Value & Capital, CHAPTER XIII -- INTEREST AND MONEY

In this section, the first one of the chapter, the author, Sir John Hicks, notes that "there are certain kinds of promissory documents, not usually reckoned as securities, but included as types of money."  Among these are bank deposits, which are essentially promises to pay money in the future, as well as bank notes.

The difference between securities that are "types of money" and those that are not is that money securities do not pay interest.  In other words, "their present value equals their face value."  Hicks goes on to observe that

Looked at in this way, money appears simply as the most perfect type of security; other securities are less perfect, and command a lower price because of their imperfection.  The rate of interest on these securities is a measure of their imperfection -- of their imperfect 'moneyness'. The nature of money and the nature of interest are therefore very nearly the same problem.  When we have decided what it is which makes people give more for those securities which are reckoned as money than for those securities which are not, we shall have discovered also why interest is paid.

Hicks notes that his earlier chapter on interest identified two elements, both relating to risk, that comprise parts of the interest paid on securities.  These elements are the risk of default and the risk premium due to uncertainty over future interest rates.  Hicks observes that Keynes in his writings "appears to reduce all interest into terms of these two risk factors."  But having noted the existence of a rate of interest on perfectly safe securities, Hicks suggests that to say this interest rate is determined by uncertainty over future interest rates would be a somewhat circular argument.  His conclusion is that "one feels an obstinate conviction that there must be more in it than that.  Let us try to discover what that something more can be."