Mr. LUCAS. I cannot follow that theory, Senator Bricker. It may be that some economists from the Board could explain that, but I cannot follow that theory, and I do not believe that is the logical

answer.

Senator BRICKER. That is the basis upon which they predicate it. Mr. LUCAS. I shall get into a point a little later which may partially answer the question the Senator has raised.

Senator CAPEHART. Of course, the automobile has been manufactured and sold, so the only possibly new money involved is the difference between the price the manufacturer sold to the dealer and the price it is going to be sold to the consumer, which I would say normally is around 20 percent of the total selling price of the automobile. Before you can sell a car, it must have been made, the manufacturer has been paid for it, the dealer has paid for it, he owns it. He has his money in it, so the only additional credit involved or money involved, is the difference between what the dealer paid the manufacturer for the car and the price he is going to sell it to the consumer which runs, I suppose, with the dealers' discount, 20 to 25 percent. Mr. LUCAS. It is the profit system we Americans believe in.

Senator CAPEHART. In the case of used cars, the dealer has his money in it; they are already paid for. The money has already been put into circulation for the purchase of those cars; and, as you say, the material has been used, whether it be scarce or otherwise. In the manufacture of a new car, of course, we know the materials have been used in the manufacturing of the used cars; so as far as new money is concerned, you are dealing with the so-called dealers' gross profit. Mr. LUCAS. The Senator states the case much better than I could, and I am grateful to him for that statement because that is the exact fact, of course. I cannot advocate the theory advocated by the Federal Reserve Board.

I believe that a valid test is the relationship between installment sales credit and total consumer purchasing power. Installment sales credit outstanding at the end of 1950 was only 3.85 percent of total consumer purchasing power. Let me emphasize this: That it is against this small volume-3.85 percent of total consumer purchasing power that Regulation W applies. If you believe the Federal Reserve Board in some of the statements you read in the press and magazines, you would think Regulation W was the whole key to this socalled inflationary spiral which we are trying to stop.

Senator MOODY. Is it not true on new cars at least the prices are very firmly fixed now by the OPS, and there is not going to be any bidding up of prices.

Mr. LUCAS. The Senator is absolutely correct. That is true of used cars, too. The Federal Reserve Board frequently talks about price fixing in one way or another; and, after all, the Federal Reserve Board is not the price-fixing agency in Government. They have nothing to do with that.

Senator BRICKER. The Federal Reserve Board, in measuring the inflationary pressures in the country, takes the amount of credit that is outstanding all over the country, and they add the amount of consumer credit to that as a part of the inflationary pressure on the theory that the seller has the money and there is credit extended to the purchaser, and you take both that money and that credit as a part of the underlying inflationary pressures in the country.

I am one, as you remember very well, who opposed regulation W back yonder when we did not think we were going to have a war on the ground that it prevents the little fellow, the worker who does not have ready cash, from getting a needed part of his living: transportation.

Mr. LUCAS. I will cover that just a little later.

Senator BRICKER. I felt then that Regulation W was out of place in our economy at that time.

Now, I wish you would give a little attention to the fact as to whether or not there is a multiplied credit in the country due to the fact that in this transaction you create not only the cash or the money that the owner gets for the car, and his credit which he can use, of course, with his bank, if this voluntary program and further reserve restrictions do not cut that credit out, as it is being lessened tremendously at the present time, but you also create credit in the purchaser which also takes spending from another line, of course.

Mr. LUCAS. I understand that theory.

The CHAIRMAN. Of course, the Federal Reserve Board is working on some other regulations, too.

Mr. LUCAS. I am not surprised at that.

Senator MOODY. Senator Lucas, is it not true

Mr. LUCAS. I am only interested in this one regulation.

The CHAIRMAN. I was reading a little ahead of you, that bank credit must be checked. I understood we would have some suggested legislation, that it might be necessary to have some different type of control that will seriously affect regulation W, too.

Mr. LUCAS. I understand.

Senator MOODY. Senator Lucas, is it not true, when bank credit is created, there new money is created; but when you sell on an installment basis you are merely spreading a given amount of consumer income over a number of months? You are not creating any new money; is that not correct?

Mr. LUCAS. That is the point I made a moment ago.

The only

question is the distribution of the money. They do not have any new money at all. It all comes from a different source.

Senator BRICKER. There is new credit created?

Mr. LUCAS. Yes; there is; there is no doubt about that.

Senator BRICKER. Is that an inflationary pressure?

Mr. LUCAS. I cannot see that it is of such a serious inflationary pressure to cause this Federal Reserve Board to have done what they did in the way of further curtailment of credit.

Senator BRICKER. That is because of the low percentage of consumer credit when you take it as against the whole credit and monetary situation?

Mr. LUCAS. Correct, sir. It seems to me, Senator Bricker, that if the Federal Reserve Board were truly operating under the spirit and intent of Congress and under present conditions as they exist with respect to the automobile industry, instead of going to Canada, as they have done, to study the restriction features up there with a view of making a decision later on whether to go to 12 months and 50 percent down payment, they should do just the opposite and say instead of 15 months it should be 18 months or 21 months' credit, due to the tremendous amount of inventories of cars these dealers and car owners have throughout the country.

Senator BRICKER. I think a stronger argument for it, or against regulation W, is that your great laboring force that we are trying to build up in defense industry at the present time needs transportation. Mr. LUCAS. I will get to that problem. I was only mentioning this other phase of it because it does seem to me that the Federal Reserve Board ought to be consistent in their policy; in other words, the moment they saw the automobile supply going down or they thought it was going down, that is when they put on further restriction and restraint upon the consumer's credit."

The moment the automobile situation develops in the opposite direction, they do not say, "We will give you 18 or 21 months during this crucial period when there are more automobiles in the country than people know what to do with," but instead of that we hear that they are going to leave regulation W as it is or further restrict the consumer credit. It seems to me they ought to be able to go up and down. If they can go down they can go up, depending on the economic conditions that exist at the time they are considering it.

They went from 21 months to 15 months in about 3 weeks' time. I want to get back to the discussion of total consumer purchasing power in this country. This figure of 3.85 percent, bear in mind, is related to all installment sales credit outstanding. The automobile portion, the part we are now speaking of, would represent about 2 percent of total consumer purchasing power affected by Regulation W. Look at it another way. Let us see where installment credit fits into the total picture of expanding credit. According to the published statistics of the Federal Reserve Board, only 9.18 percent of the total increase in bank credit outstanding during 1950 was due in installment credit. The other 90.82 is virtually uncontrolled. Here is the field in which the Voluntary Credit Restraint Committee is operating. In my opinion it is not consumer credit but bank credit which much be checked. At this point I desire to read from this same document from which I read before, hearings before the joint. committee on the Defense Production Act on Regulation W from December 6 to 11, inclusive, from the bottom of page 87 to page 88, where Mr. McCabe said the following:

We can't buy more goods than can be produced. To weaken or abolish regulation W will not produce more goods. If we are to succeed in maintaining stable prices and preserve confidence in the value of the dollar, we must make a determined effort to mop up all sources of excess buying power which tend to make the demand for goods greater than available supplies. Otherwise, we know from past experience what to expect.

In conclusion, I would like to make this point clear: That selective credit controls, including regulation W, will not of themselves check all of the inflationary forces. More fundamental than selective credit controls is an adequate program of fiscal and general controls that restrains all types of bank credit and thereby curtails the total dollar volume of private expenditures. In other words, Mr. McCabe recognizes in his statement that regulation W is just a small part of the economy that should be controlled, and yet regulation W is the only part of the economy over which you have any legislative control. We are now entering into the voluntary control stage on this 90 percent of consumer credit which comes primarily through the bank.

Senator BRICKER. And it is becoming very effective.

Mr. LUCAS. I hope it is because it is the proper way to handle it, in my opinion, and I hope it does become effective because if it doesn't,

ultimately, if the inflationary spiral continues to grow, we will get the controls that none of us wants.

The point I make is, if it is effective with the banks and the insurance companies and other lending agencies, why do they have to select the automobile dealers and those who are in the financing of automobiles to put the controls on them and nobody else?

Senator BRICKER. Of course, they have put controls on other products in addition to automobiles; radios, television, household goods. Mr. LUCAS. You are correct; under Regulation W. Regulation X and regulation W are the two.

Senator BRICKER. The most effective control, as far as regulation X is concerned, up to the present time has been the failure of the Open Market Committee to peg the market at par or above. Now they have gone down, and I think you see the credit drying up pretty effectively throughout the country.

Home builders are now saying they won't get up to the starts; Mr. Martin testified a couple of weeks ago they will have 1.2 million this year. The question is now whether or not you will have 800,000 starts, even, that were anticipated for this year, showing that it is a very effective control, the Open Market Committee and your bank reserve controls and also your voluntary control program.

Senator SCHOEPPEL. Mr. Chairman, I would like to draw to the attention of Senator Lucas at this point, since we are discussing this matter of credit controls and the extension of credit, I am wondering if we do not have a less ratio of credit at the present time than we had in 1939. I want to draw to the Senator's attention that in 1939 there were $72.5 billion of national income. We had a credit extension at that time of about $7 billion, or a ratio of about 11 percent.

Now, let's go to 1948. We had an income, a national income, of $223.5 billion, and we had consumer credit of $11.3 billion. In 1950 we had a national income of $236.5 billion and just a shade over $20 billion of consumer credit. In March 1951, according to the index, we have a national income of $265 billion and an average credit extension of $19.5 billion.

Now, if you take and figure the ratios and percentages, at the present time you have a lesser credit extension along that line than you had in 1939.

Mr. LUCAS. Well, I am very grateful to the Senator from Kansas for bringing out those figures. We were familiar with those figures, but I didn't want to burden the committee with too many statistics.

So far as the ratio is concerned, the Senator is absolutely right, and those are the statistics we got from the Federal Reserve Board.

Senator SCHOEPPEL. I think it is pertinent to mention in 1939 we had 3.5 million automobiles, and they were averaging around about $1,000. Now, in 1950, what do we have? We have 7.5 million automobiles, with an average of about $2,000 per car, and up, and when we figure those percentages and ratios, I am afraid that the gentlemen who are thinking in terms of further curtailment, against an industry, under regulation W, are missing a bet that is going to be tremendously and disastrously effective in this country.

Mr. LUCAS. I think the Senator has made a very sound argument from those figures, and they can't be disputed.

Senator MOODY. As a matter of fact, Senator Lucas, might not this be true: that there is a good deal of talk about the amount of money

in the economy bidding up some of the prices, at the same time in some lots in Detroit you have yards full of cars sitting idle, doing nothing for the economy.

Might it not be one way of soaking up some of the money that is bidding up the price of other goods to take some of those cars and put them on the road?

Mr. LUCAS. The Senator is absolutely correct. There is no doubt about that at all. I will touch on that just a little futher in my discussion. That is why I say the Federal Reserve Board has missed the boat in not using the discretionary power they have in liberalizing these terms rather than talking about further restricting them at this particular time. In other words, if they have the power, if they give us 18 months or 21 months base, or whatever they believe is necessary to keep the economy rolling along sound lines, well and good-instead of that, we get no liberalization, and the cars are continuing to move into the warehouses.

The other day my good friend, Senator Morse, placed in the record and extract from Barron's Magazine of November 13, 1950, consisting of an article by R. C. Leffingwell, vice chairman of J. P. Morgan & Co., in the course of which Mr. Leffingwell said:

How odd to control credit for consumers and home builders while the source of credit pumps out more of it to oblige the Treasury.

Senator BRICKER. Of course, now, they are curtailing the source at at the present time, and very effectively.

Mr. LUCAS. The Senator is correct on that, and this statement doesn't quite apply at the present time, and I certainly hope they continue to do what they are doing in the way of voluntary restraint.

I have tried to make it clear that at least so far as automobile financing is concerned, regulation W has not accomplished its purpose. should also like to refer to an earlier comment I made dealing with the equities of regulation W with respect to automobile financing.

Senator BRICKER. That was the argument I used 3 years ago when this bill came up, if you remember. I think it is very unfair to discriminate against a man who hasn't much capital laid aside, who is an important factor in our labor force at the present time, and deny transportation when he would otherwise get it and pay for it.

Senator SCHOEPPEL. I might say along that line that from my own State of Kansas, from the city of Wichita, which has accelerated defense industries, with the airplane companies, Boeing, Beech, and Cessna, and other military installations going in, I have received numerous letters from workers in that city, who by reason of the expansion of city activities and because of housing miles from where they are working are running into drastic curtailments, and it is working a hardship on a lot of those people. They are asking me, "How can we buy these cars when we come in here, have to go to the rentals we have to pay, plus the increased living costs, and then we are estopped to buy transportation in the used-car industry." I refer those matters, some of them, to the departments that I think have something to say about it, and I confess to the Senator from Illinois I don't get very much of a satisfactory answer.

I am hopeful that out of this kind of proceeding here we can spotlight this thing and get some kind of a practical approach.