What You Should Know About Inflation

In January 1956, the President’s annual Economic Report suggested the restoration of the government’s power to regulate the terms of consumer installment credit. The then Secretary of the Treasury, George M. Humphrey, showed political courage as well as excellent sense when he refused to endorse the suggestion.

The Secretary also gave the right reasons why such stand-by powers would be inadvisable. They would put too much discretion in the hands of whoever was to administer them: “You take a great responsibility on yourself when you tell 160 million people what they can afford to buy.” Chairman Martin of the Federal Reserve Board also pointed out that: “Selective controls of this nature are at best supplements and not substitutes for the general over-all credit and monetary instruments.”

The most eminent advocate at that time of the imposition of stand-by controls on installment credit was Allan Sproul, then president of the Federal Reserve Bank of New York. In a speech on December 29, 1955, he declared: “I do believe that there is a temptation to abuse consumer credit in boom times, that it can thus become a serious source of instability in our economy, and that we would not jeopardize our general freedom from direct controls by giving the Federal Reserve System permanent authority to regulate consumer credit.”

But Sproul’s argument indirectly admitted that he wished this power in order to avoid a sufficiently firm control over general interest rates and the total volume of credit: “If there has grown up a form of credit extension which . . . is introducing a dangerous element of instability in our economy, and if it is difficult to reach this credit area by general credit measures without adversely affecting any of the less avid users of credit, is there not a case for a selective credit control?”

What Sproul was saying in effect is that a handful of government monetary managers should be given the power to discriminate among borrowers; to say which are “legitimate” and which not; to say just who should have credit and on what terms. No government body should have such power. It becomes an implement for political favoritism.

President Eisenhower declared in a press conference on February 8, 1956, that if the government were granted stand-by powers over consumer credit they would not be abused. But the record shows that the “selective” powers over credit which already existed had already been abused. Our Federal Reserve authorities complained of “inflationary pressures.” Yet at the very time they were suggesting “selective” credit powers they were keeping the official discount rate down to only 2½ per cent. (Within a year and a half they were forced to raise it three times, to 3½ per cent. In that same year—1957—the Bank of England, to stop British inflation, had to raise its discount rate to 7 per cent.) Early in 1956, also, our Federal Reserve authorities had allowed and encouraged a $12 billion increase in the total volume of money and bank credit since the beginning of 1954.

Government authorities discriminate against purchase of corporate securities by compelling a minimum down payment of 70 or even 90 per cent. They have discriminated in favor of purchase of houses by pledging the taxpayers money to allow such purchases for a down payment of only 7 per cent or perhaps only 2 per cent. A Congressional subcommittee, in 1956, raised a storm about even these tiny down payments. It asked for a return to the conditions under which a veteran could buy a $10,000 house without putting up even the $200 cash. The belief that government agencies are above the political pressures which lead to such discriminations among borrowers has been disproved everywhere.

In sum, if general interest rates are allowed to rise to their appropriate level, and if there is a sufficiently firm rein on the total quantity of credit, “selective” credit controls are unnecessary. But if there is not a sufficiently firm rein on the total quantity of money and credit, “selective” controls are largely futile. If a man has $2,500 cash, for example, but can buy a $10,000 house for only $500 down, then he can also buy a $2,000 car with his “own” cash, whereas if he had to pay down his $2,500 for the house he couldn’t buy a car even on pretty loose credit terms. This elementary principle of the shifting or substitution of credit seems to have been overlooked by the champions of “selective” credit controls.