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BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Statement of Chairman ISccles Before Senate Banking aqd Currency Committee on REGULATION OF CONSUMER INSTALMENT CREDIT June 25, 1947 The Board of Governors of the Federal Reserve System has recommended t o the Chairmen of the Senate and House Banking and Currency Committees a b i l l which would authorize the Board t o continue on a specific l e g i s l a t i v e basis the regulat i o n of consumer instalment c r e d i t t h a t i s now based on Executive Order. As the members of your Committee know, since the end of the war the question of whether some r e s t r a i n t s upon overexpansion of t h i s type of c r e d i t should be retained has been the subject of sharp controversy. The Board has hoped t h a t Congress would hear the pros and cons before coming to a conclusion as to whether l e g i s l a t i o n should or should not be enacted. We f e e l t h a t regulation of t h i s character should have specific l e g i s l a t i v e sanction i f i t i s to be i n d e f i n i t e l y extended i n peacetime. Accordingly, we have recommended to the President t h a t the Executive Order be vacated i n the event t h a t the Banking and Currency Committees do not recommend favorably the enactment of appropriate a u t h o r i t y f o r continuing regulation. The President has w r i t t e n a l e t t e r i n d i c a t i n g t h a t he w i l l follow the Board1 s recommendation but at the same time expressing the hope t h a t the Congress w i l l enact the necessary enabling l e g i s l a t i o n . This l e t t e r i s as follows: THE M I T E HOUSE * WASHINGTON June 5, 1947 Dear Mr. Chairman: The Council of Economic Advisers has transmitted t o me a memorandum i n regard to the l e g i s l a t i o n which the Board of Governors has recommended f o r consideration by Congress t o continue instalment credit regulations now i n e f f e c t under an Executive Order based on the Trading with the Enemy Act. I n t h e i r memorandum the Council states: "There now exists the power t o l i m i t the growth of installment credit which, even under the present r e s t r a i n t s , has been expanding a t a disturbing r a t e . This power now rests on wartime Executive Order, which may have t o be rescinded i n the absence of l e g i s l a t i v e authority f o r i t s continuation. I f the curbs on the extension of instalment c r e d i t -now being exercised under Regulation W were to be removed a t t h i s time, - 2there would be a tendency of producers and d i s t r i b u t o r s t o t r y t o sustain the absorptive power of the market by accepting lower down-payments and a longer time period rather than adjusting prices to the purchasing power of current incomes. This would postpone rather than promote the kind of stable adjustment that our economy requires. 1 1 X wish t o advise you t h a t I am i n f u l l accord with the Council 1 s recommendations and hope t h a t the Congress w i l l enact the necessary l e g i s l a t i o n t o r e t a i n r e s t r a i n t s upon excessive expansion which results i n excessive contraction of consumer credit thereby making f o r economic i n s t a b i l i t y , reduced production, and unemployment. I f the Congress does not see f i t to provide the necessary l e g i s l a t i v e a u t h o r i t y , i t i s my i n t e n t i o n to vacate the Executive Order because I do not believe t h a t such regulations should r e s t i n d e f i n i t e l y i n peacetime on emergency or war powers a f t e r the Congress has had ample opport u n i t y t o consider the subject. Very sincerely yours, (S) Harry S. Truman Honorable Marriner S. Eccles, Chairman, Board of Governors of the Federal Reserve System, Washington, D. C. I f l e g i s l a t i o n i s t o be passed, we believe from our experience t h a t consumer c r e d i t regulation should be directed t o the v o l a t i l e sector of consumer c r e d i t , t h a t i s , instalment c r e d i t . This i s the part which has been subject to the greatest fluctuations i n the past, thus contributing t o i n s t a b i l i t y and tinemployment. Regulation under the proposed l e g i s l a t i o n would be i n about the form and scope e f f e c t i v e at present under the Board1 s Regulation W. I t would, with appropriate exceptions t o provide administrative f l e x i b i l i t y , prescribe maximum maturities f o r a l l types of instalment c r e d i t and i n addition would prescribe minimum down payments f o r instalment credit to finance the purchase of important categories of consumers1 durable goods. Thus, the regulation would cover not only instalment c r e d i t f o r consumers1 durable goods but also instalment credit f o r other consumer purposes, both of vihich contribute to the accentuation of business upswings and downswings and neither of which can be sharply disassociated from the other. Generally speaking, the instalment terns now prescribed by Regulation W c a l l f o r m a t u r i t i e s of not more than 1$ months and down payments of a t l e a s t onet h i r d . Under the proposed l e g i s l a t i o n , terms would, of course, be varied from time to time depending upon changing economic conditions but with a view to r e straining the development of unsound credit terms and with a view to preventing or reducing excessive expansion or contraction of consumer instalment c r e d i t which i s t h a t sector of consumer c r e d i t subject to the widest f l u c t u a t i o n . These would be the declared statutory objectives. - 3Under e x i s t i n g conditions when the a r t i c l e s commonly financed with i n stalment c r e d i t are for the most part i n short supply r e l a t i v e to demand, i t i s .apparent that the r e s t r a i n t s help to dampen the demand and thus reduce the upward pressure on prices. Even when gpods become available i n l a r g e r q u a n t i t i e s , hewever, reasonable r e s t r a i n t s on consumer instalment c r e d i t would serve a useful public purpose, because they would tend to induce s e l l e r s t o reach more customers by reducing prices instead of by resorting t o a competitive r e l a x a t i o n of i n s t a l ment credit terms while s t i l l maintaining high prices. Under p r e v a i l i n g conditions of maximum peacetime employment and n a t i o n a l income, i t would be economically unsound to encourage people t o go deeper and deeper i n t o debt on increasingly easy terms. To i l l u s t r a t e : the prices of automobiles i n the used car market today reveal a serious lack of balance between supply and demand. I n t h a t market, 1947 cars i n the lowest price l i n e s are s e l l i n g f o r premiums of $300 and $400 above the delivered prices established f o r these cars when new. Prices of older used cars are i n proportion. These prices have been holding f i r m , and even showing some tendency to r i s e , notwithstanding the present credit r e s t r i c t i o n s . With the added demand f o r both new and used cars which would r e s u l t from the removal of c r e d i t r e s t r i c t i o n s and with a supply of both which i s s t r i c t l y l i m i t e d by the productive f a c i l i t i e s , labor supply, and materials available, there i s no l i k e l i h o o d t h a t there would be the downward adjustment i n prices of used cars that i s so much needed. On the contrary, i f credit r e s t r i c t i o n s are removed, there i s every reason t o expect t h a t the present abnormally high prices of used cars w i l l increase f u r t h e r i n r e l a t i o n to the prices established by manufacturers f o r new cars. A downward adjustment i n used car prices i s especially needed by the working people and the lower income groups who make up the p r i n c i p a l market f o r used cars. Notwithstanding continued shortages of goods, p a r t i c u l a r l y durable goods, and notwithstanding regulation of consumer c r e d i t , instalment c r e d i t expanded during the past 12 months by more than 2 b i l l i o n d o l l a r s . The economic e f f e c t of adding borrowed dollars to current income, together with the unprecedentedly large volume of savings i n the hands of the public generally, can only be to prolong the period of i n f l a t e d prices. The premature r e l a x a t i o n of r e s t r a i n t s , or t h e i r complete removal, would make no more goods a v a i l a b l e . I t would only help t o hold prices high i n the marketplace. With e x i s t i n g shortages i n consumers1 durable goods and the r e s t r a i n t of Regulation W, the volume of consumer instalment c r e d i t has not reached a point where i t could be considered excessive as viewed i n r e l a t i o n t o the l e v e l of nat i o n a l income and production. The r e s t r a i n t i s now imposed because of other current factors such as the high i n d i v i d u a l incomes and the large cash resources which consumers widely possess as r e l a t e d to the supplies of consumers1 durable goods a v a i l a b l e . Were goods available i n l a r g e r volume and were many consumers able to finance t h e i r purchases on easier c r e d i t terms, there i s l i t t l e question but that the volume of consumer instalment c r e d i t would be much higher. As an indication of the p o t e n t i a l i t i e s , sales of consumers1 durable goods i n 1946 were nearly twice the d o l l a r volume of such sales i n 1940 but the volume of instalment sales credit extended i n 1946 was less than three-fourths of the instalment sales credit extended i n 1940. Thus with the elimination of r e s t r a i n t and the l a r g e r - 4supplies of goods t h a t are becoming a v a i l a b l e , consumer instalment credit could \ncrease r a p i d l y i n absolute volume and i n r e l a t i o n t o n a t i o n a l income. The need f o r regulation i s not merely a temporary one. Experience has shown t h a t the excessive expansion and subsequent contraction of consumer i n s t a l ment credit contributes substantially t o the r i s e and f a l l of production and employment. I t s r o l e i n i n s t a b i l i t y i s increasing w i t h the growing importance of consumers1 durable goods i n the economy. I t i s recognized t h a t the development of t h i s type of c r e d i t has gone hand i n hand with and f a c i l i t a t e d the unparalleled i n d u s t r i a l development of the nation. Yet, i t i s equally s i g n i f i c a n t t h a t when comp e t i t i o n takes the form of relaxing credit terms and i s carried t o extremes, i t i s a symptom and cause of economic unsoundness. M i l l i o n s of people are encouraged t o overpledge future income. This i n e v i t a b l y e n t a i l s i n s t a b i l i t y , because the excessive c r e d i t extended during a business boom accentuates the boom and has to be l i q u i d a t e d out of current income on the downswing, which accentuates depression. The f a c t t h a t current income has to be used t o pay o f f excessive instalment debt created during the business boom necessarily diverts t h a t income from the channels of consumer expenditures i n the depression, especially i n the important sector of consumers1 durable goods. Voluntary e f f o r t s made by foresighted r e t a i l e r s , sales finance companies, banks, and other lenders t o prevent down payments from becoming excessively small and repayment periods from becoming over-extended i n times of credit expansion are i n e f f e c t i v e because of the aggressive competition of those who w i l l not v o l u n t a r i l y cooperate i n t h i s objective. The present trend of expansion i n consumer instalment debt needs t o be c a r e f u l l y watched and restrained so t h a t the country s h a l l not repeat the pattern of inducing American families t o gp heavily i n t o debt on too easy terms, p a r t i c u l a r l y f o r high-priced goods many of which are not only high-priced but of i n f e r i o r q u a l i t y . The decline t h a t would be bound to follow would be f e l t not only i n the durable goods industries but throughout the economy. Continued r e s t r a i n t s as proposed i n the l e g i s l a t i o n would help to prevent a r e p e t i t i o n of such an unsound sequence of events. The Board f e e l s t h a t t h i s type of regulation, which i s of a selective character, serves a useful purpose which cannot be reached by the exercise of any powers over bank c r e d i t i n general. The regulation i s needed, t h e r e f o r e , as a supplement t o general c r e d i t control powers. As the Board pointed out i n i t s 1945 Annual Report t o Congress, however, o v e r a l l r e s t r a i n t s to the sources of bank credit have, under e x i s t i n g conditions, l o s t much of t h e i r effectiveness. For t h i s reason i t i s a l l the more important f o r Congress t o consider whether a selective control such as proposed would, as the Board believes, reduce economic i n s t a b i l i t y and thus help t o provide conditions more favorable t o the maintenance of our p r i vate enterprise system. The case forpermanent l e g i s l a t i o n seems to the Board t o be very strong. At the same time, we recognize t h a t Congress may not f e e l t h a t there i s time enough, a t the present session, to give adequate consideration to a permanent measure. For t h i s reason, and because i t now appears that there i s great need f o r r e s t r a i n t during the coming year, we suggest t h a t the Committee give consideration - 5t o the adoption of a Joint Resolution providing that consumer c r e d i t controls should continue under the e x i s t i n g Executive Order u n t i l a specified date, such as July 31> 1943, and then be automatically terminated. I f the regulation were continued on t h i s basis, the Board would be i n position to modify or remove the present r e s t r i c tions i n the event such action should be warranted by a change i n economic conditions at any time during the coming year. The substance of such a Resolution might be along the following l i n e s : Resolved by the Senate and House of Representatives of the United Spates of America i n Congress assembled. That the Board of Governors of the Federal Reserve System i s authorized t o continue t o exercise consumer c r e d i t controls pursuant t o Executive Order No. 8843 u n t i l July 31, 1948 and, except during any w$r beginning a f t e r such date or any n a t i o n a l emergency proclaimed by the President a f t e r such date, no such consumer c r e d i t controls s h a l l be exercised a f t e r such date.