Full text of Marriner S. Eccles Papers : Provide for Insurance of Business Loans [Hearings], [Excerpts], Box 64, Folder 8, Item 6

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1 PROVIDE FOR INSURANCE OF BUSINESS LOANS
A beer and root-beer distributor with a net worth of about $18,000 requires
$5,000 for additional working capital during the summer months. This he is
unable to obtain.
A manufacturer of neon signs complained of the high cost of the limited bank
credit he receives.
A musical instrument company which is receiving some bank credit could, if
$10,000\pf long-term capital were obtainable, expand its business.
A verV small 5-and-10-cent store with no bank credit would like $1,500 as a
long-ternVloan to augment working capital and install modern fixtures.
A small manufacturer of ornamental wire products burdened with high
accounts payable would like $5,000 of long-term money to increase its working
capital. It Ms unable to get bank credit.
/
A casket tympany with sales between $40,000 and $100,000 and with heavy
accounts receivable was turned down by the baiiks and forced to curtail
operations.
\
/
An electrical1 appliance and fixture business unable to obtain adequate bank
credit claimed thjit with $6,000 they could discount their bills and show profits.
A wholesaler o\ radios, refrigerators, and household appliances with sales of
around $180,000 is forced to go to finance companies for accommodation, as is a
music store with sa\es of about a third that amount.
A Denver distributor of busses and trucks finds himself unable to get the
local banks tofinance\liiscash purchases ,from motor-car manufacturers when
he has effected sales. IJe also discounts Mis paper with finance companies. He
\ yWaitts $3,000 for 1 year.
> \ >AHimber company sells timber exclusively to coal mines, receiving much of its
payment in coal. The delay between fhe cutting of timber in the summer and
the sale of the timber the to! lowing winter (or the subsequent sale of coal
received) ties up its working capital. It cannot obtain bank loans on the
timber as security. The Reconstruction Finance Corporation refused aid.
With $0,000 it could extend operations, employing eight or nine men. It believes
it could liquidate such a loan oiif of the profits of its increased operations.
A pipe and machinery concern with a net worth of around $13,000 finds itself
at a disadvantage as against Ks large competitors. The proprietor feels that
$10,000 would enable him to increase inventory, hire salesmen, advertise, and
pay off about $3,000 of present indebtedness.
A wholesaler of air-conditioning equipment and refrigerator parts in San
Francisco shows sales of $270,000. Inventory averages $35,000. About 20 persons are employed. An application to the Federal Reserve bank in 1936 for
$10,000 to expand inventory was refused on tli^ grounds that an insufficient business history could be shown. It is claimed mat additional earnings of $3,000
would result if discounts could be taken and chat additional savings would be
made possible through/bulk purchases.
A wholesale hardware dealer with sales of $s0,000 and profits of $3,000 needs
additional working capital in order to take advantage of discounts. The banks
declined the loan because of the lack of outside resources of the partners and
the limited scope of the business.
A partnership of two men importing and wholesaling beverages went into the
liquor business in 1934. With sales of over $1,000,000 they tried in 1936 to get a
loan of $100,000 from the Federal Reserve bank to refinance a bank loan, to
finance withdrawals of whisky, and to provide additional working capital. The
loan was refused. One of the partners complains that their large competitors
obtained bank credit on more favorable terms than are sNforded them. As a
result of their inability to obtain additional credit they hKye been forced to
curtail operations.
In Portland. Oreg., a trailer manufacturer needs $10,000 of lfaig-term capital.
He was offered this from private sources, but refused because \ involved the
loss of control of the business.
. A mattress company could use a small loan for additional working capital.
It is unable to obtain bank accommodations and is considering an supplication
to the Reconstruction Finance Corporation.
A winery and distillery could have gotten $25,000 last year from the Reconstruction Finance Corporation if a bank would take 50 percent of the loan. It
was unable to find a bank willing to do this.
An insecticide company borrowed $2,000 last year from the ReconstruHion
Finance Corporation which required that the loan be amortized $100 a month.
The company would like an additional $1,000 and a longer term for repayment.
152788—30




6

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PROVIDE FOR INSURANCE OF BUSINESS LOANS

A lumber company with a line of $20,000 bank credit needs an additional
$20,000 to modernize its plant. It has hesitated to apply to the Reconstruction
Finance Corporation because it does not want to mortgage its property and is
afraid of being turned down.
A dry-ice manufacturer with earnings of $11,286 last year wants $80,000
to $100,000 to expand capacity.
A dress manufacturer in Seattle wants $5,000. A bank advanced $5,200
which has been reduced to $3,100. The bank now wants the balance repaid at
once. The company showed a small loss last year although the business
had. previously been profitable.
A supply company supplying fishermen on long-term credit is using its full
line of $35,000 of bank accommodations. It could use $25,000 of long-term
capital to extend further credit to its customers.
A fireworks company which receives banking accommodations needs more
working capital in order to operate at capacity. An application for a $40,000
loan was turned down by the Reconstruction Finance Corporation. The company refused an offer made from an eastern competitor for fear of losing
control.

Senator WAGNER. Gentlemen, we have another very important
witness—Mr. Draper, a member of the Federal Reserve Board.
STATEMENT 0E ERNEST G. DRAPER, MEMBER OF THE FEDERAL
RESERVE BOARD OF GOVERNORS, WASHINGTON, D. C. ^ / t f o

Mr. DRAPER. Mr. Chairman and gentlemen, if you have no objection, I have a very brief statement here that I would like to make.
Senator TOWNSEND. Have you discussed this bill with the Board ?
Mr. DRAPER. Yes; we have discussed it.
Senator TOWNSEND. And your views represent the Board?
Mr. D R A P E R . N O ; they do not.
Senator T O W N S E N D . Y O U come here as an individual ?
Mr. DRAPER. Just as an individual, and not as a representative of
the Board.
Senator T O W N S E N D . I think we ought to have for this committee
the conclusions of the Board as well as those of individuals.
Mr. D R A P E R . I think the chairman of the Board will present the
conclusions of some of the other members of the Board. Mr. Eccles
intends to testify on Monday.
Senator W A G N E R . Y O U may proceed.
Mr. DRAPER. In testifying on this subject, I wish to make it clear
that what I shall say represents only my own personal views and
not necessarily the views of the Board of Governors of the Federal
Reserve System.
This subject of loans to small business has been such a controversial
one that there is danger either of (1) no satisfactory legislation being
enacted or (2) such elaborate machinery being set up as to cause the
Government an inordinate amount of expense in order to relieve a
situation that might have been cured by simpler and more economical
means.
Since June 1934 the Reconstruction Finance Corporation and the
Federal Reserve banks have had authority to make loans to business
and industry subject to certain limitations; and the authority of the
Reconstruction Finance Corporation in this respect was broadened by
the act of April 13, 1938. Under the present law, the authority of
the Reconstruction Finance Corporation to make such loans will
expire on June 30, 1941; but there is no such time limitation on the
authority of the Federal Reserve banks to make loans to business and




J

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PROVIDE FOR INSURANCE OF BUSINESS LOANS

industry. However, the Federal Reserve banks are authorized to
make such loans only with maturities of not exceeding 5 years and
only in order to provide "working capital" to businesses that are
"established." It is obvious that these restrictions prevent the granting of credit in many legitimate cases where it might be helpful to
small business and to the community at large.
Many persons with knowledge of the general problem genuinely
feel that the existing avenues for credit to small industry are insufficient. They insist that there is a legitimate need for credit on the
part of small but sound concerns and that this need is not at present
t)eing met by any agency, either public or private.
The results of certain surveys which have been made on this subject purport to show that there is no need for additional credit facilities for small businesses. I do not doubt that such surveys have been
made in the utmost good faith; but the results are not convincing to
me, because the conclusions are based very largely upon the fact that
only a small percentage of persons to whom questionnaires were sent
replied to them. There are many reasons other than the lack of need
for additional facilities which may account for the failure of many
businesses to reply to such questionnaires.
Why not get to the bottom of this problem, once and for all, by
devising legislation which is simple in character, inexpensive in
operation, and cooperative in its approach? In this way we could
meet the present difficulty squarely and without reliance upon an
entirely new set-up of elaborate and perhaps unwieldy machinery.
Then, if it should develop after the passage of such simplified legislation that the need is not as great as anticipated, no great harm would
be done and no great expense incurred. If, however, the need should
prove to be greater than anticipated, the flexible machinery of this
new plan could easily take care of any increase in demand, regardless
of its volume.
There is much to be said in favor of the approach to this problem
proposed in the Mead bill, since it avoids the creation of an additional
system of banks, which would be expensive and slow to get into operation, and seeks instead to encourage the use of part of the enormous
amount of credit now lying idle in the banks by providing insurance
through the Reconstruction Finance Corporation, which is already
in existence and has accumulated much experience in this field.
I believe, however, that the bill could well be improved and liberalized in some respects. I have here a memorandum containing suggestions for the improvement of certain technical features of the bill,
which I shall ask leave to have inserted in the record at the conclusion of my testimony; but I wish at this point to mention one feature
of the bill which I think especially needs liberalization.
Under the bill as now drafted—page 2, line 8—the Reconstruction
Finance Corporation could insure a lender only against any loss in
excess of 10 percent of the amount of the loan. In other words, the
insured lender would have to absorb all loss up to 10 percent of the
amount of the loan and the insurance would only cover any loss that
might occur in excess of that amount. Insurance so limited might not
afford sufficient protection to encourage banks to make loans on a
more liberal basis than they would without insurance, and thus the
bill might fail to accomplish its chief purpose. I believe that the
principle of retaining a local interest in each loan could be preserved




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PROVIDE FOR INSURANCE OF BUSINESS LOANS

and the beneficial effects of the legislation could be greatly increased
if the bill were amended so that the insured bank and the Reconstruction Finance Corporation would share any loss that might occur
on some pro rata basis to be specified in the law.
I also hope that your committee will consider the advisability of
adding to this bill a separate title providing for the utilization of the
existing machinery of the Federal Reserve System in extending additional credit facilities to small businesses on a much more liberal and
flexible basis than the Federal Reserve banks are now- permitted to
extend under the limitations prescribed in section 13b of the Federal
Reserve Act. Such a plan deserves careful consideration, because the
existence of the 12 Federal Reserve banks and 24 branches located
strategically throughout the United States, and already staffed with
trained and experienced personnel, offers an excellent opportunity to
decentralize the actual administration of this business and have it
handled locally by persons familiar with the problems and already in
close touch writh the banks of the regions in which the applications
arise.
At the same time the assets and liabilities resulting from such operations could be segregated in a separate corporation organized as an
integral part of the Federal Reserve System, utilizing the existing personnel and other facilities of the Federal Reserve banks and acting
under the general direction of the Board of Governors, which could
be charged with the duty of seeing that the corporation functions in
such a manner as to meet whatever legitimate need there is for additional credit facilities for small businesses, either directly or through
cooperation wTith existing banks and other financing institutions.
I wTish to make it clear that this is proposed as an addition to the
Mead bill and not as a substitute for it. The provision of such additional facilities on a regional basis could not in any way impair the
effectiveness of the facilities provided for in the Mead bill but would
supplement those facilities in a manner which might prove to be very
helpful.
With reference to suggestions for improvement of S. 2343,1 submit
the following :
The provisions in the bill regarding the distribution of losses—page
2, line 8—differ from those which are contained in other insurance
plans set up by Congress, The bill, as now drafted, provides that the
Reconstruction Finance Corporation may insure against the wThole or
any part of a loss which an insured bank may sustain in excess of 10
percent of the principal amount of the loan. Thus, for example, if a
loss of $10,000 were suffered on an insured loan of $100,000, the insured
bank would have to bear the entire loss and the Reconstruction Finance
Corporation none. Since a bank would derive no benefit from the
insurance until after it had suffered a loss equal to 10 percent of the
loan, a question arises whether the bill in its present form would give
sufficient encouragement to banks to make such loans on a more liberal
basis than they wTould without such insurance. It is believed that the
benefits afforded by the bill might be more generally utilized if this
provision were changed so that the insured bank and the Reconstruction Finance Corporation would share in such loss as might occur on
some pro rata basis to be specified in the law.
It is also believed that more loans wTould be made and increased
benefits derived from the legislation if more flexibility wTere provided




5 PROVIDE FOR INSURANCE OF BUSINESS LOANS

in the bill with respect to rates of interest and the insurance premiums.
The restrictions in the present draft in these respects may result in
limiting the usefulness of the additional facilities provided by the bill.
The fifth limitation in section 3 (b) of the bill—page 3, line 22—
would forbid the making of such loans to a borrower of which an
officer, director, or security holder owning more than 10 percent of any
class of the borrower's stock is, or has been within the preceding 12
months, a director of the bank making such loan. It is doubtful
whether this restriction would serve any useful purpose and it may
prevent the making of sound and desirable loans. It is believed, therefore, that the bill should be liberalized by eliminating this restriction.
The bill would be improved if the provisions of section 5 regarding
the rediscount and purchase and sale by Federal Eeserve banks of
obligations evidencing loans insured under the bill were changed to a
provision authorizing the Federal Eeserve banks, subject to regulations
prescribed by the Board of Governors of the Federal Eeserve System,
to make advances to member and nonmember banks for periods not
exceeding 6 months at a time on their promissory notes secured by
such obligations, at rates to be established from time to time by the
Federal Eeserve banks subject to the review and determination of the
Board of Governors.
From the standpoint of practical operation, experience has shown
that it is more convenient and less expensive both to the Federal Eeserve banks and to the member banks for the Federal Eeserve banks to
make advances to member banks on their promissory notes secured by
the pledge of assets than it is to rediscount such assets. Eediscounts,
furthermore, are ordinarily held until maturity, so that the discounting bank has to pay the discount rate from the date of discount until
maturity, whereas advances can be made for limited periods and
renewed from time to time as the circumstances require, so that the
borrowing bank pays interest only for the period during which it
needs the credit.
If it is deemed advisable to provide a market in which such obligations can be sold, it is suggested that consideration be given to provision for the organization of a corporation to purchase such obligations
and to issue and sell debentures against them, in a manner similar to
that in which the EFC Mortgage Co. now operates in the field of
insured mortgages.
It is not clear that the insurance provided in the bill would inure to
the benefit of an institution which rediscounts or makes an advance
against such a loan, since section 4 (b) provides that the insurance
shall inure only to the benefit of any "assignee" or any "purchaser."
To eliminate any doubt on this point, it is suggested that the remainder of the sentence following the words "the benefit of", on page 5,
line 10, be changed to read "any person to whom such a loan shall have
been assigned or pledged, or by whom such a loan shall have been
purchased or rediscounted."
Senator HUGHES. Then your plan would take the place of the proposed bill, setting up credit by regional banks, would it not?
Mr. DRAPER. No, sir; it would not do that. It would be supplementary ; but I am in an embarrassing situation, if I may say so, iu
that I would prefer not to discuss the plan except in very general
terms, because I believe that the chairman intends -to say something
about it in detail.




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P R O V I D E F O R I N S U R A N C E OF B U S I N E S S

LOANS

Senator TOWNSEND. Are the amendments which you have suggested
amendments worked out in the Board, or are they your individual
thought ?
Mr. DRAPER. N O ; they are amendments that were worked out partly
as discussions in the Board and partly as discussions with members of
the staff.
Senator TOWNSEND. D O you feel from your experience as a member
of the Federal Reserve Board that there is a real demand for loans
by little business ?
Mr. DRAPER. Personally, I do feel that, Senator. When I was in
the Department of Commerce as Assistant Secretary you may remember that we had quite a little discussion of this problem, and you may
also remember that we had a meeting in which it was discussed at
great length. Before that meeting we received about 4,500 letters,
of which I should say 3,500 were not particularly revealing, but there
were at least 1,000 or 1,200 letters which indicated to me that this
problem was a real one.
Senator TOWNSEND. Why, under the provisions of the law which
gave you $139,000,000 to loan to business, have you not been able to
loan it ?
Mr. DRAPER. I pointed that out in the first part of my remarks, in
which I said that the authority which wTas given to the Board of
Governors was a somewhat restrictive authority; it prevented us from
making loans beyond 5 years.
We could not make them except for working-capital purposes and
only to businesses that were already established.
Senator TOWNSEND. Then you think that should be liberalized ?
Mr. DRAPER. I think it should be liberalied; yes, sir.
Senator TOWNSEND. In what manner? Illustrate it specifically,,
please.
Mr. DRAPER. I think, in accordance, roughly, with the provisions
of the Mead bill. They say, "for any purpose." They also say, I
believe, that loans should run from 1 to 10 years.
Senator TOWNSEND. There is no limit in the R. F. C. They can
loan for 10 years, or with no limit. If you had applications to your
Board your could have suggested that they go to the R. F. C., could
you not?
Mr. DRAPER. Yes. But I am not familiar with how the R. F . C.
manages that type of business.
Senator A D A M S . Mr. Draper, this Mead bill will involve, will it
not, essentially some changes in the deposit system of our banks?
That is, our banks are required to make the major portion of their
loans short-time loans?
Mr. DRAPER. That is true.
Senator A D A M S . This bill provides that the shortest period which
could be guaranteed or insured would be 1 year.
Mr. DRAPER. That is true; yes, sir.
Senator A D A M S . Can you g i v e , an estimate as to the proportion of
member bank loans which would at this time qualify for insurance?
Mr. DRAPER. I would not like to do that.
Senator A D A M S . Would you make a guess ?
Mr. DRAPER. I would not, no; I prefer not to guess.
Senator ADAMS*. It would be a very small part, would it not ?
Mr. DRAPER. I would not like to say, because I am not sure.




7 PROVIDE FOR INSURANCE OF BUSINESS LOANS

Senator A D A M S , Your Board, of course, is given general supervision over the 12 Federal Reserve banks, and they, in turn, over the
banks, and there are statutory limitations on loans, are there not?
Mr. DRAPER. That is true.
Senator A D A M S . And a loan beyond a year would be a loan secured
by real estate, would it not ?
Mr. DRAPER. That is true. Of course, under present regulations, I
think a long-time amortized loan can be made by a bank today, but
naturally the bank is very cautious about making that type of loan,,
and I think the bank is absolutely right in that attitude. I do not
believe a bank should have an excessive amount of long-term paper.
As I understand it, this legislation is to meet that particular need.
Senator ADAMS. But it would involve changing the type of loans
which the banks are now making. It would involve also changing
both the statutes and the regulations of the banking and currency
departments of the States and the Federal Government ?
Mr. DRAPER. I am not familiar enough with the legal aspect to be
able tT) answer that intelligently.
Senator ADAMS. But the neecls of small business in the way of longtime loans, capital loans, cannot be met in any substantial degree
unless there was a change in the loaning authority to the banks, could
they ?
Mr. DRAPER. I think so, Senator. I think that a long-term amortized loan insured by the R. F. C. up to 90 percent would be a type
of credit which the bank examiner, for instance, would not criticize.
Senator A D A M S . There is a limit as to the percent of the bank'S
assets that can be put into that type of loan, is there not ?
Mr. DRAPER. I know of no limit, so far as the national banking system is concerned. There may be in various States.
Senator A D A M S . I am speaking of the national banking system.
Senator CLARK of Idaho. Ten percent of capital and surplus to any
one person.
Mr. DRAPER. Even so; that would represent quite a large amount
of loans.
Senator TOWNSEND. Depending upon the size of the bank, of course.
Senator ADAMS. D O you have any familiarity with the average interest rate received by your member banks, especially in the western
part of the country ?
Mr. DRAPER. I cannot answer that directly, Senator, but it was my
feeling as I read this bill carefully that 4 percent is the average rate,
and taking the whole country as a whole, that was a little conservative. I think there are sections of the country in which a bank wTould
not be interested in making a loan of this type if it could only charge
4 percent.
Senator ADAMS. A S a matter of fact, the smaller banks in the country, especially the western part of the country, could not survive on a
4-percent basis, with their small capital and their small deposits.
Mr. DRAPER. I can very easily believe that. However, I did notice
in the bill that there was a provision which permits a sliding scale
interest rate.
Senator A D A M S . I was asking the question because there was an
implied criticism of that liberality from one of the leading members
of the committee, if not the leading member.



8

P R O V I D E F O R I N S U R A N C E OF B U S I N E S S

LOANS

Senator W A G N E R . I do not know why you interpret that as a
criticism. I asked to have it explained. But I did criticize the fact
that there was no limit placed upon the amount of interest that may
be charged under this bill. I was going to ask you, Mr. Draper, as
to whether you had thought that in giving this power to permit the
charging of a greater interest rate than 4 percent* there ought to be
some limitation.
Mr. DRAPER. Mr. Chairman, I look at most of these problems, of
course, as a businessman, because I was only a businessman and not
a banker; and with that in mind I think that matters of that type
ought to be left to the administrative agency. The Reconstruction
Finance Corporation is not going to make a charge which is unduly
excessive, in my opinion. The more you tie their hands the more
you restrict the benefical effects of the bill.
Senator TOWNSEND. Is the Reconstruction Finance Corporation
limited now as to interest ?
Mr. DRAPER. I do not know, Senator.
Senator TOWNSEND. Are they not, as a matter of fact, making loans
now as low as 3 percent ?
Mr. DRAPER. I clo not know that, Senator.
Senator TOWNSEND. D O you think the members of the Federal
Reserve System are derelict in their duty in making longer term
loans than they should make ?
Mr. DRAPER. I clo not; no, sir. But of course, as I stated, they
are greatly restricted in the way in which they can make long term
loans at the present time.
Senator TOWNSEND. D O you feel that the Federal Reserve banks
have a large volume of applications which they have not approved,
and which you think banks would readily approve and the R. F. C.
would readily insure if this bill were enacted into law?
Mr. DRAPER. There was no use in a man making an application if
l:e had to make it in accordance with 13 (b), because he knew in
advance that lie would not get the money. I personally think there
are many applications that would be made if 13 (b) were liberalized:
that is, i3 (b) of the Federal Reserve Act.
Senator TOWNSEND. What language would you use to liberalize it?
Mr. DRAPER. That is a matter, sir, about which I said I thought
the chairman would give details in his testimony on Monday; and
if you have no objection I would prefer not to go into that further.
Senator TOWNSEND. All right.
Senator W A G N E R . Are there any further questions of Mr. Draper ?
Senator C L A R K of Idaho. I would like to ask one question, Mr.
Draper. I do not know whether it comes within your hesitancy field ;
but how do you interpret "workng capital"? Perhaps you would
rather not answer that.
Mr. DRAPER. Working capital is capital which is used primarily for
the day-to-day operation of the business and is not associated in any
way with what you might call equity capital or long-term capital. In
other words, if you make a loan to a man for working-capital purposes, the chances are that the length of that loan would be less than
1 year. But if you make a loan for capital purposes or equity-capital
purposes, you may make it for any length of time.



9 PROVIDE FOR INSURANCE OF BUSINESS LOANS

Senator C L A R K of Idaho. I was wondering if the only time restriction placed on you were a 5^ear time limitation, how that would
jibe with the working-capital loan, if by working capital you merely
mean cash to meet pay rolls and perhaps buy supplies and things that
go in and out the doors every day. That is my conception of working
capital.
Mr. DRAPER. But, of course, working capital might be considered as
capital that would be used in the business, let us say, for 1 or 2 years;
certainly not in excess of 5 years. But if you consider working capital
with respect to a loan made for a long term, and then expect the business to pay it back within 5 years, you are making a request that probably cannot be complied with by the average business.
Senator WAGNER, Thank you very much, Mr. Draper.
(The witness withdrew from the committee table.)
Senator WAGNER. I have received a letter from the Associated General Contractors of America, Inc., approving this proposed legislation,
and with the request that it be placed in the record. It reads as follows [reading] :
T H E ASSOCIATED GENERAL CONTRACTORS OF AMERICA. INCL,

Washington, D. C., June 2, 1939.

H o n . ROBERT F. WAGNER,

Chairman, Committee

on Banking and Currency,
United States Senate, Washington, D. C.
DEAR; SIB: The Associated General Contractors of America, Inc., with 2,300
members resident throughout the United States, wishes to record its approval
of the purposes of S. 1482, a bill to provide for the insurance by the Reconstruction Finance Corporation of loans made by banks to business enterprises for the
purpose of enabling such enterprises to increase their productions, extend their
operations, and modernize their plants, and for other purposes.
As evidence of our particular concern and interest with respect to the subnormal volume of commercial and industrial construction which has prevailed
during the past few years, we submit that during the Seventy-fifth Congress,
first session, this association sponsored legislation identified as H. R. 1987, which
failed of enactment, but was designed to enable the Federal Housing Administration to insure mortgages issued in connection with the construction of commercial and industrial buildings, types of private construction that were lagging
appreciably in their return to normal volume.
It is our belief that no better example can be submitted as to the value of
Federal aid in restoring private building construction volume to normal than that
afforded by the Federal Housing Administration insured mortgage and the consequent yearly increase in housing construction since its inception.
The insured-mortgage principle applied to commercial and industrial construction as contemplated under S. 1482, will, in our opinion, bring about a
very material recovery of these types of construction and thus assist in relieving
unemployment.
A study of the chart enclosed, entitled "Private Construction" will readily
substantiate the effectiveness of the Federal Housing Administration in stimulating the volume of residential construction and will show the need of providing a similar form of Government aid in respect to commercial and industrial types of construction.
With respect to the provisions of S. 1482, it is our recommendation that
the proposed limit of $200,000 set for any one loan or advance of credit be
increased to $500,000. By doing this, it is our belief that benefits to private
industry under the act will be more widespread.
Your favorable consideration of this most important and vital legislative
proposal is solicited.
Very truly yours,
T H E ASSOCIATED GENERAL CONTRACTORS OF AMERICA,

By EDW. J. HARDING, Managing




Director,

INC.

10

PROVIDE FOR INSURANCE OF BUSINESS LOANS

(The chart enclosed with the above-quoted letter is as follows:)

Senator WAGNER. We will adjourn now until 10:30 next Monday
morning.
(Whereupon, at 12:30 p. m., an adjournment was taken until Monday, June 5,1939, at 10:30 a. m.)



TO PROVIDE FOE THE INSURANCE OF LOANS TO
BUSINESS
TUESDAY,

JUNE

13,

1939

U N I T E D STATES

SENATE,

S U B C O M M I T T E E OF T H E C O M M I T T E E ON B A N K I N G AND C U E R E N C Y ,

Washington, D. 0.
The subcommittee met at 10:30 a. m., pursuant to adjournment
from June 5, 1939, in room 301 Senate Office Building, Senator
Robert F. Wagner presiding.
Present: Senators Wagner (chairman of the subcommittee), Adams,
Herring, Hughes, Clark of Idaho, and Frazier.
Senator W A G N E R (chairman of the subcommittee). We will hear
Mr. Edward Brown.
STATEMENT OF EDWARD E. BROWN, PRESIDENT, FIRST NATIONAL
BANK, CHICAGO, ILL., MEMBER OF FEDERAL ADVISORY COUNCIL,
MEMBER OF THE ADVISORY COMMITTEE OF RECONSTRUCTION
FINANCE CORPORATION IN CHICAGO

Mr. Brown, you are a member of the Federal Advisory Council, and
president of the First National Bank of Chicago, 111. ?
Mr. BROWN. I am; and I am also a member of the Advisory
Council of the Reconstruction Finance Corporation in Chicago, and
have been for a number of years.
Senator WAGNER. We have invited you here to discuss with us
Senate bill 2343 and Senate bill 1482, and we would be delighted
to get your views upon those pieces of legislation. First, are you
speaking just for yourself, or do you represent any particular group
or association ?
Mr. BROWN. I am speaking for the Federal Advisory Council, at
their request, Mr. Chairman.
The Federal Advisory Council at its meeting on June 6 passed
a resolution directed to the Board of Governors of the Federal
Reserve System, which I am informed was transmitted to the chairman of this committee on June 7. With the permission of the committee I would like to read it [reading]:
The Federal Advisory Council desires to call to the attention of the Board
of Governors of the Federal Reserve System Senate bill No. 2343 on which
hearings are now being held by a subcommittee of the Banking and Currency
Committee of the Senate.
The Council believes that the great majority of businesses needing loans for
a period of years, where a reasonable assurance of repayment exists, can and
do obtain such loans from banks and other nongovernmental sources such as
insurance companies. In those cases where such loans are not obtainable
117




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PROVIDE FOR INSURANCE OF BUSINESS LOANS

from banks or private sources the Reconstruction Finance Corporation is
already empowered by existing legislation to make, and through participation
arrangements, in effect, to guarantee or insure percentages of such loans, and
does so make and in effect insure loans.
Under present legislation the Reconstruction Finance Corporation is restricted in that the loans must be in the opinion of its board "of such sound
value or so secured as reasonably to assure retirement or repayment" and to
concerns "only when in the opinion of the board of directors, the business enterprise is solvent" Under Senate bill No. 2343 no such restrictions are imposed.
If it is the intent of the bill that the Reconstruction Finance Corporation will
under it only insure loans the repayment of which in its opinion are reasonably
assured, the bill should be so amended.
If it is the intent of the bill that the Reconstruction Finance Corporation
shall insure loans the repayment of which in its opinion are not reasonably
assured, and the Reconstruction Finance Corporation should insure such loans,
the council feels that the result would be injurious to industry as a whole and
would tend to restrict longer term credit now being made available by banks
and others to businesses which in the opinion of the lenders do have reasonable assurances of being able to repay such credit. The extension of credit,
through insurance or direct lgans, by governmental agencies or by private capital, to businesses not able to repay not only is costly to the lender and does
not benefit the borrower, but enables inefficient, poorly managed, and uneconomic businesses to compete for a time with other people's money against successful, well-managed, and economic businesses in the same line. By so doing
it retards the expansion of sound business enterprises and because these are
faced with unsound competition, makes it more difficult for them to obtain
credit either short or long term, and makes it even more difficult for them to
obtain additional proprietary capital. In fairness to the sound and solvent
businesses of the country, and apart from any considerations of probable loss
to the Treasury, the council believes that no governmental agency should be
empowered to make or insure loans to industry or commerce unless after examination the agency feels that such loans are reasonably certain to be repaid.
The provisions for the rediscount of the insured portions of loans contained
in the bill should be eliminated. In the case of member banks the Federal
Reserve banks could under existing law accept them as collateral for shortterm loans which can be renewed if necessary. Member banks should not be
indebted through rediscounts to Federal Reserve banks over long periods of
time as would be the case if notes running up to 10 years were rediscounted.
Nor should nonmember banks be able to use the credit facilities of the Federal Reserve banks but should depend on their correspondents.
The Council urges that before legislation is enacted which puts the Government in the business of insuring industrial and commercial loans on a
permanent basis, as contemplated by the bill, and which might have far-reaching ultimate effects on industry, commerce, and banking, that an investigation
be made by Congress of the extent to which existing agencies meet the need
for term loans on the part of business and of the extent of the unsatisfied justifiable demand for such loans. The Council is informed that various studies are
in progress which might w^ell be used in connection with such an investigation.
The Council requests that a copy of this expression of its views be sent by
the Board to the subcommittee considering Senate bill 2343. If the subcommittee will give opportunity the Council would be glad to have one or more
of its members appear and testify regarding the bill.

It is on the basis of that resolution or recommendation, Mr. Chairman, that I am appearing before the committee.
Senator A D A M S . For the sake of our record, Mr. Brown, will you
explain how the Advisory Council is constituted?
Mr. B R O W N . The Advisory Council was provided for in the original Federal Reserve Act. It consists of one representative from each
of the 12 Federal Eeserve districts, elected by the Board of the Federal Reserve bank in each district. It is required by the Federal
Reserve Act to meet with the Federal Reserve Board at various
times a year and to discuss the problems of interest to the Federal
Reserve System with the Federal Reserve Board.



119 PROVIDE FOR INSURANCE OF BUSINESS LOANS

Is that a sufficient explanation, Senator Adams?
Senator ADAMS. Yes,
Senator WAGNER. YOU meet here in Washington, as I recall it?
Mr. BROWN. We always meet four times a year, and whenever
there is any emergency we have special meetings in addition to the
four regular meetings.
Senator ADAMS. As I get the point you are making, a loan which is
not a sound loan is of course detrimental to the lender. That follows inevitably, and it is of no service to the borrower; and then,
beyond that, the borrower, in failing conditions, normally will make
excessive efforts to keep afloat, with the result that he becomes an
unfair competitor of sound business; so that if you make an unsound
loan to an unsound borrower you jeopardize a sound business interest?
Mr. BROWN. That is a point in the resolution; and I would be glad
to testify as to one or two examples of such loans and their effect on
competitive businesses later on.
Senator WAGNER. YOU may do so now if you wish.
Mr. BROWN. I would like to take up these points in order, if I
may, Senator Wagner.
Senator WAGNER. Very well.
Mr. BROWN. There have been a number of expressions of opinion,
not supported by data, given to this committee to the effect that
there is a large or a very considerable unsatisfied demand for credit
extending over a year on the part of businesses and businesses which
might need to borrow up to sums as large as a million dollars a
year, apparently.
It is the view of the council, all of whom are active bankers from
all over the United States, that such is not the case. I can only testify from my own knowledge, because, obviously, neither I nor the
Federal Advisory Council as a whole have been in a position to make
a study of that situation affecting the whole of the United States.
But I do know what is going on in the part of the country of which
Chicago is the center. I do know, both as president of the First
National Bank and as a member of the advisory committee of the
Reconstruction Finance Corporation, the Chicago agency, as to the
demand for credit which exists.
Right here I want to make a sharp differentiation between credit—
that is, loaning money where such a reasonable assurance of repayment exists as to justify the borrower getting it at legal rates of
interest, which banks are authorized to charge under the existing
laws—and proprietary or risk capital, which nobody would be justified
in furnishing at any legal rate of interest, and which is entitled by
some arrangement in consideration of the risk it takes to a share in
the profits, if profits are realized.
In my opinion, it has always been difficult for small businesses to
get risk capital. I think the difficulties today, for a variety of causes,
are greater in getting proprietary risk capital for small- and moderatesize businesses, and even for large businesses, than was the case in
former years. In this bill the problem is approached not from the
standpoint of the proprietary capital needed for business, but the loan
capital which should be furnished at legal rates of interest and
which inevitably carries with it the connotation that there is such a



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PROVIDE FOR INSURANCE OF BUSINESS LOANS

reasonable certainty of repayment as to justify the borrower getting
it at legal rates of interest.
In the Seventh Federal Reserve District a study was made under
the direction of the Treasury Department by Dr. Jacob Viner and
Mr. Hardy, of the Brookings Institution, of the extent to which the
credit needs of business were not being met by the banks. It was
a rather complete and exhaustive study, made by obtaining a large
number of graduate students of various Middle Western universities,
having them talk with some thousands of borrowers who complained
that they could not get credit, and then going around and interviewing banks or loan agencies who declined their request for credit, to
decide if the requests were justified. That is the last study that I
know of; and it has been 5 years ago since there has really been made
a thorough study of the subject.
The conclusions of the study showed that of the people who were
declined credit only about 20 percent at that time could give any
reasonable assurance of repayment. The report recommended at
that time—and I might say that all of its recommendations have
since been carried out—that banks be encouraged to adopt a more
liberal attitude toward longer-term loans and loans which were not
cleaned up in short periods; that bank examiners be instructed to
take a more liberal attitude toward such loans, if they were sound;
that the slow classification in bank examinations be abolished, and
that the slow loan be not criticized if its repayment was reasonably
assured; that the Federal Reserve Act be amended, as was done in
1935, to provide that such loans could be the basis of credit in time
of need through the Federal Reserve Banks on the part of member
banks; that the tests of the Reconstruction Finance Corporation as to
loans that should be made should be liberalized, which was done by
the amendment of 1938, and that their application forms should be
simplified.
As I say, since the Viner report was made, covering the Seventh
Federal Reserve District, all these various recommendations have
been put into effect; and my observation is that virtually no small
business or medium-sized business which is entitled to credit either
for a short or a long time, and which can give reasonable assurances
of repayment, fails to get it.
Senator FRAZIER. Are there quite a considerable number of smaller
or average-sized businesses that would like to have loans, that are not
considered safe risks, and cannot get loans from a bank for that
reason ?
Mr. BROWN. There are a great many people who want loans, Senator Frazier, for all sorts and kinds of purposes, where the assurance of repayment is so doubtful that no prudent man will make
the loans.
Senator FRAZIER. D O those requests come from what may be termed
substantial business men?
Mr. BROWN. Not to any very great extent; but there are some very
substantial businessmen; substantial businessmen in the sense that
they may have quite sizable businesses which, in times past, have been
profitable, but which for a number of years have been steadily losing
money because of conditions in the industry, or location, or poor man


121 PROVIDE FOR INSURANCE OF BUSINESS LOANS

agement, and where there is grave doubt as to the ability to repay
the loans. There are many such men who do w7ant loans.
Senator ADAMS. IS it not the present situation that there is more of
a demand for borrowers than there is for loans on the part of borrowers? That is? that the banks are looking for opportunities to
make loans?
Mr. BROWN. The banks are all looking for opportunities to make
all kinds of loans. Since the report of Dr. Viner in 1934 there has
been a development in the last 5 years in that the banks of this country have gone very extensively into what is called term loans; that
is, loans payable over a term of years, generally from 1 to 10;
sometimes serial loans, and sometimes running for 5 years or 3 years,
without prepayment. It is a development which has been encouraged
by the difficulty of the banks in getting normal commercial loans, by
the fact that such loans are now available as collateral in time of need
at the Federal Reserve banks, and due also to the fact that many borrowers prefer them rather than going through the expense and delay
of S. E. C. proceedings.
In the case of our own bank in the last 5 years we have made
almost $200,000,000 of such loans, and we have outstanding today
some $84,000,000 of them. They have been made in sums ranging
from $30,000 up to amounts of several million dollars. The majority
of them are loans of several hundred thousand dollars.
Ordinarily the small business—not the business that is justified in
getting a loan of $300,000 or $500,000 or $700,000, but a business
which wants to borrow less than $100,000—cannot give the assurance
of repayment over a long term of years that a large business can.
It is due to a variety of causes. In the first place, the small business
generally cannot afford more than one executive. If anything happens to that executive, the business is just out of luck. You can
insure against his death, of course, but you cannot insure against his
illness. The possession of smaller resources tends to make it much
more difficult to predict whether in 2 years or 3 years or 5 years or 10
years that business wTill still be alive and going than is the case writh
a large business.
Senator FRAZIER. What is to become of these litle-business men
that need money and cannot get it because you consider them unsafe
risks? Are they to get out of business or go broke?
Mr. BROWN. NO, Senator. They do get loans. They do not get
them in the form of long-term loans payable over a period of years,
of the type that are envisaged in this pending bill. I have some
statistics from our own bank here which I had made up. The bank
may make a loan for a period of 6 months. Such a loan may be
secured by assigned accounts, may be secured by the plant or inventory, or it may be entirely unsecured. It may be secured by real estate
or some other collateral. If at the end of 6 months the business is
still going, still is solvent, and is as able to repay as it was when
the loan was originally made, the loan is renewed and re-renewed,
and it goes on from year to year.
I have a tabulation in the case of our own bank of loans that have
not been cleaned up, that were made originally for periods of under
6 months to businesses with net worths of under $100,000, which we



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PROVIDE FOR INSURANCE OF BUSINESS LOANS

will take, for the purpose of discussion, as small businesses, and
which are totally unsecured, but because of the satisfactory condition of the business there has been no clean-up required. There are
22 such loans in our bank, aggregating $798,000, dating back to 1934
and prior.
Senator FRAZIER. What is the rate of interest on loans of that
kind?
Mr. BROWN. About 4 or 5 percent. We have a total of unsecured
loans for working-capital purposes to small businesses of $2,500,000.,
These are loans to businesses of a net worth of under $100,000. We
ha - o loans to businesses with a net worth under $100,000, secured by
collateral other than real estate of some $12,000,000. There are various types of seasonal loans; and when you go to businesses with a net
worth of from $100,000 to $500,000, you find that where the business
continues solvent, continues to give reasonable assurances of repayment, our bank and, it is my observation, other banks in Chicago and
in the Middle West, do not insist on complete clean-ups as long as
they are satisfied that the business can ultimately repay, but we
keep renewing from time to time these loans to smaller businesses.
From the mental point of view of the small-business man, Senator*
that is not as satisfactory as if he got a straight loan for 10 years;
but owing to the greater hazards of smaller businesses, if you want to
have a reasonable assurance of repayment, it is necessary originally
to make the loans for short times, sot that you can take frequent
looks to see if the business is going well, and if it is not, to take steps
to collect the loan.
Senator FRAZIER. I S it your opinion, then, that Congress would not
be justified in passing a bill sych as this S. 2343 for the purpose of
making long-time loans to these smaller-business men?
Mr. BROWN. It is my opinion. It is my opinion, based on my experience, that no such need exists. Contrary opinions have been
expressed here without supporting data. My opinion is shared by the
11 other members of the Federal Advisory Council. I think, under
such circumstances, that before legislation of this type is passed, a
statistical study of the extent of the unsatisfied demand for justifiable
loans should be made by some independent agency, or by the committee itself, employing somebody like Mr. Viner, or using some similar
procedure to his, to determine what the extent of this need is, and if it
really exists in any such amount as to justify either a new type of loan
agency or a new type of loaning by an existing agency
Senator WAGNER. Mr. Brown, let us assume for a moment that
there is a need for additional facilities for the small-business man
that he is not able to secure. Would you then feel that this legislation meets that need? I mean, this particular kind of legislation
which is pending. You say that there should be an inquiry as to
whether there is really a need. But let us assume for the moment that
there is a need. I am not asking you to concede it, but just to assume
it.
Mr. BROWN. That there is a need by businesses which can give
reasonable assurance of repayment ?
Senator WAGNER. Of course, I assume that must be so as to every
loan, that we could not expect a bank to make a loan without such
assurance. But assuming that there is that need, would you say that



123 P R O V I D E FOR INSURANCE OF BUSINESS LOANS

this particular legislation would be workable in providing the necessary credit?
Mr. B R O W N . I do not think it would. I think the powers given the
R. F. C. at the present time to insure loans are far greater than the
powers given by this bill.
Senator W A G N E R . Y O U mean, by participation?
Mr. B R O W N . By participation. The R. F. C. at the present time,
whenever it is convinced that a sound loan exists, will go into a participation arrangement with the bank under which the bank takes 10
or 20 percent of the loan and it stands only its pro rata share of the
loss. Under this bill, as Mr. Eccles pointed out in his testimony, the
bank would have to assume the entire first 10 percent of the loss; and
assuming the need, the present arrangements which the R. F. C. is constantly making with banks are much more likely to cause the banks
to make such loans and get R. F. C. participation than this bill would.
Senator C L A R K of Idaho. Do you have many of those loans now ?
Mr. B R O W N . We have a few ; not many. As I tried to say, Senator
Clark, we have tried very hard to make loans; and where we were satisfied that a long-term loan exists where payment is reasonably certain,
we have made it ourselves; and we have made loans on terms of over
a year to the extent of some $200,000,000, and we have over $80,000,000
of them today outstanding.
Senator W A G N E R . What percentage of your applications for loans
made by what we call the small-business men do you reject?
Mr. BROWN. I cannot give you that figure.
Senator W A G N E R . Can you approximate it?
Mr. B R O W N . N O ; I cannot, except to say that the percentage would
certainly be less than 3 or 4 percent.
Senator W A G N E R . Only 3 percent are rejected, you say ?
Mr. B R O W N . I would say less than that. I cannot give you the
figures; but the average small-business man who comes in and wants
a loan does not ask a' large bank like ours for it unless he thinks
himself.that he is reasonably certain of repaying it.
Senator W A G N E R . In your statement you spoke about loans which,
you made without security, I think. Did you not say that?
Mr. B R O W N . Yes. You mean, short-term loans?
Senator WAGNER. Yes; short-term loans, without security. Are
those what you call character loans ? What induces such loans without security ?
Mr. B R O W N . They are character loans in a sense, yes; in the sense
that we believe by experience with the borrower that he is honest, that
he has ability in his business, that the business, from our experience
with it, has been making money, and our belief that with the present
management it will continue to make money. When one speaks of
character loans, they are character loans in that sense. The term
"character loans" as generally used in banking jargon are loans of
under $500 to somebody who has got no business and no assets, but only
on the general belief that he will repay it—such loans are made by
personal loan companies, and many banks are going into the making
of them. They adopt various devices on that kind of loan to get
higher than the 6- or 7-percent rates of interest, because the percentage of loss is great. That is, it is considerable ; but the expense
of collecting them and going around and dunning the man to pay



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PROVIDE FOR INSURANCE OF BUSINESS LOANS

it is very great, and you simply cannot make that type of loan and
live on a 6-percent interest rate in any great volume. When people
speak of character loans, in the technical jargon of bankers, that is
the type of loan to which they refer. If you mean by character loans
that we will not loan to a man except one who has integrity and
ability to make money, and we have confidence in him, all loans are
character loans in that sense.
Senator WAGNER. Except that as to some you are protected by
collateral, so that character does not enter into it to the same extent.
Mr. BROWN. There may be an exceptional case where we would
loan on Government bonds or marketable stocks; but where you loan
to a going business, you very rarely get collateral, and in the case
of commercial loans we generally do not take collateral even in the
case of these long-term loans, Senator.
Senator WAGNER. What is that money1 that you loan as a rule
used for? Is it for working capital, capital investment, or what is
the nature of the aid as a rule?
Mr. BROWN. The same loan may be used for several different purposes. In many cases it is used for what would be working capital,
to enable them to carry more inventory and more accounts. In
many other cases it is borrowed for the purpose of plant extension
or for the acquisition of additional sources of supply, as in the case
of a coal-mining company or a lumber company. It is very frequently, c.nd I should say in the last few years it has been used, more
than fcr any other purpose, to refund existing indebtedness at lower
rates of interest. What the money is used for is to replace outstanding indebtedness at lower rates of interest.
We are interested in our estimate of a man's ability to repay and
the soundness of his business. We are only incidentally interested
in the purpose for which he uses it. We have made money on these
loans, and do make them for capital expansion and for working capital.
In the case of these smaller loans which are made for 6 months,
but which have been outstanding and renewed from time to time, we
do clean up. I have some figures here as to the purposes, so far as we
could determine, for which they were used; and in those cases the
loans would come down and go up for what might be called seasonal
working capital to the extent of $3,000,000, roughly. These are businesses under $100,000 of net worth; to the extent of $15,000,000 for
what you might call permanent working capital; to the extent of
about two and a half millions for fixed capital. That gives you the
bulk of them. In this tabulation that type of loan is for what you
might call more or less permanent working capital.
If I may give you an illustration: We have a small business
which supplies most of the horseradish to the retail grocers in
Chicago. It is a one-man business. The product has a good reputation. It has never been advertised, but it is used all over Chicago.
The business is more or less constant, because horseradish keeps and
it is ground up into a sauce and put into bottles and there is a
demand for it. That man has a fairly constant amount of inventory on hand and a fairly steady amount of good accounts receivable. He has probably a net worth of about $50,000 or $60,000,
and makes $15,000 a year, perhaps, out of his business, which in


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PROVIDE FOR INSURANCE OF BUSINESS LOANS

eludes his own time and salary. To my knowledge he has been
indebted to us steadily for a good many years, and we have not
been worried about it, because we loan him only for 6-month periods,
and as long as he is managing the business it insures repayment.
But we would not want to make that loan for a period of 1 to 10
years, because he might die tomorrow, or the public might decide
that using horseradish is an unhealthy habit, or stop eating it for some
other reason beyond our control.
Senator WAGNER. Are there any other questions?
Senator DANAHER. I would like to ask, if I can fairly restore to
your mind, Mr. Brown, your line of thought at the time you said
that it has always been difficult to get risk capital, but it is more so
particularly of late, and, I quote, "for a variety of factors." Would
you just indicate any of those factors? Or is that a fair question
to you ?
Mr. BROWN. It covers a great variety of ground. I should say,
first, and most important of all, is that the people who have in the past
put proprietary capital, expecting to get a share of the profits, into
small businesses think that under present business conditions and
the present political world conditions that exist, there is less chance
of a business making a profit than there was 10 or 12 years ago.
I think that is the estimate of the would-be investor in proprietaryrisk capital in small businesses. He has that attitude. He thinks the
chances of profit are less than in the 1920's or in the decade before
the 1920's. I think that is the reason why it is difficult to get that
capital.
I think a second reason, much less important than that, is that if
he puts his capital into a small business, as risk capital, he feels that,
if he makes money on the investment, the Government will take a
very large percentage of it, and that, if he loses money, he will not
get a proportionate deduction in his tax payments.
The third thing—but I do not believe that this applies except to
businesses which want to raise several hundred thousand dollars of
capital—is the expense of the S. E. C. registration and regulations.
In my years of business experience, when a business was growing
a man did not get his additional capital by going to the open market or by borrowing at simple interest. He put his own savings
back in the business that was making money. If it looked like a good
chance, he would go to people and get them to put $10,000 or $5,000
or $25,000 into the business, and they might take stock in it ; they
might put it in in the shape of a loan with an option on the stock
or make the proprietor of the business give up some of the existing capital stock as a bonus for making the loan. That type of
investor expected to lose in a majority of his investments. He expected one out of three or four or five to make so much money that
it would more than offset the loss on the others. It was only after
the business got to a point where he had a net worth of $400,000 or
$500,000, at least, that it began to go to the open market and get
some stock house or some bond house to put out an issue of stock
or convertible debentures, or debentures with warrants entitling
them to buy stock which gave the prospective investor a chance to
share in the profits if the enterprise was successful.
152788—39

9




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PROVIDE FOR INSURANCE OF BUSINESS LOANS

Senator DANAHER. Thank you.
Senator CLARK of Idaho. Do you think that equity or long-term
financing could be done today in amounts, say, from $100,000 to
$500,000 by small bond houses, provided the limit was raised, say,
to $500,000 for S. E. C. registration; would the cost be too prohibitive
even if the limit were raised to $500,000 ?
Mr. BROWN. I do not know about a limit of $500,000. I think
some could be done, but I think a very considerable amount could
be done between $500,000 and $1,000,000. I might say in that connection that the First National Bank of Chicago, before 1933, had
an affiliate, the First Trust & Savings Bank, which in 1933 was
merged into the First National Bank. It was an incorporated State
bank with a savings department and trust business, and it was probably the largest distributor of industrial bond issues in the city of
Chicago, both large and small; and every year we would put out
a number of small industrial bond issues. When I say "small" I
mean ranging from $500,000 to a million and a half. The various
investment banking houses which are still alive and doing business
in Chicago put out similar issues. These would frequently have conversion privileges of stock warrants or something to give the buyer
a chance for more than simple interest if the enterprise was successful.
Answering your question categorically, I think that if the limit
of exemption under the S. E. C. were raised a certain amount of
bond issues and stock issues in the amount of several hundred thousand dollars could and would be floated that are not now floated.
Senator ADAMS. Mr. Brown, you made a suggestion a while back
as to the number of risk investments that an investor might think he
would have to make in order to find one profitable one. In your
experience what estimate have you arrived at as to the percent of
risk investments which proved to be unfortunate; or, to put it the
other way, what percent was profitable ?
Mr. BROWN. That is awfully hard to say, Senator. I was not a
rich man, but) before the late depression I put sums r a n g i n g from
$5,000 to $25,000 into quite a number of enterprises. Taking the
grand result, I made money on them; but four out of five failed.
The fifth would make enough money to make up for the losses in the
others. But what the experience of other people has been I do not
know. I have had some of my friends who probably made a hundred
investments in mining and oil companies and have not had a single
one of them give them any return. On the other hand, there are some
people who take a lesser degree of chance, and probably have gotten
returns in two cases out of three or three out of four. I would like
to answer your question, but I just do not know.
Senator ADAMS. I notice in estates that sometimes inventories are
published, and sometimes in my own professional experience I have
noticed men very successful in net results, had accumulated quite a
lot of bad investments.
Mr. BROWN. I scarcely know of a millionaire who dies who has
not somewhere in his estate—they may not be inventoried, because
they are so utterly worthless—dozens of securities which have become
utterly valueless. He has probably made his fortune on some one
thing that did happen to hit.



127 PROVIDE FOR INSURANCE OF BUSINESS LOANS

Senator ADAMS, YOU are thinking in terms of men who are in
the position, of acquiring information on business opportunities. If
you take the man who merely has savings, his percentage of loss will
be much higher than that of the experienced man in business, would
it not?
.
Mr. BROWN. It certainly would if he tries to go into that field.
Senator ADAMS. Everybody does.
Mr. BROWN. Most people do. I will not say, everybody. I know a
few conservative souls.
Senator WAGNER. Again referring to the credit of the small-business man, did you have an opportunity to read the testimony before
the so-called monopoly committee, of small-business men giving their
experiences with reference to small business ?
Mr. BROWN. I did not, Senator. I would say that when you hear
the testimony of a small-business man, unless you take the other side
of the story as to why the loan was declined you only get one side
of the story. I remember at the time of the Viner investigation a
man who had a perfectly good statement was turned down and the
investigator who came around could not understand it. In going
through the man's books we had found he defrauded the Government
on income tax and filed a false return for a number of years, and
he was not a good business risk—not because of dishonesty or because
of defrauding the Government, but because of the danger that the
Government might act against his property on a lien for income taxes.
I go back to the proposition that the only way to get at the truth
in the matter is not to take ex parte statements from every smallbusiness man. They are honest; they believe they have been turned
down on credit which they are entitled to get; but you should have
somebody capable of forming a judgment, to listen to the borrower,
and then listen to the man who declined the loan, and then make up
his own mind; and if he takes a large enough sample of such cases he
will give you a pretty fair picture of how much the unsatisfied need
exists.
I would like to point out the danger which exists in the present
bill. It seems to me that it authorizes loans to be made without any
requirement on the part of the R. F. C. or the lending agency that
there is a reasonable certainty of repayment,
Senator HUGHES. That is the amendment that you spoke of awhile
ago ? You said that the bill ought to be amended in that respect.
Mr. BROWN. There is no need of arguing the question with the committe, if the committee feels that loans ought only to be made to businesses, which, after examination, can satisfy the agency making the
loans that there is reasonable assurance of repayment, There has been
some philosophy advanced that loans ought to be made irrespective
of whether the business can repay them, because if loans are made to
businesses which cannot repay, they may, by using the money, give
employment to a lot of people and advantage the national economy
more than the loss which the Government would take on the percentage of loans which are not repaid.
Senator ADAMS. Just as an individual member of the committee,
I suggest that you do not restrain your views on any presumption
of what the committee may report.



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P R O V I D E FOR INSURANCE OF BUSINESS LOANS

Senator WAGNER. At any rate, I do not recall any testimony where
it was suggested that loans should be made irrespective of any prospect of repayment of the loan. I do not think anybody said that.
Mr. B R O W N . The text of the law giving authority to the Federal Reserve banks to make direct loans to industry requires that they shall
be adequately secured in the opinion of the bank. The test in the
original R. F. C. Act was that they should be safely and adequately
secured. The test now is, in the 1938 act, which was the great liberalization of the R. F. C. Act, that the investment be of sound value,
or so secured as to reasonably assure retirement or repayment, and
only to concerns which are in the opinion of the R. F. C. solvent when
the loan is made.
If anybody under 2343 can see any requirement that the R. F. C.
must satisfy itself as to the solvency of the borrower or as to the
certainty of repayment, I have not been able to find it.
Senator FRAZIER. If this bill should pass, Mr. Brown, would your
bank go to the R. F. C. to make a loan under this provision if you
did not think there was a reasonable assurance that the borrower
could pay his debt?
Mr. BROWN. I hope we would not; but I know a good many cases
where it would be to our advantage to do so. We have got, for
instance, a loan of several hundred thousand dollars to a closed oil
refinery in Texas that is charged off. I would1 be delighted to
double the amount of the loan to get nine-tenths of the double loan
guaranteed by the R. F. C.
Senator FRAZIER. Y O U are talking about loans which you have on
hand.
Mr. B R O W N . All right. I will talk about a new loan. One of the
courses of our midcentral western country at the present time has
been the fact that local businessmen have stimulated the building
of small canneries by supplying capital to promoters on the theory
that the cannery, when it is located in their town will benefit the value
of surrounding real estate. I can readily see that instead of all the
citizens of the town clubbing together and putting up the money,
they will go to a bank and say, "You loan this fellow $100,000, to
put up a cannery which will bring a lot of business to the town,
and get the R. F. C. to insure 90 percent of it. The bank may lose
10 percent, but it will mean that more money will be spent in this
town and we will see you get it back some way."
That is not imaginary, Senator Frazier. There are a good many
banks in this country which go into unsound loans for reasons of
local patriotism.
Senator FRAZIER. And politics ?
Mr. BROWN. And politics. There have been several large banks in
Chicago which were wrecked because of loans made in response to
political pressure. You ask me whether our bank would do it. I
hope we would not; but I know perfectly well that there are a great
many banks in this country that would, and it seems to me that the
least that Congress can do, if it is going to set up any loaning agency
or any insuring agency, is to require an inspection of the risk and a
finding that there is at least a reasonable certainty of repayment.



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PROVIDE FOR INSURANCE OF BUSINESS LOANS

Senator H U G H E S . D O you think that if the bill is to be reported, it
should have that amendment in it?
Mr. BROWN. I would say so, by all manner of means, Senator.
When a loan is made to a badly managed business or a failing business, that keeps it alive whether that loan is made by a private individual or made by the Government, it operates unfairly to all the
sound concerns in that industry. We had an example in the Chicago
district. There was a large radio business, and it made good radios.
It was located in a small city in Indiana. It got into difficulties, and
it was going to close down. Its closing down meant that the people
in that town would be out of jobs. It tried to get bank loans and
could not. It finally got a loan from the E. F. C. The R. F. C.
tried to surround itself with every possible safeguard, but I think
it was very much influenced by the fact that if the loan were not
made, a lot of people would be thrown out of employment. What
happened? For a little over a year in which the company made
radios and sold them at less than the cost of manufacture, it absorbed
the trade of the other radio manufacturers in the Middle West. It
finally folded up, and the R. F. C. is now holding a mortgage on a
shut-down radio plant, and the bulk of the loan will be lost.^ But
it absorbed the profits, it absorbed- the expansion plans, and it absorbed the opportunities for employment of three or four solvent
competitors who were paying income taxes.
The same result would have been obtained if the loan had been
made by a bank or by a private individual, as if it w^ere made by a
governmental agency. But the bank or the private individual wants
to be pretty sure that the business is a success before it loans the
money out, because it is going to lose its own money. The governmental agency has not got the same deterrent; and, as I say, in this
bill there is absolutely no requirement of examination to satisfy the
loaning agency that there is any reasonable assurance of repayment.
Just one more point, Senator. I realize that I have probably talked
too much. A number of studies have been and are being made as to
the need' of this kind of credit, but as far as I know, none of them,
have been introduced before this committee; none of them are complete in themselves. I think that the committee, before enacting
legislation, should make a real investigation. I understand, for instance, that the Federal Reserve banks at the request of the President's
council of Federal Reserve banks have caused an examination of the
need of this sort of credit. Last Tuesday the Federal Advisory
Council was in session and it was told of the investigation. I do not
know its result, but from what I have heard from officers of two or
three of the banks I doubt if there is shown any considerable existence
of an unsatisfied justifiable demand for loans as distinguished from
proprietary capital. There have been local studies made by other
groups, and I do think that the dangers in the implication of the
Government's going into the business of direct loans to industry
and commerce on a large scale are such that before legislation is
passed, all of the available material should be assembled and studied
and examined and correlated, and where there are gaps in it, further
studies and examinations should be made.
(The witness withdrew from the committee table.)



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STATEMENT OF HOWARD A. LOEB, VICE PRESIDENT,

FEDERAL

ADISORY COUNCIL, CHAIRMAN, TRADESMENS NATIONAL BANK
& TRUST CO., PHILADELPHIA, PA.

Senator WAGNER. Shall we continue this afternoon? Some of
these gentlemen have come from out of town. Mr. Smith, for instance, is from St. Louis. Can we not meet this afternoon?
Senator ADAMS. They may finish the calendar about 3 o'clock.
Senator WAGNER. I think so. We will go on until 12 o'clock, and
then recess until 3.
Will you state your name and whom you represent ?
Mr. LOEB. My name is Howard A. Loeb. I am vice president of
the Federal Advisory Council, and chairman of the Tradesmens National Bank & Trust Co., Philadelphia, Pa.
Senator WAGNER. YOU do not mind if we interrupt you at 12
o'clock ?
Mr. LOEB. Certainly not, Mr. Chairman.
Senate bill S. 2343 and the comments made by its proponents imply
that there continues to exist a substantial demand for credit upon
the part of medium-sized and small business enterprises that is not
being supplied by banks, by the Reconstruction Finance Corporation, by the Federal Eeserve banks under authority of section 13b
of the Federal Reserve Act or by other lending agencies of the Federal Government. Little or no data in support of this statement
other than an expression of opinion has been submitted with this
bill, despite the fact that during the last 7 or 8 years numerous
studies have been made of this subject by public bodies, banking and
business groups and latterly by the Federal Reserve banks. A careful review of these reports indicates no significant volume of justifiable unsatisfied credit.
If I may be permitted at this time, I have prepared a supplementary statement supporting those conclusions, but before continuing I would like to submit some, what might be termed local, data
obtained from banks in and about Philadelphia.
Taking our own bank, let me say that for the last 18 months we
have kept a record of rejected loans, which I think is a very important
record to maintain.
For the period of June 1, 1938, to May 31, 1939, our bank made
2,916 loans aggregating $19,914,585—and these are all unsecured
loans—an average of $7,000 per loan. It rejected in that period 34
loans, and those loans are not so-called personal loans or small personal loans.
Senator FRAZIER. HOW many rejections?
Mr. LOEB. Thirty-four out of 2,916 loans made, totaling $3'81,700, or
an average per loan of $13,500; a percentage of 1.16 in number and 1.91
percent in amount.
An examination of those 34 rejections is interesting. In the $1,000loan class there were 14 loans, involving $9,200, of which 1 was
rejected in the sum of $1,000 because of the type of business; 3 in the
sum of $1,800 because of the history of the borrower; 10 in the total
of $6,400 because of the financial condition of the borrower.
In the next class $1,001 to $2,500 there were two rejections amounting to a total of $3,500—rejected because of the history of the borrower.



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P R O V I D E F O R I N S U R A N C E OF B U S I N E S S

LOANS

In the next class, $ 2 , 5 0 1 to $ 5 , 0 0 0 , there were seven rejections,
because of financial conditions, involving a total of $ 3 4 , 0 0 0 .
In the class of $ 5 , 0 0 1 to $ 1 0 , 0 0 0 there was one rejection because of
financial condition.
$ 1 0 , 0 0 1 to $ 2 5 , 0 0 0 , one rejection because of history.
In the $ 2 5 , 0 0 0 to $ 5 0 , 0 0 0 class there were two because of the type
of business. They amounted to $100,000.
In the class of over $ 5 0 , 0 0 0 there was one loan in the sum of
$200,000 because of financial condition.
This only covers, as I said before, what we call our unsecured loans.
In addition to that we have made loans on commodities, loans on
collateral of various kinds and a small amount of automobile financing. These are all in the category of secured loans.
Senator W A G N E R . What do they amount to ?
Mr. LOEB. They amount to $1,483,435.
As to some of those loans wTe have participations with other banks.
Senator A D A M S . What about participation with the E. F. C. ?
Mr. LOEOB. W E have one participation and one stand-by, and we
have agreed to continue to afford the borrower a line of credit under
certain limitations which have been agreed upon by the borrower, the
R. F. C., and our bank.
Senator W A G N E R . H O W long are these loans for?
Mr. LOEB. They are current loans for relatively short periods. On
that subject I think you must realize that these so-called short loans
are not really short loans, and there is a certain advantage and stability afforded to the whole industrial situation by having these loans
mature at shorter periods, so that the borrower as well as the lender
may have the value of conferences. These conferences result in information of value both to the borrower and to the lender. Information
is developed that frequently enables the lender to be of further assistance, not only to the particular borrower, but furnishes the lender
with information leading to a broadening of loan activities.
Senator W A G N E R . Y O U make them for how long?
Mr. LOEB. They vary, Senator. I have not broken that down, but
I should say all of these loans except our participations are for within
a year.
Senator W A G N E R . Have you any information there as to how far
the loan was really extended?
Mr. LOEB. Obviously, with 2 , 9 1 6 loans wTe are designating each loan
as it matures and is renewed, a new loan, because it has matured. That
in itself will give you some idea of the length of time involved in the
loan.
Senator W A G N E R . What I was trying to find out was, while the loan
is for 6 months, say, what is your average loan? How many renewals are there ? Have you any information on that ?
Mr. LOEB. N O ; I have no information on that, except the general
information that under the tremendous pressure that banks are suffering today with unloaned funds and exceedingly low rates, every
effort has been made to keep, where it is reasonably safe, money in
operation; so that that old idea of short maturity—because a note
happens to have a short maturity, is not in effect a short maturity.
Senator W A G N E R . What is the rate of interest charged?



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PROVIDE FOR INSURANCE OF BUSINESS LOANS

Mr. L O E B . I should say that the average rate is around 3 percent
on our commercial-loan portfolio.
In addition, I would like to submit a piece of publicity issued by
a much larger bank that struck me as very interesting and as indicative of the attitude of banks, and I should like to read this rather
fully, because it helps clear up an impression which is much to the
contrary [reading] :
There is a current impression that banks do not want to lend money. This
may be due to a lack of information. The larger part of the bank's income is
derived from interest on loans.
Every bank has two plain duties: First, to safeguard the depositors' money—
that means it must make "safe" loans—second, to provide the public with the
most helpful financial service possible.
This bank—and we are sure the vast majority of other banks—is glad to
lend money and is seeking good loans. Our record is evidence of it. During
the past 12 months, we have loaned a total of $81,902,685, made up of 39,674
separate new loans.
Eighty-four percent of these loans were in amounts of less than $1,000. We
mention this to show our interest in serving the man or woman who may
need as little as $100, as well as the large business concern borrowing in the
thousands.
As part of this plan of rendering a really constructive banking service, the
bank maintains special departments devoted to handling five broad types of
loans which cover almost every human need.

Commercial loans.—This department finances the needs of business. It serves merchants and manufacturers, large and small, local
and national.
Collateral loans.—This department makes advances at attractive
rates of interest on the security of bonds or stocks.
Time sales.—This division serves many business concerns that sell
merchandise on deferred payments. It purchases installment contracts from public utilities and dealers in automobiles, furnaces,
refrigerators, stoves, etc.
Personal loans.—A business-like, courteous service for making loans
to individuals, repayable by monthly deposits. Six percent of the
amount borrowed is the charge for the entire year and the monthly
deposits receive the bank's regular saving-fund interest rates.
Amounts from $100 upward are loaned.
Home-financing.—Thebank is paying its part in home financing.
Our services are available to those interested in owing a home, building a home, making improvements, or refinancing mortgages.
During the past 12 months, the bank has made the following new
loans:
3,384 commercial loans
$34,070,424
5,164 collateral loans
33,566,602
21,409 installment-sales loans
10, 221,135
4,416 personal loans
1,209,112
5,301 Federal Housing Administration, mortgage, and construction
loans
2, 835, 412
Summary (excluding loans on our books at the beginning
of the 12-month period), 39,674 loans aggregating

81,902,685

An average of $2,000 per loan.

In a study that was made as of April 19 on loans of 27 member
banks in the third Federal Keserve district, the banks being located
in Philadelphia, Camden, Scranton, and Wilmington, this information is revealed. This covers 819 loans aggregating $23,566,300.




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PROVIDE FOR INSURANCE OF BUSINESS LOANS

Broken down, the installment loans with a final maturity of 1 year
or more, but less than 3 years, were 380 loans aggregating $5,707,900,
or an average of $15,000 per loan.
With final maturity 3 years or more from date of loan, 324 loans
aggregating $13,690,200, an average of approximately $42,500 per
loan. They were installment loans.
Other loans with a maturity of 1 year or more, but less than
3 years from date of loan, 88 loans with a total of $2,710,000, an
average of $31,000.
Loans with a maturity of 3 years or more from date of loan, 27,
a total of $1,458,000, or an average of $54,000 per loan.
The further interesting fact is revealed that in a break-down of
those loans, out of a total of 819,000, 767 were loans of less than
$100,000, or an average of $11,500 per loan.
Fifty were for sums between $100,000 and $1,000,000, aggregating
$12,814,000, or an average of $250,000 per loan.
There were two loans of a million or more, averaging $1,000,000
each.
I present those figures at this time to show what the banks are
really doing to meet loan demands. I would like nowT to proceed
Senator WAGNER. Maybe this would be a good place to stop, Mr.
Loeb, until 3 o'clock.
(Whereupon, at 12 o'clock noon, a recess was taken until 3 p. m.
of the same day.)
AFTERNOON SESSION

The hearing was resumed, pursuant to the recess, at 3 p. m.
Senator WAGNER (chairman of the subcommittee). The subcommittee will resume. Mr. Loeb, you may continue your statement.
STATEMENT OF HOWARD A. LOEB, VICE PRESIDENT OF THE FEDERAL ADVISORY COUNSEL, CHAIRMAN OF THE

TRADESMENS

NATIONAL BANK & TRUST CO., PHILADELPHIA, PA.—Resumed

Mr. LOEB. I just want to add a comment to the group of statistics
I read this morning, that is fairly indicative of the loan activity
in the third Federal Reserve district. That district, as you 110 doubt
already know, embraces that section of Pennsylvania east of Johnstown, and that portion of New Jersey south of Princeton, and the
State of Delaware.
Despite the fact that through most active publicity and personal
solicitation, with huge volumes of unused funds pressing for use,
banks are continually seeking loans at unprecedenteclly low rates of
interest and for periods of time, the propriety of which considering
the problems and vicissitudes of business, are debatable, the impression persists. It continues despite the fact that the Reconstruction
Finance Corporation, with the enlarged powders granted under the
amendment of April 13, 1938, is making loans in relatively large
numbers and volume, subject only to the reservation that such loans
must be "of such sound value or so secured as reasonably to assure
repayment or retirement" and to borrowers "only when in the opinion of the board of directors the business enterprise is solvent."
It has been my privilege to serve as a member of the advisory loan
committee of the Philadelphia agency of the Reconstruction Finance




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PROVIDE FOR INSURANCE OF BUSINESS LOANS

Corporation since its inception some years ago, and throughout that
entire period, in considering loans, a spirit of sympathetic understanding of the borrowers' problems has prevailed. Its accomplishments in meeting the demand for credit throughout the period are
significant.
I would like to add here that the Reconstruction Finance Corporation particularly within the last 2 years when an application is
made for a loan which it thinks is too large in amount, or the conditions
are not proper, does not reject the loan flatly. It confers with the
borrower to see whether his problem can be readjusted in terms which
will permit the granting of the loan. I think that is a very important contribution to the easing of any tension, or I might say meeting any contention that there are credit restraints.
The Federal Reserve banks, within the limitation of section 13 (b)
of the Federal Reserve Act, and the Reconstruction Finance Corporation have played an important part in meeting credit demands of
a character that for one reason or other banks cannot make. A careful review of the reports of the Reconstruction Finance Corporation
and the Federal Reserve Banks with regard to loans to business
enterprises will reveal their activities in this field. An analysis of
the record of these agencies will disclose not only the volume and
character of loans made, but also the reasons for refusals of loans.
Further reference to these reviews is contained in my supplementary
statement.
Now, I think that is something that should be stressed. These
refusals frequently loom up in fairly important numbers, but when
the amounts are considered are not so important. I think there would
be a considerable contribution to the information surrounding this
whole question if a morel careful review were made by some competent authority of the reasons for rejection of loans. In this supplementary statement I referred to before, a review is contained of that
situation.
Regardless of the findings of the groups hereinbefore mentioned or
the opinions of the proponents of the Mead bill, I urge that the
Congress make its own study "of the extent to which existing agencies
meet the need for term loans on the part of business and of the extent of the unsatisfied justifiable demand for such loans." It may
be appropriate that it be made a part of the study of the entire
banking system suggested by the Board of Governors of the Federal
Reserve System. The delay involved in such a program will cause
little, if any hardship. The existing powers of the Reconstruction
Finance Corporation are as extensive as those granted under S. 2343
and are more attractive to banks, both from the standpoint of participations and insurances. Furthermore, there is no limitation on time
of repayment of loans made by the Reconstruction Finance Corporation under present authority. I am assuming that the requirements of ultimate repayment by and the solvency of the borrower
are not to be waived under S. 2343, although the bill is silent on these
points. I am of the opinion that under the conditions imposed in S.
2342 banks would not be disposed to make loans because of the initial
loss provision.
In the meantime, if for no other reason than because of pressure
of large volumes of unused funds and low earnings, banks may be



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PROVIDE FOR INSURANCE OF BUSINESS LOANS

relied upon to continue to exert their efforts to meet justifiable unsatisfied demands for credit, The Federal Reserve banks and the
Reconstruction Finance Corporation would continue their activities
in this field.
Such investigation as is suggested will of necessity embrace the
study of many correlated subjects. Primarily a demand for credit
should not be confused with a demand for equity or enterprise capital.
The former can be repaid over a relatively short period of time from
the seasonal demands of business and out of profits. Equity capital,
even in the case of enterprises that are of more than average earning
power, is subject to much slower repayment because of the necessity
of using profits for development, to meet depletions, obsolescences,
and the vicissitudes of business. Such an investigation might properly include the following phases of the subject:
1. Why, with huge volumes of credit and/or capital available at very low
rates and upon extended repayment terms, are borrowers reluctant to borrow
and investors unwilling to invest?
2. To what extent would additional borrowing, that it is hoped will result
under S. 2343, stimulate general business recovery, keeping in mind; that present
producing capacity of business not suffering from lack of credit or capital is far
in excess of present demands?
3. To what extent would loans granted to business having doubtful managerial capacity, regardless of solvency at the time of making the loans, have a
depressing effect upon business because of dislocations arising out of inadequate
management?
4. To what extent are small or relatively small businesses adversely affected
by the rigid provisions of regulatory acts of Government, whether Federal or
State?
5. To what extent is the demand for credit and/or capital affected by the
character and the volume of taxation?
6. To what extent is the demand for credit and/or capital affected by consideration of consistent profitable use thereof?

Finally, it would seem appropriate at the same time to ascertain
the effect upon recovery of loans already made in substantial amounts
at low rates of interest and upon extended repayment terms by
governmental and private agencies. It would also seem appropriate
to inquire into the effect upon recovery of the continuation and
further extension of such a policy.
Now, with regard to the resolution of the Federal Advisory Council
I have only a few remarks to make.
A copy of the resolution of the Federal Advisory Council of the
Federal Reserve System in re S. 2343 has been filed with your committee. As a member of the Council I fully endorse that resoltuion.
Briefly, I should like to comment on a few of the features of
S. 2343.
As I have hereinbefore stated, I am assuming that the gages of
capacity of repayment and solvency of borrowers now used by the
Reconstruction Finance Corporation are not purposefully omitted
from S. 2343. However, if the omission is intentional, I seriously
question whether banks would be stimulated to make marginal loans
on the theory that only 90 percent of the net face amount of the loans
would be guaranteed by the Reconstruction Finance Corporation.
Banks so inspired would suffer heavy losses—probably beyond those
they could safely meet without endangering their stability. On the
other hand, if the Reconstruction Finance Corporation were to guarantee 90 percent of each such loan, the insurance charge of one-fourth



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PROVIDE FOR INSURANCE OF BUSINESS LOANS

of 1 percent to 1 percent would not compensate it for losses sustained.
In support of this conclusion reference is made to the experience of
several of the Federal Reserve banks in the cost of servicing and
losses encountered in loans to business under section 13 b, and to the
experience of the Reconstruction Finance Corporation. On the other
hand, if the Reconstruction Finance Corporation, in order to reduce
the insurance hazard under S. 2343, required banks that desire to
avail themselves of the insurance provision, to include loans which
the banks were satisfied to carry on an uninsured basis, there would
be no incentive to make marginal loans.
It is not likely that banks will apply for insurance of loans in which
they have confidence. The Reconstruction Finance Corporation,
therefore, would then be confronted with the problem of takingonly doubtful loans under the insurance plan.
As the resolution of the Federal Advisory Council correctly states,
even though the Reconstruction Finance Corporation were willing to
extend insurance on loans of this type, disturbance to the business
situation would result. Sound business enterprises would be faced
with unsound competition, causing progressive weaknesses, resulting
in a demand for further extension of unsound credit. The losses
sustained would be borne by government, and subsequently repaid
through taxation.
Section 5 of S. 2343 provides for the rediscounting of insured loans
by the Federal Reserve banks whether offered by member or nonmember banks of the Federal Reserve System. This seems to me to
be an unwise proposal insofar as it will open the door to continuous
borrowing upon the part of member banks unless regulations prescribed by the Federal Reserve banks provide otherwise. If this section is intended to provide for the proper use of the rediscounting of
insured loans by the Federal Reserve banks, then the present
broadened eligibility rules of the Federal Reserve System provide
ample opportunity for making advances on such loans. In the interest
of banking stability, it is highly important that member banks be
not continuously indebted to the Federal Reserve banks for as long
periods as would be possible under the provisions of section 5 of
S. 2343.
That is the conclusion of my main statement. I have a supplemental statement that bears on the experiences of the Reconstruction
Finance Corporation, Federal Reserve banks, and some comment on
studies made of this credit situation recently and in previous years.
I will be glad to read it if you would like to have me do so.
Senator WAGNER (chairman of the subcommittee). You might file
it with the subcommittee. We will want to ask you some questions
now.
(The supplementary statement referred to by the witness appears
at the end of his testimony.)
Mr. LOEB. All right, Mr. Chairman.
Senator WAGNER. I believe you said that you have very few loans in
your institution in which the Reconstruction Finance Corporation has
participated ?
Mr. LOEB. In which we participate, or we participate in the takeback. We have only one at the present time. We have not had any
occasion for them. On the only two occasions where we participated
they were clients of the bank. In all other cases it is because our cus-




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tomers did not find it necessary to avail themselves of loans from the
E . F . C.

Senator W A G N E R . It was not a case of the E . F . C . itself being
unwilling to participate?
Mr. LOEB. N O , sir. In our experience it just so happened. I do
not have a review of the extent to which participation has been made
by other banks in Philadelphia, although I know as a member of the
Advisory Loan Committee that there are a number of such participations, and they usually arise from participations as a result of previous
relationship between bank and borrower. Sometimes even the position
of the bank is subordinated to the Eeconstruction Finance Corporation, depending, of course, upon the particular problems involved in
the particular credit.
Senator W A G N E R . What I had in mind, and perhaps I should have
waited until I got more definite suggestions, was a statement made
that the E. F. C. now has authority to make loans on very liberal
terms, and particularly insuring the bank where the bank participates;
and yet your bank only shows one such loan, and I do not recall just
what Mr. Brown said about his bank, but I know there were very few
loans that that bank made in which the E. F. C. participated. Now,
it might be there was no demand for loans, but I do not know as to
that.
Mr. LOEB. I cannot answer categorically except with regard to my
own bank.
Senator W A G N E R . D O you know that there are participations of
that kind?
Mr. LOEB. Yes, sir. But they largely arise where the borrower is a
client of or has been a borrower from a particular bank. In other
words, that would seem to me to be the more normal way in which
those participations would be taken. For instance, the question of
a loan comes up and they will see from the record that certain banks
have been depositaries of the particular borrower, and that they have
loaned money, and they will confer with those banks. Frequently
the banks will take participations, or take the whole loan on a takeback of 50, 75, or 90 percent, subject to the insurance. Of course, in
that case losses would be shared in the participation proportions. The
banks do not take the initial loss.
Senator CLARK of Idaho. In the ordinary case if the loan is sound
and a fairly desirable loan you make it. If not, you do not want the
E. F. C., as a rule, or anybody else, to go in and make the loan.
Mr. LOEB. Not unless we have had a previous relationship with the
borrower.
Senator CLARK of Idaho. Unless there is an unusual circumstances ?
M r . LOEB. Y e s , s i r .
Senator CLARK of Idaho.

Unless the loan is too large as one single
loan. But by and large if the loan is not sound you do not want it
on any basis ?
M r . LOEB. N O , s i r .
Senator CLARK of Idaho.

And if it is sound you are perfectly willing in the ordinary instance to make it ?
Mr. LOEB. Yes, I want to go a step further to show the degree
of cooperation banks try to give in helping out in these situations,
where a bank is in a situation it will go into participations



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PROVIDE FOR I N S U R A N C E OF BUSINESS LOANS

Senator CLARK of Idaho (interposing). Yes; and that has been
done frequently.
Mr. LOEB. Quite frequently. I do not want you to get the impression that E. F. C. loans are without bank participation.
Senator CLARK of Idaho. It is for some other reason than their
soundness.
Mr. LOEB. They are prompted to work out the credit.
Senator D A N A H E R . Mr. Chairman, might I ask a question?
Senator W A G N E R (chairman of the subcommittee). Certainly.
Senator D A N A H E R . I would like to direct the witness's attention to
section 5, subparagraph b, on page 6, line 4, of the bill. You will
notice the interpolation of the wrords "or abroad." That section reads:
Every Federal Reserve bank shall have power to buy and sell, at home or
abroad, obligations evidencing loans insured under this act.

Have you given thought to the extent to which that language
might be applied ?
Mr. LOEB. I do not quite get the point of buying abroad.
Senator D A N A H E R . Perhaps that is why I asked the question. I
do not know either.
Mr. LOEB. I am not sufficiently familiar with that side of it. I
think that is just one of the things put into the bill and it does not
mean anything to me.
Senator D A N A H E R . D O Federal Reserve banks today have the power
to buy obligations abroad ?
Mr. LOEB. Member banks?
Senator D A N A H E R . Whatever the term means.
Senator H U G H E S . Does it not mean loans under this law?
Mr. LOEB. I should think it confines it to that.
Senator D A N A H E R . Does a Federal Reserve bank today have the
power to buy paper evidencing obligations abroad?
Mr. LOEB. Under this act?
Senator D A N A H E R . N O ; under the present act, under the powers
of Federal Reserve banks.
Mr. LOEB. I think so.
Senator HUGHES. This confines it to loans insured under this bill.
Mr. LOEB. Exactly.
Senator D A N A H E R . Under this particular bill itself ?
Mr. LOEB. Reference to the act itself will show. IT may have
been put in here as an extension of the provision giving the right to
buy and sell bills abroad.
Senator D A N A H E R . I want to know why that power is granted to
your banks. Do you know?
M r . LOEB. I d o n o t .
Senator H U G H E S . Can Federal Reserve banks buy or sell
Senator CLARK of Idaho. They are given the power to

loans ?
buy and

sell obligations evidencing loans.
Senator HUGHES. I would like to know about that. Mr. Loeb,
there is complaint I hear often about rates of interest, and I suppose
that applies to some sections, of the difficulty of getting small loans
on account of the high rate of interest. I take it there is nothing
of that kind in your district. Your rate of interest you said ran
4 or 5 percent.



139 P R O V I D E FOR INSURANCE OF B U S I N E S S LOANS

Mr. LOEB. Our average is under 3 percent. There may be a case
here or there but it would be an unusual circumstance, where the rate
is about 5 percent. It may be highly desirable to get more but
competition does not permit of it.
Senator W A G N E R . D O you make any outright loans for a period
of, say, 10 years?
Mr. LOEB. We have not, but the banks in our area have. We have
some loans that we know will be going on for perhaps 10 years, but
they were not made as a fixed contract.
Senator W A G N E R . D O you know what rate of interest is charged
for such periods ?
Mr. LOEB. I know they are too low. I think we are all agreed there
again as to the tremendous eagerness, evidenced by the rate of interest
that exists in the case of these loans. I have heard of some of them
for 5 years as low as 2 and 2% percent. I think there are some lower
than that made lately for longer periods of time. Of course they are
subject to reductions, but all these rates are effective by reason of the
unusual surplus of money.
Senator W A G N E R . A number of small-business men's organizations
have met here and at other places, and there has been voiced in the
meetings complaint that they cannot get sufficient credit. That is
what has brought about this movement for more liberal loans for
small-business men. How do you account for that activity?
Mr. LOEB. Well, I think that is something of a mass statement,
where people subscribe to it but are not in any way the victims of it.
These things arise because of a sort of mass psychology. The statement is made and then the crowd gets up and cheers. The way to
meet it is not to take what is tantamount to an unjustified clamor but
to go ahead and make an ex parte investigation of the situation. That
has been done not only by banking groups and business groups but
also by educational groups. It has been done, as Mr. Brown indicated, by the Treasury 2 or 3 years ago. It is true it was only in the
Chicago district, but there is a way of ascertaining the facts, and wThen
ascertained you will know whether injustice has been done.
Senator W A G N E R . I think Mr. Eccles also stated there was a gap.
Mr. LOEB. Senator Mead in presenting this bill said there was a
gap, but it is not supported by any evidence.
Senator HUGHES. The theory of this bill, as I understand it from
the standpoint of the borrower, is that it would induce the loaning
of money which is now in large quantities tied up in banks, would
loosen up credit; that banks would be induced to make these loans
and be more liberal about them by having 90 percent of a loan insured by the Government. I want to ask you this question: Do you
think it would have that effect? In other words, would banks risk
10 percent on a bad loan because 90 percent was insured by the Government ? Or, I should say, make a loan that was not as good as they
would ordinarily select if they were making the loan themselves ?
Mr. LOEB. No; I do not think so.
Senator HUGHES. Y O U think from the standpoint of the bank it
would look at the possible loss of 10 percent ?
M r . LOEB. Y e s , s i r .
Senator HUGHES. They

would stand the chance of losing 10 percent
but they would not be losing any more than they do now.



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PROVIDE FOR INSURANCE OF BUSINESS LOANS

Mr. LOEB. I am practically sure of that from a survey I caused
to be made of medium-sized city and country banks in their reaction
to this bill. I have that data here. I cannot mention the names
of the banks, but I have the statements they made, and not a single
one could see how this would in any way stimulate lending.
Senator HERRING. I think the one Mr. Eccles referred to is the
same one Mr. Brown referred to here this morning—these relatively
small loans you are unable to make to affiliates now which cannot
stand the expense of going through the R. F. C. The charge is so
high in order to finance $200,000 worth of bonds they cannot afford
to get the money that way. There is perhaps a gap in there you
are unable to meet now.
Mr. LOEB. There might be an area there, but you must keep in
mind that is in the area of enterprise, or risk capital, which was in the
past but not always completely taken up by local individuals. I have
been in the banking business for over 30 years, and have gone through
quite a period of varying history and development. I recall that in
the old days I would always have on my desk applications from men
who were either retired from business and would want to get back
again, or who would want to put a son in business, in amounts from
$10,000 to $100,000, and would ask me for opportunities to reinvest
money to get into business. Of course they took the risk and got more
than the loan rate. That condition in the past 5 years has practically
disappeared.
Now, there are some things there that might well be investigated.
It is not because there is an absence of that kind of money but
because of a change in disposition. I think that is one thing it
is so important to determine. Why, with all these devices we have
set up, that condition persists. With the huge volume of money at
very low rates, with the Government lending activities on a very broad
and extensive scale, this condition still persists. That is the thing I
think you would find out if this investigation were made, and it
would have to be made by ex parte groups dedicated to the proposition
of determining just what, if anything, is wrong and how it can be
corrected.
There are some groups that say we have gone too far in our reform legislation, that it is pressing down on recovery. It is easy
enough to make that statement but it must be supported by intelligent investigation. Whether that is the case or not would be determined by such an investigation.
Senator W A G N E R . Referring again to what Senator Herring said,
that type of credit Chairman Eccles referred; to, that is, inability to
secure credit for longer than 10 years, which is really investing
Mr. LOEB (interposing). That is a misuse of terms. We are never
going to understand this thing, and the public will not understand
it, unless we use correct terms.
Senator W A G N E R . He does refer to another category: Chiefly enterprises which would be doing better if business activity were more
fully restored, but which, with business at its present level, represent
a degree of risk that banks quite rightly hesitate to undertake unassisted. They are not enterprises that have been mismanaged, or
possibly ill-advised, but merely those whose business, either because
it is new, because it is peculiarly affected by present business con


35

P R O V I D E F O R I N S U R A N C E OF B U S I N E S S

LOANS

ditions, or for some other reason, are not at this time able to secure
credit from the banks. With the existing volume of unused funds,
banks are eager to make all the loans they can, but their responsibilities make many of them hesitate about extending credit to concerns in this category.
Mr. L O E B . Well, that is a statement. I T is not supported by facts
based upon my own experience, but that does not say there are not
occasions of that kind.
Senator W A G N E R . But from your own experience you do not know
of these cases?
Mr. L O E B . N O . There might be a case here and there. Sometimes it is due to unintelligent presentation. You can never hope
to establish a system in which there is not going to be a case of
justifiable credit that is not obtained. That is not necessarily the
fault of the lender. Perhaps it is a lack of intelligence, or a lack
of capacity of proper presentation upon the part of the borrower.
Senator W A G N E R . W E are not finding fault with you on that.
Mr. LOEB. Y O U cannot so far as justifiable loans are concerned.
I realize in making that statement it is made as the result of such
investigations as I have either participated in or reviewed; there is
no substantial volume of justifiable loans that are not taken care of.
When you get into the field of enterprise capital you are entering
another field altogether, and I do not take it this bill is to guarantee
enterprise capital.
Senator D A N A H E R . This morning the witness testified that his
bank has made 2 , 9 1 6 loans involving more than $ 1 9 , 0 0 0 , 0 0 0 . May I
ask whether or not the most of those include what you would consider consumer-goods types of businesses?
Mr. L O E B . Well, no; I should not say that. Let me see—I think
perhaps the most of them are in what we call consumer activities.
But there is a proportion in what might be termed capital- or
durable-goods loans.
Senator D A N A H E R . Are not the most of them what we are trying to
consider, small businesses?
Mr. L O E B . The average is $ 7 , 0 0 0 . The field is being covered by
these loans, with the average of $7,000, and that does not include
personal loans. Those are not in the category of unsecured loans.
Senator D A N A H E R . So it is fair to say that the overwhelming plurality of that type of loans does involve small businessmen and merchants who are dealing generally in the consumer-goods field?
Mr. L O E B . I think it does.
Senator W A G N E R . Does this represent primarily working capital?
Mr. L O E B . Working capital for the time being. It adds to the
borrower's working capital for the purpose of facilitating his business
activities.
Senator W A G N E R . Perhaps I should have made myself more clear.
Does it represent money to carry on the business as it exists mostly,
or does it include in some cases construction of additional plant or
buildings ?
Mr. LOEB. Yes. There would be a proportion of those loans so
made. I have not had them studied, how7ever, from that standpoint.
Senator W A G N E R . They would be smaller in amount.
152788—39

10




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PROVIDE FOR INSURANCE OF BUSINESS

LOANS

Mr. L O E B . A borrower may come in and say he has to borrow money
for additional machinery. That loan will be made for 6 or 8 months;
or it may be to take care of obsolescence and depreciation.
Senator W A G N E R . A S to the larger enterprises they go out into the
market and sell bond issues to secure their money.
Mr. L O E B . In case of the very large corporations, yes.
Senator W A G N E R . And they get the money for long periods of time,
of course?
Mr. L O E B . The period of time is not really disturbing the borrower.
As I said this morning, I think it is something that should be carefully
observed. More frequent conference in connection with the renewal
of a loan is of vast value not only to the borrower but also to the
lender. Such conferences enable borrowers and lenders more intelligently to solve not only credit problems but also business programs,
resulting in greater stabilization in business, with a consequent reduction in failures.
I think there again there is some misunderstanding as to what we
might call a short loan and a long loan. Country banks, they make
them for short periods, but they endure frequently for long periods in
many cases. And I am not in any way criticising the value of them.
But it is the frequent conference between borrower and lender that is
of great value. And I have not found in this group of loans that
there is any quarreling over or any discussion about the matter of
time. There is really no demand in the case of ordinary loans of this
kind for long loans. If you are going to stress the matter of long loans
you may introduce a factor in borrowing that may some day work to
the disadvantage of the business situation.
Senator W A G N E R . What I was thinking of was where a man has a
department store and he thinks his business justifies expansion and
he builds another plant, or another store almost as large as the one
he was operating before the loan was secured. Is it not really a
hardship if he has to amortize that loan within a period of a year
or a year and a half, a loan that rather represents a large investment
in his business?
Mr. L O E B . That would of course depend upon a review of his credit
statement. It might be a hardship if the amount he has put in is
too large a proportion of his so-called free capital. On the other
hand it might be borne out of income. In other words, if it is more
than he has the right to contract to pay out within a given period
of time under the normal profit expectancy from his business.
Senator W A G N E R . But over a period of 1 0 or 1 5 years he would
have no difficulty in paying off that loan, but he might hesitate about
paying it off in a shorter time.
Mr. L O E B . That involves the question of management.
Senator W A G N E R . H O W about credit there?
Mr. L O E B . Let me see if I understand your question, and I do not
think I do.
Senator W A G N E R . Let us assume I have a department store and I
come to you for a loan. You have watched my business and think
I am doing all right. I tell you I want to get a loan, say, of $15,000
or $20,000, because I want to build another building, but the most of
my investment is in the business and my income is not enough if
you call upon me within 6 months or a year to pay it. But if I



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P R O V I D E FOR INSURANCE OF BUSINESS LOANS

have a period of 10 or 15 years, as one does have in the case of a
mortgage on his house, I will have no difficulty in meeting that loan.
Mr. LOEB. Obviously that would be treated and should be treated
as a time loan.
Senator W A G N E R . Could I secure that loan from your bank?
Mr. LOEB. Yes. As a matter of fact we have a loan somewhat
along that line. It is not an extension of a present department store,
but a department store in Harrisburg is buying a department store
in Chambersburg, and requires capital to do it. The whole thing is
shown in his statement. He cannot undertake to pay that money
within 6 months, so a.repayment period is arranged for that loan
in which he can comfortably meet it.
Senator W A G N E R . Has that individual, like the example I just gave
you, any difficulty in getting credit for a period of 10 years?
Mr. LOEB. Well, that would depend on whether it required 1 0
years to pay it.' He might have that thought, but it might be the
judgment of the lender that a shorter period is proper. I do not
think it is that group that is suffering from credit restraint in the
lending competition of today.
Senator A D A M S . Your deposits, which of course constitute the bulk
of your loanable funds, are payable either on demand or upon not
more than 60 or 90 days' notice, are they not?
Mr. LOEB. I can give you those figures offhand. Our deposits are
in the neighborhood of about $45,000,000. We have two central city
offices and three branches located in small retail and residential districts. Of the $45,000,000, five million are savings funds and about
three or four million time funds, and all the rest are demand
deposits.
Senator A D A M S . And the time funds are subject to withdrawal
within 60 or 90 days I take it?
Mr. LOEB. Within 30, 60, or 90 days.
Senator A D A M S . What justification could a bank offer to a depositor, to whom it is obligated to repay his deposit on short time, in
marking 10-year loans ?
Mr. LOEB. There are two points to consider: Good bank management would always determine what might be termed the normal
fluctuation of deposits. Good management would never tie up and
there would be no demand today to tie up unduly large amounts in
such loans as compared to the deposit liability. Then) as has been
correctly stated, we feel the loan facilities of the Federal Reserve
System, under broadened eligibility, reduces any such danger.
Senator A D A M S . And you pay interest when you go to a Federal
Reserve bank?
M r . LOEB. Y e s , s i r .
Senator A D A M S . It costs you every time you
M r . LOEB. Y e s , s i r .
Senator A D A M S . SO that if for one reason

go there.

or another you have
heavy withdrawals it penalizes your stockholders perhaps, and even
beyond that your depositors ?
Mr. LOEB. That might occur at some future time2 but today the
unloaned funds in banks are so heavy that one could tie up quite a lot
of deposits without having recourse to the Federal Reserve System.
Senator A D A M S . Primarily the obligation of a bank is to maintain the funds of its depositors so that they may be returned either




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PROVIDE FOR INSURANCE OF BUSINESS LOANS

under normal or abnormal conditions. That is, so far as you are
justified in making longer-time loans it is only within the limits of
where you are sure deposits will not be called for.
Mr. LOEB. I would like to call attention to the words I used
advisedly. I am reading the first part of the paragraph: Despite the
fact that through most active publicity and personal solicitation,
with huge volumes of unused funds pressing for use, banks are continually seeking loans at unprecedentedly low rates of interest and for
periods of time the propriety of which considering the problems and
vicissitudes of business, are debatable, the impression persists.
Now, the debatable part is the question whether we may go too far,
perhaps not presently but we may be going too far in tying up
deposits in long-time loans. I recall distinctly in 1930 and 1931
when bankers came down to Washington and they were met with
the charge that they had by one device or another gotten the people
under an unconscionable burden of debt. Well, I do not believe they
did it maliciously or consciously, but we got into the thing. Therefore I feel the propriety of tying up for 3, 5, or 10 years of demand
moneys, even though lending facilities are afforded, is subject to
careful consideration. The reason we do not give it all the consideration today that we should is because we have such huge volumes of
unused funds on hand.
Senator ADAMS. Of course, throughout the country more or less
there is complaint about the banker. They say: here are fifty-oddbillion dollars of deposits, and the bankers have all this money and
they are not lending it. That is not the bankers' money, with the
exception of their capital, surplus, and undivided profits. You are
under certain obligations and the community is not entitled as I see
it, nor is the Government entitled, to demand that the banker make
a loan or a series of loans which are not of the kind consonant with
your obligation to your depositors. The banker is running a private
institution based on a contract between the bank and the depositor for
the repayment of his deposit.
Mr. LOEB. Over a period of time, of course, variations in deposits,
or withdrawals banks are subjected to, can be pretty well charted
short of some upheaval or cataclysm.
Senator ADAMS. It was not chartered in the past.
Mr. LOEB. I admit the future has many questions.
Senator ADAMS. We have seen a change of $20,000,000,000 in bank
deposits in the last 6 years.
Mr- LOEB. D O you mean increase ?
Senator ADAMS. From the low point to the high point.
Mr. LOEB. And that carries us into another question, as to how we
have done it.
Senator ADAMS. Have you had occasion to read the last paragraph
of S. 2343? There is a provision that Federal Reserve banks shall
have power to buy and sell, at home or abroad, obligations evidencing
loans insured under this act.
Senator WAGNER. That question has been asked.
Senator ADAMS. Oh, well. Never mind.
Mr. LOEB. I think there is a source from which you can get information. But if I were asked to explain it I would say I suppose
it follows something that is in the present act, that it broadens that



145 PROVIDE FOR INSURANCE OF BUSINESS LOANS

power out to include these bills with other authorized bills. That is
just one thing that happens in the drafting of a bill, because the act
provides this right as to other instruments.
Senator A D A M S . It occurred to me that it took in a good deal of
territory.
Mr. L O E B . I think it is just one of the things that would not happen. That is all. The trend is the other way as far as the abroad
part of it is concerned.
Senator W A G N E R (chairman of the subcommittee). You may proceed.
Mr. L O E B . Mr. Chairman, I will be glad to leave this draft that I
have here, which is a supplementary statement covering the results,
or my judgment of the results of some of these investigations, and
it is a particularly interesting bit of information. It is a summary
of the findings of the Federal Reserve Bank in Philadelphia, just
completed, which to my mind was a most intelligently d,one piece
of work, and really tried to cover the situation in as accurate a way
as it could be done, and more particularly because it gave time and
attention to a study of the rejected credits, which I think is the
important thing.
Senator W A G N E R . I believe this morning you said you had a less
than 1-percent reduction.
Mr. L O E B . That was my bank.
Senator W A G N E R . Couid you give us just the conclusions of that
survey ?
Mr. L O E B . May I read the Philadelphia bank survey?
Senator W A G N E R . It seems to be pretty long.
Mr. L O E B . It is only about half a page. If you want me to do so
I can leave it with you.
Senator W A G N E R . G O ahead with that part of it at least.
Mr. L O E B . It is as follows :
The analysis of data from business concerns in the Philadelphia Federal
Reserve District shows that 361 of the 380 replying establishments, or 95 percent, do not desire credit or equity capital under the prevailing business conditions. * * * The principal obstacle to borrowing currently seems to be
the lack of confidence on the part of both the lenders and the borrowers. A
small proportion of the reporting concerns—42 of the 380 returns—have advanced some suggestions as to the ways and means of overcoming the existing
difficulties, but these suggestions do not seem either to be novel or to touch the
heart of the problem. * * * A few of these respondents would attempt to
implement these suggestions through some legislative action, including the
creation of new agencies, extension of the lending powers of the existing
agencies, guaranteeing loans made by commercial banks, and changing the
present registration requirements on new capital issues. * * * The basic
need seems to lie in the stimulation of the flow of capital into the productive
channels of private industry. But this flow, especially of venturesome capital,
appears to have bogged down, and the problem is how to remove or lessen the
obstacles and to quicken those forces which actually stimulate business recovery,
piomote the use of capital, and increase employment and income. * * *
The scope and character of the information so obtained from banks may be
summarized as follows: Those small businesses and a few larger ones in need
of funds represent primarily establishments whose condition is such as to
provide no sound basis for bank credit. For the most part permanent or fixed
investment capital is required, rather than bank credit. * * * A number of
bankers look with favor upon recent changes permitting purchases of small
local bond issues whose marketability is limited but underlying assets and earning prospects are reasonably satisfactory.




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PROVIDE FOR INSURANCE OF BUSINESS LOANS

The possible volume of such securities is indeterminable but the steps taken
in this respect may ease the situation in some communities. * * * With
large resources on hand, banks universally are searching new fields where their
idle funds can be safely and profitably employed. For that reason there appear
to be comparatively few cases within the scope of grantable bank credit that
commercial banks are not willing to consider. The change in the point of view
in this respect has been rather significant.

From my own observations, and in talking with bankers in going
over banking situations, my fear is we may have gone just a little too
far in long-time loan activities.
Senator HUGHES. What territory did you say you cover?
Mr. LOEB. The Third Federal Eeserve District covers the area of
Pennsylvania east of Johnstown, New Jersey south of Princeton, and
the entire State of Delaware.
Senator W A G N E R (chairman of the subcommittee). We thank you,
Mr. Loeb.
(Thereupon Mr. Loeb left the committee table.)
SUPPLEMENTARY STATEMENT SUBMITTED BY HOWARD A . LOEB, MEMBER OF FEDERAL
ADVISORY COUNCIL, REPRESENTING THE THIRD FEDERAL RESERVE DISTRICT, JUNE

13, 1939

While there must necessarily be concerns, as there always are even in prosperous times, whose demands for funds may not be satisfied, the general assumption
that there is a large unsatisfied demand for credit is questionable in fact. Sufficient data are available to show that the experience of the lenders and borrowers during recent years does not support such a belief or impression. On
the contrary, it indicates that the unsatisfied demand for credit is relatively
small and that efforts to liberalize credit standards and practices further will
undermine the credit structure by forcing funds into a class of enterprise which
may constitute questionable risks.
A. Under section 13b of the Federal Reserve Act providing for the extension of
credit up to 5 years' maturity to provide working capital to established industrial or commercial business the 12 Federal Reserve banks, from June
19, 1934, to May 17, 1939, received 9,424 applications for a total amount of
$404,105,000.
The initial review of these applications was made by industrial advisory committees which under the law consist of active businessmen who are not bankers.
The committees recommended for approval 2.997 applications, or about 32 percent
of the total originally received, for the amount of $186,198,000, or about 46
percent of the total amount sought. The great majority of the applying concerns were small or medium in size.
The Federal Reserve banks approved 2,705 such applications for the total
amount of $179,086,000. Advances outstanding on May 17, 1939, totaled $15,352,000 and commitments outstanding on that date were $11,688,000, the largest
volumes of $32,493,000 and $27,649,000, respectively, being at the end of 1935.
The amount of loans! repaid, expired, or withdrawn by applicants by May 17,
1939, aggregated $137,441,000.
Even if allowance is made for the "emergency" character of this type of
credit and for the somewhat restrictive provisions of section 13b, the total
volume of approved applications and loans has been relatively small. Total
loans of all banks in the United States at the end of 1938 aggregated $21,354,000,000 and investments $27,575,000,000.
A detailed analysis of the experience of the Federal Reserve Bank of Philadelphia in handling industrial loans from June 30, 1934, to December 31, 1938,
shows that only about 26 percent of the 2,497 inquiries resulted in formal applications and of these less than one-third or 191 could be approved. After approval, 64 applications were withdrawn, so that advances were disbursed to 127
borrowers, or 5 percent of those inquiring originally and 19 percent of those
making formal applications.
The greatest number of borrowers represented establishments of small and
medium size. There were 45 concerns, or about 35 percent of the 127 recipients




147 PROVIDE FOR INSURANCE OF BUSINESS LOANS
of disbursed loans, whose net worth ranged from $1,000 to $100,000 ; 53 concerns,
or 42 percent, with net worth from $100,000 to $500,000 ; 29 borrowers, or 23
percent, whose net worth was upward of $500,000; and in 11 instances net
worth exceeded $1,000,000. Of the 127 borrowers, 103 or 81 percent received
loans ranging from less than $5,000 to $100,000. The remainder consisted of
19 concerns whose borrowings varied from $100,000 to $500,000, and 5 establishments whose borrowings exceeded $500,000, one application being approved for
$5,000,000, two for $4,900,000 and two for $1,900,000.
Despite the care exercised by experienced personnel at the time the loans
were made, 7 borrowers have been placed on the "trouble list" and 5 have petitioned reorganization under section 77b of the bankruptcy law. The principal
difficulties which forced these borrowers into receivership were inadequate
management, highly unfavorable competitive positions, excessive carrying
charges, and general price instability. On the other hand, 60 borrowers or about
47 percent of those receiving funds have paid off their loans and are continuing
in business.
This analysis shows that, while the record of cost of making and servicing
these loans by the Federal Reserve Bank of Philadelphia may be regarded as
satisfactory, it is not to be assumed that costs or losses are controllable or
predictable. By reason of experienced personnel and adequate facilities already
in existence when the law went into effect, expenses have been relatively low
and excessive losses have been avoided. It is doubtful whether or not this could
have been accomplished if an entirely new agency had been set up.
B. The experience of the Reconstruction Finance Corporation in making and
servicing loans to industrial and commercial businesses has been equally
enlightening, especially as the legal provisions governing such loans have
been considerably broadened
In the 7 years during which the Reconstruction Finance Corporation has been
in existence (February 2, 1932, to February 2, 1939), authorizations for loans
to business enterprises have numbered 7,371, the amount involved aggregating
$390,816,097, of which the sum of $160,595,495 has been disbursed. Loans for
$5,000 or less comprised over one-third of the total number, while those for
$50,000 constituted 83 percent.
The volume of credit extended primarily to small and medium-sized business
has been limited. On April 30, 1939, the outstanding volume of loans to industrial and commercial business amounted to $112,531,000. In its Seven-Year
Report, the Reconstruction Finance Corporation points out: "Within the past
year our Board has authorized approximately two out of every three applications presented. Each application receives the most sympathic consideration,
and when it cannot be approved as submitted, every reasonable effort is made
to find a basis upon which a loan can be approved." This statement not only
tends to corroborate the belief that the effective demand for credit is limited
but it also suggests, as has been the case in extension of credit under section
13b of the Federal Reserve Act, that the applications represent borderline
enterprises and that each prospective loan must be very carefully considered
even though the character of the credit contemplated is essentially of an
emergency nature.
This report observes further: "We shall probably have a substantially larger
percentage of losses from industrial loans than from any other class. Fortysix of these (representing loans in the aggregate amount of $3,009,092) have
already been foreclosed and the security reduced to possession. Properties
securing three of these loans, which amounted to $234,905, have been sold at
a net loss to the Corporation of $31,003. Five hundred and forty-three loans to
business, aggregating $21,427,000, are in default and 60, aggregating $3,588,000,
are in process of foreclosure, usually after several extensions and supplemental
loans.
The record of the experience of these agencies covering the entire country
does not support the belief that there exists a large volume of justifiable but
unsatisfied demand for credit by business of small and medium size. The
amount of loans outstanding is insignificant—less than 1 percent of the $21,354,000,000 of all bank loans outstanding. Nor does this experience substantiate
the claim that many of the prospective borrowers have a "reasonable and sound
basis" for favorable credit consideration.
In 1932 and 1934, when these "emergency" lending agencies and powers were
being established, it was generally assumed that the unsatisfied demand for




148

PROVIDE FOR INSURANCE OF BUSINESS LOANS

credit was large. The surveys made at that time by Federal Reserve banks
and other organizations indicated that this general belief overrated the prevailing need—as the experience of the lending agencies subsequently demonstrated.
In the survey made in 1932 by the Federal Reserve Bank of Philadelphia,
replies were received from 2,800 concerns. In the commercial and industrial
groups, 30 percent replied that they were not interested in obtaining credit
under prevailing conditions, and of those who were making use of banks,
only about one-fourth encountered any difficulty or were refused loans. In
nearly all specific lines of business, the greatest difficulty was encountered
by concerns with net worth under $50,000 and with limited or no credit rating,
and this difficulty primarily reflected their need for proprietary capital rather
than for credit.
In 1934 replies to a telegram questionnaire were received from 469 banks
and chambers of commerce. The results in general were the same as in 1932—
only a small proportion of respondents believed that there was any significant
demand for funds in their communities.
C. The Federal Reserve Bank of Philadelphia in November and December 1938
sent out questionnaires to 1,166 establishments of small and medium size
operating in the third Federal Reserve district. More than one-third
or 400 individual concerns replied, and the information from 380 was in
usable form. The remaining 20 questionnaires wTere returned unanswered
because the firms were in liquidation, out of business, or wTere branches of
corporation with head offices elsewhere.
The analysis of the data so obtained shows that 361 of the 380 replying
establishments, or 95 percent, do not desire credit or equity capital under prevailing business conditions. Only 16 concerns, or 4.2 percent of the returns,
indicated a need for funds, primarily refunding or equity capital; and 3
respondents, or 0.8 percent, applied to the Reconstruction Finance Corporation
for loans but their applications were rejected.
Difficulties encountered by concerns seeking bank credit reflected the depletion of resources occasioned by unsatisfactory operating conditions since 1929.
These difficulties are of three types: (a) Weakened financial positions; (&)
lack of acceptable collateral; and (c) the long-term or equity nature of funds
desired, and reflect primarily the underlying influence of unfavorable competitive positions and inadequate management.
Comments from the great majority of concerns indicate clearly that what
individual business establishments need most are orders for their products.
They indicate that responsible management will not borrow unless it has a
reasonable belief and expectation that money can be used profitably and the
loans be retired or repaid at maturity. These comments indicate further that
such belief and expectation have been lacking. The tendency has been to
increase costs largely through such rigid elements as prices of raw materials,
wages, and taxes. These elements have been particularly difficult for small
and medium-sized businesses, which frequently are not able to effect economies
or adjust their current position to meet these requirements.
D. The information obtained from banks in the third Federal Reserve district
through correspondence and personal interviews with bankers in the
leading industrial cities by officers of the Federal Reserve Bank of Philadelphia shows the following:
Those small businesses and a few larger ones in need of funds represent
primarily establishments whose condition is such as to provide no basis for
bank credit. For the most part permanent or fixed investment capital is
required.
The caution that dominated banks after their experiences in the twenties
has been relaxing somewhat, as evidenced by their willingness to consider other
types of credit than the so-called strictly commercial, self-liquidating loans, to
wit, small personal loans, loans for the purchase of automobiles and household
appliances, term loans, and loans secured by insurance policies. Recognizing
the change in the character of the credit needs of business, bankers today are
contemplating or making so-called term loans, the purpose of which includes
purchasing industrial equipment and acquisition of other fixed assets, revamping of outstanding debt or capital structure, and rehabilitating working capital
of businesses.




149 PROVIDE FOR INSURANCE OF BUSINESS LOANS
There apparently prevails among some bankers a feeling that certain phases
of former credit practices have been somewhat rigid. There is a recognition
of the fact that "short-term commercial loans" were frequently short in form
only and in reality often required numerous renewals over a period of several
years before complete liquidation. The increased willingness on the part of
banks to extend credit on an amortized basis is a natural evolution of this
former practice of renewals. Broadened discounting facilities at present favor
some relaxation and adjustment of credit terms to existing conditions consistent
with a reasonable degree of safety and soundness.
With large resources on hand and under pressure for earnings, banks universally are searching new fields where their idle funds can be safely and
profitably employed. For that reason there appear to be few, if any, cases
within the scope of grantable bank credit that commercial banks are not willing
to consider carefully.
That banks are making installment and term loans to commercial and industrial businesses, predominantly of small or medium size, is indicated by the
figures obtained from 27 banks in Philadelphia, Camden, Scranton, and Wilmington as of April 19, 1939. The original or face amount of such loans
maturing in from 1 to 3 years and in over 3 years shows the following:
Number

Size of loan
Less than $100,000
$100,000 to $999,999
$1,000,000 or more
Total

.
.

_

_

- -

-

-

-

- - ---

Amount

767
50
2

$8, 757,900
12,814,400
2,000,000

819

23, 566, 300

The information further shows that banks are holding large amounts of
unemployed funds and that they are eager to put them to work in order to
improve earnings positions.
A recent survey of loans of the leading weekly reporting banks in 101 cities,
which represent about 70 percent of the deposits of all member banks of the
Federal Reserve System, shows that 25 percent of commercial loans made by
these banks was of more than 1 year maturity. Such loans, numbering 24,600,
aggregated $1,410,000,000, of which $420,000,000 maturing in from 1 to 3 years
was made to 18,000 borrowers, and $990,000,000 in loans maturing in 3 years
or more to 6,600 borrowers.
SUMMABY

A. The analysis of data summarized here does not indicate that there exists
any substantial demand for justifiable bank credit that banks in various communities are unwilling to consider with utmost care.
B. It appears that unsatisfied justifiable demand for bank credit is relatively
small, largely because of the lack of business opportunities and continued
uncertainties in conditions under which business establishments are operating.
For the most part the existing demand reflects desire for refunding of debts
or for proprietary capital.
C. The majority of business enterprises apparently do not desire to burden
themselves with additional debts under present operating conditions. If weaker
or borderline enterprises are sustained by an unrestricted supply of funds, the
effect would be to disturb the entire competitive system. It would tend to impair the position of the large number of those concerns which have weathered
the economic storm and are in condition to perform their normal business function. This would be tantamount to unfair competition and would be detrimental to business progress.
D. Owing to a superabundance of available funds and to the constant pressure
for earnings, banks are not only willing to make loans of all justifiable categories but they are also soliciting directly all types of borrowers who can show
a reasonable basis for bank credit.
E. Underlying current discussion there seems to be a failure to distinguish
between short-term loans, the repayment of which depends upon the conversion
of assets, and longer term or immtermediate term credit, the retirement of
which is predicated upon earnings. There is also a confusion between the functions of bank credit and those of equity or venture capital.




150

PROVIDE FOR INSURANCE OF BUSINESS LOANS

F. The data summarized herein suggest that the problem of stimulating the
demand for credit goes beyond the mechanistic approach directed primarily
toward the liberalization of credit standards and practices. The problem is
more fundamental and should be considered in conjunction with those influences
which are apparently interfering with the profitable use of credit and business
recovery. It would seem essential that a comprehensive study of all factors
relating to credit and capital requirements should be made before any plan
is enacted into law.

Senator W A G N E R (chairman of the subcommittee). We will now
hear Mr. Smith, president of the Federal Advisory Council, if he will
come around to the committee table.
STATEMENT OF W A L T E R SMITH, PRESIDENT OF THE FEDERAL
ADVISORY COUNCIL, PRESIDENT OF THE FIRST NATIONAL BANK,
ST. LOUIS, MO.

Mr. SMITH. Mr. Chairman, may I read a statement I have here?
Senator WAGNER. Yes.
Mr. SMITH. I would like to make the following comments in connection with Senator Mead's bill, S. 2343.
The fundamental weakness of the bill, as I see it, lies in confusing
the need for risk or equity capital as distinguished from bank credit
and if passed will prove disappointing in its results as it is based
on a false assumption.
The supporters of the Mead bill take the position, apparently, that
small-business men are handicapped by inadequate credit and are
denied banking facilities. As far back as 1934 a study was made by
Dr. Viner in the Fourth and Seventh Federal Reserve Districts, and
since that time investigations have been made by the Small Business
Men's Association and the National Industrial Conference Board
with the result that the reports do not indicate a shortage of bank
credit for small business, but a need in most cases for partnership
capital.
There are two additional studies being made at the present time as
to the availability of bank credit, one through the Federal Reserve
banks, and the other by the S. E. C. through the Junior Chamber of
Commerce. It would seem desirable to defer action on the Mead bill
pending a study of the results of these Nation-wide investigations.
Granting, for argument's sake, that the bankers have erred to some
extent in the extension of credit to small business, there still would be
no need for governmental action.
Competition from other lending agencies would correct the situation and provide ample lending facilities for small business, just as
it did in developing the finance companies in the past to supply consumer credit. When the need for consumer credit developed and the
banker doubted the soundness of that type of credit, special lending
agencies quickly developed to supply the demand.
There was no necessity for providing governmental insurance facilities to take care of the legitimate borrowing requirements for
consumer credit.
The very fact that at a time when available investment funds have
been the greatest in history, and no specialized facilities have been set
up to supply the deficiency on the part of small business, is of itself
rather convincing proof that the requirements of small business are
not for sound credit but rather for risk capital.




151 PROVIDE FOR INSURANCE OF BUSINESS LOANS

There is, on the other hand, ample evidence that risk capital in
recent years, due no doubt to higher taxes, labor difficulties, and so
forth, has not been responding in its former or customary manner.
Because risk capital has been hesitant in recent years, those seeking such capital clamor for loans to supply the void resulting from
their inability to secure equity financing. The cure for this situation
does not lie in the Mead bill.
If it is the intent of Congress that the Federal Government should,
through the medium of this bill, become a partner in thousands of
enterprises, then the utmost consideration should be shown those competitive enterprises which are capably and efficiently managed.
Very little can be gained and probably untold injury done to thousands of solvent, well-run businesses, by unfair competition of inefficient and poorly managed concerns operating for a time with taxpayers' money.
The provision which places the first 10 percent of the loss on the
insured banks will not, in my opinion, result in any substantial loans
being made under the bill, as banks could not afford to absorb the
heavy losses which would be sustained in the extension of loans for
equity capital due to the fact that the average net return on bank
loans today is less than 1 percent.
The provision prohibiting the insuring of a loan "to any person"
of which an officer, director, or security holder owning more than 10
percent of any class of its stock is, or has been within the preceding
12 months a director of the bank making such loan, seems unnecessary and unfair.
Why should a business organization be penalized because one-tenth
of its stock is owned by a director of the bank with wThich it has carried its account.
Furthermore, in small cities and country towns bank directors are
chosen almost entirely from the local businessmen, and if the Mead
bill is to prove of any assistance to small business, why eliminate
what might prove the most fertile field in which the act could serve.
I might even say that in practically all large cities all outlying banks
would come into the same classification as the small banks in small
towns.
The limitation of a service charge fee or commission aggregating
during the life of the loan of not more than one-fourth of i percent,
is grossly inadequate and would not cover the actual expense of
handling real-estate papers, checking tax records, safeguarding insurance expirations, and compiling the reports which are required
by the R. F. C. In the case of a $20,000 loan running 10 years, the
maximum charge would be $5 per annum.
Would suggest that in lieu of the right to rediscount insured loans
with the Federal Reserve Bank, that the bill should provide that the
lending bank, or its assignee, would have the right to borrow on its
obligation secured by insured loans up to the amount of the insurance coverage on each loan, as in practice a bank would be unlikely
to rediscount a 10-year obligation with any financial agency.
As I have stated before, none of the surveys that have been made
indicate that there is a credit shortage for large or small business
and I would like to submit to this committee some data with reference to the determined efforts made by the St. Louis bankers in an
endeavor to increase loans in their district.




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PROVIDE FOR INSURANCE OF BUSINESS LOANS

The method pursued includes advertising by radio, bill boards,
direct mail campaign, personal solicitation, and newspapers. It is
not infrequent to find three or four banks advertising in one edition
of the daily paper with such headings as "Wanted: by banks, more
borrowers for their loanable funds," "Here the same yardstick measures a $1,000 or $100,000 loan," "Banks are not only willing but
anxious to make loans," "Wanted: business concerns that can use bank
credit." These types of advertising have been appearing in the
St. Louis papers for a year.
I will be glad to leave with the committee samples of the newspaper advertising which is used by some of the St. Louis banks.
As an evidence of the results of this advertising and the desire of
our banks to make loans, I submit the following record of three
banks in St. Louis, viz:
Bank No. 1 made 2,612 loans from January 1 to June 7, 1939,
totaling $23,713,446.63, of which 2,435 were under $25,000 which
aggregated $9,088,069, or an average of $3,732 per loan.
B a i i No. 2 made 3,088 loans from January 1 to May 31, 1939,
totaling $32,857,531.90, indicating an average of slightly in excess
of $10,000 per loan.
Bank No. 3—a smaller institution—reports a total of 696 loans
made from January 1 to June 1, 1939, aggregating $1,583,000, or ail
average of $2,280 per loan. All of these banks have extended term
credits running from 1 to 10 years.
It would seem just as intelligent to criticize the bankers for refusing to lend money as to accuse a merchant for refusing to sell
goods, as interest to the banker is just as necessary for his existence
as profit on the sale of goods by a merchant.
In conclusion, if you will permit, I would like to quote from an
article by Gen. Hugh Johnson a few days ago, as follows:
In the first place, the only way a bank can make profits is to lend money—
to both big and little customers. It is as much the business and instinct of a
banker to lend money and make profits as it is the business and instinct of a hog >
to root. All the bankers I know are hungry to make loans—and most of them
are scouring the woods for them as never before in recent years.

Since I got here, Senator Wagner, I received an excerpt from the
report of the St, Louis Federal Reserve Bank, if I may read that
into the record.
The Reserve bank states that it is the opinion of bankers, brokers, businessmen and investors that there is a reluctance to provide funds for additional
capital or intermediate credit to business interprises under present conditions,
especially for small businesses, when there exists doubt in the mind of most
everyone as to the future of business and as to the chances of proper returns
on investments. It is also pointed out that many businesses will not accept
credit under the present-day business conditions. The Reserve bank states that
it feels the intermediate credit needs of business in its district has been overemphasized,, and; further, that there always has been and always will be a demand for credit from individuals and concerns who are not entitled to it.
The matter of commercial banks providing intermediate credit needs to business
is one to be approached with caution.

Senator W A G N E R (chairman of the subcommittee). We thank you.
Mr. SMITH. I would like, if I may, to pass out some samples of
the advertising matter so that the members of the subcommittee may
see them. I think there is a feeling abroad that banks are not striving



153

PROVIDE FOR INSURANCE OF BUSINESS LOANS

very hard to place their funds, and this will at least be in part an
answer.
Senator WAGNER (chairman of the subcommittee). Senator Mead,
you may feel at liberty to ask any questions.
Senator MEAD. All right.
Senator HUGHES. Mr. Smith, in your territory do banks make
amortized loans ?
M r . SMITH. Y e s , sir.
Senator HUGHES. For 1 0
Mr. S M I T H . A few for

years ?
10 years, but mostly our limit has been

5 years.
Senator HUGHES. There is some complaint as to that. I have heard
complaint that there is a lack of amortized loans. If a man wants
$10,000 and he is not able to pay it at the end of the year, why, if he
had a longer period, something like 10 years, he could out of his
earnings pay it, that such an arrangement would ease the situation.
Mr. S M I T H . Senator, we have had no requests for amounts as
small as $10,000 to be amortized over a 10-year period. I think I
would have heard of them if other banks had received such requests.
Senator HUGHES. I was speaking of $ 1 0 , 0 0 0 as being the amount
that small-business men talk about.
Mr. S M I T H . I spent most of my life on the credit side of banking,
and I just wonder at the wisdom of a man who can take a small
concern and know how its credit standing will prevail throughout a
10-year period. The percentage of those that fail over a 10-year
period is astounding.
Senator WAGNER. Have you a record, Mr. Smith, of the number of
rejections of applicants?
Mr. S M I T H . N O ; I have not, Senator. We started that as of June
1. I think we should have had it.
Senator WAGNER. Can you approximate it at all from your own
experience ?
Mr. S M I T H . Very, very slight in recent years. I think Will Rogers
said at the height of the depression that even the fellow that never
paid his bills had quit buying.
Senator CLARK of Idaho. This advertisement advertises long-term
loans maturing serially, among others. That is what you had in
mind in answer to Senator Hughes' questions ?
Mr. S M I T H . Yes; we have done everything we could to get all
kinds of loans. That is not 10 percent of the data that was furnished
me.
Senator WAGNER. Are there any further questions to be asked of
Mr. Smith? [No response.]
Thank you very much, Mr. Smith.
Mr. S M I T H . I thank the committee for the courtesy they have extended to us bankers.
(The witness withdrew from the committee table.)
Senator WAGNER (chairman of the subcommittee). Is Mr. Needham
here ?
Mr. NEEDHAM. Yes; Mr. Chairman.
Senator WAGNER. I S your witness prepared to go on on Thursday ?
M r . NEEDHAM. Y e s , s i r .




154

PROVIDE FOR INSURANCE OF BUSINESS LOANS

Senator WAGNER. H O W many have you for Thursday?
Mr. WIGGINS. We will have probably five or six.
Senator WAGNER. D O not have too many. If there is a witness
here now who isi from out of town and to whom it would be an inconvenience to stay over until Thursday, we can hear him now. We
have some time left.
Mr. WIGGINS. Senator Wagner, I think we would prefer to resume
on Thursday morning.
Senator WAGNER. All right.
Senator MEAD. Will there be an opportunity a little later to hear
representatives of what might be termed "little-business enterprises?"
Senator WAGNER. Oh, yes.
Senator MEAD. It seems to me it is important, in view of the fact
that the Monopoly Committee and the Securities and Exchange Commission in a sort of Nation-wide study have revealed the fact that
there is more demand for loans of this character, coupled with the
fact that the bankers say there is little or no demand, that the committee find out by contacting the representatives of the business enterprises embraced within the scope of the bill.
Senator WAGNER. There will be ample opportunity for that. I am
sure this committee would not close the hearings without giving
everybody a chance to be heard.
Senator MEAD. Then at the proper time, and according to the convenience of the committee, they will be heard ?
Senator WAGNER. Yes; we will take a recess until next Thursday
at 10: 30 a.m.
(Whereupon, at 4:25 p. m., a recess was taken until Thursday,
June 15,1939, at 10:30 a. m.)




STATEMENT OF HONORABLE ERNEST G . DRAPER
RE:

S. 2343

In testifying on this subject, I wish to make it clear that
what I shall say represents only my own personal views and not necessarily the views of the Board of Governors of the Federal Reserve
System,
This subject of loans to small business has been such a controversial one that there is danger cither of (1) no satisfactory
legislation being enacted or (2) such elaborate machinery being sot up
as to cause the Government an inordinate amount of expense in order to
relieve a situation that might have been cured by simpler and more
oeonomical means•
Since June 1934 the Reconstruction Finance Corporation and
the Federal Reserve banks have had authority to make loans to business
and industry subject to certain limitations; and the authority of the
Reconstruction Finance Corporation in this respect was broadened by the
Act of April 13, 1938. Under the present law, the authority of the Reconstruction. Finance Corporation, to make such loans will expire en
June 30, 1941; but there is no such time limitation on the authority of
the Federal Reserve banks to make loans to business and industry.

How-

ever, the Federal Reserve banks are authorized to make such loans only
with maturities of not exceeding five years and only in order to provide
"working capital" to businesses that are "established"•

It is obvious

that these restrictions prevent the granting of credit in many legitimate cases where it might be helpful to small business and to the community at large•




Many persons with knowledge of the general problem genuinely
feel that the existing avenues for credit to small industry are insufficient. They insist that there is a legitimate need for credit on the
part of small but sound concerns and that this need is not at present
being met by any agency, either public or private.
The results of certain surveys which have been made on this
subject purport to shov; that there is no need for additional credit
facilities for small businesses.

I do not doubt tint sucli surveys have

been made in the utmost good faith; but the results arc not convincing
to me, because the conclusions are based very largely upon the fact that
only a small percentage of persons to whom questionnaires were sent replied
to them. There are many reasons other than the lack of need for additional facilities which may account for the failure of many businesses
to reply to such questionnaires,
Why not get to the bottom of this problem, once and for all,
by devising legislation which is simple in character, inexpensive in
operation and cooperative in its approach?

In this way we could meet

the present difficulty squarely and without reliance upon an entirely
new set-up of elaborate and perhaps unwieldly machinery. Then, if it
should develop after the passage of such simplified legislation that the
need is not as great as anticipated, no great "nana would be done and no
great expense incurred.

If, however, the need should prove to be

greater than anticipated, the flexible machinery of this new plan
could easily take care of any increase in demand, regardless of
its volume.




There is much to be said in favor of the approach to this
problem proposed in the Mead bill, since it avoids the creation of
an additional system of banks, which would be expensive and slow to
get into operation, and seeks instead to encourage the use of part
of the enormous amount of credit now lying idle in the banks by providing insurance through the Reconstruction Finance Corporation,
which is already in existence and has accumulated much experience in
this field.
I believe, however, that the bill could well be improved
and liberalized in some respects.

I have here a memorandum contain-

ing suggestions for the improvement of certain technical features of
the bill wnich. I shall ask leave to have inserted in. the record at the
conclusion of my testimony; but I wish at this point to mention one
feature of the bill which I think especially needs liberalisation.
Under the bill as now drafted (page S, line 8) the Reconstruction Finance Corporation could insure a lender only against any
loss in excess of 10 per cent of the amount of the loan.

In other

words, the insured lender would have to absorb all loss up to 10 per
cent of the amount of the loan and the insurance would only cover any
loss that might occur in excess of that amount.

Insurance so limited

might not afford sufficient protection to encourage banks to make loans
on a more liberal basis than they would without insurance and thus the
bill might fail to accomplish its chief purpose.

I believe that the

principle of retaining a local interest in each loan could be preserved
and the beneficial effects of the legislation could be greatly increased
if the bill were amended so that the insured bank and the Reconstruction




-4-

Pinance Corporation would share any loss that might occur on some pro
rata basis to be specified in the law*
I also hope that your Committee will consider the advisability of adding to this bill a separate title providing for the utilization of the existing machinery of the Pederal Reserve System in extending additional credit facilities to small businesses on a much more
liberal and flexible basis than the Federal Reserve banks are now permitted to extend under the limitations prescribed in section 13b of the
Pederal Reserve Act.

Such a plan deserves careful consideration, because

the existence of the 12 Federal Reserve banks and 24 branches located
strategically throughout the United States and already staffed with
trained and experienced personnel offers an excellent opportunity to
decentralize the actual administration of this business and have it
handled locally by persons familiar with the problems and already in
close touch with the banks of the regions in which the applications
arise.
At the same time the assets and liabilities resulting from
such operations could be segregated in a separate corporation organized
as an integral part of the Federal Reserve System, utilizing the existing personnel and other facilities of the Federal Reserve banks and
acting under the general direction of the Board of Governors, which
could be charged with the duty of seeing that the corporation functions
in such a manner as to meet whatever legitimate need there is for additional credit facilities for small businesses, either directly or through




-5cooperation with existing banks and other financing institutions.
I wish to make it clear that this is proposed as an addition to the Mead Bill and not as a substitute for it.

The provision

of such additional facilities on a regional basis could not in any
way impair the effectiveness of the facilities provided for in the
Mead Bill but would supplement those facilities in a manner which
might prove to be very helpful.




SUGGESTIONS FOR IMPROVEMENT OF
MEAD BILL, S. 2343
(Presented by Hon. Ernest G. Draper)
The provisions in the bill regarding the distribution of
losses (p. 2, line 8) differ from those which are contained in other
insurance plans set up by Congress, The bill, as now drafted, provides that the Reconstruction Finance Corporation may insure against
the whole or any part of a loss which an insured bank may sustain in
excess of 10 per cent of the principal amount of the loan* Thus, for
example, if a loss of $10,000 were suffered on an insured loan of
$100,000, the insured bank: would have to bear the entire loss and
the Reconstruction Finance Corporation none. Since a bank would derive no benefit from the insurance until after it had suffered a
loss equal to 10 per cent of the loan, a question arises whether the
bill in its present form would give sufficient encouragement to banks
to make such loans on a more liberal basis than they would without
such insurance. It is believed that the benefits afforded by the
bill might be more go nerally utilized if this provision were changed
so that the insured bank and the Reconstruction Finance Corporation
would share in such loss as might occur on some pro rata basis to be
specified in the law.
It is also believed that more loans would be made and increased benefits derived from the legislation if more flexibility
wore provided in the bill with respect to rates of interest and the
insurance premiums. The restrictions in the present draft in these
respects may result in limiting the usefulness of the additional
facilities provided by the bill.
The fifth limitation in section 3(b) of the bill (page 3,
line 22} would forbid the making of such loans to a borrower of which
an officer, director or security
holder'owning more than 10 per cent
1
of any class of the borrower s stock is, or has been within the preceding 12 months, a director of the bank making such loan. It is
doubtful whether this restriction would servo any useful purpose
and it may prevent the making of sound and desirable loans. It is
believed, therefore, that the bill should be liberalized by eliminating this restriction.
The bill would be improved if the provisions of section 5
regarding the rediscount and purchase and sale by Federal Reserve
banks of obligations evidencing loans insured under the bill were
changed to a provision authorizing the Federal Reserve banks, subject to regulations proscribed by the Board of Governors of the




Federal Reserve System, to make advances to member and nonrnember
banks for periods not exceeding six months at a time on their promissory notes secured by such obligations, at rates to be established
from time to time by the Federal Reserve banks subject to the review
and determination of the Board of Governors. From the standpoint of
practical operation, experience has shown that it is more convenient
and less expensive both to the Federal Reserve banks and to the member banks for the Federal Reserve banks to make advances to member
banks on their promissory notes secured by the pledge of assets than
it is to rediscount such assets. Rediscounts, furthermore, are ordinarily held until maturity so that the discounting bank has to pay
the discount rate from the date of discount until maturity, whereas
advances can be made for limited periods and renewed from time to
time as the circumstances require, so that the borrowing bank pays
interest only for the period during which it needs the credit.
If it is deemed advisable to provide a market in which
such obligations can be sold, it is suggested that consideration be
given to provision for the organization of a corporation to purchase
such obligations and to issue and sell debentures against them, in
a manner similar to that in which the RFC Mortgage Company now operain the field of insured mortgages.
It is not clear that the insurance provided in the bill
would inure to the benefit of an institution which rediscounts or
makes an advance against such a loan, since section 4(b) provides
that the insurance shall inure only to the benefit of any "assignee"
or any "purchaser". To eliminate any doubt on this point, it is suggested that the remainder of the sentence following the words "the
benefit of" on page 5, line 10, bo changed to read "any person to
whom such a loan shall have been assigned or pledged, or by whom
such a loan shall have been purchased or rediscountcd."