Spencer Heath Archive

Item 1420

Exchange mediated by Ada Lynes between Heath and M.I. D’Andrea, Hardware & Paint Trades Promotion Service, 154 Nassau Street, New York City

May 3, 1943

CREDIT AND INFLATION

D’Andrea:

     A recent newspaper article expressed fears and warnings about the adverse effects on business of the restrictions on consumer credit. It told of a 60% drop in installment business for 1942 over 1941, although there had been a 4% increase in total sales — an apparent pre­ference for those with cash. It reminded us of some things we mentioned in recent discussions, namely, that Credit, if too restricted, can ultimately affect the system of distribution — with cash around that can be spent in other stores — and also that Credit was not the standard for “rationing” goods. We are all interested in refraining from doing anything that might create any inflation and we would do anything to fight it — but — what we think is not clear is — AT WHAT POINT DOES CREDIT HAVE AN EFFECT ON INFLATION?

Spencer Heath:

Inflation is a condition in which the production and flow of consumers’ goods into the general market is diminishing and the outflow is increasing, the market thus becoming depleted of goods and services. Consumer credit, including installment buying, accelerates the flow of goods and service out of the market with only a deferred and delayed return of services and goods into the market to replace them. Hence any sudden increase in consumer credit is, in its immediate effect, inflationary. Infla­tion has other and much more powerful causes. Increase of consumer credit, at the most, can only aggravate the con­dition. Sudden heavy restrictions on consumer credit would tend to retard inflation — unless it at the same time hampered the production of consumable services and goods. The point at which credit affects inflation is the point at which it draws consumable services and goods out of the market more rapidly than they flow in.

 

D’Andrea:

You picture the effects clearly enough but your very picture of the situation raises certain questions, which you may be able to give further opinions on.

We can see how diminished civilian production reduces the replacements of goods sold and how increased purchasing power accelerates the outflow. We can see how credit can further accelerate the outflow — but it seems to us this would be only temporary — until the bill is paid. When payment of this bill is made, that much purchasing power is used up just as it would have been if the transaction had been for cash.

The danger, we think, would come from unwise credits only. In other words, how can credit draw goods off the market faster than cash, if the credit has to be paid for in 30 days, let us say. It would — within that 30-day period — but then — might that not be offset by extension of credit by manufacturers and wholesalers?

 

/In Heath’s comments, the term services is penciled out from lines 4, 6, and 14 — by Heath or by someone else is not known./