"Cheap" And "Dear" Money

Money is said to be cheap or dear when the amount available (the surplus savings not at the time invested in trading or in securities) for loans and the discount of bills is plentiful or scarce in proportion to the demand for its use; and the value of money (its cheapness or dearness) is measured by the relation between each £100 of it and the sum charged for its loan - the rate of interest per cent. This relation naturally varies, and the rate of interest required depends upon the amount of money which those who possess it desire to lend, and the amount which others wish to borrow for trading and investment purposes. Money being simply a commodity selected as a suitable medium for effecting the interchange of material commodities useful and desirable, the price paid for its use is obviously controlled by the relation of supply and demand: an increased number of borrowers (and an increased volume of borrowings) tend to augment the rate of interest; as the borrowings decrease, the need of employing the supplied capital profitably produces, by competition between lenders, a diminished price or rate of interest. This is a general statement affecting the charge for loans: in particular cases the rate is also influenced in its amount by the nature of the borrower's business, its riskiness or comparative freedom from violent fluctuations, the soundness or imprudence with which he conducts his operations, his financial position, and generally the credit (which includes these features) which he possesses for integrity and promptitude in fulfilling any obligation he may assume.

Dearness And Cheapness Of Money Merely Relative Terms

But the dearness (or a high rate of interest) and the cheapness (or a low rate of interest) of money are merely relative terms, and imply a standard of comparison by which the value at any period is to be measured, or their employment would be meaningless. Money, then, is reckoned dear or cheap at any time when, compared with the value (or rate of interest) at another specified time, the price required for its service has increased or become lower. We may thus employ as the standard the value current yesterday or at some earlier date, or the average rate which has been charged over such a number of weeks or months or years, as may be selected to be the unit of comparison.

Dear Money In Relation To Stock Exchange Investments Is Largely Determined By The Volume Of Speculation

So far as the prices of Stock Exchange investments are concerned the effect of dear money (an increased rate of interest) is largely, though not entirely, related to the volume of speculation then existent in stocks and shares. Speculation, as distinguished from investment, is the difference between buying simply for the purpose of selling at a profit, and buying for the purpose of acquiring and retaining a permanent source of income. Speculation is conducted by the use of borrowed money: as the rate of interest charged upon it increases, or money grows dear, the original benefit to the speculator, in the excess of the return derived from the purchased security and the interest he pays upon the loan, gradually diminishes, until the point is reached when the two coincide and profit ceases, and finally the lower point when the first condition is reversed, and the rate of interest surpasses the rate of return. The speculator's capacity to sustain this heavier burden, from account to account, in the hope of more propitious times, sooner or later, reaches its limit of endurance; the bargain must then be closed by the sale of the purchased stock, and its general market value in consequence falls. Banks and other lenders, who have advanced the money with which the stocks have been purchased, call in their loans at such a crisis, and the securities are sold to discharge the debts. The price will stand in inverse ratio to the volume of sales, and speculative sales, conveying apprehension to the public who rarely examine and estimate causes, will be succeeded by sales on the part of timid and untaught investors (in trepidation of a deeper plunge in values), who should preferably reckon the time propitious for purchases.

Stocks, Like Material Commodities, When Pressed For Sale, Must Carry A Diminished Price

For stocks, like material commodities, when pressed for sale, must carry a diminished price to tempt the buyer - particularly when buyers generally become scantier by reason of the fall, and by reason, further, of possible purchasers finding no attraction towards the investment market when their funds, in a period of high interest, can be more profitably employed outside in trade and loans. In these modes the dearness of money, or a high rate of interest for its loan, causes a depreciation of securities, although these securities may remain as intrinsically valuable as before - the variation being consequent upon an alteration in the ratio of supply and demand of money.