They are the agents of lenders and their principal reason for being in business is to make good, safe, and profitable loans.

The CHAIRMAN. Of course, that is true with respect to certain types of agency. The insurance company, for example, must find sound loans. It can't go around putting up money for small business or any other kind of business when a risk is involved.

Mr. PIKE. It has its depositors; it is its depositors.

The CHAIRMAN. Of course, the same is true of the bank, and the local banker is unwilling to invest in local industry if he feels that there is no certainty that that local industry may not be swallowed up by some absentee industry which will come in there with the competitive advantages that size gives. But there is another field. There is a field, so-called investment banking, is there not?

Mr. PIKE. Investment banking and investment trust. A study can be made a study has been made. My impression is that the results are quite unsatisfactory, both as to the would-be lenders and the would-be borrowers.

The CHAIRMAN. To what extent would it be possible for Congress by legislation to stimulate venture capital from investment bankers for local business?

Mr. PIKE. I hesitate to answer that, Senator, in the presence of the president of the Investment Bankers Association of America, whom I see sitting back there.

The CHAIRMAN. That is primarily the reason I have been asking the questions because I saw him back there, too.

Mr. PIKE. He might say I was wrong. We have been in conference with the investment bankers on that and many other subjects for a long period. I think it is fair to say that in the large centers the investment-banking group is not geared up and probably has little prospect of being geared up to handle the medium, the small type of loans, as we think of them, by and large, something around a million dollars. That, to most of us, is an enormous loan.

I do think there is a real prospect that in the smaller cities where the investment bankers themselves are small businessmen-we have dealers and investment bankers who really are essentially small businessmen themselves-where attention has been given in the last several months to the problem, and I don't see any closer approach to the solution, but I think it is encouraging that some of the investment bankers-good able people-have really been thinking and wondering what they can do about it. I don't think they have got the answer yet. The CHAIRMAN. You say a small loan within the scope of investment banking is a million-dollar loan?

Mr. PIKE. I mean large city investment banking. That is a pretty small loan.

The CHAIRMAN. Is there any private institution which operating in the present economy can serve the need of those who want loans ranging up to $50,000?

Mr. PIKE. I think you can take small segments of that and refer them to schemes like Morris Plan Banks which have been able to handle some of those things. In the case of some of the large city banks they have established a personal-loan department which would cover $500,000. I should say as a whole it is pretty well untouched.

The CHAIRMAN. I was leading up to this thought: That if the trend toward Government participation is to be stopped it must be stopped

by the initiative of private individuals which will come forward with some plan which is more acceptable than those with which Government is working at the present time.

Mr. PIKE. That, sir, is the answer to be found on almost every single one of these problems-the failure of our own people in keeping their noses too close to their own problems-so that we have to bring in the somewhat awkward machinery of the Government to attempt a solution.

The CHAIRMAN. The committee tomorrow will have a presentation from the Department of Labor. Dr. Lubin, a member of the committee, head of the Bureau of Labor Statistics, will conduct the presentation. On Thursday there will be no session, and on Friday the S. E. C. will appear again, if the present schedule is carried out, and will probably discuss the problem of insurance.

The committee now stands in recess until 10 o'clock tomorrow morning.

(Whereupon, at 12:45 p. m., a recess was taken until 10 a. m. Wednesday, February 26, 1941.)

EXHIBIT No. 2810

(Introduced in connection with testimony of Senator Mead, supra, p. 499.)

EXPLANATION OF SENATE BILL 877

Section 13b of the Federal Reserve Act now authorizes Federal Reserve banks to make loans direct to established commercial and industrial enterprises for working capital purposes for periods up to 5 years. It also authorizes the Federal Reserve banks to grant commitments to or participate with financing institutions with respect to any such loans. The limitations now contained in the act with respect to working capital, established businesses, and maturities make it impossible for the Federal Reserve banks to grant credit to many worthy enterprises, particularly where additional funds are needed for expansion or improvement. S. 877 would eliminate these limiting provisions and permit Federal Reserve banks to extend credit to any business enterprise, without restriction as to purpose, for such periods as the circumstances in each case would warrant.

Under present law the Secretary of the Treasury is authorized to pay to the Federal Reserve banks up to $139,299,557, out of the increment resulting from the reduction of the weight of the gold dollar, for the purpose of enabling the Federal Reserve banks to make industrial advances. This is the amount paid by the Federal Reserve banks for stock in the Federal Deposit Insurance Corporation. The Secretary of the Treasury has paid to the Federal Reserve banks approximately $27,000,000 for this purpose. The law now requires the Federal Reserve banks to pay the Government annually 2 per cent, if earned, on the amount received from the Secretary of the Treasury. The proposed amendment would direct the Secretary of the Treasury to pay to the Federal Reserve banks when requested by the Board of Governors of the Federal Reserve System such portions of the sum of $139,299,557, not already paid to the Federal Reserve banks, as the Board of Governors may deem necessary to enable the Federal Reserve banks to make the loans, discounts, advances, purchases, and commitments therein authorized, would eliminate the provisions for the annual payment by the Reserve banks of 2 per cent, and would authorize the Board of Governors to make such reallocation among the Federal Reserve banks of funds received from the Secretary of the Treasury as it may find necessary to meet existing needs.

The amendment also provides that whenever the Board of Governors of the Federal Reserve System shall conclude that the amounts paid to the Federal Reserve banks by the Secretary of the Treasury are no longer needed for operations under section 13b, the amount received from the Secretary of the Treasury, plus income and less expense and losses, shall be paid to and become the property of the United States.

The amendment eliminates the requirement of the present law that each Federal Reserve bank shall have an industrial advisory committee to pass on all loan applications.

77th Congress, 1st Session

S. 877

IN THE SENATE OF THE UNITED STATES

FEBRUARY 14 (legislative day, FEBRUARY 13), 1941

Mr. MEAD introduced the following bill; which was read twice and referred to the Committee on Banking and Currency

A BILL To amend section 13b of the Federal Reserve Act, as amended

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That section 13b of the Federal Reserve Act, as amended, is amended to read as follows:

"Sec. 13b. (a) In exceptional circumstances, when it appears to the satisfaction of a Federal Reserve bank that a business enterprise located in its district is unable to obtain requisite financial assistance on a reasonable basis from the usual sources, the Federal Reserve bank, pursuant to authority granted by the Board of Governors of the Federal Reserve System, may make loans to, or purchase obligations of, such business, or may make commitments with respect thereto, on a reasonable and sound basis.

"(b) Each Federal Reserve bank shall also have power to discount for, or purchase from, any bank, trust company, mortgage company, credit corporation for industry, or other financing institution operating in its district, obligations of any business enterprise; to make loans or advances direct to any such financing institution on the security of such obligations; and to make commitments with regard to such discount or purchase of obligations or with respect to such loans or advances on the security thereof, including commitments made in advance of the actual undertaking of such obligations. Each such financing institution shall obligate itself to the satisfaction of the Federal Reserve bank for at least 10 per centum of any loss which may be sustained by such bank upon any of the obligations acquired from such financing institution, the existence and amount of any such loss to be determined in accordance with regulations of the Board of Governors of the Federal Reserve System: Provided, That in lieu of such obligation against loss any such financing institution may advance at least 10 per centum of such advance of credit without obligating itself to the Federal Reserve bank against loss on the amount advanced by the Federal Reserve bank: Provided, however, That such advances by the financing institution and the Federal Reserve bank shall be considered as one advance, and repayment shall be made pro rata under such regulations as the Board of Governors of the Federal Reserve System may prescribe.

"(c) The aggregate amount of loans, advances, and commitments of the Federal Reserve banks outstanding under this section at any one time, plus the amount of purchases and discounts under this section held at the same time, shall not exceed the amounts paid to the Federal Reserve banks by the Secretary of the Treasury under subsection (d) of this section, except that when the amounts so paid by the Secretary of the Treasury are in the judgment of the Board of Governors of the Federal Reserve System, inadequate for operations under this section the Federal Reserve banks, with the approval of the said Board, may continue operations under this section through the utilization of their other funds until the amount of such other funds so utilized equals the amount received by them from the Secretary of the Treasury. All operations of the Federal Reserve banks under this section shall be subject to such regulations as the Board of Governors of the Federal Reserve System may prescribe.

"(d) In order to enable the Federal Reserve banks to make the loans, discounts, advances, purchases, and commitments provided for in this section, the Secretary of the Treasury is authorized and directed to pay to each Federal Reserve bank not to exceed such portion of the sum of $139,299,557 as may be represented by the amount paid by each Federal Reserve bank for stock of the Federal Deposit Insurance Corporation, and not already paid to a Federal Reserve bank under the provision of this section, upon request by the Board of Governors of the Federal Reserve System, in such amounts and at such times as the Board of Governors deems necessary to enable the Federal Reserve banks to make the loans, discounts, advances, commitments, and purchases authorized by this section, and upon execution by each Federal Reserve bank of an agreement (to be endorsed on the certificate of such stock) to hold such stock unencumbered and to pay to the

United States all dividends, all payments on liquidation, and all other proceeds of such stock, for which dividends, payments, and proceeds the United States shall be secured by such stock itself, up to the total amount paid to each Federal Reserve bank by the Secretary of the Treasury under this section. Payments heretofore made by the Secretary of the Treasury to any Federal Reserve bank under the provisions of this section shall be subject only to the terms of the section as now amended. The Board of Governors of the Federal Reserve System shall have authority to reallocate among the Federal Reserve banks the funds received from the Secretary of the Treasury as said Board may find necessary in order to meet existing needs. Whenever the Board of Governors of the Federal Reserve System shall conclude, either as a result of a decrease in the volume of operations or otherwise, that the amounts paid to the Federal Reserve banks by the Secretary of the Treasury under this section are no longer needed for operations under this section. The total amount received from the Secretary of the Treasury under this section, after making adequate provision for losses incurred in the use of such amount and after adding any net income derived from the use of such amount, shall be paid to and become the property of the United States, such payments to be made as orderly liquidation of assets acquired through the use of such amount, as in the judgment of the said Board, will permit. All amounts required to be expended by the Secretary of the Treasury in order to carry out the provisions of this section shall be paid out of the miscellaneous receipts of the Treasury created by the increment resulting from the reduction of the weight of the gold dollar under the President's proclamation of January 31, 1934; and there is hereby appropriated, out of such receipts, such sum as shall be required for such purpose."

EXHIBIT No. 2811

(Introduced in connection with testimony of Senator Mead, supra, p. 499.)

CHIEF FEATURES OF INDUSTRIAL LOAN CORPORATION BILL

(S. 939)

Industrial Loan Corporation.-The bill would terminate the present limited authority of the Federal Reserve banks to make industrial loans, and would transfer this authority, in broadened and more effective form, to the Industrial Loan Corporation, which the bill would set up as an integral part of the Federal Reserve System. The activities of the Corporation could be promptly set in motion through the existing facilities of the Federal Reserve System. The plan would involve no increase in the budget.

Loans to Business by Corporation.-The Corporation could extend financial assistance to commercial or industrial businesses by acquiring their notes, debentures, bonds, or similar obligations, by purchasing preferred stock in such businesses, or by making commitments to acquire such obligations or stock. Such obligations could not have a maturity in excess of 10 years and a provision would have to be made, in a manner satisfactory to the Corporation, for periodic repayments or retirements on such obligations and stock sufficient to repay or retire at least 40 per cent of the principal amount within a 10-year period. The Corporation could extend its assistance to industrial or commercial businesses directly or in cooperation with financing institutions, but it could not have more than $1,000,000 of funds outstanding at any time to any one commercial or industrial business.

Insuring Business Loans.-The Corporation could set aside an amount not exceeding $25,000,000 as an insurance fund for insuring banks whose deposits are insured by the Federal Deposit Insurance Corporation against losses which such banks may sustain on future loans to commercial or industrial businesses. The Corporation could prescribe regulations regarding such matters as limitations on the rate of interest on insured loans, the types of obligations insured, the percentage of total obligations of any bank which would be insured, and premiums to be paid for the insurance, but no such loan could be insured unless it was for an amount not exceeding $25,000 and was to be amortized over a period not exceeding 10 years.

Capital and Surplus of Corporation. The capital and surplus of the Industrial Loan Corporation would be supplied from a fund of about $139,000,000 which has already been appropriated (out of the increment resulting from the devaluation

of the dollar) for the purpose of assisting Federal Reserve banks in making industrial loans. The Secretary of the Treasury was authorized to pay this sum to the Reserve banks for this purpose on the security of the approximately $139,000,000 of Federal Deposit Insurance Corporation stock which the Reserve banks were required to purchase when the Federal Deposit Insurance Corporation was organized. Pursuant to this authority, the Secretary has paid approximately $27,000,000 to the Reserve banks and the proposed plan would require him to pay the balance, or about $112,000,000. The Reserve banks would be required to use all of these funds to supply the capital and surplus of the Industrial Loan Corporation which would consist of about $39,000,000 of surplus and $100,000,000 of capital stock, to be issued to the United States and delivered to the Secretary of the Treasury. The Federal Deposit Insurance Corporation stock now owned by the Federal Reserve banks would also be transferred to and be owned by the United States. The outstanding industrial loans and commitments of the Federal Reserve banks would be transferred to the Industrial Loan Corporation. Upon the dissolution or liquidation of the Industrial Loan Corporation all its assets in excess of indebtedness would be paid to the United States.

Borrowing by Corporation.-The Corporation could issue notes, debentures, bonds or similar obligations to the amount of $500,000,000, and such obligations would be guaranteed as to principal and interest by the United States and would have tax exemptions similar to those of other Government guaranteed obligations. The Corporation also could borrow from any Reserve bank on the Corporation's promissory note secured to the satisfaction of the Reserve bank and having a maturity not exceeding four months.

Management of Corporation.-The members of the Board of Governors of the Federal Reserve System would be the directors of the Industrial Loan Corporation and the Chairman and Vice Chairman of the Board of Governors would be chairman and vice chairman, respectively, of the Corporation. The Corporation could utilize the Federal Reserve banks as its agents, and could use any employees of the Board of Governors or the Reserve banks as its own officers or employees, reimbursing the Board of Governors or the Reserve banks for such services. No director of the Corporation and no officer or employee of the Board of Governors or of any Reserve bank would receive any extra compensation for his services for the Corporation. The bill provides that the Corporation "shall endeavor to decentralize its activities" and that functions other than the prescribing of regulations or the determination of general policies may be performed through designated representatives.

Dissolution of Corporation When Not Needed.-The Board of Governors of the Federal Reserve System could order the dissolution and liquidation of the Corporation whenever it appears, either by reason of decreased volume or otherwise, that, there is no longer a reasonable need for the facilities of the Corporation. Small-Businessmen's Committees.-The Corporation would be authorized to take appropriate steps to encourage and assist in the formation of committees of representatives of small business and others in local communities to explain the Corporation's facilities and assist prospective borrowers in presenting their applications.

Annual Report.-A full report of its operations would be made by the Corporation annually and included in the annual report submitted to Congress by the Board of Governors of the Federal Reserve System.

77th Congress, 1st session
S. 939

IN THE SENATE OF THE UNITED STATES

FEBRUARY 22 (legislative day, FEBRUARY 13), 1941

Mr. MEAD introduced the following bill; which was read twice and referred to the Committee on Banking and Currency

A BILL To establish a permanent industrial loan corporation to assist financing institutions in making credit available to commercial and industrial enterprises

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That section 13b of the Federal Reserve Act is amended to read as follows:

"SEC. 13b. (1) This section may be cited as the 'Industrial Loan Corporation Act.'