70 Gray, Peter H., "Some Evidence on Two Implications of Higher Interest Rates on Time Deposits," Journal of Finance, March 1964 Guttentag, Jack M., "The Behavior of Residential Mortgage Yields Since 1951," in Guttentag and Cagan, eds., Essays on Interest Rates, National Bureau of Economic Research, New York 1969 Henderson, A., "A Note on the Theory of Rationing," Reveiw of Economic Studies, 1947-48 Johnson, Robert W., "The Uniform Consumer Credit Code and the Credit Problems Lindsay, J. K., "The Economics of Interest Rate Ceilings, New York University Press, Linke, Charles M., "The Evolution of Interest Rate Regulation on Commerical Bank McManus, M., "The Geometry of Point Rationing," Reveiw of Economic Studies, 1947-48 Michaelsen, Jacob J. & Robert C. Goshay, "Portfolio Selection in Financial Intermediaries: A New Approach," Journal of Financial and Quantitative Analysis, June 1967 Michaely, Michael, "A Geometrical Analysis of Black Market Behavior," American Economic Reveiw, September 1954 Mitchell, George W., "Interest Rates Versus Interest Ceilings in the Allocation of Nordin, T. A. & Wayne R. Moore, "Bronfenbrenner on the Black Market," American Plumptre, A. F. W., "The Theory of Black Market: Further Considerations," The Report of the Commission on Mortgage Interest Rates to the President of the United Ritter, Lawrence S., Regulation Q: Issues and Alternatives. City Bankers, Chicago 1965 Robinson, Joan, "Economics of Perfect Competition, 1933 Association of Reserve Schaaf, A. H., "Mortgage Interest Rate Controls and the Veterans Housing Market," Silber, William L., "Portfolio Substitutability, Regulations and Monetary Policy," Silber, William L., "Portfolio Behavior of Financial Institutions, Holt Rinehart and Winston, New York, 1970 Smith, Lawrence B., "On the Economic Implications of the Yield Ceiling on Government Issued Mortgages, Cnandian Journal of Economics and Political Science, August 1967 Tobin, James & Hendrik Houthakker, "The Effects of Rationing on Demand Elasticities," Reveiw of Economic Studies, 1950-51 Tobin, James, "A Survey of the Theory of Rationing," Econometrica, October 1952 71 STATEMENT OF NELSON ANDREWS, PRESIDENT, MCCLURE'S DEPARTMENT STORES I am Nelson Andrews, President of McClure's Department Stores. McClure's is a family owned corporation operating five stores in Nashville and Middle Tennessee. These range from ladies specialty stores doing a volume of $150,000 a year to small department stores in the slightly over $1,000,000 category. Our competition consists of other stores similar to our own but principally comes from national chains including Sears-Roebuck, J. C. Penney, Allied and Mercantile. You have undoubtedly heard much of the plight of the lenders to this type of business, but let me today speak principally to the problems of the small business borrower in Tennessee. We are, of course, tied to the general business climate which is now suffering and will continue to suffer under conditions that exist in regard to interest rates in Tennessee. We share, along with other businesses, the bad effects of a poor business climate, but let me first speak to the more immediate and specific problem that faces us. I would like to put several facts before you to give you a frame of reference of this problem. First of all, we require two kinds of money to operate our business-somewhat longer term capital and short term seasonal borrowings. The longer term capital finances our expansion-in our case we have within the year completed our newest and largest store and we plan that this borrowing will be repaid over a longer period of time out of contemplated profits. Our reasonal borrowings are on a short term basis and are used to finance the peaking of inventory and accounts receivables, principally in the fall and Christmas seasons. Our profits come principally in the fall and Christmas seasons, so obviously the aforesaid borrowings are essential to our profit picture. The source of our borrowings is entirely from our banking connection in Nashville, Tennessee. We are neither large enough nor financially strong enough to float bonds or sell commercial paper. Being a closely held corporation, we do not have the opportunity of selling additional stock to raise new capital. Unlike national corporations, we cannot go to the New York or other money center banks for loans, because their loan demand is also high and they are in no position to make what they would consider small loans to distant borrowers who have not previously been customers of their banks. If such arrangements could be made, they would naturally and properly insist that we move our bank accounts out of our Tennessee banks to their institutions. This, of course, would compound the problems of the availability of credit to other smaller Tennessee borrowers. The necessity of some of Tennessee's larger borrowers having to do this has undoubtedly affected our ability to receive our full credit needs from our Tennessee bank. In any event, we are totally dependent on the aforementioned bank for the source of our borrowings. Now to the specific problem we face. If credit is to be refused by the bank in Tennessee, and at this point this seems logically to be the only solution they have (certainly we must expect a rationing of available funds), and if in turn that means we would not be able to obtain seasonal borrowings, the fact is that we simply could not compete with those competitors who have access to borrowings outside of Tennessee. In even simpler terms, if Allied or SearsRoebuck or Mercantile could and would bring in the proper inventories for the Christmas season and we could not and did not, we would be in an extremely critical and serious position as to profits and, in fact, survival. In this regard we are like all other retail businesses in Tennessee who are dependent upon sources within Tennessee for their seasonal borrowings. Because of the money supply situation, we have, of course, completely stopped any expansion plans that we had entertained and have curtailed other promotional efforts that would have required additional capital. The conflict between Tennessee's usury laws and the cost of funds imported in Tennessee by banks and other financial institutions is well known by the business community in Tennessee. Business men know that Tennessee banks are rationing credit by refusing many loans that would ordinarily be made by insisting that those loans that must be made for essential business operations be reduced to minimal amounts. In June of this year we adopted the Master Charge and Bankamericard programs to lessen the need for accounts rceivable borrowing. This is but one illustration that we are doing what we can to continue to operate our business in the restrictive environment created by our outmoded usury laws. While we appreciate and understand the problems of lenders in Tennessee, we feel that the ultimate problem is one from the borrowers' standpoint. No business wants to pay more interest, but we must compete and we certainly are willing to pay for money on a fair and competitive basis. Obviously, lending institutions can and will pull in theih horns, so to speak, and lend money on a restrictive basis keeping within the bounds of a profitable money source-money loan situation. As we would not be able to for long sell our merchandise for less than it costs us, the lenders cannot lend money for less than it costs them. And we are keenly aware of the dangers of inflation. We see its effects every day in the prices we pay for inventory and the prices we must charge our customers. We support the efforts to control inflation, but the national monetary policy to combat inflation squeezes harder in Tennessee because of our usury laws. It hurts us when construction jobs or new manufacturing payrolls are lost because potential sales of dresses, suits, and home furnishings are lost. We do not ask for an unfair advantage over any other sector of our economy. Instead, we ask for accessibility to capital and short term borrowings to the same extent that our national competitors have. We ask for the right to compete. STATEMENT OF J. GARRETT BURDETT, PRESIDENT, TENNESCO, INC. My name is J. Garrett Burdett. I am President of Tennesco, Inc., a savings and loan service corporation owned by 12 federal savings and loan associations ranging from Bristol, Tennesssee to Union City, Tennessee. I appear before you today as a representative of the Tennessee Savings and Loan League whose Board of Directors has adopted a resolution of support for this proposed legislation on behalf of all seventy-five Federal Savings and Loan Associations in Tennessee. My statement is as follows: "Mr. Chairman, Ladies and Gentlemen of the Committee, I find myself rather filled with awe in your presence and the responsibility of presenting to you the problems of the savings and loan industry in Tennessee which has become my assignment. The responsibility for providing the funds for housing the citizenry of our state has been, in large measure, assigned to our industry throughout the years. The funds obtained by our industry are deposited for much shorter periods than the periods required by our citizenry to feasibly plan to repay loans of a size required to purchase homes. This has continuously caused the savings and loan industry to find itself with loans comprising its portfolio which carry interest rates lower than their current rates paid on deposits. This, of course, forces the Industry to obtain rates from new borrowers or other types of investments which will offset the below cost loans in their portfolios. The housing needs of this nation must be met. More and more, we have seen the growth of multi-family housing as the most economical method of housing our average citizen. This type of housing is produced by the knowledgeable, sophisticated developer, who must carefully study his market versus current material and money costs, and then decide whether to borrow now or wait. His decision is one made by a man who knows the costs, knows the marketplace, and after careful consideration, makes his final decision on his ability to produce this housing at interest rates currently available in the market place. His decision is then carefully analyzed by the lender with whom he negotiates, and he, too, must be fully satisfied that the rate to be charged can be supported by the project under consideration. Thus, we see a transaction negotiated between parties fully knowledgeable, cognizant of their business responsibilities, and desirous of filling the need for housing the people in the community. Present capital requirements of this nation coupled with the inflationary trend with which we are all familiar, have forced the Federal Reserve to restrict the money supply. The price the banking industry must pay for daily funds has been running between 12 and 131⁄2 percent. Should the savings and loan industry, in view, of their cost squeeze, make loans on real estate when prohibited from getting maximum returns, or should they invest in outside higher yielding investments? Are we to expect our banks to make us loans for loan warehousing and other short term needs at 10 percent, when they are paying 12 percent for overnight funds? It appears to me that the only answer to the problem of equalization of the flow of funds throughout the economy in times requiring such remedies as we now face is the ability to lend and borrow on equal terms area by area. The sophisticated borrowed, able to negotiate at arms length, must be able to obtain funds or face the collapse of his business. For these reasons, we dutifully request your support of this legislation. Thank you, Mr. Chairman and members of the committee for your kind attention. THE AMERICAN BANKERS ASSOCIATION, Hon. THOMAS J. MCINTYRE, DEAR MR. CHAIRMAN: The American Bankers Association would like to express its support for S. 3817, an emergency bill which would enable corporations to obtain loans from insured banks and insured savings and loan associations at rates up to 5% above the Federal reserve discount rate, even though these rates might exceed the applicable State usury law. This Association is a firm supporter of the dual banking system. This consists of two strong, competing groups of banks in each State-one consisting of State-chartered banks, the other consisting of national banks with Federal charters. These groups are interrelated through correspondent relationships and the Federal Reserve Systm to form what we consider to be the most highly competitive and most effective banking system in the world, providing the world's best banking services to industry and commerce, to consumers and the public generally, and to local, State, and national governments. One of the elements of the dual banking system is the general principle that national and State banks are to be governed in most basic aspects of their structure and operations by the applicable State law. Among such State laws which apply to national banks are State laws regulating interest rates, which, by 12 U.S.C. §85, are generally applicable to national banks. There are exceptions to this general rule. For example, the National Bank Act, since 1933, has permitted national banks to charge 1% in excess of the discount rate on 90-day commercial paper in effect at the local Federal Reserve Bank. This provision was proposed by Senator Glass in order to enable business firms to borrow the funds necessary to carry on their operations, even though this might involve an interest rate higher than the State usury rate. With the current discount rate at 8%, and with prime rates generally around 12% and Federal funds rates around 13-14%, Senator Glass' exception provides no help for corporate borrowers in States where the interest ceiling applicable to corporations is 10%, as in Tennessee and Arkansas under their Constitutions or in Montana under its usury statute. S. 3817 would provide a 3-year exception to the general rule, permitting corporations to borrow money at as much as 5% over the applicable Federal reserve bank discount rate from insured banks and insured savings and loan associations. In our view, this proposal would result in substantial benefits to corporate borrowers in Tennessee, Arkanas, and Montana and to their employees and customers. It would also benefit banks and savings and loan associations in those States, by permitting them to take care of their customers' needs, avoiding either the loss of production and employment which would result in their communities if these needs were not met, or causing the customers, if they are large enough, to go to financial sources in some other State for their funds. We are advised that bank customers in Tennessee, Arkansas, and Montana are finding it increasingly difficult to satisfy their financial requirements from their ordinary sources, because of the low interest rates in those States. And when the agricultural crops are harvested in the latter part of the summer and the fall, the need for funds to finance the harvest, storage and ultimate sale of these crops will place a tremendously increased burden on the banking systems of those States, with further disruption of other customers of the banks. Such a failure of the banking system to carry out its responsibility for the financial needs of business and agriculture would have serious effects on the economic health of those communities and would, of course, constitute a most unfortunate failure to carry out the purposes and functions of the banking system. It is our view that S. 3817 would provide temporary relief for this situation, giving Tennessee, Arkansas, and Montana, and any other States which might be |