Price controls on interest rates also cause the loanable funds market to malfunction. Consider a maximum ceiling on the interest rate that can be charged on a loan. Sometimes economists call these ceilings “usury laws”; usury laws date back to medieval times and earlier. Today most American states have usury laws, although often they have loopholes (they don’t stop most credit card borrowing, for instance) or they are set at levels too high to influence most loan markets. Nonetheless, a binding and enforceable ceiling on interest rates would look like Figure 9.12.

The equilibrium is just like our analysis of price controls in Chapter 5. At the artificially low price, there is a shortage of credit, and many people who wish to borrow at the controlled interest rate cannot do so. Moreover, the control on interest rates reduces savings. In Figure 9.12, savings fall from $250 billion at the market equilibrium to just $190 billion at the controlled interest rate. Similarly, just as with price controls on oil, an interest rate control will cause a misallocation of savings and a loss of potential gains from exchange. Perhaps most important, investment, which is determined by the supply of savings, will fall below what it would be at the market equilibrium.

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