Full text of Statements and Speeches of Rudolph M. Evans : Statement on the Defense Production Act of 1950

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J v i O V M a * ^

v

LIBRARY ;

J

xv

STATEMENT

ON

THE

DEFENSE

PRODUCTION

^he Defense Production Act of 1950 w o u l d carry
° u t the steps toward

ACT

larger prime contracts.

OF

1950*

It can also m a k e practical

economic preparedness rec-

the a w a r d i n g of more G o v e r n m e n t contracts, re-

ommended by the President in his message of July

q u i r i n g unusually large w o r k i n g capital or expan-

the Congress.

Because of the responsibilities

"Uch the Congress has placed
,n

upon

the

sion

Board

credit a n d monetary area, we are especially

"^crested in those provisions of the bill

relating

a

m a ,

re, therefore, addressing this statement

%

to the reasons w h y

pri-

financing,

these concerns

<e

such

be able

to defense

to

production.

formance of G o v e r n m e n t contracts, the mechanism
with a promptness which

we believe that these

tion

301

of

OF

the

DEFENSE

under usual

is not always

possible

procedures.

T h e loan guarantee proved to be an eminently

bill

would

private

LOANS

authorize

the

to the V-loan program operated by the Federal
serve System d u r i n g W o r l d W a r I I .

credit

for

facilitating

production

under

G o v e r n m e n t contracts d u r i n g W o r l d W a r II.

j r e s 'dent to reinstitute a guarantee program simi,,r

contribution

not

successful means of encouraging the extension of
GUARANTEE

Sec

would

relatively

Without

can serve to expedite the c o n s u m m a t i o n of loans

the broad legislation needed to meet the present

p

facilities, directly to

medium-size concerns.

Finally, where great speed is essential in the per-

P r °visions should be promptly enacted as a part
Nation.

plant and

m a k e a full

guarantee of defense production loans and
the regulation of consumer and real estate credit.
Wc

in

small and

guarantee
V-loan

program

program

of that

referred

period—the

The

so-called

to earlier—was

set

up

under Executive O r d e r of the President in M a r c h

T h e pro-

1942.

U n d e r that program, loans for war produc-

P°sed program w o u l d be confined to the guarantee

tion

I y the national defense procurement agencies of

through the agency of the Federal Reserve System.

° a n s made by banks and other financial

T h e twelve regional Federal

institu-

te to contractors to finance the production of dense

materials needed by the U n i t e d States in the

Present emergency.
Se

lo

d

with

T h i s program is not to be con-

various

proposals

advanced

in

post-

years for the peacetime guarantee of business
an s

j

financing

problems of contractors engaged

defense production, particularly where they are
s
tnall and medium-size, are u n i q u e in character.
iC ' 0 a n guarantee mechanism here proposed proes
cts
1Uc
e

n

an effective solution of these problems.
for essential defense materials often
larger

financing

Conrequire

by contractors than

able to c o m m a n d
^tices.

the

Armed

Services

Reserve Banks

twenty-four branches, w i t h experienced
and close daily contacts with

financial

and

personnel

institutions,

afforded an already existing and well-adapted organization
available

for m a k i n g such guarantees
to contractors

throughout

promptly

the

country.

under

ordinary

by

the
to

the

Hoard

of

Governors

Committee

on

Representatives,

July

25,

of

Hanking

Urr
Fv,
e n c y o f t h e S e n a t e , a n d read In' G o v e r n o r
_l()i'
«rK
.•
. ,,
1S t o
t.il c
'
Committee on Hanking and Currency

"f

proved

for

both

large and

small,

10.5 billion dollars were ap-

guarantees

by

the

Armed

Services

the a m o u n t of these guarantees were on loans to

is essential for p r o m p t performance on the
presented

contractors,

a m o u n t i n g to about

Over 90 per cent of the n u m b e r and one-third of

larly those w h o do not themselves have direct

Reserve System

D u r i n g the course of the V-loan program, bank
loans to war

partici-

J 0 v ^ " n r h e n t contracts but whose work as subcon-

n<|

of the

program.

financing

It can m a k e possible m a x i m u m

* c
'
(|lc, j. ^ i i u n t

coordinating agency in the administration

through the agency of the Federal Reserve System.

• e Government's defense production program, par-

lsc

by

they

j^tion by n u m e r o u s smaller business enterprises in

a

guaranteed

T h e Board of Ciovernors in W a s h i n g t o n acted as the

11

y-

were

R.

1950.

M.
i
the

small

medium-size

businesses; that

is, busi-

N o t w i t h s t a n d i n g the great volume of loans handled,
the program
Treasury

was self-supporting;

from

the

program

receipts of the

exceeded

expenses

and losses by 23 million dollars by the end of 1949.
W i t h o u t tin.* program, the production of war materials w o u l d have required more G o v e r n m e n t financing through direct lending a n d other means.

PREPRINTED
FEDERAL RESERVE
FOR

and

nesses with total assets of less than 5 million dollars.

AUGUST

FROM
BULLETIN
1950

STATEMENT

ON

THE

DEFENSE

For the reasons indicated, the Board feels that
the program of guaranteed loans which would be

PRODUCTION

ACT

OF

19 5 0

neces-

effort, including the materials and manpower
sary to expand our total productive capacity.

in

authorized by Section 301 of the bill would con-

T h e present international situation not only

stitute an essential part of any plan for expediting

creases greatly the Government's demand for th e

deliveries under defense production contracts.

goods and services of our economy, but at the same

the President should
Federal

see fit again

Reserve System

for

If

to utilize the

this loan

guarantee

time accelerates private demand.

'

These two addi-

tional factors of demand are imposed on a

condi-

program, the Board and the Federal Reserve Banks

tion of already very high demand, employment, and

would immediately direct their facilities toward its

prices,

vigorous

North Koreans on June 25, prices were rising an"

and

expeditious

the experience gained

administration.

by the System

With

under

the

we

liven before the attack by the C o m m u n i s

were

in

a

potentially

inflationary

situation-

with

Because of developments of the past few weeks, 11

personnel both at the Board and at the regional

is imperative that steps be taken to reduce or dt'fer

Reserve Banks who participated

civilian demands and

V-loan program d u r i n g W o r l d

War

II and

in the

previous

operations, it would be possible to develop and put
into efTect within a very short time the new program
of guaranteed loans contemplated by this bill.

T h e state of public psychology has already stiff'
ulated consumer buying and the accumulation
In the week ending July I 1

business inventories.
REGULATION

OK C O N S U M E R

AND R E A L ESTATE

CREDIT

Section 401 of the bill authorizes the President
to regulate consumer and real estate credit.

Under

department store sales rose to a level 24 per cep^
above a year ago, with increases ranging from
per cent in the R i c h m o n d District to 39 per ce"'

such authority m i n i m u m down payments on pur-

in the Dallas District.

chases, m a x i m u m

houses have risen to record levels.

maturities, and other standards

appropriate to limit credit extension could be prescribed.

Section 402 of the bill would strengthen

pi"eS'

to lessen inflationary

sures.

Sales of automobiles an'

Prices of 28 basic commodities, which had rise"
7 per cent from January 3 of this year to June 23advanced

ing programs in the housing field when the na-

Korea—1() per cent in one month.

tional

modity index of wholesale prices, which had ri^'1

interest so requires.

We

regard

these as

important provisions of the proposed legislation.
Consumer credit regulations were administered

sharply

after

the

invasion

of

Sou''1

the President's authority to curtail Federal financ-

The all-con1

4 per cent by June 20, has since jumped 3 per c^1'1
further.

Consumer prices began to rise in Maf c

by the Board of Governors from September 1941

and recently the advance has been further acce'

through October 1947 and again from September

erated.

1

Such

t lt

any other time, except for a short period i'

1948 through June 1949.
regulations as might be necessary in the

real estate credit field under Section 401 would have

,lt

Consumer prices are now higher than

'

latter part of 1948.
vV

Unless prompt action is taken, the country

'

to be designed to meet the special needs of this

face serious problems of gray markets and spifi1

area.

ing prices.

They would

have the general

purpose of

Not only would this situation

Upsel

supporting and supplementing the President's pro-

our economic balance but it would add to the <J'|

gram of cutting back on Federally guaranteed and

faculty in procuring the manpower and

insured mortgage credit.

necessary for the military effort.

Authority for restrictions on consumer and real
estate credit

should

be provided

lor use to the

O n e of the major
private demand

materia

factors in the expansion

is the growth

of mortgage

:l,lt

extent necessary as an essential part of the program

consumer credit.

for conserving resources for defense and

on the accompanying chart, consumer credit I1'1

ing the economy against inflation.
would help to prevent current and

protect-

Since the end of 1945, as sho^

This authority

been increasing by about 3 billion dollars a Ve*,r'

potential de-

The increase in the past 12 months was 3.5 bill'0'1

m a n d from exceeding supply in the areas affected.

dollars and

Accordingly, it would help to reduce inflationary

largest increase on record for that

pressure upon prices in these areas.

It would help

was before the Korean crisis precipitated the ()rt"

to make

materials and

more

cnt buying spree.

available

for

the

manpower

national

defense

and

readily
military

in

May

was about

500 million,

^

month.

T h e most important segment of total

consul

STATEMENT
CONSUMER CREDIT

ON

THE

DEFENSE

PRODUCTION

ACT

NONFARM

OUTSTANDING

OF

19 50

MORTGAGE

DEBT

BL
IUOWS OF DOLLARS

Cr

edit is instalment credit, especially for the pur-

chase of durable goods.

D u r i n g the past year in-

stalment credit rose nearly 3 billion dollars

and

C o u n t e d for 83 per cent of the increase in total
c

°nsunier

credit.

The

role

which

instalment

Cre

dit has been playing in the growth of demand

ls

illustrated

not only in the amount of the ex-

tension but also by the relaxation
u

NEW LOANS MADE

1940

in the terms

'ider which such credit is extended.

1945
1950
*AHNUAL RATE ros JAN.JUNC

Reports of

declines in the required d o w n payment are wide-

to the growth of bank deposits.

spread and the average period of repayment has

of both consumer instalment paper and mortgage

en

holdings

gthcned progressively.

paper are rising rapidly and are thus adding to the

I he current record rate of residential construc-

total supply of money which is already so large

t'cin
Cr

Hank

involves

edit

which

the

greatest

the country

increase
has ever

in

in relation to current output as to provide a con-

mortgage

experienced.

stant inflationary threat.

Restriction of consumer

'Ionic mortgages made by all lenders in the first

and mortgage credit, therefore, would help to keep

of 1950 amounted to about 6.5 billion dollars

within bounds the quantity of money and other

°r

annual rate of 13 billion dollars, as shown on
The net increase in mortgage debt outstanding

clu

liquid assets in the hands of the public.
In normal times consumer and mortgage credit

accompanying chart.
" n g the first half of 1950 ( after regular amorti-

play a very important and desirable role in our
economic system.

W i t h o u t such credit widespread

sation and other repayments) was about 3 billion

home ownership and mass distribution of durable

hilars, bringing the total outstanding on June 30

goods would not have been possible.

,0

production

about 40 billion.

T h e home mortgage debt of

country has more than doubled since the end
of

tr,

sustain

If our mass
its

expansive

of mortgage and consumer

financing.

Expansion of consumer and mortgage credit con-

However, in order that such financing may be of

W e s not only to the current demand for labor

greatest value it is important that it be used most

aru
c

is to

character in normal times, we will need to have
expansion

the war.

economy

' materials that go into housing and

durable

°nsumer goods, but also augments the demand tor
other goods.

The purchasing power created

h

V consumer and mortgage credit enters the income

Str

^ m where it adds to the competition for goods

" e l u d i n g materials vital to the national
Growth

of consumer and

defense.

mortgage credit

in-

c a s e s the volume of money and other liquid assets,
^ p a n s i o n of bank loans for such purposes adds

[3]

fully when industry is in a position to meet the
demands created.

When

cupied to capacity and

industry

important

is already ocresources must

be diverted to the defense effort, the creation of
new credit can not increase the general availability
of goods.

O n the contrary it contributes to infla-

tion and economic disorganization.

If

mortgage

and consumer credit is appropriately limited

now

it will be in a better position to play a necessary

a

e
STATEMENT

ON

THE

and desirable role whenever adequate

DEFENSE

productive

PRODUCTION

ACT

OF

19 5 0

sociations took an active part in acquainting busi-

capacity is once more available to meet freely con-

nessmen and the public with credit regulations, and

sumer demands.

they cooperated to the fullest in helping to assemble

Regulation of consumer credit should and can
be flexible.

needed

T h e previous regulations were tailored

technical

information.

Large and

small

institutions responded generously to oUr

financing

to fit prevailing conditions, with coverage and terms

requests

suited to changing circumstances.

Federal supervisory authorities also gave us val-

T o illustrate, in

the fall of 1941 the regulation applied only to in-

the like.

When

country entered the war the regulation

With

the

was en-

should be enlisted to design a regulation, similarly
flexible and adapted to the changing economic situ-

instalment,

single payment, and charge account credit.

ation.

After

The commercial banks play a strategic role

the war, late in 1946, the scope of the regulation
was made even more limited than when
originally

the real estate credit market.

it was

such credit will

applied.

effects on genthe Federal

Rc"

The need to strengthen our economic defenses

ministration of consumer credit regulation as well
program.

which

serve System is primarily interested.

System operations proved well adapted to the ad
V-loan guarantee

in

111

A n y regulation of

have significant

eral credit conditions

T h e decentralized character of Federal Reserve

as to the

practicable approach. T h e full co-

operation of leaders in the mortgage financing field

It covered practically all

consumer durable and soft goods and

State and

respect to real estate credit, there should

be an equally

larged in scope in keeping with the general mobilization which took place.

advice.

work.

sumer durable goods of substantial unit cost—autorefrigerators, and

and

uable assistance d u r i n g the course of their regular

stalment credit relating for the most part to conmobiles,

for information

is no less than the need to strengthen our military

Through

our twelve Federal Reserve Banks and twenty-four

defenses.

branches, located in every region of the country,

our economy by leaving it unduly exposed to the

we were able to tap quickly and effectively

the

inflationary

informed opinions of small as well as large busi-

pressures that

defense expenditures.

ness.
In

W e can not afford to risk
are inherent

disrupting
in

large

Prompt action is imperative.

A s the President said in his message on the present
our experience with

the administration

of

situation: " W e must be sure to take the steps that

consumer credit regulation, the business community

are necessary now, or we shall surely be r e q u i r e d

gave us excellent cooperation.

to take m u c h more drastic steps later o n . "

Various trade as-

[

4

J