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gftgss RELEASE

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afternoon newspapers
s d a y , March 2 1 , 1961

Remarks On Consumer Credit Trends
by
M . S . Szymczak
Member of the Board of Governors
of the
Federal Reserve System
before the
American Bankers Association
Annual National Instalment Credit Conference

C ^ r a d H i l t ° n Hotel,
' h l c a g o , Illinois.

March 21, 1961

The Federal Reserve System has three principal responsibilities—
bank supervision, fiscal agency functions, and monetary policy.
covers a wide field of interest and a large area of activity.
a

relationship to credit—especially monetary policy.

t o

All of them have

All of them require

much research, for which the Board has a well-qualified staff.*
fee

Each of these

Therefore, I

l competent to speak before this Conference, but more importantly I am pleased
be here.
First, I should like to say something about the trends that have been

l n

s

operation in the consumer credit industry for a number of years.

Then I

hould like to see what modifications of earlier conclusions may be suggested

ky developments of the past few years.
Nothing is more illustrative of the changes in the attitude toward
c

°nsumer instalment credit and the dynamic character of the industry than the

ra

n

Pid increase in commercial bank activity in the field.

It is hard to realize

°w that commercial bank instalment loans were negligible until the late 1920's

a n d

lns

t o

that not until about 1935 did banks hold as much as 10 per cent of all

talment credit.

By the end of the 1930's, however, the bank share had risen

about 25 per cent, and during the postwar period banks have consistently
just under 40 per cent of a growing volume of instalment credit.

ab

All but

out 175 of the 1 3 , 0 0 0 insured commercial banks now make instalment loans.

Ins

t a l m e n t credit constitutes about 8 per cent of the total loans and investments
banks, and the proportion exceeds 10 per cent for banks with total loans

D p T ^ r a c t i c a l l y all of the data I shall submit here today were compiled by our
Mon 1 S i ° n o f R e s e a r c h and Statistics. They have been brought together by Miss
a
Dingle, Chief, Consumer Credit and Finances Section.

-2and investments of $5,000,000 to $100,000,000.

I do not need to emphasize to

this group how actively banks have competed for consumer loans over the past
30 years.
Developments in Consumer Credit. 1930-55
The rapid growth in commercial bank activity in the consumer credit
market over the past several decades has reflected both the changing attitude
toward instalment credit generally and the ready availability of reserve funds
over a substantial part of the period.

As expenditures for automobiles and

household appliances formed an increasingly important part of a rising level of
consumer expenditures, more and more consumers made use of credit to finance the
purchase of such items.

It was recognized that these were large-ticket durable

items for which expenditures were "lumpy" and which would provide services over
a period of time.

There was increasing acceptance of the appropriateness of

consumers' financing purchases of these items by borrowing and repaying their
idebtedness as they used them.

It was observed that borrowers for the purchase

of these items are not the impecunious but are predominantly young, middle-income
families who can look forward to increasing incomes over future decades.

More-

over, it was noted that these items could be repossessed and, at least in the
case of automobiles, resold in an active market.
The rapid increase of bank activity in consumer credit reflected also
the availability of a large volume of excess reserves during the 1930's and of
Government securities that could be sold at pegged prices in the early postwar
period.

While seeking outlets for loanable funds, banks made a number of dis-

coveries about consumer loans.
sound loans.

First, they learned that consumer loans were

Even during the depressed 1930's, consumers did a remarkable job

of repaying debts.

Defaults declined to very low levels during the war and

-3ea

rly postwar periods.
Second, banks learned that consumer loans are very profitable loans.
banks have discovered that their consumer credit departments are among

the

an(

i r most profitable departments, despite relatively high administrative costs

* laws limiting interest charges.

Such loans seemed particularly attractive

^ t h the excess reserves of the 1930's and the continued low interest rates of
th
n e

inimeidate postwar period.

They have continued to be attractive, however,

^ e s Pite the higher levels of interest rates and security yields prevailing
l n

recent years.
Banks also discovered that consumer credit was an area with rapidly

ex

e

Panding demand.

Again, this was of particular importance when banks had

*cess funds and demands for other types of loans were depressed.

It has con-

tinned to be important, however, as more and more banks have come to consider
c

°nsumer loans an important part of their portfolios.

t h e y

c

Many banks learned that

ould make direct loans to consumers while continuing to supply funds to

° t h e r types of consumer lenders.

I am sure that many, if not most, of the banks

^Presented here make direct loans to consumers, purchase paper from retail
° u t lets, and at t h e same time lend to retail outlets and finance companies for
Purpose of carrying consumer paper.
In the decade following the close of the war the growth in instalment
re
Con

d i t was particularly rapid, giving rise in some quarters to expectations of
U n u e d growth at astronomical rates and in others to fears of a drastic cut-

back
resulting from the high percentage of consumer incomes being devoted to debt
re

Payments #

Consumers incurred debt to meet the backlog of deferred demand result-

from wartime shortages.
to

Increasing home ownership and the move to the suburbs

gether with increased incomes gave rise to the two-car family, which constituted

-412 per cent of all families by the end of 1955.

The rise of new products, such

as television, and the improvement of old products were further factors in credit
expansion.

New types of credit plans permitted the substitution of instalment

for charge account credit, and increased demand for services such as travel and
education encouraged the expansion of credit for these purposes.
Instalment credit controls were reimposed on two occasions—in 194B and
again in 1950—to moderate expenditures for durable goods and the expansion of
credit.

The removal of credit controls in each case was followed by an easing

of credit terms which both encouraged consumer expenditures and intensified the
effect of the expenditures that took place.

After a moderation of credit growth

in 1954, outstanding credit rose 23 per cent in 1955 as automobile sales reached
a record high and terms eased sharply further.

At the end of 1955, total instal-

ment credit was 12 times as high as 10 years earlier and automobile credit was
30 times as high.

The ratio of debt payments to consumer disposable income

reached 12-1/2 per cent in 1955, compared with 3-1/2 per cent in 1945.
it seemed that the demand for consumer credit was insatiable.

To many

There seemed also

to be an almc6t unlimited supply of credit as banks and other lenders competed
aggressively for business.

To many observers it seemed that consumer credit

controls were the only way to prevent continued sharp inflationary pressure from
increased credit purchases and continued easing of terms.
What Have We Learned from Recent Developments?

j

j
In what ways have developments over the period since 1955 modified intei"

J.!
pretations of consumer credit trends?

Few would suggest that the trends just

discussed have been reversed or that the basic quality of consumer credit has
changed.

I do believe, however, that developments over the last five years have

taught us some new lessons about consumer credit—or, rather, retaught us some ol^

j

^ssons.

I think that recent developments have pointed up the unusual nature of

the early postwar period and the exceptional combination of circumstances that
Blade 1955 possible.
na

At the same time, they have emphasized the continued dynamic

ture of the consumer credit industry.
What are the lessons that we have learned from developments of the last

c
^ars?
ra

First, I think that we have learned that consumer credit growth at the

t e of the early postwar period was an unusual development that is not likely
b

e repeated under normal peacetime conditions.

t h a t

o f

Period was associated with the backlog of deferred demand, the small volume

indebtedness at the beginning of the period, far-reaching social and economic

cha

1

The rapid increase of credit in

n g e s , and expectations of continued inflation on the part of much of the public.

^ i n k that it is now generally recognized that the period 1946-50 was largely a

Ca

tching-up period.

The ratio of debt to disposable income was about the same in

^ 5 0 as j u s t before the w a r .

Developments in 1955 reflected an unfortunate combination

of
re

lea

c o r d automobile sales and sharp easing of credit terms.

r n e d that such a growth rate cannot be sustained.

Since then we have

Moreover, we have learned that

A u c t i o n s in consumer credit may take place in periods of recession, and that these
AM ua cn ts ii oonns. are likely to be the greater the more excessive was the preceding credit
We have also learned that automobile credit is not necessarily the
dom

i n a n t factor in the expansion of instalment credit that it s eemed in the early

Postwar period.

Expenditures for automobiles have increased less rapidly than

other types of consumer expenditures in recent y e a r s .
ttle

e l a

Meanwhile, many of

factors which earlier resulted in such sharp expansion of automobile credit in
U o n to sales have not been operating to the same extent in recent y e a r s .

At

end of i960, automobile credit accounted for about the same proportion of total

-6instalment credit as at the end of 1953—slightly more than 40 per cent.
was also about the same proportion as in 1941.

This

Personal loans increased from 21

per cent of the total in 1953 to 26 per cent in I960, while other consumer goods
paper declined from 29 to 26 per cent.

Before I discuss these developments in

more detail, let me mention two other lessons that I believe we have learned from
recent developments.
One more lesson that we have learned is that there are such things as
delinquencies and repossessions on consumer loans and that these need to be taken
into account in administering consumer loan departments.

Despite the generally

good record of consumers in paying their debts, we have learned that not all
consumers discipline themselves adequately and that many will attempt to borrow
more than they can service from their incomes.

We have also learned that recession

may convert otherwise sound loans into at least temporary defaults.

We have l e a m e

that dealers that have sold recourse paper can go into bankruptcy, and that lenders
can lose money on repossessions in a declining market.

I know that a number of

lenders are now operating with the highest delinquency and repossession rates of
the postwar period.

Others are spending increased time and money in collecting

overdue loans and in screening new loan applications.

Many lenders have learned

to their regret that injudicious promotion efforts may require a high refusal
rate if a rise in delinquencies is to be prevented.
A fourth lesson that we have learned is that consumer loans are affected
by limitations of credit supply as are other types of credit.

We have learned t h ^

loanable funds cannot be made available in unlimited amounts in periods of
prosperity and high level demand without encouraging inflation, and that restrictions on the growth of credit affect consumer as well as other types of credit.
As long as banks had excess reserves or large amounts of securities which could

-7be

s

old at pegged prices, and as long as they were actively interested in expanding

th
e

res

Proportion of consumer loans in their portfolios, this limitation did not come

0
Play, in the past decade, however, we have relearned the lessons of credit
triction

in all areas.
Co

Credit restriction appeared at times not to affect

nsumer loans as banks as well as other lenders competed actively for such loans.
consumer loans have increased in proportion to bank assets, however, banks

^at have been pressed for funds have restricted expansion in this as in other
re

as.

No doubt many of you were among the lenders who were curtailing promo-

te
°nal efforts sharply, screening loan applications more carefully, exercising
au

t i o n in taking on new dealer accounts, and upping interest rates on some
of loans a year or so ago.

5 it m
a

Some of you have also discovered, however, that

y be difficult to apply the brakes on consumer credit expansion if there has

£ P e v i o u s l y been injudicious promotion or sharp easing of terms.
Changes in Outstanding Credit. 1955-60
Having summarized the lessons that we have learned from developments

Of J-v
e

Past few years, let me review these developments in somewhat more detail,

^ special
reference to changes in automobile credit. In 1955, as you are
aware
*
» automobile
credit increased 37 per cent and other instalment credit
x

-> per cent. The sharp increase in automobile credit reflected in considerable r, ar4
- Part the record 7-4 million new cars sold. Meanwhile, however, developments
tah
a
K i n g place in the market for automobile credit which both made these sales
P o S S i b lx e and intensified their effect on outstanding credit. The average size
note 0 n
new car contracts rose sharply as automobile prices increased, consumers
Pgraded their purchases, and the real down payment ratio declined.
tion 0 f
the j»-?s e

automobiles bought on credit also increased substantially.

The proporMeanwhile,

in repayments was moderated by the lengthening of average maturities as

-8first 30- and t h e n 36-month contracts became common.
The continued operation of most of these factors in 1956-57 kept
extensions above the rising level of repayments despite a drop of almost 20 per
cent in new car sales.

By the end of 1957 almost one-half of all new car con-

tracts were being written for 36 months.

The average size note on new cars was

about one-third higher in 1957 than in 1954»

The proportion of cars bought on

credit rose about one-sixth from 1954 to 1956 before declining slightly in 1957*
Automobile credit, however, rofee more moderately than other types of credit in
the 1956-57 period—an average annual rate of 7 per cent, compared with 10 per
for nonautomotive instalment credit.

A further sharp drop in automobile sales in 1958 reduced extensions bel01' ,
repayments.

Outstanding automobile credit declined 8 per cent during the year

}

while other types of credit continued to rise.

t

Automobile credit extensions picked up with automobile sales in late
but in the period 1959-60 automobile credit rose slightly less than other i n s t a l l
credit—an annual average rate of 12 per cent, compared with 13-1/2 per cent for

a

nonautomotive credit.

s

The average size note declined slightly as manufacturers

failed to increase prices for the first time in several years and compact cars be' p
came an important element in total sales.
bought on credit were unchanged.

Down payments and the proportion of c^' vj

By late 1959, 36-month contracts on new cars

f

accounted for about two-thirds of all contracts, but the proportion showed littl 6

i

further change in I960.

As you are well aware, the muah-heralded 42-month contr^' a

failed to materialize.

The growth of other types of credit in this period, howeV*' }

was encouraged by promotions, b y the adoption of new types of credit plans, and ^ c
some cases by an easing of terms.

Automobile credit began to decline at the end

of I960, but personal loans continued to increase.

t

j

-9Future Trends
What conclusions can you draw from the past with respect to probable
ure developments in consumer credit?

It is obvious that whether the early-

f e l i n e in instalment credit will continue will depend largely on changes
consumer demand, particularly for durable goods.
x

I do not think any of you

Pect a decline of major proportions in consumer credit. On the other hand,

"OnSnrn
^ e r credit as such cannot be expected to pull us out of the current recession.
^hen p
^

onsumer demand revives, however, consumer credit should be a contributing

4*

^ c t o r to the upswing.
Over the longer run, you would expect a continued growth in consumer
a s

population and income increase and new items are bought on credit.

w

°uld expect, however, that the rate would be substantially slower than in

the
z

^

M a n s i o n to be followed by moderate declines.
^oderatpi
since tv,e
'
^

1

Postwar decade, and obviously you would expect periods of cyclical

The ratio of consumer debt payments to disposable income may rise
*
from the rate of slightly more than 13 per cent which has prevailed
second half of 1959.

The large baby crop of the war and immediate

Postwar
also
,
u
Periods
be reaching
maturity
and setting This
up homes.
Older
people
iorm anwill
increased
part of
the population.
group has
always
accounted

t

s

® a l l part of total consumer debt, but the incidence of debt may rise as an
for
^creasi
ln

G

g proportion of older people are accustomed to the use of instalment credit

-Lnue to have regular incomes after retirement.

ns

To the extent that an increase

t a l m e n t credit reflects rising incomes and an increase in the number of

•^-Worthy families using such credit, it is of course no cause for alarm.
Next, you would probably expect new items and the newer types of credit plans
°ntinue to account for an increasing share of total instalment credit.

The

-10proportion of credit accounted for by the traditional types of household durable
goods has been declining for some time.

You might question how much further auto-

mobile demand can increase, in view of the very high incidence of automobile owner'
ship and the number of multiple-car families at the present time.

On the other

hand, other types of large-ticket items are becoming an increasingly important p a ^
of what Americans consider the good life.

You might also expect a continuation of

the trend toward the use of revolving credit accounts for making a variety of
purchases.
Many of the big-ticket items that are entering into the standard of livi1^
of more and more Americans are durable goods like boats and camping equipment.
Others are services like trips to Europe and college educations.

Many of these

services are "lumpy" in the same sense as purchases of durable goods—that is, the?
are made infrequently and they involve expenditures that a r e large relative to cofl'
sumer incomes.

The response of lenders to these new demands has illustrated the

continued dynamic character of the consumer credit industry.

On the other hand,

some of these new types of credit may involve dangers if injudiciously promoted.
Acceptance of the widespread use of consumer credit for the purchase of durable
goods has been based in part on the fact that consumers were paying for goods as
they were using them.

I believe that there is a limit to the extent to which

consumers can be expected to allocate current income in payment for purchases fr
which they are no longer deriving utilities.

This danger is likely to be greatest

in the case of expenditures that are in fact of a more-or-less regular nature or
are likely to be repeated at intervals shorter than the maturity of the debt.
The danger may be aggravated in some of the new types of credit plans that do not
require a complete pay-off of debt incurred in connection with specific purchases*
Finally, on the basis of recent developments you would expect consumer

-11cr

edit to continue to show more sensitivity to developments in general credit and

Monetary policy than in the past.
ra

In view of recent increases in loan-deposit

tios and in the ratios of consumer loans to total loans, more and more banks
Probably find it necessary to restrict expansion of consumer as well as other
i n periods of credit restraint.

> a

U also find it difficult to raise sufficient funds for unlimited credit

xpansion.
X

By the same token, other consumer lenders

I do not say that general credit and monetary policy can prevent all

° e s s e s in the consumer credit field in the future.

I do believe, however, that

he a pparent insensitivity of consumer credit to general credit and monetary
P

°licy

some past periods has been associated in part with special conditions in

financial system and in the economy generally.

After recent developments lenders

f\ *** be l e S S eager than in the past to enter into excessive credit easing or promo'

tior

* that may be difficult to curb.
* * * #

4c

As in all things, we have much to learn, not only about consumer credit,
but

a l s o

a

n d especially about its use.
s0

Experience teaches discretion.

As in life

this field abuses and excesses have been experienced that were

Hot i n +L,
n e interest of the borrower or the lender and of course not in the public
intere^f
Nobody knows that better than y o u , and nobody can contribute to the welfare Q f J,
the consumer credit industry as effectively as y o u .
en

^ i a l to its sound economic and social contribution.

Your discretion is