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Memorandum re attached plan e n t i t l e d
"Credit for Small Industry"

The plan was developed o r i g i n a l l y as a suggested mechanism
for meeting the credit and c a p i t a l requirements for small industry,
and i s submitted only as a general outline i n preliminary form, many
details as to organization and operation being omitted.
In view of the continued unsatisfactory condition of the
c a p i t a l market, i t has been suggested that government aid for business should be extended to the larger corporations as w e l l as to the
small ones. This could be accomplished by a government-sponsored
i n d u s t r i a l credit corporation such as i s proposed i n the attached
plan, with amendments as follows:

Removing the maximum l i m i t a t i o n of $1 m i l l i o n to any one


Permitting the corporation to invest i n existing securit i e s so as to assist the capital market, absorbing undigested issues or taking any other appropriate action.

I t has been further suggested that under present conditions
any plan for furnishing c a p i t a l a i d to business i n order to be of subs t a n t i a l effect and to serve as a recovery measure, must be ba^ed upon
a rather l i b e r a l credit policy. I t would l i k e l y be necessary under
present conditions that the credit corporation make a substantial port i o n of i t s advances or investments upon the security of junior securit i e s , including preferred stocks, and on terms more favorable than can
be obtained presently i n the c a p i t a l market. In other words, i t i s
reported that some large corporations would today undertake c a p i t a l
improvements i f they could market their securities on favorable terms,
which i s not possible i n the present state of the c a p i t a l market. I f
these suggestions are to be followed, the p o r t f o l i o of the credit corporation would not permit the ready sale of debentures by the corporat i o n at a low enough coupon rate to permit the corporation to make the
indicated loans at rates which would induce business to undertake capit a l expansion under present economic conditions. Therefore, to carry
out such a program i t would be necessary to have the government guarantee
the debentures of the credit corporation, also that the c a p i t a l of the
corporation be substantially increased above the amount proposed i n the
attached plan.

February 21, 1938
Credit for Small Industry

The Problem.
Small industry 1 s need of enlarged credit f a c i l i t i e s arises from two



Creditors are aware of the deterioration of the

r i s k s i n existing credits to small business and are pressing
for payment or reduction.

This tends to further r e s t r i c t the

operations of small business and i f continued w i l l bring about
a great deal of insolvency and bankruptcy.

Thus there i s a need

of short or medium term credits, partly for refunding and partly
for maintaining or increasing present output.

Capital Expansion:

While at the moment there i s probably a

limited demand by small industry for c a p i t a l expansion, there
i s unquestionably some demand and with any general resumption
i n business the demand w i l l be acute.

Therefore, a mechanism

should be i n operation at an early date to anticipate t h i s need.

Present f a c i l i t i e s for capital inadequate:
As against the period of the f 20 f s the following developments have

impeded the flow of c a p i t a l to industry generally and p a r t i c u l a r l y to
small industry.

This i g not i n c r i t i c i s m of the l e g i s l a t i o n and regula-

tions referred to i n their general purposes but simply to show f a c t u a l l y
the effect of them on the flow of c a p i t a l to industry.

Underwriting by banks of deposit:

This has been prohibited by

While the underwriting of security issues by investment

bankers i s s t i l l permissible, a great deal of investment banking

c a p i t a l was wiped out by the depression and i t i s generally
admitted that there i s a shortage of c a p i t a l i n that f i e l d at

Underwriting by banks was always an important ad-

junct of the c a p i t a l market and while i t i s impossible to e s t i mate just what difference i t s absence i s making i n the present
situation, i t i s reasonable to suppose that i t i s an important

The Securities Act of 1955s

This Act and the regulations issued

pursuant thereto have discouraged the issue of stocks and bonds
generally and have prevented almost e n t i r e l y the f l o t a t i o n of
securities by small industry.

This i s not due to the registra-

t i o n fee which i s very nominal, but to the fact that the registrat i o n process i s necessarily complicated and technical so that
r e l a t i v e l y heavy expense i s incurred for lawyers, engineers,
underwriters 1 expense, etc., which i s proportionately heavier
for smaller issues.

From a s t a t i s t i c a l survey by the SEC of the

estimated costs involved i n the issuance of new securities (bonds,
notes and debentures) from January 1, 1936, to June 50, 1937, the
following percentages of cost as against gross cash r e a l i z a t i o n
of the securities i l l u s t r a t e the heavier burden on the smaller
issues, p a r t i c u l a r l y under one m i l l i o n d o l l a r s .
Under #250- #500- $750- #1,000- #5,000- $10,000- #25,000
(In thousands)
or more
Number of issues . . 11
Commission and d i s 2.1
Other expenses . . . . 2.2

- 5 The exemptions from registration as to ^private offerings*
would afford some r e l i e f i f l i b e r a l i z e d .

However, any change

i n the registration requirements would be of no effect unless
accompanied by appropriate changes i n the Comptrollers Regulat i o n on Investment Securities next referred t o .

The Comptroller 1 s Regulation on Investment Securities:

Even i f

there were no registration requirement whatever, the Comptroll e r ^ Regulation would e f f e c t i v e l y prevent small industry from
obtaining c a p i t a l from member banks through the issue of securities.

The statute leaves wide discretion to the Comptroller

to regulate the type of "investment securities® that may be purchased by member banks.

The Regulation very properly endeavors

to define ^investment securities 11 so that unsound or speculative
issues are not e l i g i b l e .

The d e f i n i t i o n , however, lays stress

not only upon the inherent quality of the obligations but r e quires that they be "marketable*1.

Marketability i s obviously

closely related to the extent of d i s t r i b u t i o n and the Regulation
proceeds on that ground by requiring that the issue be of a suff i c i e n t l y large t o t a l to make marketability possible and i n addit i o n that such marketability be protected or insured by a public
d i s t r i b u t i o n unless i t i s an exempted security.

In effect, t h i s

means that small issues, hence l o c a l issues, cannot quality
under the Comptroller's Regulation*

Small business, therefore,

i s now e f f e c t i v e l y blocked from the c a p i t a l market.

- 4 But, one may ask, should banks be permitted to invest i n
small issues?

Should they have securities of limited market-

This comes down to the question of "liquidity 1 1 i n

banks and involves the whole question of Federal Reserve
credit policy and bank examination policy, discussed below.
Suffice i t to say at t h i s point that small business i s today
e f f e c t i v e l y barred from obtaining needed c a p i t a l from security
issues, which furnish a substantial part of the c a p i t a l r e quirements of large industries.

Capital loans and bank examination policy?

In the l i g h t of the

obstacles to the issue of securities by small industry and their
purchase by banks, outlined above, the natural question i s , why
do not the banks make d i r e c t capital loans to small industry,
thus avoiding, for the bank, the Comptroller's Regulation and,
for the borrower, the heavy expense and long delay involved i n
registration and underwriting?

The average banker would reply,

"I don f t l i k e c a p i t a l loans i n the f i r s t place, and i n the second
place, i f I made any, the bank examiner would c r i t i c i z e them

This i s perfectly true.

By t r a d i t i o n bankers are

f e a r f u l of c a p i t a l loans and i f there were any disposition on
the part of banks to make such loans the bank examiners would
soon discourage i t .

At the same time i t i s considered highly

proper f o r a bank to invest i n rated bonds which are simply
another form of capital loan.

But here the banker feels that


- 5 he i s following sound practice because the bond i s "marketable11.

Experience has shown, however, that marketability i s

an i l l u s o r y quality and invariably disappears at a time when
the bank most needs to dispose of i t s securities.

The Fed-

e r a l Reserve System, under the authority of the Banking Act
of 1955, has recognized the inconsistency of looking at the
form rather than the substance of a bank loan and has consequently made a l l sound assets of member banks e l i g i b l e for advances at the Federal reserve banks.

Hence, i f any member bank

or group of banks should make a sound capital loan to a l o c a l
industry, this loan would be available for credit at the r e serve bank i n case of need.

Nevertheless such a loan would un-

questionably be severely c r i t i c i z e d by bank examiners of whatever authority, Federal or State.

Examiners, l i k e most bankers,

have the l i q u i d i t y complex and c l a s s i f y loans as "slow" i f the
maturity i s beyond a few months.

There should be no "slow"

A loan i s either good or i t i s a loss, i n

varying degree; and maturity should not enter into the c l a s s i f i cation.

A step i n t h i s direction was made by the Examiners

Conference of 1954 called by the Treasury, but the "slow" c l a s s i f i c a t i o n s t i l l exists and should be eliminated by a l l the Fede r a l supervisory agencies.

Undoubtedly the State supervisory

authorities could be brought into agreement.

Mr. Crowley, Chair-

man of the FDIC, has already expressed the concurrence of his
organization i n t h i s suggestion.

Such a move would be i n l i n e

- 6 with the present policy of the Reserve System i n recognizing
sound credits regardless of form and maturity.

But the a t t i -

tude of examiners should be changed even farther so as to encourage banks to make sound c a p i t a l loans to l o c a l industries.
Summary of the Problem:
Small industry today has need of credit f a c i l i t i e s to provide:

A certain amount of short or medium-term credit for
current operations and to arrest the present deflationary contraction of credit.


This i s urgent.

Capital funds for expansion and refunding.

This w i l l

become urgent with any recovery of business a c t i v i t y .
Meeting both these needs would contribute i n an important
manner toward recovery, f i r s t by arresting the current deflat i o n and secondly by encouraging c a p i t a l expansion.
The suggested program which follows does not deal with the
question of underwriting by banks but would remove other barr i e r s , as w e l l as set up an entirely new mechanism.

The Program.

The objective.

To provide ( l ) short or medium-term credit for

which the depression has created an urgent need, and (2) capit a l funds to commercial and i n d u s t r i a l businesses of smaller
size, such funds to be used for expansion, refunding, modernizat i o n or otherwise.

- 7 B.

Four complementary methods proposed?

L i b e r a l i z a t i o n of SEC regulations or amendment to the

Securities Act of 1935 i f necessary, i n order to encourage the
issue of l o c a l s e c u r i t i e s .

(See Appendix



L i b e r a l i z a t i o n of rules regarding purchase of invest-

ment s e c u r i t i e s by member banks through amendment to the regul a t i o n s of the Comptroller o f the Currency.


(See Appendix

Changing examining p o l i c y so as t o eliminate the




c l a s s i f i c a t i o n and encourage sound c a p i t a l loans to l o c a l i n dustry, already discussed heretofore.

Establishment of a permanent i n d u s t r i a l loan f a c i l i t y

by the Government.



i n d u s t r i a l loan* operations of the Fed-

e r a l reserve banks and the RFC under present authorizations and
p o l i c i e s do not meet the problem either i n i t s current or i t s
permanent aspects.

(See Appendix "C11)

There are several ways

i n which the mechanism for furnishing the c r e d i t requirements
of small business might be provided.

The RFC could be empowered

by necessary l e g i s l a t i v e amendments.

Since, however, the mechan-

ism should be permanent, there i s an apparent inconsistency i n
having such operations performed by an emergency organization.
S i m i l a r l y , l e g i s l a t i o n could be framed to authorize the Federal
reserve banks to carry on the suggested a c t i v i t i e s but i t


f e l t that the reserve banks, being banks of issue, should not take
i n t o t h e i r p o r t f o l i o s long-term c a p i t a l loans and preferred stocks.
I t would appear, therefore, that the suggested a c t i v i t y could best


- 8 be carried on by a newly formed corporation which would
specialize i n the f i e l d and have no other a c t i v i t y .

It is

desirable, however, that i n the interest of a prompt beginning of the operations as well as i n the interest of economy,
such a corporation be housed and staffed by some existing government agency.

The Federal Reserve System has an almost ideal

t e r r i t o r i a l d i s t r i b u t i o n of f a c i l i t i e s i n the twelve banks with
t h e i r twenty-five branches a l l located so as to best serve the
various trade areas of the country.

At the present time the

Reserve System i s extending very l i t t l e credit to i t s member

At the same time each reserve bank must be prepared to

extend such credit and hence must maintain a well equipped d i s count and credit department so that there i s presently an overstaffed condition i n such departments.

I t i s suggested, there-

fore, that i n the interest of speed and economy, the proposed
corporation be owned and operated by the Federal Reserve System,
the twelve banks with their.branches furnishing the necessary
f i e l d agencies and the Board of Governors with i t s s t a f f furnishing the necessary head o f f i c e direction and personnel.


with the addition of a few experts i n the investment banking f i e l d ,
the System, as agent of the corporation, could very promptly begin
lending to industry and insuring i n d u s t r i a l loans made by insured
The more detailed discussion hereafter, i n which the Federal

- 9 Reserve System i s connected up with the proposed corporation, i s suggestive only, and i f i t i s decided that the
corporation should be owned and operated by some other agency
of government, the purposes of the corporation could be
carried out just as f u l l y although not with the same promptness as to i n i t i a l operations nor with the same economy.

Industrial Loan Corporation.

Method of operations.

I t i s proposed to create by law a cor-

poration to supply c a p i t a l funds to small businesses, and to
insure loans made by insured banks (FDIC System) to small
businesses, the insurance mechanism to be similar to T i t l e I
of the Federal Housing Act.
board of three directors.

This corporation would have a
The Board of Governors from time

to time would designate three of i t s own members as directors
of the corporation and would also designate three alternate
directors from among the remaining members of the Board of
Governors or members of i t s s t a f f .

The corporation would

u t i l i z e , as o f f i c e r s and employees, such o f f i c e r s and employees
of the Board of Governors as might be necessary.

The corpora-

t i o n would be authorized to u t i l i z e the Federal reserve banks
as i t s agents, or, i f i t deemed i t desirable, to designate
other agents or set up i t s own agents.

Ho director of the

corporation and no o f f i c e r or employee of the Board of Governors or a Federal reserve bank would receive any additional

- 10 compensation for his services f o r the corporation.

The Fed-

e r a l reserve banks as agents would receive applications for
i n d u s t r i a l loans and mice loans i n the name of the corporation.
They would also handle the insurance of loans made by insured
banks of their d i s t r i c t .

The corporation would reimburse the

Reserve Board and banks or other agencies for their expenses
on such basis as might be determined by the Board of Governors.

Capitalization and Debentures.

I t i s proposed that the Treasury

pay over to the Federal reserve banks $100,000,000 (being a part
of the unpaid remainder authorized tinder section 15b of the Fede r a l Reserve Act).

The Federal reserve banks would u t i l i z e the

#100,000,000 to subscribe for stock i n the i n d u s t r i a l loan corporation.

The Federal reserve banks would pay to the Treasury

the amounts due the Treasury on account of sums received from
i t under section 13b, within a period not exceeding


and after the new corporation begins business the Federal reserve
banks would make no new loans or commitments under 13b.


i n the corporation would have no voting r i g h t s .
The corporation would have authority to issue debentures up
to f i v e times i t s c a p i t a l and surplus; but i t would be required
to pay a l l earnings into a reserve fund for losses u n t i l t h i s
fund equaled f i v e per cent of outstanding loans.


(so long as the reserve did not f a l l below t h i s r a t i o ) earnings

- 11 might be paid to surplus•

The debentures would not be guaran-

teed by the United States.
I t i s further proposed that Congress appropriate #50,000,000
as an insurance fund to be administered by the corporation as
set f o r t h below.

Mature of loans to be made by corporation.

The corporation

would be authorized through the acquisition of notes, debentures,
bonds or other similar obligations or of preferred stock to supply
funds i n amounts not

exceeding #1,000,000 to any one enterprize.

The obligations enquired would mature i n not more than ten years,
and at least fo£ty per cent thereof must be paid o f f through
p a r t i a l payments before maturity.

This would not prevent the

renewal or extension of obligations at maturity.

Insured loans.

The #50,000,000 insurance fund would be a v a i l -

able to the corporation i f and when needed to meet losses on
insured loans made by any insured bank up to 20 per cent of the
aggregate of a l l loans and advances made by such bank to any
commercial and i n d u s t r i a l business.

The maximum amount of any

such loans to one borrower would be #50,000, but a loan exceeding #

would be submitted to the corporation or i t s agent

for approval before being made.

Ho such loan could be made for

the purpose of paying i n whole or i n part any existing indebtedness of the loaning bank.

Any insured loan would have a maximum




maturity of ten years and provide for equal regular i n s t a l ment payments under which the entire loan would be r e t i r e d not
l a t e r than the date of maturity.

The t o t a l l i a b i l i t y for i n -

surance which the corporation might have outstanding at any time,
plus amounts paid i n settlement of insurance claims, could not
exceed the amount of the insurance fund.

This would provide i n -

surance for a maximum of $250,000,000 of loans.

Regulations and reports.

A l l the operations of the corporation,

including insurance of loans, would be subject to a broad authori t y i n the corporation t o make rules, regulations and requirements, with a right i n the Board of Governors to review and revise
such rules, regulations and requirements from time to time.


Board of Governors would transmit to Congress with each of i t s
Annual Reports an Annual Report of the corporation regarding the
operations of the l a t t e r .

February 19, 1938.
Registration of Private Issues under Securities Act of 1955
Law. - Section 5(a) of T i t l e I of the Securities Act of
1935 reads as follows:
"Unless a r e g i s t r a t i o n statement i s i n effect as to a
security, i t s h a l l be unlawful f o r any person, d i r e c t l y or

( l ) to make use of any means or instruments of transportation or communication i n interstate commerce or of the
mails to s e l l or o f f e r to bi$r such security through the use
or medium of any prospectus or otherwisej or
"(£) to carry or cause to be carried through the mails
or i n interstate commerce, by any means or instruments of
transportation, any such security f o r the purpose of sale
or f o r delivery after sale."
Exemptions. - A number of classes of securities are exempt
from r e g i s t r a t i o n requirements under section 5 of T i t l e I of the Act.
Subsection (11) of such section exempts the following:
"Any security which i s a part of an issue sold only to
persons resident within a single State or Territory, where the
issuer of such security i s a person resident and doing business within or, i f a corporation, incorporated by and doing
business within, such State or T e r r i t o r y . "
Among other classes of securities which are exempt are
Government securities, commercial paper, securities of r e l i g i o u s and
charitable organizations, securities of building and loan associations and similar organizations, securities exchanged by the issuer
with i t s existing security holders exclusively where no commission
or other remuneration i s given, and others.

The Commission i s author-

ized by section 5(b) to exempt by regulation securities of an issue

- 2 which does not exceed $100,000 and nnder t h i s authority i t has exempted
securities sold entirely f o r cash, the aggregate offering price of which
does not exceed $100,000, and other issues not exceeding $100,000.
With the possible exception of the exemption of securities sold ent i r e l y i n the issuer 1 s State, the above exemptions are believed to
be of l i t t l e significance i n connection with the present problem,
but the exemption discussed below for transactions not involving a
public offering i s believed to have important p o t e n t i a l i t i e s .
Private Offerings. - Section 4(1) of T i t l e I of the Secur i t i e s Act provides that the prohibition upon the use of interstate
commerce and the mails for the purchase or sale or transportation
of unregistered securities i s not applicable to "transactions by an
issuer not involving any public offering", and informally the Commission has taken the position that, generally speaking and subject
to exception, securities which are offered to not more than twentyf i v e persons do not involve a public o f f e r i n g .

However, t h i s ex-

emption applies only with respect to transactions by an issuer and
not to transactions by a dealer or underwriter.

I t i s understood,

however, that i n some circumstances an underwriter may be u t i l i z e d
i n connection with unregistered issues not involving any public o f fering without v i o l a t i n g the law where he i s employed merely to
attend to the details of the issue and he does not i n fact perform
the usual functions of an underwriter, i . e . , purchase the securities
with a view to public d i s t r i b u t i o n .


369 -

Proposal* - I t i s believed that there i s some uncertainty
or misunderstanding as to the extent to which an underwriter may be
u t i l i z e d i n connection with unregistered i s sties not involving a publ i c offering without v i o l a t i n g the statute and a more e x p l i c i t ruling
or statement by the Securities and Exchange Commission, which could
be publicized, as to the circumstances under which an underwriter
might be u t i l i z e d would be very h e l p f u l i n encouraging issues where
no public offering i s involved*
I t would also be b e n e f i c i a l for the Commission to rule
that an offering of securities exclusively to banks insured by the
Federal Deposit Insurance Corporation of a limited number or i n a
r e s t r i c t e d area would not be a public offering*
of the Commission has stated that


The General Counsel

the basis on which the offerees

are selected i s of the greatest importance.

Thus, an offering to

a given number of persons chosen from the general public on the
ground that they are possible purchasers may be a public offering
even though an o f f e r i n g to a larger number of persons who are a l l
the members of a particular class, membership i n which may be determined by the application of some pre-existing standard, would
be a non-public o f f e r i n g . "

The General Counsel has also stated

that another factor to be considered i s the business of the purchaser, as for example, "whether the purchase of such a block of
securities for investment i s consistent with i t s general operations
Since insured banks as a class have f a c i l i t i e s and experience which

- 4 enable them to evaluate securities and to protect themselves against
fraud better than members of the public and since, as a rule, they
purchase securities f o r investment rather than f o r resale, i t i s believed that a r u l i n g such as that proposed above would be consistent
with the position heretofore taken by the Commission.
Statutory Amendments* - Further l i b e r a l i z a t i o n of the r e g i s t r a t i o n requirements with respect to l o c a l , private, or small issues
could be effected only through amendments to the law, and i t i s believed to be desirable that, as soon as practicable, amendments to
the law be obtained as follows:
(1) Exempting securities which are part of an issue sold
only to persons resident within a State i n which the issuer has i t s
p r i n c i p a l business instead of requiring, as the existing law does,
that a corporate issuer not only do business within the State but be
incorporated therein*
(2) Increasing from #100,000 to #250,000 or #500,000 the
maximum amount of an issue of securities which may be exempted from
the Act by regulation of the Commission.

February 19, 1938
Purchase of Investment Securities by Member Banks
Law. - Under section 5136 of the Revised Statutes, a
member bank "may purchase for i t s own account investment securities
under such limitations and r e s t r i c t i o n s as the Comptroller of the
Currency may by regulation prescribe."

The section further pro-

vides that "the term investment securities 1 s h a l l mean marketable
obligations evidencing indebtedness of any person, copartnership,
association, or corporation i n the form of bonds, notes and/or
debentures commonly known as investment securities under such
further d e f i n i t i o n of the term


investment securities 1 as may by

regulation be prescribed by the Comptroller of the Currency."
Existing Regulations. - The regulations of the Comptroller
of the Currency on t h i s subject include the following provisions:
"Under ordinary circumstances the term 'marketable®
means that the security i n question has such a market as
to render sales at i n t r i n s i c values readily available.
"In determining whether a given security i s marketable,
i t must meet the following minimum requirements:

"(a) That the issue be of a s u f f i c i e n t l y large t o t a l to
make marketability possible;
"(b) (1) That a public d i s t r i b u t i o n of the securities
must have been provided for or made i n a manner to
protect or insure the marketability of the issue,
or, i n the alternative
(2) other existing securities of the issuer have
such a public d i s t r i b u t i o n as to protect or insure
the marketability of the issue under consideration,
and fchch issue must be registered under the provisions of the 'Securities Act of 19331 as amended,

- 2 unless I t i s exempt from registration under
Section 3 thereof.

(c) That where the security i s issued under a trust
agreement, the agreement must provide for a trustee
independent of the obligor, and such trustee must
be a bank or trust company."

Since securities which have a public distribution must
be registered under the Securities Act of 1955, i t i s obvious that
as a p r a c t i c a l matter a l l investment securities purchased by a
member bank must be registered unless expressly exempt from registration.
Many securities which are floated i n small issues or
which are issued only l o c a l l y are both sound and marketable, but
nevertheless can not comply with the requirements of the Comptroller's
regulations either because the issues are not s u f f i c i e n t l y large i n
amount or because the securities do not have a public d i s t r i b u t i o n .
I f a practicable means can be found by which member banks may purchase such securities, small businesses w i l l be greatly aided i n
their endeavors to borrow c a p i t a l funds on a medium or long term
The regulations of the Comptroller also include the
following provisions:


The purchase of 'investment securities 1 i n which the
investment characteristics are d i s t i n c t l y or predominantly
speculative, or 1investment securities 1 of a lower designated
standard than those which are d i s t i n c t l y or predominantly
speculative, i s prohibited. The purchase of securities
which are i n default, either as to p r i n c i p a l or interest,
i s also prohibited.®




A footnote provides:

The terms employed herein may be found i n recognized
rating manuals, and where there i s doubt as to the e l i g i b i l i t y
of a security for purchase, such e l i g i b i l i t y must be supported
by not less than two rating manuals."
Proposal - Small or Local Issues* - I t i s proposed, therefore, that the regulations of the Comptroller of the Currency regarding the purchase of investment securities by member banks be modified
so as to substitute for the existing marketability provisions other
less r e s t r i c t i v e provisions with respect to issues of a email or
l o c a l character*

Securities which are part of an issue of less than
and which are part of an issue which i s distributed

l o c a l l y — t h a t i s , not beyond a radius o f , say, 100 miles of the princ i p a l o f f i c e of the issuer—could be exempted from the marketability
provisions of the regulation.

In l i e u of such provisions i t would

be required that the bank be able to show that there i s or would be
a reasonably ready market for the securities at i n t r i n s i c values i f
they were offered for sale, but not necessarily that they might be
Immediately disposed of at i n t r i n s i c values.

The bank would be

limited to 20 per cent of the amount of the issue or #50,000, whichever i s greater.

The bank should be i n a position to demonstrate

the marketability of any such securities that i t purchases by evidence of the f i n a n c i a l condition of the issuer, the standing of the
issuer i n the community, evidence of demand f o r the securities when
issued, the ease with which they were sold and other facts tending

- 4 -

to show probable a b i l i t y to dispose of them i f the bank wished
to do so.
Rating Manuals. - The present regulations prohibit the
purchase of investment securities i n which the investment characteri s t i c s are d i s t i n c t l y or predominantly speculative and permit the
use of rating manuals to establish the e l i g i b i l i t y of the securities
f o r purchase.

The use of rating manuals i s obviously not appro-

priate for securities of a l o c a l character, and i t i s suggested that
the reference to r a t i n g manuals as a method of determining whether
a security i s an investment or a speculation be d.iminated altogether
from the regulation.



Although Federal Reserve banks have authority under
section 13b of the Federal Reserve Act to make i n d u s t r i a l loans
for working capital purposes, and although the Reconstruction
Finance Corporation has authority to make loans to industry under
certain conditions, these provisions do not meet the needs of the
present situation and would not afford the same l i b e r a l basis for
supplying funds to industry as that here under consideration.
Loans by Federal Reserve Banks under Section 15b of the
Federal Reserve Act. - Federal Reserve banks are authorized under
this section to make loans to established i n d u s t r i a l or commercial
businesses, either d i r e c t l y or i n cooperation with financing i n s t i tutions*
However, such loans can be made only for the purpose of
providing working c a p i t a l , must have a maturity of not exceeding
f i v e years, and can be made only to established businesses.
Many applications have been received by the Federal Reserve banks for loans under t h i s section which could not be granted
because the proceeds of the loan, or a substantial portion thereof,
were to be used for f i x e d or permanent c a p i t a l or for paying o f f
existing indebtedness instead of for working capital.


have also had to be refused because the business applying f o r the
loan could not demonstrate that i t was "established 11 , even though
the management was highly regarded and i t s prospects for successful
operations appeared good.

- 2 The plan now under consideration would provide for loans
for f i x e d capital as w e l l as working c a p i t a l and f o r other purposes, and would not be restricted to established businesses.
Such loans could be made with maturities up to ten years, on an
amortized basis requiring 40 per cent of principal to be paid
before maturity.
(Here i n s e r t such material as may be supplied by Mr.
Smead1s o f f i c e . )
Loans by Reconstruction Finance Corporation. - Loans
may be made by the Reconstruction Finance Corporation, either
d i r e c t l y or i n cooperation with lending i n s t i t u t i o n s , to any i n d u s t r i a l or commercial business for the purpose of maintaining and
increasing the employment of labor.
Such loans, however, can be made only u n t i l June 50,
1959, must mature not l a t e r than January 51, 1945, and must be so
secured as reasonably to assure repayment.
In order to afford small commerce and industry an assurance of the continued and permanent a v a i l a b i l i t y of c a p i t a l
funds, i t i s believed that the authority to make loans to business
should not be of a temporary or emergency character, expiring next
year, but should be placed upon a permanent basis; and for this
purpose the planuunder consideration would set up a permanent corporation to supply funds to i n d u s t r i a l and commercial businesses.

- 3 -

Moreover, capital loans to business should not be
limited to those which mpst mature within less than seven years,
as under the Reconstruction Finance Corporation, because businesses frequently need to borrow for longer periods.

The In-

d u s t r i a l Loan Corporation proposed to be set up would have authority to make loans for ten years, and renewals or extensions might
be made.
The requirement that loans must be "so secured as
reasonably to assure repayment" may have the e f f e c t of preventing
the making of many loans ?/hich would otherwise be possible.


requirement i s believed to be unduly r e s t r i c t i v e i n certain
meritorious cases where the f i n a n c i a l statement and character of
management of the borrower, together with i t s prospects for successful operation, are such as to warrant the granting of the
loan although i t i s unable to o f f e r the most desirable c o l l a t e r a l
(Here i n s e r t such material as mpy be supplied by Mr.
Smead1s o f f i c e . )