Turgot recognized interest return on investment as the price paid by laborers to capitalist-entrepreneurs for advances of savings in the form of present money.
He also noted that interest on money loans tend towards the natural rate of interest through the process of capital rebalancing. Demonstration:
If the interest rate is lower than the natural rate, people begin to borrow more and invest in businesses where they can earn higher returns. This relative increase in borrowing will increase the interest rate, making it approach the natural rate from below.
If the interest rate is higher than the natural rate, people will divest from businesses or liquidate assets and begin to loan out their funds. This will increase the relative supply of loans, which will decrease the interest rate, making it approach the natural rate from above.
Capital rebalancing is consistent with this proposition of David Hume: “no man will accept of low profits, where he can have high interest; and no man will accept of low interest where he can have high profits.”
He described the positive relationship between risk and interest rate: Less risky loans would have lower interest and vice-versa. Since government bonds would be the safest, they should bear the lowest rates.
Along with the note on the interest rate of governement bonds, Turgot attached how pernicious to the economy such debts would be. They would effectively result in an interest rate floor, diverting funds to sterile investments. Public debts crowd out productive use of private savings by maintaining artificially high rates.
Lending and borrowing at interest is a reciprocal contract, advantageous to both parties. Hence, usury laws are absurd on moral grounds: the contracts are voluntary and no one is injured.
Turgot also arrived at the Austrian conception of time preference. Interest accounts for the difference in the value of the promise of a sum of money compared to the value of the money available now. The lender of funds needs to be compensated, in the form of interest, for the following:
The sacrifice of the utilization of the funds at the present moment,
The risk associated with the possibility of losing forever all or a part of the amount loaned.
Turgot also defined the concept of capitalization: present capital value of land or other capital good on the market tends to equal the sum of its expected future rents or returns, discounted by the rate of time-preference/interest.
Turgot described the relationship between quantity of money and interest. Interest rate depends on the savings-spending ratio of the population. Increase in money supply can both increase or decrease the rate of interest, depending on the spirit of thrift or the spirit of luxury. (The logic is similar to that noted in point 2.)