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o M m I A A ^ ¿ c d , o ^ e ^ M e e ^ F E D E R A L R E S E R V E BANK OF ATLANTA September 8, 1944 PRESIDENT Mr. Ronald Ransom, Vice Chairman Board of Governors of the Federal Reserve System Washington 25, D. C. Dear Governor Ransom: For your information I am enclosing copy of a resolution adopted by the Georgia Bankers Association at an extra convention held in Atlanta September 4* As usual, this convention was dominated by a minority group, and members of the Association who did not agree with the speakers, and did not approve the resolution, did not say a word. It may be interesting, however, to note that after the adjournment of the convention several of the members of the Association visited the Smaller War Plants Corporation office for the purpose of obtaining commitments or guarantees of loans. You will note that Bob Hanes and Walter French v/ere the out-of-town speakers, and while Bob Hanes carried out his assignment by opposing all Government lending agencies he was not nearly as violent as French who devoted most of his talk to denouncing the Murray Bill, which he referred to as "the Eccles Bill", and who made frequent references to Mr. Eccles1 testimony during the recent hearing on the Bill. Just to be contrary, among other reasons, I asked that the Federal Reserve Bank's vote as a member of the Association be recorded as opposing the resolution as, otherwise, the record would have shown that the vote was unanimous even though not more than 20 to 25 per cent of the members of the Association present actually voted. Very truly yours, Enclosure -1 W. S. McLarin,Jr., President VICTORY UNITED STATES kVINGS ONDS POST-V&R SMALL BUSINESS CREDIT CONVENTION GEORGIA BANKERS ASSOCIATION Atlanta, September 4, 1944 RESOLUTIONS ADOPTED RESOLVED: That the appreciation of this convention be expressed to . the Georgia Bankers Association and to its president David Arnold for taking the initiative in calling this extra convention at this opportune time and as an example for the whole United States to follow, and be it further RESOLVED: That the thanks of this gathering be expressed to the chairman of the P0st-YJar Snail Business Credit Commission, Mr. Robert M. Hanes and to the Deputy Kanager of the American Bankers Association, Mr. Yialter B. French, to llessrs. Young and Lewis, members of the commission, and to Mr. Herman; Jones for their forceful presentation of their respective subjects, and be it further RESOIVED: That this extraordinary convention go on record in approval J of the arguments advanced against future participation of the govern-.L ment in the business of making, insuring, guaranteeing loans in any / form; more particularly the l/Mrray Bill, the Taft Bill and the bill I proposing to vest the federal Reserve System with the po-wer of \ guaranteeing loans, and be it further J RESOLVED: That the banks of Georgia hereby again pledge themselves to fulfill all legitimate demands for credit by competent persons, firms, and corporations, and be it further RESOLVED: That this now declaration of policy confirms the attitude and position that banks have long occupied for granting and seeking all legitimate applications for credit; we hereby deplore the exaggerated form that has been imputed to the unfilled demand for credit, and be it further RESOLVED: That copies of this resolution be transmitted to Georgia's senators and representatives in Congress with the urgent request that they use overy effort to defeat any present mea ures and forestall any future measures looking to the further socialization of credit. Respectfully submitted, Y/illis Johnson, chairman, A # A # McCurry, Lec Hudson, Carl Floyd—Committee S e c r e t a r y p i f l of R O B E R T V. F L E M I N G CHARLES P R E S I D E N T A N D CHAIRMAN O F THE B O A R D C. GLOVER, JR. VICE CHAIRMAN O F THE BOARD ÄteJjtttgimt,B.Ol POSTAL ZONE 13 September 13, 1944 IN R E P L Y I N G P L E A S E Q U O T E Honorable Marriner S. Iccles, Chairman, Board of Governors of the Federal Reserve System, Washington, D. C. INITIALS P E R S O N A L Dear Marriner: Referring to our recent telephone conversation relative to the speech made by Walter French, Deputy Manager of the American Bankers Association, before the Convention of the Georgia Bankers Association on September 4-th, as you know, I talked with Hal Stonier on this subject following the advices you received from the President of the Federal Reserve Bank of Atlanta. I have now received a copy of Walter French1 s address and I have also ascertained that he made no statements off the record beyond what is in the printed text of the address. Apparently, the President of the Federal Reserve Bank of Atlanta did not thoroughly understand what he had said, and while the speech, generally, is in opposition to the continuation of any guarantees by government, its references to you are rather complimentary. Secondly, there is no confusion with respect to stating that the Murray Bill is the Eccles Bill, as I understood from our telephone conversation. Personally, I am in favor of the Wagner Bill, as you know, but French's address was certainly within the framework of the resolution of the A.B.A. which was adopted, in my opinion, more on the grounds of long-range fundamentals than political considerations. address and I would appreciate your taking a few minutes to read this return it to me after it has served your purpose. Dr. Stonier has advised me that he knows the Association is going along with the nTn loan program and other proposals to settle the problems arising out of the war and the peace but, of course, unless the Association changes its policy in Chicago the standing resolution precludes endorsement of the Wagner and Spence Bills. I am hopeful that further consideration will be given this subject, with particular reference to the Wagner Bill approved by the Baruch-Hancock Report and yourself, at the forthcoming convention. qtfmro'g M l - m «TOT Address by Halter B. French, Deputy Manager, American Bankers Association, before special ne©ting of the Georgia Bankers Association, Atlanta, Georgia, September 1944 Curing the past year thinking leaders have often warned that if banking is to survive as a private enterprise, we oust get back into the risk business* During the past eleven years our concept of credit has changed. Because of the rapid changes in our economy, fro© the trying days of the early 1930' s following the bank holiday to the critical times of the present, with the country engaged in a global war, bank credit has sought weans and devices to protect itself. discouraging to the entrepreneur. Such a period is Venture capital is surrounded with all kinds of safeguards, waiting for a better day. Interest rates become lower and lower, and none but almost riskless loans are m&oe. Government enters the field of credit and competes further with private enterprise. It does this in the beginning because there is an apparent need for the additional credit. After the need has been met, the experience is that the government continues to supply the credit. Private credit cannot compete with government credit on a basis of either risk or rate| so various shcemes are developed to use private capital with government guaranties. Under this arrangement, the borrower enjoys the same low rate as when government credit is extended directly, and private capital is compensated for its share of the low rate by the elimination of most, if not all, of the risk. The con* tinuanoe of such a credit arrangement would be undesirable and would eventually destroy banking as we have known it in this country. Many students of the subject say that without a completely free banking system a country cannot have a system of free enterprise. To retain free enterprise in its broadest sense is the very reason we are at war today. That system is the only one ww Americans know* It is our very lifebloodj it is the incentive of competitive enterprise that has made us a great nation. We warnt get government out of private credit as quickly as is consistent with sound economic policy. That will not be an easy thing to do because ww soon lose sight of why the»« government credit agenoies were created and what particular job they vara organised to do. After tha job hat been finished, they become permanent fixtures. Sons part of oar economy always demands that they be allowed to continue to operate—business and agriculture, for example, because the credit appears to be cheap and in many cases easy to obtain. Certain groups in banking that are permitted to participate want to see these agencies continued because they eliminate most of the rick, if not all of it. If we would only take the time to think this thing through, we would soon see that the continuance end expansion of government credit agencies would eventually destroy our private credit system. Government must and should come to the aid of its economy when the need is there. After the need has b«?«n supplied or the crisis is over, government should withdraw from private business and go back to running tha government. If it is determined fey responsible, unbiased authority that these government credit Agencies are still needed, they should at least be required to operate on a self-sustaining basis. As a general rule, subsidised credit eneourages a form of competition that is unfair to legitimate business. By legitimate business is meant business that pays its own way and asks favors from no one* Already demand is being made in so^a quarters that the V loan principle be continued after the war. The numbing effect of no risk would lead to a decadent credit system, for we cannot have healthy business without a strong, unmolested flow of private credit, le must have borrowers who are willing to pay for money at rates commensurate with the risk they offer and private lenders who are ready and willing to assume the risk. That favorable situation, so necessary to our eoonoay, cannot be brought about as long as we have government competition in the credit field, either on a direct basis or through guaranties. After every financial crisis similar to the one we experienced in 1932 and the subsequent years of depression, reforms are instituted which are often toe rigid, towevar ooaaendable the original motives, the restrictions must be relaxed when they interfere with ven tur« ospitai &nd haaper the eoonoay, Expedienta, »neh ut govern— aent credit guarentiee and active participation by the goveraumt in the credit field, are enoouraged. Such expedienta are far acre hartaful than the originai situa tion. A H «ree it involvea aooe riak, and when we try to a&ke it riskleea by varioua devi ce», «e are atteapting the iapoeeible and at the aaoe tiaa iapeding the progress and orderly developnent of private enterpriae. Although thia prohiba ha & been a ¡setter of great oonoern to private credit aouroes in reoent years, Dothla| »ora than recognition of the problea ase possible beoeuae ve are a nation at «*r. the uain funoticns of governaent during an eaergency period are regula tlon, tasca tion, and control«—the v»ry antithesis of the prerequisites to free enterpriae. The banking aya tea la uaed to the fulllin eaeiating the governaent in ita ver prograa. Eightjjr per cent of ali governa«»t bon^a held by individuala bave been «old through the haiika. Banka are an assentisi pert. of the re tioning prograa. Banking unita bave been «et un in handreds of contee tee! war production areaa to handle the banking neeca of m x industri and workera. Tlte suooo^aful prosecution of the ver stili takea « «ajor part cf our tiae and it ahould, un til the var ia succesafully conciuded. But at the end of the war, ehat? Should governaent, with a terrific debt prob» ebly reaehir.g ohree hundred billlon dollars, be expectetì to continue eaeualng the riaka of buaineaa and banking? The A £ socia tion expreeaed itaelf on tuia point last gepteaber by the following pronounoeaent on a revolution that had been adopted: Banking has aade an iapreaaive volume of ver production Ioana under guaran tiea, aad a suba tan tially equivalen t voltine of ita ovn reaponsibility. We noe declare our belief that governaent Ioana or the guarente of Ioana la noi crtiy unneoeasery for the financing of poat-aer coaaercial enterpriae, but is actually contrary to sound finaneial pollagr and the beat in ter« sta of the Aaerioan zemaersy, If the whole field of credit is surveyed in an atteapt to anticipate deaends that «111 be «ade upon it after the eer by both conauater and produeer, aost inforaed persona «ili egree that adequate credit «ili be available froa private sourees and that there «ili be no credit problea. Aaple credit «ili be available for the eeneuaer. Nino thousand bunks have indicated that tiny will sake this type of credit avallabla N after the war. Big business «ill have no credit probleaj many sources are available to tbea. Small Business should hare no credit problea after the war, and yet that is the one group that is getting special attention fro« federal legislators and governsent bureaus which want to s*e government expend its activities in the field of private credit* The credit needed by legitimate small enterprise has always been provided by the private credit systea of this country but now certain groups in Congress, in both •a J or political parties, are asking a bid for the favors of small business. This is Indicated by legislation which has been introduced over the past few ¡aonths, for example, 8* 1918, introduced by Senator Wagner) S. 1777, introduced by Senator Taftj and 8« 1913» introduced by Senator Hurray, 8. 1918» introduced by Senator Wagner, which is favored by Governor Ecoles of the Federal Reserve Board, would continue the V loan guaranty principle by enabling the Federal Reserve banks to guarantee loans asde by banks and other financing institutions to business. If we are to conform with the policy of the Association as expressed in the resolution passed last September, the Itagner Bill, and all similar bill* must be opposed. Last week X had the opportunity of attending the hearings in both the Senate and the House on the legner Bill, Governor Socles was the only witness at both hearings sad he advocated the passage of the bill. He did an able job and presented a strong Sefore hefeeganhis formai testiaooy, he offered a number of anendmenta te the Bill in ita present forra, whioh mede his case even stronger. The se aaendmcats would eliminate about ali of the objections te the bill exoept the all-taportamt one— the principio of goverament guaranty of private credit. Briefly, the anendmente vere te liait the aggregate of guaranty to four times the paid-in capital, which would giva the Federai Reserve Board a total guaranty fund of about 1600,000,000. Str. Socie» suggested inoluding a ceiling of 5 per cent to fix the aaxlima rate that aey be eharged* Ha suggested that the life of this guaranty fund be Halted to five year», that the activity then be terminated and all monies be turned over to the United States Treasury, [ One aspect of this proposal which Congress would probably like Is that It oalls for no new appropriation. The capital of #139,000,000 is already provided for and the Treasury ic authorized to pay up to this amount to the Federal Reserve banks for loans they were to make to business and induutry under Section ljb of the Federal Reserve Act, and never did. The bill has one other feature that differs from all other similar measures in that it prohibits any loans being made direct by the Federal Reserve System. All loans must originate in banks and other financing agencies and the mailwam limit of the guaranty is set at 90 per cent of the loan. As I say, the amendments overcome just about every objection except the most Important one of permitting a principle to expand that may prove to be the opiate that will put private bank credit Into a state of impo ten ay forever. Give the banks of «•¡»H.I.—-P|..|||.|I.| I la..' ' n•' -m- —mm • Jfi this country five years under a government guaranty system and many of them will demand it forever* FHA Title Z modernisation loans are a good example. The great majority of banks could have assumed these risks without insurance of any kind and made money« The point was also made that this bill would carry the • and ¥T principle into the post-mar years and emphasis was placed on how well the V loan Idea has wwrked. In ray judgment, there are two things wrong with this argument. First, the V loan was a necessary war emergency measure because loans were made by banks in amounts that were far above their lending limits and to borrowers in amounts all out ef proportion to their own equity. These loans were in reality credit granted by the United State« Government to business, and the use of the credit mas facilitated by the credit machinery of the nation's banks. In all of this operation it must be remembered that the bill is being yaid by one source, the United States Government. It must aIcq be remembered that, although the figure» cm V loans, with commit- ments of over 6 billion dollars and actual loans outstanding of over 2 billion dollars, look impressive, almost all of this was done by the 500 largest banks. Over 14,000 banks in this country have made no V loans, and yet all of them h&ve made some loans for war production on an unguaranteed basis. The 500 largest banks, as a matter of fact, had outstandings of war production loans on an unguaranteed basis, last December 31, of 1 billion 500 million dollars. 9o, the 7 loan experience is not a good reason for continuing a principle foreign to a private credit system. That operation was created for a specific mroose (¡hiring a national emergency and, when that emergency Is over, every emergency measure that was necessary during that ctitioml period that Interferes with the system of private enterprise should be discarded. During *r. Scales' testimony on the Itagner Bill the frequently brought cut In both hearings that £. 1918 and its companion bill ere necessary if banks are to avoid j bank examiner»1 criticism on the loans they will be obliged to make in the post-war period. If we were out to make bad loans, that <?lght be a good argument, but the day the banks of this country make bad loans or encourage unsound risks, on that day the i very purpose of our Post-war Snail Business Credit Commission has been defeated. If 1 the purpose cf this criticism is to dictate the terms and conditions under which loans j I will be made, then I think both Mr, Crowley and Comptroller Delano should Issue statements to their examiners on th& subject. Both of theee gwntlenen heve expressed themselves on this phase of the problem. • In the annual report of the FDIC lest year, nr. Crowley said: One of the chief objectives of bank management and bank supervision must be the uninterrupted operation of banks able and willing to bear the risks inherent in the provision of credit. Shile risks can be Xept low by the adoption of standards which have been shown by experience to provide reasonable aseurrnee of fulfillment of obligations, such standards most be conceived of in terns of the requirements and capacities of business. The/ m e t be adapted to changes in the business structure and in business methods, otherwise business will have to seek increasing proportions cf its credit elsewhere than at the banks. It is lnoortant, therefore, either that banks maintain adequate capital margins and provide ** k Ti * ree«*rv»s on a ragular basis for the losses inherent in the financing of business and agriculture, or that they provide tone means of transferring risks to others. Coaptroller Delano, in his annual report to Congress dated August 15 last, saidt lb* The formation of credit pools to facilitate tera loans to business and an active campaign by the American Bankers Association for the education of its neabers in their spproech to problems of transition are heel thy signs of determination to aeet the issue. . • • Adding that the banks will have the responsibility of prudently handling the assets in which the deposits are invested and by the purchase of which they were largely created, Comptroller Delano eontinuedi But the major responsibility of the banking ays ten, once the eeonosy is released fro» the bondage of war, will be the search for lending opportunity in a society i'o free enterprise and personal initiative. • • • It is consistent with all the rules of good credit practice to advance credit under terms and conditions that can be set by the borrower, whose willingness and ability to meet those conditions have satisfied you^, rather than to accept short term paper with some undisclosed renewal seheas just to circumvent the objections of an uninformed examiner. Both the Comptroller of the Currency and the Chairman of the Federal Deposit Znsuramee Corporation, as heads of the two largest supervising groups, can correct this situation speedily. It seems ridiculous to have a good loan on your books and, in order to have a bank examiner agree with your judgment, find it necessary to go into partnership with some government credit agency. The experi- ence we have had with small business loans in our instalment loan departments is proof enough of how much wore satisfactory it is to both business and banking to apply the term loea principle to loans when the application for credit indioates that such a procedure is desirable. Of the other two bills so far introduced, the Taft Bill, S. 1777, would set up a division in the Department of Commerce not only to guarantee loans asde to small business by banks and other financial institutions but also to supply equity capital in the fore of eoasaon end preferred stock. It is rather difficult to follow the line of reasoning that advocates this type of measure with the argument that it is designed to »»•• individual enterprise when the government, by reason of the money it invests, is a substantial part-owner. It seeas obvious that you cannot go into business partnership with the government sad retain the freedom necessary to individual enterprise. S. 1913, the Murray Bill, seeks *ot only to prolong the life of the Smaller War Plants Corporation but actually to expand its facilities. to the private credit system of this country. That is the rial threat Recent material issued by this govern- / sent corporation offers to do just/everything for small business except provide capable management and assure profits. The billion dollar oapital which 8. 1913 would provide for the Small Business Corporation, if it should become law, would sake it by far the largest credit agency in the oountry. This huge corporation is i advocated solely for the credit needs of small business. If we are to maintain the benefits of our economy, we need small business, lots of saall business. But we need small business in its true, legitimate form—enterprise that creates for itself, starting from a saall beginning and growing stronghealthy business growth that cones from experience and capable aanagement. The worst possible competition for legitimate small business would be competition from business operated by any credit agency that attempts to create small business by the siaple process of handing out money and credit. Under such a scheme aanagement could not possibly be tested or tried, which is absolutely necessary if great damage is not to be done to our ecofuwy. Any agency that makes possible easy credit on long terms would be unfair to legitimate business beoeuse it would place aoney in the hands of some «ho are not capable of good aanagement. An agency that would «apply the buildings sad machines to a new business cn any free and easy basis would take away froa enterprise the chief reward of good business judgment. Small business wiiieh begins on a •shoestring" and does a little better year after year, making money during good times end surviving bad times, is what wakes American business the important influence SWG^MwS'^Pf ft»'it is in our eeonosgr. Competitive enterprise 1« difficult enough under fair end legitimate conditions. Under such a system the weaklings eventually are removed from competition, Tbsy either have sense enough to give up themselves or they ere forced into bankruptcy. Those businesses which survive do so because they have demonstrated by actual experience that they can successfully meet and overcome the risks involved. All business must have private credit available always or In most cases it cannot survive. The credit needs of sound business must be supplied and should be supplied by the private credit system. If any credit agency is permitted to develop that will make loans on any but a sound basis, that will make money available to incompetents with little regard for those already in the field, that will be the end of small business in America. As one industrialist recently put It, "Be can meet any kind of competition in ay business but bankrupt competition.* So legitimate business can. The question to be determined very soon Is whether the credit and capital available In this country are ample for the needs of business. Recent surveys indicate that they arc more than adequate, and further that those who have the responsibility of making this credit and capital available to business are ready, willing, and anxious to do so. In order to bring about a more favorable situation, some new legislation 1* needed—not legislation that would create more government credit &geneies but legislation that would encourage available capital and credit to seek their proper markets. Tee changes In existing laws should be made very soon—modification of the SBC regulations so that capital for small businesses can be made available without making It necessary to go through all the formality of the larger set-ups, and modification of income tax laws as they apply to business, especially small business. The incentive to invest money and do business 1« profit. Small business especially should be permitted to make a good profit. The two legislative chsnges suggested would encourage legitimate small business, not subsidised incompetence sustained by a free and easy credit corporation. Whatever any ba the needs of business enterprise, both auail and large, efter the ear, aoney and credit are available ¿roa private sources in amounts far greater than «111 be needed. There ia only oue serious problem facing the private «redit field not only after the war, but no« and alea?*, and that is the interference «Ith its nomai functions by government restraints and governaent agencies* September 15, 1944 Confidential Mr. W. S. McLarin, Jr., President, Federal Reserve Bank of Atlanta, Atlanta 3, Georgia. Dear Mae: I talked to you on the telephone yesterday in regard to your letter of September 8, particularly with respect to Walter French's talk before the Georgia Bankers Association. On its receipt, I showed your letter to Mr. Eccles, and he shared my feeling and yours that these people were going rather far out of their way in attacking a legislative proposal, which, incidentally, is not •the Eccles B U I 8 but technically the Wagncr-Spence Bill. Of course, it is true that Mr. Lccles supported the proposal, because he is in favor of it, as am I. In the meantime, as I told you, Haynes McFadden had been in on a personal matter. He had been disturbed about Walter French's Atlanta talk and had told French so. He felt that it was not what he called a "constructive" discussion. After reading your letter, Mr. Eccles took the matter up with Mr. Robert V. Fleeing, because of his past association with the American Bankers Association and also because he was iaraediately available. I am enclosing - for your own persons! information - a personal letter under date of September 15, 1944 from Mr. Fleming to Mr. Eccles, which I will greatly appreciate your treating as confidential and returning to me after you have read it. I am also enclosing the text of Walter French's Atlanta speech. If you could get a transcript of what he said in Atlanta, it would be interesting to compare the two. However, Haynes McFadden felt, after looking over the enclosed text, that Walter French apparently stuck pretty close to his prepared speech. His prepared speech doe8 not impress me very favorably and, as you said to me on the telephone last evening, emphasis and manner of delivery could play a large part in the impression you and others would gain from hearing him speak. For your own information, the Surplus Property Act (H.R. 5125) contains the following provision in Section 14(f): F F "The Smaller War Plants Corporation ia hereby authorised, for the purpose of carrying out the objectives of this section, to make or guarantee loans to small business enterprises in connection with the acquisition, conversion, and operation of plants and facilities, and, in cooperation with the disposal agencies, to arrange for sales of surplus property to small business concerns on credit or time bases." Apparently, this language is broad enough to cover almost anything. It passed the Senate and we understand this provision has been approved by the conferees. Undoubtedly, with this increased authority, the Smaller War Plants Corporation will have no difficulty in getting an appropriation for an increased capitalisation and, as a matter of fact, a bill providing |200 million additional capital has already passed the Senate and is pending in the House. With this type of threat hanging over the bankers' heads, they are certainly foolish in not supporting the Wagner-Spence bill and in criticising a sincere and an intelligent effort to provide something that may contribute to maintaining the banking system and eliminating corcpetition of Government agencies. After you have read the enclosed text of Walter French1 s speech, please also return it with your comments. Sincerely, Enclosures 2 RRjac FULE F E D E R A L R E S E R V E BANK OFFICE OF ATLANTA OF P R E S I D E N T September 30, 1944 Mr. Ronald Ransom, Vice Chairman Board of Governors of the Federal Reserve System Washington 25, D. C. Dear Governor Ransom: I am returning herewith the letter addressed to you by Mr. Fleming and the copy of Mr. French1s address referred to by Mr. Fleming. I have read the prepared address carefully and while I am positive that Mr. French departed considerably from the prepared address in his speech here, particularly in his discussion of the Wagner Bill, as well as the Murray Bill, I cannot remember exactly where and how his conaments differed from the prepared speech. While I have been informed there is no stenographic record of his speech,I will make further inquiry and if I find there is a copy in existence I will obtain one and send it to you. Very truly yours, Enclosures iyiCTORY BUY UNITED STATES IRVINGS DNDS BAND STUMPS W. 's'^i^ President
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