§ 5. The Rate of Interest determines the price of land and of Securities.

Before quitting the general subject of this chapter, I will make the obvious remark that the rate of interest determines the value and price of all those salable articles which are desired and bought, not for themselves, but for [pg 449] the income which they are capable of yielding. The public funds, shares in joint-stock companies, and all descriptions of securities, are at a high price in proportion as the rate of interest is low. They are sold at the price which will give the market rate of interest on the purchase-money, with allowance for all differences in the risk incurred, or in any circumstance of convenience.

The price of land, mines, and all other fixed sources of income, depends in like manner on the rate of interest. Land usually sells at a higher price, in proportion to the income afforded by it, than the public funds, not only because it is thought, even in [England], to be somewhat more secure, but because ideas of power and dignity are associated with its possession. But these differences are constant, or nearly so; and, in the variations of price, land follows, cæteris paribus, the permanent (though, of course, not the daily) variations of the rate of interest. When interest is low, land will naturally be dear; when interest is high, land will be cheap.

A lot of land, which fifty years ago gave an annual return of $100, if ten per cent was then the common rate of interest, would sell for $1,000. If the return from the land remains the same ($100) to-day, and if the usual rate of interest is now five per cent, the same piece of land, therefore, would sell for $2,000, since $100 is five per cent of $2,000.

The price of a bond, it may be said, also varies with the time it has to run. At the same rate of interest, a bond running for a long term of years is better for an investment than one for a short term. The lumberman, who looks at two trees of equal diameter at the base, estimates the total value of each according to the height of the tree. Then, again, a bond running for a short term may be worth less than one for a long term, even though the first bears a higher rate of interest. That is, to resume the illustration, one tree, not rising very high, although larger at the bottom, may not contain so many square feet as another, with perhaps a less diameter at the bottom, but which stretches much higher up into the air.

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