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THE CHAIRMAN OF THE
COUNCIL OF ECONOMIC ADVISERS

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WASHINGTON

May 22, 1979

Dear Senator Proxmire:
The Senate Banking Committee is considering a bill that
would repeal the Credit Control Act of 1969. That Act provides
that the President may authorize the Federal Reserve to regulate
and control extensions of credit when he determines that such
action is necessary or appropriate to control an inflation
generated by extensions of credit in an excessive volume. This
letter is to convey my views that repeal of that Act would not
be in the national interest.
The authority for institution of credit controls provided
by the Credit Control Act of 1969 is very broad and general.
At the same time, the language of the Act provides safeguards
that would effectively prevent it from being used in inappropriate
ways. First, the Act specifically provides that the President's
authority is limited to cases in which inflation is generated \
by an excessive volume of credit. Second, while the President '
may authorize the Federal Reserve Board to regulate and
control credit extensions, he cannot order or instruct the
Board to do so. The ultimate decision to impose credit
controls resides in the Federal Reserve Board. Given the
independence of that institution from the executive branch
of government, any President would undoubtedly have to give
the views of the Federal Reserve very careful attention and
great weight before authorizing them to impose such controls, a
especially under circumstances in which the Board deemed the v
impositions of such controls to be unwise. And since the
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Federal Reserve Board answers for its stewardship directly
to the Congress, the legislative branch of government
ultimately retains the power to determine whether, and for
what purposes, the authority under the Credit Control Act of
1969 is utilized.
Although the authority granted in that Act has been in
existence for ten years, no Administration has sought to use
it, and properly so, in my judgment. The sources of inflation
during the past decade have been many and varied. At times,
too rapid an expansion of money and credit has been a contributing
factor. Nevertheless, there has been no time in the past decade




- 2 when the expansion of credit could not have been controlled
appropriately by the more general instruments of monetary
policy — that is, by open market operations or by changes
in the discount rate or reserve requirements. As a result,
there has simply been no need to resort to selective credit
controls.

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Under almost all conditions, selective credit controls
are not a substitute for the general instruments of monetary
policy, nor, indeed, can these two types of instruments
complement one another effectively. But one can certainly
conceive of circumstances in which resort to selective
credit controls might be necessary. For example, at some
point in the future, we might find that strong inflationary
pressures were being generated by a substantial relaxation
of terms on consumer credit, and that the resulting increase
in consumer borrowing was threatening to put many consumers
in a precarious financial position, as well as to heat up
inflation. Since the general instruments of monetary policy
would be unable to deal effectively with that situation,
resort to selective credit controls could contribute to
economic stability. A similar need for selective controls
might arise if inflation were being generated by a wave of
credit-financed scare buying by consumers because of threatening
international developments, as was the case immediately
following the beginning of the Korean war.
The examples I have cited are remote possibilities.
There is nothing on the horizon that suggests the need to
use the authority of the Credit Control Act of 1969 in the
foreseeable future. Having this authority on the books,
however, provides a useful backstop for dealing with potential
credit developments that could not be effectively handled by
the general tools of monetary policy.
For these reasons, I would strongly urge your Committee
not to take steps to repeal the Credit Control Act of 1969.
Cordially

Charles L. Schultze
Honorable William Proxmire
United States Senate
Committee on Banking, Housing and
Urban Affairs
Washington, D. C. 20510





Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102