In a large country like the United States there is a wide variation in the interest rate. Even the states recognize this fact in their usury laws. Some restrict the legal rate of interest to 6 per cent, some to 7 per cent, while others permit as high a rate as 10 per cent. Three closely related causes account for this variation: (1) relative scarcity of capital, (2) cost of supervising loans, (3) lack of information on the part of lenders.

In the newer sections of the country, capital is scarce. Yet it is there that capital can usually be used to the best advantage in improving farms, in building cities, and in starting manufactures. Naturally, enterprisers bid high for the scanty stock. The question may very properly be raised, however: Why does not the capital of older sections flow to these regions of high interest rates? First of all, there is a greater degree of uncertainty connected with the industries here than would be the case if they were being carried on in the older settled regions. For that reason a lender hesitates to loan his funds, especially if he is not in a position to supervise them to the extent of protecting his own interests. The next best thing he can do is to send them to some bank or mortgage concern in the newly settled section with instructions to loan them to the best advantage. Granted that the security offered is ample, yet there has been some cost in handling the funds, which will appear in the form of higher interest rates. Finally, the lender, unless he is in a particularly good position to get information, is likely to know little about either the borrower or the banker.

Hence he prefers to loan his funds nearer home even at a lower rate.