statement to that effect be printed on the bonds. Just what effect would the printed statement have legally?

Mr. BROWNELL. I think it would be sufficient, but I see no objection to repeating it both ways in the bill, if you think that would make it any clearer.

Senator GORE. You think then that a printed statement on a bond constitutes a contract between the Corporation and the purchaser, and that further is it your opinion that the holder could not go behind that statement on the bond?

Mr. BROWNELL. Yes; I come to that a little later on in the statement. Senator GORE. Excuse me.

Mr. BROWNELL. Therefore, I conclude that the public obligations of the Corporation would not be within the debt limitation of section 21 of the Second Liberty Bond Act.

It is suggested that the "no guaranty" language of the bill is anunprecedented device designed to befuddle the innocent-a device to which only a dishonest merchant planning to defraud his creditors would stoop. This characterization is entirely without merit.

Senator GORE. General, I do not believe anyone has made that kind of statement before the committee.

Mr. BROWNELL. Good, because I think there would be no merit to it. This method is one which frequently has been used in connection with financing Government corporations. See, for instance, the provisions of the National Housing Act, section 306 (b) to be exact, as amended, 68 Stat. 618, pursuant to which the Federal National Mortgage Association is authorized to incur obligations which

are not guaranteed by the United States and do not constitute a debt or obligation of the United States or of any agency or instrumentality thereof other than the Association.

Then there is another example, which we might cite, with respect to secondary market operations by the Federal National Mortgage Association. That is included in section 304 (b) of the National Housing Act, as amended (68 Stat. 616). Another example might be the Federal home loan banks whose obligations, according to the

statute

shall plainly state that such obligations are not obligations of the United States and are not guaranteed by the United States (12 U. S. C. 1435).

I imagine a more intense search of the Federal statutes might provide further examples.

Senator MARTIN. Might I ask a question?

Senator GORE. Senator Martin.

Senator MARTIN. General, are there any records of similar obligations going back over the year on which there have been defalcations? Mr. BROWNELL. I do not know of anywhere there have been any questions raised as to whether or not the Government would have to step in.

Senator MARTIN. That is what I am getting at.

Mr. BROWNELL. Yes.

Senator MARTIN. The question has been brought up here several times that even if we make the statement that the Federal Government is not obligated, nevertheless, if there were to be a defalcation, that Congress would feel that there is a moral obligation, and I did

not know whether we have in the history of financing through corporations of this character, whether we have any history not only in the Federal Government but in the State governments.

Mr. BROWNELL. As I point out later, there may be some distinction between Federal and State, but I know of no example where it has happened in the Federal Government.

Senator MARTIN. You take in presenting a brief, if you do not have anything in the Federal Government, then the next would be the State; and I didn't know whether you had any historical data in your department that would clarify that, because that has been brought up here by a great number of men-those that are friendly to the proposal even have brought it up.

Mr. BROWNELL. There are some State cases, Senator, but there, of course, there is a separate constitutional reason, because there is a provision in the Constitution that applies only to the States in there, the fact that they must not violate their contractual obligations; so the State cases in our opinion would not be in point here.

Senator MARTIN. Thank you very much.

Mr. BROWNELL. That covers for the moment the Federal debt limitation question. I turn next to the question whether the obligations of the Federal Highway Corporation would be considered an obligation of the United States and the extent to which they involve a pledge of the faith and credit of the United States.

Senator BUSH. Might I interrupt the Attorney General just a minute there?

Senator GORE. Yes.

Senator BUSH. At the middle of page 4 where you have the quotation from the Federal National Mortgage Association thing, you think that could be put into this bill? That very language could be put in to satisfy the chairman; could it not?

Mr. BROWNELL. Yes, sir.

Senator BUSH. Thank you.

Mr. BROWNELL. This is a most important question, as Senator Martin has already indicated, and I want to answer it as precisely and carefully as I can. In doing so, I want to distinguish clearly between legal obligations and moral ones, in other words, between legal obligations and predictions of what the Congress may do in the future.

I believe that not only the Congress, but also potential investors, are entitled to as clear and unequivocal an explanation as I can supply. Section 105 (a) says that the obligations of the Corporation are to contain language clearly stating that they—

are not guaranteed by the United States and do not constitute a debt or obligation of the United States or of any agency or instrumentality thereof other than the Corporation.

That language seems perfectly clear, and I certainly think means exactly what it says. The bill would create a corporation which would be authorized to issue obligations to the public.

To be sure, the Corporation would be a governmental instrumentality, but the bill expressly states that the obligations of the Corporation shall not be a debt or obligation of the United States or of any agency thereof other than the Corporation.

Further, there is significantly absent from the bill any language that would indicate that the faith of the United States is pledged to the payment of such obligations.

In comparison with another statute, such an express pledge of the faith of the United States has been inserted; for example I cite section 10 (e) of the United States Housing Act of 1937, as amended (50 Stat. 888, 893).

That section deals with the obligation incurred, as you may remember, under annual contributions contracts which are entered into between the Public Housing Administration and local housing agencies. Senator, in the past when Congress has wanted the good faith of the United States to be pledged, it has expressly stated it in the statute, and there is no such statement here.

Thus, the express disclaimer of liability which the bill requires to be inserted in the public obligations of the corporation, and the absence of language pledging the faith of the United States leads me to the conclusion that the obligations of the Corporation are not the legal debts or obligations of the United States.

If the Corporation should default on its obligations, neither the United States nor any officer or agency thereof, other than the Corporation, would be under any legal duty to meet those obligations.

I am aware, of course, that section 105 (b) of the bill would provide for a continuing appropriation of an amount equal to the revenue in excess of $622,500,000 received from the taxes on gasoline and special fuels necessary to finance the program and for the payment of this amount so appropriated to the Corporation.

This it is estimated will be sufficient to pay off the Corporation's bonds. But I see nothing in the bill which constitutes a legally binding obligation on the Congress not to repeal or reduce those taxes. Nor do I even see a legal obligation which would prevent the Congress from diverting the appropriation away from the Corporation at some time in the future.

Senator GORE. What kind of appropriation could this Congress create that would prevent the next Congress from so doing?

Mr. BROWNELL. May I follow my argument a little further here, because I try to meet that point subsequently?

Senator GORE. Maybe I am getting ahead of you. Go ahead.

Mr. BROWNELL. This conclusion might be different if this were State legislation to go back to that point a minute, Senator. There is authority to the effect that if private individuals enter into valid contracts with a State instrumentality on the faith that the obligations of this instrumentality will be met from existing taxes legislation thereafter enacted is invalid if it repeals or lowers the tax so as to render the obligation valueless.

However, I know of no such authority with respect to the Federal Government, and it would be wholly unprecedented for one Congress to enact tax legislation which a subsequent Congress would be powerless to repeal.

Further, as I have already pointed out, these obligations are expressly not guaranteed by the United States and are not a debt or obligation of the United States. The faith of the United States is not pledged to meet them.

It should also be noted that no specific source of funds would be pledged or even set aside to meet the obligations. The taxes referred to in section 105 (b), in other words, are the measure of the appropriation, not its source.

Combining all these factors, I conclude on this second point that the bill would impose no legal duty on the Congress not to repeal or lower the appropriation for the Corporation.

The legal consequence of what I have just outlined is that the holders of obligations of the Federal Highway Corporation would have a claim against that Corporation, not against the United States. The only assets of the Corporation would be the appropriation turned over to it by the Secretary of the Treasury pursuant to the bill, but there would be no legal inhibition preventing the Congress from drying up that source at some time in the future. If it did so, there would be no assets upon which the creditors could realize and they could not require the United States to make good on the obligations.

Now, some critics of the bill have concluded that this situation would create a financial monstrosity, the obligations of which no responsible investor would purchase. But I would like to point out that there are, however, historical and moral factors present, in addition to the legal ones, which, in my opinion, justify an entirely different view of the matter; for anyone who purchased these obligations would be investing in America.

Senator GORE. General, may I break in to ask you a question facetiously? If the paragraph on the top of page 7, by itself as an instrument seeking to help sell these bonds, at what interest rate do you think they would sell?

Mr. BROWNELL. Of course, if it were published by itself, it would be taken out of context and would be misleading. It takes longer than a few words to get the answer to this, but I think it is very important to everybody not to have the slightest misapprehension as to what the legal relationships are, and it is also equally important to understand that that is only one factor that is involved here and does not necessarily give a clear and true picture of the situation; for, as I say, anyone who purchased these obligations would be investing in his country. He would be putting his faith in our future economic developmenta faith which in the long run has always reaped handsome financial rewards.

Section 105 (a) appropriates an amount equal to a portion of the proceeds of the gasoline and special-fuels taxes "for each fiscal year" following 1957 "in which there are outstanding unmatured obligations of the Corporation."

Further, section 105 (c) provides that the Corporation may issue obligations to the Secretary of the Treasury in an amount not to exceed in any one year the amount necessary above its other revenues to provide for the debt service of the Corporation.

The aggregate of such additional borrowings by the Corporation may amount at any one time to $5 billion. So, in addition to the tax revenue which is to be paid to the Corporation, there will be available, as I am quite sure it is clear to you, if necessary, an additional $5 billion to service these public obligations.

In other words, in order to make this investment a bad risk an investor would have to make the judgment that there is a substantial likelihood that either (1) the taxes involved will not produce in each year enough revenue above $622,500,000 to service the obligations and that the deficit will be so large that the $5 billion cushion will be in

sufficient; or (2) the Congress will repeal or lower the taxes or repeal the direction to pay the proceeds to the Corporation without making adequate provision for another source of revenue for the Corporation. The Congress and the investors are well able to judge whether the proceeds of the taxes involved are likely to continue to provide sufficient revenue for the debt service; and I think it inconceivable, once they have passed such a bill, that the Congress would ever callously remove this source of revenue without providing an adequate substitute.

So in a real sense the investors would be relying on the good will and sense of responsibility of the Congress for their continued protection. Our whole history shows this to be a very small risk indeed.

In this connection, I might point out that there is nothing to stop the Congress from failing to appropriate for obligations of the United States as to which its faith is expressly pledged.

And, even in the event it did so, there would be nothing to prevent the Congress from going further and withdrawing consent to suit against the United States.

Investors and their counsel know this and know that if such hypothetical action were taken they would have no remedy. But it has never been done, and the faith that it won't be done is the thing that makes United States obligations a better investment than those of the most highly solvent private corporations elaborately protected by liens, pledges, mortgages, and other security.

Senator GORE. Then may I break in there just a moment, General? The gist of your statement is that these are not technical legal obligations of the United States Government, but in a broader and a moral sense they are; is that correct?

Mr. BROWNELL. Yes.

Senator GORE. In that respect you would, I take it, agree with the statement of the Secretary of the Treasury before this committee, in which he says, on page 986:

This bill does carry a debt limit in it. This bill will not-this is not a direct obligation of the United States Government. It is an obligation of the Government, it is something that the Government sponsors, it is something that the Government says it will take this appropriate action to see that it is repaid, and it takes appropriate action in two ways to see that it is repaid. But it is not technically within the debt limit.

Mr. BROWNELL. That is right. The only comment I would make on that when he says it is an obligation of the United States Government, I think he means quite clearly in the context, a moral obligation. Senator MARTIN. Mr. Chairman.

Senator GORE. Senator Martin.

Senator MARTIN. General Brownell, there is not anything that would even require the Congress of the United States to appropriate to pay the interest on the outstanding bonds, is there?

Mr. BROWNELL. That is right.

Senator MARTIN. That has to be done every year, and if the Congress did not do it, there would be nothing to pay the coupons on these various outstanding bond is that not correct?

Mr. BROWNELL. Yes, sir.

Senator BUSH. I would also like to amplify that by saying that what the Attorney General's statement implies is that this places a