Harold G. Halcrow

Neil H. Jacoby

Raymond J. Saulnier

English

Research Papers in Economics

This PDF is a selection from an out-of-print volume from the National
Bureau of Economic Research
Volume Title: Federal Lending: Its Growth and Impact
Volume Author/Editor: Raymond J. Saulnier, Harold G. Halcrow, and
Neil H. Jacoby
Volume Publisher: UMI
Volume ISBN: 0-87014-372-7
Volume URL: http://www.nber.org/books/saul57-1
Publication Date: 1957
Chapter Title: The Economic Significance of Federal Lending and Loan
Insurance
Chapter Author: Raymond J. Saulnier, Harold G. Halcrow, Neil H. Jacoby
Chapter URL: http://www.nber.org/chapters/c2719
Chapter pages in book: (p. 28 - 29)at least to strike rough balances in their. operations (the Farmers Home
Administration being the principal exception). Lending programs in the
business field showed varying degrees of self-sufficiency. The Export-
Import Bank has shown. a sizable net income. The RFC long operated
under a concealed subsidy (interest-free Treasury funds); in its final years
it earned a small net profit over all, but the records do not show the results
of the business loan program separately. Though the Federal Reserve
Banks also profited somewhat on thàir recent industrial loans, experience
in their most active period (to 1941) was unfavorable. Business loans to
small enterprises cost the Veterans' Administration about $25 million
from 1945 to 1952, but this program was never intended to be self-
supporting.
The agencies concerned with housing credit have been generally self-
sufficient, the Federal Housing Administration showing modest earnings.
As no premiums were charged, the loan guarantee and insurance program
of the VA required a Subsidy, foradministrative costs, estimated at
about $430 million through December 1952.
The authors conclude this section of their study with the following
observation:
"Surveying the major areas of federal credit programs —agriculture,
business, and housing —itis found that most of the programs have been
self-supporting, at least from a long-range point of view. An element of
subsidy has been present only in those programs which served a particular
class of borrower such as low-income farmers, veterans, or small business
firms. On the other hand, it is clear that no program, except possibly that
of the Export4mport Bank, has realized profits at a level which would be
considered satisfactory by the conventional standards of the private finan-
cial system."
The Economic Significance of Federal Lending and Loan Insurance
What have been the effects on the American economy of the large and
growing volume of federal credit? These credit aids have grown faster than
the value of gross national product or the credit activities of private finan-
cial institutions. Cumulatively from 1917 through 1953, the gross volume
of direct and insured or guaranteed loans totaled $138.7. billion. The
annual volume for 1953 was a new high, $14 billion. Outstandings at the
end of 1953 were $4.3 billion, also a new high. This vast pool of obligations
28in the public's hands represented the accumulation of over thirty-five
years of federal credit activity, reflecting a steadily upward trend.
The magnitude of these figures suggests that the influence of federal
credit activities has been profound; their diversity greatly complicates the
analysis of their effects, many of which have been unforeseen and unin-
tended. In perhaps the most important segment of the study, the authors
analyze the influence of federal lending on the economy as a whole; on
allocation of resources among different sectors of the economy; and on the
private credit market and practices ("institutional effects"). The latter
two actually overlap, since it was found that the so-called institutional
effects produced by federal credit aids may in turn produce material
changes in the use of resources.
Effects on Aggregate Economic Activity
How did federal lending and loan insurance affect the general level of
prices and the physical volume of production? And, have federal loans
tended to amplify or to dampen business fluctuations in the past twenty
years? The report goes into some detail on both these points.
Relation to GNP and the business cycle
In relation to gross national product, federal credit (the sum of loans,
loan insurance and guarantees extended) first became a significant factor
in the economy in 1932, when it rose from less than 1 per cent in previous
years, to 3.7 per cent of GNP (Chart 3 and Table 8). Up to 1953 it has
never been less than 2 per cent, and in the peak year of 1934 reached 9 per
cent. Federal loans, deliberately employed to combat the Great Depres-
sion, became in the thirties a major economic force, equaling or outweigh-
in.g federal expenditures.
They were about neutral in their effects from 1936 to 1946, when large
military expenditures dominated the economy. Thereafter, with rising
volume in a period of high employment of economic resources, federal
credit programs contributed appreciably to postwar inflation.
Their influence on business cycles is therefore mixed; they have oper-
ated at times in a stabilizing, and at other times, in a destabilizing direc-
tion. A modest tinge of counter-cyclical behavior is apparently due to
faster repayment of loans in good times than in bad, rather than to
conscious management of the programs. (Unified management explicitly
to promote economic stabilization has, however, never been a major
objective.)
On balance, however, the programs have operated more often than not
to offset a contracting or depressed level of economic activity, and to
29

Federal Lending: Its Growth and Impact

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