Tightening Up

STATE OF BUSINESS Tightening Up

From Washington last week, the Federal Government reached out a firm hand to tighten the reins on the U.S. economy.

Authorized by the Federal Reserve Board and its chairman, William McChesney Martin Jr., the Federal Reserve System's districts across the U.S. started boosting the rediscount, i.e., interest, rate to banks who borrow money from the Federal Reserve. Within 48 hours, ten Federal Reserve Banks announced increases in their rates of 1/4 to a total of 2% on loans. In Cleveland, where autos, steel and machine tools are rolling along at record rates, the increase was a full 1/2, up to 2 1/4%. Private bankers quickly passed on the new rates. By week's end virtually every New York bank had increased its own interest rates for borrowers with top credit ratings from 3% to 3 1/4%, the first rise since April 1953. and as high a rate as business has had to pay in 22 years.

The tightening up of bank credit was part of a continuing effort to temper 1955's optimism with economic horse sense. For several months, Eisenhower Administration economists had been carefully charting the accelerating business cycle. Their decisions: to ease off the accelerator and reach for the brakes. Like the earlier checks on housing loans and brokers' stock-market loans (TIME, Aug.

8), the braking was gentle. But it was a warning to expanding U.S. business.

No Breathing Spell. Ideally, as business reaches peak production and employment, there is a leveling off period. With labor in increasingly short supply, businessmen must bid higher for more workers to make more goods; marginal costs increase; expansion becomes more difficult; prices tend to go up, thus gradually lessening demand. At first, the forecast was for such a breathing spell starting last month.

But so far the boom shows little sign of slowing down.

In the auto industry, production and sales are pushing to new records. For the first six months, Chrysler reported earnings of $70 million, the highest in its history; Ford and G.M. were also pushing ahead. Overall retail sales in June soared to a $15.9 billion monthly rate, $1 billion higher than last year. In July, for the third month in a row, construction posted a record with $3.9 billion worth of new building. After the C.I.O.'s hefty wage increases, overall steel prices jumped 6.3%, a full 1/2% more than expected, with the chance of another 1/2% boost this fall when tin-plate manufacturers announce new prices. Consumer installment credit for June shot up to $24.9 billion v. $21.7 billion in 1954; new mortgage loans increased at the rate of $1 billion monthly.

Gentle Braking. With peak production and annual personal income at a record $301.1 billion in June, few economists are seriously worried about the overall health of the U.S. economy. But no one wants to take chances. Instead of waiting, and risking a sharp decline later, the FRB and the Administration economists would much rather apply the brakes now, and do it gently. For one thing, the Government remembers all too well the way businessmen ran for cover in 1953 when the Treasury, with its 3 1/4% 30-year bonds, sharply contracted the money supply. For another, the move keeps the FRB squarely on top of the situation, in position either to ride along or give the reins another slight tug whenever needed.

The key economist in the U.S., Dr. Arthur Burns, chairman of President Eisenhower's Council of Economic Advisers, hopes by such means to keep the boom rolling smoothly within the speed limits. Last week Burns was braking the economy with a steady hand. Said he: "Except for local areas, we are in a position of full employment in a practical sense. At this stage of the business cycle, we try to make sure that we avoid excesses of credit expansion and speculative movements. This is essential if we are to expand and prolong the prosperity that our nation is now enjoying."

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