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Mr. LANSTON. I will take your word for it, certainly, sir.
Mr. SPENCE. We thank you for your very able statement.
Mr. Widnall.
Mr. WIDNALL. Thank you, Mr. Chairman.

Mr. Lanston, I believe that your testimony substantiates our belief that this bill would not offer an alternative method of financing, but it would mean a substitute method of financing. Is that not so?

Mr. LANSTON. Well, it would be both, I guess. You substitute the Government for the public as the buyer, in the first instance.

Mr. WIDNALL. Well, with the rules set up in this bill as to, first, going out into the private market and seeing if you can finance under the same terms, what possibility is there of 278 percent financing for cities of under 35,000 or over 35,000?

Mr. LANSTON. That, unquestionably, is one of the technical weaknesses of the bill. And, in the period we are in, where we hope for an increasing use of our productive resources and manpower, it is inescapable that, sooner or later, some increased demands on the capital and credit markets will appear.

So, if you start here with a fixed cost to State and local governments, fixed as of last June, the rate could get further and further away from reality; the Government would be paying more and more above the going rate in the marketplace. Already, the rate specified is much lower than that of the marketplace, the price the Government would be obliged to pay would be much above the market price. It would create a bonanza for State and local governments.

Mr. WIDNALL. Mr. Spence speaks about the small municipalities and their needs, and undoubtedly in many cases they are urgent. But I would like to call your attention to the fact that the bill provides an allocation of only 25 percent of the billion dollars to the municipalities under 35,000 population. That means $750 million would be available for the municipalities over 35,000 population.

Do you of your own knowledge, or does Mr. Pizer have information that he could furnish to the committee, as to the inability of the municipalities of 35,000 population and over to adequately finance water pollution plants, and sewage treatment plants?

Mr. LANSTON. No, sir, we could not. That is really outside of our field. I think some evidence has been submitted. I do not know how good it is, but I would be surprised, in view of several decades of experience in that business, and of the statistics I have seen, if there were any large need, taking dollars in the aggregate, for this type of assistance.

Actually, many small towns, as I am sure you are aware, are run much better than many big ones. That helps them to find a ready market for their obligations at prices that are quite favorable.

When you get down to quite small towns, which I guess would be measurably less than 10,000, the situation could be different. I really don't know.

Mr. WIDNALL. You cited the testimony of Marriner Eccles before the Joint Committee on the Economic Report. I happen to be a member of that committee and was present when he testified and gave a lot of sound advice to the committee.

We also have had a number of economists testifying, who have asserted what you did, that we must establish priorities as to our

spending if we are going to come out of this on a sound basis. And what interested me so much was the fact that they were almost unanimous, outside of one particular special interest they might have themselves, in saying the national defense, first; and research and development, second, by way of priority.

Mr. LANSTON. I would put national defense first, and some new, clear evidence that this Government is prepared to preserve the future value of its currency second, and nothing else second.

Mr. WIDNALL. You said in your testimony that you thought the Government should have exhibited a better fiscal policy during the last 6 years.

Do you have any concrete suggestion of your own along that line that you would like to offer to the committee, or further comments on that score?

Mr. LANSTON. It is a very large subject. One thing has seemed clear to me. There is neither economic nor social justification for one large item of expenditure, and we could, for the time being, afford some of our other waste, and so forth, if we were able to bring some sense into that one expenditure category.

I know there are others, but we haven't had unlimited time to dig into this, and we didn't need much time to dig into this one, so we continue to bring it up. That is the farm program.

Mr. WIDNALL. I think there is agreement on the fact that we have fumbled with respect to that program and haven't really worked out anything sound yet.

But again, in a democracy, our problem is that even the three great farm organizations can't agree on what they want, and they are all dissatisfied with the present.

Mr. LANSTON. There is a very good article in this month's Reader's Digest, not about the attitude of the farm bureaus, but about the attitudes of farmers.

Mr. WIDNALL. One more question: From what we know about Russia, and of course it is rather sketchy, but also from what we know about England and other countries, how successful do you feel policies of austerity have been in stimulating their production and stabilizing their economy?

Mr. LANSTON. In France, in Germany, and in England, we have three outstanding examples of what you call austerity. I wouldn't call it that. I would call it a necessitous return to some semblance of prudence in the handling of national financial affairs. Nor do I consider Great Britain to be an outstanding example by any manner of means, but they have at least dealt with their problem, and they have the courage to do what Thornycroft said.

Unemployment is pretty brutal on the chap that is out of a job, but as Thornycroft said, "If we have to take some unemployment in order to maintain the currency for the rest of our people, we will be prepared to take that hardship.”

This may or may not have been an easy thing for him to say, and I agree with Marriner Eccles, where he says we may have to do something to tide the unemployed over. But after all, the difference between the present number of unemployed and that which would be a bare minimum if we are to have a chance to maintain economic stability and stable growth is not much more, if as much, as 2 million people. We are a very large country. We number about 170 million people and each of us is concerned with what happens to the currency. That is being demonstrated in the market by the unwillingness of people to buy Government securities of other than the shortest term, and sometimes not even those.

Doesn't that set up a priority?
Mr. WIDNALL. That is all. Thank you.
Mr. SPENCE. Mr. Brown.
Mr. Brown. I have no questions.
Mr. SPENCE. Mr. Ashley.

Mr. ASHLEY. Do you think that their unwillingness to buy Government securities is because of inflation or because of their worry over inflation, over the threat of inflation?

Mr. LANSTON. There is a general unwillingness on the part of individuals to buy money obligations. It is natural that they should become increasingly unwilling to buy any worthwhile amounts of Governments because these are taxable obligations and they offer relatively low yields. Further, after paying taxes, an even smaller yield exists out of which to repair the purchasing power of the dollars that have been invested and out of which they may protect themselves against declining market prices for such investments.

The declines in the price of Government securities are not entirely in response to economic conditions. They are, importantly, in response to a concern on the part of people that is evidenced by the public's entry into the stock market, evidenced by their attitude toward real estate, and so forth.

Mr. Ashley. That is what I was going to get at, the activity of the stock market in the last year or so.

You say that this in large measure might be traced to people who are trying, perhaps, to hedge against inflation, by buying stocks, rather than fixed Government obligations?

Mr. LANSTON. I don't think you have to trace it back to an active point of view. It also comes about through a passive point of view. A chap who has held savings bonds over the years has found that he has taken a pretty good licking. What is there in the picture to encourage him to buy Government obligations that pay only a little bit more? Nothing, so he just doesn't do it. And he lets his savings bonds run off. Gradually, perhaps, he sells some other Governments or perhaps lets them mature. He either buys municipals, or stocks, or goes down and gets off the train at some railroad station in Florida-and you don't have to be wealthy to go to Florida-where he sees a sign, “Lots for sale, $10 down and $10 a month.” So, maybe he buys one there.

Mr. Ashley. Let me ask you one further question. You say that the bill really proposes little more than a substitution of credit at an artificial rate.

I don't think the purpose of the bill is to preempt private financing in these fields. I take it that you think that the first billion is followed by a second, that the chances of the Government preempting this field would follow ?

Mr. LANSTON. Well, there isn't any question about it. In the present status of the money and capital market, that simply follows. Any of the rates proposed in this bill or in the bill that was before

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the committee last year, the Government would take the securities away from the public.

Mr. ASHLEY. But you were asked by Mr. Spence whether, if the interest rate were increased, whether this criticism of yours with respect to substitution of credit wouldn't be answered.

Mr. LANSTON. It reminds me very much, Congressman Ashley, of past attempts to peg the Government security market. Earlier, we pegged the Government securities market by pinning their prices against the wall.

Here, it would be more like pegging them against the hull of a ship that is floating on the tides. At least, we have flexible monetary policies now. But the ship isn't in very good repair, speaking of Federal Government finances. The hull is apt to sink lower and lower in the water. Whatever interest rate you start with, unless it is so high as to be ineffective, is going to dominate the market. The Government is going to buy the securities, rather than the public, and the banks will buy whatever issues the Government sells, because they are about the only buyer the Government has left.

Mr. Ashley. That is all, Mr. Chairman.
Mr. SPENCE. Mr. Lanston, does your firm handle municipals?

Mr. LANSTON. We used to, sir. We don't now. We have our hands full trying to keep track of the Government's issues.

Mr. SPENCE. There is no doubt that the great basic need for industry is adequate water supply and sewage facilities; isn't that true?

Mr. LANSTON. I wouldn't know, sir, but I would take your word for it. It would seem reasonable to

me,

sir. Mr. SPENCE. Then if that is true, the small municipalities now are unable to meet their needs. This bill would have the tendency of allowing them to attract industry. You would agree with that, wouldn't you, generally?

Mr. LANSTON. I don't know, sir. You see, I have this trouble: The volume of municipal financing has grown by leaps and bounds, and is still growing. Now, among the purposes that are to be served, there are various types that one might prefer over others. I am sure no one would dispute a claim that water is one of the real necessities of life and of industry.

Mr. SPENCE. Sewage disposal, too, is also an essential for industry, is it not?

Mr. LANSTON. That is right, sir. But the rate at which State and local governments today are creating new debt, it will be only a relatively short time when the tax-exempt feature of municipal securities will command no particulars in the marketplace, despite continuing high levels of income taxation.

The yields on tax exempt securities will rise. They will come closer to those paid by other private borrowers, such as public utilities, and so forth. Whatever interest rate you set, you will face that trend.

In addition, you are faced with the problem, if you have a bill of this kind that preempts the market rate for tax-exempt securities, that stems from the substitution, therefore, of other Federal Government securities which are likely to be purchased largely only by banks.

Mr. SPENCE. If the effect would be to stimulate industry and increase production it would have the tendency to counteract the inflationary influences. That is certainly true; is it not?

Mr. LANSTON. I don't think I could go along with you on that, sir. If you really want to stimulate industry and enterprise in this country, the best way to do it would be to have the Congress of the United States say, "We are spending for too many things; we are spending for more things than we can afford. We are going to sort out the things we should spend for, but we are going to bring the total down.”

If you want to stimulate industry and enterprise and increase employment in this country, I have no doubt in my mind that that is the way to do it.

Under bills of this kind, I think you will provoke a public reaction such as, "For heaven's sake, here goes another great big program. How long will it be before we have a $10 billion authorization for things of this kind? How long will it be before some of the other purposes that were in the original bill are added to the limited purposes

that are in this bill ?” Mr. SPENCE. You are opposed to the farm program and the housing program?

Mr. LANSTON. I think the housing program leaves a great deal to be desired; yes, sir. The Government is stimulating the creation of mortgage debt at a time when the approach and philosophy of the Government toward taxation causes nearly most businesses to do the same, except as retained earnings cover their needs for new plant modernization, and so forth. They also help to enlarge debt. On top of that the Federal Government deficits pile up more.

We just don't save that much, and we certainly are not going to save anywhere near that much as long as the Government evidences little or no regard for the value of the money that is to be saved. If you want to stimulate saving, convince the people that you are interested in the future value of the currency.

Then maybe we could get around to taking a look at the debt picture as it is stimulated by taxation. Perhaps we move back toward the first principle of equitable income taxation, naimely, to aim to tax income as it is created but only in the hands of the ultimate recipient. If this were done we wouldn't have the kind of tax structure we have now.

That is idealistic, perhaps, but we are not going to get anywhere, in my judgment, by constantly stimulating indebtedness. We have too much debt now.

Mr. SPENCE. Then you are opposed to the whole program that has been adopted. You want a reversal; isn't that true? You do think that if we are going to spend, that there is no better way to spend than to help the cities establish water systems and sewer systems to meet their needs?

Mr. LANSTON. If you would just take out the word "help" and say, "Is not one of the best ways that governments can spend money that of trying to improve their water and sewage systems and the facilities of their hospitals?” Then I am with you 100 percent.

When it comes to the Federal Government helping, I have difficulty, sir. Mr. SPENCE. Mr. Healey. Mr. HEALEY. I have no questions.

Mr. SPENCE. Mr. Lanston, it is always a pleasure to see you and to hear

you, and we are very glad that you were able to come down.

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