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DEFENSE PRODUCTION ACT AMENDMENTS OF 1951

TUESDAY, MAY 22, 1951

UNITED STATES SENATE,

COMMITTEE ON BANKING AND CURRENCY,

Washington, D. C.

The committee met, pursuant to recess, at 10:30 a. m., in room 301, Senate Office Building, Senator Burnet R. Maybank (chairman) presiding.

Present: Senators Maybank, Benton, Moody, Capehart, Bricker, Schoeppel, and Dirksen.

The CHAIRMAN. The committee will come to order.
Senator Lucas, will you proceed?

STATEMENT OF SCOTT W. LUCAS ON BEHALF OF THE AMER-
ICAN FINANCE CONFERENCE, ACCOMPANIED BY DAVID B.
CASSAT, PRESIDENT, INTERSTATE FINANCE CORPORATION,
DUBUQUE, IOWA, AND CHAIRMAN OF THE EXECUTIVE COMMIT-
TEE OF THE AMERICAN FINANCE CONFERENCE; THOMAS W.
ROGERS, EXECUTIVE VICE PRESIDENT OF THE AMERICAN
FINANCE CONFERENCE; AND MORRIS MILLER, OF SENATOR
LUCAS' LAW OFFICE

Mr. LUCAS. Mr. Chairman and members of the committee, I should like to take this opportunity of thanking the chairman and the committee for permitting me to testify before you this morning, rather than last Friday afternoon.

I am appearing before you today on behalf of the American Finance Conference, a group comprising some 366 independent automobile sales finance companies, operating through more than 1,300 offices doing business in all parts of the United States.

I have sat on the other side of the table for so many years that I believe I know the magnitude as well as the seriousness of the problems which confront your committee as you consider legislation intended to continue the Defense Production Act of 1950.

The adoption of that act presented a very grave departure from the normal relationship which exists between our Government and its citizens. The extraordinary power to impose controls over production, distribution, and credit was justified only because we were confronted with an extraordinary situation.

Wisely, I believe, the Eighty-first Congress provided for a termination date for many of these authorizations, for it thus assured Congress of an opportunity to reexamine the picture.

83762-51-pt. 2-19

Now it seems to me that the reexamination must be made against the background of two large questions:

(1) Is the situation critical enough to justify the controls which are authorized; and

(2) If the answer to the first question is yes, then has the exercise of the powers been calculated to accomplish their purposes, and have these controls been so equitable in their application as to justify their unrestricted continuation?

My appearance before you today is for the purpose of inviting your attention to one type of control which stems from title VI of the Defense Production Act of 1950, the authorization of which expires on June 30 of this year, and which under S. 1397 would be extended until June 30, 1953.

I refer to Regulation W of the Board of Governors of the Federal Reserve Board, the authorization of which appears in section 601 of the Defense Production Act of 1950, which authorizes the Board of Governors of the Federal Reserve System to exercise consumer-credit controls. The particular aspect of Regulation W, as amended, to which I invite your attention is that part which requires a minimum of one-third down payment for new and used cars sold on the installment plan and which fixes the maximum maturity at 15 months.

I shall have occasion in a few moments to measure Regulation W insofar as it applies to the installment sales of new and used cars against the criteria which I have named above; that is, accomplishment of purpose and equity in application. But I cannot refrain from pointing out that Regulation W was made effective on September 18, 1950, and that the law, which was approved only 10 days before September 18, 1950, called, in section 709, for rules, regulations, or orders, or amendments thereto, issued under authority of that law, to be issued after there has been consultation with industry representatives, including trade-association representatives. There could not have been a great deal of consultation during the 10 days preceding the issuance of Regulation W. Certainly there was little or none before the issuance of amendment No. 1, effective October 16, 1950, which reduced the maximum maturity on installment sales of automobiles from 21 months to 15 months. I assume the Board of Governors of the Federal Reserve System is subject to section 709 of the act. At least, its program for voluntary credit restraint is, by the Board's own admission, under authority of section 708 of that act.

Members of the committee, I want to pause here and ask in all seriousness whether this committee has any idea what took place between September 18, 1950, when Regulation W was first effective and October 16, 1950, when amendment No. 1 became effective, which made it necessary for the Board of Governors of the Federal Reserve System to take the drastic step of reducing by some 28 percent the maturity period of installment sales of cars. I tell you in all seriousness that this unconscionable action, taken, as I have indicated, without any serious consultation with industry, cannot be defended or supported in the slightest degree. The only way to curb this sort of action is to establish a floor, a suggestion to which I shall advert later. Mr. Chairman and members of the committee, the statement just made is subject to some further explanation in view of the fact that the present defense legislation was enacted into law while I was serv

ing as majority leader of the United States Senate. Without qualifying the position on this legislation I now hold, it might lead to the charge that I was acting in a selfish capacity, ignoring the basic philosophy in the bill which I supported in the Eighty-first Congress. I wish emphatically to state that had I had the slightest reason to believe that the Federal Reserve Board would use the delegated power in such an arbitrary and capricious manner as we find in Regulation W, as amended, I would have favored a limitation upon that power by placing a floor below which the Federal Reserve Board could not reduce consumer credit.

I might add that immediately after October 16, 1950, when the Board used this extraordinary power over individual action, I telephoned Mr. McCabe, Chairman of the Board, vigorously protesting the decision, requesting that the Board reconsider its action, and that the industry representatives be given an opportunity to be heard in accordance with section 709 of the Defense Production Act. That request was denied.

I have an idea this committee would be in for a considerable surprise if it were to poll the individual members of the Board and to learn from them what evidence and statistics were presented to them in justification of the amendment. We submit that under such circumstances there was no justification for this dictatorial action.

The nearest thing to an announced justification was the innocuous generality of Chairman Martin-who, incidentally, was not a member of the Board of Governors at the time of the amendment--when testifying before the House Banking and Currency Committee on May 10, 1951. On that occasion he said:

Some weeks later, after careful consideration of current and prospective developments not only in the consumer durable-goods field but in the economy as a whole, the Board announced, effective October 16, a more restrictive set of terms which has remained in effect since that time.

It is quite interesting to learn the reasons assigned by Mr. McCabe in taking such drastic action, and I refer now to page 81 of the hearings before the Joint Committee on Defense Production of the Eightyfirst Congress, from December 6 to 11, inclusive, in which Mr. McCabe said this:

Special circumstances have rendered impracticable and contrary to the interest of national defense consultation with industry representatives, including trade-association representatives, in the formulation of the above amendment, and, therefore, as authorized by the aforesaid section 709, the amendment has been issued without such consultation.

That is what Mr. McCabe testified to before the joint committee holding hearings last December.

When Chairman Maybank outlined his program for these hearings, he said:

I am determined that these officials [Government officials] shall make a clear, concise record of exactly what they propose to do with this authority.

In view of what the Federal Reserve Board did in arbitrarily making Regulation W more restrictive, I am certain that Senator Maybank is correct, but I go even farther. I believe that one test of what they propose to do with extended authority is how they have acted under existing authority. And I submit that, if future conduct is to be of a pattern with the conduct obtaining in the case of the issuance

of the amendment 1, then this committee had better take a long look before extending consumer-credit controls under present conditions. Senator BRICKER. You do not think this is unique at all, do you? Mr. Lucas. It is not. It is the same pattern, as far as industry is concerned.

This committee should also consider the following:

Section 708 of the Defense Production Act authorizes the Board of Governors of the Federal Reserve System to encourage financing institutions to enter into voluntary agreements and programs to restrain credit where such restraint will further the objectives of the

act.

A national committee known as the Voluntary Credit Restraint Committee has been created, with the Honorable Oliver S. Powell, member of the Board, as Chairman. This action is in keeping with congressional intent. The experience of the Congress with rigid controls in the past has been anything but encouraging. Therefore, the voluntary credit restraint program, requesting banks, life-insurance companies, investment bankers, and many other types of lenders not to extend credit of an undesirable character is a commendable step in the right direction against inflation. However, it makes one wonder why Regulation W, as amended, became effective before the voluntary method was tried with financial institutions and dealers who handle installment credit upon automobiles. It would seem to me wholly unwarranted to make installment selling of automobiles the whipping boy of inflation in the absence of actions covering all sections of our economy.

However, charges of precipitous and ill-considered action based on the short period of time for study and consultation and charges of failure to consult with industry members along with the voluntary credit-restraint program must be subordinated to the more objective approach of analyzing the purposes for which the regulation was issued, and seeing whether operations under the regulation achieve its purpose.

Now, Mr. Chairman and members of the committee, what were the declared purposes of Regulation W? They are two:

(1) To check inflation by reducing the credit available to the public for purchases of goods that are in short supply; and

(2) To save essential materials by reducing the demand for durable goods.

Before going ahead, let me make one thing crystal clear: Neither I, nor the group for which I speak, contends that it is unnecessary to curb inflation and to conserve essential materials.

On my left is Mr. David B. Cassat, president of the Interstate Finance Corporation, of Dubuque, Iowa, and chairman of the executive committee of the American Finance Conference. On my right are Thomas W. Rogers, of Chicago, executive vice president of the American Finance Conference; and Mr. Morris Miller, my associate here in my office in Washington.

Neither I nor the group for which I speak contends that it is unnecessary to curb inflation and to conserve essential materials. I am anxious that you understand our position on this point, for I assure you that I would not be here if I thought that opposition to Regulation W meant the promotion of, rather than checking or, inflation,

or the dissipation, rather than the conservation, of essential materials. Perhaps the second justification-that of conserving critical materials should be taken up first and dismissed quickly. I have already mentioned that Regulation W applies equally to used cars as well as to new cars. I shall welcome any help from this committee toward expalining how credit control on used cars conserves materials. I should hope that, before this hearing ends, the Chairman or some member of the Federal Reserve Board would explain this economic fallacy.

As to new cars, it is obvious that the manufacturer depends upon the availability of materials going into the cars. There is ample power in the Defense Production Act for the allocation of materials. to automobile manufacturers, and, in fact, that power has been exercised. No amount of curbing consumer demand is going to make scarce materials plentiful. It must be readily obvious to this committee that you cannot control the manufacture of new cars by making it impossible for those who need them to buy them.

In other words, Mr. Chairman and members of the committee, if you really want to control inflation, as far as the automobile industry of this country is concerned, you should get at the roots of it, and the Defense Production Act confers all the power and authority necessary to curb the manufacture of automobiles by allocating less steel and other critical and essential materials. That is the spot where they ought to be striking at rather than at the little fellow down at the tail end of this situation.

As long as manufacturers are going to be able to get the steel, aluminum, copper, and so forth, which go into their cars, they are going to make cars; and if these materials are critically necessary for the defense effort, the present law confers ample jurisdiction on the Executive to reduce the amount of such materials available for automobile manufacturing and to divert those materials for defense activities.

I must confess that I find it hard to see how any critical materials are conserved by a regulation which tells a man who needs a car that he cannot buy the car, already made, mind you, unless he pays onethird down and the balance in not in excess of 15 months. Incidentally, are the materials in a car not critical if the car happens to be purchased on an all-cash basis?

The principal argument for the exercise of the extraordinary control in Regulation W is, of course, that it checks inflation. Now, Mr. Chairman and committee members, I do not hold myself out to be an economist. However, in my many years on Capitol Hill and especially in my service as a member of the Senate Finance Committee, I have been exposed to a tremendous amount of education on this subject. It has been my understanding that inflation is caused by the creation of new money through extension of credit. There must be a distinction made between sources originating new money and sources distributing the new money that is created. The only originating sources of new money are the Federal Reserve System and our banking system and the credit program of the Federal Government. This consumer credit which we hear and talk about so much is not an originating source of new money-it is an avenue for the distribution of the new money.

Senator BRICKER. Is there any new credit created? The contention of the Board is that this creates a new credit, a floating credit that multiplies the dollars that are already out.

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