View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Some Perspectives on Interest Rates
E. Gerald Corrigan, President
Federal Reserve Bank of Minneapolis

Presented to the
Southern Minnesota Farm Forum
Lake Crystal, Minnesota

January 24, 1981

I welcome this opportunity to address the Southern Minne­
sota Farm Forum, but I will confess to a certain trepidation about
appearing here with you this afternoon.

The apprehension arises in

part because I suspect that many of you look upon the Federal Re­
serve as the cause of the current high level of interest rates.

In

that light, I hope to use this occasion to put the current interest
rate situation in its proper perspective and, in the process, shed
some light on the causes and cures for high interest rates.
But in the spirit of the frankness that I know will be a
hallmark of our dialogue, I have to own up:

the real reason for my

sense of trepidation in meeting with you this afternoon is that I
know full well that as an Eastern "city-boy," my limited knowledge
of your business and, in some cases, your problems will be all too
transparent.
I am, however, beginning to learn about your business and
from what I have already seen and learned, I can tell you that from
the vantage point of Wall Street in New York or Constitution Avenue
in Washington, it is virtually impossible to appreciate and under­
stand the contribution that you in the agricultural sector make to
our economy and our well-being as a nation.

The magnitude of agri­

cultural production just can't be captured by reading in The Wall
Street Journal

that corn production

bushels.

high

The

and

growing

in 1980

productivity

totaled
of

our

6.65

billion

agricultural

sector can't be captured by looking at comparative statistics.
extent

to which agricultural

years,

contributed




to our

The

exports have, particularly in recent

strengthened

balance

of

payments— OPEC

2

-

-

notwithstanding— can't really be appreciated by looking at the num­
bers, impressive as they are.
However, it is not my purpose to speak to you today about
the agricultural economy as such, but rather to use this occasion
to discuss with you some of the more general economic problems, the
economic challenges and the economic opportunities that are facing
all of us today.

I say all of us because I strongly believe that

the core issues and the core problems facing this nation truly do
face all of us— farmers and bankers, consumers and producers.
Some of the symptoms of those problems are seemingly con­
flicting and certainly confusing:

the simultaneous occurrence of

high inflation and high unemployment;

the simultaneous occurrence

of low and, in some instances, declining real incomes in virtually
every sector

of

the economy;

the simultaneous

and

self-defeating

effort of all groups to escape the dilemma by striving to increase
their

real

income— their

"share

of

the

pie"— at

the

expense

of

others.
Other

symptoms

are less ambiguous.

The "buy now" atti­

tude that we see so plainly is, in one sense, an understandable re­
sponse
more

to

the fact of

inflation.

therefore
ductivity.

inflation and

to the expectations of still

But that same attitude produces

low investment,

low savings

and

low capital formation and sluggish pro­

Similarly, our markets, whether the market for precious

metals, for corn, or for Treasury bills, are buffeted by short-run
price

variability

that,

in

my

view,

illustrates

forcefully

the

heightened sensitivity of market participants to changes in infla­
tion and expected inflation.




-

3

-

Surely some part of this churning we see in our markets
is a reflection of the inflationary process as both buyers and sel­
lers try to outwit each other in the drive for that one extra basis
point— that one-hundredth

of

a percent

margins of profits are so thin.

that

looms

so

large

Again, in this case, we lose sight

of the fact that unless we can achieve again sustained
nomic growth,

when

the market churning we see

real eco­

is a "zero sum game" — a

game in which today's winners could be tomorrow's losers.

What we

need, not just in our markets, but in our economy at large, is to re­
create the conditions in which we can all be winners!
At the risk of a gross oversimplification,

I think it is

fair to say that the symptoms of which I speak— those that are am­
biguous

and

those

that

are clear— can

all

find

decade and a half of essentially accelerating
would

submit

sively higher

to you

that

the experience of

their

roots

inflation.

15 years

in a

And,

I

of progres­

inflation was not altogether an accident or an out­

growth of OPEC.

In part, it was a reflection of the fact that many,

if not most of us, convinced ourselves that we could somehow live
with

a "little" more

inflation.

We could somehow isolate or

in­

sulate, we could somehow index or subsidize, we could somehow mu d­
dle
that

through.
the

We

accepted

"little more"

that thinking because we also believed

inflation

seemed

to buy

so much

more

in

terms of lower unemployment and increased availability of goods and
services.
Unfortunately, we, like many before us, were wrong.

In­

deed, in retrospect it is now clear that had we been willing to look
hard

enough




and

had we been willing

not

to delude ourselves,

we

-

4

-

would have recognized that accelerating inflation is not something
that can be lived with.
inflation.

There is no such thing as a "little more"

Inflation is inherently debilitating, and as it grows,

the resulting distortions and inequities grow with it.
escape— there

is no haven.

and it must be rooted out.
the problem and
the process.

In short,

There is no

inflation must be attacked

Avoiding that reality only intensifies

increases the pain and discomfort associated with

That is why I believe it is so important that we, as a

nation, come to grips with inflation now— now before both the prob­
lem and its ultimate

solutions

reach proportions

that could make

our current difficulties look mild by comparison.
I do not mean to suggest for one minute that this implies
that our national priorities and our national policies need be or
should be designed to the exclusion of other pressing
mate

concerns.

ities— energy

Certainly there
independence

and legiti­

is a long agenda of other prior­

to name one— which

must

be

addressed.

However, I do mean to suggest that as we approach these other prob­
lems we should keep one steady eye on the manner

in which our ef­

forts to solve those problems will either contribute to or detract
from the ongoing effort to control inflation.
Nor do I mean to suggest that the task of rooting out in­
flation will be easy.

It will not be.

that we have the knowledge,

the tools,

the opportunity to get on with the job.

But I do very much believe
and above all, we now have
Indeed, the only issue is

whether we have the will.
All of which brings me to the role of monetary policy.

I

know full well that monetary policy and the Federal Reserve are not




5

-

easily understood.

-

Monetary policy— particularly

in a day-to-day

operational sense— is highly complex and is subject to many
of misunderstandings.

I'm sure you appreciate that just from read­

ing the financial press.

It's also subject to many technical prob­

lems

and— I would

some

short-run miscalculations

issues

kinds

freely

acknowledge— it may
on our

part

even

now

can and should be matters of concern,

be

and

subject

then.

to

These

but they should not

stand in the way of an appreciation of the core and essence of our
policy.
Essentially, that policy is one that says that we in the
Federal Reserve intend to restrain the growth in money and credit
and bring the growth in money and credit into line with that com­
patible with a sustained and continuing
inflation.
you,

reduction

in the

rate of

That policy and that realization over time, I submit to

is a necessary prerequisite to rooting out inflation.

plain from history— both here

It is

and abroad— that inflation cannot be

turned around in an environment of rapid and undisciplined growth in
money and credit.

This is not to suggest that the appropriate mon­

etary policy can or should do the job by itself, but it is meant to
say

that

without

that

policy

other

efforts

will

surely

fail.

Specifically, we must have a compatible and credible fiscal policy
as well as a disciplined monetary policy.
policy

is

a

necessary

but

not

a

An appropriate monetary

sufficient

condition

for

con­

trolling inflation.
What
claim

that

then

about

the Federal

interest

Reserve

is

rates?

What

the cause of

then

the

about

current

the
high

level of interest rates that I know is such a concern to all of you?




-

6

-

There is, I must confess, an element— and I emphasize, only an ele­
ment— of truth to that supposition.
our

policy of restraining

It is true, for example, that

the growth

in the supply of money does

imply that only a certain amount of credit demands can be satisfied
at any interest rate level.

When credit demands are sizeable— and

especially when they are fueled by inflation and inflationary ex­
pectations— interest

rates will

rise,

as

they did so markedly

in

the fourth quarter.

I wish I could tell you that there was some

easy way to avoid that result or to somehow get around that result.
In fact,
economic
tives.

and

in the short run and given some set of overall

financial

conditions,

I can

see only three alterna­

First, the Federal Reserve could back off.

It could speed

up the printing press and push enough new money out into circula­
tion to validate all of the credit demands.

That could be done.

But I think you recognize as readily as I that such a response would
only fuel more inflation, higher inflationary expectations and, in
very short order,

higher,

not lower,

interest rates would result.

In short, I don't think much of that alternative.
A second approach might be to try to somehow structure a
program of credit controls or interest rate ceilings.
face, at least, that idea may seem to have appeal.

On the sur­

However, on re­

flection, it too, I believe, is fraught with problems and doomed to
failure.
massive

Experience has shown all too vividly that controls entail
governmental

bureaucracies

counterproductive allocations,

and

arbitrary

and

sometimes

and they are fundamentally in con­

flict with our system of markets and free enterprise— a system that
you farmers may well more fully appreciate than do many.




But there

7

-

is another

-

and perhaps even more fatal practical flaw with credit

controls and interest rate ceilings.
high

technology

in the money

That is, with the advent of

transfer

business,

trying to impose

artificially low lending rates by law or regulation would only en­
sure

that

markets,

money— which

is

highly

fungible— would

even to foreign markets.

flee

to

From where I stand,

other

those are

not the results we want either.
There

is

a way,

however,

that

can

help

to

pressures on interest rates, even in the short run.

lessen

the

For example,

it is clear that pressures on interest rates would be relieved if
the

demands

for

money

and

credit

were

more

moderate.

Unfortu­

nately, such a softening in credit demands is often associated with
a fall-off in economic activity— a process that we saw very clearly
in the second quarter of 1980.
credit demand need not entail

However, achieving a moderation in
that

kind of circumstance

larly when we recognize that the government itself,

particu­

and its spon­

sored agencies, are by far the largest single source of credit de­
mand.

Obviously, large and persistent patterns of government bor­

rowing work to place upward pressures on interest rates and in the
process

work

to

limit

the

amount

of credit

private borrowers— small and large.
cannot

tolerate

successive

and

that

is available

to

Stated differently, we simply

large

federal

deficits— with

all

they imply for the borrowing needs of the Treasury— and at the same
time

expect

to meet

the

legitimate

credit demands of businesses,

households and farmers in a climate of moderate interest rates.
Achieving improved performance in our fiscal affairs will
not be easy, but I have the clear sense that we are now at the point




-

8

-

where we have both the recognition and the opportunity to achieve
that objective.

In my judgment, the first and most necessary step

in that process is to achieve meaningful and credible reductions in
federal spending.

I do not claim to know how large such cuts can

be; nor do I claim to know how and where they should fall.

But I do

sense that Congress and the American public will more readily ac­
cept spending cuts if the associated burden of short-run adjustment
is shared across industry and interest groups.

No group should be

singled out, but no group should escape scrutiny.

In that light, I

think we must be frank and recognize that farm programs— either the
direct

spending

should,

in the interest of a balanced program of federal

restraint,

programs

or

the

off-budget

be subject to the same scrutiny.

lending

programs—
spending

My point, of course,

is that unless our nation's producer and consumer groups, including
farmers,

can compromise

their narrow interests and unite behind a

broad program of fair and equitable reductions in federal spending,
then I fear we will all be losers.
Achieving

that broad-based discipline

in federal

spend­

ing is necessary and desirable in its own right, but it also has a
bearing on the related question of tax policy and tax reductions.
There is, for example, no questioning the proposition that the tax
burden on households and businesses has become stifling.
case for tax reduction is strong.
our

tax

reductions

Thus, the

But I believe that we must earn

by spending restraint.

As

importantly,

I be­

lieve that, in tandem, spending restraint and tax reduction can, if
properly balanced and structured, play a positive role in recreat­
ing the conditions needed for sustained economic growth and a sus­
tained reduction in inflation.




-

9

-

I said earlier that none of this will be easy.
are successful
get

in these efforts,

the appropriate

legislation

Even if we

it will take time and effort
through

the Congress

to

and it will

take more time for the resulting programs to work their way through
a large

and complex economy.

That period of

transition will

difficult and it will test the strength of our conviction.

be

How­

ever, I must confess that I have a sense of optimism that we now are
prepared to get on with the job.

That sense of optimism grows in

part out of my belief that we have learned from our past mistakes
and it grows out of my strong conviction that there is a widespread
recognition that prosperity— true prosperity— can only be achieved
in a noninflationary environment.
to that true prosperity.
terest rates.




Thank you.

Our efforts now can pave the way

That is the only sure road to lower in­