An Essay on Economic Theory

2.9. Interest on Money and its Causes

An Essay on Economic Theory by Richard Cantillon
Richard Cantillon

Interest is established in the market by lenders and borrowers and the interest rate on a particular loan is determined by the risk of default. A loan is repaid from the income generated from capital investments and the interest paid is equivalent to the profits of fully capitalized enterprises. Small entrepreneurs pay high rates whether they borrow cash or purchase goods to be paid at a later date, based on risk and their propensity to spend beyond their means.Thereby, interest rates on loans are connected with an individual’s time preference.

From Part 2: Money and Interest. Narrated by Millian Quinteros.