INTEREST 27 



only at reasonable rates. As investors, the former group desire 

 to "get rich quick" and by seeking abnormal profits usually 

 lose what capital they may possess. The latter group are apt 

 to favor long time investments which give a certain return even 

 at a low rate. 



45. Risk and Expense. As most loans of money are made 

 on the basis of a security pledged as a guarantee for repayment, 

 and worth more than the amount of the loan, the risk of loss 

 of principal or interest is correspondingly reduced. In case of 

 unreliable parties, notes are guaranteed by some one who is 

 able to pay. Risky loans are made at higher rates than safe 

 loans, the extra rate being intended to cover average losses. 

 The exorbitant rates charged by loan sharks are not justified on 

 this basis, although loans of this character require a somewhat 

 higher rate than business loans. Such rates are due to personal 

 elements, exaggerated by defective laws and bad economic con- 

 ditions, which permit the exploitation of a class of persons unable 

 to protect themselves. 



Expense of placing loans and of collecting interest tend to 

 increase the rate of interest charged. This expense is greater for 

 short loans, and the funds are apt to be idle part of the time. 



It follows that the lowest rates of interest are received on 

 absolutely safe securities, which run for a long period and upon 

 which the interest payments are made without expense to the 

 owner. Government securities and bonds of high grade fulfil 

 these conditions. 



46. Fluctuating Value of Money. Should money fall in 

 value or in purchasing power, the rate of interest tends to rise 

 to a degree corresponding to the average annual loss in the value 

 of the capital. Only by this means can a lender of capital escape 

 actual loss. If the fall in value amounts to i per cent per year, 

 securities upon which the normal rate of interest is 4 per cent 

 will be worth in purchasing power only 99 per cent of their 

 original value at the close of the year. A rate of 5 per cent 

 enables the investor to replace this difference by adding it to the 

 capital. 



Such losses usually escape the notice of the owner, who imag- 



