The Economy: With Baling Wire

No one knows better than President Johnson that his Administration’s fight against inflation so far has been patchwork. Last week, announcing the latest in a series of anti-inflation moves, the President rather ruefully told newsmen: “As we say down on the farm, ‘maybe we ought to try to get by with some baling wire, patch things up,’ to get by during this particular period, when there is such pressure on our economy.”

Pieces of the patchwork last week:

Bonds. Johnson disclosed Treasury plans to sell a new savings certificate to individuals. Treasury Secretary Henry Fowler said that the new certificate will offer a “much higher rate of interest” than the 4.15% paid on present savings bonds. But buyers may have to hold the certificates for 18 to 24 months, as against the minimum 60 days required on Series E savings bonds. Final details on what Fowler called the Treasury’s “more attractive product line” will be announced in November, and the notes will be issued next year. It is expected that the certificates will augment, not substitute for, the savings-bond system; for example, said Fowler, persons enrolled in payroll savings plans may be allowed to buy one new certificate for every $25 Series E bond purchased. The Government also will launch a promotional campaign “reminiscent to some extent of a wartime drive.” Hopes are that the new certificate not only will provide Government financing, but will take many millions in consumer spending money out of circulation, thereby dampening inflation.

Interest. With that old tight-money man, Federal Reserve Board Chairman William McChesney Martin watching approvingly, President Johnson signed a bill allowing the three bank regulatory agencies (the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Federal Home Loan Bank

Board) to set ceilings for a year on interest rates paid to depositors by banks and by savings and loan associations. The limit of 5% on bank certificates of deposits of under $100,000 obviously will affect individuals more than corporations. It will force several hundred banks that have been paying up to 51% to roll back interest rates on new deposits. Mutual savings banks will be held to 5% on all deposits. In most cases, savings and loan associations will be limited to 4¾% on passbook savings accounts. S & Ls in California, Nevada and Alaska, which have suffered badly in the competition with banks for deposits, will be permitted 51% . For bankers, the slowdown in deposits forced by the new ceiling undoubtedly will diminish the supply of money available for lending.

Government Hiring. The Budget Bureau moved to impose personnel ceilings on all Government agencies except the Defense Department, the Selective Service System and the Post Office Department. All but the three excepted agencies will be required to hold employment at the level of July 31, when it reached 2,382,993. The projected total by the end of next June had been 2,444,533, but the full 61,540 difference between the two figures will not be realized. Because of the exceptions, the number of planned jobs eliminated will be no more than 40,000, with a possible saving of about $200 million this fiscal year. In his effort to cut Government spending by $3 billion—without reducing the size or scope of his Great Society programs—the President also issued “very specific” orders for the Defense Department and the General Services Administration to control inventories.

President Johnson may need a Jot more baling wire if he is finally to bring inflation under control. Among signs of continuing inflation last week were auto price increases (see following story) and the consumer price index, which rose in August another four-tenths of a percent to a record level of 113.8, up 3.5% in the past year, with most of the increase due to the higher cost of food. Meanwhile, Wall Street had a kind of relapse. Two weeks ago, after President Johnson announced the suspension of the 7% corporation tax credit for capital investment, the market rallied strongly. Last week it staggered through five uncertain trading days, closed 24 points lower on the Dow-Jones industrial average.