Financial Guidelines and Credit Controls

Abstract

IN RECENT YEARS there have been several moves towards qualitative controls in the form of credit guidelines. In the international field we introduced limitations on foreign investment, and at home Congress has given the President the unasked-for authority to institute a system of credit controls. In addition, there is the 1966 Federal Reserve Letter in which the Fed opened the discount window more readily to those banks which were curbing their business loans. And Governor Brimmer recently recommended a moderate form of credit controls, supplemental reserve requirements which could vary for different types of loans [8]. I will confine my discussion to domestic guidelines and ignore the controls over foreign lending. In part, this is so because I view the problem of controls over foreign lending as being merely a part of a much larger problem, our unwillingness to accept flexible exchange rates. Guidelines applied to foreign investment therefore raise quite different problems than do credit controls over domestic lending. It is not difficult to guess at least one of the reasons why there has developed some support for domestic credit controls. In recent years the Federal Reserve's monetary policy has changed substantially. In their massive historical survey published in 1963, Friedman and Schwartz could praise the Fed for keeping the growth rate of the money stock fairly stable. This is hardly a good description of the Fed's behavior in the last few years! And a very activist monetary policy does, of course, give rise to numerous complaints that certain sectors of the economy are hit too hard by the restrictive policy. If it is felt that these complaints are justified, and that the suffering of certain sectors is intolerable, there are only three possibilities. One is to abandon monetary policy as a restrictive policy tool and to rely instead