I always have the first opportunity to consume the fruits of my labor. What I do with the remaining amount enables me to access other things I want in life: clothing, shelter, software. This increases my enjoyment of life; eating only fruit all day long will give me the runs.

I can also decide to exchange my fruit for money. I can save this money until the future, which frees up resources for other activity in the mean time. There is only a particular amount of fruit, clothes or anything else on any given day. You can only use what I do not; I can only use what you do not. Saving money allows other people to consume things instead.

A hungry person is very eager to eat some fruit and bread as soon as possible. He can only eat fruit and bread that I do not. How does he stop me from eating my fruit? He has to entice me with an alternative.

He may have something that I want today. He may offer to exchange a coat for a particular amount of fruit. Lowering the coat price makes me more likely to prefer the coat to eating the fruit and bread he wants. This only works when he has something that I want today.

What if he has no coat today?

If he has nothing I want in his immediate possession, I might eat the fruit or exchange it with someone else. Neither of these actions solve his hunger. How can he convince me to give him the fruit? By promising to make me something I want tomorrow that I cannot have today.

It is not important what the something is. There are infinite possibilities: a better or cheaper coat, more coats, a new fleece jacket invention… who knows! The point is that he offers me a future something valuable enough to stop my present consumption. He must convince me to refrain from eating my fruit or exchanging it with someone else. Only then can the man use the fruit to satisfy his hunger.

I may be hungry or cold today. The more hungry or the colder I am today the more expected value I require tomorrow. This determines the rate at which my savings must become more valuable in order to defer my consumption today and save. This is the cost of money, also called the interest rate.

The interest rate helps me determine how much to consume today and how much to consume tomorrow. Tom Woods explains how interest rates help people serve each others needs in his best-selling book, Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse:

The interest rate coordinates production across time. It ensures a compatible mix of market forces: if people want to consume now, business responds accordingly; if people want to consume in the future, business allocate resources to satisfy that desire as well (p. 67).

In other words, a high interest rate signals how people can help others. Interest rates and the cost of money rise when people have more immediate wants and needs. Increasing the value of money rewards people who produce more and/or reduce their present consumption. This allows others to satisfy those present needs with what is produced and not consumed.

A low interest rate also signals how to help others. Interest rates and the cost of money decline as people’s immediate wants and needs are satisfied. People satisfied with the present state of affairs will value new and innovative ideas. This makes it increasingly affordable for others to satisfy their immediate needs working towards a better future for the satisfied.

A free-market interest rate helps the needs of a poor person in all situations. High interest rates help encourage comparatively wealthy people to defer their consumption, allowing the comparatively poor to consume things instead. Low interest rates make it more affordable for the poor to learn and invent new ways of satisfying the increasingly diverse and complex needs of society.