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The Rationale for varying Rates of Interest

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In the money business, the basic factor encouraging moneylenders to determine an interest rate is the gravity of the borrower’s need. If the borrower is not very hard-pressed, the rate will naturally go down, however, it will continue to swell with a rise in the gravity of the borrower’s need such as the poverty-stricken. As for the commercial interest that the market manipulators determine, the economists generally hold one of the following two opinions.

One group is of the view that the law of supply and demand is the basis for the rise and fall in the rate of commercial interest. The capitalist is not willing to participate in a proper and judicious manner with the entrepreneur, sharing both the profit and loss in a venture. Instead, he speculates about the likely benefit accruing to the entrepreneur on the sum of the loan. The entrepreneur also speculates about the dividends he is likely to earn and on this basis tries not to let the interest on a loan exceed his profit. Both parties thus resort to speculation.

A ‘tug of war’ is inevitable between the two because of the conflicting nature of their interests rather than a relationship of cooperation and consideration. The raising and lowering of interest rates adversely affect the global economy’s health.

According to the second view, fluctuations in the rate of interest are justified on the grounds that a capitalist raises the interest rate only when he thinks that he needs capital for his own use; but when he has no such urge, he lowers it. The actual reason for the capitalist’s behavior of withholding most of his money at some times and letting it flow through at others is entirely for maximizing his self-interest through capital market manipulation and speculation.

These are the two factors that play a major role in determining rates of interest. However, there remain questions that have continued to defy answers. How can anyone justify the capitalist’s desire to earn interest as rational and how can he be allowed to manipulate the money market for his narrow personal gains at the cost of the vast majority who suffer? We thus arrive at the inevitable conclusion that the interest-based system is most exploitative and injurious for humanity’s economic health.

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