INTERMEDIATE CREDIT CORPORATION

WEDNESDAY, JUNE 5, 1935

HOUSE OF REPRESENTATIVES,

COMMITTEE ON BANKING AND CURRENCY,
Washington, D. C.

The committee met at 10:30 a. m., Hon. Michael K. Reilly, presiding.

Mr. REILLY. The committee will come to order. We will resume the hearings this morning on H. R. 5918, introduced by Mr. Kopplemann. The first witness is Professor Dice.

Will you give your full name to the reporter and state your business or profession.

STATEMENT OF DR. CHARLES A. DICE, PROFESSOR OF BANKING, OHIO STATE UNIVERSITY, COLUMBUS, OHIO

Dr. DICE. Mr. Chairman, my name is Charles A. Dice; I am professor of banking at Ohio State University.

I have been teaching in that institution, at the head of the banking department, for 15 years.

I have had a substantial amount of contact with practical banking. I have worked in the Chase National Bank, New York City, for some time. Also, I am on the board of directors of the Ohio National Bank, in Columbus, Ohio, the largest bank in central Ohio, and on account of my connection there, where I have access to what is going on, I feel almost like a practical banker.

Mr. KOPPLEMANN. What is your practical experience in banking? Dr. DICE. I had quite a little experience at the Chase National Bank.

Mr. KOPPLEMANN. In New York City?

Dr. DICE. In New York City. Then at home, in Columbus, I have been on the advisory board of the Ohio National Bankwhich is the biggest one in central Ohio-for about 3 years.

Mr. KOPPLEMANN. In what town is that located?

Dr. DICE. In Columbus, Ohio. It is the largest bank in central Ohio and in the State, outside of those in Cleveland and Cincinnati. And not only that, but the executive vice president of that bank was a student of mine, and I helped get him his job 10 years ago. Mr. KOPPLEMANN. What did you do for the Chase National Bank? Dr. DICE. I worked in different departments of that bank. First, I was in the foreign exchange department and worked there for quite a little while. Then I went into the tellers' department and worked. there for some time. I did not get into the credit department, but I was also in the currency department, where I worked quite a while, and also in the investment department.

Mr. KOPPLEMANN. Was this before you went to Ohio State University?

Dr. DICE. This was while I was a professor at Ohio State. I went down there to the Chase National Bank to get the practical contacts. and practical experience.

Mr. KOPPLEMANN. Are you now engaged in a practical way with any bank?

Dr. DICE. I am on this board of the Ohio National Bank.

Mr. KOPPLEMANN. That is the Columbus Bank?

Dr. DICE. Yes; the Ohio National Bank, which is the largest one in central Ohio.

Then I have some of my own students who are officers of banks. First, there is the executive vice president of the Ohio National Bank, and also the head credit man, who were under me as students 10 or 12 years ago. I discuss matters with them just like any other

bank officer would.

Mr. KOPPLEMANN. So you have had practical experience in credit other than your association with the Ohio National Bank?

Dr. DICE. I would say yes; quite a good deal.

Besides that, I have written a book on the subject of the stock market. There were 25,000 copies of that book sold, and one reason why I can come down here is because I am still receiving some royalty on that book.

I also wrote a smaller book and a number of magazine articles. I am now writing a book on banking, which is to be published by the McGaw-Hill Book Co.

Mr. CROSS. Doctor, what we need here is common sense and practical experience. We have had so many economists and professors before us, each one of whom says the other is profoundly ignorant and entirely wrong, that now we would like to hear from someone who has had practical experience and get some information from him. We would like to get some information and opinions from men who have had practical experience along this line.

Dr. DICE. I have had considerable practical experience, and that is the reason why, instead of going to the library, I have gone to the bank and worked with those men and helped them work out their credit problems. My teaching is not primarily out of books. I teach much of what I get from these men on the job.

Mr. REILLY. You may proceed with your statement in reference to the bill we have under consideration.

Dr. DICE. I want to make a few general statements.

Probably 15 years ago I began to think that we ought to have in this country an institution, or several institutions that would fill in a gap in our credit structure. That opinion was more confirmed than ever when the agricultural people, of whom I know quite a few, began to talk in terms of an intermediate credit system.

I began to advocate that among my banker friends. But I never could get very much sympathy.

Three years ago, in our board of directors at the Ohio National Bank I brought the matter up, expressing the idea that there should be an intermediate credit system. But I still did not get very much sympathy then from some of them, although others of them thought that might be helpful in taking care of a number of customers they

had who wanted 1-year, 2-year, or 3-year credit. The bank officers could not supply it; they did not feel they could supply it.

I remember one day in one of our advisory board meetings the vice president said, "Do any of you men want any credit?" One man said, "Yes, I can use quite a bit of money." He was a local manufacturer in Columbus.

They said to him, "What do want to do with it?" He said, "I have a certain machine I want to buy, and there are certain accessories to this machine, and that would take some $5,000 to $10,000."

"Well", they said, "how long do you want it for?" "Well", he said, "for not less than a year; and if I cannot get this money for at least a year it will be of no use to me."

The vice president said to the members of the advisory board, "Should the bank make that loan?" Unanimously, the members of that board said, "No; that is a type of a capital loan."

So I did get quite a little sympathy on that proposition from several of the officers of the bank because they saw that that would be an outlet for some intermediate credit.

Upon looking into the matter, I found that both England and France have organized and established such institutions. France, in 1919, began to organize intermediate-credit institutions. The way they did it over there was that they organized affiliates. That is, a regular commercial bank organized an affiliate which would take care of these loans which they did not feel should go into the regular commercial banks.

They organized the first one in 1919. This first one was organized by two of the largest commercial banks in France. By 1928 this particular thing became so successful that these same two banks organized another one.

In 1919, the Crédit Lyonnaise and the Comptoir National d'Escompte, two of the largest deposit banks in France, formed the first organization I referred to, the Union pour le Crédit à l'Industrie Nationale.

Then in 1928 the Société Générale and several other banks formed the Société Anonyme d' Crédit à l'Industrie Française.

Then, in 1929, these same two large banks, in connection with one or two others of the large banks organized a third one called the "Union des Banques Règionales pour le Crédit Industriel."

That was so successful that the same group of banks organized a fourth one in 1929, called "Crédit Industriel et Commercial." That was in 1929.

I do not have any record concerning any others, but there were some others of the same type organized.

The idea was to provide money for small industries in France. In France many industries are relatively small, so that that institution would have an appeal there.

In England there was a similar development in 1929. Governor Montagu Norman, of the Bank of England, saw this same need to fill this lack in the credit system, and put in what was called the Securities Management Trust, Ltd. That was formed under the auspices of the Bank of England. Governor Norman, I may say, was the chairman of this particular credit organization. Mr. KOPPLEMAN. What do they call that?

Dr. DICE. They do not call it an intermediate organization; they call it the "Securities Management Trust, Ltd." It includes also long-time credit. It includes what we would call intermediate, and also longer-time loans.

That was in 1929. In 1930 a second one was organized called the "Bankers' Industrial Development Co., Ltd." That organization again was sponsored by the Bank of England, but as far as I can find out, I do not think the Bank of England has any ownership, or that Governor Montagu Norman has any official connection with it.

Next came the MacMillan committee, which was organized immediately after the depression, and they reported something like this, that the facilities for small business enterprises for credit on the basis of medium and long-time loans is very inadequate in England. They said they advised a separate financial institution instead of joint-stock banks to take care of this lack. That is what the MacMillan committee said in 1931.

Members of the same group of people that were put on the MacMillan committee were appointed by the Government of Canada to set up there a central bank. So this was an outstanding committee dealing with that particular subject.

In 1934 the United Dominions Trust, Ltd., organized what they called "Credit for Industry, Ltd." That is another of these intermediate credit and also long-time credit organizations, to provide capital for plant and equipment and working capital for small and medium sized plants. That was in 1934, and in the United Dominions Trust, Ltd., the Bank of England has a controlling interest. So we see that the Bank of England has been right behind this thing from as far back as 1929, and in 1934 was still behind it, not only having a dominant interest, but also having Governor Montagu Norman on the board of directors of one of these organizations.

When I saw this I became further convinced that we needed something of that type in this country, to fill in this credit gap.

That should be emphasized, and should be emphasized because of the various trends that have been developing in banking in this country, especially in the last ten years.

One trend is the fact that time deposits are increasing at a tremendous rate. Since 1921 time deposits in banks increased possibly 40 percent, and demand deposits increased from 10 to 15 percent, showing, as you will see, a much more rapid increase in time deposits than in demand deposits.

So, even today with all of the drop we have had in time deposits in what are known as the member banks of the Federal Reserve System outside of the reserve and central reserve cities, that is, the banks other than the banks in some 60 cities that we know as reserve and central reserve cities, those banks even today have 52 percent of their total deposits in time deposits.

In the smaller towns, in the nonmember banks, you will find that a great many of those have as much as 75 percent of their deposits in time deposits.

Mr. CROSS. I do not think that holds true in New York City. Dr. DICE. You are right about that.

Mr. CROSS. There 19 banks have a little over 712 billion dollars of checking deposits and something like 600 million in time deposits.

Dr. DICE. You are right about New York. But outside of New York City and these other cities like Cleveland, Cincinnati, and Washington, these reserve cities, outside of the central reserve cities, that is, in towns the size of Dayton, Ohio, outside of that group of member banks, about 52 or 53 percent of their deposits are in time deposits. In New York City the time deposits are relatively small. But outside of that, if you are going to take the nonmember banks, which are the great body of some 7,000 small banks, the proportion of time deposits there will be still greater. We do not have the figures, but just as a matter of knowing the banks in Ohio and some other places, I know that much the greater part of the deposits of the nonmember banks are time deposits.

What are the banks going to do with these time deposits in the next 5 years? They are going to do what they did from 1921 to 1926; they are going to put them in real-estate loans, and be sorry like they were the last time.

We ought to open up an avenue for the purpose of encouraging these people not to use all of that money for real-estate loans, but to use a considerable part of it to help the small business men and industries on the basis of 1-year, 2-year, or 3-year loans, possibly, for more or less permanent working capital.

Why will they want to put their money into real estate? They know real estate. These bankers, real-estate men, and farmers, on the boards of directors, know real estate, so the money goes into real estate. So we get real-estate inflation, like we had in 1925, 1926, and even in 1928.

One reason why the Federal Reserve discount rate was not put up, so I read in the reports of the Federal Reserve Board-one reason why the rediscount rate was not put up rapidly when we got a tremendous boom in the stock-market was to protect the business man so he could go ahead without having to pay prohibitive interest rates on business loans. Here is a source of money that should be shifted to small business men, and that would be shifted there, provided there was a place where banks could rediscount, if they needed the funds.

Just take one illustration. A couple of months ago I inquired of a bank as to making housing loans. They had made only a relative small amount of housing loans. I said to the operating vice president, "why do you not make more housing loans? It seems to me that it is a good proposition." The reply was that the bill provides for a type of rediscount or mortgage organization which shall take over the loans if we want them to take them over. I said, "Do you want them to take them over?" They said, "No; but we must have a place where we can shift these loans, if need be." But they had not organized any of those, and as long as the housing organization had not organized any of those organizations, they said, "we think it is too big a risk, so we are not making many of those loans." Here we have the same thing. As I said, all these banks have all these time deposits. What will they do with them? They keep them, or they put them into real estate or bonds. They should put relatively more funds into industry. If there is an institution to which they can shift their loans to industry they will be much freer to make them, because they will have a nice rate of interest, and, I think, such loans will be profitable and perfectly sound; and, more