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 72 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

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over, if necessary, there is always an outlet for them at the Intermediate Credit Corporation at one of its agencies.

Another thing: We ought to have somebody at the top who is more or less of a specialist in longer-time credit to set up a standard as to what is a good medium-term loan and what is not a good loan, because these bankers, as far as I know them, have a reasonable idea about it, but still they need somebody to give them some help from higher up, to set some standards of what should be considered a good loan and what should not be considered a good loan.

This development of time deposits is a very important trend which we must take into consideration, and which this proposed intermediate credit organization would fit very well.

A second development concerns the bond market. We have developed in banking a tremendous bond market. Of course, right now it is dealing almost entirely with Government bonds. But the Intermediate Credit Corporation is not supposed to be simply an emergency agency; it is supposed to be a permanent thing.

Banks have gotten into the habit of buying bonds. In 1920, 1921, 1922, and 1923, 1924, 1925, 1926, 1927, 1928, 1929, and even in 1931, banks were buying a tremendous amount of bonds. I do not have the percentage here, but the percentage of bonds that banks bought as compared with their total loans, discounts made to commerce and industry increased tremendously during those years.

That gives large industry an advantage, because small industry has difficulty in floating bonds and stocks. We must make the medium-term loans attractive against this bond market.

And not only that, but here is another trend, in that the development of our bond and stock market has made bonds and stocks so liquid that bonds, and especially loans on securities, made by the banks, have become very attractive. And they will be attractive again. Right now, of course, nothing is very attractive, but in a year or 2 years they will again be attractive.

So, in order to get these 1-year, 2-year, 3-year, or even 5-year loans we must make those attractive so as to compete with the bond market in the field of the banks.

One way in which to make such loans attractive is to have an outlet which banks and other financial institutions will know is always permanent, and which will rediscount their medium term loans, just like the Federal Reserve takes care of their short-time commercial loans. There should be an organization to take care of this longer-time paper, so that it will be attractive somewhat equally with the bond market, investments, and loans on securities to traders and speculators and investors, who use this money in the securities market, which is very liquid, especially on the upswing of a business cycle. And we hope such an advance is just ahead.

When the advance comes, speculative and investment loans will again be very attractive, and we must do something to make mediumterm loans attractive, and this will do that, as far as I can see.

Some years ago, when the bond and stock markets were not so highly developed, loans to industry and business, even on a longerterm basis, were relatively attractive. But now, with this highly developed market, these other loans fall in the rear and are less attractive. We must do something to make them more attractive

and to bring small business men on a credit basis somewhat equal to that of the big business corporations.

Here is a very significant result that has come about through the development of bond and stock markets to a high degree of liquidity. It can be offset by making medium-term credit equally liquid through rediscount privileges granted by an intermediate credit corporation to banks and other financial institutions.

Here is another thing that I think is significant. Beginning in 1928, and in 1929, 1930, 1931, and 1932, the failures of small business concerns during those years increased about 40 percent. The failures in big business did not increase anything like that at all.

One reason for the increase in failures was the fact that when the crash came the banks in their fight for liquidity began to call their loans. As evidence of that I call your attention to some of the testimony which I think Governor Eccles gave before this committee. He mentioned that very fact, if I am not mistaken.

Let me illustrate the kind of loans that these banks called. For instance, a concern worth possibly $50,000 or $100,000; usually it was a small concern with much less than a $100,000 loan at the bank, due in 6 months, customarily renewable for another 6 months.

In their fight for liquidity, what did the banks do? When the 6 months were up they refused to renew, and my notion is, from my experience, that that is one very significant reason for the increase of 40 percent in the failures of smaller business.

If we had had the intermediate credit corporation, these banks in their fight for liquidity could have passed these loans on, the sound loans they still had, to an intermediate credit institution, and that would have saved a very substantial amount of distress among relatively small business concerns.

Here is another thing. I do not know whether it is right or wrong for the Government to make direct loans to business. I suppose that, on the whole, I would rather have the banks handle business, handle the loaning business, than the Government.

Mr. KOPPLEMANN. When you say the banks, you mean national financial institutions, or loaning organizations, or similar organizations?

Dr. DICE. Yes. On the whole, I think we would rather have the financial institutions do business financing than the Government. That means this, that this loaning should not be done by the Federal Reserve, and should not be done by the R. F. C., but that it should be done by banks and other financial institutions under the supervision of an intermediate credit institution, to which such loans can be shifted.

That will put this matter of credit back into the banks and other financial institutions where, I suppose, on the whole, business men want it, and according to all of our present theories, business enterprises, very probably, on the whole, think they should do it. But I would not offer that as the most important suggestion-but it is an important suggestion.

Mr. KOPPLEMANN. Say that a Government financial organization makes the loan.

Dr. DICE. Yes.

Mr. KOPPLEMANN. Then a bank or financial institution decides that it wants to rediscount the loan; then the Government makes the loan.

Dr. DICE. Yes; but here is the point. We might say this, that as to this intermediate credit institution, of course, according to the bill, the Government furnishes the capital stock, and then this institution sells debentures to the public, the Government, of course, guaranteeing them.

So part of the money comes from the Government and part of the money comes from private people, whoever would buy the deben

tures.

But this is the point, very likely $50,000,000 would be quite adequate, or, to begin with, possibly, with the 12 agencies to be set up by the Intermediate Credit Corporation two and a half million per agency might be adequate, for this reason, that, just like this bank in Ohio said, we would make these housing loans, if we had a rediscounting mortgage company.

When I said, "Well, you want to keep the loans, do you not ", they said, "yes; we do not want to rediscount them; we want to keep them for our own portfolios."

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Mr. KOPPLEMANN. For the purposes of this record, why do they not want to rediscount them?

Dr. DICE. Because they have plenty of money; they can make loans. They want to get the interest, because on Government bonds they get a very low rate of interest. But they say, "We want the chance to shift housing loans if the need comes." Likewise, you probably would get a great many of these intermediate credit loans, with relatively few of them going for rediscount to the intermediate credit banks. That is what I mean when I say we need a relatively small amount of capitalization in the hands of the intermediate credit bank.

Mr. BROWN of Georgia. You want the small business man to have the same opportunity that the cotton farmer has. When the banks in the cotton country get loaded up they sell the notes to the Government.

Dr. DICE. The idea would be not to sell anything that is unsound, but sell sound assets to the intermediate credit bank.

Mr. CROSS. You just want done for long-time paper what is now done for short-time paper by the Federal Reserve bank.

Dr. DICE. Yes. Let the smaller businessman who needs 1-, 2-, 3-, or 4-year credit have done for him what is done for the short-time credit of the commercial banks, and do just the same as they do in England and France, where they recognize the need for it.

Generally speaking, there is a gap there that we have not yet built up. We have not built up that open space in our credit machinery. Mr. KOPPLEMANN. Suppose at this point I ask you this question: Supposing the intermediate bank sets up regulations and requirements for so-called “adequate, sound, and safe security" for these loans, and those regulations are regulations which are now being set up and which are now in existence in the R. F. C. and the Federal Reserve Bank System.

Where would the difference be under this bill, H. R. 5918, so far as the ability of small business and industry to secure loans is concerned?