Reply To: Legislating lower interest rates


If the low rates were enforceable, it would create a shortages in credit markets. The quantity supplied of credit would shrink. The general rate of interest in the economy would still be determined by time preference and could still be earned by direct investment in production. Some savors, striving to earn the market rate of interest, would abandon credit markets and adopt other methods supplying capital funding like buying stock or entering into partnerships or coops. The efficiency of the time market would be impaired as the volume and type of different transfers of capital funding would not align with people’s preferences. The majority of capital funding in our economy, however, is through self-financing. So, usury laws would not devastate production.

Depending on how widespread the usury law was (e.g. only on mortgages, or only on consumer loans, or on all consumer and producer loans), the effects would be more or less damaging. It would not create a recession per se, however, since that is the liquidation of malinvestment from a boom and the reallocation of resources misallocated during the boom. Obviously, without credit expansion pushing interest rate below their market levels, a usury law would not generate a boom and therefore, no recession would follow. As mentioned above, usury laws reduce the supply of credit. They would result in a reallocation of resources and reinvestment of capital funding especially for businesses that have built their business model on access to credit, either short term or long term. They would have to find alternative arrangements for short term credit, like accounts receivable and payable, and long term credit, like stock. If they could not do so, they would be liquidated and their assets reorganized, albeit, less efficiently.