Money: What It Costs

Arabs in dusty white robes queued up outside a government bank from sunup to sundown in Cairo last week.

In the back streets of Hong Kong, men ducked through the beaded curtains of dingy little stalls, later reappeared clutching envelopes. And in Rome, workers with small salaries and large families stood hopefully before the cashier windows of pawnshops, known popularly as the monte di pietà — mount of pity. All of them had one quest in common — money — and they were willing to pay a price to get it.

Just how much money should cost —the interest paid on loans — has been fiercely argued from Aristotle to Aquinas to Adam Smith. The cost varies by the time and the place: in 1964 money is generally becoming more expensive to obtain. Under pressures of inflation or economic expansion, central banks in Japan, Britain, Sweden, Belgium, France, The Netherlands and the U.S. increased their discount rates in the past year, thus encouraging a broad rise in interest rates.

Farther from Wall St. Where inflation has taken hold — as it has in many parts of the world — lenders charge higher and higher rates as protection against being repaid in drastically devalued currency. Credit is so scarce in Latin America that borrowers consider themselves lucky if they pay only 60%, and rates in Brazil go as high as 20% a month. In Argentina, when a government bank recently announced that it had secured an international loan to finance home building, money-seeking mobs rushed the bank, smashing windows and overturning desks. The Southeast Asian pays up to 20% for prime business loans, and Iranians pay anywhere from 8% to 15% in Teheran. Most well-connected Middle Eastern businessmen get their loans in Lebanon at 5½% to 12%. As a rule, says U.S. Treasury Economist Henry Bittermann, “the cost of money is liable to increase with the distance one goes from Wall St.”

The world’s cheapest money can be found in Switzerland (4% to 5% a year on low-risk business loans) and the U.S. (5%); similar loans cost most Western European businessmen 7% to 9% . Though their interest rates are still well above those in most industrial nations, the cost of money has been declining in Taiwan, Mexico, Thailand and India, thanks to commercial development and increasing stability. Paradoxically, by trying to make money cheap enough to lure investors, some developing countries have set rates too low to attract working money from such safe havens as Zurich and New York. In the Soviet bloc, economic planners have a genuine dislike of paying any interest at all on loans, but are forced to when they go shopping for credit in the West.

Religious Reasons. A number of developing countries have launched credit unions to encourage savings and special agricultural and development banks to provide low-cost loans. But they run into all manner of cultural hindrances. Turkey has resorted to a lottery with savings accounts numbers, but many peasants still bury their money rather than trust it to a bank. Egypt now gives farmers no-interest loans—but that is for religious as well as economic reasons. Though most major religions condemn usury, Moslem traditionalists believe that charging any interest is wrong. Regularly, the Pakistani National Assembly debates a proposal to ban all interest rates as in violation of Koranic law. So far, the commercial “nays” have won out.

The cost of money also depends on who the borrower is, how much he needs and why he needs it. By borrowing millions of dollars at a time, modern corporations can usually get lower interest rates. A Ruhr industrialist can often negotiate a 4½% loan, but a Bavarian woodcarver might have trouble whittling down the rate even to 7½%. A New Wave film producer in Paris must pay about 32% for a loan that an established French producer could get for only 14%.

Every country has its loan sharks —cursed, legislated against, but regularly patronized. Peasants in India prefer to get their money without delay from the village moneylender rather than go through the red tape of a low-cost government loan. The price is high: as much as 75%, including all sorts of hidden costs. And in New York City, shady money dealers have been known to charge as much as 25% a week, or, theoretically, 1,300% a year. That is something of a present-day record, but it comes nowhere near history’s highest interest rate: the 10,000% charged in Berlin after World War I.