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B/D 12/20/51
Increase in prime lending rate from 2 3/4 to 3% at a number of N e w York
City banks, presumably being followed by some banks in other cities, has
caused further talk of an increase in the discount rate. Banks would have liked
us to take the lead I think and now would like us to confirm what they have done.

The discount rate as one of our instruments of credit policy Is geared, however,
to the general business and credit situation and not solely, or in a fixed
relation, to bank lending rates.

The business situation has continued to be one of mixed developments, with
some factors such as capital investment and increasing defense expenditures
pressing strongly upward, and other factors such as continuing sizable
inventories in some lines and cautious consumer buying holding these upward
pressures in check. Prices have not given evidence of breaking out on the
upside. Bank credit has been expanding, but,allowing for seasonal factors,
the expansion does not appear to have been excessive.

W h a t will happen if w e
have another round of w a g e increases beginning with the steel industry is another

The present rate 1 3/4 which has been in effect since August 21, 1950, has
slowly been coming into its own as an effective rate, as rates for short
Governments and commercial paper and acceptances have moved up to or
slightly above this figure.

This would seem to be no time to waste the psychological influence of an

in the discount rate, and a good time to test the effectiveness of

the present rate, with its bias in favor of bank borrowing as against sale of
Government securities.

-2Healthy thing to have the market making its own decisions, and trying out
these competitive rates which m a y or m a y not hold depending on the
availability of funds and the demand for them.

But t i need not force

action by us i the general credit situation does not warrant i .

R e c ommend that existing schedule of rates be re-established. Call attention
to increase in currently effective mini m u m buying rates on acceptances.

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