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Prorogea T e s t e r to Rucogatmerlon F ^ n c e Corporation
QÎ "Y* tjpA
Loan Progra»

A abort time ago, you and M r , Tisher diacuaaed with mm a
proposal to tr&ssfer to the Reconstruction Finance Corporation the
gomranteeing functions of the 1er and Havy Departments and iterltlro
Co*® is si on umdftr the V * and *T* loan pro&re», with the Federal Reserve Banks acting aa fiscal agents for the Reconstruction Finance
At that time Z «aa not is a position to appreciate all of
tre implication* of the proposal and it was necessary for re to investigate the matter further* I m nov convinced that the proposal
is unsound and that the plan would be ixpraoticable uad inadvisable*
Shortly after my discussion with you and tfr* Fisher, Colonel
Seche» of the tar Department advib&z ma that he and General Carter bad
just found out about Colonel Cleveland's part in this ratter and his
rendu* on the subject* They «ere smch embarrassed about Colonel
Cleveland's activities, which had been taken without their Knowledge
or consent, and they thoroughly disapprove the plan« Colonel fc'echcn
¿od General Carter have advised General Sossrvell of their strong objections both to the plan and the method uaed by Colonel Cleveland in
proposing i t .
I hove also discussed this natter with Mr» Hinckley and ho
has stated to »a that he too is opposed to the proposal. Moreover,
when the matter was recently brought to the attention of the fcavy
Lap»rirent*» Advisory Cop&ittee of Bankers, I understand that they
expressed opposition to the proposal and thought that it would be moat


I can see nothing to be gained by putting this proposal into
effect and there would be »uefc to lose« Without attempting to elaborate, I would like to outline ao*e of the reasons tor my opinion*
Duplication of credit functions
The Federal Reserve Banks have been utilised in carrying
out this program principally because of their loaf? credit experience
and, as a wetter of operating procedure, the Services have left the
credit aspects of the program largely to the reserve Banks* However,
the HFC, unlike the Services, is itself a credit agency with experienced
credit personnel; m & if the proposed transfer of functions is *ede,
it is assused that the HFC credit department would review loan applications and rake recommendétions to the FJC board*

Consideration of the credit aspects of guaranteed lesna by
both the Feder&i Reserve Bank» and the Pit would r&suit in wasteful
duplication of effort and expense*
In this connection, Z understand that Colonel Cleveland*»
proposal contemplates tfcat the Federal Reserve Bank« «oul¿ aet a*
agents for the RFC, not only under the 1
and "¥* loan program, but
aleo in connection with th* Corporation a own progryr of deferred par»
tlcipatlons* In fact, be ban ateted that the plan would be of no value
unless the vgo programs are combined* there la no relationship between
these two pro¿ra** and I aee no purpose at all to be «erred by attempting to consolidate thr® in this fashion*
The proposal els ply means that the facilities of the federal
fteaerve System would be turned over to tha HFC. The RFC would have full
discretion and would «¡afee and eontrol all policies* The function of
the Federal Keserve Da nit a w i l d be te rely to carry out these policies*
This would be true not only as lon& as the V-loan and t-losn programs
ray last but also permanently with reapeot to the deferred participation
plan of tibe RFC. This in my Judgment would be wholly impractical. If
any change were to be ?ade, it would a»«r. core logical for the RFC to be
substituted for the Federal Reserve Banks and the Boar: rather than for
the Services, thus relieving the Federal heeerve Banks and the Bonr¿ of
any responsibility in the setter*
In the V-lo&c «ad T-loan p robres a the Board of Governor* has
had the Important function of coordinating the operations of the Services
with the Federal Heaerve Beak*« It has prescribed regulations &©vt»raia£
the operations of the Reserve Banks and has established guarantee fees
and maxlaum rates of interest* Under the proposal, however, the Board
would hereafter have virtually no functions to p e r f o m in this connection*
The Federal Feserve Banks wo^id set under HFC directives rather than
under policies of the Board*
Heterá 1 r f , effect upon the program
The adoption of the proposal could not help but complicate
and retará the program of guaranteed financing of war production, with
possible advera« effects upon production of war Ksterials and upon the
speedy financing of contractor« whose war contract» are cancelled*
The necessity for continued close cooperation with the procurement branches of the Services would cot be elisinkted ay the proposal* It is obvious that only the Services ere in a position to be
fully f»«ilisr with the needs of war production and of the war contract
termination pro^r/sa, and, if the proposal is adopted, it would be

aeee#«ury for the Services to be eoaaulted by the 816 1b practically
«11 cases of guaranteed loans to fin&nce w&r production and the t©s*miaatiom of war coatr&cta.
thiff fact, tas plan flOit«|lfttM that lisdson
officers uwder the jurisdistion of the War Department would be retained
«t the various Fader**! ííeaerve Henks for the purpose of executing coin»
tificates of necessity »nd eligibility in coimection with gusraatees of
war production end termination ionos.
I undo ra trad that
the proposal contemplates that the local loan agencies of the
have to bo consulted it* connection with the execution of such
Consequently, it as#»a to se that the effect of the proposal
**>uld is a rely be to Introduce into the prograa & new o r ^ n i a a t i o a , together with its own field agencies, and that inevitably the functioning
of th© ¡ftogrttw w u l d bo impaired sjbd slowed down.
Uptfa.yorablo reaction by bawfcers and borrowers
I have already india»ted that certain t a k e r s hssve expressed
their opposition to the ;>ro;p<oaftl« It sear.ia to m* that this opposition
would be (feared by bankers generally and by borrowers es well« Their
dissatisfaction *ould result, cot only fnor the «lowing up of sdmlnis*
trutlve procedure«, but «1*0 from the fact that the change of fuarentors
*ould giro rise to u&eari*inty with respect to the policies which would
be followed by PSC and the «¿anner in which hundreds of directive© end
later pretal; i on.' of guurentes a^reeronts made fey the Smrvieee in the pest
would be administered in the future by a new organisation«
i% prosest, fi&aaclftg institutions under the
and "T" loas
progresa feel that they will share with the Service» la «mounts recovered by the United States under it« statutory priority In the »vent
of the bankruptcy or insolvency of a borrower, This statutory preference
is not available to the HFC and would b* lost If the MFC were substituted
for the Services a» guar&ntor. Coase tuently, the interests of financia? institutions would be adversely affected in this respect.
Utjoifotion ph*ae„ of


If, when the V-loan altó T-loen programs have reached the
st^ge of liquidation, th* armed Services feel th»t they want to get out
of the financing bissinoss completely, there is no reason whatever why
the windiftg up of the programs cannot be transferred to the Federal Reserve Oyster-, The Services would get out of the picture in this way just
as completely 4S if the transfer were made to the RIC t and there is certainly mask ?rore reason for waking the transfer to the Reserve 3 y s t m .


Til« federal Reserve S&nks are entirely fawillar with these loans nd
are now servicing thee, They would »«rely have to continue doing what
they «re now doing. Tûey would continue to purchase t*»e loans when
•put«* «re »&de, a« tl»ey do now, and arrangements could be made to obtain fïO& the awfifl Services such fund» ae »ay prove to b* necessary
for losses or otherwise. Whatever could be done to transfer tbe liquidation ¿rogra» to the FJPC could likewise be don* to transfer it to the
Federal Reserve System. There ie no reason for bringing an additional
agency of the Government into the picture either now or »hen the , rogr&a
is merely one of liquidation*
Present program « o r « ^ ; w « H
Tbe present war financing progrès bas been in effect for
over three years and is working wnoothly and efficiently. The fedr
eral Reserve Banks execute * V* loan guarantees in the field, without
submitting the ftfttter to Washington, up to $£50,000 for the War Dep&rtrent end up to $100,000 for the Maritime Cossdsslon. In the ease
of "T* loans, they execute guarantees for both tbe War Department and
tferi tif e Comzlsalon up to $300,000, where the guaranteed percentage
is not »ore than 90 per cent and up to Sl00,000 where the guaranteed
percentage Is not »ore than 93 per cent« $here guarantees involve
larger assounts and must be su bait ted to Washington for approval, it
has been possible to establish s standard of expedition «hereby the
Services usually act upon the application within a 24-hour period.
Is the instances in which the Services h^ve found it necessary or advisable to take over guaranteed loans, the "puts* or "purchases* hr,ve
been processed expeditiously through e r a n g e m e n t s worked out between
the Services »vtà the Federal Reserve Banks*
I have discussed this proposal with the *erbers of the Board
and also with the Presidents of the f ederal Reserve Banks when they
were recently feere. They unanimously feel that tbe plan Is unnecessary
and would be inadvisable. If it should be decided to put the proposal
Into effect, they all feel that the entire program should be turned
over to tbe KFC and the Federal Reserve Banks and the Board relieved
of all responsibility in the matter.