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BOARD OF G O V E R N O R S OF THE FEDERAL RESERVE SYSTEM W ASHINGTON OFFICE OF THE CHAIRMAN March 9, 1951. TO ALL FINANCING INSTITUTIONS IN TH UNITED STATES: E Section 708 o f the Defense Production Act o f 1950 author ized the President to encourage financing in stitu tio n s to enter into voluntary agreements and programs vhich w ill further the objectives o f that Act. By Executive Order the President delegated to the Board o f Governors o f the Federal Reserve System his authority with respect to financing under th is section o f the Act. A program fo r voluntary cred it restrain t has been developed by representatives o f financing in stitu tion s and has been approved by the appropriate Government o f f i c i a l s as required under the Act. It is hoped that you v i l l give your f u l l support to th is program, a copy o f vhich is enclosed. The Voluntary Credit Restraint Committee, provided fo r in the program, is being organized and the subcommittees which are to be designated by the Voluntary Credit Restraint Committee w ill be appointed as promptly as p o ssib le . I f you have questions regarding the program or operations under i t , i t is suggested that you discuss them with the subcommittees. Sincerely, /? • •* Thomas B. McCabe, Chairman. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) F ed eral Re Ban serve k OF DALLAS D allas, T e x a s, M arch 13, 1951 V O L U N T A R Y CREDIT R E ST R A IN T To All Financing Institutions in the Eleventh Federal Reserve District: T h ere is q u oted b elow a statem en t issued b y th e B oard o f G overn ors o f th e F ed era l R eserve S ystem f o r release in th e m orn in g n ew spap ers o f M arch 13, 1951: “ T h e B oard o f G overn ors o f th e F ed eral R ese rv e S ystem is tra n sm ittin g to all fin ancin g in stitu tion s in th e U n ited S tates cop ies o f a p ro g ra m f o r v olu n ta ry cre d it re stra in t w h ich has been w ork ed ou t b y rep resen ta tiv es o f c o m m e r c ia l b a n k in g , in v e s t m e n t b a n k in g and life insurance. “ S ection 708 o f th e D efen se P rod u ctio n A c t o f 1950, and th e E x e cu tiv e O rder o f th e P resi dent N o. 10161, au th orized th e B oard o f G overn ors to en cou rage financing in stitu tion s to en ter into volu n ta ry a greem en ts and p rogra m s to restrain cr e d it w h ere such re stra in t w ill fu r th e r the o b je ctiv e s o f th e A c t. T h e p rogra m f o r v olu n ta ry cre d it re stra in t w h ich w as w ork ed ou t b y rep resen ta tiv es o f financing in stitu tion s in con su ltation w ith the B oard has as its m a jo r o b je c tiv e loan screen in g b y all fin ancin g in stitu tion s in th e U n ited S tates to elim inate loans w h ich are n ot n ecessa ry to fin ancin g th e d efen se p ro g ra m and are n ot essen tial to th e needs o f a g r i cu ltu re, in d u stry and com m erce. “ A n ation al com m ittee to be kn ow n as th e V o lu n ta ry C redit R e stra in t C om m ittee w ill be created, th e m em bers o f w h ich will be a pp oin ted b y th e B oard o f G overn ors o f the F ederal R eserve S ystem . In itia lly th e C om m ittee will con sist o f tw elve m em b ers, fo u r rep resen tin g th e life insu ran ce com pan ies, fo u r rep resen tin g th e in vestm en t bankers, and fo u r rep resen tin g th e banks. T h is m em bersh ip m a y be expan ded in th e fu tu r e if deem ed advisable. T h is C om m ittee will m eet fr o m tim e to tim e f o r th e purpose o f co n sid erin g th e fu n ctio n in g o f th e p ro g ra m and a dvisin g th e B oard o f G ov ern ors w ith re sp e ct th e re to . T h e C om m ittee w ill a lso ap p oin t su b com m ittees th ro u g h o u t th e U nited S tates to be available f o r con su ltation w ith individual financm g’ T n stitu tion s and to a ssist th em in d e term in in g th e a pp lication o f th e p ro g ra m w ith resp ect to specific loans. “ P a rticip a tion in th e p rog ra m is en tirely v olu n ta ry , b u t th e B oard o f G overn ors exp ressed th e h ope th a t all fin ancin g in stitu tion s w ould jo in in th e p rogra m and coop era te in ca rry in g it ou t and m a k in g it effectiv e. T h e re q u e s t'to com p ly w ith th e p rogra m w h ich has been tran sm itted b y the B oard to all fin ancin g in stitu tion s has, as req u ired b y th e L aw , been issued a fte r con su lta tion w ith th e A tto r n e y G eneral and th e C hairm an o f th e F ederal T rad e C om m ission and approved b y th e A tto r n e y G eneral. U nder th e L aw , a ction s o f financing in stitu tion s in a cco rd ance w ith th e p rog ra m and th e req u est are exem p t fr o m th e p roh ib ition s o f th e A n titr u st L aw s and the F ed era l T rad e C om m ission A c t o f th e U nited States. A tta ch ed are cop ies o f th e p ro g ra m and o f th e req u est, to g e th e r w ith the B oa rd ’s letter o f tran sm ittal to all financial in stitu tion s.” T h e m a terial refe rre d to in th e p ress statem en t is enclosed. Y o u rs v e r y tru ly, R. R . G IL B E R T P resid en t PROGRAM FOR VOLUNTARY CREDIT RESTRAINT D P ream ble T h e task o f restraining strong inflatipnary pres sures is one o f the most difficult and most im por tant in the w hole range o f econom ic problems today. One part o f this task— the restraint o f unneces sary credit expansion— presents a challenge to the financing institutions throughout the nation. Section 708 o f the Defense, Production A ct of 1950 authorizes the President to encourage financ ing institutions to enter into voluntary agreements and programs to restrain credit, w hich w ill further the objectives o f that Act. By executive order, the President has delegated to the Board of G o v ernors o f the Federal Reserve System his authority with respect to financing under this section of the Act upon the required condition that it consult with the Attorney General and with the Chairman o f the Federal Trade Com m ission, and that it obtain the approval o f the Attorney General before re questing actions under such voluntary agreements and programs. A t the invitation o f the Board, and in company with it, representatives o f the Am erican Bankers Association, the L ife Insurance Association of Am erica and the Investment Bankers Association o f Am erica have been examining the possibilities o f this m ethod o f credit restraint. W hile it is recognized that the proposed Pro gram is addressed only to one limited source o f inflationary pressure, the vital importance o f this problem to the stability o f the econom y, and the necessity to extend credit only in such a way as to restrain inflationary pressures outside the financ ing o f the Defense Program should be emphasized to all financing institutions. It is appropriate to point out that this Program of voluntary credit restraint does not have to do with such factors as inflationary lending by fed eral agencies, unnecessary spending, federal, state or local, and the wage-price spiral and other much more seriously contributing factors. These should be vigorously dealt with at the proper places. It assumes that the proper governmental authorities will exercise the requisite fiscal and monetary controls. e f in itio n s As used herein: T h e terms “ financing institution” or “ financing institutions” mean banks, life insurance com pan ies, investment bankers engaged in the under w riting, distribution, dealing or participating, as agents or otherwise, in the offering, purchase or sale o f securities, and such other types or groups o f financial institutions as the Board of Governors o f the Federal Reserve System may invite to par ticipate in the Program. T h e terms “ loan,” “ loans,” “ lending” and “ credit,” in addition to their ordinary connota tions, mean the supplying o f funds through the underwriting and distribution o f securities (either on a firm com m itm ent, agency or “ best efforts” basis), the m aking or assisting in the m aking of direct placements, or otherwise participating in the offering or distribution o f securities. St a t e m e n t of P rinciples Pursuant to the provisions o f Section 70 8(a ) o f the Defense Production A ct o f 1950, and with the approval o f the Board o f Governors o f the Fed eral Reserve System in accordance with the func tions delegated to it by Section 70 1(a ) (2 ) of Ex ecutive Order 10161, this Statement o f Principles has been drafted to w hich all financing institutions are asked to conform . It shall be the purpose o f financing institutions to extend credit in such a way as to help maintain and increase the strength o f the domestic econom y through the restraint of inflationary tendencies and at the same time to help finance the defense program and the essential needs o f agriculture, industry and commerce. Inflation may be defined as a condition in which the effective demand for goods and services exceeds the available supply, thus exerting an upward pressure on prices. A ny increase in lending at a more rapid rate than production can be increased exerts an infla tionary influence. Under present conditions of very high em ploym ent o f labor, materials and equip ment, the extension o f loans to finance increased output will have an initial inflationary effect; but t 1] PROGRAM FOR V O LU N TA R Y CREDIT RESTRAINT loans which ultimately result in a commensurate increase in production of an essential nature are not inflationary in the long run whatever their temporary effect may be. It is most important, however, that loans for nonessential purposes be curtailed in order to release some o f the nation’s resources for expansion in m ore vital areas of production. Cooperation with this program of credit restraint makes it increasingly necessary for financing in stitutions to screen loan applications on the basis o f their purpose, in addition to the usual tests o f credit worthiness. T h e criterion for sound lend ing in a period o f inflationary danger boils dow n to the follow in g: Does it commensurately increase or maintain production, processing and distribution o f essential goods and services? In interpretation o f the foregoing, the follow in g types of loans w ould be classified as proper: 1. Loans for defense production, direct or in direct, including fuel, pow er and transportation. 2. Loans for the production, processing and orderly distribution of agricultural and other staple products, including export and im port as well as domestic, and o f goods and services supplying the essential day-to-day needs o f the country. 3. Loans to augment w orking capital where higher wages and prices o f materials make such loans necessary to sustain essential production, processing or distribution services. 4. Loans to securities dealers in the normal conduct of their business or to them or others incidental to the flotation and distribution o f se curities where the money is being raised for any o f the foregoing purposes. This Program w ould not seek to restrict loans guaranteed or insured, or authorized as to purpose by a G overnm ent agency, on the theory that they should be restricted, in accordance with national policy, at the source of guaranty or authorization. Financing institutions would not be restricted in the acquisition o f existing companies or plants where no over-all increase o f production w ould result. 2. Loans for speculative investments or pur chases. T h e first test of speculation is whether the purchase is for any purpose other than use or distribution in the normal course of the borrow er’s business. T h e second test is whether the amounts involved are disproportionate to the borrow er’s normal business operations.* T h is w ould include speculative expansion of real es tate holdings or plant facilities as well as specu lative accumulation of inventories in expectation o f resale instead o f use. T h e foregoing principles should be applied in screening as to purpose on all loans on securities whether or not covered by Regulations U or T . * * * * * R ecognizing that the maxim um estimate o f the percentage of our 1951 production which w ill be devoted directly or indirectly to national defense is between 20 per cent and 30 per cent, a very sub stantial proportion o f the lending o f the country w ill be devoted to the financing of the production and grow th of our industrial and com m ercial c o m munity. In these circumstances, it is felt that each financing institution can help accomplish the o b jectives outlined above by careful screening o f each application for credit extension. In carrying out such screening, financing institu tions should not only observe the letter o f the existing regulations of the Board of G overnors o f the Federal Reserve System with respect to real estate credit, consumer credit, security loans, etc., but should also apply to all their lending the spirit o f these and such other regulations and g u id in g principles as the Governm ent may from time to time announce in the fight against inflation. This Program is necessarily very general in na ture. It is a voluntary Program to aid in the over-all efforts to restrain inflation. T o be helpful, this Program must rely on the good will o f all financing institutions and the over-all intention to com ply with its spirit. honoring previous commitments. P rocedure for I m p l e m e n t in g the P r o cram The follow ing are types of loans which in gen Pursuant to the provisions o f Section 7 0 8 (b ) and eral financing institutions should not make under ( c ) of the Defense Production A ct o f 1950, and present conditions, unless modified by the circum stances of the particular loan so as not to be in * Loans additional to those needed tor a borrower's norma! business may. of course, be regarded as proper when thev consistent with the principles of this program : 1. Loans to retire or acquire corporate equities are for the purpose of defense production or otherwise con form to the types of loans listed as proper in this Statement in the hands o f the public, including loans for of Principles. PROGRAM FOR V O LU N TA R Y CREDIT RESTRAINT upon full com pliance with the terms and conditions thereof: 1. A “ Voluntary Credit Restraint Com m ittee” (hereinafter referred to as “ the C om m ittee” ) w ill be appointed by the Board o f Governors o f the Federal Reserve System (hereinafter re ferred to as “ the Board” ). Members shall be appointed for such terms as the Board may pre scribe. Initially, the Com m ittee will consist of twelve members, four representing the life in surance companies, four representing the invest m ent bankers, and four representing the banks. T h e membership o f the Com m ittee may from time to time be expanded as deemed advisable or appropriate by the Board to insure adequate representation thereon o f other types or groups o f financing institutions w hich may participate in the Program . In selecting and appointing the members o f the Com mittee, the Board shall have due regard to fair representation thereon for small, for m edium and for large financing institutions, and for different geographical areas. T h e Com m ittee will: (a ) W ith such assistance from the Board and the Federal Reserve Banks as may be necessary, distribute this statement o f the Pro gram, including the Statement of Principles, to financing institutions to such extent as may be deemed desirable in view of any dis tribution previously made; ( b ) Appoint the subcommittees referred to below in 2; ( c ) Meet for the purpose of considering the functioning o f the Program , advising the Board with respect thereto, and suggesting for the consideration o f the Board such changes in the Program , including the Statement of Prin ciples, as may from time to time appear ap propriate. Meetings o f the Com m ittee shall be held at the call o f an official o f the Federal Reserve System, designated by the Board; shall be under the chairmanship o f such an official; and an agenda for such meetings shall be prepared by such an official. Full and complete minutes o f each meeting shall be made by such an official and copies shall be kept in the files o f the Board available for public inspection. 2. Subcommittees may be established for each type o f financing institution participating in the Program . One o f the members o f each subcom mittee located in any city in which there is a  Federal Reserve Bank or branch thereof will be a Federal Reserve representative designated by the Board o f Governors o f the Federal Reserve System or by such Federal Reserve Bank or branch; and such member shall attend each meet ing o f the subcommittee. For the investment bankers, the life insurance companies, and the banks there may in each case be one or more sub committees organized. Ali such subcommittees will meet only for the purposes specified in the Program ; will maintain records o f their actions; and will make reports directly to the Committee regarding the actions taken by them, including statements o f the types o f cases considered and the nature o f the advice given. T h e subcommittees w ill be available 'for consultation with individual financing institutions to assist them in determin ing the application of the Statement o f Principles with respect to specific loans for which applica tion has been made to such financing institutions. In consulting with a subcommittee, a financing institution shall not be required to disclose the identity o f the applicant for any loan. N o financ ing institution shall be required to consult with any subcommittee with respect to any loan or loans, or any application or applications there for. Consultation with a subcommittee shall be wholly within the individual and independent discretion o f a financing institution. T h e final decision with respect to making or refusing to make any particular loan or loans shall likewise remain wholly within the individual and inde pendent discretion of each financing institution, whether or not it has consulted with any of the subcommittees. In setting up the subcommittees, the C om m it tee shall have due regard for fair representation thereon for small, for medium and for large financing institutions, graphical areas. and for different geo It shall also inform the Board o f all subcommittee appointments. 3. T h e Com m ittee shall be furnished with such compilations ot statistical data on extension o f credit by financing institutions as may be re quired to show the amounts and direction of credit use and to watch the operation of the Program. Such statistics shall be com piled hv the Board. T o assist the Board in m aking such compilations, data shall be supplied for the in vestment bankers, jointly by the Investment Bankers Association and the National Associa PROGRAM FOR VO LU N TARY CREDIT RESTRAINT tion o f Securities Dealers, and for the life in surance companies, jointly by the L ife Insurance Association o f Am erica and the Am erican Life Convention. Com pilations o f data made by the Board shall not reveal the identity o f in dividual financing institutions or borrowers. Such compilations shall be kept on file with the Board and shall be available for public inspection. 4. Financing institutions participating in the Program will keep records o f individual loans, as to purpose, in such form as to be available for future analysis. 5. Any change in the Program, including the Statement of Principles, shall be passed upon by the Com m ittee and shall be made in accordance with the requirements o f Section 708 o f the Defense Production A ct of 1950. All actions pursuant to and under the Program w ill be automatically terminated by all participat ing financing institutions as o f the termination o f the authority conferred under Section 708 o f the D e fense Production A ct o f 1950; or upon withdraw al by the Board o f its request for action under the Program. If the Com mittee, after study o f the operation o f the Program , concludes that it is no longer necessary or is not m aking a substantial contribution to the solution o f the problem for which the Program was established, it shall so ad vise the Board. REQUEST TO FINANCING INSTITUTIONS BY HOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM TO ACT PURSUANT TO A PROGRAM FOR VOLUNTARY CREDIT RESTRAINT UNDER SECTION 708 OF DEFENSE PRODUCTION ACT OF 1950 T his “ Request” is addressed to all financing in the prohibitions o f the antitrust laws or the F ed stitutions in the United States, including without limitation all individuals, firms, partnerships, cor porations and other organizations of any kind which are engaged in the business of extending credit, m aking loans, or purchasing, discounting, selling, distributing, dealing in, or underwriting securities, any and all o f such institutions being hereinafter referred to as “ financing institutions.” Pursuant to the provisions o f section 708 o f the Defense Production Act o f 1950 (hereinafter called the “ A ct” ) and o f section 701 o f Executive Order N o. 10161, the Board of Governors o f the Federal eral Trade Com m ission A ct o f the United States. T h e Board o f Governors of the Federal Reserve System has consulted with the Attorney G eneral and with the Chairman of the Federal T rade Com mission on and before February 5, 1951, said date being not less than 10 days before the date o f this Request, with regard to the provisions o f the Program , the finding by the Board above mentioned and this Request; and the A ttorney General has given his approval to the m akin g o f this Request. Reserve System has consulted with representatives of financing with a view to encouraging the m aking o f voluntary agreements and programs to further the objectives o f the Act. As a result of such consultations, such representatives have prepared a “ Program for Voluntary Credit Restraint,” includ ing as a part thereof a Statement of Principles, the entire docum ent being hereinafter referred to as the “ Program .” T h e Program is attached hereto. T h e Board o f Governors of the Federal Reserve System hereby approves the Program and finds the Program to be in the public interest as contribut ing to the national defense. Under section 708 of the Act and section 701 o f the said Order, acts or omissions to act pursuant to this Request and the Program which occur while said section 708 is in effect and before the withdrawal o f this Every financing institution in the United States is hereby requested by the Board of G overnors o f the Federal Reserve System to act, and to refrain from acting, pursuant to and in accordance w ith the provisions o f the Program. T h e national co m mittee w hich is to be set up pursuant to the pro visions o f the Program , each and every su bcom mittee set up pursuant to the provisions o f the Program , and each and every individual w h o may become a member of said national committee or o f any o f said subcommittees are hereby requested by the Board o f Governors o f the Federal Reserve System to act, and to refrain from acting, pursuant to and in accordance with the provisions o f the Program. By order o f the Board o f Governors o f the F e d eral Reserve System this 9th day of March, 1951. Request or o f the finding o f the Board in the S. R. Carpenter, preceding sentence are not construed to be within Secretary. [ 4] BULLETIN NUMBER 1 OF VOLUNTARY CREDIT RESTRAINT COMMITTEE T h e V o lu n ta ry C red it R estrain t C om m ittee at its m eetin g o n M a r c h 14 a n d 15 in W a sh in g ton ga ve con sideration to the fu n ction in g o f the p ro g ra m as d e v e lo p e d b y the fin a n cin g institutions and a p p rov ed b y the a pp rop riate gov ern m en t agencies. R e g io n a l com m ittees are in the process o f form a tion to b e available for con su ltation b y lenders w h o h ave specific questions o n the a p p lica tion o f the cred it restraint p rogram . T h e C om m ittee recognizes that there are m a n y inflation ary influences at w ork. T h e C om m ittee expects to issue further bulletins from tim e to tim e o n various phases o f the v o lu n tary cred it restraint p rog ra m . T h is bu lletin deals w ith the m atter o f in ven tory financing. Inven tories in the U n ited States, p articu la rly at w holesale and retail establishments, are at peak levels even after a llow a n ce is m a d e for the sharp increase in prices at w h ich in ventories are ca rried . A n im p orta n t part o f this a bn orm al increase in inventories has been fin a n ced b y b o rro w e d m on ey. Excess in v en tory a ccu m u la tion has already con trib u ted d ire ctly to the rise o f w holesale a n d retail p rices b e y o n d a n y level ju stified b y the su pp ly situation. It ob v io u sly has created u n d u e com p e titio n in scarce m aterials. In the ligh t o f the a bove, the V o lu n ta ry C red it R estrain t C om m ittee expressed the h op e that all fin a n cin g institutions w ou ld , in ca rryin g o u t the terms o f the p rogra m (1 ) R efra in from fin a n cin g in v en tory increases a b o v e n orm a l levels relative to sales, o r reason able requirem ents b y oth er conservative yardsticks. (2 ) E n cou ra g e b orrow ers w h o already have excess inventories to b rin g these com m itm en ts and in ven tory positions in line as p ro m p tly as is rea son ab ly p ra ctica l, th ereby red u cin g the a m ou n t o f cred it b ein g used in this m anner. T H E C O M M IT T E E O N V O L U N T A R Y C R E D IT R E S T R A IN T Committee action of March 15, 1951.