Installment credit is the most important form of consumer credit, which is the short-term and medium-term portion of individual debt. Consumer credit accounts for about 30 per cent of total household debt in the United States, with mortgage debt amounting to most of the rest, and for about 10 per cent of the total private debt in the country. Consumer credit is, excepting real estate mortgage credit, the credit granted to consumers for household, family, and other personal reasons. Noninstallment credit includes all single-payment loans, charge accounts, and service credits. Installment credit (or hire purchase, as it is known in Great Britain) is composed of loans to finance automobiles and other durable consumer goods, repair and modernization loans, and certain other personal loans. Installment loans are repayable at regular intervals over a specific period of time. Contracts frequently provide that the goods purchased shall not become the legal property of the purchaser until every installment has been paid.
The demand for consumer credit arises in countries where there is the need to finance automobiles, refrigerators, laundry equipment, and other such products. In all the wealthy countries in the world, the greatest single use of installment credit is for the purchase of automobiles. In the United States, since the 1920s, except for a short period after World War II, from 60 to 70 per cent of the automobiles have been purchased with installment credit. [SeeConsumers, article onconsumer assets.] Other exceptionally large expenditures, such as tax payments, insurance premiums, travel expenses, Christmas expenses, and unpaid bills are also financed by installment credit. Single-payment credit is used to meet more transitory financial requirements or arises as the result of sellers offering delayed payment terms for customer convenience.
The major lenders of consumer credit are financial institutions such as commercial banks, sales finance companies, credit unions, and consumer finance companies. Retail outlets such as department stores, furniture stores, and appliance and automobile dealers also extend substantial amounts of consumer credit. Commercial banks are by far the largest issuer, owning about 50 per cent of all the consumer credit financed by financial institutions and over 40 per cent of all consumer credit.
The volume of consumer credit in a country depends on the employment and income conditions, the types of goods produced, and the level of competition in the sale of these goods. Installment credit is feasible only where a large part of the population receives its income in regular periodic amounts, such as weekly or monthly payments of wages and salaries. At the same time, these incomes must be large enough for the population to afford rather expensive consumer goods. Postwar Europe, including the United Kingdom, has experienced a rapid growth in consumer credit as incomes have risen. Single-payment credit requires the ability to forecast the future availability of funds to repay the loan. Much of this type of consumer credit is offered to attract customers to specific stores or products.
History. Individual or consumer credit is an old institution. Ever since markets existed where
|Table 1 - Consumer credit and disposable personal income (in billions of dollars)*|
|TOTAL CONSUMER CREDIT||INSTALLMENT CREDIT||NONINSTALLMENT CREDIT||DISPOSABLE PERSONAL INCOME|
|*Details may not add to totals because of rounding.|
|Sources: U.S. President, Economic Report …|
products were sold, there has been financing of consumers. Until the nineteenth century, however, much of this credit was on a personal basis: debt was not institutionalized, and repayment agreements were often not formally written down. Installment loans for the purchase of consumer durable goods, such as furniture, appeared in the nineteenth century in the United States. Serious attention to installment credit first arose after World War i. The introduction of the mass-produced passenger automobile was facilitated by the very rapid expansion of consumer credit in the 1920s.
The rapid growth of consumer credit in the United States since the 1920s has aroused great public interest and discussion. The development is regarded by some as unsound from the viewpoint of the economy and unwise from the viewpoint of the borrower. Others feel that installment credit is necessary for the distribution of new durable goods among broad groups of the population, permitting the development of industry on an efficient and highly productive basis. During the depression of the early 1930s, consumer credit proved to be a sound asset. However, some observers continue to feel that installment credit does contribute to economic instability and ought to be regulated.
Between 1947 and 1965 consumer credit grew at a faster rate than individual mortgage credit in the United States. In 1947 consumer credit amounted to $11,600 million; in 1965 it amounted to $87,900 million. The rate of increase in consumer credit has been 10 per cent per year, or about double the rate of growth of income (see Table 1). Installment credit constitutes about 75 per cent of consumer credit; noninstallment loans, about 25 per cent. About 40 per cent of installment credit is automobile loans. Personal loans and loans to purchase consumer durables account about equally for the balance.
|Table 2 - Consumer credit outstanding, by type, 1947 and 1965 (end of years)|
|Billions of dolloars||Percent of dolloars||Billions of dolloars||Percent of dolloars||AS A MULTIPLE OF 1947*|
|Source: Federal Reserve Bulletin.|
|*Multiples computed from unrounded figures.|
|Repair and mod-|
|Table 3 - Growth of consumer credit and of installment debt repayments relative to disposable income|
|Consumer credit as percentage of disposable income||Installment debt repayments as percentage of disposable income|
|Source: U.S. President, Economic Report.…|
Throughout the postwar period installment credit has increased relative to noninstallment loans (see Table 2). The initial spurt after World War II probably reflects the end of the wartime period of short supply of automobiles and consumer durables. Easily available credit and the widening variety of uses for personal loans help to explain the growth since then.
Not only has consumer credit been growing more rapidly than income, but consumer debt repayments as a percentage of disposable income have also been rising (see Table 3). These trends have caused some observers to question how long this can continue and to express alarm over the long-run and cyclical effects of the growth in debt. Many fear that consumers may become overextended.
Cyclical implications. Since consumer credit accounts for a significant share of purchases of consumer durables, variations in the rate of growth of consumer credit may not only intensify the business cycle but may, in fact, act to create it. Throughout the postwar period, consumer credit has exhibited a strong growth trend. The change in consumer credit outstanding, however, displays a lagging cyclical pattern. Net extensions increase most rapidly after income rises sharply and decline after a downturn has begun. This suggests that consumers borrow heavily to purchase durable goods during a cyclical upswing in anticipation of future growth in income. The additional spending, however, acting through the multiplier and accelerator, tends to amplify the boom.
During recessions, when income prospects are less certain, new borrowing declines. Repayments of debt granted during the expansion, however, must be met. Borrowers may be forced to reduce the proportion of their disposable income spent for consumption, thus aggravating the decline. Difficulties will be compounded if, at the peak, the level of indebtedness is pressing against the ability of borrowers to meet scheduled repayments. In this instance a decline in income, even of modest proportions, could produce widespread defaults. If the solvency of creditors is threatened, they may refuse to grant additional loans, and spending will be further reduced. Thus, consumer credit can add to the forces causing business cycles. [SeeBusiness cycles.]
Variations in the rate of growth of consumer credit may also create a business cycle. Since repayments represent a drain, or leakage, from currently available income, new installment loans at least equal to repayments are required to supply consumers with purchasing power. If new borrowing declines or repayments rise for any length of time, sales of consumer durables will fall. In 1961, for example, new installment loans on automobiles fell $1,600 million from the 1960 level of $16,000 million, and repayments rose negligibly to $16,500 million. The fact that repayments were slightly larger than new lending helps to explain the reduction in automobile sales from 556,000 monthly in 1960 to 462,000 monthly in 1961. If additional net purchases financed on credit are required to sustain a boom, extensions must always exceed repayments.
In the postwar period the cyclical swings in the change in consumer credit outstanding have followed the business cycle. For this reason, consumer credit variations have probably delayed recoveries and added to inflationary pressures later on during expansions. The fluctuations, however, do not appear to have been a major independent influence in creating business cycles.
Trend implications. The fact that installment credit has been growing more rapidly than income and that installment debt repayments as a percentage of disposable income (see Table 3) have been rising suggests that families may have been borrowing larger and larger amounts relative to their incomes. If this were to continue, the burden of the debt would eventually become intolerable, and its growth would stop. When this happens, some authorities maintain, sales of consumer durables will decline, and the prosperity, which has been financed in part by installment credit, will end.
Alain Enthoven has presented (1957-1964) a model which shows that the growth of installment credit can be explained primarily by the increase in the proportion of households using installment debt rather than by a rise in the average indebtedness of households that already have some debt outstanding. According to this model, if the number of families using installment credit suddenly rises, and total debt initially is small, and the debt-income ratio (average propensity to incur debt) for each family remains constant, the installment credit-income ratio will asymptotically approach a stable limit from below. As the number of families using installment credit increases, the limiting debt-income ratio will rise.
Other models have been suggested that relate the number of families borrowing to the level of income in the economy, and the amount of borrowing per family to the income level in that family. These models suggest that the ratio of consumer credit to income will rise as income levels rise.
There is no consensus on how high the debt-income ratio may go before the burden of the debt becomes intolerable. There is fairly general agreement, however, that very serious problems are not likely to arise as long as income remains high and growing. In analyzing the total burden of household debt, not only consumer credit but also mortgage debt, security credit, and other household debt must be considered. As suggested above, the burden depends on the distribution of the debt and the financial resources that borrowers could marshal to repay their debt if their incomes should falter.
Individual debt has increased relative to disposable income each year since 1955 and has risen relative to discretionary income in eight of the nine years from 1956 to 1964 (see Table 4). Although
|Table 4 - Total household debt relative to disposable and discretionary income and liquid assetsa|
|TOTAL HOUSEHOLD DEBT||TOTAL HOUSEHOLD DEBT AS A PERCENTAGE OF|
|(In billions of dollars)||Disposable income||Discretionary income||Liquid assets|
|a. Household debt includes mortgage debt. Liquid assets includes currency plus demand deposits, time and savings accounts, savings bonds and other federal government security holdings.|
|b. Not available.|
|Sources: Federal Reserve Bulletin; U.S. President, Economic Report. . . .|
the ratio of debt to liquid assets for households leveled off in 1960, the most recent figure indicates a sharp jump. While these figures tend to show that the burden of the debt has become greater, the discretionary income of households has increased, indicating their debt capacity may have risen substantially over the period. Basic expenditures, such as food, now account for about 20 per cent of current household expenditures, down from 28 per cent in 1947. Also a considerable portion of borrowing results in the substitution of durable goods and housing for services and in a consequent reduction in other relatively fixed expenses. Consumers borrow to buy homes, cars, and washing machines rather than pay rent, subway and taxi fares, and laundry bills.
These figures, however, are aggregated and may present a misleading picture. They do not show the distribution of debt by income class and liquid asset holdings. If liquid assets are owned primarily by debt-free consumers, it would be incorrect to assume that all liquid assets could serve as a backstop for debt repayments. Ideally one would like to know the total debt—mortgage plus consumer credit—owed by families relative to their incomes and wealth, but this information is not available. (Some data on the distribution of households owing installment debt is provided in the 1964 volume of Michigan, University of …Survey of Consumer Finances.)
In 1964, 47 per cent of American families owed installment debt (see Table 5). Most families in debt owed relatively small amounts; almost one-half owed less than $500, and only 6 per cent owed $2,000 or more. The distribution of families according to installment credit repayments as a percentage
|Table 5 - Number of spending units and percentage having installment debt, selected years, 1950-1964|
|Percentage of spending units having installment debts||Number of spending units (in millions)|
|Source; Michigan, University of … Survey of Consumer Finances.|
of income has not changed greatly in the last ten years. In 1964, about one family in ten was committed to debt repayments greater than 20 per cent of income. Twelve per cent of all families with incomes below $3,000 and 17 per cent of all families in the $3,000-$4,999 income bracket were obligated for annual repayments of at least 20 per cent of income. Only 8 per cent of the families made debt repayments between 20 and 39 per cent of their incomes, and only 2 per cent were obligated to make repayments in excess of 40 per cent of their incomes. Most families with relatively high debt repayment-income ratios also had relatively low incomes (below $5,000). Perhaps some of these families had suffered a temporary reduction in income. From these figures, relatively few families appear to have excessive debt. If there is a problem, it would seem to be with a few borrowers rather than with most.
Throughout the postwar period debt-income and debt repayment-income ratios have been rising. Although the cyclical movements in installment credit have tended to reinforce the business cycle, variations in consumer credit have not played a major independent role in creating a business cycle. Until recent years most of the growth in installment credit could be explained by the widening of its use rather than a deepening of the intensity with which individual families use it. This distribution of installment debt indicates that some borrowers may be overcommitted, but this is not a widespread occurrence. There is no consensus on how high the debt-income ratios may go before the burden of making repayments is likely to create widespread defaults. As long as income is rising, serious problems are not likely to be encountered. The existence of debt, however, does make recovery from a recession slower and more difficult than it otherwise would be.
Consumer credit regulation. On three occasions the federal government has undertaken to regulate the terms of consumer installment lending in order to curb the volume of this type of borrowing. Federal selective control of consumer credit was first imposed during World War II by Regulation W of the Board of Governors of the Federal Reserve System as the result of an executive order of the president in 1941 based on war-emergency legislation. The major purpose of Regulation W was to dampen the demand for consumer durable goods containing strategic materials needed for defense, and then, war production. Prior to this time, however, theoretical recommendations for the adoption of installment credit controls were based on arguments for moderating peacetime business fluctuations rather than on “emergency” considerations. The conflict that still exists about whether this type of control should have emergency or permanent status really stems from the fact that it was proposed to accomplish one set of objectives and was adopted to accomplish others of an emergency nature. Nevertheless, the executive order of August 9, 1941, was drawn broadly enough to include more objectives than the transfer of resources to defense industries:
The public interest requires control of the use of instalment credit for financing and refinancing purchases of consumers’ durable goods … in order (a) to facilitate the transfer of productive resources to defense industries, (b) to assist in curbing unwarranted price advances and profiteering which tend to result when the supply of such goods is curtailed without corresponding curtailment of demand, (c) to assist in restraining general inflationary tendencies, to support or supplement taxation imposed to restrain such tendencies and to promote the accumulation of savings available for financing the defense program, (d) to aid in creating a backlog of demand for consumers’ durable goods, and (e) to restrain the development of a consumer debt structure that would repress effective demand for goods and services in the post-defense period…. (Code of Federal Regulations … 1965)
The regulation established minimum down payments and maximum maturities for installment sales of consumer durable goods and for installment loans used to purchase consumer durables. This phase of the regulation lasted until November 1, 1947, when controls were terminated.
In the early postwar period the general upward movement of prices, accompanied by increases in consumer credit, caused growing concern about this segment of the economy. In a special session in 1948 Congress enacted a measure authorizing credit regulation until June 1949. By 1950 the economy had started into the expansionary phase of a business cycle. The demand for consumer durables increased and by early 1950 had reached the limit of productive capacity. This produced an inflationary situation, which was aggravated by the start of the Korean conflict in June 1950. The president accordingly urged reinstatement of Regulation W, and in September 1950 controls were re-established. Regulation lapsed May 7, 1952. In April 1966 the House Committee on Banking and Currency urged that the president be given stand-by authority over consumer credit as a part of the Defense Production Act extension bill.
During each instance of consumer installment credit regulation the Board of Governors of the Federal Reserve was authorized to regulate the maximum maturities and minimum down payments required for borrowers purchasing different types of commodities.
Effect of changing maturities. A shortening of contract maturities increases the required monthly repayment. Since repayments will take a larger share of income, some potential borrowers will refrain from buying. This will reduce the amount of consumer credit extended and lower the demand for consumer durables. A lengthening of contracts, on the other hand, is intended to induce consumers to make additional purchases.
Although the change in the monthly repayments will have an immediate impact on the number of borrowers, there is also a secondary reaction for those who obtain credit. Increased monthly repayments reduce the discretionary income of the borrower, so that less remains to be spent on other goods. Rising repayments, therefore, also tend to curtail consumer spending, but this effect is of uncertain magnitude and is likely to have a considerable lag.
Effect of changing down payments. Theoretically an increase in the minimum down payment will eliminate potential borrowers whose liquid asset holdings are not sufficient to meet the minimum requirements. This will tend to reduce the amount of consumer credit extended and lower demand for consumer durables. A reduction in minimum down payments, on the other hand, is intended to encourage greater borrowing and spending.
In practice, since automobile credit transactions usually involve trade-ins that fulfill all or part of the down payment requirement, the impact of changes in the minimum down payment is likely to be small unless the down payment is large relative to the purchase price. This may so restrict effective operation of changes in minimum down payments that the desired result can be achieved more effectively through variations in maximum maturities. When Regulation W was in force, automobile down payments were set at one-third the purchase price and remained there throughout the period of regulation. Since many household durable goods have relatively low purchase prices, any change in down payment requirements must be fairly drastic to be effective. For these reasons, variations in the maturity of installment credit loans are likely to be a more effective regulator of the volume of installment credit than are changes in minimum down payments.
Regulation and monetary policy. Although their ultimate desire is to dampen cyclical fluctuations in the production and sale of consumer durables, proponents of selective credit controls generally establish their case by maintaining that monetary policies and variations in interest rates will have little or no influence on the demand and supply of consumer installment credit. Borrowers are believed to be concerned primarily with minimum down payments and monthly repayments, so that demand tends to be interest inelastic. Lenders, on the other hand, are only slightly affected by variations in interest rates. Since rates charged borrowers are always much greater than the cost of obtaining funds in the money market and since the federal income tax absorbs almost half of the interest payments by corporations (since they are a deductible expense), rising interest rates do not make sales and consumer finance companies reluctant to grant loans. Although banks may restrain other types of credit during periods of tight money, they are not likely to curtail installment lending because of its profitability. Competition from sales finance companies is likely to make banks adopt liberal installment lending policies, even during periods of tight money. The record-breaking increase in installment credit in 1955, when interest rates were rising, is often cited as proof that installment lending is not sensitive to general monetary policies.
Opponents of credit controls argue that consumer installment credit deserves special consideration only if expansion in installment credit makes it impossible for the Federal Reserve to limit expansion in total bank credit and the money supply during periods of boom. Since 1951 the average rate of increase of the money supply has been slightly less than 3.5 per cent per year. Since the economy historically has grown about 3.5 per cent per year and since the money supply needs to grow secularly at about the same rate, the performance since 1951 indicates that the Federal Reserve has been quite successful in keeping the expansion in bank credit and the money supply within a desirable range. The annual increases in the money supply and bank credit, moreover, were greatest during periods of recession—as would be desired. Opponents claim that 1955 is a poor example for showing that the Federal Reserve could not regulate installment lending because the Federal Reserve did not tighten monetary policies significantly until mid-fall.
Although installment credit continued to rise during this period of tight money, there is evidence the growth was less than otherwise would have occurred. In 1956 a number of banks reported the imposition of ceilings on the volume of installment loans. Despite high profitability they were unwilling to expand consumer credit at the expense of other types of credit for fear that it might involve a sacrifice of existing borrower relationships in other loan areas. Longer maturities were discouraged, and stricter credit standards were imposed on borrowers. Drawing on what would otherwise have been idle balances does not seem to have constituted a major source of financing for installment credit. The immediate goal of monetary policies is to make over-all credit expansion less than it otherwise would be. In this respect, monetary policies appear successful in influencing all types of credit. If the evidence suggests that the Federal Reserve can limit the expansion in total bank credit, then the case for direct regulation of installment borrowing must rest on specific imperfections in the money and capital markets that result in an “incorrect” allocation among the numerous claimants of a “correct” amount of credit. Most economists, however, would agree that government controls to influence the allocation of resources during periods of peacetime are contrary to the basic notion of economic freedom.
Instability of durable goods production. One of the major obstacles to the Federal Reserve’s efforts to stabilize aggregate demand is its inability to influence the production and sale of automobiles and other consumer durables. General monetary policies cannot protect against sharp independent shifts in consumption, such as occurred when the United States became involved in the Korean conflict. Historically, variations in installment credit and production of durables may have intensified the business cycle. As the economy approaches full employment, increases in installment credit are likely to come at the expense of credit for investment, with the result that capital formation and economic growth will suffer. It is argued that consumer credit controls wisely used would smooth the production of durable goods and prevent over-expansion in one period at the expense of the next. Greater economic stability and economic growth could be achieved. Selective controls over consumer credit, moreover, would make it unnecessary to adopt a policy of active restraint in periods of overbuying of consumer durables while other sectors of the economy were still operating below capacity.
Opposition to consumer controls. Many economists are opposed to the use of selective consumer credit controls. In their view, the goal of monetary and fiscal policies should be to prevent undue fluctuations in total aggregate demand, not to stabilize each component of the total. Variations in the components—for example, consumer durables—reflect changes in the demand and supply of particular commodities and are a sign of progress. They show the adaptation of production to the changing tastes of the public and are to be welcomed. Destabilizing effects occur only when an expansion in the sale of consumer durables does not represent a reduction in spending on other types of goods and services. In this case, the net addition to aggregate demand will create a higher level of income and consumption among those producing durable goods. This secondary reaction, or multiplier effect, may intensify or even cause a business cycle. The problem, therefore, is a general excess or deficiency of aggregate demand. Total aggregate demand, however, may be stabilized more effectively by general monetary and fiscal policies than by operating on the narrow base of consumer installment credit.
Even if installment credit controls were available, they would be exceedingly difficult to apply, for the regulatory authorities would be forced to make judgments on whether particular sectors of the economy were growing too slowly or too rapidly. The 1955 boom in automobile sales was the immediate cause of interest in credit controls. Yet the expansion of automobile production and the subsequent decline did not have the secondary repercussions that were so widely feared. Few cases calling for regulation, however, are likely to be as clear as the one in 1955 appeared to be at that time.
Controls to protect against loan losses. During a sustained boom, the profitability of lending is likely to be high, and some financial institutions may lower their lending standards and liquidity to accommodate a greater volume of loans. The reduced quality of credit is likely to be concealed by the exuberance of the expansion. If a cyclical downturn occurs, however, large loan losses may occur, which would weaken financial institutions and would have undesirable repercussions on the money supply and on confidence in financial institutions. Consumer credit regulations could help to prevent undesirable growth of this type of credit or a possible lowering of standards of lending in the consumer credit field.
Although economists have not emphasized this aspect of consumer credit controls, it has been very influential with lenders who fear the consequences of reduced down payments and longer periods of repayment. Most economists maintain that this fear is entirely hypothetical and is not based on historical experience. Consumer credit, they point out, has produced few, if any, bank failures and has never been responsible for a loss of confidence in banks.
Despite a general easing of terms throughout the postwar period, it is interesting to note that loan-loss data show no significant trend. For sales finance companies, the loss experience has improved recently; for consumer finance companies, it has deteriorated slightly. A study by the Federal Reserve ([U.S.] Board of Governors …1957) indicated that if the worst loan-loss experience encountered in 1938 were to occur again, losses to companies in the industry would amount to 17 per cent of their reserves and net worth in 1955. With income after taxes amounting to 10 per cent of net worth per year, possible losses could largely be absorbed in the general operations of a business. Losses, actual and potential, therefore, do not appear great enough to jeopardize the solvency of consumer credit institutions as a group.
Need for additional tools. Many proponents of installment credit controls argue that the greater the number of tools available to the regulatory authorities, the more likely they are to be successful in smoothing or eliminating business cycles. Consumer credit control may not be the best tool, but it is effective in the sense that the regulations can be reasonably well enforced and that changes in terms appear to affect the sales of particular goods. Those opposed to consumer credit regulation maintain that business cycles could be countered by more effective and wiser use of the existing tools than has been the case in the past. Business cycles will not be eliminated by giving the regulatory authorities additional tools.
Shifts in consumption. It is usually assumed that if the consumer cannot buy durable goods because of a high down payment or a short maturity, he will save the funds he would have spent rather than spend them elsewhere. If he shifts some of his buying from consumer durables to other goods and services, the installment credit regulation will be responsible for a change in consumption patterns rather than a reduction in aggregate demand equal to reduced purchases on durables. If both durable and nondurable goods production is initially at capacity, a tightening of consumer credit regulations could cause inflationary pressures in nondurables. Most economists opposed to consumer credit regulation believe shifts in consumption patterns could be considerable. As before, the question of installment credit controls really hinges on whether there is excess demand for all goods and services or merely for consumer durables.
Evasion. One of the most effective arguments against installment credit regulations is that they would be impossible to enforce. Both sellers and buyers would have incentives to evade the regulations. Sellers of durable goods often extend credit and retain the paper rather than sell it to a financial institution. Except in times of national emergency, stores are likely to be more interested in achieving a high level of sales than in enforcing credit regulations. In 1950 about 150,000 establishments were covered by credit regulations. Unless the regulatory authorities are prepared to hire thousands of investigators to police stores and lending agencies, the likelihood of compliance is low.
Borrowers could avoid the regulations by shifting from “purpose” to “nonpurpose” loans. Since the minimum down payment and maximum maturity would vary for different types of goods, a borrower could skirt the requirements by borrowing without any specific purpose against his general credit or by alleging a purpose for which the minimum down payment is lower or maturity greater. Although this would probably be impossible whenever the loan is large, such as for a new car, it could be significant for sales of used cars and other consumer durables.
Dealers could avoid minimum down payment requirements by starting with unrealistically high prices and then giving an overallowance for trade-ins. This, of course, could be avoided by imposing maximum loans-to-value ratios based on dealers costs. However, the number of commodities involved is so large, the availability of list prices so limited, and the practices of manufacturers in setting suggested retail prices so varied, that it would be very difficult to determine reasonable maximum loan-value ratios for each commodity and make them widely known to sales finance companies, banks, and dealers to facilitate compliance.
At the moment no clear consensus exists on the need for, or the usefulness of, consumer credit controls in achieving economic stability. It is generally agreed that such controls must remain subordinate to general monetary and fiscal policies. The real question to be answered is whether fluctuations in the production of consumer durables have been sufficiently destabilizing to warrant special regulation. Those in favor of regulations tend to assume that greater stability in all components of aggregate demand is desirable. Overextension of consumer credit, however, is unlikely to have caused any of the postwar recessions. Several proponents believe the same objectives would be achieved as effectively by selective excise taxes or more active fiscal policies but see little hope in this direction because of congressional delays in revising tax laws. Others have urged passage of legislation to improve the short-run effectiveness of fiscal policy.
To be effective, consumer credit controls would require the support of the public. Since there is no clear agreement on the objectives to be sought and since few would agree that consumer credit should be regulated to control the allocation of resources in peacetime or periods of limited involvement in hostilities, the public is unlikely to support consumer credit regulation. Even if rationing of credit by individual lenders is defective, many would consider it extremely dangerous to have the central bank assume this function.
In 1957, after an extensive study by the Federal Reserve System ([U.S.] Board of Governors …1957), President Eisenhower concluded that the evidence did not justify a request for authority to reimpose controls. The Federal Reserve concurred in this decision. In explaining the decision, five points were made: First, fluctuations in consumer installment credit, though tending to accentuate swings in business conditions, have accounted for a fairly small proportion of changes in total credit. Second, losses involved, even in recessions, have not been large enough to affect seriously the financial position of lending institutions. Third, the relatively rapid growth in this type of credit largely reflects the growing proportion of middle-income people using it. Fourth, existing instruments of policy can hold changes in total bank credit and the money supply within reasonable limits. Fifth, the large 1955 expansion reflected a concatenation of special factors not likely to be repeated.
In 1960 the Joint Economic Committee (U.S. Congress …1960), after extensive study of the problems involved in maintaining full employment, rapid economic growth, and stable prices, concluded that the Federal Reserve should be given stand-by authority to regulate consumer credit. In 1961 the Commission on Money and Credit reported no clear consensus among its members on the desirability of permanent consumer credit controls. In 1966 Congress granted the president stand-by authority to control consumer credit. The desirability of installment credit regulation remains a topic of active debate.
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