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eview' F E DE RAL RESERVE BANK OF ST. LOUIS • P. O. BOX 442 • ST. LOUIS 66v MO. Page Business Activity Continues its Rise............................ 26 Discount Rates Increase................................................. 28 The 13b Program— An Experiment in Small Busi ness Finance................................................................. This issue released on March 20 V O L . 41 • No. 3 • M ARCH ’5 9 30 Business Activity Continues its Rise I n T H E FIN A L Q U A RTER O F 1958 the total national output of goods and services, adjusted for price changes, was 5 per cent above its recession low and was less than 1 per cent below the level reached in the third quarter of 1957 before the recession began. Now, with the first quarter of 1959 almost over, it is evident that gross national product has increased fur ther. Industrial production rose in January and F eb ruary and construction activity held near the advanced levels reached in December, after adjustment for sea sonal influences. Steel output grew from an average weekly rate of 74 per cent of rated capacity in January to a rate of 84 per cent in February. In the first week of March, steel mills produced 2.56 million ingot tons, or 90.3 per cent of rated capacity, the largest volume for any week in history. Automobile assemblies were limited somewhat during much of February by strike-caused shortages of glass which restricted operations of one of the major producers. Later in the month auto pro duction picked up and assemblies were scheduled for March at a higher rate than was reached in February. Production of aluminum and other nonferrous metals also increased after the turn of the year. Output of construction materials, which was at pre recession levels in January, probably increased fur ther in February, reflecting settlement of the glass strike and the continuing high rate of construction activity. Demand for Southern pine and hardwood was reported to be growing during February, and output of Southern pine in the first three weeks of the month was above the average weekly rate in January. Growth of consumer spending has been one of the main supports for the gains in output, with an increase of 3 per cent in real terms between the first and fourth quarters of last year and possible further gains in the first quarter of this year. Total retail sales held with in one per cent of their Decem ber rate through Janu ary and February after adjustment for seasonal in fluences and trading day differences, and were about 7 per cent greater than in the same months a year earlier. Sales of durable goods stores were nearly 16 per cent larger in February than in February 1958, and sales of nondurable goods stores were up about 6 per cent. Government purchases of goods and services have also increased substantially over the past year, grow ing by nearly 7 per cent in real terms between the Page 26 first and fourth quarters of 1958. Although outlays for defense purposes increased, the bulk of the growth in government purchases in 1958 was for nondefense activities of the Federal government and continuing expansion of state and local government activities. In the first quarter of this year government pur chases have continued to increase, as evidenced by growth in outlays and contracts for public construc tion and an increase in cash expenditures of the F ed eral Government. During January and February cash expenditures of the Treasury amounted to $15.2 billion, about $2.4 billion greater than expenditures in the same period of 1958. Private investment, particularly in residential con struction, has contributed increasingly to recovery in the output of the economy since the trough of the recession last spring. Inventory liquidation, which had accounted for a large part of the recession de cline in investment, ceased in the fourth quarter of last year. In the first quarter of this year, business inventories have been increasing. In January, manu facturing and trade inventories, seasonally adjusted, rose $300 million. A part of the high current produc tion of steel is evidently going into stocks being built up in expectation of a possible steel strike, as well as to meet expected larger requirements for steel as production of steel-using products grows. Although growth in gross national product can be seen clearly, some of its implications for employment and personal income and prices are not so clear. D e spite the recovery in rate of output, unemployment in January remained at 6 per cent of the labor force. Personal income, on the other hand, reached a new high in January, both in dollar terms and in real terms. Prices on the average have been quite stable for several months, with declines in prices of farm products and foods tending to offset increases in prices of industrial commodities. Improvements in employment conditions in Janu ary and February were moderate. Between Decem ber and February there were slight employment gains, after seasonal adjustment, in construction, trade, trans portation, and state and local government, while manufacturing employment remained unchanged. Total nonfarm employment in February, seasonally adjusted, was up 982,000 from the recession low but was still 1.4 million below its 1957 peak. Unemployment changes have been mainly seasonal since November. February unemployment of 4.75 mil lion was at a seasonally adjusted rate of 6.1 per cent of the labor force, as compared with a 1958 peak of 7.6 per cent. Total unemployment rates and the rates in most major industry groups in February were about the same as in February 1958, or slightly higher. In durable goods manufacturing, however, 8 per cent of the industry work force was unemployed this February as compared to about 10 per cent a year earlier when durables production was sharply curtailed. Improve ment over a year earlier was especially marked in the automobile and primary metals industries. Although employment growth has lagged behind the growth in output, personal income has grown substantially. At a seasonally adjusted annual rate of $362.3 billion in January, total personal income was almost $15 billion, or 4.3 per cent, above its recession low of last February, and was $10 billion, or almost 3 per cent, higher than at the August 1957 pre-reces sion peak. Between April 1958 and January of this year total wage and salary income rose 5.4 per cent, while nonfarm employment rose but 2 per cent (sea sonally adjusted), reflecting increases in wage and salary rates and lengthening of the average work week. Income other than labor income was about the same in January as in April of last year. Because the cost of living, as measured by the consumer price index, remained practically constant between April and January, the increase in wage and salary income has been as large in real terms as in dollar terms. Changes in Wholesale Prices August 1957 — February 1959 Per Cent per Cent Changes in Nonfarm Employment and W ag e and Salary Income August 1957 — January 1959 Per Cent Per Cent In the recovery from the April 1958 recession low, wage and salary income has grown more rapidly than nonfarm employment, reflecting increases in wage and salary rates and lengthening of the work week. Sources: Wages and salaries—National income and product accounts of the United States Department of Commerce. Seasonally adjusted annual rates have been converted to per cent of August 1957 rate. Lump-sum retroactive salary payments to Federal employees in July 1958 at an annual rate of $4.6 billion have been ex cluded. Nonfarm employment— Seasonally adjusted total employment in nonagricultural establishments, estimates of United States De partment of Labor, Bureau of Labor Statistics. Monthly esti mates have been converted to per cent of August 1957 level. During the recession and the recovery changes in prices of farm products and industrial commodities have tended to offset each other. Source: Department of Labor, Bureau of Labor Statistics, Monthly In dex of Wholesale Prices. Each component has been converted from 1947 - 49 — 100 base to August 1957 = 100 base to facil itate comparisons. Page 27 Stability of the consumer price index has limited cost of living wage increases and for the second successive quarter 1.25 million workers in the automobile and related industries received no cost of living adjust ment. Between Decem ber and January the consumer price index rose 0.1 per cent to 123.8 per cent of the 194749 average. Food prices increased 0.3 per cent after declining 2.5 per cent in the preceding five months. Prices of other commodities and services combined were about unchanged with seasonal reductions in apparel, household textiles, and automobiles offsetting increases in some appliances, furniture and services. Wholesale prices of some manufactured products and industrial materials have been advancing in re cent weeks. In January and February, prices of scrap steel, refined copper, textiles, hides, shoes, tires, ma chinery, lumber and plywood increased. Prices of lead and zinc, on the other hand, declined. Prices of farm products and foods declined further through the end of February, offsetting the increases in industrial commodities. Recent developments in livestock mar kets and on farms indicate that prices of farm prod ucts and foods will be under continuing pressure from large expected supplies of crops and livestock in com ing months. Discount Rates Increase E f f e c t i v e MARCH 6, discount rates, the interest rates charged on commercial bank borrowings from Federal Reserve Banks, were raised from 2& per cent to 3 per cent at the New York, Philadelphia, Chicago and Dallas Reserve Banks. By March 16 all other Reserve Banks had taken similar moves. Rates had / been at 2x2 per cent since November 1958. A year ago, during a period of recession, discount rates of the Federal Reserve Banks were marked down in several steps, reaching a low level of 1% per cent in April 1958. In August, as signs of improve ment in business and financial activity appeared and as market rates rose rapidly, the discount rates were raised to 2 per cent. Again, in late October and early November the Reserve Banks increased their lending rates to 22 per cent. / Discount rates of many central banks of the world are generally above the yields available on high-grade short-term money market instruments, such as the 90-day Treasury bills of this country. In Canada the discount rate is set each week at M of 1 percentage point above the latest average tender rate for Treas ury bills. In the United States, from December 1950 through August 1958 the discount rates on a daily average basis were nearly }l of 1 percentage point above the 3-month Treasury bill rate. Since 1929 the discount rates have averaged about % of 1 percentage point higher than the bill rate. During the 7-month period from early August 1958 to early March 1959, discount rates did not maintain their customary position above money market rates despite being raised on two occasions for a total of % of 1 percentage point. During most of the period discount rates have been as much as % of 1 percentage point below the Treasury bill rates, at times more than J2of 1 percentage point below. Page 28 In recent months member banks have been increas ing their borrowings from the Reserve Banks. In the five months ending with July 1958, daily average borrowings of member banks were $130 million; dur ing August and September last year average borrow ings were $365 million; in the fourth quarter borrow ings rose to $500 million, and in the first two months of 1959 they averaged $530 million. It is of some interest to compare the level of dis count rates in this country with those of central banks in other countries. In most of the rest of the world central banks currently have discount rates above the 3 per cent level, although there are some nations with rates lower. The Bank rate in England was 4.0 per cent in early March, the Canadian rate was 4.32 per cent, and in France the rate was 4.25 per cent. D is count rates in selected other countries in early March were: Argentina, 6.0 per cent; Belgium, 3.25 per cent; Brazil, 10.0 per cent; Western Germany, 2.75 per cent; Greece, 10.0 per cent; Japan, 6.9 per cent; Netherlands, 2.75 per cent; New Zealand, 7.0 per cent; Sweden, 4.5 per cent; and Switzerland, 2.0 per cent. R ec en t B a n k in g D e v e lo p m e n t s During January and February outstanding credit at weekly reporting member banks decreased about the seasonal amount. Businesses reduced bank indebt edness more than they usually do at this time, in part because improvement in earnings and other cash in flows more than offset a moderate growth in inven tories and other immediate needs for cash. Security loans, which rose sharply in 1958, declined about $500 million in the two months. Also, banks sold securities on balance. On the other hand, real estate loans con tinued to rise markedly, and “other,” including con sumer, loans did not decrease the seasonal amount. I m erest From late January to early March, interest rates on marketable securities declined somewhat. The yield on three-month Treasury bills declined from 2.96 per cent on January 23 to 2.73 per cent on March 16. Over the same period the yield on a 4V2-year Government bond (August 1963) fell from 4.04 per cent to 3.88 per cent. theless, the current volume of money may be infla tionary. During 1958 the money supply rose sharply so that the volume outstanding is presently large com pared with early 1958 levels. Then, too, use of the money supply, as indicated by debits to demand deposit accounts, has remained active, perhaps rising. Active Money Supply Seasonally Adjusted Billions of Dollars Billions of Dollars Yields on U. S. Government Securities Weekly Averages of Daily Figures 1958 1959 Latest data plotted — Week ending March 13 Source: Board of Governors of the Federal Reserve System Reportedly, the decline in yields reflected a strong demand for short-term securities by nonfinancial cor porations. These corporations were seeking to invest funds which they accumulated as cash inflows ex ceeded cash needs. However, this source of funds to the money mar ket may be only temporary. March 1947-49 = 100 tax payments will probably cause P er Cent a drain on cash resources of cor porations. In addition, funds may be needed to expand inventories in the near future, since inventories have declined in the past year and sales have been rising. M nt s s i Demand for bank credit may be increasing in forth coming weeks and months. Business activity has been improving, which usually creates an increase in the demand for credit. The Treasury may be seeking additional funds, an unusual development at this time of year when tax receipts are seasonally large. Also, it is unlikely that nonfinancial corporations will continue to increase their liquidity as fast as they have in recent weeks. Debits to Demand Deposit Accounts National— Excluding New York City Seasonally Adjusted— Three-Month Moving Averages Per Cent I The active money supply ad justed for seasonal influences rose by a small amount in the first two months of 1959, according to pre lim in a r y d a ta , a contraction in January being more than offset by an expansion in February. Never Page 29 The 13b Program — An Experiment in Small Business Finance O n AUGUST 24, 1958 President Dwight D. Eisen- perfectly clear that smaller firms were expected to hower signed the Small Business Investment Act and be its principal beneficiaries. thereby opened a new chapter in the history of Gov serve Board's press release on inauguration of the ernmental aid to small business. program stated: This new legisla tion takes account of much of the experience gained from earlier efforts. Its scope and application was served by the commercial lending program of the Federal Reserve System, inaugurated some 25 years earlier under Section 13b of the Federal Reserve Act and terminated by the Small Business Act itself. Federal Reserve lending under the so-called 13b program was only a part of a much larger Governmentally sponsored program of loan assistance to busi ness which came into existence during a period of vast unemployment, financial chaos, and profound material distress, with the fervently expressed hope of assisting the nation toward economic revival. The quiet departure of 13b a quarter century later mutely testified to the fact that it had become, over that space of time, more a legal fiction than an economic reality. Yet 13b deserves an obituary for it was one of the prototypes of Government-assisted financing of small business and as such has a current relevance warranting an elaboration of the circumstances of its birth, the facts of its development, and the causes of its demise. Interestingly, there is not one word or even a hint about small business in the depression-born statute Nevertheless, both Con gressional debate and official announcement make it Page 30 . . . Many small industrial establishments have suf fered severe capital losses during the depression and are now short of working capital. A survey made by the Federal Reserve Board through the Reserve Banks and the chambers of commerce showed that this con dition is widespread and is not being met by existing facilities. Small industries find it difficult at present to obtain their requirements of working capital through the capital market, while commercial banks and other financial institutions, in many cases, are hesitant about undertaking on their single responsibil ity the risks involved in making relatively long-time loans for working capital purposes.1 The Board’s announcement was made in connec tion with Congressional action of June 1934, which pledged the financial assistance of the United States Treasury and the Federal Reserve Banks to fill such a "working capital” *void and made the latter institu tions the conduits through which businesses could get funds for periods up to five years for this pur pose. The Treasury was tapped for a potential con tribution of $139.3 million and the Reserve Banks were authorized to use $138.4 million of their own resources.2 Thus, the program got underway with a generous endowment of almost $280 million. Sources and Uses of 13b Funds which created this program. Thus, the Federal R e 1 Federal Reserve Bulletin, July, 1934, p. 429. 2 Congress did not arrive upon these particular sums accidentally. $139-3 million had been paid previously by the Reserve Banks for stock of the Federal Deposit Insurance Corporation. Congress provided that the Treasury make an identical sum of money available to the Reserve Banks for business loans. The Federal Reserve’s FDIC stock was, in effect, pledged against the Treasury’s contribution. The $138.4 million which the Reserve Banks could use from their own resources was determined on the basis of their combined surplus on July 1, 1934. It should be made clear at this point that Congress which it acted to put the program into effect. On did not intend these funds as a pool of venture capital June 26, 1934, one week after President Roosevelt nor, despite widespread opinion to the contrary, as signed the enabling act, the Board published Regula artificial respiration to marginal businesses. tion S, setting out the ground rules for 13b lending. Rather, use of the money was carefully limited to sustaining The Board emphasized that it was giving the indi “established” or “operating” creditworthy firms. Two vidual Reserve Banks the greatest possible measure general methods of loan-making were provided. One of authority in order to facilitate and accelerate their involved a cooperative arrangement between the Fed newly authorized operations. eral Reserve and private financing institutions where provided little in the way of details and was largely by the latter could make intermediate-term “working a reiteration of the text of the statute. capital” loans to creditworthy firms and, at their own paired the broad powers which Congress had given initiative, turn over such loans to a Reserve Bank. the Reserve Banks, and made no attempt to pre Thus, the Regulation It left unim The turnover was usually made under an arrangement scribe specific definitions of “working capital”, “estab called a commitment, whereby the Reserve Bank lished businesses” and the other general terms of the promised (for a fee), prior to the private lender’s law. initial disbursement of funds, that it would buy, or Banks to make direct loans. lend on, a specific loan at the lenders demand. Pri Bank considerable latitude in setting up systems and vate lenders were, therefore, given an opportunity to methods of loan making. make loans they might otherwise have declined. Such loans were not to be without risk to the private lender, however, since the latter was required to stand a minimum of 20 per cent of the loss on any credit transferred to the Federal Reserve. It granted blanket authority to all Reserve It gave each Reserve The Reserve Banks responded accordingly. Ad visory committees were established by late July, and consideration of applications for credit began imme diately. The first 13b loan was made at the Federal Reserve Bank of Minneapolis on August 1. By the In addition to such participation with private lend end of that month the program was a going concern ers, Reserve Banks were also permitted to make direct at all Reserve Banks save three and $870,000 of 13b loans, that is, loans in which private financing institu credit was outstanding. tions were not involved. This authority was carefully hedged with qualifications. It could be used only “in exceptional circumstances”. Approval of the Reserve Board was required. It was mandatory that a Re serve Bank ascertain that the prospective borrower could not get financial assistance “on a reasonable basis from the usual sources”. Most important, the direct loan itself could be made only “on a reasonable and sound basis”. By the end of October 1934, 4 months after the inception of the program, Systemwide lending was in effect and amounted to over $6 million. The Nature of the Treasury’s Contribution to 13b During the first few months of the program, or ganizational activities in the field were paralleled in Washington by discussions between the Treasury and the Federal Reserve which were necessitated by the W hile private lenders and the Reserve Banks were failure of the statute to specify how their respective thus to be the principal participants on the lending contributions were to be made available to the pro side of the 13b program, Congress brought two other gram. groups into loan administration. The Federal Reserve Board was given responsibility for overall supervision. Five-man advisory committees, composed of local (nonbanking) businessmen, were organized at each Reserve Bank to review and to make recommenda tions on each request for 13b credit. The First Days of the Program The Reserve Board underscored the urgent char acter of the legislation by the speed and manner with By midsummer an earlier “gentlemen’s agree ment” had been cast in final form. It contemplated the Treasury’s supplying the first $10 million, the Federal Reserve the second, and so on until the maximum of $139 million from the Treasury had been utilized.3 The agreement provided as a matter of mechanics that each Reserve Bank would certify to the Treasury its cash disbursements of 13b credit and be reimbursed until it received its pro-rata share of the initial $10 million advance (e.g., $365,623.01 in the case of the Federal Reserve Bank of St. Louis). Thereafter the Reserve Bank would not receive Treasury funds until its outstanding disbursements and commitments stood at double the amount of such first payment (e.g., $731,246.02 at St. Louis) when the alternative process would be resumed. Page 31 The law under which this financing arrangement ed; no more than 2 per cent of the Treasury’s con was effected was itself a compromise between (1) the tribution was credited to the Treasurer’s general ac original Senate bill to fund the program in its entirety count and the remainder, if any, was credited to Sec through an out-and-out Treasury grant to the Reserve tion 13b surplus. Banks and (2) a House amendment requiring that all to the Reserve Banks was credited to their regular financing be done with Federal Reserve money. (so-called Section 7) surplus. It provided for annual payments by each Reserve Bank The share of net earnings allocated A net loss was divided between the two surplus accounts on the same basis.5 to the Treasury of “up to 2 per cent of the total payment as shall be covered by net earnings of the G r o w th of th e P r o g r a m in 1935 Bank for that year derived from the use of the sum The first six months’ income from the 13b program so paid by the Secretary of the Treasury . . .”4 This was a rather unsubstantial sum to warrant such a statutory language was a source of both conceptual complex formula. and practical difficulties. Yet it was a deceptive index to the growing scope of It amounted to less than $137,000. For example, were the payments to be derived this activity for on Decem ber 31, 1934, $14.3 million from the total income of the Reserve Banks, or were of direct advances were outstanding and, in addition, they to stem from that portion which arose from the Reserve Banks had issued commitments amount the Bank’s 13b activities only? ing to $10.0 million. If the former, then These amounts were but a obviously the maximum 2 per cent payment would be fraction of requested financing; over 5,000 applica made every year since the Reserve Banks operated at tions for a total of $188 million had been received. at a profit. However, if payments on the Treasury’s Roughly, about a fifth of that number, amounting to contribution were confined to income generated by $50 million, had been approved; as was noted earlier the 13b program, the payments would be substantial some $24.3 million of direct advances and commit ly smaller; indeed for several years the program op ments were outstanding, and about 600 applications erated at a loss. Th e statutory language was per totaling $41 million were pending at year end. The fectly general on this point and was a source of dif Reserve Banks were vigorous in pushing the pro ficulties on other matters as well. Was the Treasury’s gram. Energetic efforts were made to publicize the contribution a loan requiring eventual repayment or availability of loans; cooperation and assistance of a permanent contribution of capital? W ere the annual commercial banks and other financial institutions were 2 per cent payments (a) interest, (b) a repayment of solicited; and requests for credit were checked and principal, or (c) a disbursement in the nature of a rechecked to insure that all applications which fully dividend? complied with the stringent requirements of the law Could administrative expenses and bad debts be deducted in arriving at “net earnings”? Pending definitive legislative action and in order to were approved. The program continued to grow during 1935. In expedite the program the Federal Reserve resolved November of that year loans and commitments out these questions by defining, for operating purposes, standing reached an all-time high of $60.6 million and the source of the 2 per cent payments to the Treasury the annual average of month-end figures was $48.6 to be the net earnings from 13b operations only. Net million. earnings in turn were represented by the Federal increased to $53.1 million, although new loans ap Reserve as gross earnings minus bad debts and op proved fell erating expenses. Such net earnings were divided While the Reserve Banks received a substantially between the Treasury and the Reserve Banks on the smaller number of requests for a smaller dollar vol basis of Treasury and Federal Reserve funds em ume in all of 1935 than in the first six months of the ployed. program s existence, they approved a larger number The Treasury’s share was then again divid- In 1936 the average volume of outstandings off sharply from year-earlier figures. and for c o n s id e r a b ly larger a m o u n ts (see table 4 Actually the formula was more complex, because the annual payments were required only if annual dividends, payments, and other proceeds on the Federal Reserve’s FDIC stock fa iled to equal 2 per cent of the Treas ury’s 13b contribution. No such proceeds were ever received, and conse quently the condition waiving annual payments to the Treasury was inopera tive. Page 32 5 The provision for annual payments by the Federal Reserve to the Treasury ended in October 1947, when at Congressional direction, the FDIC retired its stock via a payment to the Treasury. In effect, this meant the entire proceeds of the 13b program came from Federal Reserve sources. below). However, in 1936 only 287 new applications These differences were deepened and broadened by subsequent legislative amendments of the R FC totaling $15.3 million were approved. program. 13b Loan Application and Approvals 1934 — 1936 strictions on the size of loans were removed, and ten- (Amounts in Millions of Dollars) Applications Submitted Applications Approved Amount Number Amount 1934 5,053 $187.7 984 $49.6 1935 2,562 119.0 1,009 79.9 1936 764 Number 36.0 In January 1935, business lending became a permanent part of the Corporation’s activity, re 15.3 287 year maturities were permitted. RFC activity was again enlarged in 1938 as a result of the preceding year’s recession. In order to encourage small busi ness and promote employment, a general relaxation of requirements was effected, particularly the pro Causi?■$ of tbe visions relating to the collateralizing of loans. [J tv h n e c As Chairman Eccles was to observe later, the lack of a The foregoing decline could hardly be attributed corresponding liberalization of the Reserve Banks’ to a lack of sympathy or a lack of interest on the program put them part of the Federal Reserve Board. out of business in this particular field”. On the contrary, . . for all practical purposes . . . as early as January of 1936 the Board noted a sidewise movement in 13b activity and directed the R e serve Banks to circularize member and nonmember institutions on the availability and terms of such credit. The Banks complied in renewed promotional effort, but it was not enough. During 1936 the vol ume of new approvals of 13b credit had declined to $15.3 million. Thus, at the close of 1935, outstanding 13b credit totaled $60.1 million as compared to the R F C ’s $40 million. One year later the R F C ’s year-end total of $63.5 million exceeded the Federal Reserve’s $46 mil lion. This gap was to widen with the passing years. Doubtless the sustained expansion of the R FC busi ness loan program— which, in retrospect, stands out as The decline occurred, in large measure, because the Corporation’s primary function—sprang in large two other sources of credit became more readily measure from the fact that Congress tended to make available. the R FC the principal vehicle for conveying Federal First, there was an expansion of inter mediate credit lending by the Reconstruction Finance Corporation. Second, commercial bank loans to business evidenced their first rise from the sustained decline which set in in 1929. assistance to business. The second factor restricting 13b which also began to become apparent in 1936 was the resurgence of private finance. For the first factor we must turn back to the orig As was noted earlier, it was in that year bank loans first stopped declining since the ’29 inal 13b statute in which the R FC was given, almost crash and began a slow upward movement. as an afterthought, six-months’ authority to use $300 was a product of many components. million for a somewhat similar program. most was economic recovery. Here again This First and fore Second was the host small business was intended as a principal beneficiary. of changes that had come into American finance, On the face of the statute both the R FC and Federal especially the new lending methods that had begun Reserve programs showed considerable parallelism. to make their effect felt in the overall credit picture. Both limited the authorized credit to five-year terms. Financing institutions had undertaken a reassessment Both provided for direct and indirect lending. Both of their lending conventions and had shown a will demanded credit worthiness of prospective borrow ingness to part with money on other arrangements ers. than the classic short-term, unsecured, self-liquidating Yet other elements provided the seed of pro found differences, for the language setting R FC loan loan. standards subtly but distinctly manifested a more by single or multiple lenders for long periods was liberal standard of borrower eligibility. coming into increasing use. Moreover, The term loan involving extensions of credit A related but distinct the R FC was required to take into account the po development was the transformation of collateral de tential of a prospective loan for providing "reasonable vices, such as assignments of accounts receivable and assurance of continued or increased employment”. various forms of inventory security, from badges of Page 33 bankruptcy to routine conventions of commercial Korean War, reaching $10.4 million in 1952, by 1958 bank lending. Here 13b had paved the way for its own decline, for these measures had been pioneered to a certain extent in 13b lending and participating banks had re ceived thereby a relatively riskless lesson in new ways of doing business. Moreover, the resurgence was not confined to banks. Insurance companies, commercial finance companies and other nonbank lenders had begun their competitive drive to share the short- and intermediate-term credit market for American business. million. Although this figure rose slightly during the In this connection we should again stress the climate of recovery which encouraged resumption of intermediate-term credit to small busi ness in the form of short-term notes. In effect, these developments served to reduce the number and amount of creditworthy 13b applicants, just as the liberalized R FC program preempted the field on the only $1.4 million remained outstanding (see chart). Yet loan volume is a spurious index to the interest evidenced in 13b toward the end of World W ar II and immediately after when fears of a postwar de pression were widely held. In early 1944 the Baruch- Hancock report recommended expansion of the pro gram into a liberalized and permanent source of small business credit. Legislative suggestions for a variety of amendments to this end became hardy perennials in successive sessions of Congress. On several occasions the Board of Governors gave its blessing to proposals which would get the Reserve Banks out of the direct loan business and transform commitment activity into a stepped-up program of private loan insurance. However, the successful transition from war to peace took the steam out of the movement to revital more marginal risks. ize 13b, and for the last decade of its life the pro gram existed only in skeletal form. 13b Activity from 1937 to the Present The dampening effect of these factors on 13b credit was continuing and progressive. 13b operations became dormant for all practical purposes at most Annual aver Reserve Banks. Demand for credit on the terms re quired by the basic law had largely evaporated due ages of month-end loans and com mitments outstanding dropped from Advances, Commitments and Total 13b Credit $37.7 million in 1937 to $30.1 mil Annual Averages of Month-end Outstandings 193 4 -1 9 5 8 (Millions of dollars) lion in 1938 and from $23.9 million in 1939 to $17.1 million in 1940. The defense program brought a turnabout and a modest increase; outstandings climbed to $19.8 mil lion in 1941 and reached $25.5 million in 1942. From then on the volume of 13b credit declined as the tremendous increase in war production necessitated different credit arrangements, and the V and V-T loan programs were de veloped accordingly. These activi ties took over the bulk of the Re serve Bank credit d e p a r tm e n ts ( drawing substantially, it might be added, on the store of 13b expe rience). The latter program was shunted aside and during 1945 out standing 13b loans averaged $7.3 Page 34 Millions of Dollars Millions of Dollars Industrial Advancements and Commitments Under Section 13b, by Federal Reserve Banks Annual Averages of Month-end Outstandings 1934-1958 (Thousands of Dollars) System Total Boston 1934 11,998 1935 New York Phila delphia 2,1 0 9 2,121 1,271 804 48,641 5 ,3 6 0 13,761 5,158 1936 53 ,0 5 4 5 ,7 5 9 16,568 1937 3 7 ,7 3 0 4 ,9 4 6 1938 3 0 ,0 7 7 1939 Cleve land Rich mond St. Louis Minne apolis Kansas City Dallas 1,039 829 384 471 546 2,263 2,271 2,0 2 6 1,687 2,0 7 9 3,604 1,032 1,968 2,201 1,389 1,498 2,128 5,914 4,0 5 5 555 936 1,252 831 772 1,535 5,133 2,3 6 0 3,2 1 0 445 566 659 1,086 800 981 4 ,5 1 7 3 ,9 3 0 1,963 2 ,126 875 452 455 955 77 0 619 4,354 2 ,8 4 7 3 ,5 0 6 1,385 1,535 747 322 293 273 392 406 3,944 1,841 2,4 8 0 4,731 1,520 1,648 837 853 655 451 1,033 314 3,424 25 ,5 4 6 1,341 1,281 6 ,4 7 0 1,267 2 ,114 1,490 1,614 1,530 492 2,332 175 5,440 1943 23,863 1,938 408 6 ,4 1 0 1,159 1,379 343 47 1,342 158 3,048 21 7,61 0 1944 15,835 1,351 109 6,262 411 1,055 58 2 65 141 1,027 116 5,238 1945 7 ,2 7 0 263 4 5,138 118 437 2 306 30 18 129 825 1946 6,311 107 - 2 ,1 1 7 791 164 - 99 2,6 0 0 - 188 167 78 1947 9,0 96 9 - 2 ,434 1,553 91 443 168 1,849 - 2 ,375 12 162 1948 8,359 63 - 1,247 1,421 175 843 415 323 - 3,7 5 0 - 122 1949 2,943 44 - 1,106 1,367 120 143 21 42 12 1950 4,492 - 16 2,612 469 157 3 229 125 176 208 - 49 7 1951 9,073 - 25 4,718 1,014 212 264 1,065 42 155 635 34 909 1952 10,372 - 2 5 ,6 3 0 864 149 601 1,811 - 109 801 7 398 1953 6,285 - - 3,913 749 115 470 53 - 113 813 - 59 1954 3,591 - - 1,782 718 51 174 21 - 100 745 - - 1955 3,708 - - 765 532 19 76 9 _ 78 2,2 2 9 _ _ 1956 3,2 64 226 - 621 201 2 - 70 - 51 2,093 - — 1957 2,354 319 - 34 7 64 - - 82 - 31 1,511 — — 1958 1,423 327 - 69 61 — — 10 _ 16 940 _ _ Atlanta Chicago 1,028 884 512 3 ,1 4 0 5,5 9 0 1,702 5,691 3 ,0 2 0 5,8 8 6 11,532 4,1 5 5 2 ,028 3,7 9 4 8,033 3,6 2 6 23,933 2,483 4,951 1940 17,128 1,478 1941 19,787 1942 • _ — _ San Francisco 88 Page 35 to two factors which the Board of Governors stressed employment. in its Annual Report for 1946: be dismissed as marginal. Certain provisions of (Section 13b) have proved so restrictive as seriously to impair the ability of the Reserve Banks to lend directly to business and to assist banks and other lenders in such lending . . . The basic need of the small, independently owned business enterprise is for long-term funds. Twelve years later, Congress confirmed the Board’s 1946 judgment in passing the Small Business Invest Yet this aspect of the program must A second and largely un premeditated result was the influence of the program on American banking conventions by providing a laboratory in which new lending techniques could be explored, tested, and refined. Here we should note again its influence on term lending, and the develop ment of techniques, which paved the way for the massive amounts of V-loan financing. ment Act by which extended financing was made W ith these considerations in mind, certain tentative available to small firms through long-term Govern- conclusions are suggested by this brief review of the mentally assisted loans and purchases of equity-type 13b program. securities. As part and parcel of this action, Federal business should probably be administered by an First, Governmental assistance to small Reserve commercial lending, both direct and indirect, agency created solely for that purpose rather than was revoked as of one year thereafter and the R e by the central bank whose major duties are credit serve Banks ordered to repay the total Treasury ad control and bank supervision. vances within 60 days.6 Thus, did 13b pass into history. financial need of small firms appears to be in the area Second, the major of long-term funds rather than loans with a five-year maximum term. An Overall Appraisal the second; insofar as small firms require sources of Any overall appraisal of the program— whether the effort begins with an attempt to vindicate its success or to charge it with failure—inevitably winds up with a verdict of "not proven”. Its context is simply too tangled to admit of an orderly delineation of causeand-effect. Nevertheless, certain by-products can be singled out. risk capital, loans made to satisfy that need cannot, in a literal sense, be made "on a reasonable and sound basis”. To the extent that the 13b program proved these points-and they were all recognized in subse quent legislation—it provided knowledge that could only come of experience. In short, we can write 13b’s epitaph as an arrange The most apparent is the credit that was provided in the depressed years. The third point follows closely on Unquestionably the program ment born in depression and expiring in prosperity, an arrangement which, it was hoped, would assist provided a welcome source of funds for some bor small business, an arrangement that fell somewhere rowers with a consequent effect upon income and between success and failure, and whose historical 6 The repayment provision settled the question as to the nature of the Treasury advances by determining, in effect, that the Treasury contribution was a loan repayable in full. Page 36 position lies in its status as a way station on the road of public assistance to private enterprise.
