Now There's Plenty of Money

What the Johnson Administration wants, the Federal Reserve Board has not always delivered--at least not while the economy was booming. In late 1965, when the President wanted an easy-money policy, the Fed seemed to go out of its way to tighten things up. But ever since business turned sluggish last winter, the President and the Reserve Board have been working in tandem. The Federal Reserve sliced required bank reserves to make money more available. The Administration pushed the reinstatement of the 7% investment credit on corporate capital spending, pumped money into a drooping mortgage market, stepped up highway and other construction spending, including $1.14 billion more released last week. Federal Reserve Chairman William McChesney Martin and his governors also took a major step last week. The seven-man board voted unanimously to reduce the discount rate--the interest rate charged banks that borrow from the Federal Reserve--from 41%, where it has stood for 17 months, to 4%.

Less to Lyndon. Though the move had been anticipated for weeks, cynics immediately suggested that the reduction was Martin's debt to Easy-Money Man Johnson--a quid for the quo of his reappointment as Reserve Board chairman the week before. A more logical explanation was that this time the Fed, which is often a leader in money matters, was simply a follower. It was reacting to an earlier drop from 6% to 51% in the prime rate--the interest rate that commercial banks charge blue-chip customers. The Board's decision was less a tribute to Lyndon than an acknowledgment of sorts to Chase Manhattan Bank President David Rockefeller, the first banker to lower the prime rate, and the man who held fast to his decision despite opposition from competitors.

For all that, last week's move was mostly psychological; in spite of the new rate, few member banks are likely to rush to the Federal Reserve's discount windows for loans. At the moment, they have all the money they need. A record rate of consumer saving and a decline in demand tor loans have pushed bank reserves to a four-year high. Bank deposits have increased 20% at an annual rate since the beginning of the year, while loans have dropped by $1.9 billion or 1.4%. Certificates of deposit, which hit a high of $18.6 billion during the tight-money crisis last August, rose even higher last month until they reached $19.1 billion. Last week New York's First National City Bank announced that it was cutting the interest rate on small-sized CDs from 5% to 4 3/4%. Other banks began limiting the CDs they would accept.

From Bank to Bonds. One reason that the lending market is slow is that banks are deliberately building up reserves after having practically loaned themselves out of money last fall. Another reason is that even with the prime rate reduced to 5 1/2%, many a corporate customer has turned to the bond market to get money for such immediate needs as repaying bank loans and building cash on hand. Corporate bond issues last month reached a record $1.64 billion. Banks, as a result, have also turned to the bond market to keep their excess funds working. So far this year they have invested $4.6 billion in municipal and Government bonds, keeping most of their money in short-term securities that can be quickly liquidated if cash is needed. With so much money around, and the discount rate reduced, some businessmen say that they expect the prime rate to drop still lower. Few bankers agree. They expect loan demand to increase by midyear with a revitalized economy. They are confident that when that happens, their customers will come to them, eager to borrow at the present 1/2% rate.

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