The commercial. (Union City, Tenn.) 190?-193?, 1922-06-16
CONTRACT RATE
OF INTEREST LAW
Recommendation Adopted by th
Tennessee Bankers Association.

meeting, we recommended passage oil
contract rate in excess of the legal
rate of per cent. The sound rea,
sons for such legislation were ap-
parent at that time, and subsequent
events have abundantly shown the
wisdom of that recommendation.
The General Assembly of 1921
passed an act legalizing a contract
rate of interest not to exceed 8 pei
cent per annum. On the day that
this act became a law, and prior
thereto, the Federal Reserve Banks
the final and controlling source OF
money and credit and interest rates
under our banking system, were
charging their member banks the fol
owing rates:
Z per cent on loans secured by Lib
erty Bond collateral, where the ap-
plicant was the original purchaser of
such bonds;
IN per cent on loans secured by
the same collateral, where the appli-
cant was ut the original owner of
such bonds;
7h per cent on loans secured by
commercial paper as collateral.
1t is evident to any intelligent citi-
zen that no bank can afford to borrow
money at 71a per cent and lend it at
6. The simple statement of this prop
osition is sufficient to establish its
truth and no argument is necessary
to support it. If any banker should
ever be so rash as to adopt the policy
of borrowing money at certain rate
of interest and then lending it at a
lower rate, his own depositors would
convince him of the error in this ex-
pertinent as soon as they became
aware of his system. At the time
of the passage of this law and prior
thereto, there was a money famine in
Tennessee, and it was largely pro-
duced by the fact that borrowers in
other States, and in foreign coun-
tries, were actually draining this
State of it's loanable funds.
The banks of this State were com
PEELED to break the law or to break
their borrowers. 1t is no blot on
their records to admit that, the ma
jority of them who were confronted
with this alternative resolved it in
the interest Of humanity.
But this condition was removed by
the enactment of this lay, and the
beneficial effects of it's passage were
immediate The situation of the bor-
rover began to improve, and that i'm
provement has been steady and con-
tinued. Money and credit are more
plentiful in this State than they
were prior to the enactment of this
law, and rates have decreased, and it
may be confidently predicted that
they will further decline before this
act can possibly be repealed. The
fact that there may be isolated ex-
ceptions to this rule, in some COM
munities, does not impair the truth
of it's assertion as a rule of general
application and of almost universal
effect throughout theState.
The law has of itself worked to
refute every argument that has been
suggested as a reason for its repeal.
Millions of dollars of outside capital
have been loaned in this State during
the past twelve months at rates va
rying between and per cent, with
the rate showing material decline
during that period and a manifest
tendency to decline still further. The
law of supply and demand, having
been unshackled by the removal of
an unreasonable arbitrary restriction,
has worked its natural tendency to
relieve the excessive demand, and
this slackening in demand is produc-
ing it's inevitable competition be-
tween lenders of money, and conse-
quent lowering of interest rates.
Turning now to some future con-
tingencies that we may be called up
on to face, let us consider briefly the
matter of the War Finance Corpora
tion, which is now offering funds for
agricultural credits at II per cent
with the privilege of renewal for
three years, but with the reserved
option to increase their rate to 6
per cent. Assuming that the rate
will remain ATS u per cent during
the three year period, what will be
the condition that will confront us
if our own rate is reduced by law to
a maximum of 6 per cent?
1t will surely come to pass that the
banks availing themselves of this
source of credit will encounter some
losses because of bad p er. Can they
afford, to take this risk on margin
Of only one half of one per cent pos