Are They Needed in a Peacetime Economy?

CREDIT CONTROLS:

WHEN President Eisenhower suggested in his economic report to the nation that Congress study the problem of direct controls on credit, he touched off a hot argument. Democratic Senator J. W. Fulbright, chairman of the Senate Banking and Currency Committee, said that he would be "sympathetic" to any such request. He considered holding hearings on direct consumer credit controls such as the wartime Regulation W, which specified minimum down payments and maximum loan terms. Allan Sproul, president of the Federal Reserve Bank of New York, is also worried, feels that credit abuses in boom times can become a "serious source of instability in our economy." He argues that consumer credit controls should be among the Federal Reserve Board's permanent economic tools.

Other businessmen and economists are not that sure. General Motors President Harlow Curtice and St. Louis Federal Reserve Bank President Delos C. Johns are against the idea. Last week Treasury Secretary George Humphrey said that "it would be better not to have stand-by controls."

The chief argument for direct controls is to put more curbs on consumer credit, which has increased $6 billion, to $36.2 billion since 1954. Like Banker Sproul, the President's Council of Economic Advisers thinks that the FRB should have the power to impose direct consumer credit controls. Currently, the FRB can enforce only indirect restrictions on consumer credit through its overall monetary operations. It can restrict credit only by increasing loan costs through boosts in the rediscount rate and reserves of member banks and sales of Government securities. But on the basis of past history, the council feels that such general, indirect controls are inadequate to deal with the special problem of consumer credit. While these may curb consumer credit, they also affect loans for new plants and equipment, thus may cut productive expansion good for the economy.

Actually, there are many economists who oppose the idea of direct consumer controls. They argue that FRB's indirect controls and the rise of interest rates have worked effectively to slow consumer credit without hamstringing the economy's overall growth. Though the FRB tends toward direct controls, it is staying neutral in the debate. It says that if it had Regulation W type powers, it would have clamped them on last summer when consumer installment credit was jumping at the rate of $400 million to $500 million monthly. But without direct controls, it had to rely on an indirect method: it hiked the rediscount rate. As a result, the net increase in consumer installment credit dropped to $291 million in October. It rose again seasonally because of heavy Christmas buying to $345 million in November and $438 million in December. Since it takes several months for indirect controls to take firm hold on the economy, FRB economists now expect consumer installment credit to start dropping, figure the net increase in January was below $300 million.

Those who argue in favor of direct consumer credit controls look back at the wartime days when Regulation W was in effect, and feel that the same type of curb would work equally well now. But there is a big difference between a wartime and a peacetime economy. In World War II and again during the Korean war, Regulation W was vitally necessary because the Government could not afford to clamp overall indirect credit controls on the econo my. The U.S. needed easy credit and low interest rates in wide areas of the economy to encourage business to expand and to help finance the war as cheaply as possible.

Furthermore, even when direct consumer credit controls were needed under a tightly regulated wartime economy, there was a big question as to their fairness: the people hardest hit were relatively low-income consumers who needed credit to buy. Some union leaders, notably the A.F.L.-C.I.O.'s Walter Reuther, denounced the idea, argued that the regulation penalized lower-income groups. And today, by buying everything from toasters to tricycles on time, these small consumers are supplying much of the steam for the boom.

Beyond that, the opponents of Regulation W-type controls also argue that if consumer credit is highly volatile and should be specifically controlled, then why not control other equally explosive sectors of the U.S. economy. Inventories, for example, shot up by $8 billion, to $82 billion during--and after--the Korean war, as businessmen went on a buying spree. Later, in 1954 when demand slacked off, business inventories tumbled $6 billion in 13 months, bringing on the "inventory recession."

The strongest argument against direct controls on consumer credit is pragmatic. Time and again the Eisenhower Administration has demonstrated that one of its prime objectives is to reduce the burdening weight of too much Government control. And so far, that policy has guided the U.S. economy to the greatest boom in history.

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