The Social Cost of Federal Financing 121 



of the order of magnitude by listing the sectors affected by mone- 

 tary policy and the rates of return prevailing in them. 



Bank loans are the traditional, perhaps most important, form of 

 credit that can be reduced through monetary policy. Loans to 

 business, which totaled $31 billion in 1955, were made at nominal 

 average rates of 4.2 per cent.*^ While we cannot estimate what 

 rates of return would have been earned on curtailed loans, we 

 know that the rate expected by the borrower must be at least 4.2 

 per cent. And it is probably more, in view of the somewhat higher 

 interest rates charged to marginal borrowers and the return above 

 borrowing cost which must be expected as an incentive to take the 

 risk of the investment. Loans to individuals totaled $17 billion 

 and were made at a wide range of rates — from as low as 4.5 per 

 cent to over 10 per cent, depending upon the purpose, the col- 

 lateral, and the credit worthiness of the individual. The marginal 

 loans that would be refused because of a tighter monetary policy 

 would have borne rates well above the minimum of the range. 



The market for mortgages would also be tightened by monetary 

 policy, both through a toughening of the terms and diminished 

 availability of funds. Total outstanding mortgages were in excess 

 of $130 billion, but the impact of the policy is concentrated on 

 only a portion of the market. The rates on this category of credit 

 largely fall between 41/2 and 6 per cent and would apply to the 

 mortgages that are precluded by the change in the monetary policy 

 necessitated by a public investment. Debt issues of state and local 

 governments would be curtailed, bearing very low interest rates, 

 but often used to finance investments yielding higher returns, e.g., 

 schools, hospitals, etc. Other forms of credit — such as brokers' loans 

 on securities, corporate borrowing from sources other than banks, 

 etc. — would also bear part of the impact, but the effect would be 

 less important quantitatively. 



These figures suggest that the social cost of federal capital raised 

 in this manner is roughly of the same order of magnitude as the 

 cost of releasing the necessary resources through taxation. Depend- 

 ing upon the exact combination of weapons employed by the 



*' "Business Loans of Member Banks," Federal Reserve Bulletin, op. cit., 

 April 1956, pp. 328-40. This rate makes no allowance for the common practice 

 of requiring minimum account balances, which raises the effective rate of the 

 loan by as much as 1 per cent. 



