All Commentary
Monday, January 1, 1990

The Price of Chiminelli Seeds and Regulation Q

Dr. Doti is Professor of Economics at Chapman College in Orange, California.

In a way, searching for the chiminelli seed was a search for my roots. That thought struck me as my great aunt, Si Annunciata, and I climbed the barren and parched hills of Brienza, Italy, to locate the rare and elusive chiminelli bush, a bush capable of producing a seed of inestimable value to those who know of it.

As we reached the crest of the hill, the incredibly thin and old but still wiry Si Annunciata pointed her gnarled finger to a bush that looked like a diseased tumbleweed. I suddenly realized I was looking for the first time at a chiminelli bash and the seeds that had given me so much sensory delight over the years. After I picked a seed and put it in my mouth, the sudden explosion of flavor unleashed memories of a bygone day.

It was an important family powwow. One could tell by the thoughtful and methodical way the three brothers were shelling nuts. Their children looked on with obvious pride as the three middle-aged overweight men extracted with surgical precision whole nut-meats from the rock-hard and generally impenetrable Brazil nuts.

“It’s too bad the Sox lost that game to the Yankees. If they’d won, they would-a pulled within six games,” said Angelo, the youngest of the three brothers.

Angelo’s life revolved around the fortunes of the Chicago White Sox, or lack thereof which was generally the case. The fact that the White Sox were perpetual also-rans to the Yankees transformed Angelo’s thinking pattern into a series of what-ifs.

Angelo added, “If only Yogi Berra hadn’t hit that homer in the ninth . . .”

“Yea, yea, yea,” Tony interrupted, “dey could-a done this, dey could-a done that, but dey never win da big ones. Forget dose bums. We have ta figure out what ta send to da old country.”

Tony, the oldest of the three brothers and never one to mince words, had abruptly changed the subject to one of timely importance. It was the time of year for the family to send an annual “care” package to distant relatives in Italy. How much these’ relatives appreciated the castoff remnants of Italo-American consumers was unclear, but the family regularly received in return a stock of chiminelli seeds that if used with discretion was good for making a year’s supply of an Italian-type pretzel called “biscotti.”

It is the chiminelli seed that gives an indescribably rich and sweet flavor to the biscotti. The flavor is so intoxicating that some people have been known to recite poems and sing songs about it. An indication of the seed% value is reflected by the fact that biscotti are not conducive to family sharing; in most homes each family member is given a personal stash to hoard and ration until another batch appears.

The Brienza Connection

The source of the small black seeds that make the biscotti a food fit for the gods is our ancestral home, the southern Italian village of Brienza, the only area in the world with the proper blend of harsh climate and barren soft that allows the ugly chiminelli bush not only to survive but to thrive and prosper as well.

The arrival of an annual shipment of chiminelli seeds from Brienza once created quite a stir in Chicago’s Little Italy when two FBI agents came to investigate several families regarding their possible involvement in drug trafficking. After each of the agents was given a bag of the chiminelli seed-laden biscotti, the case was closed.

“I have a lot of double-breasted suits I wanna get rid of,” said Angelo. “What if we send ‘em some of those?”

“Yea, Ange, but I can’t figure what dey use dem for. They’re farmers for cry’n’-out-loud,” said Tony.

One of the children squirming in his chair suddenly interjected, “Hey, did they like my Slinky that you sent them last year?”

“Anthony, don’t butt in when we’re talkin’,” said Tony, who then felt guilty for stifling his son’s curiosity and offered Anthony some perfectly shelled Brazil nuts.

Tony continued, “Maybe with da earthquake an’ all we should send ‘em some money.”

At the mention of money, the middle brother Rocco, who up to this time had devoted his full attention to a particularly resistant nut, looked up and said, “Just because they have an earthquake means all of a sudden they want our money?”

The possibility of sending money instead of goods was suggested in a recently arrived letter from Brienza that threatened it would be difficult to collect and gather the seeds that year. The contents of the letter also strongly suggested that dollars would go a long way to improving the general lot of life in Brienza, especially after an earthquake virtually leveled half the town. And though the utilitarian value of the goods included in the annual “care” package was not directly questioned, perhaps some dissatisfaction was expressed at the end of the letter when it was asked what one does with a used Uncle Milton Ant Farm.

“None of Your Junk”

“What if the earthquake really was as bad as they’re saying?” Angelo asked and added, “If we don’t send ‘era money, maybe we don’t get the chiminelli this year.”

There was a momentary hush as the brothers contemplated this shocking possibility.

“Sure we’ll get ‘em,” said Rocco, “wait till dey see all the baby clothes I’m gonna send.”

At that point, Mama, the mother of the three brothers and matriarch of the family, walked into the dining room carrying fruit and biscotti to the table. It was obvious she had been eavesdropping. She said in Italian, “Baby clothes? Those poor people don’t even have any babies. Listen, you see these biscotti? If you want any more of them, then we are going to send them money this year and none of your junk.”

That pretty much decided things. While up in years and certainly not as active as she used to be, Mama still ruled in most family matters, particularly in those relating to familial relations.

Angelo broke the silence that followed Mama’s pronouncement with a loud crack of a Brazil nut and an observation: “You know, if the White Sox sweep the Boston series and the Yankees lose in Detroit . . . .”

During the 20th century, the typical response of the Federal Reserve Board (Fed) to inflationary pressures and concomitant distortions in production caused by its own expansionary monetary policies, has been to reverse course sharply and clamp down on money growth. But because of the long and variable lag before the changes in money growth affected economic activity, the Fed would generally overcompensate for past excesses and, as a result, push the economy into a recession.

Economic cycles were therefore generated by waves of expansionary and contractionary monetary policies on the part of the Fed. These cycles were then exacerbated by government-imposed rigidities of one kind or another that constrained free market forces and had a tendency to multiply miscues on the part of the Fed and lead to more extreme cyclical activity than otherwise would have occurred. Hence, it was the Fed% disastrous manipulation of the money supply between 1929 and 1932 that precipitated the Great Depression. But other government-imposed market rigidities like the ill-conceived Hawley-Smoot Tariff of 1930 served significantly to aggravate an already desperate situation.

In fact, the explanation for the unprecedented longevity of our most recent business expansion is not based on the premise that the Fed or any other governmental body has become more adept at fine-tuning the economy. Quite the contrary, the absence of a recession in almost eight years is more likely related to the removal of cer tain government-imposed rigidities.

The Repeal of Regulation Q

Perhaps the most important but least recognized change during the deregulatory revolution of the Carter-Reagan years was the repeal of Regulation Q, a regulation that imposed interest rate ceilings on most deposit accounts at financial institutions. The repeal of Regulation Q was mandated in the Depository Institutions Deregulation and Monetary Control Act of 1980 and was carried out during the 1981-84 period by the Deposi tory Institutions Deregulation Committee according to a timetable established by Congress. While the repeal of Regulation Q is sometimes incorrectly lamented today in discussions of the savings and loan crisis, far more significant is how its repeal has greatly benefited the macro-economy.

To compete for deposits under Regulation Q interest rate ceilings, banks and thrifts had to give away toasters, crock pots, bun warmers, and other non-monetary goods. But whenever Fed tightening pushed short-term interest rates too far above regulated levels, the various gifts being given out to retain deposits were not valuable enough to prevent an outflow of funds to other investments that were not subject to Regulation Q ceilings. At some point when the spread between market rates and Regulation Q ceilings was wide enough, people would opt for more money in the form of higher interest rates rather than gifts which ultimately turned out to be the stuff upon which future garage sales were built.

The outflow of funds from banks and thrifts, known as disintermediation, had costly economic consequences. Since banks and thrifts were the principal sources of retail credit to the housing industry, the resulting shortage of lendable funds in these institutions led to credit crunch conditions that invariably threw the construction industry into a tailspin. This process would effectively shut down a critical industry that had strong multiplier effects throughout the economy, thus making a bad situation only worse. Notice too that the brunt of the resulting downturn would be felt, at least initially, by those industries that were particularly sensitive to the availability of retail credit.

But now that interest-rate caps have been removed, banks and thrifts can compete effectively for deposits. Even if this competitive process pushes interest rates up during times of relative credit scarcity, such a situation is vastly preferable to a credit crunch where deposits in regulated institutions are drained away through financial dis-intermediation—a process that leads to conditions where lendable funds at those affected banks and thrifts are not readily obtainable even at a high price.

A recent inversion of the yield curve—where short-term interest rates exceed long-term rates—has led to ominous warnings about the economy. These warnings are based on the fact that the U.S. economy invariably moved into re-cessionary straits soon after such an interest-rate inversion took place. Indeed, the Chapman Econometric Model and many other models suggest that the term structure of interest rates is a better predictor of construction activity and overall economic activity than is the level of those rates.

Freeing capital markets from arbitrary interest-rate caps on bank and thrift deposits, however, has changed all this. The strong negative effect of an inverted yield curve undoubtedly was related to the fact that it served as a proxy for the outflow of funds from banks and thrifts that always occurred to some degree whenever short- term interest rates exceeded long-term rates. This process of financial disintermediation that occurred in the past because people wanted money rather than bun warmers in return for their deposits is not likely to take place in an economic environment where interest rates are allowed to move freely. Hence, the elimination of Regulation Q means that the negative consequences of an inverted yield curve are lessened and, as a result, such an inversion should be significantly discounted as a harbinger of recessionary activity.

The beauty and power of a freely moving price system should be evident here. Freer credit markets tend to lessen the ill effects of erratic Fed monetary policies. A simple change that breathes life into the economy by removing impediments to the free market system mitigates the harmful consequences brought about by knee- jerk reactions of a benevolent but woefully ill-informed Federal Reserve Board.

Mama’s decision to send money instead of a “care” package turned out to be the right one. The veiled threats made in the letter from Brienza were not just threats. While Mama received her annual supply of chiminelli seeds soon after the family’s monetary gift of $200 arrived in Brienza, other Italo-American families with relatives in Brienza received little or nothing in return for their annual shipment of castoffs. In fact, one of the families thought there might be a message in having received a Christmas wreath made of the chiminelli bush as a gift instead of the expected seeds. Evidently, the earthquake meant that it would take greenbacks rather than trinkets to entice the villagers to scavenge the barren hills of Brienza for the elusive chiminelli seeds.

After laboriously gathering a spoonful of seeds from that lone chiminelli bush, Si Annunciata and I climbed down the hill. By the time we reached Si Annunciata’s home, perspiration stung my eyes and my clothes clung to me like pâpier-maché. As we entered the centuries-old dwelling built with two-foot walls of plaster, stone, and rock, its natural coolness invaded my senses and renewed my spirit.

I pushed several hundred dollars’ worth of lira into the palm of Si Annunciata’s hand. She quickly deposited the lira in her barely existent bosom. Then she kissed my cheek and brought from the cupboard a large jar full of chiminelli seeds which she tenderly placed in my hands. It was undoubtedly the largest stash I had ever seen. I caressed the jar she had given me as one might caress the Hope Diamond and felt proud that I had learned at an early age the market price of chiminelli seeds.

So let Donald Trump buy up casinos, airlines, and Skyscrapers; let Queen Helmsley rule over her hotels; and let Rupert Murdoch transform the world’s print and electronic media. At that moment I felt I had done something far more significant: I had cornered the market in chiminelli seeds.

  • James L. Doti, Ph.D., has served as Chapman University's president since 1991. He earned his bachelor's degree in economics from the University of Illinios, Chicago where he was an Edmund James Scholar.