Banking Formula

RFC Chairman Jesse Jones finally admitted that banks were doing their part in lending to business. Secretary of the Treasury Morgenthau sent a platoon of professors into the Chicago Federal Reserve district to find out who was holding up credit expansion. But not until last week did it occur to anyone in Washington to look for the Administration's pet banking villain right inside the Treasury. At a Washington conference of national bank examiners President Francis Marion Law of the American Bankers Association politely suggested that perhaps the periodic examinations were so strict that bankers feared to do anything except sit on the vault.

So impressed with this suggestion was Secretary Morgenthau that he promptly ordered Mr. Law's speech released to the Press. President Roosevelt, too, seemed impressed. At Hyde Park he told newshawks of two cases within his personal knowledge which seemed to justify the criticism against bank examinations.

One was a small clothing dealer who wanted to enlarge his store. Having secured two endorsers, one worth $500,000 and the other a lawyer with an annual income of nearly $100,000, the clothier obtained an $800 loan from his bank. Nevertheless, the federal examiners ordered the bank to write off the loan because the principal had not been reduced in more than a year.

The other case was a farmer with a $3,000 mortgage who had been able to pay interest on the dot but nothing on principal for three years. The bank examiner likewise threw it out. The President declared that he himself could sell the farm for $6,000, perhaps $8,000 if he had a couple of months' time.

To most commercial bankers, however, the President's two personal stories seemed to suggest a formula for how not to run their business. Wall Street pundits promptly pointed out that it was just the type of loan referred to by Mr. Roosevelt which brought on most of the banking troubles of the Depression. The examiner, they said, was quite right in throwing them out because a commercial bank's proper function is not to lend money for long or indefinite periods but to keep its funds turning over with short, self-liquidating loans. The Treasury, however, pushed plans to co-ordinate the activities of RFC examiners, Federal Reserve examiners, national bank examiners and most important of all, Federal Deposit Insurance Corp. examiners, so that a more liberal policy on slow paper might be quickly formulated.

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