When President Carter ordered the Federal Reserve Board to impose credit controls last March 14, the White House expected the restraints to have only a marginal impact on the overall economy.
Faced with near-panic in the financial markets over a rising budget deficit and soaring interest rates, strategists were looking for a new gesture that would help dampen inflationary fever and blunt speculation in the markets.
What they got, instead, was a national psychological hammer-blow that sent consumers retrenching sharply, heightened the strain on business and made the economy plunge into recession far more rapidly than it would have otherwise.
Now six and one-half months later -- and 13 weeks after the restraints program was fully dismantled -- analysts are asking whether the controls really worked or were simply a panicky reaction that ultimately did more harm than good.
Despite the economy's steep second-quarter slide, inflation seems little improved from where it was before, and interest rates have soared back to the levels they had reached last February. Was it all really worth the trouble?
Economists are divided on the answer.
Those supporting the program argue that the restraints helped ward off a new wage-price that otherwise could have resulted from the inflation psychology that had beset the country.
"There simply was no other choice," says one official involved in the decision. "Everyone seemed convinced the bond market was on the verge of collapse. People were panic-buying. Nothing else would have done the job."
But some outside analysts contend that the entire escapade was not really necessary after all, and the restraints only made the economy more unstable -- and vulnerable, to day-to-day shocks.
Allen Sinai, economist at Data Resources Inc., points out that the crunch already had begun by the time controls were imposed -- the result of a lagged impact from the Fed's money- and credit-tightening moves of the previous Oct. 6.
If the White House "had had a little more patience," the situation would have resolved itself, Sinai contends. He charges that imposition of the controls was a "panic" reaction that proved counterproductive.
And in a detailed analysis prepared for the U.S. Chamber of Commerce, Ronald D. Utt brands the controls program "an excessive reaction to one or two months of unexpectedly had reports on credit growth and prices."
Utt asserts there was "no lasting contribution" from the restraints: "We merely paid a very high price for what may have been nothing more than a few months of temporarily depressed growth in the consumer price index,"
How well did the controls really work?
Initial reaction from papers and discussions by several key economists in the past few days suggest these considerations:
Whatever the other pros and cons, there is general agreement that the controls were effective psychologically in dampening the inflationary fever that had gripped the nation -- and in blunting speculation in the markets.
They also helped ward off any new burst of inflation that may have resulted from the panic-buying that set in at the time. (Economists are split over how much inflation might have accelerated, but pressures were strong.)
At the same time, nearly everyone agrees the restraints made the economy slide into the recession far more rapidly than it would have otherwise.
Almost overnight, consumers slashed spending sharply, prompting manufacturers to respond quickly by cutting production.
Evidence indicates that many families were on the verge of cutting back anyway, but the controls appeared to provide the catalyst. As Sinai puts it, imposition of the controls "made people think that using credit cards was immoral."
What is more, the impact continues today: Although buying has rebounded to a degree, consumers still are cautious about charging.
Beyond that, however, the financial impact of the controls appears to have been undramatic.
Besides holding down overall credit growth, the restraints were designed primarily to channel as much of the available new credit as possible to business and mortgage loans.
But here, too, even Fed officials concede that the effect was relatively modest: Despite their best efforts, the housing and auto industries collapsed during the quarter -- even though they were exempt from controls.
Most analysts agree the restraints were not in force long enough to have much of the serious adverse effects that critics had predicted. As soon as loan demand fell off significantly, the Fed began dismantling the program.
There were some unexpected side effects: For example, credit-card issuers used the controls as an excuse to impose new fees and to stiffen eligibility more quickly than they otherwise might have -- but this has been coming anyway.
Most of the major card-issuers who imposed new fees have continued them intact, even though the controls have been lifted. Many oil companies, for example, are limiting their extended-payment plans to big-ticket purchases.
Beyond heading off a possible new burst of inflation, however, the impact of the controls on wages and prices was negligible. The nation's so-called underlying inflation rate is the same now as before the restraints.
Most analysts agree that, strictly in economic terms, the controls weren't really necessary: The economy would have fallen into recession anyway as a result of tightening monetary policy and cutbacks in consumer spending.
And Philip Cagan, a Columbia University economist, contends the major effect of the restraints -- to trim available bank reserves -- could have been accomplished by more traditional Fed action to slow the growth of reserves.
However, proponents argue that politically the White House had almost no choice but to impose the credit restraints: Wall Street was adamant in demanding bold action. Not to have moved would have intensified the panic.
The importance of the psychological impact of the controls program depends in part on how much you believe the price spiral would have worsened as a result of the inflation fever that gripped the nation early this year.
When the administration made its decision, the country was clearly in a panic, with inflation fever more frenetic than at any time in recent memory:
The financial markets, concerned over the budget deficit and continued sharp growth of the money supply, were in dangerous turmoil. There were warnings that the bond market was on the brink of collapse.
Businesses, in a frenzy over soaring interest rates, were scurrying to nail down new lines of credit -- boosting loan demand even further and increasing pressure on the markets.
Consumers, worried about scary new inflation figures stemming primarily from a pass-through of previous oil-price increases, were panic-buying -- often overextending themselves in new debt.
Moreover, the controls, while unprecedented in the peacetime economy, were not nearly as sweeping as some critics have asserted.
Their most visible impact was on credit-card users, not on businesses.
And even in their broadest form, the restraints were designed merely to limit the overall growth of new credit -- not to apportion credit rigidly among various sectors of the economy, the way previous controls programs had done.
Separate riders approved by the House and Senate this past week would revoke the president's authority in mid-1981 or mid-1982 -- depending on which version is enacted. The White House, for now, is opposing those moves.