THE NATION: The Carrot Technique

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This week the Administration finally took one hesitant step toward damming the forces of inflation, generated by the Treasury's "easy-money"' policy. It announced that on the next issue of Government bonds, the Treasury would: 1) raise the interest rate by one quarter of one percent and 2) make the new securities ineligible for sale on the open market.

The decision settled one basic argument between the Treasury and the Federal Reserve Board, which has long been arguing for higher interest rates. The decision was designed to discourage banks from turning their Government securities into cash, then loosing the cash into the nation's credit structure where its buying power increases six-fold (TIME, Feb. 19). In a nutshell, what the Treasury will do is this: a new issue of bonds paying 2¾% will be offered as a swap for existing 2½% bonds maturing in 1967-72.

This was the carrot technique; bondholders would be modestly rewarded for holding on to Government securities. Was there a hidden stick? No one could tell until the terms and details of the new issue were announced. Nor did the +¼% sign which Treasury and FRB waved as a symbol of peace represent a final settlement of the differences between them.

The real question remained: Was Treasury Secretary John Snyder (who has had the President's backing) still insisting that the FRB continue to support the Government bond market, thus put unlimited cash at the call of banks, insurance companies, etc.? If he was, the inducement of higher interest alone would not be enough to persuade bondholders to lock away their cash in new Government securities. It was merely a sign that things might be moving in the right direction—away from Snyder's "easy money" toward a sounder monetary policy.