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LIBRAE
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
RESERVE-**
August 2,194B«
STATEMENT OF GOVERNOR R. M. EVANS,
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
BEFORE THE
BANKING AND CURRENCY COMMITTEE OF THE HOUSE OF REPRESENTATIVES
REGULATION OF CONSUMER INSTALMENT CREDIT
PET,KASF, UPON DELIVERY
\—\
%S(o i
5)
BOARD OF GOVERNORS
of the
FEDERAL RESERVE SYSTEM
REGULATION OF CONSUMER INSTALMENT CREDIT
The Board of Governors of the Federal Reserve System on several
Occasions in the past has recommended to the Congress legislation which would
authorize the regulation of consumer instalment credit. This is the sector
consumer credit which has been subject to wide fluctuations in the past,
hereby contributing to instability and unemployment. The Board believes that
^asures permitting the moderation of these fluctuations, which are tending to
^crease in size and influence, are an essential part of a program to achieve
table production and employment at maximum levels, a declared national goal
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this country.
The Congress has before it at this time a resolution which would
store, in so far as instalment credit is concerned, the authority that was
®x©rcised from 1941 to 1947 through Regulation W. This would be a temporary
ea
-sure designed to help meet the special inflationary pressures which exist
oday, ip^Q Boar(jts opinion is that, while permanent legislation would be
Preferable, conditions are such as most urgently to require action and a temporary measure is better than none. To have any real usefulness, however,
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authority should be provided for a sufficiently lon^ period so that
{j^sons subject to regulation will realize their responsibility and adhere to
s Provisions. For this reason, we believe that any legislation on this
*ubject should extend at least until June 30, 1950. During this period, of
°urse, the Board would be able to modify the regulation to meet changing
Editions.
re
Regulation under the proposed legislation would be in much the same
f
^ orni as it was under the Board's Regulation V when that was last in force. It
,;
°uld cover instalment credit, not only instalment credit for financing the
Wchase of consumers' durable goods but also instalment credit for other conf e r purposes, both of which are inflationary under present conditions. It
prescribe maximum maturities and minimum down payments as did Regulation
"» but not necessarily at the sa le levels. The proposed legislation includes
£fovision for more appropriate enforcement machinery than was available under
ec
Courts of equity
v* Utive Order No. 8843 which authorized Regulation V.
be empowered to aid enforcement by enjoining violations, as provided in
Sislation dealing with similar matters.
g.
The case for this legislation seems to the Board to be particularly
trong i n the light of the general conditions which now exist. During the
years that have elapsed since V-J Day, the American public has gone into
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debt more rapidly than in any other period in our history. At the sane tine
consumers in general have been fully employed, have received a record amount
income, and have continued to increase their exceptionally large holdings
liquid assets. The large volume of consumer spending from current incomes,
£apid turnover of accumulated savings, and increased borrowing, accompanied
by limits on output of goods and services, have contributed to the upward
spiral of prices.
Consumer credit consists of both instalment credit and singlePayment credit. !/ide fluctuations in the total volume of consumer credit
over the years have reflected principally changes in instalment credit. The
importance of these changes is indicated by the chart. The 194-2-43 decline
this type of credit accounted for more than 35 per cent of the decline in
total consumer credit, while the postwar rise in instalment credit accounted
*or 60 per cent of the total rise. Other forms of consumer credit fell very
little in the early war period and began to increase earlier than instalment
^edit.
Their greatest growth occurred in 1946, and in recent months a
pendency to level out has appeared. Instalment credit, on the other hand,
has
continued upward.
Instalment credit outstanding rose 2.3 billion dollars from June
to June 1948, about 15 per cent more than the 2 billion dollar increase
of the previous 12 months. The rate of advance appeared to be falling off
the first quarter of 1943, but in the second quarter there was a picl;-up
in
activity and the net gain in outstanding credit was again 15 per cent
above that of the corresponding period of the previous year.
An indication'of the increasing frequency of the use of instalment
credit is given in the Consumer Finances Survey made for the Board of Governors. The information was obtained by interview of a selected sample of conf e r spending units in the country, each unit being a group of persons in
the same family and dwelling who pool incomes to meet major expenses. Data
from the survey show that one out of every four consumer spending units, or
^proximately 12 million spending units, bought on the instalment plan (instalsale credit) in 1947 as compared with a ratio of one out of every seven
°r eight in 1946. Instalment loans at banks, loan companies, credit unions,
an
<l other 3uch agencies were obtained by 15 per cent of all consumer spending
^its in 1947 (7 million spending units) as compared with 13 per cent in the
Preceding year. There was some evidence to indicate that the new users of
such credit were concentrated in the middle and upper income classes, principally those with incomes of above 03,000 a year.
Reports on instalment buying terms tliroughout the country indicate
that when Regulation !J was terminated many, oredit grantors adopted credit policies that were considerably less restrictive than those reouired by the reg^ation but somewhat more restrictive than those prevailing before the war.
recent months there has been a further relaxation in the down payment and
^aturity requirements in instalment credits for practically all categories of
durable good's. Competition has been the primary factor leading to lower down
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Payments and longer maturities; when one important retail outlet in a community relaxed terms, other stores soon felt that it was necessary to follow.
The prospect for the balance of this year is for increased use of
consumer instalment credit, further reduction in down payments, and lengthenof maturities. Together with the seasonal rise in the use of instalment
credit during the late months of the year, these factors suggest a growth
deeding that which occurred in the first six months.
The increase in instalment credit this year is of special significance because it is taking place notwithstanding the fact that the output of
consumers' durable goods is no longer growing. Uith a rise of 85 per cent in
durable goods in 1946, there was an increase of 65 per cent in instalment
credit. In 1947 the percentage increase in instalment credit of 55 per cent
accompanied a growth of but one-third in durable goods. Gradually, the increases in credit have outstripped the expansions in output of goods. By
the middle of 194.7, durable goods production had stabilised at a level that
has been maintained up to the present time. Yet instalment credit continued
to rise — one billion dollars for the first six months of 1948 and more in
Prospect.
In view of the curront tight situation in supplies of labor and
Materials, further expansion of instalment credit can neither increase output
n
°r put more people to work. It can only add more purchasing power to the
already swollen spending stream and reinforce inflationary pressures. International developments, moreover, inevitably add pressures in the markets for
consumers' durable goods.
Because more purchasing power is being added to a supply of funds
already excessive in relation to available goods, expansion of instalment^
credit under present conditions is of an inflationary character irrespective
of
its relative level as compared, for example, with national income. IJhile
credit outstanding now amounts to no more than 3.9 per cent of annual disposable income in the United States, as compared with a range of 5.5 per cent
7.1 per cent in the years just preceding the war - the highest levels on
record - conditions today are much different. In the year 1940, for example,
l;
hen the percentage was at its peak, average unemployment was 14.5 per cent
of
the total labor force, according to the Bureau of Census estimates, as
compared with 3.5 per cent in 1947. In other words, there is no slack today.
More credit cannot call forth more goods - it can only add to the upward presSur
e on prices.
It should be noted that the Board's position on regulation of instalment credit is not to be taken as in any way indicating a feeling that
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l instalment credit is undesirable. The problem is to prevent the abuse the use - of credit. A damping of disruptive fluctuations is what we are
interested in, and more stability at levels related to the conditions of the
time.
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Since the end of Regulation U a number of trade associations of
edit grantors have urged their members to exercise caution in liberalizing
terms and expanding portfolios. Such efforts have undoubtedly had some effect
in moderating the increase in instalment debt. These voluntary efforts, howey
er, have not succeeded in preventing gradual reduction in the down payments
an
d lengthening of the maturities advertised by credit grantors. Easy terms
ar
e rapidly approaching those which were offered before the war.
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Now is the time when it is in the best interest of all consumers
to save more and spend less. This is the time to reduce - not to increase debt. This is a time for restraint - voluntary, yes, but reinforced, much as
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all dislike compulsions, so far as necessary to protect the real interests
of
all of us.
Finally, the Board has asked me to reiterate as strongly as possible
that regulation of instalment credit is a tool - but only a supplementary
tool - for dealing with the problem of inflationary credit. By itself it
cannot do the job. To be adequately effective, it must be buttressed by the
basic bank credit controls which the Board has advocated repeatedly, beginning with its 194-5 annual report to Congress.
@FedFRASER