The Wind Changes

Had it not been drowned by the tumult of Washington's inflation wrangles, the voice of Federal Reserve Board Chairman Marriner S. Eccles might often have been heard quietly protesting the "monetization of the public debt." He did not like the way a large proportion of Treasury borrowing had been financed by bank credit, which added to the supply of money, instead of by individuals, which contracted the supply.

This week the board took a step toward practicing what its chairman preached. It eliminated the preferential wartime discount rate which enabled member banks to borrow from the Federal Reserve banks on their short-term Government securities at 1/2 of 1%, use the cash to buy long-term Government bonds. This was highly profitable to the banks. But it kept pumping more money into the economy, and helped inflation. Dropping the preferential rate was a significant straw that showed how the financial wind is changing.

U.S. Treasury Secretary Fred Vinson has long fought any change in the Government's inflationary policies in general, the preferential discount rate in particular. He feared that a change would pull one of the props out of the Government bond market and raise the short-term cost of Government financing. The Federal Reserve Board convinced him that it would not (although prices of Government bonds dropped last week). So, in effect, the board has finally taken a small step towards shaping its policies for the needs of peace.

Result of the board action will be to deflate the supply of money a little, check some speculation in short-term Government securities.

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