Manipulating Interest

March 15, 1965

Since the end of 1957, the government has become increasingly involved in economic policies that must have increasingly harmful results.

On the one hand it has been undermining the value of the dollar by progressively expanding the money supply to hold down interest rates. This has made it less attractive for either Americans or foreigners to lend or invest in the United States, and comparatively more attractive for them to lend or invest abroad.

But then the government, ignoring its own clear responsibility for this result, is determined to find the culprits among American private citizens. It has chosen for its chief whipping boys those American individuals, banks, or corporations attracted by the higher interest rates abroad.

In brief, in order to maintain its own cheap-money policy at home, the government has launched a series of what must be progressively tighter controls on investment, lending, and the foreign exchanges. As long as the government maintains its cheap-money policies, these penalty taxes and surveillance of loans and investments will be futile in their intended purpose of curing the balance-of-payments deficit. These “remedies” will prove, at best, short-lived. In the long run they can only restrict our export trade, and set back both American and world development.

HIGH-POWERED MONEY

Let us examine this process in detail. Since the end of 1957 the country’s active money supply (currency plus demand bank deposits) has been increased by 17 percent. Total money supply (including time deposits) has been increased by 48 percent. But if we direct our attention to the way in which the Federal Reserve authorities, egged on by the politicians, have been increasing the high-powered reserve money supply on which the inverted pyramid of our total money and credit supply is built, we get an even more striking set of comparisons.

The Federal Reserve banks, which are bankers’ banks, can create reserves for the member banks (the banks with which the public deals) against which the latter can in turn, by making loans and investments, create about six times as much deposit “money.” The Fed creates these reserves mainly by buying government securities from the member banks or the open market, and then “monetizing” them.

At the end of 1957 the amount of Federal Reserve credit outstanding was $26.2 billion ($1.1 billion less than at the end of 1952). In 1958 this outstanding credit was increased by $2.2 billion, and in 1959 by another $1 billion. In 1960 it was reduced by $375 million. Then the Fed, under the new Democratic regime, began to inflate in earnest. In 1961 it increased Federal Reserve Bank credit by $2.2 billion; in 1962 by $2 billion more; in 1963 by $3.4 billion more; and in 1964 by $3.3 billion more. At the end of 1964 the total stood at $39.9 billion, an increase in seven years of 52 percent. (Federal Reserve credit went up $13.7 billion though our gold stocks went down $7.4 billion.)

RATES LOWEST HERE

The intention and effect of this increase of credit was to hold down U.S. interest rates. In its February letter the First National City Bank of New York presents a table comparing short-term lending rates in some 60 countries. (The interest rates compared are “the lowest at which business firms of the highest standing can obtain credit on an unsecured, single-name basis.”) The comparisons show that U.S. rates at 4½ percent are lower than in any leading country. The Canadian rate is 5¾ percent. The rates in France, Germany, Belgium, and Japan are above 6 percent. The range in Sweden, Italy, and Britain is around 7 and 8 percent. International comparisons of long-term rates would show a similar difference.

The situation, in brief, is this. The government, by its monetary policies, has brought about artificially low interest rates here. The result has been to divert lending and investment into foreign countries. The government then picks on this foreign investment as the marginal culprit causing the deficit in our balance of payments. But instead of abandoning its own cheap-money policies, it starts lecturing, penalizing, and policing private investors.