Evening star., 1934-12-26
new LOAN POLICY
ADOPTED BY R.E.C.
Federal Reserve May Follow
Plan of Extending Credit
to Pay Old Debts.
BY DAVID LAWRENCE.

It permits the loan of Government
funds to help pay off existing debt.
Both the r. F. C. and the Federal
Reserve Banks, although granted by
Congress the right to make loans to
business, have limited their aid to
solvent concerns which are free of
debt
But an official inquiry has just re-
vealed that employment could be
stimulated and business operations
considerably enlarged if company
with a debt could find some way of
liquidating it, and. at the same time
getting extra capital to finance fu-
ture transactions.
Banks May Follow Suit.
What the r. F. c. is doing prob
ably will be followed by the Federal
Reserve Banks. The operation works
out about as follows:
A small manufacturer, for instance
owes a few thousand dollars to the
banks. Let us assume that the insti-
tutions holding the notes were closed
and are being hquidated by the Gov
ernment itself. The receivers are
empowered to accept a reasonable
compromise in settlement of the ex-
listing debt. but, until this question is
cleared up, the manufacturer who
may need credit to carry on his bust
ness is unable to borrow anywhere
II he had loan to pay of the exist
ing debt and to provide something for
his immediate needs, he might be
able to employ more people.
Or, perhaps, an open bank holds q
short time note and the manufacturer
cannot pay it off at once. though he
continues to pay interest and some
small curtailments. But he needs
working capital and would be able tc
employ more people if he could gel
. fiVe-year loan to embrace both his
old short t-term loan and the new cap
ital he requires.
Survey Revealed Need.
These are some of the kinds OF
cases that will come under the policy
of the R. F. C. In this connection,
what the Treasury Department sur
vey, conducted by Prof. Viner and
Charles Hardy, disclosed after exam
lining several credit cases IN the sew
enth Federal Reserve district is espe-
cially pertinent. The Government
lends through two agencies-the Fed
eral Reserve banks and the r. F. c.
Said the report, in speaking of Fed
eral Reserve loans:
by far the most important ques-
ton of Interpretation of the term
working capital relates to the extent
to which Federal Reserve funds can
be lent to pay existing debt. The
present Interpretation of the law is
that money used to clear up debt is
not for working capital purposes.
Hence, if man wants to expand in
ventory or accounts receivable, or the
volume OF goods in process, and can
not get the money from the bank,
either because the banker does not
believe in capital loans or because
the bank examiners do not, and If his
security Is adequate, he is eligible for
a loan at the Federal Reserve Bank.
But If his working capital needs have
already been financed by a bank on
q short-term note, he cannot shift to
the Federal Reserve Bank when the
note natures, even though he is other
wise sound.
Indefinite Renewals Implied.
This restriction implies that banks
which have made what are at least
nominally Short-term loans are to be
expected to renew them indefinitely
If they do not renew the loans and
working capital consequently becomes
depleted. then, and presumably then
only, will the borrower become elig-
ible for Federal Reserve loan.
There seems to be no sound eco
nomic basis for this position. 1t is,
Of course, necessary to scrutinize ap-
plicationS with great care where the
money is to be applied to existing debt,
in order to make sure that the old
lender is not unloading a bad loan on
the Reserve bank. But the issue we
are raising now does not relate to bad
or doubtful loans. 1t relates to cases
where the security is admittedly ade-
quate but where the bank is pressing
for collection because of considerations
Of liquidity. We believe the purposes
OF the law would be better served if
lending officials were given consider
ably greater latitude in the matter Of
loans to clear up existing debt"
r. F. c. Policy Criticized.
Virtually the identical criticism, wa G
made of r. F. c. policy by the same
report, which added:
THE number of cases in which a
loan to clear up old pressing debt
would protect the working capital of
a going concern and make it possible
for it to maintain or expand produc-
tion is very large"
From the start Of the r. F. c. under
the Hoover administration and con-
tinuing until this very month, the off,
cials have feared to make any loans
to pay of existing debt. The first
loans to railroads in which banks were
paid of their short term debt were
severely criticized in Congress and
hence caused stoppage of what might
have been a recuperative step in the
handling Of Government credit.
The truth of the matter is that. as
the Viner-Hardy report comedies, the
channels Of long term credit normally
through the securities
are choked up and the banks
and mortgage companies, which
usually take care Of the working cap
ital needs Of small businesses, have
become very strict about using de-
mand deposits for capital loans.
Credit Policy Long Needed.
The absence Of an intermediate
credit system to loan three or five
year money. something that from the
beginning Of the depression has been
as vital need to take care
Of existing debt and provide new
capital, has forced the Government
into the lending business through both
the r. F. C. and the Federal Reserve
But the $500 ,O00, 900 900 fund
of the R. F. c. has hardly been
though at first it was ex-
pected the amount would be absorbed
in so days. It has been found that
the real trouble is with the existing
debt and that readjustment of capital
revaluation of assets and
the provision of new capital are al!
intertwined, as they ALWAYS have been