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PR 609 Rev. lo/59 Minutes for To: November 17, 1959 Members of the Board From: Office of the Secretary Attached is a copy of the minutes of the Board of Governors of the Federal Reserve System on the above date. 1/ It is not proposed to include a statement with respect to any of the entries in this set of minutes in the record of policy actions required to be maintained pursuant to section 10 of the Federal Reserve Act. Should you have any question with regard to the minutes, it will be appreciated if you will advise the Secretary's Office. Otherwise, please initial below. If you were present at the meeting, your initials will indicate approval of the minutes. If you were not present, Your initials will indicate only that you have seen the minutes. Chin. Martin Gov. Szymczak Gov. Mills Gov. Robertson Gov. Balderston Gov. Shepardson Gov. King 1/ Meeting With thr Federal Advisory Council. A meeting of the Board of Governors of the Federal Reserve System with the Federal Advisory Council was held in the offices of the Board Of Governors in Washington on Ttesday, November 17, 1959, at 10:30 a.m. PRESENT: Mr. Mr. Mr. Mr. Mx. Mr. Mr. Martin, Chairman Balderston, Vice Chairman Szymczak Mills Robertson Shepardson King Mr. Sherman, Secretary Mr. Kenyon, Assistant Secretary Messrs. McCloy, Sienkiewicz, Hays, Alfriend, Sibley, Livingston, McDonnell, Murray, McClintock, Jacobs, and Frankland, Members of the Federal Advisory Council from the Second, Third, Fourth, Fifth, Sixth, Seventh, Eighth, Ninth, Tenth, Eleventh, and Twelfth Federal Reserve Districts, respectively Mr. Prochnow and Mr. Korsvik, Secretary and Assistant Secretary of the Federal Advisory Council, respectively Mr. Roger C. Damon, President, The First National Bank of Boston, Boston, Massachusetts Mr. I. F. Betts, President, The American National Bank of Beaumont, Beaumont, Texas President Livingston commented that the service of several members Of the Council, including Messrs. Brace, Sibley, McDonnell, and Jacobs, 14t11(1- conclude at the end of this year and that the other members would 111188 their participation in the meetings. He also noted that Mr. Damon 1448 representing the First District at this meeting inasmuch as Mr. Brace Q131116- not be present and that Mr. Jacobs had brought with him MX. Betts, the eeJected member from the Eleventh District for 1960. 11/17/59 -2- Before this meeting the Council had submitted to the Board a memorandum setting forth its views on the subjects to be discussed. The topics, the Council's views, and the discussion were as follows: 1. The Board would appreciate receiving the views of the Council regarding the current business situation and the prospects for business activity during the remainder of this year and the first six months of 1960, along with reports from the individual members of the Council regarding current or prospective developments in their districts having especial significance to the total picture for the country as a Whole. Comments on the impact of the strike in the steel industry, as it may have affected levels of production and trade and also as it may have a future effect on activity or psychology of the business community and the general public, will be of particular interest to the Board. The strike in the steel industry temporarily retarded the upward trend in production, income and sales, but did not significantly affect the psychology of the business community and the general Public. Furthermore, the strike had less impact on the levels of Production and trade than was originally anticipated, and as a consequence the current business situation is generally good. Consumer spending has been sustained in volume. Capital expenditures have been rising. Although construction outlays have exceeded those of a year ago, they have declined in recent months. Aggregate farm income is down sharply. Assuming that the production of steel is not again interrupted) the prospects are favorable for a relatively high level of business during the remainder of this year and the first six months of 1960. President Livingston said that, as at the time of the September Ineeting, the collective response of the Council to this question reflected IlnanimitY of Opinion. "the Accordingly, he suggested that the individual comments members other than Mr. McCloy, might be dispensed with on this "easion. Since Mr. McCloy was unable to attend the meeting of the Council 11/17/59 -3- yesterday, it would seem appropriate to call upon him for observations regarding developments in the Second District. Concurrence being indicated by the Board in the procedure suggested IDY President Livingstoni the latter turned to Mr. McCloy, Who said that he agreed with the conclusions set forth in the statement submitted by the Council. During the last few weeks of the steel strike, he thought he had detected an increasing element of uncertainty as to the business outlook and a moderating in the demands for long-term financing. In Other words, it appeared that a certain lack of confidence might be developing. However, with the resumption of steel production under the I3r°vi8i0n8 of the Taft-Hartley Act, there seemed to have been some diminution of that sentiment. In this connection, he was rather impressed by the results of the recent McGraw-Hill survey, which indicated that business capital expenditures during 1960 would continue at a high level. 14 the Second District, Mr. McCloy said, the direct effects of the steel strike had not been too great except that the Buffalo area was hard hit. President Livingston said it was implicit in the statement of the C°11ncil that the members were surprised at the shallowness of the penetl'ati°/1 of the steel strike on the economy. In general, business had e°11tinued to be surprisingly good in spite of the longest steel strike ill the nation's history. There was, of course, the question as to what 11°1114 happen at the conclusion of the cooling-off period provided by the Taft -Hartley Act. The view was prevalent within the Council 11/17/59 that the workers were not likely to go on strike again at the end of the cooling -off period, and the Council's statement was premised on that assumption. If another strike should develop, the estimates of the Council regarding business activity in the first half of 1960 could Prove to be badly out of line. 2. The Board would appreciate the Council's views on the strength of the current and prospective demand for bank loans and other credit during the remainder of this year and the first half of 1960. The Council believes that with some modifications the normal seasonal pattern in the demand for bank loans will prevail for the remainder of this year and the first half of 1960. TO the extent, however, that bank credit in the form of loans and the acquisition of short-term Government obligations from corporations is required to finance the rebuilding of inventories liquidated during the steel strike, the usual seasonal pattern maY be altered. Some further rise in the volume of consumer credit also seems probable if the predicted increase in the sale of automobiles and other consumer durables is realized. However, the change from a substantial deficit to a cash surplus in the Treasury's operations in the first half of calendar 1960 may tend to ease the credit situation somewhat. Chairman Martin referred to that portion of the Council's stateMent which suggested that the usual seasonal pattern in the demand for bank "")ans during the remainder of this year and the first half of 1960 nlight be altered to the extent that bank credit in the form of loans and the ac quisition of short-term Government obligations from corporations vas required to finance the rebuilding of inventories liquidated during the steel strike. He requested the further view of the Council on this 13(lint, adding that there appeared to he a difference of opinion among ex-per tid as to the extent of the credit demand that might develop for this pUlioose. 11/17/59 -5- President Livingston commented that this was a difficult thing to evaluate. There had been a substantial liquidation of inventories and a good deal of money had gone into short-term securities. The first step probably would be a turning over of short-term Governments, notably Treasury bills, to the commercial banking system. Beyond that, there probably would be borrowing from the banking system to restore Inventory levels, and the Council's statement was predicated on those assumptions. One question was how soon steel would be produced in volume, and there was some indication that this might be much sooner than had been generally envisaged. Governor Balderston inquired regarding the sufficiency of iron °re to enable the steel mills to operate through next spring, assuming that the strike was not resumed, and President Livingston replied that this was a real problem. Insurance on iron ore shipments over the Great Lakes would terminate the first of December, thus indicating vhen the hazards of shipment begin to increase, and at present the veather outlook seemed bad. °ducers were low. ' 131 Also, supplies of ore available to steel It was certainly a possibility that steel producers ight be prevented from getting back into full production due to madeSupplies of iron ore, and much seemed to depend on the weather. Governor Robertson inquired whether it appeared that inventories 14°111d he built up to their previous levels, that is, the levels accumulated ticipation of the steel strike, and President Livingston replied that " 11/17/59 -6- thi8 was also a difficult question to answer. Under present conditions, steel becoming available to fabricators would be used up immediately Later, after immediate needs had been satisfied, inventories would be built up, but the likelihood of as high an accumulation of inventories as prior to the strike seemed somewhat remote. Another factor hard to evaluate was the effect of a possible railroad strike. was difficult to judge the posture of the economy. Altogether, it The thing that really stood out was that business had been so good in spite of the prolonged steel strike. Mr. McCloy commented that the delayed impact of the strike c°nceivably might be greater than one would sense; there might be an aftereTtelt that one could not yet appraise. Thus far, however, -thr_i Situation was as President Livingston had stated. It was remarkable that the steel strike had not cut more deeply. 3. The Board would be glad to have the views of the Council regarding appropriate credit policy between now and the next meeting of the Council. The Council is of the opinion that appropriate credit poli2y between now and the next meeting of the Council would be a contintlanee of the present degree of credit restraint. However, as the uouncil observed at the September meeting with the Board, the character of the eventual "settlement of the steel strike may have nRnificant consequences on public psychology and business expecta'Ions that may require modifications in credit policy." Chairman Martin asked for the views of the Council as to how tight el'edit actually was at this time and inquired whether the banks were down, to any serious extent, bona fide loans that they otherwise 14°Uld have made. 11/17/59 -7- Mr. Damon said that his bank certainly was turning down some loans. While he did not know that the amount of loans turned down was tremendously significant, the effect of being a reluctant lender in one ease tended to carry over into another. President Livingston commented that the question raised by Chairman Martin tended to lead into the matter discussed at the previous meeting of the Board and the Council; namely, the privilege of borrowing from the Federal Reserve Banks. In view of the extensive discussion at that time, he had contemplated avoiding further reference to the subject at this meeting. Nevertheless, it had a definite relationship to the Chairman's question. Setting that aside, he would say that there was increased selectivity on the part of the banks in handling loan applicatic)ne. However, his own bank was not turning down bona fide loans beeause of a tight-money situation. After Mr. Sibley commented that his bank was not looking for new customers, Chairman Martin asked how the situation might be compared to 1956 and President Livingston replied that it was not as tight. Chairman Martin then explained that he was being asked constantly to comPare the present situation and that prevailing in 1956. However, he ha d been receiving fever complaints from the public about tight money than in 1956, when there was a steady barrage of criticism. Mr. McCloy said that the liquidity ratios of New York City banks aPPear ed to be about the same as in 1956. It was his feeling that the 11/17/59 New- York —Bbanks were in a precarious situation, and they were confronted with a further drain on foreign time deposits. To date, however, he did not know of any bona fide loan applications that had been turned down, and the situation was not as drastic as in 1956. There had been a considerable volume of requests for participations in loans from banks throughout the country. Governor Mills inquired whether, if there was not evidence of extreme tightness in the loaning position of the commercial banks, that Inight be traced to a lesser seasonal or overriding demand for bank credit in the summer and fall months. President Livingston replied that there had been quite a demand for bank credit in the summer months, including the demand from metal rabricators in connection with the accumulation of steel inventories. Exee„ -FL. for the steel strike situation, he had not discerned any particuiar difference from the usual pattern of seasonal demand. The volume of ioanE "nerallY goes up, starting in June, to a peak around December 1 or teceml„ ""' - er 15 due to the movement and processing of crops and the accumu- lett° , — of inventories for the retail trade. Also, appliance manufacturers Itre the large users of credit late in the year. As the Council's answer to first question on today's agenda indicated, it was felt that, excluding 11111asual circumstances related to the steel strike, the seasonal pattern Or loan demand would be about normal. bealks One factor important to many larger was that the medium-sized and smaller banks had made more use 11/17/59 (3f -9- borrowing because of their unwillingness to sell Government securities at a loss. Had his own bank not had access to the borrowing privilege at the Federal Reserve Bank, it would now find itself in a much tighter position. Mr. McCloy commented that this was true also in the case of New York City banks, following Which President Livingston said that although the general tightness of credit was not equivalent to 1956, the commercial banks had become more selective in taking on new loans thet otherwise they would welcome. Mr. Jacobs commented that city banks in the Eleventh District had relatively full portfolios but were not turning down legitimate 1°an applications. He then referred to the question raised at the September meeting of the Board and the Council about the extent to ' 4hich banks might be lending long-term money on a short-term basis. a check he had made in the District, the banks appeared to have deftnite and complete take-outs on construction loans. Reverting to the question of the tightness of credit, he noted that at most city banks there is a tendency for loans to rise in the last quarter of the and that loans are usually higher in December than at any other time However, he felt that credit conditions were all right at present 6" that there was nothing for anyone to complain about. Mr. Hays said that tightness was being felt more at the smaller babk„ in the Fourth District than at the metropolitan banks, with perhaps ' 11/17/59 -10- one or two exceptions. He also noted that when a party asked for a line Of credit at the present time, that line was quite likely to be extended in s smaller amount than requested. In some cases there was reluctance to take on a new customer, particularly if it appeared that the borrower Probably would need longer-term credit. Generally speaking, the loan ratios of the Fourth District banks were running around 55 per cent, which was not too had. not as With occasional exceptions, the situation was tight as in 1956. However, more country banks were borrowing from his bank at this time than at any other period in the bank's history. Governor Balderston inquired whether commercial banks were seeking c°11sumer loans aggressively and President Livingston noted that this ' 01111d be covered in the discussion of the last topic on the agenda. Governor Robertson inquired whether there was any evidence of diminution of the demand for credit as the result of higher interest charges, to which President Livingston replied that in the case of his 'bank the answer was in the negative. He had always held the belief, he said, that the level of interest rates had little to do with the borrowing Of Money and, generally speaking, was not a deterrent to borrowing. Mr. Hays commented that higher rates may have had some effect in the ease of speculative builders, to which Mr. Frankland added that there ftscussion of this point at the Council meeting yesterday. The aiscu he said, centered around the question of how much speculative ding was necessary. In certain areas, including some parts of the 11/17/59 -11- Twe1fth District, the housing situation appeared to be reaching a saturation point. President Livingston noted the assertion sometimes heard that historicallY every major recession could be traced first to a decline in housing starts. He went on to say that it was hard to be sure to what extent the current drop-off in housing starts might be attributable to tight money as °Pposed to saturation areas. The Council's general feeling was that the recent reduction reflected somewhat Part an overbuilding in many areas. the scarcity of money but in large In his judgment, it was not true to say categorically that no greater amount of housing was being constructed because "tight money. It appeared that some borrowers were staying out of the pic- tIlre at the present time because they did not see a sufficient demand for 111°1"e houses. 4. The Board has been considering the desirability of amending the definition of savings deposits contained in Section 1 (e) of Regulation Q, Payment of Interest on Deposits, so as to exclude deposits of public agencies even though operated for charitable or educational purposes. Consideration is also being given to whether the definition should be even further restricted so as to limit savings deposits solely to individuals, thus eliminating all corporations including the special types of nonprofit corporations and associations now permitted to have savings deposits. The Board would be interested in any views that the Council might care to express. The members of the Council do not have statistical information which might indicate the significance of the savings deposits of p,ublic agencies. In the absence of such information, the Council unable to express an opinion on this matter. The Council would he Pleased to consider any information on this subject which the Dooard might wish to make available. 8 The Council cpposes restricting the definition so as to limit avinga deposits solely to individuals. 11/17/59 -12- Following comments by President Livingston indicating the need of the Council for clarification concerning the proposal to exclude deposits (If public agencies, even though operated for charitable or educational PurPoses, from the definition of "savings deposits" contained in Regulation Q, Governor Mills commented that the history of this problem vent back to the statute requiring the Board to set a ceiling on the rates permitted to be paid on time and savings deposits. Over the Years, he said, there had developed a hazy area Where it was difficult to decide What should be properly admitted as a savings deposit. When the °riginal regulation of the Board was issued, it contained a rather 174gUe reference to bona fide savings, but this was found to be a cumbersome definition and after some years it was dropped from the regulation. The Board then ruled that there could be included in savings accounts the d-ePosits of eleemosynary, charitable, fraternal, and similar organizations. °lit of that situation, there had now arisen the question whether an orga nization which is in part supported by public funds and administered 17 Public officials but whose objectives are charitable in nature should be e ligible to maintain a savings deposit. A case that came before the Board recently involved a public housing authority. This case was of a tYPe Where the Federal Government subsidized an operation engaged in for the benefit of the tenants of the project. The question seemed to come to a matter of principle, and the Board was seeking guidance. The question Might be put in the form of inquiring of the Council whether it was the 11/17/59 -13- general feeling of commercial banks that they would welcome this type of deposit as a savings deposit or whether it would appear that such funds should be taken only on time account. Mr. McCloy said examination of his bank's savings accounts revealed that only two per cent represented organizations as distinguished from individuals. These organizations varied considerably in character, 'with religious organizations and unincorporated associations included, and the accounts tended to be small. He felt that quite a public relations problem might be created if deposits of such organizations could not be accepted as savings deposits. Mr. McCloy went on to say that the New York Reserve Bank, upon appeared to be somewhat troubled by the problem and to feel that there may have been some abuses in this area. He judged, however, that the Reserve Bank hoped it would not be necessary to restrict savings "counts to individuals and rather favored the idea of a limitation, say $25)000, on the savings deposits of organizations. President Livingston said that in his case deposits of the type referred to by Governor Mills would be considered ineligible for savings aec0unte, although the funds would be taken on time deposit. Such fonds 1."Ild not he regarded as thrift accounts within the spirit of Regulation Q. President Livingston repeated at this point that the Council would Qm113c)ee strongly any definition limiting savings deposits solely to individllea -* In many banks, he said, there are deposits of eleemosynary insti ttltions which constitute exceptions to the general principle. 11/17/59 All in all, President Livingston was inclined to believe that this was not a large problem, although there may have been a tendency in some instances to admit accounts that would not fall squarely within the spirit of Regulation Q. It was the Council's view, he said, that restriction of savings deposits exclusively to individuals would represent extremely poor public relations. In response to an inquiry by a member of the Council, there followed further comment on the scope of the problem relating to deposits °I* Public agencies and the manner in Which the problem most recently cerne to the Board's attention; namely, in the form of a question raised IV a bank extaminer. Mr. Alfriend reported that a search of his bank's savings acc°Unts had resulted in findings similar to those reported by Mr. McCloy, f°110141ng Which Mr. Hays stated that the principal banks in the Fourth tistrict appeared to have no public funds in savings accounts. He said there was a strong feeling, however, that if funds of charitable and Bilailar organizations were made ineligible for savings accounts, those 1\allcis were likely to go to savings and loan associations. Governor Mills inquired whether the Council would favor liberalizatiOn of the definition in Regulation Q to admit other types of borderline °rRani, --auional deposits into savings accounts, to Which President Livingston ed that his bank had experienced no demand on the part of such organizstio ns and would hesitate to enlarge the area of eligibility. It was 11/17/59 -15- difficult for him to think of taking public funds into savings accounts. lie vas inclined to feel that the present definition was adequate, that banks, generally speaking, were doing a good job in resisting the acceptance Of deposits outside the definition, and that the definition was broad enough to enable banks to take all true thrift accounts. Mr. Damon said that he knew of no particular problem and that, in his view, banks should not consider a public housing authority as a charitable organization. Governor Shepardson then inquired Whether the Council would °PPose narrowing the definition to exclude public housing authorities, elld the responses that were heard were in the negative. Governor Robertson concluded the discussion by commenting that the Board had thought it appropriate to consider this matter before anY unsuitable practice became widespread. 5. The Board would be interested in the views of the members of the Council with respect to the development and operation of "revolving"check and charge credit plans, particularly as such developments may have an impact on sound bank lending and on the exercise of monetary and credit policy. The members of the Council are of the opinion that the impact °n sound bank lending of "revolving' check and charge credit plans is directly dependent upon the thoroughness and continuity of the investigation of the credit worthiness of the borrowers and the quality of the banks' management of these credits. If the development of these additional outlets for credit results in a significant increase in the total volume of credit outstanding, new factors and new problems are introduced Which at be considered in the exercise of monetary and credit policy. 11/17/59 -16- For example, the administration of a restrictive monetary policy, including possible selective credit controls, in its application to this type of credit would be difficult. The information available regarding these credits is relatively limited because of the lack of extended experience. The members Of the Council believe it would be very much worthwhile if pertinent statistical information regarding these credits could be collected and periodically published. This information would include applications received and rejected, total lines of credit extended and the amount used, and data on delinquencies and losses. Additional points of view on these types of credit will be presented orally by members of the Colmcil. President Livingston commented that this was a subject on which the Council had spent a good deal of time and that there were some differences of viewpoint within the Council. The extension of credit thrQugh revolving check and charge credit plans was a relatively new device, the plans were going forward rapidly and the results were hard to evaluate. For the expression of one point of view, President Livingston tallliad to Mr. Damon for comments on the experience at the First National /2.8.3ak °f Boston, which had been in this business longer than any other Mr. Damon reported that after fout years and eight months First Natio nal had about $9 million of such credit outstanding, representing b°11t °Ile per cent of the bank's total portfolio. Over this period, ne t lOsses to loans made were at the rate of .29 per cent, as against a rati° of .27 in the ease of unsecured personal loans, with total 0alain e in the respective categories within a range of 10 per cent. 11/17/59 -17- Measured in terms of average outstanding balances to final losses and charge-offs, unsecured personal loans showed a record of .43 while check credit accounts showed a ratio of .54. Of about 23,000 revolving check credit accounts outstanding on a recent date, 162 were overdue 14hi1e 239 out of a total of 14,000 personal loans were in overdue status. Mr. Damon suggested that criticism of the entrance of commercial banks into these forms of credit extension might reflect an attempt on the part of other types of lenders to limit the activity of the commercial banks, as exemplified by legislation, relating to banks only, which was 158.88ed recently by the Pennsylvania House of Representatives. Also, this e of lending seemed to some people a rather free-wheeling way of 1°811ing money. As he saw it, the banker has a duty to do his best to hallnel credit to deserving persons. The main criterion in passing 1113°n a loan should be a judgment as to the applicant's ability and vil lingness to repay, and in this respect the situation was probably no d ifferent in the case of revolving check and charge credit plans than in the case of other types of loans. In the case of First National, he 4. -Lalt that the controls developed over this type of borrowing had been de the bank not only was careful when it originally made the loan blat Very loan was checked at least once a year. Through holding checks dra, on the bank, it was possible to follow more or less what each borro 14er VRS doing. In cases where the line of credit was at the peak 11/17/59 -18- point most of the time, certain procedures were followed and the line Of credit might be cancelled if that seemed to be indicated. Repayment schedules were based on the maximum line of credit, granted for either 12 or 24 months. Therefore, if a line of credit was cancelled, the Period of repayment would be less than 12, or 24, months unless the borrower was at that time using his full line of credit. The important thing, Mr. Damon said, was Whether the banks were 80ing to loan money, or whether someone else would do it. In terms of dollars, First National had more loans in the form of credit to department store chains to carry their own credit accounts than in loans involved in the bank's own check credit accounts. As he saw it, it 41'13 important to have the public know what the commercial banks would lend and how the banks functioned. If the banks could set up systems to serve the public without jeopardizing their stability, he felt that 8°Mething would have been accomplished. Mr. Damon said he would rather see banks in the charge account blisillesa than nonfinancial institutions, and that he saw dangers to the bellks in the business not conducted by them. Nonfinancial institutions /lere setting up systems of consolidating debts, with payments made by inst ruments not typical of those going through the banking system. In thi. Manner, certain organizations were building up a banking system de the commercial banking system, with offices all over the country. /411eth er or not they would continue to grow was a question, because 11/17/59 -19- effective service charges were high. There must be some way, he thought, in which the commercial banks could get together and do this job more Cheaply; at present the whole field was subject to refinement and improveinent, and he felt sure that these would be forthcoming. Through revolving check and charge credit plans, he believed that commercial banks had developed a procedure that would make the banks more usable by the general Public, and this, he thought, was one of the functions of the banking system. President Livingston then turned to Mr. McCloy, who stated that the Chase Manhattan Bank had $4 million out in charge credit accounts. According to his concept, charge account credit was intended to be a service primarily of value to the small retailer. He said that Chase lianhattan constantly checks the position of the retailers, as well as ' l el3Pective borrowing, and the lines extended run from $100 to $5,000. L'elinquencies had been so small he could scarcely believe the figures, elld they represented mostly absolute frauds rather than overreaching on the Part of individuals. Charge account credit can be used only in designated retail shops and the bank, by receiving the sales slips, is Etbis to determine how the credit is used. Mr. McCloy said that the operation of these plans could not, e't course, be divorced from the whole credit picture. Thus far, he clic ' not believe they had been any great stimulant to credit expansion, but if thing got to that point, the matter would have to be looked into 41°re thoroughly. Except as a part of the general credit picture, he thought that the plans were not a matter of great concern at the moment. 11/17/59 -20- Governor Robertson inquired of Mr. Damon as to the basis on which the ceiling on individual lines of credit was fixed by First National, azd the latter replied that it was basically the ability to repay. As he recalled, the largest line of credit was $6,000, the average outstanding balance on 12-month revolving credit accounts was about $330, and the average on 24-month accounts was about $825. For a somewhat different point of view on the revolving check and Charge credit plans, President Livingston turned to Mr. Sienkiewicz, who began by saying that it was not his intention to oppose either plan and that he subscribed to the summary statement made by the Advisory Council. What troubled him was the principle involved. The Board had asked regarding the impact of these plans on sound lending and on the exercise or Illonetary and credit policy, and it was in this context that he wished to express a certain degree of anxiety. Mr. Sienkievicz said that he wanted to consider first the consumer credit package as a Whole, in order that there might be clear understanding (It each part. The first part, instalment credit) involves a plan under /4hich the borrower obligates himself to a systematic reduction of debt that debt is liquidated. The lender knows the purpose of the loan closely supervises its servicing. Loans under this plan generally tecilitate the flow of goods from the producers to the consumers and 13e1Torm a legitimate economic function. 11/17/59 -21- In contrast, Mr. Sienkievicz said, the charge credit plan is essentially a collection or debt liquidation arrangement between the retail merchant, the bank, and their mutual customer. The merchant turns over his receivables to the bank for payment and gets immediate credit, and the bank then bills the customer. A possible exposure for the bank would be if the depositor should overload himself with debt beyond his current income; another possible exposure would be in the case of a general economic setback When incomes would decline and del inquenqies develop. Mr. Sienkiewicz noted that the third part of the package, the l'ev°17ing check credit plan, was being promoted under various catchy slogans. it does While this plan also provides for the reduction of loans, not provide for the enforcement of liquidation and the initial litle of credit can become a perpetual line. The lender virtually never 1trl°148 the purpose for which the credit is used and therefore has no itItIllance over the use of the credit, as long as the borrower pays the ll'eacribed interest rate. TUrning to the impact of these plans upon sound lending, Mr. kankiewicz said it seemed generally agreed that instalment credit had 131'°ved beneficial to the growth of the economy and that lending standards 6" Practices had been reasonably high. 641d the The credit is self-liquidating, borrower must repay in regular instalments. The charge credit is primarily a collection device although it does involve an 11/17/59 -22- im1flediate expansion of short-term credit. While it departs from the tradition of bank credit, one must recognize the theory of service to bank customers, particularly in country areas. The revolving check credit plan, however, seemed to him to involve a more disturbing situation, presenting an aspect of perpetuity and free-wheeling. The timing of its growth this year was unfortunate because of the general credit situation. that In effect, people were invited to come in and get type of credit at a time when monetary policy was trying to restrain the expansion of credit. One might ask how much consideration was given to the cardinal principles of thrift, systematic saving, and reduction debt. After citing statistics on the rapid expansion of consumer indebtedness recently, Mr. Sienkiewicz suggested that certain abuses °t the revolving check credit plan appeared already to be developing, ' "d in this connection he presented an example. the He then referred to costliness of screening a large volume of applications and suggested that a charge of one per cent a month might not be adequate. In addition, the criticism, made in connection with the Pennsylvania legislation to *Itch Mr. Damon referred, that the banks were "squeezing the little fellow", BlIggested a public relations problem that might prove embarrassing to b"king. While no one could deny that a party with stable income and Rood c haracter was entitled to some credit and no one could criticize 1"tvidual banks for seeking and offering new services to their customers, 11/17/59 -23- the crucial issue hinged on the type, quality, and effect of those services on banking and credit standards and practices. Mr. Sienkiewicz expressed the view that the impact of the revolving Check credit and charge credit plans on the exercise of monetary and credit 13°1icY was difficult to determine at the present stage. While the volume of 811ch credit was growing, it was not large enough for adequate analysis. However) as more banks adopted such plans and volume increased the effect on eQnsumer spending and indebtedness would grow more pronounced. If the general demand for credit was strong, banks would be under pressure to ' l ation credit between businesses and consumers, particularly those of the class Who would be borrowing under the revolving credit plan, and such t'ationing might impose embarrassing strains on both the monetary authorities arld the banks in the absence of more specific controls. exn.— Furthermore, over- of revolving check credit would tend to accelerate spending in Ileric/ds of business boom and would very likely aggravate the ensuing period °r adjustment. Under such conditions the monetary authorities would be 13resented with difficult problems of control even on a selective basis. in summary, Mr. Sienkiewicz said, the use of revolving check Qlseclit is left to the discretion of the individual, and it is profitable tc4r th e -Lending bank to encourage the borrower to use his credit and to tEor '1/1 debt. Under these conditions, the monetary authorities are 'rotated with a problem of addition to the monetary supply and there 1.B a. question regarding the ability to prevent undue expansion. It 11/17/59 -24- seemed desirable, as suggested in the statement of the Council, to obtain more information on the volume and methods of handling this type of credit. Following some discussion with respect to the technical operation Of revolving check credit plans, Mr. Damon said his fundamental difference with Mr. Sienkiewicz was that he felt nobody ever asked for a loan without a good purpose. For a bank to pay too much attention to the purpose the loan was, in his opinion, overplaying the matter. The important thing was whether the applicant was entitled to credit and had the ability and willingness to repay. Mr. Sibley suggested a distinction between charge credit and the liey°1ving check credit plan, stating that charge credit really is not bellking for it involves buying accounts before they have been made. bellke, he felt, were in that business as a defensive measure. The At least the revolving credit plan represented a form of doing banking and was 814Ject to being policed more carefully than charge credit. Governor Balderston then commented on the difference between the 151'°b1ems faced by the Federal Reserve System and by the commercial banks. Damon had remarked on the low rate of delinquencies under the revolving el'eclit plan, and he (Governor Balderston) had heard the same standard 415133-led in appraising the impact on the economy of the mortgage and c°r18111ter instalment credit advanced in 1955. However, the Board's es °f instalment credit indicated that the rapid expansion in 1955 va8 a destabilizing influence. From the standpoint of the central banking 11/17/59 -25- 6ystem, it was not the percentage of loans that went bad but whether the lending represented an unstabilizing influence such as to demand some control that the System could not apply through flexible monetary c ontrols. Governor Balderston then asked what the choice would be if a bank had to choose, in a period of credit restraint, between cutting back on c°nsumer loans and credit to manufacturers and retailers. Mr. Hays indicated that this possible problem had been discussed at his bank and that the thinking was toward a budgeting of the amount "funds allocated for various types of lending. Mr. Damon suggested that a bank might move to cut back first on the amount of credit extended to nonfinancial institutions for the purpose of °ffering credit to their customers rather than on consumer borrowing clirect from the bank. President Livingston stated that this was a difficult question. 111 the case of his bank, the percentage of instalment loans in the portfolio 11" sMall enough to make the question rather academic. It had never c'Q(larred to his bank to diminish allocations to the consumer credit clePartment because the volume was relatively insignificant and there }lac' been an effort to build up the department over a period of time. On the other hand, it might be hard to reduce loans to large retailers that eXtend credit to their customers because their business might be lost. If Et balik got into a position Where it had a substantial amount of consumer 11/17/59 -26- credit outstanding and was forced to cut back on total credit, he supposed that the answer might be a prorating. Addressing himself to the possible impact of the charge credit and rev°17ing credit plans on monetary and credit policy, Mr. McDonnell euggested that the answer might depend largely on Whether this type of business actually was creating new money or represented a transfer of credit from one form to another. He did not have enough information at this time to be sure, but in his personal opinion these plans did not inv°17e entirely the creating of new credit. He also suggested that one should not pinpoint these plans and seek to do something about them Unless he thought of the whole consumer credit field) for it would seem 4 Mistake to apply restrictive controls to one particular segment of the entire field. Governor King concluded the discussion by commenting that there "e t14° 'ways of borrowing from a bank, the first being to borrow for a 8Pecific purpose and the second being on an open line of credit. it As he the charge credit and revolving credit plans represented essentially extension of the principle of the open line of credit to a large number "1/e0Ple on a modest basis. 111°11ght, for 131117P08e he De°131e In essence this was a desirable thing) he the banking system was more likely to accomplish its true financial responsibility was placed on a large number of instead of a relatively small group. While old safeguards could not be di -.'scarded, he felt that banking would tend to benefit by its venture 11/17/59 into this field. -27Like Mr. McDonnell, he doubted whether credit extended under these plans was entirely new credit. Instead, he believed that it 'night represent more a replacement of one type of credit by another, although undoubtedly a certain amount of new credit was brought into being. It was agreed that the next meeting of the Federal Advisory Council vould be held February 15-16, 1960. Chairman Martin concluded the meeting by expressing on behalf of the Board appreciation for the service rendered by the members of the CQuncil during 1959. He also expressed regret that the members referred to 11, 4—eviously by President Livingston would no longer be participating in the Council meetings. The meeting then adjourned. )-\ Secrete, fA -
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