Rate of return

“ The only difficulty with the first one is in determining what is a reasonable interest rate on invested capital, and, as far as the writer has read, no Court has yet determined what this is, although some Courts have held that 5% is a not unreasonable return, that 8% is a not unreasonable return, and, if the writer's memory serves him right, that even 15% is a not unreasonable return. ”

“ It establishes an important fact in dealing with the difficult question of determining what is a reasonable rate on a particular article. Where the rates as a whole are under consideration, there is a possibility of deciding, with more or less certainty, whether the total earnings afford a reasonable return. But whether the carrier earned dividends or not sheds little light on the question as to whether the rate on a particular article is reasonable. ”

“ 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. ”

“ The necessary cost, and hence the capital charge, of the money embarked recently in utilities, and of that which may be invested in the near future, may be more, as it may be less, than t e prevailing rate of return required to induce capital to enter upon like enterprises at the time of a rate hearing ten years hence. ”

“ The price of any piece of land is affected by all the considerations on which its rent depends, but it is also affected by another factor which has no influence whatever upon rent. This factor is the rate of interest. The higher the rate of interest, the higher the return which a man could obtain by buying gilt-edged securities, the lower will be the price that he will pay for a piece of land which yields a given rent. ”

“ If a bond sells above par, it does not yield its purchaser a net return as great as the rate of interest which the bond bears, for two reasons: first, because the loss in principal, represented by the premium which the purchaser pays, must be distributed over the number of years which the bond has to run, and operates to reduce the rate of interest which the holder receives ”

“ The product of the profit per ton and the total tonnage gives the total net amount which will be received; it does not, however, give the present value, because the commodity cannot all be taken out and sold at once, but must be mined and absorbed by the market through a considerable period of years. The returns receivable some years in the future have obviously a lower proportionate present worth than amounts to be received at once. The interest rate comes into play, making it necessary to discount each annual payment for the number of years which will elapse before it is received. ”

“ 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. ”

“ 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. ”

“ At certain times and in certain businesses the prevailing rate of exchange on the actual day, or the monthly average of daily rates, may need to be used to secure satisfactory results. With the use of the fixed average rate, as above, the totals of foreign sales and sales returns journals are converted into home currency and carried respectively as debits and credits to Accounts Receivable control, and credits and debits to Sales. ”

“ The capital of those who live on the interest of their own fortunes, has generally sought and found some fixed investment, such as the public funds, mortgages, or the bonds of public companies, which investment, except under peculiar temptations or necessities, is not changed.
§ 3.⁠Fluctuations in the rate of interest arise from variations either in the demand for loans, or in the supply. The supply is liable to variation, though less so than the demand. ”

“ A timely amended return is as much a 'first return' for the purpose of fixing the capital stock value in contradistinction to returns for subsequent years, as is a single return filed by the taxpayer for the first tax year. ”

“ 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. ”

“ 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. ”

“ As we have seen, a doubling of all prices and incomes would not affect anybody's rate of turnover of money. Each person would need to make exactly twice the expenditure for the same actual result and to keep on hand exactly twice the money in order to meet the same contingencies in the same way. The determinant of velocity is real expenditure, not nominal. But a person's real expenditure is only another name for his volume of trade. We conclude, therefore, that a change in the volume of trade, when it affects the per capita trade, affects velocity of circulation as well. ”

“ 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. ”

“ Thus, suppose that a workman spends at the rate of $1 a day and receives at the average rate of $1 a day. The average amount that he will require to keep on hand will be less if his receipts occur once every fortnight than if they occur at intervals of three weeks and one week respectively in alternation. ”

“ Current assets and liabilities are converted at the rates current at the date of the balance sheet because the balance sheet should represent these values at the exact cost of converting them into cash at the present moment. If in practice they were actually liquidated, this could not be realized but in principle it represents the present condition. Revenue items are convertible at the average rate because they represent items accumulating during the entire fiscal period ”

“ Each man's adjustment is, of course, somewhat rough, and dependent largely on the accident of the moment; but, in the long run and for a large number of people, the average rate of turnover, or what amounts to the same thing, the average time money remains in the same hands, will be very closely determined. It will depend on density of population, commercial customs, rapidity of transport, and other technical conditions, but not on the quantity of money and deposits nor on the price level. ”

“ Whether a bank lent one million, ten millions, or a hundred millions, they would not permanently alter the market rate of interest; they would alter only the value of the money which they thus issued. In one case 10 or 20 times more money might be required to carry on the same business, than what might be required in the other. ”

“ His weekly cycle need show no higher balances than $7, $0, $0, $0, $0, $0, $0, the average of which is only $1.
V.22 Through book credit, therefore, the average amount of money or bank deposits which each person must keep at hand to meet a given expenditure is made less. This means that the rate of turnover is increased; for if people spend the same amounts as before, but keep smaller amounts on hand, the quotient of the amount spent divided by the amount on hand must increase.
V.23 But we have seen that to increase the rate of turnover will tend to increase the price level. ”

“ The report of the Comptroller of the Currency shows that the average return on all the shares and bonds of all the corporations in the United States is 4.3 per cent. That doesn’t look unreasonable. It isn’t very much more than savings-bank interest. Of course, some corporations make very much more, but many must make nothing in order to bring the average down to 4.3 per cent. ”

“ For example, the kinds of tax measures we have at different times--whether we raise our revenue in a way to encourage consumer spending and business investment or to discourage it--have a vital bearing on this question. It is affected also by regulations on consumer credit and by the money market, which is strongly influenced by the rate of interest on Government securities. It is affected by almost every step we take. ”

“ 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. ”

“ Much study and effort to reduce all the conditions under which assets depreciate to a common basis and so to a definitely stated rate for each set of conditions, have, so far, come to naught and all qualified experts say without reserve that the rate of depreciation is an individual problem. ”

“ For the determination of individual rates local conditions are always the controlling factor. An illustration in point is given by Henry Floy, [28] showing the varying rates used by thirty-one different concerns for the depreciation of their rolling stock equipment. The methods vary in almost every case, comprising annual charges of an arbitrary amount, per cent of the original cost, cents per car mile, arbitrary deductions from income irregularly applied, per cent of gross earnings, per cent of present estimated values. ”

“ Believing that there may be some ground for the claim that rates as a whole should be thus fixed, and that the return should not be unreasonable, let us consider how what is reasonable may be determined. ”

“ When the same rate of interest is employed, any divergence in the ratios of the annuity-values will of necessity be due to differences in the rates of mortality.
A prevailing fallacy in the popular mind, which has grown out of the practice of net valuations, is the inference that the average technical reserve represents the value of the individual policy. Each risk is properly assumed at its probable or average value at the time. ”

“ 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. ”