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July 9, 1951.
Honorable Burnet R. Maybank, Chairman,
Banking and Currency Committee,
United States Senate.
Honorable Brent Spence, Chairman,
Banking and Currency Committee,
House of Representatives.
Dear Mr. Chairmen:
In accordance with Senator Maybank's telephone call to me on
June 29, 1951, and i n view of the respective reports of the Banking and
Currency Committees of both Senate and House on S. 1717 and H.R. 3871
(bills to amend and extend the Defense Production Act of 1950), the
Board of Governors has carefully reviewed and reconsidered Regulation W,
dealing with consumer credit, in i t s relationship to the declaration of
national policy as set forth i n the Act.
This declaration of policy reflects the imperative need to
maintain our economic strength on which the entire defense effort depends.
Our economic strength i s founded on preserving the integrity of the dollar,
symbolizing as i t does the good faith and credit of our country.
If the Federal Reserve System i s t o f u l f i l l the purpose for which
i t was established i t must, to the best of i t s a b i l i t y , use the means given
i t by Congress to help protect the value of the dollar. The means a t our
disposal bear only on the monetary and credit factors in the economy. Important as these factors are they are nevertheless secondary t o fiscal
considerations. Moreover, such credit r e s t r a i n t s as the System can exert
under today's conditions have inherent limitations. In combination we
believe that they have been effective and salutary i n helping t o counteract inflationary forces.
Regulation of consumer credit has been instituted as an a n t i inflationary emergency measure on three separate occasions; f i r s t by
Executive Order in 1941 and twice subsequently by action of Congress.
It has inherent limitations and defects as a means of credit r e s t r a i n t .
It affects only one segment, though an increasingly important segment,
of the credit structure. The present regulation i s focused on consumer
instalment credit because of i t s v o l a t i l i t y and hence i t s possible
unstabilizing effects on the economy. This limits i t s application to

-2roughly about half of the current outstanding total of $19 billions of
consumer credit. Unlike broad, general credit measures (open market
operations, discount rates, and reserve requirements) Regulation W directly imposes specified terms upon individual transactions in the
regulated area, Therefore, it has aroused widespread opposition, as
the hearings before your Committees eloquently testify, especially from
dealers in automobiles and other major durable goods and from some
finance companies and other lenders. When civilian demand for the
regulated articles greatly exceeds supply, the opposition is tempered
because sales are readily made at the prescribed terms. When this
demand abates, for whatever reason, the regulation appears to many to
be the immediate cause.
We are in such a period, and it is natural that the regulation
and we who now have the unpleasant task of administering it should seem
to those who testified in your Committees to be needlessly thwarting
business. The report of the Banking and Currency Committee of the House
refers to us as "intractable" and as "unduly harsh and unyielding in
administering consumer credit controls...." The report of the Senate
Committee admonishes us to be more "flexible", recalling that we have
often made much of the virtue of flexibility in adjusting this regulation to changed economic conditions. Some of the witnesses before you
concluded that what seemed to them to be our intransigence could only
be accounted for because we live in an "ivory tower" remote from the
real world. Many witnesses before both Committees have pointed to the
accumulations of inventories of various articles and have contended that
if we mean what we have said in our protestations of flexibility we
should promptly relax the terms of the regulation with a view to facilitating disposal of these stocks of goods.
That this viewpoint appealed to the Senate Committee as reasonable is evident from the statement in its report that "the Board of
Governors of the Federal Reserve System should be sufficiently flexible
to permit relaxation or tightening of the regulations in accordance with
the conditions prevailing in the respective segments of the economy to
which the regulations apply. Specifically, it is your Committee's view
that relaxation of the control regulations should be promptly effected
when it becomes evident that accumulations of inventories seriously
threatens to impede production with resulting unemployment in the industry
Accordingly, the Senate Committee introduced into the pending
legislation "a statutory requirement that no more than one-third down
payment and not less than 18 months for completion of deferred payments
shall be prescribed by the Board of Governors of the Federal Reserve
System for installment purchases of automobiles...."

-3The House Committee went still further by introducing into the
bill pending before them statutory restrictions as follows: "new automobiles, one-third down, 18 months' maturity; used automobiles, one-fourth
down, 18 months' maturity; household appliances (including phonographs,
radios and television sets), 1$ per cent down, 18 months' maturity;
household furniture and floor coverings, 10 per cent down, 21 months'
maturity; residential repairs, alterations and improvements, 10 per cent
down, 36 months' maturity."
A further provision in the House bill, which would present
insuperable administrative difficulties, would require "that the Board
shall recognize freight costs on automobiles and make due allowance by
extending amortization periods to equalize as nearly as practical monthly
payments throughout the United States and its Territories."
It is apparent that a profound difference exists in the criteria
by which this regulation is judged and administered. The Board has reviewed at length the many aspects of this matter. It seems to us that
those who are so vigorously opposing the regulation in its entirety or
in its present form are judging the regulation or its terms by one
standard — while we, who have the problem of fixing terms and administering and enforcing them, are judging the regulation by an entirely different standard.
The introduction into the proposed bills by both Committees of
statutory restrictions on terms, and more particularly the statement in
the report of the Senate Committee that inventory accumulation should be
the test for determining when to relax the terms of the regulation, reflect this basic difference in the yardsticks, so to speak, by which the
regulation is being measured.
The Board freely admits that it has failed to impress sufficiently
upon many who are directly affected by the terms of the regulation that
the principal yardstick by which we have continued to appraise the regulation measures its effect on the overall supply of credit and the soundness
of the credit structure. We have no other reason for being concerned with
the regulation. The Reserve System's fundamental task, under the law, is
that of influencing, so far as the means at its disposal permit, the
availability of credit. In a period of general inflation the task calls
for doing what we can to limit the availability of credit. Conversely,
in a period of general deflation the task calls for making credit readily
available. That is the objective of System policy with respect to the
exercise of its broader, traditional means of affecting the supply of
credit, such as open market operations, discount rates, and reserve requirements. Since the great bulk of our money supply is bank credit,
and since the banking system creates new supplies of money when it extends credit, our concern with consumer instalment credit is its bearing
upon the overall supply of money.

-4The appropriateness of a given set of terms at any particular
juncture is, of course, a matter of judgment on which opinions may
honestly differ. In arriving at terms the Board tries to give consideration to all relevant factors, including the inventory situation. The
ultimate test of the regulation, however, is its impact on the credit
structure. By that test we think that the regulation has exerted a
restraining influence that we believe it was intended to exert. This
is evidenced by the fact that consumer instalment credit outstanding
at the end of May is estimated at $12.9 billion as contrasted with
$13 billion on August 31, 1950, just prior to the reimposition of the
regulation. In the comparable 1949-50 period, the outstanding volume
of this type of credit increased by $2.1 billion.
In striving to weigh all of the facts and factors involved in
this controversial but comparatively subordinate means of affecting the
credit supply, we have been unable to come to any other conclusion than
that, judged by the yardstick of the supply of credit requisite for the
defense effort and the civilian economy, we could not justify liberalizing the terms of this regulation at a time when upward pressures on
prices, even though abated at present, threaten to re-emerge irrespective
of Korean developments. Judging by the present size of the money supply
and its potential expansion in volume or velocity, or both, we do not
feel that we could justify an action, even on the subordinate front of
consumer instalment credit, that would announce, in effect, that we
believe the inflationary danger is no longer present. We do not believe
that we should, by such an action, encourage the general public to incur
more consumer instalment debt which would be financed ultimately by
further expansion of bank credit. This is not a type of credit which
is directly essential for national defense.
If we are wrong in our appraisal of the longer-term outlook we
are erring on the side of safety. Whenever that appraisal changes, the
same reasoning which leads us to believe that we should hold the line at
this time would require immediate relaxation of existing terms or perhaps
dropping of the regulation altogether. It is, as we have indicated, an
emergency anti-inflationary measure. It is inappropriate to a period of
general deflation. If our considered conclusion at this time were different we would feel that the policy of credit restraint should be replaced by one of ease with respect not only to Regulation W but also to
open market policy, discount rates, and bank reserves, as well as stock
market and real estate credit. Similarly, we would feel that the nationwide program for voluntary credit restraint was no longer in order. Our
conclusion to the contrary seems to be borne out by both Senate and House
Committee reports which make it clear that a program of general credit
relaxation at this time would not be in the public interest.
These considerations, which govern our policy, seem far removed
from the very real problems immediately confronting various trades subject
to the regulation. However, what may appear to be conflicting interests

-5are not, in fact, separable. If we failed in our obligation to do what
we can to avert the ravages of inflation, and thus give those who would
destroy our nation a cheap and easy victory, the businesses which sincerely feel discriminated against by this regulation would rightly
condemn us.
We do not wish to exaggerate the importance of this regulation.
We are not prepared to say at this time that even if the Congress decided
to abolish it altogether the consequences would be grave. We have said,
and we believe, that it is a desirable, supplementary measure of credit
restraint in a time of inflationary danger. As an anti-inflationary
measure it would be meaningless, and better discarded, if it failed to
restrain credit. We wish to emphasize that so long as the regulation
is authorized by the Congress as a means of credit restraint we think
we should administer it on the basis we have indicated.
A very different situation would be presented if the Congress
were now to continue the regulation under different terms of reference.
The criterion of inventory accumulation and the attempt to differentiate
between segments of the economy affected by the regulation would, in our
judgment, transform an instrument of credit restraint into one that would
place the principal emphasis upon quite different considerations. We
think they would be incompatible with the objectives of effective credit
restraint if such a regulation is to contribute to that end in a period
of intense inflationary pressures. The proposed statutory restrictions
limit the extent to which terms of the regulation might be tightened
but would not, of course, limit the easing of terms. If the restrictions
did both we would view the regulation in the light of one to set national
standards for this type of credit or to deal with what might be termed
trade practices. In either case, it would be difficult to think of the
regulation as a flexible instrument to supplement traditional central
banking measures designed to adjust the credit supply to the changing
requirements of the economy.
We feel very strongly that if this type of regulation is to
be continued with terms conditioned, for example, upon inventory accumulation or employment in affected industries, it should be clearly understood that it is no longer related primarily to the end of credit restraint.
From the standpoint of restricting -- it does not, of course
prohibit — consumer instalment credit, we question whether the present
terms of the regulation are as serious a factor in the immediate problems
confronting certain trades or financing institutions as their representatives and spokesmen no doubt sincerely believe. A relaxation of present
terms, as would be specified in the bills before the Congress, would, of
course, serve to test the validity of that assumption. Viewed from this
narrower standpoint and disregarding the broader considerations of general credit policy, it might well be concluded that we should initiate
the indicated relaxations. We cannot consistently take that course. It

-6is our view that if the present terras are in fact as serious a sales
deterrent as has been contended, then the statutory easing of the maturities by only three months, as proposed in S. 1717, would hardly be sufficient to bring the hoped for relief. Following this line of reasoning,
we think it would be more logical to drop the regulation altogether. but
we would not wish to be understood as favoring that action at this time.
Finally, we wish to emphasize that we would welcome an opportunity to discuss further with your Committees the question of the role
that such a regulation should play in the present emergency. If it is to
serve as a supplementary means of restraining over-expansion of credit,
we would strongly urge the elimination of the proposed statutory limitations, regardless of where the administrative responsibility is lodged.
If it is to be governed by other considerations, then we would like to
have an opportunity to discuss with the Committees whether such a regulation should not be administered by some agency of Government whose
functions are more nearly related to such considerations than are those
of the Federal Reserve System.
The subject of the future of this regulation would not warrant
such an extensive letter but for the fact that the Committees dealing
with the legislation have been most seriously concerned about it, as we
have, and the Board wished to set out fully and frankly its views and
the considerations which govern them. Moreover, it is important to all
those affected by the regulation, whether as sellers or buyers of goods
or as financing institutions, to have these questions resolved as rapidly
as possible consistent with the national interest. That is your aim,
as it is ours.
In the course of debate in Congress on this subject it was stated
that the action of the respective committees constituted what was termed
a "mandate" to relax the terms of the regulation. For this as well as
other reasons we felt that we should communicate to the Committees the
foregoing views of the Board as early as possible during the 31-day
period for which the Congress extended the Act under which the present
regulation is authorized. We earnestly wish at all times to help, not
hinder, production for defense and for essential civilian requirements.
It is hardly necessary for us to add that the Federal Reserve System,
which Congress created and can abolish, will carry out to the best of
its ability any mandate of the Congress.

Sincerely yours,
(Signed) Wm. McC. Martin, Jr.
Wm. McC. Martin, Jr.