Interest varies in the same region with a variation of energy and productive enterprise or of the speculative spirit undertaking great improvements, and on the other hand with any change of circumstances affecting universal credit. Distrust on the part of anybody reduces the readiness with which borrowers find lenders. In times of widespread lack of confidence, when all credit becomes debt, the borrower is likely to offer unusual rates of interest. And the few who are willing to lend at all expect enormous profits in such interest.
Similar variations in rates of interest are found between different classes of borrowers, due to the variation of risk. Thus promises to pay on demand, with personal security of two good paymasters, will usually be accepted at very low rates of interest, since the owner of wealth so loaned feels sure of having the wealth when he wants it. Government loans in times of peace and prosperity being essentially without risk, approach very near the same low rate of interest, since the owner of these securities believes himself at any time able to command the use of his wealth for any purpose by a transfer of these securities. If for any reason, official or legislative, public confidence is disturbed, rates of interest on such securities rise proportionally through the sale at a discount. Even a law prohibiting such sale would have exactly the contrary effect to that intended, because of creating additional distrust. Loans upon time, if secured by productive landed estate not subject to unusual risks, can usually be made at moderate rates, and form a fair basis for judging the normal interest in any region. Loans secured by chattel mortgage bring higher rates, because the chattels involved are a less certain means of payment than landed estate. Loans secured upon unproductive lands, whether in prospective farms or city lots, are made at high rates, not only because these lands fail to furnish in themselves the means of interest payment, but because they represent the speculative energy of their owners with unmeasured risk. All these variations and fluctuations are found in every community, and grow out of the natural wants of borrowers and the natural feelings of lenders. Custom may have something to do with rates in special cases, as it has to do with wages and retail prices, but in the range of frequent dealing between borrowers and lenders rates follow the higgling of the market as truly as prices of commodities.