Brake on the Boom

Is the boom headed for a sharp upturn or a slide? For months the question has split official Washington. One faction, which includes President Eisenhower's Council of Economic Advisers, worried that business was slowing down, kept a wary eye on such soft spots as autos and farm prices. But the Federal Reserve Board leaned in the opposite direction, convinced that the boom was still picking up speed so fast that it might get out of hand. Last week the Federal Reserve governors decided it was time to put more checks on credit and industrial expansion. With a flourish of his pen FRB Chairman William McChesney Martin Jr. okayed, for the fifth time in a year, an increase in the discount rate for eleven of FRB's twelve district banks, thus making it more expensive to borrow money.

In nine districts the discount rate, i.e., the fee the Federal Reserve Banks charge on loans to member banks, was raised 1/4% to 2 3/4%; the Minneapolis and San Francisco banks boosted their rates 1/2% to 3%--highest rate in 22 years. Chicago prepared to follow suit.

Flood of Optimism. The nation's bankers promptly passed along to their customers the price increase on borrowed money. Big eastern banks hiked the prime rate, i.e., the interest they charge big borrowers with top credit ratings, from 3 1/2% to 3 1/4%. On the stock market the change was taken in stride. Two days earlier Wall Streeters sensed that some anti-inflation move by the Government was due, and stocks took their sharpest slide in six months. But before week's end stocks steadied again.

More than anything else, what finally made up FRB's mind was the spring flood of optimism, cheering reports of first-quarter earnings (see below), the big expansion plans of U.S. businessmen, the big spending plans of the U.S. consumer. Retail trade for March, said the Commerce Department, climbed 2% over February and 4% above March of last year. After a survey of economists and businessmen, the U.S. Chamber of Commerce predicted that consumer incomes will go up 3% to 5% this year, and that all of this $8 billion to $14 billion will be spent.

Rise on Loans. Business borrowing is so high that last week alone banks borrowed $1,119,000,000 from FRB, up 14% in a week and almost 100% over the same week of 1955. All told, business loans were running more than $5 billion ahead of last year. Real estate loans went up $862 million over 1955 and consumer credit loans topped last year's by almost $1.8 billion. Steelmakers turned out a record 10,921,000 tons of ingots and steel in March, but were still unable to catch up with orders.

Against the threat of higher prices, many a businessman borrowed money to build up inventories, thus put more pressure under both credit and prices. In March wholesale metal prices rose nearly 1% over February, stood 11% higher than a year ago. With more price increases in the offing, FRB's Bill Martin hopes to discourage marginal borrowers who can put off their spending plans, thereby balk more inflation.

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