View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

WORKS FINANCING ACT OF 1939

HEARINGS
BEFORE THE

COMMITTEE ON BANKING AND CUEEENCY
UNITED STATES SENATE
SEVENTY-SIXTH

CONGRESS

FIRST SESSION
ON

S. 2759
A BILL TO PROVIDE FOR T H E CONSTRUCTION
F I N A N C I N G OF S E L F - L I Q U I D A T I N G
A N D FOR OTHER

AND

PROJECTS,

PURPOSES

J U L Y 12, 13, 14, 18, (l9) A N D 20, 1939

REVISED
Printed for the use of the Committee on Banking and Currency




UNITED STATES
GOVERNMENT PRINTING OFFICE
WASHINGTON: 1939

C O M M I T T E E ON B A N K I N G A N D

CURRENCY

R O B E R T F. W A G N E R , New York, Chairman
C A R T E R GLASS, Virginia
A L B E N W . B A R K L E Y , Kentucky
JAMES F. B Y R N E S , South Carolina
JOHN H. B A N K H E A D , Alabama
A L V A B. A D A M S , Colorado
FRANCIS T . M A L O N E Y , Connecticut
GEORGE L. R A D C L I F F E , Maryland
PRENTISS M . B R O W N , Michigan
JAMES H. HUGHES, Delaware
C L Y D E L. H E R R I N G , Iowa
W I L L I A M H. S M A T H E R S , New Jersey
JOHN E. M I L L E R , Arkansas
D . W O R T H C L A R K , Idaho
S H E R I D A N D O W N E Y , California

JOHN G. T O W N S E N D , JR., Delaware
L Y N N J. FRAZIER, North Dr*kota
CHARLES W . T O B E Y , New Hampshire
JOHN A. D A N A H E R , Connecticut
R O B E R T A. T A F T , Ohio

PHILIP L E V Y ,

II




Clerk

WORKS FINANCING ACT OF 1939
WEDNESDAY, JULY 19, 1939
COMMITTEE

UNITED STATES SENATE,
ON B A N K I N G AND C U R R E N C Y ,

Washington, D. C.
The hearing was resumed at 10:30 a. m., pursuant to adjournment
on Tuesday, July 18, 1939, in room 301, Senate Office Building,
Senator Robert F. Wagner, chairman of the committee, presiding.
Present: Senators Wagner (chairman), Glass, Barklev, Byrnes,
Bankhead, Adams, Maloney, Radcliffe, Hughes, Herring, Miller,
Clark of Idaho, Frazier, Tobey, Danaher, and Taft.
The C H A I R M A N . The committee will come to order. Mr. Eccles,
as you know, we are considering a bill introduced by Senator Barkley,
Senate bill 2759. We should like very much to get the benefit of your
views with reference to that proposed law. We are glad to hear you.
STATEMENT OF MARRINER S. ECCLES, CHAIRMAN, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM; AND A MEMBER OF THE FISCAL AND MONETARY ADVISORY BOARD,
WASHINGTON, D. C.

Mr. E C C L E S . I was advised yesterday that I would be expected to
appear here this morning, and I have undertaken since that time to
prepare a brief statement. If the committee will permit me to do so,
I should like to read that statement.
In appearing here this morning I wish to make it clear that I testify
not in my capacity as Chairman of the Board of Governors of the
Federal Reserve System but as a member of the Fiscal and Monetary Advisory Board which was consulted by the President when the
program underlying this bill was formulated.
I should like to state very briefly my views as to the nature of our
economic difficulties that make it necessary to undertake a program
along the lines proposed in this bill at this time.
I am convinced on the basis of observation and a great deal of
study that has been given to the problem that the present unsatisfactory economic condition of the country, with its large volume of
unemployment, is not a passing stage in the so-called business cycle
but has fundamental underlying causes that need to be remedied
before we can hope to achieve a sustained adequate volume of employment, a reasonably satisfactory national income, and a reasonably stable degree of prosperity. The fundamental adjustment in
our economic mechanism that is required is the establishment of a
better equilibrium between the capacity of the country to consume
178




WORKS FINANCING ACT OF 1939

J 79

goods and services and its capacity to produce them. In the 1920's
we had a fair degree of adjustment between consumption and production, but this adjustment was achieved through the existence of
many outlets for investment which no longer exist at present. The
automobile industry was rapidly expanding ; States and municipalities were expending nearly a billion a year, in excess of tax receipts,
much of it on roads, highways, and schools. There was a billion
spent a year on commercial buildings, stores, offices, and hotels.
Universities, hospitals, country clubs, and other nonprofit institutions were spending between one-half billion and a billion a year.
A similar amount was annually lent abroad. There was a rapid
growth of installment selling which increased the annual spending
of the people in later twenties by nearly a billion a year. And, in
addition to all this, we had a tremendous bull market in securities,
which resulted in a large volume of luxury spending of profits made
in the market.
Many of these factors, which helped to produce a consumer demand
for goods that was sufficient to consume the products of industry,
are not at present at work or in prospect. The rate of population
growth is about one-half now of what it was in the twenties. This
drastic slowing up in population growth, together with declines of
property values, have resulted in a decline in State and municipal
expenditures so that tax revenues have, since 1932, exceeded expenditures, thus resulting in an addition to funds available for investment
instead of providing an outlet for such funds.
In other words, the municipalities have reduced their debts since
1932, whereas during the twenties they increased them nearly a
billion dollars a year. So they have not been a potential absorber
of idle funds.
There is no disposition to make private foreign loans at this time.
Commercial and office buildings are still available in excess of the
demand. Churches, clubs, and universities have reduced their capital
outlays to a small figure. The automobile industry is no longer in
the stage of rapid expansion. There is no prospect of the kind of
source of spending power as grew out of the stock-market boom.
And even residential construction, notwithstanding indispensable help
from the Government, is below the level of the twenties.
The magnitude of the problem facing us is clear. From 1923 to
1929, outlays of the type that absorb capital funds averaged more
than $15,000,000,000 a year. Allowing for the increase in population,
as well as for technological advances that have taken place in the last
decade, it would appear that comparable outlays today to insure
reasonably full employment would have to be more than $18,000,000,000 a year, provided there is no material change m the present
division of the national income between consumption and new
investment.
In view of our changed conditions one of three alternatives faces
the country: (1) either an unforeseen and unforeseeable very large
outlet for investment must develop in new or in old industries, or
(2) a very considerable increase must be brought about in the proportion of the national income that goes into consumption, or (3) the
Government must provide an outlet for idle funds through deficit
financing of work relief, public works, armaments, and so forth, or, as



180

WORKS FINANCING ACT OF 1039

far as possible, through a program such as proposed in this bill for
socially and economically desirable, nonprofit-making but largely selfliquidating investments. Unless some or all of these developments
take place, we cannot escape continuous depression with its accompanying great unemployment. We can remove all the so-called
deterrents to business and provide all the stimulus to business that we
can contrive, and yet we shall still fall far short of the objective of full
production and employment. It is only as adequate outlets are
provided for our savings that the national income can rise to a satisfactory level, and it is only as the national income increases that tax
revenue adequate to balance the budget can be achieved.
Of the solutions just indicated—the first is unpredictable, and we
cannot wait in the hope that it will materialize sometime, somehow,
although much more can and should be done to stimulate private
activity in the field of housing to reach a much larger percentage of our
population. The second—a larger proportion of the national income
going into consumption—should be a major part of public policy,
but it appears to be a slow process, and in the meantime, as an immediate approach, increased investment operations of the Government
are the only direct, immediate, and feasible plan at our disposal for
the achievement of badly needed improvement.
The present bill constitutes in part an attempt to develop a program
of public investment of a self-liquidating nature. It is, I think,
indispensable, in view of the proposed greatly reduced employment
in W. P. A. and P. W. A. I am, however, forced to say that the
annual expenditures that can be achieved under this program will,
make only a small contribution toward the solution of our basic
problem. My own personal view is that the self-liquidating program,
excellent as it is so far as it goes, should be supplemented by a continuing public-works program.
Even more basic, however, is the necessity of increasing the proportion of the national income that goes into consumption. The
line of progress in this field is clear. It has been traveled ahead of
us by many of the older countries. Old-age security provisions in
European countries have been so designed as to increase consumption
relative to income. In England only 60 percent of the cost of a
national old-age pension scheme is met by pay-roll taxes; in Sweden
only 22 percent. In our country, however, we will have, in the 3
years ending next December, taken out of consumption in the form
of pay-roll taxes $1,700,000,000 more than has been returned in oldage benefit payments. Payments under the old-age assistance j>art
of the program have constituted only a minor offset to this withdrawal. IQ addition, we have increased national saving and decreased
consumption through the operation of our unemployment-insurance
program. The changes in our old-age security program now pending
will alleviate this situation slightly. Even if pending amendments
are passed, however, we will collect some three to four himdred
million dollars more than we pay out in benefits next year. These
provisions will have to be further revised. We shall also have to
reconsider our entire tax structure, with a view to decreasing taxes
on consumption and increasing taxes on income that would otherwise
add to unused investment funds.
It is idle money, hoarded money in cash or in deposits, that obstructs
the flow of the national income. Money that is saved and invested



WORKS FINANCING ACT OF 1939

J

79

continues to function, and we must find means both of increasing the
proportion of the national income that is consumed and of providing
investment outlets for the money that is saved. There is no other
way to keep the economy going in a satisfactory manner.
This, then, is the situation in which the present bill must be viewed.
If the various items in the bill are approved, and if the resulting programs are prosecuted with vigor, investment outlets for an additional
portion of the mounting savings of the community will have been provided in useful self-liquidating projects which will not entail any
charge on the Budget nor any increase in the public debt. There is
little financial risk involved as compared with the social and economic
gain. The present extremely low level of interest rates makes it possible to utilize a part of our vast volume of idle funds, to make some of
them available to borrowers who could not afford to use them if the
rates were higher, and thus to diminish the number of idle men.
The provision of certain transportation facilities on a toll basis will
permit the construction of certain bypasses, tunnels, bridges, and so
forth, whose cost should properly be borne by the user. The rural
security loans will enable hundreds of thousands of farmers who now
cannot support themselves and are a continuing charge on relief funds,
to become self-supporting. Such an investment is one of the most
desirable our country could possibly undertake. The rural electrification loans will bring the benefits of electricity to thousands of farmers
and will provide markets for the private power companies and for the
makers of appliances.
It is, however, of the section relating to railway equipment that
I wish to speak particularly. I think the committee will be interested in the considerations that led to its inclusion in this program.
We have, on the one hand, in the railroad-equipment industry, one
of the most depressed of all our capital-goods industries. On the
other hand, we have the railroads, with the supply of rolling stock
rapidly declining in quantity and deteriorating in quality. Our
supply of freight cars is back to the level of 1905. Well over 40
percent of the freight cars are 20 years of age or older. Over 70 percent of the steam locomotives are 20 years of age or older and only 3
percent are under 10 years of age. Some 13,000 locomotives of American railroads were built before 1910. Most of the machine-shop
equipment of American railroads is universally acknowledged to be
obsolete and in poor condition. Consequently, repair costs are high,
both because of the age of the rolling stock and because of the character of the equipment of the machine shops. In no field, I believe,
from the point of view of economy, recovery, or national defense,
could the Government's credit be better used than in enabling the
roads to modernize their equipment.
The success of this program depends upon low interest rates, long
maturities, and no down payments, so that railroads can acquire new
equipment at annual costs no greater and in some cases less than those
arising out of the operation and maintenance of some of the present
aged and obsolete equipment. The bill contemplates that the
interest charged will be no higher than the cost of the money to the
R. F. C. on like maturities and in no case more than the highest rate
on long-term Government obligations.
The present bill proposes that, in addition to the existing loaning
powers of the R. F. C. which have been used to a relatively small



W O R K S FINANCING ACT OF 1939J79

extent by the railroads for new equipment, the railroads should be
permitted to acquire equipment on a leasing basis. The Government
will then be in a position to meet the needs of every type of railroad
for every type of equipment. Many railroads will doubtless prefer to
acquire equipment through the customary form of equipment trust
certificates. Others, however, who are reluctant to increase their
debt, will prefer to acquire equipment on the very favorable terms
that will be possible through a leasing arrangement.
In fact, in certain cases, the leasing arrangement will make expenditures possible that would otherwise not be undertaken. Thus it will
now become possible for the Government to finance a major rebuilding program, should this prove the economical tiling for any railroad
to undertake. The R. F. C. will be in a position to contract to purchase older equipment, to have it rebuilt in the shops of the railroad
in question, and lease this equipment back to the railroad. Again,
the purchase of machine shop equipment can be facilitated through
a leasing arrangement, and the cash resources of railroads can be
saved for urgently needed improvements on way and structures.
Finally, the scrappage of obsolete equipment and the sale of used
rolling stock to certain foreign countries that are badly in need of
cheap equipment can be facilitated.
I have found in discussing this proposal with various men in the
industry in recent days that a good deal of confusion and misunderstanding exists as to the nature of the leasing arrangement. Since
it is proposed that the leasing arrangement should be used merely
as a means of enabling railroads to acquire equipment, and that the
R. F. C. should not purchase any equipment except upon the agreement to lease and upon the specifications of individual roads, I suggest that this be made perfectly clear through a rephrasing of paragraphs (b) and (c), under section 8.
I should also favor making this additional $500,000,000 available
for loans as well as leases, as the existing loaning power of the R. F. C.
for railroad equipment is limited. Paragraph (a) could well be
deleted, providing the specifications submitted by individual roads
for rolling stock to be constructed and leased to them should be
subject to the approval of the R. F. C. If these changes were made,
they would meet the only objections that I, personally, have heard
raised to this part of the self-liquidating bill.
Senator G L A S S . This is altogether your personal statement, is it,
Mr. Eccles?
Mr. ECCLES. I stated that, before you came in; and I shall reread
that first paragraph which answers your question:
In appearing here this morning I wish to make it clear that I testify
not in my capacity as Chairman of the Board of Governors of the
Federal Reserve System but as a member of the Fiscal and Monetary
Advisory Board which was consulted by the President when the
program underlying this bill was formulated.
Senator A D A M S . Mr. Eccles, you do not have different opinions in
those two different capacities, do you?
Mr. ECCLES. Oh, no; I could not do that.
Senator A D A M S . So the distinction really is not very great?
Mr. ECCLES. Except that I wanted to make it clear that I was
brought into the program as a member of this committee. That was
the point I wanted to make.



WORKS FINANCING ACT OF 193!)

Jg3

Senator A D A M S . And not binding the other members of the Federal
Reserve Board?
Mr. E C C L E S . That is correct. I did not want to appear to be speaking for the Federal Reserve System or the Federal Reserve Board,
because the Board is not familiar with or advised regarding the program, and has taken no part in the program; and the only reason that
I happen to be here, is that I have taken a part in the program—and
that was only at the time when these general economic problems which
I have mentioned here were being considered, and a general outline of
the program was suggested as one means of meeting some of the
problems.
Senator B Y R N E S . Did you ask to appear as Chairman of the Federal
Reserve Board?
Mr. E C C L E S . I did not ask to appear.
Senator B Y R N E S . You were asked to appear?
Mr. E C C L E S . Yes; yesterday.
Senator G L A S S . What prompted my inquiry was that it is clear that
these are questions that the Federal Reserve System has nothing to
do with.
Senator T O B E Y . May I ask a question?
T h e CHAIRMAN.

Yes.

Senator T O B E Y . What is the genesis of this suggestion regarding
railroad equipment? Did it come from you, or from whom did it
come?
Mr. E C C L E S . I do not know. The thing has been discussed by
quite a number of people, and I would not say that it originated with
anyone. I think it has been somewhat of a process of evcUution. The
R. F. C. has been doing some lending on equipment for some time; and
in the making of the economic studies with reference to the question of
housing, railroad equipment, the automobile industry, and the steel
industry, these figures were gathered by people in the Division of
Research and Statistics merely as economic information as to the
state of the industry.
Senator T O B E Y . And as a means to carry out the desired objective?
Mr. E C C L E S . That is right. With that information, it appeared
that here was a field where funds should be spent for the production
of equipment which would seem to be preferable to other expenditures
that were being made to create employment.
Senator T O B E Y . Yesterday, when Mr. Pelley was testifying, he
stated that he was not consulted, as representing the railroads of the
country, as to the wisdom of this procedure; and his testimony—
boiled down—was that he suggested the striking out of the entire
section 8. Are you aware of that? Did you talk to Mr. Pelley at
all?
Mr. E C C L E S . N O ; I did not; I have not seen Mr. Pelley.
Senator T O B E Y . Your idea is that this railroad-equipment plan is
probably advisable solely on the ground that it would give a lower
interest rate than is obtainable from private investment sources,
that are glad to buy equipment certificates under the Philadelphia
plan, like hot cakes, but could not compete with the Government
interest rate? Is that it?
Mr. E C C L E S . Well, for instance, the railroads are not going to buy
new equipment unless the payments on that equipment are no greater
than the cost of maintenance of the old equipment. After all, it is a



W O R K S FINANCING ACT OF 1939J79

question of saving. It is like the situation in the housing field: The
way a substantial expansion in housing was developed, under Federal
housing, was when we completely changed the method of financing
housing from a 20- to a 25-year lending basis, when the monthly
cost, including the interest and the amortized payments, was no
more than rent. Only in that way did that stimulate private housing.
There is nothing new about it; foreign countries have been doing it
for a long while, but we had never done it.
Now, we developed a very large amount of private activity in the
housing field that could not and would not have developed without a
complete reformation of the mortgage market under that plan, and
without the insurance program that was set up.
The railroad field is similar, in a way. Without question, you
could go along with the present railroad equipment, and they could
repair it indefinitely, and possibly get along with the purchase of
practically no or very little new equipment, just as we could get
along with the present housing situation, and patch them up and go
along for an indefinite period. We could go along with the present
automobiles, and buy no new automobiles, and run the old ones for
an indefinite period. However, you have got idle money to a very
large extent. If some of that money can be siphoned into the construction of what later would be needed, by getting modernized
equipment, lighter equipment, more efficient equipment, by the
railroads' making monthly payments that would return to the F. R. C.
the full principal payment together with the interest which they have
to pay for money, then certainly that is a better type of expenditure
than some other types that we might make to give employment.
Senator T A F T . Are you familiar with the fact that even bankrupt
railroads today can borrow at a good deal less than 3 percent?
Mr. ECCLES. Yes, sir; but I am talking about a good deal less
than three.
Senator T A F T . But here is a case where people can get private
money at a very low rate of interest, and therefore it hardly seems to
be a good field for the Government to step into, and to give them even
a lower rate of interest.
Mr. ECCLES. It just depends on whether you want to get employment through the purchase of equipment.
Senator T A F T . Of course if you gave them the money, you could
get even more employment.
Mr. ECCLES. That is correct, but there is no point in doing it.
We are talking, here, of getting the return of the principal together
with interest, and I shall give you some figures on that.
Senator M A L O N E Y . Before that, may I point out that yesterday
Mr. Pelley said that they had thousands of cars and engines in good
repair, in storage, that they could not use until they had an increase
of at least 25 percent in the railroad business; and that if there was
an increase of 40 percent, they still had a sufficient amount of idle
rolling stock, in good condition, which they could use.
Mr. ECCLES. Well, all I am basing it on is the age of the equipment
and the estimated cost of repairs of equipment. I recognize that
there would be no demand for a lot of new equipment if the roads
have got to pay some of the equity—that is, if they borrowed only 80
percent. Private financing is on the basis of an 80 percent loan, and
the railroads have to dig up 20 percent cash.



W O R K S FINANCING ACT OF 1939

J 79

Senator T A F T . The R. F. C. could loan them that 20 percent, and
they do that.
Mr. ECCLES. Yes; they can. I doubt if they have.
Senator T A F T . Yes; in effect they have; because with some of the
roads, part of the R. F. C. loan has made possible the purchase of
equipment.
Mr. ECCLES. That is right. They may have loaned it for other
purposes, and part of it has made the purchase possible.
Of course a 20 percent payment would require some cash and many
of the railroads have very little idle cash. Therefore it seems to me
to be important that the full amount of the loan be made.
The average term of equipment loans is for 15 years, whereas the
life of equipment is considerably longer than that. It would seem
perfectly safe to make the loan or the leasing arrangement for 20
years instead of 15 years. The rate of interest on a 15-year, 80 percent loan is from 2% to 3% percent, depending upon the credit of the
railroad. Those that can least afford to pay have the highest rate
to pay; those that can best afford to pay have the lowest rate. Of
course that is always true.
Now, here is a situation on a 100 percent loan for 15 years, with a
3 percent interest cost: The annual outlay would be approximately
$207, assuming a car that cost $2,500. If that loan were made for 20
years, you would reduce that cost; and loaned at 2 percent, which is
a quarter of 1 percent more than the average interest cost would be,
the cost there would be $151 a year. You have there a cost of less
than 50 cents per day per car. The interest item and the length of
time are the tilings that reduce the annual payment down to a point
where the payment would be less than the maintenance on older
equipment.
Senator M A L O N E Y . May I interrupt, Mr. Chairman?
T h e CHAIRMAN. Y e s .
Senator M A L O N E Y . I

think you made a fine statement, Governor;
and for myself, I am pretty much in accord with what you say.
However, I am disturbed about this railroad feature of the bill.
You seem to be completely at odds with Mr. Pelley, who should be a
real authority. You made a reference to the sale of old equipment
to foreign countries. Mr. Pelley seemed to know nothing about that,
and he told the committee definitely that the railroads preferred themselves to dispose of their old equipment. He indicated to the committee, it seemed to me, that there was no real desire on the part of
the railroads to get new equipment.
Mr. ECCLES. There is a difference of opinion apparently, because
I have talked to several railroad men, myself. Now, I know that
there are some railroads that have an excess of equipment and that
lease it to other railroads. I can well understand how some of the
railroads that have always made a custom of leasing equipment at a
dollar a day, because they have excess equipment, leased it to other
roads, roads that have plenty of funds. So that the situation with
all railroads is not the same. Some railroads are in a very different
situation than other roads, and railroads have bought, in spite of the
fact that they have been borrowing only 80 percent or 90 percent
and that they have been paying as high as 4 percent, during the
last 2 years, and in no case, as I understand, less than 3 percent, and



W O R K S FINANCING ACT OF 1939J79

they have had no terms longer than 15 years. In spite of that,,
however, there has been a substantial amount of financing by the
R. F. C. for railroad equipment.
Senator M A L O N E Y . Mr. Pelley discussed all of those things—the
interest rates and the other things that you have discussed. However, it seems to me that it would be too bad, in this effort to help the
railroads, if after the bill is passed, as I assume it will be, the railroads
do not cooperate and will not come in and take advantage of these
opportunities that you are pointing out. In that case, every thing
will be lost.
Mr. ECCLES. Certainly it can do no harm, if it is offered.
Senator T A F T . Mr. Eastman's testimony was that two bankrupt
railroads have been able to borrow at 2.75, and the Western Maryland
has recently gotten an equipment trust loan at 1.75.
Mr. ECCLES. For what length of time?
Senator T A F T . I think it was 1 5 years, with 2 5 percent down
payment.
Mr. ECCLES. I would doubt that.
The CHAIRMAN. I think it was 10 years, Senator.
Mr. ECCLES. Yes; I can understand a 10-year loan.
Senator T A F T . The two bankrupt roads borrowed at about 2.75 for
15 years.
Mr. ECCLES. But how much was the down payment?
Senator T A F T . Twenty percent in one case, and I think the other
was 30 percent.
Mr. ECCLES. Yes. Well, you see, they had a substantial equity
payment, and the average time the money was out would be 7K years,
on a 15-year loan.
Senator C L A R K of Idaho. Mr. Eccles, my recollection of Mr.
Pelley's testimony was as stated by Senator Maloney: That the railroads did not want the Government to buy this equipment and lease
it to them. He said that despite the general surplus, nevertheless
there were many roads which would buy equipment but that they
wanted a very cheap money, by direct loan, to do it with. I think I
am correct in that.
Senator M A L O N E Y . N O ; that is not quite what he said.
Mr. ECCLES. Let me give some figures I have here on this thing,
if you please. Of course I do not presume to be the authority that
my friend, John Pelley, is.
The source of this information is the American Railroad Car Institute, and this is as of January 1, 1938, so the picture would be considerably worse now: The total of all freight cars was 1,729,000.
Those over 25 years of age were 386,000, or about 23 percent. Those
from 21 to 25 years of age were 341,000; those from 16 to 20 years of
age were 306,000. For those 16 years or more, you have over 60 percent of the equipment.
It would seem that of these cars over 25 years—386,000 of them—a
substantial portion might well be abandoned, that they could be
scrapped. Possibly some of them are in better repair than others,
naturally. There may be also some in the 2l-to-25-year group that
it would be economically cheaper to scrap.
Senator A D A M S . You stated that the figures for the present time
would be worse. I heard yesterday the statement that the rialroads
in the reasonably recent past had disposed of some 600,000 of their



W O R K S FINANCING ACT OF 1939

J 79

cars. I wondered whether since the date of those statistics there had
not been a scrapping of old cars and a replacement with new cars,
which would make thosefiguresbetter.
Of course I know nothing about that.
Mr. ECCLES. It cannot have been. Here is a chart showing the
average service .of cars, the freight-car loadings, and the equipment
expenditures. You notice that the equipment expenditures went up
and then dropped down almost to nothing, in the middle of 1938. You
will notice how high the surplus cars were, along at this period which is
indicated on this chart, and how they dropped down, with the improvement in car loadings.
Senator T A F T . Mr. Eccles, let me ask you this question, please:
If the railroads thought that the Federal Government is engaging in
the construction of a Federal highway program and is proposing to
spend $750,000,000 in building superhighways, is any railroad man
justified in buying new equipment? Must he not look forward to a
reduction of traffic, wnicli is going to make the buying of new equipment in the freightfield,at least, entirely unwise?
Mr. ECCLES. I should like to answer that, Senator. However, before
answering it, I should like to go back, if I may, to the point that
Senator Clark was making, about this leasing of equipment: The suggested change—and I understand that there is one contemplated—
about the R. F. C.'s purchasing no equipment whatever or leasng no
equipment whatever except upon the order and specification of a lease
arrangement with the railroad, prior to making such an arrangement.
There was never a thought that the Government itself would go out or
that the R. F. C. would go out and buy equipment with the expectation and hope that it would be able to lease it.
Senator ADAMS. It was not going into the merchandising business?
M r . ECCLES. N O ; n o t a t all.

The thought was that many of the railroads would prefer a leasing
arrangement whereby they, acquire title to the equipment after the
expiration of the lease, rather than incur the debt obligation; and it
was also with this thought in mind—and to what extent it would be
useful, I do not know: that is, the supplying of equipment for shops,
on the same kind of an arrangement, and the further supplying or further
being able tofinanceroads for the rehabilitation of some of their older
equipment, whereby they could sell it to the R. F. C., because it
would be under their general mortgage, and the proceeds of the sale
would have to apply or go to the trustee. The R. F. C. could then
finance the rehabilitation of equipment and sell it back, under a lease
arrangement.
For instance, as I understand it, the New York Central built some
of its passenger cars for its streamlined trains by taking some of its
equipment and completely remodeling it, at a cost of around $30,000
a car, whereas if the New York Central had gone out and bought
J" 1
"
" " " "1
'ehabilitating their old equipment,
Now, to what extent more of that can be done by various railroads
is questionable. There is a great deal of modernization of passenger
equipment that it seems to me is going to be necessary on the roads
if they are going to compete with various types of transportation;
and the roads that do not have it are going to compete with the roads
that do. It would be a shame to scrap considerable equipment that



W O R K S F I N A N C I N G A C T O F 1939J79

has a good deal of life and that could be remodeled and rehabilitated;
and under this leasing plan it could be financed. That was the
thought in mind.
To the extent that this facility, here provided, is not used, certainly
it is not going to do any harm.
Senator B Y R N E S . I wanted to ask you about that. I regret that
I did not hear Mr. Pelley. However, there is nothing mandatory in
this?
M r . ECCLES. N O .
Senator B Y R N E S .

If the railroads do not want to use it, I do not
see their interest in striking out that section. If one railroad wanted
to use it and others did not, is there any objection to leaving the
language there?
Senator T A F T . I might explain that the objection was to the
language. Mr. Pelley?s principal objection was to having the Government go out and build equipment which did not meet the railroads'
specifications.
Senator B A R K L E Y . Senator Taft, I want to say that I have an
amendment which will correct that situation.
Mr. E C C L E S . I shall merely say, Senator, that the committee worked
with reference to the general idea rather than the technical language
of the bill, and the committee had no such thought in mind as apparently some people seem to think they had.
I agree with you that under the bill it might well be interpreted
that they did have that intention, because certainly they have that
power. That is why I suggested in this statement that certainly,
inasmuch as there was no intention of using that power for the purpose
of owning and buying equipment, it should be elimininated.
Senator B A R K L E Y . Let me suggest some language here that I
think will correct that.
Before I do so, I wish to say that I regret very much that I was
unable to be present yesterday when Mr. Pelley testified, because I
am interested in this part of the bill. However, I had to be on the
floor of the Senate, and I did not know Mr. Pelley was going to testify.
Probably I could not have attended, anyhow.
As Senator Byrnes has suggested, and you have confirmed that
suggestion, there is nothing in this bill that compels any railroad to
borrow a dime or to lease a car or anything else in the way of equipment; and we might admit that the railroads* financial structure might
not need any of this equipment. But if there are a substantial
number of them that do need it and would take advantage of this
method of financing, for the acquirement or use of the equipment,
there does not seem to be any reason why those who do not need it
would oppose its use by those who do. If no railroads would use
this method, certainly there is no harm that can come, and there
would not be a dollar spent under it. However, Mr. Jones, who has
had a good deal of experience, feels that there are some; and I do not
see why the stronger roads should insist that the whole thing be
stricken out.
Senator T A F T . I think you have the wrong idea. Mr. Pelley
says that any railroad would like to get money at 1 percent from the
Government, instead of at 2 percent from the public. He is not
opposing that idea, from the railroads' standpoint. It is our con


W O R K S FINANCING ACT OF 1939

J 79

sideration as to whether we ought to lend money to the railroads at
1 percent, when they can borrow it from the public at 2 percent.
Mr. ECCLES. Senator, there is no contemplation, as I understand,
to loan the money at 1 percent.
Senator T A F T . I want to bring that out, if I may interrupt on that
question.
M r . ECCLES. Y e s .
Senator T A F T . Suppose

a loan were made for 5 years. What does
Government money cost, now, for 5 years?
Mr. ECCLES. Well, for a 5-year loan it would be a little less than one.
Senator T A F T . And if you added this one-eighth, it might be 1 percent?
M r . ECCLES. Y e s .
Senator T A F T . I suppose

you might make a 5-year loan, with the
railroad obligated to buy at the end of 5 years, at 1 percent, under this
bill, and then renew it ut the end of 5 years, again?
Mr. ECCLES. Senator, it is the banks that are taking this paper.
Senator T A F T . I thought the Government was taking this paper.
Mr. ECCLES. No, the Government does not take the paper at all.
The R. F. C. is a corporation that sells its debentures, like any other
corporation. It sells its debentures in the market. The banks will
be the purchasers of the paper, with the idle money they have, and
for which they today are getting practically nothing. They are buying them; they are buying Government bills. Last week there were
about three hundred millions of bank bids for Government bills, for
$100,000,000 of bills that were offered; and the return on those bills
^vas sixteen one-thousandths of 1 percent per annum. That was the
rate on Government bills that the banks offered last week.
Now, if the R. F. C. puts out two or three or four or five hundred
million of paper for this purpose, it will be money that they now have,
that otherwise they get nothing for.
Senator ADAMS. Mr. Eccles, the banks will take the notes of the
R. F. C. ,and the R. F. C. will take the notes of the railroads?
Mr. ECCLES. That is correct. If the banks get paper that otherwise they would not get, and if car equipment is built and employment
is given that otherwise would not develop, then I say it is perfectly
sound.
Senator ADAMS. If there is any loss, it would be to the R. F. C. and
not to the banks, because they have Government paper.
Mr. ECCLES. That is correct; and the loss to the R . F . C . , under
this equipment program, we all admit would be extremely small.
Senator T A F T . Of course, it would remove a number of possible
sources of private investment, and it would further depress the rate of
interest on private investment?
Mr. ECCLES. The rate of interest is going to continue to be depressed
as long as there is a huge surplus of idle funds; and to the extent that
these funds are used in this way, that otherwise would not be used,
it would help the interest rate.
Senator ADAMS. Senator Barkley, did I not understand you to say
that you had the perfect amendment that would meet this problem?
Senator B A R K L E Y . N O ; you did not understand any such thing.
I said I thought I had an amendment that would correct at least some
impressions here, that had been developed about this particular
provision.
165717—39 13



W O R K S FINANCING ACT OF 1939J79

Senator ADAMS. Well, I am disappointed. I was most hopeful.
Senator B A R K L E Y . I would leave it to you to perfect it.
You see, on this point, and talking of the 1 percent, Senator Taft
probably was confused by the testimony of Mr. Jones; and I should
like to read the testimony of Mr. Jones, in answer to questions of
Senator Adams, with reference to this leasing proposition. Mr. Jones
said as follows, and it presents a little of the other side, with reference
to what Mr. Pelley testified yesterday.
Senator Adams suggested that the process "would not be a selfliquidating process"?
Mr. JONES. It would be if you had an over-ride between what the interest cost
the Government and what was added in to amortize in the rental. In other
words, if we paid 1 percent for the money and add in 3 percent on the lease price
for the equipment, we might make a profit sufficient to cover the cost or, rather,
to cover the loss on the box car which you would scrap.
Senator ADAMS. It is rather highly problematical, is it not?
Mr. JONES. I do not think so at all, Senator. I think it is feasible.

He is talking about the loaning.
But it has got to have management; it has got to be done properly. It just
won't do itself. But I think there is substance in that. I think there is an
advantage. When you look over the life of railroad equipment we find a lot of it
that is 25 years old or older. Obviously it is uneconomical. The . railroad does
not feel like scrapping it; it does not feel able to go in debt for new equipment;
and I think we could do some good under that part of the bill.

In discussing this provision here, I should like to suggest the
language of the amendment—probably a very imperfect amendment,
but still an amendment—which I think probably will clarify what
was really the purpose. I grant you that under the original language
here, where the Corporation is empowered to prepare plans and designs for construction, rebuilding, or repair of railroad equipment, and
then under (b) to enter into contracts for the construction, repair,
rebuilding, or scrapping of any railroad equipment, it might be construed to mean that the R. F. C. could go out and build a shop somewhere and build some equipment in it, or that it could enter into
private contracts with equipment factories, for the purpose of building
this equipment for it.
Senator GLASS. Could not that be done under paragraph (d), on
page 11?
Senator B A R K L E Y . N O , I do not think so.
Senator GLASS. I think it is.
Senator B A R K L E Y . Here is the way I have redrawn this, and I
should like to have you discuss it in that light, and I should like to
have Mr. Pelley also give consideration to it.
This is the new language;
The Corporation shall have power to make contracts for

Senator A D A M S (interposing). You are dropping out section (a)?
Senator B A R K L E Y . Yes.
The Corporation shall have power to make contracts for or aid in financing:
by loan, lease, or otherwise, the making of contracts by carriers by railroad for the
construction, rebuilding, repairing, or scrapping of any material or railroad
equipment, as defined in subdivision 8 of section 4 of this act, of such type and
design specified by the carriers, with the approval of the Corporation, and upon
such terms and conditions as may be agreed upon, pursuant to public bidding or
private negotiation.




W O R K S FINANCING ACT OF

193!)

Jg3

That simply authorizes the Corporation to enter into contracts
with railroad companies for the loaning or leasing of equipment which
is to be manufactured upon their own plans, and through their own
negotiations, and does not in any way put the Government itself
into the business of manufacturing equipment.
Senator T O B E Y . On the initiative of the railroad?
Senator B A R K L E Y . Yes.
Senator B Y R N E S . Substitute that for what language?
Senator B A R K L E Y . Page 12, line 7, subsection (a), "To prepare
plans and designs for the construction, rebuilding, or repair of railroad equipment.7'
Strike that out entirely; and it puts in the power to make contracts.
Senator B Y R N E S . H O W about subdivision (b)?
Senator B A R K L E Y . Subdivision (b) is changed in this way: It is
stricken out and is combined with (a)—
making contracts by carriers by raalroad for the construction, rebuilding, repairing, or scrapping of any material or railroad equipment as defined in subdivision
8 of section 4 of this act, of such type^ and design" specified by such carriers, with
the approval of the Corporation, and upon such terms and conditions as may be
agreed upon, pursuant to public bidding or private negotiation.

That is all a new section (a), and the subsections are renamed.
Subsection (b) follows, instead of (c). Subsection (b) would read:
To lease, with or without the option to purchase, or to sell or rent upon such
terms or conditions as it shall prescribe, any. railroad equipment constructed,
rebuilt, or repaired under this section.

That is, it is equipment constructed, rebuilt, or repaired under the
authority to contract with the railroad for the lease or the loaning of
money for that purpose, so that it clearly takes the Government out
of the construction business.
Senator T O B E Y . What do you do with subsection (d)?
Senator B A R K L E Y . Subsection (d) is to be subsection (c):
To enter into contracts for the purchase of old railroad equipment for the purT
pose of lease or resale in its existing state or for the purpose of rebuilding, repairing,
or scrapping the same.

That is left practically as it is.
Subsection (e), as it now exists, is entirely stricken out, and also
subsection (f) is eliminated.
Senator D A N A H E R . Does the Senator understand that this language
applies alike to streetcar traction companies?
Senator B A R K L E Y . Well, I do not think it is intended to appljr.
Senator D A N A H E R . I S there any reason why it should not, if the
plan and principle are to be applied at all? Is there any reason why it
should not include traction equipment?
Senator B A R K L E Y . I think that is worth considering. It had not
been understood that it would, but I think it ought to be given consideration.
The CHAIRMAN. A S I understand, surface lines have not been, in
law, designated as railroads. I think they are a special class. So, if
you use the word urailroads," you would not include the surface lines.
Senator D A N A H E R . I expect so; but if the principle contended for
is justifiable at all, it certainly ought to extend to that type of durable
goods.
Senator B A R K L E Y . I doubt if the language, as it is now written,
would include traction companies.



W O R K S F I N A N C I N G A C T OF 1939J79

Senator T O B E Y . Y O U strike out paragraph (f) on page 1 3 , and also
paragraph (d) on page 11?
Senator B A R K L E Y . Yes.
Senator M A L O N E Y . N O ; you just said you moved that section up.
Senator B A R K L E Y . N O ; section (e), as originally written in the bill,
is striken out, and (d) is made (c).
Senator M A L O N E Y . I am sorry.
Senator B A R K L E Y . And (e) and (f) are both eliminated, on the
bottom of page 12 and the top of page 13.
In view of that change, I thought you might make some comment,
Mr. Eccles.
Mr. E C C L E S . That was the change that I contemplated when I
said it should be made perfectly clear, through a rephrasing of paragraphs (d) and (e) in section 8.
Senator H U G H E S . Mr. Chairman, I should like to ask what you are
doing with subdivision (f) on page 13.
Senator B Y R N E S . That is stricken out.
Senator H U G H E S . That is cut out?
Senator B Y R N E S . Yes.
Senator H U G H E S . It is difficult to hear, down here.
Mr. E C C L E S . Senator Taft asked a question, and I asked to defer
answering it.
Senator T A F T . That was relating to the effect of highways and the
discouragement of railroads, through the construction of a Federal
highway program.
Mr. E C C L E S . Yes. This program contemplates only that type of
highway construction that would be paid for by the user. It would
seem to me that if there is a type of highway construction, bridges, or
tunnels, that would facilitate transportation and would be sufficiently
economical to be paid for by the user, then certainly it should be
built, and it should in no way deter the railroads from keeping up to
date and modernizing. As a matter of fact, it would seem to me that
it would have the effect of causing them to reduce their expenses in
every way possible; and if buying new equipment would be an economy, they would buy it. If it is not economy to do so, then I do not
expect them to buy it, whether we build highway systems or not.
The idea of permitting the use of highways for commercial purposes,
to the extent we do, without making any of the companies that use these
highways pay more for their use, is one that demands serious consideration. Of course I can well agree with the railroads on that point;
and as I travel over the highways and encounter the number of trucks
that I do—and especially when going up a hill—I certainly feel that our
highways are used excessively, at the expense of the railroads, without
many of the trucking systems or companies that have their own trucks
paying for the use of highways. That is the situation today.
However, this plan certainly is not nearly as much of an abuse of
the system and would not be as bad for the railroads as the present
situation. If we could build some kind of a bypass around Baltimore, over here—if any of you have driven to New York, you have
realized the need of something of that sort—or if we could build
bridges, something like the San Francisco Bridge, which is a case in
point, that could not possibly be financed privately, and yet has
been so successful that private capital has now purchased the bonds,



W O R K S FINANCING ACT OF

193!)

Jg3

at a big profit, I understand, to the R. F. C., and they have been able
to reduce the toll upon the bridge—whether they have done it or not,
they feel that they can—and that the tiling will pay off much sooner
than they contemplated, of course all such enterprises would be
tremendously helpful and worth while.
We have a lot of unemployment, a lot of idle facilities and a lot
of idle money, and this is a field wrhere we can use some money at a
low rate, rather than to get no rate at all, and get that back with
reasonable assurance of getting it back, over a long period of time;
and if we can help to give employment and to give activity to business, it is not going to detract from what private business otherwise
would do, because there are plenty of men, plenty of productive
facilities, and plenty of money left over after all that can possibly
be undertaken under this bill. As I tried to bring out in my statement, this is merely an incident in dealing with a big problem.
Senator T A F T . Perhaps the draftsman in this case went further
than your idea, but it seems to me, as I read the program, to authorize
the Federal Government to build a Federal highway system. Your
idea as to this highway program is that it involves simply self-liquidating projects, or perhaps some lease arrangement with the roads.
Is that it?
Mr. ECCLES. A S I understood the program of the committee that
discussed this matter, it was to do two things: First, it was to be a
type of program that would not further bring about an unbalanced
budget; we want to avoid that. It must be loans and investments
in projects that would be expected to be self-liquidating. Secondly,
that it would be projects that would be largely undertaken by existing
agencies.
Now, as to the highway and transportation features, outside of
the railroad, that is, tunnels and bridges and so forth, it was contemplated that only those would be undertaken where there was
reasonable assurance that they would be self-liquidating or selfsupporting.
Senator T A F T . That type of highways which were testified to here
would be confined to a very few congested areas in the East, not at all a
national proposition.
Mr. ECCLES. There may be bridges, there may be tunnels, and there
may be other types of highway necessary. But, certainly, looking at
the West—I am from the West—the West gets a good deal of highway
money from the Federal Government for the construction of highways
that are not toll roads. There is practically no prospect, in my
opinion, in the South and West for toll roads. There may be a few
cases of bridges, but there could not be very many, and probably no
toll highways.
Senator T A F T . It seems to me, if you start off with a Federal highway requiring a toll, it would only be about a year before somebody
would be bere trying to take the toll off. If it is a loan to a municipality, it might be a different thing; but this bill authorizes the Federal
Government to build roads.
The C H A I R M A N . Senator Taft, we have some toll roads in my State,
and a number of toll bridges. There has never been an effort, where
the toll was collected, to liquidate the debt.
Senator T A F T . Those local communities are responsible. They
feci the necessity of balancing their budget, but dowrn here we do not.



W O R K S F I N A N C I N G ACT OF 1939J79

Senator B A R K L E Y . I have got to go to the floor of the Senate, and I
wanted to ask Mr. Pelley a question. I have submitted to him the
amendment that I have suggested, and I would like to ask him
whether, if adopted, it would remove the objection that he expressed.
Mr. P E L L E Y . It does.
The C H A I R M A N . Y O U are satisfied with it?
Mr. P E L L E Y . Yes. As I understand this amendment, it will be
optional with the railroads to borrow; and certainly I have no objection
to that. The real objection I had, and it was only a suggestion on my
part, was that it would be a mistake for the Government to undertake
to design and build a lot of railroad equipment with the idea of leasing
it to the railroads, because I think I know it would not work that way;
and my suggestion was that that be stricken out and that the simple
and easy way to do it was simply to put the money in reach of the railroads on terms that would be satisfactory to them.
Senator B Y R N E S . This amendment is satisfactory to you, is it?
Mr. P E L L E Y . Yes, sir. If you want to put in a leasing provision
which is optional with the railroads, I see no objection to that.
Senator B A R K L E Y . That is what the amendment does. Thank you
very much.
I wish to state, before I leave, that I have gone through this bill,
and there are a number of amendments that will be offered when we
meet in executive session. For your information I might say that one
of them will be to eliminate the creation of corporations, and one mil
eliminate the revolving fund feature with respect to the collection of
interest and repayment on principal. It will be confined to the
amounts stipulated ii\ the bill, without any future revolving fund after
those amounts are exhausted.
There are other technical amendments that will be discussed, but I
thought you would be interested to know that.
Senator B Y R N E S . With reference to subparagraph (a) under highway improvements
Senator B A R K L E Y . I would rather discuss that a little further,
because, frankly, it was thought that there might be a short section in
densely populated areas where the Federal Government might find it
desirable to strike out through a new territory; that is, to buy completely a right-of-way and bund one of these superhighways upon which
tolls would be charged, in the event it was found desirable, and the
modus operandi of complete integration and cooperation between the
Federal Government and local authorities could not be brought about.
But that is a matter that we can discuss later.
Senator T A F T . It could be leased to the State concerned?
Senator B A R K L E Y . Yes; a way might be found to do that.
Senator B Y R N E S . The language here would not require the collection of tolls at all.
Senator B A R K L E Y . We will discuss that a little later.
Senator T A F T , I S a substitute likely to be prepared for the whole
bill?
Senator B A R K L E Y . I do not think so. I have some amendments.
Senator A D A M S . You have made great progress, sir.
Senator B A R K L E Y . I thank you for your cooperation.
Senator D A N A H E R . May I ask a question, Mr. Chairman?
The C H A I R M A N . Certainly, Senator.



W O R K S FINANCING ACT OF

193!)

Jg3

Senator D A N A H E R . When the President addressed us earlier in the
-session with reference to national defense, he pointed out that one of
the important things to be done was the relocation of key industries.
Is it in any way contemplated by the committee which considered this
legislation that this bill would authorize the relocation of industries?
Mr. ECCLES. N O ; it was not. There was no thought or discussion
of such an idea; the whole thought being that the bill was to provide
employment and to supplement private activity.
Senator D A N A H E R . Would there be objection to the inclusion of a
clause that none of the Government funds, through any of its agencies,
should be used to compete with private industry?
Mr. ECCLES. I would see no objection to that, personally, because
certainly there was no contemplation of using funds for that purpose.
Senator B Y R N E S . What do you mean?
Senator D A N A H E R . For instance, to create power plants where none
now are.
Senator B Y R N E S . Such projects as have been constructed under
P. W. A.?
Senator D A N A H E R . Which, of course, have previously proceeded on
a grant-and-aid basis.
Senator B Y R N E S . That is what I mean—that section of the bill?
Senator D A N A H E R . Yes.
The C H A I R M A N . Are there any further questions?
Senator T A F T . If I may ask one, Mr. Chairman. This advisory
committee of which you speak; did they approve the general principle
that none of these things to be constructed should compete with
private industry?
Senator G L A S S . The President's letter to Senator Byrnes said that.
Senator T A F T . That is why I ask whether that is part of the
program.
Senator G L A S S . The President's letter to Senator Byrnes disclaimed any such thing as that.
Mr. ECCLES. It was not a major part of the discussion, but certainly there was no thought in my mind and, so far as I know, in the
mind of anybody else on the committee, that any part of this program
would be used for any other purpose than to supplement and assist
private activity. Certainly it could not do that and at the same
time use any portion of it to compete with private industry.
Senator T A F T . As the bill is drafted there is nothing in it to prevent
loans for competitive projects.
Mr. ECCLES. Well, there certainly was no intention to do that.
Senator T A F T . Would you see any objection to the inclusion of
some such clause to carry out that idea?
Mr. ECCLES. I would see none, because I do not think it would be
used for that purpose, and it is not contemplated.
Senator T A F T . Your own views are rather opposed to Federal loans
for municipal purposes?
Mr, ECCLES. My own views have always been opposed to competitive projects.
Senator FRA.?IER. I want to ask you if you think this low rate of
interest could have the effect of lowering rates through other lending
agencies, such as business loans.
Mr. ECCLES. I think riates are lowering £*nd have been for some
time. I think the effect of the excess idle funds, as well as the excess



W O R K S FINANCING ACT OF 1939J79

reserves that the banks have is tending to force all types of interest
rates down. Certainly that is true where there is sound and safe
credit. Naturally where there is very questionable credit you
cannot get money at any price, and to the extent that there is risk
involved, even small risk, the rates are higher than they would be
if there were no risk. With the Government guarantee it is like the
insured mortgage loans: you get a long-term rate and you get a
90 percent loan that would be absolutely impossible without some
assistance.
The CHAIRMAN. Are there any further questions of Chairman
Eccles?
Senator M A L O N E Y . Yes; I want to ask a question.
The CHAIRMAN. Very welL
Senator M A L O N E Y . A S I recall your testimony, you said you wTere
hopeful that there would be a further extension of P. W. A. work.
Mr. ECCLES. That is my personal view that I expressed.
Senator M A L O N E Y . I share the view. That is why I am trying to
bring this into the hearing. I am wondering if you think it would
be advisable for us to have a provision in the bill for continuing
P. W. A. grants under this bill; and before you answer I would like
to tell you why I ask that question. Secretary Morgenthau said
yesterday it would not be possible under this bill that States or
municipalities or subdivisions thereof could be made to assume the
responsibility for any of these bonds; that in every instance the
Federal Government would have to assume the responsibility.
You referred also to the creation of social values under this program.
It seems to me we would guarantee, as nearly as a guaranty could be
possible, the creation of better social values if we compel the States or
subdivisions of States to make some contribution and that they would
select with a greater degree of care the projects to be undertaken, that
they could build more schoolhouses where they are necessary, and
other public buildings of that sort. But to briefly come to a conclusion, I am wondering if you feel that we should do something about
a continuation of the P. W. A. program under this bill.
Mr. ECCLES. I was not thinking of it from the standpoint of this
bill. I was thinking of it from the standpoint of economic activity
and employment, recognizing that during the next 8 or 10 months
there will be a reduction in the people on W. P. A. from 3,000,000
down to 2,000,000. There is a reduction of 1,000,000 people on the
W. P. A. After the end of this year their projects will drop very,
very rapidly. The stimulation of employment directly and indirectly
is very substantial, and this proposal will not commence to offset or
to compensate for the great reduction in the W. P. A. and the P. W. A.
together. There was over a billion dollars provided in grants a year
ago.
Senator A D A M S . For the P. W. A . ?
Mr. ECCLES. Yes. I think it was a billion dollars. That organization has, in my opinion, done an excellent job and has had a lot of
experience over the last 3 or 4 years, both here and throughout the
country; and to drop from a billion dollars down to nothing, just like
that
Senator A D A M S . They are not dropping "just like that." They
have not reached the peak of expenditure, and won't for some months
in the P. W. A. It is bound to taper down.



W O R K S FINANCING ACT OF

193!)

Jg3

Mr. ECCLES. It takes 6 months to a year as we know from experience, when P. W. A. money is appropriated, to actually get the
projects approved and under way and the money disbursed.
Senator ADAMS. We passed a bill in the last of June with a requirement that the projects must be under way by January 1. We only
allowed 6 months on that to get it all under way.
Mr. ECCLES. That is right. But if nothing is done at this time,
and the matter has to be done next spring, it would be another year;
and in the meantime there will be a huge gap. In other words, we
tend to create a boom and then a depression.
Senator B Y R N E S . Don't you think we have got to stop giving 45
percent grants?
Senator M A L O N E Y . That is not my intention. The last P. W. A.
proposal in the Senate was that the grants be in the amount of 30
percent. When this bill was first written about in the newspapers
I gained the impression, and I think many others did, that the very
lowT interest rate was going to make up to the municipalities and to the
States the difference in the loss of the grants. Now, as the bill is
drawn, I do not see that that is happening. As the bill is drawn,
it seems to me that the Federal Government is going to be entirely
responsible, and as the bill is drawn it seems to me that the States
and municipalities are not going to have these projects. The only
way we can get the projects is through the P. W. A. The only way
we can get the better grade of social values through the projects
is by giving the States and municipalities a stake and giving them the
right to select what projects shall be undertaken. I have the notion
that we can best serve the unemployment problem by continuation of
the P. W. A.; and I would like to add, in connection with Governor
Eccles' pointing out a gap that is created, that when it comes, as it is
certain to come, it is going to have a very serious effect upon the
entire economic structure and it is going to intensify unemployment.
Mr. ECCLES. There is a $ 3 5 0 , 0 0 0 , 0 0 0 revolving fund that goes to
P. W. A. now for 100 percent loans.
Senator T A F T . It just stopped revolving.
Mr. ECCLES. That is what Senator Barkley proposes. But there
would be $350,000,000 that could be loaned on non-Federal selfliquidating projects; the idea being that they would borrow 100 percent of the cost of the project and they would be given very favorable
terms both as to interest and as to the maturity.
Senator B Y R N E S . If we do that, is not that equivalent to a grant?
Mr. ECCLES. I am not saying anything about the elimination of it.
I say it will be helpful. When I suggest P. W. A. I certainly would
not suggest the same amount as last year. But it does seem to me
that with this $350,000,000 it is not even contemplated that it -will
go out to the extent of more than $100,000,000 to $150,000,000 next
year, and if that were supplemented with some direct P. W. A., I
should agree with you that the idea of a constant 50 or 45 percent
grant certainly does not seem right. But if it could be more gradually
tapered off—
Senator B Y R N E S . Have you given consideration to the vastly
increased expenditures on account of national defense?
Mr. ECCLES. Yes. They will not increase a great deal next year.
Senator B Y R N E S . Why not? I would be greatly disappointed,
after all we have been told, if they are not going to get started in the
next year.



W O R K S FINANCING ACT OF 1939J79

The CHAIRMAN. I understand it takes almost a year to draft the
plans, and all that, for a battleship.
Senator B Y R N E S . Oh. You are talking; about a battleship?
The CHAIRMAN. What else have we got?
Senator B Y R N E S . We have certainly increased appropriations for
the production of airplanes. So far as battleships are concerned,
fortunately the designs are already under way, and with the increased
amount of money that is available there will be increased expenditures on account of ship construction. But that is only one part of it.
The CHAIRMAN. May I interrupt there? I went over with one of
the Treasury officials the rate of interest to be charged here for loans
to municipalities for public works, and they figured out to a 22 percent
grant as compared with what the municipalities are required to pay
now.
Mr. ECCLES. Over what maturity? It depends on the maturity.
The CHAIRMAN. Over a period of 20 years.
Senator T A F T . As far as the immediate effect is concerned, the
thing the Government money is spent for does not make a great deal
of difference, does it, during the next 6 months? Of course this
Congress will have appropriated over a billion dollars more than the'
last Congress did, even without this bill. So I would think there
was no fear of a general falling off, except in particular fields.
Mr. ECCLES. I was merely thinking of the great gap that always
happens between a public-works appropriation and the actual expenditure. The element of time is a factor; and unless by next year
there is an expectation and a willingness to have a great decline in
the—
Senator A D A M S . Mr. Eccles, do you not really think that we are
going to have some measure of industrial recovery? We have not
been going all this way hopelessly, have we? Are there not indications now of an up-raise? Government employment is a relatively
small percentage of the number that must be employed. We are
dealing with employment here of 40,000,000 to 50,000,000 employable
people, and the amount of Government employment that is involved
in this bill is relatively small. We have got to look to private employment, have we not?
Mr. ECCLES. Industry is producing everything it can sell today.
Certainly it is not turning orders down. The industrial plant is being
kept up in an efficient manner in order to be able to meet competition
and to supply a market for purchasing. It is not adequate to take
what can be produced. That is a fact.
Senator A D A M S . I do not agree with you at all. I think there is
not only a capacity to consume, but there is an actual capacity to
pay, once the people of this country are given the encouragement to
feel that we are moving forward.
Mr. ECCLES. Senator, you say "capacity to consume"—;—
Senator A D A M S . I mean, capacity to pay for what is desired. The
capacity to consume is unlimited.
Mr. ECCLES. That is right; but the capacity to buy is very limited.
Senator A D A M S . You told us about the vast fund of capital that has
accumulated. That is all capacity to pay.
Mr. ECCLES. That is right, but not for consumers' goods. It is
capacity for new investment for more producers' goods, plants, and
facilities.



W O R K S FINANCING ACT OF

193!)

Jg3

Senator ADAMS. Y O U cannot separate one from the other or draw
any hard and fast line.
Mr. ECCLES. We are really very short in the consumption field and
not in the production field. The masses of the people do not save.
Studies that the National Resources Committee made covering 1935
and 1936 would indicate that out of a national income, averaging
for that period $60,000,000,000, 59 percent of families got less than
$1,500 a year, and 38 percent from $1,500 to $5,000. ^ The 59 percent
as a class saved nothing. They actually spent a billion and a half
dollars above their income which had to be supplied from loans or
from private and public relief.
In the 38-percent class the saving was about $2,800,000,000.
Senator T A F T . What year was that?
Mr. ECCLES. The average for 1935 and 1936.
Senator T A F T . What is your estimate of savings today? Can you
form any accurate estimate?
Mr. ECCLES. The savings in that period individually—I am not
speaking of corporate savings—is another matter. If is very important, as indicated by the huge idle balances of corporations, with
no debt, as to many of them, taking more income in than they are
disbursing. But the individual savings at that time ran about 10
percent, or to $6,000,000,000 out of a total of 60 billion, it is estimated.
Senator T A F T . This year?
Mr. ECCLES. N O . On the basis of $60,000,000,000 national income.
Senator T A F T . Have you any figures showing what the actual
savings were in 1938?
Mr. ECCLES. Yes. We had between six and seven billions, because
the national income was between sixty and sixty-five billions.
Senator T A F T . I think you are assuming a program that does not
work. Sometimes people do not save as much as they do at other
times.
Mr. ECCLES. I am speaking of individual savings as against corporate savings, which are in addition to this.
Senator T A F T . H O W can you find out what the savings are? You
have life insurance savings; that is one of the large items. That is
about a billion and a half a year.
Mr. ECCLES. It is life insurance, trustee funds, mutual savings,
savings in commercial banks, private investments——
Senator T A F T . Trustee funds are not necessarily savings, except
to the extent that they are cash. Otherwise they are invested.
Mr. ECCLES. They are savings. Anything is savings that does
not go into consumption.
Senator T A F T . What is put in trust may have been capital.
Mr. ECCLES. But I am distinguishing. The national income goes
into consumers' goods and producers' goods. If too much of the
national income is going into producers' goods there is a stoppage in
the flow of money.
Senator T A F T . I think that happened in 1 9 2 8 and 1 9 2 9 , but I do
not think it has ever happened since; and in that I disagree entirely
with Senator Downey as to its really going into savings. I think it4
has been under rather than over.
Mr. ECCLES. If there is too much, it is not invested; and the fact
that it is not invested is because you have excess capacity and there
is no profitable outlet for it.



W O R K S FINANCING ACT OF 1939J79

Senator T A F T . It is because people are not willing, under present
conditions, to invest their money.
Mr. ECCLES. Why?
Senator T A F T . Because the Government regulates them and fixes
their prices and taxes them so that they cannot make any money.
Mr. ECCLES. I will take as an example an automobile corporation,
one of the large ones. The first quarter of this year they had greater
earnings than they had in any first quarter in their history. They
increased their cash from $70,000,000 to $90,000,000 in one year.
They doubled their business.
Senator T A F T . Over last year, but not over 2 years ago?
Mr. ECCLES. They doubled their business over last year. But the
point I make is that even though they doubled their business—and
you would have thought their cash would have decreased to carry
that much more business—by being able to do twice the amount of
business they actually increased their cash from $70,000,000 to $90,000,000. They have no debt. They had the biggest earnings they
had ever had in any first quarter in their history. They took in
$20,000,000, and that money is idle. I can give you dozens of examples just like that.
Senator T A F T . Y O U can give me examples, but I question whether,
if you take all the industries of the country as a whole, you will find
any such situation as that. Many people have less cash than they
had a year ago.
Mr. ECCLES. Taking them as a whole, they have a great deal more
cash.
Senator T A F T . We are getting into a theoretical discussion.
Mr. ECCLES. Yes. I did not mean to get into that.
The CHAIRMAN. The fact is that there are about 10,000,000 people
unemployed, between eight million and ten million, anyway, and one
of the immediate problems is to get those people back to work. One
of the ways we have devised is that during the time when there is a
slack in private industry, to have public works to help absorb a
great many of these unemployed. That is one of the problems confronting us now. The use of public works is needed at a time when
they would do most good to our economic structure. I am not talking about savings.
Mr. ECCLES. What we do is to have public investment in the absence
of private investment, to use money, men, and materials.
The C H A I R M A N . Which, in turn, is used to buy goods that are being
produced but are not being purchased now?
Mr. ECCLES. Foreign countries are meeting their problems by huge
armament programs.
The C H A I R M A N . Which is not a very desirable -way of absorbing
unemployment.
Mr. ECCLES. It is all waste, complete waste.
The C H A I R M A N . And you pay for it sometime.
M r . ECCLES.

Yes.

Senator F R A Z I E R . In addition to what the chairman said, there are
30,000,000 farmers that are broke, too, that do not have any purchasing power. I cannot see how this bill is going to restore purchasing
power to them.
The C H A I R M A N . I want to ask one question, because I am in sympathy with the public works program. In fact, I sponsored the first



W O E K S F I N A N C I N G A C T OF 1939

201

large one of 1933. I want to ask you whether, if we sponsor a public
works program, municipalities will utilize the provisions of this bill
which provides for no grants at all. If you put a limit on the amount,
would it nullify the other public works program?
Senator M A L O N E Y . I think actually that would happen. I do not
think they are going to take advantage of the situation, under this bill.
The C H A I R M A N . Y O U are really advocating a substitute for the
public works provision under this bill?
Senator M A L O N E Y . Yes; because I do not think it will work.
Mr. E C C L E S . There is provided a hundred-percent loan under this
bill. You will find some projects, I think, that will be undertaken on
a basis of revenue bonds because of the very low rate and because of
the long term of payment. I think there are other projects that will
not be undertaken under this bill that would be undertaken under the
usual type of public works operation. I think one can be a supplement
of the other, and between the two of them it would not bring about
the drastic cut that will, in my opinion, develop next year.
I am expressing my personal view on the public works matter.
The C H A I R M A N . I will ask the members of the committee to stay
for a short executive session.
Senator Townsend the other day requested the presence of Mr.
Evans, of the Farm Credit Administration, because he desired to ask
him some questions, and the Senator is unable to be here today. I explained to him yesterday that this was the day that we would have
Mr. Evans present, and he said he could not bs here, but he might
speak to some of you gentlemen with reference to some questions that
he would like to propound. Are any of you informed as to that?
Senator T A F T . I know something about what he would ask, I think.
The C H A I R M A N . Would you like to propound some questions to
Mr. Evans?
Senator T A F T . I cannot possibly stay at this time. Can we not
have one more hearing?
The C H A I R M A N . I do not know of anybody else who wants to be
heard.
( W h e r e u p o n , at 12:25 p. m., the committee considered certain matters in executive session.)