TABLE 10.-Selected consumer expenditures by types, 1939, 1955, 1960

Purchases of new construction; expenditures for land and transactions among consumers in existing houses have been netted out.

1 Nondurables services and taxes other than income, estate, and gift taxes. Conforms to present flow-offunds coverage; includes small amounts of expenditures by nonprofit organizations not separately estimated. Source: Federal Reserve.

TABLE 11.-Selected payment commitments of consumers, 1939-60

National income series for space rent on tenant-occupied nonfarm dwellings, table II-4, line IV-2 in national income tables. 2 Current receipts after deductions for income, estate, and gift taxes and employee contributions to pension funds and OASI. See flow of funds, table 4-A, line G (Federal Reserve Bulletin, January 1960, p. 89). Principal differences from series in table 47 of consumer credit study are (1) it excludes insurance benefits (but it still includes pension benefits), and (2) it excludes capital withdrawals, net, by proprietors from noncorporate business.

*Not available.

⚫Preliminary.

Source: Federal Reserve.

TABLE 12.-Consumer installment credit, and gross national product

Senator DOUGLAS. Senator Bennett, did you wish to make a statement?

Senator BENNETT. Yes, I would like to make an opening statement, if you please.

This bill has been dignified by the title "The Truth in Lending Bill." On May 3 of this year I spoke to the Congress about this bill. I said then, and I repeat, that it is incumbent upon the Congress to seek truth in legislation. If this is so, then this bill ought to be passed only if it lives up to its title of "Truth in Lending.'

I say that the record of last year's hearings raises serious questions whether this bill is true either (a) in its premise that it will curb excessive use of consumer credit, (b) in its promise to the American people that it will lead to the dissemination of truth about credit costs, or (c) in its representation that Federal legislation is necessary to govern local retail credit dealings between every merchant and every consumer in every town and hamlet in the country.

The bill declares that there is an excessive use of consumer credit due to ignorance of credit costs and that this will be alleviated by providing consumers with more information as to credit costs. Is there any truth in this?

In January 1960 the Joint Economic Committee of the Congress, under the chairmanship of Senator Douglas, issued its Report No. 1043, 86th Congress, 2d session. That report states on page 33 that since the Korean war the national economy has suffered from a shortage in the supply of money and credit.

It states, and I quote, that:

Since 1953 the increase in real output and of population probably caught up with and surpassed the supply of money and credit in the latter part of the period. There is need, therefore, for further secular expansion of the money supply in line with the growth of the economy.

It is interesting that there are many in the Senator's party who feel that in order to increase available credit we must drastically reduce interest rates all through the economy.

This bill says there is too much consumer credit, that it might be upsetting to the stability of the economy.

Next, is there any truth in the assumption that the size of finance charges affects the volume of consumer credit?

This premise was flatly rejected by the Chairman of the Federal Reserve Board, the only governmental agency which has really studied the problem, in their report on the legislation, which is already in the record.

Is the bill true in its representation that its enactment will increase the amount of information now provided to consumers about credit costs?

I believe that, in fact, it will reduce the circulation of information as to credit costs.

I further believe that it is useless and unenforceable without the unthinkable recourse to companion price control legislation.

The testimony at last year's hearings is clear that the overwhelming majority of merchants in the United States now furnish consumers with fair information as to credit costs and that only a fringe of unscrupulous merchants engage in deceptive credit practices.

This is generally provided in the dollars-and-cents terms which are most meaningful to the consumer or, where that is not possible, in terms of a monthly rate of service charge.

What will this bill do?

According to its sponsors, the bill's key provision is the requirement that finance charges be stated in terms of a simple annual percentage rate.

Assuming this could be done, what would happen if the bill were passed?

The fact is that service charges averaging about 18 percent per annum represent a fair charge for retail installment credit extended in small principal amounts. The fairness of such charge is self-evident from the fact that the credit unions themselves generally charge 1 percent a month, and they enjoy the benefits of tax exemption, uncompensated services, and free facilities.

The truth is that because consumers have mistakenly been led to believe that 6 percent is the fair charge for credit, the statement of annual rates at 18 percent will be suicidal for retail merchants.

Prof. George Katona, director of the economic behavior, survey research center of the University of Michigan, is an authority whose reliability is attested by the chairman of this subcommittee. This is what Professor Katona said with specific reference to the bill in last year's hearings:

The most potent argument against the bill consists of the possibility that there would be a shock effect. It has been shown before that many present day users of installment credit believe that the finance charge amounts to 6 percent or even less. If these people were given a document in which a percentage twice or three or even four times as high is shown they will be surprised, disappointed, and resentful.

Consumer good will is the bulwark of any successful business. No merchant can risk its loss. Could the merchant advertising 18 percent risk survival against his competitor who covers part of his credit cost in price and advertises low rates? In self-protection he would have to follow suit and state palatable rates of 5 to 6 percent to

consumers.

As the hearings progress I think we can show that this process has already started.

Nothing in this bill will prevent merchants from using this means of self-protection against the popular 6 percent myth.

Every merchant is free to price his own merchandise as he sees fit. He has no greater obligation to make a separate charge for credit in terms of cost than to charge separately for the part of his price which represents advertising, delivery, gift-wrapping, or other services.

In passing, it should be noted that part of the retail merchant's business which is done on 30-day credit for which he makes no charge represents part of his cost which is already included in the price of his merchandise. This would simply mean extending that principle a little further.

Consequently, this bill could not promote the dissemination of truth about credit charges unless it were supplemented by a vast Federal agency issuing an avalanche of regulations fixing cash ceiling prices for all retail goods and requiring a separate statement of all credit costs and charges.

This is an unthinkable proposition in a free economy particularly in peacetime.

The unenforceability of this bill is verified by the fact that not a single Federal agency which commented on last year's bill was willing to accept the responsibility for its administration.

The Federal Reserve Board last year stated that it did not want that responsibility, and it has reaffirmed that in the statement of this year.

It is no answer to suggest, as some have, that price competition will force the specification of 18 percent charges in the absence of price controls.

We do not have a one-price economy. The downtown department store or the credit store, the discount store, all compete and prosper in the economy despite wide disparity in prices even on branded goods. The fact is that the low-income consumer has little choice of sources of credit. He is generally a marginal risk. He must fill his needs and wants where he can get credit often regardless of price.

Is there any truth in the proposition that Federal legislation of this bill is necessary or appropriate?

I say there is not.

The bill is not limited to transactions in interstate commerce. It reaches as far as the price control acts of World War II and Korea. It would deserve congressional consideration, if at all, only on a clear showing that States have neglected the subject. But this would be a false assumption.

At least 48 States now have legislation comprehensively regulating the permissible amount and required disclosure of interest on small loans. Thirty-six and the District of Columbia regulate automobile sales. Twenty States regulate installment sales of other types of goods as well as automobiles. And at least seven have comprehensive laws governing rates and disclosure on the relatively new form of retail credit known as the revolving account.

Moreover, the trend of State activity shows a rapidly accelerating attention to this subject. According to the Wall Street Journal for June 27 of this year, and I quote:

This year 47 State legislatures are considering changing their credit laws, some to the extent of complete overhauls of existing legislation.

Finally, I ask this question: What earthly use is the specification of a simple annual percentage rate to the consumer? This is said to be the key provision of the bill.

The claim is that it will afford a common denominator for comparing costs of credit. This is meaningless. No sensible consumer will blindly elect to patronize the merchant offering the lower rate unless the overall dollar cost is lower. Consequently, the useful information to the consumer is the dollar cost, not the percentage rate, and the dollar changes are already provided in most credit arrangements.

That is my statement, Mr. Chairman.

Senator DOUGLAS. Is there any other member of the subcommittee who would like to make a preliminary statement?

Senator Proxmire?

Senator PROXMIRE. No.

Senator DOUGLAS. Senator Bush?

Senator BUSH. No.

Senator DOUGLAS. Mrs. Neuberger?

Senator NEUBERGER. No.

Senator DOUGLAS. The first witness this morning is Dr. James Tobin, member of the Council of Economic Advisers.

Mr. Tobin, will you come forward?

We are very glad to have you, Mr. Tobin.

STATEMENT OF JAMES TOBIN, MEMBER, COUNCIL OF ECONOMIC ADVISERS

Mr. TOBIN. Mr. Chairman, members of the subcommittee, I am pleased to have the opportunity to testify on S. 1740, a bill to promote "truth in lending." This is an important bill; its passage will contribute to economic stability and to the efficiency of our market economy by promoting increased awareness of the cost of consumer credit. It will also serve to prevent fraud and deception and to invigorate competition in the field of consumer finance.

I am testifying as a general economist, not as a specialist in this field. My statement will be directed primarily to the overall impact of the legislation.

The Employment Act of 1946 pledges the Federal Government to promote maximum employment, production, and purchasing power. In addition, it is widely recognized that reasonable price stability should be a goal of Government policy. I believe that S. 1740 will enhance the effectiveness of Government policies designed to achieve these goals.

Consumer credit is a large and important factor in the U.S. economy. According to Federal Reserve estimates, short- and intermediate-term consumer credit outstanding at the end of 1960 totaled $56 billion. Net addition to outstanding consumer credit of this type have averaged $3.4 billion over the past 5 years. Payments last year on installment debt alone amounted to $46.9 billion, or over 13 percent of disposable personal income.

Senator DOUGLAS. In other words, one-eighth of the personal income of the country was devoted to paying installment debt. Senator BENNETT. Or making installment purchases.