Mr. MCFADDEN. I am presuming it is going to receive consideration, and if it is I think that the business with which this section 5 (a) will deal that it is important, at least to the members of the committee here, if we are going to have to deal with that, not only here but in Federal reserve matters that we should have full information pertaining to this acceptance business that is to be done. This constitutes this Reconstruction Finance Corporation into an acceptance bank, and it is proposed that in international trade transactions that this reconstruction finance corporation will assume the same position as an acceptance bank.

Mr. GOLDSBOROUGH. May I ask a question there?

Mr. MCFADDEN. Yes.

Mr. GOLDSBOROUGH. It was stated yesterday by Mr. St. Jean that these acceptances would be discounted on the credit of the borrower; I mean, on the credit of the seller.

Mr. STEVENSON. The shipper.

Mr. GOLDSBOROUGH. Rather than on the credit of the foreign buyer. My question is this: That if the foreign buyer does not constitute a vehicle to which we would like to extend credit and the credit of the shipper depends upon the solvency of the buyer in the last analysis, where are we left? Isn't it almost the same thing as if the credit were extended originally to the purchaser?

Mr. MCFADDEN. I am not dealing with the technical angle of it. I am dealing with the fact that we are setting up an institution which has to do with the acceptance business.

Mr. GOLDSBOROUGH. We have raised the question several times in the committee that we did not care to go into the business of furnishing any money outside the United States. Isn't this an indirect way of doing that very thing?

Mr. MCFADDEN. It certainly is; yes.

Mr. STRONG. But this is furnishing money to Americans to help foreign trade.

Mr. GOLDSBOROUGH. But the value of those acceptances depends upon the solvency of the foreign buyer, does it not?

Mr. STRONG. No, no; they are guaranteed by the American shipper.

Mr. GOLDSBOROUGH. But where does he get off if his buyer is not solvent?

Mr. STRONG. He pays it; that is what he does.

Mr. GOLDSBOROUGH. Does he?

Mr. PRALL. Supposing he can not pay it.

Mr. STEVENSON. Supposing he shipped 1,000 bales of cotton over there and gets his acceptances and the man who is buying it does not pay, he has 1,000 bales of cotton left on his hands on foreign docks. Where are we coming out?

Mr. STRONG. That is the business of this corporation to see that his guarantor does not fall down.

Mr. STEVENSON. It would come back on this company.

Mr. STRONG. In the Senate they stated very plainly that it was money to be loaned to American exporters to assist in foreign export trade.

Mr. BRAND. I want to ask this: If that remains in here aren't you extending credit directly to that foreign purchaser?

Mr. STRONG. No.

Mr. BRAND. You are if the exporter is involvent.

Mr. GOLDSBOROUGH. Certainly.

Mr. MCFADDEN. Mr. St. Jean said last evening here that this was the same kind of business that was now represented by the frozen credits in Germany with which the New York bankers, headed by Mr. Albert H. Wiggin, were dealing.

Mr. STRONG. Mr. St. Jean is here.

STATEMENT OF GEORGE ST. JEAN, PRESIDENT FEDERAL INTERNATIONAL CORPORATION

Mr. ST. JEAN. What I said was, Mr. McFadden, that because the banks in the past had not been willing to extend to the end of the transaction credit based on the American exporters' credit that these banks had gotten frozen credits. The evil we seek to remedy is that credits shall at all times be extended on the faith of the American shipper. When a bill is sold in the market the bill is sold on the basis of the credit of the drawer.

Mr. GOLDSBOROUGH. I understand that, it is perfectly clear.

Mr. ST. JEAN.. In 99 cases out of 100 nobody knows who the drawee is.

Mr. GOLDSBOROUGH. If the drawee fails, ultimately the drawer is going to fail.

Mr. ST. JEAN. Oh, no. If a man who is a large exporter is exporting to 100 or 200 different concerns, and acceptances made for him by American Finance

Mr. GOLDSBOROUGH. All foreign customers?

Mr. ST. JEAN. Assuming he is doing one-tenth of his business abroad, or, we will take the average American exporter, 5 per cent of his business is foreign business and 95 per cent of his business is domestic business, and his credit is on his entire business, his domestic business as well as the foreign business, 5 per cent of his business being represented by foreign business and he has 200 different people he deals with. Some of them might fail but the credit that is extended is extended to the American shipper, and if anyone of his foreign customers fail to pay he is not going to go bankrupt.

Mr. GOLDSBOROUGH. Do you mean to say there is an exporter who would hang out his sign as an exporter and would sell 95 per cent of his goods in the United States and only 5 per cent to foreign companies?

Mr. ST. JEAN. There are very few companies who would sell more, except those dealing in foreign cotton and in the cotton business that is true, they are generally factors.

Mr. BRAND. This was not in the original bill.

Mr. ST. JEAN. No; it was not in the Walcott bill, it was put in in the Senate.

Mr. BRAND. In the Senate committee?

Mr. ST. JEAN. The committee.

Mr. BRAND. Who introduced the amendment?

Mr. ST. JEAN. Senator Fletcher.

Mr. BRAND. Senator Fletcher of Florida?

Mr. ST. JEAN. I am president of the Federal International Corporation.

Mr. BRAND. You are in the export business?

Mr. ST. JEAN. It is American exporters.

Mr. MCFADDEN. You are qualified to talk on this foreign credit business because of your former connection with the Federal Reserve Bank of Boston?

Mr. ST. JEAN. No; I was not with them.

Mr. HANCOCK. I would like to get a matter cleared up.

The CHAIRMAN. Certainly.

Mr. HANCOCK. The bill refers to loans to financial institutions. In line 18, page 23, this language appears:

No acceptances shall be made in favor of any one drawer for more than a total of 1 per cent of the subscribed capital of the corporation unless the transaction be fully secured and guaranteed by a bank or banker of undoubted solvency.

In view of this language, can an individual utilize the funds of this corporation

Mr. ST. JEAN. It is so intended.

Mr. HANCOCK. To the extent of 1 per cent of the subscribed capital.

Mr. ST. JEAN. To the extent of $5,000,000.

Mr. HANCOCK. That would apply to an individual or financial institution of the United States.

Mr. ST. JEAN. This amendment is directed so that exporters, individuals, firms or corporations may have direct access to the funds and facilities of the reconstruction finance corporation within the limitations of the sentences you have just read.

Mr. HANCOCK. If the amount is in excess of 1 per cent of the subscribed stock it would be necessary that the acceptances be indorsed by some bank.

Mr. ST. JEAN. And fully secured. By fully secured it means documeans, and warehouse receipts attached.

Mr. HANCOCK. Under the operation of that particular provision this institution, the reconstruction finance corporation, would be making loans to individuals.

Mr. ST. JEAN. It would not be making loans at all, loaning its credit to it.

Mr. HANCOCK. It is the same thing in the last analysis.

Mr. STEVENSON. To the extent of $5,000,000.

Mr. GOLDER. May I suggest that, in my judgment, Mr. St. Jean is wrong, and I say that most respectfully, because section 5 limits those people to whom loans can be made and no loan can be made to an individual. How, the language which Mr. Hancock reads, "any one drawer," that necessarily must go back to section 5, on page 20 of the Senate bill which defines those institutions to which a loan can be made. I do not think that it permits a loan to an individual. It specifically states to whom a loan can be made.

To any bank, savings bank, trust company, building and loan association, insurance company, agricultural or livestock corporation, or any other bona fide financial institution in the United States.

It does not permit a loan to an individual.

Mr. ST. JEAN. I understand in the Senate there is a difference between making a loan and making an acceptance. It is so intended.

Mr. STEVENSON. This section 5(a) provides for acceptance of drafts and bills of exchange.

The CHAIRMAN. I do not think there is any conflict in the two provisions.

Mr. STEVENSON. There is no conflict.

Mr. HANCOCK. Let me get this clear.

The CHAIRMAN. Yes.

Mr. HANCOCK. The reconstruction finance corporation could not make a loan to any individual but its credit could be used in favor of an individual, is that correct?

Mr. ST. JEAN. That is correct.

Mr. STEVENSON. Through acceptances.

Mr. ST. JEAN. Yes; through acceptances.

The CHAIRMAN. May I ask a question?

Mr. ST. JEAN. I want to answer Mr. Stevenson.

He said that

would be $5,000,000 without security. It would not be without security.

Mr. STEVENSON. You would have the documents.

Mr. ST. JEAN. And two-name paper, too.

Mr. STEVENSON. It says, "No acceptances shall be made in favor of any one drawer for more than a total of 1 per cent of the subscribed capital of the corporation unless the transaction is fully secured." If it is over 1 per cent it has to be secured and guaranteed by a bank or banker of undoubted solvency.

Mr. ST. JEAN. This may clarify it: An acceptance is made in a transaction of this kind: I am a shipper, and I have a customer in Italy who wants to buy 100 tractors. In order to finance this sale I do this: I attach my shipping documents on Mr. X, accept Milan for $50,000, we will say. I take that to my banker and I say, “Are you willing to finance this for me on an acceptance basis?"-and the banker says, "I will." I then draw another draft-I have there an acceptance draft on my bank directed to him-as an illustration, the Manufacturers Trust Co., and the Manufacturers Trust Co. on that acceptance writes the word "accepted."

In other words, this is drawn to the order of X and they expect me to pay. That bill-that is, the acceptance-is sold on the market, and I get $50,000 less whatever the discount is on acceptances on that date. When that draft on my customer in Milan matures the proceeds of that draft are collected by the Manufacturers Trust Co. and deposited to meet the maturity of the draft which they have accepted and sold in the market so that they are placed in funds with which to pay the draft which has been sold in the New York bill market. Now, that is the nature of an acceptance transaction. Am I describing it correctly, Mr. McFadden?

Mr. MCFADDEN. I think you are.

Mr. ST. JEAN. You do have, then, collateral and you are secured. Mr. STEVENSON. You are secured by the value of the stuff being shipped.

Mr. ST. JEAN. You have 2-name paper on it.

Mr. STEVENSON. Now, you go through this with this corporation; let us see how it would work.

Mr. ST. JEAN. This corporation in the illustration is to take the place of the Manufacturers Trust Co.

7

Mr. STEVENSON. This credit is extended to you because it accepts that draft and it is sold in the bill market.

Mr. ST. JEAN. Yes; and it is sold in the bill market.

Mr. STEVENSON. It is the credit of the drawer and the goods which he has shipped, that is the security to protect this corporation from having to pay that out of its own funds. Therefore you have just got the drawer and the goods.

Mr. ST. JEAN. Suppose the General Electric Co., or the Westinghouse, or Allis Chalmers, or any concern whose credit is unquestionably good, they require no other credit than that of a shipper of that kind. They have to be protected, and they are protected. Now, the reconstruction finance corporation is in no different position.

Mr. STEVENSON. You have provided they can accept from any one person acceptances unsecured up to $5,000,000?

Mr. ST. JEAN. Fully secured is a technical term.

Mr. STEVENSON. Now, listen to the language:

No acceptances shall be made in favor of any one drawer for more than a total of 1 per cent of the subscribed capital of the corporation unless the transaction be fully secured and is guaranteed by a bank or bankers of undoubted insolvency.

That can not mean anything except that a drawer might appear to be a person without security. That is what that language means.

Mr. ST. JEAN. When Parker Wells wrote that I had in mind fully secured, which is contained in the regulations promulgated under the Federal reserve act. He was not referring to the term secured as it is usually described.

Mr. STEVENSON. If you want that to be that way, that they shall be fully secured, why, you would have to strike that that " for more than 1 per cent of the subscribed capital of the corporation unless," and then it would read, “ and no acceptances shall be made in favor of any one drawer unless "-leaving the word "unless" in there" unless the transaction be fully secured," but you say, "no acceptance shall be made in favor of one drawer for more than 1 per cent unless the thing is secured or the acceptance up to 1 per cent of the capital made without security."

Mr. ST. JEAN. Looking at it from the point of view of a lawyer and not the technical view, your criticism is entirely correct. As a matter of operation of the bill if you strike out the language which is objectionable to you as a lawyer, as a matter of legal security, this follows our security, anyway.

Mr. STEVENSON. If you went into the courts you would have to take the legal definition when you went to collect this money. Mr. BRAND. Let me ask a question before you go any further. Mr. MCFADDEN. Yes, I yield.

Mr. BRAND. I am asking the question because it was not in the original bill. It was put in by amendment in the Senate committee. Mr. ST. JEAN. Yes.

Mr. BRAND. As a matter of fact, has the Treasury Department, either the Under Secretary or the secretary of the Federal Reserve Board approved this?

Mr. ST. JEAN. I understand Mr. Morrow is opposed to it because he wants to route everything through the banks.