The rate of interest is determined by the condition of the credit market. Rates of interest on bonds and other long-term obligations appear to be fairly fixed, altho they vary somewhat with the demand for, and the supply of, such investments. These variations, in the case of bonds and similar securities, arc more likely to find expression in the price of issue than in the interest rate. Generally speaking, railway obli gations bear from four to six per cent interest, public service corporation bonds from five to six per cent and real estate mortgage bonds from five to seven per cent, according to the location and the value of the security.
On the other hand, the discount for commercial paper has a much wider range. It may be as low as three per cent when the market is easy and bankers are eager to loan. But as the demand for credit increases, rates of discount rise and in times of panic may be as high as 10 and 12 per cent. The average is perhaps from four to five per cent. The lower rate of interest for commercial paper sometimes prompts men who have no immediate prospect of repayment to borrow on short-time paper.
Naturally the borrower seeks the lowest rate of interest available. If he has borrowed at four per cent on short-time notes he is reluctant to issue six per cent bonds in their stead. If money becomes tight he seeks to make the change but is liable to find that the market will no longer absorb the bonds. The ad vantage of long-term borrowing in certain lines of business is so great that far-sighted men of business will often forego the temporary advantage of lower interest in short-term notes in favor of the greater security of long-term obligations. When capital is borrowed on such terms the borrower has no fear of being squeezed in a tight money market which may jeopardize his enterprise.
N. What credit description of the conditions under which credit is obtained has inci dentally given some idea of what credit does. It must be evident that credit directly adds nothing to the wealth of the community except perhaps as it draws in capital from other sources. If we take the world as a whole, the existence of credit does not Of itself' enhance the amount of wealth. Any inventory of the world's wealth would pass over credit, because credit is, after all, a relation between individuals, a question which concerns not the aggre gate of wealth but its distribution among individuals.
The chief function of credit in the world of pro duction is to distribute capital. Thru its agency the active, energetic men of the world are enabled to secure control of' the capital needed in their enter prises. Thus, while credit does not increase wealth it ' greatly increases capital, which has been defined as wealth devoted to production. It can therefore be readily understood why writers upon the subject have been disposed to sing hymns of praise in honor of credit, and extol in eloquent periods its beneficent workings. Thru its aid the world's production is vastly increased, and the creation of wealth is greatly stimulated. While it is not wealth, it is one of the most powerful factors in the creation of wealth. In directly it serves to bring forth new stores of value, to create new means of production,. favoring economy and providing for each generation a larger store of this world's goods than was possessed by its predecessors.
11. Credit and money.All credit is expressed in terms of money, and back of it there must be cer tain reserves not only of capital, as has already been pointed out, but also of money. Such reserves are needed for the contingency that a portion of the credit obligations must be met by money payments. This is not the only relation of credit to money. As we have seen, the function of money which is most gen erally understood, and which was perhaps the first in point of,time, is to serve as a medium of exchange. If anything besides standard money serves as a medium of exchange in just so far does it partake of the nature of money. Now under many conditions credit serves to make exchanges; thus it is described as a medium of exchange.
Some have pointed out that, as the majority of exchanges are made by the use of credit, credit and not money is the chief medium of exchange. This point of /view is useful in calling attention to the services of credit but it should not lead to any misap prehension of the relation of money to credit, or the designation of credit, as money. Between the two there is a fundamental difference. As a medium of exchange money is universally acceptable, while credit has only a limited acceptability.