Mr. WALCOTT, from the Committee on Banking and Currency, submitted the following REPORT [To accompany S. 1] The Committee on Banking and Currency, to which was referred the bill (S. 1) to provide emergency financing facilities for banks and other financial institutions and for other purposes, having considered the same, report favorably thereon with the recommendation that the bill do pass as amended. The Secretary of the Treasury has expressed his views in the following letter to the chairman of the committee: Hon. PETER NORBECK, THE SECRETARY OF THE TREASURY, Chairman Committee on Banking and Currency of the Senate. MY DEAR MR. CHAIRMAN: I have your letter of December 12 inclosing a copy of S. 1, a bill to provide emergency financing facilities for banks and other financial institutions, and other purposes, and requesting the opinion of this department as to the proposed bill. I am satisfied that the need exists for the creation of the corporation contemplated in the bill. The mere existence of such an instrumentality, furnished with adequate resources and enabled to deal with any weakness that may develop in our credit structure, should have a reassuring effect on public confidence and a stimulating influence on the resumption of the normal flow of credit into the channels of business and commerce. I understand that the governor of the Federal Reserve Board has suggested an amendment to section 5 with a view to defining somewhat more accurately the term "other financial institution." I approve of this amendment. I understand further that Mr. Meyer has suggested that the loans to steam railroads provided for in section 5 should be made only subject to the approval and recommendation of the Interstate Commerce Commission. This seems to me a most desirable amendment. The Treasury Department approves of the bill and trusts that it may receive early and favorable consideration by the Banking and Currency Committee of the Senate. Very sincerely yours, A. W. MELLON, Secretary of the Treasury. The purpose of the proposed bill is briefly that of affording assistance to financial institutions and railroads, which, as a result of the present depressed conditions in the business and financial world, need support, and those deserving such aid are not under present circumstances able to obtain it through the usual channels. Unless vigorous financial support can be promptly rendered, the inevitable consequences must be increased difficulties for every branch of business. Your committee has made a careful inquiry into the factors underlying the present situation and the urgent necessity for government aid to the various financial institutions and has interrogated numerous representative witnesses, holding extensive hearings on this bill. Its deliberation upon the matter was not broken by the holiday recess, but has been actively continued through private consultation and correspondence to the present day. It may be stated conservatively that the country, as represented by its most eminent banking, business, and financial leaders, is eager for the prompt enactment of a measure guaranteeing Government support, such as is provided by this bill. There is substantial agreement among those who have been consulted that some step for the consolidation of effort and the reestablishment of confidence in the underlying foundations of business and finance is absolutely essential. That this step should be taken with a minimum of delay is the unanimous opinion. Moreover, unless the machinery provided by the bill can be set in motion without loss of time, the opportunity for good, which might otherwise be accomplished, will inevitably be sacrified and the aid when offered or made available may come too late. The concrete proposal contained in the bill is to establish a Government corporation whose function shall be to make loans to enterprises which are performing a useful service in their respective communities but which, either owing to derangements in the banking machinery or to inability to draw funds from the usual sources of supply, are in an unliquid condition. According to the information which has been furnished, the total assets of banks which have been closed since October, 1929, now amount to more than $2,000,000,000. The record of failures for the past year (1931) has been unprecedentedly high, the banks closed numbering 2,290. The following table furnished by the Comptroller of the Currency pictures this situation for the year 1931: Bank suspensions in 1931, preliminary figures Several serious failures involving the funds of a great number of depositors in many cities and towns throughout the country have lately occurred. This series of failures must be stopped, and as soon as possible. Many banks now in danger are not members of the Federal reserve system. Other institutions, although members, have no paper eligible for discount in the Federal reserve, and hence are in no position to apply for aid. Still other institutions have found their assets so greatly impaired through the depreciation of their market value that their capital has been practically exhausted. The new reconstruction corporation now proposed will be free from most of the conventional restrictions upon lending, and wisely managed, should be able to rescue many situations which otherwise will grow rapidly worse. The railroads are in an extremely embarrassing predicament, owing to the abnormal falling off of traffic, which has affected their revenues so seriously during the past two years and to their difficulties in borrowing. The roads made the same error that was committed by many other large borrowers supposing, before the collapse of 1929, that they could with safety borrow on short term and without much doubt obtain renewals from the banks when maturities occur; or failing in that, could fund their obligations into long-term bonds. In this they have been disappointed owing to the overanxiety of many banks to keep liquid, and owing also to the lack of general confidence which has kept many institutions from buying even the most gilt-edge securities at bargain prices. Several class A railroads, which have had a continuous dividend record for generations, have recently been compelled to suspend their dividends. Consequently the bonds of some of these roads have been disqualified as investments for savings banks. It is becoming increasingly difficult to market the bonds of even the best roads and the market price of railroad bonds in general is becoming so depressed that the financial institutions holding this class of paper are unable to realize on them. The situation regarding railroad maturities has been investigated recently by the Interstate Commerce Commission and their findings are set forth in the following letter: Hon. FREDERICK C. WALCOTT, INTERSTATE Commerce CoMMISSION, Senate Committee on Banking and Currency. MY DEAR SENATOR: The following information is submitted in response to questions stated by you during my testimony before your committee on Decemver 21: 1. What are the maturities becoming due for payment by steam railroads during the first quarter of 1932, as to bonds, short-term loans (including bank loans), and miscellaneous obligations? Answer: The commission has not tabulated bond maturities by months, but a special report secured through the Bureau of Railway Economics indicates the following totals for 128 Class I roads: Maturities, first quarter, 1932 Bonds.. Loans and bills payable (includes bank loans). Equipment trust obligations____ $2,677, 550 35, 984, 395 35, 560, 820 2. The same information for the remainder of the year 1932. Answer: For Class I operating railways (excluding lessor companies) the total amount of bond maturities for the year 1932, including the amount given above The for the first quarter, is $70,299,513-that is, $67,621,963 for the last three quarters. Loans and bills payable on October 31, 1931, amounted to $224,145,827. amount falling due after March 31 in the year 1932 is not available without special tabulation. The total amount of equipment-trust obligations for 1932, including the amount given above for the first quarter, is $110,782,506—that is, $75,221,68☎ for the last three quarters. The term "bond” in this paragraph includes miscellaneous obligations running for more than two years. 3. Comparative earnings for the years 1928, 1929, 1930, and 1931 (estimated on basis of reports for 10 months). Answer: The earnings from operations were as follows: 1928. 1929. 1930. 1931 1 Class I railways (including switching and terminal companies) Calendar year Gross railway revenues $6, 189, 917, 189 Net railway operating income (after taxes, but before fixed charges) $1, 194, 487, 806 1, 274, 595, 403 885, 011, 325 535, 800, 000 1 Estimated by adding to the amounts reported for the first 10 months, the earnings of the last two months of 1930 reduced by the same percentage that October, 1931, earnings fell below those of October, 1930. No adjustment has been attempted to allow for deferred maintenance. 4. How promptly can the commission accomplish the purpose sought in this bill through section 210, or does the commission rely on new legislation? Answer. If the commission were authorized to resume the making of loans under section 210, it could promptly certify the loans, upon proper application, for payment by the Secretary of the Treasury. In an emergency less than a week might be required within the commission. Some investigation would be made by the Secretary of the Treasury before payment. Very truly yours, EZRA BRAINERD, Jr., Chairman. The evidence before the committee developed the fact that throughout the country there has been a marked increase of borrowing from insurance companies by their policyholders. Therefore, whenever the current income from premiums is insufficient, these companies are compelled to realize on their securities in order to maintain their loans to policyholders and pay losses. Consequently this proposed bill is needed to protect the insurance companies against the serious deterioration in the market value of their securities. This bill provides that the bonds of the Reconstruction Corporation be absolutely and unconditionally guaranteed by the Federal Government as to principal and interest. These bonds, while not eligible for rediscount at the Federal Reserve, will be eligible for both purchase and sale by the Treasury of the United States. This provision is covered in the following language: The Secretary of the Treasury, in his discretion, is authorized to purchase any obligations of the corporation to be issued hereunder, and for such purpose the Secretary of the Treasury is authorized to use as a public debt transaction the proceeds from the sale of any securities hereafter issued under the second Liberty bond act, as amended, and the purposes for which securities may be issued under the second Liberty bond act, as amended, are extended to include any purchases of the corporation's obligations hereunder. The Secretary of the Treasury may, at any time, sell any of the obligations of the corporation acquired by him under this subsection. All redemptions, purchases, and sales, by the Secretary of the Treasury, of the obligations of the corporation, shall be treated as public-debt transactions of the United States. |