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Statement o f Chairman Eccles Before House Banking and Currency Committee on REGULATION OF CONSUMER INSTALMENT CREDIT June 10, 1947 The Board o f Governors, 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 Banking and Currency Committees a b i l l which wpi&d a u t h o r i z e t h e Board t o continue on a s p e c i f i c l e g i s l a t i v e basis the r e g S f s I E ^ As t h e members o f your Committee know, since t h e end o f t h e war t h e q u e s t i o n of whether some r e s t r a i n t s upon overexpansion of t h i s t y p e o f c r e d i t should be r e t a i n e d has been t h e s u b j e c t o f sharp c o n t r o v e r s y . The Board has hoped t h a t Congress would hear the pros 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 whether l e g i s l a t i o n should or should n o t be enacted. 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 should 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 t i s t o be i n d e f i n i t e l y extended i n peacetime. A c c o r d i n g l y , we have recanmended t o t h e P r e s i d e n t t h a t t h e Executive Order be vacated i n t h e event t h a t t h e Banking and Currency Committees do not recommend f a v o r a b l y t h e enactment o f a p p r o p r i a t e a u t h o r i t y f o r c o n t i n u i n g r e g u l a t i o n . 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 , which I w i l l l a t e r read i n t o the r e c o r d , 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 Board 1 s recommendation. I 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 from our experience t h a t consumer c r e d i t r e g u l a t i o n should 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 which has been s u b j e c t t o the g r e a t e s t f l u c t u a t i o n s i n t h e p a s t , thus c o n t r i b u t i n g t o i n s t a b i l i t y and unemployment. Regulation under t h e proposed l e g i s l a t i o n would be i n about t h e form and scope e f f e c t i v e a t present under t h e Board 1 s Regul a t i o n W. I t would, w i t h a p p r o p r i a t e exceptions t o p r o v i d e a d m i n i s t r a t i v e 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 types o f i n s t a l m e n t c r e d i t and i n a d d i t i o n would 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 c r e d i t 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 consumers1 durable goods. Thus, t h e r e g u l a t i o n would cover n o t only i n s t a l m e n t c r e d i t f o r consumers 1 durable goods but 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 purposes, b o t h of which 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 o f business upswings and downswings and n e i t h e r o f which 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 speaking, 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 by Regulat 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 l e a s t o n e - t h i r d . Under t h e proposed l e g i s l a t i o n , terms would, o f course, be v a r i e d f r o m time 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 view t o r e s t r a i n i n g t h e development o f unsound c r e d i t terms and w i t h a view -4t o p r e v e n t i n g or reducing excessive expansion or c o n t r a c t i o n o f consumer i n stalment c r e d i t which i s t h a t s e c t o r of consumer c r e d i t s u b j e c t t o t h e widest f l u c t u a t i o n . These would be t h e d e c l a r e d s t a t u t o r y o b j e c t i v e s . 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 are f o r t h e most p a r t i n s h o r t supply 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 thus reduce t h e upward pressure 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 purpose, because t h e y would t e n d t o induce s e l l e r s t o reach more customers by reducing 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 competit 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 i n come, i t would be economically 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 terms. N o t w i t h s t a n d i n g continued shortages 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 expanded d u r i n g t h e past 12 months by more t h a n 2 b i l l i o n d o l l a r s . 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 precedentedly 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 g e n e r a l l y , 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 • The premature r e l a x a t i o n o f r e s t r a i n t s , or t h e i r complete removal, would make no more goods a v a i l a b l e . I t would o n l y h e l p t o h o l d p r i c e s h i g h i n t h e marketplace. W i t h e x i s t i n g shortages i n consumers1 durable 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 could be considered excessive as viewed i n r e l a t i o 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 . 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 resources which consumers w i d e l y possess as r e l a t e d t o t h e s u p p l i e s o f consumers1 durable goods a v a i l a b l e . Were goods a v a i l a b l e i n l a r g e r volume and were many consumers able t o f i n a n c e t h e i r purchases on easier c r e d i t terms, t h e r e i s l i t t l e q u e s t i o n but t h a t t h e volume o f consumer i n s t a l m e n t c r e d i t would be much h i g h e r . As an i n d i c a t i o n o f t h e p o t e n t i a l i t i e s , sales o f consumers1 durable 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 sales i n 1940 b u t t h e volume o f i n s t a l m e n t sales 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 sales c r e d i t extended i n 1940. Thus w i t h the 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 . i t are 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 increase r a p i d l y i n 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. temporgiy one. Experience w T h e need f o r r e g u l a t a o n j k & j a ^ has s h o w n ^ H S P T H f ^ 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 g r o w i n g importance of consumers 1 durable goods i n t h e economy. I t i s recognized t h a t t h e development o f t h i s t y p e of 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 . Y e t , i t i s 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 takes t h e form of r e l a x i n g c r e d i t -3terms and i s c a r r i e d t o extremes, i t i s a symptom and cause o f economic u n soundness, M i l l i o n s o f people a r e encouraged t o overpledge 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 business boom accentuates t h e boom and has t o be l i q u i d a t e d out o f c u r r e n t income on t h e downswing, which accentuates d e p r e s s i o n . The f a c t t h a t c u r r e n t income has t o be used t o pay o f f excessive 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 business 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* 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 by 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 comp a n i e s , banks, 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 over-extended i n t i m e s o f c r e d i t expansion are i n e f f e c t i v e because o f t h e aggressive c o m p e t i t i o n * 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 o b j e c t i v e . 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 o n l y h i g h p r i c e d b u t o f 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 would be bound t o f o l l o w would 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 economy. Continued 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 p M ^ L l L ' i n i l m M 1 1 8 f l M l l i i y M ' s e q u e n c e d events'! i t h i s t y p e o f re<mJAt.-j nn|t whir,h i s o f a s e l e c t i v e character... aeflres a u s e f u l reached by t h e e x e r cxse o f any powers over B1IBPCfSWC11'!!! MHl e r a l . Tne 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 Board p o i n t e d out i n i t s 1945 Annual Report t o Congress, however, o v e r a l l r e s t r a i n t s . t o t h e sources o f 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 e f f e c t i v e n e s s . For t h i s reason i t i s a l l t h e more, | m p p r t a n t f o r Congress t 2J£nsider vdiether a more x a v o r a b l e W Tne maintenance o f our p r i v a t e e n t e r p r i s e system.
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