IT'S ALL THE fault of the Federal Reserve Board -- according to Secretary of the Treasury Donald T. Regan. The budget deficit's getting steadily bigger only because economic growth is slowing down only because money is too tight only because the Federal Reserve made it that way -- according to Mr. Regan. You certainly can't blame the Treasury if things go wrong, and you can't blame the administration's fiscal mismanagement, because things would be fine if the Federal Reserve just loosened up on money -- Mr. Regan says.
This latest assault by Mr. Regan is reported from the White House meetings in which the president and his staff are beginning to make choices for the next budget. The various factions of the administration are taking their positions on the most urgent of the questions now confronting the president. But what about the charge itself? Is money too tight?
The evidence indicates quite clearly that it is not. The Treasury has argued that M1 -- money measured by the narrowest definition, currency and bank balances in checking accounts -- has been flat since early summer. That's true. One important reason for it seems to be that after the Continental Illinois National Bank nearly failed last spring, a lot of businesses have got a bit wary of banks in general and have held down their balances. M1 gets attention only because it's supposed to provide an accurate indication of the growth of all credit. But, unlike M1, credit has been growing rapidly. It's currently well above the target rate that the Federal Reserve has set -- with the administration's support. Rapid rises in credit do not suggest that money is tight.
The Federal Reserve is walking a tightrope. It has in fact been loosening its restraint on the money supply this autumn to encourage business to expand. If it goes too far, it will incite fears of another surge of inflation ahead, and foreign investors will cut off the money that they send here for safekeeping. Mr. Regan has never acknowledged the degree to which the American economy is now dependent on the present massive inflows of foreign capital. The Treasury does not seem fully to grasp its implications for the dollar's exchange rates, or domestic interest rates, or the unemployment rate. The Treasury is not currently well staffed to deal with international finance.
The Federal Reserve has always accepted, with a sigh, its function as a lightning rod for frustration and anger elsewhere in Washington. Mr. Regan's scapegoating will not greatly influence the process of careful adjustment that goes on there. But Mr. Regan needs to take note that his appeals for looser money may be read as a call for just a bit more inflation to help an administration in a tight situation. Surely that isn't what he means. But with these repeated attacks on the Federal Reserve, he risks that kind of dangerous misinterpretation.