Speech

STATEMENT ON REGULATION OF CONSUMER CREDIT* The Board of Governors of the Federal Reserve 1. I believe the Congress at that time was System welcomes this opportunity to report to deeply conscious of the concern felt by the your Committee on its regulation of consumer American public over the value of their dollars, credit and particularly automobile instalment and wished to take every practical step to pre­ credit, as authorized by Title VI of the Defense serve the integrity of our money. Production Act of 1950. 2. I believe also the Congress intended that At the outset, I should like to emphasize that adequate taxes and general and specific credit the Board has viewed its stewardship under the controls should be the first reliance in maintain­ Defense Production Act in the light of its responsi­ ing the value of the dollar. bilities for monetary and credit policies that will 3. I believe the Congress intended that the help maintain a stable value for the dollar and powers to regulate consumer and real estate preserve a strong economy. In carrying out its credit should be "used to the fullest extent prac­ responsibilities under the Act, the Board, of course, ticable, as a means of limiting demand to the has also been guided by the observations of the available supply in the affected fields, thus re­ House and Senate Banking and Currency Com­ straining further price increases. mittees concerning the inflationary role of consumer 4. I believe also that the Congress had in and mortgage credit under current conditions, made mind that the use of these powers, in limiting in their respective reports on the Defense Produc­ demand, would help in the transfer of resources tion Act. from the production of civilian goods to the The Federal Reserve has acted to carry out production of military goods without unneces­ its assignment in the light of its understanding sary price inflation. of the objectives that Congress had in mind. As During the period when the Defense Production long as you leave the responsibility with the Fed­ Act of 1950 was under study by the Congress, the eral Reserve we believe you will expect us to do Board and its staff, in collaboration with officials our duty in accordance with the objectives of the of the twelve Federal Reserve Banks and their Congress. twenty-four branches, carried on intensive studies During the period the Congress was deliberating of the consumer credit business, including numer­ and acting on the Defense Production Act of 1950 ous consultations with the major segments of the —from July 19 to September 1—business and trade. In all, some 750 trade consultations were consumer markets were being swept by hysterical involved in this pre-regulation exploration. Officers buying, prices in practically all sectors of the econ­ of the twelve Reserve Banks conducted a total of omy were advancing sharply, and inflationary pres­ 725 of these regional conferences with trade groups sures were generally rampant. The Congress, the and businessmen prospectively subject to consumer Administration, and the public were very appre­ credit regulation. The Board and its staff con hensive about these developments both because they suited on 25 different occasions with such groups, threatened the very foundations of our free enter­ including the major national trade associations prise society and because of their adverse effects affected. upon our preparedness efforts. I can assure you As evidence of the way in which the Board has that we at the Federal Reserve System were very consulted with the interested public while making deeply concerned. In the light of this background, decisions regarding Regulation W, I should like the intent of Congress with respect to Title VI to quote from the October issue of the official of the Defense Production Act seems to me clear. magazine of the National Automobile Dealers As­ Let me here state briefly my beliefs in this respect: sociation. The auto dealers said: * Statement by Chairman Thomas B. McCabe on behalf “N.A.D.A. officials did a great deal of work of the Board of Governors of the Federal Reserve System and cooperated closely with the Federal Reserve before the Joint Committee on Defense Production, Dec. 8, 1950. Board during the period that the new Regula- December 1950 1577 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis STATEMENT ON REGULATION OF CONSUMER CREDIT tion W was being drafted. They compiled and Board was prepared to reexamine its regulation and presented data showing that the terms should establish more stringent terms. On October 13, not be so strict that they would work a needless five weeks after the issuance of the original regula­ hardship on persons who have the greatest need tion, the Board announced Amendment No. 1 for reliable transportation. to Regulation W establishing, effective October 16, “N.A.D.A. is continuing its frequent contacts minimum down payments and maximum maturi­ with the Board, which has been working on ties substantially stricter than those which became interpretations necessitated by special problems effective on September 18. This action was taken that have arisen.” three days after the Board had issued Regulation X, to be effective October 12, establishing down pay­ Against this broad background of study and ment and maturity terms on mortgage credit consultation, a draft of the regulation was prepared to finance newly constructed houses. The following and considered by the Board after submission to all table compares the new terms of Regulation W of the Federal Reserve Banks. Thus, the Board with those provided in the initial regulation. was ready for formal action once authority to regu­ late consumer credit was enacted into law. Minimum Down Payments and Maximum Maturities The Board issued Regulation W on September 8 Under Regulation W within the hour after the President signed the Defense Production Act of 1950. The regulation Minimum Maximum was made effective ten days later on September 18. down payment1 maturity Listed articles [Per centj [Months] This interval was considered the minimum period and loans for placing the regulation in the hands of regis­ S O ep ct t . . 1 1 8 5 - Oct. 16- S O ep c t t . . 1 1 8 5 - Oct. 16- trants and enabling them to adjust their operations to it. The Board’s decision as to the terms of the listed articles: Passenger automobiles.. 33 H 33 H 21 15 consumer credit regulation was based on the prac­ Major appliances *...,.. 15 25 18 ' 15 Furniture and floor cov­ tical consideration that the regulation should re­ erings...................... 10 15 18 15 strain consumer demand and credit growth in the Home improvement ma­ terials, articles, and most volatile segment of the field, namely, the services*....................... 10 10 30 30 instalment financing segment. Loans: To * purchase listed Taking the field of instalment credit as a whole, articles.......................... <<) <<) {*) (4) however, the initial minimum down payment and Unclassified...................... 18 15 maximum maturity requirements. under Regula­ *.!vi^em?tio.ns: 18“Oct. 15, listed articles costing less than tion W were only moderately restrictive in relation #100; beginning Oct. 16, those costing less than $50. * Includes radios, television, refrigerators, food freezers, phono­ to practices generally prevailing in the instalment graphs, cooking stoves, ranges, dishwashers, ironers, washing machines, clothes driers, sewing machines, suction cleaners, financing trade. In the used car field, particularly room-unit air conditioners, and dehumidifiers. * Includes heating, plumbing, and other household fixtures. for older models, and also in some appliance lines, 4 Requirements same as on instalment sales of the respective articles. the regulatory terms were more liberal than those practiced by the conservative trade. Data supplied I should like to make entirely clear three aspects by the trade indicated that the bulk of the trans­ of the Board’s Amendment No. 1 to Regulation W. actions being written on new and late model auto­ First, the Board’s amendment action was taken mobiles and on other items of relatively high unit in the light of the total economic and credit situa­ price in the months just prior to the regulation tion. It was taken not primarily because of devel­ were somewhat more liberal as to down payment, opments in the specific fields during this period maturity, or both, than the introductory terms of but because the magnitude of the general inflation­ the regulation. Information subsequently obtained ary problem became more clear. It reflected the by the System’s own field investigators has con­ Board’s apprehension over the continuing strong firmed this basic finding. inflationary trends in the economy generally as In announcing the new Regulation W to the well as over the continuing strong consumer de­ press, the Board expressly stated that, if the terms mands for durable goods and accompanying expan­ established did not provide an adequate restraint sionary trends in instalment credit. Figures now on consumer demand, as well as on further rapid available show that loans of commercial banks ex­ inflationary expansion of instalment credit, the panded 5.7 billion dollars from the end of June 1578 Federal Reserve Bulletin Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis STATEMENT ON REGULATION OF CONSUMER CREDIT to October 25 of this year—the largest loan ex­ Let us look at the retail automobile market today pansion in such a short period of time in the compared with August. New cars are available country’s history. More than 25 per cent of the to the buying public at list prices, without required loan expansion was the direct or indirect result of extras or premiums. On the basis of advertised growth in consumer credit and another fifth was prices, a popular priced 1949 model used car could due to a rise in bank holdings of real estate mort­ be purchased in leading cities in November for gages. This loan expansion was accompanied by $1,280, compared with $1,635 in August. The a further increase in bank holdings of corporate buyer of such a model had to pay one-third down and municipal securities. The total expansion of or $427 in November compared with one-third bank holdings of loans and non-Government se­ down or $545 in August. The unpaid balance in curities was the immediate cause of a 3 billion dol­ August was on the average paid off in 21 months lar increase in the economy’s already large supply at the rate of $63 per month. In November the of money. balance was required to be paid off in 15 months Second, the Board was seriously concerned, as or at the rate of $67 per month. were other agencies of Government, over the un­ A great proportion of the cars bought by con­ desirable and hindering effects of inflationary pres­ sumers in the United States are used cars. In 1949 sures generally on the rearmament, stockpiling, and it is estimated that 6.9 million used cars were industrial expansion programs. Appropriations bought by consumers as compared with 4.5 million for national defense were able to buy far less this new cars. Old cars predominate in the holdings fall than contemplated when Congress passed them. of the population. It is estimated that 69 per cent Third, the Board took its action only after con­ of the passenger cars in operation are more than sultation with other interested agencies of Govern­ three years old. The man of average income typi­ ment. cally buys a used car. In helping to keep used cars I should now like to report on what I think the at a reasonable price and to make new cars readily effects of Regulation W have been. To report first available at effective prices at or below the list, in general terms, the regulation has limited the Regulation W has been of great service to the rise in prices in the durable goods field; it has American consumer. It has done a great deal to limited somewhat the further expansion of the combat the price inflation which seemed last sum­ money supply; because of these two effects, it has mer to be getting completely out of hand. limited the advance of prices generally; and, lastly, At the present time about 20 million out of our it has removed some of the pressure which would 38 million privately owned cars are prewar cars have hampered diversion of materials and man­ and when sold as used cars have a price of around power to the military effort. These results have $500 or less. Before imposition of Regulation W, been of great benefit to the American people. if a purchaser bought a $450 car on a basis of one- Let us now examine the effects of the regulation third down, he paid $150 cash and paid off the in the automobile field, with which your hearings balance at a rate of $24 to $28 per month, depend­ are particularly concerned. At the time the Con­ ing on whether the maturity was 15 or 12 months. gress was deliberating the Defense Production Act, Regulation W has not affected the typical terms new cars were not generally available at list prices, of payment for these cheaper cars. One-third i.e., unloaded of extra equipment or special down and 12 or 15 months to pay, if dealers will premiums, to the great bulk of the people who finance on these terms, arc still permitted. Good wanted to buy them. With respect to used cars, usable cars for performing a great portion of the average retail prices of a representative popular daily travel of the public continue to be available priced 1949 model car rose from approximately under Regulation W on purchase terms of about $1,430 in June to $1,635 in August. On the aver­ $25 a month or less. These are the cars which age, monthly payments to buy the 1949 model used are customarily bought and used by large numbers car had risen from $56 to $63. It is clear that in­ of our working population who are looking for flation in the retail automobile markets was im­ transportation and not for the latest style and pinging adversely on both those who bought higher gadget. priced cars and those who bought lower priced Supply developments in the retail automobile cars. market following the introduction of Regulation W December 1950 1579 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis STATEMENT ON REGULATION OF CONSUMER CREDIT and its subsequent tightening are of course not all men out of work. But to date unemployment has attributable to the regulation. Some buying that been at a low level and employment has reached would otherwise have been done this fall was ac­ a new high level. If some unemployment does celerated and done in the summer months. The develop, the principal cause will be the dislocations fall is typically a season of declining automobile that are inevitable in the transition to military travel and softened demand for cars. The industry production, and not Regulation W. has been preparing new models and this fact has It is sometimes claimed that Regulation W has no doubt induced some deferment of new car prevented the American working man from buy­ buying by purchasers who would otherwise be in ing the automobile that he needs to provide his the market. But the important fact for these hear­ transportation. It is said that Regulation W favors ings is that the market with Regulation W is less the rich as against the poor, that it bars from the inflationary and more competitive than it was. market the low income man with his credit and It is more of a buyers* market and less of a sellers’ leaves the high income man free to buy with his market. It is in every respect a more normal cash. The truth is that Regulation W has helped market situation. Despite the role of other in­ rather than penalized the person of moderate or fluences, I believe that Regulation W has con­ low income. It helps him where he is most in need tributed significantly to this more healthy market of help—in his pocketbook. Cars, new or used, condition. are available at various prices to meet the budgets Inventory of new cars was at an abnormally low of practically all workers who want or need cars. level when consumer credit regulation was in­ And these cars cost less than they would have cost augurated. This enabled manufacturers to go in the absence of Regulation W. Furthermore, ahead full tilt at high levels of output despite the prices are lower for other articles listed in the regulation. In recent weeks production has been regulation, and also for articles not listed, than down from earlier peak rates, the lower level re­ they would have been without the regulation. flecting primarily model changes, but the current The American consumer is better off as a result rate of output of about 120,000 cars a week is of Regulation W. still, historically speaking, a very high rate. Some We must of course bear in mind that the bor­ inventory accumulation by dealers has recently rower is getting credit, not a gift. This credit must taken place, but new car inventory for the new car be paid back—and with finance charges added, too. dealer trade as a whole is still not above traditional In other words, when the consumer increases his relationships with sales. The latest retail sales expendable income of today by borrowing, he is, reports with respect to new cars indicate that No­ at the same time, reducing his expendable income vember sales were probably one-tenth above a year of tomorrow. The thing that limits the man of ago. Sales a year ago were in large volume. The low income is his income. He doesn’t get some­ rise in retail inventory of new cars probably thing for nothing by borrowing to go into the tapered off considerably in November. market to bid against others for a limited supply The foregoing observations relate to the auto­ of goods. He merely helps to push up the price mobile market as a whole. The situation will of that limited supply of goods and increases the vary for different makes of cars, and among in­ burden that he must meet out of his same income. dividual dealers. Such differences are matters for To encourage the man of low income to do that competition and not regulation to iron out. Regula­ under present conditions is to encourage him to tion W affects the general terms of sale on credit. With respect to the size of the current auto­ engage in a contest where he is at the greatest mobile inventory: trade sources estimate inventory possible disadvantage. The wealthy can always of new cars at about 500,000 on November 1. With meet high prices more easily than can those of output at an annual rate of over 6 million cars lower incomes. Price is exactly the field where now, with dealers generally in the best financial the man of low income is at greatest disadvantage. condition of the automobile industry’s history, and Under current conditions, the low-income man will with the use of materials already ordered curtailed, find that the bait of easier credit is carried on a hook it would seem that inventories are not excessive. of higher prices. It has been argued that Regulation W will throw It is of the very essence of regulation of con- 1580 Federal Reserve Bulletin Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis STATEMENT ON REGULATION OF CONSUMER CREDIT sumer credit that the business of those financing We must continually remind ourselves, and consumers will be affected. If their business were others, that we cannot get something for nothing. as great under Regulation W as it would be in We can’t buy more goods than can be produced. the absence of the regulation, then there would be To weaken or abolish Regulation W will not pro­ no point to having the regulation. Any contraction duce more goods. If we are to succeed in maintain­ of the business of these financing agencies is not ing stable prices and preserving confidence in the an end to be desired as such. But it is a necessary value of the dollar, we must make a determined consequence of limiting demand by these means. effort to mop up all sources of excess buying power The sacrifices of those called into the armed serv­ which tend to make the demand for goods greater ices are not in themselves desirable but they are than available supplies. Otherwise, we know from necessary. past experience what to expect. By and large the consumer finance agencies have In conclusion, I would like to make this point proved themselves extremely adaptable. In time clear: that selective credit controls including Regu­ of peace they have facilitated demand which has lation W will not of themselves check all of the contributed to our great production and to our inflationary forces. More fundamental than se­ high standard of living. In war they have proved lective credit controls is an adequate program of their capacity to adapt themselves to new conditions fiscal and general controls that restrains all types and stand by till a day when they can again serve of bank credit and thereby curtails the total dollar their basic function. volume of private expenditures. December 1950 1581 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Thomas B. McCabe (1950, December 7). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19501208_mccabe

@misc{wtfs_speech_19501208_mccabe,
  author = {Thomas B. McCabe},
  title = {Speech},
  year = {1950},
  month = {Dec},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19501208_mccabe},
  note = {Retrieved via When the Fed Speaks corpus}
}