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March U » 1942.
Mr. Henry H. Edmiston,
Assistant Vice President,
Federal Reserve Bank of St. Louis,
St. Louis, Missouri.
Dear !!r. Edtedstons
The Chairman asked me to take care of your
wire of March 12, 1942, and as requested I am enclosing
herewith a copy of two ©esios, one short and one longer,
prepared by Mr. Currie in 1936.
With best wishes, I am
Sincerely yours,
Lawrence Clayton,
Assistant to the Chairman,
Fnclosures 2
LCihbw
FROM
Mr. Clayton
REMARKS:
I am returning your aemos
re railroad equipment, together with an
extra copy which I had mad? and which
you might wish to keep in your files.
CHAIRMAN'S OFFICE
COPT
April 1 8 , 1938
RAILROAD B3UIPtfEMT
Proposal
The R* F* C* has the power to purchase adequately-secured
equipment trust certificates upon such terss and conditions as
It isay determine. Loans made for maintenance or purchase of equipment need the approval of the I. C, C* as regards maturity but do not
require a certification by the I* C. C* that the railraod in question,
on the basis of present and prospective earnings, say reasonably be expected to meet its fixed charges, as do loans to railroads for other
purposes.
It is suggested that for a limited period the FU F» C* announce
itself prepared to purchase new equipment trust certificates (a) covering 100 oercent of the cost of new equipment, (b) maturing in twenty
years in the case of freight cars, 10 years in the case of complete
streamlined trains, (c) at a 2 percent interest rate, (d) interest
beginning one year after date of loan.
Arguments in Support of Proposal
1* An offer on less favorable terms would not interest the
better railroads that can ncm sell equipment trust certificates on •
4. percent basis or better. On an offer such as outlined above, they
could hardly afford not to anticipate part of their future requirements*
2* In the present conditions of railroad finances, equipment
trust certificates constitute the most secure tfp* of loan that can be
made to the roads*
-23, In no other way could the Government induce as swch total
expenditure and employment at as little cost to Itself. It has be«n
carefully estimated that to handle the volume of traffic MMtcpMMt
upon full recovery in three .years* tiae would necessitate the purchase of $2j billion worth of equipment.
4» M y anticipation of thest requirements nould both provide
employment and buying power now and help mitigate the almost inevitable
bottlenecks in th© future.
5* It Is important to limit this offer to equipment purchased
In the comparatively near future, as otherwise roads will hold back* The
stipulation that the equipment srast be contracted for in this
year to be delivered before June 30, 1939, appears to be
This type of work could be begun almost immediately, as contrasted with
some other elements of the recovery program*
£0 PI
Confidential
December 2, 1938.
UKITKD STATES RAILROAD EQPIFtaMT AUTHORITY
Proposal! Establish a railroad equipment authority, with
capital stock owned by the Treasury, empowered to issue fuar&nteed debentures for the purpose of contracting for the purchase
of new railroad rolling stock to be rented or leased to railroads*
!•
The Stimulation of Recovery
Expenditures of sose f5QO million on railroad equipsaent could
be assured In the first year of operation* Apart from the stiarulation this would afford the economy in general, it would provide
work for the railroads* own car shops and increased traffic for
th© roads themselves*
2. The Removal of Future Bottlenecks
Preliminary estimates indicate that in order to handle the
volume of traffic consequent upon the continuance of recovery at
a desirable rate, yearly expenditures on rolling stock of about
$800 million at present prices would have to be incurred in the
period 1939-41• From the standpoint of the national economy it
would obviously be to our interest to utilize idle plant and labor
in the im&edi&te future in order to relieve the shortages, stoppages,
and bottlenecks that will arise in freight traffic, the railroad
equipsaent industry and in the steel industry with the continuance
of recovery*
3. A Contribution to Future Stability
The railroad equipment field has traditionally a feast and
famine character and is consequently an important source of economic
instability. A federal authority, not pressed by financial considerations or immediate profit considerations, could level off the peaks
and valleys of railroad equipment buying.
In addition, variation in rental rates for equipment would
offer a highly desirable alternative to variations in freight rates
as a seans of bringing about greater stability in railroad net earnings.
4. National Defense
A modernized supply of rolling stock adequate to handle the
volume of traffic incident upon war appears to be an indispensable
element in any comprehensive program of national defense. Moreover,
experience in the handling of a national car pool will be invaluable
in the event of war.
5. Betterment of the Financial Structure of Railroads
The gradual substitution of rented and leased rolling stock
for o m e d equipment would permit a reduction in the debt of railroads
and a substitution of variable for fixed charges. Moreover, the proposal offers a means whereby the Government could stimulate private
expenditures without getting deeper involved in the complicated financial structure of the railroads.
6*
Improved Efficiency
The proposal, through making possible continuous buying, greater
standardization, and ?-iore liberal provisions for research, should permit very substantial reductions in costs to be achieved. It should
also penal t more efficient utilization of rolling stock in the handling of empties, etc*
7. Relation to the "Railroad Problem"
The proposal could be adopted independently and without
prejudice to any comprehensive program of reorganization and
consolidation of the railroads, "which may take a long %iam to
accomplish.
Objections to the Proposal:
1, Government Ownership*
The proposal does, of course, involve a degree of Government
ownership, so far as rolling stock is concerned* It m y be
pointed out here, however, that
(a) it is only a degree raaoved tram the present practice of siaking loans to financially shaky roads,
(b) it is far rensoved from the actual Government operation of railroads as is practiced in certain other democratic
countries such as Canada and Sweden,
(c) it is proposed that the Government operations be
confined to research and ordering, renting or leasing equipment and that no construction or repair be undertaken in
Government shops.
2. Loss to the Government
It may be objected that the Authority's equipment will be
used only during peak periods and years of exceptionally high
traffic volume and that for the rest "the Government will be left
holding the bag.*
This objection can easily be disposed of by pointing out
th&t this all depends on the terns of leasing or daily rentals*
If they are set sufficiently low, it will pay the railroads to
use the Authority's equipment, and rely on old high - repair - cost
equipment for peak requirements. Low rental rates will also
constitute an induceinent to retire old equipment*
This way out, however, raises another objection. If rentals
are set too low, the revenues of the Authority will be inadequate
to service its obligations and keep its equipment in good repair*
It should, however, for the folio-wing reasons, prove possible for
the authority to set sufficiently low rant&ls to induce the railroads to use its equipment and yet not suffer a loss:
(a) it will have the advantage of borrowing at lower
interest rates than the railroads can secure;
(b) being a very large and continuous buyer of standardized equipment it should be able to secure greater price concessions than any individual road could obtain;
(c) there should be ©conom.es consequent upon the growth
of a national car pool;
(d) it will be in a position to charge higher rentals
in good years to recoup any losses sustained in bad years*
Finally, it saist be kept in mind that even though the Authority
should actually show a loss, this would not be incompatible with
a large net national gain in sore stable and higher national income,
production and employment.
3. Technical Difficulties
The proposal has been examined by a number of operating railroad
men and although problems have been pointed out in connection
with repairs, zoning, storage, etc., it appeared to b# the general
consensus that the problems would be similar to those now eacotBit~
ered in connection with "foreign* cars and the private leasing
Sj such as Pacific fmlt Express^ and various ways of
these problems vere at hsnd»
In connection with the determination of th® VBlMM of new
equipment of various types, it would mppmtet feasible to make far
better national estimates of th« number of di,ff«r€ffit types of
freight care and locomotives that a owtaia voltane of traffic wO.l
require than could T^ssfbly be arrived at as the &vm of individual
mmtm Independently by the various roads,
ea m Between Roads
Some companies IMKPB run—11J m excess of cars and others
m dofici^Hcsy. thtm cotrspuniss, therefor®, veol4 b© in a better
position to tain advantage of low rentals or* w&m equipment
others might suffer a loss of revenue now derived fltM the use
of their cars by other lines*
Agata9 many road© now b^Ild a substantial asioimt of @quip~
mmt in their owi shot© and individual hardships might result
from the Inevitable changes in the location of work consequent
upon national bidding for a single buyer. These changes might
b^ tempered ^>J p#ll«t«# of the Authority in distributing new
©quips^at, repair and reconditioning work.
-7-
The alternative© an;;ear to be either to do nothing or to
st.isails.te railroad •qslpMOt purchases through loOM to railroad©
txvm the R. P» C», on favorable tersa*
It is said that i.f the E* P* ۥ should announce that it was
prepared to purchase equipment trust certificates
(a) up to 100 percent of the cost of new aqaltamant*.
{h) st a 2-| percent rat©,.
(c) for comparatively long maturities,
(d) th© offer to be available for a limited period only,
a very large aznount of aoticipatory railroad equipment buyinf would
While thin alternative is far better than doing nothing at all,
it aDp#ar« inferior on various ecunts to the proposal under discission •
1* It .Lacks flexibility,
Th@ chi^f objection, fro® the compensatory fiscal policy viewpoint, is that an N N f g M M p loan operation does not provide a asechanim, through which th-e CkrreiiMNNii conld operates contiirocmsly, and
outside the badgett to smooth out fluctuatione in expenditures in an
important field*
W3th reference to the Jmediate situation, it is almost impossible
to forecast the extant to which a favorable loan offer would be taken
op* Once anncranc«d9 it would be difficult to change the tearos« If
a big rush of orders ©natied, deliveries would have to bm spread over
a future period, or else a temporary bottleneck would occur* If few
orders ctuie in, the t u n could not be lor/ered further or the offer
extended without arousing a sense of grievance on the part of those
who had already availed theaselves of the offer.
2*
•
There are definite obstacles In the way of offerin.fr terms
that will really be effective.
The H* f* C» must consider the soundness of each individual loan
and cannot explicitly rely upon averaging and upon higher interest
returns in j*ood years offsetting low returns in bad, as could th#
proposed Authority. The raost favorable t«nM offered to date by
the R. F# C* were in connection -with the purchase of pquipaent trust
•
certificates of the Southern Railroad for 100 percent of the cost of
freight, cars, at L, per cent, and for fifteen ye&re^
In bad years, ishen on tiiitional ©conos!.c gronuds, expmditures
on railroad eqiiipsent are 5io?t desirable, the credit of the railroads
is ireakest andf confronted with stirpljis equipment on the one hand
and financial difficulties on the other, they nould be east reluctant
to borrow and purchase new equipment even on the aost favorsble tema.
3*
A lo&n operation does not offer &floodpossibility for
cost reductions and efficiencies*
Each loan bo ing m
individual loan, there does not exist the
sa&e oprortTmity to derive the economies arising tron larfe, contln—
uotis orders of standardized equipment, or from research, or from car
pooling,
U* Other Implications
Further larfe loans to the railroads would involve the Qoverni^n
still more in the complex financial structure of railroads, and would
-9-
result In * further llMfMl in railroad debt and fixed charges.
Moreover» i t wotild be difficult to refuse to other borrowers the
particularly favorable terms that would have to be offered to
the
BOARD DF GDVERNDRS OF THE FEDERAL RESERVE SYSTEM
March 13,
Mr, Clayton:
These memoranda are the only
ones we can find in our files on the subject,
I suppose the longer one is what is wanted.
It seems to be the only copy we have in the
division.
W.T.
Attachmerts
Form . F.
R.
51
TO
7
FROM
REMARKS:
CHAIBMN'S OFFICE
T E L E G B AM
Board of Govei r
of the
Federal Reserve System
Leased Wire Service
Received at Washington, D, C.
W17WASH G*79 STL 1 2 - 2 ^
ECCLES
1942 MAR |2 Pt 4 12
fi
OSCAR JOHNSTON EXPRESSED DESIRE AT BOARD MEETING TODAY TO SEE
DETAILS OF PROPOSED RAILROAD EQUIPMENT POOL DEVELOPED IN
CONNECTION WITH SPEND-LEND PROGRAM IN 19}8 MR DAVIS SUGGESTED
THAT YOU MIGHT SEND US AIRMAIL A COPY OF THE PLAN FROM YOUR
FILES. MR JOHNSTON WANTS TO EXPLORE POSSIBILITIES OF A
GOVERNMENT-OWNED EQUIPMENT POOL TO MEET URGENT NEED FOR
SUFFICIENT CARS TO MOVE WAR TRAFFIC
EDMISTON.
FEDERAL RESERVE BANK
OF
ST.
LOUIS
March 3 7 ,
Mr. Lawrence Clayton,
Assistant to the Chairman,
Board of Governors of the
Federal Reserve System,
Washington, D. C.
Dear Larry:
Thanks so much for sending me the memos with
regard to a proposed plan for a railroad equipment pool.
After reading them over I am sure that Mr• Johnston will
find them exceedingly helpful.
'Y certainly enjoyed the Chairman's visit
.e
to St. Louis last fall. For myself I miss my friends
in Washington, but have been having very interesting
work at the St. Louis bank. I hope I can plan a trip
to :Vashington sometime this spring. With kindest personal regards, I am
Very truly yours,
Henry 11 Jf Edmiston,
Assistant Vice President,
