STATE OF BUSINESS: Using the Credit Tools

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During four days of insistent questioning in Washington last week, Texas Congressman Wright Patman, chairman of the House Small Business Committee, tried his hardest to discover what every U.S. businessman would dearly like to know: What will the Federal Reserve Board do next to ease credit and implement its reduction in rediscount rates?

Easy-money Patman prodded FRB Chairman William McChesney Martin Jr.: "I'm sure you will follow through on an easy-money policy." But Martin, as carefully noncommittal as ever, answered: "We are going to look at business conditions at all times and adjust in a way we consider most satisfactory for the economy." FRB's reduction from 3½% to 3% in the rediscount rate, said Martin, was merely a "signal that we saw some change in the business situation. But this doesn't mean that inflation won't occur, or that deflation is the order of the day. I don't think we've licked either one."

President Alfred Hayes of the New York Federal Reserve Bank was a little more helpful. He hinted broadly that "other actions are on the fire." Two days later it became apparent what some of those actions are. The Fed, which has kept heavy pressure on member banks, eased the pressure. It did not counteract an increase in the "float," i.e., uncollected checks in transit between commercial banks, for which bankers get an automatic Fed credit. This was used by mem ber banks to cut their debt to the Fed by $158 million and made possible further borrowings from the Fed, thus could give banks more cash to lend.

Markets & Minims. The Federal Reserve's credit-easing last week was only the mildest and most cautious of the many devices at its disposal. Aside from such private lenders as savings banks, insurance companies and pension funds, the vast bulk of the commercial credit in the U.S. is based on commercial bank deposits, 85% of which are controlled by the Fed through its 6,462 member banks.

To reduce credit, i.e., lending ability, as the Fed has been doing under its tight-money policy, it digs into its $23.3 billion portfolio of Government securities and sells them on the open market, to either the general public or anyone else (banks, dealers, insurance companies) that wants to buy. To pay for them, the buyers draw down their bank accounts, cutting the amount of money banks can lend. To increase credit, the Fed merely has to buy securities. Its checks, deposited in banks, increase the banks' reserves and make more money available for loans. Moreover, since banks can lend $6 for each $1 held in reserves, any increase in reserves rapidly multiplies the available credit.