INTEREST ON FARM LOANS 



709 



money, he is entitled to a somewhat lower rate than the farmer. In 

 a community mainly agricultural the large amount of interest paid 

 on time deposits imposes a heavy burden on the banks. In the South 

 and in the newer states of the West, time deposits usually bring 5 per 

 cent and often 6 per cent interest, and as long as such rates must be 

 paid to attract and hold free capital in the community, just so long 

 must the bank's borrowers feel the burden of high interest rates. 

 Finally, since the credit demands of the farmer are not evenly dis- 

 tributed throughout the year, the bank often has idle money which 

 it must invest in short term commercial paper at a rate lower than 

 that charged the farmer for his loan. This is not, however, as is often 

 stated, discrimination against the farmer, for if the bank did not 

 invest in such paper, he would have to pay a still higher rate for his 

 loan. 



D. Making Interest Rates by Law 



229. USURY LAWS AND THEIR ENFORCEMENT 



In order to keep the rate of interest from becoming excessive 

 most of the states have put on their statute books laws prohibiting 

 the charging of rates above a certain amount, generally not less than 

 6 nor more than 10 per cent, though 12 per -cent is permitted in 

 several of the western states. Such legislation is open to the objec- 

 tions that apply to all attempts to make prices by law. If the con- 

 ditions of supply of, and demand for, loan funds are such as to strike 

 their equilibrium at a figure higher than the one named in the law, 

 that rate will be charged in spite of its prohibition. Lenders have 

 devised countless subterfuges which make the taking of the excess 

 interest fairly safe, and they are protected by the fact that the bor- 

 rower is loath to make complaint under the law, because such action 

 will only make his condition worse, by making it impossible for him 

 to borrow at all. 



In the fall of 1914, the Comptroller of the Currency undertook 

 an investigation of national banks, to learn whether they were in the 

 habit of charging usurious rates of interest. He found that the prac- 

 tice was decidedly prevalent, especially in the Southwest. In his 

 report he cites particularly -three national banks in small towns in 

 Oklahoma, which averaged 25, 36, and 40 per cent, respectively, on 

 all their loans, and two of them ran as high as 147 and 300 per cent, 

 respectively, on individual loans. Oklahoma had at the time a usury 

 law forbidding rates in excess of 10 per cent. The state has since 



