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CHAPTER 6Credit Diverts Production1Government “encouragement” to business is sometimes as muchto be feared as government hostility. This supposed encouragementoften takes the form of a direct grant of government credit ora guarantee of private loans.The question of government credit can often be complicated,because it involves the possibility of inflation. We shall defer analysisof the effects of inflation of various kinds until a later chapter. Here,for the sake of simplicity, we shall assume that the credit we are discussingis noninflationary. Inflation, as we shall later see, while it complicatesthe analysis, does not at bottom change the consequences ofthe policies discussed.The most frequent proposal of this sort in Congress is for morecredit to farmers. In the eyes of most Congressmen the farmers simplycannot get enough credit. The credit supplied by private mortgagecompanies, insurance companies or country banks is never “adequate.”Congress is always finding new gaps that are not filled by theexisting lending institutions, no matter how many of these it has itselfalready brought into existence. The farmers may have enough longtermcredit or enough short-term credit, but, it turns out, they havenot enough “intermediate” credit; or the interest rate is too high; or25