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For release in morning newspapers,
Saturday, June 9, 1951.

THE VOLUNTARY CREDIT RESTRAINT PROGRAM

An Address by Oliver S. Powell, Member,
Board of Governors of the Federal Reserve System,
Before the District of Columbia Bankers Association Convention,
Hot Springs, Virginia.

Friday, June 8, 1951.
Ic.oo a MA

THE VOLUNTARY CREPTT RESTRAINT PROGRAM
(Oliver S. Powell)
This talk might have been labeled "Learning to Live with National
Defense".

Outside of actual wartime conditions, the United States for gen-

erations has found it possible almost to forgeb defense against outside
enemies and to devote its energies completely to developing a higher standard of living at home.

Now we find ourselves the most powerful non-communist

country in the world, able to depend on other countries for protection only
in very limited ways and faced with the problem of rebuilding a strong national defense.
The problem resolves itself into one of increasing the production
^
a

defense items while maintaining the supply of civilian goods at as high
level as possible.
If the total demand for goods exceeds the supply, prices go up.

This is inflation.
the defense program.

It hurts the civilian economy and increases the cost of
A considerable amount of price increase has already

occurred since the Korean war began.
The restraints against inflationary price advances must cover a
broad front.

First of all is an adequate tax program.

be encouraged to increase their savings.

Then, people should

Abnormal profit margins should be

discouraged.
If commodity prices can be held in check, further rounds of wage
increases should be avoided.
b

Above all, individuals and businesses should

e encouraged not to buy more than their normal requirements.
As a beginning, I want to take you back to some elementary

-2econornics.

Since ve are dealing with inflation, we should recall that an

increase in prices occurs when the money supply increases more rapidly
than the volume of business or when the rate of turnover of money increases
to a point where the monetary work done by the money supply is greater than
needed for the Nation's business.

This story really starts back in 1934

with the devaluation of the dollar.

That event immediately created an enor-

mous increase in gold reserves which are the base of the bank credit pyramid.

in the next few years after devaluation, world events caused a tremen-

dous inflow of gold into the United States, adding further to the basic
gold reserves.

From that time on, the problem nf monetary authorities has

centered largely around t.hs management of these large...gold reserves in such
g-way as to prevent undue manufacture of credit and an inflation in commodity
Prices.
an

This holds true today in spite of the gold exports in the last year

d a half.
Many of our monetary problems would probably not have happened

Without this plethora of gold reserves.

The forced feeding of excess re-

serves into the banks to support the bond market would have been more difficult and doubtless would have ceased much sooner.
a

What now appears to be

titanic struggle against unneeded bank credit expansion would have been

greatly reduced.

There just would not have been the excess reserves and

banks would have automatically limited loans.

For most of the history of

modern finance this was the traditional situation in banking.
There was a respite in the problem during World War II.

In fact

we were very thankful to have such large gold reserves, for these reserves
made it possible for the banks of the United States to purchase Government

securities in huge quantities to provide money for war, over and above the
amount provided out of national savings and taxes.

However, at the close

of the war the Nation found itself with bank investments and bank deposits
greatly increased and as these bank deposits went to work for the purchase
civilian goods, price advances occurred as soon as controls were removed.
Those price advances would have been much greater except for a littleunderstood phenomenon in the behavior of bank deposits.

This was the fact

that the turnover of bank deposits declined steadily from the 1920' s until
In the 1920's an annual turnover of demand deposits from 31 to 37
times was considered normal for leading cities.

By 1945 this turnover had

been reduced to 16 so that a dollar of deposits was doing only half of the
monetary work that it did in the 1920's.

There has been some increase in

deposit turnover during the post-war years, but even the sharp increase
since the Korean War started has not brought the turnover rate above 23
turns a year.

If the owners of bank deposits were to use these deposits

the efficiency shown in the 1920's, prices could increase substantially
£gomresent levels without any further increase in bank loans or investments.
Thus, we have two difficult factors in the money supply to deal
v

ith: first, large basic reserves which make it possible to increase the

Q

mount of bank credit and bank deposits, and second, a rate of turnover of

df3

Poslts which, as demonstrated . n former years, can grow substantially
i

a

^ove today's levels.

Both bank credit and the turnover of bank deposits

increased sharply in 1950 and in the early months of 1951.
It is my purpose today to give you a progress report on the use
of

inflation restraints.

Early in 1950 the recovery of business from the

-Aminor recession of 1949 had brought the level of production, consumption
and employment to a high plateau.

Production was almost at capacity, a

point beyond which it is difficult to expand except by the slow processes
of population growth, more factories and improved industrial techniques.
Then came the Korean invasion and it set off a rush of panicky buying.
Hemembering the shortages that developed during World War II, we rushed to
the stores and bought abnormal quantities of merchandise—everything from
sheets and coffee to television sets and autos.
buying—autumn and winter.
residential building.

There were two waves of

There was also an unprecedented increase in

This buying rush caused retailers and manufacturers

to step up their purchases and production rates, and there was a sharp increase in employment.

The inevitable result of all this was a sharp rise

in prices, and another round of wage increases.
It is important to analyze the sources of buying power which made
Possible this abnormal buying movement which was superimposed on a high
ievel of peacetime trade.

There were three principal sources of buying

Power:
First, current income.
f

The sum total of wages, rents and income

rom invested capital which normally just about equals the production of

goods and services at stable price levels.
Second, the use of savings by drawing down savings accounts, cashing savings bonds and spending funds which had remained idle in checking
Accounts awaiting a suitable time for use.
Third, borrowing against future income.

Consumers' borrowings to

automobiles, household appliances and houses; business firms borrowings

•

)

-5-

t

to increase inventories or to pay higher prices for inventories or to
extend credit to consumers, or to expand plants.
The combination of these three sources of buying power, coupled
with the greater activity of deposit accounts, when used to purchase a
quantity of goods and services that could not expand with equal rapidity
has caused a sharp price rise.
This situation would have called for restraining action at any
t:i

-me.

It became much more essential to invoke restraints under today's

conditions of growing national defense.
f

or civilian consumption and the supply of purchasing power promises to

be

^

The gap between available goods

a

even larger as the months go on.

Within a year we are likely to see

million fewer employees engaged in making civilian goods.

of

raw materials available for civilian goods production will probably be

iess next year than today because of defense requirements.
i

The amount

Already allo-

cations and restrictions in many strategic materials have been announced.
Y

et with full employment, counting as employees those producing civilian

goods, the workers in defense industries and people in military service,
i

the national income might be as much as twenty-five billion dollars above
current levels.
increases occur.

This guess is on the assumption that no further price
The probable gap between income and available civilian

goods would cause tremendous pressure for higher prices, even with no expansion in bank credit and various forms of consumer borrowing against
f

uture income.

It should be borne in mind that higher prices not only,

&&Lto o u r cost of living and subtract purchasing power from our savings,
)

but_they_ also add to the cost of defense and to the problem of financing
- ^ d e f e n s e effort.

• -6The monetary authorities have made important moves in their field
°f action to counteract the inflationary effects of these factors.
(1)

Last August, the discount rates of the Federal Reserve Banks

were raised somewhat and short-term money rates vere allowed to rise.
(2)

The consumer credit regulation was reestablished.

While the

^establishment of this regulation has not brought about any marked reduction in the total of consumer credit outstanding, it has served the purpose
of

preventing any .further expansion in instalment credit since last October,
spite of the high level of retail trade.
(3)

A new regulation dealing with real estate credit was imposed.

*t ' s commonly understood that it is too early to appraise the restraining
i
effect of Regulation X since builders are still working on the backlog of
orders received before Regulation X was announced.
starts did not show a seasonal increase.
le

However, April build-

At 88,000 they were 4-5,000

S3 than in April 1950 but just about as many as in April 1949.
{U)

In January 1951 reserve

requirements of member banks were

Raised to substantially their upper legal limits.
One of the most important tools of inflation restraint was practically out of use for this purpose for several years.

This was the em-

ployment of open market operations, which were devoted almost solely to
ma

intaining a pegged price for long-term Government securities.

The Fed-

Reserve Open Market Committee first announced in the depression years
tha

t a major objective would be a stable or orderly bond market.

This was

a time when the Federal Government was borrowing heavily to provide
f

unds for various kinds of relief.

Then came World War II with its huge

-7expansion of the'public debt.

The Federal Reserve played an important

Part in this financing by providing the banks with excess reserves with
^hich to buy Government bonds.
Then came the post-war years.

Almost everyone expected a sharp

depression as had happened in 1920-21 after World War I.

Hindsight proves

"this to have been an error in judgment but it was a factor in causing the
Federal Reserve authorities to continue their easy money, excess reserves,
Pegged bond market policies.
v

With one or two minor exceptions this policy

as maintained until this spring when the pressure of inflation made a

change to a more flexible attitude toward the bond market necessary.
The pegging of the Government bond marKet had deep-seated and
Pernicious effects.

Holders of long-term bonds instead of treating those

securities as true investments came to consider them equal to cash in
"Liquidity.
be

In fact they were the equivalent of cash so long as they could

sold to the market at a fixed rate and the market could be sure that it

could sell them to the Federal Reserve Banks at the same price.

This

caused the Federal Reserve Barks to manufacture bank reserves at the whim
the holders of Government securities.
The recent reduction in prices of long-term Government bonds has
had far-reaching effects in the control of inflation.

Holders of those

securities have been reluctant to dump them on the market and as a result
supplies of funds for mortgage loans and for many other types of credit
have been reduced.
Turning from Government controls, and to complete the picture of
m

°ves toward inflation restraint in the monetary and credit field, there

-8is the Voluntary Credit Restraint Program.

This program is in essence

nothing but enlistment of the collective horse sense of all kinds of
lenders to sort out the kinds of credit which should have priority under
today's conditions and in that way to avoid Governmental regimentation
credit which, at best, must be a clumsy affair.

The Board of Governors

the Federal Reserve System and the managements of all of the Federal
Reserve Banks are eager to have the voluntary plan succeed and are lending
possible assistance.
As one banker who is taking a leading part in the Voluntary Program expressed it, "This is the greatest adventure in American finance."
At

the same time it is a prodigious undertaking.

Recall that there are

H,000 banks, more than 400 life insurance companies, about 3,000 investment bankers and dealers and many thousands of savings institutions,
building and loan associations and other types of lenders.

All of these

lenders must be educated in the fundamentals of the Program to a point where
they not only give their complete cooperation but so that they do not unfittingly extend credit of an undesirable character.

It is only by this

complete understanding that we can overcome what one United States Senator
called the "competitive drive" for business, which though desirable from
the earnings standpoint of the lender, is nevertheless needlessly inflationary under today's conditions.
This Program has been inaugurated under the provisions of Section
of the Defense Production Act.
Wq

The authority to set up the Program

s delegated to the Federal Reserve Board, which body consulted with the

Federal Trade Commission and obtained the approval of the Attorney General
of

the United States for the Program on March 9, 1951.

-9The first step was for the Federal Reserve Board to request all
lenders in the United States to take part in the Voluntary Program.

For

this purpose a letter was sent to some 90,000 lenders, the broadest list
Mailable to the Federal Reserve Banks.
is not a Government program.)

(I repeat, however, that this

The next step was the appointment of a na-

tional Committee by the Federal Reserve Board.
The national Committee has set up regional committees to deal
v

ith problems in three major lending fields:

commercial banicing, life

insurance and investment banking.
Considerable progress has been made in other directions.

The

national Committee has issued three bulletins on credit problems in relation to the Voluntary Credit Restraint Program.
v

ith the subject of inventory loans.

The first bulletin dealt

In view of the rapid increase in

inventories, particularly st the retail and wholesale level, the Committee
decided that this was its number one problem.
credit for plant expansion.

Bulletin No. 2 dealt with

According to Government estimates, business

firms were planning to spend about $24 billion on plant expansion in 1951.
While part of this money would come out of corporate savings, a large part
v

°uld need to be financed by borrowing.

Furthermore, regardless of the

sources of funds, it seemed very doubtful to the Voluntary Credit Restraint
Committee that expenditures of this magnitude, aside from those directly
related to defense, could be carried through without exerting undesirable
inflationary pressures.

The third bulletin dealt with borrowings by states

and municipalities.
Progress has also been made in collecting better statistics to
measure the developments in the credit field.

The largest banks in the

-10United States have already begun reporting weekly to the Federal Reserve
Banks a detailed breakdown of their loans so that the national Committee
can ascertain periodically the cross currents due to the rising volume of
defense lending and the desired decrease in other types of loans.
You are all wondering what success the Voluntary Credit Restraint
Program is achieving.

I must confess that the national Committee and the

Federal Reserve Board share in this curiosity.

The Program has not been

in operation very long and much of its work has been organizational and
educational.

Furthermore, two other important restraining influences came

to bear at the same time.

The top-heavy retail inventory situation began

to be apparent with the drop-off in retail sales before Easter; and the
March and April declines in the Government and corporate bond markets ex>

erted a chilling influence on credit expansion.

However, I deem it some-

thing more than a coincidence that the sharp and counter-seasonal weekly
*

increase in commercial and industrial loans at reporting member banks
ceased with the week of March 21.

The request by the Federal Reserve

Board to all lending institutions to cooperate in the Voluntary Credit
Restraint Program was issued on March 9.

The national Committee's first

bulletin dealing with inventory loans was issued on March 20.

The more

detailed figures now available reveal that defense loans are rising, and
loans to carry raw commodities are falling.

However, loans to carry re-

tail inventories continue to climb.
From my vantage point as Chairman of the national Committee, I
can attest to the tremendous release of energy in the field of credit
•Restraint made possible by the Federal Reserve Board's request.
a

I can

^so bear witness to the spirit of unified effort and the desire to be

-11"on the team" which is evident in all parts of the country and among all
groups of lenders.
Everyone of you in this audience undoubtedly has a dozen lending
Problems connected with the Voluntary Credit Restraint Program.

I urge

you to send them to some member of the Fifth District Committee.

They

w

ill receive prompt attention and on the basis of replies received you

V l

H be better able to formulate your opinions as other cases arise.

the form supplied by the Committee for sending in your problem.

Use

This will

ttake sure that the Committee has the necessary information to render an
intelligent opinion.
v

Also as the Wall Street Journal shrewdly put it

hen they first saw this form:

"It may be that after you have filled out

the form and answered the questions contained in it, you will know the
answer to your problem without sending it to the Committee."

However,

don>t send in a case if you expect to turn it down anyway.
In Washington the national Committee is assembling a file of
ln

quiries submitted by lenders to the District Committees and of the opin-

ions rendered by those committees.

We are classifying these replies and

reporting them back to all of the committees so that the replies given
be as uniform as possible throughout the United States.

While your

Problems may seem unique in your community, I can assure you that many of
these problems are showing up all over the United States.

It is the col-

^Ivo,judgment of lenders and committees that gives the Voluntary Pro^ H L i t s special validity and strength.
Your task in restraining loans will be easier to the extent that
businessmen understand the program and its purpose.

The national Committee

-12has been helping in this campaign.

The newspapers have been generous in

carrying stories about the bulletins issued by the national Committee.
Probably the most publicity was given to the bulletin suggesting the postponement of State and municipal borrowings that are not urgently needed
now.

Mr. Charles E. Wilson, Director of the Office of Defence Mobilization,

gave us an important "assist" by writing to governors of States and other
important municipal officers asking their cooperation.

All of the news

stories and editorials are part of the education of the public in the facts
about inflation and the remedies.
Bonkers themselves are taking the lead in educating the business
community to the facts:

essential credit will be available as fully as

needed; nonessential credit will not be forthcoming.

An amazing flood of

advertisements by clearing houses, resolutions by bankers associations,
reports of interviews with bankers, public addresses and radio talks is
Pouring into my office.

I_congratulate the banking profession on their

public stand so fully proclaimed.
In my judgment there is at least one further informational job
to

be done, that is to talk to your business customers individually.

°et their ear before they walk in with their plans all made and ask for a
loan,

it is much easier for them to fit their plans to the anti-inflation

Program when their seasonal and other decisions are being discussed in
hoard meetings or among the firm's executives

than after the plans are

complete and the owner or treasurer starts out to arrange the financing.
I have two suggestions.

First, explain this program to your

^rectors and keep them informed as to how it is affecting your own bank

-13and community.

Your directors are the men of affairs in your city and

their explanations in their circle of acquaintances will save you much
strain and possible loss of customers.
Second, follow the advice of the American Bankers Association
and send copies of the Voluntary Credit Restraint Program to your commercial, customers.

A few days ago President Shelton of the American Bankers

Association wrote to all banks asking that this be done.

A postcard ad-

dressed to the Federal Reserve Board was enclosed to order copies of the
Program.
W
1

The response has been tremendous.

In the first five days' mail

have received requests from 527 banks for 57,059 copies of the Program.
have been greatly pleased to note that it is not .just the great city

£§nks_.that are writing inT it is the hundreds and thousands of smaller
•fenKs—the country banks which are taKing hold of this project.
We are the richest country on earth.
the highest.

Our standard of living is

We are surrounded by comforts and conveniences that will

tide us over a long period of self-sacrifice without real hardship.
are the best educated nation in the world.
m

We

Bankers as merchants of money

ust be the leaders in this educational effort.

If we can not beat the

forces of inflation, we are not worthy of the land handed down to us by
the sacrifices and heroism of our forefathers.

- H -

Sfth-Mstrict Commercial Banking Voluntary Credit Restraint Committee

Archie K. Davis, Chairman,
Senior Vice President, Wachovia Dank & Trust Company,
Winston-Salem, North Carolina.
^gene L. Miles,
President, Baltimore National Bank,
Baltimor e, Maryland..
Hulbert T. Bisselle,
Senior Vice President, The Riggs National Bank of Washington, D. C.,
Washington, D. C.
J

- Phillips Coleman,
Vice President, First and Merchants National Bank of Richmond,
Richmond, Virginia.

Th

°s. C. Boushall,
Chairman and. President, Bank of Virginia,
Richmond, Virginia.

Ernest Patton,
Chairman of the Board, The Peoples National Bank of Greenville,
Greenville, South Carolina.
L. Armistead,
Vice President, Federal Reserve Bank of Richmond,
Richmond, Virginia.

Alternate Member:

John S. Alfriend,
President, National Bank of Commerce,
Norfolk, Virginia.