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and it wears out more rapidly under those conditions than if they are operating under lighter traffic conditions.

Senator FLETCHER. I understand that; but about the average conditions.

Mr. Houston. My statement a while ago was that replacement could be made as rapidly as would be economical in this country and over a 20-year period, and the savings effected would pay the interest on the debt, amortize it on a 15-year equipment trust certificate, and leave a substantial profit to the railroads in that period.

Senator FLETCHER. Now applying that to this Barbour bill or the Wagner bill—we reported out, you know, the Wagner bill.

Mr. HOUSTON. Yes, sir.

Senator FLETCHER. Do you advocate the Government purchasing these equipment trust certificates?

Mr. Houston. I advocate the Government doing one of two things, or both. First, authorizing the Reconstruction Finance Corporation, in its discretion, to purchase outright the equipment trust certificates, or to purchase through an intermediate credit corporation securities secured by such equipment trust certificates. In the first instance, the Reconstruction Finance Corporation would have to look for payment, by carrying these certificates to maturity; or by selling them in the open market when the market for such certificates recovers. There has been for very many years a very excellent market for securities of this character that have sold at the yield equal to or better than the best bonds, other than governments.

Senator COUZENS. May I ask you how many locomotives you would expect to be purchased by the railroads, within two years, under a plan of this sort?

Mr. HOUSTON. I would say not more than 2,000 or 2,500 locomotives within a 2-year period from the time such plan would become operative; and I would call to your attention the fact that that would be only about 5 or 6 per cent of the replaced inventory. You remember I said that there are now 55,000 locomotives in the United States, and I believe that when they are replaced they will be replaced with about 45,000.

Senator FLETCHER. What rate of interest do these certificates bear?

Mr. HOUSTON. I can best answer that by referring you to the-Senator FLETCHER (interposing). Do they not have a fixed rate?

Mr. Houston. Oh, no; they vary with the market. In 1929 equipment trust certificates were selling on an average yield of from 4.90 to 5.24 per cent. I would say from 47to 5 per cent would be the normal rate of interest paid by standard equipment trusts.

Senator FLETCHER. They are not listed, are they, on the stock exchange?

Mr. HOUSTON. They are not listed on the stock exchange, but they are traded in regularly by insurance companies and savings banks. They are legal investments in New York State for those institutions.

Senator FLETCHER. You know one of the difficulties here, if you advocate the purchase of those certificates by the Reconstruction Finance Corporation, is that that corporation expires in 5 years, and these certificates run 15 years. There would be some conflict there.

Mr. Houston. No; the repayment would depend upon the Reconstruction Finance Corporation selling these certificates in the open market, which they could do the moment the market recovers anything like normal. There is an enormous market for equipment trust certificates in the savings institutions and insurance companies of the United States.

I would like to put into the record at this point a comparison between the average prices or yields of equipment trust certificates in 1929 and at the present time. I have here a list of 10 all bearing 4 to 4% per cent interest and maturing in 1942 and 1944. They sold in 1929 at 5.06, at this particular time. The same certificates are selling to-day at 9.23 per cent yield. That is the reason the railroads can not and will not buy any equipment at the present time.

Senator FLETCHER. Now, have you in mind the suggestion of any amendment to the Wagner bill that would meet that situation?

Mr. Houston. Senator, I have not seen the latest draft of the Wagner bill. I would not attempt to state what the amendment would be, except to make the suggestion I did a while ago, that it would follow one of two lines: First, authorize the Reconstruction Finance Corporation, in its discretion, to purchase outright equipment trust certificates of Class A railroads properly constructed as effective loans upon equipment, depending for their repayment upon the sale in the open market of those certificates during the life of the Reconstruction Finance Corporation.

The second plan would authorize the Reconstruction Finance Corporation to purchase securities of an intermediate credit corporation which, in turn, would be secured by these equipment trust certificates and collateral, the repayment of the securities of such credit corporation depending upon its selling these equipment trust certificates in like manner upon the market.

Senator FLETCHER. Is there any such credit corporation set up now?

Mr. Houston. No; such a credit corporation would have to be created by the equipment companies interested in such an undertaking.

Senator FLETCHER. How many people do you think would be employed if that plan could be carried out?

Mr. HOUSTON. We have made

Senator FLETCHER (interposing). I mean, in addition to what are now employed.

Mr. Houston. I know. We have made some general estimates along that line. I would say that $150,000,000 a year spent in railroad equipment would employ directly in excess of 100,000 men which, of course, would result in a larger indirect employment through the disbursement of the earnings of such men.

Senator TOWNSEND. What would you estimate the indirect employment would run?

Mr. Houston. I would say that that would make a substantial effect upon the income of 500,000 men.

Senator COUZENS. You stated awhile ago that the present locomotive production was 2 per cent of normal. How much would this production of 2,500 locomotives bring it up?

Mr. Houston. I would say that it would bring it up to 75 or 80 per cent of what the country would normally need. If the same

volume were spread over locomotives and cars, it would bring it up to about 50 per cent, or more.

Senator COUZENS. Now, you spoke of cars. I hold in my hand a chart issued by the American Railway Association, car service division, containing a summary of the car surplus and car shortage, and I observe between the dates of April 30 and March 14, 1932, that the grand total of surplus cars was 776,067. And on April 30, 1932, there were 772,044 cars surplus. On April 14, 1932, there were 772,519 cars surplus. On March 31, 1932, there were 748,672 cars surplus, and on March 14, 1932, there were 750,233 cars surplus. And you will observe that the grand total on April 14, 1932, was higher than in any previous period.

Mr. Houston. That is true, Senator, and I would reiterate what I have said in the past, that efforts along those lines should not be to increase the equipment, but to replace it. There are a large number of obsolete cars in America to-day. The American Railway Association has decreed that those cars must be taken out of traffic, I think, by 1936. I am not familiar with the details of that matter, but there is a large obsolescence.

In addition to that, there is a demand for certain special types of cars.

I have before me this telegram, which is illustrative of the matter I speak of. This telegram is addressed to me by Mr. Epstein, of the General American Car Co., which builds standard cars of various kinds.

Senator COUZENS. Before you get into that, do I understand that your view is that these 776,000 surplus cars should be junked and replaced with new equipment?

Mr. HOUSTON. Very largely; and this period we are in is an economical period in which to do that.

Mr. Epstein says in this telegram (reading]:

You may say for me to the Senate Committee on Banking and Currency that if the powers of Reconstruction Finance Corporation are extended to make possible loans to corporations under conditions similar to those provided in Senate bill 4822, the General American Car Co. would undertake to build at once 1,000 refrigerator cars, thus broadening our operations and furnishing new employment for a substantial number of persons at early date. Building of 1,000 cars will involve approximately labor cost of $2,000,000 and material cost of like amount.

That is a $4,000,000 piece of business that came in entirely unsolicited. Mr. Epstein knew I was going to appear here this morning.

Senator COUZENS. You have not answered my question with reference to what Mr. Eysmans said, that there was no needed capacity now.

Mr. HOUSTON. My answer to that is this: 18 per cent only of the locomotives of the country are under 10 years of age; the greater part of those over 10 years old are no longer economical to operate; and if the obsolete motive power of the railroads were junked to-day, there would be a large immediate shortage, and as soon as traffic recovers there would be a large and continuing demand for motive power. To illustrate

Senator COUZENS (interposing). Just before you illustrate. What do you think Mr. Eysmans meant, then, if you didn't agree with him? What did he mean?

Mr. HOUSTON. He was stating the obvious fact that there is a large surplus capacity in this country to-day. His own company is illustrating my point in spending millions of dollars to-day to put in modern locomotives in the form of electrical equipment, moving their steam equipment onto less intensive trackage, and junking their old power. They are doing the very thing I am talking about.

Senator COUZENS. Why did he make this statement, then?
Mr. HOUSTON. I do not know.

Senator COUZENS. He is the vice president in charge of traffic, and I would assume he is an authority. It seems you are not in agreement with him.

Mr. HOUSTON. I am not in agreement with his statement-his statement is a statement of fact. The Pennsylvania Railroad is modernizing its equipment more rapidly than any other railroad in the United States. That, it seems to me, answers the question quite conclusively.

Mr. Chairman, there is just one more point I wish to make. Senator COUZENS. Have you got Secretary Mills' statement there?

Mr. HOUSTON. That is the statement he read. That statement was prepared by me and given to him. He brought it in here.

He held that one of the reasons for the very great reduction in the output of capital cost is the shutting off of long-time credit of reasonable price and I am of the opinion that if such long-time credit were available at reasonable cost there would be a marked and continuing stimulation to enterprise in the restoration of the production of capital cost.

I want to illustrate by these figures the present condition of longterm fixed capital. In 1929, 15 high-grade bonds were selling at 4.96. That is, the yield, in January, 1929, was 4.96, and the present yield, in January, was 7.11.

Senator COUZENS. This year?

Mr. Houston. 1929. And they go up to a high of 5.12 in September; and to a low of 5.03 in December. They are now selling, for January, 7.11; for February, 6.98; and in March, 6.79.

First-grade railroad bonds were selling in January, 1929, at 4.50 yield

Senator COUZENS (interposing). Would you mind defining what you mean? A bond underlying a junior mortgage?

Mr. Houston. They are classified by Standard Statistics Co. as high-grade bonds.

Senator TOWNSEND. Second-grade bonds, or first-grade bonds, or what?

Mr. Houston. I have not that classification defined here, but I have some others that give the exact information. These rate a high of 4.71 in September, 1929, and are now selling, in January of this year, at 5.70; in February, 5,78; in March, 5.60. That is about 5 per cent high.

Senator TOWNSEND. Is that a bad rate?
Mr. Houston. It is increasing the cost capital 20 per cent.

Now, let us see how that affects the prices. High-grade railroad bonds were selling on May 31, 1921, at 95.5, to yield, 4.60. Those identical bonds were selling on June 10, 1932, at 84, to yield 5.37.

Second-grade railroad bonds were selling on May 31, 1929, at 96%,; and on June 10, 1932, at 62%.

Third-grade railroad bonds were selling on May 31, 1929, at 100; and on June 10, 1932, at 2756. On May 31, 1929, when they sold at 100, they yielded 5.07. On June 10, 1932, when they sold at 2756, they yielded 20.11.

Senator COUZENS. That is, they yield that if they pay the interest.

Mr. Houston. Yes; these are all paying the interest. I will not bother with the ones that are defaulted.

Industrial bonds, and I want to call your attention to this

Senator BROOKHART. Just before you go on with that, I have the statement of an expert that the interest and dividends collected in 1931 were more than in any year except 1929.

Mr. Houston. I have not the figures available, Senator, but I think I can assure you in 1932 they will not be.

Senator BROOKHART. They will go down some.

Mr. HOUSTON. Now, in a selected list of industrial stocks which I have here—and they were selected as typical, on May 31, 1929, the price was 9756, and the yield was 5.85 per cent. These same bonds are selling to-day at 56%, and yield 13.62 per cent. And they are all paying interest at the present time.

Now, the equipment trust certificates—a selected list of equipment, trust certificates

Senator COUZENS (interposing). As a matter of fact, are they not paying interest, a great many of them, with Government money?

Mr. HOUSTON. Oh, no; these are industrial bonds.
Senator Couzens. Oh, industrial bonds?
Mr. HOUSTON. Yes, sir.

The railroad equipment trusts, which I mentioned a few minutes ago, a selected list, carrying 4 to 472 per cent interest, were selling on May 31, 1929, to yield 5.06—I have not the price and they are selling to-day to yield 9.23, nearly 50 per cent reduction.

Now, gentlemen, that to my mind, makes nearly impossible the stimulation of the modernization of old facilities, or the entry of capital into new enterprises and, in fact, the complete stagnation of capital industries.

If I may, I will place these comparisons in the record.
The CHAIRMAN. Without objection, it is so ordered.

(The data presented by Mr. Houston is printed in the record in fulì, as follows:) Cost of long-term fixed capital as indicated by bond yields

[Yield in per cent)
FIFTEEN HIGH-GRADE INDUSTRIAL BONDS 1

1929

1930

1931

1932

7. 11 6.98 6. 79

January.
February.
March
April.
May
June.
July.
August.
September
October
November
December

4. 96
5. 01
5. 02
5. 02
5. 06
5. 09
5.09
5. 09
5. 12
5. 08
5. 09
5. 03

5. 04
5. 02
4. 96
4. 91
4. 91
4. 91
4. 92
4. 87
4. 85
4. 89
4. 97
5. 12

4. 99
5. 01
4. 98
5. 10
5. 24
5. 25
5. 13
5. 26
5. 64
6. 21
6. 08
7. 24

1 From Standard Statistics Co.

12598532-10

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