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RETAIL CREDIT INSTITUTE OF AMERI
INC.
WILLIAM J. CHEYHEY
E X E C U T I V E
F e b r u a r y 2,
D I R E C T O R
1951
1627 K STREET, N. W.
W A S H I N G T O N 6. D . C.
TELEPHONE
EXECUTIVE
Honorable M a r r i n e r S. Eccles
M e m b e r , B o a r d of Governors
F e d e r a l R e s e r v e System
Washington 25, D . C .
Dear M r .
Eccles:
I want you to know that I was tremendously i m p r e s s e d with the
beautifully thought out fiscal plan you recently presented to the
Joint Committee.
The w o r k - d a y is so short that it is r a r e for any of us to have an
opportunity to explain to one another our complete o v e r a l l j u d g ment with respect to any m a j o r p r o b l e m - - in this case the question of inflationary influences and how to combat them.
It is because of this, I am sure, that you have unquestionably in
m i n d a feeling that I, and the Retail C r e d i t Institute of A m e r i c a ,
have been pretty much opposed to your thinking. Actually when
given an opportunity, such as I now have had to study your c o m plete analysis of the situation, I find m y s e l f v e r y closely in accord with you - - which of course isn ! t too important to you, but
most interesting to m e .
Because of the confines of m y position and the fragmentary o p portunity to express m y s e l f - - I have been able only to make
known to the B o a r d of Governors views on consumer credit standing alone by itself. Since it is common practice to rate a m a n as
being , f for M or "against" I realize that I have been m a r k e d as an
opponent of Regulation W , whereas, to the contrary, you often
simply have been labeled as f f f o r H it.
A l l of which, i t is evident, comes f r o m taking a minute part of
our thinking out of context.
I have long had the feeling which I have t r i e d to express v e r y
b r i e f l y in the enclosed m a r k e d editorial and bulletin. I wish
A23 S
-
2
-
Honorable M a r r i n e r S. Eccles
F e b r u a r y 2,
1951
you might have time to read them.
I feel strongly, and it seems to m e you probably agree, that i f we
could put the brakes on borrowing by r e t a i l e r s (and s i m i l a r l y wholesalers, manufacturers and others) to finance R e c e i v a b l e s , M we
could hold i n check the rise and fall of consumer accounts without,
at the same time, pin-pointing the individual working family and
denying it the right to buy some specific product badly needed on
credit t e r m s mutually agreeable to buyer and s e l l e r .
I a m convinced that thousands of retailers do not use banks to f i nance their receivables. Hence in their case a purchase by a
customer on f a i r l y long credit t e r m s actually slows up the t u r n over of money, and acts as a deflationary influence
so long
as the retailer is forced to wait for the r e t u r n of his capital
before he can place an order in thewholesale markets to r e plenish his stock.
Is it not basic that when this retailer goes to a bank and by a
loan arrangement increases his deposit account with money,
newly created by the bank through a bookkeeping entry - - that
the r e a l inflationary influence is exerted?
T o go into detail is useless because I am quite certain f r o m your
recent statements that you are well aware of the many r a m i f i c a tions of this thought.
A n d I want m e r e l y here to say that I agree heartily, personally,
with the idea that if through regulatory power the B o a r d of
Governors could persuade banks to tighten up upon the e a r m a r k i n g of such newly created bank loan money for c a r r y i n g
retail accounts receivable f the result not only would equal that
obtained through the m o r e cumbersome Regulation W method
with a l l its social implications - - but spread into other directions
the same policy would increase this effect many times over, and
would t r u l y exert a tremendous deflationary influence.
W i t h kind r e g a r d s .
W i l l i a m f/. Cheyne
WJC:mj
Enc.
I
%EC'D IN FILES SECTION
F ^ t f m i
^ftllBBlJ 10, 1191
Some Notes on Credit and Inflation
Members 2
When arguing the point of whether consumer credit is inflationary, a good
many people who feel i t is not, except under certain circumstances, (a) have
trouble defining these circumstances, and (b) get tangled up in the broader
question of whether credit as a whole is inflationary.
For personal conversations, public addresses, correspondence, etc,, recall that:
Spendable Buying Power
The test of whether or not a factor is inflationary is: "Does i t add to
spendable buying power; does i t add to "demand" without at the same time increasing production or the supply eommensurately?"
To the extent that a merchant is operating with his own capital, owns his inventory, finances his receivables personally - - the purchase of one of his
products on credit has very l i t t l e , i f any, inflationary effect.
Until he receives the instalment payments from the customer, he himself has
no renewed purchasing power than i f the product remained on his shelves.
Actually as compared with a cash customer, the credit customer is tremendously deflationary, for whenever an article is purchased for cash the merchant
can return this cash immediately into the stream of commerce, order new inventory, etc., whereas the credit customer slows up this turn-over considerably by forcing the merchant to wait for the renewed use of this particular
capital.
I f the merchant immediately goes to his bank and borrows, on the strength of
the new account receivable, then this commercial bank borrowing is inflationary - - but not the consumer purchase on credit.
The bank in making the loan creates new, heretofore unissued money, adds dollars to the merchant's checking account by a bookkeeping entry. Considering
the tremendous current bank holdings of government bonds, there has been almost no limit to the no* money they can and do create.
( I t is quite obvious from the retail merchants1 point of view and that of the
average citizen, that this creation of new revolving currency through bank
loans could be stemmed effectively by stiffer controls on commercial bank and
similar lending which creates new currency. Of course, the problems of the
banking fraternity are not fully considered in this "appraisal.")
The only way a retailer who does not borrow from banks can add appreciably to
the inflationary stream through his credit business is for him to finance receivables by using currency which he has kept previously in a mattress or sock,
in absolute non-use. I f he finances new receivables by drawing on his bank
balances, spending money already on deposit in banks, he does not add to the
inflationary stream because he is withdrawing from the stream of commerce ( i .
http://fraser.stlouisfed.org/
e., his bank) funds which the bank has been using right along.
Federal Reserve Bank of St. Louis
Members
-
2
-
January 18, 1951
The two transactions i . e . , financing of the consumer, and withdrawing active
retailer bank balances, counter-balance one another.
Long-Term versus Short-Term Credit - - and Inflation
The second basic question is: "What are the types of credit which are particularly inflationary as they expand?"
Even commercial bank loans which finance consumer purchases are nowhere nearly as inflationary as bank and other loans which create currency - - money - for the production and creation of articles w i l l not be paid for by the purchasers for five, ten or twenty years.
When bank loans finance consumer on average ten or eleven-months within the
then current fiscal year, such loans, as far as the consumer is concerned,
w i l l have been created and cancelled, begun and ended. While an inflationary situation is created momentarily, in the ensuing ten or eleven months
i t is wiped out by the deflationary influence of the repayments.
However, i f one borrows $50,000 to erect a structure, — borrowing the money
from banks, investment houses, or Investors, he starts In motion a flow of
spendable purchasing power with no counterbalancing intention of cancelling
i t out again, except over a period of five, ten, twenty or f i f t y years, 3herefore, as regards any one year, the inauguration of new building borrowings,
over and above the amount of repayments flowing in from previous similar borrowings, has a net inflationary effect. Because of the long-term nature of
these loans, the i n i t i a l emphasis is heavy and the repayment factor in any
one year is relatively light, so that the inflationary influence is immediately noticeable, effective and lasting.
State and Municipal Borrowings
Almost never discussed in arguments on inflation are the tremendous borrowings
of states, municipalities and local governments for the erection of public
buildings, roads, bridges, public parks, and even just to finance increased
payrolls in municipal offices and agencies.
In 1950 the increase of such borrowings ( a l l relatively "long-term" with
sharp inflationary effect, and only infinitesimal deflationary counterbalance
through repayments) far outstripped the increase in the short-term consumer
credit outstanding. The inflationary influence of these borrowings has beexr
many times as great aethat of the eoAsumar cr6dit expansion.
The fact is that almost the entire impact of these new municipal borrowings
has been in direct pressure on prices and wages.
WW M Mil
AAnAH
We shall not discuss here the effect of similar expansion of federal borrowings which create new money to finance unnecessary domestic payroll and other
programs, which could be postponed. You are conversant with this aspect of
the situation.
Sincerely,
http://fraser.stlouisfed.org/
Federal Reserve Bank William
of St. Louis
J. Che^ey^L
Ut4€ilit
JANUARY,
tyowi
H
P l i U
1951
* l w o . ,
WASHINGTON,
M i t u U
^ w a ,
£ < f u a U
tf-awt.
The mere fact that a customer buys a watch on
credit terms does not mean that the supply of money
has been increased. Nor that the credit purchase
has had an inflationary effect.
The only real inflationary influence results from
an increase in the supply of money as balanced
against the supply of goods and services available,
or the activating of existing supplies of money otherwise dormant i.e., buried in a hole in the ground or
in the American family mattress.
Let us examine this. If in selling the watch on
credit the jeweler ties up temporarily some of his
own capital until he has been repaid, the net result
is that he cannot go immediately to the wholesale
market and buy more watches with this particular
capital.
To the extent that in the use of credit by consumers no new money, no new buying capacity, is
added to the total flow, i.e. to the total disposable
annual cash income of the people, it has no inflationary influence.
If, for instance, the people spend $30 billion on
credit purchasing of goods and services, but in the
same year repay $30 billion of indebtedness carried
over from the previous year, actually they here
have added nothing to the stream of money, and
the credit business has not been inflationary.
If, as in 1950 compared with 1949, the people
closed their year with indebtedness $3 billion or so
more than it was at the end of 1949, roughly speaking they have added this $3 billion to the "quantity
of money" thrown into the stream of business during the year.
This is not conclusive, however, because inflationary effect, if there is any, must result from an
actual increase in the flow of spending. Probably
half the merchants in 1950 allowed their accounts
Turn
to Page U
D. C.
The Free Shoppers
Anybody with cash can buy anything he wants, and it is the people
flush with cash who do most of the
boom buying. But the people in moderate circumstances who have to watch
their pennies and who contribute little
to inflation buying, cannot buy a needed article of household furnishings without complying with Regulation W. The
regulation, therefore, bears down hardest, not on the free spenders, but on the
careful shoppers who buy only what
they need.
If the government wants to control
credit, it can well start at the source
with reserve requirements for banks,
open market operations of the Federal
Reserve System, and the rates of interest. Regulation W treats the effect
and leaves the cause untouched.
It is the same old story of "partial
controls," none of which will work.
This business of economic controls is,
as we have said time and again, all oi
nothing.
—Editorial from Charlotte (N.C.) Observer
Money Supply
The root of the (inflation) problem is
the tremendous size of the money supply in relation to the volume of available goods. In 1939 there were only $7
billion of money in circulation. Today
there are about $27 billion. In 1939 total
demand and time deposits were only
$68 billion; today the figure is over $160
billion.
But, while the money supply since
1939 has been tripled, the physical
volume of industrial production — the
amount of goods available to be bought
with all this extra money — has gone
up only about 80 per cent.
—Standard & Poor's Forecast for 1951
THE P E O P L E ' S
JANUARY,
CREDIT
1951
FEDERAL RESERVE 1950 SURVEY OF CONSUMER FINANCES
Statistics on Family Indebtedness
DISTRIBUTION OF SPENDING UNITS HAVING SPECIFIED CHARACTERISTICS, BY SIZE OF TOTAL D E B T , EARLY
1950
[Per cent]
Amount of total debt i
All cases
Characteristics of spending unit
Number
Per
cent
No
debt
Some
debt
$'l-$949
$950$1,949
$1,950- $4,950$9,949
$4,949
$9,950
and over
Not
ascertained1
3,512
100
48
52
27
6
10
6
2
1
1949 money income before taxes:
Under $1,000
$1,000-$l,999
$2,000-$2,999
$3,000-$3,999
$4,000-44,999
$5,000-$7,499
$7,500 and over
479
604
672
615
397
437
269
100
100
100
100
100
100
100
66
58
46
42
34
38
52
34
42
54
58
66
62
48
22
29
35
31
30
19
5
4
5
5
7
9
7
2
4
6
9
12
13
15
15
2
1
3
6
12
15
12
1
(')
(*)
1
1
5
12
1
1
2
1
1
2
2
Occupation of head of unit:
Professional and semiprofessional.
Managerial and self-employed
Clerical and sales
Skilled and semiskilled
Unskilled and service
Farm operator
Unemployed
Retired
287
466
486
895
344
410
187
176
100
100
100
100
100
100
100
100
46
43
53
39
48
44
49
86
54
57
46
61
52
55
51
14
26
14
25
34
39
20
40
6
6
7
5
8
4
9
3
1
9
16
7
11
5
16
3
4
7
12
7
6
3
5
3
1
5
6
1
1
1
2
2
1
1
2
1
Age of head of unit:
18-24
25-34
35-44
45-54
55-64
65 and over
342
779
777
670
495
419
100
100
100
100
100
100
52
37
36
48
60
78
48
63
64
52
40
22
40
35
31
25
20
9
3
7
7
6
6
4
3
10
13
12
9
5
1
8
10
5
3
2
1,459
100
32
68
33
7
14
10
488
100
63
37
30
3
3
1
8
6
2
All units
Family composition of unit:
Children under 18, married head
(all ages)
N o children under 18:
Unmarried heads, under 45
years of age4
Married heads, under 45
years of age
Unmarried heads, 45 years of
age and over *
Married heads, 45 years of
age and over
283
385
764
100
100
100
—
4
1
2
—
——
2
2
2
1
2
1
1
1
2
1
(')
3
1
<«>
—
3
36
64
36
9
78
22
12
2
5
2
<*)
1
17
6
9
3
3
2
60
40
Total reported debt of the spending unit.
Existence or amount not ascertained.
* Less than one-half of 1 per cent.
4 Includes those divorced, separated, or widowed.
1
2
Published monthly by RETAIL CREDIT
INSTITUTE OF AMERICA . . . member-
ship retailer organization of 44 states.
District of Columbia, and Dominion of
Canada . . . dedicated to improvement
and popular acceptance of the credit
function . . . distributed to professional
men and women, educators, civic and
consumer leaders, public officials . . .
editorial content may be reprinted without permission . . .
William J. Cheyney
Editor
Albert L. Maguire Corresponding Editor
1627 K Street. N. W.
Washington 6, D C.
Volume VII
Number 10
Since the last Survey a year ago, there has been
an almost imperceptible increase in the percentage
of family units having any debt at all. Last year
51 percent had some debt; this year 52 percent. The
difference may reflect change in statistical method
more than in family financing.
Last year only 22 percent of the units had any
instalment debt. This year the tables do not show
this separately, but with other ratios remaining almost constant, it is safe to presume the same is true
in this area.
The figures above include mortgage debt on the
buying of homes. It is interesting that only 46 percent of the non-farm American homes are mortgaged and that the smaller the home the more likelihood that it is debt-free.
THE P E O P L E ' S
CREDIT
JANUARY,
1951
Harry F. Byrd
This item is a simple plea for the preservation of freedom in our homes, in
our work and our religion. It is a simple
plea that we do what we know has to
be done—strip off the luxuries of sociological ventures and political bids for
votes by spending public money. It is
a simple plea that we get down to the
sweat and the toil of the work that is
required to make this country fiscally
sound and militarily impregnable . . .
Total consumer indebtedness for the purchase
of automobiles is listed in the latest figures of the
Federal Reserve System at $4 billion. The Reserve
Governors have been able to extricate a portion,
but not all of the "truck" paper from this total listed
as "consumer debt."
The above chart, from "Automobile Facts," illustrates the great need for further research in this
area. It bears out the belief of many economists
that much indebtedness catalogued as "consumer"
in the figures is not of consumer origin.
It has just been noticed, as a sidelight upon the
issue, that at least one state officially permits those
in business and the professions to take income tax
exemption as "business expense" the equivalent of
three-fourths of the annual mileage of passenger
cars which are used in business, where such cars
also serve private family purposes.
Plumbers, carpenters, electricians, salesmen, supervisors and countless others driving passenger
cars, own and use these vechiles principally for
business, in addition to the thousands which are
used exclusively in non-consumer pursuits.
One thing is certain, cars are an absolute "must"
for multitudes of these small and large business
and professional enterprises, whereas their private
family use is a side issue, much more easily dispensed with if necessary. Probably almost the entire indebtedness to banks and others for the purchase of "passenger" cars is chalked up to "consumers," in the official tallies, as the People's Credit
has pointed, out.
Our only hope to meet the responsibilities we have assumed and to preserve our free way of life lies in the
capacity of the free enterprise system
to produce in mass quantities these
goods, materials and engines of war
which are needed under such conditions in better quality and greater
quantity than all of our adversaries
combined . . .
—Senator Harry F. Byrd
Sees No Need Now
Any curtailment in the volume of instalment financing will continue in reasonable proportion to the curtailed production of . . . articles (financed), said
A. E. Duncan, chairman of Commercial
Credit Company.
"The total volume of consumer credit
recently outstanding has been less in
proportion to the total volume of retail sales than in 1941."
The real danger is that public attention will be so fixed upon consumer
credit that it will fail to understand and
realize that there are a million other
ways in which an inflationary potential
may be built up in the economy.
—Commercial and Financial Chronicle
Businessmen should be permitted to
run their own businesses. They know
more about business than government
officials.
—Charles Sawyer, Secretary of Commerce
THE P E O P L E ' S
CREDIT
Cut Waste First
Four Plus Two, Minus
Stripping out the chaff in government
gives the best value, dollar for dollar,
of all the anti-inflationary medicines.
The alternative of a corresponding tax
increase, for example,
financial
rewards
weakens the
for
extra
effort,
trenches on savings, and tends to push
up wages and prices as employers and
employees seek redress for their added
expenses.
Higher taxes (and economic and fiscal controls-Ed.) will be accepted with
far less disturbance to moral and to
economic stability if they are preceded
by a genuine effort at retrenchment in
government.
—The National City Bank of N.Y.
House Committee Agrees
"The subcomittee finds that, in general, executive agencies could do a better job with fewer
employes. In many respects, they have not fully
recovered from the ill effects of the World War II
period. Elaborate staffing requirements still exist.
Work habits are relaxed from the all-out effort
which formerly prevailed.
"Although
some
new
non-defense
activities
have been added to the normal pre-war workload, they are not sufficient to take up the slack.
Functional duties have not been altered in conformance
with
postwar
conditions.
Improved
methods and labor-saving techniques have not
been placed in general practice.
"Reorganization
to
eliminate
duplicate
and
overlapping activities has not been completed.
Overhead
administrative
costs have
increased
sharply. The retrenchment from a peak period of
wartime employment has not been fully carried
out. The cost consciousness which prevailed in the
pre-war period has not been restored.
The full
capacity and myriad talents of the Federal work
force are not properly utilizied."*
JANUARY,
1951
Two, Equals
Four
From Page 1
receivable to rise without resorting to bank loans
or discounting. In the process they used their own
capital and plowed back current earnings so that
a great portion oi this $3 billion increase in outstandings was neither caused by nor itself caused
the creation of new money through bank loans and
discounts.
At year end such merchants as these, with increased receivables, find themselves with less
liquid money to spend for new inventory and less
to distribute to themselves and stockholders as
salaries and dividends.. Both of these conditions are
deflationary, a direct counterbalance to the inflationary element seen in the $3 billion increase in
consumer receivables.
So long as the merchant does not go to his bank
and borrow to make up this difference there is no
inflationary effect. It is only when in the course of
credit buying consumers cause businessmen to borrow more extensively from banks, creating new
money, or to use other heretofore idle (unbanked)
funds, that the inflationary situation is affected.
This of course could be controlled by the banking system through tightened loan requirements
and practices.
It should never be forgotten that had the credit
customers of 1949 paid cash, merchants' capital and
profit immediately would have been replenished,
made available for new inventory and their own
personal spending. Moreover, the debtor customers
instead of having several billions of indebtedness
to repay in 1951, a deflationary deduction from their
expendable income for the year, would enter the
new period scot-free to spend their entire earnings
after taxes, tremendously more inflationary than
their actual present situation.
Said the committee, employees in four agencies—FSA, Treasury, Interior and GSA—used up
an average of 35.5 days each in annual and sick
leave. With a 5-day workweek, this means more
than SEVEN WEEKS out of the year.
Is this in-
flationary?
'From the final report of the House Civil Service
Sub-Committee studying government departmental efficiency.
Pressure of direct service to our member stores
forced us to omit the December issue.
We have extended all subscriptions to The People's Credit to make up the deficit, and hope that
no further omissions may be necessary.—Ed.
February 12, 1951
Mr. William J. Cheyney,
Executive Director,
Retail Credit Institute of America,
1627 K Street, S. W.,
Washington 6, D. C.
Dear Mr. Cheyney:
I greatly appreciate your letter of February 2, 1951*
and I welcome your agreement and support on the problem of combatting inflationary forces which threaten to undermine the value
of the dollar and the stability of our economic system.
I have read your editorial and bulletin with interest,
and think that your distinction between inflationary bank borrowing and business self-financing of customer purchases is well
made. Of course, to the extent that credit permits individual
consumers to purchase goods which they might not otherwise be
able to buy, i t has some inflationary effect, regardless of its
source. I t is, however, true, as you point out, that to the extent a business man must reduce his own purchases because his
funds are tied up in accounts receivable, the extension of credit
to individual consumers may slow-up the trade cycle.
So far as control of bank credit to finance trade receivables is concerned, the great difficulty with this approach
is the ease with which business concerns can divert funds from one
purpose to another. Thus, i f a businessman were denied bank credit
to finance receivables, he might borrow to finance Inventory accumulation or for general working capital requirements, or he might
use funds intended for expansion of fixed assets to finance current
operations and borrow additional funds for the purchase of fixed
assets. Thus, i t is exceedingly difficult to devise a precise and
workable means of restricting bank lending to business, whereas
regulation of downpayment and maturity provisions for individual's
purchases of consumer durable goods are capable of fairly precise
definition and administration.
-
2
-
The great advantage of the quantitative or general credit
controls over the qualitative or eelective credit controls i s that
the former reduce the bank's a b i l i t y to extend credit without
specifying what particular type or types of credit shall be curt a i l e d , vhereas the l a t t e r operate to reduce the demand for specific
types of c r e d i t .
I f the Federal Reserve System were able to apply
general credit controls e f f e c t i v e l y , the need for selective controls
would be greatly reduced.
Very t r u l y yours,
M. S. Eccles
VaLois Eoi,ert /
CBStta
JOSEPH C. O'MAHONEY, WYO., CHAIRMAN
FRANCIS J. MYERS, PA.
JOHN SPARKMAN, ALA.
PAUL H. DOUGLAS, ILL.
ROBERT A. TAFT, OHIO
RALPH E. FLANDERS, VT.
C o n g r e s s o f tfce ® t u t e b S t a t e s
EDWARD J. HART, N. J., VICE CHAIRMAN
WRIGHT PATMAN, TEX.
WALTER B. HUBER, OHIO
FRANK BUCHANAN, PA.
JESSE P. WOLCOTT, MICH.
ROBERT F. RICH, PA.
CHRISTIAN A. HERTER, MASS.
JOINT COMMITTEE ON THE ECONOMIC REPORT
(CREATED PURSUANT TO SEC. 5(A) OF PUBLIC LAW 304, 79TH CONGRESS)
February 12, 1951
Mr, Marriner 8. Eccles,
Board of Governors of the
Federal Reserve System,
Washington, I)• C.
Dear Mr# Eccles:
Senator 0*Mahoney asked me to thank you for
sending him the statement on monetary policy by some of the
University of Chicago economists.
We had received a copy
early enough to include in our hearings, which are currently
being printed.
Sincerely yours,
Grover W. Ensley
Associate Staff Director
@FedFRASER