maturity. In other words, inflation in the price of a new home has in effect added more to the monthly costs than a jump in the mortgage rate from 61⁄2% to 82%."

Monetary restraint, moreover, is not the prime cause of higher interest rates; rates were rising many months before restraint began. As inflation eroded the value of money, lenders naturally insisted on a larger return.

Rates have continued to rise partly because it takes time to persuade lenders that inflation will be brought under control. The only hope for lower rates is responsible finance, not irresponsible inflation. In the process the rise in housing costs also should be slowed.

The Administration and Congress continue to press plans to help housing. Their efforts are more likely to be effective if everyone sees the real bricks and mortar of the industry's financial problems.

[From the Wall Street Journal for March 23, 1970]

DECLINE IN MONEY-MARKET QUOTAS EASES PRESSURE SUPPORTING RECORD PRIME RATE

(By Edward P. Foldessy)

NEW YORK. The downtrend in money-market interest rates is alleviating the heavy pressure that has kept the nation's banking system from reducing the prime rate, the minimum fee on corporate loans.

Major banks have had a record 82% prime rate since last June. A number of smaller banks reduced their rates beginning in February, but the big banks called the moves premature.

Principally, the money-center institutions argued that their own cost of obtaining lendable funds was too high in relation to the prime rate, and that loan demand, although off from the torrid pace of late 1969, was still a threatening factor. In recent days, however, the cost picture has changed dramatically. Rates have fallen sharply on three key sources of banks' funds: Commercial paper, Eurodollars and Federal funds.

In two of these areas, rates have moved below the prime rate. For instance, Federal funds, the reserves that banks lend each other, usually overnight, have been at an average rate of about 74% for the past two weeks or so. For most of the year the rates have averaged around 9% and in some cases reached as high as 12%.

COMMERCIAL PAPER RATES

Commercial paper issued by bank affiliates currently is being sold at rates ranging from about 74% to 84%. Such issues, basically, are unsecured promissory notes; proceeds from the sales are used to buy loans from the portfolios of the affiliated banks. As recently as two weeks ago, the going rate on bank-related paper was about 82%. Prior to then, the rates had ranged to as much as 94%. Eurodollar rates, while still above the prime rate, have fallen dramatically. Eurodollars are dollars held outside the U.S. Banks in major U.S. money centers have relied heavily on such funds for their domestic needs. Recently, such funds have been trading at less than 9%, in contrast to the 10% and more rates common throughout most of last year.

Perhaps most significant for the commercial banks has been the rate reductions registered on commercial paper issued by financial and industrial corporations. Such paper is sold mainly to other companies and thus provides in essence a system whereby corporations borrow from each other, bypassing the banks.

The going rate on such paper dropped to about 72% Friday after hovering about 82% on active maturities until early this month. Bankers had been concerned that a reduction in the prime rate to below the prevailing commercial paper rates would cause corporations to switch their borrowings from the paper market to banks. Should paper rates remain at their current levels or fall further, banks would be given considerable leeway in setting the prime rate.

But banks may want to wait until at least the April 15 tax-payment date before taking action on the prime rate in order to get a better idea of loan demand.

The latest tax-payment date, last Monday, produced relatively heavy loan demand on banks, but according to bankers, created no real strains.

BANKERS' ACCEPTANCES

In money-market developments Friday, several dealers lowered their rates on bankers' acceptances by % percentage point.

These included M&T Discount Corp. and New York Hanseatic Corp. Both posted scales of 72% bid, 7% % offered on acceptances due in one to 180 days. Bankers' acceptances primarily are bills to finance the export, import, transfer or storage of goods. They are termed accepted when a bank guarantees their payment at maturity.

One key benefit to banks of the general decline in interest rates is that it is allowing negotiable certificates of deposit to become competitive with other moneymarket instruments. CDs represent deposits left with banks for a specific period of time. Because banks aren't permitted to pay more than 64% to 72% (depending on maturity), such CDs haven't been attractice to investors who could get higher rates on other money-market instruments.

While the CD ceiling rates are generally still below most other money market rates, banks in recent weeks have been able to find "buyers" for a moderate amount of certificates. Until the Federal Reserve clamped down tightly on credit, beginning late 1968, CDs had been a principal means banks used to obtain lendable funds.

Chairman PATMAN. Mr. St Germain.

Mr. ST GERMAIN. Thank you, Mr. Chairman.

I want to thank the entire panel, those that remain now, and those who were here before because certainly, despite what we may say, the interest rates are still high today and they are going to be high tomorrow and there are predictions that they are going down but the man in the street in the low- and moderate-income group is still not feeling the effects of any lower interest rates.

Mr. GIBBONS. Mr. St Germain, if I may

Mr. ST GERMAIN. Mr. Gibbons, just a minute.

I want to commend you gentlemen, because certainly you appear here reflecting the thoughts and the views and the feelings, the trials and tribulations of your constituents, and that is why you were elected to the Congress, to represent these people and I feel that by your appearance here today, the action you are taking, you certainly are representing them and representing them well.

I have more to say, but if you have a comment, Mr. Gibbons, you go ahead.

Mr. GIBBONS. I would only say this in response to Mr. Brown's statement, that interest rates are coming down, and God help us, I hope they are. But I hope this committee will act to make sure they give some encouragement to the interest rates coming down through this resolution, but if they aren't the interest rates we have had in the past are going to leave greater scars on the economy of this country and on the social problems of this country and on the business problems of this country, than any one thing that you could have had, because when you couple high interest with the philosophy of our income tax laws, you are helping those who need the least help and you are hurting the most those who need help the most.

It is completely counterproductive under our present system of taxation, and high interest rates are most burdensome upon the consumer and upon the business that is struggling to get a start.

Mr. ST GERMAIN. Gentlemen, I hope you are aware of the fact that this committee under the chairman has held extensive hearings. When the prime rate was increased last year, we held hearings immediately, and when there was a further increase, we held further hearings.

There is one thing that puzzles me in the first sentence of the resolution: "Whereas the high-interest rate policy has been followed for the past 14 months as part of the administration's fight against inflation"-now the thing that puzzles me is the fact that when the

Secretary of the Treasury was here before us on the matter of interest rates, he was urged by many members of the committee and he was in fact, castigated, let us put it that way, for not having spoken out strongly against the prime rate increase. However, at no point do I recall any testimony being given wherein it was alleged or contended that the high interest rate was part of the administration's fight against inflation.

Their contention was that it was a result of inflation.

I wonder where you gentlemen who have cosponsored this resolution have found anything, any pronouncements on the part of the administration, that the highest interest rate, the high prime rate, was part of the administration's fight against inflation?

Mr. WRIGHT. Mr. Chairman, may I respond?

Mr. ST GERMAIN. I yield to the gentleman from Texas.

Mr. WRIGHT. Let me respond as best I can and perhaps the gentleman from Arkansas would have something to add.

I believe Dr. McCracken, the President's economic adviser, has characterized restrictive monetary policy as one means of curbing runaway growth.

Now, to that extent, I think the administration has earnestly belived that our interest rates constitute a means of halting the spiral in the pricing index. I think it is demonstrable that this has not worked. During the past year when interest rates were higher than at any time since the Civil War, the cost of living rose more rapidly

than it has risen since 1951. It continues that rise.

Now, let me comment on the characterization of high interest rates as being but a reflection of inflationary pressures.

The gentleman, the member of the committee, Mr. Brown, seems to have described high interest as simply a blind economic force that developed because we have inflation. I don't think that is true. I think it is demonstrably untrue.

I have distributed to the members of the committee two charts. If you would refer to chart 2, I believe an analysis of the economic history of the past 45 years as seen in two indices will dispel that myth. (The charts referred to follow :)

Mr. WRIGHT. We see, for example, that average commercial interest rates now are higher than they have been in the past 45 years. Indeed, the only time in the past 45 years when they had attained anything approaching this level was in 1929, at which time I am convinced that high interest rates, among other things, precipitated the depression. Now, the only way it can be said that high interest rates ever would reduce prices would be in the sense that they would bring about a recession in the economy. Now, they have done that and I think this is also demonstrable. But if you will observe the chart, I think you will see that from the year 1934, to the year 1947, the average commercial interest rate in this country was stable, and was below 1 per

cent.

Now, the reason for this is that the administration in Washington was determined to keep the prime interest rate low and the average commercial interest rate low. The Government is not without powers to influence the interest rates, notwithstanding the fact that the Federal Reserve Board, through its Open Market Committee, has been given almost carte blanche authority to do whatever it wants in the last few years.

I ask you to recall that during those years we had a depression from which we were recovering, and that we had the most expensive war in the history of the United States.

Now, if anything would be inflationary, surely it would be the amount of money borrowed during that time by the Government to finance World War II. Yet it did not result in increased interest rates. They were held low because President Roosevelt and President Truman were determined to keep them low as a matter of conscious Government policy. So I think it is demonstrably clear that interest rates can be held low by the Government, given the willingness and the determination of the administration to do so.

The chart shows another thing. This is that an increase in interest rates almost always can be expected to bring about a commensurate decline in the gross national product.

The second lower line on the chart reflects the percentage of change by year in the per capita gross national product-that is, the gross national product divided by the number of people in the country.

In other words, if we have 200 million people, and the gross national product grows by, say, for purpose of example, $200 billion, then that would reflect a share of approximately $1,000 per capita. As you will see, the top line of the graph, reflecting the average commercial interest rate, is marked off in 1 percentage point, whereas, a square on the graph at the lower line reflects a 5-percent of change.

So we see that a 1-percent increase in interest rates almost always brings about a 5-percent decline in the average citizen's share of the gross national product.

I think that ought to be fairly conclusive evidence that, No. 1, the Government can control interest rates if it is determined to keep them at a low level;

No. 2, you don't have to have high interest rates in a period of inflationary pressures and that, indeed, high interest itself adds to those pressures and only reduces prices when it brings about a recession; and

No. 3, that interest rates, when they are raised, do bring about a decline in the gross national product. We've got to produce in this country about 2 million new jobs every year, if we are simply to stand