242 JOURNAL OF FORESTRY 



VARIATION IN INTEREST RATES 



It should be most specificaUy stated that the -financial institution zvill 

 fail of its purpose if it establishes one set rate of interest for all classes 

 of loans, as has been done by the Federal Farm Loan Board. Interest 

 rates should be fixed with some degree of flexibiHty, just as the Federal 

 Reserve Banks give preferred discount rates on certain classes of 

 security. The principles under which interest rates should vary are 

 partially discussed below. 



Of three elements going to make up the interest rate — (i) a per- 

 centage to cover the bare value of the capital if loaned without cost of 

 investigation or risk (a condition closely approximated in loans to the 

 Federal Government), (2) a percentage to cover cost of investigating 

 the loan, and (3) a percentage to cover risk — the first may be consid- 

 ered constant as between loans on the same date and variable only by 

 periods of time. The second possesses considerable variation, but the 

 third is the principal variable, varying from nothing in loans to the 

 Federal Government to 100 per cent in loans to some mining companies. 

 It is by considering this element of risk that the Forest Loan Board 

 can serve all parts of forest industry with capital in complete safety. 

 If experience shows that in sawmilling i per cent of loaned capital is 

 lost through industrial failures, then the risk part of the interest rate 

 to sawmill concerns must not be under I per cent. If less tried wood- 

 using plants, such as ethyl alcohol plants, lose 3 per cent of borrowed 

 capital through industrial failures, then loans to this class must add 3 

 per cent to the base rate to cover risk. If the base rate (rate at which 

 the capital is borrowed in open market) be 4 per cent, the cost of ad- 

 ministration and investigation of the loan ^ per cent, and the risk 3 

 per cent, then the total rate to such an industry would be 7 J/ per cent. 

 In a loan on the National Forests risk would be entirely eliminated and 

 cost of investigation and administration nearly so. Hence the rate 

 would be reduced practically to base rate and should not exceed 4^ 

 per cent or less. It should also be remembered that it is not worth 

 while for the public to lend its aid in the establishment of such a finan- 

 cial institution unless it serves a social purpose. In this case it should 

 aid in the perpetuation of the forest for national use and help in better- 

 ing the conditions under which employer and employee live and work 

 together. 



Enterprises best securing social ends may thus properly receive 

 favored treatment in interest rates/ so far as consistent with sound 

 finance. Fortunately, such enterprises, as a rule, present the least 



