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February 11,


Mr. S. R* Carpenter, Secretary,
Board of Governors of the
Federal Reserve System,
Washington 25, D* C*
Dear Mr* Carpenter:
This letter constitutes the interim report on developments
in the instalment credit field requested in your letter of January 27,
19^9* Comment numbers conform to the numbers of the questions listed
in the Board's letter*
1* Electrical appliances, generally, and radios, washing
machines, and refrigerators, specifically, have accumulated at the
dealers1 level in recent months in most parts of the district*
Stocks of used cars also appear to be excessive* Part of this latter
increase is seasonal but in most cases it reflects a more than
seasonal decline in demand* There is only scattered evidence of an
abnormal increase in furniture stocks and, even where they exist,
the relatively large inventories are not regarded as seriously out
of line* Part of the increase in appliance stocks can be traced to
changes in models and design - and the failure of dealers to dispose
of the old stock before receiving shipments of new models* In some
lines, such as refrigerators, a seasonal factor is involved* Part
of the imbalance between stocks and sales reflects the difficulty
of moving off-brand items* Yet, after allowing for all these, it
appears that the major factor accounting for larger inventories is
the sharp drop in demand* It should be noted that, in cases where
retailers1 inventories are in fairly good shape relative to sales,
this results from the fact that dealers have been refusing shipments,
preferring, as they put it, to let the distributor and/or the manufacturer carry the inventories*
2* With the exception of the l$h$ Chevrolet, few if any other
makes of "used" new cars command a premium in the used car markets*
This situation is reported in all parts of the district* Concessions are being made by some automobile dealers (on high priced or
off-brand makes, or makes where new models are expected shortly),
the concession usually taking the form of a slightly more liberal
trade-in allowance than was being granted a few months ago. However,
even in those cases the allowance is held somewhat below the NADA

Mr. S. R. Carpenter

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February U , 19k9

(Bluebook) value* Scattered reports of merchandising concessions
by furniture and appliance dealers were obtained but this practice
by no means is general* In part the increase in trade-in allowances
on new cars may be seasonal* To a larger extent it is a reflection
of the decrease in demand, which in turn is attributed by many respondents to a widespread inability on the part of the potential
customer to meet the monthly payments required under Regulation W.
These respondents say that the down payment can be managed, particularly where a trade-in is possible, but the size of the required
monthly payments is so large that many customers are eliminated from
the market.
3* The banks and finance companies indicate that, while they
are not particularly reluctant to handle retail instalment paper,
they are screening applications with considerably more care now than
they did a few months ago* Most banks apparently are not actively
soliciting new accounts, although there are a few exceptions, but
are continuing to service their old customers. Specific items
mentioned by banks as being subjected to more careful scrutiny are
radios and used cars. One finance company reported that credit
granted on used cars is held to a level that is 10 to 1!> per cent
below the NADA level. It is interesting to note that, while banks
and finance companies said they are growing more cautious, this
tendency apparently has not impressed itself on automobile and appliance dealers who rather generally indicate that they are experiencing no increased difficulties in handling the paper through their
lending agencies. Reasons given by the banks for the more careful
examination of applications are (a) doubt with respect to the future
price level, and (b) in some cases, to the employment outlook. One
bank says U0 per cent of the applicants have been denied credit because they already have two or more other instalment loans*
U. Lending agencies generally are tightening credit lines
extended to dealers for floor plan financing. This is particularly
true in the case of automobile and truck financing but also is true
of appliance dealers. In some cases it has been reflected in higher
interest rates nhile in other instances the tightening has resulted
in a reduction in the amount of credit extended. Generally, banks
report they are continuing to serve their old accounts but are
adding no new customers*
5. In almost all parts of the district, bankers report known
instances of dealers being over-extended financially. Retailers,
themselves, in some cases indicate knowledge of other dealers being
over-extended. This condition apparently has been confined pretty
much to smaller retailers, particularly those handling off-brand
items in the appliance field* Where the credit picture is reported
generally satisfactory, the reason given by the bankers is that over-

Mr* S. R. Carpenter

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February 11, 19h9

extensions are not present because they are watching the situation
very closely and are reducing credit or cutting it off completely
when the outstandings begin to get out of line* In a number of areas
there are bankers who state they are and have been exercising increasing caution in making loans of this type, and at the same time
report instances of dealers being over-extended. This appears somewhat inconsistent but it may reflect the fact that the market changed
so rapidly, particularly in the case of refrigerators, stoves, and
used cars, that an over-extended condition developed despite the
bankers1 screening of loan applications*
6* Since November, 19U8, cutbacks in employment have occurred
in Eighth District plants manufacturing refrigerators, stoves, automobiles and automobile parts, electrical equipment used in electrical
appliances, and in some woodworking lines* Lay-offs that occurred
since November in plants producing refrigerators and stoves largely
reflect a decline in sales* Some of this decline is attributed to
the fact that for the first time since the end of the war sales may
have begun to return to their prewar seasonal pattern* Most of the
decrease is believed to reflect (a) the exhaustion of the urgent
demand and (b) increasing consumers1 resistance or reluctance to buy*
The reimposition of Regulation W is given as a third factor - one
manufacturer noted that it was just the straw that broke the camel1s
Inventories of refrigerators, at the manufacturers1 and
at the wholesale and retail levels, increased considerably in 19U8*
As a result, it is believed by the industry that 19k9 production will
have to move into consumption channels and not into inventories* How
to increase consumption is a major problem* One leading stove company believes the answer lies in producing a stove that can be sold
for less money* This solution is not regarded favorably by one
refrigerator manufacturer who believes the answer lies in greater
sales effort*
The lay-offs at automobile plants largely reflect model
changeovers, although one plant reduced employment here as a part of
a national curtailment program* However, production is expected to
equal that in 19U8* At the plants where model changes were the
reason for reductions, employees are being recalled and full operations are expected by the middle of March* Employment cuts have occurred in plants manufacturing fractional horsepower motors widely
used in electrical appliances* Inventories are large and it is
hoped that these can be reduced sufficiently to permit a return to
somewhat higher employment levels* Scattered cutbacks are reported
in the furniture industry but as yet they are neither widespread
nor extensive*
Although not specifically asked for by your letter, I am
including a synthesis of opinion with respect to Regulation W #


Mr. S. R. Carpenter

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February 11, 19U9

The principal opposition to Regulation W in this district
comes from used car dealers. Opinion among appliance dealers is
mixed and, -while the majority are in favor of the regulation, specific
modifications have been suggested. Bankers generally favor the
regulation, although, again, some opposition is voiced* The limited
number of finance companies contacted restricts the value of the
opinion obtained, -which in general favored the regulation with some
modification. Furniture dealers1 opinion largely favored the credit
Specific proposals for changes in the provisions differ
among the various groups involved. In the new automobile field it
is felt that the down payment requirements are satisfactory but the
pay-off period should be lengthened to 2U months. Appliance dealers
favor the regulation but want the controls changed to permit them to
deduct from the required down payment any trade-in allowance that is
granted. These people report considerable difficulty on the part of
customers in raising the down payment, but the monthly payments can
be met.
We will develop information on the same questions and send
it to you in early March in our regular quarterly report on significant
banking developments.
Yours very truly,

Chester C. Davis,