When Government Lends

November 15, 1954

The follies, scandals, and self-contradictions of government meddling in business become more apparent every day; yet Washington seems to learn nothing from them.

A recent dispatch in The New York Times, for example, tells us that “The Eisenhower Administration may soon decide whether to liberalize the lending policies of the Export-Import Bank to help maintain adequate world markets for United States industry in the face of growing competition.” Foreign competition is now described by some exporters as “fierce.” It has been “developing rapidly over the last two years in the wake of Europe’s dramatic recovery.” So a new scheme is being put forward for further “liberalization” of the Export-Import Bank’s lending policies. The last Congressional session already increased the bank’s lending authority by $500 million to a total of $5 billion.

The new proposal is particularly ironic when one recalls that it was the American taxpayers’ money in the first place which was used to subsidize Europe’s “dramatic recovery” and its present “fierce” competition. We not only poured into Europe billions of dollars of the American taxpayers’ money in order to subsidize the retooling and modernization of Europe’s factories (at the indirect expense of our own) but, also at the taxpayers’ expense, we sedulously taught our European competitors all we could about our “know-how.” Not content with that, we insisted on placing defense orders, paid for with American taxpayers’ money, with European factories. For example, as was brought out recently by a contract cancellation, our government gave one contract for a destroyer escort to an Italian firm dominated by Communist workers in a majority of seven to one.

Having given away the taxpayers’ money to build up European competition, Washington now proposes to use more of the taxpayers’ money to help individual American exporters meet this competition.

Now not only is there no sound reason for expanding the operations of the Export-Import Bank; there was no sound reason for setting up the bank in the first place. What the bank does is to extend to foreign buyers, to finance sales to them, loans that are so dubious that neither the American exporting firm itself, nor any private American bank, will itself assume the full risk. The bank is based on the inconsistent assumption that there are projects sound enough to risk the taxpayers’ money in, though not sound enough for any private lender to risk his own money in.

This was also the basic assumption of the old Reconstruction Finance Corp. That institution finally got so involved in bad loans, scandals, and corruption that it was terminated. But Congress then blandly proceeded to set up in its place the Small Business Administration for precisely the same purpose. The chief difference is that the new agency cannot lend more than $150,000 to any one firm. Just why the new SBA setup is supposed to involve less risk of political favoritism and scandal than the old RFC I don’t know. In fact, it was precisely the big individual bad loans made by the RFC—such as the $37 million to the Lustron Corp.—that made the front-page headlines which finally led to efforts at correction.

When government goes into the lending business a disproportionate number of loans are bound to be economically unsound. When private lenders risk their own money they examine with great care the profitability of the borrowing enterprise, the integrity of the borrower, and the chances of repayment. But when bureaucrats lend other people’s money these economic aspects are too apt to get a merely formal notice and to be subordinated to political considerations. The recent tremendous Federal Housing Administration scandals, which grew out of government loans in excess of what any private agency would have been willing to grant, are merely one more illustration of the same lesson. There are half a dozen other major examples of unsound government lending. The only real remedy is not for Congress to “set up more safeguards,” but to get the government out of the lending business.