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which is feeding into the Ohio, all of the streams of this area reach the Ohio, and of course practically none of the communities on these streams are treating any of the sewage.

Mr. SPENCE. I think that is a great problem that we will have to solve. It certainly is a national problem, and I hope we can find some solution of it. I hope you will continue your work on the planning commission, and I know we will always be glad to have your views on the subject.

Mr. WHISMAN. We on the planning commission very much appreciate the efforts at the Federal level, sir, I want to say, especially when our own Congressman is taking leadership in this effort, to take a new look, as I have indicated is much needed.

We feel that we have special problems that are probably shared by a number of communities around the country, and that these require other than general national solutions, that the effort to put our furthest repressed communities into line with the productivity of the country would be a productive effort and one that would, as has been testified here earlier, not be inflationary, but which would prevent the existence of a condition which is potentially inflationary in itself.

So we appreciate very much the efforts of this committee and of the sponsors of this bill in taking this new look, and I wish you great success in passage of the bill.

Mr. SPENCE. Are there any questions? (No response.)

Mr. SPENCE. If not, thank you very much, Mr. Whisman, for your testimony. I think you have done a great service to the people of Kentucky and the people of our district by coming here and describing these conditions of our depressed areas, which are similar to those in other depressed areas in the United States, particularly the Appalachian coal producing regions.

Mr. WHISMAN. Thank you, sir.

Mr. SPENCE. The committee will stand in recess, to reconvene tomorrow morning at 10 o'clock.

(Whereupon, at 11:40 a.m., the subcommittee was adjourned, to be reconvened at 10 a.m., Wednesday, April 29, 1959.)





Washington, D.C. The subcommittee met, pursuant to adjournment, at 10 a.m., in room 1301, New House Office Building, the Honorable Brent Spence (chairman of the subcommittee) presiding.

Present: Messrs. Spence, Brown, Ashley, Healey, and Widnall.

Mr. Spence. The committee will be in order. We will resume hearings on H.R. 5944.

We have as our first witness this morning Mr. Aubrey Lanston, a very distinguished member of the investment industry in New York. He is well known throughout the financial world for his ability and for his public spirit.

We are very glad to have you, Mr. Lanston. It is always a pleasure to see you and to have your views on the subjects of interest to you and to this committee.

You may proceed as you please. I understand you have no prepared statement.

Mr. LANSTON. No, Mr. Chairman, I don't have a prepared statement, and with your permission I would like to introduce to the committee Mr. Leroy Piser, vice president in charge of reserach for us.

Mr. SPENCE. We are very glad to have Mr. Pizer to testify with you.

Mr. WIDNALL. Mr. Chairman, will you yield at this point?
Mr. SPENCE. Mr. Widnall.

Mr. WIDNALL. I am very pleased as a member of the committee to see Mr. Lanston here to testify, because he is an expert in the field, but also I am particularly pleased that he has with him Mr. Pizer, who happens to be a constituent of mine.

Mr. PISER. Thank you.



Mr. LANSTON. I am not, gentlemen, in the field of municipal finance, although for many years it was one of my favorites. In other words, I am not at the present time dealing in municipal securities. Nevertheless, all bills that involve Federal spending, even the substitution of one credit for another has some bearing on my business, which is that of dealing in Government securities.


I would like to compliment the chairman on H.R. 5944, because as I see it, this bill is quite an improvement over the bill that appeared before this committee last year. This bill would at least hold down the expansion in the public facility loan program to matters of crucial importance, to health and to our very living.

We can't, for example, live without water or sewerage facilities, nor can industry move into a town that does not have proper water and sewerage facilities. Certainly when it comes to hospital beds and equipment, we find every day, we run into shortages.

However, as in all things, there are limits. We have to choose among our needs even though the needs covered in this bill perhaps might be foremost.

But as Marriner Eccles told the Joint Committee on the Economic Report last month, and I am quoting now:

Unfortunately all the economy has to divide are the goods and services it is able to produce, and not the amount of money we could create, which is, of course, limitless.

This committee has a direct interest in the matter of bank credit expansion, and what goes on in the way of increases and decreases in the money supply, and in its use, the effective money supply being, of course, the amount in existence multiplied by the number of times this amount is turned over.

Since World War II, we have had a very marked expansion in the money supply and what, to me, is perhaps even more significant these days in bank credit. This expansion in bank credit has been and recently may be directly attributed to what may be properly termed weaknesses in fiscal policy.

Take, for example, the period of years ending, June 30, 1957, six in all, we had an aggregate expansion in the total loans and investments of the commercial banks of almost $38 billion.

The public debt held by these commercial banks was reduced during the period by only $2.6 billion. Had we had a better fiscal policy these holdings would have been reduced much more and we would have had a less sharp advance in bank credit. Had this been the case, we might have had, perhaps, less of an increase in the cost of living.

From 1951 to 1957 is, however, but one period. If we go back of that, to the 4 years ending June 30, 1951, we find we also met with a sharp expansion in the demands for private credit. But then, fortunately, the cash budget of the United States permitted a very substantial decrease in the amount of public debt held by commercial banks so that, while the rate of increase per annum in the other loans and investments of the banks was almost as sharp as it was during the 6 years ending 1957 the overall rate of increase in bank credit was substantially less.

To put it on an annual basis, for the 4 years ending June 1951, the expansion in bank credit overall ran at the rate of $3.4 billion per annum. For the 6 years ending 1957, the expansion in bank credit overall was at the rate of $6.3 billion per annum.

What has happened since then? During the period since June 1957, a time that might be said to mark the beginning, or to be close to the beginning of the recession of 1957–58, bank credit has expanded at a rate of 213 times greater than that at which it expanded during the 6 years ending with June 1957.

Now, we must bear in mind that when we have a situation wherein the Government is the major factor in increasing the amount of bank credit that is outstanding as has been the case during the past 2 years, that the Government's securities appear as the least attractive form of investment for the average person.

And when that period is one wherein people become alarmed by the continuing deficits of the Government, fewer and fewer among them are buyers of the Government's own securities, with the inevitable result that a larger proportion of the public debt lands in the banks. This is precsely what has happened during the past 2 years. And, when the situation becomes such that the people begin to fear that the Congress either is unable, or perhaps unwilling to cut back on the aggregate spending, to keep it well within receipts during periods of moderate business activity, and to keep such spending well beneath receipts in periods of high business activity, they become fearful or disenchanted, shall we say, with money obligations.

As that takes place, Government securities flow into the banks at a faster rate.

Now, we have in this bill, and in other bills, a substitution of credit, a substitution that calls, unfortunately, for the creation of a somewhat artificial rate of interest.

Artificial, because as has been demonstrated by the IBA, had the predecessor of this bill been in effect over the last year or two, a very substantial proportion of the total State and local obligations issued would have been bought by the Federal Government, and under this bill all but a small fraction of the water and sewer and nonprofit hospital obligations would be so purchased.

Now, it really doesn't make any difference in the money and credit markets whether the total demand is undesirably enlarged via Government securities or via quasi-governmental obligations. Both of these are among the least attractive forms of fixed income securities.

Therefore, when quasi-Government obligations are sold at short term, as would probably be true of obligations issued under this bill, these are likely to land in the banks.

The situation is not quite the same when States and municipalities finance on their own. Their obligations are tax exempt, and that does attract, as you gentlemen know, a certain amount of individual investment. Today we need all the individual investment we can get in the large aggregates of the debt securities that are created in this country.

I think it must be kept in mind that we have a debt-creating type of economy. We have a debt-creating type of economy partly because so much of the debt creation takes the form of Federal Government issues—the interest from which is subject to income taxes—and partly because the tax structure makes it more worthwhile to raise capital and credit through money obligations than equities. While the incentive offered to individuals to purchase these is reduced, tax-exempt securities are comparatively more attractive.

It might be well to pause a moment and look at why it is less worthwhile to buy taxable securities—that is, taxable money obligations, regardless of whether these take the form of Government securities or quasi-Government securities, such as obligations of the Housing and Home Finance Agency. The interest income from each is taxable. We are living in an economy wherein the purchasing power

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