The contracts which place the debtor and his fortune or the collateral as a buffer between the creditor and the disastrous consequences of malinvestment of the capital lent, are conditioned by laws and institutions. It is, moreover, codetermined by the legal and institutional setting. The entrepreneurial component included in the creditor's gross proceeds is determined by all those factors which are operative in every entrepreneurial venture. Net interest is a magnitude which only analytical thinking can extract from the gross proceeds of the creditor.
If they earn any net interest at all, it is included in a yield which contains more than merely net interest. Gross interest can be reaped only by creditors who have been successful in their lending. The dictum pecunia pecuniam parere non potest (money cannot beget money) is meaningful in this sense, which, of course, differs radically from the sense which ancient and medieval philosophers attached to it. Capital as such does not bear interest it must be well employed and invested not only in order to yield interest, but also lest it disappear entirely. He has linked his fate with that of the debtor or with the changes occurring in the price of the collateral. He can be affected by changes in the market data concerning them. The creditor is always a virtual partner of the debtor or a virtual owner of the pledged and mortgaged property. Debtors, guarantors, and warrantors may become insolvent collateral and mortgages may become worthless. There can never be perfect safety either in moneylending or in other classes of credit transactions and deferred payments. His appraisal of this danger determines his conduct in bargaining with the prospective debtor about the terms of the contract.
The lender is always faced with the possibility that he may lose a part or the whole of the principal lent. Every grant of credit is a speculative entrepreneurial venture, the success or failure of which is uncertain. The moneylender is always an entrepreneur. Among the components contributing to their determination there are also elements which are not interest. The market rates of interest on loans are not pure interest rates.
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