§5. Salability as a Safeguard

When a security, because it is well known, or for any other reason, has a high degree of salability, that is, can be sold on short notice without risk of great sacrifice, its price will be higher than less favored securities, and the rate it yields will therefore be low. Salability is a safeguard against contingencies which may make quick selling advisable. In other words, in a world of chance and sudden changes, quick salability, or liquidity, is a great advantage. For this reason, the rate of interest on individual Edition: current; Page: [216] mortgages will be higher than the rate of interest on more marketable securities. It is, in general, advantageous to have stock listed on the stock exchange, for, being thus widely known, should the necessity to sell arise, such a stock will find a more ready market.

The most salable of all properties is, of course, money; and as Karl Menger pointed out, it is precisely this salability which makes it money. The convenience of surely being able, without any previous preparation, to dispose of it for any exchange, in other words, its liquidity, is itself a sufficient return upon the capital which a man seems to keep idle in money form. This liquidity of our cash balance takes the place of any rate of interest in the ordinary sense of the word. A man who keeps an average cash balance of $100, rather than put his money in a savings bank to yield him $5 a year, does so because of its liquidity. Its readiness for use at a moment's notice is, to him, worth at least $5 a year. There is a certain experienced buyer and seller of forests, in Michigan, who makes a practice of keeping a ready cash balance in banks of several million dollars in order better to be able to compete with other forest purchasers by having available spot cash to offer some forest owner who, becoming forest-poor, wishes to sell. Forests are extremely non-liquid while cash balances are extremely liquid.