For reasons set forth in detail above, therefore, the Department of Commerce urges favorable congressional action on S. 1789 and identical bills and opposes the enactment of S. 545, S. 720, and S. 1762. We are advised by the Bureau of the Budget that it would interpose no objection to the submission of this report to your committee. Sincerely yours, Hon. J. W. FULBRIGHT, SINCLAIR WEEKS, Secretary of Commerce. THE SECRETARY OF COMMERCE, Chairman, Committee on Banking and Currency, United States Senate, Washington, D. C. DEAR MR. CHAIRMAN: This letter is in reply to your request for views of the Department with respect to S. 719 and S. 2160, bills to make capital more readily available for financing small business and thus to promote, foster, and develop the domestic and foreign commerce of the United States, and for other purposes. The Department of Commerce is opposed to the enactment of S. 719 and S. 2160 at this time. These bills would authorize formation by Federal Reserve Banks of national investment companies and their incorporation by approval of the Board of Governors of the Federal Reserve System. Stock purchase by the bank forming the company would provide for $5 million in equity capital. These companies would be established as a source of loans and equity capital for independent smallbusiness enterprises. The provisions of these proposals which, in our opinion, would provide incentive for establishment of these national investment companies are the special tax provisions establishing the companies as regulated investment companies and authorizing special tax benefits in the establishment of reserves. We do not believe that such special tax provisions should be enacted at this time when the national security and related programs of our Government require that so much of our Nation's earnings be set aside as taxes to meet the expenses of these programs. Since we consider these tax benefits to provide the incentive for the establishment of these companies and in fact to be the sine qua non for their formation under these proposals, and since we urge against any such special tax benefits at this time when Federal expenses are necessarily high, the Department of Commerce, therefore, urges against favorable action on either of these proposals. We are advised by the Bureau of the Budget that it would interpose no objection to the submission of this report to your committee. DEAR SENATOR FULBRIGHT: This is in further reply to your request for my comments on S. 244, a bill to authorize loans by the Small Business Administration to alleviate unemployment in areas of substantial labor surplus. This bill would authorize the Small Business Administration to make loans to any business concern located in an area determined by the Secretary of Labor to be an area of substantial labor surplus, if the administration determines that the granting of such financial assistance will tend to alleviate unemployment in the area. A comprehensive program of assistance for areas of substantial and persistent unemployment is embodied in S. 1433, the administration bill designed to assist these areas to develop and maintain stable and diversified economies. Enactment of S. 1433, which I strongly recommend, would adequately deal with the problem to which S. 244 is addressed. The Bureau of the Budget advises that it has no objection to the submission of this report and that enactment of S. 1433 would be in accord with the program of the President. DEAR SENATOR FULBRIGHT: This is in response to your request for the Board's views with respect to six pending bills to amend the Small Business Act of 1953. S. 55, S. 246, and S. 300 would simply repeal section 221 of the Small Business Act of 1953, thereby eliminating the existing termination date of July 31, 1957, and making the Small Business Administration a permanent agency of the Federal Government. S. 1762 likewise would make the Small Business Administration permanent and also would amend the Small Business Act in a number of respects, including increases in (a) the maximum dollar amount of an individual loan and (b) the aggregate dollar amount of loans in which the Small Business Administration could participate. In addition, S. 1762 would add to the Small Business Act a new title providing for "insurance of loans for small business." S. 1789 is in some respects similar to S. 1762, but it would not change the present maximum limitation on individual loans and would not raise the aggregate limitation to a level as high as would be provided by S. 1762. Furthermore, S. 1789 does not include any provisions with respect to insurance of loans. S. 2185 would authorize the Small Business Administration to make loans to "local private nonprofit organizations . . . formed to assist, develop, and expand the economy of the area." As a general principle, it is the Board's view that the role of the Federal Government in aiding the financing of small business should be that of encouraging the development of additional private local or regional facilities rather than itself acting as a lender. It should also encourage existing financial institutions to meet the legitimate needs of small business as fully as they can in the light of their responsibilities to their depositors, policyholders, and shareholders. The Board has been impressed by the difficulty inherent in identifying the exact scope and nature of the small business financing problem. While it is not difficult to find specific small businesses that have been unable to obtain the financing they want and believe they deserve, it is hard to determine from these instances whether there are institutional gaps in our financial structure or whether other factors account for the difficulty reported. In the field of equity or risk capital there are identifiable impediments to the free flow of funds to small business. Legislation to protect small investors from unscrupulous or irresponsible promoters, desirable as it may be in accomplishing that purpose, in some cases tends to make access to the capital markets somewhat more cumbersome and expensive for small-business men. At the same time the present high rates of Federal income taxation, combined with the ready availability of tax-exempt securities at attractive yields, reduce considerably the incentive for individual investment of equity capital in small businesses. It is less clear that there are widespread artificial barriers to the availability of loan funds. However, the increased institutionalization of savings and the understandable preference of savings institutions for high-grade marketable investments may have operated, over the years, to reduce the relative availability of funds to small-business men. Generally, market forces respond to situations of this kind through the development of intermediary institutions that borrow wholesale in the capital markets and then retail to smaller borrowers. This process has been highly developed, for example, in the field of consumer credit. The establishment of regional privately owned investment companies with objectives along the lines expressed in S. 2160 might contribute to the solution of both the equity and long-term loan problems of small business. Proposals to establish such companies are not contained in the bills to which this letter relates. However, the Board's views regarding such proposals will be presented during the scheduled hearings on S. 2160 before the Small Business Subcommittee of your committee. In the Board's judgment efforts should be directed toward identifying the factors that operate to limit the availability of capital or credit to small businesses and determining whether these situations can be remedied within the framework of our present financial structure. In the meantime, extension of the Small Business Act of 1953 appears to the Board to be justified. However, the addition of a loan insurance program as proposed in S. 1762 would seem to add little to the accomplishment of the objectives of the act and the Board does not see any need for an amendment along these lines. Likewise, the provision in S. 2185 for the Federal Government to make loans to local development organizations raises certain questions. Although the Board is sympathetic to the objectives of such organizations, it has reservations as to the advisability of using Federal Government funds for the purpose of aiding them, and it assumes that the pros and cons of this question will be carefully considered. MY DEAR MR. CHAIRMAN: This is in response to your committee's two letters of January 23, 1957, requesting the opinion of the Board with respect to the bills S. 719 and S. 720. Since both of these bills relate to the provision of financing for small business, they are being treated together. S. 720 would authorize the Administrator of the Small Business Administration to insure qualified lending institutions with respect to loans made to small business enterprises up to an aggregate amount of $250 million, subject to increase by the President, after July 1, 1958, by an additional $500 million. The amount of insured loans to any one borrower would be limited to $250,000; and the insurance could not exceed the lesser of 90 percent of the unpaid balance of any loan or the amount of an "insurance reserve" to the credit of the lending institution. No insured loan could have a maturity of more than 5 years and 32 days. S. 719 would provide for the formation of national investment companies, either by the Federal Reserve banks or by groups of not less than five private persons, each such company to have a minimum capital of $5 million. The organization of such companies would be subject to the approval of the Board of Governors and their operations would be subject to regulation by the Board. The companies would be authorized to make loans to, and purchase common and preferred stock of, eligible business enterprises; and for this purpose each company would be authorized to borrow money by the issuance of bonds and other obligations up to the amount of its capital and surplus. Basically, the Board believes that any proposals for Government action to provide additional credit facilities or mechanisms to business should be premised on a determination that there is an existing or prospective lack of such credit facilities on the part of small business enterprises not being furnished by commercial banks or other private lending institutions. In a period of restraint, some would-be borrowers who are unable to obtain credit may feel aggrieved and may actually be aggrieved. This, however, would seem unavoidable under any system of credit, once credit becomes scarce in relation to total demand. Apart from that matter, there is, on the basis of existing information, some question whether there is any deficiency in the economy's facilities and mechanisms for providing short-term and intermediate credit for small businesses. Consequently, the Board questions the desirability of the enactment of S. 720. If there is any gap today in institutional or mechanical means for providing the necessary financing for business enterprises, it would appear to relate primarily to long-term debt and equity capital. For this reason, if consideration is to be given to legislation in this field at this time, the Board feels that it should be along the general lines of S. 719 providing for the organization of private national investment companies. In the event favorable consideration should be given by the Congress to the enactment of any legislation of this kind, it is the considered opinion of the Board that responsibility for the supervision and regulation of such investment companies should not be lodged in the Board of Governors but rather should be vested in some other agency of the Government more primarily concerned with the problems involved in supervising capital financing. The Federal Reserve System is charged by Congress with responsibility for influencing the total volume of money and credit available, with a view to fostering stable economic growth. However, it is not in a position to allocate loanable funds among different borrowers in the market, such allocation under our free enterprise system being the proper function of the commercial banks and other lending institutions. The Federal Reserve System also is charged with responsibility for exercising supervision over its member banks, primarily with a view to fostering a sound banking structure. Any responsibility vested in the System over the operations of the proposed national investment companies could conceivably become inconsistent with the System's responsibility for supervising member banks who might, on occasion, hold the obligations of such companies. Nor can the matter be said to rest there. If the proposed investment companies are to fulfill constructively the desires indicated by this bill, it is clear that they will need to have intimate relationships with the commercial banking system; to have member banks buy their stocks, introduce customers in need of long-term equity financing, and service loans made by the investment companies. Under these circumstances, it would be sounder in the public interest if the chartering, supervision, and examination functions of the two types of institutions were entrusted to entirely different organs of the Federal Government. If the organization and operation of national investment companies is not placed under the supervision of the Federal Reserve System, the Board would not object to legislation along the lines of S. 719, authorizing the establishment of such companies to provide long-term financing. It is noted that S. 719 contains provisions which would repeal the present limited business loan authority of the Federal Reserve banks under section 13b of the Federal Reserve Act and provide for the payment to the Treasury of amounts totaling approximately $27,500,000 which have heretofore been paid to the Reserve banks by the Treasury in connection with operations under that section. The authority of the Reserve banks under this section was granted in the 1930's under emergency conditions and has not been extensively used in recent years. In keeping with the views heretofore expressed as to the inappropriateness of the System participating in the financing of business enterprises, the Board would favor the repeal of this authority and the payment to the Treasury by the Reserve banks of the amounts above mentioned, as provided in S. 719. Sincerely yours, Wм. MCC. MARTIN, Jr. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, Hon. J. W. FULBRIGHT, OFFICE OF THE CHAIRMAN, Washington, D. C., May 27, 1957. Chairman, Committee on Banking and Currency, United States Senate, Washington, D. C. DEAR SENATOR FULBRIGHT: This is in response to your letter of May 9, 1957, requesting a report by the Board of Governors with respect to S. 1992, a bill to amend section 24 of the Federal Reserve Act, which relates to loans by national banks on real estate security. It is proposed that disaster loans covered by Small Business Administration deferred participation agreements "shall not be subject to the restrictions or limitations of this section (i. e., sec. 24) imposed upon loans secured by real estate." Section 24 establishes minimum standards for real estate loans by national banks and limits the aggregate amount of such loans. These provisions are designed to safeguard solvency and liquidity. If S. 1992 were enacted, a national bank would be subject to no aggregate limit on the amount of disaster loans secured by real estate that it could have outstanding; and such loans could be made (1) on the security of second or third mortgages, (2) without any provisions with respect to amortization, and (3) in amounts that might equal or exceed the value of the real estate security. When a bank makes disaster loans in compliance with the requirements of its disaster participation agreement with Small Business Administration, the bank is protected against loss on such loans by a commitment on the part of Small Business Administration to take over upon demand whatever percentage has been designated by the bank. That percentage cannot exceed 90 percent of loans of less than $20,000 or 75 percent of loans in excess of $20,000, and it may be a smaller percentage if the bank so elects. However, the Board has been informed that in most cases Small Business Administration's deferred participation in residential disaster loans is 90 percent. When occasion for making disaster loans arises, the demand for such loans in a particular community or area may be very substantial, and a national bank might be under considerable pressure to make such loans with less than the usual attention to safeguards of the kinds prescribed by section 24. If such a bank elected to have only a relatively small percentage of such loans covered by Small Business Administration deferred participation, the risk exposure might be sufficient to endanger the bank's capital structure or liquidity. However, if most loans affected by the proposed amendment would be protected to the extent of 90 percent by Small Business Administration deferred participations, the aggregate risk may not be excessive as a practical matter. The Comptroller of the Currency, who is the primary supervisor of the national banking system, has detailed information regarding its condition and operations, and accordingly the views of the Treasury Department presumably should be accorded particular weight in passing on the advisability of the proposal embodied in S. 1992. In the interest of clarity, it is suggested that, if a provision on this subject is enacted, it should be inserted at the end of the fourth paragraph of section 24 rather than in the first paragraph of that section. Sincerely yours, WM. MCC. MARTIN, Jr. WASHINGTON, D. C., February 21, 1957. Hon. J. W. FULBRIGHT, Chairman, Committee on Banking and Currency, United States Senate. DEAR MR. CHAIRMAN: Reference is made to your letter of January 14, 1957, requesting our views on S. 55, S. 246, and S. 300. The three bills have the same objective, namely, to give the Small Business Administration permanent status. This would be accomplished by the repeal of section 221 of the Small Business Act of 1953, as amended, which presently provides that all authority under the act shall terminate July 31, 1957, except for purposes of liquidation. If the Small Business Administration should be given permanent status, it might well make personnel recruitment and retention easier for the agency, and it would permit more orderly planning of its budget. However, we believe that these possible advantages are matters for the Congress to evaluate in reaching its decision on the question of permanent status, and we have no recommendation for or against the bills. In the event permanent status is to be given the Small Business Administration, we believe there would be advantages in placing it under an established Government department, presumably the Department of Commerce. DEAR MR. CHAIRMAN: Further reference is made to your letter of January 14, 1957, requesting our views on S. 244 which would amend subsection (b) (1) of section 207 of the Small Business Act of 1953, as amended, to authorize the Small Business Administration to make loans to any business concern located in an area of substantial labor surplus if the Administration determines that unemployment in such area would thereby be alleviated. Section 2 of the bill would change the present statutory limitation on disaster loans and total loans. The authority which would be granted by the bill appears to parallel the authority already granted to the Small Business Administration to make loans determined to be necessary or appropriate because of floods, major disasters, or other catastrophes. We believe that the granting of authority contained in the |