Evening star., 1950-05-09
Equity Capital Loans
Proposed by Truman
Called Step 10 Right
Credit Financing Plon
Should Not Be Involved
In Purtisun Politics
Bv David Laurence

SOllSIGSS ICCOLIlLlC4LOl11S ClloG CA"
uity capital" and credit loans be
made available to business through
a new system of loan insurance
and investment institutions goes
to the heart of problem which.
in one form or another, has been
before Congress ever since the
depression of 1929-1933.
In the melee of crusades and
criticism, the so-called bank af-
filiates" - the companies which
were affiliated with banks and did
much of the financing Of Amer
lean enterprises in the 1920s-
were abolished. They have never
been followed by any constructive
substitutes. There has been a re-
current outcry since that some
means should be provided to as
sure equity capital for the enter
prises not big enough to warrant
national attention through the
floating of stock issues. This de-
flciency has led radicals to make
many a proposal for Government
financing or Government owner
ship.
But Mr.. Truman comes forward
now with something which he and
his advisers have striven to formu-
late in such a manner as to take
the Government itself out of the
loan business and to put the bur-
den on private financing with
Government coordination and
Government insurance as stop
gap.
Loans Of Recent Origin.
Broadly speaking, banks have
hesitated for years to extend
credits that are in fact capital
loans. They have felt. and rightly
so, that demand deposits should
not be so used. But at the same
time large loans in commercial
financing have been syndicated by
the banks or taken in their en-
tirety by insurance companies.
Likewise, although froWned upon
in early years, installment f1nanc-
ing of automobiles and many
household products is now an Or
thodox credit device. There was
a time when banks did not like
installment financing.
Even the real estate loans made
under the so-called insured plan,
whereby banks have made housing
loans or have participated in the
making Of mortgage loans along
with governmental agencies, are
really Of recent origin.
When the President, therefore,
comes forward with what he calls
a pioneer undertaking" in the
financing Of business, 1t is natural
that first reports should say that
bankers are cool to the idea. AS
they examine and study it, per-
haps making alternate sugges-
tions, it may turn out to be the
very thing that will increase the
earnings Of the banks without any
such risks as would be involved
in individual transactions as con-
trasted with group risks.
The principle of insuring a lot
Of loans through an over all
agency makes it possible for the
income from the premiums and
che interest on the successful
loans to offset any that may go
sour.
The plan has several parts. One
relates solely to loans of $4,000
or less which would run for five
years. No one in the Government
would pass on such loans and the
banks would take a minority per-
centage risk while the Govern
ment took the major percentage
risk.
The second part of the plan is
even more important. 1t proposes
that national investment COM
panies" be set up in which the
banks and private investors could
invest. The major purpose of
these companies, as the President
phrases it, would be to provide
equity capital and long-term loans
for efficiently-managed businesses
unable TO finance themselves on
reasonable terms through the Or
ganiZed securities markets"
Public Would Invest.
Actually the public and banks
would invest in the national in
veStment companieS-buying their
bonds - while the companies
would, in turn, finance the equity
capital needs of worthy busi-
nesses. There is no limit placed
here as to size of loans but it is
assumed that the plan will pri-
marily take care of the needs of
business ranging from $4,000. to
81 million. This is the bracket of
financing about which there has
been considerable discussion in
recent years, and the President
says this phase of his plan "is
designed to fill the most serious
remaining gap in the business
financial structure"
Coincident with these develop
ments, the President proposes that
both the Reconstruction Finance
Corp. and the Federal Reserve
Bank authority to make business
loans be cut down, so that the
latter may be abolished altogether
and the former would be retained
only for those rare cases where
private investment companies find
themselves unable to do the f.
nancing and yet where credit ex-
tension of large size may be
needed.
The whole plan is designed to
maintain a private enterprise sys-
tenn Of credit. 1t is the first i'm
portant move toward the right"
in financing technique which the
Truman administration has made
and it would be most unfortunate