In Defense of the Availability Doctrine: A Comment

Abstract

If monetary policy works exclusively through the cost of borrowing and many borrowers are insensitive to higher rates of interest, how is a debacle in the government securities market to be avoided in the process of restraining a boom? This problem had its genesis in the union of the Keynesian stress on the interest rate as the sole channel for monetary policy with the phenomenon of the apparent indifference of business borrowers to interest charges reported in the Oxford surveys of 1938 and I940. The growth of government debt during the war, followed by strong inflationary pressures, has made this the central issue for postwar monetary policy. While the monetary authorities have been feeling their way gingerly forward on the practical level, the availability doctrine has been evolving to rationalize their experience (and perhaps hopes) on the theoretical level. It is important to realize that the dilemma which the availability doctrine seeks to solve arises because the relative insensitivity of borrowers to rate increases on private securities is assumed to extend above pursuit levels available to government yields as limited by considerations of government debt policy. Presumably no one denies the power of the monetary authority to check an inflationary boom if it wishes to force the general level of interest rates high enough. But can monetary policy be made effective without raising yields on government securities to levels which are excessive in terms of the burden of interest charges on the national debt and of reasonable stability in the market for government securities? It is within this more restricted elbow room left to monetary policy by the assumptions of inelastic demand from private borrowers and ceiling yields on government securities that the availability doctrine advances its solution. It is not surprising, therefore, that the availability doctrine should stress lenders' behavior on the one hand and variables other than the interest rate on the other. The availability doctrine or, more broadly, the new theory of credit is subjected to a trenchant restatement and critique in formal terms by Professor John H. Kareken in the August I957 issue of this REvIEW.1 Kareken finds small comfort for monetary policy in the availability doctrine. If credit rationing is absent and the doctrine strictly interpreted, monetary policy will be either ineffective or too effective, depending on the interest elasticity of lenders' supply in the private market (assuming quite inelastic demand). On the other hand, if lenders do ration credit, the availability doctrine suffers from internal inconsistencies and requires modifications in ways which Kareken is unwilling or unable to suggest. In either instance little encouragement is offered to monetary policy. My purpose is to defend the availability doctrine against these views and to argue for the effectiveness of monetary policy. To contribute to the control of inflation, monetary policy must be able to restrict the flow of funds to private borrowers. Whether borrowers are deterred from borrowing by the high interest costs incurred or fail to receive accommodation from lenders at any interest rate because of non-price rationing is a matter of indifference to monetary policy so long as the desired restraint is effective. It is a matter of indifference, that is, unless important side effects attend either the price or nonprice rationing of funds. The availability doctrine has been fashioned to meet a specific objection to the use of rate increases to restrain borrowing,