taking a business activity that private capital is already in and already undertaking as a competitive matter with other business aff it is entirely not justified. Senator FULBRIGHT. That is the whole theory of RFC because the area in which we are interested there is a gap in the credit str ture, is there not? Mr. ECCLES. I do not think so, not at the present time. Mr. ECCLES. I think during the depression when you had m unemployment and you had a deflation, as I have indicated here, th the RFC may have served its purpose. Senator FULBRIGHT. There was not any deflation in 1947, was the Mr. ECCLES. In 1947 there was not, and I was certainly not fav able to the Senator FULBRIGHT. You thought at that time there was a ga did you not? Mr. ECCLES. I suggested in S. 408 that it be substituted for 13 of the Federal Reserve Act. The CHAIRMAN. Well, let us get this straight. Senator FULBRIGHT. Could not I read in one paragraph, M Mr. Chairman and members of the committee, I am glad to have an opportunity to appear here this morning in order to urge the passage of S. 408. The bill has two sections. The first one repeals section 13b of the Federal Reserve Act and provides for the return to the Treasury of approximately $139,000,000 that was set aside from the gold increment to enable Federal Reserve banks to make direct loans to industrial and commercial businesses. The second section of the bill substitutes for the direct lending authority a provision which would enable Federal Reserve banks to guarantee in part loans by chartered banks particularly to small- and medium-size businesses that need capital for periods up to 10 years. It is important to emphasize that the principal purpose of the bill is to make term loans especially to smaller businesses for the purpose of providing them with necessary capital that they could not otherwise obtain. It will fill a gap in private financing that now exists in enabling these enterprises to obtain essential financing. The costs of going to the capital markets for small business are prohibitive. Likewise, many banks properly feel that they cannot extend some term credits for from 5 to 10 years without some protection as provided by this bill. It amounts to a form of spreading the risk by providing insurance for a fee. It is not the purpose of this bill, however, to provide guaranties for either short- or long-term financing which banks can and should extend without assistance. The basic need of the smaller, independently owned business enterprises is for long-term funds. Some businesses need funds for modernization of plant and equipment and additional facilities. The need also arises from the sharp increase in prices and greatly expanded volume of business resulting in a much larger volume of accounts receivable and of inventories. Because of these various factors many enterprises whose financing needs have ordinarily been met through current borrowings now need a funding of their short-term obligations into a term loan. Owners of small enterprises, as a rule, prefer to obtain funds on a loan rather than on an equity basis because they do not wish their stock ownership to be diluted or to run the risk of losing control of the business. Term loans amortized out of profits meet this need. This type of financing is particularly suitable for small businesses that need a substantial period of time to retire loans by gradual repayment from earnings. AR surplus. I am sure that this responsibility placed on the officers and director the Reserve banks, under regulations and supervision of the Board of Govern will not encourage easy and unsound credits on the part of the private ban Under section 13b Federal Reserve banks handled some 3,500 applications commitments and advances aggregating about $560,000,000. Similarly, un the V-loan program, 8,771 authorizations for guaranties of war production loa aggregating nearly $10,500,000,000, were handled. The interest and fees collect in connection with this total of about $11,000,000,000 of operations were m than sufficient to cover expenses and losses and to show some profit. In oth words, the record is not one of loose lending. This bill, of course, does not place the Reserve banks in competition with private banking system. Credit judgment and responsibility would remain p marily with the lending bank. Loans guaranteed would originate with lo banks dealing with local people whom they know and with whose charact capability, and capacity they would be familiar. A Federal Reserve bank co not guarantee any loan unless requested to do so by the local bank. If a proved by the Reserve bank the guaranty would be made promptly availa without referring the matter to any agency in Washington. Each loan wou have to be passed upon by the Federal Reserve bank. There would be blanket approval. The 12 Federal Reserve banks and their 24 branches pr vide a regional organization through which local financing institutions in all par of the country would have convenient access to a guaranteeing agency if neede The Federal Reserve System, which is a permanent organization created by Co gress and responsible to Congress, is especially qualified to provide this servi because of its close contacts and daily relationships with banking institution Its responsibilities for maintaining sound credit conditions, so far as its powe permit, make it the appropriate agency for this purpose. As in the case of war-production loans under the V-loan program, a maximu interest rate would be set for guaranteed loans. The present maximum ra under section 13b is 5 percent and it is contemplated that the initial maximu rate under the new legislation would be the same. Within this limit, whic may be subject to change with changing conditions, interest rates would be d termined by the borrower and the bank. Guaranty fees charged would be spe ified percentages of the interest rate, graduated according to the percentage the loan guaranteed. The method would be similar to that used in the V-loa program, when guaranty fees ranged from 10 to 30 percent of the interest rat according to the percentage of the guaranty. This has been and would be th operating procedure. RY the whore statement needs to bem. Senator FULBRIGHT. I had known Mr. Eccles very well and he persuaded me of that view, and I followed in his footsteps. I wondered when he changed his mind about this matter because he was definitely of the view that there was a gap in that area which I was talking about in my State. It is exactly the same view that in that area around from 100 to 500 thousand dollars those little companies not large enough to go to the great money markets in New York, and yet too large for the local bank, and they had a difficult time furnishing their credit requirements. I am sure that Mr. Eccles felt that way in 1947 because it is not only that statement, but I have discussed this matter at some length. Mr. ECCLES. I would like an opportunity to discuss that point that the Senator raises when I finish this statement. The CHAIRMAN. Go ahead and do it right now, Mr. Eccles, because I have read on through your statement, and I have one or two thoughts about FNMA. Mr. ECCLES. I would like to finish the statement and then I would like to comment upon the Senator's remarks. The CHAIRMAN. I do have to leave at 5 minutes to 12, but you go right ahead with your statement. I have read ahead. Mr. ECCLES. I will be through in a few minutes. Government participation in either activity is socialistic in nature and will, if continued and expanded, weaken and ultimately destroy the private free-enterprise system. The Government's function is to regulate and supervise the activities of private enterprise in the public interest, and not to own and operate tax-free financing and production facilities in competition with those that are privately owned and operated and are taxed. AR R ART RY the commercial panks, me-insurance companies, mutual-savings va and savings and loan associations alone held over 290 billion dol of loans, investments and other assets, and they are adding billion dollars to these assets every year. To continue the existence of the RFC in competition with private financing institutions is completely indefensible if we re believe in our private enterprise economy. This is because RFC's only source of funds is the Federal Treasury, while the Tr ury's only source of funds is the private economy through tax col tions or by borrowing to meet a budgetary deficit. Using these fu to make loans that cannot be secured in a free market means in ef that the RFC is employing funds obtained from the entire public making questionable loans for the benefit of a select few. It is viously unfair for the Government to subsidize with credit th business concerns which cannot stand on their own feet, but nev theless are competing for sales and profits with concerns that have obtain the funds they use in the private market. In other wor privately financed business concerns are called upon to provide directly through the Government part of the funds used by th competitors who receive RFC loans. As the Government does not own the business enterprises which finances by means of direct or guaranteed loans, any profits from th operations accrue to the private owners. But, if the loan eventua proves to be a loss, either in part or in whole, the Government, a ultimately the taxpayer, suffers the amount of such loss. Th have been conspicuous examples of borrowers from RFC who ma great profits through the use of the taxpayers' money, as well as borrowers who incurred substantial losses at the expense of taxpayers. If we are going to be socialistic in some of our econom activities, it had better be by going into business directly where t profits as well as the losses accrue to the taxpayer, instead of indirec through providing unjustified credit where only the losses accrue the taxpayer. I am vigorously opposed to either form of socializatio |