Paying More for Money

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rates very far for very long, because lenders would shortly demand higher interest again to guard against having their returns eaten up by a recurrence of rapid price hikes. Indeed, Volcker argued that if the Fed had not restrained the growth of money supply, "interest rates would ultimately be still higher" than they are today, "and remain there longer."

Thus, Volcker has made it plain that he intends to provide only a bit more money to the economy this year than he did in 1981. That policy will possibly permit some recovery from the current recession, but not a rebound anywhere near so vigorous as President Reagan predicts and people everywhere are hoping for. If the Administration and Congress want a drop in interest rates great enough to promote faster growth, Volcker's position is that the only way they can get it is by whacking down the deficit. That way, the Government will no longer be driving up interest rates by competing with private borrowers for a limited supply of lendable funds. If the Administration and Congress will not slash the deficit? Well, sorry, says Chairman Volcker, then interest rates will stay high, and growth, if any, will remain slow. Such is the price that the nation must pay for containing inflation. Unfortunately, the costs are climbing daily.

Housing. Builders started work on a mere 1,086,000 houses and apartment buildings last year, the slowest pace since 1946, and annual rates in the past few months have dropped lower still. Sales of existing homes plummeted to 2,351,000 in 1981, 40% below the level in pre-Volcker 1978. Housing's woes are especially maddening to builders and real estate men because they figure that the rate at which people are marrying and forming new families would support sales of 2 million new and 5 million used homes a year. Michael Sumichrast, chief economist for the National Association of Home Builders, gloomily calculates that the prime rate would have to drop to 13%, with a corresponding decline in mortgage rates, just to maintain last year's depressed pace of sales.

When an upturn does come, many builders may not be around to enjoy it. Thousands have gone broke already, and many thousands more are barely hanging on. Turkey Creek, Inc., a family-owned contracting firm in Gainesville, Fla., was selling an average of two new houses a month until March of 1981. In the eleven months since then it has sold two more, total. Meanwhile, the company is paying $14,400 a month interest on loans taken out to put up 24 houses that are still empty. Says President Forest Hope: "We're having to put money back into the business that we had invested in certificates of deposit for our children's education, and we have cashed in all our life insurance policies." Hope thinks he has kept his business solvent by such desperate measures, but, he admits, "I haven't seen a financial statement since June 1980 because we can't pay the auditors."

Autos. Sales of U.S.-made cars plunged to 6.2 million in 1981, the lowest level in 20 years. Signs of a vicious circle are appearing. Interest rates on auto loans, averaging 16%, discourage buyers, and unsold cars start piling up on dealer lots. Meanwhile, the dealers have to borrow at rates generally two or three percentage points above the prime to support the bulging inventory. Not only has that