One Small Notch

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The Federal Reserve Board pulled in another notch in the nation's credit belt last week. It ordered its 7,000 member banks to put up some $1.9 billion in additional reserves. It was the second time FRB had used the new anti-inflation powers granted by the special session. (The first was tightening of installment credit, which goes into effect next week.) As banks lend about $6 for every dollar they have on deposit, FRB's order, in effect, cut the lending power of banks about $12 billion.

The stock market, already nervous over the news from Berlin (see INTERNATIONAL), promptly went into a new decline, certain that the new curb would edge interest rates upward and increase the cost of doing business. In two days, the Dow-Jones industrial average fell 2.29 points to 180.61 in the heaviest selling in weeks. But bankers doubted whether FRB's action would tighten credit much. There was too much money in circulation and too many big non-bank lenders, e.g., insurance companies, ready to fork out cash. New York's National City Bank Monthly Letter said that a practical banker might well ask: "Why crack down on us so that our competitors can take the business?"

Showdown. None of the previous credit tightening had had much effect. For example, when Congress dropped some of the easy credit for housing last spring, builders gloomed that it would take the steam out of the housing boom. They were wrong. Last week, the Department of Commerce reported that new construction had hit an alltime high of nearly $1.8 billion in August, 31% higher than a year ago.

Though businessmen talked of supply catching up to demand in many a line, there were only a few faint signs that the boom was slowing down. In July, reported the Department of Commerce, individual income had fallen by $100 million from the June peak of $17.7 billion. Thanks to the drop in farm prices, commodity prices had also fallen steadily for three weeks, but were still only 1.1% below their peak last month.

Upturn. Industrial prices were still edging upward. International Harvester boosted prices of its farm tractors 9% and Philco Corp. raised its radio prices 2.5%, even though the radio market was swamped with sets.

After the summer lull, retail sales had picked up sharply and U.S. department store sales last week showed a 16% gain over the same week last year. This was partly due to an extra shopping day this year. But it was also due to the enormous demand kept up by industrial employment, which is still on the rise. It reached a record of 52,801,000 in August, some 350,000 above the previous month. (But total employment fell because of the seasonal midsummer slack on farms.) In the face of all this, it looked as if the U.S. could tighten its credit belt a great deal more before any sizable amount of inflation was squeezed out of the economy.