Speech

ETBRz\RV STATEMENT ON THE DEFENSE PRODUCTION ACT OF 1950* I he Defense Production Act of 1950 would carry larger prime contracts. It can also make practical out the steps toward economic preparedness rec- the awarding of more Government contracts, re­ ^'Uended by the President in his message of fuly quiring unusually large working capital or expan­ to the Congress. Because of the responsibilities sion in plant and facilities, directly to relatively ^utch the Congress has placed upon the Board small and medium-size concerns. Without such 'u the credit and monetary area, we are especially financing, these concerns would not be able to ""crested hi those provisions of the bill relating make a full contribution to defense production. the guarantee of defense production loans and Finally, where great speed is essential in the per­ regulation of consumer and real estate credit. formance of Government contracts, the mechanism o ^re, therefore, addressing this statement pri- can serve to expedite the consummation of loans t^arily to the reasons why we believe that these with a promptness which is not always possible Provisions should be promptly enacted as a part under usual procedures. c the broad legislation needed to meet the present The loan guarantee proved to be an eminently station. successful means of encouraging the extension of private credit for facilitating production under GUARANTEE OE DEFENSE LOANS Government contracts during World War H. The p Action 301 of the bill would authorize the guarantee program of that period—the so-called 1 res'dent to reinstitute a guarantee program simi- V-loan program referred to earlier—was set up ^r to the V-loan program operated by the Federal under Executive Order of the President in March eserve System during World War H. The pro­ 1942. Under that program, loans for war produc­ , ^ed program would be confined to the guarantee tion were guaranteed by the Armed Services ^ the national defense procurement agencies of through the agency of the Federal Reserve System. ^"^ made by banks and other financial institu- The twelve regional Federal Reserve Banks and ' tis to contractors to finance the production of de­ twenty-four branches, with experienced personnel Use materials needed by the United States in the and close daily contacts with financial institutions, Present emergency. This program is not to be con- afforded an already existing and well-adapted or­ ^ed with various proposals advanced in post- ganization for making such guarantees promptly 1 years for the peacetime guarantee of business available to contractors throughout the country. The Board of Governors in Washington acted as the .^ttie financing problems of contractors engaged coordinating agency in the administration of the 'T defense production, particularly where they are program. ^a[[ and uiedium-size, are unique in character. During the course of the V-loan program, bank ^ loan guarantee mechanism here proposed pro- loans to war contractors, both large and small, tr" cs an effective solution of these problems. Con- amounting to about 10.5 billion dollars were ap­ cts to,- essential defense materials often require proved for guarantees by the Armed Services JUcn larger financing by contractors than they through the agency of the Federal Reserve System. e able to command under ordinary financing Over 90 per cent of the number and one-third of ^ctices. [t can make possible maximum partici- the amount of these guarantees were on loans to Dtion by numerous smaller business enterprises in small and medium-size businesses; that is, busi­ e Government's defense production program, par- nesses with total assets of less than 5 million dollars. "larly those who do not themselves have direct Notwithstanding the great volume of loans handled, ^"Vcrnnient contracts but whose work as subcon- the program was self-supporting; receipts of the -^^"s is essential for prompt performance on the Treasury from the program exceeded expenses and losses by 23 million dollars by the end of 1949. *'\' ','*^'Hnit presented tty the Hoard of Governors of Hn<] ^"^'d Reserve System to the Committee on Hanking Without the program, the production of war mate­ p ^ Gtrrcncy of the Semite, am) read hv Governor R. M. rials would have required more Government finan­ T U' t" the Committee on Hanking and Currency oi the ^^ '^f Representatives, Jtdy 25, l'At). cing through direct lending and other means. '365 25 PREPRtNTED FROM FEDERAL RESERVE BULLETtN FOR AUGUST <950 STATEMENT ON THE DEFENSE PRODUCT!ON ACT OF 19 5 0 For the reasons indicated, the Hoard feels that effort, including the materials and man[iowerneces- the [irogram of guaranteed loans which would be sarv to ex[)and our total productive capacity. antfiorized by Section 30! of tfie bi!! won!(t con­ fhe[iresent international situation not only'"' stitute an essentia) [)art of any [)tan for ex[)e(hting creases greatly the Government's demand for th^ deliveries under defense [iroduction contracts. H goods and services of our economy, but at the sa'^c the Rresident should see fit again to utilize the time accelerates [irivate demand. These two add'* Federal Reserve System for this loan guarantee tional factors of demand are inqiosed on a cond'* tion of already very high demand, em[iloyment,a"d [irogram, the Hoard and the f'ederal Reserve Hanks would immediately direct their lacilities toward its prices. Fven before the attack by the (Tmmun'S* vigorous and ex[ieditious administration. With North Koreans on June 25, prices were rising R't" theex[ierience gained by the System under the we were in a potentially inflationary situat'd' V-loan [irogram during World War 11 and with because of develo[)ments of the [)ast few weeks,'* personnel both at the Hoard and at the regional is im[ierative that ste[is be taken to reduce or defc' Reserve Ranks who partici[)ated in the previous civilian demands and to lessen inflationary p'"^' o[)erations, it would be possible to develo[) and put sures. into effect within a very short time the new program 'f he state of public [)sychology has already stt!'i' of guaranteed loans contem[ilated by this bill. ulated consumer buying and the accumulation" business inventories. In the week ending July RE(;t'L.\T)OX'O) (a)r<SL'Xtt:n AND REAL F.STATECREDU department store sales rose to a level 24 })erce^ Section 401 of the bill authorizes the Presidetit above a year ago, with increases ranging from'* [ier cent in the Richmond District to 39 [icrce"' to regulate consumer and real estate credit. Utider such authority niinimum down [layments on pur­ in the Dallas District. Sales of automobiles""' chases, maximum maturities, and other statidards houses have risen to record levels. Rrices of 28 basic commodities, which had rise" ap[)ro}iriate to limit credit extension could be pre­ 7 per cent from January 3 of this year to June 2^' scribed. Section 402 of the bill would strengtlien the Rresident's authority to curtail I'ederalfinanc- advanced shar[ily after the invasion of Sor'd' ''1^ programs iti tlm lionsin^ fiel(l cvlietitlmtia- Korea—10 per cent in one month, fheall-c"'" tiotial interest so requires. We regard these as modity index of wholesale [irices, which had t''^*' important provisions of the [iroposed legislation. 4percentbyJune20, hassince]umi;)ed 3peree'it Cotisumer credit regulations were administered further. Cotisttmer prices began to rise in Md^ liy the Hoard of (tovernors from September 1041 and recently the advance has been further ac"^ through October PM7 and again from September erated. Consumer [irices are now higher than *'^ 1948 through June 1949. any other time, except forashort[ieriodi"d''' Such regulations as might be necessary in the latter [iart of 1948. real estate credit field under Section 401 would have Unless prompt action is taken, the comitry in­ to be designed to meet the s[iecial needs of this face serious [troblems of gray markets and sp'r"* area. They would liave the general purpose of ing [irices. Not otdy would this situation t'P^ supporting and supplementing the President's pro­ ortr economic balance but it wordd add to the d'' gram of cutting back on Federally guaranteed and ficulty in [irocuring the man[iower and mater'" insured mortgage credit. necessary for the military effort. Authority for restrictions on consumer and real One of the major factors in the ex[iansion'^ estate credit should be [irovided for use to the private demand is the growth of mortgage""' extent necessary as an essential part of the program consumer credit. Since the end of 1945, as sho" for conserving resources for defense and [irotect- on the acconqianying chart, consumer credit''-' ingtlie economy against inflation. This authority been increasing by about f billion dollars a V^-'f' would help to prevent curretit and potential de­ f he increase in the past 12 months was 3.5 bill'"'' mand from exceeding supply in the areas aflected. dollars and in May was about 500 million, *''** Accordingly, it would help to reduce inflationary largest increase on record for that month. '''' [iressttreu[ion[irices in these areas. It would hel[i was before the Korean crisis precipitated the pf to make materials and manpower more readily ent buying spree. 'f he most inqiortant segment of total consuM'^ available for the national defense and military STATEMENT ON THE DEFENSE PRODUCTION ACT OF 19 50 credit is instalment credit, especially tor the pur­ chase o) durable goods. During the past year in- stahnent credit rose nearly 3 billion dollars and Accounted for 83 per cent of the increase in total consumer credit. The role which instalment credit has been playing in the growth ot demand '$ Illustrated not only in the amount ot the ex­ cision but also by the relaxation in the terms r'oder which such credit is extended. Reports of ^clines in the required down payment are wide­ to the growth of bank deposits. Bank holdings spread and the average period of repayment has of both consumer instalment paper and mortgage 'C'lgthened progressively. paper are rising rapidly and are thus adding to the ! he current record rate of residential construc- total supply of money which is already so large hon involves the greatest increase in mortgage in relation to current output as to provide a con­ credit which the country has ever experienced. stant inflationary threat. Restriction ot consumer 1 Ionic mortgages made by all lenders in the first and mortgage credit, therefore, would help to keep ' ^1 ot 1950 amounted to about 6.5 billion dollars within bounds the quantity of money and other cr an annual rate of 13 billion dollars, as shown on liquid assets in the hands ot the public. '^'- accompanying chart. hi normal times consumer and mortgage credit The net increase in mortgage debt outstanding play a very important and desirable role in our coring the first half of 1950 (after regular amorti- economic system. Without such credit widespread C'on and other repayments) was about 3 billion home ownership and mass distribution of durable Pilars, bringing the total outstanding on June 30 goods would not have been possible, ft our mass 'o about 40 billion. The home mortgage debt ot production economy is to sustain its expansive ^hs country has more than doubled since the end character in normal times, we will need to have the war. expansion of mortgage and consumer financing. Expansion of consumer and mortgage credit con­ ! fowever, in order that such financing may be of tributes not only to the current demand for labor greatest value it is important that it be used most C! materials that go into housing and durable fully when industry is in a position to meet the consumer goods, but also augments the demand for demands created. When industry is already oc­ 'h other goods. Hie purchasing power created cupied to capacity and important resources must ^Y consumer and mortgage credit enters the income be diverted to the defense effort, the creation of ^ream where it adds to the competition tor goods new credit can not increase the general availability "tcludmg materials vital to the national defense. of goods. On the contrary it contributes to infla­ Growth of consumer and mortgage credit in­ tion and economic disorganization, ft mortgage creases the volume of money and other liquid assets. and consumer credit is appropriately limited now Expansion of bank loans for such purposes adds it will be in a better position to play a necessary STATEMENT ON THE DEFENSE PRODUCTION ACT OF 19 50 and desirable rote whenever adequate productive sociations took an active part in acquainting bust* capacity is once more avaitabte to meet freely con­ nessmen and the public with credit regulations, ant! sumer demands. they cooperated to the fullest in helping to assemble Regulation of consumer credit shoutdandcan needed technical information. Large and smalt be flexible. The previous regutations were taitored financing institutions responded generously to out to fit prevaiting conditions, with coverage and terms requests for information and advice. State and suited to changing circumstances. Toillustrate, in Federal supervisory authorities also gave us vab the fatt of i94i the regutation apptied onty to in- Liable assistance during the course of their regular statment credit relating for the most part to con­ work. sumer durabte goods of sut)stantiat unit cost—auto- With respect to real estate credit, there should mobites, refrigerators, and the tike. When the be an equally practicable approach. The full co* country entered the war the regutation was en- operation of leaders in the mortgage financing field targed in scope in keeping with the generat mobili­ should be enlisted to design a regulation, similarly zation which took place. It covered practically all flexible and adapted to the changing economic situ­ consumer durable and soft goods and instalment, ation. single payment, and charge account credit. After The commercial banks play a strategic role "' the war, late in 1946, the scope of the regulation the real estate credit market. Any regulation of was made even more limited than when it was such credit will have significant effects on gen* originally applied. eral credit conditions in which the Federal R^' The decentralized character of Federal Reserve serve System is primarily interested. System operations proved well adapted to the ad The need to strengthen our economic defenses ministration of consumer credit regulation as well as to the V-loan guarantee program. Through is no less than the need to strengthen our military our twelve Federal Reserve Hanks and twenty-four defenses. We can not afford to risk disrupting our economy by leaving it unduly exposed to the branches, located in every region of the country, we were able to tap quickly and effectively the inflationary pressures that are inherent in large informed opinions of sniall as well as large busi­ defense expenditures. Prompt action is imperative. ness. As the President said in his message on the present hi our experience with the administration of situation: "We must be sure to take the steps that consumer credit regulation, the business community are necessary now, or we shall surely be required gave us excellent cooperation. Various trade as- to take touch more drastic steps later on."

Rudolph M. Evans (1950, July 24). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19500725_evans

@misc{wtfs_speech_19500725_evans,
  author = {Rudolph M. Evans},
  title = {Speech},
  year = {1950},
  month = {Jul},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19500725_evans},
  note = {Retrieved via When the Fed Speaks corpus}
}