The Federal Reserve Board has been boosting interest rates for more than a year to cool inflation by slowing the growth of the money supply and making it more expensive for business and individuals to borrow money.
Today, just as the evidence seems to be accumulating to show Federal Reserve policies have indeed restrained the growth of the money supply, analysts are beginning to understand that high interest rates are doing more than curtailing borrowing and money growth.
High interest rates have had important, but so far unmeasured, side effects. They have changed the way many companies, and to a lesser extent individuals, handle their money.
Some people still keep their cash in a sock under the mattress (or like the late Secretary of State of Illinois Paul Powell, in shoe boxes in their hotel rooms). But their numbers are dwindling.
Similarly, some corporate treasurers may keep millions of dollars in checking accounts for days. But their numbers are dying out faster than the Paul Powells of the world.
With the advent of electronic banking-taking hold here probably faster than anywhere else in the United States-consumers have found they can, in a small way, get in on what corporations are now doing in a big way: getting out of cash and checking accounts.
It takes no more effort than the punch of a few buttons at a Citibank machine here to transfer today's paycheck into a 5 percent savings account and transfer it to a checking account next week when the rent is due.
New Federal Reserve regulations that went into effect lat November make it even easier for consumers to earn interest on their money until they need it.
But it is not the consumer who earns a small amount of interest on a small amount of money for a few days that concern the molders of monetary policy.
For what motivates the small saver and billpayer also motivates the major corporation. And as companies move to get their funds out of no-interest checking accounts into earning assets (for periods as short as overnight), they are beginning to give the molders of monetary policy some fits.
Economists have long known that the amount of money in the economy has an important effect on how fast prices rise, how much the economy produces and how many persons have a job.
That is why monetary policymakers pursue loose policies during periods of recession and tight policies during periods of inflation and boom. One of the major benchmarks they use is the impact of their action on the money supply-whether it is defined narrowly as checking accounts plus currency or more broadly to include various types of savings deposits at banks.
The notion is that a good indication of how much companies and consumers have to spend is the amount of money or near money in their pockets and bank accounts.
But companies have begun to use one method of making money with their spare cash that doesn't change their ability to spend for more than hours or days but at the same time totally takes the funds out of the measuring purview of the Federal Reserve Board.
The technique is called the purchase agreement. When a consumer transfers $500 from a checking account to a savings account, the Federal Reserve still measures it. When a company invests in a $5 million overnight repurchase agreement with his friendly banker, the funds disappear from the money supply altogether. But the company still owns the funds and often will be able to sepnd them the next day.
Even though the money supply, which was growing sharply for the first 10 months of 1978, has slowed or contracted for the last five months, Federal Reserve Board Chairman G. William Miller has said that the central bank must continue to pursue a course of austerity. In other words, Miller was saying, things aren't as tight out there as the old statistics would have you believe.
A rough estimate by the Federal Reserve Board staff-based on two surveys of 46 large banks- holds that the bank-corporate repurchase market has grown from $20 billion five years ago to $40 billion today.
The transactions themselves are hardly sinister. A corporate treasurer who 10 years might have let a million dollars or two sit overnight in the checking account wouldn't do so today.
Instead he'll try to make as much money as he can. If he engages in a repurchase agreement with his banker, the bank will sell him, say, $1 million of securities such as Treasury bills, and will agree to repurchase those securities at some time in the future, often the next day.
The company then gets to earn interest on its million dollars while the bank doesn't lose the funds. As a matter of fact, the bank doesn't even lose control of the securities. They stay on the bank's book as an asset.
But what does happen is that the bank no longer records $1 million of checking accounts (or demand deposits as they are called) as a liability. Instead, it records a liability called securities repurchase funds.
A demand deposit shows up as part of the money supply, and the bank in question must keep a certain percentage as much (as 16.5 percent) of that deposit in a special account with the Fed. The repurchase funds are neither part of the money supply nor must they be reserved against it.
No one really knows whether these repurchase agreements are "demand deposits in disguise," as one Fed official put it, or whether they have no ultimate impact on the money supply.
The theory that says they ahve no impact notes that the bank, which buys back the funds the next day, doesn't let its money sti idle. It lends the money out to someone else or uses it to buy back securities from someone else.
But Miller and others just aren't sure how the burgeoning "repo" market is affecting the money supply and the Fed is trying to find out.
Until the Central Bank is sure, interest rates will stay high.