Senator CONNALLY. Mr. Chairman, may I ask the secretary a question right there? Of course, on that bond plan, the veteran would suffer, because he would have to discount and hawk these bonds around, would he not?

Undersecretary MILLS. Yes.

Senator CONNALLY. If that kind of a plan were adopted, it would be better for the Government to handle the bonds and get the money and pay him the present value, rather than have a system of that kind, would it not?

Undersecretary MILLS. I think so.

The next letter is dated January 19, 1931, and is addressed to Hon. Willis C. Hawley, Chairman of the Committee on Ways and Means of the House of Representatives. [Reading:]

TREASURY DEPARTMENT,

Washington, January 19, 1931.

MY DEAR MR. CHAIRMAN: I have your letter of recent date inclosing a copy of H. R. 15589, a bill providing for the amendment of Title V of the World War adjusted compensation act, and requesting the views of this department

The bill provdes that the Administrator of Veterans Affairs is authorized to pay to any veteran to whom an adjusted service certificate has been issued, upon application by him, the cash surrender value of the certificate. The cash surrender value of the certificate is defined as the amount of the adjusted service credit of the veteran, increased by 25 per cent, plus interest at 4 per cent per annum compounded annaully from the date of the certificate to a date to be determined by the administrator, which would be fixed at not more than 30 days prior to the date of the check issued to the veteran in payment.

The bill further provides that if the veteran has at any time borrowed upon the certificate and has not repaid the principal and interest, the administrator, upon request of the veteran, shall pay both principal and interest, deducting these amounts from the basic surrender value: Provided, however, That interest shall be computed at 4 per cent per annum compounded annually in lieu of the rate fixed in the note or prescribed in section 502 of the World War adjusted compensation act.

The bill further provides that if interest on any loan to the veteran has been paid by him, there shall be added to the basic surrender value the amount of interest paid by the veteran to the extent that it exceeds interest on the loan computed at 4 per cent compounded annually.

I am informed by the Administrator of Veterans' Affairs that if all holders of these certificates should avail themselves of the option provided for in the bill, the total amount that would be paid covering basic surrender value would exceed $2,100,000,000. It is impossible to estimate the number of veterans that would avail themselves of the option, but I should point out to you that the measure is so framed as to offer an inducement to the veterans to cash in their adjusted-service certificates and so in effect destroy the endowment insurance plan. Indeed, the bill seems designed to effect just such a purpose, since it rests on no actuarial principles and the total cash surrender value which it contemplates exceeds by over $375,000,000 the present-day value of the certificates outstanding, and in effect would constitute a grant of this additional amount. The retirement of outstanding adjusted-service certificates would automatically defeat the purpose which after careful and extended deliberation these certificates were devised to serve. Compensation was made in this form and not in a lump cash payment in order that the veteran might be given an investment the value of which would increase from year to year and be available for distribution at a time when presumably it would be most helpful, at the same time providing him fully paid life insurance during the interim period. It is not sound or equitable for the Government to invite the veterans to cash in their endowment insurance policies and so to forego the benefits of future protection.

As far as those sections of the bill are concerned, referring to the payment by the Administrator of Veterans' Affairs of the principal and interest of loans secured by veterans on their certificates or the repayment of interest paid in excess of 4 per cent compounded annually, the Administrator of Veterans' Affairs informs me that the administrative difficulties involved are so great as to make this task almost impossible of performance. The total number of transactions involving

interest on loans made on certificates up to date it is estimated exceeds 6,000,000. To make a recomputation of interest in each one of these cases would in itself constitute an extremely difficult problem. But the difficulties are further enhanced owing to the fact that numerous loans to veterans were made by banks, and many of these loans have been repaid and the notes destroyed. Even if it were determined administratively feasible to undertake this mass of recomputations, its practical effect would not be in the interests of the veterans seeking cash on their certificates, as the time it would take to accumulate the necessary data upon which to base action would constitute a major delay in the distribution of any funds to be paid. Moreover, it would seem as if this proposal involves discrimination as between the veteran who borrowed with his certificate as collateral and the veteran who borrowed on some other form of security.

Finally, I think I should point out some of the problems involved in obtaining this huge sum for distribution and which merit serious consideration by your committee. I think it will be conceded that the $2,000,000,000 more or less can not be raised by taxes. The alternative is for the Government to borrow the funds. In March of this year the Treasury is faced with public debt maturities in excess of $1,100,000,000, calling for a large refunding operation, and within three years some eight billion of bonds, most of them bearing a 44 per cent interest rate, become callable. While the market for Government securities is at present good, it can not be taken for granted that it has the capacity to absorb an indefinite amount of these securities, particularly if the new issues are not offered in replacement of outstanding ones, but have to be absorbed by way of new investment. Business recovery is in some degree at least dependent on a good market for new securities to supply the needs of various business enterprises. To the extent that funds seeking investment are diverted to the purchase of Government bonds, to that extent is the capital market depleted of funds otherwise available for industrial and other employment. I am of the opinion that the enactment of this measure would have far reaching consequences, not only in its practical destruction of the endowment insurance plan, but in its effect on the finances of the Nation and our general economic situation.

The problems to which it gives rise should receive the most careful consideration by the Congress.

Sincerely yours,

Hon. WILLIS C. HAWLEY,

A. W. MELLON, Secretary of the Treasury.

House of Representatives.

Chairman Committee on Ways and Means,

Senator CONNALLY. Mr. Chairman, may I ask the Secretary a question?

Senator WATSON. Certainly.

Senator CONNALLY. Mr. Secretary, in pointing out the difference between the amount which it would be necessary to secure to redeem these certificates under the bill last suggested, and the actual cash. surrender value, you stated that there is a difference of three hundred million and odd dollars, between that and the actual cash surrender value.

Undersecretary MILLS. There is a difference of $375,000,000 between that and the present-day value.

Senator CONNALLY. You based that, however, upon the theory that it required that sum of money to pay the premiums on the insurance that these soldiers have enjoyed up to the present time. That is where you get the difference, is it not?

Undersecretary MILLS. I do not quite get that question.

Senator CONNALLEY. In other words, in figuring the cash surrender value of a policy, you base it upon what it has cost to insure the man up to the time of its surrender, do you not?

Undersecretary MILLS. I will ask Major Briening to answer that question, because he did the computing.

Mr. BRIENING. The whole amount is due to the proportional part of the 25 per cent added. That was the unearned portion of the 25 per cent which was added to the basic credit value.

Senator CONNALLY. That goes back to that same assumption of the Treasury and of the Veterans Bureau, which I do not think is justified. Mr. BRIENING. That is where it all lies, Senator.

Senator CONNALLY. With that element removed, it would be the same proposition. I am speaking of the bill of Mr. Garner in the House, and a similar bill which I have introduced here, based upon the optional payment of these certificates on the original basis of $1 or $1.25 per day, respectively.

Undersecretary MILLS. Plus 25 per cent.

Senator CONNALLY. Plus 25 per cent, which, according to my theory, is based upon the fact that the certificates were not granted until 1925, seven years after the war, and with 4 per cent interest for six or seven years, it would amount to about 25 per cent. Then there is 4 per cent compounded on that sum. The question is, wherein does that differ from the present cash value? Is not that the present cash value of these certificates?

Undersecretary MILLS. On your assumption that the 25 per cent was not compensation for deferred payment.

Senator CONNALLY. My assumption is that it is a part of the interest. It was the interest which had accumulated on these certificates up to that date, on the theory that if the man was going to get a dollar a day, it would have been due when he was discharged. Not having gotten it when he was discharged, but having gotten a note for it six and a half years afterwards, my assumption is based upon the fact that that much interest had accumulated at that ime. Based upon that assumption, does not that bill represent the actual cash. value of those certificates as of the date of redemption?

Undersecretary MILLS. Based upon that assumption, it is reasonably accurate, is it not, Major Briening?

Mr. BRIENING. Not if you consider the insurance protection. Undersecretary MILLS. Major Briening makes the reservation that it does not cover the insurance.

Senator CONNALLY. That is what I asked a while ago, and it was said that that feature was not in it. It was only the 25 per cent. Under that plan a soldier, if he gets it, will nave gotten his dollar a day and 4 per cent interest up to date, and in addition he will have gotten the benefit of insurance up to now, in the full amount.

Undersecretary MILLS. He will have had free insurance for six

years.

Senator CONNALLY. In that respect you point out that it is more favorable than the present cash surrender value, because he has not been charged for the insurance.

Undersecretary MILLS. No, Senator. The major difference comes from the fact, according to my recollection, that that 25 per cent which we allowed at the time this bill was passed, was additional compensation for deferred payment, and had no relation to the period prior to the passage of the act. I think the record will bear me out in my recollection. General Hines can tell you better than I can.

Senator CONNALLY. Regardless of that, in settling this now, we have a right to view it from either angle we desire, because we are initiating independent legislation. We are not bound by that.

37803-31-5

Undersecretary MILLS. Clearly not; but that accounts for the difference in our figures.

General HINES. At the request of Senator Couzens, we are making a study of the history of the adjusted-service certificate. So far as the information we have uncovered is concerned, in making the presentation of the bill before the Senate, the chairman of that committee called attention to the fact, in explaining its provisions, that they had first given consideration to adding 40 per cent for the purpose of inducing the veteran to take the deferred payment, for his protection, rather than cash. We have not quite discovered where the change was made from 40 per cent to 25 per cent, but undoubtedly it took place in the House, in their discussion. However, we will complete that study and give you the history of it, which, I am sure, will show you the full intent. Many schemes were discussed, even to the extent of giving these men vocational training, and all of them seem to have been optional, as against the cash plan of payment-either an increase in the amount for deferred payment, or an increase in the amount for vocational training, land grants, and various other forms of compensation.

Senator COUZENS. Then, you have not discovered anything in the record which indicates that this 25 per cent that was added was added for the purpose of making good the deferring of the payment for six and a half years?

General HINES. Not up to this time.

Senator CONNALLY. So far as I am concerned, I appreciate the efforts of the Veterans' Bureau, but I do not need any assistance in determining what Congress intended. I think Congress is able to decide what it intended by that act as well as the Veterans' Bureau. Senator COUZENS. I might say, Senator, that it was done at my request and not at the suggestion of the bureau.

Senator BARKLEY. Of course, if there is anything in the record showing the reason for that 25 per cent, it would have some bearing on what Congress intended.

Undersecretary MILLS. May I say, before answering that question, that, for what it is worth as evidence, it has just been called to my attention that on the cash payments made on January 1, 1925, no interest was allowed from 1918 to 1925, and therefore the 25 per cent could not have been looked upon as being paid in lieu of interest.

Senator CONNALLY. The Government was cashing all those little ones in, and paying them cash. They were glad to get the cash, I suppose. The $50 ones were paid in cash.

Undersecretary MILLS. My very distinct recollection, Senator, is that at the time that 25 per cent was compensation for deferred payment.

Senator CONNALLY. You were in the House at the time, were you not, Mr. Secretary?

Undersecretary MILLS. Yes; and I am basing my recollection on my experience there.

Senator CONNALLY. If you are going to base compensation on the idea of interest, why should you ignore the seven years that had expired between the war and the date you were settling with them? Undersecretary MILLS. We did. That is the answer. Senator CONNALLY. But why should you ignore it?

Undersecretary MILLS. I do not know, but we did ignore it, and I think the fact that we did not pay interest to those who received cash in 1925 showed that we were not going to compensate them for the deferred payment from the time they were discharged from the Army to the time we were paying them.

Senator BARKLEY. The reason it was ignored was because the whole thing was an effort to pay the ex-service men just as little as the Government could get by with. As the veteran had no voice in it except to take what was offered, the Government whittled it down as low as possible.

Seantor WALSH of Massachusetts. May I ask the Secretary a question?

Senator WATSON. Certainly.

Senator WALSH of Massachusetts. I understood you to say that the deficit this year is likely to be $375,000,000.

Senator WATSON. Senator Walsh, may the Secretary read his statement to the committee first?

Senator WALSH of Massachusetts. If he will answer that question, then my other questions relate to what has been already presented. There is no dispute about that, is there?

Secretary MELLON. I would like to ask Mr. Mills to read that statement.

Senator WALSH of Massachusetts. And you stated that there are maturing $1,100,000,000 of securities that must be refunded in March of this year. Have you any doubt about the capacity of the Government to refund those loans that are maturing?

Secretary MELLON. Oh, no.

Senator WALSH of Massachusetts. And there would be no difficulty in raising the $1,500,000,000 necessary to take care of the deficit and to take care of maturing bonds?

Secretary MELLON. I would not anticipate any difficulty.

Senator WALSH of Massachusetts. I am impressed very much with what you say about the effect of the issuing of a large loan of this character to meet this legislation, on the general bond market. Is it not a fact that it is now almost impossible to float securities other than Government securities?

Secretary MELLON. No. There is a bond market, and securities are being floated.

Senator WALSH of Massachusetts. A leading representative of a public utilities company in this country told me recently that they had many public improvements they would like to carry on, and good deal of expansion work they would like to undertake, but that bankers had discouraged them and had stated that it was most difficult at the present time to float securities.

Secretary MELLON. I think there is a large volume of securities being held until a more favorable market, that is, until lower rates prevail on the cost of the financing.

Senator WALSH of Massachusetts. But it is a fact that there has been a great depreciation in the issuing of private securities in recent months; is it not?

Secretary MELLON. There was a depreciation. The situation has been improving.

Undersecretary MILLS. I think it is fair to say that we have had a reviving bond market since the first of January.