Reorganization Plan No. 24 of 1950

Clearly, the issue involved in plan No. 24 is much broader than in many reorganization plans which have been submitted to the Congress. This committee or Congress as a whole may not find it easy to pass intelligently upon the question of the proper position of the RFC in the Government structure until action is taken upon substantive legislation which is pending in this field.

Legislation embodying the President's small-business credit program, which includes amendments to the Reconstruction Finance Corporation Act, is awaiting hearings before the Banking and Currency Committees of the two Houses. A subcommittee of the Senate Banking and Currency Committee is engaged in a study of the operations of the RFC.

The Hoover Commission in its recommendations upon the Reconstruction Finance Corporation placed major emphasis upon a fulldress review of the RFC's operations by the Congress.

Such a review, as proposed in recommendations Nos. 8 and 18 in the report on Federal Business Enterprises, should contribute to sound decisions on the direct loan issue as well as on organizational questions.

Deferment of effectiveness of Reorganization Plan No. 24 for transfer of the Reconstruction Finance Corporation, pending consideration of substantive legislative issues, may offer opportunity for consideration of the full recommendations of the Hoover Commission relating to the RFC. Under the Reorganization Act of 1949, this would require rejection of the pending order.

That is my statement, sir.

The CHAIRMAN. The appendix to your statement you wish to have incorporated in the record?

Mr. McCORMICK. Yes, sir. That goes into the problem of the wisdom of direct loans.

(The complete statement and appendix referred to follow :)

STATEMENT OF ROBERT L. L. MCCORMICK, RESEARCH DIRECTOR, CITIZENS COMMITTEE FOR THE HOOVER REPORT

My name is Robert L. L. McCormick. I am research director of the Citizens Committee for the Hoover Report; formerly I was assistant to the Chairman of the Commission on Organization.

Dr. Robert L. Johnson, chairman of the Citizens Committee, appreciates your invitation, Mr. Chairman, to appear at this hearing and has asked me to represent him.

With your permission, I shall read my letter of authorization from Dr. Johnson, as follows:

PHILADELPHIA, PA., June 12, 1950. DEAR BOB: Owing to my prior commitments, will you be so kind as to represent the Citizens Committee, its 45 State committees, and other cooperating organizations at the hearing of the Senate Committee on Expenditures in the Executive Departments on reorganization plans relating to the Reconstruction Finance Corporation.

The place of the Reconstruction Finance Corporation, historically the largest of the Government corporations, and its subsidiaries in the Government structure is an important problem in any scheme for reorganization on a more efficient basis.

The Commission on Organization of the Executive Branch of the Government gave considerable attention to this problem in its report on Federal Business Enterprises. The three reorganization plans under consideration which have to do with this Corporation are in part in harmony with the Commission's recommendations and in part at variance with them.

Your elaboration of the recommendations and the factors activating the Commission in making them should be helpful to the Senate committee in its task of passing upon the pending plans.

Sincerely yours,

ROBERT L. JOHNSON.

I shall address myself to plans Nos. 22, 23, and 24, all relating to the Reconstruction Finance Corporation.

REORGANIZATION PLAN NO. 22

Plan No. 22, which transfers the RFC subsidiary, the Federal National Mortgage Association and its functions to the Housing and Home Finance Agency, is in direct conformance with recommendation No. 11 of the Hoover Commission in its report on Federal Business Enterprises. This recommendation was as follows:

"We recommend that the Federal National Mortgage Association be placed under the Administrator of the Housing and Home Finance Agency."

This proposal supplemented recommendation No. 9, which followed an explanation that, inasmuch as the Congress was then dealing with basic questions of organization in the field of housing, the Commission was not in a position to present complete recommendations. In its recommendation No. 9, the Commission said:

"We do, however, recommend that all housing activities be placed in one agency under a single administrator which should be given the type of authority which we have recommended for the heads of all agencies.'

The Federal National Mortgage Association provides a secondary mortgage market for insured loans under the National Housing Act and the Servicemen's Readjustment Act. The amounts involved in mortgages which this RFC subsidiary has taken over from financial institutions have become so large as to form an increasingly important factor in the Federal budget and in housing expenditures. These mortgage loans were a substantial item in recent Treasury deficits. Inadequately coordinated with other housing financial programs, this activity can be a source of hidden inflation.

Various questions of policy are involved in the law creating this secondary market. These the Hoover Commission did not attempt to pass upon. It seems obvious, however, that whatever is done with respect to restriction or liberalization of this market should be integrated with all Government policies relating to housing. Hence, the transfer of the Federal National Mortgage Association to the Housing and Home Finance Agency is a logical step.

REORGANIZATION PLAN NO. 23

Plan No. 23, which transfers from the RFC to the Housing and Home Finance Agency the lending functions of the Government with respect to the production and distribution of prefabricated houses and components, is in general conformance with the Hoover Commission's Recommendation No. 9 in the report on Federal Business Enterprises as quoted above.

The Hoover Commission did not deal specifically with existing authority of the RFC to make loans up to an outstanding total of $50,000,000 for production of this type of housing. This law was enacted after the creation of the Commission. It is not illogical to say, however, that the Commission would have considered it desirable that this aspect of housing policy should be under the Housing and Home Finance Agency in keeping with the placing of all housing activities in this agency as proposed under recommendation No. 9.

We realize the differences between the basic laws here relating to the HHFA and the RFC and urge full consideration of them.

In this case, as in the secondary-mortgage market, the Hoover Commission did not attempt to decide what policies with respect to the financing or prefabricated housing should be. The Commission was concerned only with the organizational phase.

Unquestionably, plans Nos. 22 and 23 both follow a fundamental principle laid down by the Commission in its report on General Management of the Executive Branch. This principle as stated in recommendation No. 12 in that report was that "The numerous agencies of the executive branch must be grouped into departments as nearly as possible by major purposes in order to give a coherent mission to each department." Recommendation No. 13 was that "within each department, the subsidiary bureaus should also be grouped accord

ing to major purposes." As Mr. Hoover phrases it, "Like functions should be located cheek by jowl."

This principle is applicable to the activities of the Housing and Home Finance Agency.

REORGANIZATION PLAN NO. 24

Reorganization plan No. 24 for the transfer of the Reconstruction Finance Corporation, exclusive of activities already referred to, to the Department of Commerce, and its supervision by the Secretary of Commerce is directly counter to the pertinent recommendation of the Hoover Commission.

Certain of the issues here also may be broader than those relating to efficient organization. For example, the Hoover Commission chose to take a stand on the important legislative issue of direct loans. Its decision as to the proper place of the RFC in the Government structure may have been influenced by its attitude on that issue.

However, it is important to realize that transfer of the new independent RFC to one of the Government departments or major agencies is consistent with a basic recommendation of the Hoover Commission for reduction in the number of agencies reporting directly to the President.

The Commission in its report on General Management of the Executive Branch pointed out that there were about 65 departments, administrations, agencies, boards, and commissions engaged in executive work reporting directly to the President, if they report to anyone. This number does not include the independent regulatory agencies with quasi-judicial or quasi-legislative functions. The Commission in its recommendation No. 17 in that report advocated consolidation of the 65 agencies into about one-third of that number. Recommendations Nos. 18 to 21 had to do with a reorganization of the consolidated agencies under powers to be vested by Congress in the heads of departments or agencies. In its report on the Treasury Department, the Hoover Commission pointed out that the Reconstruction Finance Corporation, the Export-Import Bank, and the Federal Deposit Insurance Corporation are independent agencies reporting directly to the President, that the President cannot give the time necessary for their supervision, and that, practically, they are accountable to nobody. Recommendation No. 3 in the Treasury Department report was as follows: "We recommend, therefore, that the supervision of the operation of the Reconstruction Finance Corporation, the Federal Deposit Insurance Corporation, and the Export-Import Bank be vested in the Secretary of the Treasury." This recommendation as to the disposition of the RFC is in conflict with Reorganization Plan No. 24, which provides for transfer to the Department of Commerce instead of the Treasury Department.

The Commission's report on Federal Business Enterprises makes it clear that its attitude on direct loans was a consideration for assignment of the RFC to the Treasury Department.

In this report, the Commission said:

* * *

The Commission's Recommendation No. 8 in this report was as follows: "We recommend (a) that the Congress review the power to make loans taking into account the problems of economy, efficiency, and integrity; (b) that in nonemergency periods, the Congress place restrictions on direct loans in order to insure that the normal channels of credit are utilized to the maximum extent possible or, alternatively, provide for the guaranty of loans made by private or other established agencies."

The Commission added that no guaranties of loans should be made on terms more liberal than those made on direct loans and that the Government should not engage in direct lending where loans can be obtained from private sources on reasonable terms.

In recommendation No. 18 in the same report, the Commission proposed that "Congress review the Reconstruction Finance Corporation in accord with our recommendation No. 8."

In discussing this recommendation, the Commission's statements clearly showed a disposition to curtail the activities of the RFC, doing away with direct loans so far as possible and substituting on a restricted basis guaranties of loans by commercial banks. The Commission did not go as far as its Task Force on Lending Agencies, which recommended liquidation of the RFC.

The Commission's report on the Treasury Department listed among that De- · partment's responsibilities "advice in the conduct of credit institutions and supervision of certain others," and "the periodic inspection of lending and other agencies in process of liquidation."

The Commission considered it appropriate that the RFC should be assigned to this Department.

A minority of the Commission, taking exception to the majority's criticism of direct loans, recommended that the RFC be transferred to the Department of Commerce, one of whose statutory functions is "to foster, promote, and develop the foreign and domestic commerce.'

The President's Reorganization Plan No. 24 is in accord with the viewpoint of the minority of the Commission. It may be noted that the President in his special message to Congress on small business on May 5 proposed a broadening of the lending powers of the Reconstruction Finance Corporation as one of a number of new credit aids to be administered in the Department of Commerce. Perhaps the question here may lie in another problem than the purely organizational one. If the Congress favors liberalization of direct loans by the RFC, rather than curtailment, there is ground for transfer of this agency to the Department of Commerce, which is more concerned with the active promotion of business than is the Treasury Department. Such transfer, under the circumstances, might be considered as in conformity with the Hoover Commission's Recommendation No. 12 in the report on General Management of the Executive Branch for a grouping of agencies in departments by major purposes.

Legislation embodying the President's small-business credit program, which includes amendments to the Reconstruction Finance Corporation Act, is awaiting hearings before the Banking and Currency Committees of the two Houses. subcommittee of the Senate Banking and Currency Committee is engaged in a study of the operations of the RFC.

The Hoover Commission in its recommendations upon the Reconstruction Finance Corporation placed major emphasis upon a full-dress review of the RFC's operations by the Congress.

Such a review, as proposed in recommendations Nos. 8 and 18 in the report on "Federal Business Enterprises," should contribute to sound decisions on the direct-loan issue as well as on organizational questions.

APPENDIX

The purpose of this appendix is to discuss in more detail certain recommendations relating to the Reconstruction Finance Corporation.

The text of the section dealing with the Reconstruction Finance Corporation in the report of the Hoover Commission on "Federal Business Enterprises" follows (p. 43):

"The Reconstruction Finance Corporation performed a useful and necessary function in the days of the depression and the war. Its life was extended by the Congress on May 25, 1948. The manifest major purpose of that extension was to maintain it as a stand-by agency in case of emergencies. But it still has 31 branch offices and over 3,000 employees.

"This agency is engaged in making direct loans to persons and enterprises, frequently without the participation of private agencies in its risks.

"Our task force strongly recommends the liquidation of this corporation and the substitution of guaranties by the Government, operating through the Federal Reserve banks, of loans to be made by commercial banks.

"The Commission believes it preferable that the Corporation be reorganized to guarantee loans by commercial banks.

"There may arise cases of needed loans which are not available from private institutions. However, this unavailability, except in the case of emergency or where the national defense is involved, arises from the fact that more than

normal risk usually is involved. It may be in the public interest to provide such credit.

"However, the credit of the Government should not be used to obtain lower rates of interest and easier terms than those which private institutions can properly provide.

"Recommendation No. 18.—We recommend that the Congress review the Reconstruction Finance Corporation in accord with our recommendation No. 8.

"In our report on the Treasury Department, we, have recommended that the Reconstruction Finance Corporation be placed under the supervision of the Secretary of the Treasury."

Recommendation No. 8 appeared in a section of the report applicable to all lending, guaranty, and insurance agencies. In this section the Commission took a stand against direct lending by Government agencies.

An excerpt from this section of the report follows (p. 23):

"While some agencies in this group have additional security for their loans because private credit institutions participate in their guaranties, other agencies lend directly to private enterprise or to individuals without the participation of intermediate private agencies.

* * *

"Direct lending by the Government to persons or enterprises opens up dangerous possibilities of waste and favoritism to individuals or enterprises. It invites political and private pressure, or even corruption. Emergencies may arise in depression, war, national defense, or disaster, which must be met in this way. But direct lending should be absolutely avoided except for emergencies. Five agencies make direct loans at the present time "Recommendation No. 8.-We recommend (a) that the Congress review the power to make direct loans taking into account the problems of economy, efficiency, and integrity; (b) that in nonemergency periods, the Congress place restrictions on direct loans in order to insure that the normal channels of credit are utilized to the maximum extent possible or, alternatively, provide for the guaranty of loans made by private or other established agencies.

* * *

"However, no guaranties of loans should be made on terms more liberal than those made on direct loans. The Government should not engage in direct lending where loans can be obtained from private sources on reasonable terms."

The Hoover Commission made recommendations for legislation which would be applicable to the Reconstruction Finance Corporation as well as to other Government corporations. Its recommendation No. 1 in the report on "Federal Business Enterprises" was as follows (p. 9):

"To correct the defects in corporation charters, we recommend that the Congress should, by new enactment, or by amendment to the Government Corporation Control Act of 1945, provide:

"(a) That borrowing powers, Government liability for their obligations, and budgetary presentation be made uniform for like classes of loans and like securities.

"(b) That the Government stock in these corporations be held by the President or by the head of such agency as he may direct.

"(c) That the Congress determine what disposition should be made of surpluses already earned by partly owned Government corporations. Policies as to distribution of future surplus earnings of both partly owned and fully owned corporations, should also be determined.

"(d) That major expenditures for capital additions be made only with prior congressional approval and appropriation.

"(e) In order to establish a consistent practice among corporations, that all corporations, in determining the cost of construction undertaken by them, include a charge for interest on capital expended during the period of construction.

"(f) That where boards or part-time boards are established they be wholly advisory and be appointed by the President. Public-spirited citizens presently serve on such boards even though fees are paid only for attending meetings. "(g) That where these corporations are located in the departments or major Government agencies, the heads of such agencies, or representatives designated by them, serve as ex officio chairmen of their advisory boards."

The recommendation for transfer of the Reconstruction Finance Corporation appears in the Hoover Commission's report on the Treasury Department. The text of this section of the report follows in part (p. 10):

"The Reconstruction Finance Corporation, the Export-Import Bank, and the Federal Deposit Insurance Corporation are independent agencies reporting directly to the President. The President cannot give the time necessary for their supervision. Practically, they are accountable to nobody.

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Reorganization Plan No. 24 of 1950: Hearings Before the Committee on ...