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CONFIDENTIAL
BOARD OP GOVERNORS Of THE FEDERAL RESERVE SYSTEM
MEMORANDUM
To:
January 11, 19U9
Informal Group Selected to Consider
Questions Relating to Regulation W
Subject: Policy Change in
Regulation W
From: Mr* Thomas, Mr# Leonard,' and Mrt Young
The attached staff report analyses recent tendencies in the general
economic situation (Part I) and specific tendencies in the instalment credit
and consumer durable goods sector (Part II) # The main conclusions of the
report and their implications for Regulation W are presented below.
Background Comment*
Since the end of the war, effective demand on the part of business,
consumers, and Government has been so strong as to result not only in practically full employment but also in sharply rising prices. This broad
inflationary movement, however, has not been continuous*
On several occasions
it has appeared that inflationary pressures were waning and that the immediate
business outlook was one of general price weakness and rising unemployment*
Such evaluations were being made, for example, in the spring of 1947 and
again in the first quarter of 1948. Each of these periods was ended, however,
by a renewal of the inflationary spiral. The past few months again have
witnessed an abatement of inflationary pressures and again there is a fairly
widespread belief that some dowiward readjustment is under way, although some
of the underlying forces of inflation continue.
General Economic Outlook.
Taking into account recent indications of developing weakness in
the business situation, underlying factors of continuing economic strength
and such new factors as phanges in Federal expenditures and tax programs,
• 2 bargaining for a fourth round of wage increases, adjustments required in
business inventory positions, and expanded reliance on farm support prices,
the following expectations and possibilities seem reasonable:
(1) A renewal of increases on a broad front in wholesale prices and
in the cost of living during the next six months is highly unlikely.
(2) In view of the underlying factors of strength in the economy, sub~
stantial deflation and recession also appear unlikely.
In other words,
prospects still are good for sustained high levels of employment with average
prices stable or perhaps declining somewhat as piecemeal adjustments continue
to be made*
In some lines, moderate reductions in production and employment
along with significant price declines are likely, but these should be largely
offset by expanding production and employment and rising prices in other areas,
thus leaving levels of activity much the same as at present.
This expectation
is tentative and subject to revaluation both because of the recency of the
change of trends and the relatively small magnitudes of the changes involvedf
(3) The expansive forces contributing to the growth of inflation during
the past three years now may be so nearly expended that a cumulative downturn
might supplant, sometime this year, the condition of piecemeal adjustment
which we have had for the past three years.
(U) T^ith the economy generally as delicately balanced as it now appears
to be, the outlook beyond the middle of the year is especially clouded.
Changes in Government policies in the domestic and international fields, as
yet unknown, may well exert a decisive influence on the course of economic
activity. Substantial enlargement of the defense or foreign aid programs
could provide the stimulus for a renewal of the inflationary spiral.
-3 Refunds on National Service Life Insurance, scheduled for fall, will undoubtedly strengthen consumer demand.
An unfavorable crop this summer might also
strengthen inflationary pressures.
The money supply and total volume of
liquid assets are still large in relation to the economy1s needs and the
ownership distribution of holdings is still broad*
(5)
In the absence of important changes in Government policies in fiscal
and other areas, the likely alternatives for the short-run future ahead appear
to be:
(a) relative general stability with further piecemeal adjustment in
prices, output, and employment, or (b) general prosperity with little change
in, or slowly falling, prices, accompanied by a gradual increase in credit and
accumulation of durable goods, which might eventually turn into a speculative
expansion and ultimately a marked recession (as in the 1920fs), or (c) a
recession, beginning sometime this year, brought on by the wearing out of the
postwar boom in domestic capital investment, consumer durables, net exports,
and the accumulation of maladjustments in prices, incomes, and investments*
Specific Tendencies in Instalment Credit
and Consumer durable Goods
""
(1) A noticeable slackening has taken place in the rate of growth of
consumer instalment credit, especially since the reimposition of Regulation W,
reflecting in part reduced volume of new credit and in part acceleration of
repayments,
The slowing down in volume of instalment credit has characterised
each major segment of the instalment business —• automobile, pth?r retail,
and cash loans.
(2) At the end of the year, total instalment credit outstandings exceeded 8 billion dollars, nearly a third more than a year earlier, and about
one-quarter more than the prewar peak. Total consumer credit amounted to
nearly 16 billion dollars, or one-»third more than the prewar record and one~
seventh above a year ago*
Throughout the postwar period there has been a
tendency in all categories of consumer durable retailing towards a rising
proportion of time payment to total sales, and this tendency was further
continued in 19i|£t
(3) Available evidence suggests that in the major sector of instalment
credit — new passenger car financing, Regulation W has had the direct effect
of increasing average downpayments from I4.7 to h9 per cent and decreasing
average maturities from 20 to 16 monthsf
Average monthly payments have ap-
parently increased from 73 to 39 dollars. Differences in these effects
appear, of course, among the various car-price classesf
(il) Another impact in the automobile field, attributable in some part
to Regulation W, has been a sharp decline in the prices of used cars, particularly prices of recent models*
Premium prices are still obtainable on
many "used" new cars, especially in lower price brackets.
(5) Retail sales of consumer durables, particularly of household
appliances and used cars, exhibited a marked weakening in the fourth quarter
of 1948# and total retail sales showed distinct signs of leveling off,
Levels of dollar sales, however, are substantially above prewar years. With
respect t# all categories of durable goods, dealers appear to faoe a problem
of maintaining sales volume at prevailing prices for the first time since the
war.
- 5(6) Factory production of most consumer durable goods has continued at
high levels, but with recent flagging sales* there has probably been some
inventory accumulation at wholesale and retail levels*
In 19i{£ output of
a few household lines was moderately below 19U7*
(7) Employment in consumer durable goods industries has also continued
at high levels, but there are currently more frequent reports of tempprary
lay-offs, actual or prospective.
Generalization of recent tendencies is
difficult because of varying seasonal and other production conditions in the
several industries*
(8) Equity positions in the sales finance business were under strain
prior to Regulation W and subsequent developments have brought only slight,
if anyf improvement in financial positions. Partly under pressure of
limited funds, some sales finance companies have apparently been placing
greater emphasis on automobile financing, causing dealers in appliance lines
to rely more heavily upon their own resources and on bank financing*
Furni-
ture dealers continue to rely on their resources supplemented by bank financing*
Reports indicate that sales finance companies are especially concerned
about the volume of funds they have tied Up in dealer stocks, and are tending
to limit the volume of "wholesale" paper they are willing to handle for
individual dealers*
Such policy "rationing" of dealer financing has an
immediate impact on factory sales, output, and employment*
Alternative Policy Actions.
In view of the uncertain general economic situation and outlook,
together with recent tendencies in the instalment credit and consumer durable
goods area, consideration might be given to three alternative courses of
Regulation W policy*
- 6(1) No change in policy at this time+
The case in favor of this course
may be found in the continuing full-employment position of the economy, the
existing high production and consumption levels in the consumer durable goods
sector, the generally strained position of the instalment financing business,
continued expansion in the already record levels of total consumer indebtedness, and the uncertainty as to the meaning of the scattered weaknesses which
have appeared.
Such a policy course would be consistent with apprehension over
the excessively high prices currently prevailing and the dangers of further
inflationary developments expressed in the President's State of the Union
Message and Economic Report, and also with the Presidents legislative program
for economic stabilisation,
(2) A policy of limited relaxation.
The competitive and highly fluid
character of consumer credit and the need for maximum simplicity in regulating
day-to-day operations of many sellers and lenders makes it difficult to single
out narrow segments of the Regulation W field for tightening or relaxation.
?fiLth further careful study, it might be possible, however, to work out for
new cars and higher priced used automobiles (the area most subject to criticism
at the moment) some limited relaxation in maturities where unpaid balances
exceed $1,000. Such a relaxation, which might be from 18 months to 2i|. months,
would not necessarily require a change in other maturities*
(The longer
maturities might, perhaps, be permitted only in those cases where the downpayment is kO per cent instead of 33 l/3 per cent.) Another possible relaxation, suggested by recent weakening in sales and instalment credit tendencies
for Group B articles, would be a reduction in downpayment requirements for
these articles from 20 per cent to, say, 15 per cent.
This relaxation would
-7 present no administrative difficulties*
In view of the President's messages
and legislative program, a limited relaxation of Regulation W along these
lines might be difficult to justify at this time in terms of anti-inflation
objectives.
It is conceivable, however, that suph a limited relaxation to be
effective for a predetermined short time might be justified on seasonal grounds
without conflicting with anti-rinflation objectives.
(3) A general easing of the Regulation*
This course of policy might
be argued on the theory that, with recent tapering off of inflationary tendencies,
the restraint imposed by iegulation W has largely served its purposes. This
argument assumes that, with some softening in the situation, effepts of the
Regulation are to make for further weakness and further contends that, with
at least some possibility of moderate downturn which might become a cumulative
recession, easing of the Regulation should be prompt and vigorous*
It would
be implied that, if later developments showed a recovery of strength, the
terms could again be tightened*
However, such a course of policy would seem
to be premature in view of the possibilities that:
(a) recent softness in
automobile retailing may reflect more seasonal and model change-over influences
than sharply reduced demand; (b) weakness in the economic situation may not
become much more serious than already shown; and (c) underlying strength and
possible optimistic developments could easily convert scattered weakness into
general strength with inflationary features.
The policy would also run
counter to positions on the economic situation already taken by the
Administration*
Concluding Comment.
Although prospective economic tendencies are highly uncertain, there
is probably not enough indication in recent weaknesses in the consumer durable
-
8
T
goods field and in the economy generally to justify the third alternative
course of policy*
The first alternative would appear to have the strongest
support in current and prospective economic tendencies•
A case might be
made, however, for the second alternative, but exact specifications for a
limited relaxation would have to be worked out carefully in order to avoid
unduly complicating the Regulation*
Business and consumption tendencies will need to be watched care-*
fully during the next few months, and if signs of downturn multiply, the
question of a comprehensive relaxation of Regulation 7F terms will need to be
reviewed.
Attachments
@FedFRASER