The time is ripe for an alliance of all forces intent upon the business
of recovery. In such an alliance will be found business and banking,
agriculture and industry, and labor and capital. What an all-American
team that is!
Franklin D. Roosevelt, Oct. 24, 1934
Address before the American Bankers Association
President Roosevelt's team included the hard-working members
of the Federal Reserve banks' newly created Industrial Loan divisions,
which were units of the banks' Discount Departments, and the citizen members
of the Reserve banks' Industrial Advisory Committees. Their job? To implement
Section 13(b) of the Federal Reserve Act and get the Reserve banks into
the business of making working capital loans to industrial and commercial
But how was such a task accomplished? It was true, as the accompanying
article shows, that the Federal Reserve was already given some lending
powers through its discount window in 1932 and 1933, so the banks had
some practice in this matter; but those were restrictive programs and
little used. The 1934 legislation added a whole new layer of business
to the banks. What follows is a brief description of how such loans were
handled at the Federal Reserve Bank of Minneapolis. Other than offering
perfunctory explanations, no record in "official" historiesFed
publications or other published historical workswas found on this
subject, so the following is based on a review of the Minneapolis Fed's
archives. It's not clear from those archives that every Reserve bank managed
this business in the same way, but it may be safe to assume that there
"Men of practical affairs"
First, the Industrial Advisory Committee: Subject to the approval of
the Federal Reserve Board, each bank appointed this group, which consisted
of not less than three or no more than five individuals "actively
engaged in some industrial pursuit." One Minneapolis Fed document
called them "men of practical affairs and sound business judgment"
who "insist that an enterprise must be fundamentally sound
to qualify." These practical men received no remuneration for their
work, but were reimbursed for expenses relating to their service, and
were apparently appointed for indefinite terms. The job of this committee
was to review loan applications and make recommendations to the Reserve
At the Minneapolis Fed, records suggest that this group first met on
July 30, 1934, about six weeks after the legislation was signed into
law. Prior to the meeting, a member of the Federal Reserve Board, Eugene
R. Black, made a "brief statement regarding the new functions of
the Federal Reserve Banks." Unfortunately, that statement or any
discussion that may have ensued, are not recorded in the meeting's minutes.
Three members of the bank's Committee were present at this inaugural
event, with an additional two joining the group at the subsequent meeting.
Also, three members of the bank's Executive Committeeincluding
President J.N. Peytonwere also present at the meeting and "participated
in the discussion relative to a number of applications." Again,
that discussion is not recorded.
Minutes of these meetings largely consist of lists of loan requests
and the Committee's action, whether it was a "request for final
application and further investigation" or a denial.
Minneapolis Fed records indicate that these meetings were held through
1955 (Section 13(b) was repealed in 1958), but with increasingly less
frequency and with very little business. Although they began as
twice-monthly meetings in 1934 with numerous applicants, they sometimes
occurred just once a year in the early 1950s with as few as two items
on the agenda. Also, two original members of the groupChairman
Sheldon Wood and John Bushremained on the Committee throughout
its tenure (although the chairman was absent from the final two gatherings).
Putting on the commercial banker hat
When an applicant submitted a request for a Minneapolis Fed working
capital loan, the Reserve Bank would record the receipt of the application,
acknowledge receipt to the applicant and then turn over the application
to Dun & Bradstreet for a credit report. After the credit report
was received, the bank would then assign an "investigator"
to the "case," whoafter making a determination that
the application met with the requirements of the lawwould make
a field investigation.
This field investigation included a verification of financial statements
and an examination of the applicant's books and records "to assure
that applicant has not failed to disclose any of his liabilities."
Assets were also appraised to determine liquidation value.
During the examination the investigator studied "the applicant
himself" to determine management skill and efficiency and would
interview local bankers, if any, and others familiar with the business.
"When all possible information" was assembled, the investigator
would prepare a report for the Industrial Advisory Committee, a copy
of which was mailed to each member in advance of a meeting.
Following the Advisory Committee meeting, the Minneapolis Fed's Discount
Committee would further review the Advisory Committee's recommendation;
this Discount Committee was the final arbiter on whether credit would
be extended to an applicant. If approved, the applicant would then receive
a letter stating terms and conditions of the loan. Security on such
loans included stocks and bonds, town real estate, farm real estate,
chattel mortgages on furniture and fixtures, logging equipment and "various
other types of security."
The above quote, along with other quotations in this section, are taken
from a staff presentation given at the Minneapolis Fed in December 1936
by E.F. Klein, head of the Discount Department. We conclude with an
extended passage from Klein's lecture (collected in an internal publication
called "Staff Lectures on Federal Reserve Operations"), which
gives a sense for the way in which central bankers in the 1930sjust
20 years from the Federal Reserve's creationwere beginning to
act a lot like commercial bankers.
In conjunction with our duties as investigators we service all
loans. Borrowers are required to furnish periodical financial statements.
Their statements are analyzed by our department. We visit all borrowers,
usually once a year, at which time we re-examine the books and records,
re-appraise the collateral and re-investigate the character and ability
of the management in an endeavor to determine the progress of the
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