THE THEORY OF INTEREST

tween the rates on short term and long term loans. Thatis, if the short term rate is greatly above the long term,it is likely to fall, or if greatly below, to rise. The longterm rates thus set a rough norm for the short term rates,which are much more variable. When the future is re-garded as safer than usual, loan contracts tend to belonger in time than otherwise. In a stable country likethe United States , railway and government securitiesare thus often drawn for half a century or more. There isalso a variability according to the degree of liquidity. Acall loan which may be recalled on a few hours’ noticehas a very different relation to risk than does a mortgage,for instance. The call rate is usually lower than time ratesbecause money on call is a little like money on deposit,or ready money. It is ready, or nearly ready, for use when-ever occasion demands. This readiness or conveniencetakes the place of some of the interest. On the other hand,a sudden shortage of funds in the call loan market maysend the call rates far above time rates and keep themthere until the slow working forces release “time-money”and transfer it to the call loan market. Thus the call loanrates are very volatile and mobile in both directions.

The element of risk will affect also the value and basisof the collateral securities. Their availability for collateralwill increase their salability and enhance their price. Onthe other hand, when, as in times of crisis, the collateralhas to be sold, it often happens that for purposes ofliquidation it is sold at a sacrifice.

§3. Limitations on Loans

The necessity of having to offer collateral will affectnot only the rate which a man has to pay, but the amounthe can borrow. It will limit therefore the extent to which

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