SEPTEMBER 01, 1981 by LUDWIG VON MISES
Originary interest is the ratio of value assigned to want-satisfaction in the immediate future and the value assigned to want-satisfaction in remote periods of the future. Originary interest is not “the price paid for the services of capital.”
If future goods were not bought and sold at a discount as against present goods, the buyer of land would have to pay a price which equals the sum of all future net revenues and which would leave nothing for a current reiterated income. In every act of lending, even apart from the problem of changes in the monetary unit’s purchasing power, there is an element of entrepreneu rial venture. The granting of credit is necessarily always an entrepreneurial speculation which can possibly result in failure and the loss of a part or of the total amount lent. Every interest stipulated and paid in loans includes not only originary interest but also entrepreneurial profit.
The role which the rate of interest plays in the deliberations of the planning businessman is obvious. It prevents him from embarking upon projects the execution of which would not agree with the limited amount of capital goods provided by the saving of the public.
In the rate of originary interest there is no more permanence than in prices or wage rates.
It was a blunder to explain interest as an income derived from the productivity of capital. There were schools of thought for whom interest was merely a price paid for obtaining the disposition of a quantity of money or money substitutes. From this belief they quite logically drew the inference that abolishing the scarcity of money and money substitutes would abolish interest altogether and result in the gratuitousness of credit.
The banks and the monetary authorities are guided by the idea that the height of interest rates as the free loan market determines it is an evil, that it is the objective of a good economic policy to lower it, and that credit expansion is an appropriate means of achieving this end without harm to anybody but parasitic moneylenders. It is this infatuation that causes them to embark upon ven tures which must finally bring about a slump.
The cyclical fluctuations of business are not an occurrence originating in the sphere of the unhampered market, but a product of government interference with business conditions designed to lower the rate of interest below the height at which the free market would have fixed it.
Therefore there cannot be any question of abolishing interest by any institutions, laws or devices of bank manipulation. He who wants to “abolish” interest will have to induce people to value an apple available in a hundred years no less than a present apple. What can be abolished by laws and decrees is merely the right of the capitalists to receive interest. But such decrees would bring about capital consumption and would very soon throw mankind back into the original state of natural poverty.