% ^ m ' m 
 
 O r*
 
 WAR FINAiNCE CORPORATION 
 
 HEARINGS 
 
 BEFORE THE 
 
 COMMITTEE ON WAYS AND MEANS 
 
 JTOUSE OF REPRESENTATIVES 
 
 SIXTY-FIFTH CONGRESS 
 
 SECOND SESSION 
 
 ON 
 
 H. R. 9499 
 
 A BILL TO PROVIDE FOR THE NATIONAL SECURITY AND 
 DEFENSE, AND, FOR THE PURPOSE OF ASSISTING IN THE 
 PROSECUTION OF THE WAR, TO PROVIDE CREDITS FOR 
 INDUSTRIES AND ENTERPRISES IN THE UNITED STATES 
 NECESSARY OR CONTRIBUTORY TO THE PROSECUTION OF 
 THE WAR, AND FOR OTHER PURPOSES 
 
 FEBRUARY 18 AND 19, 1918 
 
 
 WASHINGTON 
 
 GOVERNMENT PRINTING OFFICE 
 1918
 
 COMMITTEE OX WAYS AM) MEANS. 
 HOUSE OF REPRESENTATIVES. 
 
 SIXTY-FIFTH CONCRKSS. SKCOMI SKSSION. 
 
 CLAUDE KITCHIX, North Carolina, Chairman. 
 
 HENRY T. RAINEY, Illinois. 
 
 LINCOLN DIXON. Indiana. 
 
 CORDELL HULL, Tennessee. 
 
 JOHN N. GARNER. Texas. 
 
 JAMES W. COLLIER. Mississippi. 
 
 CLEMENT C. DICKINSON. Missouri. 
 
 WILLIAM A. OLDFIELD. Arkansas. 
 
 CHARLES R. CRISP, Georgia. 
 
 GUY T. HELVERING, Kansas. 
 
 GEORGE F. O'SHAUNESSY, Rhode Island. 
 
 JOHN F. CAREW, New York. 
 
 GEORGE WHITE, Ohio. 
 
 JOHN E. WAI.KEK. Clerk 
 2 
 
 JOSEPH W. FORDNEY. Michigan. 
 J. HAMPTON MOORE, Pennsylvania. 
 WILLIAM R. GREEN, Iowa. 
 CHARLES H. SLOAN. Nebraska. 
 NICHOLAS LONGWORTH, Ohio. 
 GEORGE W. FAIRCHILD, New York. 
 JOHN A. STERLING. Illinois. 
 WHITMELL P. MARTIN. Louisiana. 
 WILLIS C. HAWLEY, Oregon. 
 ALLEN T. TREADWAY, Massachusetts.
 
 STACK 
 
 ANNEX 
 
 H6- 
 
 WAR FINANCE CORPORATION. 
 
 COMMITTEE ON WAYS AND MEANS, 
 
 HOUSE OF REPRESENTATIVES, 
 Washington, Z>. C., February 18, 1918. 
 
 Pursuant to notice the Committee on Ways and Means met at 
 10.30 o'clock a. m., Hon. Claude Kitchin (chairman) presiding. 
 
 Present : The chairman and Messrs. Rainey, Dixon, Hull, Garner, 
 Collier, Dickinson, Oldfield, Crisp, Helvering, O'Shaunessy, White, 
 Fordney, Moore, Green. Sloan. Longworth, Martin, Hawley, and 
 Treadway. 
 
 Present also : Hon. W. G. McAdoo, Secretary of the Treasury, and 
 Hon. Paul M. Warburg, vice governor of the Federal Reserve Board. 
 
 The CHAIRMAN. Gentlemen, while the Secretary of the Treasury 
 has made a statement before the Finance Committee of the Senate 
 with respect to this bill, yet, no doubt, each Member has not had an 
 opportunity to read that statement, and then a great many questions 
 may occur to the minds of the Members of this committee that did 
 not occur to the minds of the Members of the Senate committee and 
 upon which the Secretary was not asked any questions. I have there- 
 fore asked the Secretary to appear and make a statement before this 
 committee so that any Member may ask any question relative to the 
 bill and its provisions that seems proper to him. 
 
 Mr. Secretary, I am going to ask you just one broad question: 
 Will you please state the mam purposes of this proposed legislation 
 and the main reasons to your mind that make this legislation 
 necessary ? 
 
 STATEMENT OF HON. WILLIAM G. McADOO, SECRETARY OF THE 
 
 TREASURY. 
 
 Secretary McAnoo. The proposed act to incorporate a War Finance 
 Corporation should be regarded primarily as a measure to enable 
 the banks, both national banks and State banks and trust companies, 
 to continue to furnish essential credits for industries and enterprises 
 which are necessary or contributory to the prosecution of the war. 
 
 The Government's borrowings, particularly during the period im- 
 mediately preceding and following each Liberty loan, have tended to 
 preempt the credit facilities of the banks and often to prevent them 
 from giving needed and customary help to quasi-public and private 
 enterprises. Many instances have been brought to the attention of 
 the Secretary of the Treasury and of the Federal Reserve Board 
 where industrial plants, public utilities, power plants, railroads, and 
 
 3
 
 4 \\.\K FINANCE CORPORATION. 
 
 others have found it difficult, if not impossible, to obtain the neces- 
 sary advances to enable them to perform vital service in connection 
 with the war because essential credits, ordinarily available to them, 
 are being absorbed by the Government itself. 
 
 In Europe central banks are permitted to grant to banks and bank- 
 ers loans upon stocks and 'bonds upon certain well-defined terms. 
 
 I would like to direct your particular attention to that statement 
 because that indicates the fundamental purpose of this bill. In 
 Europe, I wish to repeat, central banks, which correspond to our 
 Federal reserve banks in a sense, are permitted to "-rant to banks 
 and bankers loans upon stocks and bonds upon certain well-defined 
 terms. But here the Federal reserve banks arc not permitted to do 
 that, the Federal Reserve Act having: specifically contemplated ad- 
 vances of that character only upon what we call liquid or com- 
 mercial paper, and therefore the Federal reserve banks aiv not per- 
 mitted to rediscount any paper for other banks which is secured by 
 fixed investments. 
 
 The Federal Reserve Act does not provide for these and the War- 
 Finance Corporation is designed as a war emergency to fill this gap. 
 The provisions of the Federal Reserve Act which permit Federal 
 Reserve banks to rediscount and purchase commercial paper and 
 paper secured by the Government's obligations have had the effect of 
 forcing the banks to discriminate against loans on ineligible paper, 
 even where such loans were vitally necessary for war purposes, in 
 favor of loans on commercial paper even where they represented 
 activities or enterprises not related to the war and which might well 
 be curtailed during the period of the war. It is believed that the 
 proposed bill has been wisely and conservatively conceived as a war 
 measure to give relief from this condition during the war. The 
 banks of the country would, no doubt, scrutinize with the utmost can- 
 both the loans themselves and the security therefor and would exercise 
 their individual judgment upon the borrower's credit before assuming 
 a liability for the amount of the loan, and also because they would be 
 under the necessity of advancing, out of their own resources. -25 per 
 cent of the amount loaned. The bill would authorize advances to a 
 bank of only 75 per cent of the amount loaned by the bank on the 
 notes or obligations of persons, firms, or corporations whose activities 
 are necessary or contributory to the war. 
 
 The bill contemplates that the War Finance Corporation shall lend 
 money to banks, both National and State, which are making loans to 
 enterprises conducted by persons, firms, or corporations producing 
 materials or supplies, or doing anything else which is necessary for 
 or contributory to the war. If a bank, for instance, should loan 
 money, we will say, to a munitions company and take the company's 
 six months' note with the company's bond as collateral security, that 
 note would not be eligible for rediscount in the Federal Reserve 
 banks; but the War Finance Corporation in such circumstances could 
 advance to the bank against the note of the munitions companv. so 
 secured with that bank's indorsement on it. 75 per cent of the face 
 of that note. 
 
 The provision of the bill permitting direct loans by the corpora- 
 tion in exceptional cases is intended to provide for those rare in- 
 stances where it may be made to appear to the corporation that a
 
 WAR FINANCE CORPORATION. 5 
 
 meritorious borrower is being unwisely discriminated against by the 
 banks. 
 
 You will understand that direct loans are permitted under the 
 terms of this bill, only in exceptional cases. 
 
 As a corollary to the provision for the extension of credits the bill 
 provides for approval by the corporation, through a system of 
 licenses, of issues of securities with a view to preventing the use of 
 capital in unnecessary expenditures during the period of the war. 
 
 It is important that appropriate provision be made by law, so that, 
 for the duration of the war. funds available for investment in securi- 
 ties shall be eft'ectivel} T and economically used to supply the financial 
 requirements of the Government and of those industries whose opera- 
 tion-! are necessary or contributory to the war. The ordinary flow of 
 < ii]r.t il, which in normal times is left free to seek its own investment, 
 should during the war be so directed and conserved that these require- 
 ments shall be taken care of before funds shall be invested either in 
 new enterprises or for the expansion of such old enterprises as are 
 not necessary or contributory to the prosecution of the \v;ar. In these 
 critical times funds available for investment must not be dissipated on 
 miscellaneous capital expenditures which, however useful or desirable 
 in normal times, will not now aid in the success of the war. It is not 
 so much a question of money as a question of labor and materials. 
 It is essential that the demand for labor and materials for industries 
 which are not contributory to the prosecution of the Avar should be 
 kept within bounds, so that the Avar needs shall be first provided for. 
 The test must be whether the proposed expenditure will strengthen 
 the industrial and military structure of the country for the purposes 
 of the Avar. 
 
 The Secretary of the Treasury has already asked the voluntary 
 submission to the Federal Reserve Board of any projected capital 
 issues and has asked the Federal Reserve Board to pass upon such 
 issues. The Federal Reserve Board is already performing this pa- 
 triotic service. The work which the board has undertaken along 
 these lines should be regarded as preliminary and as laying the basis 
 and furnishing in no small part the organization for the work AA T hich 
 the corporation will have to do. While patriotic business men and 
 bankers have in many instances voluntarily submitted the question 
 whether the particular security issue then contemplated Avill be in any 
 way helpful to the prosecution of the Avar, it is certainly not desirable 
 that matters of such great importance should be left upon a purely 
 voluntary basis. These questions should be dealt with systematically 
 under authority of Congress. The thoughtful and patriotic citizen 
 Avho voluntarily submits his plans to the Government should not be 
 placed at a disadvantage with his less thoughtful or less scrupulous 
 fellow citizen who goes ahead Avith his private affairs without refer- 
 ence to the war needs of his country. 
 
 The proposed license system for security issues is in line Avith the 
 act which established the selectiA'e draft in lieu of a A*oluntary system 
 of creating an army. The sacrifices which must be made if the war 
 is to be won should be made by all alike and not merely by those 
 whose patriotism impels them to volunteer and who Avould have to 
 carry the entire burden unless the slackers are compelled to do their 
 part.
 
 D WAR F.1XAXCE COKPOKATION. 
 
 The bill has been flrawn with the double purpose of restricting 
 unnecessary capital expenditures and of providing facilities for aid- 
 ing those industries whose operations are necessary or contributory 
 to the prosecution of the war. Broadly speaking all these are " war 
 industries." The bill is purely a war measure: designed to conserve 
 the supply of labor and materials for the purposes of the war, and 
 to help supply the war's financial requirements, and to give them a 
 first claim on capital seeking investment in like manner as the war's 
 material requirements have been given a first claim on production. 
 By the term " war industries " is meant not only those industries 
 turning out the actual munitions of war but also all those supplying 
 any of the other elements of production or distribution in an indus- 
 trial structure designed to meet the diversified requirements of the 
 war. The bill is not intended to interfere with the continued exist- 
 ence and operation of existing industries, even though not remotely 
 contributory to the prosecution of the war. Such industries should 
 not. however, be permitted to assert a first claim on fresh capital or 
 be considered until the requirements of the Government and of the 
 " war industries " have been fully met. 
 
 The proposed bill creates the War Finance Corporation, to regu- 
 late the sale of new issues of securities, and to make loans of its funds 
 or its credit in aid of " war industries." It prohibits any person, 
 firm, corporation, or association from selling or offering for sale any 
 securities issued after the date of the approval of the act unless a 
 license for such sale or offering (if required by the corporation) shall 
 have been obtained from the corporation. Through its regulation of 
 security issues the corporation will be able to keep the field some- 
 what clear for the borrowing operations of the Government, and at 
 the same time will stand ready and able to aid " war industries " 
 whose financial requirements may be rendered difficult if not impos- 
 sible to meet in competition with Government loans. This regula- 
 tion of security issues will also tend -to prevent the further diversion 
 of labor and materials into nonessential industries. 
 
 The entry of the United States into the European war imme- 
 diately necessitated a vast increase in the country's production of 
 material, which in turn necessitated an increase in the machinery of 
 production and corresponding enlargement of land and water trans- 
 portation facilities. Xo such enlarged demand could be met without 
 increased demands upon the banks for commercial credits to pro- 
 duce the goods required and upon capital both for enlarging the ma- 
 chinery employed by our industries and for developing railroad fa- 
 cilities, for building ships, and for other purposes. Fortunately 
 the establishment of the Federal Reserve System had already pro- 
 vided the means through which the financing of the greater com- 
 mercial turnover could be largely taken care of, and this has been 
 supplemented by the Government's policy of making advances 
 through the War Credits Board of the War Department to manu- 
 facturers upon work in process for the Government. I do not re- 
 gard advances of this character with favor as it tends to force upon 
 the overburdened Treasury the load of financing private enterprises 
 through the indirect medium of the War Department, when such 
 transactions ought to be made through the banks. If the banks 
 are unable to meet such demands, then the War Finance Corpora-
 
 WAR FINANCE CORPORATION. 7 
 
 tion can do so and relieve the strain now unwisely imposed directly 
 upon the Treasury. 
 
 Permit me to say in connection with that statement about the 
 advances now being made through the War Department that I am 
 not criticizing the act which authorizes that to be done. The War 
 Department, as you know, and I think also the Xavy Department, 
 has the right to make advances on Government contracts of not ex- 
 ceeding 30 per cent, at the discretion of the heads of those depart- 
 ments. 
 
 We find that contracts are made, and that the departments have 
 the power to make these advances to the contractor, without con- 
 sulting the Treasury at all. They do not have to consult the 
 Treasury under the law. They do not decline to consult the 
 Treasury, but everybody is very busy, and they proceed under au- 
 thority of law and make these contracts from their own particular 
 Standpoints upon the assumption that the Treasury is ready to 
 meet any strain that may be put upon it. AVe are now trying 
 to work out a plan for consultation Avith the other departments, 
 and there is a thorough disposition on their part to consult with 
 the Treasury and to cooperate with respect to such advances, so 
 that they will not be made Avithout our knoAvledge and so that 
 unusual demands will not come upon the Treasury without notice. 
 But I think the practice is bad. because these contractors are only 
 too Avilling to get advances from the Go\ r ernment at a loAver rate of 
 interest than they are really entitled to from the commercial stand- 
 point. In this indirect way these contractors diA*ert to the Treasury 
 financial transactions that ought to be conducted through the banks, 
 and would ordinarily be conducted through the banks. 
 
 Xo\v. if the banks are unable to finance those demands, this Finance 
 Corporation could step into the breach and finance the demands upon 
 a character of security that a commercial bank might not like to 
 take. Even though the banks may not noAv be in position to do this 
 financing, after the AA'ar Finance Corporation has been established 
 they could A'ery properly do it because the AA 7 ar Finance Corporation 
 could ahvays come to their relief and take paper \vhich would be 
 unavailable for rediscount in Federal reserA'e banks. 
 
 The money required for increased facilities for ocean transporta- 
 tion has been provided by act of Congress. Provision for at least a 
 pai't of the money required for enlarging railroad transportation 
 facilities is contemplated in legislation noAv pending in Congress. 
 
 The necessary increase, hoAvever, in machinery to produce goods, 
 which requires the investment of capital in industrial enterprises, 
 not only has not been provided, but a considerable restriction has 
 been imposed upon the usual supply of capital for investment, partly 
 by reason t>f the investment market having been preempted by the 
 Government through the issue of its own bonds and partly because 
 of the natural tendency of investors Avho. notAvithstanding that they 
 have money to inA^est. hesitate to do so on account of the uncertainties, 
 of war. 
 
 The situation with which the country is confronted, therefore,. 
 seems to require the imposition of reasonable restrictions upon the 
 inA'fstment of capital in industries and production not essential for 
 the conduct of the war. It is equally important that there shall be
 
 WAR FIXAXCE CORPORATION. 
 
 some means of supplying necessary capital to the industries which 
 are essential to the production of war materials and of^those tilings 
 which indirectly contribute to the efficiency of the Nation. The 
 restriction of unnecessary capital expenditures will relieve the mar- 
 ket of demands which now interfere not onlv with the direct finan- 
 cial requirements of the Government, but which make it difficult for 
 those who are furnishing the Government and the people with essen- 
 tial goods to obtain the capital necessary to increase their production. 
 
 The license system proposed is peculiarly applicable to a country 
 of the great size of the United States, where banking and credit 
 transactions are conducted by a vast number of independent banks 
 and private banking firms. 
 
 The combined operation of the two functions of the corporations 
 that is, the extension of credit and licensing will make the exercise 
 of supervision and regulation by the corporation much more effective 
 in putting the productive activities of the country on a war basis 
 than would be the case were the Government simply to make ad- 
 vances without at the same time exercising supervision and control 
 of security issues. 
 
 In so far as the corporation may be called upon to make advances 
 to banks, its first concern would naturally be to aid those for which 
 other instrumentalities of relief have not already been provided: 
 for example, savings banks, and particularly mutual savings banks, 
 which are without capital stock and which are not operated for the 
 profit of stockholders. As a class these institutions are not members 
 of the Federal Reserve System nor are most of them eligible for 
 membership. Their investments consist for the most part of the 
 securities of the United States and of States and municipalities and 
 of the bonds of industrial, transportation, and utility companies, and 
 also mortgages. 
 
 Nothing will tend so greatly to prevent the development of a in- 
 possible uneasiness among savings bank depositors as the assurance 
 provided by this act that any solvent savings bank in case of sudden 
 withdrawals can obtain advances upon the security of its invest- 
 ments and promptly liquidate the claims of its depositors. There 
 is considerable apprehension among savings banks as to means of 
 relief if an emergency arises, but I believe that the assurances of 
 support which this \Var Finance Corporation will provide will allay 
 all apprehension and probably head off any demand for withdrawals. 
 of deposits. 
 
 The next concern of the corporation would be the requirements of 
 commercial banks, which are unable to get required accommodation 
 upon the security of their investments through the Federal reserve 
 banks. Many banks which are now called upon to extend large 
 lines of credit to customers which are expanding their businesses to 
 meet the present needs of the Government are obliged to take se- 
 curities from these customers which are not eligible for rediscount at 
 Federal reserve banks. At the same time these banks are being called 
 upon to extend larger lines of credit to their customers than ever be- 
 fore. Their customers are calling upon them not only for commercial 
 loans to carry their large inventories, but for what are in effect tem- 
 porary capital loan.- in order to construct new facilities and add 
 machinery to existing plants for the purpose of filling Government 
 contracts. The bur-leu of these banks is also heavily increased bv the
 
 WAR FINANCE CORPORATION. 
 
 financial requirements of the Government, which at the same time 
 is calling upon them to lend large sums through sales of Treasury 
 certificates of indebtedness. 
 
 I may add just here, gentlemen, that in order to carry the burden 
 ' ,ver the interval between Liberty loans, I have just called upon the 
 banks of the United States to contribute, pro rata of their resources, 
 to the purchase of temporary certificates of indebtedness issued by the 
 Treasury, and if they should all respond to that it will absorb tem- 
 porarily about 10 per cent of the resources of the banks of the 
 United States. We have got to secure from them approximately 
 ^.000.000.000 on short-term Treasury certificates in order to carry 
 the next Liberty loan over to a period when I think it would be wise 
 to offer it to the country. One of the reasons why it is necessary is 
 that until the railroad legislation is out of the way so that the status 
 of railroad investments is fixed in the country and the stabilizing 
 effects of that are felt, and until this War Finance Corporation legis- 
 lation can be acted upon so that the banks themselves will know what 
 resources they will have if they undertake to finance capital expendi- 
 tures of this character, the soil will not be ready for undertaking 
 another Liberty loan. 
 
 In these circumstances the commercial banks are quite naturally 
 discriminating in their loans between those eligible for rediscount 
 by Federal reserve banks and those which are not. The proposed act, 
 however, would remove the ground for any such discrimination, for 
 it provides a means by which such banks mav procure accommoda- 
 tion upon certain securities arising out of war conditions which are 
 not eligible at Federal reserve banks. The proposed act would thus 
 free credit pressingly needed at the present time, both directly and 
 indirectly, for the Government's use. 
 
 I shall give one or two illustrations of pressing needs which it is 
 hoped that the War Finance Corporation mav be able to meet. It 
 is not necessary to multiply examples, as everyone at all familiar 
 with existing industrial and financial conditions will be able to sup- 
 plv other illustrations from his own knowledge. 
 
 There has been called to mv attention the case of an important and 
 successful power company whose business is showing substantial in- 
 creases, and whose power is consumed largely in war industries. It 
 has recently made a public offering of its securities. The nroceeds 
 of the securities were to be used in part to pav maturing obligations 
 and in part for needed extensions to plant. The capital-issues com- 
 mittee of the Federal Reserve Board had determined this issue to 
 be compatible with the national interest. After a public offering in 
 the usual Avay, less than 20 per cent of the entire amount was sold, 
 and most of these sales were made to persons whose prior investments 
 in the company's securities made it desirable that the issue should lie 
 a success. This is only one illustration of the difficulties with which 
 even the most successful industries having maturing obligations or 
 pressing capital requirements are confronted. 
 
 Another instance will show the importance of dealing with this 
 matter promptly. A power company operating in central Pennsyl- 
 vania is under insistent demands for power for the operation of coal 
 mines, approximately 80 per cent of its power being utilized for that 
 purpose. Under ordinary conditions, it was stated by one of its
 
 10 \VA!{ F1XANCE CORPORATION. 
 
 officers, the company would >cll at the present time about si, 500.000 
 of securities for the purpose of completing necessary extensions and 
 construction work. Being unable to do so, the company is borrowing 
 about $500,000 on short loans from small local banks throughout its 
 territory. A demand on the part of a few of these banks for repayment 
 of loan- << uld not possibly be met, and not only would extension work 
 cease but the company might face a receivership. Relief in this sort 
 of case, in view of the urgent necessity for an enlarged production of 
 coal, is of vital importance. 
 
 A similar situation in Michigan has been called to my attention : 
 A public-utility corporation has $5,000,000 of notes maturing, all 
 having been issued for construction purposes. This company is now 
 borrowing over $5.000,000 in short loans from different banks. 
 There is an insistent demand from the industries of ihat section for 
 more power for manufacturing purposes, which the company is 
 unable to meet because of lack of adequate capital and because of 
 the uncertainty of its position with su"h a large floating debt. 
 
 The necessary restriction of passenger transportation by the steam 
 railroads during the present period of congestion will throw greater 
 burdens upon urban and interurban railroad lines, which will there- 
 fore require for their operation a greater amount of electric power 
 and doubtless some extension of their facilities. In some cases, no 
 doubt, enlargement of their facilities is directly required for the 
 Government's service at the various Army encampments. Borrow- 
 ings for such purposes are not eligible for rediscount with Federal 
 reserve banks, and necessary provision must be made for the develop- 
 ment of such lines. 
 
 .V very large part of the manufactures of the country are conducted 
 by the use of electric energy, for which the demand in some parts of 
 the country necessitates immediate enlargement of production by 
 both steam and hydroelectric power. Indeed, I am informed that 
 in some important industrial districts there exists a distinct shortage 
 of electric power, which is badly needed for war industries. If this 
 deficiency is to be supplied, additional facilities must be procured, 
 and money is urgently needed for the necessary capital expenditures. 
 Existing financial conditions are such that power companies find 
 themselves unable to procure these funds on reasonable terms. That 
 these funds should be obtained to produce the power needed for our 
 war industries is a matter of prime importance, and yet. at the pres- 
 ent time it is difficult, if not impossible, to obtain these funds through 
 the ordinary channels. 
 
 Since the publication of the terms of the proposed act some criti- 
 cism has appeared indicating a belief that the operation of the cor- 
 poration may produce expansion, or. as some term it. inflation, of a 
 dangerous nature. 
 
 In my opinion the existence of this corporation and the intelligent 
 exercise of its' functions will do more to prevent unsafe expansion 
 than any other course which could now be pursued, for it must be 
 remembered that the investment markets are practically closed to the 
 country's industries, including public-utility corporations and the 
 railroads. These essential industries and transportation companies 
 in these circumstances, in the absence of some such plan as is pre- 
 sented in this bill, are obliged to look to the banks for the means not 
 only of continuing their normal business but of enlarging it for war
 
 WAR FINANCE CORPORATION. 11 
 
 purposes. The needs of these corporations, which sound finance 
 would require to be provided for in the form of capital loans, must 
 now increasingly be taken care of in the form of bank loans. The 
 burden placed upon the banks to meet the demands of this class of 
 borrowers can only be met if these banks use the facilities of the 
 Federal reserve banks by discounting such eligible paper as they may 
 have in their portfolios. The continuance of this process of looking 
 more and more to the banks for short loans of funds which should be 
 provided as capital by investors is the quickest way to bring about an 
 unsound expansion of bank credits. If this burden, through the 
 instrumentality of the War Finance Corporation, can be removed 
 from the banks, and if investors can be induced to furnish necessary 
 capital, that kind of expansion will be checked. 
 
 The intervention of a corporation of this character, with its large 
 capital, will provide the class of security which will appeal to the 
 minds of even the most timid investors and will naturally assist in 
 converting what might become a dangerous bank expansion into a 
 legitimate investment of free capital. Even though the corporation 
 were not called upon to make any considerable advances itself, so 
 that the issue of its own securities to a large extent might not be 
 required, it has been the experience in Great Britain, and I believe it 
 will be our experience also, that the restraint imposed upon unneces- 
 sary capital borrowings, through Government intervention such as is 
 proposed, not only allays the fears of timid investors but stimulates 
 a demand generally for issues of licensed securities. Such securities 
 sell promptly, and their distribution is general and effective. This 
 again provides a check to unwise expansion of bank credits. 
 
 The functions of the corporation are intimately connected with 
 Government finance, and are, therefore, within the peculiar province 
 of the Treasury Department. The War Finance Corporation is an 
 administrative device for exercising governmental regulation of se- 
 curity issues during the war and for utilizing for war purposes the 
 revolving credit created from the proceeds of its capital stock and 
 other securities. As the operations of the corporation must be har- 
 monized with the financial operations and policy of the Government 
 itself, the proposed bill provides that the Secretary of the Treasury 
 shall be a director and chairman of the board of directors and im- 
 poses upon him certain other duties in connection with the corpora- 
 tion. A somewhat fuller statement of the functions and operations 
 of the corporation is given below under the appropriate section num- 
 bers of the act. 
 
 SECTION i. 
 
 For the purposes outlined above, the Secretary of the Treasury 
 and four additional persons, to be appointed by the Secretary of the 
 Treasury, with the approval of the President, are created a corpora- 
 tion, under the name of the " War Finance Corporation." 
 
 The Secretary of the Treasury and these same four persons will 
 constitute the original board of directors. The life of the corpora- 
 tion, by the terms of the bill, is limited to 10 years, but its powers 
 are to cease, except such as may be necessary to its successful liquida- 
 tion, six months after the termination of the war.
 
 12 WAR FINANCE CORPORATION. 
 
 SECTION 2. 
 
 The capital stock of the corporation is fixed at $500,000,000. all of 
 which is to be subscribed by the United States, and for that purpose 
 an appropriation of a like amount is made. Payments upon this sub- 
 scription will be called only when three-fifths of the board of 
 directors shall so determine. The capital stock was fixed at thi> 
 amount to provide the corporation with substantial resources with 
 which to aid "war industries'" and to furnish an additional equity 
 for any other securities issued by the corporation. 
 
 SECTION 3. 
 
 The management of the corporation is vested in a board of direc- 
 tors, constituted as stated above. The directors are to serve for four 
 years: and provision is made in the following section for rotation in 
 office, so that two directors shall retire every two years. The power 
 of removal is vested in the Secretary of the Treasury, with the ap- 
 proval of the President. 
 
 In connection with that provision I wish to say this: I under- 
 stand there has been some criticism of the powers conferred upon the 
 Secretary of the Treasury in this bill. The policies of this corpora- 
 tion and its operation must be integrated and articulated absolutely 
 with the Treasury if it is to perform the functions which it ought to 
 perform, just as much so as the functions of the Treasury must be 
 articulated through the Secretary and the Assistant Secretaries. As 
 a matter of fact, all we are now proposing to have done could be done 
 through the ordinary Treasury machinery if we could use the Treas- 
 ury of the United States to issue obligations or bonds of the char- 
 acter proposed by this bill: but, of course, the Government of the 
 United States can not conveniently engage directly through the 
 Treasury in this form of security issues. The bill creates a corpora- 
 tion of a character which may take collateral securities for loans and 
 obligations indorsed by the banks, which the Treasury should not 
 do. Therefore the Secretary of the Treasury should be put as nearly 
 as it is possible to put him in the same relative position with regard 
 to the management of this corporation that he holds with respect 
 to the management of the Treasury through the Assistant Secre- 
 taries: naturally, however, he -would not have such power over these 
 directors as he would have over the Assistant Secretaries of the 
 Treasury, but we ought to approach that situation as nearly as pos- 
 sible in order to insure an absolutely harmonious cooperation of this 
 corporation, and coordination of its operations and policies, with 
 those of the Treasury Department. That is the reason the bill is 
 framed in this way. 
 
 SECTION 4. 
 
 The corporation is authorized to establish branch offices, though 
 the principal office is required to be located in the District of Co- 
 lumbia. 
 
 That is done so that the corporation may be reached at different 
 points throughout the country without requiring everything to be 
 sent to Washington. My idea is that the Federal reserve banks.
 
 WAR FINANCE CORPORATION. 13 
 
 which are the fiscal agencies of the Government, are a very useful 
 nucleus for that organization, the Federad reserve banks with their 
 branches. 
 
 And I may say further in this connection that the purpose of 
 this bill is to employ the very excellent organization already estab- 
 lished by the Federal Reserve Board at my request through their capi- 
 tal issues committee, of which Mr. Wai-burg, the vice governor of the 
 Federal Reserve Board, is chairman, and which has been establishing 
 agencies of this character throughout the country for the purpose of 
 passing upon these capital-issue applications. The machinery thus 
 provided is being perfected all the time, and will be in shape to come 
 directly under the operations of this corporation and to perform that 
 function for it. It has been stated to the Senate committee that if 
 it should be desired to put a specific provision in the bill that this 
 licensing feature should be administered by a committee composed 
 of three members of the Federal Reserve Board, as the present com- 
 mittee is composed, and of three additional competent men to be 
 chosen for that purpose. I have no objection to that. As a matter of 
 fact. I think it would be a very excellent way of dealing with the 
 licensing feature of the bill. 
 
 SECTION .-,. 
 
 Following the analogy of the Federal Reserve Board, no officer or 
 director of the corporation is permitted to continue to be a member 
 of the board of directors of any other corporation or a member of 
 any banking firm. 
 
 I am frank to say with respect to this provision that I am not sure 
 fhat we ought to make such a severe restriction. I put it in because 
 some people are sensitive about these matters; but as this is an 
 emergency measure, perhaps we ought not to require men of ability 
 to give up every interest they have to come and serve temporarily in 
 an organization of this kind. 
 
 That might be liberalized if. in the judgment of the committee, it 
 is wise to do so. 
 
 The bill specifically provides, however, that this requirement shall 
 not prevent the appointment of any member of the Federal Reserve 
 Board or of any other governmental administrative body or of a 
 director of a Federal reserve bank. The directors are required to 
 devote their entire tim" to the business of the corporation, except 
 such time as they may give to other governmental business. They are 
 to receive salaries to be fixed by the Secretary of the Treasury, with 
 the approval of the President, not in excess of the salary of the head 
 of an executive department of the Government. 
 
 The bill is so drawn that where a man is receiving as a mem- 
 ber of the Federal Reserve Board is now receiving $12,000 a 
 vear. if h j were appointed a inember of this board of directors he 
 could not receive additional compensation: but if some other Gov- 
 ernment official were put on this board who was receiving, say, $6.000, 
 then the corporation could grant an additional $6.000 a year in order 
 to bring his salary up to $12.000 a year: that is, if $12,000 should be 
 fixed as the salary for members of the board of directors of this 
 corporation.
 
 14 WAR FINANCE CORPORATION. 
 
 SECTION r,. 
 
 This section defines the corporate powers of the corporation, in- 
 cluding the specific provisions for extending aid to " war industries," 
 while the regulation which the corporation is to exercise over secur- 
 ity issues is provided for in section 7. 
 
 The corporation is granted (subdivision (a)) the ordinary powers 
 and privileges enjoyed by corporations, including, among others, 
 the power to sue and be sued, to contract, to adopt a corporate seal. 
 to appoint officers and agents, and. with the approval of the Secre- 
 tary of the Treasury, to adopt by-laws for the conduct of its business 
 and to define the powers and duties of its officers. 
 
 The corporation is empowered (subdivision (b)) to make advances, 
 for periods not exceeding five years, upon such terms as it may 
 prescribe. "(1) to any bank, banker, or trust company" you see. 
 it is not limited to banks in the Federal Reserve System " and 
 which has outstanding anv loan or loans to any person, firm, cor- 
 poration, or association whose operations shall be necessary or con- 
 tributory to the prosecution of the war and evidenced bv a note or 
 notes, or ('2) to any bank, banker, or trust company which ha- ren- 
 dered financial assistance, directly or indirectly, to anv such person, 
 firm, corporation, or association by the purchase of its bonds or other 
 obligations." The bill thus provides two different methods for 
 extending aid indirectly to "war industries'' through any bank. 
 banker, or trust company {referred to generally as a bank). These 
 two different methods have no sharply defined line of demarcation, 
 but they are based upon two generally distinct devices used in cor- 
 porate finance. The first method is where financial requirements are 
 provided for through bank loans, and the second method is where 
 such requirements are provided for through the sale of securities. 
 
 The first method (see (1) in preceding paragraph) applies when 
 the bank has made a direct loan to a "war industry" evidenced by 
 a note. This is the ordinary bank transaction, and the bill provides 
 that the corporation may make an " advance " to the bank to the 
 extent of 75 per cent of the bank's loan to the particular " war indus- 
 try." 
 
 The second method (see (2) above) of extending aid to a " war indus- 
 try " through a bank, applies where a bank has purchased the bonds 
 or other obligations of a " war industry " either directly from a " war 
 industry" or from others. The "war industry" has been benefited 
 by the sale of its securities, whether this sale has l>een made directly 
 by the " war industry" to the bank or indirectly through others, and 
 the corporation is therefore authorized in either case to make an 
 advance to the bank. These " advances " may be made to. the bank up 
 to 7o per cent of the " market value '' of the bonds or other obligations 
 of the " Avar industry " acquired by the bank. It provides a method 
 by which banks may procure funds from the corporation upon this 
 class of securities. 
 
 Let me take the case of a power company, for instance, which is 
 furnishing a large amount of power to coal mines. Suppose a bank 
 had bought $100,000 of the bonds of that power company. The 
 power company would be, of course, a war industry, because it is 
 furnishing power for the production of coal, which is used, in turn.
 
 WAR FINANCE CORPORATION. 15 
 
 to run the factories that are turning out war munitions or other 
 supplies needed for the war. In such case the War Finance Cor- 
 poration may loan to that bank 75 per cent of the market value of 
 the bonds which the bank has bought. 
 
 Under either of these provisions (1) or (2) the aid extended by 
 the corporation to the " war industry '' is indirect and the advances 
 made to the bank are always secured by the obligation of the bank. 
 This plan enables the corporation to aid " war industries v through 
 the ordinary banking channels. In either case the bank must not 
 only give its own note to the corporation for the amount of the ad- 
 vance received from the corporation, but must also secure that note 
 by the notes or bonds or other obligations of the particular " war 
 industry " the purchase or acquisition of which forms the basis for 
 the advance by the corporation. 
 
 The terms of the advances, including the interest rate, are to be 
 determined by the corporation, with the limitation that no advance 
 is to be for longer than five years. 
 
 As alternative arrangements, instead of 75 per cent advances to 
 the banks, advances may be made by the corporation up to 100 per 
 cent of the particular loans made by the banks to a u war industry," 
 or up to 100 per cent of the market value of the bonds or other 
 obligations of a " war industry.'' provided that in either case the 
 bank, to which the particular advance is made, shall itself supply 
 additional collateral to the extent of 25 per cent of the advance. 
 
 These provisions as to security require- in effect that the corpora- 
 tion shall have an equity of at least 25 per cent in the security for 
 the advances in addition to the obligation of the bank, to which the 
 particular advance is made. 
 
 You can see the whole theory of this bill will oblige the corpora- 
 tion to take only well-secured loans, just as Federal Reserve Banks 
 are required to take only well-secured loans. 
 
 The corporation may (subdivision (c)) make advances directly to 
 savings banks and other banking institutions which receive "sav- 
 ings deposits " on the note of the borrowing institution, secured by 
 collateral to the extent of 125 per cent of the amount advanced. The 
 duration of these advances is limited to 90 days. 
 
 I stated before the Senate committee, in response to questions, that 
 there would be no objection to making these loans to savings banks 
 for a period of one year if that should seem to be desirable, and 
 that the bill might be so amended if. in the judgment of the com- 
 mittee, it was thought wise to do so. 
 
 As I have said, the duration of these advances is limited to 90 
 days, and the interest rate is required to be not less than 1 per cent 
 in excess of the rate of discount on 90-day commercial paper pre- 
 vailing at the Federal Reserve Bank in the district in which the 
 borrowing institution is located. This provision will tend to restrict 
 the borrowings of these institutions from the War Finance Corpora- 
 tion to cases in which the necessary funds shall not be obtainable 
 through ordinary banking channels. 
 
 I may say that the purpose of this bill is not to preclude the bor- 
 rowing between banks and trust companies, by one bank from an- 
 other, in the usual way. as they are doing now. It is only an addi- 
 tional facility. It is not intended to restrict, but to enlarge existing 
 facilities.
 
 16 WAR FINANCE CORPORATION. 
 
 It may be suggested that a loan to a savings bank is not an aid to 
 am " war industry." It is, however, important for the protection of 
 the whole financial and industrial fabric that these institutions, 
 which hold the savings of the working people, should be able 
 pn.mptly to obtain cash with which to meet any demands that may 
 be made upon them, without sacrificing sound investment securities 
 under possibly abnormal market conditions. If for any reason the 
 necessary funds should not be obtainable through the ordinary bank- 
 ing channels, then the War Finance Corporation would be in posi- 
 tion to make the necessary advances. It would unquestionably have 
 a most far-reaching and detrimental effect upon the "war indus- 
 tries," as- well as others, if solvent institutions of this character 
 should not be able to obtain funds to meet their obligations without 
 sacrificing needlessly the securities they hold. 
 
 Advances to savings banks are to be made not only for the pro- 
 tection of these institutions themselves and the savings of the work- 
 ing classes, many of whom are themselves engaged in war indus- 
 tries, but for the protection of the community from the shock and 
 financial disturbance which would unquestionably result if these 
 institutions because of abnormal conditions should be unable to meet 
 promptly the demands of their depositors. Any such financial dis- 
 turbance might seriously embarrass the borrowing operations of 
 the Government. 
 
 In ordinary times, current deposits in savings banks are in exces.- 
 of withdrawals, but as every effort is now being made to induce the 
 investment of savings in Government securities, deposits in savings 
 banks will probably be less than they otherwise would be. Savings 
 bank depositors have, I understand, been discouraged from with- 
 drawing deposits for investment in Government bonds, but there will 
 always be withdrawals for one reason or another and in some com- 
 munities at least, there has been a net loss of deposits. So far no 
 embarrassment has resulted, but. if continued, an enforced sale of 
 securities to meet the demands of depositors might result. Further- 
 more, as most savings banks do not pay more than 4 per cent, the 
 falling off in deposits would probably be accentuated if the Govern- 
 ment should at any time offer bonds at a higher rate than 4 per cent, 
 for that would probably have the effect of inducing withdrawals for 
 investment in Government securities, no matter how much the prac- 
 tice might be discouraged. 
 
 The proposed act safeguards the savings banks by providing a 
 method by which they may obtain loans on these securities, instead of 
 having them thrust upon the market. The War Finance Corpora- 
 tion will not, however, make such advances unless they are amply 
 secured, but will stand ready to lend prompt assistance when needed, 
 upon the security required. 
 
 The corporation is authorized (subdivision (d)) to make advances 
 in exceptional cases to war industries "upon such terms and upon 
 the security of such bonds, notes, or other obligations, and subject to 
 such rules and regulations as may be prescribed by the board of 
 directors of the corporation, with the approval of the Secretary of 
 the Treasury." This provision is intended to give the corporation 
 power to render direct assistance to "war industries" without the 
 intervention or obligation of any bank. The assistance which mav
 
 WAR FINANCE CORPORATION. 17 
 
 be rendered through the banks which I have already described is of 
 course indirect. 
 
 This subdivision (d) is an emergency provision, so that direct 
 assistance may be rendered in exceptional cases, where and when it is 
 urgently needed, without compliance with the provisions of subdi- 
 visions (b) and (c). The corporation may call for additional col- 
 lateral for any advances which it may make under any of these sub- 
 divisions (a), (b). or (c). 
 
 The corporation may (subdivision (6)) buy, subscribe for, and 
 deal in bonds and obligations of the United States to such extent as 
 the Secretary of the Treasury may from time to time determine. 
 Much has- been said about the market price of Liberty bonds and the 
 subject has received careful study, following is a quotation from 
 the last annual report of the Secretary of the Treasury : 
 
 The niau who subscribes for a Government bond and is advertised as a 
 patriot for doing so is not a patriot if he immediately sells that bond on the 
 market when he does not imperatively need the money. It is not mere sub- 
 scription to a bond that helps the Government ; it is the actual purchase of the 
 bond and the keeping of the bond that really helps. The people must save and 
 invest in Government bonds. It is by actually lending money to the Government 
 and not by merely promising it and shifting the load to some one else that 
 the citizen really helps in this great time. If loans are made to the Govern- 
 ment and bonds are taken therefor, the lender is supposed to deny himself 
 something which releases in turn a demand on the vital supplies or stores of 
 the country and puts the Government in position to buy the supplies thus 
 released and to furnish them to our armies and navies. But if the lender im- 
 mediately sells his bonds, relieves himself of the obligation to save vital sup- 
 plies, sind goes on wasting them he does his country a grievous injury and hurts 
 himself as well. 
 
 I want to make it clear that there is no desire on the part of the Government 
 to prevent or to interfere with freedom of legitimate trading in Government 
 bonds that is, trading in good faith. 
 
 The only sound and sure way to protect the market price of Gov- 
 ernment bonds is to teach the people to save, so that they may become 
 true investors in bonds and not merely subscribers for bonds. Yet 
 there will be on every issue subscribers who find themselves unable 
 to pay for their bonds, or through necessity, misfortune, or otherwise 
 are obliged to sell them. And there will always be those, few in num- 
 ber I am glad to believe, whose patriotism is of the surface sort and 
 who take the credit of appearing as subscribers but are unwilling to 
 make the necessary sacrifices to enable them to become permanent in- 
 vestors in the bonds. Last, and least, are those sympathizers with 
 the enemy who deliberately sell ther bonds with a view to the injury 
 that they may do to the credit of the United States. I have studied 
 with interest various measures which have been introduced in Con- 
 gress and plans which have been presented to me for preventing 
 Liberty bonds from going below par. Most of these, I am sorry to 
 say. have been, though very well meant, ill considered and calculated 
 to destroy the success of the Government's financial plans. Any pro- 
 hibition upon the sale of Liberty bonds would restrict subscriptions 
 to such an extent as to jeopardize the success of future loans, and 
 would be an act of bad faith toward those who have subscribed to the 
 past loans and may be unable to hold their bonds. Any attempt to 
 peg the price of Liberty bonds at par would be unwise and subject 
 
 4312218 2
 
 18 WAR FINANCE CORPORATION. 
 
 to legitimate criticism as turning the Government's long-term 20 or 
 25 or 30 year bonds into demand obligations. 
 
 The only way in which that could be done Avould be for the Govern 
 ment to stand ready to redeem them at part at any time. The pur- 
 pose of borrowing on time by the Government is exactly the same 
 purpose which animates the manufacturer or merchant to borrow 
 for a definite period in reference to his needs, with a view to paying 
 back the obligation at maturity, and the man who lends the money 
 has no right to expect a borrower to pay it back in advance upon his 
 demand at any time. 
 
 There is always a different reasoning, however, about the Govern- 
 ment. Many people seem to think that if they lend their money to 
 the Government for 10 years and the Government agrees to take it 
 for 10 years .and pay the principal in full upon maturity and interest 
 in the meantime, if they get tired and want to sell their bonds, the 
 Government ought to stand ready to take them back immediately; 
 in other words, to stand ready to convert a 10-year obligation into a 
 demand obligation. They would never think of expecting that of a 
 manufacturer or an individual or a banker who borrowed the money 
 for a definite length of time. 
 
 And yet many people have the idea that the Government, because it 
 borrows their money for 10 or 20 years, or whatever period it may be, 
 and agrees to pay it back at maturity at par with interest meanwhile 
 at the stipulated rate, must stand ready to respond to their demand 
 find redeem the bonds before maturity at par, merely because they 
 want it. 
 
 The great mass of the purchasers of Liberty bonds not only are 
 buying them with a view to holding them primarily because they are 
 a good investment, but also because they patriotically want to help 
 the Government ; and I must say I have been immensely gratified 
 with the splendid spirit shown by the people throughout the United 
 States in buying Government bonds. I think I may say that out of 
 the last two Liberty loans, when we sold over five billion eight hun- 
 dred million dollars of bonds, there probably has not been resold up 
 to date in the market more than one hundred million of these bonds. 
 
 If the Government attempted to make only demand loans, it would 
 not be possible to pay them, and we should put ourselves in position 
 to face some extraordinary calamity. If the Government attempted 
 to pay those loans on demand it might be bankrupted. Then, again. 
 I think that if you undertook to peg the market at par you would 
 encourage people to turn their bonds back to the Government when 
 they get a little tired of holding them. Those people are not suffi- 
 ciently informed about the importance of holding on as long as they 
 can, and if they find that they can turn them back at par they would 
 do so quicker, whereas if they may be penalized for selling before 
 maturity they may not be so anxious to sell. 
 
 Practically to attempt to maintain Government bonds at par in- 
 volves the idea of issuing interest-bearing currency. It is impossible 
 to peg the price of $6.000,000,000 or $10,000.000.000 of any security. 
 The price of Government bonds will fluctuate as the price of other 
 securities fluctuates. The man who holds on to his bonds and now 
 watches calmly a downward variation in the price of his bonds, will 
 see the time come when the variation will be the other way and his 
 bonds will sell at a premium. It is highly desirable that violent
 
 WAR FINANCE CORPORATION. 19 
 
 and unnecessary fluctuations in price should be avoided and that all 
 possible measures should be taken to stabilize the price of Liberty 
 bonds. The War Finance Corporation would be able. I believe, to 
 stabilize to a large extent the price of Liberty bonds. It is well 
 known that a comparatively small buying power will not only dis- 
 courage those speculatively or viciously disposed persons who might 
 desire deliberately to depress the price of Government bonds but 
 would furnish added impetus to any upward movement in the price. 
 This plan is along the lines of the plans adopted in European coun- 
 tries whereby sinking funds or specfic appropriations are made for 
 the purchase of bonds with the same object in view, arid is better 
 than any of them, I think, because the Government itself is removed 
 from the transaction. 
 
 The purpose I have in view, under this subdivision (e) of the pro- 
 posed act. is simply to permit this corporation to act in any circum- 
 stances that may develop, to such an ex-tent as may seem wise in 
 steadying the market for Government bonds. I say, if in the judg- 
 ment of the board of directors, such an operation were wise. My own 
 judgment is that no effort ought to be made on any large scale to 
 maintain the price of Government bonds. But there may be times 
 when it will be of very great value to have some means through 
 which we could steady the situation. 
 
 The corporation is also empowered (subdivision f ) to issue its own 
 bonds or notes or obligations. The word " notes." which is used in 
 the bill, has been very much misunderstood. It has been said that 
 this corporation was going to issue bank notes to circulate as cur- 
 rency. That, of course, is most emphatically not the case. I sug- 
 gest that the bill be changed by the substitution of the word " bonds " 
 for "notes'" in this subdivision, so as to avoid that misunderstand- 
 ing. I shall refer to what the bill calls notes as bonds. 
 
 I want to make it absolutely clear that the power of the corpora- 
 tion to issue its own bonds does not mean any power whatever to 
 is-ue currency. It is a means' of providing funds in addition, to 
 the proceeds of the sale of its stock to the United States, by the issue 
 and sale of its own securities. The amount of the corporation's 
 bond issues outstanding at any one time is limited to eight times the 
 paid-in capital stock (i. e.. a maximum issue, in case all the stock is 
 actually paid in. of $4,000,000,000). 
 
 It could never issue and have outstanding over $4,000.000,000 of 
 bonds and then only against security which is at least 25 per cent 
 greater than the amount of its own bonds, plus all of the $500.000,000 
 capital stock. 
 
 These bonds which the War Finance Corporation may issue are 
 required to run for not less than one year nor more than five years. 
 They may bear such rate or rates of interest and may be made re- 
 deemable at the option of the corporation, as the board of directors, 
 with the approval of the Secretary of the Treasury, may determine. 
 These bonds are given a first and paramount floating charge upon the 
 insets of the corporation and are not to be otherwise secured, for 
 the corporation is specifically prohibited from placing any lien of 
 mortgage upon its property. 
 
 The purprse of these provisions is to make anv bonds it issues 
 ',\ paramount floating lien or mortgage, because the corporation is 
 prohibited from creating any mortgage or other charge which would
 
 20 WAR FINANCE CORPORATION. 
 
 have priority over the bonds. Whatever bonds the corporation issues 
 are protected by a blanket obligation and a paramount lien upon all 
 the assets of the War Finance Corporation. 
 
 I now want to take up another aspect of the bonds which may he 
 issued by the War Finance Corporation. The Federal reserve banks 
 are authorized, subject to the regulations of the Federal Reserve 
 Board, to purchase, rediscount, and use paper secured by the bonds 
 of the War Finance Corporation in the same manner and to the 
 same extent that paper secured by bonds or notes of the United 
 States not bearing the circulation privilege may be similarly used, 
 purchased, and rediscounted. There are. however, two important 
 exceptions to this statement. First, the Federal Reserve Board may 
 require the Federal reserve hanks to charge a higher discount rate 
 on paper secured by the securities of the War Finance Corporation 
 than on paper othenvise secured; and, second, the Federal Reserve 
 Board may impose upon the Federal reserve banks a special interest 
 charge in respect to Federal reserve notes issued against paper se- 
 cured by the securities of the War Finance Corporation, which need 
 not be applicable to Federal reserve notes otherwise secured. 
 
 These provisions are made in order to impose a special tax in 
 effect upon Federal reserve notes circulated by the Federal reserve 
 banks against paper secured by the bonds of this corporation, on 
 the theory that it is an emergency measure, and so obtain the retire- 
 ment as quickly as possible of any Federal reserve note issues that 
 may from time to time be issued against the security of this class of 
 paper. That is a mere matter of machinery that is easily worked out. 
 
 It is believed that the right to impose this higher discount rate and 
 this special interest charge will enable the Federal Reserve Board 
 to exercise a beneficial control over the issue of Federal reserve notes 
 based on bank paper secured by the corporation's bonds. All existing 
 provisions of law not inconsistent with the provisions of the bill 
 are expressly made applicable to Federal reserve notes issued against 
 paper secured by the bonds of the corporation. The Federal reserve 
 banks are also authorized to make advances to member banks secured 
 by bonds of the War Finance Corporation. 
 
 There has been some criticism of the bill on the idea that in some 
 way or other there will be currency inflation. Any idea of currency 
 inflation must result from a misconception as to the bonds issued by 
 the corporation, for there is no danger that such securities will cause 
 inflation through an undue expansion of the circulating medium of 
 the country. 
 
 It must always be remembered that the Federal Reserve Board has 
 absolute control over the issue of Federal reserve notes. That board 
 would undoubtedly be quick to restrict the issue of such notes if at 
 any future time the danger of inflation appeared. 
 
 T think I have made it clear that the bonds of the War Finance 
 Corporation are not intended to circulate, though they may of course 
 be bought and sold like other ordinary corporate bonds or notes. 
 Moreover, they can not directly be made the basis of Federal reserve 
 note issues. In this respect they stand in the same situation as 
 Liberty bonds. 
 
 If a member bank makes a loan to a customer for the purpose of 
 enabling the customer to buy either Liberty bonds or bonds of the 
 War Finance Corporation, taking the customer's note, eligible for
 
 WAR FINANCE CORPORATION. 21 
 
 rediscount in other respects also, the member bank may indorse and 
 rediscount that note at the Federal reserve bank of its district. The 
 Federal reserve bank, having discounted the note indorsed by the 
 member hank may, with the approval of the Federal Reserve Board, 
 in turn take out Federal reserve circulation upon the security of such 
 note. As the note indorsed by the member bank must mature in not 
 more than 90 days the Federal reserve notes issued against it must 
 then be either retired or other security must be found therefor. Fed- 
 eral reserve note issues will contract or expand responsively to the 
 contraction or expansion of the demands for credit upon the member 
 banks. 
 
 The Federal reserve act requires that there shall always be main- 
 ini.ied for Federal reserve notes a "gold cover" of at least 40 per 
 cent. 
 
 SECTION 7. 
 
 This section prohibits the sale or offering for sale or for sub- 
 scription by any person, firm, corporation, or association, of any 
 issue of securities in excess of $100,000, or any part of any such 
 issue, issued after the approval of the act. except under rules and 
 regulations prescribed by the corporation, with the approval of the 
 Secretary (if the Treasury, and under licenses from the corporation 
 in case such rules and regulations shall so require. I may say that 
 amount may be increased; I am not wedded to the $100,000 limit. 
 We can make it larger if it should seem wise. The $100,000 limita- 
 tion was fixed with the idea of establishing a limitation which shall 
 he sufficiently large so that the corporation shall not be burdened to 
 an impracticable extent with the duty of passing upon minor issues 
 of securities, and which shall also be sufficiently small so that the 
 uncontrolled issue of a very large aggregate amount of securities shall 
 not be permitted. 
 
 The difficulty has been to get the provisions of the bill sufficiently 
 broad to bring under the regulation of the corporation the issue of all 
 securities which it was desirable that the corporation should regulate, 
 and at the same time not include a vast number of transactions which 
 do not involve capital expenditures. 
 
 It is not intended that the corporation shall exercise any regulation 
 over securities already issued, for new issues of securities make the 
 principal demands upon capital seeking investment. The prohibition 
 against selling or the offering for sale of securities therefore applies 
 only to securities issued after the approval of the act. Xo buying 
 or selling of existing securities in or out of any stock exchange is 
 prohibited. Though the terms of the bill are broad enough to pro- 
 hibit any sale of securities issued after the date of the approval of the 
 act. whether or not they have once been licensed, it is probable that 
 the corporation will in most instances find it desirable in licensing 
 anv issue of securities at the same time to license any resale of such 
 securities. This arrangement would mean that once the sale of an 
 issue of securities had been licensed- all further trading in such issue 
 should be entirely free. It may be that the regulations issued by the 
 corporation will require a notation of the license to be made upon the 
 securities themselves. In that case it would give those securities a 
 greater market availability. The bill is not intended to prohibit, or
 
 22 WAR FINANCE CORPORATION. 
 
 in any way to interfere with, the ordinary bank borrowings for the 
 purpose of transactions in the ordinary course of business. Any other 
 borrowings in excess of $100.000 evidenced by bonds, notes, or other 
 obligations are subject to the prohibitions of the bill against the sale 
 or offering for sale of securities without a license from the corpora- 
 tion, if the regulations established by the corporation shall require 
 such a license. Let me say that the corporation does not have to issue 
 regulations and licenses.' It is only in a position to do so if any 
 exigency develops where it is desirable that the matter should be 
 regulated by a formal license. 
 
 In order 'that there may be no embarrassment, while the opera- 
 tions of the corporation are being gotten under way. to corporations 
 having pressing capital requirements, such for example as maturing 
 obligations, in making arrangements to meet these requirements, the 
 bill provides that this section shall not take effect until the rules and 
 regulations under which the corporation will exercise its functions 
 shall have been duly prescribed. 
 
 The provisions of section 7 of the bill do not apply to any railroads 
 which may be in the possession and control of the President. These, 
 of course, could not be subject to the provisions of the bill. 
 
 SECTION 8. 
 
 This section prescribes a fine of $5,000 or imprisonment for four 
 years, or both, as the penalty for violation of any of the provisions 
 of the act. 
 
 SKCTION !>. 
 
 The sulplus earnings of the corporation not required for its 
 operations are to be accumulated in a reserve fund to be invested 
 under the direction of the Secretary of the Treasury, in bonds, 
 notes, or certificates of indebtedness of the United States. This sec- 
 tion also provides for the liquidation of the corporation, beginning 
 six months after the termination of the war. The proceeds of such 
 liquidation are. of course, to be paid over to the United States. 
 
 This corporation will undoubtedly be profitable, because it can not 
 lose money under the plan devised. 
 
 SKCTION 10. 
 
 The corporation is to be exempt from taxation except that its real 
 estate is to be subject to local taxation in like manner as other real 
 estate. The securities of the corporation are to be subject only to like 
 taxation as the bonds of the second Liberty loan. 
 
 SKI I IONS 11. \2. AND 13. 
 
 These section^ define the term "securities," reserve the right of 
 amendment, and provide that the invalidity of any portion of the act 
 dclared invalid by any court of competent jurisdiction shall not in- 
 validate it as a whole. 
 
 (The committee thereupon adjourned until Tuesday, February 19. 
 1918. at 10 o'clock a. m.) 
 

 
 WAR FINANCE CORPORATION. 23 
 
 COMMITTEE ON WAYS AND MEANS, 
 
 HOUSE OF REPRESENTATIVES, 
 Washington, D. C., February 19, 1918. 
 
 The committee met at 10 o'clock a. m.. Hon. Claude Kitchin (chair- 
 man) presiding. 
 
 Present: The chairman, Messrs. Rainey, Dixon. Hull, Garner, 
 Dickinson, Oldfield. Crisp. Helvering, O'Shaunessy. White, Ford- 
 ney, Moore, Sloan. Long-worth. Sterling. Martin. Hawley, and 
 Treadway. 
 
 Present also: Hon. Paul M. Warburg. Vice (Governor of the Fed- 
 eral Reserve Board. 
 
 The CHAIRMAN. The committee will come to order. 
 
 STATEMENT OF HON. PAUL M. WARBURG, VICE GOVERNOR, 
 FEDERAL RESERVE BOARD. 
 
 Mr. WARBI'R<;. Secretary McAdoo has submitted to your commit- 
 tee a very full statement concerning the general purposes of the bill 
 before you. He has gone so fully into the discussion of its various 
 provisions that I hardly expect that you wish me to amplify his 
 remarks in this respect. I take it that Avhile Secretary McAdoo dis- 
 cussed the matter from the point of view of the Treasury you wish 
 me to deal with it from the point of view of the Federal Reserve 
 Board, dealing particularly with the sections affecting the operations 
 of the Federal reserve banks. 
 
 I believe it is unnecessary for me to dwell at length upon the fact 
 that, through the extended financial operations of the Government 
 and through other conditions inherent to the Avar, the security mar- 
 ket in the United States has been very seriously affected. It is a 
 well-known fact that not only have prices for securities materially 
 declined, but even at this reduced level it is most difficult to find pur- 
 chasers for securities. Under those circumstances there is a natural 
 disinclination on the part of banks to grant or continue loans on 
 securities. There is, furthermore, a distinct feeling of anxiety on 
 the part of the savings banks that if deposits should be withdrawn 
 they would have difficulty in realizing upon their assets, and at best 
 that they could do so only by taking very heavy losses. In addition, 
 even the strongest corporations find it difficult to renew maturing 
 obligations or to finance in order to pay for improvements or addi- 
 tions necessary or previously contracted for. 
 
 This is a grave situation realized by all, and I think it may be 
 stated as a matter of common agreement that it is imperative that 
 something should be done to relieve it. There are three methods of 
 bringing about the desired relief: (1) By letting all necessary as- 
 sistance be extended by the Treasury; (2) by amending the Federal 
 reserve act so as to permit loans on stocks and bonds to be granted 
 by Federal reserve banks: and (3) by the creation of a new and inde- 
 pendent organization dealing with the present emergency. 
 
 As to the first method, it is evident, without my elaborating this 
 point, why it would be most undesirable for the Treasury to enter 
 this field. Leaving aside the direct burden involved for the Treas- 
 ury, touched upon yesterday by Secretary McAdoo, there are. in 
 addition, obvious and grave reasons militating against allowing the
 
 24 WAR FINANCE CORPORATION. 
 
 Government through the Treasury to go directly into the business of 
 granting loans to private concerns to the degree which would be 
 necessary at this time. A corporation organized for the purpose, 
 administered by a separate board <;f directors, and with a definite 
 capital set aside for that purpose, would offer a better instrument, 
 particularly with the proviso contained in the bill that, immediately 
 upon the conclusion of peace, the liquidation of the corporation must 
 proceed, so that, upon its dissolution, normal, methods both of gov- 
 ernment and business automatically would be restored. 
 
 As to the second method relief to be granted by the Federal re- 
 serve banks bills have been introduced to provide for enlarged 
 powers on these lines, but the board has expressed itself as much op- 
 posed to such a course. As far as it possibly can be done, the Federal 
 Reserve System ought to remain a purely commercial structure based 
 upon liquid loans. It would be unfortunate and inadvisable to 
 undermine the strength and loaning power of the Federal Reserve 
 System because the security market at present has gone to pieces. 
 The legislation now proposed proceeds, therefore, on the third line: 
 that is, the creation of a new and independent organization having 
 for its object relief rather by a resurrection of the security market 
 than by destroying the discount market. 
 
 The War Finance Corporation provides for a machinery which. 
 by creating a new short-term bond which, no doubt, will enjoy a 
 wide .market will "thaw out frozen securities." Almost all trans- 
 actions contemplated for the corporation will have the effect of sub- 
 stituting for maturing or unsalable obligations the readily market- 
 able short-term bond of the War Finance Corporation. So far as 
 this process can be carried out. it will serve to relieve the Federal 
 Reserve System from pressure and not add to its burdens, as many 
 appear to think. It will place securities where they ought to rest in 
 the security market and with the investor and will prevent the 
 strong pressure which exists at this time to push into the member 
 banks and. through them, into the Federal reserve banks, loans which 
 are " camouflaged " as commercial paper, but which, as a matter of 
 fact are nothing but a means of carrying unsalable securities. 
 
 If the war is to be won by us. our financial structure must be kept 
 alive and strong, and ways and means must be found to provide for 
 the necessary financing for such industries as do a business either 
 essential to the prosecution of the war or to the general welfare of 
 the people. 
 
 It is furthermore imperative that our savings banks and our banks 
 should remain protected, because any unnecessary financial weak- 
 ness affects unfavorably the Government's power successfully to 
 carry through its financial operations. 
 
 I have noticed a great many comments in the public press to the 
 effect that the power of Federal reserve banks to rediscount for 
 member banks paper secured by short-term bonds of the War Finance 
 Corporation is bound to lead to inflation. I believe there has been 
 widespread misunderstanding of this feature of the bill. Many 
 people appear to think that it is proposed to empower the Federal 
 reserve banks to issue notes directly against these obligations; in 
 other words, to endow them with the note-circulation privilege, as 
 in the case of the old 2 per cent United States Government bonds. 
 Nothing of the kind is proposed. All that is contemplated is that.
 
 WAR FINANCE CORPORATION. 25 
 
 just in the same manner as authorized with respect to Liberty loan 
 bonds, member banks may rediscount their 15-day notes, secured by 
 short-term bonds pf the War Finance Corporation, or the}' may 
 rediscount the notes of their customers, having to run not in excess 
 of !>0 days, secured by such short-term bonds. In other words, the 
 appeal of the War Finance Corporation will be. first, to the security 
 market by trying to sell its short-term bonds to new investors, unless 
 these short-term bonds are given' in exchange to the holders of matur- 
 ing obligations, and only when the bonds can not be absorbed by the 
 investment market will they go into the banks, and only when the 
 banks have accumulated more of these short-term bonds than they 
 can carry with theiv own resources, then will they appeal to the Fed- 
 eral reserve banks for loans against these bonds. As stated above, 
 these loans can be granted only for 15 days or 90 days, and at the 
 expiration of that period they are. as far as the Federal reserve bank 
 is concerned, due and payable. 
 
 People have been frightened by the amount of $4,000,000,000 men- 
 tioned in the bill as the outside limit of short-term bonds that may 
 be issued. But we must bear in mind that it is one of the foremost 
 objects of this legislation to strengthen confidence. For that reason 
 it is advisable that the scope of this corporation be not too narrowly 
 circumscribed. The stronger its lending power the greater its power 
 to command confidence. But that does not mean that it is expected 
 to issue anything like the maximum. As a matter of fact, whenever 
 the corporation would find that the securities market could not absorb 
 the bulk of these short-term bonds, and whenever it would be found 
 that the banks are beginning to carry too large a proportion of these 
 s cin-ities. and when, again, the banks would lean too heavily on the 
 Federal reserve banks, then the War Finance Corporation would 
 have to slow down its speed of doing business. Otherwise, instead of 
 being a help to the Government in keeping the market strong, it 
 would have a detrimental effect upon the financial operations of the 
 Government. I look upon this War Finance Corporation as an 
 emergency organization to take care of the security market in a man- 
 ner similar to that in which the Federal Reserve System takes care 
 of emergencies in the commercial-paper market. In Europe central 
 banks have large powers in case of need to make loans on all kinds 
 of securities. Our financial system has been devoid of such an emer- 
 gency instrument, and it is to provide for this weakness in our organi- 
 zation that the War Finance Corporation is being proposed. 
 
 During these last few days I have been asked quite frequently why 
 I should be in favor of a war finance corporation when I had ex- 
 pressed myself as being opposed to the resurrection of the Aldrich- 
 Vreeland note-issuing machinery and the so-called Calder bill. In 
 answer to that I have written a very short memorandum, which, with 
 your kind permission. I should like to embody in my statement. 
 
 (The memorandum follows as Exhibit A:) 
 
 KXHIIUT A. 
 
 MKMOKANDr.M. 
 
 "\VASHI.\<;TO.V. b'cliruarii 13. 1918. 
 
 The object of this memorandum is to outline briefly some of the most impor- 
 tant points of difference, in substance and effect, between the so-called raider 
 hill and the \var finance corporation.
 
 26 WAR FINANCE CORPORATION. 
 
 (1) The Calder bill would give power to Federal reserve banks to rediscount 
 member banks' notes secured by "such bonds or notes of any railroad, industrial, 
 public-utility corporation, or municipality, as the Federal Reserve Board, upon 
 investigation, deems a proper security for the Federal reserve banks T<> receive 
 ;is collateral." For the purposes of this memorandum we must assume, of course. 
 that if the bill were passed the Federal Reserve Board would permit the redis- 
 count of member bank notes secured by such collateral. Upon that assumption 
 it is clear that billions of outstanding securities would become directly available 
 MS collateral for advances by Federal reserve banks, and indirectly available 
 as security for Federal reserve notes. It would not be a question of dealing 
 only with Dew financing "compatible with the public interest at this time," or 
 with the renewal of maturing obligations, but the whole mass of securities 
 already outstanding would become available without any power of differentia- 
 tion at all as to whether or not they are serving the public interest at this time. 
 The proceeds of such borrowing could be used for anything compatible or in- 
 compatible. It is unnecessary to elaborate the importance of this point. 
 
 (2) Granting that most of the securities covered by the raider bill are eirher 
 unsalable to-day or could be sold only with substantial concessions, even as 
 against the present heavily reduced prices, the Calder bill does not have for its 
 object to find a means of thawing out these frozen securities. The only solu- 
 tion that the ("'aider bill provides is that holders of securities, either directly 
 or indirectly, pledge them against advances to be secured from Federal reserve 
 banks. The finance corporation, on the other hand, provides ways and means 
 by which the appeal should be made not exclusively to the Federal Reserve 
 System but to the securities market in general. By substituting, in effect, the 
 short-term bond for the unsalable security of industrial corporations, public 
 utilities, railroads or municipalities, or by substituting these short-term bonds 
 for the maturing obligations of such corporation, a new security is offered 
 which will have a general market, first, because it will be considered a Govern- 
 ment security and. second, because of the fact that some provision is made, in 
 case of emergency, to use these bonds as collateral for borrowings from Federal 
 reserve banks. To make this point clear, suppose that an electric company has 
 maturing bonds amounting to $10.000,000; it wants to offer instead a five- 
 year electric note, but finds it impossible to place the same. Under the Calder 
 bill all that could possibly be done would be to borrow the full amount from 
 the Federal reserve bank. Under the plan of the war finance corporation five- 
 year bonds of that corporation would be issued and either taken in exchange by 
 the holders of the old. maturing electric notes or the new five-year short-term 
 bonds could be placed on the market and the proceeds \ised to pay off the 
 maturing notes. In other words, the finance corporation should have the 
 tendency of reopening the security market for now unsalable securities, so that 
 new elasticity will be given the securities market instead of regarding this 
 market as hopelessly dead, and instead of using the Federal Reserve System. 
 an instrument created for the protection of commercial paper, as a market upon 
 which to unload unsalable securities. 
 
 (3) It is safe to conclude from the above that the amount of paper secured 
 by War Finance Corporation bonds expected to be rediscounted with Federal 
 reserve banks would be much smaller than the amount likely to be borrowed 
 from the Federal Reserve System in the ease of the Calder bill, not only be- 
 cause, in the first case, the absorbing power of the security market acts as a 
 buffer, and only what the security market can not take and what, after that. 
 the banks can not carry will go into the Federal Reserve System, but also, as 
 stated under (1), because the output of the short-term bonds by the Wai- 
 Finance Corporation is restricted to definite purposes of the present emergency, 
 while, under the Calder bill, the only possible assistance would have to come 
 through the Federal Reserve System, and all securities issued during past genera- 
 tions would become available as collateral without any scrutiny as to the obiects 
 for which they have been issued. 
 
 (4) If we have these points clearly in mind, it is incomprehensible why the 
 hue and cry of inflation should be raised against the finance corporation by 
 the very people who apparently are in favor of the Calder bill. At a matter of 
 fact, as above stated, we would have to expect a much larger degree of inflation 
 under the Calder bill than under the proposed War Finance Corporation legisla- 
 tion. Are we not driven to the logical conclusion that these critics of the War
 
 WAR FINANCE CORPORATION. 27 
 
 Finance Corporjitioii bill are opposed to it because it restricts inflation so much 
 more than the ('alder bill, rather than because they are generally apprehensive 
 of too much inflation to be caused by the contemplated legislation? 
 
 I believe you wish me to say a few words about the proposed 
 method of licensing the sale of securities. I can best illustrate what 
 is proposed to be done by giving yon a sketch of what has been done 
 in England by a similar organization and what has been done so 
 far by us in the United States. 
 
 When the war broke out, in 1914, there was at once organized in 
 England the so-called capital issues committee, of which the per- 
 sonnel was as follows: Lord St. Aldwyn (formerly Sir Michael Hicks 
 Beach), who had been chancellor of the exchequer from 1896 to 1902, 
 chairman; Lord Cunliffe, governor of the Bank of England; Sir 
 Thomas Whittaker, M. P. (liberal) ; Sir Frederick Yanbury, M. P. 
 (unionist) ; Sir George, Barnes, assistant secretary of the board of 
 trade: and Mr. B. P. Blackett, secretary. 
 
 Mr. Blackett is at this time in Washington as financial adviser to 
 the British Embassy. Some months ago, when this question of con- 
 trol of issues of securities was discussed, he was invited to write a 
 short report, giving an outline of what was done in England. This 
 report, which is very instructive, I beg leave to have inserted in my 
 statement. 
 
 (The report is attached as Exhibit B.) 
 
 (Confidential.) 
 
 EXHIBIT B. 
 
 NEW YORK. Auyn>tt il. l!)17. 
 Memorandum for Mr. Curtis, Federal Reserve Rank, New York Pity. 
 
 GOVERNMENT CONTROL OF NEW CAPITAL ISSUES IN GREAT BRITAIN. 
 
 The control of new issues of capital by the British Government started with 
 the regulations for the reopening of the stock exchange, which, after being 
 dosed from the end of July. 1914, was reopened at the beginning of January, 
 191.1. subject to special conditions agreed upon between the Rritish treasury 
 and the committee of the London Stock Exchange and accepted by the other 
 stock exchanges in the United Kingdom. In accordance with this agreement, 
 the committee of the stock exchange bound itself and the members of the stuck 
 exchange to deal in stocks and shares subject strictly to certain regulations 
 approved by the Rritish treasury and made binding upon the stock exchange. 
 These regulations were not statutory, but the penalty of failure to observe them 
 in any part'cular was expulsion from the stock exchange of any member found 
 guilty of contravening the regulations. Particular regulations dealing with 
 new issues of capital laid it down that no dealings should be allowed on the 
 stock exchange in any securities issued subsequent to the date of the regula- 
 tion unless the issue of such securities had been tirst approved by the Rritish 
 treasury. 
 
 A committee known as the "Capital issues committee" was ap|M>inted by the 
 chancellor of the exchequer to examine all applications for approval of new 
 issues and to recommend to the treasury whether or not approval should be 
 given for such issue. The original members of this committee were Lord St. 
 Aldwyn (formerly Sir Michael Hicks Reach), who has been chancellor of the 
 exchequer from 1S9(> to 1902, chairman; Lord Cunliffe. governor of the Bank 
 of England; Sir Thomas Whittaker. M. P. .(liberal): S : r Frederick Ranbury, 
 M. I', (unionist) ; and Sir George Rarnes. assistant secretary of the board of 
 trade 1 , with Mr. R. P. Blackett as secretary.
 
 28 WAR FINANCE CORPORATION. 
 
 On the death of Lord St. Aldwyn u year later Lord Cunliffe became chair- 
 maii and .Mr. Gaspard Farrer. of Baring Bros., \vas added to the committee. 
 Mr. Blackett resigned the secretaryship in July. 191."), ami the representative 
 of the hoard of trade lias changed more than once. 
 
 It was soon found that applications for permission to make new issues were 
 being received nor merely in respect of important new issues, such as would 
 expect- to obtain a quotation on the stock exchange, but also in respect of issues 
 of shares and debentures by publ : c and private companies of all sorts. It was 
 decided tliat it was desirable as far as possible to prevent any new issue taking 
 place without treasury approval, although the penalty of being unable to obtain 
 dealings on the stock exchange was of little or no importance in many cases. 
 There have undoubtedly been a certain number of new issues by private com- 
 panies and small public companies, such as a company to run an individual 
 cinematograph theater, but. with the assistance of the bankers and of the vast 
 majority of outside brokers and financial houses, practically speak'ng, no new 
 issue of the least importance has taken place since January. 191."). without 
 treasury approval. The number of applications dealt with up to the end of 
 June. 1917, was something like 15,000. In practice, the treasury has accepted 
 in every case the recommendat'on of the committee and it is generally under- 
 stood in the city of London that an appeal against the decision of the com- 
 mittee is simply an appeal for reconsideration by the same committee and that 
 the chancellor of the exchequer will not interfere. This has been of consider- 
 able importance from the parliamentary point of view, because the chancellor 
 of the exchequer has been able to shelter himself behind the opinion of the 
 representative city committee against complaints, which have been numerous, 
 of the action of the treasury in regard to specific cases. 
 
 The procedure adopted by the committee has been, broadly speaking, to deal 
 with the less important cases, which form the vast majority of the total, in 
 a somewhat summary fashion, and to refuse applications for new issues unless 
 and until a fairly good case has been made out, either 
 
 (1) That the new issive is necessary or desirable from the point of view of 
 the successful prosecution of the war: or 
 
 (2) That to refuse permission would involve the complete loss of capital 
 already expended or at any rate would involve a very heavy loss of previously 
 expended capital. 
 
 Tiie more important cases may be divided into two categories : 
 
 (1) A disappearing category; cases in which leave is asked for the issue of 
 capital on behalf of foreign or colonial governments or corporations. In these 
 cases there has been an increasing tendency to insist on the funds required 
 being obtained outside the United Kingdom that is. occasionally in Holland or 
 elsewhere, but usually in the United States of America. 
 
 (2) rases where the issue is alleged to be necessary for the prosecution of the 
 war, that is. usually in connection with some firm engaged on Government con- 
 tracts. In these cases arrangements have been perfected for obtaining the advice 
 of the Government department or Government departments concerned, i. e., the 
 war office. Admiralty, board of trade, and. above all, the ministry of munitions; 
 and sometimes other departments. The decision in such cases, subject to techni- 
 cal questions on the method of finance, is nearly always dependent on the view 
 taken by the responsible Government department as to the desirability of the 
 issue from the point of view of securing necessary supplies. 
 
 I should perhaps add a third category, namely, renewals of maturing de- 
 bentures, etc.. which are, as a rule, granted without much examination, unless 
 there is an obvious opportunity for referring the application to a neutral money 
 market. 
 
 The issue of loans by the Governments of the British Dominions of Provinces 
 and States of the British Dominions or by the Government of India, has been 
 reserved by the treasury and dealt with in connection with war finance without 
 any recommendation being required from the capital issues committee. 
 
 It may be stated broadly that after a transition period covering the year 
 191."). no new issues of any sort, except for renewal purposes, has been approved 
 unless for the purpose of the successful prosecution of the war. 
 
 Soon after the capital issues committee was constituted, the question of capi- 
 tal expenditures and borrowings by local authorities in Great Britain came 
 under the consideration of the committee. In January. 1915. many of the local 
 authorities had not yet got over the idea which was so prevalent at the begin-
 
 WAB FINANCE CORPORATION. 29 
 
 ning of the war that Government and municipal capital expenditure would be 
 necessary or desirable for the purpose of preventing unemployment. Local 
 authorities in Great Britain finance their capital expenditure (1) by the issue 
 of stock on the market, (2) by the issue of six months' or one-year bills. (3) 
 by the issue of mortgages on the security of the rates which are sold from day 
 to day over the country for amounts of 100 or even in a few cases of 10. 
 These mortgages usually run three or five years in the first instance, biit they 
 are frequently left after the original term has: expired at call, and are very 
 popular because they are not subject, as a rule, to market fluctuations. 
 
 The capital issues committee as such did not (leal in detail with the question 
 of new capital expenditure by local authorities, hut recommended the treasury 
 to take the question up with a view to preventing new capital expenditure as 
 far as possible. The town clerks and treasurers of most of the large cities 
 were interviewed at the treasury, and it was urged upon them that in order 
 to conserve the capital and labor of the country for the prosecution of the war 
 further capital expenditure by local authorities should be prevented as far 
 as possible. 
 
 A circular drawn up by the treasury was issued in .March. 1 })!.">. by the local 
 Government board, informing all local authorities that the sanction of the local 
 Government board would not be given for new capital expenditure in any cases 
 where such sanction was necessary by law unless the local authority could prove 
 to the satisfaction of the treasury that such expenditure was essential for the 
 prosecution of the war. e. g.. extension of electric-power plants owned by munici- 
 pal corporations or in the interests of public health, e. g.. water supply in cases 
 where there was a serious danger of shortage. This circular covered capita! 
 expenditure by most of the smaller authorities but did not cover capital expendi- 
 ture on a large scale by many of the large cities, whose authority for such ex- 
 penditure is dependent upon acts of Parliament already obtained. In practice. 
 however, pressure from the treasury and the local Government board and coop- 
 eration by the treasurers and town clerks has sufficed in this matter, even in 
 respect of contracts already let. For example, there was a contract involving 
 over 1 .OOO.OOO sterling for the erection of a new county hall by the London 
 County Council. Arrangements have been made with the contractors to bring 
 the work to an end for the period of the war as soon as a stage has been 
 reached where a building can be left unfinished without the work already done 
 being wasted. As a result, capital expenditure by the local authorities has 
 practically ceased, and one incidental effect has been that considerable sums 
 accrued on the sinking funds established in connection with capital expenditure 
 by the local authorities have become available for investment in war loans, 
 owing to the closing down of the channels previously available for the invest- 
 ment of such moneys, namely, capital expenditure by the local authority itself, 
 since some of the authorities were in the habit of using their sinking funds to 
 finance their new capital expenditure, or capital expenditure by other local 
 authorities, since it was a favorite practice for one corporation to lend its sink- 
 ing-fund moneys to another corporation. 
 
 In dealing with the closing down of work upon contracts in the course of 
 progress, considerable difficulty was naturally met with in reaching a fair set- 
 tlement as between the local authority and the contractor. This difficulty was. 
 however, overcome, first, by the issue of a circular by the treasury to the banks 
 asking them not to give accommodation for new building works of any kind 
 unless these were proved to be necessary in connection with the prosecution of 
 the war. and. finally, by the issue of a regulation under the defense of the realm 
 act by the ministry of munitions making it necessary for the sanction of the 
 ministry to be obtained for any expenditure on new buildings in excess of .~>OO. 
 This regulation was justified by the difficulties met with by the ministry of 
 munitions in providing labor for the building of new munitions works and for 
 the operations of munition factories generally in various districts where the 
 existence of large building contracts in the course of progress was found to be 
 leading to serious shortage of labor for munitions purposes. 
 
 Apart from this regulation under the defense of the realm act in regard to 
 building work, the only legislation of which I am aware remotely connected 
 with the control of new issues of capital is a section in an act which has the 
 effect of extending the period during which "ancient lights" and similar rights 
 and franchises are kept alive for an extra period corresponding to the period 
 during which new building work has been prohibited by reason of the war. and
 
 30 WAR FINANCE CORPORATION. 
 
 a stock clause in nil m>\v acts of Parliament ^ivinjr new borrowing ]o\ver to 
 municipal corporations, railway companies, etc.. under wliich the exercise of 
 any new borrowing powers conferred by such act is made subject, for the i>eriod 
 of the war and 12 months thereafter, to the sanction of the treasury. 
 
 Apart from these special cases, the whole control by the Government of new 
 issues of capital has been based on cooperative arrangements with bodies such 
 as the stock exchange, the association of cleariiiir house, hankers, etc. 
 
 BASH. I*. HI.AI KKTT. 
 
 NEW YOKK. Aii'tHxt <i, 1917. 
 
 To give you in a nutshell how the English committee organized 
 and what it brought about, I should say that, as a matter of form, 
 this committee was a voluntary organization. There was no specific- 
 law which forced anybody to submit to the regulation of the commit- 
 tee, but. as a matter of fact, it acted. as a law. Immediately upon 
 the organization of the committee stock exchanges agreed not to 
 quote any new securities except such as had been passed upon favor- 
 ably by the committee, and investment houses would not touch any 
 securities which had not been so approved. This gave the committee 
 complete control and it exercised such control very rigidly. They 
 recognized at once that in order to win the war it was not only a 
 question of conserving to the greatest possible degree all available 
 credit and the savings of the country, but also the goods and the men, 
 and that, therefore, all unnecessary expenditures and unnecessary 
 operations should be restricted. The committee addressed itself with 
 particular rigidity to the operations of municipalities and counties. 
 Where contracts had been made for construction not necessary for 
 England's immediate requirements, the Government went so far as 
 to indemnify contractors in order to halt the construction and the 
 waste of funds, of material, and labor involved. 
 
 It is interesting to note the results of the operations of the English 
 capital issues committee. I beg leave to submit for insertion in my 
 statement a table which shows the issues in previous vears and the 
 issues in the years of the operations of the committee 
 
 (The table follows as Exhibit C.)
 
 WAR FINANCE CORPORATION. 
 
 31 
 
 EXHIBIT C. 
 
 New capita) issues on the London market, c.rdiixirc of re >i dors' share* mid 
 
 rcborrowinp operation*. 
 
 [In thousands of pounds.] 
 
 Issues. 
 
 1913 
 
 1914 
 
 1915 
 
 1916 
 
 6 months 
 to June 30, 
 1917. 
 
 British Government loans 
 
 
 332,500 
 
 614,251 
 
 554,071 
 
 1,038,483 
 
 Colonial Government loans 
 
 26,270 
 
 38,674 
 
 17,385 
 
 6,500 
 
 6,453 
 
 Colonial corporations 
 
 14,811 
 
 7,754 
 
 350 
 
 
 
 
 14 941 
 
 23 378 
 
 3,965 
 
 
 
 
 
 
 
 
 
 Total items 2-4 
 
 56,031 
 
 69,806 
 
 21,700 
 
 6,500 
 
 6,453 
 
 
 
 
 
 
 
 Foreign government loans 
 
 26, 158 
 
 18,333 
 
 38,450 
 
 15,000 
 
 
 Foreign corporations 
 
 6,958 
 
 10,606 
 
 
 
 
 Foreign railways . 
 
 17,411 
 
 12, 795 
 
 2,940 
 
 384 
 
 
 American railways 
 
 10, 627 
 
 1,416 
 
 
 
 
 
 
 
 
 
 
 Total items 5-8 
 
 61, 154 
 
 43, 150 
 
 41,390 
 
 15,384 
 
 
 
 
 
 
 
 
 British municipal loans 
 
 920 
 
 3,096 
 
 
 495 
 
 
 British railways . . 
 
 1,019 
 
 2,161 
 
 3,294 
 
 1,679 
 
 
 Electric lighting, power, telephone, etc 
 Tramways and omnibus. .. . 
 
 6,916 
 4,710 
 
 6,746 
 5, 8(19 
 
 .547 
 432 
 
 102 
 
 200 
 100 
 
 Gas and water 
 
 422 
 
 G99 
 
 20 
 
 ""ie" 
 
 
 
 
 
 
 
 
 Total items 11-13 
 
 12,048 
 
 13,314 
 
 999 
 
 118 
 
 300 
 
 
 3,329 
 
 2 677 
 
 21 
 
 23 
 
 
 Exploration and financial.. 
 
 7,424 
 
 5,099 
 
 45 
 
 
 
 
 24 
 
 911 
 
 
 
 
 Merchants, etc.. 
 
 433 
 
 280 
 
 
 102 
 
 
 Manufacturing 
 
 10,895 
 
 7,957 
 
 1,808 
 
 1,449 
 
 78 
 
 Stores and trading. 
 
 2,216 
 
 2,263 
 
 
 
 
 Estate and land 
 
 4 042 
 
 3 002 
 
 25 
 
 
 
 Rubber 
 
 1,276 
 
 718 
 
 153 
 
 16 
 
 3 
 
 Oil 
 
 5 265 
 
 3 408 
 
 22 
 
 1 574 
 
 
 Iron, coal, steel, etc. 
 
 6,419 
 
 3,673 
 
 163 
 
 1 275 
 
 
 Motors 
 
 1 528 
 
 1 559 
 
 130 
 
 381 
 
 332 
 
 Hotels, theaters, etc . . 
 
 538 
 
 803 
 
 79 
 
 
 
 Patents 
 
 2 188 
 
 396 
 
 
 27 
 
 
 Docks and shipping 
 
 3,265 
 
 7 209 
 
 580 
 
 800 
 
 
 Banks and insurance 
 
 4,494 
 
 3,480 
 
 266 
 
 275 
 
 1 500 
 
 Miscellaneous. . 
 
 12 029 
 
 5 060 
 
 316 
 
 1 260 
 
 30 
 
 
 
 
 
 
 
 Total items 14-29 
 
 65 365 
 
 48,495 
 
 3 608 
 
 7 189 
 
 1 943 
 
 
 
 
 
 
 
 Grand total . . . 
 
 196 537 
 
 512 522 
 
 685 242 
 
 585 436 
 
 1 047 179 
 
 
 
 
 
 
 
 Destination of new capital: 
 United Kingdom 
 
 35 951 
 
 364 420 
 
 621 140 
 
 
 
 British possessions. 
 
 76 137 
 
 80 940 
 
 22 289 
 
 
 
 Foreign countries 
 
 84 449 
 
 67 162 
 
 41 912 
 
 
 
 
 
 
 
 
 
 Total . . 
 
 1% 537 
 
 512 522 
 
 685 242 
 
 
 
 
 
 
 
 
 
 I should like to draw your attention to the following figures from 
 this report : 
 
 Issues. 
 
 19131 
 
 1916' 
 
 Issues. 
 
 1913' 
 
 1916e> 
 
 Colonial government, colo- 
 nial corporations, and colo- 
 
 
 
 Foreign government and 
 American rails 
 
 61,154 
 
 15,384 
 
 nial rails 
 
 56,031 
 
 6,500 
 
 
 12,048 
 
 111 
 
 
 
 
 Mining industrial, etc 
 
 65,365 
 
 7, 18t 
 
 
 
 
 
 
 
 1 In thousands of pounds. 
 
 I should also like to submit table of the best available figures show- 
 ing the totals of financial issues, exclusive of foreign loans, for the 
 four years prior to America's entry into the war.
 
 32 
 
 WAR FINANCE CORPORATION. 
 
 (The statement follows as Exhibit C-l.) 
 
 K.XHIBIT C-l. 
 
 
 Par value 
 
 1913 
 
 1914 
 
 1915 
 
 1916 
 
 Corporate financing: 
 
 $278.0 ! 
 453.5 
 958.5 
 
 $271.5 
 346.0 
 714.5 
 
 $571.0 
 324.0 
 684.5 
 
 $951.0 
 542.0 
 371.0 
 
 Utilities 
 
 Railroads 
 
 Total 
 
 1, 690. 
 
 1,332.0 
 
 1,579.5 
 
 1,864.0 
 
 State, county, and municipal financing: 
 
 403.2 
 161.5 
 1.0 
 
 474.1 
 177.9 
 3.0 
 
 488.0 
 267.3 
 2.0 
 
 445.2 
 246.9 
 4.7 
 
 Canadian loans 
 
 United States possessions 
 
 Total 
 
 565.7 
 
 655.0 
 
 757.3 
 
 696.8 
 
 <irand total 
 
 2,255.7 
 
 1,987.0 
 
 2,336.8 
 
 2,560.8 
 
 Temporary loans 
 
 550.4 
 
 1 
 
 384. 6 1 
 
 236.4 
 
 290.:-! 
 
 
 In the United States, since many months, the conviction has been 
 growing and taken a more definite form that operations in our 
 country should be controlled in a similar manner. Committees, 
 formed in several financial centers, urged the Government to take 
 steps on these lines, and they became more insistent as the banks 
 and the public became convinced that there was no such thing as 
 'unlimited resources" nor that there was any such thing as "busi- 
 ness as usual " when, as a matter of fact, business and financing had 
 been driven into -the most unusual channels the world had ever seen. 
 
 Acting upon these very urgent pleas, Secretary McAdoo issued a 
 statement asking all would-be issuers of new securities to communi- 
 cate with him in order that he might express the point of view of the 
 Government as to whether or not the issue of such securities was or 
 was not compatible with the public interest. This request of the 
 Secretary's met with such hearty and spontaneous response that he 
 found very soon that it was impossible for him fairly and justly to 
 deal with these cases without the creation of an effective organization 
 which could undertake to study carefully each individual case and 
 judge it upon its merits. The Secretary therefore invited the Fed- 
 eral Reserve Board to undertake, as a voluntary duty, the appoint- 
 ment of a committee to act substantially in the same manner as the 
 British Capital Issues' Committee. The board undertook these new 
 duties and created such a committee, consisting of Hon. Charles S. 
 Hamlin. Hon. Frederic A. Delano, and myself as chairman. This 
 committee organized at once an advisory committee. It was very 
 fortunate 1 in being able to prevail upon such good citizens as Messrs. 
 Allen B. Forbes, of New York: F. H. Goff. of Cleveland: and Henry 
 ( '. Flower, of Kans'as City, all prominent bankers, to become mem- 
 bers of such advisory committee. In addition, it secured the services 
 of Mr. Bradley \V. Palmer, of Boston, to act as its counsel. All of 
 these gentlemen filled at home offices of great responsibility which 
 they unhesitatingly left to serve the committee, without compensa- 
 tion, as volunteers. The committee then organized 12 subcommittees, 
 with headquarters at each of the 12 Federal reserve banks. In each 
 case the Federal reserve agent acts as chairman and the governor of
 
 WAR FINANCE CORPORATION. 33 
 
 the Federal reserve bank acts as vice chairman of the subcommittee, 
 and three additional gentlemen, representing expert knowledge in 
 municipal, industrial, or public-utility financing, form, with such 
 officers of the bank, a standing committee. In addition, there were 
 designated in each district 10 or 12 gentlemen of the same caliber, 
 representing the various cities in their respective districts, to be avail- 
 able to give expert advice in case transactions should originate in 
 their immediate territory. These latter groups comprise our so- 
 called auxiliary committees. 
 
 These organizations have been at work since about two weeks, and 
 it can be stated with confidence that they may count upon the hearty 
 cooperation of all sections of the country. 
 
 I have here copies of resolutions adopted by the New York Stock 
 Exchange, the League of Kansas Municipalities, and by the Eich- 
 mond (Va.) Real Estate Exchange, all of them expressing a hearty 
 desire to cooperate with the committee. The New York Stock Ex- 
 change has indeed passed a resolution that it will not quote any new 
 security except it be submitted to and favorably acted upon by our 
 committee. I beg leave to insert these resolutions in my statement. 
 
 (The resolutions follow as Exhibits D. E, and F, respectively:) 
 
 EXHIBIT D. 
 
 RESOLUTION AIKH'TKl) I!V THK NKW YOHK STOCK KXCHAM.K. 
 
 Whereas the Federal Reserve Board lias, upon the request of the Hon. W. G. 
 McAdoo, Secretary of the Treasury, appointed a committee of its members to 
 act as a capital issues committee authorized to pass upon such proposals as 
 may be submitted to them in respect to capital expenditures or issues of new 
 securities. 
 
 Resolved, That the committee on stock list will require as a condition to the 
 listing of such new capital issues the presentation of the approval of such com- 
 mittee of the Federal Reserve Board. 
 
 EXHIBIT E. 
 
 MlNHIl-AI, \VAK SKRVICE RESOLUTIONS. 
 
 (Adopted by the unanimous vote of the Executive Committee League of Kansas 
 Municipalities, January 17, 1918.) 
 
 Whereas the supreme need of the time is the concentration of the energies of all 
 individuals, organizations, and units of government upon work necessary for 
 the winning of the war; and 
 
 Whereas it is the desire and determination of the municipal authorities and 
 ctizens of the cities and towns of Kansas to aid in every possible manner in 
 the conduct and success of this struggle for the honor and safety of our 
 Nation and our allies, and for humanity and democracy; and 
 Whereas it is desirable that a statement of proper war-time policy for the 
 municipalities of Kansas be formulated and submitted on behalf of the organ- 
 i/od cities and towns of the State, therefore 
 
 llr it rexolreil hi/ the V.reeittin Committee of the J^ciif/iic "f KanxiiK Munici- 
 palities, That it is recommended that during the period of the war each and 
 every city government in this State shall undertake only such paving and other 
 improvement work as may be actually necessary to be undertaken at this time, 
 thereby releasing men and money for the service of the National Government. 
 It is understood that adequate local public-utility service must be main- 
 tained, and that to that end the municipal operation and ownership of any 
 privately owned public utility may be <>r become a matter of vital public need 
 and necessity. 
 
 43122 18 3
 
 34 WAR FINANCE CORPORATION. 
 
 EXHIBIT F. 
 
 Kcnolri'd hi/ tin' lilflinioinl (!>/.) Jft-nl i'.xtatc H-n-lnnii/c. Tliat the President 
 of the United States and the Secretary of the Treasury he. and they are hereby. 
 requested to issue an appeal promptly to all irovernors. and through them to 
 State legislatures, mayors, and legislative hodies of municipalities. requesting 
 them to exercise the most careful scrutiny over all appropriations, and to 
 exclude from their respective budgets every item that does not represent an 
 actual necessity for the proper conduct of the government, to the end that the 
 States and municipalities may set an example in patriotism and sacrifice for 
 the institutions and individuals within their respective .jurisdictions; and that 
 material and labor may he conserved for the needs of our National Government. 
 
 The committee, in passing upon these issues, does not presume to 
 pass upon the intrinsic merits of any security. It merely examines 
 it from the point of view of whether or not the expenditure to he 
 covered by the financing is one compatible with the interest of the 
 public, either from the point of vieAv of the successful prosecution of 
 the war or from the point of view of the public health and welfare. 
 
 In investigating issues, the committee cooperates, as far as it pos- 
 sibly can. with the respective, departments and boards of the Gov- 
 ernment which best can judge the facts as to whether or not a 
 particular thing or a particular service is required at this time for 
 the best interest of the country. Broadly speaking. I should say 
 that, in dealing with maturing obligations, the committee has Taken 
 the point of view that renewals should be permitted unless there are 
 reasons to the contrary, such as an available amount of cash in hand 
 or possibly some plan of paying excessive dividends out of excessive 
 profits. The same policy would apply in dealing with the funding 
 of banking debt incurred prior to February 1. 1918. when the com- 
 mittee began operations. 
 
 As to the construction of new roads, drainage and irrigation 
 projects, the view is held that only such construction should be 
 undertaken at this time as is of great strategic or economic impor- 
 tance, and generally only such as promise producing results within 
 the year 1918. 
 
 In dealing with municipal and State expenditures, the cooperation 
 is sought on the part of the local administrations to pare down their 
 expenditures to the lowest possible minimum. In this respect, cases 
 that have come up for discussion and action by the committee are 
 most encouraging. We find that, where there is still time to explain 
 our point of view, and where definite commitments have not yet been 
 made, there is a general inclination to let the national interest pre- 
 vail over the local at this time, and in several cases we have prevailed 
 upon municipalities to postpone issues contemplated and to restrict 
 present financing to such enterprises as were absolutely necessary at 
 this time. I have no doubt that, as we go along and as the under- 
 standing of our national requirements spreads, we will have no diffi- 
 culty in securing the fullest cooperation from all. 
 
 As to building operations in general. I beg to submit a statement 
 which Secretary McAdob gave to the press some weeks ago. This 
 statement expresses generally the point of view adopted by the com- 
 mittee in this respect.
 
 WAR FINANCE CORPORATION. 35 
 
 (The statement is attached as Exhibit G.) 
 
 EXHIBIT G. 
 
 fKor morning papers of Feb. 5. 1918.] 
 
 TREASURY DEPARTMENT. 
 
 Secretary McAdoo authorized the following statement: 
 
 1'eoause of r'ne interest of the Treasury Department in the conservation of 
 capital and credit during the period of the war, I have received several in- 
 quiries us to whether building operations of one kind and another should be 
 discouraged. With regard to plans for public buildings under the control of 
 this department, I have stopped letting contracts except in cases where they 
 were absolutely necessary. 
 
 Home building is an excellent thing in normal times, but at present, unless 
 there is a real shortage of houses for war workers, I strongly advise that 
 materials, valuable labor, and credit be not utilized fo this purpose. Whether 
 IK unes should be built should be determined strictly by the urgency of the need. 
 
 The committee, up to this time, has requested only that municipal 
 issues of $250.000 and above, and industrial or public utility issues 
 of $500.000 and above, be submitted to it. These limits were placed 
 at a higher figure than provided in the bill because it was necessary 
 for us to get under way before we would be prepared to act upon the 
 vast number of cases that would come before us if we reduced the 
 limit below those figures. We expect, however, very shortly to be 
 able to reduce our present limits. 
 
 I hope that I have made it clear that the operations of the com- 
 mittee are confined to new issues; that wherever people finance them- 
 selves in the regular course of business without applying to the in- 
 vestment market by the public sale of securities, in amounts in ex- 
 cess of the limits above described, they do not come within the pur- 
 view of the operations of the committee. 
 
 The CHAIRMAN. Gentlemen, does any member of the committee de- 
 sire to ask Mr. Warburg any questions? 
 
 Mr. O'SiiAi NKSSY. I would like to ask Mr. Warburg about the 
 committee, of which he is a member, dealing with these securities. 
 Do you think they will go on and perform their duties effectually 
 without any law being passed to define their duties and responsi- 
 bilities? 
 
 Mr. WARBURG. You mean in case you do not give the power to en- 
 force orders? 
 
 Mr. O'SiiAuxEssY. Yes; I mean will they go along in a voluntary 
 way just as this English committee did? Will they go along with 
 the same duties and power as if they were created by law? 
 
 Mr. WARBURG. In England they have an act which we call D. O. 
 R. A., the Defense of the Realm Act, which is a very broad act, and 
 which they can really put behind anything they want to enforce. 
 Such an act we have not got. But I believe that without such an 
 act probably, with the spirit in which the work of the committee has 
 been accepted, we probably will have good results. 
 
 Mr. O'SHAUNESSY. And it will be just as effective? 
 
 Mr. WARBURG. It is very important, however, that there should be 
 some big stick in the background. I mean that we should have 
 power, if necessary, in case we can not get the cooperation, particu- 
 larly, of some less patriotic operators. For instance, there are still a
 
 36 WAR I INAXCE CORPORATION. 
 
 great many oil propositions of a very doubtful kind which absorb a 
 great deal of money, and some people offering them do not care what 
 we say. It is very important, therefore, to have a big stick in the 
 background which would indicate that if we can not get voluntary 
 cooperation we can get it by act of law. I think that would he- 
 useful. 
 
 Mr. FORDXEY. Mr. Warburg, if I am correct in my assumption, if 
 this bill becomes a law as it is written, almost any industry of the 
 country, through their local bank, can get relief from this board, 
 whether directly producing something for the war or not? 
 
 Mi-. WARBTRG. As a matter of theory, yes. 
 
 Mr. FORDXEY. That is to say. if the board feels so inclined ( 
 
 Mr. WARBURG. The board could not feel so inclined very long. 
 
 Mr. FORDNEY. There is practically no limit to their authority if 
 they feel so inclined. If this bill becomes a law you can take almost 
 any security a bank would offer; that would he acceptable. 1 mean 
 to say. 
 
 Mr. WARBURG. That would he acceptable and that would be com- 
 patible with the public interest. I think the directors of thi^ cor- 
 poration would feel that their duty primarily is to protect the gen- 
 eral welfare and to do only such business, as was said in the state- 
 ment by Mr. McAdoo. that can not be carried on by the usual banking 
 channels at this time. 
 
 Mr. FORDXEY. Mr. Warburg, yesterday Mr. McAdoo in his state- 
 ment made reference to some power company, and I understood him 
 to say the company was in Michigan: a waterpower company which 
 is furnishing electric power to street railways and electric lines and 
 industrial institutions, etc. I know of that company. It is a very 
 large company, and they transmit power fully 200 miles away from 
 their power plant. The Secretary spoke of the large amount of se- 
 curities of those companies that were outstanding or in private banks 
 or trust companies. Am I correct in my understanding of this bill. 
 that the maximum loans are to be- 90 days? 
 
 Mr. WARBURG. Xo. 
 
 Mr. FORDXEY. I thought I read that in the bill. 
 
 The CHAIRMAN. That Avas in reference to loans to savings banks. 
 
 Mr. FORDXEY. I was going to say that if that was so the time 
 should be extended, because 90 days will do those people no good. 
 
 Mr. WARBURG. Ninety days is the limit for Federal reserve banks, 
 and then there is a provision in the act providing 90 days for loans 
 to savings banks: but I think when this question was discussed in 
 the Senate committee the point was raised that that was too short, 
 and that they should be made to extend to one year, and Mr. McAdoo 
 conceded that that change should be made. 
 
 Mr. FORDXEY. What is the maximum rate of interest charged now 
 bv the Federal reserve banks for commercial loans? I ought to know, 
 but I am not positive that I do know. 
 
 Mr. WARBURG. Five and a half per cent is the highest, and that is 
 for six months. 
 
 Mr. FORDXEY. Then this law provides not to exceed 1 per cent 
 above that amount? 
 
 Mr. WARBURG. I think that limit probably would dror> out if you 
 removed the 90-day limit, because that was only to serve as an index
 
 WAR FINANCE CORPORATION. 37 
 
 for 90-day loans. If you decide to make these savings-bank loans up 
 to one year, I think then you want to strike out the limit entirely and 
 leave it to the hoard of directors: and I think it is very important 
 that the board of directors should have a free hand in fixing those 
 rates of interest, because you can not put down any rule which would 
 cover a one-year loan and a five-year loan at the same time. 
 
 Mr. FORDNEY. I agree with you. 
 
 Mr. WARBURG. Loans may be made for DO days or for 5 years un- 
 der this act. 
 
 Mr. FoRDNEY". And undoubtedly will be for a long time if the 
 securities of power companies and such companies are taken, because 
 they can not meet their financial obligations in 90 days. 
 
 Mr. AVARBURG. It is impossible. You will have to have normal 
 linu's again to dissolve the transactions. 
 
 Mi 1 . GARNER. Mr. Warburg 
 
 The CHAIRMAN (interposing). I would suggest that when one gen- 
 tleman begins questioning Mr. Warburg that he finishes his questions 
 without any other gentleman breaking in. because it interferes with 
 the trend of thought of Mr. Warburg and also the trend of thought 
 of the gentleman who is asking the questions. If Mr. Garner will 
 take the witness, I would suggest that he be not interrupted until he 
 has concluded. 
 
 Mr. GARNER. Mr. Warburg, the two principal features of this bill 
 are the extension of desirable credit and the prevention of undesir- 
 able enterprises? 
 
 Mr. WARBURG. Yes. 
 
 Mr. GARNER. They are the two features of this bill? 
 
 Mr. WARBURG. Yes. 
 
 Mr. GARNER. Why was it you did not undertake to perform those 
 duties through the Federal reserve organization? 
 
 Mr. WARBURG. We have not got the power. 
 
 Mr. GARNER. Well, why did you not ask Congress to give you the 
 the power, the same as you do in this bill? 
 
 Mr. WARBURG. We do not ask now to have the power in the Fed- 
 eral reserve banks. 
 
 Mr. GARNER. I understand you do not, but you are asking for the 
 passage of the bill, and I am asking you why it was you did not ask 
 Congress to pass a bill amending the Federal reserve act and enabling 
 you to do the very things sought to be done in this bill I 
 
 Mr. WARBURG. Because this bill gets its main sources of strength 
 in its power, if you please, to guarantee securities. That is what it 
 Iocs, in effect. This bill altogether deals with securities and not with 
 commercial paper. 
 
 Mr. GARNER. Yes. 
 
 Mr. WARBI-RG. The Federal reserve system is primarily based upon 
 liquid, commercial paper. It is the ultimate source of the reserve 
 power of the country, arid it is a grave responsibility to administer 
 any reserve money. Reserve money ought to be available all the 
 time. When we invest it. we ought to invest it so as to always have 
 a hold on it so \ve can always get it back when the bill matures; 
 in lf> or 30 or <>() or DO days it must come back. AVhen you go into 
 the security market there is no such thing. But you do not want me 
 to go into the whole theory of securities versus commercial paper?
 
 38 WAR FINANCE CORPORATION. 
 
 Mr. GARNER. No; I am merely trying to ascertain why it was that 
 the framers of this bill in their original thought did not select the 
 Federal reserve system for the accomplishment of the purpose sought 
 to be accomplished in this bill. Now, this bill in a way works through 
 the Federal reserve system. Outside of your special loans and your 
 loans to savings banks, you work through the Federal reserve system 
 by rediscounting their paper, do you not? 
 
 Mr. WARBURG. Well, I hope not. 
 
 Mr. GARNER. The bill authorizes that to be done, does it not ? 
 
 Mr. WARBURG. Yes. When I say I hope not, I mean in the way 
 you put it. What this bill will do, as I tried to make clear in my 
 statement, is that it will put life back into the security market. 
 This bill enables power companies, utilities companies, municipali- 
 ties, and industrial corporations to appeal again to the investor, 
 where to-day they can not. If I may make that clear: If that Michi- 
 gan company has $10,000,000 of maturities and wants to renew them 
 and can not pay them off and has got to renew them, and appeals to 
 a syndicate of bankers, " Will you take this $10,000,000 ? " those 
 bankers will say. " We can not do it ; we can not get the holders of 
 those maturities to take the five-year bonds of the Michigan company 
 at this time." NOAV there steps in this new corporation and says. 
 "All right ; is this banking syndicate ready to take an advance from 
 us for five years on those securities?" "Yes." "Then we will give 
 you either cash," or probably Ave will say. " Here are $10.000,000 of 
 five-year notes of that corporation."' The banking syndicate can 
 proceed to offer them to the maturing bondholders, and for the bal- 
 ance it can come to the Federal reserA T e banks, if the banks can not 
 carry that balance themseh-es. 
 
 So yon see the Federal reserve banks Avill deal only \vith whatever 
 is unplaced, while under the Calder bill and the Aldrich-Yreeland 
 bill there is no appeal to the security market at all. because you do 
 not create anything that Avill go. You throAv 100 per cent of the 
 loan on the Federal ReserA-e System or upon the Aldrich-Yreeland 
 note-issuing organization, instead of getting 90 per cent into the 
 bond market first, and only getting the balance, Avhich Avill not float, 
 into the Federal Reserve System. I do not know whether that is 
 quite clear or not. 
 
 Mr. GARNER. The main point I Avanted to ascertain was why you 
 did not undertake to perform the duties sought to be performed 
 under this bill through the Federal Reserve System? I can under- 
 stand that that ought not to be the permanent law. but it just oc- 
 curred to my mind that probably the results sought in this bill could 
 have been accomplished by an amendment to the Federal reserve act 
 Avhich Avould have expired at the end of the Avar. 
 
 Mr. WARBURG. We would have pulled doAvn our reserves much 
 faster in that Avay. as I have explained to you. than through this 
 method. Moreover, there is this to be considered: This neAv law 
 provides for a distinct discrimination between essential and non- 
 <> cntial things: betAveen things that ought to be done at this time 
 and things that ought not to be done at this time. If you permitted 
 every security Avhich has been issued since this country has existed 
 to be used as collateral for borroAving with the Federal reserve banks, 
 then you take everything that has been issued in the past even for
 
 WAE FINANCE CORPORATION. 39 
 
 unnecessary things and permit them to come in as collateral, where- 
 as now we will only permit what we pass upon as compatible future 
 issue. So we expect to establish some very important " buffer 
 State? " for the protection of the Federal reserve system, and that is 
 very important. 
 
 Mr. GARNER. Mr. Warburg, are you familiar with any of the so- 
 called " blue sky " laws of the various States? 
 
 Mi-. WARBURG. Not very; no. 
 
 Mr. GARNER. What is your opinion, based on whatever informa- 
 tion you have, with reference to the object of those laws? Are they 
 not to curb the issuing of stocks and bonds of undesirable corpora- 
 tions or uncertain corporations? 
 
 Mr. WARBURG. Yes; I think so, in a general way. 
 
 Mr. GARNER. Is not this bill, in a sense, along that line, creating 
 n governmental office for the purpose of determining whether cer- 
 tain corporations are desirable or undesirable during the time of 
 this war? 
 
 Mr. WARBURG. Yes. 
 
 Mr. GARNER. What would you say about a governmental policy 
 of that kind in time of peace? 
 
 Mr. WARBURG. I should think it was undesirable paternalism. 
 I should say also that if this bill, which I strongly urge, were offered 
 in peace times I would say that it was one of the most undesirable 
 pieces of legislation I could imagine; but we have to do a lot of 
 things at this time which would be bad Government policy in time 
 of peace. 
 
 Mr. GARNER. You probably have observed that since the begin- 
 ning of this war, even before this country' got into it, Congress has 
 passed many laws that probably it would not have passed if it had 
 not been for the condition of the world, especially since we have 
 entered into the war: and nearly all the laws we have passed have 
 been with the understanding that they expire at the end of the 
 war, and I think the country ought to know and observe that the 
 Congress has not refused to give the executive branch of the Govern- 
 ment any essential law necessary to the conduct of this war. 
 
 Mr. WARBURG, I might state that when we discussed this bill in 
 the board we went on record amongst ourselves that we favored 
 the general plan of the bill, but we entered upon our minutes that we 
 did it on account of the emergency, and that in doing so we did not 
 abandon any of the principles which we have espoused for normal 
 times and which would run counter to these things. 
 
 Mr. GARNER. Mr. Warburg, you have a provision in this bill which 
 authorizes you to buy and sell Government bonds? 
 
 Mr, WARBURG. Yes. 
 
 Mr. GARNER. Do you hope by that provision to put the Liberty 
 bonds, the 4 per cent bonds, at par? 
 
 Mr. WARBURG. I should like to say that the Secretary of the Treas- 
 ury is really the proper person to answer that question. I am not 
 the War Finance Corporation. I am simply here to answer ques- 
 tions about the theory of the bill. 
 
 Mr. GARNER. Thsere must be some object in having that provision 
 in the bill. 
 
 Mr. WARBURG. I will be glad to tell you what, individually, I 
 think of it: but I do not want to say what the corporation is going
 
 40 WAR FINAXCK CORPORATION. 
 
 to do, because I have no right to say that. The Sec-rotary of the 
 Treasury was very clear in his statement to the Senate committee 
 that he does not expect at all to peg the market for Government 
 bonds. He said it would be entirely impossible for anybody to try 
 to keep the bonds at par all the time and to say " We are holding the 
 bag for everybody who wants to sell." because that, as a matter of 
 fact, would make the Government obligation, which is a 25 or a 30 
 year obligation, a demand obligation, and. of course, the Govern- 
 ment could not do that. The Government is selling securities all the 
 time at par. and it could not undertake to buy them all the time at 
 par. What this corporation might do. however, to very good effect 
 is simply to have a very strong psychological influence upon the 
 market. There is not any other country that has not an instru- 
 mentality to protect its own bonds. When we have completed our 
 liberty-loan sales and have filled every hole that we can find and 
 every future hole, because we ask people to dig that hole in ad- 
 vance 
 
 Mr. GARNER (interposing). If you undertook by this provision in 
 the bill to maintain the market at par it would merely transfer these 
 bonds from a circulating medium to be cashed at the Treasury to the 
 stock exchange in New York? 
 
 Mr. WARBURG. I did not quite catch that. 
 
 Mr. GARNER. If by this provision in the bill this corporal ion should 
 undertake to maintain these bonds on the market at par, we will say 
 the New York Stock Exchange, it would merely transfer from the 
 Treasury the circulating medium, as it were, the cash value of it. 
 to the New York Stock Exchange? 
 
 Mr. WARBURG. Oh. yes. 
 
 Mr. GARNER. If you could go to New York and get 100 cents on the 
 dollar, of course, it would be no use to come down to the Treasury 
 and hand in your bond and get the money, and the result of the effort 
 would be to make this the par value and. you might say. a circulating 
 medium to be cashed at the Treasury for gold at any time which. I 
 think, is simply impossible to think about. 
 
 Mr. WARBURG. Impossible. The Secretary will be here to-morrow 
 and if you ask him the question I think he will be very emphatic in 
 saying that that is not his intention at all. 
 
 Mr. GARNER. I was merely asking that to find out what there was 
 to it. Now. you say it is psychological, and I agree with you. Sup- 
 pose this corporation should on Monday decide to bid for the bonds, 
 and being in the market for those bonds the bonds would naturally 
 go up. Now, suppose it should become supplied with all the bonds it 
 .desires and then cease to buy and they go down and are lower on 
 Saturday ? 
 
 Mr. WARBURG. The psychological effect I had in mind was this: 
 That the people in general and the people who are not well inclined 
 in particular would not have the certainty that here is a market 
 which is absolutely unprotected and a market which is without any 
 purchasing power, because when we have completed our liberty-loan 
 sales there is no more purchasing power, because we have taken' every 
 cent that will come during the following two or three months. So 
 everybody knows that he can be-jin to sell these bonds short and find 
 an entire unprotected market. That is what I mean when I sav there
 
 WAR FINANCE CORPORATION. 41 
 
 is a psychological effect. It is very important that there should be 
 somebody to protect the market. 
 
 Mr. GARNER. I merely wanted to direct your attention to the fact 
 that in ca>e the market should go up at some time and this corpora- 
 tion should be in the market for bonds and then at another period 
 it should go down, there might be some criticism throughout the 
 country, or rather an inquiry as to whether this corporation was un- 
 dertaking at one time to put the price of bonds up and at another 
 time neglecting the market, so that they might go down. I wanted to 
 merely throw out that suggestion to see what your views might be 
 with reference to the effect vtpon the entire country of having a 
 governmental corporation here authorized to put up or down, we 
 might say, the price of bonds. 
 
 Mr. WARBURG. Well, you would hardly expect that they would 
 ver put it down. 
 
 Mr. GARNER. I mean by that not intentionally or not necessarity 
 by their individual effort, but if they were in the market this week 
 for bonds and next week they should decide to go out of the market 
 and the liberty bonds had no support in the market, naturally, the 
 bonds would go down. 
 
 Mi\ WAHIH KG. I should think the corporation would do just as 
 little as it possibly could and would consider itself only an emergency 
 institution also in that respect to protect the market when it was 
 necessary and take away from the market blocks of bonds from 
 people who have got to sell and who otherwise might spoil the mar- 
 ket. Naturally. I think we have got to be prepared to have some 
 criticism from time to time. People may become disappointed and 
 there will be some kicks, I have no doubt, but I think the advantage 
 is so much greater in getting the protection for the market that we 
 have to take the danger of criticism into the bargain. 
 
 Mr. GARNER. I was only afaid of what the effect of the criticism 
 might be upon the administration of this law in case the market 
 should go up and down and they should attribute it to the efforts or 
 want of efforts on the part of this corporation. I believe that is all, 
 Mr. Chairman. 
 
 Mr. MOORE. Mr. Warburg, following up the suggestions of Mr. 
 Garner. I would like to ask whether the thought of those advancing 
 this bill was to make this War Finance Corporation a permanent 
 institution? 
 
 Mr. WARIH KG. The law provides, Mr. Moore, that this institution 
 shall stop doing business inside of six months after the conclusion of 
 peace and then from that time on shall proceed at one? to liquidate. 
 
 Mr. MOORK. In your statement you referred to the fact that we 
 ought not to circumscribe its influence, and you stated you hoped its 
 influence would be very much like that of the Federal reserve bank. 
 The Federal reserve bank is certainly a permanent institution, is it 
 not '( 
 
 Mr. WARIH KG. I did not mean to convey that impression at all. 
 I would like to make it as emphatic as I can that I think this is only 
 an emergency institution for this war. and that it would be a very 
 unfortunate thing if an institution of this kind were to be permitted 
 to exist after the conclusion of peace: and that is one of the reasons 
 why I think these powers are bettered lodged in the corporation than 
 in the Government, because the corporation automatically ceases to
 
 42 WAR FINANCE CORPORATION. 
 
 have power to operate, yet upon the conclusion of peace the Govern- 
 ment could go on. 
 
 Mr. MOORE. But the machinery provided in the first and second 
 sections of the bill contemplates a rather long and enduring or- 
 ganization. For instance, it is provided that it shall have succession 
 for a period of 10 years: then the manner of electing officers and 
 directors provides for terms of office which looks as if it was in- 
 tended to carry this business on for a long time. 
 
 Mr. WARBURG. If you prefer it I think you could change it to 
 say: the duration of the corporation shall be just as long as 
 required to liquidate its affairs after the conclusion of the war. I 
 think if you would start to write this bill you would find yourself 
 in the same predicament. You have got to give that corporation a 
 certain length of life, because it will make five-year loans and those 
 loans may possibly not be paid immediately after the conclusion of 
 peace, and you will have to go on until you liquidate them; but 
 you will find that there is a very clear clause there which provides 
 that immediately upon the conclusion of peace the corporation ceases 
 to have power to do business. 
 
 Mr. MOORE. Yes; I am familiar with that provision, but section 
 provides that the corporation shall have the power to hold or dispose 
 of real estate and to sue and be sued, and it generally prepares for 
 what might be regarded as a rather long life. Now, when you begin 
 to take over real estate, it looks as if you were going to have a 
 long existence. 
 
 Mr. WARBURG. Would it not be rather a prolonged death, because 
 you can not do* any business any more and you would hold only 
 certain investments that you may not have been able to dispose of, 
 but I should think the directors would make every effort to get rid 
 of the expensive management and everything also as soon as pos- 
 sible. The clause I have in mind is at the end of section 1 : 
 
 In no event shall the corporation exercise any of the powers conferred by 
 this act, except such as are incidental to the successful liquidation of its 
 assets and the successful winding up of its affairs after six months after the 
 termination of the war, the date of such termination to be fixed by proclama- 
 tion of the President of the United States. 
 
 Mr. MOORE. In just what way would you dispose of all the min- 
 utia> provided for in the succeeding sections, as, for instance, the 
 holding of real estate, the making of contracts, which undoubtedly 
 would be for a term of years, some of them : how would that business 
 be disposed of? 
 
 Mr. WARBURG. The corporation can not go on doing any business, 
 but like any corporation in course of liquidation, you have to carry 
 it on until you dissolve it. 
 
 Mr. MOORE. But if it made contracts for a period of veal's, and if it 
 held real estate which had to be disposed of at some subsequent 
 period, and was not what you call a liquid asset, that would contem- 
 plate a long existence or at least the transfer of the business to 
 some other corporation which would have similar powers. 
 
 Mr. WARBURG. If you have the power only to provide your money 
 by securities which can not run longer than five years, does it not 
 stand to reason that you will be careful not to go into obligations 
 extending over that period?
 
 WAR FINANCE CORPORATION. 43 
 
 Mr. MOORE. This is what I am getting at : The Federal reserve 
 bank is undoubtedly a fixed institution, and some of us are inclined 
 to think it is as close to a central bank as ever the United States 
 Bank was in its day. 
 
 Mr. WARBI RG. Xone of this should ever go into the Federal re- 
 serve banks. Indeed, all that we provide now is that during the war. 
 and as long as these obligations are outstanding, the Federal reserve 
 banks may discount the paper security of thesa banks. We have not 
 given the Federal reserve banks any larger powers than that. If 
 this corporation wishes to go out of business, there will not be any 
 other instrument that can do this business. I am very much opposed 
 to having any of these powers go into the Federal Reserve System. 
 
 Mr. MOORE. You make that statement as a financier? 
 
 Mr. AYARBURG. Yes. 
 
 Mr. MOORK. Mr. Garner asked you about 
 
 Mr. WARBURG (interposing). I want to be quite clear in regard to 
 that proposition. The rediscounts, as proposed, I am in favor of. 
 But the power to grant loans on bonds and stocks, and make direct 
 loans to corporations in need, that I do not want the Federal reserve 
 banks to enjoy. 
 
 Mr. MOORE. That certainly would have a very unfortunate effect 
 upon the existing banking institutions throughout the country, would 
 it not '( 
 
 Mr. WARBURG. If it were done, or not done \ 
 
 Mr. MOORE. If this corporation were to continue to do a direct dis- 
 count business with the public. 
 
 Mr. WARBT RG. It would be more than a discount business, because 
 it would be buying securities; it would be making permanent five 
 year loans. If we were to put that power into the Federal Reserve 
 System, we would destroy it. 
 
 Mr. MOORE. If a man wanted to borrow money and could initiate 
 his transaction through the War Finance Corporation, he might not 
 go to his State bank or his local or Federal band. 
 
 Mi-. WARBURG. If this corporation were going to take the place of 
 members banks, in normal times? 
 
 Mi'. MOORE. Yes. 
 
 Mr. WARBURG. That would be very unfortunate. 
 
 Mr. MOORE. Does not this bill provide that this corporation may 
 do business directly with a borrower? 
 
 Mr. WARBURG. The preamble says that in exceptional cases it may 
 be done, but I hope that these exceptional cases will be but a very, 
 very small percentage. 
 
 Mr. MOORE. Those exceptional cases would be wholly within the 
 discretion of the Secretary of the Treasury, and the board cooperat- 
 ing with him? 
 
 Mr. WARBURG. The board of directors '( 
 
 Mr. MOORE. Yes. 
 
 Mr. WARBURG. Yes. 
 
 Mr. MOORK. They would have power to say. in almost any case, 
 whether the money should or should not be loaned > 
 
 Mr. WARBURG. I do not think there would be any objection to put- 
 ting a limitation on that, to say that no more than 5 or 10 per cent
 
 44 WAR FINANCE CORPORATION. 
 
 of tin 1 business done by the corporation shall be done in that direct 
 manner. 
 
 Mr. MOOHK. That question comes up in connection with the ordinary 
 banking business of the country. There are some bankers who were 
 not wholly in favor of going into the Federal Reserve System. There 
 are some who would hesitate about indorsing a law which proposed 
 to take away what business remained to them. 
 
 This proposition. a I read the testimony of the Secretary of the 
 Treasury and your testimony, would mean that if I. as a contractor, 
 making war munitions, or if I. as a farmer or a representative of a 
 farmers' association, desiring to get money from this corporation, 
 brought sufficient influence to bear, I might get it from the corpora- 
 tion without going to my bank. 
 
 Mr. AYARBURG. Let me give you what I believe to be the meaning 
 of this paragraph. 
 
 If we left it out. there would be two weaknesses in the law. One 
 would be that a hue and cry would be raised that we are delivering 
 the country into the hands of the bankers. It would be said that the 
 Government is willing to provide for a tremendous amount of money 
 which would be absolutely under lock and key. and nobody could 
 get it out except a man who has a bank to stand sponsor for him. 
 
 It would not be right, either, to have it that way. because. a$ we 
 have seen in the past, it might be feared by some that there might 
 be a ring of bankers who could keep deserving people out. 
 
 For that reason it is necessary to have what we might call an 
 '" open-market clause," which is practically the same as the open- 
 market clause in the Federal reserve act. 
 
 The other is that there may be possibly some industrial propo- 
 sitions which might be really essential for the well being of the 
 country at this time, but which the banks might not be willing to 
 guarantee, because, let us assume, the contracts are too short. They 
 expire after a short while, and a big plant has to be created, and it 
 may be considered bad business for a bank to finance that. 
 
 For such cases it would be very important that this institution, 
 which represents the Government, could be free to say, "We will 
 step in and help them out in that situation/' although if must he the 
 intention of this war corporation to deal as much as possible 
 through banks and bankers. 
 
 If you will consider how the corporation is going to act. you will 
 see that for its own sake it can not act in anv other wav. 
 
 Here are five men who will be swamped with requests for loans 
 from all parts of the country. How is it possible, even with the 
 organization of the 12 Federal reserve banks and their branches, 
 through whom they can keep advised, to investigate and examine 
 every industrial proposition of $100,000 and not make mistakes? 
 
 Their only protection is to act through banks and bankers, prima- 
 rily, and put that test upon a cash proposition that if the people, 
 locally, are willing to stand behind it and guarantee it, then the 
 Government is willing to provide the funds, but not otherwise. 
 
 Mr. MOORE. I think it is in the bill that it is to be done primarily 
 by the banks, and they have to come to the corporation and obtain it's 
 approval before the loan is consummated. 
 
 But provision is made that if anyone does not get that help from 
 a bank and does come to this corporation with what seems a war
 
 WAB FINANCE C'OHPOKATION. 45 
 
 necessity, he can get :l loan, even though the bunks decline to lend the 
 money. 
 
 That brings up the case of the Michigan corporation which the 
 Secretary of the Treasury referred to yesterday, and which Mr. Ford- 
 ney adverted to this morning. That was the case of a power com- 
 pany which was unable to obtain necessary financial support to con- 
 tinue its work to furnish power to the trolley lijies, to public utilities, 
 or to mines. It brings up this question: If the corporation wishes 
 to issue stock or the local banks that are familiar with the situation 
 decline to make further loans, either for maturing securities, or for 
 any other purpose, would it not be within the province of the \Var 
 Finance Corporation to loan that company money, notwithstanding 
 that its request had been rejected by those who are most familiar 
 with its business? 
 
 Mr. WARBURG. If I were on the board of directors, I would say if 
 it were plainly a commercial proposition, having no relation to the 
 war. where the local banks are unwilling to stand behind the securi- 
 t ies. that the corporation should not do it either. If the vital interests 
 of the country at this time are involved. I would judge the case dif- 
 ferently. 
 
 Mr. MOORE. 1 do not know that I have in mind the company which 
 the Secretary of the Treasury referred to, but I have in mind a large 
 corporation which might have answered his description, which did 
 issue more stock and bonds than, perhaps, its assets warranted. Yon 
 might call them paper issues, or water issues. The banks were 
 familiar with the situation, and they went as far as they thought it 
 was wise to go in loaning money to that particular corporation. Still 
 the business being done by the corporation, if it could continue busi- 
 ness, would probably be valuable in time of war. In that case, where 
 things had practically reached a bankruptcy basis, would this War 
 Finance Corporation lend money to such an enterprise to keep it 
 going, on the ground of war necessity, or on the ground of that com- 
 pany being essential at this time? 
 
 Mr. WARBURG. That is a case that would have to be dealt with on 
 its merits, and the facts in that particular case would have to be 
 taken into consideration. 
 
 Mr. MOORE. The War Finance Corporation would have power to 
 lend money in a case of that kind ( 
 
 Mr. WARBUfiG. I think the power is there, but there is a grave re- 
 sponsibility resting on these men to guard against abuses, and they 
 have to exercise common sense. 
 
 Mr. MOORE. In other words, a dead horse might be put on its feet 
 if it could show that it had a war value at this time? 
 
 MV. WARBURG. If you could ride on a dead horse to battle, it would 
 be put on its feet. 
 
 Mr. MOORE. I am using an extreme case for the purpose of illustra- 
 tion. The only way to get information is to ask questions, and 
 these questions are not intended to be objectionable* 
 
 Mr. WARBURG. Of course not. 
 
 Mr. MOORE. It is a question of the integrity of the proposition. 
 Why would it not be sufficient, instead of creating this new r organi- 
 zation, with all its officers and its headquarters and all its clerks, all 
 the other paraphernalia necessary why would it not be sufficient to
 
 46 WAR FINANCE CORPORATION. 
 
 give the sanction of law to some such body as your capital'issues com- 
 mittee in the Federal Reserve Board ? 
 
 Mr. WARBURG. That is only a negative means of relief. What we 
 do in our committee is to prevent people from raising money where 
 they should not. but. w r e can not provide any relief where we find 
 that things are compatible with the public interest and where the 
 machinery for providing the money has broken down. 
 
 Mi-. MOORE. Where your capital issues committee puts its stamp of 
 approval upon certain securities, they go. do they not ? 
 
 Mr. WARBURO. Xo: they do not: not a bit of it. You may put it 
 the other way. Securities that we do not approve do not go. But 
 the mere fact that we say this is compatible with the public interests 
 does not mean that it is a good security. We are very particular in 
 putting it into our letters of approval we do not even call it ap- 
 proval that our permit does not mean that there has been any 
 investigation in regard to the intrinsic merits of the proposition. It 
 merely involves the question as to whether or not the thing is com- 
 patible with the public interests at this time. 
 
 Mr. MOORE. If your committee, backed by the Secretary of the 
 Treasury, were to say. "We do not approve of this issue at this 
 time." it could not be sold, could it '. 
 
 Mr. WARBURG. It would probably not be sold, but that would not 
 mean that you can sell it with our approval. 
 
 Mr. MOORE. Would not that affect the sale of municipal or State 
 securities ? 
 
 Mr. WARBURG. I hope so. 
 
 Mr. MOORE. That is to say, if the authorities of a State or a munici- 
 pality were to say to you. "We would like to make this issue for 
 waterworks, or for State roads, or for a public building." and you 
 said publicly you felt that such an issue would not be compatible 
 with the public interests, it is very doubtful whether the securities 
 market would touch that issue at all, is it not ? 
 
 Mr. WARBURG. That is correct; the securities market would prob- 
 ably not take them. 
 
 Mr. MOORE. Then you have almost absolute power now. even in 
 your volunteer committee. 
 
 Mr. WARBURG. To prevent: but we have no power to assist. 
 
 MT-. MOORE. My point is that, apparently, for the work you are 
 undertaking to do you have just as effective an organization now as 
 you would have if you had the new War Finance Corporation, 
 which is contemplated by this bill. 
 
 Mi 1 . WARBURG. For the work our capital issues committee is under- 
 taking now. we would probably have the same power that we have 
 to-day, except that it would be a great he!]) if the power of law 
 could be placed behind it. but that does not cover an equally im- 
 portant feature, which is the relief to savings banks, relief to indus- 
 trial corporations, and relief to the securities market in general. 
 
 Mr. MOORE. Then the purpose of this bill must be to obtain a 
 grouping of funds for the purpose you have indicated, to give assist- 
 ance in certain cases during the war. 
 
 Mr. WARBURG. That is right. 
 
 Mr. MOORE. That is a function you do not exercise now us a capi- 
 tal issues committee, or a Federal Reserve Bank? 
 
 Mr. WARBURG. That is correct.
 
 WAR FINANCE CORPORATION. 47 
 
 Mi-. MOORE. The real purpose is to group money, to gather it 
 together, with a view to saying, for instance, to the American Inter- 
 national Corporation, which is building the Hog Island shipyard. 
 If this is a war proposition and it is approved, we will loan you the 
 money. 
 
 Mr. WARBURG. We might. 
 
 Mr. MOORE. That would be Federal money, after all? 
 
 Mr. WARBURG. Not exactly, because we raise it on the credit of 
 the corporation although indeed we have the power of the Govern- 
 ment behind it. and the stock ownership of the United States. 
 
 Mr. MOORE. But with the sympathy of the Federal reserve banks, 
 which you would undoubtedly have under this bill, you would so 
 group the funds of this country, both the deposits in the Federal 
 reserve banks and the Federal resources appropriated by this bill and 
 raised under it you would have them so grouped that it would be 
 within the power of the corporation to assist a company in Penn- 
 sylvania or to refuse to assist a corporation in Illinois? 
 
 Mr. WARBURG. That is the object of the law. 
 
 Mi-. O'SiiAi NKSSY. What kind of a letter do you give the security 
 that seeks the approval of this committee now ? 
 
 Mr. WARBURG. I have it here: it says: 
 
 Having inquired into the purpose of the issue above described, we are of 
 opinion that the sale of the said bonds is not incompatible with the interests 
 jof the United States. 
 
 This finding constitutes no approval of such issue as regards its merits. 
 security, or legality in any respect. 
 
 In any public offer or advertisement of the said issue this letter must be 
 incorporated in full. 
 
 Mr. O'SiiAiXKssY. Is I hat used by those who issue the securities > 
 
 Mr. WARBURG. Yes. 
 
 Mr. O'SiiAUNESsY. Do they stamp that upon them? 
 
 Mr. WARBURG. Yes. They print it in the prospectus. 
 
 Mr. O'SiiAUNKSsr. When you spoke about the mining companies 
 in the West that are not responsive to the invitation of the committee. 
 I believe you did not indicate how large that interest is and how 
 extensively they issue securities. I wish you would indicate how 
 large their interest is and how extensive the issues of securities are. 
 
 Mr. WARBURG. I could not tell you, in exact figures. They adver- 
 tise, as a rule, in pretty glowing terms. It is always the best, the 
 biggest, and the greatest, and we have turned over some of them to 
 the Attorney General to see how far we can stop such advertise- 
 ments. So far we are dealing with issues of $500,000 or above. 
 
 Mr. O'SIIAUNKSSY. Do you believe you should confine yourself 
 to that figure, or do you believe it would be for the public good to 
 come down to $100,000? 
 
 Mr. WARBURG. We hope very scon to come down to $100,000 as 
 far as municipal issues are concerned, because the greatest waste- is 
 in municipal issues, and there are a great many small < nes that slip 
 through. 
 
 Mr. O'SIIAUNESSY. What is the figure generally used in the mining 
 
 business ? 
 
 Mr. WARBURG. It is less than $500.000. and. therefore, they escape 
 
 us so far. 
 
 Mr. O'SiiAUNESSY. How is the public good to be served in stop- 
 ping money being invested in worthless enterprises ? I am trying
 
 48 N'AK FINANC'K CORPORATION. 
 
 to show that a good effect might How from the work of this cor- 
 poration in saving the public and in enabling them to put it into 
 better investments. 
 
 Mr. WAKIH-HG. We hope to go down to ft>50.000 and over as far 
 as industrial concerns are concerned. We have got to go slow, be- 
 cause the amount of material that is submitted to us is so large. 
 
 Mr. O'SiiAt NKSSY. As long as your committee operates without 
 the sanction of law. merely as a volunteer committee, responding to 
 rhe invitation of the Secretary of the Treasury, have you the power 
 to compel any submission of this information by these exploiters? 
 
 Mr. WABBUBO. No. 
 
 Mr. O'SiiAi NKSSY. But with the sanction of law. such as I have 
 indicated in my first question, you could compel these people to 
 make application to you? 
 
 Mr. WARBI m;. Yes: the law prescribes a fine if anybody does nor 
 submit it. We have not got that now. 
 
 Mr. O'SHAUNKSSV. Do you believe that would be a good thing 
 for the public ? 
 
 Mr. WARBURG. I think so; if we had the power to impose a penalty. 
 
 Mr. O'SnAUNESSY. Do you believe it would be a good thing for the 
 public, in times of peace even I mean dealing with such companies 
 as that ( 
 
 Mr. WAKBURG. That is a very large question. That is done in 
 Europe. In France and in Germany they have Government commis-. 
 sions that pass on every prospectus that is intended to be published 
 in regard to the sale of securities. But that brings about a degree of 
 paternalism that I do not believe in. 
 
 Mr. O'SHAUNESSY. But there might be extreme cases in which 
 some intervention might be justifiable? As I recollect it. it runs 
 into millions of dollars: millions of dollars are extracted from a 
 gullible public every year by these people. 
 
 Mr. WARBURG. So it is. There is no doubt about it. I think the 
 matter had better be covered by having some legislation that pun- 
 ishes the sale of such securities upon a misstatement or incomplete 
 statement, because these men almost all misstate the facts. 
 
 Mr. OLDFIELD. A good many of the States have laws in regard to 
 that now. It might be left to the States, might it not ? 
 
 Mr. WARBURG. If they would enforce the laws. 
 
 Mr. O ? SHAUNESSY. Will you indicate to us just what the operation 
 is when you issue this certificate? How do you invite these state- 
 ments or call for these statements? Is it by advertisement or by 
 letter? 
 
 Mr. WARBURG. This matter has been widely published, so that 
 everybody in the United States knows about it now. 
 
 M*r. O'SiiAUNKssY. It is a matter of general knowledge now among 
 the investment companies? 
 
 Mr. WARBURG. Every good citi/en knows now that he has to apply, 
 and I think the way we are going to control it is more or less through 
 the associations of the investment bankers, with whom we are getting 
 in touch now. I gave you the illustration of the New York Stock Ex- 
 change, which does not list anything which has not been approved. 
 Through these investment bankers' associations I think we are going 
 to control the more important issues. The difficulty is with the
 
 WAR FINANCE CORPORATION. 49 
 
 smaller ones, which are not offered at all for public sale, but which 
 are offered by means of circulars and appeals to the investors direct. 
 
 Mr. O'SHAUXKSSY. What is the life of the corporation's bonds? 
 
 Mr. WARBURG. The longest are five-year bonds and the shortest are 
 one-year bonds. 
 
 Mr. O'SirAuxKssv. You denominate them all as short-term bonds? 
 
 Mr. AVARBI R<;. Yes. 
 
 Mr. LOXGWORTH. Let me see if I can summarize the items in favor 
 of this matt, r in simple language. 
 
 In the first place, we admit it is desirable to lend credit to con- 
 cerns which are doing good work for the war. The Federal system 
 has not that power now. because they can not loan money on secur- 
 ities: they can only loan money on liquid paper. 
 
 Mr. WARBURG. That is right. 
 
 Mr. LOXGWORTH. Therefore, as the Secretary told us yesterday, our 
 Federal system has not the power that the English system has, with a 
 central bank, to loan on credits? 
 
 Mr. WAUIU RG. That is correct. 
 
 Mr. LOXGWORTII. You think it would not be advisable to confer this 
 power on the Federal system by legislative act, because it would tend 
 to deplete the reserves in the Federal banks and that the corporation 
 .system would be more convenient? 
 
 Mr. WARBURG. Yes. It would not only deplete the reserves, but I 
 think it would destroy the credit of the Federal Reserve System. If 
 the banks issued five-year notes of their own, all the things that are 
 necessary here, it would destroy the character of the reserve banks. 
 They would cease to be liquid, and I think you would have a terrible 
 condition of distress. I think it would be the end. 
 
 Mr. LOXGWORTH. Why is there such a marked difference between 
 our system and the English system? 
 
 Mr. WARBURG. In England they did much more than simply make 
 loans on credit. The treasury stepped in and guaranteed all stock- 
 exchange loans at the beginning of the war. They were given power 
 to do almost anything, and they did it there. They guaranteed ac- 
 ceptances, declared moratoria, closed stock exchanges, etc. So they 
 did in other countries, and in some cases made loans and issued notes 
 too freely, and with bad results. The note issue became so inflated in 
 certain cases that the matter became rather serious. Those are the 
 results that we are trying to avoid. 
 
 Mr. LOXGWORTH. You and Secretary McAdoo, I think, both used 
 the phrase " as a corollary to this power" you ought also to have the 
 power to supervise and refuse to license the issue of unnecessary 
 securities? 
 
 Mi-. WARBURG. Yes. 
 
 Mr. LONGWORTII. You ask for legal authority to do that in the case 
 of all private corporations, but you do not ask for that in the case of 
 municipalities. I suppose you would not have the power to do that 
 in the case of municipalities? 
 
 Mr. WARBURG. Congress has not the power to say to a munici- 
 pality, I think, that they shall not issue securities, but we can catch 
 them when it comes to the sale of securities. A State could sell 
 direct to a State bank $2,000.000 of State bonds, and we could not 
 interfere, but when the State bank would publicly offer those se- 
 
 4312218 4
 
 50 WAR FINANCE CORPORATION. 
 
 curities lor sale to the public we can interfere, because they would 
 have to have a license to do that. 
 
 Mr. LONG WORTH. You could not interfere with a municipality 
 offering them itself, but you could interfere if the State offered them 
 for sale through bonding agencies? 
 
 Mr. WARBURG. Yes. I may say that the municipalities appear 
 quite willing to cooperate with us, and they are very grateful where 
 they do want to do the right thing, to have us take the responsibility, 
 where they themselves might sometimes not be willing to do it unless 
 we stood behind them. 
 
 Mr. LONGWORTH. Is this an additional argument in favor of the 
 granting of power to extend credit to deserving corporations, that 
 many of them will be very short of cash at the time they would have 
 to pay their excess-profits taxes in June? 
 
 Mr. WARBURG. I think it is an additional argument that we have 
 entirely abnormal conditions. The mere thought that over $2.000.- 
 000,000 of taxes are due in June and have to be paid is a thing so abso- 
 lutely unprecedented that in itself it creates apprehension on the 
 part of a great many corporations that they might be unable to 
 finance, and that, with a security market that has been destroyed, 
 brings about a demand for an organization that may grant extraor- 
 dinary relief. 
 
 Mr. LONGWORTH. I have always felt that the proper relief in that 
 case was to postpone the payment of the excess-profit tax. and let it 
 be paid in installments say running six months after the 1st of 
 July. 
 
 Mr. WARBURG. I think that would be a very happy solution, if 
 the law were so amended that these taxes were to be paid in in- 
 stallments four times a year instead of on one date. But I do not 
 think we could postpone it now, because the Government needs the 
 money. This year we would have to proceed as the law now pro- 
 vides, but after that I thiak it would be a very good thing if pro- 
 vision were made that these payments could be made in four in- 
 stallments instead of one. because $3,000,000,000 is too much to take 
 out at one time, even though we spread the loan through the ad- 
 vance sale of certificates. 
 
 Mr. LONGWORTH. Do you think it advisable to give the Secretary 
 of the Treasury veto power over every act of this corporation '( 
 
 Mr. WARBURG. I think it is I do not know about " every act." 
 
 Mr. LONGWORTH. I notice the words " with the approval of the Sec- 
 rotary of the Treasury " occur about eighteen times in the bill. In 
 other words, the directors of the corporation have no powers what- 
 ever which are not subject to the approval of the Secretary of the 
 Treasury. 
 
 Mr. WARBURG. I think that probably it would be better for you to 
 discuss that with the Secretary of the Treasury rather than with me. 
 But I should like to say this. This corporation has got to be run in 
 absolutely close touch with the Treasury Department, because this 
 corporation competes with the Treasury in the sale of Government 
 bonds. The five-year notes, or the two-year notes, or the one-year 
 notes, whatever the corporation will sell, will appeal to the same 
 market as the Government appeals to with its issues of bonds. You 
 could imagine if there were two absolutely independent bodies in
 
 WAR FINANCE CORPORATION. 51 
 
 charge the War Finance Corporation might preempt the field of the 
 Secretary of the Treasury. 
 
 Again, there are certain transactions which are being carried on 
 by the War Department and the Navy Department making advances 
 on contracts, and these transactions are expected to go into this corpo- 
 ration. That is Government business, and I think there ought to be 
 a veto power in the Secretary of the Treasury, so that he could con- 
 trol to that extent and harmonize with his own the operations of the 
 corporation. 
 
 Mr. HAWLKY. If a municipal corporation offers to sell an issue of 
 bonds that you have not approved, and a bank takes them, the first 
 control you have is that it can not sell them without your consent, 
 and then the second is that if the bank submits them as security for 
 a loan, for which it makes a request, they will not be accepted as 
 security for that loan. Is that correct? 
 
 Mr. WARBURG. No; municipal securities are not admissible any 
 way with Federal reserve banks, or do you refer to the War Finance 
 Corporation ( 
 
 Mr. HAWLKY. Yes; I understood the Secretary of the Treasury 
 to so state to the Senate committee, but I was not clear whether the 
 War Finance Corporation would refuse to any bank the right to 
 accept such municipal securities and hold them without your con- 
 sent as security for a loan. 
 
 Mr. WARBURG. I have no doubt it would do that because the 
 mere fact that the approval would be withheld would show that 
 these funds are being raised for a purpose for which they should 
 not be raised at this time. 
 
 Mr. HAWLKY. So that you have absolute control over municipal 
 issues in that way ( 
 
 Mr. WARBURG. We would if the law passed not absolute, because 
 of the local banks. There are some very strong local banks and if 
 they, in spite of our sayso, were to take the securities and hold 
 them, that, of course, could be done. 
 
 Mr. HAWLKY. But they could not take very large quantities of 
 them ? 
 
 Mr. WARBURG. They could take a good many millions. If the 
 local bankers wanted to take in two or three year notes of their 
 respective cities, they could take a large amount, if they wanted, 
 but I do not think they will. I do not expect any such trouble. 
 
 Mr. HAWLKY. Suppose an industrial corporation desired to issue 
 a quantity of bonds, and this law having been enacted, it proceeds 
 in this way: It authorised the issue of a block of bonds this month, 
 sav of $50,000, and the next month $75,000, and the month subsequent 
 S(l'( ).()((). and so on in successive periods, offering them in small blocks, 
 not at anv time equal to $100.000. and a number of corporations 
 should do that? They might offer for sale outside the provisions of 
 the law a large amount of securities. What would you do in such 
 a case as that ( 
 
 Mr. WARBURG. We would show them up. I think that is all we 
 could do. I think they could do it. but if you went further than 
 that in the law you would block the business of the country. 
 
 Mr. HAWLKY. You have considered the possibilities of preventing 
 by some administrative method the sale of unnecessary bonds in 
 small blocks?
 
 52 WAR FINANCE CORPORATION. 
 
 Mr. WARBURG. Yes; that can be done. 
 
 Mr. HULL. On the question of State and municipal securities, the 
 act only authorizes the board to prohibit the sale or offering for sale. 
 It does not prohibit the purchase of them. If it was desired to abso- 
 lutely control the floating of State and municipal securities, the act 
 could authorize the board to prohibit the purchase of them, could it 
 not? 
 
 Mr. WARBURG. I think it might. I am not a lawyer and I do not 
 want to pass on that. It looks to me as if it could. 
 
 Mr. HULL. The other laws in most of fhe other countries do go 
 that far, do they not? 
 
 Mr. ^ ARBURG. I do not think so. The laws provide that the issu- 
 ance houses have got to have the approval of their prospectuses and 
 the control is most of the time through the stock exchange, and no 
 stock exchange is permitted to give a quotation until the prospectus 
 has been approved. I do not think any country puts an innocent 
 purchaser of securities on notice. Personally. I think that is going 
 too far. 
 
 Mr. HULL. Almost every country at war imposes that strict restric- 
 tion on the issue of securities? 
 
 Mr. WARBURG. Yes: they do. 
 
 Mr. HULL. Except this one? 
 
 Mr. WARBURG. Yes. 
 
 Mr. HULL. It seems necessary that this country should do like- 
 wise ( 
 
 Mr. WARBURG. I think so. 
 
 Mr. HULL. Speaking about the Federal Reserve System taking over 
 these functions, the only two places in the bill I have noticed where. 
 by implication, the Federal reserve act is amended are on pages 10 
 and 11. if you will turn to those two pages. Line 16, on page 10. is 
 the first amendment, and beginning with line i l. on page 11. is the 
 second ; is that correct ? 
 
 Mr.. WARBURG. I think that is the only reference in the bill. 
 
 Mr. HULL. Those are the only two provisions in this bill which, 
 by implication, amend the Federal reserve act? 
 
 Mr. WARBURG. That is correct. 
 
 Mr. HULL. There has been quite a little discussion and comment on 
 the fact that England has no law regulating the issue of securitie-. 
 I notice that Germany and France have express legal provisions on 
 that subject, and that Canada has what is equivalent to one an 
 Order in Council which is very comprehensive. If I understand 
 you correctly, the stock exchange in London, which was closed at 
 the outbreak of the war. would not and could not undertake to reopen 
 without the permission or the consent of the British treasury. Is 
 that correct? 
 
 Mr. WARBURG. That is correct. 
 
 Mr. HULL. And before they would agree to the reopening of the 
 stock exchange they imposed certain restrictions on the operations 
 of the exchange relating to the sale of securities, which the exchange 
 agreed to abide by. 
 
 Mr. WARBURG. They did. 
 
 Mr. HULL. They prohibited the selling of any securities which the 
 securities committee of the British Government imposed restrictions 
 on?
 
 WAR FINANCE CORPORATION. 53 
 
 Mr. WAKBUIUJ. That is right. 
 
 Mr. HULL. I notice there are a few legal provisions here in the 
 compilation of emergency war legislation in England, which in part 
 expressly authorize the prohibition of these security issues, so that 
 in addition to this condition, which is equivalent to authority of law 
 in relation to the operation of the stock exchange, there are two or 
 three statutes which enforce entire prohibition of security issues, if 
 necessary, as it relates to certain classes of business. 
 
 Mr. WAKBURG. That is correct. 
 
 Mr. HULL. Under this system of regulating issues of securities, 
 local or district or State boards who have local knowledge of the con- 
 ditions relating to each kind of business that might make a special 
 application, the general board here would prescribe the rule of 
 poiicy, and the chief work of ascertaining the true facts and making 
 recommendations would devolve on these local organizations, would 
 it not? 
 
 Mr. WARBURG. Yes. The local organizations investigate the mat- 
 ter on its merits, and particularly as to the statement of the facts, 
 and when they make their recommendations, unless we have an abso- 
 lutely clear case which we decide without submitting it to the local 
 organizations. There are some cases which are absolutely clear. 
 But wherever a local investigation is necessary, that is being done by 
 the local organization. 
 
 Mr. HULL. I do not know whether this is a difference in figures or 
 a difference in rule. On page 0. line 14, the bill provides: 
 
 Ami proridcd. That any advances so insult' by the corporation in cast's where 
 such financial assistance shall have been rendered by the purchase of such bonds 
 or other obligations shall not exceed 75 per cent of the market value of such 
 bonds or other obligations at the time of such advance, as estimated and deter- 
 mined by the board of directors of the corporation. 
 
 Then on page 7, it is provided that the corporation may make ad- 
 vances up to one hundred per cent, under certain conditions. On 
 page 0, the power to make advances to the extent of 75 per cent makes 
 a ratio of the securities to the advance of 133 per cent? 
 
 Mr. AYARBUUG. That is right. 
 
 Mr. HULL. And the ratio, according to the figures on the next page 
 is only 1^5 per cent. AA'as it intended that there should be a variance 
 of that kind ? 
 
 Mr. AA T ARBURG. I do not think so. That is a little inconsistency 
 there which we have found, and it ought to be adjusted. It ought to 
 be the same in both cases. That is not an intentional variance. AYe 
 discovered it. 
 
 Mr. HULL. In reference to the question of inflation, which has been 
 spoken of. would you mind telling us to what extent, if any. we have 
 hurtful inflation in this country that is not necessary, inflation under 
 existing conditions, and what the principal factors of it are? 
 
 Mr. WARBCTKJ. Inflation is a very big word; it is used with respect 
 to the expansion we are having just now. 
 
 Talking about the matter in hand here. I should say you want to 
 differentiate between credit inflation and currency inflation. As far 
 as currency inflation is concerned, we are very far from it. We have 
 a gold cover of 67 per cent, which is more than any other similar sys- 
 tem in any other country, even before the beginning of the war. and 
 so we are far from a currency inflation.
 
 54 WAR FINANCE CORPORATION. 
 
 As far as credit inflation is concerned, that is a phenomenon which 
 exists all the world over, and it exists with us, too. It can not be 
 avoided. If a Government issues billions of credit instruments for 
 tilings that have no lasting value and puts them out, thus creating 
 credits in banks, or creating bearer obligations, that automatically 
 dislocates the proper proportion that existed before the war between 
 the value of goods and the value of the dollar and as we all know, 
 the value of the dollar has gone down about 50 per cent and I will 
 not quote to what per cent the purchasing power of the ruble or 
 other currencies in other countries went down that is a world phe- 
 nomeon which we can not avoid. 
 
 As far as our own problem is concerned, how far we are going to 
 inflate and possibly will get a currency inflation does not depend 
 upon the Federal reserve banks, does not depend upon what you are 
 doing to-day; it depends solely upon two factors. One is the amount 
 of money the Government spends and the other the amount of monev 
 the people are willing to save. The expenditure of the Government 
 is beyond our control, but the amount of money that the people 
 can save is not beyond our control; at least, we are trying all we 
 can to bring about a greater saving of material, men, and available 
 funds and credit. 
 
 That is one of the reasons why we are so keen on controlling the 
 issue of securities, to prevent wasteful issue of securities at this 
 time. What ever the people will not save and whatever the Gov- 
 ernment expends in excess of the savings of the people has to be 
 provided somehow, and it has got to be provided by an expansion 
 of bank credits and note circulation. We have no excessive note- 
 circulation expansion, but the expansion of credit affects our reserve 
 proposition, of course. Therefore I think whatever we can do to 
 bring about an increase in the will to save and the power to save by 
 the people is of much greater importance than is generally realized at 
 this time. I think it is one of our main duties at this time to bring 
 that about. 
 
 Mr. HULL. To what extent is credit inflation now responsible for 
 high prices, so called, and to what extent is the diminished production 
 a necessary part of it? I only have in mind the effect of this bill 
 on the policies of the Government, but I bring in the other viewpoint 
 in order to get a relative view. 
 
 Mr. WARBURG. I think they both go together, but that is a ques- 
 tion upon which you can get all the professors in the I T nited States 
 together around a table, and they will all disagree. I think the in- 
 creased demand for goods is the thing that starts the movement 
 toward higher prices, and the existence of higher prices brings about 
 the necessity of creating larger issues of bonds, because you have to 
 issue so many dollars for everything you buy at a higher price. On 
 the other hand, large issues of Government obligations bring about a 
 further decrease of the purchasing power of the dollar; and so one 
 thing pulls along the other, and that is why it is important to fix 
 prices to prevent their running away entirely. 
 
 But the difficulty is that we are not independent ; the United States 
 alone can not quite emancipate itself in that respect. The demands 
 are world-wide, and we are tied together with other nations in this 
 respect, and when they issue securities or currency against bread or
 
 WAR FINANCE CORPORATION. 55 
 
 powder, or whatever it may be, it necessarily affects our prices at 
 home, too. 
 
 What we are doing here this creation of the War Finance Cor- 
 porjttion has very little to do with the whole problem. The whole 
 problem is ultimately decided by what is being saved, and what is 
 being spent, and the difference 'will have to be made up anyway, 
 whether it is through Government issues or through War Finance 
 Corporation issues. 
 
 Mr. HULL. It is proposed in floating the bonds of this corporation 
 to keep the interest level. I suppos'e, on a similar basis to that of 
 other Federal securities; that is. the War Finance Corporation would 
 not undertake to pay higher rates of interest than would be charged 
 on our Liberty fours, for illustration? 
 
 Mr. WARBURG. I do not think you could quite compare them, be- 
 cause the ones are 25 and 30 year bonds and the others are 1 to 5 
 year notes, and there would always be a different basis for those. At 
 times they may be offered on a higher basis and at times on a lower 
 basis. 
 
 Mr. HULL. These notes would be issued at par? 
 
 Mr. WARBURG. Yes: the law provides that. 
 
 Mi-. HULL. This authority proposed here allows the corporation 
 to purchase and sell United States obligations. Do you not think 
 it would have been better to have left out the other securities of the 
 Government existing prior to these war issues and limited that to the 
 Liberty fours and the converted three and one-halfs and the cer- 
 tificates? 
 
 Mr. WARBURG. You mean to exclude all issues we put out before 
 the beginning of the war? 
 
 Mr. HULL. Those for which circulation prevailed. 
 
 Mi-. WARBURG. Those you can leave out entirely. 
 
 Mr. HULL. This provision would indicate to the public that the 
 corporation would be as ready to go on the market and purchase 
 one as the other. 
 
 Mr. WARBURG. I do not think that is the intention of the Secretary. 
 I think he will be willing to strike that out. He has in mind to pro- 
 tect the market of the new issues, which is now without protection. 
 
 Mr. SLOAN. I would like to ask if it is not designed to ultimately 
 control the credits issued and the ones that are to be granted by the 
 members of the Federal reserve banks ? 
 
 Mr. WARBURG. No. 
 
 Mr. SLOAN. Not to be controlled? 
 
 Mr. WARBURG. I do not think so. 
 
 Mr. SLOAN. Is not one of the purposes of this legislation to bring 
 in and coordinate with the credit-loaning power of the Federal 
 reserve banks the State banks and the savings banks ? 
 
 Mr. WARBURG. You mean whether that is the plan of this legisla- 
 tion ? 
 
 Mr. SLOAN. Yes. 
 
 Mr. WARBURG. No ; I do not think so. 
 
 Mr. SLOAN. It is not intended in anywise to control the loaning 
 power or the credit-granting power of State banks, savings banks, or 
 Federal reserve banks? 
 
 Mr. WARBURG. I do not think this is any instrument of control 
 at all.
 
 56 WAR FINANCE CORPORATION. 
 
 Mr. SLOAN. Will it not ultimately have the effect of to some extent 
 hampering all large new investment enterprises? 
 
 Mr. WARBURG. That depends upon what view you take of the 
 money market. If you take the view that we are going to get into 
 such a condition that nothing will sell except Government securities, 
 then, of course, we would approach a condition where this corpora- 
 tion would exercise a very important control. But that is not the 
 condition to-day. 
 
 Mr. SLOAN. Granted the passage of this act. would it not be one 
 of the first questions of the organizers of an enterprise, or those 
 who would obtain loans, to find out what the attitude of the banks 
 would be, and would not the attitude of the banks in granting that 
 loan depend a good deal on the attitude of this new organization? 
 
 Mr. WARBURG. Only to the extent that they could not float it with- 
 out the assistance of this corporation. I think their first question 
 would be, Are we dealing with a proposition we can sell without 
 going to that corporation? And if they can do it. as T hope they 
 will, then they will be independent. This corporation ought to do 
 everything in its power to leave in its natural channels whatever will 
 float on its own bottom. 
 
 Mr. SLOAN. It is taking care of the large surplus. All that is in 
 the twilight zone, and such a new enterprise would become more or 
 less subject to the will and judgment of the new Government cor- 
 poration, would it not? 
 
 Mr. WARBURG. Whatever could not float on its own bottom would 
 become subject, I think, primarily, to the banks of the district, and 
 whatever the banks could not float, would come to the War Finance 
 Corporation. 
 
 Mr. SLOAN. The whole purpose of this proposition is it not. is to 
 mobolize the ultimate large credits of the country and put them in 
 control of the new corporation ( 
 
 Mr. WARBURG. I do not think you put them in control, but you 
 place the loaning power of this corporation at their disposal. 
 
 Mr. SLOAN. Disposal, ordinarily, would mean a large measure of 
 control, would it not? 
 
 Mr. WARBURG. It would, but in this case the effect ought to be 
 different. 
 
 There is no intention of granting any control, but quite the con- 
 trary. I think what this bill ought to do is to enable the banks to 
 go on doing business, and not either force the country to stop doing 
 business, or to bring them into direct dependence. 
 
 Mr. SLOAN. If that is true, why not draft a bill that would leave 
 it all in the Federal reserve banks, with such amendments as might 
 be necessary? I believe you have already gone over that proposi- 
 tion pretty thoroughly. 
 
 Mr. WARBURG. That would have a very unfortunate effect. I think 
 we can not deny that this is a proposition that In normal times no 
 one of us would like. But no one of us likes the present condition. 
 But taking it all in all, and taking the necessities of the case, I think 
 this is the best means to meet the present situation. 
 
 Mr. SLOAN. Notwithstanding it is not based upon the credit either 
 of the reserve banks, or the other banks, still you think it would be 
 well to leave it in control of a board to be headed by the Secretary 
 of the Treasury, who has already several functions to perform? You
 
 WAR F1NANCK CORPORATION. 57 
 
 think it is wise to create a new function for the Secretary of the 
 Treasury and leave him at the head of the corporation? 
 
 .Mr. WAIMH RG. I think it is imperative to do it in this case. Of 
 course, the way the tiling would work out would be for him to draw 
 together the ablest men he could get. He would have to find the best 
 possible manager to take full charge of if, with a board of able men 
 around him. and get the local committees built up so that each of 
 these propositions would be handled on its own merit before it came 
 to him. and the scrutiny and approval of the local branches that 
 would be required would act as a strong element in the sifting process. 
 
 Mr. SLOAN. For that reason would it not seem more important, 
 and would it not inspire confidence throughout to have the largest 
 banker and the largest business man, in ability, at the head of the 
 institution, rather than the natural head of the Reserve bank system? 
 And when I say that. I do not mean to reflect on anybody, having 
 the utmost admiration for the ability of the present head of the. 
 Treasury Department. 
 
 Mr. WABBCBG. The operations of the Go\ eminent and this cor- 
 poration are so closely linked that it would be impossible to turn 
 this corporation over to an independent body. That could not be 
 done. 
 
 Mr. SLOAN. It occurred to me that if it was so close to the (io\ em- 
 inent it ought to be made closer, and that that could be done by t he- 
 adoption of an amendment to the act in reference to the Federal 
 reserve-bank system, rather than have the so-called independent or- 
 iranization. which would still not be independent. 
 
 Mr. HKLVEUING. Mr. Warburg, will you cite, for the record, two 
 examples of a probable situation, one where, commercially, the favor 
 can not be extended, which you would approve, and the other where 
 the favor, commercially, would be extended to investors, but which 
 you would disapprove? 
 
 A great many members have asked why it was, with practically 
 the -ame proposition, there is one that commercially can not be ap- 
 proved, and on the other hand one that was not sound would be ap- 
 proved: that is. with reference to the conduct of the war. 
 
 Mr. WAKJU i;<;. The point of view as to whether a thing is com- 
 patible with public interest: that is what you wanted me to explain? 
 
 Mr. HKI.VKIUNG. Yes. 
 
 Mr. \V.u;m K<;. That is a hard question, as a question of theory. 
 It is very difficult to draw that line between what is essential and 
 what is an unessential thing at this time. 
 
 There are certain things concerning which it is clear that they can 
 be postponed. Other things are on the border line, and there we 
 have to deal with a good deal of discretion. What we do in those 
 cases is this: We go to the departments and find out how much they 
 want a certain service. For instance, if it is a question of roads, we 
 consult with the Department of Agriculture, and if it is a question 
 in connection with reference to irrigation, or if it is a drainage prop- 
 osition, or if it is a question of oil. we go to the Department of the 
 Interior, and we find out how much there is of the present capacity 
 being used or how nearly existing plants are run to capacity, and we 
 are guided by those facts'. 
 
 There may be a perfectly good commercial proposition. For 
 instance, a man may be making artificial Mowers, and he may be
 
 58 WAR FINANCE CORPOKATION. 
 
 making 100 per cent on his money. If he wanted to sell an issue of 
 $1,000,000 worth of notes and asked us at this time to approve of 
 that issue, we would say no; the country does not need artificial 
 flowers at this time. That is the only point of view we have to con- 
 sider at the capital issue committee at the present time. 
 
 The other thing you mentioned is a question that may come before 
 the War Finance Corporation. It does not touch our committee be- 
 cause we have not gone into the commercial value of things so far. 
 That is a question that will be dealt with by the War Finance Cor- 
 poration and is a very important thing. 
 
 Suppose it is a question of a power plant that has to produce 
 power for certain manufacturing processes directly connected with 
 the war. Banks may be unwilling to finance that because the contract 
 may be such that they may have doubts as to what will happen to 
 the plant when the war is over. I should think those are decidedly 
 propositions banks would not entertain on their commercial values. 
 while the War Finance Corporation would have to consider very 
 seriously the question of public interests. 
 
 Mr. LONGWORTH. Why might it not be a good idea to increase the 
 size of this board of directors and put on it a representative of the 
 Army, of the Navy, of the Fuel Administration, and of the priorities 
 board, so that you would not have to go in each instance to a certain 
 department, but would always have sitting on the board a repre- 
 sentative of that particular department? 
 
 Mr. WARBURG. Quite frankly, that Avas discussed, and I think the 
 first draft of the bill proceeded on those lines. Do you not think 
 experience has told us that there is a great danger of delay in every- 
 thing the Government wants to do, and has to do, and that the danger 
 is altogether with the great size of the country and with our political 
 construction, that we may always be some months too late. 
 
 Mr. LONGWORTH. Would not that have a tendency to hurry them 
 up? 
 
 Mr. WARBURG. I do not think so. The difficulty is that a man 
 representing a department would not have at his fingers' ends all 
 those details. The departments are so large that if it were a question 
 of building a trolley, for instance, from one place to another, that 
 particular man would probably not know about it. Then, his being 
 on the board would keep out other men who are much more impor- 
 tant: that is, men who have commercial training and banking 
 training. 
 
 I find that with our present modus operand! it is not difficult for 
 us to get from the departments all the information we want. They 
 get it out for us very rapidly. It would be difficult for them to dele- 
 gate a man whose time could be given entirely, because the War 
 Finance Corporation is likely to sit all day, from 9 o'clock in the 
 morning until late in the evening, and a man on that board would 
 soon be out of touch with what is happening in his own department* 
 anyway. 
 
 Then, too, he would not have the qualifications you really need. 
 He would not have the qualifications of a well-trained and fast-work- 
 ing business man or banker who will deal with these matters without 
 much red tape, as he has got to do in order to get results. 
 
 While I am fully alive to the thought that prompts that question, I 
 believe that a corporation of this kind, to do effective work, must
 
 WAR FINANCE CORPORATION. 59 
 
 have centralized authority to work in a businesslike way. and work 
 quickly. 
 
 Mr. TREADWAY. What methods have not been satisfactory in the 
 control of the new securities in the British system ? 
 
 Mr. WARBURG. I think they have been entirely satisfactory. 
 
 Mr. TREADWAY. I understood you to say they were not satisfactory, 
 and you did not wish to encourage that method under the Federal 
 reserve act. There have been one or two questions as to whether 
 or not this permission could not be given to the Federal Reserve 
 Board, following along the line of the concentration of war power. 
 
 Mr. WARBURG. As Judge Hull said, the British have some powers 
 behind the voluntary organization. There is a big stick somewhere. 
 
 Mi-. TREADWAY. It does not appear actually in the law? 
 
 Mr. WARBURG. No: it does not. and I think if we could get a big 
 stick, some power to put the force of law behind us. we could proceed 
 substantially in the manner as we are doing now. 
 
 Mr. TRKADWAY. That is, under the Federal Reserve Board ( 
 
 Mr. WARBURG. As far as licensing goes. 
 
 Mr. TREADWAY. But there is such a distinction between the two 
 classes of securities liquid assets and the actual stocks and bonds 
 that the two can not be harmonized sufficiently to be under one juris- 
 diction ( 
 
 Mr. WARBURG. So far as actual business concerns are concerned 
 the corporation is going to make advances on securities for five years. 
 
 Mr. WHITE. You stated that your capital issues committee had a 
 minimum of $250,000 for permission for issue. 
 
 Mr. WARBURG. On municipalities, and $500,000 for corporations of 
 other character. 
 
 Mr. AViiiTK. My question is. Would not that interfere less with 
 the normal activities of business than the $100.000 minimum, and 
 be just as well to put in this bill? 
 
 Mr. WARBURG. It would interfere less, and therefore would also be 
 less efficient. You can not bring about the results you want to bring 
 about by leaving the people alone. I think our committee will prob- 
 ably reduce its limits very soon. We have been discussing it very 
 seriously, and we are very clear that the municipal issues should go 
 down to $100.000, and as to the industrial issues, that they should 
 go to $250,000. It means a great many applications, and we do not 
 want to go faster than we are certain we can dispose of them. We 
 do not want to keep them waiting for a fortnight or three weeks, and 
 let business come to a halt because we can not handle the applications, 
 so we are proceeding slowly. This corporation has the power to issue 
 regulations. 
 
 Mr. TRKADWAY. Is that power which your committee is now exer- 
 cising similar to the power exercised by the British Government? 
 
 Mr. WARBURG. Exactly the same. 
 
 Mr. TREADWAY. The only difference is that you have to deal with 
 it in larger increments than they do over there? 
 
 Mi. WARBURG. Yes. 
 
 Mr. TREADWAY. The work of your committee is now practically the 
 same as the general system in England ? 
 
 Mr. WARBURG. That is correct.
 
 60 \VAK FINANCE COBPORATION. 
 
 Air. HULL. On page 12, line 19, the bill says : 
 
 Any securities, which upon the date of the approval or control of, or have 
 been hypothecated by the corporation, association, or obligor issuing the same, 
 shall not be deemed to have been issued prior to the date of the approval of this 
 act within the meaning hereof. 
 
 Is that not intended to interfere with the sale of collateral? 
 
 Air. WARBURG. No. 
 
 Air. HULL. On page (>. line 11, that limits the advances to bonds 
 or other obligations. If a concern had a large amount of stock which 
 it held in another concern, it could not have any recognition under 
 this provision on the stock item, even though that should be the only 
 security it had to offer ? 
 
 Air. WARBURG. It says, " to any banks, bankers, or trust company 
 which has rendered financial assistance, directly or indirectly, to 
 any such person, firm, corporation, or association by the purchase of 
 its bonds or other obligations.'' That means if a syndicate has 
 bought bonds or obligations; I do not think you want to advance on 
 stocks. 
 
 Mr. HULL. Their stock is intended to be excluded there ? 
 
 Air. WARBURG. Their stock is intended to be excluded there ; yes. 
 
 (Thereupon the committee adjourned to meet to-morrow, Wednes- 
 day. February 20, 1918, at 10 o'clock a- m.) 
 
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