T

HE rapidity with which economic history is now being made, with the fire of war fanned by the plea of military necessity to speed the process, makes it difficult for us to appreciate the significance of many profoundly important proposals until after they become accomplished facts.

This was true of the amendments to the Federal Reserve Act, which reduced the bank reserves required by law to a minimum which would have been regarded as an invitation to disaster a few years ago. It is also true of the Rural Credits Act, as well as the President's proclamation taking over the American railways, the meaning of which is not even yet fully understood, and it is particularly true of the proposal to create the "War Finance Corporation" that is embodied in a bill that has already been published in full and which will probably have been introduced in Congress by the time this is published.

Briefly, the War Finance Corporation, or, as it has already been dubbed, "The War Bank," is designed to provide financial credit and relief for the security markets that have been more or less paralyzed by the Governmental pre-emption of investment capital that has been necessary in the flotation of the Liberty loans. The control and restriction of new security issues is also provided for, so that unnecessary demands upon the credit supply of the Nation may be avoided while the war lasts.

The bill is a long one and it is not practicable to reprint it· in full. In brief, it provides for the creation of a corporation to be called the "War Finance Corporation," which shall have a capital of five hundred million dollars, procured through the issuance of stock in that amount to which the Government shall be the only subscriber. The control of the Corporation is to be vested in a board of five directors, of which the Secretary of the Treasury shall be chairman. The other four directors are to be appointed by him, subject to the President's approval. The Corporation is to continue in existence during the war and

for six months thereafter, when it shall be liquidated. The Corporation is authorized:

To make advances, upon such terms as it may prescribe, for periods not exceeding five years from the respective dates of such advances: (1) to any bank, banker, or trust company which has made and which has outstanding any loan or loans to any person, firm, corporation, or association whose operations shall be necessary or contributory to the prosecution of the war, and evidenced by a note or notes, or (2) to any bank, banker, or trust company which has rendered financial assistance, directly or indirectly, to any such person, firm, corporation, or association by the purchase of its bonds or other obligations; provided that advances so made by the Corporation on the basis of any such loan or loans shall not exceed seventy-five per cent of the face value thereof, and provided that any advances so made by the Corporation, in cases where such financial assistance shall have been rendered by the purchase of such bonds or other obligations, shall not exceed seventy-five per cent of the market value of such bonds or other obligations at the time of such advance, as estimated and determined by the board of directors of the Corporation; and provided further that all such advances shall be made upon the promissory note or notes of such bank, banker, or trust company, secured by the notes, bonds, or other obligations which are the basis of any such advance by the Corporation, together with all the securities, if any, which such bank, banker, or trust company may hold as collateral for such notes, bonds, or other obligations.

In the case of advances to banks, bankers, and trust companies, one hundred per cent may be advanced against the loans rehypothecated, provided "additional collateral is furnished having a market value of at least twenty-five per cent of the amount borrowed. In the case of savings banks ninety-day loans may be made against collateral having a market value equal to one hundred and twenty-five per cent of the amount advanced.

The rate of interest on such loans may not be less than one per cent in excess of the discount rate for ninety-day commer

cial paper at the Federal Reserve bank of the district in which the borrowing institution is located. Against the loans so made the War Finance Corporation may issue and have outstanding at any one time its notes or obligations in an amount not more than eight times its paid-up capital. These obligations shall run not less than one year or more than five years, and shall bear interest at a rate to be fixed by the Board of Directors. They are to be a paramount floating charge on all assets of the Corporation and are to be issuable at par in payment for any advances made or sold publicly, as the Board of Directors of the War Finance Corporation may determine.

They may also be dealt in by the Federal Reserve banks under the conditions that apply to the bonds of the United States Government that are without the circulation privilege, and paper secured by them shall be eligible for rediscount at the Federal Reserve banks. Against the obligations of the War Finance Corporation, whether acquired by purchase or rediscount, the Federal Reserve banks may issue Federal Reserve notes, subject to a special interest charge or tax to be imposed at the discretion of the Federal Reserve Board-the intention being, presumably, that the Federal Reserve Board shall be empowered to restrain the tendency toward inflation that might otherwise be implicit in the measure.

The directors of the War Finance Corporation are also empowered to license the issuance of new securities, and no issue having a par value of over $100,000 is to be made without their approval. This latter provision is not, however, to apply to loans made in the ordinary course of business as distinguished from borrowing for capital purposes, or to any securities issued by railway corporations whose property may be in the possession and control of the Government. The obligations of the War Finance Corporation are to be exempt from all Federal and State taxes, except inheritance taxes, income surtaxes, and excess profits and war profits taxes now or hereafter imposed.

From this brief analysis it will be seen that the War Finance Corporation will, if it comes into existence, possess the machinery through which the Federal Reserve note circulation may be increased by a maximum of four billion dollars, thus providing a credit fund of that amount that will be at the disposal of those who own or have made advances against the bonds or obligations of "persons, firms, or corporations whose operations shall be necessary or contributory to the prosecution. of the

war.

Obviously there is room for great latitude in determining what operations are "necessary or contributory to the prosecution of the war," but it is plain that a reasonably broad construction of this clause will put at the disposal of the security markets a credit fund of some four and a half billion dollars, as the War Finance Corporation is authorized to lend its capital of $500,000,000, plus $4,000,000,000 (e.g., eight times its capital), to be obtained by the issuance of obligations that will rank with Government bonds and may be used to secure Federal Reserve note circulation.

This fund of $4,500,000,000 may be loaned through banks, bankers, and trust companies directly or indirectly on the bonds and obligations of individuals, firms, and corporations that are engaged in operations that are necessary or contributory to the prosecution of the war. These loans may run for not more than five years, and when secured by the deposit of collateral owned by the borrower may not be for more than seventyfive per cent of the market value; but when bankers rehypothecate the obligations of other borrowers one hundred per cent of the face value of the rehypothecated obligations may be loaned at the discretion of the directors of the War Finance Corporation.

It is also to be noted that, while the bill apparently provides that all loans shall be secured by "obligations or bonds," thus excluding stocks from the securities that are acceptable as collateral, it would seem to permit the use of stocks as margin to the extent of twenty-five per cent of the amount loaned. This is made clear by a clause which permits loans up to one hundred per cent of the market value of the bonds or other obligations hypothecated, provided such advances are additionally secured by "collateral security" (which is not otherwise described) having a market value equal to at least twenty-five per cent of the amount advanced.

Assuming that the Corporation shall exercise its maximum powers, the market value of the securities financed would be $5,625,000,000, computed as follows:

The loans made may be for five years, which brings them nearly within the category of what is described as "permanent financing;" and, while it is not to be assumed that a very large proportion of the accommodation extended will run for so long a period, this five-year provision is to be specially noted as affording a means for successfully bridging any depression in the security markets that may follow peace.

The whole plan is one that its opponents will probably describe as a radical departure in finance. It is being widely discussed already, and at least one prominent authority has hastened to criticise it as "inflationary." As no two of those who use this term would probably agree upon a definition of inflation, I shall not attempt to answer their criticisms.

My own theory is that there can be no inflation as long as the gold standard is maintained (except as it may come through a depreciation in the purchasing power of gold), and that any increase in the supply of credit based upon real values, as measured in terms of gold, is desirable in that it develops the latent energies of capital hitherto dormant. This is, however, a complex question concerning which there is room for endless debate, and I shall not attempt to discuss it; my main purpose in drawing attention to the proposed War Finance Corporation being to point out the results that will probably follow its operations if it is brought into being.

It will provide the means by which, under the guarantee of the United States Government, some $4,500,000,000 may be loaned upon bonds and other corporate obligations for a period of five years or less. It is a maxim of finance that an assurance of credit makes for stability in values. The knowledge that capital can be borrowed by those who need it tends to promote confidence and release what may be described as the hoarded credit that is withheld by the timid in times of stress. The effect is to stimulate enterprise and energize hope and ambition in constructive activity.

I believe that the creation of the War Finance Corporation will accomplish this result, and I am therefore in favor of it as providing a method by which the industrial operations that are essential to the prosecution of the war may be quickened, and the marketable value of the securities which represent such a large share of our accumulated wealth may be maintained upon a parity with their intrinsic value.

If the War Bank becomes a fact, the unnecessary depreciation that has recently occurred in the value of many securities that are indubitably sound is likely to be promptly recovered, and men of ability will be encouraged to devote themselves wholeheartedly to the business of war because they will know that the capital required can be obtained when it is needed.