§ 6. Mercantile cash discounts. When goods are sold on time (as thirty, sixty, or ninety days) the contract (except in rare cases where the terms are net cash) is an implied interest contract, for it specifies that the full sum shall be charged only when the full time elapses; otherwise the dis counts for cash are at various figures, such as 1, 2, or 6 per cent or even higher for payment in ten days (giving time enough to examine the goods), and smaller rates for thirty days or other periods. This virtually makes two or more prices, one to customers that pay cash, and another to those letting bills run. The difference between cash in ten days and a discount of 1 per cent in thirty days is equivalent to a rate of 18 per cent a year on the amount of the bill, and is so great that it is impossible without taking advantage of the discount, for a buyer to carry on a business against strong competition. Such purchases on credit frequently are made, however, not only by dealers in small towns, but sometimes by large mercantile establishments when short of funds. "Slow collections" go along with increasing interest rates and "hard times." If the purchaser does not discount his bills, the seller has the choice either of waiting till the account is due and col lecting the bills direct from the customers, or of discount ing the customers' acceptances (notes) for ready money at the bank. According to the conditions and needs of the par ticular business, either method may be chosen. A series of credits is then created, each resting upon the one below: man ufacturer A sells goods to manufacturer B, who sells the finished product to the jobber C, who sells it to the retailer D, who sells it to consumer E, and all these credits for the same goods may be in existence at the same time, and every one may be represented by a promissory note that may be discounted at a bank. In most industries there is need for larger capital at the seasons when the product is put upon the market, and ordinarily a large part of these debts are converted into ready funds (discounted) at the banks. The merchant or manufacturer plans his business in the expects tion of an average rate of interest at such times, and if it chances that the rate is abnormally high, he has no choice but to go on borrowing and paying the high rate of interest out of the expected profits of his business. This risk of a change in the interest rate is one of the many chances he has to run.
§ 7. Long-time loans. A large part of the debts in mod ern times are outstanding for a term of years and represent the lender's purchase of a claim on income from public or private sources. The most familiar form of long-time loan is that made on the security of real estate, which is mort gaged to the lender for the term of the debt. Usually the debtor is obliged to pay the interest either annually or semi annually, and often, but not always, is permitted to reduce the principal by partial payments. These real-estate mort gages rest on the security of the particular mortgaged wealth, and, unlike most short-time loans in bank, are not obligations resting primarily on the general credit of the borrower. Corporation bonds, issued by railroads and other public utility corporations, which have increased so greatly in recent years, yield an income fixed in advance, and are secured usually by mortgage on the entire property of the corporation issuing them. (The income on some special kinds of "preferred stocks" is so certain as to make them for investors almost the same as bonds, but they are legally not loans, payable at a certain time, but are evidences of ownership.) Another large . class of long-time loans are those made by national, state, and local governments. Tens of billions of dollars of public debts are now outstanding, held by private investors in every walk of life.
The contract in the case of each kind of these loans pro vides for a fixed term after which the borrower must repay or renew, and for a fixed rate on the nominal or par value of the loan. Nearly all the securities (bonds, certificates, evi
dences of indebtedness) are saleable at a market rate. The incomes are fixed, the selling price (or capital value) fluctuat ing above or below the nominal sum except just at the moment when the debt falls due.
§ 8. Special markets for money loans. T choice of timeliness is possible in a market along any o e of many series of incomes, but in commercial circles tra e in timeli ness most commonly takes the form of money-loans. Let us see how this would appear. Let lender A offer some dollars at 10 per cent interest (or more) ; let borrower B be ready to borrow some dollars at 16 per cent (or any less). Then there is a motive for trade (omitting fractions) for a loan at any rate between 15 and 11, let us say 13 per cent. But this motive exists only with respect to certain marginal units of money, not without limits. A could not give up all his control over income during the year for 13 per cent for that would mean greater present deprivation than he chooses to make; B would not borrow much beyond a certain amount even at less than 13 per cent, for he would have to pay in terest either for less urgent personal desires (consumption loans) or to get control of incomes which to him will yield a smaller surplus.` , If there are numerous competing would-be lenders and bor rowers there is a true lending mirket. The various prefer: ence rates (each regarding successive dollars, viewed with relation to the marginal valuation) unite into hypothetical bidders' curves (as in the market for commodities, see Chap ter 7) and a price results that establishes equilibrium between demand and offer!' So in a market all the individual bids 4 If B (having good security to offer) should bid a very high rate of interest (say 20 per cent) either through bad judgment or because of a chance to buy under-capitalized goods (or incomes) it might induce A to sell his goods which involve a premium of, let us say, only 10 per cent, to lend the proceeds to B; A meantime could escape any deprivation by renting the goods he had sold, for a little more than half of the interest he is receiving. A is then not using fewer present goods but is temporarily taking advantage of a chance to substitute a more advantageous mode of purchasing both present and future incomes.
5 This may be traced on figure 11, showing how various bids meet in that are satisfied and enter into the making of the market price are modified by trade; the urgent bidder (or bidders) on either side are included on the marginal principle, the units most easily spared being loaned, the units most urgently desired being borrowed. As in the market for objective com modities, so in the market for loans, the valuations of the various individuals within a certain range are thus brought into conformity with the market-price. The earlier isolated valuations cease to be actual ; they are, as we look back at them, merely of historical interest, and as we look forward, are only hypothetical, being the rates at which preference would appear under other conditions than the present. (See Chapter 7, section 7.) Under these conditions the price of loans (expressed as a rate of interest) has to the superficial view an appearance of independence, as if the market for loans were a thing apart from the existing premium involved in capitalization. But this loan market could not exist apart from an existing status of prices. Money borrowed to keep would indeed be barren of any income; it would even cease to be money." The repre sentative character of money makes a loan mean to the bor rower the loan of whatever use-yielding, or whatever rent bearing, agent can be bought with the amount of money bor rowed ; and makes it mean to the lender parting with the purchasing power to buy goods at their present prices. The loan market is meaningless and motiveless, if it be thought of as cut off from the existing system of prices (capitali zation).