would determine the area (1) where the need was great; (2) a very important point, Senator Sparkman, would be to determine where we could corral the best management to start this institution, because we have a strong feeling that if we set one up, if possible, it must succeeed. That would mean you would have to select that bank that would have the greatest sympathetic interest in this program and would want to make that institution succeed.

Senator SPARKMAN. Would it be your thought you would just set up one as a kind of pilot plant, or would you set up two or three?

Mr. MCCABE. I think you would determine that after you made your study, whether you would want to start with one, two, or three. I could subscribe to starting two or three, if we felt that the areas to be served warranted the banks, and if we felt sure that we had the organization to start the bank in that area.

proper Senator SPARKMAN. How long a testing period do you contemplate would be required?

Mr. MCCABE. I do not think you can determine that today.

Senator SPARKMAN. You would just have to be regulated by the experience gained?

Mr. MCCABE. That is right. Then, another thing, Senator: You would be regulated to a considerable extent by the state of the economy. That is, in a period like this you would want to get ready for perhaps a downturn in the economy when these banks might be a godsend. This would be a period of preparation, getting ready. That is, I do not believe the necessity for these banks is as great today as it might be at another period.

Senator SPARKMAN. Your idea would be, then, assuming that your pilot plant banks worked out all right, or your experimental banks worked out all right, then you would contemplate a gradual development of the whole system until perhaps eventually we would have the whole 36?

Mr. MCCABE. That is right, and you might have more, if the investment companies that Senator Benton spoke of should come in and ask for a license. Under one of these laws, the investment companies could be additions to the 36.

Senator SPARKMAN. I just wanted to bring that point in at this time. Thank you very much.

Mr. MCCABE. Those are the private investment companies that apply to the Federal Reserve.

Participation through equity financing in the gains of successful ventures will be an essential to offset the high costs of operation as well as losses.

Various critics of the proposed legislation have expressed apprehension that the suggested new type of investment institution would constitute a competitive threat, on the one hand, to the existing commercial banking system and, on the other, to our existing investment banking facilities. I do not share this apprehension.

The new type institution would have to supplement its capital funds by borrowing from banks or in the capital market at market rates of interest. On the basis of this feature alone, it could not compete in its charges with rates of interest which banks, using depositors' funds, can charge their customers. In addition, both the credit appraisal and risk costs of an institution specializing in long-term capital and

credit would run much higher on the average than in the case of commercial banks which make shorter term and better secured loans. The success of this new type institution would depend largely on its effectiveness in working through commercial banks and in supplementing the facilities which they are able to offer small business

customers.

I should like to stress particularly the point just made that the success of the new type investment institution will depend largely on its effectiveness in working through commercial banks. The local bank is in a unique position to discover and evaluate investment opportunities for such institutions, even if the bank itself is not in a position alone to extend direct long-term aid to the business. More over, the local banker is in a strategic position to handle the servicing and supervision of longer-term investments of the new institution, if such assistance is deemed helfpul. The credit analysis and administration which the local banker is in a position to provide cannot be duplicated elsewhere under existing financial mechanisms.

As for competition with established investment banking facilities, these facilities are not now adapted to meet the equity and long-term credit needs of small business. This fact, which is generally admitted and fully substantiated by objective evidence, constitutes the principal case for providing for new, specialized investment facilities for small business.

The two bills differ in the tax relief that would be specially available to the proposed investment institutions. We feel that some special provisions adapted to the peculiar needs of this type of institution are desirable, in view of its experimental nature and the high risk exposure to be incurred. The committee will, of course, give great weight to the advice of the Treasury Department in determining what tax provisions may be practicable.

I have emphasized the need for combining managerial and technical assistance with any financial aid to small business. Therefore, we heartily endorse those sections of the proposed legislation that would provide for the collection and dissemination of information. of benefit to small business.

Insurance of commercial bank loans: As a means of assuring greater availability of credit to small, and particularly very small, businesses, the proposed legislation would authorize an insurance program for small-business loans. The program would be administered by the Secretary of Commerce under S. 3625; it would be handled by the investment companies under S. 2975.

Loans would be insured without any preliminary review of individual loans. However, because of this automatic feature of the plan, the insurance would be limited to very small loans with maturities of not more than 5 years-loans which would not justify the expense and work of reinvestigation by the insuring agency on an individual basis. The principal amount of an insured loan could not exceed $25,000 under one bill, or $10,000 under the other. The total insurance protection afforded to any financing institution would be limited to 10 percent of the aggregate amount of its total insured business loans. Also, in order to make certain that the financing institutions would carry a reasonable share of the risk, the insurance

coverage on any one specific loan would not be more than a certain percentage of the unpaid balance, 90 percent under one bill and 95 percent under the other.

Reasons for the loan insurance program can be summarized about as follows: Because of the expense of credit and risk appraisal, loans to many small and to most very small business concerns must ordinarily be made on a banker's personal knowledge of the applicant's abilities, character, and financial worth, without the benefit of costly investigations. Where the businessman's banking contact is impersional or casual, information of the type needed for negotiating a loan may be inadequate and the work and expense of getting the information may be too great.

No one can say how large a volume of insured small-business loans would be generated by the banking system under the proposed program. We have noted an expansion of specialized plans for loans to small business by insurance companies and by banks in some areas of the country. Considering the favorable experience of these institutions, it is anticipated that other new plans will be developed, particularly since there is considerable interest on the part of private financial institutions to cultivate the demand in this field. In view of this rapidly changing situation, I would prefer to see this program of insuring loans placed in the hands of the proposed investment companies where it could be flexibly adapted to the needs of various areas of the country.

Senator SPARKMAN. Mr. McCabe, under S. 3625 the Secretary of Commerce is given the right, you know, to designate or utilize the national investment company as his agent.

Mr. MCCABE. That is right, sir.

Senator SPARKMAN. It seems to me that the argument you made as to the gradual development of the investment company program might likewise be a pretty good argument in favor of the insurance program as provided for under the Secretary of Commerce, because he can carry that on in areas where there is no investment company yet functioning. And yet in an area where you have established an investment company he can delegate the authority to that investment bank to do business in that area.

Mr. MCCABE. The authority in both bills to the investment companies is rather broad and flexible. You could, Senator Sparkman, set up one of these investment companies and have it do—

Senator SPARKMAN. An insurance business for the whole country? Mr. MCCABE. For the whole country, if you want.

Senator SPARKMAN. That can be done under S. 3625?

Mr. MCCABE. Our thought is that, if you are going to set up the investment companies, it would be better to center them where not only would they have the responsibility for equity financing and longterm credit, but also any insurance program that might be developed. Senator SPARKMAN. Of course, that can be worked out under the terms of the bill as it is now drawn?

Mr. MCCABE. The particular point is provided for more clearly in S. 2975.

Senator BENTON. Do you not think it would be better to do it through the 36 local companies, Mr. McCabe?

Mr. MCCABE. That is right, gentlemen.

Senator BENTON. I would think so, too. It would help make investment in these 36 companies more attractive and help make the companies more stable, it would seem to me.

Mr. MCCABE. Yes.

Senator SPARKMAN. Once the 36 companies are organized.

Senator BENTON. Yes. Until that time

Senator SPARKMAN. Until that time, it seems to me it might very well be a transitional program.

Mr. MCCABE. You could, however, with the investment companies, after you have set one or two of them up, have them insure loans on a Nation-wide basis, if they wanted to.

Senator BENTON. Until the others get going, you mean?

Mr. MCCABE. Yes.

Senator, that was a subject of great discussion that has continued over weeks, even for a few months. We went into it very exhaustively with Senator O'Mahoney and one of his staff members, who is vitally interested in it. I think he is going to testify here tomorrow.

The CHAIRMAN. That is right.

Mr. MCCABE. Then we went into it very exhaustively with many others. We came out with this conclusion here as our best judgment as to how it could be done.

Senator SPARKMAN. By the way, Mr. McCabe, in that connection, is it not true that one of the subcommittees of the Joint Committee on the Economic Report, in making its study came up with the conclusion that one of the greatest needs for small business was investment capital, equity capital?

Mr. MCCABE. You see, Senator O'Mahoney is chairman of the committee

Senator SPARKMAN. Yes, and it was out of that he introduced this bill.

Mr. MCCABE. It was out of that discussion that I mentioned that in the earlier part of my report.

The interesting part here is that the suggestion or the two suggestions prior to Senator O'Mahoney's coming forth with his suggestion, came from private industry, one from the Investment Bankers Association, first; and the second that I have referred to from the CED.

Senator SPARKMAN. And then the Federal Reserve Board, acting on that recommendation, recommended to Congress in 1944 that something be done, did it not?

Mr. MCCABE. Yes.

Senator SPARKMAN. An extension of the V loan program to postwar operation?

Mr. MCCABE. Yes.

Senator SPARKMAN. And then in 1948, a bill was introduced and hearings were held before this committee for similar programs? Mr. MCCABE. That is right.

Senator SPARKMAN. So this is not something that is brand new out of the sky, is it?

Mr. MCCABE. This has been under discussion for a good many years.

Senator SPARKMAN. And has been pushed by the Federal Reserve Board for a good long time, certain parts of it?

Mr. MCCABE. As I say, the so-called capital banks_or investment companies, as they are referred to, that suggestion, as I say, came out of private industry in which it was recommended in the two reports I have referred to that the Federal Reserve set up such institutions. Then there was what we call the Tobey bill, which had the guarantee principle in it. The Federal Reserve, as I recall, at the time asked for that as the stand-by authority which it might use at the proper time. Congress never acted on that particular recommendation.

Senator SPARKMAN. But the first two impulses came first from the investment bankers, the second from this group of industrial and economic leaders of the United States, the Committee on Economic Development, and then the Federal Reserve Board studied it and transmitted its recommendations to Congress?

Mr. MCCABE. Yes. In chronological order, there was the joint committee study.

Senator SPARKMAN. The joint committee came next?

Mr. MCCABE. It came next; then the President's recommendation. And then, in conclusion, if I might just complete this

Senator SPARKMAN. Yes. I just wanted to get the point clearly before us that this is not a new program which the Government is trying to impose on the people. It is one that has come from the people up to Congress.

Mr. MCCABE. That is right, sir.

In conclusion, I would like to say that the proposal for the investment companies contained in this legislation was originally conceived not by the Federal Reserve but by private finance. The role projected for us was first suggested in the Fennelly report of the Investment Bankers Association in 1945 and later by the Committee for Economic Development after an exhaustive study of small-business problems. After full hearings by his subcommittee of the Joint Committee on the Economic Report, Senator O'Mahoney undertook to give the suggestion concrete legislative form. Recently, in his message to the Congress, the President endorsed this same proposal. We would like to have it distinctly understood that we do not wish to be placed in the role of asking that Congress increase our powers. However, if the Congress elects to place these responsibilities in our hands, let me assure you that the wishes of the Congress will be carried out as vigorously, soundly, and expeditiously as we know how. The CHAIRMAN. Mr. Chairman, I want to congratulate you on that statement. I know that it will be very helpful and of much interest to many people in this Nation. I think it is one of the best statements on the situation I have ever read or ever listened to.

Mr. MCCABE. Thank you, sir.

Senator BENTON. May I concur in that, Mr. Chairman?

Mr. McCabe is one of our most distinguished public servants, and this statement is a further explanation of how he got to that place. It further accounts for his wonderful reputation. It is a wonderful

statement.

Senator SPARKMAN. I want to say it is one of the finest statements that has ever been presented to this committee.

Mr. MCCABE. Thank you, Senator Sparkman.

The CHAIRMAN. If there are no further questions, we will stand in recess until 10 o'clock tomorrow morning.

(Whereupon, at 12:15 p.m., the committee recessed until 10 a.m., Wednesday, June 28, 1950.)