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Chairman Martin's Testimony before the
Joint Committee on the Economic Report
February 7, 1956

The Economic Report recommends that "consideration should be
given to restoring the Government's power to regulate the t e r m s of consumer instalment credit" and suggests that "this is a good time for the
Congress and the Executive Branch to study the problem. "
The Board of Governors a g r e e s that a special study of consumer
instalment credit in relation to economic stability would be timely.


study might well be undertaken by or under the direction of Congress
with the help of the interested Government a g e n c i e s .

Both the Twentieth

Century Fund and the National Bureau of Economic Research made
comprehensive studies of consumer instalment credit in the thirties.
A current r e s e a r c h project could build on the fundamental knowledge
contributed by these pioneer studies. The Board would be glad to do what
it could to facilitate the r e s e a r c h .
There are important arguments both for and against enactment
of an authority to regulate instalment credit t e r m s .

Among those in

support of permanent Government regulatory authority, there are at
least three that have merit.
The first concerns the tendency for instalment credit t e r m s to
be liberalized over the expansion phase of the business c y c l e .

Such a

tendency may result in increasing risk exposure to a point which at a
time of economic reversal would intensify r e c e s s i o n .

-2The second argument concerns the sharp variation in the outstanding volume of consumer instalment credit over the various stages
of the business cycle and the resultant change in the contribution to, or
diminution of, consumer purchasing power from the use of such credit.
These swings in instalment credit volume also tend to accentuate ups
and downs in general business activity.
A third argument, related to the others, is that consumer instalment credit extension is not as sensitively responsive to general credit
controls — exercised through regulation of the supply of bank r e s e r v e s
and interest r a t e s - - a s are many other types of credit.

For example,

in periods of general credit restraint consumer instalment credit may
continue to expand and impinge on the availability of funds for competing
uses, while in periods of decline such credit may contract because of
the high level of previously incurred indebtedness, regardless of the
ready availability of loan funds and low interest r a t e s .
On the other hand, the most telling arguments against Government regulation of consumer instalment credit t e r m s in other than
recognized national emergencies need to be stated.

F i r s t is the fact

that this type of regulation would necessarily interfere with the allocation of credit resources by the interplay of market forces.

To justify

regulation, for example, it would need to be demonstrated that credit
standards and credit volume over business swings vary to a greater
extent for consumer credit than for other types of credit.

It would also

need to be demonstrated that longer-term economic growth would best

-3be fostered by regulated t e r m s ,

Over the long run, the argument g o e s ,

only competition, experience and the discipline of the market place can
determine reasonable and sound maturities, down payments, and the
volume of this type of credit.
Another argument against a regulatory authority is that the
administrative problems involved in regulation are exceedingly complex.
The instalment credit industry includes not only banks, finance companies,
and large retailers but also many thousands of small r e t a i l e r s .


were nearly 200,000 lenders and r e t a i l e r s who registered as subject to
Regulation W when last in effect.
public acceptance.

Moreover, enforcement requires

Experience shows this is difficult to obtain in the

absence of national emergency.
A third argument against the regulatory authority pertains to the
problem of criteria for regulatory action.

Determination of guides for

deciding what t e r m s were appropriate at different stages of the business
swing is a complex undertaking in itself.

Then, there i s an allegation

advanced by representatives of the consumer finance business that
regulatory t e r m s inevitably tend to become the standard credit t e r m s .
This tendency, if true, would make difficult orderly business adjustment to changes in regulatory t e r m s , particularly when stricter terms
became appropriate.
Thoughtful consideration of all of these arguments, as well as
of other aspects of the economic role of consumer instalment financing,
should be included in the broad study of the subject proposed in the
President's Economic
Federal Reserve Bank of St. Louis


-4Concerning the specific question of an authority to regulate consumer credit t e r m s , the Board's present thinking is much the same as
I have expressed several times in recent y e a r s .

The Board does not

seek such authority, but if it were to be enacted, the Board would perfer
that it be made a part of the basic Federal Reserve Act, to be used as
and when economic circumstances require.

With respect to the use of

a selective control such as this one, as in the use of general credit
controls, timing is of the e s s e n c e .

Finally, I want to emphasize that

selective controls of this nature are at best supplements and not substitutes for the general over-all credit and monetary instruments.