Evening star. [volume] (Washington, D.C.) 1854-1972, 1955-08-14
Rediscount Rate Boost
Acts as Initiation Curb
BY ROBERT T. PATTERSON

The rise in the rediScount
rate early this month con-
firms the intention of Fed
eral Reserve authorities to
tighten the supply of money
and credit. BY discouraging
overly liberal bank lending
|. they hope to forestall an in
f1ationary spiral that would
reduce the purchasing power
Of the dollar. and by discour-
aging excessive use of credit
they hope to prevent those
unsound developments of
prosperity that can transform
it suddenly into depression.
Last April the rediscount
rate had been raised from IL
per cent to 124 per cent. The
present increase, for most Of
the country. is from 134 per
cent to 2 per cent. although
at the Cleveland Federal Re-
serve Bank the rate has been
lifted to "a per cent. The
more drastic revision there
gives a clue to the thinking
Of the Board Of Governors at
Washington, who deter
mined it.
Boom sentiment is especial
ly rampant in the Cleveland
banks area, which includes
Pittsburgh, This is due appar-
emily to the highly prosper
Gus state Of auto, steel. ma
chinery, tool and other IN
dustries. Expansion in many
lines of business there soaks
up bank credit. while full en-
ployment encourages extern
sive installment buying. Retail
sales in and about Cleveland
are running far higher than
the average for the Nation,
and doubtless a considerable
part of them is ION the cuff"
Rise in Speculation
But almost everywhere in
the country business is BOOM
ing and expanding. wage
earners are prospecting. con-
sumers are spending literally.
the thrifty and the wealthy
are investing. All this is good.
but along with it has developed
an inordinate amount Of spec
ulation. 1t has crept into al
most every aspect of our eco
nomic life.
There is speculation in Sc
curities and commodities, in
real estate, in inventories, in
the establishment of new bust
nesses and the expansion Of
old. and-very markedly-in
consumer installment buying.
There is widespread trading
on the equity" that is. the &C
QUESTION of property and goods
by means of borrowed money.
much of which is in the form
of loans literally advanced by
the banks.
This boom is spanked by
rapidly expanding credit In
the IL months ending in
June 90 loans outstanding of
all banks in the United States
increased from $81.2 billion to
an estimated S9l.9 billion, an
increase Of over Is per cent.
Since the end Of 1945, when
total bank loans were only
1904 billion, the increase has
been over 200 per cent.
Member banks of the Federal
Reserve system that are loaned
up to the limit can increase
their lending capacity by bor-
rowing at the regional Federal
Reserve banks. The rediscount
rate is the rate Of interest they
must pay. Theoretically. a
higher rate discourages them
from borrowing. But in actual
ity banks that can lend at sub
stantially more than the re-
discount rate-and most banks
can quite readily-will still
find it profitable to borrow
from the Federal Reserve and
lend to their customers.
Bosic Interest Rote
One may wonder then why
so small a change in the price
for money borrowed by the
banks should be considered
significant. Part of the ex-
PLANTATION is that the redis-
count rate is the basic interest
rate, and changes in it tend to
be communicated to other in
terest rates - whether for
short-term bank loans, inter-
mediate-term borrowing. or
long term Notwithstanding
the use of credit generally more
expensive.
But the more immediate and
important effect is psychology
ical. Raising the rediscount
rate signals a warning. 1t tells
banks and other lenders that
money and credit will be
harder to get. 1t cautions
them to be stricter and more
selective in their lending. 1t
means that too liberal a lend
Ing r0lirv will ha frounAh