Open Floodgates

Last week Federal Reserve Board Member Marriner S. Eccles bluntly told Congress why price & wage controls alone would not stop inflation. The "cheap-money" policy established by Secretary of the Treasury John W. Snyder would prevent it. Any program of controls, Eccles told a joint Senate-House Committee on the Economic Report, "can hardly be adequate to stop inflation in the long run, as long as the money and credit floodgates are left open."

Eccles got strong support from Allan Sproul, president of New York's Federal Reserve Bank.

The root of inflation, Eccles and Sproul agreed, is the vast increase in credit money which has bid up the prices of goods. Although FRB had restricted consumer credit, Eccles said that FRB's powers to control overall credit are "much more limited than is generally believed." The reason, said Eccles, is that U.S. banks, heavily loaded with Government securities, can sell them at any time to the Federal Reserve Banks. As long as the Reserve Banks are compelled to buy them and keep prices pegged at a level, the operation virtually guarantees banks against any loss. For every $1 thus obtained, banks can put out $6 more in loans, inflating credit still more.

To stop this, FRB has been pushing for higher interest rates on Government securities, to induce banks to hold them. Since a rise in the Government rate would also boost private rates, an increase would also make private loans more expensive and cut them down. Last summer, FRB, by a tricky maneuver, boosted the rate on short-term Government securities (TIME, Sept. 4) and hoped to do the same for long-term bonds. But a fortnight ago, Secretary Snyder, who had lost last summer's battle, announced that he had won the war. He had won the President's approval to keep the long-term rate where it is (2 1/2%), because the U.S. cannot afford the "questionable luxury of tinkering with [it]." In his zeal to keep down the cost of financing the $257 billion national debt, Snyder overlooked the fact that the inflationary rise in prices has more than canceled out any savings that resulted from the low rate.

This week the Senate-House economic committee reported that 405 top U.S. economists whose opinions it had sounded had taken FRB's view.

Everybody was out of step but Snyder.

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