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Reli7rr\flns c o / y to Legal DiV sy4i as soan as origin mailod, showing on cfciPV the January 2Í, Bo no ra ble Jesse F. Iclcott, Chai men, Covaitte* O Banking and Currency, B Boti»« of ft*precentfctlTee, W«sfel»tf ton, D. C. By 4«tr Br. Ckainait Tfc« Board of Oorernom of the Federal Becerro £y»ten reeonMiá* tbe enaetneat of t u acal o sad M i l to r«pe«l »actio» of the Federal Reeerre Act, cantai»lag tho existing industrial l o t i authority of tbe Fad«rei Beeerre kidu, and to aaeaad »action 19 of the Federal Reserve Act la order that tbe Beeerre Itaki nay coat i at» to gnerentee lo«»» to business enterprises but on a nor« offact imo beai»* TI» M l l t in repeal lag »action 15b, would rehuir« U e return by tho foderai leaerre Bank» of a l l funds heretofore received by the« fvo« the Treasury is connection with tfceir industrial loon operations and would ella ine to any fnrtbar slain upon the Treasury for any pert of the llSf,000,000 «hieb «a» appropriated for this purpose. The repeal of section 13b, coupled with the re*uir«sent for the return by the Becerro lank« of the fund« r»colred fro* the Treaeujy, would scrry out the reeesnenástton of the President, contained in hie Budget Keecage for 1948, reedin« as follewsi •Tba Board of ©oreraorc has nade a fwrtfcer reeorj^oadetion, in which X also concur, that the Gongree* repeal the existing* largely domant, »uthority of the Federe1 Beeerre benha to make direct loans to industry, releasing to ths Treasury the funde reeerwed for this purpoce. The gold increment fund now includes l i t mill ios dollars re «erred for each leene, and an added 28 million dollars has been advanced to the roderei Beeerre banks. Theee suns will be transferred to «1 seel lentous receipts«* In the judge «at of the Boerd, i t ie «leo important that the euthority of the Federe! Beeerve Banks to render a sei ciance in financing business enterprises en contained In the proponed bill be are ila ble wfeanerer eoaditions are such that it Is needed. The reeeons for the Sonora ble Jesee P. Voleott Boerd' a reeoraaend tton of tUls M i l are f u l l y erpieined l a the anclosed statevent with respect to thie matter. The Board hopea tbat the proponed M i l n i I I reeeiTa the favorable eonsider&tion o f tfea CoBcaittee on Banking and Curreney. Sincarely youra, X. S. Z e d a s , Cheirwan. Zrelosuree A BILL To repeal section 15b of the- Feder&l B#serr© Act, te as?«nd section 1? o f tfa® said Act, and f o r other purpose«* Be I t enacted fry the Senate and Houee of ¿representatives o f tii» United States of «uaerlea in Congress assentled. Sect ion 1» Repeal of section l^b of the Federal »eserve Act. Section l ? b of the Federal Reserve Act 1« hereby repee-.lec; but attar repeel »hall not jiffeet the power of any Federal «'eserve Bank to carry out, or to protect i t s interest under, any *e<r«e&ent heretofore Bade in carrying on operations under that section, within aixty (60) days a f t e r the enact&ent of this Act, «»ch Federal Keserve bank shall pay to the United States the aggregate a&ount which the 3ecret&ry of the Treasury has heret o f o r e paid to ¿such beak xiudar the provisions of section l ? b o f the Federal Seserve Act, together with any net earnings thereon f o r the period fro® January 1, 194?, to the date on tthleh such peys.ent to the United Stetes i s eede; and such payment shell constitute a f u l l discharge of any obligation or l i a b i l i t y o f the Federal Seserva frank to the United States or to the Secretary of the Treasury arising oat of subsection (e) o f said section 13b or any agltNNMftt th*reund«r. - e c . Sd. Attendee Bt of section of the Fao Eese.-ve Act* Section of the Federel Reserve Act, as amended, Is hereby further a? ended by &cdia& at the end thereof the following ne* paragraph; "Subject to such limitations, r e s t r i c t i o n s and regulations as the Board of Ciovercors o f the Federal Reserve Syster »ay prescribe, any Federal heserve Bank aay guarantee any financing institution against l o s s of principal or interest on, or nay make o conrltRent to purchase and thereafter purchase fror a financing Institution, any loan *ade to a business enterprise which has e raturity of not t o r e than 10 years. Ho Federal Reserve nank uncer this paragraph s t a l l guarantee o r <M»ke a cocsltrent to purchase »ore than 90 per cent o f the unpaid balance o f any loan. The aggregate amount o f guarantees and eossffltvents of the Federal Reserve Banks under this paragraph outstanding at any one t l c e , together with the amount o f ioens acquired thereunder and held by then at the seas tie;«, shall not exceed the combined surplus o f the Federal Reserve Banks at such t i r e ; «ad the aggregate amount of such guarantees end cossritireuts outstanding at any one t i r e end loans held at the s&se t i r e , «hieh individually are in excess of 1100,000, shall not exceed SO per cent of the ooeblned surplus of the Federal feeserve Banks at such t i » e . w STATMOMT IN COKNECTIOK »ITS PROPOSE BILL TO RXFlAL 32CTI0K l ? b AKD AHfSD SSCTIGK 1? OF THE FXDIi^L 8E3ERVI ACT The *k>ard o f Governors of the Federal Reserve &yste® r^com»endf f o r the favorable consideration of the Committee on Banking end Currency the attached d r « f t o f a b i l l ushich has f o r Its purpose the revleion of the authority o f the Federal Reserve Banks to guarantee financing inati tut ions against l o s s on loans mads to business enterprisac. Such guarantees by the ¡Reserve Banks would require no appropriation« by Congress. The Federal Heserve Mnks are especially qualified f o r proTiding financial assistance to business enterprises through commercial banking channels. They hold tha reserves of rber banks, they provide discounting f a c i l i t i e s f o r jn«Bber banks, thsor c o l l e c t their checks, and they administer many of the governmental regulations a f f e c t i n g banka. In nimerous ways the Seserve Banks bare long been in close contset with coiR»erclal banka and business enterprises in their d i s t r i c t s end are f u l l y acquainted with their problems. Since the Federal Keserve Banks are permanent institutions with experienced personnel, the Board f e e l s that whatever financial assistance i s to be provided under governmental authority f o r business enterprises through commercial banks should be extended by the Peserve Bsnks. During the war, the Fetiersl Reserve flanks gained valuable experience in the administration of the V- and T-loan programs f o r guaranteeing war production and contract termination loans. Und^r those programs, the Reserve Banks, as of September ?0, 1946, had processed 8,771 guarantees, aggregating nearly 10-1/8 b i l l i o n d o l l a r s , losses being relatively s&all and substantially l e s s than the guarantee f e e s c o l l e c t e d . The proposed b i l l follows the guarantee principle which was applied under those programs; and financing institutions are already familiar with the services of the Reserve Banks in th&t f i e l d . Accordingly, the b i l l would not Involve the establishment of any new governmental agency or the application of untried principles. Iven though business and credit conditions at time may not be such as to require extensive use o f tfc* authority which the Beserve Banks would have under thle desirable that such authority be made a part of the law i t nay be promptly available in periods when conditions the need may be greater. any particular guarantee b i l l , It i s in order that err such that Provisions of the B i l l The proposed M i l contains two sections. The f i r s t section would repeal section l?b o f the Federal Reserve Act which contains the present authority o f the Federal Eeeerve Banks to meke and guarantee industrial loans. In doing so, i t would require the return by the Federal tteservo BarJts o f a l l fund» heretofore received by the® fror the Treasury in connection with their industrial loen operation» kwJ •ould eliminate any further alalia upon the ¿raasury f o r any pert of the $139,000,000 which was appropriated f o r this pur->oae. The second section of th«? b i l l would add a saw paragraph to »action 1? of tba Federal i?e»erve Act in order to continue the authority of the Federal Beeerve Banks to ^u&rantae financing institutions against lose on loans ir;»de to business enterprises or to r«ke cosaritiseuts to purchase such loans, but on & inore e f f a c t i v e basis than at preeent. In Carrying out operations uttdsr suah authority, the Federal Reserve Banks would u t i l i z e their own funds and no use of Treasury funds or any appropriation ey Congress would be required. It will be recalled that when section 13b of the Federal Reserve Act was enacted in 1934, about 179 million dollar» w*a appropriated out of the jrisoellaneous receipts created by the increment resulting fros: the reduction in the weight of the £Old d o l l a r , in order that tha Secretary of the Treasury *igj*t *ake advance« to the Reserve Basks f o r th«r purposes of industrial} loans. About 27 million dollars has baaa received by the Reserve Panics from the Treasury under this authority. Under the proposed b i l l , the funds received would be returned to the Treasury ana the appropriation would be repealed. Thus, p i l l i o n dollare would no longer be earmarked f o r payment te the fceserve ^anks and would therefore be available for other govcrarental purpoaea. c »vision of :.xiAtlm. Authority of weaerve ¿asks The Bo*«rd recc-aends the repeal o f section 15b of the Federal Passive Act because that section contains r e s t r i c t i v e provision» which seriously impair the authority of the Federal Reserve t^nks to lend the assistance to business which i t i s believed the Act was Intended to provide. These r e s t r i c t i o n s require tnat loan» bo wm6e f o r working capital purposes, that they be isade only to as tab. is*ed enterpriser, th*t th©y Lava sujturitlej o f f i v e years or loaa, and that the portion o f the loan gutar&uteed «ay not exceed 80 per cant. Whan Paction 15b was added to the Federal Reserve Act in 1934, the need was very largely f o r working capital financing. However, experience has shown that rany of the loans applied f o r involved the use of the proceeds f o r both working capital purposes and the acquisition of fixed assets and the repairing, and modernising o f plants. In l i e u of the restricted authority eontained In the present law, the second section of the proposed b i l l would authorize the Federal Reserve Banks to guarantee loans i&ade by financing institutions to business enterprises. This authority would bo subject to appropriate l i m i tations. So loan gorranteod could have a rmturity of sore than ton years. While the percentage of the loan guaranteed by a Federal Reserve Bank would vary with s p e c i f i c easoa, i t could not exceed 90 per cent in any instance; in other words, the cosaerclal bank would be required to asause at l o s s t 10 per sent of the risk Involved in any loan. The •o aggregate amount of «11 «roar*»tee* end cotrmitments could not exceed the combined surplus of the Federal Reserve Bank«; and, in order to insure the a v a i l a b i l i t y of guarantees f o r loans to smaller businesses, the aggregate anount of a l l guarantees which ere individually in excess o f $100,000 could rot exceed 50 per cent o f the combined surplus o f the Reserve Banks. All operations of the Federal Reserve Banks under this section mould be subject to the regulatory supervision of the Board of Ctoverrors. Direct Leading Eliminated Authority f o r the making of direct loans by the Federal fceaerve Banks, no» contained in section l^b of the Federal Reserve Act, would be eliminated under this b i l l . The basic purpose of the proposed l e g i s lation la to assure an adequate flow of private credit to small businesses in times of need. Tha Federal Reserve Banks mould not be placed In competition with the private banking system. Under the b i l l , the loans would be wade by l o c a l banks dealing mith l o c a l people whom they know and with whose character, capability and capacity they would he familiar. To the extent that the backs wight *ake such loans without reliance upon a guarantee, so much the better. However, I f f o r any reason the l o c a l bank should desire a guarantee, the support o f the Federal Reserve Bank would be promptly available In suitable esses without the necessity of referring the matter to any agency In Washington f o r approval. The Board f e e l s strongly that any ¿overmrental assistance in the financing c f » « a l l business should be extended by iteans of guarantees through the regular b a l i n g channels in the manner provided by t i l s b i l l r&ther th*n through direct loans by governmental agencies. Moreover, under this b i l l the Federal Reserve Bunks, which are permanent Institutions, would use their own funds, rather than funds derived from taxation or governmental borrowing., f o r the purpose of aiding in the financing of business enterprises, and there wo ild appear to be no necessity or J u s t i f i c a t i o n f o r permitting any agency of the Sovsrnrent to use governmental funds f o r this purpose.