1972 Was Scary, but Rate Cuts Helped

Where were you in 1972--the last time interest rates were this low?

In that turbulent year, the Federal Reserve continued to push rates down to bolster the economy: The rate on three-month Treasury bills fell from a high of 7.81% in 1969 to a 4.07% annual average in 1972--virtually the same decline that we’ve had between 1989 and today.

The Fed’s rate tonic worked then: The economy’s growth rate rebounded from a negative 0.3% in 1970 to 2.8% in 1971 and 5.0% in 1972.

Yet today, despite the plunge in interest rates, the economy appears on the verge of a new recession, after growing just 0.9% in 1990.

Why were Americans more willing to borrow and spend in 1972 than they are today? Certainly, the future didn’t seem any more secure then:

* The Vietnam War raged, and global tensions were epitomized by terrorists’ murder of 11 Israeli athletes at the Olympics in Munich.

* Alabama Gov. George Wallace was shot while campaigning for the presidency--the David Duke of his era. Social unrest and bigotry in America also were symbolized by the trial of black militant Angela Davis and by TV’s “All in the Family.”

* Organized crime was glorified by the year’s No. 1 movie, “The Godfather.”

The nation did have one big advantage in 1972, however: Debt was low. Interest on the federal debt, for example, ate up just 6 cents of each tax dollar Uncle Sam collected. Today, interest eats up a stunning 17 cents of every federal tax dollar.

In short, say experts, rate cuts can’t spur more borrowing because government, businesses and consumers reached their peak debt loads in the go-go ‘80s. Until more of those debts are reduced, Fed rate cuts amount to pushing on a string.