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f Circular Xo. 3 7 3 3 1
July 13. 1951


To all Persons Concerned with Regulation W
in the Second Federal Reserve District:

Recently, Chairman M artin o f the B oard o f G overnors o f the F ederal R eserve System
w rote a letter to the Chairmen o f the Banking- and Currency Com mittees o f the United States
Senate and the H ouse o f Representatives, explaining the origin and purpose o f the present
restrictions 011 the use o f consum er credit, as em bodied in Regulation W . I recomm end it to
you as a clear statement o f p olicy with respect to selective credit controls and o f the reasons
fo r the B o a r d ’s decision not to relax consum er credit restrictions at this time. The text o f the
letter is reproduced below (italics added).





In accordance with Senator Maybank’s telephone call to me on June 29, 1951, and in view of the respec­
tive reports of the Banking and Currency Committees of both Senate and House on S. 1717 and H .R . 3871
(bills to amend and extend the Defense Production A ct of 1950), the Board of Governors has carefully
reviewed and reconsidered Regulation W , dealing with consumer credit, in its relationship to the declaration
o f national policy as set forth in the Act.
This declaration o f policy reflects the imperative need to maintain our economic strength on which the
entire defense effort depends. Our economic strength is founded on preserving the integrity o f the dollar, sym­
bolizing as it does the good faith and credit of our country.
If the Federal Reserve System is to fulfill the purpose for which it was established it must, to the best of
its ability, use the means given it by Congress to help protect the value of the dollar. The means at our dis­
posal bear only on the monetary and credit factors in the economy. Important as these factors are they are
nevertheless secondary to fiscal considerations. Moreover, such credit restraints as the System can exert under
today’s conditions have inherent limitations. In combination we believe that they have been effective and salu­
tary in helping to counteract inflationary forces.
Regulation of consumer credit has been instituted as an anti-inflationary emergency measure on three
separate occasions; first by Executive Order in 1941 and twice subsequently by action of Congress. It has
inherent limitations and defects as a means of credit restraint. It affects only one segment, though an increas­
ingly important segment, o f the credit structure. The present regulation is focused on consumer instalment

credit because of its volatility and hence its possible unstabilizing effects on the economy. This limits its appli­
cation to roughly about half of the current outstanding total o f $19 billions of consumer credit. Unlike broad,
general credit measures (open market operations, discount rates, and reserve requirements) Regulation W
directly imposes specified terms upon individual transactions in the regulated area. Therefore, it has aroused
widespread opposition, as the hearings before your Committees eloquently testify, especially from dealers in
automobiles and other m ajor durable goods and from some finance companies and other lenders. W hen civilian
demand for the regulated articles greatly exceeds supply, the opposition is tempered because sales are readily
made at the prescribed terms. When this demand abates, for whatever reason, the regulation appears to many
to be the immediate cause.
W e are in such a period, and it is natural that the regulation and we who now have the unpleasant task
of administering it should seem to those who testified in your Committees to be needlessly thwarting business.
The report of the Banking and Currency Committee o f the House refers to us as “ intractable” and as ‘ ‘unduly
harsh and unyielding in administering consumer credit controls. . .
The report o f the Senate Committee
admonishes us to he more “ flexible” , recalling that we have often made much of the virtue of flexibility in
adjusting this regulation to changed economic conditions. Some o f the witnesses before you concluded that
what seemed to them to be our intransigence could only be accounted for because we live in an “ ivory tower”
remote from the real world. Many witnesses before both Committees have pointed to the accumulations of
inventories of various articles and have contended that if we mean what we have said in our protestations of
flexibility we should promptly relax the terms of the regulation with a view to facilitating disposal of these
stocks of goods.
That this viewpoint appealed to the Senate Committee as reasonable is evident from the statement in its
report that “ the Board o f Governors of the Federal Reserve System should be sufficiently flexible to permit
relaxation or tightening o f the regulations in accordance with the conditions prevailing in the respective seg­
ments o f the economy to which the regulations apply. Specifically, it is your Committee’s view that relaxation
of the control regulations should be promptly effected when it becomes evident that accumulations o f inven­
tories seriously threatens to impede production with resulting unemployment in the industry affected.”
Accordingly, the Senate Committee introduced into the pending legislation “ a statutory requirement that
no more than one-third down payment and not less than 18 months for completion of deferred payments shall
be prescribed by the Board of Governors of the Federal Reserve System for installment purchases of
automobiles. . .
The House Committee went still further by introducing into the bill pending before them statutory restric­
tions as follow s: “ new automobiles, one-third down, 18 months’ maturity; used automobiles, one-fourth down,
18 months’ maturity; household appliances (including phonographs, radios and television sets), 15 per cent
down, 18 months’ maturity; household furniture and floor coverings, 10 per cent down, 2 1 months’ maturity;
residential repairs, alterations and improvements, 10 per cent down, 36 months’ maturity.”
A further provision in the House bill, wr
hich would present insuperable administrative difficulties, would
require “ that the Board shall recognize freight costs on automobiles and make due allowance by extending
amortization periods to equalize as nearly as practical monthly payments throughout the United States and
its Territories.”
It is apparent that a profound difference exists in the criteria by which this regulation is judged and
administered. The Board has reviewed at length the many aspects of this matter. I t seems to us that those who
are so vigorously opposing the regulation in its entirety or in its present form are judging the regulation or its
terms by one standard— while we, who have the problem of fixing terms and administering and enforcing
them, are judging the regulation by an entirely different standard.
The introduction into the proposed bills by both Committees o f statutory restrictions on terms, and more
particularly the statement in the report o f the Senate Committee that inventory accumulation should be the test
for determining when to relax the terms of the regulation, reflect this basic difference in the yardsticks, so to
speak, by which the regulation is being measured.
The Board freely admits that it has failed to impress sufficiently upon many who are directly affected by
the terms of the regulation that the principal yardstick by which w e have continued to appraise the regulation

measures its effect on the overall supply oj credit and the soundness of the credit structure. W e have no other
reason for being concerned with the regulation. The Reserve System’s fundamental task, under the law, is that
of influencing, so far as the means at its disposal permit, the availability of credit. In a period of general
inflation the task calls for doing what we can to limit the availability o f credit. Conversely, in a period of general
deflation the task calls for making credit readily available. That is the objective of System policy with respect
to the exercise of its broader, traditional means of affecting the supply of credit, such as open market operations,
discount rates, and reserve requirements. Since the great bulk of our money supply is bank credit, and since
the banking system creates new supplies of money when it extends credit, our concern with consumer instal­
ment credit is its bearing upon the overall supply of money.
The appropriateness of a given set o f terms at any particular juncture is, of course, a matter of judgment
on which opinions may honestly differ. In arriving at terms the Board tries to give consideration to all rele­
vant factors, including the inventory situation. The ultimate test of the regulation, however, is its impact on
the credit structure. By that test we think that the regulation has exerted a restraining influence that we believe
it was intended to exert. This is evidenced by the fact that consumer instalment credit outstanding at the end
of May is estimated at $12.9 billion as contrasted with $13 billion on August 31, 1950, just prior to the reim­
position o f the regulation. In the comparable 1949-50 period, the outstanding volume of this type of credit
increased by $ 2.1 billion.
In striving to weigh all of the facts and factors involved in this controversial but comparatively subordinate
means of affecting the credit supply, we have been unable to come to any other conclusion than that, judged
by the yardstick of the supply of credit requisite for the defense effort and the civilian economy, we could not
justify liberalizing the terms o f this regulation at a time when upward pressures on prices, even though
abated at present, threaten to re-emerge irrespective o f Korean developments. Judging by the present size of
the money supply and its potential expansion in volume or velocity, or both, w e do not feel that w e could justify
an action, even on the subordinate front of consumer instalment credit, that would announce, in effect, that we
believe the inflationary danger is no longer present. W e do not believe that we should, by such an action,
encourage the general public to incur more consumer instalment debt which would be financed ultimately by
further expansion of bank credit. This is not a type of credit which is directly essential for national defense.
If we are wrong in our appraisal of the longer-term outlook we are erring on the side of safety. W hen­
ever that appraisal changes, the same reasoning which leads us to believe that we should hold the line at this
time would require immediate relaxation of existing terms or perhaps dropping of the regulation altogether.
It is, as we have indicated, an emergency anti-inflationary measure. It is inappropriate to a period of general
deflation. If our considered conclusion at this time were different we would feel that the policy of credit
restraint should be replaced by one of ease with respect not only to Regulation W but also to open market
policy, discount rates, and bank reserves, as well as stock market and real estate credit. Similarly, we would
feel that the nationwide program for voluntary credit restraint was no longer in order. Our conclusion to the
contrary seems to be borne out by both Senate and H ouse Committee reports which make it clear that a p ro­
gram o f general credit relaxation at this time would not be in the public interest.
These considerations, which govern our policy, seem far removed from the very real problems immediately
confronting various trades subject to the regulation. However, what may appear to be conflicting interests are
not, in fact, separable. If we failed in our obligation to do what we can to avert the ravages of inflation, and
thus give those who would destroy our nation a cheap and easy victory, the businesses which sincerely feel dis­
criminated against by this regulation would rightly condemn us.
W e do not wish to exaggerate the importance of this regulation. W e are not prepared to say at this time
that even if the Congress decided to abolish it altogether the consequences would be grave. W e have said, and
we believe, that it is a desirable, supplementary measure o f credit restraint in a time of inflationary danger.
A s an anti-inflationary measure it would be meaningless, and better discarded, if it failed to restrain credit.
W e wish to emphasize that so long as the regulation is authorized by the Congress as a means of credit
restraint we think we should administer it on the basis we have indicated.
A very different situation would be presented if the Congress were now to continue the regulation under
different terms of reference. The criterion of inventory accumulation and the attempt to differentiate between

segments o f the economy affected by the regulation would, in our judgment, transform an instrument of credit
restraint into one that would place the principal emphasis upon quite different considerations. W e think they
would be incompatible with the objectives of effective credit restraint if such a regulation is to contribute to
that end in a period o f intense inflationary pressures. The proposed statutory restrictions limit the extent to
which terms of the regulation might be tightened but would not, of course, limit the easing of terms. If the
restrictions did both we would view the regulation in the light of one to set national standards for this type of
credit or to deal with what might be termed trade practices. In either case, it would be difficult to think of the
regulation as a flexible instrument to supplement traditional central banking measures designed to adjust the
credit supply to the changing requirements o f the economy.
W e feel very strongly that if this type of regulation is to be continued with terms conditioned, for example,
upon inventory accumulation or employment in affected industries, it should be clearly understood that it is
no longer related primarily to the end o f credit restraint.
From the standpoint o f restricting— it does not, of course prohibit— consumer instalment credit, we ques­
tion whether the present terms o f the regulation are as serious a factor in the immediate problems confronting
certain trades or financing institutions as their representatives and spokesmen no doubt sincerely believe. A
relaxation o f present terms, as would be specified in the bills before the Congress, would, o f course, serve to
test the validity o f that assumption. Viewed from this narrower standpoint and disregarding the broader con­
siderations o f general credit policy, it might well be concluded that we should initiate the indicated relaxations.
W e cannot consistently take that course. It is our view that if the present terms are in fact as serious a sales
deterrent as has been contended, then the statutory easing of the maturities by only three months, as proposed
in S. 1717, would hardly be sufficient to bring the hoped for relief. Following this line o f reasoning, we think
it would be more logical to drop the regulation altogether, but we would not wish to be understood as favor­
ing that action at this time.
Finally, we wish to emphasize that we would welcome an opportunity to discuss further with your Com­
mittees the question of the role that such a regulation should play in the present emergency. If it is to serve
as a supplementary means of restraining over-expansion of credit, we would strongly urge the elimination of
the proposed statutory limitations, regardless of where the administrative responsibility is lodged. If it is to
be governed by other considerations, then we would like to have an opportunity to discuss with the Committees
whether such a regulation should not be administered by some agency of Government whose functions are
more nearly related to such considerations than are those o f the Federal Reserve System.
The subject o f the future of this regulation would not warrant such an extensive letter but for the fact
that the Committees dealing with the legislation have been most seriously concerned about it, as we have, and
the Board wished to set out fully and frankly its views and the considerations which govern them. Moreover,
it is important to all those affected by the regulation, whether as sellers or buyers o f goods or as financing
institutions, to have these questions resolved as rapidly as possible consistent with the national interest. That
is your aim, as it is ours.
In the course o f debate in Congress on this subject it was stated that the action o f the respective Commit­
tees constituted what was termed a “ mandate” to relax the terms of the regulation. For this as well as other
reasons we felt that we should communicate to the Committees the foregoing views of the Board as early as
possible during the 31-day period for which the Congress extended the A ct under which the present regulation
is authorized. W e earnestly wish at all times to help, not hinder, production for defense and for essential
civilian requirements. It is hardly necessary for us to add that the Federal Reserve System, which Congress
created and can abolish, will carry out to the best of its ability any mandate o f the Congress.

Sincerely yours,
(S ign ed )

W m . M cC . M

a r t in

, J r.


ed er al
o f




N e w Y o r k 4 5 , N .Y .


13 ,


To Member Banks and Nonmember Clearing Banks
in the Second Federal Reserve District:
The Federal Reserve Bank of Kansas City has today
advised us that, because of flooded conditions in Kansas and
Missouri and the curtailment of train and bus service, mail
schedules cannot be maintained in the affected areas.

As a

result, there ■will be some delay in notice of nonpayment and
in return of unpaid items until normal communications are re­
We will continue to give credit in accordance with
our time schedules for cash items payable in the affected
areas, but advice of nonpayment and return of unpaid items may
be delayed.

W e reserve the right, of course, to charge back

any unpaid item at any time.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102