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CURRENT CREDIT AND MONETARY PROBLEMS Remarks by Chas. N. Shepardson, Member, Board of Governors, Federal Reserve System, before the meeting of New Hampshire Bankers Association, Portsmouth, New Hampshire, on June 8, 1956. It is a real pleasure to be with you this evening and to discuss briefly some problems of mutual interest. Cost and availability of money and credit have been in the forefront of the news in recent months. This development alone suggests the desirability of reviewing together some facets of this problem in which we are all interested and for the successful soluof which we are mutually responsible. I should like to say a little about the recent policies of the ^deral Reserve System and their effects. dev Before turning to these recent elopments, however, let me comment briefly on the basic objectives of our ^netary policy and the way in which we hope and expect that various measU]?es will operate to achieve these objectives. The basic function of the Federal Reserve System is to make possible a f low of credit and money that will foster orderly economic growth with ^ s o n a b l y stable prices. At times the level of expenditures may be either f i n i s h i n g or expanding at a slower rate than the healthy growth of the e °onomy would permit. the This requires that we take actions which encourage M a n s i o n of bank credit and the money supply and thereby both the rate amount of consumption and investment expenditures. ther t h e On the other hand, ® may be a tendency for money, credit, and the level of expenditure in economy to expand more rapidly than healthy sustainable growth would in- dicat e. It is then clearly important that we do those things which are within - 2 cu r power to restrain the pace of expansion and thereby reduce the danger o f inflationary developments and the sharp and painful adjustments in econ- 0In ic activity that may result from them. The tools that we have to work with toward these ends are well kn ov/n to you. Basically, they operate by influencing the availability and °ost of additional bank reserves, encouraging or restraining, in turn, the total flow of credit and money in the economy. Over the years there has been considerable discussion in Govern^ t and academic circles, among bankers and in financial markets, as to the ef fectiveness of these general instruments of monetary policy. ^ Ho one, to knowledge, has ever contended that general monetary measures, even if the timing a n d ma g n i t u d e of their application were perfect, could completely d e r a t e swings in business activity. Some observers, however, would attriblrb e more potency to these measures than the facts of the situation justify. The very nature of our economy, based as it is on innumerable and fre quently conflicting human judgments and actions, precludes such a possi- bili 0r ty. Furthermore, our entire universe is dependent on a system of more less rhythmic pulsations. a b l e variations in the rate or intensity of activity in different phases of existence. e Complete elimination of these swings in our activity can only t h i e v e d , if at all, by the imposition of rigorous artificial controls. Je e These produce inevitable and probably desir- have always abhorred such controls and, so far, largely avoided them Ce * P t i n cases of dire emergency. thQ f We have learned, however, to modulate orce of these pulsations both in our physical and our economic life. - 3 I-t is to the achievement of this end rather than complete stability that our flexible credit and monetary policies are directed. I believe that even th °se who are most skeptical of the effectiveness of these measures would a Sree that they do make some contribution to reducing the range of economic fluctuations. In recent years, the attitude toward general instruments of monetar y policy seems to have shifted away from the negativism of the 1930's ^°vard a more balanced appraisal of the important part that such policy can pla y in helping to achieve sustainable growth. Certainly among bankers, and "r believe also among informed businessmen, union leaders, and farmers, there has a n d recently been an increasing recognition that sound, flexible monetary fiscal policies on the part of the Government and prudent, far-sighted ^ g o m e n t of private business are all essential parts of any program directed tcv >ard the most effective use of our resources. the This is fortunate both for Present and future welfare of the United States and those nations which are associated with us in our efforts to demonstrate the effectiveness and ^ a b i l i t y of individual freedom in economic affairs. As I have said, we at the Board have a responsibility with regard t 0 th ® general cost and availability of credit, make credit generally easier or tighter. to lie can do certain things It is your responsibility, Sether with other bankers, to see that available supply of credit is pruand economically allocated among the various demands. Seerns This task, it to me, is equally important and, if possible, even more difficult. In the prudent and intelligent allocation of available credit in any quant i t y *nay be of more importance to our long-range economic welfare than the - ab solute amount of credit available. uCertainly, when credit growth is sub- l e t to restraint and this restraint is reflected in rising interest rates a n d a limitation on credit lines to creditworthy borrowers, you can expect to have your decisions, like ours, subject to criticism from persons outside inking. With this background, I should like to turn now to the current situation. It is no secret that the Federal Reserve System directed its efforts tov ef 'ard credit restraint after the spring of last year. The results of these forts have been widely discussed and commented upon and the casual reader ^ S h t well gain the impression that these policy actions resulted in a sharp CUr tailment in lending activity. n o t the the case but I wonder if you have observed that, in fact, 1955 witnessed largest expansion in the dollar volume of loans at commercial banks in Ur ° entire history — t h i s Pur amounting to about 11 billion dollars — and so far year loan expansion has been twice that for the same period last year. thermore, the volume of security flotations so far this year has been gre a t e r than the high level of last year and in recent months has been above devious peaks in 1952 and 1953. ein I am sure you all realize that this was I mention these rather striking figures to Phasize that credit policy was not directed toward, nor did it accomplish, ^ reduction or even leveling of the volume of credit available to the pri- V a t e economy. the What it attempted to do was to bring about some restraint on rate of expansion. There was never any question that some growth in the v °lume of bank credit to meet the needs of our expanding economy is both ne Q ° ssary and desirable. The only valid limit on the rate of our economic - 5 growth is found in the emergence of inflationary pressures, resulting from ^ excessive rate of expansion and giving rise to maladjustments which lead 4. potentially serious reversals. In recent months outlays for new plant and equipment have been running 30 per cent above a year ago and surveys of businessmen's expected E n d i n g indicate planning for continued increases in these expenditures. Furthermore, businessmen have continued, to accumulate inventories, most of theni b Publicity about U s i n e a s inventories has tended to emphasize the sharp increase in automobile st °cks in the hands of dealers and overlook the fact that the major rise in 1Uv entories lias been in the metal and metal products industries. f o r p apparently in connection with the capital goods boom. This demand industrial raw materials has been reflected in the increase in industrial -' ice s, which are now 5 per cent above a year ago. Therefore, if we can describe credit as "tight" in any sense, it ^ be in relative terms, i.e., that not every businessman has been able to all of the credit he wants for every purpose. 0lne ° ter businessmen have had to tailor their plans to the availability of ex- n a l financing. a b X e This is undoubtedly true. This raises, of courso, the question of whether the loan- funds available to banks and other financial institutions have been and being wisely and fairly allocated among competing borrowers. Clf Cn More spe- i c a l l y j there has been some discussion of whether small business is dis- ttinated against in periods when credit demands outstrip the availability 0f saving. p o r this reason it seemed to me that it might be interesting and ^ h w h i l e to reviei^ with you the factual information we have on this point. - 6 First of all, it seems to me, it is important to realize that most of the banks in this country are small businesses themselves. cerv Th Nearly 85 per t of our 13,700 commercial banks carry less than $10 million in deposits. e survey of business loans taken last fall, in which many of you gentlemen P^Hioipated, shows that 80 per cent of the loans made by these small banks Qre extended to businesses with assets of less than $250 thousand. p e r Only 5 cent of their loans are made to companies with assets of over $1 million. Even if t i g h t c r e d i t conditions have tended to make banks favor their best u ° stomers, the best and in fact the only business customers of most commerCla3 - banks continue to be small businesses. The larger banks in our country, of course, lend mostly to larger lru *U3tri a l firms and, over the past year, our data indicate that most of the lncr> leri SUrv ease i n loans at larger banks has been to their larger customers. <Ung, however, has not been at the expense of the small customer. This Our Q,ys on such matters indicate that even at larger banks the volume of to such customers has been maintained. You may know of our quarterly survey of the new business loans by l a r g e b a n k s i n 1 9 s ^vey Th a B p r i m a r We have been conducting this i i y i n order to follow the course of interest rates. latest survey available, pertaining to loans made in the first two weeks 0f lai? s i n c e financial centers. March, shows that over 80 per cent of the business loans made by these ger banks were for less than $100 thousand and averaged less than $18,000. ° th the number and the aggregate dollar amount of the small loans made this n Were as large as in March a year ago. - 7 As far as borrowing costs are concerned, the data show that although rates have increased on all sizes of loans, the rise has been sharpes "t on the large loans. h Differentials between rates on large and small loans ave narrowed considerably. hav In summary, our survey would indicate that banks e not penalized their smaller customers by curtailing their loans or by Raising the costs of borrowing disproportionately. ha While smaller companies ve not expanded their bank indebtedness as much as the larger ones this they have not been deprived of the large volume of credit available to last year. You may have also heard that, in this period of almost unprece- dented prosperity, many small businesses are going bankrupt. the cl Frequently, inference is drawn that inability to obtain necessary credit is the prin- Pal cause of such failures. While we cannot say what are the most impor- tari a t t underlying factors in the failure picture at any one time, we can look "the figures to see how many businesses have failed this year and what kind of businesses they have been. The Dun and Bradstreet data on business failures show that, in the fir s t four months of 1956, 4,200 concerns went out of business with some loss •4. ^editors. This is one-eighth more than in the same period of 1955 and R e s e n t s an annual seasonally adjusted rate of about 45 failures per 10,000 g0in abov S concerns — about the same rate as in late 1954- Though this is well e other postwar years, it is far below the failure rate in the immediate years. It is true that the sharpest increases in failures this year have b 6 e n in the construction and retail automotive groups — industries whose - 8 CUr rent troubles, in my opinion, have not developed primarily out of recent Cre( Cori H t stringency. The available data on business failures do not show any centration of bankruptcies among the smaller firms. What we can glean from the available statistical information would Seem t o suggest that there is at least no preponderance of evidence that ' ^ H business is discriminated against in a period when credit growth is some restraint. While this is reassuring, it should not cause us to *smias the possible problem or to be complacent about it. Aer As I indicated > "the responsibility for allocating the over-all supply of credit n °2 tho various competing borrowers rests with commercial banks and other lending institutions. a§Ues It is the responsibility of you and your col- to see to it that the loanable funds available to you are directed to +u uses which will best serve the interests of the whole community. Ift a fv Ar Q e competitive system, we necessarily rely on the operation of the x changes in supply and demand and the price fluctuations which they e °t to allocate our resources among various competing uses. As you all w °> however, particularly in the field of credit, judgment plays an allp0r t a n t role. 01 Your collective decisions as to the relative creditworthi- Various competing borrowers and the points at which various under- tskiiv, should be encouraged or discouraged in their requests for credit quite literally shape the future of our country. In this connection, there is only one point that gives me some Mifca v • is frequently stated that creditworthiness is often deterPast record of performance and that new enterprises with little Past credit record are thus automatically - 9 discriminated against in favor of old established customers. 13 Certainly, it to be expected that old customers will and should be given due considera- tion. On the other hand, we should never overlook the fact that in the kaleidoscope of our economic community there is an ever-changing pattern and tha t with the normal attrition of all human institutions the life blood of S o r r o w ' s business may flow from the untried newcomer of today. tha We all know t the farmer with a short crop must set aside a portion of his harvest for e v e n lnes 3. a t t h Q e x p e n s e 0 f other current needs — if he would stay in bus- Similarly,we must be alert to the importance of setting aside a pru- ^ n t portion of available credit to meet the needs of promising new enterprises which have in the past and will in the future provide the youthful imagination, and enthusiasm so essential to the continuance of a owing? dynamic economy. As I stated in the beginning, the basic function and objective of it ue federal Reserve System is to provide the money and credit essential to °iMerly and sustainable growth in the economy while maintaining a reason- acl n y stable level of prices. Our success in achieving this objective lies in ° small measure in the wisdom and prudence with which available credit is located. While I have avoided burdening you with a mass of figures, the ^gmentary statistics which I have presented would seem to justify my conf i ^ n C e in then Capa t h e willingness and ability of bank officials to do this job. This, > leads me to the conclusion that such credit growth as the productive °ity of our economy will safely permit, will continue to be directed toward th Se ° Uses which will contribute most to the further sound development and s Pority of our country.
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