Evening star., 1955-11-18
U. 5. Clamps
2-WayCurbo on
Business Boom
By the Associated Press

ended its recent pampering of
the business boom with a double
breakdown on resurgent credit
expansion.
Effective today. the ReserveI
Board permitted six Reserve
Banks to increase the discount
rate-the interest cost at which
they lend to their member COM
mercial hanks-from az to 2lsI
per cent.
That is the most restrictive
lending cost enforced by the
Reserve System in 20 years.
Since the first half of 1885, until
late this year. the Reserve Bank
lending rate had never topped q
per cent.
The new discount rate was
authorized for the Reserve Banks
at New York, Philadelphia, At
lanta. Chicago. Cleveland and
San Francisco. A similar in-I
crease for the Nations six other
Reserve Banks is expected toI
follow.
Open Sale Of Securities
AS a second step to curb cred
1t. the reserve board disclosed
that it returned this week toI
sales on the open market OIL
Federal securities owned by theI
reserve system. Funds used toI
buy these securities thus become
unavailable for lending.
The two moves followed AMI
ebullient upswing in business ac-l
ttyity since the first of this
month. The squirt created sud-
den new demands for credit onI
q large scale, and put a strain
on production reflected in in
creasing commodity prices.
It was learned that the con-
tinued tendency Of basic prices
such as those for metals tol
move up, while farm prices con-
tinued to drift downward. and
q new upward trend to stock |
market prices were key factors
In Federal Reserve thinkingi
which led to the new crack
down.
The rise in reserve bank dis
count rates was the fourth since
April. when the IL banks were
lending at ia per cent.
Favorite Technique
Upward movement Of the dis
count rate is a favorable tech
nique of the reserve system forl
hitting at possible inflationaryl
developments Il makes bor-
rowing from the Federal Re-
serve System more costly forl
the member banks which, inl
turn, increase the rate of in-I
terest they charge their clients. |
This progressively discouragesl
the expansion of credit, but at !
the same time keeps credit
available--at a price. Thus.
speculative borrowing tends toI
be forced out
The reserve board can use its |
purchases or sales Of Govern
ment securities on the open
market simultaneously with itsI
use Of the discount rate to mod
crate effects of discount rate
changes, or to strengthen them.
It used the moderating effect
Of purchases id the last week
Of September--as business coni-I
dence wavered following Presi-l
dent Eisenhower's heart attack
and throughout October. ItsI
purchase of nearly half q billion
dollars worth Of securities on thel
open market had the effect OIL
pumping nearly $2.5 billion of
potential new credit into theI
economic system, since a bank
cand lend up to five times asI
much as the reserves it deposits
in the reserve banks.
Boom Was Resting
The reserve system continued
Its purchases into the first week i
Of this month. It's production in
dex for October, released thisl
week. showed why 1t pampered
the boom during that month.
October was only the second
month this year when. accordingI
to current figures. production did
not rise. The boom was resting,
with an eye on the convaIescing
President In Denver.
Toward the end Of October,
some interest rates were turning
down. bank borrowing from theI
reserve board shrank. and Gov
ernment policy makers were say
ing 1t looked like imitation might
have been mastered. They were
describing their position as one
Of neutrality with watchfull
eye out for either defiation orl
any new upsurge Of imitation.
But In the weeks since then,
bank borrowing has again he
come heavy. interest rates have
tilted upward again. and COM
modify and stock market prices
have moved up.