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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.