Rate-making

“ It is everywhere accepted as valid. And it in a measure substantiates Mavor's statement that "freight rates, like rent, are rather the effect of price movements than the cause of them." When tariffs are high because prices are high, we are afforded a fair illustration of value of service as an element in rate making. ”

“ The general or comprehensive system of interdependent and fairly related rates, each so equitably adjusted to the others that any local change must of necessity throw the whole out of balance, is declared to exist only in imagination,-to be a fiction constructed in disregard of the facts of rate-making, and without attention to the inconsistencies shown by the schedules which had been in force. ”

“ They steal the money for improvements, and predict that reform will raise the tax-rate. When the prophecy comes true, they take the people back in their sheltering embrace with an "I told you so!" and the people nestle there repentant. ”

“ Cost of operation constantly is compared with fixed charges, the interest with the capital investment. Expensive improvements on railroads, the straightening of curves, the tunneling of mountains, the reducing of grades, the replacement of lighter by heavier rails, have been made possible by a fall in the rate of interest. A fall in the rate of interest disturbs the equilibrium that has been arrived at, between the cost of operation, the amount paid for wages, coal, etc., and the income on permanent investment. ”

“ Other things being the same, an increase of the money in circulation raises prices, a diminution lowers them. If more money is thrown into circulation than the quantity which can circulate at a value conformable to its cost of production, the value of money, so long as the excess lasts, will remain below the standard of cost of production, and general prices will be sustained above the natural rate. ”

“ For, as is now well established by economic theory and reinforced by the observations of practical men, while any increase in the supply of loanable funds on the call-money market temporarily [Pg 642] reduces the "money rate," an increase in the general supply of standard money in the community, on the contrary, raises not only the price level of all commodities, but the price for the use of capital, which we call the general rate of interest. The increase of money as the standard of value inevitably tends to increase the general rate of interest. ”

“ If the standard by which the reasonableness of charges is to be determined should fluctuate with the market prices of material, labor and land, no schedule of rates could be established for any length of time, for, under the circumstances, a rate that would be reasonable to-day might be very unreasonable to-morrow. ”

“ Among these stresses is the gradual increase in the costs of doing business. The decline in supplementary costs per unit of output ceases when enterprises have once secured all the [Pg 657] business they can handle with their standard equipment, and a slow increase of these costs begins when the expiration of old contracts makes necessary renewals at the high rates of interest, rent, and salaries which prevail in prosperity. Meanwhile prime costs, wages and raw materials, rise at a relatively rapid rate. ”

“ Even when these vestiges of natural economy had passed away and payment in money had been introduced, the terms of exchange were frequently the subject of regulation. There was often a recognised rate at which dues in service, or in kind, could be commuted for money; or attempts were made to determine the prices of goods and the rates of wages by authority, either in the interest of the consumer or, at other times and places, in that of the producer. ”

“ Such a policy, however, could not be continued with constantly diminishing net income. The downward tendency in the rate of return was caused in part by a hardening of the rate structure through a more inflexible policy of public regulation, in part by steadily increasing costs of wages and materials, and in part by the greater difficulty of finding means through economies and new operating methods of overcoming increasing costs. ”

“ Not only, as I have shown, have they not charged to capital the cost of improvements covered by stock and bond issues in other countries, but they have shared their gains liberally with the people through rate reductions. It has become common to think of the progressive lowering of rates, while all other charges are rising, as the work of legislative compulsion. ”

“ If, for instance, men arranging for loans in April, 1862, to be repaid a year later, had known that in the meantime the purchasing power of money would decline 30 per cent., they would have agreed upon a very high rate of interest. Men able to discern the future course of prices would not have lent money at the ordinary rates, and if the rates prevailing in the New York market throughout all 1862 and 1863 were less than 7 per cent., it must have been because the extraordinary rise of prices was not foreseen by borrowers and lenders. ”

“ He must be compensated in the same manner for the risk which he will run till the bill be ultimately paid.
⁠As an index of the general position of trade, the value of short bills is the more important; whereas the rates given for long paper, as compared with those for bills on demand, point mainly to the rate of interest, and partially to the state of credit. ”

“ Where a rate has been established and maintained for a considerable period, for the purpose of developing a particular industry, and with full knowledge that the industry could not be developed without it, and where, under the influence of such rate, large amounts of money have been invested in property the value of which must be seriously impaired by an advance of the rate, that fact is an important consideration in passing upon the reasonableness of such advance. ”

“ When the adjustment of loan interest to the rising prices shall be fully made, neither of these parties will gain at the other's expense so long as the rise shall continue at the prevalent rate; but if the rise should cease as quickly as it began, it would be entrepreneurs who would lose and lenders who would gain. Loans running at rates fixed when prices were rising would be paid by an amount of money which would buy more commodity than the business would afford. ”

“ It is, therefore, to the interest of every one to realize that while he, or the community in which he lives, would like to have his or its particular rate reduced, or its particular facility improved, nevertheless, in the interest of New England as a whole, the general rate-situation should permit earnings sufficient to meet the payments above described. ”

“ We shall examine the various issues presented by the rate structure in light of these interrelated criteria.
The first issue is whether the Commission properly rejected the producers' contention that area rates should be derived from field, or contract, prices. The producers have urged that prevailing contract prices provide an accurate index of aggregate revenue requirements, and that they are an appropriate mechanism for the protection of consumer interests. ”

“ If the rate is set by the 'financial requirements' of the higher cost producer it will be higher than that necessary to make it just and reasonable to the lower cost producer, thus resulting in a windfall to the latter. ”

“ The profits of stock in different employments, having been shewn to bear a proportion to each other, and to have a tendency to vary all in the same degree and in the same direction, it remains for us to consider what is the cause of the permanent variations in the rate of profit, and the consequent permanent alterations in the rate of interest. ”

“ But the general tendency to regulate rates by authority of the state has apparently rendered unnecessary the old plan of rate regulation through competition, even if it had not been demonstrated often and again that this form of regulation is costly for all concerned and is effective only during rare periods of direct conflict between companies. ”

“ The policy of the Government, national and state, during the last twenty-five years seems to have been to decide rate questions in the great majority of cases in such a way that rates were rarely advanced and generally were reduced, and to introduce rules, regulations, and methods that increased expenses. ”

“ Aside from the question of rate regulation, is it not worth this much to the railroads of the country to be able actually to prove that the amounts at which they are capitalized are reasonable, as in the great majority of cases they probably are? ”

“ The principle of Government control of rates and profits, now thoroughly imbedded in our governmental attitude toward natural monopolies such as the railways, at once eliminates the need of competition by small units as a method of rate adjustment. ”

“ Rise of prices generates rise of prices, and continues to do so as long as the interest rate lags behind its normal figure.
§ 3 IV.11 The expansion of deposit currency indicated in this cumulative movement abnormally increases the ratio of M' to M. This is evident if the rise of prices begins in a change in some element or elements in the equation other than the quantity of money; for if M remains constant and M' increases, the ratio M' to M must increase also. If M increases in any ratio, M' will increase in a greater ratio. ”

“ We recognize that interest rates are potent factors in production and business activity, and for the purpose of further equalizing and of further lowering the rates of interest, we favor such monetary legislation as will enable the varying needs of the seasons and of all sections to be promptly met in order that trade may be evenly sustained, labor steadily employed, and commerce enlarged. The volume of money in circulation was never so great per capita as it is to-day. ”

“ By tracing the usual course of interest rates and of business conditions throughout one of these cycles, a general idea can be formed of the way in which the joint influences operate to produce price movements. To what extent the course of interest rates is a cause as well as a result of changing business conditions, we shall not attempt here to estimate, but will be content to note carefully the general course which rates for money pursue throughout the cycles. Immediately after a financial crisis, which usually closes an era of great business prosperity, money rates become abnormally easy. ”

“ The lowest rate, he tells us, at which advances used to be obtained from capitalists, even upon the land-tax, which seems to have been considered the surest part of the national revenue, was eight per cent., although repayment was made within the year, and premiums were generally granted to the subscribers. On anticipations of other taxes, counting premiums, discount, and interest, the public had sometimes to pay twenty, thirty, and even forty per cent. ”

“ As is only to be expected when aggregate demand increases, when higher incomes are available to a greater number of people than even before, and when industry is expanding at a fast rate, our balance of payments experienced some pressure last year. ”

“ If the demand for capital exceeds the supply, the rate of interest will ordinarily go up, and vice-versa. But this does not always take place because capital is sometimes obtained at a fixed rate for a long period, and this rate, whatever it is, remains the same for the duration of such period. ”

“ Though the rate of interest rises tardily, it rises progressively, and eventually catches up with the rise in prices, owing to the necessity which banks feel of maintaining a reasonable ratio between loans and reserves. ”

“ There is nothing more difficult in economical inquiries than the attempt to ascertain what was the actual rate of wages at any given period. The fluctuations in the value of money enter into this question, more or less, at every period of our history. We find the nominal rate of wages constantly increasing, from one generation to another, but we cannot at all be certain that the real rate is increasing. That nominal rate always requires to be compared with the prices of the necessaries of life. What pertains to wages pertains to all fixed money-payments. ”

“ To the former, who intends maybe to draw a few hundred pounds on London in a day or two against the shipment he is preparing, the difference between selling his draft next week instead of this may mean, if the rate should move in his favor, the gain of an additional half per cent.; but to our home manufacturers, who sell their wares in sterling and stipulate for payment in bills on London, the see-saw of rates is but of academic interest. They pay attention to the course of discount, because they may have to melt some of their paper before pay-day comes round ”

“ While, also, the rates for the low-value articles may not cover every item in the so-called cost of service, they do contribute to the revenue an amount which might otherwise have to be made good by the fixing of higher rates on goods in other classes. ”