THE CREDIT UPROAR

Is the FRB Throttling the Boom?

THE Federal Reserve Board, as it has often been in the past, was under bitter attack last week. The ruggedly independent agency, which in 1951 was roundly belabored as an "engine of inflation," was now just as severely criticized as a boom-toppling instrument of deflation, largely because of its credit-tightening action. Amid the growing furor over credit, Texas Representative Wright Patman called for a full-dress congressional investigation to find out if the Federal Reserve has pinched credit too tight. Treasury Secretary George Humphrey, Commerce Secretary Sinclair Weeks and White House Economic Adviser Arthur Burns have all voiced public disapproval of FRB's fifth boost in the discount rate in a year (to 3% in two districts), although President Eisenhower publicly defended the right of the independent agency to use its own judgment. General Motors' President Harlow H. Curtice went so far as to blame Detroit's sliding auto sales on FRB's credit-crimping policies. On FRB's side are such experts as J. P. Morgan Chairman Henry C. Alexander, who thinks FRB "was wrong only in not being more vigorous a little sooner," Harvard Economist Sumner Slichter and retiring New York Federal Reserve Bank President Allan Sproul, who tartly dismisses Automan Curtice's complaint as "a sort of cosmic jest." Detroit's difficulties, says Sproul, are a hangover from 1955's frantic sales race when too-easy credit skimmed the cream from 1956's auto market.

There is no doubt that credit is tight--and getting tighter. Many banks are turning down loans that they would have gladly accepted last year. Unfortunately, the pinch is harder on small than big businesses. But, as FRB Chairman William McChesney Martin points out, to be effective, credit controls must hurt.

FRB argues that there is still enough credit available for the "legitimate" needs of business. As of last week, total reserve bank credit stood at $25.3 billion, some $470 million higher than last year at the same time. With U.S. industry planning an estimated $35 billion record expansion in 1956, commercial and business loans through May 23 jumped a whopping $1 billion to $27.7 billion v. only a $480 million increase in the same period last year.

Consumers did not lack for cash. In 1956's first quarter, disposable personal incomes showed an increase to a rate of $277 billion for a gain of $16 billion (6.2%) over 1955's first quarter. But consumers are spending more for nondurable goods such as food, amusement, utilities and clothing and less on cars and other durables. While incomes have gone up, the rate of new savings is down $600 million from 1955's year-end level. In addition, notes FRB, total consumer installment debt is still rising. The seasonally adjusted rate for 1956's first quarter showed a $2.5 billion jump over 1955's first quarter, while extensions of new credit were clipping along at an annual rate of $3.3 billion higher than repayments on old installment debts. Furthermore, FRB economists see other worrisome inflationary pressures. The overall wholesale price index shows a 1.8% rise since January, while the cost-of-living index rose .2% in April for the second monthly increase in a row, thus bringing wage increases to 1,000,000 workers with escalator contracts. Key products like lumber, structural materials and metals have all edged up.

In the current debate, the Federal Reserve feels that some industrialists are trying to use FRB as a convenient whipping boy for every economic zigzag. But FRB also sees signs that its credit medicine is working effectively. Such sensitive barometers as daily spot-commodity prices have been edging downward, especially in scrap steel and copper. Furthermore, the volatile money market seems to be adjusting to the new climate after a sharp flare-up in April immediately following the latest hike in discount rates to Federal Reserve member banks. Interest rates on short-term (up to 90 days) Treasury bills, which jumped from 2.17% at the end of March to 2.78% at the end of April, are settling down again, and long-term U.S. bonds show the same pattern.

What worries businessmen, whose memories of 1954's recession are still fresh, is that FRB's credit brakes might have too harsh an effect on the econ omy, curb the industrial expansion that is now taking up the slack left by the auto industry. But FRB is watching the situation closely, and is ready to change at the first real sign of trouble. With its many monetary tools, it does not necessarily have to make money cheaper by relaxing the discount rate in order to ease credit. It may simply expand the money supply by stepping up purchases of Government securities on the open market, or reducing member-bank reserve requirements. Economists look for the Federal Reserve to start easing credit again soon, possibly in June or early July.

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