Interest a Payaient for Capital 1

money, demand, rate, gold, loans, supply and prices

Page: 1 2 3 4 5 6

The borrower of capital is a borrower of money, because he knows he can purchase the capital (tools, machinesimaterials) in the market. There being, at any given time, an amount of money to do the money work, the relation of the money to the exchanges that are made is expressed in a rate or percentage. A building fever may strike a community; everybody decides to erect a house. What is the result? The first expression of this decision is a demand for capital in the form of building materials.

The use of such capital is seemingly worth more at a time of special demand than before, in view of the possibility of limits to the supply; and the percentage, or rate, consequently rises one-half or one per cent. There is no more money than before, and no larger aggregate of exchanges. The continuance of the de mand will result, however, in a change in the price of building commodities, and with the higher prices will come a decline in the building operations which will sooner or later be 'followed by a lowering of the interest rate.

A repetition of the statement made a few pages back emphasizes a point that may now appear more evident : A demand for capital is not a demand for money; the demand for money produces price, the demand for capital creates interest.

Under the law that created the Federal Reserve banks, an immense amount of gold was released from the reserves of the national banks in the early part of 1914. The conditions abroad were such that the necessity for gold as a reserve steadily grew in France, England and Germany as the war went on. In America there was more than enough gold; and the possibility of an immense expansion of credit and enormous development of corporate activities, with increase of prices, seemed imminent.

Instead of falling, as the money situation seemed to foretell, the rates of interest held pretty well. There was first the demand for credits from abroad, and this was followed by a demand for certain types of commodities, and a systematic and continued destruction of permanent capital, food supplies and war munitions used in the maintenance of hostile armies. The destruction of capital and the consump tion of food supplies were offset by the change in the money and credit situation.

With the change in the bankitig conditions the rate of interest would have fallen markedly except for the controlling element, the actual destruction of capital; and in the final adjustment the rate of interest, based on the producers' goods in existence, must rise as a result of the war. Sometimes efforts have been made

in the United States to lower the rate of interest bv the issue of paper money thru legislation. Prices, however, rapidly adjust themselves to a changing monetary standard, and interest rises instead of falling.

7. Variance in the variance in the rate of interest, noted from time to time in the money market, is due in part to the attempt to adjust the demand f6 capital to its supply. A bank receiving an increase in gold is given, as a result of its enlarge ment of the reserve, a greater loaning capacity. While this is true, there is neither growth in the demand for loans nor any change in the call for capital. The bank, however, wishes to stimulate borrowing and in order to do so lowers the rate on loans.

One of the best examples of this method of pro cedure is to be found in the case of loans on call. In time, the increased gold holdings get into circulation and there is an enlargement of credit facilities which stimulates a demand for goods. An upward move ment of prices follows, and the amount of money needed to make the same number of exchanges is greater than before. The power of the bank to accommodate those who seek new loans is only tem porarily enlarged, and upon the later readjustment of prices the interest rate returns to its former level.

The above is a simple example of the effect upon interest rates of an increase in money supply. When the money supply declines, the economic machinery works in the opposite way. Any reduction in the supply of the basic gold money would necessitate a reduction in loans, irrespective of the needs for capital. Money with which to meet ordinary counter needs would be eagerly sought. The banks, in order to hold their supply of gold, would be compelled to call in loans and would refuse to extend loans to new borrowers. Everywhere men would reduce their activities, prices would decline, and the intetest rate would fall as a consequence of the falling off in the demand for capital. Eventually readjustments would take place and conditions would be reestab lished in which a normal rate of interest would obtain.

Page: 1 2 3 4 5 6