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rows from the Treasury it will never be able to repay the Treasury unless, through an appropriation, it receives another equal amount from the Treasury with which to make the repayment the use of Reconstruction Finance Corporation for this and similar purposes perverts the character of that enterprise, and exposes the Government to unwarranted risks of financial loss through improperly divided management responsibilities.

Reconstruction Finance Corporation has been used in this way before. In each case its use was duly authorized by the Congress and in each case the activities financed with its borrowed funds were necessary activities undertaken in response to an emergency




Let us face facts. The Congress took the responsibility for the adoption of these extraordinary financial procedures. The Congress authorized the Corporation to engage in the activities which called for the expenditure of these public funds and, through its committees, it received reports from time to time of the progress of the activities; it was therefore advised that the activities were proceeding, from which it would normally follow that the funds were being expended despite the absence of appropriations. At any rate, appropriations were not requested, nor were they made. Reconstruction Finance Corporation, in fact, functioned as the back door to the Treasury. The CHAIRMAN. This is the statement that was read by Mr. Herz? Mr. KENYON. Yes.

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The CHAIRMAN. As I understand, Mr. Herz is now with Price Waterhouse, and they are now making a study of Government corporations for the Hoover Commission.

Mr. KENYON. That is correct.

The CHAIRMAN. There does not seem to be any conflict between your position and his statement.

Mr. KENYON. I am sorry I did not introduce this statement as the statement of Mr. Herz.

The CHAIRMAN. Yes; I understand that. The entire statement can go into the record. But you are in substantial agreement with that? Mr. KENYON. Yes; we are.

The CHAIRMAN. And we might presume, I suppose, that this will be contained in the recommendations of the Hoover Commission. Mr. WEITZEL. Depending upon whether Mr. Herz can convince the Commission.

The CHAIRMAN. All right.

Mr. KENYON. Proceeding with the statement: Unless authorized borrowings are made against funds appropriated in advance to the Treasury for a particular purpose, the Appropriations Committees of the Congress are bypassed, and the customary procedures of advance authorizations for the expenditure of funds from the Treasury are avoided. This leads to a situation in which the Congress finds itself unable to approve or place specific limitations in advance on programs or activities contemplated by them.

Under such a situation the Congress, at some later date, would have to authorize or appropriate funds, to the extent of such utilization of borrowings, long after the Treasury funds have been expended, and thus circumvent normal congessional appropriation procedures adopted to implement the basic concept expresesd in the Constitution, which provides in article I, section 9:

No money shall be drawn from the Treasury, but in consequence of appropriations made by law.

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It is further provided by law that—


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No act of Congress passed after June 30, 1906, shall be construed to make an appropriation out of the Treasury of the United States, * * * such act shall in specific terms declare an appropriation to be made (34 Stat. 764, 31 U. S. C. 627).


While the Congress has the power to cancel all or any part of the obligations representing borrowings utilized in lieu of appropriations, it is suggested that such action would of necessity occur after the Government's fund had been expended or obligated. It is believed, since consideration of such expenditures must be undertaken by the Congress at some point of time, that the Congress is in a much more desirable position to give its approval in advance, through the regular appropriation procedures. Such practice, coupled with the budget approvals, and later supplemented by the audit under the Government Corporation Control Act afford positive control of, and accounting for, the operations and activities of the corporation.

It is emphasized that the device referred to is wholly legal since its authority stems from provisions in the basic legislation for certain corporations providing three things: (1) for the corporation to borrow from the Treasury, (2) for the Treasury to lend to the corporation, and (3) for the Treasury to use, for such purpose, the proceeds of public-debt receipts from the sale of bonds. The result is that the public money is paid out without the authority or the benefit of an appropriation act. That there is need for the over-all budget control which only the appropriation act procedure provides is believed to be manifest; that control is not provided when certain large-spending agencies are exempted from it. Nor can it be said that the budgetary controls under the Government Corporation Control Act, in view of the limitations of that statute, can provide an adequate substitute.

If the committee should be of the view that the regular appropriation procedures should be used to supply further needs of the Corpɔration for the United States Treasury funds, this could be accomplished by amending the last sentence of section 7 of Public Law 132 to read as follows:

The Secretary of the Treasury is authorized to purchase any obligations of the Corporation to be issued hereunder, to the extent of appropriations made for such purposes, and such appropriations are hereby authorized.

Certain other technical changes in the act might be necessary if this proposal were adopted. The General Accounting Office will be glad to develop such changes upon request by the committee.

The CHAIRMAN. Without objection, the two statements will be included in the record.

(The documents referred to are as follows:)


NOTES.-1. Title I of the existing RFC Act (Public Law 132, 80th Cong.) contains 13 sections. Act S. 2287 proposes complete revisions of sections 1 through 4. The sections set forth hereunder (secs. 1, 3, and 7) represent only the sections where deletions or new language are suggested. Sections 1 and 3 represent the language of S. 2287; section 7 represents the language of existing law (Public Law 132, 80th Cong.).

2. Suggested deletions of language in existing law or the proposed act, S. 2287, are shown in black brackets.

3. Suggested new language is shown by italics.

SEC. 1. (a) There is hereby created a body corporate with the name "Reconstruction Finance Corporation" (herein called the Corporation), with a capital stock of $100,000,000 subscribed by the United States of America. Its principal office shall be located in the District of Columbia, but there may be established agencies or branch offices in any city or cities of the United States under rules and regulations prescribed by the Board of Directors. This Act may be cited as the "Reconstruction Finance Corporation Act."

(b) Within six months after the close of each fiscal year the Corporation shall make a report to the Congress of the United States which shall contain financial statements for the fiscal year, including a balance sheet, a statement of income and expense, and an analysis of accumulated net income. The accumulated net income shall be determined after provision for reasonable reserves for uncollectibility of loans and investments outstanding. Such statements shall be prepared from the financial records of the Corporation which shall be maintained in accordance with generally accepted accounting principles applicable to commercial corporate transactions. The report shall contain schedules showing, as of the close of the fiscal year, each direct loan to any one borrower of $100,000 or more, each loan to any one borrower of $100,000 or more in which the Corporation has a participation or an agreement to participate, and the investments in the securities and obligations of any one borrower which total $100,000 or more. Within six months after the end of each fiscal year, beginning with the fiscal year ended June 30, 1948, the Corporation shall pay over to the Secretary of the Treasury as miscellaneous receipts, a dividend on its capital stock owned by the United States of America, in the amount by which its accumulated net income exceeds $50,000,000.

(c) Within sixty days after the effective date of this amendment, the Corporation shall retire all its outstanding capital stock in excess of $100,000,000 and shall pay to the Treasury as miscellaneous receipts the par value of the stock so retired.

(d) Commencing July 1, 1948, the Corporation shall pay to the Secretary of the Treasury interest on (1) its capital stock outstanding, (2) the amount of accumulated net income which the Corporation retains under Section 1 (b) of this Act, and (3) on the portion of such other funds, arising from liquidating or similar activities and for which it is accountable to the Secretary of the Treasury, which the Corporation utilizes in its lending activities. The Secretary of the Treasury shall determine the interest rate annually in advance; such rate to be calculated to reimburse the Treasury for its cost.

SEC. 3. (a) The Corporation shall have succession through June 30, 1960, unless it is sooner dissolved by an Act of Congress. It shall have power to adopt, alter, and use a corporate seal; to make contracts; to lease or purchase such real estate as may be necessary for the transaction of its business; to sue and be sued, to complain and to defend, in any court of competent jurisdiction, State or Federal; to select, employ, and fix the compensation of such officers, employees, attorneys, and agents as shall be necessary for the transaction of the business of the Corporation, in accordance with laws, applicable to the Corporation, as in effect on June 30, 1947, and as thereafter amended; and to prescribe, amend, and repeal, by its board of directors, bylaws, rules, and regulations governing the manner in which its general business may be conducted. [Except as may be otherwise provided in this Act or in the Government Corporation Control Act, the board of directors of the Corporation shall determine the necessity for and the character and amount of its obligations and expenditures under this Act and the manner in which they shall be incurred, allowed, paid, and accounted for, without regard to the provisions of any other laws governing the expenditure of public funds, and such determinations shall be final and conclusive upon all other officers of the Government.] The Corporation through its board of directors shall determie its necessary expenditures under this Act and the manner in which they shall be incurred, allowed, and paid, without regard to the provisions of any laws governing the expenditure of public funds not specifically applicable to the Corporation or to Government corporations: Provided, That no part of the funds of the Corporation shall be used to make any purchase or for personal services or to enter into any contract for the use or benefit of any other agency of the Government unless such agency shall have authority in law and appropriations available to make reimbursement for such purchase, personal services, or contract: Provided further, That the Corporation shall contribute to the Civil Service Retirement and Disability Fund on the basis of annual billings, as determined by the Civil Service Commission, for the Government's share of the cost after June 30, 1948, of the Civil Service Retirement System applicable to the Corporation's employees and their beneficiaries and for a fair portion of the cost of administration of the fund; shall reimburse the Employees' Compensation Fund on the basis of billings, as determined by the Federal Security Agency, for the cost of benefits paid after June 30, 1948, under the provisions of the Employees' Compensation Act of September 7, 1910, on account of employees of the Corporation and for a fair portion of the cost of

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administration; and shall reimburse other Government agencies or payments of a similar nature made on behalf of the Corporation.

The Corporation shall be entitled to and granted the same immunities and exemptions from the payment of costs, charges, and fees as are granted to the United States pursuant to the provisions of law codified in sections 543, 548, 555, 557, 578, and 578a of title 28 of the United States Code, 1940 edition. The Corporation shall also be entitled to the use of the United States mails in the same manner as the executive departments of the Government. Debts due the Corporation, whether heretofore or hereafter arising, shall not be entitled to the priority available to the United States pursuant to section 3466 of the Revised Statutes (U. S. C., title 31, sec. 191) except that the Corporation shall be entitled to such priority with respect to debts arising from any transaction pursuant to any of the following Acts or provisions in effect at any time: Sections 5d (1) and 5d (2) of the Reconstruction Finance Corporation Act added by section 5 of the Act entitled "An Act to authorize the purchase by the Reconstruction Finance Corporation of stock of Federal home-loan banks; to amend the Reconstruction Finance Corporation Act, as amended, and for other purposes," approved June 25, 1940 (54 Stat. 573); sections 4 (f) and 9 of the Act entitled “An Act to mobilize the productive facilities of small business in the interests of successful prosecution of the war, and for other purposes," approved June 11, 1942 (56 Stat. 354, 356); section 2 (e) of the Emergency Price Control Act of 1942 (56 Stat. 26); the Surplus Property Act of 1944 (58 Stat. 765 and the following); sections 11 and 12 of the Veterans' Emergency Housing Act of 1946 (60 Stat. 214, 215); and section 403 of the Sixth Supplemental National Defense Appropriation Act (56 Stat. 245).

SEC. 7. The Corporation may issue to the Secretary of the Treasury its notes, debentures, bonds, or other such obligations in an amount outstanding at any one time sufficient to enable the Corporation to carry out its functions under this Act or any other provision of law, such obligations to mature not more than five years from their respective dates of issue, to be redeemable at the option of the Corporation before maturity in such manner as may be stipulated in such obligations. Such obligations may mature subsequent to the period of succession of the Corporation. [Each such obligation shall bear interest at a rate determined by the Secretary of the Treasury, taking into consideration the current average rate on outstanding marketable obligations of the United States as of the last day of the month preceding the issuance of the obligation of the Corporation.] Such obligations outstanding during any fiscal year, shall bear interest at a rate determined annually in advance by the Secretary of the Treasury; such rate to be calculated to reimburse the Treasury for its cost. The Secretary of the Treasury is authorized to purchase any obligations of the Corporation to be issued hereunder, and for such purpose the Secretary of the Treasury is authorized to use as a public-debt transaction the proceeds from the sale of any securities issued under the Second Liberty Bond Act, as amended, and the purposes for which securities may be issued under the Second Liberty Bond Act, as amended, are extended to include any purchases of the Corporation's obligations hereunder.


The General Accounting Office has reviewed generally the provisions of the existing RFC Act, as amended (Public Law 132, 80th Cong., 1st sess.), and the presently proposed amendments thereto contained in S. 2287.

S. 2287 was passed by the Senate on April 6, 1948. The proposed legislation was accompanied by a report from the Senate Committee on Banking and Currency.

S. 2287 comprises sections numbered 1 through 9, of which sections 1 through 4 contain complete revised language for sections similarly numbered (1 through 4) in title I of the existing law (Public Law 132, 80th Cong., 1st sess.). The remaining sections of title I of the existing law (secs. 5 through 13) are not amended by S. 2287.

Sections 5 through 8 of S. 2287 amend certain title II (miscellaneous provisions) sections of the existing law, and section 9 is a technical amendment of the Federal Reserve Act.

As a result of our review, we suggest certain language revisions in sections 1 and 3 of S. 2287 and in section 7 of the existing law; the suggested revisions are indicated in the attached copies of these sections. Our comments with respect to the suggested provisions are set forth below.


The suggested insertion in section 1 (b) of the words "within 6 months" merely establishes a time limit within which the dividend payment required by this section is to be paid into the United States Treasury, to avoid undue delay in such payments.


This is a new subsection which we suggest for inclusion in S. 2287.

It is believed that all Government corporations should be required to pay interest on all the Government's funds invested therein. This is consistent with the President's recommendation in his annual budget message for 1949, and generally consistent with recommendation of the General Accounting Office in connection with proposed charter revisions for other Government corporations. Further, section 4 (b) (2) as proposed to be amended by S. 2287 provides with a minor exception that all loans made by the Corporation shall bear such interest as to be reasonably calculated to enable the Corporation to operate without loss. In order to determine realistically whether or not the Corporatio is operating without a loss, it is, of course, necessary to the extent practicable to include in the Corporation's accounts all costs which are related to the income produced.

It is believed that there are two main items of costs incurred by the Government with respect to RFC operations which, under present or proposed legislation, the Corporation has not been required to pay. These costs are (1) intere: t on the Government's capital (other than loans from the U. S. Treasury) invested in the enterprise, and (2) Government contributions with respect to employee benefit programs. (The latter category would include contributions made to the civil service retirement and disability fund and claims paid out of the employee ' compensation fund, Bureau of Employees' Compensation, Federal Security Agency. See section 3 (a) hereinafter for proposed legislation in this respect.)

Section 7 of the existing law authorizes the Corporation to borrow from the United States Treasury and requires it to pay interest on such borrowings.

Section 1 (a), (b), and (c), as proposed to be amended by S. 2287, provide that the capital of the Corporation will be reduced from the present 325 million dollars to 100 million, and the present accumulated earnings of some 550 million dollars be reduced to 50 million dollars; such reductions to be accomplished by payment into the United States Treasury as miscellaneous receipts. It will be noted that the Corporation has had the use in its lending operations of interest-free capital and surplus aggregating in recent years approximately 875 million dollars.Assuming the cost of the money to the United States Treasury to be in the neighborhood of 2 percent per annum, the cost to the Government of carrying its. investment in the Corporation would be approximately 171⁄2 million dollars per annum, no part of which was reflected in the Corporation's accounts. While the proposed legislation would reduce the Government's investment in the capital stock and accumulated earnings of the Corporatioon to 150 million dollars, this would still be on an interest-free basis and, at the same rate, the interest cost to the Government on this adjusted investment would amount to approximately 3 million dollars per annum.

Our suggested subsection (d) of section 1 provides that RFC be required to pay interest to the Treasury on the 150 million dollars designated as capital stock and retainable accumulated earnings in sections 1 (a) and (b). This requirement would also be applicable to other funds arising from liquidating activities for which the Corporation is accountable to the Treasury and which it uses in its lending activities. The amounts involved are substantial.

Where Government corporations are financed solely by the United States Treasury, there does not appear to be any purpose served by maintaining distinct classifications of such financing as between capital stock, loans from the Treasury, etc. In effect, all represent the Government's investment in the enterprise.

In the review of charters for certain other Government corporations, we have proposed that the distinction between loans and capital stock be eliminated and that all funds required by the corporation (from the U. S. Treasury) be of one class; that Government ownership of the corporation and net funds advanced or

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