The government monopoly of fiat money and its control over the banking system further distorts interest rates. In a pure market, public revenue comes from user fees and land rents, which do not affect interest rates. Interest could be lower than it is today, since one would not have to borrow to pay for land, as the public collection of the rent would drive the price of land down to near zero, and there would be no tax premium. But interest rates would not fall to zero, since even in a prosperous society, young adults would borrow to buy a house and car, and entrepreneurs would want start-up funds to finance a business or some project. Since the natural rate of interest is based on the time preferences of people, when folks want to save a lot of their income, interest rates would be lower, and when they would rather save less, interest rates would be higher.
Interest rates rise in a growing economy and fall during a depression.
In a pure market, interest rates would be set by the supply and demand for loanable funds based on time preferences. If interest rates are set by the pure market, then neither high nor low interest rates are an economic problem. Only when government intervenes with taxes, restrictions, and money monopolies do interest rates become exploitative usury. Pure free-market interest rates are as natural as time itself. Your name Your email address Check this box if you'd like to receive occasional Economic Justice Updates via email.