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Show 'Who Makes Interest Rates?' Subject of Article from Bank The following is one of a series of articles furnished by Bank of Pleasant Grove on the various phases of money and banking in the economics of our country. Interest rates represent the prices charged borrowers by lenders for the use of money and credit. Banks do not make interest rates to suit their own fancies. Interest rates, like other oth-er prices in competitive markets, mar-kets, reflect the various impersonal imper-sonal forces of supply and demand. de-mand. I On the demand side are the ; requirements of agriculture, commerce, and industry for investment in-vestment and operating funds; i th requirements of federal, state and local governments; and the needs for money to finance fin-ance real estate mortgages and consumer credit. On the supply side, we have savings corporate and individual in-dividual and bank credit. There are markets for money mon-ey just as there are for commodities. com-modities. The New York money mon-ey market, where short-term loans for a variety of purposes can be readily obtained, is also a clearing center for both national na-tional and international financial finan-cial transactions. Whereas the money market is usually concerned con-cerned with short-term loans (of not less than a year), it is closely related to a number of other markets, the most important impor-tant of which is the capital market (the market for long-term long-term loans). Both money and capital markets bring borrowers borrow-ers and lenders together, and the interest rate the price paid for the use of money results from negotiations of large numbers of borrowers and lenders. There are many kinds of interest in-terest rates, but usually the whole structure of interest rates rises or falls uniformly. Rates on personal and consumer consum-er credit loans vary widely. However, the prime rate the rate charged by banks to the largest borrowers of high credit standing is usually the same all over the country. Changes generally are closely related to broad movements in other short-term interest rates. Long-term obligations generally gener-ally carry higher interest rates (except perhaps when short-term short-term rates are extremely high) partly because of the increased risk of delayed maturity. The tax exemption of interst paid on state, municipal, and public authority obligations affects interest in-terest rates here. They may be one percent or more below that of high grade bonds of corporations. cor-porations. Rates on long-term mortgage loans tend to be uniform, but there are some regional, differences. differ-ences. They generally ar influenced influ-enced by the quantity of funds available for these loans and the volume of financing required re-quired for construction activity Rising interest rates normally norm-ally accompany rising economic econom-ic activity. As output grows and more credit is used, the cost of financing increases. At the same time, higher interest rates attract more funds to the market as increased savings sav-ings are encouraged. This discourages dis-courages spending and dampens damp-ens inflationary pressures. When business is slow, increased increas-ed availability of money and credit at lower rate is intended intend-ed to spur spending and create jobs. In our booming economy of today, with such vast con-, con-, sumption of durable goods financed fin-anced by credit, we should not expect an early return to very-low very-low interest rates. Cheap credit during a boom is a sure-fire such an economic environment, rising interest rates are the symbols of or responses to rapid rap-id growth, not a barrier to it. |