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have not known of a single instance-I am not a banker, and I am probably a good deal more liberal-I have not known of a single instance where they have, in effect, turned it down, where, in my judgment, they ought not to have advised a loan to have been made. I mean here.

Dr. BECKMAN. How many of those cases can be taken up through Congressmen, and how many Congressmen can be successful in their attempts?

Mr. Sisson. I am very sorry to say, Professor, there are probably very few Members of Congress that are able to do that. They say it is the same as in the case of applicants for a post office.

Dr. BECKMAN. Some Members of Congress have told me of experiences of just an opposite nature.

Mr. Sisson. We should not be obliged to have anything to do with it.

Dr. BECKMAN. I mean cases where a member investigated the situation, as a business man, and in general, he was convinced that there was not the slightest justification for the provisions that were imposed. But the matter was turned down, he said, in cold blood.

Mr. CAVICCHIA. I will say, that so far as applications for small loans are concerned, I have not been able to get one through.

Mr. RUSSELL: Why is not this an attractive field for private capital?

? Dr. BECKMAN. That is what we are trying to do, and I think it is one of the soundest, one of the most constructive, and one of the most effective propositions, because we are providing a rediscounting system side by side with the Federal Reserve System for long-time loans, giving banks and trust companies an opportunity to make the loans which they have rediscounted. We had one man from New York who claimed he could get over a billion dollars' worth of capital for loans of this kind if a bill like this would be passed.

Mr. KOPPLEMANN. In other words, private capital would enter into it.

Dr. BECKMAN. That is the intention, to give private capital an incentive through a rediscount of the paper for which there is no provision at the present time.

Mr. RUSSELL. Why do you need a Government institution to do that?

Dr. BECKMAN. The Government has been in the banking business for many years, and at a time like this you will find private capital will not risk going into new ventures, but if you give them a chance they will do it.

Mr. RUSSELL. You suppose to set up a permanent Government institution?

Dr. BECKMAN. To supervise, control, and regulate the work of a rediscounting system, but the loans would be made by private capital.

The CHAIRMAN. You would put up a billion dollars to start with, and if they use a billlon they will ask for more the next time.

Mr. REILLY. They guarantee the rest.

Dr. BECKMAN. The billion dollars will be based on security that is accepted from the various business men to whom loans will be made.

I was just told the other day about the president of a shoe-manufacturing company that does over a million dollars' worth of business a year. His plant is absolutely unencumbered. He carries it at the lowest possible appraisal figure on a depression basis. But he can not borrow $100,000 on a plant which is as modern as any shoe plant in existence. There are absolutely no encumbrances on the plant or on the land. He borrows from the bank because he is a good risk and pays a high rate of interest, with the idea of renewing. But that is an intermediate bank proposition.

Broadly speaking, small business enterprises now operating in the commercial and industrial fields normally require three types of capital to finance their operations. First, there is the need for capital to meet seasonal and other temporary requirements incident to current operations. Every business enterprise is subject in some degree to seasonal influences. In every line of trade or industry there are times during the year when larger inventories must be carried, when accounts receivable in excess of normal outstandings must be provided for or when pressing debts must be reduced. Short-term credit is normally used for these purposes, varying in length from 30 days to 6 months, depending largely upon the nature of the industry or line of trade, and upon the geographic location of the enterprise.

In the second place there is the capital required to maintain a minimum of goods in process of production or trade and to care for working requirements of concerns with a slow turn-over. The processes of production in some industries extend over a period of time in excess of 6 months. In a number of industries production is of necessity seasonal in nature even though the marketing processes may be continuous throughout the year. Inventories are therefore piled up in anticipation of steady demand. On the other hand, the selling season for some commodities may be very short, but production, for the sake of economy and efficiency, must be continuous. In still other cases unusually large inventories are carried for seasoning purposes, as in the case of lumber. All of these contingencies require capital for an intermediate term, varying in length from 6 months to 5 years. Additional demands for this type of capital have developed during this depression due to the depletion of current assets. It is probably one of the best and most economical ways of financing depleted working capital at a time like this.

The third type of capital required by business is that used to procure necessary plant and equipment, to refinance existing obligations of a similar nature, and to acquire capital goods for replacement purposes or for expansion. This type of capital is normally obtained through owner investment including the sale of equities such as common and preferred stocks, through the sale of bonded obligations with a maturity of 10 years or longer from date of issue and, to a considerable extent, through borrowings from commercial banks.

Sources for all three types of capital have been seriously impaired during this depression. Some of them have virtually disappeared, while others are unavailable to small business men. Consequently the distress experienced by such firms is wide-spread and equally severe in all fields of credit.

It was because of this situation that I recommended on a previous occasion that two kinds of measures be adopted, one of a policy and regulatory nature and the other dealing with remedies requiring special legislation. The first type could be made effective without delay by changes in policy and regulations of the governmental agencies involved, including the Comptroller of the Currency and his bank examiners, Federal Reserve banks, and the Reconstruction Finance

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Corporation. The second group of measures recommended aimed at the development of a permanent underpinning of the financial structure that would place industry and commerce on a par' with agriculture and housing. It involved a coordination of our banking system, some modifications in the securities act, and the provision of facilities for intermediate-term loans to industry and trade.

The following were the specific recommendations I made:

Changes in Federal bank examination policy.--To effect speedy business recovery it is imperative that drastic changes be made in the policy of the Comptroller of the Currency and Federal bank examiners as outlined below:

(1) In the first place, national-bank examiners should be instructed to stop marking as “slow”, loans that are fundamentally good and sound. The detrimental effect of the examiners' attitude in this regard has already been discussed in a preceding section of this analysis.

On September 19, 1934, the Comptroller of the Currency was reported in the press as having told members of the Federal Reserve Advisory Council they should not become excited when loans are placed in the "slow column" by bank examiners. He pointed out that loans so listed are “merely flagged”, and that "such loans would bear watching by bankers but that it did not necessarily follow that such loans should be called or pressure placed on borrowers to make payment.'

Notwithstanding this statement, it is apparent that a different attitude has been taken by large numbers of our banking institutions, to the detriment of industry and further retardation in the flow of credit. Additional evidence of this attitude on the part of bankers is indicated by the statement of Mr. F. M. Law, president of the American Bankers’ Association, on September 10, 1934, at the session of national bank examiners in Washington. His statement in part was as follows:

“It stands to reason that as long as bank examiners believe it to be their duty constantly to hammer on loans that are admittedly good only because they are slow, it will have the effect not only of forcing banks to exert unnecessary pressure on such loans, but will prevent them from making any new loans except those that are extremely liquid and of short duration."

(2) Bank examiners should be instructed to consider the stable character of smaller manufacturing establishments when auditing bank records, with a view to extending the maximum of credit, commensurate with reasonable safety, rather than restricting it. It is realized that too liberal a policy in granting credit might jeopardize depositor confidence, so essential a prerequisite to banking. On the other hand, prohibitive restrictions upon credit jeopardize industry and commerce, create liabilities for the banks with funds to lend but no one qualifying for loans, and impair our whole economic structure. A proper balance between these two extremes is essential to economic progress.

(3) Bank examiners must cease insisting upon loans of a self-liquidating nature until such time as new and permanent sources of intermediate-term credit are made available. In utter disregard of the tenets of so-called "prudent banking”, banks have in the past loaned to industry for periods longer than 60 or 90 days. Not only did they extend credit for a year or two at a time, but to a large extent they also provided permanent working capital. This, the "short-time selfliquidating paper” test of eligibility for rediscounting purposes did not prevent commercial banks from lending for long periods of time. To stop such practices suddenly, without provision of substitute sources, serves to disrupt the normal conduct of business so far as small industry is concerned.

(4) Provision should be made to supervise the activities of examiners in such a manner as to assure immediate and continuous compliance with the changes in rules and regulations relating to bank examinations, instead of leaving the matter to their individual discretion.

Changes in loan policy of Federal Reserve banks.-If it were not for the criticism leveled against Federal Reserve banks by small manufacturers, it would be difficult to reconcile the restriction of credit to small and medium-sized establishments, with the broad policy laid down in Regulation S, series of 1934, of the Federal Reserve Board.

The last session of Congress enacted legislation authorizing the Federal Reserve banks to make industrial loans on a broader basis than heretofore through various financial channels and/or by direct loans to “established industrial and commercial

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businesses.” The law further directed the appointment of an industrial advisory committee in each Federal Reserve district, to be composed of from 3 to 5 members, each one of whom “shall be actively engaged in some industrial pursuit.”

In the prefatory statement to the regulations governing this act of Congress, the Federal Reserve Board says:

Recognizing the need of many small and medium-sized industrial and commercial businesses for additional working capital to enable them to continue or resume normal operations and to maintain employment or provide additional employment, Congress has granted the Federal Reserve banks very broad powers to enable them to provide such working capital, either through the medium of other banks, trust companies, and other financing institutions, or, in exceptional circumstances, directly to such commercial and industrial businesses. It is believed that the facilities thus afforded will aid in the recovery of business, the increase of employment, and the general betterment of conditions throughout the country.

“In accordance with the policy of Congress and in order to facilitate as much as possible the performance of the new functions thus granted to the Federal Reserve banks, the Federal Reserve Board's regulations leave the broad powers granted by Congress to the Federal Reserve banks wholly unimpaired and prescribes no restrictions beyond those prescribed in the law itself

The saw permits Federal Reserve banks to make direct loans to established industrial and commercial businesses only when authorized by the Federal Reserve Board but, in order to avoid the necessity of having applications for such accommodations passed on in Washington, the Board has granted blanket authority to all Federal Reserve banks to grant such accommodations directly on their own responsibility without reference to Washington.

That the provisions herein outlined and the high purposes of the law have not, been carried out, has already been amply demonstrated. The very fact that less than 1 percent of the amount authorized has actually been disbursed in more tian 3 months of operation and but 5 percent in about 6tj months of operation in an indictment of the failure of the Federal Reserve banks to bring the immediate relief Congress intended. It is therefore recommended that the Federal Reserve Board amend its policy toward industrial loans by encouraging Federal Reserve banks, when passing upon applications of smaller commercial or industrial enterprises to use a latitude of discretion conducive to the expansion of credit. They should also be encouraged to grant loans on a "reasonable and sound basis" provided for by law, including

in this judgment not alone present ability to repay loans but character and credit standing anis normally applied in the analysis of credit risks.

Changes in policy of the Reconstruction Finance Corporation.--In its last session, Congress also enacted temporary legislation to expire January 13, 1935, authorizing industrial and commercial loans by the Reconsturction Finance Corporation aggregating $300,000,000. As has already been pointed out, up to January 5, 1935, and with less than 1 month remaining before the law expires, the Reconstruction Finance Corporation had disbursed less than two and one-half percent of the amount authorized by Congress.

The sharp and varied complaints registered against the Reconstruction Finance Corporation in its administration of this phase of the law were analyzed in a preceding section of this treatise. In the light of these complaints and in view of the small accomplishments to date, it is recommended that the Corporation take immediate steps to change its present policy in order that it may carry out the intent of the law "for the purpose of maintaining and increasing employment of labor” by:

(1) Simplifying the machinery for the handling of applications. According to reports, the ponderous machinery necessary for the procurement of a loan requires anywhere from 3 months or more to secure any action. Indeed, the charge has been made by some accounting organizations which handled applications for clients that the machinery is so slow in movement that large numbers of applications receive no attention for long periods of tiine after filing, and that it is frequently too late to do the applicant any good. To avoid forced liquidation, action must be immediate. Cognizance must be taken of the fact that it is an emergency measure and that time is the very essence of things.

(2) Eliminating some of the "red tape" as reflected by the size of the application and the number and variety of documents of which it is composed. To prepare an application for a loan with the Reconstruction Finance Corporation, manufacturers report that they must employ the services of attorneys, account ants, and appraisers. All of this is costly, time consuming, annoying, and much of it is quite unnecessary from the standpoint of safety or credit analysis.

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(3) Reducing the collateral and other requirements to a minimum, commensurate with reasonably safety. Requirements are now too strict. The charge has been made by many concerns from widely scattered parts of the United States and in various lines of business, that any firm meeting the requirements of the Corporation would not only be granted credit by the most hard-boiled local banker but that such concern would be in a financial condition that would not require any loans. To put the matter as it has been frequently presented, in order to qualify for a loan from the R. F. C. one must prove that he does not need a loan. The insistence upon subordination of all other obligations, at times works a serious hardship on the borrower.

(4) Considering on a just basis the character and credit standing of applicants for loans, as differentiated from a consideration of present financial strength or current profitable operation.

(5) Permitting the refinancing of present obligations. This apparently necessitates a change in the law itself. "Reports from manufacturers indicate that loans, when granted, must not be used to pay off pressing debts to banks or to other creditors. This, it is claimed, is a serious handicap to continued operation.

LEGISLATIVE MEASURES RECOMMENDED

Coordination of our banking system.-It should be recommended to Congress that legislation be speedily enacted with a view to bringing about coordination of our banking system. With 40 percent of all banking being undertaken under the divergent laws of 48 States and the District of Columbia, the development of national policy with a view to solving national financial problems is virtually impossible. The process of bringing this coordination about falls into two distinct steps. First, by encouraging banks to join the Federal Reserve System, and, second, by coordinating all banking under the Federal Reserve System.

The first of these steps can be accomplished by amending the Federal Deposit Insurance Act and following the precedent already established whereby banks of issue were restricted through taxation on paper money which made its issuance unprofitable except for national banks. It can and should be made unprofitable for banks to operate without the Federal Deposit Insurance protection and all banks operating under that act should be required to become members of the Federal Reserve System.

The second step is not so much a matter of legislation as it is a problem of administration. While the Federal Reserve System is ostensibly but a single system, in actual banking practice there are, for most purposes, 12 distinct systems which insofar as national policies are concerned do not function on a Nation-wide scale in a manner commensurate with their purpose. In national matters they appear to be but loosely grouped together in their operation. In practice, each Federal Reserve bank follows its own dictates no matter how greatly they may diverge from the policy of other districts.

The growing tendency on the part of officials of the Federal Reserve Board to pass on to each district bank the responsibilities which by law rest primarily upon it, probably has contributed to no small extent to present ultra-conservative banking practice. For example, the regulations and instructions issued by the Federal Reserve Board dealing with the industrial and commercial loan provisions of the Glass Act of June 19, 1934, in effect give to each Federal Reserve bank authority to interpret the act in any manner it sees fit. Only broad, general regulations are laid down, without direction of the necessity for a national policy as contemplated by the authors of that act.

The introduction to regulation series of 1934, of the Federal Reserve Board, states “the Board has granted blanket authority to all Federal Reserve banks to grant such accommodations directly on their own responsibility without reference to Washington.” The ambiguity of these regulations by giving discretion to the several districts with full individual district responsibility has prevented the development of a national policy on the part of the Federal Reserve System, Contrarily, as is pointed out in this survey, it has resulted in no discretion being shown and has brought upon the system severe criticism from many small manufacturers.

The administration of credit policies is now carried on by no less than 61 different authorities. About 60 percent of the loans and discounts made by banking institutions are effected by affiliates of the Federal Reserve System under the control of 12 different Reserve banks. The remaining 40 percent are administered by a larger number of banks under the policies laid down by banking authorities in 48 States and by the Comptroller of the Currency for the District of Columbia,

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