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Full text of "Investigation of concentration of economic power. Hearings before the Temporary National Economic Committee, Congress of the United States, Seventy-fifth Congress, third Session [-Seventy-sixth Congress, third Session] pursuant to Public Resolution no. 113 (Seventy-fifth Congress) authorizing and directing a select committee to make a full and complete study and investigation with respect to the concentration of economic power in, and financial control over, production of goods and services .."

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Given By 
U. S. SU?T. Ci' I^CCUlviiiNiS 








Public Resolution No. 113 
(Seventy-fifth Congress) 


^^3> ^^^ 


May 16, 17, 18, 22, 23, 24, 25, and 26, 1939 

Printed for the use of the Temporary National Economic Committee 











Public Resolution No. 113 
(Seventy-fifth Congress) 




May 16, 17, 18, 22, 23, 24, 25, and 26, 1939 

Printed for the use of the Temporary National Economic Committee 

124491 WASHINGTON : 1940 


MAY 2 1940 


(Created pursuant to Public Res. 113, 75th Cong.) 

JOSEPH C. O'MAHONEY, Senator from Wyoming, Chairman 

HATTON W. SUMNERS, Representative from Texas, Vice Chairman 

WILLIAM E. BORAH, Senator from Idaho 

WILLIAM H. KINO, Senator from Utah 

B. CARROLL REECE, Representative from Tennessee 

CLYDE WILLIAMS, Representative from Missouri 

THURMAN W. ARNOLD, Assistant Attorney General 

•WENDELL BERGE, Special Assistant to the Attorney General 

Representing the Department of Justice 


•LEON HENDERSON, Commissioner 

Representing the Securities and Exchange Commission 

GARLAND S. FERGUSON, Commissioner 

•EWIN L. DAVIS, Commissioner, Representing the Federal Trade Commis.^ion 

ISADOR LUBIN, Commissioner of Labor Statistics 

•A. FORD HINRICHS, Chief Economist, Bureau of Labor Statistics 

Representing the Department of Labor 

JOSEPH J. O'CONNELL, JR., Special Assistant to the General Counsel 

•CHRISTIAN JOY PEOPLES, Director of Procurement 

Representing the Department of the Treasury 

RICHARD C. PATTERSON, Jr., Assistant Secretary 

Representing the Department of Commerce 

JAMES R. BRACKETT, Executive Secretary 



Testimony of — 

Altman, Dr. Oscar L., Investment Banking Section, Securities and 

Exchange Commission, Washington, D. C 3669-3702 

Barriger, John W., Ill, Railroad Division, Reconstruction Finance 

Corporation, Washington, D. O 3561-3576 

Berle, Hon, Adolph A., Jr., Assistant Secretary of State, Washing- 
ton, D. C 3809-3835 

Currie, Laughlin, Assistant Director, Division of Research and Sta- 
tistics, Board of Governors, Federal Reserve System, Washing- 
ton, D. C 3520-3538 

Davenport, Dr. Donald H., Special Economic Consultant, Investment 
Banking Section. Securities and Exchange Commission, Washing- 
ton, D. C 3726-3774 

Davis, L. F., vice president, McAleer Manufacturing Co., Detroit, 

Mich L 3965-3971 

Dennison, Henry, president, Dennison Manufacturing Co., Flaming- 
ham, Mass 3774-3792 

Eisenschiml, Otto, president, Scientific Oil Compounding Co., Chi- 
cago, 111 3913-3915 

Ferris, John P., Tennessee "Valley Authority, Knoxville, Tenn 3923-3943 

Hansen, Alvin Harvey, professor of political economy. Harvard Uni- 
versity, Cambridge. Mass 3495-3520, 3538-3559, 3837-3859 

Hellyer. Thomas W., secretary and treasurer, Columbia Feather Co., 
Chicago, 111 389&-3902 

Hicks, M. B., Wyoming Valley Industrial Development Fund, Wilkes- 
Barre, Pa 3945-3964 

Hillyer, William Hurd, assistant vice president, James Talcott, Inc., 
New York City 3993^005 

Hopkins, Ernest J., Investment Banking Section, Securities and Ex- 
change Commission. Washington, D. C 3890-3898,3974-3982 

Lebo, Willis R., The W. R. Lebo Co., Seattle, Wash 398^-3993 

Manuel, Ralph W., president, Marquette National Bank, Minneapolis, 

Minn 3706-3725 

Nicolay, E. I., president, Nicolay-Dancey, Inc., Detroit, Mich 3909^913 

Perkins, Hon. Mllo, president, Federal Surplus Commodities Corpo- 
ration, Washington, D. C 3859^3868 

Quackenbush, S. V. P., president, Scranton Chamber of Commerce, 
Scranton, Pa 3902-3909 

Rentschler, Frederick B., chairman of the board, United Aircraft 

Corporation, Hartford, Conn 3634-3650 

Sloan, Alfred P., chairman of the board. General Motors Corporation, 
New York City 3650-3669 

Stettinius, Edward R.. Jr., chairman of the board. United States Steel 
Corporation, New York City 3576-3597 

Trinklein, Edwin J., president, Air-O-Cel Industries, Inc., Detroit, 

Mich 3916-3922 

Young. Owen D., chairman of the board. General Electric Co., New 

York City 3598-3631 

White, William R., Superintendent of Banks, State of New York, New 

York City 3792-3808 

Whitehead, William, Securities and Exchange Commission, Washing- 
ton, D. C 3972-3974 

Whiteside, Arthur, president, Dun & Bradstreet, New York City__ 3872-3883 

The flow of savings and the flow of investment 3497 

Effects of changes in the volume of capital formation on the size of the 
national income 3500 




Recent structural changes in the national economy 3503 

Gross and net capital formation. 1919-37 3506 

Significance of the change in ratio of gross to net capital formation 3510 

Factors responsible for the prosperity of the twenties 3511 

Effect of industrial maturity on the volume of capital formation 3513 

The volume of construction 1920-37 3515 

Relation of savings to investment 3521 

Outlets for savings, 1921-38 3524 

Relation of capital expenditures in selected industries to output in those 

industries 3529 

Composition of total expenditures offsetting savings, 1921-38 . 3533 

Relation of income-producing expenditures offsetting savings to the na- 
tional income 3536 

Effect of Government action on the volume and flow of the national iriconje- 3543 

Need for increasing the volume of Government investment ^ 3546 

Contribution of Federal Government to income-producing expenditure 3552 

Ration of consumption to income increases as an economy matures ^ 3554 

Sources of railway capital, 1921-37 3562 

Sources of capital funds— United States Steel Corporation, 1921-38— _____ 3580 
Relation of operating ratio to volume of capital expenditure- — United States 

Steel Corporation. 

Sources of capital funds — General Electric Co 3599 

Financial history of General Electric Co., 1879^38 3600 

Tax policy and capital accumulation — General Electric Co -. 3615 

General Electric Co. — capital requirements financed entirely from internal 

sources since 1920 .__ 3620 

Sources of capital funds — Pratt & Whitney Aircraft Co __^- 3635 

Advantages of financing capital requirements from internal sources '.-- 3643 

Sources of capital funds — General Motors Corporation, 1921-38 .- 3650 

Capacity and relation of output to capital requirements — General Motors 

Corporation 3658 

Significance of internal financing 3670 

Capital exijenditure and replacement 3671 

Depreciation and depletion allowances 3674 

Increase and significance of depreciation and depletion allowances 3675 

Business savings _ 3679 

Internal .sources of business funds 3684 

External and internal sources of funds, 1935-37 3692 

Sources of funds for selected groups of companies, 1930-38 3693 

Sources of funds for corporations classified by size 3695 

Summary of data on financing ■ 3696 

Functions of money in the economic process 3707 

Social conse(iueiK'es of hoarding 3709 

Suggestions for meeting the problem of hoarding 3711 

I^se and function of bank deposits 3714 

Philosophy of investment 3719 

Suggested restrictions on the use of demand deposits 3721 

Mechanisms of the savings process 3726 

Growth in the volume of savings held by selected savings institutions 

1910-38 3734 

Spirit of thrift not declining 3741 

Recent changes in character of commercial banking activities 3747 

Geographical concentratiou of assets of savings institutions 3751 

Volume of funds available for investment 3768 

Numbers of people saving through savings processes 1920-38 3769 

Relation between the growth of savings institutions and the growth of 

urban economy 3770 

Vobune of public construction — Federal, State, and local, 1920-38 3775 

Planning of public works — National Resources Committee 3781 

Role of public works in solution of investment problem 3786 

Role of legal list in directing flow of investment funds 3793 

Effect of expanding the legal list of flow of investment funds 3806 

Function and development of capital credit mechanism 3810 

Role of bank credit in capital formation 38iL3 

Function of investment banker in capital m^irkets . 38^5 

Opportunities for public investment if interest rates were sufficientlv 

favorable ___—_"_ 3819 



Increasing credit facilities available to small-business man 3823 

Proposal for creation of capital banks with Federal credit for public 

works 3824 

Function of government in economic life 3831 

The double budget — increasing importance of expenditures for investment 

in the total outlay of the Federal Government 3839 

Types of public debt 3840 

The Budget and taxation 3841 

Budgeting public investment — the Danish system 3846 

Budgeting public investment — the Swedish system 3847 

Use of public corporations by Federal Government 3848 

Cautions on use of a double budget 3852 

The Federal debt 3856 

Work of Federal Surplus Commodity Corporation in increasing volume of 

The food-stamp plan 3862 

Volume of opportunities currently available for private capital invest- 
ment 3864 

Importance of stimulating consumption by increasing the volume of pro- 
duction 3866 

Mortality record of the small retailer 3875 

Need by small business for financing facilities 3881 

Proposal for setting up institutions to finance small business 3886 

Small-business survey in Fall River area 3891 

Credit needs of small business — the situation in Scranton area 3903 

Need for capital and credit by smaller business enterprises in Tennessee 

Valley area 3923 

Financing small business — Wyoming Valley plan 3946 

Major difficulties encountered by small business seeking new capital 3948 

Proiwsal for financing of small business . 3956 

Capital needs of small business : 

The Detroit area 3972 

The Seattle area 3975 

Function of the factor in supplying credit to small business 3994 

Schedule of exhibits 1 VII 

Tuesday, May 16, 1939 3493 

Wednesday, May 17, 1939 3561 

Thursday, May IS, 1939 3633 

Monday, May 22, 1939 3705 

Tuesday, May 23, 1939 3791 

Wednesday, May 24, 1939 3837 

Thursday, May 25, 1939 3871 

Friday, May 26, 1939 3945 

Appendix 4007 

Supplemental data 4122 

Index I 


Number and summary of exhibits 

at page 

on page 

541. Chart: Gross national product and capital formation, and 

consumer's outlay for durable goods and other goods and 
services, 191&-37. Supported by statistical data on p. 
4007 in appendix 

542. Chart: Decennial increase in United States population 1800- 

1960 (estimated). Supported by statistical data on p. 

4007 in appendix 

643. Chart: Gross and net capital formation, private and public, 
1919-37. Supported by statistical data on p. 4008 in ap- 

544. Chart: Business gross capital formation, capital consump- 

tion, and net capital formation (excluding inventories), 
1919-37. Supported by statistical data on p. 4008 in 

545. Chart: All construction in the United States, 1920-37. 

Supported by statistical data on p. 4009 in appendix 

546. Letter from President Roosevelt, dated May 16, 1939, ad- 

dressed to Senator O'Mahoney, anent aims and 

of the Temporary National Economic Committee 

547.^Chart: Income-producing expenditures that offset saving, 
1921-38. Supported by statistical data on p. 4010 in 

548. Chart: Income-producing expenditures that offset saving — 

continued, 1921-38. Supported by statistical data on p. 

4010 in appendix 

549. Chart: Income-producing expenditures that offset saving — 

continued, 1921-38. Sujiported by statistical data on p. 

4011 in appendix 

550. Chart: Income-producing expenditures that offset saving — 

continued, 1921-38. Supported by statistical data on p. 
4011 in appendix 

551. Chart: Income-producing expenditures that offset saving — 

continued, 1921-38. Supported by statistical data on p. 
4011 in appendix 

552. Chart: Mining and manufacturing expenditures for plant 

and equipment and index of industrial production, 1921- 
38. Supported by statistical data on p. 4012 in appendix. 

553. Chart: Electric power expenditures for plant and equipment 

and indexes of total installed capacity and total output, 
1921-38. Supported by statistical data on p. 4012 in ap- 

554. Chart: Railroad equipm.ent expenditures, available freight 

cars and car loadings, 1921-38. Supported by statistical 
data on p. 40 1 2 in appendix 

555. Chart: Composition of income-producing expenditures that 

offset saving. 1925, 1929, 1937. Supported by statistical 
data on p. 4013 in appendix 

556. Chart: National income and total income producing expendi- 

tures that offset saving, 1921-38. Supported by statisti- 
cal data on p. 4013 in appendix 

557. Supplementary tables: Plant expenditures by type of busi- 

ness, 1919-38, and composition of income-producing ex- 
penditures that offset saving, average 1923-29 







































Number and summary of exhibits 

at page 

on paaie 

558. Appendix giving sources and methods for statement sub- 

mitted to the Temporary National Economic Committee 
by Dr. Lauclilin Currie 

559. Table: Funds obtained for capital purposes from income, 

class 1 railways and their lessor companies, 1921-37 

560. Table: Funds secured for capital purposes from the sale of 

stock, all classes of steam railway companies, 1921-37 

561. Table: Funds secured for capital purposes through the sale 

of funded debt, all classes of steam railway companies, 

562. Table: Funds secured for capital purposes from the sale of 

securities, all classes of steam railway companies, 1921-37_. 

563. Table: Summary of funds available for capital purposes, 

1921-37, by railways 

564. Table: Expenditures for maintenance, class 1 railways, 

excluding depreciation and retirements, 1921-37 

565. Table: Capital requirements, class 1 railways, and their lessor 

companies, 1921-37 

566. Table: Sources and application of railway capital, 1921-37-. 

567. Table: Changes in investment in road and equipment of 

class 1 roads and their lessor companies, 1921-37 

568. Table: Sources and disposition of funds, United States Steel 

Corporation and subsidiaries, consolidated, 1921-38 

569. Table : United States Steel Corporation ; finished products for 

sale, percent of production to capacity, 1920-38 

570. Chart: Retail value of new passenger car sales compared 

with national income produced 

571. Statement entitled "General Motors Corporation and sub- 

sidiary companies — summarj^ of principal products cur- 
rently sold" 

572. Table: General Motors Corporation — Disposition of funds 

statement, 1921-38, inclusive 

673. Table: General Motors Corporation — Summary of informa- 
tion requested in question 8, table 4 

574. Table: General Motors Corporation — Summary of informa- 

tion requested in question 7, table 3 

575. Table: Terborgh's estimates of business gross, capital forma- 

tion, excluding inventories, 1921 to 38 

576. Table: Business gross, capital formation, capital consump- 

tion, and net capital formation (excluding inventories) for 
1919 to 1937 

577. Table: Estimated business expenditures for new durable 

goods (excluding inventories) and business depreciation 
and depletion allowances, 1920 to 1937 

578. Table: Compiled net profits, dividends, depreciation and 

depletion of all nonfinancial corporations, 1923 to 1937--. 

579. Table: Indexes of prices of capital goods, 1920 to 1937 

580. Table: Index of prices of business capital goods for replace- 

ments and for depreciation charges, 1920 to 1937 

581. Table: Business savings for all nonfinancial enterprises, 

capital gains and capital losses for all nonfinancial cor- 
porations, and adjusted business savings for all nonfinan- 
cian enterprises, 1922-37 

582. Table: Undistributed profits, depreciation, and depletion 

of nonfinancial corporations, 1923 to 1937 

583. Table: Undistributed profits, depreciation, and depletion 

of net income nonfinancial corporations, 1923-35 

584. Table: Undistributed profits, depreciation, and depletion 

of no net income nonfinancial corporations, 1923-35 

585. Chart: Net profits plus depreciation and depletion of non- 

financial corporations, 1923 to 1937. Supported by 
statistical data on p. 4041 in appendix 

















































Number and summary of exhibits 

at page 

on page 

586. Chart: Financing investnionls in business plant and equip- 

ment, 1922 to 1937. Supported by statistical data on p. 
4041 in appendix 

587. Table: Assets and liabilities of all nonfinancial corporations, 


588. Table: Changes in assets and liabilities of all nonfinancial 

corporations, 1927-36 

589. Table: Inventory revaluations, 1919-35, of all business en- 

terprises, excluding farms 

590. Table: Inventory revaluations, 1919-33, of all business enter- 

prises, excluding farm and securitv inventorv revaluations, 
1919-33 - 1 

591. Table: Sources and uses of funds, 1930-38, for 56 industrial 


592. Table: Sources and uses of funds, 1930 to 1938, for 11 oil 


593. Table: Sources and uses of funds, 1930-38, for 7 automobile 


594. Table: Sources and uses of funds, 1930-38, for 9 steel com- 


595. Table: Distribution of compiled net profits and undis- 

tributed gross income (undistributed profits plus deprecia- 
tion and depletion), by corporations classified into 9 size 
groups, 193 1-35 

596. Table: Adjusted undistributed profit plus depreciation and 

depletion allowances for corporations, with assets of less 

than $50,000 during the period 1931-35 

■597. Letter from E. R. Stettinius, Jr., to Senator O'Mahoney, 
chairman of the Temporary National Economic Commit- 
tee, dated May 19, 1939, elaborating his testimony before 
the committee on the effect of modernization of factories 
upon employment 

598. Memorandum prepared for the Temporary National Eco- 

nomic Committee in re "the relation of the chain-store 
gross margins to distribution costs and net profits," by 
Dr. G. A. Stephens. "Exhibit No. 598" appears in the 
appendix to hearings. Part V, p. 2299 

599. Chart: The flow of money income and expenditure 

600. Chart: Individual savings invested in long-term debts and 


601. Chart: Growth of savings institutions in United States, 

1910-38. Supported by statistical data on p. 4052 in 

602. Chart: Comparison of assets in savings institutions, 1920, 

1930, 1938. Supported by statistical data on p. 4052 in 

603. Excerpt from Cleveland Trust Co. business bulletin. Mar. 

15, 1939, with attached table, discussing relation of new 

life insurance and national income 

■604. Reprint of an editorial entitled "Eclipse of savings," from 
the New York Herald Tribune, Apr. 6, 1939 

605. Copy of a letter to the New York Herald Tribune, from 

M. A. Linton, president. Provident Mutual Life Insur- 
ance Co. of Philadelphia, dated Apr. 12, 1939, replying 
to the Herald Tribune's editorial on "Eclipse of saving". 

606. Table: Premium income, total income, and adjusted in- 

crease in the assets of all life-insurance companies, in rela- 
tion to national income, 1920-37 

607. Chart: Loans and investments of all member banks of the 

Federal Reserve System, 1921-38. Supported by statis- 
tical data on p. 4056 in appendix 












































Number and summary of exhibits 

on page 

608. Chart: Concentration of assets of life-insurance companies, 

Dec. 31, 1937. Supported by statistical data on p. 4057 
in appendix 

609. Chart: Concentration of assets of mutual savings banks, 

Jan. 1, 1939. Supported by statistical data on p. 4059 
in appendix 

610. Chart: Concentration of assets of commercial banks in the 

United States, Dec. 31, 1938. Supported Vjy statistical 
data on p. 4060 in appendix 

611. Chart: Concentration of assets in principal reservoirs of 

savings, 1937. Supported by statistical data on p. 4062 
in appendix 

612. Table: Data reflecting the number of persons employing 

various savings processes, 1920, 1930, 1937-38 

613. Chart: Public and private construction and maintenance in 

the United States, 1920-38. Supported by statistical 
data on p. 4063 in appendix 

614. Chart: Outlay for construction and maintenance of Govern- 

ment plant, Federal, State, and local, 1920-38. Supported 

by statistical data on p. 4064 in appendix 

616. Chart: Public construction and maintenance in the United 
States (part of work relief included), 1920-38. Supported 
by statistical data on p. 4064 in appendix 

616. Chart: What was built by the Government, 1920-37. 

Supported by statistical data on p. 4065 in appendix 

617. Chart: Corporate securities issued, for durable capital goods 

and for other purposes, 1921-38 

618. Chart: Growth of private placement of corporate bonds and 

notes, 1934-38. Supported by statistical data on p. 4065 
in appendix 

619. Chart: Distribution of United States Steel Corporation 

$100,000,000 debenture issue 

620. Memorandum submitting proposals for a banking system 

for capital and capital credit dated May 23, 1939, by A. A. 
Berle, Jr 

621. Table: Estimated expenditures for cotton articles by non- 

relief families, July 1935-June 1936 

622. Article entitled "Facts About the Food Stamp Plan To Be 

Tried Out in Rochester Upon an Experimental Basis 

623. Article entitled "The Food-Stamp Plan— Why It Is Being 

Tried Out and How It Will Work in Rochester 

624. Statement of Dr. Will Alexander, administrator, Farm Secu- 

rity Administration, advocating adqeu ate funds for rehabi- 
litation loans to dependent farmers 

625. Chart: War against depression — Total receipts and expen- 

ditures of Federal Government, 1931-38. Supported by 
statistical data on p. 4091 in appendix 

626. Chart: Holders of the mortgages on American homes 

627. Chart: Holders of the farm mortgage debt, 1920, 1930, 1938 

Supported by statistical data on p. 4096 in appendix 

628. Chart: Owners of the Federal debt, direct and guaranteed 

obligations of the U. S. Government, June 30, 1938. Sup- 
ported by statistical data on p. 4098 in appendix 

629. Table: Summary of position of 40 Fall River small-business 


630. Map entitled "Spendable Income Per Capita in the Southeast 

by Counties" 

631. Map entitled "Leading Industrial Counties in Relation to the 

1930 United States Geographic Center of Population." 

632. Article entitled "Tennessee's Industrial Expansion and Its 

Relation to Economic Independence," by Dean Ford L. 
Wilkinson , Jr 

3751 3752 





























3927 4099 



Number and summary of exhibits 

at page 

on page 









Report of the Agricultural Industries Division of the Tennes- 
see Valley Authoritv, Nov. 1, 1935, entitled "Industries 
in Which the Southls Deficient." 

Booklet entitled "Engineering and Social Progress in the 
South," by John P. Ferris, director. Agricultural Indus- 
tries Department, Tennessee Valley Authority 

Chart: Showing increased income as a result of railway re- 
frigeration of foods in transit, entitled "Income Added to 
Area by Freezing." 

Article of Association of the Michigan Milk Producers 
Association. "Exhibit No. 636" appears in the appendix 
to Hearings Part VII, p. 3279 

Telegram to Mr. Louis F. Davis, vice president, McAleer 
Manufacturing Co., from the Detroit Association of 
Credit Men 

Memorandum from the Investment Banking Section, 
Securities Exchange Commission to the Temporary 
National Economic Committee respecting study of small 
business enterprises in the Detroit, Mich, area 

Memorandum to the Temporary National Economic Com- 
mittee from Lyman J. Briggs, Director, National Bureau 
of Standards. "Exhibit No. 639" appears in the appen- 
dix to Hearings Part VIII, p. 3475 

Chart and table: Federal ownership of real estate in the 

various States, June 30, 1937 

Unnumbered. Table: Net and gross national income and income- 
producing expenditures that offset saving, 


Unnumbered. The following eight documents were submitted in 
connection with the testimony of John W. 
Barriger, III: 

1. Class I railroads in receivership or trustee- 

ship, excess of total income over fixed 
charges paid — years ended Dec. 31, 
1932-38, inclusive 

2. Excess of total income over fixed charges 

paid, year ended Dec. 31, 1938 

3. Excess of total income over fixed charges 

paid, year ended Dee. 31, 1937 

4. Excess of total income over fixed charges 

paid, year ended Dec. 31, 1936 

5. Excess of total income over fixed charges 

paid, year ended Dec. 31, 1935 

6. Excess of total income over fixed charges 

paid, year ended Dec. 31, 1934 

7. Excess of total income over fixed charges 

paid, year ended Dec. 31, 1933 

8. Excess of total income over fixed charges 

paid, year ended Dec. 31, 1932 

Unnumbered. 2 letters, dated "May 23, 1939, and June 14, 1939, 
from Albert Bradley, vice president of General 
Motors Corporation, to Dr. Isador Lubin, Com- 
missioner of Labor Statistics, Department of 
Labor, concerning General Motors, investments 
in real estate, plants, and equipment 


















schedulp: of exhibits 

Number and summary of exhibits 

at page 

on page 

Unnumbered. The following charts and tables were submitted in 
connection with the testimony of Henry S. 
Dennison : 

1. Chart: Pubhc construction, 1920-38. Fed- 

eral and non-Federal maintenance not 
included. Supported by statistical data 
on p. 4140 

2. Chart: Pubhc construction and maintenance 

1920-38, Federal and non-Federal. (Fart 
of work relief construction included) sup- 
ported by statistical data on p. 4140 

3. Table: Work relief construction and main- 

tenance, 1933-38 

4. Chart: Funds available and the disposal of 

such funds by the Federal Government, 
total 1931-38. Supported by statistical 
data on p. 4145 

5. Table: Expenditures for construction and 

maintenance of naval vessels in the 
United States, 1920-38 

6. Chart: Increase in Federal debt and in value 

of selected Federal properties, 1931-38. 
Supported by statistical data on p. 4146. - 

7. Chart: Increase in public debt and in Gov- 

ernment a.ssets, total 1931-38. Sup- 
ported by statistical data on p. 4149 

Unnumbered. Chart: Receipts and expenditures of Federal funds, 
fiscal years, 1917-21. Supported by statistical 
data on p. 4151 





TUESDAY, MAY 16, 1939 ■ 

United! States Senate, 
Temporary National Economic Committee, 

Washington^ D. G. 

The committee met at 11:20 a. m., pursuant to adjournment on 
Friday, May 12, 1939. in the Caucus Room, Senate Office Building, 
Senator Joseph C. O'Mahoney presiding. 

Present: Senators O'Mahoney (chairman) and King; Representa- 
tives Reece and Williams; Messrs. Henderson, O'Connell, Lubin, 
Frank, Hinrichs, Patterson, and Brackett. 

Present also: Representatives James M. Barnes, of Illinois; Com- 
missioner Ed^Yard C. Eicher, Securities and Exchange Commission; 
AVillard L. Thorp, Department of Commerce; Joseph Borkin, Depart- 
ment of Justice; Thomas Blaisdell, Securities and Exchange Commis- 
sion; Peter R. Nehemkis, Jr., special counsel. Investment Banking 
Section, Securities and Exchange Commission ; and Joseph R. Kelley, 
associate counsel. Investment Banking Section. S curilios and Ex- 
change Commission. 

The Chairman. The committee will please come to order. Today 
we begin the presentation of the study of investment and savings by 
the Securities and Exchange Commission. Sometimes I think that 
this may indeed prove to be the most important of all the studies 
which have been undertaken under the sponsorship of this com- 
mittee. Production, employment, and investment are all indissolubly 
bound together. I suppose it will be remembered that wdien Presi- 
dent Roosevelt sent his message to Congress in April 1938, recom- 
mending the study which this committee was instituted to undertake, 
he pointed out that business enterprise needs new vitality — to use his 
own words, "and the flexibility that comes from the diversified efforts, 
independent judgments, and A^brant energies of thousands upon 
thousands of independent businessmen." ^ And that in concluding 
that notable message he said that idle factories and idle workers 
profit no man.^ 

I suppose that the justifiable inference from these brief quotations 
from the President's message and from the entire message is that 
it was intended to point the way to a study that might find how 
free, independent, private enterprise may be stimulated. We want 
io know who saves money and where the capital reservoirs are, and 
what the access of the individual is to the capital reservoirs; how 
individual savings and corporate savings alike affect the common 
Avelfare of the United States; and it was with these and numerous 

1 See "Exhibit No. 1," Hearings, I'art I, app3ndix. p. 185, at p. 186. 
= Ibid., at p. 191. 



other questions in mind that the Securities and Exchange Comniis- 
sion, at the direction of the committee, undertook this study, having 
the benefit of the assistance and experience of all the agencies of the 
Government which from time to time have had something to do with 
money and investment. 

Mr. Peter Nehemkis, Jr., has been selected as counsel to present 
the results of the study. Mr, Jerome Frank, of the Securities and 
Exchange Commission,' is here today and I shall ask him to open the 

Mr. Frank. In these hearings the Securities and Exchange Com- 
mission, through the testimony of a number of distinguished wit- 
nesses drawn from several agencies of the Government, from finance 
and from industry, will endeavor to present the facts about certain 
important phases of our national economy. 

The examination of the witnesses will be undertaken by a mem- 
ber of the Securities and Exchange Commission's staff, Mr. Nehemkis. 
During the jDresentation of this material, the Commission will be 
represented on the committee, for the most part, by Mr. Leon Hen- 
derson, who has just been appointed to the Commission. 

Inasmuch as tlie material to be presented is the product of many 
varied points of view, it should be pointed out that the views which 
may be expressed by the several witnesses are their own and are 
not to be taken as representing the views of the Securities and 
Exchange Commission. 

Mr. Henderson. Mr. Nehemkis, are you ready to proceed? 

Mr. Nehemkis. Mr. Chairman, may it please the committee: As 
has already been indicated, the public hearings which are to begin 
today will be concerned with the problem of savings and investment. 
The purpose of these hearings is to present a factual picture of cer- 
tain important jjhases of our economy. The facts will be brought 
out, as Commissioner Frank has already indicated, by witnesses from 
several branches of the Government (such as the Federal Reserve 
Board, the Department of Agriculture, and, I am very happy to say, 
the Department of Banking of the State of New York) as well as 
from industry and from finance. 

I should like once again to repeat that the interpretations which 
may be put on some of these facts by some of the witnesses should not 
be taken as representing the opinions of the Commission which I 
represent this morning. 

Today and throughout these hearings we shall be discussing with 
you a single problem: Why is it that we continue to have in this 
country idle men, idle machines, and idle money? To indicate the 
scope of these hearings, I can do no better than to refer to a series 
of challenging questions which Mr. Leon Henderson raised before 
this committee at the very outset of its inquiry. Mr. Henderson then 
had occasion to say:^ 

The over-all question seems to be, why have we not had full employment 
and full utilization of our magnificeut resources? 

Why has nevp investment lagged? Is this lag likely to continue? Has the 
forward drive of the American economy stopped? Have we witnessed the 
end of our dynamic mass production, lower price, more employment policy? Are 
we in for stagnation or decline? What is the proper function of government 
in periods of under -investment ? Is government debt different from personal, 

» See Hearings, Part I, pp. 180 and 181. 


that is to say private, debt? Under what set of economic conditions can sav- 
ings be absorbed? Wtiat is the influence of the present rate of return on 

It is to these questions, wliicli Mr. Henderson has propounded, that 
we shall endeavor to i^resent an answer, and it is to these fundamental 
questions that the witnesses who will appear before you will direct 
their testimony. 

Mr. Chairman, may it please the committee, I desire to call as the 
Securities and Exchange Commission's first witness. Dr. Alvin 

Tlie Chairman. The witnesses of course, under the rules the com- 
mittee has adopted from the outset will be sworn, even though on 
many occasions they are often stating only opinions. 

Do you solemnly swear that the testimony you are about to give in 
this proceeding shall be the truth, the whole truth, and nothing but 
the truth, so help you God? 

Dr. Hansen. I do. 

The Chairman. Let me suggest to the members of the committee 
in the interests of orderly procedure that it might be well to permit 
the witnesses to proceed under questioning by Mr. Nehemkis before 
the members of the committee undertake to examine. At the conclu- 
sion of each witness' testimony, the Chair will give ample oppor- 
tunity to every member of the committee to propound any questions 
that may suggest themselves to you, and unless there is objection, 
that will be the rule by which this proceeding will be carried on. 

You may proceed. 


Mr. Nehemkis. Will you state your name, please? 

Dr. Hansen. Alvin H. Hansen. 

Mr. Nehemkis. And your present residence? 

Dr. Hansen. Belmont, Mass. 

Mr. NEHEMias. What is your occupation? 

Mr. Hansen. Professor of economics, Harvard University. 

Mr. Nehemkis. Mr. Chairman, may it please the committee, I desire 
the leave of the committee to read into the record a very brief state- 
ment of the professional qualifications of this witness. 

The Chairman. Very well, proceed. 

Mr. Nehemkis. Dr. Hansen has been a member of the Columbia 
Commission of Economic Reconstruction during the years 1932-33, a 
director of research of the Social Science Research Commission on 
International Economic Relations during the years 1933-34, an econ- 
omist for the Department of State during the years 1934-35, and 
chairman of a committee on industry and trade of the Social Science 
Research Council. 

Dr. Hansen has also been a member of the Committee on Research 
in Fiscal Policy of the National Bureau of Economic Research; 
chairman of the Economic Advisory Council of the National Indus- 
trial Conference Board. Dr. Hansen has also been economic adviser 
to the Prairie Provinces before Canadian Royal Commission on 
Dominion Provincial Relations during the years 1937-38, as well as a 
member of the Advisory Council on Social Security. 


Dr. Hansen, have yon been past president of the American Eco- 
nomic Association ? 

Dr. Hansen. I have. 

Mr. Nehemkis. Do yon accept the statement wliich I have just 
read as an accurate resume of your professional qualifications? 

Dr. Hansen. Yes, sir. 

Mr. Nehemkis. Have you discussed the substance of the testimony 
you are about to give with counsel? 

Dr. Hansen. Yes. 

Mr. Nehemkis. Notwithstanding those discussions, is the testimony 
you are about to give your own considered findings and conclusions ? 

Dr. Hansen. Yes, sir. 

Mr. Nehemkis. In addition to your general knowledge of the 
subject, have you made a special study in preparation for the testi- 
mony to be given by you ? 

Dr. Hansen. I have. 

Mr. Nehemkis. Dr. Hansen, were the charts which 3^011 will iden- 
tify and discuss prepared at your direction? 

Dr. Hansen. Yes. 

Mr. Nehemkis. Are they based. Dr. Hansen, upon statistical data 
which you believe to be accurate and authentic? 

Dr. Hansen. Yes, sir. 

Mr. Nehemkis. Very well, sir, will you go on with your discussion 
of the problem, calling for the production of such charts as you may 
need for the purpose? 

Dr. Hansen. Mr. Chairman and members of the committee, I 
should like to preface my remarks with a comment about economic 
analysis and economic conclusions in general. One cannot emphasize 
too strongly, I think, the undoubted fact that we are here dealing 
with material which is not subject to unequivocal mathematical dem- 
onstration or to verifiable conclusions, such as are possible in the 
laboratory of the natural scientists. The factual data with which we 
deal are subject to a varying margin of error. The methods of 
analysis are imperfect, and, hence, the conclusions are inevitably 
tentative. The role of the economist in his effort to interpret eco- 
nomic trends and to guide public police must, if one is candid, be 
an extremely modest one. We are living in dangerous times. It is 
dangerous to act, and it is dangerous not to act. It is dangerous to 
give advice, and it would be easy to attempt to escape or to shirk 
all responsibility by refusing to do so. 

On the basis of a good many years of thinking and analysis of 
economic trends, I have reached certain conclusions, firmly held but 
subject to revision as new data appear. I have been asked to lay 
these conclusions before 3^011 insofar as they pertain to your inquiry. 
Because of the shortness of the time at my disposal, and also for 
the sake of clarity, I have stated these views with relatively few 
qualifications. I should like, however, to ask j^ou to bear in mind 
from the very outset that all investigators in this area must approach 
their subject with due humility, and with a full realization that 
there is wide scope for difference of honest and competent opinion 
with respect to both current economic tendencies and the appropriate 
solutions of our problems. 


I cannot give positive proof of any of nn' conclusions. They must 
stand or fall according as they do or do not appear to be realistic 
and sensible to reasonable persons. 

The inquiry undertaken by the Temporary National Economic 
Committee, as I understand it, related particularly to the current 
functioning- of our system of production. Its purpose is to inquire 
into the reasons why it is not functioning as effectively as it might, 
into the reasons why it is not succeeding in producing the maximum 
output of which it is capable, or in giving full employment to our 
Inbor and capital resources. It relates not only to the problems of 
imperfect competition in the decline of price competition ; it relates 
also to the role of consumption, saving and capital outlays in our 
economy. It involves, therefore, a consideration of the financial 
institutions through which a large part of our national savings flow 
and the great reservoirs of savings in which the flow of funds 

Too frequently when the functioning of the price system is under 
consideration attention is focused almost exclusively upon the com- 
modity markets. 

To leave an inquiry into the functioning of the price system, with a 
consideration of commodity prices alone would in my judgment over- 
look a sector in our economy, which is more important than any 
other for an understanding of the operation, the maladjustments and 
the instability of modern economic life, I refer in particular to 
that area which relates to the flow of savings and to the flow of 
new investment into the expansion of productive equipment. 


Dr. Hansen. Of first-class importance in appraising the functioning 
of our economy is to examine into the question, what it is that keeps 
the income stream going : how can it be raised to a higher level ; and 
how may it be maintained at a high level? That income stream 
flows day by day to everyone participating in the productive process, 
including not only the production of commodities but also of serv- 
ices of every kincl and description, trade, professional, and govern- 

This income stream is large or small according to the volume of 
purchases currently made. These purchases are of two kinds; one 
type consists of the purchase of consumption goods and services; 
another type consists of the purchase of capital equipment, indus- 
trial plant and machinery, public utility and railroad equipment, 
commercial and residential building, and the like. There are, there- 
fore, two streams of expenditures continually going on ; one stream 
consists of expenditures for consumption and the other consists of 
expenditures on capital outlays on ]:)lant and equipment. 

How large the income stream will be, whether 60 billions or 80 
billions, depends upon the volume of these two expenditure streams. 
Now the expenditure stream which is mainly responsible for the rise 
and fall of the total income is the outlay made on equipment and 
plant expansion. When large expenditures are made on industrial, 
commercial, residential, and public construction ; when office build- 

124491 — 40 — pt. 9 2 


ings, hotels, apartments, houses, school buildings, and public works 
of all kind are being erected in large volume, when investment is made 
on a large scale in railroad, utility, manufacturing and mining, and 
agricultural equipment, the income is lifted to a high level and it can 
be maintained on a high level so long and only so long as large capital 
outlays of this sort are being made. 

Thus in the good years from 1923 to 1929, inclusive, the total volume 
of capital outlays amounted to the vast sum of $128,000,000,000. I 
am taking the figures from Dr. Kuznets in his monumental study on 
National Income and Capital Formation, made in the offices of the 
National Bureau of Economic Kesearch. Of this total, one-half Avas 
expended on replacements and renewals, and one-half for plant 
expansion and new construction. 

This includes business capital outlays as well as residential capital 
outlays and outlays for public construction. Average annual expen- 
diture on capital outlays for this 7-year period amounted to 18.3 bil- 
lions of dollars. It required this volume of capital outlays to lift the 
national income to 77 billions, the average income figure for this period 
of high prosperity. 

These figures suggest that reasonably full employment and a fairly 
satisfactory income level, such as we had in 1923 to 192'9, require 
a quite extraordinarily large volume of expenditures on capital 
goods. It is the margin of income which is created by the capital- 
goods industries that fills the gap between prosperity and depression. 
No high level of employment and income has ever been achieved 
without a large outlay on plant equipment and new construction. 

At this point I should like to introduce a chart. 

Mr. Nehemkis. Before you proceed, will you let me offer this? 
May it please tlie committee, I desire to oifer ijito evidence a chart 
entitled "Gross National Product and Capital Formation, and Con- 
sumer's Outlay for Durable Goods and Other Goods and Sei'vices, 
1919-37," together with the accompanying table. 

The Chairman. They may be received. 

(The chart referred to was marked "Exhibit No. 541" and appears 
on p. 3499. The statistical data on which this chart is based are in- 
cluded in the appendix on p. 4007.) 

Dr. Hansen. This is a chart based on the studies of Dr. Kuznets 
to which I have already referred. It shows in the blue area the 
gross capital formation, including total capital outlays, both re- 
placement, and new capital outlays. 

The Chairman. May I interrupt you to say that the colors will 
not appear in the record, so if you would be good enough to identify 
the areas to which you are alluding by their arrangement on the 
chart, I think it would be helpful to the reader. 

Dr. Hansen. Yes, sir. The lower area entitled "Gross Capital 

Mr. Nehemkis (interposing). Would you just define that term, 
if you will, Dr. Hansen? 





Dr. Hansen. I am about to do so, yes. The lower area, which is en- 
titled "Gross Capital Formation," includes the total capital outlays 
on railroads, utilities, manufacturing, mining, and so forth, and also 
the outlays on residential building and public construction. It in- 
cludes not only new capital formation — that is to say, new outlays 
on neAv equipment, additional equipment, but also replacements and 
renewals, and it is particularly the volume of gross capital forma- 
tion in which I am at the moment particularly interested. 

The area above is entitled "Durable Consumers' Goods" — the 
automobiles and the like; and they are at the top, the large area at 
the top entitled "Consumers' Outlay for non-Durable Goods," is, I 
think, self-explanatory. The line at the top indicates what Dr. 
Kuznets calls the gross national product, or we might call it the 
gross national income. 

This, I may say, is a special definition of gross income in the sense 
that it includes what we ordinarily call the national income, the net 
national income, and it also includes in addition the capital outlays 
that have taken the form of replacement and renewal of plant. Now 
the thing that I wish to direct your attention in particular to is the 
large volume of gross capital formation through the twenties, par- 
ticularly through the good years from 1923 to 1929, and I wish to 
direct your attention to the fact that so long as those large gross 
capital outlays were being made, the income was maintained on a 
high level and indeed growing in that period; but as soon as the 
gross capital outlays declined heavily, then you get a drastic decline 
in the income. 

You will note, however, that the expenditures for consumers' goods 
declined percentage- wise was very much less than the decline in the 
capital outlays, and similarly in the subsequent period of the thirties 
when gross capital outlays increased, the national income again in- 
creased. As I shall say later on, in my testimony, tliis gross capital 
outlay may be regarded as the really dynamic part of income, of our 
national income. 

Mr. Nehemkis. Di'. Hansen, before you leave the chart may I ask 
you to return to it for a moment. Will you make clearer to us pre- 
cisely what you mean by two terms ; the first term is "outlay." What 
does that involve? The second term, what precisely do you mean 
by "capital formation"? 

Dr. Hansen. By capital outlays I simply mean expenditures on 
plant and equipment ; and on construction. And by capital forma- 
tion I simply mean those real capital goods, factories, and machines, 
which were produced as a result of those outlays. Capital formation, 
then, means the real construction, the construction of real capital 

Mr. Nehemkis. Thank you very much. Dr. Hansen. 

Dr. Hansen. Let us consider what is necessary in order to keep 
the income stream flowing on a high level, once it has reached that 
level. The income received or realized out of the ])roductive process 
of the prior week or month will either be expended for consumption 
or it will be saved. The part that is spent on consumption goods and 
services automatically becomes the source of a new income stream. 


The part that is saved may or may not feed into the income stream, 
depending npon whether or not these savings are used either by the 
saver himself or by a borrower for the purpose of capital goods, 
plant, machinery, industrial and commercial construction, houses, 
office buildings, schools, or public works. 

If the saver does not himself use the funds, or if he fails to find a 
borrower who will use them to purchase plant, equipment, and other 
capital goods, the income stream dries up and unemployment pre- 
vails in the capital-goods industries. It is highly essential that all 
that part of the current flow of income which is not expended on 
consumption goods, namely that part which is saved, shall be ex- 
pended either directly by the saver himself or indirectly through a 
borrower on new plant and equi])ment of some sort. If the amount 
which is saved is large, as it is likely to be at a high income level, 
it is necessary that equally large outlets be available for these savings 
in equipment and plant expansion, and in residential and public 

In every boom })eriod, tlie flow of savings is expended on capital 
outlays of this sort and frequently these funds are augmented by 
additional sums created out of an expansion of bank credit. In a 
depression, expenditures on capital projects fall off, savers are un- 
willing themselves to purchase capital goods with their savings, or 
are unable to find borrowers to do so. The income stream thus 
dries up. In consequence, owing to the fall of employment, even 
the stream of expenditures on consumption declines, and so the 
income stream shrinks still more. 

At low income levels, even the savings stream dwindles away and 
the economy runs along on a low level of output and employment. 

Why is it that no boom has ever been able to perpetuate itself year 
by year and so maintain income on a high level? Special causes have 
from time to time brought particular booms to an end, but apart 
from these we can say that every boom eventually dies a natural 
death. By this I mean that the available outlets for plant and equip- 
ment expansion have been temporarily exhausted. A temporary 
saturation point has been reached. 

The boom is a period in which we exploit to the full all the avail- 
able new developments which the progress of science and technology, 
together with the growth of population, have up to that point made 
economically possible. Once all factories have installed the new^ 
machines, once a city has been equipped with the municipal utilities 
which technology has so far made available, once the construction of 
houses, apartments, office buildings, hotels, school buildings and the 
like have caught up with the growth of the population, there remains 
little that can profitably be done except to maintain the capital 
plant already constructed. When this point is reached, the boom 
dies a natural death. 

This is essentially what happened in 1929. Nearly all over the 
world, England excepted, there had been going on for some years a 
gigantic constructional boom. This was true not only of the United 
States but of Germany, France, Canada, Latin America, and even 
the Orient. The vigor of this boom was due in part to the backlog 
of housing requirements which had accumulated by reason of the 
cessation of building during the war; in part it w^as due to the 
impetus to the industrialization of backward countries which the 


war itself had caused, and in part it was due to the growth of new 
industries and to other factors to which I shall later refer. 

The boom of the twenties was a gigantic spurt in capital forma- 
tion, in capital outlays; progress typically is made by spurts — ^by 
leaps and bounds. Progress typically is discontinuous, jerky, and 
lumpy. New developments are exploited to the full and then the 
boom dies. It peters out because a saturation point has temporarily 
been reached. The spurt cannot last at the pace set. 

It is not difficult to see that if we had kept on constructing office 
buildings, apartments, hotels, houses, commercial and industrial struc- 
tures, and the like, at the rate they were being constructed in the 
late twenties, we should very soon have bankrupted all the owners 
of old property. 

For a time there was no room left for further plant expansion or 
for other new capital outlays. It takes time before new develop- 
ments can again accumulate, before the discovery of new techniques, 
new resources, new industries, and the growth of population will 
again set the stage for another boom. 

In the depression, even a severe one, gross capital outlays, including 
plant replacement and renewals, will not sink to zero, but there is 
danger that the capital expenditures will not be large enough even 
to absorb depreciation allowances. Thus in such a period there is 
no room whatever for new savings. 

Now the total stream of gross savings consists in part of net sav- 
ings from current income and in part of depreciation and depletion 
allowances designed to maintain intact the plant and equipment. If 
the total expenditures on capital structures and equipment is not even 
enough to absorb the depreciation allowances set aside by business 
year after year, a two-fold deflationary effect to the income stream 
IS present, first, the failure of new savings to be expended on expansion 
of plant and equipment, and, second, the failure of business concerns 
to expend depreciation allowances on the replacement and renewal of 
plant and equipment. 

Under the impact of the unemployment thus created, consumption 
expenditures will fall to low levels. Thus the total income stream will 
be reduced by an amount not only equal to the decline in expenditures 
on plant and equipment, but also by the induced decline in con- 

The dynamic part of expenditures, as I have already said, is, how- 
ever, the outlays on capital goods, on plant and equipment, on con- 
struction. It is the rise and fall of these expenditures that causes 
income to be high or low, and the income will rise or fall, as we have 
seen, not merely by reason of the increase or decline of capital 
outlays, but also by reason of the induced increase or decrease in 
consumption expenditures. The rise and fall of consumption is a 
result of the rise and fall of employment incident to the rise and fall 
of capital outlays on plant and equipment. Money expended on capi- 
tal outlays is therefore high-powered money. Every dollar of money 
so expended will cause consumption to rise. Every dollar withdrawn 
will cause consumption to fall. Thus every dollar of capital outlays 
has a multiplier or leverage effect on income, and similarly every 
dollar of savings or depreciation allowances not expended on capital 
outlays drives the income down with a magnified effect. 


To repeat, money spent or withheld for capital outlays is high- 
powered money, whether in the upswing or in the downswing. Thus 
a society geared to a high peak load of capital-goods production is 
likely to experience violent fluctuations in income and employment, 
a high savings economy will remain a highly dynamic economy so 
long as it is able to experience periodically great bursts of capital 
outlays on plant and equipment. It is then a dynamic, rapidly ex- 
panding, and progressive economy, despite its instability. But if 
such an economy fails to find adequate investment outlets in plant 
and equipment for its new savings and for its depreciation allow- 
ances, it will lose its dynamic quality and become a depressed and 
stagnant economy, with a large volume of chronic unemployment. 
The higli -savings economy can escape a fall in income and employ- 
ment only through the continuous development of new outlets for 
capital expenditures on industrial plant and equipment and on com- 
mercial, residential, and public construction. 

So far as private investment outlets are concerned, this requires 
continuous technological progress, the rise of new industries, the 
discovery of new resources, the growth of population, or a combi- 
nation of several or all of these developments. 


Dr. Hansen. We are completing this year a decade of unemployment 
on a scale never before known in our history. This decade of unemploy- 
ment was interrupted by a partial recovery which culminated in 1937. 
This depression is of a magnitude and duration which has eclipsed 
all others, not excepting even the deep and prolonged depressions of 
the seventies and nineties. It is a unique phenomenon. It cannot be 
explained in terms of ordinary business-cycle analysis. For the time 
being at least we are experiencing a chronic maladjustment, a faihire 
of adequate outlets for capital expenditures for a society geared to 
a high savings, high investment level. We are caught in the midst 
of powerful forces in the evolution of our economy which we but 
dimly understand. Something has gone wrong with the forces mak- 
ing for expansion. We are undergoing a fundamental change in 
the structure of our economic life. 

In every historical epoch it has always been difficult for the gen- 
eration then living to understand what is going on. It is extraor- 
dinarily difficult to get a proper perspective on current drifts and 
tendencies. Forces slowly accumulating over a long period of time 
have suddenly converged to give us a decade of unparalleled unem- 
ployment. Change is indeed the law of life, but change has come 
in recent years with accelerated speed. It is not difficult to see that 
the economic system of tomorrow will be very unlike the economic 
system of the past. We are living in a period of transition. Yet in 
this period men's thinking is still dominated by frozen patterns of 
the past into which people try to mold the facts of the present. 

The economic order of the western world is undergoing in this 
generation, it seems to me, a structural change no less basic and 
profound in character than the industrial revolution beginning 150 
years ago and extending deep into the nineteenth century. That 
revolution transformed the western world from a primitive, rural 


economy into a highly industrialized machine economy. In this gen- 
eration we are passing over a divide which separates the great era 
of the growth and expansion of the nineteenth century from an era 
which we cannot as yet characterize with clarity and precision. 

One overwhelmingly important fact, however, characterized the 
century which preceded the World War. It was a unique epoch. It 
was a century of rapid expansion into new territory and it was a 
century of prodigious growth of population. Population poured 
into America, into the great West, into Brazil, the Argentine, Canada, 
Australia, and flowed back from the agricultural communities into 
giant urban centers which grew and fed on this expansion. This 
one central fact of growth and expansion dominated the whole of 
economic life. It minimized the risk of new ventures. If optimism 
had carried railroad building too far at the moment, if a city had 
temporarily overbuilt, the damage was short lived. Expansion and 
growth soon made good the error. Businessmen could look far into 
the future with gigantic plants, with anticipatory capital outlays, 
investment plans which had no relation to the present, and which 
were based upon the expectation of growth and expansion. 

It is not difficult to see that a country experiencing a rapid increase 
of population requires a vast capital outlay in order to provide hous- 
ing, transportation, and all the facilities necessary for modern meth- 
ods of living, such as municipal utilities and the like. The enormous 
capital outlays of the nineteenth century Avere, of course, in the first 
instance conditioned by new technological developments, but they 
were determined also by the vast growth of population. It seems not 
unreasonable to suppose — and some rough estimates lead to this con- 
clusion — that approximately one-half of the capital outlays of the 
past century were due to the growth of population and its expan- 
sion into new territory. 

J. R. Hicks, a distinguished British economist, in a recent book 
entitled "Value and Capital," says: 

Nevertheless, one cannot repress the thought that perhaps the whole indus- 
trial revolution of the last 200 years has been nothing else but a large secular 
boom, largely induced by the unparalleled rise in population. 

The prodigious growth of population in the nineteenth century 
was apparently something quite unique in history. Gathering mo- 
mentum with the progress of modern science and transportation, the 
absolute growth of population in western Europe mounted decade 
by decade until the great World War, and in the United States it 
reached the highest level of absolute growth in the pre-war decade, 
and again in the decade of the twenties. 

The upward surge began with relatively small accretions, which 
rapidly swelled into a flood, but the advancing tide has come to a 
sudden halt and the accretions are dwindling toward zero. Thus 
with the prospect of actual contraction confronting us, already we 
are in the midst of a drastic decline in population growth. In the 
decade of the twenties, the population increased by 16,000,000. In 
the current decade we are adding only half this number, roughly, 
to our population, and the best forecasts indicate a further decline in 
the decade which we are about to enter. 

For us the rising tide of population grow^th continued until 1930; 
for western Europe it ended with the World War. 



I should here like to introduce a chart showing the increments of 
jDopulation growth in the United States. 

Mr. Nehemkis. Mr. Chairman, may it please the committee, I 
desire to offer in evidence a chart entitled ''Decennial Increases in 
United States Population," together with the accompanjdng table. 

The Chairman. The chart may be received. 

(The chart referred to was marked "Exhibit No. 542'* and appears 
on this page. The statistical data on which this chart is based are 
included in the appendix on p. 4007.) 

Dr. Hansen. I should like to call your attention to the fact that 
this is not a chart showing the total population from decade to 
decade. It is a chart showing the decennial increases in population, 
the net increment of increase from decade to decade. You will 

Exhibit No. 542 




1820 1830 1840 1850 1860 1870 

1910 1950 I960 

notice that the decennial increase mounted decade by decade from 
1800, and indeed the century before, if our chart had gone back that 
far, until 1930. The decade ending 1910 added to our population 
slightly more than the decade ending 1930, but they are substantially 
on the same level. The decade of the World War, ending 1920, 
had a somewhat smaller increase, experienced a somewhat smaller 
increase, than that of the preceding decade or that of the following 

By and large we may say, therefore, that the decennial increase 
of population continued to rise until the end of the decade 1930. 

Now the bars to the right indicate the estimated decennial in- 
creases in the next three decades, as estimated by the National 
Resources Committee. They have also given us estimates that run 
further into the future, which would show a decline until eventually, 


by about in the last quarter of the twentieth century, it would reach 

The point that I especially wish to stress with respect to this chart 
is the great importance of the amount of growth, the absolute amount 
of growth. It is not enough that an economy is simply gix)wing. 
If the additional amounts of growth are smaller and smaller you 
have from that fact alone a depressing effect upon your economy. If 
your plant is built up to a point to take care of the growth, a fall in 
the growth of population means that you have already a depres- 
sional effect. It is in connection, let me say in somewliat technical 
terms, with a chart such as this showing the decline in growth that 
the well-known principle of acceleration in business-cycle discussions 

(The testimony of the witness was interrupted for the taking of 

Mr. Nehemkis. Dr. Hansen, you were speaking of the effect of 
acceleration. Will you continue please from that point ? 


Dr. Hansen. I had finished the statement. 

In this era of rapid territorial and population expansion, the 
United States was a capital-poor country. Not only were we able to 
find a ready outlet for our own savings, we imported besides a vast 
amount of capital from abroad. All this changed with the World 
War. From a capital-poor country we became a capital-rich country. 
Instead of a capital-importing country we became a capital-exporting 
country on a prodigious scale. The World War postponed the diffi- 
culties of the transition. The post-war decade for special reasons 
which I shall explore briefly offered temporarily adequate outlets for 
our savings. It gave us a period of precarious equilibrium between 
savings and capital investment. Thus, for a time enjoying high pros- 
perity and relatively full employment, we were unaware of the under- 
lying trends and forces which were converging upon us to produce 
the great depression. 

Let me consider the major facts which made the twenties so pros- 
perous. I have already said that we had an outlay on capital goods 
of all sorts of $18,000,000,000 per annum in the prosperous years from 
1923 to 1929. This was the basis of our prosperity, and here I should 
like to introduce a chart showing the capital formation in this period. 

Mr. Nehemkis. Mr. Chairman, may it please the committee, I offer 
in evidence a chart entitled "Gross and net capital formation 1919- 
37," and the statistical tables which accompany it. 

The Chairman. It may be received. 

(The chart referred to' was marked "Exhibit No. 543" and appeai-s 
on p. ;'^507. The statistical data on which this chart is based are in- 
cluded in the appendix on p. 4008.) 

Mr. Henderson. Mr. Nehemkis, tlie witness is going to distinguish 
between gross and net, is he not? 

Mr. Nehemkis. 1 believe he will iu the course of his explanation 
of the chart. 

Dr. Hansen. This is a chart showing the total capital outlays on 
plant and equipment of all sorts, on residential construction and on 



o m 





public construction. It shows not only the net outlays, the net cap- 
ital outlays, that is to say the outlays on quite new developments, on 
expansion, but it also shows the capital outlays on replacements and 
renewals of plant and equipment. 

The red area or the lower marked area (striped) indicates the net 
capital formation, the expansion of plant and equipment, the expan- 
sion of residential building and public works. 

The Chairman. Now, you are referring to the lower area of the 
second half of the chart. 

Dr. Hansen. Of the second half of the chart. 

The Chairman. Of each part of the column. 

Dr. Hansen. Yes. The blue area opposite the yellow area above 
the. area to which I have just referred (meaning the part of the cross- 
barred area opposite the dotted area) represents the capital outlays 
on replacements and renewals of ]3lant and equipment, of residences 
and of public works. By and large you will see that in the twenties 
that area of renewals and replacements was about a half of the area 
of expansion of capital outlays on plant and equipment, residences 
and public works. The next chart please. 

Mr. Nehemkis. Mr. Chairman, may it please the committee, I de- 
sire to offer in evidence a chart entitled "Business gross capital for- 
mation, capital consumption, and net capital formation 1919-37," to- 
gether with the statistical data in support thereof. 

The Chairman. The chart may be received. 

(The chart referred to w^as marked "Exhibit No. 544'' and appears 
en p. 3.509. The statistical data on which this chart is based are in- 
cluded in the appendix on p. 4008.) 

Senator King. Before leaving that other chart, if the committee 
will pardon me I would like to direct the attention of the Avitness to 
the line below what might be called the base line, which shows the 
years 1932 and 1933 and 1934. I suppose that refers to the deprecia- 
tion of capital in use. 

Dr. Hansen. Which was not offset by outlays on maintenance and 

Mr. Nehemkis. Will you point to those two bars that Senator 
King has referred to, please. Dr. Hansen, on the other chart ?^ Point 
them out to the committee, and will you be good enough to repeat 
your answer for the record. 

Dr. Hansen. The upper bars to the right in each case refer to 
depreciation of capital in use, and this capital refers to all kinds of 
capital goods, whether business or residential or public. Up to the 
great depression, the depreciation was offset by renewals and replace- 
ment, but during some of the years of the depression, notabl}' partly 
in '31, and especially in '32, '33, and '34, the expenditures on re- 
newals and replacement was not equal to the depreciation of capital 
in use. In other words, there was a decline in our capital stock in 
those years. 

Now it is a very difficult thing to measure, and as a matter of fact 
the depreciation of capital in use is measured in terms of accounting 
procedure, and one could enter into a good deal of discussion about 
the appropriateness of the usual accounting procedure with respect 
to depreciation. 

1 See "Exhibit No. 543," p. 3507. 





^— • c 




o < 









1/1 01 


CO 10 ^ M O CM 


— 1 1 1 r 

"< 1 r- 




















Senator King. I was wondering whether that was obsolescence. 

Dr. Hansen. No; it means capital consumption which was not 
offset by replacements and renewals. 

Senator King. Does your chart indicate the value measured in 
dollars and cents, the loss from obsolescence, depreciation, and destruc- 
tion of capital? 

Dr. Hansen. Yes ; that is supposed to be represented by the yellow 
bars below the line. The blue bars, the bars to the left (cross-barred) 
indicate the extent to which the capital consumption was offset by 
renewals and replacement in each year, but the renewals and replace- 
ments were not adequate in those years to offset fully the capital 

Mr. Nehemkis. Professor Hansen, before you leave that chart 
would you be good enough to explain the distinction between gross 
and net capital formation for the committee? 

Dr. Hansen. Net means the capital outlays on expansion of plant 
and equipment, on expansion of residences and public works, on new 
additional plant and equipment. Gross includes the expansion ex- 
penditures, but it also includes the capital outlays on replacements 
and renewals. 

significance or the change in ratio of gross to 

NET capital formation 

Dr. LuBiN. Mr. Hansen, may I for my own purposes clarify this 
last statement? Looking at the table that you submit with your 
chart,^ am I to understand that in the year 1932 American industry, 
according to its accounting records, used up approximately $4,400.- 
000,000 worth of capital that they didn't replace ? 

Dr. Hansen. Yes, sir. There is one comment, however, that I 
should like to make. It is quite possible that those capital outlays 
which were made on renewals and replacements, introducing through 
those capital outlays news technics and improved machinery, may 
have left your total capital plant as productive as before, despite 
the fact that the accounting figures would indicate a decline in the 
total capital stock. It is quite possible the productive plant was 
fully as effective despite that seeming decline in the total capital 

Now, if we may turn to this other chart,^ this chart refers exclu- 
sively to business capital outlays, which, however, is a broad term 
including manufacturing, mining, public iitilities, railroads, and 
even trade and agriculture. It excludes, therefore, capital outlays 
on residential construction and on public construction. I may say 
also that this chart does not include outlays on inventories, nor does 
it include investments made in foreign countries. It includes, there- 
fore, total capital outlays made by business of all sort, and the top 
bars refer to gross capital outlays, including not only expansion out- 
lays but also replacements and renewals. 

This chart also differentiates between net capital outlays and gross 
capital outlays. 

I should like to call your attention particularly to the elements in 
this total volume of capital formation, the two categories to which I 

1 See supporting data for "Exhibit No. 543," appendix, p. 4008. 
» "Exhibit No. 544," p. 3509. 


liave just referred, the net and the gross. They are different in this 
chart from the preceding one, as you will notice. It is, I think, a 
very striking fact that the gross business capital outlays consist to 
a very large extent of replacements and renewals. The area above 
the red bars or the bars to the right in the case of each set of bars 
(dotted), in the twenties was, roughly, about twice as large, that is 
to say, the area for capital replacements and renewals was about 
twice as large as the capital outlays on plant and equipment expansion. 

It indicates that in the modern highly developed economy the 
capital outlays on mere replacement is enormously important as 
against the capital outlays on expansion, and I would call your 
attention to tlie fact that it is only the expansion outlays that can 
absorb new savings. The replacement and renewal outlays are 
financed by depreciation allowances — depreciation and depletion 
allowances. So that you may have a very great improvement jn 
your capital equipment merely through the expenditure of depre- 
ciation and depletion allowances, without using any new^ savings at 

I will refer to that later in my testimony. 

Mr. Neh:emkis. Dr. Hansen, before you continue, so that the^ 
record may be clear, in connection with your discussion of the pre- 
ceding chart,^ that is to say the chart which appeared on the easel 
at the right, you had occasion to use the phrase "capital stock." 
I take it you meant by capital stock physical plant, something you 
can kick with your feet? 

Dr. Hansen. That is right. 

Mr. Nehemkis. As distinguished from a piece of paper which 
you crumple in your hand, is that correct? 

Dr. Hansen. That is right. If I may revert again for a moment 
to that earlier chart. 

Senator King. Those charts are not numbered, are they. Doctor, 
one, two, three, four? 

Dr. Hansen. They are not here numbered. 

The Chairman. Let me say that the chart entitled "Gross and 
Net Capital Formation" is "Exhibit No. 543" and the chart entitled 
"Business Gross," etc., is "Exhibit No. 544." 

factors responsible for the prosperity of the twenties 

Dr. Hansen. I think before leaving this chart, "Exhibit No. 543,"" 
I should break up the gross into its constituent elements, which are 
as follows. This is the chart referring to total capital outlays, in- 
cluding not only business outlays but also outlays for residential and 
public construction. The total is broken up as follows: On the 
average in the good years, 1923 to 1929, 9.7 billions of dollars were 
spent each year on plant and equipment: 1.1 billions on inventories, 
400 millions a year on net foreign investments. They are all in- 
cluded here: 4.4 billions a year on residential construction and 2.6 
billions on public construction. 

Of the total of about 18 billion, the very large figure of 7 billion 
was expended on residential construction and public construction. 

Senator King. What year was that? 

1 See "Exhibit Xo. .■i4.'?,"' p. r{."07 


Dr. Hansen, For the years 1923 to 1929, on the average. The pros- 
perity of the twenties, to which I have especially been referring, 
rested heavily upon several factors, many of which are no longer 
present or present in an adequate degree. First, and this I regard 
as of quite extraordinary importance, there was residential building, 
which reached in this decade an all-time high; 8,750,000 urban 
residential units, not including farm units, were built in this 
decade, with a total expenditure of $33,500,000. 

On residential construction, according to the figures of the De- 
partment of Commerce 

Senator King (interposing). Twenty to '27? 

Dr. Hansen. For the entire decade, from '20 to '29, inclusive. I 
may say that the great bulk of this came from '23 to '29. The first 
3 years of the decade ran relatively low, but here I have included 
the entire decade in these figures, and they are for urban units, not 
including farm. 

Residential construction fed on an accumulated backlog of housing 
requirements caused by the virtual cessation of house building dur- 
ing the war. It fed, moreover, on the great growth of population 
in this decade, which amounted, as I have already said, to 16 mil- 
lion. From decade to decade throughout our history, the increase 
in the number of dwellings has maintained a remarkably close rela- 
tion to the increase in population. From 1916 to 1922 the population 
of the highly industrialized section of the United States, the urban- 
ized section comprising Massachusetts, Connecticut, Rhode Island, 
New York, New Jersey, Pennsylvania, Ohio, Michigan, and Illinois, 
increased 10 percent in 6 years. 

From 1922 to 1928, another 6-year period, there was a further in- 
crease of 10 percent in this area. Then came with dramatic swift- 
ness the change in the rate of growth. From 1930 to 1936, again a 
6-year period, the population of this area increased only 3 percent. 
If one takes the population of the entire country into consideration, 
the percentage increase from 1922 to 1928 is 9.1 percent, compared 
with 4.3 percent from 1930 to 1936. Thus the percentage rate of in- 
crease for the urbanized area is less than one-third of that of the 
twenties, and for the entire country, below one-half. 

During the great depression, accordingly, there did not accumu- 
late any such backlog of housing shortage as had developed in the 
period from 1916 to 1922, and there was not the pressure from a 
continued rapid growth in population such as occurred in the period 
of 1922 to 1928. Objection has been made sometimes to this argu- 
ment, on the ground that housing requirements depend not on the 
size of the population but on the number of families. It is true 
that the number of families, owing to the current abnormal age dis- 
tribution, has increased more rapidly than population, but it may 
be doubted whether this is nearly as significant a fact as the rate 
of population growth. 

About this there may be certainly difference of opinion. Young 
childless couples may double up with their parents and they get along 
quite well with one or two rented rooms. For this and other similar 
reasons, it seems to me that the rate of population is at least equally 
significant as the rate of increase of the number of families. 

In the second place there was a high volume — I am still referring 
to the special factors in the twenties — of public construction, financed 


lieaA'ily by State and local borrowing. State and local debt increased 
in this period at the rate of $1,000,000,000 a year. Large capital 
outlays were made on roads, schools, and other public improvements. 
In the third place, there was the outlet for savings in the foreign 
loans and investments which in part provided foreign countries with a 
purcliasing power to buy from us an excess of exports over imports, 
amounting to $10,600,000,000 in the decade from 1920 to 1929. 

Fourth, there was the growijig importance of consumer-installment 
credit, which financed the purcliase of durable consumers' goods and 
which reached the quite extraordinary level of 11 billion by 1929. 

Mr. Henderson. Dr. Hansen, would you mind if we struck out "con- 
sumer-installment credit"? As I recall, that figure was not on an 
installment payment basis. 

Dr. Hansen. That is right: it should be consumer credit. Fifth, 
there was the prodigous growth of the great automobile industry, to- 
gether with all the related industries which it fostered and sustained, 
including rubber, oil, glass, steel, road equipment machinery, ce- 
ment, and otlier materials entering into the construction of the wholly 
new network of hard-surfaced roads. These, as I see it, are the five 
main props to the pi-osperity of the 1920's. Their income-creating 
force was, in large part, si)ent by 1929, 

It is this, above all, that explains, it seems to me, the stagnant 
thirties, in contrast with the booming twenties. With the growth of 
population only half that of the twenties it is not so surprising that 
residential building in the last 4 years has been running along at a 
level less than a lialf or ap|)roaching a third that of the predepression 

The outlet for foreign loans and investments has been almost totally 
absent during the past decade, and the prospects are far from bright 
in the years ahead. Consumer credit declined heavilv from 1929 to 
1933. and only regained the 1929 level by 1937. State and local capital 
outlays fell fi'om $2,335,000,000 in 1930 to $1,300,000,000 in 1936. The 
net outstanding State and local debt declined by 46 millions from 
1932 to 1938, while cash balances of the State and local bodies in- 
creased by 1.6 billions. Thus the net contribution of State and local 
bodies to the national income stream has been absent in the current 

In the decade of the twenties the great automobile industry gave 
a tremendous upward push to our entire economy, running through 
a vast range of related industries. While this industry still occu- 
pies an extremely important place in our economy, there is this highly 
significant difference, that it is no longer growing and when a revo- 
lutionary new industry like the railroad in the last century, or the 
automobile in our time, after having initiated in its youth a powerful 
upward surge of plant expansion m all the basic industries which 
serve its needs, after such an industry reaches maturity and ceases to 
grow, as all industries finall}'' must, the whole economy must experi- 
ence a stagnation, unless indeed new developments equally far-reach- 
ing take its place. 


Dr. Hansen. It is not enough that a mature industry continues its 
activity at a high level on a horizontal plane ; the fact that new railroad 
mileage continued to be built at a high rate throughout the seventies 

124491 — 40— pt. 9 3 


eighties, and nineties was not sufficient. It is the cessation of growth 
which is disastrous, for when they have ceased to grow there is no fur- 
ther need for plant expansion and when giant new industries have spent 
their force, it may take a long time before something else of equal 
magnitude emerges. In fact, nothing of equal magnitude has 
emerged in the decade in which we are now living. I regard the 
development of new industries as an extremely important matter. 

Certainly no one can say at this moment what great new develop- 
ments the future may hold in store, but I should like to call atten- 
tion to what seems to me to be a fact, namely, that economic progress, 
even in the nineteenth century, came by spurts and not at a uniform 
rate. Such notable students of economic development as Spiethoff, 
Wicksell, Cassel, Schumpeter, and Robertson stress the discontinuity, 
the jerkiness and lumpiness of economic progress. 

The history of the last 200 years affords no basis for the assump- 
tion that the rise of new industries proceeds at a steady pace. But 
beyond the immediate effect upon the so-called business cycle is the 
larger problem of the effect of the presence or the lack of new indus- 
tries upon the vigor of investment booms. In periods when great 
new industries are rising to maturity over several decades, it is 
likely that booms will be very vigorous and carried to high points, 
and depressions will be short-lived. And similarly in periods 
when great new industries have reached their maturity and ceased 
to grow, and equally important new industries have failed to take 
their place, it is likely that booms will be less vigorous, prosperity 
relatively short-lived, and depressions deep and prolonged. 

Thus, throughout the nineteenth century the emergence, develop- 
ment, and growth of giant new industries has played an enormous role, 
not only in the cycle movement itself, but also in the vigor and 
intensity of America's booms, and the depth, severity, and length of 
depression periods. It is my view that the deep and prolonged de- 
pression of the nineties relates to the cessation of growth of the rail- 
road industry. There was a temporary lull before the electrical and 
automobile industries emerged, and similarly in the decade of the 
thirties, in which we are now living, we are having a similar experi- 
ence. The great automobile industry has risen to maturity, and no 
comparable new industry has appeared to fill the gap. It is my grow- 
ing conviction that the combined effect of the declining population 
growth, together with the failure of any really important innova- 
tions of a magnitude sufficient to absoib large capital outlays, weigh 
very heavily as an explanation of the failure of the recent recovery 
to reach full employment. Other factors are certainly important, 
particularly our failure to grapple effectively with certain specific 
situations, such as those presented by the railroads or the public 
utilities, or building construction. 

It might be inferred from what I have said that in the recovery 
of 1935-37 no substantial capital outlays were made. This is not the 
case, as indeed the charts which I have presented show. From the 
best available evidence, it appears that in 1936-37 capital outlays 
made on industrial plant and equipment were on a scale quite com- 
parable with those of 1927 to 1929 — that is, the capital outlays on 
industrial equipment were quite comparable in '37 to those made 
in 1927-29. The important single gap, and I would like to stress 


this, in the recoA^ery of '36-'37, was residential construction, and 
in part commercial construction. Capital outlays on railroads 
and public utilities, however, also lagged behind the '27-29 level. 
The large capital outlays on industrial plant and equipment in 1936- 
37 may appear surprising if one accepts my thesis with respect to 
declining population growth and the lack of important new indus- 
tries. One must remember, however, that we had passed through a 
long period of deep depression, so that there had accumulated a 
considerable volume of depreciation, depletion, and obsolescence, to- 
gether with the new capital requirements which the rising national 
income stimulated, but new developments were not available on a 
sufficiently large scale to sustain for long the high capital outlays of 
1936-37, or to push them to sufficiently high levels in view of the 
lag, particularly of residential building. 

Here I sliould like to introduce a chart on construction. 


Mr. Nehemkis. Mr. Chairman, I desire to offer in evidence a chart 
entitled "All Construction in the United States, 1920-37." The sta- 
tistical tables accompanying this chart will be submitted to you, sir, 
at a later time. I therefore request that the clerk be instructed to 
designate an appropriate number for this table when it is introduced 
at a later time. 

(The chart referred to was marked "Exhibit No. 545" and appears 
on p. 3516. The statistical data on which this chart is based are in- 
cluded in the appendix on p. 4009.) 

The Chairman. Will it be introduced in time to have it printed in 
the record, accompanj'ing the chart ? 

Dr. Hansen. This chart, Mr. Chairman, presents the total construc- 
tion, private and public, in the period from 1920 to 1938, It shows the 
extraordinarily high level of construction in the good years of the 
twenties, the drastic decline, and particularly the failure of construc- 
tion to recover in the relatively prosperous years of 1936 and 1937. 
In my ^dew, it is particularly the failure of residential construction, 
which accounts for the anemic character, if we may say so, of the 
prosperity of 1936-37. 

I should like to revert again to this earlier chart. 

The Chairman. You are referring to "Exhibit No. 543" ? 

Mr. Nehemkis. That is correct, sir. 

Dr. Hansen. You will notice that the gross capital formation, in- 
cluding business, capital and public, was as high in 1937 as on the 
average in the good years of the twenties, but I should like to call 
attention to what I regard as a very iini^ortant fact with respect to 
that high figure. Over $4,000,000,000 of that capital formation in 
1937 was increase in inventories — over 4 billions was an increase in 

The Chairman. May I break the rule which I laid down for all 
of us by asking you how much of that outlay was public outlay, as 
compared with private outlay? 

Dr. Hansen. You mean outlay on inventories? 

The Chairman. No; for the whole, as compared with the similar 
division in the twenties. 


Exhibit No. 545 


1920 - J937 

1920 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 1939 

sou/fC£ Ku^neTS 

OS- 1210 PRLPAKUD ar SEC & £.JtCH. COMM 


Dr. Hansen. I can give you those figures, Mr. Chairman. I 
haven't them available in my manuscript at the moment. We can 
insert them in the record. 

The Chairman. They are significant, are they not? 

Dr. Hansen. They are significant. I may say that the public con- 
struction Avas a little higher, as I recall it, in '36 than in the good 
years of the twenties, but not much higher than the good years of 
the twenties, and that will in effect answer your question, I think. 

Mr. Nehemkis. Dr. Hansen, if you will just indicate on "Exhibit 
No. 545" all construction with your pointer, I think the chairman 
will see brieflAT^ what it is he asked you. 

Dr. Hansen. "Exhibit No. 545" does show the value of public 
works in '36 and '37. as compared with the twenties. It runs on a 
somewhat higher scale. It amounts to not quite half of the total 
construction in 1936-37. 

Mr. Frank. Public works in the earlier period included a large 
amoiuit of State and municipal public works, a larger amount than 
in the latter period? 

Dr. Hansen. Yes, sir; a very much larger amount of State and 
municipal construction, and a very much smaller amount of Federal 
construction. The Federal offset the State and local in the period '36 
and '37. 

Mr. Nehemkis. There will be offered in evidence, Mr. Commis- 
sioner, statistical data and a chart which will show you that point 
very clearly, at a later time.^ 

Dr. Hansen. Now, in referring to tlie surprisingly large total out- 
lays, total capital outlays in 1937, compared with the twenties, I was 
calling attention to the fact that ovei- four billions of that was in- 
crease in inventories. I would remind you that the residential con- 
struction in that period was only about one-third of the volume of 
residential construction in the twenties. Had we had four and one- 
half billion of residential construction in '36-'37, as we had in the 
twenties, sustained over a number of years, I think we could be very 
sure that we M^ould have had a very much more vigorous and sus- 
tained recovery in '36 and '37 than we had. 

The large capital formation which went into inventories was 
necessarily of a precarious sort. 

It M'as, of course, stimulated by various factors, by the rearmament 
program which lifted certain prices, and by the drought which lifted 
certain prices, and a price rise tends to stimulate inventory accu- 

I may say also that filling the gap, so to speak, which was left by 
the failure of a high volume of residential construction in '36-'37 
were large expenditures in '36 on the soldiers' bonus, in '36-'37 on 
relief. We did not have the solid imderlying basis of capital outlays 
on such things as residential construction in '36-'37 which we had in 
the twenties, so that I think one must qualify very much this figure 

1 See "Exhibit No. 614" entered In the record during hearings held May 22, 1939, supra, 
p. 3779. 


of a very large total capital outlay in '36-'37. When we take out the 
inventories it will be seen that the capital outlays in '36 and '37, and 
we see that in '36 there was also a very large increase in inventories, 
amounting to over $2,000,000,000 — we see that the capital outlays 
ran considerably below the period of the good years of the twenties. 
So I wish to stress particularly the failure of residential construc- 
tion, and that links up with my thesis about the importance of 
population growth. 

Senator King. May I ask a question? Do you differentiate in your 
explanation of inventory between personal property, such as com- 
modities which might be produced, and real estate ? 

Dr. Hansen. These are accumulations of business inventories. 

Senator King. That accumulation of business inventories would 
relate solely to goods? 

Dr. Hansen. Yes; to goods. 

Mr. Nehemkis. Something one buys for the shelf. 

Dr. Hansen. Yes, sir. 

Mr. Henderson. And raw materials. 

Dr. Hansen. And raw materials used in manufacture. 

Mr. Frank. Professor Hansen, before you conclude, just one ques- 
tion for clarification. When you speak of savings, you are referring 
to the savings of hidividuals, not the amounts retained by corpora- 
tions in their depreciation reserves, which also might in a certain 
sense be called savings? 

Dr. Hansen. No; I think I would disagree with you, Commissioner. 
Gross savings include individual savings, the retained earnings of 
corporations, and depreciation and depletion allowances. Now, new 
savings include individual savings and the savings of corporations, 
the new savings of corporations, but new savings excludes the depre- 
ciation and depletion allowances. 

Mr. Nehemkis. Mr. Chairman, this witness' testimony for the 
time being is concluded. We have no further questions and we will 
recall him at the committee's pleasure. 

The Chairman. Perhaps it would be well for Dr. Hansen to resume 
the stand at least temporarily when we reassemble after lunch, in 
order that he may be questioned by members of the committee if they 
so desire. 

Mr. Nehemkis. Very well. 

The Chairman. The committee will stand in recess until 2: 30. 

(Whereupon, at 12 : 45 o'clock, a recess was taken until 2 : 30 p. m. 
of the same day.) 

afternoon session 

The committee resumed at 2:35 p. in., on the expiration of the 

The Chairman. The committee will please come to order. In open- 
ing this hearing this morning I took occasion to refer to the message 
of the President of last April, in which he had recommended the study 
which this committee has undertaken, and in making this, reference 
I quoted two sentences from the President's message, one being the 
sentence in which he referred to idle factories and idle men.^ It was 
a curious coincidence that just a few moments ago I received a letter 

1 Supra, p. 3493. 


from the President dealing with exactlj^ the same subject matter. It 
seems to me to mark the objective, the principal objective of this study, 
and I think it is of the utmost importance that all the people of the 
country should know exactly w^iat the President had in mind when ho 
recommended this study, and the high hopes he entertains for the 
development of facts in which we are now engaged. 

The letter is dated at the White House, Washington, May 16, 1939 : 

Dear Joe : In my message to the Congress initiating the work of the Temporary 
National Economic Committee, I had occasion to say that "idle factories and idle 
workers profit no man." It may equally be said that idle dollars profit no man. 
The present phase of the hearings before the committee bear directly upon this 

It is a matter of common knowledge that the dollars whicli the American 
people save each year are not yet finding their way back into productive enter- 
prise in sufficient volume to keep our economic machine turning over at the rate 
required to bring about full employment. We have mastered the technique of 
creating necessary credit; we have now to deal with the problem of assuring its 
full use. 

In the series of hearings which the Securities and Exchange Commission is to 
hold before your committee, I take it that a major problem of your committee 
will be to ascertain why a large part of our vast reservoir of money and savings 
have remained idle in stagnant pools. 

Is it because our economy is leaving an era of rapid expansion and entering 
an era of steadier growth, calling for relatively less investment in capital goods? 

Is it because of lag, leak, and friction in the operation of investment markets 
which pervert the normal flow of savings into nonproductive enterprise? 

These are questions for your committee to answer. 

I know of no more urgent ones in the country today. 

The hearings before your committee, I hope, will assume the task of analyzing 
the financial machine in its relation to the creation of more needed wealth. We 
know that the mechanism can be improved. Improvement <!an only be made 
on a basis of clear analysis. Having made that analysis, I hope that your com- 
mittee will then be able to indicate ways by which the machine may be made to 
function more efficiently. 

We have an immense amount of wealth which needs to be created in this coun- 
try. Much of it can be created through private enterprise. Some of it can 
properly be created through quasi-public agencies. The problem is to use our 
added savings and increased credit to get this wealth moving — that is, to get it 
now in productive enterprise — and, at the same time, to make savings available 
for use in all categories of private enterprise, as well as for the great and recog- 
nized enterprises which can command capital, but have less actual need of capital 
than many smaller but equally deserving enterprises. There is also the problem 
of determining how credit can best be made available for instrumentalities of 
local government and for those quasi-public enterprises which must do the work 
which cannot be done by private enterprises. 

We have developed several methods of connecting money with men and mate- 
rials so as to get useful work done. We shall need to use all of these oppor- 
tunities, or, if you choose to put it differently, we must meet all of tlie demands 
made on our system, if we are to have lasting prosperity. It is our task to find 
and energetically adopt those specific measures whicli will bring together idle 
men, machines, and money. In proportion as we succeed we shall strengthen 
the structure of democratic economy. 

In commenting upon the President's message this morning, I 
pointed out that a justifiable inference from what he said in that 
message was that he was primarily interested in promoting the in- 
vesting of private funds for private profit, and in the development 
of free, private, independent enterprise. Tliat comment seems to me 
to be amply borne out by the letter which has just now been read 
into the records of this committee. 

(The letter from President Roosevelt was marked "Exhibit No. 
546' and is included in the appendix on p. 4009.) 


The Chaikman. A significant phase of this problem which must 
appeal to all students of the problem is the difference between in- 
dividual enterprise and collective enterprise. That I conceive to be 
one way of differentiating between little business and big business. 
Little business is that business Avhich is owned and operated by the 
same persons; big business, as we commonly know it, is that enter- 
prise which is owned by one group and operated by another. I 
think it can be said without error that big business for the most part 
has not suffered anything like little business has suffered. It is in 
little business that we have one of the biggest lags, and therefore 
I am hoping that the results of the presentation will show a way to 
stimulate this private, individual enterprise which apparently is so 
lacking in our system at this time. 

Mr. Nehemkis, are you ready to proceed? 

Mr. Nehemkis. I am, sir. 

Tlie Securities and Exchange Commission calls as its next witness 
Dr. Lauchlin Currie. 

The Chairman. Do you solemnly swear the testimony you are 
about to give in these proceedings will be the truth, the whole truthj 
and nothing but the truth, so help you God ? 

Dr. Currie. I do. 

Mr. Nehemkis. Before Dr. Currie commences his testimony, Mr. 
Chairman, I should like to briefly describe what Dr. Currie will 
present to this committee. He shall be asked to testify with respect 
to the magnitude of the various outlets for savings since 1921 and 
the relation of the total to the national income. In a sense, Dr. Currie, 
and I trust he will forgive me for this characterization, will be a 
fact factory, an appendix, as it were, to the material presented this 
morning by Dr. Hansen. 

It is important for the sake of the record that the material that 
Dr. Currie will deal with go in at this time. It is essentially the kind 
of statistical data that we all have to study in our leisure, but it 
does fit in logically at this moment, and when Dr. Currie has com- 
pleted his testimony, I should like, then, with the leave of the com- 
mittee, to recall Dr. Hansen, who will comment upon and intepret 
that material. 

The Chairman. I wonder if an}' member of the com.mittee would 
prefer to question Dr. Hansen before Dr. Currie makes his state- 
ment. Are tliere an}^ questions in the mind of anybody here? Ap- 
parently not. You may proceed. 


Mr. Nehemkis. Dr. Currie. you are, I believe. Assistant Director 
of Kesearch and Statistics of the Federal Reserve Bonrd; is that 
correct ? 

Dr. Currie. That is right. 

Mr. Nehemkis. You have been at one time instructor in economics 
at Harvard University; is that correct? 

Dr. Currie. That is correct. 


Mr. Nehemkis. You luive also been professor of international 
economics at the Fletcher Graduate School of LaAv and Diplomacy; 
is that correct ? 

Dr. CuREiE. Correct. 

Mr. Nehemkis. You have also been associated in a professional 
capacity with the Treasury Department of the United States ; is that 
correct ? 

Dr. CuRRiE. That is correct. 

Mr. Nehemkis. Are you prepared. Dr. Currie, to testify with 
respect to the matters embraced in the statement which I made 
previously to the committee^ 

Dr. Currie. I am. 

Mr. Nehemkis. And were the several charts to be offered during 
the course of your testimony prepared under your direction? 

Dr. Currie. They were. 

Mr. Nehemkis. Are they based upon stauistical data which you 
believe to be authentic and reliable? 

Dr. Currie. They are, 

Mr. Nehemkis. Please proceed, then. Dr. Currie, indicating as you 
go, the charts and the data that you wish to present to illustrate and 
support your testimony. 

relation of savings to IN^'ESTMENT 

Dr. Currie. Mr. Chairman and members of the connnittee, I have 
been asked to present information relating to the magnitude of the 
various outlets for saving since 1921 and the relation of the total to 
the national income. The data which I shall present have been 
worked up in the Division of Research and Statistics of the Board 
of Governors of the Federal Reserve System, of which Dr. E. A. 
Goldenweiser is the Director. Being mostly of a preliminary nature, 
the data have not as yet been published in the present form. 

It may make it easier to follow the charts and figures presented 
and to appraise their significance if they are prefaced by a brief 
description of the conception of the way our economy works which 
underlies the choice of charts and figures placed before you. 

If we think of the national income as a stream of goods and serv- 
ices, all represented by their dollar equivalents, we can take the next 
step and consider the factors that tend to keep the stream going 
uninterruptedly, and the factors that tend to obstruct and divert the 
stream. When a person earns wages and spends them for living 
expenses as rapidly as he receives them, there is no interruption. 
When a corporation takes in money in exchange for the goods it pro- 
duces and disburses it at the same rate for wages, materials, power, 
and dividends, there is no interruption. 

When, however, a part of the wages received or of money realized 
for sales is not disbursed but is retained by the individual' either in 
the form of cash or of deposits, or is used to pay off debts, or even 
if it is invested in securities, there ma}^ be an interruption in the 
even flow of the money stream. Whether there is or is not depends 
on whether the money thus withdrawn is kept idle, or hoarded, or 
whether it is returned to the stream through disbursement for new 


plant and equipment, or for renovation or enlargement of existing 
plant, or offset by the expenditure of an equal amount. The money 
thus restored continues to he a saving by the individual, but it is no 
longer a withdrawal from the income stream. 

The analysis underlying the charts and tables here presented, in 
other words, separates the act of saving, which when taken by itself 
represents a withdrawal from the income stream, from the act of 
expenditure which restores the money to the stream. Such a separa- 
tion is necessary for a clear analysis and is logical because in most 
cases offsetting expenditures are made by groups different from the 
original savers. The principal exception is industrial capital ex- 
penditures financed out of corporate income and depreciation allow- 
ances, and even there the act of saving and the actual capital expendi- 
ture may be quite unrelated to each other. 

The selling price of all goods produced covers not only the current 
expenses of wages and materials but also depreciation and depletion 
charges, taxes, interest, and profits. Some of these funds are retained 
by business; others are paid out to individuals and some of these, 
especially interest and dividends, are likely to be saved. Hence, only 
a portion of the gross national income is available for consumption. 
If the stream of money payments is not to decline, an amount equiva- 
lent to the portion of the gross national income not spent on con- 
sumption must be spent on plant and equipment, etc. It is proper, 
therefore, to speak not only of outlets for saving but of offsets to 

It IS not implied in this analysis, as is sometimes believed, that 
there is something uneconomic or antisocial in the act of saving. 
From the point of view of an individual it is a natural and prudent 
act, and from the point of view of the economy as a whole it is neces- 
sary in order to provide a source of funds for the replacement and 
\ expansion of our plant and equipment. The point is simply that if 
' money is withdrawn from the income stream by saving, it has to be 
offset by an equal expenditures on plant, etc., if the flow of money 
payments and the total demand for goods of all kinds is not to be 

The most commonly accepted definition of saving, as applied to 
the Nation as a whole, is that it is the difference between the national 
^income and the amount spent out of that income on consumption. 
Since the national income is the value of all goods and services pro- 
duced in a period, the total volume of saving is also the difference 
between the value of goods and services produced in a period and the 
value of goods and services consumed. In other words, the volume 
of expenditures on plant and equipment, construction, etc., maj' not 
only be regarded as an offset or outlet for current saving, but it is 
also a measure of saving as just defined. 

It is obvious that the larger the portion of a given national income 
that is withheld from consumption, the larger must be the expendi- 
tures that represent offsets to saving, if the national income is not 
. to decline. To state the reverse of this pro])osition, tlie larger the 
portion of income that is spent on consumption, the smaller need be 
the volume of capital expenditures to sustain the given national 
income. How much income will result from a given increase in capi- 


tal expenditures depends on the proportion of the additional income 
that will be consumed and the proportion that will be saved. 

Still another inference may be drawn from this line of reasoning. 
If it can be established what proportion of an assumed national 
income will be saved, or withheld from current consumption, it is also 
established how large the outlets for or offsets to saving will have 
to be to attain and sustain that national income. Hence the prob- 
lem of maintaining full employment is the problem of securing 
sufficient outlets for the saving that will accompany full employment. 

The following types of expenditures are generally considered to 
represent the major outlets for or offsets to gross saving : 

1. Expenditures on plant and equipment charged to capital ac- 
count: Tliese are financed from such sources as depreciation allow- 
ances, retained earnings, borrowings, and stock issues. 

2. Private housing expenditures: Since the bulk of expenditures 
on new residential construction is financed by borrowing, and little 
comes out of current income, it is customary to consider such expendi- 
tures as outlets for saving. 

3. Value of the change in inventories : An increase in inventories 
represents an increased value of goods produced but not purchased 
out of final consumer income. The monetary effect of a change, while 
it is taking place, is strictly analogous to the effect of plant and 
equipment expenditures. 

4. Net additions to disposable cash income attributable to public 
bodies: This category is chosen rather than expenditures on public 
construction because we are here more interested in the dynamics of 
the flow of income than in the measurement of the addition to the 
durable goods of the community. Public expenditures that add to 
disposable cash income more than tax receipts decrease disposable 
cash income, constitute an offset for an equivalent amount of current 

5. Net foreign balance on current account : This represents the 
excess of payments received by us from foreigners over payments 
made by us to foreigners on other than capital movements. An 
excess is a net addition to disposable domestic cash income and hence 
may be regarded as an offset to domestic saving. It represents goods 
produced and not sold to domestic consumers and hence, for present 
purposes, is analogous to plant expenditures. 

6. Net change in consumer credit : An increase in this category 
might either be treated as negative saving or as an outlet for current 
saving. The latter alternative is adopted here. 

The figures presented below differ in reliability and are subject to 
revision. They are believed, however, to give a reasonably accurate 
approximation of the total income-producing expenditures that offset 
saving, and to give a more accurate approximation of the magnitude 
of current gross savings, i. e., of gross income not spent in consump- 
tion, than is now possible to obtain by direct measurement. Most of 
the series are available only on an annual basis. 

Mr. Nehemios. Mr. Chairman, I offer in evidence the chart en- 
titled "Income-Producing Expenditures That Offset Saving," and the 
accompanying tables. I ask that the clerk be requested to mark this 
chart and the accompanying table. 



The Chairman. The chart may be received. 

(The chart referred to was marked "Exhibit No. 547" and appears 
on this page. The statistical data on which this chart is based are 
inchided in the appendix on p. 4010.) 


Dr. CuRRiE. The first five charts I am about to present bring to- 
gether in finer details these six categories I have just mentioned as 
making up the total of the type of expenditures that provides an 
outlet for or an offset to current saving, and the total is by inference 
a measure of the total saving of the community. 

In the first chart, "Exhibit No. 547," I plot all plant and equip- 
ment exj)enditures for industrial, commercial, and agricultural pur- 
poses broken down into plant and equipment. 

Exhibit No. 547 


















>i A^ 

TOTAL 1 1 





.X PEN on 









' \ 





























\ \ 
\ \ 



















1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 . 

It will be observed that equipment expenditures recovered far bet- 
ter than plant expenditures in the recent recovery, and in 1937 
approximated 94 percent of the peak 1929 level. Plant expenditures 
on the other hand recovered only about 50 percent of the 1929 level. 

Another interesting fact that will be observed from this chart is 
the smallness of the increase in total equipment expenditures from 
1923 to 1928, Despite rapidly increasing production, despite rapidly 
increasing consumption, and despite the smallness of the increase 
in equipment expenditures, there was no evidence of any growing 
strain on our productive facilities. 

Mr. Nehemkis. Mr. Chairman, I offer in evidence a chart entitled 
"Income-Producing Expenditures That Offset Saving," a continua- 
tion of the previous chart Dr. Currie referred to, together with the 
accompanying table. 



(The chart referred to was marked "Exhibit No. 548" and ap- 
pears on this page. The statistical data on which this chart is based 
are inchided in the appendix on p. 4010.) 

The Chairman. The chart and table may be received. 

Dr. CuRRiE. "Exhibit No. 548" is a break-down of income-produc- 
ing expenditures that offset saving into four categories, mining and 
manufacturing, commercial and miscellaneous, all public utility 
(which includes electric power, telephone, transit, gas, and others), 
and railroad. 

It will be observed that by 1937 mining and manufacturing plant 
and equipment expenditures together exceeded the 1928 level and was 
exceeded only by the peak 1929 level. 

Exhibit No. 548 







G A 






••••"COM'L a MISC. |*\| 
































• • 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 

Mr. Henderson. Will you say that again. Dr. Currie? 

Dr. Currie. It will be observed that in 1937 the total volume of 
plant and equipment expenditures in mining and manufacture ex- 
ceeded the 1928 level and was exceeded only by the peak 1929 level. 

Conmiercial and miscellaneous did not recover so well. That was 
almost entirely attributable to the failure of commercial building 
to come back. Commercial building approximated one billion two 
in 1929, and only three hundred seventy million in 1937. 

Mr. Henderson. Does that include office buildings, hotels, and the 
like? ^ ' . 

Dr. Currie. Yes. The railroads' equipment expenditures, as I 
shall show in a later chart, came back by "37 to the level of the late 
twenties. The main gap there is attributable to expenditures on way 
and structure, which clid not come back. 

Mr. Nehemkis. Mr. Chairman, I offer in evidence a chart entitled 
"Income-Producing Expenditures That Offset Saving," in continua- 



tion of the discussion you have been hearing, together with the accom- 
panying table. 

The Chairman, The chart and table may be received 
(The chart referred to was marked "Exhibit No. 549" and appears 
iin this page. The statistical data on which this chart is based are 
included in the appendix on p. 4011.) 

Dr. CuRRiE. In "Exhibit No. 549" I show the value of the change 
in inventories yearly, the change in the foreign current account bal- 
ance, and the absolute amount of expenditures on agricultural plant 
and equipment. The level of foreign current account balance through- 
out the twenties was generally associated with the large volume of 
foreign loans we made at that time which tended to increase our ex- 
ports relative to our imports. It went to a negative figure in '36 and '37, 

Exhibit No. 549 



























1 \ 


1 1 







^\ . 

.. /! ' ^_ 



1 ^A- 





1 1 1 ; > 


















1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 

and it became a very high positive figure in 1938, which has been 
generally associated with a drastic decline in imports attributable to 
the business recession here. 

Agricultural expenditures for plant and equipment, it will be ob- 
served, by 1937 got back to the 1929 level. 

Mr. Henderson. That means then that mining and manufacturing 
and agriculture spent almost as much as offsets to saving in 1937 
as they did in the high years of the late twenties? 

Dr. Currie. That is right. 

Mr. Henderson. And so the lag in the total is due to other items? 

Dr. Currie. That is right. 

Mr. Henderson. And the totals in "Exhibit No. 549" are embodied 
in "Exhibits Nos. 547 and 548"? This is merely a break-down of part 
of "Exhibit No. 547"? 

Dr. Currie. No ; current balance and change in inventories are not 
included in "Exhibit No. 547." "Exhibit No. 547" is just plant and 



equipment ; but agriculture is included. I think the only final obser- 
vation I would make on this chart is to draw attention to the verj 
large increase in inventories in 1936 and particularly in 1937. The 
increase in inventories in '37 was the highest for any post-war year 
since 1920— $4,000,000,000.^ 

The Chairman. Do I understand from tliese charts that the ex- 
penditures of agriculture during this period represented by the 
charts have been at least equal, if not greater than expenditures for 
railroads ? 

Dr. CuKRiE. Yes; that is true. 

Mr. Nehemkis. Mr. Chairman, I desire to offer in evidence a chart 
entitled "Income-Producing Expenditures That Offset Saving," a 
further continuation of Dr. Currie's discussion. 

The Chairman. The chart and table may be received. 

(The chart referred to was marked "Exhibit No. 550" and appears 
on this page. The statistical data on which this chart is based are in- 
cluded in the appendix on p. 4011.) 

Exhibit No. 550 












































































1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 

Dr. Currie. This chart shows the annual expenditures on private 
housing, construction by nonprofit institutions, churches, country 
clubs, universities, things like that, and the change from year to year 
in the outstanding volume of consumer credit. 

Mr. Henderson. That is on an annual basis? 

Dr. Currie. The change from year to year. We observe that the 
point that Dr. Hansen was stressing as he closed his testimony this 
morning is strikingly illustrated here. The most serious gap in these 
offsetting expenditures in 1937, as contrasted with the twenties, was 
in residential building. Recovery has been very modest to date. 

1 See revised figures subsequently submitted by Dr. Currie, wliich appear in appendix, 
p. 4122. 



The recovery has been even less marked in the case of nonprofit insti- 
tutional construction, 

Mr. Henderson. Dr. Currie, all these charts are plotted on the 
same basis; so if you wanted to relate, as the chairman did, agi-icul- 
tural expenditures to private housing, you could superimpose the two 


Dr. CuERiE. They are all on the same scale, these first five charts. 
There was a growth of nearly 1 billion in some years in the net out- 
standing volume of consumer credit throughout the twenties, build- 
ing up to a figure of 8 billion dollars in 1929. The increase since '33 
has been very rapid with 31/2 -billion expansion in the total volume 
of consumer credit from '33 to '37, inclusive. The increase of con- 
sumer credit outstanding in 1937 and the absolute volume outstanding 
at the end of the year were both larger than the comparable 1929 

Mr. Nehemkis. Mr. Chairman, I offer in evidence a chart entitled 
"Income-Producing Expenditures That Offset Saving," continuing 
Dr. Currie's testimony. 

(The chart referred to was marked "Exhibit No. 551'' and appears 
on this page. The statistical data on which this chart is based are in- 
cluded in the appendix on p. 4011.) 

Exhibit No. 551 









1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 

The Chairman. The exhibits may be received. 

Dr. Currie. This chart represents an attempt to measure the net 
addition to the disposable cash income of the community attributable 
to both Federal and State and local public bodies. It represents, gen- 
erally speaking, the excess of expenditures that go into income made 
by public bodies over tax collections that represent a deduction from 
disposable cash income. 

The Chairman. Does this line representing Federal expenditure 
include all P. W. A. expenditures? 




























r 1 













1 / 





i T" 1 ~^ 





Dr. CuRRiE. Yes, sir. 

The Chairman. What allowance have you made for a contribution 
by local governing bodies by way of bonds which they have issued? 

Dr. CuKRiE. That comes in the dotted line "State and local." 

The Chairman. So that the Federal line includes onlv the grants 
ontheP. W. A.? 

Dr. CuRRiE. That is right, sir. 

The Chairman. As far as P. W. A. is concerned? 

Dr. CuRRiE. That is right. It will be observed that throughout the 
twenties local bodies provided an annual offset to saving of around 
$1,000,000,000 a year. Since 1932, instead of providing an outlet ior 
savings, they have actually added to the supply of savings. Incoming 
tax receipts have more than counterbalanced expenditures going into 
current income and there has been a net retirement of debt and net 
addition to cash balances on the part of local and State bodies, so that 
the position in the last few years in comparison with the twenties i& 
exactly in reverse with reference to the Federal Government and the 
State and local bodies. 

Mr. Henderson. That means that all during the twenties when the- 
Federal Government was retiring its debt at a faster rate than it wa& 
issuing debt, it was also adding to savings, wasn't it ? 

Dr. CuRRiE. That is right. 

Mr. HiNRicHS. If I read that chart correctly, it means that the net 
addition by all types of government in 1937 was almost precisely 
identical with that in 192'9, is that correct, except that there had 
been a reversal; that whereas there Mas a very small decrease in the 
Federal debt in 1929, there was an almost identical decrease in State- 
and local debt in 1937 ; whereas the State and local governments had! 
contributed $1,000,000,000 of construction borrowing over what it 
may have been in 1929; that $1.,000,000,000 was contributed in 1937 
by Federal Government borrowing? 

Mr. Nehemkis. Mr. Hinrichs. if I might call your attention, I 
have no objection — and I know the witness would be delighted to go 
into much detail; however, one whole session of these hearings will 
be devoted to an explanation and exposition of the very question; 
you are raising.^ May I request, therefore, Mr. Hinrichs, that you 
defer putting your question until that time, so that we may go into, 
it in great detail? 

Mr. Hinrichs. Pardon the interruption. 

Mr. Nehemkis. Mr. Chairman, I offer in evidence a chart entitled 
"Mining and Manufacturing Expenditures for Plant and Equipment 
and Index of Industrial Production," together with table supporting- 
that chart. 

The Chairman. The chart and table may be admitted. 

(The chart referred to was marked "Exhibit No. 552" and ap- 
pears on p. 3530. The statistical data on which this chart is based 
are included in the appendix on p. 4012.) 

relation of capital expenditures in selected industries to output 

in those industries 

Dr. CuRRiE. "Exhibits Nos. 552, 553, and 554" illustrate the rela- 
tionship of capital expenditures in mining and manufacturing andl 

1 Infra, p. 3546 et seq. 

124491 — 40 — pt. 9 4 



railroads and utilities to the output in those various fields. "Exhibit 
No. 552," which makes a comparison between the F. R. B. index of 
pr()(hiction and the total volume of phmt and equipment expenditures 
in minin<2; and manufacturing;, su<i;«>ests a remarkably ck)se relation- 
ship in ti-eiids between ca|)ital expentlitures anil industrial produc- 
tion, so that plant and e((uipment ex})enditures bore the same relation 
to the volume of production in lOJ^T as they did in 1928, and indeed 
all Ihroufih the period, l)ut 11)28 happens to be the year in wliich the 
absolute volume ol" ex[)enditures was the same. 

Mr. IIenukhson. It sufj^ests also that every time i)roduction has 
turned down, the expenditures for minino; and m^lnufacturing have 
likewise turned down. 

Ex II HUT No. 552 

















— ^< 







1 i 








\ /^ 





.. ,„ 

2 ^.-' 

1 - 

1923-25 AV. ■ too 






J 50 

1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 

Dr. CuKKiE. That is true, and there is an evidence of a slioht lag 
of expenditures behind production in 1983 and 193-4. Unfortunately 
these series, beino; on an annual basis, are not very suitable for 
developing loads and lags. 

Mr. Neiieinikis. I otfer a chart entitled ''Electric Power Expendi- 
tures for Plant and Equipment, and Indexes of Total Installed 
Capacity and Total Output," together with the accompanying table. 

The Chairman. The chart and table will be received. 

(The chart referred to was marked ''Exhibit No. 553" and appears 
on p. 3531. The statistical data on which this chart is based are 
inchuled in the appendix on p. 4012.) 

Dr. CuiJniE. In this chart the plant and equipment expenditures 
in electric power are related to indexes of total installed capacity 
as of January 1 every year, and total output in January every 
year, ,Tanuary being chosen as a month of customarily ])eak output, 
aind also, because it is close to the end of the vear, a date on which 



we can get installed capacity. It should be remembered that when 
the output line goes above the capacity line, that does not mean 
actual output in excess of capacity. That is just in relation to 
the base period, 1926 to 1930, which is 100. 

It will be observed that in terms of that relationship of output to 
capacity on January 1, 1926 to 1930, when output exceeded capacity, 
you had a very high or rising volume of capital expenditures in 
electric power. When output fell short of capacity relative to that 
period, you had a drastic decline in expenditures for plant and 

It also comes out very clearly on the chart how the total installed 
capacity continued to increase until 1932, whereas the peak output 
declined in the depression, and it was not until January of 1937 that 
output again exceeded capacity relative to the late twenties. 

Exhibit No. 553 


1926-30 AVG.> too 




1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 

It was in 1937, too, that we first began to get a fairly substantial 
volume of expenditures in electric power, though they were still 
some 300 million short of the level prevailing throughout the middle 

Mr. Nehemkis. Mr. Chairman, I desire to offer into evidence at 
this time a chart entitled "Kailroad Equipment Expenditures, Avail- 
able Freight Cars, and Carloadings," together with the accompany- 
ing data. 

The Chairman. They will be received. 

(The chart referred to was marked "Exhibit No. 554" and ap- 
pears on p. 3532. The statistical data on which this chart is based 
are included in the appendix on p. 4012.) 

Dr. CuRRiE. Reading from the top to the bottom of this chart, 
the first line being the average freight cars owned by all class 1 

1 ! i 1 ! 

1 ,^r*"^^^ 


\RY 1 



















/•-. ^ 









^ / 







1 1 1 

















railroads ; the second line being the average serviceable cars, the dif- 
ference between the two lines being bad-order cars; the third line 
being the carloadings in the highest week, the annual peak carload- 
ings; the fourth line being total equipment expenditures for rolling 
stock; the bottom line the lowest reported surplus cars prevailing at 
the time of the peak carloadings. 

The shortage of equipment in the early twenties is illustrated by 
there being no surplus cars left at the time of the yearly peak. That 
was accompanied by a very large volume of expenditures for equip- 
ment, which brought about some increase in the total freight cars 
owned. Expenditures fell after that shortage definitely had been made 
up and remained between three and four hundred million throughout 
the latter years of the twenties. The very substantial decline in car- 
loadings since 1929 has resulted in a large volume of surplus cars 
existing every year during the peak traffic period and a virtual cessa- 

ExHiBiT No. 554 



J 800 

! '^ 

1 i ' 




1 \ 1 ' 






J . 
























"^ r 







































\ — 

J\ ^> 

1 ' 






tion of any expenditures on railway equipment, while retirements 
were taking place steadily, reducing the total stock of serviceable 
cars by some six to seven hundred thousand freight cars. 

Mr. Henderson. Do I understand that the available serviceable 
cars owned by the railroads now are fewer than they were at any 
period during the twenties? 

Dr. CuRRiE. That's right; fewer by about 600,000 than in the 

A further fact I would like to bring out is that with the very low 
peak of carloadings in 1938, which was very little above the very 
trough of the depression, we had hardly any more surplus cars left 
than we had in the late years of the twenties. 


A final point I might make is that the vohnne of equipment expend- 
itures alone on rolling stock in 1937 by the railroads approximated 
the level of the late twenties, 1928, and 1929. 

Mr. Nehemkis. I offer in evidence a chart entitled "Composition of 
Income-Producing Expenditures That Offset Saving," together with 
the accompanying table. 

The Chaieman. The chart and table may be admitted. 

(The chart referred to was marked "Exhibit No. 555" and ap- 
j>ears on p. 3534. The statistical data on which this chart is based 
are included in the appendix on p. 4013.) 


Dr. CuRRiE. In "Exhibit No. 555" I have attempted to illustrate 
both in absolute terms and percentage terms the composition of the 
total of all these types of expenditures that offset savings, and hence 
by inference the total of saving in the community, in 1925 and 1937, 
years when the national income was fairly close, and 1929, the peak 
year both for national income and for capital expenditures. 

I will direct your attention first to the center column, which con- 
tains the names of these various segments — "Change in inventories," 
"Change in consumer credit," "Foreign balance," "Housing and non- 
profit institutions." "Other plant and equipment." "Railroad and 
utility," "Mining and manufacturing," that whole group making up 
"Plant and equipment," and finally, at the bottom. "Government," 
both Federal and local. 

The Chairman. What do you classify as the income-producing 
expenditure of government? 

Dr. CuRRiE. The net addition to the disposable cash income of the 
community, the excess of expenditures that go into income over tax 
receipts that withdraw money. 

The Chairman. So that you are not referring to the actual invest- 
ment by government in an income-producing device or enterprise. 

Dr. CuRRiE. No. In that way my figures differ from those pre- 
sented by Dr. Hansen this morning, where he just gave figures of 
public construction, regardless of whether it was financed by taxes 
or borrowing. 

Contrasting 1937 with 1925, it is pretty obvious that the big changes 
"were in inventories and housing and nonprofit construction. In the 
former year inventories amounted only to 9 percent of thf total; in 
1937, to 28 percent. In the former year, housing amounted to 33 per- 
cent of the total; in 1937. only to 11 percent. 

Total plant and equipment expenditures were about the same per- 
centage of the total in tlie 2 years, 47.5 in 1925 and 49.6 in 1937. 

Mr. Henderson. On the basis that you have explained earlier, then, 
the difference between plant and equipment in 1929 and 1925 might 
account for the higher national income in those periods. 

Dr. CuRRiE. That's right. That is about the only substantial in- 
crease, I believe, as you go up the line. Inventories are slightly higher 
too. In terms of what Dr. Hansen was saying as he concluded his 
testimony, of the importance of the composition of the total, 1929 
shows some worsening from 1925, housing being smaller, shrinking 
from 33 percent of the total to 19 percent, inventories being larger. 



Mr. Henderson. And part of that is made up in the expansion of 
equipment and new plant expenditures. 
Dr. CuRRiE. That is right. 

Exhibit No. 555 









The total share provided b}^ plant and equipment expenditures in 
mining and manufacturing was as liigh in 1937 as in 1929—20 percent 
in both cases of the total. 



Mr. Henderson. Is this an entireh' new cliart that hasn't been made 
aA-ailable to the public before? 

Dr. CuRRiE. That's riglit ; it is entirely new. 

Mr. Nehemkis. Mv. Cliairman, may I offer in evidence a chart en- 
titled. "National Income and Total Income-Producing Expenditures 
That Offset Saving," together with supporting data ? 

The Chairman. The chart and table may be received. 

(The chart referred to M^as marked "Exhibit No. 556" and appeal's 
on this page. The statistical data on which this chart is based are 
included in the appendix on p. 4013.) 

Representative Reece. Before he leaves the other chart, would you 
mind the explanation being repeated for the first item in those 
columns ? 

Mr. Nehemkis. Dr. Currie, have you the question put to you by 
Congressman Reece ? 

Exhibit No. 556 















^•<>-n- - >,» w 





■ ^ 

. ^-r-^ "fl^ 





NET r^ 

























1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 

Dr. Currie. By the first item did you mean "Government?" I 
meant to comment on that^ 

It is rather surprising that owing to the very sharp increase in 
Federal tax collections in 1929 the offsets to saving provided by all 
Government bodies was very little higher — it was almost the same, as 
a matter of fact, in 1937 as it was in 1929 or 1925. 

Representative Reece. But I am not yet going to get clear what that 
item includes. 

Dr. Currie. That item includes, for the Federal Government, all 
types of expenditures except refinancing, minus all types of receipts 
that come out of current income, that decrease disposable cash in- 
come^ — income taxes and sales taxes and the like. 

Mr. Henderson. It represents the amount which the Government 
I)Ut into the income stream in excess of what it withdrew. 


Dr. CuRRiE. That is right. It does not correspond to the ordinary 
cash-deficit figures, because there have been many adjustments made 
in these figures. For instance, we inchide the purchase of domesti- 
cally mined gold and silver, even though that does not come into the 
Budget at all. 

Representative Reece. I was interested in getting the difference, in 
view of the fact that the figures didn't appear to be in harmony with 
those Dr. Hansen gave this morning. 

Dr. CuRRiE. He was speaking of public construction ; I am talking 
about the difference between taxes and expenditures. 

The Chairman. From that chart, so long as we have interrupted 
you, Doctor, it is evident that for the year 1937 the contribution of 
private housing was more than twice as great as the contribution of 
Government, and the contribution of change in consumer credit was 
6.6 percent against the Government percentage of 5.3 percent? 

Dr. CuRRiE. That is true. 

The Chairman. So that that was greater. In other words, the 
contribution of the Government in the sense that you have defined it 
here was the smallest of all the contributions that were made to 
income-producing expenditures during the year. 

Dr. CuRRiE. Except foreign balance, which in that year .was a 
negative quantity, minus 0.2 percent. 

Tlie Chairman. Oh, yes; the foreign balance in 1929 was 2.5 per- 
•cent, in 1925 it was 2 percent, and a minus 0.2 percent for 1937. 

Dr. CuRRiE. That is right. 



Dr. CuRRiE. I turn now to the second part of the data requested of 
me, the relation of income-producing expenditures that offset saving 
to the national income. Since the figures presented to this point in- 
•clude gross capital expenditures on buildings, plant, and equipment, 
it is proper to relate them to figures of national income before deduc- 
tion of depreciation allowances. 

For our present purposes we may call this series the gross national 
income as distinguished from the customary national income, which. 
is net. Also, for present purposes, I have adjusted the income-pro- 
ducing expenditures series by adding 60 i^erccnt of the aggregate 
volume of the current year to 40 percent of the preceding year. 

Mr. Henderson. I am afraid I didn't get that explanation. Dr. 

Dr. Currie. Instead of taking the absolute total of all income- 
producing expenditures that offset saving for a gi\^en year, I have 
taken 60 percent of that year plus 40 percent of the preceding year, 
so as to smooth the series, which is better, I think, for the current 
purposes for whicli I am going to use this chart. 

Mr. Nehemkis. You might. Dr. Currie, before you continue, 
clearly differentiate, if you will, the difference between gross national 
income and net national income. 

Dr. Currie. The difference, which is shown to be quite slight on 
this chart, actually amounts to around $8,000,000,000 in recent years, 
and is attributable to the fact that we have taken national income 
Itefore deduction of depreciation for both business and residences, 


SO the gross national income includes expenditures for replacement 
goods as well as for new capital to offset depreciation, as well as 
for net expansion of capital. 

There are several interesting things that I think are borne out by 
this chart. In tlie first place, there is an obvious tendency for the 
expenditures representing offsets to savings to increase more rapidly 
than income as you emerge from a bad depression. That is under- 
standable because you tend to save more income as income increases. 
The proportion of income saved tends to increase with an increase in 

There is, however, one exception, a very interesting exception, to 
that general rule; that is, the period 1923 to 1928 was a period 
broadly speaking in which you had a stable volume of these types 
of expenditures that offset saving, and hence by inference saving, 
associated with a rising trend of national income. In other words,, 
from 1923 to 1928, apparently consumption was increasing relative 
to income. 

One suggestion offered to account for that would be the influence 
of the stock-market speculation in tending to stimidate consumption. 
Not only did rising stocks decrease the inducement for individuals 
to save, but an enormous amount of savings must have been canalized 
through the medium of brokers' Joans and cashing of paper profits 
back into consumption again, so that, I think, was a force in the late 
twenties tending to hold down saving relative to income, or. in- 
crease consumption relative to income, and hence make it possible 
for a more or less stable volume of capital expenditures to support a 
rising national income. 

Another point I should like to make in this chart is that by 1937 
we were apparently saving as large a proportion of the gross national 
income as we did throughout the twenties. In fact, the percentages 
come out exactly the same, the average for 1923-'29 being 19.2 percent, 
the figure for 1937 being 19.2 percent.^ 

The Chairman. Will you show" the spots on the chart which dem- 
onstrate the conclusions which you have just drawn? 

Dr. CuRRiE. Those spots. Senator, are for my next conclusion, and 
that is that if this relationship holds in the future as it has held in 
the past for relatively prosperous periods, in other words as we get 
up toward eighty and ninety billion dollars income, if we save as 
large a proportion of that national income as we did in the twenties, 
a national income gross of one hundred billion, or a net of ninety bil- 
lion, would have to be associated with $19,000,000,000 of capital expen- 
ditures of the type that offset saving. 

If, of course, we save a larger proportion of our income, you would 
have to have a correspondingly larger volume of saving offsetting 
expenditures. If we save a smaller part of our income, you will 
have a smaller volume of saving offsetting expenditures. 

Mr. Henderson. As I understand it, you are making no suggestion 
on policy. What you are saying is that in the concept of $90,000,- 
000.000 of income, on the basis of what the experience in saving has 
been, we would have to have something like $19,000,000,000 of these 
various income-producing expenditures which you have just been 

1 Revised percentages are 19.4 and 17.8. See revised figures subsequently submitted; 
by Dr. Currie, appendix, p. 4122. 


illustrating in jour charts in order to make up the national income 
at that level. 

Dr. CuRRiE. That is right. 

Mr. Henderson. And so the prospect would be that we have to be 
thinking, based on past experience, of a comparable expansion in in- 
vestment or income-producing expenditures in the future, rather than 
less under the present terms. 

Dr. CuRRiE. That would be my inference. 

Mr. Nehemkis. Dr. Currie, before you leave the stand do you wish 
me to offer in evidence certain statistical tables wdiich support some 
of the statements you made a few moments ago ? 

Dr. Currie. Yes. And also the appendix containing the source of 
the figures I have used in making up the charts and tables. 

Mr. Nehemkis. Mr. Chairman, I offer in evidence a table entitled 
"Supplementary table I-a, plant and equipment expenditures by 
type of business." 

(The table referred to was marked "Exhibit No. 557" and is in- 
cluded in the appendix on p. 4014.) 

Mr. Nehemkis. I likewise offer in evidence "Appendix on sources 
and methods to statement submitted to the Temporary National Eco- 
nomic Committee by Dr. Currie." 

The Chairman. The material may be received. 

(The appendix referred to was marked "Exhibit No. 558" and is 
included in the appendix on p. 4015.) 

Mr. Nehemkis. Thank you very much, Dr. Currie. 

Mr. Chairman, if it please the committee, I wish now to recall Dr. 
Alvin Hansen. 


Mr. Nehemkis. Dr. Hansen, are you pre])ared to continue your 
testimony at the point you left off this morning and comment upon 
the testimony just given by Dr. Currie? 

Dr. Hansen. Mr. Chairman, members of the committee, I should 
like to remind you that the charts that Dr. Currie has presented relate 
to capital outlays which include not only expansion, but also capital 
outlays for replacement and renewals. If I may revert to the chart, 
because I wish to make a comment about it, that I presented this 
morning ^ and call attention to the fact that for business capital 
outlays, in the good years of the twenties a very much larger amount 
of capital outlays was for replacements and renewals than for plant 
and equipment expansion. In fact, the ratio is about 2 to 1. 

importance of depreciation and depletion allowances in volume 
of funds available for capital purposes 

Dr. Hansen. A significant characteristic of the highly developed in- 
dustrial system is the increasing importance of depreciation and deple- 
tion allowances as a source of funds for capital outlay on renewal and 
replacement of plant and equipment. When a society has accumulated 

1 See "Exhibit No. 544," supra, p. 3509. 


a vast amount of capital goods, it is evident that the mere expendi- 
ture of depreciation allowances provides wide scope for continuous 
improvement of plant and equipment. The larger the amount of 
capital equipment, the larger will be the depreciation, depletion, and 
obsolescence allowances which are available each year for capital 
outlays. Frequently large portions of these allowances are available 
not merely for renewals and replacements, but even for new and addi- 
tional equipment. The expenditures from depreciation and deple- 
tion allowances may often have no relation to any specific worn-out 
machines. Newly built plant and equipment will not need to be 
replaced for many years and sometimes even decades, yet the annual 
depreciation allowances on such equipment will be available year by 
year for expansion. 

Obviously, a society with large depreciation and depletion allow- 
ances can modernize and improve its capital equipment in producing 
continuously new technics and even at times expanding its plants 
and equipment without tapping any new^ savings. On the other hand, 
there is an offset that, especially in periods of rising prices, it 
may well be that the accounting allowances do not adequately cover 
the true economic depreciation. At all events, highly developed units 
are prepared to make large capital outlays and to produce a vast 
amount of plant and equipment without going to the market for new 
funds at all. According to a study by Dr. Fabricant of the National 
Bureau of Economic Research, depreciation and depletion allow- 
ances amounted in 1929 to over $5,000,000,000, while from an esti- 
mate by Mr. George Eddy in the Review of Economic Statistics for 
May 1937, only $2,000,000,000 of new productive issues were raised 
by corporations in the capital markets. 

Mr. Henderson. Does that mean tw^o and a half times as much 
available from the depreciation account as w^as supplied through 
the capital markets ? 

Dr. Hansen. Two and a half times as much available; yes, sir. 

Mr. Henderson. In 1929? 

Dr. Hansen. In 1929. But a full-fledged recovery calls for some- 
thing more than the mere expenditure of depreciation allowances. 
It requires large capital outlays on plant and equipment expansion, 
whether private or public. Unless there is expansion of productive 
equipment and new construction there will be no outlets for new 
savings, and if savings are not invested either by the saver himself 
or by a borrower on plant expansion and the like, they become hoards 
or idle funds. As hoards or idle funds they not only do society no 
good, but do positive harm. Hoarded savings cause unemployment 
in the capital-goods industries. 

The Chairman. Is it necessary, Doctor, if I may interrupt you, to 
have an offset for any saving except the saving which is hoarded ? 

Dr. Hansen. Yes; it is necessary to have an offset for all saving. 
Otherwise, you will have a decline in the national income owing to 
the fact that a part of the previously received income will not be 
spent in the commodity markets, and consequently you get a decline 
in the national income unless there is an offset to the entire volume 
of new saving. 

The Chairman. But Dr. Currie told us that the total volume of 
savings is the difference between the value of goods and services pro- 


diiced in a given period and the vahie of goods and services 

Dr. Hansen. Yes : I noted that point. I should say M'hen I speak 
of the diiference lietween income and consumption, the part that i& 
saved, I am referring to the income previously realised as against 
the consumption of the current period. If you define your savings 
as the diiference of current product and current consumption, then of 
course it must always be true that savings and new investment are 
exactly equal, and in the current literature there has been much dis- 
cussion about these definitions, but I think they are not important in 
understanding the problem, once one sees how the different individ- 
uals use the terms. 

The Chairman. Savings which go into capital formation, to use 
the phrase that you adopted this morning, are a contribution to 
national income, aren't they? 

Dr. Hansen. That is right. Savings that go into capital forma- 
tion are a contribution to the national income exactly as consumption, 
expenditures are a contribution to the new income stream. 

Mr. Frank. Dr. Hansen, in effect your definition of hoarded sav- 
ings is that portion of the savings that goes neither into consump- 
tion nor into investments. 

Dr. Hansen. Yes: that portion which was in fact not offset by 
capital outlays. The remaining savings were offset by capital out- 
lays, and therefore those savings were not deflationary. 

The Chairman. What, in your judgment, is the difference between 
the effect on the economic machine of that contribution which comes 
by way of a net saving which is invested in capital formation and a 
borrowing which is invested in capital formation? 

Dr. Hansen. The borrowing merely represents an absorption of a 
part of the savings. 

The Chairman. Unless the borrowing comes from a source which 
has accumulated through saving, it does not constitute a contribution 
to national income, does it? 

Dr. Hansen. Well, the expenditure on capital outlays does make a 
contribution to national income, and those expenditures must come 
from savings or from new loanable funds supplied by the banks. 

The Chairman. It makes a temporary contribution, but borrow- 
ings which exceed available savings make only annual use or 
contribution to national income, do they not ? 

Dr. Hansen. Well, Senator, I should not say so. I thhik that 
such capital outlays which are in excess of savings from income, and 
let us say are financed by borrowing from banks, represent a net 
addition to the current income, and that amount of capital outlays 
would in all probability represent an expansion of the national income 
over and above the realized income of the previous period. 

If 3'our capital outlays merely absorb the savings out of previously 
realized income, you are holding your income stable. It is not ad- 
vancing, but if you have capital outlays in excess of that amount, 
your income w^ill be advancing. Now, there is one other way, of 
course, in which your income could advance, and that is by an 
expansion of consumption expenditures. 

The Chairman. What I am trying to say, and probably having^ 
a great deal of difficulty in doing it, is that the saving or the con- 


liibution to national income which is really beneficial to the national 
economy is that which comes from excess production over 

Dr. Hansen. Yes; that is, I think, Senator, a somewhat different 
story, though it certainly relates to what we are talking about. 
That is to say, your capital outlays on new plant and equipment, it 
is highly significant for the economy, and in a sense as much more 
significant for the economy than consumption expenditures, for the 
reason that it gives you a more productive plant out of which you 
can increase the national income. 

The Chairman. Well, the whole people, considered as a unit, can- 
i:tot invest in new productive enterprise what they have not already 
somehow produced. 

Dr. Hansen. Well, they are currently producing it, Senator; they 
are currently producing it and the capital outlays currently produced 
in real terms — you might, of course, have a change in the value of 
money or change in price level, but the capital outlays in real terms 
are beneficial to society, certainly, whether those funds were raised 
out of voluntary savings from income or out of an expansion, let us 
say. of bank credit. 

Mr. Henderson. That might be true of consumer credit also, Dr. 
Hansen ? 

Dr. Hansen. Yes; it might be true of consumer credit also. 

Mr. Henderson. The point is that if you use bank credit for an 
expansion of producing equipment, it is likely to yield more real 

The Chairman. The discussion is getting so interesting. Doctor, 
that we are violating our rules on all hands, and Mr. Ballinger wants 
to contribute to the violation, and I think I can't rule against him. 

Mr. Ballinger. Dr. Hansen, I understood you to say that in order 
to achieve full prosperity we have to have more expansion of existing 
plant equipment, more saving power in the industry. Noav, I may 
be wrong on this ; if I am you can correct me at once. I understand 
that in 1929 there was considerable idle plant capacity in American 
industry, and I understand that was true in 1928, and true in 1927. 
Now, why should we go on the theory that savings will help increase 
jiiosperity when we apparently haven't learned the trick of using to 
maxijiium the existing plant equipment that we have? 

Dr. Hansen. Yes; I think the excess plant capacity in the late 
twenties was not so terribly great, and I myself am not terribly 
alarmed about excess plant capacity. The problem, essential prob- 
lem, that I am dealing with exists whether or not there is any excess 
plant capacity'. The importance of savings finding an outlet in real 
investment. That is equally important, whether or not there is any 
plant capacity. However, the point to which you refer, I think, sir, 
I will take up before I am through; and perhaps we might postpone 
the question until that time, and if I don't adequately answer it you 
may wish to come back at me again; but I am dealing with just the 
point you are raising in a little different connection. 

Mr. Nehemkis. Mr. Ballinger, on the 24th,^ I believe, Dr. Hansen 
will devote an entire session to the very point that you have raised, 
and I am sure that you would prefer that he go into it in detail, 

- See infra, p. 3S37 et seq., for further testimony of Dr. Hansen. 


which he will at that time, rather tlian in a spotty fashion at this 

Dr. Hansen. I am also referring to it in my testimony this after- 

Mr. Ballinger. That is perfectly agreeable to me. I shall await it 
with interest, but I was going to say that perhaps another aspect of 
this problem might be finding some way to perhaps decrease saving 
and pnt more money into consumption goods. 

Dr. Hansen. I am dealing with just exactly that point. I would 
like to stress, Mr. Chairman, at this point, that capital outlays on 
plant expansion and equipment is extremely important in raising the 
productive capacity of society and thereby raising real income, but 
at the same time I want to stress the point that it is quite wrong to 
assume that you can't make any progress in increased productivity 
without a large volume of savings, because the depreciation allowances 
enable you to renew your plant and equipment and introduce new 
techniques and greatly improve your plant, and you can have in 
modern times a perfectly enormous increase in your productive ca- 
pacity merely by renewing your plant and equipment, merely by 
expending your depreciation allowances and not tapping a cent of 
savings; you can have very great progress. 

Mr. Henderson. In other words, by spending that $5,000,000,000 of 
depreciation account on the best technological developments there 
could be an increase in productivity without a single dollar of new 
savings being used? 

Dr. Hansen. That is right. 

Mr. Frank. And with the result that you would have the paradox 
of increased productivity without a demand for the supplies that in- 
creased productivity could supply? 

Dr. Hansen. That leads into the intricate question of relation of 
consumption to saving, and investment. Also on that point I am 
going to refer at the end of my paper ; yes. 

The Chairman. Now for a little while we will try to avoid inter- 
ruption. Doctor. 

Dr. Hansen. Hoarded savings cause unemployment in the capital- 
goods industries, thereby reducing consumption expenditures, which 
in turn further reduces capital outlays, and so the national income 
falls. Conversely, to get full employment and a full national income 
it is necessary to make large capital outlays in plant expansion. 
These put to active use the flow of savings, give employment in the 
capital goods industries, and this employment in turn raises the level 
of consumption expenditures which again stimulates further capital 
outlays on plant expansion. 

If we can get adequate capital outlays on plant expansion we shall 
easily reach full em])loyment on a full-income level, but it is extremely 
important to keep firndy in mind the fact that we cannot maintain 
full employment unless there is continuously going on a sufficient 
vohune of plant and equipment expansion over and above replace- 
ment and renewals to absorb the full flow of savings. Savings do us 
good or harm according as they find or do not find investment outlets 
in productive expansion of plant and equipment and durable goods, 
including residential building and public works. 


If we are going to get a full recovery we must have outlays on 
capital goods expansion adequate to absorb all our savings, and 
when I say capital goods I use the term in a broad inclusive way to 
include the entire physical equipment, both private and public, which 
enables us to live according to the standards of a modern civilized 
community. Capital goods broadly conceived includes not only 
factories and railroads but also hotels and private residences and 
public works of all kinds. 

To get prosperity and full employment we must expand this equip- 
ment, unless we are willing to settle down to a chronic stagnation, 
chronic unemployment. We must have capital goods expansion ade- 
quate to absorb our flow of savings. Through expansion equipment 
we can put our savings to active use creating employment and in- 
come. How are we going to do this, of course, is the question every- 
one is asking. For myself I do not think there is any one panacea. 
There is no single answer. There are those who think there is one 
perfectly simple answer. Some say the answer is purely and simply 
Government spending. I do not think so. 

Some say on the other side that the answer is purely and simply 
to reduce to the minimum the role of Government in economic af- 
fairs. Also, I do not think this is the case. 

Mr. Nehemkis. Dr. Hansen, would you please read a little 
slower ? 



Dr. Hansen. I do not think there is any simple solution. I think 
we have to do a great many things. It is a complicated problem and 
we have to attack it from many angles. For one thing, I believe we 
should undertake a thoroughly exhaustive study of our complicated 
tax structure. With respect to one aspect of our current taxes, our 
social security taxes, modifications, in my judgment, should be made 
along the lines recently proposed by Secretary Morgenthau. Our 
social security taxes have, in recent years, abstracted vast sums largely 
from consumption and forced them into the savings stream at a 
time when there were inadequate investment outlets for our savings. 

In 1937 the net withdrawals were about one billion and a quarter, 
including both old age and unemployment insurance. In 1938 nearly 
a half billion were paid out in unemployment benefits, but after taking 
account of this offset there was still a net withdrawal of around one 

The Chairman. Will you give me those figures again, please? 

Dr. Hansen. In 1937 the net withdrawals were about one and a 
quarter billion, including both old-age and unemployment insurance. 
In 1938 there was paid out in unemployment benefits a half billion, 
approximately, but after taking account of this offset there was still 
a net withdrawal of around one billion. These withdrawals bore 
heavily on consumption. Let me say, however, that I do strongly 
favor social security measures, and further I favor a contributory 
system in which contributions are made from employers and em- 
ployees, but I do not think we should accumulate a large reservoir 
in the old-age account. 


We should put it on a pay-as-you-go })asis, with a small contiiigeiicy 
reserve. To this end we should liberalize the early benefit payments 
along the lines recommended by the Advisory Council on Social 
Security and we should not permit the step-up in pay-roll taxes as 
■of January 1940, in my judgment. 

Moreover, we should supplement the contributory system by 
Federal contributions from general tax revenues. By these measures 
we can remove, it seems to me, the repressive effect of these taxes 
■on consumption. There are other respects in which our current tax 
structure weighs heavily on construction. In 1938 we collected in 
J'ederal taxes nearly three and a half billion dollars, bearing primar- 
ily on consumption. This includes the social security taxes, includ- 
ing the State collections for unemployment insurance, or 50 percent 
of the total tax collections. Exclucling social security taxes the figure 
is nearly $2,000,000,000 or 36 percent of tax collections. In 1929 only 
^30 percent of our tax collections came from soui-ces bearing primarily 
on consumption. 

Mr. Henderson. What do you include in those besides the social- 
security taxes? 

Dr. Hansen. Well, I have a list ; it includes commodity taxes, 
manufacturers' excess taxes, customs duties, gasoline taxes, and all 
of that sort of thing; taxes weighing on consumption, customs and 
commodity taxes and excess taxes, which enter into the price of the 

Mr. Henderson. Which are generally a withdrawal? 

Dr. Hansen. Withdrawal from consumption. In addition the 
trend of State and local taxation has been in the same direction, 
the States raised about $600,000,000 from general sales taxes, liquor 
and tobacco taxes. In 1938, let me say, the figures I gave you before 
on Federal taxes include the liquor and tobacco taxes, a very large 
part of it. 

Now. I do not believe — these sources of revenue were of negligible 
importance in 1929 for State and local taxes. Now. I do not believe 
we can dispense altogether with consumption taxes, but it is, I think, 
generally recognized that our current tax structure is unduly re- 
pressive on consmnption. The recent round table of the Fortune 
Magazine on taxation and recovery,^ participated in by distinguished 
■executives and leaders in other fields, was in substantial agreement 
on this point. They recommend as an offset to a reduction in con- 
sumption taxes an increase in the income tax to be raised from tY\e 
so-called middle-income brackets ranging up to $50,000 per year, by 
lowering exemptions, and by raising present rates in that so-called 
middle area. 

By reducing repressive taxes on consumption we could give en- 
couragement to expansion, and thus make a contribution to the 
solution of our problem. There is, moreover, widespread belief 
among many competent leaders in the business community and else- 
where that the reform of certain features in our corporate tax struc- 
ture is desirable in order to remove repressive effects on e:xpansion. 
This opinion justifies, it seems to me, a candid and exhaustive study 
■of our entire tax structure — Federal, State, and local. 

1 Fortune, vol. 19, pp. 67-68, May 1939. 


Most important of all, it seems to me, the Fortune Round Table to 
which I have just referred recommends the establishment of a national 
tax commission to formulate a long-term tax policy. 

There has been much discussion about the importance of increasing 
business confidence, or reducing to the utmost possible extent the risk 
and uncertainty that confronts the business community. That, I state, 
is the essence of this particular problem — risk and uncertainty. This 
is of great importance. We are living in dangerous times. The mod- 
ern world is loaded with a high risk factor. We are living in a very 
tense international world. We are living in a period of rapid insti- 
tutional change in our internal economy. 

In ovu' complicated modern world we are confronted with intricate 
and seemingly insoluble problems of human organization. We are in 
process of developing new institutions controlling the relations of 
employers and employees. The Social Security Act, the regulations 
of the capital market, of public utility, and the like confront business — 
American business — executives with new and difficult problems. For 
the most part these changes in our institutional arrangements are, in 
my judgment, in some form or other here to stay and business cannot 
go forward without recognizing this fact. 

Many of the reforms recently introduced were long overdue. Where 
mistakes have been made, they must be corrected as rapidly as possible. 
We must consolidate and improve these institutions in a statesmanlike 
manner. This, I think, we can all take for granted. Business has 
learned to live with changing situations in the past; flexibility and 
versatility to meet new conditions in a rapidly changing world are 
essential for survival of a free enterprise economy and for political 

The highly dynamic nineteenth-century world was also a world of 
high risks. Technical progress itself implies the risk of obsolescence 
and depreciation of capital values. Nevertheless, confronted with 
alluring investment projects springing from rapidly expanding popu- 
lation, the occupation of new territory, the exploitation of new re- 
sources, and the growth of new industries, capital outlays were eagerly 
made, despite the high risk factors. A rapidly expanding economy 
can afford to undertake and willingly does undertake risk. 

Yet it cannot be denied that even under the favorable conditions 
of rapid expansion heavy losses alongside rich gains were sustained. 
Yet, despite these losses, hope always ran higli with respect to new 
ventures. Our current less rapidly exj^anding economy is perhaps 
in a stronger position to safeguard itself from the risks of technological 
innovations, but it is compelled to face larger risks from institutional 
change and from social and international u]Dheaval, 

It does not enjoy the buoyancy and optimism under which the 
rapidly expanding economy of the pre-war century was capable of 
riding rough shod over risk. 

I think we must face the fact that we live today in a peculiarly 
risky world, and this fact does have a repressive eife"ct. It makes the 
problem of adequate investment outlets more difficult. 

The great fields for private investment outlets are, of course, 
manufacturing and mining, utilities, railroads, and residential 

124491— 40— pt. 


Mr. Nehemkis. Mr. Hansen, will you make it a bit slower, if you 
will, please? 

Dr. Hansen. In the good years of tlie twenties, about $3,000,000,000, 
Dr. Currie has shown, were annually expended on manufacturing, 
mining, plant, and equipment. This w^as the gross outlay. It in- 
cluded not only replacement of w^orn out and obsolete equipment and 
plant, but also expansion of plant and equipment, adding greatly to 
the productive capacity. According to Dr. Currie's estimate, $3,- 
000,000,000 were expended — in other words, an equal amount — in 
mining and manufacturing plant and equipment in 1937. With a 
rising national income, capital outlays of something over this amount 
could reasonably be expected. In 1926 to 1929 the volume of gross 
capital outlays on utilities, including electric power, telephone, transit 
and other utilities, amounted to 1.7 billions. In 1937 they amounted 
to slightly over $1,000,000,000. 

Here is certainly an important field for expansion. With respect 
to the railroads, the yearly volume of capital expenditures in the late 
twenties amounted to about $800,000,000; in 1937 the expenditures 
were about $500,000,000. The retirement of equipment in excess of 
additions in the past 8 years has created, as Dr. Currie's figures 
show, a considerable backlog in the event that railroad traffic should 
increase. Residential building, everything considered, v\'ould appear 
to offer the most hopeful fieM. The current low level of construc- 
tion is partly due, as I have indicated, to the slower growth of popula- 
tion, but is also due to the current low level of the national income 
and of employment. We are here dealing with a vicious circle. How 
far can residential building be pushed to a high level in advance of 
a rise of the national income? The backlog of potential demand for 
housing which the depression has created will not materialize into a 
strong, active demand until people are again employed. Families 
will continue to double up, to live in a restricted and congested man- 
ner as long as unemployment confronts them, yet it is necessary to 
expand the volume of residential construction in order to overcome 
unemployment. It is for this reason that active measures are 
urgently needed. For one thing, it seems to me that the time has 
come when we could well reduce the guaranteed rate of interest 
allowed under the Federal Housing Administration regulations ; the 
5 percent guaranteed rate with the current surplus of funds seeking 
investment appears abnormally high, and is certainly a deterrent to 
building which might otherwise be made. 


Dr. Hansen. Considering the current investment outlet deficiencies 
compared with the decade of the twenties to which I have referred, it 
appears very doubtful that we can solve our problem of full employ- 
ment by relying exclusively on private investment. Private invest- 
ment, it seems to me, will have to be supplemented and, indeed, 
stimulated by public investment on a considerable scale. Public 
investment could furnish an outlet for a part of our flow of savings, 
and thus put them to active use, raising income and employment 
above the current chronic stagnation level. 

The Chairman. What do you mean by public investment ? 


Dr. Hansen. By public investment, I mean not only investment 
in self liquidating- public projects, such as Boulder Dam, but also 
investment, in roads and schools. I use the term in a broad way of 
capital outlays on durable improvements and projects. 

Let me remind you again that even in the decade of the twenties 
public investment by State and local bodies in roads, schools, and 
other improvements absorbed $1,000,000,000 of savings per year. 
The States borrowed that much to make these improvements per 
year — State and local bodies. In the current decade local capital out- 
lays declined so that State and local borrowings ceased. Local con- 
struction was maintained by Federal aid, amounting to $5,600,000,000 
from 1933 to 1938. Thus a part of the recent rise in Federal debt 
merely takes the place of the former annual increase in State and 
local debt. Public investment, financed in part from borrowing, 
is not a new development springing from the great depression. It 
already played an important role in our economy in the decade 
of the twenties. 

Some public investments are self liquidating in character. These 
offer no difficulty with respect to financing, and about those there can 
be, I think, no serious ground for controversy. Yet, because of an 
obsolete system of public accounting, we have dumped even these 
expenditures into our ordinary operating budget and mistakenly 
counted ourselves poorer by reason of the public debt incurred to 
finance these self liquidating projects. 

About this matter of appropriate accounting I shall speak later. 

Mr. Nehemkis. It is also your understanding, Dr. Hansen, that 
at a subsequent time in this presentation several items to which you 
have referred will be dealt with extensively. Is that correct ? 

Dr. Hansen. Yes, sir; I am only illustrating certain points. 

I only wish now to stress the point, in view of our current diffi- 
culties in finding adequate plant expansion outlets, we should, I think, 
explore to the limit all worthwhile self liquidating public projects, 
and undertake such capital outlays as rapidly as feasible. I under- 
stand that plans have been developed by the Bureau of Public Roads 
for revenue yielding types of public investment, such as toll roads, 
tunnels, bridges, municipal express highways and boulevards through 
congested areas aggregating several billions of dollars. Insofar as 
these can be made self liquidating, though financed by borrowing, 
they would place no burden upon the Public Treasury, and they would 
serve to put to active use a considerable part of the flow of savings 
It has also been suggested that rural rehabilitation projects and rural 
electrification projects can be put on a self liquidating basis. A rail- 
road equipment authority financed outside of the regular budget, 
with power to purchase new railroad rolling stock which could be 
leased to the railroads as and when needed, might also help our prob- 
lem. This might break the railroad's financial log jam and open the 
way for an expansion of railway capital expenditures. 

There is danger, however, that we stress too much the merit of 
self liquidating public projects and loans. There are many poten- 
tialities for public investment in areas that are of the greatest social 
and economic significance, but wdiich are not self liquidating. They 
may, nevertheless, be extremely necessary and useful and even highly 
productive in an indirect manner. Expenditures on the conserva- 


lion and development of energy and natural resources may indirectly 
raise the national income by very much more than the annual amorti- 
zation and interest charges incurred. Insofar as this is the case, 
such public investments are in fact profitable in a financial sense, 
even though they are not strictly self liquidating. 

Public investment in the conservation and increased efficiency of 
our human resources can, if wisely expended, be equally productive. 
Outlays for hospitalization, public health, pollution abatement, 
sewerage projects, public low-cost housing may be no less productive 
in an indirect sense than outlays on national resources. The National 
Kesources Committee and other branches of the Government have 
gone exhaustive!}^ into all these matters. It is not my purpose to go 
into any detail, and, indeed, for this I am not competent. I only 
wish to illustrate my general thesis. 

We cannot afford to engage in irresponsible public spending. 
On the other side, we cannot afford to be niggardly with respect 
to public investment projects which are either directly or indirectly 
])roductive, and which serve to raise the standard of living and 
thereby contribute to private business expansion, and especially is 
this the case when we have huge unused and idle resources. 

The question is always raised, where is the money coming from, 
and will we not soon go bankrupt as a government if we borrow for 
public investment projects. As far as self liquidating public works 
are concerned, there can be no question, I should suppose, that bor- 
rowing is a perfectly legitimate and financially sound procedure. 

The Chairman. What is a self liquidating project? 

Dr. Hansen. A project that, over its lifetime, or within its life- 
time, M^ill earn money income that will cover the interest charges 
and the initial loan. Boulder Dam, as I understand it, it is said, 
will easily return its full initial outlay plus interest charges within 
50 years. 

The Chairman. Unless we reduce the rate of return, and tho 
demand, of course, is being made. 

Your answer illustrates the point I had in mind, the fund which 
liquidates such a public project must be derived from some source. 

Dr. Hansen. The source is the income of this self liquidating 

The Chairman. No; the source goes back of that. How is the 
income to be ]:)roduced? It must necessarily come from private 
sources eventually. 

Mr. Nehemkis. Tolls and revenues. 

Dr. Hansen. It is simply part of the outlay of the general body 
of citizens from their income on the services of this particular proj- 
ect. That is identical to the income derived by private business, 
which is also deducted from the income of the community and paid 
for the services in question. 

The Chairman. Then before there is any possibility of the self- 
liquidation of such a project, there must first be the means of devel- 
oping the income of the citizens who are to pay the rates to the 
Government on the project. 

Dr. Hansen. Yes; and. Senator, these expenditures themselves 
serve to create that income out of which 

The Chairman (interposing). That is exactly the point which it 
will be interesting to develop. 


Mr. Nehemkis. That is to say, Dr. Hansen, you have a concomi- 
tant situation. You have high purchasing power. One way of 
bringing that about is through these public projects, and at the same 
time, as a result of that activity you make it possible for the project 
itself to operate on a self-liquidating basis. That is con-ect. 

Dr. Hansen. Yes. 

The Chairman. Let me give you an example before you finish the 
ansAver to the question of Mr. Nehemkis. You have referred to 
Boulder Dam. The principal source of revenue to liquidate the cost 
of that project comes from the sale of electric power and also, I 
think, of water. The principal market for the power is the Power 
District of Los Angeles and the fund from which the repayments 
to the Government must be made is raised by the rates wdiich the 
citizens of Los Angeles and the surrounding area pay to the com- 
pan}' which distributes the electric power. Now, if those persons are 
not employed, they can't produce the income. If those persons or 
any large majority of them are either on relief. State relief or 
Federal relief, or on the W. P. A., they are not earning the income 
Avhich would make it possible for them to contribute toward the 
self liquidation. Does it not seem, therefore — you are nodding in 
agreement with what I say. 

Dr. Hansen. Yes; I am. 

The Chairman. Does it not seem, therefore, that the first step is 
to provide employment before you can develop income for self- 
liquidating projects? 

Dr. Hansen. This is a part of that process. 

The Chairman. I would like to see you tie the two together. 

Dr. Hansen. I have been trying to explain all through that income 
springs currently out of current consumption expenditures spent out 
of previously realized income and current capital outlays, and these 
capital outlays made on projects of this sort are income creating 
currently. Capital outlays on new plant and equipment are income- 
creating not only in this sense of which I am now speaking, namely in 
creating a part of the current flow of income; they are also income 
creating in another sense — and I think we need to distinguish — in 
the respect that expansion of plant and equipment increases the pro- 
ductive power with which we can make inore goods. But whether 
that is the case or not, currently flow of income springs from these 
capital outlays, out of which individuals make further expenditures 
in the next period on consumption goods or on capital outlays. So 
that currently your income is all the time created out of the expendi- 
tures from previously realized income for consumption goods and for 
capital outlays, and a capital project is income creating I should say 
in two senses, first in the sense that I am speaking of it, and second, 
in the sense that it raises the productive power of society to increase 
the volume of real goods created. 

Tlie Chairman. But in an economic society in which there are be- 
tween 10 and 11 million persons unemployed and between 2 and 3 
million people drawing security wages from the Government, how is 
it possible that by the deficit spending on plant and equipment by 
the Government which according to the chart just presented by Dr. 
Currie constitutes less than 6 percent of the total income-producing 
expenditure — how is it possible, I say, under those circumstances to 


imagine that merely added expenditures by the public for the con- 
struction of new plant will produce the salary or w^age income to the 
unemployed of a sufficient amount to start the wheels going again 
and even to liquidate these projects? 

Dr. Hansen. That, Senator, all depends on the volume, as to 
whether it is sufficient or not, but it operates precisely in the same 
manner as private outlays on plant and equipment, and in the event 
that the public projects are also directly productive, not only does it 
increase the flow of the income at the moment but it also increases 
the productive power just as the expansion of private plant and 
equipment does. 

The Chairman. When we find a column here, as in "Exhibit No. 
555" ^ presented by Dr. Currie, in which 20 percent of the income- 
producing expenditures have been contributed by mining and manu- 
facturing, 10.3 percent by railroad and utility operation, 19.3 by other 
private plant and equipinent — I have interpolated the word "private" 
because I understood that to be the gist of the term; 11 percent by 
housing and nonprofit institutions, 6.6 percent by changes in con- 
sumer credit, and 27.7 percent by changes in inventories, how is it 
possible to expect that self -liquidating public enterprises which must 
necessarily go into this little segment at the bottom of only 5.3 
percent will produce the wages to the masses of the people which 
must lie at the bottom of the new structure of prosperity? 

Dr. Hansen. I think I see the point to your question now. Senator. 
It so happens that in this year 1937 the large public works expendi- 
tures that were made by the Federal Government was to a very con- 
siderable extent offset, its expansionist influence was to considerable 
extent offset in that year by the social security taxes. That is one 
important offset, so thnt in that year the net income creating ex- 
penditures of government was considerably smaller than in the pre- 
vious year. It is for that reason it seems to me that we have to take 
cognizance in connection with these matters also of our tax struc- 
ture and our social security taxes. We may offset the expansionist 
advantage of public-work construction by other policies which deduct 
just that much from tlie income-creating factors, and that particular 
year was a year in w^hich because of all of these matters the net income- 
creating expenditure of government was very small. In other years 
it was very much bigger. 

Mr. Frank. Doctor, you might turn to page 13 of Mr. Currie''s 
pamphlet, the table there and the chart - show the differences between 
income-producing expenditures that offset savings for the 2 years. 
It is a very significant figure that bears out what you have just 
been saying. 

Dr. LuBiN. Mr. Hansen, may I clarify a situation, at least in my 
own mind. In order to get clear, may I give an illustration to see if 
it is what you mean. I take it the Federal Government should adopt 
a program similar to that recommended by the Bureau of Public 
Roads and should spend, say, $2,000,000,000 on roads over a period of 
a year or two, if such a thing were possible, what would happen would 
be that in Bethlehem, Pa., there would be created a demand for 
cement, that in Pittsburgh there would be created a demand for steel, 

1 See supra, p. 3534. 

2 See "Exhibit No. 551," supra, p. 3528. 


in Cleveland there would be created a demand for machinery; that 
the peojDle who got those jobs would spend money and among the 
things they spent their money on would be movies. Part of the 
money they spent on movies would go to Los Angeles, thereby in- 
creasing the income of people in Los Angeles, which would thereby 
permit them to buy more houses, buy more of the power from 
Boulder Dam and by buying more houses create demands elsewhere. 

If that expenditure should create a sufficient demand for more 
private investment, the time would come when you wouldn't have to 
spend these billions on roads and other Government projects. If 
on the other hand it did not create a sufficient private expenditure, 
you feel in order to make use of these idle savings, the Federal 
Government would have to continue spending. 

Dr. Hansen. Yes; that is it. 

The Chairman. I understand that theory. It doesn't seem to me 
to answer the question which I have propounded. Nor does your 
own answer, Dr. Hansen. Whatever may be the facts regarding the 
singular characteristics of expenditures in 1937, "Exhibit No. 555" ^ 
shows that Government expenditures of the same type in 1929 were 
3.9, and in 1925 3.1, and I think it is commonly understood that at 
no time during the last 6 years has the Federal Government expended 
for all purposes more than ten or eleven billion dollars at the outside 
in a single year. 

Mr. Nehemkis. Dr. Hansen, before you attempt to answer: Mr. 
Chairman, may it please the committee, if we explore this problem 
further I respectfully request that I be permitted to recall the pre- 
vious witness. Dr. Currie, and ask him the question which involves 
testimony which he gave. 

The Chairman. That would be perfectly all right. But let me 
finish the statement I was about to make. It seems to me that all 
of the statistics which are available to us indicate that Government 
expenditure, both Federal and State and local, is just a drop in the 
bucket as compared with the expenditure which is necessary if you 
are going to start the machine again at the rate at which it was 
running before the crash. 

When the Government contribution to income-producing expendi- 
tures is only 5.3 percent of the total,^ it means just one thing, to my 
mind, and that is that 94.7 percent comes from some other source and 
since 94.7 percent is a much larger figure than 5.3 percent, should we 
not devote all of our attention to expanding those sources of income- 
producing expenditures which contribute to the 94 percentage of the 
total rather than devote ourselves to the expansion of public 

Dr. Hansen. Let me put it in these terms. I think the essential 
question is: How are you going to get capital outlays equal to the 
flow of new savings? Let me remind you that this chart ^ refers not 
only to the expansion of plant and equipment from all sources, 
including residential construction and public construction, but also 
the replacements and renewals. Now our all-important problem is 
to find adequate capital expenditures offsetting the flow of new 
savings. That magnitude in the 1920's was around 9 billions a 

1 See supra, p. 3534. 
« Ibid. 


year, according to the deductions one may make from Dr. Kiiznets' 
study. In that period public construction amounted to 2.6 billion 
dollai'S, which already in the twenties was a very large part of the 
total capital outlaj's offsetting savings. 

Dr. Currie here has taken into consideration all other public 
policies bearing on this situation, taxes and oifsets of taxes, there- 
fore, to these expenditures, and that is the reason why I say that it 
is important to combine with your program of ext)enditure a con- 
sideration of your tax program. It is quite possible that one or two 
billions of dollars of public expenditures absorbing a flow of saving 
may make a very much larger effect on your national income, because 
as I tried to explain this morning, these expenditures, wdiether pri- 
vate or public, on capital outlays are what we may call high-powered 
money. They raise the income by more than the amount of expendi- 
tures and I think that relatively small amounts, both of private and 
public investment, may have a very considerable influence on the rise 
in the national income. 



Mr. Frank. Dr. Hansen, may I call your attention and the 
Senator's to a fact that is obscured somewhat by the chart to which 
you have been referring. Dr. Currie has just called my attention, 
and I direct your attention, to the table and chart ^ on page 13, of 
the memo introduced today, and it will appear from that, Senator, 
that the government contribution to the income-producing expendi- 
tures for the year 1936 was 34 percent of the total. It drops in the 
year 1937, which is in the chart before you,- to 5.3 ]>ercent of the total. 

I should correct that. Dr. Currie tells me it is 30 percent. I don't 
want to develop the point now. I think w'e should recall Dr. Currie 
and let him explain that, but the figure for '37 taken alone is a 
deceptive figure. It was small in that j^ear and it was very high in 
the preceding year. 

Dr. Hansen. That is what I said. 

The Chairman. That table on page 13 is merely a comparison of 
Federal Government expenditure and State and local Government 

Mr. Frank. No, Senator; if you will look at the chart that you 
were referring to,** you took as significant the black line at the bot- 
tom which shows (jovernment expenditures as 5.3 percent of the 
total income-producing expenditures that offset savings. Now if 
you will go back to this table * and look at the years '36 and '37, 
you will see that for the year '36 the total amount of the Govern- 
ment income-producing expenditures that offset savings, was 4 bil- 
lion; w^hereas for the succeeding year of 1937, which is what is shown 
in the chait that you were previously referring to, was less than 1 
billion, or 5.3 percent of the total of income-producing expenditures 
that offset savings in 1937. It was 30 percent of the income-produc- 
ing expenditures that offset savings in the year 1936. 

1 S«>e "Exhibit No. 5.51." snpva, p. 3528. 

2 See "Exhibit No. 555,"' supra, p. 3534. 
s Ibid. 

* See statistical data for "Exhibit No. 551," appendi.x, p. 4(»1]. 


The Chairman. No; I don't think you are reading the chart cor- 
rectly there, Mr. Frank. Dr. Currie will agree with me, I am sure, 
when I point out to you that his figure of 5.3 percent on "Exhibit 
No. 555" does not represent the total contribution as is represented 
in "Exhibit No. 551". It represents the difference between the total 
expenditure and the tax returns of the Government. 

Mr. Frank. This is the same thing on "Exhibit No. 551." 

Dr. Currie. That happened to be the percentage of the total of 
1937. If I worked out the percentage composition of the total in 
1936 the Government figure would have mounted nearly to 30 percent 
of the total. There is a very drastic decline in the offset of saving 
provided by the Federal Government from 1936 to 1937, as indicated 
in "Exhibit No. 551." 

The Chairman. Well, very good then; let me ask you if it isn't 
true that the national income for 1937 with a smaller Government 
percentage was not greater than the national income of 1936 with a 
larger Government expenditure. 

Dr. Currie. With a larger Government expenditure? 

The Chairman. The answer is yes, isn't it ? 

Dr. Currie. The answer is "Yes." 

The Chairman. That is just what I was driving at. 

Dr. Hansen. It was also in that year that we got a recession and 
I think that recession of '37 was to a very large extent due to just 
that decline in the net income ci'eating expenditures of the Govern- 

The Chairman. Just a moment, please. 

Mr. Frank. We are planning to have a 3-day session on this subject. 

The Chairman. Well, I am going to bring out an interesting state- 
ment now, which probably will need a little elaboration. Perhaps 
we shall need more than 3 days to explain this. I am going to read 
Dr. Currie's statement : ^ 

Public expenditui-es that add to disposable cash income more than tax re- 
ceipts decrease disposable cash income, constitute an offset for an equivalent 
amount of current saving. 

Now, accepting that as true, which I do, my question to Dr. Currie 
and to Dr. Hansen is, would not the same results be obtained by 
reducing the tax receipts as by increasing the public expenditure? 

Dr. Hansen. Yes. 

The Chairman. The answer is yes? 

Dr. Currie. The answer is yes. 

The Chairman. And which would be the better policy for the 
Government to pursue, in your opinion ? 

Dr. Hansen. That I am also going into more fully in the hearing 
subsequently. Now, if I may continue my testimony? My last 
statement was so far as self liquidating public works are concerned 
there can be no question, I should sui3]:)0se, that borrowing is a per- 
fectly legitimate and financially sound procedure. And under appro- 
priate accounting practice, such investment financed by borrowing 
does not involve, properly speaking, an unbalanced Budget. 

Intelligent debate begins with the question of borrowing for non- 
self liquidating projects. It is certainly true that the volume of such 
borrowing ouo-ht to be scrutinized in terms of its relation to taxable 

1 Supra, p. 3523. 


income and taxable capacity, but we need here also to look very 
carefully into M'hat a balanced budget really means. I think it is 
clear that the ordinary run of governmental expenditures, the operat- 
ing expenditures, which in modern times must include social service 
relief and welfare expenditures, should be balanced by tax receipts 
over an entire business cycle. 

But when public investments are made in long term durable proj- 
ects, it falls well within the limits of a wisely conceived financial 
plan to borrow^ for such capital expenditures if provision is made 
for amortization and interest charges within the lifetime of such 
durable projects. When an individual builds a house and borrows 
the funds to defray part of the cost, his personal budget cannot be 
said to be out of balance if his income is adequate to cover interest 
and amortization charges on the debt incurred. 

Indeed, the borrowing and amortization plan is nothing more or 
less than a means whereby he may pay for the services of the house, 
so to speak, on an installment basis. A similar procedure has always 
been regarded as legitimate and appropriate for State and local 
bodies. Peculiarly under the conditions of a more slowly expanding 
economy there are sound reasons for the Federal Government 
embaiking on a longer volume of public investments, on the basis 
of a borrowing and amortization plan. It is true that if the Federal 
Government financed all such improvements from such tax receipts 
the communit}^ would escape the interest burden, but it is not clear 
to me that the payment of interest is not quite as legitimate a 
charge for public investment services as it is in the field of private 

And insofar as the borrowing, interest and amortization mechanism 
may facilitate the employment of resources that would otherwise be 
idle and make possible the construction of community capital proj- 
ects, the benefits of which would otherwise be unavailable, the inter- 
est charge is all the more legitimate. If tax revenues are provided 
amply to cover amortization and interest charges, the budget is in 
fact balanced. The whole project will be paid for out of taxes within 
the amortization period, but this is leading into the question of an 
operating versus an investment budget, and about this I shall speak 

If it is deemed desirable, a part of the public investment could 
quite well be paid from taxation, provided the taxes are so levied as 
to fall on savings and not on consumption — in that case there would 
not be an offsetting deduction. In this connection it is of interest to 
note recent development in England. 


Dr. Hansen. It appears that savings are being siphoned into con- 
sumption in very considerable volume in England through the tax 
structure and through the expenditures on social services. Estimates 
of national income and savings in England indicate that the .propor- 
tion of income which was saved in the post-war decade and in recent 
years is very much smaller than before the war. Indeed, not much 
more than half as much. 

The report of the Royal Committee on National Debt and Taxa- 
tion found that savings had declined by some 150 to 200 million 


pounds a year. Prof. A. C. Pigou and Colin Clark, in the pamphlet 
on the economic position of Great Britain, published in 1936, reached 
the conclusion that saving before the war amounted in England to 
12 or 13 percent of the national income, while by 1924 this propor- 
tion had fallen to 8 percent, and by 1935 to 7 percent. 

Colin Clark, in his recent study on national income and outlay, 
arriA-es at similar results, based on estimates of net investment. In 
1907 net investment was 12.2 percent of national income, 8.1 percent 
in 1924, and 7.3 percent in 1937. 

According to the report on economic conditions issued by the Royal 
Economic Society, new capital issues declined from £308,000,000 in 
1928-29 to £194,000,000 per annum in 1936-37. 

And in this connection we must remember that 1928 and 1929 
was not a high point of prosperity for England, and yet the new 
capital issues in tliose 2 years were very much higher than the 
average capital issues in the recent high prosperity of 1936-37. 

There was thus a marked decline in the new issues from the late 
twenties to the recent period of full recovery in 1936 and 1937. 

These estimates disclose a remarkable shift in England in the ratio 
of savings to income. England is saving less than formerly. Stated 
otherwise, England has become a higli consumption economy, and 
on that basis, that and other matters which I wish I had time to go 
into, England has staged a full recovery in recent years. 

I may refer to one other matter which I think is extremely im- 
portant in her recovery, namely the fact that she was able in her 
recovery years to purchase from all the world extremely cheap food 
and raw materials, and on the basis of this subsidy, so to speak, from 
tlie rest of the world, she was aljle to divert purchasing power into 
housing construction and so on, and that is an important basis for 
the British recovery, besides this one that I am here referring to. 

Mr. Henderson. I don't want to slur over that. Dr. Hansen. I 
gather that what you are saying is that in addition to a considerably 
reduced level of saving, England was buying her cost of living items 
more cheaply and therefore had an amount to be diverted into housing 
out of current consumption. 

Dr. Hansen. Yes. 

In large measure, by reason of this shift to a high consumption 
economy and a lower savings economy, England has adjusted herself 
more successfully than we to the conditions of a less rapidly expand- 
ing society, a society which requires a smaller flow of savings than 
that required in the nineteenth century. So long as large savings 
could find active use in plant expansion, whether in England or in 
investments abroad, in her empire or elsewhere, a high ratio of savings 
to income was desirable, but in recent years, with foreign outlets 
largely gone and a more slowly expanding internal economy than in 
pre-war years, a lower ratio of savings to income in the last 5 or 6 
years has helped to prevent the income deflation and employment 
stagnation which idle savings unavoidably cause. 

Community social expenditures added to private consumption ex- 
penditures have made England of late, as I have said, a high-con- 
sumption economy. 

Professor Pigou noted that the decline in savings was very nearly 
equal to the excess of social expenditures in 1924 over 1911. Professor 


Bowley finds that in 1911-12 only 3 percent of the national income 
was spent on social services, while 12 percent was expended in 1934-35 ; 
according to Colin Clark, expenditures benefiting the working classes 
have risen from 76,000,000 pounds in 1913-14 to 429,000,000 pounds in 
1935-36. On the other hand, the total taxes born by the well-to-do 
rose from 177,000,000 pounds in 1913-14 to 685,000,000 pounds in 
1935-36. Clark estimates that before the war taxation weighing on 
the working classes, consumption taxes, and the like, exceeded the 
social benefits from governmental expenditures, while by 1935 the 
value of social benefits received by the working classes exceeded by 
21 percent all the taxes, direct and indirect, paid by this group. 

According to his calculations, the sum redistributed from the w^ell- 
to-do to the lower income groups amounted to 91,000,000 pounds in 
1935-36, while Ursula Hicks, on the basis of later data, puts the figure 
at 110 to 115 million pounds. 

In addition to the high level of consumption, including community 
consumption expenditures, social services, and the like, local govern- 
mental units in England have made important capital outlays on 
public projects and low cost housing financed in large part by bor- 
rowing. This is to be noted when we consider the whole fiscal plan 
in England and the whole budget in England, not only the National 
Government but also the municipalities. 

The gross debt of the local authorities in England and Wales in- 
creased fi-om 800,000,000 pounds in 1922 to 1,400,000,000 pounds in 
1934. Taking account of the difference in population, this rise in 
local debt is very comparable with the annual rise in State and local 
debt in the United States in the decade of the twenties. New munici- 
pal issues have absorbed a considerable part of the flow of savings 
in England in recent years. 

Then, returning to our own problem, let me sum up very briefly. 
Our tax structure bears heavily on consumption and for the so-called 
middle income brackets, from $2,500 to $50,000, relatively lightly on 
savings. AVe have in recent years been collecting large sums for 
social security but we have paid very little out into benefits. Our ratio 
of savings to income continues to be relatively high. We need, there- 
fore, aboTe all to find adequate outlets for our flow of savings into 
plant expansion and new construction if we are to avoid a dejn'essed 
income level and chronic unemployment. To this end we should 
encourage private plant expansion wherever and by whatever means 
it is possible and reasonable to do so. We can get a great deal of 
private plant and equipment expansion. It will require consolida- 
tion, stabilization, and improvement in reforms already made. 

It will require modification in our social security program, it will 
require reform in our tax structure, it will require stable and responsi- 
ble labor relations, it will require adjustment of prices to the lower 
costs springing from technical improvements in order to tap ])Oten- 
tial demand and thus secure larger output, and thereby also larger 
private capital plant and equipment expansion. 

After all these things have been done, it is my view, and" on this 
there may be honest difference of opinion, that it will be necessary 
after all these things have been done with respect to private invest- 
ment to supplement private plant expansion and equipment expansion 
with a reasonable amount and volume of public investment. There 


should be no irresponsible spending. There are too many things 
urgently needed and useful on their own account. There is a sensible 
middle course which we ought to be able to agree upon as reasonable 
in view of the economic situation currently confronting us. No 
policy could be more wasteful at a time when there are large unused 
resources of both capital and manpower than to forego useful public 
outlays of a sort for which we will have something to show in the 
form of durable improvements and in the conservation and increased 
productivity of human and natural resources. 

Mr. Nehemkis. Mr. Chairman, this concludes the presentation of 
the Securities and Exchange Commission for this day. If it is the 
pleasure of the committee, we are prepared to proceed tomorrow with 
a discussion of the way in which our great corporations finance them- 
selves from their own internal sources, and carry on a discussion 
which Dr. Hansen has set forth before this committee both this morn- 
ing and this afternoon. 

The Chairman. Is it the desire of any member of the committee 
to question Dr. Hansen tomorrow ? I don't think we would want to 
undertake it tonight. Of course, there are many, many statements 
made by the doctor which are thought provoking and which could 
be used as a basis for a prolonged examination. I don't know whether 
it is the desire of anybody here to recall him in the morning. Does 
anybody suggest that? 

Dr. LuBiN. Mr. Chairman, will the witness be available for cross- 
examination at a later date? 

Mr. Nehemkis. If it is the pleasure of the committee. Dr. Hansen 
will appear before this committee on two different occasions. Of 
course his subject of discussion will be different from what it is 
today. Today he has merely set forth for you the entire scope of the 
inquiry which will be discussed before this committee in the next 
2 weeks. 

Mr. Frank. He is to be recalled, according to 3'our schedule, on 
JSIay 22. 

jNIr. Nehemkis. And he will also appear on one other day. 

Tlie Chairman. May I ask you. Doctor, before we adjourn for the 
evening, what your conception of consumption expenditures in the 
modern sense is, notably the sense in which this type of expenditure 
is appearing in England? 

Dr. Hansen. Private consumption expenditures, I think as one 
quite readily understands, includes, of course, the general run of 
expenditures on all manner of nondurable consumers' goods, and in- 
deed on durable consumers' goods. Usually we do not include hous- 
ing, but otherwise all other nondurable and durable consumers' 

The Chairman. Have you any reason to believe that in England 
the masses of the people are buying and consuming more food or 
buying and using more clothing than formerly was the case ? 

Dr. Hansen. Yes; I think that definitely is the case. 

The Chairman. How does that compare with conditions in the 
United States? 

Dr. Hansen. Both countries have had, if one looks back over a 
long period of 100 years, approximately the same percentage rise in 
standard of living over a long period. 


The Chairman. And tlie rise in the standard of living is ex- 
pressed, is it not, in the purchase and use of articles wliich a few 
years ago would be regarded as luxuries? 

Dr. Hansen. That is correct. 

The Chaieman. So we are living in a luxury economy, even though 
it may be more unstable than the economy of our grandfathers, which 
was far less luxurious but probably much more stable. 

Dr. Hansen. Definitely so ; and the more we come to high incomes 
I think the more we consume durable-consumption goods. 

The Chairman. So that the way to promote stability in our econ- 
omy today is to bring about a condition under which the masses of 
the people can produce more of the commodities of luxury which 
industry today produces. 

Dr. Hansen. Yes ; I think that is a large part of the problem. In 
the case of England, I should add to these private expenditures 
about which we have been talking, a very large amount of what we 
may call community expenditure, expenditure which is made in terms 
of social services, education, health, all the various forms of social 
insurance and the like. 

Those community consumption expenditures are the ones, I take it, 
that have particularly increased consumption in England in recent 
years, in addition to the rise of private consumption ex))enditures to 
which we have referred, especially the rise of community consump- 
tion expenditures which have been made not by the individuals but 
in the form of these social services which has, above all, made Eng- 
land a high-consumption economy. You see, when I say a high- 
consumption economy I am using it in a relative sense. Not merely 
has consumption risen, but the ratio of income consumed by private 
individuals and by the community is larger than was formerly the 
case, and therefore the ratio of the total income saved is smaller than 
before. That difference has largely come, I think, because of the 
rise in community consumption of all the sorts that I have referred to. 

Mr. Nehemkis. May I interrupt, Mr. Chairman? 

I merely want to indicate briefly that at a subsequent date Dr. 
Hansen will testify specifically in detail on two of the items that 
have provoked discussion and thought before this committee, and I 
dare say that at that time many of the questions that must be in 
your minds at this time can be fully and amply explored with Dr. 
Hansen. I also should like to add that we will subsequently reach 
a stage of our discussion before you in which we will approach what 
might be characterized as the constructive phase of the development 
of our presentation, at which time there will be other witnesses who 
will develop in greater detail than obviously Professor Hansen can 
do, this afternoon, and I am certain that the committee will have full 
time at that period to explore a great number of questions that I 
know are in their minds. 

The Chairman. The committee will desist. 

Dr. Lubin. May I just ask one question of fact? Is it not true 
that the per-capita consumption of goods in the United States in the 
year 1938 was considerably smaller than in the year 1928? 

Dr. Hansen. Yes ; I expect that is the case. 

Dr. Lubin. Is it not true ? 

Dr. Hansen. It is the function of vast unemployment. 


Dr. LuBiN. Is it not further true that in England in the year 1928 
the per-capita consumption of goods in 1938 was hirger than in 1928? 

Dr. Hansen. Yes; England, having experienced more or less a 
chronic stagnation in the twenties, did achieve higher activity in th« 
thirties, on the basis of various factors — one has to go into a great 
many tilings. 

Tlie Chairman. What did England do to bring about this stimu- 
lation of per capita consumption that we have not done? 

Dr. Hansen. I tried to explain two important features; one, this 
very large volume of communit}^ expenditures, financed in very 
large part from a tax structure that bears on savings, and then in 
addition to that she obtained a very great boost to her prosperity from 
the very low prices of raw materials and foodstuifs, enabling her to 
expand her consumption, and indeed capital outlays on various 
things, such as hoiising. 

Tliat was a very important factor there. There are a great many 
factors in the British situation. I would not pretend these are 
the only two. I think it is very dangerous and I would like to say 
so, to compare one country and another, and argue that one single factor 
explains why England has had an experience different from ours, 
and I am afraid the committee might think the things I have men- 
tioned I regard as wholly explanatory of the situation. I do not so 
regard them. I haven't had time to go into all the various factors. 
I see certain differences between the English and the American 
situation. I have singled out certain points that bear on our 

The Chairman. I think we will all acknowledge that we have 
told only part of the story. Would you care to announce who your 
witnesses will be tomorrow? 

Mr, Xeiiemkis. Tomorrow morning our witnesses will be John 
W. Barriger 3d, Chief of the Kailroad Division of the Reconstruc- 
tion Finance Corporation, who will explain how the American 
railroads have financed themselves from their internal sources. He 
will be followed by Mr. Edgar M. Queeny, of the Monsanto Chemical 
Co.: and in the afternoon, Mr. Edward Stettinius of the United 
States Steel Corporation. 

The Chairman. The committee will stand in recess until 10 : 30 
tomorrow morning. 

(Whereupon at 5 p. m. an adjournment was taken until Wednes- 
day, May 17, 1939, at 10:30 a. m.) 


WEDNESDAY, MAY, 17, 1939 

United States Senate, 
Temporary National Economic Committee, 

Washington, D. G. 

The committee met at 10:55 a. m., pursuant to adjournment on 
Tuescla}^, May 16, 1939, in the Caucus Room, Senate Office Building, 
Senator William H. King, presiding. 

Present: Senators King (acting chairman) and O'Mahoney; Repre- 
sentatives Reece and AVilliams ; Messrs. Frank, Henderson, O'Connell, 
Lubin, Berge, Patterson, and Brackett. 

Present also: Senator Robert M. La Follette, Jr., of Wisconsin; 
Representative James M. Barnes of Illinois; Joseph Borkin and 
Ernest S. Meyers, Department of Justice ; Kenneth Tupper, Depart- 
ment of Commerce; Willis J. Ballinger, Federal Trade Commission; 
Thomas BJaisdell, Securities and Exchange Commission; Peter R. 
Nehemkis, Jr., special counsel, Investment Banking Section, Securi- 
ties and Exchange Commission; and Joseph R. Kelley, associate 
counsel. Investment Banking Section, Securities and Exchange 

Acting Chairman King. The committee will be in order. Mr. 
Nehemkis, is your witness read}'? 

Mr. Nehemkis. Mr. Barriger. 

Acting Chairman King. Mr. Barriger, do you solemnly swear that 
the testimony you are about to give in this proceeding shall be the 
truth, the whole truth, and nothing but the truth, so help you God? 

Mr. Barriger. I do. 

D. C. 

Mr. Nehemkis. Will you state your name and address, please? 

Mr. Barriger. John W. Barriger, 3d, Chief Examiner of the Rail- 
road Division in the Reconstruction Finance Corporation, Washing- 

Mr. Nehemkis. Senator King, I desire to read into the record the 
qualifications of this witness. Mr. John W. Barriger, 3d, is Chief 
Examiner of the Railroad Division of the Reconstruction Finance 
Corporation and has held that post for the past several years. Prior 
to that time this witness was a member of the statistical department of 
Kuhn, Loeb & Co. during the years 1927-29. This witness has also 
been associated with Calvin Bullock & Co., in charge of railroad mat- 
ters, during the years 1929-33. 

124491— 40— pt. 9 6 3561 


Mr, Barrijjer is co-author of the Prince Plan of Railroad Consoli- 
dation. He was associated with the Pennsylvania Railroad in their 
maintenance and transportation departments during the years 1917-27. 

Mr. Barriger, do I understand that you are a graduate of the Massa- 
chusetts Institute of Technology and that you hold a degree as civil 
engineer ? 

Mr. Barriger. Yes. 

Mr. Nehemkis. Have you discussed your testimony with counsel? 

Mr. Barriger. Yourself. 

Mr. Nehemkis. I am glad to have you clarify it, since there is some 
doubt in your mind. In spite of that discussion, is the testimony 
you are about to give this morning your own considered facts and 
conclusions ? 

Mr. Barriger. It is. 

Acting Chairman I^ng. I assume that in view of the fact that he 
subscribed to an oath he would tell the truth. 

sources of railway capital 1921-193 7 

Mr. Nehemkis. Are you prepared to testify, Mr. Barriger, to the 
sources of the capital funds of railways ? 

Mr. Barriger. I am. 

Mr. Nehemkis. Will you proceed and state your statistical sources ? 

Mv. Barriger. The statistical sources are the published records of 
the Interstate Commerce Commission, which, in turn, are based upon 
the sworn statements of individual railroads to the Commission. 
Many of these statements are taken directly from its blue book of 
statistics of railways of the United States. To some extent these 
statistics are based on the underlying data from whicli that blue book 
is prepared. I will submit later today mimeographed copies of the 
statements from which I shall testify and those mimeographed sheets 
will state on each column the exact source of the data. 

I want to express my appreciation to the Bureau of Statistics of the 
Interstate Commerce Commission for preparing this data in accord- 
ance with the formula which I suggested, after consultation with Mr. 
Nehemkis and one of his associates, to be certain that it covered the 
subject of their inquiry. 

Mr. Nehemkis. Will you proceed, Mr. Barriger, with your discus- 
sion, explaining as you go along, in your own words and in your own 
way, the various categories of capital sources and the expenditures as 
set forth in your work sheets ? I am going to leave it to you to carry 
on the discussion in your OAvn words, telling the committee the story 
of how the American railroads have financed themselves largely from 
their own internal sources. Will you proceed, Mr. Barriger ? 

Acting Chairman King. How^ far back do you go in the discussion 
of the problem ? 

Mr. Barriger. 1921. The end of the first full year after Federal 
control marked an epoch in American railroad history. I regret that 
I do not have the mimeographed sheets which would aid you in 
following mv discussion, which will be merely to explain the topic 
beadinos and to call attention to the totals. 

I tliinic that most of the column headings are self-explanatory, but, 
nevertheless, I shall go over them point by point to be certain that 


there may be no doubt as to what each means and to discuss the relative 
importance of the different sources of capital. 

Any healthy industry must have continuous access to new capital. 
It can obtain it through the security markets or out of its own 
revenues to the extent that the expenses and the fixed or the dis- 
cretionarj^ return to capital already invested in the industry will 

Tlie data which I shall present will measure the amount of capital 
goino- into the railroad industry over this period of years, '21 to '37, 
and the source from which it was derived. 

The industr3?'s own revenues appear to have been the principal 
source of its capital. This may or may not have been a healthy sit- 
uation. The revenues of a railroad are, first of all, a fund out of 
which must be paid the operating- expenses which must currently be 
met if the railroad is to continue to do business. Those are primarily 
wages, material bills, and taxes. After that remains a balance which 
may variously be reinvested in the property or distributed to those who 
have furnished the capital. Tliat which goes to capital is in some 
measure beyond the discretion of the management to the extent that 
it is represented by fixed interest-bearing securities, although even 
there management may have some discretion because it can ahvays 
seek resort to the courts in bankruptcy or receivership if it finds that 
the fixed-capital returns are too serious a drain. 

The income payments are largely discretionary. 

This balance remaining after the necessary expenses of opera- 
tion are paid may be subdivided into two categories, that which 
would be earmarked as depreciation, and that which would be ear- 
marked as earnings for capital whether directly distributed to the 
security holders or held as undistributed earnings. 

I would like first to discuss depreciation charges. Whenever a 
railroad train is operated it takes some life out of the property and 
the equipment. Replacement of that service life is properly a charge 
against that operation. However, that is not a charge which can be 
paid at that particular time. It is a bill for present-day operations 
which will have to be met and paid at some future date, which is 
anticipated by the depreciation charges. These charges are included 
in operating expenses, but are not immediate expenses in the same sense 
that wages and materials and taxes (which is a charge rather than an 
expense) are. 

There is a distinction between depreciation for road and deprecia- 
tion for equipment which I may get into later, for generally speak- 
ing, the railroads do not charge very important sums for deprecia- 
tion of roadway. However, the depreciation of equipment runs into 
very substantial amounts. Depreciation of equipment can be definitely 
earmarked because a car or a locomotive wears out or becomes obsolete 
as an entire unit, and its replacement in full is a definite factor, and 
the measure of depreciation of that unit of equipment can be definitely 
traced. Accordingly, depreciation of the equipment is developed to a 
relatively exact accounting science and each unit on the books is 
depreciated at a fixed rate per annum, determined by engineering 
studies and, of course, under Interstate Commerce Commission 

Cash derived from depreciation of equipment is very largely util- 
ized to replace it in kind, by modern units. It is a matter of regret 


that to some extent in recent years railroads have had, because of 
financial pressure, to use the funds derived from the depreciation 
charges to meet deficiencies in bond interest, but that is another 

Depreciation of equipment is precise and specific and is required 
of every railroad by the Interstate Commerce Commission. The 
very important aggregate of these charges in the operating expenses are 
produced in this manner, and this represents a large sum of money 
available for replacement of obsolesent equipment by the purchase 
of new units. 

On the other hand, depreciation of roadway and slructures pre- 
sents a somewhat different problem from that of equipment depre- 
ciation, because while no amount of maintenance can prevent ulti- 
mate obsolescence and retirement of equipment, with proper mainte- 
nance and development there need be no depreciation of roadway from 
the standpoint of providing stated funds for replacement. A locomo- 
tive or car becomes too antiquated for use and must be replaced in its 
entirety, but the roadway and track does not. Individual ties and 
rail and other parts nuist be replaced by heavier and better material, 
but with a normal maintenance program, the yearly budget permits 
adequate renewals and improvements as rec{uired and the uniformity of 
the work on soundly maintained and financed lines makes it unneces- 
sary to provide special funds except in the case of certain specific 
facilities such as a particular bridge or building. 

Acting Chairman King. How do you treat abandoned roads? I 
know of some roads four and five hundred miles in length which 
have been abandoned. Do you charge that to loss of capital? 

Mr. Barkiger. They are written out of the capital accounts through 
the maintenance of way expenses normally, but where a very heavy 
write off would be made so that it might seriously distort the earn- 
ings of the railroads and in any one year possibly change an income 
to a deficit or make a small deficit a large one, the Interstate Com- 
merce Commission, because of the financial situation of recent years, 
has permitted large amounts of property to be w^ritten off directly 
through profit and loss. To that extent, you might say the income 
accounts are slight!}^ distorted because any write off like that prob- 
ably should be reflected in the income account because, to the extent 
that that was not provided for, income in previous years has really 
been overstated. 

I risked trying your patience a little bit with these discussions of 
depreciation charges to indicate why road depreciation is small and 
equipment depreciation is large, and possibly I should just continue 
this discussion by ]:)ointing out, in the period under discussion, the 
total depreciation charges to operating expenses for road were $124,- 
000,000. That represented a fund of that amount available for cap- 
ital or other corporate purposes, on the other hand, equipment de- 
preciation totaled $3,161,471,000 in that period, and at the same time 
there were depreciation reserves for nonoperating physical property — 
that would be hotels and warehouses and other things of that char- 
acter—amounting to $9,468,000. Total charge for depreciation- 
Excuse me, I should go back and point out that retirements were 
$307,629,000, and may I stop here and digress a minute to point out 
that those equipment retirement expenses arise by actual retirement 


of a piece of equipment for which depreciation reserves had not been 
built up to the extent necessary to balance the book value less the 
depreciation reserve, which was that much in excess of the salaries 
value. This additional write-off which had to be made at the time 
the units of equipment were retired, and those were included in 
operating expenses as specific retirement charges in the same sense 
that I indicated a few minutes ago, when you write off a branch line 
unless it is with si^ecial permission through the ]3i'ofit and loss 
account that is written directly into the operating expenses through 
the maintenance of way account. 

The sum total of those depreciation and retirement charges was 

Acting Chairman King. That is between the years you referred 
to 1921 to what date? 

Mr. Nehemkis. 1938. 

Mr. Barriger. Excuse me, '21 to '37, because the combined figures 
for last year are not yet available. 

Mr. iS'EHEMKis. That will be the period under discussion 

Mr. Barriger. The undistributed earnings were $1,948,000,000 and 
those represent earnings which either were undistributed because it 
was net income not paid to stockholders, or undistributed earnings of 
railroads in bankruptcy or receivership not paid to the bondholders. 
The Missouri-Pacific or C. & N. W. or other railroads now in bank- 
ruptcv may show very substantial net deficits, but of their calcu- 
lated fixed charges actually little is being paid to security holders, 
only some underlying divisional bonds, and so forth, and the residual 
earning power which might go to other bondholders is actually held 
within the property and reinvested. 

Senator King. There might be undistributed earnings when the 
bonds matured and were not paid, wlien interest was not paid, when 
the road was in receivership and the stockholders didn't receive a 
dollar on their investment. 

Mr. Barriger. Yes. 

Acting Chairman King. That is rather paradoxical, isn't it, to 
have undistributed earnings with all those obligations undischarged. 

Mr. Barriger. Yes; it does seem to be that way, but that is the 
way properties are built up during receiverships. 

Dr. LuBiN. What was the actual amount of undistributed earn- 
ings that under other circumstances would have gone to bondholders 
and other people to whom they are indebted ? ^ 

Mr. Barriger. I regret that I do not have here our detailed com- 
putations of the amount of undistributed earned interest which was 
held back by railroads in bankruptc}^ or receivership.^ 

Mr. Nehemkis. You could make that available? 

Mr. Barriger. I could make that available. It is rather a sub- 
stantial sum. Take, for example, in the case of the Missouri-Pacific 
system lines, that is the Mo.-P., the I. G. N., and the Gulf Coast, 
together have nearly 30 million dollars fixed charges a year. They are 
paying only two or three million a year out. Now to be sure they 

1 Mr. Barriger subsequently submitted data on excess of total income over fixed charges 
paid by Class I railroads in receivership or trusteeship, which appears in the appendix 
on p. 4123. 


are not earning any substantial portion of that 30 million dollars, but 
they are earnino- probably three or four times the amount Avhich they 
are actually paying out to their divisional bonds and their equipment 
trust securities. When I said three or four times, I should limit 
that to the best of the present years, that is '36 and '37. Those 
withheld earnings in the case of bankruptcy and receivership rail- 
roads, however, total a very substantial sum, and I would rather 
give it to you from the record than from memory. 

Dr. LiTBiN. Offhand, would you know whether it is a substantial 
proportion of that $1,900,000,000 that was reinvested ? 

Mr. Barriger. I would say that it was a substantial sum. It would 
run several hundred million because at the present time I am sure 
there is more than a hundred million dollars' worth of bond in- 
terest — I know there is a good deal more than a hundred million 
dollars' worth of bond interest. I suppose it would run nearer two 
hundred than one hundred million, in default. 

Acting Chairman King. In interest? 

Mr. Barriger. In interest and wdiile, of course, the amount of 
default does not represent the undistributed earnings, possibly one- 
third of the amount in default is being earned and held in the 
property. That is a rough guess and I might be in error. 

Mr. Nehemkis. You were describing, Mr. Barriger, the various 
categories of capital sources. In addition to those you have already 
described, what other capital sources do we have in the American 
transportation plant? 

Mr. Barriger. When we consider income sources, there are the 
sale of property and miscellaneous assets and certain nonoperating 
income which is earned by railroad subsidiaries but not taken di- 
rectly into the parent company in the form of dividends or inter- 
est, and there are a number of other minor sources which I need 
not go into at this time but which will be explained in full on this 
sheet, as I turn it in to you, which over the period of 1921-37 aggre- 
gated nearly a billion eight hundred million more. 

In addition, strangely enough, there were aid grants and gifts. 

IVIr. Nehemkis. What does that mean Mr. Barriger ? 

Mr. Barriger. Well, those represent primarily gifts from cities, 
from corporations, and individuals, for the purpose of assisting the 
railroad usually in developing some facility which will be of benefit 
to the donor and the railroad, but the railroad actually owns and 
controls the property and carries it on its books. 

Mr. Nehemkis. If a railroad wants to construct a siding next to 
a particular piece of property, it may well be under certain circum- 
stances that the municipality or local government or individual cor- 
poration makes a gift of that property to the railroad corporation, 
is that correct? 

Mr. Barriger. That often occurs, and it is the aggregate of those 
gifti? by individuals and corporations which over this period total 71 
million, and to a certain c^.tent that might be considered capital, 
although in many cases that would not be productive capital in the 
sense that it would earn a return. It might be beautifying the sta- 
tion or building a new terminal, things of that sort. 

Mr. Nehemkis. But for the purposes of our discussion this morn- 
ing we may regard that category as capital? 

Mr. Barriger. Yes. 


Actinc; Chairman King. However, that gift might require a large 
contribution upon the part of the railroad company, which would 
more than offset any value that it received from the gift itself^ 

Mr. Barriger. Very true. 

Acting Chairman King. May be a liability rather than an asset? 

Mr. Barriger. That is very true. 

]\Ir. Neiiemkis. In what instance might you have such a gift where 
actually it turned out to be a liability? 

Mr. Barriger. Well, I don't know that the city of Chicago gave 
the Chicago Union Station any property, but if, for example, in the 
construction of the Chicago Union Station and the straightening of 
the riA^er and related improvements there, anything was given by the 
city to Chicago Union Station. It might have resulted in this way; 
and the same way at Cleveland or other places. I couldn't give you a 
specific case without checking with some railroad. The sum total of 
income available for capital purposes from all sources I have men- 
tioned, is $7,406,000,000 over this period of time. 

Mr. Nehemkis. If I understand correctly, then, Mr. Barriger, for 
the period under discussion, 1921 through 1937, the last period when 
figures are available to us at this time, the American railroads had 
available to them from internal sources, as you have described them, 
7 billion plus for plant expansion and other uses. Is that correct, 

JNIr. Barriger. Yes; I would like to amplify that just a little bit by 
stating that is for plant expansion and plant replacement. 

Mr. Nehemkis, Correct. I am glad you made that qualification. 

Mr. Barriger. Because thisi is capital and capital goes in for two 
purposes; one is to replace the existing capital that is worn out and 
the other is the new capital to improve or to add to, and a little 
later on I will get into measurement of what went to replace and 
wdiat went to expand and improve. 

I think that on the tables that I w^ill turn in, the explanatory com- 
ment will develop any point that I may have skimmed over too 

Acting Chairman King. Mr. Counsel, do you intend to offer those 
rather voluminous tabulations for the record? I see you have a large 
number of sheets there. 

Mr, Nehemkis. Mr. Barriger had suggested that it might be of 
some interest to the committee at some future time at a leisurely 
moment to study these things, and he has very kindly consented to 
have tliem mimeogra]3hed so that it will be easier to read. 

Acting Chairman King. This is schedule A, as I understand. That 
doesn't absolve you from the dut}^ of furnishing mimeogra])hed ones. 

(The schedule referred to was marked "Exhibit No. 559" and is 
included in the appendix on p. 4019.) 

]\Ir. Barriger. If you will permit me, I might want to refer to that 
again and while I have a carbon copy of this, if I could take this 
back with me and turn it in later it would be a convenience. 

Acting Chairman King. You might give them a mimeographed 

Mr. Barriger. I shall. Schedule B of this table ^ shows the funds 
secured for capital purposes from the sale of stock and a subsequent 

1 See "Exhibit No. 560," appendix, p. 4020. 


table which will show the quantity secured for capital purposes 
through the sale of funded debt introduced a difficult problem to 
separate capital which was for refunding or exchange purposes, and 
capital which was really brand-new capital in addition to what was 
already there. When stock might be issued in exchange for stock 
of other companies for the purpose of acquisition, as tlie Southern 
Pacific in the case of the Cotton Belt, and when stock was sold by 
the Chesapeake & Ohio to raise money to purchase stock of other 
railroads. Capital was shifted and not added. 

We had to be careful, as best we could, to eliminate all of those 
things lest w^e got the duplication from new capital which went into 
property, or into investments for which railroad securities had already 
be^n issued and had created that investment. C. & O. purchase of 
control of Erie presented a problem of elimination of these intercor- 
porate duplications, and whether or not we were overeliminating them 
or undereliminating them, I don't know, but we did the best we could 
and I think accurately within a reasonably small percentage of error, 
our computation indicates that over this period 362 millions of new 
capital in the technical sense of the word was raised through the sale of 

Acting Chairman King. But that capital so obtained resulted, 
did it not, or did it, in the exchanges of one property for another? 

Mr. Barriger. That is eliminating everything like that, which 
you might say represented a sale of stock in order to put a company 
in funds to acquire a property already created rather than creating 
new property. 

Mr. Nehemkis. In other words, as distinguished from an original 

Mr. Barriger. Yes; original investment. Now we tried as best 
we could to eliminate all those intercorporate duplications and we got 
a net figure of $362,000,000 new capital raised through the sale of stock 
w'hich went into creating railroad property. 

Acting Chairman King. To what purpose, to what use was that 
$362,000,000 put? 

Mr. Barriger. Primarily for addition and betterments, but 

Acting Chairman King (interposing). Personal property, that is 
rolling stock? 

Mr. Barriger. Rolling stock and heavier rails, new lines, passenger 
terminals. It would be difficult to earmark exactly where that went 
because it went into a common fund like when you put grain into an 
elevator, you don't know exactly whose grain you are taking out. 
This we might say is what the lawyers call fungible goods and I think 
this money is in that character. 

Acting Chairman King. Some of it was utilized for rehabilitation 
of plants and roads and it could not be in any sense new capital 
independent of existing obligations and existing plants. 

Mr. Barriger. It is new capital. 

Acting Chairman King. Replacing obsolete and obsolescent plants? 

Mr. Barriger. To some extent replacing that, and to some extent 
adding new plant that was not there previously. 

Mr. Xehemkis. To recapitulate the point, IMr. Barriger 

Acting Chairman King (interposing). It wasn't available for the 
discharge of bonds or for interest or for the payment of dividends 
to stockholders? 


Mr. Bareiger. We tried to eliminate all of those things. 

Mr, Nehemkis. In other words, we are dealing here with a cate- 
gory which may be described as plant, pl^ysical plant^ as distin- 
guislied from financial operations, and this money, as Mr. Barriger 
has described, went into a combination of plant expansion and plant 
replacement, something physical as distingnished from something 
financial; correct, sir? 

Mr. Barriger. That is correct, and in the same way we have pre- 
pared data on the fnnded debt of the class I railroad and show 
that eliminating refunding operations, because so large a proportion 
of bond sales are to meet maturities or to call existing high coupon 
bonds and replace with bonds of lower coupon rates which represents 
no new money going into the railroad industry. That is simply an 
exchange of holdings. We have tried to eliminate that in this case 
and in addition to the sale of bonds we have added the sale of receivers 
certificates — receivers' and trustees' — because we regret in recent years 
that has become an important instrument of raihvay finance, and we 
find that over this period the net capital raised through the sale of 
funded debt available for plant development and plant expansion and 
phmt rehabilitation replacement, and so forth, was $1,575,000,000. 

Acting Chairman King. Do your figures show liow much of that 
resulted from the sale of receivers' certificates? 

Mr. Barriger. That is in there and that is 

Acting Chairman King (interposing). And trustees' certificates? 

Mr. Barriger. That is approximately $65,000,000. 

Mr. Nehemkis. Is it agreeable with you. Senator, if I offer these 
in the entirety and not interrupt each time? 

Acting Chairman King. No objection, just so they are identified as 
we proceed. 

Mr. Barriger. I have all of these in one bound volume. 

Acting Chairman King. When j'ou refer to a sheet you had better 
call it schedule A, B, or C. 

Mr. Barriger. I then state that schedule B will be a table of funds 
secured for capital purposes from the sale of stock and schedule C 
will be a similar statement of capital raised from the sale of funded 

Mr. Nehemkis, Just a moment, Mr. Barriger. I think we may 
confuse the reporter and if I may have leave of the committee I 
want to offer each individual document separately. I offer now a 
sheet entitled, "Schedule B, Funds Secured for Capital Purposes 
From the Sale of Stock, All Classes of Steam Railway Companies.'' 

(The schedule referred to was marked '"Exhibit No. 560" and is 
included in the appendix on p. 4020.) 

Mr. Nehemkis. I offer now a sheet entitled "Schedule C, Funds 
Secured for Capital Purposes Through the Sale of Funded Debt, All 
Classes of Steam Railway Companies." 

(The schedule referred to was marked "Exhibit No. 561" and is 
included in the appendix on p. 4021.) 

Mr. Barriger. Schedule D totalizes the individual totals of B and C 
shown with the funds secured for capital ]:)urposes from the sale of 
securities of all classes, which was $1,938,000,000. 

Mr. Nehemkis. I offer a sheet entitled "Funds Secured for Capital 
Purposes from the Sale of Securities, All Classes of Steam Railway 


Companies," and, Mr. Witness, if as you refer to these you will just 
refer to the title you may help the reporter, 

(The sheet referred to was marked "Exhibit No. 562" and is in- 
cluded in the appendix on p. 4022.) 

Mr, Bareiger. I wnll endeavor to do so. The next schedule E sum- 
marizes in its first column the capital derived from the income sources 
detailed on "Exhibit No. 559." The second double column which shows 
amounts and percents, lists the capital derived in each year from de- 
creases in working funds, because that is a source of capital which I 
haven't previously touched on. You can draw down working capital 
for plant development just as you can sell securities. That is not as 
large a source and that is, you might say, an earmarking of income 
from future years, but the decreases in working capital in certain 
years which went into capital funds was 970 million. The sale of 
securities which we have just discussed, as I previously stated, aggre- 
gated $1,938,000,000, and tlie sum total of these three sources over a 
period of years, '21-37, aggregated $10,313,228,154, which as near as 
we can compute it is the capital which the railroads had from all 
sources available for extension, expansion, betterment, and replace- 
ment of their railway o])erating properties, and also their many 
nonoperating activities. 

And a little later on I shall introduce a statement showing how 
much of this went to replace capital that was worn out, so that is a 
gross and not a net figure, and by no means indicates, I might say, the 
financial expansion of American railroads. 

Mr. Nehemkis. In other words, you will tie those two things up? 

Acting Chairman I^ng. Any part of that $10,000,000,000 go to meet 
bonded indebtedness or from refunding operations ? 

Mr. Barriger. None of that went for those purposes. Now, some 
of that $10,000,000,000, as I will indicate a little later, was used to pur- 
chase securities of other companies; the large acquisitions by the so- 
called Van Sweringen railroads or when the Pennsylvania made cer- 
tain purchases through some of its subsidiaries, w^hen the Baltimore 
& Ohio made purchases of Reading, and so forth. So that is a gross 

Mr. Henderson. Do you want to introduce that in evidence ? That 
is the grand total. 

Mr. Nehemkis. Summary of funds available for capital purposes. 
I offer this in evidence. 

Acting Chairman King, It may be received. 

(The summary referred to was marked "Exhibit No. 563" and is 
included in the appendix on p. 4022.) 

Acting Chairman King. Could you logically and accurately treat 
as capital, when you purchased new property, borrowed money 
through the sale of bonds for the purpose of acquiring new property — • 
for instance. Van Sweringen, you stated that is included in this ten 
billion summary? 

Mr. Barriger. Yes; purchases are included in there and that, tech- 
nically speaking, does not represent new capital going into the in- 

Mr. Nehemkis. That is to say, as you distinguished a moment ago, 
Mr. Barriger, that is something which did not go into new plant; 
that was a kind of, shall we say, squirrel cage activity ? 


Mr. Barriger. Yes; and a little later I measure investments of that 
character, although at that time I will point out that not all of those 
investments were of this nature. 

Acting Chairman King. It would be inaccurate then to say that 
$10,000,000,000 was new capital or was invested for capitalistic pur- 
poses because a large part of it was utilized in the purchase of addi- 
tional property which was railroad property ? 

Mr. Barriger, That is correct. 

Mr. Henderson. As I understand it, Mr. Barriger, this statement 
up to date shows the source and the amount of funds that were avail- 
able, and you are going to deal later with what 

Mr. Barriger (interposing). What was done with them? 

Mr. Henderson. The disposal was? 

Mr. Barriger. That is correct. 

Mr. Henderson. Did you put into the record the percentages of 
these three main sources that make up the total? 

Mr. Barriger. Yes; the percentages are computed. 

Mr. Henderson. Did you put them into the record directly ? 

Mr. Barriger. No; I didn't mention them. 

Mr. Henderson, Do you mind if I 

Mr. Barriger (interposing). I wish you would, 

Mr. Henderson. As I understand it, 71.81 percent of the funds 
available for capital purposes for these railroads from 1921 to 1937 
came from income; 9.40 percent came from decreases in working 
capital; and 18.79 came from securities. 

Mr. Barriger. Yes, sir. From time to time in my previous dis- 
cussion I alluded to depreciation charges to roadway and equipment, 
which were included in maintenance of way and equipment, respec- 
tively, and I also mentioned the retirements which went through those 
accounts, and I thought accordingly it might be helpful to put into the 
record the total maintenance expenses for road and equipment sepa- 
lately, and totalized for maintenance of class I railroads, excluding all 
of these depreciation and retirement charges. These are the current 
expenses for restoring the service life used up by the elements and 
wear, and these total large sums of ten billion eight hundred thirty- 
one million for the roadway maintenance ; thirteen billion eight hun- 
dred and seventy-five million for equipment maintenance, or a total 
of twenty-four billion seven hundred and seven million for mainte- 
nance expenditures of the American railroads, '21 to '37, inclusive, ex- 
cluding depreciation and retirements. 

Acting Chairman King. Do any of those numbers indicate the 
amount that Avas utilized for the purchase of trucks, passenger, and 
bus lines? 

Mr. Barriger. No; I regret. Senator, that we have not broken 
the capital expenditures down to that detail. 

Acting Chairman King. At any rate, a considerable sum was 
utilized in the acquisition of bus lines. 

Mr. Nehemkis. Could you tell us in a very general way, Mr. Bar- 
riger, what your understanding of the over-all amount which went 
for such acquisitions was ? ^ 

^ ' Mr. Ban-iger subsequently informed the committee that he was unable to obtain the 
information on busses. 


Mr. Barriger. I regret that I can't because the bus and truck 
acquisitions were, ahnost invariably, through subsidiary companies. 

Mr. Nehemkis. Woukl it be a difiicult matter for your statistical 
department to compile that material for the information of the com- 
mittee ? 

Mr. Barriger. I shall endeavor to do it. 

Mr. Nehemkis. We will be very grateful if we might have it. 

Mr. Barriger. If it can be done, we will do it. 1 am not certain 
that the records are available, but if they are, it will be done.^ 

Acting Chairman King. What part of the expenditures to which 
you have referred were made by, or in connection ^ith, subsidiary 
companies and what receipts, if any, were obtained from those sub- 
sidiary companies? 

Mr. Barriger. When you speake of subsidiary companies 

Acting Chairman King (interposing). I am using the term you 

Mr. Barriger. Yes. I ])resume you mean those nonoperating affili- 
ates rather than a subsidiary operating railroad company, and if I 
may — I think this next table may cover that point. 

Mr. Nehemkis. Before you do that, Mr. Barriger, may I otfer into 
evidence a table entitled "Expenditure for Maintenance, Class I 
Eailroads, Excluding Depreciation and Retirements." 

(Ilie table referred to was marked "Exhibit No. 564" and is in- 
cluded in the appendix on p. 4023.) 

Dr. LuBiN. Mr. Barriger, you just used the figure of $24,000,000,000 
approximately that was invested in the roads between 1921 and 1937. 
Can you telfus offhand how that sum of $24,000,000,000 compares 
with the total valuation of the railroads as made by the I. C. C. ? 

Mr. Barriger. That sum of 24 billion was the amount expended on 
maintenance and charged in accordance with the Interstate Commerce 
Connnission rules to operating expenses and excluded the charges 
for depreciation and retirements. That was an operating expense for 
repairing locomotives and cars and repairing track and repairing 
bridges, buildings, purely the ordinary routine maintenance and that 
proportion of replacement which the Interstate Commerce Commis- 
sion accounting regulations require to be charged to operating ex- 
penses. If I may ask your indulgence to explain that point a little 
more fully. When a railroad replaces a 90-pound rail with a 112- 
pound rail, that proportion of the cost of the 112-pound rail wliich 
represents a mere replacement of what existed before would go into 
the operating expenses. The cost of the additional rail weight, and 
the cost of the laying of that additional rail weight — and, of course, 
that is worked out by engineering formula — would go to capital. So 
when you replace 90 with 112-pound rails, the principal part of( the 
cost runs into a maintenance-of-way expense account, but a little bit 
of it — the ecjuivalent to the additional material or the betterment — is 

Now, accordingly, ordinary maintenance is composed of those two 
kinds of charges; one is to operating expense, representing, you might 
say, replacement in kind ; and the other, that which is in addition to 
replacement in kind goes into capital, where you have a betterment 
or an improvement. Where like replace like all an operating expense, 
as, for example, when ties are replaced ; I might say that ties, accord- 

1 Mr. Barriger subsequently informed the committee that he was unable to obtain the 
information on busses. 


ing to the Interstate Commerce Commission, are the only railway 
item which, when an improvement is made is not capitalized unless 
you so desire, and there is only one railroad that I know of that has 
ever desired to avail itself of "the privilege of capitalizing the addi- 
tional cost of the improved ties; that is to say, where treated ties of a 
superior quality replaced untreated ties of a lower quality. 

Dr. LuBiN. Mr. Barriger, when these rails are put in let's assume 
that so many new rails were put in in the year of 1938; are those 
written off partly in 1939 as they start wearing out? 

Mr. Barriger." No ; roadway and track is not depreciated because 
i-ailroad plant does not wear out as a unit; it w^ears out gradually. 
When a car wears out, that whole car is destroyed at one time and 
replaced. Units of equipment are written down gradually, but on 
structures and track, there is a piecemeal replacement and the fact 
that the plant never wears out in entirety, leads to ordinary mainte- 
nance, if it is kept up to the required standard, fully replacing the 
service life, as it is taken out. No depreciation is charged save on 
certain large structures. 

Railroads may depreciate a bridge; they may depreciate a partic- 
ular building, but they are not required by the Interstate Commerce 
Commission to depreciate their roadway, although tliat is a subject 
iibout which there has been some discussion and the practice may 
later be changed. 

Dr. LuBiN. What does this mean in terms of the railroad accounts? 
In other words, if railroad A decides it is not going to replace rails 
this year, it is going to make them last another year if it can, does 
the same thing next year, and the year after, and the fourth year 
decides it is going to replace all it wants to replace. In other words, 
they replace only the essential ones in the first 4 years; their operat- 
ing expenses take a terrific jump. 

Mr. Barriger. They can be distorted. ISIaintenance expenses are 
in part a matter of policy. While the maintenance expenses are 
incurred currently, it is within the discretion of the management as 
to whether or not the maintenance at any one time shall be equal to 
the service life worn out, or shall be less than that in order to con- 
serve revenues for other purposes. Or you can anticipate mainte- 
nance by doing more than you need, more or less doing next year's 
work in advance. Accordingly, maintenance expenses for any rail- 
road probably should be averaged over a period of time rather than 
considered for a single year. 

The next table, schedule F, summarizes the capital requirements 
of class I railroads and their lessor companies. 

Mr. Nehemkis. What is meant by a class I railroad ? 

Mr. Barriger. That is a railroad with a gross revenue in excess 
of $1,000,000 a year. The class I railroads of the country earn 
about 98 percent of the gross revenues and carry about that pro- 
portion of the traffic of the country. Many of these large class I 
railroads comprise not merely the lines owned by the operating 
com})anies, but those leased to them. The Pennsylvania Railroad, 
for example, conducts a large proportion of its operations on leased 
railroad property; so does the New York Central and a good 
many others, and we would have to include those lessor companias. 
The Pennsylvania, for example, owns virtually no railroad mileage 
outside of the State of Pennsylvania, and not all of the mileage it 
operates in that State. The rest is largely leased railroad property, 


SO you should include all these leased lines to obtain the total capital 
requirements of all railways used in producing the revenues of the 
class I carriers. 

Mr. Nehemkis. Would it be a fair statement, Mr. Barriger, that 
any generalizations you make about class I railroads broadly speak- 
ing, cover the American transporation system, the railroad system? 

Mr. Barriger. In some cases these statistics that I have submitted 
are for class I railroads and in some they include smaller railroads, 
because I wasn't able at all to have a consistent separation all the way 
through, but the difference in material represents about 2 percent. 

Acting Chairman King. Would it be inconvenient for you to fur- 
nish the names of all the railroads which are embraced in your 
discussion, the mileage of each, and classification and the subsidiaries 
of each?^ I would like to know something about these subsidiaries 
and what their functions are. 

Mr. Nehemkis. Could you conveniently, Mr. Barriger, prepare a 
memorandum on that for the committee? Would that involve any 
great burden ? 

Mr. Barriger. No ; that can be done. 

Mr. Nehemkis. You will do that? Thank you very much. 

Acting Chairman King. Have you come to a stopping point con- 
venient to you? 

Mr. Barriger. I have two tables to discuss and I can run through 
them in 5 minutes. 

Acting Chairman King. We intended to adjourn at 12 o'clock. 
If you can do that in a few minutes, go ahead. 

Mr. Barriger. This table F shows the capital requirements of the 
class I railroads and their lessor companies, for investment in trans- 
portation properties. This is the purpose to which this capital was 
put. Additions and betterments to railroad property totaled $9,480,- 
000,000, new lines and extensions $380,000,000, a total of $9,860,- 
000,000. The investments in miscellaneous physical property not 
related to railroad operation, $13,000,000. The sinking funds and 
miscellaneous deposits of that nature represented an actual decrease 
of $21,000,000, that is they drew $21,000,000 out of sinking funds to 
invest in the mortgage and property, presumably under the mort- 
gages for which those 

Mr. Nehemkis (interposing). Expansion of plant, in other words. 

Mr. Barriger. Expansion of plant of the mortgaged property 
securing the bonds into which those sinking fund payments were 

Mr. Nehemkis. But a kind of physical investment, as distinguished 
from what you have previously described as financial investment; 
is that correct? 

Mr. Barriger. Yes. Now the investment in securities and affili- 
ated and subsidiary companies — and this is where investment in 
outside railway securities would come in, not this entire sum, but 
probably a substantial part of it: $814,000,000, other investments 
$3,700,000, increases in working capital $714,000,000, and the total is 

^ This information is available in the Fifty-first Annual Report of the Interstate Com- 
merce Commissiion, Stati.«tics of Railways in the United States, sec. C. pp. 214-247. 


This last table, schedule H, recapitulates the sources and applica- 
tions, with the percentage. 

Mr. Nehemkis. Just a moment, so we don't confuse the reporter, 
may I offer in evidence a table entitled "Capital requirements, class I 
raiiAvays and their lessor companies"? 

Acting Chairman King. It may be received. 

(The^able referred to was marked "Exhibit No. 565" and is in- 
cluded in the appendix on p. 4024.) 

Mr. Nehemkis. And may I also offer in evidence, Senator King, a 
table entitled "Sources and application of railway capital"? 

Acting Chairman King. It may be received, 

(The table referred to was marked "Exhibit No. 566" and is in- 
cluded in the appendix on p. 4025.) 

Mr. Barriger. The last table, a supplement to table H, is primarily 
for the purpose of showing the credits for retired property to indi- 
cate the net increases in investment, the net development of the prop- 
erty which was approximately $5,400,000,000. As I indicated previ- 
ously, it is just as important to provide capital for property worn out 
as for new property created. 

In conclusion, may I state that we have not, throughout this table, 
been able to give effect to the discounts at vdiich securities may 
have been sold, or the premiums realized in the sale of securities ; that 
we have taken in all cases the par amount but I don't think that has 
introduced any error, because discount is w^ritten off as a charge to 
operating expense each year, or to profit and loss, and introduced a 
negligible error into the table. 

Mr. Nehemkis. Senator King, may I offer into evidence a table 
entitled "Changes in Investment in Road and Ec[uipment of Class I 
roads and their Leasor Companies." 

Acting Chairman King. It may be received. 

(The table referred to Avas marked "Exhibit No. 567" and is in- 
cluded in the appendix on p. 4026.) 

Dr. LuBiN. Mr. Barriger, can you in recapitulating, so that the 
figures may be more simply folloAved, state what the amount was 
invested in plant and equipment that was paid for from this fund 
which is made up of depreciation account, profits, and other sources 
of income that you mentioned in your first exhibit? What is that 

Mr, Barriger. That was 7 billion and and some hundred million. 

Dr. LuBiN. In other words, over a period from 1921 to 1937, 
$7,000,000,000 was reinvested in roads? 

Mr. Barriger. Yes. 

Dr. LuBiN. Under the accounting system of the I. C. C. w^hich does 
not include maintenance of way as new investment. 

Mr. Barriger. That is correct. 

Dr. LuBiN. How does that 7 billion compare to the total value 
of the roads? 

Mr. Barriger. The total value of the railroads as computed by the 
Interstate Commerce Commission is a little under $20,000,000,000. 

Dr. LuBiN. In other words, roughly during this period of 18 years 
the railroads reinvested an amount equal to a third of their value 
as computed by the I. C. C. ? 

Mr. Barriger. Out of earnings. 

Dr. LuBiN. Out of earnings and deductions? 

3576 co^'CENTRATIo^; of economic power 

Mr. Barriger. Yes. sir. 

Mr. Nehemkis. Senator King, may I advise the committee that 
Mr. Stettinius will be present as the first witness this afternoon, if 
that is tlie pleasnre of the committee. 

Acting Chairman King. So you withdraw the witness for the time 
being and Mr. Stettinius will be here at 2 o'clock. We will reas- 
semble at 2 o'clock. 

(Whereupon, at 12 noon, a recess was taken until 2 p. m. of the 
same da,y.) 


(The hearing was resumed at 2:15 o'clock upon the expiration 
of the recess.) 

The Chairman. The committee will please come to order. Are you 
ready to proceed, Mr. Nehemkis? 

Mr. Nehemkis. I am, sir. 

Mr. Henderson. Mr. Chairman, it is the S. E. C.'s purpose with 
the next series of witnesses to ])resent a general discussion of interiial 
corporation financing, and the natural and logical source for expert 
testimony on questions of policy and the availability of internal 
funds for the financing of plant and equipment expansion is certainly 
the executives of typical leading American corporations whose ex- 
perience we want to tap in this next set of hearings. 

One of the things that the S. E. C. would like to bring out by 
means of these distinguished witnesses is the importance of internal 
sources of funds as compared to the tapping of savings on the out- 
side. In other words, what is the relative importance from the stand- 
point of large American corporations of the availability of funds 
from depreciation and depletion accounts as compared with funds 
available through the sales of securities? Today a witness from 
R. F. C. discussed railroad financing from 1921 to 1937. and before 
w^e have completed this particular series of hearings testimony as to 
other fields will be adduced from other witnesses. 

Are you ready to proceed? 

Mr. Nehemkis. I am, sir. 

The Securities and Exchange Commission calls Mr. Edward R. 
Stettinius, Jr., chairman of tlie board of directors of the United 
States Steel Corjxn-ation. 

The Chairman. Mv. Stettinius, do you solemnly swear that the 
testimony you are about to give in this proceeding shall be the truth, 
the whole truth, and nothing but the truth, so help you God? 

Mr. Stettinius. I do, Mr. Chairman. 


Mr. Nehemkis. Mr. Chairman and gentlemen of the committee, 
may I ask that the following procedure, if it meets with the com- 
mittee's pleasure, when we shall have occasion to deal with matters 
pertaining to facts and figures, and it is not possible for any one indi- 
vidual to carry everything in his mind, accordingly I suggest the 
following : That Mr. Stettinius avail himself of the aid of those who 
are sitting with him. I shall ask if he adopts the answer as his, 


and if he so indicates, then that answer will go into the record. Is 
that agreeable to yon, Mr. Chairman ? 

The Chairmax. "Without objection, that procedure will be fol- 
lowed. I don't think it will be necessary for you to ask in each 
instance if the witness adopts it. It will be adopted. 

]Mr. Neiiemkis. Thank you, sir. Mr. Stettinius, will you indicate 
briefly the history of your association with the U. S. Steel Corpora- 
tion '. 

Mr. Stettinius. I joined, Mr. Nehemkis, the U. S. Steel Cor- 
poration in April 1934 at the request of Mr. Myron C. Taylor, then 
chairman of the board. I received the title of vice chairman of 
the finance committee. I later was elected chairman of the finance 
committee and recently, about a year ago, was made the chairman of 
the board of the Corporation. 

^ir. Xehemkis. As I understand it, Mr. Stettinius. the U. S. Steel 
Corporation is a holding company which was first organized in the 
year 11)01; is that correct? 

]\Ir. Stettinius. That is correct, Mr. Nehemkis. 

^Ir. Nehemkis. And am I correct in understanding that the U. S. 
Steel Corporation owns a controlling stock interest in various sub- 
sidiaries which as a group principally conduct integrated operations 
foi- the production and sale of a wide variety of finished and semi- 
finislied steel products? 

^Ir. Stettinius. That is correct, sir. 

]\Ir. Nehemkis. And am I correct in understanding that the prin- 
cipal subsidiaries of the U. S. Steel Corporation are the following: 
Carnegie-Illinois Steel Corporation, National Tube Co., American 
Steel & Wire Co., Oil Well Supply Co., Tennessee Coal, Iron & 
Railroad Co., Universal Atlas Cement Co., and Columbia Steel Co.? 

]\Ir. Stettinius. I think the American Bridge Co. should be added 
as an important subsidiary. 

Mr. Nehemkis. The American Bridge Co.? 

]\Ir. Stettinius. Yes. 

^Ir. Nehemkis. And would you say that the following statement 
which I am going to read into the record was substantially correct, 
as indicating the principal products of the manufacturing subsidiaries 
of U. S. Steel Corporation : Rolled ste^l and forged steel products, 
flat rolled products, seamless and welded steel tubular products, oil 
field equipment, alloy steel, wire and wire products, high tensile steel 
})roducts, structural steel, cement, pig iron? 

Mr. Stettinius. That is substantially correct. 

Mr. Nehemkis. Bearing in mind, Mr. Stettinius, that you are not 
confined to facts within your own personal knowledge, I am going 
to you to state in your own words some of the new processes of 
the U. S. Steel Corporation to the extent that you are prepared to 
do so. Will you begin, Mr. Stettinius? 

Mr. Stettinius. Well, gentlemen, generally speaking; it must be 
realized that the steel industry has been through a revolution since 
the early 1920's. New products have been developed; tlie quality of 
others has been radically improved. While actually they are new 
materials, still in many cases they are called by the old names. Many 
of these improvements and developments have been made in the re- 
search laboratories of the sreel industry and in the laboratories of the 
ultimate consumers. Large-scale experimentation has been necessary 

124491— 40— pt. 9 7 


and the fact is that the steel industry spends many millions of dollars 
annually carrying scientific studies and new developments forward. 

Creation of new and improved products involved practically a com- 
plete rebuilding of the finishing facilities of the steel industry. The 
various forward strides in treating raw materials and in blast fur- 
nace and open-hearth practice are others. The Steel Corporation 
alone has spent over $500,000,000 in the past 10 years in improving 
existing facilities and in the construction of new plants and facilities 
to produce these new steel products to which I refer. 

These rapid strides in the science of steel making have had and will 
continue to have a profound effect on the national economy. It has 
been possible to develop natural resources. The newer progress in 
transportation, the better preparation and the preservation of food- 
stuifs, the economical construction of modern plant and office build- 
ings, and better roads, better agricultural buildings and products, 
improved airplane construction, have all — and other examples that I 
could mention — made distinct contributions. 

Mr. Nehemkis, I should like to give a few brief, specific examples 
of individual products and individual industries that I think would 
be of interest to the committee, such as oil, food preservation, the 
automobile industry, railroading and structural, and then a word 
about stainless steel and housing which I think will be particularly 

Fifteen years ago there was a definite Ihnitation on the utilization 
of oil as a natural resource, by reason of the fact tliat the steel pipe 
in use would permit drilling to only a depth of 5,000 feet. Improve- 
ment in the steel industry's method of ]:)roducing pipe now enables 
oil drilling to a depth of 15,000 feet. This has tapped new sources 
of oil supply which are very important not only in peacetime pur- 
suits but from the standpoint of national defense. A case in point 
is the Kettleman Hills fields in California where the first drilling 
of oil, as you know, was unsuccessful because of the limitation of 
the depths that it was possible to go with the product then at hand. 
Some years later by the use of the new pipe to which I have re- 
ferred, these vastly rich reservoirs were successfully brought into 

This has been true also in oil and gas fields in Texas and Colorado 
and to some extent in Louisiana. 

Now, a word on food preservation and tin plate. Another im- 
portant service, rendered by the steel industry is the preservation 
and handling of foods. In 1937 the steel industry provided tin plate 
for over 16,000,000,000 cans produced in tliis country. The tin plate 
produced today enables the packing of a wide variety of products 
that was not possible 10 years ago. A basic improvement in tin 
plate itself was necessary to accomplish this result. 

In the automobile industry also distinctive advances have been 
made. Cold reduced sheets, the introduction of which has been an 
outstanding development, have made possible the all-steel- top with 
the added safety factor and the new body and the fender and the 
hood construction which we now have. Not only that, but these 
sheets have been improved so that one forming operation, that is, 
the stamping of the metal, can now take place, compared with the 
several operations that used to be required when the old-style hot- 
rolled sheet was employed, which is a very important element. 


There have been important developments, as you all know, in trans- 
portation. Faster, lighter, and more comfortable trains have become 
an actuality in the last 6 years. Stronger steels have been developed 
by combining chromium and other elements with steel, which lend 
special qualities, such as hardness, heat resistance, and resistance to 
corrosion. Alloy steels are used in a great many branches of indus- 
try. Most of the stressed mechanical and moving parts of machines 
are made of such alloy steel. Silicon alloj^ steels are standard for 
the production of transformers and in the field of generators and 
motors. In the building of tractors, and practically all kinds of 
farming equipment, various kinds of alloy steels are used in the 
production of important parts. 

Likewise in the chemical and the processing industries, alloy steels 
have a place of high utility. The Steel Corporation, through its 
subsidiaries, has played a large part in the development and pro- 
duction of alloy steels. In recent years it has brought out an alloy 
steel known in the trade as Cor-ten. You would be interested I think 
to know where the name came from, the combination of the words 
"corrosion" and "tensile" — corrosion-resistant and high tensile, the 
trade name for this product. 

This was developed particularly for the production of mobile 
equipment such as rolling stock, railroad trains, or street cars and 
busses, and the like. The production of this product has had a large 
influence in the reduction of the dead-weight load which has been 
significant in economies in this field. 

In the case of Cor-ten, resistance to atmospheric corrosion is four 
to six times that of ordinary carbon steel, and the tensile strength 
is approximately double that of ordinary carbon steel. 

Now, a word on stainless steel, which is a bit more dramatic, and 
I think would interest the committee. While most highly drama- 
tized in connection with the streamlined train, stainless steel has a 
wide variety of uses in many fields. Many of the articles familiar 
in the home are made of this new product — table tops, cutlery, table- 
ware, }3arts of the electric refrigerator, and other electrical devices 
use stainless steel in substantial quantities. Architects, as you all 
know, are using stainless steel widely in the interior and exterior of 
buildings, private and commercial. Stainless steel has entered into 
construction in the aviation industry in wing struts, ailerons, rud- 
ders, and other parts of the airplane, and the Steel Corporation has 
important plans for furthering the use of stainless steel in the avia- 
tion industry. 

Rail improvements are another item. Constant improvements have 
been made, as you all know, in the weight and in strength and in 
quality of railroad rails, making possible great safety factors which 
have served to reduce accidents. New high-speed trains have brought 
about a great advance in this development. Specifically, major 
advances have been made in the heat treatment of rails whereby de- 
fects known as shatter cracks are greatly minimized. 

I should like to turn briefly to structural steel. One of the widest 
uses of steel, as you all are familiar, is in the construction industry. 
Modern skyscrapers and bridges are dependent upon developments 
in structural steel. One of the more fundamental measures in recent 
years has been the standardization and the utilization of the improved 
wide flange beam. Prior to the early 1920's many structural sec- 


tions were built up from plates and shapes, which involved consid- 
erable fabricating, resulting in a more costly and heavier section. 
The virtual elimination of the smaller built-up section has effected 
savings up to as much as 20 jjercent in the cost of the steel, erected, 
for high-tier buildings. For the lower-tier buildings, smaller apart- 
ment houses, etc., the savings is estimated at 15 percent. 

In the building of bridges the savings have been estimated to have 
decreased the cost of the steel, erected, anywhere from 5 to '20 ])ereent, 
and in addition to that there is, of course, the important factor of 
materially decreasing dead-weight load of the structure. 

In the low-cost housing field, within recent years we have been 
studying the application of steel to the construction of residences 
and comparatively small buildings. Cooperative experimental work 
on steel framing and on systems of construction has been sup})oi-ted 
and numerous possible methods of construction have been analyzed 
from an engineering point of view. In our own laboratories the 
Corporation has designed and developed a system of fabricated houses 
which promises to make a very valuable contribution in the low-cost 

It will be of interest to the committee, I am sure, to know that 
to meet the conditions prevailing in the South our subsidiary at 
Birmingham, Ala., the Tennessee Coal, Iron & Railroad Co., has de- 
veloped and designed, and is now marketing, a complete set of farm 
buildings, including a house and a barn and the other outbuildings. 
These buildings are fabricated mainly of steel and are characterized by 
their low cost. It is a very distinct advance in the whole field. I 
haven't the exact cost figures before me, but the figure of $2,500 is a 
conservative figure to keep in mind for this unit. 

Other improvements in the steel-making process, in the recovery 
from byproducts, and in mill practices involved in the production of 
modern steel products might be enumerated. These are equally 
important in their particular function of furnishing a better product 
nt a lower cost. Credit for steel improvements must be shared by 
the various companies within the industry, and by their customers 
with their laboratories whq have made this great development pos- 
oible, and whose cooperation has made possible, as I say, the present- 
day advances in the science of steel making. 


]Mr. Nehemkis. Mr. Stettinius has just given us a very interesting 
]3resentation of some of the new frontiers, industrial frontiers, that 
his corporation is pushing forward. Now these frontiers have to be 
developed through some kind of financing, so I think now I should like 
to discuss with you, if I may, Mr. Stettinius, some of the ways in 
which the United States Steel Corporation has been able steadily to 
l^ush forward into the new processes and products that you have been 
speaking of. 

Turning now to your financing, your return to our questionnaire 
discloses that you accumulated $270,000,000 out of earnings over the 
life of your company, which was invested in plant, and that about 
$130,000,000 of that amount was accumulated between December 31, 
1921, and December 31, 1935. Is it a fact, Mr. Stettinius, that the 
amounts so accumulated and invested represent that part of your 


plant expansion or replacement necessitated by depreciation and ob- 
solescence actually realized in excess of the reserves provided there- 

Mr. Stettinius. That is correct. 

Mr. Nehemkis. As of December 31, 1935, you revised your ac- 
counting so as to apportion two hundred seventy million dollars out 
of accumulated earnings, eighty-eight million plus to depreciation 
reserves and one hundred eighty-one million plus to obsolescence re- 
serves. Is that correct? 

Mr. Steitinius. That is correct. 

Mr. Nehemkis. That revision to which I have just referred did 
not affect your surplus one way or the other, is that correct? 

Mr. Stettinius. That is correct as to surplus not specifically appro- 

]Mr. Nehemkis. Out of the whole two hundred seventy million dol- 
lars you were able to allocate only eighty-eight million plus to specific 
depreciable properties, were you not? 

Mr. Stettinius. That is right. 

Mr. Nehemkis. So that the one hundred eighty-one million plus 
had to be absorbed in general over-all obsolescence. 

Mv. Stettinius. That is correct. 

Mr. Nehemkis. Now that $270,000,000 accounted in part for an 
increase in your reserves for depreciation and obsolescence between 
December 31, 1924, and December 31, 1935, of nearly $500,000,000, is 
that correct, Mr. Stettinius? 

Mr. Stettinius. Yes. 

Mr. Nehemkis. Overall, then, in the period from 1921 to 1938, 
inclusive, you have accumulated out of earnings about $1,000,000,000 
for depreciation, obsolescence, and other factors, have you not? 

Mr. Stettinius. Yes; approximately. 

Mr. Nehemkis. And nearly a quarter of a billion dollars out of 
earnings for surplus account. 

Mr. Stetiinius. Yes; that is correct. 

Mr. Nehemkis. Notwithstanding those accumulations, you thought 
it desirable to go to the public market for $100,000,000 through a 
debenture issue in 1938, is that correct? 

Mr. Stettinius. That is correct, sir. 

Mr. Nehemkis. You had done a good deal of internal financing 
prior to the occasion of your visit to the money markets, is that cor- 
rect, sir? 

Mr. Stettinius. We had, sir. 

Mr. Nehemkis. That financing had included the continuous strip 
mill development, is that correct? 

Mr. Stettinius. Correct. 

Mr. Nehemkis. In other words, at the time of your public offering 
of $100,000,000 of debentures, I might say that your company had 
stripped itself a bit of cash. 

Mr. Stettinius. Yes. 

Mr. Nehemkis. To put the question somewhat differently, would 
you say, Mr. Stettinius, that your company had, perhaps, become a 
bit property poor at that time? 

Mr. Stettinius. That is right. 

Mr. Nehemkis. I think I have no further questions, Mr. Stettinius. 
You liave given us the information I desire. 


The Chairman. Do any members of the committee desire to ask 
Mr. Stettinius any questions? 

Senator King. How did you determine your depreciation and obso- 
lescence, etc., and that large sum which had been set up to meet those 
charges ? 

Mr. Stettinius. Senator, I think if you would allow me perhaps 
to read our depreciation policy, which has been published in our 
registration statement to the S. E. C. and in our annual report to 
the S. E. C., that would answer the question of how we meet the 

Senator King. I just wanted to know how you allocate it, how 
much depreciation with respect to mills, or exhaustion of ore supplies, 
or what not. 

Mr. Stettinius. I think that is all brought out in this statement of 
depreciation and depletion policy. 

Senator King. You may read it then. 

Mr. Stettinius (reading) : 

The annual depreciation provision for plant and equipment (other than 
investment in road and equipment of the railroads) is made on the straight- 
line method and is arrived at bj applying against the investment cost of each 
facility a rate of depreciation based upon the life expectancy of that facility at 
its average operating use so as to provide a reserve to equal the cost of each 
facility at the end of its useful operating life. The life expectancy assigned to 
the depreciable facilities is based on the life experience of similar facilities 
over a long period of years under varying operating conditions. The plan also 
involves a revision in the rates when a change in life expectancy becomes 
apparent. The provision for depreciation in any year is reduced when the 
actual operating use of the facilities in that year is less than the predetermined 
average use, but is not reduced in as great a proportion as the actual reduction 
in operating use, and under no circumstances is reduced to less than 50 percent 
of the annual provision for depreciation at the full annual rate, even if such 
facilities are not operated during that year. The depletion rate per ton or 
unit mined or exhausted of raw materials (ore, coal, limestone, timber, etc.) 
is the pro rata investment cost of same arrived at by dividing the total esti- 
mated recoverable quantity in the respective properties in operation into the 
total investment cost of same. The annual provision is determined by applying 
this rate to the actual quantity of raw materials removed during the year. 

That is the general policy. Senator, that has been followed since 
the formation of the Corporation in 1901. 

Senator King. I assume before this $100,000,000 bond issue was 
provided for, you furnished the S. E. C. the necessary data which 
you have indicated here. 

Mr. Stettinius. Oh, yes, sir. 

Mr. Nehemkis. Yes; that was an issue we registered. 

Senator King. Let me ask one other question. In view of the 
great improvement in developments in the steel product, the in- 
creased uses to which they have been put, I assume that that called 
for the scrapping of property, plants, and mills which had cost mil- 
lions, if not hundreds of millions, of dollars. 

Mr. Stettinius. In some cases. Senator, but the true answer to 
that is that the change in demand of the product has made it im- 
possible to produce the new product in the older mills. Therefore, 
scrapping or obsolescence isn't really quite the truth, becaiise these 
mills could be used for many, many years to come, but because with 
the demand for a different character of product by the consumer we 
have had to modernize. 


Mr. Xehemkis. Mr. Chairman, may I offer into evidence several 
exhibits which complete the testimony of Mr. Stettinius, first an 
exhibit showing the sources of funds which we discussed a moment 

The Chairman. How do you identify this? 

Mr. Nehemkis. As the "Sources and Disposition of Funds." 

The Chairman. By whom was it prepared? 

Mr. Nehemkis. This was prepared by the United States Steel 

The Chairman. Just for the purpose of the record, let the witness 
identify it so it won't go in on your authority but on the authority 
of Mr. Stettinius. 

Mr. Nehemkis. Suppose I ask Mr. Olds, who is counsel for Mr. 
Stettinius, to offer this. 

The Chairman. You may offer it if you will identify it. 

Mr. Stettinius. We do identify it. 

The Chairman. It may be admitted. 

(The table referred to was marked "Exhibit No. 568" and is 
included in the appendix on p. 4026.) 

Mr. Stettinius. Mr. Chairman, in answer to the Senator's ques- 
tion, may I say that we did file an A-2 registration statement with 
the S. E. C, a document in connection with our hundred million- 
dollar debenture issue. 

Mr. Nehemkis. I would like to ask Mr. Stettinius to identify two 
further exhibits. 

The Chairman. Very well. 

Mr. Nehemkis. I think, Mr. Chairman, it will be unnecessary to 
offer any further exhibits. 

The Chairman. Mr. Henderson, you indicated a desire to ask a 
few questions. 

Mr. Henderson. About what percentage of capacity are you 
operating at the present time? 

Mr. Stettinius. Approximately 42 percent, Mr. Henderson, 

Mr. Henderson. Have you figured out over any period of time 
what the average use of vour rated capacity is, say from 1920 to 

Mr. Stettinius. Yes; we have those figures available, Mr. 

Mr. Henderson. I see them frequently in your reports. 

Mr. Stettinius. I have before me a statement, Mr, Henderson, show- 
ing tlie average operations for the Steel Corporation for each year 
since 1920 through to 1938, inclusive, by months. 

Mr. Henderson, I think I ought to say this was not a request. My 
selection of 1920 was just happenstance. 

Mr. Stettinius. I will be glad to submit this.' 

Mr, Henderson. I would be very glad to have that submitted, Mr. 
Chairman, after I have asked Mr, Stettinius some questions on it. 

Mr. Stettinius. Yes. 

Mr. Henderson. At what percentage of capacity were you oper- 
ating in 1920? 

Mr. Stettinius. In 1920 for the year we averaged 88.3. 

Mr, Henderson, Wliat was the highest year between that and 1929 ? 

Mr, Stettinius, The highest was 1923, 88.3 ; 1926 was 88. 

Mr. Henderson, 1926 was 88. Wliat was it in 1929? 


Mr. Stetiinius. 1929 was 89.2. Of course, you understand, Mr. 
Henderson, these are only purely the Steel Corporation's figures, not 
the steel industry's figures. 

Mr. Henderson, Yes; I understand that. 

The Chairman. Was there any change in the actual capacity in the 
meantime ? 

Mr. Stettinius. Mr. Henderson, on January 1, 1921, our ingot 
capacity was 22,693,900 tons ; January 1, 1939, it was 25,790,000 tons. 

Mr. Henderson. Had it been higher than that at any period or was 
it a constant growth ? 

Mr. Stettinius. I think it is fair to saj' that there was a constant 
rational growth over this 18-year period in our total ingot capacity, 
although during the period from 1932 to 1935, inclusivp. our total ingot 
capacity was more than 27,000,000 tons, as compared with 25,790,000 
tons today. 

Mr. Henderson. In other words, all during that period you were 
either maintaining or slightly increasing your capacity ? 

Mr. Stettinius. Yes; but not really materially increasing our 
capacity for ingot production — rather changing the character of our 
capacity in finishing facilities. 

Mr. Henderson. Finishing facilities? 

Mr. Stettinius. Yes. 

Mr. Henderson. What was the low point after 1929 ? 

Mr. Stettinius. After 1929 our low was for 1932, when our produc- 
tion of finished products for sale was 18.3 percent of capacity. 

Mr. Henderson. Eighteen point three ; and what has been the high 
since 1929 ? 

Mr. Stettinius. Since 1929? The high has been 71.2, in 1937. 

Mr. Henderson. I understood that you had spent $500,000,000 in the 
last 10 years in replacement of equipment ? 

Mr. Stettinius. Modernization of finishing facilities really. 

Mr. Henderson. Mainly modernization of finishing facilities? 

Mr. Stettinius. Yes. 

Mr. Henderson. During the 1920's while you had this rated capacity 
and the use indicated, did you have any substantial outside financing? 

Mr. Stettinius. Up until 1920 ? 

Mr. Henderson. Between 1920 and 1929 ? 

Mr. Stettinius. No. 

Mr. Henderson. So your capacity was maintained principally from 
internal financing ? 

Mr. Stettinius. That is correct. 

Mr. Henderson. And then what was your policy between 1930 and 
say 1936, as far as replacement and expansion were concerned? 

Mr. Stettinius. Yoti mean 

Mr. Henderson. Did you have any substantial outlays during that 
time? "VVliat I am trying to get at is, at what point was this 500 
million spent in the last! 10 years — did that take place on an average 
of 50 million a year, roughly, or was it somewhat concentrated in one 

Mr. Stettinius. Mr. Henderson, we anticipated you might be in- 
terested in that, and I have before me a brief memorandum entitled, 
"Modernization and Financing Program of the U. S. Steel Corpora- 
tion from 1929 until 1938." Now I would 


Mr. Henderson (interposino). I must say that we have had no 
culhision on this. 

Mr. Stettinius. No; we have had no collusion, Mr. Chairman. 

Mr. Henderson. It was just a susj^icion on your part I might ask 
this question ? 

Mr. Stettinius. I not only would like to offer this memorandum 
but I should like, briefly, to take a few minutes 

Senator King. I think you might proceed, as far as I am concerned. 

^Ir. Stettinius. Mr. Chairman, in order that the committee may 
clearly understand the circumstances leading up to our $100,000,000 
lU-year 31/4-percent debenture issue which was sold in June 1938, I 
should like, wdth your permission, to relate briefly the inception and 
the carrying forward of a plant rehabilitation and modernization pro- 
gram which began in 1929, just prior to the depression. 

About 10 years ago the Steel Corporation conducted an exhaustive 
study of the manufacturing facilities of its subsidiaries to ascertain 
what rehabilitation of plant and equipment might be necessary to 
meet present and future customer demands for the new and improved 
products which were being developed within the steel industry, and 
also to effect wherever possible economies in operation. 

Work on this initial program, which primarily concerned the 
manufacturing plants in the Chicago district, was started in 1929. 
The bulk of the expendituie, however, came the following year, 1930, 
when approximately $143,000,000 was spent for plant and equipment ; 
approximately $59,000,000 additional was expended on this program 
the following year of 1931. You will all recall, I am sure, the appeal 
made in November 1929 by the then national administration that 
industry continue all pending construction programs. The Cor- 
poration met this appeal and completed its initial plant rehabilita- 
tion program according to schedule. 

During the dark years of 1932, 1933, and 1934 naturally no one 
could foretell the extent of the business depression. The Steel Cor- 
poration was then operating at a great loss. Since it was necessary 
that there be adequate working funds to carry through this period, 
expenditures for plant and equipment were smaller in these years 
than in the years just prior to and following that period. Never- 
theless, the program to provide modern manufacturing facilities 
capable of supplying the new demands for steel products was carried 
on. For example, cold reduction mills at Gary, Ind., and a new 
continuous strip mill at McDonald, Ohio, were built. 

Incidentally, these mills for the rolling of plate and strip are of the 
most modern type and are designed to meet the most exacting 
specifications of our customers. With the improvement of business 
in 1935 the Steel Corporation decided to go forward actively with its 
plant rehabilitation and modernization program. In February 1935 
the expenditure of $47,000,000 for new facilities was authorized. Dur- 
ing the 4-year period of 1935, 1936, 1937, and 1938 expenditures for 
modernization of plant and equipment aggregated in excess of 

Among the facilities installed during this period 

The Chairman (interposing). What was the period again? 

ISIr. Stettinius. The 4 years from 1935 to 1938, inclusive, $300,- 
OOii.OOO. Among the facilities installed during this period I should 


like to mention the 100-inch semi-continuous sheared plate mill at 
Homestead; the extensive new mills in the Birmingham district for 
the production of cold-reduced tin plate; and the new Irvin Works 
at Pittsburgh for the production of hot rolled strip and sheets and 
cold reduced sheets and tin plate. The new mills at Birmingham 
and the Irvin Works alone cost in excess of $100,000,000. 

We were fortunate in having Dr. Lubin out in Pittsburgh last 
December at the opening of this mill. Now we realize that you 
gentlemen are terribly pressed for time, but if you would ever like 
to see a motion picture of this new mill, which can be shown in 15 
minutes, we can arrange it for you; one of the most dramatic stories 
I know of in the industrial history of the present time. 

These mills constitute modern, efficient, and completely coordinated 
units for the production of a wide range of flat-rolled finished 
products, such as strip, sheets, and tin plate. These mills were built 
to supply the new kinds of steel which today are used generally in 
the automobile industry, the refrigerator industry, and in the canning 
and tin-plate industry. These great expenditures at a time when the 
current business of the Steel Corporation was not prosperous, with 
the exception of the year 1937, substantially reduced the liquid assets 
of our Corporation. According to the figures submitted to the com- 
mittee, cash and marketable securities were some $17,000,000 less at 
the end of 1936 than they were at the end of 1935. 

Cash and marketable securities dropped another $38,000,000 in 
1937. Early in 1937, when the outlook for the Steel Corporation was 
much improved over the preceding 5 years, the prospects for outside 
financing seemed to be more promising. The management of the 
corporation then gave serious consideration to the best way of raising 
$100,000,000 of new cash so as to avoid depletion of its cash position 
which had resulted and would result from carrying forward the 
balance of this great program to which I have referred. 

In March 1937 the common stock of the Corporation, with par 
value of $100 per share, was quoted on the New York Stock Ex- 
change well above par. The management thought there was a good 
possibility, in view of improved business conditions, that our stock- 
holders would subscribe at par for an issue of 1,000,000 shares of 
common stock. 

Legally, the stock could not be issued for less than $100 per share, 
its par value. It was never contem])lated that such a common stock 
issue should be underwritten. Work was at once started on the pre- 
paration of a registration statement to be filed with the Securities 
and Exchange Commission covering an issue of 1,000,000 shares of 
common stock. The Securities and Exchange Commission was ad- 
vised that the Corporation expected to file such a registration state- 
ment by June 30, 1937. 

Although the registration statement was practically completed, once 
in the first half of 1937 and again in the second half of that year, such 
a statement was not filed because of the weakness which developed 
after March 1937 in the market for the outstanding common stock 
of the Corporation, making it impossible to sell common stock at $100 
a share, the par value. Therefore, financing by means of an issue 
of common stock necessarily had to be definitely abandoned at the 
end of the year 1937. 


On December 31, 1937, the unexpended balance of appropriations 
for the completion of the modernization program was approximately 

Mr. Henderson. What is that again? 

Mr. Stettinius. Eighty millions at December 31, 1937 ; unexpended 
balance on authorized appropriations was $80,000,000. In view of 
this situation, the management deemed it prudent to borrow $50,- 
000,000 from a group of banks in New York, Chicago, and Pitts- 
burgh. This loan was made on February 1, 1938, Ten million dol- 
lars of this loan was for 1 year, forty million was equally divided 
between 2- and 3-year maturities. The rates of interest were those 
currently in effect for bank loans of this character. 

The management of the Corporation did not feel that the cash re- 
quirements of the Corporation were fully met by this $50,000,000 bank 
loan. Accordingly, the Corporation in 1938 converted into cash ap- 
proximately $2€ ,000,000 of its holdings of Gov^ernment bonds, and 
on March 30, 1938, disposed of its holdings of $30,000,000 of first- 
mortgage 3y2-percent bonds of the Duluth, Missabe & Iron Kange 
Railroad, a fully owned subsidiary. 

At the end of April 1938, at which time it seemed possible to bring 
out an issue of 10-year obligations upon satisfactory terms, we de- 
cided to proceed with an issue of unsecured 10-year debentures in the 
principal amount of $100,000,000. We felt that the registration of 
the issue under the Securities Act of 1933 could be completed by 
June 1, 1938. 

The registration statement was filed with the Securities and Ex- 
change Commission and became effective on May 31, 1938. The 
debentures were offered to the public on June 2 by an underwriting 
group of 102 members, headed by Morgan Stanley & Co. The deben- 
tures were sold to the underwriters at 981/^ and were offered to the 
public at 100. They carried interest at the rate of 314-percent per 
annum. The net proceeds from this debenture issue amounted, after 
underwriting commissions and expenses, to approximately ninety- 
seven million eight hundred and seventy thousand dollars, which were 
used to pay off the $50,000,000 bank loans, and the balance was added 
to the cash funds of the Corporation, which had been and were contin- 
uing to be heavily drawn upon to complete the plant-modernization 
program which I previously discussed. 

The Corporation's cash and marketable securities at December 31, 
1938, were approximately $52,000,000 more than at December 31, 1937, 
amounting to approximately $138,000,000 at December 31, 1938, as 
compared with approximately $86,000,000 the year before. While 
the unexpended authorizations for property additions and better- 
ments at the end of 1938 amounted to approximately $22,000,000, the 
major part of the '36, '37, and '38 program which I have discussed 
was then practically completed. 



Mr. Henderson. As I gather, during the 1920's, while you had 
a very high use of capacity, you didn't have any occasion to go to the 
capital markets for any substantial sum. In fact, the kind of opera- 


tion you had was a conversion operation. That was your major 

Mr. Stettinius. That is correct — financing largely from within. 

Mr. Henderson. Then in 1929, before the break, you had a very 
substantial building program in contemplation which you went 
through with, and for the most part it was financed out of internal 
funds of the Corporation. 

Mr. Stettinius. Correct. 

Mr. Henderson. And then again in 1936, with better business 
conditions and the prospect of their continuance, you had another 
program which you have aptly characterized as bringing your equip- 
ment up to date. 

Mr. Stettinius. That is correct. 

Mr. Henderson. And in this period you depleted the accumulated 
funds which had not been de]3leted by your low volume of opera- 
tions, and therefore you w^ere in need of additional financing. 

Mr. Stettinius. Right. 

Mr. Henderson. Which, as you have just explained, has been ob- 
tained very satisfactorily. 

Well, that means that over a period of about 10 years in the 
1920's and another 9 to 10 years in the 1930's, you have had very 
little occasion to go to the market for a tapping of the reservoirs 
of savings there. 

Mr. Stettinius. That is right, principally with the exception, Mr. 
Henderson, of issues of railroad equipment trust certificates for cer- 
tain of the subsidiary railroads. 

Mr. Henderson. But that was for something outside. 

Mr. Stettinius. In relatively small amounts, and those were the 
principal occasions for going outside for funds. 

]\Ir. Henderson. I am not pressing on this, but is that your under- 
standing of the experience of other large corporations in your indus- 
try, or is yours, you might say, unique? 

Mr. Stettinius. I think, Mr. Henderson, there has been, gener- 
ally speaking, probably more outside financing within the steel 
industry than we typify. 

Mr. Henderson. So that yours is a little unique; but let me ask 
you this: Companies competing with yours have been compelled to 
modernize by the same driving forces that required you to go into 
extensive modernization ? 

Mr. Stettinius. Entirely to meet customer demand. 

Mr. Henderson. The actual requirements of your business occa- 
sioned that? 

INIr. Stettinius. That is correct. 

Mr. Henderson. You are running at about 42 percent of capacity 
now; and as I understand it, this recent 3-year improvement program 
has been completed. How long do you think it would be before you 
would have either to modernize in such a substantial way, as you 
recently did, or expand your equipment? 

Mr. Stettinius. Well, I think anybody, to answer that intelli- 
gently, Mr. Henderson, would almost have to be a prophet, because 
he would be speculating with technological advance in the science 
chemically and metallurgicaly. 

Mr. Henderson. Put it this way : If we had a similar change in 
consumer demand you would have to meet it by modernizing as needed. 


But at what percentage of operation over any sustained period would 
you have to consider expanding your capacity? You expanded last 
time when it got to 60 or 70. 

Mr. Stettinius. We didn't expand; we modernized. We didn't 
add substantially to our capacity. 

Mr. Henderson. You expanded your demand on the durable 
goods market, certainly; regardless of whether it was additional ca- 
pacity, which it was not, or whether it was modernization, you did 
come in and make a considerable demand on other machinery manu- 
facturers and the like. That is the point I am getting at. 

Mr. Stettinius. Oh, entirely correct. 

Senator King. Was the gross value of the output, by reason of that 
modernization in the market, larger or smaller — the value of your 
output after the modernization? 

]Mr. Stettinius. Well, I think that our consumers have got the 
benefit of most of the economies as a result of price pressure, sir. 

Senator Kino. What I mean is, were your gross receipts larger 
or smaller after the modernization ? 

Mr. Stettinius. We have a statement here. I would say that 
they should be larger theoretically, but actually perhaps they have 
been smaller as a result of the price structure during the time, 
which is a rather technical explanation. If you would like to have 
a statement prepared we would be delighted to do that. 

Mr. Henderson. Isn't that also due to the low percentage of ca- 
pacity at which you are operating, which throws an extraordinary 
burden of expense onto a small volume? 

Mr. Stettinius. That is correct. 

Mr. Henders(»n. AVoll, you don't have in mind, then, at what point 
of acceleration in demand that might be sustained you might have to 
consider an expansion of your capacity ? 

Mr. Stettinius. That is, to add to our facilities, to produce more 
goods ? 

Mr. Henderson. Yes. Do you foresee that, or have you any point 
in mind at which that might take place ? 

Mr. Stettinius. We haven't prepared a statement of that kind. 
We would be delighted to have our market analysis department 
apply themselves. 

Mr. Henderson. I think you have answered my question. In 
the discussion of the future of the Corporation, that particular con- 
sideration has not entered. Isn't that what you mean ? 

Mr. Stettinius. That is correct. 

Mr. Henderson. So in the foreseeable near future the prospect 
that you will be in the market, tapping for any large sum for an 
expansion of your capacity, is just not there ? 

Mr. Stettinius. I mean, if you want to take for example that an 
automobile normal year is a 5,000,000-car 

Mr. Henderson (interposing). Pardon me, I wouldn't. We will 
get into a discussion of normality, and I don't think 5,000,000 is a 
normal year. 

Mr. Stettinius. There are sufficient sheet facilities in the steel 
industry today to meet the requirements of the automobile industry, 
for example, as far as we can see ahead. 

Mr. Henderson. Do you get the point? 


Senator King. I get the point. That is, your productive capacity 
for the demands of the automobile or any other business, if it con- 
tinues along the present lines, is sufficient to meet those demands ? 

Mr. Stettinius. That is correct. 

The Chairman. Are there any other questions? 

Secretary Patterson, please. 

Mr. Patterson. Mr. Chairman, from two points I should like to 
comment on Mr. Stettinius' testimony. One point he has brought 
out and the other point he has not. I think the financial policy as 
you have outlined it, Mr. Stettinius, of modernization of research 
and expansion, is sound from the public as well as the i)rivate in- 
terests' viewpoint. That is point 1. 

Now, point 2 : You have not pointed out the broad social view- 
point in its public and labor relations that has challenged your com- 
pany. Both showed that private interest and public interest can, 
as they should, work together. 

Now, what I am specifically interested in is the statement you read 
about housing. Do I understand that the Steel Corporation has a 
subsidiary that is set up to do a housing job? 

Mr. Stettinius. The housing reference, Mr. Secretary, was that 
our subsidiary Tennessee Coal, Iron & Railroad Co. at Birmingham, 
Ala., has recently designed and put into production, along with its 
other manufacturing facilities, a system of building small four- or 
five-room houses with the outbuildings, which will be built in semi- 
mass production and virtually prefabricated so they can be erected 
on the job. That, we feel, is going to be a distinct advance in the 
South from the standpoint of giving low cost durable housing to 
both the farming area and the industrial area of the South, but that 
is entirely within the Tennessee Co., Mr. Patterson, and concerns a 
new product. 

Dr. LuBiN. Mr. Stettinius, it may be that before I came you talked 
of this point and, if so, it won't be necessary to attempt to answer 
this question. I was very much interested in what you said about 
the expansion of plant and equipment of the United States Steel Cor- 
poration and its subsidiaries. I don't know whether you have seen this 
mimeographed sheet that members of the committee have. 

Mr. Stettinius. Yes ; we have a copy of it. 

Dr. LuBiN. I note you have added to your plant and equipment 
in the last 19 years approximately a billion and a quarter dollars, 
and I note, too, that you have raised $148,000,000 in cash through the 
sale of common stock. Offsetting that, however, you have retired 
certain of your funded debt. 

Mr. Stettinius. Tliat is right. 

Dr. LuBiN. In other words, you have invested a billion and a quar- 
ter in plant and equipment, and it is quite evident that the bulk of 
it did not come from outside sources. The figures on this table show 
you had $937,000,000 allowances for depreciation and depletion and 
you had $191,000,000 from your profits that you retained. 

Mr. Stettinius. That is correct, Dr. Lubin. 

Dr. Lubin. In other words, the 19-year history of your company 
is pretty ample evidence of the fact that in at least an organization 
such as yours the net savings set aside from depreciation and de- 
pletion and profits (when there are any) are almost sufficient to keep 
an organization such as yours modernized and up-to-date. 


Mr. Stettinius. That is correct. 

Mr. Nehemkis. Commissioner Liibin, do you want to make one 
correction for the sake of the record ? The public issue of the U. S. 
Steel Corporation was a $100,000,000 debenture issue. 

Dr. LuBiN. I am quoting from this table, which says common 
stock issue. 

Mr. Stettinius. That was another operation in 1929. Tliat wasn't 
the 1938 debenture issue to which you are referring, Mr. Nehemkis. 

Senator King. There were two issues, were there? 

Mr. Stettinius. An internal conversion issue of 1929; it wasn't 
outside, Senator. The stock issue in 1929 was for the most part sold 
to our stockholders, and the proceeds therefrom were used for retire- 
ment of our bonds. 

Dr. LuBiN. May I ask one further question. In your knowledge of 
the steel industry, dollar for dollar, do you think it costs more or 
less to replace capacity as compared, let's say, with 15 years ago? 
In other words, for each dollar of new investment in plant and ca- 
pacity in terms of productive capacity, do you get more or less ? 

Mr. Stettinius. I should say, while I have no figures available, my 
impressions are that capacity today costs more. Dr. Lubin. 

Dr. Lubin. So that over a long-run period if this tendency con- 
tinued it would not be necessary for you to invest all of your depre- 
ciation funds in equipment to maintain the same capacity that you 
formerly had before you wrote your equipment off. 

Mr. Stettinius. It is the other way. 

Mr. Henderson. It is the other way ; in other words, to come up to 
capacity in your recent improvement program, you probably had to 
spend more per 5 or 10 percent of rated capacity for replacement. 

Mr. Stettinius. Sure. 

Mr. Henderson. But the anticipation was that the cost of manu- 
facture would be considerably reduced. 

Mr. Stettinius. Yes ; that is correct. 

Senator King. The cost of further modernization would depend 
upon the complexity of the demand by the public. They might ask 
for products that would cost a tremendous amount to produce the 
necessary machinery for fabrication, so it would be rather difficult to 
determine what you would spend for modernization without know- 
ing the character of the modernization that was being demanded by 
the public. 

Mr. Stettinius. And the kind of product, absolutely, Senator. 

Mr. Henderson. On the other hand, as you go along from year to 
year you will probably, as you did in the 1920's, spend currently a 
certain percentage to keep the actual equipment up to capacity. 

Mr. Stettinius. That is right. 

Mr. Henderson. As I gathered, from the answer you gave me, you 
kept fairly close to twenty-two million tons of ingot capacity and 
had a slightly rising tendency during the 1920's. 

Mr. Stettinius. That is approximately correct. Our total ingot 
capacity was about 22,600,000 tons in 1921; at January 1, 1939, it 
was 25,"7^0,000 tons, although it had been more than 27,000,000 tons 
in the period from 1932 to 1935, inclusive. 

Senator King. You stated for a number of years you were run- 
ning behind. What was the maximum amount of your deficit for 
i\ny one year? 


Mr. Stettinius. One year we lost about $72,000,000, Senator ; $71,- 
175,705 in the year 1932. 

Mr. Henderson. Was there any year particularly in recent his- 
tory where you spent as much of the internal savings as you did in 
'35, '36, and '37? I mean, did you ever have a program as big as 
that? As I recall your figures, the 1929 figure was nowhere near as 
large as this enormous expansion. 

Mr. Stettinius. No; we never had one as large, Mr, Henderson, 
in a similar series of years. 

The Chairman. Are there any other questions? 

Mr. Stettinius. You wanted this statement for evidence? 

The Chairman. Will you just identify the table? 

Mr. Stettinius. "United States Steel Corporation Statement of 
Finished Products For Sale, Per Cent of Production to Capacity,*' 
for the years of 1920 to 1938, inclusive. 

The Chairman. The statement may be admitted for printing in 
the record. 

(The table referred to was marked "Exhibit Xo. 569" and is in- 
cluded in the appendix on p. 4027.) 

Mr. Henderson. Mr. Stettinius, if I get on delicate ground I hope 
you will not hesitate to indicate that to me. In the revision of the 
British steel industry which has been taking place with a certain 
amount of government intervention in recent years, one of the distinct 
requirements laid down by the Government as a condition for their 
intervening on tariffs and the like was that the British steel industry 
would undertake to come up to the efficiency of the mills of other 
countries. What do you think about Americaii mill efficiency now, 
after your company and other companies have been through this 
private coming-up-to-customer demand ? Does it compare favorably 
with other countries or is it above or just about equal? 

Mr. Stettinius. Of course, Mr. Henderson, you appreciate that I 
am ]iot a technical steel man, but I don't think there is any question 
that it could be said that our mills are now as efficient as any steel 
mills in the world today after this modernization program is carried 
out to which I have referred. 

Mr. Henderson. The driving force for that came from your con- 
sumers and was done as a matter of business practice within the 
industry ? 

Mr. Stettinius. And cooperative effort between the steel industry 
and the consuming industries. 

Mr. Henderson. Yes? 

Mr. Stettinius. That is correct. 

The Chairman. Are there any other questions? 

Mr. Stettinius, may I ask you how many stockholders there are 
in the United States Steel Corporation? 

Mr. Stettinius. About 220,000, if my memory serves me correctly, 
of the most recent date we have counted, at the end of 1938. 

The Chairman. How manv employees do you have? 

Mr. Stettinius. At the present time, a])proximately 210^000 em- 
ployees. That was the figure for March 1939. 

The Chairman. Do these figures of stockliolders and of employees 
include all of your subsidiaries ? 

Mr. Stettinius. They do, sir. 

The Chairman. How many subsidiaries do you have? 


Mr. Stettinius, Well, from the standpoint of operating steel sub- 
sidiaries, I think there would have to be a breakdown between 
steel producing subsidiaries and the railroads and the mining com- 
panies. In the actual production of steel, that is the steel-making 
subsidiaries, there are seven major subsidiaries of the steel producing 
kind — that is, the subsidiaries that Mr. Nehemkis read — of course^ 
there are subsidiaries operating mining properties and railroad prop- 
erties in addition but these are the steel producing subsidiaries. 

The Chairman, But including these mining properties and pro- 
ducing properties approximately how many subsidiaries are tliere 
all told? 

Mr. Stettinius. Over one hundred, Mr. Chairman. 

The Chairman. In giving the figure of 210,000 employees, you 
have included the employees of all of these? 

Mr. Stettinius. Of all tlie subsidiaries, that is correct. 

The Chairman. How^ many of the employees are what you might 
call administrative employees, office employees as distinguished from 
the actual mill worker? 

Mr. Stettinius. We have a cliart showing approximately 15 per- 
cent on the salary rolls as compared with the wage roll — approxi- 
mately 30.000 of the employees of the group would be on the salary 
roll rather than the wage roll. 

The Chairman. That is 30,000 of the 210,000 are salaried em- 
ployees . Are they employed all the year around ? 

Mr. Stettinius. That is correct. 

The Chairman. What is the term of employment of those who- 
draw wages? 

Mr. Stettinius. It is on an hourly or production basis, Mr. Chair- 
man, entirely depending upon production schedules. It is something^ 
entirely out of our control. 

The Chairman. But you have a definite annual arrangement 
with those whom you call salaried employees? 

Mr. Stettinius, Not always. A certain group of that — I would 
say about 21,000 employees, w^ould be on the mill salary roll but 
would only work when the mill worked and would be given a 
rotation, maybe be off 2 days a week, so it wouldn't be fair to say 
that they worked a full year. 

The Chairman. Well, are they a floating labor supply, as the wag& 
worker is? 

Mr. Stettinius. No. 

The Chairman. They are a permanent labor supply. 

Mr. Stettinius. They are a permanent labor supply. 

The Chairman. In other words, they can depend upon the Steel" 
Corporation and its subsidiaries for continuous employment, though 
not perhaps for 6 days a week throughout the year. 

Mr. Stkitinius. That is correct, Mr. Chairman. 

The Chair^ian, What is the rate of compensation, I mean the 
limits, minimum and maximum, of those whom you call salaried 
employees on the annual basis ? Wlien does a man — in other words — 
become a salaried employee — when he draws how much money? 

Mr. Stettinius. Of course, the rolling-mill operator might be 
earning $1 an hour and be on time, and the office boy might be earn- 
ing $12 or $14 a week and be on salary. 

The Chairman. There would be no distinction there at all 1 

124491 — 40— pt 9 8 


Mr. Stettinius. It would be necessary to supply the committee 
with a statement showing that break-clown. 

The Chairman. It isn't necessary ; I wouldn't want you to do that 
I was trying to bring out whether there was a distinction. 

Mr. Stettinius. There is no distinction. 

The Chairman. The distinction is between the administrative em- 
ployee and the mill worker. 

Mr. Stettinius. The office worker and mill worker. 

The Chairman. And they fall into a different category of em- 

^h\ Stettinius. That is correct, sir. 

The Chairman. How many plants do you have ? 

Senator King. For the production of steel? 

The Chairman. All these subsidiaries — approximately. 

Mr. Stettinius. I find the correct number of subsidiaries is 140, 
all in all, taking in mining companies and everything. I think if 
you could let us supply for the record a statement 

The Chairman (interposing). If you desire to make it accurate, 
we will be glad to have you do so. But for my purposes these ap- 
proximate answers you are giving are quite sufficient. 

What was my last question? 

Mr. Stettinius. You asked the number of plants. I have a state-' 
ment before me showing we have 120 manufacturing plants in all 
subsidiaries throughout the Nation. 

The Chairman. In how many States are they located? 

Mr. Stettinius. Approximately 21. 

The Chairman. In about 24 of the States ? 

Mr. Stettinius. Twenty-four States. 

The Chairman. Do you have plants in foreign countries? 

Mr. Stettinius. We have not, sir. 

The Chairman. You have no plant in any foreign country ? 

Mr. Stetfinius. No manufacturing plant. 

The Chairman. What is the approximate annual labor bill of the 
United States Steel Corporation and its subsidiaries, exclusive of the 
salaried employees ? 

Mr. Henderson. Dr. Lubin can find it for you. 

Mr. Stettinius. Dr. Lubin has it in his head. For 1938 the total 
pay roll was $282,209,000, Mr. Chairman. 

The Chairman. What percentage is that of your expenditures, of 
your total expenditures ; can you approximate that ? 

Mr. Stettinius. We have this material worked up in chart form, 
Mr. Chairman, and it so happens we have a pie chart showing 
exactly that. 

The Chairman. That may be developed a little later. Let me then 
ask you this question : What is the effect, or what has been the effect 
of modernization upon the number of employees who work for 
wages? ^ Again, I don't necessarily want an accurate answer. 

Mr. Olds. We can give you later on all of that material. 

The Chairman. Can you give me an ai:>proxiinate answer? 

Mr. Stettinius. Mr. Chairman, may I call upon Mr. Ralph H. Wat- 
son, present vice president of the Corporation in charge of operations, 

1 Under date of May 19, 1939, Mr. Stettinius submitted further information on this 
subject, which was subsequently entered in the record as "Exhibit No. 597." see appendix, 
p. 4050. 


who is here; he might be able to give you an approximate number of 
men employed today under modernized facilities in comparison with 
earlier operations. 

Mr. AVatson. For those plants which are affected, which is a small 
part of the Corporation, it amounts to about a 25-percent decrease — 
only those plants that are affected. For instance, in the sheet and 
tin^nills, it is between the slab and the black plate and tin plate 
and the finished sheet in sheets, compared to the old mills. 

The Chairman. The effect of modernization in the plants in which 
the modernization has taken place has been to bring about approxi- 
mately a reduction of 25 percent in the number of wage workers. 

Mr. Stettinius, the story you have told to the committee this after- 
noon would indicate, would it not, that by and large the United 
States Steel Corporation, with all its subsidiaries, is financially self- 

Mr. Stettinius. Giving us normal operations, that is right, sir. 

The Chairman. May I ask just one other question. In your first 
prepared statement when you spoke of the financing and the first 
issue when that was handed out, you said that you secured the rates 
which were currently in effect at that time for that character of 
loan, as I remember your language. 

Mr. Stettinius. That was the $50,000,000 bank loan raised by a 
group of banks in New York, Chicago, and Pittsburgh : $10,000,000 
first maturity and the balance equally divided, 20 millions and 20 
millions, between two subsequent maturities. 

The Chairman. What were the rates? 

Mr. Stettinius. One and a half percent for the first maturity, 
214 for the second maturity and 31/2 for the third maturity. 

The Chairman. So the current rate for the character of loan made 
by the United States Steel Corporation was substantially lower than 
that which is available to the ordinary small-business man for loans 
which he may make at a bank. 

Mr. Stettinius. Well, I would think that 

The Chairman (interposing). In other words, you are borrowing 
at about the same rate that the Government borrows. 

Mr. Stettinius. No, sir; at higher interest rates than on Gov- 
ernment loans. 

The Chairman. And 102 different underwriters participated in 
floating one of these loans for you ? 

Mr. Stettinius. No; the 102 underwriters were used in the de- 
benture issue. There were no underwriters at all involved in the 
bank loan. The 50-million-dollar loan was a clear bank loan and 
the underwriters were used in connection with the debenture issue. 

The Chairman. Have you considered a policy of attempting to 
stabilize employment among your wage workers ? 

Mr. Stettinius. That is a subject, Mr. Chairman, that we have 
given a tremendous amount of thought and are studying constantly 
and continuously. I think we are gradually making strides in that 
connection, in leveling out our production curve. 

The Chairman. You draw the picture of modernization, of in- 
creasing ability to turn out your product, decreasing number of 
employees, and, of course, a lack of stabilization among the workers. 

Mr. Stettinius. Of course, Mr. Chairman, you must appreciate, 
sir, that it is the consuming industries that really first must get their 


production schedules straightened out. The automobile industry 
and the tin-plate industry and the structural industry must ctill upon 
our supply of steel in even quantity if we are ever to be able to level 
out our employment curves satisfactorily. 

The Chairman. Yes ; of course that is an element. 

Senator King. Many of those subsidiaries are small companies 
connected with your mining operations and it is necessary to have 
separate corporations to deal with your mining claims in mining 
operations in various States; is that correct? 

]\Ir. Stettinius. Of course, in Minnesota we are limited to certain 
holdings within certain mining companies, as you know, sir. 

Senator King. But many of your subsidiaries consist of small 
railroads to deal with your mining operations, and your mining 
operations in the various States. 

Mr. Stettinius. That is correct, sir. 

The Chairman. Mr. Nehemkis, it appears some other members of 
the committee would like to ask a few questions. I will ask Con- 
gressman Reece to preside, and may I ask you before we go (we^ 
have been called into the Senate to vote) wdiether you intend to call 
anybody else this afternoon? 

Mr. Nehemkis. Yes; there is another witness to be called, sir. 

Tlie Chairman. Representative Reece, will you be good enough to 
take the chair and permit anybody who wants to ask some questions 
to do so? 

(Representative Reece took the chair.) 

Acting Chairman Reece. Mr. Barnes, you wanted to ask some' 

Representative Barnes. I understood you to state you are operating 
at 42-percent capacity at the present time and you are employing-^ 
210,000, approximately, in those operations. In 1937 I understood 
you operated 71 percent of capacity or thereabouts. 

Mr. Stettinius. That is correct. 

Represenative Barnes. "VVliat was the total amount of your pay 
roll at that time ? 

Mr. Stettinius. In what year was that? 

Representative Barnes. 1937, from the number of workers point of 

Mr. Stettinius. The pay roll in 1937 was four hundred and forty- 
two million dollars. 

Representative Barnes. Number of workers. 

Mr. Stettinius. The number of employees was 261,000 in that year^ 

Dr. LuBiN. What was your rate of production that year on the 
average ? 

Mr. Stettinius. Seventy-one percent of capacity. 

Acting Chairman Reece. Are there any further questions? 

Dr. LuBiN. I would like to ask another question. Could you, off- 
hand, tell us what the relative relationship is between the number 
employed today as compared to some period when you were operat- 
ing at exactly the same capacity? In other w^ords, you were just 
asked about your employment level in 1937. You were operating 
71 percent of capacity. Now you are down in the forties and you 
have only cut your labor force by 50,000, although you have cut your 
capacity almost in half, your production. 


'Sir. Stettinius. Dr. Liibiii, as you know, sir, we have been work- 
ino- with the Department of Justice and the Federal Trade Commis- 
sion on a number of studies, and we have some of these figures avail- 
able, but not all of them. We are working up some charts that later 
on, if you would like me to make up a statement for the record, I 
will do so. For the year 1927 it might be of interest to know that 
the number of our employees, figured on the basis of working full 
time, was 231,000 ; in 1937, the number of our employees, also figured 
on the basis of working full time, was 246,000. The actual number 
of employees was 255,000 in 1927 and 261.000 in 1937. You have 
a table there, Mr. Henderson, showing you the operations for differ- 
ent years. 

Mr. Henderson. You assume that they stay in front of us, 

Mr. Stettinius. In operations those were fairly comparable years. 
Our total employees, cak-ulated on such a basis, were 231,000 in 1927 
and 246,000 in 1937. 

Mr. Henderson. As I see it, just to try to put your testimony on 
savings and investment in a nub, you are not in any time in the 
immediate future going to give any great amount of business to 
underwriting firms; in other words, you are not going to tap indi- 
vidual savings very much, isn't that about correct? 

Sh\ Stettinius. That is correct. 

Mr. Henderson. And also on this 50-million dollar loan that you 
got from the banks, your rate was higher for the short term than the 
Government rate. But considering the enormous pools of credit 
wliich banks have, that was a very, very small dent to be made in 
those credit resources and was only used pending this formalized 
funded debt operation that j^ou undertook. 

Mr. Stettinius. A temporary loan until market conditions made 
it possible to issue a longer term obligation. 

Mr. Henderson. As far as — without any criticism — your corpora- 
tion is concerned, the prospect for individual savings being canalized 
into your operations is very, very low ? 

Mr. Stettinius. Yes. 

Mr. Henderson. I think that is the importance of the testimony 
for this savings and investment presentation. We hope to go into, 
]Mr. Chairman, at a subsequent time, price policy and capacity and 
the like with this witness, and I think that the committee will benefit 
tremendously with the same kind of generous and frank testimony 
tlie witness has offered here today. 

Acting Chairman Reece. In response to a question by the chair- 
man you gave the number of stockholders of the Steel Corporation. 
That did not include the bondholders, I assume? 

Mr, Stettinius. No; it didn't. 

Acting Chairman Reece. Do you know the number of bond- 
holders ? 

Sir. Stettinius. I do not, sir. We don't have that tabulation. 

Acting Chairman Reece. The committee greatly appreciates your 

Mr. Stettinius. For the record, Mr. Chairman, may I state that 
our stockholders as of December 31. 1938, were 219,727. 

^Ir. Nehemkis. Mr. Chairman, the next witness to be called is Mr. 
Owen D, Young. However, before calling Mr. Young, I respect- 


fully request that there be a recess of 5 minutes so that counsel may 

(The witness, Mr. Stettinius, was excused.) 

Acting Chairman Reece. The committee will stand in recess for 
5 minutes. 

(Whereupon at 3 : 40 p. m., a short recess was taken.) 

Acting Chairman Reece. The committee will come to order, please, 
and I will ask the visitors to assume their seats, if you please. 

Mr. Young, do you solemnly swear that the testimony you are 
about to give in this proceeding shall be the truth, the whole truth, 
and nothing but the truth, so help you God ? 

Mr. Young. I do. 


Mr. Nehemkis. Will you state your name, please? 

Mr. Young. Owen D. Young. 

Mr. Nehemkis. And your address? 

Mr. Young. 570 Lexington Avenue, New York City. 

Mr. Nehemkis. And will you indicate your connection with the 
General Electric Co., please? 

Mr. Young. I am chairman of the board of the General Electric 

Mr. Nehemkis. Mr. Chairman, if this meets with the pleasure of 
the committee I would prefer not to ask any questions' of Mr. Young 
at this time, but let him proceed in his own way to tell one of the 
unique stories of American^ industry, how it has grown and how it 
has financed itself largely from its own internal sources. Mr. Youngs 
will you proceed first? 

Acting Chairman Reece. Is it your wish that he be permitted to 
complete his statement before the members of the committee ask 
questions and subject himself to questioning later? 

Mr. Nehemkis. I think that undoubtedly would aid Mr. Young. 

Acting Chairman Reece. If it is agreeable to the committee we 
will follow that procedure then. 

Mr. Young. Thank you, Mr. Chairman. May I first of all com- 
pliment the committee upon the adoption of the case system in this 
economic study? I am a great believer in the case system; it has 
had great success in the law. Pollock said of it that the law will 
yield up its reason to no man who lacks the patience to study its 
history. And I suspect that is true of our economic system as well. 
Now i have first of all endeavored to draw a picture of the forma- 
tion of the capital of the General Electric Co. and showing its evolu- 
tion. And I mean by that really a picture, not a blueprint, because 
I have brought into the statement enough of the story of the sur- 
rounding circumstances so as to make figures mean something, as 
distinguished from mere statistics which, at least speaking from my 
own experience, are useful only to experts who handle them. This 
is an effort to draw an over-all picture of the material growth of the 
General Electric Co. and to show the origin and development of its 

The statement does not deal with the adventures and accomplish- 
ments of the company in the field of science nor with its experience 


in welding together great numbers of human beings of widely di- 
versified capacities and skills into an organized and effective serv- 
ice. Even in the material field the attempt to reflect the story truly 
and briefly is a daring one. None will understand that better or 
make more charitable allowance than the group for which this memo- 
randum is prepared. The corporate age of the General Electric Co. 
is 47 years, but as it sprang from the consolidation of the Edison and 
Thomson-Houston companies, it is perhaps more correct to say that 
its present age is 60 j^ears. 


Mr. Young. At the close of its sixtieth year, on December 31, 1938, 
we find its material resources are carried on its books and I emphasize 
are carried on its books; I am using the book figures. Its material 
resources are carried on its books at the net value of $322,739,000. 

That is made up of the following: Net working capital, that is, 
current assets less current liabilities, $155,023,000. Affiliated com- 
panies and other investments, such as the International General Elec- 
tric Co., and associated manufacturing companies, $105,585,000, or a 
total with the investment companies of $141,528,000. 

There is plant equipment of $40,148,000 and other scattered assets 
of $10,022,000 which, less the reserve, roughly, of $24,000,000, leaves 
a total capital investment of $322,739,000— $155,023,000 of liquid 
assets, $141,528,000 of investments, $40,148,000 plant, $10,022,000 of 
miscellaneous assets, less $24,000,000 of reserve. 

This capital was accumulated as follows: From retained earnings, 
now carried as surplus and general reserve, $142,452,000; from issue 
of capital stock, $180,287,000. The capital stock was issued for prop- 
erties, $37,784,000; for cash, $75,379,000; in exchange for bonds of 
the company, $17,334,000 ; and as dividends, $49,790,000. That makes 
the total of $180,287,000 of stock which, with the surplus and general 
reserve of $142,000,000, accounts for the $322,000,000. 

Mr. Henderson. $49,000,000 of stock dividends? 

Mr. Young. $49,000,000 of stock dividends. 

Eepresenting this stock there is now issued and outstanding 28,- 
845.927 shares, held by 208,580 stockholders. There are no bonds and 
no preferred stock outstanding. In a word, the two hundred thou- 
sand-odd stockholders own the company, not an equity in its assets. 

This picture, which is one of affluence in the foreground, might 
well be misleading unless we can see in the background the rough 
and dangerous road on which the pioneers set out, with confidence 
and courage, more than half a century ago. In that great caravan 
were scientists and inventors to originate, engineers to apply, manu- 
facturers to make, commercial men to sell, people w^ith savings to 
finance, entrepreneurs and administrators to develop and manage, and 
a vast army of conscientious and skillful men and women doing their 
respective jobs with pride in a new art and enthusiasm in the creation 
of a new industry. 

In looking for the beginning of the road it is necessary for us to 
recall what has been earlier stated, that the progenitors of the Gen- 
eral Electric Co. were the Edison General Electric Co. and the Thom- 
son-Houston Electric Co. Let us speak of the latter first, not be- 


cause it is the more important of the two, but rather because, in typi- 
cal American fashion, it arose out of the unknown. 

I want to emphasize that feature. Thomson-Houston came out 
of the unknowni. The Edison has a different histor}^ 

If we exckide the telegraph, it is fair to say that in 1878 the 
electrical manufacturing industry was not only nonexistent, but the 
art as a practical one was unknown. The men who created, financed, 
and managed the Thomson-Houston Co. were likewise relatively un- 
known. At that time Edison was well enough known through his 
inventions so that his initial adventure into the electrical industry was 
financed by a group of prominent New York capitalists. Not so with 
the Thomson-Houston group. There were no prior inventions, there 
Avere no names of great capitalists, and there was very little money. 


Mr. Young. Elihu Thomson and Edwin J. Houston were teachers in 
the Philadelphia Central High School. They built a dynamo, induc- 
tion coils, and an arc lamp. Thomson showed the contraption to his 
friend, Thomas H. McCollin, a commercial photographer in Philadel- 
pliia. McCollin asked his cousin, George A. Garrett, to see a demon- 
stration. Thomson, then 26 years old, said, "I can build a better ma- 
chine than this, one that will run any number of lights you want." 
Garrett, w^ith enthusiasm, replied, "Let's build a four-lighter. I'll 
stand the expense." That was America speaking in 1879 ! 

The first installation was in an all-night bakery in Philadelphia 
and the second one in a brewery. When the brewery caught on fire 
one of the firemen who was holding the hose said, "What the dickens 
kind of a light is that ? You pour water on her and she won't go 
out !" That was news too, in America, 60 years ago. 

At the same time, Mr. Edison, having incorporated the Edison Co. 
with the backing of J. P. Morgan, and a capital of $300,000, was re- 
ceiving considerable well-deserved publicity in the New York press. 

Thereupon Frederick H. Churchill, of New Britain, Conn., seeking 
a new industry for his town, invited Thomson and Houston to settle 
there. When they accepted Churchill circulated a prospectus in New 
Britain wdiich, after describing the new company as "a rare oppor- 
tunity for the upbuilding of a successful business enterprise," ended 
with the following sentence : 

Such an industry would have within it a capacity for expansion and growth 
such as is furnished by hut few of the business opportunities tliat today present 
themselves to the business world. 

That was a prospectus written in 1879. 

Senator King. By a prophet. 

Mr. Young. By a prophet. 

Churchill died in 1881, and the New Britain venture failed; not, 
however, before one of its installations had been made in an armory 
in Lynn, Mass. A Lynn newspaper proprietor, Silas A. Barton, be- 
came interested in the possibility of a second installation in that city 
and visited New Britain. Learning that the business was for sale, he 
suggested the idea of purchase to a group of Lynn shoe manufacturers, 
among whom Mas Charles A. Coffin, then under 40 years of age. The 
upshot w^as that Coffin and his associates purchased a controlling in- 


terest in the company, moved it to Lynn and changed its name to the 
Thomson-Houston Electi-ic Co. 

The members of the Lynn syndicate were successful shoe manu- 
facturers. Initially they were primarily interested in bringing a new 
industry to their town. That business soon captured the imagination 
of Charles A. Coffin, and from that time until his retirement in 1922, 
he was its leader through bad times and good. 

It is necessary for us to remember that in 1882 — this is important — 
the problem which faced both the Thomson -Houston Co. and the 
Edison Co. was not only the origination, development, and manufac- 
ture of electrical machines. That was only half their task. Broadly 
speaking, there were no buyers. New customers had to be created to 
buy the new machines. This led to the creation of local light and 
power companies. The sponsors were usually made up of local capi- 
talists and politicians, for it was necessary to have a franchise and 
some money. 

For the most part they wei-e motivated by civic pride and the 
promotion of local development. The capital of the companies was 
proverbially inadequate. This forced the manufacturing companies 
to accept in part payment for the new equipment the bonds and stocks 
of the new customer companies. The Edison Co., through a some- 
what different technic, that of issuing exclusive licenses against securi- 
ties of local operating companies — that is. licenses to operate in a com- 
munity under the patents — ultimately faced the same necessity of 
accepting additional securities in part payment for its products. 

Leaving now the Thomson-Houston Co. at Lynn, with Charles A. 
Coffin and his associates in charge, let us look at the development of 
the Edison Co. 

In 1879, while Thomson, the high-school teacher, was tinkering 
with his arc-light system, Edison, still under 35, had already estab- 
lished a modest position as an inventor. One of his earlier inven- 
tions, relating to the electric telegraph, had been the subject of patent 
litigation. Grosvenor P. Lowrey, a prominent New York lawyer, 
had defended Edison's interests and as a result became one of his 
most faithful and staunch supporters. Lowrey, having confidence 
in Edison's ability and knowing of his interest in developing an in- 
candescent lamp, approached Mr. J. P. Morgan and other influential 
financiers of his acquaintance. iThe result was the organization of 
the Edison Electric Light Co. The capital stock amounted to $300,- 
000, of which $250,000 was issued in payment for equipment and the 
remaining $50,000 was subscribed for, with 80 percent paid in in cash. 
That, too, was America speaking, in 1878. 

Edison's immediate problem w\as the discovery of some material 
for a filament that would stand incandescence for a considerable 
period without disintegration. 

On October 21, 1879, his experiments were crowned with success 
at Menlo Park, when his carbonized cotton filament burned contin- 
uously for 40 hours. Truly a historic demonstration ! 

To successfully operate an incandescent lighting system, however, 
it was necessary for Edison, in addition to the lamp, to develop a 
completely new set of mechanisms to generate and transmit the elec- 
tric current. This was the kind of staggering task which only a 
great genius could master. It soon made Edison's facilities at Menlo 


Park inadequate. In 1880, therefore, he organized the Edison Ma- 
chine Works in New York City to manufacture generators, and the 
Edison Lamp Worlds near Newark, N. J., to manufacture lamps. 

In 1886, Edison decided to move the Edison Machine Works out 
of the metropolitan area. He became interested in an unused plant 
at Schenectady, and made an offer which was refused by the owners. 

An impasse threatened. But civic pride burned bright in the 
breasts of some, at least, of Schenectady's citizens. They grasped 
what it would mean to the town to have a plant of the famous Edison. 
A meeting was called, and eventually by local subscription a fund 
was raised which made up the difference between "bid" and "asked" 

So it was that the Mohawk Valley became the center for manu- 
facturing the generating equipment required by the growing number 
of Edison licensee operating companies. 

These were stirring times. The formative period of electric de- 
velopment was approaching its height. The Edison system, as an 
organization for manufacturing, licensing and selling electric-light 
systems, was beginning to sprawl. Greater integration seemed de- 
sirable, and in 1889 a merger of the individual Edison enterprises was 
consummated through the formation of the Edison General Electric 

At the same time that the Edison Machine Works was established 
at Schenectady and the Thomson-Houston Co. was getting under way 
at Lynn, another idea was germinating in the minds of several com- 
petent and creative engineers, notable among whom were Charles J. 
Van Depoele and Frank J. Sprague. In 1887 and 1888 these two, 
working independently, had demonstrated the practicability of using 
electricity to propel streetcars. 

This opened almost at once a vast new field for the electrical man- 
ufacturers. Larger power units had to be made, longer transmission 
was necessary, and cars needed to be equipped with motors. The old 
horse railways had to be transformed, franchises modified or en- 
larged, and additional capital provided. As in the lighting field, the 
problem of financing was difficult but imperative. It invited the 
manufacturing companies to extend their limited credit further in 
order to enlarge their business. 

The rapidity of the development of the Edison and Thomson- 
Houston Cos. is shown in the following statement of their condition 
in 1891 : The Edison Co. had a capitalization of fifteen million at that 
time; the Thomson-Houston of ten. The Edison Co. had a gross 
business of ten million nine hundred and the Thomson-Houston of ten 
million three hundred and four, almost exactly the same. The profits 
of Edison were two million ninety-eight; the profits of the Thomson- 
Houston were two million seven. The number of employees of 
Edison were six thousand; the number of employees of Thomson- 
Houston were four thousand. The factory space of Edison was four 
hundred thousand square feet ; the factory space of Thomson-Houston 
three hundred and forty. The customers were from three to four 
thousand of each company, probably duplicated. The central stations, 
Edison had 375 — that is, central lighting stations ; Thomson -Houston 
had 870. Street railways equipped, Edison, 180; Thomson-Houston, 
204. Street railway cars, Edison had 2,230; Thomson-Houston, 2,760. 


Now I want to make this point. The Thomson-Houston Co., 
springing from the unknown, is catching up with the great Edison 
Co. and m points surpassing it. With two-thirds of the capital and 
two-thirds of the number of employees, Thomson-Houston is equaling 
Edison in gross business and exceeding it in profits. It has a larger 
number of central lighting stations, more street railways, and more 
streetcars equipped. The Edison Co. in its annual report for that 
year, and this is significant, said that it — 

■could have done a much larger business if it had been willing to accept securities 
in payment for orders ; but * * * ^ strict rule was adopted of declining all 
such and doing business exclusively on a cash or shoi*t credit basis. 

The Thomson-Houston Co. had been rediscounting its customers' 
notes with its banks and pledging operating-company securities as 
collateral for its loans. Finally the banks became hesitant, particu- 
larly in accepting securities as distinguished from customers' notes, 
and in 1890 Charles A. Coffin organized the United Electric Securi- 
ties Co. The purpose was to transfer to it large blocks of securities 
of utility operating companies and to sell to the public the debentures 
or the preferred stock of the holding company and so obtain longer- 
term money to bolster the waning treasury of Thomson-Houston. 
The Thomson-Houston Co. kept the common stock of the United 

The public, however, was hesitant, too. It soon became apparent 
that debentures could not be sold in sufficient quantities to finance 
the rapidly increasing amount of utility securities which the manu- 
facturing company was obliged to take. The Edison Co. was draw- 
ing in its horns as a matter of business policy. The Thomson- 
Houston Co. was doing the same thing from necessity. 

Perhaps, at this point, we should remind ourselves that there were 
several other companies operating at this time in the electrical manu- 
facturing field ; notable among them was the Westinghouse Co. They 
Avere all more or less in the same condition with the same problems 
and the same difficulties. 

Under such circumstances, what could be more natural than to 
■combine the Edison and Thomson-Houston companies, giving the 
consolidated concern the business leadership of Charles A. Coffin, 
the inventive genius of Edison and Thomson, eliminating patent con- 
flicts which were threatening both concerns, and bringing together 
the financial interests in Boston which had supported Thomson- 
Houston with the great prestige of Mr. Morgan and his associates in 
New York? 

So it was that the General Electric Co. was incorporated on April 
15, 1892, and began active business on the first day of June in that 

Senator King. Is that '92 ? 

Mr. Young. In '92. Charles A. Coffin was made president and the 
contest began for the market of electrical manufactures between the 
Westinghouse Co., led by George Westinghouse, the brilliant and 
imaginative engineer, and Charles A. Coffin, the daring and equally 
imaginative man of business. 

The first board of directors of the General Electric Co. reflected 
its distinguished and substantial backing: F. Lothrop Ames, Charles 
A. Coffin, T. Jefferson Coolidge, Jr., Henry L. Higginson, all of 


Boston; Thomas A. Edison, Charles H. Coster, Frank S. Hastinos, 
Gen. Eugene Griffin, Darius Ogden Mills, H, McK. Twombley, and 
J. Pier]iont Morgan, of New York. 

The directors made their first report to stockholders on April 11, 
1893, covering the 8 months from June 1, '92, to January 31, 
'93. At that time it stated its capital investment to be $45,000,000. 
against which it had issued $10,000,000 of bonds, $4,000,000 of 
preferred stock and $30,000,000 of common stock, and a surplus of 
$1,000,000. It had 3,272 stockholders in 1892. There were then 1.277 
central station lighting companies using Edison and Thomson-Houston 
apparatus, supplying even at that early date 2,500,000 incandescent 
and 110,000 ai-c lamps. Of the lighting companies, the report says — 
now this is the annual report of the directors and I quote : 

The growth of these companies has been phenomenal, and it is very satisfac- 
tory to note tliat tliose which have been establislied longest are making the most 
rapid increase in the size of plant and volume of business. 

Further quoting from the directors to the stockholders of that year : 

During the past year there has been a very marked appreciation in the value 
of the securities of local companies, especially in the larger cities, testifying to 
the increased confidence of investors in such properties. 

Now, I quote that for the reason that the panic of 1893 is just 
around the corner, and I want to go on with the story. 

It is interesting to note, at this time, the growth in 2 years of the 
electrification of street railways. On February 1, 1891, there were 
151 roads operating electrically or under contract; on the same date 
in 1893 there were 435. On February 1, 1891, there were 1.578 electric 
cars; on the same date in 1893 there were 8,386 — 2 years. On Feb- 
ruary 1. 1891, there were 1,252 miles of electric railway in operation : 
at the same date in 1893 there were 4,927 miles. See that jump in 
those 2 years. 

In its first 8 months of its existence the company did $11,000,000 
of business, at a profit of $3,000,000. of which it distributed in divi- 
dends $1,900,000 and carried to surplus $1,000,000. I am giving the 
round figures. 

The prestige of the company enabled it to sell $454,000 par value of 
the preferred stock of the United Electric Securities Co. for a price 
in excess of $408,000. It was still necessary for the company, however, 
to endorse customers' notes because such notes — this is tlie General 
Electric Co. now in the first year — because such notes unendorsed 
were not acceptable to the banks. They amounted on January 31, 1893. 
to $3,787,000. In addition, it had outstanding $10,000,000 of 5-per- 
cent bonds. 

In such a condition the new General Electric Co. faced the panic 
of 1893. It will be interesting to see what happened during the next 
few years. 

You will remember that glowing re]wrt of January 31, 1893 — now, 
I am making some quotations from the report of the directors as of 
that time because they are a contemporary statement and it seems to 
me that they throw great light on what happens in a serious depression, 
especially to a new concern. 

Now, I will read what they say in this report of January 31, 1894, 
which covers the 12 months preceding : 

It is needless to say — 
the directors state — 


that the past year has been a most trying one to all corporations. It has been 
especially so to companies like yonr own, dealing with local enterprises situated 
in all parts of the United States, and largely dependent on normal conditions 
f(ir tlieir success and development. During the summer of 1S93 even old and 
strong customers were obliged to ask for leniency in paying their accounts and 
notes. Under these circumstances your company found itself with its own obli- 
gations to meet, but unable at that time to collect the money with which to meet 
them. The ditticulties thus presented were carefully considered by your board 
and were met by selling to a syndicate certain of the company's assets, consisting 
(jf claims against, and stocks and bonds of, local lighting and railway companies, 
the same being of a class of which your company sold several million dollars in 
181)2, and which your directors, in their last report, said they intended to continue 
to sell from time to time as heretofore through the ordinary channels. The 
channels through which your company usually made such sales having become 
unavailable owing to the panic, your directors adopted a plan used on several 
occasions in (he earlier days of the Thomson-Houston Co., and made the sale 
of assets above described to a syndicate which paid over $4,000,000 in cash. 

Xow I pause to emphasize that because I want to refer to it hiter. 
It is one of the beginnings of a new era in public utilities and in the 
electrical industry. 

Although the transaction involved a large shrinkage from hook valuations, the 
sale was at a price high under the conditions then prcv.iiling. Few of the 
securities sold were listed on any exchange or commonly dealt in, and it was not 
possible to effect a ready sale except in bulk to a syndicate. These assets were 
placed in a trust known as "The Street Railway and Illuminating Proper- 
ties." * * * 

The depreciation in value of the assets thus sold applies equally to those 
still on hand. Holders of stocks and bonds of almost every kind find them 
quoted today much lower than a year ago. and this company, as a holder of 
electrical stocks and bonds, is no exception to the rule. In fact the shrinkage 
in values of electrical securities has been greater than in most others. The 
last year has been characterized by shrinkage in every direction, and your 
company has stiffered severely from it. 

This is the second annual report. 

The officers of the company were making a titanic effort in their 
race with receivership. By January 31. 1894, the debt had been 
reduced by $6,750,000. The cash had dwindled from $3,871,000 on 
January 31, 1893, to $591,000 on January 31, 1894. The directors 
stated : 

While the liquidation of the debt has been going on, the company has also 
readjusted its basis for sales, eitlier to cash or to short credits to desirable 
customers. In view of the extreme depression and the uncertainty as to the 
early future, your directors have not felt justified in any other course than 
that of adhering strictly to sales on this basis. It is believed that your com- 
pany has lost little legitimate business in consequence of its curtailment of 
credit to customers. It intends to confine its business to this basis, and to 
accept smaller profits. 

The capital investment of the company dropped in that year from 
$45,000,000 to $32,000,000 and its surplus from $1,000,000 in the black 
to $12,000,000 in the red. Such was the first impact of the panic on 
the capital structure of the new concern. 

It is interesting to note that the red figures in the surplus con- 
timied at substantially the same figure until 1898, when it was wiped 
out by a reduction of capital stock of $14,000,000, 4 years later. In 
January 1899 the sm-plus was in the black to the extent of $156,000 
and it has remained in black continuously ever since. The directors 
further said in their report of January 31, 1894 : 

Your directors do not believe that it will be possible for some time to come 
to do as large a business as was done by the company prior to the panic, 


although a gradual Improvement has beeu apparent during the last 2 months. 
The street-railway business, which to a considerable extent was formerly done 
through syndicates and promoters, many of whom have become embarrassed, 
promises to be smaller than during the previous year. Arc-lighting business 
is also reduced, largely because of the inability of local companies to secure 
capital with which to extend their business for the purpose of carrying out 
municipal contracts. The business of the company, with respect to incandescent 
lighting, which is to a great degree performed by strong and conservatively 
managed local companies, is in a more healthy condition, and has not suffered 
so severely. 

In the third annual report, as of January 31, 1895, the directors^ 
in order to cover additional losses, "arbitrarily charged $2,000,000" — 
set it aside, really, as a reserve — "to profit and loss account." 

During that year, ho^Yever, they were busy dealing masterfully 
with their debt. Of it they say : 

In the last report your directors expressed the opinion that they could, out of 
the then-unliquidated assets, pay off the balance of your floating debt and alsa 
provide all necessary working capital. These expectations have been realized, 
and in addition thereto the company has purchased and canceled $1,250,000 of 
its own debentures at an average cost of less than 89 percent. 

In the fourth report as of January 31, 1896, the directors make 
the following statement: 

In their last report your directors referred at some length to the liquidation of 
old assets, and stated that the sum of $2,000,000 had been charged to profit and 
loss for the puiT)ose of providing for all shrinkages which could then be antici- 
pated in the liquidation of old matters. 

Much has been accomplished in the year just closed in liquidating old and 
slow assets, and the condition of the assets of like character which still remain 
on the books of the company is such as to enable your officers to more definitely 
fix their proper values. Information regarding these matters will be found in 
the report of the second vice president, to which particular attention is invited. 
There have been charged against the $2,000,000 item above referred to the sums 
of $530,152.16, representing the shrinkages which have accrued from the liqui- 
dation so far as completed, leaving $1,469,847.84 still standing to provide for 
possible shrinkages in the future. It is the belief of your directors that this 
amount is suflScient to cover all the purposes for which the above simi of 
$2,000,000 was originally set apart. 

The purge continued, but signs of health were reappearing. 

The business secured by your company for the fiscal year just closed was less 
than 10 percent greater in value of sales than for the year previous. The actual 
increase in output of factories, based upon capacity of machines and number 
of articles produced, is more than 30 percent greater than for the previous year. 
While the selling prices as thus shown have been materially reduced, there has 
been a corresponding curtailment in manufacturing and other expenses and 
lowering in costs, largely due to improved designs and methods of manufacture. 

The gross business was still running around $12,000,000. Even in 
1897 the business had not increased. In that year, however, the 
directors referred again to the $2,000,000 that had been set aside in 
1894 to provide for shrinkage in assets. 

The business of your company has suffered during the past year, in common 
with that of all manufacturing enterprises, from the disturbed financial and 
political conditions which have prevailed during a considerable portion of the 
time. These conditions have curtailed the amount of capital ordinarily avail- 
able for the establishment and extension of power and lighting plants, and have 
enforced the practice of great economy on the part of its customers. As a result, 
the shrinkage in orders received by your company was very marked, especially 
during the latter half of the year. This shrinkage is not shown by a material 
falling off in shipments, as given in the profit-and-loss statement on page 17 of 
this report, but the amount of work in progress and unfilled orders on hand 
is considerably less than a year ago. 


With a return to normal commercial conditions, a corresponding revival in the 
business of your company may be expected. The volume of business secured by 
it for the first 3 months of the current year is slightly in excess of that for 
the same period in either of the 3 previous years. 

On January 31, 1895, the sum of $2,000,000 was set aside, as shown in the 
annual report of that year, to provide for shrinkage in assets, the exact values 
of which it was then extremely difficult to fix. During the past year your 
directors have been able to value these items with substantial accuracy, and 
the $2,000,000 fund has been found suflicient and has been used to provide for 
the proper adjustment of all accounts and other assets for which it was created. 

In opening the sixth report as of January 31, 1898, the president 

said : 

The past year (1897) witnessed a revival in business which increased rapidly 
in activity and volume during its latter months. 

He was there referring to orders taken rather than sales billed. 
The latter remained at substantially $12,000,000. The clouds were 
lifting — the sun was beginning to shine. For 5 years the depression 
had continued. The struggle for survival of the General Electric 
Co. was over at last. 

A reduction of 40 percent in the share capital of the company was 
made in 1898, bringing the common stock from $30,460,000 to 
$18,276,000 and the preferred stock from $4,252,000 to $2,551,200. 

In 1898 the company was clearing the way for dividends. The 
surplus went into the black, as heretofore stated, to $156,000. The 
business jumped to $15,500,000, having stood at 12 millions for several 
years. In the report to stockholders for that year there appears the 
following significant statement: 

The company has no notes payable, nor is there under discount any paper 
bearing the company's endorsement or guaranty. 

It has not borrowed any money, nor has the company's credit been used 
during the year either by issuing notes, endorsing customers' paper for discount, 
or lending its name in any way ; but by adhering to the policy of the previous 
4 years and maintaining sales on a basis of cash or short credit to desirable 
customers, all purchases have been paid for in cash. 

Now, that was the result of the purge of 1893. I think it has some 
illumination for us. 

By 1899 the volume of business had grown to more than $22,000,000, 
and the market was beginning to take securities which the company 
was selling at prices substantially in excess of their book value after 
the drastic write-downs of the depression years. The company was 
off to a new start and was to participate profitably in the truly 
amazing developments of the next 30 years. 

By the turn of the century, then, the capital investment of the 
company, as shown by the report of January 31, 1901, was $32,114,681 
— in contrast with the $46,000,000 with which it had started 8 years 
before — and was represented by $1,534,000 in bonds, $2,551,200 of pre- 
ferred stock, $21,400,300 of common stock, and $6,629,181 of surplus. 
The sales billed for that year were approximately $28,000,000. 

The 2 succeeding years were very profitable ones, especially due to 
the liquidation of securities above the then book values, and the sur- 
plus had risen to $15,000,000. All the preferred stock and about 
$1,000,000 of bonds were converted into common. About $2,000,000 
of new bonds were issued. The company restored the stock reduc- 
tion which had been made in 1898, which brought its capital stock 
lo approximately $42,000,000. 


During the next 4 years it whs able to find new capital with which 
to carry on its rapidly increasing business by issuing its common 
shares to stockholders for cash at par to the extent of approximately 

So the company faced the critical year of 1907 with a capital 
investment of $81,000,000, represented by $2,000,000 of bonds, $64,- 
000,000 of common stock, and $15,000,000 of surplus, the preiferred 
having been converted into common. Its volume of business had 
grown to approximately $60,000,000. 

As a result of the panic of 1907, the directors said in their report 
of January 31, 1908: 

I.iite in the year there was u sudden and severe shrinkage in the vaine of 
all merchandise and materials used hy your company, notably copper. All 
said materials, whether raw, manufactured, or in process, wliicli were on hand 
January 31, 1908, were inventoried at the lower prices then prevailing. The 
book value of such inventories was thereby reduced by about $2,0(J0,(K)0. 

The stockholders having subscribed for only $1,500,000 of common 
stock in 1907, the company issued $13,000,000 of 5 percent 10-year 
debenture bonds convertible into stock at par on and after June 1, 
1911. The financial pressures had forced the use of c(mvertible de- 
bentures in 1907 to maintain an ader^uate capital structure, but, for- 
tunately, by this time the resources and credit of the company enabled 
it to withstand the shock of the short depression of 1907. 

During the year 1911, $12,000,000 of the bonds were converted into 
common, bringing the common capital to $77,000,000. In 1912 the 
company declared a stock dividend of 30 percent out of surplus for 
the purpose, as stated in the report, "of recouping the stockholders 
in part for dividends passed or reduced during the years 1893 to 
1902." During that same year the company authorized an issue of 
$60,000,000 of 4()-year debentures to be sold from time to time as 
required, and they sold, in 1912, $10,000,000 of such bonds bearing a 
rate of 5 percent per annum. 

So. at the end of 1912, the capital investment stood at $125,000,000 
with bonds of $12,000,000 surplus of $12,000,000 and common stock 
of $101,000,000. 

During the war years, 1917, 1918, and 1919, there were substantial 
temporary borrowings, increases of capital and surplus, the detail 
of which throws little light on the normal and progressive capital 
development of the company. 

The year 1920 brought another crisis. The orders for that year 
were $318,000,000, moi-e than 80 millions in excess of the previous 
year. Inventories and receivables had increased, so when the sudden 
and severe decline in market prices came in 1920 the company wrote 
off of inventory some $18,000,000. During the year it made short- 
term loans of $45,000,000, but between January and April of the 
succeeding year, $42,000,000 of such loans had been repaid. The 
common capital, however, was increased in excess of $50,000,000 dur- 
ing the 2 years 1920 and 1921 ($40,000,000 being for cash and prop- 
erty and the balance as stock dividends), bringing the tot-al capital 
investment up to $298,000,000 consisting of $176,000,000 of common 
stock — but it shows what a shock there was in 1920 and how even 
then it had to go to the banks for a loan of $45,000,000— $38,000,000 
of bonds and $84,000,000 of surplus and general reserve. 


In 1922 a special stock was created having no preference over the 
common except a limited dividend rate of 6 percent. For the next 
several years this special stock was issued as stock dividends, and no 
further dividends in common stock were issued. The last dividend 
paid in special stock was in 1926, and the total amount issued was 

Senator King. That special stock was sold, I suppose, on the 
market ? 

Mr. Young. No; that was issued as dividends. They conserved 
their cash. 

Senator King. Took the place of dividends? 

Mr. Young. Took the place of dividends and they declared some 
cash dividend and the balance in special stock. 

In 1923 the company called and paid off $15,000,000 of its bonds. 
In 1925 it called $15,000,000 more, and it had acquired enough in 
the market in the meantime so as to reduce its funded debt to 
$2,000,000. In 1935 the company called this remaining $2,000,000 
of bonds and retired all of its $43,000,000 of special stock. 

The company had in the year 1935 $180,000,000 of common stock, 
$136,000,000 of surpliLs and general reserve, making a total capital 
investment of $316,000,000. 

From the above brief sketch of capital growth, I have only drawn 
attention to the major changes and the problems which faced the 
management. The resume of the source of capital was shown at 
the beginning of this statement. 

When one looks at the growth of the volume of sales of the General 
Electric Co. he finds it remained stationary at $12,000,000 for the first 
5 yeans of its life, but at the turn of the century it reached more than 
$25,000,000. At 1910 it was $70,000,000; at 1920 it was $275,000,000; 
and at 1929 it reached its high point of $415,000,000. In 1933 it 
dropped to $136,000,000, in 1937 it recovered to $350,000,000 and in 
1938 it was $260,000,000. The enormous growth in the two decades, 
where it jumped from 70 millions to 415 millions in those two decades 
after 1910, needs to be accounted for by anyone who wishes to under- 
stand the background of the capitalization of the electrical industry. 

I want to tell you a story which involves the capitalization of 

I wish now to go back to the trying year of 1893, when the General 
Electric Co. transferred reams of utility securities to the Street 
Railway and Illuminating Properties in order to raise $4,000,000 in 
cash, and thereby saved itself from bankruptcy. The Street Railway 
and Illuminating pool, as it was then called, was strictly a liquidat- 
ing concern. It had no intention of entering the utility business as 
such. It had no particular interest in or knowledge of management 
of such properties. In order to make its securities marketable, it 
was obliged in many instances, if not indeed in most, to reorganize 
the operating units through receivership by reducing the prior lien 
bonds and preferred stocks. It thereby threw larger equities in the 
new common. The new bonds and preferred were sold to the public 
to the extent and at such prices as the market would take them. 
The new common shares remaining in the liquidating pool were, for 
the most part, not marketable through then established channels. 
Something new needed to happen and it did. 

124491 — 40 — pt, 9 9 


For the 10 years preceding the turn of the century, the olumour of 
tlie new electrical art had attracted many of the most brilliant young 
men of the time into the field of electrical engineering. That was 
prior to 1900. Most of them took a post graduate course with the 
manufacturing companies known as the Test. Thereafter, some of 
them remained in manufacturing, but many others went out to the 
lighting and railway companies. A few of them stalled in business 
on their own account, first as expert advisers to existing companies, 
and later as experts in management. It was to this last group that 
liquidators like the Illuminating pool went for the purpose of creat- 
ing, through expert management and engineering skill, values in 
common shares. The usual procedure was to turn over to such man- 
agement groups a small block of the common shares at a rather 
nominal figure and install the engineering organization as manager. 
To spur the managemenr, it was usually customary to grant options 
on additional blocks to be taken up in specified ])eriods at increasing- 

So the young engineers came into positions of management and 
later control of operating })ublic utilities. They replaced the nomi- 
nees of the old politician and the local capitalist who, with little 
knowledge, had endeavored to operate in the early days and whose 
influence was much diminished and in many cases entirely eliminated 
by the purge of the panic of 1893. 

So we find at the beginning of the twentieth century groups of 
highly trained young engineers, able and ambitious to develop util- 
ities, with an opportunity open to them not only to render great 
service to. the community, but to acquire a competence for them- 
selves. At the same time in the manufacturing organizations their 
contemporaries were coming into positions of influence. For the 
first time the manufacturers, and this is important, had competent 
and appreciative buyers, and conversely these young managers of 
utilities were stimulating and urging the electrical producers to make 
more efficient and more economical equipment. They wanted to 
reflect values in those common shares as rapidly as ix)ssible. 

Here then were producers and users venturing into a new field 
unafraid of new things, all young men, by the way. The rate of 
te<?hnical advance was tremendous. Human brains alive and at work 
everywhere were enlarging the field of electrical service and ma- 
terially reducing the costs. Values began to be reflected in these 
common stocks and then the public itself began to buy them, in lim- 
ited quantities to be sure, but nevertheless a market was emerging. 
Soon the old liquidating concerns had finished their task, usually 
with great profit to the stockholders avIio had dared to invest their 
money in the dark clays of the panic. 

But when the utility common shares became valuable the new man- 
agers did not wish to sell them, although they could do so at a 
profit, because they might lose control of the companies which they 
had really made. As energetic Americans, however, they were am- 
bitious to extend their management operations and achieve the added 
economies that such extension promised. 

To meet this situation the utility holding company was invented, 
which enabled these ambitious young managers not so much to sell 
their original common shares at a profit as to obtain some funds 
against them through the issue of holding company securities, and 


tliereb}' enable tJieiii to enlai'iie their operations in the cominiinities 
whicli they served or to acquire an interest in other properties and 
so extend their management program. Then, too, the holding com- 
pany was a better medium for the investor. Instead of taking com- 
mon shares in an individual operating company, he was able to 
invest in a diversified group of shares, and if he took preferred 
stock of the holding com})any he would gain some security through 
the equity margin represented by the common. 

This, broadly, is the story of utility holding companies before the 
war. If holding companies have, in these later days, fallen under 
criticism, we must ever remember the service which they performed 
ill the rapid expansion of electrical services to the public. As an 
effective instrument for providing capital it made possible the rapid 
development and use of the steam turbine, not only in great centers 
of population l)ut in power plants serving large numbers of rural 
communities through networks of transmission systems. In no other 
way could the small communities have received such high cliaracter 
of service at such low cost. 

This mechanism was developing diu'ing the period from 1900 to 
1910, during which time the business of the General Electric Co. 
trebled. But even so, the full effect was not felt until the next 2 
decades when the business of the company rose from $70,000,000 to 
more than $400,000,000. This tremendous increase was not experi- 
enced alone by the General Electric Co., but by the entire electrical 
manufacturing industry. Indeed, and this is significant, General 
Electric's percentage of the industry business has remained through 
the years at between 20 and 25 percent. 

There is another aspect, however, of this cooperation between the 
engineers of the utilities and the engineers of the electrical manu- 
facturers. As I have suggested before, it was difficult for the manu- 
facturers to keep pace with the demands of their own customers for 
new things. To do so, the General Electric Co. in 1901 established 
a research laboratory and called to it men of great vision and ability 
to explore the unknown. Those men had no specified jobs. To im- 
prove what we had was the work of the engineers. The research 
men were to move out into an unknown land, and they were sup- 
ported on their adventure in the hope that they would bring back 
among their discovered treasures a few at least that would be of 
practical advantage to the electrical industry. One might well have 
criticized in those days a corporate management which gambled 
stockholders' money on such remote chances. Yet I suppose no 
venture has been more profitable to the General Electric Co., to in- 
vestors and operators in utilities and to the public served by them 
than these research laboratories. 

The drive for economy and efficiency in the production of electri- 
cal power so urgently demanded by the utility engineers was sup- 
ported by the work of the research laboratories and the engineers 
of the manufacturers. Indeed, the profits of the utility operating 
companies became so large as not only to attract investors as the 
result of that cooperation, but to precipitate constantly calls from 
customers for reduced rates. In the beginning, municipalities en- 
deavored to regulate rates, but the utility rapidly outgrew the 
municipality. Then State commissions were charged with that re- 
sponsibility, but the utilities in some cases overran State boundaries 


and so the Federal Government found its justification for a limited 
entry into the field of utility regulation. 

I should like to say in passing that in the political debates inci- 
dent to the entrance of the Federal Goverimient into the field of 
regulation, there has been criticism of the incompetence not only of 
local regulating bodies, but frequently of State commissions. I 
should like to take the opportunity of saying here that by and large 
I think those criticisms are unfair and unwarranted. The f act^ is 
that the research laboratories and the engineers in the electrical in- 
dustry made such rapid progress in efficiencies and v'conomies that 
regulating bodies were unable to keep up with them. As a conse- 
quence, by the time the rather cumbersome machinery of regulation 
established a rate the efficiencies introduced meanwhile frequently 
kept the profits on the new rate as high as they were on the old ones. 
This fact led customers to criticize the regulating boards. Such 
criticism to my mind was unjustifiable and, indeed, on the whole I 
think the fact that the utility companies were highly prosperous 
during the early days was of great public advantage. Their earn- 
ings were largely turned back into their properties and so supple- 
mented the capital which they were able to get from the public and 
which in amount would, I think, have been inadequate to have pro- 
vided for the rapid expansion of facilities which took place between 
the years 1910 and 1930. 

I have spoken of the part which the engineer managers of the elec- 
trical utility companies played in the development of the business, 
and consequently the capital formation of the General Electric Co. 
To complete the picture it is now necessary to speak of the major ad- 
ventures of the General Electric Co., itself, in the utility field. 

I have already told how essential it was in the earlier days for 
the company to accept public utility securities in part payment for 
its apparatus and how large blocks of such securities were sold in 
the panic of 1893 to save the company's life. Attention has also 
been called that prior to the organization of the General Electric 
Co., Charles A. Coffin had organized the United Electric Securities 
Co. of Boston as a medium through which, by the issua of its de- 
bentures and preferred stock, he could find an indirect market for 
the securities of operating companies which he wished to take. The 
United Electric Securities Co. was continued in existence as a sub- 
sidiary of the General Electric Co. and was used from time to time 
for tlie purpose of liquidating in part the utility securities of the 
General Electric. Its headquarters were in Boston and its securities 
were largely sold in that market. 

In 1904 the General Electric Co. caused to be organized the Elec- 
trical Securities Corporation in New York for the purpose of doing 
a similar business in New York and thereby widening the oppor- 
tunity of the General Electric Co. to aid in the financing of utilities. 
Tlie common stock of this company, too, was held by the General 
Electric Co. Many years later, to save overhead and simplify the 
organization, the United E'ectric Securities Co. of Boston was 
liquidated by a transfer of its assets in the domestic field to the 
Electrical Securities Corporation, and in the foreign field to the 
International General Electric Co., which is the subsidiary of the 
General Electric Co. doing its foreign business, except in Canada. 
It is unnecessary to speak of the United Electric Securities Co. 


further than to ^ay that it served a useful purpose for more than 40 
years with satisfactory returns to its investors and the General 
Electric Co. and that it had rendered a substantial service to the 
financing of utilities during that period when the market was not 
ready to supply the capital demands. 

The Electrical Securities Corporation still exists, but it no longer 
issues its securities to the public, all of the outstanding ones having 
been called and retired. It is owned entirely by the General Electric 
Co. and it developed through many years a highly specialized man- 
agement and it is today, practically speaking, only an incorporated 
securities department of the General Electric Co. It, too, as a financ- 
ing mechanism to protect utility credits, had served a useful purpose. 

These two companies were investment companies. They were not 
in any sense management companies although at infrequent times 
they were compelled as investors to participate as directors, and oc- 
casionally as managers. Such activities, however, were purely in- 

I shall now speak of another adventure of the General Electric Co. 
into the utility field which did not originally contemplate but which 
ultimately eventuated in management and in a "holding company." 
I speak of the Electric Bond & Share Co. It was natural that the 
two investment companies above referred to should take the secur- 
ities of the larger public utility operating companies. It was, of 
course, the ambition of the engineer managers, of whom I have 
spoken, to operate initially in the larger communities. Even after 
the turn of the century, the utilities operating in the smaller com- 
munities were finding it difficult to get adequate capital and partic- 
ularly equity capital. Prior lien securities, such as bonds and pre- 
ferred stocks of the smaller companies could only be sold on a high 
interest basis and when adequate capital for common stock was not 
available, the senior securities often could not be sold at all. 

Under these circumstances, the General Electric Co., again under 
the leadership of Charles A. Coffin, conceived the idea in 1905 of 
organizing the Electric Bond & Share Co. for the purpose of aiding 
the smaller utilities in raising junior capital and in selling their 
senior securities at a better price. The development of the utility 
business in serving many communities from centralized power plants 
through the use of long transmission lines practically forced the 
Electric Bond & Share Co., through the normal evolution of its 
business, into a large holding and management company. Mean- 
time, other operating units, through holding companies and other- 
wise, were extending their lines to serve not only small cities, but 
small villages and hamlets; indeed, they were reaching out for the 
farms. As these operating units became larger and the general trend 
of the utility business was profitable, the Bond & Share Co. was 
able to handle its own financing and to provide its own capital re- 
quirements without help from the General Electric Co. Accordingly, 
on December 30, 1924, the General Electric Co. decided to divest it- 
self of ownership of the Electric Bond & Share Co. by distributing 
the common stock of that company to its own stockholders as a divi- 
dend. Such stock at the time of its distribution was valued on the 
books of the General Electric Co. at $25,000,000. Of course, the 
market value at that time was very much larger — $125,000,000. 

Mr. Henderson. At the time it was distributed ? 


Mr. Young. Yes ; but \Ye were carrying it on our books at 25 mil- 

Mr. Henderson. Did you have any idea what the value would 
be today ? 

Mr. Young. We didn't know anything about it. 

The Chairman. But you distributed it as 25 million. 

Mr. Young. And charged 25 million to surplus. 

So much for the utility business. 

In 1919, after the close of the Great War, the General Electric 
Co., at the suggestion of the President of the United States, under- 
took to secure the cooperation of all American concerns interested 
in wireless in the creation of a unified organization to develop and 
protect the communication interests of the United States throughout 
the world. The story of radio and its rapid development need not 
be repeated liere. It is only referred to because the Radio Corpo- 
ration of America was organized for the above purposes in 1919 and 
as the result of a decree of the Federal court, the common stock of 
the Radio Corporation which the General Electric Co. held was 
distributed in 1933 to the stockholders of the General Electric Co. 
as a dividend. The value of that stock as carried on the books of 
the General Electric Co. was approximately $26,500,000 and that 
amount was deducted from surplus in that year. 

Mr. Henderson. What was the market value? 

Mr. Young. The market value was just about that at the time of 
the declaration. 

Mr. Henderson. That was in 1933 ? 

Mr. Young. That was in 1933. 

While speaking of dividends, perhaps I should say at this point 
that in addition to the Electric Bond & Share and the Radio Cor- 
poration dividends of $51,000,000, the General Electric Co. has, dur- 
ing the 48 years of its life, paid cash dividends to its stockholders 
of $655,662,000 and an additional $47,000,000 to retire its special 
stock issued as stock dividends. During this same period the com- 
pany has sold approximately $7,000,000,000 worth of electrical prod- 
ucts and it has paid to its employees in wages and salaries something 
over $2,700,000,000. 

Now we are back to the point where I started. The enterprise has 
been profitable, but it took the vision and daring of genius to create 
it. It took confidence, ^persistence, and courage to develop it and 
carry it through its earlier clays. It remains only for us at this 
time and for those who come after us to so administer this great 
concern that it may continue to render a service in the future com- 
parable to the past. 

That is the story, Mr. Chairman and gentlemen, of the evolution 
of the capital of the General Electric Co. and a general picture of 
its over-all business. 

I will make, if the committee wishes, some observations, my own 
observations now, of the lessons which I think may be fairly drawn 
from the statement which I have just made. 

The Chairman. The committee will be very happy to receive them, 
Mr, Young. 



^Ir. Young. First, as to taxes, the General Electric Co. has built its 
capital largely out of undistributed profits. Of its $322,000,000 of 
capital investment, $142,000,000 represents i-etained earnings in the 
form of surplus and general reserve. In addition, $50,000,000 of its 
capital stock was retained earnings evidenced by stock dividends. In 
a word, $192,000,000 of its $322,000,000 of capital came from earnings; 
$92,000,000 from cash investment, either in the form of direct stock 
subscriptions or in initial purchase of bonds later converted into 
stoQlv. The remaining $38,000,000 represents acquired properties 
which I think we may assume had a money value equal to the amount 
of the stock issued against them. 

The important point, then, is that in a new industry, where it 
is always difficult to obtain adventure capital and equity capital, 
it is desirable, if not indeed necessary, to provide that earnings may 
be retained for the development and expansion of the business. That 
is not only in the public interest from the standpoint of the de- 
velopment of the industry, with its increased employment and con- 
tributions to the national wealth, but even from the standpoint of 
the Government budget over a period of years the tax returns will 
be increased and not diminished. That is my judgment. It seems 
to me that the history of the General Electric Co. shows that. 

While I sympathize entirely with the view that the retention of 
profits in the corporate treasury ought not to be permitted in those 
cases where it is merely a ruse to relieve large stockholders from 
personal taxes, still, on the other hand, the universal application of 
the undistributed profits tax works great hardship on smaller con- 
cerns which find it difficult to get capital and especially on new 
enterprises in which investors are hesitant to embark their savings. 
Some way should be found by which the undistributed profits tax 
might be conserved as a weapon against tax evasion on the one side, 
but relinquished for the purpose of legitimate capital needs of the 
companies having earnings to conserve, on the other. 

Second, again as to taxes: It seems to me clear that the General 
Electric Co. could not have survived the panic of 1893 and probably 
could not have obtained such large subscriptions to its capital stock 
after the turn of the century if a capital gains tax of the kind we 
now have had been in operation. Without such subscription it seems 
entirely probable that the General Electric Co. would not have been 
able to face the temporary panic of 1907. I am strongly inclined 
to think that the capital gains tax is a wholly undesirable item in 
a program of national taxation. It has probably received its chief 
support because of the desire to reach the speculator, especially over 
the stock exchanges. The impact of the tax, however, has become 
a serious deterrent to supplying adventure and equity capital in the 
country. The speculation over the stock exchange is only a flea bite 
in our national economy and one might say that insofar as the 
capital gains tax is an instrument to reach the profits so made, it is 
a weapon which not only kills the mosquito of speculation but the 
goose that lays the golden egg for the development and expansion 
of industry. 


In any event, now that the stock exchange is under adequate con- 
trol, it may well be considered whether the capital gains tax need 
be retained for the purpose for which it was largely originated. 

By and large, I may say on taxation — and this is only a personal 
observation — ^I think I am in very complete accord with the recom- 
mendations of the preliminary report of the Brookings Institution 
on tax modifications. I volunteer so much, Mr. Chairman. 

Now, as a general observation, it seems to me fair to say that the 
history of the General Electric Co. shows what a tremendous 
factor individual leadership is in the development of new industi'y 
and in any organization within that industry. Truly, it may be said 
that the General Electric Co. was and is only the lengthened shadow 
of Edison and Thomson in the field of science, and of Charles A. 
Coffin in the field of business. It was their energy and capacity, 
functioning largely without governmental restraint, that enabled them 
to build in half a century one of the most spectacular industries of 
the world. 

I am not now protesting against certain Government regulations 
and restraints in this age, but I am saying that it should be exercised 
with the greatest discrimination and in such a manner as to conserve 
to the utmost the advantages of free and competent leadership. 

One also can't look at the history of the General Electric Co. and 
of the electrical industry without realizing the tremendous benefit 
which came from the terrific and painful purge of the panic of 1893. 
Great benefit came. There was no artificial effort then to alleviate 
the impact of that depression. The result was that both the utilities 
and the manufacturing industries came out with a sounder capital 
structure, a more competent and aggressive leadership than could 
possibly have existed under the old regime. It took from 5 to 7 years 
to recover from that panic, but when the recovery came the economic 
structure of the electrical industry at least had been cleared up so 
that it was ready for effective action, as the next three decades show. 

This raises the question whether artificial alleviation of the impact 
of depressions through Government aid in the financial field are help- 
ful to a nation's economy. Please do not misunderstand me. I am 
not here speaking of the relief of individuals who may need aid for 
a period. I am speaking of the effort to conserve financial structures, 
as distinguished from relief of individuals, and sometimes to bolster 
up organizations and concerns which are not effective economic agen- 
cies from the standpoint of the national economy. It may be much 
better to face the suffering which comes from their elimination, that 
is of inefficient units, than to prolong the depression by a fruitless 
effort in their conservation. 

I am not saying this in criticism of anything that has been done, 
but I suggest that there should be, beginning now, wide and liberal 
laws under which prompt reorganization with private capital of un- 
wieldy capital structures, wherever thej" exist in business, may be 

Perhaps at this point I may be justified in saying a general word 
about the overworked term "pump priming." I had occasion to saj'^ 
in a little speech which I made in Florida recently this. I will 
repeat it here : 

I am in favor of temporary deficit financing, providing that it is supple- 
mented by an aflirmatively stimulating and lielpful attitude toward the rail- 


roads, toward the utilities, toward the coustruction industry, and provided 
further that tliere be such revision of tax laws and suspension of threats and 
restraints as will really enable the stimulant of deficit financing to work. I do 
not believe in the policy of giving a stimulant and then immoiliately neutraliz- 
ing its effectiveness. Let us stimulate purchasing power with deficit financing, 
provided that coincidentally government is ready, actively, to aid the stimulant 
by decisive measures helpful to business and to business confidence. 

That is all, Mr. Chairman. 

The Chairman. Do any members of the committee desire to ad- 
dress questions to Mr. Young? 

Dr. LuBiN. Among the items you dealt with, Mr. Young, was 
the development of the holding company in the utility field? 

Mr. Young. Yes. 

Dr. LuBiN. And in justificaticm of the growth of those holding 
companies you mentioned the fact that the investor was thereby 
given an opportunity to purchase securities over a variety of firms, 
as it were, as opposed to purchasing in underlying operating com- 
panies. Has the experience of the last 3 or 4 years in your opinion 
led you to believe that the people wdio continued their holdings 
in these underlying operating companies came out better or worse 
than those who bought these securities in the holding comj^anies? 

Mr. Young. Let me say at the beginning that I dealt with the 
holding company as stated, as it existed up to the period of the 
great war, if you noticed. I have not endeavored to deal with the 
development of the holding company since. That is quite another 

Dr. LuBiN. I also was very much interested in what you said about 
the regulation of utilities by municipal and State regulatory au- 
thorities. I take it there must be some Innidreds of operating utility 
companies in the United States. Does the General Electric have any 
records available showing the number of instances in which rates 
have been cut, let's say, over a period of 10 or 15 years? 

Mr. Young. I don't know that we have now. I think the Edison 
Institute has complete records of that. 

Dr. LuBiN. Is it your impression that those rate cuts were quite 
frequent ? 

Mr. Young. Yes; during recent years very frequent. 

Dr. LuBiN. But prior to the Federal Government coming into 
the picture were they frequent? 

Mr. Young. Yes; they were coming progressively along prior to 
that, but I think they have received stimulation — I think the indus- 
try believes undue stimulation — from the entrance of the Govern- 
ment into the field. 

Dr. LuBiN. The reason I raised that question w-as the fact that 
I recently was looking at some figures on rates and the thing that 
struck me was that in city after city rates remained unchanged for 
periods of 8. 10, and 15 years, despite the fact that new technology 
was cutting these costs tremendously. 

Mr. Young. Quite true, and the profits were very large during 
that time. But it is also true that I don't think any regulatory 
l>ody, during the period of most rapid development, could possibly 
liave kept up with the efficiencies and economies of the engineers. 

Dr. LuBiN. Thank you. 

Mr. Young. I don't think that Avas harmful, as I said. I think 
those additional earnings went back into the properties and supplied 


a certain deficiency of capital wliich they probably tlien couldn't 
have got from the public. 

Mr. O'CoNNELL. I should like to ask one or two questions about 
what you had to say about taxes. I understood you, directly refer- 
ring to the undistributed profits tax, to feel it should have a very 
limited application and be limited to what you might call personal- 
holding companies or organizations which have for their purpose the 
evasion of taxes. 

Mr. Young. Yes. 

Mr. O'CoKNELL. And if I also understood you correctly, your feel- 
ing was that an undistributed profits tax operates to the disadvan- 
tage of new and small industries. 

Mr. Young. Yes. 

Mr. O'CoNNELL. Would you care to say whether, in your opinion, 
or how in your opinion, it operates as regards large and well-estab- 
lished industries ? 

Mr. Young. Well; I may say how it operates so far as the General 
Electric Co. is concerned. It is a matter of no consequence at all 
to us. We have ample liquid capital ; we have no debts, we intend to 
distribute our earnings to our stockholders as they come along. The 
effect the tax wall have, the impact of the tax, will be much more 
serious on our small competitors. It w^ill have no influence upon ns. 

Mr. O'CoNNELL. When you speak of the undistributed profits tax 
you mean the tax that now exists or the one that existed before the 
last revision? 

Mr. Young. It doesn't make any difference, because we are going 
to distribute our profits to our stockholders anyway, no matter what 
the tax is or whether there is no tax. It makes no difference. 

Mr. O'CoNNELiv. So you belicA^e, insofar as your company and com- 
panies of your type are concerned, an undistributed profits tax is 
all right. It gives you an advantage. 

Mr. Young. I say it doesn't hui't us. I think in the long run, if 
it is conthiued, that it will, especially at high rates, impair tremen- 
dously all of our small competitors. 

Mr. O'CoNNELL. But it won't hurt your company? 

Mr. Young. It won't hurt us. 

Mr. O'CoNNELL. And as regards the capital gains tax, I under- 
stood you to feel that the capital-gains tax should in all probability 
be completely eliminated? 

Mr. Young. Yes; that is the way I feel. 

Mr. O'CoNNELL. Is that on the theory that it impairs confidence? 

Mr. Young. It is on the theory that what we need most in this 
country now, as I see it. is adventure capital and equity capital, and 
I do not see how we can hope to recover from this depression with- 
out the promotion of new industries and without the supply of equity 
capital for certain old industries which need it, and it seems to me 
that the capital gains tax is the greatest deterrent toward the supply 
of equity and adventure capital. 

Mr. O'CoNNELL. Do you happen to know when a ca|)ital gains tax 
first became a part of our tax structure ? 

Mr. Young. I haven't looked that up ; no. 

Mr. O'CoNNELL. I was under the impression that it was about 
:-:Mr. Young. Yes? 


Mr. Henderson. Tlien we had a whole movement in the twenties 
when the capital gains tax was still in effect. Is it your opinion, 
then, that at a time like this, when we are perilously in need of ex- 
pansion, repeal of the capital gains tax would have a much more 
restraining effect than it had in the twenties? 

JNIr. Young. I should think it would have a very great effect on the 
positive side. 

Ml-. Henderson. It didn't have much of a restraining effect in the 
jNIr. Young. Xothing had any restraining effect in the 1920's. 
Mr. Henderson. We had a dynamics in the system. 
Mr. Young. That is the trouble. Nobody was thinking. They were 
in unrestrained action. 

Mr. Henderson. This is a very instructive history. 
Senator King. Before you leave the question of taxes, may I ask a 
question? Isn't it a fact that Great Britain, after a number of years 
operating under the capital-gains tax, abolished it and took no account 
of its capital gains or losses? 

Mr. Young. That is my understanding. Sir Josiah Stamp has read 
me long lectures on that. 

Senator Ktng. And with respect to evasion by withholding undis- 
tributed profits, isn't it a fact that one of the sections, I think it is 
section 506 of our statute, makes it clear that if it is for evasion, punish- 
ment may be had and the ])enalty is very severe against a corporation, 
so that the Governinent has in its hands now a club by which it may 
force the declaration of dividends from undistributed profits? 

Mr. Young. I haven't experience enough from the Government end 
to know how effective that is, but I would say, Senator, that I referred 
to that matter only because I didn't want to be understood as in any 
sense favoring the repeal of the excess-profits tax when it might 
prejudice the Government collection of taxes or might favor tax 

Senator King. I think, if I may be pardoned a personal statement, 
the hearings before the Finance Committee witli respect to the undis- 
tributed profits tax are being held. I will say, frankly, I was always 
against it because I thought it was very unwise, and it woidd result in 
penalizing the small corporations against the large ones, and the evi- 
dence before the committee showed that those corporations that had 
those large reserves weren't affected, and when the panic came on many 
corporations distributed — oh, a tremendous sum, billions of dollars, to 
the stockholders at that time, and the corporations continued in busi- 
ness because of the reserves which they held as a result of the undis- 
tributed profits, so that ultimately it filtered back into the industries 
and into the pockets of the employees and the public generally. 

Mr. Hendfjjson. I think, Senator King, the figure to which you 
are referring was an amount of negative savings to the corporations 
which was not the amount paid out. It was the amount which was 
charged against those accunnilated surpluses that had been derived 
from maintained earnings, and for the large part they didn't repre- 
sent disbursements in the way of wages and dividends as much as 
they represented an ability of the corporation to adjust its affairs by 
writing down its inventories and writing down the value of its securi- 
ties, which I think was the procedure your company went through. 


Senator King. I don't agree with that, but that is a controversy 
we can carry on before the Finance Committee, because we will have 
that question up within a short time. 

Mr. Young. Oh, yes; we have written down plants that cost 200 
millions to 40 millions. 


Mr. Henderson. You have been writing down your fixed plant 
investment over a period of time, as I recall. Considering it from 
about 1920 down to now, you have had at least a 30 or 35 percent 
reduction in that. 

The Chairman. What was the answer? 

Mr. Young. Yes ; I think that is so. I haven't the figures before 
me in percentage. I should think it would be at least that. 

Mr. Henderson. Have you the figures on your fixed plant after 
deducting depreciation from the early twenties down to now? I 
think it will show about 30 to 35 percent reduction. 

Mr. Young. It is all shown in the annual reports and we will be 
glad to send you a tabulation of it. 

Mr. Henderson. I have some of those and I have been over them 
at various times. 

I want to get back to this period when you were in the expansion 
phase of G. E.'s existence; as I recall, until the end of the war you 
might be said to have been in that period. 

Mr. Young. Yes. 

Mr. Henderson. And then right after the close of the war you 
had a need, because of tremendous orders that came in, for some 
financing, but since that time there has been no need to go to the 
capital markets. 

Mr. Young. No. 

Mr. Henderson. In fact, you have been going through a process 
of disinvestment, as I recall. 

Mr. Young. Yes. 

Mr. Henderson. With retirement of your bonds and 

Mr. Young (interposing). We called our bonds; we called and 
paid off our forty-odd millions of preferred stock, our special stock; 
we distributed to stockholders 50 millions of securities in the shape 
of Electric Bond & Share Co. and Radio Corporation stock in addi- 
tion to the cash dividends during that period. 

Mr. Henderson. And so to all intents and purposes your general 
experience parallels that of Mr. Stettinius' company iii that from 
your internal sources, after you had arrived at this period of relative 
maturity in your company, you could do the financing without tap- 
ping outside savings. 

Mr. Young. That is right. 

Mr. Henderson, I should like to ask you also, as I recall pretty 
generally you have not spent for plant and equipment since. 1921 or 
1922 as much as your depreciation account; is that true? 

Mr. Young. I think that is probably true. 

Mr. Reed.^ Our plant was carried at 66 millions in 1920 and carried 
at 40 millions in '38, so there has been a net reduction of $26,000,000. 

* Phillip D. Repfl. assistant to the president, General Electric Co. 


Mr. Henderson. Yes; and you have had the depreciation account 
avaihible and you did maintain your capacity intact, I imagine, or 
did it increase during that period ? That is, here is a period in which 
you have not been spending as much for new investment or for 
replacement as was available from the depreciation account, and your 
plant has been carried at a lower figure. Now has your capacity in 
that 18-year period expanded, contracted, or stayed the same? 

Mr. Young. When you talk about capacity in a concern like the 
General Electric Co., it is very difficult to answer without being mis- 

Mr. Henderson. Particularly when in 1920 there was no such thing 
as a radio tube and now there is; yes. 

Mr. Young. You see, now in an automobile company that capacity 
means something; even in the steel company it means something, 
but do you realize that the General Electric Co. makes over a million 
different kinds of tilings — over a million different kinds of things? 

Mr. Henderson. I realize, Mr. Young. 

Mr. Young. And, therefore, when you start talking about capacity 
it is almost impossible to deal with it intelligently. 

Mr. Henderson. Take it on the dollar volume of products. 

Mr. Young, Yes. 

Mr. Henderson. There has been an expansion since 1920, hasn't 
there ? 

Mr. Young. Oh, yes. 

Mr. Henderson. So what you said, of course, was correct about the 
undistributed-profits tax ; it would not have affected you in that period,, 
but in the early period. 

Mr. Young. It wouldn't affect us in that period, nor can I see how 
it would affect us in any reasonable projection of time. 

Mr. Henderson. In that same period, as I recall from 1921 to 
around 1929, the retained earnings of all American corporations were 
something like $32,000,000,000, and you have expressed yourself as 
being against — as Senator Harrison and many others have, and as 
Senator King has — the use of a retained earning as a basis for escape 
from personal taxation. 

Mr. Young. Yes. 

Mr. Henderson. Now, assuming that you had an exemption for 
small concerns by which they could have built up their capital, since 
we know pretty well that their access to the capital markets is de- 
cidedly limited, would you have had any feeling about the larger 
corporations if some way had been conveniently available for allow- 
ing them to retain the earnings and yet pay somewhat the same ratia 
of tax as the dividends wluch actually passed out? As I recall, 
probably $4 passes out and $3 is retained of the earnings of the 
twenties and that $4 that passed out, particularly when it passed 
to the liigher brackets, was subject to a rather high taxation. 

Now, in England they have means by which they get at the amount 
which is retained. I wonder if you have given any thought to the 
possibility of something like that which would have gone beyond 
the purely escape function of the personal holding company, but 
would have gone to the desirability of taxing the more stable and 
larger corporations on a basis of what was really the investors'' 
equity retained by the company? 


Mr. Young. I think that if there is any way by which that could 
be reached, particuhirly in the larger brackets, it is justifiable. 

Mr. Henderson. The English have had a much better experience 
than we. Have you talked to Josiah Stamp about that ? 

Mr. Young. Yes; I have. 

Mr. Henderson. Other Enolish observers besides Stamp, as they 
have come into this country, have said that we failed to get at some 
of the proper uses of taxation to reach that 32 billion. As I gather 
from your testimony, you see ])robably. like Mr. Stettinius. no time in 
the immediate future in which your company will be needing new 

Mr. Young. I can't. 

Mr. Henderson. And therefore you are looking toward risk and 
venture, the encouragement of risk and ventin-e for the newer com- 
panies and for newer enterprises nnd for smaller c<)m{)anies in their 

Mr. Young. Newer companies and new business and the smaller 
companies for equity money and the newer businesses for venture 

Mr. Henderson. Suppose that there Avas an adjustment in the 
credit granting mechanisms so that a small company, a medium-sized 
company, could get capital or get bank credit which it coidd liquidate 
on a longer term than the banking acts now permit, wouldn't that be 
much better as far as inunediate stimulus goes than merely the provi- 
sion concerning retaining undistributed profits or the repeal of the 
capital gains tax^ 

Mr. Young. It seems to me that that presupposes that the Govern- 
ment is going to provide that financing. I don't see how it can be 
done by private business. 

Mr. Henderson. You mean private business — you mean private 
banking business? 

Mr. Young. Yes; any private business — whether it is the individ- 
ual or the banker. 

I don't see how anyone can supply that equity and adventure capi- 
tal on the terms which were indicated unless it be the Government, 
or Government-guaranteed. 

Mr. Henderson. We have had an experience over at F. H. A. 

Mr. Young. Now personally, and this I would like to make very 
clear, I think that anybody who puts equity capital or adventure 
capital into a concern has to participate in management ; and I think 
if the Government provides equity or adventure capital, it will inevi- 
tably have to participate in the management of the hundreds of 
concerns, small concerns in this country that need it. I don't believe 
that that is the way to develop the business of the country, either 
from the standpoint of the Government or from the standpoint of 
our economy. 

Mr. Henderson. May I say also that I agree with you, that any i)l'an 
which contemplates the Government's participation in the- manage- 
ment of thousands of concerns ought to be thrown down immediately. 
But isn't there something in tlie F. H. A. experience of guai'anteeing 
loans through banks which might be used foi' small concerns^ 

Mr. Young. Possibly; I wouldn't say it could not be done, but I 
say that when you supply equity capital without tlio responsibilit}' 


somewhere on their part to watch the management, thai it is a pre- 
carious enterprise. 

Mr. Frank. Mr, Young, I gather you think, if new and small and 
medium-sized enterprises are to be aided, that you would prefer to 
see that aid, assuming Government weren't to do it, come in the form 
of equity financing rather than disproportionately through loans. 

Mr. Young. I don't tliink tliat loans will solve the problem at all. 
I liave had some experience in watching the applications of the Federal 
Keserve bank in New York, where I am chairman of the board of 
directors, and the great number of cases that apply there for loans, 
even on a 5-year term, are cases which need permanent fixed capital, 
capital to be invested in new macliinery, perhaps in new improved 
machinery, in the deA^elopment of ])rocesses, wliicli in the nature of 
things can't be paid back. 

Mr. Frank. And even if the loan were of long term, the fixed charge 
through interest might put the small, growing business in a precarious 
position if there came a temporary recession and default, whereas 
equity financing would avoid that embarrassment. 

Mr. Young. It would avoid that em])arrassment. 

Senator King. Don't you think, Mr. Young, you are building up on 
a i-ather sandy foundation — at least, not a desirable foundation — where 
the Oovernnient is the creditor and most of the people are the debtors, 
which will result if the Govermnent extends credit to the little man 
and to the big man and to all enterprises? Isn't that a situation 
which we should avoid if we can? 

Mr. Young. Without any question. 

Senatoi- King. Our country has grown during the twenties and 
thirties and forties and fifties and sixties, and on, without the inter- 
j)osition of the Government in extending credit to everybody; and the 
more credit we have extended during the past few years, the worse off 
we are. 

Mr. Young. Quite true. 

Dr. LuBiN. We didn't loan them; we gave land away and we gave 
franchises away. Instead of loaning these people things, we gave them 
gifts, in tariff protection and things of that sort. 

The Chairman. Are there any other questions? 

Dr. LuBiN. Just one question. Mr. Young, I w^as very much inter- 
ested in your statement to the effect that you were in favor of deficit 
spending if at the same time certain constructive things were done 
along certain lines, and you particularly mentioned construction. 
There is no doubt, I think, in any of our minds that the basis of a real 
forward movement in the American economy is in construction right 
now. Do you have any suggestions — would you amplify your state- 
ment when you say we should take constructive action to lead to the 
stimulation of construction? Here you have the whole housing prob- 
lem which has a potential capacity to absorl) four or five billion dollars 
per year. Have you any ideas as to what we can do constructively to 
stinnilate housing? 

Ml". Young. That is such a large area now, and one is so likely to 
l)e misunderstood if he deals wnth a segment of it without dealing 
with the others, that I hesitate to answer that question. 

For 2 years at least I have said that I thought it would be better, 
even from the standpoint of the Government, to exempt a certain 


Hinount of a man's income if he put it into housing than to have the 
Government provide the money itself for the housing, and that was 
because you have literally several million people interested in develop- 
ing housing, watching the character and cost of construction, and 
trying to make that Valuable, and I don't see how any over-all organ- 
ization of Government can possibly do that kind of thing as 'well. 
That is my ow^n personal feeling. 

Senator King. Governments haven't exhibited much omniscience, 
although they have exhibited a great deal of omnipotence. 

Mr. Young. Tliey exhibit as much omnipotence as any of us do. 
They are no better or worse than we. 

Senator King. But I w^ould rather trust you than trust the 

The Chairman. I was absent, of course, Mr. Young, when you 
came on the stand, and it may be that in your prepared statement, 
which of course I haven't had the opportunity of reading from the 
beginning, you may have covered some of the points that I should 
like to develop, A little while ago you were testifying about the 
present capital of the General Electric Co. I understood you to say 
that that amounted to approximately 332 million ? 

Mr. Young. Three hundred and twenty-two. 

The Chairman. Three hundred and twenty -two, of which 192 mil- 
lion is represented by earnings, 92 million by investment, and 38 mil- 
lion by the acquisition of property? 

Mr. Young. Tliat is right. 

The Chairman. I take it from that statement that $38,000,000 
worth of capital stock was issued in exchange for property? 

Mr. Young. For ijroperty. 

The Chairman. At what value was the stock issued in exchange 
for the property, at reasonable accurate cash value of the property? 

Mr. Young. I have said that I thought it was probably a fair 
value. My idea in that is that that very largely came in the early 
days first when they took over Edison and Thomson-Houston. They 
issued stock against plants, do you see, and so they 

The Chairman (interposing). Is there any possibility when that 
stock was issued against plants it really was in excess of the valuation 
of the plants? 

Mr. Young. I should doubt that. 

The Chairman. That, of course, lias happened in some financing? 

Mr. Young. I think in every case that I know where General Elec- 
tric stock has been issued there has been such an adversary position 
between the person parting with the property that got stock that it 
is fair to assume that the properties were correctly priced. There 
was no place that I know where anybody interested in the General 
Electric Co. sold its property and took stock back. 

The Chairman. Now you have no debt? 

Mr. Young. Which is the usual case, isn't it, where the excessive 
valuations appear? 

The Chairman. I think so. Now you have stated that the com- 
pany at the present moment has no debt? 

Mr. Young. No debt; no preferred stock. 

The Chairman. It did borrow in the earlier days ? 

Mr. Young. Oh, yes. 


The Chairman. AVhat was tlie total amount of borrowings which 
have been repaid ? 

Mr. Young. Senator, even in 1920 when tliose inventories shrank 
so severely, it borrowed $45,000,000 from the banks. 

The Chairman. Can you tell me, approximately ? 

Mr. Young, And it paid back 42 millions in the 3 months of 
the succeeding year. 

The Chairman. Can you tell me the total amount of borrowings 
which have been repaid throughout the life of the company? You 
miglit have covered that in your earlier statement. 

Mr. Young. If you omit the bonds, the total short-tenn borrow- 
ings of the company, as I see them here, $92,900,000. 

The Chairman. I beg your pardon? 

Mr. Young. $92,900,000. 

The Chairman. Now, then, your earnings were $192,000,000, which 
have been retained ? 

Mr. Young. Been retained. 

The Chairman. And you paid out in dividends 655 million? 

Mr. Young. 655 million. 

The Chairman. That would make a total of 939 million which 
were earned approximately during this entire period ? 

Mr. Young. Yes. 

The Chairman. As against a total investment of approximately 
130 millions, figuring the acquisition of property at face value of the 
capital stock issued against it? 

Mr. Young. Yes. 

The Chairman. And you are now what I call the U. S. Steel, a 
self-sufficient company, depending on no outside resources of any 

Mr. Young. I think if any company in the country is self-sufficient 
the General Electric is. 

The Chairman. Now did you give us the number of your stock- 
holders ? 

Mr. Young. Yes; 208,000. 

The Chairman. And the number of employees? 

Mr. Young. The number of employees is between 55,000 and 65,000, 
direct employees, and not those in the subsidiaries. 

The Chairman. You Avere here when I questioned Mr. Stettinius 
about the difference between salaried workers and wage workers ? 

Mr. Young. Yes; I couldn't hear it very well, Senator; I was 
sitting over there fiiidicating]. 

The Chairman. Well, do you have that distinction in your com- 
pany between salaried workers and wage workers? 

Mr. Young. Yes; we have somewhere — 18 to 20 thousand of those 
55 or 65 thousand that are salaried workers. 

The Chairman. From 18 to 20 thousand of the 55 to 65 thousand 
are salaried workers? 

Mr. Young. Salaried workers. 

The Chairman. Who are on more or less permanent basis? 

Mr. Young. Yes. 

The Chairman, And the others constitute a floating labor supply 
which you use or discharge as the needs of the market 

Mr. Young (interposing). I would hardly say "floating." There 
is a certain number of the younger employees who have, for example, 

124491— 40— pt. 9 10 


1 year of service, or so, sometimes 2, may be said to respond to tlie 
characterization which you have made. 

The Chairman. Well, perhaps I shouldn't have used the word 
"floating." What I am trying to differentiate is the salaried worker 
who has a more or less permanent status and the wage Avorker wiiose 
claim on employment arises only when the plant is operating and 
you need the work. Now there is that distinction ? 

Mr. Young. Quite right. 

The Chairman. So that by far the largest proportion of the em- 
ployees of the General Electric Co. which has made this perfectly 
marvelous financial record do not have a stable employment with the 
company ? 

Mr. Young. Well. I have to say that in certain departments of the 
company, like the lamp department for example, the incandescent 
lamp department, we have made an effort to guarantee certain yearly 

The Chairman. How successful were you in that effort? 

Mr. Young. We have been very successful. 

The Chairman. How many persons have you guaianteed annual 
earnings ? 

Mr. Young. I would have to get those figures for you. Senator. 

The Chairman. Could you give me any idea? 

Mr. Young. May I throw a little light on that incandescent lamp? 
That is something, being a necessity, you can count on a reasonably 
certain demand. In the dull seasons we can make them and store 
them and let the inventory run up, because we know the demand is 
coming; and, therefore, that kind of business lends itself to a guar- 
anteed wage wdthout great risk on the part of the employer, and with 
great assurance to the employee, and it ought to be done wherever 
it can be done. 

Now let me i)oint to another case. In the turbine department, 
where you are building turbines of great horsepower, and where 
utility companies ma}' order many of them over a short period, or 
they may give you no orders at all over a long period, it just isn't pos- 
sible, so far as we now know, to make any guaranteed wage or em- 
ployment to workers of that kind. Now, it is just as Mr. Stettinius 
said; I heard him say that, that when the automobile business squares 
itself away so that the demand for steel is continuous, then the steel 
companies can do something. When the utilities and the industrials 
square themselves away so as to give us anything like a regular load, 
on a turbine plant, then we can do something. 

The Chairman. Well, in other words, the effort to guarantee wages 
to the employee can be made only in those departments of your com- 
pany which have a more or less stable and steady output ? 

Mr. Young. Verj^ true. We are quite ready to pay the i)rice of 
increasing our inventory, for example, during the summer months in 
lamps, where it runs up very high, in order to keej) our people at 

The Chairman. Now, what has been the effect u])on employment 
by your company of modernization ? The testimony of Mr. Watson, 
you remember, for the U. S. Steel was that in those plants where 
the modernization had taken place there was a reduction of 25 percent 
of the employment schedule? 


Mr. Young. Now, again, sir. I think that any answer to that or 
attempt to answer it would be more misleading than enlightening 
l)ecanse, for example, the problem of modernization of the incandes- 
cent-lamp field or modernization in a repetitive thing like refrigera- 
tors, and so forth, where yon liaAe large volume is one thing. When 
yon move over into the made to order industries, like turbines and 
large motors and generators, and so forth 

The Chairman (interposing). But the modernization of which I 
speak, tlie modernization of your ov;n equipment which enables you 
to pi'oduce your output ^^'ith fewer employees. Now you have such 
a modernization, do you not^ 

Mr. Young. Yes ; but in order to make that enlightening we would 
have, for example, to make comparisons between now and .r years ago 
in the incandescent lamp field for you. Then that would mean some- 
tliing — or in the turbine field, or in the i-efrigerator field. 

The Chairman. Then have you no present impression of the effect 
of what is called technology on employment in your company? 

Mr. Young. I haven't any question but what that has reduced it. 

The Chairman. It has reduced employment? 

Mr. Young. I haven't any doubt but what it has. That is the 
whole tendency of industry, but if you were to ask for figures about 
it I think it would be wholly misleading unless you apportioned it 
to departments. That is what I am trying to get at. 

The Chairman. Now the wage cost, I suppose, represents with 
General Electric as it does with most other enterprises a very sub- 
stantial portion of the total cost of production? 

Mr. Young. Yes. In wages I should say it represents about 50 

Mr. Henderson. We have it here. Mi-. Young. During the period 
y<:>u sold $7,000,000,000 worth of products you paid employees two 
billion and seven, so that would roughly be about 38 percent. 

Mr. Young. P^orty ])ercent pei-haps. The question is whether you 
relate it to costs or selling prices; in relation to costs it is perha])S 45 
or 50; in relation to selling prices naturally it is less. 

The Chairman. Your testimony was, as I I'ecall it, that through- 
out the history of the development, approximately at least. General 
Electi'ic has maintained about 20 to 25 percent of the total output of 
the entire electrical industry? 

Mr. Young. Yes. 

The Chairman. To what do you attribute that proportion, that 
steady proportion? 

Mr. Young. Well it is very surprising. Senator, to see how difficult 
it is ill a growing industry for any concern to increase its percentage, 
if tliere is adequate competition. 

The Chairman. Well is the electrical industry still a growing 
industiy ? 

Mr. Young. I think it is still — the last few years don't indicate 
it very well in gross business, but I think it is an expanding industry 
still. ^ 

The Chairman. Well, assuming that is only a temporary 

Mr. Yoi^NG. I do. 

The Chairman. Develo]:)ment. then in the electrical industry there 
is now the opportunity, in your opinion, for adventure capital and 
equity capital? 


Mr. Young. I think undoubtedly. 

The Chairman. What is the comparative opportunity of adven- 
ture capital to secure investment as compared with you? Or let me 
put it the other way. Wliat is the comparative opportunity of some 
new company or some new enterprise to obtain capital for adven- 
ture in the electrical industry field as compared with your self- 
sufficient ability to finance expansions yourself? 

Mr. Young. Well, over the last 30 years there have been great 
numbers of smaller electric concerns started, and they have obtained 
capital even against the strong position of the General Electric and 
Westinghouse. Now why do they do that? Sometimes because of 
smaller overhead, of closer contact with workers, of quicker and 
more effective production and delivery. There are great margins in 
there for small business. 

The Chairman. A loan to a small business of that kind would not 
in your opinion be uneconomic? 

Mr, Young. A loan? 

The Chairman. Yes. 

Mr. Young. Well, I think — I don't think you can deal with it 
through loans. Senator. 1 think we made that mistake ever since 
the depression began, that we have complained because banks didn't 
make loans or Federal Reserve banks didn't make loans. The fact 
about it is that there is all the difference in the world between loan- 
ing a companj' something where it turns over its capital and can 
pay it back and lending money to buy machinery or something of 
that sort, and have it fixed capital ^here it can't pay back. 

The Chairman, But I understood you to tell me, in your opinion, 
there is an opportunity for adventure capital, 

Mr, Young. Yes ; equitj^ capital but not loan capital. I am making 
that distinction in reference to your term "loan capital." 

The Chairman. It isn't altogether clear to me why it was an 
economical and wise thing for General Electric to borrow money to 
adventure in this field and why it would be unwise for a small 
enterprise to borrow money for that purpose. 

Mr. Young. Oh, it isn't unwise for the small company to borrow. 
Please don't misunderstand me. 

The Chairman. Then I didn't get your explanation. 

Mr. Young. Suppose a small company has a block of orders here 
and it needs to buy materials and pay wages in order to get them out, 
but it has the orders and the buyers are here. There is no reason 
why tliey shouldn't borrow money to carry that and pay it out of 
the proceeds of the sale. 

The Chairman. Then it comes down to this, that a loan which 
is on security in the business is a perfectly proper loan 

Mr. Young. No ; if you will pardon me just a minute. It is quite 
a different matter to borrow money to build machines t_o fill those 
orders because you can't liquidate the cost of the machines out of 
the orders and, therefore, you have an unlimited — there is. no way 
of paying them back: you can't turn the machine over to the bank 
very well. 

The Chairman. But if the machines were to produce a product for 
which there was an insured sale in an expanding industry, would not 
that product be a 

Mr. Young (interposing). It would over a course of time. 


The Chairman. But that, of course, is what the little business 
enterpriser says he can't get and what he should get. 

Mr. Young. Well, what I think, he may be mistaken himself. I 
don't think he wants loans. He needs partners to put up money 
with him. That is what he needs. 

Mr. Frank. Isn't the difficulty, if he borrows against a fixed plant 
and if for any reason there is a temporary recession so he isn't able 
to earn enough to pay the interest on the loan, he is going to be 
foreclosed ? 

Mr. Young. Bankrupt. 

Mr. Frank. Therefore, what he ought to have is a flexible condi- 
tion where those who advance the money are his partners and will 
take potluck with him in those periods of recession. 

Mr. Young. Quite right. 

The Chairman. In response to the question asked by Mr. Hender- 
son, you spoke of the unrestrained activity of the twenties. 

Mr. Young. Yes. 

The Chairman. And rather deprecating it, I think. 

Mr. Young. I did ; perhaps I didn't emphasize it enough. 

The Chairman. By whom or what should that activity be re- 
strained ? 

Mr. Ygung. Well, now that is quite a long story, but it is very near 
to my heart. 

The Chairman. It is near to the heart of a lot of people, I think. 

Senator King. Near to the purses of a lot of them, too. 

Mr. Young. I think that the handling of the credit situation in the 
1920's was an inexcusable blot on our whole economic mechanism. 
There was no control over credit by anybody. The Federal Reserve 
System didn't adequately function. The banks couldn't function be- 
cause there was bootleg money in the market and until you got a 
complete run-away credit situation, which I think was at the base of 
the trouble of the 1920's. 

The Chairman. Well, what agency could have restrained that 
run-away system? 

Mr. Young. I think myself — and I was a part of the Federal Re- 
serve System then — the Federal Reserve System, if it had taken that 
situation in hand early enough, say in 1927, could have prevented 
entirely the catastrophe that came in 1929. . 

The Chairman. Well, that to a certain degree at least would be 
a Government restraint, would it not? 

Mr. Young. Well, to a certain extent, yes. 

The Chairman. Now what did you mean by the phrase "threats 
and restraints" which you felt ought to be removed? What threats 
and what restraints? Certain restraints are good. 

Mr. Young. You don't really want me to answer that. 

The Chairman. If you care to, Mr. Young. I will be very glad 
to have you answer it. I am just trying to develop a picture. 

Mr. Young. Because if there is one thing that I don't stand for 
in this economy it is an accumulation of complaints about what has 
been done. I think we all sense that certain menacing attitudes have 
been taken, one way or another, sometimes necessarily taken ; in any 
event, there is a certain break in confidence in our business structure 
and I wouldn't like — ^I would like to see the attitudes changed suffi- 
ciently so that we might get some confidence in place of the present. 


The Chairman. Well, there was plenty of confidence during this 
period of no restraint to which yon referred a little while ago. 

Mr. Young. Yes; I know. 

The Chairman. That was overconfidence. 

Mr. Young. That was overconfulence, and what I am speaking of 
now is that here we are trying to lift ourselves out of the depression 
by getting an increased business turnover and a consequential in- 
crease in the national income, and unless we get that increase in the 
national income, I do not see how we can go on with the plans that 
we have. Therefore, the first thing to do, it seems to me, is to try 
and aet this machine functioning so that the national income can be 
adequately increased. 

The Chairman. Now, in the course of your prepared statement 
you paid a compliment, and a very gracious compliment, I thought, 
to the various regulatory bodies of the various States. 

Mr, Young. Yes. 

The Chairman. Those bodies exercise a certain amount of 
government restraint. 

Mr. Young. The}' do, ;iud when I said restraint I did not mean 
to criticize the regulating agencies of the Govermnent. Some of 
them are new, they haven't found their way yet. Great difficulties 
are facing them. It is no complaint about them to say that. It takes 
time to work that out. 

The Chairman. So that, obviously, we cannot draw the picture 
in either broad sweeps of black paint, or broad sweeps of white 

Mr, Young. You are quite right. 

The Chairman. And say, thus far shall you go in Government 

Mr. Young. You are quite right, and that is the reason I didn't 
want to answer your question about restraints, lest I be considered 
as draAving black paint across this picture, which I have no desire 
to do. 

The Chairman. My feeling was that the reference to threats and 
restraints, which ought to be done away with without defining them, 
might be so inteipreted, and I think perhaps you have cleared 
that up. 

Mr. Yoi'NG. Thank you for helping me clear it up, sir. 

Senator King. You referred to the runaway situation during the 
twenties. 1920 and on. 

Mr. Young. Yes. 

Senator King. Was that not largely due to the gambling propensi- 
ties, the speculative spirit which existed in every industry and in 
every segment of our country? 

Mr. Yoi^NG. I think it w;is due to that spirit plus an unrestrained 
credit situation. 

Senator King. I recall eoing through the stock exchange to make 
inquiry in 1924, 1925, 1926, 1927, and 1928, and I found there that 
the banks of NeAV York had loaned on margins for stock purchased 
by people in every part of the United States more than 7 or 8 
billion dollars as a maximum. 

Mr. Young. Tremendous, 

Senator King. And I introduced bills in the Senate to restrain 
the Federal banks from loaning upon marginal transactions. I could 


get no siipi)ort. The peoj^le resented it, they felt that they ought 
to be permitted to buy stocks, gamble upon the stock exchange, 
and you would find farmers in every part of the United States 
clamoring to get to the telephone to ascertain whether there had been 
a rise or de^'line in the stocks in which they had invested the day 

Mr. Young. Quite true. 

Senator King. So wasn't the situation largely the fault of the 
gambling and speculative spirit, and the phobia that possessed the 
American people ? 

Mr. Young. Senator, let me give you a reference to show how 
strong that spirit was. A given manager of a business who realized 
that the price of his shares was wholly out of line with iheir true 
value, made a public statement to that effect, and the day after he 
made the statement, the shares took the largest rise they had in weeks 
because somebody said, here was a conspiracy on his part to buy 
in the shares for less than they were worth. So wliat were you 
going to do? 

Senator King. So that the banks were largely to blame for loan- 
ing so much money upon collateral which in many instances lacked 

The Chairman. This isn't a very good preliminary for the con- 
clusion that we ought to let business regulate itself, is it? 

Senator King. I think it is so; yes. Children fall down. You 
let them run. 

The Chairman. You shouldn't have introduced those bills. 

Senator King. The banks are subject to (iovernment control. 

The Chairman. Well, it is after 6 o'clock, Mr. Young, and we are 
very much indebted to you for a very interesting afternoon. It was 
very illuminating. What is your })rogram for tomorrow? 

Mr. Xehemkis. We hope to proceed promptly at 10:30 with Fred- 
erick R. Rentschler, United Aircraft Corporation. 

The Chairman. The committee will stand in recess until 10 : 30 
tomorrow morning. 

(Whereupon, at 6 p. m., a recess was taken until Thursday, May 
18, 1939, at 10:30 a. m.) 


THURSDAY, MAY 18, 1939 

United States Senate, 
Temporary National Economics Committee, 

Washington, D. G. 

The committee met at 10:40 a. m., pursuant to adjournment on 
Wednesday, May 17, 1939, in the Caucus Koom, Senate Office Build- 
ing, Senator Joseph C. O'Mahoney presiding. 

Present: Senators O'Mahoney (chairman) and King; Representa- 
tives Reece and Williams; Messrs. Henderson, Hinrichs, Lubin, 
O'Connell, and Brackett. 

Present also: Ernest S. Meyers, Department of Justice; Ernest 
Tupper, Department of Commerce; Peter R. Nehemkis, Jr., special 
counsel, Investment Banking Section, Securities and Exchange Com- 
mission; and Joseph R. Kelley, associate counsel. Investment Banking 
Section, Securities and Exchange Commission. 

The Chairman. The committee will please come to order. Mr. 
Nehemkis, you are ready to proceed this morning? 

Mr. Nehemkis. I am, sir. 

The Chairman. Who is your first witness ? 

Mr. Nepiemkis. The first witness is Mr. Frederick B. Rentschler, 
chairman of the board of the United Aircraft Corporation. Mr. 
Rentschler is in the stand at this moment. 

The Chairman. Mr. Rentschler, do you solemly swear that the testi- 
mony you are about to give in this proceeding shall be the truth, the 
whole truth, and nothing but the trutli, so help you God ? 

Mr. Rentschler. I do. 

Mr. Nehemkis. Mr. Chairman, may it please the committee, yester- 
day there was presented to the committee a discussion of the way in 
which some of our major industries have expanded, largely through 
their own internal accumulated resources. We have been told by the 
witnesses who appeared here yesterday how the United States Steel 
Corporation, the General Electric Co., and the railroad industry are 
virtually financially self-sufficient business units. That is to say, these 
industries have little recourse to the capital markets for plant expan- 
sion and replacement, but these industries, it will be noted, are mature 

This morning we shall turn our attention to an industry which is 
a relativel}'^ new industry, the airplane industry. As Mr. Young 
observed yesterday, one of our great needs today is venture capital.^ 
Accordingly we invite the committee's attention to a case history 
where the question of venture capital has loomed large. This morn- 

1 Supra, p. 3618. 



ing you sliall hear the story of three men who upon returning from 
the war had between them three things; an enthusiasm for the air- 
plane, a good idea, and a thousand doUars. I therefore call one of 
these men to tell the story of the United Aircraft Corporation's de- 
velopment and expansion, Mr. Frederick Rentschler. 


Mr. Nehemkis. Will you state for the record, please, your name 
and address? 

Mr. Rentschler. Frederick B. Rentschler, Hartford, Conn. 

Mr. Nehemkis. And will you state, sir, your connection with the 
United Aircraft? 

Mr. Rentschler. Chairman of the board of United Aircraft Cor- 

JNIr. Nehemkis. Now. Mr. Rentschler, I am going to ask you to tell 
in your own words and your own way the beginning, the develop- 
ment, and the ex})ansion of your corporation from a small business 
enterprise to one of our large and growing and important corpora- 
tions, and the way in which you and your associates have financed 
this expansion through the internal sources of the corporation. Will 
you proceed. Mr. Rentsclder? 

JNIr. Rentschler. We are i)leased to respond to your invitation to 
appear before this committee to tell the history of United Aircraft 
Corporation of Hartford, Conn. This company makes Pratt & Whit- 
ney aircraft engines. Hamilton Standard pro})eilors, and Vought- 
Sikorsky airplanes. 

The backbone of our present company is the Pratt & Whitney 
engine division, and I believe this conmiittee v.'ould be interested in 
tlie history of the original Pratt & Whitney Aircraft Co. 

Pratt c^ Whitney Aircraft Co. was incorporated in July 1925. in 
compliance with a contract between the Niies-Bement-Pond Co., 
George J. Mead, and myself, with the object of developing airplane 
engines. About 1 year previously I resigned as president of Wright 
Aeronautical Corporation located at Paterson, N. J. About 4 years 
prior to this date I liad assisted in the organization of Wright Aero- 
nautical Corporation; was first its vice president and general manager 
and sb.ortly thereafter became president. For several years Mead Avas 
chief engineer of that company. 

Thus it was in the sjiring of 1925 I began serious consideration of 
some way of going on with tlie development and manufacture of 
aviation engines. 

I discussed this possibility fully with the Bureau of Aeronautics 
of the Navy Department. The Navy believed that if a successful 
air cooled engine of approximately 40 horsepower could be de- 
veloped, it might have a very broad application in naval as well as 
all other tyjies of aircraft. This was obviously a highly experi- 
mental project at that time. However, here was the opportunity, if 
a successful engine could be developed, to start a company. The 
Navy advised that there were no experimental funds to finance this 
project, as it was against the policy of the Navy to do this in ad- 
vance, but Navy did advise that if an engine meeting their per- 
formance requirements were successfully demonstrated on a naval 


eiicliiraiice test, they would then be prepared to order experimental 
engines and that if these were sucecssfid in fiiglit demonstration, 
quantity orders might follow. 

soimcES or cAPrrAL funds— pratt a- wurrxEY aircraft co. 

Mr. RENTsrHLf:R. Now. at this time my ho[)es for a new company 
had therefore readied the i)oint where we knew what we wanted to do 
and believed that we had the experience to do it, but did not have the 
capital to begin our operations. 

I believed that this was not an ordinary banking proposition, due 
to the extra hazard of the new aviation industry. It came to my 
attention that the Xiles-Bemen-Pond Co. had surplus plants on 
hand and also a considerable amount of cash, neither of which could 
be immediately used in its own business. Xiles was one of the old- 
est manufacturers of machine tools and precision tools, gages, and 
shop equipment. After negotiations with them, during which time 
they thoroughly investigated our plans, we entered into a formal 
contract with them, out of which developed the Pratt & Whitney 
Aircraft Co. 

Senator King. What company ( 

Mr. Rentschler. The Pratt & AMiitney Aircraft Co. 

Pursuant to this conti'act. Xiles was obligated to advance the 
sum of $250,000 in cash and to provide space for us to rent, as we 
might need it, in one of their idle plants in Hartford, Conn. With 
this sum of money, we believed we could carry through a so-called 
experimental period, during which time it was our job to design 
and construct a 400-horsepower air-cooled engine which could pass 
a successful Xavy endurance test. 

In the meanwhile, I disclosed progress of my plans not only to 
George Mead, but to Donald Brown. Both of these men were well 
known to me, and the three of us became the first employees of 
Pratt & Whitney Aircraft Co.; Mead as chief engineer, Brown as 
factory manager, and myself as president. 

We went to Hartford and began operatif)ns on August 1, 1925, 
and within a few days had built up our personnel to 30 people and 
were occupying a few hundred square feet of floor space in a large 
empt}' plant of 4 stories, most of which was being used as a ware- 
house for tobacco. Others in the industry knew as much about Xavy 
requirements for a 400-horsepower air-cooled engine as ourselves 
and it was now a matter of who first could produce a successful job. 
In March 1926. our engine of 410 horsepower, which we called the 
Wasp, successfully passed its Xavy endurance test, and shortly 
thereafter orders were placed for 6 experimental engines of this 

Following the successful Xavj- endurance test, the so-called experi- 
mental period, as provided for in our original contract, was deemed 
successfully carried through, whereupon Xiles. as originally provided, 
were obligated to advance an additional $500,000 to carry on. Again, 
pursuant to this contract, preferred stock in the amount of $750,000 
was issued to the Xiles Co. 

In the meanwhile, additional experimental engines were delivered 
to the Xavy and after exhaustive tests, successfully demonstrated 


their superiority to previously used water-cooled types, and this led 
to the placing of an order for 200 Wasp engines by the Bureau of 
Aeronautics. This contract was obtained in October 1926. At this 
time the Niles Co. had advanced the $750,000 referred to above and an 
additional $280,000 covered by demand note from the aircraft com- 
pany. I think it is also of interest to note that the Wasp was the 
first successful high-powered air-cooled type of engine, and its suc- 
cessful demonstration led immediately to a very broad application of 
the air-cooled type in not only military aircraft, but in all types of 
commercial aircraft as well. 

Needless to say, beginning in 1926 our organization of 30 original 
men began to expand pretty rapidly and it became a game to see how 
soon new machine tools could push tobacco out of its warehouse. 
Our shipments during this period were as follows : 

1926 $57,000 

1927 2, 760, 000 

1928 7, 900, 000 

1929 15, 898, 000 

I think it is also of interest that our original three employees are 
still with our present company, United Aircraft Corporation ; George 
Mead as its chief engineer. Brown as its president, and myself as 
chairman of its board of directors. In the meanwhile, too, we must 
not lose sight of the fact that of these other 30 employees mentioned 
above, who might be deemed the founders, one has resigned and one 
has died and the others are still in our present company. 

Now, in review, the Niles Co. risked more than $1,000,000 before 
there was any real assurance that this new project had got on its 
feet. At the end of the first several years, and through earnings of 
the company, the preferred stock of Niles was retired as well as the 
demand note for the additional sums advanced. Niles owned one- 
half of the common stock of this new aircraft company, the other 
half was owned by us. Other than as indicated above, there was no 
other financing of Pratt & Whitney Aircraft Co. 

Now, the above summation brings the Pratt & Whitney Aircraft 
Co. to the point where, in October 1929, it joined in a merger of 
other companies to make up United Aircraft and Transport Corpora- 
tion. This latter company was the result of a desire to develop a 
thoroughly integrated aircraft company engaging in the manufac- 
ture of airplanes, engines and propellers, as well as the operation of 
air transport lines. All the companies which entered into this united 
group had histories more or less m line with that of Pratt & Whitney 
Aircraft Co. All were pioneer companies in aviation; all were de- 
veloped by individuals whose primary business was aviation ; all were 
originally financed by the personal funds of their founders or through 
private sources ; all were successful in their particular fields. 

At the time of the formation of United Aircraft and Transport 
Corporation, it was deemed advisable to obtain additional capital. 
Aviation at that period was expanding very rapidly and no one 
could possibly foresee how long or how sound this expansion would 
become. In all, $12,000,000 was obtained through the sale of $50 par 
value cumulative 7-percent preferred stock. Before the dissolution 
of this company in 1934, all of this preferred stock was retired at 
the call price of $55, and during the meantime all dividends had reg- 
ularly been paid thereon. 


In 1934, due to Governnieiit regulations, it became necessary to 
bring about the disassociation of aviation equipment and transport 
companies. In compliance therewith, United Aircraft & Transport 
Corporation was dissoh'^ed and out of this dissolution the following 
companies came into existence: United Airlines Transport Corpora- 
tion, The Boeing Airplane Co., and United Aircraft Corporation. 

The interest of our group now is solely confined to United Air- 
craft Corporation, Its plants are all located in Connecticut. 

Largely because of the separation into the three groups, United 
Aircraft found itself lacking in what was deemed to be adequate 
•capital. In March 1936 we offered our stockliolders the opportunity 
of advancing the desired amount of new capital through the issuance 
of additional stock. The result of this offering was completely suc- 
•cessful, and all of the stock was taken up. The company realized 
approximately $6,000,000 which was used to pay off bank loans in 
the amount of $2,500,000, the constniction of a new propeller plant 
and additional machinery in the amount of $1,500,000, with the bal- 
ance of $2,000,000 added to working capital. In 1937 the sum of 
$1,300,000 was expended for additional plant account, principally 
machinery. In 1938 $723,000 was expended for new plant account. 
For the year 1939 there has been expended or authorized expendi- 
tures for additional plant account in the amount of $3,000,000. 

Still managed and directed by its original personnel. United Air- 
craft Corporation has continued to make progress. A glance at ship- 
ments from its inception in 1934 to date reflects the following: 

4 months to Dec. 31, 1934 $3,800,000 

193'i 11, 885, 000 

1936 22, 300, 000 

1937 29, 295, 000 

1938 36, 800, 000 

It is expected that 1939 shipments will be the largest in our history. 

As one of the founders of this aircraft company — and I think I may 
speak also for Messrs. Brown and Mean — we have felt proud of this 
job. We took idle cash and idle property in Hartford, and saw this 
converted into a going vigorous industry which shortly outgrew the 
original large empty quarters, and then the erection of an entire new 
plant of our own. 

During a little less than 15 years we have grown steadily to a point 
where our original personnel has been expanded into an average 
force of between 5,000 and 6,000 people, with a pay roll approaching 
$1,000,000 monthly. We have given employment to the very finest 
type of mechanics and skilled workmen, and at highest wages. W© 
have always been extremely satisfied with our location in New Eng- 
land, and particularly in Hartford, principally because of the avail- 
ability of skilled labor which is so necessary, as well as the procure- 
ment of materials and even manufacturing assistance from many of 
the other skilled workshops of New England. We believe that we 
must have been a considerable factor against unemployment in Hart- 
ford and Connecticut, particularly during the past 5 or 6 years. 

Our company has demonstrated its ability to expand its operations 
to meet all requirements and entirely from its earnings. We intend 
to continue this procedure as a matter of policy. Our company to- 
day is owned entirely by its approximately 29,000 common-stock 
holders, free of any indebtedness whatever, and we believe with ade- 
quate working capital for the future. 


Mr. Nehemkis. Mr. Rentschler, I desire to ask you a few questions 
and I think then the committee will undoubtedly desire to interrogate 

If I understand correctly, Mr. Rentschler, the interest of your group 
today is confined solely to the United Aircraft Corj^oration which is 
an operating company, is that correct ? 

Mr. Rentschler. That is correct. 

Mr. Nehemkts. The United Aircraft has one subsidiary I 

Mr. Rentschler. T]\e Canadian Pratt & Whitney Aircraft Co.. a 
small company su])plying engines in Canada. 

Senator King. Manufactured in the United States? 

Mr. Rentschler. Partly, and partly in Canada. 

Mr. Nehemkis. And the United Aircraft holds 70 percent of the 
stock ? 

Mr. Rentschler. Of the Canadian Pratt & Whitney, 70 percent. 

Mr. Nehemkis. For purposes of clarification and so that the record 
may be entirely clear, is it correct that the group tliat you have 
described is com])osed of three divisions, so to speak, the Pratt & 
Whitney Aircraft which manufactures engines? 

Mr. Rentschler. That is right. 

Mr. Nehemkis. Plamilton Standard Avhich manufactures propellers? 

Mr. Rentschler. Propellers. 

Mr. Nehemkis. And the Vought-Sikorsky whicli manufactures 

Mr. Rentschler. That is right. 

Mr. Nehemkis. Is it correct, Mr. Rentschler, that in the case of 
the United Aircraft & Transport Corporation, there were two in- 
stances of financing, the first for general expansion purposes, where 
it was necessary to obtain a cumulative 7-percent stock? 

Mr. Rentschler. That is right. 

Mr. Nehemkis. And before its dissolution in 1934, United Air- 
craft & Transport Corporation called all of its preferred stock at 
call price of 55; is that correct? 

Mr, Rentschler. That is right. 

Mr. Nehemkis. And is it also correct that throughout the period 
of its existence, the preferred-stock dividends have been paid regu- 
larly by the company? 

Mr. Rentschlfj?. Regularly. 

Mr. Nehemkis. In the early stages of Pratt & Whitney Aircraft 
Corporation, Niles-Bement-Pond advanced, roughly speaking, 1 mil- 
lion ; is that correct ? 

Mr. Rentschler. That is correct. 

Mr. Nehemkis. Largely if not entirely for experimental purposes. 

Mr. Rentschler. That was all experimental. 

Mr. Nehemkis. Between July 1925 and 1934 j'our capital 
requirements were 12.5 million plus; is that correct? 

Mr. Rentschler. That is right. 

Mr. Nehemkis. Witli the exce])tion of about 1 million advanced 
by Niles-Bement-Pond and the original $1,000 advanced by the in- 
corporators which you liave already described, that entire amount of 
12.5 millions plus was ])rovided through the sale of the company's 
products; is that correct? 

Mr. Rentschler, Correct. 


Mr. Xkhemkis. The total amount spent for engineering and cle- 
yelopnient between July 1925 and September 1934 was about 3 million 
plu8, was it not ? 

Mr. Rentschler. That is right. 

Mr. Nehemkis. After September 1934, the enterprise conducted 
by Pratt & Whitney Aircraft Co. was carried on by United Aircraft 

Mr. Rentschler. That is right. 

Mr. Nehemkis. Between September 1934 and December 1938 the 
capital requirements of the United Aircraft Corporation were 20 
million plus, were they not ? 

Mr. Rentschler. That is correct. 

Mr. Nehemkis. So that total internal sources made the following 
contributicms: 1, Depreciation — about 2.6 million; 2, retained profits, 
about 4.6 million. 

Mr. Rentschler. I think that is correct. 

Mr. Nehemkis. And three other reserves — oh, about tAvo hundred- 
odd thousand? 

Mr. Rentschler. Two. 

Mr. Nehemkis. During the same period $9,254,000 was expended 
for engineering and development, is that correct, sir? 

Mr. Rentschler. Yes, 

Mr. Nehemkis. Now, if we combine thoses figures for Pratt & 
Whitney Aircraft, your plant expenditures totaled about 11 million? 

Mr. Rentschler. That is correct. 

Mr. Nehemkis. Com])ared with an over all expenditure of about 
$13,142,000 for engineering and developing? 

Mr. Rentschler. That is right. 

The Chairman. Let me interrupt you there. Would you be good 
enough to repeat those figures? 

Ml-. Nehemkis. Beginning with the internal sources; yes. The 
internal sources made the following contribution: 

Dej)reciation, 2.6 million; retained ])rofits, 4.6 million; other re- 
serves, 211,000. 

The Chairman. 211,000? 

Senator King. Dollars^ 

Mr. Nehemkis. I want to add that in the event either you or I 
have not been altogether accurate on a figure, we both have the 
right to amend any statements. I think my associate, Mr. Kelley, 
tells me the figure for other reserves should be 217,000; that is cor- 
rect, isn't it ? 

Mr. Rentschler. Yes. 

Mr. Nehemkis. Now, during the same ])eriod $9,254,000 was ex- 
])en(led for engineering and development. Now, if we combine those 
figures we have a total which is derived as follows, $6,802,000 plus 
$4,202,000 for plant expenditures; combining the over all expendi- 
tures Ave have the following figures: 3,888,000 and 9,254,000, giving 
a total ex})enditure for engineering and development of 13,142,000. 
1 have one further question, Mr. Rentschler, so that the record may 
be entirely clear on this point. 

Am I correct in assuming that there w^as no financing of Pratt & 
Whitney Aircraft Co, from without, except as you have already 
indicated, and to the extent of $750,000 from the Niles-Bement- 
Pond Co., in accordance with their original obligation; and then 


an addition of $280,000 which was borrowed from them on an open 
account ? 

Mr, Rentschler. That is entirely correct. 

Mr. Nehemkis. And that during* the entire period Pratt & Wliit- 
ney Aircraft Co. never borroAved any money from a bank, even dur- 
ing a temporary period? 

Mr. Kentschler. That is correct. 

Mr. Nehemkis. The witness is yours, Mr. Chairman. 

The Chairman. Mr. Rentschler, as I understand the stoi"y that 
you have told, this great corporation which has made such a name 
in this country and throughout the world for the manufacture of 
aviation engines began with a contribution of about $250,000 from 
Niles-Bement-Pond Corporation ? 

Mr. Rentschler. That is correct. 

The Chairman. On an arrangement whereby that company which 
was a very old company, founded in the early days of the United 
States, as I understand? 

Mr. Rentschler. Yes. 

The Chairman. Was to participate in the development of the new 
industry ? 

Mr. Rentschler. That is right. 

The Chairman. And by and large it contributed over $1,000,000 
in this manner? 

Mr. Rentschler. That is right. 

The Chairman. Then to obtain funds for necessary expansion you 
sold preferred stock? 

Mr. Rentschler. True. 

The Chairman. You did not issue any bonds ? 

Mr. Rentschler. No. 

The Chairman. Now, in addition to the preferred stock there was^ 
of course, common stock? 

Mr. Rentschler. That is right. 

The Chairman. But all of the funds that were necessary for the 
development of the company were, I take it, derived from the sale 
of the preferred stock? 

Mr. Rentschler. That is right. 

The Chairman. The common stock itself, if I remember the story 
of the financing at the time, was, at least for the most part, dis- 
tributed as a bonus to promote the sale of the preferred; is that 

Mr. Rentschler. No; I wouldn't say that. It was common stock 
issued when the company was incorporated, but it had no value as 
issued, no nominal value. 

The Chairman. This no value when issued, that is my point, and 
it was distributed in connection with the sale of preferred stock, was 
it not? 

Mr. Rentschler. It was all of a part of our agi'eement with the 
Niles Co. as individuals. 

The Chairman. But my recollection of what happened at the time 
was that the stock of the company was offered in units of preferred 
and common; is that right? 

Mr. Rentschler. No. 

The Chairman. I am speaking only from memory. 


Mr. Rentschler. That was United Aircraft & Transport Corpora- 
tion, but the events that you were first referring to took place in 

The Chairman. Oh, yes. Well, the events that I am referring to 
took place later on? 

Mr. Rentschler. Yes. 

The Chairman, The original financing did not involve the dis- 
tribution of common stock as a bonus with the sale of the preferred ? 

Mr. Rentschler. No. 

The Chairman. But the common stock was issued as of a nominal 
value; the real value was in the preferred because that is where the 
investment was coming from ? 

Mr. Rentschler. Sure. 

Tlie Chairman. Those who contributed cash to the enterprise con- 
tributed by way of the purchase of preferred stock and not by way 
of the purchase of common stock? 

Mr. Rentschler. That is right. The arrangement simply was that 
Niles had the money; w^e thought we had the experience, and our 
business deal with them was that they would have only half of the 
common stock of the company; half was ours. It was their obliga- 
tion to put up the money and ours to run the company. 

The Chairman. Now, then, except for the sale of preferred stock 
you had no other occasion to borrow money ? 

Mr. Rentschler. Tliat is true today of the aircraft company. As 
a matter of time, that is from 1925 through to 1928, during which 
period, however, the company did develop into a going concern that 
was fully on its feet and very actively engaged in the business of 
making aviation engines. 

The Chairman. And, of course, there Avas a growing demand for 
aviation engines as the aviation industry expanded, and the country 
became air minded, and the opportunity was there opening to you, 
and your associates, to take advantage of what we call the new 
frontier to develop this business and place your company upon a 
strictly self sufficient basis? 

Mr. Rentschler. That was right. It really was the beginning of 
a realization which was just a dream in 1923 and 1924. 

The Chairman. So that the sales of the aviation engines and re- 
turns which you received from these sales were sufficient to place 
value in the common stock? 

Mr. Rentschler. That is right. 

The Chairman. Wliat is the value of the common stock now ? 

Mr. Rentschler. Well, of United Aircraft Corporation the market 
price is somewhere in the thirties — '33 or '34, as I remember it — but, of 
course, that hardly would tie up with the original company we are 
speaking of now. 

The Chairman. No. 

Mr. Rentschler. There have been successive changes in corporate 

The Chairman. But now you are in that fortunate position that 
it is not necessary for you to call upon the savings of the public for 
further expansion? 

Mr. Rentschler. We think so. We follow that policy to date. 

124491— 40— pt. 9 11 


The Chairman. The concludiii|^ statement was, I think, that it is 
your intention to maintain that position if you can and finance what- 
ever further expansion you may be fortunate enough to undertake 
out of your o^vn earnings and your own capital? 

Mr. Rentschler. That is our aim and policy. 

The Chairman. Now, what is the effect of this development upon 
employment ? 

Mr. Rentschler. Well, the effect on employment, I should say, 
rests with our ability to keep on expanding our business. 

The Chairman. I take it that your busine«?s being an expanding 
business in a new field, the number of employees has constantly been 
growing ? 

Mr. Rentschler. That has constantly grown. Our shipments are 
still upward each year. 

The Chairman. You haven't yet encountered any difficulty by the 
way of technological unemployment, have you? 

Mr. Rentschler. I should say not. 

The Chairman. In other words, the demands of the aviation indus- 
try are such that although there may be an increased efficiency of 
machines, you are constantly using a new labor supply ? 

Mr. Rentschler. We have been constantly using a new labor sup- 
ply and think we have kept our corporation, and must keep it, as 
nearly modern and up-to-date as possible. 

The Chairman. I observed with very much interest as you were 
giving your prepared statement that in 1937 you expended $1,300,000 
for additional plant account, principally machinery, and that in 
1939 your expenditures have increased to approximately $3,000,000. 

Mr. Rentschler. At the present time, yes; and they' may be 
larger before the year is out. 

The Chairman. So that there are industries which are expanding ? 

Mr. Rentschler. I thiwk tliat is right. 

The Chairman. And, of course, that expansion depends upon the 
demand for the particular kind of product which you are able to 

Mr. Rentschler. I think that is true. 

The Chairman. Are there other industries in your mind which 
might offer similar opportunities to investment ? 

Mr. Rentschler. Well, I don't know of any I could mention at 
the moment. 

The Chairman. In any event it is obvious that the problem for the 
country would be to find other industries such as yours which even 
in a depression could proceed to expand and increase expenditure for 
the purposes of development? 

Mr. Rentschler. I think that is right. An example in line with 
what you ask for might be television that it is possible to develop; 
that is something else new and it is found it can be developed. 

The Chairman. What is your policy toward employees? Do you 
have a certain number of salaried workers and certain number of 
wage workers ? 

Mr. Rentschler. That is right. 

The Chairman. How many salaried workers do you have? 

Mr. Rentschler. I will have to 

The Chairman. Just approximately. 


Mr. Brown.^ If I may be permitted to answer that. We have a 
total on the wage pay roll of 5,794. I would estimate that our office 
pay roll would perhaps run around 600. 

The Chairman. Six hundred out of 5,000? 

Mr. Eentschler. Six hundred out of 5,794 as the total. 

Mr. Brown. It might be more; it might be less. 

The Chairman. Now, those office employees are more or less per- 
manent employees? I mean they have all the year round employ- 
ment? Tlie wage workers, do they have all year round employment 

Mr. Eentschler. They have as long as we have been running the 
way we have been. The answer really is "yes," because our plant 
has been busy continuously. 

The Chairman. But if plant orders should let up why naturally 
they would be the first to go? 

Mr. Eentschler, That is right. 

The Chairman. Have you considered — you probably haven't, be- 
cause your plant has been constantly expanding and the demand 
increasing — but have you given any consideration to the question of 
stabilizing employment of these wage workers on a similar basis to 
the stabilization of employment which the ordinary salaried worker 

Mr. Eentschler. We haven't been up against that condition, but 
I am sure if we should, that we want to. In other words, I think 
our attitude would be very friendly toward finding some way of 
spreading employment as far as we could in some proper way. 

The Chairman. Well, the thought that comes to my mind is that 
it is quite evident not only from the testimony which has been devel- 
oped here before this committee, from what we see about us, that 
there are opportunities for expanding industry from time to time, 
but that the most important obstacle in the way of the develop- 
ment of industry, at least so it seems to me, is the inability of the 
great numbers of the people who are unemployed or who receive 
only a miserable W. P. A. compensation from the Government to 
enter the market to purchase the products of industry, and I con- 
cede that to be as great a problem for industry as it is for Govern- 
ment to solve. Indeed, from my own point of view, I think it is a 
greater problem for industry than it is for Government. 

Mr. Eentschler. I agi^e with you. 

The Chairman. Are there any other questions ? 

Mr. Henderson. I have a question or so. 

The Chairman. Mr. Henderson. 

advantages or financing capital requirements from internal 


Mr. Henderson. I noticed that you said in your concluding para- 
graph, Mr. Eentschler, that "we intend to continue this procedure 
as a matter of policy." That is the policy of meeting all your 
requirements entirely out of your earnings. Now, that isn't neces- 
sarily—hasn't over a period of years been so much a policy as an 
opportunity, has it? Does it run in your mind that your company 

^ Donald Brown, president United Aircraft Corporation. 


definitely planned to finance from internal sources and to get on a 
very desirable self financing basis, or was it because of your expan- 
sion and your earnings and things like that? More of a happen- 
stance. Did you have a conscious policy of keeping away from the 
capital markets? 

Mr. Rentschler. We frankly did. I will admit that under cer- 
tain conditions we might have been forced to adopt another policy. 

Mr. Henderson. You say "forced." Do I get a connotation from 
that that you would like to keep away from the capital markets ? 

Mr. Rentschler. Well, I would frankly say that I would ; yes. 

Mr. Henderson. Why? 

Mr. Rentschler. Well, I think if you can do it the other way, or as 
long as you can do it that way, I'd prefer to. 

Mr. Henderson. What are the advantages that run in your mind? 

Mr. Rentschler. Well, I like a company, in the first place, that has 
nothing but the common stock if you can keep it that way. I admit 
that under certain conditions that might not be at all reasonable. 

Mr. Henderson. Let me stop on that one point — the advantages of 
the common stock being what ? 

Mr. Rentschler. Well, the preferred stock or bonded indebtedness 
of any kind is, after all, a debt. It isn't a stock ; it is something you 
owe somebody. The same is true in an individual. I'd rather not as 
an individual owe someone if I can avoid it. 

Mr. Henderson. Is there a value in the swings of business activity 
in having common stock as against 

Mr. Rentschler. Well, there is — of course, usually, preferred stock 
carries with it some obligation to pay, sometimes deferred but usually 
required in the long run. A company of that kind, under certain 
conditions, as I say, it is perfectly feasible, I know, but I think if the 
company can find a way of financing itself and carrying on without the 
burden of that kind it is preferable. 

Mr. Henderson. In that case each of the owners in his proportion 
of ownership is taking a share of the risk. It is a real picture of 
the enterprise then, isn't it ? 

Mr. Rentschler. I may not follow things as clearly as the next one, 
but it is something to me to know if you have 10,000 shares of stock 
outstanding, or 100,000 shares of common stock, the worth of your 
company is then very easily determined and it is all on the same basis. 

Mr. Henderson. What other operating advantages are there to this 
kind of policy as against an alternative of going to capital markets? 

Mr. Rentschler. Well, under certain conditions I think the com- 
pany, perhaps, is freer in its management of its own affairs. Usually 
a preferred stock or any bonded obligation requires certain controls 
or checks on the company's policy. 

Mr. Henderson. You mean if outside money comes in? 

Mr. Rentschler. If outside money comes in, they have the right 
and the feeling usually that they have some right to follow it up on 
policy and even to influence policy sometimes. 

Mr. Henderson. That is just not a guess on your part? 

Mr. Rentschler. It is a matter of fact. 

Mr. Henderson. It is a matter of fact, and that is one thing you 


Mr. Rentschler. We escape entirely. Theoretically, our common 
stockholders elect officers and directors, and it is their company; we 
control the rest within it. 

Mr. Henderson. You think, then, it is a fact of common practice, 
when outside capital is in, not on an equity basis, that some control 
is exercised in the direction of managerial policies. 

Mr. Rentschler. There usually is. 

Mr. EDenderson. So you escape from any direction from outside by 
this means? 

Mr. Rentschler. That is right. That would be my opinion, at 
any rate. 

Mr. Henderson. You haven't had any experience of attempted con- 
trol over your operations? 

Mr. Rentschler. We have not. 

Mr. Henderson. You have been free then to do whatever you 
wished as far as the amount that you would allocate to research is 
concerned ? 

Mr. Rentschler. Yes, sir. 

Mr. Henderson. Thinking in terms of a much longer term pro- 
gram entirely free from any of the commitments that you would have 
to make for current earnings and out payments. 

Mr. Rentschler. That is right. In the early days of the Pratt- 
Whitney Aircraft Co. down to the present day, that is absolutely 
true in our case ; there has never been any other outside control. 

Mr. Henderson. You have worked consciously toward this. You 
think of it as a policy, as I intimated in the beginning? 

Mr. Rentschler. Exactly. 

Senator King. You follow the practice which has been followed 
in most successful corporations from their beginning; namely, to 
have two classes of stock, the common and the preferred; and you 
prefer to keep the preferred stock because, first, you widen the base 
of interest in the corporation and you don't have any control as you 
might have if you went to the banks or to underwriters in order to 
obtain the necessary capital to carry on your enterprise. 

Mr. Rentschler. Yes, sir. 

Senator King. You had no difficulties by reason of the success at- 
tending your enterprise in selling your preferred stock at a fair price 
and obtaining the necessary funds for expansion. 

Mr. Rentschler. Yes. 

Senator King. So, as I state, that is a common practice, is it not 

Mr. Rentschler (interposing). Very common. 

Senator King. To issue your common stock and your preferred ? 

Mr. Rentschler. Yes. 

Senator King. There are many advantages in that course rather 
than in resorting to banks and underwriters to obtain the necessary 
capital for expansion of your business. 

Mr. Rentschler. I think there is. 

Senator King. I want to ask you whether or not you obtained any 
funds from the Government itself as a bonus or as loans or only such 
as might be derived from the sale of your products to the Government. 

Mr. Rentschler. No; none whatever. 

Senator King. Did the Government buy any of your planes? 

Mr. Rentschler. Oh, yes; I should say a great number of them. 


Senator King. Has not the Government been your principal pur- 
chaser ? 

Mr. Rentschler. About 50 percent of our business. 

Senator King. I beg your pardon. 

Mr. Rentschler. About 50 percent of the business, I should say, 
is Government. 

Senator King. And the other 50 is commercial? 

Mr. Rentschler. Commercial and export. 

Senator King. Export? 

Mr. Rentschler. That is right. 

Senator King. You have exported some planes abroad, have you? 

Mr. Rentschler. Probably 25 percent of our gross business 
throughout the whole period is done in exports. 

Senator King. To what countries, principally? 

Mr. Rentschler. Well, world-wide. Most of that, of course, has 
been for commercial purposes — air lines all over the world. 

Senator King. Is the Government purchasing your planes now? 

Mr. Rentschler. Yes. 

Senator King. Do you manufacture anything besides planes? 

Mr. Rentschler. We manufacture engines, planes, and propellers. 

Senator King. Engines and propellers. 

Mr. Rentschler. Yes; and planes. 

Mr. Henderson. You sell those to other companies who want to 
assemble them. 

Mr. Rentschler. That is right. 

Senator King. Why did you dissolve your company when part of 
your activities were engaged in transportation — did the Government 
require that? 

Mr. Rentschler. The Government required that there should be 
no mail contracts given to air lines who had connection with any 
equipment companies. 

Senator King. The purpose then was — you preferred to divorce 
yourself, separate the corporation in order to get the Government 
contracts for carrying mail. 

Mr. Rentschler. No ; you see we have nothing to do with the air- 
line companies at the minute; our business now is entirely manu- 

Senator King. You just manufacture. 

Mr. Rentschler. Purely manufacture. 

Senator King. What became of the other companies, that is, the 
divorced part of the company? 

Mr. Rentschler. They are a separate corporation now entirely. 
One of them is the United Air Lines Transport which is still ojjerat- 
ing the air lines. The third one is Boeing Co., in Seattle. That, 
too, is a manufacturing company. 

Senator King. I suppose there is competition in the activities in 
which your company is engaged. 

Mr. Rentschler. I beg your pardon? 

Senator King. I suppose there is competition in the production 
of the products which come from your company. 

Mr. Rentschler. In every way, yes; complete competition. 

Senator King. Is that competition active? 

Mr. Rentschler. Very active I should say. 


Senator King. There has been no effort, no purpose, to stifle com- 
petition by agreements or by associations or organizations? 

Mr. Rentschler. None that I know of. 

Senator King. You attribute your success in part to the fact that 
you have had free competition. 

]Mr. Rentschler. Well, I think that is absolutely necessary in 
any industry; yes, the freest competition. 

Senator King. You haven't felt it necessary then to cooperate with 
other corporations for the purpose of restricting production? 

Mr. Rentschler. None whatever. 

Senator King. Your production has increased? 

Mr. Rentschler. From year to year. 

Senator King. I assume your efficiency has likewise been apparent 
in your activities. 

Mr, Rentschler. We think so. 

Senator King. So you are making a better machine now than a few 
years ago? 

Mr. Rentschler. I am sure of that. 

Senator King. You look for continued improvement and for in- 
creased efficiency in the activities of your organization? 

Mr. Rentschler. Yes; I still believe aviation is just in its infancy. 

Senator King. Are you making large planes and large engines? 

Mr. Rentschler. Yes; we make large engines. We have made 
large planes ; we are not making them at the moment but the Sikorsky 
Co. did make the first of the so called clipper ships. 

Senator King. Have you seen marked improvement in the carrying 
capacity and the qualities of endurance and lightness of your 
products ? 

Mr. 'Rentschler. Of course that has increased by leaps and 
bounds; going back to this first engine that we described some time 
ago, it is quite a different thing than the engine we are building 
today. Of course, that is true in every detail of aircraft construction. 
There has been a remarkable improvement and it is still continuing 
at about the same rate ; if anything, accelerating. 

Senator King. With the utilization of aluminum and magnesium 
you make planes much lighter, do you? 

Mr. Rentschler. Very much lighter. 

Representative Reece. How much money did you and your two 
associates, Mr. Mead and Mr. Brown, spend in the preliminary 
stages before the Niles-Bement-Pond Co. advanced you $200,000 for 
organizing and developing the company ? 

Mr, Rentschler. Nothing whatever. 

Representative Reece. You only had an idea up to that time? 

Mr. Rentschler. Purely an idea. I will say we knew definitely 
that something would be required or else there was no use starting 
our idea. 

Representative Reece, That period, however, was the critical period 
and what led to this enlarged development and successful develop- 
ment in which you are engaged at this time, 

Mr, Rentschler, Oh, yes ; we were absolutely on the spot. We had 
$260,000 and an opportunity of getting an engine through a test. 

Representative Reece. Did you get as much encouragement and 
sympathy at that time as you have since becoming more successful? 


Mr. Rentschler. I think the answer to that would be self-evident. 

Dr. LuBiN. Mr. Rentschler, is there any arrangement in your in- 
dustry whereby you cooperate in research activities and development? 

Mr. Rentschler. I beg your pardon? 

Dr. LuBiN. Is there any arrangement in the industry whereby you 
and other people in the industry cooperate in your experimental and 
developmental activities ? 

Mr. Rentschler. No; at least in no sense directly. Everyone in 
the industry, I think, is in very close touch with the Wright Field 
and the Air Corps or Langley or the naval air stations and there 
might be something there, but purely in that way. There is no other 
cooperation that I know of within the industry. 

Dr. LuBiN. Are the results of Langley Field, for example, available 
to you? 

Mr. Rentschler. I should say they are available to everyone in the 
industry at the moment they really have something to disclose, and 
I think everj^one in the industry tries and does keep as closely in 
touch with Langley as possible. 

Dr. Lubin. Is there any way of estimating what the industry itself 
would have to spend or would have had to spend if these research 
activities of the Government had not been going on? 

Mr. Rentschler. I wouldn't want to estimate it in dollars. I think 
I can say we have been constantly carrying on research work in the 
industry, because for the most part Langley has confined their re- 
search work to those things of general application. Take, for ex- 
ample, the development of a particular kind of cowling for a certain 
engine, something once developed that would be applicable with modi- 
fications to any form of engine. Now those are all things which re- 
quire in many cases a great deal of very special equipment. For 
example, these big wind tunnels. It is almost still beyond the possi- 
bilities of a private company to operate a wind tunnel or to have to 
bear the initial cost of that sort of thing. In that way Langley has 
been extremely helpful and they have really done a very fine job. 

Dr. Lubin. Would it be fair to say that your industry has an 
advantage, in the sense that other industries don't have, to the 
extent to which the Government finances certain types of experi- 
mental and developmental work which would have had to have been 
developed by the industry and w^ould, therefore, have required more 
capital if the Government hadn't undertaken the experiment? 

Mr. Rentschler. Well, what probably would have happened is 
our whole rate of development would have been much slower than it 
has been; but, outside of finding out things as quickly as we have, 
waiting, in other words, until we could afford to do certain experi- 
ments, we would have delayed the whole development of aviation 
to that amount. 

Dr. Lubin. To that extent the Government has advanced the de- 
velopment of this industry which would have been advanced at a 
later date. 

Mr. Rentschler. That is right. They are all things that had to 
be done, in other words. 

Senator King. Just one question, prompted by Dr. Lubin's. I 
suppose you have a sort of a research laboratory, do you not? 

Mr. Rentschler. Oh, yes. 


Senator King. So that you continue your experimentation with 
a view to developing improved methods and better products. 

Mr. Rentschler. I might answer that in part by saying that the 

actual figures show that something around 10 percent of the value 

of our expenditures is put into engineering and research each year. 

Senator King. And you regard the dividends which you derive 

as compensation for the 10-percent expenditures? 

Mr. Rentschler. Ours is an engineering and development industry 
and the whole success depends upon having the right thing at the 
right time. 

Senator King. I suppose, aside from patented developments, in- 
ventions wdiich are patented, you communicate with persons and 
organizations engaged in the production of aircraft. Is the risk 
shared that way among the producers of airplanes? 

Mr. Rentschler. The situation hasn't really been of any great 
importance in engines or in airplanes themselves, at least in the 
last 10 years. Very early there was this whole situation of the 
original Wright patents and a lot of complications but those have 
all run out, fortunately, I think, and at the minute there are no real 
important patents which go into planes or engines. 

We have a lot of patents, but I wouldn't even know what most 
of them were. They are mostly construction of things or odds and 
■ends of things which an engineering department go ahead and take 
out patents for, but I wouldn't say there are many of such. 
Senator King. You wouldn't emphasize that patent situation. 
Mr. Rentschler. No; I wouldn't. 
Senator King. Do you have any patent litigation? 
Mr. Rentschler. We have had small instances, nothing at all 
■serious. Once in a while somebody writes in and thinks he has 
designed something we are using 2 years before we did, or something 
of that kind ; nothing you can call serious litigation. 

Senator King. This is a broad question and I think you have 
answered it. You do expect a continued improvement in the science 
of aviation, if it may be denominated as a science ? 
Mr. Rentschler. I certainly do. 
The Chairman. Are there any other questions? 
Mr. TuppER. In selecting Hartford as the center of operations for 
the plant, I suppose you were influenced by the available labor sup- 
ply, the location of the machine-tool industry in that section? 
"Mr. Rentschler. That had a great deal to do with it. 
Mr. Tupper. Did you consider any other location ? 
Mr. Rentschler. In our negotiations with Niles we were limited, 
of course, to those places where they had idle plants. We didn't, to 
answer your question exactly, because we began negotiations with 
Niles and then we found this one in Hartford and were so satisfied 
with that location that it stopped our inquiry. 

Mr. Tupper. I was wondering whether you were offered any in- 
ducements by any cities to locate any particular place. 

Mr. Rentschler. None whatever, including Hartford. I don't 
think anyone in Hartford knew we were coming there until a year 
or two later. 

Senator King. You were a prophet without honor in your own 

Mr. Rentschler. Quite. 


The Chairman. Are there any other questions? Mr. Rentschler, 
we are very much indebted to you and thank you for appearing 
before the committee. 

Mr. Rentschler. I was very happy to come down. 

Mr. Brown. I enjoyed this very much. 

The Chairman. The next witness is who, Mr. Nehemkis? 

Mr. Nehemkis. The Securities and Exchange Commission calls as 
its next witness, Mr. Alfred P. Sloan, Jr. 

The Chairman. Do you solemnly swear the testimony you are 
about to give in this proceeding shall be the truth, the whole truth, 
and nothing but the truth, so help you God ? 

Mr. Sloan. I do. 


Mr. Nehemkis. Will you state your name and address, please? 

Mr. Sloan. Alfred P. Sloan, Jr., 1775 Broadway, New York City. 

Mr. Nehemkis. You are chairman of the board of directors of 
General Motors Corporation, are you not? 

Mr. Sloan. Chairman of the board; yes. 

Mr. Nehemkis. Mr. Sloan, are you prepared to discuss the growth 
of General Motors during the last two decades, its expansion and 
the sources of the financing for that expansion, and I should like 
you particularly to tell the committee of one of the great new de- 
velopments of your corporation, namely, the Diesel engine. I want 
you to tell that story, Mr. Sloan, in your own way and in your own 
words. If you have occasion to refer to any statement or paper, 
feel perfectly free to ask Mr. Bradley to supply it. His answers to 
you will be your answers. Will you proceed, Mr. Sloan. 

SOURCES or capital funds general motors corporation, 1921-1938 

Mr. Sloan. Mr. Chairman, the period that I will deal with is 
the period ending in 1938, going back 18 years, and I would first like 
to outline the expansion of the corporation in that period with respect 
to its motorcar production, as well as with respect to other products 
which have been developed in that period. And I would like the 
privilege, if I may, of outlining the way that expansion has been 

Dealing with the first question, at the beginning of the 18-year 
period the corporation had a capacity of about 500,000 motorcars, 
somewhat less than that. In the intervening period of 18 years, we 
built up that capacity, so that now we could produce about two and 
a half million motorcars per year, and of that capacity 90 percent is 
in the United States and 10 percent is in foreign countries. 

In addition to that, as a result of our research work we have de- 
veloped in two directions, one in making additional devices which 
have expanded the job opportunities we have, and second, in de- 
veloping entirely new products which have come out of our research 
work in addition to our normal motorcar activity. 

I might mention two outstanding illustrations of the results of our 
research work in developing new projects, and these illustrations are 
quite dissimilar in character. Six or seven years ago we felt.that there 


was an opportunity for accomplisliment in a more intense development 
of the Diesel-engine idea. We had associated with ourselves a rela- 
tively small company, and with that contact through our research 
activity we have developed a much-improved technique in the applica- 
tion of the Diesel engine, so that today we are making Diesel engines 
at a low cost and in a low weight relation to power, which is an 
important factor in the Diesel engine, and have expanded the appli- 
cation of the Diesel engine quite broadly. 

For instance, we have as a result of this work developed a Diesel- 
electric locomotive. It is possible today, to illustrate what has been 
accomplished, for a railroad to buy a Diesel-electric switching loco- 
motive and, with the savings that result from its operation, to meet 
the interest charges and also pay back the principal. It is not neces- 
sary for the railroad to put up any money. It will return the entire 
cost in from 6 to 8 years, deiDcnding on how extensively the locomo- 
tive is used. 

We have another somewhat different illustration of what has been 
accomplished in the expansion outside of our motorcar line, in the 
development of tetraethyl lead, which has entirely revolutionized the 
consumption of gasoline in engines, with greater efficiency of the 
engine, and around that has been built a new industry. 

In our Diesel industry at the moment we are employing something 
like $20,000,000 and, as we are running at the moment, between three 
and five thousand workers in that industry, which has been created in 
the last few years. 

I might go on and elaborate and use many other illustrations of what 
we have accomplished in the way of engineering and research. One 
important difference between the automotive industry and other indus- 
tries lies in the fact that we revolutionize or entirely change our prod- 
uct once a year, and that involves very heavy expenditures in engi- 
neering and in tools. 

That would give you a general idea of how we have expanded in 
the 18 years under review. Now, when it comes to the financing of 
this expansion program, we have sold in the 18-year period — our sale? 
have amounted to about $17,250,000,000 in the 18-year period. We 
have made a profit in the 18-year period out of those sales of 
approximately $2,300,000,000. We have diverted in the last 9 years 
about 91 percent of our profits to our stockholders in dividends. 

In the entire 18-year period we have diverted a little less than 80 
percent of our profits to our stockholders. In the 18-year period 
there has been substantially no outside financing. It is largely 
financed within ourselves. I say largely; in connection with pre- 
ferred stock issued back in the late twenties, there was something like 
$29,000,000 additional stock placed on the market which increased our 
capital to that extent. 

Also in the twenties, about 1926, there was a consolidation with an 
organization which had been an important supplier, amounting to 
about $55,000,000, which brought that much property and for which 
stock was issued, but practically no cash. 

Now, taking the amount of our profits less the amount paid out in 
dividends, there has been retained in the business through the profit 
rule during the 18-year period about $490,000,000. There has been 
obtained through depreciation $520,000,000. There are some addi- 


tional amounts wliicli are quite inconsequential when we are dealing 
with such large figures. 

Now, of course, when it comes to the depreciation it is possible to 
some extent to use depreciation for expansion, but naturally the 
time must come, if it is really depreciation, when it must be used for 
replacing properties to maintain its efficacy. 

We have in addition, too, insofar as expansion of plant and equip- 
ment is concerned during the 18-year period, spent $770,000,000 in 
expanding our plant. As I said, in the additional things we are 
making as w^ell as increasing our motorcar capacity per se, we have 
also invested $176,000,000 in subsidiary operations of various kinds, 
manufacturing abroad, financing operations, and in other directions. 

We have also an item here of about $335,000,000 which covers ex- 
penditures for special tools during the period. 

The Chairman". Mr. Sloan, I regret very much that it is necessary 
for me to leave at the moment. I have to be on the floor of the 
Senate, but Senator King will preside. 

Mr. Sloan. I will re])eat that. We have a special item of $335,- 
000,000 covering expenditures for special tools. In our industry, as 
I remarked before, we bring out a new model every year, and this 
amount of $335,000,000 really represents expenditures we make in the 
capital goods industry. They are passed on to the customer in cost of 
sales and returned to us in a period not to exceed 2 years, more often 
1 year, but that is quite a contribution to the capital-goods industry, 
and it also has the advantage of keeping our products up to date, 
which is very essential in keeping up with the constantly advancing 

I was interested in a statement that was made before your com- 
mittee — I think it was on Tuesday — regarding the point that the 
automobile industry had reached the stage of stabilization.^ I 
don't know whether that is true or not, but I really don't believe it is 
because today there are more motorcars in use in this country than 
there ever have been before and it would appear as if, from past 
history, we could expect a further expansion of the industry in re- 
lation to the increase in income of the country. 

I have a curve here which is very interesting and shows that re- 
lationship.2 Now, also, we find that there is a very direct relation- 
ship between the Federal index of production and the trend of our 
business, so I feel that if ways and means could be found of expan- 
sion of the income of the country, that it is reasonable to suppose 
that the automobile industry could enjoy its share. 

I would like to show you this because it is very interesting. I 
can't seem to locate it, but there is a direct relationship and as the 
national income goes up we go up with an increasing rate and I 
see no reason why that should not continue. In other words, I 
don't think we have reached the point of saturation of our industry, 
especially if we are able through capitalizing technological im- 
provements to keep on reducing the cost or adding to the value. 

I would like to point out also that in the evolution of our in- 
dustry, so far as our price position is concerned, our policy has been 

^ See supra, p. 3513. 

2 See "Exhibit No. 570," infra, p. 3653. 



to manage to keep increasing the value of the car rather than to 
reduce the price of the car. I don't think that would be sound eco- 
nomically unless there was some special circumstance. Of course, 
I think industry has got to work toward lower prices to maintain 
productivity, and through capitalizing technological improvement 
to raise wages and at the same time reduce price. But in the 
case of our industry, we are quite different because we have what 
we call the used-car situation and our real objective in maintaining 
the price with better value, capitalizing our technological pro- 
gram that way, is to make those that can afford to buy, dissatisfied 
with their last year's product, trade it in, and pass it down in the 
used car market so that we are really producing a better value all 
the time. But it is very difficult to determine just what improve- 
ment has been made in that particular. 

Exhibit No. 570 










M .000,000,000 

r ■ 

$3,S00 000 000 













P 2 



$1, SCO ,000.000 






















(Billions Of Dollars) 

Because of the fact that each year's design of car is quite differ- 
ent from the previous year, there is no yardstick of value. Wd 
use the price per pound to some extent and if you look at it from 
that standpoint, why in the period that we are talking about the 
price per pound, on a pound basis that the consumer pays for a 1939 
motor car as compared with one in 1913, it is about half as much; 


and in our records the price of a Chevrolet in 1913, that the con- 
sumer paid, was about 50 cents a pound. Today it is about half of 
that. And in addition to that there has been a tremendous value put 
into the car that is represented by increased weight and in greater 

Now that in brief is our story. I might add that notwithstanding 
the tremendous advance that the industry has made in giving in- 
creased value, we have the amount of labor per car which has not 
been greatly decreased because we have added so much to the car. 
We have things like independent springing, and innumerable de- 
vices have been added to the car, which have maintained the man- 
hours per car; and at the same time through more intensive design 
have made it possible for us to reduce the price. 

For instance, the Chevrolet car in 1913 — I just happen to have that 
figure — would cost a purchaser about $1,150; it Aveighed about 2,200 
pounds; it had about 31 horsepower. The Chevrolet car of today 
costs about $750; weighs more than 3,000 pounds ; and is 85 horsepower 
and is infinitely better in the quality of its development and the fea- 
tures that lead to speed and comfort and convenience and safety, and 
all those kinds of things. 

Now that gives in a brief way our picture as represented by a 
survey of this 18-year period. I would like to present that chart. 

Acting Chairman King. You desire that in the record? 

Mr. Nehemkis. Yes. 

Acting Chairman King. It may be received. 

(The chart referred to was marked "Exhibit No. 570" and appears 
on p. 3653.) 

Acting Chairman King. Mr. Sloan, the bell has rung; some of us 
are compelled to adjourn to the Senate and the House and we will 
take a recess now until 2 : 30 this afternoon. 

(Whereupon at 12:05 noon, a recess w^as taken until 2:30 p. m. 
of the same day.) 

afternoon session 

The committee resumed at 2 : 35 p. m. on the expiration of the 

Acting Chairman Reece. The committee will come to order, please. 
Are you ready to proceed, Mr. Nehemkis? The witness has com- 
pleted his principal statement? 

Mr. Nehemkis. That is correct, sir, and I wish to examine him 

Acting Chairman Reece. You may do so. 

Mr. Nehemkis. Mr. Sloan, I want to ask you to identify a state- 
ment before I offer it in evidence. Will you look at this statement 
and identify it for me, please? 

This statement has been identified by the witness. I offer it in 
evidence. The title of this statement is "General Motors Corporation 
and Subsidiary Companies, Summary of Principal Products Cur- 
rently Sold." 

Acting Chairman Reece. It may be admitted. 

(The statement referred to was marked "Exhibit No. 571" and is 
included in the appendix on p. 4028.) 


Mr. Nehemkis. Mr. Sloan, will yon be good enough to identify 
this statement before I offer it ? This has been identified. I offer in 
evidence a statement entitled "General Motors Corporation, Disposi- 
tion of Funds Statement, Years 1921, 1938, inclusive." 

Acting Chairman Reece. It may be received. 
(The statement referred to was marked "Exhibit No. 572" and is 
included in the appendix on p. 4031.) 

Mr. Nehemkis. Mr. Sloan, will you be good enough to identify the 
statement now shown you ? The statement has been identified by tha 
witness, which I offer in evidence, and is entitled "Summary of In- 
formation, Question 8, Table 4." 

Acting Chairman Reece. It may be received. 
(The statement referred to was marked "Exhibit No. 573" and is 
included in the appendix on p. 4033.) 

Mr. Nehemkis. Will you identify the statement now shown you, 
please? The statement has been identified. I offer in evidence a 
statement entitled "Summary of Information, Question 7, Table 3.'* 

Acting Chairman Reece. It may be received. 
(The statement referred to was marked "Exhibit No. 574" and is 
included in the appendix on p. 4035.) 

Mr. Nehemkis. Mr. Sloan, I want to ask you a few questions 
based on the information which was submitted to us by the General 
Motors Corporation. Your research expense since December 1925 has 
been over $170,000,000, is that correct? 

Mr. Sloan. That is correct, but in order that it may be under- 
stood, I would like to make an explanation. 

Mr. Nehemkis. Please do, Mr. Sloan. 

Mr, Sloan. The research expense in our operation should be con- 
sidered as divided into two parts. In the first place there is research 
per se, I might say, or pure research, where we develop new devices 
and products from a fundamental standpoint. Then there is an 
engineering type of research, which is involved, as I explained this 
morning, in the production of new models yearly. 

What you have there is the complete cost over the period, though 
I believe there are 5 years that were omitted in that, but anyway it is 
the complete cost of all our engineering involving our changing of 
models from year to year, and our research in addition. 

Our research expense, pure research, runs about one million and 
a half to two million dollars per year. 

Mr. Nehemkis. Subject to the statement you have made, however, 
you accept the figure? 

Mr. Sloan. I accept the figures with the explanation. 

Mr. Nehemkis. Correct, and that expense likewise was paid out 
of your earnings and deducted from your gross income for income- 
tax purposes; is that correct? 

Mr. Sloan. Exactly. 

Mr. Nehemkis. Between 1921 and 1938, both inclusive, your return 
to the informal questionnaire which we had occasion to submit to you 
indicates that your net sales were over 17.1 billions of dollars. Is 
that substantially correct? 

Mr. Sloan. That is substantially correct. 

Mr. Nehemkis. I would take it that that meant a lot of jobs and 
a lot of wages ; would you agree ? 

Mr. Sloan. It certainly does. 


Mr. Nehemkis. Are you prepared to discuss briefly what that 
vohime of sales meant, let us say, to the petroleum industry? How 
did that affect the relationship of your corporation to petroleum ? 

Mr. Sloan. Well, of course, that would have to be dealt with in 
very general terms. 

Mr. Nehemkis. Just generally and very briefly. 

Mr. Sloan. Of course, when we put out into the domestic market 
a million and a half to two million motor cars, why it means the 
impact of that on the economy is very important from the standpoint 
of what, in the first place, the making of the cars involves. You could 
then add a third more, which is the stimulation arising from the dis- 
tribution of cars. And all this stimulation is before the impact on, 
say, the petroleum industry. Then, of course, there is the consump- 
tion of gasoline and everything else that goes to the maintenance of 
the car. It would be impossible to answer that question in definite 
terms. You could say that it was a very great stimulation. 

Mr. Nehemkis. You have indicated sufficiently, I think, the answer. 
Would you say that the net sales of the seventeen billions to which 
I have just referred had a profound effect upon governmental invest- 
ment in terms of highway construction? 

(Senator King took the chair.) 

Mr. Sloan. I don't know as I understand your question. Of 
course, the development of a proper highway system is essential to 
the operation of the increasing number of cars on our roads. 

Mr. Nehemkis. You understand my question precisely, Mr. Sloan. 

Mr. Sloan. I would say that I think that if we are going to con- 
tinue as we are, and according to my belief, to make, not the same 
number of cars we have but still more cars, the question of highway 
is very important, because it may develop into what you might call 
the neck of the bottle type. It is very important. I think today 
probably more cars could be consumed if we had, especially in our 
congested areas, a better system of highways. But the impact of 
that on the railroads, and everything else, is of course tremendous. 

Acting Chairman King. The more cars you manufacture, the more 
gasoline and oil are consumed, and the more highways are con- 
structed, the more wear out and the more need repairs, so there is a 
very great increase in productivity along the various lines by the 
production of your cars. 

Mr. Sloan. You could say unquestionably, for as I remarked be- 
fore, if you take that $17,000,000,000 and add a third to it, it will 
give you an idea of what is involved in purely the distribution of 
that $17,000,000,000. 

Mr. Nehemkis. And I would take it, Mr. Sloan, that that seven- 
teen billions of sales has had a profound effect upon the building 
industry in opening up areas for development which were otherwise 

Mr. Sloan. I don't think anybody can appreciate, unless he has 
made a study of it, the effect of the increasing use of motorcars on 
our method of living. Especially as you say the opening up of areas 
outside our cities is really providing what I think is a better means of 
living, not necessarily a higher standard, although I think it is in a 
way a higher standard. 

Acting Chairman King. You mean, therefore, that a motorcar is 
not a luxury alone but it is a necessity. 


Mr. Sloan. It certainly is. 

Mr. Nehemkis. And I likewise assume, Mr. Sloan, that all of that 
.$17,000,000,000 of sales depended upon the existence of a consumer 
capacity to absorb that output. In other words, a vast amount of 
those sales were made on the installment payment plan, is that cor- 
rect, sir? 

Mr. Sloan. A substantial part of them. It varies considerably 
from year to year. The percentage of cars sold that you referred 
to on the installment plan is somewhat declining at the moment, and 
curiously enough the percentage sold on the installment plan declines 
very materially in bad times. It increases in good times. But that is 
an important factor in our ability to maintain our production. 

Mr. Nehemkis. You have an affiliated or subsidiary company, do 
you not, which is engaged in the business of financing your output? 

Mr. Sloan. Yes; that is the General Motors Acceptance Corpora- 
tion. We also have an affiliate dealing with the insurance phase of it. 

Mr. Nehemkis. Would it be a correct statement, Mr. Sloan, to say 
that General Motors is in a position today to do most of its internal 
financing out of earnings, and, in addition, to finance the ultimate 
consumers of your product as well ? 

Mr. Sloan. I think that is a correct statement of fact — I mean in a 
practical sense. One could imagine what certainly doesn't seem at all 
likely, a tremendous expansion when it might get beyond our capacity, 
but if things continue in a reasonable way, the way we expect, that 
is true. 

Mr. Bradley gives me a note that G. M. A. C. borrows from the 
banks. We do not, but General Motors Acceptance Corporation does. 
I am sorry I omitted to point that out. We do not in the corporation, 
"but tlie finance company. General Motors Acceptance Corporation, 
does, and I should say about 25 percent of the funds we use in financ- 
ing the consumer through the General Motors Acceptance Corporation 
is their capital derived from a dollar investment basis ; the balance is 
the borrowing. I am sorry I overlooked that. 

Acting Chairman King. That means that three-fourths of the value 
of the cars which you sell is paid through the company? 

Mr. Sloan. It isn't exactly that. Of the cars the corporation sells, 
they are all paid for in cash to the corporation. The automotive 
industry is done on a 100-percent cash basis. In turn, the dealer who 
sells tlie car, if he sells it to the consumer on time, finances it with 
some finance company. He is not required to finance with General 
Motors Acceptance Corporation even if he is a General Motors dealer. 
He is a free agent to finance with whom he chooses. 

Where cars are sold by General Motors dealers on an installment 
plan, we have about 70 percent of that business, but that doesn't 
represent 100 percent of the business because, as I said before, a con- 
siderable quantity of the cars are sold for cash. And I might make 
the observation that that has been particularly true in the last year or 
so where the banks have been seeking opportunities to invest their 
money and they have been going direct to the consumer and extending 
credit. So that appears on our records as a cash transaction, although 
the consumer, instead of financing through a regular finance company, 
•organized for the purpose, gets his money from the bank. Do I make 
it plain ? 

124491 — 40— pt. 9 12 


Mr. Nehemkis. Mr. Sloan, may I sum up briefly one point from your 
testimony this morning? Would it be a fair statement to say that the 
General Motors Corporation today is virtually a self-contained unit in 
the sense that it has little or no need at this time to go to the public 
markets for its financing? 

Mr. Sloan. That is absolutely correct. 

Mr. Nehemkis. I have no further questions of this witness. 



Acting Chairman King. Are there any further questions? 

Mr. Henderson. Mr. Sloan, this morning I believe you testified 
that for about 18 years that self-sufRciency had been maintained. 

Mr. Sloan. That is substantially correct. You are speaking from 
the standpoint of the outside financing? 

Mr. Henderson. Yes. 

Mr. Sloan. That is correct. 

Mr. Henderson. And in that period I believe you testified also 
that you had been increasing your assets? 

Mr. Sloan. Substantially so; yes, sir. 

Mr. Henderson. And then, as I recall, your plant-account valua- 
tion now is lower than it was in 1929 ? 

Mr. Sloan. I don't know just the reference to 1929. That might 
be so because of the effect of depreciation; if you take the net, that 
might be so. 

Mr. Henderson. You haven't spent all your depreciation, in other 
words. You have testified on that this morning, I believe. You said 
that the time was coming in real depreciation where you must use it 
for expansion. 

Mr. Sloan. What I meant by that was this: Supposing we start 
out with new machinery where the first year or two we receive cash 
from sales to use for the depreciation but since our machinery is new, 
we don't need to spend money on it, so we can use the money for 
something else. The point I make is that the time must come finally 
when we have to reinvest the cash in new machinery to maintain our 

Mr. Henderson. You have a certain elasticity about that ? 

Mr. Sloan. Up to a few years, until you sort of get an average 
term of life. 

Mr. Henderson. And you do attempt each year, when you are lay- 
ing out your prospective program of sales, to estimate what the vol- 
ume of sales will be related to national income, as I understand ? 

Mr. Sloan. No; we don't exactly do that. The relation of sales 
to national income sort of follows after the fact. The way we do 
that is that we try as best we can to judge the general business trend, 
and then we lay down, establish, what we call a corporation index, 
which is the expectancy for the model year, which may begin this 
year, say, October 15. 

Then our production schedules, our initial production schedules for 
the first month or so are related to that index. As we begin to get 
the trend of consumers' sales that are reflected to us by our reports 
from our dealers, we then have a basis of fact upon which to alter 
our estimate. 


Mr. Henderson, Do you have a chance in that period to do any 
more tooling up ? 

Mr. Sloan. No; we can't. 

Mr. Henderson. That is what I am getting at. You spoke this 
morning of your contribution to the capital-goods industry in the 
way of machinery, and you spoke of how you are making a very 
substantial contribution every year or two. But at the beginning of 
any period you have to make a businessman's guess as to what 
degree of tooling up you will do in order to carry your estimate of 
what the year's production would be. 

Mr. Sloan. That is correct. As a matter of fact today, say the 
first of June, substantially all our program for 1940 is pretty well 
crystallized and we have got to take a position. But when you say 
tooling, we must distinguish tooling which is the item I have referred 
specifically to this morning as applicable to a current model from 
tools on which the tooling operates. You understand the distinction? 

Mr. Henderson. Yes; surely. 

Mr. Sloan. Now, of course, therefore if you have a capacity, say a 
fundamental capacity, for domestic production, say, of 2i/4 million 
cars, that is represented by buildings, machinery, and what not, but 
when it comes to the special tools to which I referred this morning, 
there is a great deal of flexibility in it. For instance, you have spent 
a lot of money for buying a die and the capacity of that die in terms 
of volume has a great deal of flexibility so that we are not so much 
concerned with the specific tooling cost with respect to any year's 
business, because there is so much flexibility. 

Mr. Henderson. What would you say now in terms of what your 
i\igh productions have been. As I recall, 1936 and 1937 were the only 
years in which you passed the 2 million mark on passenger cars and 

Mr. Sloan. That is right, that is, if you include production of 
foreign manufacturing subsidiaries we hardly made the 2 million 
mark if we are considering domestic production. 

Mr. Henderson. I know, but you have a way of computing the 
parts you sell abroad in terms of what your actual production is. 

Mr. Sloan. Exactly, but we consider anything that we sell from 
an export standpoint as part of our production scheme, but you 
understand that we have a capacity abroad of about 10 percent 
of our total capacity, or substantially two hundred fifty, maybe 
three hundred thousand cars that has nothing to do with production 
in the United States. It is an entirely different type of car. 

Mr. Henderson. Yes; well what would you say as to the current 
automobile production year as to your capacity to produce? Is it as 
large as it was in terms of 1936 and 1937 ? 

Mr. Sloan. Yes; I should say it was. I should say it was. In 
other words, let me be sure I understand your question. 

Mr. Henderson. Maybe I could go a bit further. If there was a 
very sustained and increased demand for cars for the balance of 
this 3'ear, which would run at the rate at which you ran in '36 and '37, 
could you meet that without much more investment in plant capacity 
or in tools? 

Mr. Sloan. Yes; we could because, as a matter of fact, the time 
element would prevent further heavy investment because, as you see 
at the moment — here it is the 1st of June — our problem, as you know. 


of course, is to liquidate everything that we have preparatory to the 
new model which will go into production in about 60 days, so that in 
answer to your question I think I should say that we couldn't 
change our capacity very much now or our output because we are 
too close to the time we are going to change over our models — you get 
the idea I am sure. But normally, if you asked that question in 
January, say, then I would say that we could increase our production 
quite substantially if the trend changed. 

Mr. Henderson. Now, you had about 1,800,000 or 1,900,000 cars in 
]929 and over 2 million in 1936, and in 1937. In 1937 the national 
income was around 70 billion as against 1929, when it was 80 billion. 
In other words, you had a larger volume in 1937 with a lower na- 
tional income than you had in 1929 with a higher income, which tends 
to support what you said this morning, that you are directly corre- 
lated with national income. 

Mr. Sloan. I think we are. 

Mr. Henderson. I think the statement that was made about the 
automobile industry reaching the stage of stabilization was not in 
terms of the actual output of cars, but was in terms of the plant 
investment and capital expenditures necessary to produce what was 
in the range of expectancy of any larger area, getting out of the range 
of the abnormalities. 

Mr. Sloan. I think that is a perfectly correct statement of fact. 

Mr. Henderson. In other words, w^e could have considerable expan- 
sion of automobile production without your plants having to be ex- 
panded very, very largely and your tooling expanded. 

Mr. Sloan. May I make a remark there? 

Mr. Henderson. Certainly. 

Mr. Sloan. I am inclined to think that it would be logical to assume 
that our productivity would increase not only with the national 
income but faster than the national income, because if we increased 
the national income — and nobody knows better than you do that we 
are increasing the spread between the necessities of life and the 
income, of course more goes to the luxuries. That is in my judgment 
our big problem. 

Mr. Henderson. And that is the time also wdien people choose 
to buy new cars and to drop the old models they have been continuing 
to use? 

Mr. Sloan. That is right. The relationship can be established 
between the annual income and the consumption of motorcars — per- 
haps I should say the sales of motorcars — by the consumer; and it 
indicates that in times of declining in the business, when we are 
going down in the business cycle, we drop below the national income 
because of the fact that people are conservative and they run their 
cars longer. They reduce the total car mile inventory they have in 
their present cars. Conversely, when the economy begins to go up 
and we are increasing production, then we run ahead of the national 
income, because people who have not bought and whose demand for 
cars has been retarded; then go into the marget and buy. That 
has been evident for over 20 years. You probably know more about 
it than I do. 

Mr. Henderson. Well, suppose there was a recapture of the 1929 
national income. Have you given consideration as to how large 
an expansion in plant over and above what you have now would 


be necessary to carry what your estimates would be of your demand 
in that year? 

Mr. Sloan. No; we never have. No; we never have. We have 
never had occasion to. As I remarked before, there is a very great 
deal of flexibility in our productive capacity as influenced by the 
number of hours a day that we run. By that I mean that we don't 
figure our capacity on the basis of 365 days or anything like that. 
We have certain amounts of time out for change in models. And 
then another thing, due to the large — due to the important value of 
a motorcar and due to the fact that the consumer demands four times 
as many cars some months as he does the others, the seasonal trend, 
which is very difficult to contend with, but at the same time you 
have to meet that situation — there is a verj^ great deal of flexibility. 
Business is increasing and we can put in the low months more cars 
into the hands of the dealers; there is a tremendous flexibility there. 

]Mr. Henderson. Would you say that the prospects of meeting an 
$80,000,000,000 a year, for example, would indicate you might have to 
alter your 18-year record of not going to the capital "markets for 
financing, or would you be able to handle the expansion that would 
come from internal funds? 

Mr. Sloan. I am quite certain that we can handle anything that 
you have in mind. I think, in answer to your question, from the 
internal funds without going into the money market, if that answers 
your question. 

Mr. Henderson. That is the question. 

Mr. Sloan. The answer is yes. 

Mr. Henderson. And you would have in that case some expansion 
in the amount of business you would give to the capital-goods in- 
dustries in the way of tooling up, but there would be 

Mr. Sloan. There wouldn't be very much in addition to what we 
have to tool up anyway, because of the great flexibility in the par- 
ticular form of tooling that you are talking about. I mentioned the 
die question; that is the type of thing. There is so much flexibility 
in that that I think that we could reach that point without any 
great difficulty. As a matter of fact our contribution to the capital 
goods industry — and I realize the tremendous importance of that — 
is from the standpoint of these special tools ; it varies more from the 
standpoint of the type of engineering program that we have, what 
parts we change, than it does from the volume of any particular 
period — did you get that point? What I was saying was that the 
amount of tooling that we do for a specific model is more importantly 
affected by the changes incidental in that particular model over 
against the other, than it is the volume of cars contemplated tlirough 
the use of those tools in the following year. Do you get that point? 

]Mr. Henderson. Yes; that would mean, as I gather, that the capi- 
tal-goods, the durable-goods industries, if the}^ are to be utilized at 
anything like their normal capacity, have to look either to new devel- 
opments such as your refrigerator and Diesel-engine business or have 
to look to the outside? 

INIr. Sloan. I think that is true, except for this point — that we in 
General Motors are very strong believers in capitalizing to the full- 
est possible extent we can the technological progress, and we have 
a program that is always going on whereby our different plants 
not only have the authority but are responsible for discarding equip- 


ment where they can buy new equipment and make a return that 
justifies it, so that this process with us is going on constantly. 

Mr. Henderson. The practice you spoke about this morning of 
recapturing within 2 years through your sales the value of new 
equipment means enormous contributions to the capital-goods 
business ? 

Mr. Sloan. That is right. That means — as I remarked this morn- 
ing, our engineering programs from year to year — and I again 
repeat to make it clear, don't vary so much from the volume ex- 
pectancy as from the character of the program. They vary from 
25 to 40 million dollars a year and that is a correct contribution to 
the capital goods industry, even if we take it out of the economy 
through cost of sales within a year or two. 

Now" in addition to that this frequently happens. When we change 
a model we not only require tooling but we frequently have to go into 
the capital-goods market for machinery to support the tools, due to 
the fact that the design is different. Do you get my point? 

Mr. Henderson. Yes. I have concluded my questions on this part 
of the testimony. I think you introduced this morning in j^our dis- 
cussion your price policy on reduction as it was distinguished from 
the general policy of industry. That is, of course, a necessary part to 
this expansion that you have talked about, but the discussion of 
industrial price policy does not come within the frame of reference 
of this presentation before the committee as it has been planned. We 
are here concerned with the employment of savings and investment 
and at some other time 

Mr. Sloan (interposing). I mentioned that incidentally because 
I want to say that I don't think there is anything more important 
in promoting progress and in stimulating economy than capitalizing 
technological progress, because it is the only way we can afford to 
pay higher wages and at the same time get lower prices. We have 
to have both those things. 

Mr. Henderson. I don't think you and I are going to have much 
of an argument on that. 

Mr. Sloan. I am glad of that. 

Dr. LuBiN. Mr. Sloan, I was very much interested in your discus- 
sion this morning of depreciation and the function that depreciation 
plays. In fact, I think you specifically stated that the time comes 
when you must replace your equipment to keep it as efficient. In 
other words, you don't necessarily invest your money in the next 
day or next year, but there is a time when you must replace that' 
equipment. Now in your industry very remarkable technological 
changes have occurred in the last 10 years; new steels, new cutting 
steels, for example ; the development of new techniques. 

Mr. Sloan. Tremendous. 

Dr. LuBiN. Now, in order to replace a given type of machinery 
and, of course, one can't generalize, but in order to replace certain 
equipment today as compared to say 15 years ago with the investment 
let us say of $1,000, would the machine you replace today produce 
more and better product than the one you would have gotten for 

Mr. Sloan. Unquestionably. It is astounding the progress that has 
been made. 


Dr. LuBiN. And would it be fair to conclude, then, that in order 
to get the same output per machine today you would have to invest 
less than you would have invested let us say 5 or 10 years ago per 

Mr. Sloan. I think in some cases that would be true to some ex- 
tent ; yes. I think that would be true. Of course, in our case — in our 
industry the type of machinery changes so rapidly with the design 
of the car that it is awfully hard to answer that question, but I would 
say that there has been tremendous progress in increasing the output. 
I would say, however, that we are talking in very general terms, of 
course. But my judgment would be that in a majority of cases 
the machine would probably cost more, but you would get much more 
output from the standpoint of a certain amount of output. I dont 
know as a total you would find you had less number of machines, each 
one costing more, but with the increased output possible, I think it 
would not necessarily involve any increased capital expenditure irk 
terms of capacity, but I am dealing in awfully general terms. 

Dr. LuBiN. What I am trying to get your opinion on is whether 
or not taking in an industry that moves as rapidly as yours does in 
the terms of the type of equipment that you use, whether we can 
look for a situation where less and less of your depreciation account 
will have to be invested to maintain the capacity that you discussed 
this morning. 

Mr. Sloan. No; I don't think so. I think, as I tried to explain 
awhile ago — I think up to a certain point we can do that,, but 
when we get to a certain point we have got to reimburse to maintain 
the efficiency of our equipment. 

I know that you must know that it can be fairly stated that the 
metal working production equipment of the United States is ob- 
solete. I think you know that, and you know, probably, of that 
study that was made back in 1935, I think — maybe '36, although I 
think it was '35, when a careful survey was made and it was shown 
that something like 70 percent of the metal working equipment of 
that time was 10 years old. Just see what a wonderful thing it 
would be if we could stimulate the replacement of the new for the 
old. We get lower costs, we get a better-quality output, and we free 
employment to the capital goods industry, that you know should 
absorb half of the unemployment. 

Dr. LuBiN. The special thing I am interested in knowing is 
whether or not if you did replace that 70 percent of equipment, it 
would cost as much to replace as has been written off over a period 
of years. 

Mr. Sloan. I think it could cost a little more but not a great deal 
of difference, dealing, as I said before, in very general terms. 

Dr. LuBiN. One more question. I don't know whether you can 
answer it for the industry as a whole. 

Mr. Sloan. I will try to. 

Dr. LuBiN. In your opinion, do you feel that the capacity of the 
industry with its present investment is such as to meet any I'easonable 
expectation of demand for automobiles? 

Acting Chairman King. You mean his plant alone? 

Dr. LuBiN. The industry as a whole. 

Mr. Sloan. I would say the answer is "Yes," but of course, as 
you appreciate, it doesn't work out that way because we have the 


most intense competition. For instance, we have increased our posi- 
tion in the period I am surveying, of 18 years, from 15 percent of the 
domestic consumption to 45 percent, and of course in the distribution 
of the business, if somebody is smart enough to get a lot more, he 
might not have enough capacity. If you ask on the industry as a 
whole, I would say the answer is definitely "Yes." 

Dr. LuBiN. With the exception of changes you normally have to 
make in the model, the present investment in the industry is suffi- 
cient to take care of any reasonable demand. 

Mr. Sloan. I think it is. 

Acting Chairman King. By reason of your strong development, 
there has been considerable mortality along the pathway of auto- 
mobile consumption, has there not? 

Mr. Sloan. It is perfectly astounding to look over the record of, 
you might say, the dead ones up to 1925. 

Acting Chairman King. So there has been a great loss of capital 
in the automobile industry. 

Mr. Sloan. Those eliminations were principally in the very early 
stages of the industry, and they have not been so prevalent in the 
last 20 years. Further than that, the amount of capital lost wasn't 
as much as one would think when one considers the situation in terms 
of the present, for this reason. In the earlier days, when those 
casualties took place, the different companies were very poorly in- 
tegrated. What I mean is that at that time many of the manufac- 
turers were purely assemblers. They had practically no machinery 
at all. They bought their parts and put them together, so at the end 
of a model run they had practically nothing left except an empty 
assembly plant, so the casualty from the standpoint of capital loss 
was not important, although the number involved was very big. 

Acting Chairman King. Yes; going over the list of automobile 
companies of the past 15 or 20 years 

Mr. Sloan (interposing). But the capital involved has not been 
large. In our case we make practically everything ourselves, but 
that wasn't true in those cases. 

Acting Chairman King. There is more capital invested in the 
automobile industry today than there was 5 or 10 or 20 years ago, is 
there not? 

Mr. Sloan. I would say unquestionably so. 

Acting Chairman King. And the output is much greater than it 
was then. 

Mr. Sloan. No; the capacity is bigger, and the output in 1937 in 
this country was big. 

Mr. Henderson. I wanted to get at this point again to assist Dr. 

Acting Chairman King. Don't call me doctor; you are the doctor. 

Mr. Henderson. This constant investment in plant that you make 
every year by reason of the tremendous increase in technology, and 
so forth, in effect substitutes for the investment of capital that was 
going on in the early years, doesn't it ? 

Mr. Sloan. Yes; I think it would be an offset. 

Mr. Henderson. There was quite a loss of initial dollar volume, 
but the great investment in the automobile industry has been con- 
stant every year in this tooling that took place. 


Mr. Sloan. When you say that, you mean the contribution to the 
capital goods industries, because you realize that is not a fixed invest- 
ment, in a way. We call it in our parlance deferred expense. It 
comes back inside of two years, because it is put into the cost of the 
sale. You see, the distinction is this : In developing the cost of goods 
where you have machinery and buildings, you take into the cost, as 
you know, depreciation, which perhaps is 10 percent, or whatever it 
may be. In the case of this specific tooling for the model, we take 
100 percent in within the first, or certainly less than 2 years. Do 
I make myself clear? 

Mr. Henderson. Yes; the point I was making, there was quite a 
loss of dollars to investors in these companies Senator King spoke of, 
in terms of the capital investment of companies that have not 
survived, that is very, very great annually. 

Mr. Sloan. That is true. 

Acting Chairman King. I was about to ask you in view of the fact 
that there was mortality and loss of capital, there has been a very 
large investment in the automobile industry as a result of the mor- 
tality and the development of the industry, so that there is more 
invested in the automobile industry today, perhaps, than at any 
period in the history of our country. 

Mr. Sloan. I don't think there is any question about that. 

Acting Chairman King. Do you see the field sufficiently broad and 
inviting to invite additional capital in the automobile industry, either 
through expansion or through development of some segment of the 
industry ? 

Mr. Sloan. No ; as I have already stated, I don't think that we can 
look for any additional investment in the automotive industry from 
the standpoint of general expansion, as we speak of it, more capacity 
to make more cars, because we have a slack which I have already 
pointed out, which would take care of a considerable expansion over 
and above what we now have. I think we can look forward to im- 
portant contributions from year to year in the way of new machinery 
and contributions to the capital goods industries, because as far as 
I can see now, I see no end to our advancing technology which has 
characterized our operations in the last 15 or 20 years. 

As long as we are aggressive and intelligent and that sort of 
thing, I think that we can continue that. In other w^ords, I don't 
see the end of that type of thing in sight. Now that manifests 
itself either in a better car for the same money or less car for less 
money. It depends on what the policy may be. 

Acting Chairman King. You are developing, are you not, what 
might be denominated auxiliaries to your important manufacturing 

Mr. Sloan. We are doing that all the time. For instance, I might 
mention one item that comes to my mind. As you know in the last 
3 or 4 years the radio has become quite an important feature in the 
motorcar. Now we have a radio industry. We make our own radio 
on wliich we employ quite a large number of people. 

Acting Chairman King. So you don't confine your activities to 
the manufacture of automobiles? 

Mr. Sloan.^ No ; we are very thoroughly integrated. We make 
practically all the parts of the cars ourselves. As a matter of fact, 
in the automotive industry, as you would, of course, recognize if you 


stopped to think of it, the responsibility of a supplier is so great 
because the volume is so great that you have to have a very close 
relationship between the supplier and the manufacturer and the evo- 
lution of that is that the supplier eventually becomes part of the 

Acting Chairman King. Isn't your depreciation very great as a 
result of your changing your models so frequently, as I understand 
you have to change your models every year? 

Mr. Sloan, No ; the depreciation isn't affected by that. That comes 
out in the amount that I have referred to this morning that we 
have just been discussing here where we charge into the cost of the 
product, this special tooling. That comes out through cost of sales iii 
a year or two, but the depreciation continues from year to year prac- 
tically on a normal basis because of the fact that the machinery and 
the buildings, the obsolescence and the depreciation is pretty constant 
irrespective of volume. So our depreciation in General Motors now is 
running about $45,000,000 a year. 

Acting Chairman King. I had in mind when I made that in- 
quiry a statement I read a few years ago made by Mr. Ford that 
one of the changes he had made cost him $50,000,000. 

Mr. Sloan. I should think it would cost him easily $50,000,000. 
When I say changing our lines, I don't mean to say that we are 
l)uilding a line in the beginning because we may change it — w« 
don't very often start it all over again ; it would be almost impossible 
to do that — but even the changes that we make in General Motors 
sometimes involve a cost for thos© changes, outside* of the engineer- 
ing I mean the tooling alone, outside of the organization as high as 

Acting Chairman King, How many employees have you in all 
your plants? 

Mr. Sloan. We have about 200 — roughly speaking — w^e have about 
200,000 wage earners and we have about 45,000 salaried employees. 
That is substantially correct. 

Acting Chairman King. Is that the largest number of employees? 

Mr, Sloan. No, sir ; we have been up in terms of wages to 235,000. 
I don't think our salaried employees vary very much from what it 
now is, perhaps 5 percent, but our wage workers have been up con- 
siderably beyond the 200,000 figure because our business today is con- 
siderably off what it was, for instance, in the years 1936 and 1937. 
Of coui*se that reflects itself in a reduced number of workers. 

Acting Chairman King. Has any plan been devised to cushion 
the unemployment? 

Mr, Sloan. We have given a very great deal of consideration to 
that. In the first place, we tried to bring out the new models that 
I keep talking about at that time of the year which gives the best 
continuity of employment. I don't think we yet are thoroughly 
agreed to what is the best time of the year. We used to bring out 
our new models the first of January. That was the official time. 
Then it was moved to November 15. Then this year it was moved 
to October 15. My own opinion is that from tlie standpoint you 
are asking about, Senator, the best time to bring out the new models 
is the first week of December. However, that is one thing we have 
done. In addition to that we build an inventory of component parts 
in the off season when the consumer demand is low in order to 


keep continuity of employment, and in addition to that we have a 
plan whereby at the beginning- of the year we guarantee our work- 
ers a weekly wage equivalent to 60 percent of their normal wage, 
figured at their hourly rate at 40 hours per week, which is our stand- 
ard. Now that means that if we get to the time of the year when busi- 
ness slacks off, not necessarily due to a change of the business trend, 
but from the standpoint of the time approaching when we must liqui- 
date everything and come into this new model, and when hours fall 
down to less than 60 percent of normal, or less than 24 hours per week, 
we make up the difference in the form of a loan, and that is returned 
to us when, as, and if the corporation gives that worker employment 
and not if the corporation is unable to do that — in other words, what 
I am trying to say is that every one of our workers who has a 5-year 
service with us can make his plans at the beginning of the year with 
the surety that every week in that year he will receive 60 percent of his 
normal wages, and he is under no obligation. If he should die, it is 
canceled. If he should leave the corporation's services it is can- 
celed and he only pays us back when he has work in excess of 24 
hours per week to the extent of half the excess.^ 

For instance, if he gets up to 36 hours, then he gives us back 6 of 
them. Do I make myself clear? 

Acting Chairman King. Of course your corporation hasn't asked 
for any capital but from your observation you would think there 
is capital for investment — plenty of capital for investment in prom- 
ising enterprises or for the expansion of existing enterprises? 

Mr. Sloan. Well, I think that there is plenty — I think there 
is probably plenty of capital available. I think we all would recog- 
nize that, but I think that — well, let me explain — let me say this on 
that point. I think it is very difficult to get entirely new enterprises 
started because in the first place you have to have a certain amount 
of capital and then you have to carry the enterprise through an 
interval of time that my associate, Mr. Kettering, calls the "shirt- 
losing time" and that means that you have heavy losses — you take for 
instance my remark this morning on the Diesel engine development of 
ours. We have great faith in that in the future. It is already furnish- 
ing job opportunities and it has made a contribution, I think, as I re- 
marked this morning, to the railroad situation, but we have macle 
very little money so far on that because we are putting so much 
money back in engineering and development, and all that sort of 
thing, that it eats into our expense account so that we may be some 
time. I mentioned also this morning the development of tetraethyl 
lead as a very important contribution toward the petroleum industry, 
and its effect in relation to the automobile industry. We lost millions 
of dollars before we got that on its feet. Now, I think that is a 
very big problem, although I didn't come down here to offer a receipt 
or formula for recovery, because I think that the weakness of the 
present situation today — I am only repeating what many have told 
you — is the lack of confidence in the future profit-making possibility 
of industry. 

iMr. Sloan subsequently advised the Committee that the figures given by him in 
mneetion all deal with the Income Security Plan which applies to workers with 

connection all deal with the Income Security Plan which apl)lies fo workers with 5 or 
more years' service. A similar plan, tbe Lay-Off Benefit Plan, but with less liberal benefits, 
applies to workers having from 2 to 5 years' service. 


I don't think that — I am not speaking personally. I am speaking 
purely in the interest of economy; that is everything to me. The 
personal point is entirely inconsequential, but I do think that we have 
to have more profit in industry. I think one of the reasons why 
the automotive industry is so virile and strong is it can do these 
things and analyze technological progress, and all that sort of thing, 
and because it has had down through the years a reasonable profit 
margin. I may be wrong about that but that is the way I feel about 
that. I think we have to encourage industry to make money and 
we have to encourage people to put money into industry and I think 
we have to make it more flexible, so people can move what money 
there is in one type of thing into another. 

I think a lot can be done in that general direction that will stimu- 
late these new things. I was looking over the record of our new 
things because I thought some questions might be asked about them 
and you will find that you frequently have to go through several 
years. Take in the case of that tetraethyl lead, we not only lost 
millions of dollars before we got it on a paying basis, but w^e put 
millions of dollars into the research work before we ever got it at 

Acting Chairman King. The profit motive, then, stimulates invest- 

Mr. Sloan. As long as we have the profit motive, we have to 
respect it. 

Acting Chairman King. That is all. 

Dr. LuBiN. Mr. Chairman, may I question him? Mr. Sloan, could 
you tell us what the present investment of General Motors is in 
automotive plant ; that is, parts, bodies ? ^ 

Mr. Sloan. Segregating that from everything else — I don't know 
whether I can pick that out. 

Mr. Albert Bradley (vice president. General Motors, Detroit, 
Mich.). Excluding such stuff as 

Dr. LuBiN. Including parts. 

Mr. Bradley. Excluding the financing, about 700 million net; 
usually 70 percent of our total. 

Dr. LuBiN. Plant and equipment only. 

Mr. Bradley. We haven't that. 

Mr. Sloan. We haven't that segregated ; I will see that you get it. 

Dr. LuBiN. I would appreciate it awfully much if you could give us 
the figure of your investment and plant for equipment. 

Mr. Sloan. Applicable to motorcar industry and including the parts 
that we make that go into the motorcar, per se ; is that right ? I will 
see that you get that. 

Dr. LuBiN. And could you give us those same figures for, let us say, 
1927, 1928, 1929, and 1936, 1937, and 1938? 

Mr. Sloan. I will be very glad to do so. 

Mr. Bradley. 1927 to date? 

Dr. LuBiN. Yes. 

Mr. Bradley. Investment in physical motorcar facilities and not 
working capital. 


1 General Motors Corporation subsequently submitted these figures, under date of May 
23 and June 14, 1939. Both letters api>ear in the appendix on p. 4139. 



Mr. Sloan. You wanted growth as well as depreciation stood up 
against it ? 

Dr. LuBiN. That will be all right. 

Acting Chairman King. Mr. Sloan, we thank you very much for your 
contribution to this study which is being made by the committee. 
Call your next witness. 

Mr. Nehemkis. Dr. Oscar Altman, please. 

Acting Chairman King. Dr. Altman, do you solemnly swear the 
testimony you are about to give in this proceeding shall be the truth, 
the whole truth, and nothing but the truth, so help you God ? 

Dr. Altman. I do. 

Mr. Henderson, You will identify the witness, Mr. Nehemkis, and 
will you explain the general nature of the testimony he is about to 
give ? 

Mr. Nehemkis. I shall, Mr. Commissioner. There has been evi- 
dence, Mr. Chairman and gentlemen of the committee, to show that 
corporations by accumulation of resources out of earnings make sav- 
ings. We have heard that in the case of the Steel Corporation, in the 
case of General Electric, and, this morning, in the case of the United 
Aircraft Corporation and the General Motors. Dr. Altman will be 
asked to give further evidence along these lines. I ask leave of the 
committee to read Dr. Altman's qualifications into the record. 

Dr. Altman has been head of the banks, trusts, and research section 
of the assessor's office of Chicago, 111., and has been a member of the 
department of economics of Ohio State University, and is the author 
of numerous studies in the field of taxation. Dr. Altman, you are 
presently connected with the Investment Banking Section of the 
Securities and Exchange Commission? 

Dr. Altman. I am. 


Acting Chairman King. How long have you been connected with 
theS. E. C? 

Dr. Altman. Since September of last year. 

Acting Chairman King. Prior to that what were you doing? 

Dr. Altman. I was a member of the department of economics of 
Ohio State University. 

Mr. Nehemkis. The statements I read about your professional 
background are correct, are they not? 

Dr. Altman. They are correct. 

Mr. Nehemkis. Have you discussed the testimony that you are 
about to give with me and my associate, Mr. Kelley ? 

Dr. Altman. I have. 

Mr. Nehemkis. Notwithstanding that association and the discus- 
sions you have had, does the evidence that you are about to present 
to the committee embody your own considered findings and conclu- 
sions ? 

Dr. Altman. They do. 

Mr. Nehemkis. Were the charts to which you will refer prepared 
by you or under your direction ? 

Dr. Altman. They were. 


Mr. Nehemkis. Are they based upon published statistical data 
which you believe to be authentic and reliable ? 

Dr. Altman. Yes; they are. 

Mr. Nehemkis. Are you prepared to testify with respect to cor- 
porate savings, devices by which such savings are made, and their 
effects on the investment and securities market? 

Dr. Altman. Yes. 

Mr. Nehemkis. Will you proceed. Dr. Altman, calling as you go 
for the charts and tables you wish to illustrate and support your 
remarks ? 

significance of internal financing 

Dr. Altman. I have been asked to present material this afternoon 
on the overall aspects of business and internal financing. My pres- 
entation is designed to supplement and generalize the material on 
corporate financing, both external and internal, that has been pre- 
sented to the committee during the past day and a half. Business 
internal financing is important because a study of the problem will 
indicates two things: First, how much money is available to cor- 
porations and business enterprises generally from internal sources; 
and secondly, to what extent these business enterprises need to tap 
the new savings of the nation in order to make their necessary 
expenditures and carry on their necessary activities. 

I have neither the time nor the qualifications to discuss business 
financing in all its aspects nor in all its details. With the com- 
mittee's permission, I should like to delimit the questions and to 
consider only the financing of business expenditures for fixed assets, 
in other words, the financing of expenditures for plant and 

Acting Chairman King. For plant development and expansion 

Dr. Altman. For plant development and expansion, and for plant 
itself and for equipment. 

I thus propose to deal with long term investible funds. I shall 
leave aside that part of the question which concerns the financing of 
current assets. This omission is the less serious because current 
assets are usually financed by current liabilities (that is to say, by 
bank credit, loans, accounts payable, advances, and the like), while, 
on the other hand, fixed assets are financed by stocks, bonds, and 
funds raised from internal sources. 

The financing of investment in fixed assets — plant and equipment, 
that is — and the importance of internal financing may be discussed 
under two headings : the first, how much do business enterprises spend 
each year and how much do they spend on the average on plant and 
equipment; and the second, how do they obtain the funds to pay for 
these investments. Internal financing is important in financing these 
investments because, to the extent that enterprises so finance, they 
do not need to draw upon the new savings of individual and institu- 
tional investors, and they need not have recourse to the capital mar- 
kets of the country. 

Before going further in this discussion, I should like to recall to 
the attention of the committee the precise meanings of the terms 
used in discussing the financing of fixed assets. 

A business receives most of its funds for long-term investments 
from three principal sources. First, external sources. A business 


enterprise may sell stocks or bonds to investors. These investors may 
be individuals, or tliey may be institutions charged with the savings 
of individuals, such as insurance companies, savings banks, and the 
like, or they may be commercial banks. Second, internal sources. A 
business may retain part of its profits. These savings, together with 
depreciation and depletion allowances available from current opera- 
tions, are available for investment. Third, sale or conversion of 
assets. A business may collect its accounts receivable, reduce its in- 
ventories, and draw down its cash balances, and use the funds ob- 
tained in this way for the purchase of plant and equipment. Thus 
the three principal sources of funds for financing fixed asset expendi- 
tures are external sources, internal sources, and conversion of assets. 
The testimony heard during the preceding two days on four large 
corporations in as many important industries has indicated, I think, 
that internal sources are by far the most important source of funds 
for financing investments in plant and equipment. The same con- 
clusion can be drawn from a study of all business enterprises, though 
not to the same degree. 


Dr. Altman. During the period 1923 through 1929, the estimated 
expenditures for plant construction, machinery, and equipment, by 
all incorporated and unincorporated business enterprises, including 
agriculture, averaged $8,500,000,000 a year. In this connection, I am 
using a series of expenditures compiled by George A. Terborgh of the 
Board of Governors of the Federal Reserve System and introduced 
into the record by Dr. Laughlin Currie in his testimony.^ These ex- 
penditures reached a high point of $10,045,000,000 in 1929. On the 
average, approximately 44 percent of these totals went for construc- 
tion of plant and 56 percent went for investments in machinery, 
equipment, and other capital goods. 

In this connection, I offer for the record a table having the title, 
'Terborgh's Estimates of Business Gross Capital Formation, Ex- 
cluding Inventories — 1921-1938," and showing the distribution of 
this total by the percentage going for construction and the percentage 
going for durable goods. 

Mr. Nehemkis. Mr. Chairman, I offer into evidence the table just 
identified by the witness. 

Acting Chairman Reece. It may be admitted. 

(The table referred to was marked "Exhibit No. 575" and is in- 
cluded in the appendix on p. 4036.) 

Mr. Nehemkis. Will you ask the reporter to mark that "Exhibit 1," 
please ? 

Dr. Altman. The major part of these expenditures was not made 
for additional plant. On the contrary, the major part went to 
replace plant and equipment which was worn out or discarded. 
It has been estimated that during the period 1923-29 more than 
65 percent of all the plant that was built and all the machinery and 
equipment that was produced went to make good the wear and tear 
on the existing business plant. 

In this connection, I should like to offer for the record a table 
having the title "Business Gross Capital Formation, Capital Con- 

1 See "Exhibit No. 547," supra, p. 3524. 


sumption, and Net Capital Formation" again excluding inventories^ 
for the period 1919 to 1937. 

Mr. Henderson. Will you repeat that 65 percent figure again, Mr. 
Altman, I didn't get it? 

Dr. Altivian. That 65 percent of all the construction of plants 
and all the construction of machinery and equipment went for re- 
placement purposes during this period 1923 to 1929. 

Mr. Henderson. In order, in other words, to keep the stock of 
plant and equipment intact. 

Dr. Altman. Yes. 

Mr. Henderson. Eather than for adding to the stock. 

Dr. Altman. Exactly. 

Acting Chairman Reece. But at the same time, was the plant 
ca]3acity increased by reason of those replacements to which you. 
refer ? 

Dr. Altman. With your permission, I should like to postpone 
my answer to that question, because I discuss it a little bit later in my 

Mr. Nehemkis. Mr, Chairman, I offer into evidence the table just- 
identified by the witness. 

Acting Chairman Reece. It may be received. 

(The table referred to was marked "Exhibit No. 576" and is in- 
cluded in the appendix on p. 4036.) 

Dr. Altman. This is not to imply that each new machine was 
exactly the same as the machine which it replaced, nor that each 
new building was a duplicate of the old. Each new machine and 
each new building was the best that could be purchased. In this 
sense, in terms of the dollar values of the physical plant and equip- 
ment, we may say that during the years 1932-29, 65 percent of the 
amount of money spent for plant construction, machinery, and 
equipment was used, broadly speaking, for replacement purposes. 
Only 35 percent of those expenditures resulted in any addition to 
our productive plant. 

Between 1929 and 1933 the value of new plant construction and 
the value of machinery and equipment produced fell by more than 
75 percent, or from 10.0 billion in 1929 to 2.3 billion in 1933. From 
1931 through 1934 our volume of plant construction and of ma- 
chinery and equipment production was insufficient to replace the 
plant and equipment that wore out. In each of the years 1932 and 
1933 the amount of plant and equipment produced was approxi- 
mately 2 billion less in value than the amount worn out. By 1937, 
however, the value of new construction and plant equipment had 
increased to 7.5 billion, of which two-thirds went for replacement^ 
while one-third represented an addition to our plant. 

The high ratio of business investment that represents replace- 
ment rather than addition to plant has two important consequences. 

First, to the extent that business enterprises set aside depreciation 
and depletion funds, they need not seek money from the capital mar- 
kets to pay for their new plant and equipment. In an economy such as 
ours, where approximately 65 percent of the business capital goods pro- 
duced goes for replacement purposes, it is not surprising that earned 
depreciation and depletion allowances are the largest and steadiest 
source of funds available to business. Every businessman includes. 


amoii|2: his expenses an item to cover the value of his plant and equip- 
ment used up during the year. In the case of plant, machinery, and 
equipment this charge is called depreciation; in the case of natural 
resources that are used up, such as coal and oil, the charge is called 
depletion. In any case, no corporation is said to earn a profit^ 
whether for income-tax or general accounting purposes, unless it not 
onW makes enough to meet all its expenses, but in addition is able 
to set aside a fund large enough to cover the wear and tear on its 
investment. These funds so set aside are available for reinvestment. 
If the particular business enterprise holds its place in the industry, 
it reinvests these funds itself. If the business is liquidating, it does 
not reinvest these funds. Instead, it may retire its outstanding se- 
curities; or it may turn these funds over to some other enterprise 
that is expanding, by means of the purchase of securities ; or it may 
return funds to its investors in the form of dividends. 

Second, we all know that building construction and machinery 
output fluctuate sharply from prosperity to depression, much more 
sharply than do consumers' goods. vVe like to explain this by saying 
that in some years we expand our plant and in other years we do 
not. But it is necessary to note that in some years we don't even 
replace the plant and equipment which wear out. It is important 
to stress this point. 

In some years we simply do not replace the plant that wears out. 

Mr. Henderson. What were some of the years that we did not? 

Dr. Altman. In 1932 and in 1983 we failed by $2,000,000,000 each 
year to replace the plant and equipment that wore out, but there 
were four years during the depression when we did not replace the 
plant and equipment that wore out. 

In this connection I should like to offer for the record a table 
called "Estimated Business Expenditures for New Durable Goods 
(Excluding Inventories) and Business Depreciation and Depletion 
Allowances, 1920-1937." From this table we see that the years in 
which we failed to replace the plant and equipment which wore out 
were 1932, 1933. 1934, and 1935. 

Mr. Nehemkis. Mr. Chairman, I desire to offer in evidence the 
table just identified by the witness. 

Acting Chairman Reece. It may be admitted. 

(The table referred to was marked ''Exhibit Xo. 577" and is 
included in the appendix on p. 4037.) 

Dr. Altman. When a business enterprise sets aside a million dol- 
lars as depreciation on its existing plant and equipment, and does uot 
invest this million dollars in new plant and equipment, new plant 
and equipment in general are not produced. The enter])rise is dis- 
investing plant and machinery. If the business uses this money 
to increase its bank account, to pay off its accounts payable, or to 
retire existing bonds, there may be no immediate corresponding; 
increase in the production of other goods. If the business enterprise 
pays out the depreciation allowances in the form of dividends to its; 
stockholders, the business is again disinvesting, but the immediate 
results are different. 

Paying out depreciation allowances in the form of dividends helps 
to sustain consumer purchasing power. On the other hand, to the 
extent that depreciation allowances are used in this manner^ the net 

li;4491— 40— pt. 9 1.3 


effect upon the economy as a whole during a depression is to stimu- 
late the production of goods designed for the consumer, and to 
induce a sharp decline in the production of plant and equipment. 
In other words, the net effect of paying out depreciation allowances 
is a small increase in the production of consumer's goods and a great 
decrease in the production of plant and equipment. 

Mr. Hendeeson. Wait a minute. That payment out, rather than 
increasing the amount of consumers' goods beyond the previous 
period, would just prevent it from falling lower? 

Dr. Altman. Yes. 

Mr. Henderson. Isn't that what happens on the down curve? 

Dr. Altman. That is to say, consumer outlay does not fall as 
sharply as it otherwise would because it is sustained by the paying 
out of depreciation allowances to individuals who own parts of 

Mr. Henderson. They have to be paid out? 

Dr. Altman. Yes ; they must be paid out. 

Mr. Henderson. When they are paid out they are not called depre- 
ciation allowances in accounting terms? 

Dr. Altman. No; they would be paid as dividends or something 
similar, or they might be called interest on bonds. 

Mr. Henderson. You are speaking of the accounting source of such 

Dr. Altman. Yes; I am. . 

depreciation and depletion allowances 

Dr. Altman. Now, I should like to turn to the question : How large 
are depreciation and depletion allowances ? The reports of the Bureau 
of Internal Revenue on all nonfinancial corporations, compiled in the 
Treasury Department's annual Statistics of Income, indicate that an- 
nual depreciation and depletion allowances increased steadily from 
21/2 billion dollars in 1920 to 4.1 billion dollars in 1930. In 1936, 
the last year for which data have been released, they were $3,500,- 
000,000. It has been estimated that depreciation and depletion allow- 
ances were approximately $3,700,000,000 in 1937. 

For the record I should like to submit at this point a table called 
"Compiled Net Profits, Dividends, Depreciation, and Depletion of All 
Nonfinancial Corporations, 1923-1927." 

Mr. Nehemkis. INIr. Chairman, I offer into evidence the table just 
identified by the witness. Perhaps the years should be repeated by 
me at this time. The years mentioned in the caption of the table are 
1923 through 1937. Is that correct. Dr. Altman? 

Dr. Altman. That is right. 

(The table referred to was marked "Exhibit No. 578" and is in- 
cluded in the appendix on p. 4037.) 

Acting Chairman Reece. If you haven't clone so, would you mind 
stating what you mean by nonfinancial institutions. 

Dr. Altman. Nonfinancial institutions would exclude such busi- 
nesses as banks, insurance companies, savings and loan associations, 
and the like. 

The depreciation and depletion allowances for all business enter- 
prises in the United States are naturally greater than those for cor- 
porations alone. Data compiled by Dr. Fabricant for the National 


Bureau of Economic Research indicate that depreciation and deple- 
tion allowances for all business enterprises, unincorporated as well 
as incorporated, doubled from 1920 to 1929. They rose from 2i/2 
billion in 1920 to 5.1 billion in 1929. Dr. Fabricant estimated that 
depreciation and depletion allowances for all business enterprises 
Avere 4.3 billion in 1935 and 4.6 billion in 1937.^ 

The latter figure of 4.6 billions is a preliminary figure and is intro- 
duced into the record at tliis point by S]Decial permission of Dr. 
Fabricant and of the National Bureau of Economic Research. 

What accounts for the great increase of depreciation and depletion 
allowances from 1920 to 1929 ? 


Dr. Altman. The growth in the amount of capital invested in plant 
and machinery, and thus subject to depreciation, accounts for part of 
the increase. But the most important factor in this increase is a more 
general realization than has ever before existed in this country of 
the importance of depreciation and depletion as business expenses. 
More than ever before, businessmen realize that unless a business 
earns enough to set aside a sum sufficient to replace plant and ec^uip- 
ment as it wears out, the business is operating at a loss. No small 
elements in driving this home have been the spread of income tax 
accounting standards, the growing importance of the profession of 
accountancy, and the influence and requirements of our regulatory 
commissions. In addition, businessmen are becoming increasingly 
aware of the rapidity of technological change. They recognize that 
as new and better machines are developed, as more efficient methods 
of plant and lay-out of construction are devised, the economic life 
of business plant and equipment becomes shorter, even though the 
physical life of these objects may remain the same. Hence, there is 
an increased awareness among businessmen of the importance of get- 
ting their money back in a shorter time; that is, of increasing 
depreciation allowances. 

The prevailing business practice is to base depreciation allowances 
upon original cost. The annual depreciation charges, for the most 
partj are computed on a straight-line basis. That is to say, the de- 
preciation charged in any year is the same, and is equal to the cost 
of the machine or the plant, minus whatever the scrap or salvage 
value may be at the end of its expected useful life, divided by the 
length of that useful life. 

As a result, depreciation allowances are much more stable than 
industrial production (although depletion allowances, of course, 
naturally fluctuate with production). Industrial production, as 
measured by the index of the Federal Reserve Board, declinecl by 
more than 36 percent between 1929 and 1933, whereas, during the 
same period, depreciation declined by little more than 15 percent. 

In further contrast to the relative steadiness of depreciation and 
depletion allowances on an original cost basis, have been the changes 
in the costs of plant construction, machinery, and equipment. The 
cost of replacing plant and equipment fell sharply after 1929. It 
was approximately 12 percent lower in 1935 than in the period 

1 See "Exhibit No. 577," appendix, p. 4037. 


1921-29. Even the increase in the costs of phxnt and equipment 
after 1935 left replacement costs below those of 1921-29. 

Mr. Henderson. What do yon base that on? 

Dr. Altman. I mean to submit for the record — well, perhaps 1 
•can discuss it at this point. I base the fallino; costs upon indexes 
of the prices of business capital ocf)ds as computed by the National 
Bureau of Economic Research for capital equipment and as com- 
puted by the American Appraisal Co. for construction costs, and 
these indexes, together with other indexes covering other business 
outlays for plant machinery and equipment of different types, have 
been weighted and put together by Dr. Fabricant into what he calls 
ji weighted index of durable goods and construction costs. 

INIr. Henderson. That would mean then, Dr. Altman, that if a 
company maintained its cash position through a disinvestment process, 
or shall we say without paying out dividends in the decline of ^2% 
to '33, and by conversion of its inventory into cash, as many did, 
if it chose in 1933 to use its accumulated depreciation account to buy 
equipment for replacement, it could do it on about a 12-percent-less- 
cost basis. 

Dr. Altman. Even better than that. It could do it at 20 percent 
less than it could in 1929. The 12 percent refers to 1935. 

Mr. Henderson. 1935 when the real movement for replacement 
was re-instituted, that is the first year in that series when we actually 
began to add to plant and equipment. 

Dr. Altman. That is right, when we actually began to add to it. 
We could replace it at a lower cost then than we could have built it 
in 1929. 

Mr. Henderson. Have you the figure of what the cost was in, sav, 
'36 and '37 ? 

Dr. Altman. The index I have here indicates that, taking 1929 as 
100, the index in 1935 stood at 88. In other words, in 1935 the cost 
of replacing plant and equipment was 12 percent below 1929. In 
1936 it stood at 90. which is to say that the cost of replacement was 
10 percent below what it had been in '29. There was a sharp rise 
in prices in 1937, but even so the index did not quite go back to 
100; it stood at 981/2 percent so that you have a II/2 l^ercent differ- 
ential even in 1937, after a recovery of prices in capital goods and 
construction costs. You have a differential of !]/■> percent in 1937 
as compared with '29. 

Mr. Henderson. Do you have there what was the accunudated un- 
spent depreciation account from '29 through '36 i 

Dr. Altman. No, I do not; but I mean to discuss in just a moment 
tlie relationship between the prices on w^hich depreciation is computed 
and the costs of replacing equipment. May I put that off for the 
moment ? 

May I offer for the record the table from which I have just been 
reading, which is called the 'Tndexes of Prices of Business Capital 
■Goods, 1920-1937"? 

Mr. Henderson. You consider the National Bureau of Economic Re- 
search the best economic agency of its kind in the country? 

Dr. Altman. I would consider this work the best of its kind. 

Mr. Nehemkis. Mr. Chairman, I offer in evidence the table just 
referred to. 

Acting Chairman Reece. It may be admitted. 


(The table referred to was marked "Exhibit No. 579" and is 
included in the appendix on p. 4038.) 

Dr. LuBiN. May I interrupt at this moment ? I don't know whether 
you feel you are in a position to answer this question, but if you are 
I should appreciate it. In looking at this table on the estimated 
business expenditures/ I note in the year 1937 these expenditures for 
new durable producers goods were less than in any year in the 
twenties except 1922 — '21 and *22. Despite that fact, however, the 
price that was charged for this equipment was only 2 percent less 
than in 1929 when you had your peak. Can one conclude from that 
that the prices of producers' goods went up in 1937 almost to the 
level of 1929 although in terms of the volume of investment and 
demand of those goods there was a considerable decrease as compared 
to the preceding high period? 

Dr. Altman. Yes; I think one can say that. 

Mr. Nehemkis. Will you proceed, Mr. Altman? 

Dr. Altman. Since original costs are higher than replacement 
•costs, the depreciation charges exceed the sum needed to replace the 
particular items of plant and equipment which are being depreciated. 
This is in reference to the discussion we have just terminated. 

May I offer for the record here a table called the Index of Prices 
of Business Capital Goods for Replacements and for Depreciation 
Charges, for the period of 1930 to 1937? 

Mr. Nehemkis. Mr. Chairman, I think a correction should be made 
in the years mentioned by the witness. They should read 1920 through 
1937. I request the table identified by the witness be admitted to 
the record. 

Acting Chairman Reece. It may be admitted. 

(The table referred to was marked "Exhibit No. 580" and is in- 
cluded in the appendix on p. 4038.) 

Mr. Nehemkis. Will you proceed. Dr. Altman? 

Dr. Altman. This general discussion I have concluded was de- 
signed to deal with the general question of the relationship between 
the })rices on which goods are being de])reciated and the prices at 
Avhich the goods are being replaced. Now to the extent that the 
prices which are serving as the basis for depreciation are higher than 
the prices of the goods when they are being replaced, to that extent 
the business is more and more able to replace its equipment and have 
something left over. Consequently 

Mr. Henderson. It happens, though, that when they buy, accord- 
ing to the recent experience, the price is almost as high. 

Dr. Altman. Only in 1937, and even then there was a slight saving 
in the replacement of equipment. 

Mr. Henderson. But there wasn't a substantial volume bought at 
the lower prices? 

Dr. Altman. Only in 1935 and in 1936. During the depression 
the effect of the price saving was lower than one might have expected, 
because the volume of capital goods bought during those years was 
quite low. 

Dr. LuRiN. May I ask a question about this last table that you 
presented; in the index of prices of business capital goods I notice 
in one of your columns you have the heading "Prices Underlying 

1 See "Exhibit No. 577,' appendix, p. 4037. 


Business Depreciation Charges," and tlien you have in the next 
cohnnn "Keplacement Costs," and you have a ratio between the 
two. Have you any data which averages these figures? In other 
words, property that was purchased in 1921, when the index was 39, 
was being depreciated during the whole decade. On the other hand, 
property purchased in 1922, v/hen the index was 90, was being depre- 
ciated, and simihirly property purchased in 1929, when the index was 
100, was being depreciated during the following decade. Now, have 
you any data which averages these figures so that j^ou can get some 
conception as to what the real relationship was between the costs of 
equipment and the replacement costs? 

Dr. Altman. May I explain, Dr. Lubin, the computation of the 
first column of figures called "prices underlying depreciation 
charges"? Those figures are averages. They are the averages to 
which you refer, and they reflect the prices of the goods purchased in 
any given year which were being depreciated in a subsequent year. 
That is to say, when we see a figure of 100 in 19'29, that figure of 100 
means that it is based upon the prices of all the goods which were 
being depreciated in 1929, whether they had been bought in 1921 or 
in 1925 or in 1927. So that what you have here is a weighted average 
of all the property that was being depreciated as of any given year. 

Dr. Lubin. Thank you. 

Acting Chairman Reece. When the depreciation rate is decided 
upon; the plant management makes an estimate of what the replace- 
ment cost will be when the time for replacement comes about. How 
can the management determine with accuracy what the replacement 
cost is going to be ? It will be affected by economic conditions that 
might obtain at that time. Now, sometimes prices — the replacement 
cost will rise; then under other circumstances it will go down. It 
happened during the period to which you referred that replacement 
costs have declined. 

Mr. Henderson. Maybe I could help the chairman with that. The 
American Appraisal Co. is constantly making just such estimates of 
the cost of replacement of equipment purchased in the previous 
period for certain companies. 

Dr. Altman. Mr. Henderson, may I address myself specifically to 
one particular point that I think comes in here, in addition to the one 
you made ? I am not quite sure, and if I am not right this discussion 
is not to the point, but it seems to me that the question as raised seemed 
to imply that depreciation charges were computed on replacement cost. 
Now, it doesn't make any difference to the management what the re- 
placement cost will be 5 years hence. When they buy a machine today 
what they do is invest $100 in a machine ; they decide that the machine 
will last 5 years and they then charge $20 each year as depreciation. It 
doesn't make any difference whether that machine will sell for $80 five 
years hence, or $100 five years hence ; nobody knows. 

Mr. Nehemkis. Will you proceed. Dr. Altman, unless the Congress^ 
man has further questions ? 

Acting Chairman Reece. You may proceed. 

Dr. Altman. Consequently only part of the depreciation allowances 
p.eed to be reinvested to maintain capacity. 

This decrease in the amount of investment required — and 1 will deal 
now with the information contained in the last table offered in evi- 
dence — this decrease in the amount of investment required to main- 


tain productive capacity is being accentuated by research and teclmo- 
logical progress. These factors are continually increasing the physical 
productivity of a dollar's worth of investment. The available evidence 
indicates that this increase in productivity has been accelerated since 
1929. For example, there has been an increasing utilization of large 
capacity equipment in the electrical, power, and other industries; a 
growing importance of measuring, controlling, and recording devices: 
and improvements of physical and chemical composition of metals and 
other raw materials. 

These factors combine to create the present situation : reinvestment 
of part of the present depreciation allowances will maintain productive 
capacity. Business can invest all of its depreciation allowances only 
by expanding its productive capacity, 


Dr. Altman. The second most important internal source of funds 
for building plant and bujdng equipment is business savings. 

Mr. Nehemkis. May I interrupt, Dr, Altman, before you proceed, 
unless you had intended immediately thereafter to do so ; what do you 
mean by business savings ? 

Dr. Altman. I mean to define that immediately. Business savings 
are the amount of money left in the hands of a business enterprise 
after paying all the expenses of production, including rent, interest, 
wages, taxes, and so forth, and after payment of dividends to pre- 
ferred and common stock holders. In the case of unincorporated 
business enterprises savings are equal to the amount left in the busi- 
ness after the payment of profits to the owners. 

Acting Chairman Reece. Now, what is the difference between what 
you denominate as business savings and the item in the balance sheet 
called surplus and undivided profits? 

Dr. Altman. The item surplus and undivided profits may or may 
not be composed of savings which are retained as business savings. 

Acting Chairman Reece. But would business savings be included 
in those terms? 

Dr. Altman. Yes; business savings would result in an increase in 
some type of asset that the particular enterprise had and an increase, 
on the other side, of undistributed profits and surplus. 

Acting Chairman Reece. But in our accounting practice, would 
they regularly be included in those terms? 

Dr. Altman. The}^ would be carried to surplus at the end of the 
fiscal year; yes. 

Mr. Nehemkis. Dr. Altman, another way of putting it would be 
to say, would it not, that business saving is a synonym for the terms 
used by the chairman? 

Dr. Altman. No; I don't think so. I would say that business 
saving is one of the elements which at the end of the fiscal year 
creates or goes into the surplus which the chairman has been dis- 

Acting Chairman Reece. Now, is that a term common to account- 
ing practice? 

Dr. Altman. I have used the term business savings here in a very 
general sense to include two types of savings. When you deal with 
corporations you call them undistributed profits, and they at the 


end of the fiscal year are carried to tlie surplus and undivided jjrofits 
account. In the case of unincorporated business enterprises, the 
terminolog:y is not quite so ^ood, so that I have simply used the 
over-all term business saving-s to indicate the amount that is re- 
tained in the business after the payment of expenses and after the 
payment of dividends and so on. 

Mr. Nehemkis. Will you identify that for the record ? 

Dr. Altman. a table called "Business Savings For All Nonfinan- 
cial Enterprises, Capital Gains and Capital Losses For All Non- 
financial Corporations, and Adjusted Business Savino;s For All 
Nonfinancial Enterprises, 1922-37." 

Mr. Nehemkis. I offer in evidence the table just identified by the 

Acting Chairman Reece. It may be admitted. 

(The table i-eferred to was marked "Exhibit No. 581" and is 
included in the appendix on p. 4039.) 

Dr. Altman. During the period from 1923 to 1929 the average 
yearly business savings of all enterprises, as com])uted by the De- 
partment of Connnerce, was $2,200,000,000. In 1929 the business sav- 
ings of all nonfinancial enterprises; that is, all businesses except banks, 
insurance companies, finance companies, and the like, was $2,900,- 
000,000, Business savings fell sharply after 1929, and reached a low 
of minus $8,771,000,000 in 1932. They were negative in each of the 
5 vears from 1930 through 1934, and amounted to minus 

Mr. Nehemkis. What do j^ou mean by the term ''negative"? What 
does that mean? 

Dr. Altman. I mean to discuss the significance of this at a later 
point. I would appreciate permission to postpone that. 

Acting Chairman Reece. One of the members suggested that 
"negative" meant less than nothing. 

Dr. Altman. I would like to postpone to a later point the signifi- 
cance of such negative business savings. At this point it seems pref- 
erable to indicate that business savings have not returned to their 
predepression level, although they amounted to $1,300,000,000 in 1930 
and $840,000,000 in 1937. 

Mr. Henderson. Dr. Altman, isn't that figure often confused with 
the idea that these negative savings were actual cash out-payments by 
corporations ? 

Dr. Altman. They were no such thing, Mr. Henderson. 

Mr. Henderson. Isn't it often confused? 

Dr. Altman. Yes; I think I have seen misconceptions of that sort 

Mr. Henderson. These did not represent any additions to the 
money flow that was available to consumers? 

Dr. Altman. Well, to some extent they did, and to that extent — 
but I mean to discuss that a little bit later. I am sorry I am in the 
position of saying that everything is going to be discussed later. If 
I haven't done so, I will be glad to return to any of these questions. 

In this connection I think it is worth while pointing out that Avhen 
you say there were considerable business savings in some years, and 
that there were negative business savings in other years, we should 
not be misled into thinking that all corporations made money in 
good years and all corporations lost money in bad years. In this 


connection I am offerino; for the record three tables ^ dealing with the 
undistribnted })rofits, depreciation, and depletion of all nonfinancial 
corporations, of those nonfinancial corporations which had a net in- 
come and of those nonfinancial corporations which had no net income. 
The summary data in these tables are presented in this particular 
chart,- which deals with net profits, after taxes and after dividends, 
l)his depreciation . and depletion allowances of nonfinancial corpo- 

It is clear from the chart that even in the years of prosperity — 
what we commonly think of as prosperity now — from 1923 through 
1929, there was a considerable number of corporations that had losses. 
I do not mean to imply that the same corporations had a loss each 
vear throughout the period. One year a corporation may have been 
in the pi'ofit column; the next year it may have been in the other 

Mr. Henderson. That chart would show in the line above zero, 
the profits of corporations that reported net incomes, and the red line 
])elow the zero line would indicate the net losses of corporations 
which had losses in those years. 

Dr. Altman. Not only net losses, Mr. Henderson, but it would 
include those corporations which for some reason or other may have 
earned their depreciation and depletion allowances and paid these 
out in the form of dividends. 

Mr. Henderson. This chart, then, in the terminology of net profits, 
is after dividend payments? 

Dr. Altman. After dividend payments, after taxes, and plus de- 
])reciation and depletion, or to use the terminology which runs 
throughout my paper, the blue bars at the top indicate the amount 
of business savings available for reinvestment by the corporations 
that had a net income, whereas the red lines at the bottom indicate 
the amount less than zero that corporations had after paying taxes 
and dividends and taking into account depreciation and depletion. 

Mr. Henderson. It is a measure of the difficulty they might have 
had in making capital investments? 

Dr. Altman. Well, I think in considerable part these corporations 
were not contemplating making capital investments because they wero 
paying out depreciation and depletion as earned, though in some part 
the clejireciation and depletion may not have been earned. 

Mr. Henderson. Would it be possible that a corporation, which had 
a loss and therefore was represented in the red, might have had from 
])revious periods depreciation allowances which would have been 
available, in case it chose, for the buying of equipment? 

Dr. Altman. Oh, yes. 

]\Ir. Kelley. Will you identify these by title? 

Dr. Altman. The three tables that underlie this particular graph 
I call "Undistributed Profits, Depreciation, and Depletion of Non- 
financial Corporations, for the years 1923-1937" ; then, "ITndistributed 
Profits, Depreciation, and Depletion of Net Income Nonfinancial Cor- 
porations, for the period 1923-1935"; and "Undistributed Profits, De- 
jireciation, and Depletion of No Net Income Nonfinancial Corpora- 
tions." In other words, all the nonfinancial corporations are sepa- 

1 Entered later as "Exhibits Nos. 582, 58:>, and 584," see appendix, pp. 4(10!) and 4040. 
- Entered later as "Exhibit No. 585," see infra, p. 3GS:5. 


rated into two groups; those that made an income and those that 
didn't, and these three tables deal with all the corporations as a group, 
with those that had an income, and with those that didn't have an 

Mr. Nehemkis. May I offer these? I desire to offer the tables just 
identified bv the witness into evidence. 

(The tables referred to were marked "Exhibits Nos. 582, 583, and 
584," and are included in the appendix on pp. 4039 and 4040.) 

Mr. Nehemkis. Mr. Commissioner, may I ask your indulgence for 
one moment ? I want the witness to clear a point for the record. 

Acting Chairman Reece. Those exhibits may be admitted. 

Mr. Nehemkis. Dr. Altman, earlier in your discussion the acting 
chairman asked if you would give a definition of nonfinancial corpo- 
ration. The record shows that you have given a definition of finan- 
cial corporations. Will you clarify that at this particular point? 
What is your definition of nonfinancial corporations? 

Dr. Altman. Nonfinancial corporations would be all corpora- 
tions except or excluding banks, insurance companies, finance com- 
panies, and the like. That is what would be commonly taken by that 

Dr. LuBiN. I am interested to clarify in my own mind just what 
the lines above the zero base, and those below the line, mean.^ For 
example, a corporation earns $100,000 after having paid taxes, all 
other operating expenses, interest on bonds, and so forth. It pays 
out in dividends $150,000. In other words, it takes $50,000 out of 
the surplus account. Would it be above or below the line ? 

Dr. Altman. It would be above the line and the negative amount, 
if there was a negative amount, would be offset by the positive 
amount from other corporations in the same group. May I clarify 
this particular point? Suppose you had a corporation which had a 
net income of $1,000, paid out $2,000 in dividends, earned $500 in 
depreciation and depletion. The sum total of all those items is minus 
500. Now that minus 500 would be added to any positive sum for any 
net income corporation. So that minus $500 would be added into the 
total which included a corporation, let us say, that made $10,000, paid 
out $5,000, then had another $5,000 of depreciation and depletion. 
There you have $10,000 positive. The five w^ould be subtracted from 
the 10.000 to give 9,500 in the blue bar (above the line). 

Dr. LuBiN. But the fact still remains that there are corporations 
in the red bar (below the line). Does that mean every corporation, 
are the sums in those bars made up of those instances wdiere the net 
income of the corporation was minus zero after dividends and de- 
preciation had been taken out? 

Dr. Altman. It might have been plus zero after the depreciation 
and depletion had been taken care of. I am very glad that cor- 
rection has been made. In other words, the blue bar (above the line) 
which I have discussed before as indicating the amount that was avail- 
able for investment on the part of corporations that had a net income, 
understates the amount to the extent that you had corporations with 
a positive amount in the red bar (below the line). But it is difficult 
for this type of statistical analysis to take the plus corporations out 
of the red bar and put them up in the blue bar. 

1 Referring to "Exhibit No. 585," see infra, p. 3683 



Exhibit No. 585 




1923 - 1937 








1923 24 2S 26 27 28 29 30 31 32 33 34 35 36 1937 


souitet STtTisTics OF income, us Tnets de^t 


OS' lilt fKCPARCD ar sec a excH comm 


Dr. LuBiN. That means then in effect that your red bars may be 
misleading, at least to the extent that they include corporations that 
make money, and because of the policy of paying out dividends 
have got themselves into a position where they automatically would 
fall into the red section of your bar (below the line). 

Dr. Altman. If I understand your question correctly. Dr. Lubin^ 
I think I take the converse of that particular proposition. They 
are in the red bar because they lost money. Now it may be that by 
way of internal savings they have a plus amount for investment, 
which means they should be up in the blue but instead they are 
down in the red. That means that you may have corporations which 
have been included in the red bar because they lost $1,000,000 let us 
say, in any given year but which nevertheless may have had $1,000,000 
available for investment, which should be included in the blue. 

But I haven't been able in the light of the information available 
to me to make the correction. I simply indicate it is an under- 
statement of the amount available for investment. 

Acting Chairman Reece. Since the colors will not show in the 
record, it might be well to state the blue bars are above the zero 
line and the red bars are below the zero line. 

Dr. Altman. This particular chart we have been discussing has 
been photographed and reproduced and is offered in the record. It 
is called "Net Profits (After Cash Dividends and Taxes) Plus De- 
preciation and Depletion of Nonfinancial Corporations, 1923 through 
1937." The upper half of the chart deals with corporations reporting 
net incomes, and the lower half of the chart deals with corporations 
reporting no net incomes. 

Mr. Nehemkis. Mr. Chairman, I offer into evidence the chart just 
identified by the witness, together with the supporting table therefor. 

Acting Chairman Reece. It may be admitted. 

(Tlie chart referred to was marked "Exhibit No. 585" and appears 
on p. 3683. The statistical data on which this chart is based are 
included in the appendix on p. 4041.) 


Dr. Altman. The situation for the ])eriod 1923-29 may now be 
summarized as follows: The average annual amount spent by busi- 
ness enterprises for plant construction, machinery, and equipment 
was 8.5 billion per annum; the average annual amount available to 
the same business enterprises from internal sources was 6.4 billion 
per annum. Thus the maximum amount which business enterprises 
needed from the capital markets of tlie country — that is, from indi- 
vidual and institutional savers — was only 2.1 billion per year. 

The table on which these statements are based is offered for the 
record and is called "Financing Investments in Business Plant and 
Equipment, 1922-37," and the data in this table are incorporated in 
the chart which you see and which has the title "Financing Invest- 
ments in Business Plant and Equipment, 1922-37." In this particular 
chart covering the period '22 to '37, the yellow bars (the bars to the 
right of each set of bars) indicate the amount spent each year for 
plant and equipment. The pink bars (upper segment of the bars 
to the left) represent the amount available in each year to all busi- 



Exhibit No. 586 



1922 - 1937 







1922 23 24 25 26 27 28 29 30 31 32 33 34 35 36 1937 

ai-iijs: i>R£pM>ra.By SEC- a euch csmm 


iiess enterprises, excluding financial enterprises, from business savings 
plus depreciation and depletion allowances. 

The difference between the height of the pink bar and the yellow 
bars, which is the bar at the right, represents the amount that was 
needed from other sources for financing these particular investments 
in plant and equipment, 

A reproduction of this particular chart has been made and is 
offered for the record. It has the same title as the large one. 

Mr. Nehemkis. Mr. Chairman, I desire to offer into evidence the 
chart entitled "Financing Investments in Business Plant and Equip- 
ment, 1922-37," and the supporting table therefor. 

Acting Chairman Reece. They may be admitted. 

(The chart referred to was marked "Exhibit No. 586" and appears 
on p. 3685. The statistical data on which this chart is based are 
included in the appendix on p. 4041.) 

Dr. LuBiN. May I ask a (][uestion about this chart? You take the 
year 1929, the bar at the right for 1929 is approximately $10,200,- 
000,000, roughly. 

Dr. Altman. That is right. 

Dr. LuBiN. And the bar at the left is $9,900,000,000. 

Dr. Altman. I should offer a correction, I think, that the bars 
at the left in each particular case consist of two segments. The top 
segment is added to the bottom segment so that the amount of un- 
distributed profits plus depreciation and depletion does not start 
from the base but starts from the place Avhere the lower segment of 
the left hand bar, which is in brown, ends off. The lower segments of 
the left-hand bars indicate the funds available from security flotations. 

Dr. LuBiN. The reason I raise the question is that one immediately 
asks himself, where did the difference come from, because you have 
in your two sources of funds internal and external, and both appear 
to be less than the amount actually expended for producing goods. 

Dr. Altman. My answer to that. Dr. Lubin, would be that in an 
overall analysis of this kind it is impossible to make the sources of 
funds and the expenditure for any particular purpose balance pre- 
cisely. I have simply attempted to indicate the relative magTiitudes 
involved and to attempt to set forth the amount which was available 
each year from the two major sources of funds for the financing of 
plant and equipment. 

Dr. Lubin. In other words, you are assuming that other sources 
were available. 

Dr. Altman. They must necessarily have been available since the 
debts incurred in building the plant and equipment must have been 
paid. They may have been paid by drawing down cash or by 
liquidating accounts receivable, or the like. 

Mr. Nehemkis. Dr. Altman, while discussing the chart, what is the 
significance of the pink bar which falls below the zero line because of 
the component funds available from internal sources? 

Dr. Altman. That is precisely the question asked me a little earlier 
in the discussion and again I would like to give the same answer; 
namely, I would like to deal with the depression period by itself 
and indicate what the pink bar below it indicates in that discussion. 

Mr. Nehemkis. You impose a heavy responsibility on me to make 
sure I remind you of all these things. Dr. Altman. 



Dr. Altman. I have indicated in this discussion this point, that 
the average amount spend for construction of plant and equipment 
for the period '23 to '29 was about 8.5 billion. The average amount 
available from internal sources was 6.4 billions. In other words, 
the maximum ainount which business enterprises needed from the 
capital markets of the country to finance these expenditures and fixed 
assets was only 2.1 billions. 

I would now like to deal with that 2.1 billions. The actual amount 
required was probably substantially less than 2.1 billions. In many 
cases business expenditures for minor improvements, dies, small tools, 
and plant additions, and development expenses are charged directly 
to income. 

Mr. Henderson. We had an instance of that in Mr. Sloan's state- 
ment, which I presume you took note of, where there was a 2-year 
period for amortizing, for writing off really, the cost of tools and 
the like.i 

Dr. Altman. His statement falls directly within what I have been 
saying, providing that the initial charge was to income and not 
capital investment. 

Mr. Henderson. I think he made that very clear. 

Dr. Altman. To the extent that these items are charged to income 
in the first place, they tend to understate the amount of undistributed 
profit, and then they understate the upper segment of the bar at the 
left, and thus they understate the volume of funds available from 
internal sources. 

Mr. Henderson. I think Mr. Sloan stated two or three times that 
they were currently getting back the cost of tooling up from the pro- 
ceeds of the sale of cars. 

Dr. Altman. I think there is no question, Mr. Henderson, that in 
a good many cases costs of this type which are capitalized are 
charged directly to income, and so understate the volume of funds 
available for internal financing. 

In addition, every year business enterprises receive insurance set- 
tlements for property that has been destroyed by fire, damage, ship- 
wreck, and flood. The value of these claims is not available, but a 
conservative estimate indicates that business enterprises receive at 
least $150,000,000 a year for losses covered by insurance. In other 
cases, the establishment of contingency and other reserves, when 
charged to current income, reduces the amount of savings shown in 
business reports, without, however, reducing the amount of funds 
available from internal sources. 

No estimate has been made of the additional amount of funds 
available from these three sources, that is, charging some invest- 
ments to income, from the payment of insurance claims, and from 
the establishment of some types of reserves. These items have been 
mentioned merely to indicate that the estimate of the volume of 
funds available from internal sources is a modest one. This volume 
may well be several hundred million dollars greater than the average 
of 6.4 billions estimated for 1923-29. The indicated requirement of 

1 Supra, p. 3652. 


2.1 billions a year on the averatje from individual and institutional 
f^avers was thus clearly a maximum figure. 

In fact, the capital markets during the period 1923-29 never con- 
tributed so much as $2,000,000,000 a year toward the financing of 
j)lant construction and the purchase of machinery and equipment. 

May I direct your attention to this particular chart again. ^ The 
segment of the bars covered in brown, which is equal to the lower 
segment of the left-hand bar in each particular case, represents the 
statement made by Moody's Investment Service of the amount of 
capital issues each year which were used for productive purposes, 
that is, for the construction of plant and the purchase of machinery 
and equipment. Notice that these brown segments never rise above 
$2,000,000,000 a year for tlie whole period. In some yeai-s they were 
substantially less than $2,000,000,000 a year. Hence, this segment of 
the bars indicates the amount that was contributed by the capital 
iiiarkets through new security issues which went toward the construc- 
tion of plants and the purchase of machinery and equipment, 

Mr. Nehemkis. And what was the figure you gave for that? 

Dr. Altman. The statement was that in the whole period 1923-29, 
the capital market never contributed as much as $2,000,000,000 in 
any year for the financing of plant construction and the purchase of 
machinery and equipment. 

Mr. Henderson. You were going to discuss the relation of that 
lo what was available from other sources. Are you going to tie the 
two together? 

Dr. Altman. I hope to do that. 

The volume of securities issued each year was, of course, greatly in 
excess of $2,000,000,000 a year, but a considerable portion of the 
securities issued went for refunding purposes; others were floated 
by investment trusts; and still others were designed for financial 
purposes, that is, to build up cash balances and to buy securities for 
investment or for mergers and consolidations. 

I wish to be understood as not passing any judgment upon any of 
the ]:)urposes for which these securities were issued. I am simply 
dealing with the facts as they are and I merely indicate the propor- 
tion of the securities issued that was used for the purchase of plant 
and for the purchase of machinery and equi})ment. 

Acting Chairman Reece. I assume that a considerable percentage 
of the securities which were not used for that })urpose were refunding 

Dr. Altman. A considerable percentage was. The particular per- 
centage varies from year to year. As I remember it, the figure for 
1929 indicates that we had total new corporate issues of about $10,- 
000,000,000. Of this, about two and a half billion went for refund- 
ing purposes. 

Mr. Nehemkis. Is it your undei'standing. Dr. Altman, that at a 
fui'ther point in these proceedings additional testimony will be given 
on the point now under discussion? 

Dr. Altman. Yes. If it is the pleasure of the conunittee. I shall 
l)roceed with this, attempting to answer this question from memory. 
Otherwise, we can simply leave it for the next witness. 

Acting Chairman Reece. I think that would be very good. 

iSeo "Exhibit No. 586," supra, p. 3685. 



Dr. Altman. Now, I turn to the period about which two ques- 
tions have ah-eady been asked, namely, the period when the business 
savings were negative. What did that mean? 

During the period from 1931 through 1933 business did not replace 
plant and equipment as they wore out. Instead of being reinvested 
in new plant and equipment, depreciation and depletion allowances 
were in part paid out as dividends to stockholders and in some cases 
as interest to bondholders. Depreciation and depletion allowances 
during these 3 years totaled $13,800,000,000, while business expendi- 
tures for j)lant and equipment amounted to $10,100,000,000. There 
was a net disinvestment, therefore, of $3,700,000,000. That is, plant 
and equipment were not replaced during these three years to the 
amount of 3.7 billions. 

Business savings for the three vears 1931-33 amounted to minus 
$19,700,000,000. Cash dividends paid constituted $9,300,000,000 of this 
amount. The balance of minus $10,400,000,000 was composed of 
actual business losses and revaluations of various business assets, 
principally inventories and fixed plant. The cash outlays repre- 
sented by dividends and current losses were met both by current 
receipts and by reduction of cash balances, liquidation of inventory 
stocks, and sales of securities and other property. The revaluations 
of assets, however, did not result in cash disbursements so far as 
business enterprises were concerned, nor did they constitute any cash 
receipts on the part of stockholders or bondholders. 

And I might add that to that extent they didn't contribute at all to 
maintaining consumer purchasing power during the depression. 

The general material with which I have been dealing is contained 
in four tables which I offer for the record at this point. The first 
one is called "Assets and Liabilities of All Corporations, 1926-36." 

The second one is called "Changes in Assets and Liabilities of All 
Nonfinancial Corporations, 1927-1936". 

The third is called Inventory Revaluations, for the period 1919 to 
1935 — perhaps I had better restate this title — "Inventory Revalua- 
tions, 1919-35, of All Business Enterprises, Excluding Famis." 

The last one is called "Inventory Revaluations, 1919-1933, of All 
Business Enterprises. Excluding Farm and Security Inventory Reval- 

I think we can't emphasize too much 

Mr. Xehemkis (interposing). Just a moment. Mr. Chairman, I 
offer in evidence the four tables just identified by the witness. 

Acting Chairman Reece. They may be admitted. 

(The tables referred to were marked "Exhibit Nos. 587, 588, 589, 
iind 590" and are included in the appendix on pp. 4042, 4043, ancl 

Dr. Altman. I think we can't emphasize too stronglv at this point 
that cash outlays on the part of business are not the principal part of 
the huge volume of negative business savings that I have been dis- 
cussing. They don't mean cash disbursements on the part of business. 

i\Ir. Henderson. Let me try to get it down to less econometric 
terms. Did the business system between 1929 and 1934 pay out more 
in cash than it took in? 

Dr. Altman. Yes, it did; because the cash on hand and in the 
bank of all business corporations declined by about, I think, $2,000,- 
000,000 for the period. 


Mr. Henderson. So there was about 2 billion dollars paid out in 
that period. 

Dr. Altman. Well, that is, if I could answer the question gen- 
erally, Mr. Henderson, the payments that were made by business 
corporations consisted of the following elements : In the first place, 
they earned depreciation and depletion, and they didn't reinvest those 
items; they paid those out. They paid out, I have indicated, some- 
thing like 3.7 billions of depreciation and depletion allowances. 

Mr. Henderson. Well, do you know for a certainty whether the 
cash on hand in liquid investments at the end of 1933 was larger or 
smaller than it was at the end of 1928 or the beginning of 1929 ? 

Dr. Altman. They were smaller. 

Mr. Henderson. My own impression is about the same. 

Dr. Altman. I think the table will indicate that.^ 

Mr. Henderson. I can find it in the table, or you can. 

Dr. Altman. In 1928 the amount — 1929 rather — the amount of 
cash of all nonfinancial corporations was 7.9 billions whereas ni 1933 
the amount of cash for the same corporations was 5.9 billions.^ In 
other words, a difference of almost $2,000,000,000. 

Mr. Henderson. Now that was the cash item. 

Dr. Alttvian. Then you had reductions in other items; you had 
collections of notes and accounts receivable, reduction in inventories, 
but the mere fact that you had a reduction in a liquid asset doesn't 
mean that was paid out to anyone. It simply means a good part of 
that was paid out to pay off your debts. You liquidate your in- 
ventory and then you pay off the account payable which that in- 
ventory represents. 

Dr. LuBiN. Do you have any figures wdiich show the holdings of 
securities or other types of liquid investments that might account 
for the depletion in the cash accounts ? Might it not be possible that 
they used cash to buy Government and other securities? 

Dr. Altman. The particular item is contained in that table, but it 
is my recollection that for the period 1929 through 1933 there was 
no such conversion. There was after 1933. That is, corporations did 
actually take their cash and go into investments. 

Dr. LuBiN. In other words, that decline in cash is not to be ac- 
counted for in any measure by shifting from a cash position to a 
liquid investment position in the form of securities. 

Dr. Altman. Well, I wouldn't say that. Dr. Lubin. because I am 
dealing with 470,000 corporations and I can't say what any o]te of 
them did. All I can say is what the whole 470,000 did. That may 
give a very misleading effect in regard to any one. I think for all 
corporations for the period '29 to '33 there was no such shift. 

Mr. Henderson. You said that that reduction in cash was almost 
2 billion dollars. It was from 7.6 billion to 5.9 billion — 1.7 billion. 

Dr. Altman. Well, I stand corrected, Mr. Henderson. Whatever 
the table indicates is what I should have said. 

Mr. Henderson. Pardon me, I was taking the end of 1928, which 
was improper because the depression set in at the end of 1929. 

Dr. Altman. Toward the end of 1929. 

Dr. Lubin. Tax hivestments went up by almost $3,000,000,000, 
Might that account for that cash difference? 

1 See "Exhibit No. 587," appendix, p. 4042. 


Mr. Henderson. Yes; investments other than tax exempt securities 
between 1929 and 1933 went up from 21.8 billion dollars in 1929 to 
24.6 billion in 1933 which more than offsets the reduction in cash. 

Dr. Altman. I didn't say anything about that for the fol- 
lowing reason : You will notice that there was no figure given in 
this table for investments other than tax exempt for any year be- 
fore 1929. You will notice, too, in 1929 the figure was $21,000,000,- 
000 ; in 1930 it was $29,000,000,000. Now it is inconceivable that for 
nonfinancial corporations as a whole there was any increase of $8,- 
000.000.000 for other than tax-exempt investments between 1929 and 
1930. Hence the conclusion must be that the first year in which they 
reported this particular item they didn't get the correct total. Hence 
the total of twenty-one billion eight hundred million as shown in 
1929 must be wrong and for that reason I simply cannot draw any 
conclusions whether they did or did not go into this particular type of 

Mr. Henderson. If the early figure were correct and the 1933 
figure were correct and the two cash figures were correct, the 
amount, of cash and liquid investments at the end of 1933 was greater 
than at the end of 1929. Take the two items together. 

Dr. Altman. Well, my answer to that would be that it is simply a 
coincidence. I think the first figure is wrong. 

Mr. Henderson. But I am trying to get some idea of the magni- 
tude of what might have been the amount of extra payments which 
were disbursed to consumers, you see, made available for consump- 
tion in the two periods, and this would mean that the business sys- 
tem, as far as its intake and output in these two years was concerned, 
was about the same. 

Dr. Altman. You mean at the end of 1929 and the end of 1933. 
Well, there was an actual reduction in cash. 

Mr. Henderson. Yes. 

Dr. Altman. And the point I am simply trying to make 

Mr. Henderson (interposing). And that item is likely to be a 
very correct item. 

Dr. Altman. Oh, yes; that is right because it is a long-continued 
series and it is hard to misplace anything in that particular item. 
I am simply trying to indicate that I don't think the reduction in 
cash went into an increase of investments of tax-exempt character 
because I think the starting point of that particular series is prob- 
ably off. Now it may well have represented paying out of cash to 
someone outside of the business system. 

Mr. Henderson. If you will forgive me, I happen to know these fig- 
ures and to have made a computation previoush^ which seemed to indi- 
cate on the basis of the Treasury figures from which these are derived, 
Statistics of Income, that the financial position of corporations as 
represented by their cash and investments at the end of the depres- 
sion was almost the same as it was at the beginning of the depres- 
sion. That has been a contention of mine, and I relied upon the 
Treasury statistics for that. 

Dr. Altman. That would in part depend, Mr. Henderson, upon 
whether you were dealing with nonfinancial corporations, as I am 
dealing with here, or all corporations. I think the figure for all 


corporations gives a vastly different picture because it shows a; 
tremendous increase of tax-exempt investments. 
Mr. Henderson. Yes. 


Dr. Altman. Now I should like to turn to the last period I mean 
to consider, the period 1935 through 1937. During the 3 years 1935- 
through 1937 business enterprises spent 17.4 billions for plant, ma- 
chinery, and equipment; 4.2 billion in 1935, 5.7 billion in 1936, and 
7.5 billion in 1937.^ During these same years business enterprises set 
aside from savings, depreciation, and depletion, a total of 16 billion. 
Internal sources therefore furnished 92 percent of the expenditures 
for plant construction and equipment. The remaining requirements 
were met from external sources. And again the picture is set forth 
on the chart: 

We deal with the 3 years 1935 through 1937. Notice the height 
of the top segment of the left bar, which is in pink, compared with 
the investment in plant and equipment.^ In 1935, for example, the 
volume of internal savings was greater than the amount invested in 
plant and equipment. In 1936 the volume of internal savings — the 
pink bar, upper segment, of the left-hand bar — is about the same as 
was the investment in plant and equipment. In 1937 the internal 
savings were less than the volume of investment. Notice that the 
bottom segment of the left-hand bar in brown, which represents the 
amount obtaining from the security markets and invested in plant 
and equipment was very low in 1935 and increased to about 428 

Mr. Henderson. It is sufficient, is it not, to say that it was at no 
time in any one of these years of any substantial importance so far 
as financing investments is concerned ? 

Dr. Altman. That is right. 

Mr. Henderson. And that is the point you are trying to make. 

Dr. Altman. For the sake of the record we could say that in 1934 
the volume of new securities that went for the purchase of plant and 
equipment was $94,000,000—1 meant that for 1935. In 1935 it was 
$94,000,000, in 1936 it was $379,000,000, and in 1937 it was $630.- 

The bulk of the funds for investment in plant and equipment cer- 
tainly came from internal sources ^lU'ing this period. 

If we focus our attention upon 1937 alone, the last year for which 
complete data are available, we find that the estimated business ex- 
penditures for plant and equipment were $7,500,000,000 whereasi the 
estimated volume of funds available from business savings, deprecia- 
tion, and depletion Avas $5,500,000,000.=* Therefore, the maximum 
requirement on the part of all business enterprises in the year of 
greatest business activity since 1929 amounted to only $2,000,000,000. 

In other words, the pink bar, which is the upper segment of the 
left-hand bar, was 5.5 billions, whereas the yellow bar, or right-hand 
bar, representing investment in plant and equipment, Avas 71/0 bil- 

1 See "Exhibit No. 586," appendix, p. 4041. 
- Ibid, supra, p. 3085. 
8 Ibid, appendix, p. 4041. 



lions.^ You will notice that for '35 and '36 the volume of internal 
firms was more than enough to pay for any investment in those 

This picture is by no means a complete one. In order to complete 
the picture we should have to consider such additional factors as 
changes in bank balances, changes in the volume of inventories, and 
changes in the volume of commercial bank borrowings. The factors 
Ave have discussed, however, are the dominant ones in connection with 
the financing of investments in plant, machinery, and equipment. 
Changes in cash balances and in bank borrowings are more import- 
ant in financing current assets than fixed assets. 

It does not seem possible to make a complete analysis of the 
sources and uses of funds for all business enterprises or for all 
corporations. The data available in the Statistics of Income are 
inadequate for this purpose. 


Dr. Altman. It is possible, however, to determine the sources and 
uses of funds for individual corporations with a high degree of exact- 
ness. The testimony of our distinguished business executives who 
testified yesterday, this morning, and this afternoon, has furnished 
information in this connection. 

Studies in the same direction are currently being made by the 
Board of Governors of the Federal Reserve System, and preliminary 
data are available for 56 corporations. The sources and uses of 
funds have been computed separately for each individual corpora- 
tion and then compiled for the 56 corporations. I mean to discuss 
these data as compiled by the Board of Governors of the Federal 
Reserve System. May I have the permission of the committee to 
offer them in evidence now and have them back so I may discuss the 
particular figures? 

Mr. Nehemkis. We will have them marked for identification and 
have them returned to you. 

Mr. Kelley. Will you identify them by title? 

Dr. Altman. The first table consists of four pages; that is called 
"Sources and Uses of Funds, 1930-38, 56 Industrial Companies." 

(The table referred to was marked "Exhibit No. 591" and is in- 
cluded in the appendix on p. 4044.) 

Dr. Altman. The next "Sources and Uses of Funds, 1930-38, 11 
Oil Companies." 

(The table referred to was marked "Exhibit No. 592" and is 
included in the appendix on p. 4046.) 

Dr. Altman. The next, "Sources and Uses of Funds, 1930-38, 
Seven Automobile Companies." 

(The table referred to was marked "Exhibit No. 593" and is 
included in the appendix on p. 4047.) 

Dr. Altman. And the next, "Sources and Uses of Funds, 1930-38, 
Nine Steel Companies." 

(The table referred to was marked "Exhibit No. 594" and is in- 
cluded in the appendix on p. 4048.) 

Mr. Nehemkis. May we have these marked? 

1 See "Exhibit No. 586," supra, p. 3685. 


Acting Chairman Reece. These must be returned to the steno- 
graphic service in time for the record in the morning. They will 
manage to get them some way, but we want to be sure they are 
available to them. 

Dr. Altman. It will take only a few moments for the discussion 
of these tables. I would like to discuss the individual industries first 
and then turn to the 56 companies of the sample. Let us take jfirst 
the 7 automobile companies.^ We are dealing here with a sizable 
group of companies, because the assets of the 7 automobile companies 
total $1,637,000,000. The companies spent on plant and equipment 
during the years 1930 through 1938, $430,000,000. During the same 
years they had available from internal sources, that is undistributed 
profits or business savings, depreciation and depletion, $564,000,000. 
In other words, the amount of funds available internally was 31 
percent greater than the amount of money they needed to pay for 
investments in plant and equipment. 

Let us take another group; 11 oil companies, having assets of 
3.5 billion dollars in 1938.^ These companies for the same period, 
1930 through 1938, spent $2,118,000,000 for plant and equipment, 
and they had available from internal sources $2,109,000,000. In this 
case the internal sources did not quite cover the investment in plant 
and expenditures but they did cover 95 percent of the investments of 
two billion dollars for the period. 

The steel companies made a somewhat different showing with an 
investment of $1,118,000,000 for the period of 1930 through 1938, and 
they had available from internal sources $650,000,000.^ In other 
words, even in the steel industry where you had very rapid techno- 
logical progress during this particular period and scrapping of a con- 
siderable portion of the steel plant, the steel companies had available 
from internal sources enough money to finance 58 percent of their 
expenditures for new plant and equipment during the period. 

For the companies as a whole, for the 56 companies as a whole, 
having assets of almost $12,000,000,000 in 1938, we find that for the 
years 1930 through 1938 there was spent for plant and equipment 
$4,184,000,000.* The companies had available from internal sources 
$3,800,000,000, or in other words these companies to finance an ex- 
penditure of $4,200,000,000, needed only $400,000,000 from other than 
internal sources; or to state this in yet another way, these corpora- 
tions were able to finance 90 percent of an investment of $4,200,000,000 
in plant and equipment from internal sources. 

Acting Chairman Reece. Do you plan. Dr. Altman, to discuss at 
some period the difference in the effect on our economy of financing 
these plants and equipment improvements from internal funds and 
from the capital markets? 

Dr. Altman. Mr. Chairman, I don't really intend to discuss that 
particular question to much greater length than I have indicated 
already. That is to say, I have indicated that to the extent that 
investments in plant and equipment are financed internally, business 
enterprises need not draw upon the new savings of individuals and 

1 See "Exhibit No. 593," appendix, p. 4047. 
- See "Exhibit No. .592," appendix, p. 4046. 
3 See "Exhibit No. 594," appendix, p. 4048. 
* See "Exhibit No. 591," appendix, p. 4044. 


institutional savers to finance these expenditures and so the economy 
is faced \\'ith the problem of finding outlets for savings in other new 
business enterprises. 

Mr, Nehemkis. Mr. Chairman, I think we shall have a specific 
answer to your question in three days of testimony which will follow. 

Acting Chairman Eeece. Very good; you may continue. 

Dr. Altman. I think I am finished with these particular exhibits 
now and I return them. I haA^e been dealing here with rather large 
size corporations, you can gather, when you have 56 corporations 
having assets of almost $12,000,000,000. 


Dr. Altman. I would like to point out that the same sugges- 
tion as to' self-sufficiency appears from an analysis of corpora- 
tions when they are classified by amount of assets. That is to 
say, when they are classified by size. Since 1931 the Treasury De- 
partment has classified corporations by amount of assets, but 1935 
is the latest year for which such data are available. Corporations 
having more than $50,000,000 of assets showed a compiled net profit 
each year from 1931 through 1935; on the other hand, corporations 
with assets of less than $50,000 showed a compiled net loss in each 
year from 1931 through 1935. If we consider the amounts avail- 
able to corporations from internal sources, that is, from business 
savings (after payment of taxes and dividends), depreciation and de- 
pletion, we find that corporations having more than $50,000,000 of 
assets paid out in excess of compiled net profits $206,000,000 in 1931 
and $323,000,000 in 1932. 

Beginning in 1933, however, the volume of funds available from 
internal sources increased rapidly — for corporations with assets of 
over $50,000,000— from $511,000,000 in 1933, to $1,000,000,000 in 1934, 
to $1,500,000,000 in 1935. On the other hand, the volume of business 
savings plus depreciation and depletion for corporations having less 
than $50,000 of assets were negative all through the period. In other 
words, corporations in this group containing the largest sized corpo- 
rations made money every year. 

Mr. Henderson. From 

Dr. Altman. 1931 through 1935. 

Acting Chairman Reece. In what corporations? 

Dr. Altman. Having assets of more than $50,000,000 in each year. 

Mr. Henderson. Made a profit? 

Dr. Altman. Made a profit each year for the years 1931 through 

Mr. Henderson. Is that total as a group ? 

Dr. Altman. As a group ; yes. 

Dr. LuBiN. Did you say each one did, or the group did ? 

Dr. Altman. The group did; there may have been losses in the 
group but they were canceled by profits on the part of other corpora- 
tions in the same size group. 

Acting Chairman Reece. From the information that you have do 
you think a majority of them made a profit? 

Dr. Altman. Well, I couldn't say. 

Acting Chairman Reece. Or a relatively large number of them 
made a profit? 


Dr. Altman. I couldn't say to that. The Treasury doesn't pub- 
lish any data on the number of corporations in this «rronp that made 
a profit and the number that didn't make a profit. These corporations 
would tend to run relatively homogeneously witli regard to size, since 
you are dealing with big ones, and the probability is that the majority 
()f them did make a profit; still, I wouldn't want to be held too strictly 
to that. 

The data which I have been discussing are contained in two tables 
which are offered for the record ; one called the ''Distribution of 
Compiled Net Profits and Undistributed Gross Income by corpora- 
tions classified into nine size groups for the period 1931 to 1935"; and 
the second is called "Adjusted Undistributed Profits plus Deprecia- 
tion and Depletion Allowances for Corporations with Assets of less 
than $50,000 during the Period 1931 to 1935." 

Mr. Nehemkis. I desire to offer in evidence the twv) tables just 
identified by the witness. 

Acting Chairman Reece. They may be admitted. 

(The tables referred to were marked "Exhibits Nos. 595 and 596" 
and are included in the appendix on pp. 4049 and 4050.) 


Dr. Altman. The conclusions that emerge from this discussion of 
business internal and external financing may now be simply stated. 

Business enterprises are dependent upon capital markets for only a 
small part of the funds they invest annually in ])lant and equipment. 
For the period 1923-29, business savings, depreciation, and depletion, 
on the average, contributed $0,400,000,000 a year toward financing 
outlays on plant and equipment, while security issues contributed 
an average of $1,800,000,000. In 1929 business savings contributed 
$8,100,000,000 against $1,800,000,000 by security issues. 

Mr. Henderson. That is in 1929, the big year of stock sales, secu- 
rity sales, when the volume ran about 

Dr. Altman. A little over 10 millions. In that year when we had 
security issues of slightly over 10 billions, 1.8 billions of securities 
issued were used for the: plant and equipment, whereas against this 
1.8 billions from security issues we must set 8.1 billions from internal 
sources; the figures are just reversed — 8.1 internally, 1.8 externally. 

Mr. Henderson. Do you recall what amount was used for business 
plant equipment in 1937 from your chart? 

Dr. Altman. Yes. For the ])eriod 1935 through 1937, for those 
3 years, internal sources contributed an average of $5,700 000.000 
a year, while security issues contributed an average of $370,000,000. 
For the year 1937 alone we find that the investments in plant and 
equipment were 7.5 billions, the amount available from internal 
sources was 5.5, and the amount contributed from securities issued 
630 million. 

Mr. Henderson. Roughly, it was what it was in 1929. 

Dr. Altman. That is right. 

In years of high business activity, business enterprises draw upon 
the capital markets; that is, the savings of individuals and institu- 


tional iuvestoi's, but never since 1922 for more than $2,000,000,000 a 
year. Diirino- years of low activity business enterprises do not re- 
quire any fund's from the capital market. Instead, they contribute 
funds to the cai)ital market, either by payinp; out dividends in excess 
of earnings or by convertino; depreciation and depletion allowances 
into bank deposits or securities, thus making them available to other 
tyi^es of investors. 

Mr. Henderson. But in all those years from 1922 to 1937, savings 
by individuals, either through their own deposits in savings banks or 
through institutions, continued, did they not? 

Dr. Altman. That is right. 

Mr. Henderson. In other words, as far as the use which the system 
makes of those savings is concerned, it taps them only in periods of 
high activity, but just the same, there is the problem of getting those 
savings employed each one of those years. 

Dr. Altman. Yes ; to the extent that you have savings in any one 
year you must find an outlet for those savings to maintain a high 
level of activity. 

Mr. Henderson. And you can convert that into terms of employ- 
ment : that is, the business system as far as it gives employment via 
the capital markets does it only in periods of high activity, and at 
the low periods of activity it is not using the capital markets for 
funds which would give employment. 

Dr. Altman. That is right. 

Mr. Nehemkis. Mr. Chairman, I desire to ask the witness a few 

Doctor, just a few questions to complete your presentation. De- 
preciation reserves — including obsolescence — and depletion reserves 
are accumulated income tax free, are they not^ 

Dr. Altman. That is right. 

Mr. Nehemkis. And when amounts accumulated by those reserves 
are reinvested, the result is a gradual increase of those charges for 
depreciation and depletion, is it not? 

Dr. Altman. Yes. 

Mr. Nehemkis. It is only when a specific property is fully de- 
]:)reciated or written off that we find a corresponding reduction in 
those charges, is it not? 

Dr. Altman. Yes. 

Mr. Nehemkis. In the event of fully realized obsolescence or de- 
pletion before the specific property affected has been fully depre- 
ciated or depleted, the existing revenue acts allow the amount of the 
realized obsolescence or depletion, adjusted for reserves already set 
up for that pro])erty, as a deduction from income, do they not? 

Dr. Altman. Yes; they do. 

Mr. Nehemkis. Inventory write-downs have the effect of increas- 
ing the cost of goods sold and of decreasing, pro tanto, the taxable 
income, have they not? 

Dr. Altman. Yes. 

Mr. Nehemkis. Reserves for contingencies and the retention of 
earned surplus, including gains on sales of capital assets, do not 
operate to reduce the income tax liability of the corporation, do 


Dr. Altman. No. 

Mr. Nehemkis. But they do operate to reduce the income tax lia- 
bilities of the shareholders, because they operate to reduce the dis- 
tributed profits, do they not? 

Dr. Altman. That is to say, the shareholders are taxed only on 
what they receive. If they don't receive anything they don't pay 
any tax upon it. 

Mr. Nehemkis. As a matter of fact, obsolete property has an ac- 
tual value, as an ordinary thing, has it not ? 

Dr. Altman. I think one would say that a good many times prop- 
erty may be obsolete for one purpose and may still have a value for 

Mr. Henderson. It may be obsolete for tax purposes. 

Dr. Altman. It may be obsolete for tax purposes and have a 
value for other purposes, though I wouldn't want to narrow the 
answer to that degree. 

Mr. Nehemkis. Dr. Altman, more specifically, parts of the obsolete 
property may find their way back into property that is not obsolete, 
may they not? 

Dr. Altman. That happens from time to time. 

Mr. Nehemkis. As a matter of fact, physical depreciation and 
obsolescence is nowhere near as great as the reserves allowed for 
them, are they? 

Dr. Altman. Well, that would vary from case to case. In a good 
many cases the depreciation that is taken might be in excess of the 
amount one would take if one considered merely the physical life 
of the particular asset. 

Mr. Henderson. You have to take into account, do you not, Mr. 
Examiner, what the maintenance expenditure is on that equipment, 
or were you coming to that? 

Mr. Nehemkis. I would rather ask the witness to reconsider my 
question. Would you be willing to say as a generalization that physi- 
cal depreciation and obsolescence, in general, is nowhere near as 
great as are reserves generally allowed for them? I am not asking 
you to specify specific instances, but I am asking you to make, if 
you feel you can make as an expert, the kind of generalization 
suggested by the kind of question I put to you. 

Dr. Altman. I wouldn't know as to that, Mr. Counsel. In some 
cases the depreciation is less than the actual loss in value, and in 
many other casesi it may be more. 

Mr. Nehemkis. I will accept your answer. 

Depletion reserves come much nearer to a correspondence with 
the realities, do they not? 

Dr. Altman. That is correct, the amount that is set aside for 
depletion actually varies with the amount of the exhaustible resources 
taken from the grounds, so in that respect it would correspond in a 
physical and vital sense. 

Mr. Nehemkis. Likewise, I suppose inventory write-downs cor- 
respond more nearly with realities. 

Dr. AltMxVN. Inventory write-downs are made in accordance with 
accepted business policies, and if you follow the policy of cost or 


market, whichever is lower, yon A'ahie the inventory in accordance 
with the general value at the end of the year. 

Mr. Henderson. What it means is that if you have a revaluatian 
of an inventory, you have a problem with the income tax unit of 
showing that there was a market price on that inventory as a basis 
for your revaluation, do you not? 

Dr. Altman. Oh, yes. 

Mr. Henderson. But it does come closer to a market price than 
anything else. 

Dr. Altiman. Yes ; that is when you have been keeping your books 
for a period of years on the basis of cost or market, whichever is 
lower, for the inventories and you can show in any given year that 
you are revaluing your inventories in accordance with this ci'iterion, 
it is obvious, I think, that the only conclusion one can draw is that 
when you actually do write down your inventory you are conforming 
to reality. 

Mr. Nehemkis. In the case of corporations, Dr. Altman, which 
maintain their own laboratories, research expense is an allowable 
deduction for tax purposes, is it not? 

Dr. Altman. That is right. 

Mr. Nehemkis. Now, I take it, the purpose of research is the 
development of new products and new processes, or the improvement 
of existing ones. Is that correct, generally speaking? 

Dr. Altman. Yes; I think so. 

Mr. Nehemkis. And I suppose we may say that fruitful research 
tends toward great profits. 

Dr. Altman. I should hope so, because patents are taken out upon 
research, and they wouldn't take any patents unless they thought 
they were going to be valuable. 

Mr. Nehemkis. I am just asking for your opinion. I take it fruit- 
ful research tends to increase the real value of plant. 

Dr. Altman. In some cases it does. In many cases it does, but 
in some few cases it may not because you may have research which 
may make a particular plant obsolete in a sense. 

Mr. Nehemkis. Would you say in most instances fruitful research 
tends to increase the value of plant? I accept your reservation that 
there are exceptions. 

Dr. Altman. I prefer not to answer that question. That is like 
asking me whether General Motors' plant has become more valuable 
because they have conducted research on any of the dozen things they 
do research in. 

Mr. Nehemkis. Would you say research was income tax free as 
long as a corporation maintained a laboratory as an ordinary and 
natural expense of business? 

Dr. Altman. Yes; that is right. 

Mr. Nehemkis. Small companies that cannot afford the expense 
of a laboratory must buy research on the market, is that correct? 

Dr. Altman. Yes. 

Mr. Nehemkis. Sometimes, I suppose, research results in some 
physical plant and equipment, do you agree with me ? 


Dr. Altman. Results in the plans which result in plant and equip- 
ment; yes. 

Mr. Nehemkis. In other words, internal corporate financing, the 
thing we have been discussing, which you have been testifying about, 
is aided and abetted by our tax laws, is that correct? 

Dr. Altman. Oh, I think, to the extent that depreciation and de- 
pletion are allowable deductions, that expense for research is al- 
lowable, not to mention other factors that would be important in 
this connection. The answer to the question is yes. 

Mr. Nehemkis. Realistically, the stockholders of our corporations 
don't have very much to say about it, do they? 

Dr. Altman. They have as much to say about this as they have 
to say about anything else the corporation does. 

Mr. Nehemkis. We may describe this process as forced savings? 

Dr. Altman. I think the previous answer would hold for this 

Mr. Nehemkis. I have no further questions, Mr. Chairman. 

Mr. Henderson. I want to get one point clear. While the small 
business may have to buy its research, and research by an insti- 
tutional laboratoi-y or research agency of a large corporation is a 
proper charge to expense, you didn't mean to express any qualitative 
judgment as to the small versus the large? 

Dr. Altman. No; I did not. 

Mr. Henderson. It would be better, would it not, if small cor- 
porations were allowed, when they purchase research in any form 
from the outside, to charge this as against expense ? 

Dr. Altman. Oh, yes. 

Acting Chairman Reece. Are there any questions? 

Mr. TuppER. This picture which you have developed is an overall 
picture of all business, all cor])orations. Presumabl3% it is built 
up from the corporation that has no need to go into the capital 
market for funds and the corporation that perhaps has need to go in 
for considerable parts of its funds. Now, have you been able to de- 
termine from your studies whether a particular industry or particu- 
lar type of industry, or a particular group of corporations based on 
size of assets, or a particular group of corporations in terms of ma- 
turity — old corporations as against new — are responsible for the 
greater part of this financing through the capital markets? Or is 
this picture generally true of all industries, all stages of maturity? 

Dr. Altman. I think the general answer to that is that the picture 
is generally true for all industries, though, of course, the degree to 
which they finance internally varies from industry to industry and 
I have introduced various exhibits giving the different type of in- 
dustries. One remark might be made in this direction, that is to say, 
the composition of the amount saved internally is not the same in 
a new industry as it is in an old one. That is to say, when you are 
dealing with a new industry you very often find that the bulk of the 
funds saved internally come from undistributed profits, with a small 
amount coming from depreciation; as the industry matures, you 
find that the situation tends to be reversed, so that the bulk of the 
funds available from internal sources comes from depreciation and 
depletion allowances, which are available. 


Dr. Li^BiN. Is it possible, from the data that are available to you, 
X)r. Altman, to come to any conclusion as to whether this practice 
varies by size of firm? I mean, would the practice be more prev- 
alent in larger firms than in the smaller firms? 

Dr. Altman. It is very difficult to answer that question because 
the over-all Treasur}^ data doesn't permit you to do that. I have 
inti'oduced into the record what there is, but I don't think it is quite 
:satisfactory for this purpose. However, I think I should mention 
that a study is currently under Avay by the Department of Commerce 
•dealino; with a thousand corporations for the period 1926 to date, 
and examining for those corporations the amount of funds available 
from various sources, including internal sources, and the direction 
(if the expenditure of those particular corporations. When that par- 
ticular study is done we will have a much better answer than we 
have had for the American economy as a whole as to how corpora- 
tions finance and how large corporations finance. 

Mr. Henderson. Dr. Altman, you have been indicating what is 
the business saving. That takes place through the depreciation 
account. I adverted a minute ago to the question of maintenance. 
Given a corporation that has a depreciation schedule of 10 years, 
if it spends a large amount for maintenance, that charge of main- 
tenance is not subject to tax, is it ? 

Dr. Altman. No; that charge for maintenance is an ordinary 
operating expense and would be deducted before you find your 
business savings. 

Mr. Henderson. And then if that equipment is kept in good 
order and the depreciation is taken via reserve at the end of the 10 
year period, it may easily be that they have made an addition to 
tlieir capital assets by means of a very good maintenance. 

Dr. Altman. Oh, that is quite true. 

Mr. Henderson. One other question. You introduced into the 
record some information about the experience of some fifty com- 
panies studied by the Federal Reserve Board in the period of 1930 
to 1938.^ I wonder, did you undertake to make any analysis of 
Avhat was tlie effect on the working capital of those different groups? 
Did the expenditures, for example, in the oil industry which were 
:about equal to the business savings tend to exhaust working capital 
or did it leave them pretty much in the same general position as had 
been maintained before? 

Dr. Altman. I don't think there was any significant change in 
the cash j^osition. 

Mr. Henderson. How about the automobile companies. Is there 
an exhaustion of liquid capital? 

Dr. Altman. I don't have the record before me, Mr, Henderson, 
but the tables will indicate what it actually was.^ 

Mr. Henderson. So we will be able to know something which I 
think the chairman is interested in — whether or not what was in 
effect a deferred purchase of new business plant and equipment until 

1 "Exhibit No. 591," appendix, p. 4044. 
- '"Exliibit No. 593," appendix, p. 4047. 


approximately the end of the period, had made an extraordinary 
drain on the working capitaL 

Dr. Altman. I should add though in this connection that to the 
extent that expenditures for plant and equipment were met by un- 
distributed profits, depreciation, and depletion, there simply wasn't 
any drain upon the working capital of the company. I have indi- 
cated that in the case of the automobile companies these were more 
than sufficient to meet the plant expenditures. In this particular 
case you actually might have had a net increase in the cash position 
of the company, after making all the investments in plant and 
equipment. Now, the situation tended to be in the other direction 
for the other companies, so that unless they went into the security 
markets or unless they had some other sources of funds, they might 
have depleted their cash position somewhat in making these invest- 
ments in plant and equipment. The tables offered in the record 
will furnish all the information needed on that point. 

Dr. LuBiN. You stated in the course of your testimony as com- 
pared to '29 the cost of replacing equipment on the '29 basis was 12 
percent less in 1935 than in '29.^ 

Dr. Altman. Yes. 

Dr. LuBiN. In other Avords, a given corporation which had written 
off its equipment in that period of time could replace it and still have 
12 percent more cash than at the beginning of the period. 

Dr. Altman. That is right, but I made the additional point that 
not only would they have 12 percent of the original cost in cash 
but they would probably also have a better machine. 

Dr. LuBiN. You say they would probably have a better machine. 
Of course, one can't measure the changes in the productivity of 
the machines over a period unless one knew what machines they 
were talking about, but the possibility is that even to 1935 the 
changes in technology were sufficiently great to mean that the same 
equipment would be more productive than the equipment that was 

Dr. Altman. Yes; I think the evidence seems to indicate that. 

Dr. LuBiN. There is this double saving in terms of the actual 
amount that you have to charge for depreciation in the future. It 
is less because you paid 12 percent less for the product. At the 
same time the product itself, being a more efficient producer, the 
unit cost is less per unit of output. 

Dr. Altman. I would agree with that. 

Dr. LuBiN. I take it that you don't have any figures to throw any 
light upon the relations of this problem of more productive equip- 
ment replacing old equipment and its bearing upon the amount of 
labor that is required to produce the same number of units per 

Dr. Altman. No; nothing besides what I have offered already. 

Acting Chairman Reece. The committee appreciates your able 
and, I- might also say, interesting contribution to the study. Dr. 

Dr. Altman. Thank you, Mr. Chairman. 

(Dr. Altman was excused from the stand.) 

1 Supra, p. 3675. 


Acting Chairman Eeece. As I understand, it is the plan of the 
committee when it adjourns to adjourn until Monday morning at 10 
o'clock. What are your plans at that time, Mr. Nehemkis, and it 
might be well for you to give the committee the names of the wit- 
nesses whom you expect to call. 

Mr. Xehemkis. Beginning ]Monday we shall change the subject 
of discussion with which the committee has heard for the past few 
days and turn to the problem of individuals and how they accumu- 
late their savings and where their savings go. We have been hear- 
ing for the past few days of how corporations save. Monday we 
are going to discuss the other side of the picture, of how individuals 
save, and where their savings go. The hrst witness will be Ralph 
Manuel, president of the Marquette National Bank of Minneapolis, 
the second witness will be Dr. Donald Davenport, of the Harvard 
Business School. The third witness willbe the Honorable Adolph 
Berle, Jr., Assistant Secretary of State. 

Acting Chairman Eeece. The committee will stand adjourned 
until Monday morning. 

(Whereupon, at 5:35 p. m., an adjournment was taken until Mon- 
day, May 22, 1939, at 10 o'clock.) 


MONDAY, MAY 22, 1939 

United States Senate, 
Temporary National Economic Committee, 

W ashington^ D. G . 

The committee met at 10:20 a. m., pursuant to adjournment on 
Tliursday, May 18, 1939, in the Caucus Room, Senate Office Build- 
ing, Senator Joseph C. O'Mahoney presiding. 

Present: Senators O'Mahoney (chairman) and King; Representa- 
tives Williams and Reece; Messrs. Hinrichs, O'Gonnell, Frank, Pat- 
terson, and Brackett. 

Present also: Willis J. Ballinger, Federal Trade Commission; 
Amos E. Taylor, Department of Commerce; Ernest S. Meyers, De- 
partment of Justice ; Peter R. Nehemkis, Jr., special counsel. Invest- 
ment Banking Section, Securities and Exchange Commission, and 
Joesph R. Kelley, associate counsel, Investment Banking Section, 
Securities and Exchange Commission. 

The Chairman. The committee will please come to order. 

During the hearings last week, when E. R. Stettinius, Jr., of the 
United States Steel Corporation, was on the stand, the chairman 
directed a question to him with respect to the effect on employment 
of improvements which have taken place in the modernization of 
factories. A good deal of testimony was submitted to the com- 
mittee by Mr. Stettinius to the effect that there had been considerable 
modernization of plant. The purpose of the inquiry, of course, was 
to develo):) the fact that this modernization was the result of the 
expenditure of accumulated funds in the hands of the United States 
Steel Corporation, and that it was not necessary for the corporation 
to depend upon outside financing. In response to the chairman's 
question, it was testified by Mr. Watson, I believe, that the result of 
modernization in the plants in which the modernization took place 
was a reduction of about 25 percent in the number of persons em- 
ployed as waoe workers. 

jNIr. Stettinius has addressed a letter to me intended to clarify Ms 
answer to that question and I am putting his letter in the record at 
this point, in compliance with his request. 

(The letter referred to was marked "Exhibit No. 597" and is in- 
cluded in the appendix on p. 4050.) 

The Chairman. Let me add, in commenting upon the question of 
technological unemployment, as it is called, my own feeling has been 
that there can be no doubt that the development of new devices even- 
tually has the effect of providing new jobs for people provided the 
modernization results in reducing prices to the general public so that 


124491— 40— pt. 9 15 


there can be a larger consumption of whatever the product may be. 
On the other hand, there can be no doubt that the effect of techno- 
logical improvement is to reduce the opportunity for work of the 
persons whose jobs are taken over by the machine, and that, of 
course, is one of the very serious problems that must be met before 
this problem is solved. 

Senator King. Mr. Chairman, I would feel that we could not, at 
least I am not willing to, generalize at this time and to indicate just 
what the effect has been by reason of technological developments or 
the modernization of plants. I agree, if I understand you correctly, 
with you, that it has furnished a considerable outlet for new com- 
modities and new processes, new developments, and it has also 
added to the opportunities for employment. Generally speaking. I 
think that the modernization of plants and of technological develop- 
ments have been an important contribution to the economic improve- 
ment of our country. 

The Chairman. I think the committee will no doubt agree with 
that statement. 

Mr. Nehemkis, are you ready to proceed ? 

Mr. Nehemkis. I am, sir. 

The Chairman. Will you call your first witness? 

Mr. Nehemkis. Before I do that, may I read a statement wliich I 
liave ])repared : 

The basic problem which is under consideration by the committee 
in these hearings is the failure of savings to find investment in job- 
producing enterprises. If savings are not invested, money lies idle, 
the dollar circuit is broken, and presently men and machines are idle. 
If the flow of dollars slows down, the flow of goods likewise slows 
down and our economic machine goes on part time. 

Of the two major streams of savings, the committee has heard 
evidence pertaining to one of our major channels — the savings of 

We now invite the committee's attention to the second maiii chan- 
nel — the savings of individuals. 

This morning the witnesses to be called by the Securities and 
Exchange Commission will present evidence on the mechanism of 
the dollar circuit, how savings are formed, into what reservoirs thej^ 
flow, and how they are invested. 

The Securities and Exchange Commission calls as its first witness 
Mr. Ralph Manuel. 

The Chairman. Do you solemnly swear that the testimony you are 
about to give in these proceedings shall be the truth, the whole truth, 
and nothing but the truth, so help you God ? 

Mr. Manuel. I do. 


The Chairman. Please be seated, Mr. Manuel. 

]\Ir. Nehemkis. Will you state your name, sir, for the record. 

Mr. Manuel. Ralph W. Manuel. 

Mr. Nehemkis. And your place of residence. 

Mr. Manuel. Minneapolis, Minn. 


Mr. Nehemkis. You are, are you not, Mr. Manuel, president of 
the Marquette National Bank of Minneapolis? 

Mr. Manuel. I am, sir. 

Mr. Nehemkis. I believe, Mr. Manuel, that you have been asso- 
ciated ^Yith that bank and its predecessor organizations for a quarter 
of a century, is that correct? 

jNIr. Manuel. That is correct, sir. 

jNIr. Nehemkis. I think, Mr. Chairman, that the committee will 
take judicial notice in view of Mr, Manuel's long association with 
the banking business that his expert qualifications are such as to 
qualify him to proceed with the discussion. 

(The chairman nodded his head in the affirmative.) 

Mr. Nehemkis. Are you prepared, ISIr. Manuel, to discuss the flow 
of income and the accumulation of savings? 

Mr. Manuel. Yes, sir. 

Mr. Nehemkis. Then will you proceed, Mr. Manuel, in your own 
words and in your own waj'? 

jNIr. ]Manuel. Mr. Chairman and members of the committee, the 
myriad economic activities through which 130,000,000 people provide 
themselves with the useful goods and services that they wish to con- 
sume and possess and enjoy constitutes a vast and bewildering ag- 
gregate that is very hard to examine and analyze. Let us, therefore, 
for a moment create for ourselves a greatly simplified picture in 
which the major elements of our problem will be visible at a glance. 

Now. I realize that analogies are always dangerous and often 
misleading and that this one is wholly inadequate. It is not a part 
of my argument; it is a mere illustration. Please accept it as such, 
designed only to attract your attentitm in the direction which the 
subsequent discussion will take. 

functions of money in the economic trocess 

Mr. Manuel. Let us suppose an isolated community of perhaps 100 
families, existing mainly on potatoes and raising their potatoes col- 
lectively. Naturally each family would be entitled to a share of the 
crop corresponding to its contribution to the production thereof. A 
member of the community might be appointed to engineer the enter- 
prise and he might give out from day to day to the several families 
claim checks evidencing the contributions that they have made. At 
the end of the season he might have a thousand bushels of potatoes in 
the pile and there might be a thousand claim checks outstanding, for 
instance. If the crop was meager and the various families had con- 
tributed only approximately in proportion to their several needs for 
potatoes, it is likely that each family would come in and present all 
of its claim checks and take away all of its share of the product and 
the whole transaction would clear completely. 

If, however, the crop was abundant and some families had con- 
tributed out of all proportion to their needs, it is likely that those 
families would find themselves in possession of claim checks entitling 
them to much more of the crop than they could possibly use. In that 
event, it is likely that these families would present only as many of 
their claim checks as would bring them the quantity of potatoes that 
they could consume and would hold the other claim checks for subse- 
quent use. 


The manager might, therefore, find himself, at the end of the sea- 
son, with 100 claim checks outstanding and 100 bushels of potatoes 
rotting upon the ground. The families that made the lesser contribu- 
tions would have received their full shares of the crop and the fami- 
lies that made the greater contributions would have received all they 
wanted, so the enterprise must be regarded as having successfully- 
performed the purpose for which it was undertaken. But what 
about those 100 claim checks that haven't been presented ? Shall these 
contributors who have neglected or refused to take their full shares 
of the crop and have allowed the potatoes to rot upon the ground 
be permitted to present those remaining claim checks next year and 
claim a part of next year's crop? Manifestly not, because these 
claim checks do not evidence any contribution to the creation of next 
year's crop, and because next year's crop will all belong to those who 
produce it and who hold the current claim checks against it. 

Obviously the inherent right of each family is the right to his 
share of every crop and that must, of course, be a temporary right to 
be exercised in due course or lost. Such an economy could continue 
only by repudiating, at the end of each season, the claim checks that 
have not been presented for redemption in the product. 

This is a principle which we have sort of lost sight of in our 
complicated modern economy and the failure of the economic process 
by which we make our living in the world to function adequately 
and continuously appears to be due mainly to our ill-advised attempt 
to permit the participants in that process to postpone at will the 
exercise of their several rights to claim their shares of the product. 

Let us examine that matter from the foundation up. Private capi- 
talism, I take it, rests upon a single and very simple principle: 
namely, that what a man creates belongs to him. It follows, of 
course, that what several or many men create collectively belongs to 
those who contribute to its creation and, of course, belongs to them 
in proportion to their several contributions. The inherent right of 
the men who operate our trains and the men who furnish the railway 
capital is the right to their respective shares in the transportation 
service produced. But men can't eat or wear transportation service 
and neither could these contributors readily exchange such transpor- 
tation service for the things that they require. That difficulty has 
been met by the development of our rather marvelous technique of 
distributing the product of our economy through the device of money 
income. Each contributor receives, instead of his share of the par- 
ticular product he has helped to create, a quantity of money equal to 
his share of the whole money sales value of the entire product. This 
money ordinarily is not wealth, but partakes of the nature of claim 
checks evidencing the rights of these individual contributors to claim 
in the markets, goods, and services of their own choosing to the ex- 
tent of the contributions that they have made. 

This money is distributed as wages and salaries and fees and com- 
missions and royalties and rents, dividends, interest, profits, and con- 
stitutes the money income of the country, and it is interesting to note 
that this money income generated by the economic process itself is 
always roughly just enough to buy the whole collectively .produced 
product of our economy. 

Now, by this device of money income we have accomplished the 
enormously important purpose of converting the contributor's right 


to his share of the particular product he has helped to create into 
that much broader and more useful right to claim its equivalent in 
the products of any and all producing units. Not content, however, 
with this complete freedom of choice as to the goods and services 
in which we will accept our pay or reward for our contributions, we 
claim a still further privilege. We claim the privilege of determin- 
ing when we will make our choices and take our shares. We claim 
the right to take our shares currently or to postpone as long as we 
please the right to choose and to take. This obviously is impossible. 
The plain, hard fact is that all those who contribute to the economic 
process of creating goods and services must take their pay in goods 
and services that are thus created. Society has and can have noth- 
ing else with which to pay them. 

The money in our pay envelope and in our dividend check that we 
are accustomed to think of as payment isn't final payment at all, of 
course. It is only incontrovertible evidence of our right to claim 
in the markets final and absolute payment in useful goods and serv- 
ices. Our money economy — or perhaps I should say our device of 
distributing the product through money income — rests squarely upon 
the presumption that the recipients of that money income or those 
to whom they give or trade or lend it will bring it back in due course 
into the markets to claim their product. It is unworkable on any 
other basis. It is inherent in the nature of our money economy that 
it must clear through the markets and only to the extent that it does 
so clear, can production and employment continue. 


Mr. Manuel. When all the current money income does flow back 
through the markets to claim the current product and no other 
money purchasing power appears in the markets, the stream of pur- 
chasing power flowing into the markets is just enough, roughly, to 
buy the whole current product at the existing price level. Effective 
demand and available supply are evenly balanced. Enterprisers are 
reasonably assured of a market for all the useful goods and services 
that they can produce. Production and employment expand until all 
the labor and equipment available are in use. 

When contributors to the economic process, however, decline to 
receive substantial portions of their current shares of the product, 
hoarding the corresponding portion of their current money incomes 
either in mattresses or in idle deposits in coimnercial banks, we have 
a situation where the stream of money purchasing power flowing into 
the markets is less than enough to buy the current product. Our 
economy seeks to adjust itself to this situation through the price 
mechanism and prices must fall to a level at which that part of the 
current money income which does flow back through the markets will 
buy the whole product. 

But falling prices destroy profits and discourage production and 
employment. Shrinking profits make new investments less attrac- 
tive and encourage farther hoarding. That is the familiar and 
vicious cycle of deflation which feeds upon itself and produces major 

On the other hand, when the contributors to the economic process 
claim the whole of their shares, and more too, bringing into the 


markets all of their current money income, and disgorging some of 
their previously hoarded money income into the markets beside, we 
have a situation where the stream of money purchasing power flow- 
ing into the markets is more than enough to buy the current product 
at the existing price level. Our economy seeks to adjust itself to 
this situation also through the price mechanism and prices must rise 
until the current product will absorb the whole current money in- 
come and the disgorged hoards beside. 

Rising prices, of course, increase profits, and increased profits make 
new investments increasingly attractive and encourage the disgorg- 
ings of further hoards. This is the familiar, vicious cycle of infla- 
tion which also feeds upon itself and which produces major booms. 

The hoarding and disgorging of money income, however, are not 
the only causes of these major distortions. Persons wishing to claim 
more of the current product than corresponds to their current con- 
tributions, and, therefore, more than can be paid for with their cur- 
rent money incomes, besides disgorging old hoards, bring into the 
market money which is not current income and never was income. 
I refer to monetized claims against fixed assets created by capital 
loans and investments in commercial banks. This sort of bank 
money doesn't reach the consumer as a part of his current money 
income, as does the bank money created by monetizing entrepreneurs' 
claims against current goods, but becomes money purchasing power 
in excess of current money income. The bringing of that sort of 
money into the market has precisely the same inflationary effect as 
does the disgorging of previously hoarded money income. 

Likewise, persons unwilling to accept their full shares of the cur- 
rent pix)duct, beside or instead of diverting their current money in- 
come into hoarding, may apply it to the extinguishment of previously 
contracted capital loans in commercial banks and diversion of money 
income away from the purchase of goods and services into the pay- 
ment of capital loans has precisely the same effect and influence as 
the diversion away from the current markets into hoarding. 

I am not trying to tell you that hoarding of money income and the 
misuse of the banking process are the only causes of fluctuations 
in the volume of business activit3^ As a matter of fact, minor and 
even quite substantial fluctuations in volume of economic activity 
occur from time to time and are caused by millions of individual 
decisions by millions of individual participants in the economic proc- 
ess, motivated by literally innumerable circumstances. These mod- 
erate fluctuations arising from the interplay of a multitude of eco- 
nomic forces are perfectly natural and require no labored explana- 
tion, and in themselves they produce no disastrous results. But the 
conversion of these ordinary and perfectly natural movements of ex- 
pansion and contraction into wild booms and economic debacles are 
mainly the result of the attempt at some periods, on the part of the 
public, to claim more of the current product than corresponds to their 
current money incomes, and, on the other hand, at other times the 
unwillingness of contributors to the economic process to accept the 
whole of their shares of the current product. 

These phenomena manifest themselves in the boom phage by the 
intrusion of previously hoarded money income and newly created 
bank money through capital loans and investments in commercial 
banks, and, in the depression phase, by the diversion of current 


money income away from the markets, away from purchase of goods 
and services into hoarding and into the extinguishment of capital 
loans in commercial banks. 

Mr. Chairman and counsel, I think there we have the elements of 
our j)roblem. 

Mr. Nehemkis. Mr. Manuel, may I ask a few questions of you? 
Do I understand you to say as a result of the testimony you have 
just given that you recommend that people be compelled to invest 
their savings? 

Mr. Manuel. Certainly. The sole purpose of all economic en- 
deavor is the creation of useful goods and services. If a man doesn't 
desire any portion of that product he has no occasion to play in the 


Mv. Nehemkis. How would you enforce that compulsion ? 

Mr. Manuel. That is a very difficult question. I probably can't 
ansAver it. Many men have thought that it might be accomplished 
through the use of perishable money of one sort or another. It is 
•possible that in a country where the business is transacted mainly by 
the use of paper bills, that that might be made to work. In our own 
country, wdiere our business is nearly all done by bookkeeping trans- 
actions through the banking system, it would be very difficult to 
apply it. I presume that the best approach would be a direct attack 
upon the hoarding of money income. Starting with our present 
income tax procedure, perhaps, requiring each taxpayer to show, per- 
liaps at the end of 90 days after the close of his taxpaying year, 
that he had actually taken into the markets the current money 
income shown in his statement or that he had given it or traded it 
or loaned it to somebody who had assumed the obligation to do that 
for him. 

Mr. Nehemkis. In short, you are suggesting a kind of, what we 
might call, moneyed capital tax? 

Sir. Manuel. I think of it in the form of escheat, but I presume 
the purpose could be accomplished by a tax of less than 100 percent. 

Mr. Nehemkis. Are you prepared to advise the committee as to the 
volume of excess bank reserves today ? 

Mr. Manuel. They are right around $4,000,000,000. 

Mr. Nehemkis. What is meant bj'^ excess bank reserves? 

Mr. Manuel. The excess balances in the banks of the Federal Re- 
serve System above those required by law. 

Mr. Nehemkis. I would take it, Mr. Manuel, that the views you have, 
just presented to the committee deviate somewhat from more orthodox 
views. Is that correct 'i 

Mr. Manuel. I think the notion that our prime difficulty arises from 
the failure of saved income to come back through the markets for 
investment is a perfectly orthodox one, and one all economists would 
agree to. When it comes to the remedy, I dare say it is quite un- 
orthodox. The orthodox notion of remedy seems to be that we must 
create investments that are so attractive that these reluctant invest- 
ors can't resist the temptation to invest their saved income in them. 

Mr. Nehemkis. Are you not in effect, Mr. Manuel, suggesting a plan 
that would actually discourage thrift among the American people ? 


Mr. Manuel. Not at all. Our savings and accumulations occur in 
things and not in money. The 18 or 19 billion dollars we save in a 
fairly good year in this country consists in durable goods. If I have 
saved any of my part, it consists in some part of those durable goods. 

Senator King. Your savings consist of property, does it not ? 

Mr. Manuel. That is right. 

Senator King. If a sheepman thinks there is going to be a very large 
market for his product he will increase the number of his sheep, and 
if the market drops he may have on hand perhaps double what the 
demand is. Would you force him to disgorge that double and throw 
it on the market or give it away? That is his capital; that is his 

Mr. Manuel. Not at all ; but when he sells his sheep I would expect 
him to bring that part of his sale price which represented his net in- 
come into the market for investment somewhere. Probably he would 
invest it in new corrals or new equipment for his ranch. 

Senator King. You realize, I suppose, do you not, that a large part, 
perhaps the greater part, of the accumulations do not consist of money, 
but they consist of property ? 

Mr. Manuel. Exactly. 

Senator King. And you wouldn't comi)el a disgorgement of that 
property because it happened to be a product or profits ? 

Mr. Manuel. Not at all. I am contending that his money income 
shall be invested in that property and not hoarded either in idle de- 
posits or 

Senator King (interposing). Do not the greater part of your profits 
consist of property — personal property, real property, and mixed — 
rather than in money ? 

Mr. Manuel. Insofar as they do there is no problem. Senator. It 
is only the situation where the profit consists of money and then we 
sit on the money. 

Senator King. Well, it consists in many instances, does it not, of 
stocks which, when you purchased them, had a certain value, and 
within a short time thereafter the value was greatly reduced, so that 
instead of their having a profit they have a loss ? 

Mr. Manuel. I am not thinking of speculative losses at all. Senator. 
The thing we are principally concerned with here is how the economic 
scheme itself is producing the goods and services which the consumers 
enjoy, and it operates through money income. 

Senator King. But doesn't your system — and I am not implying a 
criticism — apply rather to what might be denominated parochial 
and primitive economic situations rather than conditions that exist 
in the United States, Great Britain, and other largely commercial 
communities and states? 

Mr. Manuel. I think the problem arises more particularly in the 
latter, where the situation is so complicated we lose sight of real- 
ities. In our more primitive economy people did invest their current 
money income quite pl•omptl3^ They needed it. Most of them 
needed it for present current purposes, and if a man had a mill 
and he had some profit he was always anxious to build an addition 
or improvement, and so on ; but now the investors, to quite gin extent 
are divorced from the enterprise in which they invest, and clients 


have no sentimental interest whatever in the institutions in which 
they invest. They are interested only in a safe and profitable in- 
vestment and one they believe they can convert into cash over night. 

Senator King. If t properly interpret your position, you would 
not favor the view some of our friends advocate : namely, whenever 
prices of commodities, particularly farm commodities, fall, they 
should be elevated by the Government issuing a vast sum of paper 
money, and that the issue of money is to be adjusted to meet the 
rise and fall of commodities, rather than by production and demand. 

Mr. Manuel. I think we don't have to worry very much about 
the changes in the quantity of money. That takes care of itself. 

Senator King. You don't think the quantitative theory of money 
absolutely determines our economy? 

Mr. Manuel. I think its importance has been very greatly ex- 

Senator King. Some of our friends contend that under the power 
of the Federal Government to issue money and regulate the value 
thereof, it is the duty of the Federal Government to keep on issuing 
money whenever prices fall, and perhaps restrict the issuing of paper 
money or any kind of money you want to call it when the reverse 
takes place. You are not in favor of that view, are you? 

Mr. Manuel. I am not, Senator. 

Senator King. That would lead to wild inflation, would it not, and 
to destruction of prices and to disequilibrium, the evil consequences 
of which are not always easy to foretell? 

Mr. Manuel. On the contrary, I would favor just the opposite 
course; namely, I would favor prohibiting commercial banks from 
monetizing iixed assets at all. 

Senator King. By that you mean you would prohibit them from 
loaning money upon a fine house or building? 

jMr. Manuel. That is right. That is a proper use of the separate 
savings and time deposits in a bank, but is not a proper use of the 
commercial banking process. 

Senator King. You would restrict commercial banks to legitimate 
commercial transactions ? 

Mr. Manuel. I would. 

Senator King. Not making them investment organizations, as you 
would have a real estate investment organization. 

Mr. Manuel. I think that is very important, sir. 

INIr. Nehemkis. Thank you, Senator. 

Mr. Manuel, would the views which you have just expressed to 
the committee be classified as monetary reform? 

]Mr. Manuel. Not at all. I am interested only in assurance that 
all those who contribute to the economic process will take their pay 
in the goods and services that the process recreates. 

Mr. Nehemkis. In other words, you are not advocating currency 
inflation of any kind? 

Mr. Manuel. Certainly not. 

The Chairman. What is your definition of hoarding? 

Mr. Manuel. As I have used it here, a delay in investment that 
might occur by putting the money in a barrel or might occur by 
leaving the money in idle deposit iii commercial banks. 



The Chairman. There is a distinction, is there not, actually, be- 
tween the burying of actual specie and depositing money income 
in a bank ? 

Mr. Manuel. There is a distinction, but it is not quite ^yhat it is 
thought to be. In times of scarcity of basic money, the particular 
type of hoarding through burying money has the unfortunate effect 
of pulling the foundation out from under the banking structure. 

The Chairman. But for the purposes of your discussion this morn- 
ing you were not referring to that kind of hoarding ? 

Mr. Manuel. Not at all. In my discussion, burying the money 
and leaving it in commercial banks are approximatel}' the same 

The Chairman. All right. Now, what control could the indi- 
vidual who has saved some of his current income have over the in- 
vestment of his bank deposits? 

Mr. Manuel. All he has to do is to invest them. 

The Chairman. You have, I suppose, some depositors in the bank 
over which you preside who come to you and deposit their surplus 
funds with you. Is it not so ? 

Mr. Manuel. That is true, Mr. Chairman, because we, unfortu- 
nately, in our country, in our banks, do two wholly different kinds 
of business and get them all mixed up. We perform a savings serv- 
ice, an investment service, for our savings depositors. That is one 
thing, a wholly different thing from the banking process itself. 

The Chairman. I am trying to separate them. 

Mr. Manuel. I am with you. 

The Chairman. For the purpose of clarifying this testimony, the 
depositor who comes to you and deposits his surplus funds with you 
makes you his agent for the purpose of investment. 

Mr. Manuel. If he deposits in our savings department, he does. 

The Chairman. Well, then suppose he deposits them in a current 
checking account. Does he not also do- that? Does he not make 
you his agent? 

Mr. Manuel. No ; not for the investment of it. 

The Chairman. Wliat do you do with those funds ? 

Mr. Manuel. His funds consist in a credit balance on the bank's 
ledger. That balance is our liability and not our asset. 

The Chairman. Wliat do you do with them ? 

Mr. Manuel. It is our debt. We can't do anything with them. 
We owe it to him. 

The Chairman. Do you do nothing with them? 

Mr. Manuel. We do nothing with his deposit. That is our lia- 

The Chairman. But he has deposited with you his credit, what- 
ever it may be — his surplus funds. Wliat do you do with it? 

Mr. Manuel. We don't have it. 

The Chairman. He thinks you have it because if he sits down 
the next morning and writes a check you will honor the check, 
will you not? 

Mr. Manuel. What does that check do? It simply transfers the 
balance in his name to somebody else's in this or some other bank. 


The Chairman. But he niav make out the check to cash, where- 
upon you hand him paper currency, which is merely the promise 
of the Government to pay. 

Mr MvNUEL. That is right, but tomorrow that money will appear 
in the banking system somewhere. He spends it today and it goes 

back in. -, i i -^ 

The Chairman. In other words, you do iiave it. 
Mr. Manuel. We have certain reserves. , n j 

The Chairman. You have his actual claim for surplus funds. 

He has transferred it to you and put it on deposit m your bank, 

' Mr U ^NUEL. He has if he put it in a savings deposit. _ 
The Chairman. I am not discussing that phase of it. i am 

discussing the actual case of the deposit ii^ a commercial account. 
Mr. Manuel. Mr. Chairman, may I try to tell you what I think 

that deposit is? 

The Chairman. Certainly, certainly ! -j .u^ 

Mr JkI\NUEL The function of a commercial bank is to provide the 

community with a sound credit currency. It does so by monetiz- 


The Chairman (interposing). All right. Now, what is a credit 

currency. . , ^ n ^.i ^ 

Mr. Manuel. I am just going to try to tell you tnat. 

The Chair^ian. All right. _ r^ -p ;fo 

Mr Manuel. It does so by monetizing the sound credit of its 
so-called borrowing customers; by monetizing it, I mean giving the 
quality of currency to that credit, and by giving the quality ot cur- 
rency to that credit, we convert it into money, but the kind of money 
into which we convert it is not paper money or gold, it is credit 
balances on the books of the banks which may be transferred from 
person to person and place to place, and serves the purpose ot money 
in the pavment of bills and in the purchase of goods. 

The Chairman. And it might even be used for the construction ot 
plant and durable goods? 
Mr. Manuel. It might. 
The Chairman. And frequently is? 
Mr. Manuel. Yes ; and should not be. 

The Chairman. And why not? , , . -, p ^ • o 

Mr MANUEL. Because monetization ot that kind of assets gives 
us a bank money that has no honest foundation in currently created 
goods and services that will presently appear m the market and re- 
deem the money in the goods. •, x, ^ ^ 

The Chairman. I don't quite follow you. Now, let's try to over- 
simplify this and make a very rash assumption. Let s assume that 
everv member of this committee deposits $1,000 at your bank, and 
let's^assume that that thousand dollars deposited by each member ot 
this committee represents a surplus of production by the niembei^ 
of the committee over consumption; in other words, a saving by each 
member of this committee out of current income, and that then you 
have had, assuming that all of the alternates on the committee have 
also saved a thousand dollars, we may have as much as $10,000 on 
deposit in your bank. 


Then there comes to your office one morning a reputable citizen 
in whom you have every confidence, who tells you that he wants to 
borrow $20,000 to build a certain kind of factory in which he can 
produce an article which you believe the community will use, which 
will produce income immediately. 

Now, am I to understand from your testimony that it is not a 
proper function of a commercial banker, it is not a proper act for 
you, as the head of your bank, to loan this customer of yours the 
$20,000 to build the factory ? 

Mr. Manuel. That depends upon how you men have deposited it. 

The Chairman. These are deposits in commercial checking ac- 

Mr. Manuel. All right; then my answer would be no. 

The Chairman. That is done. 

Mr. Manuel. Yes; it is done. 

The Chairman. And j^ou consider that to be an incorrect use of 
savings ? 

Mr. Manuel. No, Mr. Chairman; because you are not talking 
about savings. 

The Chairman. That is saving, isn't it? For each one of us it is 
a saving, is it not ? 

Mr. Manuel. Then you will put it in a savings department and 
permit me to invest it for you. If you will, it is all right. 

The Chairman. I am trying to clevelop some distinction between 
the two, and I am unable to do so. 

Mr. HiNRicHS. Isn't the distinction between the two types of de- 
posit that a deposit in your savings department is an advertisement 
to you by the 24 members and alternates that they are permanently 
committed, or committed over a substantial period of time, to the 
saving of those funds, whereas the deposit in your commercial de- 
partment is an advertisement by each person that he may want to 
come down to the bank the day after tomorrow and take it out 
again, and that unless there is some actual distinction made, you are 
unable to give a permanent commitment of the funds because you 
ma}^ not be able to meet your immediate demand obligations? 

Mr. Manuel. That is true, sir: but more than that is true. If I 
made the loan that the chairman describes I would have created — did 
you say a $10,000 loan ? 

The Chairman. I was unusually optimistic. I said $20,000. 

Mr. Manuel. If I made that loan, as a commercial bank, I would 
have created $20,000 of new deposit liability, $20,000 of new bank 
money, what, to the depositor, would be his funds in the bank. I 
couldn't help making it, and actually, if you take the commercial 
banking system as a whole I wouldn't have loaned these men's money 
at all, but would have created between the borrower and the bank 
$20,000 of new bank money. I couldn't help myself. The result of 
that transaction would be the creation of a new deposit of $20,000 

Tlie Chairman. It would be on the account of the person to whom 
you loaned the money. 

Mr. Manuel. Immediately. 

The Chairman. So that you would have the $20,000 in each of 
these $20,000 items charged against you, and you would also have 
the $20,000 charged against your bank on the account of the person 


to whom you loaned the money, and your evidence of that would be 
the note or whatever security the borrower gave you m return tor 

^^Mi^^'manuel. That is the way banks and their borrowers create 

^ThJ^CntrnMAN'. Well, now, am I to understand from you that you 
think that that is an improper use of the banking function^ 

Mr. Manuel. Yes. May I tell you why ? , . -^ 

The Chairman. Certainlv; I think we ought to develop it. 

Mr MANUEL. It is an un-needed function because the saved in- 
come "is always enough to finance the creation of all the capital goods 
we can make. The process itself creates the savings, and it is an 
unwarranted function, I think, because it has no liquidity. That 
kind of bank money doesn't represent any current goods and serv- 
ices that are on the way to market to redeem the money ._ 

The Chairman. Now, then, you discussed the possibility ot es- 
cheat I gather from what you now say that you would not sug- 
<rest that such a policy should apply to the actual savings of your 
depositors: that is to say, to those sums which they gave to you to be 
deposited on time certificates or in savings deposits and under which 
you were the agent to invest. _ . • -^ , 

Mr Manuel. Really, no problem arises because m savings it be- 
comes necessary to invest it. We can't pay them interest unless 

Tlie Chairman. But in your contemplation there would be no such 
thing as escheat applving to that. 

Uv Manufx No, sir; the saver who puts his money m a sayings 
bank has taken his sole step of investment. He performed his 
part. The savings bank then has assumed the obligation of invest- 
ment of funds. -, ^, 1 T J i- J ^-^ 

The Chairman. He has invested. Then do I understand you to 
contend that the function of a commercial bank is to loan money 
merelv for purposes of current consumption? , 

Mr' MANUEL. Yes; or, if you please, the function of a commercial 
bank "is to create a bank monev to implement the current economic 
process of creating goods for consumption. Lending is not an accu- 
rate term. The borrower and the bank create these funds. 

The Chairman. Congress is being besought upon every side, or at 
least on numerous sides, to provide a system of insured capital loans 
on the theory that it will expand industry and provide employment. 
What is your opinion of that suggestion in the light of your 

testimony ? „,,-,ij.^-x -i 

Mr. Manuel. That is a part of the whole plan of trying to provide 

a substitute for the investment of savings. ^ .. rri ^ 

If savino-s were invested, there would be no necessity tor it. iliat 
is just one^of the devices by which we try to compensate for the fact 
that savers on a large scale are now hoarding their savings 

The Chairman. You see the problem that is presented to the 
country, to all concerned, the banker and the person in public serv- 
ice the consumer and the worker and everybody, is that apparently 
the banks are bulging with money, but that money is not being 
used It has been contended that the money ought to be used to 
provide new industries. Now what, in your opinion, would be the 
way to approach that objective, or should we approach that objective « 


Mr. Manuel. It should be used, and it should be used by the people 
who own it. That is what I am asking for, that people who own 
those savings be compelled to bring them into the markets and ac- 
cept their shares of the current product. 

The Chairman. Now. you say the people who own the savings 
should be compelled, and a moment ago we differentiated savings — 
you did at least. You made a very great difference between the sav- 
ings of the person who has i:)ut his deposit on time in your bank 
and the depositor who has just put it into a commercial account. As 
to the former, you said he had already done his work. 

Mr. Manuel. That is right. 

The Chairman. As to the latter, you said his money should be 
used only for current consumption, I misunderstood you then. How 
are you going to use that money for plant construction without 
capital loans? 

Mr. Manuel. By the depositor who owns it investing it in the 
new product. 

The Chairman. All right. Then here are 20 of us again, each with 
$1,000. It is impossible for each one of us to find a satisfactory in- 
vestment for $1,000, but the 20 of us together, using you as the agent, 
may find an investment for the $20,000. 

Mr. Manuel. Quite probably. Then you put it into the savings 
department and permit me to do that. 

The Chairman. But we don't choose to do that. We follow our 
habits and put it in other departments. 

Mr. Manuel. We have to change our habits in that respect. 

Senator King. Your view is that you are acting as a fiduciary 
with respect to commercial deposits, and you must have the money 
on hand at midnight and during the day so that each depositor may 
come and get the amount which he deposited. 

Mr. Manuel. As a practical consideration, that is right, sir. 

Senator King. And the banking failures, which were so numerous, 
resulted from the fact that the current deposits subject to check, sub- 
ject to demand at any moment, were utilized oftentimes for plant or 
for other expenditures, and when the depositor came for his money 
the bank didn't have it, 

Mr, Manuel. That is quite true, and it is also true that the savings 
deposits were payable practically on demand, while the only invest- 
ment that could be made of them was in long-time securities, which 
we had practically promised to pay on demand, and, of course, we 

Senator King. Of course, this is the situation. A large number 
of people have money, and they may want to use it tomorrow, and 
they are looking for investment, so they deposit it in commercial 
banks, expecting that they may obtain it immediately. As a result 
they don't find investments that are satisfactory, and you ma}^ have 
in your bank a large accumulation of commercial deposits, and your 
bank and other banks are in the same situation, as a result of which 
in all of the banks there is an aggregate perhaps of several billion 
dollars of call money, and it is not available for the purchase of 
durable goods or for investment generally. 

Mr. Manuel. Right. 



Senator King. Is there any way to avoid that. I have $1,000 and 
don't know where to spend it. I leave it in your bank. I have 
confidence in you and in the integrity of your bank whenever I 
demand it. You are not going to penalize me for leaving my money 

Mr. Maxuel. It depends on how long it takes you to find a suitable 
place and how exacting are your requirements. The general public 
theory is that we must make the investment so attractive to the in- 
vestor that he can't resist the temptation to invest. I am inclined to 
think the thing is the other way around. 

The Chairman. Isn't that the answer, that we must make the in- 
vestment so attractive that the depositor cannot resist ? Is it not a 
fact now that depositors all over the country are saying, "I don't 
know what to put my money into." 

Mr. Manuel. Quite right, Mr. Chairman, but I don't know that 
you can make it so attractive. That may be quite impossible. I 
think the thing is the other way around, that the investors must 
. accept such investment opportunities as are available, and hope for 
better opportunities. If we did, we would soon come to better ones 
and those that we made that were a bit wobbly would be good. 

The Chairman. Da}^ by day are your deposits much in excess of 
your withdrawals ? Isn't there a rather static situation ? 
Mr. ]Manuel. Yes, there is. 

Senator King. So that you receive, as an illustration, $100,000 and 
you pay out $100,000. You have to have, on a checking account, the 
money there available to meet wliatever deposits have been made. 

Mr. jNIanuel. May I recite a little incident that will illustrate 
"what we are talking about. In our bank we have a small manu- 
facturing customer. It is an individual business that requires very 
little capital. It makes very little demands upon the owner for 
capital investment. For 6 years he has allowed his earnings to 
accumulate until that little manufacturer has $85,000 now in his 
current checking account, the accumulation of G years of saving, and 
in all that 6 years he hasn't invested a dollar, and that $85,000 has 
been leached out of your economy. 

Senator King. Are you going to penalize him now for his thrift, his 
energy, and for developing a business which was profitable? 

Mr. Manuel. Not at all ; but he must, if our money economy is to 
function, invest that money. He must take his share of the product. 
Senator King. Perhaps he was solicitous of obtaining a sufficient 
reserve that he might expand his business, and in the seventh year or 
sixth year he expanded his business by purchasing additional land or 
building another structure. 

Mr. Manuel. That may well be, but it can't be done. I am not 
going to make him spend his profit; I am going to make him invest it. 
Senator King. Even though he has to have a veiy large nest egg. 
In other words, your philosophy is that the Federal Government is to 
com])el me and my friends to spend our money, regardless of the fact 
that we are not quite ready, and are anticipating spending it in other 


Mr. Manuel. If you mean to include investment — yes; otherwise 
the portion of the product that corresponds to that current-money 
income is going to pile up in somebody's warehouse. 

The Chairman. Suppose we invest it in real estate. Is that satis- 
factory ? 

Mr.'MANUEL. No ; that is the same thing. 

The Chairman. Here is your friend Avith $85,000 in your bank. As 
I understood your description of his case, he has alloAved his earnings 
to accumulate because he doesn't know what to do with theni. 

Mr. Manuel. That is right because he isn't satisfied with what 
opportunity he has. 

The Chairman. Therefore, if you could make a suggestion to him 
for the investment of his $85,000 he would probably follow it, would 
he not? 

Mr. Manuel. I presume so. I wouldn't dare do it because the rest 
of the fellows are not investing their current income and our economy 
is only operating on three legs. 

The Chairman. That has always been the way it has operated, 
hasn't it? 

Mr. Manuel. Yes. 

The Chairman. How would you change it ? 

Mr. Manuel. I would require all recipients of current-money 
income generated by the economic process to bring it back into the 
markets, or to give it or trade it or lend it to somebody who would. 

The Chairman. Either invest or consume is your theory. 

Mr. Manuel. That is right. There are only two alternatives. 

The Chairman. And there should be some method to make invest- 
ment easy, certain, and safe? 

Mr. Manuel. Perhaps there should be. There probably isn't any 
way to make it safe. The thing I have suggested would come nearer 
it than anything else I know. It certainly wouldn't be safe as long 
as people are free to hoard their money income and break down the 

Senator King. Then, to give an illustration of some of the prob- 
lems that some of us have to meet, one of my clients, when I was 
practicing law, was in the sheep business. He made $10,000 a year 
for several years in profit. He felt that his business was precarious 
unless he had a summer range. To acquire the summer range re- 
quired the purchase of 18,000 acres of land at a cost of approximatelj'^ 
$150,000. He began saving each year from his operations, determined 
to get a summer range. Finally he did save enough, over $100,000, 
in 8 or 9 years. He added to it and invested it each year at interest, 
and at the end of 8 or 9 years he had enough to buy the land . Do 
you think the Government ought to penalize him each year and make 
him invest that? That was a wrong course for him to pursue, was 
it, according to your philosophy? 

Mr. Manuel. It was perfectly proper for him to accumulate it, 
but he can't accumulate it in cash without doing injury to the eco- 
nomic process. 

Senator King. We have, of course, different opinions respecting 
that. I think it is not the purpose of the Government to compel that 
man to spend that money when he desired to save it for the purchase 


of land. But, as I understand you, as to the money that is deposited 
Avith your savings bank, it is proper for you to invest that. 

IMr. Manuel. Yes. 

Senator King. And it is perfectly proper for the depositor to have 
it invested, and that investment doesn't mean its loss to the economy, 
does it? 

Mr. Manuel. No, certainly. 

Senator King. I suppose you loan money on real estate or Gov- 
ernment bonds, and so on, so that deposits, then, are all right if they 
are in a savings bank, but if they are in a commercial bank they 
are not? 

Mr. Manuel. If they are in a commercial bank they are for 
commercial purposes. 

Senator King. All right. 


Representative Williams. I understand you represent a commer- 
cial bank that has a time and savings deposit division. Do you keep 
those entirely separate? 

Mr. Manuel. Unfortunately, we cannot, under the law. 

Representative Williams. What is there in the hnv tliat prevents 
you from it? 

Mr. Manuel. We can't distinguish our liability. The liability of 
the bank to its customers is a liability of the whole bank, it is not a 
liability of the savings department to savings customers and a lia- 
bility of the commercial department to commercial customers. 

Representative Williams. Yours is a national bank? 

ISIr. Manuel. Yes, sir. 

Representative Williams. Would you like any change in the law 
in that respect? 

^Ir. Manuel. I would like a change very much, Senator. I think 
it is very important that we separate those departments and that the 
liability of the savings department shall be a liability to its own 
depositors and the liability of the commercial department be limited 
to a liability of its depositors. 

Representative Williams. Do you think that is a practical proposi- 
tion for the banking fraternity all over the country? 

Mr. Manuel. I can't see why it isn't. 

Representative Williams. You think especially in small com- 
munities a small bank, without sufficient business, could be con- 
ducted along that line? 

Mr. Manuel. It couldn't aifect the amount of its business at all. 
The only requirement is that the two departments be conducted 
separately. They could be conducted under the same management 
and the same capital. 

Representative Williams. Would you have a wall built between 
the two departments? 

Mr. Manuel. Not necessarily, not a physical wall. 

Representative Williams. Would you have an entirely different 
set of bookkeeping, two different funds involved? 

Mr. Manuel. Yes. 

124491— 40— pt. 9 16 


Kepresentative Williams. I understand that you are not opposed 
to the creation of banking credit for commercial purposes. 

Mr. Manuel. That is right. 

Kepresentative Williams. But you are for the other? 

Mr. Manuel. That is right. 

Representative Williams. In other words, you don't believe in this 
liundred-percent-reserve theory that is going around the country. 

Mr. Manuel. No. That takes the banks out of the banking 

Representative Williams. What does it make tliem? 

Mr. Manuel. Well, instrumentalities of exchange. 

Representative Williams. Simplv makes them a warehouse, doesn't 


Mr. Manuel. On one side, and on the other side it makes them an 

instrumentality for exchange, for clearing the checks. 

Representative Williams. Now, in the investment field, it is not an 
individual proposition as a rule, is it? It is rather an institutional 
affair, isn't it, in the broad sense of the word ? 

Mr. Manuel. You mean most investments are made through 
institutions ? 

Representative Williams. Yes. 

Mr. Manuel. A great many of them are. 

Representative Williams. Where are the savings accounts now, in 
general? Where are they? 

Mr. Manuel. Do you mean in what form have people their savings 
invested ? 

Representative Williams. Yes; where are they? They are not 
buried in the ground, are they ? 

Mr. Manuel. No; there is $25,000,000,000 or so of them invested 
through the savings banks and savings departments, and there is an- 
other $20,000,000,000 invested througli life insurance companies, six 
or seven billion invested through the savings and loan and building 
and loan associations. 

Representative Williams. They are in these various institutions 
throughout the country? 

Mr. Manuel. Yes. 

Representative Williams. They are the ones that do the investing? 

Mr. Manuel. To that extent, they are. 

Representative Williams. How many individual depositors are 
there; do you know? 

Mr. Manuel. No; I don't know; but there are a very great many. 

Mr. Nehemkis. Will you forgive me for interrupting? I was just 
going to say the next witness is going to give you many of the an- 
swers that you are asking. He is specifically prepared to go into 
the precise points that you are raising. 

Representative Williams. I have no objections. I was wondering 
whether you had this information. There is a vast reservoir of sav- 
ings now in these various institutions throughout the country. 

Mr. Manuel. Right. 

Representative Williams. Where is the outlet for those savings? 

Mr. Manuel. You mean in what are they invested ? 




Representative Williams. Yes; and where is the future outlet for 
tlie savings accumulated in the savings institutions? What are they 
going to invest them in? 

Mr. Manuel. Well, I presmne they are going to continue to invest 
them in real estate, mortgages, and in municipal bonds, Government 
bonds, and some corporate bonds perhaps. 

Representative Williams. Is there any new field, so far as you can 
see, for those investments ? 

Mr. Manuel. I haven't any in mind. I think perhaps there should 
be a Avidening of the legal authority to make those investments. That 
might expand the investment field a little bit. 

Representative Williams. Would you be in favor of enlarging it 
so they could invest the funds in the common stock of industrial 
concerns ? 

Mr. Manuel. Well, Congressman, that leads to another problem. 
If you segregate your savings in banks and introduce a sul3Stantial 
element of flexibility in the obligation of the bank to its savings 
depositors, then I think we could invest in good preferred stocks and 
perhaps some common stocks, but we can't as long as we would be 
under the hammer to return that money every time the depositor 
chooses to want it. 

Representative Williams. I understand that can't be done in anj- 
State of the Union, can it ? 

Mr. Manuel. I am not aware of any State in which it can. 

Representative Williams. In other words, the investment of these 
funds, well, yes, in all of them, is controlled by State legislation. 

Mr. Manuel. That is true. 

Representative Williams. And there isn't any State law which 
permits the investment of these savings funds in common stock? 

Mr. Manltel. With the exception of the New York provision that 
savings may be invested in certain types of bank stocks, I think there 
IS none. 

Representative Williams. The only difference, after all, between 
tlie commercial bank and the savings institution is simply a matter 
of time, isn't it? 

Mr. Manuel. I think there is an essential fundamental difference. 
The savings bank is an agency for assisting people to invest their 
saved income in proper securities. The commercial bank is strictly 
an instrument for creating credit currency to implement the eco- 
nomic process through which we do our business. 

Representative Williams. But at the same time the current funds 
are invested by the bank. 

Mr. Manuel. Well, they are invested when they are created. When 
we make the loan we make the investment and we create the deposit. 
They are all one transaction. 

Representative Williams. In other words, you use the individual 
deposit. It fosters money to loan to somebody else. 

Mr. Manuel. The depositor doesn't happen to have any money, 
as a matter of fact. While any individual depositor may bring in 
money, the whole deposit structure of the banking system is built 
out of loans. 


Representative Williams. Well, at the same time there is an obli- 
gation to pay back there just the same as in the savings institutions. 

Mr. Manuel. That is right. 

Representative Williams. And it is only a matter, it seems to me, 
of when they mature and giving an opportunity in the savings ac- 
counts to invest them in capital credit rather than in commercial 

Mr. Manuel. That is a very practical view. I think there is 
somewhat more to it, Mr. Congressman, but perhaps we can't get 
into it here. 

The Chairman. Are there any other questions ? 

Senator King. What did you say the excess reserves were? 

Mr. Manuel. They are a{3proximately $4,000,000,000. It varies a 
little from week to week, but mostly upwards. 

Senator King. That is all. 

Representative Williams. What does that mean? What does the- 
excess reserves mean, not the legal definition that you gave a while- 
ago, but what are the possibilities? 

Mr. Manuel. It represents amortization of the gold bullion out 
in the Kentucky mountains. 

Representative Williams. And it represents the potential credit 
expansion ? 

Mr. Manuel. Yes; it represents the basis of credit expansion, pos- 
sible credit expansion. 

Representative Williams. That is the amount of reserves over and 
above the legal requirements. 

Mr. Manuel. That is right. 

Representative Williams. Of course, the legal requirement can't 
belong; it has to stay there. 

Mr. Manuel. That is right. 

Mr. Meters. Have you any idea how much interest is paid annually 
by banks to all depositors? 

Mr. Manuel. No; I wouldn't have that figure in mind. It wouldn't 
be difficult to estimate that, though, because there are about $25,000.- 
000,000 of those funds and they are now bearing, I suppose, an average 
of about 2 to 4 percent. 

Mr. Meyers. Would that be composed of commercial savings? 

]Mr. Makuel. No interest is paid on commercial savings. 

Representative Williams. That applies normally to only the mem- 
bers of the Federal Reserve System and the F. D. I. C. 

Mr. Manuel. My figure had in mind the mutual savings banks and 

Representative Williams (interposing). I mean with reference to 
payment of interest on current accounts. 

!Mr. Manuel. You mean perhaps there are some banks which could 
pay interest on 

Re])resentative Williams (interposing). Any commercial bank out- 
side of the Federal Reserve System or the F. D. I. C. system can pay 
interest on demand deposits. 

Mr. Manuel. Possibly so, I don't know of any bank that does,^ 
possibly they can. 

Representative Williams. I might say I know they can, because I 
know^ thev do it and there are some 8,000 outside the System, aren't 
there ? 



Mr. Manuel. No; I don't think there are that many outside the 

Representative Williams. You mean outside the Federal Reserve 

Mr. Manuel. Outside the F. D. I. C. 

Representative Williams. I meant the Federal Reserve System. 

Mr. Manuel. This, of course, includes the F. D. I. C. No bank 
under F. D. I. C. can pay interest on checking accounts. 

Representative Williams. And there are about a thousand of 
those ? 

Mr. Manuel. Yes ; and they are very small. 

The Chairman. Any other questions. Mr. Nehemkis, if you are 
ready to proceed. Thank you very much, Mr. Manuel. 

Mr. Manuel. Thank you. 

(Mr. Manuel was excused from the chair.) 

The Chairman. At the hearing of the Temporary National Eco- 
nomic Committee on March 3, 1939, following the testimony of Wil- 
liam H. England, Assistant Chief Economist, summarizing the Com- 
mission's report on agricultural income, certain questions were asked- 
•of Dr. G. A. Stephens by Dr. A. Ford Hinrichs, member of the com- 
mittee.^ In the course of this questioning Dr. Hinrichs asked if it 
would be proper to have additional information on the point under 
discussion introduced into the record.' This information was prom- 
ised and is given in the attached statement. The statement is here- 
with ordered to be inserted in the record. 

(The statement referred to was marked "Exhibit No. 598" and 
appears in Hearings, Part V, appendix, p. 2299.) 

Mr. Nehemkis. Mr. Chairman, may it please the committee. Dr.- 
Davenport has already been sworn by this committee and all I ask 
leave for at this moment, so that this record in this proceedings may 
be complete in itself, is to read Dr. Davenport's qualifications for the 
testimony he is about to give. 

The Chairman. Very well. 

Mr. Nehemkis. Dr. Donald Davenport holds a doctor of phil- 
osophy in economics from Columbia University. He has been asso- 
ciate professor in business statistics, at the Graduate School of Busi- 
ness Administration, Harvard University, since 1929. He has been 
chief statistician for the New York State Joint Legislative Commit- 
tee on Taxation and Retrenchment, 1922 to 1923. He has been chief 
statistician for the California State Tax Commission during the 
year 1928. 

He is the author of the following publications : 

The first, coauthor. The Financial District of New York, published 
by the Regional Plan of New York and Its Environs, 1925. 

The Cost of Government in New York State; Unemployment and 
the Prospects for Reemj^loyment in Massachusetts, published by the 
Bureau of Business Research, Harvard University. 1936, of which he- 
is coauthor. He is likewise coauthor of the volume entitled 'Tndex: 
to Business Indices," published by Business Publications, Inc., Chi- 
cago, 1937. The Cooperative Banks of Massachusetts, published by 
the Bureau of Business Research, Harvard University, 1938. 

(Senator King assumed the chair.) 

1 Hearings, Part V, p. 1S26. 



Mr. Nehemkis. Dr. Davenport, are you prepared to state your find- 
ings and conclusions with respect to the accumulation and diffusion of 
the savings of individuals? 

Dr. Davenport. I am. 

Mr. Nehemkis. In addition to your general knoAvledge of the sub- 
ject, have you made a special study in preparation for the testimony 
to be given? 

Dr. Davenport. I have. 

Mr. Nehemkis. Were the charts which you will identify at this time 
for the committee prepared by you or under your direction? 

Dr. Davenport. They were. 

Mr. Nehemkis. Are they based on statistics believed to be by you 
authentic and reliable? 

Dr. Davenport. They are, 

Mr. Nehemkis. Do the statistical tables in sujiport of the charts 
embody data of similar authenticity? 

Dr. Davenport, They do, Mr. Nehemkis. 

Mr. Nehemkis. Are you economic consultant to the Investment 
Banking Section of the Securities and Exchange Commission? 

Dr. Davenport. I am. 

Mr. Nehemkis. Have you discussed the testimony you are about to 
give with counsel ? 

Dr. Davenport. I have. 

Mr. Nehemkis. Notwithstanding those discussions and your con- 
nection with the Investment Banking Section, is the testimony you 
are about to give to the committee your own considered findings and 
conclusions ? 

Dr. Davenport. It will be. 

Mr. Nehemkis. Will you identify that chart, please. Dr. Davenport ? 

Dr. Davenport. I identify the chart entitled "Flow of Money Income 
and Expenditures." 

Mr. Nehemkis. Mr. Chairman, I offer in evidence the chart just 
identified by the witness. It is not exhibited. It is for the record 

Acting Chairman King. It may be received, 

(The chart referred to was marked "Exhibit No. 599" and appears 
on p. 4051.) 

mechanisms or the savings process 

Dr. Davenport. Mr. Chairman, I have been asked to present to you 
a description of the methods and processes employed by individuals 
in accumulating personal savings out of their personal incomes and 
to discuss with you the mechanisms and processes by means of which 
individual savings get back into circulation. The subject of business 
savings has been discussed by other witnesses. My sole function is 
to present the processes employed by individuals in th.e accumulation 
of their savings. 

I identify the chart entitled "Individual Savings Invested in Long- 
Term Debts and Equities." 

Exhibit No. 600 




- 50 






124^01—10 pt. 9 (Facep. 37i;7). 










Mr. Xehemkis. Mr. Chairman, I offer in evidence; the chart just 
identified by the witness now exhibited in extent before the committee. 

Acting Chairman King. It may be received. 

(The chart referred to was marlced "Exhibit No. 600" and faces 
this page.) 

Dr. Davenport. This chart, Mr. Chairman, presents the various 
processes that are employed by individuals in the accumulation of 
their savings out of personal incomes. The titles that appear in the 
boxes at the top of the chart describe the various processes that are 
available to individuals to assist them in the accumulation of their 
personal savings. The first process is designated as "Social security, 
United States Government life insurance and all governmental pen- 
sion funds." These are processes which have accumulated approxi- 
mately $7,000,000,000 and are represented in that magnitude in the 
bar that appears directly below that process. 

The second process is that which represents the accumuhition of sav- 
ings in the postal-savings departments and in addition the accumula- 
tion of savings represented by the purchase of baby bon.ds by indi- 
viduals, available to individuals through every post office in the 

Acting Chairman King. May I interrupt you? Those deposits to 
which you referred on those two processes are not inactive, the savings 
are not inactive? 

Dr. DA^'ENP0RT. They have been immediately returned to the system 
through the investment of those funds in Government bonds in the 
case of postal service. 

Acting Chairman King. What I am trying to get at is that you don't 
want to convey the idea that those funcls in the seven billion or two 
billion, whatever it is, are inactive. 

Dr. Davenport. Not at all. 

Mr. Nehemkis. Will you proceed ? 

Dr. DA^'ENP0RT. The third process is that whicli is represented by 
the payments of premiums on life insurance policies to legal reserve 
life insurance companies and in addition to the fraternal life-insurance 
as^-ociations. By this process assets that total over 28 billions of 
dollars have been accumulated to the credit of individual policyholders. 

Acting Chairman Iving. Wliat do you mean there by the words 
'cash" and "other"? 

Dr. Davenport. There are about $800,000,000 of cash held by the 
life insurance companies, deposited by them in commercial banks. 
The other assets include, among other things, about 3.5 billion dollars 
Df policy loans. Then there are such things as the working equipment 
3f a life-insurance office — furniture and fixtures and things of that 

Acting Chairman King. Below the word "other" the column there is 
3ut up into various figures. What do they represent ? 

Dr. Davenport. The bar represents $28^000,000.000. It is segmented 
[o show the manner in which those assets are invested, Senator King. 
The colors and the cross hatchings on the bar are related to the colors 
md cross hatchings that appear at the bottom of the chart and will 
serve to identify the exact procedure that is followed by these com- 
panies in putting this savings of individuals to work to create jobs and 
:o create profits, to keep our system going. 


If I may be permitted, then, to continue the next process, it repre- 
sents the accumulations of savings deposits in the mutual savings 
banks. These stand today at about $11,000,000,000, and again the bar 
representing that sum is segmented to show the character of invest- 
ments in mutual savings banks. I might point out at this time that 
the mutual savings banks also have cash which they keep on deposit 
with the commercial banks. They have approximately a half a billion 
dollars of cash to their credit in checking accounts which they have in 
commercial banks. 

The next process that is employed by individuals is the accumu- 
lation of their savings in the savings departments, the thrift depart- 
ments, or the special interest departments, as they are sometimes 
called in the commercial banks, those deposits which the previous 
witness identified as being ear-marked for investments. They ac- 
count at the present time for approximately 14 or 15 billions of 
dollars, the so-called time and savings deposits of commercial banks. 

The bar immediately to the right represents the total demand de- 
posits of commercial banks. As the previous witness has indicated, 
some of these deposits have also become invested in fixed plant and 
assets of our business enterprises. 

Mr. Nehemkis. Will you point to that bar? 

Dr. Davenport. That is this bar, "Balances in demand deposits," 
and here to the left is the bar that represents savings deposits in 
commercial banks. Both of these bars are segmented to show some- 
thing of the disposition of those assets held by the commercial banks. 

It is a matter of opinion how you might allocate those investments. 
We would ordinarily think that long-term investments, loans on real 
estate perhaps, the bonds of public utilities, bonds of railroads, the 
bonds of industrial corporations. Government bonds, would be the 
kind of investments that it would be appropriate to make with the 
savings deposits, so we have put those types of investments into this 
first bar. There still remains a considerable portion of Government 
bondsl over and above what has been accounted for in the first bar 
that represents the savings deposits in these thrift accounts. 

Mr. Nehemkis. Will you proceed with the next reservoir? 

Dr. Davenport. The next reservoir of savings, Mr. Counsel, is a 
reservoir that we don't know a great deal about in absolute magni- 
tude. We do know that individuals can invest directly, they can 
buy bonds; you and your colleagues with a thousand dollars apiece 
might have bought a thousand dollar bond, each one of you, but there 
are no figures that we have that would indicate those investments in 
equities on the part of individuals. We have indicated it as a process. 

The next process is represented by the accumulations of savings in 
the savings and loan associations. Sometimes these associations are 
known as building and loan associations. In Massachusetts they are 
called cooperative banks, but they are essentially the same thing, and 
they represent approximately $5,000,000,000 of assets, practically all 
of them invested in mortgages on urban real estate, principally 
mortgages on homes. 

I would call attention to the fact that these processes are processes 
which channel the savings of individuals into what we have termed 
internal lono; term debts. These savings are primarily ticketed for 
investment m Government bonds, in the bonds of State and local 
municipalities, in the bonds of the railroads, the bonds of the public 


utilities, the bonds of our industrial corporations, or they may go 
into the mortgages on our farms, the mortgages on our homes, and the 
mortgages on other urban real estate. 

Acting Chairman King. Has an attempt been made to classify 
those mortgages, those obligations, to determine what mortgages 
on homes represent, farms, and so on ? 

Dr. Da^-enport. We have that. The magnitudes that are repre- 
sented by the bars that appear at the bottom of the chart are pro- 
portional to the outstanding debts. This bar of Federal debt, for 
example, goes up to about $44,000,000,000. The light section at the 
top of it represents the guaranteed obligations of the United States 
Government, and the heavy section at the bottom represents the 
direct obligations of the United States Government. In addition we 
have about $18,000,000,000 of State and local bonds outstanding; we 
have approximately $12,000,000,000 of the bonds of railroads, and 
about $14,000,000,000 of public utility bonds; industrial bonds ap- 
proximate about $8,000,000,000. 

The farm mortgages outstanding are a little over $7,000,000,000 at 
the present time. The nonfarm home mortgages, I think, run about 
$17,000,000,000. The other mortgages on other urban real estate look 
about $11,000,000,000. The aggregate of the long-term internal debts 
of the country approximate $131,000,000,000. That includes the debts 
of the governmental units, the United States Government, our rail- 
roads, public utilities, farms, homes, and industries. 

Mr. Nehemkis. May I interrupt you for a moment ? I take it that 
you are not discussing intercompany investments. Is that correct? 

Dr. Davenport. That is right, Mr. Nehemkis. With respect to the 
bonds that company holding is not as significant as it is in the case 
oi ownership of stocks. 

Now, if you will permit me to continue with the description of the 
savings processes available as reservoirs to receive the savings of 
individual citizens, I point to a bar about which we know verj- little. 
This process is described as the amount of money that is being en- 
:rusted to private and corporate trustees. 

Mr. Nehemkis. Dr. Davenport, it seems to me rather extraordinary 
'hat the bar which you have outlined there with the huge question 
mark, according to the statement you have just made to the commit- 
:ee, seems unknown. In your juclgment, what would you hazard to 
36 a guess as to the amount of assets that might be included in that 

Dr. Davenport. Our own staff in the Trading and Exchange Divi- 
don of the Securities and Exchange Commission has gone on record 
naking an estimate of approximately $50,000,000,000 as the total 
imount of wealth controlled by individual and corporate trustees. 
There is no central authority that collects the information concern- 
ng these trustees. 

Mr. Nehemkis. Professor Davenport, if my memory serves me cor- 
rectly, you have already testified before this committee that, roughly 
speaking, the aggregate assets of the legal reserve life insurance com- 
Danies was in the neighborhood of $26,000,000,000.^ Is that correct ? 
" Dr. Davenport. Approximately $28,000,000,000 for 1938, I would 

1 See "Exhibit No. 221," Hearings, Part IV, pp. 1189 and 1513. 


Mr. Nehemkis. In other words, the assets entrusted to corporate 
and individual trustees is twice the size of the assets of the legal 
reserve life companies. Is that correct ? 

Dr. Davenport. Not quite twice the size. 

Mr. Nehemkis. But roughly speaking? 

Dr. Davenport. Roughly speaking, you might say twice the size. 
We don't know what the absolute magnitude is; it may be 50, it may 
be 40, it may be 60. 

Mr. Nehemkis. So that we have here in this bar, which you are 
now directing the committee's attention to, perhaps the largest aggre- 
gate of wealth in this country. 

Dr. Davenport. Yes ; I think that would be correct to say that the 
amounts of wealth controlled by private and corporate trustees is 
probably greater than the amount controlled by any one of the other 
processes listed. 

Mr. Nehemkis. Let me ask you. Dr. Davenport, do the trustees, 
corporate or individual, do any reporting as to how the assets are 
invested, either to State authorities or to the Federal authorities? 

Dr. Davenport. It is my understanding that the attorneys general 
of various States make periodic examinations of the activities of these 
trustees. We do have, in the case of the national banks, which have 
permission to open up trust departments, reports made to the Comp- 
troller of the Currency, and he makes a report. The national banks, 
however, have never gone in in any big way to the trust business. 
Most of the trust business is concentratecl in tlie control of the State 
trust companies and the State banks. We do know that the national 
banks that have trust departments — and it is my recollection that 
only about a thousand of them have such trust powers — aggregate 
assets of about $10,000,000,000. There is no central authority that 
has the complete figures of the activities of these trustees. 

Mr. Nehemkis. In other words, Dr. Davenport, if I understand 
your testimony correctly, with respect to one of the largest single 
aggregates of wealth in this country we really have no adequate sys- 
tem of public reporting. Is that a fair statement? 

Dr. Davenport. I am willing to make that statement ; yes. 

Mr. Nehemkis. Very well, sir. Will you proceed? 

Acting Chairman King. Is that quite accurate, in view of the fact 
that these trust companies are corporations in the main and they 
exist under State laws, under separate State control and State exam- 
inations. State regulation? 

Dr. Davenport. They are periodically examined by the State bank- 
ing commissioners; that is correct; but there is no reporting by those 
State authorities of the disposition of the assets under the control of 
the trustees, so we have no way of knowing. 

Acting Chairman Kino. They have State charters? 

Dr. Da\t.nport. Yes; they have State charters. 

Acting Chairman King. And the charters, of course, are issued by 
the State, and the corporations are under the control of the State, 
Do not the States make investigations of their solvency and under- 
stand what their reserves are, whether they are measuring, up to the 
requirements of the charters and the regulations of the State? 

Dr. Davenport. We should segregate the activities of the trust 
companies into two parts. They are commercial banks ; they receive 
money on deposit — savings or time deposits; they also receive money 


which becomes a demand deposit; that is the bulk of their commer- 
cial banking activity, and that is reported very completely. 

Acting Chairman King. Are the commercial banks included in this 
column to which you have just referred? 

Dr. Davenport. But with respect solely to their trust activities, 
which is quite separate and distinct from their banking activities. 
It is their trust activities which this process refers to. 

Mr. Nehemkis. Dr. Davenport, I want to recall you for a moment 
to tlie unknown bar, the question mark bar. Is it correct that State 
superintendents have no concern with the administration of trusts 
unless and until representation is made to such departments that 
•there has been a breach of fiduciary relationship arising from that 
trust? Is that correct, sir? 

Dr. Davenport. I have been so informed by competent legal 

Mr. Nehemkis. Will you proceed, please, Dr. Davenport, to your 
next reservoir? 

Representative Williams. Just in that connection, isn't it a fact 
that those trusts are administered under jurisdiction of some kind 
of court? 

Dr. Daa^enport. Not always. If they have been created by court 
action, that is so, but court action is not necessary to create those 
trusts. It is only when someone alleges a breach of the trust that 
the court comes in to determine what the trustee has done with the 

Mr, Nehemkis. In other words, Dr. Davenport, in response to the 
Congressman's question, it may perhaps be said that courts do or do 
not exercise jurisdiction, depending upon the circumstances of the 
individual trust. 

Dr. Da-\tenport. I think that is right. 

Mr. HiNRiCHS. Just one question in connection with that bar. You 
spoke of the lack of reporting. The accuracy of the reports in con- 
nection with mutual savings banks, for example, arises out of the 
fact that reporting is incident to supervision. 

Dr. Davenport. To State regulation. 

Mr. HiNRiCHS. To State regulation, and when you speak of a 
central authority you don't necessarily mean a single center, but 
rather reports to inspecting authorities. 

Dr. Davenport. Inspecting authorities wherever they may be 

Mr. Nehemkis. Dr. Davenport, in connection with the question 
put to you a moment ago by Congressman Williams, is it a fact that 
many trusts are never administered or supervised by a court at any 
time in their life history? 

Dr. Davenport. I am quite sure that would be true of a great many 
individual trusts, and I suspect that it is also true of a great many 
trusts that are given over, estates that are given over to a corporate 

Acting Chairman King. The trusts are compelled, are they not, 
mider the State and Federal laws, to submit reports for tax purposes? 

Dr. Davenport. That is my understanding, sir. 

Acting Chairman King. So the Government can ascertain the 
character of operations and profits and losses of respective trusts. 


Dr. Davenport. They are interested merely, I take it, from the 
point of view of getting revenue. 

Acting Chairman King. Yes; for tax purposes, the same as the 

Dr. Davenport. The States that have that type of taxation. 

Acting Chairman King. So that the Federal Government and the 
States, by the tax laws which they have, can learn and do learn some- 
thing of the financial character, the earnings, losses, and so on, of 
these trusts. 

Dr. Davenport. But we don't know the total amount of wealth that 
is contained in this particular type of reservoir, 

Mr. Nehemkis. In other words, Mr. Davenport, the reports that 
are made available in connection with tax purposes relate to income 
but not to capital assets. 

Dr. DA^^NP0RT. Not to capital assets or to the method in which 
they have been invested. 

(Representative Williams took the chair.) 

Acting Chairman Williams. Proceed. 

Dr. Davenport. The remaining processes available to individuals, 
the processes depicted on the chart, ^ are, in order: Investment trusts 
and insurance companies other than life insurance companies — the 
fire insurance companies and the marine and casualty insurance 
companies operate on principles that are very similar to the prin- 
ciples followed by investment trusts. 

Acting Chairman Williams. Briefly, what is an investment trust? 

Dr. Davenport. It is a corporation that receives money from the 
sale of its own securities, which it then invests in the securities of 
other types of corporations. It is a savings process ; it is very similar 
in type to the mutual savings bank, except that in the mutual savings 
bank the depositor gets a passbook instead of a certificate which 
entitles him to participate in the profits of the investment trust 
Moreover, in the case of the savings bank the depositor has the right 
to withdraw his entire savings directly from the savings bank. Ir 
the case of the investment trust no such right ordinarily exists, D 
the stockholder in an investment trust washes to withdraAv the mone> 
that he put in the investment trust it is necessary for him usually tc 
sell his participating security in the market. 

Acting Chairman Williams. Are those investments stocks and 
bonds both? 

Dr. Davenport. Typically they are not; they are in stocks, so w( 
have shown this bar colored and segmented in such a wav as tc 
indicate that practically the total of the $8,000,000,000 held in these 
processes is invested in the stocks of railroads, public utilities, indus 
trial plants, and miscellaneous corporations. 

Again, just as we had the possibility that an individual might pul 
his savings directly in the purchase of a bond or a mortgage, it if 
possible for an individual to put his savings in the outright owner 
ship of stock. We have rejiresented that process by this bar, anc 
again we have no information as to tlie total stockholdings oi 

The last process shows the investment of individuals in the dired 
ownership of real property, and again our information is almos 

1 See "Exhibit No. 600," supra, facing p. 3727. 


totally lacking as to the amounts of wealth, savings, that have been 
accumulated through the direct outright ownership on the part of 
individuals of real property. 

Mr. Nehemkis. Dr. Davenport, as I understand your testimony, 
Individuals, when they place their savings in the reservoirs which 
vou have already indicated to the committee, ultimately land up in 
:wo kinds of investment, long-term debts and equities which you have 
just described. Now, I notice that your chart contains several blocks 
?haracterized as "marketing mechanism." What does that mean? 

Dr. Davenport. This is the mechanism that is employed, the market- 
ing machinery that is employed, by the institutions that accumulate 
:he savings fund, the great reservoirs of savings, in investing those 
funds in the securities that are available to them. For example, we 
lave represented this marketing mechanism here as the one that is 
employed in selling bonds to the savings institutions; it would include 
he New York Stock Exchange, brokers, investment bankers, and those 
people who are emj^loyed in the capital market. 

Mr. Nehemkis. That is the traditional way by which an individual 
3uts his savings into an investment function. 

Dr. Davenport. That is correct. 

]Mr. Nehemkis. I also notice you liave three lines separately colored 
•vhich bypass the traditional methods that you have just indicated. 
Will you point to the lines that I am suggesting? 

Dr. Da\^nport. You refer to this broken line. It indicates a bypass 
iround the marketing mechanism. 

Mr. Nehemkis. What does that mean? 

Dr. Davenport. That means that in many instances it is possible for 
hese savings institutions to ignore the capital market and to go 
lirectly to the industrial corporation that needs money and make a 
oan directly to that corporation. In the case of the postal savings it 
neans that the postal savings are directly invested by the post office 
n bonds of the United States Government without paying any broker- 
ige commissions. That bypass is present in all three of these market- 
ng mechanisms — the marketing mechanism that we referred to in the 
ilistribution of bonds, the mechanism that has been set up for the 
listribution of mortgages, and also for the distribution of stocks. 

I should like to call the attention of the committee to the close rela- 
iunship that exists between the savings that are accumulated by 
ndividuals and the debts of the United States Government, the States, 
md the local governmental bodies, the railroads, public utilities, the 
lebts of the farmers represented by the mortgages on their farms, the 
mortgages on our homes, the mortgages on our large city buildings. 
Ihese are debts upon which the savings mechanism has a prior lien. 
riiey are by law typically restricted to investment in such types of 
;lebts. If the savings mechanisms, the savings reservoirs, grow, the 
money accumulated in those reservoirs must find an outlet in invest- 
ment in the bonds and mortgages of our productive plants in this 

Acting Chairman Williams. Would you advocate the purchase of 
stocks also? 

Dr. Davenport. Already, Mr. Chairman, the insurance companies 
have prevailed upon the insurance commissioner of New York 
State and the Legislature of New York State to permit them to in- 
vest in preferred stocks that are guaranteed, and I understand that 


there may be some loosening of restrictions to permit investment in the 
common stocks of corporations that do not. have any outstanding 
bonded debt. 

Mr. Nehemkis. Dr. Davenport, is it your understanding that on 
Tuesday morning the Honorable William R. White, superintendent of 
banks of the State of New York, will apj^ear before this committee to 
give evidence on the question just asked of you? ^ 

Dr. Davenport. That is my understanding, Mr. Chairman. In view 
of that, perhaps further elaboration of your question would be unwise. 

The sum total of the long term debts is approximately $131,000.- 
000,000. The sum total of the savings of individuals accumulated in 
these reservoirs of credit is now approximately $70,000,000,000. In 
other w^ords, $70,000,000,000 being accumulated in these reservoirs, 
the reservoirs that are channeled to investment in a sum total of 
approximately 131 millions of debt. The balance of the bonds and 
mortgages that are not held in the 70 billions held in these institutions 
is held by individuals as individuals, by some of the large founda- 
tions and charitable institutions, and so on; or, I might add, by tlie 
commercial banks, if you merely consider their commercial demand 
deposit activities. 

Mr.- Nehemkis. Does that conclude your remarks with reference 
to that particular part ? 

Dr. Davenport. I am now prepared to pass on to the next chart. 

Mr. HiNRicHS. Merely one incidental question. Those three bars 
that end in a jagged line with a question mark, the height of those 
bars is of no sginificance at all ? 

Dr. Davenport. The height is of no significance at all. They 
merel}- represent the fact that the process exists. We know nothing 
about the relative magnitude of the funds so held. 

The next chart presents growth of savings institutions in the 
United States, 1910-38. 

Mr. Nehemkis. Mr. Chairman, I offer in evidence the chart just 
identified by the witness, together with the supporting table for such 

Acting Chairman Williams. It may be admitted. 

(The chart referred to was marked ''Exhibit No. 601" and appears 
en p. 3735. The statistical data on which this chart and "Exhibit No. 
602" are based are included in the appendix on p. 4052.) 

institutions, 1910-1938 

Dr. Davenport. This chart accumulates from 1910 to 1938 the 
funds that have been saved by individuals in the savings processes 
described in the previous chart, those savings processes of the great 
savings institutions, the savings of which are channeled into the 
investment of long term internal debts. 

In 1910 this total was made up almost entirely of four processes. 
The process that is shown at the bottom is the process of savings 
through life-insurance companies; that is represented on the large 
chart in red. The time deposits, savings, and thrift accounts in the 

1 For Mr. White's testimony see infra, pp. 3792-3808. 



Exhibit No. 601 



n t:-x.>;.»....,.-.. ■...■::.■■■<. ,,::■: :,,:,: 

1910 12 14 16 18 ZO 22 24 26 28 30 32 34 36 1938 

source STtTISTienL ABSTDACT 0S-IS09 PfffP4BfO 8K SfC 8 fXCH CO¥V 


commercial banks is represented in the next segment on the chart 
colored in blue on the large chart. The mutual savings bank process 
is represented in a purple color, and the green represents the amounts 
accumulated by the building and loan associations. These four proc- 
esses accounted for the total of approximately $16,000,000,000 in 1910, 

The growth in the total is shown by the area under the top line. 
It grew to approximately $61,000,000,000 in 1931, tlie peak in the 
period j)rior to the great depression. The total dropped from that 
$61,000,000,000 to approximately $54,000,000,000 in 1933. This drop 
is represented in the decline in the colored section of the chart. From 
that low point in 1933 it has since risen to a total which is now a littlf^ 
over $69,000,000,000, 

Mr. Nehemkis. Dr. Davenport, I call your attention to the area 
blocked off in red. I notice there that in contrast with the other 
segments — time deposits, the mutual savings banks, and so on — we 
have only a very slight decline for the depression year. How do you 
explain that? 

Dr, Davenport, There was no decline, Mr, Counselor, in the assets 
of the life insurance companies in the depression years. All you can 
say is that there was a diminution of the rate of increase, 

Mr. Nehemkis. In other words, depression or no depression, the 
assets of the insurance companies are mounting steadily upward and 
upward ? 

Dr. Davenport. There is no question about the fact that the life- 
insurance companies are a unique institution for the accumulation of 
savings. They show no diminution in absolute assets, only a slight 
retardation in their rate of accumulation during the depression, and 
they stand today at their highest point on record and account for 
a total of a]-)proximately $:28.000 .000,000 out of the total amount of 

Mr. HiNRiCHS. Dr, Davenport, Mr. Nehemkis, in speaking of the 
decline in the other types of savings, referred really to a mechanical 
characteristic of the chart, didn't he; the dip in those higher figures 
is due to the fact that time deposits themselves went down materially 
and would carr}^ all the other figures down ? 

Dr. Davenport, I have a subsidiary chart here which will answer 
your question directly — the one that M'as previously introduced at the 
time of the insurance hearings.^ It will not be necessary to introduce 
it into the record, but it will satisfy the point that you are now 

In this chart each one of these main principal savings institutions 
is represented by a separate line plotted from the base instead of 
accumulated, to show^ the great sweep in the total. Tins enables us to 
trace the history of each one of these institutions. The heavy black 
line is the line that shows the assets of the life insurance companies 
and shows no drop, as you see, in the period of the depression. The 
black and red dashed line that appears next in order of magnitude 
represents the savings deposits in the commercial banks. There was 
a sharp decline in those savings deposits as commercial banks were 
closed and as savings were withdrawn by people whose incomes had 
been curtailed during the depression. You note that since the low 
point was reached in 1933 these savings accumulations have in- 

1 See "Exhibit No. 221," Hearings, Part IV, p. 1189. 


reasecl, but not to their previous total. In the case of the savings 
lanks represented by the black and white dashed line, you find a 
lower growth, a slighter decline ; there were very few savings banks 
hat were closed up at the time of the depression, and since then an 
ncrease to an all time peak. 

The building and loan associations, represented by another black 
nd white line, lower down on the chart, show a rise to a peak in 1930 
dien they had approximately $9,000,000,000, and then a sharp drop 
about $6,000,000,000, where they stand at the present time. Many 
'f the building and loan associations were put into bankruptcy, as 
ou know. 

I should like to give you, while we are still talking about this 
ame subject, another chart which compares the relative magnitudes 
if the savings held by these great institutions in 3 years — each of 

years, 1920, 1930, and 1938. This chart is entitled "Comparison of 
^Lssets in Savings Institutions." 

Mv. Nehemkis. Mr. Chairman, I offer in evidence the chart just 
dentified by the witness. 
• Acting Chairman Williams. It may be received. 

(The chart referred to was marked "Exhibit No. 602" and appears 
•n p. 3738. The statistical data on which this chart and "Exhibit No. 
■01"' are based are included in the appendix on p. 4052.) 

Dr. Davenport. Here are three bars. The first bar represents 
920, the second 1930, and the third the present situation as revealed 
t the end of 1938. The scale runs from zero at the bottom to 70 
lillions at the top. Each bar is broken up into parts, and those 
►arts are proportional to the amounts represented by the different 
nstitutions. They are colored and cross hatched in a way to iden- 
ify the institutions. The red segment at the bottom represents life 
nsurance assets. In 1920, life insurance assets amounted to 7.3 
dllion dollars. By 1930 it had grown to 18.9 billion dollars. 

Similarly the next segment, the blue one, represents mutual sav- 
ngs banks. 

Acting Chairman Williams. You might distinguish that out and 
ompare it with 1938. 

Dr. Davenport. I would prefer, Mr. Chairman, if j^ou don't object, 
o take 1920 and 1930, and then later take up 1938, because I am 
'ery much interested in bringing out the expansion in each one of 
hese processes that took place in the decade of 1920, the decade 
aarked by sustained prosperity, the decade that showed an increase 
n the total savings of individuals from the high-income level that 
vas maintained throughout that period. 

The savings deposits in commercial banks rose from 10 billion 
iollars in 1920 to 19.1 billion in 1930. 

The mutual savings banks, represented by the purple, the next 
)lock, increased from 5.6 to 10.3 billion dollars in this decade of 

The next one up, the building and loan associations, staged per- 
laps the most dramatic increases. From 2.5 billion dollars they rose 
.n their total assets to 8.8 billion dollars in this decade. 

Three other segments, tiny segments that appear at the top of this 
3ar of 1920, represent the governmental pension and life-insurance 
funds, of the United States Government life insurance on the lives 
3f veterans, the pension funds of the civil service of the various State 

124491 — iO— pt. 9 17 



Exhibit No. 602 


PFePAKCD er sec a c> 


and municipal governments. They were relatively insignificant in 
1920. accounting for about $200,000,000. 

Postal savings is another $250,000,000, relatively insignificant. 
There were no baby bonds in 1920. 

Fraternal organizations that issue life insurance of a type had 
about $300,000,000. By 1930 these three processes had risen to about 
$3,000,000,000, and the total of funds that belonged to individuals, 
funds that they had saved out of their individual incomes, stood at 
about $60,000,0*00,000 on the eve of our great depression. 

The depression that struck us the latter part of 1929 carried the 
assets of the savings institutions down to $54,000,000,000. They were 
withdraAvn, some of them were frozen, some of the commercial banks 
went bankrupt, some of the building and loan associations passed out 
of existence, but the total assets of these institutions that were in 
operation at the depth of the depression amounted to about 

Since then an increase has been staged from the low point of the 
depression, about here if you put in a bar for 1933; we have added 
$15,000,000,000 since 1933. In 5 years' time we have increased the 
assets of these savings institutions by about $15,000,000,000, which 
brings them up to their all-time peak of $69,000,000,000. 

Now it is very interesting to see the changes that have taken 
place in the relative importance of the different institutions. Life 
insurance has continued to grow and now constitutes the biggest 
single process that is involved. $28,000,000,000 of funds are held in 
the assets of the life insurance companies for the credit of the policy- 

The commercial banks are not as important in the holdings of 
savings of individual depositors. Time deposits have dropped from 
1930, when they stood at $19,000,000,000, to about 14.4 billion dollars. 
The mutual savings banks are a little more important now than 
they were in 1930; in 1930 they had 10.3 billions, today they hold 11.6 
billion dollars. The building and loan associations, which held 8.8 
billion in 1930, now hold 5.7 billion. 

I call your attention to the fact that the increase between 1930 
and 1938 in the assets of the life insurance companies is approxi- 
mately equal to the increase in the total. If you will, the expansion in 
the life insurance companies has compensated for the decline in the 
savings departments of commercial banks and the decline in the 
assets of the building and loan associations. Mutual savings banks 
have helped to compensate for those declines; their assets have in- 
creased only about 1.3 billion dollars in this 8-year period. 

I should particularly like, however, for the committee to notice 
the comparable expansion that has taken place in the importance 
of the three processes which were so unimportant in 1920 and rela- 
tively of little importance in 1930 — the governmental pension funds 
and governmental life-insurance funds; that is, the total of our civil- 
service pension funds, the social security fund, the funds held in the 
railroad retirement account, the funds held in the civil-service retire- 
ment account, plus the funds that are held by States and munici- 
palities for their own employees' retirement pension. They now con- 
stitute 6.2 billion dollars. In addition, the postal savings and baby 
bonds have expanded to a point where together they account for 2.5 
billion dollars. 


At a later point in my testimony I should like to revert to some of 
the reasons for this rapid expansion that took place between 1920 
and 1930. 

Mr. Nehemkis. Dr. Davenport, as these savings continually rise to 
higher and higher levels, you are, of course, confronted with the task 
of finding outlets for them in enterprises ? 

Dr. Davenport. Very decidedly. If these savings are to be fruit- 
ful, they have to be used, they have to be invested ; they have to be 
invested in plant, equipment, tools, machinery, in such a way that 
they will provide jobs and produce commodities and services for the 
community. If they are not invested they are sterile. You can't pay 
interest on funds that are sterile. 

Mr. Nehemkis. Does that conclude your testimony, sir, on that par- 
ticular chart ? 

Mr. HiNRiCHS. Dr. Davenport, you mentioned more or less in pass- 
ing that 6.2 in Government pension and life-insurance funds. One 
of the very powerful contributing factors was the introduction of a 
totally new savings process, wasn't it, with the development of the 
social-security accumulations? That is included in the 6.2? 

Dr. Davenport. That is a point that I should like to emphasize, 
it rose from 1.9 to 6.2, and in the previous decade, 1920, that process 
was piddling; it accounted for just small change, 200 million dollars. 

Mr. Nehemkis. Mr. Chairman, if it is the pleasure of the committee, 
I request that we adjourn at this time. 

(Whereupon, at 12:35 p. m. a recess was taken until 2': 30 p. m. of 
the same day.) 

afternoon session 

The committee resumed at 2 : 40 o'clock on the expiration of the 

(Senator O'Mahoney resumed the chair.) 

The Chairman. The committee will please come to order. 

Mr. Nehemkis, are you ready to proceed ? 

Mr. Nehemkis. I am, sir. 

The Chairman. Very well. 

Mr. Nehemkis. Dr. Davenport, will you continue at the point you 
left off this morning, please. 

Dr. Davenport. Just before the committee adjourned we were dis- 
cussing the chart ^ before j^ou which shows the comparison of assets 
in savings institutions and I had drawn your attention to the fact 
that between 1930 and 1938 there was an' increase of $8,000,000,000 
that had accumulated in these reservoirs of credit, these reservoirs of 
savings, to the credit of the individual savers of the country. 

Now it is significant to remember that at the depths of the depres- 
sion in 1933 the total of the savings in these reservoirs had dropped 
to a point about $54,000,000,000 and since 1933 we have added indi- 
vidual savings in these reservoirs to the amount of $15,000,000^000. 
In other words, in the great savings institutions individual citizens 
had poured out of current national incomes in this 5-year period 
savings at the rate of $3,000,000,000 a year. 

The Chairman. That is from 1933 to 1938, inclusive? 

Dr. Davenport. That is right, sir, in that 5-year period. 

1 See "Exhibit No. 602," supra, p. 3738. 


The Chairman. And the savings institutions to which you refer 
are legal reserve life insurance, the savings deposits of commercial 
banksj" mutual savings, building and loan associations, Government 
pensions, and life insurance funds, postal savings and baby bonds 
and fraternal organizations. 

Dr. Davenport. That is right, sir. 


Mr. Nehemkis. Dr. Davenport, isn't the testimony that you have 
just given to the committee contradictory to the statement of the 
Cleveland Trust Co. Business Bulletin to the effect that the spirit of 
thrift in this country was declining? 

Dr. Davenport. It is, Mr. Nehemkis. 

Mr. Nehemkis. How do you explain that contradiction? 

Dr. Davenport. The Cleveland Trust Co. Bulletin of March 15, 
1938, published an article ^ in which the conclusion was drawn that 
the spirit of thrift in the United States was declining. The bulletin 
measured thrift by the relation of the face amount of new life insur- 
ance issued to the national income. It was pointed out that the new 
ordinary insurance written as a percentage of the national income 
had increased steadily from 1919 through 1932. After 1932, how- 
ever, the percentage of new ordinary insurance written to the national 
income fell steadily, from 15.4 percent in 1932 to 9.4 percent in 1938. 

(Representative Williams assumed the chair.) 

Dr. Da-venport. The author of this article concluded that this 
meant a decline of thrift. He continued that [reading from "Exhibit 
No. 603"] : 

Representatives of life-insurance companies offer two chief explanations of 
these developments. One is that people have too little faith in the future of the 
dollar to be vpilling to make present sacrifices in return for payments which 
w^ill be received many years hence. The other explanation is that people con- 
sider present thrift unnecessary, because they think that the Government will 
always take care of everybody through social security and relief payments. 

Mr. Nehemkis. Would you care to reveal to the committee the 
name of the author of that statement ? 

Dr. Davenport. It is generally supposed that Col. Leonard P. 
Ayres is the author of the articles that appear in the Cleveland 
Trust Co.'s business bulletin. 

Mr. Nehemkis. And according to the testimony you have just 
given to this committee, that statement is clearly erroneous. 

Dr. Davenport. That is right, 

Mr. Nehemkis. Are you prepared to proceed, Dr. Davenport? 

Dr. Davenport. Although these explanations were attributed by 
the bulletin to representatives of life insurance companies, they were 
immediately disputed by Mr. M. A. Linton, president of the "Provi- 
dent Mutual Life Insurance Co. of Philadelphia, autlior of many 
significant and stimulating articles on the subject of life insurance. 
In a letter to the Nevv^ YoVk Herald Tribune, dated April 12, 1939,^ 
commenting on this editorial which appeared as the result of the 
aiiicle in the Cleveland Trust Co. bulletin. This editorial that 
appeared in the Herald Tribune was entitled "The Eclipse of 

1 Later introduced as "Exhibit No. 60.3." See appendix, p. 4052. 

2 Subsequently entered as "Exiiibit No. 605," see appendix, p. 4054. 


Saving." ^ Mr. Linton, in answering this editorial, pointed out tliat 
[reading from "Exhibit No. 605"] : ^ 

Life iusurance differs from most other things purchased by the public in 
that almost all of it requires the payment year after year of renewal premiums 
if the insurance is to remain in force. As national income falls the margin 
of income available for savings declines sharply and policyholders find diffi- 
culty in maintaining the insurance they already have in force. Under such 
conditions a measure of their confidence in the institution of life insurance 
would more properly be the relation to national income of the total amount 
of premiums being paid to life-insurance companies. 

I am in complete agreement with Mr. Linton's criticism. 

In the April 15 issue of the Business Bulletin of the ClevelaiKl 
Trust Co. 

Mr. Frank (interposing). April 15, 1939? 

Dr. Davenport. 1939, Mr. Frank — an attempt was made to meet 
the criticisms of Mr. Linton and others. A graph was presented 
of the total of premiums paid on ordinary life insurance and on all 
other life insurance. The article mentioned the fact that the total 
premiums paid on all forms of life insurance amounted to 6.3 percent 
of national income paid out in 1933, 4.5 percent in 1937, and 4.9 
percent in 1938. 

For some rea.son, the author failed to use the method of analysis 
presented in the March 15 issue of that bulletin. He did not relate 
premiums paid to life insurance companies to the national income 
before and after the depression, and to this extent he did not answer 
Mr. Linton's criticism. 

Mr. HiNRicHS. Mr. Davenport, in that connection, while it is very 
dangerous not to continue a series and take in a full historical retro- 
spect, I suppose what you mean by your statement with reference to 
the reason is connected with the fact that the article of the Herald 
Tribune appeared on the 12th and the Business Bulletin appeared 
on the 15th and you are really implying that it might have been 
better to wait until May, other than the inadequacy of the thing 

Dr. Davenport. Numerous letters apparently were sent to the Busi- 
ness Bulletin's editor calling his attention to the injustice that he 
had done life insurance companies, so undoubtedly they had more 
notice than would have been implied by the date of the letter that 
appeared in the Herald Tribune. 

I should like to present the data which Mr. Linton may not have 
had the space to include in his letter in the New York Herald 
Tribune. It is perfectly clear that the total of the premiums paid 
for all types of life insurance was substantially higher in 1937 and 
in 1938 than it had ever been in the history of the country. 

Mr. Frank. That is an absolute as distinguished from a relative 

Dr. Davenport. Yes. These premiums were only $1,400,000,000 
in 1920, $3,400,000,000 in 1929, $3,300,000,000 in 1933, and $3,800,- 
000,000 in 1937— three billion eight in '37, three billioii three in '33, 
in '29 three billion four.- If we divide the premiums paid on ordi- 
nary life insurance and premiums paid on all other life- insurance, 
we discover two things: First, premiums paid on ordinary life in- 

1 Subsequently entered as "Exhibit No. 604,"' .see aiUJeudix, p. 40.j3. 
- See "Exhibit No. 006," apiJendix, p. 40.5.5. 


suraiice increased during tlie 1920's, they decreased from 1930 to 
1933, they increased somewhat after 1933, although they did not 
reach the" peak attained in 1929 ; yet they were substantially above 
the averaoe for the good years, 1926 through 1929. Second, pre- 
miums paid on other forms of life insurance, other than the ordi- 
nary life insurance, principally industrial insurance, group insurance, 
and' ainiuities, increased more rapidly during the 1930's than the 
premiums on ordinary life insurance. These premiums paid de- 
creased slightly in 1932 and then began another uninterrupted rise, 
a rise which is still continuing. 

In summary, premiums paid on all forms of insurance stand at 
the highest point in our history. Premiums paid on ordinary life 
insurance are somewhat lower than in 1929, but far above the 
average for the decade 1921-29, and premiums paid on all other 
life insurance are still increasing very rapidly. 

Now, let us consider how much individuals saved in this man- 
ner, in this process of putting premiums into life insurance com- 
panies. Let us look at the relation of premiums paid to national 
income. The total premiums paid to life insurance companies for all 
forms of policies constituted 4.1 percent of a national income of 
$81,100,000,000 in 1929. By 1932 income had fallen greatly so that 
the total premiums reached a level of 8.7 percent of a national 
income of $40,000,000,000; in other words, your national income 
dropped much more precipitously than did the income of the insur- 
uice companies from their premiums. 

As national income recovered, the growing volume of premium 
payments naturally became a smaller part of the total. In 193T 
premium j)ayments were 5.4 percent of a national income of 69.8 
billion dollars. The percentage of the national income paid as pre- 
miums increased thus by a quarter, by 25 percent from the 1929 level 
to the 1937 level. In other words, they had grown from 4.1 percent 
of the national income in 1929 to 5.4 percent in 1937. 

Now, let us consider another measure of thrift; relationship of 
the total income of life insurance companies to the national income.^ 
Life-insurance companies not only have the premiums that are paid 
in to them, but they also have a large investment income from these 
huge sums that they hold in their portfolios. In 1921 the total 
income of life insurance companies constituted 3.9 percent of a 
national income of $50,700,000,000. That was in '21. In 1929, the 
total income of life-insurance companies was 5.4 percent of a na- 
tional income of 81.8 billion dollars. At the depth of the depres- 
sion, in 1932, total life insurance income reached the unprecedented 
figure of 11.6 percent of our national income. Here we may see 
the tremendous efforts made by the American people to keep on 
saving despite the lowest income since 1920. In 1937, when our 
national income recovered to 69.8 billions, the highest level reached 
since the depression, the total income of life-insurance companies was 
7.5 percent of that national income. 

Are the American people becoming less thrifty? Tlie first article 
in the Cleveland Trust Co.'s Business Bulletin assumed that they 
were. It set forth [reading from "Exhibit No. 603"'] : 

Two chief explanations of these developments — 

1 In tbis connection see "Exhil)it No. 220," Hearings, Part IV, pp. 1183 and 1513. Siee- 
also supplemental data, ibid, pp. 1041 and 1042. 


— and attributed by them to representatives of life-insurance com- 
panies : 

One is that people have too little faith in the future value of the dollar to 
be willing to make present sacrifices in return for payments that will be 
received many years hence. 

Tlie New York Herald Tribune published an editorial on April 6,- 
1939, entitled, "The Eclipse of Savings," based on the Cleveland 
Trust Co.'s Business Bulletin. This editorial stated [reading from 
^'Exhibit No. 604"] : 

It is a commonplace that the last 5 or 6 years have witnessed a marked 
decline in the spirit of thrift in this country. 

These hasty conclusions that the American people are saving less 
through life insurance are without any foundation. 

Mr. Linton, president of the Provident Mutual Life Insurance 
Co., Philadelphia, remarked that [reading from "Exhibit No. C()5"] : 

Speaking of inflation as a deterrent to the purchase of life insurance, it is 
interesting to note that commencing in 193.3 there was a noticeable increase in 
the buying of annuities. In 19.34 the $414,000,000 of new annuity premiums 
were more than double the 1932 figure, and the high level was maintained 
through lt>37, despite the raising of annuity premiums and the restrictions 
adopted by life insurance companies to prevent policyholders from giving 
the companies huge sums which could not be handled satisfactorily because 
of the decline in the interest rates on new investments. Such fear of inflation 
as may have resulted from the fiscal policies of the Government has not become 
evident in life insurance premium receipts. 

Mr. Linton concluded his answer to the New York Herald 
Tribune's editorial, The Eclipse of Saving, with this paragraph 
[reading further from "Exhibit No. 605"] : 

When all the facts are taken into consideration, I think it will be found 
that the confidence in life insurance is close to an all time high. Should the 
national income reach the much desired level of .'}!SO,000,000,000 on a price level 
comparable with the present, people will have greatly increased margins for 
saving, and I anticipate a large increase in the sale of new life insurance. 

I should like to identify a marked section of the Cleveland Trust 
Co. Business Bulletin, dated March 15, 1939, the entire back page. 

Mr. O'CoNNELL. May I ask a question? 

Mr. Nehemkis. May I offer this, please, before you ask the ques- 
tion? Mr. Chairman, I offer the section of the dociunent identified 
by the witness in evidence. 

Acting Chairman Williams. Let me inquire, is this the article 
from which you quoted? 

Dr. Davenport. I quoted a section from that, a section of the 
last paragraph in which the author of the article described why it 
was that he thought there was an eclipse in saving. 

Mr. Nehemkis. We are not offering the entire document. We 
are merely offering that passage which is marked. 

Mr. Frank. The entire last page? 

Dr. Davenport. Yes. 

Acting Chairman Williams. It may be accepted. 

(The article referred to was marked "Exhibit No. 603" and is in- 
cluded in the appendix on p. 4052.) 

Dr. Da^^nport. I identify a copy of the editorial which appeared 
in the New York Herald Tribune, April 6, 1939, entitled "The 
Eclipse of Saving." 


Mr. Nehemkis. Mr. Chairman, I offer in evidence a copy of the 
editorial just referred to. 

(The editorial referred to was marked "Exhibit No. 604" and is 
included in the appendix on p. 4053.) 

Dr. Davenport. I identify a clipping from the New York Herald 
Tribune containing a letter which Mr. M. A. Linton, president of 
the Provident Mutual Life Insurance Co. of Philadelphia, sent un- 
der date of April 12, 1939, to the New York Herald Tribune. 

Mr. Nehemkis. Mr. Chairman, I offer the editorial just identified 
and referred to by the witness. 

(The letter referred to was marked "Exhibit No. 605" and is in- 
cluded in the apj^endix on p. 4054.) 

Dr. Daa-enport. I identify a table entitled "Premium Income, 
Total Income, and Adjusted Increase in the Assets of All Life In- 
surance Companies, in Kelation to National Income, 1920 to 1937." 

Mr. Nehemkis. May I offer the table just identified by the wit- 
ness, Mr. Chairman? 

Acting Chairman Williams. This exhibit may be accepted for 
the record. , . . 

(The table referred to was marked "Exhibit No. 606' and is in- 
cluded in the appendix on p. 4055.) 

Mr. Nehemkis. Are you ready to proceed, Dr. Davenport? 

Dr. Davenport. I identify the next chart which I shall discuss as 
chart entitled "Loans and Investments of All Member Banks of the 
Federal Keserve System, 1921-38." 

Mr. Nehemkis. Mr. Chairman, I offer the cliart just identified and 
described by the witness. 

Acting Chairman Williams. This may be accepted for the record. 

Mr. Nehemkis. I likewise offer the supporting table for that chart. 

(The chart referred to was marked "Exhibit No. 607" and ap- 
pears on p. 3746. The statistical data on which this chart is based 
are included in the appendix on p. 4056.) 

Mr. Nehemkis. I believe Mr. O'Connell desired to direct a ques- 
tion to you. 

Mr. 6'CoNNELL. Keferring for a moment to the bulletin which 
we were discussing a moment or two ago, my understanding of the 
purport of the article in the Cleveland Trust Co. bulletin was to 
the effect that by taking premiums paid to insurance companies the 
author came to the conclusion that thrift in general was declining. 
Is that it? 

Dr. Davenport. He did not take premiums paid. He took the 
face amount of new insurance written, which does not represent the 
amount of savings, because the premium on a $10,000 policy, a new 
$10,000 policy taken out at a certain age, might be a couple of hun- 
dred dollars a year. It is only the amount that is paid in premiums 
that is a deduction from income. A comparison of new insurance 
written with national income in those years was meaningless. He 
did not support the conclusions that were drawn from that com- 

The importance of the Cleveland Trust Co.'s Bulletin, and the 
importance that was attached to it in the press, is what has led to our 
taking exception to the statement that there has been a decline in the 
spirit of thrift. Our figures show definitely the contrary. 



ExHiBir Xo. 607 


1921 - 1938 


Mr. Frank. Both absolutely and relatively? 

Dr. Davenport. Both absolutely and relatively. 

Mr. Frank. Relative to the national income and in absolute figures, 

Mr. O'CoNNELL. Using other means of measurement other than 
insurance receipts, that so called decline in thrift has not occurred? 

Dr. Davenport. That is right, sir. You can point to a decline in 
the total individual savings held in certain reservoirs. The building- 
and-loan associations are not as great now as they were prior to the 
depression. They have lost absolutely and relatively. Similarly, 
the savings funds held in the savings departments of commercial 
banks, while greater than they were in 1933, are still considerably 
below where they were before the depression began. But the great 
expansion that has taken place in the life-insurance company assets 
more than compensates for the decline in the savings departments of 
connnercial banks and the decline in the savings held in the building- 
and-loan associations. There was an absolute increase in the savings 
held in the mutual savings banks; and then, in addition, we had a 
great expansion in a newer type of savings process, represented by 
the governmental pension funds and trust funds of all governmental 
units, including the social-security fund, the civil-service retirement 
fund, the railroad retirement fund, the United States Government 
life insurance fund, and baby bonds and postal savings. Those 
processes expanded very greatly between 1930 and 1938, and they 
were relatively new processes, you see. We have only had baby 
bonds for 4 years, and we jiow have a billion and a quarter of baby 
bonds held by individuals. Postal savings now account for another 
billion and a (juarter. We added last year to the social security 
fund through the withdrawals from wages almost a billion dollars. 

Mr. Nehemkis. Dr. Davenport, unless this committee has any fur- 
ther questions, are you ready to proceed with the chart which was 
identified and Avhich has been offered in evidence? 

Dr. Davenport. I am, Mr. Counsel. 


Dr. Davenport. The member banks of the Federal Reserve System 
represent between 80 and 90 percent of the total commercial banking 
structure of the country. With respect to the member banks of the 
Federal Reserve System, we have comparable and reliable statistics 
going back over a number of yeais. These statistics reveal some very 
interesting changes that have taken place in the character of com- 
mercial banking activities. 

If you will note the three curves on this chart,^ you will see the 
three principal categories of their loans and investments. The heavy 
black line that extends upward to the right shows the absolute 
amounts of the member banks' investments in securities, including 
Government bonds, and their investments in real estate mortgages. 
This classification of investment rose from a figure of 7.1 billion dol- 
lars in 1921 to 20.4 billion dollars in 1938. 

The dashed i-ed line represents commercial loans of these member 
banks. You can see, they ran about $12,000,000,000 a year during 
the twenties and have since declined to a much lower level, to a figure 

1 See "Exhibit No. fi07," supra, p. 3746. 


that is probably half of the figure that represented such investments 
in commercial loans during the twenties. 

Loans made on securities are represented here by the heavy red 
line that appears on the bottom of the chart. 

Mr. Nehemkis. Do those loans include brokers' loans? 

•Or Davenport They would be brokers' loans and loans to m- 
di^du^r^ho %e enV^o^ng^V^e jnon secured by ^to 

P"l92r Th™ "pW^1iurh.g°the'p;Sperity.of the twenties to 
'" f•„^■ 10 AiUion dollars in 1930. The depression caused a sharp 
l^pln tlis1,se''of toikcredit. At the present time, security loans 
aniount to only 3.3 billion doited u„der^tand, then, that the 

significance of *e *«e Ime^ J y^^^^^ „, today assuming some- 

Sifgthi^rioriS^^ht^ge r^^:s^^' '"' ' 

are in effect becoming in™s tors^^ ^^/p^ctSy' two-thirds of the 

thing whic IS veiy simitai to a ^^^^^ ^^^^^ ^^^ percentages as 

Wft thfaSide "nS. A study of those percentages will 
bear out my statement. Doctor, whether it is 

Mr. Nehemkis May j^^^nento the member banks in Govern- 
:S"bHgS^rL*Vf?'Si around $2,000,000,000 in 1921 to 
over $12,000,000,000 for the y<;|^^ If^S^ ^,^^ .^_ 

Dr. Davenport. That '= fff/;"'^\f >„4°"^ental obligations, all 
vestment of the member banks in all overnn g ^^^^^ 

V'^f^ls «Sfam^orrw:fl2t&"'d£' In'l921 this class of 
In 1938 this amount ^cibi percent of their total loans and 

irstrenLrri9%'iraS:;u^nJs°to''40.2 percent of their total loans 

and investments. . . ^^^ during the 1920's 

To summarize, "^l^f^^l^^^^^^^^^^^^ loanl on securi- 

loans that were made f 01 commec^^^^^ ^^^^^^ ^^^ .^^_ 


:f,n;;er i!ts r ?;? G=:S- se^:re:tlUate mortgages, 

^troSK?i"Df t:Xort%lid you hear Mr. Manuel's testi- 

'""dJ. ^^LTrr ^i 'came in after the t-timony had stai.^^^^^ 
am afraid that I shall have to confess that I haven t a ^elJ 
idea of his whole philosophy. , j ti,;- „nrt of it Mv 

1 Supra, p. 3706 et seq. 


two-thirds of the amount of investments, was a type of activity 
that in his opinion commercial banks should not be permitted to do. 

Dr. Davenport. I heard him make that statement. 

Mr. O'CoNNELL. Was that your impression of what he meant? 

Dr. Davenport. Yes, sir. 

Mr. O'CoNNELL. How would you classify the security loans, the 
lower line, as between— well, he divided his type of investment activ- 
ity into two categories, as I recall, those which commercial banks 
should make and those which savings institutions should make. Do 
I understand that on your chart commercial loans and security loans 
would be within his classification of commercial bank activity? 

Dr. Davenport. If I understood Mr. Manuel's testimony correctly, 
he would consider as legitimate functions of commercial banks the 
financing of commercial loans, the financing of working capital, of 
pay rolls, and of seasonal requirements for inventories, and so on; 
and in addition I believe he would include, though I have not dis- 
cussed the matter with him and I didn't hear all of his testimony, 
security loans made to individuals to enable them to purchase 


Mr. Frank. I happen to have read some of his articles and I think 
you are in error. From his articles I think he believes that the banks 
should do nothing but commercial loans. I may be in error, but you 
can read his articles. He has had two or three in the bankers' 

Mr. Nehemkis. In any event, I think you appreciate the witness 
did not indicate 

Mr. O'CoNNELL (interposing). But at least it is clear that accord- 
ing to Mr. Manuel the upper black line represents activities into 
which commercial banks should not be permitted to go. 

Mr. Nehemkis. I wouldn't care to characterize that one way or 
the other. 

Acting Chairman Williams. How do you account for that large 
upswing in the heavy black line? Whatsis the cause of that, from, 
say, '33 to '37? ' . . ^ . 

Dr. Davenport. I would say it represented the competition for in- 
vestments on the part of the commercial banks. They bought Gov- 
ernment bonds, they held their real estate mortgages to a greater 
extent than did the building and loan associations and the mutual 
savings banks, and they held approximately the same amounts of 
investments in other securities. 

Acting Chairman Williams. The main part of that is due to in- 
vestments in governments, isn't it ? 

Dr. Davenport. It is. Investments in governments rose from 21/2 
billions in 1921 to 12.3 billions in 1938. 

Acting Chairman Williams. Has there been any material increase 
in real estate loans by commercial banks in the last — that heavy up- 
swing is between '33 and '38—5 years ? Has there been any material 
increase in the real-estate loans during that time ? 

Dr. Davenport. I think I can state definitely that there have been 
very few extensions of loans on real estate by commercial banks in 
thai period. 

Acting Chairman Williams. Then we can say as a general proposi- 
tion that that large increase there is due to the investment in Gov- 
ernment bonds. 


Dr. Davenport. That is right. 

Acting Chairman Williams. How do you account for the decided 
down-swing in the commercial line there from '29 to '33? 

Dr. Davenport. As we went into the depths of the depression, 
business activity tapered off. Not only was the activity less — were 
pay rolls less — but the price level declined and it took less in the way 
of bank credit to finance what little activity was going on. Business 
enterprises did not have to go to the banks to finance their activity to 
the extent that they did during the twenties. 

Acing Chairman Williams. It is a different system of financing on 
the part of big industry largely, isn't it, that has cut down the neces- 
sity for commercial loans? 

Dr. Davenport. I wouldn't say it was the only explanation. The 
necessity was less because the volume of activity was less. In addi- 
tion we had the developments that were described to us last week 
by the representatives of industries, a method of financing their own 
requirements from their own internal funds. 

Acting Chairman Williams. Then even after we btarted the re- 
covery and reached the high point of '37 there was very little upturn 
in commercial loans. 

Dr. Davenport. Very little. 

Acting Chairman Williams. Some, but comparatively small to 
what there had been. 

Dr. Davenport. That is right, sir. 

Acting Chairman Williams. How do you account for that? 

Dr. Davenport. It is being done on a lower price level for one 

Acting Chairman Williams. And it sliows still further, doesn't it, 
that there isn't the necessity at all for commercial loans that there 
used to be, that they are not using that form of credit in the com- 
mercial banks of the country that was formerly used ? 

(Dr. Davenport nodded his head in the affirmative.) 

Acting Chairman Williams. What do you mean? I am not sure 
I understand your line there on security loans. 

Dr. Davenport. Well, if John Jones becomes convinced that a cer- 
tain security offers an opportunity for a speculative profit, he may 
go to his bank and negotiate a loan in order to enable him to pur- 
chase that security. He may put up, we will say, on a $5,000 invest- 
ment a couple of thousand dollars that he has himself, and he negoti- 
ates his loan from the bank for the balance, i)utting up the security 
as collateral. That, in its simplest term, I think, is the essential char- 
acteristic of a security loan. 

Mr. Frank. You might want to modify that sliolitly. Doctor. It 
wouldn't necessarily be for speculative purposes ; it'might be for any 
purposes; that is, a man might want to purchase a security and make 
a partial payment, borrowing the rest, intending later to purchase 
it and hold it as investment. 

Dr. Davenport. I will accept that modification. You are correct. 

Mr. Nehemkis. It is true, is it not, that the sharp increase on 
security loans is due also, as your previous testimony indicates, to 
the fact that brokers utilized that technique, as well as'indivictuals? 

Dr. Davenport. Tliat is right. 

Mr. Taylor. Dr. Davenport, if you take that line of conmiercial 
loans for the full l7-year period and break that down into, let us 


say, three different lines so as to represent what you might call your 
one-third smaller business, or possibly it wouldn't be numerically 
one-third but at least the so called smaller businesses, intermediate 
and larger, would the three lines run about the same as that one 
composite line, either for the whole period or part of the period, 
and then not for the rest ? 

Dr. Davenport. I am afraid, sir, I cannot answer that question 
on the basis of any facts at my disposal. 

Mr. Taylor. It has a very direct bearing on a question that has 
received a great deal of attention recently with regard to the needs 
of loans by small business and I thought perhaps your statistics 
would throw some light on that. 

Dr. Davenport. I have never seen a compilation of statistics on 
the basis of the size of the individual loans or the size of the business 
enterprises for which those loans were made. 

Mr. Taylor. You wouldn't venture a suggestion? 

Dr. Davenport. I am not in a position to make such a suggestion. 

Mr. Nehemkis. Dr. Davenport, if the committee has no further 
questions, will you turn now to the problem of concentration of 
assets, touching briefly, if you will, on the concentration of assets 
in life insurance companies. 


Dr. Davenport. The next series of charts is designed to show the 
€xtent to which the control of certain of these savings institutions is 
concentrated geographically and, in some instances, concentrated 
in the hands of individual units. There are four charts in this 
series, and we will pass over the four of them rather rapidly. 

Mr. Nehemkis. Would you care to identify the chart which is now 
exhibited to the committee? 

Dr, Davenport. I identify the chart entitled "Concentration of 
Assets of Life Insurance Companies, December 31, 1937. 

Mr. Nehemkis. Mr. Chairman, I offer in evidence the chart and 
the accompanying table just identified by the witness. 

Acting Chairman Williams. They may be received. 

(The chart referred to was marked "Exhibit No. 608" and appears 
on p. 3752. The statistical data on which this chart is based are 
included in the appendix on p. 4057.) 

Dr. Davenport. We have 308 legal reserve life-insurance com- 
panies in the United States. They hold aggregate assets of ap- 
proximately $28,000,000,000. If we examine the individual units, the 
companies \hat make up this total, we get a picture of a certain 
degree of concentration as the result of the very large size of the 
largest units. The largest unit is the Metropolitan Life Insurance 
€o., that controls 18 percent of the total life-insurance assets. The 
next, in size is the Prudential, with 13.7 percent; the New York Life 
Insurance Co., with 9.6 percent; the Equitable, with 8 percent, and 
the Mutual of New York, with 5.1 percent. These 5 companies 
control 54.4 percent of the total assets of all life insurance com- 
panies. If we take the next 11 largest life insurance companies we 
hring the total up to 80.6 percent. 

It is interesting to examine the geographical location of the con- 
trol that is exercised over this great reservoir of individual savings. 



Exhibit No. 608 



DEC. 31, 1937 



y // '262%/ // ■/ 

/ "v // // V, / 

5 COS 



kLL > 




OS- 1103 pnePARco ar sec- a cxch com 


Six of the largest companies are in the New York City area; 4 in 
NeAV York City itself; 2 in Newark, N. J., within about 10 miles of 
the others. Those 6 companies control 56.9 percent of the total life- 
insurance assets of the country. There are 10 large companies in 
New England that have about 17.2 percent of the total. 

Mr. Nehemkis. Mr. Davenport, before you leave the chart, may I 
ask you if this might be a fair characterization, although simply put : 
That chart would indicate that dollars from all over the United 
States continue to roll into the Atlantic seaboard, and while those 
dollars may be ultimately reinvested in the place of their origin, 
control over those investments rests in the Atlantic seaboard. Is that 
correct ? 

Dr. Davenport. That is perfectly true, it is the control, not the 
location of the investments, it is the control over the flow of these sav- 
ings funds into investments that is represented by this concentration, 
because these companies hold farm mortgages in the Middle West, 
they hold home mortgages on the Pacific coast, they hold the bonds 
of States and cities throughout the United States. 

Mr. Nehemkis. Doctor, I would like to ask you another question, 
if I may. It has been claimed that when we pay on life insurance 
policies we are forced to save, there is a kind of automatic saving 
that takes place. I wonder if you would explain that. 

Dr. Davenport. I don't like the term "forced to save," Mr. Counsel. 
No one is forced to continue payment of his life-insurance premiums. 
It is perfectly true that premiums on most forms of insurance con- 
tain two elements, the pure insurance element and a savings element. 
To that extent continuation of the payment of premiums introduces a 
routinized, automatic accumulation of savings to the credit of the 
individual policyholder. That is how the reserves of life insurance 
companies are built up. If they sold life insurance merely on a pay 
as you go basis, if all life insurance sold was merely term insurance, 
there would be no accumulation of reserves held by the life insurance 
companies. Life insurance companies would then provide a pure 
insurance function and not a savings function. As it is, they consti- 
tute the most important single savings process in our economy. 

Mr. Nehemkis. And does that procedure which you have just 
described tend to increase the individual fund of savings regardless 
of investment opportunities? 

Dr. Davenport. Yes, regardless of investment opportunities, those 
funds would pile up and would accumulate in cash balances deposited 
in the commercial banks if the life insurance companies were unable 
to find suitable investments. As a matter of fact, at the present time, 
I think, if my memory serves me correctly, the life insurance com- 
panies have cash balances of approximately $800,000,000, and the 
officials of the life insurance companies repeatedly complain about 
the lack of opportunity for investment. 

Mr. Nehemkis. Does that conclude your testimony on that? 

Mr. HiNRicHS. Mr, Davenport, am I correct in trying to relate 
this chart with the table which you earlier introduced on the princi- 
pal savings institutions in the United States,^ showing at the end of 
1937 roughly $66,000,000,000 as the aggregate for the principal sav- 
ings institutions, including life insurance, building and loan, savings 

1 See "Exhibit No. 601," appendix, p. 4052. 
124491— 40— pt. 9 18 


banks, even the social security? These six apparently control 14.3 
billion dollars, which would indicate that with reference to the total 
amount held bv the principal savings institutions these six account 
for about 20 to'21 percent, 21 or 22 percent of the total. Would that 
be correct? 

Dr. Davenport. I am sorry, Mr. Hinrichs. 

Mr. Hinrichs. The table that I am referring to is this one on the 
principal savings institutions, showing a figure of $66,000,000,000 in 
1937, which is the year that you have plotted in this chart of concen- 
tration of assets of life insurance companies. You show in the table 
that you have just introduced, 14.3 billion dollars for these six. 

Dr. Davenport. That is right. 

Mr. Hinrichs. So it would be correct to say that these six life- 
insurance companies control about 21 or 22 percent of the total sav- 
ings in all of the principal types of savings institntions, even going 
so far as to include within that category the social security funds. 

Dr. Davenport. Yes. I haven't my slide rule here but I think 
that percentage is correct. 

Mr. Frank. That is six New York companies have about 21 or 22 
percent of all the savings in all savings institutions. 

Dr. Davenport. Yes, that is approximately correct. 

Acting Chairman Williams. Doctor, do I understand now there 
is a growing difficulty on the part of these savings institutions to find 
an outlet for their funds? 

Dr. Davenport. Mr. Chairman, that is a complaint which they 
have made for several years. Tliey are restricted as to the type of 
investment that they can make. These savings institutions that we 
have been talking about typically are restricted to investments in 
certain kinds of bonds and mortgages, typically they do not invest 
or are not allowed to invest in equities, in stocks. 

Mr. Frank. Dr. Davenport, wouldn't, it be true that even if the 
legal list w-ere widened and they were permitted to invest in equity 
securities, the very nature of the institution would preclude them 
from investing in venturesome investments? 

Dr. Davenport. That is perfectly true. I would agree to that. I 
would like to call your attention to the fact that it is planned, I 
believe, to have Mr. White, the superintendent of insurance of New 
York, discuss this matter of the legal list with us tomorrow or the 
next day. 

Mr. Frank. What I was getting at was that even if the legal list 
were widened so that they could purchase stocks, they would neces- 
sarily, because of the requirement of seeking safe investment, desist 
from investing in new ventures. 

Dr. Davenport. That is true. 

Acting Chairman Williams. The rate of interest which these insti- 
tutions pay their depositors has been considerably less during the 
last few years than it was formerly? 

Dr. Davenport. It has been reduced substantially. 

Acting Chairman Willia3IS. Has there been a corresponding re- 
duction of the income to the institutions? 

Dr. Da\tenort. Their investment income has been materially re- 
duced by reason of reduction in interest rates. You may have noticed 
m this mornina's New York Times that H. O. L. C. is refunding an 


ssiie at considerably less than it was originally bronght out, I think 
t rates that would be almost half what it was. 

]Mr. HiNRicHS. Mr. Davenport, is that reduction in interest rates 
•ery largely a reflection of the shift in the type of investments that 
hey have in their portfolios? Has there been an equally marked 
eduction in the rate on policy loans or in the rate on mortgage 
oans as such? 

Dr. Davenport. Policy loans, up until the first of this year, were 
ypically made at 6 percent and in some cases a little higher. There 
vas no reduction in the rate of interest charged policyholders for 
oans made by the insurance companies to those policyholders out of 
heir own reserves, out of reserves that belonged to the individual 
)o]icyholders. They stood at 6 percent to the first of this year. The 
irst of this year that interest rate has been somewhat reduced. I 
hink the discount rate is 5.8 percent, which figures out almost to 
1 percent for the New York Life Insurance Co., and the other com- 
)anies had to follow suit. 

Mr. HiNRicHS. Isn't a policy loan virtually a risk-free loan? I& 

man allowed to borrow beyond the liability of the insurance com- 
>any to the individual? 

Dr. Davenport. It is a riskless loan as far as the insurance com- 
)any is concerned. The insurance company is merel}^ lending the 
)olicyholder money that belongs to the policyholder, savings that 
lavo been accumulated to the credit of the policyholder, and if the 
(olicyholder doesn't pay back that loan, all the insurance company 
;as to do is to cancel the policy. 

Mr. HiNRiCHs. So that actually it is a safer loan from the point 
f view of the internal mechanics of liabilities and assets than a loan 
ly the United States Government. 

Dr. Davenport. That is simply a matter of taking an lOU out 
if one pocket and putting it into another pocket. It is a riskless 
aan. There is some expense attached to the servicing of such loans, 
if course, probably a higher degree of expense than would be the 
ase of handling a loan made by the United States Government, as 
videnced by investment in Government bonds, because these loans 
re in small amounts and they have to be followed up, and if they 
re not paid back it usually means that the policyholder has to reliii- 
uish his insurance.- The life insurance companies will tell you that 
f a policyholder has borrowed the full amount on his policy it usually 
jeans a gone policy. 

Acting Chairman Williams. In that connection, there has been a 
onsiderable reduction in real estate interest loans. 

^Ir. Davenport. Some, Mr. Chairman ; a reduction in the mortgage 
oan rate has taken place. I am not prepared to say specifically how 
nuch those rates have been reduced, because they vary in different 
)arts of the country. 

Acting Chairman Williams. If those rates are reduced, as is being 
idvocated by a good many, the rate to the saver will necessarily be 
educed also, won't it? 

Dr. Davenport. Yes, sir; because the saver is only entitled to a 
•etiirn that can be earned on the investment of his savings. As 
;avings accumulate as they have and compete for the opportunities 
o invest, there will be a reduction in the interest rate that has taken 


Acting Chairman Williams. What is that rate now, the average 
rate of savings ? What do they get, on savings? 

Dr. Davenport. I believe that most of the mutual savings banks 
now pay 21/2 percent. . i i 1 

Acting Chairman Williams. And the commercial banks savings 
departments are limited, I believe, to two. v -^ j 

Dr. Davenport. I can speak only with information from a limited 
area,' namely, Massachusetts. There, I think you will find that the 
mutual savings bank will pay around 21/2 percent. I dont know 
what the commercial banks pay on their deposits, but I should im- 
agine that they would meet the competition in the locality m which 

they happen to be. •-,■,-,■ 

Acting Chairman Williams. There has been considerable increase, 
has there, in the postal-savings account during the last 4 or 5 years? 
Dr Davenport. No, sir; the increase that took place in postal 
savings took place between 1929 and 1933. The postal savings jumped 
from about a quarter of a billion dollars to about 1 billion and a 
quarter, and they have leveled off at a billion and a quarter and show 
practically no deviation from that figure which they achieved in 

1933.^ , . -, 

Acting Chairman Williams. That is due to insurance corpora- 
tions, F. D. I. C, and Federal Savings and Loan, and such 
corporations ? 

Dr. Davenport. Do I attribute it to that? 
Acting Chairman Williams. Doesn't the leveling off, rather than 
increasing, indicate that the people themselves have confidence m the 
bank by reason of the Federal insurance of checking accounts of the 
banks and savings institutions, both of which are now insured? 

Dr. Davenport. That is right. I think the occasion for the rise 
in postal savings was the break in the confidence in the commercial 
banking structure of the country that occurred between 1929 and 
the bank holiday in 1933. It was a flight of deposits from the com- 
mercial banks which took refuge in postal savings, savings that 
were guaranteed bv the credit of the United States Government 
Now, with the F. D. I. C. guaranteeing up to $5,000 of deposits, yov 
iiave'the same kind of Government guaranty back of the money thai 
is deposited in the insured bank as you would have back of the monej 
that is deposited in the postal savings. Tliere is no occasion foi 
the use of a less convenient form of savings than the savings depart- 
ment of a commercial bank ; there is no occasion to go to the incon 
venience of using a postal-savings deposit if you have the samt 
confidence in the commercial bank that you have in the deposit yoi 
put in the United States postal savings. 

Acting Chairman Williams. And therefore these insurance cor 
porations have stopped the upward trend of postal savings. 

Dr. Davenport. Yes, sir. 

Acting Chairman Williams. I mean the Government, the F. D 
I. C, and the Federal Savings & Loan Deposit Insurance Corpo 

Dr. Davenport. Yes. 

(The Chairman, Senator O'Mahoney, took the chair.) 

Mr. O'Connell. You were referring a few moments ago to th< 
policy loans of insurance companies. Do you happen to knov 

1 See "Exhibit No. 601," appendix, p. 4052. 


whether, as a practical matter, a policyholder has any access to the 
commercial banks or the banks in the country for the purpose of 
borrowing money on his policy? 

Dr. Davenport. Yes, sir. There are banks in the vicinity of New 
York that advertise in the papers that they will lend policyholders 
as much as the policyholders can borrow from their own insurance 
companies, at 3I/2 percent instead of at 6 percent, the insurance com- 
panies' charge. "Those advertisements appear in the financial pages 
of the New York papers. 

Mr. O'CoNNELL. Do you know whether that practice is general or, 
rather, whether it js recent or confined to the area around New 
York ? I hadn't heard of it before. 

Dr. Davenport. I have no knowledge that it exists in other parts 
of the country, but I see no reason why an enlightened policyholder 
would not try to borrow at the lowest rate he could on an asset as 
sound as a life insurance policy, and go to his commercial bank and 
offer that as collateral. 

Mr. O'CoNNELL. Also, you see no reason why an enlightened bank 
would consider that an avenue for investment, a riskless loan? 

Mr. HiNRicHs. Excuse me, it is not a riskless loan in this case, 
is it'^ Now you are introducing a lower rate offered by the banks 
which are accepting the risk of the credit standing of the insurance 
company itself. As far as the insurance company and the policy- 
holder are concerned, if the policyholder is in up to his neck the 
insurance company can't lose even if it is insolvent, if such a thing 
were conceivable in the case of a small insurance company. In the 
case of a loan made by a bank, the bank is taking the risk of the 
solvency of the insurance company. 

Mr. Frank. Doctor, you wouldn't consider it much of a risk to 
lend on an obligation of the JMetropolitan Life Insurance Company, 
would you ? 

Dr. Davenporiu Was that question addressed to me, Mr. Frank? 

Mr. Frank. I mean if you were a commercial banker you wouldn't 
think a loan secured by them 

Dr. Davenport (interposing). I should have no hesitation what- 
ever in lending the Metropolitan Life Insurance Co. any amount I 
was able to lend. 

Mr. Frank. For practical purposes, then, it might be called 

Dr. Davenport. Mr. Hinrichs pointed out that some of the smaller 
companies might not be in such an enviable position. 

The Chairman. But some of these institutions which advertise the 
willingness to make such loans of course reserve to themselves the 
right to reject a policy in an insurance company in the strength of 
which they would not be satisfied. 

Dr. Davenport. Yes, sir. 

Mr. Nehemkis. Are you prepared to continue your discussion of 
the concentration of assets? 

Dr. Davenport. I am, Mr. Counsel. We have just discussed con- 
centration of the control of the assets in the process that is repre- 
sented by this bar of the life-insurance companies. We now turn to 
a discussion of the concentration of the control over the assets of 
the mutual savings banks. I identify a chart entitled "Concentra- 


tion of Assets of Mutual Savings Banks, January 1, 1939," together 
with supporting data. 

Mr. Nehemkis. Mr. Chairman, I offer in evidence the chart just 
described by the witness. 

The Chairman. The chart may be received. 

(The chart referred to was marked "Exhibit No. 609'* and appears 
on p. 3759. The statistical data on which this chart is based are 
Jncluded in the appendix on p. 4059.) 

Di'. DA^'ENPORT. The mutual savings banks have aggregate as- 
sets of $11,570,000,000. The extent to which those assets are concen- 
trated in certain geogi*aphical areas is represented by the first bar on 
this chart. The height of tlie bar is represented by 100 percent, 11.57 
billion dollars. The largest segment of the bar that appears at the 
base is that for New York State. There are 134 mutual savings banks 
in New York State. The total of the assets of those savings-banks 
accounts for 53.64 percent of the total assets of all savings banks in the 
United States. 

The Chairman. Of all savings banks or of all mutual savings banks ? 

Dr. Davenport. All mutual savings banks, Mr. Chairman. In fact, 
421/3 percent of the assets of all mutual savings banks is located in 
New York City. The other States of importance are, in order of im- 
portance, Massachusetts, Connecticut, Pennsjdvania, and New Jersey. 
These five States together contain 89.75 percent of the control over the 
assets of the mutual savings banks. 

The second bar on the chart is intended to show the extent to which 
the control over these assets rests with individual institutions, and for 
that purj^ose we liave picked out the 25 largest mutual savings banks. 
The largest mutual savings bank is represented by the segment of the 
red bar at the bottom, the Bowery Savings Bank. That has approxi- 
mately $600,000,000. The next in order of size is the Emigrant Indus- 
trial Savings Bank, also of New York City, with $500,000,000 of assets. 
The 25 largest mutual savings banks have 411/2 percent of the total. 
Five hundred and eighteen smaller banks have the balance. 

Mr. Nehemkis. Doctor, isn't it somewhat anomalous that that con- 
centration to which you have just referred should be in the East and 
so highly concentrated in the few States that you liave pointed out? 
How do you explain that ? 

Dr. DA\Ti:NP0RT. The organization of mutual savings banks goes back 
122 years. They were established in the Eastern States at a time when 
the commercial banks were not performing a savings function. Later 
on with the development of our banking system the national banks 
and the State banks assumed this savings function so as other sections 
of the country were established, and as they were equipped with com- 
mercial banks, there was no necessity for organizing mutual savings 
banks in those areas. There are, I think, 16 different States that have 
mutual savings banks. 

Mr. Taylor. To what extent are the investments of those saving-s 
banks in New Yoi-k City outside New York City and the surrounding 
areas ? 

Dr. Davenport. Genei'ally speaking, between 40 and 50 percent of 
an individual mutual savings bank's assets are invested in the local 
real estate mortgages. The balance of their assets they invested in the 
legal list of securities, which may include United States Government 



Exhibit No. 609 



JAN. 1. 1939 




Ol» B»NKS1 

1 $ B-ILLIONS 1 
\ /TOTALS ' 
'2 \ 11.57 j 

( 22 esMKs; 



(7 eiNKS) 







1 !93 B IN XSI 


8 9.75 V. 






(3) OHIO. MO. a N J. 





53 64% 





V ■:'-:-''.'j:^:/^-!::'yy.-:'y::-\-. 



6 2 


2 5 

IN N.Y.C. 

(134 BANKS S7 IN N 1 C 1 




4 1 5 1 % 




32 13% 


'yt\ llVam sburgh':-;: 

the' bank for s'/iv;-. 


■■.'•. EMIGRANT ';-'.v.'. 


,;.;;•: INDUSTRIAL ■.;._• f.-V 




• V.v ■.■.•.■•:■.■.'■.•,••.■.■.■;";•. :>.'.;V.|' 






bonds. Usually the State requires that investment in State municipal 
bonds must be of the State in which the bank is located. 

Mr. Taylor. Presumably a fair proportion must be m f an^ly distant 
sections of the country, since you have the concentration of the mvest- 
ment itself so definitely in these States. 

Dr. Davenport. That is perfectly true. To the extent that 40 or 50 
percent of their assets are represented by real estate mortgages, we 
can say that it goes back into the community from which the prin- 
cipal savings came, but to the extent that they buy railroad bonds or 
public-utility bonds or A. T. & T. stock— I will take that back; 
they don't buy stock as a rule— to the extent that they buy the bonds 
of an industrial corporation, those savings are spread out over the 

Mr. Taylor. Would you have any way of knowing what percentage 
of outstanding real-estate bonds of a city like Chicago are held by 
the savings institutions in New York? Chicago, I understand, has 
practically no important savings institutions such as life-insurance 
companies or even larger savings banks and yet there must be a great 
deal of real estate which is held by these institutions. 

Dr. Davenport. I think you will find the State laws where these 
mutual savings banks are located usually restrict the kinds of mort- 
gages that they can take to mortgages on property within the State. 
There is no such restriction on investments of life-insurance com- 
panies, and they do buy mortgages on farm properties all over the 
country. They" are truly national institutions. The mutual savings 
banks are typically local institutions. It is also true, I might add, 
that the people who deposit savings in the mutual savings banks pre- 
dominantly live in the areas where their bank is located, but an 
individual who has a deposit, let's say, in the Bowery Sayings Bank, 
and who moves down to Washington to work and takes his residence 
in Washington, probably continues to bank by mail with the Bowery 
Savings Bank in New York. That is equally true with respect to 
the building and loan associations. Many of them do quite a sizeable 
mail business in the acceptance of savings deposits from people all 
over the country. 

Mr. Taylor. In other words, in a case of this type of institution 
you may have the investment of the savings more highly concentrated 
than the savers themselves. 

Dr. Davenport. It would be possible to have that, that is true. 

Mr. Nehemkis. Doctor, may I ask you to hazard a guess as tc 
what the percentage of concentration in New York would be if yon 
combined the concentration of assets of life insurance companies tc 
which you have just referred and the concentration of assets of oui 
mutual savings banks. 

Dr. Davenport. Mr. Counsel, if you will reserve that question foi 
a moment, I am coming to it. 

Mr. Nehemkis. Fine, I will withdraw the q^uestion. 

Representative Williams. In connection with the chart you have 
just had there that covers, as I understood it, only the mutual saving;- 

Dr. Davenport. That is right, sir. 

Representative Williams. Do they cover the field of savings banks 
pretty generally or what are the stock savings banks? 


Dr. Davenport. The stock savings banks are of relative insig- 
nificance and they are classified with the commercial banks now in all 
of the reports made to the Comptroller of Currency. 

Kepresentative Williams. So the chart which you first had here, 
the one of individual savings invested in long-term debts and equities/ 
refers to the mutual savings banks only, does it ? 1,0.1 

Dr. Davenport. This process is mutual savings banks only.^ ihe 
process that is represented by "Deposited in commercial banks," the 
balance in the savings departments of commercial banks, would in- 
clude what savings funds were entrusted to the stock savings banks. 
They are relatively few so called stock savings banks. 

Representative Williams. Now, we do have some stock savings 
banks which are purely savings institutions as distinguished from 
commercial banks. 

Dr. Davenport. That is right ; there are still a few of them. 

Representative Williams. A few of them. 

Dr. Davenport. They used to be much more numerous than they are 

today. ^ ,. . . , 

• Representative Williams. That is all. I just wanted to distinguish 
between the mutual and the stock savings banks. 

Dr. Davenport. I would say the total assets— and that would include 
capital stock and surplus belonging to the stockholders of the stock 
savings banks— probably the total assets, capital stock, and surplus 
and savings deposits in the hands of the stock savings banks would be a 
matter of perhaps $300,000,000. 

Mr. Nehemkis. Doctor, are you prepared to continue your discussion 
with the concentration of assets of commercial banks ? 

Dr. Da\tenpokt. I identify the chart entitled "Concentration of 
Assets of Commercial Banks in the United States, December 31, 1938." 

Mr. Nehemkis. Mr. Chairman, I offer in evidence the chart just 
identified by the witness. 

The Chairman. The chart may be received. 

(The chart referred to was marked "Exhibit No. 610" and appears 
on p. 3762. The statistical data on which this chart is based are 
included in the appendix on p. 4060.) 

Dr. Dam^nport. We now pass to a consideration of this savings 
process that was represented by the square up here. 

The Cpiairman. Please refer to the chart so that the record will 

show. . T ,,T T 

Dr. Davenport. Thank you. On the large chart entitled "Indi- 
vidual Savings Invested in*^ Long-Term Debts and Equities,"^ at the 
time when we first discussed this large chart we pointed out the sig- 
nificance of the savings processes involved in the accumulation of indi- 
vidual savings by commercial banks. That process had accumulated a 
total which was' 14.67 billion dollars in 1938. These savings deposits 
or time deposits of the commercial banks are represented on the chart 
entitled "Concentration of Assets of Commercial Banks in the United 
States" by the bar to the extreme right ; the height of that bar on this 
scale is 14.67 billion dollars. The bar is segmented to show the geo- 
graphical location of the assets held as time deposits in the commercial 
savings banks. 

1 Referring to "Exhibit No. 600," supra, facing p. 3727. 

2 Ibid, 
s Ibid. 



Exhibit No. 610 




DEC. 31, 1938 






2.7 S 



MO. 2.3% 

N. J. 







7 9% 




. 9.5% 

N. Y. 29.2 % 








$56 792 














$ 14.67 

MINN Z 2 »-0.3 
MASS. 2 7»-0.4\_ 

WIS. J 9 « -0 4^£: 

MICH. 4 2 »-0.6 


54 7% 


OHIO € 6 % 

PENNA. 12.4% 
N. Y. 13.5% 

CALIF. 15.3% 


pncptRtD Br sec a exch comu. 


You will note that California is the largest State with respect to 
the, use that is made by individuals of the savings or thrift depart- 
ments of commercial banks for the accumulation of their savings. 

The Chairman. This is the first time on any of these charts in 
which a Western State appears as holding the largest amount of any 
]iind of savings or commercial assets. 

Dr. Davenport. That is right, Senator. 

New York had to give first place to California. New York takes 
the second place with respect to this matter of time deposits. New 
York accounts for 13.5 percent of the total of such individual sav- 
ings. Pennsylvania is third with 12.4 percent; Illinois fourth with 
6.9 percent; Ohio comes next with 6.6 percent, and New Jersey next 
with 6 percent. 

Tl>e other two bars show" us the picture of concentration of total 
assets, not merely tlie assets that were accumulated through individ- 
ual savings, but total assets of commercial banks. These assets 
amounted to 56.79 billion dollars in 1938, 

Now, we have to give first place again to New" York, New York 
■holds 29.3 percent of the total, Pennsylvania 9.5, Illinois 8.3, Cali- 
fornia 7.9, Ohio 4.5, Massachusetts 3.7, New Jersey 3.4, Missouri 
2.8, Texas 2.8, Michigan 2.7. The five largest States in this regard 
hold 59.4 percent of the total commercial banking assets of the 

If we now turn to the middle bar, we can get some idea of the 
relative hnportance of the individual banks in this respect. We have 
selected the eight largest banks for individual attention. The largest 
single commercial bank in the country is the Chase National Bank, 
New York City, and it holds assets of two and a half billion dollars. 
The National City Bank, of New^ York City, has about two billion 
dollars, Tlie Guaranty Trust Co,, 1.9 billion dollars; the Bank 
of America, 1.6; Continental of Illinois, 1.4; Bankers Trust of New 
York a billion, the Central Hanover a billion, and the First National 
of Chicago -a billion. These eight largest commercial banks conti'ol 
21.8 percent of the total. There are 42 other large banks among the 
fifty largest banks of the country that account for this segment here, 
^ncl after that we get down into smaller banks and we find that: 
the balance of the banking assets are divided among 13,606 smaller 

The Chairman. Before that chart is taken away, do I understand 
that the 50 largest banks control 35.4 percent of all of the assets? 
No ; that represents dollars, I see. 

Dr. Davenport. The scale is in billions. 

The Chairman. What percentage of the deposits do the 50 largest 
banks control? Have you figured that out? 

Dr. Dai'Enport, I haven't the percentage on my chart, but it looks 
to me as though it would be about 45 percent of the total, Mr. 

The Chairman. It would be just a question of totalling up the 
deposits in each instance and making a percentage calculation. 

Mr. Nehemkis. We should be very glad to give you a memorandum 
on that. 

The Chairman. It is not necessary; it is perfectly obvious. 


Dr. Da\'enport. I identify chart entitled "Concentration of Assets 
in Principal Reservoirs of Savings, 1937." 

Mr. Nehemkis. Is this a composite chart, sir ? 

Dr. Damenport. This is a composite chart which contains the assets 
of life insurance companies, all savings deposits, whether in mutual 
savings banks or in commercial banks, and all assets of building and 
loan associations. These savings reservoirs represent a total of 
56.5 billion dollars out of a total of approximately 66 billion dollars, 
I can give you the exact figure for the record. 

The Chairman. Now, you have all the savings institutions? 

Dr. Davenport. No, Senator. This is merely the life-insurance 
companies, the building and loan associations, the mutual savings 
banks, and the savings departments of commercial banks, those 
processes which we could readily allocate by States for which we 
have information. We can't allocate the social security fund pre- 
cisely by States; we have no way of allocating the railroad retire- 
ment fund by States ; and no figures readily available to allocate the 
fraternal insurance fund by States. 

Mr. Frank. If you added those omitted items, how many billion 
dollars would it acid? 

Dr. Davenport. The total was approximately 66 l^illion dollars, 
so it would add 10 billion dollars to this figure. But for this figure, 
this fund of 56.5 billion dollars in 1937 

Mr. Frank (interposing). Which is more than five-sixths of the 

Dr. Davenport. Right. It was possible for us fairly readily to 
allocate the control over that by States, and that is the purpose of 
this chart before you. 

The Chairman. I observe that California now disappears from 
the identifiable States. 

Mr. Frank. Is Wyoming identifiable? 

The Chairman. It is one of the other States. 

Mr. Nehemkis. May I offer the chart just identified and the sup- 
porting table? 

The Chairman. The chart may be received. 

(The chart referred to was marked "Exhibit No. 611" and appears 
on p. 3765. The statistical data on which this chart is based are 
included in the appendix on p. 4062.) 

Dr. Davenport. The scale on the left of the bar is in percent. 
The height of the bar represents 100 percent. The figures to the 
right of the various segments of the bar are in billions of dollars. 
New York State controls one-third, precisely one-third, of the total 
of this 56.5 billion dollars. There is another third that is contained 
in the next four largest States — New Jersey, Massachusetts, Pennsyl- 
vania, and Connecticut. These five States in the northern section of 
the country together account for 67 percent of the total. The other 
States account for a third, the balance. 

The Chairman. When you refer to assets you mean, of course, all 
of the property of every kind and character which is owned by these 
institutions as a result of the manner in which the savings deposits 
have been handled ? 

Dr. Davenport. These assets have been created through the ac- 
cumulation of individual savings, and they are held for the account 
of the individual savers by these great savings institutions. 


Exhibit No. 611 










HAVE $37.8 



67% OF 



* Lire: ivs COS. savings deposits 




The Chairman. Have you any idea to what extent savings of this 
character flow into these five States from the other States? 

Dr. Davenport. Unfortunately there is little information about the 
location of the individual savers. We do know that the building and 
loan association is a local organization and predominantly the mem- 
bers are people who live right in that community. That institution 
finances the home ownership of the people who live in that com- 
munity. Typically they do not go out of a radius that can be reached 
by the directors of the individual locations, let's say during a lunch 
time, to investigate whether or not a mortgage of $2,000 on John 
Jones' property is a safe investment for them to make or not. That! 
is not true with respect to life insurance companies. Their funds are 
obtained from all over the United States. Most of these big com- 
panies do business in every State in the Union and the life insurance 
companies in New York and New England, constitute a syphon that 
draws in savings in the form of premium payments into these States. 
Their investment procedure, the purchase of farm mortgages in the 
Middle Western States, the purchase of municipal bonds of cities all 
over the country. In that ])rocess the directors of the life-insurance 
companies decide where they will place those funds and how theyj 
will be put to work. But the control is represented by figures that 
we have just presented. j 

The Chairman. And the whole economy of the whole people, and: 
of the whole 48 States, depends upon the skill with which that dis- 
cretion is carried out by the persons who are directing the investment 
of these huge savings. 

Dr. Davenport. A great responsibility rests upon the skill anc 
wisdom of the directors of these great savings institutions. Thert 
is no dodging that question. They hold and control $67,000,000,00( 
of assets. That is equivalent to the national income in a good year 

Mr. Nehemkis. Dr. Davenport, I don't believe the chairman wa: 
here this morning when you discussed the reservoirs of savings ^ anc 
pointed out that in that reser^^oir entitled ''Entrusted to Corporat* 
or Individual Trustees" there were assets Mdiich, in your opinion, yoi 
estimated to be $50,000,000,000. Was that correct? 

Dr. Davenport. That is correct. We have estimates made withii 
the Securities and Exchange Commission by the Trading and Ex 
change Division that would place that total at approximateb 

Mr. Frank. That is in addition to these figures? 

Dr. Davenport. That is quite in addition to what we have beei 
talking about. We have been talking about the great savings institu 
tions, the life insurance companies, mutual Scvvings banks, the saving; 
departments of commercial banks, and building and loan associations 
They are the institutions we have been talking about. They are th( 
institutions that accumulate the savings from individuals and poui 
them down into what we have termed "long term debts" — into th( 
bonds of the United States Government, in the bonds of States anc 
cities, into bonds of our railroads, the bonds of our utilities and of oui 
industrial corporations. They are the institutions that finance farn 
mortgages, the mortgages on our homes, and the mortgages on oui 
large city properties. 

1 '-Exhibit No. 600," supra, fncing p. 3727. 


Mr. Nehemkis. And it is true, is it not, Doctor, that the assets in 
the bar which you have now represented by a question mark are,^ 
roughly speaking, twice the size of the assets of our legal reserve 
life-insurance companies ? 

Dr. Davenport. Very roughly speaking, twice the size. The assets 
of the legal reserve life insurance companies are about $'28,000,000,000 
and this is about $50,000,000,000. 

Mr. Nehemkis. And the bulk of those assets, would you be willing 
to hazard a guess, likewise rests in the eastern seaboard ? 

Dr. Davenport. I think there is no question about the fact that the 
control over those assets rests primarily in New York City. 

The Chairman. On what do you base that conclusion, Dr. Daven- 
port? Of course, it is a point of tremendous significance, but you 
have chosen, in the preparation of your chart, to mark it by a ques- 
tion mark, thereby indicating that you are not definite about it. 

Dr. Davenport.' We do not know how that money is invested. Sen- 

The Chairman. How do vou arrive at th,e approximate estimate of 

Dr. Davenport. We do know this: We know that the national 
banks that have been permitted to establish trust departments report 
to the Comptroller of the Currency that they hold in those trust 
iepartments approximately $10,000,000,000. The national banks have 
never gone in in a big way for this tvpe of trust work. 

The Chairman. Those' $10,000,000,000 are not included in any of 
ihese other charts that you have compiled? 

Dr. Davenport. No, sir; they are not included in these processes 
ttt all. 

The Chairman. What do you add to that to get your 

Dr. Davenport. You add to that the trust estates held by the great 
State trust companies, the great State commercial banks and trust 
3ompanies like the Bankers Trust of New York, for example. And 
then I should add that the State trust companies have made a definite 
effort to specialize along this line and they are not as restricted as the 
national banks are in their efforts to develop this type of business. 

In addition you have huge amounts held by private trustees, the 
great foundations, the charitable organizations, the Rockefeller Foun- 
dation, and the Mellon fund and funds of that type. 

The Chairman. Thank you very much. 

Representative Williams. Let me ask you. Doctor : I understood 
you to say a while ago that the savings institutions were having some 
difficulty in finding an outlet for their funds. 

Dr. Davenport. That is correct, sir. 

Representative Williams. By reason of that has tliere been an ac- 
cumulation of idle money in these institutions? 

Dr. Davenport. Yes, sir; to the extent that you can call about $800,- 
000,000 that belongs to life-insurance companies that is deposited in 
commercial banks — idle money. They are not using it. They have 
that to the credit of their checking accounts. If they had had ade- 
quate opportunities for investment, those funds would undoubtedly be 
much smaller. 

1 "Exhibit No. 600," supra, facing p. 3727. 


Representative Williams. What about the funds that are on de- 
posit with the commercial banks on time? Have they accumulated as 
they have in the checking accounts and are simply lying there unin- 
vested ? 

Dr. Davenport. One of the charts that I showed you this morning 
had on it a line that represented the growth in time and savings 
deposits of commercial banks,^ That line showed a tremendous drop 
from 1930 to 1933 by reason of withdrawals on the part of depositors 
for cash needed to compensate for reduced income, reduced wages, 
and salaries, and also a considerable amount of loss as a result of 
the failure of individual banks, the freezing of those savings. The 
low point was reached in 1933. Since then there has been increased 
accumulations in the savings departments of these commercial banks. 

Representative Williams. "V^Hiat about the mutual savings ? 

Dr. Davenport. The mutual savings banks never suffered to the 
extent that the commercial banks did during the depression. There 
were vei*}' few mutual savings banks that failed. There was a de- 
crease in the total amount of their assets at one point in the depth 
of the depression, but almost immediately the line showing their total 
assets started an upward movement, and today it stands at its all- 
time peak. 


Representative Williams. Have you any figure which shows at 
least approximately the amount of funds available in these savings 
institutions that are not invested? 

Dr. Da^tenport. I have for two institutions, life insurance com- 
panies and mutual saA'ings banks. The figures of the cash balances 
to their credit at the end of 1938 are contained in exhibits that show 
the consolidated balance sheets of those institutions.^ For the life 
insurance companies it was about $800,000,000 in cash that they held. 
For the mutual savings banks that do not do checking business, when 
they pay out money they have to send it through the mail. They 
pay out by a check drawn on a commercial bank where they keep a 
checking account. The mutual savings banks of the country car- 
ried, I think the figure was, about $500,000,000 on deposit in com- 
mercial banks. 

Representative Williams. That would make a billion three hun- 
dred million in those two institutions of cash available for invest- 

Dr. Davenport. They would normally keep some cash on hand, 
but theirs is a continuous process. Money is coming into these insti- 
tutions all the time and going out all the time, so that the amount 
they would have to keep would be relatively small. 

Representative Williams. Have you any figure on the amount of 
savings accounts in the commercial banks? 

Dr. Davenport. Unfortunately I cannot give you that figure. It 
is not broken down that way. 

Representative Williams. I am wondering whether or not there 
has been an accumulation during the last few years of these reserve 
funds in these savings institutions that cannot or have "not been 

1 See "Exhibit No. 601." supra, p. 3735. 

2 See "Exhibit Nos. 608 and 609, appendix, pp. 4057 and 4059. 


Dr. Davenport. We have the figures of excess reserves, which I 
quoted this morning, which is an evidence of the extent to which 
commercial banks have been unable to find outlets for the money at 
their disposal. 

Representative Williams. That is the commercial banks, 

Mr. Frank. What was that total? 

Dr. Davenport. Four billion dollars. 

The Chairman. That, of course, is separate and apart from the 
$1,300,000,000 of the life insurance companies and the mutual savings 
banks to which you have just referred — or is it? 

Dr. Davenport. The life insurance companies and mutual savings 
banks are mere depositors, just like you and I would be. 

The Chairman. What I am trying to find out is whether that 
billion three hundred thousand should be added. 

Dr. Davenport. No; it should not, sir. 

The Chairman. Then the 4 billion plus represents, so far as you 
can approximate it now, the total amount of accumulated savings 
for which no investment has been found as of this time. 
. Dr. Davenport. I should hesitate to put it in precisely that 
language because that $4,000,000,000 of excess reserves cannot prop- 
erly be allocated solely to the savings departments. 

The Chairman. Yes ; I realize that, but I was referring to savings 
here without regard to whether the money was deposited in a savings 
institution or a savings department but rather to include all unused 
funds which are available for use, would that be correct? 

Dr. Dav'ENPort. I think I should agree with that, Senator. Of 
course, you might point out that investments would not be made in 
securities that yielded as low a return as, let's say, some of the cer- 
tificates and notes, short time certificates and notes of the United 
States Government, if there existed opportunties that would give a 
higher rate of return. 

The Chairman. Not only does the United States Grovernment bor- 
row money at very small interest rates, but some of the large cor- 
porations, like the United States Steel Corporation, borrow at a very 
loAv rate of interest. 

Dr. Davenport. That is true, sir. 

The Chairman. So that actually one might add at least a portion 
of the amount of money loaned to the United States Government 
and to large corporations at these very low rates of interest to the 
total of accumulations which are not working in constructive invest- 
ment at the moment. Is that correct? 

Dr. Davenport. They certainly would be put to other uses if the 
other opportunities existed. 

The Chairman. Proceed. 


Dr. Davenport. I identify a table entitled "Data Reflecting the 
Number of Persons Employing Various Savings Processes, 1920, 

Mr. Nehemkis. I offer in evidence the table just identified by the 

The Chairman. It may be received. 

124491 — iO— pt. 9 19 


(The table referred to was marked "Exhibit No. 612" and is 
jiichided in the appendix on p. 4063.) 

Dr. Davenport. The question naturally arises as to the reasons for 
the concentration. 

The Chairman. Before you go to that, let me ask you in what 
sense in this table you use the word "employing." 

Dr. Da^tenport. Making use of. 

The Chairman. All right, making use of by depositing or by using 
the deposits. 

Dr. Davenport. Not using the deposits. For example, the number 
of policies. 

The Chairman. You mean the number of persons who are making 
the investments or making the savings? 

Dr. Davenport. Making the savings, that is it. 

The Chairman. That is what I wanted to get. Proceed. 

relation between the growth or SAVINGS institutions and the 


Dr. DA^^ENP0RT. I started to say, the question naturally arises as to 
the reason for the control that exists in these savings funds on the 
Eastern Seaboard, principally in the five States — New York, New 
Jersey. Pennsylvania, Connecticut, and Massachusetts. 

I think the principal reason for this lies in the essential industrial 
and urban character of those five States and the fact that they were 
the first States to be so industrialized and so urbanized. The accu- 
mulation of savings by individuals is the way in which they purchase 
their own social security. These institutions were first established — 
savings banks were established 122 years ago ; the first building and 
loan association probably 115 years ago; the first life-insurance com- 
panies probably 102 years ago. These institutions were established 
by socially minded leaders in these communities that recognized that 
an important change had taken place as soon as we developed city 
and industrial populations dependent solely upon cash wages paid to 
them, not only for their current living but for their claim on the 
product that would be produced in future years, and who depended 
upon their cash salaries or wages to tide them over a time when they 
might be too old to participate in the productive processes. It be- 
came evident with the development of our first cities and our great 
industrial centers as soon as the depression fell upon those centers 
that we had these large numbers of wage earners who had not prac- 
ticed frugality and thrift and were consequently a charge upon the 
charity of the community. 

Socially minded citizens conceived of the idea of organizing insti- 
tutions that would stimulate and implement thrift on the part of 
wage earners. And the idea of thrift and frugality was taught and 
these institutions were set up almost as philanthropic institutions, 
and the men at the head of them usually took no salary and con- 
sidered that they were rendering a public service of great importance, 
as so they were. It soon became apparent that the benefits of these 
savings institutions had two different aspects. Their chief objective 
was, of course, to encourage the thrift of individuals and to provide 
a method which would enable persons with small incomes to accumu- 
late a reserve from their wages and salaries. Such funds furnished 


assurances that they would be able to take care of themselves and 
would not become charges to society or burdens to their friends and 

On the other hand, these institutions provided a mechanism for the 
collection of funds which were needed for the building of our rail- 
roads, the expansion of our industries, the construction of our homes, 
and the provision of utilities in our rapidly developing cities. Thus 
the savings institutions facilitated the processes of industrialization 
and urbanization and assisted in providing proper homes and security 
for the industrial workers. 

Although these three types of savings institutions continued to 
grow with the industrial development of the country and the growth 
of population, they met with varying degrees of success. The sav- 
ings banks undoubtedly made the greatest headway up to 1900. In 
that year mutual savings banks had deposits of only $2,000,000,000 
belonging to 5,000,000 depositors. The life-insurance companies 
doing business in 1900 had only 3,000,000 ordinary policyholders and 
11,000,000 industrial policyholders. Tlie admitted assets back of 
these policies amounted to about $1,700,000,000 in 1900. The build- 
ing-and-loan associations of that year had li/^ million members and 
assets of $614,000,000. In comparison with their present magnitude, 
they were relatively unimportant. 

These figures, however, are impressive evidence of the need that 
was served by the savings institutions during the industrial develop- 
ment of the nineteenth century. They bear witness of the thrift of 
these millions of persons and they demonstrate the ability of our 
economic system to enable workers to purchase their own security 
out of current income. However, impressive as they are, they fade 
into insignificance when we examine the situation 30 years later — 

In 1930 the total savings deposits in mutual savings banks 
amounted to $10,000,000,000. That is in the first 30 years of the 
twentieth century, while population increased from 76,000,000 to 
123,000,000, a growth of 61 percent, savings-bank deposits in mutual 
savings banks grew 331 percent. Nor was this all. In the meantime 
the State and national banks, envious of the success of the mutual 
savings banks, had entered the savings-deposit business. In 1930 the 
total savings deposits in the mutual savings banks and in the sav- 
ings departments of commercial banks amounted to $29,400,000,000. 
How many million people contributed to this huge fund, no one 

The Comptroller's Report gives the number of depositors for that 
year as 52,000,000 people, but, of course, there were many duplica- 
tions where depositors had more than one account. No matter how 
much these figures are discounted we cannot escape the conclusion 
that the hopes of a very large percentage of the population were 
centered in their savings deposits. 

Some idea of the relative importance of this huge savings fund 
is obtained when compared with the regular bank deposits subject 
to check of the same year — 1930. Demand deposits of that year 
totaled $25,200,000,000. In other words, savings deposits accounted 
for over half of the total bank deposits. Of course, not all of the 
savings deposits were made by people of small incomes, but typically 
this was true. Wealthy people had other opportunities for invest- 


ments and were not satisfied by the small interest rates paid on sav- 
ings accounts. The number of deposits indicates clearly this situa- 
tion is primarily an institution of the great middle class. 

Life insurance also experienced a phenomenal growth in these 30 
years. The admitted assets of one billion seven hundred million in 
1900 jumped to eighteen billion eight hundred million in 1930. The 
funds accumulated to the credit of life-insurance policyholders as 
reflected in the admitted assets of legal reserve life insurance com- 
panies was 10.8 times what it had been in 1900. That is, in the 
period of 1900 to 1930 these assets grew more than tenfold. 

In 1930 there was a total of $108,000,000,000 worth of life insur- 
ance in force — the face value of the policies in force. Of this, 90 
billion was ordinary insurance. The balance, $18,000,000,000 repre- 
sented the industrial insurance written for amounts under $1,000. 
This insurance was held in 33,000,000 ordinary policies and 89,000,000 
industrial policies, a total of 122,000,000 policies. Of course, this 
did not mean 122,000,000 separate individual policyholders, as there 
were many who owned more than 1 policy. It has been estimated, 
however, that this insurance covered the lives of no less than 60,000,- 
000 separate individuals, roughly 1 out of every 2 men, women, and 
children in the United States. 

Turning now to the building and loan association, we found in 
1900 they had I14 million members and controlled assets of $600,- 
000,000. By 1930 there were 12 million members of the building and 
loan associations and they had assets of $8,800,000,000. 

The assets of these institutions in 1930 were 14.4 times as large as 
they were in 1900. 

To comprehend the importance of the forces represented by these 
institutions we must view them not as separate organizations, but as 
parts of a whole. When we examine the savings accumulated by all 
three types, we are impressed not only by their magnitude but by the 
great rapidity of their growth. Total savings in the 20 years from 
1910 to 1930 increased 382 percent. In this same interval, 1910 to 
1930, the population of continental United States showed a growth 
of only 331/2 percent. With aggregate assets of over $56,000,000,000 
invested in high grade bonds and mortgages, the savings institutions 
entered the great depression of the thirties in a new position, a posi- 
tion quite different in importance from what it had been in previous 
depressions. This was the first great depression in which the fate of 
the creditors affected such a large proportion of our city population 
and carried grave political consequences. 

The year 1930 found the funds in our savings institutions at their 
record height up to that time. Unemployment and reduced wages 
and salaries which came with the depression presented some of the 
contingencies against which that fund had been accumulated by indi- 
vidual savers. As the depression continued and conditions grew 
worse, savings were drawn upon to ease the burden of unemployment 
and reduced incomes. 

Between 1930 and 1933, savings and time deposits declined $8,000,- 
000,000. The total number of savings and time depositors dropped 
from 53,000,000 to 40,000,000. The persons who either' lost their 
savings accounts or were forced to close them out numbered 13,000,- 
000. Life-insurance savings were also sacrificed in this emergency. 
Some policyholders were forced to borrow on their policies, to let 


them lapse, or to surrender them entirely. The number of policies 
lapsed, surrendered, and purchased was over twice as large in 1933 
as in 1930, and loans on policies in this period increased by a third. 
In these 3 years the number of policies in force declined from 122,- 
000,000 to 113,000,000 and the amount of ordinary insurance in force 
dropped 9 percent. However, the admitted assets of the life insur- 
ance companies continued to increase. 

The building and loan associations also felt the strain of depres- 
sion as their members were forced to withdraw savings and as defla- 
tion reduced the value of their assets. Between 1930 and 1933 mem- 
bership dropped from 12,000,000 to 9,000,000, and the assets declined 
about $2,000,000,000. 

The significance of this savings fund flows more from the nature 
and number of the group protected by it than from its huge size. 
Information concerning the characteristics of the individuals who 
Qiake up this thrift group is not available in statistical form to any 
great extent. We do know, however, that in general it is made up or 
composed almost entirely of people living in the industrial States. 
The precise number of persons with an interest in this fund is 
unknown even today. All that is known is that as a group they have 
44,000,000 savings accounts, they own 124,000,000 life-insurance poli- 
cies, and over 6,000,000 of them own shares in building-and-loan 
issociations. Even though these figures must be shaded somewhat 
;o allow for duplications, it is clear that a very large number of 
persons in this country rely today upon the savings institutions. 
Vloreover, the evidence is that the savings institutions are continuing 
:heir vigorous growth. 

These millions of savers, policyholders, depositors, members of 
savings and loan associations, are predominantly located in great 
cities. Farmers have little occasion to use the mutual savings bank. 
Life insurance officials will tell you that farmers do not constitute 
1 very good prospect for life insurance. 

I said a moment ago these millions of savers are located pre- 
dominantly in our great cities. It is important to realize that these 
savers in our great cities constitute the principal market for the 
products of our factories. Anything that shakes the confidence of 
the savers in their savings institutions, anything that weakens their 
confidence in the solvency of these institutions changes their habits 
in buying and in consuming products. They tighten their belts, 
they postpone purchasing anything except necessities. The result 
is a decreased demand, a decreased production, and a decreased 

We have given hostages to fortune to the extent that we have 
placed such huge sums of savings in the long-term debts of States, 
Federal Government, railroads, utilities, industries, farm mortgages, 
home mortgages, and mortgages on city property. In previous de- 
pressions, when these savings institutions were relatively insignificant, 
it was a simple matter to let the orthodox economic process work 
itself out through the bankruptcy courts, to liquidate debts through 
the bankruptcy courts; when only a few individuals made up the 
"bloated bondholder" class the liquidation of those debts did no great 
harm to your social structure, but when the millions of savers, the 
millions of policyholders, the millions of holders of passbooks in the 
mutual savings banks and the savings departments of commercial 


banks are the owners of the bonds and mortgages, you cannot allow 
that deflationary process to liquidate those debts and disillusion those 
millions of savers. If you were to do that, you would change their 
buying and consuming habits so rapidly that you would bring about 
an economic collapse almost overnight. 

We have established the precedent in this depression for the first 
time of the use of Federal credit in support of the debt structure, 
in support of these great savings institutions. That precedent has 
been established. It was absolutely necessary, in my opinion, for the 
Federal Government to go to the aid of the debt structure. I shudder 
to consider the consequences if we had attempted to get out of the 
depression of the thirties without such process. 

The Chairman. Those who contend that every institution, the 
whole system, should have been permitted to go through the wringer, 
as the phrase has it, are overlooking, are they not, the fact that we 
are no longer living in an individual economy, but we live in a cor- 
porate economy, represented by the aggregation of these tremendous 
assets by large institutions. 

Dr. Davenport. That is right. 

The Chairman. The whole industrial system is the product of 
corporate economy, and the disaster which would be localized in 
the ordinary bankruptcy of an individual would be Nation-wide in 
the bankruptcy of a huge institution. 

Dr. Davenport. We are all in the same boat now. 

The Chairman. In other words, the same reasons which support 
the contention that the Federal Government had to step in with 
credit to prevent complete liquidation is support of the practice which 
has been followed heretofore of preventing, or at least reducing, the 
extent to which large organizations like the railroads were permitted 
to go through the wringer. 

Mr. Davenport. That concludes my direct testimon;^. 

Mr. Nehemkis. Mr. Henry Dennison is the next witness. 

The Chairman. Mr. Dennison, do you solemnly swear that the 
testimony you are about to give in this proceeding shall be the truth, 
the whole truth, and nothing but the truth ? 

Mr. Dennison. I do. 


Mr. Nehemkis. State your name, please. 

Mr. Dennison. Henry S. Dennison. 

Mr. Nehemkis. What is your occupation. 

Mr. Dennison. President of the Dennison INIanufacturing Co. 

Mr. Nehemkis. Are you a member of the Advisory Committee of 
the National Resources Committee? 

Mr. Dennison. I am. 

Mr. Nehemkis. Mr. Dennison, I believe that you are co-author of a 
volume entitled "Toward Full Employment." Is that correct? 

Mr. Dennison. It is. 

Mr. Nehemkis. Wlio are the other authors of that volume? 

Mr. Dennison. Mr. Flanders, Mr. Leeds, and Mr. Filene. 

Mr. Nehemkis. I take it, Mr. Dennison, that like yourself the co- 
authors of that volume are all business men. 


Mr. Dennison. Yes; they are. 

Mr. Frank. They have all met pay rolls. 

Mr. Dennison. So far as I know. 

Mr. Nehemkis. And I think one of the authors, Mr. Flanders, if 
memory serves me correctly, has already appeared before this com- 

Mr. Dennison, are you prepared to testify ? 

Mr. Dennison. I am. 

Mr. Nehemkis. Will you proceed, calling for the charts that you 
need as you go along? 

VOLUME or public construction — FEDERAL, STx\TE, AND LOCAL 19 20-19 3 8 

Mr. Dennison. The testimony we have had so far had to do with 
the accumulation of savings primarily and their tucking away in 
various reservoirs. I shall take up a part of the use and investment 
of savings, a very considerable part in construction, both public and 
private, in the United States. We have taken construction with ref- 
erence to private construction, to be what I think would ordinarily 
be called real property. We have eliminated machinery from those 
figures of private investments. We have taken with the Govern- 
ment figures for public construction what would ordinarily be known 
as pulblic construction, practically all the dams and public buildings, 
school houses, and have included, of course. State and local with the 

One chart will show the distinction among the three divisions hav- 
ing to do with the Federal and State and local divisions. 

The idea is to show the relation over 20 years or so of this large 
sum, of the public and the private sectors and to analyze a little 
more closely the public sector, to show some interesting and important 
facts concerning it. 

The leaving out of machinery was done largely because the com- 
parison shown here is more clear if this construction and maintenance 
is taken out in the private sector for the buildings alone. The two 
occupations are more nearly alike. If the machinery had been in- 
cluded the relations would have been very much the same. 

We start with the first chart, which I can identify as the same as 
the large one. The title is "Public and private construction and 
maintenance in the United States, 1920-38." 

Mr. Nehemkis. Mr. Chairman, I offer in evidence the chart just 
identified by the witness. 

The Chairman. The chart and table may be received. 

(The chart referred to was marked "Exhibit No. 613" and appears 
on p. 3776. The statistical data on which this chart is based are 
included in the appendix on p. 4064.) 

Mr. Dennison. This lower section is the total public, which includes 
State and local; the upper section in yellow is the total private. 
There are several interesting points about that. It starts in 1920 
and ends with 1930, which has had to be very slightly estimated and is 
probably correct within a very small percentage. The bulk, as will 
be seen, has been in all the late twenties up to 1929. A very heavy 
proportion, 75 percent or about, has been private construction. 


J- For testimony of Ralph E. Flanders, see Hearings, Part III, pp. 925-937. 






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The Government share— and again I want perhaps to emphasize 
and perhaps not do it again, that government is local and State as 
well as Federal— was rising all during the twenties except for a slight 
drop in '23, and carried along until the peak of 1930. The private 
construction sector came to its maximum in 1926, as it includes hous- 
ing ; that is one explanation anyway, although there was a softening 
in general in private construction from then on. The largest private 
sector happens back not at the last end, not in the great year of '29 
that we usually think of, but back in 1926. The Government sector 
was rising all that time, so that the peak year of the two together 
is '27, with very slight drops in the succeeding 2 years. 

Then you see the familiar toboggan slide which is exaggerated in 
the case of construction, as you have no doubt heard many times, 
because that is the critical and crucial sector of our economic life. 
That can stop almost utterly ; the current operations have to go on 
to a certain extent anyway to keep the population alive, but we can 
almost completely stop, if conditions are bad enough, the sector of 
construction for productive purposes. Here was this very heavy 
drop. The figures show it played very close to 11 billions, this pri- 
vate sector, in the late twenties, and then dropped with great sud- 
denness to 8, 5, to 3 and to 2, virtually, ending in '33 with just over 
2 billions of dollars. 

Mr. Frank. Private? 

Mr. Dennison. Private construction; that is the private alone. 
The total can be seen perhaps by the top lines as readily as it can 
be read. The private construction is hard to pick out there. That 
is why I gave you the figures. 

The recovery period showed the building up slightly of both with 
1936 showing the first considerable increase, and that also was an in- 
crease in both. Thirty-seven shows a slight drop in public construc- 
tion, but more than enough increase in private to make up for it; 
'38 holds about even in total and shows a slight increase m public 
construction, with almost equal decrease in the private. 

The Chairman. It would appear from this distance, Mr. Dennison, 
that government construction in 1930 was approximately the same 
in amount as in 1938. 

Mr. Dennison. Just a few dollars over; it is a little bit larger. 
The public in 1930 was 3,733,000,000; in '38 it was 3,711,000,000, 
almost exactly the same. 

Mr. Frank. So our public-works program has just about caught 
up with what it was in '30. 

Mr. Dennison. Just about. 

The Chairman. I assume that there may be a different proportion 
between Federal and State and local in the two columns. 

Mr. Dennison. The next chart will show that there decidedly 

was a difference. . <. -r. i i 

The Chairman. In other words, that the proportion of Federal 

construction in 1938 was vastly greater than in 1930. 

Mr. Dennison. Federal and Federal-aid construction is very much 

greater. We have drawn the distinction between the two. 

One word perhaps should be said with reference to the chart. We 

have included maintenance. I will show later, just for safety and 


clearer understanding, a chart which shows the public maintenance 
charge separately.^ It is not significant to our purposes because it 
goes along so perfectly uniformly. It is almost an even percentage 
all the way through. It did not seem safe to leave out maintenance 
because maintenance comes so close to being construction ; it is hold- 
ing up and keeping the condition of the asset up to full value and 
we felt that to show the full story it should be in. 

The next chart is, "Outlay for Construction and Maintenance of 
Government Plant, 1920-38, Federal, State, and Local." 

The Chairman, The chart may be received. 

(The chart referred to was marked "Exhibit No. 614" and appears 
on p. 3779. The statistical data on which this chart is based are in- 
cluded in the appendix on p. 4064.) 

Mr. Dennison. That brings out immediately the point that you 
make. We have here in the lower bar strictly Federal, direct Federal, 
operations. We have in the middle bar, which is colored yellow, the 
Federal aid, which includes both the loans and the grants in aid, 
and we have in the upper bar, that beautiful purple, the strictly 
local, direct, unaided local operations. 

The Chairman. Federal -aid to States appears on this chart in the 
first bar which appears in the year 1920. I assume that is principally 
road construction. 

Mr. Dennison. I assume that is almost wholly road construction. 
I don't remember that in those early days there was anything but. 
There may have been small operations in the nature perhaps of irriga- 
tions or flood controls or something like that, but it was extremely 
minor in any case and showed up as the first growth of any kind 
in 1930, which about doubled 1929 ; 1931 then not quite doubled 1930, 
and from then on that sector of Federal aid has grown, as shown 
there, very greatly, and the figures give it in the accompanying tables 
quite clearly. 

There, as clearly as one could show it, I think, is the picture of 
our total governmental construction and maintenance activities. 
Notice that in 1936 there was a considerable increase in the Federal 
activities, which dropped in 1937, of both sorts, direct Federal in 1937 
which dropped most heavily, and in 1938, while the direct Federal 
dropped the aid increased, but the top year of Federal aid and 
direct added together was 1936. The local has increased fairly 
steadily but very slightly from the low year of 1933, the local direct 

I am showing for the record, and it need not take more than a 
moment, a chart, "Public Construction and Maintenance in the United 
States, 1920-1938." 

The Chairman. The chart may be received. 

(The chart referred to was marked "Exhibit No. 615" and appears 
on p. 3780. The statistical data on which this chart is based are in- 
cluded in the appendix on p. 4060.) 

Mr. Dennison. Now, that is simply shown to separate the mainte- 
nance from the construction, so that a thorough understanding, if 
anyone needs at any time to use the figures, can be given somewhere 
separately. In the full record I hope that many of the details of 

1 Subsequently entered as "Exhibit No. 615," see infra, p. 3780. 





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these figures will be given.^ I suspect they will. Here, in making 
a relatively short appearance and not to weary you too much, I am 
using a very minimum of the charts. This I don't think has any 
particular significance. The totals will be just what you have seen 

The fourth and last chart that I want to show is entitled "Wliat 
Was Built by the Government, 1920-1937." 

The Chairman. The chart may be received. 

(The chart referred to was marked "Exhibit No. 616" and appears 
on 3782. The statistical data on which this chart is based are in- 
cluded in the appendix on p. 4065.) 

Mr. Dennison. This is again Federal and local and State govern- 
ments, and the form of expenditure in six main classes. Here is the 
highway expenditure, which, as one sees, is by all odds the largest. 
It goes 'to a figure of $1,480,000,000. 

Mr. Frank. In 1930? 

Mr. Dennison. In 1930. It has been a very considerable volume 
of governmental activity over the whole United States from 1920. 
Jts meaning, of course, is perfectly clear. We had to have roads if 
we were going to have automobiles, and we had to have automobiles 
if we were going to have roads, and there we were, but in all cases 
over the whole it seems to me it must be taken as an extremely im- 
portant activity which has then led to the richness and variety of life 
in any case of the whole citizenship if it hasn't done even more. 

This is water supply, sewage disposal, and that sort of thing, or 
water activities, the total of the river work, harbors, and all that sort 
of thing. 

Here are the public educational buildings, schools. You realize this 
is also the local expense. 

Here is the naval and military expenditures which come to con- 
siderable figures in the last 4 year's. They stayed about even, 40 to 50 
or 60 millions in the middle of the session. 


Mr. Dennison. The conservation and development began to get 
into considerable importance by 1930, and then the miscellaneous con- 
struction of public buildings and the whole range of activities of a 
miscellaneous nature. 

That I am putting in evidence because it seemed to us when work- 
ing together on the book that it must be appreciated that these 
activities are of considerable importance, of considerable social and 
personal importance; that is, the money that our governments spend 
in part at any rate goes to essential facilities that we couldn't do 
without ; we couldn't do without our schools in any case, it would be 
a horror to suppose what would happen to us if we did without our 
roads, or went back even to the condition that they were in years 
ago, and all the rest. We must realize that they are extremely 
important activities. 

1 See also data and chart on "Public construction, 1920-38, Federal and non-Federal 
maintenance not included ; part of work relief included," which appear in the appendix 
on pp. 4140 and 4141. . ,-^„^ oo i-, ^ ^ j 

2 See table and chart on "Public construction and maintenance, 1920-38, Federal and 
non-Federal ; part of work relief construction included," appendix, pp. 4140 and 4142. See 
also table "Work relief construction and maintenance, 1933-38," appendix, p. 4143. 







I am suggesting that these charts show that the governmental con- 
struction outlet is a considerable matter, it amounts to figures that are 
important, and that it devotes itself to purposes that are valid, that 
are in fact for the most part essential to our life together in this 
country, and, therefore, I want to make the point, as I come here 
direct from the meeting of the Kesources Committee, that the quality 
of each of the projects is of first importance; and the effectiveness 
of each one of the projects in the thousands of projects and tens of 
thousands of projects that are represented here, and we must be will- 
ing to spend a great deal of effort to be sure that they are good. 
I don't think the criticism of Government expenditures as such lies 
usually so heavily against simply expenditure as it does against a 
project which seems useless, ineffective, or ill chosen, or ill-timed. 
It seems to me with the quantity that is here, indicated by the past, 
with no indications on our charts that it is lessening materially, 
although it may to a slight extent, with that quantity it is of the 
utmost importance that we see that the quality is as high as we can 
possibly make it. That I believe can be accomplished primarily by 
foresight, by looking ahead, by arranging our projects years ahead 
of the time that we expect to undertake them, and so handling them 
that they can be thoroughly investigated and can be compared with 
each other, and particularly correlated. That is the point I want to 
emphasize very strongly, the one with another. In other words, 
I believe we can do it by planning. 

It is an old principle — planning. We talk about Alexander Ham- 
ilton and the Army and everybody else years ago ; but to come more 
nearly to date, there has been excellent planning for years by govern- 
mental bureaus; with long foresight they have been planned years 
ahead. The difficulty has been not with their individual planning, but 
there has been altogether insufficient means of bringing their various 
plans together, comparing them, particularly sometimes of uniting 
them so that two different bureaus dealing with the same sort of thing 
could bring their plans together in advance and work them out. You 
will realize that there are something like 80 in the Federal Govern- 
ment alone, something like 80 separate agencies that at some time 
or another give the funds with which to take part in construction 
projects, and the correlation and integration of the work of any such 
large number is a task of very considerable difficulty and of very 
considerable importance. 

That was first recognized in a given form by the Congress in 1931 
when they set up the Federal Employment Stabilization, and that 
was given, among others — 

the duties to cooperate with the construction agencies in formulating methods 
of advanced planning, to collect information concerning advanced construction 
plans and estimates by States, municipalities, and other public and private 
agencies, which may indicate the probable volume of construction within the 
United States, or which may aid the construction agencies in formulating their 
advanced plans. 

It is quite significant that at that time the beginnings of a coopera- 
tion with the States and local authorities was instituted. As is seen 
here, most of our public works would ordinarily be and have commonly 
been undertaken as local projects, and the Federal share has always 
gone out, most of it except the work that has been done here, a great 
deal by the Department of Agriculture, the Department of the Inte- 



rior, the Army's engineers, and all the rest, into these various com- 
munities, and there has been, I think, altogether too little institu- 
tionalized, organized cooperation so that plans of the one may be 
known in advance and correlated and integrated with plans of the 

other, . j_ ^ ^ 

When the P. W. A. was set up this became a very important mat- 
ter, as most of the work had to be done outside of Washington m 
the field, so to speak, in the country at large, and then Mr Delano 
and Dr. Merriam and Dr. Mitchell were asked to act as a board to 
criticize and correlate and bring together all the projects. They 
worked in cooperation with the Federal Employment Stabilization 
Board until the appropriation of the latter expired. The full duties 
were taken over by the National Kesources Board, which was an 
enlargement of the smaller committee, in 1934. Since then one of 
their principal jobs has been to get the projects far enough m ad- 
vance so that thev could be thoroughly criticized and thoroughly 
thought over not from one point of view, not an irrigation project 
from the point of view of irrigation alone, but of game conservation, 
of flood control, sometimes of navigation, of power; so that all of the 
possible interests, all the possible services that any project could per- 
form in any district could be thought over and the project so set up 
that it would serve the maximum purpose in all those directions. 

The way we have gone about the planning, I simply want to indi- 
cate very shortly with the idea of showing that it is a practical thing. 
As far as we have gone— of course, we have far to go to do a good 
job— it appears to be a wholly practicable thing. 

Our method is first to rely on the departments here, or the 1^ ed- 
eral (Tovernment, listing their projects just as they did with the 
Stabilization Board, and we bring those to others to look over, to 
see if they have any that correlate with them that ought to be taken 
into account when they are thought over. 

We go to the State planning boards which are set up very suc- 
cessfully over the country. There are now 46 active State planning 
boards over the country, and through them we can work with county, 
city, and municipal planning boards. They have their projects, 
which are either local, or jointly Federal and local, or are projects 
for the Federal Government alone ; they have a long list ahead, so 
that when any one of them is taken up, it can be looked at m the 
setting of all of the likely projects that will show up in the next half 
dozen years. It is significant that the first listing of the Stabiliza- 
tion Board was that they called upon the departments for projects 
for the next 6 years. 

We have done a great deal of work through special committees and 
regional committees, interstate committees, in such things as the 
Rio Grande project, the Red River,, and others, where for some 
special proposition we bring them together. • i at i. 

We have two very active regional committees, one m the JNorth- 
east and one in the Northwest, who are studying in each case for a 
half dozen States, projects that involve all of the States m coopera- 
tion with each of the State planing boards. We formed these com- 
mittees out of the people involved in the various departments to 
criticize and work over the projects as they have come to us. 

The best example and the furthest advanced m work is the Water 
Committee. There we have representatives of the bureaus that are 


concerned with work on the rivers; in the Army in the irrigation 
division you have conservation, and all the rest. We have in each 
case some men outside the Government. In the case of the Water 
Committee, Abel Wolman of Maryland, who is outside the Federal 
Government, acts as chairman, and they have done a sample of work 
which I would like to show iaecause I think it is the best example 
we can give of the promise which this type of advanced planning 
holds. I think that an examination of these two drainage basin re- 
ports which are public documents — I have plenty here if anyone 
wants them on the spot — of December, 1936, and a revision in 1937, 
shows just about what is meant by planning and just about the prac- 
tical possibilities of making it a success. 

Mr. Frank. Could you identify these two reports so they can be 
incorporated by reference? 

Mr. Dennison. The first report is "Drainage Basin Problems and 
Programs, December 1936, National Resources Committee." ^ 

The second report is, "Drainage Basin Problems and Programs, 
1937 Revision, National Resources Committee." ^ 

One or two points about those reports I want to emphasize. In 
the first place, it is a multiple-use problem. The special reason for 
undertaking it is that there is hardly a project there that involves 
simply one bureau. They involve the interests that two or three 
bureaus are set up to guard, but, more than that, in preparing these 
we have had local participation of 45 committees covering the 115 
basins that are covered in that first report; 550 people around the 
country have taken active, interested part in working out these reports, 
getting as far as they can. They have been very thorough with 
respect to one project and just barely mentioned another that is in the 
future, that is in the offing, and then there would be one half worked 
out. But there we have a connection between the center, as illustrated 
by some of the bureaus here that have part of the work to do and part 
of the interests to guard, and the field, working together in these com- 
mittees. We think that decentralization is of the utmost importance 
for all the construction activities, or almost all, that the Government 
might undertake, and so I am emphasizing and reemphasizing the 
importance of that in respect of thorough understanding — the chance 
to criticize thoroughly before Congress or the Executive has to select 
and undertake. We are trying to lay before those who have the final 
selection to make the fullest information possible and the biggest 
background possible. We believe that this sort of planning can 
make — cannot guarantee but greatly assure — the effectiveness and 
the real quality of the various projects that have made up Govern- 
ment expenditures in the past and are almost certain to make up a 
very significant part of our total investment in this country in the 

The Chairman. How do you correlate this with the problem of the 
investment of so called private funds which was delineated before us 
this afternoon by Dr. Davenport? 

Mr. Dennison. This Government part of this is not, I suppose, to 
be talked of in precisely the same language as the investment of 
private savings. This is sometimes called the investment of Govern- 

^ On file with the committee. 
124491 — JO— pt. 9 20 


ment savings.^ I think the terms are misleading and probably we. 
have got to reanalyze and invent some others. This, after all, is a 
Government expenditure. It is different from others such as paying 
teachers' salaries, without which, of course, the schoolhouses are no 
good. The difference is that you have something you can look at and 
touch afterward. Presumably a teacher gives you a quality and a 
value in the future that may be of much more importance than the 
schoolhouse itself, but that is in the realm of the imagination. 


The Chairman. But this committee has been requested by the 
President of the United States to develop, if possible, information on 
how investment funds — by which I assume to be meant private invest- 
ment funds — may be actually put to work.- Your testimony does not 
deal with that; you are speaking only of the contribution which 
Government expenditure may make and you are not offering any 
solution to the problem of unemployment, are you ? 

Mr. Dennison. I am not. 

The Chairman. I observe from your chart entitled "Public and 
Private Construction and Maintenance in the United States" ^ that 
the entire contribution of public construction for the years 1933 to 
1938, inclusive, approximates about $18,000,000,000, and that the pri- 
vate contribution to construction and maintenance during the 2 years, 
1927 and 1928, also amounted to about $18,000,000,000. Is that 
correct ? 

Mr. Dennison. There are about 20 for the private and about 19 
for the Government. 

The Chairman. In other words, it is your judgment that private 
construction called for the expenditure in 2 years of a billion dollars 
more than the entire Government expenditure. Federal and State, 
for public construction during the years 1933 to 1938 inclusive? 

Mr. Dennison. Two years in the late twenties. 

The Chairman. Yes, 1927 and 1928. Did I not say that? That 
is what I meant if I didn't say it. In other words. Government 
spending in itself is not the contribution toward the restoration of 
prosperity that private spending is. 

Mr, Dennison. Under the present situation I don't see how it could 
amount to more than a fraction of the contribution. 

The Chairman. The question for us, then, to answer for the Presi- 
dent and for the country, I take it, is how we can stimulate these 
private expenditures without which there can be no real prosperity. 
Have you any suggestion to make to us on that score ? 

Mr. Dennison. I think that is the crux of the matter, but I haven't 
prepared on that particular angle. If I had, I am not at all sure that 
I would be quite bold enough to make the suggestion. 

The Chairman. That, of course, as you say, is the crux of the 
matter and desirable public expenditure or public construction in 
itself is no answer to the problem unless by means of it we succeed 
in putting people to work. 

i In this connection see table and chart on "Funds available and the disposal of such 
funds by the Federal Government, total, 1031-38," appendix, pp. 4144 and 4145. 

2 See "Exhibit No. 546." appendix, p. 4000. 

3 See "Exhibit No. 613," appendix, p. 4063. 


Mr. Dennison. Yes. I am emphasizing simply that it is extremely 
mportant in the situation. I think it is important psychologically. 
[ think we have felt for years we should do our best to make that 
valid and good, what there is of it, but for a long time to come, 
onger than I expect to be wandering around here, I think the prin- 
cipal thing is to look for private expenditure. 

The Chairman. So that you are not offering this plan of public 
expenditure as a solution of our problem. 

Mr. Dennison. Absolutely not. 

The Chairman. There was another thing, Mr. Dennison, which 
appealed to me very strongly from your chart, "What Was Built 
Dy the Government." ^ It is just by way of commentary, not that it 
las any great significance, but it would appear from this chart that 
jroverimient expenditure for educational construction was far greater 
luring the period 1920 to 1937, inclusive, than all expenditures for 
military and naval construction. Your chart shows that. 
; Mr. Dennison. Very much greater, yes. 

I The Chairman. And Government expenditure for highways was 
lipparently greater than the total expenditure for naval and military 
purposes, public educational purposes, and sewage disposal and 
vater supply purposes. 

Mr. Dennison. Eoughly speaking the highways have been pretty 
: learly half and that is to say equal to all the others put together, a 
i ^ood many years slightly more than half. It runs not far from half 
ill through the twenties. Highways has been equal to all the rest 
i)f them added together. 

The Chairman. I think it is probably not very well understood 
hat military and naval construction is such a small proportion of 
he total Government expenditure during this period. 

Mr. Dennison. Even as it has grown — it is 200 millions — but with 
he highways at 800 million, they have gone down a great deal.^ 

Mr. Nehemkis. Are there any other questions to be asked? 

Mr. O'Connell. Referring to the chairman's earlier question, it 
seemed to me that your entire discussion of this type of activity 
issumes the social desirability of public expenditures of the char- 
icter that you are referring to. Isn't that true ? 
j Mr. Dennison, Yes ; it certainly does. 

j Mr. O'CoNNEiiL. Would it be too much to say that it also as- 
{ sumes some beneficial effect of this type of activity insofar as creating 
employment, and so forth? 

Mr. Dennison. Yes; I think that is wholly true. I think if you 
magine cutting all of this off suddenly you would find yourself 
;hinking of considerable deflation. I would say that to depend upon 
government construction to fill up the whole gap within the measur- 
ible number of years would be, well, decidedly premature and unwise. 

The Chairman. Not only premature and unwise, but impossible. 

Mr. Dennison. It would be quite impossible as well. We can't let 
a)p on all of the efforts in the world, it seems to me, to spur the 
present construction, because I don't think we could win out on the 
public alone under the best of circumstances. 

1 "Exhibit No. 616," supra, p. 3782. 

' See also table on "Expenditures for construction and maintenance of naval vessels in 
the United States, 1920-38," which appears in appendix, p. 4146. 


Mr. Frank. On the other liand, having read your book— perhaps 

that is an unfair advantage — I gather 

The Chairman (interposing). An unfair advantage of Mr. Denni- 


Mr. Dennison. He is quoting the Bible— 'Would that mine ene- 

niy * * *" . , 

Mr. Frank. I am going to ask whether you don't think that public 

expenditures indicated in your first chart are very important as a 

means of furnishing the basis for the private expenditures in the 

field of construction and otherwise, and for helping to meet the 

problem of unemployment. 

Mr. Dennison. I have no doubt whatever that the public expendi- 
tures help to meet the problem. I don't see how it could be figured 
any other way, but that if the public expenditures are there there 
is that much less unemployment than there would be. Also, we had 
very much in mind in the book, a more — I hate to use the word — 
normal situation. That is, what I am saying is that we can't now, 
or couldn't certainly after '32, have counted on public expenditure 
to fill up the whole gap. We probably can't count on it to fill up 
the gap that is left, considering the increase in the population and 
all the rest, today. But we should consider, as we said in the book, 
a fluctuation in public expenditure, public construction, a fluctua- 
tion to help cushion the fall and perhaps prevent it. I don't know 
that it will prevent; if it is tackled early enough it may, and of 
course that involves the retraction and diminution of public con- 
struction as soon as private business activity goes on. 

The Chairman. May I interrupt to say that I didn't mean to imply 
by my questions that the Government expenditures, both State and 
Federal, for public construction, were not a very important contribu- 
tion to the solution of the trouble. My point, however, is, as demon- 
strated by this chart, that the Government expenditures are, compara- 
tively speaking, only a drop in the bucket as compared to the expendi- 
ture which is necessary to restore anything like a prosperous economy. 
Would you feel that that is a correct way of stating it ? 

Mr. Dennison. I think we can put it in a word by saying that we 
can look to this field for a certain tonic and amelioration but not for a 
cure. If you talk public expenditure as a cure, then I think you are 
talking certainly beyond your time, beyond the moment, and beyond 
the possibilities'^ of the moment, but what can be done in that field 
without any damage which overwlielms its usefulness is. it seems to 
me, very much to the good, and if it is the sort of thing we want 
anyway, there can be very little argument against it. 

Mr. Nehemkis. To put it somewhat differently, we might say it is 
a way of holding the line until private investment moves up to the 
front ranks. 

Mr. Dennison. I think that is another way to put it, that one might 
keep in good condition with a tonic until natural forces begin to build 
up his health. 

The Chairman. Then, of course, the other question arises whether 
or not the Government can, for a long period of time, follow the policy 
of engaging upon construction of this kind with borrowed funds and 
not out of income. Construction out of income is one thing; construc- 
tion with borrowed funds over a long period of years is quite another. 


Mr. Dennison. That I would not be bold enough to have views 

The Chairman. You don't offer any opinion on that ? 

Mr. Dennison. You have men so much better qualified than I that 
ny view would be simply that of an amateur. 

The Chairman. So that this testimony leaves this whole question of 
ieficit spending unanswered. 

Mr. Dennison. It does. It takes a very small and very practical 
mgle of the whole, that here is this Government activity which enters 
nto your problem, as you have already said, to some extent, and I am 
naking the emphasis that it enters in most effectively, perhaps only 
effectively, if the quality of the projects is guarded with the utmost 

The Chairman. Are there any other questions ? 

Mr. Nehemkis. No, Mr. Chairman. I would call your attention 
hat it is now 5 : 30, and we promised to have the witness through with 
lis testimony at that time. 

The Chairman. I think you have done very well with a very inter- 
iSting witness. 

(The witness, Mr. Dennison, was excused.) 

Tlie Chairman. What time do you want to begin in the morning? 

Mr. Nehemkis. At your pleasure. The witness will be Hon. William 
^. White, Superintendent of Banks of the State of New York. The 
vitness for the afternoon will be Hon. A. A. Berle, Jr., Assistant 
secretary of State. 

The Chairman. The committee will stand in recess, if it is agree- 
ible, until 10 : 30 in the morning. 

(Whereupon, at 5 : 30 p. m., a recess was taken until Tuesday, May 
!3, 1939, at 10: 30 a.m.) 

1 See tables and charts on "Increase in Federal debt and in value of selected Federal 
■roperties, 1931-1938," and "Increase in public debt and in Government assets, 1931- 
938," whicb appears in appendix on pp. 4146, 4147, 4148, and 4149. 


TUESDAY, MAY 23, 1939 

United States Senate, 
Temporary National Economic Committee, 

Washington^ D. C. 

The committee met at 10 : 50 a. m., pursuant to adjournment on 
Monday, May 22, 1939, in the Caucus Eoom, Senate Office Building, 
Jenator Joseph C. O'Mahoney presiding. 

Present: Senators O'Mahoney (chairman). King, and Borah; 
Representative Eeece; Messrs. Henderson, Davis, O'Connell, Frank, 
nd Brackett. 

Present also : Willis J. Ballinger, Federal Trade Commission ; Amos 
J]. Taylor, Department of Commerce; Commissioner Edward C. 
Richer, Securities and Exchange Commission; Peter K. Nehemkis, 
r., special counsel. Investment Banking Section, Securities and 
Exchange Commission; and Joseph K. Kelley, associate counsel, 
nvestment Banking Section, Securities and Exchange Commission. 

The Chairman. The committee will please come to order. 

Are you ready to proceed, Mr. Nehemkis ? 

Mr. Nehemkis. I am, sir. 

The Chairman. Will you please call the first witness? 

Mr. Nehemkis. Mr. Chairman, may it please the committee, yes- 
erday we examined the formation and flow of the national income, 
nd the great importance of savings in that flow. Mr. Ralph Manuel, 
•resident of the Marquette National Bank, Minneapolis, described the 
lechanism of the dollar circuit.^ Dr. Davenport described the 
eservoirs into which individual savings flowed, and the types of 
Qvestments made by our great savings institutions.^ 

He indicated that savings were no longer individual transactions, 
lut were woven into the whole economic fabric through the medium of 
lur giant financial institutions. His testimony made it clear that the 
Lmerican people were not becoming less thrifty, but rather the con- 
rary. He developed some of the difficulties now appearing in find- 
ng investment outlets for this growing stream of savings, and cited 
igures of idle money and cash balances and excess bank reserves. 

Mr. Henry Dennison, president of the Dennison Manufacturing 
Do., Framingham, Mass., analyzed construction outlays, both public 
md private, as investment outlets.^ He showed how public construc- 
ion had averaged from 20 to 25 percent of all construction during 
he 1920's, but now running from 40 to 50 percent of all, due to the 
;reat shrinkage of private construction, especially housing. 

1 Supra, pp. 3706-3725. 

2 Supra, pp. 3726-3774. 
8 Supra, pp. 3774-3792. 



From his testimony it would appear that public construction can 
hold the line against further decline, but can hardly be expected to fill 
the whole gap. Today, Mr. Chairman, we invite the committees 
attention to ways and means for increasing investment opportunities, 
especially in the area of private enterprise. ^ , . , -^ . , , 

The Chairman. By the way, Mr. Nehemkis, I think I might prop- 
erly comment on at least the final conclusion of your statement on the 
effect of Mr. Dennison's testimony. He was very clear m saymg that 
he was offering no solution of the economic problem by Government 
spending and whether one may say that his testimony indicated that 
the line could be held by that alone I think might be open to some little 
debate. I make this comment merely because I don't want it to appear 
that the committee is by any means authorizing any definite conclusion 
with respect to what the effect of the testimony is. , . , t 

As a matter of fact, as I remember some of the questions which 1 
addressed to Mr. Dennison, he expressly disclaimed any attempt to 
answer the question of spending. He was merely offering or com- 
menting upon what seemed to be a desirable program; but whether 
such a program should be carried on by borrowed funds he didn t touch 
at all. And that, of course, is one of the problems that this committee 

must eventually study. rr^i . -r n ^ *. 

Senator King. May I make this comment : That I would not want 
it to be understood that the presentation just made by this distin- 
guished attorney was the view of the committee. Certainly some o± 
the statements made by him as conclusions would be subject to serious 
controversy, and I doubt the propriety or the wisdom, at any rate, ot 
counsel representing or stating their conclusion as to what the testi- 
mony means. ^ . .^ , , , j. 

My Nehemkis. Let us merely characterize it as a statement ot 
counsel and his impression of what the evidence purported to indicate. 

Senator King. That is all right ; let it be so characterized. 

Mr Nehemkis. Mr. Chairman, if the committee please, this naming 
I have the pleasure of presenting to you as our first witness the Honor- 
able William R. White, Superintendent of Banks of the State ot Wew 


The Chairman. Do you solemnly swear that the testimony you are 
about to give in this proceeding shall be the truth, the whole truth, and 
nothing but the truth, so help you God? 

Mr. White. I do, sir. 


Mr Nehemkis. Will you state your name and address, please ? 
Mr. White. William R. Wliite, 419 East Fifty-seventh Street, New 

Mr. Nehemkis. Mr. Wliite, what is your official connection with the 
government of the State of New York? . . ^r. a. . 

Mr. White. As superintendent of banks I am the head o± the btate 
banking department. , . u j? 

Mr Nehemkis. Mr. White, you have been for a number ot years 
connected with the department of banks in one capacity or another, 
have you not, sir? 


Mr White. That is correct. I came into the department in 1930 as 
assistant counsel and later became deputy superintendent and counsel, 
md for the last 3 years have been superintendent of banks. 

Senator Ejng. As counsel, you mean legal adviser? 

Mr. White. That is correct. 

Mr. Nehemkis. Mr. White, are you prepared to discuss this morning 
with the committee the possibilities of expanding and opening up the 
legal list? 

Mr. White. Yes, sir. 

Mr. Nehemkis. Mr. White, can you give us an estimate ot the 
amount of trust funds and savings-banks deposits in the State of New 

York? , • 1 , ^ 

Mr White. The deposits of New York mutual savings banks as ot 
the end of last year were approximately $5,400,000,000. Accurate 
figures concerning the amount of personal trust funds in New York 
are not available. We estimate, however, that there are approximately 
^7,000,000,000 held by corporate trustees in New York; that is, by New 
York trust companies and national banks which are authorized to 
exercise fiduciarv powers. We also estimate that approximately one- 
quarter of this $7,000,000,000 of trust funds is restricted to investment 
tin securities which are prescribed by law for legal investment. All of 
the funds held by savings banks are likewise restricted, so that we have 
in the State, including the deposits of savings banks and trust funds 
which are restricted to investments in which savings banks may 
invest, about $7,000,000,000. 

Senator King. Part of the first $5,400,000,000 you mentioned and 
part of the $7,000,000,000? 

Mr. White. Yes; it would include about one-quarter of the seven 
billion, and the five billion four hundred millions. 

Mr. Nehemkis. Will you explain briefly, Mr. White, the meaning 
of the term "legal list" ? 

role of legal list in directing flow of investment funds 

Mr. White. The legal list is a document published annually by the 
New York State Banking Department. It lists the securities which, 
in the opinion of the superintendent of banks, comply with the stand- 
ards prescribed in section 235 of the banking law and which are there- 
fore, in his opinion, legal for investment for savings banks and for 
trustees. The fact that securities are excluded from the list is not to 
be taken as definitely meaning that those securities are not legal. 
However, the fact that securities are included in the list affords some 
protection to savings banks and trustees investing in those securities 
and, ill fact, investment in other securities is barred by savings banks 
and by trustees unless the instrument creating the trust authorizes 
investment beyond the list. 

Mr. Nehemkis. Not all States restrict investments by savings banks 
and trustees in the same manner as New York. Is that correct ? 

Mr. White. That is correct. In some jurisdictions we have what is 
known as the Massachusetts rule, which means that the State does not 
attempt to prescribe with exactitude the securities in which trustees 
may invest. On the contrary, a broad discretion is allowed the trustee 
in selecting investments so long as he acts with prudence and in good 


The majority of States, however — the large majority of States — 
have legal lists similar to the one which we have in New York. Some 
States, I believe, incorporate by reference the New York legal list 
without setting up a list of their own. 

Mr. Nehemkis. Before the obligations, say, of a railroad can be 
admitted to the legal list in New York, what qualities would the road 
have to have demonstrated? 

Mr. White. The road must not have experienced a default in 6 
years prior to the time an investment is made, it must operate at 
least 500 miles of track or have annual gross operating revenues of 
at least $10,000,000 during 5 of the 6 preceding years. It must have 
earned fixed charges at least one and one-half times during 5 of the 
preceding 6 years and during the last year prior to the investment, 
and have either paid cash dividends during 5 of the preceding 6 years 
equal to one-fourth of the amount of fixed charges or, as an alter- 
nate, must have earned fixed charges at least one and one-half times 
during 9 of the preceding 10 years. By a temporary moratorium 
which has been extended from year to year for the past 8 years, I 
believe it is, the rule that a road must have earned its fixed charges 
one and one-half times has been displaced by a provision to the effect 
that the road must have earned its fixed charges once. 

Mr. Nehemkis. In other words, Mr. White, if I understand you 
correctly, before the obligation of an American railroad can find its 
place on the legal list of the State over which you have jurisdiction 
it must have fulfilled the four requirements which you just set forth. 

Mr. White. That is correct. 

Mr. Nehemkis. I presume that in the municipal and utility fields 
the issuing corporations must likewise comply with certain specific 
requirements. Is that correct? 

Mr. White. That is correct. The law is very definite with respect 
to the requirements which must be met by the issuing corporation 
or municipality. 

Mr. Nehemkis. Can you tell the committee, Mr. Wliite, the amount 
of the different classes of securities which make up the list and the 
major changes in recent years in its composition ? 

Mr. White. The legal list does not attempt to enumerate Govern- 
ment bonds, the reason being that all United States Government 
bonds are legal for investment without any condition being prescribed 
whatever. Hence, because the superintendent is not required to 
exercise any discretion relative to these obligations, they are not 
enumerated in the list. 

In 1931, and I take that year because it was about the last year 
when the list reflected the situation as it existed prior to the effects 
of the depression, the amounts of the different classes of securities 
included in the legal list were approximately as follows: Obliga- 
tions of States, two billion three hundred one millions; municipal- 
ities, eight billion seven hundred seventy three millions; railroads, 
seven billion six hundred two millions; utilities, two billion one 
hundred sixty-six millions. 

(Senator King assumed the chair.) 

Mr, Nehemkis. I suppose in connection with the 8-billion figure 
that you gave of the municipals, that is a direct obligation debt; 
so it would not be on the legal list because of specific tax provi- 


, Mr White. That is correct; ves. With the exception of the rail- 
road classifications, these figures have not changed materially snice 
1931 In the case of railroads, the 1931 figure of seven billion six 
hundred millions has dropped to two billion five hundred millions, 
and even this amount is not properly comparable to the 1931 figure 
because it includes one billion six hundred twenty-five millions of 
securities which are eligible for investment only by virtue o± the 
temporary moratorium to which I referred a few moments ago. 
A^ctually there are less than a billion dollars of railroad securities 
which, on the basis of the last year's earnings complied with the 
standards prescribed by the banking law of 1931, that is the regular 
standard provision of the banking law. This situation is due, of 
course, to the fact that decreased earnings in the rail industry made 
it impossible for many roads to comply with the statutory standards 
which were applicable in 1931. 

Mr. Nehemkis. Suppose, Mr. White, that a railroad, the securities 
of which are removed from the legal list, is reorganized on a sound 
basis so that its earning power is restored and its future prospects 
are bright, would savings banks and fiduciaries then be permitted to 
invest in its obligations? 

Mr. White. If the road defaulted, of course, an investment could 
not bei made in its obligations until after 6 years had elapsed and 
even if it had not its obligations would not be legal investments 
for savings banks or for trustee until the road made a record of 6 
years, during which in the case of its mortgage bonds it had earned 
fixed charges at least one and one-half times in 5 of the 6 preceding 
years, and in the case of its debentures it had earned its fixed charges 
at least twice during 5 of the 6 preceding years and in the last year. 

Acting Chairman King. Have any railroads that have been reor- 
ganized met the 6-year requirement to which you have referred and 
thereby become eligible? 

Mr. White. I am sorry I can't answer that. I assume that prob- 
ably that has been the case in years past, but I wouldn't wish to 
try to answer the question. 

Acting Chairman King. Not within your recollection ? 

Mr. White. Not within my recollection ; no. 

Acting Chairman King. On your list of eligibles you have not 
placed then, reorganized railroads that have met those requirements 
to which you have just referred? 

Mr. White. No ; we have not so enumerated them. 

Mr. Nehemkis. Mr. White, you have mentioned railroads and 
utilities as the two fields of private business in which the funds of 
savings deposits and trust funds can be invested. Do you believe 
that the list includes all of the investments of these two fields which 
might properly be considered as investments for savings and trust 

Mr. White. I believe not in the utility field. For example, I be- 
lieve there are undoubtedly a substantial number of corporations 
which failed to meet the technical requirements of the banking law, 
but whose securities might properly be considered as investments for 
savings banks or for trustees. We have found, however, that it is 
very difficult, if not impossible, to prescribe fixed standards in the 
law which operate to include all the good securities and at the same 


time exclude all those that are not proper for investments, and the 
law fails to take into consideration a great many intangible factors 
which are incapable of standardization. 

Mr. Nehemkis. In other words, I take it that the exact standards 
fixed by the law are necessarily inflexible. 

(Senator O'Mahoney resumed the chair.) 

Mr. White. That is right. 

Senator King. May I ask a question there? Have you placed upon 
your eligible list, with or without a question mark, debenture bonds 
based upon real estate, hotels, large apartment houses, real estate, 
urban properties? 

Mr. White. No, no ; they would not be legal investments. 

Senator King. No matter how meritorious the securities might be? 

Mr. White. That is correct. There are no standards prescribed in 
the law with respect to that type of security. 

Senator King. I suppose the board which prescribes the require- 
ments for eligibility there have reached the conclusion that real estate 
is so uncertam in value that debentures and mortgages and so on are 
not to be placed upon the eligible list. 

Mr. White. All of the standards to which I have referred up to 
this point are standards prescribed in the law, that is by the legisla- 
ture, and these provisions to which I have referred make no reference 
to debentures which I assume you have in mind, corporations engaged 
in the real estate business. 

Senator King. Yes. 

Mr. White. Of course, first mortgages are eligible for investment 
for both savings banks and trustees. 

Senator King. I didn't so understand your statement. 

Mr. Nehemkis. Is it your opinion, Mr. White, that there are other 
industries in addition to railroads and utilities whose securities might 
measure up to proper investment standards for savings and trust 
funds ? 

Mr. White. In my opinion, yes; certainly consideration should be 
given to industries, such as foods, oils, tobaccos, and steel. At the 
present time savings banks and trustees which are restricted to the 
New York legal list are barred from making investments in corpora- 
tions operating in these fields, no matter how sound the individual 
corporation may be. 

Mr. Nehemkis. As I understood your answer, it was your view 
that consideration could be given to such industries as foods, oils, 
tobacco, and what was the other one? 

Mr. White. And steel. 

Mr. Nehemkis. Steel. 

Senator King. Do you know whether efforts have been made to 
secure legislation broadening the list of eligibles? 

Mr. White. Yes; a great deal of study has been given to that in 
the last few years in New York and a year ago an act was passed 
which we hope will make it possible to broaden the legal list. 

Senator King. Would that list include, if it were passed, steel, 
tobacco, foods? 

Mr. White. The amendment to the law to which I refer is one that 
would permit the State banking board to make additions to the list. 


Mr. Nehemkis. How would it be possible, Mr. White, to revise 
he legal list to permit the investments of savings and trust funds in 
ndustrial fields such as those you mentioned ? 

I^Ir. White. There are three general avenues of approach. One 
neans of accomplishing the purpose would be to formulate statutory 
ests and make them applicable to corporations operating in the m- 
lustrial fields. Those tests would be similar in principle to those 
hat now apply to railroads and to utilities. However, as I have 
ilready pointed out, it is extremely difficult to prescribe fixed stand- 
irds which operate effectively to admit all of the good securities and 
it the same time bar those that are inferior in one way or another. 
The second possibility lies in the consideration of the Massachusetts 
•ule to which I have also referred ; the rule which places broad dis- 
iretion in the trustee to select securities so long as he acts with pru- 
ience and in good faith. 

It is probable, however, that most States which have for many 
i^ears followed the New York rule would be reluctant or unwillmg to 
iccept the Massachusetts rule. 

• Mr. Nehemkis. May I just interrupt at this point, Mr. Wliite? 
PVould it be a fair characterization on my part to say that the ma- 
jority of the American jurisdictions follow the New York standards, 
md the rules laid down by your department? 

Mr. White. It would be proper to say that a majority of the States 
lave legal lists similar to the one in New York. I think that it is 
ilso safe to say that since New York originated that method of test- 
ing securities that it has been followed by most of the other States. 

Senator King. By the adoption of your statute or by reenacting 
3r by adopting it in general terms or reenacting it in the same words. 

Mr. White. It has been done both ways; usually the State has 
taken it over and enacted it into their own statutes, or similar statute. 

Senator Kjng. Has there been much criticism of Massachusetts, 
where responsibility rests on the trustee and who, I assume, might 
be liable in damages if he acted capriciously or without due con- 
sideration of the responsibility devolving upon him? 

Mr. White. I believe there has been a minimum of criticism of 
the manner in which the Massachusetts rule has operated. I am in- 
clined to feel personally that it has many advantages over the New 
York method. 

Senator King. I suppose in view of the large discretion vested 
in the trustee, the court or the individuals, or those creating the 
trusts have been a little more meticulous and careful in the selection 
of the trustees? 

Mr. White. That may possibly be true, and of course where the 
trustee is given broad discretion that way, the courts have usually 
held him to very strict accountability. 

Mr. O'CoNNELL. Referring to the Massachusetts rule, do you hap- 
pen to know whether in States where that rule operates it results 
in a substantially different character of investment by the trustees 
concerned ? 

Mr. White. Well, in years past I think that it has resulted m 
quite a difference in investment practices. 

Mr. O'CoNNEUi. You mean more equity securities and that sort 
of thing ? 


Mr. White. For example, in Massachusetts the courts have held 
that equity investments are permissible. 

Mr. O'CoNNELL, Does the legal list in New York operate sub- 
stantially as a substitution for the responsibility that each trustee 
would ordinarily have under the Massachusetts rule? 

Mr. White. I would say not. I think even where the trustee is 
operating under a list such as we have in New York, the court still 
holds him to pretty strict responsibility. 

Mr. O'CoNNELL. That is, it is possible that he might buy secu- 
rities that were within the list and still be held to have breached 
his fiduciary duty ? 

Mr. White. That is correct, depending largely upon the needs of 
the particular trust account in which he made the investment. 

Mr. O'CoNNELL. But the degree of care required of the trustee 
is probably less in the eyes of the courts where they follow a legal 
list than where they follow the Massachusetts rule, wouldn't you 

Mr. White. I think I would prefer not to express an opinion on 

Senator King. At any rate, have you found in New York that the 
trustees who were acting under this eligible list have measured up to 
the highest standard of fidelity to their trust so that they haven't been 
subjected to criticism because they made loans of trust funds upon 
security that was not adequate? 

Mr. White. Well, I believe that the record of the corporate trus- 
tees in New York — I refer to corporate trustees because they are the 
only ones that I have any first-hand knowledge of — has been very sat- 
isfactory. There have been some cases of abuse, but not many. 

The Chaikman. What has been the effect upon the trust funds 
of the two systems ? Have you any definite information with respect 
to that? 

Mr. White. Well, I haven't any information with me at this time. 
I am inclined to think that under present conditions most trustees are 
confining themselves pretty much to Government bonds so that you 
could look at a trust under the New York law and another one 
under the Massachusetts law and you would probably find the in- 
vestments running pretty much parallel. 

The Chairman. So that in effect upon the trustee funds, there is 
no difference between the two rules actually ? 

Mr. White. I am saying that only — I think that is true only under 
present circumstances when trustees are being very cautious and feel 
that probably they could do as well or better to stay in the Govern- 
ment list, as to go outside. 

The Chairman. How long has the tendency been evident to stay 
in the Government list? 

Mr. White. I would say that it has been in process of development 
during the past 6 or 7 years — perhaps 8 years. 

The Chairman. In other words, developing over a comparatively 
long period of time? 

Mr. White. That is right. 

Senator King. Does the Government list include State bonds, State 
issues ? 

Mr. White. I was referring only to United States Government 
bonds then, but of course most of the States are also legal. 


Mr. Nehemkis. Mr. White, I believe that there was an amendment 
made in the banking law in 1938 which authorized the State banking 
board upon application of a group of savings banks to add to the 
regular list corporate interest bearing obligations, not otherwise eli- 
gible for investment. Is that correct, sir ? 

yir. White. Yes; that is correct, and the banking board acting 
under that authority has during the past year added to our legal 
list in New York debentures in an aggregate of about 577 million 
dollars, and those debentures were of the American Telephone & 
Telegraph Co., the Liggett & Myers Tobacco Co., the Mountain 
States Telephone & Telegraph Co., the Socony Vacuum Oil Co, the 
Southern Bell Telephone & Telegraph Co. The board now has under 
consideration other securities and it is quite possible, I think, that, 
under this new statute which places this discretionary authority in 
the State banking board to pass upon securities when application to 
list securities has been made to the board by a group of savings banks, 
it may be quite possible that we may find a partial solution to our 
problem of broadening the legal list, and I think it is interesting to 
observe that all of these securities which have been added to the list by 
the banking board are debenture bonds. 

It was not many years ago when only mortgage bonds were 
thought to be suitable investments for savings banks and for trust 
funds. In recent years, however, we find that a growing tendency 
is to shift part of the emphasis from the underlying security to the 
credit standing of the issuing corporation and I believe that as 
greater emphasis is placed upon a corporation's earning power and 
less upon the underlying collateral that the subject of investment in 
preferred and common stocks is likely to receive more serious con- 

Mr. Nehemkis. Perhaps we might shift that reply you have just 
given, Mr. Wliite, by saying that if we are going to permit invest- 
ments in common and preferred stocks, it must follow that earning 
power has to become the paramount criterion ? 

INIr. White. That is correct. 

Mr. Nehemkis. What is your opinion, Mr. Wliite, relative to the 
suitability of preferred and common stocks for inclusion in the list 
of legal investment? 

Mr. White. I would be opposed to adding stocks to our present 
legal list in New York. However, if a separate list for trustees 
were established, I believe that consideration might properly be 
given to stocks as a medium of investment. This would not consti- 
tute a radical departure from accepted practices. For many years 
trustees have invested in preferred and common stocks for the 
account of trusts with respect to which they have managerial discre- 
tion; likewise preferred stocks have been regarded for many years 
as suitable investments for life-insurance companies. 

In considering stocks for trust investment it is important to bear 
this in mind, that some of our most successful corporations have little 
or no funded debt these days. It would seem that the purpose of 
many trusts which are concerned with income might be better 
served by inclusion of some high grade common and preferred stocks. 
The principal reason for not permitting savings banks of ours to 
invest in stocks is that the matter of fluctuation of market values 


is of little importance to trusts in comparison with banking insti- 

In weighing the advisability of granting broader discretion to 
trustees to select investments, we should also take into account the 
fact that the bulk of trust investments of the trust business today 
is done by corporate fiduciaries which are able to retain the services 
of experts to pass upon their investments, whereas the legal list was 
originally set up at a time when trustees were usually individual 
laymen and needed more guidance, probably, than they do today; 
and it was also important to bear in mind that at the time these 
standards were set up the issuance and sale of securities was not 
regulated in the manner that it is today. 

Mr. Nehemkis. I take it, then, Mr. White, it is your opinion that 
if the legal list were broadened along the lines that you have just 
indicated we could to some extent stimulate investment outlets in 
private enterprise presently closed to the investment funds of some 
of our trust institutions and savings banks? 

Mr. White. I think that over a period of years it is important that 
our laws permit trustees to invest in all of the sound securities that are 
available. Otherwise, we cannot keep open the channels by which 
the savings flow into the capital investments of the country and, like- 
wise, we will be denying to trusts and to savings the income which they 

I would say that over a period of years certainly the legal list and 
the laws relative to investment of savings and trust funds has a direct 
bearing upon the question that you mention. 

Mr. Nehemkis. Mr. Chairman, I have no further questions. 

The Chairman. Do any of the connnittee members desire to ask 
Mr. White any further questions? Mr. O'Connell? Mr. Henderson? 

Mr. Henderson. Mr. White, in this trend toward Governments, 
that you have described, which took place both under the Massa- 
chusetts rule and under the legal list of New York State and other 
States, was there any unfortunate experience of trustees which raised 
doubt as to their wisdom in choices they had made in the past and 
drove them to securities almost surely not to be questioned by the 
courts as to their fiduciary capacities, or was it just the general 
volume of Governments that was available ? 

Mr. White. Well, undoubtedly the trustees quite generally in the 
past few years have had many unpleasant experiences with securities 
which they purchased and thought were good which didn't stand the 
test of the last few years, and that was probably a factor in making 
them a little more conservative. I think another and very important 
factor is that with low money rates, high-grade bonds have been sell- 
ing at a premium so that the income advantage from buying the 
securities of corporations as against Government bonds was not great 
enough to justify going into the private field. I don't mean to give 
the impression that investments are not and have not been made in 
private industries because unquestionably great volumes or great 
amounts of money have been invested in those securities and are beino 
so invested. Otherwise, these securities would not be selling at the 
premium that I refer to. 

Mr. Henderson. But as between the Government bonds with prac- 
tically complete protection against any question that a trustee has 


to resolve, and the case of the risk taking which goes with others, 
it has been ahnost inevitable. 

Mr. White. That has certainly been the trend in my experience. 

Mr. Henderson. We have moved away from even the normal 
amount of minimum risk taking by these substantial pools. 

Mr. WnriE. I have here some consolidated figures with reference 
to savings banks on that, if you would like me to give them to you. 

Mr. I&NDEESON. I would very much. 

Mr. White. In 1931 the savings banks in New York had invested 
in Government bonds, United States Government bonds, $329,846,000. 
That amount increased every year since 1931 until at the end of 
1938 it was $1,441,553,000. In terms of percentage of assets ; that 
is, in 1931, the j)ercent of United States Government bonds to total 
resources in savings banks was 5.5 percent, and at the end of 1938 
it was 23 percent. 

Mr. Henderson. At the expense of what securities was that gain 
in percentage made? What types of securities in that same period 
had diminished in attractiveness? 

Mr. White. In 1931 the savings banks held $817,670,000 of rail- 
road securities, and that amount decreased each year until the end 
of 1938, when it was $417,000,000— nearly cut in half. In 1931 rail- 
road securities constituted 14 percent of the total resources of savings 
banks and at the end of 1938, 6.7 percent. 

Senator Ejng. Are the savings banks to which you are referring 
all in New York ? 

Mr. White. Yes • all in New York. 

Senator King. You haven't the figures there showing the invest- 
ments of savings banks throughout the country ? 

Mr. White. No ; I haven't. 

Senator King. And the categories of securities which have been 
approved by them? 

Mr. WnrrE. No ; I am sorry I haven't. 

Mr. Henderson. Mr. White, another question : Has this additional 
necessity of caution on the part of institutions such as you mention, 
and the consequent greater increase in percentage of governments, 
had any effect upon the market price of these securities, in your opin- 
ion ? In other words, has there been a greater demand for the Gov- 
ernment bonds which has seriously moderated or affected the price 
of the others? 

Mr. White. Well, yes. Of course, there are probably two im- 
portant factors affecting Government bonds. One is the member 
banks excess reserves that exist and the other is the fact that other 
banks find it difficult to find acceptable borrowers and to find outlets 
in other corporations by investing in thel securities of corporations. 

Mr. Henderson. And there is a lowered availability of real-estate 

Mr. White. That is correct. I meant to mention that in connec- 
tion with your previous question. You said, "What other types of 
assets went down when governments went up?" There has been a 
gradual downward trend in the mortgages held by savings banks. I 
don't have those figures here at the moment, but I think that at the 
present time savings banks have about one-half their total resources 
in New York invested in mortgages, but banks do find it difficult, 

124491 — 40 — pt. 9 21 


with their deposits tending to rise or at least to hold, to lend that 
money on acceptable mortgages. 

Mr. Henderson. I gather from your testimony that this pressure 
on the legal list has impelled your Board, the Banking Board, to 
think of additions. But going beyond that relatively narrow need for 
a greater volume of acceptable securities, they have the feeling that 
the economy would be better off, also, if those pools of savings, or 
some part of them, could be canalized into the investments of substan- 
tial American industries that have had exceptionally good records 
for earnings over a period of time. 

Mr. White. That is correct. I would say that when a corporation 
has been operating in a field long enough to demonstrate its stability, 
its ability to earn, that then our laws should be flexible in some way 
to permit trustees and savings banks to make investments in that sort 
of business. 

Mr. Henderson. Over a period of time some of our industrial com- 
panies have had a far better record of earnings than some of our 
political subdivisions that were eligible on the list at times, haven't 

Mr. White. Yes. 

Senator Kjng. May I ask a question? Is any preference given to 
the stocks and securities of corporations that have been formed out- 
side of New York? In other words, is preference given to local cor- 
porations over corporations organized in other States? 

Mr. White. No; no preference is given to corporations formed 
under New York law or under any other law. Most states, I think, 
give a certain preference in their legal list to their own state obliga- 
tions and possibly to their municipal corporations. 

Senator King. Do you have any data indicating the percentage, 
the proportion of loans which have been made to corporations outside 
of those which are existing under the New York laws ? 

Mr. White. Corporations outside of New York? 

Senator Kjng. Yes ; that is, corporations other than those organized 
in New York. 

Mr. White. No ; I'm sorry I haven't. 

Senator King. Are you familiar with this measure which was re- 
cently passed by the Senate — I don't know its fate in the House — the 
so-called Barkley bill, which requires debentures to be registered?^ 
Are you familiar with that ? 

Mr. White. That is the bill regulating the corporate trust depart- 
ments, in effect, of the trust companies and the national banks exer- 
cising fiduciary powers. I'm sorry ; I have read the bill, and I think 
it was in the Senate for the last 2 or 3 years. I have been fairly 
familiar with it at times. At the moment, though, I am not. 

Senator King. Would the registration of those debentures, if that 
measure were passed or if the States should pass laws requiring issues 
of stocks and bonds to be registered, have any effect upon the sal- 
ability, the marketability, of debentures, securities of corporations? 

Mr. White. I suppose that it might have some effect in some cases. 

Mr. Nehemkis. Mr. White, the bill to which Senator King refers 
I think is the bill which requires corporate trustees to submit their 
trust debentures to the Securities and Exchange Commission. 

1 Subsequently enacted — Public Law No. 253, 76th Cong., 1st sess. (53 Stat., chap. 411). 


■Senator King. Yes; the so called Barkley bill. 

Mr. White. I'm sorry ; I don't feel I am sufficiently familiar with 
that bill at the moment to discuss it. 

The Chairman. How many States follow the New York rule, Mr. 

Mr. White. If you permit me to make a guess on that, I would 
say a minimum of 25. 

The Chairman. And how many States follow the Massachusetts 
rule ? 

Mr. White. Probably not over 10 or 12. 

The Chairman. Were you here yesterday during the testimony of 
Dr. Davenport? 

Mr. White. No; I wasn't. 

The Chairman, Are you familiar with the extent to which savings 
and deposits have accumulated in your jurisdiction ? 

Mr. White. Well, I think I have some information about it. I 
don't know whether I am as familiar with the subject as Dr. Daven- 
port or not. 

The Chairman. For example. Dr. Davenport presented as "Exhibit 
No. 611" ^ yesterday. Concentration of Assets in Principal Reservoirs 
of Saving, and this showed that of a total of $56,500,000,000 there are 
concentrated in the institutions of five States — New York, New Jer- 
sey, Massachusetts, Pennsylvania, and Connecticut — 67 percent of the 
total. New York State alone has 33^^ percent of the total of all of 
these assets. New York has 33 V^ percent of all of the assets and 
^18,800,000,000. You are familiar with that picture, are you not ? 

Mr. White. Yes. If I may ask, does that figure include what he 
regards as savings, no matter where they may be held ? 

The Chairman. This chart, as I understood his testimony and as 
I recall it, refers to the assets, not particularly to the savings, the 
investments controlled all over the country wherever they may be 
iocated, but they are under the control of these institutions in your 

Mr. White. That figure obviously wouldn't have included all de- 
posits, all resources of banks, and, at the same time, resources of sav- 
ings banks, insurance companies, and trust funds. The figure would 
be much too low for that. 

The Chairman. Well, he had several tables. One showed the con- 
centration of assets of life-insurance companies and on that table 6 
companies in New York State has assets of $14,900,000,000.^ The 25 
largest companies control 87.2 percent of the assets of all companies. 
Six of these companies are in New York, 10 in New England, 1 in 
California, 1 in Wisconsin, 2 in Iowa, 2 in Philadelphia, and 3 in 
Ohio and Indiana. 

Then the chart showing the concentration of assets of mutual sav- 
ings banks indicated that 53.64 percent of the total of all of these 
assets of mutual savings banks were concentrated in New York State, 
and 42.33 percent in the city of New York.^ 

Mr. White. That figure is readily ascertainable and sounds correct 
to me. 

1 See supra, p. 3765. 

2 See "Exhibit No. 608," supra, p. 3752. 

3 See "Exhibit No. 609," supra, p. 3759. 


The Chairman. Then there was a similar chart showing the con- 
centration of assets of commercial banks.^ 

I am calling your attention to that because these accumulations of 
information impressed me with the magnitude of the savings and of 
the assets which are under the jurisdiction of the New York law and 
of the division of the New York government, of which you are the 
representative. Do you know what these great institutions are doing 
to encourage what we have been calling free, independent, private 
enterprise throughout the country ? 

Mr. White. I think it is safe to say they are all advocates of that 
principle, and I think that the banks, with due regard to their depos- 
itors, have been anxious to make loans and to make investments, 
because only in that manner is it possible for them to earn money 
and to pay their dividends. 

The CHAiRMAisr. Yes ; but, as I understood your testimony, the New 
York law confines legal investments largely to mortgages and to 
Government bonds. 

Mr. White. Railroad securities and utilities. 

The Chairman. I was going to divide the two so that the only 
so-called private obligations which are legal for investment in New 
York State are the railroad and public utility obligations. 

Mr, White. We are speaking only, of course. Senator, of trust 
funds, which are restricted to the list, and to the deposits of savings 
banks. The total resources of all the institutions subject to the super- 
vision of the banking department is about $18,500,000,000, and this 
restriction applies to a relatively small part of that, you see. 

The Chairman. It is still a very substantial amount. 

Mr. White. It is. It is still a very substantial amount. 

The Chairman. We had some testimony yesterday, as I recall, to 
the effect that there were probably $50,000,000,000 in the whole coun- 
try in trust funds of one kind or another.^ Do you regard that as a 
reasonable estimate? 

Mr. White. Of course, the term "trust funds" is one that has never 
been defined in a way that is acceptable to everyone. I have no 
knowledge of the amount of trust funds. If you take into considera- 
tion foundations, endowment funds 

The Chairman (interposing). Those were taken into consideration. 

Mr. White. Funds held by individual trustees, and so on. 

The Chairman. Those were taken into consideration. 

Well, here we have a picture of a tremendous concentration of 
assets. Of course, only a fraction of those assets are under the re- 
strictions to which we are referring here and on which your testimony 
is based, but the New York rule sets the style for all of the States of 
the country. But the organizations in which these investments may 
be made, aside from the Government securities, are national business 
enterprises. The railroads and the public utilities are national. 
These institutions exercise an influence far beyond the confines of the 
State of New York, but New York, the New York Legislature, 
makes the rules, and all the other States follow; or 25 of them, ap- 
proximately, according to your estimate, follow that leadership. 

1 "Exhibit No. 610," supra, p. 3762. 
a Supra, p. 3729. 


My thought is that that arises from habit. When these restric- 
tions were laid down by the New York Legislature investment was 
largely a local matter and not a national matter. Even the railroads 
were more or less local. What I am leading up to is the question of 
what significance you give to the circumstance that most of the busi- 
ness upon which our economy now depends is national in its scope, 
yet the whole investment policy is apparently fixed by the concept of 
a local legislature in New York. 

Mr. White. Well, I think that we should bear in mind, in con- 
nection with that, that the national banks, for example, are permitted 
to invest in such securities as Congress permits them to invest in, and 
that accounts for a very large proportion of the banking resources of 
the Nation. Through the Federal Keserve System and through the 
Federal Deposit Insurance Corporation similar control is exercised 
over most of the State banking institutions in this country, so that 
New York really isn't setting the style — at least not any more — for 
the investments of banking resources. Wlien it comes to trust funds 
and savings banks investments, it is I think still pretty much true 
that New York is followed by other States. 

In the insurance field, of course, since insurance corporations are 
not formed under the laws of Congress, I think that because of that 
fact New York exercises a great deal of influence in the field of 
investments for life insurance companies. I think that the insurance 
corporations subject to the supervision of the State insurance depart- 
ment have resources of something like 19 or 20 billions. However, 
the legal list, if we may call it that, of life insurance companies is 
much broader than the one to which I have been referring. Under 
the insurance law, investment is permitted, for example, in preferred 
stocks of corporations that have been tried and found capable of 
earning a reasonable amount over a period of years. 

Mr. Hendeeson. And can an insurance company buy an F. H. A. 
guaranteed loan in the State of New York if the property is located 
outside the State of New York ? Do you happen to know ? 

Mr. White. I probably could find that. 

Mr. Henderson. Let me ask it this way. So far as these trust 
funds you have been discussing today are concerned, they are not 
available for taking F. H. A. bonds unless the actual property is 
located in the State of New York. Is that it ? 

Mr. White. When the first law was passed, my recollection is that 
the mortgages were not limited to property located in New York. I 
think later on it was amended to so restrict those mortgages. We 
found, I believe, for banking institutions to invest in mortgages that 
are located, or on property which is located at a considerable distance 
from the banking institutions, was unwise. 

Mr. Henderson. Is that based on any experience as to the loans 
going bad or of the diflficulties of management in case the loan has to 
be taken over ? You say it was found it wasn't a good thing. I was 
wondering what your basis was? 

Mr. White. Unless the investor is going to rely entirely on the 
insurance under the F. H. A. plan, he should be in a position to 
check up on his property and to know whether the property is being 
kept in proper condition, whether the taxes are being paid, what 
the trends are in the neighborhood, and he cannot do that unless he 


expends considerable money in doing it if the property is located in 
another State or at a considerable distance from where he is doing 


Mr. Nehemkis. May I interrupt ? The chairman's line of question 
to you a moment ago, Mr. White, suggested this question to me : Is it 
your judgment that if the superintendent of insurance of the State of 
New York and the superintendent of banks of the State of New York, 
respectively, revised and expanded their list along the lines proposed 
by you this morning, that such expansion would have a profound effect 
upon the flow of investment in this country ? By that, perhaps I had 
better add, I mean in encouraging other States which we all recognize 
realistically follow the example of New York to revise and modify 
their own laws. 

Mr. White. I have with me here a copy of the insurance law with 
respect to investments, and the insurance law in New York was re- 
codified by this session of the legislature and some changes were made 
in that law. I believe that by and large the insurance law is broad 
enough to permit investments in all of the types of corporations that 
we feel our savings banks and trustees should be permitted to invest in, 
so I think that such problems that may have existed in the insurance 
law have already been met and to a large extent I think we are meeting 
it in the case of our savings banks and trustees. I do feel, as I indi- 
cated before, that that is a matter which should have great influence 
over a period of years in determining the flow of capital. 

Mr. Henderson. Mr. White, in your contemplation of expansion of 
the list to include industrials you would, of course, give no considera- 
tion except to seasoned companies and their securities ? 

Mr. White. That is correct. 

Mr. Henderson. That would mean that for some time at least the 
competition for these industrials which are already listed would be 
increased to the extent that funds would be available from those 
savings institutions. 

Mr. White. That is correct. 

Mr. Henderson. It wouldn't add tremendously to the opportunities 
for new investment right off the bat, would it ? 

Mr. White, Not right off the bat. Of course, it is impossible to 
estimate the number of billions of dollars that may be eligible for in- 
vestment, that is, that may properly be accepted for investment. 
The figures that I gave you a few moments ago indicated that about 
$6,500,000,000 of rail securities have come off the list since 1931. 

Mr. Henderson. They have passed to other owners. 

Mr. White. Well, they have come off the list. The savings banks 
never did hold all of them, of course. 

Mr. Henderson. They owned about 14 percent. 

Mr. White. They are no longer eligible now ; obviously that places 
more pressure on the rest of the list. 

Mr. Henderson. Wliat I am getting at is that the competition 
would be for securities that have existed for quite a long time. Most 
of these corporations have not shown any need for new investment. 
and there would be exchange of ownership for the most part to begin 


with rather than any direct encouragement of new investment which 
would result in new plants and equipment, 

Mr. White. Well, we have always found this: That corporations 
issuing securities in New York are very; anxious, if possible, to com- 
ply with the list so that they can have their security included on the 
list. It usually means something to them in terms of the conditions 
or the terms upon which their security is sold, and that is true, I 
think, even today when there is an abundance of money available. 

Mr. Henderson. There is no doubt that they would like to have a 
better status as far as their securities are concerned, but what I am 
getting at is, as testimony last week indicated, these companies are 
not in the market for new capital funds. 

Mr. White. Yes; that is true. 

Mr. Henderson. That is, the capital that is represented, say, by 
the securities of General Electric registered on the New York Stock 
Exchange has long since been expended. Whatever was the accumu- 
lated effect of the purchasing power generated there has died and 
has gone. And they testified that they were not in the market for 
new capital. In effect, the first! real result would probably be to 
stabilize the market values of the securities of some of the leading 
corporations, wouldn't it? 

Mr. White. Yes; I would think that would be true, and I would 
think to permit the savings banks to make investments in those securi- 
ties in normal times would be much more important than it is today. 

Mr. Henderson. That is, if you would have any decline in the mar- 
ket value, market quotations of a security of industrial company 
that had gotten onto your preferred list, then there would be nig- 
gardliness on the part of your institutions to take it on and it would 
have an unstabilizing effect. 

Mr. White. That is correct; yes. 

The Chairman. Aside from the present conditions which compel 
investment in Government, as I understand your testimony, what in 
your opinion is the effect upon the general investment situation of this 
limitation in the New York law which bars the ordinary industrial 
corporations, equity investments, in other words ? Or let me put it in 
another way. Do you believe that it would be advisable to permit the 
investment of trust funds in equities? 

Mr. White. I certainly feel that wdth proper safeguards invest- 
ments of trust funds might be permitted in preferred stocks; in the 
matter of common stocks, I think that people who have studied the 
question may not be in complete agreement, but certainly there is a 
pretty large school of thought that believes such investments should 
be permitted. 

The Chairman. Has it been proposed to the New York Legis- 
lature ? 

Mr. White. Yes; it has been proposed last year to the New York 
Legislature and was not accepted, but most legislation of that kind 
is not accepted the first year it is presented. 

The Chairman. Do you know why it was not accepted? 

Mr. White. I think it was perhaps lack of understanding of the 
problem to be met and the fact that sufficient time was not available 
to explain it to the legislature, and to explain its purpose. 

The Chairman. Well, of course if that were done it would then 
become necessary for your offices to supervise very carefully the 


character of the preferred stocks which were admitted to the Hst 
and the corporate structure of the corporations issuing them, would 
it not ? 

Mr. WnrrE. Well, some sort of a check would certainly be neces- 
sary. Under the insurance law — the insurance law does not provide 
for a list of securities in the sense that the banking law makes such 
provision, but it merely prescribes the tests that must be met by the 
corporations and then the investor takes his own responsibility for 
deciding whether a particular corporation meets those tests or not. 
Now having made that decision and selected investments, he is open 
to criticism or to some order from the insurance department, I as- 
sume, to get rid of that security, or to possibly make good a loss in 
it if it is found that it did not comply with those tests. 

The Chaieman. And to that extent the State exercises a great 
deal of control over the corporate structure of corporations char- 
tered in other States but seeking an outlet for their securities? 

Mr. WnrrE. Yes ; to some extent I would say that is true. 

The Chaieman. Are there any other questions to be asked? 

Mr. Taylor. One question I would like to ask. Mr. White, if a 
new legal investment list were made up providing for the inclusion 
of common and preferred shares, is it your thought that it is desir- 
able to have a ratio provided for by law, a maximum above which 
investment in stocks could not go, or would it be more desirable from 
an administrative standpoint to apply the discretionary idea of, let 
us say, the Massachusetts rule? It seems to me that is a very 
important consideration that I don't think has been touched upon. 

Mr. White. I do think that is a very important consideration and 
the suggestion was made to the New York Legislature a year ago that 
provided that not more than a certain percent of any trust funds 
could be invested in stocks and equities. 

Mr. Taylor. The fact, of course, would still remain that some- 
where very careful thought would have to be given to the considera- 
tion within that ratio of the stocks to be included ? 

Mr. White. That is correct; it is a very important consideration. 

The Chairman. If there are no other questions, the committee will 
stand in recess until 2 : 30 o'clock. 

Mr. Nehemkis. Mr. Chairman, would you care to announce the 
witness for this afternoon? 

The Chairman. Mr. A. A. Berle is to be the witness brought by 
the Securities and Exchange Commission this afternoon. 

(Wliereupon at 12 : 05 noon, a recess was taken until 2 : 30 p. m. of 
the same day.) 

afternoon session 

(The hearing was resumed at 2:40 p. m., upon the expiration of 
the recess.) 

The Chairman. The committee will please come to order. Mr. 
Nehemkis, are you ready to proceed this afternoon with Mr. Berle? 

Mr. Nehemkis. That is correct. 

The Chairman. And then tomorrow you have? 

Mr. Nehemkis. Dr. Alvin Hansen, who appeared here earlier. 

The Chairman. That will be part of this presentation? 

Mr. Nehemkis. That is correct. 


The Chairman. To be followed by the Little Business study? 

Mr. Nehemkis. That is correct. 

The Chairman. And we will be able to conclude those hearings 
this week? 

Mr. Nehemkis. I believe so. 

The Chairman. Because several of the members of the con- 
gressional group have a feeling that they should be permitted to 
pay a little attention to other legislative duties. 

I think it might be well to announce at this time that the invest- 
ment banking presentation will be postponed until a later time. 

Mr. Berle is to be on this afternoon? 

Mr. Nehemkis. Yes, sir. 

Will you take the stand, Mr. Berle, please? 

The Chairman. We have been following the practice of swearing 
the witnesses, even though they are in some cases only offering 

Mr. Berle. It is understood this is only an opinion. 

The Chairman. Do you solemnly swear the testimony you are 
about to give in this proceeding will be the truth, the whole truth, 
and nothing but the truth, so help you God ? 

Mr. Berle. I do. 


Mr. Nehemkis. Will you state your name, sir, and address? 

Mr. Berle. A. A. Berle, Jr. The address is State Department, 
in Washington, or 70 Pine Street, New York City. 

Mr. Nehemkis. You are presently, are you not, Mr. Berle, Assis- 
tant Secretary of State? 

Mr. Berle. Yes. I should like to make it plain that I do not 
appear here in that capacity, however. 

Mr. Nehemkis. I understand, sir. We are merely identifying you 
for the record. 

You have been at one time chamberlain of the city of New York, 
Ihave you not ? 

Mr. Berle. Yes. 

Mr. Nehemkis. And a member of the listing committee of the New 
York Stock Exchange? 

Mr. Berle. Yes. 

Mr. Nehemkis. You are presently, are you not, Mr. Berle, a member 
of the faculty of the law school of Columbia University? 

Mr. Berle. Yes. 

Mr. Nehemkis. I suppose it would be a fair statement, would it not, 
Mr. Berle, to say that you have spent most of your professional life 
dealing with the problems of corporate law and corporate finance as 
we so designate those fields? 

Mr. Berle. Yes ; I think that is true. 

Mr. Nehemkis. Are you prepared to testify this afternoon, Mr. 
Berle, concerning the investment banking mechanism and the need for 
a banking system for capital and capital credit ? 

Mr. Berle. Yes. 

Mr. Nehemkis. Will you proceed, sir? 


Mr. Berle. Mr. Chairman, gentlemen of the committee, you have 
already had very fully developed before you the actual flow of capital 
from the time when it is created by way of savings or by the use of 
bank credit, through various institutions and so out eventually into 
what one hopes is constructive capital work. That flow, of course, 
has changed materially in the past two decades and the method of it 
still more. It has finally reached the point where, in my humble judg- 
ment, we could profitably take account of stock and of the factual 
changes which have happened and where we may fairly be asked to 
consider a modernization of the machinery. 

In going into this, if you will bear with me, I first want to make it 
plain, of course, that I speak for myself. I happen to be called as a 
witness by the Securities and Exchange Commission who are conduct- 
ing this investigation, but my views are my own, and the last thing in 
the world I would like to do is to suggest that they have any responsi- 
bility for them — not that they would not cheerfully disclaim it if they 
felt like it, but I would like to get the disclaimer in first. 


Mr. Bekle. Now, the blunt truth about the situation is that the old- 
style capital credit mechanisms to all intents and purposes ceased to 
function about the year 1931. I don't know that we need to go into 
the reasons for it now. There were many. But that phenomenon 
occurred in the United States, and it likewise occurred practically 
everywhere else in the western world. It was at least partly due to 
that that we had what has sometimes been known as the depression 
which followed 1929. 

It was probably increasingly aggravated in the United States be- 
cause we here had gone less far along the road of a modern capital 
banking mechanism, perhaps, than some of the countries elsewhere 
in the world. The immediate effect of that, as you know, was a 
distinct diminution in the amount of capital, whether it was savings 
or bank credit, which actually flowed through the mechanism of the 
public markets into the kind of construction and work which we 
normally associate with capital goods. I think the arithmetic on 
that has been done and while I should imagine this committee already 
had had its fill of charts, I merely submit one, but the English lan- 
guage is sufficient, perhaps, to describe it without going into it in 
too great detail. 

Koughly speaking, in the decade 1920 to 1930 

Mr. Nehemkis (interposing). You are now referring, Mr. Berle, 
to the chart entitled "Corporate Securities Issued" ? 

(The chart referred to was marked "Exhibit No. 617" and appears 
on p. 3811.) 

Mr. Bekle. That is right. During that period the public capital 
markets associated with investment banking as we know it handled 
on an average of around 6 billions of securities a year. They fluc- 
tuated violently, of course. Out of that about 2 billion actually 
went into honest construction work. I think, myself, that figure is 
an underestimate. The balance that you see there represents refund- 
ing issues and in some cases mere financial pyramiding. Of that 
refunding work and of the purchase of existing properties, some part 
of this line above the 2 billion undoubtedly also found its way into 



Exhibit No. 617 














— 1 









I I 


1921 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 1938 

os■(/^^ FRCPAitco er sec a £kch can 


capital construction, but the solid figure that you can tie to of money 
that actually did some work and found its way to that work through 
the mechanism of the capital markets, of course, is about 2 billion, 
and you see it on the chart there. 

You will note that in the year 1930 we were running on about a 
regular average, and in 1931 that drops away down to less than 

1 billion ; and since that time the public markets, at least, have never 
done anything like the amount of work which they were relied upon 
to do before, and behind that, of course, you have a whole huge 

The first question is not what happened, but whether that was a 
complete cessation. The answer is that it appears not to have been 
a complete cessation, but a partial cessation. We no longer had the 

2 billions going into direct construction and an additional amount to 
handle refunding, and that kind of thing. We actually had a small 
part of it going in through the mechanism of the public markets; 
other of that capital trying to find its way toward a constructive use 
by one process or another, sometimes successfully and sometimes not. 
And because the work was not being done, a considerable amount 
of it found its way through the medium of straight Government 

That appears in Government debt, cases in which the Government 
picked up a job and itself issued its own bonds, thereby securing 
capital (more often bank credit than savings) and putting that capi- 
tal into constructive work. I may say that that presents a situation 
with which I believe we now have to deal, for if that process goes on 
indefinitely, obviously you are in for a very large expansion of the 
Government function. 

Whoever pays the piper eventually calls the tune over a period of 
years. I hasten to say that I am not criticizing in any way the use 
of the Government credit for that purpose. I myself advocated it 
in the dark days of 1933 on because when private capital or privately 
created capital either cannot or will not go to work, as the case may 
be, someone has to get the work done, and the Government has one 
quality, of course, which private enterprise does not — it always can 
act if necessary, and our Government, as did practically every other 
Government in the world, filled up the gap by using its own credit 
to stimulate into existence and into use the money which otherwise 
was immobilized. 

That is perfectly all right as a temporary proposition, but if it is 
to be a permanent policy, you would then have to deal with a whole 
other set of considerations. What we really seek, of course, is a 
method by which the currency and credit which we have or can 
create, and the savings which we undoubtedly are accumulating can 
move so far as possible without the use of that extraneous mechanism. 
In other words, the object is to get as much of this done as is possible 
without using the extraordinary machinery of the Government. 

I may also add that the problem, I think, is one which requires 
being dealt with now. Business cycles don't last forever. They 
come and they go ; while the down turn of this business cycle when it 
comes will not be reflected in failing banks. It will be reflected, or 
could be easily reflected, in increased unemployment, and that precipi- 
tates a social problem in a very real sense. You may say that on the 


solution of the problem you are now examining the social issue in 
the United States in the decade to come probably turns. 

If we can handle through our banking system and our economic 
system the normal needs of the country and the normal needs for 
employment, we shall probably avoid the head-on impact of forces 
which led, as you know, to extreme difficulties in Europe and in 
some cases to revolutions outright. I hasten to say that this is not a 
prophecy of revolution here. It merely means that by intelligent 
action here we can probably forestall a period of very considerable 
stress later on, and we have, I think, all of us seen enough of stress 
so that we don't particularly want to see any more. 

Now the odd fact about our capital credit machinery as contrasted 
with our commercial banking is that the investment mechanism we 
run on today substantially has not changed in nearly a century and a 
half. It is about the machinery that was invented by the house of 
Rothschild at just before and after the time of the Napoleonic wars: 
the process of finding savings somewhere, either individual or insti- 
tutional, of selling bonds broadly and thereby accumulating a part 
of capital which could be applied to a known need. 

That was a system which worked well enough, I presume, at the 
time it was developed. Meanwhile, however, our commercial banking 
system was moved along through the long phase of the establishment 
of the European central banks, the realization that you created credit 
which is much the same as currency against a flow of goods ; and the 
whole conception has emerged that you were supposed to use that 
money for the purpose of getting the flow of goods that you needed, 
of getting the goods processed, or, in other words, that the job of a 
financial system was to get men and materials organized to do the 
needed work, and, when it was done, to take the goods from the place 
where they were to the point where they were needed. 

A final development is worth noting, though it happens to have 
occurred in countries which have nothing in common with our own 
system. In the so called totalitarian governments, including therein 
Eussia, which fairly can be so classed, of course, the theory is that 
you ought always to grade your finance to the necessary amount of 
production that you want, never to limit the production by your 
financial machinery. That is not peculiarly either a Communist or 
a Fascist idea. It is, in fact, the idea that every country has, or has 
had, when, for instance, it was at war or in any kind of stress ; and I 
rather think in so doing those governments have merely fallen into 
an idea which, oddly enough, happens to be, strictly speaking, an 
American idea. 


Mr. Berle. It is interesting to note that the first great breach in 
the theory of this was made by an American in 1918. That was 
Prof. Harold Moulton, who is now the head of the Brookings Insti- 
tution. Prior to that time it had been assumed all the money that 
went into capital construction was savings. There could be no other. 
I may say that that assumption was fairly well founded, because in 
the earlier economies we had never produced currently all of the 
goods . for consumption that the country could absorb. It was, there- 
fore, necessary to ask people not to consume everything that they pro- 
duced, to forego that immediate advantage, and by that process to 


take a part of the materials and energy which would have gone into 
consumption and use it for capital goods instead. 

When the scientific development which began in 1900 began to reach 
its peak, we suddenly found ourselves in a state of affairs which is 
frequently described as a surplus economy, by which I mean that the 
productive mechanism of the country could produce more than the 
effective demand. At that point there was no particular need to bribe 
or cajole or reward anyone for not consuming, because if he consumed 
everything that he was able to there still was capacity left over, and 
at that point the economics have distinctly changed. 

In that situation, Moulton considered that a considerable part of 
what we now know as capital was really bank credit; that is, that 
we had actually, without knowing it, learned the trick of creating 
currency to do the work of creating capital exactly as currency is 
created to move a crop or to take care of a businessman's needs. As 
you know very well, when a merchant discounts a note the bank 
merely writes up a deposit, in effect prints the currency via the credit 
route to take care of it, and then withdraws it, deflates it, demon- 
etizes it, as you choose, when the note is paid. 

Moulton discovered that during the war and other times we had 
been doing that in very large degree for capital purposes, with the 
result that bonds and stocks and securities had been used to create 
bank credit, that bank credit had created the building of the canal 
or railroad or whatever it was as effectively as the old savings had 
done, and from that the conclusion could be drawn that a banking 
mechanism had always in its power to create capital to any extent 
reasonably needed, always provided that you kept your price level 
in order, provided the currency didn't run away. There is a pet 
banking phrase, "monetization of assets," against that, but I don't 
know that we need to invent a new jargon for this. It is perfectly 
simple. It meant in substance working through all the machinery 
you were using, long-term notes, exactly as we have always learned 
to create bank balances by the use of the short-term note. 

That, of course, while it is dull to state, was a rather staggering 
change in theory. I don't now go into the added fact, of course, 
that we meantime had learned a good deal about what construc- 
tion does, the fact that that does tend to increase the national 
income by more than the actual amount spent because it engenders 
a lot of subsidiary activity. That we have already learned, and so 
while this process in 1921 to 1930 was going on, we were slowly 
learning that a good deal of the machinery that we were using was 
not necessary, and in any given situation might not .any longer do 
the work at all. 

Now, actually, that happened. I suppose the reason why the old 
investment banking machinery began to pass out was a double one. 
It was caught in a vise from two ends. One of them you have al- 
ready seen: The large companies which they themselves had created 
had become self-sufficient, as you have seen, I imagine, from the testi- 
mony of Mr. Youn^ and Mr. Stettinius. The great concerns were 
able by internal savings to plow along without any great, use of the 
capital markets, and apparently they continued to do so. 

The smaller companies, however, of medium size, used the capital 
markets and, of course, the very small companies couldn't get to them 
at all. By consequence, what the investment banker had left to do 


was to refund certain of those commercial enterprises which hadn't 
been able to develop their internal finance such as railroads and the 
medium or second-grade companies which had not quite got to the 
stage of United States Steel or General Electric. And that was in- 
deed the bulk of their work. After the tremendous growth of private 
plant which ended in 1929, the large companies went ahead under 
their own steam and the small companies did not go ahead at all, 
and for the moment the supply actually bogged down. That opened 
up somewhat, as you see, in 1936 and 1937, falling off a little in 1938 
and I imagine, just based on present indications, that it will fall off 
somewhat more in 1939, though that of course we can't tell, the year 
not being over. 

The other end of the vise lay in the fact that the companies which 
wished to sell securities found an easier way of placing them by what 
is called private placement. You will find that in the second chart. 

Mr. Nehemkis. Suppose we pause for a moment, Mr. Berle, while 
you identify this chart. Eead its title, if you will, please. 

Mr. Bekle. That is a chart entitled "Growth of Private Place- 
ments, Corporate Bonds and Notes, From the Years 1934 to 1938." 

The Chairman. These charts may all be admitted to the record. 

(The chart referred to was marked "Exhibit No. 618" and appears 
on p. 3816. The statistical data on which this chart is based are in- 
cluded in the appendix on p. 4065.) 


Mr. BERiiE. While the actual use of the investment banking system 
by the large corporations was going down, those corporations that 
wanted to place were placing their securities privately and, as you 
will see, that jumps from the year 1936 on up until today something 
over one-third of the total amount of securities actually issued in the 
market, if you can call it that, really never reached the market at 
all and never passed through the investment banking machinery 
except possibly as an investment banker may be of use and collect a 
fee for advising somebody on it. 

Mr. Nehemkis. It is true, isn't it, Mr. Berle, that our investment 
bankers do have occasion to act as intermediaries ? 

Mr. Berle. Yes; in that case the investment banker has the job 
of finding an investment and selling it broadside in the market. 
What he really does is act as a private broker, a purchasing agent, if 
you like, for 10 or 15 large insurance companies. 

There seems to be no likelihood of the diminution of that situation. 
Parenthetically I may say that I don't know there is any reason why 
it should stop particularly. If savings choose to find their way into 
the capital markets by buying an insurance policy or depositing in a 
savings bank and let the insurance company or the savings bank do 
their investing for them, I am by no means clear that the average 
man isn't a good deal better off. It is pretty difficult for any indi- 
vidual to buy securities intelligently ; in fact, it is pretty difficult for 
an expert to do so, but the great institutions are probably better able 
to protect their people in a way than any individual is able to protect 
himself, so I don't see that there is any surprising danger to it. 

There is one quality about it which is worth while taking into con- 
sideration, and that is the fact that when that happens there is a 



Exhibit No. 618 














1934 1935 1936 1937 1938 



■greater geographical concentration of investment, the bulk of invest- 
ment of that kind, the privately placed issue, finds its way into the 
strong institutions frequently in the East, naturally because they are 
there and they have the connections and so forth. 

If you followed the fate of a public issue, you would find that 
there was a much wider geographical distribution. Yet today even 
when an issue goes through the public market, it does not scatter 
itself so very widely. If you were to follow, for instance, the United 
States Steel issue from flotation to location you would discover that 
the bulk of that issue wound up in institutions and only a very small 
fraction of it in individual hands. 

There you have the picture of it.^ This was a public issue and a 
high-grade public issue, and you will notice that, immediately after 
offering, roughly 60 percent of it lighted in the hands of banks and 
trust companies and only 10 percent lit in the hands of individuals. 
That was the immediate result of the issue. 

If you follow it a little bit further, you will discover that the 
banks and trust companies very largely distributed that issue to their 
correspondent banks and again a very small fraction found its way 
: into the hands of the general public. What you really have there is 
the same thing that is done by private placement, only done on a 
wider scale and a wider geographical scale. No individual, to speak 
of, got very much of a chance at the United States Steel 3i/2S. The 
institutions took them; and, as I say, maybe they are quite as able 
to protect their people as the individuals are. 

Senator Borah. Was that identified? 

The Chairman. Have you a copy of that chart? 

Mr. Nehemkis. That chart is not being offered into evidence. It 
is part of a forthcoming study which will discuss a number of public 
issues in great detail. They are being marked at this time. 

Senator Borah. His testimony ought to be identified. 

Mr. Berle. I see no reason why that shouldn't be offered in evi- 
dence. I think the reason Mr. Nehemkis did not lies in the fact that 
he is having a similar study made on a number of other issues and 
doesn't wish to draw unduly from one chart. 

The Chairman. Your testimony will not be as intelligent to the 
reader without the chart as with it. 

Mr. Nehemkis. Yes ; we should offer it then, if you please, sir. 

Mr. Berle. In that case, I identify the chart. This is a chart 
headed "$100,000,000 United States Steel Corporation, 314 Per Cent 
Debentures, Due 1948." For the record I will state that that is 
assumed to be one of a series which the S. E. C. has in mind offering 
at some later time, and it is here put in by way of illustration. 

( The chart referred to was marked "Exhibit No. 619" and appears 
on p. 3818.) 

Mr. Berle. Where we are on all this, however, is this. Your 
i private investment banker who used to do substantially the whole job 
tiow is out of a job so far as the large corporation is concerned and 
certainly so far as the major and the high-grade issue is concerned. 
They are prepared to do without him altogether except perhaps as a 
minor service agent. 

The actual amount remaining in the market, you will see by the 
chart which is earlier in evidence, shows the growth of private place- 

1 ileferring to "Exhibit No. 619," infra, p. 3818. 
124491 — iO— pt. 9 22 












































ments which means that now only two-thirds of a highly restricted 
market remains in any sense public, and that threatens to be increas- 
ingly submerged by the newer and swifter system. 

We have, therefore, a situation in which, first, we have a real change 
"in theory, and in the second place we have a market that is in 
large measure closed, and has been for nearly 10 years. In the 
third place we have a piece of machinery which obviously has a very 
much restricted function, with no particular reason to assume that its 
function will change. Briefly, new ways have been developing of 
doing this particular job. 


Mr. Berle. The question now comes as to whether we cannot see 
some way out of it. As has been stated, the gap had to be filled, and 
it has actually been filled heretofore by the use of Government credit 
on a large scale. Now, unless the Government is going to go into 
the business of running the entire economic system, of course, that 
can't go on. Some things undoubtedly are Government functions, 
and still others are perhaps local government functions, but we still 
entertain the hope that we shall eventually find ways of doing the 
bulk of the work that the country needs to be done privately, and 
that, of course, happens to be our problem. 

To my mind, there is no particular danger in the increasing Gov- 
ernment debt, provided wealth is created against that debt, for to my 
mind the result is exactly the same as though you had private debt 
created against wealth. The objection lies not in any danger either 
to Government credit or to the fiscal system ; the danger lies, as I see 
it, in the fact that the Government as it is at present organized has 
only very limited opportunity to create wealth. Some things it can 
do, but it can't do others unless it is to be reorganized entirely, and 
nobody wants to do that. By consequence, we have to see whether we 
cannot use our capital machinery to make it increasingly available for 
private work which ought to have been done and is not. 

Now I doubt, myself, whether we need to assume at this stage of 
the game that all of the useful work in the United States has already 
been done. What little I can find out about it indicates that it has not 
been done. One great area, of course, which we have traditionally 
used as an avenue for investing capital, no longer exists. That is the 
development of the great open spaces. There is still plenty of useful 
work to be done in developing natural resources, but obviously there 
is no such tremendous aTid virgin field as there was during the last 
generation and the generation before that. On the other hand we 
do have a tremendous amount of work which needs to be done for 
our own people, and that seems to come from two distinct sources. 
One is that a modern population makes greater social demands on 
civilization than our ancestors did, and perhaps rightly. They want 
better housing and more advantages and some of the fruits of this 
technical civilization we have worked out, and they rather feel that a 
way ought to be found to give it to them. Still better, a way ought 
to be found by which they can earn it, which is still more to the 


The second avenue, I think, is that when a civilization industrializes 
itself rapidly, certain general needs grow more rapidly than the 
growth of the wealth of the country, and they tend to be ignored. 
Those are the needs, for instance, for things like hospitals and public- 
health services, and the services of the great cities. A city like New 
York, for instance, with 7,000,000 people in it, will need not only 7 
times as much in the way of public services as a city of 1,000,000, it 
will need probably 20 or 30 times as much, because the problems of so 
many people living close together create tremendous cooperative prob- 
lems that can only be solved by the local government unit. And that 
process of concentration of population and high mobility has been 
going on to a terrific degree. The private plant has been beautifully 
built, but we are far and away behind in the public services. 

If I may take as an illustration my own city of New York, there is 
a noncommercial job there that has to be done. No private indi- 
vidual will be afraid of the competition, because it happens to be in 
hospitals, and I think very few hospitals ever made any money. We 
shall need in New York in the next 10 or 15 years to spend approxi- 
mately $438,000,000 to keep our hospital plant up to date. That does 
not mean creating a millennium ; that means keeping it about on an 
average of standard services. If you choose to regard that not as 
a job taht the city has to do but as a market for $438,000,000 worth of 
men and materials and work, and so forth, you get a picture which 
is a picture of something which should have been done long ago, and 
a job which is legitimately the job of the capital market. 

You can go on with that kind of thing indefinitely, but the two 
great avenues, as I see it particularly at the moment, are housing and 
these local government services which have not kept pace with the 
actual capital industrial progress. 

So long as there is that kind of work to be done, nobody can say 
that we haven't plenty of outlet for employment, plenty of outlet for 
capital use. But there is a difference. The noncommercial business, 
like a hospital or like low-cost housing, or the semicommercial busi- 
ness like middleclass housing, cannot pay the same kind of rate of 
interest which a commercial enterprise pays. I personally have never 
been able to see why New York City should pay more than a nominal 
rate of interest to induce a bank to create credit to permit the city 
of New York to build a hospital, which is not a profit enterprise 
and never will be. On the other hand I can see every reason why, 
if a man wants to build a new chemical plant on which he expects to 
make a large profit and he wants to issue his bonds and have a bank 
create credit for that, which is what is now occurring, he should 
pay a commercial rate of interest based on what the capital market 

My point is that it seems to me that our first concern ought to be to 
work out a banking system which can quote a rate of interest which 
will take the business. If that rate happens to be a nominal one for 
something which isn't going to make any profit, then that is the rate 
to quote. If it happens to be, let us say, a 1- or 1^^- or 2-percent rate 
for the middle-class or lower-middle-class housing which is not being 
built by anybody today, then quote that rate. If it happens to be a 
commercial enterprise, making the standard commercial profit which 
can pay a standard commercial rate, then quote that rate. For after 
all, what is this money that we are using ? It is the creation by a bank- 


ng system of currency under a Federal license, and the only reason 
for quoting any interest rate at all is to induce the bank to function. 

Now, of course, that does cut down the profit in banking. There 
s no question about that. But on the other hand I am by no means 
jlear why a bank should feel that it had to have a tremendous profit 
m its capital to induce it to perform what is essentially a public 
function. The Federal Reserve banks, for instance, have operated 
aicely on a 6-percent profit, the balance over going to the Federal 
Treasury, and I would like to note that the most successful financial 
institutions in the United States, not manned by Socialists or by New 
Dealers or otherwise, are not run for profit at all. The large mutual 
insurance companies don't have the profit motive. The officers, of 
jourse, collect pay, and so forth, but there is no stockholder to collect 
I profit. 

The mutual savings banks in New York State and New England 
which have been successful do not collect any profit. You do not need 
I profit system to energize a perfectly successful banking system, and 
:hat is not worked out by any radical. That has been worked out 
aver many, many years in these United States. 

I don't mean to say that the bank ought to run at a loss. The profit 
system is really an index of whether the bank is well run, but you 
do not need, it seems to me, to have your interest rate so calculated 
that on a relatively narrow margin of capital the interest rate will 
funnel down to and accrue to the bank stock as dividends. 

This may mean that you have to work out a new division in the 
banking system to handle capital matters, so adjusted that it is 
expected to pay its expenses, a nominal return on its capital, but that 
its interest rate is regarded not as a method by which somebody makes 
some money, but a method by which you control the operation, lower- 
ing it when you want more work done, raising it when you don't want 
it done, exactly as the Federal Reserve banks do with their commer- 
cial banking rates designed to cover the short term credit field. 

I pause for a moment to say that I don't honestly believe that 
much of the talk you hear about the closure of the capital markets 
has very much justification. I suppose as in most of these arguments 
that we hear, there is something in all of it, because I have rarely seen 
the question that didn't have two sides, but I don't honestly think 
that either the present tax system or the supposed lack of harmony 
with the Government, or the antitrust moves, or even the forums and 
investigations and so forth which harass businessmen — I think, my- 
self, those could be simplified considerably — ^I doubt if those actually 
prevent a man who sees a profit from going after it. 

I do think that there are great areas that are barred from the 
capital markets, and I do think that there is a great area of initiative, 
particularly in the public and semipublic field, that now finds no 
way of getting into action. I recall in that last field that we our- 
selves in New York have made a very real attempt to get capital to 
enter the middle class-housing field and we offered all the inducements 
we could through the city government machinery to do it, and we 
were unable to do it because a real-estate owner and a builder would 
figure out at what rate of return he could do the job. If he had to 
pay 414 percent for his money, and unless he could get 4i/^ percent- 
plus back, he simply could not do it, and as nobody stepped up and 
offered to lend him the money at 1 or li/^ or 2 — and we couldn't do 
it — the work simply wasn't done. 


Further, we couldn't do it ourselves because our own money cost 
us from 314 to 4 percent, running down finally to 3, so we couldn't 
move in the matter; and here you had a tremendous job that needed 
to be done, that ought to be done; that there were men anxious to 
do ; that there were materials laying around ready to do, and no way 
of uniting the three. There were the initiative of the men who were 
prepared to do it — all of the makings; the obvious need — nobody 
objecting to it; everybody realizing that it had to be done, and no 
way of getting into action. 

And I was recalling that I had discussed this with one of my 
friends from overseas, and he had said in view of that situation, 
"The time will come in your country when if you want to do a thing 
that you know ought to be done, to say you haven't the money for it 
will merely be a comic remark. You have all the money in the 
world, whenever you want to use it. Wliere we come from," said 
he, "we say, 'Have we the men and have we the materials?' Because 
if we don't have those we can't move. ; 

"But it is time that you learned at least to handle your monetary 
system so that that is never an obstacle, provided you know. exactly 
what you want to do." 

Coping with this situation, it seems to me that the time has come 
now to recognize frankly what we haven't been willing to recognize 
before, and .that is that our banking system ought to handle a con- 
siderable part of this capital business, and that it ought to be so 
organized that anyone with a legitimate job to do has access to a 
bank somewhere prepared to supply him the capital at a rate of 
interest which will actually get the business done, the bank naturally 
scrutinizing it to make sure that the thing he is doing is an actual 
creation of wealth. 

I do not here go into a long technical discussion as to why I do not 
believe that will result in inflation. I think Professor Hansen has 
discussed that very briefly earlier, but I am not worried about aii 
inflation in this country because, as far as I am able to see, you cannot 
get inflation in any event until your productive machinery is working 
at or near capacity, and we are a long, long way from that. 

Further, in the past 20 years, when we began to get too much' 
currency, and a change in the price level because of that fact, we have 
learned the trick now of hauling in so that you do not get prices