View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

DEPARTMENT O? COMMERCE
OFFICE OF THE SECRETAD
"WASHINGTON 25
March 25, 19U7
Honorable Charles W. Tobey
Chairman, Committee on Banking
and Currency
United States Senate
'Vashington, D. C.
Dear Mr. Chairman:
This is in response to your letter dated February h, 19^7,
requesting the views and comments of this Department on S. L|08, a bill
"To repeal Section 13b of the Federal Reserve Act, to
amend Section 1J> of the said Act, and for other purposes,"
S. I4O8 provides a sound basis for the expansion of muchneeded small business credit facilities (the need for which I have
also discussed in my comment on S. 217)« Vie indorse the approach taken
toward this problem in S. Í4D8 because it recognizes the proper role of
privately-owned financial institutions in tnis field by providing for
private participation in credit risks, by contemplating guarantees rather
than outright loans by the Government, and by involving the commitment of
private Federal Reserve funds rather than funds derived from taxes or
public borrowing.
Despite the obvious purpose of S. I4O8 to improve credit facilities for small business, S. 1^08 contains no statement of any small business objectives except to the limited extent they might be implied from
the requirement that the aggregate amount of commitments which individually are in excess of $100,000 shall not exceed 50 percent of the
combined surplus of the Federal Reserve banks. Particularly in view of
the clear statement of small business and anti-monopoly objectives contained in S. 217 and certain other proposals for small business credit,
it may be desirable to strengthen S. Í4D8 along these lines, without,
however, going so far as to write in standards which would compromise
9ffective administration of the Act or tend to preserve inefficient or
uneconomic enterprise. One possible improvement along this line might
be to specify that "the Board of Governors of the Federal System and the
several Federal Reserve banks shall exercise their respective powers and
duties under this Act in such manner as may be necessary and desirable
to discourage monopolistic practices and to strengthen and preserve the
competitive position of small business concerns in an economy of free
enterprise."




-

2

-

In addition, the Committee may wish to consider the
desirability of reinforcing -the small business aspects of this
legislation by prescribing specific lending standards to be
applicable to each loan considered for guarantee or purchase. In
this latter connection, you may be interested to know that the
Small Business Advisory Committee of this Department, in preparing
a draft of a proposed amendment of Section 13, suggested the
inclusion of explicit terms and conditions concerning such matters
as (a) interest rates and other terms comparable to those available
to large concerns, (b) the extension of a loan only in any case
where the loan represents a substantial portion of total capital
requirements, (c) sufficient term of years, (d) flexible amortisation dependent, at least in part, upon profits, (e) optional
advance repayment of interest and principal, (f) reasonable
limitations upon withdrawal of sums for payment of salaries or
dividends to owners (g) sufficient regard for short term requirements of the borrower, (h) sufficient regard for character of the
borrower. It is recognized, of course, that these matters can be
taken care of by rules and regulations of the Board of Governors
of the Federal Reserve System, and in some cases merely by the
application of sound and progressive banking principles.
It is
also recognized that such limitations and conditions must be
carefully framed and considered if sound administration of legislation of this character is not to be compromised. On the other
hand, in view of the fact that these points have been raised by
persons very actively interested in promoting the competitive
position of small business, it is believed that such provisions
should be given careful consideration on their merits, and that
provisions of this character need not be detrimental to sound
banking practice. In short, although the efficacy of this legislation lies ultimately in the character of its administration, the
inclusion of some appropriate standards of this character may
increase public confidence in this bill as a measure for the
preservation and strengthening of small business, may provide
appropriate guidance to those who will have operational responsibilities under the legislation (including private banking establishments), and may therefore minimize the risk of public pressure
for credit legislation of unsound character.
We believe that the Committee should give special
attention to the fixing of a reasonable maximum interest rate
which takes full account of the principle that any savings resulting from the pooling of risks should be passed along to the borrower
to -the fullest extent feasible, and which recognizes that the
guarantee provided by this legislation is virtually tantamount,
as a practical matter, to a guarantee by the Government. We have
discussed this matter at greater length in our letter concerning
S. 217, in which we stated that we did not consider unreasonable
the four percent rate mentioned in that bill.




-

3

-

In addition, although we feel strongly that legislation
of this character should provide credit assistance by extending
guarantees, or through an insurance or participation system, rather
than by outright loans, and although we seriously question the
need for authorization which would permit such outright loans, we
think it would be appropriate for the Committee at least to inquire
whether S. 1^08 should be amended to permit outright loans under
exceptional circumstances, particularly in view of the fact that
S. 217 and other small business credit proposals provide for such
loans, and since it may therefore be presumed that there will be
considerable popular pressure for statutory authorization of this
character at some future time if not immediately. If it is
deemed necessary to provide for outright loans by the Government,
however, the statute should make it clear that such loans should
be given under only exceptional circumstances, and then only up
to a fixed percentage of the guarantees or of the funds available
for commitments. In the Small Business Advisory Committee proposal
mentioned above, for example, a provision for outright loans was
set forth as follows:
"(e) When it appears to the satisfaction of a
Federal Reserve bank, under exceptional circumstances, that a newly-organized or established
small business enterprise has been unable to
obtain financial assistance on reasonable terms
from any financing institution, such Federal
Reserve bank may participate in or make commitments
respecting loans to, make loans to, or purchase
obligations of, such small business enterprise under
the conditions set forth in subsdction (a) of this
section, provided that the total amount of all such
participations, loans, and purchases in excess
of $250,000 per borrower shall not exceed 25 per
centum of the resources made available for this
purpose under subsection (c) of this section."
Although we doubt the necessity or desirability for such a provision,
we think that it deserves careful exploration.
If you desire any further comment or assistance in regard to
this matter, do not hesitate to call upon us.
I have not been advised by the Bureau of the Budget as to the
relationship of this bill or this report to the program of the President.




Sincerely yours,
(Signed) William C. Foster
Acting Secretary of Commerce.