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Z-2166 Board of Governors of t h e Federal Reserve System O f f i c e of the Comptroller o f the Currency Federal Deposit Insurance Corporation For r e l e a s e i n morning newspapers of Tuesday, November 2 5 , 1947. November 2 4 , 1947• BANK CREDIT POLICY DURING THE INFLATION Our countiy i s experiencing a boom of dangerous p r o p o r t i o n s . The volume of bank c r e d i t has been g r e a t l y i n f l a t e d i n response t o the needs f o r f i n a n c i n g the war e f f o r t . Domestic and f o r e i g n demands f o r goods and services are e x e r t i n g a strong upward pressure on p r i c e s i n s p i t e o f the high volume of our p h y s i c a l production. These demands would be i n f l a t i o n a r y without any f u r t h e r increase i n the use of bank c r e d i t , but the demand i s being s t e a d i l y increased through continued r a p i d expansion i n bank loans, i n a d d i t i o n t o other f a c t o r s outside the c o n t r o l of the banking system. A s u b s t a n t i a l increase i n production, a g r i c u l t u r a l as w e l l as i n d u s t r i a l , would be h i g h l y b e n e f i c i a l . However, increases can only take place slowly and t o a l i m i t e d degree. I n i n d u s t r y , they are dependent upon c o r r e sponding increases i n the a v a i l a b l e supply of basic raw m a t e r i a l s , p l a n t c a p a c i t y , and the number and p r o d u c t i v i t y of the l a b o r f o r c e . Therefore a f u r t h e r growth of outstanding bank c r e d i t tends t o add t o the already excessive demand and t o make f o r s t i l l higher p r i c e s . The Board of Governors of the Federal Reserve System, the Comptroll e r of the Currency, the Federal Deposit Insurance Corporation, and the Executive Committee of t h e N a t i o n a l Association of Supervisors of State Banks are unanimously of the view t h a t present conditions r e q u i r e the bankers of the countiy t o exorcise extreme caution i n t h e i r lending p o l i c i e s . I t is at times such as these t h a t bad loans are made and f u t u r e losses become i n e v i table . I t i s recognized t h a t a continued flow o f bank c r e d i t i s necessary f o r the production and d i s t r i b u t i o n of goods and s e r v i c e s . The banks of the countiy have adequately met t h i s important need i n the r e c i n v e r s i o n p e r i o d . Under e x i s t i n g c o n d i t i o n s , however, the banks should c u r t a i l a l l loans e i t h e r t o i n d i v i d u a l s or businesses f o r speculation i n r e a l e s t a t e , commodities or s e c u r i t i e s . They should guard a g a i n s t the over-extension of consumer c r e d i t and should not r e l a x the terms of i n s t a l l m e n t f i n a n c i n g . As f a r as possible extension of bank c r e d i t under e x i s t i n g conditions should be confined t o f i n a n c i n g t h a t w i l l help production r a t h e r than merely increase consumer demand. The bank supervisoiy a u t h o r i t i e s strongly urge d i r e c t o r s t o see t h a t t h e i r banks f o l l o w these p o l i c i e s and m a i n t a i n adequate c a p i t a l i n r e l a t i o n to r i s k assets.
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