their interests in dealing with lenders are free to
pay any rate that they desire. As might be expected,
these corporations find that they have a tremendous
advantage in attracting funds over unincorporated
firms and individuals that are "protected" by the state.
In addition, many credit market arrangements

have been devised for circumventing the effect of usury
laws and permitting credit flows which otherwise would
be halted. Some of these activities may be an outright
disobeyance of the law, such as simply ignoring the
ceiling, or by calling the payment something other than
interest. However, violation of usury laws frequently
carries high financial penalties, such as loss of

all interest or even principal, and so lenders are
generally reluctant to knowingly violate the statutes.
Other arrangements, which may or may not be

technically legal, but which certainly conflict with
the spirit of the law, have been adopted in order
that a loan made at the legal rate might be effectively
adjusted to the market rate. One method is to lend
to those who in some other way help you. Examples
include the practice by lenders of favoring customers
who maintain compensating deposit balances or whose
firm does.

Another approach is to "adjust" the legal

rate in some manner. The effective rate on mortgages

65

use of "points" charged either to the buyer or to the seller

or both. At times, loans have been granted, by

third parties at the legal rate, after which

the real lender then purchases the loan at a discount.

Other loans have been "closed" in a more liberal

location, such as across a state line. Such

techniques, although permitting credit to flow,

run risks of legality, are inefficient, and

probably cause effective rates to be slightly higher to the borrower and lower to the saver than they would be in a free market.

Lenders in states with low usury ceilings

also have an option of moving funds into a state with more liberal laws. Informed opinion indicates

that the interstate movements of funds because

of usury laws is sizable. Investment funds leave

the state to finance mortgages in other states and to
buy notes and bonds. Also, banks and savings and loan
associations "sell" net sizable amounts of day-to-day
Federal funds in the national money markets. This alter-
native of lending in another state protects large lenders
to some extent and makes funds more readily available
in states with liberal usury ceilings. However, such
movements contribute to inefficiency. Also,

66

20

in the low ceiling state borrowers find credit

still more difficult to obtain, lenders with

small amounts are forced to accept lower yields,

and economic activity suffers.

Conclusions

Ceilings on interest rates are relics of

ancient and medieval thought, and have survived

to the present largely because of a lack of confidence

in market forces or as presumed benefit to weaker credit

risks.

Actually, supply and demand for funds, rather

than rate controls, have been the chief forces holding interest rates at existing levels.

Ceilings on rates may, at times, be of some

benefit to borrowers easily deceived by unscrupulous

lenders.

However, usury laws cause a loss of individual

freedom, and in modern economies they are very disruptive,

67

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69

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