The Value of MoneyAnderson, Benjamin M. (Benjamin McAlester)
General
The Value of Money
Anderson, Benjamin M. (Benjamin McAlester)
Money
Now, in general, when such rents appear, they may be capitalized. And
the price of the instrument of production that bears these rents, will
be the sum of the rents, discounted at the prevailing rate of interest,
with considerations of risk, etc., allowed for. The reasoning of the
capitalization theory is really quite simple. Take, for example, a piece
of urban site land, which is expected to bring a perpetual annuity of
one hundred dollars. The whole economic significance of the land is
contained in its services, present and prospective. The possession of
land under certain circumstances brings other services, as social
prestige, than the services which can be alienated to a lessee. But in
this case I am abstracting from considerations of that sort, and also
from the factor of risk. The whole value of the piece of land under
consideration comes from the value of the one hundred dollars a year.
But these annual incomes are not all equally valuable, even though all
expressed as one hundred dollars. The first one hundred dollars is due
one year hence, the tenth ten years hence, the thousandth, a thousand
years hence. The principle of perspective comes in--I abstain from any
detailed discussion of the theory of interest, simply stating that in a
general way I agree with the contention that _time_ constitutes the
essence of the phenomenon, or rather, the tendency to discount the
future. The capital price of the land is the sum of an infinite
convergent series of the "present worths" of the incomes. The formula
is as follows: capital price of land = $100/1.05 + $100/(1.05)^2 +
$100/(1.05)^3 ... + $100/(1.05)^n when the rate of interest is 5%. The
limit of this series, assuming the series to be infinite, is $2000, and
a simple formula for calculating it under the assumptions, is to divide
$100, the annual income, by .05, the rate of interest. Given the annual
income, given the prevailing rate of interest, the capital price is
determined. The relation may be illustrated, roughly, by the figure of a
candle, a disk, and the shadow of the disk on the wall. The disk
represents the annual income, the shadow on the wall the capital value,
and the distance between the flame and the disk the rate of interest.
Increase the distance between the flame and the disk, the rate of
interest, and the shadow becomes smaller; shorten the distance, and the
shadow is increased. Similarly, enlarge the disk, and the shadow is
enlarged. The capital value varies directly with the annual income, and
inversely with the rate of discount. Now my purpose here does not
involve a detailed examination of the validity or limitations of the
capitalization theory. For the present, the only question is, has this
theory any application at all to the problem of the value of money? It
offers itself as a general theory of the values of durable bearers of
income. Money is a durable bearer of income.
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