Harvard Economic Experts Support Johnson's Criticism of FRB Policy

Three Harvard professors yesterday joined President Johnson in criticizing the Federal Reserve Board's decision Sunday to raise discount rates from 4 to 4 1/2 per cent.

John Kenneth Gallraith, Warburg Professor of Economics and frequent consultant to Johnson, called the FRB's action "an arrogant exercise in self assertion." He added. "The Board's 4-3 decision reflects less interest in stability than a desire of people with money to tend to get a greater return on their loans."

Gallbraith predicted that the Federal Reserve Act would be amended by Congress to "make the Board more responsible to the public interest."

High Cost of Credit

The discount rate is the interest rate charged by the 12 Federal Reserve banks to their member banks when they need to borrow in order to fulfill the loan requirements of their customers.

Within hours after the FRB announced the hike in discount rates. Johnson affirmed the Board's statutory right to act independently, but regretted its refusal to hold its decision until next year's economic prospects have been appraised and a budget prepared.

Johnson added that the higher cost of credit that will result from the FRB's new anti-inflationary policy could retard the nation's rate of economic growth.

Eli Shapiro, professor of Finance at the Business School, forecast that the imminent increase in short-term interest rates will be transmitted to long-term rates within a year. He added that the restrictive effect this will have on capital investment and residential construction will introduce a "bearish note" into the nation's economy by 1967.

He reinterated Johnson's contention that the FRB has acted hastily and went on to contradict the Board's contention that the new discount was the best method to solve the balance-of-payments problem.

The Board's policy, Shapiro commented, could severly harm the more serious British payments deficit and weaken further the unstable pound by attracting a new flow of funds to America from the London market for short-term security investment.

Arthur Smithies, Nathaniel Ropes Professor of Political Economy, felt that some restrictive monetary measures may be needed to prevent an inflationary spiral.

It is impossible to know now, Smithies added, whether new expenditures for the Vietnam war on top of the present 58-month boom would necessitate the restrictive monetary measures advocated by the board