Dr. DICE. In the first place, of course, the bill, I think, is more liberal than the present R. F. C. requirements and standards.

Mr. KOPPLEMANN. Can you recollect at which place in the bill it is more liberal than the present requirements?

Dr. DICE. Yes. There is a greater variety of asests that are allowed. For instance, such things as shipping documents and warehouse receipts, and liens on real estate, plants, and warehouses; and mortgages covering plants, real estate, and warehouses, with an appraisement at 75 percent of the market value. The bill, in itself, is more liberal, and the administration, I think, would be quite a different sort of thing.

Mr. KOPPLEMANN. Why do you believe the administration would be quite different than that of the present financial organizations of the Government?

I

Dr. DICE. In the first place, I do not think the R. F. C.-and when say this I want to say first that I think the R. F. C. has done a great job with the railroads and with the banks and with the insurance companies—but I do not think it has done a very good job in making loans to industry.

Let me go into that a little. Probably it is partly their fault, and probably partly not their fault. Probably it is just a matter of the conditions.

In the first place, the idea is that it is an emergency institution. It is true that many business men, many of the better business men who could quite well furnish the assets that would be quite acceptable to the R. F. C., even with their relatively high standards, will not borrow from the R. F. C., for this reason, that if they do borrow from the R. F. C. that information gets into the trade.

Say, for instance, I am a business man, and I am buying from another business man or business concern, and he finds that I am borrowing from the R. F. C.

Immediately, my credit standing with that particular house drops. I have found that to be true in several fairly important places, just exactly like it was in the case of the development of the trade acceptances some years ago.

Some years ago the Federal Reserve Board put on a program, which was backed up by the Acceptance Council of New York with some prominent bankers. They advertised and tried to develop the trade-acceptance practice in this country.

But a business man will not sign his name to an acceptance.

In one of my classes at one time I was saying how fine a thing the trade acceptance would be and how fine it would be to use that instead of the open bank account. One boy came back the next day and said, "My father said he would not sign his name to a thing like that." I said, "Why?"

He said, "Because business practice means that when a man signs his name he is delinquent in his payments and is being collected from." It is because of the tradition in business, business men will

develop the trade acceptance.

Here is the same thing. Because a concern has to go to the R. F. C. to get a loan, its supplier, or the business concern with which it does business, immediately writes down the borrower's credit as being not the highest.

14

Mr. KOPPLEMANN. Where would the difference be under this bill? Dr. DICE. The R. F. C. is an emergency institution set up for emergency purposes, and a business man in borrowing must subject himself to all the emergency psychology that surrounds it. He will borrow only as the last resort.

This bill sets up a permanent institution, not an emergency institution. It is a permanent thing and would fill in a lack in our whole organization. It would be advertised as such and put cut as such.

It is not an emergency institution; it is just simply a place where a man goes to get his 1, 2, or 3 years' credit.

One reason why it would have to be kept separate, and have a separate board of directors, is the very fact that we have among business men this psychology that if anybody borrows from the R. F. C., that is prima facie evidence that his credit is not up

to par.

The bill provides that banks and other financial institutions, primarily, make the loans but if a concern cannot get a loan at the bank it can go to an agency of the Intermediate Credit Corporation and get a loan directly. But very few people would probably have to go to this organization because the banks would make the loans in the regular fashion, maintaining the standards that the trade recognizes, and then if the banks need the money for liquidity they go on to this other institution and rediscount.

Here is another angle to it. We would set up an institution here that very likely would be very simple in its organization, and very likely would be less costly, or surely would not be any more costly, because the report of Hardy and Viner point out in one or two sections how the cost is almost prohibitive in making relatively small loans.

This is what the Hardy and Viner report says, on page 45, and with your permission I will make a few excerpts from this report to show how tremendously costly this present set-up is.

The report says:

66

There is a great deal of complaint about the amount of red tape involved in the making of applications at the Reconstruction Finance Corporation. An inquiry as to the feasibility of borrowing from the Corporation brings the would-be applicant an elaborate application blank. Audits and appraisals are required in all applications involving more than $10,000.

Our investigators have been told of numerous cases in which the applicants lost interest in loans as soon as they saw the application blanks; in many other cases applicants complained of the expense and trouble of preparing applications which were finally rejected on grounds that could have been made just as apparent without the elaborate exhibits.

I know of a case where a business concern went to get a loan, and they asked for $25,000. After they had gone to quite a bit of expense in hiring auditors and attorneys-a businessman is afraid, and he hires an attorney; he does not take any chance, he hires an attorney and he hires an auditor.

After some time a report was made, and the authorities said, "If you will cut down the amount of the loan we might consider your case, that is, if you reduce the amount." So he cut down the loan to $10,000, and he again went through the necessary formality.

Then the report came back which said, "You had better cut it down some more." Then he made out another application on the

basis of $5,000. The report finally came back denying the loan. It may be that that was the best they could do, but you see what the position of the business man was. That is what this report is driving at.

I am not condemning the R. F. C. There are certain conditions in its set-up which makes for "red tape " and high cost.

The Hardy and Viner report goes on to say:

Complaints abound particularly as to the cost of meeting the requirements of audit and appraisal. In addition, the applicants often make several trips to Washington or Chicago, some of them of course unnecessary

but the business man does not take any

chances

and are required to pay for all visits which examiners may make to the applicant's place of business. Legal expenses are also considerable.

A Michigan concern claimed that it dispensed over $1,200 on appraisals and audits over a period of nearly a year and was refused a loan. A Wisconsin firm alleged that it spent $10,000 in connection with its application. An official of the Reconstruction Finance Corporation estimated the necessary cost of preparing an application as from $1,000 to $1,500. A Milwaukee investigator reported that disappointed applicants mentioned total expenses ranging from $50 to $3,000. A chamber of commerce secretary in Michigan reported that most attempts by small establishments to obtain Reconstruction Finance Corporation money were given up after they discovered the requirements, red tape, and time involved. An investigator who worked in both Illinois and Wisconsin wrote:

"I only ran across two Reconstruction Finance Corporation cases. However, I found a half dozen business concerns which had received Reconstruction Finance Corporation blanks and after looking them over threw them in the wastebasket. Even the president of a large paper mill threw the blanks away as being too formidable."

Why would the intermediate credit system be any better than that? That is your question, Congressman.

In the first place, these loans would be made at a bank or other financial institution in the regular order of things, like men have always gotton loans.

In the next place, if a bank wants to rediscount them, or if somebody wants to go directly to the rediscounting corporation, we have a board that is made up of practical men in the credit field. That is, it is supposed that the President would pick out men like the credit men in sizeable corporations, men like the outstanding men in the General Motors Acceptance Corporation, or in a corporation like the Commercial Credit Co. of Baltimore, that have had years of experience.

In addition to that, of course, there would be business executives who have had substantial experience in trying to get loans; that is, the middle types of loans for their particular industries. So I say we would get a body of men who would be quite different from this body of men now, who are more or less of an emergency group. There was no time for them to develop any standard or experience. They have a wholly emergency attitude.

Take this kind of an illustration, for example.

Mr. REILLY. If this bill should be passed, would not its success. depend a good deal on the board?

Dr. DICE. Very considerably.

Mr. REILLY. How could you tell whether you ever had the right. kind of a board?

Dr. DICE. Of course, you could not, absolutely. But suppose you could induce one of the best men in the General Motors Acceptance

Corporation to go on this board. And suppose you could induce one of the best men in the Commercial Credit Corporation of Baltimore to go on this board. Then, suppose you could get in sizeable corporations, some of their credit men, or their treasurers or auditors to go on this board.

Then, in connection with that, suppose you could induce several outstanding business men, say, men in a business running a million dollars a year, or perhaps $500,000 a year, or from $500,000 to $1,000,000 a year. Then, possibly, in addition to that, suppose you could get a business man in a larger concern to go on the board, and make up a board of men like that.

It seems to me that that sort of a board, at least in a few years, should gather up an experience which is beyond anything that the Reconstruction Finance Corporation could hope to develop, and even if it had a similar board such a board would be up against the fears and prejudices of business men, and up against this emergency proposition.

We must have a board clear of the emergency psychology, one that is made up of men of experience in medium-term credit with the industrial outlook rather than the short-time view of the orthodox banker. Furthermore, this board must work independently of purely commercial banking.

Suppose that Babe Ruth, when he sees a ball coming, would have to get the weight of the pitcher and get the weight of the ball and get the twist that the pitcher puts on the ball, and put that into a formula. It would be practically impossible to get results or to know where the ball could be played. But through experience this man knows where the ball is going to come.

I am afraid one difficulty is that these Reconstruction Finance Corporation people have tried to use too many formulas.

In the stock market we have many kinds of analyses. I think, as a matter of fact, however, that the good trader who gets experience and who knows a few significant things, though not so learned, is the most successful. I would rather trust my funds to that kind of a man than a man who comes along with fine analyses but very little experience.

I think that has been a great difficulty, and this board which would be set up here would be composed of the type of men who have gone through this experience, and who have an eye for credit just like Babe Ruth has an eye for the ball. That, on the whole, would be my

answer.

Then another thing is to keep this organization separate. There must be a department set up even in the banks themselves where these loans are segregated and are made by a vice president who realizes just what he is doing. His judgment checked by people higher up who are constantly having more experience, who are setting up certain standards, and so on.

It seems to me everything is in favor of this sort of thing, separate from an emergency organization, with a body of directors who have the intermediate credit type of thing in mind. I think good men would be proud to be on this sort of a board at the salary which is set up here.

Mr. REILLY. Is there anything further you desire to submit to the

committee?

Dr. DICE. That is about the substance of my statement. In other words, the general trend of our development in banking, with the large time deposits, with the increasing development of facilities in the stock and bond market, making that very attractive, and therefore making the other thing relatively less attractive, with the English trying the same development, and trying to improve their situation, and the French also having the same development and trying to also improve their situation; with the Reconstruction Finance Corporation not having been very successful, and under the conditions not seeming to be ever able to become very successful, I think the solution is a separate institution with a separate board.

It might be possible, that after a year the capital stock of the Intermediate Credit Corporation might possibly be sold to the public, if there is an objection that this is too much of Government going into finance, the Government furnishing the capital stock, after a year, exactly as in the case of the Federal Farm Loan banks, where at first the Government furnished practically all of the capital stock. After that it was put out to the farmers' organizations, and up until 1929 they absorbed practically all of it.

We could do the same thing here if there is a serious objection to the Government putting up this amount that would be required. We could sell that stock to the participating organizations, to the savings banks, to the mortgage companies, or to whatever companies would participate in the business of this particular branch. We could let those organizations absorb the stock and let the Government gradually get out.

Or, we might do something like this. It might be set up within the Reconstruction Finance Corporation, but with an entirely separate organization, because this emergency psychology is in the business man's mind.

So it would have to be an entirely separate board and an entirely separate organization, but after all, under the general sponsorship or basic organization of the Reconstruction Finance Corporation. That is a possibility.

Mr. REILLY. We thank you very much for your statement, Doctor. (Thereupon, the committee adjourned to meet tomorrow, Thursday, June 6, 1935, at 10:30 a. m.)