Evening star., 1959-10-14

I
refused credit. II the Treasury
could reduce its short-term
borrowing, the pinch on private
borrowers might ease.
Ceiling Called Inflati0nary
Besides raising costs of short
term credit, the administration
contends, the interest ceiling is
inf1ationary.
Short-term credit is liquid,
according to this argument,
That is, the purchaser of a
l3-week Treasury bill easily can
sell It to obtain quick cash. or
he can wait q few weeks until
the bill natures.
Purchasers of long-termI
bonds, on the other hand, are
willing to tie up their money
for five years or more. Sale Of
bonds. therefore, helps restrain
AlIldI1OLldIy SpcIlulIlB.
Furthermore, short-term bills
and notes can expand the
money supply when banks buy
them. When a bank buys a
Government security, it merely
credits the purchase price to
the Treasury's account. This
bookkeeping process creates
new money.
Recently, however the Fed
eral Reserve Boards restrictive
policies have prevented banks
from increasing their total
holdings of Government secur-
tiles. Corporations have been
the main purchasers of short
term notes and bills.
Federal Reserve Can Act
The Federal Reserve can, /
some extent, counteract the in ,
f1ationary effects Of short-term
borrowing by the Treasury. It
can, for example, raise the
reserve requirements of mem
Der banks to limit the supply of
money and credit. But such
action intenSif1es the tightness
Of money and builds up pres
sure for easy-money policies.
"The Government has three
major weapons for combating
imitation" a Treasury official
asserts: budget balancing, debt
management and credit con-
trolls. I'VE must use all three,
and not put too much of the
burden on any one of Them"
The administration is bal
ancing the budget, he con-
tinues, and the Federal Reserve
is doing a good job of restrain
ing excessive credit. But. he
adds, the interest ceiling pre-
vents the Treasury from man
aging the public debt on a
sound basis.
Bond Buying Urged
THE interest ceiling is the
last hole in the dixie" he con-
tends. "I'm not saying that
one hole will make the cike COL
lapse, but it certainly will
weaken the good effects of
sound budgetary and credit pol
icies. 1t would be a pity if we
succeeded in everything else
and then failed to stop imitation
because of nsound debt man
agement."
Critics Of the administration
answer these arguments by say
ing the Treasury could sell
bonds for less than Az per cent
if the Federal Reserve would
ease its controls on money and
credit. For one thing. they
urge, the Federal Reserve
would ease its controls on
money and credit. For one
thing, they urge, the Federal
Reserve should buy Treasury
bonds to keep prices near par
and thus lower interest rates.
They want Congress to bail
them out of the troubles they
have created through foolish
budget and money policies" a
leading opponent of tight
money charges. "They refuse to
help themselves"
Some Democrats contend the
Treasury could borrow at lower
rates even under present market
conditions, if 1t would insist on
competition among investors in
stead of setting rates on the
basis Of negotiation with a few
Leading bankers
And some of the Democrat.
maintain the Treasury could re-
duce its credit requirements by
eliminating wasteful spending
and closing tax loopnoles. The
resulting budget surplus, they
assert, could be used in part to
pay off some of the debt.
Economy Blow Seen
The Federal Government so
dominates money markets, the
critics argue, that removal of
the Az per cent ceiling would
raise the whole structure of
interest rates and thereby hurt
the economy.
1t is clear that economic argu-
ments do not tell the whole
story of Democratic opposition.
Some Democratic Strateglsts
hope to use their power over
interest rates to pry loose con-
cessions from the administra-
ton and the Federal Reserve on
tight money.
"The interest ceiling is one
of the few ways Congress can
get into the act on monetary
policy. and the Democrats are
going to demand a guild pro quo
before they give in," a Capitol
Hill observer declares. He COM
plains that the Federal Reserve
is naughty"
This line Of argument leads
Treasury official to this analy-
sis: !,
What we're up against is
not just the question OF the
interest rate ceiling, but a very
Cnf-inINc