Loosening Up the Pinch

Like any good driver, Treasury Secretary Humphrey knows that there is a time to put on the brakes and a time to step on the gas. Having put the brakes on credit expansion by raising interest rates, Humphrey last week decided the time had come to step on the gas. The supply of credit had become too tight for the needs of a still expanding economy and a Government still in the red. One warning signal: construction, which usually rises seasonally in April and May, dropped in May for the first time in eleven years.

Humphrey, the architect of the Administration's tighter-money policy, agreed with the Federal Reserve Board on what to do. For the first time since 1949, the FRB lowered its reserve requirements for member banks, enough to free $1.1 billion. Since every such freed dollar liberated about $5 in additional credit, the move made available about $5.5 billion for loans.

But its biggest significance was the demonstration that neither Humphrey nor the FRB plans to follow any undeviating course in money policy. If need be, they are as ready to loosen credit to prevent a recession as they are to tighten it to prevent inflation.

The move was a temporary reversal of the hard-money policy in that it keeps interest rates from going any higher. Humphrey had a compelling reason to seek that. Right after he floated $1 billion worth of 3 1/4% bonds in April--the highest long-term rate in 20 years--all interest rates went up until the Treasury found itself paying far stiffer rates for short-term borrowings. Since then, a drop in tax receipts has proved that Harry Truman's budget overestimated the Government's income this year by $2.2 billion. Humphrey will have to raise $6 billion in new money in the next three months. On top of that, he will have to raise about $6 billion more by year's end, perhaps $30 billion overall to refund old securities and float new ones.

In a money market as tight as his credit-pinching had created. Humphrey might have had to boost interest rates even more to raise such huge amounts. The credit expansion would not only create almost the identical amount banks may need to finance new-money bond issues; the prospect also stiffened the prices of both Government and corporate bonds. The Government's 2 1/2% bonds rose a full point, and Humphrey's new 3 1/4% bonds rose to par for the first time in six weeks.

Actually, the FRB has been providing additional credit for the past two months, during which it has bought some $740 million worth of Government securities from member banks, creating a base for around $3.7 billion of new credit. It could have provided last week's additional $5.5 billion in the same way, but most of the credit would have gone to big-city banks. By lowering the reserves instead, credit was also liberated in the country banks, where farmers, harried by drought in some regions and glut in others (see below), were having a hard time getting badly needed loans.

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