Washington, March 15, 1924

AN intermediate credit system for business analogous to that of Agriculture will be set up with the full support of the Roosevelt Administration.

After three years of discussion, which has varied all the way from insistence on the part of commercial bankers that such a system was not needed to proposals that the Government engage in direct lending, a plan has been worked out the essential features of which will be acceptable to the Government and the banks.

The argument that business already has all the credit which it legitimately can absorb has been found to apply only to short term borrowings. The necessity for working capital and loans of the one, three or five-year type, which could be amortized out of earnings, was first disclosed statistically by a survey made by the National Industrial Conference Board in 1932 as a result of data made available through the Committees on Business and Industry of the twelve Federal Reserve Districts.

Working capital has been depleted by the ravages of the depression. It is hard to get today for large industrial units because of the restrictions of the unworkable Securities Law. There will be no relief from the stalemate on large financing until the Securities Act is revised, but the small business man is not as a rule a participant in investment banking. He goes to his local bank for credit.

For the last three years the banks have been telling small business men that they could not conveniently make loans for longer than nine months, that it was not the business of a commercial bank to lend out for a year or more deposits which might be demanded at any timely the depositor.

Banks Could Give Credit if They Chose

Jesse H. Jones, chairman of the Reconstruction Finance Corporation, has been saying in his speeches to bankers that cooperation in the matter of long term credit could be given by the banks if they wished. But while the banks have been willing now and then to set aside a small portion of their deposits for this purpose, they saw the difficulty of turning down general demands for such credit once they embarked on capital loans.

Within the last few weeks, a strong movement has arisen inside the Government to make the Federal Reserve Banks and their branches active lending agencies accessible to the public instead of super banks that rediscount general banking obligations. The member banks naturally didn't like this.

So a reconciliation of differences of opinion has been in progress, with the result that lending will remain where it has always been--in the commercial banks of the country, which are equipped by their experience and credit files to determine what are or are not good loan applications.

The new plan is to build new lending machinery upon existing facilities. Thus commercial banks would make one or two or even five-year loans but they would be allowed to get cash immediately by transferring those notes to the Federal Reserve Banks, which will have an intermediate credit division. It has not yet been determined what percentage of each loan can be transferred or rediscounted. But if a commercial bank knows that at any moment it to get 80 per cent of its funds back by depositing them with the intermediate credit division of the Federal Reserve banks all the notes which it has received from business for long term credit, there will be a disposition to make such loans to business men in the first instance.

This does not mean that every proposal to expand business projects or that every existing business will get credit. It does mean that capital will be advanced to those businesses which can show by a record of their past operations and an analysis of their current progress that they can earn enough every ninety days or six months to curtail their notes so that over a year or three or five years, as the case may be, the notes can be repaid.

Longer Term Loans

In other words, self-liquidating loans, which hitherto have been by banking practice limited to ninety days with a renewal or two, dependent or conditions at each renewal date, will be supplanted by longer term commitments on credit at perhaps a higher interest rate than would be charged for short time accommodations.

The idea of keeping control of this new form of credit in the Federal Reserve System where it belongs has been accepted by the Administration. Conferences between the Governor of the Federal Reserve Board, the chairman of the Reconstruction Finance Corporation and the Secretary of the Treasury are moving along satisfactorily.

R. F. C. May Supply Capital

The legislation that will be asked will not be complicated. The initial capital for the enterprise may be supplied by the R. F. C., though Congress may not be adverse to making a direct appropriation. It is not believed that more than $500,000,000 will be needed to launch the enterprise and provision doubtless will be made for the sale of such capital to the banks in much the same manner as arranged when the Federal Reserve system was established.

The important thing is that capital for industry, which may do more to bring about reemployment than all the public works projects put together, is likely to be made available in the next six months as a part of the general drive to find work for CWA workers and the vast number of unemployed who are still on relief rolls.