ON THE DIFFERENTIAL EFFECTS OF TIGHT MONEY: A COMMENT

Abstract

THE RECENT PERIOD of tight money has brought to the fore once again the issue of the uneven incidence of restrictive monetary policy. The construction industry, especially the residential end of it, has borne the major focus of public attention as well as apparently the brunt of monetary restraint. No less interesting, however, is the question of whether, under tight money conditions, the credit demands of small business firms are neglected relatively to those of large businesses. Since the commercial banking industry plays a critical role in both the financing of business and the transmission of monetary policy, an examination of the pattern of commercial bank lending to firms of various sizes during the past few years would be most illuminating. Unfortunately, data appropriate for such a study are unavailable. At best, it may be assumed that the present does not differ significantly from the past, and thus the differential impact of monetary policy during 1968-1969 ought to be similar to that experienced during 1955-1957. It is therefore doubly disturbing that two major studies, working with 1955 and 1957 data, derive contradictory conclusions. In the first of the articles to probe into the differential impact of monetary policy on business borrowing, Bach and Huizenga (B-H, hereafter) concluded that commercial banks did not discriminate against small businesses nor favor large firms.' In a recent article in this Journal, Silber and Polakoff (S-P) reexamined the B-H study, and using the same data, concluded that commercial banks did indeed discriminate against smaller firms.2 We do not intend to rework the same statistics for a third time, and thus this comment cannot resolve these diametrically opposed conclusions. On the other hand, while we appreciate the contributions of S-P, nonetheless we are convinced that the issue has yet to be brought to a satisfactory resolution. The purpose of this comment is to suggest that, on theoretical grounds, the S-P approach to discrimination is less appropriate than the B-H line of attack, although the latter also suffers from a faulty conceptualization of the problem. Furthermore, the empirical work of S-P, although more sophisticated than that of B-H, suffers from several faults. Either of these criticisms alone provides sufficient grounds for remaining skeptical about the S-P conclusion.