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OFFICE OF WAR MOBILIZATION AND RECONVERSION
Advisory Board
Room 12Ó1-B
Lafayette Building

Maroh 5, 19U5.

Hon. Ilarriner S. Eccles, Chairman
Board of Governor®, Federal Reserve System
Federal Reserve Building
Washington, D. C.
Dear Mr. Eccles:
Your conference with the Advisory Board to the Director of War
Mobilisation and Reconversion regarding problems and proposals in the
matter of financial aid to small business served to focus the attention
of the Board on this vital matter. In each of the several meetings we
have had since you were with us, the matter has come up in one way or
another. At the meeting today, the Board 1 embers requested that they
be furnished memoranda explaining the proposals now under consideration
in Congress and under discussion in business and governmental circles
regarding financial aid to small business.
While I realise that you gave us a very lucid statement earlier,
it occurs to me that you might wish to furnish us with a memorandum in
connection with our present effort to inform ourselves adequately both
as to the problem and the various proposals being advanced to cope with
it. As I understand it, current Senate Bill $11 re-introduces the
original Wagner-Spence Bill with certain minor changes. If we can have
a memorandum from you, we would be grateful if it were to summarize
your view of the problem and the workings of the proposals incorporated
in S. 511.
Our Board meets in another two weeks, and such a memorandum, if
we can have it toward the end of this week, can be placed an the hands
of our members for study well in advance of the meeting.
Please do not hesitate to call upon us for any further information
you desire on this request.




Sincerely yours,
(Signed) 0. Max Gardner.
0. MAX GARDNER
Chairman, Advisory Board
Office of War Mobilisation and Reconversion.

BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Washington
Office of the Chairman
March 1k, 19^5•
Honorable 0. Max Gardner,
Chairman, Advisory Board,
Office of War Mobilization
and Reconversion,
1261-B Lafayette Building,
Washington 25, D. C.

Dear Governor Gardner:
In your letter to me of March 5 you refer to the fact that Senate
Bill 511 reintroduces the original Wagner-Spence Bill with certain amendments and suggest that I furnish you with a summary of my views in connection
with this measure» I have testified before the Banking and Currency Committees of both Senate and House favoring enactment of this legislation because it rests on what I consider a very vital and fundamental principle;
namely, that of encouraging the private enterprise system, of which private
banking and credit institutions are an integral and indispensable part.
This measure would carry over into the reconversion period and,
specifically, until the end of 19Û9* unless further extended by Congress,
the guarantee principle of governmental aid which has worked out so successfully in FHA financing and in the so-called V and VT loaning operations for
war production and transitional reconversion purposes. X have advocated the
same principle in connection with agricultural loans. In fact, ever since I
came to Washington more than a decade ago, I have invariably advocated the
guarantee or insurance principle and opposed direct Government lending which,
to my mind, can only be justified in periods of extreme economic emergency
if, as should never be permitted, the private credit system has broken down*
The banks of this country are as much small business enterprise
as any other components of the free enterprise system. Instead of setting
up governmental lending agencies, financed out of taxes or deficits, to
supplement or, as so often happens in fact, to compete with banks or other
private lending institutions, it would be far better, if we mean to preserve
this free enterprise system, to enable the banks and similar institutions t*
function effectively in meeting the various needs of business, industry,
agriculture and individuals in the communities they serve.
Where oppressive and restrictive regulations beyond those required for public protection cripple private lending institutions, they
should be liberalized and amended in the light of modern needs and conditions. Some progress has been made in that direction, notably in the
revision of bank examination policy, which I had a hand in initiating in
1938* The revised procedure, now based upon appraisals of bank assets on




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intrinsic worth rather than on fluctuating market values, has, I am glad to
say, been adopted in principle by the three Federal bank supervisory authorities and those of practically all of the States, If it has not been
carried out adequately in practice, it is largely because old habits die
hard.
Similarly, the Banking Act of 1935 greatly liberalized the lend~
ing provisions of the Federal Reserve Banks that were so restrictive after
the crash of 1929 that the System was incapable of rendering the very sort
of aid to the private banks of the country that should have been provided.
B » @ m k failures and accentuated deflation were the consequence of those
former needlessly restrictive provisions.
Vifhere governmental agencies actually compete with existing
private credit institutions, they should, in my judgment, be abolished or
narrowly restricted as standby mechanisms should emergency conditions develop. Thus you may recall, many of the smaller banks in the agricultural
communities throughout the country complained bitterly and generally with
justification that the Regional Agricultural Credit Corporations were
soliciting agricultural loans both by cjirect methods and by advertising.
Other governmental lending setups have erred in the same direction, and once
established they usually seek to enlarge their operations and to justify
their existence with increasing reliance upon the public purse, instead of
diminishing or abolishing their operations once the emergencies for which
they were theoretically created are past.
The RFC, which was set up belatedly to meet an extremely deflationary situation that private credit could not meet, should, in my
opinion, be liquidated so far as its peacetime lending operations are concerned, when we no longer face the deflated condition for which it was
created and private agencies are once more in a position to meet credit
needs with the aid of the guarantee principle, i*f necessary. This does
not mean, of course, any interference with the important major functions
of the RFC in the wartime lending operations! whereby it and its subsidiaries like Defense Plant Corporation fill needs that private agencies
are not in a position to meet, but merely that when the need for it no
longer exists it should be liquidated like the HOLC.
S. 511 is merely a reapplicatiorx of the same basic approach with
a view to meeting the credit needs of small business after the war. It
would replace a direct lending provision in section 13b of the Federal Reserve Act, to which I have always been fundamentally opposed because this
provision, while it did not create a new governmental setup financed out of
public funds, authorized direct lending by the Federal Reserve Banks. In
actual operation, every effort was made to have private' lending institutions
make or participate in these loans under 13b. The most striking current example of the opposite principle is the Smaller War Plants Corporation, for
which Congress has authorized increasingly large amounts of capital that
must, of course, be raised through the budget.




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S. 511 repeals 13b. It authorizes the guarantee principle, as
in FHA financing or more particularly in the V and VT loans. The loans
would be made by private banks. To the extent that they make them without reliance upon the guarantee, so much the better. For borderline or
more risky loans, a guarantee in part, that is, up to 90 per cent, would
be available. But, as in the V and VT loans, the fee which the lending
banks would pay for the guarantee would increase with the percentage of
the loan guaranteed. Hence the inducement would exist for the banks to
assume as much of the risk as they felt they safely could do. No appropriation would be required from Congress since the fund originally provided
under section 13b, amounting to approximately 139 million dollars derived
from the gold increment, would be made available. This would permit upwards
of a half a billion to be loaned through this mechanism. It is my judgment
that many of the estimates of the amount of credit that will be needed by
small business after the war are grossly exaggerated and that this permissible total would adequately meet prospective needs* The loans, of course,
would be made by local banks to local people whom they know and with whose
character, capacity and reliability they would be familiar. Loans by
governmental institutions unfamiliar with local conditions are a very
different matter. It goes without saying that there can be no justification
for giving easy governmental credit to competitors of existing and established
small businesses who have relied upon private credit and who could not compete against what in effect would be governmentally subsidized newcomers in
the field.
The Wagner-Spence Bill, if enacted, would serve an all important
need in the reconversion period by bridging the gap between termination (VT)
loans and those needed especially by smaller business enterprise to acquire
plant, machinery, inventory, etc,, that otherwise would be taken over and
disposed of by the appropriate surplus disposal agencies. As you know, the
V loan program enabled the Reserve Banks to act as guarantors for the Army,
Navy and Maritime Comirp.ssion in war production loans made by private banks
to war contractors and subcontractors. Similarly, the so-called VT program
was developed to finance contract cancellation pending settlement by the
Government. Mien settlement is made, the money has to be applied to the VT
loan, and the Army, Navy and Maritime Commission have no further authority
whereby loans that will then be needed to finance purchase of surplus
property could be guaranteed* The Wagner-Spence Bill would supply this
deficiency, and would greatly facilitate and simplify disposal of surplus
property. War contractors and subcontractors desiring to acquire governmentowned plant, machinery, inventory, etc., would be enabled to finance such
purchases through the same channels using the same guarantee mechanism with
which they are familiar, and the Government's interest would be safeguarded
as it has been in the V and VT loans. Contractors in possession of surplus
property would be able to negotiate for purchase at the time of contract
settlement, thus avoiding delay, expense and other complications that would
arise if the property had to be removed and disposed of elsewhere»
That, in substance, is about all there is to the matter. It is by
no means complex, nor does it introduce any tiling novel. This basic principle, as exemplified in the HiA mortgages or in the V loan program, has been




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generally approved, certainly it has not been subject to criticism, by
the public or the Congress as direct Government lending so often is. It
will become increasingly subject to criticism, I venture to say, after the
war when the Congress will be under pressures to scrutinize more closely
the costs of Government and the taxes necessary to meet them.
The Wagner-Spence Bill as first introduced contained no limita^
tion on the percentage of the loan that could be guaranteed, or on the life
of the authority, or on the amount of guarantees that might be outstanding.
The bill in its present form differs from the original one in that limitations were introduced at my request to meet criticisms. It was intended,
however, to provide by regulation that not over 90 per cent of a loan
would be guaranteed, since if a bank is not willing to assume 10 per cent
of the risk, the loan doubtless should not be made at all. It would be my
idea to have liberal provisions by regulation so that loans would be for
as long as possibly ten years and be on an amortized basis.
I feel very strongly that the bill would be valuable in getting
private credit flowing without expanding public credit or without competitive governmental lending. It will enable the banker to make loans
too risky for him to make otherwise. It will put him in a position where
he has some chance of competing with direct governmental lending operations,
if they should not be discouraged or prevented by Congress.
While it is somewhat a repetition, I am citing below a summary of
arguments for the bill that I embodied in my testimony and in a letter to
Chairman Murray of the Senate Special Committee to Study Problems of
American Small Business:
"The bill would encourage a greater flow of funds from
the private banking and credit system into those marginal
credit risks which banks would not assume without a guarantee.
"All loans would originate with banks or other private
financing institutions. Amounts, terms, collateral and other
details of proposed loans would be worked out between the borrower and the financing institution to which he applies. Thus
the operation of the plan would be decentralized throughout
the United States.
"Credit extensions in the marginal area of risk would be
encouraged by guarantees up to 90 per cent of those loans on
which banks may desire guarantees. The lender would share in
the risk to the extent of 10 per cent or more, which would be
a sufficient exposure to prevent lending institutions from involving the guarantee fund in careless or excessive credit
hazardsf
"No new appropriation would be required» An appropriation
made by Congress in 193b, amounting to $139,000,000, would be
adequate to guarantee a total of more than $500,000,000 of loans
outstanding at any one time.



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"The benefits of the guarantee would go primarily to the
smaller units of business and industry. For the small businesses that are regarded by bankers as marginal or debatable
credit risks, the guarantee would be the decisive factor in
establishing their credit. Term lending, in which the risk
factor is generally higher, would be especially encouraged.
"The plan would be administered by experienced personnel
in the Federal Reserve Banks who are administering the V^-loan
and T-loan programs, a similar credit mechanism. Financing
institutions are already familiar with services of the Federal
Reserve Banks in this field. Thus no new personnel, controls
over banking, or untried activities or principles, are in-»
volved.
"Finally, no competition between direct Government lend"
ing and the private credit system would be involved. On the
contrary, the guarantee plan would encourage the existing
private system to extend credit which otherwise might be
furnished by the Government or not at all. The trend toward
multiplication of Government credit agencies, if continued,
may threaten the destruction of the private banking system.ff
The foregoing summarizes in general my view so far as the
credit problem affecting small business is concerned. The question
of providing equity capital presents a different problem that I think
can be most effectively met by special benefits extended through the
tax structure.
I am having this letter mimeographed and am enclosing copies
for your convenience since you indicated that you might wish to send
them to members of the Advisory Board.
I shall be happy*to furnish any further information that you
may desire at any time.




Sincerely yours,
(Signed) M. S. Eccles.
M. S. Eccles,
Chai rman.

OFFICE OF WAR MOBILIZATION AND RECONVERSION

Advisory Board
Room 12Ó1-B
Lafayette Building

March 15, 19U5

Bon. Marriner S. Socles
Chairman, Board of Governors
Federal Reserve System
Washington 25, D. C.
Dear Chairman Eocles:
Let me thank you for your very lucid statement on the
loan guarantee proposal to stimulate private enterprise through
a mobilisation of private banking resources.
Our conference with you on this matter shortly after the
first of the year was very profitable to us, and I note that
changes in the legislation as now introduced do not alter the
basic features of the original proposal.
We are distributing the mimeographed copies of the letter
to our members. If they wish to study the details of the proposed
program further, I shall feel free to accept your kind offer to
furnish additional information.




Sincerely yours,
(Signed)

0. Max Gardner.

0. MAX GARDNER
Chairman, Advisory Board
Office of War Mobilisation and Reconversion.