§ 4. Concealed rate of interest. Interest is often concealed under forms which make the real rate greater than the nominal, or apparent, rate. It is well known that usury laws fixing the legal rate of interest are often evaded. A simple method is for the lender to charge a commission for making the loan, or, if the lender is a bank, to charge for a pretended cost of exchange to bring the money from some other city. Sometimes the borrower is required to keep larger deposits with the bank than he voluntarily would, which he does by borrowing and paying interest on a larger sum that he is permitted to use. Again the borrower, in periods of unusual demands for money, may be forced to make a long loan instead of a short one. When a one month's loan at 10 per cent would meet his need, he may be forced to borrow for twelve months at 6 per cent, during ten months of which time 4 or 5 per cent is the prevailing rate. In these and other ways the real amount and the real rate of interest are made different from those that are expressed.

§ 5. Commercial paper. Interest-bearing loans may be roughly divided into short-time and long-time loans, according as they run for less than a year or for a year or more. In short-time loans the creditor's claim may rest either on a verbal agreement or on a written promissory note. Short-term interest contracts are implied in a large proportion of the transactions of modern commerce. A considerable number of short-time loans are made for direct enjoyable use to individuals whose money income is delayed or inconveniently apportioned in time. But a far larger number of such loans are made by banks on promissory notes given by manufacturers and merchants, frequently secured by bills of lading for goods that have been shipped to customers or by various other evidences of existing credits. Such documents are called commercial paper, or credit instruments.

§ 6. Mercantile cash discounts. When goods are sold on time (as thirty, sixty, or ninety days) the contract (except in rare cases where the terms are net cash) is an implied interest contract, for it specifies that the full sum shall be charged only when the full time elapses; otherwise the discounts for cash are at various figures, such as 1, 2, or 6 per cent or even higher for payment in ten days (giving time enough to examine the goods), and smaller rates for thirty days or other periods. This virtually makes two or more prices, one to customers that pay cash, and another to those letting bills run. The difference between cash in ten days and a discount of 1 per cent in thirty days is equivalent to a rate of 18 per cent a year on the amount of the bill, and is so great that it is impossible without taking advantage of the discount, for a buyer to carry on a business against strong competition. Such purchases on credit frequently are made, however, not only by dealers in small towns, but sometimes by large mercantile establishments when short of funds. "Slow collections" go along with increasing interest rates and "hard times."

If the purchaser does not discount his bills, the seller has the choice either of waiting till the account is due and collecting the bills direct from the customers, or of discounting the customers' acceptances (notes) for ready money at the bank. According to the conditions and needs of the particular business, either method may be chosen. A series of credits is then created, each resting upon the one below: manufacturer A sells goods to manufacturer B, who sells the finished product to the jobber C, who sells it to the retailer D, who sells it to consumer E, and all these credits for the same goods may be in existence at the same time, and every one may be represented by a promissory note that may be discounted at a bank. In most industries there is need for larger capital at the seasons when the product is put upon the market, and ordinarily a large part of these debts are converted into ready funds (discounted) at the banks. The merchant or manufacturer plans his business in the expectation of an average rate of interest at such times, and if it chances that the rate is abnormally high, he has no choice but to go on borrowing and paying the high rate of interest out of the expected profits of his business. This risk of a change in the interest rate is one of the many chances he has to run.

§ 7. Long-time loans. A large part of the debts in modern times are outstanding for a term of years and represent the lender's purchase of a claim on income from public or private sources. The most familiar form of long-time loan is that made on the security of real estate, which is mortgaged to the lender for the term of the debt. Usually the debtor is obliged to pay the interest either annually or semiannually, and often, but not always, is permitted to reduce the principal by partial payments. These real-estate mortgages rest on the security of the particular mortgaged wealth, and, unlike most short-time loans in bank, are not obligations resting primarily on the general credit of the borrower. Corporation bonds, issued by railroads and other public utility corporations, which have increased so greatly in recent years, yield an income fixed in advance, and are secured usually by mortgage on the entire property of the corporation issuing them. (The income on some special kinds of "preferred stocks" is so certain as to make them for investors almost the same as bonds, but they are legally not loans, payable at a certain time, but are evidences of ownership.) Another large class of long-time loans are those made by national, state, and local governments. Tens of billions of dollars of public debts are now outstanding, held by private investors in every walk of life.

The contract in the case of each kind of these loans provides for a fixed term after which the borrower must repay or renew, and for a fixed rate on the nominal or par value of the loan. Nearly all the securities (bonds, certificates, evidences of indebtedness) are saleable at a market rate. The incomes are fixed, the selling price (or capital value) fluctuating above or below the nominal sum except just at the moment when the debt falls due.