EVEN THE TREASURY Department seems to be getting uneasy about the very tight restraint on the money supply, and the continued very high interest rates. Specialists outside the government have been murmuring for some weeks that the pre sHOent monetary squeeze is pushing the country from a mild dip toward a severe recession. Now, of all people, Secretary of the Treasury Donald T. Regan says the same thing. In an interview published Friday in The New York Times, he called on the Federal Reserve System to relax a little or, at least, not to let the money supply tighten any further.
As is customary, the interview was followed by a chorus of assurances from the Treasury Department that it represented no change in basic position. You will believe that only if you are the kind of fanatic monetarist who, in the face of vast evidence, believes that the Federal Reserve can control the money supply with absolute precision from week to week. Mr. Regan is no fanatic. There has been a feeling at the Federal Reserve for some months that it is being set up to inherit the blame for any serious malfunction of the Reagan administration's economic strategy. Mr. Regan's interview will do no thHOing to dispel that impression.
The Treasury's previous comments on this interesting subject delivered quite a different signal to the Federal Reserve. Less than three weeks ago the undersecretary for monetary affairs, Beryl W. Sprinkel, told a congressional committee that inflation will come down "only if we stay on the course of persistent slowing" in the growth of the money supply. Later in his testimony, he added, "Any success in achieving a more rapid slowing of the money growth would be welcome."
The issue here is the movement of a number called M1B, representing currency plus deposits in various kinds of checking accounts. M1B expanded with dismaying speed in April, and the Federal Reserve tightened up severely. M1B peaked and, since then, has fallen.
If you measure from April, the growth of the money supply as measured by M1B is negative, indicating a dire and destructive degree of restraint. But if you measure from the end of last year, when by convention the targets were set, M1B is only slightly under its target range. Presumably the Federal Reserve anticipates a renewal of business expansion in the fall, carrying M1B up to precisely the level that present policy prescribes.
This whole episode is turning into an example of the political error of allowing one statistic--in this case, a notoriously flaky one--to become the authoritative measure and symbol of a highly complex policy. There is widespread evidence that present monetary policy may be, in reality, more restrictive than M1B indicates. But how to correct it?
Any significant relaxation, in the present atmosphere, risks sending interest rates even higher. That's a perverse reaction, but the money markets have come to see relaxation as the precursor of higher inflation, and the fear of inflation sends the interest rates up. Mr. Sprinkel made that point forcefully in his recent testimony, and he's dead right.
This dilemma offers a premonition of the real dangers inherent in the Reagan economic plan. The plan's central flaw is its easy supposition that tight monetary policy can choke off inflation, while tax cuts expand business prosperity. It's a nice thought, but the world doesn't work that way. Ending inflation is going to exact real costs in bankruptcies, poor profits and lost jobs. Rational policy has to recognize these costs, and move gradually to keep them within tolerable limits. The risk of damage is now rising.