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AN RFC LESSON
(From New York Times)
The letter of the chairman of the RFC, urging more liberal lending policy toward industrial borrowers, "even the applicant has been operating at loss during the past few years," appeared on the same day as the announcement that the RFC was suing to recover what it can the $60,000,000 unpaid balance very liberal loan, indeed, that it made in 1932. The RFC's loan to the Central Republic Trust Company Chicagothe "Dawes to $90,000,000. The size of it was enough to indicate its essential unsoundness. The total deposits of the Dawes bank were then only 000, and additional $5,000,000 loan made by group of Chicago banks. bank that is compelled to borrow the entire amount of its deposits in order to meet run something more than merely liquid". The extraordinary nature of the loan from business point of view was recognized by those who made It was felt, however, that if the bank had been allowed to close its doors it would have precipitated general bank panic. happened. the bank panic was averted only for the time being, nor there any certainty that would have developed 1932 if the Central Rein June Trust Company had been allowed to No doubt there will still be those to defend the wisdom of the loan, and even today the RFC officially hopeful. Though is suing the stockholders for the $14,000,000 theoretically collectible under their "double liability," the Chicago agent of the corporation is quoted saying that this action is not to be construed definite expression of opinion that the collateral securing the unpaid balance will eventually prove insufficient for payment, but taken merely to preserve the right of recourse "in Chairman Jones has expressed the hope that the end of 'five ten years" the RFC may be able to pull out by disposing of its collateral with little no loss; but when one considers that on Jan. 1933. the principal of the loan had been reduced to $66,423,000. while in the nearly twoyears since then has only been reduced $9,316,000 more, even this sounds As general policy, at all events. now recognized that it one thing for the RFC extend loans for the purpose of making illiquid banks liquid, and another to try to bolster up banks actually insolvent. The same principle must be applied in direct loans industry. Where they are made to sound going businesses for long-term working of commercial banks to supply, the capital that is not the function RFC may advance them with comwhen comparative but mercial banks are obliged to turn down loans not merely on the ground that they are illiquid but that they the RFC will represent bad risk, usually be well advised to keep away company has able to make available spending time power when the latter was most needed. Perhaps it not quite accurate to suggest that Telephone represents perfect cross-section of the public utility industry as whole, but to the extent that does one might well pause and consider the stabiliing possibilities that industry, with its annual net operating income of something like $1,100,000,000 and its army of investors, estimated at about three million The approved theory of government spending that should be held down minimum in good times and backlog of funds built up for use in periods of depression; yet governments being what they are and what they probably always be, this program thus far never been followed. Corporate practice, on the other hand, in such cases as that of American Telephone, been of sort calculated to contribute general stability. Here, it seems us, is one more to add to the numerous other sound reasons why the present administration would be well advised to go slow in its more grandiose schemes for putting the government into the utility business. discouraged investment. The uncertainty is increased by the government's unbalanced budget and the refusal to regard the huge excess of expenditures anything to worry about. The certainty of greatly increased taxation is, of course, another discouragement. The administration's fondness for experimentation at the expense of invested capital is still another. Normally there huge flow of capital into house building, for ample. It is highly speculative business which depends for its istence on generous use of credit. uncertainties have cut off all but trickle of the money which flowed into this business through the purchases of mortgages and equities. The result stagnation which will not be relieved until the uncertainties are removed. The government has made bad situation worse encouraging the fixing artificially high prices for materials and labor.
