TIGHTER MONEY

The Pressures: Politics & Prosperity

THE world's wealthiest nation is booming at such a solid rate that the very measure of wealth--money--is harder to come by than in many months.

Bullish economic news generally tightens the money market, encouraging more borrowers to compete for the available supply. For the nation's bankers, home builders, corporations and consumers, the tightening means that they must pay more to get the money they need to make loans, build houses, expand industry, buy autos, appliances and TV sets. Money has been gradually tightening up since spring as the economy spurted to new highs; last week it got a heavy turn of the vise.

The turn was applied by the House Ways & Means Committee, which voted to kill a bill giving the President authority to raise the interest-rate ceiling on long-term Government bonds above the present 4 1/2. This will force the Government to do more of its financing through short-term borrowing (under five years), on which there is no interest ceiling. Result: the Treasury will have to compete with consumers and small businessmen for short-term funds, thus placing pressure on fhe money market, forcing up short-term interest rates.

The Treasury must refinance $34 billion in the next twelve months and come to the market each week with $1,000,000,000 or more in bill offerings. Last week the interest rate that it has to pay on short-term (gi-day) bills rose to 3.4%, the highest since the fall of 1957; it may go up to 4%. What the Treasury fears most is that its dependence on short-term financing will force yields on short-term paper above yields on long-term bonds, thus attracting many investors who might ordinarily put their money in long-term securities and forcing rates up even higher. Such a development during the next year would put Secretary of the Treasury Robert B. Anderson in the worst position of any Treasury Secretary since the 1920s in maintaining a market for Government securities. The committee's action, said Anderson, "is a matter of grave concern."

The Treasury's troubles are a key part --but only a part--of the squeeze on money. Because of the new boom, there has been a large rise in business loans, which have soared from a recession low of $52 billion in May 1958 to $58 billion last month. Heavy Government financing ($13 billion deficit last year), a record volume of state and local fund-raising in the first half of 1959, and a jump in consumer credit have added to the competition for funds. Following the surge, interest rates on bank business loans in 19 major cities went from 4.17% in 1958's second half to 4.87% in June --and are expected to go higher (see chart).

At the same time, banks find themselves with relatively less money to lend. In the nation's mutual savings banks, total deposits rose $585 million in the first six months this year to $34.6 billion --but the growth during the same period last year was $1.3 billion. Instead of putting and keeping their money in savings accounts, people are attracted by higher returns in the stock market or Government bonds. The rate of growth of time deposits has been falling off because corporations, state and local governments, and foreign depositors can now get nearly 3 1/2% on a 91-day Treasury bill v. 3% on time deposits.

To get more money to make loans, commercial banks have been selling Government securities at a loss, will make up for it by charging higher rates for the loans they make. Banks are scrutinizing loans far more carefully; many now charge as high as 6 1/4% for conventional loans. Some banks are already overlent. Despite two hikes in the discount rate in the past six months (to 3 1/2%), daily average borrowings by the Fed's member banks were up to $945 million a day last week v. $508 million in February.

One major result of the money squeeze is heavy pressure on mortgage loans. Many banks are less anxious to float them when their big commercial depositors are clamoring for money, and most "permanent'' investors (e.g., insurance companies) are already heavily committed and are being more selective in granting mortgages. So far, builders have not been severely affected (partly because commitments have been made well in advance), and the Federal Housing Authority has not seen fit to raise the interest rate of 5 1/4% on mortgages. But if money gets tighter, large discount rates--now nearly 5% in some areas--will be needed to attract backers.

All the prospects point to even tighter money, especially when the boom gets another spurt after the steel strike ends. The Treasury's restriction to short-term borrowing is expected to force a rise in the Federal Reserve Board's rediscount rate--the cost of loans to member banks --to keep in tune with higher rates in the money market. All this is indeed a matter of concern to the U.S. Government. If the money market tightens so much that it seriously curtails consumer spending and business investment, this --rather than inflation--could become the greatest threat to the economy.

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