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The problem is that in order to obtain funds necessary to meet today's unprecedented loan de. 15 mand, Tennessee banks are being forced to purchase money on the open market at rates of 11 12 per cent and higher – and then reloan the same money in Tennessee at no more than 10 per cent.
Its effect is vividly painted, matter-of-factly. by W. W. Mitchell, chairman of First National Bank of Memphis and president of the Tennessee Bankers Association:
"Tennessee banks want very much to continue to meet the credit needs of their customers, even if it means suffering short term losses. But such losses cannot be sustained over a long period of time."
Two roads are open. The first is relief from Tennessee's constitutional 10 per cent interest limitation.
The second is for banks to sharply reduce their lending, a step that would dry up the supply of capital necessary to keep the state financially healthy and to finance its continued growth.
Tennessee lenders saw the "credit crunch" coming. And they saw with disappointment the failure of the General Assembly to permit corporations to obtain loans at national money market levels.
The measure applied only to corporations and not to consumer loans — automobile, credit card, home mortgage and others.
The lenders say if this bill had passed and had been upheld by the courts, they could have breathed easier about Tennessee's economy crisis.
And the economy crisis is the avenue to no money to build new factories, business and apartments and no money to finance new equipment and inventories.
The net result would be the loss of jobs, purchasing power and tax revenues - at all levels of governmont.
D. Roscoe Buttrey, president of Nashville's Third National Bank, set the tone: "If Tennessee is made an island in the large financial market sea and the states around us are able to drain funds out of our economy, it will affect everyone in the state and is a set of circumstances we just cannot afford."
The waters of the credit crunch" sea have already nearly isolated Tennessee. Only Arkansas and Montana are stranded, like Tennessee, with the 10 per cent limitation.
Banks in the other no-limit states can siphon money out of Tennessee because they can pay lenders higher rates on their deposits.
The cold, hard fact is that, whether done now or later, it simply does not make sense for Tennessee borrowers to be unable to get the money available in 47 other states.
The illness is paralysis of progress.
Tennessee's banks are asking legislative action. Such action, which would have to come in the form of a special session of the legislature, appears doubtful before the August primaries.
Many legislators say they aren't convinced the interest squeeze has reached the critical stage.
But the danger is there. And it is real.
And it has to be dealt with, sooner or later, if Tennessee's forward economic progress is to be sustained.
TENNESSEE'S“money pinch” – the limitation of 10 per cent on corporate loans - is making the record rate of inflation a dangerously acute problem for corporations seeking dollars for modernization, expansion and other capital improvements.
Financial houses – bankers, mortgage bankers, savings and loan associations — see the 10 per cent ceiling as a vehicle traveling well down the road to a full-scale "credit crunch" and maybe a recession in this state.
They say their hands will be tied in lending sufficient money to Tennessee corporations, however unappealing the high cost of interest, at a time when customers may need it most.
This state – particularly the larger urban areas has experienced a breathtaking era of construction and progress.
Gleaming shafts of steel and concrete and glass jut into the skies from Memphis to Bristol.
Nashvillians are most familiar with skyline changes. Their city has become the showcase of the South in construction development.
It appears now that the showcase lights may dim or even go out.
Memphis Daily News
June 12, 1974
BANKS' FUTURE DIM UNLESS CHANGED
(This is the third in a series been a direct effect on home
building and real estate. Con
sumer purchasers are mount-
In a letter to Governor Wip-
nessee, in my opinion, is suffer-
ing because of the ceiling placed
on interest charges that our
The banks in Tennessee, ac-
Wallace E. Johnson
tion to permit Tennessee banda
son and me additional money
In conclusion, Johnson said to
A Scripps-Howard Newspaper
Address: 195 Union Aronue, Momphis, Tenn. 38101
Monday, June 3, 1974
Tennessee's Money Problem
Money, as is the case with all commodi- president of the Tennessee Bankers Asties, has a way of seeking the best sociation adds another warning. Banks in market.
states where there are no interest limits, It is this simple fact of economic life he says, are able to siphon off money that has the Tennessee banking industry from Tennessee and re-lend it at higher in a serious bind,
rates. If something isn't done, Mitchell At the bottom of the problem is the says, Tennessee's money supply will be Tennessee Constitution, ratified in 1870, cut off. which forbids the lending of money at Not a very bright prospect for a state more than 10 per cent interest. Only two that is striving to forge ahead in industry other states have similar limitations on and commerce. interest rates-Arkansas and Montana. The Bankers Association has launched a
But money has become scarce and now statewide campaign in support of a speInterest rates of 11 per cent and higher cial session of the Legislature to on a are being charged across the country. bill designed to remove the 10 per cent This means that money for loans is by
limit on loans to corporations. The bill passing Tennessee in favor of areas where it can earn a higher rate of return.
would not apply to individuals and would
have no effect on consumer credit. Al. Tennessee bankers fear that if they are unable to supply the funds needed for
though a similar bill was held up in the plant expansion, new construction and
1974 session of the Legislature because of inventory, the state is in for serious éco
an opinion from the Attorney General's nomic setbacks.
office that it was unconstitutional, the
bankers believe their new bill will pass the The situation was summed up by J. test and are willing to back it up in apRobert Cannon, of Nashville, president of peals to the U.S. Supreme Court if necesthe Tennessee Mortgage Bankers Associa- sary. tion, who reported that construction projects totaling $50,000,000 are being Governor Dunn is reported to be relucdelayed in the state because of a lack of tant to call a special session of the Legisfinancing.
lature to act on a measure that
be Cannon warned: "If we see a continued unconstitutional. We hope the Governor drying up of short-term bank credit in explores the matter further because this is Tennessee, there will be a lot of unem- a problem that cries out for early solution. ployment in the construction industry. It Of course, the Constitution could be is one of the first and hardest to be hit by changed, but the very earliest a conven. conditions such as we have now."
tion could be called for that purpose would William W. Mitchell, chairman of the be 1977. That, the bankers say, would be First National Bank of Memphis and too late.
18 June 12, 1974
COMMERCIAL APPEAL, MEMPHIS, TENNESSEE
Limit On Business Loans Is Fought
By BRUCE SANKEY
borrowed stock with the Economists at Memphis
expectation that the price State University and the
will decline, allowing the
seller to repurchase the University of Tennessee in Knoxville have joined state
stock at a lower price.
Financial Investments was bankers and some business
suspended from the securimen in asking for an end to
ties business for six months. Tennessee's 10 per cent limit
Edward Stewart, Finanon business loans.
cial Investments manager, “We must accept the fact
was barred permanently that our money market is
from the securities busincss. national and the flow of
although he will be allowed funds is affected by econom. ic factors, not state bound.
to apply for permission to
re-enter the business after a aries," says a new report issued by the Bureau of Busi
on loan rates and the result- period of time. ness and Economic Re
ing low rates paid by Tensearch in the College of
nessee banks for funds will Index Shows Increase Business Administration at certainly cause a "large out
The Memphis "Help-Want. flow of time deposits from MSU.
ed Advertising Index" regis"If we do not, the Tennesthe state and a drying up of
tered another increase in see economy will suffer from outside funds flowing into
April, The Conference Board unsatisfied credit needs of the state.
reports. its industrial and commer
At 175 (1967-100), the cial firms which may well SEC Fines Firm
seasonally-adjusted index is lead to economic
The Securities and Ex- 9 points above March's readstagnation, the report adds.
change Commission has ing and 11 points abowe UT's Center for Business
penalized a Memphis invest- February's 164 mark. The and Economic Research said
ment company and its man. April index also is 7 points that with almost all other
ager after finding that the above its level of a year ago. states having no limit for
concern manipulated the The Help-Wanted Index corporate loans, "it seems
price of shares being offered measures the volume of clearly to be in the interest to the public.
classified of the Tennessee economy as
advertising in The firm, Financial In- Memphis' two major news. a whole to eliminate the
vestments Corp., made short papers. It is considered a statutory limit."
sales a week or so before the "coincident" indicator of Tennessee one of but
effective dates of registra- general business. A gain in three states (the others are Arkansas and Montana) tions covering public offer. the index, claims the Confer.
ence Board, often precedes a having a 10 per cent ceiling ings of the same stocks, the SEC said.
decline in the unemployment on interest rates that can be
This, the charged for business loans.
government State bankers, who must
agency continued, "caused
the market prices of those purchase funds in the nationstocks to fall and hence de
TREND OF STAPLE PRICES al money market at rates ex
NEW YORK, Jure 11-AP)-The As pressed the prices at which sociated Press welanted wholesale price ceeding the state lending
the shares covered by the 12.8. limit, are leading a vigorous registation statements were her the mono 90.5 or 6902
Previous Dov 349.37, Week Ago 345.71, effort aimed at getting legis- sold to the public.".
w71 1973 1972 197
Hich. lative relief from the ceiling.
274.75 351.71 22. A short sale is the sale of Love
mns average equals 100. Paul R. Lowry, director of Memphis State's business bureau, said was his opinion that the conditions of today with prime above 11 per cent are a much greater threat to the state's economy that the money crunch of 1968-69.
"National economic indicators suggest that the prime interest rate will remain above 10 per cent for a long period of time," says Lowry. "If this happens, Tennessee commercial banks will not be able to provide financial services required by Tenenessee business firms without some relief from the 10 per cent limitation on loans."
Lowry said the restriction
CHATTANOOGA NEWS-FREE PRESS
THURSDAY, MAY 30, 1974
It's Your Welfare That's Involved
These are some things nobody of Tennessee's senators and reprewants: Jobs lost, industrial activity sentatives in the dire need, to justify and aspansion stagnating, the pro a call by the governor of a special vision of goods and services cur. session of the Tennessee General Aslaised, consumer loans unavailable, sembly for the purpose of passing a a gederal chaos in our economy as we law removing the 10 per cent limit. slip backward.
While we favor the intended reBut all of these things, and more, sult, we do not think legislative accould come if there is not relief from tion of this kind can change the Conthe Tennessee Constitution's limit stitution. The next step of propo of 10 per cent on interest rates, while nents, therefore, would be a move to much higher rates are being offered take the new law in a test case to the elsewhere throughout the country. Tennessee Supreme Court. There it
Most of us do not like high interest would be contended that the intent rates but they are better than a of the framers of the 1870 Constitulack of available money.
tion did not include corporate . fiInterest, after all, is simply the pance (as is probable) and that willwages that money can earn for the ing corporations may voluntarily di'work it does. Just as workers seek vest themselves of the protection of the best pay they can get, so money the 10 per cent limit and accept loans goes where the interest is highest. at higher rates at their own discre. If Tennessee has lower interest tion. rates than other states, then money Again, we favor that result but not leaves Tennessee and goes else- the method. It would be up to the where, creating economic degenera- court to decide. lion here that would be harmful to That the need is great, however, all of us.
should not be in doubt. Tennessee is The obvious solution, therefore, is one of only three states with such a to remove the Tennessee constitu- low limit as 10 per cent. The others tional limit on interest rates com- are Arkansas and Montana, neither pietely, and let them set themselves so highly industrialized as Tennesin the free market, by dealing be- see and thus without Tennessee's tween willing lenders and willing needs. Four states have 12 per cent borrowers.
limits. two 15 per cent, three 18 per Unfortunately, that isn't easy to cent. one 21 per cent, 37 no limit. do.
No one should get the idea that ac. Tennessee's Constitution written tion to raise the interest rate ceiling in 1870 provided the top limit of 10 per is "for the bankers." We are not pricent an interest rates. The idea was
marily concerned about the bankto protect the people from usurers. ers' welfare but we are deeply conIt seems probable that the Constitu- cerned about the welfare of Tennestion's authors were not thinking seans who need business to be able to about corporate business needs be- borrow the money to buy the supcause there simply were few corpo plies and maintain and expand the rations then and conditions in 1870 plants that provide jobs and meet did not indicate the problems of payrolls and provide us with goods today.
and services. li enough sentiment to amend the Interest rate limits should be eliConstitution could be generated. the minated as quickly as possible in the process would take until 1976 to com- proper way and left to compete, up plete. That's too long to wait.
and down on the free inarket in the So it has been proposed in at an ci- private enterprise iradition that Tert be made to interest a majority has built America.