Time-value of money

“ Therefore, while the rate is determined by each to some degree, all that any one does is to buy or sell present goods, borrow or lend capital, use up or save wealth, according as his own estimate of time-value is less or more than the market rate. In fact, the estimates of individuals diverge constantly from the market rate, but are brought into harmony by their actions with reference both to money loans and to the use and valuation of the various forms of wealth. A Robinson Crusoe working on his island and valuing future goods relatively to present goods higher than before, consumes less ”

“ If we have more at the end of the day, we lend it out; if we have less, we borrow to make up the deficiency. We try to have just that balance, and no more, to our credit at the bank at the end of every day." The handling of funds by a brokerage house is a fine art, involving both technical skill and a philosophic grasp of the factors of the "money market." Are rates going up? Then it is well to reduce call loans, and borrow more on time. If lower rates are anticipated, more call money will be employed—with the possibility of a "squeeze" if too much is taken that way. ”

“ 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 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. ”

“ To throw the emphasis on inertia, however, and to assume that men do not readjust their margins to meet changed conditions, is to depart from the fundamentals of the Austrian theory. If the price-situation is a rapidly changing one, men do rapidly readjust their estimates of money. If money is fluctuating rapidly in value—as, say, during a time when there is depreciated paper money, whose future depends on military events, the adjustments may be very rapid indeed. ”

“ If the dominant banks manage ill, the rate of interest will at one time be excessively high, and at another time excessively low: there will be first a pernicious excitement, and next a fatal collapse. But if they manage well, the rate of interest will not deviate so much from the average rate; it will neither ascend so high nor descend so low. As far as anything can be steady the value of money will then be steady, and probably in consequence trade will be steady too—at least a principal cause of periodical disturbance will have been withdrawn from it. ”

“ If money is more abundant, if money-rates are easier, for a time, it may easily happen that many small merchants will experience the superior convenience of having a more adequate amount of change in the till, and will, even after the money-rates have risen—if they do rise again to the old figure—find a new reason for keeping more cash on hand. There is a marginal equilibrium between the interest on the capital invested in cash in the till, and the wages of the clerk, [211] whose active legs assist the velocity of money. ”

“ I think, however, that the extent to which bank-credit serves for permanently financing industry is underrated. A good many investors have learned that the short-time money-rates are, on the long time average, lower than the yield on long-time securities. ”

“ To the extent that static assumptions are not realized, we need money in bank reserves. This extent is a thing that varies from time to time, and from place to place. It is not the same for a given place from time to time, nor is it the same at all places at a given time. It is not the same for the whole world from time to time. ”

“ At times, short time financing may be even more expensive than long time financing. But such study as I have given to quotations of short-term notes of corporations, as compared with the longer term bonds of the same corporations, would leave the distinct impression that short-term notes fare better in the security market, and yield less return. ”

“ If the collateral note be a call note, the rate will be lower, in general, than on a time note. I here refer to what was said in the chapter on the functions of money with reference to the relation of short loans, es [Pg 495] pecially call loans, to the "bearer of options" function of money. Part of the yields of these loans is in the bearing of options. This function grows out of the uncertainties of a dynamic market. It would disappear if uncertainties, "friction," and dangers disappeared.
The importance of liquidity and saleability in the assets of a banker needs little discussion. ”

“ The explanation of the time-element in the trade cycle, of the fact that an interval of time of a particular order of magnitude must usually elapse before recovery begins, is to be sought in the influences which govern the recovery of the marginal efficiency of capital. ”

“ In the last words the hazy conception of the ideal money measure melts away and its real meaning breaks through. The reckoning names of gold, pound sterling, shilling, etc., should be names for definite quantities Pg 102of labor-time. Since labor-time constitutes the substance and the intrinsic measure of values, these names would then actually represent definite proportions of value. In other words, labor-time is maintained to be the true unit of measure of money. ”

“ As will be more fully shown in discussing the relation of the prevailing rate of interest to saving, the recognition of time-value is implied in the use men make of consumption goods, in their postponement of enjoyment, in their storing of goods for future use. ”

“ In truth, however, value is here the active factor in a process, in which, while constantly assuming the form in turn of money and commodities, it at the same time changes in magnitude, differentiates itself by throwing off surplus-value from itself; the original value, in other words, expands spontaneously. For the movement, in the course of which it adds surplus value, is its own movement, its expansion, therefore, is automatic expansion. Because it is value, it has acquired the occult quality of being able to add value to itself. ”

“ The problem of time-value is involved in the application of one's energy to repairing one's own possessions. It is a thought of wide bearings that numberless minor decisions in every petty business involve, if they are correctly made, a measuring of the rate of capitalization. ”

“ Time-value, as here considered, is a broader conception than that of contract interest, for it has to do with the all-pervading element of time in its influence on value. Some rents are logically, and in practical business as well, not measured over periods of time, but at the moment of their accrual. The measurement of time differences is mainly required in setting a valuation upon a more or less permanent use-bearer. ”

“ Practically every man in a market acts on the knowledge of what the [Pg 146] exchange of direct and indirect goods means; yet abstractly stated, the thought seems at first difficult. In valuing any durable good, the theory of time-value is implied. Every time a machine, a house, a book, a field, is bought, the distinction between direct and indirect goods is acted upon, for a choice has been made between present enjoyment and future provision. Anything that endures is an indirect good and implies in its valuation a premium rate on present goods. ”

“ Time-value is a different genus of the value problem. Having to do with time differences, it must be found in connection with every use that is not immediate, whatever be the bearer of that use. Its application to rent is more frequent and obvious, as only the uses of material agents are capitalized, that is, sold in perpetuity. Moreover any service of labor that is not at once consumed is fixed in material form and appears thenceforward as wealth whose uses are yielded as rent or as consumption goods. ”

“ This is least true of time deposits, for the motive of the depositor in such cases is usually to invest his funds for a time rather than to keep them available as money. However, there are many cases in which persons save for some moderately distant use—such as the purchase of furniture, of a piano, of a house. The safety and convenience of time deposits, combined with the reward of a small rate of interest, cause great sums, in the aggregate, to be deposited as temporary savings, which otherwise would be hoarded in the form of money and thus withdrawn from circulation. ”

“ Time is money in America; the meals are hurried over, relaxations necessary to the enjoyment of existence forbidden—and what for? to make money. To what end? to spend it faster than it is made, and then to begin again. You have only a faint shadow of the immense wealth realized in England by that of the merchant or the shopkeeper in the States. ”

“ But it does not act instantaneously; even the right rate, the ultimately attractive rate, requires .an interval for its action, and before the money can come here. And the right rate is often not discovered for some time. ”

“ The last, accordingly, wound up their business, and, in the language of the day, “went on to the street,” and made their living by selling on time what they did not possess, and buying on time what they never expected to receive, and reckoning profit or loss according to the difference in prices growing [71] out of the fluctuations of the currency between the day of buying or selling, and the day of receiving or delivering. ”

“ On account, lastly, of this Circumstance, that a stronger Demand for Money is met in either one of two ways, by increasing the stock of coin, or by an increased rapidity of circulation of that on hand. It is exceedingly fortunate that a brisker demand for money, especially if it be but temporary, does not necessarily enlarge the Supply or alter the value, but only hurries round the existing money. Oscillations in the Demand are responded to by a slower or a more rapid circulation. ”

“ Where payments such as rent, interest, insurance and taxes occur at periods irrespective of the times of receipts of money, it is often necessary to accumulate money or deposits in advance, thus increasing the average on hand, withdrawing money from use for a time, and decreasing the velocity of circulation. ”

“ The volume of piece work increases with progress in invention faster than the volume of time work.
X.51 In considering the index number as a standard for deferred payments, the desirability of assuming piece wages to change like commodity prices is based largely on the difficulty and consequent impracticability of including wages on a time basis. On the piece-wage basis, changes in money prices of other goods furnish an approximate measure of changes in money prices of labor. ”

“ The varying gratifications yielded by consumption goods, and their values in different conditions cannot be explained without taking account of differences in time. Wherever there can be a choice in the time at which, and consequently in the conditions under [Pg 144] which, a thing can be used, there is a choice presented between the different values. Time-value is present even in a period during which no goods continue to exist, as when a good is consumed at a moment of greater need, to be replaced at a time when less valuable. ”

“ But the interval of time, which will have to elapse before the shortage of capital through use, decay and obsolescence causes a sufficiently obvious scarcity to increase the marginal efficiency, may be a somewhat stable function of the average durability of capital in a given epoch. If the characteristics of the epoch shift, the standard time-interval will change. If, for example, we pass from a period of increasing population into one of declining population, the characteristic phase of the cycle will be lengthened. ”

“ Here are, therefore, very different aspects of the value problem. The rent conception is earlier grasped by men, is nearer in point of logic; the concept of time-value has only recently been clearly recognized. If men lived only in the moment, they would be concerned only with rent; living in the future also, they are constantly regulating their acts with reference to time-value. ”

“ Hence, for short periods of time, it may be said in a paper currency country, that business transactions based on cash money have a great element of variation in them. (Wagner in Bluntschli's Staats-wörterbuch, III, 971.) The purchase and lease-hold prices of fixed capital, of houses, for instance, rise much less because most people look upon the distress as transitory, and of short duration. ”

“ The multiplying and fructifying nature of Rapidity of Circulation has never been understood by our national financiers. When, however, enterprises are multiplying and Exchanges are being permanently increased in number and variety, then there must be a larger volume of money, and this larger amount is secured in the ways already indicated, with perhaps slight disturbances of value, but the temporary ebbs and flows of business should have no effect at all on the mass of money, but only on its movement, and its value consequently would scarcely be disturbed. ”

“ Understood aright, money, being the measure and representative of wealth, is in the main, the measure and the representative of dead men's toil; for, rightly understood, wealth is almost entirely the product of the labor of by-gone generations. This product, we have seen, involves the element of time as the chief factor. And so we discover how money, properly understood, is connected with time—the main function of money is to measure and represent the accumulated products of the labor of past generations. ”