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466 A meeting of the Board of Governors of the Federal Reserve SYstsul was held in Washington on Saturday, April 12, 1941, at 10:30 Et PRESENT: Mr. Mr. Lir. Mr. Ransom, Vice Chairman Szymczak Davis Draper Mr. Mr. Mr. Mr. Morrill, Secretary Bethea, Assistant Secretary Carpenter, Assistant Secretary Clayton, Assistant to the Chairman The action stated with respect to each of the natters hereinafter referred to was taken by the Board: The minutes of the meeting of the Board of Governors of the Federal Reserve System held on April 11, 1941, were approved unanimously. Memorandum dated April 8, 1941, from Mr. Goldenweiser, Director of the Division of Research and Statistics, recommending, for the reasons stated in the memorandum, that Alice L. Fracker be apPointed as a clerk in the Division of Research and Statistics, with 8111arY at the rate of 4,440 per annum, effective as of the date up- Which she enters upon the performance of her duties after having Passed satisfactorily the usual physical examination. Approved unanimously. Letter to Honorable Robert F. Wagner, Chairman of the Senate Blatilking and Currency Committee, reading as follows: "This is in response to your request for an expression of the Board's views with respect to S. 877, a bill 167 4/12/41 -2- "To amend section 13b of the Federal Reserve Act, as amended'. "Section 13b of the Federal Reserve Act now authorizes the Federal Reserve Banks to make loans and advances with maturities not exceeding five years to established industrial and commercial businesses in order to supply them with working capital. It also authorizes the Federal Reserve Banks to participate with financing institutions in making such loans and to make commitments in connection therewith. The requirements of the present law that such loans may be made only to provide working capital, only to established businesses, and only with maturities up to five years have made it impossible for the Federal Reserve Banks to grant credit to many worthy business enterprises, particularly in cases where additional funds are needed for expansion or improvement. The bill S. 877 would broaden the authority of the Federal Reserve Banks in making industrial loans by eliminating these unnecessary restrictions. Similar restrictions, originally contained in the law under which the Reconstruction Finance Corporation makes advances to business enterprises, have been eliminated. "The Federal Reserve System is cooperating with the Office of Production Management for the purpose of enabling business enterprises throughout the country to participate more fully in the national defense program. The Federal Reserve Banks serve as a conduit for information between small business concerns and the Office of Production Management and the War and Navy Departments, and are endeavoring to assist in the arranging of needed credit for primary contractors and subcontractors who are participating in the defense effort. There is an especial need for credit facilities for subcontractors, who, of ?ourse, have no contracts with the Government with resulting Government claims that can be assigned to the banks as security. Where possible, of course, commercial bank credit is provided, but there are some credit demands in amounts that the banks are unable to supply or of such a Character that they do not feel justified in supplying them. "This situation has emphasized the fact that the existing authority of the Reserve Banks to make industrial loans does not permit them to utilize their facilities in many cases where they are urgently needed to expedite the 4/12/41 -3- "financing of defense activities. The Federal Reserve System can be of more assistance to local banks, both members and nonmembers, if it is in a position to participate in making loans for defense purposes without being subjected to the limitations and restrictions of the present law. It is understood that it is desired to spread the defense work more widely, and this policy would be aided by the enlargement of the powers of the Federal Reserve Banks to make industrial loans because of their contacts with banks and, indirectly, with business in all sections of the country. "In addition to removing unnecessary restrictions now contained in the law, S. 877 would eliminate the Industrial Advisory Committees, which are now required to pass upon applications for loans made under section 13b of the Federal Reserve Act. The bill would also direct, instead of merely authorize, the Secretary of the Treasury to pay to the Federal Reserve Banks up to $139,299,556.99 out of the increment resulting from the reduction in the weight of the gold dollar in order to enable them to make such loans. This sum is the exact equivalent of the amount which was originally taken from the surplus of the Federal Reserve Banks for part of the capital of the Federal Deposit Insurance Corporation and, therefore, in effect represents money provided out of the earned surplus of the Federal Reserve Banks. Its use under S. 877 would involve no charge against the Federal Budget and no additional appropriation of public funds, as the Secretary of the Treasury is already authorized to pay to the Federal Reserve Banks all amounts which he would be directed to pay under this bill. The sum would be paid to the Federal Reserve Banks from time to time, upon request of the Board of Governors of the Federal Reserve System, in such amounts as the Board deemed necessary to enable the Federal Reserve Banks to make the loans and commitments authorized by the amendment. "The bill would also increase from 80 per cent to 90 per cent the portion of any loss which might be assumed by a Federal Reserve Bank on loans made by financing institutions in cooperation with or under commitments obtained from Federal Reserve Banks. It seems to the Board of Governors that the Federal Reserve Banks can be most helpful to worthy business enterprises which cannot obtain credit on a reasonable basis from the usual sources, by encouraging 469 4/12/41 -4- "banking institutions to make loans to them under the Protection of commitments from the Reserve Banks, for Which fees are charged, obligating the Reserve Banks to absorb an agreed portion, not in excess of 90 per cent, of any losses that are sustained on the loans. "If the Federal Reserve Banks are to do effective work in this field, and especially in connection with the financing of defense activities, they should not be required to turn down loans to business enterprises simply because the proceeds are to be used in part for plant rehabilitation or expansion or for any other reason except that the loans cannot be made on a reasonable and sound basis. In the Board's opinion, therefore, section 13b of the Federal Reserve Act should be amended along the lines of the bill S. 877. "Should Congress, however, be unwilling to amend section 13b as indicated or in any other way broaden the Powers of the Federal Reserve System to provide credit in the field under discussion, it is the Board's feeling that, in fairness to the Federal Reserve System, section 13b should be entirely repealed and the loans and commitments now outstanding under that section gradually liquidated. So long as the section is in effect in its present restrictive form, the Federal Reserve Banks are compelled to decline to make certain loans which could be made on a reasonable and sound basis, with the result that the Reserve Banks suffer from the erroneous implication that they are not willing to extend this type of credit. The Board's preference is that the section be amended as proposed by S. 877 or that some other legislation be enacted to broaden the powers of the Federal Reserve System to provide such credit. The twelve Federal Reserve Banks and their branches with experienced staffs in close contact With the business conditions and credit needs throughout the United States constitute a most effective field organization for carrying out the purposes Congress had in mind When section 13b was enacted. The desirability of such legislation is increased in the present situation when many businesses might be in position to make substantially greater contributions to the production of goods for the enlarged national defense program if adequate credit for Productive purposes were readily available." Approved unanimously, together with the following letter to Mr. F. J. Bailey, 470 4/12/41 -5— Assistant Director of the Bureau of the Budget: "Receipt is acknowledged of your letter of April 5, 1941 enclosing a copy of a report which the Secretary of the Treasury proposes to submit to the Chairman of the Senate Committee on Banking and Currency relative to S. 877, a bill 'To amend section 13b of the Federal Reserve Act, as amended', and requesting an expression of the Board's views regarding the proposed legislation. "The Board has received a request from the Chairman of the Senate Committee on Banking and Currency for a report on the bill S. 877 and there is enclosed herewith a copy of a letter which the Board is sending to the Committee Chairman in response to his request. The opinion expressed by the Board in this letter is in accord with the views which it expressed in a letter dated June 1, 1940 to the Chairman of the Senate Committee on Banking and Currency in response to a request from him with reference to the then pending bill S. 3839, the provisions of which were identical with those of the present bill S. 877. "Under date of June 12, 1940, the Acting Secretary of the Treasury addressed to the Chairman of the Senate Banking and Currency Committee, regarding the then pending bill S. 3839, a letter which is substantially identical with the proposed report of the Secretary of the Treasury that was enclosed with your letter of April 5, 1941. Accordingly, there is also enclosed for your information a copy of a letter which the Board on June 24, 1940 sent to the Chairman of the Senate Banking and Currency Committee commenting on a number of statements contained in the letter of June 12, 1940 from the Acting Secretary of the Treasury. A copy of the Board's letter of June 24, 1940 was furnished to the Treasury at the time. "It is noted that the proposed report from the Secretary of the Treasury on S. 877 states that it is the view of the Treasury Department that, if Federal Reserve Banks are to continue to make industrial loans, they Should be permitted to do so out of their own funds and 'the Government should withdraw its funds heretofore advanced to the banks for this purpose and terminate the authorization for further advances.' This proposal, if adopted, would in practical effect cause a virtual discontinuance of the operations of the Federal Reserve Banks in this field. 471_ 4/12/41 -6- "The sum of $139,299,556.99 which Congress set aside for this purpose in 1934 is the exact equivalent of the amount which was originally taken from the surplus of the Federal Reserve Banks for part of the capital of the Federal Deposit Insurance Corporation. The subsequent allocation by Congress of this amount, for the purpose of making industrial loans, would merely be continued by the Pending measure, S. 877. Accordingly this fund in effect represents money already provided out of the earned surplus of the Federal Reserve Banks and its use under S. 877 would involve no charge against the Federal budget and no additional appropriation. "The Treasury's suggestion contemplates that the Federal Reserve Banks be cut off from the use of this fund and be required to fall back upon further drafts upon their capital and surplus in order to continue to make industrial loans. The capital and surplus of the Federal Reserve Banks have already been reduced to a low level (less than 1-1/2 per cent) in relation to their liabilities. The making of loans to businesses that are without sufficient financial standing to obtain credit from the usual banking sources involves a considerable risk. The Federal Reserve Banks would hesitate, and could not be expected, to make arlY substantial volume of such loans which might further reduce their capital and surplus through losses. The Board of Governors believes that unless the present law is made more, not less, workable, it would be preferable to repeal it altogether." In connection with the approval of the two letters quoted above Mr. Ransom stated that when the Board was reporting on a similar bill on May 31, 1940, he voted "no" because he felt that the proposal was another example of piecemeal legislation and that at that time it might be possible to obtain Congressional consideration of a more complete legislative program, which could include this as well as other matters equally pressing and more important, and the Board in making the report in 1940 might have difficulty reconciling its position with opposition to other picemeal legislation. He said that he thoughtthe situation was materially different at this time, that he did not believe Congress would have occasion to give consideration to any over-all banking L172 -7legislation at this session, and that therefore, he had no objection to piecemeal legislation at this time. Furthermore, Mr. Ransom said, the existing Defense Program required utmost cooperation from every agency, private and governmental, and the present proposal might prove helpful to the Defense Program and for these reasons, he was now voting in the affirmative on the proposed report. Thereupon the meeting adjourned. Approved: Vice C airman.
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