Fed’s Cut in Discount Rate

The Federal Reserve’s discount rate cut on March 7 to merely 7%, causing banks to cut their prime loan rate merely to 9%, forces U.S. producers to continue to pay unfairly higher interest rates than their competitors in Japan, West Germany and the Netherlands pay.

The previous week the central banks of West Germany, Japan, and the Netherlands cut their discount rates to 3.5%; 4%; and 4.5%, respectively.

In recent years the Federal Reserve has unfairly forced U.S. producers to pay much higher finance costs than their Japanese and West German competitors--years in which such competitors have greatly increased their U.S. sales, thereby seriously cutting U.S. producers’ profits and the number of their employees.

For example, during 1983-4 Japan’s central banks’ discount rate was 5 1/2% to 5%; West Germany’s was 4%, except for about two months when it was 4 1/2%. The Federal Reserve’s discount rate, during the same period, ranged from 8 1/2% to 9%, except for approximately a week when it was 8%.

High U.S. interest rates have also helped keep the U.S. dollar at high levels. This has given Japanese and West German producers substantial price advantages when selling their products in the United States.

The Federal Reserve’s repeated assertions that really low interest rates would cause an inflationary expansion of the economy are merely assertions. In fact there has been no possibility of that in recent years. There has been, instead, sustained high unemployment and high idleness of productive capacity. Capital, labor, and the unemployed have been severely injured by persistent, serious, and inadequate demand.

That is the case now. Unemployment is more than 7%; production is less than 81% of capacity. Most producers, furthermore, are able to expand capacity and train new workers, as needed.

High interest rates have created severe inflation as well as high unemployment and plant idleness. For example, during 1979-81, when the Federal Reserve maintained double-digit discount rates, the United States suffered double-digit inflation and the commencement of a severe recession.

The inadequate discount rate cuts since then have been accompanied by inflation rates lower than in 1979-81. Our price levels, however, are probably far higher than what they would be if the enormous costs of years of ultra-high interest rates had not been injected into our price structure by the Federal Reserve.

JOHN G. SOBIESKI Pasadena