Evening star., 1937-02-07
Bond Trends, Finance Costs
and Bank Profits Hinge
on Outcome.
IDLE RESERVES REDUCED
TO PREVENT RUNAWAY
Recent Hesitation of Investment
Market and Rise in Short Term
Rates Stir Interest.
BY FREDERICK GARDNER,
Associated Press financial Writer.

nOpe1ully toward washington Ill
search of larger reward for its work.
In Wall Street and wherever capital
congregates to sell its services. recent
manipulation Of credit control levers
by the Federal Reserve Board has
raised the question:
Are the wages Of dollars as we'll as
men going up?
On the answer, the money street
hinges the trend Of bond prices. cost
OF borrowing for business and spec
ulators, profits of lending institutions
and ultimately the cost Of financing
an installment purchase Of an auto
mobile or the mortgage on a new
house.
The cost Of money, as some author
tiles view it, is the hub of the re-
covery wheel. Federal monetary policy
since early in the depression has been
directed toward driving down interest
rates and keeping them low with the
objective Of putting idle dollars and
men back to work.
Loanable Funds Piled Up.
Washington moved toward that goal
by facilitating accumulation of a
huge surplus of loanable funds-the
much discussed excess reserves Of
banks-and borrowing and spending
billions to expand deposits for the
use of individuals and business.
Now some Of these deposits have
begun to 60 into private employment.
The Reserve Board, apparently fear
full the movement might get out of
hand and shoot prices and the cost
of living skyward. has reduced sur
plus reserves to more manageable"
proportions.
In the language Of finance, 1t has
twice raised reserve requirements
the percentage of deposits member
banks must keep with the reserve
system as liquid resources. The effect
is to remove these locked up" de.
posits from the base Of the inverted
pyramid Of loans and so restrict
potential credit expansion.
For. theoretically, bankers may lend
several times the amount Of their
excess reserves and thus create de-
posits and purchasing power which
move men and materials into en-
ployment. In the ebb and flow Of
these deposits derived from bank
loans, economists see the heart of
the modern money control problem.
Treasury Co-operates.
Moreover, the board and the
Treasury, as in the recent plan for
"sterlizing" additional gold acquisi-
tions to prevent them from becoming
part Of the credit base, have CO.
operated in other precautionary moves
to bolster money controls.
Around Washington's "easy money"
policy. and moves to prevent credit
expansion from running out of bounds
and feeding another volatile business
boom, has revolved much controversy.
Some bankers protested against
what they regarded as attempts to
keep money rates "artif1cially" low.
Advocates Of easy money" as a cure
for depression have been antagonistic
to action which threatened to raise
interest rates.
From an immediate practical stand
point. Wall Streets attention is
focused mainly on the bond market
to catch repercussions Of change in
underlying money conditions.
Ordinarily top-grade bonds move in
accord with money conditions. After
virtual collapse of short-term rates q
lew years ago and accompanying
steady decll..e in the long-term in
terest rate in the meanwhile, the
bond markets trend was persistently
upward until few weeks ago.
Hesitancy Appears.
Recent hesitation in bonds coin.
Gliding with slight upturn in short
term rates, naturally caused many to
wonder whether the bull market had
terminated. Some authorities hold
the Reserve Board, in tightening
credit controls, signalled a gradual
shift from extreme low interest rates
to somewhat higher levels.
Most authorities concede the reduce
ton in surplus reserves, which are ex-
pected to fall to around $500, ,000, 900
when the latest order becomes fully
effective May l compared with the
peak Of more than $4,000, 600, 900 last
year, should bring some rise in the
cost of money for the near term.
Actually some rates have been raised
little already.
But there is no such agreement
about the long-term rate. Federal
authorities, in fact, have insisted the
moves could not be interpreted as
abandonment of the easy money
policy, explaining them merely as
preparation in event Washington finds
it necessary to use more effective
levers later.
Since top-grade bonds follow the
long-term rate Of money, rather than
the short, investment men are uncer-
tain whether the minor recession in
prices is merely another setback in
major trend upward or marks the
end of the climb from the 1882 DEPTHS
Sharp Drop Recorded.
The bottom fell out Of the market
for money at short-term when surplus
bank funds began to accumulate
rapidly toward the end Of 1888 and in
1894.
Dollars accepted employment for
periods Of a few months to q year for
almost nothing. The Treasury in the
Summer Of 1885 borrowed on bills for
about one-twentieth Of per cent
Certain classes Of trade paper yielded
as little as one-eighth Of / per cent.
Money return went 50 low that capt.
(see CREDIT STEPS, R GID