In view of the myriad proposals already advanced, all of which have encountered both support and opposition from one source and another, it occurs to me that this committee might best consider the problem from the standpoint of its urgent application to the immediate defense program.

The effort should be to provide speedy and effective means to small business to participate in the defense program; and second, to strive to provide the basis for a permanent solution to this vexing economic problem. In this regard I wish to briefly lay three suggestions before the committee.

First, consideration should be given to the liberalization of section 13 (b) of the Federal Reserve Act as amended. I have introduced a very simple amendment to accomplish this purpose in one manner. I would refer the committee to Senate bill 877, and I ask that a rather detailed explanation of its technical provisions be printed in the record of this hearing.

(Copy of S. 877, a bill by Senator Mead, and explanation of S. 877, were received in evidence, marked Exhibit No. 2810, and appear on pp. 508-10.)

Senator MEAD. Senate 877 simply lifts the present restrictions of the act which limit the Federal Reserve banks in making loans only for a period up to 5 years and for working capital purposes to existing concerns. These restrictions freeze out of consideration the great bulk of worthy loan applicants. My bill does not disturb any of the fundamentals of the Federal Reserve System. It, by the way, has the endorsement of the Chairman of the Federal Reserve System.

Also, I would commend to the committee's earnest consideration the second bill which I am now sponsoring, Senate bill 939, which is a more comprehensive, and, of course, a more effective amendment to the same section of the Federal Reserve Act. I also ask that a detailed technical explanation of its provisions appear in the records of this hearing.

(Copy of S. 939, and analysis entitled "Chief Features of Industrial Loan Corporation Bill," were received in evidence, marked Exhibit No. 2811, and appears on pp. 510-16.)

Senator MEAD. Section 939 proposes the establishment of a permanent Industrial Loan Corporation as an integral part of the Federal Reserve System. The members of the Federal Reserve Board of Governors would act as a board of directors of the Industrial Loan Corporation. I am not going into details respecting its provisions unless you wish me to do so, but I will state that I am convinced it provides an efficient, economical, and decentralized method for assisting commercial banks in the extension of credit and capital to small and medium-sized enterprises.

Second, I would suggest that consideration be given to the enactment of legislation which would provide for a system of loan insurance; something along the line of the F. H. A. system could be most effective. Last year I introduced a bill to provide for the insurance of banks against losses they might sustain in the extension of industrial loans. I recommended that the R. F. C. operate the program, but it was not warmly embraced by the chairman of that agency. He felt that the agency needed no additional authority. I couldn't agree with him then, and I cannot do so now, although I do feel that the R. F. C.

is doing a splendid job at the present time in many fields affecting the defense program.

Third, as a final suggestion, let me ask you to ponder the wisdom of establishing a bureau for small business which might operate under any one of the several existing permanent departments of the Government. I am not completely informed as to the possibilities of the proposition, but it seems to me that a carefully authorized and confined bureau could exert a tremendously helpful influence along the lines especially as recommended by Commissioner Pike.

I am thinking of a bureau staffed with experts who could gather certain specific and detailed statistics helpful to business, a bureau that could carry on an educational and a rehabilitation program, one that could publish bulletins and advise on problems peculiar to smaller enterprises, one that could sponsor cooperative endeavors wherever feasible. Whether it should have authority to extend loans in deserving cases is problematical, but it could serve many notable and beneficial purposes.

These are the thoughts, Mr. Chairman, I leave with you and the Commission. They all merit attention and must be considered if we are going effectively to deal with the vexing problem of smaller enterprise.

Mr. PIKE. Do you remember, Senator Mead, at some of the hear ings-I think it was last year, or maybe it was in 1938-on your most comprehensive bill, there was testimony from both the R. F. C. and the Federal Reserve on their experiences with small loans in the way of losses? You check me if I am wrong on this. As I remember it, the R. F. C. said that their losses on those loans looked as though they would run around 10 percent. Am I wrong on that? That is about it, isn't it?

Senator MEAD. It occurs to me that was the statement given in the record.

Mr. PIKE. As I remember, the Federal Reserve had lent about $300,000,000 and had $18,000,000 under foreclosure, of which they figured they would take a loss of about half, let's say $9,000,000 that would be about 3 percent; that they had $25,000,000 more in default, rather behind in their interest, half of which, let's say, might go into foreclosure and they might take a total loss of half. That would pull it down to $6,000,000 loss. That would be 2 percent. That would be, say, a 5 percent loss that they envisaged.

As Mr. Jones said, they borrowed the money at 1; let it go at 4 percent. It cost them 1 percent to operate. They were making a profit of 2 percent per annum. In the run of 3 years, if a loan ran 3 years before it went bad, or say in the run of 3 years in total, if you were going to have a 6 percent total loss, you would be even; your profit of 2 percent per annum in 3 years would offset the 6 percent loss. It wouldn't have been a very profitable enterprise, but it certainly didn't look to me as though the Government were taking it "on the chin" to an undue extent.

That didn't seem to be quite as true in the R. F. C. One would suspect that people coming to Washington, to the R. F. C., to a central reserve office, might be far enough from home that their story couldn't be checked up quite as well as if they went to the Federal Reserve Board, that is a member of the Federal Reserve in

their own town. That might account for the better experience in the Federal Reserve. I didn't think the losses seemed enormous at all, considering they were made under rather bad economic circumstances, and in some cases probably they stretched themselves to make the loan.

Senator MEAD. The study, which was made by a reliable source, was brought to my attention during the course of those hearings, and the study mas made of the losses in loans to smaller enterprises within a certain category-the category, I presume, was standardized as to risk and other elements; and the report indicated that the losses were approximately 2 percent over a period of years from a category of loans. So it was assumed that any ideal set-up catering to that specific category would have to have three specific charges one for the investigation of the loan, another for the profit on the loan, and the other to liquidate sour loans; and a reasonable suggestion was offered which limited the profit to 4 percent, the investigation to less than 1 percent, and the guaranty-fund contribution to approximately 2 percent. Losses could be sustained if in the liberalizing of present standards a standard not too liberal was set up. At any rate, the guaranty system gave hope to many who were now turned down.

Mr. O'CONNELL. Senator, that particular suggestion, I take it, contemplated the use of the commercial banking structure for the purpose of making loans?

Senator MEAD. That is right.

Mr. O'CONNELL. I think it was proposed by you in the original Mead bill as an insurance fund which would afford protection in the way of a guaranty fund to commercial banks up to a certain percentage of the loans that they would make.

Senator MEAD. That is correct; and in all cases we made every effort to leave all of the authority possible with the local banks and to reduce the supervision of the Government to a minimum. We were opposed at all times to the creating of a new bureau or a new agency for this work; therefore we tried to set it up within the framework of the R. F. C. or within the outline of the Federal Reserve System.

Mr. O'CONNELL. Well, I had always been impressed with the desirability of having whatever was being done done on a decentralized basis, because obviously it seems to me a corporation such as the R. F. C. has its limitations as to branch offices, and the commercial banking structure, with thousands of banks in little towns throughout the country, is made to order to do the job if it can be done. I wondered if your other suggestion with regard to the industrial loan corporation would operate through the Federal Reserve bank?

Senator MEAD. That would operate through the Federal Reserve member banks under rules and regulations set up by the directors of the corporation within the authority of the law. The directors of the corporation would be the members of the Federal Reserve Board.

Mr. O'CONNELL. Would the industrial loan corporation itself make loans, or would it discount or rediscount paper?

Senator MEAD. It would have the authority to make direct loans, and it would have the authority to approve loans made by the local banks.

Mr. O'CONNELL. So you would use the commercial banking structure?

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Senator MEAD. That is right; we would use the commercial bank to the limit.

Mr. O'CONNELL. Is there any limitation on the size of the loan contemplated?

Senator MEAD. Yes, and there was much question with reference to that limitation. The principal and common limit was a million dollars, that is a million was to be the aggregate amount of all loans outstanding to one applicant. That was, questions and various suggestions were offered, ranging all the way from $25,000 up; in Belgium and one or two foreign countries where a study was made of this plan, they had as many as five gradations, ranging from two hundred as a loan for the graduate mechanic to a million dollars on the order of our R. F. C. to big industries. They had categories that provided loans from separate agencies within the big agency to mechanics, professional men, small stores, small factories, and in the big national or international industries.

Mr. O'CONNELL. I should think, or it has been my impression, that when you get up to close to a million dollars you get into the area where there is much less difficulty in obtaining needed capital.

Senator MEAD. That is right, except in the case where the aggregate amount of loans preceding this final application that brought them up to a million made the last request, a request for about a few hundred thousand.

That is all, Mr. Chairman.

The CHAIRMAN. Of course, the same thought suggested itself here as with respect to other suggestions which involve the creation of debt. I feel that until we have made a complete survey of the possibilities of creating more opportunity and safeguarding opportunity we shall not have canvassed the entire situation merely by providing the means of securing loans.

Senator MEAD. That is correct. There are many cases, however, where the loan is required for equipment that will amortize the loan, as compared with the antiquated equipment now used in the smaller enterprises, so that there is a large field wherein they are not now served, but where they could be served with complete safety, but in the larger number of cases, perhaps, they come within the study that you suggest.

The CHAIRMAN. This question will always have to be answered, it seems to me, before there can be complete agreement in a legislative way upon a proposal of this kind.

Senator MEAD. Right.

The CHAIRMAN. What reason is there to believe that any plan of this kind would be more successful than the plan which the R. F. C. has followed in the past? Now, as we all know, the R. F. C. several years. ago when this question of aid to small business became very acute, announced that it would take any loan from any part of the country provided the local bank would assume a substantial portion of it. I think at first the requirement was 50 percent, and later it dropped below, but the local banks in most cases refused to go along, indicating that there was an obstacle which was apparent to the local financier which made the prospects of success dim. Now unless we override that obstacle, is there any chance of solving the problem by new machinery?

Senator MEAD. Yes. We must, first of all, come to the conclusion, if we are going any further in this direction, that rescuing small

business enterprise is helpful to our democratic society. If we decide that rescuing small business is helpful in the democratic state, that it provides not only incentive opportunity for our people, but it guarantees a higher degree of free competition between big and little business, and it safeguards the well-being of many local communities that are now ghost towns as a result of the present system that you just speak of, wherein the local banks are afraid; if we decide that that is the situation, then, realizing that we have the greatest hoard of idle money in all our history and that this big reservoir is ready for the utilization of that money-namely, the small or independent business reservoir-we must design a plan, as we did in the F. H. A., as we have insofar as the rescuing of the farmers are concerned in the farm credit and farm security, we must design a plan whereby a great portion of those loan applications will be good risks, and they will be good risks if we set up an agency that will merely pass upon those loan applications after they have been granted by the local banks-the local banks having in mind the fact that they must assume the first, we will say, 10 percent of the risk of loss, and that the Government in guaranteeing the loan will assume 90 percent of the risk— but that the Government and the banks will both be supported, as is not the case today, by a contribution, an interest contribution, of at least 2 percent by the loan applicant, which will liquidate the losses sustained by the Government in guaranteeing these particular types

of loans.

Now, the Government would have the right to determine a policy, to establish standards; but it is assumed that the local banks would be very careful if they had to assume a portion, whether it be 10, 15, or 20 percent, of the loss before any Government agency sustained any loss; and then, if in addition to that, you had a contribution from every loan applicant toward the building of a reservoir to attend to sour loans.

The CHAIRMAN. Over and over again, I come back to the part which Government plays in this entire scheme. Now it is not a matter of history at all; it is a matter of growth over a long period. More than 20 years ago we created the first of the Federal land banks to provide some sort of Government cooperation in creating a reservoir of credit to the farmer, and step by step we have broadened the credit facilities which the Government as a government operates.

During the depression, before the beginning of this administration, the R. F. C. was established, which was, of course, placing the public credit at the disposal of private business. In that method, in that agency, the loans at that time were available only to what we call big business, for lack of a better term. Then the Home Owners' Loan was set up, and the other agencies, which it is not necessary to mention, but in every case we are broadening the connection between the Central Government and the individual citizen, and no suggestion has been made yet which doesn't give to the Government, necessarily so, some discretionary power over the individuals who receive the loan and manage the loan. It is inescapable.

In all of your study of this problem, have you known so-called private industry to come forward with a suggestion to take the place of this steady trend toward Government participation in the loans? Senator MEAD. I can't recall any recommendation that they have made in this line or in the sphere that you have just mentioned. It