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War Finance Corporation (Classic Reprint)

War Finance Corporation (Classic Reprint)

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Excerpt from War Finance Corporation

In Europe central banks are permitted to grant to banks and bankers loans upon stocks and bonds upon certain well-defined terms.

I would like to direct your particular attention to that statement because that indicates the fundamental purpose of this bill. In Europe, I wish to repeat, central banks, which correspond to our Federal reserve banks in a sense, are permitted to "rant to banks and bankers loans upon stocks and bonds upon certain well-defined terms. But hero the Federal reserve banks are not permitted to do that, the Federal Reserve Act having specifically contemplated advances of that character only upon what we call liquid or commercial paper, and therefore the Federal reserve banks are not permitted to rediscount any paper for other banks which is secured by fixed investments.

The Federal Reserve Act does not provide for these and the War Finance Corporation is designed as a war emergency to fill this gap. The provisions of the Federal Reserve Act which permit Federal Reserve banks to rediscount and purchase commercial paper and paper secured by the Government's obligations have bad the effect of forcing the banks to discriminate against loans on ineligible paper, even where such loans were vitally necessary for war purposes, in favor of loans on commercial paper even where they represented activities or enterprises not related to the war and which might well be curtailed during the period of the war. It is believed that the proposed bill has been wisely and conservatively conceived as a war measure to give relief from this condition during the war. The banks of the country would, no doubt, scrutinize with the utmost care both the loans themselves and the security therefor and would exercise their individual judgment upon the borrower's credit before assuming a liability for the amount of the loan, and also because they would be under the necessity of advancing, out of their own resources, 25 per cent of the amount loaned. The bill would authorize advances to a bank of only 75 per cent of the amount loaned by the bank on the notes or obligations of persons, firms, or corporations whose activities are necessary or contributory to the war.

The bill contemplates that the War Finance Corporation shall lend money to banks, both National and State, which are making loans to enterprises conducted by persons. firms, or corporations producing materials or supplies, or doing anything else which is necessary for or contributory to the war. If a bank, for instance, should loan money, we will say, to a munitions company and take the company's six months' note with the company's bond as collateral security, that note would not be eligible for rediscount in the Federal Reserve banks; but the War Finance Corporation in such circumstances could advance to the bank against the note of the munitions company. so secured with that bank's indorsement on it, 75 per cent of the face of that note.

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