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The Price of Disbelief
There is, in fact, some question whether a regular 3% or 4% growth rate will be nearly enough to handle the economy's enormous need for cash and credit. From the savings of citizens, the retained earnings of corporations and other sources, the U.S. last year generated $129 billion of new capital to invest. But the demands for capital have been greater still. During the inflationary boom of the late 1960s, the Government borrowed heavily on the capital markets to cover federal deficits that ran as high as $25 billion a year, and much of the money was used for economically unproductive purposes, notably the Viet Nam War. Lyndon Johnson started the inflation by long insisting on fighting a war without asking for taxes to pay for it. Corporations meanwhile went into debt to raise money for new plant and equipment. They kept up their borrowing during the money squeeze; their executives simply did not believe that the Federal Reserve would hold down the growth of money supply as long and drastically as it did. Thus they saddled themselves with a debt that must be periodically refinanced. And now a profit pinch limits their ability to repay.
The balance sheets of major corporations have steadily deteriorated. In 1961 they held enough cash and easily marketable Government securities to cover 38.4% of their bills; at the end of last year, the figure was down to 19.3%. Big banks can hardly lend any more. Partly because they eagerly shoveled out cash to almost all comers during the boom years, they now have a high, potentially dangerous 86% of their deposits committed in loans. Says Fred Stein, chief executive of a subsidiary of Standard & Poor's Corp.: "The money markets are in a full-fledged rout, and something has to be done to check it."
As a way out, some financiers propose federal credit controls. Since there is not enough credit to go around, they argue, the Government should make sure that what is available goes to borrowers who really need it−home builders, say, or small businessmen−rather than to those with the greatest economic clout. Credit controls have strong support in some parts of official Washington, though not in the White House. Congress last December gave the President stand-by authority to allow the Federal Reserve to regulate the terms, amount and interest rates of all forms of credit. Wright Patman, chairman of the House Banking and Currency Committee, last week denounced Nixon for not using that power. Within the Nixon Cabinet, George Romney has spoken in favor of credit controls. He complains that money that should be going into housing is being diverted to borrowers who have more economic "muscle."
Nixon opposes controls as interference with a free market. Burns takes a less rigid position. In congressional testimony, he said "the markets do a better job" of allocating credit. "The fundamental answer to the housing problem," he