Today's questions: I keep hearing that the government may put some kind of controls on the use of credit. Does President Carter have the authority to do that? If he does, can you tell me how they would work and what they would cover?
Credit controls, as they were used in the United States three times between 1941 and 1952, involved setting minimum down payments for purchases of houses, automobiles and other durable goods, and limiting repayment periods.
Regulation W of the Federal Reserve Board addressed consumer borrowing while Regulation X covered real estate lending.
President Carter has authority under the Credit Control Act of 1969 to declare that excessive amounts of credit are being provided business or consumers, and he can ask the Federal Reserve to place restrictions on it. Under the act, the Federal Reserve Board can refuse if it wishes to do so.
As part of the economic policy review now under way, Carter's top economic advisers are known to have rejected applying credit controls to the purchase of homes or autos, two sectors of the economy already substantially depressed. They also have turned thumbs down on any proposal to control lending to business.
However, administration sources say the advisers have not yet ruled out putting some kind of restraint on credit card and charge account use. If they do, it will be intended as another symbol of their intention to curb inflation rather than a serious attempt to slow down the increase in outstanding consumer credit.
The total increase in outstanding consumer dept last year -- other than for home mortgages -- was about $35.7 billion. Of that, $12.3 billion was in auto loans and another $8.5 billion financed mobilehome purchases. The amount owed on revolving charge accounts rose $8.5 billion. All other installment loan balances went up $13.3 billion.
Given what the administration has ruled out, controls might apply to no more than that $8.5 billion and part of the $13.3 billion. Even if controls were to slow the use of credit sharply, the inpact on the U.S. economy would be tiny.
Running a controls program would be a major headache, administration officials believe. As one put it last week, "The tools to deal with it are very rough indeed." Nevertheless, Federal Reserve staffers last week were trying to figure out what would be involved if Carter decided to seek controls, however limited.
At its tightest during the Korean War, the Fed's Regulation W required a one-third down payment for a car, even a used one, and a duration of no more than 15 months. Buying a refrigerator, washing machine or air conditioner took at least 15 percent down, with full repayment within 18 months. Home repair loans had to have 10 percent down and could run for 36 months.
So-called unclassified installment loans -- personal loans not related to purchase of a specific item covered by the regulation -- could have up to an 18-month repayment period.
At one point during World War II, Reg W was broadened to include some charge accounts and single-payment credit extensions.
Some types of loans were exempt, and some borrowers were, too. Individuals could get around the restrictions on unclassified loans by providing lenderswith written statements that the loan would be used for educational, medical, hospital, dental or funeral expenses and giving detailed information about the money's recipient.
Businesses, units of government and most nonprofit institutions, such as hospitals, churches and colleges, were not covered by the regulation.
Regulation X applied to credit for construction or purchase of residential property. If a house, or a "family unit" in an apartment building cost $7,000 or less, only 10 percent down was required. There was a sliding scale, and if the house or family unit cost more than $24,500, the builder or buyer had to have a 50 percent down payment.
Housing prices have been going up faster than prices generally for a decade, but if those 1951 figures are translated into today's prices using the change in the consumer price index, that $7,000 house is today's $21,000 house and the $24,500 "family unit" is the equivalent of a $73,500 unit now.
Reg X also prohibited mortgage loans with a maturity of more than 20 years, unless the house had a value of $12,000 or less, in which case the limit was 25 years.
When credit controls first were imposed in 1941, the intent was to cut the demand for housing and consumer goods so much of the nation's productive capacity could be converted to making war materials, and thereby help restrain inflation.
Jerome Shay, a member of the Federal Reserve staff who helped administer credit controls, wrote in the Federal Reserve Bulletin some years ago that the controls worked well during most of World War II "when the economy was subject to a number of direct, emergency-type controls. When supplies of consumer goods and services are limited, any incentive to circumvent restraints such as a consumer credit control is reduced," he said.
Controls were lifted in 1947 but Regulation W alone was reinstituted in September 1948 as part of a Truman administration action against inflation. Extensions of installment credit dropped sharply as a result, but never fell below the level of repayments before Reg W was again put in mothballs the following June.
In September 1950, when the country was in the midst of an unprecendented buying spree growing out of a fear that rationing was about to be imposed, Reg W again was imposed. When the allowable repayment periods were shortened the following year, loans were being paid off faster than new loans were being made, Shay said.
That tightening brought forth howls of outrage from many quarters. Federal Reserve employes charged with enforcement of Reg W were charged on the floor of the House of Representatives as being "night riders . . . raiding the homes of private citizens."
Said another representative, "The Federal Reserve agents use government credentials as a moral blackjack to strike terror into the hearts of their victims and to extract confessions of wrongdoing." And there were complaints about "star chamber proceedings against little people," Shay recalled.
"But information needed for enforcement could not be found in the books and records of the hundreds of thousands of credit extenders subject to the regulation, except in a very few instances," Shay said. "Consequently it was impossible for the investigation to proceed like an ordinary bank examination. Customers and other witnesses had to be interviewed if possible violations were to be pursued."
In one sense, in today's world, with more and more installment credit being extended through credit cards and large retail stores whose books could be checked, the Fed's enforcement task might be less difficult. But back in the early 1950s revolving charge accounts, overdraft checking and the like were essentially unknown.
Today's consumer has far more sources of credit available to him, and therefore more ways to get around any controls that might be imposed.
Whatever the enforcement problems, one objection would be sure to be made, just as it was in the Korean war days: Credit controls discriminate against low-income consumers, young married people establishing a home, workers in need of transportation to jobs and smaller retailers.