Ten years after the last controls on interest rates were
dismantled, the nation's financial system is still coping with
the huge, and in many cases unexpected, consequences of those
For consumers, the end of controls was a chance to earn more
interest on deposits and to keep up with an inflation rate that
peaked at more than 10 percent annually in 1979 and 1980.
For banks and savings and loan associations, the higher
interest rates meant being able to compete for deposits with the
rapidly growing money market mutual funds.
But the lifting of interest rate controls had its dark side as
well. High rates on deposits ushered in a wave of new fees and
fee increases on customer accounts, and led banks and savings
institutions to make riskier loans as they looked for ways to
increase revenues and pay for the higher interest rates on
The biggest change occurred in the weeks immediately after
Dec. 14, 1982, when banks and savings institutions were allowed
to offer money market "demand" accounts. These carried no
regulatory cap on interest rates and allowed up to three
withdrawals a month by check and an unlimited number of
withdrawals in person.
The response was staggering: About $65 billion a week moved
into the new accounts as consumers were attracted to introductory
rates of about 10.5 percent, which were higher than the 8.1
percent then being paid by money market mutual funds and the even
lower rates on savings and small certificates of deposit.
By Oct. 1, 1983, several years ahead of schedule,
interest-rate ceilings were removed on small certificates of
deposit. The interest-rate controls the government had imposed 50
years earlier to limit destructive competition among banks were
gone, and bankers knew that their business would never be the
As was widely predicted at the time of these regulatory
changes, savings institutions were the most vulnerable, because
their holdings of low-rate mortgages issued in earlier years were
suddenly unprofitable when they had to pay higher interest rates
Less understood was how attempts by Congress and regulators to
help savings institutions outgrow their problems would lead to
the real estate lending boom of the mid-1980s followed by a
collapse amid a glut of empty buildings and a rash of failures
that would see the number of savings and loan associations drop
to about 2,100, from more than 4,000 in 1978.
Among banks, the carnage was not as great, but the survivors
grew more cautious about issuing loans. A result was tighter
credit that put a damper on economic growth, and many economists
say the credit squeeze is continuing today.
"The need for change was undeniable," said Albert M.
Wojnilower, senior adviser to First Boston Asset Management. "But
I think the experience of recent years has reminded people that
the abolition of interest-rate controls was not an unmitigated
In a 1981 study published by the Brookings Institution,
Wojnilower warned that lifting interest-rate ceilings would
deprive policy makers of an important tool for controlling the
economy and would have the effect of "freeing the financial
markets to pursue their casino instincts."
Some advocates of removing the rate controls contend that the
problems were a result not of lifting the controls but of inept