Evening star., 1960-06-03
DiscountsCu
Public Awaits
Bank Reaction
By SAM DAWSON
Press Financial Writer

VIEW LO1bEAs OuAiC o. / lac
borrowing public is waiting to-
day to see if the Nations banks
will drop the other shoe.
Two Federal Reserve banks
dropped the first shoe yesterday
by lowering the discount rate
that is, by making it cheaper
for the commercial banks to
borrow money from the Fed
eral Reserve.
Now it's question: VIII the
commercial banks in turn make
it cheaper for the public to
borrow from them?
And if they do, will there be
enough pickup in such borrow
ing to give business in general
la boost on the prosperity
ladder?
BY cutting the discount rate
to 31a per cent from 4 per cent
the Federal Reserve banks in
San Francisco and Philadelphia
we're bringing this rate more
in line with other short-term
borrowing charges, which have
been mostly on the downSide
for many weeks.
Less Demand for Loans
The interest rates were drop
ping because the demand for
loans from business firms and
from home builders hadn't
been as large as previously.
And many felt that the psy-
chology of a weakened stock
market had led business to be
less eager to borrow for ex-
tpansion or to build up stocks.
The scuttling of the summit
meeting in Paris set off no
rush to stock up, and appar-
emily led few people to look
Tor higher prices.
So the Federal Reserve
Spokesmen say there is little
inflationary psychology any
more and therefore no reason
to keep as tight a hand on the
supply of money and credit.
Cutting the charges for
commercial bank borrowing
from the central banks is often
done when the money man.
ayers feel that deflation is
more likely than imitation, or
when they feel that making
borrowing cheaper will give a
tagging economy a boost.
Higher Rate Is a Brake
Raising the discount rate is
often done when the money
managers feel business boom
may get out of hand and lead
both to higher prices and A.
nally to bust.
But for the public itself
raising or lowering of the dis
count rate means little except
what it leads the banks them
selves to do.
OF late the banks haven't
had to borrow much from the
Federal Reserve. A lower rate
may not lead them to borrow
any more now. 1t may not lead
them to cut their own rates to
the public.
If they do cut their rates
to their corporate and individ-
ual borrowers, the effect on the
economy in general will still de-
pend on something else: the
public reaction.
II business doesn't want to
borrow more and build uu
greater stocks, or expand its
activities, the effect on the
general economy will be slight
Installment Credit High
But one form of borrowing
goes merrily on. Outstanding
consumer installment credit in
April made its biggest monthly
expansion since last August.
The lowly consumer goes right
on buying on the cuff.
A lowered discount rate could
let the commercial banks bor-
row more money to finance
further increases in installment
credit-if the money isn't avail
able from other sources, such
as the increased flow of savings
from depositorS, from pension
funds, and the like.
The funds for financing all
the sales on time-the total
outstanding is now in excess of
$40 billion-was found when
the discount rate was 4 per
ceM tas it still is in most of
the II Federal Reserve dis
trictS).
So the effect, if any, of cut
ting the discount rate seems
likely to be only on business
borrowing. And that depends
on business psychology, which
Of late has been on the cautious
side.