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The uncovered field
There are two groups of business enterprises whose needs
are not adequately met by existing financial laachineryj
1* Those who need short and intermedi ate credit but
whose credit standing at the present level of business
activity does not Bake them acceptable risks for banks • These
are not misconceived or mismanaged or insolvent businesses*
but businesses ufaose prospects of success are dimmed by the
current economic situation*
2m Small and xaedium, size businesses which need loan or
equity capital for an intermediate or long period* The growth
of natioa>«ide business units, the discontinuance of bank
affiliates and of underwirting by banks, tfee increased cost
of security issues^, and the disappearance of local underwriters
have Bade it difficult for this type of business concern to
find long^tisa credit except at prohibitive cost*
The Head bill
It is not likely that this bill will greatly increase the
voluxas of loans Bade, for these reasons:
1* The insurance provisions are such as require the
lending bank to take a 10 per cent loss on each loan before
the insurance becomes effective for the remaining 90 per cent.
2* The rate of interest provided, 4 per cent, is so
low for the type of loan contemplated that banks would be
reluctant to xaake them, particularly as this would appear to
givs a preference to these borrowers over regular established
3# The Reconstruction Finance Corporation has authority
under existing law to do substantially all that the Bead bill
proposes, except that the present law is interpreted as requiring the Corporation to pass on each individual loan* This could
easily be changed*

Other undesirable features of the Ifead bill are: (1) the
creation of an unlimited contingent liability for the Government,
and (2) authority to rediscount insured paper with unlimited
laaturities at the Reserro banks* In so far as aeraber banks are
concerned, they can now obtain advances on any satisfactory security,
and in so far as nonraetiber banks are concerned, they should not be
given the asm privileges as those enjoyed by members withoxtfc
being subject to the laws applicable to laember banks*

of ^ g Ft RtfraBfcsTito iMystrial towa

The Reserve banks have approved consnitments and advances
to business of about #180,000,(XX) under section 13(b) of the Federal
Beserve Act, but owing to limitations in the law that loans mast be
for working capital, must be Bade to established institutions, and
mist be for not more than five years, this arrangement does not aeet
the situation and the lair should be repealed*
The proposal
It is proposed that funds in the Treasury now set aside or
used for industrial loans - about #339*000,000 - be turned over to
an Industrial Loan Corporation* This will involve no additional
appropriation* The Board of Governors would be the Board of Directors
of this corporation^ and the twelve Federal Beserve banks with their
twenty-four branches would be the field agents to pass on applications*
In this way prospt and economical action would be assured by utilising
existing machinery and experienced personnel*
The corporation would make loans or commitments or acquire
preferred stock; not more than $1,000,000 to one borrower* Intermediate or long-term loans could be made by private lenders, insured
banks, protected by eorndtzsents of the corporation*
The corporation would have #100,000,000 of capital and
$39*000,000 of surplus* It would have power to issue $500,000,000 of
Government guaranteed debentures* Upon liquidation all remaining
assets would go to United States Government* It would set aside out
of its surplus $25,000,000 for an insurance fund for small loans not
exceeding $25,000 - on the basis of guaranteeing 10 per cent of any
lender's aggregate insured loans, so that the loss on any loan even up
to 100 per cent would be absorbed by the Corporation, so long as
aggregate losses did not exceed one-tenth of the lender*s insured loans*
This is the saiae plan as in Title One of F*H*A* The corporations
possible losses on insured loans would be limited to the #25,000,000
set aside as an insurance fund* Aggregate cost to borrower, including
insurance and service charges would not exceed 6 per cent*

The purpose of the proposal is to xoeet adequately the
existing need; the Federal Reserve System is proposed as agency
because of the mide distribution of its existing offices, its
close contacts ^ith banks* and the experience of its personnel
in this field, but any other arrangement that Congress may -wish
to zaake full be entirely agreeable*