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J UN 5

1939
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STATEMENT OF HONORABLE ERNEST G. CRAPED
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 3mall business has been such a controvcrsial 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 Juno 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 ruspect was broadened by the
Act of April 13, 1938.

Under the present law, the authority of the Re-

construction 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 cxcovding five years and only in order to provide
"working capital" to businesses that arc "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.

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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, eit'her 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 addi-

tional facilities which may account for the failure of many businesses
to reply to such questionnaires.
T J y not get to the bottom of this problem, once and for all,
'h
by devising legislation which is simple in character, inexpensive in
operation and cooperative in its approach?

In this way we could moot

the present difficulty squarely and without reliance upon an entirely .
new set-up of elaborate and perhaps unwioldly machinery.

Then, if it

should develop after the passage of such simplified legislation that the
need is not as great as anticipated, no groat 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 nlan
could easily take care of any increase in demand, regardless of
its volume.

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Financo 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 porsonr.el 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 tho 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

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cooperation 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 bo 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 would be made and increased benefits derived from the legislation if more flexibility
were 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
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 bo 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 prescribed by the Beard of Governors of the

Federal Reserve System, to make advances to member and nonmember
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 tho standpoint of
practical operation, experience has shown that it is iaore convenient
and loss expensive both to tho 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 bo 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 tho 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 operat
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, lino 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."

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