The 1939 Industrial Loan Corporation
January 11, 2014 • 9:19PM

The 1939 Proposal for a “Permanent Industrial Loan Corporation" in the Structure of the Federal Reserve System

By Michael Kirsch

Contact: kirsch_michael at outlook dot com

On the trail of the fuller story of FDR's Hamiltonian credit plan which I am currently writing, I have come across a very important find: a 1939 proposal for a permanent industrial loan corporation, similar to FDR's earlier proposed structure of credit banks. The document further reveals Franklin Roosevelt’s plan and intention to establish a true return to a full Hamiltonian credit system.

The document is a record of hearings held on June 12 and 14, 1940 by the Senate Subcommittee On Reconstruction Finance Corporation Matters of the Banking and Currency Committee taking up two proposed bills to deal with the industrial loan situation.

One in particular (S.2988) called for the establishment a “Permanent Industrial Loan Corporation," in order to make credit available for industry. The second and shorter bill discussed in the hearing (S. 3839) was to give the Federal Reserve banks essentially the same powers with respect to the limited area of industrial loans which the Reconstruction Finance Corporation (RFC) was given during that decade, to ostensibly make it easier for them to lend. The bills were being put forward by James Mead, a long time FDR ally in the House and Senate.

The document further vindicated my hypothesis that there were indeed numerous people around the Administration figuring out how to permanently transform the structure of the Federal Reserve. It also further strengthens the importance of the original 1934 proposal of Roosevelt for Credit Banks for Industry in the fact that nearly the same proposal was still under consideration in 1939-1940. Most importantly, it has great implications for the remedy to the Federal Reserve and general banking system in our time.

The Context

Before reviewing this hearing, let me briefly give the context of this discussion about Roosevelt’s amendments of the Federal Reserve System, his use of the RFC, and his attempts to permanently remedy the problems by re-establishing Hamilton’s Credit Structure.

While the national banks created under Lincoln in 1862 could lend directly to any industry they wanted, the new Federal Reserve structure of 1913 not only imposed limitations upon what they could lend, but the Federal Reserve Banks could explicitly not directly lend for most industrial purposes, and could only discount securities of very specific types. This was not true of the Bank of the United States in the time of Nicholas Biddle, and that designed by Hamilton. As I will take up in the fuller article, this is one of the central contrasts between the Federal Reserve Act of 1913 and the charters for the Bank of the United States. It was precisely that laissez faire banking structure of the Federal Reserve that was established in successive phases between 1901 and the 1920s, through the workings of Wall Street Tories and London financiers, that led to the crash and crushing economic depression of the early 1930s.

Roosevelt not only remedied the situation by taking the banking system through a bankruptcy reorganization, and making the reorganization permanent with the Glass-Steagall provisions of the 1933 Banking Act, but also, chiefly, he sought to reintroduce an approximation of the Bank of the United States credit principle. The full story of this involves the powers given to the RFC which made it capable of providing that function. As I developed briefly in my report, RFC Direct Lending and the "Credit Banks For Industry", this was in fact Plan B, as Plan A was a system of credit banks for industry, as a permanent structure of the Federal Reserve System.

This would have in effect transformed the Federal Reserve systematically, rather than simply having a special institution (the RFC) that was working as an exception within the existing limitations of the Federal Reserve System. That story is largely unknown, yet important to see Roosevelt’s real intention had he been able to fully implement it. The other part of this story, which I also developed there, is that instead of that plan, the Federal Reserve and the RFC were given similar powers in the industrial advances to conduct joint lending with financial institutions and direct lending in certain circumstances. I will refer to this again later in this review.

The June 1940 Hearings

That is where this story of these hearings and the bills discussed starts off, which is an attempt on the one side to force through a limited liberalization of "Section 13b," and a longer term plan written out by Senator James Mead for an “Industrial Loan Corporation," echoing the original 1934 Credit Banks For Industry bill of FDR, to set up a permanent structure. That second one is more interesting, but I will summarize the first briefly, since it is the one most debated in the hearing.

The main bill discussed is the more limited liberalization of Section 13b (S.3879). With regard to the direct lending to industries, the bill was to take away the 5 year limitation on loans and make the loans possible to any business or corporations, not only those which were “established," and to extend the purpose of loans beyond “working capital" only. It also cut out the cumbersome advisory committees that had to approve the loans and made more efficient the funds which the Federal Reserve used.

The longer term plan, “A bill to establish a permanent industrial loan corporation to assist financing institutions in making credit available to commercial and industrial enterprises," (S. 2998) is more substantial. As I said, and will review, the bill was meant to essentially set up the original plan for the credit banks for industry, or more specifically, to set up what the RFC had become but within the Federal Reserve system, of which it would be an integral part, and whose resources it could utilize. Here is a quick review before getting into the interesting discussion and implications that take place. Skip to the next section if you are not interested in the details of the bill.

The Industrial Loan Corporation Bill

Specifically, the Industrial Loan Corporation (ILC) could make loans, discount and purchase promissory notes and bonds and stock of industries and business, and discount for financial institutions their own holdings of similar bonds and stock of corporations engaged in business, and also to loan to financing institutions on the security of such obligations, bonds, or stock of industry. The maturities of the loans would have ten years.

Also like the RFC, the ILC would be authorized to issue notes, bonds, and other forms of debt to raise funds with which to lend and conduct its operations, backed by the Secretary of Treasury for security and thus the credit of the United States. The initial amount of this would be 500 million, but it could have been expanded later on, just as the maturity of loans could have been expanded as the RFC’s was in 1938. On this matter, the authorization of the Secretary of the Treasury to purchase the notes and bonds of the ILC is nearly an exact copy of Section 9 of the 1932 RFC Act.

Importantly, the Corporation could borrow from any Federal Reserve bank, which, if I am not mistaken, the RFC could not do. It was also to be a depository of the public funds, like the RFC, Federal Reserve, and Bank of the United States before it, which could then be lent out until time of appropriation of those funds. It would also set up an insurance fund against potential losses by banks involved in such loans.

Regarding capitalization, it involves a few interesting historical processes. Title III of the Agricultural Adjustment Act of May 1933, also known as the “Thomas Amendment" authorized the President to take actions to create needed credit, and one of those actions was changing the weight of a dollar of gold. Roosevelt took this action on January 30, 1934, and created a “stabilization fund" from “the ‘profit’ from the reduction of the gold content of the dollar." He then proposed using a portion of the resulting funds for the purpose of capitalization of the “credit banks for industry" he proposed in February 1934.1“Acting under the powers granted by Title 3 of the Act approved May 12, 1933 (Thomas Amendment to the Farm Relief Act), the President today issued a Proclamation fixing the weight of the gold dollar at 15 5/21 grains nine-tenths fine. This is 59.06 plus percent of the former weight of 25 8/10 grains, nine-tenths fine, as fixed by Section 1 of the Act of Congress of March 4, 1900. The new gold content of the dollar became effective immediately on the signing of the Proclamation by the President.
 
"Under the Gold Reserve Act of 1934, signed by the President Tuesday, January 30th, title to the entire stock of monetary gold in the United States, including the gold coin and gold bullion heretofore held by the Federal Reserve Banks and the claim upon gold in the Treasury represented by gold certificates, is vested in the United States Government, and the "profit" from the reduction of the gold content of the dollar, made effective by today's Proclamation, accrues to the United States Treasury. Of this "profit" two billion dollars, under the terms of the Gold Reserve Act and of today's Proclamation, constitute a stabilization fund under the direction of the Secretary of the Treasury. The balance will be converted into the general fund of the Treasury. http://www.presidency.ucsb.edu/ws/?pid=14739"

Using those funds, the formerly proposed 1934 “Credit Banks for Industry" capitalization was for the Treasury to buy the stock of the FDIC held by the Federal Reserve, pay the Federal Reserve the amount they were required to subscribe to the FDIC ($140 mil), the Treasury thus buying the stock from them, and then having the Federal Reserve Banks use that amount ($140 million) to give to the proposed credit bank in its district. In this case of the proposed ILC, it would be exactly the same. The Treasury would pay the Federal Reserve, now owning the FDIC stock, and the Federal Reserve would be required to use all of these funds to supply the ILC its stock and surplus, 39 million surplus and 100 million capital stock.

In the event that Roosevelt indeed discussed the matter with Mead, it is extremely interesting and historically important that he was still interested in establishing essentially the same credit bank structure that he proposed in February 1934. Now onto the debate and implications of the bill, concluding with important reflections on the discussion.

Senator Mead’s Statement and Debate

James M. Mead of New York couched his proposed bill, and the more limited amendment to existing Federal Reserve industrial loaning provisions (Section 13b) in the necessity to augment the credit facilities of the nation in the looming industrial gear up for war, but also the remaining difficulties of businesses in obtaining credit.

We are all agreed that the industrial resources of the Nation must be coordinated and geared into a great productive machine which can produce quickly and efficiently the necessary weapons of national defense. We read over and over again that the time has arrived when opposing groups of our people must lay down their differences and strive for unity. We do not know what productive necessities lie ahead, but it is not outside the realm of thoughtful consideration that the industrial agencies of this Nation may be called upon, as never before, to cooperate in supplying vital military equipment.

We hope with all our hearts that the economic resources of this Nation shall not have to be dissipated in the wasteful pursuit of rearmament. Nevertheless, this is no time for miscalculation nor for indifference to the gravity of world conditions. With these unpleasant but realistic portents in mind, the Congress must assume earnest responsibility in providing for the well-being of certain branches of our industrial system which have been surviving with great difficulty during the past few years.

… I realize that if the principle is established, if the system whereby small-business men may secure adequate credit facilities is established, then their plants, which will serve the Government in this crisis, will be in fine shape to continue peacetime operations, after the crisis is over. Small business enterprise has been experiencing great difficulty in securing adequate long-term credit and capital at reasonable rates of interest.

It is an unfortunate circumstance that little business today, through a strangulation of credit and capital is, to a large extent, operating with antiquated machinery, with old processes, and has been reduced to a relatively low level of productive efficiency. The small business man supplies the raw materials which big business needs. Through his hands flow countless important articles with which we shall be more and more in need.

...If more adequate credit and capital through local banks is all that little business requires, and that is my conviction, we ought to immediately concern ourselves with the satisfactory disposition of this problem.

While he reviews both bills in detail, he says he is doubtful that the time in the session would give his longer bill a chance to pass and thus drops discussion on it in preference for the shorter bill. As the Senate began to take up the more limited bill (the amendment to Section 13b of the Federal Reserve Act), Mead states that the existing provisions are a great limitation, reviewing the current provision of authorization to loan to “established commercial and industrial enterprises for working capital up to five years," and says that his “proposed amendment would eliminate these limiting provisions and permit Federal Reserve banks to extend credit to any business enterprise, without restriction as to purpose," not just working capital but for any purpose for expansion and improvement.

Senator Alva Adams contradicted him, stating that rather than a limitation it was an “expansion and departure from the original Federal Reserve Act," indicating the fact that many still thought the Federal Reserve should be a strict laissez faire structure as it was established. Mead should have countered that the Federal Reserve System was erroneous in its original 1913 structure, and thus Section 13b and other measures were not “liberalizations," as much as they were remedies to systemic problems of design. It is useful to consider the ongoing fight at the time which Roosevelt was up against, especially after the 1937 recession, which Wall Street and related forces attempted to blame on Roosevelt’s government credit policies, even though it was in fact a result of the budget cuts on which those very forces in Congress insisted. In Congress during the years of 1937-1941, there was great resistance to the initiation of any further credit programs.

Senator John Danaher remarked that through his experience in the Subcommittee he is “perfectly convinced there is a need for equity or investment capital somewhere." Mead replies that considering the condition of the banks at that time where banks were “forced to close their doors because of the drain upon their resources resulting from idle money," this bill would deal with the problem. Along similar lines he states, “I think having banks that are overstuffed with money, and banks that have not enough money, are twin evils," he said in response to Adams who implied Mead was against banks with “too much money." This exchange brings forward the ongoing struggle in that decade to make use of idle funds in the banking system, even after the bankruptcy reorganization of 1933 had dealt with fictitious values. Roosevelt discusses the use of idle funds through government borrowing in his budget addresses, and Federal Reserve Board Governor Menc S. Szymczak reviews the same operations in more explicit detail in a 1935 address, stating that in 1934 there were 2 billion in idle funds in the banks which the government was making more efficient use of by borrowing and lending through credit corporations.

Testimony of Marriner Eccles, Chairman of Federal Reserve

Marriner Eccles argues that the existing authority of the Federal Reserve “to make direct loans to industry" was “entirely inadequate," and was either for the new amendment or cancelling the old. He makes a couple of useful points in the process which clarify what is recognizable by looking at the budgets of the 1930s and papers on industrial lending by the Federal Reserve banks during the 1930s in contrast to the Reconstruction Finance corporation.

After 1936, the RFC basically took over the industrial loans to industry, whereas during June 1934-April 1938, the Federal Reserve was taking up about 50% of the total loans going to industry through Section 13b. He stated that while “there have been three or four important amendments to the RFC law" no added powers for direct loans have been made to the 1934 Federal Reserve amendment. One such important amendment was on April 13, 1938 which removed “practically all restrictions on business loans by the RFC." As of June 28, 1939, the Federal Reserve had authorized $179 million in industrial loans, and the RFC had authorized $434 million.

As to Eccles’ opinion of the much broader proposal of Mead for the ILC, he stated it would “very much more adequately meet the situation." In addition to pointing to the importance of the ILC’s borrowing power above its initial capital, for a broader lending operation, like the RFC has in its charter, he says:

It would give the Board here power of initiation.The Reserve banks and branches would be used, of course. The loans would originate there and they would make the loans and they would service the loans as the agent for the proposed Industrial Loan Corporation, which would be a corporation under the Board.

Testimony of Jesse Jones, Administrator, Federal Loan Agency

Speaking of the Federal Reserve, Jones states that Eccles was essentially lying concerning the limitations to lending, stating “they hide behind" the excuse of “the 5 year limit and established institutions," as their “alibi for not having made loans."

In the words of Senator Mead during the testimony, Jones proposed setting up “a sort of RFC for the Federal Reserve System, limiting them to their own capital and surplus," where local banks could go to the Federal Reserve and make joint loans with the Federal Reserve just like the RFC does. Jones proposed this in the context of making a proposed change to the debated amendment, that would instead allow the Federal Reserve to make industrial loans without connection with the Treasury funds.

Jones said, give them the limitations similar to the RFC to capital and surplus, and let them “lend their own money instead of the Treasury’s money." He continued:

I believe that would be a helpful thing. If there was any competition, it would be with a member bank. Therefore, there is not going to be too much competition between them, but it would enable a bank, or a number of banks, through the Federal Reserve, to accommodate a borrower, and would divide the risk.

Asked whether the local banks already have enough money, so why would they go for joint loans, Jones said “Banks come to us all the time and say, ‘We will take 25 percent of this loan if you will take 75 percent.' Instead of coming to us to get the 75 percent, let them go to the Federal Reserve banks. That is what I am thinking of. It may be 60 percent or 40 percent." Jones said he thought the Federal Reserve would make more loans if they were doing it themselves.

It has this advantage—and I will have something more to say later about the R.F.C.'s attitude—the banker is talking to his own Federal Reserve bank about a loan in his own community instead of talking to the R.F.C. about it, and I think it would produce better results. I think the Federal Reserve would make more loans if they were doing it themselves in cooperation with their own members.

..If your bank wanted to make a loan to an industry in your community, bigger than it could afford to make, let it go to the Federal Reserve and ask that they take a part of it instead of coming to the R.F.C.

Jones’ proposal is interesting and seems directly in accord with Roosevelt’s Credit Banks Bill and also in line with Mead’s ILC proposal. It would basically put the Federal Reserve System into the category of direct lending throughout, rather than the restricted amendment of Section 13b.

Reflections

The RFC was functioning during Roosevelt’s tenure more and more as a quasi national bank of Hamilton. It had the ability to use the public debt of the government to increase the overall indirect and direct lending action in the economy, itself directly lending on unrestrictive terms, like Hamilton’s Bank did. It however did not have the ability to accept deposits from private banks and companies, or have private subscription to the capital stock of the bank like the Bank of the United States did, which limited its operations. Also, it was acting in an environment which included the structure Federal Reserve Banks, and thus not as efficient as the Bank of the United States was acting as the chief institution, and the key mover of the banking system.

This attempt here, therefore, in 1939-1940 to set up a loan corporation as a permanent part and essential structure of the Federal Reserve was important. It could easily expand itself to become the main function of the Federal Reserve System just like Hamilton’s national bank. Meaning, if this corporation can accept deposits of the United States government like the Federal Reserve and begin to accept them as the chief depository more than the Fed, actually using them for productive purposes throughout the economy in the interim before appropriation, and, if in addition, other credits are put to use, such as the way in which it was capitalized with the FDIC stock security, then the activity of this bank would begin to supersede the functions of the Federal Reserve itself. It would begin to have more of an influence through its direct lending power to spur overall economic activity and direction of the economy than the old Federal Reserve structure otherwise could ever do. This was seen in various ways with the RFC.2In the same vein is the issue raised by the testimony of the American Bankers Association representative at the hearing, who said normal banks could handle the lending demand and attempted to disparage the actions of the RFC by comparing the total values of lending amount of banks around the country. As pointed out in the hearing, this was not the case once the real estate and non-industrial, infrastructural and agricultural loans are taken out of the equation, which is not the purpose of the RFC in the first place. But chiefly, when the joint loans and the loans made possible by creating the insurance program which the RFC had, and the overall environment created by the RFC in which direct lending was going on and the risk was less and that type of capital investment was encouraged. Moreover, the Bank of the United States itself, while it was the most important institution in 1823-1836 for direction and stability of the economy, was only 35 million capital in a total state bank capital of 500 million. The purpose is not the monopoly, but the characteristic regulation and control, and the specific kinds of loans.

While it is worth considering this proposal and its background where such documents exist, it is clear that it indicates the intention to completely return to the Hamiltonian credit system, in contradiction to the Federal Reserve Act of 1913. And assuming he had discussed the matter with Roosevelt, it indicates FDR’s intention to still make the powers expressed and given to the RFC throughout the 1930’s and 1940’s, the real nature of the financial system, and not continue to have it operate as a separate institution and exception to the otherwise dominate axioms of finance at the time. In the years that followed this hearing, more powers were given to the RFC, making it possible to win WWII, which could have been applied, as Mead states in the opening of his remarks above. “[T]heir plants, which will serve the Government in this crisis, will be in fine shape to continue peacetime operations, after the crisis is over." It is clear that if Roosevelt had lived past the end of the war, the United States would have continued consolidating the Hamilton credit system, with amendments such as this, and other acts.

Footnotes

1“Acting under the powers granted by Title 3 of the Act approved May 12, 1933 (Thomas Amendment to the Farm Relief Act), the President today issued a Proclamation fixing the weight of the gold dollar at 15 5/21 grains nine-tenths fine. This is 59.06 plus percent of the former weight of 25 8/10 grains, nine-tenths fine, as fixed by Section 1 of the Act of Congress of March 4, 1900. The new gold content of the dollar became effective immediately on the signing of the Proclamation by the President.

"Under the Gold Reserve Act of 1934, signed by the President Tuesday, January 30th, title to the entire stock of monetary gold in the United States, including the gold coin and gold bullion heretofore held by the Federal Reserve Banks and the claim upon gold in the Treasury represented by gold certificates, is vested in the United States Government, and the "profit" from the reduction of the gold content of the dollar, made effective by today's Proclamation, accrues to the United States Treasury. Of this "profit" two billion dollars, under the terms of the Gold Reserve Act and of today's Proclamation, constitute a stabilization fund under the direction of the Secretary of the Treasury. The balance will be converted into the general fund of the Treasury. http://www.presidency.ucsb.edu/ws/?pid=14739"

2In the same vein is the issue raised by the testimony of the American Bankers Association representative at the hearing, who said normal banks could handle the lending demand and attempted to disparage the actions of the RFC by comparing the total values of lending amount of banks around the country. As pointed out in the hearing, this was not the case once the real estate and non-industrial, infrastructural and agricultural loans are taken out of the equation, which is not the purpose of the RFC in the first place. But chiefly, when the joint loans and the loans made possible by creating the insurance program which the RFC had, and the overall environment created by the RFC in which direct lending was going on and the risk was less and that type of capital investment was encouraged. Moreover, the Bank of the United States itself, while it was the most important institution in 1823-1836 for direction and stability of the economy, was only 35 million capital in a total state bank capital of 500 million. The purpose is not the monopoly, but the characteristic regulation and control, and the specific kinds of loans.

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