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enlightenment that you can give us on that I would appreciate having it for the record.

Mr. McCabe. We would be very glad to give you any information we have.

The CHAIRMAN. I think it is very interesting. Mr. McCABE. I would be glad to insert that in the record. (The following was later submitted for the record :) The following tables have been taken from a study entitled "A Statistical Study of Regulation V Loans" by Susan S. Burr and Elizabeth B. Sette, to be published by the Board of Governors of the Federal Reserve System.

Borrowers and loan authorizations under Regulation V by size of borrower

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Credit outstanding to small and very small concerns and additional credit avail

able under Regulation V, selected dates

(Dollar amounts in millions)

Outstanding loan

Additional credit



Credit outstand


As per

Number Amount


centage of total authorization

1942—Dec. 31.
1943-June 30.
1944-June 30.
1945—June 30.

1, 333
1, 313






NOTE.-The 3,054 small and very small concerns (total assets of less than $50,000 and $50,000 to $500,000, respectively) with loan authorizations under the program included 1,705 with one authorization and i 349 with more than one authorization,

Percentage distribution of borrowers and loans under Regulation V by size of

authorization and size of borrower 1


1 Borrowers with more than one authorization are included once only in the size group of their largest ("maximum") authorization.

? Less than .05 percent.

Senator SPARKMAN. Does that include the V loans ?
Mr. McCABE. These are the V loans.

I might add that the guarantee program was conducted with no cost to the taxpayers. On the contrary, Treasury receipts from this program totaled $23,000,000 by the end of 1949.

The CHAIRMAN. This is not going to cost the taxpayers anything, either.

Mr. McCabe. The investment companies, the capital of the investment companies as described in the proposed legislation here would be put up by the Federal Reserve. It would require no appropriation of the Congress. The Federal Reserve would put up that capital.

The CHAIRMAN. You have the capital to put up, have you not? Mr. McCABE. Yes; it is in surplus.

The CHAIRMAN. In other words, at no cost to the taxpayers. You are not going to tax anybody to give it to you to put it up, is that right? Mr. McCABE. That is right.

The CHAIRMAN. You have the money, you do not have to go to the Treasury and get it?

Mr. McCABE. That is right.

The CHAIRMAN. In other words, it is not going to cost anything, it is going to be something like what you did during the war to guarantee 4 billion to small industries out of 10.5 billion all together?

Mr. McCABE. The Federal Reserve would put up this capital for the investment companies out of its surplus.

The CHAIRMAN. You are going to take it out of your surplus?
Mr. McCabe. That is right.
The CHAIRMAN. You expect it to be paid back, do you not?
Mr. McCABE. We would hope so.

Senator SPARKMAN. And the investment companies retire that capital, do they not? In other words, yours is an original stock subscription but it is retired as busines participates in the loans, is that not true?

Mr. McCABE. Senator Sparkman, the bill provides that the member banks, other banks, and other investors can acquire the Federal Reserve interest. Say a Federal Reserve bank would put up $5,000,000 of original capital. The hope in this bill is that local investors will acquire the Federal Reserve interest so that those investment companies will be managed by local people.

The CHAIRMAN. That is what we want, a private enterprise.

Mr. McCABE. The primary provision of this bill is to have these investment companies owned ultimately by private interests. The function of the Federal Reserve is to initiate them, get them off the ground, get them started, and give them all the aid possible while they are getting under way.

The CHAIRMAN. And then get out.

Mr. McCABE. There will be certain rules and regulations that will be prescribed by the Federal Reserve System that these investment companies would have to live up to. They will be subject to examination and certain regulations.

Senator SPARKMAN. A certain amount of supervision ?

Mr. McCABE. A certain amount of supervision. But the primary thought here is to have them owned and managed by private interests.

The CHAIRMAN. That schedule that you are going to get for us about the 10.5 billion and particularly the 4 billion to small businesses, I would like the record to show that that it will appear on page 130.

Mr. McCABE. I am glad you asked for that, sir.
The CHAIRMAN. I am very interested in seeing it.

Senator BENTON. Is there anything to prevent such companies being organized right now without this bill

Mr. McCABE. You have up in New England, Senator Benton, in Boston, a very interesting one that was organized up there with local capital. That is operating today. Some existing investment companies I think will apply to Federal Reserve if this legislation is enacted, for the privilege of operating under this act. That is, the law provides that five or more individuals, if they can provide $5,000,000 of capital, can apply for a license to operate under this proposed law. That, I think, is a very excellent provision.

Senator BENTON. That lets in some that are now operating?

Mr. McCABE. That lets them in if they want to come in, or it allows new investment companies to be organized.

The CHAIRMAN. Are you familiar with the program described in the National Bureau of Economic Research report? They say on page 217, and I presume this is what you and Senator Benton are discussing-if I am wrong correct me:

Finally, special mention should be made of the regional credit pools organized under the sponsorship of the small business credit commission of the American Bankers Association. The plan involves the establishment of a pool of credit to which banks in the region can subscribe. The pool will take all or part of

you not?

any loan which the local bank considers itself unable to make either because of the size of the loan or because of some feature, such as the terms tó maturity, involving risks that the individual institution prefers not to assume alone. By early 1946, 48 regional bank credit groups had been formed with about $670,000,000 pledged to aid in financing medium and small business.

I do not know, Senator, if that is the situation in New England that you were referring to, but I presume that it is. Is that correct? Mr. McCABE. I have

a general knowledge of that program, sir. My impression is that it did not get very far.

The CHAIRMAN. Well, it says $670,000,000. Why did it not get very far?

Mr. McCABE. It is very, very difficult to get local interests to put up the capital, Senator Maybank.

The CHAIRMAN. That is practically what that says there. You lent 10.5 billion. I will guarantee you got your money back, did

Mr. McCABE. Oh, yes. We have an excellent record on that.
The CHAIRMAN. I mean very frankly?

Mr. McCabe. We have an excellent record. But to get local investors to invest in the equity of an investment company

The CHAIRMAN. If I may interrupt: The local investors have modified their policy in the last several years. When we started in here on the FHA and all these other lending programs the local investors would not advance a cent until we got them guaranteed and then they went rather happily into the FHA loans—the local banks. But at first they would not do it. When I say they would not take them I mean they were not anxious to invest in that type of loan. Am I right in that?

Mr. McCABE. Yes. I think the FHA mortgages have worked out exceptionally well.

The CHAIRMAN. But at first they were a little fearful of them. I do not mean everybody was but there were certainly some people who

Mr. McCabe. Yes. I think as to anything new like that the investors are wary of it.

The CHAIRMAN. Go ahead. I am sorry to interrupt you.

Mr. McCABE. Since the Reserve System's inception, its officials and staff members have been called upon from time to time to consult with commercial bankers or businessmen who felt that the financing needs of small business presented a special credit problem. Last fall, when business activity was much below earlier or current levels, the calls for advice and help on the small business problem became particularly numerous and we were visited frequently by representatives of small business groups. At that point, I got in touch with Secretary Sawyer who felt, as I did, that the time had come for the Secretary of Commerce to undertake a conference of interested groups to explore needs and remedies. Numerous conferences and discussions have been held since, both inside and outside of government.

The Federal Reserve's role has been to hear all sides of the problem and to make available without reservation such technical information and judgment as we were capable of supplying. Almost daily, members of our staff who are experienced in this field, were asked to consult with individuals and groups both inside and outside the government who sought our advice on various proposals.


Need for special financing facilities: The legislation before you will be strongly opposed by those who believe that small business already obtains as much credit and capital as it can efficiently use. These opponents will say that

The CHAIRMAN. That is a pretty strong statement but I judge that is correct. There are a lot of people who think we should not give any additional aid to small business but that statement you make leads me to ask you this question:

Is the Federal Reserve Board unanimous, divided, three one way or some another way with respect to this proposed legislation? Does everybody on the Board believe that this bill and your testimony are correct, or can you speak for the Board ?

Mr. McČABE. This statement, Senator Maybank, has been approved by a majority of our Board.

The CHAIRMAN. How much of a majority approved it? I am trying to find out.

Mr. McCABE. That is perfectly all right.
Senator BENTON. I think it is a pretty good question.
The CHAIRMAN. It is not a minority report, is it?

Mr. McCABE. There is no minority report unless you want to ask for a minority report.

Senator SPARKMAN. How many members are there now?
Mr. McCABE. Six.

Senator SPARKMAN. Only six members on the Board at the present. time?

Mr. McCABE. Yes. The law prescribes seven; we have one vacancy. But this statement has been approved by a majority.

The CHAIRMAN. All right, sir.
Senator BENTON. That gives you two-thirds of the Board, anyway.
Mr. McCABE. These opponents will say that:

(1) The problems which confront most small business concerns are primarily managerial and competitive, not financial;

(2) The commercial banking system is meeting all of the legitimate requirements of small business for short- and intermediate-term credit; and

The CHAIRMAN. Are there not local banks who might say that is approving loans or approving parts of loans that cannot find their way into the RFC?

Mr. McCABE. Oh, yes. As you know, local bankers from your State are very active in the field of making loans to small business.

The CHAIRMAN. Certainly, but they go to RFC a lot of times, do they not?

Mr. McCabe. They participate with RFC, they go to RFC to take care of certain customers. They take their customers to various credit agencies, depending on the type of credit.

(3) Such financial difficulties as small business encounters could be overcome more effectively by revision of present income, estate, and inheritance taxes than by the provision of additional financial institutions or facilities.

Each of these points merits careful examination.

Managerial problems: Concerning the consideration that most small business financing problems are of managerial character, one does not have to look very far for supporting evidence. Various

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