Small-business men'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.

Now, Mr. Chairman, I understand that your committee has a favorable report from the Federal Reserve Board on the similar bill, S. 3839. We also have present the chairman of the Federal Reserve Board and one of the members of the Board of Governors. If it is your desire-and it would meet with my approval I assure you to take up S. 3839, we will dismiss S. 2998 with the explanation, which can be made a part of your record, and revert to the smaller bill, which has the approval of the Federal Reserve Board, namely, S. 3839, for our further discussion this morning.

Senator WAGNER (chairman of the subcommittee). Very well.

Senator MEAD. S. 3839 is the minor bill. It is the one that I developed in the first part of my talk, and that is the one that has the approval of the Federal Reserve Board.

Senator WAGNER. That is the bill which you desire the subcommittee to consider at this time.

Senator MEAD. It is my belief that that bill may get some place at this time, that it can make progress, that it does not require the study nor the effort on the part of the committee or of the Congress that the other bill might require. Therefore I think it would be the wisest choice for us to make; and because the chairman of the Federal Reserve Board is here I would like you to ask him to answer any questions or make any statement that he may desire to make.

Senator WAGNER. Very well. Have you concluded your statement, Senator Mead?

Senator MEAD. I have concluded, unless you have some questions? Senator WAGNER. Any questions by members of the subcommittee? (A pause without response.)

We thank you very much, Senator Mead.

Now, Chairman Eccles, will you come forward to the committee table and give us the benefit of your views on S. 3839?

Mr. ECCLES I will be glad to do so.

Senator WAGNER. I think, before we ask you any questions, we would like you to give us your views generally on this proposed legislation.

STATEMENT OF MARRINER S. ECCLES, CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, WASHINGTON, D. C.

Mr. ECCLES. The Board has felt that the existing authority given to the Federal Reserve System to make direct loans to industry is entirely inadequate, and for that reason that, unless the law is amended, they should be entirely relieved of any responsibility in connection with making such loans by repealing the present provision of the law and authorizing them to liquidate the loans which they now

hold and the commitments which are outstanding to banks, thus returning to the Treasury the funds that have been advanced and upon which the Federal Reserve System is required to pay, if they earn it, 2 percent.

But in the absence of such a repeal, we feel that the Congress should give us broader powers to deal with this problem of making direct loans. It hardly seems fair to be charged with the responsibility and be unable to carry it out because of the great restrictions and limitations on loans.

We are not asking during my time, nor has the Federal Reserve System asked, for increased powers to enter this field. It is up to the Congress to determine whether or not they desire the Federal Reserve System to enter this field.

There has been considerable argument as to whether or not the Federal Reserve System should do this type of lending; whether the Reconstruction Finance Corporation should not do the lending in its entirety.

It seems to me there is this to be said in this connection: The direct lending was initiated in the first instance by Governor Black, who was the head of the Federal Reserve Board, in 1934, and it was as a result of his effort that this legislation was originally enacted. The Reconstruction Finance Corporation, very shortly after the effort was made by Governor Black to get this power, also undertook to get a duplication of the authority to make this type of loan. So that from the beginning there has been a divided responsibility, or authority, to make loans of this sort.

There has been this exception, however: That the law governing the Reserve System's authority to make direct loans has not been amended since 1934 to meet the situation; whereas during that period there have been three or four important amendments to the R. F. C. law, and as a result, of course, the Reserve System has, for all practical purposes, for the past 2 or 3 years, I would say, been almost out of business in this particular field.

The Federal Reserve System, it seems to me, is particularly well organized and adapted to do a job of this sort. With 12 banks and 24 branches, making 36 offices, located in the trade areas throughout the United States, with the close relationship of those banks and branches to the member banks, and the member banks include all national banks and a large number of State banks, practically all of the larger State banks, we should be adapted to do this job. In other words, member banks of the Federal Reserve System that do business with these Reserve banks and branches constitute more than 85 percent; that is, they hold more than 85 percent, of the deposits of the banking system. These Reserve banks have been established for a period of 25 years. They have a trained staff of people who are well qualified and who, at the present time, have little to do in the field of credit, because the member banks, due to the larger excess reserves that they have had since the twenties, have little need for borrowing from the Reserve System; and this staff is what we may term a stand-by organization, and they could very well perform this function without any extra cost or expense. They have the facilities in the way of buildings, equipment, and so forth, and they have a very close daily relationship with the banks of the area and know the credit needs of the people better than anyone else of the area.

For that reason, it would seem to me that, under the direction of the Board for the purpose of carrying out a uniformity of policy and regulations governing loans, the Federal Reserve System is in a particularly good position to perform this function.

Now, the R. F. C. in a good many instances occupies quarters in the Reserve banks. They had to set up an organization to do this work. They have, of course, other fields of activities besides this, such as the taking of the preferred stock and debentures of banks, such as the specialized field of loans to railroads, and such as the specialized field that is recently proposed in the legislation to help finance the armament program. Those are large, specialized fields that I do not believe the Reserve System should go into, and they are not in any way, of course, contemplated under this proposed bill or under the other proposed bill that Senator Mead his discussed.

This bill, or the other bill, for that matter, contemplates pretty largely the loans being made by the local banks, the member banks in the area, with the commitment made by the Reserve System.

Senator DANAHER. May I interrupt you, Mr. Eccles?

Mr. ECCLES. Yes.

Senator DANAHER. Would you right at that point be willing to explain to us the commitment in loans now outstanding under the present section 13b and compare that particular situation with what could be done under section 13b as amended?

Mr. ECCLES. Yes; I will be glad to do that.

As Senator Mead has explained to you, the present law has very great limitations. First, the loans must be for working capital purposes and they must not exceed 5 years and they must be made on a reasonable and sound basis to established businesses. In other words, the law pretty generally confines the Reserve System to the type of lending that the banks themselves would make without the Reserve System.

There is the further feature that the Federal Reserve banks each have to put up one-half of the amount that is loaned. I do not believe that that was ever contemplated in the law. The $139,000,000 of the surplus of the Federal Reserve Banks that was appropriated by Congress for capital of the Federal Deposit Insurance Corporation, it was expected, would be returned to the Federal Reserve Banks out of part of the gold profit, and there was set aside $139,000,000 of the gold increment in the Treasury for the purpose of reimbursing the Reserve banks for the amount of the surplus that had been taken away. However, that was to be reimbursed to them only for the specific purpose of making these direct industrial loans.

The Treasury was given broad powers with reference to the appropriations, and they made a regulation that they would not appropriate any of this money except on a basis of dollar for dollar of what the Reserve banks put up. That in itself was a great deterrent, because with the surplus of the banks reduced by $139,000,000, and the banks being required to put up part of what was remaining in loans, made them rather restrictive in the credit policy, in addition to complying with statutory restrictions. The requirement that they put up dollar for dollar with the $139,000,000 fund naturally caused them possibly to be more restrictive than was contemplated or than they otherwise would have been.

Senator ADAMS. Mr. Eccles, so that I may get the chronology clear in my mind, the Federal Deposit Insurance Corporation law was passed prior to the gold devaluation? That is, the $139,000,000 was put in out of the capital or the surplus of the Federal Reserve System into the Federal Deposit Insurance Corporation. That was one transaction in and of itself?

Mr. ECCLES. That is correct.

Senator ADAMS. When you refer to a restoration, that was a subsequent step not contemplated originally?

Mr. ECCLES. That is correct. It has the same effect as if it had been contemplated.

Senator WAGNER. Mr. Eccles, just so I might be clear on this, you are talking about dollar for dollar. Does that mean, for instance, that if a loan of $100,000 was to be made, $50,000 would be a commitment from the fund of $139,000,000?

Mr. ECCLES. That is right.

Senator WAGNER. And the other $50,000

Mr. ECCLES (interposing). Would come out of the surplus of the bank. The proposed amendment, of course, changes that. The restrictions that have been referred to and exist in the present law would be eliminated in the amendments.

Senator CLARK of Idaho. How will this work with the present R. F. C. set-up? Will it parallel it if this amendment is passed and enacted into law?

Mr. ECCLES. Yes, it will.

Senator CLARK of Idaho. Will you get into a competitive situation there? For instance, suppose a loan was refused by the R. F. C. Would you dare commit yourself if they turned it down?

Mr. ECCLES. Well, we had, right from the beginning, a competitive situation.

Senator CLARK of Idaho. Yes; but you just did not make loans. Mr. ECCLES. Well, we made the first 3 years more than the R. F. C. made, until they got their amendments. We both had a compara

ble situation.

Senator MEAD. You had a better record than they did.

Mr. ECCLES. I would prefer this not to be on the record.

Senator WAGNER (chairman of the subcommittee). Leave this off the record.

(A discussion was had which, at the direction of Senator Wagner, chairman of the subcommittee, was not recorded, and after which the following occurred:)

Senator DANAHER. I think that ought to be in the record, Mr. Chairman, and I have in mind that Mr. Jones himself testified before this very committee that the experience with these small loans was such that he expected the losses would be plenty-they were his words and we will all recall that when the lending-spending bill was under consideration. I do not think there is any element of controversy between these two respective agencies. On the contrary, they should analyze for us and give us any expert opinion on a pending measure. I move that it be included in the record.

Senator CLARK of Idaho. Why don't you just submit the figures? Senator WAGNER. I do not suppose he can put something in the record that is already off the record, unless he has an extraordinary memory of what he said.

Why don't you just submit the figures?

Mr. ECCLES. Can we not submit those figures, Mr. Smead? Yes. The figures are just a matter of record.

Senator WAGNER. Do not be quite so sensitive about your views. The other departments are not so sensitive about theirs.

Mr. ECCLES. I do not hesitate to express my views. I do not want to make it appear that there is any controversy between us, because, as I stated very frankly, as far as the Board or System is concerned, either Congress should repeal the present authority of the Federal Reserve bank or give us power and authority to really do a job; and we think, under the present circumstances, because of the extraordinary facilities we have, that we can do it, and there is no question that the R. F. C., with its greatly increased responsibility in specialized fields, will likely have a great deal to do.

The figures referred to above are as follows: From the passage of the act in June 1934, to January 31, 1935, when Congress first liberalized the R. F. C. authority to make these loans, the Federal Reserve banks had made loans and participations of thirty-two-million-odd dollars against approximately $9,000,000 for the R. F. C. From January 31, 1935, until April 1938-when the bars were dropped again as to R. F. C. lending-i. e., 31⁄2 years after the passage of the act, the accumulative figures show that the Federal Reserve banks had made loans and participations of one hundred and eleven-million-odd dollars, as against approximately $105,000,000 for the R. F. C. The amendment of April 13, 1938, removed practically all restrictions on business loans by the R. F. C. From that date until the end of June 1939, the Federal Reserve banks continued to make new loans increasing the accumulative total of loans and participations by $21,000,000. During this period the R. F. C.'s authorizations increased approximately $235,000,000, although disbursements increased only about $73,000,000. As of June 28, 1939, the Federal Reserve banks had authorized loans totaling one hundred and seventy-nine-million-odd dollars, of which $14,000,000, or approximately 8 percent, had been canceled, whereas the R. F. C. had authorized a total of four hundred and thirty-four-million-odd dollars, of which $85,000,000, or approximately 20 percent, had been canceled. None of the restrictions contained in the act authorizing the Federal Reserve banks to make these loans, as originally passed, have been removed.

The smaller lending up to, say, a million dollars as a maximum, can be decentralized and can be done through the Federal Reserve banks and the branches, and this fund which was set aside by Congress for this purpose and only $27,000,000 of it has been used-could be made effective and could be used.

There is this situation that may develop. Due to the preparedness program and the proportion that it is likely to reach and the period over which it may well extend, there are, no doubt, a great many small businesses that would be able to get contracts for the innumerable supplies in practically every field that the Government will require and they will need, no doubt, some capital.

The Government-at least, if you can judge by what happened in the last war-is often very slow in making payments, and we can expect that it may be as long as 6 months and in some cases a year before payments are made. That, I think, has happened in the past, and I do not believe that the larger businesses which are well financed