Rationing of credit, Managerial Economics

Rationing of Credit

As an instrument of credit control credit rationing was first employment by the bank of England toward the end of the eighteenth century when it imposed a ceiling upon its discounts for any one bank or rejected a proportion of each discount application whenever total demand for loans exceeded the amount it was prepared to discount on any one day. The bank employed its discount rate policy for the first time in 1839. Subsequently, this policy was employed in the economic crises of 1847,1857and 1866.however the wide use of credit rationing as a method of controlling credit was made only in recent times, particularly after world war i to control the exceptionally difficult conditions resulting from war and post war inflations. In Germany the Reich bank employment the method of credit rationing in 1924, when the currency which was stabilised by the introduction of rental mark was endangered and in 1931 when the Reich bank used the credit quotas to prevent the collapse of the large bank . In 1929 too when the Paris negotiations in connection with the young plan led to the withdrawal of foreign money from Germany and to attacks on the German currency and when the Reich bank wanted by means of credit restriction t force the banks to do everything in their power to counteract this manoeuvre, the useful method of credit rationing was employed.

There is no doubt about the efficacy of the credit rationing as s sound method of credit control. Credit rationing by the central bank became a very important factor in general economic policy execution. At times when the demand for credit exceeds the total available resources of the state bank of Russia, it is obliged to divide the available funds in some definite way among those who need them. Rationing of credit and capital is a logical concomitant of the intensive and extensive planning adopted in regimented economies. Not only is this method resorted to in the authoritarian economies but even in more primitive economic conditions the setting of credit quotas is the only decisive method which the central bank has in order to prevent excessive credit demands on the part of business. In Mexico the central bank has consistently employment credit rationing as a principal weapon of credit regulation. In India also the reserve bank of India on several occasions has made an effective use of this instrument.

Posted Date: 12/1/2012 7:15:19 AM | Location : United States

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