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Many bankers and economists argue that the inflation psychology cannot be exorcised unless the Government creates a necessary element of doubt about the future of the economy and somehow makes businessmen fearful that there might be a recession. As long as businessmen expect nothing worse than brief pauses in the nation's growth, they will go right on investing in new machines and factories. Economist Albert T. Sommers of the National Industrial Conference Board, sees a flaw in the policies that guided the nation in its unprecedented period of business expansion. "The basic problem is that the Government is committed to full employment, and everybody knows it," he says. "This reduces the power of statements designed to halt inflationary psychology." Sommers adds: "There does not seem to be any riskless, costless, comfortable escape from the psychology of inflation."
The bankers struck a blow against inflationary psychology last week by raising their lending rates. Led by Manhattan's Bankers Trust Co., the banks increased their prime rate for the fifth time since December. Amid all the talk of an imminent credit crisis, some rise had been widely expected. Banks were strapped for cash at a time when corporations needed to borrow heavily to help pay some $15.8 billion in federal income taxes due this week.
Still, the size of the increase—a record-high one percentage point—caused a furor in Washington. Treasury Secretary Kennedy maintained that the banks, instead of trying to price some companies out of the market for loans, should ration credit among corporate borrowers. That is precisely what banks want to avoid, except for marginal risks and economically unproductive loans like those to finance corporate takeovers. Bankers earn only ill will if they refuse loans to their regular customers. Worse, they may also lose profitable accounts. As the bankers explain it, the primerate increase was a defensive step taken reluctantly in response to the Federal Reserve's hold-down on the money supply. Two weeks ago, interest rates on long-term corporate bonds rose so high that some companies fled the bond mar ket and sought capital help from the banks, where rates were lower. So the bankers raised their rates to try to cut the demand for loans.
Big companies will be able to pay the new price of credit. Many bankers went out of their way to assure consumers and small businessmen that the rates they pay for loans will not be raised in proportion to the new prime-rate increase. But mortgage rates immediately moved up to 91% in California and Colorado, and lenders in many cities raised the fees by which they increase their take from mortgage loans, without actually changing the interest rate. For the immediate future, the higher money rates will add to the upward pressure on prices. Companies figure interest charges as part of their cost of doing business, and the consumer must ultimately pay the bill. Like it or not, bankers will have to ration money because there is just not enough of it to meet the loan demand. Says John Holman, senior vice president of San Francisco's Wells Fargo Bank: "There are no loans for speculation of any kind—stocks, bonds, commodities, land."
Warfare and Welfare