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September £9, 1959 Honorable Jeeie Jones, Adcainietr&tor Federal Loan Agency Washington, D« C. Dear Jesses You will recall our discussion at the Treasury last reek in which you jokingly took the Recerve Cyetesx to task for it* perforsumce rsepectlng Industrie! iofc.ns. In spite of the fact th&t you mere joshing sie, I feel that I shouldn't let your charges go unchallenged and for thbt reason I have checked the record end harm eoae obfic<r vat ions to make which I think you will find interesting and perhaps enlightening* The figures do not tell the story unlecs considered in the light of comparative authorisations enjoyed by the tvo Feder&l agencies under the 1ST,. Both started out under the- Act •£ Congress approved June 19, 1954, Under this Act the RFC had &n important adv&ntege over tho Kee»rve b&nke since its ioane were not limited to thot»6 for working capital purposes end its cosaaitaentf were not subject to a proscribed ratio, Ko^€fver, for the sake of the argument, I &a willing to rdmit that both ogenciec N f i unduly r«ftricted and etarted out on a more or less even footing. The fi^uree show thfct up to J&nu&ry 50, 1955, wh©n Congr^e,^ first liber&liBed the RFC 1 * authority, the federal Rererve b/.nke had a«ide io&nt sine participation* of $32 a&llion odd against approximately $9 aillion for the RFC. The aaanciaent of Janu&ry 10, 1955, lifeeralired the RFC 1 * authority in & nusber of MQT*« &^- follo^BJ (e) it changed "adequate security au^t \m provided* to "the loan smst be so secured &£ to reason/;bly acsure repayment*; (b) elijain&ted the «axiau» of #500,000 for any one borrower; (c) extended the maxima •aturity froa five to tefc ye&rej and (d) elimini^ted the recuir«raent th&t the applicent aust have teen established prior to January 1, 1 9 M . The Federal Rorerv* banks r«ceived no liberalisation vhsteoever at that tine, nor rince. In spite of the great adv&nt&ge enjoyed by the RFC for over three yeere Iroa thie point on, the cuaulativ© figures up to April 19*8 («h@n th© bcrt I W I dropped again &» to RFC lending) show Ui»t the Federal Reserve b&nk& made lor.nt ana participations of $111 Billion odd ae against appro>:i»a&tely $106 million for the RFC, Hononble Jesse Jonee The amendment oV April 1.*, 1958, not only removed practically all restrictions on business loene by tbx* RFC but «a* also & cle^r indication on the part of Congress th?.t the HFC *&? expected to carry the ball &nd enjoy the spotlight in this field* Nevertheless the Federal Recurve banks continued to s&ks net? ior.nr, incre&eiag the cuaujUtive total of losne and participatlosi by ££1 million up to the end of June 19i:.9. During thip period the RFC "authorizations" increased approximately | t W million although diebureesisnts increcred only about $75 Aillion. To ay .Tiind it if. rather ras? rkabl« tfatt the Reserve bankr *er». able to tasks even tii^t amount of loans in view of the competitive situation. The figure* also «ho* an interesting sidelight on th© question of "tightness" in authorisations. Ae of June 2&9 19*3, the Federal Reserve t&nks bed authorised loans totaling $179 million odd, of »hich £14 ailllon or approximately 8 pmr cent bal been canceled, whereas the RFC had authorized & tot? 1 of # 4 M million odd, of *hich $85 jaillion or ^ppro>la&tely £0 per cent had been canceled. As you K A O F , loans &re canceled not BO auch becsure the borrowers .srocure funds elsewhere at for the reason that the conditiooe att&ched to the "authorised* loans; are such th/it the borrower cannot or is unwilling to meet the». The j>erforai;n<:© of the Federal Reserve b&nke shoula also be viewed in the light of other oifficultios. The Ie* requires thst applications be considered by tn in»iuftri?.l advisory coaurdttee at etch Federal Reserve b??nk, selected froa successful business saen in the district. It is only natural th: t these wen, dra«m froa businesses in good financial conaition, should be inclined to look rith disfavor upon m&ny applic&tion« submitted by th^ir less successful competitors. Affcin, the l&r doee not give the Bosrci of Governors in Warldngton any authority to pass upon applicatione but only to .sake regulations under shlch the Reserve benke should lend. Obviously those regulations OOI only qualify the statutory authority, not broaden it. The ability of the Board in lashiugton, therefor©, to stiaaul^te inouctriol loans? by the ft«serve banks ha*? been liasilted both by th© restrictions in the statute and by the fact that the statute civee no final poser to the Board to approve or disapprove loan applications* In the light of the above, it eeeas to ma thfct the i'ecerel Reserve System has done as cell with Industrie! loans as could b« considering the handicaps under ^hich it has h&d to operate. Sincerely yours, (Signed) M. $, M. £. Scdes LC/fgr September 29, 1939 Honorable Henry Morgenthau Secretary of the Tre&cury Washington, D. C. Deer Henry: I think you mill recall th&t at lart week's •eeting at the TreFpury Jerre Joner indulged in some good-netured panning of the Federal Rererve banks end itself included, for the •tightness" of the Reserve Syptem in its industrial lending activity. In spite of the humor of the cccerion I feel that the charger should not £0 unchallenged snd I h&v? accordingly sent Jesse a letter containing come observations on the matter and I m enclorin^ a copy herewith, I trurt you till find the factf intersrtin^ snd informative. Sincere^, M. S. Ecclds M. S. Eccles, Chairman Identical letter sent to Jerome Frank and John Hanes THE UNDER SECRETARY OFTHE TREASURY WASH!NGTON September 30, 1939 Dear Marriner: Many thanks for your letter of September 29th, enclosing copy of your reply to Jesae Jones* I have read It with much interest, but confess that I "believe you must have taken Jesse far more seriously than I did* I never thought again of his remarks at luncheon "because I "believed them to "be in the nature of a good humour jest* At any rate, I am glad to have the informa- tion* With kindest regards, I am Sincerely yours, \\O The Honorable Marriner S* Eccles, Chairman, Federal Reserve Board, Washington, D. C* SECURITIES AND EXCHANGE COMMISSION WASHINGTON OFFICE OF THE CHAIRMAN September 30, 1939 Honorable Marriner Eccles Federal Reserve System Washington, D. C. Dear Marriner: I have read with much interest your letter to Uncle Jess, As usual in any argument you get the better of your adversary. iincerely, "Jerome N. Frank
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