March 1946
FINANCING WAR PRODUCTION AND CONTRACT TERMINATIONS
UNDER REGULATION V
In the early stages of the National Defense
Program, prior to July 1940, the principal sources
of working capital credit for defense contractors
were commercial bank loans, Federal Reserve Bank
loans under Section 13b of the Federal Reserve Act,
and Reconstruction Finance Corporation industrial
loans. Also, the War and Navy Departments had
authority to make progress payments on certain
contracts up to the value of the work completed,
protected by a lien upon the articles being produced.
In order to meet the demands of defense contractors; particularly to finance their initial heavy
costs, the Navy Department was later authorized
in the Act of June 28, 1940, to make advance payments on contracts for war supplies not exceeding
30 per cent of the contract price. Similar authority
was given the War Department in the Act of
July 2, 1940. These provisions were superseded
by Title II of the First War Powers Act of December 18, 1941, under which Executive Order 9001
was issued authorizing the War and Navy Departments and the Maritime Commission to make advance, progress, and other payments upon their
contracts in any percentage of the contract price
whenever, in their judgment, the prosecution of
the war would be facilitated thereby.
The extension of commercial bank credit to war
production contractors was greatly facilitated by the
Assignment of Claims Act of 1940, which became
effective on October 9, 1940. This Act amended
former statutes so as to provide in substance that
claims for moneys due or to become due from the
United States under a contract providing for payments aggregating $1,000 or more might be assigned to a bank, trust company, or other financing
institution, including any Federal lending agency.
The Assignment of Claims Act was of no assistance
to subcontractors who held no prime contracts.
Both the War and Navy Departments soon found
that the methods of financing thus made available
were still inadequate, particularly in view of the
fact that the extension of subcontracting under the
war production program to a point never before
contemplated in American industry brought many
hundreds of small companies into the program.
Situations arose, especially among subcontractors
240
Digitized for FRASER
http://fraser.stlouisfed.org/
Federal Reserve Bank of St. Louis
and sub-subcontractors, where the amount of working capital required was far beyond any amount
that a commercial bank could be asked to provide
without some form of protection against loss, or
was in excess of the bank's legal lending limit,
and where it was either not possible or not feasible
to handle the situation through advance payments.
Moreover, certain inherent disadvantages limited
the amount of financing of war production contracts through advance payments. First, and most
important of all, advance payments could legally
be made only to contractors with the Armed Services, i. e., prime contractors. It was possible for
the prime contractor, with the approval of the contracting agency, to use funds received from the
Services to make advances to his subcontractors,
and in many cases this was done. In general, however, this procedure was not feasible, and therefore
advance payments did not prove to be a satisfactory
method of meeting the credit needs of subcontractors. In the case of contractors who had contracts
with different supply services of the War Department or bureaus of the Navy Department, the
limitation of the use of advance payment money
by each service or bureau to its own contracts resulted in difficult problems of maintaining segregated accounts. The financing through advance
payments of a prime contractor who was also a
subcontractor led to similar administrative problems. Other difficulties grew out of the necessity
of making certain that large portions of the amounts
authorized were not advanced before they were
actually needed. Premature advances resulted in
funds lying idle in the banks. Finally, advance
payments were originally made without interest,
and this tended to encourage contractors to acquire
unnecessarily large stocks of raw materials before
they were actually needed. The imposition of a
standard interest charge of 2% per cent in June of
1942 did much to eliminate this difficulty.
Early in 1941 the War and Navy Departments,
recognizing the difficulties of financing contractors
by advance payments, suggested the possibility of
some form of joint financing to be participated in
by the Services and private banks. Various bills
to remedy the situation were introduced in Congress, including one, supported by the War and
FEDERAL RESERVE BULLETIN
March 1946
FINANCING WAR PRODUCTION AND CONTRACT TERMINATIONS UNDER REGULATION V
Navy Departments, to amend Section 13b of the
Federal Reserve Act so as to liberalize the authority
of the Federal Reserve Banks to provide working
capital for industry. None of this legislation was
enacted.
The origin of Regulation V loans. In the meantime, problems of securing the financing of individual war contracts were becoming more numerous,
particularly from the point of view of the production program of the War Department. In the
latter part of February 1942 a conspicuous incident
arose in which a subcontractor whose production
was vital to the aircraft program was unable to
secure essential working capital through private
sources or by advances from his prime contractor.
This brought the entire matter to a head. It
seemed apparent that necessary legislation could
not be obtained without additional delay and that
some quicker method of solving the problem must
be found.
A means of achieving the desired result was
suggested by officials of the War Department after
discussions with representatives of the Board of
Governors and others. This contemplated the issuance of an executive order under which the Federal
Reserve Banks would act as fiscal agents for the
Services in the guaranteeing of loans made by
financing institutions for war production purposes.
Through prompt action in formulating a workable
program a serious impediment to maximum production by small contractors, sorely needed at that
time, was eliminated. It was early decided that the
program, which became known as the "V" loan
program, was one which could be advantageously
utilized by both the War and Navy Departments
and by the Maritime Commission. Representatives
of those agencies, as well as of the War Production
Board and the Board of Governors of the Federal
Reserve System, participated in policy making conferences from the beginning.
In order to obtain the necessary authority to put
the program into effect, the Chairman of the War
Production Board, the Under Secretary of War,
the Under Secretary of the Navy, and the Chairman
of the Maritime Commission addressed a joint letter
to the President of the United States, proposing an
executive order under the First War Powers Act
which would authorize the War and Navy Departments and the Maritime Commission to guarantee,
or participate in, loans or commitments entered into
by any Federal Reserve Bank, the Reconstruction
MARCH
1946
Digitized for FRASER
http://fraser.stlouisfed.org/
Federal Reserve Bank of St. Louis
Finance Corporation, or any other financing institutions to finance contractors engaged in war production. It was also proposed that the executive
order should designate the Federal Reserve Banks
as fiscal agents for the Services so as to utilize the
existing experience and personnel of the twelve
Federal Reserve Banks and their 24 branches located
throughout the United States.
The proposed executive order was approved by
the Bureau of the Budget and by the Office of the
Attorney General, and was signed by the President
on March 26,. 1942, as Executive Order No. 9112.
Confirmation of the executive order by Congress
was included in the Act of June 11, 1942, which
created the Smaller War Plants Corporation.
The Executive Order provided that the operations
of the Reserve Banks should be subject to such
directions and conditions as the Board of Governors
of the Federal Reserve System, by regulation, might
prescribe after consultation with the Services.
Regulation V of the Board of Governors was issued
effective April 6, 1942, setting forth the general
arrangements under which the Reserve Banks
would act on behalf of the Services. It made the
Reserve Banks responsible for carrying out instructions issued by the Services and reserved for the
Board of Governors the power to prescribe rates
of interest, guarantee fees, and other charges in
connection with guaranteed loans.
Instructions were promptly issued by the Secretary of War, the Secretary of the Navy, and the
Chairman of the Maritime Commission to the
Federal Reserve Banks with respect to their duties
as agents for the Services. Among other things,
these instructions provided for investigation, report,
and recommendation by the Federal Reserve Bank
in connection with each application for a guarantee.
Operating procedure under Regulation V. In
the War Department, the V loan program was
administered by the Advance Payment and Loan
Branch, Office of the Fiscal Director, and in the
NaVy' Department and the Maritime Commission
by their respective Finance Divisions. The general
procedure under which loan guarantees were
granted was about as follows. The manufacturer,
or other war contractor, who had need of financing
to handle his war contracts would apply to his local
banker for credit. If the needed credit was in
excess of that which the local bank could furnish
because of the risk or of legal loan limitations, the
bank would apply to the nearest Federal Reserve
241
March 1946
FINANCING WAR PRODUCTION AND CONTRACT TERMINATIONS UNDER REGULATION V
Bank or branch for a guarantee of a specified per- guaranteeing agencies and at the twelve Federal
centage of the proposed loan. The local bank Reserve Banks and their branches. Important
would usually suggest terms and conditions of the policy questions were discussed by a joint policy
loan and furnish necessary credit data. The Re- committee made up of representatives of the three
serve Bank would then review the information, guaranteeing agencies and of the Board of Goverand approve the terms or suggest such modifications nors, and the resulting uniformity in policy deas seemed necessary to protect the interest of the cisions was responsible to a considerable degree for
the success of the Regulation V financing program.
Government.
In connection with its program of decentraliza- The Office of the Administrator for War Loans
tion, the War Department assigned liaison officers obtained periodic reports from the Federal Reserve
to serve at each of the twelve Federal Reserve Banks covering their guaranteed loan operations
Banks, the Detroit Branch of the Federal Reserve and has maintained the statistical records on which
Bank of Chicago, and the Los Angeles Branch of published data are based.
the Federal Reserve Bank of San Francisco. These
The first standard form of guarantee agreement
liaison officers were required to certify that each for use by the War Department, Navy Department,
borrower applying for a War Department guaran- and Maritime Commission was issued under date
tee was engaged in an operation deemed to be of May 14, 1942. The guarantee takes the form of
necessary, appropriate, or convenient for the prose- an obligation on the part of the guarantor to purcution of the war and was in need of funds to chase the guaranteed percentage of the outstanding
expedite war production. They also entered into amount of the loan from the financing institution
negotiations with the Reserve Banks and the bor- on ten days' notice, irrespective of whether any
rowers as to the terms necessary to protect the default had occurred on the part of the borrower.
Government's interest. Field officers of the Mari- The guarantee agreement of May 14, 1942, contime Commission furnished similar statements of tained provisions, Sections 5 and 6, to protect both
the financing institution and the borrower against
necessity with reference to its guaranteed loans.
The War Department delegated to the Federal cancellation of the borrower's war contracts for the
Reserve Banks authority to approve, with the con- convenience of the Government. Section 5 procurrence of the liaison officer, and execute guaran- tected the financing institution by providing, in the
tees of loans of $100,000 or less if the percentage event of cancellation, for an increase in the guaranof guarantee was not in excess of 90 without sub- tee percentage based upon the ratio of the borrower's
mission of the application to Washington. The cancelled contracts to its total war contracts. SecMaritime Commission delegated similar authority tion 6 gave protection to the borrower by providing,
to the Reserve Banks when the guaranteed portion in the event of cancellation, for a suspension of
of the loan was not in excess of $100,000. Because maturity and a waiver of interest on a portion of
most of the Navy Department procurement pro- the loan based l upon the same ratio. Interest so
gram was centralized in the technical bureaus in waived, up to 2 /2 per cent per annum, was payable
Washington, it was believed that applications for by the guarantor. Benefits of these protective proloan guarantees could be acted upon more promptly visions continued in effect until settlement of the
if they were all forwarded to Washington for con- contracts on which the adjustments were based.
The following charges for guarantee fees payable
sideration. Consequently, the Navy Department
did not delegate authority to the Reserve Banks to by financing institutions were prescribed by the
approve and execute guarantees without submission Board of Governors in April 1942 after joint approval by the Under Secretary of War, the Under
of the applications to Washington.
All applications for guaranteed loans, and all Secretary of the Navy, and the Chairman of the
correspondence between the Federal Reserve Banks Maritime Commission:
and the guarantors in connection with the V loan
Percentage of loan
Guarantee fee
guaranteed
(Percentage of loan rate)
program, passed through the Office of the Adminis0 to 75
10 to 20
trator for War Loans of the Board of Governors.
76
to
90
20
to 25
By having all matters pertaining to the program
91 to 100
30 to 40
pass through a single office, it was possible to establish substantially uniform procedures by all three A maximum interest rate of 5 per cent on guaran242
Digitized for FRASER
http://fraser.stlouisfed.org/
Federal Reserve Bank of St. Louis
FEDERAL RESERVE BULLETIN
March 1946
FINANCING WAR PRODUCTION AND CONTRACT TERMINATIONS UNDER REGULATION V
teed loans was stipulated. Within this limit the
interest rate was determined by the borrower and
the financing institution. A revised schedule of
guarantee fees was adopted on December 29, 1942,
as follows:
these fears, the War Department, Navy Department, Maritime Commission, and Board of Governors announced on September 1, 1943, a broadened
basis for the guaranteeing of loans which would
enable contractors who made arrangements in advance to obtain the use of most of their working
Percentage of loan
Guarantee fee
capital promptly upon cancellation of their war
guaranteed
(Percentage of loan rate)
contracts for the convenience of the Government.
10
60 or less
12 Vz
65
Loans guaranteed upon this broadened basis
15
70
were known as VT loans to distinguish them from
75
17/ 2
V loans. V loans were essentially production loans
20
80
although
in some cases they contained certain pro85
22 Vz
visions for termination financing as well. They
25
90 (for loans of $150,000 or less)
25-30
90 (for loans over $150,000)
were, in general, made to concerns who were sub30-50
Over 90
contractors or mixed prime and subcontractors or
prime
contractors having contracts with a number
After a year's experience a revision of the standof
different
technical services or with both the Army
ard form of guarantee agreement was adopted
effective April 6, 1943, primarily to effect certain and Navy. Frequently the concern may have had
technical improvements. It was prepared by repre- several hundred contracts and purchase orders
sentatives of the War Department, Navy Depart- which had to be financed on an over-all basis.
ment, Maritime Commission, and the Board of The loans thus usually took the form of revolving
Governors of the Federal Reserve System, after credits with maturities usually not exceeding two
discussions with members of the War Loans Com- years. They required repayments out of moneys
mittee of J:he American Bankers Association, mem- coming due from war production contracts assigned
bers of the Banking Practice Committee of the as security.
VT loans were similar except that they were
Reserve City Bankers Association, officers and attorneys of the twelve Federal Reserve Banks, and intended to free working capital upon termination
a selected group of attorneys for commercial banks of contracts as well as to provide working capital
to finance the contracts. VT loans were guaranteed
in various parts of the country.
The scope of operations under the guaranteed under the standard form of guarantee agreement
loan program was enlarged by Executive Order No. used for V loans, with two principal amendments.
9336 issued by the President on April 24, 1943. The first required the financing institution to have
This order authorized the Office of Lend-Lease a participation in the loan at all times; accordingly,
Administration and the War Shipping Adminis- the original percentage of guarantee specified was
tration to underwrite any guarantees made on their not subject to increase upon cancellation of war
behalf by the War and Navy Departments and the production contracts as was the case with V loans
under Section 5 of the guarantee agreement. The
Maritime Commission.
On May 12, 1943, the Board of Governors estab- second amendment required the financing institulished a maximum of lA per cent per annum for tion to share with the guarantor any commitment
any commitment fee charged the borrower by the fee charged the borrower on the loan.
The maximum amount of credit available to a
financing institution on a Regulation V loan.
Extension of program to include VT loans. Dur- borrower under a VT loan was based upon a stated
ing the summer of 1943 it became evident that percentage of inventories, work in process, accounts
many concerns engaged in war production were receivable, and, without duplication, amounts paid
reluctant to assume additional war contracts because or concurrently to be paid to subcontractors or
of the fear that their working capital would be tied suppliers on claims arising out of the termination
up in such contracts at the termination of the war. of war production contracts. The Board of GovThey felt this might delay their return to peacetime ernors prescribed a maximum commitment fee of
operations and thus place them in an unfavorable Y2 per cent on VT loans.
The Maritime Commission did not authorize any
competitive position. In order that war production
schedules might not be interfered with because of VT guarantees, as it desired to guarantee loans
MARCH
1946
Digitized for FRASER
http://fraser.stlouisfed.org/
Federal Reserve Bank of St. Louis
243
March 1946
FINANCING WAR PRODUCTION AND CONTRACT TERMINATIONS UNDER REGULATION V
only for war production purposes. The Navy Department restricted borrowings, prior to cancellations, to amounts actually needed for war production purposes. The War Department, however,
did not insist upon any such limitations, leaving it
entirely up to the financing institutions to see that
all borrowings were within the terms of the borrowing formula.
Legislation for contract termination loans. In the
fall of 1943, steps were taken to provide legislation
covering contract termination financing. The Joint
Contract Termination Board established a Subcommittee on Interim Financing, which prepared a
statement of policy on termination financing, that
was incorporated in the Baruch-Hancock Report on
War and Post-War Adjustment Policies of February
.15, 1944. The recommendations of this report were
in turn reflected in the Contract Settlement Act
of 1944, approved July 1, 1944.
On August 18, 1944, the Director of Contract
Settlement issued his General Regulation No. 1
prescribing procedures and policies to be followed
by the War and Navy Departments and the Maritime Commission in guaranteeing termination loans
through the agency of the Federal Reserve Banks.
Such termination loans, known as T loans, arc for
the purpose of enabling war contractors to obtain
the use of funds tied up in war production pending
final settlement of claims arising from terminated
contracts. The T loan program was a logical extension of the V and VT loan programs, and
Regulation V of the Board of Governors of the
Federal Reserve System was revised effective September 11, 1944, to cover loans made under the
Contract Settlement Act as well as loans made
under the President's Executive Order No. 9112.
Under the T loan program the War Department
and Maritime Commission delegated to the Federal
Reserve Banks authority to execute guarantees of
loans totaling (a) $500,000 or less to any one borrower when the requested percentage of guarantee
is not in excess of 90 and (b) $100,000 or less to
any one borrower when the requested percentage of guarantee is not in excess of 95, subject to the concurrence of the liaison officer in
the case of applications for War Department guarantees, and of the field officer in the case of Maritime Commission guarantees.
Since September 1944 only two types of guaranteed loans have been authorized, namely, T loans
and 1944V loans. 1944V loans were to provide
244
Digitized for FRASER
http://fraser.stlouisfed.org/
Federal Reserve Bank of St. Louis
working capital for war production purposes or to
provide funds for both production and contract
termination financing. These new 1944V loans
were similar to the VT loans made between September 1943 and September 1944. The form of
guarantee agreement was simplified and shortened,
largely by deleting Sections 5 and 6 of the April 6,
1943, form of agreement. The War Department
delegated to the Federal Reserve Banks authority
to execute, with the concurrence of the liaison
officer, guarantees of 1944V loans totaling $250,000
or less to any one borrower when the requested
percentage of guarantee was not in excess of 90.
Similar authority was delegated to the Reserve
Banks by the Maritime Commission with respect
to guarantees of $100,000 or less on loans to any
one borrower when the requested percentage of
guarantee was not in excess of 90.
Guarantee fees prescribed by the Board of Governors for T loans and 1944V loans were substantially below those which were in effect for V and
VT loans. The maximum rate of interest which
might be charged a borrower was reduced from
5 per cent to 4^2 per cent. The following is the
schedule of fees payable to the guarantor by the
financing institution on both 1944V and T loans:
Percentage
of loan
guaranteed
80 or less
85
90
95
Over 95
Guarantee fee
(Percentage of amount of
interest payable by borrower)
10
15
20
30
50
The maximum commitment fee that a financing
institution may charge is 54 per cent or a flat fee
not to exceed $50, and the sharing in the commitment fee by the guarantor was eliminated.
Decline in lending activities. Cancellations of
war contracts following termination of the war in
Europe in May and in the Pacific in August did
not bring any substantial increase in applications
for guaranteed termination loans.
Upon the Japanese surrender, it was determined
by the Services that new Regulation V loans other
than T loans should be authorized only in exceptional cases in which there is a clear necessity for
procurement of supplies or services from a particular borrower and no other means of adequate
financing is available to that borrower. Pursuant
to that policy only a few 1944V guarantees have
been authorized since August 1945.
FEDERAL RESERVE BULLETIN
March 1946
FINANCING WAR PRODUCTION AND CONTRACT TERMINATIONS UNDER REGULATION V
Between September 1945 and the middle of
January 1946 the War Department closed its liaison
offices at the Federal Reserve Banks. Incident to
the decline in guaranteed loan activity and the
discontinuance of the War Department liaison
offices, authority was delegated to the Federal Reserve Banks by the War and Navy Departments
to take action without submission to Washington
whenever, in the discretion of the Reserve Bank,
such action is deemed to be of relatively minor
importance and not materially affecting the interests of the guarantor. Such authority to act includes amendments of guarantee agreements and
loan agreements, consents or approvals concerning
acts by borrowers or financing institutions, waivers
of default, and extensions of maturity not exceeding
60 days. Applications for War Department guarantees have been submitted to Washington for
approval since discontinuance of its liaison offices
at the Federal Reserve Banks.
Statistical summary of guaranteed loans. To
December 31, 1945, a total of 1,400 banks and other
financing institutions had made or participated in
guaranteed loans under Regulation V. The smallest
credit guaranteed was for $400 and the largest for
one billion dollars. Nearly 400 banks participated
in the latter credit, of which only 100 million
dollars was utilized. This credit, like many
other guaranteed loans, was arranged for under
the provisions of Regulation V because the guaranteed portion of Regulation V loans was not subject
to legal limitations on the amount which might be
lent to a single borrower. The maximum amount
of this particular credit was in excess of the total
lending capacity of all the commercial banks in
the country (approximately 600 million dollars)
on such loans to a single borrower. Of the
total number of Regulation V loans authorized,
58.6 per cent were for loans of $250,000 or less and
approximately 75 per cent were for amounts of
$500,000 or less, indicating that many smaller concerns were assisted by this method of financing.
Table 1 shows the percentage of total number and
amount of guaranteed loans authorized, classified
by size of loan.
In general, it was the policy of the Services to
keep the percentages of guarantee as low as the
character of the risk and the size of the loan
justified. The reason for this was to insure adequate servicing of the loans by the financing institutions. Guarantees were accordingly ordinarily
MARCH 1946
Digitized for FRASER
http://fraser.stlouisfed.org/
Federal Reserve Bank of St. Louis
limited to 90 per cent, many were substantially
below that percentage and in few cases did the
percentage of guarantee exceed 90. The guaranteed
TABLE 1
PERCENTAGE DISTRIBUTION OF REGULATION V
LOANS AUTHORIZED TO DECEMBER 31, 1945
BY SIZE OF LOAN
Percentage of total Percentage of total
number of loans
amount of loans
Size of loan
$10,000 or less
10,001-50,000
50,001-100,000
100,001-250,000
250,001-500,000
500,001-1,000,000
1,000,001-5,000,000
5,000,001-50,000,000
Over 50,000,000
Group
Cumulative
Group
Cumulative
5.3
18.4
15.8
19.1
16.3
10.8
11.4
2.7
0.2
5.3
23.7
39.5
58.6
74.9
85.7
97.1
99.8
100.0
0.2
0.5
1.1
2.9
5.4
7.2
22.0
31.5
29.2
0.2
0.7
1.8
4.7
10.1
17.3
39.3
70.8
100.0
100.0
100.0
portion of loans outstanding December 31, 1945,
averaged 85 per cent.
From the beginning of the V loan program in
April 1942 to December 31, 1945, the Federal
Reserve Banks received 9,605 applications for
guaranteed loans aggregating $10,674,433,000. The
War Department, Navy Department, and Maritime
Commission authorized 8,757 guaranteed loans
totaling $10,339,400,000. Of these authorizations
6,678 for $7,952,972,000 were War Department
guarantees; 1,794 for $2,212,241,000 were Navy
Department guarantees; and 285 for $174,187,000
were Maritime Commission guarantees. Only 847
applications aggregating $334,833,000 were rejected
by the guaranteeing agencies. The principal reasons
for rejections were that the guarantor could not
certify that the production of the applicant was necessary, appropriate, or convenient for the prosecution of the war, or that it was believed preferable to
provide the necessary financing by advance payments. Of the 8,757 guarantees authorized, 7,999
were actually executed, covering credits aggregating
$9,891,284,000.
Total credit available under guaranteed loans
was always considerably in excess of the amounts
being borrowed. The largest amount of Regulation
V credit outstanding at any time was $2,083,435,000
at the end of July 1944. Credit available reached its
peak at the end of October 1944, when almost
$6,263,065,000 was available to borrowers under
guaranteed loans. Figures showing the total amount
of credit available and of guaranteed loans out-
245
March 1946
FINANCING WAR PRODUCTION AND CONTRACT TERMINATIONS UNDER REGULATION V
standing semiannually trom
December 31, 1945, are given
Table 3 shows by Federal
total number and amount
June 30, 1942, to
in Table 2.
Reserve district the
of applications for
TABLE 2
TOTAL CREDIT AVAILABLE UNDER REGULATION V
LOANS AND AMOUNT OF GUARANTEED LOANS
OUTSTANDING SEMIANNUALLY
JUNE 30, 1942—DECEMBER 31, 1945
Date
June 30. 1942
Dec. 31, 1942
June 30, 1943
Dec. 31, 1943
June 30, 1944
Dec. 31, 1944
June 30, 1945
Dec. 31, 1945
*
Credit
available
Loans
outstanding
$218,996,571
2,233,841,266
3,638,305,895
5,060,326,526
5,875,114,565
6,189,556,384
5,081,469,152
1,476,864,742
$81,108,115
803,720,080
1,428,253,058
1,914,040,298
2,064,317,958
1,735,970,146
1,386,850,954
510,269,776
guaranteed loans approved to December 31, 1945,
and the amount of loans outstanding and credit
available to borrowers under guarantee agreements
in effect on that date. Many guaranteed loans,
particularly the larger ones, were participated in by
a group of banks, often located in different Federal Reserve districts. These loans are shown in the
table for the Federal Reserve Bank in whose district the bank acting as agent for the group was
situated. Furthermore, guaranteed loans obtained
by the larger corporations having plants in various
parts of the country are shown in the figures of
only one district, whereas the credit was used in a
number of districts. Also, some large borrowers arranged for credit with a bank in a different
Federal Reserve district from the one in which
their production was carried on. For these reasons,
the district figures do not reflect the total amount of
war production credit made available under guaranteed loans in the various districts.
Table 4 shows the number and amount of each
type of guaranteed loan authorized to December
31, 1945, and the amount of loans outstanding and
credit available to borrowers under the various
types on that date.
A study of Regulation V loans outstanding on
November 30, 1943, when the volume had almost
reached its peak, indicated that about one-fourth
of the $1,798,272,000 of guaranteed loans then outstanding under 1,860 guarantee agreements was
TABLE 3
REGULATION V LOANS AUTHORIZED AND CREDIT OUTSTANDING DECEMBER 31, 1945
BY FEDERAL RESERVE DISTRICTS
Federal Reserve district
Applications for guarantee
of loans approved to date
Number
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago....
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Total .
....
Amount
Amount of credit
available to borrowers
including amount
outstanding
Loans
outstanding
Guarantee on
loans outstanding
472
1,510
491
727
275
235
2,058
432
288
426
251
1,592
$238,520,992
4,505,998,085
322,660,550
682,147,860
85,172,056
116,911,800
2,728,049,482
362,865,872
128,159,773
261,093,446
97,243,300
810,576,712
$43,829,277.50
689,103,764.31
68,419,117.12
81,430,697.13
12,092,838.86
14,551,916.89
353,318,048.40
39,993,000.00
13,348,850.28
20,312,840.98
3,805,000.00
136,659,390.32
$16,245,136.48
201,459,124.88
37,304,252.34
40,271,393.12
2,187,748.53
4,717,869.77
137,680,457.87
10,046,982.76
4,316,783.98
6,143,512.36
625,605.14
49,270,909.24
$14,563,035.14
168,578,287.97
31,879,169.70
35,496,148.17
1,795,459.89
4,226,091.45
121,137,430.36
9,036,404.48
3,905,093.18
5,497,410.09
563,044.63
38,667,006.93
8,757
$10,339,399,928
$1,476,864,741.79
$510,269,776.47
$435,344,581.99
TABLE 4
REGULATION V LOANS AUTHORIZED AND CREDIT OUTSTANDING DECEMBER 31, 1945
BY TYPES OF LOANS
Applications for guarantee
of loans approved to date
Type ot loan
V Loans
VT Loans . . .
1944 V Loans
T Loans
Total
246
Digitized for FRASER
http://fraser.stlouisfed.org/
Federal Reserve Bank of St. Louis
.
.
Number
Amount
5,953
857
1,117
830
$6,230,964,222
2,441,437,000
1,280,038,809
386,959,897
8,757
$10,339,399,928
Amount of credit
available to borrowers
including amount
outstanding
$481,938,707.76
392,093,752.49
432,231,408.58
170,600,872.96
$1,476,864,741.79
Loans
outstanding
Guarantee on
loans outstanding
$139,907,095.62
134,111,641.19
206,216,163.10
30,034,876.56
$117,555,630.95
111,009,791.72
181,186,694.20
25,592,465.12
$510,269,776.47
$435,344,581.99
FEDERAL RESERVE BULLETIN
March 1946
FINANCING WAR PRODUCTION AND CONTRACT TERMINATIONS UNDER REGULATION V
being used for the production of aircraft and its
accessories. Nearly half of the credit outstanding
went to borrowers making such articles as
machinery, electrical equipment and appliances,
and a variety of metal products. Table 5 shows the
amount of Regulation V loans outstanding on
November 30, 1943, classified by type of product
covered in contracts held by the borrowers.
About 45 per cent of the total number of Regulation V loans outstanding on November 30, 1943,
carried the maximum interest rate of 5 per cent,
but this rate was being charged on less than 6 per
cent of the total amount of credit outstanding. This
indicates that most of the small loans were made at
the maximum rate, although many of them were
made at rates of 3 to 5 per cent. Rates of 3 per cent
or under were common for the larger loans. Table
6 shows the amount of guaranteed loans outstanding on November 30, 1943, classified by rate of interest being charged on the loan and by size of the
borrowing company.
From the inception of the guaranteed loan program to December 31, 1945, the Federal Reserve
Banks collected $23,720,000 in guarantee and commitment fees for the account of the War Department. The Reserve Banks* expenses reimbursed by
the War Department during this period amounted
to $2,474,000, leaving net receipts to the War Department of $21,246,000. As of December 31, 1945,
the War Department estimated that its total losses
on guaranteed loans would not exceed $3,369,000.
During the same period guarantee and commitment fees collected by the Reserve Banks for the
account of the Navy Department amounted to $7,736,000. The Reserve Banks' expenses amounted to
$760,000, leaving net receipts to the Navy Department of $6,976,000. On December 31, 1945, the
Navy Department estimated that its total losses
would not exceed $2,500,000. The Federal Reserve
Banks collected $709,000 in guarantee fees for the
account of the Maritime Commission. Total expenses of the Reserve Banks amounted to $152,000,
leaving net receipts to the Maritime Commission of
$557,000. Losses on loans written off by the Maritime Commission to August 31, 1945, amounted to
$83,000. No losses have been sustained since that
date, and the Commission does not anticipate suffering further losses.
As of December 31, 1945, the War Department
had purchased 115 loans from financing institutions
in the total amount of $27,480,000, upon which colMARCH 1946
Digitized for FRASER
http://fraser.stlouisfed.org/
Federal Reserve Bank of St. Louis
TABLE 5
REGULATION V LOANS OUTSTANDING NOVEMBER 30,
1943 BY TYPE OF PRODUCT COVERED IN CONTRACT
[Amounts in millions of dollars]
Type of product covered in contract
Amount Per cent
Metal and metal products
Aircraft, aircraft engines, parts, and accessories
Ship construction and repair: accessories...
Combat transportation and other motor
vehicles; accessories
Guns, ammunition, bombs, shells, etc.; explosives and ammunition loading and
assembling
Machinery, electrical equipment & appliances
Other metal products; iron & steel; nonferrous metals and their products; machine tools and other metal working
equipment; etc
Chemicals, drugs, rubber
Textile products, leather
Foods and related products
Other manufactured products, including contracts unallocable because of diverse products covered.
Construction
'.
Other nonmanufacturing and noninduatrial...
Total
429.2
100.6
23.9
5.6
139.4
7.8
137.2
7.6
341.4
19.0
504.1
30.7
15.3
22.7
28.0
1.7
0.8
1.3
55.4
16.2
6.1
3.1
0.9
0.3
1,798.3
100.0
TABLE 6
PERCENTAGE DISTRIBUTION OF AMOUNT OF REGULATION V LOANS OUTSTANDING NOVEMBER 30, 1943,
BY RATE OF INTEREST AND BY SIZE OF BORROWER
Loans to borrower s with total assets of
Rate of
interest
(per cent)
Total1
2
2-3
3
3-4
4
4-5
5
39.7
23.2
18.0
10.2
3.0
5.7
0.9
19.4
16.6
2.0
61.0
""3.5"
0.7
8.1
23.2
13.2
50.3
0.2
4.6
18.3
31.9
25.9
8.7
10.4
0.0
55.0
26.3
13.9
4.0
0.4
0.3
Total....
100.0
100.0
3 100.0
100.0
100.0
Less than $50,000- $500,000- $5,000,000
$50,000 $500,000 $5,000,000 and over
1
Total includes a small amount not classified by size of borrower
as 2well as the two loans referred to in footnote 3.
Less
than .05 per cent.
3
Total includes one loan with interest rate of 1 per cent and one
loan not classified by rate of interest.
lections of $15,883,000 had been received, leaving
an outstanding balance of $11,597,000. The Navy
Department had purchased 24 loans totaling
$31,096,000, and collections had been $28,176,000,
leaving a balance of $2,920,000. Corresponding
figures for the Maritime Commission were purchases totaling $623,000, collections of $540,000, and
a balance of $83,000.
From the beginning of the program to December
31, 1945, the War Department authorized 29 adjustments, involving increases in the percentage of
guarantee, pursuant to the provisions of Section 5
247
March 1946
FINANCING WAR PRODUCTION AND CONTRACT TERMINATIONS UNDER REGULATION V
of guarantee agreements covering V loans, and 126
suspensions of maturity and waivers of interest payments by the borrowers under provisions of Section
6. The total principal amount of adjustments under
the provisions of Section 6 was $168,666,000. The
Navy Department approved four adjustments under
the provisions of Section 5, and 25 adjustments
under the provisions of Section 6. The total
principal amount of loans on which adjustments
under Section 6 were approved was $10,359,000.
No adjustments were made by the Maritime Commission under provisions of Section 5 and only two
adjustments under the provisions of Section 6.
The total principal amount of the two Section 6
adjustments was $1,945,000.
The Regulation V program facilitated the
financing of war production contracts by utilizing
the existing banking structure. Moreover, to a
considerable extent the financing was decentralized,
the loans being made by local banks to local industry. Without such a program it is probable that
the production of war materials would have been
more centralized and more Government financing
through direct lending or by other means would
have been necessary. The Armed Services, in letters
to the Board of Governors regarding the participation of the Federal Reserve System in the financing
of war production, recently stated that in their
opinion the Regulation V program had made an
important contribution to the achievement of
maximum production by American industry and
thus to the successful prosecution of the war.
Distinguished Service in War Finance^
The Treasury Department's Silver Medal for Distinguished Service in War Finance was awarded
today to the chairman and members of the Board
of Governors of the Federal Reserve System and the
presidents of the twelve Federal Reserve Banks by
Secretary of the Treasury Fred M. Vinson.
In presenting the medals, Secretary Vinson said:
"The Federal Reserve System as fiscal agents of the
Treasury Department processed some 186 billion
dollars in securities in the seven War Loans and the
Victory Loan and the interim sale of savings bonds
since May 1, 1941. Despite a wartime shortage of
personnel the System kept abreast of this flow of
securities, without precedent in financial history for
its volume. In this all ranks took part in the spirit
of good soldiers, with great credit to themselves. In
honoring thus the governors and presidents, all ranks
248
Digitized for FRASER
http://fraser.stlouisfed.org/
Federal Reserve Bank of St. Louis
in the Federal Reserve System are being honored."
The members of the Board of Governors awarded
the Silver Medal are: Marriner S. Eccles, Chairman; R. M. Evans, M. S. Szymczak, Ronald Ranson, Ernest G. Draper and John K. McKee.
The presidents of the Federal Reserve Banks,
meeting in Washington this week, are: Ralph E.
Flanders, Boston; Allan Sproul, New York; Ray M.
Gidney, Cleveland; W. S. McLarin, Jr., Atlanta;
C. S. Young, Chicago; Chester C. Davis, St. Louis;
Alfred H. Williams, Philadelphia; J. N. Peyton,
Minneapolis; H. G. Leedy, Kansas City; R. R. Gilbert, Dallas; Ira Clerk, San Francisco, and Hugh
Leach, Richmond. The Silver Medal was awarded
also to William A. Day, former president of the
San Francisco Federal Reserve Bank.
* Released to the press by the Department of the Treasury,
Feb. 28, 1946.
FEDERAL RESERVE BULLETIN