Originally, the ceilings were intended to curb competition among banks. It was believed that competition for deposits had raised bank costs, encouraged investment in high risk assets to cover deposit interest costs, weakened the banking system, and led to the large number of bank failures during the Great Depression. Subsequently, they were used to influence the flow of funds to various credit markets. The more funds flow through depository institutions, the greater control the Fed has on the money supply. So long as ceiling rates are in line with money market rates, they can be used to subtly influence the flow of funds among credit markets.
Controls distort the pattern of the flow of funds.
As a stabilization tool, consumer credit controls influence directly the purchase of consumer goods, especially durables, and indirectly the rest of the economy. If they are relaxed, bank lending increases and the money supply is expanded, as a consequence. If they are tightened, bank lending is reduced, the money supply contracts, more spending generates more income and less spending produces less income. The main reason for imposing consumer credit controls is to smooth out the flow of consumer spending to keep the economy from inflating. Most credit controls have been imposed during wartime.