U.S. Business: Pressures & Passions

Patman: You always have one answer: higher interest.

Martin: And you always have one answer: lower interest.

That is the way it mostly went last week in the Senate caucus room, where the Federal Reserve Board’s old foe, Texas Congressman Wright Patman, had summoned Board Chairman William McChesney Martin Jr., four more of the seven board members and four other witnesses to four days of hearings about the Federal Reserve’s discount-rate rise. The hearings changed no one’s mind or position one iota, but they produced some clarification of the events that led up to the rate rise and considerably heightened speculation about President Johnson’s choice to replace Vice Chairman C. Canby Balderston, the retiring member of the Federal Reserve’s 4 to 3 conservative majority.

Three Memos. Bill Martin insisted that the Federal Reserve raised the discount rate only after full consultation with the President, Treasury Secretary Henry Fowler, the President’s economic advisers and the budget director. “I indicated what the problems were, as I saw it. They did not agree with me.” In fact, Martin gave the President a written memorandum in October giving reasons why he felt a discount hike would be needed, and Fowler and Chief Economic Adviser Gardner Ackley retaliated with memos contesting his reasoning. Martin felt that the discount rate should have been raised in September, believes that if the Board had not acted earlier this month its hands would have been tied until mid-February because of Treasury refinancing of the national debt in January. Had the Board not acted when it did, he said at the hearings, the situation would have deteriorated: “Delaying action further would probably have made it necessary to take stronger measures later.”

No Administration officials showed up at the hearings, but the easy-money partisans also had their say. Senator William Proxmire deplored “an economic-policy civil war.” Seymour E. Harris, chairman of the economics department of the University of California at San Diego, called the Federal Reserve’s independence “an insane idea,” and criticized the use of a monetary “sledge hammer” on the economy. Harvard Economist John Kenneth Galbraith called the Federal Reserve an “anachronistic” body whose rate rise was “visibly uninformed.”

Horrified Rumor. Thus, Wall Street was suitably horrified last week as rumors swept the Street that Balderston’s replacement might be none other than Galbraith. If the President nominates an easy-money advocate, the Board’s one-vote margin for higher interest rates would disappear and Bill Martin might resign. Johnson has reportedly rejected three men for Balderston’s chair, has not yet made up his mind. The business community particularly opposes the appointment of another man like Sherman Maisel, an easy-money man and a former University of California economics professor named to the board by Johnson eight months ago. Maisel’s boldness as a freshman governor has stunned even some Administration leaders; last week at the hearings he called the handiwork of his colleagues on the board “irresponsible.”

The Board now has three economists: Maisel, J. Dewey Daane and George Mitchell. A group of businessmen led by two former Treasury Secretaries, Truman’s John Snyder and Eisenhower’s Robert Anderson, are busy rallying industry to oppose the inclusion of another economist on the Board. They want business to urge on the Administration a single business candidate for the vacancy to insure that the Board’s complexion remains as it is—and that Bill Martin stays where he is.