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It now owns and operates 115 miles of lines in Houston, Walker, Trinity, Polk, and Tyler Counties. Its main line extends from Weldon in Houston County via Trinity to Livingston, the county seat of Polk County, 48.3 miles, and it has a branch line extending from Trinity across Trinity, Polk, and Tyler Counties to Colmesneil, 66.6 miles.

These properties were formerly owned by the Missouri Kansas & Texas Railway Co. and were turned over to the bondholders, including the present owners, in the reorganization of the Katy in 1923. They were not then and are not now profitable to the owners, but are vital to the industrial life and public wefare in the district which they serve. The Interstate Commerce Commission has so found, and the recent discovery of mammoth oil fields shortly north of its territory, with development extending into its territory, accentuates their possibilities.

Missouri, Kansas & Texas Railway Co., prior to its receivership in 1915, had plans to extend the main line of the Waco to a connection with their main stem at Waco. In settlement of litigation between the State of Texas and the Katy in 1914, the Katy entered into a contract with the State, which was made a part of the judgment of the district court of Travis County, requiring the Waco extension. When the present ownership took over these lines from the Katy, it did so subject to the obligations stated, and in privity with the new Missouri-Kansas-Texas Railroad Co., set out to create the extension referred to, together with an extension from Livingston to Port Arthur, which after a long contest before the Interstate Commerce Commission with other carriers partly serving the district, were declared to be required by public convenience and necessity, not only as a measure for perpetuating the life and rendering profitable the existing properties, but to create a new short route for traffic, particularly water-borne traffic moving via the Gulf, between the interior of Texas and the great waterway that lies between Beaumont and Port Arthur. This waterway, created at great expense by the Government in connection with local interests, is not serviceable to the public in the interior of Texas and of the southwest via the routes of existing carriers (124 I. C. C. 789). The ports handle an enormous volume of traffic to and from the great industries situated on the waterway, principally oil refineries, but handle little general cargo originating in or destined to the interior. The commission has held that the proposed route is required to render and will render the ports serviceable for the benefit of the interior and perform a service which can not and will not be performed via the routes of the carriers that now come to the district.

Upon these considerations the present owners took over ownership of the east Texas properties in 1923 and embarked on a plan to develop same as above stated, namely, by constructing extensions to Port Arthur and Waco. According to unit prices prevailing at that time, now substantially lower, it was estimated that the total investment required, including cost of rehabilitating the existing properties on standards consistent with the new construction, would amount to about $10,000,000.

They set out to construct the section between Elizabeth, Beaumont, and Port Arthur first. The commission authorized them to do so and to sell $3,000,000 of bonds secured by first mortgage against the existing properties as well as against the new construction. The existing lines represent an investment of about $2,500,000, and about $250,000 had been expended in behalf of the new construction when existing financial conditions overtook the project, along with the balance of the country, and it was compelled to suspend construction; meantime, finding it necessary and unavoidable to let the company go into receivership until conditions improve.

The present owners have the will and would like to resume and complete the enterprise, regardless of current depressed conditions for rail transportation lines, because they consider that those conditions are transitory; that the new development will save and render profitable their investment in the existing properties; that the new construction, amounting to over 165 miles, would give employment to several thousand men now standing idle in their section and will furnish a market for a large quantity of rail, material, and supplies, now piled or stored and depreciating at mills or factories, representing a large amount of frozen capital; and because they believe that the best correction of existing conditions is the establishment and prosecution of new enterprises of all sorts. Courage in business at the present moment is the prime requisite to restore prosperous conditions.

Therefore, the board of directors of the new reconstruction finance corporation should be clearly vested with authority, in the exercise of sound discretion, to make loans to railroads under the terms of section 5 of the act, not merely to avert insolvency or relieve them of distress, but also to enable railroads, where the public interest will be served, to resume construction enterprises, work on which has been suspended on account of the depression and which otherwise could not be financed at this time.

The CHAIRMAN. I am hoping we have pretty nearly reached the end of our hearings and that we are to the point of taking up this bill for amendment.

Mr. MCFADDEN. May I raise a question in regard to the notes taken at the meeting the day before yesterday. I have here the stenogra pher's notes of January 5 for correction. I went through them very carefully last evening and I found that there does not appear in this a transcript of my questions or answers of Governor Meyer of the Federal Reserve Board pertaining to the acceptance business. I do not know whether it has been inadvertently omitted from the record or what has become of it. I wanted to call to the attention of the committee that it is not here. If it is simply an error on the part of the stenographer, all right; if it has been deleted intentionally, that is another matter.

The CHAIRMAN. I think you should send for the stenographer who did the work and who transcribed it so as to see how that error came about. I will ask you, Mr. Thompson, to get him to come as soon as you can, but we can ascertain about that.

Mr. MCFADDEN. I know all of my questions pertaining to the acceptance business are out. All my other questions are in here, but on that particular subject it is deleted.

The CHAIRMAN. I think if we get the stenographer to refer to the original notes it will be easy to make those corrections, and I am sure there will be no objection to having his notes retranscribed so that they will embody just what took place according to your interpretation of that discussion.

Mr. REILLY. Are those the public hearings we had here the other day!

Mr. MCFADDEN. Yes; the day before yesterday in this room. The CHAIRMAN. I think we might pass from that until we get the stenographer, and I am confident that would prove to be an inadvertence: I hope so.

Mr. MCFADDEN. I have some other matters I want to bring up before closing these hearings.

The CHAIRMAN. Mr. McFadden, if it suits you, let me proceed now. I am hoping we will not have to have any further discussion.

Mr. MCFADDEN. I would like to make this observation, particularly in view of the Senate amendments. If the Senate amendments, particularly 5 (a), are to be included in this bill, I think it is important for us to have full information in regard to this acceptance business, because this has a very important bearing on matters that led up to the occasion for this particular kind of legislation. Mr. GOLDSBOROUGH. What do you say about 5 (a), Mr. McFadden? The CHAIRMAN. He is referring to the Walcott bill introduced in the Senate, which we are assuming would probably receive favorable consideration in the Senate. Of course, that bill, technically, is not before us. We have it here for our information; that is all.

Mr. MCFADDEN. I am presuming it is going to receive consideration, and if it is I think that the business with which this section 5(a) will deal that it is important, at least to the members of the committee here, if we are going to have to deal with that, not only here but in Federal reserve matters that we should have full information pertaining to this acceptance business that is to be done. This constitutes this Reconstruction Finance Corporation into an acceptance bank, and it is proposed that in international trade transactions that this reconstruction finance corporation will assume the same position as an acceptance bank.

Mr. GOLDSBOROUGH. May I ask a question there?

Mr. MCFADDEN. Yes.

Mr. GOLDSBOROUGH. It was stated yesterday by Mr. St. Jean that these acceptances would be discounted on the credit of the borrower; I mean, on the credit of the seller.

Mr. STEVENSON. The shipper.

Mr. GOLDSBOROUGH. Rather than on the credit of the foreign buyer. My question is this: That if the foreign buyer does not constitute a vehicle to which we would like to extend credit and the credit of the shipper depends upon the solvency of the buyer in the last analysis, where are we left? Isn't it almost the same thing as if the credit were extended originally to the purchaser?

Mr. MCFADDEN. I am not dealing with the technical angle of it. I am dealing with the fact that we are setting up an institution which has to do with the acceptance business.

Mr. GOLDSBOROUGH. We have raised the question several times in the committee that we did not care to go into the business of furnishing any money outside the United States. Isn't this an indirect way of doing that very thing?

Mr. MCFADDEN. It certainly is; yes.

Mr. STRONG. But this is furnishing money to Americans to help foreign trade.

Mr. GOLDSBOROUGH. But the value of those acceptances depends upon the solvency of the foreign buyer, does it not?

Mr. STRONG. No, no; they are guaranteed by the American shipper.

Mr. GOLDSBOROUGH. But where does he get off if his buyer is not solvent?

Mr. STRONG. He pays it; that is what he does.

Mr. GOLDSBOROUGH. Does he?

Mr. PRALL. Supposing he can not pay it.

Mr. STEVENSON. Supposing he shipped 1.000 bales of cotton over there and gets his acceptances and the man who is buying it does not pay, he has 1,000 bales of cotton left on his hands on foreign docks. Where are we coming out?

Mr. STRONG. That is the business of this corporation to see that his guarantor does not fall down.

Mr. STEVENSON. It would come back on this company.

Mr. STRONG. In the Senate they stated very plainly that it was money to be loaned to American exporters to assist in foreign export trade.

Mr. BRAND. I want to ask this: If that remains in here aren't you extending credit directly to that foreign purchaser?

Mr. STRONG. No.

Mr. BRAND. You are if the exporter is involvent.

Mr. GOLDSBOROUGH. Certainly.

Mr. MCFADDEN. Mr. St. Jean said last evening here that this was the same kind of business that was now represented by the frozen credits in Germany with which the New York bankers, headed by Mr. Albert H. Wiggin, were dealing.

Mr. STRONG. Mr. St. Jean is here.

STATEMENT OF GEORGE ST. JEAN, PRESIDENT FEDERAL INTERNATIONAL CORPORATION

Mr. ST. JEAN. What I said was, Mr. McFadden, that because the banks in the past had not been willing to extend to the end of the transaction credit based on the American exporters' credit that these banks had gotten frozen credits. The evil we seek to remedy is that credits shall at all times be extended on the faith of the American shipper. When a bill is sold in the market the bill is sold on the basis of the credit of the drawer.

Mr. GOLDSBOROUGH, I understand that, it is perfectly clear.

Mr. ST. JEAN. In 99 cases out of 100 nobody knows who the

drawee is.

Mr. GOLDSBOROUGH. If the drawee fails, ultimately the drawer is going to fail.

Mr. ST. JEAN. Oh, no. If a man who is a large exporter is exporting to 100 or 200 different concerns, and acceptances made for him by American Finance

Mr. GOLDSBOROUGH. All foreign customers?

Mr. ST. JEAN. Assuming he is doing one-tenth of his business abroad, or, we will take the average American exporter, 5 per cent of his business is foreign business and 95 per cent of his business is domestic business, and his credit is on his entire business, his domestic business as well as the foreign business, 5 per cent of his business being represented by foreign business and he has 200 different people he deals with. Some of them might fail but the credit that is extended is extended to the American shipper, and if anyone of his foreign customers fail to pay he is not going to go bankrupt.

Mr. GOLDSBOROUGH. Do you mean to say there is an exporter who would hang out his sign as an exporter and would sell 95 per cent of his goods in the United States and only 5 per cent to foreign companies?

Mr. ST. JEAN. There are very few companies who would sell more, except those dealing in foreign cotton and in the cotton business that is true, they are generally factors.

Mr. BRAND. This was not in the original bill.

Mr. Sr. JEAN. No; it was not in the Walcott bill, it was put in in the Senate.

Mr. BRAND. In the Senate committee?

Mr. Sr. JEAN. The committee.

Mr. BRAND. Who introduced the amendment?

Mr. ST. JEAN. Senator Fletcher.

Mr. BRAND. Senator Fletcher of Florida?

Mr. ST. JEAN. Yes; at my request.

Mr. BRAND. Who do you represent !

Mr. ST. JEAN. I am president of the Federal International Corporation.

Mr. BRAND. You are in the export business?

Mr. ST. JEAN. It is American exporters.

Mr. MCFADDEN. You are qualified to talk on this foreign credit business because of your former connection with the Federal Reserve Bank of Boston?

Mr. ST. JEAN. No; I was not with them.

Mr. HANCOCK. I would like to get a matter cleared up.

The CHAIRMAN. Certainly.

Mr. HANCOCK. The bill refers to loans to financial institutions. In line 18, page 23, this language appears:

No acceptances shall be made in favor of any one drawer for more than a total of 1 per cent of the subscribed capital of the corporation unless the transaction be fully secured and guaranteed by a bank or banker of undoubted solvency.

In view of this language, can an individual utilize the funds of this corporation

tal.

Mr. ST. JEAN. It is so intended.

Mr. HANCOCK. To the extent of 1 per cent of the subscribed capi

Mr. ST. JEAN. To the extent of $5,000,000.

Mr. HANCOCK. That would apply to an individual or financial institution of the United States.

Mr. ST. JEAN. This amendment is directed so that exporters, individuals, firms or corporations may have direct access to the funds and facilities of the reconstruction finance corporation within the limitations of the sentences you have just read.

Mr. HANCOCK. If the amount is in excess of 1 per cent of the subscribed stock it would be necessary that the acceptances be indorsed by some bank.

Mr. ST. JEAN. And fully secured. By fully secured it means documeans, and warehouse receipts attached.

Mr. HANCOCK. Under the operation of that particular provision this institution, the reconstruction finance corporation, would be making loans to individuals.

Mr. ST. JEAN. It would not be making loans at all, loaning its credit to it.

Mr. HANCOCK. It is the same thing in the last analysis.
Mr. STEVENSON. To the extent of $5,000,000.

Mr. GOLDER. May I suggest that, in my judgment, Mr. St. Jean is wrong, and I say that most respectfully, because section 5 limits those people to whom loans can be made and no loan can be made to an individual. How, the language which Mr. Hancock reads, "any one drawer," that necessarily must go back to section 5, on page 20 of the Senate bill which defines those institutions to which a loan can be made. I do not think that it permits a loan to an individual. It specifically states to whom a loan can be made.

To any bank, savings bank, trust company, building and loan association, insurance company, agricultural or livestock corporation, or any other bona fide financial institution in the United States.

It does not permit a loan to an individual.

Mr. ST. JEAN. I understand in the Senate there is a difference between making a loan and making an acceptance. It is so intended.

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