The Impact of General Credit Restraint on the Supply of Commercial Bank Consumer Installment Credit: Comment

Abstract

Economists have long debated whether the monetary authorities are able to affect the supply of consumer installment credit signiElcantly with general, as opposed to direct, credit controls. For instance, in [1], as summarized in [6], most economists took the view that direct credit controls were effective but general credit restraint had little effect on the installment credit markets. In contrast, it was found in [5] that individual banks experiencing slow growth in deposits often cut back disproportionately on the rate of expansion of their consumer loan holdings-with the speed and degree of cutback depending on the importance of consumer lending to the bank. In another study [2] it was found that, as a group, large urban banks disproportionately restricted the availability of funds to the consumer credit market during the tight money phase of the 1965-67 period. Finally, it was suggested in [3] that credit supply effects existed, as one year subsequent to altered rates of growth in money M1, observed changes in ratios of consumer credit outstanding to income were greater than would be implied solely by short-run changes in the income-related demand for consumer durables. In [4] a lagged effect of changes in money M2 on consumer credit growth was also observed, but was viewed as reflecting portfolio balance influences on consumer durables demand. The evidence presented in this paper suggests that during the decade 1965-74 the supply of nonrevolving commercial bank consumer credit was significantly reduced during periods when the monetary authorities appeared to be unwilling to accommodate commercial bank demands for reserve balances fully. Additional findings are that consumer use of bank revolving credit has tended to accelerate during periods of restraint, and that changes in monetary policy seem to impact quickly on bank consumer installment credit extensions.