Money for Sale: I

Nobody wants the blame for inflation. But no one wants credit for stopping it badly enough to renounce other obligations. This week the Federal Reserve Board, for one, decided that its main responsibility is to the Treasury, not to the public.

For nine years the Federal Reserve System has supported the price of government bonds by acting as a buyer of last resort. This served the Treasury, which wanted high prices and low interest rates so that the cost of the government debt would remain low. Another result of the sales to the Reserve System, however, was that member banks received reserve money in return, on which they could base even greater amounts of new credit. So long as this policy kept the interest rate low and bank reserves high, the Reserve was powerless to take strong action toward decreasing the money supply--the primary source of inflation.

Minority members of the Reserve Board have protested this subservience to Treasury interests since the war, and the dispute has received increasing attention. Last Thursday, in a sudden burst of good fellowship and public spirit, the two branches announced "complete agreement" on terms that seemed to free the Reserve Board entirely: the Treasury issued non-marketable bonds at a higher rate of interest to attract non-bank investors, and the Reserve Board abandoned support of the government securities market. Five days later these securities threatened to drop below par. The Federal Reserve turned up at the old stand, still offering new money for old bonds.

Even within its present powers, the Reserve Board could raise member bank reserve requirements and restrict consumer credit further. It needs new authority from Congress to require banks to hold additional reserves, possibly in government bonds. It could do much more if it chose a course of bold action, which might not stop short of parting ways from the Treasury; it could then sop up purchasing power by selling bonds in the open market.

The trouble is that the Federal Reserve, like other branches of the government, prefers to look busy. Its latest token gesture toward action is a program of "voluntary restriction" of "unnecessary" loans which, it remarks ingenuously, "must rely on the good will of all financial institutions."

It is the same policy of passing the buck that is crippling the overall defense against inflation. Tomorrow's editorial will discuss the role of the most powerful weapon against the rising cost of living: the government's power to tax.