Boom & Curb

To the rash of price rises last week (see NATIONAL AFFAIRS) many a businessman had a pat answer: "We're not raising prices just because of the Korean war. The boom was on before that." And commodity prices which had slumped last winter had started up again before Korea because of the heavy new buying from industry.

In the second quarter, said the Department of Commerce last week, the gross national product (goods and services produced in the U.S.) was running at a record peacetime rate of $270 billion a year, 2.8% over the first quarter's rate. In July, the Federal Reserve Board estimated, the index of industrial production was at a peacetime high of 199 (v. 161 a year before). Department-store sales for the latest week available (Aug. 5) were 29% above last year.

Although commodity prices had skyrocketed after the outbreak of the war, many of the rises had not yet been reflected in retail prices. Many manufacturers are still using inventories they acquired months ago at lower costs. A rough indication of future rises is shown by the commodity indexes. In two months, futures prices have gone up 11%—and they are still rising.

Meanwhile, the Federal Reserve Board, which wants to fight inflation with credit curbs rather than price controls, started putting them into effect last week. By boosting the discount rate in the New York area from 1½% to 1¾%, the FRB, in effect, raised interest rates on commercial loans, thus made it harder to borrow money. Since the New York rate usually sets the pattern for the country, bankers expected a general rate rise soon.

The U.S. Treasury also took a hand. It announced that savings banks, insurance companies, etc., can now buy up to $1,100,000 (only $100,000 previously) in series F and G Government bonds. By raising the quotas, the Treasury hopes to divert the bonds from commercial banks, where they can be used as the basis for more inflationary loans.