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BOARD OF GOVERNORS
OF

THE

FEDERAL RESERVE SYSTEM

Office Correspondence
To

Governor Eccles

Frnm

Mr. Hackley

pate Apm 19,1951
Subject; M a t e r i a l w i t h r e s p e c t t o
testimony on RFC

I n accordance w i t h y o u r telephone c o n v e r s a t i o n w i t h
M r . Vest on A p r i l 17, we have prepared s e v e r a l b r i e f documents w i t h
respect t o c e r t a i n p o i n t s as t o which we understand t h a t yon wished
some i n f o r m a t i o n . These documents which a r e a t t a c h e d i n c l u d e (1) a
d i g e s t o f the pending RFC b i H s , (2) summaries o f t h e views o f Senator
F u l b r i g h t and c e r t a i n o t h e r Senators r e g a r d i n g t h e RFC, (3) a summary
o f the statement made by M r . C o s g r i f f b e f o r e t h e Senate Committee on
Expenditures, (4-) a statement as t o t h e substance and h i s t o r y o f some
previous l e g i s l a t i v e proposals w i t h r e s p e c t t o business l o a n s , and
(5) a g e n e r a l statement o f t h e reasons why t h e d i r e c t l e n d i n g a u t h o r i t y
o f t h e RFC should be d i s c o n t i n u e d *
I understand t h a t t h e Research D i v i s i o n i s now working on
a d r a f t o f a statement f o r you and I am sending Miss B u r r copies o f
t h e above documents f o r h e r i n f o r m a t i o n and f o r such use as she may
t h i n k d e s i r a b l e i n connection w i t h t h e statement*
I am a l s o a t t a c h i n g a b r i e f memorandum c a l l i n g a t t e n t i o n t o
one i m p o r t a n t respect i n which t h e p r e s e n t V - l o a n program i s n o t meeti n g c e r t a i n f i n a n c i n g needs o f defense c o n t r a c t o r s .
I s h a l l be v e r y g l a d t o t a l k w i t h you about these documents
a t any t i m e and t o f u r n i s h any o t h e r a s s i s t a n c e which you may need.

Attachments




FENDING RFC LEGISLATION
Several b i l l s have been i n t r o d u c e d i n the 82nd Congress
which d i r e c t l y a f f e c t the RFC* I n c l u d e d among these are the f o l l o w i n g :
St 515 i n t r o d u c e d by Senator F u l b r i g h t * T h i s b i l l would
s u b s t i t u t e a governor f o r the board o f d i r e c t o r s ( t h i s has a l r e a d y been
accomplished by t h e P r e s i d e n t ' s Reorganization Plan No* ! ) •
The basic
l e n d i n g a u t h o r i t y o f the C o r p o r a t i o n would n o t be changed* I t would
continue t o have a u t h o r i t y t o make loans d i r e c t l y o r i n p a r t i c i p a t i o n
w i t h banks t o ( 1 ) business e n t e r p r i s e s , (2) f i n a n c i a l i n s t i t u t i o n s ,
(3) p u b l i c agencies, and (1*) as may be r e q u i r e d by catastrophes* The
governor would be r e q u i r e d t o pass p e r s o n a l l y on loans o f $100,000 and
over* The a u t h o r i t y o f the C o r p o r a t i o n t o borrow i t s funds f r o m the
Treasury would be t e r m i n a t e d and funds would be s u p p l i e d by d i r e c t
a p p r o p r i a t i o n which would be used as a r e v o l v i n g f u n d and on which
annual payments would be r e q u i r e d c o v e r i n g costs i n c u r r e d by t h e Government i n supplying the f u n d s . The C o r p o r a t i o n would be r e q u i r e d t o pay
o u t o f t h i s a p p r o p r i a t i o n a l l i t s e x i s t i n g indebtedness t o the Treasury,
r e t i r e i t s c a p i t a l stock and pay i n t o the Treasury the funds r e p r e s e n t i n g accumulated p r o f i t s which are now being used i n t e r e s t f r e e * Other
p r o v i s i o n s are g e n e r a l l y d i r e c t e d toward i n s u r i n g t h a t the C o r p o r a t i o n
operate on a s e l f - s u s t a i n i n g b a s i s *
S* 5 l U i n t r o d u c e d by Senator F u l b r i g h t would merely s u b s t i t u t e
a governor f o r the p r e s e n t board ( a l r e a d y accomplished by the P r e s i d e n t s
Reorganization Plan No* 1 ) *
S* J* Res* I J i n t r o d u c e d by Senator Kem which p r o v i d e s f o r the
4U
t e r m i n a t i o n o f t h e powers and succession o f t h e RFC*
S* l l l 6 i n t r o d u c e d by Senator Byrd f o r h i m s e l f , Senators
Ferguson and W i l l i a m s p r o v i d e s f o r the d i s s o l u t i o n o f the RFC and the
t r a n s f e r o f the r u b b e r , t i n , and abaca programs t o the O f f i c e o f Defense
Mobilization*
S. 1123 i n t r o d u c e d by Senator B r i c k e r would amend s e c t i o n 302
o f the Defense P r o d u c t i o n A c t o f 1950 t o a u t h o r i z e the P r e s i d e n t t o
p r o v i d e f o r p a r t i c i p a t i o n s i n and guarantees o f l o a n s made t o p r i v a t e
business e n t e r p r i s e s f o r n a t i o n a l defense purposes* The b i l l would
t r a n s f e r t h e r u b b e r , t i n , and abaca programs f r o m the RFC t o the
S e c r e t a r y o f Commerce and the powers o f the RFC would be t e r m i n a t e d as
o f June 30, 19$1*

U/18/51




VHMS OF CERTAIN SENATORS REGARDING RFC
The f o l l o w i n g b r i e f summaries o f the views o f c e r t a i n
Senators w i t h r e s p e c t t o RFC are based on statements made b y them
d u r i n g the h e a l i n g s on the P r e s i d e n t s RFC R e o r g a n i z a t i o n Plan
h e l d before t h e Senate Committee on Expenditures i n t h e Executive
Departments on March 2 1 and 22 and A p r i l 3 , 19f£U
Senator F u l b r i g h t
Senator F u l b r i g h t agreed w i t h t h e P r e s i d e n t ' s p r o p o s a l f o r
t h e s u b s t i t u t i o n o f a s i n g l e A d m i n i s t r a t o r f o r t h e RFC board o f
d i r e c t o r s . A l i k e p r o p o s a l had been i n c l u d e d i n t h e S e n a t o r ' s b i l l
(S. 5>1£) t o amend the RFC A c t . He a l s o agreed w i t h t h e P r e s i d e n t ' s
p r o p o s a l f o r e s t a b l i s h i n g a P o l i c y Loan Board, b u t f e l t t h a t i t would
be d e s i r a b l e f o r t h e Chairman o f the Board o f Governors o f the Federal
Reserve System t o be a member o f t h a t Board.
m t h r e s p e c t t o the f u n c t i o n s o f the RFC, Senator F u l b r i g h t
s t a t e d t h a t , i f the RFC i s t o be c o n t i n u e d a t a l l , " t h e c e n t r a l t h i n g
i n c o n t r o v e r s y , as I see i t , i s whether o r n o t t h e agency w i l l continue
t h e f u n c t i o n o f d i r e c t l e n d i n g t o business 11 • He s t a t e d t h a t a f t e r due
study he was somewhat i n c l i n e d t o f a v o r t h e development o f a system o f
guarantees s i m i l a r t o FHA guarantees, and t h a t he had doubts about
whether the RFC should continue t o have a u t h o r i t y t o make d i r e c t
business loans i n peacetime. He r e f e r r e d , however, t o the f a c t t h a t
RFC now has c e r t a i n f u n c t i o n s i n making defense loans under t h e Defense
Production Act.
W i t h r e s p e c t t o whether t h e r e i s any need f o r d i r e c t Government l o a n s i n normal t i m e s , Senator F u l b r i g h t i n d i c a t e d t h a t t h e r e are
two areas i n which commercial banks do n o t o r d i n a r i l y meet the c r e d i t
needs o f business:
(1) Long-term l o a n s ; and (2) loans t o new
businesses. Regarding the l a t t e r , he expressed the thought t h a t RFC
might p l a y a r e a l p a r t i n making c a p i t a l a v a i l a b l e f o r t h e s t a r t i n g
of small enterprises.
Senator Maybank
Senator Maybank s t a t e d t h a t he d i d n o t d e s i r e t o commit hims e l f p r i o r t o t h e hearings which the Banking and Currency Committee
would s h o r t l y b e g i n as t o whether o r not t h e RFC should be a b o l i s h e d
o r as t o whether o r n o t some s u b s t i t u t e p l a n should be p u t i n t o e f f e c t
under a new l a w which would l i m i t i t s a u t h o r i t y . He i s o f the o p i n i o n
t h a t l e g i s l a t i o n i s necessary even under the P r e s i d e n t ' s Reorganization
P l a n i n o r d e r t o strengthen i t s a d m i n i s t r a t i o n and r e s t r i c t t o a l a r g e
degree i t s l e n d i n g a u t h o r i t y . R e f e r r i n g s p e c i f i c a l l y t o t h e




-2Reorganization P l a n , he i n d i c a t e d h i s b e l i e f t h a t t h e P l a n was n o t
an answer t o t h e RFC problem b u t i s i n e f f e c t the l e s s e r o f two e v i l s .
Some o f h i s remarks p o i n t e d i n t h e d i r e c t i o n o f some o t h e r agency
t a k i n g over RFCS p r e s e n t a c t i v i t i e s on a standby b a s i s •
Senator Kem
Senator Kem opposes t h e P r e s i d e n t ' s R e o r g a n i z a t i o n P l a n and
f a v o r s the a b o l i t i o n o f the RFC f o r t h e f o l l o w i n g t h r e e reasons:
(1) BFC was i n t e n d e d t o be a temporary agency; (2) the dangerous
p o s s i b i l i t i e s o f f a v o r i t i s m and waste which might be even i n c r e a s e d
tinder a s i n g l e a d m i n i s t r a t o r ; and (3) the operations o f the RFC are
inflationary.
Senator B r i c k e r
Senator B r i c k e r opposed t h e P r e s i d e n t s RFC Reorganization
Plan because he f e l t t h a t i t would be a b a r r i e r t o c o n s i d e r a t i o n o f
pending l e g i s l a t i o n e i t h e r t o a b o l i s h t h e RFC o r t o change i t s
f u n c t i o n s and procedures.
Senator B r i c k e r f a v o r s the a b o l i t i o n of RFC. I f i t i s cont i n u e d , however, he i s 11 fundamentally opposed11 t o d i r e c t l e n d i n g b y
t h e Government except i n unusual t i m e s , and f e e l s t h a t the Defense
P r o d u c t i o n Act adequately takes care o f any p r e s e n t need f o r d i r e c t
l e n d i n g f o r defense purposes. He would f a v o r l i m i t i n g t h e l e n d i n g
a u t h o r i t y o f RFC t o p a r t i c i p a t i o n s w i t h p r i v a t e banks.
Senator Capehart
Senator Capehart opposed the P r e s i d e n t s RFC Reorganization
Plan because he was opposed t o a one-man A d m i n i s t r a t o r and becai se he
f e l t t h a t a d o p t i o n o f the P l a n would preclude c o n s i d e r a t i o n o f pending
RFC l e g i s l a t i o n .
He s t a t e d t h a t he d i d not t h i n k t h a t t h e RFC should be
100 p e r cent a b o l i s h e d " . However, he i n d i c a t e d t h a t i t might be
d e s i r a b l e t o l i m i t the l e n d i n g a u t h o r i t y o f RFC t o p a r t i c i p a t i o n w i t h
banks and e l i m i n a t e a u t h o r i t y f o r d i r e c t l o a n s . He f e e l s t h a t f a v o r i t i s m and i n f l u e n c e i n the RFC have r e s u l t e d f r o m t h e C o r p o r a t i o n s
a u t h o r i t y t o make d i r e c t loans and t h a t t h a t a u t h o r i t y , t h e r e f o r e ,
should be taken away.
fl

k-19-51




STATEMENT BX ME* WALTER E. COSGRIFF, DIRECTOR OP RFC,
Before Senate Committee on Expenditures on March 21, 1951

B r i e f l y , t h e p r i n c i p a l p o i n t s made b y Mr* C o s g r i f f i n h i s
statement were t h e f o l l o w i n g *
He f a v o r e d t h e P r e s i d e n t s RFC Reorganization Plan because
he f e l t t h a t i t would i n s u r e a " p e r i o d o f t r a n q u i l l i t y * 1 d u r i n g which
t h e RFC might be a b l e t o go f o r w a r d w i t h i t s o p e r a t i o n s w i t h r e s t o r e d
p u b l i c confidence*
I n support o f the c o n t i n u a t i o n o f RFC, he emphasized the f a c t
t h a t since i t s i n c e p t i o n t h e C o r p o r a t i o n has made about 600,000 loans
t o business o f which a t l e a s t nine o u t o f t e n i n number have been t o
s m a l l businesses*
W i t h respect t o the need f o r continuance o f RFC, he expressed
the o p i n i o n t h a t many banks are r e f u s i n g t o make sound loans and are
r e f e r r i n g them t o the RFC* He gave as h i s e x p l a n a t i o n o f t h i s s i t u a t i o n t h e f a c t t h a t t h e Government, through FHA and o t h e r guarantees,
has taken t h e r i s k out o f banking} the f a c t t h a t the banks have come
t o depend l a r g e l y f o r t h e i r p r o f i t s on h o l d i n g s o f Government bonds;
and the f a c t t h a t bank examiners t e n d t o c r i t i c i z e banks f o r making
what seem t o be r i s k y loans*
I n f u r t h e r defense o f RFC, Mr. C o s g r i f f enumerated a c t i o n s
which have been taken by the C o r p o r a t i o n since he became a d i r e c t o r i n
October 19$0$ i n c l u d i n g , among o t h e r t h i n g s , a requirement t h a t
borrowers agree n o t t o employ RFC personnel f o r a p e r i o d o f two years
a f t e r such personnel t e r m i n a t e t h e i r employment w i t h RFC, savings i n
a d m i n i s t r a t i v e expenses through r e o r g a n i z a t i o n , increase i n i n t e r e s t
r a t e s on RFC l o a n s , e t c *
W i t h r e s p e c t t o the use o f d i r e c t loans as d i s t i n g u i s h e d
from guarantees, he s t a t e d t h a t he f e l t t h a t guarantees o f l o a n s
are p r e f e r a b l e and t h a t g e n e r a l l y banks p r e f e r guarantees because
t h e y l i k e t o keep t h e i r customers* accounts*




PREVIOUS LEGISLATIVE PROPOSALS
FOR THE FINANCING OF BUSINESS ENTERPRISES

Guarantees by Federal Reserve Banks (S. IjOS)
I n 19k7* the Board recommended a b i l l (S. U08) t o amend
s e c t i o n 13b o f the F e d e r a l Reserve A c t . Under t h a t b i l l , t h e d i r e c t
l e n d i n g a u t h o r i t y o f t h e Reserve Banks would be e l i m i n a t e d . However,
the Reserve Banks would be a u t h o r i z e d t o guarantee c h a r t e r e d banking
i n s t i t u t i o n s a g a i n s t l o s s on loans t o business e n t e r p r i s e s w i t h
m a t u r i t i e s o f n o t more t h a n 10 y e a r s , p r o v i d e d the Reserve Bank i n
each case should be s a t i s f i e d t h a t the r e q u i r e d f i n a n c i a l assistance
c o u l d n o t be o b t a i n e d on a reasonable b a s i s from the u s u a l sources.
Guarantees b y the Reserve Banks c o u l d n o t exceed 90 p e r c e n t j and t h e
aggregate amount o f guarantees o u t s t a n d i n g a t any one time c o u l d n o t
exceed the combined s u r p l u s o f the Reserve Banks. I n a d d i t i o n , the
b i l l would have repealed the p r e s e n t a p p r o p r i a t i o n p r o v i s i o n s o f sect i o n 13b, thus r e l e a s i n g about $139,000,000 t o t h e Treasury f o r o t h e r
uses.
T h i s b i l l was f a v o r a b l y r e p o r t e d b y the Senate Banking and
Currency Committee on A p r i l 2 8 , 19U7* I n i t s r e p o r t , the Committee
p o i n t e d out t h a t the Reserve Banks would use t h e i r own funds i n maki n g guarantees so t h a t no d r a i n on t h e Federal budget would be i n v o l v e d
and t h a t , because o f the r e p e a l o f t h e a u t h o r i t y t o make d i r e c t l o a n s ,
the Federal Reserve Banks would n o t be p l a c e d i n c o m p e t i t i o n w i t h the
p r i v a t e banking system.
N a t i o n a l investment companies and insurance o f business loans
I n 1950, s e v e r a l b i l l s f o r t h e c r e a t i o n o f n a t i o n a l i n v e s t ment companies and insurance o f business loans were g i v e n c o n s i d e r a t i o n .
The p r i n c i p a l b i l l , the s o - c a l l e d Lucas-Spence B i l l (S. 362$), would
have p r o v i d e d f o r the insurance o f business l o a n s (Bimson Plan) b y
the S e c r e t a r y of Commerce and f o r the establishment o f n a t i o n a l i n v e s t ment companies, t o be organized and i n i t i a l l y c a p i t a l i z e d by the Fede r a l Reserve Banks, w i t h a u t h o r i t y t o p r o v i d e b o t h c r e d i t and e q u i t y
c a p i t a l t o business e n t e r p r i s e s . That b i l l would also have somewhat
l i b e r a l i z e d the l e n d i n g a u t h o r i t y o f the RFC.
A s i m i l a r b i l l , i n t r o d u c e d b y Senator O'Mahoney (S. 297$) >
would have p r o v i d e d f o r t h e establishment o f investment companies b y
t h e Federal Reserve Banks b u t would have g i v e n such companies a u t h o r i t y
t o i n s u r e business loans as w e l l as a u t h o r i t y t o p r o v i d e c r e d i t and
e q u i t y c a p i t a l t o business e n t e r p r i s e s .




-2A t hearings on these b i l l s before the Senate Banking and
Currency Committee, Chairman McCabe presented a statement on June 27,
1950, i n which he g e n e r a l l y endorsed t h e Lucas-Spence B i l l , except t h a t
he expressed p r e f e r e n c e f o r p l a c i n g t h e program o f i n s u r i n g business
l o a n s i n t h e proposed investment companies r a t h e r t h a n under t h e
Department o f Commerce*
I n t h e p r e s e n t Congress, Senator OfMahoney on A p r i l 1 2 ,
1 i n t r o d u c e d a b i l l (S* 1329) which i s s u b s t a n t i a l l y the same as
t h a t proposed by him i n 1950, under which investment companies would
be s e t up b y the Federal Reserve Banks w i t h a u t h o r i t y t o i n s u r e
business l o a n s , make d i r e c t loans o r guarantees, and p r o v i d e e q u i t y
c a p i t a l through the purchase o f stocks o f business e n t e r p r i s e s .
Defense P l a n t s C o r p o r a t i o n B i l l
The pending b i l l , S. 533, i n t r o d u c e d b y Senator Sparkman,
would create a 11 Small Defense P l a n t s Corporation* which would be
a u t h o r i z e d , among o t h e r t h i n g s , t o make loans t o s m a l l business concerns t o f i n a n c e the c o n s t r u c t i o n and expansion o f p l a n t s and f a c i l i t i e s and t h e a c q u i s i t i o n o f equipment and s u p p l i e s f o r defense o r
e s s e n t i a l c i v i l i a n purposes. Such loans c o u l d be made e i t h e r d i r e c t l y
or by p a r t i c i p a t i o n w i t h p r i v a t e lending i n s t i t u t i o n s *
The Board, on A p r i l 12, 1951, submitted t o the Budget Bureau
a d r a f t o f a r e p o r t on t h i s b i l l i n which i t i s s t a t e d t h a t the Board
b e l i e v e s t h a t the Government should a v o i d t h e c r e a t i o n o f a d d i t i o n a l
Government i n s t r u m e n t a l i t i e s f o r the purpose o f p r o v i d i n g c r e d i t , but
should u t i l i z e t o the g r e a t e s t e x t e n t p o s s i b l e the p r i v a t e c r e d i t
f a c i l i t i e s o f the country* I n t h e proposed r e p o r t , t h e Board a l s o
p o i n t s o u t t h a t i t i s i m p o r t a n t t h a t extensions o f Government c r e d i t
be i n harmony w i t h p r e s e n t measures t o combat i n f l a t i o n and t h a t the
number o f Government i n s t r u m e n t a l i t i e s a u t h o r i z e d t o extend c r e d i t
s h o u l d be kept t o a minimum*
Small, Business Coordinator
A b i l l i n t r o d u c e d b y Senator Maybank (S* 833) i n t h e present
Congress i s s u b s t a n t i a l l y s i m i l a r t o t h e Defense Plants C o r p o r a t i o n
b i l l i n t r o d u c e d b y Senator Sparkman, except t h a t i t would v e s t i n a
Small Business Coordinator i n the O f f i c e o f Defense M o b i l i z a t i o n the
powers i d i i c h would be v e s t e d i n t h e Defense P l a n t s C o r p o r a t i o n b y
t h e Sparkman b i l l * The Board has made a r e p o r t t o t h e Budget Bureau
on Senator Maybank1 s b i l l s u b s t a n t i a l l y s i m i l a r t o the Board's p r o posed r e p o r t on the Sparkman b i l l *

1*-19-51




ELIMINATION OF DIRECT LENDING AUTHORITY OF RFC
The RFC was created i n 1932 as an emergency agency f o r the
s p e c i f i c purpose o f a s s i s t i n g i n the r e h a b i l i t a t i o n o f t h e commercial
banks d u r i n g t h a t p e r i o d o f depression and bank f a i l u r e s . Somewhat
l a t e r , i t was g i v e n a u t h o r i t y t o provide business e n t e r p r i s e s w i t h
f i n a n c i a l assistance which they were then unable t o o b t a i n from the
u s u a l c r e d i t sources. The purposes f o r which the Corporation was
e s t a b l i s h e d have l o n g since ceased t o e x i s t . The banks o f the c o u n t r y
now have ample resources w i t h which t o meet the c r e d i t needs o f b u s i ness e n t e r p r i s e s ; and, indeed, there i s need now f o r the d i r e c t i o n
o f a l l governmental e f f o r t s toward c u r t a i l m e n t o f c r e d i t , p a r t i c u l a r l y
f u r t h e r extension o f Government c r e d i t . A c c o r d i n g l y , there seems no
sound reason why RFC should n o t be l i q u i d a t e d .
A t p r e s e n t , t h e RFC has o n l y t h r e e f u n c t i o n s o f any
s i g n i f i c a n c e and none o f these completely j u s t i f i e s i t s continued
e x i s t e n c e . I t s f u n c t i o n s i n a d m i n i s t e r i n g the r u b b e r , t i n , and abaca
programs might p r o p e r l y and l o g i c a l l y be t r a n s f e r r e d t o other e x i s t i n g Government agencies. I t s r o l e under the Defense Production A c t ,
i n connection w i t h the making o f defense l o a n s , i s l a r g e l y t h a t o f an
agent and could be c a r r i e d out i n o t h e r and perhaps more e f f e c t i v e
ways. F i n a l l y , i n the f i e l d o f business f i n a n c i n g , i t s d i r e c t l e n d i n g
a u t h o r i t y i s d i r e c t l y opposed t o c u r r e n t governmental measures t o
r e s t r a i n i n f l a t i o n and i t s guaranteeing f u n c t i o n s are now unnecessary
because, t o the e x t e n t t h a t there e x i s t s a need f o r Government guarantees t o a s s i s t i n the f i n a n c i n g o f businesses engaged i n e s s e n t i a l
defense work, t h a t need can be met by the c u r r e n t V - l o a n program.
I n any e v e n t , i f RFC i s t o be continued, i t s a u t h o r i t y
should be l i m i t e d t o guarantees o f loans b y p r i v a t e f i n a n c i n g i n s t i t u t i o n s i n those cases i n which the necessary f i n a n c i n g cannot be
obtained from any o f the u s u a l sources o f c r e d i t , i n c l u d i n g the Fede r a l Reserve Banks, w i t h o u t such a guarantee. I t should not have any
a u t h o r i t y t o make d i r e c t loans except p o s s i b l y i n the most e x c e p t i o n a l
cases where such loans can be c l e a r l y j u s t i f i e d as necessary f o r the
n a t i o n a l defense.
D i r e c t loans by the RFC o r any other Government agency not
o n l y increase t h e d r a i n on the Federal budget, b u t o b v i o u s l y aggravate
and give f u r t h e r Impetus t o the i n f l a t i o n a r y tendencies i n our economy.
The proceeds o f such l o a n s , when deposited i n commercial banks, form
the basis f o r a d d i t i o n a l reserves which, i n t u r n , provide a b a s i s f o r
m u l t i p l e - c r e d i t expansion.
A t the present t i m e , the Federal Reserve System, through
r e g u l a t i o n o f consumer and r e a l e s t a t e c r e d i t , the sponsoring o f




-2v o l u n t a r y c r e d i t r e s t r a i n t s by f i n a n c i n g i n s t i t u t i o n s , and o t h e r
measures, i s a c t i v e l y seeking t o combat i n f l a t i o n a r y pressures* The
e f f e c t i v e n e s s o f these measures i s s e r i o u s l y i m p a i r e d b y any program
o f d i r e c t Government l e n d i n g and i t seems c l e a r t h a t the d i r e c t l e n d i n g a c t i v i t i e s o f the Government should be k e p t t o a minimum t o the
g r e a t e s t e x t e n t p o s s i b l e c o n s i s t e n t w i t h the requirements o f the nat i o n a l defense*
Aside from the i n f l a t i o n a r y e f f e c t o f d i r e c t l o a n s , t h e r e
are o f course c e r t a i n o t h e r respects i n which Government guarantees o f
p r i v a t e bank loans are p r e f e r a b l e t o d i r e c t Government l e n d i n g *
Any Government agency engaged i n making d i r e c t loans o u t o f
Government funds i s always s u b j e c t t o i n f l u e n c e , p o l i t i c a l p r e s s u r e ,
and charges o f abuse* A t t h e same t i m e , i t i s n e c e s s a r i l y p l a c e d i n
c o m p e t i t i o n w i t h p r i v a t e l e n d i n g i n s t i t u t i o n s and, t o t h a t e x t e n t ,
i t s a c t i v i t i e s are i n c o n s i s t e n t w i t h our system o f p r i v a t e e n t e r p r i s e *
On the o t h e r hand, guarantees b y a Government agency o f l o a n s made b y
p r i v a t e l e n d i n g i n s t i t u t i o n s encourage a g r e a t e r f l o w o f funds from
the p r i v a t e banking and c r e d i t system i n t o those m a r g i n a l c r e d i t r i s k s
which p r i v a t e i n s t i t u t i o n s o r d i n a r i l y would n o t assume, and such
guarantees t h e r e f o r e can be u t i l i z e d as a means o f p r e s e r v i n g and
s t r e n g t h e n i n g the p r i v a t e e n t e r p r i s e system*
As a p u r e l y p r a c t i c a l m a t t e r , t h e r e i s much l e s s danger o f
" l o o s e l e n d i n g " where loans are made i n the f i r s t i n s t a n c e by l o c a l
f i n a n c i n g i n s t i t u t i o n s t o l o c a l people w i t h whose character and
c a p a c i t y t h e y are f a m i l i a r t h a n where loans are made d i r e c t l y by a
Government agency* To t h e e x t e n t t h a t any governmental assistance i n
f i n a n c i n g business e n t e r p r i s e s may be necessary, t h a t assistance
should take t h e form o f guarantees o f loans made b y commercial banks
i n those cases i n which the r e q u i s i t e f i n a n c i n g cannot be o b t a i n e d
f r o m t h e u s u a l c r e d i t sources, e i t h e r because t h e borrower may be a
small business e n t e r p r i s e which presents a questionable c r e d i t r i s k ,
o r because t h e borrower r e q u i r e s l o n g - t e r m f i n a n c i n g o f a t y p e which
banks o r d i n a r i l y would n o t p r o v i d e w i t h o u t such a guarantee*
Government guarantees o f loans made b y commercial banks are
now w e l l t e s t e d as a mechanism f o r p r o v i d i n g f i n a n c i a l assistance t o
business e n t e r p r i s e s * The value o f t h i s mechanism was most successf u l l y demonstrated b y the V - l o a n program o f World War IX under which
a u t h o r i z a t i o n s f o r guarantees o f war p r o d u c t i o n loans aggregating
n e a r l y $10-l/& b i l l i o n were processed through the Federal Reserve Banksj
and the same mechanism was r e v i v e d b y Congress i n t h e Defense Product i o n A c t o f 19$0 as a means o f f i n a n c i n g c o n t r a c t o r s under t h e p r e s e n t
defense program*




The p r o p o s a l t h a t the d i r e c t l e n d i n g a u t h o r i t y o f t h e RFC
be e l i m i n a t e d i s not new. E a r l y i n 19h9$ the Hoover Commission,
w h i l e n o t agreeing w i t h i t s Task Force recommendation f o r t h e o u t r i g h t a b o l i t i o n o f RFC, expressed the view t h a t d i r e c t Government
l e n d i n g should be avoided and recommended t h a t Congress p l a c e r e s t r i c t i o n s on d i r e c t loans b y the C o r p o r a t i o n i n o r d e r t h a t the normal,
channels o f c r e d i t w might be u t i l i z e d t o the maximum e x t e n t p o s s i b l e ,
o r , a l t e r n a t i v e l y , p r o v i d e f o r the guarantee o f loans made b y p r i v a t e
o r o t h e r e s t a b l i s h e d agencies. M

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