Report No. 63

2.2. Market rate and agreed rate.-

The market rate of interest may not be necessarily the same as that which is agreed upon between an individual lender and borrower. As has been stated by a writer1 on the subject:

"The market rate of interest, as economists now commonly agree, is determined by conditions of time preference2 investment opportunity, and liquidity preference.3 This rate expresses the common estimate of buyers and sellers of the price of loanable funds, or the present exchange ratios of funds available at different points of time...."

After stating that the market rate is determined by competitive conditions, he says:

"The competitive conditions assumed above apply particularly to the money and capital markets. The assumption is likely to be less realistic in loans for consumption. Here the danger of usury in the modern sense is greatest. Yet, in this instance, interest payments will include, in addition to pure interest, charges to cover operating costs and risks of non-repayment. In the field of small money lending, some protection to borrowers against usurious rates is afforded by both federal and State legislation in the United States and similar laws in other countries."

1. Thomas F. Divine Professor of Economics, St. Louis University, in Encyclopaedia Americana, Vol. 27, p. 825, article on "Usury".

2. See para. 2.4, infra.

3. Paras. 2.5, infra.