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GLct bj^JUlS^A^ C v 0 ' BOARD. OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Statement o f Governor E. M. Evans Before Senate Banking and Currency Committee on REGULATION OF CONSUMER INSTALMENT CREDIT For immediate r e l e a s e November 24, 1947 The Board o f Governors o f t h e F e d e r a l Reserve System has recommended t o the Chairmen o f t h e Senate and House Banking and Currency Committees a b i l l which would a u t h o r i z e t h e Board t o r e g u l a t e consumer i n s t a l m e n t c r e d i t . I f l e g i s l a t i o n i s t o be passed, we b e l i e v e t h a t consumer c r e d i t r e g u l a t i o n should be d i r e c t e d t o t h e v o l a t i l e s e c t o r o f consumer c r e d i t , t h a t i s , i n s t a l ment c r e d i t . T h i s i s t h e p a r t which has been s u b j e c t t o t h e g r e a t e s t f l u c t u a t i o n s i n t h e p a s t , t h u s c o n t r i b u t i n g t o i n s t a b i l i t y and unemployment. I t i s a l s o t h e 1 p a r t t h a t i s now i n c r e a s i n g most r a p i d l y and d o i n g most t o keep p r i c e s on t h e upgrade. R e g u l a t i o n under t h e proposed l e g i s l a t i o n would be i n much t h e same form, as i t was under t h e Board's R e g u l a t i o n W when t h a t r e g u l a t i o n was s t i l l i n f o r c e . Allowing f o r appropriate exceptions t o provide a d m i n i s t r a t i v e f l e x i b i l i t y , the r e g u l a t i o n would p r e s c r i b e maximum m a t u r i t i e s f o r a l l types o f i n s t a l m e n t c r e d i t and i n a d d i t i o n would p r e s c r i b e minimum down payments f o r i n s t a l m e n t c r e d i t t o f i n a n c e t h e purchase o f i m p o r t a n t c a t e g o r i e s o f consumers' d u r a b l e goods. The r e g u l a t i o n would a c c o r d i n g l y cover n o t o n l y i n s t a l m e n t c r e d i t f o r consumers' d u r able goods but a l s o i n s t a l m e n t c r e d i t f o r o t h e r consumer purposes, b o t h o f which c o n t r i b u t e t o t h e a c c e n t u a t i o n o f business upswings and downswings and n e i t h e r o f which can be s h a r p l y d i s a s s o c i a t e d f r o m t h e o t h e r . At the. c o n s u m e r . l e v e l , both i n s t a l m e n t s e l l i n g and i n s t a l m e n t l e n d i n g are among t h e i n f l a t i o n a r y f o r c e s •aat are at t h e present t i m e ' c a u s i n g so much apprehension t o t h e p u b l i c , and t o t h e Congress. . G e n e r a l l y speaking, t h e i n s t a l m e n t terms f i n a l l y p r e s c r i b e d by Regulat i o n W c a l l e d f o r m a t u r i t i e s o f h o t more t h a n 1.5 months and c a l l e d f o r down payments o f at l e a s t o n e - t h i r d i n most cases and f o r 20 per cent in,some, cases. Under the proposed l e g i s l a t i o n , terms would, o f course, be v a r i e d from t i m e t o t i m e depending upon changing economic c o n d i t i o n s but w i t h a view t o r e s t r a i n i n g t h e development o f unsound c r e d i t terms and w i t h a view t o p r e v e n t i n g . o r r e d u c i n g excessive expansion o r c o n t r a c t i o n o f consumer i n s t a l m e n t c r e d i t . These would be the d e c l a r e d s t a t u t o r y o b j e c t i v e s . Under e x i s t i n g c o n d i t i o n s when t h e a r t i c l e s commonly f i n a n c e d w i t h i n stalment c r e d i t are f o r t h e most p a r t i n s h o r t supply r e l a t i v e t o demand, i t i s apparent t h a t t h e r e s t r a i n t s which c o u l d be imposed would h e l p t o dampen the demand and thus reduce t h e upward p r e s s u r e on p r i c e s . Even when goods become a v a i l able i n l a r g e r q u a n t i t i e s , however, reasonable r e s t r a i n t s on consumer i n s t a l m e n t c r e d i t would serve a ' u s e f u l p u b l i c purpose, because t h e y would t e n d t o induce s e l l e r s t o reach more customers by r e d u c i n g p r i c e s and i m p r o v i n g q u a l i t y i n s t e a d LIBRARY! - ^ A L RESERV BANK OF PHfLADELMfffi o f by r e s o r t i n g t o a c o m p e t i t i v e " r e l a x a t i o n o f ^ i n s t a l m e n t c r e d i t terms w h i l e s t i l l maintaining high prices. Under p r e v a i l i n g c o n d i t i o n s o f maximum peacetime employment and n a t i o n a l income, i t ' would be economically- -unsound t o encourage people t o go deeper and deeper i n t o debt on i n c r e a s i n g l y easy - t e r m s . . , ' , . N o t w i t h s t a n d i n g c o n t i n u e d shortages o f goods, p a r t i c u l a r l y d u r a b l e goods, and n o t w i t h s t a n d i n g t h e r e g u l a t i o n o f consumer c r e d i t t h a t has been a p p l i e d , i n s t a l m e n t c r e d i t has expanded d u r i n g t h e p a s t 12 months by more t h a n 2 b i l l i o n d o l lars. The economic e f f e c t o f a d d i n g borrowed d o l l a r s t o c u r r e n t income., t o g e t h e r w i t h t h e u n p r e c e d e n t e d ^ l a r g e volume o f savings i n t h e hands o f t h e p u b l i c gene r a l l y , can o n l y be. t o p r o l o n g t h e p e r i o d o f i n f l a t e d p r i c e s . A t t ie p r e s e n t t i m e Easy c r e d i t terms would make no more goods t h i s i s the r e a l l y c r u c i a l p o i n t . available. They would o n l y h e l p t o h o l d p r i c e s h i g h i n t h e m a r k e t p l a c e . Were goods a v a i l a b l e i n l a r g e r volume and were many consumers a b l e t o f i n a n c e t h e i r purchases on e a s i e r c r e d i t t e r m s , t h e r e i s l i t t l e q u e s t i o n b u t t h a t t h e volume o f consumer i n s t a l m e n t c r e d i t would i n c r e a s e even more r a p i r d l y than i t has i n c r e a s e d during the past year. The need f o r r e g u l a t i o n i s a c u t e a t t h e p r e s e n t t i m e but t h e need i s n o t m e r e l y a temporary one. Experience has shown t h a t t h e excessive expansion and subsequent c o n t r a c t i o n o f consumer i n s t a l m e n t c r e d i t c o n t r i b u t e s s u b s t a n t i a l l y t o economic i n s t a b i l i t y . I t s r o l e i n i n s t a b i l i t y i s i n c r e a s i n g as t h e y e a r s go by, w i t h the' growing i m p o r t a n c e o f consumers' d u r a b l e goods i n t h e economy. I t i s r e c o g n i z e d t h a t t h e development ; o f t h i s t y p e o f c r e d i t has gone hand i n hand' w i t h t h e u n p a r a l l e l e d i n d u s t r i a l .development o f t h e n a t i o n . Yet, i t i s equally -sign i f i c a n t t h a t when c o m p e t i t i o n t a k e s t h e f o r m o f r e l a x i n g c r e d i t terms and i s c a r r i e d t o extremes, i t i s a symptom and cause o f economic unsoundness. M i l l i o n s o f people are encouraged t o .overpledge f u t u r e income.. T h i s i n e v i t a b l y e n t a i l s i n s t a b i l i t y because t h e excessive c r e d i t extended d u r i n g a business boom accentuates t h e boom and t h e n has t o be l i q u i d a t e d o u t o f c u r r e n t ' .income on t h e downswing, which accentuates d e p r e s s i o n . The f a c t t h a t c u r r e n t . i n c o m e has t o be used t o pay o f f e x c e s s i v e i n s t a l m e n t debt c r e a t e d d u r i n g t h e business boom n e c e s s a r i l y d i v e r t s t h a t income f r o m t h e channels o f consumer e x p e n d i t u r e s i n t h e d e p r e s s i o n , espec i a l l y i n t h e i m p o r t a n t s e c t o r o f consumers' d u r a b l e goods. V o l u n t a r y e f f o r t s have been made f r o m t i m e t o t i m e by f o r e s i g h t e d r e t a i l e r s , s a l e s f i n a n c e companies, banks, and o t h e r l e n d e r s t o prevent down p a y a n t s f r o m becoming e x c e s s i v e l y s m a l l and repayment p e r i o d s from' becoming o v e r - e x t e n d e d i n t i m e s Of c r e d i t expansion. These e f f o r t s , however, have always been i n e f f e c t i v e because o f t h e a g g r e s s i v e c o m p e t i t i o n o f t h o s e w h o ' w i l l n o t v o l u n t a r i l y cooperate i n t h i s o b j e c t i v e . Since t h e end o f R e g u l a t i o n W, o n l y t h r e e weeks ago, f o r example, and n o t w i t h s t a n d i n g e f f o r t s by many t o " h o l d t h e l i n e , " i n s t a l m e n t c r e d i t terms have been growing more and more l i b e r a l i n many f i e l d s . Credit terms, i n f a c t , have a l r e a d y become t o o easy f o r these boom t i m e s . The p r e s e n t t r e n d o f expansion i n consumer i n s t a l m e n t debt needs t o be c a r e f u l l y watched and r e s t r a i n e d so t h a t t h e c o u n t r y s h a l l n o t r e p e a t t h e p a t t e r n of i n d u c i n g American f a m i l i e s t o go h e a v i l y i n t o debt on t o o easy t e r m s , p a r t i c u l a r l y f o r h i g h - p r i c e d goods many o f w h i c h a r e n o t . o n l y h i g h - p r i c e d but o f i n ferior quality. The d e c l i n e t h a t would be bound t o f o l l o w would be f e l t n o t o n l y i n t h e d u r a b l e goods i n d u s t r i e s but t h r o u g h o u t t h e economy. The. proposed r e s t r a i n t would h e l p t o p r e v e n t a r e p e t i t i o n o f such an unsound sequence o f e v e n t s . - 3 - .The Board f e e l s t h a t t h i s t y p e o f r e g u l a t i o n , w h i c h i s o f a s e l e c t i v e c h a r a c t e r , serves a u s e f u l purpose w h i c h cannot be reached by t h e e x e r c i s e o f any powers ever bank c r e d i t i n g e n e r a l . The r e g u l a t i o n i s needed, t h e r e f o r e , as a supplement t o , and. n o t a s u b s t i t u t e f o r , g e n e r a l c r e d i t c o n t r o l powers. Each i n strument has i t s p r o p e r p l a c e i n a w e l l - r o u n d e d a n t i - i n f l a t i o n program. I n c o n n e c t i o n w i t h any C o n g r e s s i o n a l a c t i o n on t h e s u b j e c t , t h e r e --.re some l e g i s l a t i v e a l t e r n a t i v e s t h a t seem t o us t o deserve t h e c a r e f u l c o n s i d e r a t i o n o f t h e Congress. E x e c u t i v e Order No. 8843, under which R e g u l a t i o n was i s s u e d , served i t s purpose r e a s o n a b l y w e l l . S i x y e a r s o f e x p e r i e n c e , however, have shown t h a t i t would be p r e f e r a b l e f o r l e g i s l a t i o n on the- subject, t o convey independent a u t h o r i t y f o r t h e necessary r e g u l a t i o n r a t h e r t h a n m e r e l y t o r e v i v e t h e E x e c u t i v e Order. For one t h i n g a s t a t u t e enacted a t t h i s t i m e c o u l d p r o v i d e c l e a r e r m d more a p p r o p r i a t e standards o r guides t o be f o l l o w e d i n p r e s c r i b i n g r e g u l a t i o n s . I n a d d i t i o n , i t c o u l d p l a c e c l e a r e r and more p r e c i s e l i m i t s on t h e B o a r d ' s a u t h o r i t y as, f o r example, by l i m i t i n g i t t o o n l y t h a t p o r t i o n o f consumer c r e d i t t h a t takes the form of i n s t a l m e n t c r e d i t . A b i l l c o n f e r r i n g such independent a u t h o r i t y c o u l d s t i l l be r e l a t i v e l y s h o r t , and i t would be d i s t i n c t l y more s a t i s f a c t o r y t h a n a mere c o n t i n u a t i o n o f t h e E x e c u t i v e O r d e r . T h i s would be t r u e n o t o n l y from t h e s t a n d p o i n t o f sound a d m i n i s t r a t i o n b u t a l s o f r o m t h a t o f g r e a t e r convenience f o r those s u b j e c t t o t h e l e g i s l a t i o n . The m a t t e r o f a p p r o p r i a t e enforcement p r o v i s i o n s a l s o deserves t h e cons i d e r a t i o n o f t h e Congress. Such p r o v i s i o n s c o u l d be i n c o r p o r a t e d more conveni e n t l y i n an independent b i l l such as we have suggested, b u t i n any event t h e problem i s one which t h e Congress would n o t w i s h t o o v e r l o o k . I t has been our experience t h a t t h e p e n a l t i e s a p p l i c a b l e under t h e E x e c u t i v e Order and t h e u n d e r l y i n g a u t h o r i t y i n t h e T r a d i n g w i t h t h e Enemy A c t are so d r a s t i c t h a t i t i s d i f f i c u l t t o a p p l y them i n a c t u a l p r a c t i c e . To p r o v i d e enforcement t h a t i s b o t h e q u i t a b l e and e f f e c t i v e , i t i s e s s e n t i a l t h a t t h e r e be s p e c i f i c p r o v i s i o n f o r c o u r t s o f e q u i t y t o a i d enforcement t h r o u g h t h e i r power t o e n f o r c e subpoenas•and e n j o i n violations. That i s a sound t y p e o f enforcement machinery t h a t the Congress has adopted i n c o n n e c t i o n w i t h o t h e r s i m i l a r m a t t e r s . I f necessary, t h i s a u t h o r i t y c o u l d be g i v e n i n a s i n g l e - s e n t e n c e p r o v i s i o n t h r o u g h t h e i n c o r p o r a t i o n by cross r e f e r e n c e o f p r o v i s i o n s on t h i s s u b j e c t i n s t a t u t e s a l r e a d y a p p l i c a b l e t o o t h e r agencies. The case f o r permanent l e g i s l a t i o n seems t o t h e Board t o be v e r y s t r o n g . I t i s i m p o r t a n t i n any event t h a t any l e g i s l a t i o n on t h e s u b j e c t s h o u l d have a l o n g enough l i f e r e a l l y t o a c h i e v e t h e o b j e c t i v e s o f t h e Congress. We b e l i e v e t h e Congress would l a r g e l y d e f e a t i t s purposes i f i t a t t e m p t e d t o c o n f i n e t h e o p e r a t i o n o f t h e l e g i s l a t i o n t o an u n d u l y s h o r t p e r i o d . I t would be rash t o assume t h a t i n f l a t i o n a r y p r e s s u r e s w i l l s u b s t a n t i a l l y subside i n t h e near f u t u r e . Furthermore, any temporary s t a t u t e tends t o l o s e much o f i t s e f f e c t i v e n e s s as i t approaches i t s t e r m i n a t i o n d a t e , and t h i s can become s e r i o u s l o n g b e f o r e t h a t date i s reached. A c c o r d i n g l y , i f t h e Congress i s n o t d i s p o s e d a t t h i s t i m e t o enact permanent l e g i s l a t i o n , t h e Board would recommend t h a t t h e measure a u t h o r i z e app l i c a t i o n o f t h e n e c e s s a r y r e s t r a i n t f o r a p e r i o d as l o n g as t h r e e y e a r s . At any t i m e w i t h i n t h i s p e r i o d the' Board w o u l d be i n p o s i t i o n t o m o d i f y whatever r e s t r i c t i o n s may be p r e s c r i b e d , o r even t o remove them a l t o g e t h e r , i n t h e event t h a t such -Tr- a c t i o n s h o u l d be w a r r a n t e d by a change i n economic c o n d i t i o n s a t any t i m e d u r i n g the period. I t s h o u l d be t a k e n f o r g r a n t e d t h a t t h e a d m i n i s t r a t i o n o f consumer c r e d i t r e g u l a t i o n must be, and would be, a l t o g e t h e r f l e x i b l e .
@FedFRASER