Credit and Economy

All banking operations, and the methods for controlling them, are part of the credit system of a country. The state of business activity within a country at any given moment may be gauged from the condition of the credit system: expanding credit generally reflects a period of business prosperity, whereas contracting credit usually reflects a period of declining economic activity or depression .

Fluctuations in the credit system may affect the level of prices; that is, as credit expands the money supply increases; lending causes prices to rise. Some economists consider the credit inflation that preceded the 1929 crisis to have been the principal cause of the crisis.

The relative importance of credit in the economy of the U.S. is indicated by the fact that, at the end of 1986, the more than 14,000 insured commercial banks in the U.S. held over 85 percent of their total assets in loans and investments and U.S. government securities.

Also, installment credit transactions involving the purchase of consumer goods totaled more than $575 billion. Indicating the scope of credit activity handled by the U.S. government, from February 1932 to June 1957 the Reconstruction Finance Corporation lent more than $50 billion and collected nearly as much in repayment of loans.

In 1987 total direct loans outstanding at four major credit agencies of the federal government, including the financially troubled Farm Credit System banks, exceeded $230 billion.

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