The Social Cost of Federal Financing 83 



For the other sectors, the case is not so clear. Corporate securities 

 draw on a wide variety of sources. Unincorporated business is 

 financed in part by bank loans — which, to a considerable extent 

 represent money created by the banking system — and in part by 

 loans from individuals who are willing either to invest in the 

 business or to lend the owner money because of ties of friendship 

 or family. The securities of state and local governments, because 

 of their tax-exempt feature, are particularly attractive to individuals 

 with very large incomes, and thus can be assumed to draw on indi- 

 vidual savings. Capital for agriculture is supplied in the form of 

 mortgages by banks and insurance companies and in the form of 

 loans by commercial banks. 



Interest Rates in the American Economy 



There is no one interest rate — capital is ollercd on a very wide 

 range of terms. Bonds, notes, antl other debt instrimients of 

 governments and corporations find a ready market at rates ranging 

 from 2 to 5 per cent, depending on the terms of the loan and the 

 credit standing of the issuer. Mortgages of good quality are 

 financed at rates between 4i/2 and G per cent, though this rate is kejJt 

 low by government guarantees of a large jKut of the total. Other 

 consumer credit is expensive, ranging from 5 to over 25 j)er cent, 

 with the typical automobile installment loan held by a large 

 credit company costing 9 to 12 j^er cent. Yet the sales finance 

 companies are able to raise their funds at rates below 4 per cent. 

 The difference between their lending and borrowing rates is 

 explained by the high cost of administration and collection, the 

 pooling of many small, risky loans to reduce risk, and substantial 

 profits. Bank loans to corpoiations and unincorporated business 

 may cost from 3 to G per cent, (ie[:)ending on si/e, the region of 

 the coiuitry, and the credit standing of the borrower, but their 

 availability is strictly rationed to each firm. Loans to agricultiuc, 

 while only slightly more exj)ensivc, arc e\en more severely rationed 

 to each farmer. Most ])eisonal sa\ing, in the form of savings 

 accounts, insurance, and j)cnsi()ns, ie(ei\es a return of 3 per cent or 

 so, with investments in conunon stocks the only substantial excep- 

 tion. And stock ownership is still restricted to a relatively small 



