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B/D - 1/15/53
As 1 said last week, we are not la a situation of dear and
present danger - In this case the danger of Inflation* Con­
sumer prices hare continued to move sidewise, wholesale
prices have tended downward* and basic commodity prices have
declined substantially.

Inventories of distributors moved

upward during the latter part of 1952 but may have levelled
off as a result of Christmas trade. Inventories of manufac­
turers are at record levels but, as usual, there is the
question of whether they are out of line with business volume.
Business loans at banks Increased substantially more than the
estimated seasonal late in 1952, but we are now getting a
pretty good seasonal run-off#
On the other hand, we have had a worrisome increase in con­
sumer credit, even though consumer incomes and liquid resources
are high, and an increase in non-farm mortgage credit on
small dwellings which may contain hidden dangers.

We have the

prospect of continued high level private capital expenditures
and Government spending. And we have a crystalizatlon of
sentiment that business is going to be good for at least 3ix
months and maybe throughout 1953* There Is here, with a new
business oriented administration, and the likely prospect of
the prompt removal of remaining wage and price controls, the
making of boom psychology.
The Treasury1s financing needs ana the effect of fiscal operations
on the money market are timing factors.

The Treasury must refund

nearly $9 billion of certificates as of February 15th and
this refunding will have to get under way toward the end
of January and won* t be digested probably until the end
of February* We shall then be running into the period of
March 15 tax strain.

At this point, I would say that the argument for an increase
in the discount rate is
(a) The situation is so strong that it can*t
be hurt.
(b) An increase may help to prevent healthy strength
from becoming speculation.
(c) If we don* t act now ve may be frozen in for some
weeks, no matter what happens.


There are more positive reasons for a modest increase now.
Our open market policy originally labelled one of neutrality
has become a policy of restraint in the face of increased
public and private demands for credit. That policy of re­
straint resulted in a very tight money situation during
the latter months of 1952. In its simplest terms you might
say we offset the reserve effects of increased currency
circulation by purchases of Government securities, but we
forced the banks to borrow every bit of the increased re­
serves they needed to support ^credit expansion.


situation has eased joaoonably since the turn of the year,

-3but unless we change our open market policy, we shall
continue to offset seasonal movements and the situation
will continue tight.

In these circumstances interest

rates are unlikely to go back to the level of the dis­
count rate - short-term rates are now well above the
discount rate. They really have already adjusted to an

I think it is now time to bring the discount rate into
line with open market policy. Ve have unwound the
special tangle of the year-end. Our Hew lork City member
banks have reduced their heavy borrowings, and the Govern­
ment securities dealers have worked off most of their
repurchase agreements. We can, therefore, take action
which is technically correct without damage to the market.
Modest action, I believe, will also be in line with the general
business and credit situation without giving a false signal
that we clearly see strong inflationary pressures immediately
ahead. My recommendation is that the rate on discounts of
and advances to member banks be increased from 1 3/4 to 2%
effective immediately upon approval by the Board of Governors.


If this increase is made we should also change some of our
other rates to maintain proper alignment of rates.

Advances under section 10(b)
Advances under last paragraph
of Section 13
Advances under section 13b.

Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102