Inflation Again

Inflation is like the measles: people don't notice it until they see the spots break out--in the form of soaring prices. Last week, with many prices declining, few spots were visible. Yet the U.S. economy was feeling the first premonitory fevers of a new bout with inflation.

The cost-of-living edged up almost to its all-time peak of last January. The Bureau of Labor Statistics' index for May (189) was only one-tenth of 1% below the record. Its climb of .2% since April meant a 2-c- per hour automatic wage rise for 1,300,000 railroad workers, and may soon mean another raise for over 1,000,000 auto workers whose contracts are tied to a different period. Moreover, no matter how the steel strike is settled it will mean 1) higher wages, 2) higher prices for steel and products containing steel all down the line.

Money Machine. On top of all this, the Government began to raise the inflation fever by pouring billions into the nation's credit system. It floated last week the biggest Government new bond issue since 1945. Thus the Government started a big expansion of credit, the basis of all the post-war inflation.

A recent deterrent against inflation has been the fact that the federal budget has been in balance. Now, the Government is in the red and, by the end of the current fiscal year on June 30, there will be an estimated deficit of $5.2 billion. In the next year, the deficit is estimated as high as $14.4 billion. As a starter toward borrowing the cash to meet this deficit, Treasury Secretary John W. Snyder floated his "deficit" bond issue, permitted commercial banks to buy for the first time since 1945. To keep down their buying and expansion of credit, Snyder ruled that they could buy only $500 million of the issue; only non-bank buyers could apply for the rest. To encourage private buyers, Snyder offered the bonds at a good rate of interest (2 3/8%), high enough to command a premium in the open market. His strategy worked: so many non-bank buyers applied that the issue was oversubscribed and had to be raised from $3.5 billion to $4.25 billion.

The Big Catch. But there was a big catch. Nobody in Wall Street believed that the "private buyers" would hold on to their bonds. Many, perhaps most of them had simply taken what the Street calls a "free ride"; they had put down 10% to buy the bonds and by quickly selling them, they could skim a quick profit on the 3/8% premium which the bonds immediately brought in the open market.* Thus, most of the bonds ostensibly sold to private individuals would probably find their way to the banks in short order. They would provide the basis for a huge expansion of credit at a time when other credit restraints (on autos, appliances, mortgages, etc.) were being lifted and the banks could put the new money to work. If, as many bankers thought would soon happen, $2 to $3 billion of the issue wind up with the banks, exactly the same amount of new money will be created because the banks will pay for them by simply creating an equivalent deposit credit for the Government. It looked as if the economy was in for another dose of inflation measles.

* By putting up $10,000 cash and borrowing $90,000, a free rider could buy $1,000,000 worth of bonds, resell to a bank and pocket a $3,750 profit, making 37 1/2% on his money in a week.

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