By: ABBAS ALI
In part two, we found that capital results from saving, and the natural strengths of land, such as air, water, etc., are not included. Some part of the production of wealth or a huge amount is spent on the necessities of workers, capitalists, and landlords. There is no reason that the entire quantity of the production of wealth is not consumed in the same way unless there is something that will separate wealth from the result of psychological interest and will motivate the individuals of a nation to save. In civilized countries with business expansion, there is a great stimulus for the propensity to save. Because every person wants that, he must have capital to invest and earn profit or lend to somebody and receive interest as compensation.
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This profit or interest, which is paid in exchange for the use of capital, is the greatest stimulus. However, it has a different impact on the other individuals of the world’s nations. Generally, it is said that interest is paid as compensation for using money. However, this is not true. Money is not the real purpose; commodities are the real purpose, which are received with the help of borrowed money and used as capital. In addition, most business trades are run based on goodwill in the present era. Therefore, during buying and selling, money is needed occasionally.
Hence, interest is not paid against using money but is paid as compensation for using capital. Therefore, its rate depends on the ratio between the demand for debt and the quantity of capital in a country, which can be provided on interest. An increase in the interest rate implies a decrease in the capital and vice versa. It leads to the result that an increase in the interest rate is not unprofitable from an economic point of view. Capital is the result of saving, and interest rate is its reward. Therefore, as the rate of interest increases, so will the motivation for savings increase and the quantity of capital increase.
Therefore, it is evident that in some countries devising such laws, the intention of which is to decrease the rate of interest or to stop its increase, will be as if to restrict the causes with the help of which the supply of capital increases. However, on the contrary, we should not understand that a decrease in a country’s interest rate implies that its civilizational situation is applaudable from all aspects. Undoubtedly, a reduction of the interest rate means an increase in the capital. However, one more result can be drawn from this that the quantity of capital is increasing with such acceleration that now there is no opportunity to put it to fruitful or profitable use, and the civilizational structure has become so disarrayed that people have become so lazy and comfort-loving that they do not care to undertake new business ventures.
There are many causes of the increase in the rate of interest. People do not lend their capital on interest in other countries unless they get a higher interest rate. Thus, in most countries, the amount of interest also depends on the profit received from the use of capital. The farmers of Australia get twenty per cent profit from agriculture. Therefore, they can give a huge interest rate against the use of borrowed money compared to countries where agriculture does not provide such profit. According to the same theory, the cheapness of the foodstuff decreases the labour cost and the profit amount, further increasing the interest rate.
On the contrary, the discovery of new gold and silver mines increased the supply of capital. Therefore, the rate of interest decreases. Also, the rival competition among a country’s banks who always think about investing their money reduces the interest rate. During the present times, the rate of interest falls under the effect of the following reasons:
- Due to the transportation facilities, it is easier for people to transfer their capital to other countries. In the country where the capital gets moved, the supply of capital decreases. Therefore, the rate of interest in the country increases.
- Members of the kingdoms of various countries borrow money from the public to finance war and undertake social welfare projects. If this were not so, the quantity of capital in the country could have been lent, which would have resulted in a decrease in the interest rate owing to the increase in the supply of capital.
- Purchasing foodstuffs from other countries decreases a country’s capital, increasing the interest rate in the country.
- Because joint venture companies are considered legally valid, most money lenders have unitedly created business companies. Thus, the quantity of capital that could have been lent on interest earlier has now been invested in different branches of the business, which decreased the amount of money that could be lent on interest, hence an increase in the interest rate.
You might understand that the interest rate and rent are the two sides of the same coin. However, this is not true. As the population grows, culture and civilization develop, and the production of wealth increases, so does the quantity of rent increase, as we have already discussed in the previous chapter.
However, due to increased capital, the interest rate has a decreasing propensity in such conditions. According to the same theory, there is one more difference between rent and interest: the former, as we have already proved, is not any part of the prices of the goods; however, the latter is part of the prices of the goods. The increase and decrease in the interest rate depend upon the increase and decrease in the capital profit, which is earned by investing it in any branch of business. The increase or decrease in the yield depends upon the increase or decrease in the prices of the goods.
In most cases, moneylenders do not have complete trust in their debitters; in some cases, they are apprehensive of non-repayment of the capital and other types of losses. Therefore, they lend money to their debitters at an uncommonly high rate of interest, which is charged due to the apprehension of non-repayment or loss. In economic terminology, it is known as “false interest.” Because the real and correct quantity of the interest rate is the one in the determination of which there is no involvement of any apprehension, this fact is why, at some times, in the same business center, the interest rate differs from place to place. You have read about the economic principle for the prices of goods that in the same market, at the same time, the price of the same kind of good remains the same.
However, it should be remembered that this principle is not true for the interest rate or, in other words, about the price paid for capital use. This fact is the reason that sometimes, in the determination of the rate of interest, the apprehension of loss is also taken into consideration. Where there is the apprehension of loss of money, the moneylender charges a higher interest rate. And where there is less or no apprehension of failure, or in other words, where they fully believe there is no chance of loss and the interest will be paid regularly, they agree to lend at a lesser interest rate. In addition, because people generally fear losing their reputation, they try to hide their borrowed capital from others.
They do not try to create a kind of business competition among the moneylenders so that the interest rate may decrease, and they will benefit from it. Therefore, those who borrow capital do not know the circumstances fully and cannot show their mutual effect on the money lenders. Its result is that different money lenders lend money to varying rates of interest.
According to the same theory, in different business centers of the world, the cause of the difference in the interest rate is the same, which has been discussed. However, there is one more cause for the difference in a particular case. Generally, moneylenders do not lend their capital to the people of other countries, leading to a difference in the local interest rate. In addition to other concerns, they also fear that, for some reason, they will have to face unnecessary trouble in fighting with strangers if they need to approach the court of law in case of non-repayment of the borrowed capital.
Sometimes, rival national prejudice, misunderstanding, and the unavailability of trustworthy brokers prevent a moneylender from lending money to people in other countries. In addition, they have the natural idea that it is better to contend with a lesser rate of interest in their own country than to transfer the capital to other countries where the apprehension of loss remains due to insufficient knowledge about the circumstances in those countries.
Ilm-ul-Iqtisad
Part-4 Chapter-2
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