Mr. JONES. All right. Let me finish my other story, please. Mr. JONES. The 18th of October 1937 was the date we were stopped. In March 1938 the President wrote us to start lending again. Up to the time we stopped, we had authorized about $190,000,000 of loans. Since March a year ago we have authorized about $350,000,000 in loans. Senator BARKLEY. That is all sorts of loans? Mr. JONES. No; I am talking about business loans only. Senator BARKLEY. I mean all sorts of business-big and little and all the rest? Mr. JONES. Yes. We have never disbursed as much as $300,000,000. A great many authorizations are made that are never availed of the fact that people find that they can get the money from the R. F. C., enables them to get it somewhere else, or they are unable to comply with the conditions. Perhaps they come in and offer us something, and then cannot do the thing they say they can do, We have probably actually disbursed $175,000,000 in industrial loans. We have a good many commitments on the books now that will go out. They go out on a budget basis. Senator BARKLEY. Commitments? Mr. JONES. Commitments; and they draw against it as they need the money; and they only have to pay the interest as they get the money. A great majority of the people who came to us after Secretary Roper's little-business conference were people with ideas and promotion schemes. They thought that if they had some money they could make money. The great majority of them were not entitled to credit on any basis, if we were going to loan with the expectation of ever getting the money back. Senator TAFT. Did not most of them need capital rather than loans? Mr. JONES. Yes. They had promotional ideas. Senator TOWNSEND. Did not the survey that the Commerce. Department made and which was placed in the record of the Mead hearings show that you had made loans to all who were in any way eligible? Mr. JONES. We think we have. We are not infallible. We make plenty of mistakes and plenty of bad loans. We will have a very substantial percentage of loss on our business loans. Senator GLASS. A practical answer to Senator Barkley's question is already in the record in the report of these experts from the Department of Commerce who examined the rejected loan applications. Mr. JONES. That is a very good answer; yes. Senator ADAMS. The liberality of the policy is going to show up in the losses you take? Mr. JONES. Yes. We are going to have plenty of losses. Senator ADAMS. Is there any estimate as to the percentage of losses that you are going to show on those business loans? Would it run as high as 10 to 20 percent? Mr. JONES. I prefer not to make an estimate. It will be plenty, The CHAIRMAN. When you testified before the committee on the Mead bill you also classified the loans to business by amounts. Mr. JONES. Yes, sir. The CHAIRMAN. Have you any recollection-of course, the figures are in the record of the other hearings-have you a recollection about that? I remember there was a large percentage of them that were quite small. Mr. JONES. Forty-nine percent since March 1938 have been loans of $5,000 or less. Senator BANKHEAD. You mean, number or volume? Mr. JONES. In number, probably seventy-odd percent have been for $25,000 or less, and the average has been $55,000 or maybe $50,000 this year. We will not lose a lot of money on the $5,000, $10,000, and $20,000 loans in the aggregate. Our losses come from loans to textile companies, coal mines, furniture factories, and businesses of that kind. Senator TAFT. And glass works? Mr. JONES. I do not remember that. It is those cases where we lend $100,000 to $500,000 to $1,000,000, when the fellow can't go any further and we can't afford to give him any more money. We will have an almost total loss, because a "busted" textile mill or coal mine that will not operate except at a loss has very little value to it. I did not intend to touch on that question. I think we have foreclosed or have in course of foreclosure something over $12,000,000 where we have made industrial loans, and on those we will have a very heavy loss, because, as I say, you can't get very much out of a "busted" industry. If anybody makes loans on an any more liberal basis than we are making them now, they will be grants; not loans. Senator BARKLEY. On the operations of the R. F. C. as a whole it has not sustained a loss, has it? Mr. JONES. No. Senator BARKLEY. It has made a profit? Mr. JONES. We will have a very substantial profit. Senator BARKLEY. You will have to offset profits on some other type of loans in order to recoup for those losses on these particular loans? Mr. JONES. That is correct. Senator BARKLEY. From what source did you get your profit that enables you to chalk up a total profit, notwithstanding these business losses? Mr. JONES. We have had an override of approximately 12 percent in interest over what we paid for money. Senator ADAMS. If this bill goes through it practically compels you to lend at the cost of your money? Mr. JONES. There will be very little override. Senator ADAMS. There is nothing to recoup your losses? Mr. JONES. No, sir. Out of that 11⁄2 percent we have paid our operating expenses, which have been less than 1 percent. We have accumulated reserves of about $250,000,000 to cover our losses; and our losses I do not think will exceed half that. The losses will come largely from the things I am talking about. Senator BARKLEY. That does have a direct bearing upon the wisdom of attempting to do what this immediate amendment is proposed to do? Mr. JONES. It has a bearing, Senator, on the wisdom of doing what we are doing in making generous, liberal loans to business where employment is involved. Senator BARKLEY. Under the circumstances, I do not know whether you would want to express an opinion as to the effect or the wisdom of adopting this amendment. What is your reaction to that, if you want to express it? Mr. JONES. I assume the effect would be something like what was stated in the paper yesterday, and I concurred in the statementsomething like the Roper little-business men's meeting. It will lead a lot of people to believe that they are going to get money, with or without security, and it will mean that they will rush the banks, and they will rush the R. F. C. and we will try a little harder to make the loans, and the banks will, I hope. The R. F. C. will, certainly. That is about what it will mean. It will stir up and advertise the fact that the money is available to business, little or big. Senator BANKHEAD. Secured or unsecured. Senator BARKLEY. It will operate as a fire under you that will make them more difficult to resist? Mr. JONES. It will do that. Senator ADAMS. And it will cause disappointment through the country? Mr. JONES. Just like the people that came in after Mr. Roper's meeting expecting to get money without any right to expect to get it. Senator BYRNES. The only way you would avoid disappointments would be to make bad loans? Mr. JONES. To make worse loans than we are making. Senator BYRNES. And you have been making losses on those? Senator BARKLEY. I do not know whether you want to say "yes" or "no"-whether you think it ought to be adopted or not. Senator BANKHEAD. I think he has pretty plainly said that. Mr. JONES. I would like to go further and say that I told the President yesterday that the R. F. C., after consultation among ourselves, had no objection to it if Congress wanted to pass it. Senator MALONEY. Before you give a "yes" or "no" answer, Mr. Jones, I would like to ask you one question. Mr. JONES. I am not going to give it, so go ahead. Senator MALONEY. As I read the language of the bill, it directs the Reconstruction Finance Corporation to make loans to companies that are insolvent. It says here that they shall be made only when the business enterprise, upon the completion of such financing, is sound. Mr. JONES. Senator, we do that now. Senator MALONEY. The law provides that the company shall be solvent before you make the loan? Mr. JONES. We do that every day, now. A lot of people come to us that are insolvent, and by our authorizing a loan, conditioned upon 165717-39——17 the fact that the creditors will accept a compromise, accept stock or income bonds or a reduction in the principal, they become solvent again. We do that every day. It does not mean a thing we are not now doing. Senator MALONEY. Except that it will add to the disappointment of people. Mr. JONES. Probably. Senator GLASS. Why don't you object to a process of that sort? Mr. JONES. Senator, I do not wish to. Senator TOBEY. If I might sum up his testimony, I would say that he has damned it with faint praise. Senator TOWNSEND. What effect will this low rate of interest have upon the Federal Land banks? Mr. JONES. Senator, I do not know. I do not know very much about that. Senator TOWNSEND. Who could answer that question? Mr. JONES. I think Mr. Hill, over at the Farm Credit Administration, could answer that. He is, I understand, a very able and fine gentleman, and I think he can answer that. I do not know anything about their operations. Senator BARKLEY. Of course loans that would be made under this bill, under the Bankhead-Jones Act, and under the Farm Security Act are a different type of loans from those made by the Farm Credit Administration. Senator TOWNSEND. They may be a different type, but why would not this fellow pay off his loan and Senator BARKLEY (interposing). If he pays off his loan on the farm he is on, he is not a tenant. Senator BYRNES. They distinguish them, as you know, before the Appropriations Committee, that those loans are made to farmers who do not own land. They are made upon the taking of collateral or a lien upon crops or mules or things of that kind, where there is no real estate. That is one group. The other group that they propose are people who are entitled under this tenancy provision. They really do not conflict with the Federal land banks. Senator BARKLEY. A different type of loans to a different type of people, really. The CHAIRMAN. Are there any further questions of Mr. Jones? We will meet tomorrow morning at 10 and proceed with the consideration of the bill in executive session. (Whereupon, at 4:30 p. m., the committee adjourned until tomorrow, Friday, July 21, 1939, at 10 a. m.) LENDING OUR WAY TO PROSPERITY (An address by Leonard P. Ayres, vice president, Cleveland Trust Co.; chairman' Research Council, American Bankers Association, delivered at the Graduate School of Banking, Rutgers University, New Brunswick, N. J., June 23, 1939, and published by the Graduate School of Banking, American Bankers Association, New York, N. Y.) When governments initiate new programs of action designed to bring about business recovery, the businessmen whose interests are most fundamentally at issue are the bankers. The reason why that is so is that the efforts of the Govern ment must always deal with the things that constitute the normal business of the banker, such as money, loans, expenditures, bond issues, and interest rates. Bankers are always much concerned when governments introduce innovations in these matters in order to stimulate business activity, for bankers know from long experience that such measures adopted to meet temporary emergencies always remain as lasting changes. During nearly 7 years our national administration at Washington has been struggling with the three R's of the New Deal, reform, relief, and recovery. It is not possible to disentangle the multitude of new measures enacted by the Congress during the past 7 years, and to state precisely which ones among them were relief measures, which were directed at instituting reforms, and which were intended to stimulate recovery. ATTEMPTS TO LIFT PRICE LEVELS Nevertheless we can with reasonable accuracy classify the recovery measures in two great groups, and we can state with some confidence that a third group is now being planned. The first of these three groups of efforts for business recovery was made up of measures designed to lift the burdens of debt. It undertook to do this in part by lifting the levels of prices, for the collapse of prices early in the depression had made people everywhere feel hopeless about the problems of ever paying their debts. When the great depression descended upon us, one of its first and most terrifying developments was the collapse of prices. Market quotations for stocks dropped fast and far, and later on those of bonds followed them downward. Real-estate values seemed to evaporate, and there were serious shrinkages in the prices of farm products, raw materials, and of most wholesale commodities. One of the inexorable laws of economics is that when prices fall the burdens of debt increase. The working out of that law on the farm is simple and direct. The farmer who had a mortgage of $2,500 on his farm when wheat sold locally for $2.50 a bushel could pay off his debt with 1,000 bushels of wheat. When the price at the farm fell to 25 cents, he could have paid off the debt, not with 1,000 bushels, but with 10,000 bushels. The law applies everywhere. In proportion as the levels of prices decline, the burdens of debt increase. The law operates against debtors whether they be individuals, families, corporations, municipalities, or nations. Our first great recovery effort was an attempt to raise prices in order to lift the burdens of debt that were oppressing our people. As a part of that effort we outlawed the clauses in bond indentures that provided for payments in gold. In the effort to lift price levels we decreased the gold content of the dollar. Another part of that same program provided for the huge purchases of silver. Most of the changes that we made in our monetary system proved to be either outright failures or only partially effective. We did not succeed in bringing about any such lifting of price levels as had been planned, and we did not produce recovery. Another important part of our effort to lift the burdens of debt consisted of the taking over by the Government of the mortgages on millions of the homes of people living in towns and cities, and the refinancing with public funds of the mortgages on millions of farms. In addition the Government lent many millions of dollars to banks, railroads, insurance companies, and other corporations. These new lending activities of the Government did lessen the difficult problems of multitudes of individuals and corporations by reducing the burden of their debts, but they did not produce recovery. ATTEMPTS TO SPEND OUR WAY TO PROSPERITY The second group of efforts designed to produce recovery includes all the varied spending activities which we know by the name of pump-priming. The purpose of these efforts is to increase consumer purchasing power. The economic argument behind them is that if great numbers of people can be given increased incomes, they will at once try to purchase larger amounts of all sorts of goods. Increased demands will call for increased supplies and as producers strive to provide for those increases they will enlarge their plants, install improved machinery, build new factories, and in general do the things that will restore full activity to America's great productive industries. It has been realized throughout the depression that the most serious unemployment was concentrated in the heavy industries that make durable goods |