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THE VOLUNTARY CREDIT RESTRAINT PROGRAM
An Address by Oliver S. Powell, Member,
Board of Governors of the Federal Reserve System,
Before the School of Banking at the
University of Wisconsin, Madison, Wisconsin.
Wednesday, August 22, 1951.

THE VOLUNTARY CREDIT RESTRAINT PROGRAM
The title of this talk might have been labeled, "Learning to Live
v

ith National Defense".

Outside of actual war-time conditions, the United

States for generations has found it possible almost to forget defense against
°utside enemies and to devote its energies completely to developing a higher
standard of living at home.

Nov we find ourselves the most powerful non-com-

munist country in the World, able to depend on other countries for protection
°niy in very limited ways and faced with the problem of rebuilding a strong
na

tional defense.
The problem resolves itself into one of increasing the production

of

defense items while maintaining the supply of civilian goods at as high a

level as possible.
Up.

If the total demand for goods exceeds the supply, prices

This is inflation.

It hurts the civilian economy end increases the

c

°st of the defense program.
The restraints against inflationary price advances must cover a

br

oad front.

First of all is an adequate tax program.

encouraged to increase their savings.
discouraged.
Wa

Second people should

Abnormal profit margins should be

If commodity prices can be held in check, further rounds of

ge increases should be avoided.

Above all, individuals and businesses

s

h°uld be encouraged not to buy more than their normal requirements.
This address deals with one particular phase of inflation restraint,
^ h a t administered by the Federal Reserve Board and particularly the related

V

°lUntary Credit Restraint Program.
Early in 1950 the recovery of business from the minor recession
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,
ttore factories and improved industrial techniques.

Then came the Korean

invasion and it set off a rush of panicky buying. Remembering the shorti e s 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.
w

inter.

There were two waves of buying—autumn and

There was also an unprecedented increase in residential building.

This

buying rush caused retailers and manufacturers to step up their purchases and production rates, and there was a sharp increase in employment.
Th

e inevitable result of all this was a sharp rise in prices, and another

*"ound 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.
Power;

There were three principal sources of buying

First, current income:

The sum total of wages, rents end income

fr

oin invested capital which normally just about equals the production of

e

°°ds and services et stable price levels.
Second, the use of savings by drawing down savings accounts, cash-

in

savings bonds and spending funds which had remained idle in checking
^counts awaiting a suitable time for use.
bh

Third, borrowing against future income:

Consumers' borrowings to

automobiles, household appliances and houses; business firms' borrowings
0

Cr>e

increase inventories or to pay higher prices for inventories or to extend
dit to consumers, or to expand plants.

- 3 The combination of these three sources of buying power, when used
to purchase a quantity of goods and services that could not expand with ecual
rf1

pidity, has caused a sharp price rise.
This situation would have called for restraining action at any

time.

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

conditions of growing national defense.

The gap between available goods for

civilian consumption and the supply of purchasing power may continue for
^ n y months. Within a year we are likely to see a million fewer employees
en

gaged in making civilian goods.

The amount of raw materials available for

civilian goods production may be less next year than today because of defense
requirements.

Already smaller allocations and greater restrictions in many

strategic materials have been announced.
a s

Yet with full employment, counting

employees those producing civilian goods, the workers in defense indus-

tries and people in military service, the national income might be as much
a s

n

billion above current levels.

This guess is on the assumption that

° further price or wage increases occur. The probable gap between income

e n d

Pr

available civilian goods would cause tremendous pressure for higher

ices, even with no expansion in bank credit and various forms of consumer

Arrowing against future income.
In addition to the inflation gap in current income versus the
Su

e

PPly of civilian goods there has also been much use of savings for current

*Penditure.

Savings are in many forms.

I shall mention only two.

The simplest illustration is the idle bank account.
0f

A phenomenon

the last ten years is the extent to which personal and corporate savings

^ v e been allowed to remain idle in commercial bank accounts.

Reposing

- 4 there, with no checks drawn, the monetary work done by those deposits is
zero. If suddenly people and firms decide to spend those funds, the money
supply begins to work more actively, exerting a pressure toward higher prices,
c

nd mind you, without any increase in the amount of bank credit.

This chain

events has played a large part in the rise of prices in the last year.
Another kind of dis-saving is the conversion of Government bonds
ir

^to cash, or more usually into bank deposits for current spending.

Ca

In the

s e of savings bonds, the Government redeems the obligation and sells a new

security to obtain the redemption funds.
tank deposits are ere?ted.

If banks buy the new securities,

If other Government securities are sold before

the redemption date to obtain funds for current spending or for other employment of savings, someone must buy the bonds.

If a bank buys them, it

creates deposits; if the Federal Open Market Committee buys them, it creates
tank reserves.
At least temporarily the tide of saving has turned for the better,
as bankers should encourage this movement.

One way is to promote vigor-

°UsIy the Treasury's Defense Bond Drive which starts next month.
Now, let us turn to the third source of buying power—borrowing
a

gainst future income. The use of credit increased sharply after the

K

°rean incident.

Loans at all banks in the United States increased

billion between June 30, 1950 and March 28, 3951.
^creased $2-1/2 billion in the last half of 1950.

Consumer credit

Residential mortgage

Ending increased by £2 billion, using annual rates, between the Spring of
l9

50 and the Spring of 1951.

Security issues by municipalities and cor-

onations to obtain new capital have been floated at an annual rate of

- 5 billion. Of course there is overlapping in these figures, and some mortgages and securities are bought with savings, but the figures serve to point
°ut that borrowing for the purpose of spending today has been an important
factor in the rise in commodity prices.

Also mark this important fact:

Our

gold reserves are large enough to permit a large further increase in bank
^edit.
As a backdrop for the problem of credit restraint, I want to take
back to some elementary economics.

Since we are dealing with the

me-

chanics of inflation, we should recall that an increase in prices occurs
when the money supply increases more rapidly than the volume of business
0r

(2) 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 Natl

on's business.
Price changes cannot be fully accounted for without observing the

^havior of bank deposits.

The turnover of bank deposits declined steadily

the 1920 T s until 194-5. In the 1920' s an annual turnover of demand deb i t s from 31 to 37 times was considered normal for leading cities.

By

this turnover had been reduced to 16 so that a dollar of deposits was
Qn
SOni

i y half of the monetary work that it did in the 1920's.

There was

e increase in deposit turnover during the post-war years, and a sharp in-

c a s e since the Korean War to a turnover rate above 23 turns a year.
SVer

How-

' j-f the owners of bank deposits were to use these deposits with the ef-

• ^ k n c y shown in the 1920' a, prices could ^ ^ M S P substantially from present

Id

^gj^_without any further increase in b a ^ i n m s , -investments or deposits.

- 6 Thus, when we try to restrain credit we find that the rope has
considerable slack—a potential increase in the turnover of money, gold
reserves that permit further credit expansion and in the background a high
level of liquid savings just one stage removed from cash.
Furthermore, bankers are well aware of the time lag that is involved in slowing down the machinery of credit.

However, the general public

does not understand the extent to which commitments are made by credit institutions for the future financing of business.

The merchant who orders a

supply of goods must be assured before he orders that his bank will lend
the necessary money to pay for the goods when they arrive.

Cotton, tobacco

grain buyers must arrange for lines of credit at the beginning of the
Cr

'op-moving season in order to plan their buying operations.

Insurance com-

panies make commitments to mortgage bankers to purchase stated amounts of
Mortgages, which assurance enables the mortgage bankers to lay out programs
o f

soliciting and purchasing mortgages.

Investment bankers underwrite stock

bond issues, a function which is vitally important in the provision of
capital to business.

In fact few kinds of business could operate with-

°ut such assurances of funds to complete transactions.
At times lines of credit granted by banks are little used; but
li

^es of credit are there, often firmly promised by the banks and available

to

Cl>

the customer at his discretion.

Last Fall the great expansion in bank

edit was to a large extent merely the fuller use of lines of credit which
been promised to businessmen long before Korea.

As an example, one bank

outstanding normal lines of credit for its customers amounting to
^ 2 0 million at the time of the Korean incident.

However, at that time

only $30 million of those lines had actually been borrowed.

During the

succeeding year, the loans of this bank doubled whereas it commitments for
lines of credit increased only 10 per cent.
The monetary authorities have made important moves in their field
°f action to counteract the inflationary effects of the many factors which
I have described.
(1)
v

Last August, the discount rates of the Federal Reserve Banks

ere raised somewhat and short-term money rates were allowed to rise.
(2) The consumer credit regulation was reestablished.

e

The re-

stablishment of this regulation has not brought about any drastic reduc-

tion in the total of consumer credit outstanding.

Although the total has

declined by $900 million since last December, the amount of consumer credit
outstanding on June 30, 1951 was still $19 billion.
(3)

A new regulation dealing with real estate credit was imposed,

is still too early -to appraise the restraining effect of Regulation X
s

ince builders are working on the backlog of orders received before Regula-

tion X was announced, and on public housing projects as well as on private
instruction under the regulation.
U)
ra

In January 1951 reserve requirements of member banks were

ised to substantially their upper legal limits.
One of the most important tools of inflation restraint was prac-

tically out of use for this purpose for several years.

This was the employ-

^ n t of open market operations, which were devoted almost solely for several
ye

nrs to maintaining a pegged price for long-term Government securities.

- 8 The pegging of the Government bond market had deep-seated effects.
Holders of long-term bonds instead of treating those securities as true
investments came to consider them equal to cash in liquidity.

In fact they

Vere the equivalent of cash so long as they could be sold to the market at
a

fixed rate and the market could be sure that it could pell them to the

Federal Reserve Banks at the same price.

This caused the Federal Reserve

& m k s to manufacture bank reserves at the whim of the holders of Government
securities.
The recent reduction in prices of long-term Government bonds has
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
Su

pplies of funds for mortgage loans and for many other types of credit

tave been reduced.

Skeptics of this change in the administration of the

Federal Open Market account have overlooked two aspects of the money market:
Fir>

tui

st, low rates had been in force for so many years that they have been

-lt into the financial structure. Any change to a higher level of long-

term money rates forces far-reaching adjustment in financial commitments.
Second, the direction of movement in the money market is an important factor
etl

Uri

i t

Urely aside from the level of money rates. Whenever rates are rising,

til the money market reaches reasonably firm ground at a higher level,
is natural that many financing plans are postponed.

One of the most

^ndamental results of this recent action has been to restore in the rest
of

the world a confidence that we can control our own inflationary problems.
Turning from Government controls, and to complete the picture of

^ e s toward inflation restraint in the monetary and credit field, there is

- 9 the Voluntary Credit Restraint Program.

This Program is in essence nothing

but enlistment o.f 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 of credit which, at best,
ftust be a clumsy affair.

The Board of Governors of 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 all possible assistance.
As one banker who is taking a leading part in the Voluntary Pro- a m expressed it, "This is the greatest adventure in American Finance."
A

t the saire time it is a prodigious undertaking.

Recall that there are

•U,000 banks, more than 4-00 life insurance companies, about 3,000 investment bankers and dealers and many thousands of savings institutions, buildin

g 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
n

°t only give their complete cooperation but so that they do not unwittingly

e

xtend credit of an undesirable character.

It is only by this complete

Understanding that we can overcome what one United States Sen: tor called
the

"competitive drive" for business, which though desirable from the earnings

standpoint of the lender, is nevertheless needlessly inflationary under toconditions.
This Program has been inaugurated under the provisions of Section
of the Defense Production Act.

The authority to set up the Program was

l e g a t e d to the Federal Reserve Board.

That body requested a group of

financial leaders to draw up a statement of principles and procedures for

- 10 the voluntary program.

The Federal Reserve Board then consulted with the

Federal Trade Commission and obtained the approve! of the Attorney General
of the United States for the Program on March 9, 1951.
The 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
available to the Federal Reserve Banks.
not a Government Program.)

(I repeat, however, that this is

The next step was the appointment of a national

Committee by the Federal Reserve Board.

This Committee is composed of men

chosen from the principal kinds of lending institutions, with a Federal
Reserve Board Member as Chairman.
The national Committee has set up regional committees to deal
v

ith problems in five major lending fields:

commercial banking, life in-

surance, investment banking, savings banks, and the savings and loan system.
Right from the start the national Committee recognized the need
for direct contact with lenders to explain the Program and to insure uniform
interpretation throughout the Nation. The national Committee has issued six bulletins to all lenders on credit problems in relation to the
Voluntary Credit Restraint Program.
l e t of inventory loans.

The first bulletin dealt with the sub-

In view of the rapid increase in inventories,

Particularly at the retail and wholesale level, the Committee decided that
this was its number one problem.
6x

Pansion.

t/0

Bulletin No. 2 dealt with credit for plant

According to Government estimates, business firms were planning

spend about t2U billion on plant expansion in 1951. While part of this

^oney vould come out of corporate savings, a large part would need to be

- 11 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, the fourth with real estate loans,

and the others with loan3 to

foreign borrowers and loans on securities.
Progress has also been made in collecting better statistics to
Measure the developments in the credit field.

The largest banks in the

United States have 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, the seasonal movements of essential loans, and the desired decrease
iri

other types of loans.

Insurance companies and others are also contribut-

ing new and important data for use in the Program.
You are all wondering what success the Voluntary Credit Restraint
Pr

°gram is achieving.

I must confess that the national Committee and the

federal Reserve Board share in this curiosity.
in

The Program has not been

operation very long and much of its work has been organizational and edu-

Ca

tional.

be

a r at the same time. The top-heavy retail inventory situation began to

Furthermore, two other important restraining influences came to

apparent with the drop-off in retail sales before Easter; and the March
April declines in the Government and corporate bond markets exerted a
billing influence on credit expansion.

However, I deem it something more

- 12 than a coincidence that the sharp and counter-seasonal weekly increase in
commercial end industrial loans at reporting member banks ceased with the
Week of March 21.

The more detailed figures now available reveal that de-

fense loans are rising.

Loons to carry raw commodities declined sharply

during the Spring and early Summer, but are now increasing again seasonally.
Loans to carry retail inventories continued to climb for a number of weeks
after the Program was announced, but have been receding recently.
From my vantage point as Chairman of the national Committee, I
°an attest to the tremendous release of energy in the field of credit
restraint made possible by the Federal Reserve Board's request.
al

I can

so bear witness to the spirit of unified effort and the desire to be
the team" which is evident in all parts cf 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.
to

send them to some member of your District Committee.

I urge you

They will receive

Prompt attention and on the basis of replies received you will be better
ab

ie to formulate your opinions as other cases arise. Use the form supplied
the Committee for sending in your problem.

This will make sure that the

Committee has the necessary information to render an intelligent opinion.
Al

s o , as the Wall Street Journal shrewdly put it when they first saw this

f

°rm: "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
Se

n d i n g it to the Committee."

^ U r n it down anyway.

However, don't send in a case if you expect to

- 13 In Washington the national Committee is assembling a file of
inquiries submitted by lenders to the District Committees end of the opinions rendered by those committees. We are classifying these replies and
reporting them back to all of the committees so that the replies given will
be as uniform a3 possible throughout the United States. While your problems
ma

y seem unique in your community, I can assure you that many of these prob-

e s

are showing up all over the United States.

It is the collective ,iudg-

&gnt .of lenders and committees that ^.ives the Voluntary Program its special
^lidity and strength.
Your task in restraining loans will be easier to the extent that
businessmen understand the Program and its purpose.
h

*s been helping in this campaign.

The national Committee

The newspapers have been generous in

carrying stories about the bulletins issued by the national Committee.
Pr

obably the most publicity was given to the bulletin suggesting the post-

ponement of State and municipal borrowings that are not urgently needed
Mr. Charles E. Wilson, Director of the Office of Defense Mobilization,
gave us an important "assist" by writing to governors of States and other
irn

Portant municipal officers asking their cooperation.

All of the news

stories and editorials are part of the education of the public in the facts
a

bout inflation and the remedies.
Bankers themselves are taking the lead in educating the business

c

°ttmunity to the facts:

ne

essential credit will be available as fully as

eded; nonessential credit will not be forthcoming.

An amaaing flood of

^vertisements by clearing houses, resolutions by bankers associations,
sports of interviews with bankers, public addresses and radio talks is

I

- H
Pouring into my office.

-

I congratulate the banking profession on their

£ublic 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.

Get

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
v

hen their seasonal and other decisions are being discussed in board meet-

lri

gs 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

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

hd 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
anc

*

copies of the Voluntary Credit Restraint Program to your commer-

-^§l_gustomers.

Some time ago President Shelton of the American Bankers

Association wrote to all banks asking that this be done.

A postcard ad-

Messed to the Federal Reserve Board was enclosed to order copies of the
r

°gram. The response has been tremendous.

In the first five days' mail

deceived requests from 527 brnks for 57,059 copies of the Program. I
been greatly pleased to note that it .is not .just the great city banks
^St^cooperated- it was the hundreds and thousands of smaller banks—the
K

banks which are taking hold of this project.

- 15 We are the richest country on earth. Our standard of living is
the highest. We are surrounded by comforts and conveniences that will
tide us over a long period of self-sacrifice without real hardship.

We

are the best educated nation in the world. Bankers as merchants of money
ftust be the leaders in this educational effort.

If we cannot beat the

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