Introduction

The U.S. financial and monetary system is broken and needs to be fixed. The collapse and bailout of the savings and loan industry—which, as of the latest government estimate, will cost U.S. taxpayers $300 billion and has crippled what was once the most accessible source of housing credit for nonwealthy households—is the most visible sign of failure. But problems in our financial system are far more extensive than this. The banking industry, for example, has also experienced unprecedented instability. Over the 1980s, banks failed at an average annual rate of 78 per 10,000, whereas for the period 1947–1979, the annual failure rate averaged 4 per 10,000. These weaknesses in lending institutions have been matched by rising levels of defaults and bankruptcies by nonfinancial businesses and households. Real interest rates, meanwhile, were sustained at historically high levels throughout the 1980s and early 1990s. From 1980 through 1989, long-term rates averaged 7.2 percent, whereas from 1947 through 1979, the average figure was 1.2 percent Even between 1875 and 1941, an era prior to the development of extensive government stabilization policies, the average long-term rate of 4.4 percent was significantly lower than for the most recent period. ¹