Money: Good Guys and Bad Guys

Davis Keeler | From the April 1975 issue

When you consider how the Naderites are able to detect consumer rip-offs of an almost metaphysical subtlety, it had long amazed me that they had never blown the whistle on the robbery of the small saver through government-enforced ceilings on the interest paid small savings accounts. As we have seen before (REASON, February 1973, p. 27), the combination of artificially low interest rates, inflation, and taxation amount to an expropriation of the capital of the small saver.

Since this result is undeniable, and may be demonstrated by simple arithmetic, I had assumed that the lack of interest by the consumerists must stem from some obtuse ideological distinction. Perhaps anyone with enough money to have a savings account was, ipso facto, an exploiter of the people, living off the surplus value of the workers.

It was with some amazement, therefore, that I found in the January 16th issue of Rolling Stone, tucked between an exegesis on Watergate and a think piece on Gregg Allman, a scathing expose of this scandal.

The article was well-written and showed a good deal of research. The most interesting thing about the piece, however, was the approach the writer took to the problem. It may tell us something interesting about the consumerists, and even about ourselves.

The government-imposed restriction on the interest rates payable on small savings accounts has long been criticized by free marketeers. This critique is based on the belief that any restriction on a free market is harmful and it does not reflect any particular class-oriented concern for the small saver. Of course it is quite true, as Milton Friedman has remarked, that a free enterprise system is the only system that will prevent capitalists from having too much power (REASON, December 1974, p. 11).

The Rolling Stone article, by syndicated columnist Peter Weaver, casts the issue in terms—not of impersonal economic forces, of the mistaken judgments of government regulators, of misguided efforts to stabilize the credit system—but of personal greed and evil intentions.

Where free marketeers would talk about the dysfunctions inherent in economic intervention, columnist Weaver gives us a moral drama, complete with a marvelous cast of heroes and villains.

The forces of evil are led by Glen Troop, a "slick operator" who "works behind the scenes wining and dining appropriate staff and committee members, making friends and keeping up contacts.…"

While Troop may be the personification of evil, its institutional form is comprised of such faceless engines of malevolence as the U.S. League of Saving Associations, the Savings Association Political Education Fund, and the Real Estate Political Action Committee, referred to collectively as the S&L lobby. One imagines fat old men wearing vests covered with dollar signs.

Through the machinations of these malefactors of great wealth, Congress has been persuaded to keep interest rates artificially low to fatten the profits of the Savings & Loan Associations. Not only are the regulated rates kept low, but the Government has been persuaded to raise the minimum purchase of higher yield Treasury bills from $1,000 to $10,000 to prevent small savers from shifting their savings from the 5 percent the S&L's were paying to the 9+ percent available in 90-day T-bills. These low rates applied only to the little guy; the fat cats could get the higher unregulated rates on certificates of deposit of $100,000 or more. The S&L lobby has also acted to prevent or discourage the "wild card" and floating rate plans offered by some institutions which would have given small savers a better rate of return.

But there are heroes too. And if they lack the rich political slush funds and lavish expense accounts with which to subvert our elected representatives, they are rich in other, finer ways. There is Peter Schuck, a "mild-manner [sic], bearded attorney," who has the "dogged persistence of the Nader-type public interest lawyer."

And then there is Charles Vanik (D-Ohio), a maverick who has "lined up for the small saver," "fighting a lone battle" on the House Ways & Means Committee.

And there are even villains who act heroically, though Weaver seems uneasy with this intricacy of characterization. Rep. John Rousselot (R-California) has been a vocal foe of the anticompetitive nature of these measures and their adverse impact on the small saver. While literary convention now permits portrayal of a Republican who expresses concern for persons earning less than $50,000 per year, Rousselot is a well-known right-winger and former member of the John Birch Society. Despite the fact that the Birch Society is predominantly made up of the "small saver" class, Weaver labels him an "unlikely hero."

The article presents a good summary of government intervention in the market for savings deposits, some of the moves by savers and financial institutions to avoid this intervention, and government countermoves to keep them in line. It concludes with some proposals to correct the problem, including even removal of many of the restrictions on competition, although this is tentatively offered as merely "another possibility" and seems limited to such "radical" measures as allowing S&L's to offer checking accounts. Interestingly enough, the proposal to give a tax credit on savings account interest is rejected because, as a result of the progressive tax system, it would give a bigger tax savings to high income taxpayers. The possibility of allowing a free market in savings deposits, in which the interest payable would be solely determined by the market, is apparently too radical for serious consideration.

AND DISMAL SCIENCE

In contrast to Rolling Stone's high-spirited exposition, the free market version seems indeed a dismal science. For example, Indiana University economics professor Michael Klein, writing in the September 13th National Review, discusses the same problem. If he offers no heroes to cheer or villains to hiss, he does offer a concise, reasoned explanation of how what he assumes to be well-intentioned government regulation results in discrimination against the small saver together with increased costs and reduced availability of home loans. He explains how low interest rates on S&L accounts channel deposits (particularly the larger ones) into the open market where they lower the cost of corporate and governmental borrowing. As Klein remarks, "It is a predictable consequence of government price fixing. There is no essential difference between the current unavailability of mortgage funds and the beef shortage of the summer of 1973."

So, here we have two versions of the same reality. One is highly colored, with characters the reader can identify with or loathe, and the other is a quiet, reasoned explanation of how yet another interventionist attempt to "improve on the market" has produced undesirable effects that its authors could never have intended. The first concludes with recommendations for further fiddling with the market, while the second concludes that there is no justification for these restrictions on freedom and that they should be abandoned. The first is reformist, the second is radical. It is interesting to speculate on which article had the greatest influence.