have been pulled into the area, and partly because of the overtime worked in plants that have resumed production. A few badly hurt plants will not make up production lost as a result of the flood this year; but many others, including some of the biggest, will. Valleywide, industrial output during the last half of 1955 should be no more than a whisker below preflood schedules.

The financial strain imposed by this recovery effort was not cushioned by flood insurance. Of course, a factory located on high ground neither needs nor wants flood insurance, which means that the only potential buyers are also the poorest risks, which in turn makes for brutally righ rates. Only a handful of American and British insurance companies will write flood insurance at all, and then only at annual premiums that may run to 25 percent or more of the coverage provided.

THE FINANCIAL SINEWS

The valley's companies depended on three things to finance their recovery: (1) Their own resources; (2) tax savings; and (3) outside help from such quarters as the Small Business Administration. As to self-insurance, the flood highlighted one of the major advantages enjoyed by large companies with scattered plants. American Brass, for example, took a loss of $15 million; but its parent company, Anaconda, had ample resources to support recovery. Oneplant companies, of course, had no rich parent to call upon. However, many of the smaller companies-including Torrington Manufacturing, Waterbury Farrel Foundry, and even Plume & Atwood-should also be able to finance their own recovery, though in some instances they will have to resort to bank borrowing.

Tax savings on losses incurred in the flood will be of less help than generally supposed. Any such losses must first be applied against this year's pretax income, and only if the loss exceeds income can the excess be "carried back" against the income of the 2 preceding years, with resultant tax refund. Moreover, any structural damage (as opposed to plant cleanup or inventory replacement) must be computed on the depreciated value of the plant. Since most of the Naugatuck Valley's plants are old and therefore fully depreciated, the actual structural damage will greatly exceed the loss for tax purposes.

A number of smaller-to-middle-sized companies in the Naugatuck Valley, among them Gilbert Clock, Hotchkiss Bros., Waterman Pen, Platt Bros., and SonChief Electrics, will require outside financial assistance exceeding that available through regular banking channels. And the needs of these companies are serious enough to warrant a close look at the structure of United States disaster relief as it relates to business.

THREE-HEADED ANGEL

The bulk of Federal aid to the Naugatuck Valley was provided by three agencies. The Army engineers were responsible under the law for repairing communications, restoring public services, and confining streams to their proper channels. The Red Cross undertook personal relief; and the Small Business Administration was charged (under a special section of its enabling act) with making disaster loans to businesses and individuals. These three agencies were ordered by President Eisenhower to carry out their flood relief activities under the general direction of Civil Defense Administrator Val Peterson.

The Army engineers, using a small staff and arranging for the actual work to be done by outside contractors, dealt primarily with towns and similar governmental units. However, some engineer work directly benefited private companies; several companies, for example had debris removed from outside their plants by engineer contractors. And while the engineers left larger public utilities like Connecticut Light & Power to take care of themselves, they did a great deal of repair work for such small, privately owned utilities as Torrington Water Co., which was the town's only source of supply.

Under the law, the engineers' emergency repairs are supposed to be only temporary. But Brig. Gen. Robert J. Fleming (who is engineer boss for New England) inquires, "How do you temporarily repair a water main, or a storm sewer?" The "temporary repair" of the Winsted water-and-sewer system required that the original builders be brought in again to start practically from scratch.

The Red Cross also extended "business relief" to an extent not generally recognized. Most Red Cross business grants go to family businesses, in amounts of a few hundred dollars up to $1,000 or so (a lunchroom in Winsted, for example, 69096-56-pt. 1—46

got $1,300, while a nearby florist got $1,000). But a business with 6 or 7 employees, in need of a grant of $10,000 or even $15,000, might also be helped. These grants are generally made only if the Small Business Administration has refused a loan, but they are sometimes used to supplement SBA loans. By October 1 the Red Cross had received 478 business applications in Connecticut, processed 120 of them, and made $188,000 in grants. And since unlikely requests are screened out upon application, most of the remaining requests will probably result in grants.

The key agency in business relief is the Small Business Administration, which is empowered to make disaster loans to businesses in any amount, for as long as 10 years, at 3 percent. (On nondisaster loans, SBA's statutory limit is $250,000.) As a Naugatuck Valley banker commented, "The commercial banks can't do this job. We can't go in where there's no net worth; we have rigid loan limits; and we must necessarily keep our loans to pretty short terms. The SBA can waive all these things, but if the SBA bogs down in redtape, it will be a calamity." The SBA set up 4 special offices in the Naugatuck Valley within 2 weeks after the flood. But while loan applications totaling $16,582,000 had been made by October 3, only $3,600,000 had received the 3 or 4 layers (depending on the loan's size) of approvals required, and only $372,000 had actually reached the borrowers.

ONE BIG UNION?

The SBA's handicap obviously is that it is a Government agency, politically accountable for anything it does. Thus its normal operation is hedged about with a variety of safeguards, which tend to be carried over to its disaster work. In fact, the gist of the business-relief problem is that in this particular area each of the three major agencies concerned is operating on uncertain ground— the Army engineers becoming involved with the problems of private utility companies, the Red Cross deciding how large an inventory is necessary for a shoestore, and the SBA striving to disregard its normal criteria of security and ability to repay.

This situation might appear to call for a single Federal agency to take over disaster relief in toto. But, upon reflection, the idea quickly loses it appeal. A disaster is by definition rare; and it is hard to imagine anything more wasteful than a well-heeled Federal bureau sitting around waiting for a catastrophe. It surely would be more economical to use existing agencies, even if twisted a bit out of shape.

One solution might be to make the Civil Defense Administration responsible not only for the overall coordination of the disaster relief effort (as it was in the August floods), but for the day-to-day direction of the recovery effort as well— thus giving it something more immediate to do than preparing for the ultimate catastrophe of nuclear warfare. Civil defense might receive from Congress special funds to be released only in the event of a flood or other disaster, and used to reimburse the engineers, SBA, and any other agencies called upon to do the work. Thus civil defense, because it would be picking up the tab, could more easily persuade the SBA to cut its interest requirements, lengthen its business loans beyond 10 years, or relax its ordinary safeguards.

AGAINST THE FLOOD

Such a setup would seem preferable to the insurance plans now being readied for congressional consideration. Insuring against floods poses this special problem: while other natural catastrophes like tornadoes, droughts, crop failures, etc., can happen anywhere, floods can occur only near streams. Thus unless flood insurance were made mandatory (which would probably be illegal, and certainly would be difficult) only the poorest risks would seek coverage and rates would be exorbitant. Yet cutting premiums by a Government subsidy would merely disguise relief as "insurance." It remains to be seen whether some scheme can be devised to overcome these objections.

Actually it is flood control, rather than flood insurance, that is of immediate importance to Naugatuck Valley businessmen. For only two companies of any size have announced plans to relocate their plants because of the flood: Platt Brothers will transfer most of its operations to a new plant on higher ground; and Waterbury Farrel Foundry is hastening plans (made before the flood) for a new heavy-machinery plant in nearby Cheshire. But the rest of the valley's industry continues to crowd the riverbank.

The single major flood-control project possible in the valley is a proposed dam just above Thomaston. The dam was first authorized by Congress in 1944;

but up to now the project never had the required approval from the State of Connecticut, in part because of opposition from industry. (Thomaston plant managers objected, for example, because the necessary relocation of the railroad would have put Thomaston off the main rail line). Now, however, the dam seems quite certain to be built.

Whether the proposed new dam would have protected the valley from the flood of August 18-19 is another question. It is designed to hold the runoff from a rainfall of 8 inches, whereas Hurricane Diane dumped about 14 inches on the Naugatuck Valley above Thomaston. Thus the dam might have impounded more than half the water reaching that point. Thomaston itself would have had only trifling damage, and the river's crest at Waterbury would have been lowered appreciably.

MEASURE OF RISK

But consider these basic facts of area and volume. The Naugatuck River near Thomaston showed a maximum flow of 45,000 cubic feet per second. Downriver, near the town of Naugatuck, the estimated maximum flow was 140,000 cubic feet per second. Thus a dam that throttled the river entirely at Thomaston might still have allowed a maximum flow of nearly 100,000 cubic feet per second at Naugatuck-which woud have done nearly as much industrial damage in the river's lower basins as actually occurred. Furthermore, a Thomaston dam could not have helped upstream towns like Torrington at all.

However, it is hardly fair to judge the effectiveness of a flood-control project against the cataclysm of August 18-19. The Army engineers called the flood Operation Noah, while a river expert from the United States Geological Survey said that "on the Naugatuck and certain other streams it was the biggest in the 325-year history of the State." The Thomaston dam would at least protect the Naugatuck Valley from the "small" floods that have afflicted it in the past; whether there are to be more of the big floods must be left to heaven. And if heaven has any feeling for human fortitude, the people of the Naugatuck Valley are safe for a long time to come.

Senator BUSH. Mr. Chairman.

Senator LEHMAN. Yes, sir; Senator Bush.

Senator BUSH. Mr. Chairman, mention was made of a study by this committee's staff on the question of disaster indemnity. That study was made at my request last summer through Senator Fulbright, our chairman. That study is a very useful part of the evidence in connection with this hearing and with this problem. I have here a few pages from that study, which includes the legislative history of the question of natural-disaster insurance.

I should like unanimous consent to insert this in the record at this time. I believe it will be helpful to have this particular section of the study in the record of these hearings. I think it will serve as a spur to us to have it there, because it shows from July 13, 1951, when the Middle West flood disasters took place, that for a whole year nothing was done. As a matter of fact, it also shows that the administration at that time submitted no definitive bill on flood insurance until May 5, 1952. They, no doubt, had good reasons for not submitting one, but one was never submitted.

I would like to have this included in the record of the hearings at this point.

Senator LEHMAN. There being no objection, it is so ordered. (The document referred to follows:)

LEGISLATIVE HISTORY

Two different lines of legislative history must be discussed in order to cover adequately past action in the Congress on natural-disaster insurance and on wardamage insurance.

NATURAL-DISASTER INSURANCE

Recent discussion of this problem dates back to September 20, 1951. On that day, following disastrous May and July floods in the midwestern United States, Senator Carlson, of Kansas, introduced for himself, Senator Schoeppel, of Kansas, and then Senator Kem, of Missouri, a bill (S. 2148) to establish a National Disaster Insurance Corporation. To be known as the National Disaster Insurance Corporation Act of 1951, this bill basically would have authorized a Federal Government reinsurance program for insurance by insurance companies against loss or damage caused by flood, tidal wave, earthquake, or hurricane to privately or State or local government-owned real or personal property. The reinsured insurance would have covered only loss or damage occurring within the United States or its Territories. Reinsurance would have been made available only where insurance of the type described would have been otherwise unavailable. The Corporation would have been given general corporate powers, including the right to sue and be sued in any State or Federal court of competent jurisdiction. Its management would have been vested in a Board of Directors, consisting of 3 persons to be appointed by the President, subject to confirmation by the Senate, for overlapping terms of 6 years. No more than two of the Board members could have been members of the same political party. The President would have designated one of the Board members as Chairman. An advisory committee of not more than five members experienced in writing fire and casualty insurance could have been appointed by the Board to advise the Corporation concerning execution of its functions.

The Corporation would have had a capital structure consisting of $50 million of capital stock subscribed by the United States. An appropriation in a like amount was authorized to enable the Secretary of the Treasury to purchase the stock. Proceeds of the sale of stock would have been placed in a National Disaster Insurance Fund the bill would have established in the United States Treasury. Reinsurance premiums would have been similarly deposited. Interest earned on investment of money in the fund in United States obligations would have augmented it. The fund could have been used to create reserves required under accepted actuarial principles, and to pay reinsurance liabilities. Administrative expenses would have been borne by the Government out of sums authorized to be appropriated. Its operations would have been made subject to the Government Corporation Control Act.

Reinsurance premium rates would have been fixed by the Corporation upon consideration of the risks involved and the desirability of providing insurance protection not otherwise available. Corporate regulations would have governed the types of property reinsured, the nature and limits of reinsured loss or damage, and other matters necessary to carry out the act's purposes.

Reinsurance could have been provided only to the extent not otherwise available at reasonable rates and upon reasonable conditions from private sources. Services and facilities of private insurance companies were to be used to the maximum practicable extent in providing reinsurance.

Corporate regualtions would have governed the adjustment and payment of claims with recourse to a Federal district court in the event of disallowance.

The Carlson bill was referred to this committee during the 1st session of the 82d Congress.

Following the usual procedure, the bill was sent by the committee staff to interested agencies in the executive branch for comment.

On August 20, 1951, President Truman sent a message to the Congress taking note of the great floods in Kansas, Missouri, and Oklahoma, and recommending establishment of a national system of flood-disaster insurance using the re volving fund principle. Congressman Bolling, of Missouri, introduced a bill in the House of Representatives intended to achieve this purpose.

On December 5, 1951, the late Senator Maybank, then chairman of this com mitttee, received a letter from RFC Deputy Administrator Bukowski in re sponse to the invitation to comment on the Carlson bill (S. 2148). Mr. Bukowski made five points concerning the bill.

1. The program should be administered by the RFC or the Secretary of Commerce, the Treasury, or Agriculture instead of creating a new agency for that purpose.

2. The same agency should administer both the flood insurance and the wardamage-insurance programs.

3. Because of hesitancy of private insurance companies to insure, it was doubted that the reinsurance approach alone would be effective.

4. Objecting to the rate-fixing provisions, he preferred that rates be actuarially based on risks alone without permitting any subsidy.

5. Unless credit of the United States was made available in addition, it was feared the $50 million capitalization would be inadequate.

At a meeting with the Bureau of the Budget in December 1952, RFC Deputy Administrator Bukowski was requested to have RFC assist the Bureau of the Budget in preparing an administration bill dealing with flood insurance. The drafting assignment was given to General Counsel Robert C. Goodale, of War Damage Corporation. Starting with the Carlson bill (S. 2148), Mr. Goodale revised and redrafted it, he and Associate General Counsel Alan B. Brown, of RFC, having conferred with representatives of the Bureau of the Budget late in December 1951. On December 28, 1951, the general flood insurance problem was discused with Mr. J. Victor Herd, who had been Vice President of War Damage Corporation and executive vice president of the America Fore Insurance Group.

On January 30, 1952, the draft flood insurance bill was circulated by the Bureau of the Budget to RFC for comment, as well as to 12 other executive agencies. After consideration of the draft bill by RFC personnel, Administrator McDonald on March 28, 1952, replied to a March 18, 1952, request from the Bureau of the Budget and suggested several comparatively minor changes in the bill.

By April 25, 1952, President Truman had decided to submit a message to the Congress requesting flood-insurance legislation. Following clearance of the proposed draft of legislation to be submitted to the Congress for its consideration, the President on May 5, 1952, sent a Presidential message to the Congress containing recommendations relative to national flood insurance, and attached a copy of the draft legislation. That message and the accompanying draft bill, printed as House Document 458, 82d Congress, 2d session, read as follows: "MESSAGE FROM THE PRESIDENT OF THE UNITED STATES TRANSMITTING RECOMMENDATIONS RELATIVE TO NATIONAL FLOOD INSURANCE

"To the Congress of the United States:

"Last summer, following the great floods in Kansas, Missouri, and Oklahoma, I recommended that the Congress establish a national system of flood-disaster insurance. As I said then, the lack of such an insurance system is a major gap in the means by which a man can make his home, his farm, on his business secure against financial loss.

"In order to be of help to the Congress in its further consideration of this matter, I have had draft legislation prepared embodying the views of the executive agencies concerned as to the best way to set up a sound and workable flood-insurance system. A copy of this draft legislation is attached to this message, and the agencies that prepared it, particularly the Reconstruction Finance Corporation, stand ready to give the Congress any further help they can. "The reasons for enacting such legislation are very clear. At present, insurance against flood damage is virtually unobtainable from private insurance companies, nor does it seem likely that the private companies, by themselves, will find it possible to write flood insurance at reasonable rates. The need for such insuarnce, however, is urgent. Homeowners, farmers, and businessmen may have their assets and their savings of years wiped out in a few hours if a disastrous flood strikes their property. We have seen it happen year after year. "To meet this situation, we can and should make available to those in potential flood areas the opportunity to protect themselves against the financial losses which such floods bring. I am sure that the great majority of the people concerned want to provide in advance out of their own resources for protection of their property against floods-just as they do now against fire and other hazards. "A Federal system of flood insurance is the logical answer. It would enable individual property owners to pool their risks and to meet a large part of their losses out of their common funds rather than forcing them to rely upon emergency relief, as is too often the case now. It would provide funds needed to restore property damage in floods, without requiring people to borrow heavily against their future incomes.

"Insurance is especially important under present circumstances when our system of protection against floods is so incomplete. Flood insurance, however, has more than short-run significance. It is also necessary as part of our long-run attack on the flood problem. Dealing with floods at their source, by doing the necessary work on the land and in the stream beds to catch and hold floodwaters,