uation will be further intensified as defense activities increase in areas of housing shortage, thus making it more difficult for defense workers to find housing at prices they can afford. Paragraphs (b) and (c) of section 106 of the bill would make certain necessary technical changes in connection with section 605 of the Defense Production Act of 1950, the section which contains the basic authority for controls on Government-aided residential credit. These changes are for the purpose of clarifying the power to enforce conditions and requirements imposed by the Housing and Home Finance Agency in connection with the relaxation of residential credit controls under section 605. The need for these technical changes is immediate in view of the relaxations of such controls now being made for the purpose of assisting the production of housing required for defense workers and military personnel in critical defense housing areas. Residential credit restrictions are being relaxed under both section 602 of the Defense Production Act (relating to non-Government-aided credit) and section 605 of that act (relating to Government-aided housing credit). As you know, the restrictions under section 602 are contained in Regulation X of the Federal Reserve Board, and the corresponding restrictions under section 605 are contained in the appropriate issuances of the Housing and Home Finance Administrator and the agencies administering the programs of housing credit involved (FHA, Veterans' Administration, and the Department of Agriculture). The relaxations of these restrictions are being approved by the Housing and Home Finance Administrator with the concurrence of the Federal Reserve Board for areas designated as critical defense areas by the Defense Production Administrator. The actual relaxation of credit terms (maximum ratio of loan to value of property and maximum maturity of loan) are made by changes in the regulations to which reference has just been made. However, such relaxed terms can be applied under those regulations only to housing programed for the areas by the Housing and Home Finance Administrator for sale or rental to defense workers and military personnel. As a condition to the granting of such relaxations (whether the loans are Government-aided or not), the builder-sponsor or subsequent owner of the housing much conform to the requirements imposed by the Housing Administrator to assure that the housing will be provided and used to serve the needs of defense workers and military personnel and of the defense installations. Enclosed are copies of Housing and Home Finance Agency Regulations CR 1, CR 2, and CR 3 which deal with this subject. As reflected in those regulations, the owners of housing aided by credit relaxations must, in return for receiving the benefit of the relaxed credit terms, rent or sell the housing for a prescribed time only to eligible defense workers or military personnel and must comply with other conditions designed to assure that the housing will actually serve defense needs. In order to assure that these conditions will be complied with and that the relaxation of credit controls will not be diverted by some owners to nondefense purposes, it is necessary that these conditions be readily enforceable. With respect to credit controls under section 602, there is clear and specific authority for this purpose. With respect to the Government-aided credit controls under section 605, however, there is need for clarifying the present general authority. Section 106 of the bill would accomplish this purpose. Paragraph (b) of section 106 would make violations under section 605 of the act subject to the criminal penalties imposed by section 603. Violations under section 602 are already subject to such penalties. Paragraph (c) of section 106 would specifically authorize the President to require lenders and borrowers to comply with reasonable conditions and requirements (in addition to those authorized by other laws) in connection with any loan of a type which has been the subject of action by the President under section 605. It also provides that such conditions and requirements may vary for classifications of persons or transactions as the President may prescribe, and failure to comply with these conditions and requirements would constitute a violation of that section. Sincerely yours, RAYMOND M. FOLEY, Administrator. Hon. BURNET R. MAYBANK, THE WHITE HOUSE, Washington, May 31, 1951. Chairman, Senate Committee on Banking and Currency, United States Senate, Washington, D. C. DEAR MR. CHAIRMAN: I am sending to you herewith several copies of a report concerning credit policies, which has been submitted to the President in response to his request. The President thought this report would be of interest to the members of your committee, particularly with reference to the amendment and extension of the Defense Production Act which you are now considering. Sincerely yours, CHARLES S. MURPHY, Special Counsel to the President. EXECUTIVE OFFICE OF THE PRESIDENT, The PRESIDENT, The White House, Washington, D. C. DEAR MR. PRESIDENT: Referring to your memorandum of February 26, 1951, addressed to the Secretary of the Treasury, Chairman of the Board of Governors of the Federal Reserve System, the Director of the Office of Defense Mobilization, and the Chairman of the Council of Economic Advisers, asking us to study ways and means to provide necessary restraint on private credit expansion and at the same time make it possible to maintain stability in the market for Government securities, I am enclosing herewith a signed report of this committee. I have been acting as Chairman of the Committee, and the report speaks for itself. Sincerely yours, CHARLES E. WILSON. REPORT OF THE FOUR-MEMBER COMMITTEE APPOINTED FEBRUARY 26, 1951 INTRODUCTION The President's memorandum of February 26, 1951, to the Secretary of the Treasury, the Chairman of the Board of Governors of the Federal Reserve System, the Director of Defense Mobilization, and the Chairman of the Council of Economic Advisers stated: "I am requesting the Secretary of the Treasury, the Chairman of the Federal Reserve Board, the Director of Defense Mobilization, and the Chairman of the Council of Economic Advisers to study ways and means to provide the necessary restraint on private credit expansion and at the same time to make it possible to maintain stability in the market for Government securities." The present problem of restraining the expansion of credit must be attacked under conditions differing vastly from those of any other inflationary period in the Nation's history. To a large degree the problem is fashioned by the continuing influence of the tremendous accumulation of public debt during World War II, and by the imminent task not only of refunding the large portion of that debt which matures in the near future but also of undertaking new financing. Conditions in the market for Government securities become, therefore, a compelling consideration. Within this framework, nonetheless, restraints must be exerted on over-all credit expansion, particularly for nondefense purposes, in order to keep combined Government and private demands within the bounds of available supplies of goods and services and yet not interfere with the maximum possible expansion of output in vital lines. We submit to you in the present report (I) a brief review of current problems of credit control, as they have emerged in the postwar period and as we face them in connection with the national defense effort; (II) a review of the accomplishments in these fields since your memorandum of February 26; (III) a summary of credit controls available under permanent, expiring, and proposed legislation; and (IV) our conclusions and recommendations with respect to further needed actions. I. CURRENT PROBLEMS OF CREDIT CONTROL During World War II, because of the large Government deficits, banks and other financial institutions and many other investors bought large quantities of Government securities. In the postwar period, Federal Reserve use of traditional instruments to restrain credit was conditioned by the objective of maintaining a market for these securities without a substantial and general increase in interest rates. This latter objective limited the effective use of open-market operations for purposes of counteracting inflation. The possible restrictive effect of increases in reserve requirements was also limited by the large holdings of Government securities by banks and other institutions. General credit control again became a matter of national concern when new inflationary pressures developed after the initiation of the expanded defense program. Various measures were adopted by the Federal Reserve and other Government agencies in this period to restrain credit expansion. Nevertheless, the needs of public debt management, the large available supply of liquid assets, and the increased accent upon full employment and production, continued to limit the Federal Reserve Systems' pursuit of a more effective policy of credit limitation. The period since the outbreak in Korea has been characterized by anticipation on the part of consumers and business concerns of the effects of the expanded national security program. This anticipatory buying was financed in a variety of ways. Credit expansion was one of the available means which financed the enhanced demand, and the support policy was one of the factors which facilitated credit expansion. Commercial banks and other financial institutions were in a favorable position to extend credit, since they could always sell Government securities and Federal Reserve System stood ready to make purchases whenever other investors were not ready to buy at prevailing prices. While any feasible Federal Reserve policy could not have prevented individuals and business concerns from financing their purchases, a stronger policy of credit restraint could have made it more difficult and would have reduced the total amount. Part of the credit extended, of course, was necessary, and as a result the American economy today is better stocked and better tooled for tackling a large defense production program than it was at the time of the Korean outbreak. The fact that some credit extension serves a highly useful purpose in the defense effort, while other is less useful or even harmful under present circumstances, makes it desirable to use credit controls as selectively as possible. While selective credit controls, such as consumer credit, real estate credit, and credit for securities markets, have a continued usefulness in the mobilization period, general credit curtailment, or a general rise in interest rates, does not have so selective an impact in relation to defense priorities. General credit control is, however, essential to reinforce the effectiveness of the voluntary and other efforts of restraint. The objective of a discriminating credit policy is further aided by Government agencies through loan guaranties, tax, amortization, and direct financial aid to defense-related activities. Supplemented by such programs, general credit controls are an effective instrument in the program of mobilization and stabilization. They must, of course, be reconciled with the Government's requirements for refunding and new financing. Credit policy will be modified in character and intensity as the mobilization effort passes through various stages. We are now shifting from the preparatory to the production phase of the defense effort. In the preparatory stage, private credit expanded while Government budgets showed a surplus. Expenditures for the defense programs have now commenced to increase substantially and as long as these expenditures are not financed on a pay-as-we-go basis the Treasury will be faced with the need for deficit financing in addition to large refunding operations. There is at the same time no certainty that private demand for investment and credit will subside. At the peak of defense production direct controls of materials may curtail private credit demands. But physical controls are still in the developmental stage and their full effect cannot be foreseen. We are facing therefore a period in which we have to deal with both the problem of Federal financing and the need for controlling private credit expansion. The large existing inventories and the fluctuations in the public's appraisal of the seriousness of the international situation may create a temporary relaxation in the demand for credit. Such a relaxation, however, may be of short duration only, and the slightest darkening of international relations may set in motion another wave of buying. Even if requirements of national security should remain high for a considerable time, we hope that an increase in total output may, after a few years, permit a relaxation or modification of physical controls. We would then enter another stage, still fully within the period of mobilization, during which some expansion in the production of consumer goods and in private investment might lead to a renewed growth in demand for private credit. In that event, our chief reliance must be on fiscal, monetary, and credit policy. II. ACCOMPLISHMENTS There has been a substantial record of accomplishment since the President appointed this committee on February 26, 1951. On March 4, the Treasury and the Federal Reserve System announced that they had reached "full accord with respect to debt-management and policies to be pursued which would affect the successful financing of the Government's requirements and, at the same time, would minimize monetization of the public debt." On March 4, the Treasury announced the offering of a new investment series of 24 percent long-term non-marketable bonds in exchange for the outstanding 2% percent marketable bonds of June 15 and December 15, 1967-72. Subsequently, during the time allowed investors for the exchange, more than $13.5 billion of the outstanding amount of $19.7 billion of 21⁄2 percent marketables were offered in exchange for the new non-marketables. Of the total exchange, $5.6 billion were owned by the Federal Reserve banks and Government investment accounts, and of these approximately 20 percent was acquired in the few weeks prior to the Treasury's announcement and during the period in which exchange was permitted. Since March 5, prices of outstanding Government securities have been permitted to decline, a number of the issues falling below par. An important result of this action has been the effect in the markets for mortgages and new capital issues. It is still too early to appraise conclusively the effectiveness of this measure. It may be noted that, beginning in April, the rate of expansion in bank loans began to slacken. But this change may also reflect seasonal factors in the demand for credit, the softening of consumer demand that became apparent in that month, and voluntary credit restraints then undertaken, as well as the decline of security prices. It appears that new commitments by insurance companies and savings banks to purchase mortgages have been reduced. Some plans for new securities to be issued have been withdrawn or postponed and others have had to be revised, although the total volume of new issues has continued very large. The new tone in the market may have an important effect upon many new offerings that were, or might otherwise have been, contemplated. 4. On March 9, a program for voluntary credit restraint was instituted by the Board of Governors of the Federal Reserve System, pursuant to section 708 of the Defense Production Act of 1950, after consultation with the Office of the Attorney General and with the Federal Trade Commission. This program is now in full operation and includes major financial institutions throughout the Nation. The program has set up a national committee as well as regional committees covering all sections of the country. The national committee has issued three bulletins, the first dealing with means of restraining inventory financing, the second with the principles to be followed in financing capital expansion programs and the third with State and local government financing. These bulletins, together with the Statement of Principles of the Program, have been distributed to all financing institutions participating in the program to provide a common guide for combating inflationary loan expansion in their respective fields. Other bulletins, as may be appropriate and helpful, will be issued from time to time. Meanwhile financing institutions are requesting the regional committees for opinions as to the desirability under present conditions of loans in debatable classes. These opinions are being relayed to all committtees to insure uniform policy Nation-wide. While there has not yet been time to build up a body of statistical information to enable the Committee to analyze thoroughly the effects of the program, there are indications that the initiation of the program has had a salutary effect on the trend of credit. Endorsements of the program and pledges of wholehearted cooperation have been received from many representative industry groups. Under these cir cumstances, those connected with the program are most encouraged, and it is the committee's view that the authorization for this unique cooperative effort as one means of restraining the further expansion of private credit should be continued. On March 12, the Director of Defense Mobilization appointed five task forces from among the personnel of the Treasury, Board of Governors of the Federal Reserve System, the Council of Economic Advisors, and the Office of Defense Mobilization to implement the joint studies of these agencies undertaken in response to the President's memorandum. On March 23, the Director of Defense Mobilization wrote the Secretary of Commerce, referring to the President's memorandum of February 26, 1951, and suggested that the Business Advisory Council of the Department of Commerce undertake a program to complement the voluntary credit restraint program. The implication of the letter was that efforts of lending institutions to limit credit expansion would be more effective if borrowers exercised restraint in their requests for financing. As a result, the Business Advisory Council has undertaken a continuing Nation-wide program to bring to the attention of lenders and borrowers the fact that the success of the voluntary credit restraint program rests equally on both of them. On May 7, the Director of Defense Mobilization wrote the governors of all States, the mayors of all major cities, and financial officers of principal counties and other political subdivisions. He requested that all State and municipal projects, which necessitated borrowing and which were postponeable, be postponed. In particular, he asked that every proposed borrowing by a State or municipality of $1,000,000 or over, before being consumated, receive the approval of one of the regional committees appointed under the voluntary credit restraint program. III. CREDIT CONTROLS AVAILABLE UNDER PERMANENT LEGISLATION, EXPIRING LEGISLATION AND PROPOSED LEGISLATION The following summary indicates the more important actions for credit restraint that can be taken under exisiting legislation, that can be employed if expiring legislation (notably the Defense Production Act of 1950) is extended, and that could be initiated if new legislation were passed in conformance with the recommendation made by the committee. Such a classification clarifies the problem and indicates the responsibilities of the several branches and agencies of the Government in implementing a program designed to achieve credit restraint and stability in the market for Government securities. 1. Permanent legislation (a) The Federal Reserve System has power to change rediscount rates. (b) The Open Market Committee of the Federal Reserve System has the authority to conduct open-market operations in Government securities and such transactions can be undertaken with a view to stabilizing the market for such securities and tightening or relaxing credit conditions. (c) Existing legislation would permit the Board of Governors of the Federal Reserve System to raise reserve requirements of central reserve city banks very slightly above existing levels. (d) Under existing legislation the Board of Governors can amend regulations T and U so as to raise margin requirements for listed securities to 100 percent, and restrict withdrawals and substitutions of securities in margin accounts. (e) Section 5 of the Trading With the Enemy Act of 1917, as amended, and section 4 of the Emergency Banking Act of 1933 authorize the President, by Executive order, to regulate and limit the issuance of credit. While these powers should not be exercised except in an extraordinary emergency, the statutory authority appears to be sufficient. 2. Erpiring legislation (a) Section 708 of the Defense Production Act of 1950 provides the legislative basis for the present voluntary credit restraint program. (b) Regulation X of the Board of Governors of the Federal Reserve System, which governs the extension of real estate construction credit, stems from authority granted the President under section 602 of the Defense Production Act of 1950; he in turn is permitted to utilize the services of the Federal Reserve System in this connection. Present authority would permit the Board of Governors to restrict the use of real estate construction credit substantially |