Stab in the Back?

What should the Government do to help check the new inflation? The Federal Reserve Board was for raising interest rates to tighten credit. The other great fiscal arm of the Government, the Treasury, thought that this would be a treacherous stab in the back. As the nation's biggest borrower, it wanted cheap money and easy credit to keep down the cost of interest on the $257 billion national debt.

A fortnight ago, Treasury Secretary John Snyder reaffirmed his cheap money policy. He announced that the Government would keep its interest rate at 1 1/4% when it refunds $13.5 billion in Government securities in September and October, biggest refunding at one time in history. In turn, FRB approved a boost in the discount rate in the New York area from 1 1/2% to 1 3/4% as a warning to Snyder (TIME, Aug. 28). Last week Federal Reserve Banks across the U.S. upped their discount rates, thus putting pressure on bankers to raise their interest rates on commercial loans.

Federal Reserve did not stop there. Last week its Open Market Committee lowered the price at which it would support certain classes of Government securities--thus, in effect, raising the interest rate on them. As investors hustled to sell Government securities and switch over to the better-paying issues, the market was rocked by a record wave of selling. Investors dumped $1.4 billion of maturing bonds and certificates, bought up $1.2 billion of Federal Reserve-held securities offering higher returns.

If necessary, FRB could go even further and order an increase in the cash reserves that banks are required to hold against their deposits; this would cut down funds available for loans. Nevertheless, the Treasury seemed in no mood to back down on its policy. Officials argued that a slight increase in interest rates would not check inflation; it was not enough to scare off borrowers. At the same time, a slight increase in Treasury's rate would add considerably to the burden of carrying the national debt--i.e., an increase of 1/8 of 1% in the Treasury's short-term interest rate would boost the interest bill on the national debt by about $65 million.

To Federal Reserve officials, that seemed a lesser evil than permitting credit to run uncurbed. Another burst of inflation would hit consumers hard and also cost the Government, as biggest consumer of all, more than it would pay out in higher interest rates. New York Federal Reserve Bank President Allan Sproul had told Congress months ago that "the country cannot afford to keep money cheap at all times and in all circumstances, if the counterpart of that action is inflation, rising prices, and a steady deterioration in the purchasing power of the dollar."

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