STATE OF BUSINESS.: Credit Lift

To spur business, the Federal Reserve Board last week brought out the most potent anti-slump tonic in its bag of economic medicines. It cut by ½% the minimum cash reserves that must be kept by the Fed's 6,400 member banks to back demand deposits; minimum reserves were dropped to 19½% of deposits in New York and Chicago. 17½% in most other big cities and 11½% in "country" bank areas. This freed $500 million from reserves, and since each such dollar can generate up to $6 in loans, it could add close to $3 billion to the credit supply. The move should give business a bigger lift than the Fed's two recent cuts in the discount rate, which actually created no new credit.

FRB acted after a survey showed that "a good many individual banks" could not satisfy all loan demands. Said FRB Chairman William McChesney Martin Jr.: "We want to get down to the point where no banks are holding back."

Bankers have long clamored for the cut in reserves (TIME, Jan. 20) as the logical follow-through to the discount-rate reductions. But last week they grumbled that the cut was not big enough. Said President George Champion of the Chase Manhattan Bank, second biggest in the U.S.: "This is only a token adjustment and not as much as will be needed. The time is ripe to loosen up much more on reserve requirements."

Yet the Fed chose to tread cautiously,"lest it relax credit too much. The cut in reserves puts the banks in about the same position as they were at the bottom of the 1953-54 recession when FRB also cut reserves to ease credit. The result was a sharp pickup in business. If last week's cut does not spur business, FRB was in a mood to cut some more. But despite spreading unemployment it still planned to move slowly. Warned Martin: "We must recognize that excessive stimulus during a recession can sow seeds of inflation that can jeopardize our long-run stability."

FRB's policy of easing money seemed to be getting results. Last week several New York banks lopped ½% off time-deposit rates, dropped them to 2% or 2½%. As interest rates edged down, demand for credit picked up. Loans by New York City banks rose $152 million last week, more than twice the gain of the same 1957 week.