Impact on the Mind

To the seven-man Federal Reserve Board went a request for help last week from the Federal Reserve Bank of Philadelphia. Philadelphia's President Alfred H. Williams argued that a tonic was in order for the nation's recession. Could Philadelphia cut the discount rate it charged member banks for loans? The FRB promptly approved a 1/4% cut (down to 2 3/4%), the second in two months. In quick succession, six Federal Reserve banks across the U.S. dropped their rates, and the remaining five were expected to follow soon. Said a top FRB money manager: "Look at the news ticker. Job layoffs, dividends being skipped or reduced, retail prices leveling off, incomes down, production down. There is no mystery to why we acted."

The Fed hoped to give the economy a lift by making it more attractive for businesses and consumers to borrow funds. Chase Manhattan Bank, second biggest in the U.S., quickly cut its prime loan rate from 4 1/2% to 4%; on the West Coast, the Bank of America, the nation's biggest, did the same--as did hundreds of smaller banks everywhere. Yet many banks kept their rates unchanged simply because there is still a great difference of opinion on how tight credit actually is.

Down & Up. On a nationwide basis, there is no doubt that demand for credit has fallen off considerably from the boom-time peaks, as industry has cut expansion and merchandisers have reduced inventories. Business loans at leading New York banks fell by $235 million last week; Chicago dipped $38 million, though both areas are still ahead of 1957. In Detroit, where layoffs have pushed unemployment to 12.4% of the labor force, bankers report that they have more money than business. Boston bankers say the same.

Yet in many other areas, money is still so tight that bankers see no reason to cut interest rates and thus reduce their profits. Denver's bankers, who normally lend out only 30% to 35% of their deposits, are running at 55% of deposits, are only able to take care of their best customers. Dallas banks have more borrowers than there is money to lend. Says President Benjamin Wooten of Dallas' First National Bank: "We're not going to drop our prime rate. Supply and demand should be the governing factors in the cost of money."

Psychology & Reserves. Actually, bankers viewed the discount cut as a cautious psychological move, like the cut in stock margin requirements (TIME, Jan. 27), rather than any real easing of credit. Said Board Chairman John Sibley of the Trust Co. of Georgia: "The impact is on the public mind, not the economy as such." Over the last few months, the Fed's only real attempt to pump more credit into the economy has been to allow bank reserves (and thus their lending ability) to increase by some $500 million, partly through open market purchases of Treasury securities. But so far, it has failed to use its strongest economic medicine: lowering the reserves all member banks must maintain to cover deposits. Currently, the FRB requires banks to keep reserves at an average ranging from 20% of loans for big central city banks to 12% for small country banks, well above the legal minimums. Even a 1% reduction in reserve requirements would make possible nearly $6 billion in new loans.

Yet the FRB and its chairman, William McChesney Martin Jr., give no hint of any quick reduction in reserve requirements to stimulate the economy. One obvious reason is that the FRB is still waiting to see which way the U.S. economy turns in the next few months. Though consumer buying is down in many lines, there is little shortage of consumer cash. Bankers around the nation reported that savings deposits have gone up sharply in the last few months as consumers put off purchases, waiting to see how bad the recession becomes. The FRB still worries about easing credit too much and too fast. With Government spending on missiles stepped up and plenty of cash in consumers' hands, the slide could turn up in a hurry, presenting the nation's money managers once again with the familiar problem of inflation instead of deflation.

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