time. It was established in the depths of the greatest economic depression in our history for the purpose of providing emergency financial assistance to banks and other financial institutions. Subsequently, its authority was broadened to include loans to nonfinancial business concerns under certain conditions. Because there were many weaknesses in our economic system in the early thirties, no one seriously questioned the need for a temporary Government agency designed to assist the country in an economic emergency which was forcing all financial institutions, as a matter of self-preservation, to liquidate all outstanding credits. We have long since recognized and corrected many of the weaknesses that brought about our economic collapse in the thirties. We have greatly strengthened our commercial banking system and provided for insurance of bank deposits; we have provided for regulation and supervision of security flotations and the operation of the organized securities exchanges; and the Government has recognized by statute its obligation to assist in the maintenance of maximum employment and has provided extensive social security for a large number of the people. In addition, we have improved our techniques and gained valuable experience in the use of monetary, credit, and fiscal policies for purposes of achieving and maintaining economic stability. For these and other reasons, the necessity for continuing the RFC as an emergency financial institution no longer exists. The problems confronting the country today are the very opposite of those which confronted the country when the RFC was first established. In our present situation, the operations of the RFC, as well as those of FNMA, in continuing to put additional funds into the spending stream, only intensify the already difficult problem of curbing credit expansion. Having long since outlived its usefulness to the economy, the RFC should be abolished without further delay. There is no real place in a private-enterprise economy for direct Government lending to the private economy, any more than there is a place for direct Government ownership of the means of production. I do not want to imply that in a war period or defense period there may not be a need for Government to build specialized plants such as atomic energy plants and other specialized activities. Senator FULBRIGHT. How about hydroelectric dams? Mr. ECCLES. I think that that should be left so far as possible to your private agencies. I think where there is flood control involved, navigation and other factors, that may make it a matter of public expenditure that could not put it upon the basis of strictly private ownership. Senator FULBRIGHT. Do you think the Government should not have built the Hoover Dam? Mr. ECCLES. You have there Senator FULBRIGHT. You built it, did you not? Mr. ECCLES. Well, I was connected with one of the companies that was a contractor. I think you have there a situation where there was a flood-control factor involved. Senator FULBRIGHT. That is all incidental, is it not? Mr. ECCLES. Also, you were in the bottom of a depression where it could not have been privately financed under any circumstances. Senator FULBRIGHT. How about the Grand Coulee Dam? Does the same thing apply there? Mr. ECCLES. I think a good deal; it is very closely related to the Boulder Dam. Senator FULBRIGHT. There is no appreciable flood control in any of those Columbia River projects; are there? They are primarily power; are they not? Mr. ECCLES. There is some power and some irrigation, and there is flood control, too. It is a combination, as I understand it. Senator FULBRIGHT. Do you think the Government should not build such projects? Mr. ECCLES. No, I am not saying that. I am not saying that. Senator FULBRIGHT. Your previous statement was that they should not own any sources of production. Mr. ECCLES. I said the means of production; that is right. Senator FULBRIGHT. Well, they produce electric power which is one of the most important commodities in our modern industrial system; is that not right? Mr. ECCLES. I think that it may be necessary, where private capital cannot undertake it, because of a proper motive, but I think where it is a question Senator FULBRIGHT. That is exactly the theory of the RFC; is it not? Mr. ECCLES. I think where it is the question of a subsidy for undertaking a business activity that private capital is already in and is already undertaking as a competitive matter with other business affairs it is entirely not justified. Senator FULBRIGHT. That is the whole theory of RFC because in the area in which we are interested there is a gap in the credit structure, is there not? Mr. ECCLES. I do not think so, not at the present time. Senator FULBRIGHT. When did you change your mind about that? Mr. ECCLES. I do not think there has been a gap for years. Senator FULBRIGHT. When did you change your mind? You once thought there was a gap, did you not? Mr. ECCLES. I think during the depression when you had mass unemployment and you had a deflation, as I have indicated here, that the RFC may have served its purpose. Senator FULBRIGHT. There was not any deflation in 1947, was there? Mr. ECCLES. In 1947 there was not, and I was certainly not favorable to the Senator FULBRIGHT. You thought at that time there was a gap, did you not? Mr. ECCLES. I suggested in S. 408 that it be substituted for 13 (b) of the Federal Reserve Act. The CHAIRMAN. Well, let us get this straight. Senator FULBRIGHT. Could not I read in one paragraph, Mr. Eccles' own statement in 1947 about this crucial matter as being a gap? The CHAIRMAN. With no objection it is so ordered. I thought we could finish this. Senator FULBRIGHT. One paragraph, because he has pointed out the issue. This is from Mr. Eccle's testimony on April 17, 1947, and I read from his opening statement: It is important to emphasize that the principal purpose of the bill is to make term loans especially to smaller businesses for the purposes of providing them with necessary capital that they could not otherwise obtain. I emphasize this next sentence: 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 market for small businesses are prohibitive. Likewise, many banks properly feel that they cannot extend some term credit of 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 through the short- or long-term financing which banks can and should extend without assistance. Mr. Eccles, for whom I have the highest regard, convinced me then and subsequently, and being also a very prominent banker, that there is a gap, and I believe there is a gap in the structure which the RFC is filling. Mr. ECCLES. I would like to suggest with respect to the statement the Senator refers to that the whole statement be put in the record. The CHAIRMAN. Without objection that may be put in the record. (The material referred to follows:) STATEMENT OF MARRINER S. ECCLES, CHAIRMAN, BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM, ON S. 408 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. There has been considerable objection from some of the larger banks to S. 408 on the ground that the smaller banks, in cases where the amount of the loan was beyond their legal limit, would resort to the guaranty even though the loan was of such quality that it could be made without the guaranty by giving participations to their correspondent banks or other banks in the community. In order to meet this objection, the Board recommends that the committee adopt the suggestion of the Federal Advisory Council of the Federal Reserve System by inserting in the bill a provision that the guaranty shall only be available “when it appears to the satisfaction of such Federal Reserve bank that the business enterprise is unable to obtain requisite financial assistance on a reasonable basis from the usual sources." The Board also favors the recommendation of the Federal Advisory Council that the bill be amended to provide that the guaranty be restricted to "chartered banking institutions" only and not to "any financing institution" as provided in the bill. It should be borne in mind that the Reserve System has had the authority under 13b for the past 13 years to make direct loans or to make commitments to purchase loans made by private banks. On principles, we feel that the private banks should originate and make the loans based on their credit judgment, and that neither the Federal Reserve banks nor any other governmental agency should extend such credits directly. Section 13b, moreover, is not adapted to present-day needs. It limits the extension of credit to loans for working capital only and provides that loans cannot be made for more than 5 years and can be made only to established businesses. The proposed bill does not call for Government appropriations and, therefore, no drain on the Federal budget is involved. The Reserve banks would use their surplus funds as a basis for the guaranties, and should losses be sustained they would first come out of the fund created by the guaranty fees charged. If this were not adequate, losses would be met out of the Reserve banks' net earnings or surplus. I am sure that this responsibility placed on the officers and directors of the Reserve banks, under regulations and supervision of the Board of Governors, will not encourage easy and unsound credits on the part of the private banks. Under section 13b Federal Reserve banks handled some 3,500 applications for commitments and advances aggregating about $560,000,000. Similarly, under the V-loan program, 8,771 authorizations for guaranties of war production loans, aggregating nearly $10,500,000,000, were handled. The interest and fees collected in connection with this total of about $11,000,000,000 of operations were more than sufficient to cover expenses and losses and to show some profit. In other words, the record is not one of loose lending. If ap This bill, of course, does not place the Reserve banks in competition with the private banking system. Credit judgment and responsibility would remain primarily with the lending bank. Loans guaranteed would originate with local banks dealing with local people whom they know and with whose character, capability, and capacity they would be familiar. A Federal Reserve bank could not guarantee any loan unless requested to do so by the local bank. proved by the Reserve bank the guaranty would be made promptly available without referring the matter to any agency in Washington. Each loan would have to be passed upon by the Federal Reserve bank. There would be no blanket approval. The 12 Federal Reserve banks and their 24 branches provide a regional organization through which local financing institutions in all parts of the country would have convenient access to a guaranteeing agency if needed. The Federal Reserve System, which is a permanent organization created by Congress and responsible to Congress, is especially qualified to provide this service because of its close contacts and daily relationships with banking institutions. Its responsibilities for maintaining sound credit conditions, so far as its powers permit, make it the appropriate agency for this purpose. As in the case of war-production loans under the V-loan program, a maximum interest rate would be set for guaranteed loans. The present maximum rate under section 13b is 5 percent and it is contemplated that the initial maximum rate under the new legislation would be the same. Within this limit, which may be subject to change with changing conditions, interest rates would be determined by the borrower and the bank. Guaranty fees charged would be specified percentages of the interest rate, graduated according to the percentage of the loan guaranteed. The method would be similar to that used in the V-loan program, when guaranty fees ranged from 10 to 30 percent of the interest rate, according to the percentage of the guaranty. This has been and would be the operating procedure. It is evident, therefore, that the lending banks must carry some portion of the loans without guaranty and this will be a deterrent on their making undesirable and risky loans. The steeply graduated guaranty fees will induce banks to carry as much of the risks as possible and thus cause them to exercise careful judgment and prudence in passing upon credits. Business and credit conditions at present and at some other times may not be such as to require extensive use of the guaranty authority. However, the Reserve banks should have a stand-by service of this kind to render to business and industry when necessary. The amount of long-term funds that individual enterprises may need is often relatively small. Many loan demands do not exceed $10,000 and relatively few exceed $100,000. The bill is intended and designed primarily to help the smaller enterprises. The larger ones, as a rule, do not need this sort of assistance because they can go to the capital market and raise funds either by bonds or equity financing. The guaranty service, as provided in this bill, would be available in the future, as it has in the past, without discrimination for all banks, whether members of the Federal Reserve System or not. It would be ill-advised and shortsighted, in my opinion, for Congress to repeal section 13b in order that the $139,000,000 of Government funds thereunder may be returned to the Treasury and fail to provide this proposed alternative authority to the Federal Reserve banks. The proposal is the result of long and extensive experience which the Federal Reserve System has had in connection with the loan-guaranty principle. It is a tried and tested principle exemplified in Federal Housing Administration loans as well as in loans to veterans. This bill is a means of aiding the private banking system of this country to meet particularly the longer term financing needs of the smaller business institutions without assuming excessive risks. Senator FULBRIGHT. Those are your words, are they not? Mr. ECCLES. I would like that all to be put in because I think that the whole statement needs to be in. 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. |