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Confidential December 2$ 1938, • ITSt? SnV'S KAB^OAIJ 3QUT ^ > roppgalt Establish a railroad equipment authority, with capital ptock owned by the reaeury, empowered to issue guaran- teed debentures for the purpose of contracting for the rmrchase of mw railroad rolling ^toek to m rented or leased to railroads. 1# Hie stimulation of Recovery Expend i t w g of Fo?re $500 million on railroad equH^ent could be assured in the f i r s t year o** operation. tion this wo* Id afford the economy in Apart frost the stimula- eneral, i t world provide wnrk for the railroads* ows car shops and Increased traffic for the roadi themmlvee* 5. The rwoval of fi:tore bottlenecks Prelirainary ef?t5raatee indicate that in order to handle the volta» of traffic consequent upon the contimiance of recovery at a desirable r a t e , ye- rly expenditures on rolling etock of about SSOO million at present orices would have fo be incurred in the period 1939-41* Fran the standpoint of the national economy i t wottld obviotisly b« to o\ir interest to u t i l i s e idle planfc and labor in th© irr'^diate future in order to relieve the shortages, Rtoppa^es? and bottlenecks that will ariee in ^reig t t r a f f i c , the railroad equipment indtiPtry and in the steel Industry with the continuance o^ recovery. 3. A Contribution to Future stability Tb* railroad equipnwnt field has traditionally • feast and famine character and is consequently an important source of economic instability, A federal authority, not passed by financial consider- ations or iminediAto profit considerations, could level off the peaks and ^alleys of railroad equlpcstnt buying* In addition, variation in rental rstes for equvmentt would offer a highly desirable alternative to variations in fmight rates as a mans of bringing about ,7raster stability in railroad net earnings, 4» £&tior:.al ."e Tense A Eod«rnieed pnpply of rolling stock adequate to handle the fltaM of traffic incident upon war appears to b an indispensable © eXeir«nt in any e-'inprshdnslTe parogram of natlrnal defense* f-'oreover, ttxperionee in tr.e liAndling of a national car pool will be invaluable in the event of war. 5* Betterment of the financial ^trv-cture of V:allroadg The gradual substitution of rented ano leased rollin stock for owryed eqnpTnent would p^nsit a reduction in the debt of railroads and e substitution of variable for fixed charges. Moreover, the proposal offer*? akeane whereby the ':overra^nt could etlmulate private exper^litur^a without attini? deeper involved in the complicated financial etmeture of the railroads. 6. Irrproved Efficiency Hie proposal, through nakin/r poeaible continuous buying greater standardisation, and more liberal provijBi one for research 9 should permit very substantial redactions in costs to be achieved. I t should also permit rore efficient utilization of rolling stock in the fcmdling of empties, etc. - 3 - 7. Relation to the "-Railroad Problem" The propo^gl co\:ld b® adopted indep«ndent3y and withoiit prejudice tc any co^prehansiTa program of reorganization and consolidation of the railroads, which may take a long time to accrmplish. Objections to the 1» Oo^rraaent Hiamershlp. 'i"h« proper>A diMj *f cn\3r*?^, in**!** a degree of ownership, r I far as rolling HMi earned. I t ray be pointed Mil bfFtj however tfcftt (a) i t is only a itgftt re»oived fro??! the pres«nt pra©- tice ^ r isaking loan» to financially ttakjf road»» (b) i t l i ^fiT rwsoTed frora tiie -ct\ial Oo^rerryaent opera- tion of railroads as is practiced iii certain other democratic countrios svsch a^ Canada mv$ 'iwsd^n, (c) i t is propor-ed Ikftt ttN Oovernififint operations I* c nfinad to research and ordering $ renting or le&elng tqn'pT,ient and that M c-nstmotion or repair be undertaken in Gov© rmont shops • 2m Loss to "MI ; ' I t way he objected that the Authority1 B equipenent will be ueed only tmlMg peak periods and y®nrs of e^repttonally high traffic volun© and that for the rest w the ao^nBmment will ba l e f t holding the bag. v This objection can easily be disposed of Isy pointing out that Ifcta a l l depends on the t©nr» of leasing or daily rentals* If they er© mt snfViolently low, i t will pay the railroads to use the Authority*e equipment, ara! rely on old high - repair * cost equipment for peak r^quireirentg. Low rental rateF will alao constitute an indueerpent to r e t i r e old equipment* This way Otftj however, M l m another objection. If Centals are set Um low, the fWfWMM of tilt •v*/horlty will be inadequate • to service ite obligations Mid btqe l i i tft&pwent in .?ood repair. I t should, however, for the following reasons, prove ixsssible for the anther*.ty to set e f f i c i e n t l y low rentals tc induce the r e i l rosds to u.*6 I t i eQuipirent and y©t not mi^^er m loce: (a) I t will have the advantage of borrowing at lower intsrert rfttee than the rsilroa^t can nacur®} (b) Ni^f i*. T«r;r large &n& cortinuour bnyar of standard- Ise4 equipnent i t should he a>3.e to secure ^^ft^«2" price concsscionr 1MB any individual road 90*14 obtainj (cN- Ifatlt Bhould be ecoiKMnies cons€iqij®nt upon the growth of a nstional car pool} (d) I t will \3@ la a position to charge his/her rentals In good years to recoup any losses sustained in bad years* Finally, i t ejejejl be kept in Bftatf that e'?»n though the Authority should actually ©how i l o s s , t> ic would not be incompatible with - large net national r^ain in r«ore stable n.nd higher national inconje, production 3. BTI£ employment* ^ohnioaX PlfficultieB The Txropofal hae beenacamined by a number of operating r a i l road pen and although problems have been pointed out in connection with repairs, noning, ^tora^e, e t c . , i t appeared to be the general urn • © mr consensus t at f,ho probleTif? nmld he similar to those now encotmtiered in MMMHAM wife "-"ofratgn*' tftri and •WpiK&ttj M i l It PaMfttfig thew • •QttpMMt of wrlo;- freight cars and private leasing VNIi and Tariou^ ways of »ra A'-> hand. Tn »onn##il« with UM Atti bettor nstioaftl UM Ion Of U N ^mlime of new t| it feasible to niake far I ;t©£ of the rvsdber of different types of UMMMIH INlt a certain Vita* of traffic will require MMi MlAd porsibly he arrived at as the mas of indivi&ial estimates made iajjpmttntly by the variour roads* 4« Tn^g'd M.ea a^. ^-atweeu "e normally an WtOiit of cars and otbars a deficiency, m» caipmisE, t:\3r0forG, wonld b# ,in a hs^t#r position to t i k i JdUwrtigt of low rentals on new equipeient v h i l e others aiffet ioffltv © l o s s of reven*o© now derived fras the use of the,ir cars by other l i n e s . iln, rxsany roads now btiild a m?b©tantial amotint of •qu'p- ment in their awn shope and i a d i v i ^ a l hardships might restilt froffi the inervitahle changes in th© location t f work consequent upon national v i"din^ for a single buyer. These changes right be tempered by p o l i c i e s of the Mithority i n di8trfbut*ng mir , repair and reconditioning work. *» I mm Alternative 8 i The alternatives tpptMP t o be either to do rotbing or to stierolat© railroad tfVlpaMA ^irchaser gh loan? It railroads frora the H# Pf 8«j on favorable terras • Tt 1? laM tfaftl 1^ the t« F. 6, sheold announce that II wes t>repi*red to p M H t^Vt|Mttl trust MVtlflefltef M i M M (s^ * j to 100 percent of MM cost of n&w »p fh) »t a 2 percent r a t e , % (c) for ownpftmtlvely lonr maturities, (d) the o r fer to b available fe*r i Hfl ted © a very large amount of antic 4 patory railroad •qoifSffai buyinr lie induced. .lie Ihifl alterrati^B Si te better thsn d oin.^ nothing at i t appears Tnf^r^nr or T«y|j«i MHH to tha r>ropo?sal tsnd^r ion* JU 7t T^icVg PlexlMJity, TJje chief objection, from llM compensatory ^i«» al policy poi.nt, is Itoei an eraergen^y loan operation does not provide a pechani«n through which the Go Vermont coiild operate con^lrnioaply, and outside M » budget, to s&ooth out fluctuations in expend i t nr«f in an w important field* With refereixie tc the immediate pitii/tion, i t ie almost impocslnlc to forecast the extent to which a favorable loan o?*fer would be taken up. Once annctmced, i t wonld b difficult to change the terms. @ If a big rufih of orderr. enc^^ed, deliverieB would have to be spread over a future period, or else a temporary bottleneck would occur. If few # I • orders; cam© in, the term could not be lowered further or the offer extended without arousing a sense of grievance on the part of thos* iBho had already availed thc-smelv, s of tht offer, 2, There are definite obstacles In the.wgy of offering terras that will really be. effective. The t< -7. C. imiFt consider t&e soundness of each individual loan and cannot explicitly rely upon averaging and upon higher interest return© in sood yaare offsetting low return? in bad, M co>jld ths proposed Authority* The r>ost favorable v^nse offered to date by the R, ^, v^# were in connection with the purchase of equipment troet certificate8 of tiie '• outhern ^?ilroftd for 100 percent of the co«t of freight ears, at & per cent, and for fifteen y©sre» In bad ysars, when on national ©conondc grounds, expend!turts on railroad equipment are most desirable, the credit of the railroads i s weakest and, confronted with purplus m^tiipment on the one hand and financial difficulties on the other, they would b© moat relnetant to borrow and purchase new eqni -irnnt even on the rco#t favorable ter^i?. 3» A loan operation doof? not offer a Food possibility for gecrarlqg coet reductions and efficiencies. Each loan being an individual loan, there does not exitst the same oprortnnity to derive the economies arising twm lar^e, continuous orders of standardised equipment9 or Hf < ron? research, or Pro?* car pooling, £• Other implications Further large loans to t,he railroads wot Id Involve the Governw*nt s t i l l Korw in the co&plex financial structure o r railroads, and result in a further increase in railroad debt and fixed charge© tforoaver, i t would be iiffflMflt to refuse to other ^rrwrers parti cil&rly ^vorsble t » f l that, wo-ald have to be offered to the railroads.