Mr. GOLDSBOROUGH. It seems to me it is not the purpose of the act necessarily to help the steam railroads. The general purpose of the act is to meet that emergency situation that arises as affecting the general good of the community, and it may be that the board of the corporation, when organized, may deem it a matter of public policy to help a situation, wherein an electric railroad may be involved; and it may be that there will appear circumstances in some cases where the board will think that the general good will be helped by some assistance to some particular electric railroad; and I suggest that, in the enactment, we should give the last determination of what organizations should be helped to the board itself, so that no question may be raised before the board as to the form of the law. It is true, the administrators of the act should have the final say, by the authority given in the act to determine what constitutes

The CHAIRMAN. Yes, we should be sure

Mr. GOLDSBOROUGH (interposing). What shall come within the provisions of the act.

The CHAIRMAN. If I understand the gentleman, I am in accord with him. We should be sure that our language carries that authority.

Mr. GOLDSBOROUGH. Yes; I would not want the corporation brought into the court sometime to determine whether a certain institution comes within the purview of the act. I think we should give those whose duty it will be to administrate the act authority to say that this institution comes within the act, and let that be final. The CHAIRMAN. And put it beyond dispute.

Mr. GOLDSBOROUGH. Yes.

The CHAIRMAN. Personally, I had thought this is a discussion that should probably come later; but I had thought that maybe the railroads should find their relief in some difference method from this, but if we are going to include the railroads themselves, I think the language should be made clear so as to get all of them.

Mr. GOODWIN. Might I also suggest that another class of industry, in the United States, which is generally in distress, is the public utilities. I am prompted to suggest this because of the failure of the Commonwealth properties in Michigan, which went into the hands of a receiver yesterday, a $200,000,000 public utility corporation-they are entitled to consideration when the taxpayers' money is used to create relief; and it seems to me that is something else that should be given consideration, that all lines of industry have an equal right to relief.

Mr. GOLDSBOROUGH. Can we not take these matters up when we reach the amendments?

The CHAIRMAN. Before Mr. Meyer continues with his interpretion of the act, I suggest that he may make answer to Mr. Stewart's question.

Mr. GOODWIN. While Mr. Meyer is here, I would like to ask him whether or not the public utilities and electric railroads, such as we have discussed here, will be given relief under this bill, should the bill be passed?

Mr. MEYER. Public utilities are not in the bill, no, nor are the electric railways; and of course, if you begin to make direct loans to all industry, you are going to have a very much wider field and it

will take a great deal more money, and it will be an almost impossible task of administration.

The loans to the banks and financial institutions and railroads were made on the theory, as I stated at the hearing, that the railroads are owned by the bondholders, and the bondholders are trust institutions, for the most part, banks, insurance companies, savings banks, are on a national scale; and if you begin to get into all the industries of the country, you get into a local and not a national situation.

I think the theory of the bill is that the scope of the bill, as drawn, is exceedingly wide already; that if the important results of underpinning the financial situation, especially through adding to the weak spots, the provisions of the bill as drawn are accomplished, so that there will be a gradual restoration of the normal functions of the investment market, and improvement in so many directions that the normal agencies which take care of the public utilities, street railways, and other industries of the country, will be restored to the normal function that they have been accustomed to.. Otherwise, gentlemen, you are going to take over a task of the banking business of the United States, and eliminate the private. banks. I do not think it is the design of the Congress of the United States to replace the private banks of the country, of the United States, by a Government bank.

Mr. GOODWIN. Mr. Chairman, may I ask, in view of the statement that has just been made, that the control of the railroads is entirely held by the bondholders

Mr. MEYER. I mean substantially. I am not saying technically. Mr. GOODWIN. Yes; as to what security the railroads will have to offer the Reconstruction Finance Corporation, when they may borrow money from it? Is it to be a first lien, and are the bondholders' liens to be relegated to second place?

Mr. MEYER. They will have to offer security which they can offer, and it will be judged by the lending agents, in the light of the experience of the railroads, perhaps over a little longer period than one or two months; but I could not answer that question. The provision is for the security as outlined in the law; it is all in the amendments suggested.

Mr. GOLDER. May I ask a question? On page 5 it says:

All such loans shall be fully and adequately secured in such manner as the corporation shall require.

That line does not mean that they will have to put up sufficient collateral

Mr. MEYER. Is that the section concerning the railroads?

Mr. GOLDER. No, sir; that is section 5. That speaks of the institutions that are subject to help.

Mr. MEYER. Yes.

Mr. GOLDER. If that means that you put up sufficient collateral which, in the ordinary sense of the word, is sufficient security, then the rest of the page does not seem to be consistent.

Mr. MEYER. Yes. What do you mean, it is not consistent?

Mr. GOLDER. Well, the line,"such loans may be made directly upon the promissory note of such financial institution "; is it your

thought that, when they give a promissory note, it must be secured by collateral in the ordinary sense of the word?

Mr. MEYER. Certainly.

Mr. GOLDER. All loans to these institutions must be secured by collateral?

Mr. MEYER. Yes. In the operation of the War Finance Corporation, many loans were made to institutions on their promissory notes, secured by collateral and the collateral security proved adequate to discharge their obligations.

Mr. GOLDER. You would not pretend, under this act, to offer assistance to banks that could not support their loans with sufficient collateral?

Mr. MEYER. No; but that is a matter for the business judgment of the board of directors of this corporation. In some cases, sometimes banks offer directors' guaranties, their own indorsement, as additional security. It is a matter of each loan being almost a special matter; under general rules, however. But I can not see any contradiction there, Mr. Congressman.

Mr. GOLDER. No; each loan is to be adequately secured, I see.

Mr. STEVENSON. I do not see any language which means it will be secured by collateral. Collateral will be taken, but it is security that is satisfactory to the board.

Mr. MEYER. The security of the obligation of the borrower. That is the first security. The collateral is the collateral security.

The CHAIRMAN. Will you let me interrupt by a question? I am curious to know, Mr. Meyer, if any authority is conferred by the language in lines 20 and 21, "Such loans may be made directly upon promissory notes of such financial institutions "--that is one thing you are authorized to do?

Mr. MEYER. Yes.

The CHAIRMAN. Under this act, unless there is something else in there contradictory of that. Now, what is there in the bill that will prohibit the board from doing just what that language says may be done, "Such loans may be made directly upon promissiry notes of such financial institutions"? That is what we want to find out. Can that be done, or is there something else in here that qualifies that?

Mr. MEYER. No; you have two methods of borrowing: One is a promissory note, and the other one is a note discounted; it is just another way of doing the same thing. In one case, the interest is paid in advance, and in the other on the maturity of the loan.

Mr. STEVENSON. "All such loans shall be fully and adequately secured": that is the amendment.

Mr. MEYER. Yes.

Mr. GOLDER. Even when a bank comes in, or an institution, to make a loan, and gives its promissory note, behind that promissory note there must be security in some manner?

Mr. MEYER. Yes, sir.

Mr. STEWART. Large leeway is given to the directors for the security they take?

Mr. MEYER. Yes; a great deal would depend on the security. Mr. STEWART. The general idea is to allow the board of directors to go beyond strict banking rules and be rather liberal?

Mr. MEYER. Well, they will do business on a banking basis, strictly in accordance with the terms of the act, only on adequate security; but it leaves elasticity as to the kind of security they may take. Mr. STEWART. They are the sole judges of that?

Mr. MEYER. Nobody else can judge for the lender. You can not supplant the judgment of the lender; it requires the good judgment of the lender.

Mr. STEWART. More liberal than existed before the stress

Mr. MEYER. Well, you can use the word "liberal." I know, for instance, in 1921, in starting the War Finance Corporation, they lent money on sheep. We loaned what was called a liberal price. It only took a certain amount of money on the sheep to remedy the distress, and forced liquidation, and the sheep doubled in value in two months and never sold below that price in eight years. So, it was on a sound basis; originally, it was called liberal, but actually it was ultraconservative.

Take cotton. The pre-war price of cotton for five years was over 12 cents. Somebody might say that 6 or 6.5 cents was a liberal loan on cotton, as compared to the market price, but I would not consider it a dangerously liberal loan.

Mr. MCFADDEN. Mr. Chairman, may I—

Mr. MEYER. Those are all words that are capable of lots of interpretation.

Mr. MCFADDEN. Supplement what has been said here in discussing this? I want to refer to the amendment which is proposed on page 6 at line 12 which reads:

Within the foregoing limitations of this section, the corporation may also, subject to the approval of the Interstate Commerce Comm ssion, make loans to or aid in the temporary financing of steam railroads engaged in interstate commerce, when in the opinion of the board of directors of the corporation such railroads are unable to obtain funds upon reasonable terms through banking channels or from the general public and, their prospective earning power together with the character and value of the security offered are such as to furnish reasonable assurance of their ability to repay within the time fixed therefor and to meet their other obligations in connection therewith. Any such railroad may obligate itself in any form as shall be prescribed and otherwise comply with the requirements of the Interstate Commerce Commission and the corporation with respect to the deposit or assignment of security hereunder, without the authorization or approval of any authority, State or Federal, and without compliance with any requirement, State or Federal, as to notification, other than such as may be imposed by the Interstate Commerce Commission and the corporation under the provisions of this section.

We all know and understand, of course, that there is now a particular situation that confronts the railroads of the United States. Within the last two weeks one of the main railroad companies got out an issue of $100,000,000; and it is understood they, being unable to float them, used the issue as security for a $20,000,000 loan. We are particularly facing such a situation now.

It is important for us to know now, it seems to me, what security, under these circumstances, this corporation is going to have back of these loans. It is apparent to me that banks and bankers who usually finance the railroads feel that these securities are not safe. We should know here and now whether, out of the necessities of this situation, the Government funds are to be used to buoy control of the railroads.

Can you give us any information, Mr. Meyer, as to how these railroad loans are to be secured?

Mr. MEYER. What railroads are you talking about? I do not know what railroad you were talking about where $100,000,000 in bonds could not be used for more than $20,000,000.

Mr. MCFADDEN. I do not care to mention names here.

Mr. MEYER. I can not give you any information, because I have not that information; but the proposition of getting good security would be an individual matter in each instance. It may be that in one case it would be one kind of obligation and in another situation it would be an entirely different matter. There is not any uniformity in the financial structure of railroads. We had occasion to make railroad loans in the period of Government control, and nobody knew what conditions were going to obtain three years later when those loans matured. They were all paid with interest in full, and in one case with a profit of over $200,000, from a road that looked to be in a very bad condition at the time. But the railroads have records of long periods of years, but I do not say that is a clear indication of future earnings; but railroad gross and railroad earnings have some relation to the average condition in the country; and I would say that some railroads obviously are safe to make advances to on their promissory notes, and they may not be able to borrow money at the present time from the banks.

The banks do not lend money to the railroads in the long run, and bankers do not lend money to railroads, except temporarily. The investment market is the place for the railroads to raise funds, and these loans would be in anticipation of the flotation of railroad securities in the investment market, when conditions are more favorable. That is all I can say. I could not tell you about any particular railroad, because I don't know.

Mr. MCFADDEN. I was prompted to ask that question because of the situation as it now exists, supplemented by the statement you made just a few moments ago, that the control of the railroads was largely in the hands of the bondholders.

Mr. MEYER. I did not say control, Mr. McFadden. If I did, I did not mean to. I would say that the main interest of a railroad in its present situation is the interest which the hondholders have in the railroad. That represents the biggest financial present value in railroads.

Mr. MCFADDEN. I was wondering if in such a situation, if this institution loaned a railroad-whether or not control is carried with the loan; and with the new loans-who will be in control of the railroads?

Mr. MEYER. The control is in the voting power, in a technical sense, but the main financial interest in a railroad is the interest which the bondholders have through their ownership of the bonds. Let us put it that way.

Mr. MCFADDEN. The usual situation that prevails when concerns are in the condition as outlined here is that, when new money is put into an industry or a going concern, it usually takes over the control, through control of the board of directors or they have a voting trust or something of that kind-I am wondering if we are getting into that kind of situation by the creation of an institution as now proposed, which might mean the control of the railroads of the United States; might mean the control of the banks of the United States, and might mean the control of the industries of the United States.