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Speech delivered before
jjashington Bankers Association, donvention
Spokane, Washington
June 18. 1936


When the Federal Reserve Banks were established they were authorized
x o discount for member banks only certain eligible types' of paper. These
represented advances of credit for-short terms cniy on the basis of commercial and agricultural activities. The idea in limiting the discount
powers of the Federal Reserve Banks to these classes of paper was to
facilitate the use of bank credit for legitimate commercial and proactive purposes, and to discourage its use for speculative and nonproductive purposes.
without departing from this objective, it has been found necessary
rom time to time in recent years to modify the limitations in the origiaj. Act. : I s of these departures were made as the result of emergency
leeds arising during the depression. It was for this reason that in 1932
ne federal Reserve Banks were authorized under certain conditions to
nai<e advances to member banks on the basis of any collateral satisfactory
™ the Reserve Banks. In the Banking Act of 1935 this provision, which
a i previously lapsed, was restored to the Federal Reserve Act in Section
•wo and made more general in its application. The result is that at the
esent time, as you know, Reserve Banks may make advances to member
hfI? ? n a n y t y p e o f collateral satisfactory to them, provided the paper
ao not more than four months to run. This power is no longer restricted,
it formerly xras, to periods of emergency. Advances of Federal Reserve
credit on such bases as well as on the basis of the class of paper
n g m a l l y defined as eligible are now within the scope of the regular
Powers of the Federal Reserve Banks. At the present time, of course,
"nen banks in general have an abundance of funds, the authorization for
vie Federal ueserve Banks to make such advances has little occasion to
e exercised. If the banks have occasion to borrow in the future as they
nave in the past, however, these powers may come to be of preatinrooroance.
r r K T h e r e i s o n e special type of loan which the ordinary bank would
rrobably hesitate to make if the law did not permit the loans to be discounted at the Reserve Bank on especially favorable terms. These are
c™.ng capital loans with five year maturities, authorized by Section
Job of the Federal Reserve Act.
The difference between Section 10b and 13b is mainly that 10b
'Authorizes advances on any satisfactory collateral for not more than four
months; whereas 13b authorizes advances and discounts for working capital
purposes for not more than five years.
The powers to discount industrial loans were given to the Federal •
reserve Banks under the terms of an Act of June 19, 193k, which added
j11 1 3 b t 0 t h G F e d e r a l reserve Act. The adoption of this measure was
decoded by considerable discussion as to the proper means of making
d^ i + a v a i l a b l e t 0 business enterprises whose working capital had been
epieted. One suggestion that has often been made is that there should
e intermediate credit banks established for the purpose. The basis for
suggestion usually is that small business enterprise has great

difficulty in procuring capital.
Whatever the•merits- of this ques- tion, Congress decided to use an existing agency rather than establish
new ones, and to provide the facilities aimed at through extension of
the powers of the Federal Reserve Banks.
The amendment which was adopted authorized the Federal keserve
Banks to discount loans made by member banks and others for working
capital purposes, or in cases where credit was not procurable from the
usual sources to make such loans direct. The law stipulated that the
loans were to be made to established industrial or commercial enterprises; they were to be for the purpose of furnishing working capital;
and they were to have maturities not exceeding five years. With
respect to such loans to be discounted by the Federal Keserve Banks,
the law reads as follows:
"iiach Federal Keserve Bank shall also have power to
discount for, or purchase from, any bank, trust company,
mortgage company, credit corporation for industry, or other
financing institution operating in its district, obligations
having maturities not exceeding.five years, entered into for
the purpose of obtaining working capital for any such established industrial or commercial business; to make loans or
advances direct to any such financing institution on the
security of such obligations; and to make commitments with
regard to such discount or purchase of obligations or with
respect to such loans or advances on the security thereof,
including commitments made in advance of the actual undertaking of such obligations. Each such financing institution
shall obligate itself to the satisfaction of the Federal
Keserve bank for at least 20 per centum of any loss which
may be sustained by such bank upon any of the obligations
acquired from such financing institution, the existence and
amount of any such loss to be determined in accordance with
regulations of the Board of Governors of the Federal Reserve
You will notice that the Federal Reserve Banks may make these discounts
not only for member banks, but for non-member banks or any other type of
financing institution.
The arrangements.that may be made under this authorization are extremely favorable to the'bank which desires to make the loans in cooperation with the Federal Reserve Bank; for the commitment which the
Federal Reserve Bank is authorized to grant is an agreement under which
a local bank may carry such a loan in its own portfolio at a good rate
of interest and with the privilege of disposing of it at any time at
the Federal Reserve Bank. Moreover, when it is sold or transferred to
the Federal Reserve Dank, the latter will assume without recourse as
much as 80 percent of any eventual loss on the loan,, The commitment,
therefore, gives the local bank assurance that the loan is perfectly
liquid even though it may run for a period of five years, and also
that its own loss on the loan may be limited to 20 percent.
. _
The Federal Reserve Bank of San Francisco makes a charge of from
1/2' to 2 percent per annum on the commitments it grants. The exact
rate depends upon various factors risk, maturity, etc. It

charges a discount rate of from 3 to'U percent on that portion of any
loan for which the bank which made the loan retains obligation, and from
h to 5 percent on that portion from which the bank which made the loan
is released from obligation.
In granting a commitment, of course, the Federal Reserve Bank has to
consider the credit risk exactly as if it were making the loan itself.
It may be said indeed that the Federal Reserve Bank assumes somewhat
more risk in granting a commitment than in making a direct loan, since a
loan which it makes itself is under its own immediate care, whereas a
loan held by another institution is not. Obviously the circumstances
are such that the Federal Reserve Bank must be assured that the loan is
a good one and that it will be properly serviced. In practice, therefore, applications for such loans are usually considered simultaneously
by the Federal Reserve Bank and by the bank which contemplates making
the loan.
In cases where a loan is refused by the local banker but is considered by the Federal Reserve Bank a good loan, the Reserve Bank may
make it direct. Under such circumstances it cannot be said that the Reserve Bank is competing with member banks. The Reserve Banks in general
prefer that local business be handled by local banking agencies. They
do not desire to develop direct banking relations with the public as a
matter of policy in any cases where local banking facilities are
As you know, the central banks of some other countries, for example,
the Bank of England and the Bank of France, have a certain amount of
private business which they conduct in competition with other banking
institutions. Before their central banking functions developed, these
institutions had much more of such business. The private business which
they still have, however, is not essential to their functioning as
central banking organizations. The same thing is true in the United
States. The basic functions of the Federal Reserve Banks are central
bank functions. The Reserve Banks are in the main intended to supplement regular banking facilities and to stand in reserve behind the local
banks. They are not competitors of their members.
It is now nearly two years since the Federal Reserve Banks were
given the authority I have been discussing. In that period they have
received, as of June 3, 8,127 applications of which 2,165 have been approved. The total amount that has been applied for is >330,026,000.
The amount approved is .,>132,626,000. Of this amount, >27,liiii,000 has
been conditionally approved, and
i|82,000 finally approved. These
final approvals include direct advances outstanding of ^30,701,000 and
commitments outstanding of - 2 * 878,000. Repayments have amounted to
^1^,988,000. withdrawals of approved applications, etc. have amounted
to ,J21,676,000. Financing institutions participations with the Federal
Reserve Banks have amounted to ,pll,970,000, and there is in process of
completion advances and commitments of about one and one-quarter million.
During the same period, that is since June, 193k, the Federal Reserve Bank of San Francisco has received 1,06£ applications, of which
2$k have been approved. The total amount applied for was ^31,32U,000,
and the amount approved was ,?ll,9ii2,000. Outstanding advances now
amount to >1,668,000, and commitments outstanding amount to <^,363,000.

Repayments have amounted to $l£0,000; The Bank now has in process of
completion approved advances and- commitments of about 51*63,000.
The statute limits the amount available for these loans and commitments to 5280,000,000 for all the Federal Reserve Banks, of which
the Federal Reserve Bank of San Francisco has $19,500,000. This constitutes a revolving fund, so that as payments are received and new
loans made, the total credit that may be extended far exceeds the
amount mentioned.
In order to assist the Federal Reserve Banks in dealing in a field
of credit which Congress felt might be new to them, it provided that
each Reserve Bank should have an Industrial Advisory Committee. The
members of the Industrial Advisory Committee of the Federal Reserve
Bank of San Francisco are as follows:
Stuart L. Rawlings

V.P., Calaveras Cement Co.

Ralph Burnside

V.P., Eatonville Lumber Co.

Shannon Crandall

Pres..,Calif. Hardware Co.

Henry D. Nichols

V.P., Tubbs Cordage Co.

flilliam G. Volkmann

Sec., A. Schilling & Co.

San Francisco,
Los Angeles,
San Francisco,
San Francisco,

All applications received by the Reserve Bank are considered by the
Industrial Advisory Committee and recommended for approval or disapproval.
The Bank's action, however, is final. It is lending its own funds and it
has the say as to whether or not a loan should be made. Consequently it
may reject a loan recommended by the Industrial Advisory Committee or it
may decide to make one even though the Industrial Advisory Committee's
recommendation is adverse.
Furthermore, applications are not referred to Washington. They are
considered and passed upon finally by the Reserve Bank of the district
in which they originate. The Board in Washington, D. C. merely issues
general regulations for the administration of Section 13b and supervises
the activity for the entire system.
While you may have full knowledge of this section and while you may
have already availed yourself of its provisions, it seems entirely
proper that we should remind business men from time to time of the service that is being rendered by an institution that was originally intended to be only a banker's ba.nk. .It is with this purpose in mind
that I speak to you on this subject today. .
There has been a falling off during recent months in the number of
applications .submitted f.or industrial loans, as the following figures
for all districts show.

Period since enactment ox Section 13b
June, 19314



Applications Received


Applications Approved


V M l e the above figures show a marked falling off in the number and
amount of applications received and approved, it is important to observe
that the proportion of approvals has greatly increased. In the first
six months, that is, from June to December 193U, only 19% of applications were approved and only 27% of the amount represented was approved.
In the first five months of this year, 33% of applications were approved
and 37% of the amount involved was approved. These figures indicate
that the average quality of the applications is now much better than it
was in 193U.
The smallest amount of any loan made to date in the 12th district is
05OO, and several loans of this amount have been granted. The largest
single loan approved in this district was for Ol,000,000.
Many banks have found it desirable to make these industrial loans
even without Federal Reserve Bank participation. Not all such cases
are reported, but the Federal Reserve Bank of San Francisco has been
informed that 72 applicants, applying altogether for Ol,715,000, have
received loans without participation by the Reserve Bank. Some borrowers who originally obtained credit from the Federal Reserve Bank
have subsequently borrowed from local banks and paid off the obligation
to the Federal reserve Bank before maturity.
The principal lines of business which have received 13b credit in
this Federal iteserve district are the following:

Kind of Business
Wholesale and Retail

Number of Applications Approved

Amount Approved
5 3,912,000

In addition to the Federal reserve Banks, the Reconstruction
Finance Corporation has also authority to make loans of similar nature
and for similar purposes.
It has been my opinion that the more often we discuss the Federal
Reserve System, the more firmly will its functions become directed
toward the accommodation of commerce, industry, and agriculture, as was
intended in the original Act. That is why I appreciate the opportunity
you have given me to say these words about this particular, new function
of the Federal iteserve Banks in the field of working capital loans.

Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102