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REGULATION OF CONSUMER INSTALMENT CREDIT The B o a r d o f G o v e r n o r s o f t h e F e d e r a l Reserve System has recommended t o t h e Chairmen o f t h e Senate and House B a n k i n g and C u r r e n c y Committees a b i l l w h i c h w o u l d a u t h o r i z e t h e B o a r d t o c o n t i n u e on a s p e c i f i c legislative b a s i s t h e r e g u l a t i o n o f consumer i n s t a l m e n t c r e d i t t h a t i s now b a s e d on E x e c u tive Order. As t h e members o f y o u r Committee know, s i n c e t h e end o f t h e war t h e q u e s t i o n o f w h e t h e r some r e s t r a i n t s upon o v e r e x p a n s i o n o f t h i s t y p e o f s h o u l d be r e t a i n e d has been t h e s u b j e c t o f s h a r p c o n t r o v e r s y . credit The B o a r d has hoped t h a t Congress w o u l d h e a r t h e p r o s and cons b e f o r e coming t o a c o n c l u s i o n as t o w h e t h e r l e g i s l a t i o n s h o u l d o r s h o u l d n o t be e n a c t e d . We f e e l t h a t r e g u l a t i o n of t h i s c h a r a c t e r s h o u l d have s p e c i f i c l e g i s l a t i v e s a n c t i o n i f i s t o be i n d e f i n i t e l y e x t e n d e d i n p e a c e t i m e . it A c c o r d i n g l y , we have recommended t o t h e P r e s i d e n t t h a t t h e E x e c u t i v e O r d e r be v a c a t e d i n t h e e v e n t t h a t the B a n k i n g and C u r r e n c y Committees do n o t recommend f a v o r a b l y t h e enactment appropriate authority f o r continuing regulation. of The P r e s i d e n t has w r i t t e n a l e t t e r i n d i c a t i n g t h a t he w i l l f o l l o w t h e B o a r d 1 s recommendation b u t at t h e same t i m e e x p r e s s i n g t h e hope t h a t t h e Congress w i l l e n a c t t h e n e c e s s a r y enabling l e g i s l a t i o n . T h i s l e t t e r i s as f o l l o w s : June 5 , 1947 Dear M r . Chairman: The C o u n c i l o f Economic A d v i s e r s has t r a n s m i t t e d t o me a memorandum i n r e g a r d t o t h e l e g i s l a t i o n w h i c h t h e B o a r d o f G o v e r n o r s has recommended f o r c o n s i d e r a t i o n b y Congress t o c o n t i n u e i n s t a l m e n t c r e d i t r e g u l a t i o n s now i n e f f e c t u n d e r an E x e c u t i v e O r d e r based on t h e T r a d i n g w i t h t h e Enemy A c t . t h e i r memorandum t h e C o u n c i l states: In -4n T h e r e now e x i s t s t h e power t o l i m i t t h e g r o w t h o f i n s t a l m e n t c r e d i t w h i c h , even under t h e p r e s e n t r e s t r a i n t s , has been expanding a t a d i s t u r b i n g rate. T h i s power now r e s t s on w a r t i m e E x e c u t i v e O r d e r , w h i c h may have t o be r e s c i n d e d i n t h e absence of authority for i t s continuation. legislative I f t h e curbs on t h e e x t e n s i o n o f i n s t a l m e n t c r e d i t now b e i n g e x e r c i s e d under R e g u l a t i o n W were t o be removed a t t h i s time, t h e r e w o u l d be a tendency o f p r o d u c e r s and d i s t r i b u t o r s t o t r y t o s u s t a i n t h e a b s o r p t i v e power o f t h e market b y a c c e p t i n g l o w e r down-payments and a l o n g e r t i m e p e r i o d r a t h e r than a d j u s t i n g p r i c e s t o the purchasing power o f c u r r e n t incomes. T h i s w o u l d postpone r a t h e r t h a n promote t h e k i n d o f s t a b l e adjustment t h a t our economy r e q u i r e s . 1 1 I wish t o advise you t h a t I am i n f u l l a c c o r d w i t h t h e C o u n c i l 1 s recommendations and hope t h a t t h e Congress w i l l enact t h e necessary l e g i s l a t i o n t o r e t a i n r e s t r a i n t s upon e x c e s s i v e expansion w h i c h r e s u l t s i n e x c e s s i v e c o n t r a c t i o n of consumer c r e d i t t h e r e b y making f o r economic i n s t a b i l i t y , reduced p r o d u c t i o n , and unemployment. I f t h e Congress does n o t see f i t t o p r o v i d e t h e n e c e s s a r y l e g i s l a t i v e a u t h o r i t y , i t i s my i n t e n t i o n t o v a c a t e t h e E x e c u t i v e Order because I do n o t b e l i e v e t h a t such r e g u l a t i o n s s h o u l d r e s t i n d e f i n i t e l y i n peacetime on emergency o r war powers a f t e r t h e Congress has had ample o p p o r t u n i t y t o c o n s i d e r t h e Very s i n c e r e l y yours, (S) H a r r y S. Truman subject. -3I f l e g i s l a t i o n i s t o be passed, we b e l i e v e f r o m our e x p e r i e n c e t h a t consumer c r e d i t r e g u l a t i o n s h o u l d be d i r e c t e d t o t h e v o l a t i l e s e c t o r o f consumer c r e d i t , t h a t i s , i n s t a l m e n t c r e d i t • T h i s i s t h e p a r t w h i c h has been subject t o the greatest f l u c t u a t i o n s i n the past, thus contributing t o s t a b i l i t y and unemployment. in- R e g u l a t i o n under t h e proposed l e g i s l a t i o n w o u l d be i n about t h e f o r m and scope e f f e c t i v e a t p r e s e n t under t h e Board 1 s Regul a t i o n W. I t would, w i t h appropriate exceptions t o provide administrative f l e x i b i l i t y , p r e s c r i b e maximum m a t u r i t i e s f o r a l l t y p e s o f i n s t a l m e n t and i n a d d i t i o n w o u l d p r e s c r i b e minimum down payments f o r i n s t a l m e n t credit credit t o f i n a n c e t h e purchase o f i m p o r t a n t c a t e g o r i e s o f consumers 1 d u r a b l e goods. Thus, t h e r e g u l a t i o n w o u l d cover n o t o n l y i n s t a l m e n t c r e d i t f o r consumers* d u r a b l e goods b u t a l s o i n s t a l m e n t c r e d i t f o r o t h e r consumer p u r p o s e s , b o t h o f w h i c h c o n t r i b u t e t o t h e a c c e n t u a t i o n of b u s i n e s s upswings and downswings and n e i t h e r o f w h i c h can be s h a r p l y d i s a s s o c i a t e d f r o m t h e o t h e r . G e n e r a l l y s p e a k i n g , t h e i n s t a l m e n t terms now p r e s c r i b e d b y R e g u l a t i o n W c a l l f o r m a t u r i t i e s o f n o t more t h a n 15 months and down payments o f a t least one-third. Under t h e proposed l e g i s l a t i o n , t e r n s w o u l d , o f c o u r s e , be v a r i e d f r o m t i m e t o t i m e depending upon changing economic c o n d i t i o n s b u t w i t h a v i e w t o r e s t r a i n i n g t h e development of unsound c r e d i t t e r m s and w i t h a v i e w t o p r e v e n t i n g o r r e d u c i n g e x c e s s i v e expansion o r c o n t r a c t i o n o f consumer i n s t a l m e n t c r e d i t w h i c h i s t h a t s e c t o r o f consumer c r e d i t s u b j e c t t o t h e w i d e s t fluctuation. These w o u l d be t h e d e c l a r e d s t a t u t o r y objectives. Under e x i s t i n g c o n d i t i o n s when t h e a r t i c l e s commonly f i n a n c e d w i t h i n s t a l m e n t c r e d i t a r e f o r t h e most p a r t i n s h o r t s u p p l y r e l a t i v e t o demand, i t i s apparent t h a t t h e r e s t r a i n t s h e l p t o dampen t h e demand and t h u s reduce -4t h e upward p r e s s u r e on p r i c e s . Even when goods become a v a i l a b l e i n l a r g e r q u a n t i t i e s , however, reasonable r e s t r a i n t s on consumer i n s t a l m e n t c r e d i t would serve a u s e f u l p u b l i c p u r p o s e , because t h e y w o u l d t e n d t o i n d u c e s e l l e r s to r e a c h more customers by r e d u c i n g p r i c e s i n s t e a d o f by r e s o r t i n g t o a c o m p e t i t i v e r e l a x a t i o n o f i n s t a l m e n t c r e d i t terms w h i l e s t i l l m a i n t a i n i n g h i g h p r i c e s . Under p r e v a i l i n g c o n d i t i o n s o f maximum, peacetime employment and n a t i o n a l in- come, i t w o u l d be e c o n o m i c a l l y unsound t o encourage people t o go deeper and deeper i n t o debt on i n c r e a s i n g l y easy t e r m s . To i l l u s t r a t e : t h e p r i c e s o f a u t o m o b i l e s i n t h e used c a r market t o d a y r e v e a l a s e r i o u s l a c k o f b a l a n c e between s u p p l y and demand. I n that m a r k e t , 1947 c a r s i n t h e l o w e s t p r i c e l i n e s a r e s e l l i n g f o r premiums o f $3Q0 and $400 above t h e d e l i v e r e d p r i c e s e s t a b l i s h e d f o r t h e s e c a r s when new. P r i c e s o f o l d e r used c a r s a r e i n p r o p o r t i o n . These p r i c e s have been h o l d i n g f i r m , and even showing some tendency t o r i s e , n o t w i t h s t a n d i n g t h e p r e s e n t credit restrictions. W i t h t h e added demand f o r b o t h new and used c a r s which w o u l d r e s u l t f r o m t h e removal o f c r e d i t r e s t r i c t i o n s and w i t h a s u p p l y o f b o t h w h i c h i s s t r i c t l y l i m i t e d by t h e p r o d u c t i v e f a c i l i t i e s , l a b o r supply, and m a t e r i a l s a v a i l a b l e , t h e r e i s no l i k e l i h o o d t h a t t h e r e w o u l d be t h e downward a d j u s t m e n t i n p r i c e s o f used c a r s t h a t i s so much needed. trary, i f On t h e c o n - c r e d i t r e s t r i c t i o n s a r e removed, t h e r e i s e v e r y r e a s o n t o expect t h a t t h e p r e s e n t a b n o r m a l l y h i g h p r i c e s o f used c a r s w i l l i n c r e a s e further i n r e l a t i o n t o t h e p r i c e s e s t a b l i s h e d by m a n u f a c t u r e r s f o r new c a r s . A down- ward a d j u s t m e n t i n used c a r p r i c e s i s e s p e c i a l l y needed by t h e w o r k i n g p e o p l e and t h e l o w e r income groups who make up t h e p r i n c i p a l market f o r used c a r s . -4Not¥dLthstanding c o n t i n u e d s h o r t a g e s o f goods, p a r t i c u l a r l y durable goods, and n o t w i t h s t a n d i n g r e g u l a t i o n o f consumer c r e d i t , i n s t a l m e n t c r e d i t panded d u r i n g t h e p a s t 12 months by more t h a n 2 b i l l i o n d o l l a r s . ex- The economic e f f e c t o f adding borrowed d o l l a r s t o c u r r e n t income, t o g e t h e r w i t h t h e u n p r e c e d e n t e d ^ l a r g e volume o f savings i n t h e hands o f t h e p u b l i c can o n l y be t o p r o l o n g t h e p e r i o d o f i n f l a t e d p r i c e s . generally, The premature r e l a x a - t i o n o f r e s t r a i n t s , o r t h e i r complete r e m o v a l , w o u l d make no more goods a v a i l able. I t would only help t o hold p r i c e s high i n the marketplace. W i t h e x i s t i n g shortages i n consumers 1 d u r a b l e goods and t h e r e - s t r a i n t o f R e g u l a t i o n W, t h e volume o f consumer i n s t a l m e n t c r e d i t has n o t reached a p o i n t where i t c o u l d be c o n s i d e r e d e x c e s s i v e as viewed i n t o t h e l e v e l o f n a t i o n a l income and p r o d u c t i o n . relation The r e s t r a i n t i s now imposed because o f o t h e r c u r r e n t f a c t o r s such as t h e h i g h i n d i v i d u a l incomes and t h e l a r g e cash r e s o u r c e s w h i c h consumers w i d e l y possess as r e l a t e d t o t h e o f consumers 1 d u r a b l e goods a v a i l a b l e . supplies Were goods a v a i l a b l e i n l a r g e r volume and were many consumers a b l e t o f i n a n c e t h e i r purchases on e a s i e r c r e d i t t h e r e i s l i t t l e q u e s t i o n b u t t h a t t h e volume o f consumer i n s t a l m e n t w o u l d be much h i g h e r . As an i n d i c a t i o n of t h e p o t e n t i a l i t i e s , terms, credit sales of con- sumers 1 d u r a b l e goods i n 1946 were n e a r l y t w i c e t h e d o l l a r volume o f such s a l e s i n 1940 b u t t h e volume o f i n s t a l m e n t s a l e s c r e d i t extended i n 1946 was l e s s t h a n t h r e e - f o u r t h s o f t h e i n s t a l m e n t s a l e s c r e d i t extended i n 1940* Thus w i t h t h e e l i m i n a t i o n o f r e s t r a i n t and t h e l a r g e r s u p p l i e s o f goods t h a t a r e becoming a v a i l a b l e , consumer i n s t a l m e n t c r e d i t c o u l d i n c r e a s e r a p i d l y a b s o l u t e volume and i n r e l a t i o n t o n a t i o n a l income. in -4The need f o r r e g u l a t i o n i s n o t m e r e l y a t e m p o r a r y one. Experience has shown t h a t t h e e x c e s s i v e expansion and subsequent c o n t r a c t i o n o f consumer i n s t a l m e n t c r e d i t c o n t r i b u t e s s u b s t a n t i a l l y t o t h e r i s e and f a l l o f p r o d u c t i o n and employment. I t s r o l e i n i n s t a b i l i t y i s i n c r e a s i n g w i t h t h e growing i m p o r t a n c e of consumers 1 d u r a b l e goods i n t h e economy. I t is recognized t h a t t h e development o f t h i s t y p e o f c r e d i t has gone hand i n hand w i t h and f a c i l i t a t e d t h e u n p a r a l l e l e d i n d u s t r i a l development o f t h e n a t i o n . Yet, i t is e q u a l l y s i g n i f i c a n t t h a t when c o m p e t i t i o n t a k e s t h e f o r m o f r e l a x i n g c r e d i t t e r m s and i s c a r r i e d t o extremes, i t soundness. i s a symptom and cause o f economic u n - M i l l i o n s o f people a r e encouraged t o o v e r p l e d g e f u t u r e income. T h i s i n e v i t a b l y e n t a i l s i n s t a b i l i t y , because t h e excessive c r e d i t extended d u r i n g a b u s i n e s s boom a c c e n t u a t e s t h e boom and has t o be l i q u i d a t e d out of c u r r e n t income on t h e downswing, w h i c h a c c e n t u a t e s d e p r e s s i o n . The f a c t that c u r r e n t income has t o be used t o pay o f f e x c e s s i v e i n s t a l m e n t debt c r e a t e d d u r i n g t h e b u s i n e s s boom n e c e s s a r i l y d i v e r t s t h a t income f r o m t h e channels o f consumer e x p e n d i t u r e s i n t h e d e p r e s s i o n , e s p e c i a l l y i n t h e i m p o r t a n t s e c t o r o f consumers 1 d u r a b l e goods. V o l u n t a r y e f f o r t s made b y f o r e s i g h t e d r e t a i l e r s , s a l e s f i n a n c e com- p a n i e s , b a n k s , and o t h e r l e n d e r s t o p r e v e n t down payments f r o m becoming e x c e s s i v e l y s m a l l and repayment p e r i o d s f r o m becoming o v e r - e x t e n d e d i n t i m e s o f c r e d i t expansion a r e i n e f f e c t i v e because of t h e a g g r e s s i v e o f t h o s e who w i l l n o t v o l u n t a r i l y cooperate i n t h i s competition objective. The p r e s e n t t r e n d o f expansion i n consumer i n s t a l m e n t debt needs t o be c a r e f u l l y watched and r e s t r a i n e d so t h a t t h e c o u n t r y s h a l l n o t r e p e a t t h e p a t t e r n o f i n d u c i n g American f a m i l i e s t o go h e a v i l y i n t o debt on t o o easy t e r m s , p a r t i c u l a r l y f o r h i g h - p r i c e d goods many o f w h i c h a r e n o t only -4h i g h - p r i c e d but of i n f e r i o r q u a l i t y . The d e c l i n e t h a t w o u l d be bound t o follow w o u l d be f e l t n o t o n l y i n t h e d u r a b l e goods i n d u s t r i e s b u t t h r o u g h o u t t h e econoisy. C o n t i n u e d r e s t r a i n t s as proposed i n t h e l e g i s l a t i o n w o u l d h e l p t o p r e v e n t a r e p e t i t i o n o f such an unsound sequence o f events. The B o a r d f e e l s t h a t t h i s t y p e o f r e g u l a t i o n , w h i c h i s o f a s e l e c t i v e c h a r a c t e r , serves a u s e f u l purpose w h i c h cannot be reached by t h e e x e r c i s e o f any powers o v e r bank c r e d i t i n g e n e r a l . The r e g u l a t i o n i s needed, t h e r e f o r e , as a supplement t o g e n e r a l c r e d i t c o n t r o l powers. As t h e B o a r d p o i n t e d out i n i t s 1945 Annual R e p o r t t o Congress, however, o v e r a l l restraints t o t h e sources of bank c r e d i t have, under e x i s t i n g c o n d i t i o n s , l o s t much o f t h e i r effectiveness. F o r t h i s reason i t i s a l l t h e more i m p o r t a n t f o r Congress t o c o n s i d e r whether a s e l e c t i v e c o n t r o l such as proposed w o u l d , as t h e Board b e l i e v e s , reduce economic i n s t a b i l i t y and t h u s h e l p t o p r o v i d e more f a v o r a b l e t o t h e maintenance o f our p r i v a t e e n t e r p r i s e conditions system. The case f o r permanent l e g i s l a t i o n seems t o t h e Board t o be v e r y strong. A t t h e same t i m e , we r e c o g n i z e t h a t Congress may n o t f e e l t h a t there i s t i m e enough, a t t h e p r e s e n t s e s s i o n , t o g i v e adequate c o n s i d e r a t i o n t o a permanent measure. F o r t h i s r e a s o n , and because i t now appears t h a t i s g r e a t need f o r r e s t r a i n t d u r i n g t h e coming y e a r , we suggest t h a t there the Committee g i v e c o n s i d e r a t i o n t o t h e a d o p t i o n o f a J o i n t R e s o l u t i o n p r o v i d i n g t h a t consumer c r e d i t c o n t r o l s s h o u l d c o n t i n u e under t h e e x i s t i n g E x e c u t i v e Order u n t i l a s p e c i f i e d d a t e , such as J u l y 31* 1948, and t h e n be a u t o m a t i c a l l y terminated. I f t h e r e g u l a t i o n were c o n t i n u e d on t h i s b a s i s , t h e Board w o u l d be i n p o s i t i o n t o m o d i f y o r remove t h e p r e s e n t r e s t r i c t i o n s i n t h e event such a c t i o n s h o u l d be w a r r a n t e d by a change i n economic c o n d i t i o n s a t any -8t i m e d u r i n g t h e coming y e a r . The substance o f such a R e s o l u t i o n might be along t h e f o l l o w i n g l i n e s : Resolved by t h e Senate and House of Representatives of t h e U n i t e d S t a t e s of America i n Congress assembled. That t h e Board o f Governors of t h e F e d e r a l Reserve System i s a u t h o r i z e d t o continue t o exercise consumer c r e d i t c o n t r o l s pursuant t o Executive Order No. 8843 u n t i l J u l y 31* 1948 and, except during any war beginning a f t e r such date o r any n a t i o n a l emergency proclaimed by t h e P r e s i dent a f t e r such d a t e , no such consumer c r e d i t c o n t r o l s s h a l l be e x e r c i s e d a f t e r such date.
@FedFRASER