Credit Control in Inflation

Report Outline
Defense Financing and Credit Expansion
Restrictions on Inflationary Bank Lending
Credit Control as Weapon Against Inflation
Special Focus

Defense Financing and Credit Expansion

Unless brought under effective control during the early months of 1951 by the indirect methods now available to the Federal Reserve Board, the steady expansion of bank credit since American intervention in Korea at the end of June will force consideration by Congress of direct measures to limit inflationary lending by commercial banks. The increase in outstanding bank credit during the last six months has amounted to $7 billion. Business loans reached a record high of more than $22 billion in December, an increase of almost one-third over December 1949.

Direct controls have already been applied to instalment credit and real estate credit under specific authority granted by Congress in the Defense Production Act. A first step to limit extensions of credit to business borrowers was taken in August when rediscount rates at Federal Reserve banks were raised; a second step was taken at the end of December when increases in reserve requirements of Federal Reserve member banks, to be placed in effect in steps during the last 20 days of January, were ordered by the Federal Reserve Board.

Calls for More Restrictive Credit Policy

Federal Reserve authorities are thus attempting to give effect to the “more restrictive credit policy” recommended by 220 leading economists in mid-December, along with increased taxation and reduced government expenditures on n on essentials, as a principal line of defense against inflation. At about the same time, the newly-created Wage Stabilization Board said an equitable solution of the problem of rising prices must include, along with increased production and control of specific areas of the economy, a minimization “to the greatest practical degree of the volume of money and credit available for spending on what will be, at best, a limited supply of civilian goods and services.”