively used up, and the stocks of the new varieties of capital been multiplied, without other new varieties coming to the front -- that is, not until production expands and fills out the newly-set limits, -- can the increase of wealth have power, first, to depress the value of the services of capital individually, and, in the long run, should its compass be sufficiently extensive, -- to cause a fall in the rate of interest.
If we look back over the changes in the rate of interest on production over the whole course of economic history, we shall notice an unceasing upward and downward movement, according as advances in production are made, or as the marginal values of the newly-acquired wealth are again depressed by the increment of capital which follows. But through these unceasing fluctuations run great fundamental tendencies, which are, of course, subject to disturbance from opposing tendencies of the rate of interest on consumption loans. Economic history begins at a period when there is almost no capital, -- the zero of property in capital as well as the zero of return from capital. From that time onwards property and return, measured absolutely, go on growing so long as the economic world thrives, and has not yet reached the down grade of the movement of value. And the relation between these two -- i.e. the rate of interest -- rises similarly from the beginning, and only begins to fall when the down grade in the movement of value begins to come in sight.
