The Value of Money

by Benjamin M. Anderson

For the present I would call attention to the interesting case of Austria, where the money-rates are normally very low, because the volume of commerce and speculation is small, and the volume of banking capital, politically fostered, is large; and where, on the other hand, the general rate of interest on long-time loans is high, owing to the scarcity of capital in industry and agriculture, as distinguished from commerce.[482] This case may illustrate, incidentally, that even as a "long run" or "normal" tendency, an excess of currency in a country may lead, not, as the quantity theorists contend, to high prices, but rather to low money-rates. Austria presents simply a striking case of what I should regard as the general tendency. The money-rates and the interest-rates tend to approach one another to the extent that paper representatives of many different industries get into the "money market"—to the extent that industrial investments in general become saleable enough for it to be safe to finance them by means of short-time banking credit. When banks lend on collateral security of corporation stocks to the buyers of those stocks, they are, in effect, financing the corporation itself.[483] Industries differ widely in the extent to which they depend on the money market for their finances. The difference depends often less on the nature of the industry than on the type of the industrial organization. An individual farmer cannot get the bulk of his credit that way! But there is no reason why a well-organized corporation, assuming it successful in agriculture, might not draw on the money market, even if not so freely as a manufacturing corporation does.

For the contention that the money-rates for short periods are lower on the average than the rates on longer loans, and that the call rates are, on the average, well below all time rates, there is abundant statistical evidence. From 1890 to 1899 in New York City, the average rate on 4- to 6-month paper was 5.99%; the average rate on 60- to 90-day paper was 4.58%; the average call rate was 3.29%. In the same city, for the period from 1900 to 1909, the averages were: 4- to 6-month paper, 5.61%; 60- to 90-day paper, 4.78%; call rate, 4.05%.[484] This last figure for call loans represents an average of quotations at the "Money Post" at the Stock Exchange. While normally the call rates are well below this, occasional high figures, like those in 1907, pull this average up. The high rates at the "Money Post," however, are not always representative. Banks frequently do not charge their regular customers as much as the quoted rates.

Even more detailed evidence for our thesis is to be found in W. A. Scott's investigation of New York money-rates, for the period, 1896-1906.[485] He studies two sets of quotations for call loans, those at the Stock Exchange "Money Post" and those at the banks and trust companies; seven sets of quotations (five of which appear regularly) under the head of "time loans," namely, 30-, 60-, 90-day, and 4-, 5-, 6-, and 7-month; and three under the head of "commercial paper," namely, double name choice 60- to 90-days, and two varieties of single name paper.

He finds a clear tendency for the rate to vary with the length of the loan, although noting many exceptions. "The difference between these quotations rarely exceeds one-half of one percent, and the general rule seems to be that the influence of time in raising the rate grows less as the length of the loan increases. For example, there is apt to be a greater difference between the quotations of 60- and 90-day paper than between 90-day and four months. Likewise there is a greater difference between 90-day and four months than between 4-months and 5-months paper."

The call rate, though much more variable than all time rates, and sometimes high above them, is, on the average, well below them. For the period, 1901-06, the averages are: call loans, 3.3%; time loans, 4.5%.

The declining influence of differences in time as the length of the loans increases, is what our theory would require. If the "bearer of options" functions of short loans is the explanation of the lower rate on them, it is a factor which would count for less and less as the length of the loan increases. A month's difference is all-important, when the month involved is proximate, say the difference between 10 and 40 days. But it is of virtually no importance, from the standpoint of the man who wishes to meet sudden and indeterminate emergencies, whether the note he holds matures in eleven months or twelve months. The difference between a one-year loan and a five-year loan might, on the other hand, still be important from the angle of bearing options. The factor should cease to have any meaning at all, or at least any appreciable meaning, when the difference is between, say, twenty and twenty-five years.

I have no statistical evidence that the one-year loan can normally expect a lower rate than the five-year loan. At times, short time financing may be even more expensive than long time financing. But such study as I have given to quotations of short-term notes of corporations, as compared with the longer term bonds of the same corporations, would leave the distinct impression that short-term notes fare better in the security market, and yield less return. A complication arises, here, of course, that the short-term note may often lack the safety which a first mortgage bond of the same corporation would have.

The legal tender for debts function calls for a brief discussion. Whatever gives legal quittance from contract obligation, or from legal obligation as for taxes, performs this function. "Legal tender" money, in the strict sense, is not alone in performing this function. Usually a government will by law or administrative practice with the force of law, bind itself to accept forms of money which it will not compel other creditors to accept. Thus, silver certificates, without being "legal tender," are a means of legal quittance from obligations to the Federal Government. Sometimes governments will receive only gold at the customs house. This was true in the Greenback period, when Greenbacks were "legal tender," but not good for payments of customs duties. The reader who is interested in refinements of the legal distinctions among different kinds of money will find the thing elaborately worked out by G. F. Knapp, in his Staatliche Theorie des Geldes.[486] But "legal tender" money is not always an adequate means of quittance. If the contract calls for corn, or wheat, or Northern Pacific stock, the best legal tender money is a poor substitute! Witness the "Corner" in Northern Pacific in 1901. It is doubtless true, as Davenport[487] points out, that all contracts, whatever they call for, may be ultimately met, under the common law, by money damages, but that does not mean that a man can maintain his solvency or position in business by offering money when Northern Pacific is designated in his contract. Doubtless even there money will free him, at a price, but Northern Pacific stock is at least more convenient for the purpose! A man does not need money to get free from debts, even when money is required by the contract. He can turn in whatever he has in an assignment for the benefit of his creditors, and get free via the bankruptcy court. In other words, the legal tender function of money, while it does distinguish money from other goods as a matter of degree, does not erect an absolute difference of kind.

Under a smoothly working monetary system, where all forms of money are kept at a parity by constant and ready redemption, and where people have no doubt that this redemption will occur, the legal tender quality which attaches to part of the money is a matter of no consequence. It adds nothing to the value of the money. In times of stress, the legal tender quality may be a source of a considerable temporary value. This is especially likely to be true of an inconvertible money. The legal tender quality of the Greenbacks led to a very considerable fall in the gold premium in the Panic of 1873. I have mentioned this point in the chapter on "Dodo-Bones," where part of this discussion has been anticipated. In general, the legal tender quality may be recognized as a factor in sustaining the value of money, if as a consequence of this quality men take the money when they would not otherwise take it, or take it on terms which they would otherwise not agree to. Where, however, the money is money which they are glad to get in any case, the legal tender quality is a matter of supererogation.

The standard of deferred payments function, as distinguished from the legal tender function and the medium of exchange function, does not add to the value of money. Of course, if the standard of deferred payments is actually used in making the deferred payment, then it finally becomes assimilated to the other two functions. But it is quite possible to divorce them completely. Suppose, for example, that the standard named in a contract in the Greenback Period was gold, but that payment was made in Greenbacks at the market ratio. Or, suppose that the standard of deferred payments should be a composite of commodities, the tabular standard, with the understanding that the index number on the day of payment should determine the amount of money to be paid. In neither of these cases does the standard of deferred payments function supply any reason for an increase in the value of the thing which serves as the standard.