The Term Structure of Interest Rates

THE TERM STRUCTURE OF INTEREST RATES 517
based upon correctly informed speculative activity might have the
twofold result of delaying an appropriate adjustment in yields and
contributing directly to the profits of the speculators.
3. Our experience has been that, except under the special conditions
of the 1930's, debt markets have been generally free of panic
reaction and excessive and self-feeding instability - though in the
early postwar period many feared that such behavior would develop.
Our recent experience reinforces the view that debt markets have
the necessary adaptability and resilience to adjust effectively to
changes in economic conditions and in active anticyclical monetary
and debt management policies.
4. Among the factors that can cause changes in the term structure
of rates are shifts in the liquidity premiums reflected in the rate
structure. These may result from changes in the maturity structure
of available debt, from other factors affecting the liquidity structure
of the stock of investment assets, or from changes in investor attitudes
toward liquidity. Properly interpreted, thus, the behavior of
the interest rate structure can be one indication of the liquidity
situation of the economy, which, together with other evidence, can
help to guide the conduct of monetary and debt management policies
in maintaining liquidity conditions suited to the needs of economic
stabilization. In particular, abnormally low yields on liquid
short-term debt during a depression may be an indication that the
economy is starved for liquidity, and abnormally high yields on such
debt during prosperity may indicate that the supply of liquidity
instruments is excessive for the conditions of the times.
5. If used actively in a co-ordinated manner, monetary and
debt management policies can play an essential role in dealing with
both inflationary and deflationary problems, by enforcing an appropriate
behavior of interest rates, through their impact upon conditions
in debt markets, and through their influence upon the liquidity
position of the economy.
J. M. CULBERTSON.
SCHOOL OF COMMERCE
UNIVERSITY OF WISCONSIN