Evening star., 1939-02-18


increase its production, extend its
operations, or modernize its plant
and equipment
Every now and then this subject
has been discussed in Congress, but
usually it has related to the use of
Government funds. Actually the
power to make loans to industry has
been given the R. F. C. and the
Federal Reserve System but such
loans are restricted to what is known
as temporary accommodations There
has been no way by which long term
loans of from to 10 years could
be obtained at moderate interest
rates from the banks.
The principal reason, of course,
is that commercial banks do not
feel that they should be asked to
make long-term commitments, and
while they are permitted now under
bank examiner regulations to give
credit up to 10 years, they rarely
do so and prefer also to make the
loans on relatively short-term
basis.
Long-Term Loan Taken.
Just the other day, for instance,
large insurance company made
loan which the borrowing company
stated it had been unable to obtain
at commercial bank It was for
the sum of $500,000 and the insur-
ance company took the loan on
10-year basis with the understand
ing that no amortization was neces-
sary during the first five years. The
interest rate was relatively low. The
borrower could have gotten this
credit at commercial bank for a
shorter period but amortization
would have been required in the first
few years.
This example is referred to be-
cause the statement is frequently
made that any business which de-
serves credit can usually get it at
a bank. This is an injustice to the
banks which do not feel that bank
examiners, despite existing regula-
tions, will look with favor on any
such loan, for instance, as is de-
scribed above Yet the nature of
the business in question was that it
would take 10 years for the COM
pany to absorb the liability out of
profits without cramping it too much
for amortization in any one year and
allowing also for the ups and downs
of profits.
The answer promptly will be made
that insurance companies can take
such loans but banks cannot because
they would have to be fortified with
large capital resources. The other
possibility is that they could make
these loans if there were some plan
of guarantee and the costs of the
insurance guarantee were paid by
premium added to the interest
charge.
Federal Money Not Used.
The merit of the Mead-Allen bill
is that it does not use Government
money. but makes active the private
funds now lying idle in the banks.
It gives private banks chance to
make loans and earn a fair interest
rate and to do so with minimum of
risk.
Intermediate capital differs from
short-term capital in that it is not
related to transactions which iqui-
date themselves in a year or so as
Is the case with most commercial
bank loans The intermediate cap
ital is desired for the purpose of
making permanent improvements in
property or to open up new depart
ments or divisions in going concerns.
Obviously, the banks will not ac-
cept bad risks or purely speculative
ventures, but they would tend to 60
along with many borderline case
which has often caused them to
hesitate between acceptance or re-
lection of loan application-if they
were buttressed by Government in
surance plan.
AS 1t is today, citizen can bor-
row $4,000 for 10 years to build
a new house and he is given any
where from 10 to 20 years in which
to pay off the debt Yet business
earning $4,000 a year which may
wish to borrow $4,000 and pay it
off in seven or eight annual INSTALL
ments will find itself rarely able to
get such q deferred commitment.
The loan might be made, but always
with the proviso that it must be for
short period and that renewal
can be a matter of decision by the
bank every time the short maturity
comes up. Businesses which seek
to try out new products or new ac-
tivities and may stand to lose their
investment but can pay 1t out of
profits are usually told these are
speculative loans. But employment
has always arisen out of such spec
ulation" by enterprising individuals
and production is increased when
there is capital for such purposes
available. To get permanent capital
nowadays the small businessman
must depend on a rich mans econ
omy-the owner of considerable
wealth in a small communicated
the rich man even in the small town
sees no incentive for risking his
funds when the tax rates are so high
and his rate of return is necessarily
low.
4IlSlC 10 IiO HldCIlIllcIy dG pIeSSIlL
for the flotation of capital loans as
between $4,000 and 81 100000. In
vestment bankers usually want to
handle loans only above 81 ,0O0, 900
because they rightly say the dis
tribution is too expensive for smaller
amounts. So with the commercial
banks ready to lend nine month or
two-year money, and the invest
ment bankers interested only in
loans Of $l,0o0,000 and up, there is
need for an intermediate credit
system in American and Congress
Is beginning to study ways and
means Of establishing it as a re-
covery measure and as one means
Of bringing the national income up
to the desired goal.
4 (Copyright, 193o.)