convinced it is not in the law, anyway-you think it ought to be? Mr. HENDERSON. Yes, sir; and may I say, Mr. Williams, I have long familiarity with consumer credit. I was the head of the department in the Russell Sage Foundation which conducted research into that, and my successor, and also my deputy, Mr. John Hamm, spent a great deal of time on the effect of installment credit on the upswing and on the downswing, and it was evident to us that there was an acceleration on both grades. And some months ago, seeing that this problem was related to efforts to maintain price control, particularly as it related to the consumer durable goods brought in competition with defense goods, I took the matter up with the Federal Reserve and asked them whether authority did exist for the control of installment credit. And, as Mr. Ginsburg has indicated, there was a representation made to us that it did exist.

I have not examined into the legal status of that because I am not a lawyer. I do know, and repeat, that it is of such critical importance that, if the law does not cover it, then there should be a law.

Mr. WILLIAMS. Well, I am dead sure, I think I can say, as one who was here when that legislation was passed, that that question never entered into the mind of any Member of Congress-that I ever heard of, at least. I know it never entered my mind that there was ever and intention, as the chairman has already indicated, at any time, by banking legislation, to enter the field of installment credit. If someone else had that idea, I never yet have heard of it. For that reason, it came as a complete surprise to me to think there was such authority existing now.

The CHAIRMAN. If the gentleman will permit me to interrupt, I will say that I am sure his knowledge of the situation will accord with my recollection. I think it is well known that what we were trying to do by the passage of that act was to enable the banks to engage in all enterprises that would make it possible to resume business, and not to put any sort of limit on them. We were not worried about that in the discussion; we were trying to get them to do business.

Mr. WILLIAMS. Since in your opinion, Mr. Henderson, this phase we are now discussing is a very important part of a threatened inflationary movement, I think it would be very appropriate for you to discuss what effect installment buying and credit has on inflation, or tends to hasten it.

Mr. HENDERSON. May I make a general statement now; then, with the permission of the committee, file a brief memorandum on the economic effects of installment selling which I have had prepared for me by the experts on my staff?

Mr. FORD. Mr. Chairman, might I ask one question there?

The CHAIRMAN. Yes.

Mr. FORD. Would not unchecked installment buying nullify many of the other attempts to check inflation, or modify them?

Mr. HENDERSON. It would help to nullify and it would put particular pressure on the demand for and, therefore, the price of consumer durable goods that will be limited in production at the same time there is an enormous increase in wages.

In effect, what installment credit does is really to make an addition to the purchasing power that is available in the market. And where

I said the pay rolls had gone up over 50 percent, if you would assume there was another expansion of one, or two, or three billion for installment credit, it has the same effect on the market and the demand for consumer goods as if it had appeared in the pay rolls as of the time of the contracting of that loan.

We have in the defense program now a decided scarcity of many of the metals. I indicated some of them the other day when I talked about the 32 that had been analyzed. Now, those scarcities, rather than any desire to limit the output of any of the consumer-goods industries, are pressing heavily and unevenly on the demand for these metals. That means, regardless of whether or not an orderly procedure for curtailment or substitution in automobiles, refrigerators, heating appliances, vacuum cleaners, and on down the list, is adopted, there will be necessity for a reduction. Now, that carries with it, just as a priority order carries with it, the necessity of keeping that price in control for the protection of consumers and the prevention of inflation. If there existed, running concurrently with the power to curtail the production of the goods and the power to fix the price of the goods, the power to curtail or limit the terms of installment creditbecause installment credit is customarily used in part for the purchase of those commodities-the job of maintaining reasonable stability in the economy would be greatly enhanced. Or, to put it the other way, in your terms, Mr. Ford: If you had an unbridled potential installment credit expansion, it would nullify the efforts toward price stability.

Now, the problem of keeping prices in line all the way down from the producers of consumer durable goods to the ultimate purchaser, the consumer, is a difficult one. We know from the normal peacetime studies which have been made in the Russell Sage Foundation that an increase of 1 percent in the down payment, or a decrease of 1 percent in the time that the installment period runs, will ordinarily bring a 1-percent reduction in the demand. Or, to put it in another way, if you are selling these highly desired consumer durable goods and you lengthen the term in which you allow a man to pay for them, or you reduce the amount of the down payment which you require, you can expand your market in a 1-to-1 relationship. And of course the limiting factor on the extension of the term or contraction of the down payment has been the fact that the risk of collection of the principal amount also moves forward in the same order; that is, letting a man buy a consumer durable good which wears out in 3 years and letting him have 31⁄2 years to pay is bad business.

Another phenomenon in the installment credit business-and that goes for all kinds of extension of credit and loans to individuals— is that we have a marked increase when there is a rising tide of prosperity; that is, the risk to the vendor is less because of a more assured certainly of pay rolls. And, of course, a man undertakes that obligation when he has gone back to work and when he has a prospect of continuing to get good wages.

The reverse is true on the down side. The householder contracts his expenditures and his long-term commitments when there is a prospect that his work and pay rolls are going to be foreshortened.

Now; because of those unusual effects, it has always seemed to

me that we need this third element of the control of credit, particularly to keep the demand for consumer durable goods from expanding at the time when the demand for metals and the demand for services and labor and management to produce defense goods is at its height. And I have made that apparent to Mr. Eccles. I would be very glad, Mr. Williams, to submit the memorandum upon which this was based.

The CHAIRMAN. That will be included in the record. (The matter above referred to is as follows:)

MEMORANDUM ON THE CONTROL OF CONSUMER CREDIT AS A FACTOR IN ARMAMENTS PRODUCTION

BY ROLF NUGENT, DIRECTOR, DEPARTMENT OF CONSUMER CREDIT STUDIES, RUSSELL SAGE FOUNDATION, NEW YORK CITY; CONSULTANT, ADVISORY COMMISSION TO THE COUNCIL OF NATIONAL DEFENSE, WASHINGTON, D. C., MAY 1941

I. NATURE OF THE PROBLEM OF ARMAMENTS PRODUCTION

During the past year rapid expansion of armaments production has occurred without curtailment of production of other types of goods. In fact, increased Federal Government expenditures for defense purposes have provided the stimulus for a substantial expansion of total effective demand, in response to which production of armaments, producers' goods, and consumers' goods have expanded simultaneously.

The rapid concurrent expansion of the output of all three types of goods was made possible primarily by the existence of idle productive factors. For a decade or more total demand has been insufficient to employ all our productive resources. Consequently, when the rearmament program was initiated, idle men, materials, and equipment were drawn into production to meet the expanding demand. In addition to calling upon idle resources, it was possible to make more efficient use of existing productive factors. Since actual production falls far short of theoretical optimums, substantial increases in productivity could be accomplished by general use of the most modern techniques. The rise in output per man-hour indicates that technological improvements have contributed in some degree to the recent expansion of total production.

After a year of rapidly increasing output, which has carried production indexes well above all previous peaks, both types of reserves continue to exist. Yet the present situation is decidedly different from that of a year ago. The recent increase in demand has not been evenly distributed over the productive system, but has been concentrated primarily upon armaments, producers' capital goods, and consumers' durable goods, all of which tend to compete for the same skills, for the same raw materials, and for the same equipment. Certain industries, such as those producing airplanes, ships, machine tools, steel, aluminum, copper alloys, and explosives are working at capacity with new orders far exceeding deliveries; but other industries, such as those producing foodstuffs, cotton, and petroleum have either experienced only a modest rise or as the result of loss of foreign markets a decline in demand. While idle productive factors remain abundant, there are growing scarcities of specific skills, of specific raw materials, and of specific equipment; and while the possibilities of expanding production through technological advance have scarcely been scratched, their realization is largely dependent upon availability of machine tools, for which productive capacities are already overtaxed.

Production of armaments is already feeling the restraint of bottlenecks produced by the uneven distribution of the recent expansion of effective demand. Moreover, further acceleration of armaments production can confidently be expected not only to increase the stringency of present bottlenecks but also to extend the area in which shortages exist. The primary effect of a further increase in defense expenditures would be, of course, to increase the lead already imposed upon armaments industries and their raw material and equipment suppliers. But expansion of armaments expenditures would also increase incomes of productive factors, and such increments in individual incomes would increase the demand for consumers' durable goods, which com

pete in very considerable degree for the skills, engineering abilities, equipment, and raw materials that are needed for armaments production.

It is true that existing bottlenecks are being gradually widened. Readily adaptable labor and equipment is being diverted from other fields of production; new workers are being trained; and new plants are being constructed. But time is an indispensable element in this widening process, and the more persistent the pressure for adjustment, the slower and more difficult the process becomes. Surpluses of readily adaptable labor and equipment in kindred industries are soon exhausted and new bottlenecks are created. The local supply of trainees dwindles and workers must be recruited from other areas at the cost of housing shortages, or from poorly qualified groups at the cost of longer training and of lower ultimate efficiency. Procurement of additional equipment becomes more difficult because the broadening of the bottleneck area has brought new competitors into the capital goods market and the further expansion of incomes has further increased the demand for consumers' durable goods. Bottlenecks in the machine tool industry are particularly stringent because expansion of its capacity requires diversion of part of its product.

Given sufficient time and the relatively free operation of the price system, production will undoubtedly adjust itself substantially even to violent qualitative shifts in demand. In the long run-and it is certainly a far longer run than was contemplated by traditional economic doctrine-labor and capital will be distributed roughly in accordance with the changed distribution of demand. For several reasons, however, we cannot rely upon operation of these natural forces for adjustment. First, the process is too slow in the light of the immediacy of the need for increased armaments production. Second, substantial price changes would increase costs of defense and permit large profits to be made by certain groups of entrepreneurs. Third, the resulting distortion of the economic system would create frightful problems of readjustment when the emergency was over.

If the present rate of output of armaments is to be rapidly increased in the immediate future, it is necessary to curtail production for nondefense purposes in those industries that are already operating at capacity. Recognition of this necessity is reflected in the establishment of a system of priorities whereby the right-of-way in certain industries is given to orders for defense purposes, and in the recent decision to curtail production of automobiles. But the effectiveness of this system of control is severely limited. Priorities restrict the supply of certain types of products without affecting demand for such products. Sellers' markets are created; increased price offers of certain consumers and fears of losing regular customers to competitors create difficulties of enforcement; and attempts to fix prices in order to offset the economic pressures are the natural consequences. As an English economist, commenting upon the fight against inflation in Great Britain, has remarked, “The most naive of all remedies is that of fixing a maximum price at which an article may be sold.” 1

Both the recent British experience and the American experience of 1917-18 clearly indicate that if certain types of production are to be controlled it must be done by curtailing demand. From the present time on, the problem of expanding armaments production in the United States is increasingly one of developing a program for controlling demand for civilian goods which compete with the defense industries for raw materials, skilled labor, and machine tools. The immediate need is for control which will divert civilian demand from those industries which are already overwhelmed by the demand for armaments to those industries that are as yet underemployed. But with the continued expansion of the national income and the consequent general exhaustion of idle productive capacities, there will be increasing need for a general curtailment of civilian demand.

One of the primary devices for curtailing civilian demand is increased taxation, by which means claims to the national product can be shifted to the Federal Government from private individuals and corporations. Another is to increase savings and to divert them to the Government either by highpressure sales of Federal bonds or by some scheme of compulsory savings. This memorandum will deal with a third method: Compulsory liquidation of consumer credit.

Holgate, H. C. F., England's Inflation Preventatives, Banking, February 1941.

The preoccupation of the writer with the latter device should not be interpreted as a denial of the importance of increasing taxation and savings, both of which the writer believes to be essential in any program of defense financing. The control of consumer credit is urged as a supplement to and not as a substitute for the other two methods of curtailing civilian demand. It will be contended, however, that control of consumer credit, while quantitatively less important than taxation and savings, offers certain unique advantages that give it a vital place in any fiscal program.

II. CHARACTERISTICS OF CONSUMER CREDIT IN THE UNITED STATES

During the eighteenth and nineteenth centuries, consumer credit granting appears to have been restrained by theoretical and practical objections. Classical economic doctrine contended that the use of credit by consumers diverted savings from the formation of capital, upon which rising standards of living depended. This theoretical objection was implemented on one hand by banking tradition, which insisted that credit should create the means of its own repayment, and on the other hand by ingrained fears of personal debt. These restraints, however, were gradually weakened by the usefulness of consumer credit as a merchandising device, by the rise of real incomes of the rank and file of the population, by the increasing importance of durable goods in consumers' budgets, and by the development of weapons for enforcing collection of debts against wage earners. The period from 1800 to 1910 was probably one of gradual expansion of consumer credit in relation to the national income. Expansion of consumer credit appears to have accelerated after 1910. Installment selling was extended to more and more types of consumer goods and to lower and lower income groups, and new types of personal loan agencies were developed. Between 1920 and 1930, the rapid growth of automobile sales on installment terms provided the primary stimulus for expansion. But the introduction and sale on installment terms of new types of consumers' durable goods such as mechanical refrigerators, radios, suction cleaners, electric washing machines, and automatic furnaces also contributed substantially to the increasing use of consumer credit.

The decline in incomes after the close of 1929 induced a substantial liquidation of consumer credit, and by the spring of 1933 the outstanding amount had been reduced by more than 40 percent. Thereafter, accelerating expansion was renewed under the stimulus of rising incomes, cheap money, inadequate demand for commercial loans, and liberalization of installment credit terms. The peak, somewhat higher than that of 1929, was reached in August 1937. after which another abrupt contraction occurred. The rate of liquidation dwindled during the second half of 1938. Expansion began near the close of that year, and has continued at an accelerating rate to the present time. By the close of 1940, the outstanding amount of consumer credit exceeded all previous peaks by a substantial margin.

Estimates of the year-end outstanding amounts of consumer credit for the period from 1923 to 1937 have previously been published. These figures, together with preliminary estimates for the years 1938, 1939, and 1940 are given in table 1. The figures for 1939 and 1940, some of the components of which represent extrapolations based upon unsatisfactory samples are necessarily crude and subject to later correction. Nevertheless, the error is not of sufficient magnitude to affect their usefulness for purposes of this memorandum.* . Consumer credit is granted almost universally on one or another of three specific plans: (1) The installment plan, under which the purchaser or borrower agrees to repay a fixed sum in a number of periodic payments, (2) the open-book or charge-account plan, under which periodic purchases are debited to the purchaser's account in anticipation of payment in full following his next pay day or after the first of the succeeding month, and (3) the term plan, under which the purchaser or borrower agrees to pay a fixed sum at the end of a specified period. Retail merchants and service creditors generally

2 Nugent, Rolf, Consumer Credit and Economic Stability. Russell Sage Foundation, 1939. It should be noted that for purposes of these estimates consumer credit is defined to exclude real-estate mortgages, delinquent taxes, delinquent rents, loans secured by life-insurance policies and building and loan shares, and loans between relatives and friends.

3 Preliminary figures from the 1939 Census of Business indicate that the error in the estimate for retail merchants in 1939 is less than 5 percent. The error in the estimates for cash-lending agencies both for 1939 and 1940 is of still smaller magnitude and for intermediary financing agencies it is negligible for 1939 and probably less than 4 percent for 1940.