THE IMPACT OF LOW INTEREST RATES ON THE ECONOMY

Abstract

As YOUR CHAIRMAN HAS stated, this paper will deal with Impact of Low Interest Rates on the Economy. Since it is impossible to treat all aspects of this broad subject exhaustively in forty-five minutes or less, my remarks will be confined to the most important aspects of the problem. I shall deal with the liberal monetary policy which has assured a highly generous supply of money as well as the maintenance of low interest rates since World War II. I shall discuss only those effects of easy money which appear to have exerted the greatest influence on Federal Reserve and Treasury policies during the postwar period. Even some of these topics will have to be treated quite briefly. To this audience it is unnecessary to describe at length the nature of the postwar easy-money policy or to analyze in detail the various methods employed to effectuate that policy. It will, however, be useful to recall briefly, as a background for our analysis, certain characteristics of that policy. The following facts are basic for this purpose. i. Interest rates were not kept down through legislative or administrative fiat limiting the rates that might be paid or charged. They were kept down by permitting an easy expansibility of the money supply to offset increases in the demand schedules for money and credit. 2. Open-market operations by the Federal Reserve constituted the principal method employed to prevent yields on Governments from rising above the levels set by the Treasury and the Federal Reserve. In effect, the Federal Reserve passively purchased all federal securities that others were unwilling to hold at the officially determined yield structure. To the extent that it was committed to an inflexible yield structure, the Federal Reserve surrendered control over the volume of bank reserves. This is not to say that Federal Reserve purchases of Governments were the only active factors tending toward easy money in the postwar period. Also important were the immense accumulation of idle balances carried over from the war period, and the sizable gold inflows. Yet it is still true that the policy of maintaining low interest rates prevented the Federal Reserve from taking more positive actions to limit the money supply.