Evening star., 1939-01-01
Federal Protection
May Help Solve
Vital Problem
Insurance Principle
Urged os Way to
Free Idle Funds
~ Camhyldse Associates.

TIee lOIS TunOS
~ camhyidee Associates.
Federal insurance OF loans to small
business may be one OF the means
used to revive the extension of
credit by banks. At least this de-
vice has been seriously proposed. 1t
Is claimed that under system SIM
liar to the present insurance of
building loans bankers will be more
aggressive in seeking investment op-
portunities. Inasmuch as the record
of residential building construction
in 1898 was favorable, it will prob
ably be easy to gain proponents for
extension of this principle
Every banker realizes the need
for expansion of commercial loans,
but the extension of longer term
credit for plant improvements, new
enterprise and other purposes which
are impossible to iquidate on short
notice, has been held unfair to de-
positors who place their faith in
the ability of the banks to return
their money on demand.
On the other hand, it is difficult
for a small company, under present
conditions, to obtain capital in the
security markets at favorable rates
because of the extreme timidlty OF
investment capital. Mutual salts
faction of the needs OF banks and
these companies would result II the
bankers could feel that greater
liouidity could be brought about by
the insurance method.
Want to Serve Industry.
With deposits at the all-time high,
banks have become more and more
dependent on large investments IN
Government securities to yield them
a small return to cover expenses.
This trend is distasteful to bankers
because it assures them of closer
control of their affairs by the Gov
ernment. not to mention pubic dis
approval of the sterility OF the bank
Ing system as far as industry IS
concerned. No amount of public re-
lations propaganda can substitute
for the performance of useful func-
tions.
Some of the larger banks have
benefited recently from corporate
refundings through temporary loans
at low rates of interest pending the
successful conclusion of financing
operations. Others have advanced
funds for capital expenditures with
the understanding that these would
be retired by new capital issues as
soon as they became large enough
to warrant the expense and detail
involved in registering and issuing
bonds or stock. Such loans yield
return of per cent or more, which
In contrast to the average earning
power of invested assets now ap-
pears attractive.
There is assurance that if the
need for funds for smaller business
Is strong enough, and remains un-
satisfied by the banks, it will assert
itself In the formation Of organiza-
tions specially designed to meet the
need, leaving the banks forever out
side. The factoring business, by
purchasing accounts receivable and
thus making working capital avail
able to the company pinched for
funds, performs what is essentially
q banking function, and one which
could be extended to supply funds
for certain types of investment IN
business. Many banks are now sorry
that they watched the growth OF in
stallment financing without making
an effort to gather some of the
profits of this business. For this
reason the proposal of loan insur-
ance is likely to find proponents
among many progressive banks.
Promote Credit Fluidity.
1t is one of the functions of banks
to contribute liquidity to all classes
of credit. This tends to lower the
borrowing cost and stimulate the
extension of further loans. Because
OF the great depression, much of the
credit -liberalizing machinery be-
came stalled and subsequent devel-
opments have done little to get 1t
Into motion again. There will un-
doubtedly be clash between the
two schools of banking philosophy
before definite measures are passed
which will loosen up credit to the
small businessman. But with pres
sure from within and without, it is
dificult to imagine preservation OF
the status quo for very much longer.
In making personal loans for the
financing Of purchases of capital
goods some banks have already had
great deal of success. Others
have abandoned this field. Those
which were more successful were
nearly always those which set up
this business by itself, in some cases
even with different Offices stated by
specialists. Among the benefits
reckoned is the creation of good will
among a part of the public for the
most part previously lacking in con-
tact with banks. The chance to
build good will or to tear it down
II ahvioNS