Consumer Instalment Credit As A Variable In The Quantity And Velocity Of Money In California, 1950-1960

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Content This dissertation has been 62— 6090
m icrofilm ed exactly as received
WEIR, Norman Edward, 1908—
CONSUMER INSTALMENT CREDIT AS A VARIABLE
IN THE QUANTITY AND VE1DCITY OF MONEY IN
CALIFORNIA, 1950-1960.
University of Southern California, Ph.D., 1962
Econom ics, finance
University Mr a Mili'i ! :u Ann Arbor, M.. -In.
CONSUMER INSTAIMENT CREDIT AS A VARIABLE IN THE
QUANTITY AND VELOCITY OF MONEY IN C/LIFORNIA
1950 - 1960
by
Norman Edward Weir
A Dissertation Presented to the
FACULTY OF THE GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF PHILOSOPHY
(Economics)
June 1962
UNIVERSITY O F S O U T H E R N CA LIFO RNIA
G R A D U A T E S C H O O L
U N IV E R S IT Y PA R K
L O S A N G E L E S 7. C A L IF O R N IA
This dissertation, written by
Norman Edward Weir
under the direction of h..%$..Dissertation C om
mittee, and approved by all its members, has
been presented to and accepted by the Dean of
the Graduate School, in partial fulfillment of
require merits for the degree of
D O C T O R O F P H I L O S O P H Y
Dean
Date June 15-62................
DIS S E RT AT ION/COMMITT E E
f " 1 ' 7 ^ '
A / : . r .
t f . r~. Chairman
■ 2 o
y i i f f j
TABLE OF CONTENTS
CHAPTER PAGE
I. THE PROBLEM AND DEFINITIONS OF TERMS USED . . 1
Introduction ............................. 1
The Problem............................... 3
Statement of the problem.............. 3
Purpose of this study . . ............. 4
The Need for this Study.................. 4
Importance of this Study................ 5
Market controls ......................... 7
Significance of consumer instalment
credit ......................... 8
Scope of the Investigation.............. 9
Sources of data......................... 11
Assumptions............................. 12
Definitions of Terms Used................ 12
Consumer instalment credit ............ 12
Personal property broker .............. 13
Industrial loan company ................ 13
Financial intermediary ................ 14
Nonfinancial intermediary .............. 14
Organization of the Remainder of the
Dissertation ........................... 14
ii
CHAPTER PAGE
II. REVIEW OF THE LITERATURE.............. 18
Books ........ .............. 19
Finance.................... 19
Financial intermediaries .......... . . 23
Commercial banks and consumer
instalment credit .................... 27
Central banking .................. 31
Textbooks........................... 34
Publications of the Government, Learned
Societies, and Other Organizations ... 38
Special Studies.............. 50
Periodicals........................... 52
Chapter Summary ........................... 59
III. CREDIT MARKET CONDITIONS IN CALIFORNIA,
1950-1960 ................................. 60
Market Conditions, 1930 to 1953 ........... 86
Market Conditions, 1953 to 1955 ........... 90
Market Conditions, 1955 to 1957 ........... 92
Market Conditions, 1957 to I960 ........... 94
Chapter Summary ........................... 97
IV. THE SIGNIFICANCE OF CONSUMER INSTALMENT
CREDIT............................... 99
Methods Used in Estimating the Supply and
Velocity of Consumer Instalment Credit . 100
iii
CHAPTER PAGE
Contemporary Studies of the Supply and
Velocity of Consumer Instalment Credit . 101
Market Conditions and the Supply and
Velocity of Consumer Instalment Credit . 114
Instalment Credit, 1950 to 1960 .......... 118
Commercial bank credit............ . . 120
Personal property brokers .............. 121
Credit unions ........................... 122
Credit controls ......................... 122
Instalment Credit, 1953 to 1955 ...... 124
Commercial banks ....................... 124
Personal property brokers .............. 125
Instalment Credit, 1955 to 1957 ...... 127
Instalment Credit, 1957 to 1960 .......... 128
Chapter Summary ........................... 131
V. AN ANALYSIS OF CREDIT AGENCIES, CONTROLS
AND PRACTICES............................. 135
State Controls........................... 136
Some views on controls................ 137
The timing of controls................ 140
Commercial Bank Policies and Practices . . 145
Personal Property Brokers . .............. 154
Industrial Loan Companies ................ 161
Credit Unions ............................. 164
iv
CHAPTER PAGE
General Motors Acceptance Corporation . . . 166
Retail Trade ............................. 168
Chapter Summary ........................... 172
VI. TREND PATTERNS AND CONTROLS................ 175
Credit Patterns, 1950 to 1953 ............. 176
Credit Patterns, 1953 to 1955 ............. 179
Credit Patterns, 1955 to 1957 ....... 180
Credit Patterns, 1957 to 1960 ............. 183
Credit Fluctuations, 1950 to 1960 ........ 188
Chapter Summary ........................... 195
VII. SUMMARY, CONCLUSIONS AND RECOMMENDATIONS . . 198
Summary ........................... 198
Conclusions............................... 202
Recommendations........................... 205
BIBLIOGRAPHY................ 208
v
LIST OF TABLES
TABLE PAGE
I. Personal Income in California, 1950-1959 . . 62
II. Consumer Price Index, United States and
California, 1947-1949 .................... 64
III. Retail Sales and an Estimate of Retail
Instalment Credit, 1950-1959 72
IV. Commercial Bank Consumer Instalment Credit
in California, 1950-1959 74
V. Quarterly Index of Business Activity in
California, 1950-1959 . . . 75
VI. Consumer Instalment Credit in California
by Financial Institutions, 1950-1959 ... 80
VII. Annual Volume of Year-end Outstanding
Consumer Instalment Credit Loans by
Sources, 1950-1959 134
VIII. Ratio of Commercial Bank Instalment Credit
to Deposits, Loans and Discounts at All
California State Banks as End of June
1950-1959 ................................. 141
IX. Ratio of Commercial Bank Retail Instalment
Credit to Total Retail Credit, 1950-1959 . 148
vi
TABLE PAGE
X. Personal Property Brokers' Consumer Instalment
Credit, 1950-1959 ........................ 158
XI. Industrial Loan Companies' Consumer Instalment
Credit, 1950-1959 ................ 163
XII. Credit Unions' Consumer Instalment Credit,
1950-1959 ................................. 167
XIII. General Motors Acceptance Corporation Con
sumer Instalment Credit, 1950-1959 .... 169
XIV. Estimate of the Distribution of Retail
Financed Consumer Instalment Credit,
1950-1959 ................................. 171
vii
LIST OF CHARTS
CHART PAGE
1. Reserve and Discount Rates, 1950-1959 .... 123
2. Rate of Change in the Annual Volume of
Consumer Instalment Credit by Financial
Suppliers, 1950-1959 ....................... 181
3. Rate of Change in Commercial Bank Instalment
Loans, 1950-1959 ........................... 186
4. Consumer Instalment Credit and Business
Activity, 1951-1959 189
5. Rate of Change in Personal Property Brokers'
Instalment Loans, 1950-1959 194
viii
CHAPTER I
THE PROBLEM AND DEFINITIONS OF TERMS USED
I. INTRODUCTION
This study was an appraisal of consumer instalment
credit as a variable in the quantity and velocity of money
in California during the past ten years. Particular
emphasis has been placed on the expansion of this form of
credit, an evaluation of the credit market conditions as
reflected by the banking and financial intermediary credit
institutions, an analysis of the sources of funds used by
these institutions in influencing the supply side of the
market, the trend patterns reflected in the changes of the
consumer instalment credit market, and a suggestion for
the development of procedures which will contribute to a
higher relative degree of market stability with growth.
More than twenty years have passed since the first
major study was undertaken for the purpose of evaluating
the possibilities of relaxing the credit procedures which
had been developed during the depression to safeguard
instalment financing. This study, which consisted of nine
specific area studies, was done by the National Bureau of
1
2
Economic Research. The last volume in the series was done
by Gottfried Haberler who, on the basis of the former
empirical studies and his own work in general business
cycle theory, concluded that consumer instalment credit
appeared to have been a very stimulating factor in the
economy during the 1920*s. ^
Following the rapid expansion of this form of credit
in 1955, the President of the United States, on February
15, 1956, directed the Chairman of the Council of Economic
Advisors to request the Board of Governors of the Federal
Reserve Board to study the significance of this form of
credit in a growing economy, and to evaluate the arguments
for and against governmental control. The four-part study,
consisting of six volumes, was published in 1957.^ This
very comprehensive examination described the significance
of this form of credit to economic movements, as well as
the operations of the financial institutions; however, no
attempt was made to evaluate the effectiveness of these
institutions in controlling credit.
^Gottfried Haberler, Consumer Instalment Credit and
Economic Fluctuations (New York: National Bureau of
Economic Research, Inc., 1942), p. 9.
2
Growth and Import," Consumer Instalment Credit
(Washington, D.C.: United States Government Printing
Office, 1957).
3
II. THE PROBLEM
Statement of the problem. During the period covered
by this study, a number of changes occurred in the economic
pattern of California. Some of the more important changes
were: (I) an increase in the population due to an increase
in the birth rate and in migration; (2) a rapid increase in
business activity despite the industrial transition which
had also taken place; (3) an increase of employment and
earnings due to this transition; (4) the disposable per
sonal Income, along with the expansion which took place in
the service trades; and (5) the retail sales which re
flected the changes in disposable income, new and expanded
product markets, and the available supply of consumer
instalment credit.
While these conditions have been exploited with
reference to the demand for this credit, the structural
conditions affecting the functional activities on the sup
ply side of the market have received little if any atten
tion. The two major areas which are important here are the
national and state policies designed to provide for the
quantity and flow of loanable funds. The national policy
directly affects the banking system through the regulations
of the Federal Reserve System, while the state policy is
important in regulating the financial intermediaries.
Prior to the time when financial intermediaries were
able to accumulate large asset holdings of their own, and
before they gained the ability to obtain funds from markets
other than the banks, they were to a large extent subservi
ent to the national policy. This shift has not only
resulted In a decline In the effectiveness of bank control,
but also the reevaluatlon by the banks themselves of their
competitive position In the market.
Purpose of this study. It was the purpose of this
study (1) to examine the market conditions and the extent
of consumer instalment credit in the State of California
from 1950 to 1960; (2) to evaluate the significance of the
financial and nonfinancial intermediaries as to their
influence in the market; (3) to analyze the effectiveness
of present methods of regulating the expansion or contrac
tion of this form of credit on the supply side of the
market; (4) to project the trend patterns in this market;
and (5) to present a policy which will more adequately
provide for stable growth in this particular market.
III. THE NEED FOR THIS STUDY
This dissertation attempted to fill a gap in the
economic literature with regard to the analysis of the
regulatory effectiveness of the agencies responsible for
supervising and supplying consumer instalment credit in a
given market area. Previous studies of this form of credit
have been confined to the advantages or disadvantages of
general versus specific controls; the desirability of con-
sumer credit as a contributory factor In augmenting demand;
descriptive studies of the agencies supplying this credit;
and theoretical studies of Its economic significance.
Although the responsibility for credit management
has been considered a function of the banking system and
the state In regulating finance agencies, events In the
past ten years have Indicated that within the market area
of the State of California, this responsibility has been
to a large extent Ineffectual. The more Important reasons
for this are the inadequacies of present measures for
directing the flow of loanable funds; the relative degree
of inflexibility in the measures presently used; the
apparent lack of coordination between servicing agencies;
and the lack of sufficient market information.
If the present trend patterns continue, with respect
to the manner in which this market is supplied with credit,
the problems will be compounded and more stringent measures
will be needed. It was the purpose of this study to set
forth these problems and to contribute constructive sugges
tions for their correction.
IV. IMPORTANCE OF THIS STUDY
In the State of California there are five principal
agencies which supply consumer instalment credit. These
agencies are: credit unions, commercial banks, industrial
loan companies, personal property brokers,3 and retail
stores. A small number of people who are members of the
service trades also accept instalment credit; however,
their volume of loans does not appear to be large and
therefore were not considered in this study.
Within the past ten years a number of changes have
occurred with respect to the relative influence each of
these principal agencies has had on the supply of funds for
servicing this form of credit. The position of the banks
in augmenting or contracting the supply of loanable funds
not only shows a high degree of vacillation, but their
relative position in this market indicates a declining
influence. It is not the purpose of the present study,
however, to analyze the reasons for the fluctuations, of
which there are no doubt many, but to focus attention on
the conditions which appear to have a bearing on the
inadequacies of the present measures to influence the
sources of supply for loanable funds for consumer instal
ment credit.
There has not only been an increase in the number
of credit intermediaries, but there has also been a large
3In the State of California, sales finance and per
sonal finance companies are considered by law to be
"personal property brokers." California Financial Code,
Chapter 1, Article 1, Sections 22000-22653.
increase In Che size of their loanable funds. These funds
have increased not only as the result of plowed-back earn
ings, but also due to the ability of the financial inter
mediaries to secure capital from sources other than the
commercial banks•
Market controls. Many of the causes for the changes
in consumer financing can be traced to the immediate post
war period. Regulation W, which had been invoked by the
President in September 1941, was allowed to lapse in
November 1947. There followed a rapid increase in prices,
and by September of 1948 the Board of Governors of the
Federal Reserve System requested and was granted the power
to again invoke this credit restraint. The regulation was
removed in June of 1949 because it appeared that the
economy was experiencing a recession. Although many indi
cators pointed to this down-turn in economic activity in
1949, consumer instalment credit in California and at the
national level continued its rapid rise.
Shortly after the outbreak of the war in Korea,
Regulation W was again invoked. During the period it was
in effect, from September 1950 to May 1952, consumer credit
at the national level declined moderately. The same
pattern was evident in California, except in 1952. For
several months prior to the removal of controls there was
a rapid increase in this form of credit. By the end of
1952 the volume on the national level had Increased by 26.8
per cent, while in California there was a 42.3 per cent
increase.
During the following seven years an orderly market
was not provided in this state by either general monetary
and credit controls or the regulation of financial Inter
mediaries by the state. The changes in the discount rates
and reserve ratios were not only inadequate at times, but
poorly timed.
These were important factors which affected the
competitive conditions in the market, the proportion of
the market obtained by each of the lending agencies, and
the aggregate volume of loans.
From 1950 to 1960 the volume of loanable funds
provided for consumer instalment credit by financial insti
tutions in the United States increased from $11.8 billion
to approximately $33.4 billion, or an increase of 182 per
cent. During the same period the volume of such funds in
California increased from $1.2 billion to $3.4 billion, or
more than 184.5 per cent. This difference of 2.5 per cent
was in large measure the result of the competitive
conditions.
Significance of consumer instalment credit. The
proportion of commercial bank consumer Instalment credit
loans to total credit loans for consumer instalment credit
indicates not only the relative position of the banks to
the intermediaries, but also the degree to which direct
control has been effective. The relative position of
credit unions to total credit and other credit suppliers
of this instalment credit emphasizes the influence of this
rapidly expanding source of supply. Personal property
brokers and industrial loan companies are also important,
however, not only with respect to their comparative impor
tance to the total supply of this credit, but with regard
to their influence on the money market. Their sources of
supply for loanable funds differ in many respects from
those of the other lending agencies.
The significance of these conditions as related to
the volume of money and velocity in California during the
period 1950 to 1960 seemed greater than the mere size of
the aggregate change, and thus warranted investigation.
V. SCOPE OF THE INVESTIGATION
This study is limited to an examination of those
financial and retail institutions in the State of Cali
fornia which are engaged in supplying consumer instalment
credit. Those institutions supplying consumer instalment
credit for real estate and housing are omitted because of
the long-term nature of the loans and, thus, the relatively
smaller impact they have on the velocity and quantity of
short-term credit.
10
The period 1950 to 1960 was selected for this study
because of (1) the more stable economic growth pattern
exhibited during this ten-year period than during the pre
vious decade; (2) the significant change which occurred in
the relative growth of the agencies supplying this form of
credit; (3) the relative influence of suppliers of this
credit on the sources of loanable funds; and (4) the
clearly Indicated influence the present trend conditions
will have on the present methods of control.
Events have made it possible to divide this period
into the following parts: 1950 to 1953, 1953 to 1955,
1955 to 1957, and 1957 to 1960. It was not only possible
to study the patterns of the control or lack of control
during each of these periods, but also to study the condi
tions which influenced the trend.
It was not the purpose of this investigation to
evaluate the social welfare aspects of this form of credit.
The extent to which the activities of the different lending
agencies may have directly or indirectly influenced the
flow of savings into or away from instalment credit supply
ing agencies was not specifically considered; however,
these conditions are evident by the patterns of the flow of
loanable funds.
Due to the lack of specific data pertaining to
certain market areas it has been necessary to use the
estimates from reliable sources. The diversion of
11
investable funds from one sector to another was assumed to
be Indicated by the change in the annual amounts of loans
outstanding and correlated with the net worth on the
balance sheets of the firms filing reports with the Cali
fornia Division of Corporations.
Sources of data. The principal sources of data used
in this study were from agencies of the State of California
and the United States Government. Where published data
were unavailable from these agencies and private sources,
special reports and information were obtained from the
files of the agencies. The data for commercial banks were
obtained from the Semi-annual Reports of the Federal
Deposit Insurance Corporation and the Annual Reports of the
Superintendent of Banks for the State of California. The
Statutes and the Financial Codes of California were the
sources for information pertaining to the regulation of
financial intermediaries. The studies and conference
reports by the Federal Reserve Board, as well as those by
state and national credit associations, provided important
information for the purpose of making an analysis of the
volume, velocity, and distribution of this form of credit.
A number of books in the field of money and banking pro
vided valuable background information, while several
articles from scientific periodicals were important in the
development of specific areas.
12
Aasumptions. It was assumed that the dollar value
of consumer instalment credit loans was the annual year-end
total outstanding for credit unions, personal property
brokers, industrial loan companies, insured commercial
banks, and retail trade. Although no adjustment was as
sumed to be necessary for the proportion of consumer
instalment loans to total loans for credit unions, personal
property brokers, and insured commercial banks, due to the
data available, an adjustment factor was used to establish
a more accurate estimate for industrial loan companies and
retail trade.
The analysis of the effectiveness or the lack of
effectiveness as the result of the dual policies for banks
and financial intermediaries was assumed to be an important
factor in the estimated trend patterns for the sections of
the market using this form of credit. In this regard the
policies adopted by the state will be analyzed, as will the
policies regulating commercial banks.
VI. DEFINITIONS OF TERMS USED
Consumer instalment credit. The term consumer in
stalment credit as used in this study means all credit used
for consumption by the final consumer and repayable within
a short or intermediate period of time in regular payments,
and attested to by secured or unsecured Instruments which
may or may not be negotiable. This definition is more
13
explicit than that generally used.
Personal property broker.^ A financial Institution
which engages In the business of lending money and taking
In return a contract or obligation which provides for the
forfeiture of the possession and use of the personal prop
erty held In trust for a loan Is considered to be a
personal property broker. This term Includes both personal
finance companies and sales finance companies as defined by
law In the State of California.
Industrial loan company.** In the State of Cali
fornia any corporation which in the regular course of its
business loans money and issues its own chose In action is
by law an industrial loan company.
^The term "personal property broker" as defined in
Section 22009 of the California Financial Code is as
follows: "Personal property broker" includes all who are
engaged in the business of lending money and taking in the
name of the lender, as security for such loan, any contract
or obligation involving the forfeiture of rights in or to
personal property, the use and possession of which property
is retained by other than the mortgagee or lender, or any
lien on, assignment of, or power of attorney relative to
wages, salary, earnings, income, or commission. Financial
Code of California, 1951, Vol. 1, Chapter 364, Section
22009.
^The term "industrial loan company" as defined in
Section 18003 of the California Financial Code is as fol
lows : "Industrial loan company" or "company" means any
corporation which in the regular course of business loans
money and issues its own chose in action under the provi
sions of this division. (As amended by law, 1951, Vol. 1,
Chapter 421, Section 18003.)
14
Financial intermediary. For the purpose of this
study the term financial intermediary has been limited to
personal property brokers, industrial loan companies, and
credit unions. Insurance companies, savings banks, and
savings and loan associations are sources of supply for
loanable funds of the financial intermediaries just listed.
However, no attempt has been made to trace the flow of
funds from these,institutions as individual sources.
Nonfinanclal intermediary. A nonfinanclal inter
mediary, as the term is applied in this study, is an
agency whose principal function is to provide, either
directly or indirectly, short-term or intermediate-term
consumer instalment credit funds. The nonbanking institu
tions excluded are factors and small loan companies.
VII. ORGANIZATION OF THE REMAINDER
OF THE DISSERTATION
The literature relating to the development, organi
zation, and contribution of consumer instalment credit to
economic activity has been reviewed in Chapter II. Some
of the more pertinent research studies, such as those of
the National Bureau of Economic Research dealing with the
nature and functions of the financial institutions supply
ing this form of credit, have been analyzed. These con
sisted of the following studies: Commercial Banks and
15
Consumer Instalment Credit by John M. Chapman and asso
ciates; The Pattern of Consumer Debt. 1935-36 by Blanche
Bernstein; Consumer Instalment Credit and Economic Fluctu
ations by Gottfried Haberler; and Sales Finance Companies
and Their Credit Practices by Wilbur C. Plummer and Ralph
A. Young.
Information was obtained on this subject from
several textbooks, and the following were the principal
sources: Money and Banking by Charles L. Prather (1957);
The Economics of Money and Banking by Lester V. Chandler
(1959); Money and Banking by W. H. Steiner, Eli Shapiro,
and Ezra Solomon (1958); Financial Institutions by Roland
I. Robinson, Erwin W. Boehmler, Frank Herbert Gane, and
Loring C. Farwell (1960); Financial Intermediaries by
Raymond W. Goldsmith (1958); and Money in a Theory of
Finance by John G. Gurley and Edward S. Shaw (1960).
Reference has also been made to the two-volume study
by the Federal Reserve Board entitled, Consumer Instalment
Credit. This four-part study was published in 1957.
Several books and research studies have also been
evaluated in so far as they make a contribution. These
included a symposium of papers published under the title
"United States Monetary Policy" and published by the
American Assembly, Columbia University, as well as several
studies published in the Proceedings of the Western Eco
nomic Association, The Quarterly Journal of Economics.
16
The Journal of Finance, and The American Economic Review.
The chapter concluded with a summary in which the
contributions of the perimetrical studies were evaluated.
Important characteristics of the market activity in
California during the years 1950 to 1960 were reviewed in
Chapter III. It was in this setting that the fluctuations
and expansion of consumer instalment credit took place.
The period covered by this study was divided into four
specific stages, during each of which specific market pat
terns developed. An evaluation was made of the importance
of these conditions with regard to the supply of consumer
instalment credit, and more particularly the influence the
latter condition had on the sources of supply of loanable
funds.
The lack of specific data pertaining to the quantity
of this principal form of credit has no doubt been the
reason why more has not been written about this field. The
important impact this form of credit has had on the supply
side as well as the demand side of the market appears to
warrant analysis based on well-defined estimates. In
Chapter IV, estimates were made for those sections of the
market in which specific data are unavailable. The tech
niques used in establishing these estimates were reviewed.
On the basis of the estimates, an analysis was made
in Chapter V of the relative Importance of each of the
agencies to the total supply of credit. The summary
17
stressed these market positions and their significance in
relation to the volume and flow of the supply of funds to
this market.
In Chapter VI, trends were projected on the basis of
the credit estimates and correlated with other business
indices. The direction and force of the trends in consumer
instalment credit and their consequences for the future,
with regard to the effectiveness of controls, were ex
plored. The long trends for the sources of loanable funds
were also discussed. In the conclusion of this chapter,
the trend conditions were analyzed in regard to the present
regulatory methods and some of the possible consequences
for this market and external markets were evaluated.
Chapter VII reviewed the principal findings and
conclusions of this study. Several recommendations have
also been made as to the possible areas into which future
studies might be directed, so that a more comprehensive
understanding may be had of the economic significance of
consumer instalment credit to the stability and growth of
given market regions.
CHAPTER II
REVIEW OF THE LITERATURE
The significance of the interrelationship between
the banking system and financial intermediaries in specific
regional markets, and the sources of loanable funds for
consumer instalment credit, seem to have been given very
little attention by most writers. Recent research has
centered attention on either the aggregate analysis of the
flow of funds or on credit as a contributing factor for the
consumers' welfare. The usual textbook pattern of section-
alizing discussions on consumer credit, banking, financial
intermediaries, credit controls, and the velocity of money
does not provide for a technical relationship.
There have been two comprehensive studies made of
consumer instalment credit. The first study was undertaken
in 1936 by the National Bureau of Economic Research and the
Federal Reserve System. The second study was made in 1938
by the National Bureau of Economic Research. The period
studied was from 1929 to 1938. Both of these studies rep
resented major research specifically related to the
analysis of monetary measures as credit control devices for
national policy. Only one dissertation was found which
18
19
related to the present study, and it consisted of an analy
sis of the Twelfth Federal Reserve District up to 1936.
Two thesis studies were made of credit conditions in Cali
fornia. One was an analysis of the operations of credit
unions, and the other, the growth of consumer instalment
credit in the State of California from 1950 to 1951.
Several technical books, journals, and other papers
dealt with specific theoretical segments of this problem;
however, no detailed empirical analysis has been made of
this form of credit on the state or regional level.
I. BOOKS
Finance. The most recent study of financial inter
mediaries was that of Gurley and Shaw entitled, Money in a
Theory of Finance.^ This work will hereafter be referred
to as the Gurley study.
In this study an attempt was made to bring together
the theories of money, banking, and financial institutions
with available financial data for the purpose of exploring
new interpretations in the field of finance. Some critics
have termed this approach "radical” and of little value
because it was based on theoretical innovations. It is a
Ijohn G. Gurley and Edward S. Shaw, Money in a
Theory of Finance (Washington, D.C.: The Brookings
Institution, 1960.)
20
field into which few have apparently dared venture; how
ever, more attention is being given to it, as is evident
from the number of recent studies. The significance of the
Gurley study to the present discussion is that it was one
of the first attempts to explain the importance of the pro
lific types of credit instruments to the quantity and
velocity of money.
By using as a first approximation the hypothesis of
neoclassical economics, a hypothetical "rudimentary
economy" was created in which credit instruments did not
exist and money was the only means of exchange. Thus,
incremental demand for money balance could only result from
the issuance of new money or price inflation. No specula
tive liquidity-preference for money existed and the only
motive for holding money was the implicit rate of gain.
Growth thus depended upon the demand for money and the
increase in consumers' real income. The counteraction of
these forces resulted in stationary equilibrium.
With the introduction of primary and indirect
securities, the significance of money and the institutional
functions changed. Primary debt was then used by business
not only to supply consumers with financial assets, but to
allow business to accumulate money balances. Thus, Gurley
drew attention to the fact that securities are contributory
factors in the quantity and velocity of money.
The growth rate in the second model no longer
21
depended upon the supply of money or real Income, for the
new variable of primary debt had been Included. Added to
this condition, but not a part of the Gurley model, is the
problem of the velocity of this debt and the relative money
market positions of the institutions making it available.
Growth and price level stability were the result of
equalizing market adjustments in the first model, with the
money neutral; but in the second model this was only pos
sible by equalizing primary and indirect debt, and money,
with the output and income of the factor and product
markets. Thus the agency, which would be created and
termed the "Banking Bureau," would be responsible for main
taining the desired relationship between neutral money and
these forms of debt* Monetary policy was then no longer
trivial, for "The impact of the open-market operation on
portfolio balance cannot be nullified by a proportional
increase in the price level, money wage rate, and nominal
bonds of business.
The discussion by Gurley of security differentiation
was particularly significant. In describing the reasons
for growth of primary securities and financial assets, it
was stated:
It would be perfectly rational for each spending
unit to maintain a pure asset-debt position. But
financial assets are not perfect substitutes for
2Ibid.. p. 84.
22
one another. Some spending units may decide
rationally to conserve, say, money balances while
financing deficits with primary security issues.
Others may decide rationally to accumulate money
instead of retiring debt. Moreover, since primary
securities themselves are heterogeneous, some
spending units may want to issue debt rather than
give up certain types of these securities, and
others may prefer to acquire certain types of
primary securities rather than retire their own
debt.3
Thus the motives of the spending sector and the heterogene
ous pattern of primary securities affect the volume and
quality of the credit issue. By the spending sector Gurley
seems to mean the financial intermediaries who issue equity
debt or primary securities in return for credit.
As a result of the development of financial inter
mediation, the heterogeneous debt issues have not only
become more standardized, but also more homogeneous. This
in turn has resulted in their being marketed far outside
the local markets.
After rejecting the quantity-theory of money, the
"modified quantity-theory," and the "stagnation model," the
Gurley study proposed the extension of controls over the
nominal debt issues of nonmonetary financial intermediaries.
This hypothesis was based on the fact that nonmonetary
intermediaries are not controlled by present monetary
measures. These agencies not only dispose of their securi
ties to non-bank sources, such as insurance companies,
3Ibid.. p. 113
23
trusts, and pension funds, but they purchase and sell to
other nonmonetary intermediaries.
The only means for providing the necessary control,
according to this study, would be to establish a "Policy
Bureau." This Bureau would instruct the "Banking Bureau"
as to the purchase and sale of primary securities. How
ever, it would not only have control over the private
nonmonetary intermediaries, but the public nonmonetary
intermediaries as well. The monetary system would thus be
used "as a counterweight to offset any unwanted effects of
nonmonetary intermediaries,"^ while the Policy Bureau would
control the amounts and deposit rate of nonmonetary
indirect assets.
The imposing of a superstructure such as a Policy
Bureau onto the present monetary system, as suggested in
the Gurley study, does offer a means for more direct con
trol which is recognized as necessary. However, the
reserve requirements proposal by Alhadeff for nonmonetary
intermediaries does, with some modifications, seem to offer
a better solution.
Financial intermediaries. The recent study of
financial intermediaries by Goldsmith-’ was apparently one
4Ibid.. p. 237.
- ’Raymond W. Goldsmith, Financial Intermediaries in
the American Economy Since 1900 (Princeton: Princeton
University Press, 1958).
24
of the first to describe the structure and changing rdle of
these institutions in the American economy. Goldsmith not
only systematically explained the flow of funds from sav
ings and financing to financial intermediaries, but also
focused attention on the interrelationships between these
intermediaries.
The growth and development of the institutions
providing credit was carefully described, and this has con
tributed the understanding of the present-day pattern.
Certain trend patterns were clearly evident, such as the
relative decline in the assets of the banking system com
pared with those of all financial intermediaries, the
growth of insurance funds, the expansion of trust funds,
and the more recent increase in government and private
pension funds. These appeared to explain in part the
ability of the financial intermediaries to supply more than
half of all external funds absorbed by other economic
groups. These conditions are not only important on the
national level, but, as Goldsmith points out, a high degree
of geographical density had also taken place.
With reference to the nature of the competition be
tween financial intermediaries, there appears at one point
to be an inconsistency in Goldsmith's reasoning. The
significance of the financial intermediaries was described
25
as dependent upon the ratio of non-metallic money, insur
ance reserves, deposits to the sum of equities in financial
intermediaries, long-term debt, and their equity to the
total national assets. Then the conclusion was reached
that there is no competition for the first and second types
of liabilities, but there is for the latter two. It would
seem quite possible that at least a portion of insurance
reserves might very properly be used in acquiring high-
grade equity paper of financial intermediaries.
From the rather brief explanation of finance com
panies, the following seem to be the more important conclu
sions: (1) sales and personal finance companies do most of
their borrowing from other financial intermediaries rather
than from nonfinancial enterprises or households; (2) re
ceivables from households generally exceed four-fifths of
the total assets of personal finance companies; (3) the
proportion of receivables from households held by sales
finance companies to total assets has increased from about
45 per cent in the 1930's to more than 55 per cent since
World War 11; and (4) this increase has resulted from the
decline from nearly 40 per cent to less than 30 per cent in
the share of these receivables held by businessIt will
be noted that this is a considerable shift and an important
factor in the apparent changing relationship between
6Ibid.. p. 178.
26
financial intermediaries.
One of the important areas in which information
seemed to be lacking was that of the financing of the in
vestor groups. Goldsmith pointed out that very little is
known about the financial intermediaries' share in mortgage
credit to nonfinancial corporations, the share of corporate
bonds held by financial intermediaries, or the proportion
of funds secured from preferred stock or common stock.
From the available data, the ratio of net purchases to
total net sales of all stocks by financial intermediaries
for the period 1901 to 1949 was 18 per cent, while for the
period 1950 to 1952 the ratio had increased to 68 per
cent .7
In a recently published book, entitled Financial
o
Institutions. the authors minimized the significance of
the trend noted by Goldsmith. In their analysis of the
flow of funds through the capital markets in 1958, they
note that
. . . the large volume of claims on and claims by
financial intermediaries, $468 and $441 billion,
respectively, and the resulting $27 billion balance
of claims against others clearly show the middleman
status of the institutions*9
7Ibid.. pp. 222-223.
Q
Roland I. Robinson and others, Financial Institu
tions (Homewood, Illinois: Richard D. Irwin, Inc., i960),
p. 364.
9Ibid.
27
They then conclude that the financial intermediaries
are not "without influence," but "if the effect of the
financial intermediaries is considered neutral, it may be
seen that the consumer group financed business and govern
ment."^ What this actually proves is the obvious fact
that all debt is credit. It also validates their final
conclusion that this is another way of making the familiar
assertion that we enjoy a system of "private property" and
have a "free-enterprise economy.The obvious question
left unanswered, however, is what influence do the inter
mediaries have on the flow of funds.
Commercial banks and consumer instalment credit. Of
the nine studies made by the National Bureau of Economic
Research in Consumer Instalment Financing, only the third
study by Chapman contained information pertaining to the
western section of the United States.^
One of the significant facts obtained by Chapman in
the 1938 survey was that the commercial banks in the
Pacific region were, on a comparative basis, more active in
10 Ibid.
11Ibid.
1 o
John M. Chapman and others, Commercial Banks and
Consumer Instalment Credit (New York: National Bureau of
Economic Research, Inc., T950).
28
consumer instalment lending than banks in any other regions.
Not only was the ratio of the number of loans to the number
%
of reporting banks larger than in any other region of the
United States, but the ratio of dollar amounts of loans to
the total was also larger.
Chapman noted that
Although only about 3 per cent of the reporting
banks were situated in the Pacific states, they
accounted for as much as 16 per cent of the number
of outstanding loans and for 13 per cent of the
amount outstanding, a relationship which may be
explained by the extent of branch banking on the
West Coast, especially in California.*3
The amount of retail instalment paper acquired by
commercial banks was also larger in the Pacific region than
in any other. It was pointed out that more than half of
the sales finance paper handled by the reporting banks was
accounted for by this region. Approximately 83 per cent of
this was automobile financing.*-4
Up to the time of this study by Chapman, only three
states had sales financing laws which applied to commercial
banks. These states were Indiana, Michigan, and Wisconsin.
The specific laws relative to consumer credit were intro
duced much later in California, and these will be discussed
in Chapter V, "An Analysis of Credit Agencies, Controls and
Practices."
13Ibid., p. 35.
14Ibid., pp. 42-44
29
The practice by banks of purchasing the accounts
receivables of finance companies and businesses has long
been recognized as an accepted practice. It was interest
ing to note that Chapman endeavored to secure information
about this activity. From the rather limited reports it
was found that in 1938 over $60 million of retail instal
ment paper was purchased by some fifty-three banks.It
should be noted that the Federal Reserve Board compiles
information on the major securities pledged as collateral
for loans in the ’’Summary of Flow-of-Funds Accounts.”
Since the classification title, "Assignment of claims or
contracts, accounts receivable, and oil runs,” covers so
many other unrelated items, comparative analysis cannot be
made.^
Chapman also explained the importance of commercial
banks as sources for loans by sales finance companies. In
1937, according to his study, more than half of the total
funds borrowed by forty-eight sales finance companies was
in the form of short-term credit, most of which was sup
plied by the banks.^ From the more recent surveys made by
the Federal Reserve Board in 1946 and 1955, the volume of
i5Ibid., p. 83.
l^Board of Governors of the Federal Reserve System,
"Summary of Flow-of-Funds Accounts,” Federal Reserve
Bulletin, Vol. 42, No. 4 (April 1956), p. 339.
17Chapman, op. cit.. pp. 193-194
30
loans made by commercial banks to sales finance companies
continued to show a decline. In 1946, loans estimated to
be $779 million were made to sales finance companies by
commercial banks, and this constituted only approximately
18 per cent of the finance companies' total consumer
Instalment credit. The estimate of loans for 1955 of
$2,872 million constitutes only approximately 10 per
cent.^ This cannot, however, be considered as an 8 per
cent decrease in the relative proportion of bank loans, but
it does indicate a sizable decline.
Personal finance companies also secured funds from
commercial banks. Chapman noted that from a sample of nine
companies, the data indicated the percentage of borrowed
funds (largely from banks) nearly doubled during the period
1934 through 1937. The Federal Reserve Board, since taking
over the surveys in 1942, has not thought it desirable to
compute these data separately. In the 1952 survey, loans
to personal finance companies were included with those of
mutual savings banks, savings and loan institutions, pawn
brokers, industrial loan companies, and other lending
agencies under the classification of "other financial
institutions"; this despite the fact that loans to consumer
finance companies, industrial loan companies, and other
^ Federal Reserve Bulletin. April 1956, p. 329.
31
lending institutions totaled $2,053 million.^ xhe con
sumer finance companies no doubt received the greater
proportion of this sum. Chapman pointed out that in 1938,
loans to industrial loan companies constituted less than
.05 per cent of the total loans of banks.
Central banking. Willis, in a study of the opera
tions of the Federal Reserve Bank of San Francisco,
described the principles on which central banking was
developed, the objectives of such a system, and the extent
to which the objectives were attained in the Twelfth Dis-
trict during the period 1914 to 1937.
This analysis is important to the present study for
two reasons. First, the development and application of
policies of that period are, to a large measure, those of
today. Second, an evaluation of the agencies affecting
consumer instalment credit requires the inclusion.
In the development of banking policies Willis stated
that, regardless of the weakness of the Federal Reserve
l^Board of Governors of the Federal Reserve System,
"Detailed Description of Sources and Methods Used in
Revision of Short- and Intermediate-term Consumer Credit
Statistics," Federal Reserve Bulletin, Vol. 39, No. 4
(April 1953), p. 16.
on
Parker B. Willis, The Federal Reserve Bank of San
Francisco--A Study in American Central Banking (New York:
Columbia University Press, 193?)'.
32
System, the bankers in each area were provided with agen
cies which could assist in the development of cooperative
central banking. The success depended upon the bankers'
acceptance of their privilege and the extent to which the
Reserve Bank followed passive policies, conscientiously
prosecuted its task, or was dictated to by powerful banks
in the district.
Willis noted that although the San Francisco bank
followed closely the change and amount of change in redis
count rates, it always had a little higher rate than that
in New York. The explanation given for this was that some
large borrowers often shop for funds. Still another proba
ble answer might be the extent of the competition between
money markets. New York was at one time considered to be
the main money market and still is to a large extent.
However, the San Francisco bank has endeavored to gain more
of the western market for itself. More will be said on
this in Chapter V.
In discussing the discount rate, Willis noted that
it does not have very much effect on the total volume of
borrowing at either the Federal Reserve Bank or its
branches. The reason given was that there has been little
effort made to pass the rates on to the customers. The
possibility of this in the metropolitan centers is more
likely than in other areas. Unless the member banks are in
debt to the Federal Reserve Bank there is obviously no
33
effective credit control.
The interest rates on consumer loans in the Twelfth
District have been less sensitive than in New York and
Chicago. The reason given was the inelasticity of the de
mand for funds due to the lack of security markets such as
in New York. While this condition still prevails in a
large measure, there has been some tendency since 1950 for
western markets to exert more influence.
The extent to which member banks use United States
securities as collateral for loans has, according to
Willis, "operated to relieve the member banks of extreme
cautiousness in making self-liquidating loans.Such a
condition results in a less liquid system and reduces the
effectiveness of the Reserve Bank's control over credit.
The original Federal Reserve Act was designed to
provide separate and somewhat autonomous central banks,
each charged with the responsibility of developing credit
policy for a particular area. Willis concludes, however,
that this has not occurred. At times, independent action
has been permitted; however, on other occasions the posi
tive functioning of district credit policy has been nulli
fied. This situation does not appear to have changed to
any major extent.
21Ibid., p. 137
34
Textbooks. Discussions on consumer instalment
credit can be found in most of the textbooks on money and
banking, credit and collections, consumer economics, and
business cycles. The extent of the discussions, generally,
is an explanation of the use of this form of credit, its
significance as a contribution to income, the institutions
which provide such credit, and the measures of credit
control.
One of the money and banking textbooks which gives
a rather extensive coverage of this subject is the recent
O O
book by Prather. The discussion on credit and monetary
policy was appropriately opened with an excerpt from the
1945 annual report of the Board of Governors of the Federal
Reserve System. The view was expressed that the tradi
tional over-all policy of the Federal Reserve is to con
tribute, "insofar as the limitations of monetary and credit
policy permit,1,23 to maintaining conditions conducive to
production and employment. The "limitations" no doubt
refer to the Federal securities market. However, it should
also apply to the intermediary securities. Large volumes
of securities are exchanged in this market which to a large
extent is outside the control of the Federal Reserve System.
^^Charles L. Prather, Money and Banking (sixth edi
tion; Homewood, Illinois: Richard D. Irwin, Inc., 1957).
23Ibid., p. 409.
35
Prather describes the instruments of credit policy,
and then centers attention on the two which are generally
accepted as the most effective, discount rates and open
market policy. Moral suasion was also discussed, and the
comment made that there was some evidence to indicate it
had been used to influence securities dealers in government
issues. Apparently there is no evidence that it has been
used to influence the dealers in the securities of non-
financial intermediaries.
In describing the significance of rediscounting or
borrowing, Prather made the statement that:
During the upswing in business, the need for
liquidity is less pressing, borrowing becomes profit
able, banks less sensitive to indebtedness, loan
demands of commercial banks' customers are large,
and there may be a greater spread between market
rates and the discount rate.24
It would appear from this that the discount rate is not a
very effective means of credit control.
In the chapter devoted to the discussion of the
various financing institutions supplying consumer credit,
Prather has described the functions of these institutions
in greater detail than have the authors of many other books.
The one topic which is not found, and which would add much
to the over-all discussion, is that of the competitive and
financial interrelationship between banks and intermediate
24Ibid.. p. 413
36
institutions.
Steiner, Shapiro, and Solomon, in the recent edition
of their textbook on money and banking, conclude that con
sumer credit increases the stock of money, and this in turn
increases the demand for goods.This view is in contrast
to that of Chandler, who holds to the fundamental concept
of money and completely omits from his latest text any
reference to consumer credit and the institutions which
26
make it possible.
Steiner and associates have themselves not presented
a very clear picture. At one point they refer to consumer
instalment credit institutions as being "retailers of
funds" and one step removed from the money market. Then,
later in a discussion of the Federal Reserve controls, all
financial intermediaries were combined under the same long
term money users classification regardless of their market
practices. This approach offers an opportunity to shift
back to the zone of respectability again, for now the sig
nificance of regulatory control of the Federal Reserve can
be related to the view that credit arises out of savings.
Thus the volume of loans can be controlled by the
25W. H. Steiner, Eli Shapiro, and Ezra Solomon,
Money and Banking (fourth edition; New York: Henry Holt and
Company, 1958).
2^Lester V. Chandler, The Economics of Money and
Banking (third edition; New York: Haroer and Brothers.
1959).
37
commercial banks who are themselves controlled by the
Federal Reserve.
After making this point, Steiner and associates sug
gested that it might be qualified, for financial intermedi
aries do have cash reserves which might allow them a
cushion. These, they hastened to add, do not nullify the
fact that the control can still be exercised, but they do
permit a time lag. Nothing, however, was mentioned about
the possibility that there could be circumvention of the
commercial banks by exchanges between intermediaries them
selves and between subsidiaries and parent companies.
The discussion then concluded with the statement
that "The most important influence of restrictive policy is
on the willingness of all financial institutions to finance
new loans by selling existing investments h o l d i n g s . " ^
This, it would appear, is a rather weak policy, for if
financial institutions such as sales and personal finance
companies are able to finance new loans with new investment
holdings from outside the banking system, then control is
drastically reduced.
27
Steiner, op. cit.. p. 545.
38
II. PUBLICATIONS OF THE GOVERNMENT, LEARNED SOCIETIES,
AND OTHER ORGANIZATIONS
The most recent and comprehensive study of consumer
instalment credit was that published by the Federal Reserve
Board in 1957.^8 The purpose of the six-volume study was
to present information which would be helpful in determin
ing whether selective controls should be reenacted or some
stand-by regulation adopted. The rapid increase of con
sumer instalment credit in 1955 had caused some to feel
that this form of credit was insensitive to general mone
tary measures. The consensus by those participating in
this study was, however, that general monetary controls
were adequate at the time and specific controls were
unnecessary.
It is impossible to conjecture to what extent this
view was a projection of the banking philosophy of main
taining the status quo. The fact remains that many changes
have occurred in the growth of intermediary financial
institutions, and their influence in the market is not open
to conjecture.
Indicative of the thinking and changing trend of
thought which has occurred was made evident in the
^®Board of Governors of the Federal Reserve System,
Consumer Instalment Credit. VoIs. I and II (Washington,
D.C.: Government Printing Office, 1957).
39
discussion by Homer Jones of Che Federal Reserve in a
29
review of Che Cheories on insCalmenC credit.
Alchough Chere has been a lack of general unanimiCy
among economises during Che pasC forCy years as Co Che
imporCance of Chis form of credit, Chere are specific pat-
cerns of choughc which can be considered as Cypical for
given periods. From Che views expressed during Che 1920's
by such writers as Milan V. Ayres, J. M. Clark, E. R. A.
Seligman, and others, Che general impression was ChaC con
sumer instalment credit provided an important additive Co
economic growth, but it might have serious implications
when business activity turned down. There was thus some
expression of caution Co be noted from these views.
The opinions expressed during Che 1930's on Chis
topic by such outstanding economists as Freynand Zweig,
G. L. Swartz, C. 0. Hardy, T. N. Carver, J. E. Meade, and
others was that consumer instalment credit provided a
desirable stimulant to business activity, and as such con
tributed to economic growth.
During the postwar period, yet another interpreta
tion was given, although it was somewhat aligned with those
of the 1930's. From mid-1940 to the 1950's a more cautious
tone seems to have been evident. Writers such as John H.
Williams, E. C. Simmons, R. S. Sayers, Avram Kisselgoff,
29Ibid., Vol. I, Part 1, p. 235
40
D. M. East bum, and others expressed the view that perhaps
some regulation might be desirable even during times other
than when there are war conditions. Thus the rapid expan
sion of this form of credit, together with the other eco
nomic changes which had occurred, caused many to stress for
the first time the need for some additional control.
In making a summary observation, Jones refers to the
fact that, with the exception of specific studies relating
consumer instalment credit to economic stability, very
little appears to have been done to analyze the relation
ship of this credit to the financial processes.
No doubt the principal reason for this condition has
been the lack of adequate data concerning the operations of
those institutions providing this form of credit. This
fact seems clearly evident from the studies made as recently
as 1955. For the more than 2,200 sales finance companies
and 3,000 consumer finance companies with loans of less
than $1 million, the statement was made that data for an
extended period were not available. Even more significant
was the statement that data were available for only 24 of
some 320 sales finance companies and 18 of the 110 consumer
finance companies having loans of between $1 million and
30
$5 million each. It has been estimated that the total
number of finance companies was approximately 8,000 in 1955
30Ibid.. Vol. II, Part 1, p. 6
41
and that about 60 per cent of their personal loans are made
under State laws.
The sample study of 125 finance companies made by
the Federal Reserve in 1955 did, however, make a valuable
contribution to the information pertaining to the sources
of loanable funds used by these companies during the period
1945 to 1955. Although both sales and consumer finance
companies increased their long-term debt, the consumer
finance companies secured a relatively larger proportion of
their funds from long-term loans than did the sales finance
companies. The extent to which long-term financing in
creased is evident by the fact that in 1941 only 15 per
cent of the total resources of seventy-eight sales finance
companies was in this form of debt. By 1952, long-term
financing had increased to 22 per cent, and in 1955 it
reached 36 per cent.^ Another important change which had
begun in the prewar period and had increased during the
postwar period was the decline in bank borrowing and the
Increased use of open market paper, private placement, and
public offering of securities. The extent to which finance
companies have secured loanable funds from sources other
than commercial banks has been important with regard to the
quantity and velocity of money.
In a study of the responses of consumer instalment
31Ibid., Vol. II, Part 1, pp. 7-8.
42
credit to changes in credit market conditions, Elliott J.
Swan and his committee reached the following conclusions:
(1) general credit and monetary policy does "in some
degree" affect the area of consumer instalment credit; and
(2) adequate evidence is not available for determining to
what extent general credit conditions affect the retail
level.32
Since this study was only a part of the more compre
hensive study of consumer instalment credit for the period
1952 to 1956, it was primarily concerned with the condi
tions during the two periods (1952-1953 and 1955-1956)
during which time credit was restricted.
During the first period, 1952 to 1953, the results
of a survey of bank lenders seemed to indicate that an
attempt was made to restrain credit by refusing new commit
ments to sales finance companies, and a closer screening of
all loans. In some instances "ceilings" were placed on
extensions. Other measures were also adopted. However, it
is interesting to note that all this was done, "to the
degree possible in terms of competitive conditions, on
direct consumer loans."33 The competitive position between
the various agencies providing this form of credit was
certainly not to be ignored. Perhaps more important was
32Ibid., Vol. I, Part 1, p. 285.
33Ibid.. p. 260.
43
the fact that the finance companies turned more to the
public sale of long-term securities when the commercial
banks initiated credit restraints.
The second period of credit restraint, 1955 to 1956,
seems to present a much different picture. According to
Swan, the banks themselves were to some extent to blame for
laxity in applying control. Throughout most of 1955 the
banks made little effort to alter their standards for
credit. There were many reasons for this, and among the
more important were: (1) the banks were themselves inter
ested in the long-run possibilities of consumer credit;
(2) there were also the questions as to what the restrict
ive effects would be on the competitive conditions in the
market; (3) what effect would there be on the relative
profitability of the banks' lending; and (4) how the banks
could take care of the expected additional demands for
credit by their business customers. These were difficult
questions to be answered by banks who were responsible for
applying credit controls and who had found themselves in a
competitive credit market.
From the information obtained for the two periods of
credit restraint, it was concluded "that bank lending to
finance companies is responsive in some degree to sustained
changes in general credit conditions."^ The reason for
34Ibid.. p. 269
44
this qualification was that the larger finance companies
are "substantial borrowers," they are "accepted," and are
"sophisticated," as well as having excellent credit records.
Just how "sophistication" is determined and measured rela
tive to credit worthiness during a period of credit
restraint was not made clear.
With regard to rates, the comment was made that
although they follow closely the prime rate, a finance com
pany may be exempt if it has an improved credit rating.
Rate bargaining has apparently also been a factor. Com
panies with excellent credit records who are extensive
borrowers, and who have the possibility of securing funds
from alternative sources, have been given preferential
rates. Although such preferential treatment need not indi
cate a lack of control, there still remains the question of
responsiveness. The restriction of small accounts in rela
tion to larger ones may merely cause a shift of the users
to the sources which have been given the preferential
treatment.
A number of deterrents were mentioned with respect
to finance companies' borrowing from commercial banks. The
first of these was the requirement of compensating balances.
The view taken in this study was that since finance com
panies need varying amounts they secure lines of credit
when the lines are tightening, and thus they are able to
protect themselves. The fact that companies never use
45
their full lines seems to weaken the argument that the
tightening of lines is a means of control.
Finance companies that have good spacing of their
accounts receivable will, in addition to revolving their
cash receipts, have an opportunity to expand their loans
from surplus. Although Indications are that this amounts
to only about 5 per cent of loaned funds, even this adds
to the additional credit. Added to this is the fact that
credit restraints have not been applied until sometime
after there has been an accelerated expansion of credit.
Swan and associates further stated that both finance
companies and banks continually screen their accounts, but
that during periods of tight credit they are more critical.
Few would deny that this is not a good business practice.
However, this, too, depends upon the institution's classi
fication of accounts, shiftability of funds, the degree of
dependency upon bank sources, the availability of nonbank
sources, the extent to which increased costs can be
absorbed or shifted to the borrower, and competitive condi
tions in the market for this form of credit and other loans.
With respect to cost it was stated: "Few indica
tions were found of concrete changes in the quantity and
terms of credit extended at the retail level as a direct
35
result of a change in general credit conditions." No
• ^Ibid.„ Vol. I, Part 1, p. 271.
46
doubt a great deal of evidence could have been presented to
show that despite the increase in interest costs, the de
mand for loanable funds increased.
Mention was also made of the changing attitude of
bank management towards finance companies. This, it
appears, has not been just a short-run change but a long-
run reaction. At times when there have been credit re
straints, the finance companies have gone to banks outside
the major money centers and opened or extended their lines
when there was a heavy demand by local borrowers. Although
there apparently is no information available as to the
extent of this practice, it does provide another reason for
the ineffectiveness of credit controls.
Since the principal sources of nonbank funds for
finance companies are insurance companies, pension and
trust funds, and nonfinancial corporations, the finance
companies can tailor their securities to meet the needs of
the investors. The smaller finance companies which lack
the financial strength are, however, at a disadvantage in
this respect. The fact that long-term financing was accel
erated during both the 1952-1953 and 1955-1956 periods of
credit restraint would seem to indicate that this practice
was a contributing factor.
Donald P. Jacobs, in a study of the sources of funds
for large sales finance companies, noted a number of
different patterns and trends for the period 1946 through
47
1955.3^ The information and data used were for the three
largest sales finance companies: General Motors Acceptance
Corporation, Commercial Credit Company, and Associates
Investment Company. The fourth largest finance company,
General Electric Credit Corporation, was not included.
It was stated that these companies not only rely to
a great extent on borrowing, but that the use of such funds
fluctuates seasonally as well as annually. Although bank
lines of credit were used extensively during the early
postwar period, the direct placement of commercial paper
increased during the postwar period. Recent data show that
this form of paper increased from $575 million in 1950 to
more than $2.5 billion by 1960.37 Another rather signifi
cant fact was that "By 1950 only a small percentage of
directly placed commercial paper outstandings were held by
commercial banks."3® This condition apparently did not
change much, for it was stated that in September 1955 the
commercial banks held only 6.8 per cent of this paper. The
principal holders at that time were nonfinancial corpora
tions which held 54.9 per cent of the total. The industrial
36Ibid.. Vol. I, Part 2, p. 327.
37
Data for 1950 are from the Federal Reserve Bul
letin. Vol. 42, No. 5 (May 1956), p. 476: data for i960 are
from the Federal Reserve Bulletin. Vol. 47, No. 1 (January
1960), prvr.
38
Consumer Instalment Credit. Vol. I, Part 2, p. 359.
48
group holding the largest quantity was the petroleum
industry, which since 1950 has held between one-third and
two-thirds of the total for nonfinancial corporations.
Although it is an apparent impossibility to attempt
to explain the degree of the impact that general credit
restrictions have had on the issuance of this form of papex;
one thing appears clear: there was an increase in direct
placement of loans even during periods of credit restraint.
As an illustration of this fact, there was an increase in
the use of this paper by five of the large finance com
panies during the period from September 1952 to May 1953
when general credit controls were being applied. The
increase for these companies amounted to almost $200
million.39
In addition to the increase in the use of commercial
paper, and the extension of bank lines of credit during the
periods of restraint, there was also an increase in the use
of subordinate long-term securities whose terms ranged up
to twenty years. Thus a form of debt which was first used
extensively by the sales finance and consuner finance com
panies in the 1930's was resorted to again to overcome the
tightening of bank lines of credit and short-term loans.
For the period December 1950 to December 1955, the long
term debt for the four companies studied by Jacobs
39Ibid.. p. 413
49
Increased from 23.95 per cent of total liabilities to 37.74
per cent.4®
The position of the consumer finance companies rela
tive to that of the sales finance companies was reported as
quite different, especially during the period of credit
restraint in 1955. One of the significant distinctions
between these two groups was the fact that credit demands
on consumer finance companies were more stable than those
for sales finance companies. Another important fact was
that during the 1955 period the consumer finance companies
were, in general, not only able to maintain their bank
lines, but also to Increase them. It was stated:
... 80 per cent of the reporting companies
were able to solicit net additions to their bank
line totals before the year-end. . . . Every
reporting company with less than $5 million in
asset8 obtained such an addition, and, as a matter
of fact, most of these small companies were able
to obtain a greater percentage increase in lines
in the second half of 1955 than in the first six
months, despite the fact that credit conditions
were demonstrably tighter in the later period.
The percentage increase was higher than for any
other group.
It was further noted that, while consumer finance companies
were able to secure relatively larger increases in their
lines during the later periods of credit restraint, their
increase during the whole period was less than that for
40Ibid.. Vol. I, Part 2, p. 396.
41Ibid., Vol. II, Part 1, p. 93.
50
sales finance companies.
III. SPECIAL STUDIES
In addition to the empirical studies of the effec-
tlveness of specific versus general monetary controls of
consumer credit, there have also been studies of the non
monetary institutions and their operations. Among the more
comprehensive were those by Dr. Clyde W. Phelps during 1952
to 1956.^2 xn the first four monographs, emphasis was
placed on the development and use of consumer instalment
credit and the role of the sales finance company. The last
monograph was an analysis of factoring. This latter study
is the most comprehensive analysis of factoring that has
been done.
Professor Phelps, in the discussion of sales finance
companies, stated:
The rise of the sales finance companies is an
excellent illustration of two important principles:
that institutions arise in response to social
needs, and that when established institutions fail
Clyde W. Phelps, "The Role of the Sales Finance
Companies in the American Economy" (1952); "Instalment
Sales Financing: Its Service to the Dealer" (1953);
"Financing the Instalment Purchases of the American Family"
(1954); "Using Instalment Credit" (1955); "The Role of
Factoring in Modem Business Finance" (1956); and "Accounts
Receivable Financing as a Method of Business Finance"
(1957), Studies in Consumer Credit (Baltimore, Maryland:
Conmerclar Credit Company).
51
to meet the changing needs of society, new institu
tions come into being.43
One might also add to this the fact that when there is a
rise of certain institutions in the market and the develop
ment of new ones, a number of new adjustments result.
Those institutions which do not change as rapidly as others
not only lose their positions to the ones which do change,
but they also sacrifice some of their standing to the new
ones.
The ever-increasing practice of accounts receivable
financing was also described by Professor Phelps, who noted
that
... it seems logical to expect continued im
provements and Innovations in accounts receivable
financing and associated services as the leading
institutions in this specialized field strive to
make the use of their facilities more attractlce
and increasingly profitable to their customers and
prospective customers.44
Although accounts receivable financing has been a general
practice of the sales finance companies, the commercial
banks have not, until rather recently, "gone out for the
business." The continuing upward trend in business activ
ity during the latter part of the 1950’s, together with the
loss of competitive position by the banks, has caused many
43phelps, "The Role of the Sales Finance Companies
in the American Economy," p. 9.
44phelps, "Accounts Receivable Financing as a Method
of Business Finance," p. 65.
52
banks to reevaluate their policies in this regard.
IV. PERIODICALS
In the more recent studies of consumer instalment
credit, attention has been directed mainly to the changing
competitive developments and to discussions of the relative
positions of the nonfinancial and financial institutions.
Although some study has been devoted to the significance of
velocity, this area appears to have received less attention
than that given other areas.
The relatively rapid increase in consumer instalment
credit in the past decade has resulted in the growth and
development of several competitive practices. One of these
competitive forms has been the establishment of "captive
finance companies." Bonner, in a recent study, described
what appears to be a trend in the growth of subsidiary
sales finance companies established by the large manufac
turers.^ Within a period of three years (1953-1956), six
major manufacturers established their own captive finance
companies. A chronological listing shows: Borg Warner
Acceptance Corporation in 1953, and Philco Acceptance Cor
poration in 1954. In 1956, finance companies were estab
lished by J. I. Case (Allis Chalmers), General Electric,
^Paul h. Bonner, "Competition, Credit Practices and
the Captive Finance Company," The Quarterly Journal of
Economics. Vol. 73, No. 2 (May 1958), pp.'241-258.
Sears and Roebuck, and Westinghouse. Sears and Roebuck
had, however, actively entered the instalment credit market
as early as 1952, but did not establish their own subsid
iary until 1956.
As one banker stated, "Literally hundreds of indus
trial companies now have financing subsidiaries."47 Over
half of the subsidiaries have been created since 1950 when
the postwar boom really got under way.
Although several of the captive finance companies
were financed by the parent company, others went to the
market for their funds. As an illustration of this last
point, Sears and Roebuck, on August 5, 1958, disclosed
plans to raise $350 million through the sale of long-term
debentures. The same underwriters were engaged who had
managed previous debenture issues of Sears Roebuck Accept
ance Corporation. A large proportion of this new debt was
to be used to purchase accounts receivables. The extent to
which this financing had increased is indicated by the fact
that on January 31 the Sears Roebuck Acceptance Corporation
held $289,400,722 of these accounts, and this was an in
crease of 80 per cent over the previous year. During 1957
this acceptance subsidiary had purchased $488,499,784 in
4^News item, Los Angeles Times. February 6, 1959.
47Ibid.
54
consumer instalments contracts from the parent flrm.^
The interest in finding a solution or solutions for
the rapidly expanding consumer credit activity is evident
by the increasing number of articles published in leading
journals. Henderson, in a recent discussion of this topic,
emphasized the need for controls over what he termed "non
monetary c r e d i t . " ^ This is credit created by financial
intermediaries. It was his conclusion that the Federal
Reserve control of reserves should be extended "to those
institutions issuing liabilities that may be classified as
savings deposits."-’* ) Henderson drew the distinction be
tween credit exchanged for money and credit in terms of
the money value of financial liabilities. The latter form
of credit excludes money and is termed credit of the
public. Gurley and Shaw used the term direct credit to
explain the same thing.
The exchange of purchasing power for financial lia
bilities, according to this view, takes place outside the
money market. Those responsible for the issuance of these
financial liabilities are the savings institutions. Thus
Henderson was of the opinion that the institutions should
48
News item, Los Angeles Times. August 5, 1958.
^James M. Henderson, "Monetary Reserves and Credit
Control," The American Economic Review. Vol. 50, No. 3
(June 1960), pp. 348-369.
50Ibid.. p. 348.
55
be required to maintain reserves, the same as member banks,
against the issuance of these liabilities. These reserves
would be held by the Federal Reserve, and so Professor
Henderson assumed this would result in an effective means
for controlling credit. One important point which was
omitted was whether or not the institutions placed under
the Federal Reserve control would also have membership
status.
Although such a program appears to offer a solution
for the present inadequate means of control, it should be
noted that the emphasis was placed on savings institutions.
While the credit creation in this discussion was limited
to savings institutions (e.g., savings and loan associa
tions and mutual savings banks), a large section of the
market has been omitted. The nonfinancial intermediaries,
such as finance companies which secure funds from other
market sources (insurance funds, trust funds and pensions),
have been neglected.
Alhadeff, in a recent study of credit controls,
suggested that all bank-eligible government securities,
except short-term liquid reserves, be made non-marketable
and that reserve requirements be imposed on certain other
liabilities of nonmonetary intermediaries.-^ The purpose
■^David A. Alhadeff, "Credit Controls and Financial
Intermediaries," The Anerican Economic Review. Vol. 50,
No. 4 (September I960), pp. 655-671.
56
of proposing these structural changes was to provide for a
more adequate credit policy, and thus to develop a better
means for regulating the velocity of money.
It is interesting to note that the nonmonetary
intermediaries included only savings and loan associations
and mutual savings banks. No attempt was made to associ
ate other nonmonetary intermediaries, such as finance,
with the problem of credit control. It was assumed that
these institutions would be controlled by open market and
reserve policies.
From time to time articles have appeared in the
scientific periodicals and books on the velocity of money
(currency and demand deposits); however, the velocity of
credit is either completely neglected or only casually
mentioned. The analysis under these conditions must of
necessity be truncated and confined. The dynamic fluctua
tions in exchange are, however, the interaction of both
money, as defined above, and credit. Credit is an income
asset whose return varies over time.
Richard T. Selden, in an article published as a
part of a symposium on the quantity theory of money,
attempted to explain the velocity of money in terms of the
cost of money holdings and in so doing approaches the area
of credit. The analysis was developed on the principle of
cash sacrifice resulting from the opportunities for alter
native uses, and thus relates the cost to both transaction
57
velocity and income velocity.^2
The measurement of cost was accepted as determined
by equity yields or interest rates which in turn are deter
mined by applying ordinary price analysis. At this point,
however, a conflict developed, for, while Seldon agrees
with Wald and Warburton that long-term rates are better
indicators than short-term rates, he was of the opinion
that short-term rates and close substitutes should not be
ignored. In support of this hypothesis, six correlations
were made of the yields and velocity between deposit turn
over and bond yields, earnings ratios, and deposit turn
over and dividend yields. It was found that the highest
correlation was between deposit turnover and bond yields.
While this is an important correlation, it is assumed that
all other close substitutes for money, such as consumer
instalment credit, are directly related to or a part of
the changes in bond yields or demand deposits. The bond
yields, however, reflect the aggregate changes, and such
aggregate analysis does not disclose the movements of the
sectors.
Craven, in a recent discussion of the velocity of
money, begins by concluding that "money" can consist only
-^Milton Friedman, Studies in the Quantity Theory
of Money (Chicago: University of Chicago Press, 1956).
58
of assets which can be directly used in making payments.
This interpretation would, however, omit time deposits in
commercial banks and savings and loan shares. The central
problem remains as to what causes the velocity of money.
While the usual analysis has been applied to the demand
side with respect to (1) the individually established pat
terns of spending and the state of the arts, (2) the speed
of decision making and unexpected flows, and (3) the
liquidity demands and efficient spending decision, still
the problem of credit remains. Credit has usually been
considered as a demand factor; however, Craven is one of
the few who has considered it as a supply factor. In this
regard he notes: "Credit extensions by sellers may pro
long for a little while the accelerated turnover of all
one’s money hoards and income.
Craven apparently places less faith in the monetary
means of control than some, for he concludes that the
limits of popular patience will have been reached before
the velocity reaches the theoretical limits of hyperinfla
tion. This interpretation further indicates the growing
concern regarding the effectiveness of the present indirect
^Howard J. Craven, "Some Aspects of Velocity of
Circulation of Money," Proceedings of the Thirty-fourth
Annual Conference of the Western Economic Association.
September 2-£, 1959, pp. 61-64.
54Ibid.. p. 63.
59
means for controlling the quantity and velocity of money.
V. CHAPTER SUMMARY
It is quite evident that there is growing concern
over the significance of consumer instalment credit and
the present means for controlling the quantity and velocity
of money. There are a number of reasons for this interest:
1. The increased use of instalment credit and the
resultant growth of nonbank institutions has created con
cern as to the effectiveness of present monetary controls.
2. The extent and effect of nonbank institutions
in circumventing the commercial banks as sources of loan
able funds needs to be analyzed with regard to the effec
tiveness of control measures.
3. The volume and velocity of consumer instalment
credit is an important variable in the quantity and
velocity of money, and therefore it must be considered in
an analysis of money market conditions.
CHAPTER III
CREDIT MARKET CONDITIONS IN CALIFORNIA
1950 - 1960
The rapid expansion of consumer instalment credit in
the last two decades has resulted in a number of studies
concerned with general credit developments, including
monetary and credit policy. Such studies are essential for
the development of national policy; however, equally impor
tant is the evaluation of all monetary and credit policies
which affect a given market. In order to make such an
evaluation it is necessary to first consider the major
characteristics of the market and the changes which have
taken place there.
In this chapter credit market conditions in the
State of California will be considered along with the
national monetary and credit policies. The local market
competitive practices and policies will be discussed in
the following chapters.
The focal interest of this chapter has been directed
first to an accounting of the principal conditions as they
occurred on an annual basis, and then to a division of the
60
61
total period into the following four parts: 1950 to 1953;
1953 to 1955; 1955 to 1957; and 1957 to 1960. It will be
noted that this grouping is not consistent with that often
used for the national economy. The reasons for this will
be evident from the discussion which concludes the brief
summary on an annual basis of the major changes which
occurred in the economy of the State of California from
1950 to 1960.
The economy of California had, like other sectors
of the nation, experienced many changes during the war and
after. Shortly after war was declared there was a sudden
expansion of the defense industry, and this was added to
an already rapidly expanding economy. Then, along with
the resulting industrial expansion, there were the accom
panying increases in marketing facilities and services.
All of this resulted in the demand for more labor, and
between 1940 and 1950 the State of California had what
might be termed a population explosion. Within the period
of a decade, more than 3.5 million people were added to
the population. This represented an approximate 35 per
cent increase and exceeded the national average by a little
more than 8 per cent.
Accompanying this increase in population and employ
ment was the increase in disposable personal income (see
Table I). During this period disposable personal income
in California increased by $10,421 million, or more than
62
TABLE I
PERSONAL INCOME IN CALIFORNIA, 1950-1959
(Millions of Dollars)
Disposable
Year Personal income personal income
1950 $ 19,627 $ 17,864
1951 22,726 20,113
1952 25,089 21,901
1953 26,642 23,252
1954 27,432 24,240
1955 30,224 26,712
1956 33,273 29,761
1957 35,582 31,264
19 58 37,241 33,230
1959 40,915 36,146
SOURCE: Data for 1950-1955 from United States
Income and Output. United States Department of Commerce
(Washington, D.C.: Government Printing Office, November
1958), pp. 157-158. Data for 1956-1957 from Survey of
Current Business. United States Department of Commerce
(Washington, D.C.: Government Printing Office, August
1959), p. 15. Data for 1958-1959 from Survey of Current
Business, August 1961, p. 13.
Disposable personal income data from State of Cali
fornia Department of Finance, Sacramento .
63
64.4 per cent. More than two-thirds of this increase
occurred between 1940 and 1943 and then the rate of in
crease declined until 1930.
The consumer price index for California, using the
1947-1949 base, was 59.8 in 1940, and thus slightly below
the figure of 59.9 for the United States (see Table II).
By the end of 1949, however, the California index was 102.1
while that for the United States was 101.8. This gap
between the two indices has continued, and the purpose of
mentioning it here was to illustrate still another way the
economy of California differed from that of the rest of
the nation.
Also indicative of the rapid growth during this
period was the Twelfth Federal Reserve District's index of
department store sales. In 1940 the annual average figure,
using the same 1947-1949 base, was 33, and by the end of
1949 the index figure had increased to 98.^ With the State
of California considered to represent 70 per cent of the
Twelfth District total, it is rather safe to assume that a
large proportion of this change occurred in California.
During this ten-year period (1940 to 1950), Regula
tion W was in effect for a total of 7 years and 2 months.
The regulation was first put into effect in September 1941.
^"Department Store Sales," a special report by the
Federal Reserve Bank of San Francisco, December 31, 1959.
64
TABLE II
CONSUMER PRICE INDEX. UNITED STATES AND CALIFORNIA
(1947-1949-100)
Year
(average) United States California
1950 102.8 102.6
1951 111.0 111.1
1952 113.5 114.5
1953 114.4 115.9
1954 114.8 116.0
1955 114.5 115.6
19 56 116.2 117.8
1957 120.2 122.0
1958 123.5 126.3
1959 124.6 128.4
SOURCE: Data for United States from United States
Department of Labor, Bureau of Labor Statistics.
Data for California compiled by the Division of
Labor Statistics and Research Department of the State of
California. A weighted average of Los Angeles and San
Francisco.
65
In November of 1947 it was removed. The second time the
regulation was applied was in September 1948 and then it
was removed in June of the following year.
Although any attempt to evaluate the complete
effectiveness of this regulation and of credit controls
during this period would be mere speculation, there are
certain facts which in a measure do raise some doubt as to
the effectiveness. While the increase in the volume of
credit is important, of more significance is the relative
market position of the two principal suppliers, the commer
cial banks and personal property brokers. Over the ten-
year period from 1940 to 1949 the total year-end volume of
such loans at commercial banks increased by $412 million,
or more than 190 per cent. The total year-end volume for
personal property brokers increased nearly $113 million,
or more than 200 per cent. Of even more significance was
the fact that, with the exception of a small decline in
1942 and 1949, the rate of change in the volume of personal
property brokers' loans was much more steady than that for
the commercial banks.
While a large part of this fluctuation in the volume
of commercial bank loans may have been due to monetary and
credit restraints, as well as the attitude of some bankers
in avoiding expansion of this type of loan, some of the
reports from bankers were to the effect that commercial
banks during this period serviced only the better credit
66
trade. The market conditions and competitive practices
engaged in during the following ten-year period indicated
a change if not a complete reversal of the attitudes and
practices.
In addition to this there were the credit unions
whose volume of loans in 1942 exceeded $10 million, and
who in 1946 increased their loans over the preceding year
by more than 118 per cent. Over the whole period 1944 to
1959, the credit unions experienced a highly consistent
rate of increase in contrast to the erratic fluctuations
of the commercial banks.
The extent to which market conditions provided the
opportunity for competition is evident from the following
comment made in regard to the findings of a 1949 survey
conducted by the San Francisco Federal Reserve Bank of
1,000 credit granting stores:
Ever since the end of the War, consumers in the
Twelfth District have been relying more and more
upon the use of credit. In 1949, they spent less
money at retail stores than in 1948, but they made
a greater proportion of their purchases through
their charge accounts or on the instalment basis
than they had the year before.2
The report further concluded that although there had been
a moderate decline in the outstandings in early 1949, this
was apparently due more to a decline in sales than to "the
2
Monthly Review. Federal Reserve Bank of San
Francisco^ March 19SO, p. 36.
67
stringency of regulations."
Following the removal of Regulation W In June of
1949, consumer Instalment credit volume Increased rapidly.
From July 1949 to July 1950, It was reported that this
form of credit In the Twelfth District Increased 100 per
O
cent while cash sales Increased by only 13 per cent.
Since the State of California constitutes approximately 70
per cent of the Twelfth District's business activity, the
proportion of the contribution to the credit volume by
California was quite large. Data were not available from
which to secure the exact proportion.
In 1950 several events took place on the national
level which affected the local market. On August 4 the
President called a meeting of representatives from the
Board of Governors of the Federal Reserve System, Federal
Depository Insurance Corporation, Federal Home Loan Bank
Board, and the National Association of Supervisors of
State Banks. The purpose of the meeting was to discuss
the rapidly increasing volume of consumer instalment
credit. The result was as follows:
Officials of associations of lending institutions
have called upon banks and other financial institu
tions to decline to make loans to business or
^Monthly Review. Federal Reserve Bank of San
Francisco^ July 1950, p. 130.
68
consumers which might be used for speculative
purposes or otherwise interfere with defense
requirements A
A number of observations should be made concerning this
meeting. This was apparently one of the few times that
state banks have been recognized as having a responsible
position in credit control. Whether or not this appeal
was the cause for the decline in commercial bank loans in
California of nearly $28 million in 1951 is a fact which
cannot be proved. There was, however, apparently little
if any effect on the credit activity of the financial
intermediaries, for their loan volumes increased appre
ciably in this period.
On August 21, 1950, the Federal Reserve Bank of New
York raised its discount rate from 1.5 per cent to 1.75
per cent.^ Several days later the Federal Reserve Bank of
San Francisco also raised its rate to the same amount.
This action not only followed the inflationary credit ex
pansion by several months, but it is also very doubtful
whether it had any immediate or short-run effect since the
commercial banks in California were not in a position to
need to discount their paper.
With third-quarter prices and credit continuing to
4Ibid.. p. 95.
^Federal Reserve Bulletin. Vol. 42, No. 8 (Washing
ton, D.C.: Board of Governors of the Federal Reserve
System, August 1956), p. 848.
69
climb, the President announced on October 14, 1950 that
consumers would be required to pay one-third down on the
purchase of automobiles, and the maximum contract period
of payments was changed from 21 months to 15 months. Home
improvement loans were to contain the provision of a 10
per cent down payment and a maximum contract period of 30
months
Prices continued to rise, and in the latter part of
December the Board of Governors of the Federal Reserve
System increased the reserve requirements by 2 per cent on
demand deposits and 1 per cent on time deposits.^ This
action also occurred at a time when the Twelfth District
banks had large excessive reserves, and it was therefore
of little influence on the credit market.
By the end of the first quarter of 1951, the retail
sales volume in the nation began to fall. The same pattern
occurred in the Twelfth District; however, the decline was
not as great. Soon those who had been critical of credit
restraints now found their ranks increased by others who
wanted the impediments to sales removed. On July 13, the
maximum length of automobile instalment loans was increased
^Monthly Review. Federal Reserve Bank of San
Francisco^ October 1950, p. 130.
^Monthly Review. Federal Reserve Bank of San
Francisco- ] January 1951, p. 3.
r
70
to 18 months and home Improvement loans to 36 months.^
This was welcome news to both the suppliers of credit and
the consumers.
Those who viewed the early lag of sales in 1931 as
the omen of a pending depression were certainly not correct
either with regard to the nation's economy or the economy
of California. By the end of the year taxable retail sales
in California had not only increased by 7 per cent, but
personal disposable income had increased by more than 11
per cent. Since consumers tend to increase their instal
ment credit purchases with increases in income, the volume
of year-end outstanding instalment credit increased. The
consumer price index also reflected the increase in general
activity and increased by 8.5 points. This was .3 points
more than the increase of the national index.
In addition to the previously mentioned meeting of
the representatives from major financial sectors, and the
application of general and specific controls, there was
another new and quite novel approach to the problem of
increasing consumer instalment credit. Early in March 1951
President Truman officially announced a voluntary credit
restraint program. Under this program the banks and other
financial institutions could enter into their own voluntary
Q
Monthly Review. Federal Reserve Bank of San
Francisco, August 1951, p. 87.
71
agreements to restrain credit. The Attorney General had
agreed not to prosecute the parties to such agreements
q
under the anti-trust laws. There is, of course, no avail
able information as to just how many of these groups or
associations were formed and are still active; however, the
author of this study does have information as to the
formation of one such secret group. More about the activ
ity of this group will be discussed in Chapter V.
The general improvement in business conditions which
had taken place in California during the latter half of
1951 continued into 1952. Employment increased by 4 per
1 0
cent over the 1951 figure. Disposable personal income
increased by $1,788 million, or more than 8 per cent (see
Table I). The rate of the seasonal decline in taxable
retail sales in the first half of the year was below that
of the previous year, and, with the removal of Regulation W
on May 7, the volume of retail sales for the last half of
the year exceeded $5.6 million (see Table III).
Consumers sharply increased their use of instalment
credit as the maturities were lengthened and the down pay
ments in many instances were reduced. The total volume of
commercial bank consumer instalment credit in California
Q
Monthly Review. Federal Reserve Bank of San
Francisco, April 1951, p. 30.
^ Monthly Review. Federal Reserve Bank of San
Francisco, February 1953, p. 21.
72
TABLE III
RETAIL SALES AND AN ESTIMATE OF
RETAIL INSTALMENT CREDIT
1950-1959
( 000)
Year
end
Total
retail
sales
Taxable Instalment Percentage
retail credit instalment
sales sales sales
1950 $ 12,634,815 $ 8,994,666 $ 2,779,659 22
1951 13,591,213 9,622,388 2,174,594 16
1952 14,624,262 10,416,653 3,363,580 23
1953 15,708,963 10,958,934 2,827,613 18
1954 15,643,974 10,729,665 2,190,156 14
1955 17,138,974 12,624,770 3,599,185 21
1956 18,678,824 13,120,603 3,362,188 18
1957 20,264,870 13,578,092 3,647,677 18
1958 20,011,073 13,407,330 3,201,772 16
1959 21,812,069 15,458,474 4,580,534 21
COMPUTATION: The 1959 base selected for this study
was from a sample study made by a Federal Agency for the
State of California. Year-end outstandings for the year
were 21 per cent of total sales. Using this base the
annual change in commercial bank loans for consumer instal
ment credit were adjusted. Total retail sales were
adjusted by the percentage of change and the volume of
consumer instalment retail sales was thus obtained. Com
mercial bank instalment credit at the end of 1959 was 21
per cent. Commercial bank loans declined by 3 per cent in
1958 and increased by 27 per cent in 1959, Over the period
studied, bank loans averaged 9.9 per cent and the degree
of variance was below the significance level. The base of
78 per cent (21-f 27 = 78 per cent) and 78 per cent of
-3 = -2, 78 - 2 ■ 76, and 76 per cent of 21 = 16 per cent.
Thus 16 per cent of 1958 sales = $3,201,772.
73
for the first time exceeded one billion dollars (see Table
IV). Of this amount, retail automobile Instalment paper
continued to account for a little more than 30 per cent.
It is estimated that retail instalment credit sales
in 1932 constituted 32 per cent of the total volume of
taxable retail sales (see Table III). This was an all-
time high which exceeded both 1950 and 1955.
During 1953, business activity in California con
tinued to improve, but at a much slower rate. Employment,
however, was 5 per cent above what it was a year earlier.^
At the same time the index of general business activity
indicated an annual average gain of 7.3 points (see Table
V). This was slightly below the 8.1 points gained in 1952.
Although disposable personal income increased by
8 per cent in 1953, most of the gain was attributed to the
wage increases received in the aircraft industry. The
gain in the dollar volume of taxable retail sales was only
5 per cent. This was lower than the year before and some
what reflects the general decline in business activity
during the last half of the year.
Consumer instalment credit financed by commercial
banks and financial intermediaries increased by more than
$200 million. However this was a good deal less than half
^ Monthly Review. Federal Reserve Bank of San
Francisco, September 1953, p. 146.
74
TABLE IV
COMMERCIAL BANK CONSUMER INSTALMENT CREDIT
IN CALIFORNIA, 1950-1959
( 000)
Year
end
Retail
automobile
paper
Other
retail
paper
Repair
and
moderni
zation
Cash
loans Total
1950 $ 421,915 $173,864 $111,508 $119,307 $ 826,594
1951 384,438 158,289 125,107 130,293 798,127
1952 563,193 232,351 156,028 168,119 1,119,691
1953 684,135 217,791 160,624 168,107 1,230,657
1954 585,184 156,684 138,909 171,261 1,052,038
1955 818,828 166,276 145,313 197,877 1,328,294
1956 886,376 168,833 163,615 210,274 1,429,098
1957 9 70,745 173,530 166,393 232,003 1,542,671
1958 926,483 172,235 177,380 272,825 1,498,973
SOURCE: Federal Deposit Insurance Corporation,
Operating Insured Commercial and Mutual Banks. Assets and
Liabilities, Reports Nos. 53-52 (Washington: D.C. : Govern-
ment Printing Office).
75
TABLE V
QUARTERLY INDEX OF BUSINESS ACTIVITY
IN CALIFORNIA, 1950-1959
Annual
Quarterly average
Year index index
Annual
Quarterly average
Year index index
1950 100.7
104.3
111.3
112.1 107.1
1955 138.1
141.6
144.7
146.0 142.6
1951 116.1
115.8
116.6
119.6 117.0
1956 138.1
141.6
144.7
142.6
1952 121.1
122.5
126.2
130.7 125.1
1957 157.6
157.6
160.1
156.2 157.9
1953 132.2
133.7
132.6
131.1 132.4
1958 151.8
153.8
157.5
161.2 156.1
1954 131.2
131.1
133.0
131.1 132.4
1959 165.6
168.6
171.2
170.3 168.9
SOURCE: Unpublished data. Permission has been
secured for use.
76
the gain that had been made in 1952. A large proportion
of this was attributed to the increase of more than 29 per
cent in automobile registrations and the fact that retail
automobile instalment credit paper had increased by nearly
75 per cent.^2
The extent to which the economic pattern of the
State of California differed from that of the rest of the
nation is evident from the fact that, not only had the
index of general business activity increased by 7.3 points
over 1952, but the consumer price index for California
increased 1.4 points, while that for the nation increased
by only .9 points (see Table V).
From the standpoint of national credit policy dur
ing 1953, there were at first attempts to restrain the
increase; then as general business activity began to level
off near mid-year, the policy was reversed. On January 16
the Federal Reserve Bank of New York City raised its rate
from 1.75 per cent to 2 per c e n t .*-3 with respect to tim
ing, it will be noted that the discount rate was increased
several months after the expansion in business activity in
California. The change in the margin requirements occurred
even later. Then, on July 1, 1953, the reserve
12
Monthly Review. Federal Reserve Bank of San
Francisco, August 1953, p. 108.
^^Federal Reserve Bulletin. Vol. 42, No. 8, p. 848.
77
requirements for Central Reserve City Banks was reduced
from 24 per cent to 22 per cent and for Reserve City Banks
and Country Banks, to 19 per cent and 13 per cent, respec-
14
tively. While this action may have reduced the rate of
decline in 1954, it is evident it was not of sufficient
magnitude to prevent the decline. Some of the credit con
ditions which offset the effectiveness of this action will
be discussed in later chapters.
Although employment in California had shown a slight
increase in early 1954, unemployment was also increasing.
By March, 6 per cent of the labor force was unemployed.
This occurred at a time of the year when unemployment
normally increases; however, the 6 per cent figure was
above the seasonal average.
The index for business activity held rather steady
for the year. Personal disposable income increased by 4
per cent, and this was in contrast to the 1.7 per cent
increase for the nation.
In an effort to stimulate trade, the discount rate
was lowered 0.5 per cent on February 5 and again on April
16. The rate was now 1.5 per cent, the lowest it had been
since August 1950. The reserve requirements for Central
14Ibid.
^ Monthly Review. Federal Reserve Bank of San
Francisco, April 1954, p. 60.
78
Reserve City Banks was lowered one per cent on June 16 and
the rate for time deposits was also lowered by one per
cent.As for the effectiveness of this credit policy on
consumer instalment credit in California, it might be
noted that the decline in commercial bank outstandings had
started as far back as November 1953, and in the Twelfth
District the consumer loans were declining almost twice as
fast as in the rest of the nation.^ The total volume of
year-end outstanding consumer instalment credit loans of
financial intermediaries did, however, increase, but this
was not sufficient to offset the decline in the commercial
bank volume.
The aircraft industry which had begun to decline
early in 1954 was, to some extent, helped by the removal
of the excess profits tax in the third quarter of that
year but never quite regained its former rate of increase.
The labor which was released found jobs in the electronics
and service trades where there were more jobs available
than there were qualified people to fill them.
General business activity which had turned sharply
upward in October 1954 continued to increase and by April
had advanced nearly 7 points. Taxable retail sales in the
^ Federal Reserve Bulletin. Vol. 42, No. 8, p. 848.
^ Monthly Review. Federal Reserve Bank of San
Francisco, May 1951, p. 77.
79
first half of 1955 reversed their usual seasonal pattern
and registered a gain of more than $124 million (see
Table V).
The rate of increase in disposable personal income
in California had declined in the first three quarters of
1954, but during the last quarter this condition was re
versed. The upward trend continued throughout 1955, and
by the end of the year, income increased by $2,472 million,
or more than 10 per cent. For the same period, the
national figure had increased by only 7.8 per cent.
The year-end total consumer instalment credit loans
at commercial banks and financial intermediaries exceeded
$2.25 billion dollars. This was an increase of more than
$1 billion over the last five-year period. The 1955
volume exceeded that of 1954 by $483 million, or more than
25 per cent, but the percentage increase was not as large
as that in 1953 (see Table VI).
More important, however, than the rate of increase
in 1955 is the fact that it occurred at a time when a
restrictive monetary policy was being applied. There was
only a moderate increase in demand, and time deposits and
banks were obtaining loan funds from the liquidating of
large amounts of government securities.^-®
^ Monthly Review. Federal Reserve Bank of San
Francisco^ January 1955, p. 37.
CONSUMER INSTALMENT CREDIT
TABLE VI
IN CALIFORNIA BY
(000)
FINANCIAL INSTITUTIONS, 1950-1959
Year
end
Commercial
banks
Personal
property
brokers
Industrial
loan
companies
Credit
unions
General
Motors Total
1950 $ 826,594 $ 182,320 $ 20,842 $ 69,409 $ 102,918 $ 1,209,184
1951 798,127 254,108 28,053 75,723 117,758 1,273,769
1952 1,119,691 318,325 31,485 105,702 159,821 1,735,024
1953 1,230,657 299,680 36,2.75 165,940 207,614 1,940,166
1954 1,052,038 317,402 41,407 203,268 256,750 1,870,865
1955 1,328,294 386,752 58,332 250,685 327,586 2,351,649
1956 1,429,098 434,150 71,141 311,058 395,472 2,640,919
1957 1,542,671 449,970 69,886 350,743 415,881 2,825,151
1958 1,548,973 476,446 71,288 393,427 380,427 2,820,701
1959 1,901,392 580,896 75,603 483,000 398,928 3,439,819
SOURCE: Commercial bank data are from the semi-annual reports of the Federal
Deposit Insurance Corporation, Operating. Insured Commercial and Mutual Banks. Assets and
Liabilities (Washington, D.C. : Government Printing Office).
Personal property brokers data are from the Annual Report upon Operations of
Licensed Finance Companies (San Francisco: State of California Division of Corporations,
Department of Investment, 1950-1959).
Industrial loan company data are from the unpublished annual reports, "Operations
of Industrial Loan Companies" (Sacramento: State of California, Division of Corporations,
Department of Investment, 1950-1960).
General Motors data are from Annual Reports. Superintendent of Banks (Sacramento:
State of California, 1950-1960).
oo
o
81
Following the first-quarter reports of rapid in
creases in business activity, the discount rate was raised
from 1.5 per cent to 1.75 per cent on April 15. By mid
year, reports were that the rate of increase was even
larger, but it was not until August 5 that the rate was
again raised by 0.5 per cent. In rather rapid succession
two additional increases were made on September 9 and
November 18.^ This was the first time since 1933 that
the Federal Reserve System had so extensively used the
discount rate as a means of affecting the credit market.
It would be far from correct to conclude that these changes
were the cause for the 50 per cent decline in the rate of
increase in consumer instalment credit loans by financial
institutions in California in 1956 as compared to 1955.
This is evident from the fact that while commercial bank
volume in 1955 increased by more than 26 per cent over
1954 and then in 1956 increased by less than 8 per cent,
the other financial suppliers' volume in 1955 increased by
25 per cent, and in 1956 by 19 per cent. Thus the commer
cial banks who supplied more than 57 per cent of the total
volume of financial instalment credit in 1956 increased
their volume by only 8 per cent, while the other financial
suppliers increased their volume by 19 per cent.
^ Federal Reserve Bulletin. Vol. 44, No. 3 (Washing
ton, D.C.: Board of Governors of-the Federal Reserve
System, March 1958), p. 308.
82
Despite the fact that business activity in 1956 did
not increase at the same rate as in 1955, disposable per*
sonal income increased by more than 10 per cent. Taxable
retail sales declined in the first half of the year by 8
per cent and this was more than four times the seasonal
rate of decline for the same period in 1955. During the
second half of 1956, however, taxable retail sales in*
creased more than 10 per cent, and thus for the year the
percentage of gain over 1955 was 11.7 per cent. This was
far below the 17.6 per cent increase of the year earlier.
The total volume of consumer instalment credit at
commercial banks and all financial intermediaries continued
to Increase, but as mentioned earlier there was a sharp
decline in the rate of increase for commercial banks. The
total volume for all agencies increased more than $295
million in 1956, but this was $188 million, or 38 per cent,
below the increase in 1955.
The down-turn in general business activity had
gained considerable momentum by the end of the first quar
ter of 1957. While this reflected in part the normal
seasonal decline, there was added to this a general reduc
tion in capital expenditures. Consumer expenditures, on
the other hand, continued to maintain a fairly steady rate
even though department store sales were 6 per cent below
the year earlier. This was, however, below the 9 per cent
83
20
decline on the national level.
Taxable retail sales declined by $408 million, or 6
per cent, during the first half of 1957. This was more
than the seasonal average but far below the 11 per cent
decline in 1954. During the second half of 1957 the sales
volume improved somewhat, but by the close of the year the
annual gain was only 3 per cent.
Consumer instalment credit volume increased by 7
per cent, but this was 4 per cent below that of the year
before. All but one of the credit suppliers continued to
expand their loan volumes, but at a decreasing rate. The
industrial loan companies' volume was $4,242,000 below
their 1956 figure. The tight money policy and the decline
in automobile sales were the contributing factors in the
1957 decline.
With the improvement of general business conditions
on the national level at the start of the second half of
the year, there apparently was some fear there might be a
repeat of the 1955 inflationary period. On August 23 the
discount rate was raised to 3.5 per cent. This was either
at the peak of business activity in California or shortly
after, for business began to decline. On November 15 the
rate was lowered to 3 per cent but it apparently had Little
20
News Release, Federal Reserve Bank of San
Francisco, March 28, 1958.
84
21
effect on the down-turn which had set in.
Unemployment continued to increase, but so did per
sonal income. This was due in part to the Government's
austerity defense program and the greater emphasis on
research and development in military procurement. Many
who were laid off in the aircraft industry found employment
in the electrical and chemical industries, and those less
fortunate received unemployment benefits. The demands in
the research and development programs were for higher
skilled personnel and the result was higher salary levels.
Added to this was the increased employment in the service
trades.
At the national level the down-tum appeared to be
much more severe, and in an effort to stabilize conditions
the Federal Reserve Bank of New York on January 24 reduced
the discount rate to 2.75 per cent. On March 21 the rate
was reduced again to 2.5 per cent, and within the space of
three weeks the third reduction was made, this time to
1.75 per cent. Member bank reserve requirements were also
lowered. There had not been a change in this control
measure since 1954, but on March 1, 1958, reserve require
ments were lowered 0.5 per cent. They were now 19.5 per
cent for Central Reserve City Banks, 17.5 per cent for
Reserve City Banks, and 11.5 per cent for Country Banks.
21
Federal Reserve Bulletin. Vol. 44, No. 3, p. 308.
85
Within a month's time, on April 1, all rates were again
lowered 0.5 per cent. A third reduction of 0.5 per cent
for Central Reserve City Banks followed within the space
22
of two weeks. These changes in discount and reserve
requirements emphasized several important points:
(1) Monetary and credit policy was given a severe test to
determine its ability to influence the market. (2) In
meeting this challenge more emphasis had been placed on
timing. (3) Of far more importance is the fact that these
measures have become less effective in controlling the
money supply for consumer instalment credit in specific
market areas.
By mid-1958 general business conditions began to
improve in California, and somewhat later there was im
provement on the national level. Disposable personal
income for the year increased by $1,388 million, or 4 per
cent, and this was in contrast with the less than 3 per
cent increase on the national level. The consumer price
index for California reversed the pattern of 1958 of
increasing at a decreasing rate and increased at an in
creasing rate. The gap between the price index for the
United States and for California continued to increase.
In 1949, the United States index figure was 101.8 and for
^ Federal Reserve Bulletin. Vol. 47, No. 6 (Washing
ton, D.C.: Board of Governors of the Federal Reserve
System, June 1961), p. 668.
86
California, 102.1. By the end of 1959 the yearly average
for the United States was 124.6, while for California it
was 128.4.23
A number of important changes had also occurred in
the money market during 1959. The rapid recovery in the
latter part of 1958 from the down-turn at the beginning of
the year had caused some to view the change with alarm.
The Federal Reserve Board was aware of the potential in
flationary dangers, and on March 6, 1959 approved the
increase of the discount rate to 3 per cent. On March 10
the San Francisco Federal Reserve Bank also raised its
rate to this amount. A second increase to 3.5 per cent was
made on June 12, and then on September 18 still another
0.5 per cent was added.^ The discount rate had now
reached an all-time high where it was to remain until
mid-1960.
I. MARKET CONDITIONS, 1950 TO 1953
The economy of California had not experienced the
same transitional pattern following World War II as had
23
Data for United States from U. S. Department of
Labor, Bureau of Labor Statistics, Washington, D.C. Data
for California compiled by the Division of Labor Statistics
and Research of the State of California. A weighted aver
age of Los Angeles and San Francisco.
r\ i
Federal Reserve Bulletin. Vol. 47, No. 6, p. 688.
87
Che rest of the nation. A large defense industry with its
many servicing agents did not immediately convert to a
peace-time position. The change was impeded by several
conditions. Although the shooting war was over for a
short time, there was the cold war and this necessitated
a high degree of preparedness. Military contracts con
tinued to supply funds to the market and these, together
with the expansion of the trade and service industries,
resulted in an expanding economy.
Any of the tendencies which the market might other
wise have had toward a higher degree of stability during
the period of 1950 to 1953 were certainly eliminated by
the build-up for the Korean War and the postwar adjustment.
Although there was some expansion of the defense industry,
the productive capacity did not need to be extensively in
creased for such a limited war. This condition permitted
an expansion of production for the purpose of supplying an
ever-increasing domestic demand. Thus, the period may
best be described as one of growth under expansionary
pressures, with the pressures only slightly affected by the
control measures which were applied. This not only aug
mented many of the changes which had been occurring in the
credit market but provided an opportunity for new and
quite different market innovations.
Indicative of the growth during this period is the
fact that the general index of business activity for
88
California moved from 100.1 in January 1950 to 131.2 by
the end of December 1952. This phenomenal expansion far
exceeded that for any other three-year period during the
1950's. Accompanying this was the increase in disposable
personal income of more than $5,750 million. This was an
increase of more than 35 per cent. It was also quite evi
dent that the marginal propensity to consume had increased,
for taxable retail sales increased by $1,465 million, or
more than 35 per cent.
Of more significance were the changes which had
occurred in the market which supplied consumer instalment
credit. Although Regulation W was applied in September of
1950 and not removed until May of 1952, the total volume
of year-end outstanding consumer instalment loans at com
mercial banks and financial intermediaries increased by
$536 million, or more than 44 per cent. While a portion
of this increase did occur during the first nine months of
1950 and the last seven months of 1952, this accounted for
a relatively small percentage of the total change.
More important, however, than the aggregate change
was the change in the relative positions of the suppliers
of this credit. The commercial banks which had supplied
68.5 per cent of the total volume in 1950, supplied only
62 per cent in 1951. At the same time the commercial
bank's instalment credit loans declined by 3 per cent,
while the aggregate volume of such loans for all financial
89
sources of supply Increased by 6 per cent. Thus it would
appear that while the restrictive credit policy which was
applied affected the volume of commercial bank loans, the
same conclusion does not apply for the other suppliers.
This is particularly evident with respect to the change in
the volume of personal property brokers' loans and of the
industrial loan companies. The personal property brokers'
loan volume increased 39 per cent, while the volume for
the industrial loan companies increased by 29 per cent.
During 1952 the commercial banks did regain a large
portion of the market which they had lost, for their loan
volume increased by 40 per cent. The percentage of in
crease for the personal property brokers declined to 26 per
cent.
In reviewing the comparative market gains by all
tlie suppliers of this form of credit during this three-
year period, it will be noted that the gains by all the
financial intermediaries far exceeded the increase for the
commercial banks. While the commercial banks' volume in
creased by only 35 per cent, the rates of increase for the
other suppliers were: personal property brokers, 75 per
cent; General Motors Acceptance Corporation, 55 per cent;
credit unions, 55 per cent; and industrial loan companies,
46 per cent.
An analysis of the comparative market changes during
this period with those of later periods indicates that this
90
was Che beginning of the decline in Che relative position
of the commercial banks as suppliers of consumer instal
ment credit in California.
II. MARKET CONDITIONS, 1953 TO 1955
The expansion of business activity in California
during 1953 and 1954 took place at a much slower rate than
had been the case during the previous period. The index
of general business activity moved up only five points and
the larger part of this gain appeared during the latter
half of 1954.
Personal disposable income increased by $2,341
million, or 10.6 per cent, and this was far below the
more than 35 per cent increase of the previous period.
Taxable retail sales for the two years increased by 3 per
cent, although there had actually been a decline in 1953
of 2 per cent.
The volume of consumer instalment credit increased
in 1953 by more than 12 per cent at financial institutions,
but in 1954 it had declined by 3 per cent. In 1953 the
commercial banks' volume increased by nearly 10 per cent,
but in 1954 there was a decline of 14.5 per cent. The
personal property brokers' volume at the end of 1954 was
nearly a million dollars less than that for 1952. The
decline for both the commercial banks and personal property
brokers was due mainly to the decline in automobile loans.
91
This two-year period can best be described as one of
general readjustment; however, the change which took place
In the Instalment credit market Indicated It was a continu
ation of the decline of the commercial banks' relative
market position. In place of supplying 64 per cent of the
total volume of credit funds as they had In 1952, the com
mercial banks by the end of 1954 found their percentage of
the market reduced to 56 per cent.
During this two-year Interval the two principal sup
pliers of credit funds, the commercial banks and personal
property brokers, both had declines in their year-end out
standing volume of loans. The commercial banks' volume at
the end of 1954 was more than $67.5 million less than at
the end of 1952, while personal property brokers' loans
were nearly a million dollars less for the same period.
However, the volume of funds supplied by the other three
financial intermediaries, the industrial loan companies,
credit unions, and General Motors Acceptance Corporation,
increased. The largest percentage of increase was that of
the credit union3 whose volume increased by more than 92
per cent.
The national monetary and credit policy of restraint
during the first half of 1953 and the easing of credit
during most of the remainder of the two-year period appar
ently was ineffectual with respect to the volume of commer
cial bank instalment loans in California. During 1954
92
commercial bank loans declined more Chan $78 million.
Several observations may be made of the credit mar
ket conditions during 1953 and 1954: (1) Commercial banks
as suppliers of credit funds continued to decline in rela
tive market importance. (2) The personal property brokers'
relative market position also declined, but not by as much
as that of the commercial banks. (3) The other financial
intermediaries improved their positions. (4) The national
monetary and credit policy contributed little to stabiliz
ing consumer instalment credit in California.
III. MARKET CONDITIONS, 1955 TO 1957
The increasing business activity of late 1954 con
tinued on into the first part of 1955. Taxable retail
sales which usually have a seasonal decline in the early
part of the year reversed this pattern and increased by
2 per cent.
The first change in the monetary and credit policy
on the national level occurred on January 4, 1955, when the
margin requirement was raised to 60 per cent. This was
again Increased to 70 per cent in April. Also in April the
first indication of an attempt to control credit became
apparent when the discount rate was raised to 1.75 per
cent. No change was made, however, in the reserve require
ments until August, and then two successive increases
raised the rate to 2.5 per cent by November.
93
The rapid expansion in business activity in Cali
fornia failed to carry over into 1936, and by mid-year
retail sales had declined by 8 per cent. Somewhat indica
tive of the extent to which national monetary and credit
policy was not geared particularly to fit this class of
credit in the local market was the increase of the discount
rate on April 15 to 2.75 per cent. To what extent this and
the subsequent increase in August did have in restraining
the increase during the later part of the year is, of
course, highly problematical; however, the rate of increase
in sales did decline.
The general business activity during the period 1955
to 1957 was certainly reflected in the credit market. The
financial institutions who supplied more than $779 million
of consumer instalment loans to the market appear to have
made their contribution. Of more significance for this
study is the fact that the competition for this business
also increased. Commercial banks who had added more than
$277 million in loans, or a gain of 26 per cent, in 1955,
increased their total in 1956 by $101 million, or approxi
mately 8 per cent. During 1956 industrial loan companies
increase their volume by 26 per cent, credit unions by
approximately 24 per cent, General Motors Acceptance Cor
poration by 20 per cent, and the personal property brokers
by 12 per cent. While the tight monetary and credit policy
may have contributed to the decline in the rate of increase
94
of commercial bank loans, the effect was not so evident
In regard to the financial Intermediaries.
IV. MARKET CONDITIONS, 1957 TO 1960
For the most part of the period 1957 to 1960 busi
ness activity did not increase as rapidly as it had during
1955 and 1956. This was particularly evident in 1958 when
the military austerity program occurred and the economy was
not completely able to absorb the change.
Taxable retail sales, which had increased in 1956 by
4 per cent, increased the same amount in 1957. By the end
of 1958 the rate of increase had declined to only one per
cent. During the first half of 1959 sales declined nearly
$7.5 million, but during the last half of the year they had
increased by $997 million, or more than 13 per cent.
From a review of 1958 business activity it was quite
evident that consumers had changed their spending patterns.
While taxable sales and disposable personal income both
increased by the same amount in 1957, sales declined by one
per cent in 1958, although disposable personal income in
creased by 4 per cent. The 1959 pattern was quite differ
ent, with sales having increased by 13 per cent and
disposable personal income by 9 per cent.
There were, no doubt, many factors which contributed
to the significant change during 1959. Defense expendi
tures were increased as were state and local expenditures.
95
Certainly a contributing factor was that for more than two
and a half years consumer expenditures had not increased in
relationship with the increase in disposable income.
The volume of year-end outstanding consumer instal
ment credit at financial Institutions increased by $802
million during the period 1957 to I960, with more than 80
per cent of this increase occurring during 1959. A brief
review of the annual changes reveals that in 1958 the com
mercial banks' volume declined approximately 3 per cent;
and although the other institutions' percentages increased,
their gains were not enough to offset the commercial bank
decline. The most rapid expansion of loan volume occurred
in the latter part of 1959 and resulted in an annual in
crease for the year of 22 per cent. The commercial banks
increased their volume by 26.8 per cent, personal property
brokers by 22 per cent, and credit unions by 20 per cent.
The increases for industrial loan companies and the General
Motors Acceptance Corporation were much smaller.
To what extent the national monetary and credit
policy influenced the market in California cannot be defi
nitely determined; however, it appears rather evident that
many of the changes did not coincide with the changes in
this credit market. The economy of California was not in
the throws of an inflation during 1956 when the discount
rate was raised from 2.5 per cent to 3 per cent. The
instalment credit market appeared to be rather stable in
96
1957 when the rate was again increased to 3.5 per cent.
Late in the year the rate was reduced to 3 per cent, and in
early 1958 three subsequent reductions brought the rate
down to 1.75 per cent. The credit market in California,
however, continued to lag. When the market did begin to
improve in the later part of 1958 the rate was raised on
two occasions to 2.5 per cent, but this apparently had
little effect on the market in 1959 when there was such a
large increase in loan volume.
Consumer expenditures in the first half of 1959 con
tinued at a high level and the seasonal decline in taxable
retail sales was only one per cent. In the latter half of
the year expenditures continued to increase but by an in
creasing rate. They exceeded the first half of the year by
nearly a billion dollars.
Instalment credit increased by nearly $600 million,
or 22 per cent, and the commercial banks who had experi
enced a 3 per cent decline in 1958 expanded their year-end
loan volume by nearly $400 million, or 26.8 per cent, in
1959. Personal property brokers and credit unions also
increased their loans by 22 per cent and 20 per cent, re
spectively, while General Motors Acceptance Corporation and
industrial loan companies increased their volume by 5 per
cent and 7 per cent.
In addition to the national monetary and credit
policy which was so extensively used to stabilize the
97
market, there were several other important developments
during the period 1957 to 1960. The banks had changed
their relative position as suppliers of credit funds.
While in 1957 and 1958 they had continued to decline, the
situation was reversed in 1959. Whether the competitive
practices which they introduced will further enhance their
position remains for the future.
V. CHAPTER SUMMARY
The economic changes which occurred in the economy
of California during the period 1950 to 1960 can best be
described as erratic fluctuations occurring during a period
of accelerated expansion. The extent to which these fluc
tuations were the results of internal and external market
conditions has only partially been considered in this
chapter, since the objective was only to describe the gen
eral characteristics of the market during this period.
While it was not possible, nor considered essential,
to present an exhaustive analysis of all the changing mar
ket conditions during the period studied, attention was
focused on certain of the more important areas. At the
same time emphasis was placed on the changes in credit
policy which were related to the general market conditions.
Although consumer instalment credit is recognized as
being but one part of a highly integrated monetary and
credit market, a sectional analysis of credit in a given
98
market, such as this has been, must be based on a consider
ation of the prevailing market conditions as well as
general monetary and credit policies.
CHAPTER IV
THE SIGNIFICANCE OF CONSUMER
INSTALMENT CREDIT
Studies of consumer instalment credit financing may
be classified for the most part as: (1) informative and
descriptive analyses of the credit market and its func
tions; (2) aggregative evaluations of banking and non
banking intermediaries as to their functions in the market;
and (3) theoretical hypotheses of a cognitive character
based on model building and ad hoc arguments. Recent
literature also abounds with empirical hypotheses which
used macro-demand equations to explore the relative rela
tionships of institutional sources and credit market
functions. finpirical studies of institutional credit activ
ity in a specific market region appear to have been com
pletely neglected.
In Chapter III a study was made of the major market
characteristics prevailing in California during the period
1950 to 1960. The purpose of the present chapter was to
analyze the functions of the credit institutions in this
market. This will be followed in the next chapter with a
99
100
discussion of the regulatory measures which control the
agencies supplying funds to this market and the competitive
practices of these agencies.
Since this study considered only the credit supply
conditions in this market, the scope and accuracy of the
study was limited to the available data and information
obtainable from both public and private sources. Due to
the highly competitive nature of this market, and the lack
of adequate reporting in some sectors, estimates had to be
used. When such estimates were made a complete explanation
was given of the methods of computation.
I. METHODS USED IN ESTIMATING THE SUPPLY AND
VELOCITY OF CONSUMER INSTALMENT CREDIT
The supply of consumer instalment credit was con
sidered to be the quantity of year-end outstanding loans of
the financial institutions and an estimate of the volume of
retail instalment credit at the end of the year. For the
purpose of analyzing the comparative market positions of
the major credit institutions, the quantity and velocity of
loans by commercial banks was given separate consideration.
This also provided an opportunity to evaluate the primary
control of specific monetary and credit policy. From the
comparison of the market positions of the commercial and
the financial intermediaries, it was possible to determine
not only the relative distribution of the market but to
101
note the extent to which the market was changing. Then the
relative position of each of the financial intermediaries
was considered as to its share of the market and the
changes which had occurred. As for the volume of retail
store instalment credit, it was obtainable only for 1959
and, therefore, it was necessary to make estimates for the
previous years. A base was established by using the annual
percentage change in commercial bank instalment loans for
1959 as compared with 1958 and the percentage of the volume
of year-end retail store instalment credit outstanding for
1959. A percentage was computed which was considered an
estimate of the annual volume of retail store instalment
credit sales (see Table 111).
II. CONTEMPORARY STUDIES OF THE SUPPLY AND
VELOCITY OF CONSUMER INSTALMENT CREDIT
The analyses of the velocity of credit appears to
have been given little attention in the literature for two
very basic reasons. In the first place there has been no
generally accepted consensus on the meaning of the term
"credit." There are a multitude of definitions but appar
ently no clear distinction has been made between money and
credit. The contemporary view which has become widely
accepted is that since debt and credit are the opposite
sides of the same coin, and money is both a debt and a
credit, there is nothing to worry about. If debt increases,
102
then credit Increases, and the opposite Is also true. Thus
the lumping of debt and credit appears to have settled all
the problems except those of distribution, timing, and
regulation.
The distribution of debt and the distribution of
credit are, however, two different things. The distribu
tion of debt depends upon the use and consumption of
produced wealth; whereas the granting of credit depends
upon the nature of the risk, liquidity preference, the sup
ply of funds, and the alternative uses of past savings
which in turn may be capitalized on the basis of present
returns. While it is obvious that credit and debt are
created at the same time, the use of different types of
credit instruments provides for different alternative
opportunities. These in turn depend upon the structure of
the market and its needs. The structure of the market
consists of the practices, policies, and controls in the
specific market, while the market needs are primarily based
on gain.
The significance of consumer instalment credit to
the supply of money (currency in circulation and demand
deposits) depends upon a number of conditions: (1) the
velocity of consumer instalment credit; (2) the volume and
market for liquid and near-liquid assets; (3) the alterna
tive investment opportunities; and (4) the extent to which
the suppliers of funds are willing to supply the market.
103
Thus the supply and velocity of loanable funds for instal
ment credit depends in part on the market which is made
for these funds.
For many years the market for the supply of loanable
funds for consumer Instalment credit was quite heterogene
ous and to a large measure self-regulating. Certain finan
cial intermediaries provided credit funds for a rather
well-stratified class of trade. Recent trade practices,
however, indicate this condition has changed and that there
is now a more homogeneous market. This has resulted in
more competition which, in turn, raises the question of
regulating the supply of credit.
It should be clear that the supply of credit is not
synonymous with the quantity of credit, for the quantity
may be increased by the velocity of credit. The velocity
of consumer instalment credit depends upon the extent to
which there is intensive utilization of the existing bal
ances by the firms providing the credit; this is synonymous
with the gross velocity increase and is a continuous proc
ess of decision-making which is important to the income
stream. Firms with no hoards of funds can increase spend
ing by disbursing the income through credit extension, as
long as there is a continuation of this practice so that
subsequent credit income augments the working capital. The
extent to which the volume of credit extensions occurs also
implements decision-making, for there cannot be greater
104
utilization of the borrower's funds. Thus the need for new
money is not in proportion to the increase in the loan
volume, and, in addition, the availability to borrow has
increased, which may in turn supplement the supply of pre
vious money stock. Both the volume of new loans and the
instalment payments act as catalysts to expand the total
volume of income.
A micro-analysis of velocity would involve the
classification of primary accounts for the individual firm
by date of contract closing, amount of contract, time span
of contract, credit service charges, size of down payment,
add-on or revolving extensions, amounts of the instalment
payments, acceleration payments, and the volume of delin
quencies. Changes occurring in any of the above conditions
would also have to be considered. This volume of primary
credit for the firm would have to be correlated with the
volume of loanable funds. The expansion or contraction of
the volume of credit would then have to be considered with
regard to the applications for loanable funds.
Estimates of aggregate velocity may, however, be
made by classifying the accounts as previously described
for a recent year and using weighted averages. Less detail
is thus involved with a greater sacrifice of accuracy. For
certain purposes, such as determining capital requirements,
this method has been considered adequate.
For sector analysis, such as was made in this study,
105
relationships between the suppliers of loanable funds can
be determined from the quantities of year-end outstanding
loans. The velocity was considered to be the ratio of the
change in the year-end volume of loans.
Before directing attention to this analysis, how
ever, a discussion of the views presented by several of the
recognized authorities in this field was considered germane.
Although several of the following references directed their
remarks to the velocity of money and not to credit, the
analogy can be made to credit.
Pierre des Essars made the first study of the veloc
ity of deposits in 1895. Shortly after this, Edwin W.
Kemmerer studied the velocity of currency circulation, and
then Irving Fisher, in 1911, completed a study on the
velocity of demand deposits in the United States. Then
followed studies by the Federal Reserve Bank of New York
and the establishment of an index of the rate of deposit
turnover by Carl Snyder in 1924. In 1936 James W. Angell
published an index of the weekly velocity of "circulating
deposits," and then the Board of Governors of the Federal
Reserve System, in 1944, inaugurated a monthly series on
the turnover of bank deposits.^ These studies have been
^George Garvy, "The Development of Bank Debits and
Clearings and Their Use in Economic Analysis," Board of
Governors of the Federal Reserve System (Washington, D.C. :
Government Printing Office, 1952), pp. 93-113.
106
further elaborated upon by such famous economists as A. G.
Hart, Wesley C. Mitchell, and Joseph A. Schumpeter, to
mention but a few. Then followed John M. Keynes' Treatise
on Money. Since that time, according to George Garvy, "The
literature on income velocity of money that has emerged
. . . has paid little attention to factors determining
fluctuations other than the interest rate." Following the
rapid increase in instalment credit during the early 1950's,
the President's Council of Economic Advisors advocated the
re-establishment of stand-by controls and also a study of
the problem. The Federal Reserve Board was requested to
make a study and in 1957 the findings were published.
This study consisted of two volumes and six parts.
There were not only many diverse views expressed on many
diverse topics, but there were also as many different solu
tions offered. In many parts of the discussions indirect
reference was made to the significance of consumer instal
ment credit as a variable in the velocity of money, but the
only direct reference was made by Edward C. Simmons who
stated: "Monetary theory has long recognized that facili
ties for borrowing and lending are one of the factors that
^George Garvy, "Structural Aspects of Money Veloc
ity," The Quarterly Journal of Economics. Vol. 73, No. 3
(August 1959), p7
107
3
determine the velocity of money." In support of this con
clusion Simmons then pointed out that in 1955 consumers’
indebtedness increased by $61 billion and that an equal
amount of new money was not created. The stock of money
was, however, increased because of this, as well as other
types of loans, and the reason was that the banks could
increase their earning assets due to their favorable re
serve positions.4 This was a criticism of the inability of
the reserve measures to control the stock of credit as well
as its velocity. Nowhere in all the discussions was the
question considered as to the impact on the market for
loanable funds of the various intermediary financial insti
tutions. The prevailing presumption was that the central
bank could adequately influence the quantity of loanable
funds and their velocity. Thus the application of select
ive controls was eliminated, except for possible emergen
cies which were left undefined, and the status quo
prevailed.
In a more recent study of monetary policy, the fol
lowing four reasons were given as to why the public was
interested in this problem: (1) monetary policy has been
considered the principal means for achieving economic
•^Board of Governors of the Federal Reserve System,
r.onBitmer Instalment Credit. Vol. II, Part 2 (Washington,
D.C.: Government Printing Office, 1957), p. 133.
4Ibid.. p. 134.
108
objectives since 1951 (the date of the Accord); (2) the
Bnployment Act of 1946 placed greater responsibility on the
government for effecting economic growth and monetary
policy was the primary instrument which was relied upon;
(3) monetary policy had been recently used to maintain a
high degree of price and market stability; and (4) there
was a question whether the monetary machinery which was
more than half a century old was capable of properly per
forming its responsibilities under changed market condi
tions. While all of these four points are highly signif
icant not only to the national market but to the regional
market as well, it is the latter condition which is more
important to this study. From the decline of the commer
cial banks in California as the principal suppliers of
loanable funds for instalment credit during the past ten
years, it is quite evident that the present monetary
machinery is not properly performing its responsibilities
in this specific market.
Several solutions have been offered for the improve
ment of monetary policy, and since they emphasize credit
control they have been included here for the purpose of
presenting some of the contemporary proposals. Perhaps the
most critical view, and no doubt the most unsatisfactory
^Neil H. Jacoby (ed.), United States Honetarv
Policy, A symposium on monetary policy, The American Assem
bly (New York: Columbia University, 1958), pp. 1-4.
109
solution for the problem of monetary policy responsibility,
was that expressed by Edward S. Shaw. In this approach it
was emphasized that only the nominal money supply should be
the basis for monetary policy and that the instability
which has occurred has been the result of the improper
manipulation of the quantity of nominal money. This has
allowed an elastic monetary condition to be controlled by
built-in stabilizers. As for the credit, Shaw concludes it
is "a by-product'1 and that, "Congress willing, our monetary
system need not be an investor in consumer credit, business
loans, mortgages, and Treasury debt."** The solution which
is offered to replace credit is a "Demand Standard" which
would mean that the nominal supply of money would increase
with respect to the communities' demand for nominal money.
Shaw gives no indication as to how the communities' demand
for nominal money is to be measured and omits completely
the fact that demand may be exploited. There also appears
to be some confusion as to what the interest rate should
be, for at one point he explains the rate would be allowed
to change when and if the communities' demand changed;
however, at another point it was stated that the rate would
remain constant and be compounded annually.
^Edward S. Shaw, "Money Supply and Stable Economic
Growth," United States Monetary Policy. A symposium on
monetary policy, The American Assembly (New York: Columbia
University, 1958), p. 63.
110
In reply Co the objection concerning the removal of
credit as a policy function, Shaw responded: "Credit Is
one of various possible uses for the purchasing power that
the monetary system commands as It Increases the money
supply."7 It appears from this view that credit does not
affect the money supply, but the money supply affects
credit. It Is possible that Shaw overlooked the fact that
some credit Is highly liquid and functions In the market
In lieu of money.
In a discussion of how to make the monetary policy
more effective, A. G. Hart presented still another inter
esting point of view regarding the volume and velocity of
credit. Selective credit controls, according to Hart,
have not been very effective in reducing the rate of credit
expansion for "the regulations had been applied to the
'quality' of credit . . . requiring, for example, minimum
down payments and maximum repayment periods on instalment
or mortgage credit."® The conclusion was that such con
trols had only tended to "level-up" the credit practices
between agencies and has had little effect on the quantity
of credit made available. The results of the present study
7Ibid.. p. 69.
®Albert Gailord Hart, "Making Monetary Policy More
Effective," United States Monetary Policy. A symposium on
monetary policy, the American Assembly (New York: Columbia
University, 1958), p. 191.
Ill
of credit conditions in California do not support this
conclusion. Hart has made only cursory reference to the
relationships between credit suppliers and apparently has
not considered their respective market differences. The
approval by Hart of some type of program, such as the
"stamp plan" suggested by Richard Hazelett, typifies the
hysteria in dealing with this problem and also emphasizes
the extent to which effects have been treated in place of
treating the causes.
More recently the relative growth of financial
intermediaries and monetary policy has been studied by
using ad hoc assumptions and variable estimates built into
static models. The conclusions of one such study was that
"The modus operand! of wealth variables in demand deci
sions significantly determines the interpretation of
financial intermediaries."^ This apparently confirms the
rather well-known assumption that financial intermediaries
function for the purpose of profit and that their deci
sions are based on their wealth. A further significant
fact has also been established by a second conclusion de
rived from hypothetically constructed variable relation
ships :
Q
7Karl Brunner, "Financial Intermediaries, Velocity
and Effectiveness of Monetary Policy," Proceedings of the
Thirty-fifth Annual Conference of the Western Economic
Associatlon. August 24-26, 1560, Stanford, California,
p. 41.
112
Recent discussions about the implications of the
relative growth of financial intermediaries for our
policy mechanisms were haunted by a fundamental
logical fallacy. A logical relationship was asserted
to exist (at least implicitly) between statements
about financial patterns and statements about the de
gree of policy effectiveness. Such a relation could
be shown to occur at very most only relatively to a
hypothesis, and no hypothesis of this kind has ever
been constructed so far.10
Thus, from a constructed hypothesis the logic of an
assumed hypothesis has been constructed, because no hypoth
esis of such a relative incidence has been constructed.
While such ad hoc model construction based on
hypothecated modus operand! may be construed to validate or
invalidate the theoretical assumptions of market activity,
something may possibly still be gained from an empirical
analysis of such market conditions. Based on this hypoth
esis an evaluation has been made of the market conditions
in the State of California for the period 1950 to 1960.
The principal objectives of the following analysis
have been to directly and indirectly associate the charac
teristics of the market of loanable funds for consumer
instalment credit with the quantity and velocity of money.
These characteristics are: (1) the substitution or com
plement of the stock and turnover of loanable funds; (2)
the nature and extent of the supply of such loanable funds;
(3) the policies and practices of the suppliers of such
10Ibid., p. 45.
113
funds; (4) the significance of the sources and distribution
of suppliers' assets for supplying the market; (5) the sig
nificance of velocity in the use of such funds; and (6) the
market characteristics which were conducive or restrictive
as to the supply and velocity of such loanable funds. The
fact that consumer instalment credit provides for a larger
net return on investment than most other types of invest
ment was not considered since this, like the many other
decision variables, was evident in the aggregate volume of
funds supplied the market.
A regional market analysis was made for the purpose
of considering (1) the extent to which given market condi
tions were conducive or non-conducive to the expansion of
this form of credit; (2) the characteristics of the supply
side of a given market as to the relative market positions
of the suppliers; (3) the policies and practices of the
suppliers in this market; (4) the extent to which this
market was affected by national monetary and credit poli
cies which were currently designed to influence the volume
and velocity of this form of credit; and (5) the nature and
extent of the changes which have occurred in the volume and
velocity of the supplies of such loanable funds due to the
competitive practices and influences of the institutions
functioning in this market.
114
III. MARKET CONDITIONS AND THE SUPPLY AND
VELOCITY OF CONSUMER INSTALMENT CREDIT
The extent to which given market conditions are con
ducive to the expansion of the quantity and velocity of
consumer instalment credit appears to depend upon the
general economic growth factors of industrial development,
population growth and composition, extent of urbanization,
and the techniques and practices used by the suppliers of
loanable funds to exploit the market. These are all demand
conditions and, with the exception of the last condition,
they will not be further considered. Credit exploitation
should be considered one of the causes for the expansion of
loanable funds rather than a condition which is the effect
of the demand for credit funds.
The volume and velocity of the supply of loanable
funds depend on such variables as (1) the quantity of funds
available; (2) the sources of the institutional supply of
funds; (3) the nature and extent of internal and external
controls; (4) the relative market positions of the suppli
ers; (5) the competitive market positions of the suppliers;
(6) the ability of the suppliers to evaluate the present
demand conditions as well as market changes of both demand
and supply; and (7) the techniques and practices developed
by the suppliers in exploiting the market.
The quantity of loanable funds available for
115
Instalment credit depends in part on the volume and veloc
ity of circulating money, and in part on the volume and
velocity of credit instruments of varying types and lengths
of maturity. This might appear to present an unsurmount-
able obstacle to a regional analysis of specific credit
conditions; however, neither the lack of accurate tech
niques for measuring the quantity and velocity of circulat
ing money, nor the distribution of credit instruments in
either the aggregate or specific market areas present a
problem, for the generally accepted procedure appears to
have centered on the use of the size of expenditures and
their flow over a period of time. It was this approach
which was used in this study. Thus, while the use of dis
posable personal income, the estimate of retail instalment
credit, and the total volume of financial institutions1
year-end volume of consumer instalment loans lack the
degree of exactness which would be desirable for establish
ing the true market supply conditions, the analysis suffers
more from an underestimate than an overestimate of the
market. Apparently a higher degree of significance will
have to be accorded this form of credit than is currently
the case if more accurate analyses are to be made of the
market, and the causes considered rather than the effects.
One of the major differences between consumer
instalment credit and other forms of credit appears to be
the many sources of supply for credit funds. In a given
116
market the major sources are retail store reserves, the
trade credit of retail merchandise suppliers, commercial
banks, personal property brokers, industrial loan com
panies, credit unions, small loan companies, and captive
finance companies. Each of these agencies operates within
its own market, yet each influences and is influenced to a
degree by the general market conditions pertaining to the
supply and velocity of such funds. It is this condition
which not only reduces the effectiveness of control meas
ures but in several instances tends to eliminate them.
The changes in the nature of the credit market have
resulted in many internal changes in the institutions sup
plying funds. Commercial banks have apparently adjusted
their evaluations of credit consumer rating more to the
standards followed by other lending agencies in order to
recover part of the market, while the credit unions with
larger volumes of funds now have more investment decisions
and have extended their influence into other markets. The
other institutional lenders who procure increasing propor
tions of their funds from market sources other than com
mercial banks have fewer internal problems with regard to
maintaining adequate liquidity with optimum use of funds.
Despite the apparent trend towards a higher degree
of uniformity in credit practices among the suppliers, the
external market controls appear to be inadequate for over
all credit regulation. The commercial banks, who were at
one time able to exercise control of the market due to
their position as the principal supplier of loanable funds,
have now found this position changed. While a part of this
was no doubt due to the attitude of many bankers towards
consumer instalment credit as a form of lending in which
they preferred not to participate directly, equally as
significant has been the fact that the financial inter-
mediarier have to a large extent circumvented the control
of the banks. The commercial banks who are members of the
Federal Reserve System conform to prescribed regulations
of that system, while the financial intermediaries are
regulated by statutory law. In the State of California
there are three regulatory agencies which prescribe in
varying degrees regulation of consumer instalment credit:
(1) the Federal Reserve System, (2) the California State
Banking Department, and (3) the California Division of
Corporations. The nature and extent of this control was
discussed in Chapter V.
The changes in the relative market positions of the
major suppliers of credit funds in California during the
past ten years may be explained in part by (1) the apparent
decline in the more rigid stratification of risk classes;
(2) the change in the attitude of many bankers regarding
the advantages and potentials of this market; (3) the
availability of additional sources of loanable funds for
financial intermediaries; (4) the accumulation of larger
118
supplies of such funds by these intermediaries; and (5) the
greater extension of credit by the suppliers of merchandise
to the retail stores.
The result was an intensification of competitive
practices which has been most noticeable in the banking
sector in recent years. Among the techniques used were
programs directed to the final consumer and the increasing
of their services to the retail trade. The other most com
petitive sector appears to have been that of the retail
trade, which not only has the better initial advantage but
also the market advantage in the selection of sources of
loanable funds. The credit unions are also in a favorable
position because they secure less than 10 per cent of
their funds from outside sources. The competitive posi
tions of the other financial intermediaries in the local
market appear to be less favorable, with the possible ex
ception of the captive finance companies. This latter
group has the advantage of shifting funds from the parent
company and from one market to another. Other advantages
to this group are the low unit cost of operations and
larger per unit volume of credit business.
IV. INSTALMENT CREDIT, 1950 TO 1960
An analysis of the volume and velocity of the supply
of loanable funds used in the market in California for this
form of credit during the period 1950 to 1960 indicates the
119
influence of the above variables and the apparent inade
quacies of the control measures. During this period the
local economy experienced several periods of readjustment.
From 1950 to 1953 there was continued market expansion,
despite the attempt to create a more stable condition by
the reapplication of Regulation W in September 1950. The
extent to which this measure was not effective is evident
from the changes which occurred in the market. While the
volume of commercial bank loans declined by $28.5 million,
or 3 per cent, from 1950 to 1951, the volume of loans by
all other suppliers increased. Personal property brokers
increased their volume by more than 39 per cent, while the
industrial loan companies increased theirs by more than 31
per cent. The estimated volume of retail trade instalment
credit financed by sources other than financial institu
tions in this state declined by $861.5 million, or more
than 53 per cent. Thus, while the commercial banks and
retail trade dollar volume of consumer instalment loans
declined, the financial intermediaries increased their
volume.
There were a number of conditions which influenced
this market during 1950 and 1951. Some of the most signif
icant were: (1) the increase in the volume of automobile
loans by the personal property brokers and the industrial
loan companies; (2) the increase in the trailer home busi
ness; and (3) the increase in cash and modernization loans.
120
Since automobile paper constituted 51 per cent of
the total loan volume for commercial banks in 1950, the
decline in these loans in 1951 was so great as to cause
their total annual volume of loans to decline. During the
later periods, with the exception of 1954, the banks were
able to protect a large portion of this market even during
periods of tight money.
The trailer home business, which expanded rapidly as
the result of the war and the housing scarcity, was a
sector of the market the banks did not enter to any great
degree until 1955. The principal suppliers who, it has
been estimated, had more than 95 per cent of the market up
to that time were the personal property brokers.^
Commercial bank credit. The commercial banks were
apparently cognizant of the probable increase in property
values, and therefore were anxious to expand their volumes
of modernization loans.
Automobile credit continued to be the major loan
classification for all suppliers of credit funds throughout
the 1950's. There was a high degree of competition among
the suppliers of funds for this market, and the result was
a decline in the market position of the commercial banks
due to the supply of funds from other sources. In 1950 the
^Letter from Mr. L. C. Bell, Trailer Coach Associa
tion, Los Angeles, California, July 14, 1961.
121
commercial banks provided more than 69 per cent of the
credit funds for this type of loan, while by 1959 their
proportion of the market had declined to slightly more than
60 per cent.
Although no evaluation of the significance of Regu
lation W can be made for the year 1950, the impact of its
ineffectiveness was evident in 1951. While the total
volume of loans at commercial banks declined by more than
3 per cent, personal property brokers increased their
volume by 39 per cent, industrial loan companies by 29 per
cent, General Motors Acceptance Corporation (hereafter re
ferred to as G.M.A.C.) by 14 per cent, and credit unions by
10 per cent. This no doubt caused the banks to re-evaluate
their position in the market, for in 1952 they increased
their volume of loans by more than 40 per cent despite the
fact that for the first five months of the year Regulation
W was still in effect.
Personal property brokers. Although the personal
property brokers' percentage of the total of financial
institutions' volume of loans in 1950 was slightly more
than 14 per cent, they had improved their position by
nearly 5 per cent by the end of 1951. In 1952 they pro
vided 18 per cent of the total volume of funds. During the
remaining seven years their percentage ranged from 15 to 16
per cent of the total.
122
Credit unions. Credit unions and industrial loan
companies steadily increased their annual volumes of loans
during this ten-year period. G.M.A.C. also increased their
volume, except for 1958 when they experienced a decline of
approximately 9 per cent.
Credit controls. In many respects the period 1950
through 1952 stands out as one of the periods when credit
controls were least effective. During this time commercial
banks had increased their dollar volume of loans by 35 per
cent, while the percentage of increase for the financial
intermediaries was as follows: personal property brokers,
75 per cent; G.M.A.C., 55 per cent; credit unions, 53 per
cent; and industrial loan companies, 46 per cent. In addi
tion to the use of Regulation W, the Federal Reserve System
had increased the discount rate in August 1950 to 1.75 per
cent, where it remained until January 1953. The reserve
requirements were not increased until January 1951, and
then there were two sudden changes which raised the rates
from 22, 18 and 12 to 24, 20 and 14 (see Chart 1).
Several conclusions can be made regarding the inef
fectiveness of these changes. Perhaps the changes in 1950
took place after there was already a strong market condi
tion, and therefore there was not an immediate effect on
consumer instalment credit volume of loans at commercial
banks. If the effect was delayed, then this would account
24
23
22
21
20
19
C O
« w 18
>
* 17
0 )
* 16
0)
* 15
14
13
12
11
10
1/25/51 7/1/53
/ll/51
6 /14/54
7/29/54
9/9/531 1/25/51
4
CHART 1
RESERVE AND DISCOUNT RATES
1950-1959
Sep. '59
Aug. '57
2/27/58
3/20/58
4/17/58
4/18/58
May
‘59
3/5/58
4/1/58
4/24
flov^^57
Aug. '56
Jan. 5
Apr. '56
Nov. 55
Nov. '58
Sep. '55
1725751 Mar. '
7/9/53
8/1/54
ep. '58
1/16/51
Jan. '53
Apr. '5 Aug. ’50
3/5/58
4/1/58
Reserve rate changes by
month, day, and year.
a >
o
o
c
9
73
ft
a
1950 1951 1952 1953 1954 1955 ’ 1956 1957 1958 1959
123
124
for the decline in the bank volume in 1951. This does not,
however, explain why there was no similar decline in the
volume of financial intermediary loans, nor does it explain
the sudden and quite large (40 per cent) increase in the
volume of commercial bank loans in 1952. It appears that
this phase of national monetary policy had little, if any,
effect on the dollar volume of consumer instalment credit
supplied by the commercial banks in California during 1950
and 1952, as well as no apparent effect on the volume of
loans by financial intermediaries from 1950 to 1953.
V. INSTALMENT CREDIT, 1953 TO 1955
Commercial banks. During 1953 the total volume of
loans by the financial sector of the market increased by
approximately 12 per cent. This was far below the 36 per
cent increase in 1952 and reflected somewhat the general
decline in disposable personal income and retail sales.
Commercial banks1 volume of loans increased only 9 per
cent, as compared to the extreme advance in the year
earlier of 40 per cent. The volume of personal property
brokers1 loans declined by 6 per cent while industrial loan
companies, credit unions, and G.M.A.C. increased their
respective volumes. Credit unions1 volume increased by 56
per cent, while that for G.M.A.C. increased by approxi
mately 30 per cent. The industrial loan companies had only
a small increase of 6 per cent. These increases by the
125
financial intermediaries continued to indicate their rela
tive gain in this market, while the commercial banks
continued to decline.
In 1950 the financial institutions in the state
provided $927.9 million for financing retail instalment
credit. Of this amount, the commercial banks supplied 68.4
per cent. By 1953 the financial institutions provided
$1,534.4 million, and the percentage for the commercial
banks had declined to 62.4 per cent. Thus within three
years their percentage had declined even further to 55.6.
The ineffectiveness of the credit controls in 1953
was quite evident from the increase of $132.2 million in
commercial bank instalment credit during the first six
months of the year, despite the increase which had been
made in the discount rate early in January. There is also
no justification for concluding that there might have been
a delayed effect, for the rate was lowered in February of
1954 and again in April, but the volume of bank loans
declined by more than $178.6 million by the end of 1954.
Added to this is the fact that the reserve requirements had
also been lowered in July of 1953 and in August of 1954.
Personal property brokers. While the loan volume of
the personal property brokers declined by more than $18
million in 1953, they regained all but about a million
dollars of this in 1954 and thus increased their market
126
position while the banks were losing theirs. The gains by
the other Intermediaries Indicated they were not apparently
affected by the controls.
Thus, while the period 1953 to 1955 has been de
scribed as one of easy money, It would appear from the
decline In the volume of commercial bank loans in Cali
fornia during 1954 that the reverse was true. As for the
financial intermediaries, as was just mentioned, they all
increased their loan volume. The general market decline
no doubt affected the commercial bank decisions but appar
ently had little, if any, influence on the financial
intermediaries.
The rapid expansion of commercial bank consumer
instalment loans in 1955 was no doubt due in part to the
fact that the banks recognized they were rapidly losing
their position in this market. Instead of providing 68.4
per cent of the total volume of funds supplied the market
by all the financial institutions in 1950, the banks by the
end of 1955 supplied only 56.1 per cent. As for the volume
of funds supplied by financial institutions for retail
store instalment credit, the banks provided only 56.1 per
cent, which was below the 62.2 per cent in 1954.
During 1954 the banks had experienced a decline in
automobile loans, and in 1955 they apparently endeavored to
improve their position. The result was an increase of
$67.5 million, or approximately 40 per cent. The financial
127
intermediaries, however, also increased their volumes:
G.M.A.C. loans increased by 27.6 per cent; personal
property brokers, 27.7 per cent; and credit unions, 24.3
per cent.
VI. INSTALMENT CREDIT, 1955 TO 1957
Thus the market position of the commercial banks in
1955 changed in two important respects. Their total
volume of funds supplied the market by all financial insti
tutions increased by 2 per cent, due to an increase of 39.9
per cent in automobile paper, and their cash loans in
creased by 15.5 per cent. This appeared to mark the
beginning of the emphasis by the banks of cash loans, for
their volume increased during the next five years at an
increasing rate.
In 1956 all the financial credit institutions in
creased their volumes of consumer instalment loans despite
the fact that 1956, like 1955, was considered a period of
tight money. The banks increased their total volume by
8 per cent; however, their retail volume increased by only
one per cent. At the same time the financial intermedi
aries increased their volume by $305 million, or more than
37.6 per cent. This was not at the expense of the cash and
service loans, for they also increased.
There were several rather significant changes in the
Federal Reserve policy employed during this period of tight
128
money. Within the space of two years the discount rate had
been increased six times. It had been increased from 1.75
per cent to 3 per cent by August 1956. No change had been
made in the reserve requirements, however; the rate for the
central reserve city banks was in fact 2 per cent lower
than it had been in 1950. By increasing the discount rate,
the obvious objective was to increase the cost of securing
funds by this means and thus reduce the volume of loans.
This, however, follows only if the market is unwilling to
pay the higher interest charge. It also follows if the
banks are unable to secure "Federal Reserve funds" from
other banks to build up their own reserves. Either the
banks in California were able to use the discount window
and pass on the higher interest or they were able to secure
Reserve funds, for they apparently had little if any
trouble in securing an adequate volume of loanable funds.
VII. INSTALMENT CREDIT, 1957 TO 1960
During 1957 the commercial banks further extended
their efforts to secure a larger proportion of the rapidly
expanding retail market. The result was their total volume
of funds supplied this market increased from 29.8 per cent
in 1956 to 32.9 per cent in 1957. They also had increased
their percentage of the total funds provided for retail
credit by all the financial institutions from 47.3 per cent
in 1956 to 54.9 per cent in 1957. Despite this fact, the
129
retail merchants increased by more than $214 million their
use of other sources of financing to meet their credit
needs. Part of this was due to the decline of more than
$128 million in loans made by the financial intermediaries.
Thus, while the banks increased their volume of these loans
by taking over a part of the market from the financial
intermediaries, the quantity of funds supplied by the banks
was not sufficient to satisfy the increase in the demand.
Two of the markets in which the banks became more active
were the financing of foreign automobile paper and private
pleasure boats. These markets had previously been domi
nated by the personal property brokers; however, as the
banks became more aware of the market potential, they be
came more competitive and were able to secure a larger
proportion of this business.
The tight money policy which had been in effect
since 1956 no doubt had some effect in stabilizing the rate
of increase in commercial bank instalment credit in Cali
fornia during 1957. The year-end volume of loans increased
approximately 8 per cent, the same as in 1956. During the
last quarter of 1957 there were, however, some evidences of
a decline in business activity. It was not until January
of 1958 that the same report came from the national level.
During February, March and April, the reserve requirements
were lowered, but it was not until March that a change was
made in the discount rate. By May this race had been
130
lowered to 1.75 per cent. As a result, however, of some
business improvement on the national level during the
summer, the rate was again adjusted upward in September.
Neither the easing of the money situation in early 1958 nor
the tightening of the money supply in the later part of the
year had any appreciable effect on the lending activities
of the commercial banks in California. While their volume
of automobile paper declined by $44 million, their volume
of cash loans increased by $39.1 million. The financial
intermediaries, however, were increasing their volumes of
loans, with the exception of G.M.A.C. which for the first
time in ten years had a decline.
In 1959 the tight money policy consisted of increas
ing the discount rate while the reserve requirements were
not changed. This policy had little, if any, effect on the
commercial banks and personal property brokers in this
state, for they increased their volume of loans by 26.8 per
cent and 22 per cent.
A large part of the commercial bank gain was due to
an increase of $134 million in the volume of funds supplied
the retail credit market and the $98.8 million increase in
cash loans. They were able to improve their percentage of
retail credit market to 55.6 per cent of the total funds
supplied by the local financial institutions, and to extend
their operations, by means of credit card and revolving
charge account programs, into a supposedly more lucrative
131
field, that of cash loans.
There was, however, one Important market change. As
the sales of private pleasure boats increased during the
period 1930 to 1939, more manufacturers and dealers entered
the business. In 1939 one of the banks which had been sup
plying a large volume of funds for this credit decided that
the market was not sound and withdrew their funds. The
private pleasure boat Industry which was financed to a
large extent by instalment credit had rapidly expanded and
rather suddenly declined. Those dealers who continued in
business secured their funds from suppliers other than the
local financial institutions, and this contributed greatly
to the Increase of more than a billion dollars in the
retail financing from other sources.
VIII. CHAPTER SUMMARY
In considering the significance of consumer instal
ment credit to the quantity and velocity of money in
California during the period 1950 to 1960, the emphasis has
been placed on the quantity of the supply of credit funds
and the rate of change in this supply. These conditions
were analyzed with regard to the relative positions of the
commercial banks, financial intermediaries, retail store
instalment credit volume, and specific national monetary
policies.
Although consumer instalment credit is but one of
132
the many types of credit which is influenced and also in
fluences the markets for other forms of credit, the empha
sis has been centered on those characteristics of the
market which were directly related to consumer instalment
credit.
While national monetary policy was not designed
specifically for consumer instalment credit, the intent was
to control this as well as other forms of credit. Since
the two principal methods of control are the regulation of
reserve rates and discount rates, these have been analyzed
relative to their influence on the local market. Due to
the changes in the quantity and velocity of commercial bank
consumer instalment loans in California during the period
studied, this control appears to have been ineffective.
Bank loans did not increase appreciably during' periods of
easy money, and during the periods of restrictions they
were ineffective. There also appears to be no evidence
that there was any delayed action by the controls on the
market.
It is generally assumed that market controls are for
the purpose of contributing to a higher degree of market
stability and economic growth. Thus, in a free market the
value of controls cannot be based on the extent of the
competition, but rather on the extent to which the competi
tion improves the market. It has been quite evident from
the study of this market that the inadequate controls have
not contributed to improved competitive conditions, but to
credit exploitation and an unstable market.
TABLE VII
ANNUAL VOLUME OF YEAR-END OUTSTANDING CONSUMER INSTAIMENT
CREDIT LOANS BY SOURCES, 1950-1959
(Millions of Dollars)
Personal Industrial
Year Commercial property loan Credit General Retail
end banks brokers companies unions Motors trade3 Total
1950
$
826.6
$
182.3 $ 20.8 $ 69.4 $ 102.9 $ 1,851.8 $ 3,053.9
1951 798.1 254.1 28.1 75.7 117.8 1,329.7 2,603.5
1952 1,119.7 318.3 31.5 105.7 159.8 2,017.5 3,752.6
1953 1,230.7 299.7 36.3 165.9 207.6 1,293.2 3,233.4
1954 1,052.0 317.4 41.4 203.3 256.8 917.9 2,788.8
1955 1,328.2 386.8 58.3 250.7 327.6 1,752.2 4,103.8
1956 1,429.0 434.2 71.1 311.1 395.5 1,243.2 3,885.0
1957 1,542.7 450.0 69.9 350.7 415.9 1,457.9 4,283.1
1958 1,548.9 476.4 71.3 393.4 380.4 1,044.6 3,865.3
1959 1,901.3 580.9 75.6 483.0 398.9 2,071.8 5,511.6
aAdjustment has
financial institutions
been made for retail
(see Table XI).
instalment credit financed by the local
i
134
CHAPTER V
AN ANALYSIS OF CREDIT AGENCIES,
CONTROLS AND PRACTICES
The general approach to the evaluation of consumer
instalment credit has usually been centered on the types
of services provided by commercial banks, financial inter
mediaries, and retail trade in meeting the demands of the
market. This emphasis on the demand side of the equation
has precluded any reference to the significance of the
supply side. It has, therefore, been the purpose of this
chapter to consider each of the principal sources of the
supply of loanable funds with respect to (1) the nature and
extent of the regulatory measures which limit their scope
of operations; (2) the competitive practices in which they
engage; and (3) the extent to which these conditions appear
to have affected the volume and velocity of such loanable
funds in this market. Based on this analysis, suggestions
have been made in the last chapter for establishing con
trols which will more adequately stabilize the volume and
velocity of this credit.
In the State of California there are the following
135
136
six principal sources of supply of loanable funds for Che
financing of consumer instalment credit: commercial banks,
personal property brokers, industrial loan companies,
credit unions, captive finance companies, and retail estab
lishments. These sources may be classified into the fol
lowing two sectors: financial and trade. In the financial
sector, the two divisions which have been referred to pre
viously are banking and financial intermediaries. Banking
has been considered here to include state and federal banks
with the latter group consisting of only the member banks
and not the district and regional Federal Reserve Banks.
The only reference made to this last agency has been with
regard to the regulatory measures as they affect the lend
ing activities of the member banks. Since the state banks
are under the supervision of the State Superintendent of
Banks, the regulations concerning their loan activities
were considered separately.
I. STATE CONTROLS
Although the State of California has granted recip
rocal banking privileges to the G.M.A.C., this agency has
been considered to be a financial intermediary. The other
financial intermediaries considered here as providing
short-term and intermediate-term financing were the per
sonal property brokers, industrial loan companies, and
credit unions. Although there are two types of credit
137
unions, federal and state-chartered, they have been consid
ered together. Reference has previously been made to the
financing of retail store consumer instalment credit by
sources other than commercial banks and financial inter
mediaries. This has been considered as trade credit and
consists of such credit accounts as are financed by the
retail merchants themselves and the secondary use of trade
credit by the supplier of merchandise to the retailers.
Recent studies have indicated the divergent and
sometimes conflicting views regarding (1) the adequacies
and inadequacies of present control measures; (2) the forms
of control which should or should not be used; and (3) the
leveling effects of competition referred to by some as
merely providing an elastic supply of credit funds.
Some views on controls. Those who have debated the
question of the values of present regulatory methods sup
port their views by emphasizing the significance of the
monetary policy in indirect control of the supply of
credit. The opponents, however, refute this by directing
attention to the rapid increase in the volume of this
credit and the impact it has had on the market. Some have
expressed their views on the desirability of applying
specific controls even during peace-time. Others have
maintained that general controls are adequate. Still
another group has suggested that neither the specific
138
controls nor the general controls are adequate, and In
their place they would recommend a national superstructure
which would exercise control over all the lending agencies.
All efforts in this direction appear to be concerned with
the effects and not the causes.
The fact that less than half of the banks in the
United States are members of the Federal Reserve System
and that these banks control most of the commercial bank
deposits has led to the general assumption that the Federal
Reserve System can direct monetary and credit policy so as
to affect all forms of credit. Thus, when the Federal
Reserve increases the discount rate or raises the reserve
requirements, it is presumed this action will result in
higher interest rates and the raising of credit standards.
The banks are assumed to be in a position where they will
have to reduce their loanable funds allotted for this form
of credit and to balance their portfolios. The allocations
of such funds may be accompanied by both an increase in the
rate of interest charged, along with other restrictive
measures such as the reduction of the loan period, larger
down payments, and the reclassification of risks.
There are, however, several conditions which may
affect the decisions of the banks in regard to their reduc
tion of the volume of this credit. The rate of return
would certainly be one of the many factors, for if the
return was greater on this type of loan than on others the
139
bank might shift its portfolio to protect this loan yield.
Then, of course, there is the same decision to be made
concerning the direct instalment loans made by the bank
itself. This decision no doubt is less difficult, for
there are few loans whose annual effective rate of return
is as large as the more than 17 per cent received on in
stallment loans. The decision concerning the reduction in
the volume of accounts receivable financing of retail mer
chants also poses a problem, for the banks do not care to
take action which might result in the alienation of the
customers. Then there is also the matter of competition in
the market for this type of loan business. Since the
return is so favorable on these loans, and the volume of
business has increased to the point where it now involves
hundreds of millions of dollars, the banks are not only
anxious to retain their portion of this market but to ex
pand it as much as possible.
There is no information available as to which of
these conditions have been given priority in the decision
making by the bankers; however, it is quite evident they
were made and that they were not influenced to a great
extent by the tight money and credit policies in effect.
There appears to be no other way of explaining the large
increases in commercial bank loans during 1952, 1953, 1955,
1956, 1957, and 1959.
During each of these six years there was general
140
credit restraint. In 1952 there was also the use of Regu
lation W, yet this form of credit expanded. There was,
however, a slight decline in the ratio of instalment loans
to total loans in 1955, 1956 and 1957, but the ratio of
instalment loans to deposits increased from 24.6 per cent
in 1955 to 27.5 per cent in 1956 (see Table VIII).
The timing of controls. The changes in the discount
and reserve rates were apparently not significant enough to
bring about a reduction in the volume of consumer instal
ment credit in California during this period, partly
because they were not made until after there had been an
expansion of the credit volume and the increases in loan
costs were less difficult to shift. The four increases in
the discount rate by 0.25 per cent each in 1955 apparently
had little effect on the volume of loans in 1956; however,
these with the two 0.25 per cent increases in 1956 and
0.5 per cent in 1957 may have had some effect on the volume
of discounts in 1957. It appears unlikely, however, that
this was the reason for the decline in 1958 since there was
such a general decline in business activity.
In 1952 the year-end volume of commercial bank
"retail automobile paper" and "other instalment paper"
increased by more than 46 per cent, despite the fact that
Regulation W was in effect until May of that year. Al
though there was an increase in the loan volume in the last
141
TABLE VIII
RATIO OF COMMERCIAL BANK INSTALMENT CREDIT TO DEPOSITS,
LOANS AND DISCOUNTS AT ALL CALIFORNIA STATE BANKS
AS END OF JUNE 1950-1959
(Billions)
Percentage ratio
Year
(1)
Deposits
(2)
Discounts
(3)
Bank
credit
(1)
to
(2)
“C3T"
to
(1)
(3)
to
(2)
1950 $ 3.355 $ 1.258 $ .744 37.5 22.1 59.1
1951 3.542 1.576 .783 44.5 22.1 49.7
1952 3.847 1.647 .924 42.8 24.0 56.1
1953 3.985 1.936 1.253 48.5 31.4 64.7
1954 4.264 2.047 1.114 48.0 26.1 54.4
1955 4.768 2.455 1.173 51.4 24.6 47.7
1956 5.084 3.045 1.401 59.8 27.5 46.0
1957 5.421 3.301 1.467 60.9 27.1 44.4
1958 5.821 3.219 1.515 55.3 26.0 47.0
1959 6.316 3.745 1.694 59.3 26.8 45.2
SOURCE: "Deposits, Loans and Discounts,” Fiftieth
Annual Report. Superintendent of Banks, State of Cali-
fomia, Sacramento, 1959, p. 13.
142
six months of the year, it was not as large as that for the
first half of the year. Thus it was rather evident that
the commercial bank credit volume was not responsive to the
combined specific and general controls during this time.
The 9 per cent increase in the volume of commercial
banks' outstanding consumer instalment credit loans in 1953
appeared to have been due mainly to a more liberal credit
policy by the banks than to the impact of the easy money
policy of the Federal Reserve System. This conclusion is
based on the fact that while the banks were able to in
crease their volume of automobile paper by approximately 27
per cent, the personal property brokers' volume declined by
31 per cent. The 2 per cent increase in the discount rate
in January may, however, have caused the commercial banks
to be more selective in their loans, especially to the
personal property brokers who had apparently overextended
themselves in 1952. This appears to have been the only
time during the ten-year period when credit controls were
effective. The reduction of reserve requirements in July
of 1953 can also be given little credit for a large
increase in the volume of commercial bank loans occurring
during the first six months of the year.
The easy money policy which in 1954 consisted of
lowering both the discount and reserve rates also failed
to stabilize the lending of funds by the commercial banks
for this type of credit in California. Their year-end
143
volume declined by 14.5 per cent while personal property
brokers Increased their volume by 5.6 per cent. It Is
rather doubtful that the commercial banks would have ex
tended their loans to the personal property brokers rather
than take advantage of the market themselves. There Is,
of course, the possibility that the personal property
brokers secured funds from other sources; however, this
does not alter the banks' position. The fact that there
was a general decline in business activity during the year
might be offered as a reason, but this merely supports the
fact that the easy money policy failed. In contrast to
the decline of 28 per cent in the conmercial banks' volume
of retail instalment paper and 14 per cent decline in
automobile instalment paper, G.M.A.C. had increased its
volume by more than 23 per cent.
The improvement in business activity during 1954
indicated the possibility that the timing of the easy money
policy did not coincide with changing business activity.
The reductions in reserve requirements in June, July and
August appear to have occurred after the upturn in the
business activity. The same criticism applies to the tim
ing of restrictive measures during 1955. The discount
rate, which was increased by 0.25 per cent in April,
August, September and November, apparently had little
influence on the expansion of the consumer instalment
credit volume in California, for the year-end volume of
144
outstanding loans increased by $277.3 million, or 25 per
cent.
The tight money policy which continued on into 1957
provided for a relatively stable growth in instalment
loans. The commercial banks' volume increased by approxi
mately 8 per cent, and the increase for all the financial
institutions for the year was approximately 7 per cent.
In August the discount rate was increased by 0.5 per
cent and then within three months lowered by the same
amount. As far as the local market was concerned there
appeared to be little justification for the rate change.
There was not a rapid expansion of consumer instalment
credit and little reason to believe there would be, for
business activity was leveling out. By October, however,
there were some signs of a downward adjustment, and the
reduction in the discount rate was timed closer to the
market change than it had been previously.
During early 1958 the reserve requirements and dis
count rates were both lowered. Thus, for the second time
within eight years, the same policy was followed. The
principal difference between the two periods was that in
1958 the discount rate was lowered by 0.5 per cent whereas
before there was only a 0.25 per cent change. The reserve
ratio was lowered only 0.5 per cent instead of one per
cent. Another difference was that twice as many rate
changes had been made than previously. Monetary and credit
145
policy had been given Its most severe test. Despite the
attempts early in the year to expand the credit volume, the
year-end total for commercial banks declined by 2.8 per
cent.
In late 1958, business activity in California fol
lowed closely the national pattern and began to improve.
Undoubtedly there were fears of inflation and so the dis
count rate was raised in September and November. Within
the space of a year there were three changes in the dis
count rate while there were no changes in the reserve
requirements. These changes had little, if any, effect on
the volume of funds made available for consumer instalment
credit, for this marked the beginning of a new wave of
competition, the credit card and revolving credit.
II. COMMERCIAL BANK POLICIES AND PRACTICES
The statutory law in the State of California rela
tive to the lending activities of commercial banks pertains
for the most part to the enforcement of Banking Law.^ This
applies to the appraisal of the ability and integrity of
the bank's management, and the testing of the validity of
a bank's assets.
^West's Annotated California Codes, Financial Code
Section I, Official California Financial Code Classifica
tion. Vol. 30, Chapter 10, Article 1, Section 1220
(Sacramento: Documents Section, Printing Division, 1957).
146
In the establishment of such provisions it was the
obvious intent to provide for a system of free banking with
very little restraint. Banking law, as it has developed,
pertains to the nature and legality of credit instruments
and not to the responsibilities and limits of management
loan policies. Savings banks are limited, however, for
they may not hold instalment loans whose unexpired terms
exceed ten years and they may not loan an aggregate amount
which is in excess of 35 per cent of their deposits.^
The most intangible condition pertaining to the
lending activities of commercial banks is that of apprais
ing the ability and integrity of the management. While
this is a measure of control for the protection of both
depositors and borrowers, the standards are apparently
established by the banking community. Thus the lending
responsibility of the bank management depends upon the
standards of control and the market conditions prevailing
at any given time. If the standards of control are ade
quate, as many believe, then the credit market is con
trolled by the banking standards; but if the standards of
control are weakened by other market pressures, such as
competition, then new standards are developed. The extent
to which this has occurred in California is evident by the
^Ibid.» Chapter 11, Article 3, Section 1407, p. 191.
147
commercial banks' decline In relative market position In
the area of consumer Instalment credit loan volume and by
their efforts to regain their former position of the
market.
The testing of the validity of a bank's assets Is
also a form of control which might be referred to as pro
viding a standard for bank loans. The only difficulty
appears to be that no standard has apparently been set
which will apply specifically to short-term consumer In
stalment credit loans. The banks not only establish their
own credit risks, but their loaned-out position with
respect to the use of funds established for these loans.
The fact that delinquency and loss ratios have been small
would indicate that the risk standards have been carefully
established. Of more Importance Is the fact that the banks
have apparently not used this position for stabilizing the
market. This seems evident from the highly erratic fluctu
ations in the annual volume of Instalment loans made by the
banks. It also appears quite evident that the volume of
commercial accounts has had little, if any, influence. On
two occasions, in 1952 and in 1959, when the increase in
the volume of loans was the largest ($322 million and $402
million, respectively), the commercial deposits increased
by $305 million and $495 million, respectively (see Table
IX). In each instance the banks were endeavoring to
recover a part of this market. In 1954 and 1958, however,
148
TABLE IX
RATIO OF COMMERCIAL BANK RETAIL INSTALMENT CREDIT
TO TOTAL RETAIL CREDIT, 1950-1959
(Millions)
Commercial
Other bank's
Year Commercial financial percentage
end banks institutions Total of total
1950 $ 634.8 $ 293.1 $ 927.0 68.4
1951 585.5 259.4 844.9 69.3
1952 850.2 495.9 1,346.1 63.2
1953 958.1 576.3 1,534.4 62.4
1954 791.4 480.9 1,272.3 62.2
1955 1,036.0 811.0 1,847.0 56.1
1956 1,003.0 1,116.0 2,119.0 47.3
1957 1,202.5 987.3 2,189.8 54.9
1958 1,160.8 996.4 2,157.2 53.8
1959 1,394.8 1,113.9 2,508.7 55.6
COMPUTATIONS: Commercial bank credit has been ad
justed by deleting "cash” loans and 65 per cent of "repair
and modernization" loans. Other financial institutions'
loans consist of personal property brokers' and industrial
loan companies' total adjusted to include only automobile
and household goods, 50 per cent of credit union loans, and
the total of G.M.A.C. loans.
149
the banks contracted their loan volumes despite the in-*
creases in commercial deposits. Deposits in 1954 increased
by $279 million while the volume of credit loans declined
by $179 million, and in 1958 deposits increased by $400
million while loans declined by $44 million. This is not
to say that such loans should be a certain proportion of
commercial deposits (however this point might be worth
considering), but it does indicate that a better explana
tion should be given as to why the fluctuation occurred.
The rather shopworn phrase, "it was due to demand," has
lost any association with fact since other sources of sup
ply were, in general, increasing their volumes. Monetary
and credit controls also fall to give the answer, for their
influence was not strong enough to have caused the changes.
This fact was mentioned previously.
It has been reported that neither the State nor
National Bank Auditors apply any set standard for the
loaned-out reserve position for the individual bank which
has instituted one of the more recently developed programs
of instalment lending. A vice-president of one of the
banks stated that perhaps the auditors would not approve
loans in excess of 50 per cent of a bank's reserves for
this loan classification. However, since these funds may
be increased merely by shifting investments, this appears
to be a rather nebulous means of control.
Although the period 1945 through 1950 was one of
150
extensive expansion of commercial bank instalment credit
loans, there were no indications of extensive market
exploitation by the commercial banks in California. It was
not until somewhat later that they devised programs for the
purpose of expanding these loans. During the earlier
period it appeared that the retail trade area instigated
the credit expansion by advertising and credit gimmicks
which encouraged the consumers' use of this form of pur
chasing.
During the 1950's this condition appeared to have
changed, for the retail sector was apparently not only able
to secure larger volumes of trade credit and to expand
their own volume of credit as a result of the velocity of
their credit accounts, but they also had access to larger
credit funds from the financial intermediaries. Indicative
of this fact is the amount of the "Retail Financed Credit"
(see Table III). It will be noted that, on the basis of
the estimated percentage of instalment credit sales, this
volume of credit varied from a low of $918 million in 1954
to a high of $2,072 million in 1959. The result was not
only an increase in the competition between the commercial
banks themselves, but an intensification of competition
among the financial suppliers of such funds, with the
latter condition due, no doubt in part, to the improved
market position of the financial intermediaries.
In 1955 one of the large mail order retail chain
151
stores Introduced a new revolving charge account program
for the purpose of further increasing their volume of con
sumer instalment credit. This innovation not only affected
the competitive credit conditions in the retail sector but
also in the area of commercial banking. One bank reported
an increase in its volume of term loans but some decline in
its volume of instalment paper.
It was also during this time that a group of bankers
in California, and one or more of the surrounding states,
decided to establish their own secret credit organization.
One of the objectives of the group was the procurement of
credit information pertaining to the volumes of different
types of loans made by the various financial institutions.
This group began holding meetings for the purpose of dis
cussing instalment credit conditions and the dissemination
of statistical information to its members.
During 1959 the banks apparently discarded more of
their conservatism and, in an effort to obtain a larger
part of the market which they had been losing, some intro
duced credit card programs while others offered revolving
credit accounts. These were attempts to assume the posi
tion of the initial lender, and thereby obtain the addi
tional income from the interest on such loans.
In early 1959 the Bank of America introduced the
152
"Credit Card" program in California.^ Under this plan the
charge sales tickets are assigned by the retail store mer
chant to the bank without recourse, and the merchant's
account is credited with the amount of the sale less the
bank's service charge. Aside from the fact that this plan
facilitates the servicing of the customer's credit, it also
provides the merchant with liquidity and the bank with a
short-term investment, plus the possibility of securing
more of the merchant's financial business.
It has been stated, however, that there are several
problems which must be solved in order to develop this pro
gram into a profitable operation. Some retail merchants
have complained that the delays in clearing of accounts
necessitated the borrowing of funds to tide them over. In
other instances large retail stores established their own
credit card programs. This resulted in the acceptance of
the program by the smaller firms who generally were unable
^This program was developed from the "Charge-It"
plan formulated by John C. Biggins in 1946 and used by a
Brooklyn, New York bank. In September 1950 the Patterson
Savings and Trust Company (now the County Bank and Trust
Company) of Paterson, New Jersey adopted the plan with some
variations, such as the establishment of revolving credit
accounts and the customer was given a credit plate and a
book of script equal to the credit limit for one month.
Then in 1953 the Pullman Trust and Savings Bank of Chicago
adopted a program in which they used the Charge Account
Identification Plate. See Robert H. Cole, "Financing
Retail Credit Sales Through Charge Account Bank Plans,"
Business Management Survey No. 5 (Urbana, Illinois: Univer-
sity of Illinois, Bureau of Business Management, College of
Commerce and Business Administration, 1955), pp. 8-12.
153
to take advantage of trade credit and lacked the financial
strength to obtain funds from intermediary financial
institutions.
By mid-1959 the ''Revolving Credit" program^ had been
introduced in California by the Security First National
Bank of Los Angeles, Citizens National Bank of Los Angeles,
California Bank of Los Angeles, and the First Western Bank
and Trust Company of San Francisco. This program was
apparently instigated for the purpose of competing in the
very lucrative credit market. The success of the program
in the early months was indicated somewhat by the following
activities of one of the banks:
The first announcement was made on May 19, 1959.
Within a few days 150 lines had been approved, but no funds
were used until June 4. By the end of September the number
of approved lines had exceeded 4,900 with more than $4.4
thousand reserved for use. Of this number, 4,000 accounts
were using more than $2.25 million. By November 9 the
value of the approved lines exceeded $5 million and the use
exceeded $2.8 million. This does not mean to imply that
all the banks experienced the same increase but illustrates
how, in one instance, this new competition did result in an
^The first "Revolving Credit" program in retail
trade was adopted by Wanamaker's in 1938. See Credit
Management Yearbook. 1938-1939 (New York: National Retail
Dry Goods Association), p. 109.
154
expansion of consumer credit funds.
Commercial banks have also been quite active in
increasing their loan volume in other sectors of the con
sumer instalment credit market. One of these sectors was
that of financing trailer homes. In 1955 it is estimated
that the banks provided 10 per cent of the total market
financing, and by 1959 this had been increased to 30 per
cent.^ The unstable market conditions with respect to
manufacturing and retail distribution caused some banks to
be reluctant to enter this market earlier and so it was
dominated by the finance companies.
Another market into which some large banks entered
was that of'dealer financing of instalment paper of firms
selling pleasure boats. As this market increased during
the mid-1950's the banks provided a larger proportion of
the financing; then, as the risks became greater due to the
unstable financial positions of many of the retail dealers
and manufacturers, the principal lending bank discontinued
these loans in 1959.
III. PERSONAL PROPERTY BROKERS
The major suppliers of loan funds by financial
intermediaries in the State of California are the personal
^Letter from Mr. L. C. Ball, Trailer Coach Associa
tion, Los Angeles, California, July 14, 1961.
155
property brokers. They are licensed by the state, and
included in this classification are the personal finance
companies and sales finance companies. Their-activities
are regulated by the California Division of Corporations,
Department of Investment, which conducts field audits and
requires the filing of annual financial reports. The con
trol which is exercised over their operations pertains
primarily to their financial responsibility and the rates
on loans as established by law. These rates, which were
not changed during the period of this study, range from
.84 per cent per month to 2.5 per cent per month.^
Although there are major functional differences
between personal finance companies and sales finance com
panies, just as there are between the other suppliers of
funds for this market, these differences have not been
considered in the present study. These institutions func
tion within a specific market, and thus attention has been
directed to the relationships of this market to the other
markets for loan funds.
G.M.A.C., which is one of the largest sales finance
companies in the state, has not, however, been included as
a personal property broker because it was possible to con
sider this agency by itself.
^Annual Report upon Operations of Licensed Finance
Companies (San Francisco: State of California Division of
Corporations, Department of Investment, 1950-1960).
There were 219 licensed personal property brokers
in the state in 1950, and by 1960 this number had increased
to 300. Of this number, about 7 per cent were interstate
corporations, which did more than 65 per cent of the annual
total volume of business and whose net worth constituted
approximately 90 to 95 per cent of the total net worth for
all the personal property brokers. These interstate firms
enjoyed several advantages in the market which reduced, if
not destroyed to a large measure, the effectiveness of the
monetary and credit controls. They were not only able to
shift funds from one market to another but were able to
tap a number of markets for funds at very favorable rates
of interest. As an example of this, in 1955 when the
interest rates on call loans for these borrowers was 3.78
per cent, the rate on one-year loans was 3.70 per cent; and
on loans for over one year the rate was 4.45 per cent.^
In contrast, the rate for small business loans was 5.03 per
cent on call paper, 5.06 per cent on one-year loans, and
4.84 per cent on loans over one year.® The fact that this
group of borrowers was able to secure such favorable rates
during a period when there were credit restraints indicates
to some extent their ability to influence the market for
^Monthly Review. Federal Reserve Bank of San
Francisco, October 1956, p. 73.
8Ibid.
157
funds.
In 1950 Che personal property brokers supplied
$182.3 million of funds to this credit market In Cali
fornia. This was 15.1 per cent of the total volume of such
funds supplied by all the financial Intermediaries. By
1960 the total had Increased to $580.9 million, or 16.7 per
cent (see Table X). They had also Increased their portion
of the total Instalment loan business from 5.9 to 10.5 per
cent. This was not only due to a significant Increase In
the number of Individual loans but also to an Increase In
the number of loans made. In 1950 they made 520,388 loans
and in 1959 a total of 1,103,719 loans. The loans over
$500 declined from 53.96 per cent in 1950 to 32.61 per cent
in 1959.9
During this ten-year period there was a relatively
steady increase in the dollar volume of year-end loans.
The only year in which there was a decline was in 1953 when
the volume fell by approximately $8.7 million. This was
due mainly to the sharp decline in automobile equipment
loans which, in turn, was no doubt affected by the large
increase which had occurred in 1952 as well as the fact
that the market had become more competitive.
The loans made by the personal property brokers have
9Annual Report upon Operations of Licensed Finance
Companies'] 1959, pi ITT ~
158
TABLE X
PERSONAL PROPERTY BROKERS' CONSUMER INSTALMENT CREDIT
1950-1959
( 000)
Year
end
Household
goods
Automobile
equipment
Wage
assign
ments
Other
collateral Total
1950 $ 95,320 $ 52,726 $ 19,747 $ 14,527 $182,320
1951 124,634 85,828 25,855 17,791 254,108
1952 143,967 126,593 27,705 20,060 318,325
1953 164,624 87,012 32,258 15,787 299,680
1954 190,030 68,204 38,190 20,978 317,402
1955 233,673 87,003 51,649 14,427 386,752
1956 272,247 81,534 66,144 14,225 434,150
1957 276,995 84,684 72,740 15,550 449,970
1958 297,758 86,520 73,147 19,022 476,446
1959 329,386 107,165 77,879 66,466 580,896
SOURCE: Annual Reports upon Operations of Licensed
Finance Companies (Sacramento: State of California, Divi
sion of Corporations, Department of Investment, 1950-1959)..
159
been classified as follows: household goods, automobile
equipment, wage assignments, and other collateral. The
loans for household goods, which constitute between 45 and
55 per cent of the total annual volume of loans, increased
from $95.3 million in 1950 to approximately $329.4 million
in 1959, or more than 245 per cent. The largest percentage
of increase occurred from 1950 to 1955 for both the per
sonal property brokers and industrial loan companies.
The volume of automobile equipment loans did not
register as steady an increase as did household loans
during the ten-year period. These loans increased during
three of the last four years. It appears that the monetary
policy and Regulation W were apparently ineffective in this
market, for it was during 1951 and 1952 that the personal
property brokers experienced their largest percentage of
increase in these loans. In 1951 the year-end volume of
loans increased by $33.1 million or 62.7 per cent, and
$40.8 million or 47.4 per cent in 1952. During the two-
year period of 1951 to 1953 the increase was 140.1 per
cent. It might also be noted that the 1952 year-end volume
of $126.6 million was the largest volume for the ten-year
period.
The classification of personal property brokers'
loans which increased the most during the period studied
was that of ’’ wage assignments." This form of credit loan
constituted from 9 to 16 per cent of the annual volume of
160
loans and is important because of the fact that the rate
of increase is growing. The volume went from $19.7 million
in 1950 to $77.9 million in 1959, and at no time during the
ten-year period did the year-end volume fail to register an
increase. These loans also increased as a proportion of
the total loans. In 1953 they constituted only 10.76 per
cent of the loan volume, and by 1957 the percentage was
16.17. During 1958 and 1959 there was a small decline in
the rate of increase, and this may be accounted for by the
more liberal credit policies introduced by the commercial
banks during that time.
The classification of "other collateral" supports
the remaining sector into which loans are made. Although
the annual volume of these loans has, with the exception
of 1959, constituted less than 10 per cent of the annual
total volume, they are important not only because they sup
port this market, but because they are so volatile. During
the ten-year period they have ranged from $14.2 million in
1956 to $66.5 million in 1959. The principal reason for
this appears to be that when other credit supplying insti
tutions, mainly the banks, tighten credit lines, then there
is a transfer of this credit to the personal property
brokers. This has happened in the past with loans on house
trailers and pleasure craft.
161
IV. INDUSTRIAL LOAN COMPANIES
One of the more closely regulated financial inter
mediaries in the state is the industrial loan company.
They are regulated as to the minimum capital stock they
may issue, filing fees, the establishment of their offices
within a community, and the amounts of money they may
loan.^ In addition, the Commissioner of the Division of
Investment may also set the maximum amount of borrowings.
It does not appear, however, that these controls
were major factors in retarding the expansion of industrial
loan companies in California during the period 1950 to
1960. Their year-end loan volume increased from $20.8
million in 1950 to $75.6 million in 1959, or more than 263
per cent. This represented a rather steady annual
increase, with the exception of 1957 when their volume
Prior to 1959 the minimum capital stock required
for opening a company in a city of up to 50,Q00 was
$50,000, and for a city of 50,000 or more a capital stock
of $100,000. On September 18, 1959 the law was amended and
the minimum capital stock placed at $300,000. In addition,
an investigation is made to determine the need for a new
company. This includes determining whether the community
can support the company based on the nature and type of
competition in the community, the possibility for the
profitable employment of the loan funds, the average credit
demands, the number of potential investors, the volume of
industrial loan transactions, and the types of business and
industries in the community, as well as their stability and
diversification. See West s Annotated California Codes,
Financial Section 1, Official California Financial Code
Classification. Vol. 36, Division 7, Sections 18003,
18260.1, 18200.2, and 18203.5.
162
declined by $1.25 million (see Table XI).
The lending activities of the industrial loan com
panies have been classified into eleven categories; how
ever, since these do not all pertain to consumer instalment
loans, it has been necessary to adjust the item "other"
loans to arrive at the annual total volume. The removal of
the six loan categories as a percentage of the total annual
volume provided the adjustment factor. This adjustment
ranged from 17.19 per cent to 25.41 per cent over the ten-
year period. Included in "other" loan items were co-maker
loans, single-name paper, and other securities.
Automobile loans had a steady but rapid increase In
this ten-year period. The volume advanced from $4.9
million In 1950 to $19.5 million in 1959, or approximately
301.7 per cent. This was the largest percentage gain made
for this classification of loan by any of the financial
institutions.
The largest percentage gain in one loan classifica
tion for this institution was, however, in the volume of
"household" loans. These loans increased from $2.6 million
in 1950 to $17.4 million by 1959, or more than 565 per
cent. The loan volume was neither steady nor did it ad
vance at a rapid rate as was the case for automobile loans.
The peak of $21.1 million was reached in 1956, and then
there was a rather steady decline. Undoubtedly much of
this was due to the competitive changes which occurred in
163
TABLE XI
INDUSTRIAL LOAN COMPANIES' CONSUMER INSTALMENT CREDIT
1950-1959
( 000)
Year
end Automobile Household Other Total
1950 $ 4,859 $ 2,611 $13,372 $20,842
1951 7,303 3,816 20,750 28,053
1952 8,817 3,834 18,834 31,485
1953 9,058 6,114 21,103 36,275
1954 9,585 9,772 22,050 41,407
1955 11,904 15,495 30,933 58,332
1956 13,171 21,124 36,846 71,141
1957 15,205 19,137 35,544 69,886
1958 17,442 17,457 36,389 71,288
1959 19,518 17,369 38,716 75,603
SOURCE: Unpublished reports on the "Operations of
Industrial Loan Companies" (Sacramento: State of California
Division of Corporations, Department of Investment, 1950-
1959).
164
the market as the result of policy changes in the retail
trade and commercial bank sectors.
The loan category which apparently was influenced
more by the general market conditions than by monetary
policies and competitive activity was that of "other”
loans. Indicative of this fact was the irregular pattern
of the volume during the period. During 1951 this loan
volume increased more than 55 per cent despite the credit
restrictions.
The apparent ineffectiveness of monetary and credit
controls for this group of intermediaries appeared evident
from the fact that during the period 1950 to 1953 the
annual volume of loans increased by 51 per cent, and during
1955 and 1956, when there was a tight money policy, the
volume increased by more than 71.8 per cent.
While it might appear that such a small annual
volume of outstanding loans of $75 million a year is not
significant with respect to the total volume of all loan
able funds supplied the market, the important fact remains
that this loan volume had shown a steady increase and there
had been little, if any, control exercised through monetary
and credit policy.
V. CREDIT UNIONS
The financial intermediary which had the largest
increase in their annual volume of outstanding credit loans
165
(600 per cent) during the period 1950 to 1960 was the
credit union.
The Statutes of California provide that "no credit
union shall make any loan in excess of five hundred dol
lars ($500) without security,"^ The maximum amount of any
loan cannot be "in excess of three thousand dollars ($3,000)
or 10 per cent of its paid-in and unimpaired capital,
whichever is greater, but not to exceed ten thousand dol
lars ($10,000) , The maximum interest fee which can be
13
charged is one per cent per month. The Statutes further
provide that
, . . credit unions may purchase from the lendor of
any personal property, conditional sales agreement
covering the sale of such property to its members.
The credit union may hold and return any such condi
tional sales contract as an investment.14
Thus the credit unions in California are closely
regulated as to the amounts of their loans and the interest
rate they can charge. The fact that the interest rate is
lower than the maximum for other lenders actually places
this agency in a more favorable competitive market posi
tion. In addition to this, the interest paid the union
members for the use of their savings is usually higher than
^-West's Annotated California Codes, p. 712.
12Ibid.. p. 713.
13Ibid., p. 712.
14Ibid., p. 716.
166
that paid by any other savings institution.
During the ten-year period 1950 to 1960 the credit
unions increased their proportion of the total funds sup
plied the market by financial intermediaries in this state
from 5.7 per cent to 13.9 per cent. This growth far ex
ceeded that of any of the other intermediaries or the
commercial banks (see Table XII).
Since credit unions generally maintain adequate
reserves, there apparently has been no reason for requiring
reserves in excess of those established by good accounting
principles. Thus they have maximum use of their funds and
are not affected by monetary and credit controls. This,
of course, places them in a very favorable competitive
position.
VI. GENERAL MOTORS ACCEPTANCE CORPORATION
While there are several captive finance companies
operating in this market in California, all but G.M.A.C.
are classified as personal property brokers. As mentioned
earlier, G.M.A.C. was given reciprocity status as a bank
ing institution and therefore comes under the jurisdiction
of the State Banking Commission.
From 1950 to 1958 the year-end loan volume for this
agency increased at a relatively steady rate. In 1958 the
volume declined and there was only a slight improvement in
1959. No doubt the general market demand for automobiles
167
TABLE XII
CREDIT UNIONS' CONSUMER INSTALMENT CREDIT
1950-1959
( 000)
Annual
percentage
Year end Total change
1950 $ 69,409 40.8
1951 75,723 9.0
1952 105,702 39.6
1953 165,940 56.9
1954 203,268 22.5
1955 250,685 23.3
1956 311,058 24.1
1957 350,743 12.7
1958 393,567 11.6
1959 483,000 22.7
SOURCE: A special report on "California and Federal
Credit Unions," Bureau of Federal Credit Unions (Washing
ton, D.C.: Department of Health, Education and Welfare,
Social Security Administration).
168
as well as Che other products competitively produced by
General Motors Corporation contributed to this situation;
however, there were other factors which also played a part.
Those dealers who had increased their volumes of instalment
credit sales were able to do more of their own financing,
and many who needed financing were able to take advantage
of the competitive supply conditions. Several of the com
mercial banks also intensified their activities in the
commercial account sector of the market which, of course,
included automobile dealers (see Table XIII).
VII. RETAIL TRADE
The supply of consumer instalment credit funds by
the retail section of the market presents the most diversi
fied and involved pattern in the market. Complete market
data are not available; therefore it was necessary to
estimate the annual volume of year-end credit. From a
study of the 1959 market^ it was reliably reported that
the year-end volume of outstanding credit loans was 21 per
cent of retail sales. With this as a base the year-end
volume of such credit was estimated for the period 1950 to
1959. The ratio of sales to percentage of change in the
volume of bank instalment loans in 1959 was used as an
adjustment factor (see computation in the footnote of
^Confidential report.
169
TABLE XIII
GENERAL MOTORS ACCEPTANCE CORPORATION
CONSUMER INSTALMENT CREDIT
1950-1959
( 000)
Percentage
Outstanding annual
Year end loans change
1950 $ 102,918
-
1951 117,758 14.4
1952 159,821 35.7
1953 207,614 29.9
1954 256,750 23.7
1955 327,586 27.6
1956 395,472 20.3
1957 415,881 5.1
1958 380,427 - 8.5
1959 398,928 4.8
SOURCE: Annual Reports, Superintendent of Banks.
State of California, Sacramento.
Table III).
In order to estimate the distribution of the retail
instalment credit and to avoid duplication in the estimate
of the annual year-end volume of such credit, adjustments
were made by deducting the volume of such credit supplied
by the financial institutions (see footnote of Table VIII).
Thus an estimate of the volume of credit supplied by finan
cial institutions was obtained, and the remainder was con
sidered ''Retail Financed Credit" (see Table XIV). Since
there were no sources from which information could be
obtained as to the proportions of this credit which was
supplied by the retailer’s own funds, trade credit provided
by suppliers or other sources, no further distribution
analysis could be made. There were, however, some indica
tions that from late 1955 to mid-1959 several of the larger
retail firms were able to finance larger proportions of
their own accounts. This occurred in the soft goods lines
where there was an increase in credit volume, and length of
payment periods was short. The result was an increase in
credit velocity. Funds were also available from other
sources, and in one instance an investment company, whose
director was a member of the board of a retail firm, sup
plied funds. Another form of financing which contributed
to the velocity of funds was the use by merchandise dis
tributors of the partial payments by retailers for goods
obtained from the distributors which were on assignment
171
TABLE XIV
ESTIMATE OF THE DISTRIBUTION OF RETAIL FINANCED
CONSUMER INSTAIXENT CREDIT, 1950-1959
(Millions)
Year
end
Estimated
retail
credit
(1)
Financial
institution's
adjusted total
(2)
Retail
financed
credit
(3)
Non-
retail
credit
Total
(1,2,3)
1950 $ 2,779.7
$
927.9 $ 1,851.8 $ 274.2 $ 3,053.9
1951 2,174.6 844.9 1,329.7 428.9 2,603.5
1952 3,363.6 1,346.1 2,017.5 389.0 3,752.6
1953 2,827.6 1,534.4 1,293.2 405.8 3,233.4
1954 2,190.2 1,272.3 917.9 598.6 2,788.8
1955 3,599.2 1,847.0 1,752.2 504.6 4,203.8
1956 3,362.2 2,119.0 1,243.2 522.8 3,885.0
1957 3,647.7 2,189.8 1,457.9 635.4 4,283.1
19 58 3,201.8 2,157.2 1,044.6 663.5 3,865.3
1959 4,580.5 2,508.7 2,071.8 931.1 5,511.6
COMPUTATION: See Table III for estimation of retail
credit. The adjusted total of financial institutional
credit has beeYi explained in the footnote of Table IX. The
retail financed credit is the difference between the esti
mated retail credit and the adjusted total credit supplied
by financial institutions. Non-retail credit is the dif
ference between the total financial credit and the retail
credit supplied by the financial institutions.
172
from the manufacturers. In late 1959 one of the large
manufacturers requested their distributors to remit such
payments when assignments were made to the retailers.
Following the decline of the credit volume during
1953 and 1954, many of the retail merchants in California
were anxious to develop this market not only because of
the advantages of the high rate of return on such loans,
but also because of the increased volume of goods which had
moved into the market. Employment and income increased in
1955 as did consumer spending, and these conditions were
conducive to credit exploitation by such means as lowering
the down payments, reducing the instalment payments, ex
tending the length of contracts, offering larger trade-in
values, and wording the contracts so that the customer was
unaware of the contract costs. The availability of ade
quate supplies of loanable funds provided the means for the
competition and this, together with the inducements for
credit use, resulted in credit exploitation.
VIII. CHAPTER SUMMARY
Discussions of consumer instalment credit for the
most part emphasize the significance of demand and assume
that the agencies providing the sums of loanable funds are
merely passively engaged in servicing the demand. Little
if any attention appears to have been given to the nature
and characteristics of the supply side of the market as to
173
the Internal and external policies and practices which
determine the quantity and velocity of such loan funds.
The view held by many is that present monetary and
credit policies are adequate for controlling the volume
and velocity of credit. This is an aggregate view which
does not take into consideration the local market differ*
ences. These differences are: (1) the rate of economic
growth and change in the market; (2) the types of financial
institutions supplying funds and their services; (3) their
rates of growth and market practices; (4) the competitive
practices of these Institutions; and (5) the nature and
effectiveness of the measures used to control the volume
and velocity of consumer instalment credit in the local
market.
The rate of economic growth and change in this
market, as described in an earlier chapter, referred to the
population expansion, the increase and rate of change in
personal disposable income, the growth and fluctuations in
taxable retail sales, and the changes in the consumer
prices. These were the basic market conditions which were
in some instances external variables which influenced the
supply of loanable credit funds and reflected the effects
of the supply of such loanable funds.
The types of financial institutions supplying the
funds were described for the purpose of making comparisons
of their services and the extent to which these services
174
have changed over the period of this study. These changes
have been reflected in the policies and practices adopted
by some institutions for the purpose of improving their
market position.
As the result of the changes in the economic condi
tions in this market and the consumer acceptance of this
form of purchase financing, the financial institutions
became more aware of the potentials in this market. The
effect was an increase In competition which, in some in
stances, became so intense as to lead to credit exploita
tion. Thus credit became merely another commodity for
which the suppliers of loanable funds competed by adopting
many of the common market practices.
In the discussion of the credit control measures,
the purpose was not only to focus attention on the ineffec
tiveness of national monetary policy and state measures,
but to emphasize the reasons for this condition. In addi
tion to the inadequacies of present monetary and credit
control to provide for individual market differences, the
application of such controls in this market has either been
poorly timed or complete Ineffective in providing for a
stable credit market growth. The lack of effectiveness
refers here to the ability of the financial intermediaries
and retail trade to circumvent the money market by securing
loanable funds from other sources.
CHAPTER VI
TREND PATTERNS AND CONTROLS
During the period 1950 to 1960 there were a number
of significant changes in the economy of the State of
California. More than three and a half million people had
been added to the population, personal disposable income
had increased by more than $10.4 billion, retail sales
increased by more than $4 billion, and the estimated year-
end volume of consumer instalment credit increased by
nearly $2.5 billion.
There were, however, certain institutional changes
which were even more important but less obvious. This was
particularly true with regard to the market for the supply
of loanable funds for consumer instalment credit. The
position of the commercial banks as the principal lending
agency and regulator of the volume of credit was tested,
as were the monetary and credit controls. Financial inter
mediaries not only increased their volume of loans, but
they became less dependent on the banking system for funds.
This in turn reduced the effectiveness of monetary and
credit controls. Several changes also occurred in the
175
176
retail sector of the market. There was not only a demand
for this credit, but it became evident that with the proper
inducements the demand could be further increased. This
involved the procurement of additional funds to service
this demand, and it also became evident there were several
markets available in addition to the cotmnercial banks.
With the increase in the volume and velocity of sales there
was a greater opportunity to take more advantage of trade
credit, and, in some instances, financing was more readily
available through the private placement or pledging of
accounts receivable.
These changed market conditions were accompanied by
others, and in order to trace these developments more
specifically, the ten-year period 1950 to 1960 was divided
into the following: 1950 to 1953, 1953 to 1955, 1955 to
1958, and 1958 to 1960.
I. CREDIT PATTERNS, 1950 TO 1953
During the first period, 1950 to 1953, both general
and specific monetary controls were applied. Regulation W
was reapplied in September 1950 and not removed until May
1952. The discount rate was raised in August 1950 and the
reserve requirements increased in January 1951. The result
was that the volume of commercial bank instalment credit
loans declined by $28.5 million in 1951. By the end of
1952, however, this condition had been reversed and the
177
volume increased by $321.6 million. Thus, while monetary
and credit controls no doubt influenced the loan volume in
1951, the same can hardly be said for 1952, The fact that
the controls were removed In May of that year does not
explain the increase, because the increase occurred in the
first half of the year, and the volume remained relatively
stable during the latter half of the year.
Although the commercial banks in 1952 increased
their volumes in all loan classifications, the one in which
the increase was the largest was that of "Retail Automobile
Paper." There was an increase of more than 46 per cent and
some indication that the banks at that time were more
interested in this market than in the other three--retail
paper, repair and modernization loans, and cash loans. As
the annual volume of cash loans increased, however, the
banks apparently became more aware of the potentials in
this sector of the market. This was particularly true in
1958 and 1959 when there was such a large increase in these
loans.
During this early period the volume of loan funds
supplied the market by the financial intermediaries
depended largely on the market demand of the consumers. In
each of the three years they increased their volumes of
loans despite the credit controls. The result was no doubt
some shifting of credit from the banks to these agencies
who were able to supply the market. There is, of course,
178
no way of determining to what extent this condition may
have influenced the decisions of the banks to expand their
loan volumes in 1952; however, it undoubtedly was a factor.
The year 1952 was not only a favorable one for the
commercial banks with respect to automobile loans, but for
the financial intermediaries as well. The personal
property brokers increased their volume of these loans by
approximately 47.5 per cent, G.M.A.C. by nearly 37.5 per
cent, and the other intermediaries by a much smaller per
centage. This increase in the annual volume of these loans
in 1952 was not exceeded by the financial institutions
until 1959.
The 1952 volume of nearly $126.6 million of "automo
bile equipment" loans by the personal property brokers
marked the highest annual volume this group was to reach
for the next seven years. In 1953 their volume declined by
nearly $39.6 million, and this market was shifted more to
the other financial intermediaries as well as to the com
mercial banks.
The personal property brokers, who had an increase
of more than 30 per cent in their "household goods" loans
in 1951 and a 15 per cent increase in 1952, apparently
decided after 1952 that the short-term market was the most
advantageous for them, for it was here they continued to
increase their loan volume. The annual increase in their
volume of "wage assignments" apparently set a pattern for
179
the following seven years.
II. CREDIT PATTERNS, 1953 TO 1955
The period 1953 to 1955 was one of general decline
in business activity, and to compensate for this change the
Federal Reserve reduced both the reserve ratios and dis
count rate. These changes apparently did not encourage the
personal property brokers, for their volume of loans in
1953 declined by $18.6 million. At the same time the com
mercial banks expanded their volume by $111.0 million. It
is significant to note in this regard that while the com
mercial banks' volume of "cash loans" and "repair and
modernization loans" remained somewhat constant, there was
a decline of $14,560 thousand in "other retail paper."
The industrial loan companies, credit unions, and
G.M.A.C. continued to increase their loan volumes during
this period with no apparent interference from the monetary
and credit restraints. They not only increased their
volumes, but no doubt absorbed much of the loss suffered
by the commercial banks in 1954.
An estimate of the year-end volume of instalment
credit in 1952 was $3.75 billion, and by the end of 1953
this figure had declined to $3.23 billion, or more than
16 per cent. By the end of 1954 the estimated volume was
$2.79 billion, indicating a further decline of nearly 16
per cent. The ratio of the change in volume of credit
180
financed by other trade credit to the change in volume of
retail instalment credit sales indicated that the retail
trade had secured a much larger proportion of their financ
ing from the financial institutions. As the result of
credit competition in the market during the following five
years, this trend continued.
III. CREDIT PATTERNS, 1955 TO 1957
During 1955 business activity reversed the downward
trend and there was a rapid recovery. The total volume of
retail sales increased by 17.7 per cent and the estimated
volume of instalment credit sales went up from $2,190 mil
lion to $3,599 million, or more than 64.3 per cent. The
total volume of instalment credit had increased from $2,789
billion to $4,104 billion, or more than 47.1 per cent.
The volume of retail instalment credit sales
financed by trade credit showed a phenomenal increase from
$917.9 million in 1954 to $1,752 million in 1955, or more
than 90.7 per cent (see Chart 2). A large part of this
increase was no doubt due to the introduction by one of the
large national retail chain stores of a "revolving credit"
program. Under this plan an approved credit account was
assigned a line of credit and as monthly payments were made
the account would remain open for the difference between
the payment and the approved line. This competition was
also met by other retailers who adopted their own credit
CHART 2
181
RATE OF CHANGE IN THE ANNUAL VOLUME OF CONSUMER INSTALMENT
CREDIT BY FINANCIAL SUPPLIERS, 1950-1959
(Millions)
Total
Banks
Personal
Property
Credit
Unions
General
Motors
Industrial
Loan Co.
02
OlC
W
~ 1 9 5 b * *iy58 * * L 9 b J T951 1952 1955
182
card programs.
It was rather apparent that the commercial banks had
become more Interested In competing In this market, for In
1955 they Increased their year-end volume of these loans
from $1,052 million to $1,328 million, or more than 26.2
per cent. Most of the Increase was In "retail automobile
paper." These loans increased by $233.6 million over the
figure for 1954.
The personal property brokers1 loans went from
$317.4 million in 1954 to $386.8 million in 1955, a gain of
21.8 per cent. The loans for "household goods" continued
to exceed all others (see Table X).
The loan volumes of the credit unions, industrial
loan companies, and G.M.A.C. continued to increase at
approximately the same rate as in 1954. The increase in
the total year-end volume for all financial institutions
had been due mainly to the retail trade sector and the
commercial banks.
In 1956 the market began to level out and taxable
retail sales increased by only 3.9 per cent. The estimated
retail instalment credit sales, however, declined by $236.9
million, or approximately 6.6 per cent. This was the
principal factor in causing the total volume of credit to
decline by 5.3 per cent. The year-end volumes for all the
financial institutions continued to increase, however, but
at a slower rate. The distribution of the credit pattern
183
remained about the same, with the commercial banks con
tinuing to expand their volume of "retail automobile paper"
and the personal property brokers in their "household
goods" loans.
The reserve ratios were not changed during 1955 or
1956, but between April 1955 and August 1957 the discount
rate had been increased six times. Thus the commercial
banks were apparently not restricted in increasing their
commercial accounts; the cost of discounting paper was
higher, however, and therefore the cost to the borrower
would be higher. If the borrower was able to pass this
increased cost along or was able to secure bank credit
because of the favorable relationship the borrower had with
the bank or other sources, then discounting would not be a
major deterrent.
IV. CREDIT PATTERNS, 1957 TO 1960
Commercial bank instalment credit increased in 1957
by $113.7 million, or 7.8 per cent, while that of personal
property brokers increased by $15.8 million, or 3.6 per
cent, and industrial loan company credit declined by $1.2
million. Credit unions, however, increased their volume by
$39.6 million, G.M.A.C. by $20.4 million, and retail trade
credit by $214.7 million or 17.26 per cent. This occurred
at a time when the discount rate was at its highest point
and reserve requirements at the same level as in 1950.
184
It does not appear that any great amount of success
can be claimed for the monetary and credit controls during
this time. All of the financial institutions, with the
exception of the industrial loan companies, had increased
their loan volumes. There was, however, one further devel
opment; the G.M.A.C. loan volume did not increase at the
former rate. While part of this may have been due to the
decline in the automobile market, the fact that there was
more competition in this market and the commercial banks
had increased their loans in this classification was also
important.
During 1958 there were several significant market
changes. The volume of automobile loans by commercial
banks declined by $44.2 million, but "cash" loans increased
by $40.8 million. Most of the decline in the automobile
loans may be accounted for by the fact that this was a year
of declining automobile sales, while the increase in cash
loans was due mainly to the introduction of credit card and
revolving credit programs.
Taxable retail sales declined by $170.6 million in
1958, while the estimated volume of retail instalment
credit declined by $445.9 million. Due apparently to the
better advantages in the use of credit from financial
institutions, all but $32.8 million of the reduction in
credit was accounted for by the decline in the use of trade
credit.
185
In 1959 the estimated total volume of Instalment
credit increased by $1.6 billion, or 42.5 per cent. Tax
able retail sales had increased by $2.05 billion and the
year-end volume of consumer retail credit by nearly $1.38
billion. The intense competition among the suppliers of
loanable funds, along with the highly inelastic demand, had
pushed this market to a new high. More than 49 per cent of
the increase in retail store sales was provided by instal
ment credit.
The easy money policy during 1958 no doubt made a
major contribution. The reserve ratios for Central Reserve
City Banks had been reduced four times and those for the
Reserve City Banks, three times. Consequently the commer
cial banks had larger quantities of money available for
lending. The discount rate was lowered three times and,
although it is doubtful whether this was a major factor
because of the other available sources of funds, this was
at least a potential source for financial intermediary
loans. This latter view appears valid based on the appar
ent ineffectiveness of the attempts to restrict these loans
during the latter part of 1958 and 1959. The discount rate
was raised in September 1958, again in November, and then
again in March and May of 1959. The increase to 4 per cent
in September established a new high; yet the volume of
loans by the financial intermediaries continued to increase
(see Chart 3).
186
CHART 3
RATE OF CHANGE IN COMMERCIAL BANK
INSTALMENT LOANS, 1950-1959
(Millions)
2
Total
Automobile
1
.9
.8
.7
.5
.4
Cash
Other
Retail
Paper
^Tlepair
and
Modernization
1950 1952 1954 1956 1958 1960
187
The loan classification in which the largest per
centage of change occurred was that of "other collateral"
by personal property brokers. This volume went from $19.0
million in 1958 to $66.5 million in 1959, or an increase
of 249.4 per cent. This was mainly due to the fact that
this agency had taken over the financing of pleasure craft
which the commercial banks had discontinued.
The commercial banks intensified their activities in
"retail automobile paper" and "cash" loans. Reports were
that they had secured larger numbers of automobile dealer
accounts, and this was surely a factor which contributed to
the decline in the year-end volume of G.M.A.C. loans. The
intensive promotional campaigns of the "credit card" and
"revolving credit" programs also contributed to the in
crease of $98.8 million, or 36.2 per cent, in cash loans.
This latter program was in competition with the
retail credit programs. It appears, however, that it may
have stimulated rather than supplemented these, because
retail instalment credit increased by nearly $1.38 billion,
or 43.6 per cent. Of even more importance was the fact
that nearly $2.1 billion of the total retail of more than
$4.5 billion was financed by trade credit. Thus the market
was not only influenced by the competitive conditions among
the financial institutions, but the retail merchants were
in the favorable position of having two major sources from
which to secure the use of funds--the financial
institutions and the retail trade market.
188
V. CREDIT FLUCTUATIONS, 1950 TO 1960
The analysis of credit trend from 1950 to 1960 is
complicated by two conditions: (1) the credit regulations
in effect from September 1949 to May 1952 which tended to
cloud the purely economic factors for this period; and (2)
the cyclical fluctuations which were somewhat obscured by
the rapid increase in consumer instalment credit.
For the purpose of analysis, the data were adjusted
by using the arithmetic straight-line trend. This method
is illustrated in Chart 4, which shows the trend line for
outstanding instalment credit in the upper part of the
chart and the trend line for business activity in the lower
part. The trend line for business activity was computed
from the index of business activity. The deviations from
the trend reveal three complete cycles, with highs in 1952,
1955 and 1957. The amplitude in 1959 was the largest for
the whole period, while it will be noted that 1952 trends
were larger than those for 1955.
The downturn in 1951 was due partly to the 28.19 per
cent decline in the estimated volume of retail trade
financed credit, the 12.5 per cent decline in commercial
bank financed retail credit, and the 11.5 per cent decline
in retail credit financed by financial intermediaries.
Regulation W seems to have been a secondary factor since
CHART 4
CONSUMER INSTALMENT CREDIT AND BUSINESS ACTIVITY
Credit 1951-1959
Business
Indea
4220
Mo
VLo
Instalment Credit
Y-2,607 + 235.8(X)
Business Index
Y-104 + 7.78(X)
/Jo
1951 1952 1953 1954 1955 1956 1957 1958 1959
!OQ
00
VO
190
taxable retail sales increased by 7 per cent, which was
only one per cent lower than in 1952. The upturn in 1952
occurred prior to the removal of Regulation W and estab
lished a peak which was not exceeded until 1959.
The 51.7 per cent increase in the estimated volume
of retail trade financed credit in 1952 accounted for the
major portion of the upturn, and this was influenced by the
more than 40.2 per cent increase in the volume of commer
cial bank loans.
In January 1953 the discount rate was raised by 0.5
per cent, but it is doubtful that this was the principal
reason for the downturn in credit volume which occurred
during the next two years. Estimated retail trade financed
by suppliers other than financial institutions declined
approximately 36 per cent in 1953, and this was mainly due
to inventory conditions and not to money rates. The loan
volume of personal property brokers also declined, but this
was due to a decline of more than 45.4 per cent in "auto
mobile equipment" loans which, in turn, was principally due
to the increase of activity in this market by commercial
banks (see Chart 5).
Business activity which had increased slightly in
1953 began to decrease in 1954. Consumer instalment credit
continued to decline at about the same rate as in 1953.
The trough was much deeper than that for general business
activity of which it was a part, and the amplitude of the
191
revival was larger. The fluctuations in the volume and
pattern of commercial bank loans indicate the difficult
position of the banks. They recognized *-'ieir responsibil
ity for maintaining credit restraint, yet they were also
aware of the financial gain offered by this market.
It is interesting to note that the only credit
restraint imposed in 1955, 1956 and 1957 was the use of the
discount rate. During 1955 the banks added $276.2 million
to their loan volume, and the retail sector was able to
increase their volume of trade financed credit by $834.3
million, or 90.8 per cent. Credit was not restricted, but
the cost of borrowing increased. There is, however, a
point at which demand apparently becomes elastic, for in
1956 the estimated retail trade financed credit declined
by $509.0 million, or 29 per cent. This was occurring at a
time when business activity in California was beginning to
level out. While the decline in credit may have contrib
uted to this, the reverse did not occur in 1957 when
general business activity declined while the credit volume
increased.
The decline in business activity late in 1957 and
early in 1958 was undoubtedly due in part to the more than
$412 million decline in retail trade financed credit and
the small increase of only $7.2 million in commercial bank
credit. The decline in demand cannot be blamed for this as
the personal property brokers had increased their volume
192
by $26.4 million and the industrial loan companies also had
a small increase in volume. The decline in G.M.A.C. loans
can, in part, be explained by the fact that retail sales
had fallen and the commercial banks were endeavoring to
increase their proportion of this market.
The increase in the annual volume of bank loans
since 1954 may be taken as indicating a change in bank
policy and the developments in 1958 somewhat confirm this.
Despite the fact that there was a tight money policy during
most of the period after 1954, the banks increased their
volume of automobile loans and in 1958 extended their cash
loans by $40.8 million, or more than 17 per cent. This
appeared to mark the beginning of intense competition by
the banks for this credit business.
Although the fluctuations in credit extensions con
formed for the most part with general business activity,
credit more often led than lagged the cycle reference dates
and general business activity. The amplitude and magnitude
were also more severe for the most part, and, since credit
is an independent variable in the market, these conditions
are of major significance in the general stability of
economic activity.
The most significant change during this ten-year
period was that of the commercial banks. In 1951 their
volume of loans constituted 68.4 per cent of the total for
all financial institutions. Within the next eight years
193
there was a rather continuous decline. By 1959 their
volume was down to 54.9 per cent. This loss of market
position further added to the ineffectiveness of monetary
and credit control.
There appeared to be no restrictive influences from
the supply side which would reduce the rate of increase in
financial intermediaries' loan volume. The same was true
of the retail merchants' position, for they had the advan
tage of using trade credit as well as their own funds and
bank loans.
The financial intermediary which had gained the
largest percentage lost by the banks was the credit union.
They steadily increased their position from 5.7 per cent of
the market in 1950 to 13.9 per cent in 1959. This was in
excess of the over-all market change and there appeared to
be no reason for it to change in the near future.
Personal property brokers had experienced a rather
volitable change in their volume of loans; however, during
1957 and 1959 their volume increased despite the adoption
by the banking system of more competitive market innova
tions and control measures. To assume that this change
amounted to no more than the normal increase in the servic
ing of a specific credit market overlooks the importance of
the changes which occurred in the loan classifications
mentioned earlier.
Estimates of the volume of retail consumer
CHART 5 194
RATE OF CHANGE IN PERSONAL PROPERTY BROKERS'
INSTA1A1ENT LOANS, 1950-1959 (Billions)
4
Household
3
2
Automobile
1
9
8
7
6
ga/^Wage
Assignments
Collateral
5
4
3
2
1
195
1955 1957 1959
195
instalment credit financed by sources other than the
financial institutions also indicated a significant change.
In 1950 the financial institutions provided 86.7 per cent
of the total loan funds, and by 1959 this had declined to
67.9 per cent. This was no doubt due to the more extensive
use of trade credit, private placement of receivables, and
the plowing back of receipts over expenses on credit
accounts.
Although the ratio of loans and discounts to the
banks' commercial account deposits increased from 37.5 per
cent in 1950 to 59.3 per cent in 1959, the ratio of con
sumer instalment credit to loans and discounts declined
from 59.1 per cent in 1950 to 45.2 per cent in 1959. The
ratio of instalment credit to deposits increased from 22.1
per cent in 1950 to 26.8 per cent by 1959 (see Table XII).
The highest point reached by instalment credit as a ratio
of deposits and loans and discounts was in 1953 when the
percentage reached 46.7. This was followed by a continuous
decline to 1959. While there were many reasons for this
change, the competition between lenders was perhaps one of
the more important.
VI. CHAPTER SUMMARY
The market changes which occurred in the supply and
velocity of loanable funds for consumer instalment credit
in California during the period 1950 to 1960 were in part
196
due Co the market demand and also the competitive condi
tions on the supply side of the market. Monetary and
credit controls exerted only a minor influence during the
first half of the period and continued to decline in the
last half of the period.
Commercial banks appeared to move cautiously into
the extension of credit during 1950 to 1953, then con
tracted their loans in 1954. From 1955 on, it was apparent
the market had become more competitive and the bank policy
became more liberal. By 1958 it was evident that the banks
were going to make a much stronger effort to regain a por
tion of this market. The innovations which they intro
duced support this fact.
Although these new approaches have to some extent
caused a shift in the credit market, it is doubtful if they
will be able to bring about a change which will permit the
adoption of monetary and credit policy capable of stabiliz
ing the market. The credit policies have been merely the
adoption of competitive practices which stimulated demand,
thus increasing the quantity and velocity of credit while
at the same time reducing the effectiveness of controls.
The Federal Reserve monetary and credit policy, as
related to this market, has not only been ineffective in
indirectly controlling the volume and velocity of funds,
but also ineffective in controlling the volume and velocity
of commercial bank funds for this credit. There has been
197
no evidence to indicate that the financial intermediaries
in this market were restricted at any time during this ten-
year period. The commercial banks were apparently influ
enced by the restrictive measures during the period 1950 to
1953, bur then obviously adjusted their investment port
folios in an effort to participate more actively in this
market.
The retail sector had two rather distinctive advan
tages: (1) the expansion of credit sales volume with a
less than proportionate capital outlay; and (2) a highly
competitive market in which to dispose of receivables or
secure loan funds. Their amount of capital outlay was
dependent upon their credit strength, amounts of the down
payments, length of instalment contracts, rate of delin
quencies, accelerated payments, and add-on sales. When
general business activity was increasing there was a larger
consumer demand for credit which, in turn, influenced the
volume of trade credit. Trade dating also permitted the
use of trade credit and this, together with the flow of
funds from down payments and receivables, also reduced the
volume of capital requirements.
The highly competitive market for trade credit which
prevailed during this period evidently had some influence
on the quantities of funds supplied by the financial
institutions.
CHAPTER VII
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
I. SUMMARY
The significance of consumer instalment credit as a
variable in the quantity and velocity of money in the State
of California from 1950 to 1960 was evident from the rate
of annual increase, as well as the patterns of institu
tional changes. With the nation engaged in a war during
the first half of the 1940's, and this followed by a period
of defense build-up, partial conversion to peace-time pro
duction, and then another war, there developed a different
problem. This was the problem of consumer instalment
credit. Following the dictates of aggregate analysis of
economic changes, attention was centered on the nation’s
economy. Although such analysis was essential for the
formulation and implementation of national policy, no doubt
much more would have been gained by a closer evaluation of
regional differences, particularly in the area of consumer
instalment credit.
It was for this reason that the following six prin
cipal sectors in the California market were analyzed:
198
199
1. The quantity and velocity of loanable funds.
2. The significance of monetary and credit
controls.
3. State control and its effectiveness.
4. Commercial bank policies.
5. The financial intermediaries and their influ
ence.
6. The loanable funds conditions in the retail
market.
The volume of loan funds was based on the year-end
outstanding credit amounts for each of the credit agencies,
and the velocity was determined from the rate of change in
these outstanding amounts. Such an evaluation was neces
sary because of the lack of additional data. Neither the
state nor federal agencies secure comprehensive information
about this market, despite the fact that the estimated
annual year-end total volume constitutes more than 15 per
cent of the state's annual disposable income. Commercial
bank instalment credit loans alone constitute more than 50
per cent of the bank loans and deposits, and 30 per cent of
the commercial deposits.
From the available data it has been possible, how
ever, to make an evaluation of the effectiveness of
monetary and credit controls and changes in the flow of
funds. Nothing new has been added to the rather well-known
fact that monetary and credit controls have been
200
ineffective in regard to financial intermediaries, as the
term has been used here. The information obtained merely
supports this view. As for the commercial banks, the
effectiveness of both specific and general controls during
the period 1950 to 1953 presents a different picture.
Prior to 1952 it was apparent that the controls were effec
tive; however, the market information for the first half of
1952 indicates an extremely large volume of loans despite
the fact that controls were not removed until May 7, 1952.
During the remainder of the period of this study it ap
peared evident that the use of general controls was pro
gressively less effective. Annual year-end loan volumes
increased during periods of restraint, and the policies
adopted by the banks during the period 1957 to 1959 were in
contradiction to the credit controls.
The commercial banks had also changed in several
other respects. They continued to lose their relative
position in the market and this occurred despite their
credit innovations. There were attempts to move into new
markets, such as the pleasure boat and house trailer busi
ness. The boating business soon appeared unprofitable,
and there was a severe credit restraint when one of the
major banks withdrew its funds from this market. There
were also problems with the trailer home financing, but
these were apparently less severe. The fact that the
industry for the most part was more stable and the state's
201
economic growth continued were no doubt reasons for the
expansion of this loan volume.
One of the most significant changes that occurred
during this period was the relative decline by the commer
cial banks in the percentage of loan funds supplied the
market by the financial institutions. In 1950 they had
supplied 68.5 per cent of the total volume, and by 1959
their proportion of the market was only 54.8 per cent.
This loss not only reflects the transition which had taken
place but emphasizes the progressively declining influence
the banking system had in influencing credit.
Although the personal property brokers and the
industrial loan companies were credit promoters, they also
appeared to be opportunists. When credit restraints
affected the lending by the commercial banks, these finan
cial intermediaries were quick to take advantage. They
were also quick to shift their lending to sectors of the
market where the commercial banks were less active. The
credit risk distinctions between these agencies and the
commercial banks appeared to lessen as the competition in
the market developed.
Many changes also occurred in the retail market.
Estimates indicate that retail-trade credit financing
apparently became an increasing source of funds, while at
the same time the commercial banks and financial inter-
mediaires were attempting to extend their portion of this
market.
These changes indicated more than just growth and
they can hardly be passed off as leveling influences. The
relatively ineffective controls, coupled with the innova
tions for stimulating credit demand, do not appear to be a
desirable means of obtaining an orderly market. Neither
does it appear that unstable influences on the supply side
of the market can be offset by placing restraints on
demand.
It is quite apparent that such action merely treats
the effects and not the causes. Credit is accepted by
those who exchange present goods and services for future
payments and, therefore, supply as well as demand is of
the essence.
While it is true that area and district markets can
not exist by themselves, it is equally true that there are
differences between areas and districts. With the more
rapid population increase and business expansion in certain
areas the problems of these areas change. It is therefore
necessary for control measures to be adopted to meet these
changes.
II. CONCLUSIONS
It has been evident from this study that the present
monetary and credit controls have not proved effective in
meeting the changes in California in at least two major
respects.
First, the rigidity of national policy and its
influence on regional economic sectors has resulted in a
composite market approach which has failed to meet the
market problems. This has been evident not only with re
spect to districts which have their own peculiar economic
differences, but more so with respect to the states.
Second, the market for consumer instalment credit
differs in many respects from other credit markets. These
differences were not significant when the volume of con
sumer credit was a smaller proportion of the total credit
supply, but this condition has changed.
There has not only been an increase in the relative
market positions of financial intermediaries which has
weakened the effectiveness of commercial bank controls, but
there has also been an extensive development of trade
credit which has permitted the retail merchant to become an
important supplier of credit. This has resulted in more
credit competition, and the commercial banks who have
experienced the credit shifts have had to develop their
policies and programs so that they might secure a larger
share of the market. These policies and programs have been
designed for this specific type of credit, and since mone
tary and credit controls have been so ineffective the banks
have been able to further their objectives.
There have also been several other conditions which
204
have contributed to the unstable nature of this credit
market. The principal one was the lack of complete credit
information. Although the Federal Reserve District Bank
secures data from the commercial bank call reports, infor
mation pertaining to the volume of retail instalment credit
has had to be obtained from sample surveys. These are not
complete evaluations of the market and therefore are of
little value in policy formation. Another major sector of
the market in which data were unavailable at the state
level was that of the financial intermediaries. The annual
reports compiled by the California Division of Corporations
provide only aggregate data which are of no value in the
analysis of seasonal fluctuations of aggregate credit.
This lack of information, plus the rigidity and
limitations of area responsibility among the agencies
supervising the flow of credit, has resulted not only in
inadequate market coverage, but the diminution of those
facets of control which, though inadequate, provide the
only means of regulation. The limited scope of state regu
lation as it pertains to many of the financial intermediar
ies has no doubt been the result of the assumption that the
indirect monetary and credit control measures would be able
to provide a stable market. Since this does not appear
evident and the problem has been compounded with the in
crease in the volume and velocity of this credit, the
solution depends upon the proper delegation of
205
responsibility and the coordination of agencies' activities.
III. RECOMMENDATIONS
A permanent state council consisting of representa
tives from the State Division of Investment, Federal Credit
Unions, and the Federal Reserve System would appear to be
the logical agency for coordinating credit practices and
policies. This would necessitate the passage of appropri
ate legislation, so that the office of the State Division
of Investment would have the authority to secure the neces
sary credit information from the financial intermediaries
and the retail market. With this information and that
secured from Federal Credit Unions and the banks, coordi
nated policies could be developed which would provide a
more stable credit market.
There are, however, many areas of this problem which
need further study. Some of the more important ones are:
(1) comparative market evaluations; (2) the area flow of
loan funds between lending agencies; and (3) the signifi
cance of credit lending innovations in shifting or other
wise disturbing a given credit market.
The diminution of monetary and credit controls in
California, along with the proliferation of financial-asset
types of credit by market institutions engaged in highly
competitive practices, has not only resulted in augmenting
the market supply of money, but, of more importance, the
206
velocity of money. It is quite apparent that the continua
tion of such trends may completely destroy the remaining
vestiges of control.
BIBLIOGRAPHY
BIBLIOGRAPHY
A. BOOKS
Chandler, Lester V. The Economics of Money and Banking.
Third edition. New York! Harper and Brothers, 1955.
549 pp.
Friedman, Milton. Studies in the Quantity Theory of Money.
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Garis, Roy L. Principles of Money. New York: The Mac
millan Company” 1954. 1056 pp.
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American Economy Since 1900~ Princeton: Princeton
University Press, 1958. 4T5 pp.
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Finance. Washington, D.C. : The Brookings Institution,
1960.
Patkin, Don. Money. Interest, and Prices. New York: Row,
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Homewood, Illinois: Richard D. Irwin, Inc., 1957.
650 pp.
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729 pp.
Steiner, W. H., Eli Shapiro, and Ezra Solomon. Money and
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Willis, Parker B. The Federal Reserve Bank of San
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208
209
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AND OTHER ORGANIZATIONS
Bernstein, Blanche. The Pattern of Consumer Debt. 1935-36.
Financial Research Program. Studies in Consumer
Instalment Financing. New York: National Bureau of
Economic Research, Inc., 1940.
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Instalment Credit. Vols. I and II. Washington, D.C. :
Government Printing Office, 1957.
Brick, Maurice J. "Collection Techniques in Instalment
Credit." Present Day Banking. New York: American
Bankers Association, 1955.
Chapman, John M., and others. Commercial Banks and Con
sumer Instalment Credit. Financial Research Program.
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Retail Dry Goods Association.
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. Operating Insured Commercial and Mutual Banks.
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_______. Operating Insured Commercial and Mutual Banks.
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Federal Deposit Insurance Corporation. Operating Insured
Commercial and Mutual Banks. Assets" and Liabilities .
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Federal Deposit Insurance Corporation. Operating Insured
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D7C.: Government Printing Office, December 30, 1959.
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and Methods Used in Revision of Short- and Intermediate-
term Consumer Credit Statistics," Vol. 39, No. 4.
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Reserve System, April 1953.
"Summary of Flow-of-Accounts," Vol. 42, No. 4.
Washington, D.C.: Board of Governors of the Federal
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Governors of the Federal Reserve System, May 1956.
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Governors of the Federal Reserve System, March 1958.
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212
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_______. Federal Reserve Bank of San Francisco. San
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_______. Federal Reserve Bank of San Francisco. San
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_______. Federal Reserve Bank of San Francisco. San
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213
State of California. Annual Report upon Operations of
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C. PERIODICALS
214
Alhadeff, David A. "Credit Controls and Financial Inter
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of Money," Proceedings of the Thirty-fourth Annual Con
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D. ESSAYS AND ARTICLES IN COLLECTIONS
Cole, Robert H. "Financing Retail Credit Sales Through
Charge Account Bank Plans," Business Management Survey
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of Commerce and Business Administration, University of
Illinois, 1955, pp. 8-12.
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E. UNPUBLISHED MATERIALS
"California and Federal Credit Unions." A special report.
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216
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California, Los Angeles, July 14, 1961.
"Operations of Industrial Loan Companies." Sacramento:
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ment of Investment, 1950-1960.
Quarterly Index of Business Activity in California.
Anonymous source. Data available on request.
F. NEWSPAPERS
Los Angeles Times. August 5, 1958.
_______. February 6, 1959.
News Release. Federal Reserve Bank of San Francisco,
March 28, 19 58.

Asset Metadata

Creator Weir, Norman Edward (author)

Core Title Consumer Instalment Credit As A Variable In The Quantity And Velocity Of Money In California, 1950-1960

Contributor Digitized by ProQuest (provenance)

Degree Doctor of Philosophy

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag Economics, Finance,OAI-PMH Harvest

Language English

Advisor Garis, Roy L. (committee chair), Anderson, William H. (committee member), Guild, Lawrence R. (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c18-272378

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Document Type Dissertation

Rights Weir, Norman Edward

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