Bucket Brigade

For another three or four weeks at least, Harry Truman and many businessmen can agree on one thing: let's not have any direct price, wage and rationing controls. In the meantime, the big question on the minds of politicians, economists and bankers is: Can credit restrictions and other fiscal controls effectively head off rising prices?

The Federal Reserve Board, and notably Board Member M. S. Szymczak, thinks that indirect controls, if wisely and quickly used, can do the job. Szymczak, long a spokesman for moderation in Government attempts to control the economy, said: "The more we can accomplish by means of monetary, credit and fiscal policies . . . the less need there will be for the authoritarian harness of rationing and other direct controls."

Tightening Up. Last week FRB, which had been tightening up on credit since last summer, thought the time had come to tighten up some more. Bank loans, which expand credit and to some extent feed the fires of inflation, rose $108 million in the New York City area, to an all-time high of $5.7 billion (topping the previous peak of 1948). There was little doubt that loans around the nation were also up.

Since the entire economy has expanded greatly since 1948, the total of bank loans in itself was not too alarming. Furthermore, loans normally rise at this time of the year. But FRB thought that the rate of increase has been too fast (up $4 billion throughout the nation or nearly 10% since the start of the Korean war). To slow the rise, FRB last week was considering an order to boost the total reserve requirements of its member banks closer to the limit under present law, thus reduce the amount of money banks have for lending. If prices continued to go up, FRB was prepared to ask Congress for power to raise reserves still further.

Sabotage. Actually, FRB's efforts so far to fight inflation by restricting credit have been all but sabotaged by John Snyder's Treasury Department. As long ago as August, FRB made its first move to discourage borrowing by boosting the discount rate and dropping its support prices of many U.S. securities, thus pushing up interest rates throughout the U.S. (TIME, Sept. 4). But when the Treasury put on the market a record-breaking ($13.5 billion) issue of short-term notes, it refused to accept the higher rates, insisted instead on its long-standing policy of cheap money.

The result was that by last week, when the Treasury's financing operation ended, FRB had had to absorb most of the new low-interest notes itself, in order to keep an orderly market. By so doing, FRB might well have offset the higher interest rates that it had imposed; in buying most of the Treasury's huge issue, FRB had increased the amount of money available for loans to its member banks. If the banks took advantage of this, commercial loans, in the end, might rise even more. In short, before FRB could make its sensible anti-inflationary policy effective, it had to have a showdown with Snyder.

Meanwhile, FRB got ready to tighten up further on consumer credit. It thought that Regulation W, which had gone into effect three weeks ago, was too mild. Consumer credit in August had climbed to an alltime peak of $20.9 billion, up $614 million from July.

When compared to the high level of consumer income, credit actually was not quite as high percentagewise (9.5%) as in 1941, when the much smaller $9.8 billion of consumer credit was more than 10% of income. But FRB thought the rate of increase was too fast and should be slowed down.

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