Evening star., 1951-02-09

MARINER S. ECCLES.
Released boards memo.
The Treasury says the public
debt Is 50 big that to boost in
terest one-half Of / per cent would
cost between $1.25 and $1.5 billion
dollars a year. The administra-
ton says its new $71-billion budget
is bone-bare now. and implies that
an additional $1.5 billion would
upset the apple cart.
Not so, says the Federal Reserve.
The board points out that, debt
service would increase by SIS
billion this year only If the whole
public debt were to be rolled
over" now. Actually. the board
says. 1t would take 10 to 20 years
for the new interest rate to 20
into effect on all outstanding
securities. First year costs are
estimated by Federal Reserve to
be more like 500 million-not
SIS billion.
Preface to Main Idea.
How a factor of one half Of /
per cent in the interest rate can
amount to much on the imitation
front still may be puzzling. ALI
that has gone before is simply a
preface to the Federal Reserve
Boards main idea-the control of
what the economist E. A. Golden
weiser calls the "high-powered
reserve dollar"
Most of the big lending in this
country Is done by banks that are
members of the Federal Reserve
System. The amount of credit
these members may extend-the
lending they may dds controlled
by the amount they have on de-
post in the central Federal Re-
serve Bank. In general, a member
may lend s6 for each 81 it has
on deposit. When its deposits in
crease, its lending power increases
sixfold-which is why Mr.. Golden
weiser calls these dollars "higl-
powered"
Assume that a member bank
has So million on deposit at the
central bank. It can then lend
out $l8 million. But If the mem
Der decides to buy 81 million
worth Of Government bonds from
the central bank, what happens?
Check for 81 Million.
The member orders the bonds
and sends a check for 81 million.
This is deducted from the mem
ber's account leaving a balance
of 50 million. Suddenly, the
members lending power is cut by
$6 million.
On the other hand, If the men,
ber sells 81 million worth of Gov
ernments, 1t increases its lending
power Sc million.
Federal Reserve contends that
in advocating an end to the bond
guarantee business, it is simply
seeking to do what it was created
for. The idea behind Federal
Reserve in 1913, when 1t was Gre
ated, boils down to this: In hard
times. get money and credit fow-
ing; in good times tighten up.
That is just what Federal Re-
serve did during the depression
it bought and bought Govern
ments, thereby increasing banks
deposits and expanding the
amount Of lending capital avail
able.
But these are not hard times
now, Federal Reserve says. These
are the times when we should be
Tightening up on credit, and SELL.
ing bonds-rather than buying
them-is one way to do 1t.
Good Theory, But
That is good theory, maybe, the
Treasury replies, but it hasn't
worked out that way in practice.
The Treasury points out that a
free market in Governments has
never prevented boom and the
resultant bust-and can't be ex-
pected to in the future. Along
with the price, wage and credit
controls We both advocate, says
the Treasury, free bond market
is unnecessary. A rise in inter-
est rates will cost money without
doing any good.
That is where we differ, Federal
Reserve asserts. The interest rate
isn't the all-important thing, no
matter how badly you folks at
Treasury want to keep it at its
present level. The important thing
and this is the nucleus Of Fed
eral Reserves idea-is to blot UP
some Of this excess credit. Pay
Ia little more interest if necessary.
so investors will buy Governments
and thus cut down the number of
dollars in circulation.
Emergency Complicates Things.
The presence of a defense emer-
lgency in the picture complicates
lit tremendously. If these were
simply good times, without thick
layer of war-spending OVERLAPPING
everything else. the Treasury and