Lay That Club Down

To many a layman it sounded like just another bankers’ argument, dull and muddy with economists’ gobbledygook. But as a handful of top U.S. bankers carried it on before three congressional committees last week, the argument boiled down to one simple, understandable question: How can the U.S. curb inflation without bringing on a slump? But there were no simple answers to this simple question.

As there was small hope of any quick boost in production, the obvious thing to do was curb the amount of spending money. Ttie way to do this, said Federal Reserve Board Chairman Marriner F. Eccles, was to use a few old methods (keep taxes high, restrict housing and installment credit) and one new one. He wanted Congress to give FRB the power to boost maximum reserve requirements of commercial banks (the amount of deposits not available for loans) from the present 26% to 51%. This was the “mildest way,” Eccles insisted, of curbing credit.

Socialism? It did not seem mild to other bankers. Some even grumbled about “socializing the banks.” But it was Edward Eagle Brown, president of the Federal Reserve Advisory Council and chairman of the First National Bank of Chicago, who put a realistic finger on the trouble with Eccles’ plan. Eccles, he said, need not go after such sweeping powers until he uses the powers that FRB now has. Why, for example, didn’t FRB raise its rediscount rate (the cost of FRB loans to commercial banks) and thus raise the interest rates on all borrowed money?

Eccles flatly said that he “would not recommend” using this power. FRB was still frightened by the slumps of 1920 and 1929. A big boost in rediscount rates had preceded them, and many still blamed the credit curb for the slumps.

Modest Steps. Next day, Eccles had a second thought. He announced that FRB would inch up the rediscount rate from 1% to 1¼% “in the not too distant future.” Then Allan Sproul, president of the Federal Reserve Bank of New York, prodded Eccles. FRB has the power to make Central Reserve banks (those in Chicago and New York) increase their reserves another 6%. Why didn’t it do so? As for Eccles’ new plan, Sproul gave it the back of his hand. Said he: “It would expose us to grave monetary disorders. … A program of modest steps may well be cumulative in effect, in the present sensitive money and credit situation.”

At week’s end, it looked as if only “modest steps” would be taken. Eccles’ new plan was about dead. The House Banking & Currency Committee recommended that Federal Reserve banks be required to back their currency notes by 40% in gold, the same ratio as prewar (it had been dropped to 25% as a war measure). This would have no immediate effect; reserves are actually at 49% now. Nor would the proposed rise in the rediscount rate; it was too small to be more than psychological in effect.

The reason for the cautious steps was plain. Despite the hullabaloo over inflation, many a businessman knew that the threat of a recession is very real. No one wanted to swing the club on credit and risk killing the boom.