Effect Of Credit Squeeze On Economic Growth

Press, Volume C, Issue 29436, 11 February 1961, Page 11

Effect Of Credit Squeeze On Economic Growth

(From Our Own Reporter)

WELLINGTON, February 10. Does a policy of tight money, by discriminating against investment, slow down the rate of growth of national income? Not in the opinion of Dr. R. F. Henderson, an English authority on monetary theory, who claims that personal and professional borrowers bear the brunt of a credit squeeze.

In a paper delivered today to the conference of the New Zealand Association of Economists. Dr. Henderson, who is a fellow of Corpus Christi College, Cambridge, said it was sometimes implied by critics of monetary policy that the whole burden of adjustment caused by a tight money policy fell upon investment in manufacturing industry. He disputed this view on the following grounds:— Large companies had to plan investment in such projects as steel works about five years ahead and were scarcely affected by temporary credit stringency. Such companies could raise capital by a new share issue if credit was restricted. Many smaller firms aimed to finance much of their expansion out of retained profits rather than by borrowing.

The number of firms whose expansion plans were based substantially on borrowed funds constituted a small part

of total investment in manufacturing, Dr. Henderson said. "In Britain at least (and I suspect in other countries also), when bankers have to restrict credit, it is the personal and professional borrowers who bear the brunt. They constitute a large part of the squeezeable margin in bank lending.

“Some of them are forced to postpone items of nonrecurrent expenditure, repairs or improvements to the house, purchase of a new car. refrigerator. furniture, or washing machine. Others decide to make do in the old dingy office for a bit longer, to forego the new typewriter or filing cabinet.” Retailers, and the providers of certain services such as travel agents, beauty parlours, dry cleaners, and coffee bars, were also substantially affected by a credit squeeze. "They suffer both directly in that their bankers may regard them as ‘inessential’ and be rather harsh, and indirectly from any fall in the level of spending by consumers.”