Business: 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.