Speech

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Statement of Chairman Eccles Before Senate Banking and Currency Committee on REGULATION OF CONSUMER INSTALMENT CREDIT June 25, 1947 The Board of Governors of the Federal Reserve System has recommended to the Chairmen of the Senate and House Banking and Currency Committees a bill which would authorize the Board to continue on a specific legislative basis the regula­ tion of consumer instalment credit that is now based on Executive Order. As the members of your Committee know, since the end of the war the question of whether some restraints upon overexpansion of this type of credit should be retained has been the subject of sharp controversy. The Board has hoped that Congress would hear the pros and cons before coming to a conclusion as to whether legislation should or should not be enacted. We feel that regulation of this character should have specific legislative sanction if it is to be indefi­ nitely extended in peacetime. Accordingly, we have recommended to the President that the Executive Order be vacated in the event that the Banking and Currency Committees do not recommend favorably the enactment of appropriate authority for continuing regulation. The President has written a letter indicating that he will follow the Board's recommendation but at the same time expressing the hope that the Congress will enact the necessary enabling legislation. This letter is as follows: THE WHITE HOUSE WASHINGTON June 5, 1947 Dear Mr. Chairman: The Council of Economic Advisers has transmitted to me a memorandum in regard to the legislation which the Board of Governors has recommended for consideration by Congress to continue instalment credit regulations now in effect under an Executive Order based on the Trading with the Enemy Act. In their memorandum the Council states: "There now exists the power to limit the growth of install­ ment credit which, even under the present restraints, has been expanding at a disturbing rate. This power now rests on wartime Executive Order, which may have to be rescinded in the absence of legislative authority for its continuation. If the curbs on the extension of instalment credit now being exercised under Regulation W were to be removed at this time, Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -2- there would be a tendency of producers and distributors to try to sustain the absorptive power of the market by accepting lower down-payments and a longer time period rather than adjusting prices to the purchasing power of current incomes. This would postpone rather than promote the kind of stable adjustment that our economy requires.” I wish to advise you that I am in full accord with the Council's recommendations and hope that the Congress will enact the necessary legislation to retain restraints upon excessive expansion which results in excessive contraction of consumer credit thereby mak­ ing for economic instability, reduced production, and unemployment. If the Congress does not see fit to provide the necessary legislative authority, it is my intention to vacate the Executive Order because I do not believe that such regulations should rest indefinitely in peace­ time on emergency or war powers after the Congress has had ample oppor­ tunity to consider the subject. Very sincerely yours, (S) Harry S. Truman Honorable Marriner S. Eccles, Chairman, Board of Governors of the Federal Reserve System, Washington, D. C. If legislation is to be passed, we believe from our experience that con­ sumer credit regulation should be directed to the volatile sector of consumer credit, that is, instalment credit. This is the part which has been subject to the greatest fluctuations in the past, thus contributing to instability and un­ employment. Regulation under the proposed legislation would be in about the form and scope effective at present under the Board's Regulation W. It would, with appropriate exceptions to provide administrative flexibility, prescribe maxi­ mum maturities for all types of instalment credit and in addition would prescribe minimum down payments for instalment credit to finance the purchase of important categories of consumers’ durable goods. Thus, the regulation would cover not only instalment credit for consumers’ durable goods but also instalment credit for other consumer purposes, both of which contribute to the accentuation of business upswings and downswings and neither of which can be sharply disassoci­ ated from the other. Generally speaking, the instalment terms now prescribed by Regulation W call for maturities of not more than 15 months and down payments of at least one- third. Under the proposed legislation, terms would, of course, be varied from time to time depending upon changing economic conditions but with a view to re­ straining the development of unsound credit terms and with a view to preventing or reducing excessive expansion or contraction of consumer instalment credit which is that sector of consumer credit subject to the widest fluctuation. These would be the declared statutory objectives. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -3- Under existing conditions when the articles commonly financed with in­ stalment credit are for the most part in short supply relative to demand, it is apparent that the restraints help to dampen the demand and thus reduce the upward pressure on prices. Even when goods become available in larger quantities, how­ ever, reasonable restraints on consumer instalment credit would serve a useful public purpose, because they would tend to induce sellers to reach more customers by reducing prices instead of by resorting to a competitive relaxation of instal­ ment credit terms while still maintaining high prices. Under prevailing condi­ tions of maximum peacetime employment and national income, it would be economically unsound to encourage people to go deeper and deeper into debt on increasingly easy terms. To illustrate: the prices of automobiles in the used car market today reveal a serious lack of balance between supply and demand. In that market, 1947 cars in the lowest price lines are selling for premiums of $300 and $400 above the delivered prices established for these cars when new. Prices of older used cars are in proportion. These prices have been holding firm, and even showing some tendency to rise, notwithstanding the present credit restrictions. With the added demand for both new and used cars which would result from the removal of credit restrictions and with a supply of both which is strictly limited by the productive facilities, labor supply, and materials available, there is no likelihood that there would be the downward adjustment in prices of used cars that is so much needed. On the contrary, if credit restrictions are removed, there is every rea­ son to expect that the present abnormally high prices of used cars will increase further in relation to the prices established by manufacturers for new cars. A downward adjustment in used car prices is especially needed by the working people and the lower income groups who make up the principal market for used cars. Notwithstanding continued shortages of goods, particularly durable goods, and notwithstanding regulation of consumer credit, instalment credit ex­ panded during the past 12 months by more than 2 billion dollars. The economic ef­ fect of adding borrowed dollars to current income, together with the unprecedent­ edly large volume of savings in the hands of the public generally, can only be to prolong the period of inflated prices. The premature relaxation of restraints, or their complete removal, would make no more goods available. It would only help to hold prices high in the marketplace. With existing shortages in consumers’ durable goods and the restraint of Regulation W, the volume of consumer instalment credit has not reached a point where it could be considered excessive as viewed in relation to the level of na­ tional income and production. The restraint is now imposed because of other cur­ rent factors such as the high individual incomes and the large cash resources which consumers widely possess as related to the supplies of consumers’ durable goods available. Were goods available in larger volume and were many consumers able to finance their purchases on easier credit terms, there is little question but that the volume of consumer instalment credit would be much higher. As an indication of the potentialities, sales of consumers’ durable goods in 1946 were nearly twice the dollar volume of such sales in 1940 but the volume of instalment sales credit extended in 1946 was less than three-fourths of the instalment sales credit extended in 1940. Thus with the elimination of restraint and the larger Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -4- supplies of goods that are becoming available, consumer instalment credit could increase rapidly in absolute volume and in relation to national income. The need for regulation is not merely a temporary one. Experience has shown that the excessive expansion and subsequent contraction of consumer instal­ ment credit contributes substantially to the rise and fall of production and em­ ployment. Its role in instability is increasing with the growing importance of consumers’ durable goods in the economy. It is recognized that the development of this type of credit has gone hand in hand with and facilitated the unparalleled in­ dustrial development of the nation. Yet, it is equally significant that when com­ petition takes the form of relaxing credit terms and is carried to extremes, it is a symptom and cause of economic unsoundness. Millions of people are encouraged to overpledge future income. This inevitably entails instability, because the ex­ cessive credit extended during a business boom accentuates the boom and has to be liquidated out of current income on the downswing, which accentuates depression. The fact that current income has to be used to pay off excessive instalment debt created during the business boom necessarily diverts that income from the channels of consumer expenditures in the depression, especially in the important sector of consumers’ durable goods. Voluntary efforts made by foresighted retailers, sales finance companies, banks, and other lenders to prevent down payments from becoming excessively small and repayment periods from becoming over-extended in times of credit expansion are ineffective because of the aggressive competition of those who will not voluntarily cooperate in this objective. The present trend of expansion in consumer instalment debt needs to be carefully watched and restrained so that the country shall not repeat the pattern of inducing American families to go heavily into debt on too easy terms, particu­ larly for high-priced goods many of which are not only high-priced but of inferior quality. The decline that would be bound to follow would be felt not only in the durable goods industries but throughout the economy. Continued restraints as pro­ posed in the legislation would help to prevent a repetition of such an unsound se­ quence of events. The Board feels that this type of regulation, which is of a selective character, serves a useful purpose which cannot be reached by the exercise of any powers over bank credit in general. The regulation is needed, therefore, as a supplement to general credit control powers. As the Board pointed out in its 1945 Annual Report to Congress, however, overall restraints to the sources of bank credit have, under existing conditions, lost much of their effectiveness. For this reason it is all the more inportant for Congress to consider whether a selective control such as proposed would, as the Board believes, reduce economic instability and thus help to provide conditions more favorable to the maintenance of our pri­ vate enterprise system. The case for permanent legislation seems to the Board to be very strong. At the same time, we recognize that Congress may not feel that there is time enough, at the present session, to give adequate consideration to a permanent mea­ sure. For this reason, and because it now appears that there is great need for restraint during the coming year, we suggest that the Committee give consideration Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -5- to the adoption of a Joint Resolution providing that consumer credit controls should continue under the existing Executive Order until a specified date, such as July 31, 1948, and then be automatically terminated. If the regulation were continued on this basis, the Board would be in position to modify or remove the present restric­ tions in the event such action should be warranted by a change in economic condi­ tions at any time during the coming year. The substance of such a Resolution might be along the following lines: Resolved by the Senate and House of Representatives of the United Spates of America in Congress assembled, That the Board of Governors of the Federal Reserve System is authorized to continue to exercise con­ sumer credit controls pursuant to Executive Order No. 8843 until July 31, 1948 and, except during any war beginning after such date or any national emergency proclaimed by the President after such date, no such consumer credit controls shall be exercised after such date. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Marriner S. Eccles (1947, June 24). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19470625_eccles

@misc{wtfs_speech_19470625_eccles,
  author = {Marriner S. Eccles},
  title = {Speech},
  year = {1947},
  month = {Jun},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19470625_eccles},
  note = {Retrieved via When the Fed Speaks corpus}
}