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The I.B.A. proposal is summarized on the first
page and a naif of the attached memo which was prepared by Mr» Vest. It gives a good summary but
Mr. Hopkins has some doubts about the comments
following on later pa^es.

At the hearings before the House Post-War Economic Policy and
Planning Committe on April £4, 194% the Investment Banker« Association presented a plan to provide capital to small businesses through
the establishment of local investment companies. The principal features
of the plan are the following.
Congress would authorize the Board of governors of the federal Reserve System to grant charters to local investment companies
in the various Federal Reserve districts, after investigation by the
appropriate Federal Reserve Bank of the qualifications of the BAftfcgsrent and the need for the proposed company in the territory. The
company would be required to have a capital stock of not less than
Such a local investment company would be ai£horizod to purchase for investment or resale mortgage bonds, debeatnres, and preferred
and common stocks of business corporations within the federal Reserve
district end to make loans to unincorporated business; but no such loan
or purchase of securities could exceed $100,000, In any case, the
borrower would be required to employ "up to* 10 per cent of the proceeds
of the transaction, whether a loan or purchase of stock, for the purpose
of purch^sln^ stock in the investment company. The actual amount of
stock purchased would be determined by negotiations between the company
and the borrower.
An investment company could issue debentures which the Federal
Reserve Bank of its district would be obligated to purchase up to an
amount equal to 3 times the paid-in capital of such company. The existing section l?b fund of 1179,000,000 would be made available to the
Federal Reserve banks for the purchase of such debentures; and consequently no Federal Reserve Bank would be required to purchase such
debentures if the aggregate amount of its purchases equals or exceeds
the amount originally advanced by it for stock of the Federal Deposit
Insurance Corporation, ¿¿uoh debentures would mature in 25 years.
The capital stock of an investment company would be divided
into two classes: Class A shares would be issued to original subscribers
of the paid-in capital of the company; Class B shares would be issued
to borrowers at the tlire the investment company purchases stocks or
makes loans to such borrowers. Both classes of stock would be entitled
to receive dividends at the sa??e rate out of net earnings; but upon
liquidation Class A shares would bo paid off first at their par valus.
The plan suggests that an investment company would not always
hold the stock and securities purchased by it, but would endeavor to

»•XI auch securities and »took to permanent investor«, if possible,
thereby releasing its capital for further operation«»
The directors of an investment company would serve without
compensation, although th* permanent staff of the company would be paid
compensation subject to the approval of the Federal Reserve Bank.
The investment companies ^sould be authorized to render management service and technical assistance to their customers at moderate
The Federal Reserve Bank would be authorized to make examinations of the books of account of the investment companies in its
district as loi%' as it holds debentures of such conpanies.
Possible Objections to Proposed Plan
1. Saleabllity of ¿3tock in Investment ^or*-panies. - The plan
purports to provide for the purchase of «rail capital issues of a kind
which the present investment banking machia«ry will not handle because
such issues have limited markets and afford considerable risk and
difficulty to the underwriter, because small concerns frequently have
inferior management, asd because the cost to an underwriter of handling
a spall issue of stock is ordinarily about the same as the cost of
handling a large issue. The plan Indicates that it is intended to
supply a source of credit particularly to small and "risky* businesses.
In the circumstances, the question arises whether stock in
the proposed local investment companies would readily be purchased by
the investing public. At the hearing before the Rouse Post-War Economic
Policy and Planning Committee on April £6, 1945, Mr, Folder, President
of the Investment Bankers Association, emphasized the fact that there
is at present a scarcity of "venture capital", in other words, that the
public is slow to invest in any securities other than Government bonds
and the safest kinds of corporate securities. If this is true, it seems
questionable Aether the minim«* capital of the proposed investment
corpanios would be promptly subscribed, in view of the fact that these
investment companies would be engaged largely in financing sr.all business
concerns in the marginal risk area.
£• Further Government Corpetition. - The plan is based on
the theory that aid to srall business should not come from the Federal
Government and that any plan for direct Government loans or guarantees
would be a major threat to the ayster of private enterprise. Nevertheless, the proposed plan would utilize the appropriated fund of
$159,000,000 under the present provisions of section 17b of the Federal


Raserve Act, sine« the Federal Reserve Banks would use such fund for
the purchase of debentures issued by the local investment companies.
In effect, therefore, Government credit would be at the basis of the
plan. Moreover, while the investment companies would be privately
managed and of a local nature, they would be chartered pursuant to
Federal law, and therefore would be somewhat analogous to Federal
savings and loan associations, production credit associations, etc.,
which have been cited by bankers as being in effect Federally chartered
institutions which compete with private banks.
Consequently, the adoption of the proposed plan would result
in the establishment of still another system of credit institutions
operating under federal law and competing with existing institutions.
Such a result seams undesirable, particularly if the objectives of
the plan can possibly be accomplished by the use of existing machinery.
Moreover, since the investment companies would be chartered
under Federal law, the question *ould arise whether their securities
would be subject to the requirements of the Securities Act of 19??, and
also whether the companies «sould be subject to State laws governing the
issuance and sale of securities. If not so subject, such companies
would have a further competitive advantage over Stats institutions which
are not exempted from such laws*
Knowledge of Merits of local Enterprises. - One of the
arguments advanced for the establishment of local investment companies
under the plan is that such companies would be under the manag«r.ent
of local business men who would be f ami lie r with the merits of «rail
local enterprises. To some extent this ml^it be true. However, it is
unlikely that the officers and directors who ml^t be engaged to manage
such investment companies would be any more familiar with local businesses
than are the directors and officers of the commercial bunks in the
particular locality. On the contrary, it is reasonable to suppose that
the management of a local bank, with the benefit of long experience In
the community, would be much more qualified to assess the financial
needs and determine the merits of business concerns in the locality than
would the management of newly created institutions.
4. Complexity of the Plan. - The financing visualized by
the plan could be effected only with a considerable amount of procedure
and red tape« Time would be necessary to organize the investment companies in the various Federal Reserve districts, for the Federal Reserve
Bank to investigate the proposed management of such companies and the
need for the existence of the companies in the particular communities,
for the election of directors, for the establl s i ant of suitable quarters
for the companies, and for advertisement and attraction of customers.
2ven after the perfection of all details connected with the establishment

of the system, individual transactions would involve much more detail
and probably consxsae sore time than the usual type of bank loan* k
business concern wishing to obtain financing vould first have to
authorize the issuance of the necessary mortgage bonds or stock and
negotiate the sale of such bonds or stock to the investment company.
Additional details would be Involved in the issuance of debentures by
investment companies for sale to the FodereJL Heserve Bank.
5. Hequirerent That Borrower Purch ase StocK. - Any borrower
from one of the proposed investment companies would be required to use
up to 10 per cent of the prooeeds of the transaction to subscribe to
stock in the investment company. In other words, a borrower selling
#100,000 worth of stock to such an investment company Eight actually
receive only $90,000. This feature of the plan, which increases tho
financing oost by about 11 per cent, Right make the proposed system of
financing unacceptable to rsany «mall business corporations. Moreover,
since the exact amount of stock in the investment company which would
have to be purchased by the borrower would be determined by agreement
between the company and the borrower, it is possible that such negotiations might tend to prolong the consummation of individual transactions and thus retard the whole program.
6. Limitation on Arourvt of Financing. - Ko borrower could
obtain financing, in excess of H00,000 under the plan. Ihile this
limitation might not be an obstacle in auny instances, it is a restriction which would probably prevent the use of such financing: by business
enterprises requiring larger amounts to finance the purchase of new
machinery and plants. In this connection, it is to be borne in wind
that the plan purports to provide financing of a long-term nature rather
than current working capital,
7. Requirement That Feqernl Reserve Banks Purchase Debentures. Under the plan, the federal Reserve Banks would be obligated to purchase
debentures Issued by the investment loan companies at any time within
5 years after their issuance. Heretofore, the extent to which the Federal Reserve Banks will extend credit has been, in all cases, within
the discretion of the Federal Reserve *%nks. Th* proposed plan would
re;ulrc the Federal Reserve Banks to finance the proposed investment
companies apparently without regard to the quality of the management
or the financial condition of such companies. This would be an unfortunate precedent.
8. Use of Section l?b Fund. - In theory, the proposed plan
Is not inconsistent with the adoption at the same time of the proposal
for guaranteed loans by the Federal Reserve Banks under the pending
Wagner-S^ence bill. However, if the proposed plan should be adopted,
including the use of the fund of |135,000,000 as above indicated, the
program of guaranteed loans would be impossible since obviously the
fund could not be used for both programs.


9. RepayRent of Funds Under Section 15b, - The plan states
that funds heretofore paid to the Federal Reserve kanks by the Secretary
of the Treasury under section lSb of the Federal Reserve Act (about
|2?f000,000) would be "returned1* to the Secretary of the Treasury. It
is difficult to see how euah repayment could be Rade in view of the fact
that these funds are in part at least already tied up in outstanding
loans and commitments under section 13b, unless it is intended that
the Federal Reserve i%nks must make the repayment out of their own
furds. Such a situation would be a taking of the property of the
Federal Reserve -^anks to the extent that losses might develop on these
loans and obviously would be inconsistent with the intent of present
section 13b.
10. yuallfloatlons of Directors. - Under the plan, directors
of the Investment companies would receive no compensation. In view of
the somewhat risky nature of the enterprise, it is doubtful
ether a
sufficient number of iren of superior o&liber, particularly investment
bankers, could be obtained to serve as directors of such companies.
11. Lack of Supervision. - "hile the proposed investment
compenles, as previously Indicated, wsuld in effect constitute a system
of credit institutions operating under Federal law in competition with
commercial banks, the plan contains no provision for adequate supervision and regulation of such companies. It is true vixat the plan
provides that the Federal Reservefcankmay make periodic exari nations
of the books of account of such companies; but even this limited supervisory authority would apply only so lone
the Federal Reserve Bark
holds debentures in such an investment company nnd, furthermore, it
is not clear that the Federal Reserve Bank would have any power to require corrections as the result of such examinations.

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