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WHAT DOES A CREDIT MAN THINK ABOUT TODAY? M. S. SZYMCZAK Member Board of Governors of the Federal Reserve System Washington, D. C. Delivered before MIDWEST CONFERENCE of the ROBERT MORRIS ASSOCIATES Sherman Hotel Chicago, I l l i n o i s 6:30 P. M. - December 9, 1949 For Release i n Newspapers at Time of Delivery WHAT DOES A CREDIT MAN THINK ABOUT TODAY? One t h i n g I ' m n o t going t o do i s t r y t o t e l l you how t o run your business. Capable c r e d i t men need no such advice—and the others wouldn't take i t anyway. A good c r e d i t man knows the many elements to be considered i n g r a n t i n g a loan and he knows t h a t he cannot a f f o r d t o overlook any one o f them i n reaching h i s d e c i s i o n . Something o f l i t t l e importance today may, b e cause o f r a p i d economic and other changes, be o f f i r s t importance tomorrow. You members o f the Robert Morris Associates are w e l l aware o f the need f o r evidence o f the borrower's i n t e g r i t y , f o r assurance t h a t the money he borrows w i l l be employed f o r provident and productive purposes, and f o r reasonable c e r t a i n t y t h a t the loan can and w i l l be repaid upon the terms and conditions granted. You know t h a t your advice and counsel must accompany many loans i f the c r e d i t i s t o be used t o best advantage. You are aware o f the dangers o f r e l y i n g too h e a v i l y on the continued success o f any one i n dustry or e n t e r p r i s e , and of the need f o r d i v e r s i f i c a t i o n i n your lending a c t i v i t i e s . I n s h o r t , you know t h e many angles t o t h i s business of lending other peoples' money t o other people, and you are endeavoring t o consider a l l o f them i n an e f f o r t t o p r o t e c t your d e p o s i t o r s , t o provide a f a i r r e t u r n on the investment o f your stockholders, and t o assure the maximunr sound product i v e use of c r e d i t i n your community. I t i s not my purpose t h i s evening t o review the many d e t a i l e d cons i d e r a t i o n s t h a t enter i n t o the g r a n t i n g o f a l o a n . Rather, as a n a t i v e o f t h i s c i t y and former associate o f yours, I should l i k e t o discuss some o f the broader problems o f n a t i o n a l and i n t e r n a t i o n a l c r e d i t p o l i c y w i t h which I have been conversant f o r the past 16 years. I n today's w o r l d , the conduct of economic a f f a i r s a t home and abroad i s g r e a t l y i n f l u e n c e d by considerations of s o c i a l r e s p o n s i b i l i t y . I n t h e i n t e r e s t o f the greatest good f o r the greatest number we as a n a t i o n have set ourselves the task of maintaining h i g h employment, stable values, and a r i s i n g standard o f l i v i n g . Hie attainment o f these n a t i o n a l economic o b j e c t i v e s , i n view o f the growing complexity of our eoonomy, gives r i s e t o many perplexing problems. Considering t h e e s s e n t i a l r o l e o f c r e d i t i n our h i g h l y s p e c i a l i z e d system o f producing and d i s t r i b u t i n g goods and services, i t i s n o t s u r p r i s i n g t h a t these problems are a matter o f concern t o each end every c r e d i t man i n our country. The Robert Morris Associates deserve high praise f o r p u b l i c i z i n g the e s s e n t i a l s o f c o n s t r u c t i v e c r e d i t p o l i c i e s and f o r encouraging and f a c i l i t a t i n g the exchange of i n f o r m a t i o n and ideas among c r e d i t men. The Associates' f i n a n c i a l statement s t u d i e s , which are c o n t i n u a l l y being enlarged and r e f i n e d , have provided members w i t h standards o f comparison t h a t are extremely u s e f u l i n analyzing and evaluating p a r t i c u l a r loan a p p l i c a t i o n s , and i n d e t e c t i n g changes i n business f i n a n c i a l s t r u c t u r e . Through i t s Monthly B u l l e t i n and meetings such as t h i s , the Robert Morris Associates are encouraging t h a t s o r t o f t h o u g h t f u l analysis e s s e n t i a l t o a sound s o l u t i o n o f our many problems and t o t h e r e a l i z a t i o n o f our economic goals. The Role of C r e d i t and C r e d i t I n s t i t u t i o n s Tfe a l l know t h a t an adequate supply of c r e d i t a t the r i g h t place, the r i g h t t i m e , the r i g h t c o s t , and the r i g h t repayment terms i s e s s e n t i a l t o the smooth f u n c t i o n i n g of our economy. There i s hardly an i n d i v i d u a l , - 2 a business man, a municipal or state government, or a n a t i o n a l government t h a t doesn't need c r e d i t from time t o time. I n order t o meet these v a r i e d needs f o r c r e d i t , d i f f e r e n t types o f lending and investment i n s t i t u t i o n s have been developed. Some, l i k e the commercial bank, evolved i n response t o a need f o r s h o r t - t e r m business c r e d i t ; o t h e r s , such as the savings and l o a n a s s o c i a t i o n , were created f o r the purpose of supplying special types of longer term c r e d i t . S t i l l o t h e r s , such as mutual savings banks and insurance companies, have, i n recent years, turned t o lending and i n v e s t i n g funas normally supplied by commercial banks. The commercial bank, however, i s s t i l l pre-eminent i n the f i e l d of s h o r t e r - t e r m c r e d i t . I t must, because of the h i g h p r o p o r t i o n of i t s demand t o i t s t o t a l l i a b i l i t i e s , concentrate on s h o r t e r - t e r m c r e d i t . I n c o n t r a s t , l i f e insurance companies, the m a j o r i t y of whose o b l i g a t i o n s represent l i f e t i m e contracts -with p o l i c y h o l d e r s , and mutual savings banks, which h o l d peoples 1 savings, are able t o extend c r e d i t f o r longer periods through the purchase of long-term bonds, o b l i g a t i o n s secured by r e a l e s t a t e , and other investments of a long-term nature. While the demand character of much of t h e i r deposit l i a b i l i t y l a r g e l y r e s t r i c t s commercial banks t o s h o r t - t e r m l e n d i n g , member banks can, i f confronted w i t h unforeseen deposit withdrawals, obtainrfunds from t h e i r Reserve Banks. I n i t s capacity of lender of l a s t r e s o r t , the Federal Reserve System has introduced a much greater degree of f l e x i b i l i t y i n t o commercial bank lending than p r e v i o u s l y e x i s t e d . I n t h i s respect, the powers of the System were broadly expanded i n 1935. Banks can now grant loans w i t h o u t fear t h a t tomorrow or the day a f t e r they may be forced t o l i q u i d a t e them on s h o r t n o t i c e i n order t o meet depositors' demands. On the other hand, we recognize t h a t c e r t a i n types of c r e d i t extension are not f o r commercial banks—among them, purchase and lease of business p r o p e r t i e s and investment i n e q u i t y shares. I n other words, the r o l e of the commercial bank should continue t o be l a r g e l y t h a t of p r o v i d e r of s h o r t - and mediumterm c r e d i t t o business corporations, unincorporated e n t e r p r i s e s , farmers, consumers, home owners, and a l l l e v e l s of government. I n t h i s connection, I should l i k e t o say a word about p u b l i c l e n d i n g i n s t i t u t i o n s t h a t provide emergency f i n a n c i a l assistance t o banks and business„ I t h i n k most c r e d i t men would agree t h a t Government competition i n the f i e l d of d i r e c t lending i s undesirable i f p r i v a t e lending i n s t i t u t i o n s can provide the amounts and types of c r e d i t needed. On the other hand, I t h i n k we should have some p u b l i c c r e d i t agency or agencies a v a i l a b l e on a standby basis t o render assistance i n periods of f i n a n c i a l s t r e s s — a t l e a s t u n t i l such time as the commercial lending i n s t i t u t i o n s are able t o cope w i t h any conceivable s i t u a t i o n . I n a d d i t i o n , there may be some remaining gaps i n our present s t r u c t u r e of f i n a n c i n g agencies—far example, agencies that would provide long-term debt c a p i t a l t o small e n t e r p r i s e s . Such gaps may have t o be f i l l e d by new types o f p r i v a t e or p u b l i c f i n a n c i a l i n s t i t u t i o n s . Vhether the potential expansion of Government lending agencies poses any serious competitive threat f o r private credit i n s t i t u t i o n s w i l l depend, i n my opinion, on our success i n minimizing or eliminating c y c l i c a l expansion and contraction of business a c t i v i t y and credit and i n f i l l i n g any gaps with appropriate private lending i n s t i t u t i o n s wherever possible. The dual responsibility of ihe commercial banker on the one hand to protect the interests of his depositors and stockholders, and on the other hand to expedite the production of essential goods and services ty granting c r e d i t , i s a d i f f i c u l t one. The desire to protect depositors may cause individual bankers to change t h e i r credit policies a t the f i r s t signs of financial stress. The o v e r - a l l e f f e c t of such action, by sharply c u r t a i l i n g or even liquidating credit l i n e s , might seriously impede economic a c t i v i t y and hurt a l l bonk depositors. Individual bankers might find i t d i f f i c u l t to continue granting credit f r e e l y when competitors are calling i n t h e i r weaker loans and tightening up t h e i r credit terms. - 3 The only r e a l s o l u t i o n t o t h i s problem l i e s i n the prevention, by means of o v e r - a l l c r e d i t and monetary a c t i o n , and other p u b l i c and p r i v a t e means too numerous t o mention on t h i s occasion, of any economic development t h a t might lead t o sharp retrenchment and l i q u i d a t i o n of c r e d i t . Role of the Federal Reserve System The Federal Reserve System, as the c e n t r a l monetary and c r e d i t a u t h o r i t y , i s charged w i t h r e s p o n s i b i l i t y f o r r e g u l a t i n g the o v e r - a l l supply, a v a i l a b i l i t y , and cost of money w i t h a view t o c o n t r i b u t i n g t o the maintenance of high l e v e l s of employment, stable values, and a r i s i n g standard of living. I n an e f f o r t t o meet i t s r e s p o n s i b i l i t i e s , the System takes p o s i t i v e a c t i o n t o curb or t o encourage c r e d i t expansion, as circumstances r e q u i r e . It operates by using e i t h e r q u a n t i t a t i v e or s e l e c t i v e instruments, or b o t h . Q u a n t i t a t i v e instruments, such as changing the required reserves of member banks or open market purchases or sales of Government s e c u r i t i e s , increase or decrease the reserve base f o r c r e d i t extension but leave t o the i n d i v i d u a l bank the decision as t o the type or types of c r e d i t t h a t should be expanded or contracted. S e l e c t i v e c r e d i t instruments, such as margirr requirements f o r the purchase or c a r r y i n g of l i s t e d stocks or emergency r e g u l a t i o n of consumer instalment c r e d i t , apply t o a p a r t i c u l a r type of c r e d i t , but impose no d i r e c t l i m i t on the t o t a l amount o f c r e d i t outstanding. Generally speaking, a c t i o n taken by the Federal Reserve System t o i n f l u e n c e the expansion or c o n t r a c t i o n of c r e d i t has the primary e f f e c t of suggesting, r a t h e r than r e q u i r i n g , c e r t a i n responses on the p a r t of i n d i v i d u a l lenders. This i s p a r t i c u l a r l y t r u e i n time of economic recession when the Federal Reserve can enlarge the basis f o r c r e d i t expansion but i s powerl e s s t o f o r c e a d d i t i o n a l c r e d i t i n t o business and trade channels. The l a t t e r can be done only by aggressive response on the p a r t of i n d i v i d u a l banks i n extending c r e d i t and by w i l l i n g n e s s on the p a r t of business men and others t o u t i l i z e c r e d i t i n expanding t h e i r operations. To make t h i s poss i b l e , both p u b l i c and p r i v a t e p o l i c i e s should i n s p i r e confidence on the p a r t o f business men, bankers, and the general p u b l i c * I n i n f l u e n c i n g c r e d i t * p o l i c i e s i n an e f f o r t t o c o n t r i b u t e t o monetary and economic s t a b i l i t y , the Federal Reserve System must act i n the p u b l i c i n t e r e s t . Oftentimes such actions are unpopular, e s p e c i a l l y among the banking f r a t e r n i t y . Sometimes c e n t r a l banking o f f i c i a l s r e s i g n , v o l u n t a r i l y or otherwise, because of the u n p o p u l a r i t y o f t h e i r a c t i o n s . This i s p a r t i c u l a r l y t r u e i n periods of i n f l a t i o n , when most people do not want t o see business a c t i v i t y c u r t a i l e d . However, as r e c e n t l y demonstrated i n a number of Western European c o u n t r i e s , the need f o r d r a s t i c a c t i o n t o ensure monetary s t a b i l i t y does a r i s e and the r e s u l t s of such a c t i o n are b e n e f i c i a l . I n the end, most groups recognize the wisdom of a c t i o n which they at f i r s t opposed. I n the f i n a l a n a l y s i s , the major c o n t r i b u t i o n of the System t o the smooth f u n c t i o n i n g of our economy l i e s i n i t s e a r l y d e t e c t i o n of undesirable economic trends and prompt a c t i o n t o guide commercial c r e d i t p o l i c y away from paths t h a t may l e a d t o serious i n f l a t i o n or d e f l a t i o n . Without the understanding a i d cooperation of the e n t i r e banking system and the p u b l i c much o f the e f f e c t i v e n e s s of Federal Reserve a c t i o n i s l o s t . The o r g a n i z a t i o n of the Federal Reserve System, w i t h i t s 12 r e g i o n a l banks and t h e i r 2k branches, provides grass-roots i n f o r m a t i o n on what our leaders i n the f i e l d s of a g r i c u l t u r e , i n d u s t r y , commerce, and banki n g are doing and p l a n n i n g . I n s i m i l a r manner, the System obtains f i r s t hand i n f o r m a t i o n about economic developments i n f o r e i g n countries and i n the f i e l d of i n t e r n a t i o n a l t r a d e and finance through i t s membership i n the N a t i o n a l Advisory Council and from various Federal Reserve and other Govern - 4 ment missions and representatives abroad. Much o f t h i s i n f o r m a t i o n i s r e layed t o c r e d i t men through the p u b l i c a t i o n s of the System so t h a t i n d i v i d u a l lending p o l i c i e s may be reviewed i n r e l a t i o n t o n a t i o n a l and world-wide economic developments. The Current Business S i t u a t i o n and Outlook I n the f i r s t p l a c e , as you know, determination of appropriate c r e d i t p o l i c i e s depends i n p a r t on our longer-range economic o b j e c t i v e s . But i t depends also on the present and probable fixture course o f business a c t i v i t y . Between November 19W and J u l y 191+9 i n d u s t r i a l production, as measured by the Federal Reserve index, declined roughly 17 per cent; during the same p e r i o d , wholesale p r i c e s , as measured by the all~coromodity index, dropped 6 per cent and business i n v e n t o r y holdings declined f> per cent. These declines i n i n d u s t r i a l a c t i v i t y and p r i c e s , together w i t h smaller business c r e d i t demands on banks and other lending i n s t i t u t i o n s , prompted several monetary and c r e d i t actions by the Federal Reserve System during the spring and summer of 19h9* Downpayment and repayment requirements on consumer instalment loans were g r a d u a l l y moderated p r i o r t o the t e r m i n a t i o n of Regulation T7. Llargin requirements on stock exchange loans were decreased s u b s t a n t i a l l y , successive reductions i n reserve requirements o f member banks were i n s t i t u t e d , and a p o l i c y o f f l e x i b i l i t y i n open market operations t o permit f r e e r p l a y o f general c r e d i t forces i n the determination #of market r a t e s and y i e l d s was adopted. The moderate recession i n business a c t i v i t y t h a t we experienced during the f i r s t h a l f o f t h i s year probably r e f l e c t e d inventory and p r i c e readjustments, r a t h e r than any basic d i f f i c u l t i e s . VJhether the recovery t h a t began t h i s summer may l e a d t o f u r t h e r i n f l a t i o n a r y pressure or w i l l be replaced by a resumption of the e a r l i e r downward readjustment i s now a subj e c t of considerable discussion. Among the various aspects of the present s i t u a t i o n t h a t suggest continued h i g h l e v e l s of business a c t i v i t y , one of the most s i g n i f i c a n t i s the record l e v e l o f c o n s t r u c t i o n a c t i v i t y . I n a recent j o i n t r e p o r t , the Department of Commerce and Department o f Labor estimated t h a t the t o t a l value of new c o n s t r u c t i o n pui> i n place during 19l*9 would exceed 19 b i l l i o n d o l l a r s , or s l i g h t l y more than the 19U8 t o t a l o f 18.8 b i l l i o n . Moreover, these same sources p r e d i c t e d t h a t the t o t a l of new c o n s t r u c t i o n expenditures i n 19^0 w i l l equal t h a t of 19k9« Consumer expenditures on goods and services of a l l types were s t i l l running at an annual r a t e of 179 b i l l i o n d o l l a r s a year i n the t h i r d quarter of 19^9—-less than 2 per cent under the peak annual r a t e reached i n the f o u r t h quarter of 191*8. Moreover, recent Federal Reserve Board surveys have revealed the existence of continued l a r g e - s c a l e demands on the p a r t of i n d i v i d u a l s f o r automobiles, houses, and other durable goods. Not only i s the demand g r e a t , but i n d i v i d u a l s have cash or other l i q u i d assets, or a r e able t o borrow, t o finance purchases o f these goods. N a t i o n a l service l i f e insurance premium refunds during the w i n t e r and s p r i n g of 195>0 are counted upon t o b o l s t e r consumer demand, w h i l e continued l a r g e - s c a l e Government expenditures w i l l s u s t a i n a demand f o r many types o f goods and services. The o v e r a l l f i n a n c i a l p o s i t i o n of business i s sound, despite a s u b s t a n t i a l increase i n business indebtedness during the past few y e a r s . I n general, the supply of c r e d i t i s l a r g e and e l a s t i c and the c o s t , both of s h o r t - and long-term c r e d i t , r e l a t i v e l y low. Furthermore there i s a marked absence of speculative excess, such as we had i n the l a t e t w e n t i e s , w h i l e the great strength of the banking system enables i t t o deal e f f e c t i v e l y r / i t h any s o r t of economic development one might reasonably expect a t t h i s t i m e . At the same t i m e , we should not overlook the f a c t t h a t we have gone a long way toward s a t i s f y i n g the immediate postwar demands f o r i n d u s t r i a l p l a n t and equipment, business i n v e n t o r i e s , and consumers' goods. Business - 5 expenditures on new p l a n t and equipment, which reached a peak of billion d o l l a r s i n the f o u r t h quarter of 19^8, are estimated at lu3 b i l l i o n d o l l a r s f o r the f o u r t h quarter of 19k9-~a. decline o f about 20 per cent. Business i n v e n t o r i e s , which e:xpanded by 28 b i l l i o n d o l l a r s betv/een December and December 1?!$, have since declined by roughly 1; b i l l i o n d o l l a r s . Y/holesale p r i c e s have continued t o f a l l and a t the end of October were about 8 per cent below t h e i r l e v e l of a year ago. While i n d u s t r i a l production has picked up since J u l y , and i s admittedly being h e l d back by recent work stoppages i n the coal and s t e e l i n d u s t r i e s , the current l e v e l i s s t i l l some 12 per cent below the l e v e l reached i n the same month l a s t y e a r . Moreover, t h e r e i s some p o s s i b i l i t y t h a t business expenditures on new p l a n t and equipment w i l l continue t o d e c l i n e , and t h a t f u r t h e r increases i n business i n v e n t o r y holdings w i l l be r e l a t i v e l y s m a l l . Bumper crops i n many l i n e s o f a g r i c u l t u r a l production foreshadow continued downward pressure on farm p r i c e s and incomes. I t i s evident t o you, I am sure, t h a t we ere s t i l l confronted w i t h marked p r i c e d i s p a r i t i e s , such as aluminum versus copp e r , s y n t h e t i c f a b r i c versus cotton and wool c l o t h , and lumber versus other b u i l d i n g m a t e r i a l s . For example, t h e p r i c e o f lumber i s s t i l l over 3 times i t s 1939 average, as compared w i t h a current average p r i c e o£ b u i l d i n g m a t e r i a l s (excluding lumber) t h a t i s somewhat l e s s than t w i c e the 1939 4 level. More l i b e r a l pension fund p r o v i s i o n s , o f the type r e c e n t l y negotiated i n the s t e e l i n d u s t r y , together w i t h postwar wage increases i n most l i n e s o f i n d u s t r y and t r a d e , and the high cost o f postwar a d d i t i o n s t o p l a n t and equipment, have saddled many business concerns w i t h r e l a t i v e l y l a r g e and i n f l e x i b l e cost s t r u c t u r e s which may s e r i o u s l y impede p r i c e reductions t h a t might be needed i f demand should s t a r t t o f a l l o f f . A l l t h i n g s considered, the c r e d i t man i s faced w i t h the r a t h e r formidable f a c t t h a t the present balance between f u r t h e r i n f l a t i o n and def l a t i o n i s a d e l i c a t e one, which could e a s i l y be upset by expansion i n Government expenditures and d e f i c i t f i n a n c i n g on the one hand, or by any pronounced c u r t a i l m e n t o f consumer or business demand on the o t h e r . Such a s i t u a t i o n c a l l s f o r l e n d i n g p o l i c i e s t h a t w i l l permit u t i l i z a t i o n o f c r e d i t f o r cont i n u e d production o f goods and s e r v i c e s , and a t t h e same time w i l l not encourage premature exhaustion o f consumer demand. Later i n my t a l k I s h a l l mention several types o f l e n d i n g a c t i v i t y which c r e d i t men a r e watching c l o s e l y i n view o f recent economic developments. Recent Economic Developments Abroad I f I learned anything i n my several assignments abroad, i t i s the f a c t t h a t the time has long since passed when we could i s o l a t e our domestic economy from t h a t o f the r e s t o f t h e w o r l d , p a r t i c u l a r l y from the e f f e c t s of economic developments i n the westorn European c o u n t r i e s . Immediate postwar European demand f o r food and manufactured products o f v a r i o u s types provided a l a r g e export market f o r whatever could be spared i n meeting our domestic r e quirements. At t h e same time, and e s p e c i a l l y as ECA a i d became a v a i l a b l e , European c o u n t r i e s began t o r e b u i l d t h e i r f a c t o r i e s , r e - e s t a b l i s h t h e i r raw m a t e r i a l supply l i n e s , and resume production o f manufactured goods. I n order t o a t t r a c t p r i v a t e c a p i t a l t o t h e i r i n d u s t r i e s and place t h e i r own economies on a sound f o o t i n g , most o f the western European countries introduced d r a s t i c c u r rency reforms f o r the purpose o f s t a b i l i z i n g p r i c e s and money values. Once the European countries succeeded i n e s t a b l i s h i n g some measure o f i n t e r n a l s t a b i l i t y , t h e i r next step on t h e road t o economic recovery was t o r e b u i l d t h e i r export t r a d e , p a r t i c u l a r l y t o t h i s hemisphere. Devaluation o f t h e i r currencies i n r e l a t i o n t o t h e d o l l a r has had the e f f e c t o f lowering the p r i c e o f European goods i n the American market and enabling European countries t o s e l l more i n t h i s country. At the same t i m e , i t has raised the p r i c e s o f our goods i n f o r e i g n markets and c u r t a i l e d t h e i r consumption t o some e x t e n t . A l l these changes are no doubt r e f l e c t e d i n your t h i n k i n g and planning. - 6 I t i s most important t o us t h a t the progress toward general economic s t a b i l i t y , i n which most countries of the w o r l d have p a r t i c i p a t e d , should cont i n u e . VJhile United States a i d has been e s s e n t i a l t o t h e progress t h a t many f o r e i g n countries have made since the end o f t h e war, I am confident t h a t the contemplated gradual r e d u c t i o n i n the amount o f such a i d w i l l not i n t e r r u p t nor delay such progress. However, t h i s does mean t h a t i f f o r e i g n countries are t o continue buying goods which they need from the United States, they must be able t o expand sales o f such o f t h e i r goods as have a market i n t h i s country. To spend d o l l a r s here they must f i r s t earn d o l l a r s , d i r e c t l y or i n d i r e c t l y , and w i t h much o f t h e i r i n t e r n a t i o n a l t r a n s p o r t , f i n a n c i a l , and other d o l l a r producing services destroyed or disrupted by the war, more emphasis must be placed on the sale o f goods i n t h e world market. I n t h i s connection, the c r e d i t man today asks questions about the value o f the d o l l a r , n o t only from our own domestic v i e w p o i n t , but i n r e l a t i o n t o the currencies o f other c o u n t r i e s . Recently you have been hearing many rumors about devaluing the d o l l a r i n terms o f the p r i c e of gold. Devaluation o f f o r e i g n currencies was a necessary step toward trade expansion and recovery; undoing i t s e f f e c t s by devaluing the d o l l a r would have j u s t the opposite consequences. Nor would d o l l a r devaluation a i d our domestic s i t u a t i o n one i o t a . On t h e c o n t r a r y , i t would add t o any i n f l a t i o n a r y tendencies t f i a t e x i s t . There i s no shortage o f c r e d i t o r gold reserves i n t h i s country, and an increase i n t h e d o l l a r p r i c e o f g o l d , even i f t h e l e g a l obstacles t o such*action couia be overcome, would merely mean an i n d i s c r i m i n a t e subsidy to domestic and f o r e i g n gold producers. F i n a n c i a l Developments o f Current S i g n i f i c a n c e Thus f a r , we have been t a l k i n g about some o f the broader aspects o f the domestic and i n t e r n a t i o n a l economic scene t h a t have a bearing on c r e d i t p o l i c i e s . Now l e t ' s take a look a t a few o f t h e more s p e c i f i c problems i n the f i e l d o f c r e d i t and commercial banking t h a t are o f i n t e r e s t t o t h e c r e d i t man today. Instalment c r e d i t . Since June o f t h i s y e a r , the amount o f consumer instalment c r e d i t outstanding has increased by n e a r l y one b i l l i o n d o l l a r s . Some thought i s being given by the l e n d i n g o f f i c e r t o t h e i m p l i c a t i o n o f too r a p i d an expansion o f such c r e d i t a t t h i s time. Many people buy c e r t a i n l a r g e items o f f u r n i t u r e and major household appliances only once i n t h e i r l i f e t i m e . To a c e r t a i n e x t e n t , the same i s t r u e i n t h e case o f automobiles. Once immed i a t e demands are f u l f i l l e d , t h e y may recur only a f t e r the lapse o f considerable time. Moreover, the use o f instalment c r e d i t enables people to buy now and pay f o r purchases out o f f u t u r e income. I f we encourage too widespread a use of instalment c r e d i t a t a time when cash demands o f consumers are h i g h , we may exhaust n o t only the present market but a good p a r t o f t h e p o t e n t i a l market o f the f u t u r e . The r e s u l t s o f doing so should be p e r f e c t l y obvious—sales o f automobiles and other consumer goods may suddenly f a l l o f f and unemployment may ensue, while a l a r g e r p r o p o r t i o n o f the reduced income a v a i l a b l e would go to pay f o r goods purchased l a s t year o r t h e year b e f o r e . No c r e d i t man i s i n a p o s i t i o n t o say who s h a l l o r s h a l l n o t buy w i t h instalment c r e d i t , provided the borrower can e s t a b l i s h h i s c r e d i t - w o r t h i n e s s . On the other hand, he can i n f l u e n c e the use o f instalment c r e d i t by maintaining prudent downpayment and a m o r t i z a t i o n requirements. Heal estate c r e d i t . My comments w i t h respect t o instalment c r e d i t are equally t r u e o f r e a l e s t a t e c r e d i t . During the f o u r years 1946-49 home mortgage debt alone has increased by an estimated n e t amount o f some 17 b i l l i o n d o l l a r s . I n p a r t , your concern i s t h a t the volume of debt i n c u r r e d may be so l a r g e as t o threaten a serious c r e d i t l i q u i d a t i o n . I n p a r t , i t i s t h a t the a b i l i t y o f i n d i v i d u a l s t o purchase housing w i t h t h e a i d of mortgage c r e d i t i s being exhausted so r a p i d l y t h a t t h e remaining demand w i l l - 7 not be adequate to ensure continued high levels of employment i n the building and building materials industries. Again, t! banker cannot deny credit to credit-worthy borrowers. He can, however, require conservative owner equities and repayment provisions i n times of abnormally high demand, and relax his requirements somewhat when the demand begins to sleeken. These are powerful measures of influence, and I am certain that bankers want, i n t h e i r own as w e l l as i n the general i n t e r e s t , to make them as effective as possible. Term loans. Term loans are o f t e n employed by the borroaver i n the purchase of machinery, equipment, and other more or l e s s f i x e d c a p i t a l items, and are r e p a i d out of f u t u r e earnings. I n recent years the w e l l - i n f o r m e d c r e d i t man i s making term loans w i t h c a u t i o n , f o r three reasons. F i r s t , c o n s t r u c t i o n and machinery and equipment costs are w e l l above prewar l e v e l s , and there i s a good chance t h a t such f i x e d assets may prove t o be overvalued i n t h e long r u n . Second, there i s always some u n c e r t a i n t y about the p r o f i t a b i l i t y of f u t u r e business operations. T h i r d , the s i t u a t i o n w i t h respect t o business expenditures on machinery and equipment i s somewhat analogous t o purchasing of automobiles and housing by individuals—some r e s t r a i n t i n the use of c r e d i t during boom times should be encouraged. From time t o time questions a r i s e as t o the f e a s i b i l i t y of developi n g a formula, or of devising d e f i n i t i o n s and l i m i t s f o r the guidance of banks i n determining -.That p r o p o r t i o n o f t h e i r assets may p r o p e r l y be invested i n term loans. Such an undertaking would have l i t t l e chance of success. I n the f i r s t p l a c e , the d i v e r s i t y of t y p e , purpose and conditions of such loans nakes s a t i s f a c t o r y d e f i n i t i o n p r a c t i c a l l y impossible. I n the second place, the appropriate p o s i t i o n f o r an i n d i v i d u a l lending i n s t i t u t i o n can only be determined a f t e r c a r e f u l analysis and consideration of the character and v o l a t i l i t y of i t s l i a b i l i t i e s , i t s r e l a t i v e c a p i t a l p o s i t i o n , and the probable c r e d i t demands t o which i t may be s u b j e c t . The determination o f an optimum amount o f term loans involves problems s i m i l a r t o those i n s e l e c t i n g an investment p o r t f o l i o , and no r u l e of thumb applicable t o a l l banks would appear t o be p r a c t i c a b l e . Conclusion I t i s e v i d e n t , t h e r e f o r e , t h a t the time-honored d i s t i n c t i o n between the t r e e s and the ^orest i s equally t r u e of c r e d i t . The i n d i v i d u a l c r e d i t man i s p r i m a r i l y a*id r i g h t f u l l y concerned w i t h the welfare of the i n d i v i d u a l t r e e s ; the c e n t r a l c r e d i t a u t h o r i t y i s charged w i t h r e s p o n s i b i l i t y f o r promoting the welfare of the f o r e s t . 7/hile the i n t e r e s t s of the two may appear t o c o n f l i c t i n s p e c i f i c s i t u a t i o n s , t h e thoughtful c r e d i t man r e a l i z e s t h a t there are no fundamental d i f f e r e n c e s i n t h e i r u l t i m a t e o b j e c t i v e s . I t i s f u r t h e r evident t h a t c e r t a i n types of c r e d i t , notably consumer instalment and home mortgage, have increased s u b s t a n t i a l l y i n recent years. I n the i n t e r e s t o f minimizing t h e i r i n f l a t i o n a x y pressure, spreadi n g demand f o r automobiles, housing and other consumer goods over a longer p e r i o d of time and p r o t e c t i n g l o a n p o r t f o l i o s against subsequent d e t e r i o r a t i o n i n value, c r e d i t men are examining downpayment and repayment provisions w i t h p a r t i c u l a r care. As we know, change has always been characteristic of human behavior, whether i t be social, p o l i t i c a l , or economic. The principal d i f f e r ence i n the economic changes that occur now and those of a hundred years ago i s t h a t present changes occur more rapidly, and a f f e c t a much greater number of economic a c t i v i t i e s . No able credit man can isolate himself from change, nor prevent i t by ignoring i t . On the contrary, he deems i t his respons i b i l i t y to maintain that prudent f l e x i b i l i t y of thought and action that welcomes the opportunities for constructive service afforded by change. His i s not a d u l l and routine duty. I t i s f u l l of constant interest—not only i n loans and lending policies, but also i n broader economic developments.
@FedFRASER