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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

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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
[3]

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.

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