A Flood of Credit

August 29, 1955

We are enjoying at the moment the greatest prosperity in our history. But this boom has been in part created, and certainly raised to its present level, by a flood of credit. The measures so far taken to moderate it are timid and belated. Only time can reveal their effectiveness.

That the present boom is at record levels is shown by almost every major index—whether of employment, production, or money income. But the government policies responsible for this boom have been ill-considered and dangerous. When a government-created boom shows signs of getting out of hand, government officials begin to shake their fingers at the stock market, at private banks, and at private business practices, as if these were responsible. Of course they must assume part of the responsibility. But in most cases, and certainly in the present case, it is government policy that has mainly determined the result.

Suppose we begin with a segment of the economy where the direct hand of government is least visible—that of automobile credit, and of installment and consumer credit generally. In the latest figures, consumer credit has reached $32 billion, with installment credit at $25 billion, and with more than $12 billion in automobile credit alone. All these are the highest sums on record. But those close to the situation are even more troubled by the quality than by the quantity of this credit. The National Automobile Dealers Association is warning its members that “crazy credit terms” are a threat to the industry: “To sign a contract which results in a buyer owing more than his car is worth—at any time during the terms of the contract—is business suicide.”

All this may seem at first glance to be solely the fault of dealers, banks, and finance companies. But if the general supply of credit had not been kept artificially cheap and plentiful by government policy, these excesses of installment credit could not have developed. It was Federal Reserve policy that reduced the rediscount rate from 2 to 1½ percent in 1954; the rate was not restored to 2 percent until this month (Aug. 4). As a result of this low discount rate, and of other government policies, the country’s money supply (as measured by total bank deposits and currency outside of banks) increased $9 billion between May of last year and May of this year. This increased money and credit financed the boom.

But this is not the only way in which the government has brought about an inflationary credit boom. It now has $7 billion of the taxpayers’ money invested in the propping up of farm prices by its holdings of “surplus” crops. But most fantastic of all has been the policy in regard to housing.

Until a few weeks ago a veteran, under the government’s guaranteed mortgage plan, could “buy” a $10,000 home without putting up a nickel. He had 30 years in which to pay the mortgage off. The Veterans Administration and the Federal Housing Administration have now cut the payoff period down to 25 years. The VA will now require a down payment of 2 percent instead of none; the FHA, a down payment of 7 percent instead of 5. Even this mild change has led to cries of anguish from builders who had been profiting under the old rules. But what sort of government policy is it that encourages families to assume debts beyond their resources; that has piled up an $80 billion debt by home buyers; that in a construction boom already at an annual record, when current rates of home building are nearly twice as high as the estimated rate of household formations, whips it up still further by unsound credit? And even on top of this, demands 35,000 subsidized government-housing units a year?

If careful students of the business cycle have at last discovered any one thing it is that the best way to prevent a slump is to prevent the preceding unsound boom. Arthur F. Burns, chairman of the Council of Economic Advisers, has himself expressed such a view (see my Newsweek article of June 29, 1953). This wisdom has not been reflected in recent governmental credit policies.