Value & Capital, CHAPTER XIII, Section 3

This section summarizes the conclusions to be drawn from the preceding sections regarding the relationship between money and interest.  When someone purchases a "bill" to be paid back with interest after a maturity period, there is a possibility that the purchaser will want the money back prior to the maturity period.  If this happens, "he would have to rediscount his bill."  What this means is that he would have to find someone to buy the bill from him.  But if interest rates have gone up since the bill was purchased, any potential buyer would prefer to buy bills bearing the higher interest rate.  To attract a buyer, the original purchaser would have to discount the price of his bill, so that the total amount of money it repays (in principal and interest) would correspond to having received the new interest rate.

The longer the time before the maturity of the bill, the more serious this ... risk is likely to be; and thus, as we saw in our previous discussions of the long-term rate of interest, the long rate is normally likely to exceed the short rate by a risk-premium, whose function it is to compensate for the risk of an adverse movement of interest rates.

Conversely, of course, the shorter the maturity period of the bill, the less risk there will be of needing to rediscount the bill on unfavorable terms.  Lenders will still have to be compensated for the trouble of holding securities that are "imperfectly 'money'" and this compensation for the marginal lender (the lender who is just indifferent between lending and not lending) will correspond to the interest rate.  For short-term interest rates, the risk of having to rediscount on unfavorable terms is only likely to be important "essentially in conditions of great strain -- more or less crisis conditions."