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Cost of long-term fixed capital as indicated by bond yieldsContinued

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2 New issues in 1929.
Except where noted yields are yields to maturity.

Cost of long-term fixed capital as indicated by bond yieldsContinued

INDUSTRIAL BONDS

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Senator COUZENS. When Secretary Mills was here I read the following paragraph and asked him whether he could give me some specific information. He said he thought he could get it. I assume he thought he could get it from you. In the course of this memorandum, he says:

The immediacy of results. Private enterprises engaged in the production of capital goods have done a great deal of engineering and preparatory work looking to the return of normal business, much of such work having to do with specific projects held up awaiting cheap credit or for other reasons.

Can you give me some illustration of what private capital has done in the way of engineering that would be facilitated by this plan?

Mr. Houston. You understand, Senator, that is an exceedingly difficult question for me to deal with, because I am discussing the affairs of my customers.

Senator ČOUZENS. Hou do you expect the committee to deal with it if you

do not give us the information? I do not care whether you give it in private or publicly. But I want to know.

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Mr. Houston. I will endeavor to answer it as nearly as I can. First, I have shown you the communication of Mr. Epstein, which shows $4,000,000 worth of business.

Senator COUZENS. Have they done a lot of preparatory engineering work for that order?

Mr. HOUSTON. I do not know, but I presume they have. That is the type of production work that could be put into operation immediately.

My own company has, in the past three years, designed modern motive power for probably a year's normal output of locomotives for

Senator COUZENS (interposing). How many is a year's output? Mr. HOUSTON. About 400 to 500. [Continuing.] Not one of which has been ordered, because each time the railroad came up to ordering the management or directors or the bankers found it impossible to proceed.

Senator ČOUZENS. Now at that point, if this plan was adopted, how much money would you get out of this loan or facility of the Government, to produce these locomotives?

Mr. HOUSTON. There is no way of telling, because I would not advocate any attempt to crowd the railroads to purchase beyond such equipment as, in their own good judgment, should be purchased at the time. I am advocating the creation of the facilities for reasonable-priced credit in sufficient volume to permit them to make such purchase now and in the relatively near future as their judgment dictates should be made. It is my opinion that over the 2-year period a substantial quantity of locomotives and cars would be purchased by the railroads if such a credit were made available.

Senator BROOKHART. Do you think private enterprise has broken down and can not furnish that credit?

Mr. HOUSTON. The best answer to that is the prices at which outstanding equipment-trust certificates are sold. Prime equipment trusts to-day sell for a 9 per cent yield, or nearly 5 per cent reduction in price since 1929.

Senator BROOKHART. And you think the Government should step in and break up that high interest rate?

Mr. Houston. Only for one purpose, and that purpose is to relieve the unemployment in the country. I do not believe there is any other justification for it.

Senator BROOKHART. You do not believe that private industries can relieve the unemployment?

Mr. HOUSTON. Not at the present time.

Senator BROOKHART. I have long thought that the Government should step in and reduce the interest rate to the farmers, but we can. not get any action on that.

Mr. HOUSTON. I am not prepared, Senator, to express any opinion on that.

The CHAIRMAN. Just one question: The lack of credit, is it due to the inability of the bank to handle it, or is it due to their unwillingness to enter into credit extensions?

Mr. HOUSTON. The bank normally does not create these securities. They are created by the railroad company creating the securities and marketing them to the ultimate investor. The bank is the ultimate investor. Due to the lack of confidence of the investor as to affairs, economic, and as to the ability of the railroads and companies to pay the principal and interest of these obligations, there has been a very large movement from industrial and railroad securities to Government securities; and that is the reason they are selling at such low prices.

Senator FLETCHER. Do you believe, Mr. Houston, that the Government should assume the responsibility of furnishing employment to all its people?

Mr. HOUSTON. No.

Senator FLETCHER. Do you think the industries should solve that problem?

Mr. Houston. I do not see that industry is any more responsible than the Government. I do not see how industry can solve it. Industry is simply the servant of the public in the conversion of raw materials into the finished product for the people to live with and carry on their affairs. Now if the population does not want the products of industry, industry has no way to use labor or to force consumption. Industry is the most helpless of all the factors in the equation. Industry would be paralyzed in a few weeks without ability to convert its raw material into products, and without the ability of the population to purchase, and convert it into cash.

Senator FLETCHER. Well, if there is no responsibility resting on industry to solve the problem of unemployment and its own problems, how would we be justified to pass an act for the Government to extend credit?

Mr. Houston. The only jusitfication is public policy, for the good of the whole. I am not an advocate of Government participation in business. I would rather see them stay out of business entirely. I do not want them to stay out of private enterprises in relief enterprises, however, and yet endeavor to secure relief through taxation and a diversion of capital to great public works for the nccdless employment of labor, which further reduces the working capital of private enterprises.

Senator Couzens. Let me ask you, finally, if the applicant for money from the Reconstruction Finance Corporation should not be required to put up 50 per cent of the capital which they propose to borrow?

Mr. Houston. Senator, I would say in normal times an applicant for a loan should be required to put up as much margin of equity as is necessary, in the judgment of the lender, to secure the loan to his satisfaction.

Answering your question specifically, I fear you would get no stimulation to employment by endeavoring to require the manufacturer to put up 50 per cent margin, for several reasons. First, the producer of the goods has not the working capital to provide that 50 per cent. If he has working capital equal to 50 per cent of a year's output, he would be doing well.

Following your formula, if he were to run at 50 per cent of volume and put 50 per cent equity into each article he sold, his working capital would be completely tied up at the end of a few weeks, and he would be out of business. The buyer of such equipment, in my opinion, would have to put up so large a margin as that it would be a further investment in his plant or in his equipment, and it would be involved in a way that it would not be productive to make. The only way that

capital is to be used in the production of goods is for the manufacturer to take advantage of the low labor costs at this time, and the low material costs and reasonable capital and then working his own capital into his own plant, with the expectation of a recovery of business.

Senator COUZENS. A very high administrative official, speaking to me, said that he thought that in order to borrow you should put up at least 50 per cent of the amount.

Mr. Houston. In my judgment you would have no borrowers.

Senator COUZENS. I think the high administrative official had in mind that the promoter or the producer in the plant should get the stockholders, or others, interested in the enterprise to put at least that much into the enterprise in which they are going to make the profits.

Mr. HOUSTON. The program which we are now discussing yields little with profits. It deals with modernization of machinery and equipment in the plants of the country. The only incentive to doing it now is that now when it is not presently and immediately needed is the opportunity to do it more cheaply and more advantageously. The absorption of other cash capital into such fixed capital, of 50 per cent of the cost of such improvement, would, in my opinion, destroy the advantages.

Senator COUZENS. Of course, the home owner can not get anything greater than 50 per cent, as a rule.

Mr. HOUSTON. Well, a home owner is in a somewhat different position.

Senator COUZENS. In other words, he does not make a profit out of his home, so he is in a different position?

Mr. HOUSTON. Well, that was not the difference I had in mind. The difference is this: The borrowers under this plan, whether it is done directly or, as we advocate, through an intermediary credit corporation, would be borrowers with large resources, with respect to which the obligations incurred would be obligations of the corporation as a whole, and very small in proportion to their resources. A corporation, in my judgment, would not be entering into such a plan for goods which they are to buy, but they are to use it and invest it in the fixed capital investment. Now the home owner has not that large resource to secure a loan. It is an entirely different ratio.

Senator COUZENS. May I ask you this: Assuming that there are two great producers of machinery, like Brown-Sharpe, or something of that kind, producing machinery for renewal purposes, such as you have indicated for these services, and there was a limited amount of business—which seems to be quite evident, there is a limited amount and, for example, say, Brown-Sharpe were able to finance themselves whenever they could find a market, and sell their goods wherever they could find a buyer; and then another manufacturer, comes to the Government and says, “We can get a lot more for our machinery if you will loan us $500,000." And he gets the loan, and he goes out and competes with Brown-Sharpe, who have already marketed their product. Do you think it desirable for the Government to aid in that competitive situation?

Mr. HOUSTON. No; I do not. I would not do it just that way. I would authorize the Reconstruction Finance Corporation to loan money to the industrial through an intermediate-credit facility. I mean when mutually advantageous to the industry.

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