The Loan Ratio and Deficit Spending

Abstract

IN THE October, 195 1, issue of this Journal, Professor Martin Bronfenbrenner proposed and argued for the use of a as an inflationary control weapon.2 He contended that the primary force of the postwar inflation was due to monetary causes and hence that the containment of inflation could best be achieved by purely monetary measures. To this end, Bronfenbrenner suggested that the Federal Reserve System measure the expansion of commercial bank loans by the ratio: Commercial bank loans divided by demand deposits less commercial bank loans. Such a ratio would give a close approximation to derivative deposits. The next step was to ascribe an value of 100 to the loan ratio for the month prior to the outbreak of the Korean war, May, 1950. By such means it is possible to measure the extent of bank credit expansion since that date. To implement inflation control, it was suggested that the Federal Reserve System require the conmmercial banks to maintain a loan-ratio index no higher than that existing during a given period of time, with the provision that this number be lowered if it were deemed appropriate by the proper authorities. I share the view of many economists that for the foreseeable future the control of inflation, and not deflation, is likely to be our primary problem. The huge defense program coupled with a current state of overfull employment lends credence to this assumption. Further, by agreeing that the inflation was given its head by monetary expansion, the loan-ratio-index method of control looks increasingly attractive. II