Speech

Morris Plan Bankers Assn. annual convention, Sea Island, Ga., Nov.3-5. 19^1• declared; they come about. We are in one not of our making. We are faced with a hostile theory of government. There is not room in the small world Credit Control of today—a world in which distance and time have been eliminated—for the Nazi theory of govern- GOVERNOR RONALD RANSOM: Mr. ment and our own theory to live at one time. How President, Ladies and Gentlemen : long that effort will be, none of us knows. The I only wish that I deserved a small part of the choice seems to me to lie between a long and a very kind introduction of my friend, Mr. Morris. short effort. If the destruction of all that the pres- I have not made it a rule to accept invitations to ent Nazi Government stands for and all that is address various meetings since I have been a mem- inimical to democratic government is to be achieved ber of the Board; quite otherwise. In this par- within any reasonable time, it requires an all-out ticular instance I did not feel that I could possibly effort in every sense. I do not believe it probable decline the invitation. When we were faced with that many of our citizens would have believed a the difficulties inherent in Regulation W and we few years ago that we were so close to such an called on the various trades involved to come in effort, and I believe that until recently there has and discuss the matter with us, we had no finer been little realization of what this will require. If cooperation, no better response, than from Mr. it is to be a long effort, and it may have to be, our Morris and the officials of your Association, who whole economy will be involved, and I agree with accepted every invitation we extended and re- Professor Sly that, whatever the nature of the war, sponded in the most friendly and cooperative man- so far as we are concerned, so far as our economy ner, and I thought it was as little as I could do to is concerned, we are already into it, way into it, come here this morning and express to you our real and we will be a long time getting out. The ad- appreciation of the help you people have given us. vantage obviously lies in making it as short an Also, I was influenced somewhat, of course, by the effort as possible, because the further we go, the fact that I was being invited back to Georgia. If greater the difficulties that will develop. How you men don't want a Georgian to visit Georgia, short we can make it, only time will tell. you'd better not ask him. As a matter of fact, I have felt from the beginning of our struggles with As one of the problems facing us today, we must this situation that we had much to learn from the consider inflation. Historically, inflations usually Morris Plan bankers. Mr. McFadden gave some have followed wars. In the six years that I have slightly astronomical figures this morning, but Mr. been in Washington, I have never found all the Morris tells me that you have had on your books agencies of the Government so completely united in at various times during your existence twenty-four any cause as they are today in their determination million accounts. That is a large number and to prevent inflation, if it is humanly possible to means that you have had many contacts and that prevent it. Again we have no way of knowing you have considered the consumer and the custo- whether that can be done. Of course we are go- mer. In this matter of regulating consumer and ing to try every possible device that might pre- installment credit, it becomes absolutely necessary vent it, because its cost to our country, to our that we should know something not only about economy, to our standard of living, will be disas- the people who represent the trades involved, but trous if it comes upon us. It not only will greatly about the man whose affairs we arc, after all, regu- increase the cost of the defense effort in what the lating—the consumer, the purchaser, the borrower. Government will have to pay for what it must buy, I have found that I could learn much in contacts but it will completely demoralize our economic with you people. system. We must remember that the tremendous governmental expenditures incidental to the defense Mr. President, I would like this morning, if I effort, creating jobs and raising the national in- may, to try to put Regulation W in its true per- come, is resulting in a rapidly increasing demand spective. It has a background; it did not come and ability to pay for a diminishing supply of about overnight; it is not just a spontaneous effort things the people want to buy. If that won't run on the part of the Government to extend the field up prices, I don't know what will. They are of regulation. I listened with great interest to already rising rapidly. There would be no problem Professor Sly's very astute, very profound analysis if we could increase civilian production to take care of the situation facing this country today. I appre- of a rising national income, but after all our plant ciate the fact that he gave you a background facilities are limited; the supply of steel and labor, against which I would like to have you consider especially skilled labor, is limited, and we are in an Regulation W. all-out effort, a great defense effort; therefore we I think we must first remember that the Repub- cannot hope for many years to see civilian produc- lic is faced with the greatest crisis in its history. tion increased to a point where there will be ade- The dangers that beset our future are tremendous. quate goods to meet a demand that is so rapidly The difficulties are great. Unquestionably we are increasing. In such a situation, the Government engaged in an all-out effort. No longer are wars ZFrllC must not overlook any possible means to the end the present total be allowed to increase somewhat both of the defense effort and of preventing infla- in relation to a rising economy? I think that tion. In such an atmosphere and at such a time, finally, at some point along the line, decisions on Government becomes an increasingly important fac- these questions will have to be made. It must be tor, with which all must deal. borne in mind that in the whole field of credit con- It is rather interesting and might repay your trol, action can be taken predicated on the most study, if you will look at what has been recently careful research, the most careful consideration of done in Canada about consumer and installment available statistics, after conference with the people credit. Their statements, their press releases and involved, and with reasonable assurance that the their regulations reflect some of the experiences we action will produce a certain result, and such ac- have already had, but I think you will be im- tion may well produce wholly unpredictable psy- pressed, as I have been impressed, with the idea chological effects. Therefore, I am inclined to be- that Canada has gone much faster, much further in lieve that as of today, what has already been done this regulation than we have done. This again, to may have produced more results than might have my mind, illustrates the increasing role of Gov- been anticipated at the time the regulation was ernment as a country gets further into a war effort, promulgated. I do not know that we have ade- because Canada is further into it than we are, and quate statistics on which to base a conclusion as therefore when Canada attacks the problem of con- yet, but I am inclined to believe that, as you move sumer installment credit, it moves much more rapidly. into any field of credit control, there are certain imponderables, certain intangible factors involved Now why are you people concerned with any part which you cannot prejudge accurately. Human of the problem that I have stated? You are con- nature reacts to what Government does, at times, cerned with it because, as part of this anti-infla- somewhat beyond the exact letter of the regula- tionary effort, our Government is attempting to tion, so that I think when ultimately we come regulate consumer credit, and, as Mr. Morris said, to consider what are our major objectives, what we you gentlemen are the founders, the originators want to accomplish, there will always be before us in large part, of the idea of consumer credit, and the question: Is the present volume of consumer therefore you have a great stake in what is done. and installment credit too large, not large enough There are three obvious reasons for regulating or just about right? That has not been a part as installment and consumer credit. I am using those yet of the consideration of this problem. two terms rather interchangeably, because they are so closely related that it is impossible to use one Now why, if it was necessary in the opinion of term in connection with this regulation without at the Government to regulate installment purchases, times meaning both. The first reason is the most should we have stepped over and attempted to regu- obvious of all: The Government wants to curb the late consumer credit? I rather imagine that all of demand for these consumer durable goods, the you know the answer. In the first place, the vol- materials of which are essential for the defense ume of consumer credit is an important factor in program. The second is that there must be an inflationary periods. In the second place, if you effort to dampen consumer demand to prevent in- regulate installment selling very strictly, unques- flationary price rises. The third reason for doing tionably the man who would otherwise have bought anything at all about consumer and installment on the installment plan will step over somewhere credit is the effort to create a backlog of purchas- to some lending agency and borrow the money on ing power that can come into action when the post- the installment plan and go out and purchase the defense period is reached. This was an important article with the cash resulting from his loan. Mr. reason for Regulation W, and undoubtedly we will Morris was very kind in what he said about the find in the course of time that this has been ac- conferences we had in Washington with the trades complished. involved. On the other hand, I think we have ob- It seems to me that ultimately we are faced tained extraordinarily fine cooperation from all with decisions which the Board has not made, and those trades. I do not believe that the cooperation I would like at this point to say something I might would have been half as effective as it has been have said earlier. The Board is never bound by had the vendor not believed that the lender would anything that any one member says. It only speaks be put under the some restriction, under the same as a Board, so that any one of us is free to say regulation, and that both would be treated fairly. what he individually pleases, but we express our in- Lending and vending arc too inseparably connected dividual views when we speak, and no one of the to be divorced in this regulation. Again, the rea- members of the Board is ever bound by what some son for regulating consumer installment credit is other member says, unless he is quoting what the that history teaches us that, as the national in- Board has already done. It seems to me that ulti- come increases, as people have more money to mately we face these decisions: Should the volume spend, they incur more debt. On the face of it, of consumer and installment credit be held at its that would not seem probable, but, if the records present level? Should the total be reduced? Should are at all credible, that has been the case, so that 9 this regulation is an effort to curtail and curb control. The first and oldest is the general or spending at a time when too large a volume of over-all system of influencing the volume of credit installment buying or consumer credit is not desir- —the use by the System of the discount rate, open able in the public interest. market operations and reserve requirements. These While there was a reason for putting a check are controls that operate on the whole banking rein on borrowing, I do not want any of you system, where banks are members of the Federal to have the impression that we had any exag- Reserve System, and are components of a general gerated idea as to what this regulation can functional method of credit control. Every one is do in the way of preventing inflation. At best, affected alike by what you do. If you gentlemen it is but little. It is necessary to implement other have a feeling at the present time that we may be efforts of the Government. If inflation is to be curtailing your expansion of credit, I would like to prevented, there are other methods that the Gov- remind you that we have at present tied up in ernment must use and use promptly and wisely: banks that are members of the Federal Reserve Taxation, of course; priorities; allocations—per- System something over nine billion dollars in re- haps, at a point, rationing; price control; a fiscal quired reserves, which would be subject to quite a policy adapted to the existing difficulties of the substantial expansion if these banks were free to use present situation. All of these things supersede these reserves and if the demand existed for their the regulation of installment and consumer credit use. We have only recently reduced the expansive as implements in the hands of the Government to power of reserve funds from about twenty-nine bil- do this particular job. But it was felt, if there lions to nineteen billions. We have done that were to be price controls, allocations and priorities since we formulated Regulation W, so we arc not along with an increasing public income, creating operating alone on you, but we are restraining greater demand for the things to be sold, that with- credit to the member banks of the System by this out some regulation of this type of credit, there over-all method. would be a tremendous increase in such credit, and The second method of regulating credit by the that undoubtedly is not now desirable. Government is known as the direct method, where There is another point that should be made. This you go into the individual bank and through the is not an effort in any sense to prohibit installment processes of supervision attempt to tell that bank or consumer credit. That type of credit has served what it may do. That is seldom used and is not a tremendously useful purpose in our country. particularly effective in the over-all picture. Properly used, properly timed, I know of nothing The third, the one under which Regulation W that can contribute more to the standard of living comes, has become known as the selective method; than that type of credit. But timing is most im- that is, you select some particular type of credit portant, and therefore there is that additional rea- and attempt to restrict the volume of that particular son for the Government's stepping in at this point. type of credit. One of the early instances of such It may have occurred to some of you gentlemen control in our country came about when Congress to wonder why the Federal Reserve System was directed the Federal Reserve to regulate margin picked to administer this regulation. It was felt requirements on stock market collateral. The Mor- by those who had to make the final decision that ris Plan banks, so far as they extend credit on they should use an existing agency having pri- stock market collateral, are under that regulation mary responsibility with respect to the determina- and have been for some time. Somewhere between tion and administration of credit policy. There was 1024 and 1929, looking at the expansion of credit some advantage in using an agency with some in the stock market field, the Government com- twenty-five years' experience in the credit field. menced to think that some selective form of credit The Federal Reserve System, like every other liv- control would have to be applied, and our Regula- ing organism, is always developing; it is not static; tions T and U are the outcome of that. I also have it has to be dynamic to go on, and there has been a feeling that perhaps this power to differentiate in a slow but sure evolutionary process in its entire the selection of methods of credit control may have history, until today we find that from the results implications that deserve the type of study sug- of experience it is recognized that the System has gested this morning by Professor Sly. It may be a major responsibility to contribute to the forma- that you would find in such a study that a selective tion of a national credit policy. That, perhaps, method may be not only the most effective but per- really is its principal reason for being just at the haps the most acceptable. That, I do not know. present time. Therefore, it was felt that, if this That is certainly an open question. It appears per- type of credit had to be regulated, it would be plexing; is intensely interesting and is going to af- desirable to turn it over to an agency already at fect the whole banking system in the course of the work in the broad field of credit. next few years, and just such a study as he sug- gested would be a help to those in Government There are three types of credit control, and I who have the responsibility for what is done. Those think you gentlemen, as bankers, have a great stake decisions will have to be made and preference will in considering what is to be the final form of that 10 have to be expressed between these different meth- I have that we can finally establish and maintain ods of controlling credit over a period of many the right sort of public relations with this enorm- years. Men like Clark, Nugent and Riefier devoted ous group is based on the fact that the administra- a great deal of time and study to consumer credit. tion of the regulation is decentralized in the twelve Their studies have been invaluable to us in the Federal Reserve Banks and their twenty-four present emergency. Branches. This gives us a nation-wide coverage We were giving study to the subject of selective of thirty-six institutions actually administering the controls before the present emergency. A resolu- regulation, and it is possible for them to reach an tion was approved by the Senate on August 4, 1939, enormous number of people and find out whether looking to an over-all study of the whole problem the regulation is fair and just, not only to the busi- of banking, and we were considering all of the nesses involved but to the people with whom those questions involved in such a study following the businesses are dealing, and I think that only in that passage of this resolution. One of the questions way can we hope to get as wide a knowledge of that had to be considered was the necessity or de- what are the rights of the people, whose buying sirability of some form of regulation of consumer and borrowing we are regulating, as I would like. and installment credit, so we had some background We announced at the first meeting that the of the problem before we found ourselves faced regulation was subject to amendment whenever we with the task of formulating a regulation under the found out that it was not doing what we wanted it Presidential Order. The President's Order of to do. We have already amended it several times. August 9, 1941, necessitated a regulation, and we We propose to amend the regulation constantly only had a brief period in which to formulate this during its experimental period, seeking always to regulation, but we did have some advantage in that carry out the objectives of the President's order and we had been giving the problem study in an aca- trying at all times to be as fair as possible to the demic sense for quite a few years. consumer and trades involved. We do not seek to As speedily as possible we formulated a regula- upset existing trade practices. In that connection, tion, but before issuing it we called upon all the as Mr. Morris knows and several of you gentle- trades that would come under the regulation to send men present at these meetings know, we took the representatives to Washington to discuss the mat- position from the beginning and still adhere to it ter with us. We realized that time was short, but that we are not engaged in writing fair trade prac- it never would have done to have let the Presi- tice codcs, and I hope we never try. In the first dent's Order stand without a regulation, be- place, it is difficult to regulate consumer installment cause of the situation that might have devel- credit. In my opinion, it would be utterly im- oped in the interim. This meeting with the trades possible for us to assume that we will clean up was most satisfactory to us. We put the bad practices in the trades involved under this regulation before these groups. They were frank regulation. You gentlemen are fully capable of and helpful in their discussion, and out of that grew doing that, each in your own trade, and if we once the final form of the regulation as first promul- became involved in such an undertaking, we would gated. be lost in a bypath, out of which I do not see any One question came up that has never been settled way that we could escape. to my satisfaction. We knew we had to reach the Again, I would like to say that we are pro- trades. We did reach them, as I say, but what ceeding on the trial and error method. We have were we to do about the consumer—the buyer of nothing else on which to proceed. We will make these goods—the housewives, who are the principal mistakes. We have made them. We will correct users of installment credit? We could never quite them whenever you can satisfy us that they need find out how to reach that group of people. This correction. We also need tremendous additional group represents many millions, almost as many as research in this field. We need better, more accu- Mr. McFaddeti says you gentlemen deal with. rate, fuller statistics than we yet have had. We (Laughter). A professional consumer group was have done an administrative job, but we have a re- not exactly what we wanted. It is an obvious con- search job that is just as important, because, as clusion that we are all consumers and the best Dr. Sly told you, only on sound research can you way to reach the people of this country is to give base sound administration; that is absolutely neces- the matter the widest possible publicity, and there- sary. With your help and the help of the other fore we turned the regulation over to the press people involved, we hope to get to that before long. at the time we first presented it to the trades and Finally, the decisions regarding this regulation before it was actually issued, and they kindly gave are decisions made by a Board, not by an indi- it wide distribution and gave us an opportunity, vidual. At present, the five members of the Board through this means, to get some response from the of Governors of the Federal Reserve System must consumer group, though never enough to satisfy reach, by a majority decision, a conclusion on any me. Actually we have not had enough direct con- policy involving the administration of this regula- tact with consumers to satisfy me. The only hope tion. It is not an administration of any one man. 11 It is administration by a Board aided by its staff MR. ROYDEN C. BRYAN (Wilmington, and by the staffs of the thirty-six institutions com- Del.) : Those who have not made any reservations posing the Federal Reserve Banks and their for the historical tour, will please see me. The Branches. Again, I thank your Association, your hotel provides transportation for eighteen or twenty officers and your members for the very great help people; if there are some others who have their you have given us in our difficult task. cars and will drive them or permit us to put some (The members arose and applauded.) passengers in them or find some one who can drive PRESIDENT STOUT: We arc thankful to them, we will be very glad to have three or four Governor Ransom for that message, giving us the more cars. The tour will leave the hotel at 2:30. background of the regulation which has become so PRESIDENT STOUT: I am asked by the much a part of our daily lives. We are not only management of the hotel to announce that all those gratified to have that message and have it from who are not traveling by private automobiles and the source from which it came, but we are honored have not completed the transportation arrangements by his presence with us. We know from past ex- for their departure, will please do so as soon as perience that when you get into the cross fire of possible. These arrangements should be made at question and answer, you arc likely to get into the transportation desk in the hotel. trouble. On more than one occasion I have been Immediately following this meeting, we will have on the receiving end, where dodging the problem the official convention photograph on the steps. requires quick thinking. There is no limit to the The Board of Governors meeting will be held time to which such a discussion may run, but I am at luncheon in the private dining room. That is a going to interrupt the program for announcements very important meeting and I hope that every- to be made at this time. body will be there. Is there any announcement from the Golf Com- Now, with apologies to our next speaker for that mittee? I have a telegram from the chairman of interruption, I want to introduce to you Air. W. that committee, Mr. Braun, regretting his inability Pollard Turman, who has graciously come here to attend. from the Atlanta Federal Reserve Bank, of which I regret exceedingly my inability to be he is counsel, to answer your questions, and, as I with you due to a severe cold. It was said before, God be with him if lie gets some of very difficult for me to cancel my plans as those that have been thrown at me. We are glad this is the first Morris Plan national con- to have you here, Mr. Turman. (Applause). vention I have missed since 1915. Please Questions and Answers on Regulation W extend my best regards to all present and convey my sincere wishes for a most suc- MR. W. POLLARD TURMAN: Mr. Chair- cessful meeting. FRANK J. BRAUN. man, Ladies and Gentlemen: I feel tremendously I know we are all sorry indeed that lie cannot be honored to have this opportunity of meeting with with us, and since he cannot and he was going to you today. I have attended one or two of the handle the golf tournaments, he turned over his group meetings of the Morris Plan Bank and have plans and ideas to John Ilollenbeck. Have you enjoyed them very much. I realize, of course, as any announcement to make, Mr. Ilollenbeck? your President has stated, that I am a marked MR. JOHN HOLLENBECK (Springfield, man, but I am sure that the shots will not be Ohio) : No, I have not. We will have some to- vitally aimed, as Mr. McFadden was discussing morrow. the subject earlier today. A friend of mine, a prac- PRESIDENT STOUT: Is there any an- tising attorney in Atlanta, saw me on the street nouncement from the News and Publicity Com- just after the regulation was originally issued, and mittee? he said, "I have got a client that is subject to that MR. RAYMOND W. HARTLEY (Provi- W business; will you send me a copy of it?" I dence) : I have nothing to say at all except that said, "Of course I will be glad to," and when I the situation is well in hand. got back to the office I sent him one. I got a very PRESIDENT STOUT: Mr. Small? nice letter next day in which he said, "I appreciate MR. HARRY E. SMALL (Cleveland): I your sending me a copy of regulation W, but you would like a meeting of the Nominations Commit- failed to include the Rosetta Stone with it." tee at 6 o'clock in the Band Room. (Laughter). PRESIDENT STOUT: Resolutions Commit- I am sure that it would be imposing on you to tee, Mr. Wise. discuss the provisions of the original regulation. MR. RAY E. WISE (Dayton) : I would like I think you would be interested, however, in a brief to meet with my committee tonight at 6 o'clock. review of the recent amendments that become ef- PRESIDENT STOUT: Sectional Associa- fective December 1, and so if you have no objec- tions; Mr. Kenney. (No announcement.) tion, I would like to outline them briefly, and then PRESIDENT STOUT: Entertainment Com- go into a forum discussion of any problem which mittee. you might have. 12 Amendment No. 2, effective December 1, includes be interested in having me mention them briefly. in the definition of installment loan credit, install- If there arc any questions on those, of course they ment loans that are for §1,500 or less rather than will be in order and if there are any questions on $1,000 or less, as originally prescribed. In addi- the original regulation, I will be pleased to attempt tion, the minimum down payment that might be to answer them. required, if it is or below, need not be obtained. PRESIDENT STOUT : I know there are a lot The minimum monthly payment of §5, as set out of questions floating around here because we get in Section 4 (e) and 5 (c) has been omitted. In- something like twenty-three or twenty-four a day. stallment loans, as I stated, of $1,500 or less, and Now you have the final authority right here in obtained for the purpose of purchasing listed ar- front of you. ticles, are subject to the same restriction as loans MR. TURMAN: Not the final authority. I secured by listed articles; that is, the amount may have a. good backing here, undoubtedly, but re- be only the maximum credit value of those listed member that Air. Ransom said that what the speak- articles and not more than eighteen months' ma- er said personally did not bind the Board. I will turity. After January 1, 1942, a purpose statement say this, the banks are attempting to give these is required for all installment loans of $1,500 or interpretations: first, those that have been issued less. Between December 1 and until January 1, by the Board of Governors, and upon official rul- when the Board of Governors will place in your ing. They number some hundred and six. We hands the purpose statements, you may use any have also attempted to assist in interpreting pro- statement that contains that information as set out visions, although they have not been ruled upon in Section 5 (d) of the amended declaration. Sec- by the Board, if we feel that we arc reasonably tion 5 (f) now provides that installment loans for correct in doing so, and I would say that if there the purpose of making down payments are pro- has been a ruling by the Board of Governors, I hibited. That probably closes up a possible injus- will attempt to call your attention to it and quote tice that might have existed in the original regula- it, and if it has not been ruled upon by the Board, tion. Section 6 (a) was further amended so that I will attempt to explain it if I feel that I am not loans to finance construction or purchase entire over my head, and if I am over my head I will get residential or other structures are exempt along the Board of Governors to clarify it for us. Don't with those loans that arc secured by first mortgages you think that is a fair statement? on real estate. PESIDENT STOUT: Do you think you can quote a hundred and six rulings? (Laughter). Section 6 (1) now exempts business loans for operation purposes, not for the purpose of purchas- MR. TURMAN: I saw several people looking ing listed articles. Section 8, which deals with at that brief case when I brought it up here. No, revisions or renewals and consolidations, has been I am not going to read a hundred and six rulings. the section that probably you have had the most MR. E. G. BREEDLOVE (Jacksonville): I difficulty with thus far. That was to have been would like to ask a question in regard to install- effective November 1. Under Amendment No. 2 ment buying and add-ons. Do you mean to say the effective date has been postponed until Decem- that a man who had an account, five months, of re- ber 1, 1941. An amended section, 8 (b) takes carc stricted items and made purchases and bought of the question of add-ons, so that now add-ons something else, that from that date on his revis- may be treated in one of two ways: the add-ons ion was set up for fifteen months? But from that may be considered as a separate transaction or con- date on it would make the contract run for fifteen solidated so that the re-payments are at least as months regardless of the length of time it had run large as the original credit and that the credit will before ? be repaid within fifteen months from the time of MR. TURMAN : Yes, provided the amount of the consolidation. A statement of necessity still the monthly payments was not decreased by the may be obtained—in good faith—to prevent undue consolidation. hardship, and the maturity in that event is eighteen MR. BREEDLOVE: The next question is in months from the date the statement of necessity is regard to these outstanding items; in other words, obtained. That, of course, is the same as was a man comes into our bank and has a loan with originally stipulated, though the section has been another bank, and this is subsequent to September revised as to wording. Section 9 (f) is a new 1; lie has had it for five months and he wants to section regarding loans to farmers, and it stipulates borrow from our bank; what would be the proper that they may be obtained in any manner if the handling of that particular loan? The customary loan conforms to the amount and to the maximum time with our bank is twelve months and he has an maturity and at least one-half of the loan is to be eighteen months loan at the time. repaid within one-half of the maximum maturity MR. TURMAN: You can make any negotia- applicable. tion with your customer that you see fit to make, Those are the high lights of the amendment if the maturity is less than the regulation would re- quire; your problem is covered under Section No. 2, effective December 1. I thought you would 13 8 (c), which says that "Any extension of install- restriction in installment sale terms in the pur- ment credit, the proceeds of which a registrant chase of that article if it is under $1,500, extending knows or has reason to know will be used in over eighteen months? Is there any restriction on whole or in part to reduce or retire any extension installment credit? of installment sale credit or installment loan credit MR. TURMAN: All installment sales secured not held by such registrant, shall be subject to the by a listed article— requirements of Section 8 (a) or 8 (b), includ- MR. STRENG: I mean an unrestricted article. in the provisos thereof, to the same extent as if MR. TURMAN: I do not think the regulation the obligation being reduced or retired were held covers the sale of an unlisted article. by the registrant." So you might then revise his MR. STRENG: It would cover the installment obligation in any manner that you could revise it loan credit. under the regulations if you had made that original PRESIDENT STOUT: The point he is mak- extension of credit. Now if you have an exten- ing is that the lender would be handicapped by the sion of credit that is held elsewhere by your cus- regulation but the borrower would not, on un- tomer, that is, a twelve months contract, I take it listed articles. Is that correct, or not? you would be permitted to advance him the money MR. TURMAN: Well, I think that is correct. to retire that credit elsewhere and you could then The purpose statement is to take care of just that set it up in any way that you wanted to, so long as situation. Is not that correct, Mr. Ransom? it did not go beyond the eighteen months period MR. RANSOM: The purpose statement is de- from the original extension of credit. sirable for several reasons. If there be a change MR. WILLIAM A. DEWEES (Waterloo): in the installment terms; suppose that instead of Taking advantage of Amendment No. I, if a man eighteen months an automobile must be bought on were to renew a loan held by his own institution fifteen months, then cash lending, in order to con- or another institution and made it for fifteen form, would have to be on the same terms. As months, and then subsequently wanted to add on I understand your question, however, you ask if and make another loan, could he continuously do unlisted articles could be sold on any terms that that, if he did not make the maturity date exceed the seller chose to sell them. Yes, because that fifteen months, that is, carry it on to the second type of call is not regulated. and third generation? MR. STRENG: It would affect the lender MR. TURMAN: If the obligation is taken but not the borrower. over by your bank and the obligation elsewhere MR. RANSOM: Yes. Your point is this, that is retired, then you would have the eighteen months if the borrower came to you and said, "I am buy- period from the original extension of credit by the ing unlisted articles; can I get as long terms from other bank, within which to make any revision you as I could from the merchants?" Your answer you see fit. When you come to the question of con- would be no, if the vendor's terms exceeded terms solidation under option 2 of section 8 (b), you required for listed articles. That is a problem with might reorganize and consolidate that obligation which we may have to deal in the future. with a new advance provided the monthly pay- MR. STRENG: There is a movement, an ments were not less than the original obligation intensive movement in the local groups and the stipulated and they were set up in such a way that I'TIA for the rehabilitation of old property; does the entire consolidated obligation is paid out within an exception have to be asked for each individual a fifteen months period. application? MR. DEW ELS: If you go beyond that, let us MR. TURMAN: The provision for defense say at the end of ten months you wanted to renew housing is found in Section 6 (e). that and then add more to it, could you take that MR. STRENG: They are starting a mass for another fifteen months? movement, groups coining to Washington from MR. TURMAN: Your consolidation? Yes sir, FHA to try to induce people to cooperate in this you follow the same standard you did at the time movement. I want to know if, in each case, you of the first consolidation. have to get an exemption from Washington? MR. DEWEES: And you can do that a third MR. TURMAN: I think that that matter has time? been placed in the hands of the Regional office of MR. TURMAN: Yes, sir, but I believe you the Defense Housing Coordinator. will find that it will work out practically because MR. RANSOM: If the field representative of the amount of the monthly payments that will of the Defense Coordinator certifies that it is a be required. definite modernization housing project, necessary MR. JESSE F. STRENG (Louisville): In- for the defense program, that clears it up, as I stallment loan credit under §1,500 is limited to recall. eighteen months; therefore if a man wanted to pur- MR. TURMAN: But I do not know of any chase unrestricted articles, the credit could not ex- general over-all authorization that has been is- tend beyond eighteen months; would there be any sued, so that each specific case would have to be 14 presented. understanding and there might subsequently take MR. RANSOM: The Defense Coordinator place renewals, it is not necessarily subject to the has indicated in advance the defense areas within regulation. It is however a very delicate question. which specific exemptions will be granted. MR. RANSOM : It seems to me that one of MR. STRENG: This is not a defense area. the amendments regulating loans for business pur- MR. RALPH W. PITMAN (Philadelphia): poses may take care of some of the questions now I would like to ask Governor Ransom a question. perplexing commercial bankers. I would not have In Philadelphia, Wanamaker's have what is called had any difficulty at all in determining, if a man a revolving credit; if you go into their store, they came in to make a thirty, sixty or ninety day loan, will approve your credit let us say, for four whether it came under this regulation. Most of hundred dollars. If, during the next month, you such loans are renewed, certainly in part, but reduce that §400; supposing you have used up there is seldom any preliminary agreement or your $400 credit, you reduce it, let's say §30, you understanding that they will be renewed; if there may then go in and buy $30 more of merchandise. is, it would come under the installment regulation, I am talking about non-listed articles. They call but I think the exemption of loans for business it a revolving credit. The result is that they are purposes by this new amendment may get rid of i" the banking business in a big way, so that a great many of the cases in the commercial banks. it is a loan that is never paid off. It certainly While the amendment may not be so helpful to you has possibilities, in my opinion. They are much people, as I understand most of your loans are not more dangerous than a lot of other extensions of for business purposes, I believe that any banker credit; they have hundreds of thousands of dollars making a loan of that type can determine it to his tied up that they will never get back on that basis. own satisfaction. I would like to ask if there is any intention, on the A MEMBER: I was wondering if there were part of the Federal Reserve Board, to regulate some liberal interpretations? that sort of credit? MR. RANSOM: The final answer may depend MR. RANSOM: It is not now subject to on the volume of loans shifted from installment Regulation W. Of course it is possible that, in the lending to the banking basis of 30, 60 and 90 day light of future developments, it may become neces- paper. sary to regulate book accounts, but it is not now MR. MALCOLM C. ENGSTROM (Rich- under consideration. In the particular instance mond) : In Virginia we have had some little cited—that of a man with a revolving credit of experience with these defense housing loans, and $400 who wanted to buy a refrigerator, the trans- we secured from the Federal Reserve Bank of action might actually be an installment sale. If so, Richmond a series of the forms that have to be it would be subject to regulation. The facts of the completed by both the borrower and the lending case would determine that. The Canadian list institution, and our instructions are to have those is very much longer than ours. It lists many times executed by the borrower and the lender and sent the number of articles that we do. One reason to the Federal Reserve Bank, and if they are in why we started with a small list was because we order they can be returned to us and the loan can felt experience was needed before we got into too be made without resort to Section 16. I think wide an area. We took those articles most obvious- the few we have had took just about a week to ly within the defense program. It is possible that get completed and returned. finally the list may be longer and possibly even AIR. TURMAN: It would require that action include some regulation of book accounts. Natur- be taken in each specific case. ally we don't want to start widening the area any MR. ENGSTROM: Yes, action has to be sooner than we have to and only in the light of taken in each specific case. The regulation itself experience and changing conditions. refers to the fact that no given area will be named MR. W. G. AVERY (Schenectady) : Suppose as a defense area, but each specific loan or account a banker makes a three months loan with no de- has to be designated as a part of the defense hous- finite understanding about re-payment at the end ing program. of three months; you know in your heart that he MR. RANSOM : The reason for that was that is not going to pay that off at the end of three it immediately became apparent that the entire months; is not that contract an installment loan? United States was going to become a defense area. MR. TURMAN: I knew that question was Actually one of the difficulties we have encountered coming. The Board has issued a ruling on that and continue to encounter is the necessity for forms point. That is W 47. If there is a loan made under this regulation. We are very reluctant to payable at a fixed date and there is an agreement give anybody additional burdens in the way of or understanding between the lender and the bor- filling out forms. On the other hand, we arc rower that it will be paid in fact in installments, administering a statute; the penalties under it are that is regarded as an installment loan, subject to severe; therefore the language in the regulation the regulations; but if there is no agreement or does have to be legal and clear; it has to be as 15 precise as we can make it; the forms must he this regulation—this is a legal question and I only complete enough to protect the lender and the suggest it as possibility, maybe Mr. Turman will vendor as well as the customer. That is a neces- tell me that I am wrong—it might be possible to sity. There is not any way to get out of it and we put the entire responsibility on the lender, exon- are trying to do the best job we can in making erating the borrower from any responsibility other the forms as few, as short and as simple as we can. than what he may owe to the lender for making a We liave under consideration the problem of a re- false statement; in other words, instead of involv- gistration form. It has to be issued soon and we ing many millions of people in making a statement have been working continuously and have advanced about which they may have some uncertainty, that form from a very alarming looking document we may just say to the lender, "You have got to be when I first saw it, and one I would have ap- sure that the man makes a correct statement." All proached with a good deal of fear and trembling those measures are still under consideration, but had I been on the filling-out end, to one which I would like to ask you people what form of state- at the present time is very much shorter and I ment you would like to have used? Now Mr. think simpler. It probably will be improved, but Morris and I have discussed this on other oc- that is one thing you cannot escape under regula- casions, and I think I know his views pretty well. tions of this kind—imposing on those subject to I would like to ask specifically which form of regulations. I didn't know before that it took statement you would like to use? Would you four forms to declare a housing project in the prefer a negative or a positive statement? defense area, but if the Richmond bank tells you MR. ENGSTROM: That is a little difficult to that, I am sure they are correct. answer. My only point about giving the borrower MR. ENGSTROM: In Section 5 (d) we a copy of the statement is primarily a practical come to the famous statement of borrower, a form one; it will be necessary that our loan officers prepared and prescribed by the Board. I have been keep a carbon there on the desk, and it would be informed somewhere that, while the regulation a very cumbersome arrangement. As to the re- itself does not indicate that a copy of that state- sponsibility of the borrower and the certificate ment must be given to the borrower, nevertheless that he receives a copy, I would like to say that the statement itself will carry a certification from when a borrower signs a note he does not get a the borrower that he has received a copy of it. copy of the note he signs. Do you know whether or not the lending institu- MR. TURMAN: He does not often read the tions will be required to give a copy of the state- note. ment to the borrower? A MEMBER: If lie did, he wouldn't sign it. MR. RANSOM: I do not know whether or (Laughter). not that will be required. Some state statutes may MR. RANSOM: The difficulty of course is require it. There is a question I would like to ask that in the instance of the note he generally knows you gentlemen. The form of the purpose test can what he is signing. He is not incurring the liabil- either be negative or positive; it can state as a ity of a fine and possible imprisonment; he does not fact that the purpose of the loan is not to purchase read the note but he can have a copy of it if he or make a payment on any of the listed articles; wants it. Someone says if he did read it, he might it can be positive in stating the purpose for which not sign it, but this is a somewhat different prob- the money is borrowed, leaving the lender and the lem ; the man who signs that statement is incurring government to determine whether or not the pur- responsibility under a Federal statute. Therefore pose is one which comes under the regulation. I rather think that good relations, so far as we The form can be mandatory in that it lias to be are concerned and so far as you people arc con- a form prepared by us and used by the lender in cerned, might be on safer ground if, by any device each instance. Now my own personal preference whatever, we could say to the borrower, "You are would be for a permissive, negative form of purpose under no legal responsibility in the matter, we test. I may be the only man connected with the are relying on the lender. You think the borrower Federal Reserve System who feels that way about is a responsible party or you would not be lending it; I do not know. Probably therefore that is not him money. I do not know whether it is possible what you are going to get. At the same time there to let the borrower escape entirely any responsi- are very difficult questions involved, and I think bility in the matter of this statement, but if he is that we will benefit from a good deal of consulta- to face the possibility of fine and imprisonment, tion before we finally reach a conclusion on that he certainly is entitled to go off with a copy of point. It seems to me, however, that the bor- what he has signed if he wants it. rower is entitled to a copy of whatever he signs MR. ENGSTROM: I can see that all right. if he wants it. I should think you would want PRESIDENT STOUT: You have him facing that for your own protection, because if he cer- that already, haven't you, Governor, under the tifies that he has received a copy of it, then lie is statute against obtaining money under false pre- on notice. Of course it might be possible, under tenses? 16 MR. RANSOM: If he makes a false state- curtailing credit you certainly are indirectly af- ment. fecting the price structure, which is part of what PRESIDENT STOUT: I know my first re- we are dealing with. If you answer that by saying action is that you are right, you are going to have that the price administrator could fix a price and to follow this to a conclusion. As it is, I am going that more could not be paid, then you would still to attempt to answer, insofar as the conferees who have a question of credit, because under the exist- met in Washington are concerned, the inquiries you ing scheme of things there is a considerable profit make. We selected the positive form as out- in the financing of automobiles. The tendency preference. would be to stretch those payments out indefinitely, A MEMBER: So as to he in a hopeless because the seller would gain a profit on the minority. financing that he might not gain under price con- MR. GEORGE M. CLARK (Chattanooga) : trol. So I do not see how it is possible, under the It seems perfectly apparent that the confusion scheme of things under which we are living today, which is in evidence about this regulation may to hope to escape this type of regulation, but when grow. In diversified operations, we have to have a you speak of perplexities, you simply point out Vice President in charge of interpretation and what I tried to say a while ago; namely, there regulation, and if I have to be the operating head may finally be a choice between some method of of my bank, I will have to give up. I do not have over-all credit control and a series of highly selec- the close daily touch with our diversified type of tive controls. lending to keep up, I am afraid, and so, for myself, PRESIDENT STOUT: I am loath to bring I would like to have counsel who would always this meeting to a close, but we must do it. I want be available, and it may become worse. I think to express to you, Mr. Turman, our frank and we are fortunate in having approached this very sincere hope that you can stay over and be with us commendable government agency, but I wonder if during the rest of the convention, and particularly there is any feeling on the part of the Federal that you and Governor Ransom will be with us Reserve Board that allocations and priorities arc tonight when we get into a round table discussion going to settle this thing to such an extent that which will inevitably head back to Regulation W. all regulation is a tempest in a teapot? If we It goes without saying that a similar invitation is cannot get cars, as may happen, then why any extended to the other speakers. kind of regulation as to how they are financed? MR. TURMAN: I have attended several Is there any feeling that allocations and priorities forums on Regulation W and I have never been will solve this whole problem and eliminate the able to shift the responsibility of them over before. necessity for such regulation? It was unintentionally done, but I have enjoyed MR. RA.NSOM: May I try to answer that this discussion more than any of the other dis- one? The original suggestion of this regulation cussions I have ever had. (Applause). came from a very important section of the auto- PRESIDENT STOUT: I think it is only mobile industry. Those people felt that instead of fair to say at this point what I had intended to having priorities, allocations and a limited number say in the presidential address. With it I am of cars to be manufactured, that the whole problem sure you will agree after listening to these two could be controlled by regulating the credit ex- gentlemen; that is, that if we must be under the tended on automobiles. I was skeptical about credit control or semi-control of a governmental body, regulation producing such a result. If no new thank God it is in the hands of these intelligent, ears were manufactured at all, there would be a understanding and cooperative gentlemen. (Ap- tremendous demand for cars already in existence plause). and wouldn't there be great pressure to buy those . . . After attention had been called to the cars at whatever price somebody might put on Board of Governors luncheon and the Round them? Now if you can limit that demand by Table Discussion the session adjourned . . .

Ronald Ransom (1941, November 4). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19411105_ransom

@misc{wtfs_speech_19411105_ransom,
  author = {Ronald Ransom},
  title = {Speech},
  year = {1941},
  month = {Nov},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19411105_ransom},
  note = {Retrieved via When the Fed Speaks corpus}
}