The Great Credit Debate

A bitter and recurring debate in U.S. history concerns the money supply. In the 1870s and '80s national elections were fought on the issue of tight v. easy money; new parties--the Populists, the Green-backers--sprang up whose primary function was to argue for a looser money supply. William Jennings Bryan, Boy Orator of the Platte, won his reputation and the Democratic presidential nomination in 1896 with a plea for easier money.

Last week there were no Bryans to argue the matter, but among U.S. bankers and businessmen, the debate raged hotly once again: Is the Government's tight control of the money supply a rein on inflation or a noose strangling the growth of the economy? Plenty cried "noose."

P: In Washington a panel of 30 top home builders, gathered at the National Housing Center, greeted an announcement by the FHA and VA lengthening the repayment period on Government-guaranteed mortgages from 25 to 30 years. But the builders said that the longer mortgages, which mean smaller monthly payments, were not enough. Unless the Government eases the supply of mortgage money, they foresee a drop in 1956 housing starts of some 90,000 to 100,000 under 1955's 1,310,000.

P: In Chicago speaker after speaker at the 8th annual credit conference of the august American Bankers Association called for caution on credit, but did not think the present level too high. Said Bank of Virginia's President Thomas C. Boushall: "Outstanding consumer credit (totaling $34.6 billion) is not actually excessive. Private debt (which includes consumer credit) in 1930 was 176% of a year's production; in 1955 private debt is 81% of a year's production."

P: Sears, Roebuck Chairman Theodore V. Houser, who should know what he is talking about because two-fifths of Sears's immense sales are "on time," saw no cause for alarm. Opposing any direct federal controls, at present, Houser said: "The vast majority of people conduct their affairs with prudence. When the ratio of credit extended exceeds the rate of repayment by from 2% to 2.5% of disposable income, a correction occurs on the part of the consumer. Indications are good that a turn downward in the growth of consumer debt is under way right now."

P: The loudest voice of all for easier money came from General Motors' Harlow Curtice. Answering critics of current auto-payment terms, Curtice said the down payment on new cars continues to average 40% of the price; the average installment is $80 monthly, and only two out of 100 are repossessed. Concluded Curtice: "The new high level of automobile credit is in keeping with the higher level of disposable income."

Back to "W"? The tighter credit men were equally plainspoken. "How far can we go in loaning against time?" Banker William Lockwood of Burlington, Vt. asked the A.B.A. meeting. Said New York's Hanover Bank President R. E. McNeill Jr.: unless such "abuses" as small down payments are corrected, "I favor reinstatement of Regulation W" (which gave the Federal Reserve Board control over credit intermittently between 1941-52 by specifying terms on consumer credit). In Washington, following a conference of FRB economists and the Senate Banking Committee, Arkansas Democrat William Fulbright decided that consumer debt (up $3 billion since spring) is climbing too fast. "If the Federal Reserve people want direct controls on credit," he said, "we probably will be sympathetic."

The FRB had no such move in mind.

Consumer credit is still rising, but the curve is flattening out. In November the increase was $419 million; earlier last year, credit skyrocketed as much as $900 million a month. Last week the FRB sold treasury bills and other Government securities, thus soaked up more dollars and kept the supply of money for credit tight. Business loans by member banks in 94 cities dropped $252 million in mid-January, and bankers' acceptances (negotiable bills covering shipments) on Dec. 31 were 26.5% under a year ago.

The fact that many voices that sounded off in the debate last week were on the side of more credit did not necessarily drown out the voice of experience. The voice of experience said that when credit becomes too inflated, as in 1920 and 1929, the boom turns into bust. Thus, with business still on the upgrade, the FRB was wise to keep credit tight.

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