1809391 - American Economic Association The Effect of...

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American Economic Association The Effect of Interest Rate Increases on the Banking System Author(s): George W. Coleman Source: The American Economic Review , Vol. 35, No. 4 (Sep., 1945), pp. 671-673 Published by: American Economic Association Stable URL: Accessed: 27-11-2016 22:56 UTC JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]r.org. Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to The American Economic Review This content downloaded from 129.110.242.50 on Sun, 27 Nov 2016 22:56:38 UTC All use subject to
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1945] COMMUNICATIONS 671 have increased its annual savings and reduced its consumption by 20 billions? (What is required is not the use of hoarded cash but purchases at the expense of consumption. If the public increased its purchases by 20 billion dollars out of its additions to cash and deposits-savings of 40 billions were only used to the extent of one-half to buy Treasury issues-then the present inflationary pressures would not have been reduced greatly.) I do not know what the exact rate of interest should have been to discourage consumption and stimulate purchases of securities sufficiently to achieve the desired effects. I am reasonably certain, however, that a higher-rate policy would not have been the wise policy. The gains through a rise of savings and reduced com- modity prices (relatively) would probably not have been large, whereas the financing costs would have risen greatly. How greatly depends upon how long the higher rates would have had to be paid. It is extremely dubious, for example, that a rise in the rate of interest by 2 per cent would have increased savings by 20 billions. Yet this might have cost 4 billions per year. (I assume that more than two-thirds of the wartime rise in debt would be subject to the additional charge.) If the cost of the war could have been cut by 30 billion dollars through a relative decline in commodity prices of 10 per cent or somewhat more (resulting from the reduced sales of bonds to banks and hence the smaller expansion of deposits) and if the high rates of interest would have to be paid only for relatively brief periods, this policy of high rates would have been sensible. But neither of these results would probably have been had.
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