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Speech d e l i v e r e d before I l l i n o i s Bankers Association Decatur, I l l i n o i s May 20, 1935 RECENT RELATIONS OF THE FEDERAL RESERVE SYSTEM WITH BUSINESS MID INDUSTRY The name i s d i f f i c u l t . Once I almost l o s t a place on a college f o o t b a l l team because the coach thought t h a t I was playing a p r a c t i c a l joke on him when I handed i n my name w i t h others who were applicants f o r places on the team. He c a l l e d me l a t e r and said "You are through. 11 I asked him why. He said "Because you c a n ' t play jokes on me. What was i t you handed i n when I asked f o r names? I t looked l i k e the alphabet thrown together w i t h o u t any vowels." I had t o e x p l a i n t o him very s e r i ously -that t h a t was r e a l l y my name. He f i n a l l y believed me and I stayed on the team. I l l i n o i s i s the State o f my b i r t h , i n which I l i v e d and worked f o r many years. So you can understand t h a t I was more than pleased t o accept the i n v i t a t i o n o f Mr. H. A. Brinkman, your President, t o appear on t h i s program. I was e s p e c i a l l y glad t o have the opportunity t o meet you and l i s t e n t o what you have to say, so t h a t I might r e t u r n t o my o f f i c e i n Washington b e t t e r informed and b e t t e r able t o a i d , even i f i n a smell way, i n the s o l u t i o n of the problems presented d a i l y t o the Federal Reserve Board. L e t me begin by discussing something known t o a l l o f us - and .lead s l o w l y t o something t h a t may be news t o some o f us. As you know, the Federal Reserve Act emphasizes the p r i n c i p l e t h a t the System s h a l l be administered f o r "TNhe accomodation of commerce, i n d u s t r y and a g r i c u l t u r e . " 3 M s i s the basic thought of the A c t . Hie Federal Reserve banks - bankers 1 banks - are 'public i n s t i t u t i o n s serving the e n t i r e country. I n a d d i t i o n t o the banks which are members o f the System and stockholders o f the Federal Reserve Banks, the System c o n s i s t s , f i r s t , o f 12 Federal Reserve banks, 25 Branches, and two Agenc i e s . There are 9 D i r e c t o r s of each Federal Reserve bankj 6 are elected by the member banks and 3 appointed by the Federal Reserve Board* Each Branch has 5 ot 7 D i r e c t o r s , the, m a j o r i t y o f whom are appointe&by the D i r e c t o r s o f the Federal Reserve bank o f the d i s t r i c t i n vfticb the Branch i s l o c a t e d . Second, tho System includes the Federal Advisory Council of 12 a c t i v e bankers - one from each of the 12 d i s t r i c t s - elected by the Directors the respective Federal Reserve fe&nkS. T h i r d , the System includes the Federal Reserve Board. Manr/ powers are vested i n the Board, among them being the duty t o exercise general supervision over the Federal Reserve Banks* A t the present time the Federal Reserve banks hold l a r g e r member bask reserve deposits thai* a t any oth^r- time i n the h i s t o r y of the System* and the member banks are l e s s Indebted t o them than a t any other time> t h i s h i s t o r y o f the System. I n 1920, f i f t e e n years ago, the Federal Z-58 Reserve banks held the^discounted paper o f member banks i n . the amount o f nearly three b i l l i o n d o l l a r s ; i n contrast t o this, on February 20th o f t h i s year the amount o f discounted paper was less than s i x m i l l i o n d o l l a r s . F i f t e e n years ago, i n A p r i l 1920, member bank reserve deposits were less than two b i l l i o n d o l l a r s ; i n A p r i l of t h i s year they amounted t o n e a r l y f i v e b i l l i o n d o l l a r s . At the present time the excess reserves of member/banks amount to more than two b i l l i o n d o l l a r s . This neans t h a t the banks o f the country have an enormous amount o f funds which are not i n use. At the same time i n the c o u n t r y a s a whole there i s an enormous number o f men-unemployed. Ve have, t h e r e f o r e , t h i s s i t u a t i o n : .on the one hand men are out of work, and on the other hand money i s out of work-* To the average layman, t h i s i s d i f f i c u l t t o understand. The Government i s f i n d i n g work f o r these i d l e men by- embarking on various p u b l i c a c t i v i t i e s and p r o j e c t s . A large p a r t of the money r e quired f o r these w o r k - r e l i e f p r o j e c t s i s and w i l l be provided by the l o c a l banks1 purchases o f Government o b l i g a t i o n s . I n other words, the Government i s using i t s c r e d i t t o bridge the gap. Would you p r e f e r t o have the Government continue doing t h i s , or would you p r e f e r t o lend mohey d i r e c t l y t o l o c a l enterprises yourself? I t h i n k I. know'your answer, and t h a t brings me t o the one t h i n g I wont t o emphasize b o r e - t h i s afternoon. The Federal Reserve System has been authorized, and stands ready, t o a s s i s t you i n making loans to l o c a l enterprises under Section 13b of the Federal Reserve Act f o r the purpose of f u r n i s h i n g working c a p i t a l to established i n d u s t r i a l and commercial businesses. When lending act i v i t i e s "are resumed through the usual and accepted channels,* the Government w i l l , as I understand i t , withdraw gradually from i t s Public Vorks Program and from the use or i t s c r e d i t f o r . s u c h purposes. S i n c e r e l y , t h e r e f o r e , I should l i k e very much t o know j u s t what i s the a t t i t u d e of the i n d i v i d u a l banker toward the loans t o i n d u s t r y and business authorized by Section 13b o f ^ t h e Federal Reserve A c t . I should l i k e to know any and a l l reasons why these loans can or can not be made. This i n f o r mation w i l l be h e l p f u l , not "otily t o me and t o the Board, but t o the . executive ar*d l e g i s l a t i v e departments of your Government i n Washington. I t w i l l also be h e l p f u l t o you. Accordingly, I wish t o sketch b r i e f l y the background of the indust r i a l loans program of the Federal Reserve System, and place before you as c l e a r l y as I can the advantages t o you and t o your communities o f loans made under the p r o v i s i o n s o f Section 13b. These provisions had t h e i r o r i g i n i n the f e e l i n g t h a t as a r e s u l t of long continued adverse economic conditions a l a r g e number o f small business and i n d u s t r i a l ent e r p r i s e s were s u f f e r i n g from depleted working c a p i t a l . On March 19, 1934, the President o f the United States, the Honorab l e F r a n k l i n D. Roosevelt,* sent a l e t t e r t o Senator Fletcher,•Chairman o f the Senate Banking and Currency Committee, and t o Representative S t e a g a l l , Chairman o f the House Committee on Banking and Currency. I n t h i s l e t t e r he suggested the c r e a t i o n o f twelve C r e d i t Banks f o r Indust r y , t o help -provide working c a p i t a l f o r small i n d u s t r i e s , and t d f o l l o w Z-58 up the a i d given t o a g r i c u l t u r e , the banks and large business corporat i o n s , by doing something f o r the medium size man i n i n d u s t r y and commerce. On the same day the President wrote the l e t t e r , Senator Fletcher introduced i n . t h e Senate, and Congressman S t e a g a l l introduced i n the House a M i l M to provide f o r ' t h e c r e a t i o n o f c r e d i t banks f o r i n d u s t r y " . But Congress decided,,instead o f . c r e a t i n g a new agency, t o give the Federal Reserve Banks and the Reconstruction Finance Corporation authori t y t o extend the c r e d i t which was r e q u i r e d . That i s the way the law now stands and the Federal Reserve System i s f i r m l y committed t o c a r r y i n g out the added r e s p o n s i b i l i t i e s which Congress has given i t . The new l e g i s l a t i o n was adopted June 19$ 193A* I t amends the Federal Reserve Act by the a d d i t i o n o f Section 13b, which provides t h a t the Federal Reserve Banks may cooperate w i t h member banks, nonmember banks, and other f i n a n c i n g i n s t i t u t i o n s " i n making loans t o f u r n i s h working c a p i t a l t o established i n d u s t r i a l and commercial businesses, and i n exceptional circumstances, may make such loens d i r e c t vhen c r e d i t i s not a v a i l a b l e on a reasonable basis from the usual sources. An I n d u s t r i a l Advisory Committee composed o f a c t i v e business men i n the d i s t r i c t i s created under the la*?. The law l i m i t s funds a v a i l a b l e f o r advances and commitments by the Federal Reserve Banks t o the t o t a l surplus o f the banks as o f J u l y 1 , 1934, or about $140,QQ0,000, p l u s c e r t a i n payments t o be made by the United States Treasury, which would b r i n g the t o t a l a v a i l a b l e up t o about 1280,000,000. The Federal Reserve System went t o work promptly. A conference of Chairmen and Governors o f the Federal Reserve Banks was held i n Washingt o n , June 25 and 26, a t which the new i n d u s t r i a l loans provisions o f the Federal Reserve Apt were t&e p r i n c i p a l subject o f discussion. Regulat i o n s had been d r a f t e d f o r the a d m i n i s t r a t i o n o f Section 13b, and a f t e r they had been considered by the Conference and approved by the Federal Reserve Board, they were issued on June 26. I n order t o make as easy as possible the performance o f the new f u n c t i o n s granted t o the Federal Reserve Banksi these simple r e g u l a t i o n s l e f t . t h e broad powers granted by Congress t o the Federal Reserve banks w h o l l y unimpaired and prescribed no r e s t r i c t i o n s beyond those prescribed i n the law i t s e l f . Any attempt *to supply t e c h n i c a l d e f i n i t i o n s was avoided, l e s t i t have the e f f e c t o f r e s t r i c t i n g and hampering the operations of the Federal Reserve Banks. The l a t e Governor E. R. Black, who was very much i n t e r e s t e d i n t h i s amendment t o the Federal Reserve A c t , wrote a l e t t e r on June 30 t o the Federal Reserve banks, i n vhich he said i n p a r t : " I am c e r t a i n t h a t you have c a r r i e d home to your d i r e c t o r s our earnest f e e l i n g , f i r s t , t h a t these new loans w i l l mater i a l l y a i d the Recovery Program, second, thvt i t gives your bank an o p p o r t u n i t y t o render a r e a l service i n your d i s t r i c t , and t h i r d , t h a t t h i s opportunity e n t a i l s a r e s p o n s i b i l i t y t h a t f o r tfae good o f the Federal Reserve %stem must be f u l l y met.11 Since then several conferences o f Governors have been held i n Washi n g t o n , a t which the a d m i n i s t r a t i o n o f Section 13b was discussed i n detail* 4. I have v i s i t e d every Federal Reserve bank, end about 90 per cent o f the Branches since J u l y 1 , 1934* I n f a c t , I v i s i t e d some o f . t h e d i s t r i c t s several times during t h e course o f the l a s t year f o r the purpose o f dis-r cussing t h i s subject w i t h a l l concerned. On September 27 a conference of t h e Chairmen o f the I n d u s t r i a l Advisory Committees was held i n Washington f o r consideration o f the provisions of Section 13b* By t h i s time the a d m i n i s t r a t i o n of Section 13b had been under way f o r some weeks and i t was possible t o consider the program i n the l i g h t o f a c t u a l experience* Among other t h i n g s consideration was given a t t h i s conference t o the r e p o r t t h a t many member and non-member banks were r e l u c t a n t t o make i n d u s t r i a l loans because they were u n c e r t a i n o f the a t t i t u d e t h a t might be taken by bank examiners toward such loans when found i n the bank p o r t f o l i o s * I t was recommended t h a t a d e f i n i t e announcement be aiade as t o the p o l i c y t o be followed by examiners. I n compliance w i t h t h i s suggestion the Federal Reserve Board on October 6 issued i n s t r u c t i o n s as t o t h e manner i n v h i c h i n d u s t r i a l loans should be included i n c o n d i t i o n r e p o r t s and examination r e p o r t s . About the seme time the Comptroller o f the Currency issued corresponding i n s t r u c t i o n s . The purpose o f these statements by the Board and by the Comptroller vae t o c l e a r up such doubt as might e x i s t as t o the c l a s s i f i c a t i o n o f ' s u c h loans end the net e f f e c t was t o assure member banks t h a t i n d u s t r i a l loans w i t h long m a t u r i t i e s which were covered by commitments from the Federal i<eserve Banks or the Reconstruction Finance Corporation would not be c l a s s i f i e d as 11 slow11. Pursuing the a d m i n i s t r a t i o n of Section 13b, A l b e r t A* Creighton, who i s Chaiiman of the I n d u s t r i a l Advisory Committee o f the Boston Federal Reserve D i s t r i c t , and who i s l i k e w i s e Chairman of the Committee c o n s i s t ing of the Chairmen o f the 12 I n d u s t r i a l advisory Committees of the System, i s now i n Europe studying i n d u s t r i a l loans i n the various c o u n t r i e s , a t h i s own expense. He i s expected back some time i n June w i t h a r e p o r t of. what i s being done i n t h i s respect by other Banks of Issue by other Governments, ancj by other banks and f i n a n c i n g i n s t i t u t i o n s . On December 11 and 12 a Conference o f representatives of the Federal Reserve banks, the I n d u s t r i a l Advisory Committees and the Federal Reserve Board was held a t Cleveland t o consider the procedure being followed by the banks and the committees i n passing on a p p l i c a t i o n s . I t was r e a l i z e d t h a t much o f the success of the program depended upon a smooth and exped i t i o u s handling of a p p l i c a t i o n s . The f a c t was emphasized t h a t both the I n d u s t r i a l Advisory Committees and the Federal Keserve Banks have given and w i l l continue t o give c a r e f u l jggyd sympathetic consideration t o each a p p l i c a t i o n , regardless p f the amount o f money being a p p l i e d f o r * On December 19 another Conference o f the Chairmen of the I n d u s t r i a l Advisory Committees was held i n Washington t o review the work done by the Committees and t o consider aeoas o f f u r t h e r i nig the program* Also the Federal Advisory Council, which was created i n 1913, as you know, met i n Washington on September 17-18, 1934 &nd discussed the subject o f i n d u s t r i a l loans under Section 13b i n d e t a i l • At several o f the meet ings since t h a t date the Advisory Council tots, upon the request o f the Z-58 Board, discussed toe cooperation i n t h i s m a t t e r o f member banks w i t h the Federal Reserve Banks. I n a d d i t i o n t o a l l these conferences and t o continuous study o f the s i t u a t i o n t h e Federal Reserve banks have a c t i v e l y convassed t h e i r d i s t r i c t s i n order t o i n f o r m f i n a n c i n g i n s t i t u t i o n s and prospective borrowers o f the new p r o v i s i o n s o f the l a w . Every e f f o r t has been *nade through pamphlets, l e t t e r s , addresses, personal c a l l s and even by r a d i o t o make the new f u n c t i o n s o f the Federal Reserve Banks w i d e l y known. I have gone i n t o a l l t h i s rather minute d e t a i l , even a t tJe r i s k o f b o r i n g you, t o give you some idea o f the earnestness w i t h which the Federal Reserve System has prosecuted the i n d u s t r i a l loans p r o p a n . The q u e s t i o n n a t u r a l l y a r i s e s , what are the r e s u l t s ? As o f May 8 , 1935$ the I n d u s t r i a l Advisory Committees had approved 1,676 a p p l i c a t i o n s , amounting t o $88,066,000 and the Federal Reserve banks had ap. proved 1,509 a p p l i c a t i o n s , amounting t o £84,003,000. Adding the advances a c t u a l l y made ($29,626,000) and the commitments outstanding (£18,040,000) f o r a c o ^ i t m e n t i 3 equal t o an advance, since the money must be kept a v a i l a b l e f o r the purpose o f t a k i n g up the paper - we have a t o t a l o f $47,666,000 o f c r e d i t a c t u a l l y i n use. There have also been some repayments, some a p p l i c a t i o n s have been withdrawn, and some are a w a i t i n g completion by the a p p l i c a n t before disbursement o f funds can be made. The f a c t t h a t the Federol Reserve banks have about £280,000,000 a v a i l a b l e f o r i n d u s t r i a l l o a n s , under the p r o v i s i o n s o f the A c t , and a f t e r n e a r l y a year nave a l i t t l e more than $88,000,000 o f advances approved by the committees might suggest e i t h e r i n d i f f e r e n c e on the p a r t o f t h e System t o the program or t h e t t h e r e was l i t t l e demand f o r the k i n d o f c r e d i t made a v a i l a b l e by the A c t . I b e l i e v e t h a t n e i t h e r o f these conclusions i s warranted by the f a c t s . The Board and the Federal Reserve Banks have s t r e s s e d the program repeatedly and a t the same time evidence s t i l l e x i s t s o f a need f o r such c r e d i t f o r small i n d u s t r y and business. As you know, t h e r e &as been a c e r t a i n amount o f skepticism as t o the existence o f t h i s demand f o r c r e d i t . The s k e p t i c s may p o s s i b l y be r i g h t . But I do not know how we can prove what the need i s , except by e a r n e s t l y p u r s u i n g the p o s s i b i l i t i e s o f extending c r e d i t t o small i n d u s t r y under S e c t i o n 13b w i t h a l l frankness and s i n c e r i t y . Ve must a t l e a s t exhaust every means o f i n f o r m i n g bankers and borrowers what the o p p o r t u n i t i e s are. Banks were very s i c k . They c a l l e d the d o c t o r . They recuperated. Now they a r e , as i t were, l e a r n i n g t o walk a g a i n , but they are very c a u t i o u s . That i s human. Laws, t o o , a r e human. They are made by man i n accordance w i t h wh^t i s considered the need o f man. 1Te know o f man's needs by the law of averages. Bet me t e l l you o f a husian i n c i d e n t by which a c l e r k i n a haberdashery t r i e d t o apply tlie law o f averages: A w i f e c a l l e d a t the haberdashery and said ft I wish a c o l l a r f o r k my husband." The c l e r k asked her f o r the s i z e c o l l a r desired* .She saicl " I d o n ' t know, I w i l l go back and ask ay husband* The c l e r k , wh6 thought he knew something o f human n a t u r e , s a i d , " I t h i n k t know the s i s e o f the c o l l a r your husband wears." She. said " R e a l l y * . The c l e r k s a i d "Yes I t h i n k he wears a size 11 1/2 c o l l a r . " She said "That i s r i g h t - I remember now - but how d i d you know?" The c l e r k said - "A man who sends h i s w i f e out f o r a c o l l a r wears about t h a t s i z e . " I repeat t h a t i t i s p e r f e c t l y n a t u r a l t h a t a f t e r t h e i r experiences o f recent years bankers should f e e l extremely conservative. I t i s p e r f e c t l y n a t u r a l t h a t applicants should have d i f f i c u l t y i n p r o v i n g . t h e i r present prospects are good. And i t i s t o be expected t h a t a nev p r o v i s i o n o f law b r i n g i n g the Federal Reserve System i n t o , the f i e l d o f long term loans should be hard t o make generally known and understood. We ;,ar* vorking- as e f f e c t i v e l y as we can to overcome these obstacles. Now, a f t e r tli\is e x p l a i n i n g the plans and i n t e n t i o n s o f the Reserve System, I wish t o p o i n t out how t h i s law d i r e c t l y concerns you as bankers. Although i t ' i s provided i n the law t h a t c r e d i t f o r i n d u s t r y may be furnished t o the borrower e i t h e r by the Federal Reserve bank d i r e c t l y o r by the commercial banks w i t h the cooperation of the Federal Reserve banks, the law i t s e l f favors the l a t t e r procedure. To make t h i s p o i n t Clear, l e t me read the f i r s t two paragraphs o f Section 13b* The p r o v i s i o n o f the law a u t h o r i z i n g the Federal Reserve Ranks t o discount o r purchase loans made by member banks and other f i n a n c i n g I n s t i t u t i o n s i s as f o l l o w s : " ( b ) Each Federal Reserve bank s h a l l also have powers t o discount f o r , or purchase from, any ban^t, t r u s t company, mortgage company, c r e d i t corporation f o r i n d u s t r y , or other f i n a n c i n g . i n s t i t u t i o n operating i n i t s d i s t r i c t , o b l i g a t i o n s having m a t u r i t i e s not exceedi n g f i v e years, entered i n t o f o r the purpose o f o b t a i n i n g working c a p i t a l f o r any such established i n d u s t r i a l o r commercial business; t o make loans o r advances.direct t o any such f i n a n c i n g i n s t i t u t i o n on the s e c u r i t y o f such o b l i g a t i o n s ; and to'make..commitments w i t h . r e g a r d t o such discount o r purchase, o f o b l i g a t i o n s or w i t h respect t o such loans o r advances on the s e c u r i t y t h e r e o f , i n c l u d i n g commitments made i n advance o f the a c t u a l undert a k i n g o f such o b l i g a t i o n s . Each such f i n a n c i n g i n s t i t u t i o n s h a l l o b l i g a t e i t s e l f - t o the s a t i s f a c t i o n . o f the Federal Reserve bank f o r a t l e a s t 20 per-centum o f any l o s s which may be sustained by such bank upon any o f the o b l i g a t i o n s acquired from such f i n a n c i n g i n s t i t u t i o n , the existence and amount o f amy such l o s s t o be determined i n accordance w i t h r e g u l a t i o n s o f the Federal Reserve "Board." I n non-technical language, t h a t p r o v i s i o n e n a b l e the bankers t o make loans t o f u r n i s h working c a p i t a l t o i n d u s t r i a l and c o t m e r c i a l borrowers on |dag m a t u r i t i e s and a t the mm time get the promise of the Federal Rebaiak t o take over the l o a n a t any time without recourse f o r 80 per ee&t o f the l o a n . ? I l l order t h a t the c r e d i t ©ay be made a v a i l a b l e even though the bankers f a i l t o take advantage o f t h i s opportunity t o put t h e i r funds t o work w i t h a minimum o f r i s k * the law also authorizes d i r e c t loans by the Federal Reserve banks t o i n d u s t r y by the f o l l o w i n g language: " ( a ) I n exceptional circumstances, when i t appears t o the s a t i s f a c t i o n o f a Federal Reserve bank t h a t an established i n d u s t r i a l or commercial business located i n i t s d i s t r i c t i s unable t o o b t a i n r e q u i s i t e f i n a n c i a l assistance on a reasonable basis from the usual sources, the Federal Reserve bank, pursuant t o a u t h o r i t y granted by the Federal Reserve Board, may make loans t o , or purchase o b l i g a t i o n s o f , such business, or may make commitments w i t h respect t h e r e t o , on a reasonable and sound b a s i s , f o r the purpose o f p r o v i d i n g i t w i t h working c a p i t a l , b u t no o b l i g a t i o n s h a l l be acquired or commitment made hereunder w i t h a m a t u r i t y exceeding f i v e years. 11 As the law was o r i g i n a l l y d r a f t e d these two paragraphs appeared i n the order i n which I have read them, but f o r some reason t h a t order was reversed i n the l e g i s l a t i v e m i l l and t o a casual reader of the law i t might appear t h a t the emphasis was on d i r e c t loans by the Federal Reserve banks r a t h e r than on advances o r commitments t o banks. This i s not the f a c t . On the c o n t r a r y , the law says d e f i n i t e l y t h a t d i r e c t loans are t o be made only i n exceptional circumstances and when c r e d i t . i s not a v a i l a b l e from the usual sources; there i s no such l i m i t a t i o n on rediscounts or on commitments covering loans made- i n the f i r s t instance by l o c a l banks o r other f i n a n c i n g i n s t i t u t i o n s . As a matter o f the money has banks. And t h a t n o t organized t o c e r t a i n l y do n o t of f a c t , strange as i t may seem, up t o the present most had t o be placed on d i r e c t loans by the Federal Reserve needs t o be explained. The Federal Reserve banks are take business away from the l o c a l bankers, and they most wish t o do so. I t i s s t i p u l a t e d i n the law t h a t d i r e c t loans s h a l l be made by the Federal Reserve banks o n l y i n exceptional cases and when the required c r e d i t i s not a v a i l a b l e from the u s u a l soirees. The Federal Reserve Board and the Federal Reserve banks have f e l t t h a t t h i s s t i p u l a t i o n wm wltremely w i s e . The o b j e c t i o n t h a t the (banker makes t o these loans i s , o f course, t h a t they have too long m a t u r i t i e s and sometimes may be considered poor r i s k s j but these objections were l a r g e l y removed so f a r as l o c a l banks are concerned by the commitment which the Federal Reserve Bank w i l l ^oake t o take over the loan from the lending bank without r e course except t h a t the lending bank must o b l i g a t e i t s e l f f o r a t les.st 20 per cent o f any l o s s . This means, o f course, t h a t the member bank or o t h e r f i n a n c i n g i n s t i t u t i o n which makes a l o a n i s able t o insure l i q u i d i t y f o r the l o a n , and also t o have as much as 80 per cent o f i t u n d e r w r i t t e n by t h e Federal Reserve bank. A l o n g term l o a n t h a t may be discounted a t the Federal Reserve bank a t any time w i t h o u t recourse as t o 80 per cent o f acy l o s s * i s , from t h e p o i n t o f view o f the cammericml bank, as l i q u i d as any earning asset i t may hrnlMm ¥ou, o f course, are trustees of your depositor^ funds, and i t cert a i n l y i s n o t , and cannot be our aim t o urge you t o r i s k those funds by s. loaning on a basis t h a t i s not reasonable and not sound. That i s p l a i n . But i n times l i k e these when the banks have more funds than they can put t o p r o f i t a b l e Use, and on t h a t account have d i f f i c u l t y i n making adequate earnings, i t seems t o me important t h a t you should understand the ' p o s s i b i l i t i e s open to you under Section l ? b and should make the most o f then. I n concrete terms, vhat the provisions o f the law mean t o you bankers may be s t a t e d as f o l l o w s : F i r s t : You may make a loan on a reasonable and sound basis w i t h a m a t u r i t y not exceeding f i v e years t o ian established i n d u s t r i a l o r commerc i a l business i n your community f o r the purpose of supplying i t w i t h working c a p i t a l . Second: I f the l o a n i s acceptable t o the Federal Reserve bank (which may be determined before the loan i s made) you may o b t a i n from the Federal Reserve Bank a coirraitment to take over the loan on s t a t e d terms a t any time w i t h i n the period o f the commitment. T h i r d : You pay the Federal P;eserve Bank a small charge f o r t h i s comnitaent, the amount paid depending p r i n c i p a l l y upon the length of time, covered by the'boardtaent. For t h e Federal Reserve D i s t r i c t s i t l which t h i s State i s l o c a t e d , the Federal Reserve Bank rates on commitments are from 1 t o 2 per cent per annum, which may be. c a l l e d e i t h e r an i n s u r ance charge or a charge f o r standing by. Having paid i t and received i t s couiraitaient, the bank i s assured t h a t the loan.which the commitment covers is perfectly l i q u i d . Fourth: I f you subsequently need t o dispose of the l o a n on which you hold the comnitnent, you inform the Federal Reserve Bank o f your d e s i r e , and the l o a n i s taken o f f your hands. The Federal Reserve Bank discount rates on i n d u s t r i a l loans i n the D i s t r i c t s i n which t h i s State i s located are from 4 - 1 / 2 t o 6.per cent. F i f t h : Under the terms o f the confcrdtment, the Federal Reserve Bank w i l l r e l i e v e you o f o b l i g a t i o n f o r as much as 30 per cent of any loss sustained on the loan. ' I n other words, you can s e l l or rediscount the loan without recourse up t o 80 p e r . c e n t o f i t s amount, but you continue under o b l i g a t i o n f o r the remainder, which may be only 20 per cent,. Qhe banker who has been very a c t i v e i n making i n d u s t r i a l loans described i n the f o l l o w i n g words h i s plan f o r s e t t i n g up a s p e c i a l r e serve t o cover possible losses i n such loans. "The usual p a r t i c i p a t i o n i s , o f course, on an 80-20 b a s i s . Genera l l y the e n t i r e loan bears the maximua r a t e o f 6 per cent. Ve look upon the 80 per cent guaranteed p a r t o f the loan as a prime investment - t o the p o i n t t h a t i f such an investment were a v a i l a b l e i n the open market we would be w i l l i n g t o buy same on a 1 per cent per annum. income. .basis, Tie take m i l the income above 1 per cent obtainable from t h a t p a r t o f the l o a n guaranteed by the Federal Reserve bank and set i t up i n a s p e c i a l reserve amount t o provide against any loss sustained i n our p a r t i c i p a t i o n s • w Z-58 I have bejen t a l k i n g ' so f a r , n e c e s s a r i l y , i n general t e r n s . me describe a t y p i c a l a c t u a l loan under Section 13b. Now l e t A. varnish manufacturer w i t h a p l a n t i n a medium-sized i n d u s t r i a l c i t y needed f25,000 working c a p i t a l . He needed i t f o r a longer time than h i s l o c a l bank cared t o lend without p r o v i s i o n f o r l i q u i d i t y . Acc o r d i n g l y , an a p p l i c a t i o n was made by the l o c a l bank* which was a nonmember, t o the Federal Reserve bank f o r a commitment. A f t e r i n v e s t i g a t i o n of the business and the s e c u r i t y o f f e r e d the a p p l i c a t i o n f o r the commitment was approved. A loan of $25,000 was made by the l o c a l bank repayable i n equal semi-annual instalments, the l a s t instalment becoming due i n f o u r years. The s e c u r i t y comprised a l i e n on p l a n t and equipment, assignment o f stock i n another corporation and assignment o f two l i f e insurance p o l i c i e s . The l o a n bears i n t e r e s t a t 6 per cent. Covering t h i s l o a n the Federal Reserve bank gave the l o c a l bank a commitment t o take over the l o a n a t the l o c a l bank's request any time w i t h i n twelve months. The l o c a l bank pays 1 per cent per annum f o r t h i s commitment. Before the end of the twelve months, i t can e i t h e r procure a commitment f o r a f u r t h e r p e r i o d , or ask the Federal Reserve Bank to take the l o a n o f f i t s hands. The l o c a l bank i s thus enabled t o h o l d a loan o f %?hich the l i q u i d i t y i s assured, on which i t s p a r t o f any loss may not exceed 20 per c e n t , and on which i t receives 5 per cent n e t . You w i l l a l s o be i n t e r e s t e d i n types of loans which have been r e j e c t e d . We have had r e l a t i v e l y few. complaints from disappointed a p p l i cants. Those who have complained, however, have had t h e i r a p p l i c a t i o n s reviewed by the Federal Reserve Banks and every e f f o r t has been made t o '*in^e^mNfteeAft^ ^tlife"-ctnel- purpose o f the law. There was r e c e n t l y received by one o f the Federal Reserve Banks an app l i c a t i o n from a manufacturing company which had been organized i n the l a s t year or so t o reopen a p l a n t t h a t had been closed f o r some t i m e . The p l a n t a t one time had apparently been successful, but i t s former owners had subseiquehtly become bankrupt. The new company was organized by people who had no previous experience i n the business and who had i n s u f f i c i e n t funds. T h e i r business records gave no assurance o f a b i l i t y t o succeed and t h e i r bankers were u n w i l l i n g t o make the l o a n nor par t i c i p a t e i n i t . The Federal Reserve Bank was asked t o lend them pract i c a l l y a l l of t h e i r c a p i t a l . There was doubt whether the a p p l i c a n t was e l i g i b l e as.an established business, but even l e a v i n g t h a t question aside, the a p p l i c a t i o n had t o be r e j e c t e d because there was l i t t l e prospect t h a t the l o a n could be repaid from the p r o f i t s o f the business, and the underlying s e c u r i t y was inadequate. I n o t i c e t h a t i n the case o f the Chicago and S t . Louis banks, the c h i e f reasons f o r r e j e c t i o n s have been i n s u f f i c i e n t s e c u r i t y , u n s a t i s f a c t o r y f i n a n c i a l c o n d i t i o n , f o r the law requires the l o a n t o be made on a "reasonable and sound" b a s i s , and i n e l i g i b i l i t y , i n t h a t funds were not r e a l l y r e q u i r e d f o r working c a p i t a l . Question has a r i s e n as t o whether the law permits loans t o be made i n cases where the proceeds are t o be used f o r the refunding o f e x i s t i n g indebtedness h e l d by member, non-member banks or other f i n a n c i n g i n s t i t u tions.. The purpose o f the loans, i n the language of the A c t , i s t o f u r n i s h working c a p i t a l t o i n d u s t r i a l or commercial business;' t h a t i s one o f the few s p e c i f i c c o n d i t i o n s which the law imposes. Obviously, a loan t r a n s f e r r e d from one c r e d i t o r t o another does' not provide the i n d u s t r i a l o r commercial borrower w i t h a d d i t i o n a l working c a p i t a l ; n o r , Z-58 considering the f a c t t h a t the banks are already supplied w i t h more funds than they are f i n d i n g use f o r , can i t be said t h a t the t r a n s f e r of such indebtedness from l o c a l banks t o Federal Reserve banks gives the l o c a l banks funds reauired by other borrowers* Consequently, a p p l i c a t i o n s have had t o be r e j e c t e d where i t appeared t h a t the p r i n c i p a l e f f e c t of the loan would be t o t r a n s f e r c e r t a i n slow'assets from the p o r t f o l i o o f a member bank t o the p o r t f o l i o o f a Federal Reserve bank. When,however, the t r a n s f e r o f e x i s t i n g indebtedness i s c l e a r l y an e s s e n t i a l p a r t of a , p l a n o f r e h a b i l i t a t i o n i n v o l v i n g new working c a p i t a l , x t seems i n accord w i t h the s p i r i t o f the law t o a l l o w a p o r t i o n o f the proceeds o f a given loan t o be used f o r refunding.. Question has also a r i s e n as t o the meaning o f the tertif "established 11 , i n view o f the f a c t t h a t the. law authorizes loans t o be made t o establ i s h e d i n d u s t r i a l and commercial businesses. A new corporation may perhaps be organized t o take overman o l d business, and while the question whether i n any p a r t i c u l a r case the a p p l i c a n t can be regarded as an est a b l i s h e d -business may have t o be determined by counsel, i t i s f e l t t h a t i n general the term should be i n t e r p r e t e d as l i b e r a l l y as p o s s i b l e . I wish, t o remind you t h a t the Federal Reserve banks are not required t o submit each a p p l i c a t i o n t o Washington f o r the approval or disapproval o f the Federal Reserve Board. The a c t i o n taken by the Federal Reserve bank i n each case i s f i n a l , although the Board does keep constantly i n touch w i t h the Federal Reserve banks on the a d m i n i s t r a t i o n of Section 13b. I n t h i s connection, i f I had t i m e , I should l i k e t o read you r e cent l e t t e r s which the Board has sent t o the Reserve banks. They have suggested the e x p e d i t i n g o f work on a p p l i c a t i o n s so as t o get funds a c t u a l l y i n t o use more q u i c k l y . They have emphasized the need o f c a l l i n g the a t t e n t i o n o f a l l banks t o the advantages o f Section 13b. They have stated the Board 1 s judgment t h a t loans should be made by l o c a l banks under, commitment, from the Federal 'Reserve banks r a t h e r than by the Fedf e r a l Reserve banks d i r e c t l y . ' I n f i x i n g ; t h e i r r a t e s on i n d u s t r i a l loans d i r e c t t b the borrower, the Federal Reserve banks.have t r i e d t o *avoid'making r a t e s so low as t o a t t r a c t .this,business, away from member and non-member banks and other f i n a n c i n g i n s t i t u t i o n s . I n general, here i n the middle west,•commercial banks and other- f i n a n c i n g i n s t i t u t i o n s appear t o be g e t t i n g from 5 t o 6 per cent on such loans.' The rates charged by Federal Reserve banks on commitments vary w i t h d i f f e r e n t c o n d i t i o n s , but i n general run from 1 t o 2 per cent, per annum. So, .for example, as" i n ' thfe case already .described, on a loan which, bear§. 6 per cent i n t e r e s t s a member or .nonmember bank may pay 1 per cent t o the Federal' Reserve bank f o r a commitment, which w i l l leave 5 per cent net t o the member or non-member bank. The loans made e i t h e r the f e d e r a l Reserve Banks d i r e c t or by financing . i n s t i t u t i o n s under commitments frdm ;the Federal Reserve Banks vary i n size from .$250 up t o . amounts o f several m i l l i o n ' d o l l a r s . The taaturities range from a few weeks t o f i v e yedts k rA wide v a r i e t y o f ent e r p r i s e s i s covered. Z-58 I might add t h a t the automobile, i n d u s t r y i s a t the head o f the l i s t i n t o t a l amount advanced under Section 13b « nearly £12,000,000. I t may also be worth n o t i c i n g i n the copv1 of my speech which w i l l be, ' o r has been, handed you, how many o f these concerns which have been borrowing under Section 13b are d i r e c t l y or i n d i r e c t l y connected" w i t h the building• i n d u s t r y . Most o f theui ere makers of or dealers i n e s s e n t i a l products and n e c e s s i t i e s of l i f e - 175 loans were made t o manufacturers of and dealers i n food products, and 162 t o dealers i n and. manufacturers of lumber and b u i l d e r s ' s u p p l i e s . I t r u s t I have given you a d e f i n i t e idea of what i n d u s t r i a l loans should mean t o you. I hopethat i f you f i n d enterprises i n your communit i e s which could use a d d i t i o n a l working c a p i t a l t o an advantage, you w i l l not h e s i t a t e t o communicate w i t h the Federal Reserve Bank about such prospects. I n t h i s connection, I should l i k e to. read you a t l e a s t one l e t t e r , copy o f which was received by a Federal Reserve Bank, which shows t h a t r e a l assistance has been rendered under Section 13b: "We wish t o thank you foifr having permitted the Federal Reserve Bank t o make loans t o i n d i v i d u a l s , as the banks t h a t we do business w i t h have refused t o help u s ; had i t not been f o r the Federal Reserve we probably would have been a t a great handicap, t h a t i s , our farmers would have had t o go on the r e l i e f . The f o l k s here i n the Reserve Bank are the way r e a l bankers should be: prompt, courteous, business a l l the way through, and very competent. "Thanking you and t r u s t i n g t h a t you w i l l leave t h i s avenue o f finance open t o u s , I am Faithfully yours......" This l o a n has already been paid back i n f u l l . I could i l l u s t r a t e cases one a f t e r a n o t h e r , but even these would not show a l l the assistance t h a t has been rendered, f o r i n many cases the Federal Reserve banks and member and nonmember banks have helped the small i n d u s t r y and business w i t h o u t even the necessity o f granting a l o a n , by g i v i n g advice - business and f i n a n c i a l , by a s s i s t i n g i n reorganiz a t i o n s , and i n innumerable other ways t h a t cannot be, and are n o t , r e c orded i n a statement o f f i g u r e s . Through Section 13b the Federal Reserve System has come closer t o the p u b l i c i n a t a n g i b l e and concrete way, though the f i g u r e s , a t f i r s t glance, might make the service a c t u a l l y rendered appear r a t h e r small. I f c e r t a i n banks lending under Section 13b f i n d t h a t some o f these loans are b e t t e r r i s k s than they had supposed, and thus decide t o lend, a l i t t l e more f r e e l y t o comparable e n t e r p r i s e s , i t . w i l l be a d i s t i n c t advance toward p u t t i n g bank funds p r o f i t a b l y t o work. I While, o f course, there i s much more t o say about i n d u s t r i a l loans, r e a l i s e t h a t the occasion does not permit an exhaustive discussion. I am a f r a i d I have already taken too much o f your t i m e , and I d o n ' t Z-58 wish t o have you t e l l me so; You have'teeen k i n d and courteous - q u i t e u n l i k e the. f e l l o w who w&s l i s t e n i n g t o a : l b a g speech by a-professor on the o r i g i n o f man. L e t me say t o the press t h a t t h i s i s o f f the record. The professor, a f t e r three hours o f continuous speaking, asked - * I f man o r i g i n a t e s from the monkey9 -where i s Our t a i l ? " Someone i n the audience r e p l i e d q u i c k l y - "We have worn i t o f f by t h i s time s i t t i n g here l i s t e n i n g t o you. , f I hope, however, t h a t I have stated enough t o arouse your i n t e r e s t i n the amendment, a t l e a s t t o the extent o f reading Section 13b, which i s very s h o r t , and the r e g u l a t i o n s o f the Federal Reserve Board and the Fede r a l Reserve Banks o f Chicago or S t . L o u i s , i n whose d i s t r i c t s the State o f I l l i n o i s l i e s . These have been supplied t o thfe Secretary of the Assoc i a t i o n , and he promised t o d i s t r i b u t e them among the delegates t o t h i s Convention. Senior o f f i c e r s o f the Chicago and the St.. Louis Federal Reserve Banks a r e . p r e s e n t . They w i l l be glad t o meet you t o discuss any matters respecting the Federal Reserve System, and p a r t i c u l a r l y p a r t i c i p a t i o n s or commitments under Section 13b o f the Federal Reserve A c t . The Chairman o r Secretary o f the. Convention can d i r e c t you. L e t me. conclude by saying t h a t o f course we i e a r n by experience. As the years r o l l by,, we look back arid f i n d t h a t the b i g t h i n g s t h a t we have done - the r e a l l y b i g t h i n g s , i n the f i n a l account - which helped our communities and our country most - were t h i n g s t h a t appeared very small a t the moment. Human beings are apt t o spend t h e i r e f f o r t s pushing l a r g e boulders when the removal o f several small-pebbles from under the l a r g e boulders would enable the boulders t o move o f themselves - so w i t h our economic problems. Of course s we a l l look f o r a day when the sun w i l l shine once again on our highway. But the dawn doesn f t u s u a l l y come up l i k e thunder. It o f t e n s t e a l s upon us almost unawares. J u s t when our most strenuous endeavors seem t o be ending i n f l a t f a i l u r e , , and our most elaborate and best l a i d plans seem t o be going wrong, we are i n no mood t o n o t i c e t h e more c e r t a i n , • i f less conspicuous r e s u l t s of a l l our e f f o r t s . But why search f o r words o f my own? There's a b r i e f poem t h a t says i t a l l so much b e t t e r , and i t comes i r r e s i s t i b l y • t o my mind these days - perhaps i t i s f a m i l i a r to-you: "Say n o t , the : struggle nought a v a i l e t h , The labor and the wounds are Vain, The enemy f a i n t s n o t , nor f a i l e t h , And as things have been, things remain. I f hopes were dupes, f e a r s may be l i a r s } I t may be, i n yon smoks Concealed Your comrades chase e f e n now the f l y e r s , And, but f o r you, possess the f i e l d . * Z-58 "For v h i l e the t i r e d waves, v a i n l y breaking, Seem here no p a i n f u l inch t o gain* Far back, through creeks aiid i n l e t s making, Comes; s i l e n t , f l o o d i n g i n , the main. And not by Eastern windows only When d a y l i g h t comes, comes i n the l i g h t , I n f r o n t , the sun climbs slow, how s l o w l y , But Westward, l o o k , the land i s b r i g h t ! "
@FedFRASER