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FormF.R. 131 BOARD OF QQVERNDRS or THE FEDERAL RESERVE SYSTEM Office Correspondence Xo Chairman JSccles Ftwn Mr. Draper p a te September i, 1943 Subject: In view of the discussion today concerning financial and other problems of industry that may confront us during the immediate post-war period, I thought you might be interested in reading the accompanying memorandum which I have just sent to Woodlief Thomas. It covers the smaller but still important part of the subject, and it is for this reason that I am anxious to send the memorandum to you. COPY BOARD DF GDVERNDRS DF THE FEDERAL RESERVE SYSTEM Office Correspondence To Mr» Woodlief Thomas ^ Assistant Director, Division of Research and S t a t i s t i c s . Frnm Governor Draper D a te September ?, 1943 Subject! Dear Woodlief: With reference to today 1 s discussion concerning financial and other problems of industry that may confront the oountry during the immediate post-war period, I would l i k e t o submit the following views: The problem of credit for industrial reconversion divides i t self broadly into two categories: 1 - As i t affects companies with war contracts; 2 — As i t affects companies with no war contracts. This brief memorandum will not discuss credit problems of companies with war contracts for that i s a vast subject on which there i s a wide variety of thought, and fortunately much of the most effective thinking on this subject i s beginning to become crystallized in definite form, such as i n the recent liberalized Regulation V and in the plan of the Services to buttress this procedure with l e g i s lation as soon as Congress reconvenes. As to the second problem, i t has been estimated by the War Department and others that of the 4-00,000 (more or less) companies submitting incane tax returns, some 240,000 or 60$ have war contracts. These include both prime and sub-ccntractors. There are therefore some 160,000 concerns (A0%) which have l i t t l e or no direct participation in the war effort. Undoubtedly a great proportion of these 160,000 concerns are of medium or small size. Of these 160,000 concerns, a certain percentage—perhaps 50$~have been benefited by wartime conditions and hence should have l i t t l e difficulty, from a financial standpoint, i n readjusting to peace-time production. However, the other 50$, some 80,000 concerns, may find themselves in need of financial help TA/hen the war ends. For the most part, they are the ones which have been badly crippled or shut down as the result of the war. The question is—what financial aid, i f axy, the Government i s prepared to offer to them, not as a subsidy but on a repayable basis, so as to allow them to stand on their cmn feet in the future? Before answering that question definitely, we have some i n t e r e s t ing evidence that bears directly upon this problem. We have collected (but not published) the t o t a l figures of our experience with Section 13Bt As we know, Section 13B was not a satisfactory instrument from various standpoints. The language of the statute was r e s t r i c t i v e and because of more liberal powers given the RFC we were always at a disadvantage in functioning effectively in this field* Nevertheless, the record shows that from 1934 to 1943 we authorized the granting of some |475>000,000.00 in loans and after ample provision for overhead, charge offs and bad debts, we find ourselves in 1943 > s t i l l in the black on this entire operation. With these and other facts in mind, i t seems to me that the most effective financial assistance that we can give to the business concerns in question i s to provide for them the Regulation V procedure, which i s , in principle, nothing much more than the well-known 13B commitment* Banks are familiar with Regulation V, the resistance to i t in war time i s practically n i l and I think we are safe in assuming that very l i t t l e , i f any, more resistance would be encountered in time of reconversion* If we should decide to favor action of any kind in this field, the most important problem of policy a t this time would be to answer the questions—«®here "would the funds come from with which to operate under a modified Regulation V procedure and what would be in general the legal setup? There are various suggestions on these points* As to capital, the one that seems preferable to me i s to have a capital of |139,OOO,OOO.OO furnished out of Treasury funds earmarked in 1934 for a somewhat simil a r purpose-—these funds to represent the capital of a Federal Reserve Reconversion agency. There should also be included a provision that, in case of need, debentures could be sold to the Treasury up to a certain number of times the original capital* As in Regulation V, the central clearing house for policy decisions of the agency would be the Board of Governors but a l l problems of operation, etc., would be in the Federal Reserve Saflks exactly as at present under Regulation V* The more one studies t h i s problem, the more one seems to be convinced that the above approach i s the simplest, the most effective and the most easily understood ty industry and banking that could be devised at this time* Yours sincerely,
@FedFRASER