Evening star. [volume] (Washington, D.C.) 1854-1972, 1955-08-14

Inc eueCL OF SCrlCCer
credit policy on the common
man is somewhat complex and
to a considerable extent in
direct. 1t can make consumer
credit purchases and mortgage
borrowing more expensive. To
the extent, however, that
credit restraint foreStalls an
inf1ationary price rise. the con-
sumner is benefited.
If braking the boom pre-
vents or modif1es a later re-
cession with its attendant
mass unemployment. wage
earners will receive more
wages over the longer run, al
though the overtime payments
and the employment Of less
efficient workers that occur
during the extreme phase of a
boom will. of course, be cur
tailed. Most economists be-
lieve that preventing extreme
business fluctuations is most
conducive to a continuing high
standard of living for all the
people.
Firm Policy Needed
The need for a firmer money
and credit policy has been ap-
parent for some time. While
much of the borrowing by
business is for sound, produc-
tive purposes. rather than
quick speculative gain, some of
it is not. Much of the present
consumer credit can be liqui-
dated as it comes due without
strain and without forced
sales or repossessions. but an
increasing part of the total is
Of more doubtful quality.
For these reasons the Fed
eral Reserve is, in effect. say
ing to businessmen and con-
sumers. Show reasonable re-
Straint in your use Of credit"
Although this is a COMPARE
lively gentle admonition now.
it may be followed by sterner.
harder listed measures that
can force borrowers to use
their credit more prudently
and compel lenders to be less
liberal.
One such measure would be
an increase in the reserves
member banks must hold
against their customers de-
posts. Banks that are well
loaned up. would then have to
scramble to find funds to build
up their reserves to the higher
requirements. Many would
halt new lending, and some
would have to liquidate a part
of their loans and investments.
Borrowers. consequently. would
not find borrowing so easy.
Bond SoIes as Curb
Another means of credit re-
Straint that the Federal Re-
serve can use is the sale OF
some of its holdings of Gov
eminent securities on the open
market. 1t could sell in mod
crate amounts, or it could sell
heavily. marking down prices
to attract buyers. Whoever
buys must give up money or
bank deposits to the Federal
Reserve. Thereby funds are
taken out of use and, in a
sense, Cancelled. AS such pay
ments reduce bank reserves,
the contractive effect on the
banking systems ability to
lend is multiplied severalfold.
Recession Peril?
Undoubtedly the Federal
Reserve authorities would
much prefer that businessmen
and consumers take the hint
that the higher rediScount
rate is intended to give. Those
other measures that it may
use are likely to curtail credit
for sound and productive pur-
poses as we'll as credit for
speculation. There is danger
in them that the boom will not
merely be halted but that a
recession will be set off.
Yet the farther boom goes.
the greater are the elements of
speculation--of false, inflated
values. of unsound credit ex-
tension and use that can
ultimately be liquidated only
at loss, through the process
OF recession and donation.
The difficult task of the
Federal Reserve authorities is
to prevent both imitation and
collapse. But 1t is harder to
tighten the Nations credit
supply than to loosen it. Re-
stricting credit is unpopular.
for 1t moderates the boom and
spoils the prospects for many
a blithely conceived project.
The alternative to credit
restraint is. however, boom
that turns eventually into
either panic and depression or
a sharply mounting imitation
that cuts away the purchasing
power Of the dollar.