INVESTIGATION OF CONCENTRATION
OF ECONOMIC POWER
HEARINGS
BEFORE THE
TEMPOKAEY NATIONAL ECONOMIC COMMITTEE
CONGEESS OF THE UNITED STATES
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 INVESTIGA-
TION WITH RESPECT TO THE CONCENTRATION OF
ECONOMIC POWER IN, AND FINANCIAL CONTROL
OVER, PRODUCTION AND DISTRIBUTION
OF GOODS AND SERVICES
PART 28
LIFE INSURANCE
OPERATING RESULTS AND INVESTMENTS
FEBRUARY 12, 13, 14, 15, 16, 19, 20, 21, 26, 27, 28, 29,
AND MARCH 1, 1940
Printed for the use of the Temporary National Economic Committee
UNITED STATES
GOVERNMENT PRINTING OFFICE
124491 WASHINGTON : 1940
ORTHEASTERN UNIVERSITY SCHOOLof LAW LIBRARY
TEMPORARY NATIONAL ECONOMIC COMMITTEE
(Created pursuant to Public Res. 113, 75th Cong.)
JOSEPH C. O'MAHONEY, Senator from Wyoming, Chairman
HATTON W. SUMNER S, Representative from Texas, Vice Chairman
WILLIAM H. KING, Senator from Utah
WALLACE H. WHITE, Jr., Senator from Maine
CLYDE WILLIAMS, Representative from Missouri
B. CARROLL REECE, Representative from Tennessee
THURMAN ^W. ARNOLD, Assistant Attorney General
♦WENDELL BERGE, Special Assistant to the Attorney General
Representing the Department of Justice
JEROME N. FRANK, Chairman
*LEON HENDERSON, Commissioner
Representing the Securities and Exchange Commission jtl'
GARLAND S. FERGUSON, Commissioner C _
•EDWIN L. DAVIS, Chairman
Representing the Federal Trade Commission H ^'*~'
ISADOR LUBIN, Commissioner of Labor Statistics ■—
•A. FORD HINRICHS, Chief Economist, Bureau of Labor Statistics fc^
Representing the Department of Labor 5^
JOSEPH J. O'CONNELL, JH., (Special Assistant to the General Counsel,
•CHARLES L. KAJDES, Special Assistant to the General Counsel
Representing the Department of the Treasury
SUMNER T. PIKE, Business Adviser to the Secretary of Commerce
Representing the Department of Commerce
Jambs R. Brackbtt, Executive Secretary
Theodoeb J. Kreps, Economic Adviser
•Alternates.
n
REPRINTED
BY
WILLIAM S HEIN & CO . INC
BUFFALO, N. Y.
1968
CONTENTS
Testimony of —
Aldrich, Winthrop Williams, chairman of the board, Chase Na- ^"E«
tional Bank, New York, N. Y 15209-15225
Beebe, Dwight S., vice president and financial manager, Mutual
Life Insurance Co., New York, N. Y 1528&-15315
Best, Alfred M., president, Alfred M. Best Co., Ipc, New York
N. Y 15883-15414
Buckner, Thomas A., chairman of the board. New York Life In-
surance Co., New York, N. Y 14726-14760
Crawford, Lawrence C, insurance broker, Washington, D. C 15366-15373
Crowley, Thomas R., Crowley and Marr, general agents for the
Penn Mutual Life Insurance Co., Washington, D. C 15375-T5380
Bcker, F. W., vice president. Metropolitan Life Insurance Co.,
New York, N. Y 15133-15184, 15315-15329
Ecker, Frederick H., Metropolitan Life Insurance Co., New York,
■ N. Y 15170-15182, 15329
Espinosa, Jose R., accountant, Securities and Exchange Com-
mission, Washington, D. C 15207-15208
Greaves, Henry, treasurer, the Equitable Life Assurance Society
of the United States, New York, N. Y 15234-15244
Hall, Arthur F., chairman of the board, Lincoln National Life
Insurance Co., Fort Wayne, Ind 14934-14947
Howe, Ernest, chief financial adviser. Insurance Section, Securi-
ties and Exchange Commission, Washington, D. C 14700-
14725, 14786-14854, 15415-15488
KraflEt, Harold D., general agent, Provident Mutual Insurance
Co., Washington, D. C 15362-15366
Lambert, Denison David, agent. Travelers' Insurance Co., Wash-
ington, D. C 15358-15362
Limber, Ralph C, secretary. Farm Mortgage Conference, New
York, N. Y 14921-14933
McLaughlin, John G., acting manager, Real Estate Department,
Mutual Life Insurance Co. of New York, N. Y 15052-15063
Maloney, James A., agent, Fidelity Mutual Life Insurance Co.,
Washington, D. C 15373-15375'
Meyers, Alfred H., vice president and treasurer, New York Life
Insurance Co., New York N. Y 15245-15253
Murray, William G., professor of agricultural economics, Iowa
State College, Ames, Iowa 14883-14920
Polk, Frank L., trustee. Mutual Life Insurance Co. of New York,
New York 15064-15075
Rogers, Glenn E., manager, Farm Loan Division, Metropolitan
Life Insurance Co., New York, N. Y 14948-15080
Rogers, R. R., vice president. Prudential Insurance Co. of Amer-
ica, Newark, N. J 15030-15051
Saylor, George, vice president. Chase National Bank, New York,
N. Y 15186-15207
Smith, George W., president. New England Mutual Life Insur-
ance Co., Boston, Mass 15077-15104
Stedman, John W., vice president. Prudential Insurance Co. of
America, Newark, N. J 15255-15287
Stevenson, John A., president, Penn Mutual Life Insurance Co.,
Philadelphia, Pa 14763-14786
Van S'chaick, George S., vice president, New York Life Insurance
Co., New York, N. Y 15105-15131
IV
CONTENTS
Testimony of — Continued.
Wall, Norman, head of the Division of Agricultural Finance,
Bureau of Agricultural Economics, Department of Agriculture, ^as^
Washington, D. C 14857-14883
Washington, Lawrence, assistant treasurer, Metropolitan Life
Insurance Co., New York, N. Y 15225-15234
Zimmerman, Charles J., president, National Association of Life
Underwriters, Chicago, 111 15332-15357
Statement of —
Henderson, Leon, Commissioner, Securities and Exchange Com-
mission, Washington, D. C 14695-14699
Gesell, Gerhard A., special counsel, Securities and Exchange
Commission, Washington, D. O : 14855-14857
Schedule of exhibits iv
Monday, February 12, 1940 14695
Tuesday, February 13, 1940 14761
Wednesday, February 14, 1940 14799
Thursday, February 15, 1940 14855
Friday, February 16, 1940 14921
Monday, February 19, 1940 — 14995
Tuesday, February 20, 1940 15077
Wednesday, February 21, 1940 , 15133
Monday, February 26, 1940 15185
Tuesday, February 27, 1940 15255
Wednesday, February 28, 1940 15331
Thursday, February 29, 1940 15381
March 1, 1940 15433
Appendix 15489
Supplemental data 15604
Index I
SCHEDULE OF EXHIBITS
Number and summary of exhibits
Intro-
duced
at page
Appears
on page
2243-2249. Appear in Hearings, Part 31-A
2249-1 to 2249-5. Letters and tables from the Carnegie-
Illinois Steel Corporation, re: price
announcements 1
2250. Appears as Hearings, Part 10-A .-.
2251. Chart: Admittedassets, 1938, of 26 insurance companies
2252. Chart: Types of insurance carried by 26 insurance
companies, 1938
2253. Chart: Total premium income, 1929-1938
2254. Table: Total premium income — 25 largest legal
reserve life insurance companies for each year 1929
to 1938
2255. Chart: New paid-for life insurance, 1913-1938
2256. Table: New paid-for life insurance — exclusive of
revivals, dividend additions, and accepted rein-
surance— 49 U. S. companies
2257. Chart: Total income and disbursements of 25 leading
legal reserve life insurance companies, 1929-1938..
2258. Table: Total income and disbursements of 25 leading
legal reserve life insurance companies, 1929-1938. .
2259. Table: Long-term investments of 26 life insurance
companies in relation to long-term debts in the
U. S., 1930, 1934, 1937
2260. Table: Bonds and debentures of five major oil com-
panies and four major rubber companies; total
outstanding amounts held by the 26 largest life
insurance companies, 1929 and 1938
14761
14761
14702
14702
14705
14707
14707
14709
14709
14713
14713
14719
(■)
14703
14706
14708
15490-
15491
14710
15492
14714
15493
15493-
15494
14721 15494
1 On file with committee.
CONTENTS
NuiJiber and summary of exhibits
Intro-
duced
at page
Appears
on page
2261.
2262.
2263.
2264.
2265.
2266.
2267.
2268.
2269.
2270.
2271.
2272.
2273.
2274.
2275.
2276.
2277.
2278.
2279.
2280.
Appears in Hearings, ;"art 13, appendix p. 7093
Appears in Hearings, Ph,rt 13, appendix p. 7095
Appears in Hearings, Part ^3, appendix p. 7096
Schedule A: Assets of 26 insurance companies
Schedule B. Investments of life insurance companies
as of December 31, 1938, in companies whose
officers or directors interlock with insurance com-
panies
Schedule C. Arnount and percentage of total assets
earning less than the interest required for poUcy
reserves as of December 31, 1938, of 26 insurance
companies
Schedule D. Policy loans and income therefrom of
26 insurance companies
Schedule F. Mortgages o^jv^ned by insurance com-
panies as of December 31, 1938, delinquent 3
months or more as to interest
Schedule G. Interest due and accrued on bonds and
mortgages of 26 insurance companies
Table: Farm mortgage debt; total amounts outstand-
ing as of January 1, and annual interest charges,
1910-1939
Chart: Cash farm income and farm-mortgage debt,
1910-39, and value per acre of farm real estate,
1912-39. - -
Table: Cash farm income and farm-mortgage debt,
1910-39
Chart: Average interest rates on outstanding farm
mortgages, January 1, 1913, 1923, 1933, and 1939..
Table: Average interest rates on outstanding farm
mortgages, Jan. 1, 1913, 1923, 1933, and 1939
Chart: Total outstanding farm-mortgage debt and
amount held by principal lender groups, 1910-39--
Table: Farm-mortgage debt; total amount outstand-
ing and amount and percentage of total held by
principal lender j .oups, January 1, 1910-39
Table: Farm-rnoi .^age debt held by life insurance
companies; total amounts and percentage of total
farm-mortgage debt outstanding in |,he United
States and designated regions, January 1, 1910,
1915 and 1920-39
Chart: Forced and voluntary sales of farms, 1926-39;
estimated number per 1,000 farms
Table: Estimated number of farms changing owner-
ship by forced and voluntary sales, per 1,000 of all
farms, by geographic divisions, 1926-39
Table: Farm foreclosure sales; estimated number per
1,000 farms mortgaged to each type of lender on
January 1, 1935, from January 1934 through Sep-
tember 1939, by j'ear and quarter
Chart: State mortgage relief legislation, Jan. 1, 1930-
Apr. 20, 1936 .
Table: Estimated amount of proceeds of Federal
Land Bank and Land Bank Commissioner loans,
May 1, 1933-January 1, 1937, used to refinance
first and junior mortgages held by life insurance
companies and by all lenders, and amount of farm-
mortgage loans held by life insurance companies
and all lenders, January 1, 1933 - .
Table: Acquired farm real estate held by leading
lending agencies, January 1, 1929-39
14762
14762
14762
14801
14805
14809
14813
14848
14848
14858
14861
14861
14862
14862
14865
14865
14871
14873
14873
14875
14877
14878
14879
15495
15495
15496
15496-
15497
15497
15498
15498
14862
15499
14663
15500
14866
15501
15502
14874
15503
15504
14878
15505
15506
VI
CONTENTS
Number and summary of exhibits
2281. Table: Farm investment of life insurance companies;
amounts and percentage of total holdings repre-
sented by farm mortgages and farm real estate
owned; total farm investment, January 1, 1929-39-.
2282. Chart: Corporate-owned land of insurance companies
in Iowa, 1937 -
Chart: Value of land and buildings in Iowa, by town-
ships, 1930
2283. Chart: Farm mortgage foreclosures in southern Iowa,
1915-1936
Table: Percentage distribution of acreage foreclosed
in Iowa, by types of mortgage holders, 1915-1936. _
2284. Chart: Corporate land foreclosures, mortgage debt
and land values in Iowa, 1939
Table: Land holdings in Iowa of corporations
2285. Table: Relationship of farm mortgage debt to farm
value as revealed by foreclosures in 5 high and 5 low
value counties in southern Iowa, 1915-1936, and
acreage sold and deeded by corporations, 1935-1939.
2286. Table: Farm real estate under contract of sale as a
percentage of all farm real estate owned as of
December 31. 1938, inclusive .. - -
2287. Chart: Farm Mortgage Conference, amount of farm
foreclosures commenced, farm real estate acquired,
cost and selling prices of farm sales approved by
thirteen companies
2288. Chart: Total farm mortgage debt, January 1, 1935
2289. Chart: Ratio of total foreclosures December 31, 1935
to total farm investment December 31, 1935
2290. Table: Farm sales as reported by farm conference
members
2291. Letter to Julian Price, president, Jefferson Standard
Life Insurance Co., from Arthur F. Hall
2291-A. Loan form used by Lincoln National Life Insurance
Co., Lincoln, Neb
2292. Chart: Prices paid by farmers, prices received by
farmers, farm real estate values per acre
2293. Chart: 1935 drought
i Intro-
duced
at page
2293-A. Chart: 1936 drought.
2293-B. Chart: Drought— 3 years.
2294.
Chart: Actual farm land values per acre, Missouri
Valley area versus normal area
2295. Chart: Average contract rates of interest on farm
loans outstanding
2296. Letter from E. H. Lougee, mortgage broker, to G. E.
Rogers, Asst. Manager, Farm Loan Division,
Metropolitan Life Insurance Co .
2296-A, Letter from G. E. Rogers to E. H. Lougee
2296-B. Letter from E. H. Lougee to G. E. Rogers
2297. Letter from Leroy A. Lincoln, vice president and
general counsel, Metropolitan Life Insurance Co.,
to M. L. Bowman, executive chairman, Iowa Farm
Debt Advisory Committee
2298. Letter from M. L. Bowman to L. A. Lincoln
2299. Table: Type of rotation recommended by Metropoli-
tan Life Insurance Co
14881
14897
14897
14897
14897
14900
14903
14924
14926
14926
14931
14937
14945
14967
14967
14967
14967
14969
14986
14987
14987
14987
15000
15001
15007
Appears
on page
15506
15507
15508
J 15509-
\ 15510
fl5510-
\ 15512
15512
15513
14923
14927
14928
15513
fl5514-
l 15515
(>)
14965
facing
14S67
facing
14967
facing
14967
14970
14986
15516
15516-
15517
15517-
15519
l.'^519-
15520
15520-
15521
15521-
15523
~ ' On file with committee.
CONTENTS
VII
Number and summary of exhibits
Intro-
duced
at page
Appears
on page
2299-A to 2299-E. Photographs of farm buildings, before and
after repair
2300. Schedule: 10 largest urban real estate properties
owned by the Mutual Life Insurance Co., December
31, 1938
2301.
Document: Loan No. 119517, made by Metropolitan
Life Insurance Co. to Empire State, Inc
2302. Letter from Thomas A. Buckner, chairman of the
board. New York Life Insurance Co. to Gerhard A.
Gesell, General Counsel, Securities and Exchange
Commission
2303. Chapter 40 of the Laws of 1933, State of New York,
which became a law on March 7, 1933
2304. Letter from Vincent P. Whitsitt, manager and general
counsel, Association of Life Insurance Presidents,
to Gerhard A. Gesell
2305. Schedule: Metropolitan Life Insurance Company,
balances carried in cash bank or trust company as
of December 31, 1938
2306.
2307.
2308.
2308- A.
2308-B.
2309.
2309- A.
2309-B.
2309-C.
2309-D.
2310.
23 10- A.
2310-B.
Memorandum from H. A. Kiep, Jr., New Business
Department, Chase National Bank to Mr. Totton,
Mr. Shepardson
Memorandum from F. M. Totton to Mr. Shepardson
Letter from Samuel Armstrong, vice president. Chase
National Bank, to Frederick W. Ecker, vice presi-
dent. Metropolitan Life Insurance Co ....
Letter from F. W. Ecker to S. Armstrong
Letter from S. Armstrong to F. W. Ecker
Letter from W. S. Wing, Pennsylvania Dixie Cement
Co., to George D. Graves, vice president. Chase
National Bank
Letter from L. Van Sant, assistant cashier, to F. W.
Gehle, second vice president, Chase National Bank.
Letter from G. H. Say lor, vice president, to L. Van
Sant, assistant cashier. Chase National Bank
Letter from F. W. Ecker, vice president. Metropolitan
Life Insurance Co. to G. H. Savior, vice president.
Chase National Bank
Letter from G. H. Savior to f. W. Ecker
Letter from Earl R. Gafford, second vice president, to
G. H. Saylor, Chase National Bank
Letter from G. H. Saylor to F. J. Shay, cashier, Union
Trust Co., East St. Louis, 111
Letter from E. R. Gafford to Paul A. Schlafly, chair-
man of the board, Union Trust Co., East St. Louis,
111
2310-C
)
Letter from L. Washington, assistant treasurer.
Metropolitan Life Insurance Co., to G. H. Saylor...
2310-D. Letter from M. Hadden Howell, vice president, Chase
National Bank, to H. C. Hartkopf, vice president.
Union Jrust Co., East St. Louis, 111
2310-E. Letter from M. Hadden Howell to L. Washington,
assistant treasurer, Metropolitan Life Insurance Co
2311. Memorandum from G. H. Saylor to Packer, comp-
troller of the Metropolitan Life Insurance Co
15007
15063
15174
15185
15185
15186
15188
15194
15194
15197
15197
15197
15199
15199
15199
15015-
15018
facing
15523
15523-
15524
15524-
15525
15525
15526-
15527
15527-
15528
15195
15196
15197
15528
15529
15529
(15529-
1 15530
15530
15199
15199
15530
15199
15200
15200
15201
15531
15201
15531
15201
15532
15201
15532
15201
15532
5203
5202-
15203
viir
CONTENTS
Number and summary of exhibits
Intro-
duced
at page
Appears
on page
15203
15203
15207
15207
15533
15533
15207
15207
15534
15534
15207
15207
15207
15207
15534
15535
15535
15535
15207
15207
15207
15535-
15536
15536
15536-
15537
15208
15208
15537
15208'
15538-
15539
15209
(')
15209
15540
15210
15541
15232
15231-
15232
15232
15232
15232
15232
15242
15242
15541-
15542
15542
15242
15542-
15543
15242
15242
15543
15544
15242
15544
15251
15545
2311-A. Men\orandum by G. H. Saylor
2312. Memorandum from H. N. Dettmer, Banking Relations
Dept., to G. H. Saylor, Chase National Bank
2312-A. Letter from G. H. Saylor to H. N. Dettmer
2312-B. Letter from H. W. George, treasurer. Metropolitan
Life Insurance Co., to G. H. Saylor
2312-C. Letter from H. W. George to G. H. Saylor ....
2312-D. Letter from G. H. Saylor to W. E. Purdy, vice-presi-
dent, Chase National Bank
2312-E. Letter from G. H. Saylor to H. W. George
2312-F. Letter from W. E. Purdv to G. H. Saylor
2312-G. Memorandum from W. E. Purdy to Gilbert
2313. Memorandum from G. H. Saylor to J. Boyle, First
National Bank, Riverside, N. Y
2313-A. Memorandum from J. Boyle to G. H. Saylor
2313-B. Memorandum from G. H. Saylor to L. Washington..
2314. Schedule: District Depositoriesof Metropolitan Life In-
surance Co. related to Chase National Bank Correspond-
ents .•
2315. Documents in support of Exhibit No. 2314
2316. Schedule: Directors interlocking Chase National Bank
and Metropolitan Life Insurance Co., January 1,
1928-December 31, 1939, inclusive .'
2317. Schedule: Chase National Bank — Credit balances of 10
lairgest life insurance companies
2318. Summary schedule: Chase National Bank — Credit bal-
ances of 10 largest life insurance companies
2319. Schedule: Directors interlocking Mutual Life Insurance
Company of New York and Chase National Bank dur-
ing period January 1, 1928 to December 31, 1938, etc.
2320. Letter from Ketzer, agent, Metropolitan Life Insurance
Co., to Philip Licht, Bank of Manhattan
2320-A. Letter from Raymond E. Jones, vice president. Bank
of Manhattan, to L. Washington, Assistant Treas-
urer, Metropolitan Life Insurance
2320-B. Letter from superintendent of agencies, Metropolitan
Life Insurance Co. to Ketzer .
2321. Letter from George A. Rathbun, manager, Equitable
Life Assurance Society of the . United States, Los
Angeles, to A. R. Horr, treasurer. Equitable Life As-
surance Society
2321-A. Letter from A. R. Horr to G. A. Rathbun
2321-B. Letter from Cecil Frankel, assocfete agency manager.
Equitable Life Assurance Society, to Thomas I.
Parkinson, president, Equitable Life Assurance
Society
^21-C. Letter from F. H. Richmond, assistant treasurer,
Equitable Life Assurance Society to Henry Greaves,
treasurer. Equitable Life Assurance Society
23!J1-D. Memorandum from F. H. Richmond to H. Greaves..
2321-E. Letter from H. Greaves .to Victor H. Rossetti, presi-
dent, Farmers & Merchants National Bank, Los
Angeles
2322. Letter from William H. Fawcett, vice president, First
National Bank at Pittsburgh to Harold Palagano,
treasurer, New York Life Insurance Co
« On file with c.'nmittee.
CONTENTS
IX
Number and summary of exhibits
Intro-
duced
at page
Appears
on page
2322-A. Letter from Roy M. Hexter, president, Continental
Industrial Bank, Cleveland, to New York Life In-
surance Co
2322-B. Letter from A. C. Lansten, treasurer, American Bank,
Port Clinton, Ohio, to New York Life Insurance Co
2323. Table: Life insurance plans issued in 1938
2324. Schedule: Whole time soliciting agents contracts
made, terminated and in force, 45 companies
2324- A. Companies included in table entitled "Whole Time
Soliciting Agents, Contracts Made, Terminated and
in Force"
2325. Table: Cost of selecting and training agents
2326. Table: Compensation of agents for the year 1938
2327. Table: Compensation of whole time agents for the
year 1938
2327-A. Companies included in schedules relating to compen-
sation of whole time agents
2328. Table: Highest commissions paid agents
2329. Booklet: "Purposes of the National Association of
Life Underwriters"
2330. Life Underwriter's Code of Ethics
2331. Table: Connecticut Mutual Life Insurance Co. whole
time agents under contract, December 31, 1938
2332. Table: Causes of termination, lapses in 1936
2333. Document: 1938-1939 objectives of the National
Association of Life Underwriters :
2334. Form used for water company confidential report for
■ insurance companies, year ending December 31, 19-.
2334-A. Form used for report of insurance companies, year
ending December 31, 19
2335. Schedule: New York real estate properties of the Mu-
tual Life Insurance Co., December 31, 1938
2336. Table: Policyholders' losses in life company failures,
period January 1, 1930 to January 1, 1940. i
2337. Summary schedule of Exhibit No. 2336
2338. Schedule: Life company retirements, 1930-1939 (in-
clusive)
2339. Table: Membership on bondholders' protective com-
mittees par value of bonds held by 29 railroads rep-
resented as of December 31, 1938
" 2340. Schedule: Metropolitan, attendance at meetings,
board of directors
2340-A. Schedule: Prudential, attendance at meetings, board
of djioctors .... ,
2340-B. Schedule: New York Life, attendance at meetings,
board of directors
2340-C. Schedule: Equitable, attendance at meetings, board of
directors
2340-D. Schedule: Mutual Life of New York, attendance at
meetings, board of directojrs
' On file with committee.
15251
15251
15331
15332
15545
15546
15547-
15550
15551
15332
15332
15332
15551
15552
15552
15332
15553
15332
15332
15553
15554-
15555
15334
15334
15555-
15556
15556
15355
15357
15557-
15558
15559
15357
15559-
15560
15382
15560-
15562
15382
15562-
15567
15382
(0
15408
15410
" 15568-
15569
(')
15410
15570-
15572
15415
15573-
15577
15415
15578
15415
15578-
15579
15415
15579-
15580
15415
15580
15415
15581
X
CONTENTS
Number and summary of exhibits
Intro-
duced
at page
Appears
on page
2341. Table: Total ledger assets by States and countries —
distribution of life insurance, admitted assets, De-
cenaber 31, 1938
2341-A. Table: Total bonds and stocks by States and coun-
tries— distribution of life insurance, admitted assets
December 31, 1938
2341-B. Table: State, grand total (exclusive of Federal taxes)
by States and countries, — distribution of reserve,
premiums, and disbursements — life business in-
cluding disability and double indemnity, calendar
year 1938
2342. Letter from Haughton Bell, assistant general counsel,
Mutual Life Insurance Co. of New York, to Ger-
hard Gesell, special counsel. Securities and Exchange
Commission
2343. Table: Whole life policies, 20 payment life policies —
2344. Table: Net cost, policy surrendered end of 20th year_.
SUPPLEMENTAL DATA
Unnumbered. Letter from Senator Joseph C. O'Mahoney to
Representative Edward T. Taylor, with copies of documents
mentioned therein ■
Unnumbered. Schedule: Mutual Life's acquisition of rail-
road securities where issuers interlock directly or indirectly
with Mutual Life's Board of Trustees -----
Unnumbered. Memorandum submitted by John A. Stevenson,
president, Penn Mutual Life Insurance Co., to the T. N. E. C.
Unnumbered. Memorandum submitted by Union Central Life
Insurance Co. in regard to item of $10,954,000 shown for that
company on page 177 of Hearings, Part 10-A
Unnumbered. Table: Percentage of total farm-mortgage debt
held, January 1, 1930 and 1936, etc
Unnumbered. Letter from Valentine Howell, vice president,
Prudential Insurance Company, to Senator Joseph C. O'Ma-
honey
2587. Letter from Leon Henderson, Commissioner, Securities
and Exchange Commission, with questionnaire
2588-2604. Letters (signatures deleted) in reply to letter in
Exhibit No. 2587
Uiuuimbered. Statement on life insurance signed by some 150
companies
Uimumbered. Memorandum by Gerhard A. Gesell, in connec-
tion with the item immediately preceding
15415
15415
15415
15421
15421
15422
15582-
15585
15586-
15589
15590-
15593
15594-
15595
15596-
15603
15604
15604-
15615
15616-
15625
15626-
15629
15629-
15631
15631-
15632
15633-
15634
15634-
15635
15635-
15641
15671-
15731
15732-
15734
INVESTIGATION OF CONCENTEATION OF ECONOMIC POWEE
MONDAY, FEBRUARY 12, 1940
United States Senate,
Temporary National Economic Committee,
Washington^ D'. C.
The committee met at 10:35 a. m., pursuant to adjournment on
Tuesday, January 30, 1940, in the Caucus Room, Senate Office Build-
ing, Senator Joseph C. O^Mahoney presiding.
Present: Senators O'Mahoney (chairman). King, and White; Rep-
resentative Williams ; Messrs. Jlenderson, Lubin, Pike, Kades, Kreps,
and Brackett.
Present also : Gerhard A. Gesell, special counsel ; Ernest Howe,
chief financial adviser; and Helmer R. Johnson, attorney, Securities
and Exchange Commission.
The Chairman. The committee will please come to order.
This morning we resume the study of life insurance. It may be
appropriate to point out that this presentation comes under the pro-
visions of section 3 (b) of the resolution ^ which created the Tempo-
rary National Economic Committee. This section reads as follows
[reading] :
The Department of Justice, Department of the Treasury, Department of
Labor, Department of Commerce, the Securities and Exchange Commisssion, and
the Federal Trade Commission are directed to appear before the committee
or its designee and present evidence by examination of witnesses or the intro-
duction of documents and reports. The evidence presented by each of these
agencies shall cover the subject matter of this inquiry which is within its
administrative jurisdiction under existing law or which may be assigned to
such agencies by the committee.
The study of life insurance was assigned by the committee to the
Securities and Exchange Commission.
Commissioner Henderson will open the hearing.
Mr. Henderson. I have a rather long statement. I offer no
apology for it. I offer as an explanation, however, that we are
dealing in this set of hearings with something which affects the
daily lives of practically all citizens, and is concerned with millions
of dollars of investments.
The series of hearings which commence today will be concerned
with the general subj-ect of investment and operating problems of
the larger l^gal-reserve life-insurance companies.
It will be recalled that the President in his monopoly message
referred to the Securities and Exchange Commission's exhaustive
» Public Res. No. 113, 75th Cong., 3d sess. Entered in the record as "Exhibit No.
2" ; see Hearings, Part I, appendix, p. 192.
14695
14696 CONCENTRATION OF ECONOMIC POWER
study of investment trusts/ which, incidentally, is now in its final
stages, and stated [reading] :
The tremendous investment funds controlled by our great insurance com-
panies have a certain kinship to investment trusts, in that these companies
invest as trustees the savings of millions of our people. The Securities and
Exchange Commission should be authorized to make an investigation of the
facts relating to these investments with particular relation to their use as an
instrument of economic power.^
The President's message is replete with references to problems of
our economy upon which this study of insurance investments and
operating results will throw light. Not least of these are the ref-
erences to concentration and financial controls.
Unless the T. N. E. C. or Congress assigns additional insurance
studies to the S. E. C. — and this, Mr. Chairman, is to be noted
since there is no bid for such assigimient — this presentation is
almost the last on life insurance, which is the only form of insurance
which the Commission's staff has studied. Sheer lack of funds has
forced the Commission to reject all suggestions of inquiry into fire
and casualty and other forms of insurance.
A word of caution about the completeness of the present insurance
inquiry. The S. E. C, makes no pretense that every phase of life
insurance has been canvassed. There are 306 life-insurance companies
with assets of $28,000,000,000. We have never had more than 10 men
in the field, with a limited home-office staff. The present investment
study covers the 26 leading companies, but no study could be called
complete which omits review of the investment experience of 280
smaller companies, having several million policyholders and around
S^4,O0O,OOO,O00 of assets.
Mr. Chairman, at the initiation of the insurance presentations
a year ago, Justice William O. Douglas, then Chairman of the S. E. C,
said:
No policyholder need have any concern that any fact brought out in this
inquiry will in any way jeopardize the protection which he counts upon through
his insurance policy.'
I am happy at this time to reaffirm this statement — based as it was,
I believe, on an abiding belief in the institution of life insurance and a
firm sense of confidence jn the integrity of the inquiry process, so
essential to democratic government.
The Chairman. That statement, Mr, Commissioner, ought to con-
tribute a little to the stability.
Mr. Henderson. Well, I don't mind your knowing that I have
arranged within the last few weeks to add to my own insurance
protection.
Senator King. Did you get any reduction in the annual premium?
Mr. Henderson. No. [Laughter.]
Though this is almost the last public hearing, the final report of the
S. E. C. will contain the results of many staff inquiries, conducted
through questionnaires, correspondence, and interviews with insur-
ance company executives.
' S. Doc. No. 173, 75th Cong., 3<1 sess. Entered in the record as "Exhibit No. 1"; see
Hearings, Part I, appendix, p. 185.
= Ibid., at p. mo.
•■"Hearings, Part 4, p. 1161.'.
CONCENTRATION OF ECONOMIC POWER 14697
May I say a few words here on a strong, vigorous, and, at times,
overworked topic — that of cooperation. With but a few outstand-
ing exceptions, those responsible for insurance-company policy
have gone far beyond the requirements of formal requests for infor-
mation. Without the volunteer efforts of earnest executives, our small
staff could not have presented well-rounded pictures of those insur-.
ance topics we have selected as important. After the current hear-
ings, the staff will continue its conferences.
I have already referred to the fact that these hearings will be
concerned with both investment and operating problems. The two
are so interrelated they cannot be separated. One example will
serve to emphasize the point. Supplementary contracts not involv-
ing life contingencies, that is to say special contracts for the disposi-
tion of matured policy proceeds, have increased from $241,000,000 in
1929 to $1,182,000,000 at the end of 1938. These contracts grew partly
because of management emphasis upon new sales techniques and,
though admittedly a logical development in the business, have created
many new investment problems. In fact one life insurance official
said of these contracts that they —
are forcing the life companies out of their primary function of writing assur-
ances and into the investment banking and trust company field.
This is a subject we will consider. It is cited here only to dem-
onstrate how closely the investment problem is linked to the operat-
ing features of the business.
The problems of insurance operations and investments, of coui^e,
cover a broad range and have many ramifications. , As the presenta-
tion proceeds, it will be apparent that we are obliged at least to
touch upon topics ranging from technical accounting matters on
one hand to questions of management policy and economic import
on the other.
Many aspects of the investment problem have already received
attention in the insurance hearings which have been held before
this committee from time to time during the last year. The com-
mittee has heard, for example, evidence with respect to collateral
and mortgage loans to "insiders," loans sometimes of doubtful pro-
priety, and occasionally concealed under the names of dummies who
had no beneficial interest in the transactions themselves; the use of
company funds to further outside business ventures of officers and
directors ; the methods of promoters who pyramid or consolidate life
insurance companies through holding company stock trades or re-
insurance and rewriting operations; and, as m the case of recent
hearings before the special subcommittee, evidence illustrating some
unusual cases where blatant mismanagement of investments has con-
tributed to receiverships and to policyholder losses.
I believe the study of investments will be better illuminated be-
cause of those hearings.
The testimony in the hearmgs about to commence, which will be
concerned primarily with the 26 largest life insurance companies,
will have an entirely different emphasis, the effort being to con-
sider and appraise the operations of the business as a whole. Our
approach to the investment problem will be primarily from an
economic point of view. In this respect we take a sharp departure
14698 CONCENTRATION OF ECONOMIC POWER
from the studies of the Armstrong committee which were more con-
cerned with" an examination of specific abuses. To further an under-
standing of this broader problem, the Commission secured invest-
ment and operating figures, many of which were not available in
public records, by sending out two detailed investment questiopnaires.
The figures so secured will be presented to the committee' in the
course of the hearings and will provide a frame of reference against
which the operation of the business as a whole, as well as that of
individual companies, may be appraised.
Cooperation of the companies m furnishing the required informa-
tion and in conferring with our representatives on related problems
has been commendable and I should like at this time to acknowledge
the generous assistance received.
The investment and operating problems, of the companies have
admittedly become greater in recent years. In 1938, for example,
these companies were faced with the gigantic task of finding suit-
able investments for about $4,000,000,000 comprising $2,500,000,000
that was returned to them through the maturity, sale, and redemp-
tion of their old investments and $1,500,000,000 of new money re-
ceipts. In other words, into the hands of the officials of life-insur-
ance companies, there was an average daily flow of over $10,000,000
for which they had to find suitable new investments. The admitted
assets of the life insurance ■ companies are invested primarily in
bonds, mortga<Tes, real estate, and m policyholders' loans. The mag-
nitude of thef e investments justifies the statement so well phrased
in a recent editorial in the Wall Street Journal ^ to the effect that
"It would be hardly an exaggeration to say that the assets of the
life-insurance companies as a whole represent roughly a first mort-
gage on the country's business and industry." As early as 1906 the
Armstrong Report stated ^ [reading] :
No tendency in modern financial conditions has created more widespread ap-
prehension than the tendency to vast combinations of capital and assets. But
while in the case of railroads and industrials these vast amounts are mostly
fixed in particular productive activities, the larger part of the huge accumula-
tions of life insurance companies consists of assets readily convertible into money
and susceptible of application to varied uses. It is this fact which has placed
the oflicers and members of finance committees of life insurance companies in
positions of conspicuous financial power. ♦ • *
These comments are even more pertinent today for the size of the
companies has grown tremendously and the degree of concentration
within the business has increased. Indeed, the prime importance of
life-insurance company investment practices in the national economy
cannot be questioned and as I have indicated it is toward an appraisal
of the economic effect of these practices that much of the hearings
will be directed. There are many questions upon which some light
may be thrown. For example, do farm mortgage and farm real-
estate policies of life insurance companies benefit or injure the
farmer? Or again, has the trend of private savings to accumulate
in insurance companies dried up venture capital and hampered the
development of new business enterprises? Other similar problems
will come to focus as the hearings proceed.
1 December 28, 1939, p. 4.
' State of New York, Ass. Doc. No. 41, Vol. X, p. 389.
CONCEINTRATION OF ECONOMIC POWER 14699
Before calling the first witness, however, it may be well to reempha-
size the size and scope of the business and to review developments dur-
ing the last year. The Association of Life Insurance Presidents re-
cently estimated that as of December 31, 1939, the total face amount of
life insurance in force in the United States was $113,000,000,000. This
amount represents an increase of about $3,000,000,000 during 1939.
Similarly, the association estimated that the total admitted assets of all
United States companies had grown to a new all-time high of $29,-
150,000,000, an increase of over $1,000,000,000 from the previous year.
With this increase in assets and insurance in force, there was naturally
an increase in premium income and an increase in disbursements to
policyholders or their beneficiaries.
In the hearings which commence this morning, we wish to trace
in a general way the principal operating and investment problems
of the business over the last several decades. In this m.anner, prob-
lems which will be studied in detail in the hearings to follow will be
placed in better perspective. As in the past, Mr. Gesell will conduct
the examination on behalf of the Commission.
The Chairman. Let me add to what Commissioner Henderson said
that the presentation by the Securities and Exchange Commission of
this study, or indeed the presentation by any of the agencies of any
study to this committee, does not in any degree or sense whatever
imply that the committee has taken any position upon any of the mat-
ters involved in the hearing. The committee has not. This com-
mittee sits in a sense as a court or a jury to listen to evidence. I think
I may properly say that the committee has at no. time discussed any
recommendation with respect to life insurance in any of its sessions,
public or executive. No recommendations have been made by the
committee, and no suggestions have been made to the committee by any
member of the committee or by any member of the staff.^
I am reminded of the fact that in the preliminary report ^ which
was filed with Congress by this committee this paragraph was included.
I read it now, because of the apparent dissemination through the
country of inferences and reports that this committee had some legis-
lative plans in mind. This is what the Temporary National Economic
Committee said to the President and to the Congress [reading] :
The Committee "does not plan legislative hearings in the ordinary sense. It
has no legislative, jurisdiction. As in the case of its intensive study of the use
of patents in the automobile manufacturing, the glass container, and the beryl-
lium industries, it will be content to develop facts and in proper cases to make
recommendations, leaving to the standing committees of the House and the
Senate the full jurisdiction and responsibility for drafting and perfecting any
legislation that may be deemed necessary.
Of course, in calling attention to the fact that no recommenda-
tions have been made and that the committee has not at any time
discussed legislative recommendations, I do not, of course, in any way
want to foreclose any member of the committee from making any sug-
gestions, but that will come in due course and long after the facts
have been developed. Whenever such recommendations are made, if
' In this connection see also additional material appearing in appendix, p. 15604, et seq. ;
consisting of (1) letter from Senator O'Mahoney to Representative Edward T. Taylor;
(2) material released by tBe American Life Convention. See also Hearings, Part lO, p.
4345 et seq.
' S. Doc. No. 95, 76th Cong., 1st sess., p. 3.
14700 CONCENTRATION OF ECONOMIC POWER
they are made, as stated in the report which I have just read, they
will be submitted to the proper legislative committees of the House
and the Senate, where they either may be discussed or may be pigeon-
holed ; I can't tell.
Mr. Gesell, are you ready to proceed?
Mr, Gesell. Yes; I am.
Senator King. I just wanted to add I have noticed in some of the
press reports that the members of the committee had reached certain
conclusions which it had expressed with reference to the hearings
and with reference to remedies which might be suggested. May
I say that those reports so far as I am advised have been wholly
inaccurate and without foundation. I think the chairman has propr
erly indicated the purpose of this committee's work.
Speaking for myself, I have never expressed an opinion upon any
subject matter that we have had under consideration except the
patent matter and I was forced to file a dissent with i:espect to a
report which was made by the full committee.
The Chairman. Mr. Gesell, will you call your first witness, or
do you have a statement?
Mr. Gesell, The first witness is Mr. Ernest Howe, chief financial
adviser, Insurance Section, Securities and Exchange Commission. I
would like to point out Mr. Howe has testified before the committee
on a previous occasion ^ and his testimony this morning will be
short and purely for the purpose of presenting general background
information concerning the companies. Tomorrow he will return
to the stand and present a more exhaustive analysis of the invest-
ment and operating performances of these 26 companies over the
last 10 years.
TESTIMONY OF ERNEST HOWE, CHIEF, FINANCIAL ADVISER, IN-
SURANCE SECTION, SECURITIES AND EXCHANGE COMMISSION,
WASHINGTON, D. C— Resumed
The Chairman, You have already been sworn?
Mr, Howe. I have, sir,
Mr. Gesell. Mr. Howe, I show you a volume of schedules entitled
"Operating Results and Investments of the Twenty-six Largest
Legal Reserve Life Insurance Companies Domiciled in the United
States" and ask you if you will explain to the committee the methods
pursued in the assembling of the information contained in this
volume.
Mr. Howe. This volume entitled "Operating Results and Invest-
ments of the Twenty-six Largest Legal Reserve Life Insurance Com-
panies Domiciled in the United States" is a compilation of certain
material which has been received by the Securities and Exchange
Commission from replies to two questionnaires which the Commis-
sion has issued, the first under the date of January 31, 1939, and the
second one under the date of August 11, 1939. The information as
assembled here has been checked by the Commission for mechanical
accuracy and prima facie consistency but it has not in any sense been
audited by the Securities and Exchange Commission. In other
words, these are the statements of the life insurance companies them-
selves, summarized to the best of our ability.
1 See Hearings, Part 4, pp. HM^1233
CONCENTRATION OF ECONOMIC POWER 14701
The Chairman. May I interrupt, Mr. Howe, please ? Let me sug-
gest, Mr. Gesell, that at this point, inasmuch as this is the beginning
of a new hearing on insurance, it might be well for you for the pur-
poses of the record to develop Mr. Howe's background.
Mr. Gesell. That is a matter of record.
The Chairman. I know it is, but just for today's purposes I
think it would be well for the record very briefly to show what his
training and experience has been.
Mr. Gesell. Mr. Howe, will you state what your financial training
and experience has been for the record?
Mr. Howe. Well, I was graduated from the Columbia University
Business School in 1923, after 3 years of post-graduate study in finance.
Subsequently I went to Wall Street, where I was engaged in the
so-called buying department of the investment banking firm of Blyth
& Co., the buying department being the department which analyzes the
securities which the firm is considering imderwriting.
Mr. Gesell. That is an investment banking house ?
Mr. Howe. That is an investment banking house.
Mr. Gesell. Were you also connected with Lehman Bros. ?
Mr. Howe. I was connected with Lehman Bros, as an investment
supervisor.
Mr. Gesell. For what period of time ?
Mr. Howe. About a year and a half.
Mr. Gesell. Were you also formerly connected as a special repre-
sentative of the Federal Housing Administration?
Mr. Howe. I was, for about 21/2 years.
Mr. Gesell. And you have been with the S. E. C. since November
1938, have you not?
Mr. Howe. That is correct. ^
Mr. Gesell. Well, now, Mr. Howe, you were telling us that this
analysis had not been audited by the Commission but was based upon
material submitted by the, companies in response to questionnaires.
Are there any other further matters with respect to these tables that
you wish to mention?
• (Senator King assumed the chair.)
Mr. Howe. There are. The information is largely based on the
annual statements of the companies and certain collateral analyses
which the companies furnished us which do not appear in the annual
statements.
Mr. Gesell. Was the material submitted to the companies for correc-
tion and opportunity given them to correct it ?
Mr. Howe. Yes. The information was submitted to the companies
for corrections and opportunity was given them to make any correc-
tions which they felt needed to be made.
Mr. Gesell. Those corrections that hare been submitted are in-
corporated in this document I showed you, are they not ?
Mr. Howe. They are. All the figures and factual corrections which
have been submitted have been incorporated in this volume as it now
stands.
Mr. Gesell. Was this material assembled under your direct super-
vision ? i
Mr. Howe. It was. «
Mr. Gese^/L. And to your best knowledge is it correct?
Mr. Howe. I believe it is.
14702 CONCENTRATION OF BCXDNOMIC POWER
Mr. Gesell. I wish to offer this document for the record at this time,
subject to our regular understanding that if errors in any of the figures
should appear at any time, they may be corrected.
Acting Chairman King. It will be received. Do you desire this
voluminous record to be set forth in extenso in our hearings ?
Mr. Gesell. I do, Senator; yes.
Acting Chairman King. All these figures?
Mr. Gesell. That is my wish. I mignt say arrangements for print-
ing have been made in that connection with Senator O'Mahoney's
approval. I think an approach can be made that will not be very
expensive.
Acting Chairman King. It will be received.
(The volume referred to was marked "Exhibit No. 2250" and was
printed separately as Hearings, Part 10-A.)
Senator White. Am I to understand this document which T hold in
my hand and which you have been addressing yourself to, has been
submitted to the various companies for scrutiny and correction ?
Mr. Howe. Yes ; it has, Senator White.
Mr. Gesell. Now, Mr. Howe, turning to the charts behind you
entitled "Admitted Assets, 1938," have you
Acting Chairman King (interposing). Let's have that marked as
an exhibit.
Mr. Gesell. All right. I customarily qualify it before I offer it.
I will offer for the record the chart entitled "Admitted Assets, 1938."
Acting Chairman King. It will be received.
(The chart referred to was marked "Exhibit No. 2251" and appears
on p. 14703. The statistical data on which this chart is based are in-
cluded in Hearings, Part 10-^A, p. 5.)
Mr. Gesell. Have you any comments which you wish to make on
that chart, Mr. Howe? , ' '
Mr. Howe. This chart ^hiph is ''entitled "Admitted Assets, 1938,"
shows the tc^tal assets as Shown on the balance sheets of the 26 com-
panies, whose figures have been incorporated in "Exhibit No. 2250." '
On page 5 of this exhibit will be seen the aggregate assets at the
end of 1938; the total assets held by these companies at that time
was $24,290,000,000, approximately. It will be seen from the chart
that there is great concentration of assets in the companies at the top.
There were at the eiTid of 1938, six companies with assets exceeding
$1,000,000,000. The largest, the Metropolitan, had assets of almost
$5,000,000,000. Probably by the end of 1939 it exceeds $5,000,000,000
total assets. The Travelers, which was not quite a billion dollars at
the end of 1938, probably exceeds a billion dollars at this time.
Senator White. You had admitted assets — admitted by whom ?
Mr. HowB; 'Senator, that is a phrase which is used in the annual
statement. It is an accounting phrase which I will explain tomor-
row, I hope ; but in general that is the total assets. That is the figure
that comes at the bottom of the balance sheet. I mean in an ordinary
industrial concern, that would be total assets. It involves some valu-
ations, and so forth.
Senator White, Of course, there are involved in that evaluation of
securities and properties of all sorts that are held. Now, are you
accepting the companies' figures as to the value?
^ See Hearings, Part 10-A.
CONCENTRATION OF ECONOMIC POWER
Exhibit No. 2251
ADMITTED ASSETS -1938
14703
0
DOLLARS BILLIONS
1 2 3
4 5
1 1 1 1 "
METROPOLITAN
' 1
III-
PRUDENTIAL
1
1 1
NEW YORK LIFE
1
1 1 '
EQUITABLE NY
1
MUTUAL NY.
' 1
NORTHWESTERN
1
TRAVELERS
JOHN HANCOCK
1
PENN MUTUAL
1
MUTUAL BENEFIT
1
MASS. MUTUAL
1
AETN A
1
N. E. MUTUAL*
_]
UNION CENTRAL
P
PROVIDENT MUTUAL
b
CONN. MUTUAL
z]
CONN. GENERAL
I]
PHOENIX MUTUAL
I]
■
PACIFIC MUTUAL
3
BANKERS LIFE
3
NATIONAL LIFE
J
STATE MUTUAL
1
EQUITABLE IOWA
3
WESTERN a SOUTHERN
1
LINCOLN NATIONAL
]
GUARDIAN LIFE
]
1 1 L__L
PS-MO" fKCPAKCD »r sec a excn coum
14704 CONCENTRATION OF ECONOMIC POWER
Mr. Howe. Oh, entirely so, sir; oh, yes. Those are just the figures
which were shown on the annual statements of the respective com-
panies as they were filed Avith the state departments of the States in
which they are domiciled. There has been no adjustment of those
figures in any shape, way, or form.
Mr. Gesell. There will be discussion of those admitted assets and
problems of valuation asset later on in the hearing. This list of 26
companies, Mr. Howe, am I correct in saying includes all companies
with assets in excess of $125,000,000?
Mr. Howe. Yes; that is the reason for the selection of the strange
number 26. We wanted all companies with assets in excess of $125,-
000,000, and at the end of 1938 there were 26 of them.
Mr. Gesell. How much do they represent of the total ?
Mr. Howe. The 306 American life insurance companies at the end
of 1938 had total assets of $27,754,000,000, and these companies repre-
sented on this chart constitutes 871/0 percent of the assets of the 306
companies.
Mr. Gesell. Now, on December 31, 1938, how many policies did
these 26 companies have in force?
Mr. Howe. These companies had 98,054,000 policies in force. That
is to some extent an understatement, because included in there as
one policy are master group policies, which really affect a substantially
larger number of people but complete statistics aren't available on
that, so we must use the sort of hybrid figure. Nevertheless, that is an
understatement, a slight understatement. It may be compared with
124,000,000 policies in force in the 306 legal reserve life insurance com-
panies. In other words, 78 percent of the policies outstanding were
outstanding in these companies represented on the chart.^
Acting Chairman King. Of course, those are life insurance policies ?
Mr. Howe. Yes, sir; life insurance policies.
Acting Chairman King. You don't deal in industrial insurance at
all?
Mr. Howe. Oh, yes; industrial insurance policies are included in
that number.
Acting Chairman King. You call those life insurance, too ?
Mr. Howe. Oh, yes ; most assuredly so.
Acting Chairman King. What proportion would be industrial in
contradistinction to life insurance per se?
Mr. Howe. Well, I can answer you in just a second here, Senator,
Acting Chairman King. My recollection is there are approximately
65,000,0W life-insurance policies — strictly life insurance.
Mr. Howe. Senator, the estimate is there are about 65,000,000 policy-
holders. This 124,000,000 is the number of policies, the number of
pieces of paper, as it were, as distinguished from the number of
individuals.
Mr. Gesell. Some people have more than one policy, do they not?
Mr. Howe. That is correct. Now, of the total 124,000,000 policies to
which I refer, 61,000,000 policies are industrial policies held by the
top two companies, that is, the Metropolitan and the Prudential.
And of the total 98,054,000 policies, 70,309,000 policies are indus-
trial policies, so that only about 28,000,000 policies are ordinary life
insurance policies aiid master group policies.
' "Exhibit No. 2251," suprn, p. 14703.
CONCENTRATION OF ECONOMIC POWER 14705
Mr. Gesell. Now, I should like to oflfer for the record at this time
a chart entitled "Types of Insurance Carried by Each Company."
This chart, Mr. Howe, I think, will aid in answering Senator King's
question. Can you make any comment on it in connection with tne
types of business done by various companies?
Acting Chairman King. The chart will be received.
(The chart referred to was marked "Exhibit No. 2252" and ap-
I^ears on p. 14706. The statistical data on which this chart is based are
included in Hearings, part 10-A, pp. 21, 29, 35, 41, 49, 56, 63, and 68.)
Mr. Howe. Life-insurance companies are engaged in a variety of
different lines of related business. About the only generalization
which can be made about the type of business these companies en-
gage in is that the risks which they insure are exclusively risks
relating to persons as distinguished from risks relating to property.
Now, the annual statements of the companies classify the types
of business ^yhich they do, as follows : ordinary life, disability, bene-
fits, individual amiuities, accidental death benefits, group life, group
annuities, accident and health, and industrial life insurance.
Mr. Gesell. That is eight different classifications?
Mr. Howe. That is eight different classifications.
Mr. Gesell. Now, with further reference to Senator King's ques-
tion, how many companies of these 26 write industrial insurance?
Mr. Howe. Four companies write industrial insurance. That is
the Metropolitan, the Prudential, the John Hancock, and the West-
ern and Southern.
There are four more companies which write all types of business
except industrial insurance. These are the multiple line companies
of Hartford, Conn. — the Travelers, the Aetna, the Connecticut Gen-
eral, and the Equitable of New York, which latter company writes
all lines of business with the qualification that their accident and
health business is restricted, I believe, to group accident and health.
The remaining 18 companies write only ordinary insurance and
individual annuities, except the Lincoln National, which also writes
group, and the Pacific Mutual, which also writes accident and health
business.
Mr. Gesell. That makes, if I read correctly from the chart, 4
companies that write industrial business, 26 which write ordinary,
26 which write disability, 24 which write double idemnity for acci-
dental death, 25 which write individual annuities, 9 which write
group life, 7 which write group annuities, and 8 which write accir
dent and health insurance.
Mr. Howe. That is correct.
Acting Chairman King. All these corporations to which you re-
ferred have their charters under the States in which they have their
principal place of business, and they make their reports, annually or
quarterly or semiannually, pursuant to requirements of the statutes?
Mr. Howe. They do so.
Mr. Gesell. They report, do they, not only to the State in which
they are incorporated but all States* in which they do business ?
Mr. Howe. That is correct. They file elaborate annual reports in
all the States.
Mr. Gesell. Now, Mr. Howe, will you turn to the chart entitled
14706
CONCENTRATION OF ECONOMIC POWER
Exhibit No. 2252
[Prepared by Securities and Exchange Commission]
TYPES OP INSURANCE CARRIED BY EACH COMPANY
19 3 8
COMPANIES
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Mass. Mutual
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N. E. Mutual
Union Central
Provident Mut.
Conn. Mut.
Conn. Gen'l.
Phoenix Mut.
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National Life
Pacific Mutual
State Mutual
Equitable Iowa
Western & So.
Lincoln Nat ' 1 .
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Based on reports of total Income.
J
CONCENTRATION OF ECONOMIC POWER 14707
"Total premium income, 1929 to 1939" ? I would like to offer at this
time the chart so captioned and the schedule of supporting figures.
Acting Chairman King. The tendered exhibits will be received and
marked accordingly.
(The chart referred to was marked "Exhibit No. 2253" and appears
on p. 14708. The statistical data on which this chart is based were
marked "Exhibit No, 2254" and are included in the appendix on
pp. 15490-15491.) "
Mr. Gesell. Have you comments yoii wish to make on this chart ?
Mr. Howe. In order that the relative importance of these various
lines of business, in terms of the total premium income, may be under-
stood, a chart has been prepared showing total premium income, 1929-
38. Now, this chart indicates the total premiums which have been
paid into these 26 companies, with the exception of the Pacific Mutual,
for which figures are not available for the period. However, the
chart should not be taken in any sense as indication of the relative
importance of the various classes of business to any individual
company.
Mr. Gesell. These are the assembled totals for all the companies ?
Mr. Howe. These are the assembled totals for all 25 companies. The
point I wish to bring out is that in the four industrial companies, for
instance, their total premium income from industrial insurance in
each case exceeds their total premium, from ordinary insurance, so
this chart must be considered only as the aggregate figures.
During the 10-year period, from January 1, 1929, to December 1,
1938, the total premium income of these 25 companies was $31,384,000,-
000. Of this, $18,782,000,000 was received from ordinary insurance.
I refer to ordinary insurance in this condensed blank as distinguished
from industrial and other lines.
Industrial premiums amounted to $7,078,000,000 during the same
period, while annuities contributed $2,686,000,000.
Acting Chairman King. That is individual annuities?
Mr. Howe. That is both individual and group annuities. Individ-
ual annuities contributed $2,142,000,000, and group annuities $543,-
000,000 of the premium income.
Group life insurance provided a total premium of $1,038,000,000,
while accident and health insurance premiums amounted to $984,000,-
000 of the 10-year totals. Therefore, ordinary life insurance accounted
for 59.85 percent of the premium income; disability benefits, 1.72;
accidental-death benefits, 0.87; industrial insurance, 22.56 percent;
individual annuities, 6.83 percent; group annuities, 1.73; group life
insurance, 3.31 percent; accident and health insurance, 3.13 percent.
Mr. Gesell. Mr. Howe, in the case of the four industrial companies,
can you tell us, in explanation of the chart, whether or not the^ir
premium income from industrial policies exceeds or is less than the
premium they received from their ordinary policies ?
Mr. Howe. In the case of the industrial companies — I am speaking
now of the Metropolitan, Prudentialj John Hancock, and Western and
Southern — the premium income which those companies receive from
industrial insurance exceeds the premium income which those com-
panies receive from ordinary insurance.
Mr. Gesell. Do I read that chart correctly in interpreting that the
amount of premium income from ordinary insurance has decreased ?
14708
CONCENTRATION OF ECONOMIC POWER
CONCENTRATION OF ECONOMIC POWER 14709
Mr, Howe. Over the period, the total premium income from ordi-
nary insurance — that is, including renewal premiums — has increased
slightly from $1,849,000,000 to $1,903,000,000. However, in terms of
the total premiums — that is, relatively in percentages — it has decreased
from 63.86 percent in 1929 to 57.58 percent in 1938.
Mr. Gesell. Total premium income received from the ordinary in-
surance is relatively less important in terms of the total premium
income received by the company ?
Mr. Howe. It is.
Senator White. You made reference to ordinary insurance. What
do you include in the term ordinary ? You don't mean, of course, just
ordinary life?
Mr. Howe. I do not. I mean to include all types of policies or
business which are included in the convention blank under the head-
ing "Ordinary." That includes in general, Senator, what is referred
to as ordinary life. It includes term insurance. It includes endow-
ments. It includes 20-payment life. It is all of these policies which,
under usual practice, are paid for by annual premiums or quarterly
or sometimes monthly premiums. I don't mean at all to limit it to that
one type of policy known as ordinary life.
Senator White. But the various kinds of insurance you have just
now catalogued are included in your term "ordinary" insurance?
Mr. Howe. That is correct.
Mr. Geseli.. Now, do I also interpret the chart ^ correctly in saying
that over the period the individual annuities amount to a greater per-
centage of the total premium income than they did at the beginning of
the period?
Mr. Howe. Individual annuities in 1929 produced a premium income
of $55,000,000. By 1935 that had grown to $392,000,000; and by 1938,
still remained at the figure of $261,000,000. In other words, indi-
vidual annuities amounted to or accounted for 1.91 percent of the total
premium income of 1929, 12.03 percent of premium income for 1935,
and 7.91 percent of the total premium income in 1938.
Mr. Gesell. I should like to offer for the record a chart entitled
"New Paid-For Life Insurance" together with the supporting table.
Acting Chairman King. The exhibits will be received.
(The chart referred to was marked "Exhibit No. 2255" and appears
on p. 14710. The statistical data on which this chart is based were
marked "Exhibit No. 2256" and are included in thei appendix on
p. 15492.)
Mr. Gesell. Now, Mr. Howe, have you any comments which you
wisht to make with respect to this chart ?
Mr. Howe. Yes ; I have. This chart is based on a regular statistical
series, which is published by the Association of Life Insurance Presi-
dents in New York. It covers, according to their statement, the data
on 40 United States companies, which constitute 82 percent of the total
business outstanding in all the United States legal reserve companies
on December 31, 1938. The schedule excludes revivals, increases, and
more important still, dividend additions and accepted reinsurance.
In other words, the chart shows, in a general and broad way, the
volume of business on which a life-insurance salesman could collect a
1 "Exhibit No. 2253," supia, p. 14708
124491— 41— pt. 28 2
14710 CONCENTRATION OF ECONOMIC POWER
Exhibit No. 2255
NEW PAID-FOR LIFE INSURANCE
1913-1938
1913 1915
1920
1925
1930
1935 1938
# exCLusivc Of KtyiviLS. inceises ahd diviocnd additions - to uNirco STAres
coMPdmes TH£5£ coMPAwes hao est of the total eusiNCSS in all us lcgau
nestKi/c couPANics on oeconBO 31. i)}7
SOVRCg: TNC ASSOCIATION OF LIFE INSURANCE PPESIDCNTS
CS-141S PRCPAPCDtr sec
a ircil I
CONCENTRATION OF ECONOMIC POWER 14711
commission, and when I say life-insurance business I mean life insur-
ance and not amiuities.
Mr. Gesell. And you mean collect the first year's commission ?
Mr. Howe. That is right.
Mr. Hendekson. Mr. Howe, just on the face of it, this table ^ might
seem to contradict the figures I put into the record in my statement,
which shoAved that there was an increase in the admitted assets
' and an increase in the total amount of life insurance in force. Now,
what is the reconcilation between your figures and those that I put in ?
Mr. Howe. These, of course, are a trend of sales. The previous
table,^ for instance, on premium income, includes all of the income from
the policies year after year, not only the first year premium income
but the continuing premiums which are paid in successive years. That
is a very much more level curve.
Now, the continuation of the payment of premiums on lif e-iusurance
policies, the renewal premiums, year after year, have, along with other
factors which we will discuss, produced a rather substantial increase
in the total assets of life-insurance companies ; but the actual sales of
life insurance during the period from 1929 have shown the trend which
is indicated by the chart.^
Mr. Geseix. Now, see if I can't help you. The total amount of insur-
ance in force has increased, has it not?
Mr. HoAVE. The total amount of insurance in force has increased.
Mr. Gesell. Tlie total amount of new business sold each year, how-
ever, has been decreasing since around 1929, as shown on that
schedule ? *
Mr. Howe. That is correct.
Mr. Gesell. And the difference is made up in the fact that paid-up
additions, and other things of that sort, are excluded from these
figures. but not excluded from the figures Mr. Henderson gave* in
his opening statement?
Mr. Howe. That is correct.
Mr. Gesell. As I gather, this is the actual business sold by the
agents ?
Mr. Howe. That is right.
Mr. Henderson. The agent, however, does not get a commission on
such things as this, if I let my dividends accumulate and buy more
insurance?
Mr. Howe. No ; he does not receive a commission.
Mr. Henderson. That would be excluded from this' figure?
Mr. Howe. That is excluded from that figure.
Acting Chairman King. Does the chart * last exhibited include
more than the 26 insurance companies indicated on the first chart ^
which you presented?
Mr. Howe. It does, Senator. The reason is we don't have figures
over a long enough period for the 26 companies. We only have
1 See "Exhibit ino. 2256," a'ppendlx, p. 15492.
2 See "Exhibit No. 2254," appendix, pp. 15490-15491.
= See "Exhibit No. 2255," supra, p. 14710.
* See "Exhibit No. 2256," appendix, p. 15492.
" Supra, p. — .
« See "Exhibit No. 2255," p. 14710.
' See "Exhibit No. 2251," p. 14703.
14712 CONCENTRATION OF ECONOMIC POWER
them for 10 years. This is from the statistical series of the Associa-
tion of Life Insurance Presidents. There is not any great difference
in the trends.
Acting Chairman King. This chart then would represent as you
indicated about 80 percent of the insurance receipts of insurance
companies ?
Mr. Howe. Eighty-two percent of the insurance in force, and the
26 companies represent about 78 percent, I believe the figure is, of
the insurance in force.
Mr. Gesixl. Are there any figures on this chart you wish to point
out particularly?
Mr. Howe. It is interesting to note the difference in the growth
of the three principal types of insurance. I speak now of three
principal types of msurance as classified by the convention form.
That is the ordinary insurance, the importance of which we saw on
the preceding chart,^ industrial insurance, and group insurance.
Now, during the period from 1913 to 1929, it is clearly seen that,
in general, there was a period of very rapid growth. For instance,
ordinary insurance in 1913 to 1929 increased, on the basis of figures
on this chart,^ 422 percent; industrial insurance, 365 percent; and
group insurance, 5,600 percent.
Total insurance during that period, 1913 to 1929, increased 456
percent.
Mr. Gesell. What has been the experience since that time ?
Mr. Howe. Since 1929, as the chart ^ clearly indicates, there has
been a decline. . New paid-for industrial insurance from 1929 to
1938 declined 25 percent, and group declined 60 percent. Ordinary
declined 44 percent.
Mr. Gesell. Now, are these declines continued if one takes into
account the estimates of the 1939 figure ?
Mr. Howe. In comparing 1939 with 1938, we see that ordinary
insurance has shown an increase of 3 percent; industrial insurance
has declined 31.9 percent, or a greater percentage than the decline
during the entire period from 1929 to 1938.
Acting Chairman King. You mean in that one year?
Mr. Howe. Yes.
Acting Chairman King. Thirty-eight percent?
Mr. Howe. No; 31.9 percent from 1938 to 1939 and group in-
surance increased 68 percent in 1939, as compared with the previous
year.
Mr. Geseix. Now, these 1939 figures are based upon estimates, are
they not ?
Mr. Howe. I believe so. They are at least the figures which are
published by the Association of Life Presidents.
Acting Chairman King. At the close of 1938, referring to the
group figures, there was no indicating, was there, that there would
be that large increase during 1939? In other words, there was no
upturn apparent?
Mr. Howe. No, Senator ; or perhaps if you look at the figure for
1937 you might say instead of a big upturn in 1939, there was an
unaccountable downturn for 1938, because the figure for 1937 was
1 "Exhibit No. 2253," supra, p. 14708.
• 'Exhibit No. 2255," supra, p. 14710.
CONCENTRATION OF ECONOMIC POWER 14713
almost as big as 1939. In other words, the sales of new group in-
surance are a little more erratic from year to year than the other
curves which are more stable.
Acting Chairman King. That would be rather an abrupt increase,
would it not, in 1939, in the group insurance ?
Mr. Howe. Yes; a very considerable increase. Probably, you see,
someone wrote a big contract or a few big contracts, having a big
effect on the total.
Mr. Gesixl. Now, I should like to turn to the chart entitled "Total
Income and Disbursements," which I will offer for the record, and
the supporting schedule which I would like to offer.
Acting Chairman King. They may be received.
(The chart referred to was marked "Exhibit No. 2257" and ap-
pears on p. 14714. The statistical data on which this chart is based
were marked "Exhibit No. 2258" and are included in the appendix
on p. 15493.)
Mr. Gesell. Mr. Howe, can you explain the chart for the com-
mittee, please?
Mr. Howt:. This chart is a summation of the total income of the 26
companies for a period from January 1, 1929, to December 31, 1938,
and their expenses for the same period.
Acting Chairman King. You are coming back now to the 26
companies?
Mr. Howe. Yes ; this is the 26 companies. It will be seen that the
total premium income during the period amounted to $31,326,000,000,
investment income during the same period amounted to $8,473,000,000,
and other income to $2,880,000,QOO. Thus, total incoine, which includes
some duplications, amounted to $42,679,000,000.
Acting Chairman King. What other sources would there be of
income other than investment income and premium income?
Mr. Howe. Senator, that gets into quite a discussion, but
Acting Chairman King (interposing). Just in a general way?
Mr. Howe. One place that other income comes . from is from an
accounting practice of this kind : If a man dies and has a $10,000 life-
insurance policy under which the provision is that his beneficiary
shall be paid not $10,000 in cash but a sum of money over a period
of years, the accounting procedure is to include the full $10,000 in
death claims and include it again on the income side, and then the
disbursements "appear again as the monthly payments go out. So
that when I say there is some duplication in other income I mean
there are some accounting adjustments of that sort.
Acting Chairman King. That accounting system doesn't absolve
the corporation from any obligation ?
Mr. Howe. Not in the least. It is merely a matter of convenience
in accounting. But the thing that I wish to state about this schedule
of income and disbursements is that probably of all the annual state-
ment schedules prepared by life-insurance companies, this thing is
subject to — well, I was going to say the most qualifications, but cer-
tainly a great many, and therefore we don't want to take the figures
too seriously as to the minute detail ; but it does correctly convey the
broad general impression that the income of. these companies does
substantially exceed their disbursements,
Mr. Gesell, What happens to the difference, Mr. Howe ?
14714 CONCENTRATION OF ECONOMIC POWER
Exhibit No. 2257
TOTAL INCOME & DISBURSEMENTS*
1929-1938
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CONCENTRATION OF ECONOMIC POWER 14715
Mr. Howe. The difference in this 10 years is that substantially-
Mr. Gesell (interposing). First of all, how much is the difference?
Mr. Howe. The difference is $10,585,000,000.
Mr. Gesell. Can you tell us in a general way what happened to
that difference ?
Mr. Howe. Yes. In a general way, that goes to increase reserves —
that is, life-insurance and annuity reserves; it goes to increase sur-
plus; it goes to increase contingency reserves; and part of it has
washed out in asset losses.
Acting Chairman King. Insurance companies, like all other busi-
ness activities, have some losses ?
Mr. Howe. Senator, we will see that they do.
Acting Chairman King. Decline in values of property which they
have taiien or upon which they made loans?
Mr. Howe. That is right ; a very human characteristic.
Mr. Gesell. Have you any further comments you want to make on
this chart? ^
Mr. Howe. It will be seen that of the disbursements, about 72 per-
cent are payments which have been made to policyholders in one form
or another, including death claims (with the qualification that I just
mentioned about supplementary contracts) , dividends to policyholders,
and surrender values for the policies which have been surrendered.
The aggregate of surrender values amounts to about $7,000,000,000,
the death claims about the same amount, and operating expenses
$6,859,000,000 during the period.
Mr. Gesell. Now, Mr. Howe, will you turn to tables 98 and 99 in
"Exhibit No. 2250," the analysis of the 26 company accounts which was
placed in the record ? ^ These two schedules represent, do they not, the
combined balance sheet of these 26 companies?
Mr. Howe. They do.
Mr. Gesell. They show an increase of assets of slightly over $9,000,-
000,000 in the 9 years, do they not?
Mr. Howe. Yes.
Mr. Gesell. What percentage increase is that ?
Mr. Howe. Sixty-three percent.
Mr. Gesell. Now, turning to certain of the principal asset items
which have increased substantially, can you give us some idea what the
percentage increase has been ? The figures are apparent here.
Mr. Howe. The cash has increased 551 percent. The cash was in-
creased from $102,188,000 to $665,329,000.
Mr. Gesell. How much increased?
Mr. Howe. Five hundred fifty-cne percent.
Mr. Gesell. What about United States Governments ?
Mr. Howe. United States Governments have increased 1,394 per-
cent.
Mr. Gesell. Wliat has been the increase in industrial and miscel-
laneous bonds?
Mr. Howe. Industrial and miscellaneous bonds have increased 460
percent.
^ Spe "Exhibit No. 2257," supra, p. 14714.
* Spc Hearings, Part 10-A, pp. 98 and 99.
14716 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. Now, coming down to the mortgage and real-estate
items, have the mortgages increased or decreased?
Mr. Howe. The mortgages have decreased. They have decreased
25.03 percent.
Mr. Gesell. jHas that been offset by an increase in the an;ount of
real estate held ?
Mr. Howe. Yes; the amount of real estate held was increased 539
percent, or from $277,000,000 to $1,775,000,000.
Acting Chairman King. In part would that be represented by prop-
erty taken over under mortgage foreclosures or other real estate ?
Mr. Howe. Mostly foreclosed real estate. The home offices are
included, as are housing projects, but mostly the figure is foreclosed
real estate taken in satisfaction of debt.
Acting Chairman King. So there would be losses there ?
Mr. Howe. There may be ultimately. They still own it. You can't
tell yet.
jMr. Gesell. We will consider some of that tomorrow.
On the assets you said they had increased 63 percent to the $24,000,000
figure ?
Mr. Howe. Right.
Mr. Gesi LL. Can you compare that with what the increase has been
in insurance in force over the same period?
Mr. Howe. The increase in insurance in force over the same period
has been about 10 percent.
Mr. Gesell. So that assets have increased 63 percent, whereas insur-
ance in for ;e has increased 10 percent?
Mr. Howe. That is about right.
Mr. Gesell. Now, turnihg to the liabilities side, Mr. Howe, what has
been the increase in annr.itie.
Mr. Howe. The increase in reserves for annuities during this period
has been 565 percent.
Acting Chairman Kjng. That woulJ be from $400,000,000 to
$2,665,000,000?
Mr. Howe. That is correct, sir.
Mr. Gesell. What has been the increase in supplementary contracts
not involving life contingencies?
Mr. Howe. Three hundred ninety percent.
Mr. Gesell. Has there been an increase of dividends left with the
companies ?
Mr. Howe. Yes; 89 percent.
Mr. Gesell. And what about the increase of premiums and rent paid
in advance ?
Mr. Howe. That has increased 186 percent.
Mr. Gesell. Well, now, tiirning to one otl>er set of tables, can you
tell us what the total amounrt oi funds available for investment to these
companies has been over tlie period, and what the gross investments
made have amounted to ?
Mr. Howe. On page 93,^ it will be seen, are displayed the sources of
funds available for investment by life-insurance companies for the year
1929. compared with the year 1938. It will be seen that in the year 1929
these 26 companies had available for investment $2,087,000,000. In
1938 this figure had amounted to $4,315,000,000. During the entire
1 See Hearings, Part 10-A, p. 3.
CONCENTRATION OF ECONOMIC POWER 14717
period of 10 years, $26,856,514,000 was available for investment by
these companies.
Mr. Gesell. How much was the investment ? What were the gi'osg
investments made ?
Mr. Howe. The gross investments made were $26,189,000,000, and
if we look at table 95 on page 95,^ we see that in 1929 the companies
invested $1,989,000,000, whereas in 1938 their investments were
$3,649,000,000.
Mr. Gesell. Now, have you prepared some studies, Mr. Howe,
which will give some idea of the importance of the life-insurance
companies in the capital market?
Mr. Henderson. Before you go on, Mr. Gesell, let me see whether
I understand something of what you Jiave been saying. In this
period, '29 to '38
Acting Chairman King (interposing). Inclusive.
Mr. Henderson. Inclusive, which included many years of depres-
sion in which the admitted assets went up but the life insurance in .
force went up only about one-sixth as much, and in which time the
new paid-for life insurance was going steadily down, the investment
problem of the insurance companies, as distinguished from their sales
problem, had decidedly increased, had almost doubled, more than
doubled, as a matter of fact.
Mr. Howe. That is right.
Mr. Henderson. In other words, in this period where there were
declyiing opportunities for investment which this committee is study-
ing, they had an acceleration of the demands on their manageijial
efforts to find wavs of getting earnings with which to keep insurance
at a proper level ?
Mr. Howe. Eight,
Acting Chairman King. With a decline in the receipts from new
insurance, their outstanding obligations still existed?
Mr. Howe. Of course. ---^
Acting Chairman King. And, of course, thiey had to obtain revenue
from those obligations by loans or otherwise dr obviously the day
-must come when they would have a very serious situation.
Mr*. Howe. Oh, of course ; but their premium income, as this chart ^
shows, I mean their gross income in general, exceeds their outgo
although the one very great defect of that chart is that it takes no
consideration at all of the flow of funds into and out of policy loans.
That is a peculiarity of insurance accounting which I will go into
tomorrow.
Acting Chairman King. These charts indicate that there were in-
vestments made from which they derived funds to meet their obli-
gations?
Mr. Howe, Very sulpstantially.
Mr. Henderson. That is, they had $26,856,000,000 available for
investment and they invested over $26,189,000,000 of it?
Mr. Howe. That is right; and the difference is the cash account
which is $665,000,000.
Mr. LuBiN. Isn't it also true, Mr. Howe, judging by that table,'
that even if they hadn't got any return on investments, their return
1 Ibid.
'See "Exhibit No. 2257," supra, p. 14714.
3 See "Exhibit No. 2258." appendix, p. 15493.
12.4131-— 41— pt. 28 3
14718 CONCENTRATION OF ECONOMIC POWER
on premiums would be enough to meet obligations, death claims, sur-
render values, and everything else?
Mr. Howe. That is right, fpr'this period.
(Senator O'Mahoney resumed the chair.)
Mr. Gesell. Mr. Howe, I was about to ask you if you had pre-
pared some studies that would further illuminate the importance of
these investments in the capital market?
Mr. Howe. I have. In the period from 1929 to 1938, the total
assets of the life insurance companies included in this study in-
creased, as the table ^ will show, from $14,800,000,000 to $24,300,-
000,000. This is an average of almost a billion dollars a year.
Mr; Gesell. That is to say, the assets of the companies have been
increasing about a billion a year ?
Mr. Howe. That is correct.
Senator King. Of these 26 companies?
Mr. Howe, Of these 26 companies. Senator ; yes, sir. From 1936 to
1937, however, the increase was $1,180,000,000, and from 1937 to 1938
the increase was $1,290,000,000.
The necessity of finding suitable investments for these mcreasmg
amounts of new money has created a frankly difficult problem for
the life insurance companies. This difficulty has been aggravated by
reason of the fact that the demands for capital have been extremely
small from any borrowers, except the United States Government.
The situation may be comprehended by examining the total amounts
of long-term debts outstanding in the United States at various times
during the period. The over-all total amount of long-term private
debt in the United States in 1937 was $70,355,000,000. This was
$14,165,000,000 less than in 1930.
Senator King. Where did you get those figures of 70 billion as
the over-all indebtedness in the United States? Would that be pri-
vate indebtedness or corporate, municipal, State, or what?
Mr. Howe. I will give you the detailed figures in a moment, Sen-
ator. That involves the railway debt, industrial debt, public-utility
debt, farm-mortgage debt, and urban-mortgage debt.
Mr. Gesell. Those are figures from the Department of Commerce.
Mr. Howe. The $70,000,000,000 figure involves only the private
debt, you see. The Federal and State debt is $55,867,000,000 on top
of that, or was at the. end of 1937.
Senator King. Would that include the obligations of small indus-
tries, small mercantile establishments? I have received' some infor-
mation to the effect that the total indebtedness in the United States,
Federal Sate, county, and municipalities, corporates and partner-
ships, and individuals, was approximately 200 billion.
Mr. Howe. Senator, these are the long-term debts only.
Mr. Gesell. Tliese figures are taken from the long-term debt
studies in the United States of the Department of Commerce, are
they not?
Mr. Howe. They are.
Mr. Gesell. You were saying that the long-term debt has de-
creased in the period from '30 to '37 ?
Mr. JIowE. Yes.
Mr. GfisELL. How much did you say it had decreased ?
' See Hearings, pt. 10-A, p. 98.
CONCENTRATION OF ECONOMIC POWER 14719
Mr, Howe. It had decreased $14,165,000,000.
Mr, Gesell. During that period how much did the assets of the
insurance companies increase?
Mr. Howe. During that period the assets of the insurance com-
panies increased $16,000,000,000.
Mr. Gesell. How much did they increase?
Mr. Howe. I beg your pardon, they increased from $16,000,000,000
to $23,000,000,000, or $7,000,000,000.
Mr. Gesell. So that the assets of the life-insurance companies in-
creased $7,000,000,000, whereas tlie total long-term private debt in
the country decreased $14,165,000,000?
Mr. Howe. That is correct.
Senator King. May I for my own information inquire as to what
they meant by long-term? Was it a bond issue?
Mr. Howe. I think in general that is the type of thing they were
thinking of, I mean like the railroads — they get the funded debt.
Senator King. The long-term obligations would not indicate the
total obligations of the Government, State and national, corporations,
and private individuals?
Mr. Howe. I think you are correct, sir.
Mr. Gesell. Now, expressed in percentages, can you tell us how
much the long-term private debt declined as compared with the in-
crease in the assets of the insurance companies?
Mr. Howe. The total long-term private debt, as indicated by these
figures, has declined 17 percent, while the total assets of these insur-
ance companies increased 43 percent. In the same interval the loi^g-
term public debt increased from $31,891,000,000 to $55,867,000,000.
Most of thi? increase was due to the expansion of the Federal debt
from $14,454,000,000 to $36,715,000,000. State and local debts in-
creased from $17,437,000,000 to $19,152,000,000 between 1930 and 1937.
Mr. Gesell. Now, have you prepared a schedule entitled "Long-
Term Investments of 26 Life Insurance Companies in Relation to
Long-Term Debts in the United States"?
Mr. Howe. I have.
Mr. Gesell. That is based, is it not, on figures submitted by the
companies and figures obtained from the Department of Commerce?
Mr. Howe. That is right.
Mr. Gesell. I wish to offer this schedule for the record.
The Chairman. The schedule may be received.
(The schedule referred to was marked "Exhibit No. 2259" and is
included in the appendix on pp. 15493-15494.)
Mr. Henderson. Mr. Chairman, in the document from which the
long-term debt figures have been taken, prepared by the Department
of Commerce, I find they say, "For' this particular study, the debts
included in tlie aggregate may be regarded as maturing a year or
more from the original date of issue, although not without some
qualifications."
Mr. Gesell. Now, from those figures, can you point out some of
the significant developments?
Mr. Howe. The 26 companies whose figures are included in this
book in 1930 owned 2.1 percent of the Federal Government debt.
By 1937 they owned 11.6 percent. Of the State and local debt in
1930 they owned 3 percent, whereas in 1937 they had acquired 6.7
percent.
14720 CONCENTRATION OF ECONOMIC POWER
Senator King. Their investments, then, in State and Federal
securities increased?
Mr. Howe. They did. Their investments in State and Federal
securities increased from $813,000,000 in 1930 to $5,547,000,000 in
1937.
The Chairman. Mr. Howe, it occurs to me to ask you whether, in
preparing these figures on the long-term private debt as compared
with the assets of the life-insurance companies, you have examined
the figures for the national income in the respective years?
Mr. Howe. I have not made any comparisons of national income
and premium income of insurance companies.
The Chairman. Let me point out what I have in mind. You say
in 1937 the over-all amount of long-term private debt in the United
States was $70,335,000,000?
Mr. Howe. Yes.
The Chairman. Now, that was in excess of the national income
for that year?
Mr. Howe. I believe it was.
Mr. Henderson. Just about equal to it, Senator.
The Chairman. This is the significant point. In 1930 the private
debt, according to your computation, was $14,165,000,000 more than
the figure for 1937?
Mr. Howe. Tliat is correct.
The Chairman. I wonder what the ratio would be between the
national income for 1930 and for 1937 ?
Mr. Gesell. We can prepare those figures for you and would be
glad to submit them.^
The Chairman. I was going to suggest you have that informa-
tion prepared.
Senator King. May I state, Mr. Chairman, the witness before jou
came in indicated, as I recall his testimony, that the $70,000,000,000
did not include a large volume of private individuals, individuals, or
short-term.
The Chairman. Yes; I understand that.
Mr. Howe. That is my understanding, Senator.
Senator King. That, plus the other indebtedness to which ref-
erence has been made, might amount to $200,000,000,000.
Mr. Howe. It might.
Mr. Gesell. You were telling the committee about the different
percentages of types of investment held by the companies.
Mr. Howe. Yes; and I gave the figures for public debt. Federal
and State and local. With respect to private debt, in 1930 these 26
companies held 18.1 percent of the railway debt, and in 1937 they
owned 17.4 percent.
Mr. Gesell. So their ownership of the railroad debt has decreased,
has it not?
Mr. Howe. It has decreased some.
Mr. Gesell. Wliat with respect to the other tj^pes?
Mr. Howe. With respect to industrial indebtedness, in 1930 these
companies held 2.5 percent, and in 1937, 11.7 percent.
Mr. Gesell. So industrials have gone up from 2 to 11?
1 The national income for 1930 was $68,300,000,000. and for 1937, $69,800,000,000. See
hearings, Part 4, "Exliibit No. 220," appendix, p. 1513.
CONCENTRATION OF ECONOMIC POWER 14721
Mr. Howe. They have ; and public utilities has gone up from 10.5
to 18.2. Farm mortgages held by these companies, however, have
declined from 19.2 percent of the total farm-mortgage debt to 10.5
percent of the total farm-mortgage debt.
Mr. Gesell. What does that make for the totals?
Mr. Howe. Including urban mortgages, in 1930 these 26 companies
held 12.6 percent of the total private debt, and in 1937, 14.4 j)ercent
of the private debt. Of the total public and private debts, it is a
percentage of 9.8 and 12.14, for 1930 and 1937, respectively.
Mr. Gesell. Have you prepared some studies of special cases in the
oil and rubber industry which show what this increase has involved
in terms of individual concerns ?
Mr. Howe. I have.
Mr. Gesell. Are those studies contained on this schedule which I
show you ?
Mr. Howe. They are.
Mr. Gesell. I snould like to offer the schedule for the record.
The Chairman. The exhibit may be received.
(The schedule referred to was marked "Exhibit No. 2260" and is
included in the appendix on p. 15494.)
Mr. Gesell. Mr. Howe, turning to those specific cases, will you de-
scribe for the committee what has taken place ?
Mr. Howe. We have already considered the great increase in the
investments of the 26 life insurance companies in bonds of industrial
corporations. In 1929 these companies held $214,000,000 of industrial
bonds. In 1938 the bonds in this category amounted to $1,196,000,000.
The increase in this 9-year period is $982,000,000. Inasmuch as the
total amount of industrial bonds outstanding was declining through-
out this period, it is clear that the increased holdings of insurance
companies represented an absorption of debt previously held by other
lenders. The steadily increasing amount of mdustrial bonds held by
the insurance companies has given them a position of greater relative
importance to industrial corporations. On an over-all basis, it ap-
Eears that these companies rose from a position in 1930 when they
eld 2.5 percent of the industrial debt to 1937 when they held 11.^.
When attention is narrowed to that part of the industrial long-term
debt which is an appropriate field for life insurance investment, the
change in the position of the insurance companies appears even more
striking. In order to show a few illustrations of that change, 5 oil
companies and 4 rubber companies Avere selected. By combining the
lists of securities owned by each of the 26 companies, it was possible
to discover exactly how much of the total outstanding funded debt of
each of the selected oil and rubber companies was held by the 26 life
insurance companies as a group. ^
This was done for 2 years only, 1929 and 1938.
Mr. Gesell. The results are contained on this schedule that was
just introduced?
Mr. Howe. The results are summarized on the schedule just intro-
duced.
Mr. Gesell. Without regard to the figures which will be on the
exhibit, will you tell us what the increase has meant in terms of per-
centage, first starting for the oil companies and taking the years
1939 and 1938?
14722 CONCENTRATION OF ECONOMIC POWER
Mr. Howe. In the Gulf Oil Corporation, the increase from 1929 to
1938 was from 10.8 percent to 100 percent.
Mr. Gesell. You mean in 1929 these 26 companies held 10.8 percent
of the total funded debt of the Gulf Oil Corporation ?
Mr. Howe. That is correct.
Mr. Gesell. And that by 1938 they held 100 percent?
Mr. Howe. That is correct.
Mr. King. Has it decreased during that period?
Mr. Howe. Yes ; the debt decreased by $15,000,000.
Mr. Gesell. In the case of the Shell Union Corporation of Dela-
ware, what do you find ?
Mr. Howe. In 1929 the companies held 5.6 percent of the debt,
and in 1938, 38.8 percent.
Senator King. That might be less in the total amount which they
held in dollars than the 5 percent of .the first period ?
Mr. Howe. No; in 1929, Senator, the insurance companies held
$7,120,000.
Senator King. Of the Shell?
Mr. Howe. Of the Shell, and in 1938 tliey held $31,000,000.
Mr. Gesell. In the case of Socony Vacuum Oil Co. of New York,
the insurance companies increased their holdings both in terms of
amount and percentages there, did they not?
Mr, Howe. They did. The percentage increase was from 8.3 to
66.6.
Mr. Gesell. What about the Standard Oil Co. of New Jersey ?
Mr. Howe. The increase was from 4.1 percent to 26.3 percent.
Mr. Gesell. In the case of the Texas Corporation it was from 6.2
to 8.2?
Mr. Howe. That is correct.
Mr. Gesell. Turning to the rubber companies, shown on this sched-
ule, what has been the increase in the case of the Firestone Tire &
Rubber Co.?
Mr. Howe. In 1929 these companies owned none of the securities
of the Firestone Tire & Rubber Co., whereas in 1938 they owned 25.8
percent.
Senator King. Does your investigation show any losses in those
holdings, do you think, or did they show the securities were valuable ?
Mr. Howe. The securities were unquestionably valuable. Senator.
These have been acquired since the depression, largely.
The Chairman. Do they indicate losses in any of those periods?
Mr. Howe. No indication of any losses.
Mr. Gesell. In the case of the United States Rubber Co., just to
give one further example, the increase has been from 0.8 percent to
100 percent, has it not?
Mr. Howe. Tliat is correct.
Mr. Gesell. Now, Mr. Howe, in further reference to this same
topic, will you turn to table 125 contained in "Exhibit No. 2250"
and tell the committee what that table shows?
Mr. Howe. Table 125, appearing on page 125. In tins case, Sena-
tor, we have adopted the page numbers for the table numbers in
order to simplify reference. On page 125 there is a table which is
entitled "New Corporate Bonds and Notes Issued." These figures
have been assembled by the research and statistics section of the
Securities and Exchange Commission over a period of years. That
CONCENTRATION OF ECONOMIC POWER 14723
is the total amount of rails, public utilities, industrial, and miscel-
laneous bonds which have been issued by all American corporations
during the period from 1934 to 1938, inclusive. During this period,
there were $11,241,000,000 of corporate securities, new corporate is-
sues, put out. And during this period, the new corporate bonds pur-
chased by these 26 companies alone accounted for $3,683,000,000 of
all of these securities which Avere issued, and I must emphasize the
fact that of these corporate securities, only a portion are eligible for
life insurance investment because the $11,000,000,000 includes cor-
porate securities, good, bad, and indifferent.
Mr. Henderson. You mean a different rate?
Mr. Howe. Tliat is right, different qualities.
The Chairman. All these life insurance companies — I assume the
States in which they were incorporated provide qualifications for
securities?
Mr. Howe. Yes, sir, Senator. We have made an analysis of the
investment laws of the various States and schedules will be provided
you.
During this period it is interesting to note the increasing relative
importance of the purchases by these companies. In 1936 the com-
panies purchased only 24 percent of all new issues. In 1937, how-
ever, they purchased 48.9 percent, and in 1938, 47.7 perc ^nt of all new
corporate issues.
It is interesting to note that if these 26 compani.s invested the
increase in their cash account and the increase in their Govern-
ment account in corporate securities, these .corporate securities over
this period, they would have had to purchase 68 percent of all the
secuiities issued by American corporations. That is, I mean bonds
and notes.
The Chairman. When you speak about securities, when you speak
about loans which have been made by corporations, do you include
onlv the long-term loans, because corporation* frequently loan at par
fo/30 days or 60 days?
Mr. Howe. Yes, Senator, only the long-term notes; not the bank
notes in any sense.
The Chairman. Will you repeat that statement, pjease, Mr. Howe?
Mr. Howe. If the -increase in the cash account of these 26 com-
panies, plus the increase in their holdings of United States Govern-
ment bonds, had been invested in corporate bonds and notes, in these
new issues, they would have had to absorb 68 percent of the new
issues in order to provide a vehicle for the investment of those funds.
Dr. LuiiiN. Which, of course, Avould have been impossible under
the laws which restrict the type of investments they make.
Mr. Howe. I have no exact analysis of the amount of these securi-
ties eligible for purchase. It is a very complicated problem; but it
probably is that it is -an utter impossibility.
The Chairman. But when you arc talking of 68 percent, the fund
of which you are speaking includes itux-mam^er of securities, so that
it necessarily would include securities whicn, under the various State
Inws, Avould be ineligiDle?
Mr. Howe. That is correct. There is -no question about it. There
is a large element of inelig-ible securities, especially ir -^e year 1936,
which is the largest year ot issue.
14724 CONCENTRATION OF ECONOMIC POWER
The Chairman. So that actually the percentage does not repre-
sent a correct picture?
Mr. Howe, No; it is an understatement of the difficulty, I should
say, of finding corporate investments for life-insurance funds.
The Chairman. It would be probable that the companies are un
able to find' suitable investments in corporate securities in which to
place the savings of their policies, those transmitted to them by
way of premiums?
Mr. Howe. That is correct.
Senator King. And nothing in your testimony would indicate that
they had accepted ineligible securities?
Mr. Howe. No, sir; not the slightest, Senator; no such implication.
I am talking about- the shortage of available investments.
Mr. Henderson. This means, Mr. Howe, that in this period of
increasing investment difficulty, to .use the quotation of the Wall
Street Journal I referred to in my statement,^ -as far as holding
the mortgage on America is concerned, the insurance companies have
about a lO-percent mortgage on all the indebtedness of — they have
about 1114 percent of the Federal debt and 6V2 on the States; they
have a 17-percent mortgage on the railroads. They have increased
to the extent that they Jiold over 1 out of every 10 of the industrial
long-term debt pieces, they have almost doubled on the mortgage
which they hold on the utility industry so they have almost $1 out of
every $5 indebtedness. They have stayed about the same as far as
the urban mortgage is concerned, and they have cut in half the
amount of mortgage which they hold on the farmers. Tliat does
not take into account the amount of actual property which they
have taken by way of foreclosure, which has gone up also.
Senator King. That sort of indicates they have the very best
securities ?
Mr, Howe. I don't think there is. any question about that fact.
Senator.
Mr. Henderson, If this trend should keep up so far as the oil com-
panies are concerned, there is nothing to prevent, and in fact there
is a likelihood that you would have almost complete ownership of a
number of the outstanding companies.
Mr. Howe. A complete ownership for senior obligations.
Mr. Henderson. Do you know anything at all about the ratio of
equity ownership to the total capital of these corporations? Did you
make any studies on that?
Mr. Howe. I have no figures on that.
Mr. Henderson. I think it would be interesting to review, in order
to find out just what the percentage of ownership is. This increase
in debt, I think it should be pointed out, Mr. H,owe, does not carry
with it an increasing amount of responsibility or voting power in
these corporations. As far as you know, none of these oil or rubber
companies' bonds and debentures and notes carry with th^m any vot-
ing privileges ?
Mr. Howe. No, I am very sure they do not,
Mr. Gesell. One further point in this same connection, Mr. Howe.
Have you any studies which will show the relationship between the
1 Sapra, p. 14698.
CONCENTRATION OF ECONOMIC POWER 14725
increase in assets of the insurance companies and the assets of the
principal savings institutions during this same period ?
Mr. Howe. I have. From December 31, 1929, to December 31, 1938,
the total assets of principal savings institutions, including life-insur-
ance companies and fraternal associations, time deposits of commer-
cial banks, assets of mutual savings banks, building and loan associa-
tions, governmental pension funds and trust funds, Postal Savings
deposits, and baby bonds, rose from $58,033,000,000, that is of De-
cember 31, 1929, to $69,077,000,000 on December 31, 1938, or an
increase of $11,044,000,000.
Of this increase, 94.7 percent is accounted for by the increase in
the assets of life-insurance companies and life-insurance fraternal
associations; and $9,398,000,000, or '85 percent of the increase, is
accounted for by the increase in the assets of the 26 life-insurance
companies whose figures are included in "Exhibit No. 2250." ^
Mr. Henderson. So it is the outstanding dynamic savings institu-
tion in this period ?
Mr. Howe. It is unquestionably the outstanding dynamic institu-
tion so far as the increase in assets, which means an increase in re-
ceipts of the savings of the people.
Senator King. That would indicate, if we are to draw deductions,
that perhaps the banks, investment companies, and private individ-
uals have not been alive, if I can use that expression, to the acquisi-
tion of the securities issued by various corporations, as a result of
which the insurance companies have been resorting to perhaps in a
larger degree than they otherwise would have been. Isn t that a fair
deduction ?
Mr. Howe. Now, let's see. I can give you a few more figures on
that, Senator. During this period from the end of 1929 to 1938, for
instance, the time deposits in commercial banks declined from
$19,187,000,000 to $14,359,000,000. That is the type of thing you have
in mind, is it not?
Senator King. Yes; and generally the failure of the investment
companies and the banks and private persons to extend credit to
these corporations and to absorb the various bond issues. As a
result, the insurance companies became larger purchasers of these
securities by the corporations than would have been the case if
the banks and the investment companies and private persons had
been more generous, if I may use that expression, in extending credit.
Mr. Howe. Senator, I think a careful study of tlie more recent
yeajs of this period will show that with respect to the type of secur-
ities which life-insurance companies may buy there has been the
greatest competition to acquire them not only among the companies
themselves but by commercial bank^, trust funds, and other institu-
tional and private concerns.
Senator King. But in that cismpetition-
Mr. Howfe (interposing). The life-insurance companies have got-
ten the most bonds. Right.
- Mr. Gesell. I have no further questions of Mr. Howe at this time.
The Chairman. It is now 10 minutes after 12. Would it be con-
venient to recess until 2 o'clock?
• See Hearings. Tart 10- A.
14726 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. As the committee wishes.
The Chairmak. If there are no objections, the committee stands
recessed until 2 o'clock.
(Whereupon, at 12: 10 p. m., u recess was taken until 2 p. m, of the
same day.)
AFTERNOON SESSION
The committee resumed at 2 : 50 p. m., on the expiration of the
recess.
The Chairman. The committee will please come to order."
Are you ready, Mr. Gesell ?
Mr. Gesell. The -first witness this afternoon is Mr. Thomas A.
Buckner, chairman of the board of the New York Life Insurance Co.
Mr. Buckner has already appeared before this committee in connec-
tion with the insurance study,^ and I have asked him to return today
to discuss major developments in the field of life-insurance invest-
ments during the last 30 years.
The Chairman. You may be seated, Mr. Buckner. You have
already been sworn.
TESTIMONY OF THOMAS A. BUCKNER, CHAIRMAN OF THE BOARD,
NEW YORK LIFE INSURANCE CO., NEW YORK, N. Y.— Resumed
Mr. Gesell. Mr. Buckner, I would like you, first, to tell the com-
mittee how the investments which are made by your company are
supervised and handled by its board of directors.
Mr. Buckner. Mr. Chairman, I would like to preface my testi-
mony with a statement which I previously made to Mr. Gesell, that
I am not an economist nor a financial expert. It was a comfort to
me to note Mr. Feller's statement at a recent hearing that Justice
Holmes once said that a page of history was worth a volume of
logic. My knowledge of investment problems grows out of the his-
tory of our company and my experience connected therewith.
I am very glad, Mr. Chairman, to respond to Mr. Gesell's sugges-
tion that I say a word concerning the make-up of the finance com-
mittee and the mechanics connected with its operations. I mean the
finance committee of the New York Life.
The finance committee consists at the present time of eight direc-
tors, in addition to the president and the chairman of the board,
who are ex officio members, and the treasurer who keeps tlie records
but has no vote. A unanimous vote is required to purchase or sell
any security, to make any loan, and to sell any property.
All offerings of bon-ds or stocks which qualify under the New York
State law as investments for a life-insurance company and whicli
have passed all the tests of our treasurer and his statistical and
experienced bond department, are submitted to the committee for
its consideration. Each offering is accompanied with complete
details as to the issuing corporation, its financial set-up, its fixed
charges, and its management. A copy of these cletails is placed in
the hands of' each committeeman. Tlie assistant treasurer in charge
of the bond department points out and comments upon the strong
l)oints and the weak ones, if any, of the security, the probable price
1 See Ilearinss, Tart 4, pp. 14-17 to 1441.
CONCENTRATION OF ECONOMIC POWER 14727
at which it can be bought, and the interest yield. The committee
discusses the offering and votes on the question of the purchase, and,
if favorable, the amount to be so invested. The finance committee
meets regularly twice a week. A full and complete report of the
actions of the committee are presented to the board each month.
A mortgage loan application after appraisal, is considered by
experienced men in our mortgage loan department and then if it
qualifies as a good and sound loan is reported to our real estate
and mortgage loan committee, which is a subcommittee appointed by
the finance committee, and if there approved it is then presented to
the finance committee with a complete statement of facts concerning
the property, for final action.
All real-estate sale proposals with recommendations of our aj)-
praisers and field men, and our real-estate department, take a simi-
lar course up to the finance committee.
Mr. Gesell. Now, Mr. Buckner, there are several questions I
would like to ask you to fill out that statement a little. First of all,
can you tell us who the members of the finance committee are?
Mr. Buckner. Oh, yes ; there is Mr. M. N. Buckner.
Mr. Gesell. Mr. Buckner is a banker?
Mr. Buckner. Chairman of the board of the New York Trust Co.
Mr. George B. Cortelyou, ex-Secretary of the Treasury of the
United States and formerly the head of the Consolidated Gas Co.
of New York; Mr. Henry Bruere, the President of the Bowery
Savings Bank; Mr. Robert Dowling, an outstanding realtor in New
York City of lifelong experience; Mr. Hale Holden, formerly the
head of the Southern Pacific Railway Co.; Mr. Percy Johnston,
chairman of the board of the Chemical Bank & Trust Co. ; Mr.
Charles E. Hilles, in the insurance business, employers' liability;
and Mr. Arthur A. Ballantine, a lawyer.
Mr. Gesell. Can you tell me this, Mr. Buckner: How does the
New York Life find out about investments? How do propositions
come to it for it to put its money in ?
Mr. Buckner. Of course we seek through our field representatives,
salaried men, and also correspondents throughout the country, real-
estate loans in that way, and they come to us from every section of
the United States,
Mr. Gesell. You have either salaried representatives or correspond-
ents located all over ?
Mr. Buckner. We have representatives stationed around the prin-
cipal centers of the United States, and we have correspondents in
every city, in every community.
As to bonds, well, they are offered to us usually by bond salesmen,
by the bond people who have the distribution of the bonds, or else
our treasurer seeks them, as he sees issues coming out or issues for
sale.
Mr. Gesell. Would it be correct to say that by and large your
bond investments come to you?
Mr. Buckner. In the larger measure, yes; they do, except Govern-
ment bonds.
Mr. Gesell. Can you give us some idea of what proportion of the
bond offers that come to you your company takes ?
Mr. Buckner. Well, that I think our treasurer would be better
able to answer. I don't think we have ever kept any records.
14728 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. I assume there are all kinds of propositions turned
down?
Mr. BucKNER. Yes, there are many propositions turned down, as
a rule. Broadly speaking, bonds are not offered to the company
or sought by the company which do not meet our standards. The
question then becomes one of price, and that is a matter that is
negotiated and if the price at which they can be obtained is not
satisfactory they are turned down by the committee.
Mr. Gesell. Would you say that the vast proportion of the> bonds
which come to you, that meet the legal requirements for investment,
are taken by your company? In other words, you are usually able
to work out the agreement as to price ?
Mr. BucKNER. I would say that we do not even get as many as we
want.
Mr. Gesell. But of those that come to you? You take most of
those?
Mr. BtJCKNER. We take most we can get if they are favorable as
to standard and as to price.
Mr. Gesell. Wlien the committee meets, I assume the staff mem-
bers bring up to it these proposals for their decision. Are many of
those proposals turned down?
Mr. BtJCKNER. Yes; quite a few are turned down, principally on
the basis of the yield, price yield, and sometimes on the basis oi the
question as to the security.
Mr. Gesell. The finance committee then does, fairly frequently,
turn down offerings ?
Mr. BtJCKNER. V ery often in the bond field.
Mr. Gesell. What is the average length of meeting of the finance
committee ? How long do they sit ?
Mr. BucKNER. I should say that the average "is something be-
tween— about an hour, I would say, is the average — although fre-
quently a full afternoon.
Mr. Gesell. And you said they meet twice a week?
Mr. Buckner. Twice a week, Mondays and Thursdays.
Mr. Gesell. Now, do the members of the committee get material
in advance to study with respect to the investments that are coming
before them or decisions made around the table ?
Mr. Buckner. The treasurer frequently advises the committee that
there will be coming up offerings of such-and-such bonds, and mem-
bers of the committee therefore have advance notice so that they are
able if they desire to do so, to make some little investigation on their
own account.
Mr. Gesell. So at least on the important investments the mem-
bers of the committee are familiar with the general problem they
are going to have to decide in advance.
Mr. Buckner. Frequently so. But in every case the members of
the committee, each member has a written statement concerning the
issue and everything about it, and they enter into quite some discus-
sions over the offering.
Mr. Gesell. Wliat would you say are the principal reasons that
you turn down bond offerings that come to you ?
Mr. Buckner. Well, one of the principal reasons is the yield is too
low, below our levels.
CONCENTRATION OF ECONOMIC POWER 14729
Mr. Gesell. Do you set from time to time a level below which you
will not go?
Mr. BucKNER. I think the treasurer keeps a very accurate account
of what a bond of a certain standard should yield and what it can
be bought at, other bonds, I mean of the same standard.
Mr. Gesell. So one reason you turn them down is that the yield
is too low?
Mr. BucKNER. The yield is too low.
Mr. Gesell. What are some of the other reasons ?
Mr. BucKNER. Sometimes we think we have enough of them.
Mr. Gesell. That would be a problem of diversification; you
already have enough of that investment and you don't want more.
Mr. BucKNER. Occasionally there are questions about franchises
and the length of franchises.
Mr. Gesell. Matters there of legal sufficiency of the security?
Mr. BucKNER. That is right, and also as to whether or not the
bond is really of the quality that the price would warrant buying.
Mr. Gesell. So it is yield, price
Mr. BucKKER (interposing). Quality.
Mr. Gesell (continuing). Legal sufficiency?
Mr. BucKNER. And quality.
Mr. Gesell. And whether or not you are going to have too little
diversification if you buy into it?
Mr. BucKNER. They may think we have enough of that particular
bond.
Mr. Gesell. Now, what is the procedure in the committee when
investment is proposed into the securities of a concern which may
interlock with the company through a member of the finance com-
mittee who is present at the meeting?
Mr.' BucKNER. That member never enters into the discussion and
never votes.
Mr. Gesell. He has no participation whatsoever?
Mr. BucKNER. No participation whatever.
IVfr. Gesell. Do opportunities to invest frequently come to you
through your directors?
Mr. BucKNER. I would think not. So far as I know, it is very,
very rarely that they do.
Mr. Gesell. They don't serve to let you know that such and such
a concern may -be offering a new issue ?
Mr. BucKNER. There might be occasionally something of that kind,
but I don't know about it.
Mr. Gesell. By and large that isn't true?
Mr. Bucknef. By and. large that isn't true.
Mr. Gesell. I didn't mean to interrupt you, sir. Could you tell
the committee something of the developments that have taken place
in your company over the last years, the various channels of invest-
ment which you pursued, and the reasons why your company hns
gone or has not gone into certain types of securities?
Mr. BucKNER. You mean over the period that you asked me to
cover ?
Mr. Gesell. That I asked you to cover; yes.
Mr. BucKNER. I will start out by saying that Mr. Gesell has asked
me to testify concerning our investment problems since 1906. First,
14730 CONCENTRATION OF ECONOMIC POWER
I would like to say that there exists a close tie-up between the life-
insurance company's investment policy, its policy as to adequacy of
reserve, and its dividend policy. Its investments should be sound,
well diversified, and yield an income amply sufficient to meet the
reserve requirements. All our reserves for insurance and annuities
are calculated upon the assumption of 3-percent interest, except recent
annuities which are on a 2i/2-percent basis.
We began in 1898 raising our reserves to a 3-percent basis from
previous assumptions of 4 percent and completed the job as to all
life-insurance contracts in 1912, and as to annuities at a later date.
This action in my opinion was one of the wisest moves ever taken by
our company.
Following the financial panic of 1897 interest rates began to fall.
In December 1898 the New York Sun announced that the Bowery
Savings Bank could no longer maintain the 4-percent interest rate
and would drop the rate to 3i/^, "there being so much money in the
bank that it was difficult to invest it all safely at 4 percent."
During the year 1899 one of the principal New York insurance
companies — not the New York Life — sent a letter to the leading
financiers of the day asking their opinion as to what rate of interest
a life-insurance company could safely count upon realizing upon
,such securities and mortgages of the kind such an institution should
hold, during the next 20 years. This company received 57 replies
from leading financiers. With few exceptions their answer was
3 percent. Thus the wisdom of our plan of the previous year to
strengthen our reserves until we reached an oyer-all basis of 3 per-
cent, was confirmed.
Mr. Chairman, I may appear to be far removed from the ques-
tion Mr. Gesell has asked but I assure you I am approaching it,
and hope you will pardon the length of the approach. There is,
as I have intimated, the closest connection between our investment
portfolio, carefully chosen, the interest yield to be relied upon
for a long period of time, and the -reserve requirements calculated
upon an assumed rate of interest over a long period of time low
enough to be reasonably sure of realization. Upon the strength and
safety of the bridge between these two major factors largely rests
the security of the policyholders and the dividends that may be
safely paid.
Before going into the investment problems and trends since 1906,
I should like briefly to sketch life-insurance conditions during a few
decades prior to 1900 which were a lesson to life-insurance manage-
ment and which justify the conservative position taken by* our
company in matters of safety and security in investment policy,
adequate reserves, surplus for general and unknown contingencies,
and dividend declarations.
My information as to these earlier years of history of life insur-
ance is based upon my own research and information gained from my
father who began the life-insurance business in 1862. During the
sixties the competition between companies and agents in procuring
new business was based almost, if not entirely, upon dividends or net
cost. All companies were comparatively young. Some were con-
sidered little, some big. At the end of 1860 the assets of the Mutual
CONCENTRATION OF ECONOMIC PQWER 14731
Life were about $7,000,000; Mutual Benefit, $4,000,000; Connecticut
Mutual, $3,750,000; and New York Life, $2,000,000; Equitable just
born.
Interest rates were high and statutory limitations upon the kind of
investments a life-insurance company could make, if any, were mild
and broad.
So all other matters back in those early days, safety, security, and
so forth, having no play in the minds of the insurance public, divi-
dends or net cost was the all-in-all. Result : Companies entered into
competition as to dividends with great zeal. "When bank balances
and surplus margins were too low to declare dividends payable in
cash, companies, including our own, declared dividends payable in
scrip to be redeemed with G-jsercent interest in future years if and
when the financial situation permitted. It took our company many
years later — long after the mad dividend race subsided — to redeem
ihese scrip dividend^.
Well, what slowed down the race? What was the final result?
The 1870's brought the answer. During the terrible panic and
financial debacle of 1873, a sizable proportion of all the life-insur-
ance companies of the United States folded up; many failed out-
right; other merged or reinsured one another, and in many cases
again folded up.
The Chairman. What was that proportion, Mr. Buckner; do you
recall ?
Mr. Buckner. I am inclined to think it was about half or all the
life-insurance companies. I was not able to find a definite percent-
age so I placed it this way.
From an address by the llonorable Charles R. Detrick, then
commissioner of insurance and banking of the State of California,
delivered at the annual convention of the Association of Life Insur-
ance Presidents. December 14, 1^28, I quote [reading] :
The 9 years, 1871 to 1875, were the most trying period in the history of
American Life Insurance. Forty-six life companies, of which 27 were New
York's own companies, ceased doing business. Thirty-two failed outright with
total losses of $35,000,000 to policyholders.
All companies did not fail. The New" York Life did not fail.
Why? A more conservative investment management is the answer.
The mad dividend competition ceased and safety and security of
company and policy obligations began to be stressed in competition
for new business.
The Chairman. Do you know what type of investment these other
companies purchased at that time?
Mr. Buckner. I could- have found that out. Senator, but I didn't
because I didn't think that was of any material point. They are in
almost everything. They are seeking high interest returns and of
course all investments in those days yielded high interest returns.
The Chairman. I wondered if you knew from your study of that
development whether the comp>anies at that time took more risk?
Mr. Buckner. They did.
The Chairman. In their investments?
Mr. Buckner. They did. Those that failed did; that is one of
the' reasons the^j, failed.
14732 OONCENTRATION OF ECONOMIC POWER
The Chairman. In other words they weren't seeking so much
security of capital and low interest rate as they were seeking a high
return ?
Mr. BucKNER. They were seeking a high return in order to pay a
high dividend.
Mr. Gesell. There were very few laws governing investments of
any kind?
Mr. BucKNER. I stated that there were few laws governing invest-
ments. Safety and security thereafter began to be stressed in com-
petition for new business after the seventies.
The year 1880 was the beginning of the renaissance of the life-
insurance business and of economic and financial conditions through--
out the country.
Foremost in this epoch of expansion were the railroads, all calling
for capital. Prior to 1906, railroad underlying bonds were con-
sidered on all sides as prime investments for life-insurance com-
panies and all kinds of trust funds. Due to the expansion of
industry, supply as well as quality were available. By the end of
1906 more than 50 percent of our assets consisted of railroad bonds.
The Chairman. What was that percentage?
Mr. BucKNER. Fifty percent. To be exact, it was 54 percent that
was invested at the end of 1906 in railroad bonds.
This large investment probably reflected the ideas then prevail-
ing that railroad bonds were, in point of security and yield, the finest
investment f )r trust funds available. That opinion is confirmed by
subsequent ( xperiences, for with an investment for many years of
never less than $300,000,000, we practically had no defaults on our
railroad bonds as to principal or interest until 1931.
Senator King. You didn't have many investments in the New
Haven Railroad theij, did you?
Mr. BucKNER. I presume so, prior to 1931. I think we are in
most good roads.
* Senator King. Proceed.
Mr. BucKNER. After 1906, our finance committee concluded that
our increasing assets required greater diversification. Demands for
capital came from many other directions. Our holdings of railroad
bonds dropped to 20 percent of our assets by the end of 1932, and
to 10 percent at the end of 1939.
In 1912 the company set up a municipal bond department and
secured the services of Mr. Charles F. Cushman, since deceased, a
man of wide experience in this form of investment, to organize and
seek an outlet through this form of security. Thus through munic-
ipal bonds we responded to the call for capital to aid in the build-
ing of highways, bridges, school buildings, street paving, sewerage,
and all other kinds of improvements needed by people in towns,
cities, counties, and States. Our investment in municipal bonds had
increased by 1932 to $130,000,000 and at the close of 1939 to
$240,000,000.
Tlie Chairman. May I interrupt, Mr. Buckner, to ask whether
that form of security, the issuance of that form of security, was
stimulated by the companies at that time ?
Mr. Buckner. I don't think so. Senator. I think that is probably
stimulated by the people at home.
CONCENTRATfON OF ECONOMIC POWER 14733 "
The Chairman. I was wondering whether the companies went
after the bonds or merely took the bonds that were offered.
Mr. BucKNER. I think the latter is true.
Thus was a portion of our investment problem being solved.
In 1913 we entered the farm mortgage investment field and by
1924 we had invested over $68,000,000 in farm mortgages. Some-
where around 1926 we decided to withdraw gradually from this
type of investment. During the war the high prices obtained for
farm products started a speculative boom in farm lands which, to-
gether with great increase in available credit, particularly through
the Federal Farm Loan and joint stock land banks, created a situa-
tion which we thought no longer made tliis type of investment desir-
able. We knew that if we wished to successfully compete in the farm-
mortgage field we would have to follow this high valuation and it
was decided better not to continue an active participant with such
competition. Since 192f ve have made a few farm loans but so
few as to be almost negligiole, and our farm-mortgage investment for
one reason or another has dwindled to something m the neighborhood
of $6,000,000.
During the Great War practically all our investments were made in
Government bonds. We responded with all available funds to the
needs of the Government. We even borrowed money to enable us
to buy more than our available funds permitted. Prior to 1917 no
Government bonds appear in our assets-. By 1921 our holdings ex-
ceeded $119,000,000. Our holdings declined thereafter to the low
point of $14,000,000, but subsequently new purchases were made until
at the end of 1932 we held $56,000,000.
Mr. Gesehl. You now hold something like $627,000,000, don't you?
Mr. BucKNEP. I think a little over $700,000,000.
Mr. Gesell. I can't keep up with you. Does that tremendous
holding represent what the company believes is the desirable amount
that should be placed in Government bonds, _ or is it more a measure
of the company's inability to invest its funds elsewhere?
Mr. BucKNEK. I would say, Mr. Counsel, that by and large
throughout the whole history of investment of life-insurance funds, a
life-insurance company must follow the trends of the demand for
capital, and Just now the demand for capital seems to come largely
from the United States Government.
Mr. Gesell. Do I understand from that statement that if there
were bond offerings available of good quality which you could take,
of industrial, railroads, and public utilities, and so forth, that you
would still be putting this much money, $700,000,000, into Govern-
ment bonds ?
Mr. BucKNER. No; if we had gilt-edged securities offered to us
of private enterprises,^ of higher yield than Government bonds, of
absolute security, naturally we would take the higher yield.
Mr. Gesell. So that the holdings of the Government bonds are
to some extent a measure of your inability to invest at the yields
you require in bonds of private institutions?
Mr. BiTCKNER. I should say that it is due to the slowing down of
demand for capital by industry as a whole. When the demand for
capital returns, as it surely will, the Government needs will probably
quiet down and there will be plenty of investments available for all
trust funds.
124491^1— pt. 28 4
14734 CONCENTRATION OF ECONOMIC POWER
Senator King. As long as the Government is expending approxi-
mately $7,500,000,000 or eight or nine billion and issuing bonds for
three or four billions of that amount, do you feel that those bonds
issues are perhaps more advantageous and certainly more secure
than some of the less desirable issues of private corporations?
Mr. BuCKNER. That is true. There is not such a very wide differ^
ence in the yield on long-time Government bonds from the yield on
some of the highest rate industrial bonds. There is not a very wide
difference today.
Senator Kino. Would it not be desirable — and probably I am in-
jecting an element into this that ought not to be considered — if
that could be the case, to have less Government securities and more
private securities issued?
Mr. BucKNER. I would say that both are desirable. I don't see why
the needs of the Government should be shunned. It is the duty of all
corporations to support the Government needs. We wouldn t do it
at great sacrifice, but I don't think we made any great sacrifice. As
I said, there is a slowing down of the demand for capital by private
industries at this particular period, but that is a passing phase.
I am an optimist, and I can't for a minute believe that anybody
should think that America has reached a standstill and that it has
reached it^ zenith and from this time on it is going to be nothing
doing in the way of progress in industry and development.
Pardon my getting away from the subject.
The Chairman. That is not getting away from the subject. It is
the subject, Mr. Buckner.
Mr. Buckner. After the war there developed a great demand for
capital for new construction of income-producing city property. We
responded to this demand thereby increasing our mortgage loans,
exclusive of residential loans, from $138,000,000 in 1922 to $420,-
000,000 at the end of 1932. The total was reduced to $330,000,000
at the* close of 1939. Part of this reduction was due to foreclosures.
Along in the early twenties the demand for capital by public-
utility corporations to expand their facilities to meet the ever-
increasing needs of the public for electricity for use in all phases
of life resulted in our responding by increasing our investments in
this field. In 1922 our utility bondholdings amounted to something
over $20,000,000. At the end of 1932 the amount had increased to
$147,000,000 and to $298,000,000 at the end of 1939.
I am going a little beyond the years that you asked me to speak
about.
In 1922 the company decided to respond to the call for capital to
meet the housing needs. In that year we set up a residential-loan
section in our mortgage-loan department. Prior to this our loans
on real estate had been confined almost exclusively to business or
income-producing properties and to large cities. In this new field
of residential loans at the end of 1932 we had an investment of
$110,000,000, but at the end of 1939 the amount so invested, exclusive
of F. H. A. insured loans, was reduced to $62,000,000. A part of
this reduction doubtless reflected the refinancing of distress loans by
the H. O. L. C. organized for that purpose. The decrease was offset
by our prompt entry into financing F. H. A. insured residential loans.
Mr. Gesell. Your company has been one of the most active in
the purchase of F. H. A. ?
CONCENTRATION OF ECONOMIC POWER 14735
Mr. BucKNER. We entered immediately upon their making their
announcement and advised the head of F. H. A. we were ready to
take all they could offer us.
Mr. Gesell. In view of the fact that some of the companies shown
in this schedule haven't any F. H. A.'s in their portfolio at all, Mr.
Buckner, I think it would be interesting to know whether you went
into F. H. A. because you thought there was a need there or because
you felt that it was a desirable and sound investment for a life
insurance company to make.
Mr. Buckner. Both reasons. We felt there was a real need there^
and we knew that it was a sound proposition for the company.
Senator King. May I ask, could you break down the loans which
you made for building purposes, housing purposes, between the resi-
dential houses and the apartment houses?
Mr. Buckner. We have in F. H. A. — you mean F. H. A. insured
loans ?
Senator Kino. No ; those that
Mr. Buckner (interposing). We have all that data. We furnished
everything you can think of almost. If we left out anything at all
about life insurance, I haven't discovered it.
Mr. Gesell. Senator King, we have placed in "Exhibit No. 2250" ^
an analysis of the loans of each of these companies by classifications
and properties and types of business.
Senator King. That meets the inquiry.
Mr. Gesell. And another representative of New York Life, we
understand, is going to discuss that later.^
Senator King. The reason I made the inquiry was that some com-
plaint was made to me a couple of years ago about the great loss
sustained by the builders of apartment houses in New York and
some of the large cities. I was wohderirig if you had had any losses
by reason of your apartment-house investments?
Mr. Buckner. Yes; we have had losses; not only real-estate losses
but on the other end of the line. I don't know that any man has
yet been born who can handle two or three billions of dollars and
jiot have some losses. I think most everybody had losses along about
1929, and thereafter.
Prior to 1906 there were no legal restrictions against life-insurance
companies investing in stocks. However, several years before 1906
our company decided to discontinue investing in this form of security,
and gradually disposed of the limited amount of stocks it owned,
so when the laws of 1906 were adopted prohibiting stock investments
we had none such in our portfolio. In the year 1928, the New York
law was amended to permit life-insurance companies to invest in
preferred stocks, under certain limitations and restrictions. At the
end of 1939 the market value of our preferred or guaranteed stock
holdings was $86,000,000.
The Chairman. And you took advantage of that change of the
law?
Mr. Buckner. We did, Senator. We took advantage, and are still
taking advantage to the extent of $86,000,000.
The Chairman. You stated "preferred and guaranteed?"
^ S66 El6&riDfCS P&rt 10— A.
2 See testimopy of Mr, George Van Schalck, infra, p. 16105.
14736 CONCENTRATION OF ECONOMIC POWER
Mr. BucKNER. Yes ; guaranteed stocks is also included as preferred
stocks. They mean the same thing, practically speaking.
Real-estate holdings resulting from foreclosures appearing in our
portfolio are, so to speak, involuntary investments to be disposed of
as favorable opportunities arise. At the end of 1932 this item of
real estate acquired under foreclosure, was carried on our books at
$22,000,000, and at the close of 1939 i>t about $104,000,000.
Mr. Gesell. Life-insurance companies in Ncav York cannot pur-
chase real estate outright, can they, except for purposes of conduct-
ing their business?
Mr. BucKNER. No; that is true; except under special laAv they may
build up multiple dwelling houses for people of low income.
Mr. GevSEll. You say that this real estate is to be disposed of as
favorable opportunities arise. The law provides, does it not, that
special steps must be taken by a company in the event its real estate
is held more than 5 years?
Mr. BucKNER. Yes; it requires that we get the approval of the
superintendent of insurance in holding for more than 5 years.
Mr. Gesell. You are more or less, in the general run of conditions,
required to sell within 5 years?
Mr. BucKNER. We are under pressure to sell within 5 years after
acquisition.
Policy loans absorb a substantial part of the funds of the company
which would otherwise be invested. Policy loans are in reality ad-
vances against policy claims such as surrender values, death claims,
and matured endowment claims. The policyholder as provided in
his policy contract, has the right to call for a policy loan at any
time, and may repay in Avhole or in part at any time, but the com-
pany cannot call for repayment prior to maturity of the policy no
matter what its needs may be.
The rate of interest charged for funds advanced on policy loans
springs from the nature of the contract. Under the law, the rate
to be charged must be specified in the policy; the policy may, and
presumably will, remain in force for many years. The advance may
be called for at a time when money is scarce and dear, the policy-
holder having the right to call for an advance at any time to suit
his own convenience. Tlie funds so advanced deplete the funds left
for investment for the benefit of all the policyholders and that deple-
tion must be made good by charging an interest rate sufficient to
insure a return equal to that which might have been expected to be
earned on those funds over a period of years. The rate of interest
which the company thus contracts long in advance to charge cannot
possibly be compared to current money rates.
It is an error to assume that a life-insurance management is glad
to have policy loans increased when interest rates obtainable on in-
vestments are low. On the contrary, in good or bad financial weather
we do all we con to encourage those who do borrow to pay off in
order to maintain the purposes for which the insurance was taken.
The average policy loan is very small — with us approximately
$400.^ The interest rate is the same for a $50 or $100 loan, of which
there are a great many, as for a $1,000 loan. The expense connected
' Mr. Buckner subsequently stated this figure should be approximately $433. See "Ex-
hibit No. 2302," appendix, p. 15524, 15525.
CONCENTRATION OF ECONOMIC POWER 14737
with the making of these loans, collecting interest, changing amounts
up or down at will of the insured from time to time, reduces the net to
a fi^re fairly comparable, from a long range view, to average yields
on mvestments. Life insurance contracts are long-time obligations,
and long-time investments with their better yield are therefore suit-
able and desirable. But to be prepared to meet sudden or abnormal
demands for policy loans, the company must maintain a reasonable
degree of liquidity in short-term investments and bank balances.
Senator White. May I interrupt to ask what percentage of policy
loans are repaid, other than through a final settlement?
Mr. BucKNER. That figure I haven't got. Senator. I don't think
the repayment percentage is very large. They may have it in there.
If not, let's hold the thing for a while.
Senator White. It is not important. I was just curious.
The Chairman. It is an interesting phase of this busiiiess.
Mr. lieseli, may I ask if you have analyzed the figures on that?
Mr. Gesell. That is one of those figures. Senator, that we wanted
to get and were told by most of the companies that they didn't have
it, and as a result we have not got such figures If they are avail-
able I think they would be very helpful for the record. We found
in checking around that type of figure was not generally available.
Mr. BuoKNER. It is a daily occurrence, the repayment of policy
loans. Sometimes they pay a little and pay a little more the next
time he pays the premium or whenever he ^las his money. It occurs
all over the United States.
The Chairman. The question of Senator White, as I understood it,
was what proportion of these policy loans are paid off only by the
settlement of the insurance liability itself, that is to say, upon the
death.
Mr. BucKNER. That, of course, balances; everything outstanding
is paid off by the maturity of the premium.
Senator White. Everything is paid off on the final adjustment
with the insured or with the insured's estate, but I wondered what
percentage of the loans were paid in cash by the borrower during the
life of the policy?
Mr. BucKNER. That I couldn't answer.
Mr. Gesell. Is it true that policy loans frequently lead to a can-
celation of the policy?
Mr. BucKNER. I would think so. That is one of the great objec-
tions.
Mr. Gesell. In other words, a man with a policy in force, Avith
the surrender value on that policy, can see it eating up more and
more, and is liable to surrender or cancel out his loan ?
Mr. BucKNER. That is true. Many men borrow on their insur-
ance for no real good purpose whatsoever, to buy a car, to buy some-
thing they are interested in at the time, expecting to-jepay.
The Chairman. "What is your opinion of the value of the policy-
loan provision of the statute ?
Mr. Bfckner. There are a great many objections but there is
a great deal to be said in its favor. There are cases, many cases,
where the need to borrow is an absolute need, to prevent the fore-
closure of a home, in case of sickness, to pay a school bill for a
child in college or at school. There are a great many frivolous
14738 CONCENTRATION OP ECONOMIC POWER
borrowings. I am inclined to think, and this is my own theory, the
majority of policy loans are for frivolous purposes, and men say
"Oh, well, I have got a loan; I will take the balance of the cash value,
I will take another policy the next time the agent comes around, or
the next time I have some cash."
Mr. Gesell. I suppose you mean by "frivolous purposes" luxuries ?
Mr. BucKNER. Luxuries, exactly.
, Mr. Gesell. Isn't it true that a lot of people borrow on policies
in order to pay premiums?
Mr. BucKNER. Yes; that is an advantage. We^ don't include that
in policy loans, incidentally.
Mr. Gesell. Tliat is not included in your policy loans?
Mr. BucKNER. No; that is included in loans of premiums. We
keep a separate item. I think you will find we do it that way.
Senator King. I presume this matter which you are immediately
discussing was the subject of consideration by the New York Legis-
lature when they have dealt with legislation with respect to insur,-
ance companies?
Mr. BucKNER, Definitely so.
Senator King. And the failure to prohibit loans upon policies
was the result, I presume, of the investigation which was made and
it was considered not wise to prohibit loans on policies?
Mr. BucKNER. Senator, that is just the fact of the case. As I
have just said, life-insurance contracts are long-time obligations
and long-time investments, but to meet abnormal demands for policy
loans the company must maintain a reasonable degree of liquidity in
short-term investments and bank balances. The loss in yield due
to the needed liquidity is a further offset to any advantage which
some may assume exists from policy loans.
At the end of 1906, policy loans of this company amounted to
$54,000,000, or 11.5 percent of our ledger assets. During the single
year 1907 — the money panic year — the loans increased about 25
percent, causing a great drain on company funds. At the end of
1932 our policy loans stood at $390,000,000 or 20.5 percent of assets.
However, the demands for such loans during and subsequent to
1934, began to subside. At the end of 1939 policy loans amounie:i
to $300,000,000, or 11 pefcent of ledger assets.
Mr. Gesell. Now, btefore we go to the next topic, Mr. Buckner, I
have a few questions on these policy loans.
First of all, the Iomis are entirely riskless, aren't they?
Mr. Buckner. First of all, I rather object to the term "loan" being
applied to them.
Mr. Gesell. I was simply using the term we have been discussing.
Mr. Buckner. It is on the policy called a loan.
Mr. Gesell. With the understanding it is really an advance against
the final proceeds of the policy, using the word "policy loan." Such
loans are entirely riskless, are they not ?
Mr. BucitNER. Yes.
Mr. Gesell. The company ultimately is always certain of getting
back what is lent?
Mr. Buckner. It comes out of the proceeds of the policy.
Mr. Gesell. Now, can you tell me — you refer to the expense on
policy loans, of handling these loans— what is the interest you charge
at the present time ?
CONCENTRATION OF ECONOMIC POWfeR 14739
. Mr. BucKNER. Well, that is different in different classes of policies.
On policies prior to a certain date, the rate of interest is 5 percent.
On policies in the last 25 or 30 years the rate has been 6 percent,
until just, about 2. years ago, I think it was, the rate was reduced
to 5 percent.
Mr. Gesell. What is the net amount of interest that you earned on
your policies ? How much of that expressed in terms of percentages
to the handling of the loan ?
Mr. BucKNEB. We had some figures on that several years ago when
the superintendent of insurance got us down to discuss this question,
and my recollection is that we figured close to about 1 percent.^
Mr. Gesell. One percent for handling loans ?
Mr. BucKNER. Some companies have more, according to the aver-
age size of the loans.
Mr. Gesell. Then the amount of interest you are getting on your
policy loans at the present time, even taking this question of expense
into account, is greater than that that you are earning on your other
assets, is it not ?
Mr. BucKNER. Yes. Four percent is greater than we are earning
today on average assets, a little, not much. It is not greater over a
long range.
Mr. Gesell. According to these figures w-e have in "Exhibit No.
2250," table 102, shows that policy loans in your company account for
about 13.19 percent of the assets? ^
Mr. BucKNER. That is right.
Mr. Gesell. And table 9,^ which analyzes the investment income,
indicates you get 20.75 percent of your income from these assets,
which accounts for about 13 percent of your portfolio ?
Mr. BucKNER. I didn't get it.
Mr. Gesell. Our figures would indicate that you get 20.75 per-
cent of your investment income from policy loans, which account
for only 13.19 percent of the assets. In other words, they arc pay-
ing a disproportionate amount in that sense, are they not ?
Mr. BucKNER. I think you have the figures a little wrong but I
am not going to dipuste it because I haven't got them here.
Mr. Gesell. Let's decide that, Mr. Buckner, first of all, because
I don't want to have them wrong.
Table 102 ^ indicates 13.19 percent, the figure I stated, of your
assets for policy loans as of December 31, 1938.
Mr. Buckner. That is no doubt correct. You are speaking of
'38. That is right.
Mr. Gesell. According to our figures, 20.75 percent of the in-
vested income comes from policy loans. That is shown on table
9,^ "Sources of income on investment."
Mr. Buckner. If you will leave out the question of the extra ex-
pense, that is right at the present time.
The Chairman. What is this item of expense?
Mr. Buckner. There is a great deal of expense necessary in con-
nection with these policy loans, the making of loans itself and all
the papers connected with it, and then collecting of the interest, and
then the changes.
1 Mr. Buckner subsequently stated this figure should be approximately % of 1 percent.
See "Exhibit No. 2302," appendix, pp. 1.5.524, 15525.
» See Hearings, Part 10-A, p. 102.
» Ibid., p. 9.
14740 CONCENTRATION QF ECONOMIC POWER
The Chairman. You estimated that a moment ago as 1 percent?
Mr. BucKNER. Yes; that is right
The Chairman. So that the net return would be at what rate?
Mr. Buckner. Well, I think the net return would be 1 percent
less than the gross.^
The ChaJrman. That is 4, is it not?
Mr. Buckner. That is 4 for the present policy.
The Chairman. The present rate is 5 so your net would be 4?
Mr. BucK^^ER. That is right.
Mr. Gesell. But there are expenses on all your other investments ?
Mr. Buckner. But very slight, a quarter of 1 percent on our in-
vestments.
The Chairman. You mean then policy loans are the most expensive
to the company of all the funded investments?
Mr, Buckner. Oh, yes; in hanc^ling details, because there are
intricate details connected with it. A man may borrow $50 and
pav back $25, and borrow $100 or more the next year.
Senator King. Loans are smaller and the bookkeeping and details
are very much greater?
Mr. Buckner. Yes.
Mr. Gesell. It would seem to me, however, that that expense
would be somewhat offset by the fact that you have a riskless loan
in this case.
Mr. Buckner. Well, it hasn't been so very long ago when we had
what we called a riskless loan, consisting of United States Govern-
ment bonds, which we bought on 6-percent basis — not a great while
ago, in my lifetime.
Mr. Gesell. Is there any similarity between policy loans and Gov-
ernment bonds ?
Mr. Buckner. No; I am just showing that over a long range
policy loans may be on the books for. 50 years. A man can leave it
there during his lifetime as long as tlie policy is kept in force, so I
say over a long range period, I think it is a break, about an even
break between our average yield. The last 10 years' average yield of
nvestmens has been pretty low.
The Chairman. This table ^ would indicate, Mr. Buckner (table
102), that policy loans constitute 13.19 percent of all your assets.
Now there is no question about that ?
Mr. Buckner. Not at all.
• The Chairman. And table 9 ^ would indicate that the interest on
policy loans constitutes 20.75 percent of your total incom.e ?
Mr. Buckner, That is true.
The Chairman. No allowance made for the expense in that item?
Mr. Buckner. No, I think not.
The Chairman. If that expense allowance were made, what differ-
ence would it make in that percent?
Mr. Buckner. Well, I would have to see the figures on that. I
don't know. That would be calculation for me.
The Chairman. Would it make any substantial change?
Mr. Buckner. I should think it would.
1 Se« "T^xhibit Xo. 2302." appendix, pp. 15524, 15525.
2Seft. ffoarings, Part 10-A, p. 102.
••Ibii , •• J\
CONCENTRATION OF ECONOMIC POWER 14741
The Chairman. More than a fourth of this?
Mr. BuCKNER. Well, not more than a fourth. I think that is about
where it would head up, 1 percent, it would be less than a fourth,
about a fifth.
The Chairman. If that allowance were made, the interest on your
policy loans would constitute more than 15 percent of your entire
income ?
Mr. BucKNER. That is right.
I rather want to stress this point, that policy loans may be and
should be — if a man doesn't surrender; and we hope he doesn't — on
the books for a long time, and you can't compare the yield on policy
loans to the yield during 4 cr 5 ye^v&. of great depression, when money
rates are exceedingly and exceptionally low, but if you go back over
the past 20 years, the returns from policy loans are not so favorable.
Mr. Gesell. Let's take it this way. tSHiat rate of interest do you
guarantee the policy holders when you take their money and hold it
for them?
Mr. BucKNER. We don't make any guarantees about expense.
Mr. Gesell. I beg your pardon. Don't you guarantee the policy-
holder?
Mr. BucKNER. Oh, yes, on the policy we did guarantee 3 percent.
We make it 2 now.
Mr. Gesell. But you guarantee them 2 or 3 percent on their funds
and are charging them, when you loan money, 6 percent, so I don't
understand.
Mr. Buckner. I don't think you have it just exactly right. We
don't loan them their money. But I don't want to take too much
time in going into a difference of opinion as to what a policy loan is.
Mr. Gesell. It is their money, it is an advance of their money?
Mr. JBucKNER. No; it is an advance from the coffers of the com-
pany, from the fund belonging to all the policyholders, as the ad-
vance to this particular policyholder. It isn't his particular — it
isn't like a savings bank where he has a particular amount of money
in the till for his purposes.
The Chairman. Mr. Buckner, isn't the amount which a policy-
holder may borrow measured exactly by what he has paid?-
Mr. Buckner. It is measured by his policy contract. It is stipu-
lated by dollars in his policy. It is the price at which the other
policyholders will buy him out.
The Chairman. That is right.
Mr. Buckner. Now, that is the cash value, and he can borrow up
to t-he cash value.
The Chairman. Therefore you never loan to a policj'holder more
than he has paid in, do you ?
Mr. Buckner. I don't think we ever lend him as much as he has
paid in because he is buying a life-insurance policy.
The Chairman. What is the limit on the cash value of a policy?
Mr. Buckner. The reserve is the limit of the cash value.
The Chairman. Do you loan to a policyholder more than lie has
actually contributed in premiums?
Mr. Buckner. No; we don't lend him as much. Some of the
money he has paid is to carry the risk.
14742 CONCENTRATION OP ECONOMIC POWER
The Chairman. That is right, so that actually what he borrows or
can borrow is limited by what he has paid in ?
Mr. BucKNER. Yes; it is limited by the figures in his policy, as a
matter of fact.
Mr. Gesell. Then isn't it true, Mr, Buckner, that a great percent-
age of your policyholders borrow money on their policies, a sub-
stantial percentage?
Mr. Buckner. Yes; a substantial percentage. I should say one-
third.
Mr. Gesell. How many loans have you got out now ?
Mr. Buckner. You have the figures, I haven't, but I should say
around one-third, $329,000,000, that is, including premium lien notes.
You have the premium lien notes in there.
Mr. Gessel. So you have $329,000,000 loaned out, and the average
loan is $400. It -Wpuld appear that there are around eight or nine
hundred thousand policyholders who borrow from your company.
Mr. Buckner. Policies. Yes.
Mr. Gesfxl. Or almost 50 percent of your policyholders.
Mr. Buckner. We have 2,700,000, 1 think, of policies.
Mr. Gesell. Between a third and a half.
Mr. Buckner. Yes ; I would say about a third,^ but I may be wrong.
That is my recollection.
Mr. Gesell. These policyholders are borrowing from an interest
that they have in the company, aren't they?
Mr. Buckner. They are borrowing against their policy contract,
that is right.
Mr. Gesell. And in that sense is it their own money they are bor-
rowing ?
Mr. Buckner. In no sense are they borrowing their own money.
Mr. Gesell. Whose money is it?
Mr. Buckner. The money belongs to the corporation.
Mr. Gesell. Who owns the corporation, the policyholders?
Mr. Buckner. The policyholders, annuitants, and beneficiaries, and
so on.
The Chairman. I think the facts are pretty clear, the matter of
terminology may not be particularly important.
Mr. Gesell. I am trying to find out why you charge him 5 or 6V^
percent, and yet, when you take his money, guarantee to pay him only
2 or 3. It seems to me there is a contradiction there.
Mr. Buckner. It may be. Of course, so far as the management is
concerned, it doesn't make any difference at all. We are doing what
we believe to be in the interest of all the policyholders. He partici-
pated, this very man, but I don't want to get into that. The borrower
participates, however, in fact
The Chairman (interposing). It occurs to the chairman, Mr. Buck-
ner, that the policyholder, to borrow against his policy in most cases,
probably is able to get it at a lower interest rate from his company
than he could get it elsewhere, isn't that true?
Mr. Buckner. Not at the present time.
The Chairman. Not at the present time?
Mr. Buckner. I should say that, by and large, over a period of
years, that would be true.
1 Mr. Buckner subsequentty submitted additional Information on this point. See "Ex-
liibit No. 2302," appendix, pp. 15524, 15525.
CONCENTRATION OF ECONOMIC POWER 14743
The Chairman. You don't know what the banks charge for loans
out in our country, then.
Senator King. If a person wanted to borrow $50 on his policy, and
that was probably as much as the policy would warrant, if he had to
go to a pawnbroker or to the small investment banker he would pay
more than that.
Mr. BucKNER, Eighteen or twenty percent.
Senator King. In Washington and elsewhere they have to pay that
amount.
I want to ask this one question. This whole subject was thrashed
out. was it not, before the legislature of the State of New York, from
which State you obtained your charter?
Mr.BucKNER. That is right.
Senator King. And you make your annual report?
Mr. BucKNER. We do.
Senator King. Ha^e they made any particular complaint about
this particular action?
Mr. BuGKNER. There has occasionally been some bill introduced
to lower the rate and it has been done on new insurance in the past
2 years, lowered to 5 percent.
Now, Mr. Chairman, during the years 1906 to 1932 our board of
directors and finance committee have responded to the trends of
capital demands of various industries and political divisions of our
country, meeting these calls for capital so far as our resources per-
mitted. We have sought diversity of investments both geographi-
cally and in classes, kinds, and duration.
In conclusion, I wish to emphasize that in the diversification of
our investments, we followed, within the framework of the law lim-
iting the scope of our investments, the capital needs of the country
as a whole.
Our railroad bonds, many of them bought years ago, helped the
railroads in their expanding period. Our investment in municipals
helped construct school houses, roads, and other municipal services.
The company, in its mortgageUoans, helped the farmer and also
helped satisfy the housing needs of those who live in towns and
cities.
Our investment in utilities and industrial issues helped private
enterprise obtain capital possibly on more favorable terms by reason
of our ability to invest in large amounts.
Our company along with other similar institutions certainly did
its bit and performed a distinct service to our country in providing
an immediate and ; larger outlet for Government financing during
and since the late war.
To sum up, in this period from 1906 to 1932, this company played
its part in capital enterprise, both public and private, in responding
to the investment needs of the country as they presented themselves,
the first consideration being the security of the investment.
Mr. Gesell. Now, Mr. Buckner, I want to go back over this a
little on several points. First of all, can you tell the committee
who decides what general avenues of investment your company shall
follow? What I am trying to get at is whether it is done as some-
thing apart from the decisions which are made from day to day on
the individual mortgage loans pr bonds which come up for appx'oval
before the committee.
14744 CONCENTRATION OF ECONOMIC POWER
Mr. BuoKNER. The general policy, of course, is to follow the trend
of the demands, within the framework, of course, of what we may
legally do.
Mr. Gesell. There is a demand for money out in the farm coun-
try today, isn't there?
Mr, BuCKNER. There may be, but the supply is greater than the
demand.
Mr. Gesell. Your company is not loaning in the farm field today,
and you say there is a demand that exists. Is the decision. of the
company not to go into that field based upon the fact that they think
enough money is there from other sources?
Mr. Buckneb. Our decision to Avithdraw was as I stated in 1926
because of the expanding credits and the high price of land due to
the speculation - in farm properties, and the high price of products.
We then decided to retire. Now we haA^e gone back. We have
farm-mortgage loans out now, but the amount we get is rather
negligible.
The Chairman. What are the standards by which you judge
whether or not to take a new farm loan?
Mr. BucKNER. We lend on about 50 percent of the value, accord-
ing to our own appraisal of the property, of the land.
The Chairman. And are you finding opportunities now to take
such loans?
Mr. BucKNER. Yes, sir; we are out to lend all we can get hold of,
but we haven't reorganized in the field since we gradually withdrew
due to the reasons I explained.
The Chairman. You misunderstand my question, Mr. Buckner.
In 1926 for what seemed to be perfectly adequate reasons you de-
cided to withdraw from the field of farm-mortgage investment?
Mr. Buckner. That is right.
The Chairman. Now you have gone back to that field?
Mr. Buckner. Yes, sir.
The Chairman. Now, of course, there are more opportunities to
make loans than you are willing to take, but I am curious to know
what sort of loans you are finding. What has happened to make
this seem to you now a desirable field again?
Mr. Buckner. I think it is because the values have come down
to a reasonable basis and farm products are now more reasonable
than they were; they are approaching normal, whereas they were at
fabulous prices back in the era of the tAventies.
The Chairman. In other Avords, back in 1926 you thought farm
values had gone too high?
Mr. Buckner. That is right.
The Chairman. And you were not Avilling to make tlie loans which
the farmers asked at the values that tliey asked?
Mr. Buckner. That is riglit.
The CiiAiHjUAN. But noAV tlial farm values have drop])ed down you
find opportunity to go in there?
Mr. Buckner. And I think that tlio company should ex|)and their
activities in the farm field, unless "^^ find there are So many m the
field that it just can't be done; 1 nioau Ave Avouldn't get enough
business to p^vy.
CONCENTRATION OF ECONOMIC POWER 14745
The Chairman. Is there much activity now among the insurance
companies in farm mortgages?
Mr. BucKNER. Yes; indeed.
The Chairman. Mr. Gesell, I am sorry ; I didn't mean to interrupt
the continuity of your own examination.
Mr. Geselx,. That is all right.
Mr. Buckner, how many times from the period from 1926 to the
present time would you say the board of the New York Life gave
consideration as to whether or not they should go back into the farm
field?
Mr. Buckner. I think that really has depended upon the officers of
the company bringing to the attention of the committee the policy
of going back in the field. The committee have never objected to
our resuming farm loans.
Mr. Gesell. So that if the officers of the company brought farm
loans to the committee, they would approve them ?
Mr. Buckner. Oh, yes.
Mr. Gesell. And if the officers of the company felt that farm loans
were not desirable or that values were too hi^h, the committee would
raise no question as to why it was not having farm loans brought
to it?
Mr. Buckner. I think that is true. We have a farm-loan depart-
ment and they advise us in regard to that matter.
Mr. Gesell. Then it would appear to me that the rather crucial
question of policy is determined by the staff and not by the board of
directors.
Mr. Buckner. Quite naturally, the staff must bring to the board
of directors their information and their recommendations.
Mr. Gesell. But that is a pretty big matter of major-investment
policy, isn't it, Mr. Buckner, whether or not the company shall loan
in the farm field ?
Mr. Buckner. Yes.
Mr. Gesell. I mean, looking at it in the terms of the country and
all the money you have to invest, it seems to me it is quite an im-
portant policy determination.
Mr. Buckner. It certainly is, if there is any fi^ld there that will
support the expense.
Mr. Gesell. And in the case of your company 'it has been left to
the staff rather than to the board to determine that question?
Mr. Buckner. I wouldn't say altogether that. I think the finance
committee have several times spoken about, "Can't we get more farm
loans?" and matters of that kind, but we would have to go to a very
large expense reorganizing in the farm-loan field if we got any con-
siderable amount of loans.
Mr. Gesell. I wondered, for example, whether the board ever
considered this question as to whether or not it wouldn't be appro-
priate for the company to loan in the farm field in view of the fact
that there are so many farmers who are policyholders of vour com-
pany? i^ ^ J
Mr. Buckner. That is an argument, there is no doubt about that.
Mr. Gesell. I am not making the argument. I am wondering
whether or not it was ever considered by the board as to one of the
14746 (X)NCENTRATION OF EQONOMIC POWER
factors that would determine whether or not money should go into
that particular avenue?
Mr. BucKNER. That was especially one of the factors when we
went into its originally.
Mr. Gesell. It certainly couldn't have been a factor when you
withdrew ?
Mr. BucKNER. No ; we withdrew because we were getting to a point
where it looked as though we probably owned the farms, if we kept
on at the high values that the farms were selling at, or appraised at.
Mr. Gesell. You see what I am trying to get at ; I am tr/ing to get
at why it is the New York Life doesn't loan in the farm field today.
I gather that as far as the directors are cortcerned, it is mostly because
these loans haven't been brought up to them for their attention?
Mr. BucKNER. Very largely that.
Mr. Gesell. And the staff has felt it is not a good kind of loan?
., Mr. BucKNER. No ; the staff has felt we can't get them, in sufficient
quantities to justify the overhead that we would have to pay in farm
loan agencies throughout the United States.
Mr. Gesell. And the reason you can't get them to a large extent
is because of the type of field organization you have, is it not?
Mr. BucKNER. It is due largely to the competition in the field.
Mr. Gesell. Wouldn't it be for the board to determine whether or
not as a matter of pqlicy it wouldn't be desirable to set up an organi-
zation which would bring farm loans to the company ?
Mr. Bucp NER. I doubt if the board of directors would know just
of their own accord the worthwhileness of such a program. You
have to demonstrate it.
Mr. Gesell. So that the board is in the position here of an umpire
rather than to determine this matter of policy?
Mr. BucKNER. I would say that is largely so in regard to farm
loans.
Senator White. The competition you speak of is largely Govern-
ment competition ; isn't it ?
Mr. BucKNER. It is Government agencies, plus several large com-
panies which have specialized in farm loans lor a great many years
and have their organization. The field is carefully cultivated by
them, and, of course, we wouldn't want to go into competition on
rates and underbidding, and so forth.
Mr. Gesell. Why not ?
Mr. BucKNER. Do you think that would be a good thing?
Mr. Gesell. I just want to know why you don't wani to get into
competition on farm loans ?
Mr. BucKNER. We would soon get down to the point where we
were lending at ridiculous figures on loans that are full of risks.
Mr. Henderson. Does that happen with other kinds of loans?
Mr. BucKNER. No; that isn't applicable. ^Vhen you are playing
with the farmers, you have to play the farmers' game — let him have
practically what he wants, pay off when he wants, and at such rates of
interest as he thinks he ought to have.
Mr. Henderson. I gather you don't have to do that with utilities?
Mr. Buckner. No, sir.
Mr. Gesell. You don't have to play the railroad man's game? ^,
Mr. Buckner. Well, we are playing our own games with railroads
now, I don't know how succes?^ Uy.
CONCENTRATION OF ECONOMIC POWER 14747
The Chaikman, Do the railroads know it?
Mr. BucKNER. I think they have some ideas along those lines.
Mr. Gesell. Now, this matter of what the board of directors does
in the field of investment is one that is very interesting. Let me see
if I can get at another phase of it this way. Does the board at the
beginning of a period or the beginning of a particular year sit down
and decide what it wishes the composition of its portfolio to be at the
end of the year?
Mr. BucKNER. No; I think not.
Mr. Gesell. It doesn't say, "We would like to have so much utili-
ties, so many railroads, so many city loans, so many farm loans"?
Mr. BuoKNER. No. We have got plenty of money to go into each
one of them, each of those pockets, and we have to follow the demand,
the trend of the demand.
Mr. Gesell. And you do not try to plan in advance what diversi-
fied portfolio you want, what avenues you want to follow?
Mr. BucKNER. They want diversification, but you can't pick out
and say you are going to apportion so much money this year for this
purpose and so much for that and so much for that.
Mr. Gesell. Why can't you ?
Mr. BucKNER. We would be left with a whole lot of the money
still in our pocket because we wouldn't have the demand.
Mr. Ge^ell. It is because you have so much to get out, isn't it?
Mr. BucKNER. We think the United States Government can absorb
all we need to get out.
Mr. Gesell. That really isn't an answer to my question, is it?
You have said here, already, ,that you would put your money else-
where if you could get a proper yield.
Mr.; BucKNER. Eight.
Mr. Gesell. Now, isn't the reason that the board does not determine
how it will diversify its portfolio primarily the result of the vast
amount of money that it must invest? I have heard of many smaller
companies which sit down and say, "We will have so much of this
and so much of this and so much of this, and that will make a diversi-
fied portfolio," and they will put their money there.
Mr. BucKNER. They rniglit be able to do it by apportioning 200
million for this purpose and 200 million for that purpose and 200
million for this purpose, but when j'ou got through you would find
that you had one pocket that nothing went out of.
Mr. Gesell. That is one of the problems of size, isn't it?
Mr. BucKNER. No ; because you could use that 500 million that you
haven't been able to get out of the pocket, over here.
Mr. Gesell. In terms -of management of this portfolio?
Mr. BucKNER. I don't think you can manage an investment program
in the method you have in mind.
Mr. Gesell, Not within straight- jacket limitations; I don't mean
the difference between 1 and 2 percent, but you can say the same way a
man does who is an investment counsel for his clients, we will diver-
sify this man's holdings in this area so that a particular economic stress
or change of events in one field of activity won't injure the over-all
standard.
Mr. BucKNER. That is about what we do.
Mr. Gesell. But you make no allocations?
14748 CONCENTRATION OF ECONOMIC POWER
Mr. BucKNER. No ; no definite allocations.
Mr. Gesell. Even in broad limits 1 understand you make none?
Mr. BucKKER, That is probably true.
Mr. Gesell. So it is really up to the staff to get the good loans as
they are offered to them and put them up to the board to approve?
Mr. BucKNER. That is practically the case, since 1906.
Mr. Gesell. The failure of the board to take speciHc allocations or to
make specific determinations in advance of where it is going to put
the money, is not then the result of any depression experience; it has
been generally the way the insurance companies have handled it, at
least your company ?
Mr. BucKNER. 1 think tlie board has at all times insisted on diver-
sification, and that diversification has come about largely through the
trend of the deinands.
Mr. Gesell. Not because of some set program ?
, Mr. BucKNER. Not because of any set formula.
Senator King. You have various staffs, do you, one looking after
agricultural investments and one after Government bonds and rail-
roads, and so on ?
Mr. BucKNER. Right.
Senator King. So that iii practically every field of industrv, there
would be somebody in your organization who was more or less lamiliar
with that field of in4ustry ? •
Mr. BucKNER. It must be so.
Senator King. Whether railroads or utilities or what not?
Mr. BucKNER. Yes, sir.
Senator King. And those staffs are expected, are they not, to search
the market and keep in touch with the trends of economic and indus-
trial development and make recommendations to the board with a view
to determining what policy they should pursue ?
Mr. BucENER. That is right, but when you say board, of course you
mean the finance committee.
Senator King. Yes. I suppose your purpose is to loan as much as
you can where you can find good loans at a reasonable rate of
interest ?
Mr. BucKNER. Yes, sir.
Senator King. You have no purpose in hoarding your money?
Mr. BucKNER. Absolutely not.
Senator King. You have loaned so extensively, have you not, in
some instances you have lost money?
Mr. Buckner. Yes ; that has been true in times of great expansion.
Senator White. Could it fairly be said that these units of your
general staff are competitive, one with the other ?
Mr. Buckner. Oh, no ; not at. all. They all harmonize, they come
together.
Senator White. If you had a staff dealing with responsibility with
respect to farm loans, for instance, and it brought no farm loans to
you for a continued period of time, would you keep that staff?
Mr. Buckner. Well, if their duty was to get farm loans and they
didn't get them, we would simply think they are no good.
Senator White. Then if that is true, if these different units of
your staff are constantly presenting to you opportunities for invest-
CONCENTRATION OF ECONOMIC POWER 14749
ment, it occurred to me that you might fairly say that they were com-
petitive one with another in bringing matters to the attention of the
board.
Mr. BucKNER. They all know, all our lending divisions in the home
office, or departments, know that we are seeking loans and investments
of the character that New York Life should make in every direction.
Senator White. And are all recommending loans within their
respective spheres, aren't they?
Mr. BucKNER. That is rignt.
Senator King. Has your field of inve&nnent widened with the' tech-
nological developments in various fields of human activity during the
past 5 or 6 or 10 years?
Mr. Btjckner. I gave you the sequence of our branching out here
and there into the various fields in what I have submitted already.
Yes ; the field widens.
Senator King. If the market indicated by reason of technological
developments, for instance in the oil industry, that there would be a
good field for investment, though you may not have made investments
m that field, would that lead you to make an investment in that field ?
Mr. Buckner. Yes, indeed ; it would lead us to seek it.
Senator King. I suppose primarily you feel that you are trustees
for the stockholdlers and that it is your duty to make the investment
wherever you can at a profit, but at the same time to keep in mind
the fact that you are guardians of the Urust funds, that you are not
to squander them or throw them away or gamble with them in ven-
turesome matters where experience might demonstrate, or has demon-
strated, that they are unwise investments?
Mr. Buckjjer. You are quite right, Senator, but instead of stock-
holders we mayr say policyholders.
Senator Ejng. Yes; I beg your pardoli.
Mr. Gesell. Now, on Senator King's point, wouldn't one of the
things that a board of trustees would want to consider be the desira-
bility of placing money back in territories' and back into lines of
endeavor or occupations which represented a cross section of your
policyholders?
Mr. Bugkner. Yes.
Mr. Gesell. You have a lot of farmers who are policyholders,
haven't you?
Mr. Bugkner. Oh, yes; a large number of them.
Mr. Gesell. Do the trustees feel that part of their exercise of their
trusteeship and their function is the placing of money in farming
communities in order to put the policyholder's money back to aid
him, so to speak?
M.r. Btjckner. We would be glad to-
Mr. Gesell. I am sure you would be glad to. You haven't since
1926. Now, I wondered whether the trustees considered that phase of
the situation in making the determination not to loan ?
Mr. Bugkner. Well, they never made a determination not to loan.
Mr. Gesell. Loans just weren't given to them to make?
Mr. Bugkner. They simply couldn't dig them up. I may be
wrong about this farm business, although my father was a farmer
and I was more or less raised in my boyhood days in the farm busi-
124491 — 41— pt. 28 5
14750 CONCENTRATION OF ECONOMIC POWER
ness. I think practically every farmer has a loan already on his
property. All we can do is go and lift that loan from another book
to ours.
The Chairman. I understood the testimony of Mr. Buckner to be
substantially that the farm values got out of line and that was the
primary reason for withdrawing.
Mr. Buckner. That is right.
The Chairman. And you are going back into the field to some ex-
tent as farm values go down ?
Mr. Buckner. And as opportunity presents itself.
The Chairman. It is not a question so much of wanting to invest
in farm mortgages as such, as it is to invest in a sound security which
will pay a return, a secure return?
Mr. Buckner. Quite right, Senator.
Mr. Gesell. May I direct-
The Chairman (interposing). Pardon me; I just wanted to get
both pictures. That is my understanding of what you wanted to say.
Now, Mr. Gesell, what were the viewis that you were seeking to bring
out?
Mr. Gesell. I simply wanted to direct a line of questions prompted
by table 161.^ There the New York Life Insurance Co. is shown to
be in between the Prudential and the Equitable of New York in the
period there of 10 years that is covered; both of those companies
hjave loaned millions more of money in the farming area than the
New York. I was about to ask some questions as to the difference in
the policy represented by that table which is extremely substantial
and quite apparent.
The Chairman. Yes; it is quite interesting.
Senator King. Perhaps your company^ has loaned millions of dol-
lars in certain activities where other companies have not?
Mr. Buckner. Absolutely.
Mr. 'Gesell. What, for example ?
Mr. BucHNER. Particularly United States Government bonds.
Mr. Gesell. Other than Governrnents, what?
Mr. Buckner. I don't recall right now. I think probably on a
percentage basis, we hold more municipals in proportion to our as-
sets than any of the leading companies?
Mr. Gesell. What about lines of business?
Mr. Bucener. I think we would about break even on that.
Mr. Gesell. You are about even with the other companies on that,
aren't you?
Mr. Buckner, I would hope so.
Mr; Gesell. Let me ask you another series of questions that may
help 'bring this out. Has tne increasing size of your company over
this period made any, differences in your investment policy or prob-
lem?
Mr. Buckner. I think not.
Mr. Gesell. You find it equally easy to invest the increasing
amount of money that your company is called upon to invest from
year to year?
» See Hearings, Part 10-A, p. 161.
CONCENTRATION OF ECONOMIC POWER 14751
Mr. BucKNER. I wouldn't claim that it is altogether easy to invest
money in either large amounts or even small amounts at the present
time.
Mr. Gesell. Oh, I understand that. It is quite diflB.cult to invest.
Mr. BucKNER. It is difficult to invest wisely and with a fair yield.
Mr. Gesell. Let's take the period up to 1929, the period from 1906
to 1929. Did you find it more difficult to invest as you had more
money to get out?
Mr. BucKNER. No; I don't think so.
Mr. Gesell. It made no difference in the problem ?
Mr. BucKNER. Not at all.
Mr. Gesell. Do you think the degree to which you find it difficult
now to invest is partly the result of your size and the amount of
money you have to put out?
Mr. > UCKNER. I wouldn't say so. I would think if we were one-
tenth the size we would have the problem just the same. We would
simply take smaller doses of what did come along.
Mr. Gesell. I should think that would help substantially. I should
think it would help a g^eat deal if you might even be able to go out
in the market and buy up a few bonds.
Mr. Buckner, Well, yes ; you might buy an occasional one but you
would put the price up on the bonds if you went there very strong.
Mr. Gesell. And you really feel there is no difference because of
the amount of money you have to get out?
Mr. Buckner. I don't think it would make any difference in the
long run. It might at some particular juncture.
The Chairman. Mr. Buckner, let me ask you, what was your mini-
mum loan 10 years ago?
Mr. Buckner. Ten years ago? The amount that we had?
The Chairman. No ; I don't mean the total amount out. Maybe
you haven't gathered these figures.
Mr. Buckner. No; I haven't. I know what you mean. The
minimum amount we would vake from one corporation?
The Chairman. That is right.
Mr. Buckner. No ; I haven't those figures, Senator.
The Chairman. Have you any idea in mind ?
Mr. Buckner. I don't believe we had any.
The Chairman. Say over 20 years has there been any change?
Mr. Buckner. I don't think there has been any change. I think
we took about our proportion.
The Chairman. Yes; of course you would take your proportion
but do you, with your present magnitude, take as small offermgs as
you did 20 years ago ?
Mr. Buckner. I am not so sure ,about that. Possibly not. We
would be glad to take small offerings but we are looking, of course,
for larger offerings.
The Chairman. That is what I understood Mr. Gesell was trying
to develop.
Mr. Gesell. The bulk of your city real estate owned, for example,
classified by size, is in the five to ten thousand dollar area, and I
think it is apparent from these figures that your loans are, on the
average, fairly large, in the field of city mortgages.
14752 CONCENTRATION OF ECONOMIC POWER
Mr. BucKNER. They were large at the time of great expansion, new
construction in New York City particularly, but at the present time
our average loans that we make are small.
Mr. Gesell. The F. H. A. has brought them down.
Mr. BucKNER. We have two kinds, as you know. We are taking
all we can get of either one.
Mr. Gesell. Do you believe that the territorial expansion of your
company — the fact that it has gone into more and more States so
that now it sells everywhere in the United States — -has made any
difference in your investment problem?
Mr. BucKNER. We haven't had any territorial change in the last
40 years. We have been in every State.
Mr. Gesell. You have been much more active, as time has gone on,
in far away States, haven't you, agencywise?
Mr. BucKNER. I doubt that. I think we have relatively been as
active in one place as another. Wo were doing business on the Pacific
coast way back in the seventies.
Mr. Gesell. Then that has made no difference at all ?
Mr. BucKNER. No.
Mr. Gesell. What about the development of new lines of business,
Mr. Buckner? I have in mind things such as the increasing em-
phasis on cash values which has taken place over the period, the de-
velopment of annuities, the development in the field of supplementary
contracts, settlement options, the development of more premiums
being paid in advance, more dividends being left with the company.
Have things of that sort made a diflference in your investment policy ?
Mr. Buckner. Things of that kind, of course, resulted in a great
deal more money to invest. That was my testimony a year ago.
Mr, Gesell. They put an increasing emphasis on liquidity too, do
they not?
Mr. Buckner. Well, somewhat.
Mr. -Gesell. And they brought to you bigger lump sums to handle
sometimes ?
Mr. Buckner. Yes; that is trae.
Mr. Gesell. Now, what has been the effect of that on your invest-
ment problem?
Mr. Buckner. I wouldn't say it has very much effect. Annuities,
for example, brought in a large amount of money and Government
bonds are very adaptable to annuities ; it is a very simple proposition
to handle annuities at the rate^ at which we sell them, with Govern-
ment bonds as securities.
Mr. Gesell. This change of reserve basis has also obliged you to
invest more money, has it not ? As you lowered the guaranteed in-
terest rate you have to invest more to get the same amount?
Mr. Buckner. We have to invest all the money that comes in.
What we have to invest is the excess of income over disbursements.
Mr. Gesell. So that the lowering of that guarantee has increased
your investment problem. As you build up your reserve you have
more of an investment problem; as you build up your assets you
have more of an investment problem; and as you put reserves on a
more conservative basis that extends it?
Mr. Buckner. That lessens it. If we carry reserves on a 3 percent
basis our problem is simplified because you can take gilt-edged in-
vestments that yield a lower rate.
CONCENTRATION OF ECONOMIC POWER 14753
Mr. Gesell. But you have more money to invest.
Mr. BucKNER. Not because of the reserve. We have more money
to invest because of the income, the excess income is the amount we
have to invest.
Mr. Gesell. What about investing in common stocks, Mr. Buck-
ner ? Does your company want to invest in common stocks ?
Mr. BucKNER. No ; that hasn't been discussed in the board, but in
my old age I would certainly — if they take any further advice from
me, I would say no.
Senator King. I understood there had been some prohibition in
the law?
Mr. BucKNER. It is not permitted in law, but he is thinking of the
question of amending the law.
Mr. Gesell. Are there any changes in the investment laws to which
you are now subject which you think would give you greater outlet
that you would want to follow?
Mr. BucKNER. No material changes. I think the law could be
loosened up a bit. On f)referred stocks the restriction is now quite
3tiff. The limitation is on how much we can buy in one corpora-
tion. The provisions under which we may buy must be over-all
yield for capital for three consecutive years of a certain percent. I
think a little lightening of those limitations would widen the field
somewhat, not materially.
Mr. Gesell. And you have no real quarrel then with the restric-
tions that the investment law places on you ?
Mr. BucKNER. Not at all. I think they are wise, by and large
Mr. Gesell. It is pretty difficult for a small business man or some-
body setting up a new venture to come to the New York Life and get
funds, isn't it?
Mr. BucKNER. Well, you mean on a mortgage loan ? ■
Mr. Gesell. No; I mean in terms of a security.
Mr. BucKNER. No ; we don't make that kind of a commercial loan.
They have to have a security.
Mr. Gesell. You want a going concern to loan to, too, don't you?
Mr. BucKXER. Their corporate bonds. I think if they came around
and wanted to borrow $25,000, we wouldn't think it Avorth while.
It would be more or less speculation.
Mr. Gesell. And you don't make that type of loan?
Mr. BucKNER. No; we do not.
Mr. Gesell. Your loans are almost entirely to established going
concerns ?
Mr. BucKNER. That is right.
Mr. Gesell. What you might call venture capital hasn't much
Mr. BucKNER (interposing). Not much appeal. Common stocks
haven't much appeal to me. I don't know how it would be with
other insurance men.
The Chairman. What latitude would you have under the New
York law to invest funds in adventure capital ?
Mr. BucKNER. Really none. We are supposed to have ample se-
curity for any investment we make. The law is very strict and
prescribes just what that security is to be in various directions.
The Chairman. And if you were to make a loan to a small corpo-
ration or to an individual, you would require ample security, would
yoj.1 not?
14754 CONCENTRATION OF ECONOMIC POWER
Mr. BucKNER. We wculd require ample security and we would have
to have a background of experience ; a going concern, in business for
a reasonable length of time, a success, with a wise management, and
with a product that is going to be permanent.
The Chairman. So what you want by way of industry loans is
that which is represented by either preferred or guaranteed stocks
within the character described by the law, or bonds which are well
supported ?
Mr. BucKNER. That is right.
The Chairman. Would you make a loan to an individual at all
upon any other security than real estate?
Mr. BucKNER. We could make a collateral loan, but there isn't
very much in that business, not very much opportunity.
The Chairman. That would be the banking field ?
Mr. BucKNER. The banks would do that.
The Chairman. That would be banking business and you don't
do much of that?
Mr. BucKNER. That is right.
The Chairman. So, actually, the opportunity for those who need
adventure funds is not to be found with insurance companies?
Mr, BucKNER. No; nor any other kind of trust funds.
Mr. Gesell. What is the smallest bond issue you will buy, gen-
erally speaking?
Mr. BucKNER. I don't know as to that.
Mr. Gesell. You usually want something above $100,000?
Mr. BucKNER. Yes; I should think so. I would say $100,000
about
Mr. Gesell (interposing). About the rock "bottom?
Mr. BucKNER. Well, not rock bottom, but about the limit.
Senator King. Has it been your experience that persons would not
take policies from you, who wanted protection for their families,
if you were a mere banking firm and had venture capital in any
industry or any enterprise that a good salesman or bad salesman might
suggest ?
Mr. Buckner. That is right, and we shouldn't place his money
with a company like that.
Mr. Gesell. I have no ^further questions.
The Chairman. In response to Mr. Gesell, you said just now that
$100,000 would be about as small a loan as you would consider?
Mr. Buckner. That would interest us. We have no fixed limit
below that, but I was taking that as an illustration.
The Chairman. Could you say how many loans as small as that
you have?
Mr. Buckner. No ; I couldn't offhand. Of course, mortgage loans
or real estate
The Chairman (interposing). No. I am speaking of industrial
loans or corporations. The reason I am asking the question, Mr.
Buckner, is simply this : Congress is always besieged by little business
men, so-called, for legislation to put the Gov^ernment into the busi-
ness of loaning money to them for adventure putposes, and that is one
of the problems before the National Legislature — what to do to pro-
vide a source of capital to those who desire to enter into business.
Now, they don't have that source with the life-insurance companies,
Mr. Buckner. That is true.
CONCENTRATION OF ECONOMIC POWER 14755
The Chairman. And that, of course, is because of the fact that
you must seek, primarily, security in your investment.
Mr. BucKNER. Yes, sir.
The Chairman. So I was trying to determine as a corollary just
what type of small loans you do have. That is why I asked you
how many at $100,000 you might have. What would you say was
your average industrial loan?
Mr. BucKNER. The treasurer just advises me that ws don't have a
part ,of sniall industrial loan outputs. We are confined largely to
large offerings, the large loans.
The Chairman. That is to say, your industrial investments are
practically confined to the offerings of the large corporations?
Mr. BucKNER. The large corporations.
The Chairman. In other words, the big business corporations are
the ones who are your clients and whom you supply with bond
capital ?
Mr. BucKNER. That is true. I would think that the small borrower
should find his money in his own community, the banks and the capi-
tal that is in his own community, because they know him, they know
his product, they know his credit.
Mr, Gesell. But life insurance
The Chairman (interposing). But unfortunately it doesn't work
that way. What were you going to say, Mr. Gesell ?
Mr. Gesell. But life insurance is taking much money away from
those small communities. It isn't available.
Mr. BucKNER. It trickles back, the mortgage loan business, the
residential mortgage loans.
Mr. Gesell. But it doesn't trickle back to the small-business man.
Mr. BucKNER. It gets back to the small community.
The Chairman. When you invest in State bonds and municipal
and school bonds, and if you do invest in farm mortgages, the money
has a tendency to go back, but what is the proportion of your invest-
ment that goes to these big business corporations? That would ap-
pear on table 9,^ would it not? It is broken down in that table, is it?
Mr. Gesell. Table 102 ^ shows what percentage of their money is
in Government bonds, what percentage is in real estate, but there
is no break-down there as to the size of the loan. We have break-
downs as to the size of loans only in the mortgage sections of the
tables.
The Chairman. This table groups together under one heading
other bonds?
Mr. Gesell. Table 103^ breaks them down. You will find rail-
roads, utilities, industrials, preferred stocks, commoji stocks, all the
principal classifications.
The Chairman. This table 103, Mr. Buckner, shows that with the
New York Life only 1.31 percent of your assets are in industrial
and miscellaneous bonds. I would take it that is the business we
have been talking about?
Mr. Buckner. Yes.
The Chairman. Now, other life insurance companies run verT
nuch higher than that. Of the first five companies in size,*-you are
V far the lowest?
'■ See Hearings, Part 10-A, p. 9.
' Ibid., p. 102.
■■' Ibid., p. 103.
14756 CONCENTRATION OF ECONOMIC POWER
Mr. BucKNEK. ^es, sir.
Tlio Chairman. Is there any special reason for that?
Mr. BuCKNER. No special reason. We have not sought ve'-y much
of an outlet through the industrials. When we have been talking
About industrials, I have had in mind utilities as well.
The Chairman. All right. There again, in utilities, you are the
lowest but one in that amount.
I am impressed bv the fact that these tables ' would indicate, and
discussion brought out, that of these larger companies the New York
Life invested tlxe smallest amount in farm mortgages, by far the
smallest amount.
Mr.-BucKNEE. That is true.
The Cha-irman. And now it would appear that the New York Life
invested the smallest amount of these five large companies in in-
dustrials. Is there any special reason for that?
Mr. BucKNER. No ; I wouldn't say so.
The Chairman. Are there considerations that occur to you now, for
example, with respect to the farms, that might appear to another
company as indicating that farm mortgages are desirable?
Mr. Buckner. Oh, I think, beyond a doubt, they are desirable.
The Chairman. But they are not desirable enough for yoii to take
as large a proportion as some others?
Mr. Buckner. We would have to reorganize. That has been our
problem, whether we should and whether there is an opportunity. As
I say, I think the farms are pretty well plastered. Those that borrow
at all are pretty well covered. It is just a question of taking from
one book to another.
The Chairman. I was wondering if you could throw any light on
the reason for this variation in the importance ?
Mr. Buckner. It is simply a matter of judgment by the finance
committee of our company, compared with theirs.
Senator King. I suppose you had in mind the fact that we passed
the so-called Lemke bill a few years ago to grant moratorium, and
then we renewed it again recently, and the appeal was made by a
large number of farmers who had availed themselves of that lav, that
there were great losses, or had been very great losses, in farm moH-
gages.
Ir. Buckner. There is no doubt of it.
Senator King. And you had that in mind in determining your
policy with respect to farm mortgages?
Mr. Buckner. That is right.
Senator King. Do you know the number of farms in the United
States which are now under mortgage?
Mr. Buckner. No; I do not, Senator.
Senator King. Or upon which foreclosure proceedings have taken
place ?
Mr. Buckner. Well, I do not know that.
Mr. Gr.sELL. We will have complete testimony on that Wednes€ttiy
morning, sir.
Senator White. The farmers are not only under mortgage, but the
stocks are under )nortgage, the equipment is under mortgage, and
their hopes of the future are under mortgage,
' Ibid., pp. lO.S and 104.
CONCENTRATION OF ECONOMIC POWER 14757
Mr. Gesell. There you disagree with the witness, do you not, sir?
The witness said the hopes for the future are not.
Mr. BucKNER. I part with the future.
The Chairman. The table on page 161 ^ shows, for example, for
1938, that New York Life had $6,336,000, in farm mortgages,
whereas Metropolitan had $70,986,000; Equitable had $71,593,000, and
Prudential had $167,298,000. You see, that is quite a variation.
Mr. BucKNER. Yes, sir.
The Chairman. And my questions were designed to develop
whether or not there were any special reasons for that variation
except those which you have already given.
Mr. BucKNER. I think pot.
The Chairman. Just a matter of judgment, in your opinion, and
of choice upon the part of the directors as to the line to pursue ?
Mr. BucKNER. Right. I hope the Lord is good to those farms
and that the rains may come and the crop prices be good and so
forth.
The Chairman. Those of us who come from the agricultural States
feel the same way, Mr. Buckner.
Dr. LuBiN. Mr. Buckner, it has always been the policy, has it
not, however, of your company to invest relatively little in farm
mortgages? I note even in 1929 when the question of the inherent
value of farm mortgages had not been raised yet, you were still
the smallest of the five companies, in terms of farm investments.
Mr. Buckner. That is true, we entered the field long after these
other companies were in the field, and with great experience in
that line of investment.
The Chairman. Are there any other questions to be addressed
to Mr. Buckner by a member of the committee?
Mr. Pike. I have one or two. Reverting to this matter of policy
loans and cash surrender values, it does seem to me — I think you
brought it out — that in those two items the companies have no option
as to when they will make the loans or when they will pay off the
policyholder.
Mr. Buckner. That is right.
Mr. Pike. The policyholder has a continuing option as a fixed
rate during the life of his policy so that he can take that sum as
a loan or a payment, at his choice. I think the figures show —
you mentioned the 1907 figures and we have in here the figures
following 1929 — that the policyholder will, in general, call that op-
tion Avhen other investments are apt to be quite available; in other
woiTcls, at times of stress, when securities are for sale at low prices.
It seems to me that that is' a contradiction in terms, really, where
the investment policies of an insurance company, being based on
actuarial \figures — ^you have there one set of obligations which are
absolutely nonactuarial, which cannot be gaged in advance so that
you must make excess provision, and furthermore, you are most
likely to have demands when you would really like to be buying
some bonds.
Mr. Buckner. Quite right; it has happened often.
Mr. Pike. You mentioned that briefly. What would be your
preference? Would you prefer to leave the cash surrender and the
' See Hearings, Part 10-A.
14758 CONCENTRATION OF ECONOMIC POWER
loan legal, the ability of the policyholder to demand one of those
things, leave the law as it is; or should there be some modification
of that?
Mr. BucKNER. I think the law should be left as it is, even though
on the whole, it is a very objectionable part of the life insurance
policy. There is no question about that, it is destructive, really, of the
purposes for which life insurance was taken.
Mr. Pike. It is a contradiction in terms.
Mr. BucKNER. It ii. a contradiction in itself, but on the other
hand, it is a feature of the contract which is, to many people, of
very great advantage and very necessary for them to have.
Mr. Pike. But it is very disturbing from the investment point of
view ; if all the insurance business were an investment of funds, from
that point of view you would like to have it out, possibly.
The Chairman. I observe from table 106,^ Mr. Buckner, tne table
on cash, that New York Life's cash balance, or the item which is
reported as cash, has increased from $8,657,000 in 1929, to $50,466,000
in 1938, but this figure for 1938 is, however, less than the comparable
figure for 1935, 1936, and 1937. Can you say anything to explain
this upward trend of cash?
Mr. Buckner. Well, I think that in 1929 cash was pretty scarce
everywhere.
The Chairman. Yes, but I am talking about the increase. Your
cash on hand is increasing, apparently ?
Mr. Buckner. Yes; it is higher now than it has ever been before.
The Chairman. With respect to the New York Life, it was lower
in 1938 than it was in the three previous years, but considerabl)'
higher than it was at any time before that, apparently, in its history,
and the same is true with respect to the total cash on hand of all
of these companies. The total appears to have increased from
$102,000,000 in 1929 to $665,000,000 in 1938, and in response to one
of Mr. Gesell's questions, I think you indicated that for 1939 your
own cash was greater than it was in 1938.
Mr. Buckner. Yes, sir.
The Chairman. What has governed this trend? Why should
there be this increasing amount of cash which you haven't been
able to invest, apparently?
Mr. Buckner. I think there has been a slackening, as I said, of
the demand for capital. Business isn't exactly at a standstill, but
there is rather a cessation of expenditures.
Mr. Gesell. This is more cash than you need tor the day-to-day
operations of your business ?
Mr, Buckner. Yes; I think so. We could have put it in Gov-
ernment bonds if we had been so disposed during the year, but we
waited for something a little better.
The Chairman. You see, the importance of this item to me arises
from the fact *-iat your inco.iie, the income of any insurance com-
pany, is primarily from the savings of the people.
Mr. Buckner. Yes, sir.
The Chatr'man. It is not represented by borrowings. Bank de-
posits, on the other hand, are sometimes indistinguishable from bor-
rowings when a note is signed by an individual, or a bond is issued
1 See Hearings, Part 10-A, p. 106
CONCENTRATION OF ECONOMIC POWER 14759
by a corporation or by the Government. That debt and deposits
mean exactly the same thing, but with respect to a life-insurance
company, your cash does not in any sense at all represent debt, it
represents the savings of the people, and when the savings of the
people are not invested, that, it would seem to me, is one of the pri-
mary reasons for the bogging down or the halting of the economic
machine.
Mr. BucKNER. There might be something in that. Of course, it is
there to be invested just as soon as we can find an outlet.
The Chairman. But you haven't been able to find satisfactory out-
lets for cash, and at the same time your investments in Government
bonds are increased out of all proportion to investments in industrial
loans.
Mr. BucKNER. Yes, sir; that is true.
Senator King. What would be the amount of cash you ought to
retain in your till *o meet the contingencies that arise?
Mr. BucKNER. I should think with the contingencies we have, and
in order to be in position to take advantage of any good opportuni-
ties that come along — these things will come along — I should think
from 2 or 3 percent of the assets would be a reasonable figure.
Mr. Gesell. You have now less than 2 percent.
Mr. BucKNER. Well, I think we have enough.
Mr. Gesell. Th3n your answer to my previous question was wrong,
was it not, when I asked you whether or not this amount represented
more than you needed for it?
Mr. BucKNER. Just for the day, just for the time being that is true.
Mr. Gesell. Well, given a situation where you can put all your
funds out, how much would you want to keep in cash?
Mr. BucKNER. I should think it would be safe for a corporation of
our size to be not far away from 2 percent in cash, with our exposure
and also with the opportunities for investment.
Mr. Geseljl. There seems to be a big divergence in cash balance.
Table 102 ^ shows the Metropolitan with 2.2 of assets in cash ; Pru-
dential, 2.5; New York Life, 1.9;; Equitable, 4.9; Mutual, 4.4.
Mr. BucKNER. Are we on the favorable side or unfavorable?
Mr. Gesell. That is what I am trying to find out. I had taken it
for granted you were on the favorable side.
Mr. Buckner. We must never lose sight of the fact that we are in
a great storm right now in this country, with wars on all sides, and
nobody knows what the future is going to bring forth< We must be
in a fairly liquid position to maintain every obligation of the cor-
poration and take advantage of opportunities that come along.
Mr. Gesell. And you think somewhere around 2 percent is the
proper amount?
Mr. Buckner. I would say not far from 2 percent, one side or the
other.
The Chairman. Any other questions?
We are vefy much indebted to you, Mr. Buckner.
Mr. Buckner. Mr. Chairman, may I take this opportunity of
expressing my thanks and great appreciation for your courteous
treatment and eminently fair treatment, not only this time but a year
ago.
^ See Hearings, Part 10-A, p. 102.
14760 CONCENTRATION OF ECONOMIC POWER
The Chairman. We very much appreciate that comment, sir.
"Do you want to call another witness this evening?
Mr. Geseix. We have another witness but we could not finish this
evening. I am sure the witness doesn't mind waiting over, so it
awaits the pleasure of the committee whether you wish to continue
now or start tomorrow. The witness is Mr. John Stevenson of the
Penn Mutual Life Insurance Co. I know we cannot finish with him
in another hour.
The Chairman. Suppose we begin in the morning.
The committee will stand in recess until 10 : 30 tomorrow morning.
(Whereupon, at 4 : 05 p. m., a recess was taken until 10 : 30 a. m.
the following day, Tuesday, February 13, 1940.)
INVESTIGATION OF CONCENTBATION OF ECONOMIC POWEE
TUESDAY, FEBRUABY 13, 1940
United States Senate,
Temporaht National Economic Committee,
Washington, D. C .
The committee met at 10 : 38 a. m., pursuant to adjournment on
Monday, February 12, 1940, in the Caucus Room, Senate OflSce Build-
ing, Senator Joseph C. O'Mahonev presiding.
Present : Senators O'Mahoney (chairman) and White ; Representa-
tive Williams ; Messrs. Henderson, Lubin, Pike, Kades, and Brackett.
Present also : Gerhard A. Gesell, special counsel ; Ernest Howe, chief
financial adviser; Helmer Johnson, attomev* and Donald Davenport,
special economics consultant, Securities and Exchange Commission.
The Chairman. The committee will please come to order.
The chairman is in receipt today of a letter from the Honorable
Edward J. Noble, Under Secretary of Commerce, notifying the com-
mittee that Mr. Clarence Avildsen, who has heretofore been repre-
senting the Department of Commerce on the committee, has been
obliged to leave Washington at least temporarily.' Mr. Summer T.
Pike has been appointed to act in his place. Mr. Pike was with us
yesterday and is here again today.
There are also several letters which have been handed to the chair-
man for publication in the record, in connection with the hearing
upon steel.^ These letters include one which was addressed to the
chairman by Mr. Benjamin F. Fairless, president of the United States
Steel Corporation, commenting upon the significance of showing made
to the committee by the United States Steel Corporation.
(The letters referred to were marked "Exhibits. Nos. 2243 to 2249,
2249-1 to 5" and "Exhibits Nos. 2243 to 2249" and appear in Hear-
ings, Part 31A.)
The Chairman. These letters are all presented for inclusion at the
proper places in the record, except for the last five which are to be
filed with the committee.
These letters have all been submitted to the agencies which were
conducting the hearing.
(The letters referred to were marked "Exhibits Nos. 2249-1 to
2249-5" and are on file with the committee.)
The Chairman. Mr. Gesell, are you ready to proceed?
Mr, Gesell. Yes ; I am. Senator.
First, I would like to offer three documents for the record in con^
nection with the hearings which have been held previously before the
committee.
See Hearings, Part 31A.
14761
14762 CONCENTRATION OF ECONOMIC POWER
"Exhibit No. 1348-67" contains the schedule of fees paid by the
American Conservation Co. of the law firm of Henning & Baker.^
That law firm did not continue during the entire period, and Mr. Hen-
ning has had an interest in only certain fees paid to that firm. He
has, therefore, requested that this schedule which I now hand to the
chairman be substituted in lieu of "Exhibit No. 1348-67," if there
is no objection to that.
The Chairman. Without objection, it may be so ordered.
(The document referred to was marked "Exhibit No. 2261" and ap-
pears in Hearings, Part 13, appendix, p. 7093.)
Mr. Gesell. Also, I have a letter from Mr. Henning, of the Illinois
Bankers Life Assurance Co., giving information as to certain officers
of the Illinois Bankers who converted their policies from the assess-
ment to legal-reserve basis, and certain officers who failed to do so.'^
This information was obtained at the request of one of the members
of the committee, and is offered for inclusion in the record. Mr.
Henning has no objection to its being submitted.
The Chairman. It may be received.
(The letter referred to was marked "Exhibit No. 2262" and ap-
pears in Hearings, Part 13, appendix, p. 7095.)
Mr. Gesell. I should like it printed in the record.
Similarly, I have here an affidavit from Mr. R. R. Haffner, actuary
of the department o.f insurance, whose name was mentioned in the
course of the hearings. Mr. Haffner's affidavit is submitted for the
record.^ It has no new information, but since Mr. Haffner was not
here he wished his position to be made clear.
The Chairman. In other words, he is denying, is he not, certain
implications that may have arisen from the testimony of another
witness ?
Mr. Gesell. That is correct; yes.
(The affidavit referred to was marked "Exhibit No. 2263" and
appears in Hearings, Part 13, appendix, p. 7096. )
Senator White. May I ask a question, Mr. Chairman ?
Just for my information, I am curious to know to what extent you
are including in the record letters or statements by persons who are
not present as witnesses. Of course, when you embark on this policy
of allowing anyone to prepare statements, and include them m the
record, you don't know where you end.
The Chairman. We haven't embarked on that policy. As a matter
of fact, nothing is admitted to the record unless it deals directly with
a question which has been raised at one of the hearings and is in
response to a question by some member of the committee, or is sub-
mitted by a witness to amplify or clarify his statement. The one
exception of that is the exhibit which has just now been offered.
During the previous hearing upon insurance there was testimony to
the efltect that upon the check stubs of a witness who was before the
committee there appeared the name of an official of the insurance
department of the State of Illinois. This official denies that he ever
received, directly or indirectly, any money from the person who
testified. And the Chair felt, and the Securities and Exchange Com-
mission in presenting the affidavit felt that it was only fair to the
absent witness to allow his affidavit to be entered.
1 See Hearings, Part 13, p. 6943.
"See Hearings, Part 13 p. 6829.
CONCENTRATION OF ECONOMIC POWER 14763
Mr. Henderson. Mr. Chairman, I think I know about most of the
material that has been introduced into the record. I think if we follow
carefully a procedure we laid down early we will obviate the difficulty
Senator White contemplates. I suggest that the executive secretary let
him have a memorandum on the procedure which we do follow.
The Chairman. Yes.
Senator White. I won't at this late date presume to critcize the
practice of the committee, but I do know as a general proposition that
statements by a witness who is not subject to any examination at
all ought to be accepted with great hesitation.
The Chairman. The committee feels exactly as you do, Senator
White, in that matter.
Mr. Gesell. The first witness this morniing is Mr. John Stevenson,
president of the Penn Mutual Life Insurance Co. I might say to
the committee Mr. Stevenson's testimony will trace for the committee
some of the recent operating problems in the past few years and his
testimony will complete what I have been calling the background
testimony. Mr. Howe will follow Mr. Stevenson and analyze "Ex-
hibit No. 2250" ^ in some detail.
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. Stevenson. I do.
TESTIMONY OF JOHN A. STEVENSON, PEESIDENT, PENN MUTUAL
LIFE INSURANCE CO., PHILADELPHIA, PA.
The Chairman. Thank you. You may be seated.
Mr. Gesell. Will you state your full name, occupation, and resi-
dence for the record, sir ?
Mr. Stevenson. John A. Stevenson, president, Penn Mutual Life
Insurance Co., Philadelphia.
Mr. Gesell. Mr. Stevenson, can you tell the committee briefly what
your experience has been in the insurance business, how long you
have been with the Penn Mutual, and what you did before that?
Mr. Stevenson. Since 1928 I have been associated with the Penn
Mutual in one capacity or another. Beginning in 1928, I came to
Philadelphia to manage their large Philadelphia agency. I took that
position and held it until 1931. At that time, there was a vacancy
in the agency department, the agency vice president having resigned
and I temporarily filled in as agency vice president. It was contem-
plated that I should do that for a period of 8 months to a year in
anticipation of bringing, in another vice president. I finally was
relieved of that in the summer or spring of 1933 when they brought
another vice president in.
Then I returned to my agency in Philadelphia and was there until
1936. I think in June 1936, I was called to the executive vice presi-
dency of the Penn Mutual, due to the death of the president" ah^ a
vice president. I was executive vice president from the spring
of 1936 until January 11, 1939, when I was elected president. That is
my experience in the Penn Mutual. , '
^ See Hearings, Part 10-A.
14764 CONCENTRATION OF ECONOMIC POWER
Do you wish me to go into my experience before ?
Mr. Gesell. Prior to that, you had been interested in developing
training courses for life-insurance agents, had you not ?
Mr. Stevenson. Correct. In 1919 I left the University of Illinois
to go to Carnegie Institute of Technology, where was established, I
would say, the first school of life-insurance salesmanship in a higher
institution of learning in the United States. I was called to that
position in 1919 as director. The specific purpose of that school was
to develop a short, intensive professional training course for agents.
Mr. Gesell. Coming to the Penn Mutual, Mr. Stevenson, can you
tell us a little about the company, how large it is, in how many States
it operates, the types of insurance it sells ?
Mr. Stevenson. According to your outline as you find it on there,
the statistical evidence, our business falls under four classifications.
We do ordinary life business ; second, individual annuities ; third, disa-
bility coverage; fourth, accidental-death coverage known as double
indemnitv. The size of the company now is, insurance in force,
$1,969,568,000. The Penn Mutual does business in 47 States, Texas
only being excluded.
Mr. Gesell. How many policyholders does the company have?
Mr. Stevenson. Four hundred twenty-eight thousand, approxi-
mately.
Mr. Geselv Now, .one of the matters I would like to discuss this
morning wit i you, Mr. Stevenson, is how new policy forms and new
policy services are determined upon, what brings them into use and
what have been some of the types of policy forms developed in recent
years.
Mr. Stevenson. I should say to extend our life-insurance sjervice
in meeting the financial needs of prospective insurance buyers, when
it appears that the adoption of a plan will be to the advantage or
will be advantageous to our policyholders and also to our representa-
tives. First, there must be a definite need, as we see it, for the new
policy. The new policy must serve a new need or a combination of
needs in one policy.
Two, it must appear advantageous to the policyholders as a group.
If it doesn't appear to be of sound practice, or if it is a policy that
might be criticizable in any way by our actuarial department, we
don't issue it.
And third, as I said, it must be of aid to our representatives.
I mean specifically by that, if it doesn't help our representatives to
meet the needs of policyholders, the fundamental needs of policy-
holders, obviously it couldn't be sold or wouldn't be sold easily.
Mr. Gesell. Now, Mr. Stevenson, how do you determine that there
is a need for a new policy form? Do you look at it from the point
of view of a new service which you can sell, or do you try to ascer-
tain what the specific needs of a group of policyholders may be ?
Mr. Stevenson. The latter is the dominant motivating principle
which causes us to stress the possibilities of a new policy.
Mr. Gesell. You mean letters from policyholders or statements
from agents or how do you find out that need exists ?
Mr. Stevenson. First, we have frequent requests from policy-
holders direct, or we have suggestions from policyholders to the
agents. They frequently say, "Why don't you get out this lyne o^
CONCENTRATION OF ECONOMIC POWER 14765
policy?" Of course, in many instances, it is wholly impossible to
get out the type of policy that they suggest because not infrequently
the suggestion is made for a type of policy that isn't actuarially
sound or would be impossible to issue. The general feeling is that
they want something to serve oftentimes an individual purpose that
is too individual, it doesn't meet a class of policyholders.
Now, that is one. I mi^ht give as an illustration of that — ^I had
the responsibility of placmg some annuities for a minisiters' and
missionaries' board, the Baptist Ministers and Missionaries Board.
The purpose there was to find members of the Baptist Church who
would buy an annuity and then if there is anything left of the an-
nuity, to passjt on to this Ministers' and Missionaries' Board, which
is really^ an insurance company for pensioning Baptist ministers.
Obviously the board couldn't count on any definite amount, so a policy
was . ori^nated which would be half straight annuity and another
half which added to this annuity would make it possible always for
the Baptist denomination, on the death of the annuitant, to receive
one-half of the amount orginally put in the annuity.
Mr. Gesell. I suppose, too, the home office mates studies of the
insurance market ?
Mr. Stevenson. Yes. I would say that that is true.
Mr. Gesell. What about the competitive factor, the marketing
factor, Mr. Stevenson? Do you develop pplicy forms sometimes be-
cause one of your competitor companies has come out with a form
and you want or your agents want to keep up with them?
Mr. Stevenson. Yes.
Mr. Gesell. Is that fairly frequent in occurrence?
Mr. Stevenson. I should say that most companies are alert to
bringing out policies to meet the competition or a popular policy.
I think that is rather a common procedure.
Mr. Gesell. When you say popular policy, you mean a policy that
is popular with the agents or popular with the policyholders.
Mr. Stevenson. Largely with the policyholders; that is, meaning
by that that it seemed to have fitted a specific need. An illustration :
There is a policy that is gotten out by a number of companies called
the modified life, which is a combination of term insurance for the
first 2 or 3 years (the rate is a little above term insurance), and then
after the period of 3 years, the rate increases. That has as its pur-
pose the idea of bringing the gross amount of premium to a lower
figure than would be the case if a straight ordinary life policy had
been taken.
Mr. Gesell. That is the kind of policy where they come to a young
person and say, "Well, you are only making so much this year, you
can get a broader coverage and as you start to earn more and more,
you can pay more."? '
Mr. Stevenson. That is right.
Mr. Gesell. Is that one of the newer forms that has been developed
in the last 20 years?
Mr. Stevenson. Yes; it has been developed — my guess is that that
was developed on or about 1926, and it is very popular; it fills a
specific need. The Penn Mutual competitively, not issuing that type
of policy, we have a policy that we call a term automatic conversion.
Instead of having two policies — a term policy and then converting
that — we have the term automatic part written right in the policies,
12*491'— 41— pt. 28 6
14766 CONCENTRATION OF ECONOMIC POWER
SO that you actually go for 1, 2, 3, 4, or 5 years, whichever you elect,
and then at a certain period it goes into the higher rate and that
higher rate is the ordinary life rate at that period. But it is in one
policy.
Mr. Gesell. Do I understand you to say that one of the factors
in the determination of new policy forms is the desire of any com-
pany to offer the same lines of service and the same type of coverage
as his competitors?
Mr. Stevenson. In general ; but there is, of course, wide variation.
There is wide variation. The general tendency would be toward the
same type of coverage.
The Chairman. How frequently do these suggestions for new
forms of policy come to the executive officers?
Mr. Stevenson. We are having them constantly. I should say that
there are always in the offing suggestions for new types of coverage.
The Chairman. Do these suggestions cover a wide range or do they
fall into certain well-known categories?
Mr. Stevenson. In general, within a rather narrow range, because
there are limitations to what can be accomplished through life
insurance.
The Chairman. Could you give us an instance of one or two of
the suggestions which have been made but which have been rejected?
Mr. Stevenson. Well, I recall a few years ago the suggestion that
companies ought to incorporate in one policy varied types of needs,
so that one policy, the package, would do the whole job rather than
having three or four policies. For example, this was the general
broad suggestion: First, when a man is a very young man, he needs
more coverage, he needs all the coverage he can get, actual insurance
protection without much of the savings feature, so the suggestion
was to have a certain period in the beginning of term insurance ; then
the second period of the operation of the policy to have it on the basis
of permanent insurance — that is, ordinary life — until the responsi-
bilities of the family might have been met ; and then provide for some
sort of a rider to attach to the policy so that on or about the time
when his family responsibilities are over, he could probably increase
his premium in order to make it a retirement income for himself
and for his wife, or a retirement income for either, no matter which one
survived. That is about as complicated a one, I think, as I could
mention and yet the arguments for it are sound. We are able to do all
but that last part. That, I might say, Senator, is today under active
consideration to see if we could originate or develop that sort of policy.
Mr. Gesell. Now, perhaps it would help if you would tell the com-
mittee what some of the principal new policy forms have been that
have been developed in recent years. You mentioned the modified
life form. Now, there has been the form of family income and
family maintenance, has there not ?
Mr. Stevenson. Yes, sir.
Mr. Gesell. What kind of a policy form is that ?
Mr. Stevenson. There is an illustration, I presume, where a policy
was originated by the president of a company. This original family
income policy was originated by tlie late Philip Burnett, of the Conti-
nental American -Life Insurance Co. of Wilmington, Delaware. He
recognized the fact that men w-ith a family needed more coverage in the
period in which the family was growing up. Therefore, he would
CONCENTRATION OF ECONOMIC POWER 14767
purchase, for example, a policy for $10,000 on the ordinary life plan —
that is the cheapest form of permanent protection insurance that can
be purchased.
In addition to that they would tack on an amount of term insur-
ance. Many times that term insurance would be a sufficient amount,
such that it would provide $100 a month for a period of years, and
presumably the period of years in which the family was growing up,
and in addition to that at the end of that period the $10,000 would
be available. So that it is a double policy, the term to provide for
the family in case of premature death of the breadwinner, and "at the
end of that time, there would be the $10,000 available for the wife.
Mr. Gesell. Then there has been a retirement annuity or optional
deferred income policy, has there not ?
Mr. Stevenson. Yes.
Mr. Gesell. What kind of a policj^ is that, Mr. Stevenson?
Mr. Stevenson. That is not a life insurance policy. That is a de-
ferred annuity usually paid for on an annual basis. May I explain?
The original deferred annuities were unsatisfactory because you paid a
certain sum down, a lump sum, say you are age 35, you paid a lump
sum, and if you lived to the period that the deferred annuity called
for, say 60 or 65, beginning at that period, you received a substantial
return on your investment, very large, but there is all that inter-
vening period in which, if anything happened by death or an emer-
gency, no return of the money could be made. But it is a very de-
sirable policy if one can afford the luxury of the loss of borrowing
ability on the policy or it isn't necessary on his part to pass any of the
investment to the family.
Now, to get around that, the new policies were issued. They have
the same idea of deferred annuity, but you can pay for them on the
annual basis. For example, if I wanted an annuity, say I am 35 and
I want an annuity at 65, 1 pay so much a year for 30 years and along
with that I have cash and loan values, and if I die the whole amount,
practically, that I have paid after some period of years goes to my
family — or to me if I wish to borrow on it,
. But when I get my annuity at 65 on this annual premium basis,
I obviously do not get as large a monthly income for the total invest-
ment as I would on the other old single deferred income annuity
plan because of the hazard of the loss that would come through the
surrender in case of premature death on the single premium deferred
income.
Now, that is a very popular policy.
Mr. Gesell. How many policy forms does your company have, Mr.
Stevenson ?
Mr. Stevenson. Well, this is reality in the range of almost a guess.
I would say certainly over 100 different types, because in working
out our endowment plans, we have an endowment at every age. You
can buy an endowment with us beginning with an endowment at
50, endowment maturing at 51, and right on up.
The Chairman. What standards do you follow in determining,
in such a policy as you have just described, the premium that the
policyholder is to pay?
Mr. Stevenson. That is an actuarial matter, but before a policy of
this type is issued, a definite attempt is made to figure out, calculate
what is the exact liability of a policy of this type.
14768 CONCENTRATION OF ECONOMIC POWER
The Chairman. What are the factors which you used in determin-
ingj what the limit is?
Mr. Stevenson. Two big factors, and even with retirement an-
nuity, the factors would be the same, but the three main things
would be, first, our interest return, what we could calculate over a
long range would be the return, and secondly
The Chairman, (interposing). You mean the return to the
company ?
Mr. Stevenson. That is right.
The Chairman. The return to the company on the accumulating
premium ?
Mr. Stevenson. That is right, on the total accumulations from our
total premiums. That is where our earnings come from.
The Chairman. Now, then, you must determine in advance what
interest you want on that accumulated premium?
Mr. Stevenson. Yes. We attempt to arrive at what is the mini-
mum, and that is what we frequently hear of as our guaranteed
rate, minimum rate, and that in most cases is 3 percent : that is, if
we have more than that, the policyholders participate in that through
what is known as the dividends.
The Chairman. In other words, is it your experience that a 3-
percent rate would in ordinary circumstances be sufficient to enable
you to sustain and meet your liability ?
Mr. Stevenson. Yes; that is correct.
The Chairman. But what is the average return that you get ?
Mr. Stevenson. Our average return for '38, which is I think part
of the record of our statistics^here, is 3.40.
The Chairman. Now, what are the other factors? That is the
first.
Mr. Stevenson. That is one. The next is the mortality factor.
That is, in understandable language, the death rate, and in an
annuity, when we speak of a loss from mortality, it is not because
people die prematurely but they live beyond the period of normal cal-
culation, so that we mustn't get contused when we speak of the
mortality gains or losses. The ' mortality losses in annuities arise
because individuals live longer than they should according to the tables.
The Chairman. In other words, from the point of view of the
insurance man, the longer they live, the worse it is ?
Mr. Stevenson. In an annuity that is correct, but if your general
coverage is balanced through life insurance, you have the compensa-
tion there by their dying sooner than calculated, or if they live longer
in life insurance they pay in more premiums.
Mr. Gesell. You mean that life-insurance policyholders carry the
annuities ?
Mr. Stevenson. No.
Mr. Gesell. That is about what it comes down to, isn't it, Mr.
Stevenson? You make up the losses from the annuities by the sav-
ings on the mortality of the regular life-insurance policyholders.
Mr. Stevenson. No ; I would sr^ that we have to look at this whole
matter with a long-range view. Life insurance is a long-range busi-
ness. It is entirely possible that in a period of 4 or 5 years, we
might have a loss in our annuities, due to the fact that the annuitants
would live longer than the calculation indicated, or our earnings
weren't as great as we might have expected.
CONCENTRATION OF ECONOMIC POWER 14769
Mr. Gesell. How do you make those losses up as they do take
place ?
Mr. Stevenson. The losses come from our complete income.
Mr. Gesell. From the other policyholders.
Mr. Stevenson. That would be correct. Now may I say that would
be the case in a period of yeai-s. Then there are times when the
annuitants have made a substantial contribution to life-insurance
holders in other times. It is variable. Over a long range, they
balance off. It is true that in a given period, there may be some
losses in annuities and gains in insurance.
The Chairman. Well, the two types of business are absolutely dif-
ferent, are they not?
Mr. Stevenson. That is right.
The Chairman. Life insurance requires the payment to the in-
sured of a certain sum of money in case of premature death.
Mr. Stevenson. That is right.
The Chairman. And the insurer sustains or tends to sustain a loss
if the insured dies at an early age.
Mr. Stevenson. That is correct.
The Chairman. But the contrary is true with respect to annuities.
Mr. Stevenson. That is right.
The Chairman. The earlier the annuitant dies the more profit for
the insurer, and the longer the annuitant lives the more danger of
loss by the insurer.
Mr. Stevenson. Correct.
The Chairman. So that ultimately the annuity business is not life
insurance.
Mr. Stevenson. It is not.
The Chairman. Now to go back to this second factor of mortality,
how do you determine mortality?
Mr. Henderson. Mr. Chairman, may I ask a question before you
get into that second point, or do you want me to wait ?
The Chairman. As a matter of fact, we were diverted from this
question by the other, but it is all right.
Mr. Henderson. I will come back.
The Chairman. How do you determine the moilality ? The second
factor was the rate of mortality. How do you determine that?
Mr. Stevenson. The mortality table is the result of the statistics that
have been calculated or made available from experience.
The Chairman. In other words, this is what we call the experi-
ence table of mortality, is it not ?
Mr. Stevenson. That is right. That is the result of the statistical
information that we have, not only in relation to our own company,
but statistics of all companies are made available.
The Chairman. Now, then, does each company follow its own
experience or the experience of all companies ?
Mr. Stevenson. In relation to the table, the companies use in
general the same mortality table.
The Chairman. When was this table prepared ?
Mr. Stevenson. Our own table was prepared many, many years
ago. The American Experience Table was prepared at least 60 years
ago, maybe longer.
The Chairmajj . Is that still the basis ?
Mr. Stevenson, That is still the basis.
14770 CONCENTRATION OF ECONOMIC POWER
The Chairman. The expectancy of life is much greater now than
it was when that table was prepared, is it not ?
Mr. Stevenson. Yes, sir.
The Chairman. Has that increasing longevity of the average per-
son been taken into consideration now in determining this factor,
this second important factor?
Mr. Stevenson. No; the reason being that the return or net cost
or the final cost to the policyholder is the gross premium minus the divi-
dend, and any savings that would accrue as the result of increased
longevity would be reflected in the net cost to the policyholder, so
it wouldn't have any material difference.
The Chairman. I don't understand that. What you are testify-
ing amounts to this statement as I understand it. The table of mor-
tahty upon which your rates are based was prepared 60 years ago
upon the basis of conditions that existed at that time.
Mr. Stevenson. Yes. ,
The Chairman. In the intervening 60 years, life expectancy has
greatly increased; so that the mortality table of 60 years ago no longer
accurately represents the conditions as they exist today.
Mr. Stevenson. That is right.
The Chairman. But .nevertheless, although an experience table
prepared today would show a much greater life expectancy, it is not
desirable to use that table, but it is desirable to use the table of 60
years ago, is that correct ?
Mr. Stevenson. I would say it is used. I wouldn't say that we
would consider that would be necessarily a permanent conclusion.
It is used at the present time.
The Chairman. Which is used at the present time ?
Mr. Stevenson. The old one.
The Chairman. Now, why should not that table be modified to
harmonize with present-day conditions?
Mr. Stevenson. The final test of this, sir, is what the cost to the
policyholder is after the experience of doing business and the mor-
tality rate, and the excess interest. Those are the three factors that
go to determine the dividend.
If our mortality is high, that is reflected in the dividend. If it is
low, it is reflected in the dividend, so that
The Chairman (interposing). So that if your mortality is high,
your dividend is low?
Mr. Stevenson. That is right.
The Chairman. And if your mortality is low your dividend is
higher?
Mr. Stevenson. That is correct, sir.
The Chairman. But now, that is with respect to life insurance?
Mr. Stevenson. That is correct.
The Chairman. Now, how about annuities, the reverse is true
with respect to annuities, is it not?
Mr. Stevenson, Yes.
The Chairman. Now, do you use the same table of mortality in
your annuity business as you do in your life-insurance business ?
Mr. Stevenson. No, there is a different table that is used for
that.
The Chairman. What is the table you use for that ?
CONCENTRATION OF ECONOMIC POWER 14771
Mr. Stevenson. Special annuitant table.
The Chairman. And what is that based upon?
Mr. Ste\^enson. That is based upon the experience that was then
available from all sources from which any experience could be collected.
The Chairman. In other words, for the business of life insur-
ance you use the 60-year-old table, but for the business of annuities
you use the modern table?
Mr. Stevenson. Yes.
The Chairman. And the difference is with respect to life insur-
ance you use the old table because the sooner they die, the more
profit for the insurer, but with respect to annuities, the longer they
live, the greater the loss for the insurer, is that correct?
Mr. Stevenson. Yes, sir.
The Chairman. So that from the point of view of the insurance
company, it is beneficial to use the 60-year-old table on life insur-
ance, but it is beneficial to use the 1940 table for annuitants?
Mr. Stevenson. There is no benefit to the company. We want
to distinguish there. No matter what mortality table we use in the
life insurance, the net cost would be the same because the cost to
the policyholder is
The Chairman (interposing). Now, that is the answer which I
don't quite understand. Why do you say that the net cost would
be the s.ame, no matter wliich table is used? Let's discuss first,
insurance, and then annuities.
Mr. Stevenson. All right. In the case of insurance, let's assume
that we have the present mortality table. Let's assume that the
mortality is very much less now in experience than is indicated by
that mortality table; that will give a greater fund to use in giving
a dividend, so the greater the saving, the more dividend will be
returned. Is that first statement clear?
The Chairman. That is true of a mutual company ?
Mr. Stevenson. That is correct.
The Ch.airman. When you speak of the dividend, you mean the
return of the policyholder ?
Mr. Stevenson. That is correct.
The Chairman. But that dividend, of course, is fixed by the
company ?
Mr. STE^^ENS0N. That is correct.
The Chairman. By the company in its discretion?
Mr. Stevenson. That is correct.
The Chairman. You have complete control of the savings of the
policyholder, and it is for you to determine what the expenses are
and what the dividend may be ?
Mr. Stevenson. That is right.
Now, let's assume that we used a mortality table that was more
in line with experience. The amount of savings in that case would
have been a little less because in ca'lculatin^ the premium on the basis
of this mortality, wt ^orht have had a little smaller premium, but
we would likewise have had a little smaller dividend, and a smaller
premium with a small'dividend would match the little larger premium
minus the little larger dividend.
The Chairman. But obviously if a smaller premium is charged,
then the policyholder has control of his own savings and he doesn't
14772 CONCENTRATION OF ECONOMIC POWER
have to pay for insurance as large an amount as he would if the
modern table were used, and your statement that the net cost is the
same depends wholly, does it not, upon your contention that the
p«licyholder gets it back by way of dividends eventually ?
Mr. Stevenson. That is right.
Mr. GESEi:L. It is true, Mr. Stevenson, is it not, that using the old
table increases your gross premium?
Mr. Stevenson. Yes.
Mr. Gesell. And therefore with a larger gross premium, the agent
gets a higher commission ?
Mr. Stevenson. There would be a small increase.
Mr. Gesell. But it is a higher commission?
Mr. Stevenson. Yes; it is a higher commission.
Mr. Gesell. And it is also, true, is it not, that in the case of policy-
holders who lapse, in other words who drop out of the company be-
fore they have any opportunity to participate in dividends, they have
had to pay more for their insurance than they would have had to
pay had the company used the other mortality table ?
Mr. Stevenson. That is correct.
The Chairman. The consideration that appeals to me, Mr. Steven-
son, is this, and it seems to me that it is worth study : The premiums
which an insurance company receives, whether for the payment of
life insurance or the purchase of amiuities, are almost exclusively
savings of the people.
Mr. Stevenson. Yes.
The Chairman. And those savings flow into these central reservoirs,
as it were. The testimony which has been developed here upon the
statistical situation shows that the savings of the people flow into
these 26 companies from all over the United States. Your own
company does business in 47 States. You have, I think you said,
428,000 policj'holders. They are contributing their savings to you.
Now, one of the great problems which* the country is struggling with
is how to get savings invested out in these 47 States. Would it not
be true that if you used the modern mortality table a large propor-
tion of the savings would remain at home instead of being sluiced
down into the central reservoir and then have to be sluiced out again.
Mr. Stevi^nson. Well, I should say when the dividend is returned,
the net effect is the same.
The Chairman. You have to wait until the dividend is returned?
Mr. Stevenson. Oh, yes.
- Mr. Henderson. One other thing, Mr. Stevenson, when you have a
high gross premium, you are collecting a larger amount, and then
when you are determining what the dividend or rebate shall be, you
calculate the status of the surpluses and reserves, isn't that correct?
Mr. Stevenson. Yes.
Mr. Henderson. Now, your company is one of four, as I recall it, in
this 10-year period, that finished up on net balance, it really gained
on annuities.' The other 22 lost in this 10-year period we have under
consideration. Now, leaving out the long-term adjustment, the balanc-
4pg as between the annuities and the life insurance is the current
adjustment that is made through a surplus account, is it not?
Mr. Stevenson. Yes, sir.
Mr.. Henderson. Now, if there should be a loss in any one year from
the annuities, that adjustment would take place in the surplus account,.
CONCENTRATION OF ECONOMIC POWER 14773
and that would withdraw inevitably some of the accumulation from
the insurance, would it not?
Mr. Stevenson. That is right.
Mr. Henderson. And therefore it would reduce the dividend pay-
ments that year ?
Mr. Stevenson. I think that is correct.
Mr. Henderson. Let me ask you this: In this 10-year period we
liave under review, if somebody was smart enough to guess the
trend, he would have taken the annuity rather than the life insur-
ance, would he not?
Mr. Stevenson. If we look back 10 years ?
Mr. Henderson. No; I said, if he were smart enough to guess
ahead.
Mr. Stevenson. That is right. He would guess ahead. I would
say he would have bought more wisely 10 years ago if he had looked
ahead and at that time 10 years ago knew what the situation would
be today.
Mr. Henderson. And, of course, in order to know that, he would
have to know more than the insurance companies all put together,
wouldn't he ?
Mr. Stevenson. That is correct.
Mr. Henderson, It just happens that you are one of the four com-
panies that guessed right on the 10-year period. How did you hap-
pen to guess right on that 10-year period ? ^
Mr. Stevenson. May I suggest, sir, that I am not an actuary, and
a large number of these figures
Mr. Henderson (interposing). I know you are not an actuary.
That is one reason you and I can do business. Most of the time when
we had actuaries here and got right down to the question of policy
they ran behind the American Experience Table or higher mathe-
matics, and it was just like pulling teeth to ^et them out irom behind
that. The actuaries we had here were testifymg that they were sitting
together, making up what the accommodations of rates should be.
Every time we got into the question of policy, we found them way off
somewhere back of mathematical calculation.
I am just interested to know: Are your rates higher for annuities
in this period than the others ?
Mr. Stevenson. I can't give you a definite answer to that. I assume
that they were relatively comparable.
Mr. Henderson, Did you guess better? Did you hayb a selectivity?
Mr. Stevenson. The only answer could be, that wouldn't be any
question of selection because
Mr. Henderson (interposing) . It might be in the cost.
. Mr. Gesell. There you would be selecting people who are going
to die early.
Mr. Stevenson. What happens in annuities is this: If you have
only a few people that select annuities, the curious circumstance is
that those people live probably a little longer. If we have a few se-
lected, you get the people that somewhat select against the company,
but if we go out and push annuities as a sale we might get people to
take annuities that didn't select annuities themselves and, therefore,
1 See Hearings, Part 10-A, p. 59.
14774 CONCENTRATION OF ECONOMIC POWER
we would get some whose mortality would be a little greater and there-
by would get a little better experience.
Mr. Henderson. I think that you put it on the basis of your selec-
tion.
Mr. Stevenson. Yes. It is somewhat, but I would say it is prob-
ably due to the fact that we eliminated, by pushing the sale, the
antiselection that would come because only a few purchased annuities,
and with the few who purchased annuities on their own, will, the
potential losses are greater; or to put it in other words, t]ie general
rule is that is the trend.
Mr. Gesell. Is that a matter of conscious managemer i policy to
offset the antiselection present in the type of policy — to go out and sell
more of it?
Mr. STE^^ENS0N. It was not. It was a good policy Our annuities or
our retirement income served a specific need, as indicated here when we
discussed that policy, and our agents recognized that it served a spe-
cific need and sold in rather large quantities.
The Chairman. Did I understand you to say the person who volun-
tarily seeks annuities is likely to be more long-lived than the one who
doesn't, Mr. Stevenson?
Mr. Stevenson. In general.
Dr. LuBiN. Mr. Stevenson, why do you continue to use the old
actuarial table, other than the reasons Mr. Gesell mentioned — namely,
the figure returns to your agents and the advantages of savings due
to lapses which do not inure until the policy lapses? What is the
real reason behind it?
Mr. Stevenson. You are asking about the use of the old mortality
table ? The reasons I have given you are all that I know. There -
are additional reasons that are not necessarily insurance reasons.
Now, I will go to some reasons that are not insurance reasons.
The laws of many of the States, including Pennsylvania, still require
the use of the older table.
Dr. LuBiN. Has your organization ever attempted to have that law
amended ?
Mr. Stevenson. Today the companies and various State insurance
departments, I think it is fair to say, are studying the whole problem,
with a view to the possible use of a new table.
I might call attention to the fact that, of course, 1918 was a rather
difficult year, but in the year 1918 the mortality exceeded 100 per-
cent then, due to the influenza ravages.
The Chairman. Do your actuaries report any difference in the
death rate for different regions in the country?
Mr. Stevenson. We have knowledge of various territories that
return
The Chairman (interposing). The mortality table, of course, is
tlie experience of the country as a whole, and that is true with respect
to the mortality table you use on annuities also.
Mr. STE^^NS0N. That is right.
The Chairman. Do you know whether there is any substantial
variation in the rate with respect to regions in the country?
Mr. Stevenson. There is no variation in insurance rates. You mean
the rate of mortality?
The Chairman. That is right.
CONCENTRATION OF ECONOMIC POWER 14775
Mr. Stevenson. Not very large. There are certain sections. I
can't answer that, because I am neither the medical director or the
underwriting officer, but my information is that there are certain
territories that we do not care to be very active in developing.
The Chairman. For which type of business? [Laughter.]
Mr. Stevenson. Of course, primarily we are in the insurance
business.
The Chaibman. But those areas in which life insurance would be
a poor risk would be areas in which annuities would be a good risk.
Mr. Ste\tenson. Exactly. No question about that.
Dr. LuBiN. I am still interested in the question I asked. In other
words, granted that as far as the policyholder is concerned there is
no difference whether he pay a high rate and get a big dividend or
lower rate and get a small dividend, why do you continue to do it
that way ? There are two reasons cited here, namely, that you would
make more money. At least, the agent would make more money that
way and the company can make more money because of these lapses.
Are those the sole reasons you maintain the old table?
Mr. Stevenson. No; I can't give you any reasons beyond what I
have indicated. I don't know whether there are any fundamental
reasons beyond that. I can't answer that.
Dr. LuBiN. May I ask one other question? If an applicant comes
to you and asks for a life-insurance policy and after he is examined
by one of your physicians he is turned down and he should reappear
the next day and ask for annuity, would you sell him annuity ?
Mr. Stevenson. Yes. It doesn't necessarily follow that because
we turn him down it might not be desirable for him to have annuities.
Sometimes when an individual is turned down he might live at a
different tempo and the very fact that he is interested in purchasing
annuiti.es might lead to that, or might more or less substantiate that
attitude.
Dr. LuBiN. In other words, he has added reason for taking care
of himself?
Mr. Stevenson. Correct.
Mr. Gesell. Now, I think we had best, if there are no questions
from the committee, get back to the outline here. We are a little
behind time.
Mr. Henderson. It is a temptation, when you get a witness like
Mr. Stevenson, to ask everything that has been kicking around in
your mind during these hearings.
Mr. Gesell. I wanted to ask you today, Mr. Stevenson, a little
about the specific purposes of life insurance.
You sell insurance for inheritance-tax purposes, to enable a man
to pay off a mortgage that he may have coming due at some future
date, to enable him to make a bequest to some individual for business
purposes of one sort or another, for educational purposes, for the
purpose of cleaning up his estate, for arranging to continue his salary,
should his salary no longer be paid, and for other purposes of that
character. Is that correct?
Mr. Stevenson. That is correct.
Mr. Gesell. Are any of those eight purposes which I mentioned
of particular emphasis in your company^- or are they a 11 more or
less considered in terms of needs of the f^articular policyholder ?
14776 <X)NCENTRATION OF ECONOMIC POWER
Mr. Stevenson. It would depend, of course, on what we found,
after making a contact with a client, the needs of that client were.
If there is a mortgage on the home, the tendency would be to sell
insurance to take care of the mt)rtgage. If there are children, the
agent would undoubtedly make some suggestions in connection with
policies to guarantee the education. Salary continuance is a phrase
that is used to highspot the need for an income following the death
of the breadwinner.'
Now, you ask, are any of these particularly emphasized? .No; I
would say each of the eight that you have just mentioned would be in
the agent's kit, so that if those individual needs, following his analysis
of the prospect's general need for insurance, any one or a number of
them, should present themselves, he would sell insurance on that
basis. Probably the educational policy and the mortgage policy in-
surance would be the two most popular, with the salary continuance a
close runner-up.
Mr. Gesell. Now, having in mind that you said some while back
why new policy forms are developed, I am interested in the develop-
ment of the juvenile insurance that you mentioned. Was there a
crying need on the part of juveniles for insurance?
Mr. Stevenson. No.
Mr. Gesell. That was developed, I take it, as a sales proposition?
Mr. Stevenson. No.
Mr. Gesell. What were the factors that led to selling insurance to
juveniles?
Mr. Stevenson.. In many ijistances, I suspect, if what I get from our
field representatives is an indication of it, that parents frequently say,
"Well, I would like the idea of starting my child on a program," some-
times at a very early age, sometimes as early as 2 or 3 or 4 or 5, with
the idea of a thrift purpose in mind. I would say that it has come
about as a result of parents interested in insuring their children;
and secondly, of course, the desirability on the part of our agents to
get the children as clients of theirs rather early.
Mr. Gesell. You mean that if an agent sold someone a policy that
early, he would have more opportunity of following him through
these various forms?
Mr. Stevenson. Yes.
Mr. Gesell. Now, I wanted to ask you some questions about this
problem of whether or not there is any saturation in the insurance
market at the present time.
Senator White. Before you get to that, I want to ask one question
about the agents. Are there any general rules among insurance
companies as to the control of the agents in undertaking to sell to a
prospective purchaser? Is it the policy of companies that the agent
shall sell what the prospective purchaser wants, or do you encourage
the agent to advise the purchaser and to sell to the purchaser what he
thinks the purchaser ought to have ? Is there any general rule among
insurance companies about that?
Mr. Stevenson. There is no general rule. I should say that the
competent, wfell-trained agent, is in a better position to specify what
insurance would best fit the needs of the client than probably the
client himself. It is the duty then of the agent to present what he
considers is as near a perfect service ^f or that need as possible; It
is finally the policy-holder's right to determine whetlier he wants that
CONCENTRATION OF ECdNOMIC POWER 14777
suggestion coming from the agents or whether he has in mind to
purchase some other policy.
Senator White. Of course, if insurance companies encourage their
agents to educate the purchasers, it furnishes the opportunity for
the insurance company to push out the particular lines of insurance to
the exclusion of others. If that policy is followed, of course, the
insurance company has some degree of responsibility for the results
as to the different kinds of insurance that are written.
Of course, if your agents, by and large, are instructed to meet
the requirements of the purchaser as the purchaser sees them, there
isn't any great responsibility on the insurance company as to what
is actually written. That must be so.
Mr. Stevenson. Yes.
Mr. Gesell. On this question of the saturation of the market, we
saw yesterday's table^ showed that there was less and less new busi-
ness being shown. Does your experience point toward the fact that
there is any degree of increasing saturation in the market, and have
you made any studies of that general problem?
Mr. Stevenson. No.
Mr. Henderson. What is "no" the answer to? He asked two
questions.
Mr. Stevenson. The fitst one there — Have we made any studies?
Have we made any definite studies? You are asking the possibility
of saturation?
Mr. Gesell. That is correct.
Mr. Stevenson. Well, first, let me indicate that if we view the
needs of individuals for insurance there is no quest-ion but that there
is still a great opportunity for selling more insurance. The needs
are very much greater than the companies have been able to cover, or
have been able to persuade individuals to purchase. The needs for life
insurance are much greater than the coverage.
Mr. Henderson. That is, if all the unemployed people were draw-
ing annuities it would be very nice ?
Mr. Stevenson. If they had the facilities for making the purchase
of annuities or the purchase of insurance ; but you might be inter-
ested in a rough and ready measuring rod of how much insurance
an individual might need* that is, when you say it is an average
measuring rod, it is probably no good except for the mid-point, as
we well recognize.
Generally, it used to be considered that if a man owned 5 times
his annual income that was a fair coverage for life insurance. If his in-
come was $10,000 and he owned $50,000 of insurance, that was fair
coverage. Now, in those days, we used to say, however, that if you
owned 5 times j^our annual income in insurance your family would
have to get on with one-fourth of your income, provided you are able
to invest the insurance at 5 percent. Fifty thousand dollars at 5
percent is $2,500 a year to the family. That used to be considered
the minimum coverage.
The unfortunate thing about that is, those of the lower brackets
are often unable to have that amount of coverage.
Mr. Gesell. Then what you say on the first point is that a lot of
people should be holding more insurance than they are holding if you
could only persuade them to buy it?
^ See Hearings, Part 10-A, p. 27.
14778 CONCENTRATION OF ECONOMIC POWER
Mr. Stevenson. Yes.
Mr. Gesell. Now, what about the capacity of the people to buy
more insurance, looking at the saturation of the market from that
point of view? Is it about sold?
Mr. Stevenson. At the present time the amount of life insurance in
force is not quite double the annual income. The annual income in
1938 was $64,000,000,000. The amount of insurance in force was
$110,000,000,000. Had the insurance been $128,000,000,000 instead of
$110,000,000,000, that would have meant on the average that America
was insured for double the annual income.
Now, life insurance is in competition with a lot of other expendi-
tures. The first is the need. Mr. Gesell has asked about the capacity.
That is a second point. We know that the need for insurance is far
greater than the insurance companies have been able to place.
The Chairman, You have made the comparison for the year 1938.
Po you have that for other years?
Mr. Stevenson. I can, give it to you, sir, for any year* that
The Chairman (interposing). Do you have a complete table show-
ing the national income and the amount of insurance in force for a
number of years?
Mr. Stevenson. I haven't it in force, but my table is related to the
national income for each year with the total premium income for
each year. That is the same thing. That can be translated into the
same thing.
The Chairman. Yes; I think it could. Do you have that, Mr.
Gesell, this compilation?
Mr. Gesell. We have not. That is along tlie lines of what you
suggested yesterday. We are preparing a study along that line to
put into the record. We will take advantage of Mr. Stevenson's
statistics.
The Chairman. I won't ask that it be put in now, but if you will
be good enough to furnish that to the committee, it can be worked
into the study later.^ I am sorry. to have to interrupt you, Mr.
Stevenson. You were about to make additional remarks.
Mr. Stevenson. We finally have to recognize that we in insurance
are in competition for the dollar, and we have got to recognize what
other expenditures are, and in 1937 the total of all premiums paid in
life insurance was $3,761,000,000. That is the premium income of the
companies. During that same period, just as a matter of record, it
would be interesting to know that food and soft drinks were $17,000,-
000,000 plus; alcoholic beverages, $3,600,000,000, on a par with the
amount paid for life insurance premiums; tobacco, $1,674,000,000;
clothing, $7,095,000,000; transportation, $7,803,000,000; home main-
tenance, $19,000,000,000; and personal appearance, $1,383,000,000;
recreation, $3,465,000,000.
The Chairman. Almost as much as for alcoholic beverages.
[Laughter.]
Mr. Stevenson. Social cultural activities, $3,884,000,000, which is
$100,000,000 greater than the premiums for life insurance paid.
Mr. Gesell. What conclusions do you draw from those figures as to
whether or not the people can buy more life insurance, which is the
question ?
J^Thia information will be found In Hearings, Part 4, "Exhibits Nos. 217 and 220,"
Appendix, pp. 1512 and 1513.
CONCENTRATION OF ECONOMIC POWER 14779
Mr. Stevenson. Now I come to the third point, when you said
the possibilities of saturation. The need is greater than the sup-
ply. The capacity of the public is limited, but it isn't sufficiently
limited but that they are able to make large expenditures in some
of these other fields, where we in life insurance feel that we have a
right to compete actively to get more dollars maybe from some two
or three of those fields than the dollars already there. That is the
third point then, sir. The building of the companies to purchase
our product, to sell it better and even more actively.
Mr. Gesell. Well, now, let me see if I can get at this a little
differently. Do you look forward to the Penn Mutual growing in
the next 10 years, the next 15 years?
Mr. Stevenson. Yes.
Mr. Gesell. Do you expect your present management policies will
result in the growth of the company?
Mr. Stevenson. I hope so.
The Chairman. Do you expect to otow at the expense of other
companies or in the expansion of the field of insurance ?
Mr. Stevenson. In the expansion of the field of insurance.
Mr. Gesell. Have you not at the Penn Mutual placed considerable
emphasis in recent years upon more careful selection of risks, differ-
ent types of training methods for your agents? You have many
fewer agents than you used to have. I noticed that in the figures
you gave us. Do you believe, in spite of all those facts, your com-
pany will grow?
Mr. Stevenson. Yes.
Mr, Gesell. At the rate it grew in the past ?
Mr. Stevenson. No.
Mr. Henderson. Will it grow from the standpoint of new sales
or just the accumulations from the reinvestment of dividends, the
investment of income from present admitted assets ?
Mr. Stevenson. We anticipate it will grow as a result of the sale
of new business.
Mr. Gesell. Now, how much do you like to grow a year?
Mr. Stevenson. The minimum — we should have sufficient new
business to replace at least that which matured or was lapsed or
surrendered.
Mr. Gesell. You want certainly to sweeten up the risk so-called,
keep bringing in new life to take the place of the old?
Mr. Stevenson. Yes.
Mr. Gesell. How much more do you want to write ^bove that?
Mr. Stevenson. It is very difficult to state a definite amount. I
would prefer to say that that amount is probably a range above
that, roughly any place irom 10 to 25 percent above that would be
agreeable from my point of view.
Mr. Gesell. You mean an increase from 10 to 25 percent of the
insurance in force?
Mr. Stevenson. No.
Mr. Gesell. Or in assets?
Mr. Stevenson. No, over the amount that was :
(The hearing was interrupted at this point by off-the-record dis-
cussion.)
Dr. LuBiN. May I ask one question on the last subject so that
we don't have to come back to it later? Mr. Stevenson, in terms
14780 CONCENTRATION OF ECONOMIC POWER
of the Statistics you have given us, it appears that the American
people are 'turning over to the insurance companies something be-
tween 4I/2 and 5 percent of their gross national income. In other
words, that amount of money is being saved and turned over, as
the chairman has suggested, to a group to put it in sort of ,a sluice
and then put it back into the investment field.
On the assumption that we continue to increase.-lhis amount that
is being saved and turned over to insurance compatties, will we not
ultimately find ourselves in the position where the insurance com-
panies become the investment organizations of the country? In
other words, people are saving for investment purj)oses in addi-
tion to insurance. If they are going to buy more insurance and
pay more premiums, there is only one of two ways in which the pay
for it, namely; save still more than they have, or, which means less
is available for the channels of trade, shift their investment from
normal channels that, they usually use through the investment bank-
ers, let's say, to the insurance companies to reinvest for 'them.
Doesn't one largely have to come to the conclusion that the insur-
ance companies will be taking over the functions of investment in
this country if they keep going at a rate that you suggest?
Mr. Stevenson. I couldn't answer that, sir. I haven't any par-
ticular opinion on that. I don't know.
Mr. Gesell. What do you. think is an optimum size of the Perm
Mutual Life Insurance Co.? Let's get at it that way, Mr. Steven-
son. What is the biggest it should be to operate efficiently ?
Mr. Ste^ enson. I cannot give any figure. My feeling is that
there is probably a range for the total amount" of insurance in force
that would represent a range which would give to the policyholders
the maximum of service for dollars expended. There has beeli very
little of the theory of the optimum developed in this country. One
man who has made a study of the Penn Mutual with nine other
companies has stated to me that there is an optimum range of each
of those 10 companies, a range which .would represent the amount
in force which would return the most service to the individual.
Now, that would vary from year to jear because it would be
established at some one time through statistical information and an
optimum for the total insurance in force would be set. Obviously, if
that were set at the one time as an optimum range, new circum-
stances might change that possible optimum.
Mr. Gesell, Now, may I interrupt a moment? Is the business
studying from year to year the question of optimum of size and trying
to determine whether or not individual companies are growing too
fast or too slow ?
Mr. Stevenson. I presume that each company has given considera-
tion to the question of size and from their own facts, as they view it,
regard that there isn't much of a problem of optimum size with them.
Mr. Gesell. Yes, I am sure that is the case in some. We had the
president of one company here a little while ago who said he looked
forward to the time when his company would be twenty-five billions
in size. But I am trying to get down to specific studies or real
determinations of the problem. What have you done in the Penn
Mutual to study it. for example?
Mr. Stevenson. Very little has been done, for the reason that over
the period of the last 6 or 7 years, at the rate at which we were
CONCENTRATION OF ECONOMIC POWER 14781
growing, which was a very modest rate, it didn't look to us as if the
question of optimum, the determination of that, was a very imme-
diate problem, sir,
Mr. Gessell, You said in reply to the sales questionnaires that for a
number of years the Penn Mutual's new business has ranged between
2 and 3 percent of the total ordinary new business in the United
States, and it is its immediate objective to maintain this relative
position.
M. Stevenson.- That is what we are doing now, relatively. We are
in that same position now, relatively.
Mr. Gesell. Then you are in the position where if some of your
fellow companies make a big drive for business, you are going to want
to make that same drive to maintain your position, are you not, in-
stead of looking to the particular requirements in your own company ?
Mr. Stevenson. If by "drive," sir, you mean that we will attempt
to encourage our agents to work harder and more systematicallyj and
yet give us the same quality of business that they are now giving
us at a satisfactory expense ratio, then we would make a drive for
the business.
Mr. Gesell. From this discussion, then, am I correct in gathering
that you have no determinations at the Penn Mutual as to what its
largest efficient size would be?
Mr. Stevenson. No.
Mr. Henderson. Mr. Stevenson, assume that you didn't grow — as-
sume what you did was, in your own terms, get just about the number
each year to compensate for the losses through maturities and lapses
and other sources — would that affect the stability of your compaif^?
Mr. Stevenson, No. If we would replace — that was your assump-
tion, wasn'» it, sir?
Mr. Henderson. Yes.
Mr. Stevenson, It shouldn't affect the stability of the company.
Mr. Henderson. Do you see problems generally in the manage-
ment of companies larger than yours which you do not have? Is
your problem of investment, do you think, as onerous and pressing
ft burden as tha t of some of the other companies ?
Mr, Stevenson, Not knowing in detail their problems, I could not
appropriately make any comment on that other than to say my
general observation is that companies usually have an organization
commensurate with the size of their investment job, and it shouldn't
be any more difficult with their larger organization to make their
necessary investments than for a company of medium size with our
smaller organization, to make ours. It is a question of organization
and manpower in relation to the specific problem, sir.
Mr, Henderson. Do you think that a company smaller than yours,
if it stayed about the same size, would still remain healthy and strong?
Mr. Stevenson, Assmning that they would get sufficient new busi-
ness to replace the business terminating, I should like a little more
new business each year than that which was lapsed in order to provide
a reserve of new business over lapse for the dips in the general market
condition. If you would allow that modification of the assumption,
I would say that it could be healthy,
Mr, Henderson, Now we have a declining rate of population growth,
as you insurance companies probably know. Now, assume that you get
to a place where new lines of business cannot be invented to com-
12*491— 41— pt. 28 7
14782 CONCENTRATION OF ECONOMIC POWER
pensate for the decline in the new business written; and assume
that you either stayed static, or even had a moderate decline over a
period of years. Would the security of the holders of policies be
threatened ?
Mr. Stevenson. If I were president of a company when the trend
dipped downward, with probably an average drop each year for a
period until I determined whether it was a variation or a real trend,
and if it is a real trend downward, sir, then I would say the next
step would be to reduce expenses definitely in accordance with the
drop, and that would be absolutely necessary if the security of the
policyholders was preserved in a company with the declining insur-
ance-in-force trend.
Mr. Henderson. Let me make another assumption. I think I get
that you say you could meet the terms if you knew definitely that
you were on a declining scale ; you could meet it and you could pay all
your claims and all your obligations af the time they matured ?
Mr, Ste\'enson. Yes, sir.
Mr, Henderson, Now, assume a situation where you got no new
business and you had, in effect, to go ahead with a policy of each
year maneuvering your investment account so that you could meet
your maturities, and so forth ; could that be done ?
Mr, Stevenson. That to be done would require the elimination of
almost the entire company and organization overnight. That would
be a mucli severer cut of personnel than the other.
Mr. HJENDERSON. Ycs ; but I am looking now at the fundamental
question of the integrity of what is back of the insurance company
policy. I gather you say you don't need to grow in order to main-
tain the integrity of policies now in effect, isn't that a fact?
Mr, Stevenson. Yes.
Mr. Henderson. You say the integrity may be maintained if you
stay level. You can maintain the integrity if you have a declining
rate of new business. Assume you gage management to meet that,
and I believe that you said if you had no new business, you would
have to make an adjustment by cutting down those expenses which
fo toward the getting of new business and keeping up of certain
inds of services in force, you could meet all your obligations ?
Mr. Stevenson. Yes, sir
Mr. Henderson. I. think that, Mr. Stevenson, is the most construc-
tive statement, so far as the guaranty of the stability of insurance
policies is concerned, that has been made in all the course of these
hearings.
Mr. Gesell. Though we have tried many times to have it said.
Mr. Stevenson. You have caught me up on the phrase "Drive for
new business."
Mr. Gesell. Have you had any experience with what might be called
a real drive for new business ?
Mr. Stevenson. Yes,
Mr. Gesell. Will you tell us a little about it ?
Mr. Ste\tenson. As related to my own specific operations of an
agency, or in relation to the company ?
Mr. Gesell. Either way — in relation to the company^ preferably,
Mr. Stevenson. We have had drives at different tynes to honor
some special officer, and I haven't any objection to that.
CONCENTRATION OF ECONOMIC POWER 14783
Mr. Gesell. I am talking about a sustained drive.
Mr. Stevenson. You mean
Mr. Gesell (interp infr). One where increase in size of the
company through the iaition of new business is more important
than the questions of risk, selection, perhaps and distribution of
policies among classes of policyholders, and matters of that sort.
Mr. Stevenson. Yes ; I think that we have had. As I look in retro-
spect from '20 to probably '31, I suspect that in that period
we had a number of drives. Our eye was on increasing our new
business each year. We constantly had the quality of insurance, the
kind of insurance we were putting on the books in mind, but I suspect
that our company was sort of in the spirit of the time, and entered
into competition for substantial increases.
Mr. Gesell, Now such competition has serious dangers, does it not?
Mr. Stevenson. It is probable. Let me confine any criticism that
I may have to my own company.
Mr. Gesell. I certainly think that it is fair.
Mr. Stevenson. When our objective seemed to be for increase of
new business in force, our underwriting departments selected indi-
vidual cases just as well as they do today, but in order to encourage
a larger volume we did increase our limits of insurance that we would
permit on a single life, we did encourage the bringing in of larger
policies, and we likewise encouraged agents other than our full-time
agents to bring us business. Those are three things that in retrospect
I might criticize our company for doing.
Mr. Gesell. Now, that was because you were really out after
putting business on the books, is that right ?
Mr. Stevbnson. Yes ; that is right.
Mr. Gesell. What are the results of such emphasis in terms of com-
pany management? It results first of all, does it not, in the selection
of a poorer grade of risk ? You couldn't be as careful about the type
of risk you are going to take when you are trying to put business on
the books. Is that true?
Mr. Stevenson. That, sir, cannot be answered by yes or no. I
-would say, if the energies of the company are directed toward in-
crease in business, we have all kinds of, probably all varieties of risk
submitted to us, and no matter how well an underwriting depart-
ment that selects the risks operates, if it has a variety or a lot of
business of a borderline type, it doesn't select the risk as well as if it
were having submitted to it from the field a little higher type of risk.
Mr, Gesell. In other words, the more the emphasis upon growth
for growth's sake, the more apt the company is to fall into errors
in the selection of cases?
Mr, Stevenson. If we mean by gnowth for growth's sake that you
do not exercise the sarne kind of control in getting a quality busi-
ness that you did before, that would be the logical assumption, sir.
Mr. Gesell, It is the inevitable result, wouldn't it be, of too great
emphasis of growth for growth's sake that you would have to aban-
don standards?
Mr, Stevenson. That is, if you mean growth for ^owth's sake,
that it is the motivating purpose of management.
Mr, Gesell, Other than in the case of mortality, where else does
the company suffer? Can it give as good service? I don't mean by
14784 CONCENTRATION OF ECONOMIC POWER
that, meeting claims; I am talking about the services incidental to
the holding of the policyholder company.
Mr. Stevenson. I believe that the company would be always mind-
ful of giving good service. My observation of my own company
would be that there is no diminution of the service, whether we are
terrifically active for new business or not,
Mr. Gesell. Wliat else would be the effect of emphasis upon
growth for growth's sake? Would there be any other place where the
management of the company might suffer?
Mr. Stevenson. No; there may be others. I have tried to specu-
late on some of those things. I am not so sure but what we haven't
mentioned most of them, sir.
Mr. Henderson. I have one more collateral question in the series
I was asking you. Is there any difficulty that a smaller company,
one of the small companies, has in maintaining just as sound an in-
surance service as the big ones?
Mr. Stevenson. I would say it is just as important for small com-
panies to render as excellent service as the large companies. I pre-
sume there might be a very small size that might be a little difficult,
but my observation has been that the question of size has little to do
with service. The main factor is the quality of management, whether
big or small.
Mr. Henderson. When you say "service," you include protection?
You mean the integrity of the policy commitment ?
Mr. Stevenson. Yes.
Mr. Henderson. I think that this exhibit ^ will support you in that.
I think by the time this committee has got through-^ —
Mr. Stevenson (interposing). There is one theory always. It is
not my own, but it is a theory that a company should be sufficiently
large that the operation of averages can take place in relation to all
of" its activities, mortality, investments, and probably management
in the* home office.
Mr. Gesell. You feel you have reached that certainly now, don't
you? You are big enough for the law of averages to work in your
favor, aren't you?
Mr. Stevenson. Yes; what we are interested in is for the law of
averages to operate. We feel that a company of our size is suffi-
ciently large to operate on the basis of averages.
Mr. Henderson. Let me ask you this : You have had quite a bit to do
with the junior personnel, junior executives, over a long period of
time, as I recall you by reputation. That was one of your special
emphases. Are there many men in the junior-executive positions row
of life-insurance companies who are qualified to run insur "je
companies ?
Mr. Stevenson. There are in the Penn Mutual, and that is all that
I would know enough about to comment on.
The Chairman. You have a pretty good notion, do you not, that
the men who are in the life-insurance business throughout the coun-
try are all of pretty high standard?
Mr. Stevenson. I do, sir.
The Chairman. And that it is j)robably just as easy to get good
executives out of this army, I might say, of insurance agents and
executives now as it ever was, if not more, possibly.
> Ilearings, Part. 10-A.
CONCENTRATION OF ECONOMIC POWE"R 14785
- Mr. Stevenson. I would have to answer that the standard and
the abilities are far greater. It has been increasing materially in
my experience of 20 years, and, not to sidetrack or evade your answer,
my guess . is that in every single large life-insurance company in
America there are a number of junior executives that are perfectly
capable. I do not know that; I think it. I know it in the Penn
Mutual.
The Chairman! Most of those executives come up from the bottom,
do they not?
Mr. Stevenson. The general trend today in selection of manage-
ment for life-insurance companies is to select those who have had
experience in running or managing certain phases of life insurance.
The trend is toward picking for management people thoroughly
sophisticated in all branches or in some special branch of life
insurance.
The Chaerman. When you say that is the trend, do you mean to
imply that it was not the practice in the past ?
Mr. Stev'enson. I think in the past there may have been instances
where it seemed probably very advisable from the company's point
of view at that particular period to place in the headship of the
company someone other than one who came up through the organiza-
tion, and it was perfectly proper to do it in those days. In my
judgment, the demand today is for people who know life insurance
because the insurance problems are much greater today.
The Chairman. The management of life insurance companies is
becoming more and more the job of an expert and the experts are to
be found among those who have been trained in the business?
Mr. Stevenson. The job of running a life-insurance company today
is the job of an expert in insurance operation^. That is fundamental
in my way of thinking, sir.
The Chairman. Are there any other questions?
Mr. Gesell. I have no further questions. If the committee will
permit my arranging for Mr. Stevenson to submit a memorandum ^
on one or two technical matters we were going to cover, I think we
can excuse him at this time.
The Chairman. Will you indicate what the technical matters are?
Mr. Gesell. The question of proper pricing of policies which is a
matter we were going to discuss at some length would be covered by
the memorandum ^ and also reference to some of the technics which
have been used in the case of Penn Mutual in recent years to bring
some check against over-expansion of business.
The Chairman. You will recall the suggestion that was made by
Senator White this morning, that we should be very cautious about
admitting statements for the record which are not to be covered by
examination on behalf of the comiuittee.
Mr. Gesell. Those are two matters tvhich are in the outline here.
We can proceed with tliem after luncheon.
The Chairman. Before ruling on the matter, I should like to have
you, if you will, outlin^ the type of memorandum to Senator White.
Mr. Gesell. I will.
The memorandum can be submitted subject to the approval of the
committee.
^ Mr. Stevenson, under date of February 29, 1940, submitted the information requested.
It is included in the appendix on p. 15626.
14786 CONCENTRATION OF ECONOMIC POWER
The Chairman. And we will talk it over with Senator White this
afternoon.
Are there any other questions to be asked of Mr. Stevenson by any
members of the committee?
Mr. Stevenson is not to come back then ?
Mr. Gesell. No.
The Chaikman. Mr. Stevenson, may I, on behalf of the committee,
tell you how much we appreciate your generous cooperation and the
frankness with which you have answered all our questions.
Mr. Stevenson. I thank you, sir.
The Chairman. The committee will stand in recess until 2 o'clock.
(Whereupon, at 12 : 35 p. m., a recess was taken until 2 p. m. of
the same day.)
AITERNOON SESSION
The committee resumed at 2 : 15 p. m. on the expiration of the
recess.
The Chairman. The committee will please come to order. You
nay proceed.
Mr. GeseUj. The witness this afternoon is Mr. Howe. I might
ay, if the committee please, that Mr. Howe will devote the afternoon
o an explanation and discussion of "Exhibit No. 2250," ^ that is the
3ig blue statistical analysis, and since some of the matters are some-
what technical, and we have a great deal of ground to coyer, Mr.
Howe will make his own presentation without questions fi-om me,
and the committee can interrupt whenever there is some point that
they would like to have illuminated.
The Chairman. Without objection, that will be quite satisfactory.
The Chair will say it will probably be necessary for him to leave
very shortly because the Senate is now discussing the increased capi-
talization of the Export-Import Bank, frequently called the Finnish
loan, and we are under limitation of -debate beginning at 3 o'clock,
and there will be a vote at 5, so it will probably be necessary for me
to bo there.
TESTIMONY OF ERNEST HOWE, CHIEF, FINANCIAI ADVISER TO
THE INSURANCE SECTION, SECURITIES AND EXCH.i>'TGE COM-
MISSION—Resumed
Mr. Gesell. I believe your discussion starts, Mr. Howe, with a dis-
cussion of certain accounting practices in the insurance business, and
an explanation of some of the terms that are used in these tables?
Mr. Howe. That is correct, Mr. Gesell. This set of tables, it should
be remarked, is a very great condensation, perhaps even an over-
condensation, of the figures which insurance companies report in their
annual statements. An understanding of what is in here may be
gained from the fact that really there are only about 275 figures in
this book, multiplied by 10 years, multiplied by 26 companies. That
comes to something over 70,000 figures in all, but it shows the extent
to which this may be regarded as an oversimplification. Just by
comparison, in size [displaying document] is the annual statement of
the Metropolitan Life Insurance Co. for 1938, which I estimate,
roughly, without trying to count them, contains something like 50,000
. ^Hearings, Paii 10-A.
CONCENTKATION OF ECONOMIC POWER 14787
-figures for that one year. So that the committee will imderstand that
this is a great condensation, and that a complete qualification of
every figure which is in here is impossible.
Mr. Henderson. Is that the Convention Form ?
Mr. Howe. Yes; this is the Convention Form of annual statement
which is filled by the companies in the several States in which they
do business. This happens to be the one which I believe the Metro-
politan files with the State of New York. I simply show the size of
these reports in order to emphasize the complications of the problem.
Now, in order to avoid misinterpretation of some of this informa-
tion, it seemed desirable to start with a very brief and oversimplified
statement with respect to insurance accounting, because after all,
most of these figures tie into insurance accounts.
It should be emphasized that accounting methods in annual state-
ments of life insurance companies as prepared in the United States
are entirely different from those employed by commercial enterprises
in the United States and vary, even, from statements of life insur-
ance companies elsewhere in the world. Full double-entrv bookkeep-
ing, for insfence, has not yet come into fashion for life insurance
companies and the great bulk of the liabilities of the companies do
not come into the books of account at all.
Mr. Henderson. Mr. Howe, do you want this committee to under-
stand that the great bulk of the liabilities for which the couipanieg
are responsible do not come into the books at all?
Mr. Howe. That is, not into the books of account. They are
naturally matters of record but do not come into the books of account
and are not subject to accounting control — into the control accounts
in the extent and manner that they do in an ordinary commercial
enterprise.
Mr. Gesell. You mean they are computed at the end of the year
or at various intervals? You cannot tell as you go along what the
various liabilities are?
Mr. Howe. That is right. They are not posted as they go along.
They are inventoried at whatever period the company wishes to pre-
pare statements for their internal or external use.
Double-entry is used for the niajor portion of the assets, but for
the remainder of the assets and for the liabilities, single-entry book-
Iceeping is usual. The basic principles of the accounting system or
the annual atement were adopted about 1875, and have not been
fundamentally changed since that time. It is perhaps easiest to
understand the method employed by starting with the Statement of
Assets and Liabilities, Surplus, and Other Funds, which is the life
insurance substitute for a balance sheet. The asset side of the state-
ment is divided into three parts. The first of these is Ledger Assets ;
the second, Non-Ledger Assets; and the third is headed "Deduct
Assets Not Admitted."
Ledger assets, generally speaking, represent the cash and invest-
ments on hand at the date of the statement. The investment assets
are stated at book values which are not necessarily actual values or
values which the companies will use in arriving at the final balance
sheet values.
Among the investment assets are include'^ policy loans which, of
course, are technically not assets at all but merely a deduction from
the liabilities.
14788 CONCENTRATION OF ECONOMIC POWER
Non-ledger assets are those assets not taken into the accounts of
the insurance companies but simply inventoried at the end of the
period and added to ledger assets. Non-ledger assets are principally
due and" deferred net premiums (which would be more properly
treated as a deduction from liabilities) due and accrued interest on
bonds, mortgages, premium notes and bank deposits, accrued rents,
and so forth. In other words, they are the accrued items on the
balance sheet which are added all in a lump instead of being allo-
cated to the particular account to which they apply, as they would
be in ordinary commercial accounting.
However, to these accrued items is added any unrealized apprecia-
tion of which the company may wish to take account among its assets.
This unrealized appreciation is designated principally as market value
of real estate over book value, and market value of stocks over book
value.
Mr. Henderson. Do they get into the books of account ?
Mr. Howe. No ; they don't get into the books of account.
Mr. Henderson. If this unrealized appreciation does not get into
the books of account, it doesn't get into the balance sheet ?
Mr. Howe. Oh, it gets into the balance sheet if there is such an item
with respect to the company, but it is adde8l,to the ledger assets in this
arrangement where they add the ledger assets, the nonledger assets,
and then deduct the not admitted assets. It doesn't get into the books
of account. It gets into the balance sheet. You have to distinguish
all the time between what gets into the balance sheet and what gets
into the books of account.
Assets not admitted : These are the assets which are deducted from
the total of the ledger and nonledger assets, that is, in arriving at the
total on the balance sheet. They included principally any of the com-
pany's stock owned or loaned on, supplies, stationery, printed matter,
furniture and" fixtures, agents' balances — that is, any money which is
owed by agents to the company — and cash in suspended banks. In
terms of amounts involved, however, the principal items classified as
assets not admitted are valuation accounts by means of which insur-
ance companies show the excess of book or ledger value of bonds over
investment value, the excess of the book value of stocks over market,
and overdue interest considered uncollectible, so by the process of
starting out with the book values, adding the accruals and then de-
ducting the unrealized depreciation to: oversimplify the process, you
arrive at a statement of a total admitted asset figure which represents
the total asFots of the corporation.
Mr. Henderson. Whet is the custom with other financial institu-
tions, Mr. Howe, in the treatment of those items?
Mr. Howe. In ordinary institutions the net value is put right into
the accounts and when you see "accounts receivable" that figure is the
amount which the corporation expects to collect on its accounts receiy-
able. It may be less than the total amount owing to the corporation,
but the portion of the amount owing to the corporation which they
expect to collect will be designated as accounts receivable.
In this case the gross amount would first be stated and later, lower
down in the balance sheet, a deduction would be made.
Mr. Henderson. Now, take an investment trust — I don't know
whether or not you are familiar with this — take an investment trust or
an investment banking corporation, or any other type of financial
CONCENTRATION OF ECONOMIC POWER 14789
institutions which have securities, is it customary to treat their ap-
preciations in value annually and take them into the books of account,
and thence into the balance sheet ?
Mr. Howe. There is very little standardization of accounting there,
but the statements which I have examined for the most part show
securities at cost and the balance sheet carries a supplementary line
which shows the market value of the securities at the end of the year,
Mr. Henderson. Is that in a footnote ?
Mr. Howe. Frequently it is ; yes.
Mr. Henderson. So that it doesn't come into the assets vis-a-vis the
liability statement?
Mr. Howe. That is right.
It is interesting to note that under the present system of accounts
used by life-insurance companies, there are eight different ledger and
nonledger accounts which affect the valuation of assets.
The sum of the ledger assets, plus the nonledger assets, less the
assets not admitted, gives the figure of the so-called admitted assets of
the company. Therefore, when we speak of the admitted asset value
of a given bond, mortgage, or piece of real estate, we mean that value
at which such bond, mortgage, or piece of real estate is ultimately
stated in the total assets of that company computed as stated above.
The liabilities of life-insurance companies are mostly policy reserves.
These are computed whenever a statement is to be made up by the
actuarial department. They reflect, within an important latitude,
the opinions of management. Other liabilities, for the most part, are
also inventoried at annual statement time and are not necessarily sub-
jected, as are the liabilities of commercial enterprises, to accounting
control. After the liabilities have been thus computed, the balance
which remains is surplus, or may be characterized in whole or in part
as general or special contingency reserves.
Mr. i^ENDERSON. Let me see if I understand that. Computing the
liabilities, the actuary presumably would either take all the policies
and undertake to compute the reserve necessary for that?
Mr. Howe. Yes. :
Mr. Henderson. Did I understand you to say that an element of
managerial judgment other than the actuary comes into that'.?
Mr. Howe. Well, there is a degree of managerial judgment in-
volved in the actuarial determination of the amount of the reserves.
Now, whether there is a degree of other manageriaj judgment
brought to bear on that fact is something I am not in position to say.
Certainly there is an element of judgment involved.
Ml-. Henderson. After that liability has been computed, then the
difference between tliat liability and the value of the admitted assets
is the surplus account?
Mr. Howe. That is right. That is true in the case of a mutual
company. Of course, in a stock company it would be capital.
The second important statement issued by life insurance com-
panies is designated "Income and Disbursements." We had a sched-
ule for that, or rather a chart for that, yesterday.^ This statement
is not a commercial income statement in any sense of the word. The
income statements of commercial businesses take into account all
changes in assets and all changes in liabilities which affect net worth.
^See "Exhibit No. 2267,' suprn.-p. 147i4.
14790 CONCENTRATION OF ECONOMIC POWER
The income and disbursement statement of life insurance com-
panies takes into account only the changes in the accounts which are
handled by double-entry bookkeeping, that is, the so-called ledger
assets, and takes no account whatsoever of nonled^er assets, not ad-
mitted assets, or the most important liabilities. It is not a full state-
ment of cash receipts and cash disbursements. Funds expended for
the purchase of other ledger assets (such for instance as the pur-
chase of a million dollars of bonds) are not accounted for in this
statement in any way, and funds received from the sale of ledger
assets are accounted for in the schedule of income and disbursements
only to the extent of the difference between the book value of ledger
assets sold and the consideration received.
The Chairman. What accounting is there of such items?
Mr. Howe. Senator, when a million dollars is spent for a million
dollars of bonds, it does not change the total of the investment assets
of the company, and on that theory, I suppose, those items are not
included in any way in the schedule of income and disbursements.
Mr. Gesell. They do appear in other schedules contained in the
Convention Form statement, do they not ?
Mr. Howe. The amount of money which is spent annually for the
purchase of investments is nowhere scheduled in the balance sheet,
statement of income and disbursements, or Gain and Loss Exhibit.
The Chairman. But it is obtainable from scrutinizing of the books?
Mr. HowB. Of the two balance sheets from year to year or from
an examination of the schedules supporting the Convention Form.
You dan see the net result of what has happened but you cannot see
the turn-over which may have occurred, from the balance sheet. It
is perfectly possible that on February 1, the company would buy a
million dollars worth of Government bonds, short-term Government
bonds, that those bonds would mature or be redeemed in November,
in which case no trace of them would appear in the two balance sheets.
The Chairman. The totals are available? The asset values are
available?
Mr. Howe. They are.
The Chairman. And upon scrutiny these details of which you
speak, which do not appear in the income and disbursement state-
ment, are also available?
Mr. Howe. Well, some of them are. Senator. That is a very broad
question indeed. You cannot tell from these statements the turnover
of assets during the year.
The Chairman. You are speaking now then of what is to be de-
duced from these statements themselves.
Mr.^IowE. That is correct.
Now, in this book ^ that we referred to yesterday, we spoke of the
funda available for investments and the gross investments made.
Those are the figures which reflect 3 turn-over of assets during the
year. They do not appear in the income and disbursements state-
ment, but are included only in the voluminous detail of the support-
ing schedules.
In years in which there is a large change in the amount of policy
loans outstanding, the balance of income over disbursements may be
extremely misleading as to the cash position of the company. In other
* Hearings, Part 10-A.
CONCENTRATION OF ECONOMIC POWER 14791
words, increase in the amount of policy loans will not be reflected
anywhere in the schedule of income and disbursements, so that when
one looks at income in comparison with disbursements, if he is think-
ing of it as a cash statement by the extent of the drain for policy
loans which may or may not have occurred during the year, he will
be misled by those totals.
No profit or loss is experienced when policy loans expand, and as
*the accounts are set up, the income and disbursements schedule does
not reflect even to the slightest degree the very heavy demands which
from time to time have been made upon life-insurance companies for
cash for policy loans.
As a cash statement, therefore, the scehdule of income and disburse-
ments is practically valueless. Even as a statement of change in
total assets from year to year, it is subject to the serious limitation
that it does not include all assets nor does it exclude those assets and
valuation accounts which the balance sheet classifies as not admitted.
Taking practically no account whatsoever of liabilities (except such
liabilities as borrowed money, the receipt of which affects ledger
assets) it has no value whatsoever as an ordinary income account
showing the annual gains or losses of the business.
In a paper presented before the American Institute of Actuaries,
Mr. C. O. Shepherd, associate actuary of Travelers Insurance Co.,
said [reading] :
The True Income statement does riot necessarily imply a complete change in
the method of company books.
The Convention Form contains its own confession of inadequacy ; at least
it seems a fair conclusion that the weakness of the income and disbursements
schedules was one of the causes of the introduction of the Gain and Loss
Exhibit ♦ * * in 1895 ♦ ♦ * The changes in surplus schedule intro-
duced in 1925 may be regarded as a further effort to bolster up tbe defective
income and disbursements schedules.
In discussing nonledger assets, Mr. Joseph B. Maclean, associate
actuary, the Mutual Life Insurance Co. of New York, in the fifth
edition of his book. Life Insurance, makes the following statement
regarding the income and disbursement schedule [reading] :
The true financial position of a life insurance company, or indeed of any
company, cannot be shown by such a cash-basis statement'
What he means by "cash basis" is in that case, I take it, a cash basis
as distinguished from an accrual basis, which takes into account the
accruing interest and the accruing premiums and all that sort of
thing. [Reading further:]
It; would be possible to prepare the whole of the statement, including the
inooirie and disbursements, on a revenue ba?is. *•>••»
as ordinary commercial accounts are prepared.
I continue the quotation [reading further] :
It is peculiar th;it * * * no separate Information is given in respect to
premiums for group insurance or for industrial insurance.
Mr. Victor Roy Smith, M. A., associate of the Institute of Actuaries,
a British organization, and associate of the Actuarial Society of the
United States, and a fellow of the American Institute of Actuaries,
and at the time he made the following statement then president of
^ Life Insurance, p. 305.
^ Ibid., p. 306.
14792 CONCENTRATION OF ECONOMIC POWER
the American Institute of Actuaries, in his address by the president
made in October 1937, has this.to say [reading] :
In short, there does not appear to be any single question of importance which
the man on the street could ask about the profits of a life insurance company
to which the income and disbursements statement would not give an incomplete,
If not incorrect, answer or no answer at all.
The Chairman. What is the opinion of other actuaries, if you know,
with respect to this matter ?
Mr. Howe. The literature that I have perused, which has been some-
what extensive on this subject, would lead to the belief that there is
an almost complete unanimity of opinion that the schedule of income
and disbursements is su „j^.. ' le to great misinterpretation by those
who are not thoroughly familiar with it.
The Chairman. You have read to us quotations from numerous
insurance experts who take the same view as you have taken. Have
you run across any statements by other experts made at the same or
other times, which take the contrary view ?
Mr. Howe. I have not found a single one, Senator.
About 1895, some need was felt for something which approaches a
commercial profit and loss account, that is an account which takes into
consideration not only the changes of a part of the assets, but the
change in all of the assets and the changes in all of the liabilities.
This appeared in the form of an exhibit which is now known as the
Gain and Loss exhibit. After about 10 years, and after the Arm-
strong investigation in New York, the Gain and Loss exhibit was
generally adopted. The Gain and Loss exhibit was the first official
attempt in insurance accounting to provide a rough substitute for
an ordinary profit-and-loss statement taking account of the changes
of ledger assets, nonledger assets, not admitted assets, and liabilities
during the year.
Instead of setting up a statement, however, patterned on commercial
accounting procedure, the Gain and Loss exhibit was built around an
actuarial analysis of the business. A large part of its usefulness is lost
due to the fact that the classification of items is not as detailed as
the income-and-disbursements statement, and because the actuarial
analysis requires for its interpretation much information nowhere
available in the annual statement.
With reference to the Gain and Loss Exhibit, Mr. Maclean writes
as follows in his book [reading] :
No part of the convention blank is more subject to misunderstanding * ♦ ♦
than the gain and loss exhibit.^
A further defect in the form is that it does not show the gains or losses in
surplus on different classes of business. * * * '
Mr. C. O. Shepherd in his paper comments as follows on the same
exhibit [reading] :
♦ * * the Gain and Loss Exhibit ♦ * * is shown to consist of two
parts : one a pure accounting analysis made indispensible by the inherent weak-
ness of the Income and Disbursement schedule ; the other a supplemental actu-
arial analysis.
Then he comments on the actuarial feature of the exhibit when
he says:
The Gain and- Loss Exhibit in its actuarial analysis is a budget of i86r<.
^ Life Insurance, p. 329.
* Ibid., p. 337.
CONCENTRATION OF ECONOMIC POWER 14793
The first actuarial comparison which the Gain and Loss Exhibit
displays is referred to as "gain or loss from loading." Each life in-
surance premium is based upon a so-called net premium computed on
an annual rate of interest and on a certain stated mortality table —
mostly, as Mr. Stevenson explained this morning,^ the American
Experience Table which was prepared for 1868.
To this net premium is added a sum which is known as "loading."
The total of the net premium plus loading is the gross premium
charged the policyholder. The items on the Gain and Loss Exhibit
entitled "Gain or loss from loading" is the difference between the
actual expenses of operation (other than investment expenses) and
the aggregate loading in the premiums received or accrued during the
year.
The second item of importance is the "Gain or loss from mortality."
This is usually a large figure because of the fact that the mortality
contemplated by the American Experience Table is substantially in
excess of the mortality currently being experienced by American life-
insurance companies. As life-insurance companies often use the
modern mortality tables in the calculation of their net premium rather
than the American Experience Table which is generally used in de-
termining contractual reserves and in computing the Gain and Loss
Exhibit, the gain or loss from loading, therefore, and the gain from
mortality are often more appropriately considered as an algebraic
sum rather than as two separate items. This is especially true in the
case of nonparticipating companies.
The third important item of the gain and loss exhibit is desig-
nated the "gain or loss during the year from surrendered, lapsed,
and changed policies." This 'is the aggregate of the reserves on
policies, lapsed, surrendered, or changed during the year, less the sur-
render values paid. In cases of companies which use the full level
premium reserve (which is the principal method of reserve calcula-
tion used by the 26 companies under special consideration) first year
expenses are such that in order to set up the statutory reserve in the
first policy year, a deduction from surplus is experienced. There-
fore, an undeterminable portion of the gain from surrenders is occa-
sioned by a return to surplus. of funds previously appropriated there-
from. Although it is undeniably true that in most cases companies
experience a real gain from lapsed and surrendered policies, the
method of accounting pursued by the companies is such that the
amount of such gain cannot be determined with any degree of ac-
curacy from the gain and loss exhibit.
One of the features of the gain and loss exhibit is the relation of
interest earned on investments to interest required to maintain re-
serves. The balance of interest earned in excess of the amount re-
quired to maintain i:eserves is referred to as "gain from interest."
The gain and loss exhibit also shows the gain or loss from sales of
bonds, stocks, and real estate, and the gain or loss occasioned from
adjustments in value thereof which the company may elect to make.
Another important item of information to be gained from the
gain or loss exhibit of some companies, and not from the gain and
loss exhibit of others, is the gain or loss due to increase in reserves
by reason of change in the basis of calculation. That sounds tech-
nical, but in brief, it is the amount which companies have added to
' Supra, p. 14769.
14794 CONCENTRATION OF ECONOMIC POWER
their reserves in order to strengthen them. It is a reflection — or the
amount of that increase is a reflection — of the conservatism of the
actuarial department in determining these reserves, and in increasing
them from time to time.
A final nondescript item of the gain and loss exhibit is -entitled
"Increase or decrease in special funds and special reserves." These
special reserves are sometimes reserves intended to supplement policy
reserves. Sometimes they are for asset losses unaccounted for on
the asset side of the statement, and sometimes they are merely an arbi-
trary earmarking of surplus. It is to be noted that increases or de-
creases in these so-called special reserves or funds usually include in-
creases or decreases in liability accounts for estimated taxes, unpaid
items of expense, and feo forth. The lack of any clear distinction
between various classes of special reserves or funds is one of the
great weaknesses of the gain and loss exhibit. Without an accurate
knowledge of the purposes of these funds, a proper injterpretation
of the year's operating results is impossible.
The algebraic sum of the above amounts and other items gives the
amount of gains from the year's operations available for distribution
as dividends to policyholders and stockholders.
One of the great shortcomings of the Gain and Loss Exhibit is that
it gives only the haziest impression of the operating results of the
various lines of business in which life-insurance companies are en-
gaged. The need for information of this type was apparently not
sufficiently f' It until 1925, when the Exhibit of the Changes in Surplus
was insertec in the Convention Form. This exhibit, which has been
familiarly referred to as the "Jackass Exhibit," was the result of an
obvious need but was very poorly constructed. The main part .of the
exhibit is simply a division by lines of business of the information
itemized in much greater detail in the statement of income and dis-
bursements.- After arriving at a figure of excess of income over dis-
bursements for each line of business, it successfully avoids a great
opportunity to be useful by classifying all other items under the
headings: "Increase in nonledger assets," "Increase in nonadmitted
assets,' and "Increase in liability." This results in an estimate of
operating earnings but leaves the reader almost entirely in the dark
as to the method of allocation which has been adopted as between
lines of business in regard to asset lossses and in regard to the im-
portant matter of the strengthening of reserves by change in basis.
This exhibit also produces the interesting effect of a statement most of
the items of which are on a cash basis and the end-product of which
is stated on a revenue or accrual basis.
In his paper Mr. C. O. Shepherd has this to say about the Exhibit
of Changes in Surplus [reading] :
The exhibit is unsatisfactory because it explains the sources of gains and
losses only to the extent they are covered by income and disbursements, * * *
the trouble is that income and disbursements do not furnish the information that
is significant and pertinent in a financial statement.
In 1939 a new Gain and Loss Exhibit was adopted. It is patterned
more or less on the Exhibit of Changes in Surplus and all items are
put on a revenue basis. This statement has the important disad-
vantage that it is impossible under ordinary circumstances to reconcile
the figuries contained therein with the elaborate, if inconsistent, classi-
CONCENTRATION OF ECONOMIC POWER 14795
fication of accounts shown in the income and disbursements statement.
Furthermore, the statement omits data with reference to the allocation
of losses by lines of business, leaving the reader entirely at sea as to
the method of allocation of this important item, which, however dif-
ficult, is inescapably necessary in order to analyze the company's
dividend policy with respect to its various lines of business.
A few examples of a very simple sort wall serve to illustrate the
unwieldy and mconsistent character of the information in the Con-
vention Statement. For example, with respect to ordinary business,
premium income is divided between first year and renewal-premium
income. No classification, however, is given of single-premium poli-
cies. In the case of industrial insurance, premium income is not even
classified as first year and renewal. The policy exhibits showing the
amount of insurance in force at the beginning and end of the year and
the various changes throughout the year are given in considerable
detail for ordinary and industrial insurance. This exhibit shows both
the number of policies and the amounts of insurance in force. "When
we turn to group life insurance, however, figures given apply only
to the master policies in force and only a few companies gratuitously
give figures on the number of certificates, that is, actual individual
policyholders under group contracts. This makes it impossible from
the figures to determine the relatively high lapsation experienced
among group certificate holders.
With respect to group annuities, however, both master contracts
and certificateholderg are given.
It was not until 1935, 2 years after the first-year premium income
from individual annuities exceeded the aggregate first-year premium
income from ordinary insurance, that a policy exhibit of individual
annuities was included in the convention form.
Mr.' Henderson. Will you say that again, please?
Mr. Howe. It was not until 1935, 2 years after the first-year pre-
mium income from individual annuities exceeded the aggregate first-
year premium income from ordinary insurance, that a policy exhibit
of individual annuities was included in the convention form.
(Representative Williams assumed the chair.)
Mr. Howe. Confusion of life insurance company annual statements
is not only contributed to by the archaic accounting system and the
ponderous nature of the accounts but is rendered still more difficult by
reason of the fact that there is little standard of accounting within
the business, and different companies may adopt accounting practices
so significantly different as to render comparison extremely difficult
if not impossible.
It is certainly not too much to say that the comparative interpreta-
tion of insurance accounts by anyone but careful students is likely to
lead to nothing but confusion. An example of the differences which
may be found in insurance company operating statements is clearly
indicated by the case of the one company in 1936. In that year that
company was required to prepare four different Gain and Loss Ex-
hibits based upon four different sets of regulations from four different
States. It is interesting to compare the Gain and Loss Exhibit as
prepared in accordance with the regulations of the State of New
York "With the Gain and Loss Exhibit prepared in accordance with the
regulations of the Commonwealth of Massachusetts, The gain from
14796 CONCENTRATION OF ECONOMIC POWER
interest, for instance, sho\Yn in the Massachusetts statement was
$2,470,000. In the New York statement it was $1,251,000.
One could go on at great. length on this subject of accounts. In the
schedule of income and disbursements, which was shown yesterday,^ an
ordinary person looking at death claims would think that the $7,000,-
000,000 shown there was actually disbursed by the companies in the
payment of death claims. That is not correct. Those death claims
were incurred, but a substantial proportion of that liability is being
discharged under supplementary contracts. ,
Mr. Henderson. They are taking that out in trade ?
Mr. Howe. That is right. They are paying that out over a long
period of time, so that as an aggregate amount of money disbursed
the income and disbursements statement overstates death claims by
over $2,000,000;000.
Mr. Gesell. Those payments are made in accordance with the terms
of the contract?
Mr. HdwE. Oh, entirely. I am simply stating the manner in which
the ordinary individual who is not informed of these facts, seeing what
is alleged to be a cash statement, might misinterpret it.
Another factor which it seems desirable for the committee to be very
briefly informed about prior to the examination of the specific figures
are a few broad impressions of the various investment statutes in the
different States undei; which these companies operate.
Mr. Gesell. Just a moment.
Mr. Henderson. Mr Gesell and members of the committee, the
chairman feels that he has to leave to be in the. Senate, and I would
suggest that we suspend at this time, if the chairman can be here
tomorrow, particularly if we could start early, rather than go forward
without this technical analysis.
(Senator O'Mahoney resumed the chair.)
The Chairman. Did I overhear you suggesting that we might re-
cess at an earlier hour this afternoon ?
Mr. Henderson. I took occasion • in your absence to say very
earnestly that I would much rather try to catch up the time while
you are here than to go forward now.
If I could ask just one or two questions: In order to make very
clear the nature of your remarks on accounting, you are addressing
yourself principally to the great difference that exists between ac-
counting in insurance companies and other more uniform and stand-
ardized types of accounting in other types of enterprise. Isn't that
correct ?
Mr. Howe. Or more usual types. I don't think the other is entirely
standardized either.
Mr. Henderson. I say "more standardized."
Mr. Howe. More usual than this.
Mr. Henderson. And while the convention form may serve a num-
ber of purposes in the peculiar set-up of insurance, the policyholder
or a layman undertaking to read a financial statement would be seri-
ously bewildered.
Mr. Howe. I believe that is a fair statement.
1 "Exhibit No. 2257," eupra, p. 14714.
CONCENTRATION OF ECONOMIC POWER 14797
The Chairman. Wouldn't the ordinary layman be bewildered in
examining almost any statement?
Mr. Howe. That may be true, Senator, but I think you will find
that our commercial accounts are understood pretty well by a, very
large number of people who would be likely to be misled by insur-
ance accounts unless they gave them very careful study.
Mr. Gesell. This presentation, of course, is quite without regard
to anything else. It is a way of explaining what these various fig-
ures are, since we have used the captions used by the insurance indus-
try in its books of accounts.
The Chairman. I think that is already made clear by what Mr.
Howe has said. I merely remarked, because I think the testimony
before this committee in other hearings has demonstrated that, as
Mr. Howe has just said, there is really no standard system of ac-
counting, and I feel that accounting systems for other great corpora-
tions might also be improved ; if submitted to analysis they might be
open to similar criticism.
Mr. Henderson. Mr. Chairman, I was going to remark on that. I
am not suggesting for one minute that insurance companies ought to be
brought within the accounting requirements of the S. E. C. in the
filing of statements. They are excluded at the present time. But
I do want to say that pretty generally we are w^alking up the ladder
rather fast on the matter of standardization of terminology and usages
in accounting.
The Chairman. The purpose of this preliminary technical expla-
nation, as I understand it, is to make more clear to the members of
the committee the analysis of the investment accounts and the finan-
cial accounts that will later come?
Mr. Howe. That is correct, Senator, and to, as far as possible,
guard against the misinterpretation of figures which might seem to
mean something on a printed page which do not actually carry the
meaning which they might seem to indicate to a layman.
The Chairman. Are there any other questions?
Then, following the suggestion of Commissioner Henderson, the
committee will stand in recess until
Mr. Gesell (interposing). I would like it 10 o'clock, if possible.
The Chairman. If there is no objection, we will recess until 10
o'clock in the morning.
(Whereupon, at 3 : 05 p. m., a recess was taken until Wednesday,
February 14, 1940, at 10 a. m.)
124491— 41— pt. 2S
INVESTIGATION OF CONCENTEATION OF ECONOMIC POWER
WEDNESDAY, FEBRTTABY 14, 1940
United States Senate,
Temporary National Economic CoMMirrEE,
Washington, D. C.
The committee met at 10:20 a. m., pursuant to adjournment on
Tuesday, February 13, 1940, in the Caucus Room, Senate Office Build-
ing, Senator Joseph C. CMahoneyt presiding.
Present: Senators O'Mahoney (chainnan), and White; Repre-
sentative Williams; Messrs. Henderson, Lubin, Pike, Kades, and
Brackctt.
Present also: James V. Hayes, Department of Justice; Ernest
Palmer, Commissioner of Insurance, State of Illinois; Gerhard A.
Gresell, special counsel; Ernest Howe, chief financial adviser; and
Helmer Johnson, attorney, Securities and Exchange Commission.
The Chairman. The committee will please come to order.
The Chair is advised, that the Government Printing Office is now
at work on the publication of this exhibit, which has oeen presented
to the committee, "Exhibit No. 2250."^ It is the report of fhe
8. E. C. on operating results and investments of the 26 largest legal
reserve life insurance companies of the United States for 1929 to
1938. This will be printed as Part 10-A of the proceedings of this
committee and will be available from the Superintendent of Docu-
ments at a price which, I understand, is to be fixed at about 35 cents
per copy. This will be ready for delivery, I am given to understand,
some tmie next week.
. Mr. Henderson. Did you say 35 cents a copy ?
The Chairman. Thirty-five cents is what I have been told.
Mr. Henderson. Insurance executives told me they would be willing
. to pay $25,000 for it.
The Chairman. Perhaps you should have said that before the
announcement was made.
Mr. Henderson. It is just another case that proves the Govempient
is usually a poor businessman.
Mr. Gesell. Will you resume the stand, Mr. Howe, please?
TESTIMONY OF ERNEST HOWE, CHIEF FINANCIAL ADVISER TO
THE INSURANCE SECTION, SECURITIES AND EXCHANGE COM-
MISSION, WASHINGTON, D. C— Resumed
Mr. Gesell. On the recess, Mr. Howe, you were about to discuss
some of the principal investment requirements of the States in which
these 26 larg;est companies do business.
^ See Hearings, Part 10-A.
14799
14800 CONCENTRATION OF ECONOMIC POWER
The Chairman. Before you take that up, may I ask with respect
to this Convention Form of which you were speaking yesterday,
whether that is not required by law in some, if not all, of the States?
Mr. Howe. Yes, Senator. The National Association of Insurance
Commissioners prescribes a form on which annual statements shall be
made up. They have no real authority, but then the superintendents
of the individual States require this form, with certain minor modi-
fications in different States, so that substantially the form is handed
to the insurance companies.
The Chairman. Is it handed with the requirement that that form be
followed, or is the form merely approved ?
Mr. Howe. No ; the form must be followed by the companies.
The Chairman. I see.
Mr. Kades. Have the companies tried to get the form altered in any
respect ?
Mr. Howe. As I testified yesterday, in some of the meetings of the
Actuarial Society, I believe, certainly sonde of the meetings of the
American Institute of Actuaries, the form has been criticized. What
effort any companies have made in a direct manner to get the form
modified I have no knowledge, but, at any rate, there it is, and it is the
form which is required, and it is the one which the companies fill out.
Mr. Gesell. Now, we were about to consider the investment provi-
sions in the statutes of the various States.
Mr. Howe. A study of the investment statutes of 11 States, includ-
ing the principal States in which the 26 companies under review are
operating, governing the investments of most of the legal-reserve
life-insurance companies, reveals the wide range of investments per-
missible in the investment of insurance funds. Some of the States are
more liberal than others, but in general the legal restrictions are some-
what similar. Generally speaking. Government obligations of the
United States and its various political subdivisions are eligible for
investment and loan purposes, as are the obligations of the Dominion
of Canada and its provinces. Many of the States permit investment
in obligations of political subdivisions in Canada, while a few author-
ize direct investment in Canadian industrials.
Corporate obligations of domestic companies are legal investments in
all States under a wide range of restrictions, limitations, and earnings
requirements. Two ;of the States reviewed — that is, Wisconsin and
Iowa — prohibit the acquisition of corporate shares of any description,
while two — New York and Ohio — specifically prohibit investment in
common stocks. The other seven States permit investments in com-
mon stocks under various limitations.
Loans on mortgages secured by real estate in the United States are
generally permitted, while some States permit loans on mortgages
secured by real estate in Canada.
Mortgage loans in all cases examined are restricted to first liens and
may be made up to various percentages of the appraised value of the
real estate at the date the loan is made.
This percentage is 66% percent in all of the 11 State's examined
except Massachusetts and Iowa, which permit 60-percent loans, and
Wisconsin, which permits loan only to the extent of 50 percent. In
CONCENTRATION OF ECONOMIC POWER 14801
-New Jersey, while the general provision is 66% percent, under cer-
tain circumstances mortgages up to 75 percent of the appraisal value
may be made. All States permit policy loans. In every instance,
investment in real estate is definitely restricted with minor exceptions
for housing projects, to the business needs of the company, although
real property acquired as the result of foreclosure or in satisfaction
of debts previously contracted may be held for a limited period.
Mr. Henderson. Are you going to discuss later what periods the in-
surance companies have held real estate?
Mr. Howe. Yes; we have some data on that. The general rule as
to the len^h of the time which a company may hold real estate with-
out extension is 5 years. That is only a general rule, however.
It may be well to review quickly the composition of the portfolio of
these insurance companies as shown by tables 102, 103, and 104.^ It
will be seen at first that bonds constitute the largest single investment
of life-insurance companies. On the- average for these 26 companies
on December 31, 1938, this accounted for 53.97 percent of the total
assets. Government bonds accounted for 18.63 percent of total assets.
Mortgages accounted for 19.17 percent of total assets; policy loj^ns,
11.62 percent; stocks, 2.17 percent; real estate, 7.30 percent.
The Chairman. From what table are you reading now?
Mr. Howe. I was reading from the aggregate totals. Senator, on
table 102; the table which you have shows only the figures for the
companies as a whole, but I have here the aggregates.
The Chairman. The totals do not appear on our chart.
Mr. Howe. Cash, 2.74.
Representative Williams. I didn't understand what you said. I am
simply asking what it was.
Mr. HoAVE. The table shows only the percentages for the individual
companies. The figures which I have been discussing are the figures
which represent the average for the companies, and the figure which
I just gave Senator O'Mahoney was 2.74 percent, which is the average
holding of cash of the 26 companies.
Mr. Gesell. Those tables appear on schedule A ^ of the release which
has been prepared with respect to your statement, do they not?
Mr. Howe. I think they do.
Mr. Gesell. Now, casfi is 2.74 as of 1938 ; is that right ?
Mr. Howe. That is correct, which is a change from 1929, as schedule
A 2 shows, of considerable importance. In 1929 cash aggregated 0.69
of 1 percent of all the assets, whereas in 1938 it was 2.74.
Mr. Gesell. And Governments are what in 1938 ?
Mr. Howe. Governments are 18.63 percent in 1938, that is, United
States Governments.
The Chairman. May I suggest that you offer schedule A for the
record ?
Mr. Gesell. I intended to do that after he discussed it. I will do
so now, however, to make the record clear.
The Chairman. The schedule may be rpcoived.
(The schedule referred to was marked "Exhibit No. 2264'' and is
included in the appendix on p. 15495.)
1 See Hearings, Part 10-A, pp. 102, lOS.-and 104.
= See "Exhibit No. 2264," appendix, p. 15495.
14S02 CONCENTRATION OF ECONOMIC POWER
The Chairman. This shows that in 1929 Governments constituted
only 2.03 percent of the total assets, whereas today — that, is, of Decem-
ber 31, 1938 — they constitute 18.63 per cent.
Mr. Howe. That is correct, Senator. The other principal changes
are that bonds of the United States political subdivisions have m-
creased in percentages; railroad bonds have declined from 15.87 per-
cent in 1929 to 9.38 in 1938 ; public-utility bonds have increased from
8.73 to 12.22; industrials, from 1.43 to 4.92; whereas mortgages have
declined from 41.70 percent of total assets in 1929 to 19.17 in 1938.
Real estate, on the other hand, has increased from 1.87 to 7.30.
The Chairman. Suppose you make a total right now of the indus-
trials, public utilities, and railroads, so that we may compare them in
percentages with the Governments and with other political subdi-
visions.
Mr. Howe. In 1938, according to this calculation I have made here,
the total of railroad bonds, railroad equipment-trust certificates,
public-utility bonds, industrial and miscellaneous bonds in 1938
constituted 27.69 percent of the total admitted assets of the companies.
Mr. Geseul. What were they as of 1929, Mr. Howe ?
Mr. HowE. They were 28.41 percfent.
The Chairman. So that while the United States Governments w^e
increasing from 2.03 to 18.63, railroads, equipment trusts, utility
bonds, industrials, and miscellaneous were falling from 28.41 to 27.69.
Mr. Howe. That is correct. The fall came, of course, primarily in
the railroad category, and is offset only partially by increases" in utili-
ties and industrial bonds.
The Chairman. Well, there was a comparatively notable increase
in the investment in public utilities?
Mr. Howe. Yes; and also, in percentage, a remarkable increase in
holdings of industrial and miscellaneous bonds.
The Chairman. That was increased almost four times.
Mr. Howe. Yes; but the decline of- the railroads more than offset
that. These average changes which have taken place in the composi-
tion of total assets of the 26 companies are indicative of general trends
only. In the case of individual companies, however, there have been
very sharp changes not revealed by the general averages. For ex-
ample, in the case of Guardian Life, the bonds have increased from 11.4
percent to 29.2 percent of the total assets, while mortgages have de-
creased from 62.5 percent of total assets to 33.4. In the case of the
Western and Southern, bonds have increased from 7.5 percent of total
assets in 1929 to 39 percent, while mortgages have dropped from
around 83 percent in 1929 to 43 percent in 1938.
Mr. Henderson. Isn't that a general characteristic, Mr. Howe? If
the mortgage field had remained open for investment, that is, if you
had gotten the prime farm and prime urban mdrtgage loans, there
would not have been such excursion into other bonds?
Mr. Howe. I think un(juestionably the economic reasons explain
the fact that companies virtually stopped expanding their mortgage
accounts back 10 years ago. There are exceptions to that, of course,
but the total mortgage and real-estate account has about stood still
over this period. I don't think that is because of any prejudice of
companies against mortgages in many cases. I think it is simply that
the other avenues of investment were the only ones they felt were
qpen to them during the particular period.
CONCENTRATION OF ECONOMIC POWER 14803
Mr. Henderson. To meet the terms of security they had to have?
Mr, Howe. That is right.
Again, in the case of Lincoln National, bonds have increased from
1.74 percent in 1928 to 35.37, and in the case of Union Central bonds
have increased from 1.4 percent to 26.14.
That further bears out the point we had in mind.
The Chairman. Have you set those figures forth in an exhibit ? You
gave us a comparison between 1929 and 1938 for all of the companies ?
Mr. Howe. Yes.
The Chairman. And now you have been discussing individual com-
panies. Do you have a schedule showing that?
Mr. Howe. No ; Senator. I do not have all the 1929 balance sheets
of the companies included in this book.
The Chairman. You selected only those for which you had the
information ?
Mr. Howe. I have all the schedules in my three filing cabinets over
there to give you the balance sheets of any company in 1929.
Mr. Gesell. Those are simply examples.
The Chairman. It is not set forth ?
Mr. Howe. No ; it is not set forth. It would be quite a problem to
produce the balance sheets for all the years.
The Chairman. You have done a big job as it is.
Mr. Howe. We have looked at the composition of the bond port-
folio— that is, I mean, rails, industrial utilities, and Governments, and
so forth. It may be interesting to take a look at the ratings, the
quality ratings of the bonds owned by insurance companies, which are
shown by table 139.^
Mr. Gesell. You are speaking now of table 139, is that correct?
Mr. Howe. I am speaking now of tables 138 and 139. One is abso-
lute figures and the other percentages.
As the committee is doubtless familiar, there are several investment
publishing houses in New York which publish ratings of investment
securities. These are Moody, Poor's, Standard Statistics, and Fitch.
Because of the impossibility of describing in a few words the quality
of this tremendous fund of $13,000,000,000 in bonds, the only way we
can get at it is to use the ratings which these publishing companies have
prepared.
So that on table 138, we see across the top of various ratings, and the
United States Government bonds have been segregated -from the other
Aaa bonds, which is the highest rating that Moody's Investors Service
gives to a bond.^' Aa is next, and so forth, across the page.
Mr. Gesell. Those figures are expressed in terms of percentages of
the individual companies' portfolios on table 139. Is that correct ?
Mr. Howe. That is correct.
I should perhaps qualify this by also calling attention to the "Not
rated" column, which is shown here. It is not necessarily true that
because a bond is not rated that its quality is under question. There
are numerous private placement transactions on which these companies
do not have adequate information to make ratings.
Mr. Gesell. You mean which the rating companies do not have
adequate information on?
^ See Hearings, Part 10-A, p. 139.
« Ibid., p. 138.
14804 CONCENTRATION OF ECONOMIC POWER
Mr. Howe. That is right, which the rating companies do not have
adequate information on to rate, anc^ ■:'efore do not put a rating on.
Nevertheless, in a broad general *y, these figures indicate some
irfterestirig facts.
You will see, for instance, that i.x looking down the Aaa column,
excluding Grbvernments, that the Penn Mutual shows the highest per-
centage of the highest quality bonds, that is, 22.64 percent. That same
company also holds a high percentage of Aa bonds, and the total of
its Aaa and Aa bonds, excluding Government's, is 41.89 percent,
which is higher than that of any other company listed there.
Mr. Gesell. You mean that that is higher than the amount that
any other company has in Aaa and Aa bonds ? ■
Mr. Howe. Other than Government's; yes.
Mr. Gesell. There are companies with a more substantial amount
of their investments in Government's^ are there not, such for example
as the Western and Southern ?
Mr. Howe. Certainly, the Western and Southern has 91.39 percent
of its bond investment in United States Government bonds.
The Chairman. Isn't it true that all bonds which bear a rating of
Baa up, are regarded as really first quality bonds ?
Mr. Howe. Well certainly, Senator, that could be said from A up,
and there might be some difference of opinion with respect to Baa.
Mr. Gesell. You mean on individual bonds that involve to some
extent determination as to individual bonds within that classification ?
Mr. Howe. Yes ; that is right, but Baa bonds are good bonds.
The Chairman. They are good bonds but it occurred to me that
qualification ought to be made in any discussion of this list, and
would it not also be well to add the additional qualification that
frequently the bonds with the very high rating command a premium
in the market ?
Mr. Howe, At least they produce a, low yield. Senator, Whether
they are selling at a premium or disc6unt is simply a mathematical
matter after all, to some extent.
The Chairman. I note that the holdings of all bonds above Ba,
that is Baa, A, Aa, and Aaa, are greatly in excess for each classifica-
tion, greatly in excess of the holdings of Ba bonds.
Mr. Howe. Oh, very much.
The Chairman, So that that tends to bear out what I have remarked,
namely that the Baa classification upward is the classification of high
standard bonds,
Mr, Howe. That is correct. As a matter of fact, so far as these
companies as a whole are concerned. Senator, 75.69 percent of their
bonds are rated A or better, and over 90 percent of their bonds are
rated Baa or better. So that what you say is true, that the over-
whelming proportion of the bonds are definitely in' the quality group.
We have made an anlaysis of the investments of these 26 companies
in other corporations with which they interlock.
Mr. Gesell. That analysis is set forth on this schedule, is it -not,
"Investments of Life Insuaiajice Companies as of December 31, 1939,
in Companies Whose Officers or Directors Interlock with the Insur-
ance Companies"?
Mr. Howe. That is correct.
CONCENTRATION OF ECONOMIC POWER 14805
Mr, Geseix. I wish to offer that schedule for the record at this time.
The Chairman. The schedule may be received.
(The schedule referred to was marked "Exhibit No. 2265" and is
included in the appendix on p. — .)
Mr. Howe. The face value of these bonds held by these 26 com-
panies in companies with which they interlock, is $721,720,100. Book
value is $674,710,515, and the number of shares involved in those
cases where stock is involved is 1,726,623 shares of stock.
Now, of the face value of these bonds of the $721,720,100 face value
of bonds, $210,000,000 is held by Metropolitan.
Mr. Gesell. There are some companies which have no such invest-
ments, are there not?
Mr. Howe. There are ; Connecticut Mutual has none, Bankers Life
has none.
Mr. Gesell. The Connecticut Mutual has some as far as shares are
concerned, has it not?
Mr. Howe. They have some shares, no bonds. The Bankers Life
has none, neither bonds nor stock.
Mr. Gesell. And the last four companies on the list, Equitable of
Iowa, Western and Southern, Lincoln National, and Guardian Life,
have none, either in shares or bonds?
Mr. Howe. That is correct,
Mr. Henderson. Mr. Howe, where you compare the book value and
face value of investments having interlocking directorates, that ratio
of book to face value is just about the same as it is for the total bond
holdings, is it not ?
Mr. Howe. I am not sure of that.
Mr. Henderson. Will you keep that in mind when you come to dis-
cuss face and book with the total book portfolio?
Mr. Howe. We can compute that, but I think probably the prepon-
derance of rails here has something to do with this ratio.
The Chairman. Perhaps it might be well to allude to the fact that
Mr. Buckner, testifying here the other day, said the directors of his
company did not participate in action upon the purchase of bonds of
the companies that they represented so that the interlocking char-
acter of the investment doesn't necessarily carry the conclusion, does
it, that all of these were sold because of the interlocking arrangement ?
Mr. Gesell. It is also true, is it not, Mr. Hbwe, that this schedule ^
does not purport to show whether these investments took place at
the time the interlocking directorship existed ? They are investments
in interlocking concerns as of the date indicated in the schedule only,
is that not correct ?
Mr. Howe. That is correct.
Mr. Gesell. Some of the investments may have been made prior
to the time that the interlocking director came on the board of
directors.
Mr. HowB. That is correct. It is a perfectly objective study,
Senator. There is no intimation given that these bonds are better
or worse than any others or that anything improper took place in
their acquisition. It is simply a study of the facts,
1 "Exhibit No. 2235," appendix, p. 15495.
14806 CONCENTRATION OF ECONOMIC POWER
The Chairman, So that your answer to my question is that the
presentation of this chart of interlocking directors is not intended
to imply that the interlocking character of directorships was the
cause of the condition that you described in this chart ?
Mr. Howe. No ; there is no intent to carry such an implication with
the table.^
Mr. Henderson. It does show a degree of concentration of mu-
tuality and interdependence.
Mr. Howe. Yes ; that is why the table was prepared.
By looking at table 81, we can get an idea of the income on in-
vestments.2 Table 81 is net income on investments expressed as a
percentage of mean ledger assets.
Mr. Gesell. What do you mean by "mean ledger assets" ?
Mr. Howe. Those a^e the average assets which get onto the ledger.
That is the classic ratio in the gam and loss exhibit, and it is taken
from the gain and loss exhibit of the companies.
Now, that is the way in which they show the rate of return. Now,
it will be observed from this schedule that the rate of return ob-
tained in 1929, for instance, was substantially in excess of the rate
in 1938.* And as a matter of fact, on the average these companies
earned on this basis about 5.06 percent in 1929; in 1930 the figure
was 5.03 ; in 1931, 4.88 ; in 1932, 4.55 ; in 1933, 4.18 ; in 1934, 3.87 ; in
1935, 3.69; in 1936, 3.70 j in 1937, 3.69; and in 1938, 3.61.
There is also a considerable variation between companies in the
yields which they have obtained. For instance, in 1938 the Western
and Southern had a return of 3.83, while the Mutual Life of New
York received 3.30.
It will be noticed that during this period from the aggregate
figures here, the return from 1929 to 1938 has declined from 5.06 to
3.61, or 1.45 percent. On Moody's Aaa bond& •
Mr. Henderson (interposing). Mr. Howe, that is not percent.
Mr. Howe. That is right, 1.45 points in yield.
It will be interesting to note that during the period from Decem-
ber i929 to December 1938, the yield on Moody's Aaa bonds declined
from 4.75 to 3.08, or 1.67 percent.
The Chairman. Percent?
Mr. Howe. Points of yield, that is right.
The Chairman. So that the decline on Moody's rating of Aaa
bonds was greater than this decline for all ?
Mr. Howe. That is correct. On the Aa bonds the decline was
1.43 points in yield.
In A bonds the decline was 1.28 points in yield and in Baa bonds,
.63 of one point.
The interesting thing to note is the decline which has taken place
since December 1938, and the Aaa bonds have declined .08 of a point
in yield, the Aa bonds
The Chairman (interposing). Are you talking of Moody or this?
Mr. Hovste. Moody again. The Aa bonds have declined .26 of a
point in yield; A bonds, .24; and the Baa, .42. In other words, the
market is so high that even the bonds of lesser security are rising
more in proportion now than the bonds of highest quality.
1 "Exhibit No. 2265," appendix, p. 15495.
s See Hearings, Part lO-A, p. 81.
CONCENTRATION OF ECONOMIC POWER 14807
The Chairman. What was the decline for Aaa's, that last figure
you gave?
Mr. Howe. Eight hundredths of a point in yield.
Mr. Gesell. Now, there is a table here, is there not, or a series of
tables, to show what the income has been from the various types of
investment?
Mr. Howe. That is correct. That is table 10.^
• Mr. Gesell. That shows the rate of income from the types of assets
for 1938 only, does it not?
Mr. Howe. Only 1938.
Mr. Gesell. Can you tell me how over the period the earnings on
policy loans have compared with the earnings on the investments
shown in the table we were just discussing?
Mr. Howe. Well, policy loans have, especially in the latter portion
of the period, provided a higher gross yield than the other types of
assets ; mortgages, for instance, in 1938 provided a yield of 4.74 on the
average ; bonds, 3.47 ; stocks, 4.95. Policy loans, 5.79 ; foreclosed real
estate, 1.46; home-office real estate, 4.11.
Mr. Gesell. Home-office real estate is what?
Mr. Howe. It is 4.11.
Mr. Gesell. I don't understand that. What is that, the income
they have had on their own buildings ?
Mr. Howe. Yes; that is the income the companies have had on their
home offices.
Mr. Gesell. They get that from themselves, don't they, by paying
themselves a rent?
Mr. Howe. Well a large portion of it is rent which they pay to
themselves.
Mr. Gesell. I see. Will you go on.
Mr. Howe. So that the various rates of return on this table ^ as
betweeA companies are dependent to some extent on the scale of rent
they charge themselves.
Now, to relate this return on investments to the insurance aspects of
the company's business, we turn to
Dr. LuBiN (interposing). May I just raise a question before you
continue? It is quite evident that for the year 1938 the most.profit-
able investment an insurance company could make was a loan to a
policyholder.
Mr. Howe. With respect to the gross rate ; yes.
Dr. LuBiN. And these funds that were loaned to the', policyholders,
I take it, are part of the reserves that were set apart, and in a sense
is his own money ? .
Mr. Howe. There is an argument about whether it is . his own
money.
" Dr. LuBiN. Although legally it may be not his, in a sense it is a
sum set aside against his policy?
Mr. Howe, It is money which he paid in originally as premiums,
less expense.
Dr. LuBiN. And which in the event he does not pay the loan is
deducted from the policy?
Mr. Howe. That is right.
1 See Hearings, Part 10-A, p. 10.
' Ibid.
14808 CONCENTRATION OF ECONOMIC POWER
Dr. LuBiN. So in reality it is money he has turned over to the com-
pany, and the company is holding for him under a certain legal
relationship.
Mr. Howe. That is right.
Dr. LuBiN. And is there any other type of investment an insurance
company could make that would be as sound as such a loan?
Mr. Howe. There is no possibility of loss involved in a transaction
of that sort, so long as the thing is accurately handled mechanically.
Mr. Gesell. As long as the policyholder eventually dies .or his
policy matures?
Mr. Howe. That is right. Or surrenders.
Dr. LuBiN. So in reality the return is largest on the safest invest-
ment you can make?
Mr. Howe. That as right. Now, there are certain elements regard-
ing that matter which I hope to discuss at the moment when I come
to policy loans, but to return to the relationship of the earnings on
the assets to the insurance aspects of the business, we might look at
table 82.^ That table is designated "Interest required to maintain
policy reserves." The committee is familiar with the fact that in all
of the contracts written by insurance companies there is implicit
some interest assumption, and the gain and loss exhibit combines
all together at the end of the year the amount of money which is
necessary to be added to reserve from interest. Those are the figures
which are shown on table 82.^
Now, an interesting thing about this table is that as the contracts
average out between the companies, the rates which they must earn
in order to maintain their reserves, that is, the rates which they must
earn on their assets in order to maintain their reserves, vary some-
what. In other words, in 1938 the rate which the Travelers Insurance
Co., of Hartford, Conn., had to earn to maintain their policy reserves
was 3.55 percent. . On the other hand, the contracts of the New York
Life were such that they had to earn only 2.78 percent.
Mr. Henderson. Will you say that again, Mr. Howe?
Mr. Howe. This rate of interest required to maintain reserves is the
amount of money which the company figures that they have to put out
of the investment income into the reserves in order to maintain them
according to their contracts. Now, in order to determine the relative
amount of this money, we relate, as they do the net income in the gain
and loss exhibit — we now turn and relate this to the same base, you see,
namely, to the mean ledger assets.
Mr. GrKSELL. Are you now speaking from schedule C ^ of the release,
Mr. Howe?
Mr. Howe. I am not speaking from schedule C, although the per-
centages are shown on schedule C.
Mr. Gesell. You mean the percentages of interest necessary to
maintain reserves expressed in percent of the ledger assets can be
shown on schedule C ?
Mr. Howe. That is correct.
Mr. Gesell. And that schedule also indicates, does it not, the
amount and percentage of total assets earning less than the -interest
required for policy reserves in the case of these companies?
Mr. Howe. That is right.
1 See Hearings, Part 10-A, p. 82.
- "Exhibit No. 22G6," appendix, p. 15496.
CONCENTRATION OF ECONOMIC POWER 14809
Mr. Gesell. I would like to offer this schedule for the record at the
present time.
Mr. Pike. Wliat year is that ?
Mr. Howe. Those figures are for 1938.
Mr. Gesell. As of December 31, 1938.
The Chairman. The exhibit may be received.
(The schedule referred to was m"arked "Exhibit No. 2266" and is in-
cluded in the appendix on p. 15496.)
Mr. Howe. The purpose of reducing this interest to maintain policy
reserves to a percentage is to show the way in which the interest
margin — that is, the interest earned in comparison to the amount
which must be set up to maintain reserves — has declined; how the
margin has declined relatively.
Now, in 1939 the rates of interest required to maintain reserves were
not greatly different from what they are in 1938, on the average. They
were some higher but not greatly different.
The Chairman. Table 83 shows that for all of these companies the
margin has been maintained at not as large a figure as formerly.^
Mr. Howe. Oh, the margin is there, Senator. It has simply declined
in relation to the amount necessary to maintain reserves.
The Chairman. I observe also that this margin reached its lowest
point in 1935.
Mr. Howe. In terms of absolute dollars ; that is correct.
The Chairman. And it increased in 1936, and then again in 1937,
and though there was a falling off in '38, the margin for '38 is still
about $7,000,000 greater than it was in '35.
Mr. Howe. That is correct in terms of total dollars. In terms of
proportions. Senator, you will See on table 84 that in 1929 the margin
amounted to 56 percent of the amount necessary to maintain reserves.^
In 1936 it had declined to 13.65.
Mr. Gesell. In 1938 it is the lowest shown on that table, is it not?
Mr. Howe. That is correct.
The Chairman. Please explain that term which you have used there.
How did you divide this figure — expressed as a percentage, you say,
required to maintain reserves? v
Mr. Howe. From the gain ?ind lose exhibits we get the figure of the
interest required to maintain reserves — this annual amount of money
which must be added to reserves on account of the interest assumptions
implicit therein.
The Chairman. Am I to interpret.it as meaning, for example, in
1938, that the margin; that is to say, the excess over the amount re-
quired in terms of percentage, is 13.65 percent?
Mr. Howe. Is 13.65 per.cent of the amount of money which they had
put into the reserves in the way of interest. In other words, you take
your investment incpme
The Chairman (interposing) . In other words, they earned all that
was required and 13.65 percent more.
Mr. Howe. That is right.
Mr. Gesell. That is on the average.
The Chaikman. And then it would appear that in 1936 that per-
centage was the lowest for any years shown up to that time, namely,
15.22, that it increased in '36 and increased in 37.
1 See Hearings, Part 10-A, p. 83
»lbid., p. 84.
14810 CONCENTRATION OF ECONOMIC POWER
Mr, Howe. That is right.
The Chadiman. That is to say, over '35, but '38 dropped below '35.
Mr. Howe. That is correct.
The Chairman. So that in terms of percentage, 1938 is the lowest
of any of the years, although according to table 83 in terms of dollars
it is greater than 1935 ? ^
Mr. Howe. That is correct.
Mr. Gesell. And expressed in terms of expense there is a consider-
able variation ir 1938, pointing both ways from that average, is there
not? There are some places where the margin is very, very slight and
some places where it is substantial. What is the range there?
• Mr. Howe. The range is from 1.05 percent — ; —
Mr. Gesell (interposihg). And what is the highest?
Mr. Howe. The highest is New York Life, 30.45.
Mr. Ptke. Are there any figures yet available — I don't suppose there
are— for 1939?
Mr, Ho^vE. There are not. I mean to say that the annual conven-
tion forms in most cases have not been filed. We have written to the
companies for them ; they have informed us that they will give them
to us as soon as they are available.
Mr. Pike. Then there is no evidence to show whether that downward
trend continues except just the most general feeling?
Mr, Howe. We have no specific information on 1939 as yet, except
what has appeared in the press.
Mr, Henderson, I think, Mr. Howe, one of the most important things
about that margin is the wide variation which you ha,ve indicated
from 1.05 to over 30, and also the fact that there were about 13 or 14
below the average and 13 or 14 above the average. It is a wide range,
which also would mean that this number below the average would
tend to conceal that the experience of some companies is quite different
from others.
Mr. Howe, That is right. Expressed in points of yield, Commis-
sioner, the margin varies from 0.7? of a point in the case of New York
Life to 0.11 of a point in the case of Travelers, so that a decline in
yield of those proportions is the margin which they have.
Schedule C, which was introduced a moment ago, shows that
there is another factor other than mere decline in yield that insurance
companies have to contend with in investing their funds ; that is, there
is a substantial proportion of their total assets which for one reason
or another they have been unable to invest at rates which are necessary
to maintain their reserves.
Mr. Gesell. Will you tell us, Mr. How6, what type of assets are
included in "Exhibit No. 2266"?
Mr. Howe. The first is cash, the second is United States Government
bonds, the third is bonds in default, the fourth is mortgages in de-
fault.
Mr. Gesell. When you say "mortgages in default," you mean mort-
gages delinquent as to interest 1 year or more?
Mr. Howe. Yes.
Mr. Gesell. You have not included in here the 3-month delinquen-
cies, have you, only the year delinquencies ?
» See Hearings, Part lO-A, p. 83.
CONCENTRATION OF ECONOMIC POWER 14811
Mr. Howe. Only the mortgages delinquent 1 year or more are in-
cluded. Then there is also the foreclosed real estate which on the
average does not yield a return sufficient to maintain reserves. It is in-
terestmg to see what proportion of the total assets are constituted
by assets of the type we have been speaking of. On the average it is
about 31 percent, and it varies from 55 percent down to 17.
Mr. Gesell. You mean 35 percent, don't you ?
Mr. Howe. No ; I mean 55 percent.
Mr. Gesell. In the case of what company ?
Mr. Howe. In the case of the Travelers, but that figure is subject to
the qualification that they have a very large Government account.
Mr. Gesell. And what is the low ?
Mr. Howe. The low is in the case of the Connecticut Mutual, if I
read this correctly, of 17.71 percent.
Mr. Gesell. And an average of 31.19 ?
Mr. Howe. An average of 31.19.
Now, having looked quickly at the character of the composition of
the insurance companies' assets and a little about the returns they have
made on them, it is appropriate perhaps to consider the assets one by
one from the point of view of the management of those assets. Per-
haps the logical place to begin is on pages 106 and 107, on cash.^
Mr. Henderson. Before you get into that, Mr. Howe, this interest
assumption which the companies have to earn is determined by their
contracts with the policyholders, is it not ?
Mr. Howe. That is right, it is stated in the contract.
Mr. Henderson. And those contracts, many of them, have years and
years to run ?
Mr. Howe. Very long periods to run. Now, of course, there are
many qualifications that can be made on that statement, but that is
the fact that those are the rates which are stipulated in the contract,
and if they don't earn them from this source or that source, they have
to put up money at that rate.
With respect to cash, on December 31, 1938
Mr. Gesell (interposing). You are speaking now from tables 106
and 107, are you not? ^
Mr. Howe. I am. The companies had free casji balances totaling
$665,329,000. In 1929 these same balances amounted to only $102,-
188,000. In recent years the companies have had a substantial varia-
tion in the amount of interest earned on their deposits. The best per-
formance in this regard has been in the case of the Pacific Mutual
which in a year in which the year-end cash balance amounted to
$3,856,000, earned $39,944 in interest on deposits.
Mr. Henderson. Did yoii inquire, Mr. Howe or; Mr. Gesell, as to
what they did particularly, whether there was anything special about
what they did ?
Mr. Gesell. I neglected to bring their letter and I will this after-
noon,^ I wrote the Pacific Mutual because they are so far out west,
and we didn't want to bring them on here, and asked them what they
had done to brin^ about this especially outstanding performance in
terms of interest income on cash balances, and the company advised
1 See Hearings, Part 10-A.
» See Hearings, Part 10-A, pp. 106 and 107.
3 Infra, p. 14824.
14812 CONCENTRATION OF ECONOMIC POWER
that they had made this interest on their cash balances and that it
resulted from the policy of the company to get interest on their ac-
counts— simply a one-sentence explanation. I will bring the letter for
the record this afternoon. I haven't much to add to what the figures
show here.
Mr. Henderson. In other words, they "planned it that way."
Mr. Gesell. That is about what they said.
Mr. Pike. That is the only Pacific coast company in this list, as
I remember.
Mr. Gesell. That is correct.
Mr. Pike. The policy of the banks might very well be different
there.
Mr. Gesell. The rates may be a little, higher there.
Many of the companies shown on this schedule, however, as we will
consider at a later time, have bank balances in the same banks as the
Pacific Mutual.^
Representative Williams. Isn't there a provision now that they
cannot pay on demand deposits?
Mr. Howe. Not on demand deposits, but they can on time deposits.
Representative Whuams. This includes time deposits? ^i? '
Mr. Howe. This includes time deposits.
Representative Williams. In fact, that is the only place where we
can get interest.
Mr. Howe. Yes ; in this country.
Representative Williams. In these Federal Reserve banks, mem-
bers of the Federal Reserve System, they cannot pay interest on
demand deposits.
Mr. Howe. That is correct ; ever since the Glass-Steagall Act went
into effect. Wasn't that in 1933 sometime?
Representative Williams. Yes ; '35.
Dr. LuBiN. May I ask the witness a question? Looking down the
list here, Provident Mutual with $8,546,000 in cash earned $9,097,^
which I think is a better showing than even your Pacific Mutual,
is it not ?
Mr. Howe. No; it was not any better. The other people had only
a 3-million cash balance and made $39,000, and these people had an
8-million cash balance and made $9,000.
Dr. LuBiN. I thought it was $90,000 ; I am sorry.
Mr. Howe. But^ the fact is, as will be seen from the variation in
the figures here, that some companies have had the policy of putting
out money on time, and others have apparently restricted their depos-
its to demand deposits. For instance, out of the total $665,000,000
in cash balances, the companies have earned in the aggregate $273,000.
Now, of that, the Metropolitan with a year-end cash balance of
$108,000,000 collected $112,000 in interest. Of course, thac was col-
lected on the time deposits, the "time" portion of the $108,000,000.
Prudential received no interest.
Mr. Gesell. On a balance of how much?
Mr. Howe. On a balance of $95,676,000.
Representative Willlams. That simply means they had all theirs
on demand?
' See Hearings, Part iO-A, p. 107.
» See Hearings, Part 10-A, pp. 106 and 107.
CONCENTRATION OF ECONOMIC POWER 14813
Mr. Howe. That is right.
Mr. Gesell. It is a question of different management policy in the
handling of cash balances, is it not?
Mr. Howe. That is all.
The New York Life made $43 on their $50,000,000 in cash, and the
equitable with $112,000,000 made $42,000. We simply wish to point
out the differences in management policy with respect to the handling
of these various assets.
Mr. Pike. They are all insignificant, however ; except for the Pacific
Mutual hardly any of them made over one-tenth of 1 percent. ' The
whole thing doesn't add up to anything.
Mr. Howe. That is right.
Mr. Henderson. It doesn't add up, in many cases, to pay the chief
executive's salary, does it?
Mr. Howe. Well, I imagin-e" not.
Mr. Henderson. All right, let's go on.
Mr. KoWE. Policy loans outstanding December 31, 1929, as shown
by table 108, amounted to $ 1,923 ,000, 000. ^ By December 31, 1938,
this amount had increased about $1,000,000,000, to $2,822,000,000. As
previously explained, policy loans earned the highest rate of interest
of any class of assets of the company, providing a gross return of
5.79 in 1938. This return is indicated by table 109 with $163,474,000.^
Policy loans, it will be recalled, constituted 11.62 percent of total
admitted assets on December 31, 1938, helving increased 46.75 percent
since December 31, 1929.
Mr. Henderson. And they produced about 20 percent of the income ?
Mr. Howe. Yes.
Mr. Gesei^.. The schedule, Mr. Howe, entitled ''Policy Loans and
Income Therefrom," shows for the 26 companies, does it not, the policy
loans outstanding at the end of 1938, the percentage of those loans to
admitted assets, the interest earned on the policy loans, and the per-
centage of the investment income attributable to such loans?
Mr. Howe. That is right.
Mr. Gesell. I would like to offer that schedule for the record.
■ The Chairman. The schedule may be received.
(The schedule referred to was marked "Exhibit No. 2267" and is
included in the appendix on pp. 15496, 15497.)
Mr. Howe. You will see. Commissioner Henderson, in that table,
that on the average whereas the policy loans involved 11.62 percent
of the total admitted assets, they produced 18.66 percent of invest-
ment income.
Mr. Gesell. There are some rather outstanding cases on this
schedule, iare there not, Mr. Howe; such as, for instance, the Pacific
Mutual, where the policy loans constituted a little over 15 percent of
the assets, but accounted for almost 30 percent of the investment
income?
Mr. Howe. That is right. Union Central received more than 25
percent of its gross investment income from policy loans.
Mr. Gesell. On the average there is a difference as between 11.62
expressed in terms of assets and 18.66 expressed in terms of invest-
ment income.
1 See Hearlngp, Part lO-A, p. 108.
* Ibid., p. 109.
124491-:-^l— pt. 28 9
14814 COxNCENTRATION OF ECONOMIC POWER
Mr. Howe. That is correct.
Dr. LuBiN. Is there any other type of investment made by these
companies where the percent of investment income is so much greater
tlian the percent of admitted assets?
Mr. Howe. Oh, no. Of course, it is frequently said by life-insurance
executives that this 5% percent average return is only a gross return
because of the fact that policy loans in general are made in relatively
small amounts, and a study which was made of the business of the
Metropolitan Life Insurance Co. by the New York State Insurance
Department showed that, on the average, their cost of handling pol-
icy loans amounted to three-fourths of 1 percent. That is to say,
il their loans— which I don't think they did at that period— yielded
them 534-percent gross, that their net yield would be 5.
The Chairman. But it is also true, is it not, Mr. Howe, that policy
loans aflFord the policyholder an opportunity for raising money wdiich
he probably couldn't get any other way?
Mr. Howe. Well, it is about the only loan. Senator, which a bor-
rower can obtain at his option. After all, most loans are obtained at
the request of the borrower at the option of the lender.
The Chairman. And here it is at the option of the borrower?
Mr. Howe. That is right.
The Chairman. And he is not subjected to any duns and he is not
required to pay upon the day set? This runs as long as he wants to
allow it to run and pay the interest?
Mr. Gesell. Both as to loan and interest.
The Chairman. I say as long as he wants to pay the interest?
Mr. Howe. As long as he wants to pay the interest. Otherwise it
would wash out.
The Chairman. And the interest rate which is charged on these
policy loans is by and large low^er than the average rate for similar
loans from any other source?
Mr. 'Howe. Well, it is lower than you can borrow $20 any place.
The Chairman. Let us say $1,000 — is it not lower?
Mr. Howe. Senator, there are numerous cases in recent years in
which policyholdei-s have been able on the security of their policy to
borroAv at banks more cheaply than they could borrow at insurance
companies.
The Chairman. That is an interesting fact, of course. How many
instances of that kind are there?
Mr. Howe. Well, I can't give you statistics on it, but there are
organizations in New York who make a business of providing bank
credit for policyholders on which they obtain loans at lower rates
than the companies offer.
The Chairman. Is that a recent manifestation ?
Mr. Howe. I don't know how recent it is; obviously it was not
going on in 1929.
The Chairman. That problem may be a result of the general
financial condition ; that is to say, other owners of capital who would
like to get it out on good security see the opportunity of under-
cutting the rate offered by the insurance companies and therefore bid
for that business.
Mr. Howe. They are doing so to some extent.
Dr. LuBiN. Did you notice the ads in the Washington newspapers.
CONCENTRATION OF ECONOMIC POWER 14815
in which certain banks are advertising loans on the cash value of
policies at lower rates than those that the insurance companies give
to you?
- Mr. Howe. I haven't seen those.
Dr. LuBiN. There have been some in local newspapers. One of the
local banks is advertising they will lend money on cash values and
the quoted rate, I believe, is less than you can get from insurance
companies.
Mr. Howe. As far as my experience goes, in almost all cases in
which banks lend on insurance policies, at least in recent years," they
have loaned at somewhat lower rates than those obtainable from the
companies.
Dr. LuBiN. My original question was raised because I had the im-
pression— I; wanted you to correct me if I was wrong — that in a
sense not only is your original loan guaranteed but also the interest
is guaranteed. As long as that reserve is sufficiently great to cover
that interest charge, it is automatically deducted from the face value
of your policy so the company is guaranteed not only its principal
but its interest.
Mr. Howe. That is right.
Mr. Kades. Mr. Howe, have companies in time of stress always
honored the obligation to make loans ?
Mr. Howe. I think they have, with the exception of the period of
the moratoria which we are going to discuss a little later on. I have
some data on moritoria which I will present later. I would be glad
to discuss it now. but I thoug'ht I might better put it in orderly se-
quence, -^side irom a relatively short period, they have always
honored their obligations, the companies which have not failed.
Now, it might be useful, just quickly to emphasize the importance
of policy loan interest to Lhe insurance companies themselves.
The importance of income from policy loans to insurance companies
is indicated by the fact that during the 10-year period ended December
31, 1938, $1,503,048,000 was collected from interest on policy loans.
That is shown in table 109, $1,503,048,000.1
The Chatbman. In order to make that a little bit clearer, how many
policyholders contributed to that interest? Do you know?
Mr. Howe. How many policyholders?
The Chairman. In other words, how many individual policy loans
were there? Do you know?
Mr. Howe. I have no figures on that, sir.
The Chairman. You did have the figure as to the total number of
policyholders for these 26 companies?
Mr. Howe. Oh, yes.
The Chairman. That figure was what?
Mr. Howe. For these, 26 companies the total number of policyholders
is 98,000,000.
Mr. Gesell. The total number of policies.
Mr. Howe. Policies, not policyholders, at the end of 1938 was
98,054,000 policies.
The Chairman. But you don't know how many of those policies
were the basis for loans?
1 See Hearings, Part 10-A, p. 109.
14816 CONCENTRATION OP ECONOMIC POWER
Mr. Howe. No ; I do not.
Mr. Gesell. You will recall Mr. Buckner's testimony to the effect
that the average loan of his company was around $400 and that it was
between a third and a half of the policyholders of his company who
borrowed on policy loans.^
The Chairman. Yes. Thank you very much.
Mr. Gesell. Nearer a third, I believe he said.
Mr. Howe. The $163,474,000 collected from interest on policy loans
in 1938 was equivalent to over 55 percent of the total amount disbursed
as dividends on ordinary insurance in 1938, and was also equivalent,
just to show the general importance of it, to over 147 percent of the
aggregate gain from interest during that year. Further indication of
the importance of this income is obtained from the fact that certain
companies received more than 25 percent of their total investment
income from policy loans, as I have already indicated from the table.^
Mr. Gesell. The next asset you wish to discuss is bonds. Is that
correct ?
Mr. Howe. That is correct. We pay no attention to collateral loans
because it is too small an item.
The Chairman. Well, what can you tell us about the type of col-
lateral loan? Though it may be a small item, on what type of col-
lateral are these loans made?
Mr. Howe. They are mostly made on the security of collateral
which the companies could have purchased for investment in the
first place.
The Chairman. This type of business is the type which would be
in competition with ordinary banks, is it?
Mr. Howe. Well, the insurance companies don't make brokers'
loans, for instance, on stock exchange collateral.
The Chairman. I am not thinking in terms of New York or any
stock exchange. I am thinking in terms of the small town, the small
city. The collateral loans mentioned in this compilation are ordinary
loans on ordinary collateral, are they not?
Mr. Howe. Most of them are on about the type of collateral the
insurance companies could have bought in the first place, so it doesn't
greatly expand their legal ability to invest over a broader field.
The Chairman. To what type of borrower are these loans made?
Mr. Howe. Well, so far as I can find, they are mostly favorites
of one sort or another.
The Chairman. They are not made to policyholders, as such?
Mr. Howe. No.
The Chairman. And they are not made to large corporations as
such ?
Mr. Howe. In general ; no. They are made to individuals who put
up security of these corporations, or other securities which the com-
pany is entitled to loan upon or to accept as collateral.
The Chairman. Are these loans made at the home office or to per-
sons living in and around that area or are they scattered throughout
the United States?
Mr. Howe. I can't really answer that question. I think, in general,
they are not scattered. You will notice that the amount of them alto-
gether is only some
I Supra, p. 14742.
= See Hearings, Part 10-A, p. 9.
CONCENTRATION OF ECONOMIC POWER 14817
Mr. Gesell (interposing). It is only $2,324,000.
The Chairman. For all the companies?
Mr. Howe. For all the companies.
Mr. Gesell. A representative ^ of the Lincoln National is under
subpena to appear in connection with these hearings and discuss
collateral loans made by that company. You will at that time have
a chance to get a better look-in at it.
You are about to discuss the bonds.
Mr. Howe. Yes. The most striking thing about it, of course, is that
this is the place in which the growth in insurance company assets has
taken place for the rnost part, in the bond account. That is where
the expansion has taken place during the 10-year period.
As we have emphasized previously, Governments have increased
1,394 percent and industrial and miscellaneous bonds 460.
Now, from table 122, we see the acquisitions of bonds.^ This in-
cludes the United States Government bonds and all other bonds, and
the total for the period is $15,246,000,000.
Mr. Gesell. That is all bonds of any description that were acquired
by these 26 companies?
Mr. Howe. That is right; all bonds of any description acquired by
these companies during the period from January 1, 1932, to December
31, 1938.
Mr. Gesell. And that figure is $15,246,000,000. It that correct?
Md. Howe. That is correct.
Mr. Gesell. And bonds in the portfolio at the present time repre-
sent, on the average, over 50 percent of the portfolio ?
Mr. Howe. That is correct. Fifty -three percent. The United
States Government bonds which have been acquired aggregate
$8,343,000,000 of this amount, and other bonds only $6,903,000,000, as
shown by the table on page 124.^
Mr. Gesell. Have you tables showing the different methods pur-
sued by the company in the acquisition of these bonds ? *
Mr. Howe. We have. The methods which were used in the acquisi-
tion of these bonds were several. Some bonds were purchased at
public bidding; others were purchased from dealers or bankers, in-
vestment bankers, as they used to be called; still others in the open
market; others were purchased privately. We might analyze for a
moment the various methods by which this was done.
Mr. Gesell. You are talking with respect to bonds other than
Government's now — the $6,903,000,000 acquired of other bonds?
Md. Howe. That is correct.
Mr. Gesell. How many of those were acquired at public bidding?
Mr. Howe. $81,025,000, of which $46,807,000 were acquired by the
Prudential.
These bonds acquired at public bidding, of course, involve both
equipment trust certificates customarily sold that way, and probably
some municipals. Table 127 shows "Bonds of new issues purchased
from bankers."^
Mr. Gesell. What do you mean by bonds of new issues? Do you
mean bonds from dealers?
' Mr. Arthur M. Hall, whose testimony appears infra, p. 14931.
» See Hearings, Part 10-A, p. 122.
3 Ibid., p. 124.
* Ibid., pp. 126-132.
Ubid., p. 127.
14818 CONCENTRATION OF ECONOMIC POWER
Mr, Howe. Yes ; the type of underwriting leading financial houses
in New York engage in. These are the portions of those underwritings
whicli have been purchased by tlie companies on this list of 26 largest
companies within 90 days of the offering date.
Tlie ChiAiKMAN. When you speak of a new issue do you wish to
include those which are issued to refinance recalled bonds?
Mr. Howe. Yes ; I am not going back of the purpose of the issue at
all, but am speaking of all the new issues.
So there were $2,537,000,000 acquired in that way. In the open
market — now that doesn't necessarily mean exclusively the stock mar-
ket by any means, but in the open market — in the open market
$2,149,000,000 in bonds were acquired.
The Chaikman. The difference, then, was just about $400,000,000?
Mr. Howe. Yes ; about $400,000,000 more acquired from new issues
than from bonds which were otherwise outstanding.
The 'Chairman. Well, from new issues purchased from bankers?
Mr. Howe. Right. But the caption of that table might possibly be
misleading. Senator. I don't mean from commercial bankers ; I mean
from investment bankers and dealers and people of that sort.
The Chairman. Is this intended to reflect the amount of sales pr
purchases made without competitive bidding ?
Mr. Howe. The element of competitive bidding has not been con-
sidered in the organization of these figures. I am very sure that most
of these bonds have not been purchased by competitive bidding but
some of them may have been.
The Chairman. Then this table is of no significance so far as that
question is concerned ? ^
Mr. Howe. No significance whatsoever as far as that particular
question is concerned.
Representative Williams. Are there any direct purchases from the
issuers?
Mr. Howe. Yes; I was coming to that on table 129.^ We show it.
Mr. Gesell. What have such purchases totaled ?
Mr. Howe. Such purchases have aggregated during the period of
these 7 years
Mr. Gesell (interposing). That is, from 1932 to 1938?
Mr. Howe. The beginnmg of 1932 to the end of 1938, $1,850,000,000.
It is very interesting to notice the concentration of these purchases
in the largest life insurance companies: For instance, of the $1,850,-
000,000 of private purchases, $649,000,000, or 35.7 percent of the total,
were purchased by the Metropolitan Life Insurance Co.
The Chairman. What is that percentage?
Mr. Howe. It is 35.7. Nineteen and seven-tenths percent of the total
was purchased by the Prudential ; 8.6 percent were purchased by the
New York Life; 18.7 percent were purchased by the Equitable; and
5.4 by Mutual of New York.
Mr. Gesell. What is that total for the top five ?
Mr. Howe. Eighty-eight percent of the total purchased was pur-
chased by the top five companies. In 1938 the top five purchased
about the same proportion as they did during the entire period, but
the relative position of the companies changed greatly due to the very
• See Hearings, Part 10-A, p. 127.
* Ibid., p. 129.
CONCENTRATION OF ECONOMIC POWER 14819
great emphasis which the Equitable put on private purchases during
that year.
The Chairman. It would appear from the table that there was a
general trend among all the companies to purchase bonds in this
manner, although, as you pointed out, the greatest amount of pur-
chases by far were made by the larger companies.
Mr. Howe. The. practice seems to be growing and spreading, as
you look at this table, although by far the largest amount of it has
up to the end of 1938 been done by these five great, billion-dollar
companies.
Mr. Gesell. As you look back at 1932, 1933, and 1934, almost half
the companies participated to no degree at all. and in recent years
have received some
The Chairman (interposing). That is to say, there were 14 com-
panies which in 1932, 1933, and 1934 — that is, the 14 smaller com-
panies— did not participate at all, and the Equitable and the Mutual
of New York, Northwestern, Penn Mutual, didn't participate in
either 1932 or 1933, so it is a new development, isn't it?
Mr. Howe. That is right.
Dr. LuBiN. Mr. Howe, in comparing the table on page 128 with the
table on page 129,^ I get the impression that, at least as far as the
five leading companies were concerned, the purchase during this
period of 6 years of securities directly from issuers was far- ig^excess
in terms of dollar value than the purchases in the open market. Is
that correct?
Mr. Howe. That is correct. As a matter of fact, Dr. Lubin, if you
will look at table 131, it shows that the percentages of the total cor-
porate purchases — that is, of course, those bonds which might pos-
sibly be done as private deals, excluding Governments — in other
words, of the total corporate purchases of these companies, the Metro-
politan acquired 67 percent in 1938, privately; the Prudential ac-
quired 64 percent of its corporate purchases privately ; the New York
Life, 53 percent; the Equitable, 62; and the Mutual, 64 percent.^
The Chairman. Of course, as this trend develops, it means that a
larger and larger proportion of these bonds are being purchased
directly by these companies, with the premiums or the savings of the
policyholders, which are transmitted to them, and that opportunity
to purchase these issues is constantly being withdrawn from the ordi-
nary investor?
Mr. Howe. Yes. That is of special significance in view of the fact
we brouglit out the other day that tlie total debt, the total corporate
debt, available for purchases during the 10 years has declined about
$14,000,000,000.
The Chairman. And did you not have the figure to show what
percentage of these bonds have been acquired in recent years by the
companies, the life-insurance companies?
Mr. Gesell. Yes; the table on 125.^
Mr. Howe. Table 125, Senator, shows the total number of corporate
issues put out by all American companies of which we have record.
That is the good, bad, and indifferent bonds and notes.
' See Hearings, Tart 10-A, pp. 128 and 129.
"IbM., p. 13].
a Ibid., p. 125.
14820 CONCENTRATION OF ECONOMIC POWER
Mr Gesell. And without regard, I believe you said, to whether or
not those bonds and notes are legal investments for the •companies.
Mr Howe That is right, without regard to whether they are legal
far the companies or whether they are issued publicly or pn/ately,
the total figures of issues range from $515,000,000 m 1934 to $4,254,-
000,000 in 1P36, and then reach $2,187,000,000 in 1938. These coni-
panies purchased respectively, these 26 companies, 23.7 percent m
1934; 24.8 percent in 1935; 24.5 percent in 1936; 48.9 percent in 193 < ;
and 47.7 percent in 1938, of all of the new corporate bonds and notes
which were available.
The Chairman. Now, inasmuch as the companies naturally re-
stricted their purchases to the higher grade bonds, it means that the
52 percent which was left in 1938 for the balance of investors was
naturally largely made up of lower grade securities.
Mr. Howe. Certainly, all the lo^v-grade securities were in that
group, so that the competition for acquisition of these bonds is great-
est in the highest quality classification.
The Chairman. Of course, it probably would be proper to say that
life-insurance companies would naturally try to get the best bonds
and ought to try to get the best bonds.
Mr. Howe. They do. . That is right. There is no question about
that.
Mr. Gesell. Have you some figures on redemptions, Mr. Howe?
Mr. Howe. Yes ; I have some figures on redemptions. It. will be
noted quicklv from table 133 that during the period from 1932 to
1938 these 26 life-insurance companies sold only $2,469,000,000 bonds.^
And of this amount $1,702,000,000 were United States Governments,
so that of other bonds, they sold only $767,000,000.
Redemptions, on the other hand, that is, bonds which were called
prior to maturity and bonds which matured, aggregated $4,942,-
000,000, more than twice as much as the sales, and United States
Governments accounted for $2.206,000;000 of this total.
Mr. Gesell. "VVliat is the explanation on table 133 of the great num-
ber of bonds appearing as sold as against the name of the Equitable
of New York? ^ That figure, it appears, all during the years shown
on this table except for 1932 and 1933, is substantially greater than any
of the other companies, including the companies larger than it. Have
they been in and out of the market more? Is that the explanation
of It? ...
Mr. Howe. Yes; I believe that is the explanation of it. Certainly
their turn-over of Government bonds has been very much higher than
other companies'.
The Chairman. It will be noted from your company table on page
129, with respect to the Equitable, that from 1932 tp 1937 its purchases
were comparatively small ; nothing for 1932, nothing for 1933, nothing
for 1934, $54,000,000 for 1935, $28,000,000 for 1936, $31,000,000 for 1937,
and then it jumps to $225,000,000,' and that is the same year in which
you have found the large sale of bonds as reflected in table 133.^
Mr. Howe. That is right.
' See Hearings, Part 10-A, p. 133.
» Ibid., p. 133.
'Ibid., p. 129.
CONCENTRATION OF ECONOMIC POWER 14821
Dr. LuBiN. Isn't it true, on the other hand, that Mutual, which also
apparently followed policies similar to that of the Equitable in the
purchase of securities from private issuers, had an entirely different
experience when it came to redemptions ?
Mr. Howe. Yes ; I think so, in all probability. Although I haven't
had an opportunity to analyze it in detail, I think the Equitable has
probably handled more short-term Government's than some of the
other companies, and naturally that brings about a higher turn-over,
whether they sell them or whether they are redeemed.
Mr. Gesell. This table isn't all Government's P It is Govern-
ment's and all other bonds, isn't it, Mr. Howe?
Mr. Howe. Table 133 is Government's and all other bonds.
Mr. Gesell. Do you account for the $664,000,000 figure as entirely a
turn-over in Government's in the case of the Equitable, or had they
been in and out on all issues?
Mr. Howe. $605,000 of that is sales of Government bonds, as shown
by table 134.^
The Chairman (interposing). I notice a change in the method of
acquiring industrial bonds and so-called private bonds. Have you
any comments on the changes of method in acquiring Government's?
Mr. Howe. Well, of course. Government's are acquired under the
regulations which the Treasury sets up.
Mr. Henderson. That is, new issues ?
Mr. Howe. New issues; yes.
Mr. Henderson. The rest of it is bought in the open market.
Mr. Howe. Naturally the rest is bought in the open market from
banks or large Government traders in New York, but as far as new
issues are concerned, the offerings are sent to the Treasury and allot-
ments are made.
Mr. Gesell. Have you any evidence as to there having been any
change in the method of obtaining Government bonds or is it simply a
change in the amounts?
Mr. Howe. I think it is mostly a question of amounts. There have
been some slight changes over the period of the last 7 yeai-s in the way
Government honds have been handled at various times but they are
matters of detail and not matters of great significance.
It will be seen from a combination of the sales and redemption
figures and of the purchase figures that of the $6,903,000,000 of bonds
other than the United States Government's purchased, by life-insur-
ance companies since January 1, 1932, $2,736,000,000 efr 39.5 percent
were purchased to replace bonds which had matured or which had been
called for redemption.
In order to get a little clearer angle on the bond account, it may be
interesting to look at the table on page 155.^ This table compares the
cost and market value of bonds owned by the various companies. It
will be seen, for instance, in 1938, that in spite of the amazing recovery
which the bo^d market has made in the past 7 years and in spite of the
fact that the level of bond prices is now at almost a world's record
peak, the aggregate cost of the bonds owned by these 26 companies
exceeded their market value on December 31, 1938, by $360,000,000.
• See Hearings, Part 10-A, p. 133.
= Ibid., p. 134.:
14822 CONCENTRATION OF ECONOMIC POWER
The Chairman. Where does that figure appear?
Mr. Howe. And table 155, Senator, in the next to the last column on
the page. You will see a minus sign, 360,156,000.^
Mr. Gesell. That is the difference between the market value and the
cost value of bonds and stocks held by these companies as of December
31, 1038, is that correct?
Mr. Howe. That is correct.
Representative Williams. Are you going to explain why that is?
Mr. Ho^vE. I hope to.
Representative Williams. I was wondering, if the statement you
made that tlie fact that the bond market now is unprecedentedly high
is true, how it is they have paid more for them than they are now
worth ?
Mr. Howe. That is because of the railroad situation, largely, sir.
Representative Williams. All right.
Mr. Howe. Of course, the difference between the cost and the
market value of a portfolio at a given date reflects, first, the type of
securities which were purchased for the portfolio, and second, the
type of securities which were thrown out of it, as a house-cleaning
proposition as time goes on — because every investment portfolio
requires constant combmg over no matter how good its initial quality
was. So that to some extent I have thought of these percentage fig-
ures, the differences expressed in percentages to market value, as a
sort of house-cleaning index.
And it will be seen, for instance, that of the first five companies, the
Prudential's excess of cost over market is the smallest in percentage
of any of the companies shown, namely, 0.8 of 1 percent.
Mr. Gesell. It is equaled by the Western and Southern, is it not ?
Mr. Howe. It is equaled by the Lincoln National, not the Western
and Southern.
The Chairman. And the John Hancock.
Mr. Howe. The John Hancock; right.
Now, there are tAvo explanations for that. One is the volume of
sales which these companies have undertaken, the courage they have
displayed in throwing out everything that seemed to be weak. It
is always a hard thing to sell investments for liie insurance com-
panies because you are always selling the bond that yields 4Vo or 5
percent and turning around and buying high-grade bonds which
yield much less. So there is a psychological deterrent except when
the broad problem of keeping the security paramount is considered.
The Chairman. Of course, there is another factor, I suppose,
which ought to be taken into consideration in evaluating these fig-
ures, namely, that the statutes fixing the legality of issues for invest-
ment by insurance companies were all drawn before the depression.
Mr. Howe. Yes; I thnik so.
The Chairman. So that conditions with respect to the inherent
value of some types of bonds, which have been descril)ed as legal
investments for trust funds, are very different now from what they
were at the time the statute was drawn?
Mr. Howe. That is right ; there has been a whole new crop of laws
during the past couple ot years, but these bonds represent purchases
largely underprevious laws.
' See Hearings, Pnrf 10-A, p. 155.
CONCENTRATION OF ECONOMIC POWER 14823
Now, it will be observed that there are some cases in which the
market value exceeds the cost value. For instance, we get down here
to the Penn Mutual, the market value of whose portfolio exceeds the
cost, and then we come down to the Bankers' Life of Iowa, where the
market value exceeds cost ; the National- Life of Montpelier, Vt. ;
Equitable of Iowa ; and the Western and Southern.
Mr. Gesell. These are companies shown on here with a plus
figure ? ^
Mr. Howe. That is right. They are the ones I am pointing to. And
the interesting point about that is that in the case of the last four
companies I mentioned, namely, the Bankers' Life, the National Life,
the equitable of Iowa, and Western and Southern, they own no rails.
Even in the case of Penn Mutual, which has 8.53 percent of the total
assets invested in rails, they have been so managing their portfolio
that their present market value exceeds the cost.
Mr. Gesell. That is striking. You brought that out in the case
of National Life, did you not, which^has the highest plus figure on
this schedule, and, as I recall, is a company that never at arjy time
bought any railroad securities ?
Mr. Howe. That is right.
Mr. Gesell. Even back in 1906.
Mr. HowTE. That is right — never bought any rails for many, many
years.
Dr. LuBiN. May I ask one question at this particular point? The
statement on page 155, which shows the cost value, market value, and
difference between market value and cost for December 31, 1932, and
December 31, 1938,^ doesn't in any sense, however, show what has
happened to the value of investments in the sense that a company may
have had, say, the difference between cost and market value may have
been 22 percent at one time and zero at another ; that washing out may
have been brought about, may it not have, by taking losses on such
securities as they sold ?
Mr. Howe. Yes — well, no; I point out that this column is cost value,
you see. Now, the companies have taken write-downs on bonds, for
instance, during this period of 10 years in the aggregate amount of —
I think it is about $605,000,000. I don't remember accurately, but that
does not show in this cost figure. This goes back to original money
paid out.
Dr. LuBiN. In other words, a company tliat happened to have
bonds that erst a million and which Avere valued at 'half- a million
sold them, thereby getting rid of all bonds in their portfolio which
cost them more th"an the current market value they took that loss
which is not shown in this table ? ^
Mr. Howe. That is right. This l^as nothing to do with whether
the companies have taken losses. Th^ have taken substantial losses.
Mr. Pike. You could sell and buy again and set up new costs dur-
ing this period and probably many did?
Mr. Howe. Oh, yes; there were instances in which high-grade
bonds were sold and funds invested in substantially the same securi-
ties.
^ See Hearings, Part 10--A, p. 155.
» Ibid.
» Ibid.
14824 CONCENTRATION OF ECONOMIC POWER
Mr. Pike. You could do almost the same thing with low-grade
bonds to get rid of the losses in the portfolio. You looked over this
thing in detail, and I think you feel from what you said that, by and
large, these losses represent losses in railroad securities more than
anything else?
Mr. Howe. Overwhelmingly more than anything else. As a mat-
ter of fact, I think that I have schedules here which show that in the
Baa bonds the losses in rails are greater than the total losses in the
group, so there is a profit in the remainder. That is not true. of the
Ba bonds.
Mr. Pike. Those are bonds that declined since purchase? They
wTere not purchased as of that grade?
Mr. Howe. I believe that is correct.
The Chairman. We will stand at recess until 2 o'clock.
(Whereupon, at 12 noon, a recess was taken until 2 p. m. the same
day.)
AFTEIINOON SESSION
The committee resumed at 2 : 05 p. m. on the expiration of the
recess.
The Chairman. The committee will please come to order.
Mr. Gesell, are you ready to proceed?
Mr. Gesell. Yes. This morning a question came up ^ about the
Pacific Mutual's cash balances and the interest that it earned on them
and I advised the committee that I would have the letter that we
received from them for the record this afternoon. It is addressed
to Mr. Howe and signed by Mr. Call, executive vice president, stating
as follows:
De:ab Sib: This is in reply to your communication of January 23.
This company had on deposit in banlis on December 31; 1938, the total sura
of $3,856,000. This is the same sum as is shown in your "Investment Analysis,
Table 106." Of this amount the sum of $3,403,037.12 was on deposit with var-
ious California banks, at interest. Most of it was carried in the form of Cer-
tificates of Deposit, the balance as Term Deposits. The rates of interest re-
ceived from these deposits vary from 1% to 2%. The interest income received
thereon in the year 1938 was the sum $39,944, as is indicated in Table 107 of
your Investment Analysis.
It has been the policy of this company, as far as practicable, to keep its cash
balances earning interest, as- above indicated.
Very truly yours,
Mr. Howe, will you return to the stand, please?
TESTIMONY OF ERNEST HOWE, CHIEF, FINANCIAL ADVISER TO
THE INSURANCE SECTION, SECURITIES ANH EXCHANGE COM-
MISSION, WASHINGTON, D. C— Resumed
Mr. Gesell. At recess, Mr. Howe, we were about to discuss farm
mortgages and farm real estate. Will you continue your statement at
that point, please?
Mr. Howe. From 1929 to 1938 farm mortgages owned by these 26
companies declined from $1,787,000,000 to $743,000,000. This decline
was contributed to largely by foreclosures.
' Supra, p. 14811.
CONCENTRATION OF ECONOMIC POWER 14825
On December 31, 1938, over 50 percent of the farm-mortgage ac-
count owned by these companies was owned by the Prudential, North-
western, Equitable, and Metropolitan.
Senator White. May I interrupt right there? You say this shrink-
age in farm mortgages was contributed to largely by foreclosures.
Have you the precise figures as to foreclosures?
Mr. Howe. I have the figures, Senator, with respect to foreclosures
for the 7 years from January 31, 1932, to December 31, 1938. This
appears on table 165, which indicates that in the case of these 26 com-
panies, or at least approximately 20 thereof who Engaged in farm
lending, foreclosures in the amount of $669,559,000 tqok place within
this period.^
Mr. Gessell. That is from 1932 to 1988?
Mr. Howe. That is from 1932 to 1938 ; yes, sir.
Senator White. Do you know what part of the whole total of fore
closures that amounts to ?
Mr. Howe. I think that is most of them. I haven't figures prior
to 1932.
Mr. Gesell. Do you know, Senator, the percentages of foreclosures
by all classes of lenders ?
Senator White. As referred to in this statement ? The witness said
that the decline was accounted for largely by foreclosures. Now, I
was interested to know, out of that $1,787,000,000, how much was
accounted for by foreclosures ?
Now, for a period of 6 or 7 years you give a figure of $669,559,000.
That is, roughly, a third.
Mr. Howe. The decline. Senator, has been about a billion dollars.
Senator White. That is right.
The Chairman. Let us call the Senator's attention to the table on
page i61, beginning with 161.^ There is the table of all farm mort-
gages owned. ,. '
. Senator White. I was confused. I thought the decline was
$1,787,000,000.
Mr. Gesell. From $1,787,000,000 to $743,000,000.,
Mr. Howe. I was saying of the farm-mortgage account on December
31, 1938 over 50 percent of. the farm-mortgage account owned by these
companies was owned by the Prudential, Northwestern, Equitable, and
Metropolitan. The Prudential held the largest amount at
$167,298,000. .
The Chairman. Perhaps in connection with what Senator White
was referring to, it might be well to cair attention to the fact that as
shown by table 161,^ the amount of farm mortgages owned declined
from $1,787,000,000 in 1929 to $743,000,000 in 1938."
Mr. Howe. That is correct, Senator.
The Chairman. That is shown by table 164, beginning with 1932,
farm mortgages were repaid in full for 1932 amounting to $48,508,000 ;
$51,290,000 in '?3 ; $198,369,000 in '34; $150,044,000 in '35 ; $106,817,000
in '36; $87,766,000 in '37; and $63,313,000 in '38.^
Mr. Howe. A total of $807,869,000.
iSee Hea igs, Part 10-A, p. 165.
= Ibid., p. 81.
»Ibd., p.. 164.
14826 CONC'HNTUATION OF ECONOMIC TOWER
The Chairman. While farm mortgages foreclosed, the record is
. , , . .^» 1 .1 . • aril? A(\A f\f\f\ i^ 'QO. Cil PiA f^zin Ann
to 1938, inclusive, of $069,559,000.^
Mr. Howe. That is correct.
The Chairman. And then there is another table which shows the
farm real estate owned by the companies. Wliere does that table
Mr. HoA\'E. That appears a little later on, Senator. Farm real
estate owned.^ , . .
The Chairman. This tells the story of real estate owned rising from
$81,907,000 in 1929 to $529,392,000 in 1938?
Mr. Howe. That is correct.
Mr. Gesell. With that hi^h in 1934 of $456,705,000?
The Chairman. No; '36 is higher.
Mr. Gesell. I might say that tomorrow we are going to present in
detail information on the insurance investments in farm mortgages and
loans.
The Chairman. Yes, I understand.
Mr. Howe. Of the four largest holders of farm mortgages only
the Prudential's farm mortgage account has increased in recent years.
That applies quite ger^erally throughout the entire list of 26 companies,
that only the Prudential's farm mortgage account has been expanded.
You can see that on table 161.^
Mr. Henderson. Prudential was declining down to 1935 and has
increased every year since then.
Mr. Hg.ve. 'That is correct.
Mr. Henderson. And it is the only one ?
Mr. Howe. I believe that is true. They are the only one active
enough in the farm-mortgage market so their total account has ex-
panded during the period.
Over 25 percent of all the farm mortgages owned by the 26 com-
panies was secured upon land located in Iowa, and over 55 percent of
such mortgages were secured upon land located in Iowa, Illinois, Kan-
sas, and Nebraska.
One hundred ten million dollars, or 14.71 percent, of farm mortgages
had interest in default 3 months or more. About $40,000,000 of these
mortgages, or 36.4 percent, were so-called work-out cases — that is, cases
in which the lender has taken some steps other than foreclosure to pro-
tect its interest.
Twenty-four million dollars, or 21.8 percent, were in foreclosure^
This compares with $69,632,000 farm mortgages with interest delin-
quent 1 year or more.
The leading owners of farm real estate are in some cases different
from the leadmg lenders. The largest owner of farm real estate is the
Metropolitan, with $83,000,000; Equitable follows with $67,000,000;,
Mutual Benefit, $50,000,000; John Hancock, $49,600,000; Prudential,
$48,800,000; Union Central, $43,600,000; Northwestern, $25,000,000.
The Chairman. What was the percentage of mortgages on South
J)akota and North Dakota real estate?
• Ibid., p. 165.
-Ibid., p. 180.
'Ibid., p. 1(51.
CONCENTRATION OF ECONOMIC POWER 14827
Mr. Howe. These 26 companies had owned farm mortgages on De-
cember 31, 1938, in North Dakota to the extent of $4,395,000, or 0.58
percent of the total mortgage accounts. In South Dakota the invest-
ment was $18,131,000, or 2.4 percent of the total farm-mortgage
account of the 26 companies.
Mr. Gesell. Information as to geographical distribution starts at
page 167.^
The Chairman. Thank you.
Mr. Howe. The companies listed above sold the following percent-
age of their farm real estate : Metropolitan, 17 percent ; Equitable, 12
percent; Mutual Benefit, 19 percent; John Hancock, 29 percent; Pru-
dential, 58 percent; Northwestern, 46 percent.
The following percentage of farm real estate has been held 5 years
or more by the companies indicated : Metropolitan, 64 percent, Pru-
dential, 46 percent; Northwestern, 39 percent.
Senator White. May I ask you a question there ?
Mr. Howe. Mutual Benefit, 48.02 percent.
Senator White. You say of these companies only the Prudential
farm-mortgage account has increased in recent years. Then I note
that Prudential has sold 58 percent of its real estate.
Mr. Howe. Yes; the mortgage account — I am speaking of mort-
gages which they own, and when I speak of real estate I am speaking
of real estate acquired in satisfaction of debt. In other words, they
have acquired some real estate and 58 percent of it they have sold back
to the farmers.
Senator White. This doesn't mean 58 percent oi their mortgages?
Mr. Howe. No ; 58 percent of the foreclosed farm real estate has been
resold to the farmer's.
Of the $18,000,000 gained over adjusted book value received from
the sales of farm real estate, 14,000,000 was the Prudential's. The
Prudential and the Union Central are the only ones of the large 7
holders i>f farm real estate which showed an operating loss on that
real estate in 1938.
Now, there obviously is a great deal more detail which can be given
on this farm real estate but in view of the fact that extended hearings
are planned on it, I thought perhaps we might economize the com-
mittee's time and get rapidly along to urban real estate and some of
these other subjects.
The Chairman. Very well.
Mr. Howe. With respect to urban mortgages and urban real estate
we find, from 1929 to 1938, mortgages declined from $4,418,110,000
to $3,888,045,000.
Table 194. From 1929 to 1931 there was an increase from
$4,418,000,000 to $4,849,000,000 while urban real estate acquired in
satisfaction of debt increased from $12,000,000 on December 31, 1929,
to $68,000,000 on December 33, 1931.^
The Chairman. May I interrupt and say that the coinmittee is
fortunate to have present this afternoon Commissioner Palmer of the
State of Illinois. Mr. Palmer, the committee ^ill be very glad to
have you ask any questions that may occur to you during the testi-
mony, if you desire.
1 See Hearings, Part 10-A, pp. 167-171.
2 Ibid., p. 194.
14828 CONCENTRATION OF ECONOMIC POWER
Senator White. May I take occasion, during the interruption, to
osk a question which may not be of general interest, but it is to me.
On table 168, I notice there are no farm mortgages owned in the
State of Maine.' How does that come about ? if^en't there any bor-
rowers, or does the law prohibit, or has the Federal Government got
them alH •
Mr. Ho\m The law does not prohibit it. That is one of the very
striking features of this whole situation, the concentration of lending
by insurance companies in the States which I mentioned, primarily
Iowa, whcli has 25 percent of the entire farm mortgages.
Mr. Gesell. I believe you said 55 percent of the farm mortgages
•were in Iowa, Illinois, Kansas, and Nebraska?
Mr. Howe. That is c6rrect.
Senator White. I notice neither Maine nor Massachusetts had any
of these mortgages. The companies had none of the mortgages in those
two States. I wondered if there were some peculiarity of the law or
of the people,
Mr. Gesell. We will get to that when we have the gentleman from
the companies who have been loaning on the stand.
The Chairman. That is true of Delaware as well as Maine.
Mr. Howe. New Hampshire.
The Chairman. Nevada and New Hampshire.
Mr. Gesell. I think you will find the loans are rather negligible
even in New York State.
The Ch iiRMAN. Rhode Island has none. Vermont has only $1,000.
Mr. Ho ve. Yes ; a thousand dollars.
The Chairman. And Wyoming has $50,000. .
Mr. Gesell. We are going to have on the stand Mr. Rogers of the
Prudejitial ^ and Mr. Rogers of the Metropolitan ^ — two different Mr.
Rogers — in charge of the farm loans of those respective companies. I
think we can get from them some idea as to the factors that have
prompted this.
The Chairman. Proceed, Mr. Howe.
Mr. Howe. On December 31, 1931, the urban mortgages and real
estate — that is, the total of the two — owned reached a total of
$4,918,000,000, from which it declined to $4,872,000,000 at December 31,
1938. During this period, how^ever, mortgages declined $961,000,000,
while real estate increased $915,000,000; $2,087,000,000 of the
$3,888,000,000 invested in urban mortgages on December 31, 1938, was
owned by the Metropolitan, the Prudential, and the New York Life.
Over $2,552,000,000, or 65 percent, was owned by these companies and
the Equitable and the Mutual — that is, the five largest legal reserve
life-insurance companies.
Of the $905,000,000 of urban real estate, $474,000,000, or 52 percent,
was owned by the Prudential and the New York Life, and $605,000,000,
or 67 percent, was owned by the first five companies.
Of all mortgages and real estate owned by the 26 companies, the
following percentages are owned by the three leading companies:
ISIetropolitan, 23 percent of the mortgages; Prudential, 19.6 percent;
and New York Life, 11 percent.
> Ibid., p. 168.
= Ibid., p. 15030.
' Hiid., p. 16030.
CONCENTRATION OF ECONOMIC POWER 14829
Of the real estate, the Metropolitan has 26 percent ; the Prudential,
14; and the New York Life, 11.
Keal estate accounted for the following percentages of the total
urban mortgages and real estate account :
Metropolitan 20 percent
Prudential 14
New York Life 20
Equitable - 27
Mutual 18
Penn Mutual : 28
New England Mutual .. 40
State Mutual 28
Massachusetts Mutual 35
$1,227,000,000, or 32 percent of all city mortgages owned were
secured upon real estate located in New York City.
Mr. Gesell. That is 32 percent of all the city moravages?
Mr. Howe. Thirty-two percent of all the city mortgages owned
by these 26 companies were secured upon real estate located in New
York City. Fifty-nine and sixty-five one hundredths percent of all
mortgages owned were located in the States of New York, California,
Illinois, New Jersey, Ohio, and Pennsylvania.
Mr. Geseix,. Now, table 201, Mr. Howe, shows the degree of con-
centration of these city mortgages in the 10 metropolitan areas, does
it not ? ^ I was particularly impressed by the figure for the Mutual of
New York, which shows 93.3 percent of its real estate in those 10
cities shown. Is that correct?
Mr. Howe. That is right.
Mr. Geseix. Of its mortgages.
Mr. HowB. And 89.17 percent of, the Mutual's urban mortgages
were secured upon real estate in New York City.
The Chairman. Where is that shown?
Mr. Howe. That is shown on table 201, Senator.*
The Chairman. I don't see that figure.
Mr. Howe. The 89.17 is a computation, a ratio that I have made,
but it does not appear on the table.
- Mr. Gesell. They have under the heading of New York City, over
$200,000,000 of mortgages in New York City, and in the total of 10
areas they have only $209,000,000. Is that not correct ?
Mr. Howe. That is correct, and the total mortgage account is
$224,806,000 as of December 31, 1938.
Mr. Henderson. It is a case of putting your eggs in one basket
and watching the basket.
Mr. Howe. That is certainly great concentration.
Senator White. Is there any law, so far as you can discover, as to
the amount these companies loan on this urban real estate ? Do they
loan 50 percent of the .assessed valuation or some other fixed ratio?
Mi*. Howe. In the 11 States in which these companies are domi-
ciled, 1 State calls for a mortgage loan only to the extent of 50
percent — that is Wisconsin. Two States call for 60 percent. 1?he
remainder of the States call for 66% percent maximum loans, with
the exception of New Jersey, which permits 75 percent under cer-
tain circumstances.
1 See Hearings, Part lO-A, p. 201.
»Ibld. • .
124491— 41— pt. 28 10
14830 CONCENTRATION OF ECONOMIC POWER
Senator White. That is loans of assessed value ?
Mr. Howe. No. The appraised value at the time the loan is
made.
The Chairman. Does that apply to both farm and urban real
estate ?
Mr. Howe. It does.
Senator WnrrE. That is the appraised value by the company ?
Mr. Howe. Frequently they have their own appraisers and fre-
quently they have appraisals made by an independent appraiser at
the time the loan is made.
The Chairman. But do the statutes specifically prescribe that there
shall be a given percentage of appraisal made in a particular way?
Mr. Howe. There is no — of course, when you figure 48 States, there
are a lot of laws, but so far as my knowledge goes, I have never seen
a law in which the manner of appraisal was detailed.
The Chairman. If the lender is free to make the appraisal, then
the percentage is not very significant.
Mr. Howe. The same thought has occurred to me. However, it
must be said that there is some integrity among appraisers as well
as there is among accountants and other professional men.
The Chairman. Oh, yes; of course.
Mr. Henderson. We will get into that more tomorrow. Senator.
Mr. Gesell. Now, you have on tables 207 and 209, Mr. Howe, some
break-down of these urban mortgages in terms of functional types
and the size of the mortgages held ? ^
Mr. Howe. That is right.
Mr. Gesell. Have you same comments which you wish to make
on those tables 207 and 209?
Mr, Howe. It is very interesting to note in looking at these com-
panies that the policy of companies apparently is quite different with
respect to the size of loans which they emphasize in the lending
which* they do. For instance, this classification here shows
Mr. Gesell (interposing). You are on table 207?
Mr. Howe. I am on table 207. It shows that in the case of the
Metropolitan, the largest amount of mortgages held in any one
group is $135,000,000, in the size group from 1 to 2 million dollars.
That constitutes 5 percent of the total mortgage account.
Mr. Gesell. It is under the two to five million dollar class, is it not?
Mr. Howe. I am sorry ; yes, it is. It is $150,000,000, under the classi-
fication from two to five million, which is 16.7 percent of the total
mortgage account.
Mr. Gesell. How does that compare with the Prudential, for
example?
Mr. Howe. The Prudential, on the other hand, emphasizing to some
extent residential loans, has the largest amount loaned in the size
classification from five to ten thousand dollars, and 21.4 percent of
the total mortgage account of the Prudential is in mortgages of that
size.
Mr. Gessell. Is that partly brought about by the fact that the
Metropolitan hasn't seen fit to go into F. H. A. mortgages and the
Prudential has been a rather heavy investor in that type of mortgage ?
1 See Hearings, Part 10-A, pp. 207 and 209.
CONCENTRATION OP ECONOMIC POWER 14831
Mr. Howe. That may have been a contributing factor. Another in-
teresting thing is, when you jump to the Mutual Life Insurance Co.
of New I ork you find that the largest proportion of their mortgage
account which turns up in any classification here, is $46j436,000 m
the two-to-five million-dollar classification. This constitutes 20.7
percent of their total mortgages.
The Chairman. Of what company are you speaking now?
Mr. Howe. The Mutual of New York — the last company in the first
block on the page, Senator.^
The Chaerman. Now, the largest aggregate appears to be in the
classification of one hundred to two hundred and fifty thousand, does
it not?
Mr. Howe. Yes ; it does for the companies as a whole.
The Chairman. And of that also, the Metropolitan appears to
have the largest amount and Prudential next.
Mr. Howe. That is correct, in that classification.
The Chairman. No ; New York Life is next, that is right, in that
clarification.
Mr. Howe. In that classification, one hundred to two hundred and
fifty thousand dollars for 26 companies as a whole constitutes 12.9
percent of the total mortgage account.
The Chairman. And the smallest aggregate is in the classification
of less than two thousand. That amounts to $68,983,000.
Mr. Howe. 1.77 percent of the total mortgage account.
The Chairman. And the next smallest aggregate appears to be in
the twenty-five to fifty thousand classification.
Mr. Howe. And over five million is a small classification also, of
$212,000,000,
The Chairman. Yes; over five million is the next with $212,886,-
000, and then the twenty-five to fifty thousand group, $219,543,000.
Mr. Howe. That is correct.
Senator White. Are there any figures to show the extent to which
the mortgagors are in arrears either as to principal or interest?
Mr. Howe. There are no figures with respect to arrearages as to
■principal. Senator, for the reason that large amounts of mortgages
are permitted to stay, as they say, open on the books. I mean to say
a mortgage is made for 3 years, and it is extended and remains open,
and the fact that the period is extended has nothing to do with the
value of the mortgage.
So we have restricted ourselves to interest and tax delinquency.
Senator White. That is true unless the security itself has de-
preciated.
Mr. Howe. That can happen, too, that the security will depreciate,
but because of that general situation, the fact that large amounts oi
mortgages are permitted to run open, a statistical tabulation based
on principal delinquency would be likely to be grossly misleading,
and that is the reason no data of that sort was included in these
figures.
Mr. Gesell. We do have figures on interest delinquencies, however,
in Table 211.^
Mr. Howe. Yes; we do.
1 See Hearings, Part 10-A, p. 207.
2 Ibid., p. 211-.
14832 CONCENTRATION OF ECONOMIC POWER
Mr. Gbsell. Would you comment on that table, Mr. Howe?
Mr. Howe. Yes; on table 210, it will be seen that the mortgages
delinquent 3 months to 1 year amount to $125,000,000; and 1 to 2
years, $87,000,000; 2 to 3 years, $94,000,000; over 3 years, $101,000,-
000; and the last column is the total of the mortgages delinquent
1 year or more, which is $283,000,000. The total of mortgages delin-
quent 3 months or more is $409,697,000.^
Mr. Gesell. And those figures are expressed on a percentage basis
on 211, are they not?
Mr. Howe. They are.
Mr. Gesell. There seems to be discrepancies there between the
mortgage accounts, the quality of the mortgage accounts of the vari-
ous companies, ranging from delinquencies under the 3 months or
more column of as high as 33 percent of the account, down to as low
as less than 1 percent!
Mr. Howe. That is correct, shown by the column entitled "Mort-
gages with interest delinquent 3 months or more." The average is
10.52 percent. Of the four principal holders of city mortgages, the
Prudential has the highest ratio of mortgages in foreclosure to mort-
gages 2 years in default, and the Northwestern has the lowest per-
centage. The Prudential percentage is 34.4, and Northwestern is 2.79.
The three largest holders of city mortgages are also the three
largest holders of city real estate.^ They are as follows : Metro-
politan, $237,000,000; Prudential, $129,000,000; New York Life,
$108,000,000.
The Connecticut Mutual with 51.89 percent held the largest per-
centage of urban real estate owned 5 years or more" as of December
31, 1938.
Mr. Gesell. You mean to say that over half of the real estate held
by the Connecticut Mutual has been on their books more than 5
years ?
Mr.'HowE. That is right.
Mr. Gesell. Why have you taken the 5-year period?
Mr. Howe. Because there is, while not absolutely standard, a gen-
eral rule that after real estate has been held for 5 years, the com-
panies must obtain special permission of the insurance commissioners
to hold it for a longer period.
Mr. Gesell. What are the percentages for some of the other com-
panies ?
Mr. Howe. The Metropolitan, 30.08 ; Prudential, 37.44 ; New York
Life, 27.37; Northwestern, 22.72.
The following percentages of urban real estate owned December
31, 1931, and that subsequently acquired had been sold by December
31, 1938.
Mr. Gesell. Let me see if I understand before you go further.
You have tables showing the amount of real estate acquired by years,
have you not?
Mr. Howe. That is right.
Mr. Gesell. And then you have computed the amount of that real
estate that has been sold over the same period.
Mr. Howe. That is right.
Ubld., p. 210.
« Ibid., p. 217.
CONCENTRATION OF ECONOMIC POWER 14833
Mr. Gesell. Where do those tables appear?
Mr. Howe. With respect to urban real estate, on pages 222 and 223.^
Mr. Gesell. Now, on page 223, the last column, one can get the per-
centage of. the real estate held or acquired during this period ?
Mr. Howe. That is right.
Mr. GeseLl. Which was sold by the end of the period ?
Mr. Howe. That is correct.
Mr. Gesell. In other words, the Metropolitan sold 28.09 percent
of such real estate and the Prudential 50.08, to use those two com-
panies ?
Mr. Howe. That is correct.
Mr. Gesell. What are some of the other percentages of that per-
formance ?
Mr. Howe. The New York Life had sold 13.78 percent; the Equi-
table, 14.16 percent; the Mutual, 15.92 percent; the Provident Mutual,
2.95 percent; Massachusetts Mutual, 2.80 percent; and the New Eng-
land Mutual, 2.27 percent. The total average is 27.11.
Mr. Gesell. That concludes the discussion of the various types of
investments, does it not, Mr. Howe ?
Mr. Howe. Yes ; that does,
Mr. Gesell. Did you now wish to make some statement with respect
to problems of valuation ?
Mr. Howe. Yes ; I do.
Mr. Gesell. And the factors of safety that relate thereto?
Mr. Howe. I do.
Of all American business, life insurance is unique in the number of
factors of safety which are inherent in its plan of operation. The
principal factors of safety should be mentioned at this time as pre-
liminary to the discussions of valuation which are to come. There are
several of these factors which are particularly outstanding.
The first is the level of gross premiums. It is well understood that
mutual life-insurance companies charge policyholders a premium rate
which is higher than they anticipate to be necessary to fulfill their
obligations. The difference is later returned to policyholders under
the somewhat misleading name of dividends. Thus a company from
year to year takes in more money than in normal circumstances it will
require, so that in the event unusual conditions arise it has a fund
which it may use in the protection of the policyholders' interest. One
of the principal reasons for the liberal gross premiums is the fact that
rates are computed on the basis of a mortality experience which is
worse than that being experienced in the country at the present time.
As the result of this, gains from mortality are experienced almost uni-
formly, and these gains are available for return to the policyholder or
for the use of the company in the event circumstances require.
The second important factor of safety is that the interest earnings
of com{)anies have to date been in excess of the interest which the
companies have obligated themselves to earn under their contracts
with the policyholders.
To the extent that there is an excess in this regard, it gives addi-
tional funds which the companies may utilize in the event it is neces-
sary, but which in the ordinary course are returned to the policy-
holders with the excess premium.^
^ See Hearings, Part 10-A.
14834 CONCENTRATION OF ECONOMIC POWER
Another factor of safety is the restriction imposed upon the with-
drawal of reserves by policyholders. Thus in most companies the
policy must have been m force for at least a year before any with-
drawal is permitted, and thereafter a surrender charge is made on the
withdrawal. These surrender charges vary somewhat between com-
panies but are in the case of most companies substantial. In general
surrender charges have been increased since the depression. The im-
portance of these checks on withdrawal is indicated by the fact that
on the basis of figures submitted to us, the aggregate amount which
cannot be withdrawn has been estimated at $4,900,000,000, or a sum
eauivalent to over 20 percent of total assets.
Mr. Gesell. Now, you have a table relating to that, have you not,
on the subject of withdrawal?
Mr. Howe. That is right.
Mr. Gesell. What table is that?
Mr. HoAVE. Two seventy-five.
Mr. Gesell. I think some further discussion of that table would
be desirable.
Mr. Ho%vE. The table shows total liabilities to policyholders, includ-
ing policy reserves.^ Then it shows the gross sum subject to with-
drawal in cash based on answers to investment questionnaires
supplied by the companies. Not all of the companies supplied this
iniormation, but we do have information with respect to companies
whose liabilities to policyholders constituted $12,105,000,000. These
companies stated that the aggregate of the cash-surrender values of
their policies, plus other sums which may be withdrawn by policy-
holders in cash, amounted to $9,508,000,000. Using this as a basis,
and assuming that the situation is about the same for the remaining
companies, and applying this ratio to the total liabilities to policy-
holders of all the 26 companies which constitute $22,808,000,000 we
estimate that the amount subject to withdrawal in cash is $17,900,-
000,000, which being deducted leaves a balance of $4,900,000,000.
Mr. Gesell. What reasons were given by the Metropolitan and
the Equitable Life and the New York Life, for example, in not sub-
mitting this information, Mr. Howe, or were any explanations' given ?
Mr. Howe. I forget the precise language of the answers to those
questions, but evidently they thought it was rather a burdensome
and complicated calculation to determine the aggregate of cash values.
They apparently kept no records on that matter or did not wish for
other reasons to supply the information.
The Chairman. Of course, it is a rather burdensome matter to
gather all of these statistics, as your own work in preparing this
report evidenced.
Mr. Howe. I would be the first to admit that, Senator.
The Chairman. Now, the amount which is subject to withdrawal
in cash is prescribed by law, I suppose ?
Mr. Howe. I think you might say it is limited by law. The amount
which is subject to withdrawal is a matter of the contracts which the
companies have made with their policyholders. Now, the law in
some cases limits the amounts of the surrender charges which may
be made.
» See HearlngB, Part JO-A, p. 275.
CONCENTRATION OF ECONOMIC POWER 14835
The Chairman. Before the Armstrong Committee investigation,
rhe polic5^holders didn't have the right to demand cash withdrawals ?
Mr. Howe. It was about that time that cash withdrawals began
to be manifested.
The Chairman. And the policy with respect to policyholder's loans
is also as a result of law requiring the companies to make those loans,
so that the condition which we find here is by and large the result ot
statutes which have been passed in the various States, or is that true ?
Mr. Howe. Well, Senator, that is not entirely in accordance with
my understanding in the matter, i haven't made anv detailed in-
vestigation of law with respect to surrender values and policy loans,
but it is my understanding that the companies have a relatively free
right of contract within certain latitude which is prescribed by the
laws of the various States.
Mr. Gesell. That must be true, must it not, or you would not have
percentage variations as between companies as to the amounts of money
subject to withdrawal ?
Mr. Howe. For instance, there is the New England Mutual here,
who have a provision — I mean their contracts customarily bear the
provision that on surrender, the policyholders shall get the full reserve,
I believe it is beginning with the third year. On the other hand, the
surrender charges of some of the companies like the Travelers Insur-
ance Co. of Hartford in some cases run to the twentieth year.
The Chairman. It will be observed from Table 275, if you glance
at the column entitled "Policy loans outstanding," you will find that
that apparently follows a standard curve.^ The amount of policy
loans outstanding by and large corresponds to the size of the company,
does it not ?
Mr. Howe. I think so. We had some figures here this morning which
show, if you will refer to this other table, the various percentages
of policy loans in relation to assets.^
The Chairman. Just look at this one on page 275 so that I may
make the point I have in mind. That table seems to follow the curve
of size of the companies.^
Mr. Howe. In a broad general way it does.
The Chairman. Yes; just in a broad general way. Whereas, that
is not true with respect to the second column which is labeled, "Gross
sum subject to withdrawal in cash." So what I am trying to develop
is whether or not there is any standard that governs this figure, namely,
the amount subiect to withdrawal in cash.
Mr. Howe, x ou see, Senator, the situation is complicated by the
fact that these contracts have been issued over a long period of time.
There are some policies outstanding today issued mostly before the
Armstrong investigation, as I understand it, under which the policy-
holder has no right to obtain cash on surrender. I think that as a
matter of fact, most companies will pay the policyholders on sur-
render, but there is no contractual right there.
During this period
The Chairman (interposing). Is there not a legal right which has
been imposed since those contracts were drawn ?
1 See Hearings, Part 10-A. p 275.
2 Ibid., p. 102.
• Ibid., p. 275.
14836 CONCENTRATION OF ECONOMIC POWER
Mr. Howe. I understand there is not. Senator, but I have not investi-
gated that point of law. .
Senator White. I take it, so far as my experience goes, you have
two methods of getting cash, either by loan or by what I call the cash-
suri-ender value of the policy ?
Mr. Howri. Correct.
Senator Wumi. And does this heading which you have here mean
the same thing as the cash-surrender value of the policy?
Mr. Howe, ^subject to minor qualifications, it does mean that that
is the aggregate cash-surrender value of the policies.
Dr. LuBiN. Is that cash-surrender value, would that total be greater
than the loan value?
Mr. Howe. Well, one may borrow as a general rule on a life-
insurance policy up to the cash-surrender value. Now, they make a
certain allowance for interest at the §nd. You can't borrow quite as
much money as you can get on surrender because^of that difference,
but as a practical matter the amounts are the same.
The Chaikman. In other words, interest is computed on the dis-
count basis rather than on the payment basis.
Mr. Howe. I am not sure how it is computed, but at least you c£^n
only borrow an amount, which will permit the company to collect a
little interest in addition to the sum borrowed for a short period.
Another aspect of this same problem — you will remember that we
are talking about factors of safety. This, of course, is a very sub-
stantial factor of safety, this $4,900,000,000 not subject to immediate
withdrawal.
The Chairman. Yes. Of course, if all were subject to withdrawal,
then the ability of the company to meet its liability by reason of
mortality might be impaired.
Mr. Howe. Yes.
Another aspect of this same problem
Dr. LuBiN (interposing). Mr. Chairman
The Chairman (interposing). Mr. Howe, there is some disagree-
ment with that conclusion on the part of Dr. Lubin and Mr. Gesell.
Dr. Lubin. I would like to have that question and your answer
repeated by the stenographer.
(The reporter read the question and answer as follows:)
The Chaibman. Of course, if all were subject to withdrawal, then the ability
of the company to meet its liability by reason of mortality might be impaired.
Mr. Howe. Yes.
Mr. Howe. I mean, it is subject to further qualification. Naturally
the liability to policyholders as constituted by these reserves is less
than the total assets of the companies. They nave capital in the case
of stock companies and they have surplus in the case of mutual com-
panies in excess of their liabilities to policyholders. They have all
of these factors of safety, but the point that I thought the Senator
was trying to establish was that this is an additional source of
strength to the companies and if they had no surrender charges, some
other method of protection would probably have to be devised.
Mr. Gesell. Mr. Howe, I thought the Senator's question was as to
whether this sum was necessary in order to meet liabilities which
might be incurred. However, if everybody withdraws, there will be
$4,900,000,000 left and there would be no liability, isn't that correct?
CONCENTRATION OF ECONOMIC POWER 14837
Mr. Howe. That is substantially it.
Mr. Gesell. There wouldn't be any liabilities left if everybody
cashes in. So it is a margin, isn't it, Mr. Howe, it is a margin of
safety, a factor of safety?
Mr. Howe. Yes; it is a margin of safety and a factor of safety.
It is substantially a surrender charge.
The Chairman. What is the relation of the surrender value to the
contract liability ?
Mr. Howe. We got into a question of reserves there.
The Chairman. The surrender value is always substantially less
than the contract liability, the mortality liability. On a $5,000 pol-
icy, for example, the cash-surrender value is considerably less than
that, just as the loan value is.
Mr. Howe. And so is the reserve ordinarily less than five thousand ?
The Chairman. Surely, but if there were not a limit to the cash-
surrender value, then obviously there would not be as sound a factor
of safety.
Mr. Howe. If you could pay your first annual premium and draw
out $5,000, you wouldn't have to do any other work.
The Chairman. Of course, that isn't the question at all. What
can you withdraw after the first premium is paid, as a rule?
Mr. Howe. In most cases you can withdraw nothing.
The Chairman. All right, then, with respect to when the second
premium is paid ?
Mr. Howe. There is some variation, but usually then you can with-
draw nothing.
The Chairman. In other words, this is all in accordance with law
in the various States, is it not?
Mr. Howe. That is right.
The Chairman. Now, the withdrawal of the first premium, and in
most cases of the second premium as well, is due, is it not, to the
feeling upon the part of the legislators that to permit the policy-
holder to withdraw the full amount of the premium would impair
the ability of the company to meet its mortality liability?
Mr. Howe. I don't think it goes quite as far as impairing their
ability to meet their liability. •'
The Chairman. Until a company has built up its investment in-
come, its primary source of revenue is the income from permiums,
is it not ?
Mr. Howe. Oh, yes-
The Chairman. And it still is?
Mr. Howe. It always is.
The Chairman. Your testimony showed only the other day the
income from preniiums is, I would say, three or four times that from
investments, is it not?
Mr. Howe. Greatly in excess ; oh, yes.
The Chah^man. So that it is only natural that there should be by
law some factor of safety with respect to the cash surrender value as
well as the loan value.
Mr. Howe. Yes.
The Chairman. That is all I am trying to say.
14838 CONCENTRATION OF ECONOMIC POWER
Dr. LuniN. Does the law specifically prohibit making a loan on
a policy or having a surrender value on a policy before a year or
two? *If my memory serves me correctly, one of the witnesses said
under the Massachusetts Savings Bank, you could get it in 2 months.
Mr. Gesell. That is correct ; and I know of no law which requires
a company to make a surrender charge.
Mr. Ho'wE. A maximum surrender charge is stipulated by law.
It is my impression that the companies can go as much farther as
they want in that respect but that may be different in different
States.
Senator White. Or- they can stop far short of that.
Mr. Howe. Certainly. They can charge the maximum surrender
charges pexmitted by law, or a lesser surrender charge.
Mr. Gesell. Or ho charge at all.
Mr. Howe. Correct.
Mr. Gesell. Will you continue witli your statement, Mr. Howe?
Mr. Howe. Another aspect of this same problem, which like the
surrender charge may be considered an additional factor of safety,
is the provision common in most insurance policies issued in recent
years tliat the policyholder may be delayed a period of 60 days to 6
months in the event he requests the cash value of his policy. It must
be stated that there is no evidence that the companies are making
use of that provision at the present time, but it exists as a check on
serious cash withdrawals in times of stress.
Dr. LuBiN. Does this mean, then, in reality, that under these
newer contracts,. that in times of distress when the probabilities of
the needs for borrowing are the greatest, the chances of getting your
mone}' are the least?
. Mr. Howe. I imagine. Dr. Lubin, that it works somewhat as the
"■similar provisions against savings banks withdra-wal. I think the
companies will use them very, very rarely, but the provision is there
and if a moratorium isn't enacted and they feel they need one, they
have the legal power to establish one of their own.
Dr. Lubin. But if you withdraw your money from a savings bank
you don't paj' the savings bank interest on the money you have
witiidrawn.
Mr. Howe. That is right.
Mr. Gesell. There is no interest charge on the cash surrender of
a policy, is there, Mr. Howe?
Mr. Howe. No; there is nothing on cash surrender.
Dr. Lubin. This refers to loans as well, does it not?
. Mr. Howe. Yes ; this provision applies, as I understand it, both
to policy loans and to surrender values, and it is included only in
policies which have been written in recent years. There are many
policies on the books to which such provisions do not apply.
Senator White. But it is designed to prevent runs?
Mr. Howe. That is right; and of course has been used by other
financial institutions.
Mr. Kade?. Mr. Howe, before those new provisions were inserted
in policies, had insurance companies complied with the obligation to
make loans at any time?
CONCENTRATION OF ECONOMIC POWER 14839
Mr. Howe. The paragraph after the next here discusses mora-
toriums, and I think that will answer your question.
Another factor of safety is the stability of income from renewal
premiums. Reference has already been made to the psychological
and other factors which tend to encourage policyholders to continue
payment of insurance premiums even in times of stress, and it is, of
course, a fact that once a policy has been sold, a continued income
'may be expected over a considerable period. This constant and stable
income provides a company with cash funds to meet almost any
emei-gency.
During the period of growth which the companies are experiencing,
income has almost invariably exceeded disbursements, and thus in
general it has been possible for the companies to meet their commit-
ments without liquidating assets even in times of stress.
Not the least of the factors of safety is the essential first lien char-
atter of life insurance assets. In general they consist of the safest
bonds and the best mortgages available. Therefore, the investment
inccHne as well as the value of life insurance assets are less affected by
fluctuations in economic activity than any other type of investment.
During the depression, additional factors of safety were created.
These were in the nature of temporary protective devices which were
placed upon the business as a whole; regardless of the needs of any
particular companies for the additional protection. I refer to con-
vention values and moratorium legislation.
Mr. White. Will you explain what you mean by convention values?
Mr. Howe. Yes; in subsequent paragraphs I go into that subject.
Mr. White. Bring it in in the natural order then.
Mr. Howe. All right. We will get into that subject. Convention
values for securities were established by the National Association of
Insurance Commissioners. These values, which applied to bonds and
stocks only, were substantially in excess of the depressed market quota-
tions then prevalent. On December 31, 1932, the use of convention
values for insurance companies resulted in balance sheet values of
bonds and stocks for the 26 coiApanies of $6,670,000,000 compared
with estimated market values as of that date of $5,545,000,000 or a
difference of $1,124,000,000. In the succeeding years convention
values have been gradually adjusted toward' market so that at the
present time there is no substantial difference between market and
convention values, on the portion of the portfolio to "^hich the con-
vention values apply. Presumably, the action of the Association of
Insurance Commissioners was taken not only for the purpose of pro-
tecting some companies in financial distress but by reason of the
recognition that the securities held by life-insurance companies were
in general of high quality and sound character and, therefore, not
necessarily of an ultimate value as low as that represented by the
prevailing market prices. The events of subsequent years have given
further indication as to why it is permissible to cite ths first lien
nature of the assets as a factor of safety.
Convention values were simply arbitrary values based in most cases
on actual market values at periods of time prior to the date of the
balance sheet, maybe a year or so back.
Senator White. And were established arbitrarily by the Associa-
tion of Insurance Commissioners?
14840 CONCENTRATION OF ECONOMIC POWER
Mr. Howe. Yes. The insurance commissioners of the various
States are organized in this National Association, and it is my under-
standing that they appoint a committee and that committee issued a
volume an inch or inch and a half thick, in which the prices of all
these securities were scheduled.
Senator White. What legal signif. ance, if any, did these conven-
tion values have?
Mr. Howe. I don't know that they had any legal significance.
They were simply used as the basis for determining the total assets
on the balance sheet.
Senator White. I wondered whether they had any bearing upon
the authority of a particular insurance company to cpntinu^ business
in a particular State oy not, and whether they were established pos-
sibly to avoid the ihipact of some State laws ?
Mr. Howe. I am sorry; I just can't answer as to the full purpose.
Senator White. Just what was the reason for establishing conven-
tion values?
Mr. Gesell. It is clear, is it not, Mr. Howe — perhaps I can help —
that these convention values enabled the companies to show a better
financial value than had they carried their security at market?
Mr. Howe. Yes ; they showed a better financial condition without a
doubt.
Mr. Gesell. In a case where that might have meant the difference
between solvency and insolvency then they did prevent insolvency.
Senator White. Then they did have some legal significance.
Mr. Howe. If that is legal significance, they certainly had it.
Senator White. I should think that a valuation which kept a man
out of insolvency had some significance, if a different value headed
him into insolvency.
Mr. Hg^ve. That is not true of all companies. -These values had
different effects on different companies.
Mr. Gesell. And the use of convention values, I understand, had
no particular significance as to what the particular situation might
have been. They were usfl by all companies?
Mr. Howe. They were usesd by all companies so far as I know.
Mr. Hayes. You mentioned that the difference between convention
and market value which existed at the end of 1932 has since been
substantially, if not entirely eliminated?
Mr. Howe. That is right,
Mr. ^ATES. Was that elimination brought about by an increase of
market values or a writing down of convention values, or both?
Mr. Howe. Both.
Mr. Hayes. The different treatment depended upon different policies
by different companies?
Mr. Howe. No, I don't think so. Some of the portfolio has appreci-
ated. Other securities, rails, and so forth, have gone into default and
have been written down to market, and the combination of these proc-
esses has resulted in the condition where this morning we found
that the portfolio on December 31, 1938, had a market value of
$360,000,000 less than the cost.
But on the other hand, the portfolio also has a market value of
$200,000,000 in excess of what it is carried on the balance sheet.
Mr. Gesell. Now, what about moratorium legislation?
CONCENTRATION OF ECONOMIC POWER 14841
Mr. Howe. I might make one brief statement about moratorium
legislation. Moratorium legislation was enacted quite generally
throughout the country. By virtue of special legislation passed on
March 7, 1933, the New York superintendent of insurance issued the
first moratorium regulation for that State under the date of March
9, 1933. The supermtendent's ruling provided that no cash or loan
values should be permitted except for the purpose of and to the extent
of covering payment of premiums or any obligations to the insurance
companies by the policyholders.
Mr. Gesell. You mean that a policyholder under that moratorium
legislation could make a loan or surrender one policy if he needed
the funds to meet some other obligation to the insurance company,
but otherwise not ?
Mr. Howe. That is right. The only exceptions were in cases of
extreme need in which the company could pay an individual policy-
holder not in excess of $100 as cash surrender or loan value in the
aggregate on all policies of ordinary insurance carried by him.
Mr. Henderson. Mr. Howe, was t^ere any moratorium on the re-
quirement of the policyholder's contract ?
Mr. Howe. You mean to pay premiums?
Mr. Henderson. Yes.
Mr. Howe. Not that I ever heard of. In fact, this was arranged
so that the policyholder could borrow on one policy or on his policy to
pay the premium but there was no moratorium on income.
The regulations were modified providing for the payment of full
cash and loan value for pay-roll purposes on March 17, 1933, and a
further extension of the purposes for which such funds might be
obtained was made by a regula'tion of April 3. On September 9, the
moratorium in New York was terminated.
Mr.'KADES. Mr. Howe, were you here when Mr. Buckner testified?
Mr. Howe. Only a portion of his testimony.
Mr. Kades. Were you here when he testified relative to policy
loans? Do you recall his statement that the policyholder had a right
to call for a policy loan at any time, and that the advance might be
called for at times when money was exceedingly scarce and very
dear ; consequently, interest rates on policy loans ipust necessarily be
charged without relation to the current money market ? In the light
of the moratorial legislation in 1933 and the new policy contracts, is
that statement still substantially accurate ?
Mr. Howe. Well, it is substantially accurate because the mora-
torium effectively lasted only a few days, but that is the exception
that proves the rule, if you want to follow that philosophy.
Mr. EVADES. Would you care to comment on whether or not there
might be a more reasonable relationship between current money rates
or perhaps the average of current investment income rate and the
rate on policy loans ?
Mr. Howe. Of course, you know that beginning, I believe it was
January 1, 1939, there was a reduction on policy-loan interest insti-
tuted in New York, and I think all of the large companies which are
operating in New York now carry a 5-percent policy-loan rate in all
their policies issued in all States — that is, the new policies which they
14842 CONCENTRATION OF ECONOMIC POWER
are issuing. It has nothing to do with the 6-percent rate which is
charged on policies issued before that date.
Mr. Gesell. I might say, Mr. Kades, that I think subsequent wit-
nesses from the companies will be in better position to talk about the
problem you have raised, since it is one of insurance management,
and if you don't mind I think it might be better to pass over it.
Mr. Kades. It is perfectly all right.
Mr. Henderson. I think, Mr. Gesell, that committee members might
well take note of what Mr. Howe is attempting tnd that is to interpret
the facts as we have developed them and not to give opinions on
managerial questions. I think we would like very much to have those
presenting material avoid giving opinions as far as possible.
Mr. Geseix. Now, this brings you, does it not, Mr. Howe"^ to the
question of valuation?
Mr. Howe. This does.
, Given those substantial factors of safety, it is surprising to find
thaf the companies have not taken a realistic position in all cases
in the statement of their assets and income.
First, with respect to assets, if the bonds owned by the 26 coni-
panies are classified in accordance with investment ratings it is
found that the indicated market value of Baa bonds on December
31, 1938, was $121,000,000 less than the value at which these bonds
were carried on the balance- sheet. In the case of Ba bonds, the
market value was $159,000,000 less than the value at which the bonds
were carried in the balance sheet. In other words Ba bonds were
carried at 45 percent over their market value. .
Mr. Gesell. There is a table on that, Mr. Howe. Which table is
that?
Mr. Howe. That is table 157.^
Mr. Gesell. That table shows, does it not, that taking the entire
bond account as a whole, the market value is some 200 million in excess
of the admitted asset value?
Mr. Howe. That is correct.
Mr. Gesell. The type of bonds which are carried at admitted asset
value, which is above market, start with the Baa, in the case of com-
panies as a whole, and run through the Ba and B bonds, do they not?
Mr. Howe. That is right.
Senator Wkfte. Were these values at which these securities were
carried on the books the convention values, or what were they?
Mr. Howe. Senator, the National Association of Insurance Com-
missioners still publishes values at which these securities may be
carried on the balance sheet, but at the present time convention values
and market values are almost synonymous. They apply, however,
only to a section of the portfolio.
Senator White. Then your answer is that these are not convention
values?
Mr. Howe. I should say that is right. Mostly they are so-called
amortized or investment values.
Mr. Gesell. Your ans^ver rather, Mr. Howe, is, is it not, that these
are convention values but the convention values and the market-values
are approximately the same since the companies do follow the con-
vention values still in setting up balance sheets?
> See Hearings, Part 10-A, p. 157.
CONCENTRATION OF ECONOMIC POWER 14843
Mr. Howe. That is right. They still publish this book with the
quotations in it, but at the present time the quotations in it are sub-
stantially market values. However, those are only used for the valua-
tion of securities which are rated B or less, or for bonds which are in
default.
The Chairman. What is the basis upon which the admitted asset
value is determined ?
Mr. Howe. The basis on which admitted asset value is determined,
Senator, depends first on whether a bond is considered to be amply
secured or whether it is not considered to be amply secured. First,
in the case of bonds which are considered to be amply secured, those
bonds are carried at cost, plus or minus an amortization factor which
is designed to reduce the bond to par, its face amount, by its maturity.
In other words, if a bond, neglecting minor differences in the table,
were purchased at 95 and it was to mature in 10 years, the price would
be advanced a half a point a year until after 10 years it would be at
par.
If on the other hand a bond were purchased at 105 to mature in
10 years, the price would be reduced a half of 1 percent a year in
the direction of par.
The Chairman. As carried in the admitted asset value table ? ^
Mr. Howe. Yes; as carried in the admitted asset value table.
That is the way the bonds which are classified as amply secured are
carried.
The Chairman. So that the purchase price, the cost, is the deter-
mining factor plus the amortization charge?
Mr. Howe. That is correct. ^
Mr. Gesell. That is in the case of bonds that are amply secured?
Mr.^ Howe. That is in the case of bonds that are amply secured.
That is the only section of the portfolio we are talking about at this
instant.
Mr. Pib:e. The same bond might be carried at a different price by
two different companies, depending on what their. cost was?
Mr. Howe. Absolutely.
Mr. GESELii. And also depending on whether or not the individual
companies found the bonds to be iamply secured ? .
Mr. Howe. That is right.
Mr. Gesell. There is latitude there in that one company may
declare a bond to be adequately secured and carry it at cost plus
amortization, and another company, which may hold the same bond,
may sell it inadequately secured and mark it down.
Mr. Howe. We have examples of that.
The Chairman. With- respect to those which ; are regarded as
inadequately secured, what is the basis on which the admitted asset
value of such a bond is fixed ?
Mr. Howe. Bonds which are considered to be inadequately se-
cured— and I will try to define that a little further— are carried at
market value. Ihat includes all the bonds that are in default and
all the bonds which are rated by any one of these four services, at a
rating of less than Ba (or a comparable rating) or a rating of B oi
le." In other words, anything less than Ba must be carried at
mai is.et.
See. Hearings, Part 10-A, p. 112.
14844 CONCENTRATION OF ECONOMIC POWER
The Chairman. So that inadequately secured bonds are carried at
the market Value?
Mr. Howe. That is correct.
The Chairman. Which is a mark-down from cost?
Mr. Howe. Ordinarily: yes.
The Chairman. But those which are regarded as adequately se-
cured are carried at cost rather than at market value?
Mr. Howe. That is correct; adjusted cost.
The Chairman. And we are dealing here now, of course, with those
which are adequately secured?
Mr. Howe. In part.
The Chairman. In this table? ^
Mr. Howe. In this table we have bonds which are rated all the way
from Aaa down to C.
The Chairman. There are no C's in tli. , laV! .
Mr. Howe. Ca.
Now, the bonds which are rated B or less must all be carried at
market, substantially, whereas the bonds which are rated Ba or
better
The Chairman (interposing). Are there any bonds in the port-
folios of any of these companies which are excluded from this com-
putation ?
Mr. Howe. Only tbe bonds which are in so-called schedule X, which
are consid ired to be relatively worthless.
The Ci airman. Then this table undertakes to reflect a condition
with respect to the whole bond accounts? ^
Mr. Howe. That is right.
The Chairman. And there is no distinction so far as this table is
concerned, between bonds which are adequately secured and those
which are not adequately secured ?
Mr. Howe. No, except as the ratings tend to indicate that.
The Chairman. And the excess of market value over admitted asset
value takes account of the fact that you have already described,
namely, that with respect to bonds which are inadequately secured,
they are carried at martet value, which in most instances, I take, would
be probably less than the cost?
Mr. Howe. In most cases, I think it would be less ; yes.
The Chairman. So with that understanding, we have the picture
in which the excess of market value over asset value is more than
$200,000,000?
Mr. Howe. That is right.
Mr. Gesell. Will you proceed, Mr. Howe.
Mr. Howe. Yes; I will.
I was just commenting here on the fact that the Ba bonds in the
aggregate get into the balance sheet by reason of the fact that they
are amortized at 45 percent over their market value. You see, the
Ba is the borderline classification. That is the weakest classification
of the bonds which are permitted to be carried at cost and, as it shows,
that particular classification of bonds are carried here at $159,000,000
more than their market value.
The Chairman. Suppose you were to eliminate the Governments
from this computation, what would that show ?
'See Hearings, Part lO-A, p. 1B7.
CONCENTRATION OF ECONOMIC POWER 14845
Mr. Howe. Well, the indicated appreciation on Governments, Sen-
ator, is $193,000,000, and the indicated appreciation on the total port-
folio is $200,000,000.
Mr. Henderson. And it also shows, does it not, that there isn't a
single company of the 26 that does not have an excess of market value
over admitted asset value in its Governments?"
Mr. Howe. That is correct.
Now, speaking again of this question of the Ba bonds and the fact
that they are carried at 45 percent over the market, betAveen companies
there was great variation. Western and Southern carried its Ba
bonds at 7.8 percent below the market, a conservative practice. Aetna
and Mutual of New York, on the other hand,. carried their Ba bonds
at over 60 percent above the market.
Ba bonds which are held by insurance companies in general are
"has beens" of the quality group. Moody says [reading] :
Bonds carrying the Ba rating are judged to have speculative elements; their
future cannot be considered as weU assured.^
Standard Statistics designated their comparable grade Bl as "fair";
Fitch describes their similar grade designated BB as "medium grade"
which, in their scale, is one notch below "good." Poor's describes
bonds of their similar rating B* as "better grade speculation class"
and states —
Bonds of this class are borderline issues falling in Group II of the Government
regulations and therefore are not considered eligible for bank investment.
On the other hand, the companies have an excess of market value
over balance-sheet value in the case of bonds rated Aaa, Aa, and A* as
well as in the United States Government bonds, so that the entire
portfolio on December 31, 1938, had a market value over $200,000,000
in excess of balance-sheet value.
Mr. Henderson. Before you go on with that, will you come back to
the Ba, table 157 ? ^ I don't know whether you have done anything
like this or not — the ratio of those minus signs, you might say, to
the total admitted assets of the different companies — whether or not
the companies pretty uniformly had these Ba bonds which were below
in value or whether their experience was just about the same. For
example. Metropolitan has bonds that are $5,647,000 below.
Mr. Howe. That is right, $50,647,000.
Mr. Henderson. But it has a large portfolio ?
Mr. Howe. That is right.
Mr. Pike. Ninety-nine million dollars of them. Table 156 shows
$99,000,000.^
Mr. Howe. Yes.
Mr. Henderson. I wondered whether you made any calculations as
to whether or not any, -company showed up extraordinarily well or
extraordinarily poorly in this relationship to the total accounts? If
you haven't, it's all right.
Mr. Howe. I think I have it right here.
Based on market value and the relationship of that to admitted
asset value, we find that the percentage varies all the way from the
Western and Southern, which carried their Ba bonds at 7 percent
1 "Moody's Bond Record," Key to Moody's Ratings.
" See Hearings, Part 10-A, p. 157.
» Ibid., p. 15f.
12'f491-^l— pt. 28 H
14846 CONCENTRATION OF ECONOMIC POWER
less than their market value, to the Mutual Life of New York, which
carries their bonds at 63 percent in excess of market value.
Now, for the leading companies, the percentages of the excess of
admitted asset value over market value are these :
Metropolitan 50. 86
Prudential 36. 89
New York Life 51-77
Equitable 38. 96
Northwestern 26.94
Travelers 40. 97
John Hancock • 47. 16
Penn Mutual 16. 19
Mutual Benefit 44. 18
Aetna 63.09
Connecticut Mutual 54. 42
Bankers Life carried their bonds at less than their market value,
2 percent less, and so forth. So there is a very substantial difference
between the companies with respect to that.
In view of the fact that this excess of market value over balance
siieet value of the best bond is being withdrawn year by year in the
interest earnings of the companies, through the regular amortization
procedure, it is a questionable practice to offset it against the depre-
ciation of lower grade bonds. These latter bonds are of less security
and may ultimately result in loss. The companies have failed to
take account of this shrinkage in market value of $280,316,000 in
the case of Baa and Ba bonds. Further, it is interesting to note that
there is substantial difference among companies in handling bonds of
borderline security. In some instances, companies have written such
bonds down to market. In other instances, companies accounting for
the same bonds may carry them at their amortized value. For
example, Baltimore & Ohio Railroad, Southern Division First 5's
of .1950 were carried by the Aetna, Travelers, and Prudential at 34,
whereas the Metropolitan and New York Life carry the bonds at
10034 and 98%, respectively. In the case of Hudson and Manhattan,
first-lien-mortgage series A, 5's of 1957, the Prudential carries bonds
at 45 and the Mutual Benefit at 45 while the Aetna and the Equitable
of New York carry them at 97% and 98^4, respectively. In the case
of the Florida East Coast Railroad 50-year first mortgages 41/2 'fe of
1959; Metropolitan, New York Life, and Mutual Life carry the bonds
at 95% to 98%, respectively.
The amounts of these bonds held December 31, 1938, by these
companies varied from over $5,000,000, in the case of one issue by the
Metropolitan, to $31,000 in the case of another issue held by another
company.
This difference of treatment undoubtedly results from differing
interpretations placed upon the rule for bond valuations promulgated
by the superintendent of insurance of New York. The portion of the
ruling applicable to these bonds is— I am speaking of these border-
line bonds— "for all other bonds which are not in default as to prin-
cipal or interest, which are found by the insurer to be amply se-
cure"— notice that, "found by the insurer to be amply secure" — ^"and
which are also rated Bl, Ba, BB, B*, or higher, by any one or
more of the investment rating concerns referred to in the next pre-
ceding section, amortized value shall be entered in this column."
That means the amortized value shall be used.
CONCENTRATION OF ECONOMIC POWER 14847
Mr, Gesell. Take it another way; it means the companies have
latitude on what valuations they place upon the borderline securities ?
Mr. Howe. That is right.
Thus the commissioner clearly says that only bonds which are
amply secured, in the opinion of the insured, shall be carried at
amortized values.
The Chairman. That makes the opinion of the insurer the standard
which fixes the value?
Mr. Howe. That is right.
Senator White. And there is a variation of a couple of hundred
percent ?
Mr. Howe. That is right, a very substantial variation in this nar-
row borderline area.
The Chairman. Is there any such variation in any other area?
You have referred two or three times to this narrow borderline area.
Mr. Howe. With respect to the well-secured bonds, cost is the ae-
termining factor. With respect to the bonds at the other end of the
spectrum, the ones in default, they have to put them at market
Mr. Gesell (interposing). Of course, when we talk about narrow
areas, the Ba's alone amount to $159,000,000 worth of securities.
Mr. Howe. No, the Ba's amount to $358,094,000 at market value
and are shown on the balance sheet at $159,589,000 more than their
market value.
The Chairman. What page is that?
Mr. Howe. Page 156 and page 157, Senator.^
The Chairman. What percentage of the bond account do you s&j
would fall within that group?
Mr. HowB. Well, now, lers see here, what percentage of the Ba,
Baa
Mr. Pike (interposing). Twr d a half percent, isn't it?
Mr. Howe. Yes, 2^ percem . Jie Ba, and a larger percentage in
Baa.
The Chairman. So that so far as 971^ percent of the bond account
is concerned, they are carried without any question, either at cost or
at market, and it is only in this narrow group of 2l^ percent that
there is this variation of which you speak ?
Mr. Howe. That is right. It is only $159,000,000 or something like
that.
Mr. Gesell. Now, there is a misunderstanding. You are talking
about both Ba and Baa. Senator O'Mahoney is talking only about
Ba.
The Chairman. What classifications fall into the 21/2 percent?
Mr. Howe. The 21/2 percent would constitute the Ba bonds, $358,-
000,000, and the Baa bonds constitute) an additional $1,272,000,000.
The Chairman. Do you find any variation in the values at which
the Baa are carried?
Mr. Howe. No, they are almost all carried at amortized value, al-
though the amortized value is in excess of the market value uni-
formly.
The Chairman. It is the other small group that shows the var-
iation ?
Mr. Howe. That is right.
> See Hearingb, Part 10-A.
14848 CONCENTRATION OF ECONOMIC POWER
Mr. KLades. How much in excess of the market value is the balance
sheet value of Ba bonds?
Mr. Howe. Forty-five percent in the aggregate for these 26 com-
panies.
In spite of the fact that bonds in default are carried at market, no
similar provision is made for mortgages in default. This table shows
the amount of mortgages delinquent as to interest 3 months or more
and the amount of mortgage interest due and unpaid as of December
31, 1938.
Mr. Gesell. That is the table I now show you, entitled "Mort-
gages Owned as of December 31, 1938, Delinquent 3 Months or More
as to Interest."
Mr. Howe. Yes.
Mr. Gesell. I wish to offer this table for the record.
The Chairman. The table may be received.
Mr. Gesell. That will be designated "Exhibit No. 2268."
(The table referred to was marked "Exhibit No. 2268" and is
included in the appendix on p. 15497.)
Mr. Gesell. Will you proceed with the discussion of this table?
Mr. Howe. In spite of the fact that bonds in default are carried
at market, no similar provision is made for mortgages in default.
The table which has just been introduced in the record shows the
amount of mortgages delinquent as to interest 3 months or more and
the amount of mortgage interest due and unpaid as of December
31,1938.
It will be seen that the mortgages amounting to over $520,000,000
were delinquent; as to interest, over $47,000,000. In other wor4*f
the delinquent interest amounted to $47,000,000.
Mr. Gesell. On 520 millions of mortgages ?
Mr. Howe. Yes. The question as to whether it is conservative
pcrlicy to carry these mortgages in the balance sheet at their full
unpaid principal amount is one which merits serious consideration.
This is the next table.
Mr. Gesell. That is the table entitled "Interest Due and Accrued
on Bonds and Mortgages," is it not?
Mr. Howe. That is right.
Mr. Gesell. I wish to offer the table for the record.
The Chairman. It may be received.
(The table referred to was marked "Exhibit No. 2269" and is
included in the appendix on p. 15498.)
Mr. Howe. The table which has just been introduced in the record,
shows the amount of interest due and accrued on bonds and .nort-
gages on December 31, 1938.
Mr. Gesell. What is the amount of such interest, Mr. Howe?
Mr. Howe. The amount of delinquent interest on bonds in default
is $118,000,000; the m -tgage figure is $47,000,000; the total delin-
quent interest on bonds and mortsrages as of December 31, 1938, was
$166,280,000.
Mr. Kades. Mr. Howe, is it possible for you to give us a per-
centage of the amount of assets of the leading life-insurance com-
panies which is carried at other than market value, which is sub-
ject to a market valuation?
Mr. Howe. Well, so far as market values are concerned, the only
assets which are carried precisely at market values are bonds in
CONCENTRATION OF ECONOMIC POWER 14849
^- default and bonds below rating. The other bonds are carried at
an adjusted cost, which at the present time, is less than their market
value, and mortgages are carried at the unpaid principal amount,
and real estate is carried at whatever values they may elect. So
that a very small proportion of the assets are carried exactly at
market value.
Since the valuation of real estate is left almost entirely to the dis-
cretion of management, it is not surprising to find that great differ-
ences exist among the companies in the standards adopted for valuation,
and in many cases an overstatement appears to exist.
(Off-the-record discussion.)
Mr. Howe. In the case of farm real estate, for instance, there
was great variation between the companies as to the relationship
between the value at which it was carried on its books, and the
face amount of the mortgages which the companies had held on
this real estate before foreclosure. This ratio varied from 78.71
percent in the case of New York Life to 119.17 in the case of the
Union Central.
Urban real estate showed a somewhat similar condition in that
the book value of the real estate varied from 85 percent, the face
amount of the mortgage which the companies had held on this
real estate before foreclosure in the case of the New York Life
Insurance Co. to 120.66 percent in the case of the New England
Mutual,
Further evidence of the extreme difference in the relative level
of values at which city real estate was carried by different com-
panies is indicated by the fact that the real estate of the New-
York Life was carried on its books at 5.8 times gross income, whereas
in the case of the Union Central such real estate was carried on
its books at 18.23 times gross. In cases where an overstatement of
assets exists this has also caused a corresponding increase in income
over the period during which the overstatement has taken place.
One of the important forms in which this overstatement of income
has occurred in a few companies is the form of capitalization of
accrued and uncollected interest income on mortgages.
Mr. Henderson. What do you mean by that term "capitaliza-
tion"? Ordinarily that means that you take an interest rate of,
say, 5 percent, and multiply the income by 20, and put it on your
books at that ; is that what you mean by this ?
Mr. How^E. No; it is not, commissioner. The capitalization of
interest arises, really, in three ways. It always arises out of a situ-
ation where a borrower is not able to meet his interest charges. If
a borrower has been unable to meet his interest charges and an
accumulation of interest or taxes or other charges on the mortgage
has occurred, the company may sit down with the borrower . and
draft a new mortgage for a larger amount, taking into account
all the accrued interest and all the accrued taxes, and so forth,
adding that on to the face of the mortgage and starting afresh.
Mr. Henderson. Is that known in the insurance business as capital-
izing?
Mr. Howe. That is one of the ways i • which interest is capitalized.
There are three ways. The second type of capitalized interest occurs
in the case where a borrower is unable to meet his interest and the
lender says to the borrower, "All right, you don't have to pay us the
14850 CONCENTRATION OF ECONOMIC POWER
full rate, shall we say 5 percent, on the mortgage, but only 2 percent.
The remaining 3 percent we will accrue and you can p"ay that after
10 years, shall we say." Now, the 3 percent in that case, in some
instances, is taken into income right along, just as fully as the 2
percent, which is fully paid.
Mr. Henderson. Now, wait a minute. It is taken into income,
although they don't get it?
Mr. Howe. That is right.
Mr. Henderson. Wait a minute. I want to get this straight. You
mean that some insurance companies take into income account ijiterest
that is not received?
Mr. Howe. Certainly. Not received in cash; it is simply added
to the book indebtedness of the borrower.
Mr. Henderson. But that is adding to the principal amount.
Mr. Howe. Sure.
Mr. Henderson. That isn't income, I mean in the ordinary sense
of the word.
Mr. Howe. I am inclined to agree with you.
Mr. Gesell. I doubt if it is income in the extraordinary sense of
the word.
Mr. Henderson. Yoa are sure of what you are saying ?
Mr. Howe. I am as confident as I can be of it, sir. I have made
quite a study of this phase of the situation.
Mr. Gesell. Can you give us an example, Mr. Howe, of what
this capitalization of interest means in a specific case ?
Mr. Howe. Yes; I can. Now, may I just say there is a third way
of capitalizing interest, and that is just simply writing it down with-
out reference to any arrangement with the borrower. Those are
the three ways.
Mr. Gesell. May we have an example of it?
Mr. Howe. Yes. This is table 177.^ This table has the disad-
vantage that it refers only to farm real estate, except in certain cases,
and I can read the amounts of capitalized interest which occurred in
the cases of certain companies, if the committee is interested.
Mr. Gesell. You mean this would be capitalized interest for city
as well as farms?
Mr. Howe. That is right.
Mr. Gesell. That doesn't show in the exhibit.
Mr. Howe. It shows, but to get it- out would require the com-
bination of two tables, 177 and 214,^
Mr. Gesell. Table 214 shows the urban and 177 shows the farm
and you now have the total amounts that you wish to read?
Mr. Howe. That is right. In the case of Prudential, the amount
so capitalized during the period 1932 to 1938 amo.unted to $3,253,000.
In the case of the New York Life Insurance Co., the amount was
$2,389,264. In the case of the Equitable Assurance Society of the
United States, the amount was $481,000.
Mr. Gesell. The Metropolitan you did not mention.
Mr. Howe. The Metropolitan did not capitalize any interest during
that period.
The Chairman. Explain this capitalization of interest again,
please.
' See Hearings, Part 10-A, p. 177.
« Ibid., p. 2ll.
CONCENTRATION OF ECONOMIC POWER 14^51
- Mr. Howe. It occurs in three ways, Senator. First is where there
is a mortgage which is rewritten. The borrower get in trouble; he
is delinquent' on his mortgage ; he is in arrears either with respect to
taxes, interest, or other charges. The lender sits down with him and
says, "Now, if we reorganize this debt and make you pay your interest
monthly, instead of semiannually, and all these things, perhaps we
can get out of this hole," so that we will write a mortgage for an
increased amount, taking into account the interest which has not been
paid and the taxes which the insurance company may have had to
advance on behalf of the borrower, and so this new mortgage for the
larger amount is put upon the books.
The Chairman. Now, then, the difference between the original
mortgage at its face value and the new mortgage at its increased value,
which includes the unpaid interest, must be accounted for in some way ?
Mr. Howe. Correct.
The Chaibman. Now it is accounted for as income ?
Mr. Howe. That is correct.
The Chairman, Is there any other way to account for it ? It is an
increased asset, assuming that it is to be paid, technically?
Mr. Howe. Yes ; assuming the mortgage is as good as it was before
for the increased amount, it is all right.
The Chairman. The mortgage, of course, is sustained by real prop-
erty?
Mr. Howe. That is right ; but at the time that a recomposition of a
mortgage of this sort is made it is not necessary to sit down and
appraise the property and determine that the new mortgage is less
than two-thirds of the appraised value of the property.
Mr. Gesell. This is just added on ?
Mr. Howe. Yes; it is just added on.
The Chairman. But there is no other way of making the book-
keeping entry, is there ?
Mr. Howe. No ; if you are determined to put the new mortgage on
the books at the higher figure, it has got to affect tl e income account.
The Chairman. The question is whether a mortgage of this kind
should be carried upon the books at its full value, or whether it should
be carried on the books at a depreciated value because it wasn't paid ?
Mr. Howe. That is right.
The Chairman. And that judgment might depend upon the char-
acter of the real property which sustaihs the mortgage ?
Mr. Howe. I should think it would very much depend. If the mort-
gage is already a very full mortgage, the capitalization of interest un-
der tliose circumstances is very different from what it would be if the
mortgage was a 20-percent mortgage, for instance.
Mr. Geseix. There is more to it than that, isn't there, Mr. Howe, in
that capitalizing the interest? The company is showing that it has
received interest which has not been paid ?
The Chairman. Well, it hasn't received it in cash but it has received
a promise for an increased payment.
Mr. Gesell. Yes ; but it has not received it in cash, is that not cor-
rect?
Mr. Howe. Yes ; that is correct.
The Chairman. That of course is obvious, but it is merely a ques-
tion of whether this increased asset should be regarded as income or
14852 CONCENTRATION OF ECONOMIC POWER
not. I suspect that in the computation of the income tax, an accrual
of that kind would be subject to taxation on the part of an individual.
Mr. Howe. Well, if he keeps his books on a cash basis it would not.
The Chairman. But it is a thing of value that is received and any-
thing of value that is received is income.
Mr. Howb'. All right.
Mr. GeselIv. But your question suggested, Senator, that there was
no other way of accounting for this accrued but unpaid
The Chairman, (interposing). I asked whether there was any
other way.
Mr. Gesell. There is another wa}^, and that is, to be realistic about
it and not count it as income.
Mr. Howe. Metropolitan has ipitalized no interest. They must
have made some deals with some of their mortgage-holders. You
can't hold tremendous mortgage accounts like theirs without having
occasionally to make some adjustment.
The Chairman. That might be a matter of judgment as to whether
or not the real property should be carried at its real value, at its
original value.
Mr. Howe. Absolutely.
The Chairman. What other method of capitalization were you
speaking of?
Mr. Howe. The second method of capitalization occurs in a case
like this. The mortgage becomes delinquent, shall we s£^y as to
interest. The lender sits down with the borrower and the borrower
says, "I can only pay you 2 percent. You can have the property or I
will pay you 2 percent," or for some other reason he can only pay
2 percent. The borrower says to him, "All right; we will take 2
percent for the next so-many years, but the balance of the contract
rate will accrue against you and at the end of this period you will
have to pay it.'' So that as that interest accrues it is also taken into
income just to the same extent that the 2 percent which was fully
paid and cash was taken in.
The Chairman. You mean as it accrues though not paid?
Mr. Howe. As it accrues, though not paid.
The Chairman. Because it becomes an obligation to be paid later
on? It is an account receivable to be handled at some future time?
Mr. Howe. That is right.
Mr. Gesell. The theory there is -that maybe no demand has been
made for the interest and so that even though it is delinquent, it
has still been received because it hasn't been defaulted on, isn't that
the theory being expressed?
Mr. Howe. Yes; there has been no demand and it can't be in
default, and therefore it is good and they take it in.
The Chairman. What I see is the difference between cash income
and income in another form, and I can understand why some ac-
countants might call it income.
Mr. Henderson. You couldn't make a policy loan with it, or
you couldn't pay an officer's salary, and you couldn't pay rent with it.
It looks to me like that old saying, you know, Mr. Chairman, of
:-iomeone who signed a note for a debt and said, "Thank God, that
is paid !"
Mr. Howe. The third method, Senator, is simply a variation of the
second. Here is a case, shall we say, in which a, mortgage is totally.
CONCENTRATION OF ECONOMIC POWER 14853
delinquent as to interest, no interest is being paid. Well, it is ac-
cruing, you see ; the debt is being increased, and so it is income and
we will take it in as income. If the value of the property is such
that the thing all washes out and we get the ^terest and everything
back, it is all right, but it seems like a practice which could be a little
more conservatively handled.
The Chairman. Does it appear in the statements as indistinguish-
able from cash income?
Mr. Howe. Extremely indistinguishable.
Mr. Gesell. Entirely indistinguishable.
Mr. Pike. How did you get these figures of capitalized interest?
Mr. Howe. By asking for them.
Mr. Henderson. You didn't get them out of the Convention Form?
Mr. Howe. No; I did not.
The Chairman. What is the total amount?
Mr. Howe. The total amount of interest which has been capitalized
by these companies during this period is $25,463,000.
The Chairman. Wliere does that appear?
Mr. Howe. That is really the total of tables 177 and 214, Senator.^
Here the tables are divided between farm and urban, and I have made
a consolidated table.
Mr. Gesell. About half of that rests with one company ?
Mr. Howe. That is right.
Mr. Gesell. Will you show what that company is and what the
effect of that capitalization item is ?
Mr. Howe. Outstanding in this connection is The Union Central
which company has capitalized interest to the extent of $10,954,000
since 1932.^ This is an amount which is in excess of the surplus and
contingency reserves of the company. The company is a stock com-
pany, however, and has capital in excess of surplus and contingency
reserves.
The Chairman. What is the explanation of that method from the
point of view of a company which follows it ?
Mr. Howe. The explanation I tjiink is the one that you have given,
that — well, after all
The Chairman (interposing). I am not an accountant.
Mr. Howe. I mean, the. theory of it is that if the company recovers
and be made whole from the security, there iS no harm; I mean the
real property security, there is no harm in capitalizing their interest
because they will be paid back anyhow, ultimately.
Mr. Gesell. How does their real estate carry on their books from
a vf^luation point of view in relation to the others ? It is the highest,
is it not, 18.23 times?
Mr. Howe. That is right. The Union Central urban real estate is
- carried at 18.23 times gross.
Mr. Pike. They also have probably the highest ratio of real estate
owned to total assets?
Mr. Howe! Yes ; they have a higher ratio.
Mr. Gesell. In a way you might say it was a symptom of difficulty
in the real estate, would you not ?
1 See Hearings, Part 10-A, pp. 177 and 214.
2 In this connection see also memorandum regarding this item, subsequently sub-
mitted by W. Howard Cox, president, The Union Central Life Insurance Co., which appears
in appendix, pp. 15629-15631.
14854 CONCENTRATION OF ECONOMIC POWER
Mr. Howe. Well, it is a symptom of something; yes. The Union
Central has the highest percentage, or one of the highest percentage^,
at least, on real estate of any of the companies, as shown by table
.104, 11.66 percent of total admitted assets is in farm real estate,^ and
0.66 percent in city real estate.
The Chairman. Wliat is the geographical distribution of the mort-
gages of this company ?
Mr. Howe. Thev have a rather wide geographical distribution,
Senator. My recollection is that they are m 32 States, or 33.- They
have property in Alabama
The Chairman (interposing). What page?
Mr. Howe. Page 167.^ I am speaking of farm mortgages. We don't
need to review the urban account because it is relatively small. The
Union Central has 910,000 of mortgages in Alabama; none in Ari-
zona; 958,000 in Arkansas; 1,041,000 in California; 1,833,000 in Colo-
rado; none in Connecticut; none in Delaware; none in District of
Columbia; one in Florida.
In Georgia they have 1,202,000; Idaho, 1,220,000; Illinois, 1,861,000;
in Indiana, 3,788,000; Iowa, 4,255,000; Kansas, 3,867,000; Kentucky,
505,000; Louisiana, 1,048,000; none in Maine; none in Maryland;
none in Massachusetts. In Michigan, 633,000 ; in Minnesota, 2,862,000;
Mississippi, 1,763,000; Missouri, 3,482,000; and then as we skip along.
Senator, unless you want me to read all of these, you will see that in
Wyoming they have 50,000.
The Chairman. Well, Nebraska carries 3,829,000.
Mr. Howe. That is right.
The Chairman. And South Dakota, 1,523,000; North Dakota has
1,401,000, indicating that their difficulties were in the agricultural
States where the farm problem was the greatest.
Mr, Gesell. Does that complete the comments that you have, Mr.
Howe, up to a discussion of the operating results and lines of
business ?
Mr. Howe. Yes ; that completes that.
Mr. Gesell. Then unless the committee has some C[uestions, that
completes the presentation today. I would like to bring Mr. Howe
back at some auspicious occasion to discuss lines of business after
the committee and Mr. Howe have had a little rest.
The Chairman. Are there any other questions now to be asked of
Mr. Howe?
Mr. Henderson. I think in view of its importance I would like to
go back to this capitalization — sometime, not now — of the gross income
that you mentioned. I think that ties right into this last item, and
when we pick up again let's have a little more information on it.
Mr. Gesell. I might say that tomorrow we will begin a considera-
tion of life insurance company investments and farm real estate
and farm mortgages, and the first witness will be Mr. Norman J.
Wall, head of the Division of Agricultural Finance, Bureau of Agri-
cultural Economics.
The Chairman. The committee will stand at recess until 10:30
tomorrow morning.
(Whereupon at 4 : 05 p. m., the committee recessed until Thursday,
February 15,. 1940, at 10:30 a. m.)
1 See Hearlnja, Part 10-A, p. 104.
•Hearings, Part 10-A.
INVESTIGATION OF CONCENTKATION OF ECONOMIC POWER
thursday, february 15, 1940
United States Senate,
Temporary National Economic Committee,
Washing on, D. G.
The Committee met at 10:40 a. m., pursuant to adjournment on
Wednesday, February 14, 1940, in the Caucus Room, Senate Office
Building, Senator Joseph C. O'lVtahoney, presiding.
Present: Senator O'Mahoney '(chairman), Representative Wil-
liams, Messrs. Henderson, Kades, Pike, and Brackett.
Present also : Senators Guy M. Gillette, of Iowa ; George Norris, of
Nebraska ; Robert La Follette, of AVisconsin ; and Clyde L. Herring,
of Iowa ; Representatives Vincent F. Harrington, of Iowa ; John W.
Gwynne, of Iowa; and Henry O. Talle, of Iowa; James V. Hayes,
Department of Justice; Gerhard A. Gesell, special counsel; Ernest
Howe, chief financial adviser, and Hollis Black, attorney, Securities
axid Exchange Commission.
The Chairman. The committee will please come to order. Mr.
Gesell, are you ready to proceed?
Mr. Gesell. I am. Senator. I have a short statement.
During the next 2 days we will consider life insurance company
farm investments. The committee will recall that the statistical sum-
mary entitled "Operating Results and Investments of the Twenty-six
Largest Legal Reserv^e Life Insurance Companies Domiciled in the
United States" ^ which is in evidence discloses that the 26 companies
held at the end of 1938, $743,961,00O of farm mortgages and $529,392,-
000 of farm real estate. In addition, they owned $81,755,000 of farm
real estate under contract of sale making a total farm investment of
$1,355,108,000. The Prudential is the most active company in the
field of farm mortgages and farm real estate. Its holdings of $167,-
298,000 of farm mortgages are over twice that of an^ of the other
26 companies. In the case of all but 4 of the 26 companies who do
not -own farm mortgages, farm investments represent a substantial
portion of the portfolios ranging as high as 17 percent in the case of
the Equitable of Iowa.
At the end of 1929 the 26 largest life insurance companies owned
$1,787,000,000 worth of farm mortgages. During the next 10 years
this amount (decreased until at the end of 1938 it stood at $743,000,000.
During this -period the amount of farm real estate owned has risen
from $81,000,000 to $529,000,000, with another $81,000,000 worth
owned under contract of sale. From the beginning of 1932 to the end
of 1938 the companies acquired $430,000,000 of farm mortgages.
> See Hearings, Part 10-A.
14855
14856 CONCENTRATION OF ECONOMIC POWER
The Chairman. It might be interesting, Mr. Gesell, to remark at
that point that while the value of farm mortgages held by the insur-
ance companies was declining, beginning with 1929 and 1930, the
value of farm mortgages held by the Federal land banks and the
Fai-m Credit Administration under the Land Bank Commissioner was
steadily increasing, so that there was a transfer of these farm mort-
gai^es from tlie life insurance companies to government agencies.
Mr. Gesell. That is correct, and we will present figures through
the first witness with respect to that matter.
Of farm real estate owned December 31, 1931, and that acquired
between that date and December 31, 1938, 32.66 percent had been sold
by the latter date. The percentage of such farm real estate sold
ranged, for individual companies, from 4.6 to 70.3 percent. Net in-
come on farm real estate owned in 1938 averaged 0.93 percent before
depreciation.
Of mortgages owned December 31, 1938, $195,000,000 at book value
was on farms in Iowa and $91,000,000 was on farms in Illinois. At
the same time $2,000,000 was on farms in Alabama and $2,000,000 on
farms in South Carolina. The 26 companies reported no farm mort-
gages in several States, among them Maine, New Hampshire, and
Massachusetts. Relatively few loans were made in many Southern
States.
The bulk of farm mortgages owned by the insurance companies is
from $5,000 to $25,000 in size. As of December 31, 1938, 14.7 percent
of farm mortgages were delinquent as to interest 3 months or more.
In 1938 the average interest rate on farm mortgages owned by all
companies was 4.7 percent.
Because of their huge investments in farm real estate, life insurance
companies are an important factor in the agricultural economics of
the country. Difficulties with these investments have placed them
among the largest landowners in the country. The economic and
social consequences of insurance companies as creditors of farmers
and owners of farm land pose many interesting and difficult questions,
some of which cannot yet be answered and others to which the answers
can only be suggested.
In the period between the war and 1929, insurance money in liberal
amounts flowed into the agricultural country. In their efforts to
secure good mortgages the insurance companies entered into active
lending competition with one another and with local financial insti-
tutions, making farm credit comparatively easy to be had in some
parts of the country. What were the effects of this generous credit
upon agriculture? Will the insurance companies resume lending
on the same scale as formerly? What will be the results if they fail
to do so?
In some parts of the country in which farm real estate did not
api>ear to be as attractive a security as in other parts, the insurance
companies made few farm mortgages. What has been the effect of
this policy upon those sections? Has this policy served to enhance
the difficulties of farmers in these areas? Has the result of insur-
ance operations been a drawing off of capital from some sections,
particularly from the farms of the South? And why have some
companies not loaned money on farms at all ?
During the depression thousands of farmers came into financial
difficulties and the insurance companies, as well as other lendei-s, were
CONCENTRATION OF ECONOMIC POWER 14857
forced to foreclose their mortgages in order to protect their invest-
ments. As landlords, these companies have become farm managers^,.
What effect has this absentee ownership had upon the agricultural
communities of the Middle West? Has it encouraged the rehabili-
tation of these communities or has it resulted in an uprooted popu-
lation ?
In recent years the Federal Government, through the Depart-
ment of Agriculture, has undertaken an extensive farm program.
What has been the effect of this program upon the insurance com-
panies' investments? Has it helped or hindered the insurance com-
panies in their efforts to work out the problems which unprecedented
numbers of foreclosures forced upon thein? And conversely, what
has been the effect of insurance-company ownership upon the Gov-
ernment's farm program?
These are not new questions. It is hoped the testimony will, how-
ever, throw further light on the problems raised and contribute to
their solution. I might point out to the committee that the informa-
tion on farm mortgages and farm real estate will be found, com-
mencing on table 161 of "Exhibit No. 2250" and continuing to table
192.1
The first witness will be Mr. Norman Wall, of the Bureau of
Agricultural Economics.
The Chairman. Mr. Wall, do you solemnly swear that the testi-
mony you are about to give in this proceeding shall be the trutli,
the whole truth, and nothing but the truth, so help you God?
Mr. Wall. I do.
TESTIMONY OF NORMAN WAtL, HEAD OF THE DIVISION OF AGRI-
CULTURAL FINANOT, BUREAU OF AGRICULTURAL ECONOMICS,
DEPARTMENT OF AGRICULTURE, WASHINGTON, D. C.
Mr. Gesell, What is your official title, Mr. Wall ?
Mr. Wall. Head of the Division of Agricultural Finance.
Mr. Gesell. Of the Bureau of Agricultural Economics?
Mr. Wall. That is correct.
Mr. Gesell. How lon^ have you been connected with the Bureau
of Agricultural Economics?
Mr. Wall. Sinc^ 1925.
The Chairman. And the Bureau of Agricultural Economics is in
the Department of Agriculture?
Mr. Wall. That is right.
Mr. Gesell. Since 1925?
Mr. Wall. Yes.
The Chairman. Are you a civil-service employee?
Mr. Wall. Yes, sir.
Mr. Gesell. I want to show you first, Mr. Wall, a table entitled
"Farm-Mortgage Debt," and ask you if that was a table which was
prepared under your supervision?
Mr. Wall. That is correct, sir.
Mr. Gesell. I wish to offer the table entitled "Farm-Mortgage
Debt" for the record.
The Chairman. The exhibit may be received.
' Hearings, Part 10-A, pp. 161 and 192.
14858 CONCENTRATION OF ECONOMIC TOWER
(The table referred to was marked "Exhibit No. 2270" and is
included in the appendix on p. 15498.)
The Chairman. May I interrupt to say for the record that the
committee has the pleasure of having the attendance this morning
of Senator Herring, of Iowa. It is only natural that Iowa should
be represented in a study of farm mortgages according to the sta-
tistics already presented here.
Mr. Gesell. Mr. Wall, with respect to the table entitled "Farm-
Mortgage Debt," will you point out some of the significant figures
shown on that table and make any comments which you wish?
Mr. Wall. As one looks at the table on total outstanding farm-
mortgage debt, one is impressed with the very rapid rise of this
indebtedness from the pre-war period to the early twenties.^ From
1910 to 1923 the total farm-mortgage debt more than tripled, in-
creasing from around $3,200,000,000 to $10,786,000,000 in 1923.
, There were several factors accounting for this rapid, rise in the
indebtedness. In the early period, say from 1910 to 1916, the in-
crease in debt reflects primarily a continuation of the upward trend
in indebtedness that had been occurring since almOst the beginning
of the century. During that period farm-land values had been Hs-
ing almost continually, farm income was on the upward trend, there
was an expansion in the number of banks serving agricultural com-
munities, and we can consider that whole period as one of credit
expansion.
Mr. Gesell. That is the period up to '23?
Mr. Wall. No; I am speaking of the period up to 1916. Begin-
ning with 1916 and continuing to 1920, we began to get the influences
of the very rapid rise in agricultural prices associated with the war-
time demand and with our own entry into the World War.
The Chairman. Let me interrupt again. May I add to my pre-
vious statement that we also have with us Senator Gillette, of Iowa,
and Congressman Harrington, of Iowa. On behalf of the committee
I want to invite each of these gentlemen to participate in the exami-
nation of the witnesses.
Mr. Gesell. You were talking about the period 1916 to 1920, Mr.
Wall.
Mr. Wall. During this period, as I have already indicated, it
was evident that the war-time expansion in prices and in income
was being reflected in an expansion of farm-mortgage debt as well
as in the short-term debt of the farmers. From aoout 1914 to 1920
the short-term loans, that is, personal and collateral loans, obtained
from commercial banks had more than doubled. It was in 1919
and 1920 that the largest expansion in mortgage indebtedness
occurred.
In addition to this war-time influence, there was a substantial
increase in the volume of land transfers, particularly in the Mid-
west. We have found from past experience that there is a very
close correlation between the volume of transfers, that is farm trans-
fers, and the demand for farm-mortgage credit.
1 See "Exhibit No. 2270," appendix, p. 15498.
CONCENTRATION OF ECONOMIC POWER 14859
The Chairman. Mr. Wall, in preparine; this exhibit which has
just been handed in, have you made any enort to compute the total
interest, or the avt ge interest on the average indebtedness?
Mr. Wall. In 1 j second column. Senator, you will find a series
that shows the total amount of interest j)ayments on mortgage debt.
The Chairman. Well, this first exhibit shows two columns, first
the total debt outstanding and next the total interest charges, and
I wondered if you had computed the relation of the two so far as
the average is concerned.
Mr. Wall. Yes. For 1913, for instance, the average interest rate
was 6.1 percent. It increased to a high level of 6.4 percent in 1923,
and by 1939 that had decreased to 5 percent.
We shall have a chart a little later in which I shall go into these
interest rate variations a little more in detail.^
The Chairman. What was it in 1913?
Mr. Wall. It was 6.1 percent.
The Chairman. Thank you.
Mr. Wall. The increase in indebtedness in 1921, '22, and '23
reflects to a very large extent the shifting over of loans that had
pre viouslyt been held by commercial banks and the refinancing of other
short-term loans for equipment purchases and other miscellaneous
purposes.
In the period following 1923 there was a gradual reduction in the
total amount of indebtedness and, as indicated in the chart, farm
income was maintained at a relatively stable level, although farm
land values were declining during this entire period.^
Following 1930, you had somewhat the same factors showing up
as occurred following 1920 ; that is, there was the effort on the part
of short-term creditors and commercial banks to obtain greater se-
curity' for their outstanding advances, and there was some increase
in mortgage debt for this purpose. On the other hand, the forces
of the depression were so great that the dominant niovement during
that period was one of debt liquidation. This continued at a very
rapid rate until '33 and '34. Beginning with the refinancing program
of the Farm Credit Administration there was a rapid shift of loans
from the various other agencies to the Federal land banks and
the Land Bank Commissioner. As a matter of fact, from 1933 to 1936,
71 percent of the proceeds of Federal land bank and Land Bank
Commissioner loans were used for refinancing mortgage indebtedi iss
to other agencies.
The Chairman. What was the experience prior to 1933 ?
Mr. Wall. Well, there was great difficulty in obtaining credit from
the usual agencies from about 1929 until the Farm; Credit Adminis-
tration was organized.
The Chairman. Well, the land banks were established in the first
instance during the administration of Woodrow Wilson, as I recall.
Mr. Wall. In 1917.
The Chairman. Have you followed the trend from that year on
of the expansion of government credits ?
' See "Exhibit No. 2272," infra, pp. 14863-15500.
2 See "Exhibit No. 2271," Infra, p. 14862.
14860 CONCENTRATION OF ECONOMIC POWER
Mr. Geseix. That is shown in a subsequent chart, I believe.^
Mr, Wall. We will take that up a little later.
Mr. Gesell. That is scheduled third on the list. Now I notice, Mr.
Wall, that the figures on this table are estimated.^ What is the source
of these figures?
Mr. Wall. At each census period the Bureau of the Census ob-
tains information on the amount of indebtedness on owner-operated
farms. The Department of Agriculture has made surveys to indicate
the relationship of the indebtedness on farms of other tenures which
are used to raise the data obtained through the Bure^a of the Census
on owner-operated fanns, so that at census dates we obtain a total
efitimate of debts for owner operators, managers, and tenants.
For inter-censal yearg, we have used the data on outstanding loans
of some of the leading lending agencies, and in 1936 and '37 there
was a Nation-wide W. P. A. project which obtained data on farm
mortgage recordings and releases. From this material we have com-
puted changes in the outstanding debt for the other lending agencies
which then have been adjusted to the census periods.
Mr. Gesell. So these are, in effect, a composite of the figures
obtained from these various sources?
Mr. Wall. That is correct.
Mr. Gesell. Have you completed your comments on this schedule?
Mr. Wall. I have not given much consideration to the last 4 or 5
years, ^ r. Gesell. Would you like to have me take that up?
Mr. (esell. Yes; if you will.
Mr. Wall. You will note that the decline in indebtedness was
quite rapid up until about 1935 or '36, and while it has continued
to decline during the last few years, it has not been nearly as marked
as in the early depression period. There has been some increase in
the recordings of life insurance companies and commercial banks,
indicating that they are reentering the field. The decrease in indebt-
edness has been intensified in certain regions where we have had
recurring drought for a nuniber of. years, which has made it very
difficult for farmers to meet their obligations.
The Chairman. How does that affect the debt? Do you mean
that because of the inability <i the farmers to meet their obligations
they have been foreclosed?
Mr. Wall. There are two factors in operation there, Senator.
To the extent that the farmer is able to retain ownership of his
farm, he has his interest extended and there is a gradual increase.
The major factor that works in the area has been a heavy rate of fore-
closures which has extinguished debt.
The Chairman. So this reduction in recent years, which was noted
on this chart, is not due to the payment of mortgages by farmers
but to the foreclosure of those mortgages by the mortgagee? ^
Mr. Wall. That varies between different areas of the country. In
certain regions agricultural income has recovered fairly satisf actc • ily,
and there has been an increase in the repayment of loans in those
areas, so that you h^ve actually the formal repayment process pro-
ceeding together with the forced liquidation.
1 See "Exhibit No. 2274.' appendix, p. 15501.
2 See "Exhibit No. 2270," appendix, p. 15498.
= "Exhibit No. 2271," infra, p. 14862.
CONCENTRATION OF ECONOMIC POWER 14861
The Chairman. These two factors then have operated to reduce
the debt?
Mr. Wall. That is true.
The Chairman. Which is the major factor? Do you know?
Mr. Wall. It would be a little bit difficult to indicate exactly
which is the more important because it varies so between regions.
Then there is a third factor that comes in toward increasing indebted-
ness. Some of these farms that were acquired earlier are being
transferred back to the farmers.
The Chairman. These figures which have been presented lo us
indicate, for example, that the farm land owned by the life insurance
companies back in 1929 was valued at about $81,000,000 or $82,000,000,
whereas they are now valued at about $529,000,000, indicating a very
striking increase in foreclosures.^
Mr. Wall. The life insurance companies hold more real estate in
relation to their acquirements during the period than almost any
other group of lending agencies. Federal land banks have followed
a policy of rather rapid disposition of their farms.
The Chairman. The land banks have also not pursued a policy
of foreclosure. They have been withholding and have endeavored
to permit the mortgagor to remain on the farm. Isn't that so?
Mr. Wall. They have acquired a fairly substantial amoup.t over
a period of years.
Mr. Gesell. Those figures, too, Senator, are scheduled for specific
discussion.
The Chairman. Very well. I will wait until that time.
Mr. Gesell. You referred, Mr. Wall, to a chart. I take it you
mean the chart entitled "Cash Farm Income and Farm-Mortgage
Debt, 1910-39," which is in front of the committee. Is that the
chart you refer to?
Mr. Wall. That is true.
Mr. Gesell. I would like to offer this chart for the record at the
present time.
The Chairman. It may be received.
(The chart referred to was marked "Exhibit No. 2271" and ap-
pears on p. 14862. The statistical data on which this chart is based
are included in the appendix on p. 15499.)
Mr. Wall. I might make a few comments on the chart, in order
to bring out regional differences. You will notice there has been
a gradual decline in outstanding debt from 1923i to 1930. By
geographical regions, however, you get a different picture.
In the New England States you had practically a rising trend,
not only during that period but up to the present time.
In the West South Central States, the indebtedness continued
up until about 1932. The same is true for the Pacific States. The
amount of indebtedness in the West North Central States is so
large that a very sharp declining tendency influences the national
series of mortgage debt.
Mr. Gesell. Now, the chart which you wish to discuss is the chart
showing change in interest rates, is it not?
Mr. Wall. That is right.
1 See Hearings, Part lO-A, p. 180.
1244»l^-ii— pt. 28 12
14862
CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. It is entitled "Average Interest Rates on Outstanding
Farm Mortgages, January 1, 1913, 1923, 1933, and 1939," is it notY
Mr. Wall. Yes.
Mr. Gesell. I wish to offer this chart for the record.
The Chaibman. It may be received.
(The chart referred to was marked "Exhibit No. 2272" and appears
on p. 14863. The statistical data on which this chart is based are
included in the appendix on p. 15500.)
Mr. Gesell. The Chairman referred to changes in. average inter-
est rates which have taken place in the period covered by the first
exhibit.^ This chart that is now before you shows those changes
both for the country at large and by individual States for the period
Exhibit No. 2271
CASH FARM INCOME AND FARM-MORTGAGE DEBT. 1910-39. AND
VALUE PER ACRE OF FARM REAL ESTATE. 1912-39
PERCENT
250
200
150
100
Index offarm-
1915
1920
1925
1930
1935
1940
tCALENDAR YEAR.INCLUDINO GOVERNMENT PAYMENTS
^JANUARY! tMARCH I
U S. DEPARTMENT OF ACRICULTUKE
BUREAU OF AGRICULTURAL ECONOMICS
indicated, does it not? Is that true? Have you some comments
which you wish to make on that chart?
Mr. Wall. These four maps give you a graphic picture of the
change that has occurred in interest rates from 1913 to 1939. In
the first map you will note the wide area marked by black which
represents the avergige interest rate on farm mortgages of 7.8 percent
and oyer. The next area varied from 7.3 to 7.7 percent, and the
very lightest area is under 5.3 percent. You will notice there is a
very small amount of that.
The Chairman. When you are discussing interest rates with rela-
tion t-o this map, you are talking of the interest rates paid to all sorts
of lenders?
Mr. Wall. On the farm-mortgage real-estate debt.
The Chairman. And ;you are not discussing the interest rate paid
to life insurance companies alone?
» See "Exhibit No. 2270," appendix, p. 15498.
CONCENTRATION OF ECONOMIC POWER
14863
14864 CONCENTRATION OF ECONOMIC POWER
Mr. Wall. No; this is all mortgage debt. As we approach 1923.
you will note a decrease in this intense area, indicating a lowering of
the intei-est rates over most of this area (heavy dotted). As we pro-
ceed, in 1933 that becomes even more apparent, and in 1939 you see a
gi-eat inci-ease in the area representing an interest rate of less than 5.3
percent.
The Chairman. I observe from the map that it wasn't until 1933
that the interest rate in Wyoming dropped below 7.8 permit.
Mr. Wall. That has always been a high-interest-rate $tate.
Mr. Henderson. Is that because of the value of the land out there,
or the risk of the borrower?
Mr. Wall. There are three major factors involved, I think, in4his
graphic reduction in interest rates, particularly in the West and
Southwest. One is the risk factor. In the earlier period it was still
very much of a pioneer country in many parts of those areas, with
a gradual aging of those regions somewhat similar to that which
occurred in the Midwest from 1880 to 1900. In the 1880's, in the
Midwest, you had high interest rates and by 1900 those had gone down
to fairly reasonable levels.
Mr. Henderson. Was that on account of the increase in the value
of tlie land?
Mr. Wall. That is partly it. The greater development of the areas,
more stable income, and greater financial resources within the areas
themselves all contributed to that particular phase in the reduction
of interest rates.
Mr. Henderson, Are you going to discuss somewhere the relation
between the total value of farm property and the mortgage debt?
Mr. Wall. In 1935 the total mortgage debt represented about 24
percent of the value of farm lands and buildings. That compares
with a ratio of about 9 percent in 1910.
Mr. Henderson. How about the period of the highest amount of
farm debt, in the mid-twenties?
Mr. Wall. That was about 20 percent around 1923.
Mr. Henderson. Would you say that a decline in the value of
farm lands has been somewhat responsible for the decline in the
debt?
Mr. Wall. Yes; I would say that was certainly an important
factor because it reduced the security behind the loans, and of course
the declining land values— to the extent that they reflected decreased
farm income — in turn reduced the amount of funds available to the
individual farmers for paying the mortgage interest.
(Representative Williams assumed the Chair.)
Mr. Gesell. Taking this reduction of interest rates that has taken
place over this whole period from '13 to '39, can you tell us what the
principal factors have been for that period ?
Mr. Wall. I started to develop the point that there had been an
agjng of the high risk areas, and in addition to that, there have been
two other important factors. One of these is the increase in the
volume of loans held by centralized lending agencies which have
made loans at a lower interest rate. I am speaking here primarily
of the land banks in the Western areas and Southe-m areas. In other
words, as the land banks took over a larger proportion of the total
mortgage debt at a rate of interest lower than that available from
CONCENTRATION OF ECONOMIC POWER 14865
-Other lenders, it had the effect of reducing the average rate of
Then in more recent years, there has been a third factor, an actual
reduction in the rate of interest charged by practically all lending •
agencies. This is in part reflected by the reduced interest rates pro-
vided by Congress on Federal land bank and Land Bank Commis-
sioner loans, which brings the rate for Federal land banks down to
31/2 percent, and for Land Bank Commissioner, to 4 percent.
So that in this whole period of lower interest rates, you nave
the three factors at work: the aging of the Western and Southern
communities, particularly the Southwest; the increase in the amount
of loans held by the centralized lending agencies, Avhich as a rule have
lower interest rates than local lending institutions ; and, since 1933,
an actual reduction in interest rates Charged by all principal lenders.
Mr. Gesell. Have you information, Mr. Wall, which will show
the amount of the farm-mortgage debt held by the principal lender
groups over the period from 1920 to 1933 ?
Mr. Wall. If you will turn to the next chart
Mr. Gesell (interposing). Is that the chart I show you now?
Mr. Wall. Correct.
Mr. Gesell. I wish to offer this chart for the record.
Acting Chairman Williams. It may be received.
(Tlie chart . referred to was marked "Exhibit No. 2273" and ap-
pears on p. 14866.)
Mr. Gesell. Have you some comments which you wish to make
on that chart?
Mr. Wall. I would like to suggest that we consider the next table
in connection with this chart, giving the figures on which the chart
is based.
Mr. GesbJvL. I would like to offer that table.
Acting Chairman Williams. It may be received.
(The table referred to was marked "Exhibit No. 2274" and is in-
cluded in the appendix on p. 15501.)
Mr. Wall. The black bars reflect the total mortgage debt which is
the same series that we considered in a previous chart. ^
Mr. Gesell. That is just a graphic representation of the figures
whicli are on tlie very first table that we put in ? ^
Mr. Wall. That is correct, Mr. Gesell.
You will note that in this earlier period these four groups of lend-
ing agencies held a relatively small proportion of the total mortgage
debt, whereas in the period during the twenties, the four groups of
agencies held a considerable portion, and this proportion has been
increased in later years. '
Mr. Gesell. That means that back in 1910, Mr. Wall, tlie debt was
held mostly by individuals, does it, or people in the locality?
Mr. Wall. That is connect, the local individuals within the com-
munities, and private investors in other sections of the country. At
that time there was quite an extensive system of mortgage brokers
who would obtain loans in their local territories and. through sales-
men or other outlets, dispose of them in areas of surplus funds.
iSee "Exhibit No. 2271." su'nra, n. 14862..
= See "Exhibit No. 2270," appendix, p. 15498.
14866
CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. So that as you proceed across the period of years, and
the relative amount held by these individuals decreases, it means a
rise in institutional holdings of mortgages.
• Mr. Wall. Yes; I think that is one of the outstanding character-
izations we can make of this whole period, the shift in the mortgage
indebtedness from local individuals and small investors into the port-
folios of large specialized lending institutions.
(Senator O'Mahoney resumed the Chair.)
Representative Williams. But there still remains a substantial
part of those loans in the hands of private individuals or local institu-
tions; isn't that true?
Mr. Wall. That is correct. I would say, in 1939, that about 40
percent would be in the hands of individuals and others and 60 percent
in the hands of specialized lending institutions.
Exhibit No. 2273
Total Outstanding Farm-mortgage Debt and Amount Held by
Principal Lender Groups; 1910-39
i OlPARTUtNT Of *
1930 1935
BUREAU OF ACmCULTURAL tCONOUICS
Mr. Gesell. The table supporting that chart would indicate that
in 1910 individuals held aroimd 75 percent and at the present time
they hold only about 40 percent.^
Senator Herring. That was a part of the purchase price of farms
that were sold ; it wasn't a loan. Those farmers sold at a big price and
the seller retained that amount of the purchase price.
Mr. Wall. That is particularly true in that period of 1919 and
1920.
Senator Herring. Yes.
Representative Williams. During the twenties there was a very
substantial part of it owned by individuals, according to your table,
perhaps we could say 60 percent?
Mr. Wall. It was as high as 70 percent.
If I may take up this period from 1910 to 1923, which was a period
of increase in mortgage indebtedness, I might point out that at the
beginning of the pericil you had only life insurance companies and
commercial banks as your major institutional lenders.
' See "Exhibit No. 2264," appendix, p. 15501.
CONCENTRATION OF ECONOMIC POWER 14867
The Chairman. Have you made any segregation of the interest
charges required by the various types of lenders ? ^
Mr. Wall. We have, Senator.
The Chairman. You are going to develop that later on ?
Mr. Wall. Unfortunately I don't have them with me. I can put
them in the record if you wish.
The Chaieman. I think it would be very interesting because, as this
chart indicates, from 1910 to 1917 commercial banks and life insur-
ance companies were practically the only lenders upon farm real
estate.^ That is to say, they were the only lenders of sufficient
amounts to get into this chart.
Mr. Gesell. Only institutional lenders, you mean, Senator.
The Chairman. Yes ; that is what I mean ; exactly.
Then begiiming in 1917, the joint stock land Banks and the Fed-
eral land banks came into the picture, and it would appear from
the chaxt that, although a large new- source of farm mortgage funds
had appeared, there was not any substantial diminution, if indeed
any, for several years, of the amount of mortgages held by com-
mercial banks and life insurance companies; isn't that correct?
Mr. Wall. That is correct. That was a period of wide-spread
credit expansion in all lines.
The Chairman. So that from 1917 until some time after, or at least
until 1930, the operation of the Federal land banks and the joint
stock land banks were really not in competition with life insurance
companies and commercial banks, so far as actual results were con-
cerned. They weren't taking any business away from them, in other
words.
Mr. Wall. There was some shifting which I will develop in just a
moment as I go along.
In 1913, the Federal Reserve Act provided authority f^r National
banks to make loans on farm mortgages, so that in this earlier pieriod,
it was primarily State and private savings banks that held these farm
mortgages, and as a matter of fact, national banks didn't increase
their real estate loans appreciably, until after 1920.
Of course, as has already been mentioned, in 1917 you had the
lending operations of the joint stock land banks and the Federal land
banks, but you will note that until 1921 there was no appreciable
increase. From the latter part of 1919 to 1921, the constitutionality of
the Federal Farm L#oan Act was in question and there was very little
lending activity by these two group of institutions.
However, beginning in 1921, '22, and '23, there was a very substantial
increase in the demand for mortgage loans. The applications to the
Federal land baaiks, joint stock land banks, and life insurance com-
panies increased tremendously, and at that time there began the shift
of some loans from the commercial banks to life insurance companies,
Federal land banks, and joint stock land banks.
Mr. Gesell. During what period did that shift start?
Mr. Wall. The peak of mortgage loans by commercial banks was
reached in about 1922, and the increase in commercial bank loans in
1920 and '21 represented primarily the taking of additional security
on loans that had been contracted as short-term loans when the price
1 See table on "Interest charges payable on farm mortgages held by various lender groups,
United States, for selected years," which was subsequently supplied for the record and appears
in appendix, p. 15500.
a See "Exhibit No. 2273," supra, p. 14866.
14868 CONCENTRATION OF ECONOMIC POWER
level had been much higher. Gradually these were either foreclosed,
liquidated, or refinanced with other agencies. During the period up
to 1928, you had life insurance companies expanding their loans very
nepidly, as well as both the Federal and joint stock land banks, yet
the total mortgage indebtedness was going down from '23 on, so that
obviously was a period in which vast amount of mortgage indebtedness
was being shifted from privat-e individuals and commercial banks.
The Chairman. You don't mean to a'ay the total farm indebtedness,
or at least institutional indebtedness, was going down. That didn't
begin to go down as far as institutions were concerned in 1923.
Mr. Wall. No, the total mortgage indebtedness reached a peak in
1923, but from that p lod on, the amount of indebtedness held by the
institutional lenders increased, which obviously means that a portion
of the outstanding- indebtedness was being shifted to the institutional
lenders.
The Chairman. In other words, you are having' a shift from indi-
vidual lenders to corporate lenders or institutional lenders, of one kind
jr another ?
Mr. Wall. That is correct, sir.
Representative Williams. Is that rapid rise in farm indebtedness
iTom '20 to '23 due to the fact that a number of new mortgages were
nade or an increase of existing mortgages ? In other words, was there
an increase in the number of mortgaged farms in the country during
that period ?
Mr. Wall. Yes, there was. There were several factors at work
during that period.
As I mentioned earlier, there was considerable refinancing of short-
term loans obtained from commercial banks. At the end of 1920, com-
mercial banks held personal and collateral loans to farmers of around
$3,800,000,000 and by the end of 1923 that had been reduced fully a
billion dollars. While mortgage indebtedness was rising from '20 to
'23, we can't draw from that the conclusion that the total indebtedness
of farmers was increasing because there was this refunding of short-
term indebtedness into long-term indebtedness.
Representative Williams. There was an actual increase in the
number of farms mortgaged during that period?
Mr. Wall. That is correct.
Representative Williams. What is the number now; what is the
percentage of farms in this country mortgaged now?
Mr. Wall. The total percentage of farms mortgaged is around
34.5 percent.
Representative Williams. What was it back in that period — in the
twenties, '20 to '23; have you that figure?
Mr. Wall. We don't have those figures for alj farms, but we do
have them for owner-operators, and the percentage of farms mort-
gaged by owner-operators is much higher than for all farms, because
there is a greater frequency of indebtedness on owner-operated farms
than on tenant farms.
The Chairman. The percentage of owner-operators is steadily de-
clining, is it not?
Mr. Wall. Yes; there has been a slight decrease in that.
The Chairman. Isn't it more than a slight decrease?
CONCENTRATION OF ECONOMIC POWER 14869
Mr. Wall. In some areas it has been quite appreciable. For the
country as a whole, if I recall my figures correctly, the percentage of
tenancy in 1930 was about 42.3 or 42.4, and in 1935, 42.1.
The CiLviRMAN. You could go back further than that. If I re-
member correctly, in 1880 more than 70 percent of all farm operators
were owners of their own farms.
Mr. Wall. That is quite true. There has been a very marked
increase in tenancy over a long period.
The Chaibman. Whereas in 1930 that had been reduced, you say,
until it was considerably less than 50 percent.
Mr. Wall. In a certain area.
The Chairman. For tlie country as a whole.
Mr. Wall. The data supplied by the Bureau of the Census show
that the United States percentage of tenant farms in 1935 was 42.1.
Subsequent surveys made by the Department show that there has not
been a great deal of change since that time, although that is, in a
sense, a fictitious figure. Inasmuch as there has been a shift, par-
ticularly in the South, from cropper farmers to laborers, which auto-
matically puts that land into the ownership category, it doesn't depict
the true situation.
The Chairman. These facts that we are now discussing emphasize
the steady increase of the problem of the tenant farmer. They also
emphasize the fact that a larger and a larger percent of lands which
have been mortgaged are coming into the ownership of the institu-
tions which have made the loans, in some instances into the owner-
ship of life-insurance companies and in other instances into the
ownership of the Federal agencies which are administering the Farm
Credit Administration program.
Mr. Wall. I think that will be quite obvious when we take up
one of. the latter tables, which shows a total investment of over
$1,000,000,000.
The Chairman. So that while you are showing a reduction in this
chart of the amount of money loaned on farms to individuals and
a shift to institutional loaning, we are also showing a shift of owner-
ship from individual operators to landlords of one kind or another?
Mr. Wall. That is true, and it is particularly marked in certain
areas.
Representative Williams. As I understood from the figure — am
I correct? — you gave me a while ago, it was 34 perceijt of all farms
in the country that are now mortgaged.
Mr. Wall. That is right.
Representative Williams. In arriving at that figure, what do you
consider a farm, what area, what size?
Mr. Wall. The definition that is usually followed is that adopted
by the Census for defining a farm. I believe it is 3 acres or more,
with an income of $300, that is, approximately.
Representative Williams. Approximately 3 acres?
Mr. Wall. It must have a farm income of at least $300.
Mr. Henderson. Getting back to that period after 1920, Dr. Wall,
you say that part of the increase in the farm mortgage indebtedness
was due to the conversion of short-term loans to mortgage debt. I
think you gave a figure of about $3,800,000,000.
14870 CONCENTRATION OF ECONOMIC POWER
Mr. Wall. That is approximately correct.
Mr. Henderson. Well, was there any conscious fiscal policy at that
time that was responsible for that conversion?
Mr. Wall. With the sharp drop in farm prices following 1920,
commercial banks in agricultural areas were faced with a very
stringent position. There was a big reduction in the income flowing
into agricultural areas, yet prices and fixed charges were quite high,
which caused depleted reserves, forcing them to borrow very ex-
tensively from correspondent banks and from the Federal reserve
banks. There was every pressure on their part to liquidate these
loans by having the borrower refinance with some other agency, and
that was one of the major factors causing individual borrowers to
refund those loans into long-term mortgage loans.
Senator Gilllite. Mr. Chairman, may I ask a question?
I wish to amplify just a little on the question that Mr. Chairman
O'Mahoney asked a moment ago. This chart shows, of course, a
substantial increase in the percentage of farm-mortgage indebtedness
that is handled by the Federal land banks, the Land Bank Commis-
sioner, and what is left of the joint stock land bank.^ The previous
chart showed substantial interest rate reductions in substantially the
same period.^ Have you now with you any information by which
you can enlighten us as to whether these interest reductions reflect
only the entrance of tlie land banks and similar agencies in the field,
or whether there was a corresponding reduction in the rates charged by
the insurance companies and commercial banks ?
Mr. Wall. I would say that the major factor is the injection of
the Federal land banks into the picture, taking over a portion of the
mortgage debt at a lower rate of interest.
Senator Gillette. Undoubtedly that is true, but do you have any-
thing to show us whether there was any corresponding reduction in
the interest rates of the commercial institutions?
Mr. Wall. Just a very slight reduction, not very large, Senator,
except since 1933. There has been a reduction in the rates of most
lenders, of practically all lenders, during that period.
Senator Gillette. Do you have any information by which you can
help us to know whether or not there is increased competition on the
part of this type of agency in securing the cream of the farm loans
at the present time as against the cooperative credit institutions?
Mr. Wall. That problem varies a great deal from area to area.
Life insurance conipanies, of course, concentrate their lending activi-
ties primarily in a restricted area. In the State of Iowa, for instance,
they held approximately 42 percent of the total mortgage debt in 1929,
whereas in Montana they held only 6 percent. Land banks, on the
other hand, in the same year held only 6 percent of the debt in Iowa
and in Montana they held ITi^ percent.
Mr. Gesell. Now, Mr. Wall, we have still the last period shown
on this chart to consider, do we not? ^
Mr. Wall. That is correct.
Mr. Gesell. The outstanding thing there seems to be the decrease in
the amount of the debt held by life insurance companies and the sub-
' See "Exhibit No. 2273," supra, p. 14866.
2 See "Exhibit No. 2272," supra, p. 1486.3.
' See "Exhibit No. 2273," supra, p. 14866.
CONCENTRATION OF ECONOMIC POWER 14871
stantial increase in the amount held by the Federal land banks and
the joint stock land banks.
Mr. Wall. Beginning in 1933, when the Farm Credit Administra-
tion was set up, you had a somewhat liberalized basis of lending.
There was a very marked shift in the loans to the land banks, not
only of life insurance companies and commercial banks, but of indi-
viduals and all others as well. In the period from 1933 to about
1939, the financing by the Land Bank Commissioner and the land
banks accounted for about 33 percent of the reduction in life in-
surance company loans during tliat sajne period. The effect of a
larger proportion of the total debt in the hands of the land banks
and the Land Bank Commissioner, particularly with the low interest
rate authorized by Congress, has had a tendency to reduce the total
interest charges very materially. If you will refer to that first table,
you will see that annual interest payments have decreased from a
peak in 1922 of $680,000,000 to $357,000,000 in 1938, a decrease of
around 471/2 percent.^
The commercial banks in recent years, from about 1936, have
shown a slight increase in their outstanding loans. This has been
characteristic primarily of banks in the Midwest, whereas in other
sections of the country they have not shown any material increase.
The amount of recordings by life insurance companies, or the actual
amount of loans purchased as indicated by the surveys presented yes-
terday, I believe, show an increase in the amount of life insurance
loans actually made, although the total amount outstanding has de-
creased slightly in the last couple of years.
Mr. Gesell. You referred to the fact that life insurance com-
panies have been particularly active in only restricted areas of the
country. Those figures are percentaged in the table entitled "Farm
Mortgage Debt Held by Life Insurance Companies." Is that cor-
rect?
Mr. Wall. That is correct.
Mr. Gesell. I should like to offer that at this time.
The Chairman. The exhibit m?iy be received.
(The table referred to was marked "Exhibit No. 2275" and is
included in the appendix on p. 15502. )
Mr. Gesell. As I read that table, it would, appear that the low
area is in the North Atlantic States. Is that right?
Mr. Wall. That is true.
Mr. Gesell. There is no instance where the farm mortgage held
by life insurance companies is as much as 1 percent of the total
for ithat area. Is that correct ?
Mr. Wall. Correct.
Mr. Gesell. And the high appears ,to be in the West North Central
~ States.
Mr. Wall. In the East North Central and West North Central
States together, in 1928, about 78 percent of the total life insurance
company fartn loans were on real estate in that region. My 1939 that
proportion had decreased to about 72 percent.
Mr. Gesell. I notice that in the West North Central States in
the years 1933 and 1934, for example, the insurance companies held
I See "Exhibit; No. 2270," appendix, p. 15498.
14872 rONCKNTRATION OF ECONOMIC POWER
well over a third, or somewhat over a third, of the entire farm
mortgage debt of that area.
Mr. Wall. That is right.
It may be interesting to note that about 62 percent of all life
insurance companies hold farm real estate loans in some amount or
other, although the bulk of those loans is concentrated in a relatively
small numl)er of companies.
The Chairman. That table would indicate, as for the West North
Central, that the insurance companies started in 1910 with 19.9
percent of the total farm mortgage debt, and from 1927 to 1934,
inclusive, they held more than one-third of the debt in that area,
but that since 1938, and for 1939, too, their proportion now is lowej-
than what it was in 1919.
Mr. Wali,. That is true. During nearly the entire period of the
twenties, the life insurance companies were increasing their ix)sition as
the leading institutional holder of farm mortgage loans, and for the
country avS a whole, held about 22 percent of the total mortgage debt
in 1928. From that period down to about 1933, their holdings of farm
mortgages declined about as rapidly as the total indebtedness declined.
From that period on. with the shifting of loans to the land banks,
and with the conversion of loans into acquired farms, their pro-
portion of the total debt in the United States has decreased to
about 12.6 percent.
Mr. Gesell. Of course, it is true that in comparing figures for
1910 and 1939, although the amount of farm mortgage debt held by
the companies is approximately the same, the interest of the com-
panies in the farm picture, so to speak, is much greater by reason
of the substantial increase in their holdings of farm land.
Mr. Wall. That is true, and eventually that will increase their
volume of outstanding loans, so that it is possible that the proportion
of their farm mortgage debt will increase as the acquired farms are
transferred into individual farm ownership.
The Chairman. It is always interesting to note, I think, if I may
interrupt, that in 1910, when for the whole United States the life
insurance companies held 12.1 percent of the entire farm mortgage
debt, their total holdings amounted to $386,961,000, whereas in 1939,
when their holdings were 12.6 percent, only one-half of 1 percent
more than they held in 1910, their total holdings amounted to $887,-
336,000. or almost — well, it is considerably more than twice as much.
Mr. Gesell. Now, the Chairman raised a question, Mr. Wall, with
re-spect to tenancy. Taking these areas, in which areas has there
been the greatest increase in farm tenancy over the period covered
here? In other words, what I am trying to get at is, is there any
relation between where the life insurance companies invest, and an
increase or decrease in farm tenancy?
Mr. Wall. The life insurance companies, as well as other lending
institutions, have acquired more farms in the West North Central
States than they have in any other region, and there has also been
quite an appreciable change in the tenancy situation in that particu-
lar region.
Mr. Gesell. Has it gone up or has it gone down ?
Mr. Wall. From 1930, when the percentage of tenancy was 39.9
there has been an increase to 42.6 percent.
CONCENTRATION OF ECONOMIC POWER 14873
The Chairman. What are those figures again?
Mr. Wall. 39.9 as compared with 42.6, an increase of about 10
percent. There has also been an increase in the East North Central
States and the Middle Atlantic States.
Mr. Gesell. Now, what is the increase for the country at large as
compared to this increase of about 10 percent in the West North
Central States?
Mr. Wall. Tliere has been rather a slight change — about 42.1
percent in 19?5. and l r 1930 it was approximately 42.4 percent. That
is accounted " ^-r in part by an increase in the number of owner-
operated farms m the New England ai-ea and in some other sections
of the country, where farms have been sub-divided near large urban
centers.
Mr. Gesell. It would appear from what you say that farm ten-
ancy has incre<!e^('<i the sharpest in the area^ where the life insurance
companies have been lending the heaviest.
Mr. Wall. You can say it in that way, or you can say it is in the
areas where there has been the heaviest acquisition of farms by lend-
ing agencies. It has occurred with agencies other than life insurance
companies.
Mr. Gesell. You mean there have been other institutional lenders
in this same West North Central area, and that the increase in ten-
ancy can't be attributed entirely to the insurance companies?
Mr. Wall. That is true.
Mr. Gesell. I understand that. You say then that would be a
result of institutional lending service that has brought about a sharp
increase?
Mr. Wall. I think, if we cffn consider the next chart in that con-
nection, we might be able to bring out some of the points that we are
now discussing.
Mr. Gesell. That is a chart entitled "Forced and "^.^oluntary Sales
of Farms, 1926-39"?
Mr. Wall. That is right.
Mr. Gesell. I wish to offer that chart for the record.
The Chairman. The chart may be received.
(The chart referred to was marked "Exhibit No. 2276" and appears
on p. 14874. Statistical data on which this chart is based are in-
cluded in the appendix on p. 15503.)
Mr. Gesell. -All of these charts and papers were prepared under
your direction with the figures indicated on the chart ?
Mr. Wall. Yes; that is right, or within the department.
In considering this chart, which deals with forced and voluntary
sales of farms during the period from 1926 to 1939, one of the im-
portant factors to bear in mind is the difference in the intensity of the
agricultural distres's between the different regions. If you will take
the middle area there, for instance the West North Central States,
you will note that there is a much higher ratio of forced sales as
compared with the United States averages.
There are two factors that account for this high rate of forced
sales in this group of States. In this area the percentage of farms
mortgaged prior to the depression and the ratio of debt to value on
mortgaged farms was much higher than for the United States as a
whole. With the impact of the depression and the sharp drop in
14874
CONCENTRATION OF ECONOMIC POWER
income, it was a very logical development from this set of circum-
stances that there would T)e more debt distress in these areas. That
is characterized by a much higher rat€> of acquirements of farms by
lending agencies in this particular Midwest region as compared with
other areas.
Mr. Henderson. This is the area within which there was the great-
est amount of resistance to foreclosure, is it not?
Mr. Wauj. I think that is right.
Mr. Gesell. Have you any other comments you wish to make on
this chart?
Mr. Wall. I think we can pass on.
Mr. Hates. I noticed that, except in the North Atlantic States,
there is a decided drop iti other regions in the percentage of total debt
held by life insurance companies. Would you say the chief contribut-
ing factor, recognizing there are others, to that decrease has been the
Exhibit No. 2276
FORCED AND VOLUNTARY SALES OF FARMS. 1926-39*
ESTIMATED NUMBER PER 1.000 FARMS^
Forced,
I all classes
\ Voluntary
192630 34 38
U S DEPARTMENT OF AGRICULTURE
BUREAU OF ASRICULTURAL ECONONICS
acquisition by the insurance companies of land through forced sales ?
Mr. Wall. That, plus the shift of their loans to the Federal land
banks and the Land Bank Commissioner.
Mr. Hates. Which of those three elements would you say is the
greatest factor?
Mr. Wall. I don't have exact information on that point, but they
are roughly equal, I would say.
Mr. Hates. Thank you.
Mr. Henderson. Seldom do v have at the committee table some-
one who is responsible largely for turning down the line of a chart.
I think you will probably find that in the West North Central States
that line turned down at about the time Governor Herring issued
his proclamation. Isn't that right. Governor?
CONCENTRATION OF ECONOMIC POWER 14875
^ Senator Herring. That is when it started down the line. [Laugh-
ter.]
Mr. Gesell, Now, the next table you wish to discuss is the table
entitled "Farm Foreclosure Sales"?
Mr. Wall. Yes.
Mr. Gesell. I wish to offer this table for the record.
The Chairman. The table will be received.
(The table referred to was marked "Exhibit No. 2277" and is in-
cluded in the appendix on p. 15504.)
Mr. Wall. In connection with this table, I would also like to have
you bear in mind what I have just said about the regional variations
in forced sales. You will note that this table shows a rather high
rate of acquirements or foreclosures by life-insurance companies as
compared with other groups of lending agencies. However, we must
bear in mind that the life insurance holdings are primarily concen-
trated in the Midwest, in the region where you have had a large
volume of forced sales resulting from a high ratio of debt to value in
the earlier period and a higher percentage of farms mortgaged than
is to be found elsewhere in the country. I believe that
Mr. Gesell (interposing). I assume some of those factors you have
mentioned are possibly the results of the lending policies of the insur-
ance companies in the first place, are they not ?
Mr. Wall. To the extent that they have loaned a large amount
per acre or in relation to value, that is probably true. I think it is
equally true to say that all lenders in that period were fairly liberal
in their loan valuations and, particularly, many of them tailed to
make distinctions as between the quality of land in a given area.
Mr. Gesell. What I was trying to discuss with you was whether
or not these high rates of foreclosures for insurance companies, as
shown on this table, are purely the result of the area in which the
companies have to lend or the result of their lending policies ?
Mr. Wall, I presume that both factors are involved, but taking the
other lending agencies who have their loans in all areas of the coun-
try— including certain regions where the rate of foreclosure is low —
you get a lower average than you would get if you took the same
States for those lenders that represent the chief landing field of the
life insurance companies.
Mr. Gesell. Would insurance companies still show the highest in
those areas ? Supposing you had this table prepared for. the State
of Iowa, for instance, would the insurance companies show the
highest ?
Mr. Wall. I don't have any exact figures with me as to that.
Senator Herring. May I say private owners would show the
highest. Farm Credit Administration would show' second.
Mr. Gesell. Have you prepared figures which would show for in-
dividual States what the rate of foreclosure of these various loaning
groups has been ? ^ ' " ,
Mr. Wall. I would, be .very glad to get the, -records for you.
1 See table entitled "Percentage of total farm-mortgage debt beld, Jantiary 1, 1930 and
1936, and percentage of total distress farm transfers accounted for, 1930-35, by various
lender groups, for selected States" subsequently submitted for the record and appearing
In appendix, pp. 15631, 15632.
14876 CONCENTUATION OF ECONOMIC POWER
Mr. Gesell. I think it would be good to have the exact figures.
The Chairman. Well, there is nothing to indicate, is there, that
any of the lenders, including the insurance companies, really desired
to foreclose. The acquisition of these lands was not a matter of
choice, was it, on the part of any of these lending agencies.?
Mr. Wall. No; it reflects the severe economic changes that took
place in the agricultural areas. Ii^ many cases the farms were artu-
ally abandoned by the owners. In other cases the owners became too
old, and couldn't carry on. In order to conserve the investment of
the lender it was necebsary to take it over. In other cases they had
simply borrowed mor*- than they could hppe to repay, and it was
probably a better thing inv them to let it go and start out with a
lower burden of debt.
Representative Williainis. Is there anything in these figures here
to indicate that there was one of these groups. more liberal in their
flttitude toward the owners, the mortgagees and others, to indicate a
lenient tendenc}' to extend tlie time and give them more consideration,
perhaps lower the rate of interest, in order that, the farm owner
might save the farm? Is there anything in that to indicate, among
these groups, that there was any difference in the manner in which
they treated the farmer?
Mr. Wall. There have been great diffeiences in the policies of
different lending agencies, and it is probably unfair to make any
broad generalization* for as diverse a gi'oup of lendej's as tlie life
insurance companies, for instance. In many cases they haA^e granted
extensions as liberal as the Federal land banks. Certain companies
may not have followed that policy, and it vtiried amongst individual
companies. You find some individual lenders who have been very
lenient, others who have adopted a rather arbitrary policy in
handling them.
Representative Williams. That would depend on the individual
in each group rather than these intititutions as groups'^
Mr. Wall. I think that is correct,, except where you have definite
authorization to the Federal land banks and Land Bank Commis-
sioner to follow certain policies in the way of extensions and of
granting funds for extending the loans as provided by Congress.
The Chairman. Congressman Williams will recall that table 176
in the i-ejjort. on operating results shows that, as far as the 26 largest
life insurance companies are concerned, there was a total of
$40,777,000 worth of defaulted farm mortgages in what was denomi-
nated as work-out cases; namely, cases in which an <4:>portunity was
being given to the defaultmg mortgagor to retain his faiin.^
Mr. IiEN"T>ERSON. Dr. Wall, in these areas wliere the life insurance
companies concentrated their lendint^, was there any difference in
the loan policy of insurance companies as against, for example, the
Federal land banks and Land Bank Commissioner and the commercial
banks? Did they have a more liberal policy? Was there greater
competition between insurance company loans, or between all insur-
ance companies and all commercial banks and the Federal land banks?
Mr. Wall. In the twenties the life insurance companies were
able to maintain their volume of loans in the choice area; that is,
the Middle West, and even increased it, and the Federal land banks
» See Hearings, Part 10-A. p. 176.
CONCENTRATION OF ECONOMIC POWER 14877
did not get a very large portion of the total debt. For instance, in
the State of Iowa, -the Federal land banks in 1929 held only 6 per-
cent of the total mortgage debt, whereas insurance companies held
41.7 percent.
I think it is very interesting to draw certain general conclusions
relative to the mortgage movement in the twenties. With the rapid
expansion of Federal land bank loans, a larger part of that took
place in the Southern and Western States in the twenties, and the
life insurance companies were able to maintain and even expand
their holdings in the Midwest.
Now, in this refinancing period that followed 1933, the Federal
land banks made a much larger increase in taking over the debt in
the Midwest as compared with the South and West. Of course, the
life insurance companies were reducing their holdings.
Mr. Henderson. Did that . represent a change in policy on the
part of the Federal land banks and the Land Bank Commissioner?
Mr. Wall. Of course, the Emergency Farm Mortgage Act of 1933
authorized the making of Land Bank Commissioner loans which pro-
vided for loans up to 75 percent of the normal value of the property
including personal property, which was a higher percentage in rela-
tion to actual sales value
The Chairman (interposing;. That was a result of the policy of
Congress to provide opportunity for the owner to work out his
debt.
Mr. Wall. That is correct.
The Chairman. These figures also do indicate that the Farm
Credit Administration came in to save the farm operator or owrier
where his cause was most desperate, and that the life insurance com-
panies were holding on, so far as they could, in the areas where the
farms had traditionally been of a higher value.
Mr. Wall. That is true. There was virtually no sort of mort-
gage credit in '32 and '33 until the Farm Credit Administration
came into the picture.
The Chairman. No more loans were being made, and the farmer-
operator who wanted to hold on to his farm had to turn to the
Government ?
Mr. Wall. That is correct.
ITie Chairman. Because private individuals and so-called private
institutions were not loaning any more money when the farm prob-
lem had become so acute.
Mr. Gesell. The next chart, Mr. Wall, is entitled "State Mort-
gage Relief Legislation," is it not?
Mr. Wall. Tliat is a continuation of the same picture that.A^e are
discussing of the acute distress in agricultural areas.
Mr. Gesell. I would like to offer the chart for the record.
The Chairman. It miay be received.
(The chart referred to was marked "Exhibit No. 2278" and ap-
pears on p. 14878.)
Mr. Wall. I don't believe it is necessary to spend much time dis-
cussing this exhibit except to point out two or three developments.
During this period moratorium legislation was passed by various
State legislatures. It generally took the direction of either a post-
ponement of the foreclosure for a definite period of time, or it repre-
124491— 41~pt 28 13
14878
CONCENTRATION OF ECONOMIC POWER
sented the power delegated to the courts to fix selling prices on
foreclosed lands, or to extend the redemption period. In some cases
there was definite legislation prohibiting or modifying the legal pro-
visions relative to deficiency judgments.
The Chaikman. This was all the result of an attempt by Govern-
ment— States, in this instance — to protect the farm owner?
Mr. Wall. That is quite obvious.
Mr. Gesell. The next table is a table which is entitled "Estimated
Amount of Proceeds of Federal Land Bank and Land Bank Com-
missioner Loans, May 1, 1933 — January 1, 1937, Used to Refinance
First and Junior Mortgages Held by Life Insurance Companies and
by AH Lenders, and Amount of Farm-Mortgage Loans Held by
Life Insurance Companies and All Lenders, January 1, 1933."
Mr. Henderson. Is there any mistake. Dr. Wall, in the chart ? Aren't
there any figures on Wyoming ?
Exhibit No. 2278 .
us OCPARTMENT OF AeDICULTURE
BUREAU OF AGRICULTURAL ECONOHICS
The Chairman. I mi^ht say for the information of Commissioner
Henderson that Wyoming had a State farm loan act long before
the Federal Government act.
Mr. Wall. This refers only to legislation enacted in that period.
Some States already had certain provisions that took care of that.
Mr. Gesell. I would like to offer this schedule.
The Chairman. It may be received.
(The table referred to Avas marked "Exhibit No. 2279" and is
included in the appendix on p. 15505.)
Mr. Gesell. This table, Mr. Wall, shows the amoimt of loans of
these various agencies used to refinance loans held by life-insurance
companies and other lenders; is that correct?
Mr. Wall. That is correct.
Mr. Gesell. I notice that some 20 percent, 20.3 percent, of the
funds were used to refinance loans held by life-insurance companies.
CONCENTRATION OF ECONOMIC POWER 14879
Mr. Wall. That is correct.
Mr. Gesell. That should be taken mto consideration, I presume,
in relation to the figure showing that the insurance companies held
21.6 percent of the loans?
Mr. Wall. Yes. In other words, a slightly smaller percentage
of the proceeds of Federal land bank and Land Bank Commissioner
loans was used for refinancing life insurance company loans than
the proportion of the total debt that insurance companies held.
Mr. Gesell. Have you any comments which you wish to make on
this exhibit?
Mr. Wall. I think in general the table shows quite clearly the
concentration of life insurace companies in certain regions, and
also breaks that down into the States which have the largest amount
of life insurance investments in the lower half of the table. At the
right side of the table there is a column entitled "Percent Which
Loan Proceeds Used to Refinance Mortgages of Life Insurance
Companies and All Lenders Are of Mortgages Held January 1, 1933."
There again the life insurance companies have a slightly smaller
percentage than all lenders.
Mr. Geseli>. Have you any figures as to the kind of mortgages
which were refinanced, life-insurance cpn,ipany mortgages which were
refinanced and included within this table? Were they good loans,
were they loans in distress, or what kind of loans were they?
Mr. Wall. The type of loans that Were taken over represented
primarily loans in distress, and yet at the same time a large propor-
tion of those loans were very high-quality investments. The f^ct
that the life insurance companies were concentrating in what had
been considered a high-grade loan area would indicate that the
increase in the proportion of debt held by the Federal land banks in the
West North Central States would mean that they really had increased
the quality of their loans through the system as a whole.
Mr. Gesell. Do you know what percentage of the loans taken over
were loans in distress?
Mr. Wall. I have no figures on that point.
Mr. Gesell. Now, if that completes your comments wi that table,
the next table is entitled, "Acquired Farm Real Estate Held by
Leading Lending Agencies," is it not ?
Mr. Wall. That is correct.
Mr. Gesell. I wish to oflfer this table for the record.
The Chairman. The exhibit may be received.
(The table referred to was marked "Exhibit No. 2280" and is
included in the appendix on p. 15506.)
Mr. Gesell. Have you some comments you wish to make on this
table?
Mr. Wall. The table shows a very rapid increase in the farm
real estate holdings of leading lending agencies following 1929,
and particularly heavy rates of acquirement in 1933 and 1934. In
comparing the data for the five different groups of agencies shown
there, certain significant points should be brought out, I believe,
at this time. First is the difference in policy of the lending agencies
in disposing of acquired real estate. For instance, the Federal
land banks and the Federal Farm Mortgage Corporation have fol-
lowed a policy of disposing of farm real estate as quickly as they
14880 CONCENTRATION OF ECONOMIC POWER
can, so that their total real estate in relation to total acquirements
is not nearly as large as that shown for life-insurance companies.
In connection with joint-stock land banks, these institutions have
been in process of liquidation since the Emergency Farm Mortgage
Act of 1933, and they have made every effort to reduce their real-estate
holdings quite rapidly. You will note that the peak of their holdings
was in 1934, at which time they were approximately 86 million, and
they have been reduced to 54 million in 1939.
Data for insured commercial banks, which are available only
since 1936, show a policy of rapid disposition.
The three State credit agencies, involving South Dakota, North
Dakota, and Minnesota, have had an extremely high rate of acquire-
ment, and these three agencies are in process of liquidation. Thej'
are making every effort to dispose of their properties, although you
will note that the total is still continuing to increase, although at
a relatively slow rate in recent years.
Now, the refinancing program of the Farm Credit Administra-
tion has made it possible for other agencies to sell some of their
properties, and where borrowers are in position to obtain a loan
from the Land Bank Commissioner
The Chairman (interposing). In other words, the smaller insti-
tutions are liquidating, but the life insurance companies and the
Federal Government are increasing their holdings.
Mr. Wall. Well, the three State credit agencies
The Chairman (interposing). I included them as among the
smaller organizations because they are obviously State organiza-
tions and are smaller. So those three State credit agencies are in-
creasing, not liquidating, aren't they?
Mr. Wall. They are in the process of liquidating their. organiza-
tions. They are not making new loans.
The Chairman. But their holdings are increasing.
Mr. 'Wall. That is correct.
The Chairman. So that the holdings of the three State agencies, of
the Federal Government, and of the life insurance companies are in-
creasing, whereas commercial banks are disposing of their real estate
as are also the joint stock land banks.
Mr. Wall. I might call your attention to the fact that in the last
year life insurance Qompanies have shown the first decrease in their
outstanding holdings sine© this series began.
The Chairman. In 1938 and '39 both there has been a decrease.
Mr. Wall. That is correct.
The Chairman. That is true.
Representative Williams. Is there anything in your studies to indi-
cate tlie size of the farms that have been acquired by the life insurance
companies and that are being held and operated by them ?
Mr. Wall. I believe that information is available in the compre-
hensive survey prepared by the Securities and Exchange Commission.
Mr. Gesell. We have no classification in "Exhibit No. 2250" of the
size of the farms held. We do have a classification of the size of the
mortgages which have been made, Congressman, and that may indi-
cate, to some extent, what you want.
Representative Williams. It has frequently been charged — at least
I have heard it — that they have acquired a grea<^ number of very large
CONCENTRATION OF ECONOMIC POWER 14881
farms and are holding and operating those, and I was wondering
whether the record showed that.
Mr. Wall. We have some information relating to 1934 which shows
the average size farm held by life insurance companies to be around
234 acres, as I recall it.
Mr. Gesell. Table 172 of "Exhibit No. 2250'' ^ shows that of farm
mortgages owned, classified by size, the greatest amount of mortgages
of the 26 companies rests in the classification 10 to 25 thousand.
Has that completed your comments on this table ?
Mr. Wall. Yes.
Mr, Gesell. The next' table is entitled, "Farm Investment of Life
Insurance Companies", is it not ?
Mr. Wall. That is correct.
Mr. Gesell. I wish to offer this table as an exhibit.
The Chairman. The exhibit may be received.
(The table referred to was marked "Exhibit No. 2281" and is in-
cluded in the appendix on p. 15506.)
Mr. Wall. I might mention at this point .
Mr. Henderson (interposing). Before you go any further, this
table Mr. Gesell has referred testable 172, shows that, according to
size, the insurance-company holdings are greatest in the 10 to 25
thousand dollar mortgages.^ That would mean — what is the average
value of farms in the United States ? Do you have that ?
Mr. Wall. I don't have that point right at hand, but I might have
a comment to make on that particular point that you have raised.
Mr. Gesell. Mr. Howethas just called my attention to the fact that
we do have the figures that Congressman Williams wants in "Exhibit
No. 2250." At table 190 we show the farm real estate owned, classi-
fied by size, of the 26 largest companies. It shows there that the com-
panies own a total of $544,960,000 of real estate, table 190, and that
$260,000,000 «
The Chairman (interposing). Won't you qualify that, Mr. Gesell—
the 26 largest — ^because the figures which the witness is giving us
apply to all insurance companies.
Mr. Gesell. Yes. For the 26 largest companies, out of $544,000,000
of farm real estate" owned, $260,000,000 is in farms of the 10 to 25
thousand dollar classification. That would indicate that both the
mortgages and the farms held are greatest in that 10 to 25 thousand
dollar classification.
Mr. Henderson. You had a comment?
Mr. Wall, in answer to your question on the average value of ill
farms, in 1935 it was $4,823. That would probably be about $5,000
according to present values, dnd the point I was going to make in
response to your question was that the life-insurance loans, on the
whole, have been quite a bit larger than, say, the average Federal land-
bank loans, because they have been concentrated in an area where
land values were higher.
Mr Henderson. And they did, in the twenties, loan a larger amount
than the government agencies would loan. That is, their appraisals
were higher, isn't that true ?
' See Hearings, Part 10-A, p. 172
2 Ibid.
3 Ibid., p. 190.
14882 CONCENTRATION OF ECONOMIC POWER
Mr. Wall. That would probably be true in certain areas.
Mr. Henderson. Doesn't that account for the fact that the Fed-
eral agencies had such a small percentage as against the insurance
companies in Iowa and States like that?
Mr. Wall. There were a number of factors that influenced that
particular s'ituation. The life insurance companies preferred the
larger loans and the Federal land banks made loans in all areas, areas
where the values of farms were small and where the loans would
naturally be small. That would affect your national average.
Mr. Gesell. You were about to discuss the table entitled, "Farm
Investment of Life Insurance Companies," "Exhibit No. 2281."
Mr. Wall. As the chairman has already indicated, this table refers
to all insurance companies in contrast to the S. E. C. study which
deals with the 26 largest companies. This brings out the very rapid
reduction in debt from $2,139,000,000 in 1929 to a total of $887,000,000
in 1939, and on the other hand, a substantial increase in the am#unt
of real estate owned from $88,000,000 in 1929 to a peak of 713,000,000
in 1937.
Now, the real estate at the present time is about equal to 33 percent
of the loans held in 1929, and the increase in such holdings since 19p3
is about equal to 39 percent of the decline in the loans from 1933 at
which time the refinancing program of the Farm Credit Administra-
tion came into the picture. I think that probably will bring out and
answer the question that you raised earlier, whether 33 percent repre-
sented Federal land bank loan refinancing and 39 percent of the decline
reflects the increase in real estate holdings.
The Chairman. Both of these tables, this one^ to which you are
now referring and the preceding one ^ in which was shown the ac-
quisition of farm real estate by the Federal land banks as well as
by the life insurance companies, all tend to demonstrate quite clearly
that the individual farmer is being swallowed up by organized gov-
ernment and by the organized institutions engaged in the lending field.
Mr. Wall. Insofar as that refers
The Chairman (interposing). In other words, life insurance com-
panies and the Federal Government through its various agencies are
rapidly becoming the largest owners of farm lands to the disadvantage
of the individual.
Mr. Wall. It is a development following the adverse economic
conditions affecting the farmers.
The Chairman. Oh, yes, I am not trying to seek the causes, or
attributing any cause to any desire upon the part of the Federal
Government to take over farms, or any desire upon the part of the
insurance companies to take over the farms. This is a condition that
exists.
Mr. Wall. That is perfectly true.
Representative Williams. What percent of the farms do they own ?
Mr. Wall. Taking four groups of lending agencies, the Federal
land banks, life insurance companies, joint stock land banks and the
State credit agencies, at the beginning of 1938 they had about
28,000,000 acres of land, which represented not quite 3 percent of
all acres in farms, but for individual States and regions that per-
506.
1 See "Exhibit No. 2281," a'ppendix, p. 1!)506
2 See "Exhibit No. 2280," appendix, p. 15506
CONCENTRATION OF ECONOMIC POWER 14883
a?entage is higher. For instance, in the West North Central region the
percentage of acres held by these agencies was about 6 percent, and
in South Dakota it went up to about 11 percent.
Representative Williams. Have you got that in value as well as
in number?
Mr. Wall. Yes.
Representative Williams. What percentage in value do they own
of farm lands of the country?
Mr. Wall. Let me correct myself, I do not have those figures in
values. They could be computed and put in the record, however.'
Mr. Henderson. The percentage of value would be, of course,
much higher.
Mr. Wall. Yes ; that is true.
The Chairman. Could you get those figures for us?
Mr. Wall. Yes, I would be glad to.
The Chairman. If you will do that, we will put them in the
record.^
Mr. Wall. The average investment is about $35 an acre for these
4 agencies.
Mr. Gesell. That completes the presentation of Mr. Wall, and I
think perhaps it is a good time for adjournment.
The Chairman. I wonder if any members of the committee would
desire to question Mr. Wall this afternoon.
Apparently you have illuminated the problem quite thoroughly,
Mr. Wall. We are very much indebted to you, sir.
The committee will stand in recess until 2 o'clock.
(Whereupon, at 12:20 p. m., a recess was taken until 2 p. m. of
the same day.)
afternoon session
The committee resumed at 2 : 30 p. m. upon the expiration of the
recess.
The Chairman. The committee will please come to order.
Mr. Gesell. Mr. Murray, will you take the stand, please?
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. Murray. I do.
TESTIMONY OF WILLIAM G, MURRAY, PROFESSOR OF AGRICUL-
TURAL ECONOMICS, IOWA STATE COLLEGE, AMES, IOWA
Mr. Gesell. Will you state your full name, your address, and
3^our occupation, please?
Mr. Murray. William G. Murray of Iowa State College, Ames,
Iowa.
I am at the present time professor of agricultural economics, Iowa
State College.
Mr. Gesell. How long have you been there, Mr. Murray?
1 See table entitled "Acquired farm real estate held by leading lending agencies, by
Farm Credit districts, January 1, 1939," which was subsequently submitted for thf>
record and appears in appendix, p. 15506.
14^84 CONCENTRATION OF ECONOMIC POWER
Mr. Murray. I have been there at different times since 1925.
Mr. Gesell. Will you state what your experience has been in the
field of farm mortgages and farm land?
• Mr, Murray. In the fall of 1925 when I went to the Iowa State
College, the first job they gave me was to go to the courthouse and
look into the farm-mortgage situation. I have been looking at it
ever since, and it continues to be as fascinating as it was that first
day. Unfortunatelyj we have had a lot of bad experiences in the
meantime. My studies in farm credit have included not only farm
mortgages but farm appraisals, and a year out with the Farm Credit
Administration in their economic work in farm credit, and at dif-
ferent times I have made special studies on appraisal and farm
management for some of the insurance companies.
Mr. Geseix. You mean you have been employed specially by in-
surance companies for studies of that kind ?
Mr. Murray. Yes.
Mr. Gesell. "What degree do you hold ?
Mr. Murray. A bachelor's degree from Coe College, in Cedar
Rapids, a master's degree from Harvard University, and a doctor's
degree from the University of Minnesota.
Mr. Gesell. Well, now, I want to ask you some questions tliis
afternoon with respect to the Iowa farm problem, particularly as
it relates to problems arising out of the lending policies and farm
management policies of institutional holders. First of all, ,can you
give us some idea of how important the life insurance companies are
in the general Iowa mortgage and farm land picture?
Mr. Murray. For the majority of the years since 1920, they have
had the largest volume of farm mortgageis of any institutional
lender. As you have heard, Iowa has been the center of farm-mort-
gage investment by insurance companies. At one time, in 1928, they
had about $500,000,000 invested in farm mortgages in Iowa. That
represented about one-fourth of all the life insurance company farm-
mortgage investments, and it represented approximately 40 percent
of all the farm mortgages in the State of Iowa.
• So the insurance companies have been a big factor in the farm-
mortgage picture in Iowa, and the farmers of Iowa are very much
interested in the policies of the insuranct^ companies as a result.
The Chairman. To what do you attribute the fact that the insur-
ance companies occupy so large a place in the Iowa farm-debt
picture ?
Mr. Murray. There are two reasons. One of them is a little bit
of pride, I guess, we in Iowa claim to have the largest amount
of grade A land in the United States. Another one is that insur-*
ance companies like to make large loans, with^ a relatively short
distance between those loans ; that is, if they can make a $15,000 loan
6 miles from town, it is much better than having to drive 15 or 20
miles to make a $2,000 loan.
The Chairman. Then the factor of the efficiency with which these
loans can be served is an important one in this concentration in
Iowa? '
Mr. Murray. I would say so. After all, making farm loans is a
profitable business if you can make a large volume at a low expense.
CONCENTRATION OP ECONOMIC POWER 14885
Mr. Gesell. Now, Mr. Murray, could you trace for the committee
how the life insurance companies went into the farm mortgage field
in Iowa, taking the period of acquisition up to 1928 and giving
some idea of the methods and practices pursued?
The Chairman. Before the question is answered, may I ask that,
at the suggestion of Senator Norris, you make clear whether you
are referring to life insurance companies only, when you use the
words "insurance companies"?
Mr, Murray. Life insurance companies are the majority of the
lenders, when I refer to insurance companies. There are some addi-
tional companies which are lending besides the life insurance com-
panies.
Mr. Gesell. Additional insurance companies?
Mr. MuBRAY, Yes. We have other insurance companies, but they
are a small percentage. Our figures have not distinguished between
life insurance and other insurance companies, because the other
insurance companies were such a small portion of the total, but
your point is well taken that we do include all insurance companies.
Mr. Gesell. Now, with respect to this period of acquisition, Mr.
Murray ?
Mr. Murray. Starting about 1921, after the drop in farm prices,
there was a large amount of available financing to be done in the
State of Iowa, because people who had bought land in the land
boom were anxious to refinance that indebtedness. At that time
the insurance companies were finding that their investment funds
were expanding and they had money to invest. There were also
in the State of Iowa local correspondents and local mortgage brokers
who were also interested in finding outlet for farm mortgages and
they made contact with the insurance companies. The result was
a big increase in farm-mortgage lending by insurance companies
during "the period of about 1921 to 1928.
Most of the mortgages that went East went East through loan
correspondents or mortgage brokers.
Mr. Gesell. Tell us a little more about how the loan correspond-
ents or mortgage brokers operate?
Mr. Murray. I will have to give you my observations of that
from a distance. I have never been employed by a loan corre-
spondent and I don't know exactly how they operate, but we do
have the records that they charge commissions, and that the larger
the loan, of course, the larger the commission. ;
The Chairman. How did you obtain these records?
Mr. Murray. The records we got from the courthouses and by.
of course, asking farmers.
The business that we found on the^books included those mortgages
" that were made by local mortgage brokers and sold to eastern insur-
ance companies. The mortgages were first made out to this local
mortgage co^npany and they in turn assigned the mortgage to the
insurance company. In that way the insurance company, if it was
a company down East did not have to have any staff to speak of in
the State.
The Chairman. That system is now being followed by the R. F. C.
with respect to some of its financing, isn't it?
14886 CONCENTRATION OF ECONOMIC POWER
Mr. Murray. I couldn't tell you as to that, Mr. Chairman.
I will say that that praciice of using loan correspondents has
largely diminished, and that a good many of the insurance companies
are now putting branch offices and their own field staff out to get
loans rather than to buy loans directly from the correspondents.
Mr. Gesell. What was the reason you mentioned these correspond-
ents? You said they received a commission based upon the size of
the loan. What was the effect of that on the general situation ?
Mr. Murray. Well, from our observation, the charging of commis-
sions was not sound.
Mr. Geselx.. Why not?
Mr. Murray. The temptation lo loan money on commission is to
loan as much as you can, and if I drive out to see John Jones and
get him to take a loan, and if he is interested in getting a $10,000
loan and my commission is II/2 percent, that is $150, if I can get him
to take a $20,000 loan and build a new house or something of that
kind, I can earn $150 extra by talking him into that larger loan.
Mr. Gesell. WTio made the appraisal of the lands in the case where
the loan was made through the correspondent?
Mr. Murray. I may be getting into difficulty because I don't know
enough about the practices of all the insurance companies. This
much is true. The insurance companies were not taking as much
interest in appraisals in those years when they were expanding as
they are now. We have noted a very healthy change in attitude on
the part of insurance companies and other lenders, including the
Federal land baixk and private investors, in making more examination
of the fundamental security underlying the mortgage loans.
Mr. Gesell. Well, now, what terms were these mortgages made at
during this period of acquisition? Were they long-term mortgages
or short-term mortgages?
Mr. Murray. The majority of loans made by insurance companies
during this period of the twenties were 5-year loans.
Mr. Gesell. Is that short or long for out in that area?
Mr. Murray. Those are short-term loans, of "course, and they are
traditional for our part of the country. Since the frontier days, the
farmer in Iowa hoped that he could pay off his mortgage in 5 years.
Up until 1890 or 1900 he could do that, but after 1900 he couldn't
do it in 5 years.
Mr. Gesell. I should imagine these short-term loans were to the
advantage of the correspondent.
Mr. Murray. They were, in that every time the 5-year period ex-
pired, another visit to the farmer and the renewal of the loan, or
placing the loan with some other insurance company, meant another
commission. I want to say, however, that that situation has changed.
As you gentlemen noted this morning on the interest rate map,^ there
is another thing that happened. That is that not only are the farmers
today getting the advantage of a lower rate, but the companies them-
selves in many cases are absorbing the commission.
Mr. Gesell. That is because of their branch office sj'stem?
Mr. Murray. It is because of the competition in order to get
business.
Mr. Hayes. Dr. Murray, does the rate for renewals vaiy at all
from the rate for the original loans?
i See "Exhibit No. 2272," supra, p. 15500.
CONCENTRATION OF ECONOMIC POWER 14887
Mr. Murray. That depends on the competition.
Mr. Hayes. I am speaking of the time during the early expansion,
in the twenties.
Mr. Murray. As far as we can gather, and the files of the cor-
respondents were not available to us, the farmers had to pay a com-
mission regardless of whether they were making a renewal or new
loan. In fact, I know of one loan where only an extension was
granted, but to get that extension for 5 years, the man had to pay
2 percent.
Mr. Hayes. Is that the usual commission?
Mr. Murray. No. At that particular time, however, money was
scarce. That was 1931.
Mr. Gesell. What further comments have you to make about this
period of acquisition?
Mr. Murray. One thing that we found that we feel was wrong
about the situation, looking back — and this is hindsight — was that
there was a tendency to put a lid on the top loan of, say, $100 an acre,
but that that maximum became pretty widespread, and everybody
was making $100 loans on land in some cases that didn't merit the
$100 an acre loan.
The Chairman. When you say "we," whom do you mean ?
Mr. Murray. I mean the men who are engaged with me in study-
ing the farm mortgage situation in Iowa, and to some extent I may
be reflecting the attitude of farmers in the State; that is, at the
agricultural experiment station, wh^n we say "we," we often mean
the State in terms of the farmers.
The Chairman. Was this a study carried on by the university?
Mr. Murray. These studies which I am using as a basis for my
testimony were made by the Agricultural Experiment Station at
Ames, lowa.^ We went to different . parts of the State and gath-
ered this material from court-houses and from information we could
gather from correspondents and other people who were willing to
give us information.
The Chairman. How large was the sample from which you make
these deductions?
Mr. Murray. We — I shouldn't say "we" again
The Chairman (interposing). That's all right, as long as we un-
derstand what you mean.
Mr. Murray. I went to the courthouse in Story County and I
took a record of every mortgage that had been recorded there from
1 iQwa Agricultural Experiment Station Bulletins :
Murray, W. G. — Corporate land, foreclosures, mortgage debt, and land values in
Iowa, 1939. Research Bulletin 266. Ames, 1939.
Murray, W. G., Englehorne, A. J., and Griffin, R. A. — Yield tests and land valuation.
Research Bulletin 252. Ames, 1939.
Murray, W. G. — Farm mortgage foreclosuTe in Southern Iowa, 1915—36. Research
Bulletin 248. Ames, 1938.
Murray, W. G., and Bitting, H. W. — Corporate-owned land in Iowa, 1937. Bulletin
362. Ames, 1937.
Murray, w. G., and Meldram, H. R. — A production method of valuing land. Bui
letin 326. Ames, 1S35.
Murray, W. G., and Brown, W. O. — Farm land and debt situation in Iowa, 1935
Bulletin 328. Ames, 1935.
Murray, W. G., and Bentley, R. C. — The agricultural emergency In Iowa — IV Iowa
Farm mortgage situation. Circular 142. Ames, 1933.
Murray, W. G. — Prospects for agricultural recovery — II. Refinancing farm mort-
gages In Iowa. Bulletin 311. Ames, 1933. '
Murray, W. G. — An economic analysis of farm mortgages In Story County,
Iowa, 1854-1931. Research Bulletin 156. Ames, 1933.
14888 CONCENTRATION OF ECONOMIC POWER
the beginninjz: of the courthouse until 1931. That included some
25,000 mortgages. That was one study that we made. We included
every mortgage made in that county. Then we wen^ into 5 other
counties in the State and studied the mortgages in selected town-
ships, and then we went to every courthouse in the State and gath-
ered information on the location of land owned by institutional
lenders, so that we have a complete check which we have made every
2 years since 1933 of the location of all land owned by institutional
lenders.
The Chairman. The reason that I queried you. about the meaning
of the word "we" as you used it was that frequently we have noted a
disposition to attribute to the committee conclusions which are
reached by the witnesses, and I wanted to make it clear that by
"we" you didn't m6an the Temporary National Economic Committee
or the Securities and Exchange Commission.
Mr. Murray. I understand
Mr. Gesell. I might say there is before each member of the
committee some of these reports which Mr. Murray refers to, that
will give some idea of the scope and character of the studies that
were made.
Mr. Murray. I want to go back again to the fact that a limitation
of $100 an acre was put on loans in Iowa by insurance companies
and the Federal land bank, and I think also by the joint-stock land
banks. This resulted, with the competition of lending, in loans at
too high a value on some of the lower valued land in the State.
There had been too much of a feeling that all of the Jand in lawa
was of the same quality. That fact, or that disposition to think
of that, is being dissipated gradually and I think most of the in-
surance companies as well as the Federal land banks are very con-
scious of that.
In fact, in the last 3 or 4 years there has been an amazing revolu-
tion in the attitude of lenders toward their problem. We have found
the insurance companies and the Federal land bank very receptive,
very anxious to get all the information they can, on the income-
paying possibilities of the land in various parts of Iowa. They
are interested in new types of appraisal that will bring out those
facts. They have profited by the experience that they have had.
They have, however, not yet found a way, a solution for the maxi-
mum loan on the best land. I would like to see a maximum loan on
the lower-valued land rather than on the high-valued land.
Mr. Gesell. What were some of the other problems of this period
of acquisition?
Mr. Murray. Well, as I have said, there was sharp competition.
There was a tendency for loan correspondents to go out and get
loans from each other if possible, to go to the courthouse and find
out what the interest rate was on the loan and go out and tell the
man he could refinance with some other company if he want':^d to by
getting a loan from them at maybe a lower rate.
We can say, I think, that the correspondent system which pro-
vided for a commission on the basis of the amount loaned put a
pressure to get money out. Anyone whose job it was to place loans
made money in terms of his commissions.
Mt. Gesell. Most of the loan correspondents were wiped out in
the depression, were they not?
CONCENTRATION OF ECONOMIC POWER 14889
Mr. Murray. Yes. I should qualify that. They weren't wiped
out exactly but the insurance companies in many cases found that
they needed to have branch offices rather than correspondents if they
were to look after their work in the territory. Some of them still
retain correspondents, I believe, to look after their work, bu<^, in the
main, our observation from the college is that the correspondents,
have been replaced in many instances by branch offices, and that
brings out what we think is a desirable change in that the men who
put out the money should be on a salary basis and the business of
appraising and putting out money should be a salaried, professional
type of activity.
Mr. GESEMi. Was the use of this correspondent system such that
frequently insurance companies away from the scene had to depend
pretty largely upon the correspondent, both for the quality of loan
and all the other factors involved? They have very little way of
checking themselves?
Mr. Murray. I couldn't answer to that exactly, but I would say
this, that I don't think the companies who bought from the corre-
spondents had thought much about the problem except that they were
buying these mortgages from this loan correspondent who was located
right out in the territory.
Mr. Gesell. Was there a tendency for the loans to concentrate in
certain areas in a State?
Mr. Murray. Yes; there was. Very few loans were put in the
lowest valued area of the State. We have an area along the east
and in the southeast where there is a considerable amount of timber.
In some of those areas the insurance companies Were not interested
in placing loans, but on land 'that in some cases was just as good,
in fact, land that was not as good as some of this rough land, they
would be willing to make loans, but on this timber and rough land
they preferred not to enter those particular areas.
The Chairman. Was there local competition for these loans?
Mr. Murray. In many cases there was local competition "ior the
loans.
The Chairman. What was the degree of it?
Mr. Murray. Particularly in the eastern part pf the State there
were families who had funds to invest, there were banks who had
money, and either the individuals themselves made the loans or the
banks would m'ake the loan and assign the loan to older people in
the community who had funds.
The Chairman. What was the circumstance that led to the ex-
pansion of the loans by the life insurance companies rather than by
individuals or commercial banks?
Mr. Murray. After 1921, the State was hit pretty hard by the
depression from the land boom of 1919-20 and private individuals
and commercial banks in the State had, ^11 they wanted, and more.
And they were anxious wherever possible to get outside funds.
Mr. Gesell. In fact, the insjirance companies refin winced the loans
of commercial banks and other lenders during the period from '22
to '28, did they not?
Mr. Murray. They did.
The Chairman. So in a sense it might, be said that the life in-
surance companies were bailing out the individuals and the com-
mercial banks during that period, is that right?
14890 CONCENTRATION OF E(JON(JMIC TOWKR
Mr. Murray, lliut would be substantially correct ; and then dur-
ing 1933 and '34, Congress provided an agency to come in and bail
out the insurance companies.
The Chaibman. And the Farm Credit Administration performed
the same service.
Mr. Hknderson. Who is going to bail the Government out?
Mr. Murray. That is a question I don't exactly have the answer to.
Mr. Henderson. To put it less facetiously, basically the product
of the lands is going to bail out the debt, isn't that it? Doesn't it
rest on the question of whether the farmer gets an adequate return
for what he produces ?
Mr. Murray. My answer to that question might be along these
lines. I was engaged by the Farm Credit Administration last fall
to make a special study in Nebraska. I went out to Nebraska and
found that a lot of the loans out there by the Federal land bank and
I^and Bank Commissioners were in a position where the man couldn't
pay. There was under way a movement to work out some arrange-
ment for those men. There was no agency available to bail out the
Federal land bank and the Land Bank Commissioner so the Federal
land bank and Land Bank Commissioner arranged themselves to work
out a w^ay to bail themselves out by means of a scale of payments for
the farmer that were in line with what the farmer was able to make.
The Chairman. In other words, an effort was made to allow the
farmer to "< ork out his loan.
Mr. Mui^ray. That is right.
The Chairman. So that the Farm Credit Administration has been
endeavoring to keep the farmer on the land and to make it easy for
him to pay out the loan.
Mr. Murray. In fact, the Farm Credit Administration practically
Jiad to do that because there was no agency to come and take over
their loans.
Mr. Henderson. Getting dow^n to the fundamentals of the thing,
with the level of debt now oh farm, property, and with the interest
rate at the present low level, given a satisfactory agricultural situation,
the mortgaged property can bail itself out, isn't that correct ?
Mr. Murray. Except in certain areas, and I don't believe you can
generalize on the situation except to say that in many areas the situa-
tion is satisfactory but that in other areas it is not.
Mr. Henderson. Let me see if I understand what you mean. Even
if you have what some of the farm organizations are contending
for — I am not going to try to take any sides as between the different
groups — do you mean that there are still some areas so debt-ridden
that they couldn't meet their terms?
Mr. Murray. I mean that there is land in some of those areas
where the debt at the present time is too heavy.
Mr. Henderson. It just can''t be supported by a reasonable price
level for agricultural commodities?
Mr. Murray. Largely because those areas have been particularly
hard hit.
The Chairman. You don't mean to assent to what Commissioner
Henderson just said, that these debts couldn't be paid off at a reason-
able price level. What you mean is that at the present price level
they can't be paid off.
CONCENTRATION OF ECONOMIC POWER 14891
Mr. Murray. That would be a question of the interpretation of
"reasonable."
The Chairman. The farm income has not yet been raised to the
level at which it was before the depression, has it ?
Mr. Murray. That is right.
The Chairman. That is correct. Is it not possible that if we suc-
ceeded in raising the farm income to the level prior to the depression,
that this problem would gradually work itself out?
Mr. Murray. Yes.
The Chairman. Fundamentally, as Commissioner Henderson says,
it is a question of production at proper prices which will have to be
solved before the Farm Credit Administration can be bailed out.
Mr. Murray. That is right.
Mr. Pike. Isn't there more than that to it? You say they have
been hard hit? You must include by that the physical deteriora-
tion, erosion of land. No price of farm products is going to bail out
an area Avhere the soil has been ruined by one method or another.
Mr. Murray. I want to allude to that problem a little later in
one section of Iowa where I think there still is a definite problem,
because that area has depreciated because of erosion, and because the
insurance companies and other lenders still own a large percentage
of the land in that area. They own a larger percentage than they
do in other areas.
Mr. Pike. Worn-out land isn't going to be bailed out by a reason-
able price of farm products. More has to be done than that
Mr, Murray. A special problem area is what it is.
The Chairman. Do you think I would be justified in saying that
the life insurance companies,* holding as they do a perfectly tre-
mendous amount of farm land in complete ownership, and holding
mortgages upon a very much larger amount, are more deeply inter-
ested than probably any other institution except the Farm Credit
Administration in helping the farmer to solve the farm problem?
Mr. Murray. I believe you are right, and we have had indications
of that from the insurance companies who come to us for informa-
tion and are anxious for us to help them.
Mr. Gesell. Well now, if that completes what you had to say
on the period of acquisition, can you tell us a little of what hap-
pened in recent years, during the period of liquidation, we might
call it? ■
Mr. Henderson. Before we get there, I don't think I got a satis-
factory answer, or a complete one — we will put it that way — Mr.
Murray. Let me see if I can phrase it another way. At the pres-
ent time the level of farm income is below that of the rest of the
community relative to 1929. Assuming that we got back to the
1929 farm income, with a pretty general dispersion and diffusion of
that income, in your opinion even with the lower amount of farm debt,
the quite drastically reduced interest rate, and the more favorable
terms of the mortgages that exist, there are some lands in Iowa which
would still need to have some attention paid to the principal- amount. It
would have to be reduced. In other words, the burden of debt would
still be too heavy.
Mr, Murray. In answer to that question, I would say that there
would be very little land that would come under that classification.
14892 CONCENTRATION OF ECONOMIC POWER
It would be more a problem of selling and reconditioning those farms
that had deteriorated during the time when they were held by cor-
porate lenders or private investors who had to take them over, during
the time when tenants were on those farms.
Mr. Henderson. That would mean, in another way, then, if the
Government continues its general policy toward farm credit, and
if other things that I gather you are going to speak about later
are done, and there is time to work it out, pretty generally the
product of the land, with a satisfactory price out there, will bail
out the mortgage debt.
Mr, Mt71{ray. That is right.
Mr. Henderson. That is what I was getting at.
Mr. Murray. And we have had a terriflfic liquidation at that.
Mr. Henderson. I am trying to find out whether, with reason-
ably good conditions for farmers, the liquidation, the drastic liquida-
tion, is at an end.
Mr. Murray. I can say that in the State of Iowa, in 1938, our
study showed only 550 foreclosures, whereas in 1937 there were 1,375,
indicating that the liquidation was practically complete. This year
there will be a few more foreclosures, that is in 1939, excuse me,
because the moratorium ended in March of 1939, but the liquidation
in general is practically complete.
We still have, however, as I said earlier, some problems left with
land which has depreciated during the process of foreclosures-
Mr. Gesell. You are talking particularly, I suppose, about the
land in the drought areas?
Mr. Murray. The land in those sections of the State, yes; which
has suffered from either erosion or drought.
Representative Williams. Do I get the impression from what
you have said that there are a number of loans in Iowa on farm
lands valued at $100 an acre, a loan of $100 an acre ?
Mr. Murray. Yes, sir; and there were loans at $100 an acre
on which the interest was paid right through the depression period.
Representative Williams. Are those general farm loans, cover-
ing general farming conditions?
Mr. Murray. Yes, sir.
Representative Williams. Covering what area?
Mr. Murray. I have a chart here. This chart shows the value
of land in different sections of the State, and this general area is
the better area of the State in terms of land values.
Mr. Gesell. That is about the central area you are pointing at ?
Mr. Murray. I recall a loan when I was on the Debt Conciliation
Committee of $100 an acre right in here, and that man never had any
delinquency at all on his loan, and he was getting all his income from
farming.
Representafive Williams. How many acres would a loan of that
kind cover? Was it a very small body or an extensive body?
Mr. Murray. I would say it was an average loan on 160 to 240
acres in that territory. It wasn't in the best territory, as we will
show a little later, where the companies had their trouble. It was
in the areas that were not quite as good.
Mr. Gesell. Well now, will you discuss this period of liquidation,
in order that we can <-
CONCENTRATION OF ECONOMIC POWER 14893
Representative Williams (interposing). I am not clear about this
yet in my own mind and I want to make it clear, because I think
it is a matter of some importance. Now, those loans are made at
$100 per acre; upon what percentage valuation do they figure them?
Mr. Murray. Insurance companies and the Federal land bank,
who made those loans, were making them on the basis of a 50-per-
cent valuation. The land was worth $200 an acre, and from the
period 1922 to 1930 there were a great many loans made on that
valuation.
Representative Williams. And those loans didn't have any
trouble ?
Mr. Murray. Many of them did, but therfi were, as some of the
insurance companies I think can testify, many of those loans that
came through.
Representative Williams. What percentage of them, would you
say, did come through, of that character of loan? That is a rather
remarkable statement to me — is the reason I make that inquiry.
Mr. Murray. We have no check on the percentage of the loans
that came through, because w^e don't know in every case just how
many loans were made. But let me give you this picture: In the
State, with about 45 percent of the land mortgaged and with the
mortgaged land mortgaged on the average for about $80 an acre,
there was only a relatively small percentage of the State that actu-
ally went through foreclosure.
I think I can get those figures, as to the actual number of farms
that went to foreclosure.
I will have to give you the figures in this form : 12 percent of die
land in Iowa owned by corporations as of January 1, 1939, whereas
in 1930 about 45 percent of the land in the State was mortgaged
for $80 an acre.
Senator Herring. Dr. Murray, would you not say there is much
less distress in the $100-an-acre loans than there was in the $30-an-
acre loans?
Mr. Murray. Yes.
Representative Williams. What kind of mortgages were those
back in the twenties? Were they just straight direct mortgages
covering a period of 5 years, not amortized in any form ?
Mr. Murray. No.
Representative Williams. What form are the mortgages in now?
Mr. Murray. There are stiU some of the 5-year mortgages, but a
good many are made/ for longer t^rms of years. I should change my
statement to say that the Federal land-bank loans that were made
during those years were for longer terms, of course.
Representative Williams. Yes; I (Understand they were all made
for 30 or 35 years, but it was not the practice in those days for the
banks or the insurance companies to issue or accept an amortized
mortgage ?
Mr. Murray. The farmers, according to many of the lenders, and
I think maybe supported by the facts, didn't prefer the longer term
loans in all cases.
Representative Williams. It was simply not the practice at all,
was it?
Mr. Murray. That is right; and whether or not it was because
the lenders preferred it or the borrowers preferred it, I cannot say.
124491^1— pt. 28 14
14894 CONCENTRATION OF ECONOMIC POWER
Representative Williams. Wlien did that form of mortgage come
into general use?
Mr. Murray. The 5-year mortgage?
Representative Williams. I mean the longer term amortized mort-
gage. .
Mr. Murray. There are a few illustrations of it back before the
Federal land bank was started in 1917, but very few. Since the
Federal land-bank introduction into the field, the long-term amor-
tized loan has grown in popularity. Some of the insurance com-
panies are offering this type of credit at this time.
Representative Williams. Is it true that most of them are in
that form now?
Mr. Murray. No.
Representative Williams. Still the straight 5-year mortgage?
Mr. Murray. Yes.
Mr. Gesell. Now, with respect to this period of liquidation. Dr.
Murray, can you tell us a little about what has happened since 1928
or 1930?
Mr, Murray. To give you a little impression of what happened
in Iowa in 1930, there were estimated to be 1,500 foreclosures in
Iowa. In 1931, as you will recall, the price of corn began to ^o
down and difficulties increased. There were 3,400 foreclosures in
that year. In 1932 it went to 6,400 foreclosures. In 1933 there
would have been more, but in February of that year a moratorium
on foreclosures occurred and the result was in 1933 the total number
of foreclosures was only 3,700. It dropped from 6,400 in 1932 and
since that time it has dropped off until, in 1938, as I will repeat,
there were only 5^0.
You might be interested in who was foreclosing. Our estimate
for 1930 showed that 27 percent of all the foreclosures were made by
insurance companies. In 1931, 38 percent were made hj insurance
companies; in 1932, 46 percent; in 1933, 51 percent; in 1934, 67
percent of all the foreclosures were by the insurance companies.
Representative Williams. That seems to be a kind of progression,
increasing all the time. The question is : What percentage of mort-
gages did they own?
Mr. Murray. They owned 40 percent of the mortgage debt in 1928,
or thereabouts. ;
Representative Williams. These percentages are given in numbers,
as I understood it,
Mr, Murray. This is the percentage of all the foreclosures that
were put through the courts.
Representative Williams. In number? not in amounts.
Mr. Murray. Yes,
Representative Williams. What percentage of them in numbers
did they own ?
Mr. Murray. I can't give you those figures. I have never broken
them down, but I would say substantially they would agree.
Mr. Gesell. Agree with what?
Mr. Murray. They would agree with the percentage of the debt,
Mr. Gesell. Oh, you mean they held about 40 percent of the
farms ?
Mr. Murray. They had about 40 percent of the debt and in 1934
their foreclosures in numbers were 67 percent of all foreclosures.
CONCENTRATION OF ECONOMIC POWER 14895
The reason for that is that the insurance companies were late in
starting foreclosures, because most of them were first mortgages.
Representative Williams. The point I have in mind and was mak;
ing inquiry about was whether they were more rapid and more ruth-
less in their foreclosures than others.
Mr. Murray. It is difficult, of course, to say anything about that,
with this exception : You can say that since they held first-mortgage
security it was not until 1931 that most of their mortgages would
come into difficulty, so it was logical that their foreclosures would
not start until the depression deepened.
We found in working with the moratorium cases that you couldn't
generalize about insurance companies. We found that the companies
that had home offices in the Corn Belt, for example, were quicker to
realize the situation than the ones that were farther away, which was
natural, because the ones in the East who had bought their loans from
correspondents were not nearly as well acquainted with the situation,
whereas we had to write to the home offices in some cases in the eastern
companies and have their executives come out and see what the situa-
tion was — as members of the Debt Conciliation Committee, I am
speaking now.
With the companies who were located locally in the Com Belt,
generally speaking, there was very little cause for moratorium, be-
cause most of those companies were acquainted with the problem.
Mr. Gesell. Do I understand you to- say there wouldn't be any
need for moratorium if the mortgages were held by the local
companies ?
Mr. Murray. I think that is a rather broad statement. I cafi't
quite agree with all of it, but I can say that the circumstances would
lead to a conclusion approximating tTiat.
Mr. Pike. You mean a legal moratorium. There would have been
a sort of classic, private moratorium.
Mr. Murray. That is right. Each insurance company realized
that there was no use of its taking over the land. Why take over
the land if you have a good operating farmer on there? He is the
best bet you have if you can keep him in ownership. The idea of the
moratorium was that it was a receivership period in which the man
had a chance to get back on his feet.
Representative Williams. Did the insurance companies get into any
worse condition than the others? Did they have a poorer grade of
loans V
Mr. Murray. No; they didn't have a poorer grade. I think in
some cases they probably had a better grade of loan. Of course, that
is tied up with the amount they loaned per acre.
Mr. Gesell. I understood you to say in those figures that the in-
surance-company foreclosures expressed in percentage of all fore-
closures increased even during the period of moratorium.
Mr. Murray. That is right.
Mr. Gesell. Did you find the insurance companies were agreeable
to the moratorium and cooperated with it, or were they opposed to it ?
Mr. Murray. That changed over time. I think a great many of
them were on the fence at first. Some of them were probably hostile.
At least they indicated as much. But after a year or two, most of
them were coming over. In fact, some of them hated to see it go
because it dumped a lot of farms iiito their laps they would have
14896 CONCENTRATION OF ECONOMIC POWER
been able to work out maybe if the moratorium had not ended in
1939 — the moratorium principle has worked out so well in the re-
ceivership period because the farmer has a chance to come back,
has an opportunity, with good prices and good crops, to get back on
his feet.
Mr, Gesell. I gathered from what you said that the local companies
were giving the farmer that opportunitv without foreclosing on the
land and that many of the companies from outside, not being as ,
familiar with the situation, were not adopting that practice.
Mr. Murray. They were not as quick to adopt that practice.
Senator HEiiRiNG. Let me say at this point that when the original
proclamation was issued forbidding farm foreclosures, three insurance
companies disregarded it. All the others accepted it and stopped
foreclosure, as Dr. Murray will recall.
Mr. Gesell. Do you recall that, Mr. Murray ?
Mr. Murray. Yes, I recall the fact we had some difficulty with some
of the companies in getting them to accede to the moratorium in
our work with debt conciliation cases, and I ought to add probably
for the record at this point, I was chairman for a brief period of the
Debt Conciliation Committee in the State.
Mr. Geslll. Did the companies cooperate with the work of the Debt
Conciliation Committee ?
Mr. Murray. Again I will say that it was a question of time in some
cases, to get them to come around to see what we felt was the proper
attitude to take with respect to working the cases out. However, I
want to say that in some companies the cooperation was exceedingly
fine. We had some of the best possible cooperation.
Representative Williams. As I understood the figures you gave,
there was an increase in the percentage of foreclosures on the part of
the insurance companies.
Mr. Murray. That is right.
Repi-esentative Williams. Ranging from the years 1932 to 1937.
Mr. Murray. 1932 to 1934. Excuse me. My figures I gave you
were from about 1930 to 1934, our last figures on the percentage of the
number.
Representative Williams. Now the plain question is whether the
other lending institutions, whether their percentage of foreclosures
increased in the same^manner.
Mr. Murray. The private investors ; no ; because they in many cases
were out of the picture earlier. Some of the private people had sec-
ond mortgages and they had been cleaned out, so to speak, earlier. The
Federal Land Bank during this period was so busy with their refi-
nancing plan, that their foreclosures in many cases were held up. I
think the figures for recent years would show that the Federal Land
Bank foreclosures have increased relatively to what they were in that
period that I quoted.
Mr. Gesell. Now, during this period, was there quite a bit of scaling
down of the debt by the various lending groups?
Mr. Murray. The Federal land banks, of course, were doing the
refinancing and did not scale down at all ; that is, they didn't enter
in as a party to any scale-downs. Therein was the difficulty because if
we had a man with a Federal land-bank mortgage who needed a
scale-down, there was no way of getting it. Congress provided
CONCENTRATION OF ECONOMIC POWER 14897
jone remedy by reducing the rate on his loan to 3l^ percent, which
helped out. The insurance companies, by and large, on many of their
loans in Iowa were not willing to scale, and not willing to scale because
they said the land value in Iowa would come back, and it did, and in
many cases it was only a question of time. We had banks and private
investors, on the other hand, who were willing to scale and were much
more cooperative in the scaling down process because they were inter-
ested in getting cash. The insurance companies naturally were not
interested as much in getting cash.
Mr. Gesell. Now, are there any other general observations which
you wish to make about this period of liquidation ?
Mr. MuRRAT. I believe that covers that period, unless there are
some other questions.'
Mr. Gesell. Now, I want to show you, Mr. Murray, some charts
and tables which, it is my understanding, were prepared under your
direction or with your cooperation, and ask you if you will identify
these.
Mr. MuERAT. I do.
Mr. Gesell. First, with respect to the series relating to corporate
land, foreclosures, mortgage debt and land values in Iowa, have you
some comments which you wish to make ?
Mr. Murray. I would like to make some comments on that, because
it shows the large interest that the insurance companies have in the
State of Iowa. The material is included in the first bulletin, on page
310.^ It shows the heavy concentration of corporate holdings in
insurance companies.
Mr. Gesell. I think I might at this time offer these schedules and
charts for the record, all three of them at this time, as "Exhibits
Nos. 2282, 2283, and 2284."
(The charts referred to were marked "Exhibits Nos. 2282, 2283, and
2284" and are included in the appendix on pp. 15507 to 15512.)
Mr. Murray. On January 1, 1939, the insurance companies owned,
according to the records in the courthouses, 2,752,000 acres in the
State of Iowa, an acreage which is slightly more than 8 percent of
all the land in the State of Iowa, or represents about 8 counties out
of our 99. That is the reason, gentlemen, why we are interested
in the policies of the insurance companies in Iowa.
You will notice also that the next largest holder of real estate in
the State of Iowa of the coDporate lenders are deposit banks which
only hold 1 percent. That gives you some impression of the fact that
the insurance companies are the largest single group of institutional
lenders in our State.
Mr. Gesell. One percent for the deposit banks compared with
what for the insurance companies ?
Mr. Murray. 8.1 percent.
Now I would like to bring you up to date by turning to page 312
in that same bulletin, and to show you where the increase in corporate
land has occurred since 1937.^ You will notice that the corporations,
including the insurance companies, have increased their holdings in
western and southern Iowa, and you will also notice on the opposite
^ Murray, W. G., Corporate land, foreclosures, mortgage debt, and land values in Iowa,
1939. Research Bulletin 266. Ames, 1939.
=> Ibid.
14898 CONCENTRATION OF ECONOMIC POWER
page that is the area where erosion is a particularly serious problem
in our State. Consequently we have a problem tnere-of that land
being resold to owner-operators on a basis where they can operate
that land successfully.
Numerous representatives of insurance companies have told me that
they have had little difficulty in selling their oetter land, but it is the
land that has been eroded or is in bad shape for other reasons, which
has become the real problem in the State.
This area in the West and the South is not only the one of heavy
erosion, but it is also the area where the drought has taken its heaviest
toll.
The Chairman. May I interrupt, Professor Murray, to ask, what
is the character of the land investment and • mortgage companies
shown in this exhibit that you have handed in ? ^
Mr. Murray. Those companies represent a miscellaneous group,
including companies formed by men in banks to take land out of the
asset columns of the bank statements. They include some private
companies formed by men who thought they could make some money
in lands. They organized and bought some land under a name like
the Corn Belt Investment Co., or the Home Investment Co.
The Chairman. Would it be fair to assume that most of these were
local Iowa corporations ?
Mr. Murray. That is right.
The Chairman. Owned and operated by Iowa citizens ?
Mr. Murray. With a few exceptions. I know of some investment
trusts back East that for a long time have owned land in Iowa as an
investment.
The Chairman. Now, with respect to the deposit banks, are those
also primarily or. in most instances owned in Iowa ?
Mr. Murray. Not entirely. We find every once in a while a bank
from Vermont or Massachusetts, a savings bank, or some banks in
Illinois or other places back East that have invested money in Iowa
mortgages and have had to take over the land later.
The Chairman. Exclusive of the insurance companies, what pro-
portion of these landholdings would you say was held by non-Iowa
corporations ?
Mr. Murray. Probably not more than 25 percent, excluding the
Federal land bank and the joint-stock land banks.
The Chairman. Of course, the Fedferal land bank could also be
regarded as an absentee owner.
Mr. Murray. Not entirely, in that we feel out there that our stock
in the National Farm Loan Association represents an interest in the
Federal land bank.
The Chairman. So that, you think, makes it a local institution?
Mr. Murray. Partially. We have hopes that* the Federal Land
Bank system will eventually work out so that it will be owned by the
farmers.
The next exhibit I would like to present has to do with the location
of the insurance companies' holdings in the State of lowa.^ As I
said previously we have gone to each courthouse in the State of
Iowa and taken off a record of where the insurance company land is
1 "Exhibit No. 2284," appendix, pp. 15510-15512.
' "Exhibit No. 2282," appendix, pp. 15507, 15508.
CONCENTRATION OF ECONOMIC POWER 14899
v-held. You will find that located in Bulletin 362, on page 101.^ You
will also see that on the top one of the maps which are on the easel.
Mr. Gesell. I am afraid that will have to be nearer if we are to
see the dots.
Mr. MuERAT. Those who have the bulletins can see it by looking at
the chart on page 101.
I wanted to have that chart of the location of insurance companies
compared with the chart which shows the value of land in Iowa.
From that you will observe that the insurance companies own the
largest proportion of their holdings not in the best territory, but in
the twilight zone between the best territory and the poorest territory.
They own a large proportion of their holdings in southern Iowa,
in parts of western Iowa, and in northern Iowa. Those are areas
which are not as good as the best land, and not as poor as the lowest-
value land.
Tliis same picture can be presented for other lenders. The in-
surance companies are not the only ones that have learned the lesson
of the variation in income paying power, but they had the largest
volume of loans so they were the ones that were most extensively
engaged in taking over real estate in those sections.
Next, I would like to present charts showing the foreclosures in 31
southern Iowa counties.
Mr. Gesell. That appears in Research Bulletin 248, does it not? ^
Mr. MuBRAY. That is in Bulletin 248, on page 256. We went to the
courthouses in the 31 counties in southern Iowa and we took a record
of every foreclosure that had occurred in those counties from 1915
through 1936, and that first chart shows how the foreclosures in the
beginning were largely by private investors, and how later they were
largely by insurance companies.
I was unable to give you the figures for Iowa as a whole, but here
are the figures for the 31 southern Iowa counties, indicating the per-
centage which the insurance companies foreclosed.
After 1934, you will notice, the proportion which the insurance
companies had was reduced somewhat. In 1936 they had 39.3 of all
the acres foreclosed in that territory.
I would like to bring your attention to a situation in southern
Iowa which I think is important. The last chart on that bulletin
is on page 259. It is the middle chart on page 259, and it shows
the heavy concentration of foreclosures in one area of southern Iowa,
an area of lower land values.^
I would like to suggest a comparison between five counties in that
low-value area, and five counties to the west of that area in a better
land area.
Mr. Gesell. That is shown on this schedule which is before the
committee, entitled "Relationship of Farm Mortgage Debt to Farm
Value as Revealed by Foreclosures in 5 High- and 5 Low- Value
Counties in Southern Iowa 1915-1936, and Acreage Sold and Deeded
by Corporations, in These Same Counties January 1935 to January
1939," is that correct?
1 Murray, W. G., and Bitting, H. W., Corporate-Owned Land In Iowa, 1937.
=> Murray, W. G., Farm Mortgage Foreclosures in Southern Iowa, 1915-36. Ames, 1938.
" See "Exhibit No. 2283," appendix, pp. 15509. 15510.
14900 CONCENTRATION OF ECONOMIC POWER
Mr. Murray. That is correct.
Mr. Gesell. I should like to offer this schedule for the record at
the present time.
The CHAIRMAN. The schedule may be received.
(The schedule referred to was marked "Exhibit No. 2285" and
is included In the appendix on p. 15512.)'
Mr. Murray. I would like to point out the five low-value counties
are located directly in the southern part of Iowa, and the high-value
counties are located in the southwestern corner of the State. The in-
surance companies loaned an average of $94 an acre on those five
high-value counties, or thereabouts, as revealed by the foreclosures
which they had in those high-value counties. They had an average
debt per acre of $63 in the low-value counties, but the point to bear in
mind is that they loaned, evidently, more in proportion to the value in
the low- value counties.
Mr. Gesell. In other words, they overloaned in those low-value
counties ?
Mr. Murray. If you consider the correct loan as made in the high-
value county, they were too high in the low-value counties. For
example, comparing the 1925 values according to the census, they
loaned 55 percent of the value in the high-value counties and 68
percent in the low-value counties.
Now, the result of that was this: In 1939 the corporations owned
9 percent of the land in the high-value counties and 25 percent of
the land in the low-value counties.
Mr. Gesell. So that as the result of the lending policy of over-
loading on the low-value lands they have come to be the principal
owners of the low-value property?
Mr. Murray. I should add to that statement
Mr. Gesell (interposing). Is that correct? That was supposed
to be a question.
Mr. Murray. I would add to that statement that they have over-
loaned in that territory and have had to take over a larger proportion
of land in that territory than the other territory, but that they are
not the only ones that have experienced that situation. The Federal
land bank and the joint-stock land banks had the same experience.
And that leads up to another problem which is current in the State of
Iowa, and that is the fact that the land in those low-value areas is
not selling as rapidly as the lands. in the better areas, even though
those five high-value counties are in the drought area.
Mr. Gesell. That as a result gives you in effect more absentee
ownership of the land that needs the closest attention and has the
greatest need of an owner-operating relationship?
Mr. Murray. That is correct.
Mr. Henderson. Is that necessarily so? I mean, it might seem
that what that land needs is someone who can put some additional
money in there. Certainly insurance companies are in better shape
to put money in than someone who goes in and operates it right on
the margin.
Mr. Murray. That is right; the insurance companies have put a
lot of money into that land. They have fixed up the buildings and
in many cases the tenants are anxious to have the insurance companies
continue as the landowner, but the difficulty if that the insurance
CONCENTRATION OF ECONOMIC POWER 14901
companies have those farms for sale. Every year the tenant on one
of those farms is subject to termination of the agreement.
The farm may be visited by anybody at any time to determine
whether or not it is to be sold, and the farmer who is operating that
farm is constantly under possibility of having to move the next year,
and that means that land where there is erosion, and where there are
dijficulties in handling it, is not under stable ownership in terms of
a long-term program.
Mr. Henderson. What is your Iowa insurance law with relation
to an insurance company holding property?
Mr. Murray. Five years.
Mr. Gesell. They have been holding it longer in many cases?
Mr. Murray. They have been getting a renewal of that privilege
of holding it 5 years, but the situation has changed somewhat. At
least, from the newspaper reports, the present commissioner of insur-
ance is asking the insurance companies who now apply for an exten-
sion of 5 years to have a definite plan of sale; at least he is not
anxious, according to the newspapers, to extend that period of 5 years.
Mr. Henderson. What period is the usual extension?
Mr. Murray. All that I know about is the common knowledge that
it is a renewal for 5 more years.
Mr. Henderson. But the period for which the tenant actually gets a
contract is usually 1 year; is that it?
Mr. Murray. Because the insurance company may sell that farm
any time during that year. The farrps are all for sale.
Mr. Henderson. You have two things, then : you have the attitude
of the Iowa insurance commissioner and you have the desire on the
part of the insurance company to get out of the land-holding business,
working against a long-time rehabilitation of the farms. Isn't
that it?.
Mr. Murray. That is right. The insurance companies, however,
are not interested in a long period of rehabilitation, because that is
very expensive with tenant operation.
Mr. Henderson. They can't, cJin they, with the nature of their
obligations? That is, the general construction of insurance company
holdings is that they are not permitted to hold any land unless it is
taken in foreclosure. It isn't contemplated that an insurance com-
pany be an absentee owner corporation.
Mr, Murray. At the present time it is not. The attitude of the
insurance companies is that they are interested in getting out of their
land holdings, and the insurance commissioner has the same feeling,
that they should get out as soon as they can, reasonably.
Mr. Henderson. What do you think they ought to do ?
Mr, Murray. Well, there is one queistion in my mind. I have never
seen any evidence on this, but I am wondering if it would be possible
for an expansion of the use of the contract of sale to tenants. Some
of the companies, we understand from local observation, are using
that and are selling to tenants on a small margin. Some of the other
companies, particularly the ones in the east, do not favor, evidently,
that particular type of sale,
Mr. Henderson. Well, now, if you were an, insurance company
and honestly believed you were going to have an increase in the price
level, you wouldn't want to have a contract of that kind, would you ?
14902 CONCENTRATION OF ECONOMIC POWER
Mr. Murray. Well, I would be up against this, that maybe that
farm isn't making me much income there now with a tenant on there
from year to year not knowing he could stay, and if I could sell that
farm to a tenant he would be willing to take an interest in that farm
and want to preserve the topsoil.
Mr. Henderson. I can see your attitude from the viewpoint of
Ames, Iowa, somebody interested in Iowa. What I am getting at is
the viewpoint of the insurance company. One of the reasons why
the insurance company is a good reservoir for any kind of security
is that, with a few exceptions, it is not a trader. It is expecting to
hold it to maturity, and it staggers its maturities to meet its obliga-
tions. As I see it, you are caught, as far as your own citizens are
concerned, in a conflict between the type of lender and what his atti-
tudes necessarily haJve to be on account of the necessities of his business
and the rehabilitation necessary for Iowa.
Mr. Murray. Of course, if the insurance companies held all. their
land off the market in terms of a speculation that prices would be
higher and then they could sell
Mr. Henderson (interposing). Then who can sell?
Mr. Murray. Insurance companies could sell at the higher price
if they felt they were going to be higher, but insurance companies
haven't taken that position. They are interested in getting out of
the real-estate business in the State, but they are not getting out as
rapidly in the lower-valued areas, and my suggestion is that maybe
the use of these contract sales, plus maybe a revaluation of that
property — I don't know, but I am wondering if they have that prop-
erty down on the basis where the farmers could buy it.
Mr. Henderson. Maybe you have something there. Maybe it is
a necessity for them to realize what they have hold of, if they have
an asset that isn't worth as much as they have carried it at on their
books. Is that what you are suggesting ?
Mr. Murray. I am suggesting a revaluation to determine whether
or not that is the reason why they haven't been selling those farms
in those areas as rapidly as in other areas and I submit this table,
that in these five low-value areas the value of land has dropped much
more than it dropped in the high-value areas.^ Now, whether or not
these insurance companies have all realized that this property has
depreciated because of erosion or not is a matter on which I can't
judge. I think it would be a question of determination.
Mr. Henderson. And whether they have realized, also, that under
the present ad hoc basis, with erosion working day and night, the
value is likely to get lower?
Mr. Murray. That is the point that I wanted to make a little while
ago, that maybe even though they thought prices were going up,
maybe selling the land even at a lower price might save them money,
in view of the fact that the farm won't be worth as much 2 or 3 years
from now as it is today.
Mr. Gesell. Well, now, which of the companies are moving their
real estate o.ff the fastest out in that neck of the woods? Is it the
eastern companies or the western companies?
Mr. Murray. I couldn't say as to that, because I haven't the
> See "Exhibit No. 2285," appendix, p. 15512.
CONCENTRATION OF ECONOMIC tyWER 14903
figures, but I can say this, that our observation is that those com-
panies that are using the contract of sale, selling on a small down
payment, getting the lands in the hands of the owner-operator, who
as I said before is interested in maintaining the property, those com-
panies, I believe, are in the main, with some exceptions, the com-
panies with home offices out in the Corn Belt with few exceptions.
It seems to me the situation is pretty much the same as it was earlier
"in the depression. The eastern companies realized later on how to
cooperate on the moratorium. Maybe the same thing is true of these
contracts of sale, that some of the companies in the Middle West have
found that that is a way to get the land over into the hands of the
owner-operator.
Mr. Henderson. Well, there is always a risk there, too, isn't there.
Dr. Murray ? You use one of the familiar ways of concealing a lack
of value in an asset to get some kind of a contract that you can drop
iri at a face value. You are up against another potentiality, that an
insurance commissioner has to watch.
Mr. Murray. But I ask you — not ask you, I wonder — if the farm
now at its price, not selling, is any better asset than that same farm
sold to an owner-operator who is interested in keeping the topsoil
where it is ?
Mr. Henderson. Does your insurance commissioner look at what
the value is? Does your insurance department keep pretty well in
touch with the nature of the studies that you are doing ?
Mr. Murray. He has quoted some of our studies at different times ;
yes. I can't say as to the way in which he conducts his office, as to
an examination of values.
Mr. Gesell. I might call the committee's attention to tables 180
and 181 of "Exhibit No. 2250." ^
The (I!hairman. May I interrupt. .The roll is being called for a
vote on an amendment, and Senator Norris and I will have to go.
(Representative Williams assumed the Chair.)
Mr. Gesell. Tables 180 and 181 of "Exhibit No. 2250," when com-
pared on a percentage basis, sho^ that the companies with the great-
est percent of real estate, farm real estate under contract of sale,
are the companies domiciled in the West. Banker^' Life of Iowa
heading the list at 33.9 percent, followed by Union Central, Equitable,
Lincoln National, and Northwestern Mutual, ihe sixth company being
Prudential and the seventh being the Jolm Hancock.
I should like to offer this schedule, which is simply* a computation
based on the other two tables,^ for the record.
(The schedule referred to was marked "Exhibit No. 2286" and is
included in the appendix on p. 15513.)
Acting Chairman Wiixiams. In the disposition of these lands, are
they under just a sales contract or' do they sell them and take a
mortgage back on them?
Mr. Murray. It is done both ways. Usually, according to our
information, where a contract is taken, the title remains with the
insurance company or with the Federal land bank, and in this con-
nection the Federal land bank has sold a large proportion of its hold-
1 See Hearings, Part 10-A, pp. 180 and 181.
' Ibid.
14904 CONCENTRATION OF ECONOMIC POWER
ings in the State of Iowa on contract, retaining title, and as soon as
the present owner, under this contract, pays down a certain propor-
tion of his amount on his contract, he gets a deed.
Acting Chairman Wiixiams. But it would be rather difficult to
make a sale and take back a mortgage, part with the title on the part
of the company, and take a mortgage back on the same basis of
valuation on which the original mortgage is made.
Mr. Murray. The case where the outright sale is made is where
the man usually pays down 25 percent; they give him the title,
and he gives a purchase money mortgage for the difference.
Acting Chairman Williams. They don't require the 50 percent
payment ?
Mr. Murray. They use various practices. Each insurance company
usually has a different contract, a different method of sale.
Acting Chairman Williams. I thought perhaps the law in some
cases regulated that. Do the Federal land banks do that?
Mr. Murray. The Federal land banks do that. They sell to a
farmer, and after he has paid down a percentage, as I understand it,
according to their own interpretation, they can give him a deed and
take back a purchase money mortgage for the difference.
Acting Chairman Williams. In other words, they make a loan
then, and the mortgage is taken for 75 percent of the value instead
of 50 percent.
Mr. Murray. That is correct.
Acting Chairman Williams. And that is the practice with insur-
ance companies, too, is it?
Mr. Murray, I believe it is.
Mr. Pike. That is usually a smaller principal amount than the
original amount.
Mr. Murray. That is correct. If they had loaned originally, say,
$90 an acre, had $100 invested in the farm, and sold the farm for $95,
with a down payment of $20, it would mean they would take back a
purchase money mortgage of $75, whereas originally they would
have had that $90 loan.
Acting Chairman Williams. Do they resort to the deficiency judg-
ment in any cases?
Mr. Murray. Deficiency judgment in Iowa is quite common and is
used mainly for the purpose of obtaining the income from the farm
during the year of redemption. If an insurance company has a
judgment of $10,000, they may bid in the farm at $9,000, obtain a
deficiency judgment of $1,000, and use that as a basis of obtaining a
receiver who will then be in a position to collect the rent during the
year of redemption.
Acting Chairman Williams. Is their right under the deficiency
judgment limited to the collection of that out of a particular year's
rent, or is it a general judgmenl against the owner that may extend
for a period of 10 years and be collected out of any assets which he
has?
Mr. Murray. I am not informed as to that, but I would say that
it could be. T don't believe it specifically says that, as far as I know.
There has been some deficiency judgment legislation in Iowa which
I am not able to report.
Mr. HendHrson. Undoubtedly the contract of sale, as far as the
State of Iowa's purposes are concerned, is one of the best things. pos-
CONCENTRATION OF ECONOMIC POWER 14905
sible, because you have then, someone who has an ante in the land ; he
is looking forward to staying there for some time, and his whole
future is tied up with whether that land actually gets more valuable
and actually produces. Isn't that it?
Mr. Murray. That is substantially correct. We feel that land
which is constantly on the market by insurance companies, the Fed-
eral land bank and the joint stock land banks, or other lenders is
not in a stable condition, because those men who are operating it are
operating it continuously under conditions which are not satisfactory
for a long-term program.
Mr. Henderson. They are probably mining it instead of farming
it ; isn't that it ?
Mr. Murray. There is a temptation to do that. If you are only
going to be on there 1 year, and you don't know whether or not you
would have a chance to buy it, maybe because you couldn't pay the
down payment, there would be a temptation to say, "Well, the best
thing for me to do is to take as much as I can get."
Now, the insurance companies and the Federal land bank are striv-
ing to do a good job of farm management, to rehabilitate this prop-
erty, but it is expensive. A field force is expensiye to operate.
Acting Chairman Williams. They are not getting much income
out of it, are they?
Mr. Murray. That varies. From the reports that we get from
insurance companies, we infer, at least, that the income from their
better land is even higher in some cases than what they got on
the mortgage, but that on some of the poorer lands the reverse is
true, that their income is very low.
Mr. Hayes. Do the companies generally endeavor, with respect
to the poorer-grade lands, to maintain the property itself in a good
condition, to make improvements of a permanent nature, even though
they are renting that to tenants ?
Mr. Murray. That is correct. I think all of the insurance com-
panies are interested in maintaining their investment.
The difficulty is, if you have a tenant on the farm and his live-
lihood depends on that farm, and he is operating that farm for only
1 year, his best interest is to farm it not in terms of a long-term
program but of a short-term program.
Mr. Hayes. He has certainly no incentive to do anything which
would make for permanent improvement.
Mr. Murray. That is correct.
Mr. Gesell. Let's see if we can pull this together a little. Dr.
Murray. What we are getting at here are the various problems
raised by absentee corporation ownership of f arm _ lands. Now, we
h&ve one factor you mentioned, which is the increase in tenancy and
the unstable nature of the farm community which results from that.
Then I believe you mentioned farm management, one of the prob-
lems in the field of farm management.
Mr. Murray. In order to manage the property sufficiently, prob-
ably 50 farms to a man would be sufficient. But the trouble is, that
is too expensive, and that is another reason why insurance-company
or Federal land-bank operation of holdings would probably not be
economic in the long run.
Mr. Gesell. How many farms does the usual insurance company
have per ont manager?
14906 CONCENTRATION OF ECONOMIC POWER
Mr. Murray. I imagine that-
Mr. Gese'll (interposing). I want to know what you are told.
Mr. Murray. I don't have any figures, but from our reports from
individual managers, in many cases young men who have graduated
at the college at Ames who are out now managing farms— —
Mr. Gesell (interposing). That sounds like a pretty good source
to me.
Mr. Murray. Their reports back to us are anywhere from 75 to
125 farms that they manage.
Mr. Gesell. Is that about the same number as the Federal farm
land banks have?
Mr. Murray. That has changed recently, because the Federal land
banks are now using their local secretaries to assist them in han-
dling their real estate, but before that time I believe between 75
and 100 to 125 was the number of farms that was often given to a
field man. That meant the men who did that work really had very
little time to spend with the individual farmer.
Acting Chairman Williams. What do they do? I just wanted
to ask you, what are their duties?
Mr. Murray. To collect the rent, for one thing.
Acting Chairman Williams. Of course, that is one thing. Is that
all?
Mr. Mu7 RAY. And that is a very important thing, of course.
Acting Chairman Williams. Do they have to make several trips
to get it?
Mr. Murray. Not usually. I think the experience that most of
the men report is that they have a very fine relationship with the
tenants. You must understand that there is a terrific competition
for farms in Iowa, and the insurance companies have been able to
choose between tenants, and as a result they have had that kind
of cooperation, but the job of managing a farm is considerable these
days. You have to work ouj: a program, you have your rotation,
your compliance with the Governntent program, you have all the
improvements to make on the farm, and various things which come
up from time to time in the handling of grain and the arrangements
with respect to livestock and provision for livestock.
Acting Chairman Williams. Do they do all that and the tenant
has nothing to say about it ?
Mr. Murray, The agreement is usually made in the lease. The
field man of the insurance company represents the landlord, the
insurance company, and of course, the field men report to us that
sometimes they can't even get a night's sleep, because the tenants
will be around asking for this or for that, and as a result the field
men are very busy with various things connected with the landlord's
obligation in managing the property.
Mr. Hayes. That comes down to only 3 or 4 days per y -.^r per
farmer, including Sundays.
Mr. Murray. That is correct, and there are a lot of things to be
done on a farm. In fact, I don't think a field man is a man who
spends very much time in leisure. I think he is a pretty busy man.
Mr. Pike. Do the usual terms involve cash rents, not shares ?
Mr. Murray. Most of the farms in Iowa are rented for a share of
the grain and cash for the hay and pasture.
CONCENTRATION OF ECONOMIC POWER 14907
Mr. Pike. But with discretion on the part of the owner as requir-
ing certain types of cultivation, certain types of soil preservation to
comply with Government regulations ?
Mr. MxTRRAT. That is correct.
Mr. Pike. So pretty detailed power as to farm management lies
with the owner under those leases, then ?
Mr. Murray. That is correct.
Mr. Pike. So that probably the cash revenue would be much less
than if he were free and open to go at it for a year?
Mr. Murray. I didn't quite get that last.
Mr. Pike. The cash rental would be less than if you told tht
tenant: "Here you are for a year; go ahead and get what you can
out of it, and I will take half, or a quarter, or a third, whatever it
may be." The tenant can't, as Commisisoner Henderson suggested,
thoroughly mine his farm.
Mr. Murray. Oh, no; they are prescribed; they have to meet the
speciiScations of the Government program or if they are not in the
Government program, the insurance company would provide certain
fields that were to be put into legumes. The insurance companies
have certainly leaned over backward in trying to get the farms into
legumes and into crops that would conserve the soil, but the difficulty
is the set-up, the fact that the tenant out there is only there for 1
year.
Mr. Pike. Of course, it is an impossible set-up.
Mr. Murray. That is what we hope will eventually result from
owner-operator management.
Mr. Gesell. We have three things — tenancy, deterioration of the
land, and the lack of close management supervision — as problems
which arise out of absentee corporation ownership. What else can
we add to that?
Mr. Pike. How about the absentee ex-Iowan who is in Hollywood ?
That has been spoken of quite a little bit in the last 15 or 20 years.
It was a problem before the institutions got hold of these lands,
wasn't it?
Mr. Murray. We have cases of that kind. Some of them, of course,
are familiar with the situation; some of them had to come back to
Iowa to live.
Mr. Pike. I was thinking some of them returned ; yes.
Mr. Henderson. I have been wondering about that. You know,
Cal Coolidge said about the farm belt, "They hired the money, didn't
they?"
Now, what happened to all this money that the insurance com-
panies put up?
Mr. Murray. Do you mean what happened td the $500,000,000
worth of loans they had in Iowa ?
Mr. Henderson. Yes; we haven't spoken about that at all. The
insurance companies put up some of my money, and some of every-
body's money ; they put up $500,000,000 or more during the twenties.
What happened to that money ?
Mr. Murray. They still have about 190 million.
Mr. Henderson. No; but the original mortgage — when you take a
mortgage, what you usually get is money. Did a lot of fresh money
go in there to people who owned it — was it like what they used
14908 CONCENTRATION OF ECONOMIC POWER
to do in the twenties with a family-owned corporation where you
go around and get them to sell a part of it to people? Was this a
case where they were letting the general public in on a little bit of
ownership of the Iowa land, or was it refinancing of mortgages, or
what ?
Mr, Murray. It was mostly refinancing of mortgages owned by in-
dividuals, mortgages owned by commercial banks, and cases where
people owned short-time debts that were not mortgages. They came
out of the land boom without much in the way of cash.
Mr. Henderson. What I am trying to get at is, Who got the insur-
ance company's money ? The farmer didn't get it, particularly ; the
banks got it. There was three billion eight in the beginning of the
twenties, according to the testimony this morning. The insurance
companies refinanced part of that. Now, that money has been gotten
and spent for, well, farm machinery, and the like. Was that money
lost, did it wash out in the disappearance of the price level ? Was
it sort of a subsidy to make up for the failure of the farmer to get
his parity during the twenties? Have you any ideas on that?
Mr. Murray. Our figures show that a great many private investors,
private individuals and commercial banks, got out of the farm-mort-
gage business, or sold their farm mortgages, and the insurance com-
]ianies provided the money to do that.
Mr. Henderson. X^s ; I got into the mortgage business and now I
am an absentee owner because I have an insurance policy. That is
what happened. The money I was paying into the insurance company
in the twenties went for a lot of refinancing.
Mr. Murray. That is right.
Mr. Henderson. Not to send people to Hollywood, is that it, or to
California ?
Mr. Murray. No ; but there were a lot of people with mortgages on
Iowa land who were interested in getting cash.
Mr. Henderson. That was the purchase-money mortgage, wasn't it ?
Mr. Murray. Yes; they might have had a mortgage for $15,000
and the insurance companies would refinance $10,000 of that as a
first mortgage, and you keep back a second mortgage of $5,000 ; later
on you probably couldn't collect your interest on the $5,000 and you
had to foreclose and you were one of the private investors who fore-
closed during the years 1921-30.
Mr. Henderson. No; I was one of the prior ones. I foreclosed
at the beginning of 1930.
Mr. Murray. I see, you have the money in the insurance com-
pany which made the $10,000 loan and then in 1931 the interest on
that wasn't paid, so that then the insurance companies came in at
that period and had to foreclose. So we get the period from 1920
to 1930 when the second-mortgage holders of the land boom fore-
closed and were cleaned out.
Mr. Henderson. Well, that second mortgage was like a lot of the
binder stuff in Florida, that is all that was. It represented values
that were based upon an inflated price structure and land value
structure, isn't that correct ?
Mr. Murray. That is correct, and so also will the insurance com-
CONCENTRATION OF ECONOMIC POWER 14909
pany loans in many cases if we don't get back to the level of the
prices in the 1920's in certain areas of the State.
Mr. Henderson. But who got the money originally? .
Mr. Murray. I would say that private investors, private individ-
uals, banks who held short-term debts, and other individuals, would
be tne main recipients of those insurance company funds. The total
debt did not increase during that period, it went down.
Mr. Henderson. I know.
Mr. Murray. So it was more refinancing than it was the addition
of new funds into the picture. The local banks were hard pressed.
Our local banks in many cases were up against insolvency from the
period 1922 on. The record of their portfolios as revealed by vari-
ous studies shows they had in many cases notes that had no mortgage
back of them, that they represented funds they had advanced to
farmers.
Mr. Henderson. And the farmer got the money ?
Mr. Murray. The farmer got the money and mortgaged his farm
in order to pay off the bank.
Mr. Henderson. But he had gotten the money in the first place.
Mr. Murray. He may have invested it in various things. He was
in the land boom.
Mr. Henderson. I still want to know who got this money. I
think I am getting a pretty good idea. You had a period during
the war, wasn't that it, in which you got inflated land values as a
result of inflated agricultural prices?
Mr. Murray. That is correct, and in 1919 and 1920, also.
Mr. Henderson. And in that period farmers went into" debt some-
thing like $4,000,000,000 to the banks. As I recall Mr. Wall's testi-
mony this morning, it was about three billion eight at the beginning
of the 1920's. Now, the banks started to get in trouble, were under
pressure, and somebody had to bail them out, and you had the pres-
sure of a governmental policy in the early 1920's pressing down on
the banks and they didn't always have to be told from Washington
what their condition was. They knew when they ought to get these
jshort-term loans over onto somebody else. Some of them took mort-
gages, and then gradually the insurance companies came in and they
took over the loan. And then later the Federal agencies came in and
bailed out part of the insurance companies, but the part they didn't
bail out the insurance companies still have, are stuck with now, as
owner-operators, corporate operators, or as mortgages they are trying
to work out.
Now, a lot of it ^oes back to the conditions during the war and
immediately following t^at in the inflation, isn't that it? ■ Aren't
we paying in this for part of that inflation ?
Mr. Murray. That i^ correct.
I might give you an illustration of where some of your money may
have gone. I know one local bank that helped a man finance the
purchase of a 320-acre farm which cost about $90,000 and they put
up $65,000. A little later, around 1923 or 1924, this bank needed a
little extra cash, so they arranged a first mortgage on that farm for
$31,000 which they sold to an insurance company, and they kept the
104dQ1.._^1
14910 CONCENTRATION OF ECONOMIC POWER
second mortgage of thirty-two or three thousand dollars. Of course,
when the depression came in 1933, the local bank, with its second
mortgage of $33,000, was wiped out. The insurance company had the
first-mortgage loan. The land is worth about the $32,000 and would
handle Just about that much debt.
Mr. Henderson. Who got the $58,000, the difference between the
32 and the 90?
Mr. Murray. The insurance company in this case either owns the
farm or has the first mortgage on the farm. The farmer lost the
$30,000 cash he put up. The bank lost $30,000 in the cash they put
up.
Mr. Pike. The fellow that sold to him in the first place was pretty
lucky, wasn't he?
Mr. Murray. Yes ; if he didn't buy another farm. [Laughter.]
Mr. Henderson. I think we have a sufficient answer. What if the
companies don't go back in on the lending?
Mr. Murray. That is one of the problems we feel is very impor-
tant. In some of the areas the insurance companies right now are
competing actively for loans. They want loans.
Mr. Henderson. All insurance companies?
Mr. Murray. Not all of them but a number of them do and they
are willing to pay the commission themselves in order to get the
business in the better territory where experience has proved that their
loans have held up.
In this low-value territory, however, where the problem is more
acute, there it appears that the insurance companies will probably
not continue to lend. They may decide to go back in there, but I
doubt it, because it is hazardous territory, they have discovered.
Mr. Henderson. Is that territory that ought to be farmed?
Mr. Murray. It is territory that ought to be farmed, but it is more
hazardous than the best territory.
Mr. 'Henderson. Don't we have agricultural surpluses?
Mr. Murray. Certainly we have, but that gets into the whole ques-
tion of the farm program.
Mr. Henderson. Certainly it does, that is what I am getting at.
This isn't an isolated matter. It does get into the whole problem of
the economics of that territory.
Mr. Murray. Alhright, we have areas in Iowa, there are areas
surrounding Iowa in South Dakota and Nebraska and Kansas, other
areas, where they have had this same problem where the insurance
companies, if they have had poor experience, are not going to go
back in. Who is going to refinance those areas ? They are not areas
that should go out of cultivation.
Mr. Henderson. Why not?
Mr. Murray. They are above the margin and they offer a return,
but they offer a return only if properly managed under semihazard-
ous conditions, and those semihazardous conditions include the risk
from erosion and drought.
Now, it seems to me that that puts the problem up to the Federal
credit agencies in some respects, the problem of the Farm Credit Ad-
ministration and the Farm Security Administration, and it makes
possible their considering those areas as areas in which they can
CONCENTRATION OF ECONOMIC POWER 14911
render a real service, but a service which will have to be taken on
with considerable amount of study and care.
Mr. Henderson. Do you think they ought to bail me out?
Mr. Murray. As insurance company policyholders, it seems to us
that the insurance companies do not need to be bailed out. What
they need to do in those cases is to sell those~ farms to owner-opera-
tors if possible on terms which the owner-operators can pay.
Mr. Henderson. Take their licking, in other words?
Mr. Murray. It can be put that way.
Mr. Henderson. That is the way it is, isn't it ?
Mr. Pike. You have to get down to a realistic price basis to move
their goods.
Mr. Murray. The insurance companies state that if the drought
and the conditions will abate for a period, that they can move most
of that.
Mr. Pike. Have they made any arrangements for that, however?
Mr. Murray. I don't know as to the drought. We have been hard
hit in certain sections, but I will say this, that in this southwestern
corner of Iowa where there have been large amounts of difficulty
from drought, they have still sold more land in that territory than
they have in other sections of that drought territory. It is in the
areas where the values have dropped so much where they have had
the most difficulty. We feel in the college, from our studies, that
eventually the sale by contract might be supplemented by an en-
larged tenant purchase program in which the Farm Security could
cooperate with the Farm Credit Administration in working out loans
to men who want to own and operate that type of security. At the
present timtf, there is no cooperation as far as I can see between the
Farm Security Administration and the Farm Credit Administration
except that they are both in the Department of Agriculture. It
seems to me that the Farm Security Administration, which is inter-
ested in making owners out of tenants, could avail itself through
some authorization by Congress if necessary of the funds which the
Farm Credit Administration is able to borrow in the investment
"markets, to provide at least up to 75 percent of the amount needed
to finance those tenants. At the present time, the Farm Security
Administration in order to set up an owner-operator out of a tenant
must use all appropriated funds, I understand, and appropriated
funds as we have been told in the newspapers are difficult to get, and
so far the appropriated funds for the tenant purchased program are
a drop in the oucket.
Acting Chairman Williams. You ought to have been here a couple
of weeks ago when we were trying to get the twenty-five million for
these tenant farmers and didn't get fe cent.
Mr. Murray. Why can't that money be obtained mostly through
the investment markets of the insurance companies who are willing to
invest in obligations such as the Federal land-bank bonds and bonds
of the P^arm Mortgage Corporation?
Mr. Gesell. You mean in eflfect, then, that Uncle Sam ought to
come in and bail out the insurance companies. That is what it comes
down to, doesn't it ?
Mr. Murray. Not necessarily.. There are other farms owned in
these territories
14912 CONCENTRATION OF ECONOMIC POWER
Mr-. Gesell (interposing). Just a moment. On the point we have
been talking about, with respect to the farms that would be re-
financed through the program you have just suggested, it would
amount to that, wouldn't it?
Mr. Murray. If they are bought from the insurance companies,
yes, but I don't see that is necessary.
Acting Chairman Williams. Why don't the insurance companies
do that instead of the Government?
Mr. Murray. That is what we have been trying to get. We have
been suggesting that.
Acting Chairman Williams, You haven't had any cooperation
from them?
Mr. Murray. Yes. They are interested in doing just that, but so
far they can't sell in that territory.
Mr. Gesell. At the prices they set.
Acting Chairman Williams. Yes. At the prices they want, they
can't sell them. Now, you wouldn't sell them to the Government at
a higher price?
Mr. Murray. No. But I might say there are other farms besides
the insurance company farms in that area that need to be financed,
and there are young farmers coming along at all times that need
financing in that territory.
Acting Chairman Williams. The point in my mind is, if the Gov-
ernment can do it, why don't the insurance companies do it?
Mr. Murray. The insurance companies can do it with their farms.
We have additional farms owned by other investors, and there the
tenant purchase program, it seems to me, could be expanded to take
care of these other areas because the insurance companies are not
going to make new loans in that territory probably.
Acting Chairman Williams. They could do that as far as their
own farms are concerned now, and these other agencies of different
kinds, 'who own those farms could do the same thing?
Mr. Murray. That is correct.
Acting Chairman Williams. If- they would, and reduce the price
to a point where the tenant could pay for it and make a living for
himself.
• Mr. MuKRAY. Of course, in not all cases is it possible to do that,
because in some cases people are not able to finance the sale. If
they are private individuals they might not be able to finance the
sale of a tenant up to 75 or 100 percent of the value of the real
.estate.
My point is, if the insurance companies go out of those areas,
who is going to continue to lend there*
Mr, Gesell. That was the question which Mr. Henderson asked
you.
Mr. Murray. The Farm Credit Administration and the Farm Se-
curity Administration represent two agencies that could lend there,
that are in a position to lend there.
(Senator O Mahoney resumed the Chair.)
Mr. Henderson. You are going to catch me either way, as I see it.
You are going to catch me from either standpoint, the money I have
in the insurance companies, or you are going to catch me as a tax-
payer.
Mr. Murray. That depends upon
CONCENTRATION OF ECONOMIC POWER 14913
Mr. Henderson (interposing). If the farm agencies borrow the
money from the insurance companies, the only way they are going to'
get it back to pay the bond off is by taxing you and me and every-
body else; isn't that right?
Mr. Murray. I don't see why that is true necessarily, because these
bonds will represent mortgages on these farms which if they are
properly appraised in these areas and revalued on the basis of income
ability of those farms can be handled and pay out.
Mr. Henderson. Isn't that the center piece of the thing then,
getting them on a proper basis ?
Mr. Murray. I think so.
Mr. Henderson. Then when you are talking about appraisal on
farm prices and their relationship to industrial prices, what do you
assume as to farm income and the present level of income exclusive
of the benefit payments? Do you assume the present level with the
same benefit payments, or do you assume a third condition of present
income with a larger benefit payment, or do you assume that there
is going to be a better adjustment of prices as between farm and
industrial ?
Mr. Murray. Most of the assumption is on the basis of present
prices with better production than they have had in those areas in
recent years.
Mr. Henderson. You mean higher production.
Mr. Murray. Higher production than in the drought areas.
Mr. Henderson. But ii you. get higher production, then the prices
are going down.
Mr. Murray. That is generally true, but these are problem areas
where that is too -small a factor to have much effect.
Mr. HendebsOn. You mean you can handle this situation and let
the rest of them go that are in the same condition.
Mr.- Murray. No; the rest of the farmers in the territory of other
parts of Iowa, for example, are not in position to be worried about
the situation so far as the price situation is concerned, and their
debts. We have very few foreclosures.
Mr. Henderson. I think that is a rather restricted point of view.
It seems to me we have been hearing that most areas are complaining
about price-debt ratio.
Mr. Murray. In the main part of Iowa I can say that you wouldn't
have that complaint. The production has been good and the loan of
57 cents a bushel on corn is sufficient to pay the debt, the interest
on the debt. But the problem still remains on these other farms.
Mr. Henderson. If you get that 57 cents you are getting into some
of my money, too, as a: taxpayer. That is what I was getting at.
What I am trying to get at is. How are we going to get a good firm
basis out there? As I gather, you are talking about some more
jugglery of the credit of the owner of the piece of paper and the
like and you are assuming that you are going to have 57 cents on
corn. Is that it ?
Mr. Murray. That is right, somewhere around, say, 50 cents for
corn. On that basis we need refinancing in some of these areas
Avhere, as I said, the insurance companies have decided not to invest
their funds.
Now, you have got to have regular investment channels in some
of thofie areas to take care of the recurrent needs for farm credit.
14914 CONCENTRATION OF ECONOMIC POWER
Now, there is a set-up here in Congress, a tenant purchase program.
The Federal land-bank system, when it was started in.l91T, had as
its main purpose financing the ownership of land by tenants; so also
the Land Bank Conmiissioner loans in 1933 and in 1934 and in later
years, as it has been continued, the idea back of these loans was to pro-
vide for owiTership of farms by tenants, lending up to 75 percent. And
now you have the tenant purchase program, lending up to 100 per-
cent, and if there were ever areas where this financing was needed,
it is in these problem areas where the insurance companies have had
the experience and they don't want to reenter those areas.
Mr. Gesell. In other words, the insurance companies, because of
the requirements which they are obliged to follow in the handling
of their trust funds, having once been burned in this area, are prob-
ably not going to go back in, and the only way that the people there
can be benefited is by somebody bailing out the insurance companies
or somebody putting in money from the Federal Government ^s
that what it comes down to?
Mr. Murray. That is what it comes down to, with the exception
that the insurance companies can sell the land themselves.
Mr. Gesell. If they are willing to take a licking.
Mr. Murray. Well, \vhether or not there is a licking all depends
on the revaluation of their assets so they can sell it.
Mr. Gesell. You think the land is overvalued, don't you, Mr.
Murray? Doesn't that table ^ that we put in bear this out pretty
strongly ?
Mr. Murray. It has been overvalued in the past, a-s to why they
haven't been selling their farms recently in the areas, I can only
hazard an opinion.
The Chairman. When you say the land has been overvalued, do you
mean to imply that the loans are greater than the actual present
value ?
Mr. Murray. In many cases, yes.
The Chairman So that the lenders, in many cases, couldn't sell
t he land for the face value of the loan and come out even ?
Mr. Murray. That is correct.
The Chairman. Now, in what proportion of the cases is that true ?
Mr. Murray. Well, that is largely true in these low land value
areas, where the insurance companies, as far as the insurance com-
panies are concerned, in about, say,, one-fourth of the territory — that
is for Iowa. I can't say as to South Dalrota or some of the other
areas.
The Chairman. One-fourth of the territory ? What proportion of
the loan?
Mr. Murray. I have no information as to what volume of loan^ —
except as our figures do show, for example, in those 31 southern Iowa
counties, judgments on actual insurance company mortgages repre-
sented in the period from 1915 to 1936, $43,000,000.
The Chairman. Has your study gone far enough to enable you to
express an opinion as to whether or not, as a whole, the lands which
are subject to mortgage to life insurance companies in the State of
Iowa will support the amounts pledged?
I See "ExUbit No. 2285," appendix, p. 1S612.
CONCENTRATION OF ECONOMIC POWER 14915
Mr. Murray. Our studies probably have not gone far enough to
support a definite statement on that count. We could say this, the
present loans outstanding by insurance companies very largely are
being paid, the interest is being paid, and the value of the land
supports the loan.
liie Chairman. And in a great majority of the cases, is that the
fact?
Mr. Murray. That appears to be the fact, and I imagine your
S. E. C. special study records will reveal more on that point as to
delinquent interest in the State of Iowa, which we consider at the
present time is very low.
The Chairman, That is particularly true with respect to those
high-value areas?
Mr. Murray. That is right.
The Chairman. Now, you are discussing the low-value?
Mr. Murray. The low-value areas where it is a question of re-
valuation. I don't want to imply how much revaluation is neces-
sary. The only thing I would be interested in seeing would be a
revaluation to determine whether that is a reason why they can't
sell the farms as rapidly in those areas.
Mr. HENDERSONi You think the insurance companies should make
that move?
Mr. Murray. It is probably out of my field to say so. If I were
outside of the college and on this Debt Conciliatron Committee,
that would be a different matter, but from the college the facts
appear they are not selling the farms as rapidly in those areas
as they are in the better areas.
The Chairman. Is that because they cttn't get the loan value or
because they can't get the appraised value, or because they can't
get the going value — or rather, tho, gf^ing value is not a correct
statement, but the value at which they were originally brought into
the mortgage picture ?
Mr. Murray. That is the question which I think should be studied,
if it is a question of revaluation and the price was, say, reduced some-
what, whether or not more farms would be sold.
The Chairman. Did you study that question?
Mr. Murray. I nave not studied that question.
Mr. Geseil. Let me get at it this way. Just one more question,
Mr. Murray. Who is having the most trouble in the low-valued
areas, the local companies or the eastern companies ?
Mr. Murray. Well, neither one of them is having trouble as
far as I know, but I do think that the Federal Land Bank and
some local companies are selling more farms in those areas, from
our observation.
Mr. Gesell. That means one of two things. Either the local
companies are more realistic about land values or they make fewer
mistakes in the loaning on the original mortgages. WTiich is it?
Mr. Murray. Probably more realistic in the sense that they are
selling more in terms of contract sales with a smaller down-payment.
Mr. Gesell. That further substantiates the fact that some of
the big Eastern companies which are in there in the farm pictui^
are not being realistic about taking the losses that are bound t<j>
occur on this low-valued land.
14916 CONCENTRATION OF ECONOMIC POWER
Mr. Murray. Either that or the fact that they are waiting for
higher prices probably, or are interested in some other policy.
Mr. Gesell. They have already run in many cases, I believe you
said, beyond the 5-year period which is set by the statute and are
having to get special extensions ?
Mr. IMuRRAY. There may be cases of that kind. There probably
are.
Senator Herring. I would like to ask Dr. Murray : Is it true that
some oi these farms, or many of the farms, the Farm Credit Ad-
ministration are now selling are farms they took over when they
scaled down and refinanced the insurance company loans and they,
therefore, have prke at which they can sell them without loss ?
Mr. Murray. The last part of that I didn't get, Senator.
Senator Herring. The Farm Credit Administration, as you know,
refinanced a lot of these loans that -we scaled down, on which they
accepted the scale-down. Now they have them at a price at which
they can put them on the maiket and sell without loss, do they not?
Mr. Murray. That is correct. Then, in some cases, they have
found that they had to take a subsequent loss. In other words, one
of the things which bolsters our thought that maybe a revaluation
is necessary is that since 1933 many of the loans made in southern
Iowa have turned out where the foreclosure has not allowed any
equity for the Land Bank Commissioner or seconcT mortgage holder,
which is another reason, we think, why the Farm Security Adminis-
tration and the Farm Credit Administration might get together in
that territory and be of real service to that kind of area.
Mr. Gesell. I have no further questions of Mr. Murray.
The Chairman. I am sorry that I was absent during the latter
part of this examination. May I ask, Mr. Gesell, whether you went
over the tables on pages 180 to 183 with Mr. Murray ? ^
Mr. Gesell. I submitted a schedule based on tables 180 and 181,
showing which companies had the greatest percentage of the farm
land they held under contract of sale,^ and there the figures point
out that it is the companies in the Corn Belt which head the list
in the disposal of their farm properties. That was the only reference
made to those particular schedules.
The Chairman. Well, to give a complete picture it would be neces-
sary, would it not, to combine tables 181 and 183 so that we would
have both the lands which are under contract of sale and the lands
which have been sold ?
Mr. Gesell. Yes; i£ would be necessary to do that, particularly
if we wanted to get back of the situation as it existed as of September
1, 1938.
Mr. Kades. Dr. Murray, isn't it true that to the extent insurance
companies are purchjising Government bonds, the proceeds of which
are used for loans to tenant farmers, insurance companies are par-
ticipating in the rehabilitation program?
Mr. Murray. That is correct, and I feel that it is a reai oppor-
tunity there if the Farm Credit Administration could cooperate in
some way with the Farm Security Administration, so that the tenant
purchase loans, up to 80 or 90 or 100 percent of the value, could be
1 See Hearings, Part 10-A.
^See "Exhibit No. 2-'86," appendix, p. 15513.
CONCENTRATION OF ECONOMIC POWER 14917
provided for these areas, but at the present time the Farm Credit
Administration cannot assist the Farm Security Administration.
All of the Farm Security Administration funds have to come from
appropriations and the Farm Credit Administration has the oppor-
tunity to go into the investment markets and obtain funds.
The Chairman. Of course, the Farm Credit Administration, when
it goes into the securities market and offers its securities to investors,
IS under some obligation to make certain that there is a return, and
it is not as free m making loans as the Farm Security Admin-
istration would be.
Mr. Murray. Mr. Chairman, that might be handled in this way,
that if I as a tenant wanted a loan, the tenant purchase people could
get me a Federal land bank loan for 50 percent of the value of the
farm that I wished to purchase, the Land Bank Commissioner could
get an additional 25 percent, and then the tenant purchase agency
added the extra 10 percent that would be necessary, we will say, to
make possible the purchase, in that way the tenant purchase agency
would be taking that third mortgage equity, or the smaller amount,
and providing an opportunity for the Farm Credit Administration to
provide, we will say, the main part of the funds needed by the Farm
Security to finance the purchase of farms by tenants.
In the State of Iowa the tenant-purchase program is almost a
drop in the bucket because their funds will go such a short way.
The Chairman. Congress by law limited the amount of interest
that the land banks eould collect on farm mortgages. That proposal
was resisted by the Farm Credit Administration upon the ground
that it would not enable the Farm Credit Administration to earn a
sufficient amount from the borrowers to pay the expenses of admin-
istration and pay the interest upon the securities, and therefore that
it would result in making the Farm Credit Administration depend-
ent not upon the commercial loans it was making, but upon appro-
priations by Congress.
Mr. Murray. My answer to that would be that the difference would
only be the rate which is now charged by the Federal land bank
at 31/^ percent, and the rate charged by the Farm Security at 3
percent, and I think the average tenant, if he was given an oppor-
tunity to borrow through the tenant-purchasing program, even if he
had to pay the Syo percent required by the Federal land bank,
would be such that they could go ahead and finanpe a lot more
farms, if the Farm Security could use the first-mortgage and second-
mortgage funds of the Farm Credit Administration.
The Chairman. Would it not be a sounder policy to so stimulate
farm production and farm prices as to enable the farmer to operate
on a profit than' it would be to reduce interest rates and depend
upon appropriations out of the general fund of the Treasury to
carry the load ? The system does not become self -operating if it is
dependent upon appropriations. It must depend upon production
if it is going to stand up of itself.
Mr. Murray. I think that is true, and I think that at the present
time, when it seems to be difficult to get appropriations for the
tenant purchase program, and at the same time, when insurance
companies have money to invest, it seems unreasonable that there
couldn't be some way worked, out between the Farm Security Ad-
14918 CONCENTRATION OF ECONOMIC POWER
ministration "and the Farm Credit Administration, to get together,
since they are both in the Department of Agriculture, to finance the
man who wants to buy a farm. You have two organizations, as I
understand it, the tenant purchase program has a set of appraisers
and the Farm Credit Administration have a set of appraisers. Now,
what is the necessity for two Government organizations doing prac-
tically the same thing ?
The Chairman. Well, of course, there is a difference. One of these
agencies, the Farm Credit Administration, operates upon the basis
of actual production and actual value. The other, the Farm Security
Administration — and let me say I am thoroughly in sympathy witn
what it is trying to do — is operating as a relief organization, and
makes loans not so much for the purpose of or with the expectation
of having these loans repaid with mterest as for the purpose of estab-
lishing people upon the farm.
Now, it is a very fortunate fact that the clients of the Farm
Security Administration, at least up until last year, were making a
very splendid record in repayment, but actually the two agencies
are working with different motives, and there is some reason to
believe that they should not be confused.
Mr. MuBRAY. I think that point is well taken, except that after all,
on the tenant purchase part of the program it would seem logical
that if the Farm Security Administration, operating independently,
could use three-fourths of the funds that it needs, or even one-half,
if that is all they can use, from the Farm Credit Administration, it
would make it possible for the Farm Security Administration to
refinance, or to set up, far more tenants than they are able to do
under the present program.
The Chairman. That is very true, but what you are proposing.
Professor, is to take a fund which has been set up upon the basis
of sound values and sound interest returns, and to use it for a social
objective in which the return is not of such immediate moment.
Mr. Murray. It may be that there is a social motive back of the
Farm Security, and I understand that there is a good deal of that,
and yet it seems to me that the Farm Credit Administration should
have some of that same motive as far as their first-mortgage loans
are concerned, that after, all
The Chairman (interposing). Of course, the Farm Credit Admin-
istration had that motive in the commissioner's loans which were
shown upon the table this morning as representing a very substantial
proportion of the advances which were made after 1933, where con-
cessions of really important extent were able to enable the borrowers
to remain upon the land.^
Mr. Murray. Mr. Chairman, in the State of Iowa we have had
an unusually good record, I think, on the tenant-purchase loans,
and we found in many cases that the young men who had been chosen
appeared to be very likely prospects for substantial farm owners.
Now, in those cases where those men are buying those farms, there
has been a good deal of discussion made as to just how much they
would have to pay for those farms, and they have come to us at
the college and asked us how to appraise those farms or how to
> See "Exhibit No. 2274," appendix, p. 15501.
CONCENTRATION OF ECONOMIC POWER 14919
help advise them on appraising those farms, and we have discussed
the problem with them, and we are heartily in accord with the method
that they are following and it is our supposition that they are driv-
ing pretty hard bargains, that they are not setting those tenant
farmers up with a very heavy debt that they can't pay. They are
trying to buy the farms on the basis of what those tenant farmers
will be able to pay. If that is true, there is no reason, as we see it,
* why the Federal land bank and the Land Bank Commissioner couldn't
finance at least part of that money and make possible setting up far
more tenants than are now being set up under the Farm Security
program.
The Chairman. It would make it all a social movement instead
of an investment movement.
Mr. MuBRAT. The way we see it, the Federal land-bank system
was a social movement. The Land Bank Commissioner loans were
a social movement intended not for investment.
The Chairman. Oh, yes. They were intended for investment pur-
poses, and were intended to be self supporting.
Mr. Murray. That is correct.
The Chairman. When you make them dependent upon appro-
priations to carry them, then they are no longer self-supporting.
Mr. Murray. That is correct. But our idea was that they were an
investment as far as obtaining the money was concerned, but the
funds we(re to be used for people who would be interested in
becoming owner-operators. They were mainly devoted to providing
for the maintenance of farm ownership, or the making possible of
farm ownership by tenants.
Mr. Kades. Dr. Murray, if the Government were to lend through
one of its agencies to tenant farmers at the rate of interest which the
Government pays on the debt, and were to pass the benefit of that low
rate on to the tenant farmer, would that aid materially in making
the program a self-liquidating program, such as that suggested by
the chairman?
Mr. Murray. As far as I can^see, it would, although I don't see
.that it is necessary to lower the interest rate on Federal land-bank
loans and Land Bank Commissioner loans to these tenant purchasers ;
that is, I think their operations would support the rates now being
paid.
Mr. Kades. Then what deters insurance companies from lending
at those rates?
Mr. Murray. There is nothing that deters them except the ex-
pense of lending in those areas, the problem of obtaining funds in
competition with the Federal land bank and the Land Bank Com-
missioner, because at the present time the Land Bank Commissioner
and the Federal land bank are set up to lend in those areas, and have
a large amount of capital provided by the Government as well as by
the borrowei^s.
Mr. Kades. Well, the insurance companies also have a large
amount of capital, haven't they?
Mr. Murray. But the capital that they have they expect some
rate of return on. The Government is not receiving any return on
the $125,000,000 of capital that they put into the system in 1932.
14920 CONCENTRATION OF ECONOMIC POWER
Mr. Kades. I am confused, but I thought you just said that you
didn't think it was necessary to have the interest lower than it is at
the present time?
Mr. Murray. No ; but I do feel that since all this capital has been
put in, and there is a subsidy at the present time being provided on
Federal land-bank loans, which would continue under this new
plan
Mr. Kades (interposing). Do I understand you correctly, then,
that the interest rate is approximately at the correct point at the
present time, provided there is a subsidy with which to repay some
of the interest?
Mr. Murray. Maybe I could clear the point up by saying that at
the present time the rate charged on the contract mortgage rate of
interest is 4 percent on Federal land-bank loans, but that the Gov-
ernment is making up the difference between that and 31/2 percent.
Mr. Kades. I understand that. Now, then, does that mean, in
your opinion, that 4 percent or 3^ percent is the correct rate or is
not the correct rate, or the rate at which the borrower will be able to
pay his debt service?
Mr. Murray. That is a matter on which I couldn't say as to the
difference. I should think either at 3l^ or 4.
Mr. Kades. In either event the borrower would be able to purchase
the land and pay off the debt incurred in the purchase of the land ?
Mr. Murray. It appears that he would, depending, of course, on
future conditions and on whether the farms are bought right. They
are making an attempt through the Farm Security Administration to
buy those farms at that price at which the borrower would be able
to repay on a reasonable basis — in fact, the Farm Security Adminis-
tration does provide for principal payments right along in addition
to regular payments.
The Chairman. Are there any other questions?
Then Professor Murray may be released.
Mr. Gesell. That completes the examination.
The Chairman. We are very much indebted to you. Professor.
Mr. Murray. I have enjoyed being here very much.
(The witness, Mr. Murray, was excused.)
The Chairman. The next witness will be?
Mr. Gesell. Mr. Glen Rogers, of the Metropolitan Life Insur-
ance Co.
The Chairman. The committee will stand in recess until 10:30
tomorrow morning.
(V, axoreupon, at 4:40 p. m., a recess was taken until Friday, Feb-
ruary 16, 1940, at 10: 30 a. m.)
INYESTIGATION OF CONCENTRATION OF ECONOMIC POWEE
FRIDAY, FEBRUARY 16, 1940
United States Senate,
Temporary National Economic Committee,
Washington^ D. C.
. The committee met at 10 : 45 a. m., pursuant to adjourmnent on
Thursday, February 15, 1940, in the Caucus Room, Senate Office
Building, Senator Joseph C. O'Mahoney presiding.
Present: Senators O'Mahoney (chairman). King, and White;
Representatives fSumners (vice chairman) tand King; James V
Hayes, Henderson, Kades, Lubin, Pike, and Brackett.
Present also: Representative Vincent F. Harrington, of Iowa;
Gerhard A. Gesell, special counsel; Eniest Howe, chief financial
adviser; and Helmer Johnson, attorney, Securities and Exchange
Commission.
The Chairman. The committee will please come to order.
Mr. Gesell. The first witness this morning will be Mr. Limber;
and with the permission of the committee, Mr. Helmer Johnson will
examine Mr. Limber.
The Chairman. That will be quite satisfactory, I am sure.
Do -you solemnly swear the testimony you are about to give in this
proceeding shall be the truth, the whole triith, and nothing but the
truth, so help you God?
Mr. Limber. I do.
(Mr. Pike assumed the Chair.)
TESTIMONY OF RALPH C. LIMBEK, SECRETARY, FARM MORTGAGE
CONFERENCE, NEW YORK, N. t.
Mr. Johnson. Will you state your name for the record, please?
Mr. Limber. Ralph Clark Limber..
Mr. Johnson. What is your occupation, Mr. Limber?
Mr. Limber. I am secretary for the Farm Mortgage Conference.
Mr. Johnson. How long have you held that position?
Mr. Limber. Since 1934.
Mr. Johnson. And what did you do before that ?
Mr. Limber. Before that time I was an employee of the Metro-
politan Life Insurance Co., and served also as a statistician to the
Farm Mortgage Conference.
Mr. Johnson. Will you tell us what the Farm Mortgage Con-
ference is?
Mr. Limber. The Farm Mortgage Conference is a loose and in-
formal organization of life-insurance companies that hold farm mort-
14922 CONCENTRATION OF ECONOMIC POWER
gages, and who are associated together for a study of their fore-
closure and 'farm real estate problems.
Mr. Johnson. When was this conferen,ce organized?
Mr. Limber. In December 1929.
Mr. Johnson. By whom?
Mr. Limber. I can give you the names ot the companies.
Mr. Johnson. Let me put it this way : Were you connected with it
at the time of its organization ?
Mr. Limber. No ; I was not. I did not participate in the original
discussions that led up to the organization nor did I attend the early
meetings.
Mr. Johnson. For what purpose was it organized, Mr. Limber?
You came into it early.'
Mr. Limber.' As I said a moment ago, it was organized for the
purpose of studying the problems of the foreclosure period and for
tlie collection or statistical data.
Mr. Johnson. You say it is a very loose organization. Does it
have any constitution or rules of operation ?
Mr. Limber. No ; it has not.
Mr. Johnson. The principal purpose, then, of this conference is a
statistical organization? It serves to collect statistics?
Mr. Limber. That is correct.
Mr. Johnson. Mr., Limber; I show you a chart entitled "Amount
of Farm Foreclosures Commenced, Farm Real Estate Acquired, Cost
and Sellin; Price of Farm Sales Approved by Thirteen Companies." ^
Was thLt prepared by the Farm Mortgage Conference?
Mr. liiMBER. It was.
Mr. Johnson. It was prepared from data submitted by the member
companies, was it not ?
Mr. Limber. That is correct.
Mr. Chairman, may I say a word in explanation of this chart?
This chart shows the cost of farms approved for sale, compared with
the total selling price of farni sales -approved. I should like to ex-
plain what is included in that term "cost." It includes, besides the
actual out-of-pocket outlays of the insurance companies, a certain
very important item which was not an out-of-pocket expense. That
was the due and uncollected interest from the time the loan became
delinquent until the property was acquired.
That represents a very considerable item in the cost figures used
here. According to various studies I have made, it amounts to 12
or 14 percent of the total cost.
(The vice chairman assumed the Chair.)
The Vice Chairman. What is that 12 or 14 percent of the total
cost ?
Mr. Limber. The amount of due and uncollected interest during
the time the loan was delinquent and in foreclosure. That, I say, is
included in the cost figure used in this chart.
Mr. Johnson. I may say that this chart shows that during the first
half of 1932 farm foreclosures in these 13 companies rose to over
$70,000,000. By the first half of 1938 it was down to less than 10
millions. Of farms sold, the selling price in no period equaled the
1 "Exhibit No. 2287," Infra, p. 14923.
CONCENTRATION OF ECONOMIC POWER 14923
cost of the farms sold. The cost, as Mr. Limber just stated, included
certain items of acquisition cost.
Mr. Limber. It included certain items which were not out-of-pocket
costs, something the companies never had.
Mr. Pike. They represented accruals against the properties which
were neyer collected ? You added them to the cost of the properties
in the chart ?
Exhibit No. 2287
Source: Farm Mortgage Conference, Jime 30, 1038.
FARM MORTGAGE CONFERENCE
AMOUNT OF FARM FORECLOSURES COMMENCED, FARM REAL ESTATE ACQUIRED,
COST AND SELLING PRICE OF FARM SALES APPROVED BY THIRTEEN COMPANIES
Mr. Limber. That is correct.
Mr. Pike. And if you would have paid taxes, they would have been
out of pocket ?
Mr. Limber. That cost, of course, includes all direct oiit of pocket
expenses, such as taxes advanced prior to foreclosure.
The Vice Chairman. Have you anything to show the accumulation
of charges after the time the loan became delinquent, and the amount
14924 CONCENTRATION OF ECONOMIC POWER
of money that ought to have been paid where you have had to take
over the property ?
Mr. Limber. I have certain studies upon that point. The general
conclusion that I have reached is this, that from the time the loan
becomes delinquent up until the time the property is acquired, in-
cluding this accrued and uncollected interest, the amount of the in-
crease over the principal loan is about 18 percent, and a very impor-
tant item in that increase is the accrued and uncollected interest. As
you know J there is a long period between the time the loan first be-
comes delmquent and the time the companies or any other institu-
tional lender acquires title to it.
The Vice Chairman. If I am not interrupting, during the interim
between the time when the loan becomes delinquent and title is ac-
quired by another owner, are you receiving any revenue from the
farm, or are you covering that phase of it?
., Mr. Limber. Up until the time the property is acquired, from the
time it becomes fully delinquent, there is no revenue, I believe.
Mr. Johnson. How were these figures reported to you, Mr. Limber?
Were these extra costs, these items you include as costs, included with
the figures that were reported to you ?
Mr. Limber. If I understand you correctly, they were. I can read
the definition which was appended to our heading for the column of
cost. Do you wish tp hear that ?
Mr. Johnson. If you please.
Mr. Limber. The form upon which the member companies of the
conference reported the farm sales from which that chart was made
contained the column headed, "Actual cost to date of sale," and a
footnote to that heading read :
This includes maintenance, improvements and taxes, less income, as well as
the capital invested on date acquired ; that is, principal of loan, interest to dat(
of acquisition, taxes, attorney's fees, costs, and any other actual expenses ap
to and including date of acquisition.
Mr. Johnson. I offer the chart for the record.
The Vice Chairman. It may be received.
(The chart referred to was marked "Exhibit No. 2287" and appears
on p. 14923.)
Mr. Henderson. I gather from this chart, Mr. Limber, including
these accruals there was no period covered by your chart in which
the sales realization was equal to the total costs ?
Mr. Limber. Defining cost in that way, that is true. Take out
those accruals and the total selling price is equal.
Mr. Henderson. In other words, just about realized the mortgage
loan, is that it?
Mr. Limber. They not only realized the amount of the unpaid prin-
cipal of the mortgage loan but they also realized all other out-of-
pocket costs.
Mr. Henderson. In effect what the farmer got rid of was his mort-
gage and some part of the accruals. The farm population in-
volved here didn't get any return?
Mr. Limber. I am afraid I do not understand.
Mr. Henderson. It stands to reason if the farm at sale didn't bring
the total of the cost, then there was nothing left for the farmer's
equity.
CONCENTRATION OF ECONOMIC POWER 14925
Mr. Limber. I am speaking here of the cost and selling price of
the farms as sold by the insurance companies after they had beqn
acquired by the insurance companies. The original owner was out of
the picture,
Mr. Henderson. Did he get any realization when he was taken out
of the picture?
Mr. Limber. At the time of acquisition of the farm?
Mr. Henderson. Yes.
The Vice Chairman. He wouldn't, would he, because the insurance
company only bids the amount of the debt. If anybody else wanted
to go above it, he would get it.
Mr. Limber. That is not a question I am qualified to answer.
The Vice Chairman. I think I can answer it.
Mr. L^iBER. It is my understanding that some of these farms were
deeded over to the mortgagee,- possibly including some consideration.
Mr. Johnson. If your method of calculating cost is included, I
imderstand these accrued interest-tax items were not segregated in
the figures that were furnished you?
Mr. Limber. That is correct.
Mr. Johnson. In other words, they furnished a lump-cost figure
to you?
Mr. Limber. That is correct.
Mr. Johnson. So you rea,lly don't kiiow how much these acquisition
costs and the accrued interest costs were^
Mr. Limber. There are certain things which throw light upon that
question. In the first place, I have what I consider to be very accu-^
rate figures upon the time which elapses between the time foreclosure
is commenced and the time the property is acquired, by comparing
actual cases. May I give you a few of those instances?
The Vice Chairman. In order to save time — isn't it a fact that
speaking generally the insurance companies have loans on property,
the loan becomes delinquent, the property is, sold, and the insurance
company primarly wants to get its money out of it, its out-of-pocket
money, as you caU it ? They put this property up and bid it if they
think it is worth the money, then they sell it for what they can
get for it, but usually are glad to get their original investment out,
their original loan?
Mr. Limber. That is a question of policy upon which I have no
factual information.
The Vice Chairman. Well, I can help you out. They generally
do. Sometimes when they get a good piece of property, they want
to sell it for profit or they would like to make up the losses they
have sustained on that piece of property. They can have all the
charts on earth but there is about Dhe situation. They do the best
they can to get out and they take as little off as they can and if they
get a good piece of property and think they can hold it a while and
make some profit or recoup some losses they had on another piece of
property they do. They do it just like John Smith or Bill Brown or
anybody else who wants to save his business and get along — arid
charts don't hielp much.
Mr. Johnson, Mr. Limber, I show you 2 other charts. These
were prepared %^ the Farm Mortgage Conference also, were they not?
Mr. Limber. iThat is correct.
124491-.-^l— pt. 28- 16
14926 CONCENTRATION OF ECONOMIC POWER
Mr. Johnson. And like the other charts were prepared from data
furnished by the member companies ?
Mr. Limber. That is right.
Mr. Johnson. The first of these charts contains 2 maps of the
United States. One map shows the total farm mortgage debt by
States on January 1, 1935. The second map shows the percentage of
insurance company holdings of the total debt of the same day. It
appears that 36.6 percent of the total Iowa farm debt was held by
insurance companies; 30.5 percent of that of Missouri, and 27.6 of
that of Illinois.
The second chart shows by States the ratio of total foreclosures in
December 31, 1935, to the total farm investments of member insur-
ance companies on that date.
This ratio was as high as 72 percent in Montana, 70 percent in
South Dakota, and 69 percent in North Dakota.
(Mr. Pike assumed tne Chair.)
Acting Chairman Pike. The title of tliat chart is misleading,
don't j^ou think, as it is written? The ratio of total foreclosures to
farm investments, leaving out the insurance company.
Mr. Johnson. That should be "Ratio to investments of member
companies in farm mortgages."
Ml'. Limber. Which chart are you speaking of?
Mr. Johnson. I offer those for the record.
(The charts referred to were marked "Exhibits Nos. 2288 and 2289"
and appear on pp. 14927, 14928.)
Mr. Limber. Mr. Chairman, may I examine those charts again?
I looked at only the first one.
Did these two charts come from this bulletin,^ Mr. Johnson ? The
chart is "October, 1937."
Mr. Johnson. Yes.
Mr. Limber. I think an examination of the text accompanying that
discussion will make clear that those are not figures submitted to the
conference and therefore do not represent the holdings of the mem-
bers of these loans.
Mr. Johnson. Can you tell me where you got the figures?
Mr. Limber. May I examine the text of this statement ? The state-
ment here is —
The total farm-mortgage debt and the total amount held by life-insurance com-
panies, and the percentage of the total held by the latter, are shown by States
as of January 1, 1935, in the maps above.
Those figures are quoted from a publication of the Bureau of Agri-
cultural Economics.
Mr. Johnson. Well, you say they represent the industry as a whole.
Acting Chairman Pike. That is the total farm-mortgage debt in
millions of dollars, that is the one you are speaking of now ?
Mr. Limber. I am speaking of the page containing the two charts.
Acting Chairman Pike. That is the upper chart. That is in mil-
lions of dollars.
Mr. Limber. Both of those charts.
The second page, containing the single chart, headed "Ratio of total
foreclosures to total farm investment, is based upon data submitted
* Farm Investors Bulletin, September 80, 1036.
CONCENTRATION OF ECONOMIC POWER
Exhibit No, 2288
14927
Source: Farm Investors' Bulletin.
TOTAL FARM MORTGAGE DEBT
JANUAftV IJ9U
[ficurcs rcprcscnt kbt in million dollars]
KEY (mILUON dollars;
BWaoo TO too BBWioo TO too
BHH3C0TO4C0 gnp OTOWe
FARM MORTGAGE DEBT HELD BY INSURANCE COMPANIES
JANUART I.I9M
^icunes jtcPRCsCNT ptoceNTACc of iMsmuNct compiamt molb»i6s to total kbt]
MEMBER COMPANIES. FARM MORTGAGE CONFERENCE
tSCY (million dollars;
mi 100 AMD evn f ,^ M TO so
BB n ^ 'M ^9 « TO <»
pgg »c to T» rniiii 0 TO 10
to the conference by the member companies.* Concerning that part,
Mr. Chairman, may I say a word? That was the ratio of total fore-
closures to total farm investment as of that particular date.
(The Vice Chairman, Representative Simmers, assumed the chair.)
1 "Exhibit No. 2289," Infra. 14928.
14928
CONCENTRATION OF ECONOMIC POWER
Mr. Pike. Do you mean to say that 72 percent of all the farm in-
vestment in Montana was under foreclosure in 1935? The title is
thoroughly misleading, unless that is the fact.
Mr. Limber. As of that date that is correct, but that date followed
a long period of severe depression during which one set of influences
were operating to increase the amount of total foreclosures^ specific-
ally the depression and the drought, and another set of influences
were operating to decrease the total farm investment.
Mr. Pike. 1 still don't believe it can be the fact. Let's take Penn-
sylvania, where, according to the chart, 60 percent of all the farm
investment in 1935 represented foreclosures.
Exhibit No. 2289
Sooroe: Farm Investors' Bulletin, September 30, 1936.
RATIO OF TOTAL FORECLOSURES DECEMBER 31. 1935
TO TOTAL FARM INVESTMENT DECEMBER 31. 1935
KEY
|9VER 45.0% gg]22.5 TO 30.
1 37.5 TO 45.0% PH UNDER 22.5%
J30.0 TO 3Z5% Q NO INVESTMENT
Mr. Limber. I believe that figure rests upon one or two companies
in the state.
Mr. HAt^s. I find myself suffering from the same difficulty as does
Mr. Pike. Should this chart read as it does, or should it read, "Ratio
of total foreclosures by farm-mortgage conference members to farm
mortgages of conference members"?
Mr. Limber. That would be correct. We might also add, it is the
amount of investment
Mr. Hayes (interposing). Which is it, the total farm investment
by all mortagees and the total foreclosures by all mortgagees, or is
it limited to members of the Farm Mortgage Conference 1
Mr. Limber. It is limited to the members of the Farm Mortgage
Conference. Mr. Chairman, may I say also that that chart is based
upon amount of investment ; on the basis of the number, it would be
considerably lower.
CONCENTRATION OF ECONOMIC POWER 14929
The Vice Chairman. May I ask you this question, whether or not
there had proceeded, in 1935 — and I don't know a thing about this —
•curtailing of loans and a period of collection of outstanding moneys
so that these represent to some degree the remainder after a period
of inaction insofar as making new loans and activities as far as get-
ting in new money.
Mr. Limber. I understand, although I have collected no figures
upon it, that new loans were made, but repayments, particularly if
you include the amount of loans refinanced by the Farm Credit Ad-
ministration, very considerably exceeded the amoimt of new loans
being made during the years immediately preceding.
The Vice Chairman. May I ask one question to make that perfectly
clear. That is, whether or not — I think I understand your answer,
but T would like to have your mind directed to the question of whether
or not this represented the remainder, what was left over, of a policy
of curtailment of new loans and the accumulation to a considerable .
period of uncollectible loans? I think you probably answered that,
but I would like to have you answer the question, having specifically
in mind the question I have just asked, or do you knowl
Mr. Limber. Th*^ loans included in that chart were the loans that
were outstanding at December 31, 1935.^
The Vice Chairman. I understood that. What I am trying to get
over, and I don't want to press the question if you don't know it, is
whether or not they represent a lot of hangovers through a long
period of poor collections, or represent current conditions? That
question is pretty clear.
Mr. Limber. I have no data upon which I could answer.
The Vice Chairman. If you don't know, that is the answer.
Mr. Henderson. Does this mean that $72 out of every $100, of
mortgaged property was delinquent ? ^
Mr. Limber. Referring to what territory ?
Mr. Henderson. Montana.
Mr. Limber. No; that does not have reference to the delinquency
upon outstanding mortgages. The total foreclosures included in that
chart include these three things — the loans that are in process of fore-
closure, the actual real estate, farm real estate owned outright, and
also the farms that were sold with title retained — ^in other words,
contract sales.
Mr. Henderson. What does that mean as to Montana — 72 percent,
then, of all mortgages made by members of the conference were
either in the process of foreclosure, or had already been acquired?
Is that it?
Mr. Limber. No ; it does not. This is a cross-section as of a given
time. The thing you have in mind is best answered in this way. Of
the total mortgage holdings of 14 conference companies at the end
of 1928, 29.2 percent were acquired during the succeeding 9 yeirs.
That applies to the country as a whole. I do not have that figure
for the State of Montana. I can give you the exact figures underiy-
ing that percentage of 29.2 if you like.
The Vice Chairman. What I can't quite get myself is the practi-
cal value. I don't quite get the practical value of
1 See "Exhibit No. 2289," supra, p. 14928.
» Ibid.
14^30 CON^ENTiiATION OF ECONOMIC POWER
M>. LiMESR (interposing). I am sorry, Mr. Chairman, I didn't
understand it.
The ViOE Chairman. Maybe it isnH; worth it.
•Mr. Hayes. Directing your attention again to this chart ^ of the
"Ratio of total foreclosures to total farm investment," can you tell
us what the* ratio of the farm investment of the member companies
was to the total farm investment by insurance companies ?
Mr. Johnson. We might get that this way, if I may interrupt
Who are the members of your conference, Mr. Limber?
Mr. Limber. At the beginning of this year there were 15 com-
panies. Would you like me to give you the names?
Mr. Johnson. Please.
Mr. Limber. Aetna, the Bankers Life Co., of Des Moines, the Con-
necticut General, the Connecticut Mutual, the Fidelity Mutual, the
liincoln National, the Metropolitan, the Mutual Benefit, the National
Life, the Northwestern Mutual, of Milwaukee, the Penn Mutual^ the
Phoenix Mutual, the Provident Mutual, the Prudential, and the
Travelers.
Mr. Johnson. Those are the largest insurarxe companies, in gen-
eral, are they not, in the country, insurance companies that are fai;m
investors ?
Mr. Limber. A number of the largest insurance companies in the
country are not included in this list.
Mr. Johnson. Do you know about what percentage of ifisurance
farm investments those companies represent?
Mr. Limber. I can give you that figure. You are interested in the
rircentage of farm-mortgage holdings of all insurance companies,
do not nave that figure as of the beginning of this year. I do not
yet have the year-end figures for '39. As of the end of 1938, the
figure was — and this includes another small company which was a
member at that time — 58.9 percent in terms of holdings of farm-
mortgage loans. I can also give you the figure in terms of holdings
of farm real estate, if you are interested.
Mr. Johnson. Could you, very briefly?
Mr. Limber. It is 55.8 percent of the total farm real-estate hold-
ings of life-insurance companies as estimated by the Bureau of
Agricultural Economics.
Mr. Pike. Your association, then, represents somewhat over half
the insurance holdings in each case?
Mr. Limber. Slightly over half.
Mr. Johnson. Mr. Limber, I show you a table prepared from pub-
lications of the Farm Mortgage Conference, a table entitled "Farm
Sales as Rejported by Farm Conference Members." You have
checked the figures, haj^^e you not?
Mr. Limber. I have checked the take-off of this statement from
parts issued periodically by the conference, aTid the take-off is cor-
rect. Mr. Chairman, may I say a word about, this table? This table
shows the cost and the selling price of faniis soid by farm-conference
members over a period of years. I want to make clear that the cost
figure there is the cost figure as I defined it earlier in this discussion.
> See "BxhlMt No. 2289," supra, p. 14928.
CONCENTRATION OF ECONOMIC POWER 14931
It includes the due and uncollected interest, and that due and uncol-
lected interest accounts for all, or practically all, of the loss shown
on this statement. It is a loss of something the companies never had.
Mr. Johnson. I offer this chart for the record.
(The table referred to was marked "Exhibit No. 2290" and is in-
cluded in the appendix on p. 15513.)
The Vice Chairman. As a rule, do delinquent taxes accumulate
along with delinquent interest?
Mr. Limber. Prior, you mean, to the time foreclosure is com-
menced ?
The Vice Chairman. Yes. What I mean to say, does the com-
pany find itself confronted with a lot of delinquent taxes in those
situations in which there is a lot of delinquent mterest?
Mr. Limber. The companies, as I understand it, usually advance
taxes on these properties, and according to an inquiry I circulated,
on the average they have advanced taxes for an amount in excess,
or at least approximately 1 year prior to the time that they com-
menced foreclosure.
Mr. Henderson. You are making quite a point, Mr. Limber, of
the fact that in this cost figure there is this accrual amount which
you say the company never advanced, and therefore, they didn't lose
it. Is that what I gather you are saying?
Mr. Limber. I said it was not an out-of-pocket cost.
Mr. Henderson. It is not an out-of-pocket cost, but on the basis
of what the insurance contracts are, it is a serious matter, is it not,
to the insurance companies?
Mr. Limber. That is a question upon which I have no factual basis
for testifying.
Mr. Henderson. How long have you been with this conference?
Mr. Limber. I have been secretary since 1934,
Mr. Henderson. What is the purpose of this conference, anyway?
Mr. Limber. The purpose of the conference, as I stated earlier, is
purely fact-finding; also the conference meets four or five times a
year, at which meetings we usually have speakers from various gov-
ernmental agencies to explain their operations to us. We have nad
speakers from the Federal Adjustment Administration, from the
Soil Conservation Service, from the Weather Bureau, from various
other governmental agencies.
Mr. Henderson. This is for the 14 members, is that it ?
Mr. Limber. For the membership.
Mr. Henderson. About 14.
Mr. Limber. This year, 15.
Mr. Henderson. Fifteen insurance companies. Do you take any
part in the drafting of legislation which affects farm foreclosures?
Mr. Limber. No ; we do not.
Mr. Henderson. Do you make any appearances before committees
of State legislatures?
Mr. Limber. We do not,
Mr. Henderson. You have never appeared at all ?
Mr. Limber. I have never appeared.
Mr. Henderson. Do you sena them any statistics?
Mr. Limber. To State legislatures or to committees thereof?
14932 CONCENTRATION OF ECONOMIC POWER
Mr. Henderson. Yes; to committees considering any kind of
legislation.
Mr. Limber. No ;. we do not.
Mr. Henderson. This is just for what might be called a cross-check
of experience of different companies, the assembling of statistics for
their information?
Mr. Limber. Pureh' fact-finding.
Mr. Henderson. Just for its own pure ethereal sake, is that it?
I mean, who uses the facts ? That is what I am trying to get at.
Mr. Limber. The members of the conference.
Mr. Henderson. Isn't that what I just asked you?
Mr. Limber. Or the representatives of these 15; yes, sir.
Mr. Henderson. Wasn't that the question I just asked you?
Mr. Limber. Possibly I misunderstood you, Mr. Henderson.
Mr. Henderson. I suggest the witness be dismissed.
Mr. Johnson. I have no further questions.
Dr. LuBiN. May I ask the witness one further question? This
chart ^ entitled, "Amount of Farm Foreclosures Commenced," and
so forth, shows a rather close relationship between the cost of the
farms approved for sale and the total selling price of farm sales
approved.
Now, I take it that the cost of the farms approved for. sale is the
cost to the insurance company. Is that right?
Mr. Limber. It is the cost, as L define it, including the dne and
uncollected interest, between the date the loan first went delinquent
and the time of acquisition, a period of several years.
Dr. LuBiN. Does this throw any light upon what the cost was to
the company at foreclosure sale? After all, that is what the books
will show, the cost of the farm when they bought it at foreclosure
sale, will it not?
Mr. Limber. I do not understand that it does. I suppose the figures
are related, but I do not know how.
Dr. LuBiN. Let me raise a hypothetical question. Would it be pos-
sible, for example, for an insurance company that had a mortgage
on a piece of property valued at $5,000, that is, the face value of
the mortgage was $5,000 — the company was not getting its interest,
it was in default, so that it decided to write the face value of that
mortgage down to $4,000 and take a loss of $1,000, then decided to
foreclose and the property sold, let's say, at $4,500, it got $4,500 for
that piece of property, did it not?
Mr. Limber. You refer to the sale of the property after it has
been acquired?
Dr. LuBiN. No; I am referring to foreclosing at public auction
for $4,500.
Mr. Limber. The cost figure which appears in that chart as de-
fined in the definition I read to you does not take into account
those decreases by
Dr. Lubin (interposing). I can see if I went out to buy a piece
of property the cost to me is what I have to pay for it, is it not?
Now, do these figures show what this property cost the companies
when they '.'^tually bought it, or do these figures show what it cost
» See "Exhibit No. 2287," supra, p. 14923.
CONCENTRATION OF ECONOMIC POWER 14933
these companies in terms of selling price at auction when they fore-
clpsed plus other liabilities on that property which they didn't
realize?
Mr. Limber. The definition of the cost figure that is given there,
plus the principal of the original loan, unpaid principal, tax ad-
vances, prior to the time that they secured title, the cost of the
acquired title, sometimes known as foreclosure cost, also the due and
uncollected interest from the time the loan went delinquent up
until they got title — and it also includes after the time they got
title until the time they sell the property, their maintenance and
rehabilitation cost.
Dr. LuBiN. Does this mean, when you talk about the value of the
mortgage, the face value of the mortgage or the value of the mort-
gage on the company's books?
Mr. Limber. The unpaid amount of the principal.
Dr. LuBiN. As shown on the company's books ?
Mr. Limber. I have no information upon the accounting practices
followed by the different companies here. We have asked them to
report the unpaid principal in connection with that figure.
Dr. LuBix. So, you don't know whether these figures show what
these properties cost the companies or whether they just show book
values ?
Mr. Limber. This cost figure, I have defined.
Dr. Lubin. But I ask you whether or not the cost figure, as far
as the mortgage was concerned, was the actual face value of the
mortgage or the book value of the mortgage.
Mr. Limber. Referring to the mortgage alone, that part of the
cost.
Dr. Lubin. Which is the major part. The others are insignificant.
Mr. Limber. I don't know, but it is my understanding that it
would be the same, being the unpaid principal.
Dr. Lubin. I am still trying to find out, is the unpaid portion
of the principal the face value or the book value ?
Mr. Limber. I do not know.
Acting Chairman Pike. Of course, as they report to you, the fig-
ures on which these charts are built up are not the same as the
figures reported on page 186 ^ here, where, let^s say, the companies in
total have shown a profit. It shows the difference between sales price
and book value.
Mr. Limber. That is a different group of companies.
Acting Chairman Pike. They must be reported on a different basis.
Mr. Henderson. Mr. Limber, you can jolly well do as you please
about it, but as one who has set on both sides of the table, I
suggest you don't go before any legislative committee unless you
want to obfuscate something. If there comes a time when your
association wants to obfuscate something, I think you would make an
admirable witness, but in most cases there is necessity for explana-
tion. I suggest the witness be dismissed, Mr. Chairman.
Acting Chairman Pike. If there are no more questions, thank you
very much, Mr. Limber.
^ See Hearings, Part 10-A.
14934 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. The next witness is Mr. Hall of the Lincoln National
Life Insurance Co.
Mr. Hall, you have not been sworn.
Acting Chairman Pike. Do you 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. Hall. I do.
TESTIMONY OF ARTHUR F. HALL, CHAIRMAN OF THE BOARD,
LINCOLN NATIONAL LIFE INSURANCE CO., FORT WAYNE, IND.
Mr. Gesell. Will you state your full name, your occupation, and
residence ?
Mr. Hall. Arthur F. Hall, chairman of the board of the Lincoln
National Life Insurance Co., Fort Wayne, Ind.
Mr, Gesell. The Lincoln National is one of the companies shown
in these schedules we have before us, so, if the committee please, I
won't bother to bring out from the witness the size and scope and
activities.
How long have you been connected with the Lincolii National ?
Mr. Hall. I organized it 35 years ago.
Mr. Gesell. You have been with it all the life of the company ?
Mr. Hall. Yes.
Mr. Gesell. Were you president of the company prior to becoming
chairman of the board ?
Mr. Hall. I was.
Mr. Gesell. When did you become president ?
Mr, Hall. I don't remember when I became president; about 6
or 8 years ago.
Mr, Gesell. And you became chairman of the board when ?
Mr. Hall, A year ago last February,
Mr. Gesell. Now in 1929, the Lincoln National made some col-
lateral loans, did it not?
Mr. Hall. Yes, sir.
Mr. Gesell. Do you recall that on October 10, 1929 — rather, I
should say, on November 8, 1929 — a loan in the amount of $50,000
was made to Mr. Thomas M. Ryan, an officer of the Peoples Life
Insurance Co.?
Mr. Hall. Yes, sir,
Mr. Gesell. That loan was secured, was it, by stock of the Peoples
Life?
Mr. Hall. Yes, sir.
Mr. Gesell. Is the loan still outstanding?
Mr. Hall. Part of it.
Mr. Gesell, Is it delinquent in any way as to interest or prin-
cipal ?
Mr, Hall, No, sir,
Mr, Gesell. That loan was made on November 8, 1929, was it not?
Mr. Hall. Yes,
Mr, Gesell. Am I correct in saying that oh October 10, 1929, you
borrowed the same amount from the Peoples Life Insurance Co. ?
Mr. Hall.. Yes, sir,
Mr, Gesell, How was your loan secured?
CONCENTRATION OF ECONOMIC POWER 14935
Mr. Hall, By stock in my own company.
Mr. Gesell. So that in November Mr. Ryan, an officer of the Peo-
ples Life, borrowed $50,000 from the Lincoln National, and in De-
cember you borrowed the same amount from the Peoples Life, and
in each case
Mr. Hall (interposing). No; I borrowed mine in October.
Mr. Gesell. And in each case the loans were secured by the stock
of the company represented by the particular officer who borrowed?
Mr. Hall. Yes.
Mr. Gesell. What is Mr, Ryan's connection with the Peoples Life ?
Mr. Hall. He is chief counsel,
Mr. Gesell, Will you explain how these transactions took place?
Mr. Hall. Yes, sir. In May of 1929 I wrote a letter to the presi-
dent of that company, stating that I would like to borrow $50,000,
and it was almost immediately approved. I didn't want the money
uiitil fall, and I didn't get the money until the 10th of October.
Mr. Gesell, Your loan then was negotiated in May and actually
made in October?
Mr. Hall. Yes.
Mr. Gesell. Now, what were the circumstances under which, in the
following month, this officer of the Peoples came to borrow money
from the Lincoln National?
Mr. Hall, At that time they wanted to borrow the money, and
we were very glad to loan it to them.
Mr. Gesell. Is there any relation between these two loans at all,
or is it purely a coincidence that within a space in the same year
the same amount was lent back and forth ?
Mr. Hall. No relation whatever.
Mr. Gesell. Now on December 2, 1929, Mr. Harry R. Wilson of the
American Central Life borrowed $50,000 from the Lincoln National,
did he not ?
Mr. Hall. Yes, sir.
Mr, Gesell, That loan was secured by stock of the American
Central Life ?
Mr. Hall. Yes.
Mr. Gesell. Is the loan still outstanding ?
Mr. Hall. Part of it.
Mr. Gesell. That was in December 1929 ?
Mr. Hall. Yes, sir.
Mr. Gesell. In October of 1929 you borrowed the same amount,
$50,000, from the American Central Life, did you not ?
Mr. Hall. Yes ; but my loan was agreed upon in the previous May,
Mr. Gesell. Your loan was secured by stock oi the Lincoln
National, was it not ?
Mr. Hall. It was.
Mr. Gesell. Now, again, will you explain the circumstances under
which these loans were made?
Mr. Hall. Well, in May of 1929, I addressed a letter to the presi-
dent of the American Central Life, stating my desire to borrow
$50,000, and my letter, which has been submitted to you, explains why
I wanted to borrow it.
Mr. Gesell. I believe I have returned that letter, Mr. Hall. If
you do not mind, I would like to have you read it to the committee.
14934 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. The next witness is Mr. Hall of the Lincoln National
Life Insurance Co.
Mr. Hall, you have not been sworn.
Acting Chairman Pike. Do you 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. Hall. I do,
TESTIMONY OF ARTHUR F. HALL, CHAIRMAN OF THE BOARD,
LINCOLN NATIONAL LIFE INSURANCE CO., FORT WAYNE, IND.
Mr. Gesell. Will you state your full name, your occupation, and
residence ?
Mr. Hall. Arthur F. Hall, chairman of the board of the Lincoln
National Life Insurance Co., Fort Wayne, Ind.
Mr. Gesell. The Lincoln National is one of the companies shown
in these schedules we have before us, so, if the committee please, I
won't bother to bring out from the witness the size and scope and
activities.
How long have you been connected with the Lincoln National?
Mr. Hall. I organized it 35 years ago.
Mr. Gesell. You have been with it all the life of the company ?
Mr. Hall. Yes.
Mr. Gesell. Were you president of the company prior to becoming
chairman of the board ?
Mr. Hall. T was.
Mr. Gesell. When did you become president ?
Mr, Hall. I don't remember when I became president; about 6
or 8 years ago.
Mr. Gesell. And you became chairman of the board when ?
Mr. Hall. A year ago last February.
Mr. Gesell. Now in 1929, the Lincoln National made some col-
lateral loans, did it not ?
Mr. Hall. Yes, sir.
Mr. Gesell. Do you recall that on October 10, 1929 — rather, I
should say, on November 8, 1929 — a loan in the amount of $50,000
was made to Mr. Thomas M. Ryan, an officer of the Peoples Life
Insurance Co.?
Mr. Hall. Yes, sir.
Mr. Gesell. That loan was secured, was it, by stock of the Peoples
Life?
Mr. Hall. Yes, sir.
Mr. Gesell. Is the loan still outstanding?
Mr. Hall. Part of it.
Mr. Gesell. Is it delinquent in any way as to interest or prin-
cipal ?
Mr. Hall. No, sir.
Mr. Gesell. That loan was made on November 8, 1929, was it not?
Mr. Hall. Yes.
Mr. Gesell. Am I correct in saying that on October 10, 1929, you
borrowed the same amount from the Peoples Life Insurance Co. ?
Mr. Hall.. Yes, sir.
Mr. Gesell. How was your loan secured?
CONCENTRATION OF ECONOMIC POWER 14935
Mr. Hall. By stock in my own company.
Mr. Gesell. So that in November Mr. Kyan, an officer of the Peo-
ples Life, borrowed $50,000 from the Lincoln National, and in De-
cember you borrowed the same amount from the Peoples Life, and
in each case
Mr. Hall (interposing). No; I borrowed mine in October.
Mr. Gesell. And in each case the loans were secured by the stock
of the company represented by the particular officer who borrowed?
Mr. Hall. Yes.
Mr. Gesell. What is Mr. Ryan's connection with the Peoples Life ?
Mr. Hall. He is chief counsel.
Mr. Gesell. Will you explain how these transactions took place?
Mr. Hall. Yes, sir. In May of 1929 I wrote a letter to the presi-
dent of that company, stating that I would like to borrow $50,000,
and it was almost immediately approved. I didn't want the money
uhtil fall, and I didn't get the money until the 10th of October.
Mr. Gesell. Your loan then was negotiated in May and actually
made in October?
Mr. Hall. Yes.
Mr. Gesell. Now, what were the circumstances under which, in the
following month, this officer of the Peoples came to borrow money
from the Lincoln National?
Mr. Hall. At that time they wanted to borrow the money, and
we were very glad to loan it to them.
Mr. Gesell. Is there any relation between these two loans at all,
or is it purely a coincidence that within a space in the same year
the same amount was lent back and forth ?
Mr. Hall. No relation whatever,
Mr. Gesell. Now on December 2, 1929, Mr. Harry R. Wilson of the
American Central Life borrowed $50,^000 from the Lincoln National,
did he not ?
Mr. Hall. Yes, sir.
Mr. Gesell. That loan was secured by stock of the American
Central Life ?
Mr, Hall. Yes.
Mr. Gesell. Is the loan still outstanding ?
Mr. Hall. Part of it.
Mr. Gesell. That was in December 1929 ?
Mr. Hall. Yes, sir.
Mr. Gesell. In October of 1929 you borrowed the same amount,
$50,000, from the American Central Life, did you not ?
Mr. Hall. Yes ; but my loan was agreed upon in the previous May.
Mr. Gesell. Your loan was secured by stock or the Lincoln
National, was it not ?
Mr. Hall. It was.
Mr. Gesell. Now, again, will you explain the circumstances under
which these loans were made?
Mr. Hall. Well, in May of 1929, I addressed a letter to the presi-
dent of the American Central Life, stating my desire to borrow
$50,000, and my letter, which hias been submitted to you, explains why
I wanted to borrow it.
Mr. Gesell. I believe I have returned that letter, Mr. Hall. If
you do not mind, I would like to have you read it to the committee.
14936 CONCENTRATION OF ECONOMIC POWER
Mr. Hall. This letter is very similar to 10 letters written to
various insurance companies in May, 1929 [reading] :
Fort Wayne banks are terribly hard up for money and have raised the rate
of interest to 7 per cent on loans on which stock Is given as collateral.
Several of us here want to make substantial loans at 6 percent on Lincoln
Life stock at $75.00 or $80.00 a share.
When the new investment law goes into effect, I am wondering if the Amer-
ican Central is in position or is desirous of making some loans on Lincoln
Life stock, and if so about how much and when.
Our paid business is 15 per cent ahead of the same period last year and our
mortality is running lower thus far.
Mr. Gesell. Mr. Hall, was it a coincidence again that Mr. Wilson
of the American Central sought a loan from your company in the
same amount as you had borrowed from his company previously?
Mr. Hall. True. Nothing was said at any time for several months
after it had been agreed to loan me money.
Mr. Gesell. I am referring to the Peoples Life. I understand
there are several Peoples Life Insurance companies. This was the
Peoples Life Insurance Co., of Frankfort, Ind., was it not?
Mr. Hall. Correct.
Mr. Gesell. Now, Mr. Hall, do you recall that on January 6, 1931,
Mr. James A. McAvoy, an oflBcer of Central States, borrowed $8,000
from the Lincoln National ?
Mr. Hall. Yes, sir.
Mr. Gesell. And that on January 29, 1931, he borrowed $24,000?
Mr. Hall. Yes, sir.
Mr. Gesell. Those loans were secured by stock of Central States,
were they not?
Mr, Hall. They were.
Mr. Gesell. And do you recall that on April 1, 1931, you borrowed
$25,000 from Central States?
Mr. Hall. Yes, sir.
Mr. Gesell. And in July of 1931 you borrowed another $15,000
from Central States?
Mr. Hall. No ; I borrowed ten and on August 26 I borrowed five.
Mr. Gesell. Making a total of the three loans of $40,000 ?
Mr. Hall. Correct.
Mr. Gesell. So that you borrowed $40,000 in 1931 from Central
States and Mr. McAvoy borrowed from your company thirty-two
thousand ?
Mr. Hall. Correct.
Mr. Gesell. By the way, were the loans of Mr. McAvoy paid off?
Mr. Hall. They were not; they were charged off.
Mr. Gesell. They resulted in a loss to the company of $32,000?
Mr. Hall. Yes, sir.
Mr. Gesell. In the case of all of these loans, have your obligations
from the various companies from which you borrowed been paid off ?
Mr, Hall. All of them, in full.
Mr. Gesell. In this case again, there seems to be a certain degree
of reciprocity between the loans you negotiated from these companies
and the loans your company made to them. Do I understand that
there is any different explanation here than in the other two cases?
Mr. Hall. None.
Mr. Gesell. You mean to say, then, that on these three occasions
i.T',^ivin,r <i;of<n 000 trflTimintion!?. and another transaction running up
CONCENTRATION OF ECONOMIC POWER 14937
to forty or thirty-two thousand dollars, there was no previous under-
standing or arrangement of any sort between the officers of the two
companies ?
Mr. Hall. None whatever, by word of mouth or otherwise.
Mr. Gesell. In what way would these officers of the companies
who had lent you money approach you with respect to your lending
them money?
Mr. Hall. They wrote us letters which I have submitted to you.
Mr, Gesell, I have here a letter that you wrote Mr, Julian Price,
president of the Jefferson Standard, under date of May 31, 1929,
You recall that letter, do you not ?
Mr. Hall, Very well.
. Mr. Gesell. I was interested in the second paragraph in which
you say [reading from "Exhibit No. -22^1"] :
It is hard to understand the attitude of the loan committees to collateral
loans such as the one I seek. We recently loaned approximately $200,000 to
friends of yours and mine, officers of another life insurance company, on their
stock as collateral, and j: had a dickens of a time to get my finance committee
to consent to a loan on life Insurance stock. That is the one collateral they
understand better than any other. They will make a loan on a farm or a
business property at 5%% and think they have a cream loan. When we fore-
close we have the devil's own time to get rid of the security. If, however,
we should have to foreclose on the collateral loan we made, we could find a
market In ten minutes for the collateral.
I gather there was some difficulty in making these collateral loans
as far as your finance committee was concerned.
Mr. Hall. There was.
IVtr. Gesell. What arguments or explanations did you give your
finah.ce committee at the time the loans to these officers of companies
'which had loaned you money came before the finance committee for
consideration? ..
Mr. Hall. Well, we made loans, of course, to officers of other
companies long before I borrowed any money from any companies,
and my argument merely was that our officers should understand
life-insurance stock collateral, stock, rather, as collateral, better than
they should understand any other form of collateral, and that they
were intimate, or should be intimate with the operations of a life-
insurance company.
My philosophy m making such loans is set up, if you would finish
that letter which I wrote to Mr. Price, as to why they should be
made and why they were perfectly good loans.^
Mr. Gesell. I shall be glad to offer the entire letter for the record.
The Vice Chairman. It may be received.
(The letter referred to was marked "Exhibit No, 2291" ard is
included in the appendix on pp, 15514, 15515.)
Mr. Pike, It turned out later on one of those loans that the finance
committee was more nearly correct than you, didn't it?
Mr. Hall. It turned out that way on loans on all kinds of col-
lateral. We lose on farm mortgage loans, too.
Mr. Henderson. Do you lose on any policy loans ?
Mr. Hall. No.
Mr. Gesell. Mr. HaU, why didn't you borrow this money you
needed from your own company?
Mr. Hall. I can't borrow from my own company. It is illegal.
» See "Exhibit No. 2291," appendix, pp. 15514. 1551&
14938 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. Isn't that part of the story here ? The same situation
applied in the case of these other officers that were borrowing from
you; isn't that correct?
Mr. Hall. Yes; just the same as it is with banks, the president
of a bank cannot borrow from his own bank, but he can borrow on
his stock in that bank from another bank.
Mr. Gesell. Isn't there some kind of a gentlemen's understanding
or tacit understanding involved in this situation where you loaned
the same amount to an officer of another company as he in turn
borrowed from your own company?
Mr. Hall. No. In fact, we loaned more to the Peoples Life than
I borrowed from them. You didn't mention the fact that we loaned
twenty-five thousand to the president of that company.
Mr. Gesell. I haven't a record of that here. When did you loan
that to him ?
., Mr. Hall. On November 5, 1929, 3 days before the fifty thousand
was loaned to Mr. Ryan.
Mr. Gesell. You loaned how much?
Mr. Hall. Twenty-five thousand.
Mr. Gesell. So that you loaned a little more in that case to the
Peoples than they loaned to you.
Mr. Hall. That loan, by the way, is fully paid.
Mr. Gesell. And this is all a pure chance that there is this cross-
loaning ?
Mr. Hall. It is. I think they borrowed from us for the same
reason that I desired to borrow from them. .The local banks had
raised the rate.
The Vice Chairman. Just in that connection was there a shift in
loans from the local bank to the insurance company, or was this a
new transaction ? Did your loan status with your local bank change
as the result of this loan, either before or after ?
Mr. Hall. Afterwards, as soon as I got the money from the life
insurance companies, I paid off the bank who had increased the rate
1 percent. I was seeking a lower rate of interest.
Just one more point about that, Mr. Chairman. The loans from
the banks were 90-day loans. One couldn't tell when the bank would
say, "We will no longer renew this loan."
Mr. Gesell. You could get longer terms by borrowing from the
insurance companies.
Mr. Hall. And not be worried all the time.
Mr. Gesell. Were these loans collateral or time loans ?
Mr. Hall. They were due on I think 60 days' notice. I wiU get
that information for you.^
Mr. Gesell. I want to come now to a type of transaction that the
committee will be interested in.
Mr. Hayes. May I ask a question before you go into another type
of transaction? You mentionedj as I understood the testimony, Mr.
Hall, that before a loan was written off entirely, what happened to
the collateral for that loan ?
Mr. Hall. We still hold it.
Mr. Hates. Have you made any endeavor to sell it ?
Mr. Hall. Oh, yes.
I Information included In subaeQuent testimony.
CONCENTRATION OF ECONOMIC POWER 14939
Mr. Hates. Is the collateral worthless ?
Mr. Hall. No.
(Senator O'Mahoney resumed the Chair.)
Mr. Hates. About how much of the principal of the loan does
the collateral represent?
Mr. Hall. The collateral represents the entire principal of the
loan but I don't think the worth of it is more than $2,000. I don't
think we will ever realize more than two or three or four thousand
dollars.
Mr. Hates. Did Mr. Ryan pass on or have anything to do with
passing on your loan from the Peoples ?
Mr. Hall. I don't know. It was up with their finance committee.
. Mr. Hates. How about Mr. Wilson with respect to the American
Central?
Mr. Hall. I am quite sure he was on their finance committee.
Mr. Hates. How about Mr. McAvoy with respect to Central
States?
Mr. Hall. He was president of the company and I have no doubt
had something to do with passing on it.
Mr. Hates. In at least two instances people who borrowed from
your company had something to do with passing on their loans.
Mr. Hall. And no doubt the third one, too.
Mr. Gesell. And correspondingly, did you pass on the loans to
the officers of these other companies?
Mr. Hall. Yes; but my entire finance committee did. I have
here — I don't think you want it for your record but I would like
to have you see how such an application was analyzed and passed
upon. That loan was never made. It was approved. Every mem-
ber of the finance committee you see down there votes "yes" or "no."
Mr. Gesell. A specific vote was required, and details with respect
to collateral required?
Mr. Hall. Yes, two, four, seven — seven votes, so you can readily
see that I alone couldn't carry a vote.
Mr. Gesell. I want to ask you now about the circumstances under
which the Lincoln National purchased the reinsurance business of
the American Life Insurance Co. of Dallas, Tex., in 1929. Do you
recall that?
Mr. Hall. Yes, sir.
Mr. Gesell. -Can you tell us, first of all, what was the purchase
price ?
Mr. Hall. As I recall it, it was approximately $267,000.
Mr. Gesell. Can you tell us how that was financed ?
Mr. Hall. Yes, sir. It was financed by my borrowing the money
from the bank and purcfiasing the business with that money. Then
my company bought that business from me for exactly the same
price, with exactly the same interest payment that I owed, but gave
me a contract to make a payment — I think that particular one was
one-half of 1 percent of the renewal premiums collected on our busi-
ness afterwards. My collateral to the bank for the loan was an as-
signment of the contract that I had with my company. My company,
therefore, never paid me any money; it never passed through my
hands. It went directly to the bank with which I had made the
loan.
14942 CONCENTRATION OF ECONOMIC POWER
Mr. Henderson. Each stockholder?
Mr. Hall. Yes.
Mr. Gesell. These were 3-year collateral loans, is that correct?
Mr. Hall. Yes ; callable both 30 or 60 days alter the year.
Mr. Kades. Do I understand that your personal loans from the
bank were for 30 days?
Mr. Hall. I think they were for 90 days.
Mr, Kades. And you made arrangements with the insurance com-
pany to borrow in May 1939 ?
Mr. Hall. Yes, sir.
Mr. Kades. You, however, drew the money down in October 1929?
Mr. Hall. No. Some of it I didn't draw until July and August
of 1931.
Mr. Kades. Did the bank loans mature in the meantime ?
Mr. Hall. Well, they matured every 90 days.
Mr. Kades. Do I understand you to say tnat you borrowed from
' the insurance companies in order to avoid the 90-day paper, and put
it on a long-term basis ?
Mr, Hall. And on a lower interest basis.
Mr. Kades. Then why did you wait from May until October 1929,
before you drew down any money?
Mr, Hall. Well, I don't think those companies were in position
to loan such a large amount of money quickly. We were, but we
were a much larger company than the companies from whom I
borrowed.
Mr. Kades, Were banks in October 1929, asking for additional
collateral ?
Mr. Hall. Yes ; and raising the rate. The Fort Wayne banks in-
creased their rate from 6 to 7 percent on all loans collateralized by
stocks of any type,
Mr. Kades. Were they asking for additional stock?
Mr. *Hall. That I don't recall.
Mr, Kades. That had nothing to do with the shifting of the loan
from the bank to the insurance company ?
Mr, Hall. I think not.
Dr. LuBiN. Mr. Hall, you stated that in May, of 1929, you wrote
a letter to 10 companies in which you raised the question as to whether
you could borrow certain funds from them ?
Mr. Hall. Correct.
Dr. LuBiN. In some instances, however, you waited almost 2 years
before you went to these companies to borrow the money?
Mr. Hall. No ; in one instance. I then probably wanted to borrow
some more money that I hadn't even thought of previously.
Dr. LuBiN. I understand that you made the arrangements in May
'29, but you didn't borrow until 1931 ?
Mr. Hall. That is correct. The president of our company calls
my attention to the fact that although I wrote to the president of
the Central States in May of 1929, asking whether or not they
could or would make loans, that no arrangements were made at that
time for them. At that time they were in no position to make the
loan.
Dr. LuBiN, So there is no relationship between your borrowing in
1931 and the arrangement you made in 1929 ?
CONCENTRATION OF ECONOMIC POWER 14943
Mr. Hall, Merely that I had asked for it in 1929, but no loan was
consummated.
Dr. LuBiN. So you made a further request 2 years later, and the
loan was consummated?
Mr. Hall. I judge I did.
Mr. Hates. Your testimony, as I understand it just now, is that
though you made your original approach to those companies in May
of 1^9, the actual loans were deferred until some time in the tall
because of the inability of those companies at the time of the original
request to make loans of such substantial amounts?
Mr. Hall. I said I merely suspected that that was the reason for
the delay.
Dr. LuBiN. Does that mean that they refused the loan in May
of 1929?
Mr. Hall. Oh, no.
Mr. Hates. What was their answer, that they were able to make it
in May of 1929 or that they weren't able to make it ?
Mr. Hall. Mr. Chairman, I have all the correspondence from my
personal file concerning these matters which I am perfectly willing
to leave with this Commission if they so desire. It answers aU
these questions.
The Chairman. You have ample time to review your correspond-
ence and confer with your associates.
Mr. Hall. I merely want you to knorw that I don't seek to hide
the answer to any question you may ask me.
The Chairman. We appreciate that fact.
Mr. Hall. Here is the replv in June 1929 from the Peoples Life
at Frankfort, Ind., which did loan me, in October, $50,000 [reading] :
This month and next we have a number .of large mortgage loans which
aleady have been approved, and it will take all the funds available to complette
these loans according to our previous arrangement We are loaning more than
50 percent of our funds at 7 percent on city property, interest payable semi-
annually, and we have two loans of twenty thousand, one of thirty thousand,
and one of fifty thousand coming this month, and one of $15,000 being made
in Indianapolis the first of July, besides several smaller loans.
- You no doubt appreciate the fact that our income is small as compared with
yours. Looking up the law on loans on stock, our attorney advises me that
$65,000 is the limit to any one company. Therefore, as soon as funds are
available I shall be pleased to loan you $50,000, which will be a permanent
loan of $50,000.
Mr. Hates. What company was that?
Mr. Hall. The Peoples Life of Frankfort, Ind.
Mr. Hates. Is that typical of the replies you received?
Mr. Hall. The ones from whom I borrowed were all in that cate-
gory- ,
Mr. Hates. As I understood your original testimony with respect
to these loans, and I may have misunderstood and I would like to be
corrected if I did, your testimony was that while you made applica-
tion originally in May, you didn't require the funds yourself until
October, ahd for that reason did not borrow ?
Mr. Hall. J think I should correct that, because the sooner I could
get the loans the sooner I lowered my interest 1 percent.
Mr. Hates. So that the reason, primarily, was the inability of the
companies lending the money
Mr. Hall (interposing). Inability due to such reasons as I have
read here. ■
t494r4 CONCENTRATION OF ECONOMIC POWER
Mr. Hates. Were these loans made before or after you made your
request?
Mr. Hall. There were never any of them made coincident with the
time I made my other request.
Mr. Hates. They were made independently of the actual borrowing
by you ?
Mr. Hall. Y^s, sir.
Mr. Gesell. I have no further questions.
Representative Sumners. I would like to ask one further question.
I gather from that letter and your statement that your application
to these companies with reference to loans was probably for $65,000?
. Mr. Hall. No. I will get my letter.
Representative Sumners. I don't think that is important. I
thought I heard that.
Mr. Hall. I read you one letter. I said several oflBcers of the
company would like to borrow, and his answer was that $65,000 would
be the limit.
Representative Sumners. The question I want to ask is, What, if
any, difference is there between the amount and character of the col-
lateral which you put up to secure the loans from these insurance
companies and that which was securing the same indebtedness with
the banks ?
Mr. Hall. The same collateral.
Representative Sumners. You had a loan with the bank with a
certain collateral which the bank had approved. You moved that
loan and_^hat collateral over to the insurance company and got the
money from it, and paid the debt to the bank ?
Mr. Hall. That is correct.
Dr. LuBiN. Mr. Hall, is it customary for insurance companies to
make collateral loans and to make them permanent ? Does that reply
tO'you mean that this loan was going to be extended indefinitely at
your cJption ?
Mr. Hall. No. Mine was only made for 3 years. It wasn't per-
manent. As a rule, mortgage loans are made for a minimum of 5
years.
Dr. LuBiN. Did I understand you to say a minute ago that these
loans were made by your company to the officers of these other com-
panies in each instaijce before you borrowed from their companies ?
Mr. Hall. No.
Dr. LuBiN. Were they made after you borrowed ?
Mr. Hall. Yes.
Dr. LuBiN. In all instances ?
Mr. Hall. No; in one instance they were made to the other com-
pany first ; in two instances they were made to me first.
Dr. LuBiN. Which instances are those, thosB of 1929 or '31 ?
Mr. Hall. '31.
Dr. LuBiN. In 1931 they borrowed first?
Mr. Hall. Yes. That is the loan we lost.
Mr. Kades. Did the collateral notes to the banks contain the usual
provision that, in the event the collateral fell below a certain value,
additional collateral would have to be pledged ?
CONCENTRATION OF ECONOMIC POWER 14945
Mr. Hall. Yes.
Mr. Kades. Did the collateral loans from the insurance companies
contain a similar provision ?
Mr. Hall. Yes.
Now, that brings me to the point contained in the letter which
your Commission has. It shows that, first, on the Peoples Life
loan, which I secured on October 10, 1929, I put up 700 shares of
stock; on December 29, the following year, I put up 100 shares: on
July 15, of the following year, 208 shares — the market price was
going down ; on December 24, 1931, 1 put up 500 shares ; on November
18, 1935, I put up 297 shares; so I finally added up to 1,805 shares
in that case.
The American Central shows that I originally deposited 700 shares,
as in the other case; and on December 29, 1930, I added 300 shares;
on January 16, 1932, I added 450 shares ; so I had 1,450 shares.
Mr. Henderson. Had not the ad(Jitional shares been put up, the
company that made the loan to you might have lost money ?
Mr. Hall. I think so.
Mr. Kades. Did you require Mr. McAvoy to put up additional
collateral ?
Mr. Hall. I do not recall. If we asked for it, I don't think we
got it.
Mr. Hates. Did you ask for it?
Mr. Hall. I don't recall, but no doubt we did.
Mr. Kades. Did you accelerate the maturity of this note wheii he
was unable to put up additional collateral?
Mr. Hall. I do not recall that.
Mr. Hates. Did you receive a financial statement from Mrat
Avoy at the time of the original loan to him ?
Mr. Hall. No; because the loan was on the stock of his compaliy.
We made an analysis of that company's business.
Mr. Hates. That was m 1931 ?
Mr. Hall. Yes.
Mr. Hates. And you relied entirely on collateral in 1931 ?
Mr. Hall. Yes.
Mr. Hates. Stock collateral ?
Mr. Hall. Correct.
Mr. Kades. What month was that in 1931 ? What month did you
make a loan to Mr. McAvoy ?
Mr. Hall. Loaned him money in January and borrowed in April,
July, and August.
Mr. Kades. Was that a 3-year note?
Mr. Hall. I judge it was. I can look it up for you.
May I introduce, Mr. Chairman, the form of note that we used
in all these cases?
The Chairman. I beg your pardon?
Mr. Hall. May I introduce the form of note that was used in each
case when we made a loan?
The Chairman. Unless there is objection.
Mr. Hall. It will answer some of the questions that might occur
later.
14946 CONCENTRATION OP ECONOMIC POWER
Mr. Gesell. I will be glad to have this filed as part of the record.
The Chairman. Is there any objection to having it printed?
Mr. Hall. No.
'The Chairman. Then it may be received and printed.
Mr. Hall. I think, however, Mr. Chairman, the name of the bor-
rower should be left off.
The Chairman. Would you prefer to have it filed with the com-
mittee and not printed?
Mr. Hall. I would prefer that. He still owes part of that money.
The Chairman. Then it will not be printed, but will be held, with-
out references to the individuals concerned, as a part of the record
of the committee.
Mr. Hall. I think that is a courtesy to the borrower.
The Chairman. We will be glad to comply with that suggestion.
(The note referred to was marked "Exhibit No. 229 1-A" and is on
file with the committee.)
Mr. Gesell. We have no further questions of this witness.
The Chairman. May I ask, sir, whether there is any particular
provision of the Indiana law with respect to transactions of this
type, which you want to discuss this morning?
Mr. Hall. Yes ; stocks generally. We may loan 80 percent at the
present market value of stocks.
The Chairman. That is the ordinary collateral loan that Dre-
vails ?
Mr. Hall. Yes.
The Chairman. Is there any provision with respect to lending
money between life insurance companies?
Mr. Hall. None.
The Chairman. That is not covered in the law at all?
Mr. Hall. No. -
The Chairman. So the transaction that has been described here,
according to your statement, ^as wJthin the laws of the State of
Indiana ?
Mr. Hall. Yes; approved by the attorney general.
The Chairman. I beg your pardon.
Mr. Hall. We had it approved by the attorney general of our
State.
The Chairman. In other words, before the transaction was car-
ried out, it was submitted to the attorney general of your State?
Mr. Hall. Yes.
The Chairman. And approved?
Mr. Hall. Approved by him.
The Chairman. Did the insurance department have anything to
do with it?
Mr. Hall. I judge they did. It must have befen submitted to the,
attorney general through the insurance department.
Mr. Gesell. You mean you told him you borrowed so much money
from an officer of one company, and he in turn was going to borrow
the same amount of money from your company ?
Mr. Hall. No.
Mr. Gesell. Just the general proposition as to whether or not you
could loan on stock?
i
CONCENTRATION OF ECONOMIC POWER 14947
Mr. Hall, Yes.
The Chaibman. Then I misunderstod you. Was the transaction
itself submitted to the attorney general ?
Mr. Hall. No ; the question was submitted to the attorney general,
whether or not it would be proper for an Indiana officer of an Indiana
company to borrow on the stock of his company from another Indiana
life msurance company.
The Chaibman. That question, as a generality, and with no relation
to a specific case, was presented to the attorney general ?
Mr. Hall. Yes.
The Chairman. By your company?
Mr. Hall. Yes; by word of mouth, I judge. I have no correspond-
ence on that.
Mr. Gesell. It is recorded in tHe correspondence that you did take
it up.
Mr. Hall. Yes; it is recorded somewhere in the correspondence that
you have to that effect.
The Chaibman. Did you have a letter fro.n '^e attorney general ?
Mr. Hall. No.
The Chairman. Was it an oral opinion he handed down?
Mr. Hall. We were advised by the insurance department that the
attorney general had rendered such an opinion.
The Chairman. I see. Thank you.
Mr. Henderson. Mr. Hall, where do you get the market price of
the stocks of insurance companies ?
Mr. Hall. Well, it is quoted in many newspapers. Ours is only
quoted in the Chicago Journal of Commerce and the Fort Wayne
papers. It used to be quoted in the Hartford, Conn., papers. The
stocks in the larger companies are reported pretty well over the
country.
Mr. Gesell. Most of that is over-the-counter quotations ?
Mr. Hall. Yes.
Mr. Gesell. Thank you, Mr. Hall. There are no further questions.
The Chairman. If there are no further questions, the committee is
indebted to you, Mr. Hall, for the testimony. The witness may be
excused.
The committee will stand recessed until 2 o'clock.
(Whereupon, at 12 : 10 p. m., a recess was taken until 2 p. m. of the
same day.)
AFTERNOON SESSION
The committee resumed at 2 : 05 p. m. upon the expiration of the
recess.
The Chairman. The committee will pJease come to order.
Mr. Gesell. The witness this afternoon is Mr. Glenn E. Rogers of
the Metropolitan Life Insurance Co. I should say the first witness —
we will have two, we hope.
The Chairman. Mr. Rogers, 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. Rogers. I do.
14948 CONCENTRATION OF ECONOMIC POWER
TESTIMON-X OF GLENN E. EOGERS, MANAGER, FARM LOAN DI-
VISION, METROPOLITAN LIFE INSURANCE CO., NEW YORK, N. Y.
Mr. Gesell. Will you state your full name, please, sir?
Mr. KoGERs. Glenn E. Rogers.
Mr. Gesell. What is your position with the Metropolitan?
Mr. Rogers. Manager of the Farm Loan Division.
Mr, Gesell. How long have you had that position ?
Mr. Rogers. Since September 1932.
Mr. Gesell. Were jou connected with the division prior to the
time you were placed m charge ?
Mr. Rogers. I have been connected with the division since 1924.
Mr. Gesell. Prior to that had you had experience in the handling
of farm problems?
Mr. Rogers. Yes.
Mr. Gesell. Whafc^was y'our experience? _
Mr. Rogers. I was brought up on an Illinois farm and then at-
tended the Iowa State Agricultural College and went back to the
farm for a while, then became an agricultural agent, a county agent
in Minnesota, and from there I guess I was one of the first appraisers
of the Federal Land Bank of St. Paul, and from that I went with' a
mortgage company in Minneapolis, and from there to New York
City as assistant manager of the Farm Loan Division of Metro-
politan.
Mr. Gesell. And you became manager in 1932 ?
Mr.' Rogers. Became manager in 1932.
Mr. Gesell. Not just exactly the best time to become manager.
Mr. Rogers. There were many problems then.
Mr. Gesell. Now, Mr. Rogers, before we get down to detail, I
would like to get some idea from you of the Metropolitan's farm
investment. First of all, can you tell me how many farms the
Metropolitan owns?
Mr. Rogers. Seven thousand one hundred and fifty-three, I think,
is about correct toda^, but I can tell you accurately.
Mr. Gesell. Wjthin approximation is perfectly all right. Gen-
eral figures.
Hqw much of an investment does that represent?
Mr. Rogers. Today it represents $79,800,000.
Mr. Gesell. Wliat is your biggest farm? How many acres,
roughly?
Mr. Rogers. Roughly, 2,000 acres, I believe. I think there are
three farms that are approximately 2,000 acres.
Mr. Gesell. And how small do you run down?
Mr. Rogers. Oh, I would say 25 or 30 acres, but seldom below 40.
Not many farm loans are made on farms below' 40 acres.
Mr. Gesell. And the average size of the farm is about what?
Mr. Rogers. I would say the average size is approximately 200
acres. I am not sure. That would be easily calculated — ^7,153 farms,
1,560,000 acres.
The Chairman. What do you say is the average?
Mr. Rogers. About 210, I believe, Senator.
Mr. Gesell. How many mortgages have you got?
Mr. Rogers. I would say approximately 13,000. I am not real
sure on that.
CONCENTRATION OF ECONOMIC POWER 14949
Mr. Gesell. That is roughly correct?
. Mr. KoGERS. I think so.
Mr. Gesell. What investment does that represent?
Mr. Rogers. That represents $74,000,000.
Senator King. When you say farms, some of those large so-called
farms include considerable land used for dairy purposes, do they
not, and for hay, rather than for the production of what might be
'called peculiarly agricultural crops — wheat and corn?
Mr. Rogers. Well, the largest farms that we had — we carried these
farms under a single number. Now, we acquired, for instance, in
North Carolina, 7,500 acres in 1 property. We carried it as 1 farm.
Yet it was made up of a number of parcels. That particular prop-
erty has been sold. I think it was sold as 31 different parcels. Now,
the 2,000-acre farm in Kansas is broken down into about 6 different
farms. I think 1 in Minnesota is the same way. There are several
units, but 1 man owned them, and we call them 1 farm. In addition,
I should say we have 1 ranch in Colorado that has about a thousand
acres under irrigation, but it is a cattle proposition with the cattle
grazing on the forest range.
Mr. Gesell. What is your biggest mortgage?
Mr. Rogers. The biggest mortgage, I am not sure, I think it is
$150,000. I am not sure about that.
Mr. Gesell. And how small do your mortgages run?
Mr. Rogers. Oh, we have them down as low as $500. $1,000.
Mr. Gesell. Are there many that small ?
Mr. Rogers. Not many.
Mr. Gesell. Now, what States — in what States is this investment
located primarily ?
Mr Rogers. Well, it is primarily located in the Central West, al-
though it is scattered in 25 different States. If you wanted that figure
accurately, I could give it to you.
Mr. Gesell. Well, "Exhibit No. 2250" shows that specifically for
each State.^ I just wanted to refresh the committee's recollection.
Mr. Rogers. The State of Iowa,:of course, is the leading investment,
with us, and the State of Illinois runs high.
Mr. Gesell. You are in 25 different States ?
Mr. Rogers. Twenty-fiye different States; and in some States the
amounts relatively are small.
Mr. Gesell. Now, will you tell us a little about your lending and
managing organization ? I realize you could probably talk all after-
noon about that alone. I want in outline form how you lend, the kind
of staff you have, and how you are organized.
Mr. Rogers. Well, I think it is a very simple organization. When
confronted with a management probljem, it seemed that it was neces-
sary to develop an organization that 'understood farms and farming.
We have always looked upon the lending of money and the manage-
ment of farms as separate businesses. A man to be competent to lend
money must have more or less of a banking instinct. A man to man-
age farms must have an intricate knowledge of agriculture, and in
our case we have gone to the scientific agriculturalists in order to do
constructive work, in order to be of benefit to tenants who reside upon
those farms. Many of the men in the farm management organization
1 See Hearings, Part 10-A, pp. 167 to X71.
14950 CONCENTRATION OF ECONOMIC POWER
would not make lenders of money. Some would make salesmen. Some
would make lenders, but some of the men are of the type that are defi-
nitely farm managers, and will be strictly confined to that work.
Then we have the farm sales department, which takes another type
of personality. I always say that you cannot tell from talking with
a man his ability to sell farms. The sales he makes are the things
that tell the story. We have these three departments that are sep-
arate and distinct.
Mr. Gesell. Let's see. Those are the lending department.
Mr. Rogers. Yes.
Mr. Gesell. The managing department.
Mr. RoGEBS. Yes.
Mr. Gesell. And what is the third ?
Mr. Rogers. Salefe.
Mr. Gesell. And the sales department. Those are separate and dis-
tinct from each other ?
Mr. Rogers. Yes.
Mr. Gesell. What is the total personnel ?
Mr. Rogers. The total personnel in the field, you are referring to —
approximately 350 people. There are about 165 men, field men, I
believe, and of that 165, 1 think 130 are agricultural college men, most
all of whom are mature men, 35 to 45 years of age, with a few men
of a younger age who work as assistants to these older men, as a
training.
Mr. Gesell. The company at one time used farm correspondents, at
least in part, to make its loans, did it not ?
Mr. Rogers. Yes.
Mr. Gesell, Does it at the present time ?
Mr. Rogers. We have I think four correspondents left.
Mr. Gesell. You have probably switched over to the manager
system, have you ?
Mr. Rogers. We have switched over. Here was one of the great
difficulties. The farm management business being so separately and
entirely different from the lending, the correspondent had no ability
as a farm manager, he had no liking for it. He didn't want to man-
age farms. So in the very early part of the defaults, it was neces-
sary to set up a separate management organization. Then if a cor-
respondent failed or decided he cared not to continue, we would try
to carry over some of his people into our organization in order to
continue the experienced men. A good many of our present lend-
ing organizations were built up by taking the employees of the
former.
The Chairman I take it the correspondents were practically all
experts in lending?
Mr. Rogers. Yes.
The Chairman. Of this staff of which you spoke a moment ago,
how many are in the managing department, the farm management
department?
Mr. Rogers. Today I would judge about 125.
The Chairman. How long have you had a management staff as
large as that ?
Mr. Rogers. Well, that dates back quite a ways. I would say 1933
or 1934.
CONCENTRATION OF ECONOMIC POWER 14951
Mr. Gesell. I assume you started to build up that staff as soon as
you became head of the division.
Mr. Rogers. Yes.
Mr. Gesell. There was an increasing problem at that time.
Mr. Rogers. In 1932, that is correct, Mr. Gesell. The building of
an organization with farms coming to you at the rate of 300 a month
is quite a difficult thing, because the men must be trained.
The Chairman. How many persons are there in the sales depart-
ment?
Mr. Rogers. In the sales department? We handle that slightly
differently. What I claim as to our salesmen is that they are really
sales executives. We encourage the local real-€state brokers to help
us in the sale of farms, and we call the men in our branch office staff
the farm sales managers. It is their job to see that the farm-loan
men, that the farm-management men, and that the real-estate brokers,
all lend their efforts toward the sale of company-owned farms. There
are only 12, I think, Senator; now that may be 11 or it may be 13,
but I am close to right.
The Chairman. That is, those men are sales executives ?
Mr. KoGERS. Yes.
The Chairman. And then the balance of your staff is in the lend-
ing division ?
Mr. Rogers. Yes.
The Chairman. And that would number approximately 150, or
thereabouts?
Mr. Rogers. Thereabouts.
Mr. Gesell. Your company is really the biggest farmer in the
United States, isn't it, Mr. Rogers?
Mr. RoGTOS. We are today, I believe.
Mr. GESteU-. You own more farm land than anyone else?
Mr. Rogers. I believe that is correct.
Mr. Henderson. Now, you have those 11 or 12 sales executives,
but how many people would you say are on the selling staff, taking
the brokers and the managers and; the salesmen together ?
Mr. Rogers. Mr. Henderson, that would be a large organization.
Strange as it may seem, some of these individual brokers thjs past
year sold enough farms so their commissions would mount upwards
of five to ten thousand dollars on company farms alone. I have
no idea as to that. We advertise, these men are solicited, these
brokers, and it is very, very extensive. '.
Mr. Henderson. Have you any idea how many individuals last
year sold one or more farms for you ?
Mr. Rogers. No;T haven't.
Mr. Henderson. Would it be 100?,
Mr. Rogers. Oh, I would say mote than that. More than that.
For instance, last year we sold over $5,000,000 of land in Iowa alone.
We had four sales executives, a farm sales manager and three sales
executives. The sales of those farms were made by real-estate
brokers throughout that territory and that is a lot of farms to sell
in a year.
Mr. Henderson. Do you suppose you were the largest seller of
farms in Iowa last year?
Mr. Rogers. I think we were without question. We sold $11,-
14952 CONCENTRATION OF ECONOMIC POWER
600,000 worth of land last year throughout different parts of the
United States. Koughly, $5,500,000 of it was in Iowa.
Senator King. Did you get cash for any considerable part of the
land sold, or did you take mortgages?
Mr. Rogers. We sold a great lot of it on contract.
Mr. Gesell. Might I say we are coming to the sales procedure,
Senator King, in a moment.
Is the company lending at the present time on farms ?
Mr. Rogers. Yes ; our loans in 1939 were $12,000,000.
Mr. Gesell. You made $12,000,000 of loans when?
Mr. Rogers. In 1939.
Mr. Gesell. How many did you make in 1938?
Mr. Rogers. $8,900,000.
The Chairman. Do you refer to these as new loans — ^that is to say,
loans which had never before been made ?
Mr. Rogers. That is right.
The Chairman. This figure did not include any refinancing?
Mr. Rogers. Well, it might have included a few Federal land-bank
loans.
The Chairman. I mean refinancing of Metropolitan loans.
Mr. Rogers. No.
Mr. Gesell. No recasting of your own ?
Mr. Rogers. The figure would be 17,000,000 if it included refinanc-
ing of our own. We look upon the matter of what we call new loans
as new money we pay out.
The Chairman. New loans as to your company ?
Mr. Rogers. As to our company, yes.
Mr. Gesell. Now, may I ask you what type of loan — or what are
your standards in loaning farm money at the present time ?
Mr. Rogers. Well, I would say that our standards are very high.
Mr. Gesell. I am sure you would. I meant more, what do you mean
specifically, what do you look for specifically, when you loan? In
other words, what kind of an individual will you loan to, up to what
percentage of the land value will you loan on ? That is what I mean
by standards.
Mr. Rogers. We adhere quite largely to the better farm-land areas,
for several reasons, and the maximum is approximately 50 percent of
the value of the farm.
The Chairman. Who fixes the value?
Mr. Rogers. Our own organization — one of our own men. Our
farm-loan men who must be trained appraisers. Then with a corre-
spondent, of course, the correspondent's appraiser appraises. But
where we have a correspondent we have a contract of guarantee to
repurchase within 1 year if the loan for any reason is not satisfactory
to us. We have a staff of reviewing appraisers and the reviewing
appraisers review the loans made by the correspondent and also by
our own branch offices to maintain an even standard and quality of
loan throughout the organization. These reviewing appraisers are
not permitted to be a part of any branch office. They are supposed to "
be separate entities, and I usually have them come to the home office
for a period of 30 to 60 days in the winter months in order that they
will know f uljy our home-office views on lending.
CONCENTRATION OF ECONOMIC POWER 14953
The Chairman. What are your home-ofl5ce views in aflSxing the
appraised value of the property on which you loan ?
Mr. Rogers. That is a rather difficult question, other than to say
The Chairman (interposing). Yes; I realize it is not a thing you
can answer specifically, perhaps.
Mr. Rogers. In the first place, the farm must be a good farm, and in
a community of good land values. The buildings must be in good
condition. We will lend on farms without buildings, providing the
amount loaned per acre is slightly lower, but we also require financial
statements to avoid lending money to people who are already over
their heads.
The Chairman. Don't your appraisers carry some instructions from
the company to guide them in fixing values ?
Mr. Rogers. On that. Senator, an appraiser of lands is built up by
experience and discussion and exchange of views over the years, and
they do not carry instructions with them. ' They have very complete
reports to fill out. I have two requirements which I have made;
that they state the hour of the day at which the appraisal was made
to avoid a fellow appraising a farm not at the proper time of day.
Mr. GESEUi. You mean for instance midnight?
Mr. Rogers. Midnight — or the man with a long drive ahead. I
know from experience in the field there are times when a fellow
gets very tired, that he can probably try to appraise a farm at dusk,
which is just not proper, and I have sometimes required that he set
out on a dotted line his path over the farm, his trip over that farm,
to be sure of the appraisal.
So we have with these trained appraisers men- that are selected
because of their knowledge of land, and then with the reviewing ap-
praisers, we have two men who are real experts go over the property,
go over it entirely. With a branch office I realize if a man made a
mistake, that the loan is made. Nevertheless, I know the man made
a mistake.
Mr. Gesell. I believe the Senator's question was. What are the
standards for appraisal, not how do you check your own appraisers
to see that they make the kind of appraisal that they should as
professional men, but what are their standards? I take it, from
what you say, that it is just a matter of the individual man's knowl-
edge of the farm property.
Mr, Rogers. Yes. A man is able to know land and report accurately
on the contour, he must submit a plq.t showing the exact contour.
The Chairman'. Do you want your, appraisers to try to determine
what the value of the farm would be ?
Mr. Rogers. Oh, yes. ,
The Chairman. What it would bring in the matket ?
Mr. Rogers. Yes.
The Chairman. Is that the principal factor in determining?
Mr. Rogers. That is the principle factor in determining the loan
and the recommendation of it, but he must report every detail re-
garding that property, the condition of every building. '.
Th3 Chairman. Of course, it is obvious that from a comparison
of a great number of cases, you can judge whether an appraisal is
out of line or not?
14954 CONCENTRATION OF ECONOMIC POWER
Mr. RoGiKS. Yes.
The Chairman. You can judge from the conditions in the par-
ticular area, the county or the State, what value ought, approxi-
mately, to be put on a particular type of farm ?
Mr. Rogers. Yes.
The Chairman. I was wondering if any instructions of any specific
kind were given to the appraisers in reaching their figure which is
reported to you, and then reviewed by the ofl&ce appraisers?
Mr. Rogers. That, of course, is merely the education of the men
over the years, and our report is extensive, as I say. If a man will
give me an accurate plat and an accurate description of a farm
•in any county in which we make loans, I can tell within a few dollars
whether or not he is right, because we maintain that kind of infor-
mation constantly.
Senator King. I suppose the assessors of the respective counties —
^nd they assess real estate, you know, for taxation — ^they have their
values and those records are available to your organization if it is
desired ?
Mr. Rogers. The assessed valuation varies materially, and they are
difficult to folldw. Our best information is the judgment of a com-
petent man who has been oh the property.
Now, in the past, since 1932, we have made approximately $25,000,-
000 of loans, have had five foreclosures, and acquired one farm.
Mr. Henderson. You mean on the new business?
Mr. Rogers. On the new business ; yes.
]\Ir! Henderson. Did I understand that you look into the financial
ability of a armer as well as a farm itself ?
Mr. RoGEi^ts. Indeed.
Mr. Henderson. In other words, you are loaning on the farm and
on the man also ?
Mr. Rogers. Yes; we have a complete financial statement of the
man. and that is sworn to.
Mr. Gesell. Is that a pretty good, summary of what you take into
account in the loan, reading from one of the memoranda from your
files [reading] :
Each loan to be qualified for approval must meet three basic requirements:
The farm must be located in an approved lending territory; the borrower's
financial condition must be satisfactory ; and the amount of the loan applied for
must not exceed 50 percent of the value of the land without buildings.
Mr. Rogers. Yes.
Mr. Gesell. In the event an application meets these conditions the
loan is then approved for submission to the real-estate committee. Is
that an accurate summary?
Mr. Rogers That is quite an accurate summary.
Mr. Gesell. I am interested in these approved lending territories,
Mr. Rogers. Of the loans that you have made in the last couple of
years, in how many States have you loaned ?
Mr. Rogers. In the last couple of years? I would have to count
them up, but it would be over 20, 1 am quite sure.
Mr. Gesell. You have loaned in over 20 States?
Mr. Rogers. I am quite sure of that.
Mr. Gesell. There are certain areas that you have withdrawn from,
are there not?
CONCENTRATION OF ECONOMIC POWER 14955
Mr. Rogers. Withdrawn from in a way, not entirely, but there are
some territories where we are less active than we were in former years.
Mr. Gesell. Now, I would like to discuss with jou for a moment the
factors that have led to your decision not to contmue active lending in
certain areas. For instance, you have pretty well withdrawn from
California, have you not?
Mr. Rogers. Yes.
Mr. Gesell. What were the factors which led to your discontinuing
loans in California ?
Mr. Rogers. California is a long way from New York, for one
thing.
Mr. Gesell. That is quite a statement, Mr. Rogers. That is the
first time that I can recall that anyone from the Metropolitan has
discussed this question of size. Now, I would like to elaborate on
that.
Mr. Rogers. Well, that area — Senator King is very familiar with
it — is an area of highly specialized agriculture. In order for an
insurance company — that is, at least, in order for a company like
ours — to lend money at present-day rates of interest, we must be able
to obtain a volume of loans of considerable size within a relatively
small area.
Mr. Gesell. You mean you have to keep your loans well knit
so you can keep track of them.
Mr. Rogers. Yes; to service them properly. To build a branch
office to service loans and to make loans, I believe that $5,000,000
would be the minimum, and $10,000,000 would be much more nearly
the correct minimum. Now, to lend $10,000,000 oft the agricultural
land in California and maintain an active oranch office — and, as I
say, that is far away from headquarters, and with the competition
that prevails, you must remember that the Federal land bank is the
controlling institution in the farm mortgage field in America, and
you also have other insurance companies in California — it would be
difficult in that limited area to secure a large enough volume of loans
to make it worth while.
Mr. Gesell. What factors have come up to make that situation
different than it was before? You see, what I am trying to get at
is what the economic or social or any other kind of reasons are that
prompt your leaving that territory.
Mr. Rogers. Tt is insufficient volume. We started in that field, I
think, in 1924.
Mr. Gesell. It was as far away from the home office then as it is
now.
Mr. Rogers. Yes ; but you learn by experience.
Mr. Gesell. That is another point I want to chec"k up.
Mr. Henderson. What was the experience you had with Cali-
fornia lands?
Mr. Rogers. After several years we found we only had $4,000,000 of
loans in force, and to maintain an organization to service $4,000,000
of loans, and then with the depression which brought values down —
remember, land values in the United States have shrunk from
$66,000,000,000 to $34,000,000,000, which narrowed your credit basis.
It meant that loans were smaller per acre than they had been, and
as a result, it seemed impractical to try longer to support an organiza-
14956 CONCENTRATION OF ECONOMIC POWER
tion in California. We acq^uired very few farms. I think now, for
instance, we own 12 farms m California, maybe 13 or 14. I believe
we own 9 in Utah, and wa have 3 or 4 uj) near Spokane, and we are
trying to service that with one organization.
Mr. Gesell. You are reading this map a little ahead of jne, Mr.
Rogers. Let's talk about some of these areas a moment. You have
withdrawn from Oregon, the same way you have from California,
have you not?
Mr. Rogers. Not exactly. We withdrew from the Willamette Val-
ley in Oregon. We did not withdraw from the Palouse Country, as
I call it.
Mr. Gesell. That is the upper eastern central part?
Mr. Rogers. Yes.
Mr. Gesell." But you did withdraw from the west central part
of the State.
Mr. Rogers. Yes. ,
Mr. Gesell. Why was that?
Mr. Rogers. Lack of volume. I think we had six little farms out
there. We never had ^^er two hundred fifty to three hundred thou-
sand dollars of loans.
Mr. Gesell. And it was again the experience of recent years that
has made you feel that that type of volume of loan cannot be so
easily handled froni the home office?
Mr. Rogers. No; it would be handled from Spokane- but at that,
it is 250 or 300 miles from Spokane.
Mr. Gesell. You loaned in a considerable portion of Utah at one
time, did you not?
Mr. Rogers. Not a considerable portion. Utah is a State of some
irrigated land and a tremendous lot of ranch land.
Mr. Gesell. But you did loan in Utah ?
Mr. RoGi^is. We loaned in Utah, and I do not believe we ever
had more than $300,000 loaned in Utah. It is not an easy State
to get loans in. .
Mr. Gesell. Are you loaning in Utah now?
Mr. Rogers. No; we are not.
Mr. Gesell. Why not?
Mr. Rogers. Because of volume again.
Mr. Gesell. Inability to place your money in a volume which leads
to efficient management, is tnat a good summary of it?
Mr. Rogers. That is true. The loans are small, and usually money
is quite available through local sources in Utah, in that area that
is desirable farm land. It is a beautifully. farmed area, most of it —
Senator King knows that — the northern part is beautifully farmed.
Mr. Gesell. Now, let's take some of the southeastern States, such
as North and South Carolina, Alabama, and Georgia. You are
loaning less in those States, are you not?
Mr. Rogers. Yes.
Mr. Gesell. What is the reason there?
Mr. Rogers. There are two main reasons. South Carolina and
Georgia and south Alabama coastal plains areas are areas of
rather low land values. The loans there average small in size. The
Farm Credit Administration will make loans in that area at, I
believe, 4 percent interest. To make a group of loans that would
average two thousand to three thousand dollars in size and obtain
a rat« of interest that would enable you to service those loans and
CONCENTilATION OF ECONOMIC POWER 14957
have a fair margin of return left is very difl&cult. The minute you
go into an area with a higher rate than somebody else makes, you
are going to ta.ke the second type of loans. The one with the low
rate is going to get the better type. We can go into Illinois where
loans average $10,000 in size and we can compete with the Federal
land banks today, but to go into North Carolina, for instance, with
any volume and make an average loan of $2,500 — you can't service a
$2,500 loan for less than $25 a year, and then you have to have a
very high-type class of loan.
The Chaibman. In other words, the small loan doesn't lend "itself
to efficient management?
Mr. Rogers. No; not when they are univers3,lly small. If you had
a small loan in Illinois— of which we have a great many, but they
are in with a large number which gives you an average size — then you
can service them.
The Chairman. What is the size of loan that appeals to your expe-
rience as being the most profitable and most easily handled from the
point of view of the lender?
Mr. Rogers. I would say six thousand to eight thousand dollars
average. That would be the average in the portfolio— six thousand
to eight thousand dollars.
The Chairman. Would it be correct to say that you are not particu-
larly anxious to get the other loans unless they are in an area where
they can be serviced easily?
Mr. Rogers.. That is true. If it is a $20,000 farm and a man wants
a $2,000 loan, you don't hesitate to make it by any means in an area
where you probably have $10,000 loans on similar farms, and that d8es
occur.
Mr. Gesell. Now, Mr. Rogers, may I ask you this side of it :«^re
there areas in the United States where you think the areas are of recog-
nized worth from the point of view of the company where it might
loan in which you have not loaned ?
Mr. Rogers. Indeed, I do.
Mr. Gesell. Now, in a general way — ^I don't want you to give away
«.ny trade secrets — but, in general, what States do those loans rest in?
Mr. Rogers. One of the finest agricultural areas of America is in
the Lancaster, Pa., community.
Mr. Gesell. Have you loaned there?
Mr. Rogers. No.
Mr. Gesell. Why not?
Mr. Rogers. The fellows there lend to each other. You haven't a
chance and if an outsider goes in he takes what is left.
Senator King. They have a great many rather wealthy agricul-
turists there.
Mr. Rogers. Yes ; th^j do.
Senator King. Especially among the Pennsylvania Dutch, so-called.
Mr. Rogers. That is right.
Senator King. They are great farmers and thrifty and energetic
and saving, and they can loan to themselves if they need to.
Mr. Rogers. And they take the attitude of helpfulness. Their local
organizations will help each other. I investigated the area and I
decided definitely there was no place for us.
Mr. Gesell. I take it you aren't coJTOiplaining about it.
124491 — 41— pt. 28 18
14958 CONCENTRATION OF ECONOMIC POWER
Mr. Rogers. No ; not in the least.
Mr. Gesell. What about some other areas where the local folk aren't
quite so cooperative ? What about Texas ? I notice you don't loan in
Texas and I have always thought Texas had some pretty good farms.
Mr. Rogers. Texas has some very excellent land. Texas is a little
bit peculiar unto itself in this respect — that there is the black lands of
Texas, some of the most fertile land in Texas ; then they have a large
area which also is an excellent area. It is a deeded-land area where
the loan probably would run low per acre, but nevertheless the sheep-
and-cattle industry is a very sound industry on those cheaper lands.
Mr. Gesell. Table 167 indicates that you haven't had loans in
that State.^ What is the reason?
Mr. Rogers. We have been trying for 2 years to find a satisfactory
basis to go into the State, but, as I say, unless you have a $5,000,000
volume of loaned money, how long is it goin^ to take you to build a
$5,000,000 volume? That is the question with us, as far as Texas
is concerned.
Mr. Gesell. In other words, then, as a fellow gets to be a bigger
and bigger farmer he has got to find areas in which he can put
larger lumps of money to make it successful from his point of view ?
Mr. Rogers. Yes; it is really a unit of operation. You have a
manager, regardless of what the territory is, you have the manager's
salary and office, and the clerical staff and the appraisal staff. When
you are meeting the Federal land bank today with a Si^-percent
rate, and you are going in to take only the first-class type of loan,
you can allow about a quarter to a half of 1 percent for servicing
and for obtaining the loans. You couldn't help but go in with a
substantial loss, and it might continue for quite some period.
The other possibility is through a correspondent arrangement, but
the correspondent also looks at the same thing. He has to have a
volume to support him.
Mr. 'Gesell. Now, there are a lot of other States here shown on
167 in which we have loans.^ I notice my home State, for example ;
we have some pretty good farms Up in northern Connecticut. Is it
again a question of volume there ?
Mr. Rogers. It is again a question of volume.
Mr, Gesell. Is that true in practically all the New England
States, where you have not loaned, like New Hampshire, Maine, and
Connecticut, and Vermont ?
Mr. Rogers. I think I can answer that by a little illustration.
The story is often told of a Kansas farmer who went into the New
England States for a visit and was at a railroad station in Vermont
when a Vermont farmer came up with a load of milk. They struck
up a conversation. The Kansas farmer said, "Why don't you sell
your farm and come out to Kansas, where the furrows are a mile
long and it is easy to run a tractor, and so on, as against farming
in the stony land you have up here?"
The Vermont farmer answered and said, "Well, that may be all
right, but you fellows out in Kansas don't pay the interest upon
my mortgages very promptly."
The facts are that mortgages made in the Midwest area and in
the Southwest particularly were for years sold to individuals and
^ See Hearings, Part 10-A, p. 167.
» Ibid.
CONCENTRATION OF ECONOMIC POWER 14959
to savings banks in the New England States. It was a sort of sur-
plus fund. Therefore, for an insurance company to attempt to go
into an area like that would be futile. Your expense would be fa^
in excess of anything that you would get.
Mr. Henderson. Mr. Kogers, are there any States that have insur-
ance laws which require a certain proportion of the income from
policy loans to be invested in farm lands?
Mr. Rogers. You are referring, I think, to the Robinson law of
Texas, but I don't think that the way you have stated it is quite the
way the law provides, but I don't believe I could do any better, Mr.
Henderson. But there is some restriction in Texas, and that has been
modified from time to time. There was a time when some of the
companies questioned going into the State, but I am not familiar with
that detail.
Mr. Henderson. Are there any other States that have that as far
as farm mortgage investments go?
Mr. Rogers. Not that I know of.
Mr. Henderson. It is more typical of types of investments other
than farm mortgages.
Mr. Rogers. I would have to limit myself to farm mortgages be-
cause I do not know.
Mr. Hayes. Mr. Rogers, I notice you have fairly substantial hold-
ings in the State of Washington. Table 170 shows $1,593,000.1 Will
you give the reasons for the investments there in such large amounts
as against your pulling out of Oregon and the California neighbor-
hood?
Mr. Rogers. Mr. Gesell has a map there that will show you whdre
that very fertile, rich country is located. It is Walla Walla, Pendle-
ton, and so on. That area is a very high-priced land area. It is
very productive. It is very odd in its contour. It is a very high roll-
ing country, but it produces wheat at 40 bushels per acre in won-
derful shape. That area is very unusual in itself. Land values are
high. Farms run rather large, and it has been an excellent country.
It has suffered a little from the matter of restriction of the export
ef wheat, as it used to ship its wheat west, and when it struck the
proposition of having to send wheat east with a high freight rate
and long railroad haul, that country had some difficulty.
For illustration, we sold a single farm there very recently, for
$94,500, with $50,000 cash. It is a wealthy country normally.
Mr. Hates. One further bit of curiosity. I was wondering why
you have only one mortgage in New York State ?
Mr. Rogers. Well, that is quite a joke with us in New York. That
mortgage stands on the books of the company at $800. [Laughter.]
Mr. Henderson. Why don't you loan in New York?
Mr. Rogers. The same reason as New England. There is very little
outlet. An old country. With one third of the population in the
Northeast, with surplus funds for lending, makes it difficult to make
loans under such conditions.
Until, I think, the depression of 1932, there were relatively very
few loans.
The^HAiRMAN. In other words, you are telling us, Mr. Rogers, that
in New England and in New York, and that general area, the people
I See Hearings, Part 10-A, p. 170.
14960 CONCENTRATION OF ECONOMIC POWER
themselves have sufficient money to sustain whatever loaning program
is necessary?
Mr. Rogers. That is right.
The Chairman. And institutional loans are not required there?
Mr. Rogers. No ; they are not required.
The Chairman. We would probably find that the Farm Credit
Administration doesn't operate there as it does in other parts of the
country. Is that true?
Mr. Rogers. I think you would find that the Federal Land Bank
of Springfield is among the smaller banks. Probably it has grown
some since the depression, but if you were to go back prior to that
time I think you would find that the Farm Credit Admmistration is
not very active in that territory, and they came down quite a way,
I think.
Senator King. Domestic capital was available? Local companies?
Mr. Rogers. Yes; an area of surplus funds. Savings banks — you
will find a great many farms owned by savings banks in Vermont and
New Hampshire, and I think probably in Maine.
The Chairman. You say you will find a great many farms owned
by those banks?
Mr. Rogers. Middle-western farms, because they were sold mort-
gages by middle- western companies. They had to have an outlet for
their funds.
The Chairman. And if we had a study made of the savings banks'
investment in farms, is it your opinion that we would find substantially
the same condition that has been revealed here, with respect to the
increasing ownership of farms by the lender ?
Mr. Rogers. I think you would find the ownership of more farms in
New England savings banks at this time than has been the case prior
to the depression, but to what extent. Senator, I would be unable to
say.
Mr. *Ge8ell. Are there some areas in the country which need farm
mortgages in which you do not lend ? I mean States where the farm-
ing community would like to have funds but you don't feel you should
go in, for quite proper reasons I can see, with respect to securities and
your adequacy in handling the problem ?
Mr. Rogers. I would say the F. C. A. reaches into every nook and
corner of the country, and when the Federal land banks make money
available at 4 percent and 3i/^ percent interest on $1,000 and $2,000
loans, that reasonable credit is being carried to every agricultural
portion of this Nation.
Mr. Gesell. There is no community that you feel is in need of your
funds?
Mr. Rogers. In need of ours?
Mr. Gesell. Yes.
Mr. Rogers. Not necessarily ; no. There are communities in which
we desire to have our funds, however.
Mr. Gesell. Yes ; but I mean communities where you are not lending
where you feel there is need for your funds ?
Mr. Rogers. No; I should say that is right.
Senator King. Perhaps it is not relevant, but have you ascertained
the amount of loans made upon real estate, urban and suburban prop-
erty, including farms, in the United States ?
CONCENTRATION OF ECONOMIC POWER 14961
Mr. Rogers. No; I do not know, Senator. I could give you the
estimate made of the farm-mortgage debt for the United States,
which is $7,000,000,000.
Senator King. Would the study which you made enable you to
form any opinion as to the value of the property which is mortgaged
to the extent of 7 billion plus?
Mr. Rogers. No; I would not know that. I would say that the
estimate of the value of farms today is slightly over $34,000,000,000.
Therefore, the total mortgage debt is about 20 percent of the esti-
mated value of farm real estate.
Senator King. Have you any figures showing the number of farms
that are free from obligations?
Mr. Rogers. It is reported that approximately 62 percent of all
farms of the United States are free of mortgages.
Mr. Gesell. Are you able to loan as much money on farms as you
want to loan?
Mr. Rogers. No ; not now.
Mr. Gesell. Do you have some kind of budget or kitty at the be-
ginning of the year of how much money you want to get out on the
farms ?
Mr. Rogers. No ; we haven't.
Mr. Gesell. The board of directors doesn't set aside any portion of
funds and say, "Here is the money you should get out on the farms
if you are able to do it with satisfactory security"?
Mr. Rogers. No ; they usually say, "With our cash position, can you
get out more ?
Mr. Gesell. Have you any idea of what proportion of that cash
position would be allocated to your particular department to get out ?
Mr. Rogers. No.
Mr. Gesell. If it were to be brought down to the amount that
the management feels it should be in the interest of safety?
Mr. Rogers. No; you see my department is unique. You men-
tioned our being the largest landholder, and our landholdings are
r . y 1.7 percent of the company's assets.
Mr. Gesell. Yes, I realize that ; and the whole farm investment is
only around 5 percent, isn't it?
Mr. Rogers. I think less than 33/2 percent.
Mr. Gesell. So you would like to get. out moi-e money in your
farms than you are able to get?
Mr. Rogers. Yes; we would.
The Chairman. You spoke a minute ago of the extent of the Farm
Credit Administration activities reaching every nook and cranny of
the country, as I think you said.
Mr. Rogers. Yes.
The Chairman. At the same time, we have the picture of life
insurance companies operating in some areas and not in others and of
withdrawal from some areas. If the Farm Credit Administration
were not operating, what would the source of credit be for farmers
in the areas from which you have withdrawn ?
Mr. Rogers. Well, that, of course, is very difficult, because the Farm
Credit Administration has existed for over 20 years— that is, the Fed-
eral land banks. Prior to the existence of the Federal land banks, in-
dividuals and insurance companies were the two types of institutions.
14962 CONCENTRATION OF ECONOMIC POWER
along with commercial banks, and savings banks, that held the larw
part of the mortgage debt. You will notice today, after the depres-
sion, after a really complete upset of the whole economic structure of
farmmg, that individuals and commercial banks hold 50 percent of
the mortgages today. They are larger lenders than the Federal land
bank itself. ^
The Chairman. Did the app>earance of the Federal credit system
have anything to do with the withdrawal of life insurance companies
from the farm-mortgage field in any areas from which there was with-
drawal ?
Mr. EoGERS. I would say that in recent years, with a very low rate
after the subsidized rate, that might have an effect. Prior to that time,
there was not much difference between the rates.
The Chairman. The subsidized rate, of course, was a result of the
depression.
Mr. KoGERs. Yes.
The Chairman. And was the desire on the part of the Congress to
help keep the people on the land, I suppose. Well then, would you
say that the rise of the Farm Credit Administration activity and the
change in the aspect of vour farm portfolio was the result of the farm
prgblem, the farm condition ?
Mr. Rogers. I would say, to some degree as a result of farm prob-
lems, but, you see, our peculiar position is that we started lending on
farms just about the time the Farm Credit Administration started.
The Chairman. I see. Well, now, you spoke of a minimum of
$5,000,000 in the State of Texas as being a necessary minimum, you
couldn't operate at a profit with a smaller account than that. I under-
stood that was your explanation for not operating in Texas. Now, is
that the minimum for all areas, or would you change your minimum
according to the area ?
Mr. Rogers. No; that would be the minimum that I would say in
which we could maintain an organization to satisfactorily solicit and
service farm loans.
The Chairman. In how many places in the country do you have
such organizations?
Mr, Rogers. You mean organizations of our own branch offices ?
The Chairman. That is right.
Mr. Rogers. Our Fort Dodge office has about twelve to fourteen
million dollars of Iowa loans it services. Our Cedar Rapids office
has about four or five million. We are building thai: from scratch.
Our Illinois branch office has eight million. Our Minnesota branch
office has upward of three to four million, with a group of farms
to service of some five million. Of course, that makes your volume
come up as well. ■ Indiana, I can't say offhand. I. think we have now
reached close to five million. For instance, in Nashville, Tenn., we
extended the territory of the branch office to take in a larger volume.
We go into Kentucky from Nashville, Tenn. We go into Alabama
and through that method we enlarge the scope of an organization.
That is the basis.
The Chairman. How many organizations of this kind do you have?
Mr. Rogers. I think it is 10.
The Chairman. You have 10 in the United States?
CONCENTRATION OF ECONOMIC POWER 14963
Mr. KoGERS. Yes.
The Chairman. Would it not be possible for you to operate through
correspondents in areas in which you do not have a branch office and
probably operate with a smaller volume?
Mr. Rogers. If a satisfactory correspondent could be found. You
see, the correspondent system largely failed because of the cost of
servicing. When the depression came in 1930 or 1931 and from there
on, it failed and it dropped to very low in 1932. They had guaran-
teed to service the loans they had sold during the life of those loans.
Mr. Gesell. Those must have been terrific guarantees as compared
to what their financial standing was.
Mr. Rogers. Well, yes ; they attempted to service and a great many
of them stopped the business because they couldn't go on. Every
one, and especially those particular types of brokers, lelt that condi-
tions were only temporary, that they would return and that it would
return to a profitable basis, but of course the foreclosure record simply
dispelled that.
The Chairman. Do you wish to leave the inference that you found
it desirable to abandon the correspondent system and to adopt the
branch-office organization, the branch-office system?
Mr. Rogers. Not necessarily. When you take your management —
I found it necessary to take the management into our own organiza-
tion— when you have purchase money mortgages and contracts you
really get right into the investment field, and if you have a corre-
spondent in that same section, you have two organizations in there
doing the same job.
The Chairman. Does the farm-management phase of the business
operate out of the branch office as well as the lending phase ?
Mr. Rogers. Yes; they operate out of it. The branch office would
have the two separate managers.
The Chairman. Yes; I would imagine that.
Mr. Rogers. I think there are some charts here that might help
you a little bit on that situation.
Senator King. For my own information, while the charts are
being examined, perhaps the question I am about to ask was consid-
ered by Mr. Wall yesterday — from 1936, as I read this table, the
Federal land bank had mortgages nearly as great as the insurance
companies and the commercial banks.
Mr. Rogers. What year was that. Senator ?
Senator King. 1936. I was wondering, it you assume that table is
correct — and I assume it is — if that proportion would still exist;
that is to say that the Federal land banks loaned practically 50
percent of all of the loans made to farmers.
Mr. Rogers. Senator, you s"-^. that brings us into the Emergency
Farm Mortgage Act. Now, we go back prior to the Emergency Farm
Mortgage Act, and we had this situation : The Federal land banks had,
I think, $1,100,000,000. They had approximately 12 percent of the
mortgage debt. The insurance companies had approximately 23
percent of the mortgage debt. At the passing of the Emergency
Farm Mortgage Act, the Federal land banks made 10 percent of the
14964 CONCENTRATION OF ECONOMIC POWER
mortgages of the United States — that is, refinanced 10 percent of the
entire (or close to that figure) farm-mortgage debt in 1 year. You
see, $730,000j000— I think they followed the next year with $248,000,-
000— and it is that emergency financing which gave the Federal land
bank a large percentage.
The CHAibMAN. This chart which you had distributed to members
of the committee is a very interesting one, and I think it would be
illuminating if you would discuss it briefly.^ I observe that from
1918 to 1926, inclusive, when farm values were above 120 percent
upon a 1912 or 1914 basis, 80 percent of 10,000 farm loans which were
afterward foreclosed by Metropolitan were made.
Mr. RoGEORS. Yes.
The Chairman. And that these foreclosures of farms, at least of
8,000 of them, took place during the years 1931 to 1936, inclusive,
when farm values had dropped well below 90 percent, on the same
basis.
Mr. Rogers. Yes, Senator; if you will observe^ the gradual de-
crease in land values, you will observe that the farm prices, that is,
the prices farmers paid and received, were well above the 1910-14
base level, that we didn't have many foreclosures. When you hit that
1929 crash, which was really a double crash as far as farmers were
concerned — they had a set-back in '20 and '21 and '22, and our fore-
closures were not great, but when we come to this second place where
the prices that farmers received went way below the 1910-^4 level,
then we had tremendous foreclosures.
The Chairman. Now, it is very noticeable from this chart that
the prices which the farmers received began to drop in 1929. There
was a precipitous fall to a low level in 1933, and from there on the
prices which the farmers received rose rather rapidly until in the
latter part of 1934, the base line 100 percent, was exceeded, and
the farmers continued to receive more than the 1912-14 averaare until
late in 1937.
Mr. Rogers. Yes.
The Chairman. But while the prices were going up for the farmers,
during the years 1933 to 1936, during those same years, the fore-
closures were continuing?
Mr. Rogers. Yes. Now, that is the thing that Dr. Murray spoke
about a little yesterday. I have a chart that will show you why
that was.
The Chairman. Before you offer thaib other chart, I wonder if you
wouldn't describe this a little bit more so we will have the story on
one chart.
Mr. Rogers. Senator, that trouble, or that rise in prices, was due
to the fact that a severe drought struck the Middle West area, some
of the finest lands in the country, in 1934, '35, and* '36, and as a result
com went to $1 a bushel, and the areas which were fortunate enough
to have crops ^ere receiving excellent income.
The Chairman. Of course, if Secretary Wallace had a representa-
tive on this committee, he would want to have something to say to
that. Perhaps the Department of Agriculture had some credit for
the increase in prices.
1 See "Exhibit No. 2292," infra, p. 14965.
» Ibid.
CONCENTRATION OF ECONOMIC POWER
14965
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14966 CONCENTRATION OF ECONOMIC POWER
Mr. Rogers. Yes; they probably did.
Senator King. They controlled the weather, probably.
Mr. Hendebson. It is a fact that, independent of the reasons, there
have been those periods in which the two lines, the prices paid by the
farmers, and the prices received by the farmers, were tendmg to come
together, and where you were getting an equilibrium.
Mr. Rogers. The chart seems very definitely to show that.
Mr. Hendekson. I am glad you brought it up, because I have a
personal interest in this. I was attacked as a theorist for suggesting
it some years ago.
The Chairman. I thought you were going to suggest you had a
farm somewhere.
Mr. Henderson. Mr. Chairman, I have two farms somewhere.
Senator King. You are a capitalist; you don't belong here.
Mr. Rogers. I would like to have you take these maps
Mr. Henderson (interposing). Mr. Chairman, the Senator can
have either one of those farms at a considerable discount.
Mr. Gesell. May I suggest in the interest of orderly procedure
that we introduce this first chart before we go to the second.
The Chairman. Mr. Gesell, you have taken the words out of my
mouth.
May I ask with respect to the first chart, what is the source of the
figures from which the computation was made upon which the lines
Mere drawn ?^
Mr. Rogers. They are Department of Agriculture figures, except-
ing our own statement. I thought this area would show very clearly
that this farm-mortgage trouble arose in this area here.
The Chairman. Yes; but with respect to the figures themselves,
the base 1910-14 average for prices paid by the farmers, that line is
calculated upon Department of Agriculture figures-?
Mr. Rogers. Yes.
Mr. Gesell. It is really the same chart we put in yesterday, Sen-
ator.2
The Chairman. I didn't see it. It wasn't put in yesterday when
I was here.
Mr. Rogers. It is about the same, only that the prices or gross
income received by the farmers was on this figure instead of this
ratio relationship between prices received and prices paid.
The Chairman. Yes.
Mr. Rogers. I have lined the prices received and prices paid as a
comparison, and the one thing further before we leave this chart
which would accentuate this picture — you see, where the land-value
line drops across the 1910 line, the Metropolitan foreclosed approxi-
mately 10,000 farms. I think the real-estate number is 9,934 today,
and we have some 100 loans in foreclosure.
But 9,825 were made prior to 1929 — 175 were made in 1930 and
1931, and then we own the one farm that was the result of a mortgage
made since 1932 out of some $25,000,000 loaned.
Our experience so bears out the economic effects of agriculture,
that to have the portfolio of an institution simply follow your eco-
nomic chart I thought would be an interesting thing to bring out.
1 See "Exhibit Slo. 2292," supra, p. 14965.
2 See "Exhlbjt No, 2271," supra, p. 14862,
Exhibit No. 2293
[Prepared by The Metropolitan Life Insurance Company]
1935 DROUGHT
'934 1935 1936 1937 1938 1939
NOBMAL »40.8I4.624 $43,491,014 " $44,347.4eO |4I,134,096 »3«l2»i2a4 »34,I0M77
pnOOGMT »3M63.2eS |3S,8»4,9^^ $41,433^28 $44,931,»7e 147.807.327 $49,eM,ISe
124491—40 (Face p. 14967) N«. 1
■« 4
Exhibit No. 2293-A
[Prepared by The Metropolitan Life Insurance Company]
1936 DROUGHT
•935 1936 1937 1938 1939
_»iJit »40.e,-.«4 »4J,«,.0,« »4O4r,480 »4U34.0»» » 3«M^M $34,,02.«T7
«OyC«r ,3,,„„,. ,3„„.,„ »4,.43,.4a» ,44.,3,..7. »47.,07.3a7 ,4,.«.,,«
124491—40 (Face p. 14967) No.
ISzHiBiT Na 2293-B
(PrepEired by The Metropolitan Life Insuranoe Company]
124491—40 (Pace p. 14967) No. 3
CONCENTRATION OF ECONOMIC POWER 14967
The Chairman. It is very interesting. Let's give this exhibit a
number.
"Exhibit No. 2292," prepared by the Metropolitan Life Insurance
Co., may be admitted.
(The chart referred to was marked "Exhibit No. 2292" and appears
on p. 14965.)
Mr. Gesell. Can we submit at this time also, Senator, the map of
the United States which has just been offered with the legends on
it?
The Chairman. By whom was this prepared?
Mr. Gesell. Mr. Rogers prepared these.
Mr. Rogers. Here are two more, the rise of commodity prices and
paralleling it is one of the things that makes the Metropolitan the
largest farmer in the United States.
The Chapman. This chart may also be admitted as an exhibit, also
prepared by the Metropolitan.
(The maps referred to were marked "Exhibits Nos. 2293, 2293-A,
and 2293-B and appear facing p. 14967.)
Mr. Henderson. You followed my line of questioning Mr. Murray
yesterday, I guess?
Mr. Rooiais. Yes.
Mr, Henderson. And I asked him rather facetiously who was go-
ing to bail out the Government so far as its mortgages were con-
cerned. It isn't such a facetious question when you get down to it.
I asked him later, you probably remember, if the only way in which
the farm mortgage debt could be paid is the same way any credit
extension can be paid, that is, over a period of time, out of the net
income.
Mr. Rogers. Yes, you are exactly right.
Mr. Henderson. Th^t is, j^^our larm debt assumes its proportions,
either large or small, in relation to the ability of the farmer to make
a living and to have s<imething in excess ?
Mr. Rogers. That is correct, Mr. Henderson.
Mr. Henderson. Sq you are inextricably tied up with the welfare
of the farmers?
Mr. Rogers. Yes, your farms must pay for themselves, there is no
other way out of it. The farms must bail themselves out. If farms
are carried b^ some individual at a price in excess of what they are
justified, he is doing nothing but fooling himself.
The Chahiman. Now, of course, it probably should A)e pointed out
with respect to this latest chart that you have presented, the map of
the United States, that this reflects only your experience.^
Mr. Rogers. Yes, it reflects only our experience, but I think. Sen-
ator
TherCHAiRMAN (interposing). For example, the drought area as
set forth on this map is only that portion of the drought area in
which you are operatmg?
Mr. Rogers. Yes.
The Chairman. It does not include those States nor does it under-
take to reflect the condition in: those States in which you did not
operate ?
1 "Exhibit No. 2293-B," infra, facing p. 14967.
14968 CONCENTRATION OF ECONOMIC POWER
Mr. BoGERS. No. Again I was endeavoring to show the effects
of the 3 drought years following the 2 bad economic years which
meant 5 years of failure precipitated on a very fine agricultural area,
the results that would be experienced.
The Chairman. This chart very eloquently points out that in those
areas in which the drought was not effective, didn't exist, the rate of
flow of foreclosures dropped sharply.
Mr. Rogers. Yes.
The Chairman. And that it was only in the drought areas that
you were having your greatest difficulty and were compelled to fore-
close.
Mr. Rogers. Yes.
The Chairman. In other words, during this period from 1934 to
1939, in those area^ where normally they existed, the farmer was in
a much better position and he was tending to prosper rather than
the reverse.
Mr. Rogers. Yes, and effects you see now after 2 years of good
crops — that drought area hasn't fully recovered itself. Our peaK of
ownership in that area was in December '39.
Another interesting observation : We sold $2,400,000 of land in that
yellow area, within the red lines, this year. In the 5 years, 1931-36,
inclusive, we sold $1,600,000 in the full 5 years.
The Chairman. Then you did not withdraw from the drought area.
Mr. Rogers. No, that is a splendid farm area. Instead, we were
inclined to go to the assistance of those people in such ways as we
could.
Now, that brings us straight on to our farm rehabilitation program
or farm management.
Mr. Gesell. May I suggest we go along back on this line of exami-
nation a little? I have down here "farm rehabilitation program" on
page 4 of my outline and I am on page 2, and there is quite a bit I
think we ought to go into before we go much further with that.
Unless the committee wishes Mr. Rogers can go over the general
discussion, and we can come back to it specifically later on.
The Chairman. We don't desire to interrupt the orderly progress
of your examination.
Mr. Hayes. May I have one question on this chart before you pro-
ceed?
Mr. Rogers, I would like to have your opinion on one fact that the
first chart brings out rather sharply.^ You will note that the prices
received by farmers took, as the chairman said, a precipitous drop
from late 1929 to 1933. The drop was some 90 points as indicated on
your chart.. The prices paid by farmers took also a large drop, but
not quite so large.
Mr. Rogers. Yes.
Mr. Hayes. Whereas the value of land per acre had the least drop
of all. Then, when prices dropped, though both prices received and
prices paid revived rather substantially, the value per acre revived
very, very slightly.
Mr. Rogers. Yes.
Mr. Hayes. Do you have any particular opinion as to the reason for
that?
See "Exhibit No. 2292," supra, p. 14965.
CONCENTRATION OF ECONOMIC POWER 14969
Mr. Rogers. I have a chart that will demonstrate that for you if
you would like to have it and there it is.^ I anticipated that question.
I think these are simply roughly prepared for the purpose of illustra-
tion only.
To answer your question, you will notice the red line is that drought
area. It was always the higher-priced land per acre, and it was higher
in 1910 than the other area, and of course it was much higher in 1920,
but for the first time in a period of 30 years the two lines have crossed.
And then take your map. Foreclosures continued in that area, do
you see? They were in economic distress for 5 years, although the
price of corn went to $1 a bushel, the Illinois farmer was bailing him-
self out and the Nebraska farmer was probably paying $1 a bushel to
support a small herd of cattle to continue him through.
The Chairman. This again reflects the drought?
Mr. Rogers. Yes. I think that it is very interesting that that fine
land, which had been for so many years the highest-priced land
area — that the two lines have crossed.
The Chairman. Yes; that is a very significant thing, it seems to
me.
Mr. Rogers. It was an unusual combination, of circumstances.
Two years of those very low prices, and then followed by 3 years
of drought, you see, meant 5 poor years in a fine agricultural area.
The Chairman. If you have no objection we will enter this in
the record.
(The chart referred to was marked "Exhibit No. 2294" and appears
on p. 14970.)
Mr. Gesell. Mr. Rogers, coming back to the farm mortgages in
your portfolio, are your interest rates on those mortgages different
by States or localities?
Mr. Rogers. To some degree.
Mr. Gesell. Give us some idea of the difference, will you ?
Mr. Rogers. The Midwest area has always been the lower-rate area.
Mr. Gesell. What do you loan at there now ?
Mr. Rogers. We are lending at 4 percent interest, and we are
paying on a 10-year loan. The broker who turns the loan to us gets
1 percent of the face of that loan. That is getting down pretty low.
Mr. Gesell. What do you mean — pretty low from your point of
view?
Mr. Rogers. Yes; from our point of view.
Mr. Gesell. What do you loan for .in the South, for example?
Mr. Rogers. We lend at from 4 to 5 percent. The areas vary a
trifle. '
Mr. Gesell. And what region do you loan at the highest interest
rate?
Mr. Rogers. In the Memphis territory.
Mr. Gesell. What is the rate there ?
Mr. Rogers. Five percent.
Mr. Gesell. May I ask you whether your rates of interest differ
depending en the size of the mortgage ?
Mr. Rogers. No.
Mr. Gesell. That is the same all the way ?
1 See "Exhibit No. 2294," infra, p. 14970.
14970 CONCENTRATION OF ECONOMIC POWER
Mr. Rogers. Yes. I always say when you begin to classify your
mortgages you are admitting a second-class mortgage, if you ^re going
to take one at a higher rate. I think we, with our policyholders of
small means, should confine ourselves to the very best.
Representative Williams. Right in that connection, what, is your
minimum? Have you a minimum below which you*will not go, in
amount I mean?
Mr, Rogers. No ; we do this ; we say when a loan goes below $2,000
that because of the cost of the servicing a man should pay one-half of
1 percent more per annum, but we do not stick rigidly to that rule, as
we have mortgages, as we have said, as low as $600, as low as $500. In
that connection, in some foreign countries the rate is one thing and
Exhibit No. 2294
[Prepared by The Metropolitan Life Insurance Company]
ACTUAL FARM LAND VALUES PER ACRE
MISSOURI VALLEY AREA VERSUS NORMAL AREA
/,
V \
//
\:^
^^MISSOURI
GALLEY AREA
/
;/
NORMAL AREA
\
^^^
^
e
—
hb «cas SMom to oa. 3i . «»
HXUU.
iy3l/3* - t«0,8l4.«4
IV31/3S - *3,«1.0I«
l?/Jl/36- 4«.3«7,4«0
\Vi\m - «1. 134.097
IV31/M - X.B^.»
13/31/30 - 3*, 102,677
•34 - U?.9«3,2«
•38 - 47.e07.3J7
■J» • 49.6SB.19S
1
l«35'36*37'38'39
tSTIMATEO
the servicing cost is added on. That is, the mortgage states so much
interest rate and so much annual payment for servicing, but that has
never been a custom here.
Representative Williams. What is the range of your maturities ?
Mr. Rogers. We take the attitude that the farmer should say. One
man may wish a 10-year loan ; another man may wish a 20-year loan ;
another may wish a 25-year loan. A man may have income from an
estate, or he may have a farm that he is going to dispose of, and he may
wish a 5-)^ ear loan. We let the farmer tell us what type of loai. he
wishes and we endeavor to do our best to meet his needs.
Mr, Gesell. Where do your needs and his wishes clash ?
Mr. Rogers. There isn't really much reason for clash, unless he
should want something like a 50-year loan, or something of that kind.
CONCENTRATION OF ECONOMIC POWER 14971
Kepresentative Wiixiams. To what extremes do you go, from 1 year
to 20, or 1 year to 30, 35?
Mr. Rogers. We go up to 26 years, for the reason that on an amor-
tized basis, to make a loan on an amortized basis, you can get to the
point where the principal balances left is $300 or $500. We try not to
get below a mimmum of from one thousand to $500 at the end of the
term. You understand what I mean. Congressman Williams? And
26 years has to date been our custom. We have some mortgages on an
amortized basis that have been made for 34 and 35 years.
Mr. Gesell. How many of your mortgages now would you say are
secured by land which is not 50 percent of the mortgage but more ? In
other words, you said you would loail on land up to 50 percent of the
value?
Mr. Rogers. You mean how many renewals and workout cases that
we have worked along with that are now in excess of 50 percent?
Mr. Gesell. Would your renewal and workout cases include all such
mortgages, or would you have other mortgages on your books where
the land value was greater than 50 percent of the mortgage ?
Mr. Rogers. Not any other than the ones that were made prior to,
let us say, 1932, where borrowers had not been able to reduce them,
but we aim to have a 2 percent or 3 percent amortization each year,
and the mortgages that have lived through this depression are a
pretty sound group of mortgages.
(Senator King assumed the chair.)
Mr. Gesell. There are many in that group, then, where the land
values now in your opinion are greater than 50 percent of the value ?
Mr. Rogers. There are somej yes.
Mr. Gesell. I was wondering how many there were?
Mr. Rogers. I wouldn't be able to say.
Mr. Gesell. Can you tell us how much of your portfolio is rep-
resented by recast mortgages at the present time ?
Mr. Rogers. That is renewals ahd loans that have been with us
for years?
Mr. Gesell. Yes; where the terms of the mortgage have been
changed, making new mortgages.
Mr. Rogers. I would say that $45,000,000 — now that is an estimate,
but about $45,000,000 are the mortgages that have been renewed.
Mr. Gesell. How many of your mortgages would you say are
purchase-money mortgages ?
Mr. Rogers. I cannot say. Had I known that you were going to
request that figure I could have had it.
Mr. Gesell. Can you give us any estimate of that ?
Mr. Rogers. I wouldn't attempt to give you an estimate. It may
be in that book; I am not sure. Very few of our purchase-money
mortgages are in excess of ^0 percent.
Mr. Gesell. How does that happen? You mean because you
asked for such a large original cash payment on the sale of the
property ?
Mr. Rogers. No; we carry the sale on contract. We endeavor to
carry the ;property sold on contract until 50 percent of the purchase
price is paid.
Mr. Gesell. Then you take your purchase-money mortgage ?
14972 CONCENTRATION OF ECONOMIC POWER
Mr. RoGints. Yes. We hfl,ve some farmers — the thing in working
with farm people is to work with them as nearly as you can, the way
they wish to handle things. We have some farmers who don't want
a mortgage; they want a contract. We have some contracts that
are paid down to where there is no balance left, that iSj no. balance
of book value. Let us take a farm that sold at a profit of $1,000,
or $5,000 book value, and sold at $6,000. A man pays; we carry that
on contract or on the books only at the balance of the original book
value. For instance, if he paid down $1,000 we would reduce the
book value from $5,000 to $4,000, but the farmer would owe $5,000.
If he got down to the point where he had paid $5,000 in cash and we
still held the contract, we would have no book value, yet we would
have $1,000 balance of A contract.
Mr. Gesell. How many cases of that kind are there ?
Mr. Rogers. There aren't many, but there are a few, because they
show the attitude of an individual farmer. That is .the thing I
wanted to bring out. You can't set down rules on such matters. It
makes no difference to us. We are rendering a service as well as
lending money and whether a loan is made for 10 years or a contract
sale is for 25 years, it means very little. It is a matter of book-
keeping.
Mr. Gesell. Does your company have any special reserves set
aside for mortgages that may turn sour?
Mr. Rogers. Not for mortgages; we have 25,000,000 set aside for
real estate, and I am very hopeful that the farm-loan division will
never call upon a dollar of that 25,000,000.
Mr. Gesell. But I am talking now about reserves as against bad
mortgages.
Mr. Rogers. No ; not as against bad mortgages, Mr. Gesell. There
is a surplus of over 300 million, as you kno\/.
Mr. Gesell. Yes; I know. We were talking about special ear-
marked funds. We get talking about surpluses and no matter what
question you raise, it is going to nip into that, and I wondered how
much was allocated.
Mr. Rogers. One table looked kind of bad to me and I figured out,
excluding foreclosures and moratoriums, today, 0.35 of 1 percent of
mortgages were in that particular category, and that would be four
one-thousandths percent of the assets.^
Mr. Gesell. What category is that?
Mr. Rogers. That is on one of the pages there.
Mr. Geseix. Tell us what page it is. I notice on table 174 that
20.6 percent of your mortgages were delinquent 3 months or more.
Mr. Rogers. That is the one I had reference to.
Mr. Gesell. What is wrong with that table!
Mr. Rogers. Well, the table included cases in foreclosure and cases
in moratorium. Now, of course, the 20 percent, that today is 10.8,
but to get to this 4.38 you have here; then you turn to the page on
the other side, the 4.38 figure, and you have in that category $3,111,000.
Mr. Ge^fll. I have lost you entirely. What page are you on ? ^
Mr. Rt njERS. Page 173.
Mr. '^i^sELL. Now, what is the 4.38 figure there?
- -.^e Hearings, Part 10-A, p. 174.
« Ibid., p. 173.
CONCENTRATION OF ECONOMIC POWER 14973
Mr. BooEBS. The 4.38 figure is on your next page, 174, the top of
the third last column.
Mr. Gesell. We are talking about the percentage of mortages de?
linquent 3 months or more ; it is 20.65 percent. What is wrong with
that figure ?
Mr. Rogers. Because it includes a lot of foreclosures and a lot of
moratoriums, which are in the hands of the courts and which the
company could have nothing to do with, as I say, another 4.38 percent
or more.
Acting Chairman E[i>fG. Three years or three months ?
Mr. EooERS. Three years. You see. Senator Kling, we^work with
these people when they are fair and reasonable. For instance, we
have in that group, there was one loan now, where the principal was
reduced from 20,000 to 7,000.
Mr. Gesell. Look here on page 172 of "Exhibit No. 2250." It
shows that you have 20.65 percent of your mortgages with interest
delinquent 3 months or more.
Mr. Rogers. Yes.
Mr. Gesell. Now, the Prudential, just below you, shows only 6.9
percent of its mortgages are delinquent. Isn't that some measure of
the degree of delinquency which.exists in those two companies.
Mr. Rogers. Turn to your next page, 173.^
Mr. Gesell. You mean the previous page ?
Mr. Rogers. Yes.
Mr. Gesell. And how much difference is there in amount? The
same two figures. You mean, if experienced in size of the mort^
ga^ account, in terms of dollar figures it isn't as big a discrepancy
as it appear* to be, expressed in percent ?
Mr. Rogers. No; because your trouble comes out of those mort-
gages made in your troubled period. The Prudential has more new
mortgages. You are comparmg an experience with new mortgages
against an experience with old mortgages.
Mr. Henixerson. I think you are comparing mortgages. The table
undertook to compare mortgages.
- Mr. Rogers. But that is the fact.
Acting Chairman King. Where you compare mortgages you may
take into account the period in which they are delinquent, even
though they are mortgages.
Mr. Gesell. What you are trying to say is that the Prudential
closes down on these things fast and hard as foreclosure, and you
people are very lenient, is that what you are trying to get at?
Mr. Rogers. No, sir; I am trying to say this: The Prudential had
the $2,916^000 in the same classification as we have $3,111,000, which
shows that both companies are working along with the old mort-
gages, trying to help them, and about on an equal basis.
Mr. Gesell. I know, but look at the difference in the account,
Mr. Rogers.
Mr. Rogers. But look at the difference in the increase.
Mr. Gesell. Now, just a minute. I asked you to look at the dif-
ference in the account. Let's do that first, and then we will look
at what you want me to look at. On 161,^ look at the difference
1 Ibid., p. 173.
» Ibid., p. 161.
124491t-41 — pt. 28 19
14974 CONCENTRATION OF ECONOMIC POWER
in accounts. The Prudential carried $167,000,000 as against your
70 million.
Mr. Rogers. Yes.
Mr. Gesell. Then this question of percentage begins to get im-
portant, doesn't it, if you are considering mortgages as a group of
mortgages ?
Mr. Rogers. Not at all. Turn to page 161.
Mr. Gesell. That is where I was.
Mr. Rogers. You see the Metropolitan with 196 million; you see
the Prudential in 1929 with 191 million. We are still working with
those people, both companies on about the same basis.
Mr. Gesell. Now, let me see. This is 3 months' delinquency.
Mr. Rogers. Very good.
Mr. Gesell. Now, you are going back 10 years to point out a simi-
larity in the point of size of your mortgage account. I can't follow
you on that.
Dr. LuBiN. May I suggest turning to 182, where we have a table
showing farm real estate owned, and despite the fact that the Pru-
dential has loaned so much more on mortgages, its total ownership
is only 48 million as compared to 86 million by Metropolitan.^ Does
that mean, in effect, the Metropolitan has been harder on the farmer
and taken over more real estate?
Mr. Rogers. To get that picture you have to turn to 184.^ You
can turn to the tables if you wish, but the real facts are that the
volume of loans made prior to 1929 are our trouble cases, regardless
of what company made them, and we are still working with those
cases, many of them. As I say, today, after the moratorium is out;
of the way, and after some foreclosures arc out of the way, the figures
are really infinitesimal; but the Prudential foreclosed, as you say,
105 million, and the Metropolitan foreclosed 99 million. Our experi-
ences are almost identical, due to conditions.
Dr. LuBiN. But you yourself pointed to 161 and showed that Pru-
dential had $167,000,000 worth of mortgages as opposed to your 70
million.^
Mr. Rogers. No, no ; 196 million.
Dr. LuBiN. But I am talking about 1938.
Mr. Gesell. We are talking about 3-month delinquencies in 1938,
Mr. Rogers. ;
Mr. Rogers. But what I say is, you are talking about new mortgages
in contrast with old mortgages and are lumping them in together.
Mr. Gesell. We are looking at the mortgage account.
Mr. Rogers. All right, let's say this : In 1929, as I say, 9,825 of our
foreclosures came out of that area. Now, you will find that the Pru-
dential's real estate largely came out of the loans made in that area.
Mr. Geseix. Let me ask you this, Mr. Rogers. If you had a choice
of two mortgage portfolios, just had them sitting here, here is yours
and here is the Prudential's, and yours is 20 percent delinquent 3
months and theirs is 6.9 percent delinquent 3 months, which would
you rather have ? I mean, in terms of appraising that point, it seems
to me there is no question as to which company has the best perform-
ance.
«lbM., p. 182.
» Ibid., p. 184.
• Ibid., p 161.
CONCENTRATION OF ECONOMIC POWER 14975
Mr. Rogers. I can't see that. I think one acquires $107,000,000 of
real estate and the other $100,000,000. What I say is that you cannot
fairly compare a portfolio of new mortgages with a portfolio of olcj
mortgages, and if you take our 1932 mortgages only and take Pruden-
' tial's 1932 mortgages only, I think our experience would be similar.
Mr. Pike. Mr. Rogers has a point ther^ which I don't think he has
had the j)roper opportunity to finish bringing out. He has been cut off
in the middle each time. It seems to me, if I understand him. Pru-
dential has been going on taking new mortgages pretty regularly and
now has a mortgage account only 20 percent less than it had in" 1929,
so its present mortgage account of around 160 million is proba;bly com-
posed of, say, half new mortgages and half old, whereas the Metro-
politan has cut its mortgage account down from one-hundred-ninety-
some million to 180 million during the period, which means that they
haven't taken on many new ones, that its mortgage account is very
much more weighted with old mortgages than the Prudential, so that
its delinquencies largely represent those old mortgages. It seems to me
to be not an entire explanation but something of a considerable expla-
nation of the difference.
Acting Chairman King. That was what I understood the situation
to be, that your delinquencies related rather to that period when there
were so many foreclosures and so much difficulty by reason of the de-
pression, whereas the other mortgage company's portfolio contains
largely new mortgages.
: Mr. Rogers^ Yes; exactly.
Acting Chairman Kjng. And, of course, you would have a larger
delinquency in the old mortgages which were taken during tnat
period of depression than you would a corresponding number of
dollars of delinquencies with new mortgages?
Mr. Rogers. Yes. If you took our new "mortgages, Senator King, 25
million or thereabouts since 1932, and compared them with our older
mortgages, why there would be no comparison at all.
Mr. Henderson. But you would still have 20-percent delinquency.
There is no challenge on that ?
- Mr. Rogers. No challenge except
Mr. Henderson (interposing) . What you are saying is an explana-
tion rather than a challenge ?
Mr. Rogers. That is true.
Mr. Henderson. And from an income standpoint
Mr. Rogers (interposing). Let's take the income table. Let's get
into the interest-collected table.
Mr. Kades. Mr. Rogers, before you do thatj isn't one of the explana-
tions for the difference between tne Prudential and the Metropolitan
the fact that you have shifted into« a farm-ownership status where
the Prudential has not?
Mr. Rogers. Well, there are two factors there. Of course, I do
not know the Prudential portfolio ; that is one thing. I do know
that this drought area that you have shown, where we were heavy and
where it shows that crossing line, is the reason why sales have been
slow in addition to our system of rehabilitating our properties. That
makes our real -estate portfolio higher.
Mr. Kades. Considerably higher, if you look at table 185.^
* See Hearings. Part 10-A, p. 186.
14976 CONCENTRATION OF ECONOMIC POWER
Mr. Rogers. Yes.
Mr. Kades. Metropolitan shows farm real estate sold in a percentage
of 17 plus, whereas the Prudential is 58 plus.
Mr. Rogers. Yes.
Mr. BIades. So the Prudential has sold off its real estate and used
the money to invest in farm mortgages.
Mr. Rogers. You see, they have 31 million of purchase-money
mortgages in this group of their portfolio today, maybe more.
Mr. Kades. Does that mean that the real estate which the Pruden-
tial has foreclosed is sold back on a purchase-money mortgage,
whereas the real estate which the Mel^ropolitan has foreclosed is sold
back on a contract basis ?
Mr. Rogers. That to some extent is true, but the thing about it is
that the Prudential has sold. I believe, $61,000,000 of real estate, and
naturally a large number oi purchase-money mortgages would arise
out of that volume of sales, whereas I think we have sold something
like $25,000,000 of real estate today, and our contracts are something
like $12,000,000. The difficulty, as I said, is that to compare new
mortgages and old mortgages is a very difficult thing.
Mr. Gesell. I think the comparision is quite apparent there on
the schedule.^
Does tjiat complete your challenge of that figure, Mr. Rogers,
which you offered here a moment ago? Have you anything else
to say about that figure ?
(The Chairman, Senator O'Mahoney resumed the chair.)
Mr. Rogers. Only one, one figure, and then we will move on.
Mr. Henderson, what did you ask?
Mr. Henderson. I said, so far as delinquency goes, there is a de-
cided difference between a mortgage account that is 20 percent
delinquent and one which is 60.8 percent delinquent.
Mr. Rogers. Let's return to that table, Mr. Henderson, that shows
interest collected.
Mr. Gesell. That is 179, isn't it? ^
Mr. Rogers. Yes. Now, you see, that table shows a consistent —
not a consistent gain altogether, but it shows that old mortgages,
many that have been delinquent, are gradually catching up.
Mr. Gesell. Show me how that shows that.
Mr. Rogers. All right; turn to
Mr. Gesell (interposing). Now, wait a minute; you are talking
about table 179. I wanted to see how that showed that.
Mr. Rogers. You have to have the average rate of your portfolio.
Turn to 163.^ You take all mortgages; 4.85 was the average rate,
was it not, in '38?
Mr. Gesell. Yes.
Mr. Rogers. That shows 4.82 collected. Take '36 ; the average
Mr. Gesell (interposing). 1938 shows the average for all mort-
gages of Metropolitan as 4.85, and 4.91 collected on table 179.
Mr. Rogers. 4.91, yes. In other words, the collections were greater
than the contract rate.
Now, in 1939 our figure of collection is 5.01 and our contract rate
average dropped to 4.73.
1 Ibid.
~ » Ibid., p. 170.
» Ibid., p. 163.
CONCENTRATION OF ECONOMIC POWER 14977
Mr. Gesell. What you are showing by that is that you are com-
ing up on delinquent interest.
Mr. KoGERS. Because the men we have carried are gradually catch-
ing up. Those are delinquent people we are ^working with and
they are cooperating with us and they are gradually getting their
loans into condition. For that reason the interest collected is in
excess of the interest called for in the contract rate.
The Chairman. In other words, delinquents are paying not only
the current interest but some of the back interest, too ?
Mr. Rogers. Yes.
The Chairman. And that tends to accumulate the amount of
interest you are collecting year by year?
Mr. Rogers. Yes; but if we took and threw those poor fellows
out, we would show a much better record on delinquency. I don't
think that is fair.
Mr. Gesell. Looking at it from another point of view, even with
the delinquencies being paid up, you still have such a high per-
centage of your portfolio delinquent.
Mr. Rogers. That statement
Mr. Gesell (interposing). That is the figure you were challenging
a moment ago.
Mr. Rogers. Table 174.^ Now, 1939 was 10 percent.
Mr. Gesell. I think the fact you are going to 1939 figures is very
interesting, Mr. Rogers. We were wondering what we were going
to do about keeping this thing up to date. If you are going to argue
on 1939 figures we want to get 1939 figures from the other people
involved.
Mr. Rogers. My idea is to show these people are wotking out, are
working along. You take table 175.^ It is difficult to take delin-
quent interest and not compare with delinquent taxes. They are part
of the delinquency. Let us say we followed the policy of telling
a farmer he should pay his taxes, first of all, and then he should
take care of his insurance and Federal money remaining, and he was
having trouble, and that which remained would apply on interest, we
would show a poor record on delinquency per loan. But say another
company said, "All right, you pay your interest first and then find
a way to pay taxes, or we will let it go."
The Chairman, There are two other factors that probably would
be reflected in that figure. One of those would be whether or not you
made work-out agreements with your mortgagors. If you did, that
would tend to increase the amount of delinquent interest, would it
not?
Mr. Rogers. That is right; yes.
The Chairman. Then also whether or not you were undertaking
to sell the real estate?
Mr. Rogers. The sale won't account for it.
The Chairman. Well, if you sold the real estate that would remove
that interest.
Mr. Rogers. Wipe it out.
The Chairman. That charge would be wiped from your books
altogether, would it not?
1 See Hearings, Part 10-A, p. i74.
» Ibid., p. 175.
14^78 CONCENTRATION OF ECONOMIC POWER
Mr. Rogers. Yes; that is true, but, Senator, you are very correct.
Now, as to individual loans, as an illustration, we have one of
$70,000— $71,000— in Illinois. That loan has never been fully in good
standing' in 10 years, but that owner has paid everything she could pay
and has accounted for all the money that she received. Now, within
the last 30 days she has arranged to sell, I think, some 300 acres of an
800-acre farm. Out of that she will pay all delinquent interest,
she will reduce the principal of her loan and the renewal will be
made at a lower amount per acre on some 500 acres that remain,
and that person is in the clear.
It takes time to work out these things, and if you will follow that
chart, you can see that the farmers went through a terrific crash in
this whole situation.
Now, another one that is in there — I know so many of these cases
personally because I give so much attention to them — there is one
fellow that we found, I think it is 13 years that 'he has not had his
loan actually in good standing at any one time, but he has paid every-
thing he could pay, and within 60 days I expect to see him come
through with a clean record. So many of these things should be
analyzed on the basis of the facts that prevail.
The Chairman. The table at page 176 would seem to indicate tKat
the Metropolitan has a much larger number of work-out cases than
any other company in the entire group.^
Mr. Gesell. Until you get down to Mutual.
Mr. Rogers. I would say most of the insurance companies have
been very considerate all the way through. We may have been a
little more so, or we have been caught in more moratoriums, I think,
because of our larger investment in Iowa, and moratoriums are in-
cluded in there. That law was declared unconstitutional in 1939 and
since that time a lot of these cases have worked out. Time is a great
healer in financial troubles after a terrible economic collapse.
Mr. Gesell. Now, let me ask you this, Mr. Rogers
Mr. Rogers (interposing). We actually collected 4.91 in 1934; 5
percent in 1935;. 5.87 m 1936; and in 1937^
Mr. Gesell (interposing). I don't think anybody knows what you
are talking about until you tell what table you are talking about and
what percentage you are trying to show.
Mr. Rogers. Page 179.^ i ou see the default that occurred in 1932
and 1933. We collected 3.05 percent qn our entire portfolio. That
is interest actually received, dollars actually received. In 1933 it
was 3.19; in 1934, 4.91; in 1935, 5 percent; and in 1936, 5.87; in 1937,
4.82 ; in 1938, 4.91 ; and in 1939, 5.01.
That is collected on the whole portfolio of mortgages outstanding,
the entire group outstanding.
Mr. Gesell. What was the point you wanted id make ?
Mr. Rogers. I wanted to make the point that it shows that the in-
terest on the whole portfolio collected, actual dollars collected, is
higher thfin the contract rate in the whole portfolio, which would
show the opposite as to delinquencies.
Mr. Gesell. Show the opposite from what?
^ See Hearings, Part 10-A.
» Ibid.
CONCENTRATION OF ECONOMIC POWER 14979
Mr. EooERS. The delinquent item, the money, the interest is being
collected. The delinquent interest is being collected in those cases on
the work-out.
Mr. Gesell. In spite of the fact that the delinquent interest is
being collected, you still have a very substantial part of your port
folio delinquent.
Mr. KoGERS. If you wish to state it on that basis.
Mr. Gesell. What is the attitude of the company with respect to
competition between various insurance companies for the same mort-
gage or offering lower interest rate, or offering to refinance one of
your mortgages at a lower rate ? In other words, rating of mortgages
by other companies, what position do you take on that subject?
Mr. Rogers. Well, we at one time endeavored to avoid what would
seem to be raiding portfolios of other companies, but the mort-
gage business is controlled by the country banks, the local real-estate
dealers, and those people who act as mortgage brokers, and they are
the ones who control their farmer clients, and they place the mortgages
for their farmer clients with whomever they desire.
That may mean that they would be placing mortgages with some
insurance company and they control the business of one of our bor-
rowers and a loan came up for renewal and it would be paid. There
would be no question about it.
Mr. Gesell. Do you go out after loans on other life insurance com-
panies' books and offer lower rates?
Mr. Rogers. We do not go out after loans on anybody's books for
the reason that our contact is with the local country bank — the broker.
He is the man who handles the clients in his own field. We couldn't
hope or couldn't think of knowing all the farmers in the community.
Our men have to cover a wide area. Our servicing cost and solicita-
tion cost is very, very narrow. We do not do business direct with the
farmer. He goes to his own broker and the broker turns the loan
to us or to some other insurance company, or to the Farm Credit
Administration as far as that is concerned.
Mr. Gesell. By and large, have your interest rates been higher or
lower than those of other insurance companies operating in the same
territory as you do?
Mr. Rogers. I would say about the same. There are times when it
might be higher, but not very long.
Mr. Gesell. And you make no effort, through your brokers or other-
wise, to take loans from other insurance companies. Is that correct?
Mr. Rogers. I would say that is correct, Mr. Gesell. I would say
this : That if we have a broker who wants to place his loans with us
and his farmer clients have loans with other insurance companies, we
are going to consider the applications that that man submits to us,
regardless of what insurance company or Farm Credit Administra-
tion .or individual might hold that mortgage. That is the privilege
of the broker and of the borrower himself.
Mr, Gesell. Now, coming to this question of foreclosure, which we
have been discussing some already, what type of mortgage would you
foreclose ?
Mr. Rogers. We would foreclose what we call a hopeless case.
Mr. Gesell. When does a case become hopeless ?
14980 CONCENTRATION OF ECONOMIC POWER
Mr. Rogers. Well, when a man is absolutely unable to pay.
Mr. Gbsell. You have had one case of a man who has been unable
to pay for 13 years.
-Mr. Rogers. No he has been paying for 13 years, but he aever had
every dollar of interest — that is, his loan was in default during that
time, but he was accounting for every cent that he made.
Mr. Geseill. What do you take into account when a man can pay
nothing on his interest?
Mr. Rogers. When a man is fully unable to pay and there is little
likelihood of his ever being able to work out his situation.
In that connection, Mr. Gesell, I made a spot check at one time,
some years ago, of some 17,000,000 of our mortgages that had been
foreclosed. I found that those men owed $3,000,000 of mortgages
on other properties that they owned, but they owed $5,500,000 of
outside debts, and, by and large, it is that outside indebtedness that
caused a great many of the foreclosures. Now, if Ave had a borrower
who owed us $10,000 and he owed scattered debts of $5,000, and they
were coming in on him and pressing him and he was trying his
best to pay somebody, and had a farm worth 12 or 14 thousand dollars
or probably not over 10 or 11 thousand, he is under difficulties, and
you can't expect him to. pay.
Mr. Gesell. It is a matter of judgment in each individual case ?
Mr. Rogers. Yes.
Mr. Gesell. Who makes the judgment, the man on the sc^ne or is
that made in the home office ?
Mr. Rogers. Well, we go to great lengths on that.
Mr. Gesell. Will you answer my question? Who makes the deci-
sion ?
Mr. Rogers. It is made in the home office upon recommendation of
the man in the field.
Mr. Gesell. Are those recommendations customarily followed?
Mr. Rogers. Customarily followed. "
I would like to explain that. We require in each case that a fore-
closure is recommended that an extensive report be made showing
the financial condition of the farmer and giving a history of his
condition and of the reasons why he is unable to pay. Now, if the
facts indicate there is a possibility, in our opinion, we write back for
further information or insist that the man be given additional time.
I recall an odd instance of one man,. where foreclosure was recom-
mended with no default excepting principal, and I required that that
farmer sign a statement that he had no opportunity of working
out. Yet I discovered that he had become involved in some other
transactions and that he was going to lose all of his property. Each
case must be handled individually.
Bear in mind that this depression that came on, came on not through
the fault of an individual management. It came on through condi-
tions beyond the control of any of these people.
Mr. Gesell. Beyond the control of the farmer, you mean?
Mr. Rogers. Yes. An economic collapse is beyond the control
of the farmer.
Mr. Gesell. Can I perhaps get somethmg out of you this way?
Does the location of the mortgage make any difference in the fore-
closure as to the type of underlying land or as to the general locality
in which the mortgage rests?
CONCENTRATION OF ECONOMIC POWER . 14981
Mr. HoG£RS. No; I feel we are dealing with an individual. We
must constantly keep in sight his welfare.
Mr. Gesemj. Therefore, you foreclose just as little in the cases
where you have low valued land, and your company is overloaned,
as jou do in the best value territory ?
Mr. Rogers. Yes. If there is any area where we have overloaned.
Mr. Gesell. I thought we had a lot of testimony about that yes-
'terday, that made it pretty apparent that all of the companies have
gone m and overloaned in the southern part of Iowa.
Mr. Rogers. You should have excluded our company because the
counties that bothered Professor Murray do not bother us.
Mr. Gesell. You don't feel you have overloaned any place, any
time, under any circumstances?
Mr. Rogers. I wouldn't say that was the case. We had a cor-
respondent one time who sent in a few loans and we sent our in-
spector down and on the arrival of our inspector he disappeared.
There were some bad loans.
Mr. Gesell. How was it your company escaped what we heard
yesterday was the factor in alinost every other institutional lender
that ever loaned on farms during this period — they overloaned?
How did you people escape ? What was the sectet ?
]!ifr. Rogers. Well, I think that would have to be subject to analy-
sis. I could not answer for all the other insurance companies.
Mr. Gesell. I am asking you only to answer for the Metropolitan
as to why it was the only company; that had this unusual result in
the loaning on farm property?
Mr. Rogers. I womd not say that a single mistake had not been
made, but I would — I think that is true in any business — ^but I
would not agree that overlending was general upon the part of the
Metropolitan in any community.
Mr. CrESELL. How did it happen to escape ?
Mr. Rogers. Well, I would say
Mr. Gesell (interposing). Did you have better correspondents?
Did you have a lifelong system? : Did you have a different manage-
ment? Did you loan in different areas, or what?
Mr. Rogers. I would say it was undoubtedly due to management.
Mr. Gesell. You foreclosed quite a bit of property, didnx you ?
Mr. Rogers. Yes, sir.
Mr. Gesell. I have here a publication entitled "Memorandum to
Financial Correspondents" from your farm division,* in which you
say [reading] :
In- principle, if the Joan was properly made, it should not default, although
we will agree there are exceptions to this rule. Nevertheless, it is true that
in the majority of -the cases the conditicms which are the cause of the bor-
• rower's -trouble at this time prevailed to a degree at the time the loan was made.
You have had troublesome mortgages, and that sentence suggests
the possibility there was some overloaning or some errors made m the
loaning of the money originally.
Mr. Rogers. Yes, sir. I think it is very human to err, and I be-
lieve you will find errors in every community, that we made loans
but they would be individual.
14982 CONCENTRATION OF ECONOMIC POWER
That memorandum, I think, should be put in the record in full
rather than a single sentence.
Mr. Gesell. I am talking about this sentence right now, Mr.
Rogers. We have put in a great deal you have volunteered here.
What about this— did you overloan on properties or not?
Mf. Rogers. Well, I would say, no, other than an occasional
exceptional instance.
Mr. Gesell. And you think the reason your company escaped that
was the quality of its management? ^ .
Mr. Rogers. There was every eflfort made to avoid just the thing
you are talking about.
Mr. Gesell. How is it that other companies that must have had
that same point of view in mind, how is it their policyholders were
led into difficulties^
Mr. Rogers. I would rather they would state that. I would be
surprised if you got the admission out of all of them which you infer.
I think a lot of insurance companies you could say that is true.
I would defend some of the other insurance companies on the very
same thing and strongly defend them.
Mr. Gesell. What was your attitude toward the reduction of in-
terest during the troublesome period from 1930 to 1935 ?
Mr. Rogers. Our policy was not to increase interest rates but to
carry on the rates of the mortgages, with one exception, and that is
this : That many of the correspondents had depended for years upon
a cash commission, as explained by Professor Murray yesterday.
I insisted, in the time of distress, that instead of those farmers pay-
ing cash commissions, an extra quarter of 1 percent of the servicing
fees should be added on, so that a rate might be raised from
5 to 5^4- The farmer was not to pay a cash commission, and that
one-quarter would go back to the correspondent. -We would pay it
to the correspondent as a service fee rather than to have him coUect
the 1 percent commission, or a II/2 percent cash commission, and
guarantee to service the loan for 5 years or 10 years, because usually
the cash commission collected is gone before the loan is fully serviced.
The Chairman. What is your policy with respect to work-out
cases ? -
Mr. Rogers. Now work-out cases are carried along on the present
mortgage. Sometimes they would run past due as to principal for a
long period.
Tne Chairman. Did you make any change in the mortgage or in
the interest, in the principal, or in any of the factors ?
Mr. Rogers. Not very often.
The Chairman. Then what is a work-out case?
Mr. Rogers. A work-out case is a man who has been unable to pay his
interest, probably through some unusual circumstance, probably be-
cause of bad economic conditions, such as prevailed in the Missouri
Valley territory. You get all kinds and types of cases.
The Chairman. When you are working out a case, do you make a
new contract?
Mr. Rogers. Not generally. We work along with the existing con-
tract. We constantly call on the man. We have chattel mortgages.
CONCENTRATION OF ECONOMIC POWER 14983
We have the assignment of rents. And we will go along with that
man and work with him in that way.
The Chairman. Would you permit a reduction in the amount of
interest paid ?
Mr. Rogers. In some cases, but not generally, because the rate was
low in most all of them.
The Chairman. Then a work-out case is just a case in which instead
oi foreclosing, you are just going along and hoping to work it out in
one way or another by assignment of the property, chattel mortgages,
or things of that kind ?
Mr. Rogers. Giving time. That is exactly right.
The Chairman. Now, when you gave time, how would you give
time?
Mr. Rogers. Well, we would work along with a man. For instance,
he is in default today. He has an annual crop. His business is on
ah annual basis. We would take a chattel mortgage in some cases on
his crops and after he had paid what he could pay we would work
along with him on it until the next crop was harvested and we would
then see what his situation was.
The Chairman. Suppose his interest is due today and he can't meet
it. What is your policy ?
Mr. Rogers. You mean he has been in good standing heretofore ?
The Chairman. Yes; his mortgage has been in good standing
and the interest date comes and the mortgagor can't meet the interest.
Mr. Rogers. We will get in touch w^th that man after a time, proba-
bly at the end of 30 days, unless he comes in and makes a report. He
may be sealing his corn with the Government. He may ha\p hogs to
sell. He may have some reason why he wishes a delay. Wo endeavor
to be very reasonable and very fair. If you have ever work ^d with
farmers. Senator, you know that they, do have those problems.
The Chairman. And they are usually pretty good pay if they
can pay at all.
Mr. Rogers. Yes; and good faith is the thing that we desire most
of all.
The Chairman. What I am getting at is, would you permit the
payment of the interest to be postponed? You have given 30 days
of grace. If the farmer satisfied you that perhaps in 3 or 4 months
he could pay, would that be satisfactory ?
Mr. Rogers. Yes; in the individual cases. Now, for instance, we
will have loans in default over quite a period. If k man had no
second-mortgage indebtedness, had no junior indebtedness, and was
a perfectly fine fellow and had been fine with us, we would probably
not ask that fellow for a chattel mortgage.
The Chairman. What are the circumstances which would lead
■"you to^begin foreclosure proceedings'?
Mr. Rogers. Bad faith m one case, and inability, definite inability
to pay; the borrower generally will admit his inability to pay when
he nas reached that point.
The Chairman. WTiich, from your point of view, as the head of
this department, would be the better policy, to foreclose or to work
out?
Mr. Rogers. Work out. I think it is entirely wrong to promptly
foreclose, unless there are certain circumstances that prevail that
14984 CONCENTRATION OF ECONOMIC POWER
make it necessary ; then each man's individual case should be taken
into consideration and thoroughly analyzed.
The Chairman, Do vou want us to understand that your policy
was not to foreclose unless it was absolutely necessary?
Mr. Rogers. Absolutely. That is right, Senator.
Mr. Gesell. Now, when asked you about interest, Mr. Rogers,
I thought you were going to tell us you reduced interest. I take it
you didn't.
Mr. Rogers. No; we did not.
Mr. Gesell. You actually increased it?
Mr. Rogers. I explained that.
Mr. Gesell. The explanation you gave was that it resulted in
increase as far as the farmers are concerned.
Mr. Rogers. And it reacted to his advantage, that he had no cash
commission to pay.
Mr. Gesell. Now, there was quite a demand from the farmers,
was there not, for a decrease in the interest?
Mr. Rogers. I do not say there was. I can see before you a letter
of a correspondent. A correspondent always wants to decrease the
interest and a correspondent wants to increase the amount. They
were inclined to think you were too hard on them. The correspond-
ent is the one who wants the cash commission. We found that was
not a proper way.
Mr. Gesell. You mean then that this demand which is apparent
by the material that I have in front of me from the correspondent for
a lower interest rate was prompted by the selfish interest of the coi"-
respondent-and didn't reflect in any way the wishes of the farmer?
Mr. Rogers. I would say that.
Mr. Gesell. It is pretty hard for me to believe.
Mr. Rogers. In general, 5 percent interest at that time was about
as low a rate as mortgages have been made in, I suppose, 25 years. It
is a low rate of interest today. Some of your Government agencies
are getting higher rates.
Mr. R^DERSON. Couldn't we get an answer, Mr. Rogers,, to the
plain question Mr. Gesell asked ? He asked you whether or not this
request. for lowered interest was dub to the selfish interests of the
correspondents and not in any way to the farmers wanting a reduction
in interest. Could you give an answer to that ?
Mr. Rogers. Mr. Henderson, I could not give an answer to that.
Mr. Henderson. Then I think, as a member of the committee sitting,
I would prefer you to say that.
Mr. Gesell. This letter from Mr. Lougee, who was your corre-
spondent in Iowa, is dated August 24, 1931. He discusses several
matters with respect to decline in crop prices and says [reading from
"Exhibit No. 2296"] :
We hear a great deal of complaint about the lending companies charging 5%%
Interest under such conditions. There never was a time when the farmers needed
consideration like right now. I wonder if your company has any thought of
reducing the Interest rate to 5%.
You replied to Mr. Lougee, in the second paragraph, or in your
whole letter, as follows [reading from "Exhibit No. 2296-A"] :
We are in receipt of your letter of August 24th in which you inquired if we
have given thought to reducing the interest rate on ou. mortgages from 5%% to
5%. We realize that any interest charge is diflJcult for some farmers to meet. .
CONCENTRATION OF ECONOMIC POWER 14985
The difference, however, between 5% and 5%% is scarcely the determining factor
as to a farmer's success.
We have not given consideration to reducing the rate from 5^!% to 5% and
in the event we admit the total inability of farmers to pay the chances are that
we would decide to make no further farm mortgage iavestments. Probably we
should come to this conclusion. We have, however, looked upon the present
situation as more or less a temporary one and not as a complete condemnation
of the desirability of farm investments. 5%% interest is a reasonable rate,
although at times we appreciate it that a lot of farmers have been favored with
a 5% rate.
It seems to me that correspondence is pretty much in opposition to
what you have said, because you have admitted there quite clearly
that it would benefit the farmer to have a lower interest rate, that
6 percent interest rates were being granted farmers and in addition
we have the fact that your correspondent has said the farmers would
like to have a 5 percent interest rate and think it would be desirable.
Mr. Rogers. Well, Mr. Gesell, you are drawing the conclusion en-
tirely upon the statement of one correspondent.
Mr. Gesell. You mean one of the most prominent correspondents.
Mr. EoGESS. Yes; but would it not be fair to take the reports of
all correspondents and all branch offices and consider the field as a
whole, rather than to have the opinion of one man whose livelihood
depended upon the volume of loans he made, and so on, as the deter-
mining factor?
Mr. Gesell. Well, have you a tabulation there that will show what
the attitude of each of your correspondents and managers was in Au-
gust 1931 concerning the interest rate?
Mr. BooERS. I have not ; but I would like to show you that the con-
tract rate of the Metropolitan Life Insurance Co. all during that
period was slightly below the contract rate of the great Federal land
banks.: I do not believe that when a life-insurance company follows
a procedure and a policy that a great governmental institution fol-
lows that it is to be condemned because one letter from a person who
has an ax to grind writes in on a question of interest rates.
Mr. Gesell. Oh, I quite agree with you on that.
Mr. Rogers. I would like to put that into the record.
Mr. Gesell. Let's identify it and discuss it here a minute. I quite
agree with you that no one should take one letter and use it as a basis
for condemnation. There certainly was no condemnation in my ques-
tion. I was simply asking you what your attitude was about the
reduction of interest rates.
The Chairman. May I interrupt y6u just a minute? This exhibit
which you show, Mr. Rogers, represents what?
Mr. Rogers. Mr. Gesell has made a statement that the company
raised intei?est rates.
Mr. Gesell. I beg your pardon. I didn't make that statement.
You made it.
Mr. Rogers. Pardon me.
The Chairman. May I say, there is a fact here somewhere, and
the fact cai'i be developed without argument on either side, so let's
try to get the facts.
Mr. Rogers. I think it is a very minor matter. Here is out of what
the matter arises : In the period the farmers were having difficulty
paying interest, the matter of renewal of loans came up, and of new
loans as well, and th^ correspondents, particularly one correspondent.
14986
CONCENTRATION OF ECONOMIC POWER
had always charged cash commissions, and those cash commissions
were 1 to 1% percent. I insisted that instead of requiring the farmer
to pay a cash commission, that an extra quarter should be put in the
interest rate and the cash commission dispensed with during this
period, that it was difficult for them to pay interest, and that applied
in one territory.
What I want to show by this chart is that the Metropolitan did not
raise interest rates. It made that one little change in a certain area,
which did not represent the area as a whole, but met the problem that
prevailed in a particular situation, and I submit the chart to show
that the company's interest rate was in keeping with the market. It
was in keeping with the rates of the great governmental institutions,
and that is my point of view on what — ; —
Exhibit No. 2295
[Prepared by The Metropolitan Life Insurance Company]
AVERAGE CONTRACT RATES OF INTEREST ON FARM LOANS OUTSTANDING
s.sy.
S.0%
J.o % -
: ^^
FEDERAL LAND BANK-CONTRACT RATE
FEDERAL LAND BANK-EFFECTIVE RATE — ---
BA}ED ON THE ACTUAL FUNDS RECEIVED
Oy THE BORROWER
GOVERNMENT'^'
SUBSIDY 'y
Cr METROPOLITAN RATE
REDUCTION IN LAND BANK RATES
THROUGH COVCRNHENT SUBSIDY
^
fZ^ METROPOLITAN RATE EXCLUDES SERVICE ALLOWANCES PAID TO CORRESPOMDXNTS
BUT INCLUDES CROSS RATES ON LOANS MADE BY ^HE BRANCH OFFICES.
••0%
s.s%
The Chairman (interposing). This chart is entitled "Average Con-
tract Rates of Interest on Farm Loans Outstanding." By whom was
it prepared?
Mr. Rogers. It was prepared in I^^ew Yock. I can't say — under my
direction.
The Chairman. In yotir office?
Mr. Rogers. Yes. The information of the Federal land bank was
taken from Federal land bank' records and the information as to the
Metropolitan rate was taken from Metropolitan records.
^^""(The chart referred to was marked "Exhibit No. 2295" and appears
above.)
The Chairman. But with respect to the Metropolitan rate, this
chart shows that from 1928, that rate declined from what appears to be
5.3 or 5.2l^ to something under 5 in 1938. Is that correct ?
Mr. Rogers. That is correct. Senator.
The Chairman. But that between 1928 and 1935, there was prac-
tically no .change ? .
CONCENTRATION OF ECONOMIC POWER 14987
Mr. Rogers. Yes; had there been a raise in interest rates, it would
have been reflected in that figure, in that chart ; that line would show
it, and what I am saying there is that the portfolio as a whole shows
an even, consistent rate of interest in comparison with that of the rate
of Federal agencies.
The Chairman. But that there might have been some changes in
an individual case ?
Mr. Rogers. In an individual case and what I am saying is that
that individual case could not be taken to be representative of the
whole.
Mr. Gesell. Just on one point of this, you indicated that I had
taken one letter and thrown it up here in your face, and it was indic-
ative of the attitude of the field men. I have another letter from
Mr. Lougee dated October 10, 1932, which is on a different subject.
He says here [reading from "Exhibit No. 2296-B"] :
I have submitted your two letters of September 26th to Mr. Green, to Henry
Hall, to perhaps half a dozen of my field men. and sent a copy of your i)ersonal
letter of September 26th, to Eldin, as you had requested me to do.
Henry Hall wrote his reply to your question, a^d I am enclosing it herewith.
I have just received Eldin's reply addressed to ' u, this morning. He did not
touch upon the question of relief to the distr . . ded, but has dwelt at length
upon our operations in the Sioux Falls oflSce. I am enclosing his letter.
EJvery one of the field men with whom I have talked, and to whom I sub-
mitted the question that you asked of me, has given to me the same answer
without any suggestion from me as to what my answer to your question would
be. The answer in every case has been to reduce the interest rate to a low
rate, for a period of one year, letting each year take care of itself, suggesting
that when prices have again become normal, and it is warranted, that we could
require payment of the contract rate.
I would like to offer this correspondence for the record.
The Chairman. This correspondence is all from one person?
Mr.' Geseix. It is correspondence between Mr. Rogers and Mr.
Lougee, one of the farm correspondents.
(The letters referred to were marked "Exhibits Nos. 2296, 2296-A,
and 2296-B," and are included in the appendix on pp. 15516-15519.)
Mr. Rogers. I would like to enter also with that the question of
whether or not the policy pursued by the Metropolitan wasn't the
same policy as tha,t pursued by the great Federal agencies until the
passage of the Emergency Farm Mortgage Act. I think it is only
fair to look at it in that way, to look at it in comparison, and the
policies pursued by the lending agencies at the time.
Mr. Gesell. Then your policy, I take it, was controlled entirely
by what the Federal Government did and not based upon an individ-
ual estimate, as to how the problem should be handled ?
Mr. Rogers. Mr. Gesell, when you have 29,000,000 small policy-
holders, largely small policyholders, you are not very anxious to go
out and automatically reduce the income of the institution, in which
those 29,000,000 people have an interest. Most of those people are
people of small means. We have endeavored straight through to
be fair to both sides, but we
Mr. Gesell (interposing). It gets kind of complicated when the
farmer is also the policyholder?
Mr. Rogers. Well, yes; but
The Chairman (interposing). Now, Mr. Gesell, that isn't fair.
That is an argumentative statement by you, and the fact that some
14988 CONCENTRATION OF ECONOMIC POWER
farmers may be holding j^olicies in a particular company doesn't
justify the assumption that the farmers and the policyholders are the
same.
The Chairman. Let's not have an argument here between^ counsel
and the witness. As I said a moment ago, there must be a fact.
Now, let's get the fact and we can develop that without argumenta-
tive questions, it seems to me, and I say that now to both sides.
Mr. Geseix. I think, if I may be permitted, that in a company the
size of the Metropolitan, with some 29,000,000 policyholders, that it is
a rather difficult job to distinguish the people who are getting the
benefit of the funds and the people who are paying the premiums in.
I think the testimony would properly suggest that kind of a question.
The Chairman. The question here is what has been the policy of this
company with respect to the interest upon farm mortgages. Is that
flotit?
Mr. Rogers. Yes.
The Chairman. And what the company did with respect to this in-
terest during the particular period of time. Now, may I suggest, Mr.
Rogers, that you tell us, and after you have told us what you have done,
then jjerhaps we can develop it. VTI \t has been your attitude with
respect to interest ?
Mr. Rogers. Senator O'Mahoney, we did not raise interest except in
the case I mentioned, eliminating cash commissions and adding in-
terest in the f jrritory of this one man, and I made that chart to show
if we raised .nterest rates that chart would sl\ow a raise of interest
rates, would it not, the one I submitted to you ? ^
The Chairman. Then are you saying that interest rates were raised
only in the area of this particular correspondent, Mr. Lougee?
Mr. Rogers. For the purpose of doing away with the payment of
cash commissions so that the actual net cost to the farmer meant no
greater cost.
The Chairman. Just how did that operate? How was k done?
Mr. Rogers. With a 5-year loan, the rate of the existing mortgage,
6 percent, Lougee collected, or the correspondent collected, a 1-percent
cash commission normally for renewal of that loan. I insisted that
farmers could not pay a cash commission under the circumstances
that prevailed, that it was a penalty to them to require them to pay a
1-percent commission, or any cash commission ; that it was far better
to make that rate 5l^.
The Chairman. In other words, you eliminated the l-percent com-
mission that the farmer paid to the correspondent ?
Mr. Rogers. Yes.
The Chairman. But you placed a quarter percent interest addi-
tion which the farmer paid to the company?
Mr. Rogers. Yes ; and that went back to the correspondent in lieu
of his servicing commission.
The Chairman. So that the correspondent instead of getting 1
percent from the farmers received a quarter of a percent, but through
your company?
1 See "Exhibit No. 2296," supra, p. 14986.
CONCENTRATION OF ECONOMIC POWER 14989
Mr. Rogers. Yes.
Mr. Kades. Isn't it a fact he received a quarter of a percent for 5
years which means 1^/4 percent rather than a quarter of a percent.?
Mr. Rogers. Yes ; that is very true.
Mr. Kades. So the farmer paid more?
Mr. Rogers. But he paid it over a longer period of years.
The Chairman. The correspondent received l^^ percent rather
than 1 percent?
Mr. Rogers. Yes ; but he was delayed for 5 years getting it.
The Chairman. He was paid over 5 years ?
Mr. Rogers. That is right.
The Chairman. So that the farmer, then, actually paid one-fourth
of 1 percent more for 1 year; is that right?
Mr. Rogers. He paid a quarter of 1 percent more over the extended
5-year period. That is, he paid 1% by paying one-fourth each year,
you see, as against laying out a full 1-percent cash.
The Chairman. So that actually there was no reduction of the
amount that the farmer paid?
Mr. Rogers. No reduction ; it was just a deferred arrangement.
The Chairman. An arrangement whereby the amount of commis-
sion paid to the broker was given to him over a 5-year period instead
of at onetime?
Mr. Rogers. Yes, exactly right ; that is exactly right. It is a small
item when we get down to it.
The Chairman. Was there any other request to you or to your com-
pany in this area to make an adjustment of interest rates downwg,rd
to the farmer?
Mr. RoGEbs. It would be very difficult to answer that on corre-
spondence that is 9 years old. What I djd say was this, that we were
reluctant about reducing the contract rate in mortgages that we held
at that time. The letter that Mr. Gesell has read from Mr. Hall was
a result of my having sent out a general letter to the entire territory
asking for suggestions without reservations as to what was best to
meet the adverse depression situation that prevailed. I wanted to get
"Information from all territories. Mr. Gesell has taken the informa-
tion from the one source, from Lougee, whereas the information came
in from all of our representatives everywhere.
The Chairman. What was the information that came in from all of
your representatives ?
Mr. Rogers. Of course, that again is 8 or 9 years old, and to remem-
ber it is difficult, other than that the depression prevailed on every
hand. Follow your chart,^ Senator, and see where your prices were.
There was trouble in all areas.
The Chairman. You have a genei'al idea what the report was?
Mr. Rogers. I haven't now. As I say, it was 8 or 9 years ago.
The Chairman. Was there any reduction of interest that you made
to the farmer ?
Mr. Rodgers. There was no other change. We went along.
The Chairman. Was there any other concession you granted the
farmer?
1 See "Exhibit No. 2292," supra, p. 149fly5.
124491—41-
14990 CONCENTRATION OF ECONOMIC POWER
Mr. Rogers. No; there was no concession other than the extension
of time of payments of all kind, but we did not change 5-percent
mortgages.
The Chairman. How much extension of time of payments was
granted ?
Mr. Rogers. That all depended upon the individual circumstance.
That is the question that was brought up a while ago and was threshed
out, that possibly we were more lenient than we should have been.
I don't feel that we were.
The Chairman. What was the maximum extension that was
granted ?
Mr. Rogers. That I can't say. We have some loans, as was
pointed out, that were 3 years in default at one time.
The Chairman. That are since working out ?
Mr. Rogers. They are since working out. This much can be said,
that no interest over 6 months past due was ever carried as an asset
in the company.
The Chairman. Would it be fair to say that 3 years represented
the maximum of extension?
Mr. Rogers. I would not say. I had one farmer who in the last
30 days paid 4 years of delinquent interest at one time, paid it up
entirely, and is in good standing.
The Chairman. How long was he delinquent?
Mr. Rogers. He was delinquent 4 years.
Mr. Henderson. I suggest, Mr. Chairman, that the witness is using
a single example, and has been most of the afternoon, in a manner
in which he criticized Counsel Gesell. May I ask a question on the
testimony ?
The Chairman. Certainly.
Mr. Henderson. In explanation of a question asked by Mr. Gesell,
you spoke about the interest of 29,000,000 policyholders. He asked
you whether or not the contract rate for policyholders was reduced
m that period.
Mr. Rogers. I do not know, Mr. Henderson.
Mr. Henderson. May I ask you another question ? In that period,
which is 9 years old, and you can't recall, would you agree that it
is likely in that period of great depression that many farmers who
had mortgages with; your company did request lower interest rates?
Mr. Rogers. Oh, I wouldn't say that they didn't; no, indeed not.
Mr. Henderson. Now, Mr. Chairman, the answer I' got was, "I
wouldn't say they didn't." I asked you' a plain, straightforward
question.
Mr. Rogers. Mr. Henderson, I would have to have direct contact
with the borrowers and with 26,000 loans to be handled. I can't go
out and interview individual borrowers.
Mr. Henderson. Mr. Chairman, I suggest he has not given me an
answer.
The Chairman. What was the question?
Mr. Henderson. I asked what I thought was a question within the
realm of good feeling that you are suggesting.
The Chairman. You are referring now to the chairman?
CONCENTRATION OF ECONOMIC POWER 14991
Mr. Henderson. The chairman's suggestion to which I think we
subscribe. I asked him whether or not m this period of the depression
he recalls that many farmers with mortgages did request a reductio^i
in interest rates. Now, if the witness wants to say that he can't recall,
I will take that as an answer.
Mr. Rogers. I am quite willing to sav that. I can't recall.
Mr. Henderson. Then I will take tne same privilege which Vice
Chairman Sumners took this morning when we had another expert
on the stand and say that as a simple layman, familiar somewhat
with the pressure for reduction of interest rates in that period, that
many did. Can we go on ?
Mr. Ghsell. I hope so. Mr. Rogers, what about scaling down?
Did your company adopt the policy of scaling down mortgages?
Mr. Rogers. If the mortgage was in excess of the value of the
land, yes ; but we have few of such cases.
Mr. Gesell. There was a great deal of scaling down by other lenders,
was there not ?
Mr. Rogers. That I cannot say. I do not know.
Mr. Gesell. And I take it, except in a very occasional case, you did
not scale down ?
Mr. Rogers. I do not know what you would say as to occasional.
We accepted payment of a great many loans wherein we waived the
interest entirely.
Mr. Gesell. What do you understand bv the term "scaling down" ?
Mr. Rogers.. Scaling down the total indebtedness of the borrower,
i assume.
Mr. Gesell. Did you ever scale down the principal indebtedness
at all?
Mr. Rogers. I would say we accepted payment in some cases at less
than the principal amount. Again we are talking about a good many
years ago. Had I known a question of this type was to be asked I
could have brought the record.
Mr. Gesell. I^t's have that one right now.
The Chairman. Let me interrupt. Here is a matter of general
^policy which it strikes the chairman you must know, whether it was
the policy of the Metropolitan to scale down or not. Now, there may
have been individual cases in which you did, but how. about the
general policy?
Mr. Rogers. No ; because the value of the security was there ; and,
again I repeat, the 29,000^000 policyholders were to be protected.
The Chairman. That is a straight answer; the general policy was
against scaling down?
Mr. Rogers. Yes.
The Chairman. Mr. Gesell, did you hear the answer to the question
I asked?
Mr. Gesell. No ; I did not. I take it you got the answer.
The Chairman. I think so ; yes.
Mr. Gesell. I just wanted to say that Mr. Rogers has several times
now said that if he had only known what he was going to be asked we
would have a different story here. I think the record should show that
an invitation was offered to every Metropolitan executive who is to
testify before this committee to come down and discuss the matter
14992 CONCENTRATION OF ECONOMIC POWER
with US, and they did not come down, and I wrote a letter and I also
had some telephone conversations; executives of other companies have
been down in my office talking over these matters, and that has not
been the case with the Metropolitan. We have offered them that
opportunity.
Mr. John L. O'Brian (counsel. Metropolitan Life Insurance Co.).
May I make a statement on that, Mr. Chairman? That seems to
carry an imputation with it.
The officers of the Metropolitan have at all times been ready to
confer. The only suggestion that was ever made by the Metro-
politan
The Chairman (interposing). Now, that may be all
Mr. O'Brian (interposing). There is an inaccurate statement re-
flecting on the company. In the letter which Mr. Gesell wrote with
respect to this witness, he said [reading] :
We will not call for figures or detailed facts other than are contained in the
investment analysis or which are of such general knowledge that Mr. Rogers
will have no difficulty in recalling the same. In the main, we will be interested
in discussing with Mr. Rogers his policies in the handling of the farm real estate
and mortgage portfolio.
The Chairman. The chairman was saying that with respect to this
matter, it is very obvious that we could easily become bogged down
in matters of little detail as to what was^ asked and what was meant,
and the response that was given, and what this committee wanted, and
what the S. E. C. wanted. I want to say that many of the persons
and organizations which have been called before this committee have
been misled into the belief, or have fallen into the erroneous assump-
tion, that it was the purpose of the committee to find fault with, to
make a case against, to make critical conclusions with respect to, the
manner in which various persons and companies have operated. That
has not been, so far as I know, the purpose of anybody on the com-
mittee, and it has ncrt been the purpose of the S. E. C. ; am I not cor-
rect in stating that ?
Mr. Henderson. You certainly are, Mr. Chairman.
The Chairman. The committee has been trying to develop funda-
mental facts with respect to the entire economic system, and I beg the
gentlemen to believe me when I say on behalf oi the committee that
we are not seeking to cast any false implications upon management,
nor are we trying to imply any criticism. The purpose of the whole
story has been to develop the broad picture. Have I correctly stated
the position of the S. E. C. ?
Mr. Henderson. You certainly have, Mr. Chairman.
The Chairman. And Mr. Gesell, that was your attitude?
Mr. Gesell. That was my understanding of the matter.
The Chairman. Now, of course, it is only natural that in pursuing
an inquiry, the questioner and the witness are very likely to get into
an argumentative frame of mind. I think we have avoided that to
an extraordinary degree in this committee. There is only a disposition
to develop what the facts are, and I am sure the witness need not take
offense at the form in which a question is directed at him. I am sure
it is not the intention of counsel to give offense in any of these
questions.
CONCENTRATION OF ECONOMIC POWER 14993
How far from finished are you ?
Mr, Gesell. We are a long way from finished. I think it might be
a good time to adjourn and get a good start tomorrow.
The Chairman. I think possibly it would be a good thing, but I did
hope it wouldn't be necessary to hold a meeting on Saturday. I know
that several members of the committee have spoken to me about that,
not desiring a meeting on Saturday. Could we not go over until
Monday ?
Mr. Gesell. I believe we can. It might result in our having to
hold hearings Friday of next week between the holiday and the week
end.
The Chairman. Let's make an effort then to carry the inquiry on
next Monday with this new start, and with a better understanding of
what we are trying to get at, and I say to the gentlemen representing
the Metropolitan that neither the S. E. C. nor the committee is seeking
to cast any slurs, let me say, upon youi" company.
The committee will adjourn until 10 : 30 Monday morning.
(Whereupon, at 4:45 p. nu, a recess was taken until Monday, Feb-
,ruary 19, 1940, at 10: 30 a. m.)
INVESTIGATION OF CONCENTEATION OF ECONOMIC POWER
M01IX>AY, FEBKUABY 19, 1940
United States Senate,
Temporary National Economic CoMMrrrEB,
Washington^ D. G.
The committee met at 10:40 a. n)., pursuant to adjournment on
Friday, February 16, 1940, in the Caucus Room, Senate Office Build-
ing. Senatoc Joseph C. O'Mahoney, presiding.
Present: Senators O'Mahoney (chairman). King, and White; Rep-
resentative Sumners (vice chairman) ; Messrs. Henderson, Lubin,
Pike, Kades, and Brackett.
Present also : Senator Clyde L. Herring, of Iowa ; Representative
Vincent F. Harrington, of Iowa ; Gerhard A. Gesell, special counsel ;
Ernest Howe, chief financial adviser ; and Helmer Johnson, attorney.
Securities and Exchange Commission.
The Chairman. The committee will please come to order.
TESTIMONY OF GLENN E. ROGERS, MANAGER, FARM LOAN DI-
VISION, METROPOLITAN LIFE INSURANCE CO., NEW YORK,
N. Y. — Resumed
Mr. Gesell. Now, Mr. Rogers, there are one or two matters I want
to cover with you before we get to a discussion of the management
of the Metropolitan's farm real-estate and rehabilitation program
and some of those other matters we touched on last time.
First of all, I want to ask you whether you are familiar with the
provisions of the second Frazier-Lemke Act.
Mr. Rogers. Yes.
Mr. Gesell. That bill provided, did it not, that the farmer might
under certain circumstances, enter into a composition or extension
system whereby interest would be reduced to 1 percent?
Mr. Rogers. Yes.
Mr. Gesell. And then gradually increased to 5 over a period of
years ?
Mr. Rogers. That is correct, as I recall.
Mr. Gesell. What was the attitude of the Metropolitan with re-
spect to agreeing to such compositions under the act ?
Mr. Rogers. We felt that where the security for our debt was
there, in all respects, that we were duty bound to endeavor to
recover for the benefit of our policyholders that which was rightfully
theirs. The security for the whole debt was available, we believeo in
all instances.
14996
14996 CONCENTRATION OF ECONOMIC POWER
Mr. Geseix. So that in no case did you consent to such a composi-
tion; did I understand you correctly on that?
Mr. Rogers. I would not say in no case, but it was our general
policy not to consent to a composition. I would say this, that if in ^in
individual instance it was definite that the policyholders were not pro-
tected to the full extent, then we would have consented to a compo-
sition.
Mr. Gesell. But you felt in all cases that your mortgages were
sound, and that to in effect permit this interest reduction would be to
lose security for the policyholder?
Mr. Rogebs. Yes. Now in explanation, the largest number of
Frazier-Lemke cases we had at any one time was 43, out of a mortgage
portfolio of several thousand loans. We have, I think, only 12 today,
and I think the total that was ever filed, the entire total was 77, so
that the Frazier-Lemke Act, the second one, was an act that gave the
farmer an opportunity to get all of his creditors together, and so fre-
quently it was the subsequent creditors that wished protection, and in
that way it really constituted a moratorium.
Frankly, I have never been opposed to the second Frazier-Lemke
Act, I think in times of distress, such as prevailed, that such legisla-
tion is often very desirable.
Mr. Gesell. Did you have many requests for compositions under the
Frazier-Lemke Act?
Mr. Rogers. Each case was a request.
Mr. Gesell. You said you had 45 cases. Then you mean you had
45 requests?
Mr. Rogers. We had 77.
Mr. Gesell. With respect to the Federal Farm Mortgage Corpora-
tion bonds, did you acquire any of those bonds?
Mr. Rogers. Oh, yes.
Mr. Gesell. Have you in mind how. many of them you hold at the
present time?
Mr. Rogers. Not at the present time, I could not say, as they are
handled by the Treasury Department. I could tell you, I believe, to
the dollar how many bonds we accepted.
Mr. Gesell. That would be fine. Let us have that figure.
Mr. Rogers. We accepted — well, I would give it in two figures.
Would round numbers satisfy ?
Mr. Gesell. Certainly.
Mr. Rogers. Ten million five hundred thousand in bonds.
Mr. Gesell. That is bonds of the Federal Farm Mortgage Corpora-
tion which you accepted at any time during the period ?
Mr. Rogers. That was really in payment of the loans that the Farm
Credit Administration took up from the company. The total amount
of our mortgages that were refinanced by the Farm Credit Adminis-
tration was $23,553,000.
(Senator King assumed the chair.)
Mr. Gesell. Under what circumstances, and for what types of mort-
gage, did you take the bonds?
Mr. Rogers. Well, we accepted the bonds in payment of any mort-
gages. You see, the Federal Credit Administration or the Federal
land bank refinanced anj farmer's indebtedness that desired it. Now,
out of that group I believe that there were close to $5,000,000 of our
CONCENTRATION OF ECONOMIC POWER 14997
farm mortgages that were in good standing as to payment of interest,
principal, and taxes at the time they were taken over by the Farm
Credit Administration.
,: Mr. Gesbll. That was what I was trying to get at, get some idea
of what bonds were for mortgages in good standing, well secured,
and what percentage of bonds were for mortgages with which you,
yourselves, were having some difficulty. I had in mind this letter
'from Mr. Lougee, which indicated that you took those bonds only in
cases where the mortgages which you had were in some difficulty.
Referring to the first two niunbered paragraphs, you catch what I
mean, I think.
Mr. Rogers. That was an endeavor at first to retain these mort-
gages that were in good standing, but we had to abandon that policy.
We were unable to continue to hold even our very good mortgages,
and out of th^$5,000,000, or thereabouts, of loans that were in good
standing, and some of it right in the depth of the depression — well,
I shoula say the 5,000,000 were in good standing, and out of the bal-
ance were a large number of good mortgages that were excellent but
temporarily in default.
Mr. Gesell. Temporarily embarrassed?
Mr. Rogers. Yes.
Mr. Gesell. Let's see if I have the figures correctly. There were
about 20,000,000 in all?
Mr. Rogers. Twenty-three.
Mr. Gesell. Of which five were 4®finitely good at the time they
were taken over.
Mr. Rogers. That is right.
Mr. Gesell. And there were others in the remaining 18,000,000
which were just temporarily embarrassed, and you believed would
have co.nie out whole?
Mr. Rogers. That is right, and occasionally a farmer would let his
loan default because in most cases he might owe subsequent debt, and
the Federal Credit Administration had a tremendous task at that
time. They refinanced, or, let us say, they made, 10 percent of all the
farm mortgages in the United States in a single year. Naturally,
there were delays, and during a delay if a farmer realized that his
loan was approved but it would be a mere matter of time until he
would get his moneyj he frequently would let his interest default.
Those cases would go in with the default cases. .
Mr. Gesell. And these cases that went to the Farm Credit Admin-
istration did result in some scaling down for the farmer, did they
not ?
Mr. Rogers. I think they did.
Mr. Geseijl. He either got a reduction in interest or he got a mort-
gage of longer term that was more satisfactory, taking the economic
situation into account.
Mr. Rogers. Yes, indeed.
Mr. Gesell. So that along the line of some of the questions I was
asking you last week on matters of interest reduction and scaling
down 01 mortgages, to the extent that you took these bonds of the
Farm Credit Administration you did ^ant benefits to the farmers.
Mr. Rogers. Yes. We took this position, that'if we had a very well
secured loan but a man had other indebtedness, had been caught, let
14998 CONCENTRATION OF ECONOMIC POWER
US say, in some kind of a jam, that we should never stand in the way
of a man benefiting himself by refinancing his debts unless we our-
selves would do it, as it was unfair for us to say, "We have a fine
mortgage and will stand pat, but you owe other debts which do not
interest us." We say that everyone who had indebtedness subsequent
to our mortgage, regardless of how good that mortgage may be, that
man should be given the opportunity to refinance elsewhere.
Mr. Gesell. And, of course, it was true that in this group of
$23,000,000 of mortgages which were turned over to the Federal
Farm Credit Administration there were some definitely bad mort-
gages, delinquent mortgages, and to that extent you did get some real
assistance from tl^e Administration?
Mr. Rogers. Yes ; we got some real assistance.
I wish to say this, that the Federal land banks did a wonderful
job during that time considering the burden that was placed upon
them, and there were cases wherein we felt it advisable to accept
payment and waive all interest due, in a bad case, if we thought it
was definitely bad. If we thought the policyholders would not have
an opportunity to collect on those cases we would let them go, and I
think in some cases we took less than the full amount of the principal,
but I cannot recall that detail of several years ago.
Mr. Gesell. On the question of moratorium legislation, what was
the attitude of the company ? Did it oppose moratorium legislation,
or was it neutral, or what position did it take?
Mr. Rogers. We took a neutral position. We never opposed mora-
torium legislation. We might, on an individual case where bad
faith seemed to exist on the part of a farmer borrower, oppose him
in that type of case, but in the majority of the moratorium cases we
went right along with those people.
Mr. Gesell. I think perhaps you misunderstood, if I may inter-
rupt. I asked with respect to the enactment of the legislation. You
were discussingj after the legislation was in effect
Mr. Rogers (interposing). That is correct.
Mr. Gesell. What your policy was. Now, with respect to the
enactment of the legislation,
Mr. Rogers. We never took any part in that at aU.
Mr. Gesell. Did any association or organization of life-insurance
companies of which your company is a member to your knowledge
oppose moratorium legislation?
Mr. Rogers. That I do not know, Mr. Gesell. You would have
to ask those people. I do not know. I do not follow those things.
Mr. Gesell. You have no knowledge of any activities of the Asso-
ciation of Life Insurance Presidents in that regard ?
Mr. Rogers. No.
Mr. Gesell. Now, with respect to handling of cases after the mora-
torium legislation was enacted — I interrupted you when you were
about to tell us about that.
Mr. Rogers. Well, what I was going to say was that we had a great
many cases that ran under moratorium laws. Our policy of leniency,
working with borrowers, left a great many of our cases subject to
the provisions of the moratorium laws when they were passed. We
worked along with those people and did everything we could to be
helpful. We turned the work over to one man, an agricultural expert,
CONCENTRATION OF ECONOMIC POWER • 14999
to try and advise with these people in the operation of their farms.
In some few cases, the moratorium saved the farms, but not in many
cases. Another development was the fact that after the moratorium
law of Iowa, particularly, was declared unconstitutional in 1939, com-
promise arrangements were worked out in a very, very large per-
centage of the cases.
Mr. Gesell. Now, let me ask you this. When moratorium legis-
lation was up for consideration, or a legislature was about to convene
to consider legislation in aid of distressed farmers in a particular
State, did that in any way affect the foreclosure policy of your com-
pany in the farm field?
Mr. Rogers. Well, I would say this, that if we had a number of
cases that were definitely foreclosure cases that had no possibility of
working out, we might say to our attorneys, "Well, it would be
advisable to push those cases along." I think that might have been
done, and I think it was perfectly proper to do it.
Mr. Gesell. Yes; you mean that if you felt there was to be some
type of legislation enacted, in anticipation of that you would trj
to clean up all of the cases where you were sure no "work-out possi-
bilities existed?
Mr. Rogers. Yes. To illustrate: I made a spot-check, I believe I
mentioned before, oi $17,000,000 of mortgages that were foreclosed.
Those parties owed $3,000,000 on other land and they owed second
mortgages and junior indebtedness of $5,500,000. In such circum-
stances it was verv difficult for many of those people to work out, be-
cause their seconaary indebtedness was probably equal to 50 percent
in some instances of their first mortgage.
Mr. Gesell. Is that the way that you determine whether* or not
work-out possibilities existed, namely, to inquire into the whole debt
picture of the farmer?
Mr. Rogers. Indeed, in all instances.
Mr. Gesell. It wasn't based simply on an analysis of the land and
the particular mortgage you held, but his whole circumstances ?
Mr. Rogers. His whole circumstances, because after all it is the
man and the family that count.
Mr. Gesell. Well, now, one other phase of this. Are you familiar
with the Iowa Farm Debt Advisory Council And its activities?
Mr. Rogers. Yes; indirectly of course. '
Mr. Gesell. What was the nature of the activities of the Iowa
Farm Debt Advisory Council ?
Mr. Rogers. It was to get the creditor and the debtor together for
the purpose of diseussing the affairs of the farmer borrower, the
debtor.
Mr. Gesell. It was a plan, was it not, whereby the insurance com-
pany would advise the council prior to foreclosure with a view to
sitting down with the council and the farmer and considering mat-
ters of debt adjustment?
Mr. Rogers. Well, now, that is just slightly confused, I think. I
cannot recall the details, excepting this, that we took the position
that the farmer should ask for xjonsideration of his case before the
debt adjustment committee, and that we were always happy in such
circumstances to meet with him and with the debt-adjustment com-
mittee.
15000 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. The debt- adjustment committee, however, wanted you
to notify them directly, did it not ?
Mr. Rogers. I believe that is the case, but we felt that was terribly
unfair to the farmer. We shouldn't notify them or haul him before
a committee of others. He might much prefer to talk his situation
over with us. We were always willing to listen to him, always
willing to work with him.
Mr. Gesell. Well, you felt it was unfair to notify this council
before you foreclosed, do I understand you correctly in that?
Mr. KoGERS. I didn't say exactly that. I said it was a matter for
the farmer to go to the debt-adjustment committee, rather than for
us to haul him before the debt-adjustment committee.
Acting Chairman King. You didn't want to initiate the proceed-
ings which would invoke the power of the adjustment committee.
Mr. Rogers. No.
Acting Chairman King. You wanted the farmer himself to do that.
Mr. Rogers. That is right. Senator King.
Mr. Gesell. The council felt pretty strongly, didn't it, that that
approach to the matter was unsatisfactory from their point of view,
since they felt many farmers considered their. cases hopeless and
wouldn't seek the aid of any third party ?
Mr. Rogers. There may have been some correspondence that had
reference to that, but it has been so many years aga I do not recall
the details of it,
Mr. Gesell. Do you recall seeing that letter that I now show you ?
Mr. Rogers. Yes; this is a letter addressed to Mr. Lincoln, then
vice president and general counsel of the company.^
Mr. Gesell. That letter states the position of the council with re-
spect to the position your company took on this matter, does it not?
Mr. Rogers. I would have to read that letter rather carefully. I
think Mr. Lincoln's reply stated our position.
Mr. Geselu I have a letter of Mr. Lincoln's dated October 24,
1934.^ Is that the one you refer to ?
Mr. Rogers. That is the one.
Acting Chairman King. You recognize the fact that there was this
advisory committee created by the law of Iowa, and when you asked
to participate in the proceedings for the purpose of adjusting all of
the obligations, -^our organization did participate, directly or indi-
rectly ?
Mr. Rogers, o^ ~ itor King, I am not sure whether that was a law
or whether it was a created bod v. Which would you say, Mr. Gesell?
Senator Herring. It was m reated by law. I appointed the con-
ciliation board as Governor 1> the eflfort to assist both the loaning
companies and the farmers that were bein^ foreclosed.
Mr. Gesell. This is the letter of Mr. Lincoln referred to, stating
the position of the Metropolitan, is it not?
Mr. Rogers. This is the letter ; yes.
Mr. Gesell. I should like to offer this letter for the record.
Acting Chairman King. It may be received.
(The letter referred to was marked "Exhibit No. 2297" and is
included in the appendix on p. 15519.)
» See "Exhibit ^fo. 2298." appendix, p. 15520.
» See "Kxhiblt No. 2297," appendix, p. 15r>19.
CONCENTRATION OF ECONOMIC POWER 15001
Mr. Gesell. I should also like to offer for the record a letter
from the Iowa Farm Debt Advisorj'^ Council which Mr. Rogers
identified a moment ago.
•Senator White. Is the one now being offered the one to which tJie
J^incoln letter is the reply?
Mr. Gesell. It is the reverse. The Iowa Council letter is the reply
to Mr. Lincoln's letter.
Acting Chairman King. It may be received.
(The letter referred to was marked "Exhibit No. 2298" and is
included in the appendix on p. 15520.)
Mr. Gesell. That letter from the Iowa Council indicates that m.ost
of the insurance companies took an attitude opposite from yours
with respect to this matter of farm-debt adjustment, as far as ^his
particular council was concerned.^ I wondered whether there were
any other factors in your mind other than the fact that you thought
it was unfair to the farmer to bring him before this council unless
he was willing, which prompted your attitude in this connection.
Mr. Rogers. Not that I recall at this time, as letters were fre-
quently written to us by our correspondent that he had talked matters
over with a farmer and the farmer preferred not to get others into
his financial affairs.
Mr. Gesell. Do I understand that the farmers didn't Want their
matters brought before this council in cases that came to your atten-
tion through correspondents?
Mr. Rogers. I would say that some did not. Others did. We al-
ways left it to the farmer. We thought it was his right and privilege.
Acting Chairman King. It is a purely voluntary matter on the
part of the farmer. If he wahted to accept the services of this ad-
visory committee, it was all right with you. If he did not want to
accept their interposition, that was a matter for him to determine?
Mr. Rogers. Yes; that is right.
Acting Chairman King. But yiou did not feel, as I undestood you
tnat it was an obligation resting upon you or your company to insti-
tute the proceedings under which he was to be brought before or
under the jurisdiction of this advisory committee?
Mr. Rogers. That is correct.
Mr. Henderson. Mr. Rogers, you said, I believe, that there was no
other reason why you had adopted the attitude you did. Was it that
you believed a -move in Iowa would be a political move, the setting
up of this council?
Mr. Rogers. I don't recall anything of that kind.
Mr. Henderson. Would this refresh your memory?
I will make my question specific. Did you have a feeling that the
program instituted out there was for political purjJoses and you had
a general distrust of the people who were running it?
Mr. Rogers. No ; that was not the case. I would not say that was a
part of the reason, or that those in charge considered it desirable from
a political standpoint that such committees be set up. I wouldn't
say that I didn't have that feeling, though.
Mr. Gesell. This note that is attached is written in your hand-
writing, is it not?
Mr. Rogers. Yes ; it is.
1 See "Exhibit No. 2298," appendU; p. 16520.
15002 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. And you say, "I believe politics prompts the program
of Governor Herring on the foreclosure of mortgages. I know Bow-
man and frankly doubt his sincerity." Mr. Bowman is evidently the
man who signed the letter originally initiating the question as to
whether or not there would be a cooperative move between ygur com-
pany and the Iowa Farm Debt Advisory Council. I take it then you
felt that this council wasn't prompted by the needs of the farmer in
the locality, entirely — there were other factors involved?
Mr. Rogers. I would say that it was prompted by the needs of the
farmer, and I would say also that it was prompted by the desire of
the men in control of the administration of the State of Iowa to have
such legislation — or not legislation, but to have such committees
set up. The thing about things of this kind is that, not being in a
State you do not know thoroughly all that goes on.
Mr. Henderson. In other words, it mignt be good public policy
^nd good politics at the same time.
Mr. Rogers. Indeed; yes, sir.
Acting Chairman King. All political moves are not bad.
Mr. Rogers. Indeed not.
Acting Chairman King. Although some may be.
Mr. Gesell. I was just tvondering, Mr. Rogers, whether the very
fact that you weren't in the State and were somewhat removed from
those problems led you to misjudge the efforts back of the formation
of this particular organization?
Mr. RoG? ds. That is a possibility. We endeavored to keep very
fully infor.ned, but a single State is a large. area, and that which
goes on within the State is difficult to know.
Mr. Gesell. Now, coming to the question of the management of
farms — first, there is one other question. Who has been your farm-
mortgage correspondent in the States of Kansas and Oklahoma?
Mr. Rogers. In the State of Kansas, the Central Trust Co., of
Topeka, Kans. ; and in Oklahoma we had the Pioneer Mortgage Co.
for many, many years, and then succeeding the Pioneer Mortgage
Co. was the Central Mortgage Co.
Mr. Gesell. The Central Mortgage Co. and the Central Trust Co.
represented you from ^i on in Oklahoma and Kansas; is that cor-
rect?
Mr. Rogers. The Central Mortgage Co. represented us in Oklahoma
from the time that the Pioneer Mortgage Co. was unable to carry on.
What happened there was that the executive vice president and the
president of the Pioneer Mortgage Co. both died within a period of a
year. Then it became necessary for us to find someone to take over
the servicing of our Oklahoma mortgages at the time of severe
depression.
In that connection, the Pioneer Mortgage Co. had some employees
that were excellent men. We thourfit if we could get one of our
existing correspondents to just add that State to their operations and
take over some of these experienced people, that it would be the
easiest way to handle the situation in the depth of a depression when
conditions were very, very bad and experienced people were badly
needed.
Mr. Gesell. So that you took the farm correspondent in Kansas,
in whom you had confidence
CONCENTRATION OF ECONOMIC POWER 15003
Mr. BooERS (interposing). That is right.
Mr. Gesell. And he took over the business of the loan correspond-
ent in Oklahoma, some of the personnel, and continued the operations
in Oklahoma?
Mr. Rogers. Yes; that is right.
Mr. Gesell. Mr. Carroll B. Merriam was a director of the Metro-
politan at that time, was he not?
Mr. Rogers. The negotiations for the taking over of the Oklahoma
operation were started before Mr. Merriam was a director. He was
a member of the R. F. C. here in Washington, D. C. He had not
been active in the Central Trust Co. for some time. His son, Jack
Merriam, was the real mortgage executive in the Central Trust Co.
at the time.
Mr. Gesell. Then, do I understand you to say that he was a di-
rector before the negotiations in Oklahoma were completed, but that
• he was not when the negotiations started ?
Mr. Rogers. That is exactly right.
Mr. Gesell. And after the negotiations went through, Mr. Mer-
riam was a director of the Metropolitan?
Mr. Rogers. Yes ; at the time the negotiations were completed.
Mr. Geseix. What was his connection with the farm correspondent,
the Central Trust Co. ? He was a stockholder, was he not ?
Mr. Rogers. He was a stockholder in the Central Trust Co., but 1
do not recall his interest in Central Mortgage.
Mr. Gesell. The Central Mortgage was owned by the Central
Trust?
Mr. Rogers. Yes. -
Mr. Gesell. So, having a stbck interest in the parent, so to speak,
he had an indirect interest in the subsidiary ?
Mr.' Rogers. Yes; I suppose so.
Mr. Gesell. And you say the companies were run by his son?
Mr. Rogers. That is correct.
Mr. Gesell. And then for a period of some years farm loans were
made through these correspondents in Kansas and Oklahoma, were
they not?
Mr. Rogers. That is correct.
Mr. Gesell. During the time that Mr. Merriam was a director of
the Metropolitan ?
Mr. Rogers. -That is right.
Mr. Gesell. And, in addition, the farm correspondents handled the
management of some farm property that had been taken over through
foreclosure out in that area under an arrangement similar to that of
other correspondents?
Mr. Rogers. I will tell you how that worked out. At the time that
the Central Mortgage Co. took over the handling of the Oklahoma
loans they did not wish to handle the real estate — as I mentioned
Friday, the mortgage loan correspondents were not very greatly
interested.
So we set up our own organization to handle the management of the
farms and put a Mr. R. E. Wilson in charge. In keeping with our
extensive rehabilitation program, Mr. Wilson carried out and directed
15004 CONCENTRATION OF ECONOMIC POWER
the rehabilitation of our Oklahoma properties, bringing them up to a
high standard. After that difficult work was comjJleted and some of
the farms had been sold, I saw that the expense of our supervision
for the small number of farms in that State was very high. Then 1
asked the Central Mortgage Co, if they would not take over tne super-
vision of those farms on a fee basis.
Now, out of 2,000 1'^ans, over 2,000 loans, in Oklahoma, our maximum
ownership of properties was 88, and those properties were very small,
ard, of coursej I spoke of the expense in supervising small loans, and
that prevails m supervising small properties.
Mr. Gesell. So that in that instance you decided it would be better
for the farm correspondents to handle the management of the
property ?
Mr. Rogers. Yes : and they still handle it.
Mr. Gesell. Mr. Merriam has resigned as a director, has he not?
Mr. Rogers. So I understand.
Mr. Gesell. When was his resignation — last year?
Mr. Rogers. That I could not say, Mr. Gesell.
Mr. Gesell. May we have that date for the record ?
Mr. F. H. Ecker (chairman of the board, Metropolitan Life In-
surance Co.). The exact date I do not know, but it was probably
about the 1st of December of last year.
Mr. Gesell. Then, for the period from 1934 to his resignation, the
Central Trust Co. and the Oklahoma subsidiary were actively acting
as farm correspondents, were they not ?
Mr. Rogers. Yes ; the Central Trust Co. had acted for several years,
I believe.
Mr. Gesell. That was prior to the time Mr. Merriam became a
director? They had a connection?
Mr. Rogers. They had a connection ; yes.
Mr. Gesell. Due to the troubles of the Oklahoma correspondents?
Mr. Rogers. Yes.
Mr. Gesell. Well, now, how many farms — once again may we have
the figure for the record— does the Metropolitan manage ?
Acting Chairman Kjng. Now ?
Mr. Gesell. Yes.
Mr. Rogers, Slightly over 7,000. I believe I gave the number as
7,153. I believe nie number is actually 7,078, as of last week.
Mr. Gesell. When you take over a farm through foreclosure, you
have indicated you enter into an extensive rehabilitation program.
Mr. Rogers. Yes.
Mr. Gesell. Before I get to that, may I ask you geuerally what that
averages per farm, and how much of the money goes to buildings and
property, and how much of it goes to the land, so we can have some
idea on an over-all basis how it works ?
Mr. Rogers. That would be an impossible question to answer, for
the reason that reclaiming land in many respects is giving aid to
Nature. It is planting legume seed, soil-building crop seed, and it
takes time to go around the farm with your soil-building crop seeds,
but you will continue it. It is a part of regular maintenance.
Mr. Gesell. Since it is a long-term program, it is hard for you to
say, on the average, how much you put into the farm ?
CONCENTRATION OF ECONOMIC POWER 15005
Mr. Rogers. Yes. I would say this: That to date we have spent
from 8 million to 9 million dollars placing the buildings and fences
on our farms in excellent condition.
Mr. Gesell. If I may interrupt a moment, how much of it have
you spent for this land rehabilitation, so we can get the figures offset
against each other?
Mr. Rogers. That would be difficult. You have legume seed run-
ning into the millions of pounds. For instance, today we have on
liand, off of our. own farms, enough crotalaria seed to be used in the
South for the next 2 years, and lespedeza seed to be used in our
Memphis branch office territory and Missouri territory that will last
us 2 years.
Mr. Henderson. What type of seed is that?
Mr. Rogers. One type is crotolaria. It grows much like sweet
clover. Governor Herring knows sweet clover, but it grows only in
the South, in the Coastal Plain region. It will not produce seed
much norih of Macon, Ga., and it will grow sometimes 6 feet high,
and then we turn that into the soil, generally in a ver^ green state,
and that adds tons and tons of fertility to the land.
Mr. Gesell. How does it happen that you know the figure for
what it costs to rehabilitate the. buildings and fences and don't know
how much you put into the land? It would be the difference,
wouldn't it, if you took your total rehabilitation expense ?
Mr, Rogers. Because we look upon the building up of the land as
an annual, regular maintenance expense, and we look upon the build-
ing situation as a large outlay of money that will end once they are
completed.
Mr. Geseil. And you can't tell us as of today, or to date, how
much you have put mto the land?
Mr. Rogers. No; I could not. It would run into thousands of
dollars, of course.
Mr. Gksell. 1 was trying to get some relation between how much
went to buildings and fences and how much went to land. You
can see my point.
Mr. Rogers. Yes. For instance, commercial fertilizer is also an
annual expense, I think our purchases of commercial fertilizer run
from 100 to 125 thousand dollars a year.
Mr. Gesell. If vou can't tell us that figure, will you describe
your rehabilitation program for us in as short a time as you think
Tidequately covers it?
Mr. Rogers. Well, of course, rehabilitating farms is quite a heavy
task. We have spent 8 to 9 million dollars on the buildings alone,
but the farms have paid fer that expense; we have charged that
against the annual income cif the farms, and in addition I think we
have spent probably 2 piillion dollars for new buildings, maybe more,
which were added to the capital account, were considered capital ex-
penditure. I could show you more readily by a few pictures that 1
have here.
Acting Chairman King. That would take too long. Haven't you
any idea as to the amount you have expended for the rehabilitation of
the land in contradistinction to the rehabilitation of the buildings?
Mr. Rogers. No.
124491—41 — pt. 28 21
15006 OONCENTKATION OB^ ECONOMIC POWER
Acting Chairman King. Would it be 50 percent as much?
Mr. Rogers. If I were to make an estimate I would say the cost of
the rehabilitation of the land would run about $300,000 a year.
Acting Chairman King. $300,000 a year?
Mr. Rogers. Yes; that would be my estimate.
Acting Chairman King. Would that include the cost of all the
fertilizer you had purchased?
Mr. Rogers. Yes.
Acting Chairman King. Would that be the cost of. operating the
farms themselves?
Mr. Rogers. No; that is just for the seed and for the fertilizer.
Acting Chairman King. Then the cost of operating the farms
would l^ something.
Mr. Rogers. You mean the supervision of them?
Acting Chairman King. Yes; operating them, plowing, i-eaping,
and sowing.
Mr. Rogers. We do not operate them. Senator.
Acting Chairman King. You let your tenants do that ?
Mr. I^GERS. All are on a tenant basis, with very few exceptions.
(Senator O'Mahoney resumed the chair.)
Mr. Gesell. To get some idea of your rehabilitation program, could
you tell us generally after you get a farm what you do ?
Mr. Rogers. Yes. After we acquire a farm we have one of our agri-
cultural experts make a complete analysis of it. He makes out a com-
plete report, an analysis of how the fields should be laid out, as to the
buildings that should be repaired and the buildings that should be
added. Sometimes building;s should be cut down in size; sometimes
they should be moved to give a better appearance to the farmstead.
That is all worked out as a complete program, and after the field repre-
sentative, as we call him, has made his recommendation, then his super-
vigor, the man that is over him, goes over all his plans. Tlien that plan
is submitted to New York for approval, and, after approval, then we
proteeed with two things.
The plan of the farm or the field starts immediately. The rehabili-
tation of the buildings we have to take more gradually, because we
budget the amount that we are to spend on the buildings each year,
and that is much in proportion to tne amount of work the men can
handle. That, I believe, is the way that this is carried out.
Mr. Gesell, What are your relations with the tenants ? Wliat type
of agreement do you have with them? Do they pay you on a crop-
share basis, or do they pay you a percentage of their earnings, or how
does it work ?
Mr. Rogers. They pay us on a crop-share basis for the main cash
crops, and then they pay us cash rental for pasture land and hay-
meadow land.
Mr. Gesell. Then you must receive, in most instances, a considerable
share of the crops of these farms each year.
Mr. Rogers. We receive
Mr. Gksell (interposing). How does it run, around 50 percent?
Mr. Rogers. It depends upon the community. In Iowa 50 percent
of the corn in most areas is the accepted standard ; in the South, one-
fourth of the cotton ; in some areas 40 percent of the small grain ; other
areas, one-third of the small grain; whatever is the custom of the
community.
CONCENTRATION OF ECONOMIC POWER 15007
The Chairman. Can that be handled profitably from the point of
view of the Metropolitan ?
Mr. Rogers. I would say so, Senator. You take in 1939 our income,
rental income, was $5,000,000. In 1938 I think it was $4,500,000. In
1937 I think $4,600,000. The lasc 4 years it has been running along
there.
The Chairman. In other words, for 4 years the rental income of the
Metropolitan from farm tenants has been in excess of $4,000,000
annually ?
Mr, Rogers. Yes ; it averaged about $4,600,000.
The Chairman. How does that compare with the interest income
Avhich you wold have received had there been no foreclosures ?
Mr. Rogers. Well, it would be lower, in view of the fact that we have
spent so much money on rehabilitation. If that item were taken out,
you see, the gross rental return in 1939 was 6.03. The taxes amount to
approximately 1 percent.
Now, after a farm is thoroughly rehabilitated, the annual mainte-
nance item is very small.
The Chairman. The rehabilitation cost would be amortized into
the future.
Mr. Rogers. Under the ordinary circumstances, but we do not.
Mr. Gesell. Perhaps I can help by directing some questions fo the
tables which show some figures on that.
Mr. Rogers, you have "Exhibit No. 2250" in front of you, have you
not? Is it not correct that table 188 shows the farm real estate net
income or deficit of the companies — that the table shows for the
period '32 through '38 your company made, above depreciation,
$^,342,000 from its farm real estate? ^ '
Mr. Rogers. Yes; and included in that — that is, in addition
thereto — ^all of the money that was expended on rehabilitation.
Mr. Gesell. Yes. That is shown on table 191, isn't it, entitled
"The farm real estate owned — General ledger account" ? - That table
shows, does it not, that your book value of farm real estate as of
December 31, 1938, is $83,290,000?
Mr. Rogers. That is correct.
Mr. Gesell. $76,812,000 of that is represented by the unpaid prin-
cipal amount of the foreclosed mortgages; is that not correct?
Mr. Rogers. Yes.
Mr. Gesell. In other words, your farm real estate is carried at
$6,478,000 — that is the difference — more than the amount of the un-
paid principal of the amount of the mortgages foreclosed at the time
the real estate was taken over?
Mr. Rogers. Yes.
The Chairman. Would you state that again? I didn't get it.
My attention was diverted.
Mr. Gesell. We are talking of table 191, and that table indicates
that the Metropolitan's farm real estate account is carried at $6,478,-
000 more than the unpaid principa,! of the mortgages foreclosed at
the time the real estate was tak^ over. That is the difference
between $76,812,000
The Chairman (interposing) "Which is the unpaid principal
amount of foreclosed mortgages,
1 See Hearings, Part 10-A, p. 188.
» IbW., p. 191.
15008 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. And the $83,290,000 figure, which represents the value
whicli is carried in the general ledger account.
The Chaikman. The book value ; yes
Mr. Gesell. The difference is $6,478,000, as Mr. Rogers testified.
Stated in another way, Mr. Rogers, that means your book value is
109.79 percent of the unpaid principal of the foreclosed mortgages.
Mr. Rogers. Yes ; that is correct, and in explanation, $3,000,000 of
that represented new buildings constructed upon farms where we
believed that the book value was sufficiently low, or the real value of
the property was sufficiently high, to justify considering those new
buildings as a capital expenditure.
The Chairman. In other words, the investment of the Metro-
politan in rehabilitation or improvement is reflected in this figure.
Mr. Rogers. Not the rehabilitation, only the new buildings. If
we built a new house
The Chairman (interposing). I used the word "rehabilitation"
probably in too narrow a sense; in new construction and improve-
ment.
Mr. Rogers. New buildings only.
The Chairman. And what has been the valued of that?
Mr. Rogers. $3,000,000.
The Chairman. $3,000,000 have been expended in real-estate im-
provements upon the buildings.
The Vice Chairman. That is too narrow. Senator, if you will
pardon me. The figure just given is with reference to new buildings,
but it does not include the cost of improving the buildings and paint-
ing them up and patching them up, and so forth.
Mr. Gesell. It includes only a portion of the rehabilitation expense
that has been capitalized.
Mr. Rogers. And only a portion of the new buildings.
The Vice Chairman. "Wait a minute — only a portion of the new
buildings?
Mr. Rogers. Judge Sumners, if we have a farm that we doubt if
its real value is in excess of its book value, and we add a new barn to
that farm, we charge that new barn to expense.
The Vice Chairman. You don't charge it to that particular prop-
erty.
Mr. Rogers. No ' we charge it to expense.
Mr. Gesell. You don't capitalize that ?
Mr. Rogers. We don't capitalize it.
The Vice Chairman. Why don't you capitalize it? It is a part
of your investment in that property, isn't it?
Mr. Rogers. We don't, because we have our doubts as to the real
value of the farm.
The Chairman. As I understand your statement, it is simply
this — that if the value of the farm in your judgment is not actually
equal to the book value, then if you construct some building upon
that farm, you do not add the cost of that construction to the book
value, because it operates only to bring the real value up to the
boot va'hie.
Mr. Rogers. That is correct ; exactly. Senator.
The Vice Chairman. Does the cost of improvement find its way
into any other item than as an item of cost of that particular farm?
CONCENTRATION OF ECONOMIC POWER 15009
Mr. Rogers. No; not in that particular case, Now, in the event
we had a farm with a book value, let us say, of $10,000, and we be-
lieved the real value of that property was $13,000, and we were con-
structing a new barn costing $800, in that event we would increase
the book value of that particular farm $800.
The Vice Chairman. Let me ask you right at that point— ^I think
we have got you there: At what book value are you carrying these
farms that are not worth what you foreclosed them for?
Mr. Rogers. Well, we are carrying some farms that are probably at
this time not worth the full amount of the book value. They are
few in number. What we look at is our farm real-estate portfolio
as a whole. We have many farms, a great percentage, of them, that
are worth much more than the book value.
Now, if we have a farm that is injured to the extent of being worth
materially less than its book value, we write that individual property
down, but if we have a farm
The Vice Chairman (interposing). You write it down. Then
when you put a new building on it, why don't you write it up?
Mr. Rogers. We have not followed that policy.
The Vice Chairman. Suggest that to your management, will you?
Mr. Gesell. Now, Mr. Rogers, in further reference to this ques-
tion, am I correct in saying that most of these rehabilitation ex-
penses that have been capitalized have been capitalized since
January 1, 1932? I would assume that is correct, because your
foreclosures took place mostly since then, and much of your expendi-
tures.
i,^i\ Rogers. I would presume that that would be the case, since
1932.
Mr. Gesell. It would be safer to say that probably 75 percent of
these items capitalized have taken place since that time,
Mr. Rogers. I believe it would.
Mr. Gesell. Now, if you will turn
The Vice Chairman (interposing). Let me ask another question.
I can't get this clear. When you put these improvements on prop-
erties that are not equal to their book valne, you are merely trying
to pull up the real value to the book value
Mr. Rogers. That is correct.
The Vice Chairman. I can't understan-d why you don't put the
book value of the farm at its real value ?
Mr. Rogers. That was done, as I say, whenever there is any great
difference. You may have a farm, let us say, that has a book value
of $10,000, and you have an appraisal of, let us say, $9,400. The
farm is being improved,^ the income from it is being improved, and in
those cases we are not adjusting those small items.
The Vice Chairman. Let me ask another question and maybe that
will clear it up : How much is the expenditure cf the character which
you have indicated that goes on these farms that are below book
value, and with . reference to which you make no inclusion in this
item of improvements ?
Mr. Rogers. I would have to make an individual analysis of each
property, I have no other way of doing it.
The Chairman. By and large, what would be your opinion ? I
should think that your answer, would depend .upon vour general
15010 CONCENTRATION OF ECONOMIC POWER
knowledge as to what proportion of farms on which improvements
had been made were actually below book value.
Mr. Rogers. Senator, I couldn't give you an idea. That is very
difficult in handling upward of $80,000,000 of real estate.
The Chairman. Could you answer a question as to the whole port-
folio? Is that above or below book value, or was it above or below
book value when you began this program ?
Mr. Rogers. Today we believe that our value, real value, is $5,000,000
above our book value and that is arrived at by taking into account in-
come and the intricate knowledge of these properties of the men who
handle them.
The Ch^mrman. All the work that you have done in rehabilitation
and improvement has, of course, increased the value of these farms.
Mr. Rogers. Yes ; greatly.
The Chairman. All right; accepting the fact that the value now is
so much greater than book value, what about the condition at the time
you began?
Mr. Rogers. Well, Senator O'Mahoney, you know it is very difficult
to take a farm that has probably been worked hard by the owner, to
try and save it, and he has not spent money on buildings at all ; k
takes money to bring that farm back to its real value, and it is all done
over a period of years. We are constantly working with them.
The Chairman. I should think that it is perfectly obvious that in a
depression, an agricultural depression particularly, many mortgaged
farms would tend to depreciate because of just exactly the conditions
t hat you now describe.
Mr. Rogers. Yes.
The Chairman. The farmers didn't have the money to keep them
up and buildings began to run down, and so forth and so on, so that
when you began this program of rehabilitation, it would appear to me,
without any knowledge of the facts with respect to your farms but as
a general rule probably there had been a considerable depreciation of
actual value.
Mr. Rogers. Yes ; there had been ; and, of course, with the program
starting in 1932, and really being more active in 1933, during that time
(he farms kept coming to us, you see.
The Chairman. Now, you have actually by this policy greatly in-
creased the value of these farms?
Mr. Rogers. Greatly increased it.-
The Chairman. And all I was trying to find out was how greatly
have you increased it?
Mr. Rogers. Because of the changing portfolio I would be unable to
say. And another thing, you have a slight change in land value gen-
erally over the country. We can see in different sections a gradual
change in land values. For instance, land values, I believe, as indi-
cated by the Department of Agriculture, have dropjoed slightly in
the last 2 years — have gone off slightly in the last 2 years.
Mr. Gesell. Mr. Rogers, I was just wondering whether you were
quite correct in your statement to Senator O'Mahoney. The rehabili-
tation expense to a large extent may have been simply money expended
to bring the value of the land and property back to what they were at
the time the original mortgage was made — isn't that correct — just
because of this mining of the land and the deterioration that took place
during this period of depression ?
CONCENTRATION OF ECONOMIC POWER 15011
Mr. Rogers. Oh, we have gone 'way beyond that. We have some
of these farms in finer condition than they have ever been in. For in-
stance, in Minnesota our men made their crop rotations a little too
short ; in other words, they placed so many legumes on those farms that
we actually got them too fertile and have had to crop them more
heavily.
The Chairman. You have directed the farmer in these improved
methods of agriculture, have you not?
Mr. Rogers. Oh, yes ; and of course we furnish all the soil improve-
ment crop seed.
The Chairman. Do you have special experts whose duty it is to
help the farmer with respect to how he shall control the crops?
Mr. Rogers. That is correct, Senator.
The Chairman. You teach him the improved methods of cultiva-
tion, better methods of treating the soil?
Mr. Rogers. Yes.
The Chairman. Do you counsel with him with respect to the type
and character and amount of crops which are planted ?
Mr. Rogers. Yes, indeed. What we say is that each farm must have
a certain percentage in soil improvement crops each year, and that
is agreed upon with the tenant and he understands it, and I wish
to say that tenants love the system, they love to have the improve-
ments made on the farm and they work with us splendidly,
wonderfully.
The Chairman. Do you have any contractual arrangements with
the tenants by which this program is carried out?
Mr. Rogers. We have each field lettered. I wish I could show you
one of those plans.
The Chairman. I would like very much to see one. Perhaps I
am anticipating some of your questions, Mr. Gesell, on that.
Mr. Gesell. No, Senator; when you were out of the room Mr.
Rogers offered those and Senator King felt that the time was too
short, so we didn't get to them at that time.
The Chairman. I see.
Mr. Rogers. There are two types of farms. Now the one in green
I believe is Montgomery County, Ky.
The Chairman. The one before me is Montgomery County, Tenn.^
Mr. Rogers. Well then, it is Tennessee. The other one, and I think
you should have it also. Senator, is a very high type Illinois farm.
These are just the essentials, the bare essentials of the working plan.
You see, each field is lettered. A, B, and C, and then if you turn
to the next page, to the cropping program ^
The Chairman (interposing). Now we are referring to the Illinois
farm. Each field is labeled by your manager.
Mr. Rogers. That is the agreed plan of operation.
The Chairman. Agreed to by whom, with whom?
Mr. Rogers. It is worked out by our men and the tenant in making
his lease agrees to operate in this way.
Now turn to the next page, Senator, and that is the cropping pro-
gram outlined for a period of years.^
The Chairman. The rotation chart ?
Mr. Rogers. That is the rotation chart, you see.
1 See "Exhibit No. 2299," appendix, p. 1552J^.
15012 CONCENTRATION OP ECONOMIC POWER
The Chaibman. I see. Now this rotation chart is worked out in
the case of corn for the years 1939, 1940, 1941, 1942, and 1943.
Mr. Rogers. That is right. Each field has its rotation.
The Chairman. In other words, here is the rotation for field A,
and then in the next column the rotation for field B, then the rotation
for field C,'for field D, for field E, for field F, for field G, and for
field H.
Mr. Rogers. Yes.
The Chairman. All included in 320 acres?
Mr. Rogers. That is correct.
The Chairman. That is quite a detailed plan, isn't it, for the im-
provement of agriculture on this farm ?
Mr. Rogers. Yes; indeed.
The Chairman. To what extent is the farmer consulted in the work-
ing out of this plan?
Mr. Rogers. Our own men usually work the plan -out, with, of coarse,
the tenant who is on the property. The tenant is given, as a rule, an
outline of this cropping system so that he knows what it is. Some of
them have it up in their homes. The lease provides that each year
these fields shall be planted to certain crops.
The Chairman. In other words, you issue a lease to the tenant by
which he agrees to follow the program of farming which is devised
by your experts?
Mr. Rogers. Yes; that is right, and they work together on ii. Now,
there is a great elasticity in the use of crops. For instance, the one
thing that we are interested in is that the soil-building crops, the
legume seed on a certain area of the farm, is planted, and for the
balance of the field whether he wished to put a field in corn or half in
corn and half in potatoes, we are not particular about that; or if he
wanted to use a small grain — wheat, barley, or rye — we meet his
requests In that respect.
The Chairman. What is the term of such a lease ?
Mr. Rogers. Our leases are made on a 1-year basis. We have con-
sidered longer-term leases, but we would have to include in them a
cancelation right in the event of sale.
The Chairman. You have a 1-year lease and a 5-year crop-control
program ?
Mr. Rogers. Yes; regardless of what tenant may remain on the
property, the soil-building program continues. The operation of the
farm continues in the regular way.
The Chairman. You use the term soil building which brings to my
mind the soil conservation. Do you cooperate with the Department of
Agriculture in its soil-conservation programs?
Mr. Rogers. You see, we are not permitted to go into the soil-
conservation program. There is a limitation of $10,000 which practi-
cally bars us, and our policy is to leave that to the tenant. If he wishes
to go in, we work out a modification of this plan, but you can realize
that practically all of the farms that wg have enter the soil-conservation
program with little change because they have been on a soil-conserva-
tion basis for many years.
The Chairman. In other words, you don't have to do very much in
bringing your farms up to the standard set by the Department of
Agriculture?
Mr. Rogers. No.
CONCENTRATION OF ECONOMIC POWER 15013
The Chairman. If anything.
Mr. Rogers. Seldom anything, if anything. I will give you an
illustration where we arc having a little difficulty. In the State
of Georgia we had 80 thousand acres go out of cultivation. We
brought that back into cultivation by the use of large tractors and
large tractor machinery, and then after we had it rehabilitated we put
small homes up on it. A lot of those farms have been sold, but when
the soil-conserving program goes back to any degree on a base acre-
age principle, it catches those farms that were not in cultivation
during the depth of the depression period, or parts of it. ;
The Chairman. Do these leases contain any option to the tenant
to purchase?
Mr. Rogers. No; they do not. In the past 4 years 87.3 percent
of all of our farms that have been sold have been sold back to
farmers or men whose business is farming, and one out of eleven
sales has been back to a former owner or a member of a former
owner's family.
The Chairman. What is the relationship, the ratio between those
sales and the total number of farms which have been taken over?
Mr. Rogers. The sales you mean to date? Eleven million six
hundred thousand dollars of sales in '39 represented about 12 per-
cent of all farms that we owned.
The Chairman. I was asking you a few moments ago to compare
the income of the company from the crop rents and whatever other
income you derived under this prpgram with the income which
had formerly been received from the same farms by way of interest.
Mr. Rogers. To date it is lower because we have been in the process
of rehabilitation. Now, that farm in Tennessee — the one with the
green plat — we have had only 2 years.^
The Cjiairman. Would it be correct to infer it is lower only be-
cause of the expense of rehabilitation?
Mr, Rogers. I would like to answer that by saying that after
our rehabilitation is completed, that is the rehabilitation of soil
and rehabilitation of buildings, ^I believe that our income would
be equal to or greater than the interest we are now receiving upon
mortgages made on farms.
The Chairman. And from the point of view of pure investment,
for the benefit of the company and its policyholders, which, in your
judgment now, if you have had experience enough to form a judg-
ment, would be better, the farm mortgage plan wirfi paj^ment of
interest and the retirement of the mortgages, or the tenant lease
program with the income from crops?
Mr. Rogers. I would say that in the end we would have to take
into consideration the rise and fall* in land value and commodity
"prices, but inasmuch as under the law we are to dispose of these
properties as soon as we can dispose of them readily, we look en-
tirely to the question of sale.
The Chairman. Yes; I understand that, but the answer to my
question is independent of that. Which would be in effect and in
fact the better from an income point of view to the company ?
Mr. Rogers. I believe the rehabilitated farm, would produce the
better income by and large, from the experience we have had.
> See "Exhibit No. 2299," Infra, p. 1552i.
15014 CONCENTRATION OF ECONOMIC POWER
The Chairman. In other words, if the law did not require the sale
of these properties eventually, the company would get a better in-
come by holding them and following the tenant program?
Mr. Rogers. Yes ; I feel quite certain of that.
Mr. Gesell. And you believe an organization such as yours can,
over such a broad range of the agricultural land, successfully and
ably manage farm property?
Mr. Rogers. Yes; I do.
Mr. Gesell. You don't feel that the size of the job or your absence
from the territory, or any of the other factors which prevail, make
it impossible for you to do a good farm-managing job?
Mr. Rogers. No; I do not, because of the fact of the ejxperience
we have had. Take this year, I just received a report on $2,500,000
worth of Iowa farms which returned $7.85 per acre gross rental,
or 9 percent on the book value, but that is a gross figure.
Mr. Gesell. How big a crop do you have each year? Have you
any idea of that, Mr. Rogers? I remember reading an article here
in Country Home magazine which said that you counted a $3,000,000
corn crop as a failure, that during '37 you harvested 50,000 bales
of cotton, 10,000,000 bushels of corn, 5,000,000 bushels of wheat,
6,000,000 pounds of peanuts, and 1,000,000 pounds of tobacco.^ Does
that give some idea of the crop you have ?
Mr. Rogers. Yes; some idea. That includes the tenants' share.
That is what the farms have produced.
Mr. Gesell. How many tenants do you have, between 50 and 60
thousand people?
Mr. Rogers. The number of tenants is around 8,000, and with their
families and their hired help, and so on, it would run to the figure
that you have stated.
The Chairman. Mr. Gesell, may I interrupt? As I look at these
plats, I think it would be probably impossible to reproduce the
diagrams of the farms with our facilities,
Mr. Gesell. We have had trouble with the charts, I might say,
that were introduced last time. Being in color they cannot be
reproduced in the record.
The Chairman. I think that the information contained on these
two sample plats is of so much interest that they ought to be in
the record.
Mr. Rogers. The S. E. C. has that first one, the diagram ; and that
other little fellow — not so small either, the one in green, the farm
in Tennessee, I just had prepared a day or two ago. Those cases
also contain an illustration of the rehabilitation. Senator O'Mahoney.
Can you see the two pages of pictures?
Tiie Chairman. Yes; I noticed that, and of course we can't re-
l)roduce the pictures, either, very easily, although they are very inter-
esting. There are pictures here of the before and after plan, show-
ing the dilapidated condition of the farm buildings, both the resi-
dential buildings and the barns, and then the manner in which all of
these structures have been improved.
Mr, Rogers. Yes.
iSoe Ralph Wallace. "Putting New Life in 1,618,000 Acres," the Tountry Home,
Magazine, October 1938, p. 7.
CONCENTRATION OF ECONOMIC POWER-
15015
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15016
CONCENTRATION OF ECONOMIC POWER
cs —
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an
So
CONCENTRATION OF ECONOMIC POWER 15017
The Chairman. But it strikes me that it would be well to put in
the record this tabular information on page 1 of the plat of the farm,
and the rotation chart, don't you think so, Mr. Gesell ?
Mr. Gesell. I haven't seen it, but I have no objection at all to its
fToing in. Yes ; I think that would be good information to go in.
Mr. Rogers. The color tells the story of the contour of the land,
.every little knoll, every little depression is marked down. We spent
Exhibit No. 2299b
DWELLING BEFORE REPAli..
8554X-0glesDy— 370 acres— Montgomery County, Tenn.
Exhibit No. 2299c
STOCK BARN BEFORE REPAIR.
8554X-0glesby— 370 acres— Montgomery County, Tenn.
$500,000 in your State last year on this work. Senator Herring. I
don't know how many millions we have spent in your State in bring-
ing the farms up.
The Chairman. Let us admit to the record those portions of these
two plats' which I have mentioned.
(The plats referred to were marked "Exhibits Nos. 2299 and 2299-A
to 2299-E" and appear on pp 15015-15018. The rotation charts bear
the same exhibit number and are included in the appendix on pp.
15521, 15522.)
15018
CONCENTRATION OF ECONOMIC POWER
The Vice Chairman. You spoke of an item, percent gross income.
Did that farm receive any benefits from the Federal Government?
Mr. RocEHS. No benefits at all. That is, 266 farms in Iowa this
year with a book value of $4,900,000 produced the rental income of
$463j000, or 9.33 gross income on book value, and $7.85 per acre.
The Vice Chairman. ,I don't know whether you understood me or
Exhibit No. 2299d
DWELLING AFTER REPAIR.
8554X-Oglesby— 370 acres— Montgomery County, Tenn.
Exhibit No. 2299e
STOCK BARN AFTER REPAIR.
8554 X-Oglesby— 370 acres— Montgomery County, Tenn.
not. My question was whether there were any governmental contri-
butions under any farm program that w^ent into those figures?
Mr. Rogers. No; none at all. Congressman.
The Vice Chairman. Were your farmers not cooperating with the
federal Government?
Mr. Rogers. The tenants are.
The Vice Chairman. All the benefits that come from the Govern-
ment in any sort of way go to the tenants as distinguisned from the
company ?
CONCENTRATION OF ECONOMIC POWER 15019
Mr. Rogers. As distinguished from the other, other than the parity
payments, the price-adjustment payments. But we have not re-
ceived any price-adjustment payments on the 1939 crop, and I do not
know whether we are entitled to any or not.
The Vice Chairman. I don't want to go into detail.
The Chairman. We might get the opinion of the witness as to
whether or not the House was correct in cutting that $3^0,000,000
appropriation off the parity payments.
Senator Herring. Yes ; I would like to get that.
The Vice Chairman. I don't think we ought to go into that.
The Chairman. I was just trying to worry this leader of the
House.
The Vice Chairman. There is a question that I think is rather
important, and that is whether or not any of these insurance com-
panies that you know of, holders of large numbers of mortgages on
farms, have ever undertaken to establish any advisory service to
their mortgagors comparable to this service which you extend to the
farmers, and if so, what has ever happened to it ?
Mr. Rogers. I tried that. Congressman, and we have run into this
difficulty. We ran into the difficulty that the man would say, "If I
spend $50 for legume seed, or $100 for legume seed, I will have to
take that much out of what I will pay on interest or what I will pay
on taxes.^' So often their farms were run down.
The Vice Chairman. Without going into detail, you have really
tried to do it and it didn't work?
Mr. Rogers. That is right.
The Vice Chairman. That is all.
Mr. Gesell. Mr. Rogers, one more question on the management
of these farms. Have you made a profit or a loss in handling them ?
Mr.' Rogers. Our figures show this, that on the farms that we
have sold, taking into account
Mr. Gesell (interposing). Now, I must interru.pt because that is
not answering my question.
Mr. Rogers. Pardon me.
Mr. Gesell. I am going to come to the sales in a moment. Just
in the handling of the farms from day to day, tjie management of
the farms, do they make a profit or do you lose money on them?
Mr. Rogers. Well, again we come into that heavy rehabilitation
expense. If you eliminated the heavy rehabilitation expense, which
we hope to have out of the way entirely by the end of next year, then
I would say that we would make money upon them. This year we
have a 2.02 net return after a million five hundred thousand dollars
has been spent on rehabilitation.
Mr. Gesell. In other words, in capitalizing this rehabilitation
expense your figures do show that you made money.
Mr. Rogers. That would be true of the past 4 years.
Mr. Gesell. But if you hadn't capitalized your rehabilitation
expense, you would have lost money on the farms and would count
on making it at some other time ?
The Vice Chairman. The witness said 2.02 profit."
Mr. Rogers. Yes; that is right, after a million and a half spent
on rehabilitation.
The Vice Chairman. In other words, they absorbed a million and
a half and still made 2.02.
15020 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. What about '38, which is the figure we have before
us here, Table 188?^ It would show that you made a profit from
'32 to '38 of $2,342,000, and the figures we have discussed show that
you liave capitalized $6,478,000, so that if those two were taken into
"account you probably have not made money on the farms.
Mr. Rogers. Up to '38 our expenditures for rehabilitation ran
more nearly $2,000,000, you see.
Mr. Gesell. And what were your profits in '38 ?
Mr. Rogers. 0.97 in the black.
Mr. Gesell. So that you would say you made money without cap-
italizing this rehabilitation expense in '38?
Mr. Rogers. Yes. Your book shows, and our book shows, a black
return of 0.97, and of 1.16 in '37; and. in 1936 our expenditures of
rehabilitation Were not as great.- That often is affected by weather
conditions. We had 1.88 in the black.
Mr. Gesell. Taking the period '32 to '38, you said that approxi-
mately 75 percent of your rehabilitation expense occurred in that
period, and if you were to take that off this figure of profit of
$2,342,000, you would be a minus figure, would you not, for that
period?
Mr. Rogers. What profit figure do you refer to ?
Mr. Gesell. The $2,342,000 appearing in table 188.«
The Vice Chairman. Anyway, Mr. Rogers, you had to build this
property up before you could sell it?
Mr. Rogers. Yes ; that is right ; and of course we made a lot of ar-
rangements with former owners in this way, tljat there was no need
of our going through foreclosure expense, and "We will gladly give
you the 1 year full income from the property which you would be
entitled to under redemption, and you deed the property over to us."
Those properties would be inbluded in the book value, you see.
As you are accumulating real estate you have two factors. You
have farms which produce you nothing because you get them too
late in the yekr, or you have worked- out a compromise arrangement
giving the former owner the crop and then you have the factor that
you haven't had a chance to get it up into producing condition, so
that as your real-estate portfolio begins to go down, then you have an
accumulation on the opposite side. Do you understand, Congressman ?
The Vice Chairman. Sure ; I understand lots of things.
Mr. Gesell. There are a lot of companies, however, that do not
capitalize these rehabilitation expenses.
Mr. Rogers. We are one. We never capitalize rehabilitation ex-
penses.
Mr. Gesell. What is the item of improvements of $3,052,000 ap-
pearing under the heading of Improvements ?
The Chairman. That doesn't include rehabilitation. That is what
he is talking about.
Mr. Rogers. If we had a 7,500-acre farm, we broke it down into a
number of units. We put new buildings on each property.
Mr. Kades. Mr. Rogers, who determines whether or not a particular
improvement on a particular farni is to have its cost capitalized?
Mr. Rogers. In the first place, we have a complete valuation on
' Soe Hearings, Part 10 A. p. 188.
^ Ibid., p. 189.
« Ibid., p. 188.
CONCENTRATION OF ECONOMIC POWER 15021
every property. Then, when the recommendation for expenditures
comes in, I have all that information before me and I make the recom-
mendation to the real estate committee, and they are the ones who pas$
upon that or make final decision upon my recommendation.
Mr. Kades. Then you make the recommendation as to whether or
not a cost is to be capitalized ?
Mr. Rogers. I make the recommendation; yes. We had a large
estate, for instance, in the South, in South Carolina. We broke it
into 18 small farms. You have to build new buildings in such cases.
Mr. Kades. Do you follow any standards or any particular policy
in reaching that determination?
Mr. Rogers. Largely the value factor.
Mr. Kades. Would the time factor enter into it? For example, if
you had foreclosed a farm in 1932 and still held it, would that be
the determining factor- which you would take into consideration in
determining, whether or not to capitalize improvement in 1939?
Mr. Rogers. No ; the value of the property ; and the values are re-
viewed each year and are very carefully revised.
Mr. Gesell. Now, coming to your sales policy — we are almost
through, Mr. Rogers.
The Chairman. Before you ask that question — a moment ago, in
answer to one of my questions, you said that the tenants loved this
program of cultivation and advice ^a hich you have instituted. What
is the turn-over among tenants?
: Mr. Rogers.- What is that?
The Chairman. What is the turn-over among the tenants ?
Mr. Rogers. I think that in the last 3 years — that would be an esti-
mate ; you have two types of turn-overs, one where we wish to change
tenants, and one where he wishes to leavQ us — our requests have aver-
aged about 4 percent, and that an equal number have wanted to leave
us, so that our tenant turn-over, from our standpoint, is very small,
but our tenants buy farms of others. You can realize that under this
kind of a program, tenants can be built into purchasers, but they won't
always buy the farm they live on.
"' The Chairman. I was very much interested in your testimony,
which I think is very illuminating, because in our studies in the De-
partment of Agriculture appropriations bill and in the Farm Security
set-up we find almost exactly the same type of condition which you
have described. The Farm Security Administration has been en-
gaged, as part of its program, in seeking to put farmers on the land,
and the relationship between the Farm Security Administration and
the farmer who is put on the land is not unlike the relationship which
you describe.
Mr. Rogers. That is true.
The Chairman. The whole farm-tenant problem which Congress
has sought to solve by the so-called Bankhead-Jones Act brings all
of these phases into bold relief. Frequently, the Farm Security Ad-
ministration finds that some farmers would fall into the 4 percent that
you have described as the ones which you want to change.
Mr. Rogers. Yes.
The Chairman. So that to my mind the outstanding problem, so
far as agricultural land is concerned, is the relationship of the in-
dividual to the large organization.
124491-— 41 — ^pt. 28 22
15022 CONCENTRATION OF ECONOMIC POWER
Mr. Rogers. Yes; that's right.
The Chairman. Now, here you h.ive drawn this picture of a huge
iustitiition which owns a very hirge amount of land and which has
undertaken a rehabilitation ])rogram, a farm-development program
not unlike that of tlie Farm Security Administration, for the benefit
both of the tenant and of the company and then, likewise, for the
improvement of the land.
Mr. Rogers. Yes.
The Chairman. The Farm Security Administration is doing like-
wise. We find, however, that frequently tenant farmers object to
the decisions of the Farm Security Administration with respect to
whether or not certain things should be done. I have often heard
county agents criticized by farmers because county agents have
sought to impose or stimulate improved farm practices. I have
no doubt that your men have also heard criticism on the part of
some farmers with respect to the methods and policies that you
would like to carry out.
Mr. Rogers. Senator, in that connection the position that I have
taken is that sometimes the tenant is correct and your expert is
wrong, and every time a question of that kind arises I put the ques-
tion very bluntly, "Who is right in this instance?"
Now, we outline to the tenant before he comes on our property
just how the farm is to be operated so that he can say "yes" or "no"
at that time. That might account for the fact that we have very, very
little trouble. The Farm Security Administration is following very
much this plan. In fact, some of my men that were trained in my
organization are now in the Farm Security Administration and with
it, and I believe that your soil conservation program also is coming
around to this type of an operation on most farms. This plan, as
you will notice, bears a number of "220," and it called a "220" plan,
and thg tenants know it, and we have tenants today that can plan a
farm very expertly themselves.
The Chairman. You exercise great care in the selection of the
tenants who go on your farms?
Mr. Rogers. Great care ; yes.
The Chairman. So that before they go on they know what the
company will expect them to do with respect to tanning methods?
Mr. Rogers. Yes. -
The Chairman. And that reduces the friction between the tenant
and the company to a minimuni ?
Mr. Rogers. Yes.
Now, Senator, in, that connection, with 8,000 leases a year for the
past 3 years, which meant 24,000, we had litigation in 6 cases out
of 24,000, and in working with that many people you can't have a
perfect, 100 percent record.
The Chairman. You say that your ordinary lease is for a single
year. Do you give any leases to good tenants for longer periods?
Mr. Rogers. Well, the understanding is so mutual between the ten-
ants and our organization or our men that we desire good tenants
who do a good job, and they know that we want them, and the same
thing is true that the tenant who is on a good farm wishes to stay,
so we renew those leases very early, but we always are confronted
with a law that says "Sell," so that we must be in a position to sell.
CONCENTRATION OF ECONOMIC POWER 15023
The Chairman. So that because of the law which requires you to
sell you can't enter into a loirg-term lease?
Mr. Rogers. Not very easily, no; and if we did we would have
to carry that same provision, cancelation in event of sale.
The Chairman. Do you think it would be a good thing to change
the law so as to permit long-term leases, or to change the law so as
to give the tenant farmer an option to buy ?
Mr. Rogers. Well, I have this feeling, that we should not own land
or farms any longer than is reasonably necessary. I think that is
correct. I would not like to see the law changed.
The Chairman. What do you mean by "reasonably necessary"?
Mr. Rogers. In other words these properties. must be, in my opinion,
sold back to the people on the land, and as they are gradually able
to take them, they should be permitted to take them.
Mr. Gesell. Mr. Rogers, why is that? If you feel, as I recall your
testimony, that you could probably make a better income managing
these farms than you could under mortgage, and if you believe that
you are successful and making a profit in the handling of these farms,
why, from your point of view, is it desirable to turn them back to
the men on the land? It seems to me there is something of a con-
tradiction there. -
Mr. Rogers. I was probably speaking from a social standpoint.
The Chairman. I am very glad to have you say that, because it
has long been my conviction that one Of our fundamental troubles
in this country has been the divorcement of people from the land,
from ownership of the land, and the more we can stimulate fa^m
ownership and even the ownership of urban property, the better it
will be for ^11 concerned, including insurance companies and busi-
ness of all kinds.
Mr. Rogers. Yes.
The Chairman. Because I think the trouble in this country is
that there are too many people without property.
Mr. -Rogers. I think you are correct.
Senator Herring. Mr. Chairman, I should like to ask Mr. Rogers,
"irom his experience in farming in the manner in which he has farmed,
has there been any large percentage of tenants that have been able
to save enough to buy any considerable number of farms from him ?
Mr. Rogers. Yes, uovernor Herring. I think that last year 175 of
our own tenants purchased farms. Now, there is a social problem
involved at this time in that you have a good tenant that is doing
a fine job, but he hasn't accumulated enough money to make what
would generally be called a reasonable down payment. This year
we sold $800,000 worth of land on what we call a character-sale basis,
mainly to our own tenants. Some of them only paid 4 percent down.
Several of those cases are in your State, and this year we are making
an analysis of all of our tenants to see if we cannot in some way
work out an arrangement where they will be the owners under con-
tract, which will take care of this tenant situation as far as we are
concerned.
We are now taking our best-trained agricultural experts and having
them call upon and work with these contract purchasers. There is
the responsibility of property ownership and the responsibility of
15024 CONCENTRATION OF ECONOMIC POWER
debt that weighs heavily on the minds of a lot of people, especially
young people, and wh'en we are able to have these well-trained experts
call at their homes, maybe twice a year or three times a year or once
a month, and are always there to be called upon in the event these con-
tract purchasers desire help or consultation, I believe that we will
help them through that period of ownership that is most difficult.
The one thing that must bs realized with this farm situation; the
terrible catastrophe that occurred shocked the nerves of a lot of
farm people on the question of debt. They reluctantly go into debt
again and it takes time for them to recover.
Another thing, a lot of older men own these farms. You are now
dealing with a lot of young people. One of our greatest prides is to
take the young people and build them into purchasers of these farms.
Mr. Gesell. What do you do, Mr. Rogers, when you sell a farm
and the tenant has to get out to find him a place somewhere else?
Mr. Rogers. That is one of our difficult problems, and that is one
of the problems that is bothering us today, and especially March 1
in your State, Governor Herring. We have a perfectly fine tenant
ana the neighbor or someone has bought that farm and we must sell,
and you have the case of the purchaser coming up to the door with
his machinery, and so on, and the tenant that you have is a desir-
able fellow with no place to go. There are some of those cases.
Mr. Gesell. Then it becomes very important, doesn't it, as part
of your program, to try to sell the farms back to the tenants?
Mr. Rogers. It is very important at this time and we are making
an extraordinary effort to do_ that.
Mr. Gesell. Let me find out just how you do that. Do you sell
the farms back in such a manner as to always require a cash down
payment?
Mr. Rogers. We always require sQme cash down payrtient because^
we* believe in taking over the ownersnip of a property, that a man
should have some stake in it, even though it is a small stake.
Mr. Gesell. What percentage of cash down do you require on the
purchase price?
Mr. Rogers. I just stated on the character sales, which are a spe-
cial type, Ave have taken from 3 percent up to 9 percent. Our ordi-
nary terms are 10 percent to the company, which we have endeavored
to obtain.
Mr. Gesell. Ten percent to the company net if the purchaser will
live upon and maintain the farm?
Mr. RoG|a{8. Yes, sir.
Mr. Gesell. Twenty percent if the purchaser is a speculator or
p.onresident?
Mr. Rogers. Yes, sir.
Mr. Gesell. And am I correct that you will not consider a down
payment of less than $250 ?
Mr. Rogers. We have modified that. We have some farms that
are very small and some of our character sales have been made
with a down payment as low as $100 on a very small southern
farm,
Mr. Gesell. How do you price these farms for sale?
Mr. Rogers. The prices are arrived at by the field men.
CONCENTRATION OF ECONOMIC POWER 15025
- Mr. Gesell. Independent of the book value you carry them at?
Mr. Rogers. Absolutely independent of the book value.
Mr. Gesell. They go out and set a price and that is the price you
ask.
Mr. Rogers. You see, these men are on the properties, they must
be on the properties at least 12 times a year. I require a report on
the number or times each property is visited, from the field represent-
ative, along with the field manager, the supervisor, and also we fre-
quently use the farm loan man's idea of value.
Mr. Gesell. Do you recall that letter, Mr. Rogers?
Mr. Rogers. I know nothing of that letter because that was written
by the man that preceded me in office.
Mr. Gesell. His policy must have been quite different from yours.
Mr. Rogers. His policy was very much different in respect to farm
management. My policy in reference to farm management is perhaps
unique in the United States. It did not go into effect until I became
manager of the division.
Mr. Gesell. According to this letter, prior to that time the sale of
the property had a pretty distinct relation to the book value at which
it was being held.
Mr. Rogers. Yes; unfortunately, that man was very sick at the
time that letter was written — very sick.
Mr. Gesell. Your policy has always been to set an independent
price based upon the value of the property as your field men see it?
Mr. Rogers. Yes; that is correct.
Mr. Gesell. Do you believe that this matter of a cash payment
makes it more difficult to get the land back into the hands of the
tenant?
Mr. Rogers. Well, I would say that, not requiring a cash payment,
the party purchasing not having a stake in the property, is not the
best thing for the seller. I think he should have something ■ there
that is his, that he put into it.
Mr. Gesell. That isn't quite an answer to my question. My ques-
tion was whether you think demanding a large cash payment makes
it more difficult to get the land back mto the hands of the tenant.
Mr.,, Rogers. Demanding a large cash payment does.
Mr. Gesell. What about 10 percent?
Mr. Rogers. I consider that a small cash payment.
Mr. Gesell. And you don't feel that demanding a 10-percent cash
payment down makes it more difficult for you to get the land back
into the hands of the tenants?
Mr. Rogers. Well, of course my character-sale discussion would
cover that.
Mr. Gesell. Would be an exception to it, but let's take a tenant
who can't qualify as to character with your organization but still is
a pretty good tenant. You want 10 percent down with him ?
Mr. Rogers. Yes, sir.
Mr. Gesell. Does that requirement make it more difficult to get the
land back into his hands?
, Mr. Rogers. It makes it more difficult.
The Vice Chairman. I take it ^ou want to get it back into the
hands of somebody who will keep it.
15026 CONCENTRATION OF ECONOMIC POWER
Mr. Rogers. Somebody who can work it, somebody who can keep
it. I think the Federal land bank requires 15 percent; 1 am not sure.
Mr. Gesell. How do you advertise what prices your farms are for
sale at?
Mr. Rogers. We do not generally advertise the price of the farm.
Mr. Gesei-l, You mean to say you don't quote the price and set it
up for all to see and all to look at? I should think -if you were
anxious to get rid of the farms as is pretty well necessary under
present investment laws, you would want to advertise it in every
way possible so as to find purchasers.
Mr. Rogers. Not prices.
Mr. Gesell. You wouldn't advertise prices?
Mr. Rogers. In the first place, the New York State insurance law-
requires that the sale — the approval of a sale — must be by the real-
estate committee or part of the board of directors.
Mr. Gesell. Can't you advertise such and such a farm for sale,
$250, subject to approval of our real-estate committee ?
Mr. Rogers. We do not advertise the prices, but we place what we
consider a fair price, and it will be recommended. Our farm
sales executives do that with the real-estate brokers and so on:
"Here is a list of farms and the prices that we believe will be coti-
sidered proper, suggested prices."
Mr. Gesell. And they deal with the broker on that subject?
Mr. Rogers. Yes. "What we find is this, that you have to have a
buyer before you begin to talk price and when you get your buyer
you get your man that is interested, then the matter of price comes up.
Mr. Gesell. Without stating a farm price, it may be more difficult
to get buyers, may it not?
Mr. Rogers. I doubt that, but, of course, that would be subject to
opinion.
Mr. GVsell. How many farms have you had to repossess that you
sell, on a ].Qrcentage basis? Do you have many repossessions or do
most of your sales arrangements go through?
Mr. Rogers. Most of our sales arrangements go through. I think,
out of 1,700 sales contracts at the end of 1939, we had 38 cancelations.
The Vice Chairman. That is very interesting. Will you develop
how long those sales operated?
Mr. Rogers. I couldn't say how long. In 1938 we had 26 cancela-
tions out of some 1,300 sales in force.
Mr. Gesell. It is hardly right, is it, to relate the repossession to
the sales made that year? The repossessions are frequently the re-
sult of sales made in the previous years, are they not ?
Mr. Rogers. What I was referring to was the sales contracts on
our books and they may have been there a period of years. That
would have to be a research study which I have never made, but
the reason that I am going at it to have these trained agriculturists
work with these contract purchasers is to keep the farms sold. One
thing is to sell them, ancl especially on small down payments, but
the next thing is to keep the farm sold, and that is the thing we are
lending every effort toward.
The Vice Chairman. Have you any information as to how many
of these persons to whom you sold have in turn sold these properties ?
Mr. Rogers. No, I haven't. There have been some resales.
CONCENTRATION OF ECONOMIC POWER 15027
^ Mr. Gesell. How many of your sales fall in the speculator class;
in other words, where you require a 20 percent down payment?
Mr. Rogers. I had that figure, I believe.
Mr. Gesell. I saw in your manual and I believe you have con-
firmed this on the stand, that you will ask 20 percent of the pur-
chaser if he is a speculator or nonresident. I -was wondering how
many of your sales fall in that category?
Mr. Rogers. I could say this : Out of a total of 2,985 sales, 379 were
made to men other than farmers. In other words, 12^^ percent were
made to persons whose business is other than farming.
Mr. Pike. And they were presumably carrying the 20 percent
down payment? ,
Mr. Rogers. They presumably would.
Mr. Gesell. I have no further questions.
The Vice Chairman. I would like to ask one or two questions and
if I ask one that you have already 'covered, will you tell me?
In regard to tenants that go onto your farm, do you as a matter
of policy render assistance by equipping the tenant with animals or
machinery or any such thing as that ?
Mr. Rogers. We endeavor to select our tenants quite carefully, but
if he meets with misfortune during the cropping year we have gone
to his assistance in that way.
The Vice Chairman. The answer to my question, then, would
be that you do require as a part of the qualification that the person
who comes on your farm is equipped at least with the necessary tools
and animals to operate the farm?
Mr. Rogers. Yes; that is correct. We do finance a great many
tenants during the vear, and I think up to last year we had loaned
tenants for operation $888,000. We had collected $26,000 of interest,
and we had charged off as losses $8,000. That is how closely we work
with these men.
The Vice Chairman. I think it is in the record that these persons
to whom you make sales do continue to receive the benefit of your
advice ?
Mr. Rogers. That is correct. We have purchasers, for instance,
who say, "We demand that you give us that plan of operation at the
time we purchase the farm." I made a check one time to see
The Vice Chairman (interposing). I didn't mean to go into detail.
I don't want to take much time, but I wanted to get that in the
record.
Mr. Gesell. That was one other question along that line. How
do you acount for the fact that your company has more properties
held over 5 years than Prudential, Equitable, Northwestern or Mutual
Life?
Mr. Rogers. I would account for that in that m*p or chart which
f showed Friday, where we had rather high concentration of owner-
ship in the area that unfortunately was caught with that 1934, 1935,
and 1936 drought immediately following the depression.' And an-
other thing is, our rehabilitation program, slows down sales a little
because if you are selling a farm with a small down payment, you
are taking all that a fellow has. If you sell him a farm that is in
bad condition, you break him and you do not do yourself any good.
I prefer on a 10 percent down payment, which is a small down pay-
15028 CONCENTRATION OF ECONOMIC POWER
nient, to sell a fiirm that is in good condition, both as to buildings
and especially in good condition as to production.
The Chairman. In other words, you sell a better farm at a better
price in your opinion by this program?
Mr. Rogers. Yes.
The CHAfRMAN. And to farmers who are more likely to stay on
the land and go through with the contract, is that your feeling? .
Mr. Rogers. Yes; that is right. As Mr. Henderson so ably said
the other day, the farms must bail themselves out. The farms must
pay for themselves, and to sell a farm to a man and take all the
cash that he has, knowing that within a matter of a short time he
has a new roof to put on a house and such as that, you have him
broke, you have him discouraged, you don't have the same man that
you have if you give him a complete going concern and then advice
and counsel to help keep it going. .
The Chairman. To what extent is your policy governed or for-
mulated by state law?
Mr. Rogers. I would say — ^you mean the New York State Insurance
Law?
The Chairman. Any State law.
Mr. Rogers. It has no effect. Senator.
The Chairman. There are no State laws governing the form of
your contracts, contracts for sale?
Mr. Rogers. No. Georgia may have a little peculiar Jaw. It
works out to make a little change, but all the laws are reasonable
in that respect, I would say.
Mr, Gesell. And you have complete latitude as to how you shall
manage and handle these farms?
Mr. Rogers. Yes.
The Chairman. And there is no law governing tenant relations,
of course, is there?
Mr. Rogers. No, not that I know of:
The Chairman. What is the New York State law with respect
to farm holdings?
Mr. Rogers. After a farm has been held 5 years, you must ask the
State insurance department for an extension of time to hold the real
estate longer.
The Chairman. And it is the New York State law with respect
to the 5-year limitation that actually controls?
Mr. Rogers. Yes; that is correct.
Mr. Gesell. Have you ever been refused an extension, Mr. Rogers,
any requests for extension?
Mr. Rogers. No ; I never have.
The Chairman. Is there any such law in lowa?^
Senator Herring. Five years.
Mr. Rogers. I think that refers to Iowa companies, does it not?
Senator Herring. To Iowa companies, yes.
Mr. Henderson. We had quite a discussion of that in Mr. Murray's
testimony.
Senator Herring. As long as this memorandum went into the rec-
ord— and I am quite interested in this conciliation council, having
set it up, and Mr. Rogers wrote this just when it was being set up —
CONCENTRATION OF ECONOMIC POWER- 15029
"I believe politics prompts the program of Governor Herring on the
foreclosure of mortgages''^— I am wondering as he became more ac-
quainted with the work oi the conciliation council if that suspicion
was justified or otherwise?
Mr. Rogers. I would say as it worked out, it was not justified.
The Chairman. Well, suspicions generally are not justified, whether
they are held by life-insurance executives or by politicians or states-
'men.
Mr. Henderson. May I say, Mr. Rogers, that I might see a re-
dundancy here. In the Metropolitan National Farm Adjustment
Credit Management Co., do you have a stamp plan? You seem to
have about everything else.
Mr. Rogers. Well, of course, in this agricultural thing, I have made
a great study of it. I think there is much to be done, particularly in
that section of Iowa to which Professor Murray referred.
' Mr. Henderson. What you have said is that in reality you have the
equivalent of a farm agent in Iowa ; you certainly have a program, as
these charts show, for conservation; you have a rehabilitation pro-
gram ; you have a seed program ; you have a tenant cropper program ;
you have a sales agency; you have a credit agency; and you seem
to have a bureau of agricultural economics, from the nature of your
testimony ; and the only frills that seem to be lacking are perhaps a
stamp plan and a surplus disposal plan, and I expect if we probed
a little further, in time we would find you had that.
Mr. Gesell. As a matter of fact, it is true, is it not, Mr, Bogers,
that when you take these crops from the tenant you frequently hold
them off the market until you get a price that is suitable ?
Mr. Rogers. No ; we follow the plan of orderly marketing. We feel
any holder as large as we are should not throw its crops upon the
market kt one time.
Mr. Gesell. That is just the point — so you do hold them off to keep
the price stable.
Mr. Rogers. Yes- to distribute them.
The Chadiman. You control the marketing program and not the
tenants ?
Mr. Rogers. Of our part. We have one-half of the corn criK and he
has half.
The Chairman. He can sell his half and you manage your half?
Mr. Rogers. That is true.
Mr. Gesell. It is true in many cases, isn't it, that the tenant asks
you to handle his part of the crop and he takes the money rather
than handle it himself?
Mr. Rogers. Under the corn-sealing program, they would rather
seal their corn and buy ours. [Laughter.]
The Chairman. Are there any other questions?
Mr. Geselt.. I have no further questions.
The Chairman. Do any other members of the committee desire to
ask Mr. Rogers any questions?
May r ask this one question? Isn't it a fact that you have fre-
quently been consulted by Farm Credit officials and Department of
Agriculture officials with respect to agricultural problems?
Mr. Rogers. Yes ; they have all these reports. Secretar^^ Wallace
discussed these reports with me in 1934, and I have given them
15030 CONCENTRATION OF ECONOMIC POWER
througliout the plan, and the Federal Credit folks come u|> and we
talk these things over constantly, the various departments. We use
them to help us, too.
The Chairman. Perhaps we ought to call it the Wallace-Rogers
plan.
Mr. Rogers, we are very grateful to you for your testimony. Thank
you so much.
(The witness, Mr. Rogers, was excused.)
The Chairman. The committee will stand in recess until 2 o'clock.
(Whereupon, at 12:35 p. m., the committee recessed at 2 p. m. of
the same day.)
AFTERNOON SESSION
The committee resumed at 2 : 10 p. m., on the expiration of the
recess.
The Chairman, The committee will please come to order.
Mr. Geseix. The witness this afternoon is Mr. R. R. Rogers', vice
president. Prudential Insurance Co. of America, Newark, N. J.
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. Rogers. I do.
TESTIMONY OF R. R. ROGERS, VICE PRESIDENT, PRUDENTIAL
INSURANCE CO. OF AMERICA, NEWARK, N. J.
Mr. GeselL. Mr. Rogers, will you state your full name and your
position in the Prudential?
Mr. Rogers. R. R. Rogers, vice president of the Prudential, in
charge of mortgage loans, Newark, N. J.
Mr. Gesell. Your department of the Prudential handles botii
farm-mortgage loans and city-mortgage loans, is that correct?
Mr. Rogers. That is true.
Mr. Gesell. First I want to ask you a little ^bout the Prudential's
lioldings of farm mortgages and farm real estate. How many farms
does the Prudential manage or own at the present time?
Mr. Rogers. At the present time 5,940.
Mr. Gesell. And what does that represent in terms of amount of
investment?
Mr. Rogers. About $45,000,000.
Mr. Gesell. What is the size of your largest farm?
Mr. Rogers. I think our largest farm is in Louisiana; it is a sugar
plantation of about 2,500 acres.
Mr. Gesell. And your smallest?
Mr. Rogers. I should say 40 acres.
Mr. Gesell. How many farm mortgages have you outstanding now ?
Mr. Rogers. About 35,000.
Mr. 'Gesell. Your largest and smallest there, please?
Mr. Rogers. I think our largest is $372,000, which covers 21,000
aci-es of a very large cotton plantation, fully integrated, having cot-
ton gins — a wliole town — and the whole goes into the security for the
loan. The smallest I don't know, but I sliould say that probably is
20 acres, and I don't even know where it is.
CONCENTRATION OF ECONOMIC POWER" 15031
Mr. Gesell. What is your average mortgage loan?
Mr. Rogers. About $5,000.
Mr. Gesell. About $5,000? Can you give us some idea of the his-
tory of the Prudentiars farm-mortgage loans program? I think
because of the testimony that has gone on here the last couple of days
you have an idea of the subject the committee is interested in and
could probably cover it faster if I don't interrupt with questions.
Mr. Rogers. I hope so, Mr. Gesell; I will try it, anyway. The
Prudential conmienced farm lendirg in 1898—42 years ago — but
didn't get into the business in a very heavy way until 1906. It
has been actively engaged in making farm loans ever since that time,
and in the intervening period it has lent to farmers more than three-
quarters of a billion dollars. Up until' 1922 the major part of Pru-
dential's mortgage portfolio consisted^ of farm loans. After 1922
city loans increased much faster than farm loans, despite the fact
that we continued to invest all we could in farm loans.
The Chairman. I didn't get that statement.
Mr. Rogers. Despite the fact we continued to lend all we could
in farm loans.
The Chairman. What was the phrase preceding that ?
Mr. Rogers. After 1922 city loans increased much faster than farm
loans, despite the fact that we continued to invest all we could in
farm loans. For the last few years our mortgage account has main-
tained a fairly even ratio of 20 percent farm loans and 80 percent
city loans.
The Chairman. To what do you attribute the fact that city loans
were increasing at such a rate as comparea with farm loans?
Mr. Rogers. I think as I go on it will be apparent, Mr. Chairman.
The reason for the wide disparity is that our farm loans are definitely
limited.: There are just so many farms in the United States, of
wthich about 50 percent will be mortgaged, and that ends it except
for swapping back and forth.
Mr. Gesell. You mean, in other words, that there just isn't as big
an avenue for investment? ^
Mr. Rogers. Yes; definitely limited. The farm-loan debt in the
United States is about equivalent to the city-loan debt of New York
City; yet New York City loans will continue to advance because of
new buildings, new houses, new mercantile establisliments ; but the
farm-loan debt is fairly static.
The Chairman. In other words, the urban debt increased primarily
because urban areas are expanding?
Mr. Rogers. That is true.
The Chairman. And farm areas, on the other hand, tend to con-
tract instead of expand?
Mr. Rogers. I think you have explained it better than I could.
City loans, of course, are an endless supply of mortgages; every new
home creates a potential mortgage loan. Our over-all experience with
farm loans has been very satisfactory; up until 1930 the farm-loan
experience was almost perfect. Since then it has passed through
some very bad years, but the restoration of a better farm condition
has restored farm values to a point where we believe we will suffer
no loss of principal. We appreciate, of course, the foreclosures of
15032 CONCENTRATION OF ECONOMIC POWER
farms in many cases meant loss of homes, and we approached fore-
closures with very great reluctance.
Foreclosures came about for many reasons. First, I think, and the
major reason, was probably the abandonment of farms; and, second,
inability and lack of desire on the part of the farmer to attempt to
salvage a farm so heavily encumberea by first, second, and third mort-
gages, and delinquent taxes, and judgments, and what not.
Three. Absentee ownership, which had relied on farm rentals to
pay living expenses and to pay taxes and mortgage requirements. He
found his share of the yield inadequate for all of these things.
Fourth. The borrower in too many cases had ceased to be his own
man; he was so tied up with chattel and crop mortgages that when
his crop was harvested ne had nothing to say about the disposition of
the returns. This resulted in the subordinate creditors getting all
and the senior creditors getting nothing.
And fifth — and this may seem strange, Mr. Gesell — the desire of
(he farmers to be foreclosed.
Mr. Gesell. Those were in cases that he was so burdened with debt
that it was a relief for him to get rid of his debt?
Mr. Rogers. Quite true ; and we had put in a plan which we thought
was sound, and still think so, that as to any farmer who was heavily
burdened in that way, we would foreclose, and after we had foreclosed
our mortgage and cut off some of the subordinate obligations, we
would sell that farm back to him or a member of his family, and if
we were willing to sell that farm for less than our cost, that price
would be available to him. In the first of those circumstances many
farmers felt it best to be foreclosed and get a fresh start.
The Chairman. Do I understand your policy was to sell at cost?
Mr. Rogers. At our cost. We would sell the farm at a less price
to
The Chairman (interposing). You are speaking of farms to which
you had acquired the title ?
Mr. Rogers. That is right.
The Chairman. And did you follow the policy of not selling for
more than cost?
Mr. Rogers. I beg your pardon?
The Chairman. Did you have a policy of not selling for more
than cost?
Mr. Rogers. To the former owner; yes,
Mr. (lESELL. You mean, the former owner could always get it back
from you at cost?
Mr. Rogers. Yes.
Mr. Gesell. But you might be still quoting that property at more
than cost to someone else?
Mr. Rogers. Yes.
Mr. Gesell. While we are there, on this question of sales, did you
require a down payment?
Mr. Rogers. In that particular case, no.
Mr. Gesell. Will you tell us how it was arranged?
Mr. Rogers. We put this sort of a deal in process which we found
\o he very satisfactory and we have now extended it even further.
The farmer, of course, had no money, but if he had enough stock and
CONCENTRATION OF ECONOMIC POWER 15033
tools, or could get it, and if he had feed and seed or could get it, and
if he would follow a program of farming upon which we could agree,
we would sell that farm back to him without any down payment in
cash, providing he would deliver each year one-half of the crop to
us. That half of the crop would be sold at a time agreed upon be-
tween us, and out of the sales price of that crop we would first
apply to interest on the contract of sale and second to principal.
Mr. Gesell. How long, under that arrangement, was he sure of
staying on the farm?
Mr. Rogers. That was a 3-year contract, and it made no difference
if he had a crop failure the first year, he could pay us nothing. Pro-
viding he had done a first-class farmerlike job, he would not be with-
out that farm.
Mr. Gesell. So that by giving him a 3-year period you avoided
to some extent keeping him in a position of a man continually subject
to be removed ?
Mr. Rogers. That is true. And by the way, when we sold him
that farm back, we gave him the option of our going in and doing
a first-class repair job. I mean Fy that, putting the buildings and
so on in first-class condition and adding the cost, of that to the price
of the farm.
The Chairman. My understanding is that under this arrangement
you had a hard-and-fast understanding with the farmer that the
one-half of the crop which you retained, which you were to hold as
yours, would be sold at a time upon which you mutually agreed.
Mr. Rogers. True.
The Chairman. And that all of the proceeds of that would be
applied on the farm debt one way or another.
Mr. Rogers. All of the proceeds of the half ; and he would retain
the otker half.
The Chairman, Of course, it would be applied first upon the
interest and then upon the principal?
Mr. Rogers. Your statement is right.
Mr. Kades. Mr. Rogers, I want to make sure I understand. Do I
understand that the Prudential does not require a down payment in
the case of a sale to a farmer whose mortgage was .previously held by
the Prudential ?
Mr. Rogers. As I go on, we have extended that now so that we sell
farms to others than the former owner on that plan. Fi"om some we
exact a small down payment ; from others, if they have a good record
of farming, we do not.
Mr. KIades. Then you don't feel, as the Metropolitan oflScials feel,
that it is necessary that- the farmer have a cash stake in the land
before he be allowed to purchase the farm ?
Mr. Rogers. We think it would be preferable, but we still feel that
we can sell farms en that basis and the farmer can buy them on that
basis, and that has been proven by the fact that in the last 8 or 10
years we have sold a great many farms on that basis, and the farmer
has been successful in his purchase.
Mr. Gesell. How much repossession have you had ?
Mr. Rogers. The repossessions in the first years, '31 and '32, were
rather heavier, much heavier than we expected, and we were a bit
15034 CONCENTRATION OF ECONOMIC POWER
ashamed of it. As a matter of fact, they went up around 25 percent.
They have now come down to the point where the repossessions are
less than 9 percent. I should say that when we first sold we didn't
have a 3-year agreement. We have refined the process of the plan
a little bit.
Mr. Gesell. Your repossassions were heavier when you had a
shorter term. Now that you have put the man on for 3 years you
find there is less repossession ?
Mr. Rogers. They really were not repossessed, because in many
instances they were sold right back to the same people.
Mr. Pike. I suppose there is a point where, under one of these con-
tracts, he gets enough stake in the farm so he can again become th?
owner subject to mortgage.
Mr. EoGERs. Y^s. This crop-payment contract runs out in 3 years,
at which time we hope he has paid 10 percent. If he has not paid 10
percent we will continue it until he does, providing he is doing a first-
class job. When he has paid 10 percent, if he demands it we will give
him a deed. We would prefer then to carry him on a cash contract,
but we will not object to giving him a deed if that is what he insists
upon. We would rather it would go on the contract for a few years
more, which is safer for him, and safer for us.
The Chaibman. You don't find that State laws requiring you to
dispose of the real estate necessitate a 1-year contract ?
Mr. Rogers. No.
Mr. Kades. In that respect also the policy is different from that of
the Metropolitan ?
Mr. Rogers. I really don't know what their policy is.
Mr. Kades. This morning, it was testified that 1-vear
Mr. Rogers (interposing). Leases. That is rather different than a
sales contract. I apprehend that Mr. Rogers' testimony this morn-
ing would have been, on his slim payment sale, practically what m-y
answer is, and that is, that he, would give a 3-year contract. I don't
know.
Mr. Kades. Do you quote a sales price?
Mr. Rogers. To this farmer?
Mr. Kades. Yes.
Mr. Rogers. Oh, yes; a definite sales price is arranged before the
deal is made.
Mr. Gesell. Do you advertise that sales price as a matter of public
knowledge ?
Mr. Rogers. Yes. What we do — we don't advertise in newspapers.
Farm sales are not made from newspaper advertising. Farm sales
are substantially made to people living in the farming country, and
we list these farms with brokers in the various towns, ex-bankers and
people of that kind, and they are the people who find our customers.
Tliey all have our selling plans.
Mr, Kades. And your sellmg price?
Mr. Rogers. And our selling price.
Mr. Kades. Then, in respect of the down payment requirement not
being insisted upon, and in respect of making your sales prices known,
your policy differs quite radically from that of the Metropolitan,
does it not?
CONCENTRATION OF ECONOMIC POWER 15035
Mr. Rogers. Again I say I don't know what their policy is. We
do quote definite list prices.
Mr. Gesell. Will you proceed?
Mr. Rogers, There were many other reasons for foreclosures, and
we couldn't do very much about postponing foreclosures in such cases
as I have enumerated. We were, however, very reluctant to bring
foreclosures against owner-operators, and despite heavy subordinate
debts, if those subordinate creditors would work with us in avoiding
foreclosure we did not stand upon priorities.
If you would like me to explain further our foreclosure policy,
I would be very glad to go into that.
Mr. Gesell. I would like to hear a little more about it ; yes.
Mr. Rogers. This is a memorandum, Mr. Gesell, written back in
1935 [reading]:
As far back as July, 1931, we instructed our farm loan correspondents and
farm branch oflBces that foreclosure prevention should be their major program,
and in all worthy and deserving cases consideration should be given to bor-
1 owers in a program of further extention of time, based upon good moral risks
temporarily embarrassed, and upon their recommendation we would be willing
to give consideration to consolidating or funding the total debt, including
principal, delinquent interest, and taxes, providing the new loan did not exceed
60 percent of the value of the farm.
That was in July 1931.
On March 4, 1932, we again wrote to all correspondents and branch offices
that we had found this refunding loan so helpful to our borrowers that we
were willing to consider recommendations for this type of loan even if the
new loan should exceed 60 percent of the value of the farm. In practice we
would go up to 75 percent of a reasonable appraisal.
On January 11, 1933, we again wfote to all correspondents and branch offices
that, because of the very severe deflation of farm land values in the past 3
years, and of the prices of practically all agricultural products, it had become
increasingly difficult for farm borrowers to meet the terms of their mortgage
contracts, and because of our sincere desire to assist in every way possible the
worthy and deserving farmer they were instructed :
1. To refrain from commencing any new farm foreclosures on owner-occupied
farms unless such foreclosures were agreeable to the farmers.
2. To postpone the sale of any owner-occupied farms now in process of fore-
closure, unless such sale was in accordance with the wishes of the farmer.
Mr. Gesell. You mean to say there was one time when you would
undertake no foreclosure actions without the farmer's consent ?
Mr. Rogers. Yes.
Mr. Gesell. "Wlien was that?
Mr. Rogers. That was during 1933.-
Mr. Gesell. For the entire year 1933 ?
Mr. Rogers. I think it changed in September 1933, for a very good
reason, which I will explain later [reading further] :
On June 30, 1933, all correspondents and branch offices were notified that we
were in complete accord with President Roosevelt's proclamation requesting
leniency in connection with farm loans, pending the operation of the farm
relief act with its emergency credit relief measures.
On September 15, 1933, we instructed all correspondents and branch offices
that because delinquent farm borrowers now had an opportunity to refinance
their loans through the Federal Land Bank system, a modification of our fore-
closure policy was permissible to the following extent :
1. A continuation of our policy of withholding foreclosure action on worthy
and desferving borrowers who have a probable chance of working out of their
difficulties —
15036 CONCENTRATION OF ECONOMIC POWER
And may I say at this time that .we had on many of those loans,
most of those loans, from 3 to 4 years of delinquencies.
2. Tliut foreclosure be no longer postponed in hopeless cases.
3. That foreclosure be no longer postponed in any case where the borrower
is financially able to place his loan in good standing or is able to contribute
substantially to that end but refuses to do so.
4. In ail cases where our borrowers had placed or contemplated placing an
application for a new loan with the Federal Land Bank of his district ample
time should be given for the appUcation to be acted upon.
Mr. Pike. What was the date of that, Mr. Rogers?
Mr. Rogers. That was September 15, 1933. You notice that that
was a little stiffer.
Mr. Pike. A somewhat stiffer policy than you had had.
Mr. Rogers j( reading) :
I believe it indicates a complete understanding of the farm borrower's situation,
and a willingness to go along with him in any workable program leading to the
solution of his problem. At least, that has been our intention.
Further than that, fully realizing that some foreclosures are unavoidable, indeed
are beneficial to the borrower, the lender and the state, our branch offices and
correspondents have been instructed that the foreclosed borrower shall, upon
title imssing to ,us, be given an opportunity to repurchase the foreclosed farm
without any down payment in cash, if necessary, providing he has an outfit of
stock and tools and a desire and an ability to farm the land, under the terms of a
crop payment sale that provides for his possession, of the farm for three years,
half the crop to be delivered to us to be applied on principal and interest.
With respect to the renewal pf existing mortgages, despite the fact that the
law under which we operate does not permit of loans exceeding 66% per cent of
the value of the security, we have renewed, and are continuing to renew farm
loans even f lough the face of the mortgage exceeds tljat percentage. In doing
this we are lelying upon the indulgence of our own State Department of Insurance,
in the belief that we can not be criticized for continuing a loan on the basis or the
original appraisal, while to call it for payment would work a grave injustice to the
deserving borrower, since under present conditions the opportunity of refinancing
elsewhere is, to a large extent, denied him.
Mr. Geseul. Let me ask here, Mr. Rogers, did you reduce interest
during this period on your new, loans ?
Mr. Rogers. Yes ; you mean on our loans outstanding ?
Mr. Gesell. On new loans being made, first of all.
Mr. Rogers. I don't remember, Mr. Gesell. I would say that during
that period we made very few new loans.
Mr. Gesell. What attitude did you take with respect to the interest
on loans outstanding?
Mr. Rogers. We treated them on a case basis. We felt that the man
who had land and was fortunate enough not to be badly off should —
could and should — continue to pay the interest rate called for in the
mortgage. In all other cases where the farmer Avas in dire need we
tried to get together with him and offered time, long before con-
ciliation committees were established — to the end that we would not
stand upon our priorities too much, and if we could work ^ut a
satisfactory relation with his subordinate creditors we would be
willing to do that.
The Chairman. My attention was diverted for a moment. Was the
witness asked in how many States farms are owned by the Prudential?
Mr. Rogers. I think we are in 33 States and 3 Provinces in Canada.
We are in every State where farm loans can be obtained in sufficient
volume to make it an economic operation.
CONCENTRATION OF ECONOMIC POWER 15037
The Chairman. Where are your loans concentrated, for the most
part?
Mr. Rogers. We really are not concentrated. I would say w^
probably have more loans, although it is not a substantial amount,
in the Middle West States, but that is because more loans are ob-
tainable there.
The Chairman. With respect to foreclosures on farm loans, is
there any concentration there?
Mr. Rogers. No; our foreclosure experience, I would say, was
fairly comparable over the entire country. We perhaps had a little
better experience in the three Northwest States — Oregon, Washing-
ton, and Idaho. I think we had our worst experience in Montana.
Mr. Gesell. How much do you feel you must invest in a territory
before you go into it?
Mr. Rogers. I think Mr. Rogers' statement the other day was
fairly correct. For instance
Mr. Gesell (interposing). You find it takes about 5 million dol-
lars to justify going into some territory?
Mr. Rogers. And, if anything, a little more.
Mr. Pike. What is your cost, what you call a satisfactory cost,
of servicing, Mr. Rogers — a quarter percent, a half percent of the
principal ?
Mr. Rogers. It depends, on the size of the branch office. You
are asking what would be a satisfactory cost. At the present time
our over-all cost of our branch oflfices is about one-half of 1 percent,
and of that half of 1 percent I would say that perhaps three-fifths
of it would be mortgage-loan servicing, and the other two-fifths
would be property management, so that if you are asking purely
as to the cost of operating on mortgage, loans, I would say that in
a fairly sizeable branch office, 0.3 percent would do it.
Mr. Gesell. You have, according to your table, particularly table
161, a more rapidly expanding account than any of the others
shown, have you not ? ^
Mr. Rogers. I believe that is correct.
Mr. Gesell. What does that result from, just the fact that you
want to loan money on farms, or any other factor ?
Mr. Rogers. Two results. First of all, we think we have had a
very satisfactory experience with our farm-loan account despite
the last few years of trouble; and the other and more compelling
reason I think is that we have the idea that we got this money from
all over the country and we were anxious to put it back wherever
we could.
Mr. Gesell. That is a very interesting statement, Mr. Rogers, that
you feel that you have some obligation to put the money back into
the territories that you are taking money from. I believe that is
what you said. Do you mean by that that, having farmers that
are policyholders, you believe your company should loan on farms?
Is that another way to state it ?
Mr. Rogers. That would be one way to state it, but it need not
liecessarily be to a policyholder; the important thing is that the
1 See hearings, pt. 10-A, p. 161.
15038 CONCENTRATION OF ECONOMIC POWER
money of a policyholder in that territory would be spent back in the
territory in which we got it.
Mr. Gesell, And in a certain sense, then, both the size of your
f (resent mortgage-loan account and its diversification, which I be-
ieve according to the table is greater than that of any other com-
pany shown, are the result of your desire to put back money where
it came from?
Mr. Rogers. Primarily.
Mr. Gesell. What first started you thinking along those lines, Mr.
Rogers? Has that been a continual policy of the company?
Mr. Rogers. I think that would go back to Mr. Duffield's time, long
before I was connected with the company. It has always been the
policy of the Prudential.
Mr. Gesell. I wondered whether it lay anywhere in connection with
the Armstrong investigation, and some of the criticisms raised at
that time.
Mr. Rogers. It is true that, going back to the Armstrong investiga-
tion, one criticism of that investigation was that the companies, so I
am told, were perhaps concentrating their loans more on the business
side, and less on the residential and farm side, and while we were
very heavily on the residential side at that time, we then commenced,
as I said at the beginning of my paper, to invest more heavily in
farms, and have ever since.
Mr. Gesell. Does this policy of diversification that you speak about
impel you to go into territories where you do not believe you are
getting the choicest farm loans?
Mr. Rogers. No.
Mr. Gesell. You would feel that in all of these 33 areas that are
shown on the tables you can make choice farm loans.
Mr. Rogers. We know it from experience. That doesn't mean to
say we haven't made mistakes and haven't had to withdraw from
territories. Of course we have. That largely consists in expanduig
from a good territory out onto the fringes. It is a very natural de-
sire to do that, particularly when those fringes have good years,
and when they have those good years you are inclined to expand out,
and when they have bad years you go back again. That is the way
it goes.
The Chairman. You testified that there was no concentration of
farm mortgages, that these mortgages were distributed rather equally
over the 33 States in which you operate.
Mr. Rogers. In accordance with the demand.
The Chairman. In accordance with the demand. Now, how about
foreclosures ?
Mr. Rogers. Were they concentrated, do you mean ?
The Chairman. Yes.
Mr. Rogers. No; frankly I can't answer the question accurately
but my belief would be from experience I have had with the account
that we could not say that we have had a more disastrous foreclosure
experience here or there. I would have to temper t)iat by saying
perhaps down in Georgia we had a rather bad experience to start
with, although all our account is substantially sold out.
I think in some sections in Montana^ we have had a worse expe-
rience than we anticipated. I rather thmk th'at the better sections, as
CONCENTRATION OF ECONOMIC POWER 15039
a matter of fact, had a heavier concentration of foreclosures than
the poorer sections.
The Chairman. When you say better and poorer, are you referring
now to agriculturally better and poorer, or financially?
Mr. Rogers. That is right, agriculturally.
The Chairman. Agriculturally better?
Mr. Rogers. Yes. 1 mean to say the reason for foreclosures really
was the drastic fall in farm prices which occurred following the war.
Superimposed on that was a further drastic fall from 1929 on. We
had a few foreclosures before 1929 but no economy could stand the
tremendous drop in farm prices following 1929 and, of course, that
means that good land and poor land was foreclosed together.
Mr. Gesell. Did you over-loan in some of these good territories,
Mr. Rogers ?
Mr. Rogers. I haven't any doubt we all did, in instances. Of
course, everybody made mistakes.
Mr. Gesell. I was trying to get some idea of the extent of the
over-loaning in the case of the Prudential.
Mr. Rogers. Over-loaning
Mr. Gesell (interposing). It is all a matter of hindsight to some
degree, I realize.
Mr. Rogers. Let's say this, that in terms of the price level for farm
commodity prices and land values, substantially, loans that were made
in the twenties, in my opinion, were sound. However, we ran into
a very different pric?- level twice, and it was the running into that
very different price level. We were over-lent in 1932 without a qi^-
tion of doubt. Who could foresee it ?
Mr. Geserl. You have to look at it from the point of view of the
price level at the time the loans were made.
The Chairman. Did you follow prices u^ in your loans?
Mr. Rogers. All of us followed farm prices up to a point but, of
course, no one followed war prices. I am particularly familiar with
the Northwest from where I came, the Palouse country, for instance, to
which Mr. Rogers referred the other day. Ordinarily that land, pre-
■war, would sell, good land, for $100 an acre. Now, for the Prudential,
I made many millions of dollars of loans on that land, but even though
that land sold for $200 and $250 an acre in the war we never put an
appraisal on that land above $125. So our inflation value was 25.
We loaned up to $62l^ and in a few cases up to $75, and they were the
choicest. Yes ; we followed prices up a little bit, of course, but not in
terms of the very heavy inflation of land values nor did the other
insurance companies.
The Chairman. Then the deflation of farm values didn't materially
affect your loan portfolio.
Mr. Rogers. No. The trouble with the farm loan situation in fore-
closure was the fact that the price level which existed was too low for
farmers to operate
The Chairman (interposing). That is the price level for farm
commodities ?
Mr. Rogers. Yes, sir.
The Chairman. In other words, the farmer wasn't getting enough
for what he was producing to enable him to carry on his operations ?
15040 CONCENTRATION OF ECONOMIC POWER
Mr. Rogers. You are quite correct.
The Chairman. And meet his debts.
Mr. Rogers. I would even go further than that and say that but for
the measures which were subsequently put into effect by the Federal
Government, in my belief we would be in just the same fix today.
Mr. Gesell. And correspondingly the insurance companies would
be in a fix.
Mr. Rogers. Yes; and I think if they had not been put into effect
that the insurance companies would have foreclosed a great many more
mortgages.
The Chairman. In other words, the activity of the Federal Govem-
meiit toward raising agricultural prices was beneficial not only to the
farmer but to the lender on farm property?
Mr. Rogers. That is very decidedly so.
Mr. Gesell. Now, coming back to this matter of foreclosure, Mr.
Rogers, what was your attitude toward scaling down of mortgage
loans?
Mr. Rogers. The scaling down proposition came, of course, when
the conciliation committees were established. There wasn't a great
deal of scaling down before that except in. individual instances where
we were approached by the farmer and his creditors and we got together
and some scaling down was done.
I remember very well going out to Iowa to see Governor Turner, I
think that was in 1934. Governor Turner asked in what way this very
drastic situation which existed in the State of Iowa at that time could
be cured — and I am referring now to the differences between the farmer
and the lenders. I suggested to him that in Canada they had what
they called debt-adjustment groups which were voluntary and perhaps
the soundest way of bringing the farmer and the lender together, and
if the farmer and the lender could be brought together — I should say
if the farmer and the lenders could be brought together — the proba-
bilities were that much of this bad atmosphere which existed in the
farm country at that time would be cleared up.
Governor Turner did not put that plan into effect but Governor
Herring did.
Mr. Gesell. You are talking about the Iowa Debt Adjustment
Council that we had some testimony about?
Mt. Rogers. Yes. ; Of course, that was not the only one. They
were established in various States.
Mr. Gesell. Did your company cooperate with those various en-
deavors?
Mr. Rogers. Yes; after having suggested them, I guess we had to.
Mr. Gesell. And you didn't find any difficulties arising out of the
fact that you went to these debt-adjustment groups without consult-
ing the borrowers?
Mr. Rogers. No. At first the scheme didn't work very well, as a
matter of fact, and I think it came largely to a question of mechanics.
In the end it worked very well. The only difference I ever had with
Senator Herring was on the question of how the thing should be
approached. We felt, as Mr. Glen Rogers did, it was the farmers'
problem. But in discussing the problem with Senator Herring, then
Governor Herring, he was rather insistent that the insurance com-
CONCENTRATION OF ECONOMIC POWER 15041
panies had nothing to lose in dealing with a program such as that
and asked us if we would not do it and we agreed we would, and did,
and I don't think we suffered anything by so doing.
Mr. Gesell. You were testifying from a memorandum setting up
the foreclosure policy. Is there anything else you wish to add to
what you have said?
Mr. Rogers No; I think that fairly well covers it. I wanted to
go a little more into the history of it. I can say that our farm loans,
farm properties, fall under the supervision of branch oflfices much
the same as the Metropolitan, and there is not much use wasting a
lot of time on that, except you might be interested in knowing where
they are located, to know how they serve the country. We have one
at Atlanta, Ga., for the Southeastern States; one in Texas for Texas
alone ; one at Memphis for the deep South ; one at Indianapolis for
Indiana, Ohio, and northern ^Kentucky; one at Springfield for
Illinois; one at Omaha for Iowa and Nebraska; one in Minneapolis
for Minnesota, South Dakota, North Dakota, and Wisconsin ; one in
Kansas City for Kansas and Missouri ; one in Winnipeg for Alberta,
Saskatchewan, and Manitoba; correspondents at ISpokane, Wash.,
for Washington, Oregon, Montana, Idaho; and in Phoenix, Ariz., for
that territory.
This system of branch offices results in centralized control at the
home office and decentralized administration, of course.
Mr. Gesell. Did those branch offices both manage the farms and
handle the loans?
Mr. Rogers. Yes; they are fully integrated.
Mr. Gesell. You make no use of correspondents ?
Mr. Rogers. We have a couple of loan correspondents for isolated
territories. Aside from that, we are fully branch offices, and as I
say, they are fully integrated, handling all phases of the business,
including properties.
Mr. Gesell. Let me ask : Do you have a budget at the beginning of
the year of the amount of money you want to put out in farms?
Mr. Rogers. No; nor city loans, either. Our job is limited only by
the amount we can get out. If we could get Out twice as much we
would be that much better satisfied.
Mr. Gesell. You mean to say as far as the running of your city
and farm-loan divisions is concerned, that you could lend twice as
much as you are now lending if you could find the people who wanted
the money?
Mr. Rogers. Yes, sir.
Mr. Gesell. And the policy of the Prudential is such as to desire
to increase the mortgage portions of its portfolio?
Mr. Rogers. Yes; our mortgages only constitute 25 percent of our
assets and we would like it better if it was up to 50 percent.
The Chairman. You would like to increase your farm-mortgage
portfolio to 50 percent of your total assets ?
Mr. Rogers. Our farm and city.
The Chairman. To 50 percent of your farm and city assets?
Mr. Rogers. We would like our total mortgage account, farm
and city loans, to reach approximately 50 percent of our total assets.
Mr. Gesell. And they are now 25 ?
Mr. Rogers. Now 25.
15042 CONCENTRATION OF EC0N6MIC POWER
Mr. Gesell. How much of the 25 are cities?
Mr. Rogers. Eighty percent cities, and 20 percent farms. • What I
wanted to say, Senator, was that we couldn't increase our farm-loan
business lo that extent if we wanted to. Tliey are just not available.
Whether we would be willing to increase our farm loan to that ex-
tent would be a question we nave to discuss, but it is academic, be-
cause they are not available.
The Chairman. But you would like to increase your farm mort-
gages ?
Mr. Rogers. We would.
The Chairman. Then your experience has been satisfactory with
respect to farm mortgages ?
Mr. Rogers. It has.
The Chairman. What percentage of your mortgages have been
foreclosed? That may appear in that tabulation.
Mr. Rogers. You mean of all mortgages, or farrti?
The Chairman. Farm.
Mr. Rogers. Twenty-nine percent of the total risk, as we figure it.
The Chairman. Has been foreclosed ?
Mr. Rogers. We acquired about 13,500 farms.
The Chairman. Isn't.that a pretty heavy percentage?
Mr. Rogers. Much too heavy ; but, as I have said, these foreclosures
were approached with great reluctance, and on our own figures I
think we are not worse than second or third best in that respect.
The Chairman. Is it a continuing
Mr. Rogers (interposing) . No ; no foreclosures are over
The CiiMRMAN (interposing). Now, while this foreclosure pro-
ceeding was going forward were you still having a satisfactory ex-
perience with farm mortgages ?
Mr. Rogers. Yes ; we did oir new farm loans.
The Chairman. New farm mortgages?
Mr. Rogers. Made on a different price level.
The Chairman. Foreclosure was a passing phase?
Mr. Rogers. We hope so.
The Chairman. And you feel now that the farm loans are once
more productive of satisfactory revenue ?
Mr. Rogers. We hope so. We are not wholly satisfied on that, Sen-
ator. I wish we could be. That uncertainty confronting agriculture,
I think you will admit, is very ^reat.
The Chairman. It is recognition of that fact which prompts the
questions I am asking you. When you express the desire to expand
farm mortgages it seems to imply a feeling that the farm situation
is bein^adjusted and becoming stabilized.
Mr. Rogers. We have that feeling, and we ha,ve the feeling it is
becoming stabilized. After all is said and done, there are factors that
arise almost from week to week or month to month or year to year in
the situation, and I am very much afraid this war isn't going to be
very beneficial to the farmers; and when you talk about the year-to-
year proposition, you know we have just passed, and are passing,
through one of the greatest droughts that ever happened in this
country, and it is going to have its effect on the crop next year, so there
are always passing phases that arise in your mind to restrain you a
little bit from doing what you would like to do.
CONCENTRATION OF ECONOMIC POWER 15043
On the other hand, I think it is useless to assume that farming is
not always going to go on in this country, and I think it is also useless
to believe that the Government can ever let go of the farmer's hand
mitil some sound farm plan has been developed where he can go
along on his own feet.
Mr. Gesell. Right on that subject, Mr. Rogers, does the Prudential
want to manage farms?
Mr. Rogers. No.
Mr. Gesell. You don't believe in proxy farming, so-called ?
Mr. Rogers. No.
Mr. Gesell. Well, now, will you explain that a little ?
Mr. Rogers. I think that farming is for farmers.
Mr. Gesell. If you had your choice between farm-mortgage loans
or the operation and management of farmland, which would you
choose ?
Mr. Rogers. Farm loans. Let me put it this way : We believe the
interest on a sound farm sales-contract or purchase-money mortgage
is preferable to the income that can be obtained from the farm.
Mr. Gesell. Now, is that decision or that statement you make based
without regard to the sociological factors we were considering this
morning, purely from the point of view of investment ?
Mr. Rogers. I think from a social standpoint also that that state-
ment is socially correct.
Mr. Gesell. What I meant is, putting social considerations to one
side, would you still prefer to have mortgage loans than the job of
absentee managership of farm real estate ?
Mr. Rogers. Yes; we are selling our farms at the ratio of about 20
percent of those owned each year, and I hope that 5 years will see us
out of the business.
The Chairman. I notice from table 180 that you have had a sub-
stantial increase in the amount of farm real estate which is owned.*
Mr. Rogers. A substantial increase, you mean, since 1929?
The Chairman. Yes.
Mr. Rogers. That substantial increase — about 55 percent has been
disposed of.
The Chairman. In 1934, according to table 180, your total holdings
had an admitted asset value of $39,795,000; increased the following
year to $45,711,000; then increased to $50,634,000; then increased in
1937 to $50,754,000; and in 1938 we find the first decrease in this whole
period. Then you drop to $48,882,000.
Mr. Rogers. Yes ; that is true. Of course, over that period you have
to take into consideration that a great many mortgages were coming
to us by the foreclosure route, and in the last few years many of them
were passing out of moratorium, which restricted our being able to
obtain them before.
M. Gesell. Table 182, Senator, shows the farm real-estat« sales
and our figures on the percentage basis which don't happen to appear
on the
The Chairman (interposing). One hundred and eighty-two ?
Mr. Gesell. I am sorry ; on 182 we have the figures with respect to
how long the real estat-e has been held, and our figures show on a per-
1 See Hearings, Part 10-A, p. 180
15044 CONCENTRATION OP ECONOMIC POWER
centage basis that the Metropolitan real estate is 64.82 percent, which
has been held over 5 years ; the Prudential, 46.89 ; the Equitable, 20.64 ;
the Northwestern— — ^
•The CHAIRMAN (interposing). I don't find that on 182.
Mr. Gesell. No; you don't. Senator. I am giving you percentages
computed fifom the figures on 182; and the Bankers Life shows 50.48.
Mr. Henderson. Give those percentages again.
Mr. Gesell. Those are taking the amount of real estate that has
been held 5 years or more and comparing it with the total amount
.shown on the right-hand side of the page; just a computation based
on the table.
Mr. Kades. Will you repeat those ?
Mr. Gesell. Metropolitan, 64.82; Prudential, 46.89; Equitable,
20.64; Northwestern, 39.92; Travelers, 39.88. Dropping down to
Bankers Life, and other big farming companies, 50.48.
The Chairman. What is that percentage?
Mr. Gesell. That is the percentage of the total farm real estate
held as of December 31, 1938, which has been owned 5 years or more.
The Chairman. That is a rather large percentage for each of these
companies ?
Mr. Gesell. It is ; yes, I think the outstanding
The Chairman ( interposing) . I understood the witness to say that
t here had been striking reduction in the amount of farm lands owned
by the Prudential.
Mr. Rogers. I think you will find that on page 185,^ Senator.
Mr. Gesell. Table 185 expresses on a percentage basis total sales
computed on a percentage basis in terms of all the farm real estate
owned as of December 31, 1931.^
The Chairman. This table shows that you sold 58.37 percent of all
the real estate owned up to December 1931, plus subsequent acquisi-
tions. In other words, you were following the policy of getting rid
of your real estate ?
Mr. Rogers. I think we followed the policy that I have outlined in
my discussion here — in other words, very sales-minded, and have done
that on the basis that we have affixed these farms as going farms, both
buildings and soil conservation; we have tried to do that job; we have
let some of the farmers do it, and they have paid for it in additional
privileges, and then I think we have been realistic about prices and
terms.
The Chairman. In other words, your policy has been to sell and
to sell as quickly as possible and as advantageously as possibly, I
assume ?
Mr. Rogers. That is true.
The Chairman. But despite that policy, it stiU remains true, ac-
cording to the table which I first cited, namely 180, that you still
actually own $48,882,000 of farm value as of 1938? »
Mr. Rogers. That is true.
Mr. Pike. Do you have '39 figures vet, Mr. Rogers?
Mr. Rogers. What we own in '39? Forty-five milli^.i.
Mr. Pike. About $3,000,000 cut?
» Ibid., p. 182.
" Ibid., p. 185.
» Ibid., p. 180.
CONCENTRATION OF ECONOMIC POWER 15045
Mr. Rogers. That is true.
The Chairman. These sales, as I understood you to describe it,
were, so far as the mortgagor was concerned, always upon the basis
of the cost to you, or less?
Mr. Rogers. Oh, no.
The Chairman. Well, I misunderstood you.
Mr, Rogers. The basis of our sales — we were talking about the
crop-payment sale a few moments ago and we were talking about the
crop-payment sale in relation to the borrower that we had foreclosed,
that we were giving him that deal. We would sell at our cost or at a
sum less than our cost, providing we would sell that farm to some-
body else for less than cost.
The Chairman. That is what I meant to say.
Mr. Rogers. Our sale policy is based on this, that every year these
farms are appraised and a sales price is put upon them, two prices, a
list price and a lowest-acceptance price. If we find that the list price
that we have had on it in '39, and we have actively pushed that farm
for sale, has not resulted in a sale, the probabilities are we will give
consideration to a further charge-down of the sales price, so that
we may move it.
In other words, our price may be too high.
The Chairman. You see there are two categories of sales, as I see it.
No. 1, to mortgagor, sales to the mortgagor who has been foreclosed;
No. 2, sales to a stranger.
Mr. Rogers. That is right.
The Chairman. Now, with respect to the first class, your policy has
been to sell for cost or less ?
Mr. Rogers. That is right.
The Chairman. Now, with respect to the second class, what has been
your pplicy?
Mr. Rogers. Value of the farm.
The Chairman. And have you made a profit on that sort of sale?
Mr. Rogers. Yes — not a profit, put it this way : That on the sale of
our farms so far of about 55 percent of our total holdings, we have
recovered book cost, all sums previously charged off, all sums spent for
rehabilitation, and a small amount for interest lost from the first
default on the mortgage to date of sale. I would like to go a little bit
further and say that I don't believe that we will be quite so successful
with the last end of our sales program as we were with the first.
The Chairman. Now, then, combining the two, what has been the
result ?
Mr. Rogers. Combining the two ?
The Chairman. Two classes. If you were to make a computation.
Mr. Rogers. That is the result.
Mr. Gesell. That is the result of all sales programs ?
Mr. Rogers. Farm sales.
Mr. Gesell. Including the
Mr. Rogers. Including the borrower.
Mr. Pike. In that, Mr. Rogers, you can't hold that offer out to fore-
close the farms permanently, of course?
Mr. Rogers. No.
Mr. Pike. So that after a year or so he will no longer
15046 CONCENTRATION OF ECONOMIC POWER
Mr. Rogers (interposing). I should say that is for a reasonable
period of time on offers arranged beforehand.
Tiie Chairman. Then do I understand you to say that there has
really been no loss of principal in handling of farm mortgages?
Mr. Rogers. Not so far.
Mr. Kades. Mr. Rogers, you spoke of recovering the cost of im-
l>rovements which were made to the farms. Do you capitalize those
improvements?
Mr. Rogers. We didn't capitalize rehabilitation, that is, repairs. If
we built new buildings or did those things to a farm which would result
in our not being able to charge it to expense — we charged everything to
expense that we could legally, but when it came to capitalization, the
things we had to capitalize we capitalized.
Mr. Gesell. You have taken, however, according to table 191, very
substantial write-downs.^
Mr. Rogers. Yes ; about seven million two, I think.
Mr. Gesell. And those are greater than all the items capitalized
according to this schedule, is that correct ?
Mr. Rogers. I assume that is correct.
Mr. Gesell. I noticed that your real estate is carried at 96.25 per-
cent of the total amount of the mortgages foreclosed.
Mr. Rogers. Yes ; and of course really is reflected in the charts.
Mr. Kades. Mr. Rogers, did I understand you correctly that you
charged to expense everything that you legally could, but that build-
ings and other permanent improvements of that character you cap-
italized? But then, according to table 191, you wrote down the book
value.
Mr. Rogers, That is right. In other words, we think that is correct
bookkeeping, to capitalize what we have to capitalize, even though
that overvalues the farm, and then subsequently Upon appraisal of
the farm, if we feel that farm is overvalued, we w^ould make a charge-
down — a charge-down in two ways, really. The Government allows
for depreciation and obsolescence of buildings, and then a specific
charge-off against the specific property.
Mr. Kades. Do you have a program of improvement and rehabilita-
tion ?
Mr. Rogers, Oh, yes; imniediately upon foreclosure it is common
practice with all farm-mortgage people to program the farm or even
the city property. The minute you get title you enter upon the prop-
erty and have a survey made of the needs in the way of building mate-
rials and in the way of soil conservation, and subsequent to that time
a program is made and maintained as to how the program shall be
handled.
Mr. Kades. A few moments ago you spoke of leaving it to the farmer.
I didn't get what you said. Wou](5 you mind repeating it ?
Mr. Rogers. The point I made there is this, that we may not
have gone as far as many of the companies in our rehabilitation
program. We felt we would do the necessitous things, the things
necessary to. arrest dilapidation — new sills under the barn, a new
roof on the barn, putting boards back on the barn, even rebuilding
the buildings if we have to do it. Those are the necessitous things
» See Hearings, Pnrt 10-A, p. 191.
CONCENTRATION OF ECONOMIC POWER 15047
you must do to make the farm a going concern and make it attrac-
tive to the farmer to buy it.
Then there are certain nonnecessitous things that you can more
reasonably leave for the farmer and his wife to do, because if you
do them, it will be added to the price of the farm, and they are
things perhaps which he can do even better than we do them. You
wonder what. I would say if there was no bathroom in the farm
house, quite likely we would not place one there. He might if he
wanted to. Some of the rooms need papering and we wouldn't do
that.
Mr. Kades. Would you build fences?
Mr. Rogers. Yes; that is necessitous. We would fix the water
supply.
Mr. Gesell. Do you enter into a farm-erosion-prevention program
and crop-rotation program with the tenant?
Mr. Rogers. Oh, yes ; all farm handlers do that, it is common
practice.
Mr. Gesell. How many of your mortgages were taken over by
the Farm Credit Administration ? Do you have that figure ?
Mr. Rogers. Yes; I have the figure of $18,000,000 of bonds, and
I think some more were taken over where they paid cash. I think
there was a period when the bonds were worth more than par and
in that case they paid cash, but I have no record of their paying
more than that.
Mr. Gesell. Were most of the mortgages in bad shape or were
there some that you considered adequate security?
Mr. Rogers. Some of them, possibly, but in most cases they were
cases of dire need. It was a case where he owed storekeepers' bills,
and so on, and it was a plan to refinance him, to start him off fresh.
Mr. Gesell. I meant to ask you what attitude your company took
toward moratorium legislation.
Mr. Rogers. We took no attitude at all, and we felt that that was
and still is one of the incidents of the business and there isn't
very much you can do about it. We tried to get these cases out
of moratorium as fast as we could, and oftentimes accomplished it b}'
setting up some form of lease option with the farmer whereby we
lease him the farm and option it to him to buy, and that is as sat-
isfactory to him as retaining it under the protection of moratorium.
Mr. Gesell. Do you usually have your tenants on a share-crop
arrangement ?
Mr. Rogers. Oh, yes.
Mr. Gesell. Wha t do you do with those crops ?
Mr. Rogers. You mean our share?
Mr. Gesell. Yes.
Mr. Rogers. We dispose of it, and usually within the year it is
harvested.
The Chairman. How many tenants do you suppose you have ?
Mr. Rogers. I should say about 5,900. We have 5,900 farms — ^it
may be a few more than that.
Mr. Gesell. That is individual tenants. Taking into account their
families and everything else, it would run ^. much bigger figure,
wouldn't it?
Mr. Rogers. Yes, 20,000 probably.
15048 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. I have no further questions of this witness.
The Chaibman. Are there any other questions to be asked Mr.
Ropers ?
Where are these tenants scattered, Mr. Rogers ?
Mr. Rogers. I would say that we have farms in every area in
which we operate, and that would be from the eastern seaboard to
the west coast. We don't loan in California. We do loan in Oregon,
Idaho, Washington; we don't loan in the New England States be-
cause there is no demand there for farm mortgage money.
The Chairman. With respect to these tenants, did I understand
you to say that you give them an option to buy the farms ?
Mr. Rogers. We were referring particularly to tenants under the
protection of moratorium. He doesn't like to be there any more than
we like to have him there.
The Chairman. You mean under the moratorium?
Mr. Rogers. Yes; after all, it is a modified form of bankruptcy
and anybody in a modified form of bankruptcy, or bankruptcy itself,
is a little bit uncomfortable. We have found ways and means, and
T think every other company has, too, of saying, "Get out. We will
lease you the farm for 3 years with an option to buy, and what you
pay in rent shall be applied on the option to purchase, interest, and
principal, or at the end of the 3-year period we will retain the rent
and you don't have to buy the farm."
The Chairman. With respect to the tenants who are not under
moratorium of any kind, do they have an option to buy?
Mr. Rogers. Yes ; of course they do.
The Chairman. What are the terms of your tenant contracts?
Mr. Rogers. Well, I have described the crop payment plan, that
is the most available for tenants, isn't it? The next would be a
small cash payment down, say 10 percent down with
The Chairman (interposing). To a tenant?
Mr. Rogers. Yes ; if he wanted to buy it.
The Chairman. I am not speaking now of the terms of sale. I
am speaking now of the terms of the tenancy.
Mr. Rogers. Oh, the terms of the lease, you mean ?
The Chairman. Yes.
Mr. Rogers. Of course, the terms of the lease would be in accord-
ance with the custom of the country.
The Chairman. What is the length of such a lease?
Mr. Rogers. It is pretty hard to give more than a 1-year lease
although Mr. Glenn Rogers testified this morning, I think, that most
farmers, most tenants farming for institutions, life insurance com-
panies, are well aware of the fact that if he is a good farmer his
tenancy will be continued short of sale; but if a sale happens, un-
fortunately we must sell, and in those cases we, and I am sure the
other companies, do our very best to place him on another farm
we have.
The Chairman. You feel you cannot give more than a year's
lease because. of the requirement of law to dispose of the real estate?
Mr. Rogers. That is true.
The Chairman. How long do the tenants on the average occupy
farms under lease?
Mr, Rogers. I can't tell you, but I think the fact that we have
some farms that have been in our possession for 5, 6, and 7 years
CONCENTRATION OF ECONOMIC POWER 15049
would indicate that if he was a good tenant, he has been there that
long.
The Chaikman, What sort of farming supervision do you exercise?
Mr. Rogers. Much the same as has already been described to you.
Our branch offices are broken down into two sections. First we have
the mortgage side of it which has to do with the servicing of exist-
ing loans and the securing of new loans, the collection of interest and
principal, and so on.
The Chairman. That is the lending side of it?
Mr. Rogers. That is the lending side. These branch managers are
in charge of two assistant managers; an assistant manager who has
charge of the lending side, and an assistant manager who has charge
of the property side, and under him he has what might be called the
technical men or technicians. They have to do with the maintenance,
that is, repair work and that sort of thing, soil conservation, and
management and sale. That comes under the assistant manager in
charge of properties.
The Chairman. I am thinking now of the agricultural program
on the farm itself, particularly. Do you have agricultural experts
at your offices?
Mr. Rogers. Yes.
The Chairman. About how many agricultural experts in all are
employed by the Prudential?
Mr. Rogers. You mean on the lending?
The Chairman. My questions are now directed to farm activities
alone, that is, the growing of crops, the management of the farm as
a farm, not as a financial investment.
Mr. Rogers. I would think from 120 to 125 men directly employed
on the property side of the business.
The Chairman. And those men, I suppose, are ordinarily graduates
of agricultural colleges?
Mr. Rogers. Many of them are.
The Chairman. "STow, to what extent do these men lay down pro-
grams for the farmers, the tenants, to follow with respect to the
agricultural management of the farms ?
Mr. Rogers. Pretty fully. Ordinarily the farm is programmed
as soon as we acquire it, programmed as to what we are going to do
in the way of repairs and programmed as to what we are going to
do in the way of farming. I don't think I can explain it nearly as
well as Mr. Rogers explained it this morning, but a farm is pro-
grammed and when a tenant shows' up to lease that farm we ordinarily
discuss with him the program we have laid out for that farm.
The Chairman. Then -before the tenant comes to the farm, you
have already developed a farm plan for that particular area?
Mr. Rogers. That is right.
The Chairman. With respect to the type of crops and the quantity
of crops to be grown ?
Mr. Rogers. That is true.
The Chairman. And the method in which they are to be grown
and harvested?
Mr. Rogers. That is true.
The Chairman. And then sold ?
Mr. Rogers. That is true.
15050 COxXCENTRATION OF ECONOMIC POWER
The Chairman. And the tenant farmer must take his instructions
from the agricultural supervisor in your branch office?
Mr. Rogers. It works a little differently than that with us, Senator,
because the lease provides for what he shall do and how he shall do it.
The Chairman. Do you by any chance have a copy of one of those
leases ?
Mr. Rogers. No ; but I will be glad to send one down for the record
if you would like to have it.
The Chairman. I would like very much to see one.
Mr. Rogers. Now, our farms are largely in charge, perhaps 5 or 10
in a bunch, of an ex-banker in a community. After the lease is
made
The Chairman (interposing). An ex-banker?
Mr. Rogers. An ex-banker — and there are plenty of them. He may
be a real-estate man. In a section where we have a rather heavy con-
eentration of farms, perhaps we will have 10 farms under his super-
vision. He is expected to see that the terms of the lease are carried
out. He is also available to the farmer because he lives in the town
where the farmer does business.
The work that our technicians do is really the supervision of the
ex-banker to see that he is doing his job and to see that he is keeping
the tenant up to the notch and has collected our share of the crop, and
so forth.
The Chairman. I imagine the ex-banker would be better qualified
to watch the financial affairs of the contract than to watch the agricul-
tural program on the farm.
Mr. Rogers. If the agricultural program has been set, so many
acres in legumes so many acres in corn, if he has the copy of our
program of that farm, which he has^ he knows theii how^ that farm
should be handled and it won't always be handled in accordance
with the program but substantially it will. As Mr. Rogers testified
this morning, sometimes the tenant has a better idea than we do and
he knows what land will produce better than we do, but it is a matter
of^ arrangement between the tenant and ourselves, always having
in mind that so much of that farm must be in soil-conserving crops.
The ChairmIan. Would you say that this sort of a program was
an innovation?
Mr. Rogers. No. No; 1 think it has been common practice. I
was in the farm-mortgage business in 1893 and '94 and '95 and '96
when we had a very comparable situation, and my first work was in
doing exactly what we are doing now jvith foreclosed farms. It
isn't anything new.
The Chairman. And as long as you have been doing this sort
of business, the insurance companies have been managing farms
which they have foreclosed?
Mr. Rogers. Yes; but in those days, 1896, the insurance companies
didn't have any farm loans so it was individual investors you did
that sort of thing for.
I might say the soil conservation in those days wasn't nearly — in
fact, it wasn't any problem at all. *The erosion and loss of humus
and so on, in the soils
The Chairman ^interposing). Then conditions back in 1896 which
you describe were those which existed between individual farmers
and individual lenders for the most part.
CONCENTRATION OF ECONOMIC POWER 15051
Mr. Rogers. That is right, except they were concentrated in mort-
gage companies.
The Chairman. I was thinking more of the institutional farm
loans such as we have been discussing in this hearing.
Mr. Rogers. They were institutional farm loans because the indi-
vidual lenders sold to the New England savings banks and they man-
aged them for the New England savings banks as they are being
managed now.
The Chairman. With the same detail as to farm practice?
Mr. Rogers. Almost.
The Chairman. Are there other questions ?
Dr. LuBiN. Mr. Rogers, in the event that you take a farm which is
in moratorium and lease it to the former owner, are the terms of
sale always the same — namely, the face value of the mortgage plus
accrued interest?
Mr. Rogers. That is right.
Mr. Kades. Mr. Rogers, do you have any records to indicate
whether some of the farm real estate held by the Prudential is sold
to speculators ?
Mr. Rogers.. Yes; I can only make a guess on it. I think I have
said a number of times that I doubt very much whether 5 percent of
our farm holdings — going back oVer the years — whether more than
the 5 percent have been sold to speculators. There was a year or two
when people were afraid of inflation when some speculators appeared
and bought farms, but substantially speaking, there have been very
few speculators in farm property.
The Chairman. Any other ^questions? If not,' the witness may
stand aside.
(The witness, Mr. Rogers, was excused.)
Mr. Gesell. If the committee please, that completes our consid-
eration of the farm mortgage loan and farm real estate investments,
and we will now turn for a short while to a consideration of the
urban mortgages and urban real estate or city mortgages and city
real estate, and the first witness will be Mr. McLaughlin of the
Mutual Life of New York.
I might say for the benefit of the committee that the tables on city
mortgages and city real estate commerce at 194, and continue through
261.^ Perhaps a short summary would help.
Urban mortgages valued at $3,800,000,000 were owned as of Decem-
ber 31, 1938, of which $155,000,000 were insured under the National
Housing Act. Urban mortgage acquisitions rose from over $48,000,-
000 in 1933 to $487,000,000 in 1938. The average interest rates on
urban mortgages made in 1938 ranged as between companies from
3.9 percent to 5.2 percent. During the years 1932-38, inclusive, the
26 companies foreclosed urban mortgages in the amount of $1,200,-
000,000. At the end of 1938, there were $39,000,000 of urban mort-
gages in foreclosure.
Out of a total unpaid principal amount of urban mortgages owned
at the end of 1938, $2,360,000,000 were on properties in New York,
Chicago, Philadelphia, Los Angeles, Detroit, "Washington, Cleveland,
San Francisco, Boston, and Buffalo, with $1,230,000,000 of properties
located in New Yorkj alone. Of all the urban mortgages owned
$1,000,000,000 were on one- to four-family houses There were 10.5
» See Hearings, Part 10-A, pp. 194 to 261.
15052 CONCENTRATION OF ECONOMIC POWER
percent of urban mortgages in terms of unpaid principal amount
delinquent as to interest for 3 months or more. In different com-
panies this delinquency ranged from 0.87 percent to 33.68 percent
of urban mortgages owned. In 1938 the average yield on urban
mortgages was 4.59 percent. Foreclosed urban real estate owned by
all companies rose from $11,000,000 to $905,000,000 in 1938. Urban
real estate under contract of sale at the end of 1938 amounted to
over $78,000,000.
The rate of income on mortgage investments ranged from 4.03
percent to 5.96 percent.
(Dr. Lubin assumed the chair.)
• Acting Chairman Lubin. Mr. McLaughlin, do you solemnly swear
that the testimony you are about to give shall be the truth, the whole
truth, and nothing but the truth, so help you God?
Mr. McLaughlin. I do.
TESTIMONY OF JOHN G. McLAUGHLIN, ACTING MANAGER, REAL
ESTATE DEPARTMENT, MUTUAL LIFE INSURANCE CO. OF NEW
YORK, NEW YORK, N. Y.
Mr. Gesell. Will you state your full name?
Mr. McLaughlin. John G,. McLaughlin.
Mr. Gesell. And you are connected with the Mutual Life of New
York, are you not?
Mr. McLaughlin. Yes.
Mr. Gese ,l. In what capacity?
Mr. McLaughlin. Acting manager, real-estate department.
Mr. Gesell. How long have you been the acting manager? ■
Mr. McLaughlin. Since July 1937;
Mr. Gesell. And you were with the department for some time
before that, were you not?
Mr. McLaughlin. Yes, sir. •
Mr. Gesell. Now, first of all, I wanted to ask a little about the
city-mortgage loans of the company. Generally speaking, how much
money do you loan a year on city mortgages?
Mr. McLaughlin. That varies. We have loaned as high as $40,-
000,000.
Mr. Gesell. In recent years how much has it run?
Mr. McLaughlin. In '34, '5, '6, the amount was small. In the last
3 years the average was about $6,500,000. In the last 3 years the
aggregate was about $20,000,000.
Mr. Gesell. You loaned about $20,000,000 a year?
Mr, McLaughlin. No ; in the last 3 years it was about 6l^ million
a year.
Mr. Gesell. You have loaned about $20,000,000 in 3 years?
Mr. McLaughlin. That is it.
Mr. Gesell. And on what type of properties do you generally
loan?
Mr. McLaughun. Business buildings, apartment houses, dwellings,
office buildings, and various other commercial buildings.
Mr. Gesell. Am I correct in saying that most of your loans are on
large buildings and apartment houses, office buildings, loft buildings,
ana things oi that sort?
CONCENTRATION OF ECONOMIC POWER 15053
Mr. McLaughlin. I think about half of our loans at this time are
on large buildings and in large amounts, $250,000 and up.
Mr. Gesell. What is the lowest loan that your company would bQ
willing to make in the average run of things on a city mortgage?
Mr. McLaughlin. From $5,000 up.
Mr. Gesell. $5,000 up?
Mr. McLaughlin. Yes.
Mr. Gesell. You don't have many in the $5,000 class, do you?
Mr. McLaughlin. Very few.
Mr. Gesell. Where do most of them range?
Mr. Laughlin. From $250,000 up.
Mr. Gesell. That is on table 207, is it not, tbat over half your loans
are above $250,000? 1
Mr. McLaughlin. That is right.
Mr. Gesell. Now, in terms of territory, turning now to table 201,
Mr. McLaughlin, you seem to have loaned a very substantial amount
in the city of New York.^
Mr. McLaughlin. Yes, sir.
Mr. Gesell. In fact, about 89 percent of your loans are in New York
City?
Mr. McLaughlin. That is correct. I might add, that from the
beginning the Mutual hdfe favored New York City loans, and they
have proven to be very successful. We have not made many resi-
dential or farm loans since the later nineties, and the reason is be-
cause of the losses we sustained in farm and residential loans which
were made in tlie eighties and later seventies.
Mr. Gesell. You have made no residential or farm loans since before
1900?
Mr. McLaughlin. Yes; that is right-^no; that isn't correct. We
have made residential loans ; no farm loans.
Mr. Gesell. Residential loans have been rather slight, have they
not?
Mr. McLaughlin. In comparison with the whole, very light; yes.
Mr. Gesell. You say that the Mutual has always favored loaning in
•New York City?
Mr. McLaughlin. That is correct, sir.
Mr. Gesell. And that is responsible for the high degree of concen-
tration in that city?
Mr. McLaughlin. No doubt.
Mr. Gesell. Is the policy of the Mutual still to loan its money there?
Mr. McLaughlin. Not necessarily so. We tried about 1927 to
diversify, and established I think some 20 or 23 agencies or repre-
sentatives through the South and West, and in the Northwest, but
shortly after that, as you know, we got into trouble, and our representa-
tives have not been very productive, although they did the best
they could under the then existing conditions.
Mr. Gesell. Is it fair to say, do you think, that at the present time
the Mutual hasn't really got an organization which enables it to place
city money out around the country ?
Mr. McLaughlin. That is very true, although that is a matter ou-
which we are working, and we have men studying the question in
1 See Hearings, Part 10-A, p. 207.
» Ibid., p. 201.
124491^^1 -p+. 28 24
15054 CONCENTRATION OF ECONOMIC POWER
States of the South and West, and a policy will soon be determined.
Mr. Gesell. Looking to see whether there should be a greater outlet
for the funds ?
Mr. McLaughlin. That is correct.
Mr. Gesell. A greater diversification?
Mr. McLaughlin. Correct.
Mr. (lESELL. But in this period from 1900 up until '38 it has been the
policy to loan in New York City?
Mr. McLaughlin. Very largely.
Mr. Gesell. On the subject of residential loans, I noticed in table
195 that your company owns no F. H. A. mortgages.^
Mr. McLaughlin. That is correct,
Mr. Gesell. You have never gone into that field?
Mr. McLaughlin. No; not actively.
Mr. Gesell. May I ask whether you are able to loan all the money
you want to loan on city mortgages and city real estate?
Mr. McLaughlin. We haven't been lately.
Mr. Gesell. Do you have a "kitty," so to speak, of some amount
that you want to get out, and, all other things being equal, that you
would like to place in city mortgages?
Mr. McLaughlin. Well, there would be no limit on the amount
today. I would be very glad to put out a large sum of money.
Mr. Gesell. Is there any amount that you are expected to place
out if you can find satisfactory loans?
Mr. McLaughlin. I think the company would be very glad to
place thirty or forty millions of dollars in satisfactory loans at this
time for mortgages that would come within our requirements.
Mr. Gesell. Wha,t is there about the F. H. A. that does not meet
your- requirements ?
Mr. McLaughlin. That, I am not in a position to state. I will say
this, that consideration has been given to the question of F. H. A.
loans/but no definite decision arrived at. Recently we have had a
research man come in,to the office to make a very careful study of
the matter.
Mr. Gesell. Did you ever make any recommendations to the board
of directors as to loaning, or not loaning in F. H. A.'s ?
Mr. McLaughlin. No.
Mr. Gesell. You made no recommendation with regard to that?
Mr. McLaughlin. None at all.
Mp. Gesell. Was your opinion ever sought on that question?
Mr. McLaughlin. No.
Mr. Gesell. With respect to farms, you say your company has not
loaned on farms?
Mr. McLaughlin. No.
Mr. Gesell. I notice there is one mortgage that keeps cropping up
there, of $6,000.^ There is some question as to whether that is a
farm or isn't a farm.
Mr, McLaughlin. .That is really one of the holdovers from the
time we made farm loans. We bought it in, and subsequently
sold it, and now we have- the loan, but we did sell that property.
You might be interested to know that that was the home of Professor
Lossing, a great American historian, and his farm.
» See Hearings, Part 10-A, p. 195.
» Ibid., pp. 161, 169, 172, and 173.
CONCENTRATION OF ECONOMIC POWER 15055
Mr. Gesell. And he was always sure it was a farm, wasn't he?
Mr. McLaughlin. Well, it was a farm in those days. There is
no question about that.
Mr. Gesell, What about farms generally? Why haven't you
loaned in the farm field. Is it because of the organization your
company has for getting its money out, or because of its history with
loans ?
Mr. McLaughlin. The history with farm loans. We decided,
as I stated, in the late nineties, to make no more farm loans.
Mr. Henderson. How long ago was that ?
Mr McLaughlin. In the late nineties.
Mr. Gesell. And how many times has that. question been reviewed
so far as you know since that time ?
Mr. McLaughlin. It has been reviewed, but it has not been
determined whether or not we would make farm loans.
Mr, Gesell. Was your recommendation ever sought on that ques-
tion by the board of directors ?
Mr. McLaughlin, No; because I knew that would be contrary to
the policy of the board, because of prior action.
Mr. Gesell. And did you ever make any recommendations — I take
it probably not, because of that same question,
Mr. McLaughlin. I never made any ; no, sir.
I might say that the farm loans we had were made in New York
State, Pennsylvania, and New Jersey, At that time we were only
permitted to loan in New York State and the States contiguous.
Mr. Gesell, Those that were very near at hand?
Mr. McLaughlin, Very near at hand — and we had plenty of theTn.
Mr, Gesedl. Now, you have had to foreclose, like everybody else,
have you not ?
Mr, McLaughlin. Yes, sir.
Mr. Gesell, I wanted to consider with you for a moment your
city real estate account. Turning to table 223,^ first of all, I note
that your company has been successful in selling 15,92 percent of the
city real estate which it acquired during the period indicated, in other
■words, from 1932,
Mr. McLaughlin. Yes, sir.
Mr, Gesell, I wonder if you would tell us a little about what the
policy of the company is with regard to the sales of real estate —
what type of prices it asks for — and see if you can give us some
reason as to why more haven't been sold,
Mr. McLaughlin, We have no fixed prices. In other words, there
is no established sales price for these properties, but as inquiries come
in we have in mind at all times the existing book value of the prop-
erty, and also we are possessed of the knowledge of what the property
is really worth to someone who ought to own it, or feels that he ought
to own it, and we get just as good a price as we can above the book
value, but at the same time we don't always adhere to book values.
We go below them as well as above them, as indicated in the charts
which you have.
Mr. Gesell. By ai?d large people must come to you about these^
properties ?
Mr, McLaughlin, They come to the office. Of course, it is gener-
ally knowix that we own these properties and brokers and others
» See Hearings, Part 10-A, p. 223.
15056 nONCENTRATION OF ECONOMIC POWER
interested in acquiring property, call at the office or write for a
list of our foreclosed real estate, which list is very promptly
furnished.
Mr. Geseix. Well, your lists are out in the hands of brokers, in
other words?
Mr. McLaughlin. Oh, yes.
Mr. Gesell. There are, I take it, many properties upon which you
have had bids that you have not yet sold ?
Mr. McLaughlin. Oh, yes.
Mr. Gesell. Bids which you did not accept?
Mr. McLaughlin. That is correct.
Mr. Gesell. Well, now, there are a few of those I would like to
discuss with you a moment, if I may. Have you there your master
book, or whatever it is, that shows the bids that are received on the
various properties?
Mr. McLaughlin. Which property do you have in mind now?
Mr. Gesell. First of all, let's take property 27,900. On property
27,900, what is the book value of that property?
Mr. McLaughlin. Four hundred thousand dollars.
Mr. Gesell. Am I correct in saying that on October 30, 1935, you
received a cash offer of $477,000 for that property?
Mr. McLaughun. What is the date? Yes.
Mr. Gesell. October 30, 1935.
Mr. McLaughlin. That is correct, according to this record.
Mr. Gesell. There was a cash offer substantially above the book
value which you now carry the property at, was it not?
Mr. McLaughlin. Yes, sir.
Mr. Gesell. Again, if you take the case of property 27,237
Mr. McLaughlin (interposing). May we pursue this 27,900
just a little further?
Mr. Gesell. If you have any comments; yes. I would be inter-
ested in knowing why the offer wasn't taken.
Mr. McLaughlin. The trouble with some of these offers, Mr. Ges-
sell, is that they are not definite offers. That was not a written offer.
I think it was an inquiry, and the broker was notified that we would
not be interested because of the fact that there was nothing definite.
It was not an offer that you could really consider an offer. Many
of these things that you refer to as offers were only "feelers" by
brokers.
Mr. Gesell. That kind of puts the broker in a difficult position, if
he says, "I have a possible offer here of $477,000; woiild you be in-
terested?" He isn't apt to go much further and get it down in writ-
ing and submit it to you, is he? It seems to me your advice cuts off
further negotiations?
Mr. McLaughlin. That would depend, entirely, upon the broker
and other factors in connection with the matter.
Mr. Gesell. Well now, let's take some of the other properties, and
perhaps we will get a better understanding that way.
Mr. McLaughlin. I just want to see what the book value was at
that time. That is in October 1935. The book value at that time
was $550,000.
Mr. Gesell. That is what I am trying to get at. Apparently you
were not interested because the offer at that time was below your
book value.
CONCENTRATION OF ECONOMIC POWER 15057
Mr. McLaughlin. That is true to a certain extent, but we were
fully satisfied at that time that the book value of $550,000 was a fair
value of the property.
Mr. Gesell. Now, you have a book value of $400,000 and you still
have the property.
Mr. McLaughlin. But there is quite a difference in conditions be-
tween '35 and this date.
Mr. Gesell. Let's take another one as an example. Let's take
property 20,441, If my record with respect to that property is cor-
rect, you have had over 18 offers on that property since 1934.
Mr. McLaughlin. Yes^ sir.
Mr. Gesell. And they have ranged from $225,000, which appears
to be low, up to as ligh as $300,000. I believe there is one, yes, that
is correct.
Mr. McLaughlin. On this property, Mr. Gesell, I do not see the
offer of $300,000, but I can tell you very frankly we have been offered
$285,000 for it. It is returning 6 percent interest on the investment
and is considered one of our desirable properties.
Now, of course, there are properties upon which we necessar-
ily must take losses. There are other properties upon which we
expect to make a profit.
Mr. Gesell. What is your book on this now ?
Mr. McLaughlin. The book on this is $241,000.
Mr. Gesell. And a $285,000 offer — in other words, an offer that
would give you some profit — would not be acceptable?
Mr. McLaughlin. Not at this time ; no, sir.
Acting Chairman Lubin. May I ask, Mr. McLaughlin, what the
value of the mortgage was on that property when it was foreclosed?
Mr. McLaughlin. $235,000 was the principal of the loan, and the
costs Were approximately $7,000, not including the arrears of interest.
Acting Chairman Lubin. So that your book value is approximately
the same as your investment in the property ?
Mr. McLaughlin. Yes ; and we have spent on the house twenty or
twenty-five thousand dollars in rehabilitation work and deferred
maintenance. The property has really cost more money than it
shows there.
Acting Chairman Lubin. Would some o2 that be taken care of by
depreciation ?
Mr. McLaughlin. No, sir; the depreciation generally treated as
part of the write-off each year.
Mr. Gesell. How long have you held that property ?
Mr. McLaughlin. Since 1934.
Mr. Gesell. Now, it is over the 5-year line, isn't it?
Mr. McLaughlin. Yes, sir.
Mr. Gesell. And you have received something like 18 offers, in-
cluding some offers at prices substantially above your book value?
Mr. McLaughlin. Quite correct.
Mr. Gesell. I take it that you are in agreement with me that real
estate, city estate, or farm real estate, or any kind of real estate,
is not, per se, a life insurance investment. It is really the result of a
disastrous loan, isn't it? It is an involuntary investment.
Mr. McLaughlin., That is true, but it is one of the properties
we have had to take over and conditions have improved. It is one that
should enable us to recover some of the losses we have taken and will
have to take on other properties.
15058 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. And vour policy, then, with respect to the real estate
that you acquire, whether it be an apartment house or a hotel or
theater or garage or whatever it is you have happened to loan on,
19 that if you feel you can operate that property in order to make a
gain, you will so operate it?
Mr. McLaughlin. I think we ought to.
Mr. Gesell. And in effect, therefore, this acquisition of the prop-
erty through foreclosure has put your company in the city of New
York in the position of having a pretty direct management interest
in many different kinds of enterprises, has it not ?
Mr. McLaughlin. You mean various kinds of business?
Mr. Gesell. Yes.
Mr. McLaughlin. Yes.
Mr. Gesell. And I suppose the problems of running a hotel or loft
building or apartment house are all ^lightly different?
Mr. McLaughlin. Very different. We have no Teal hotels.
Mr. Gesell. So that your company is in the position of running
buildings of these various kinds?
Mr. McLaughlin. Yes, sir. Of course, you understand that th(
buildings we have are in the hands of management concerns, ana
supervised by our home-office force.
Mr. Gesell. Your management interest, so to speak, is indirect,
through one of these management organizations?
Mr. McLaughlin. Except for quite a large number of our single
occupancy houses, which we have leased and manage from the home
office.
Mr. Gesell. I was noticing from schedwie 234 that it includes quite
a list of properties ; apartment houses, commercial hotels, club build-
ings, general stores, stores and apartments, stores and offices, office
buildings, auto sales and show rooms, storage garages, theaters, loft
buildings, warehouses, lumber yards, auto service stations, tenement
houses, and even vacant lots? ^
Mr. McLaughlin. That is right.
Mr. Gesell. So that you are in a position of having a pretty
direct management interest in a multitude of different types of prop-
erties, are you not?
Mr. McLaughlin. That is correct.
Mr. Gesell. And fro-n the instances we have cited here of your
sales policy, you will continue to keep that interest until such time
as you feel you can gain on properties an amount equal to their
worth, even if that involves a profit over what it cost you when you
took it over?
Mr. McLaughlin. Will you repeat the question, please?
Mr. Gesell. You will continue to manage .these buildings as
owner if you feel that that management will bring you a profit ulti-
mately, and will not accept bids to sell the properties which would
simply result in your breaking even? ^
Mr. McLaughlin. That is true — meaning the book value?
Mr. Gesell. Yes.
Mr.. McLaughlin. Yes; we have a number of such properties.
Mr. Gesell. How does the New York law with respect to 5-year
ownership on this thing come into the situation? I suppose you are
> Se« Hearings, Part 10-A, p. 234.
CONCENTRATION OF ECONOMIC POWER 15059
conscious of that law and the desirability of getting the property off
the books within the 5-year period?
Mr. McLaughlin. I am quite sure the commissioner will be very
reasonable about that.
Mr. McLaughlin. We want to sell, and are going to sell, but I
don't think we would be justified in sacrificing a property just be-
cause we have an offer for it. If we are reasonably sure it is worth
more it seems to me we have a responsibility to keep it and endeavor
to realize its worth.
Mr. Gesell. I was just getting at what your position was in that
regard.
Mr. McLaughlin. I do want to impress upon your mind we
want to sell our real estate.
Mr. Gesell. Now, on this question of sale again, in 234 our figures
indicate that over 14 percent of your real estate is in old law tene-
ment houses ; that is correct, is it not ? ^
Mr. McLaughlin. That is right.
Mr. Gesell. Well, now, what are you doing about selling these old
law tenement houses?
Mr. McLaughlin. Selling them just as rapidly as we can.
Mr. Gesell. They are buildings, I understand, which are in such
a state of disrepair or otherwise that they will not meet the legal
requirements for occupancy at the present time ?
Mr. McLaughlin. Not all of them. Most of them are such that
we would have to rehabilitate them, but some are not the type that
ought to be rehabilitated.
Mr. Gesell. So they are, so to speak, real lemons, aren't they ?
Mr. McLaughlin. I agree with you.
Mr. Gesell. Now, what do you do about them? Do you wait for
some fellow to come along who is going to be able to put up the
money to rehabilitate them or tear them down and put something
else up — is that the kind of purchaser you must await?
Mr. McLaughlin. Well, sometimes they come along without much
money, but willing to spend seven, eight, or nine thousand for
rehabilitating, and we are very glad to sell upon very reasonable
terms, conditioned, of course, upon such an expenditure. We feeJ
that if a purchaser spends his money it is just as though he paid
us that much cash on account.
Mr. Gesell. Now these old-law tenements must be rather difficult
to value, are they not?
(Mr. McLaughlin nodded assent.)
Mr. Gesell. Pa
Particularly if you think of them in terms of book
value ?
Mr. McLaughlin. I think everything is very difficult to value.
Mr. Gesell. Particularly an old-law tenement?
Mr. McLaughlin Tliat is true. We have sold, though, $1,329,000
of old-law tenements:
Mr. Gesell. Yes; and I believe you have more of them now than
any other company here, do you not ?
Mr. McLaughlin. That 1 can't answer.
Mr. Gesell. Have you written those properties down?
Mr. McIiAUGHLiN. Very materially.
I See Hearings, Part 10-A, p. 234.
15060 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell, Additional write-offs on them, I understand, this year ?
Mr. McLaughlin. Yes.
Mr. Gesell. Now, what about these loft buildings? I see that they
c»nstitut'e over 13 percent of your real-estate portfolio.^ Those are
rather difficult problems, too, are they not?
Mr. McLaughlin. Just at the moment.
Mr. Gesell. And what has been your procedure with respect to
vacant land? I notice there again your vacant land accounts are
about 13 percent of your urban real estate, vacant property.^
Mr. McLaughlin. You include the vacant land from which the
buildings have been removed ?
Mr. Gesell. Yes.
Mr. McLaughlin. Well, the Belmont lot has a few million dollars
in value and there is a building being erected on the property
at a cost of over $800,000. We have been taking a loss on this
property of about $123,000 a year; it is a propei'ty that has be^n a
problem up to the present time, but under the leases that have now
been executed the company will net between 21/0 and 3i/^ percent
on $4,000,000.
Mr. Gesell, So there is one that has proven to be satisfactory ?,
Mr. McLaughlin. That is going to work out very nicely.
Mr. Gesell. And I suppose one consideration in holding onto this
real estate is whether or not you are making money on it, is it not ?
I mean if you have this real estate in your portfolio and it is oper-
ating at a profit, it is more desirable to hold and wait for a rise in
prices than it is operating at a loss?
Mr. McLaughlin. That is true. Of course the average person who
has any desire to buy a piece of property today, wishes to buy it
under the market, and under what we feel is a fair value for it.
Mr. Gesell. Though we have had cases here where you are being
offered above book ?
Mr. McLaughlin. We would have to analyze those offers a little
more carefully because we have offers all the time and some of them
are just simply ridiculous. You take an offer and come to an agree-
ment to submit it to the coiamittee, and then what often happens?
The broker isn't able to deliver^ but he ascertains about the amount
for which the company is willing to sell the property, because we
have gone to the committee with it. As a matter of fact he is told
to bring his client down to sign a ijontract. That is very bad, from
the company's point of view, but we have no redress.
Mr. Gesell. It is bad business for people to know what you really
want for the property ?
Mr. McLaughlin. Well, you get down to a price where you trade it
to a lower price than you really want to take.
Mr. Gesell. I was noticing on table 227 that you are the only com-
pany of the top 10 that has lost money on its real estate.- I wondered
if you had anything you wanted to say about that? It seems to me
that goes to the question of whether or not it is desirable to continue
to hold this real estate.
Mr. McLaughlin. Well, may I just add to the vacant properties, we
had two in the Bronx that were sold and they have been resold since
1 See HearlnKS, Part 10-A, p. 234.
2 Ibid., p. 227.
CONCENTRATION OF ECONOMIC POWER 15061
at an additional profit, so I am informed. Well, now, I would like to
review that just a little. About 1927 or 1928 Mr. Manchester, who
had been with the company for many years and was a statistician,
loved to delve into old records, went back to almost the beginning
of the Mutual lifelong business and developed the fact that, taken
as a whole, the Mutual Life had suffered no real losses as the result
of foreclosed real estate. Many properties taken in in the early days
that looked to be hopeless, enhanced tremendously in value and
the company had the advantage of those gains to overcome the losses
sustained on farm and residential properties. I have been through
two or three depression periods, not as bad as the present one and I
believe that it is only a question of time when there will be a
sufficient recovery in real estate values to allow us to work out this
foreclosed real estate problem in a very satisfactory manner.
Wlien you stop to consider that — from 1900 to date — the Mutual
Life has made loans aggregating about 700 millions of dollars, and
this is all we have out of those 700 millions of dollars; it looks as
though the record isn't such a bad one after all.
Mr. Gesell. I was more interested in discussing with you how you
handled your real-estate accounts, what your problems are, how you
approach them. I quite realize that many other investments of the
Mutual Life have proven satisfactory and lots of real-estate loans
have proven satisfactory, but you are faced with the fact, are you
not, that you are the only company of the big 10 that is losing money
on its real estate, according to these schedules, and that you have a
very high degree of concentration ?
Mr. McLaughlin. You mean income? You are talking about
income, are you not?
Mr. Gesell. Yes; net income or deficit.
Mr. McLaughlin. I think I can answer that. We charge all our
deferred maintenance and the greater part of our rehabilitation
expense to general expense, which goes against the property, and
I venture to say based on normal operating expense, the figure
would be very different.
Mr. Gesell. Do you take any depreciation ?
Mr. McLaughlin. Only the write-offs. Taxes paid on vacant
land lowers lowers very much the income from our properties.
Mr. Gesell. Well, now, on some of these largest real-estate prop-
erties, I had one or two questions.
Mr. Henderson. Before you get into that may I ask a question:
Do you make loans on vacant properties?
Mr. McLaughlin. We have, but very few.
Mr. Henderson-. Wliat were they?
Mr. McLaughlin. You mean unimproved properties?
Mr. Henderison. Yes.
Mr. McLaughlin. We do not make loans on unimproved property.
Mr. Henderson. But you do on property that is not occupied by a
tenant ?
Mr. McLaughlin. That is right. Most of our vacant properties
today are the result of demolition of buildings we took them over,
except one or two.
Mr. Henderson. You sometimes tear them down in order to escape
the tax burden?
15062 CONCENTRATION OF ECONOMIC POWER
Mr. McLaughlin. Not necessarily to escape the tax burden, but
more particularly because the building isn't worth trying to do any-
thing with.
Mr. Kades. With reference to the old-law tenements, Mr. Mc-
Laughlin, can you fix the approximate date of the old law which is
referred to?
Mr. McLaughlin. 1901, 1 think.
Mr. Kades. 1901. Are these mortgages as old as that?
Mr. McLaughlin. Some of them ; some are older.
Mr. Kades. Do you have many records to indicate how many of
these properties' were loaned on prior to 1901 ?
Mr. McLaughlin. I suppose the foreclosed real estate is what
3'ou are talking about?
Mr. Kades. I am speaking with reference to table 234, which is
entitled "Urban Keal Estate Owned." ^
Mr. McLaughlin. Yes; that is the real estate owned. I think
very few of these properties came to us through mortgages that
were made prior to 1900. It would be a very small percentage
of the total.
Mr. Kades. Well, weren't you aware at the time that the mortgage
was made, then, that the old law was in existence ?
INIr. McLaughlin. When these mortgages were made?
Mr. Kades. Yes; that the new laws were in existence?
Mr. McLaughlin. Well, these loans were probably made before
the new laws came into existence. Around 1900, the old law tene-
ments were certainly a good investment because they threw off a
large income. Since the new laws it is very different. Some of those
old tenements — I suppose you are referring to the old cold-water
tenements more than anything else?
Mr. Kades. That is it.
Mr. McLaughlin. Yes; they don't amount to much; we have
very few.
Acting Chairman Lubin. Mr. McLaughlin, I note that these tene-
ment houses, these old law tenements, still are very good sources of
income; in fact, relative to other types of real estate, they come
third on your list.
Mr. McLaughlin. Will you repeat the question, please?
Acting Chairman Lubin. According to this table 234, your tene-
ment houses are still one of the best sources of income you have,
in the sense that the ratio of book value and gross income is higher
than for any other type of real estate you own, with the exception
of apartment houses and loft buildings.^
Mr. McLaughlin. Of course there are tenements and tenements,
and probably those are the new law tenements about which you
are speaking.
Mr. Gesell. They show under the caption "Old law tenement
houses," I believe.
Mr. McLaughlin. The multiple dwelling law, you know, had a
lot to do with this. I think that was a law of about 1929 — certain
old tenement houses when made to comply with the Multiple Dwell-
ing Law proved to be a satisfactory investment.
' See Hearings, Part 10 -A, p. 234.
» Ibid.
CONCENTRATION OF ECONOMIC POWER 15063
Mr. Gesell. I would like to offer for the rexjord at this time this
schedule prepared by the Mutual Life Insurance Co. to apply to the
investment questionnaire showing for the 10 largest urban real-estate
properties owned, the name of the property, the book value, the ad-
justments made in that value, the date the property was taken, the date
of the first default, the date of the last appraisal, and the amount, and
the revenue income, and other information with respect to those prop-
erties. That is offered subject to correction.
Acting Chairman Lubijst. It is accepted.
(The schedule referred to was marked "'Exhibit No. 2300" and is
included in the appendix on p. — .)
Mr. Kades. Mr. McLaughlin, I am not clear on your reply to my
question. Are all the mortgages shown as "Tenement houses (old law
tenements in New York City and similar property elsewhere)" on
table 234, mortgages made before the multiple dwellings law went into
effect? 1
Mr. McLaughlin. Those loans were made before the multiple
dwelling laws \vent into effect. That would be prior to 1929.
Mr. Gesell. I have no further questions for this witness,
Mr. Polk, a trustee of the Mutual Life, is here and anxious to get
away today, and he is on the real-estate committee and I think we can
continue the discussion with him, if the committee has no further
questions of Mr. McLaughlin.
Acting Chairman Lubin. There are two questions I should like to
ask Mr. McLaughlin, if I may. I note you said the commissioner of
insurance of the State of New York would no doubt be considerate
relative to your holding this property beyond 5 years. Does he have
authority to exempt a company from the provisions of the law ?
Mr. McLaughlin. He has a perfect right, upon application being
made and given sufficient reason to grant the extension, and he has
of late\>een granting them of 2 to 3 years.
Acting Chairman Lubin. Is it the policy of your company when you
see a piece of real estate is going sour at any time to write down the
book value beyond the outstanding mortgage?
Mr. McLaughlin. Many of those properties are below the prin-
cipal of the mortgage.
Acting Chairman Lubin. When that property is sold, you show a
profit on the books ?
Mr. McLaughlin. A profit, if in excess of the book value.
Acting Chairman Lubin. So for that year at least, the year in which
you sell the property, in the event that it was sold after the property
has been written down on your books, you show a net profit from
your real-estate transactions ?
Mr. McLaughlin. That is true, sir.
Acting Chairman Lubin. Are there any other questions?
You may be excused. Thank you so much.
(The witness, Mr. McLaughlin, was excused.)
Mr. Gesell. Mr. Polk.
Acting Chairman Lubin. 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. Polk. I do.
1 See Hearings, Part 10-A, p. 284.
15064 CONCENTRATION OF ECONOMIC POWER
TESTIMONY OF FRANK L. POLK, TRUSTEE, MUTUAL LIFE
INSURANCE CO. OF NEW YORK, NEW YORK, N. Y.
Mr. Gesell. Will you state your full name and your occupation,
please, sir?
Mr. Polk. Frank L. Polk.
Mr. Gesell. And you are a lawyer, are you not, Mr. Polk, and a
member of the firm of Davis, Polk, Wardwell, Gardiner& Reed?
Mr. Polk. I am.
Mr. Gesell. You are also a trustee of the Mutual Life, are you not ?
Mr. Polk. I am.
Mr. Gesell. How long have you been a trustee?
Mr. Polk. Since 1930, October 1930, I believe that is right.
Mr. Gesell. Mr. Polk, you have been assigned, among other com-
mittees, to the real-estate cormnittee, have you not?
Mr. Polk. As of June 1931.
Mr. Gesell. And there is also, I understand, a special subcommittee
of that committee which has even a more direct connection with the
problems of the mortgage-loan division of which you have also been
a member for some time ?
Mr. Polk. On special mortgages, only. It has no closer touch with
all of the mortgages, but with a certain class of mortgages.
Mr. Gesell. What type of mortgages are they ?
Mr. Polk. Mortgages that are up for extension or renewal of the
mortgage.
Mr. Gesell. You are a member of that committee ?
Mr. Polk. I am a member of that committee.
Mr. Gesell. I wanted to consider with you, Mr. Polk, some broader
questions of policy with respect to the city mortgage loaning activities
of the company. First of all, on this question of F. H. A. mortgages
and residential loans, can you explain for us the policy of the Mutual
in not taking that type of investment ?
Mr. Polk. The matter was considered two or three times infor-
mally and referred back for report. We have not decided we would
not take them, but when the question first came up, which I think
was 2 years ago, we had a very large portfolio in Government bonds.
These F. H. A. loans are for 20 or 25 years. In the case of default,
they then get, I think it is, a 2% obligation, and we felt that this
particular class of loan at that time was so new and so untried,
there were so many questions as to the wisdom of taking that class
of loan, we decided for the moment not to take them. But that is
not a final decision. We are reviewing it again now and the chances
are that we will probably take some. That is how we met that par-
ticular situation, Mr. Gesell.
Mr. Gesell. Tliere is shown by the table a pretty striking difference
between the five largest companies, for instance, three of which have
none and two of which have 51 million and 34 million, respectively.^
Mr. Polk. Yes.
Mr. Gesell. Mr. McLaughlin having told us your company wa;
looking for outlets for funds in the field of city loans and residental,'
loans and loans of that character, 1 was particularly interested ri
why that was not taken.
» See Hearings, Part 10- \, p. 195.
CONCENTRATION OF ECONOMIC POWER 15065
Mr. Polk. We are considering it again and the chances are we
will probably take it, but that hasn't been settled. It hasn't come
up to the committee. That is just my own personal opinion.
Mr. Geseul. With respect to loans on housing developments, your
company has no loans of that character?
Mr. Polk. No ; we have no loans of that character.
Mr. Gesell. Will you explain your policy in that regard?
Mr. Polk. That is a special field and requires a large investment
and very careful check on the part of the company making the loan.
We felt that at the moment that was not a field we cared to go into,
the lending on large properties of that character. That, too, is sub-
ject to review and change.
Mr. Gesell. That question has, however, been considered by the
board ?
Mr. Polk. Yes; by the committee, not by the board, and that,
too, wasn't formal action by the committee, it was just discussed
among the members of the board and no loans of that character
have been presented.
Mr. Gesell. Did I understand the question of the F. H. A. loans
didn't go before the board but was discussed by the real-estate
committee ?
Mr. Polk. No ; I don't think it was submitted to the board.
Mr. Gesell. Is it the practice to pass on questions of policy that
way without a vote and sort of informally, sitting around the table?
Mr. Polk. Yes ; that has been the usual practice.
Mr. Gesell. It occurred to me, for example, that in the question
of those two lines of investment, that might be something where the
board would wish to take formal action and make a record decision.
Mr. Polk. We haven't taken final action yet. Members of the
committee have discussed it with other members of the board.
Mr. Geseix. With respect to the question of farm investments,
your company carries no farm mortgages. I wondered if you could
perhaps elaborate on Mr. McLaughlin's testimony in that regard.
Mr. Polk. That is all before my day. The position of the com-
pany has been, at least the feeling was, that we had a very unfor-
tunate expeiience with farm loans sometime past, and to go into
it now would need a very elaborate organization to service them
and to give the kind of service that apparently these companies
that go into that field give. I was very much interested in the testi-
mony of tl;iese two gentlemen who testified today, who go into the
agricultural study of the land, and so on, which indicates a very
elaborate organization.
Mr. Gesell. And your company has not felt that it wanted to
build up that type of organization ?
Mr. Polk. No.
Mr. Gesell. Has the question come up for review before the
board since you have been a member, as to whether or not you would
loan on fann properties?
Mr. Polk. Oh, it is generally understood that we would not. It
has been mentioned frequently.
Mr. Gesell. You see what I am considering with you in a way
is how the trustees function on these investment problems.
Mr. Polk. It has been mentioned on many occasions that we
did not go into farm mortgages.
15066 CONCENTRATION OF ECONOMIC POWER
Mr. Gfsell. Have you had any special surveys made in that field
of investmeht since you hii\e been on the board?
Mr. Por.K. Not on farm mortgages.
Mr. Gi:sKi-u No kinds of investment studies made to see whether
tliat might lie an outlet for your funds?
Mr. Poi.K. No; we are cofivinced it would not.
Mr. GtsELL. \\Tiat about this whole problem of getting money
back where it came from? Your city mortgages are lumped very
heavily in New York City. You have no farm money out. You
are not active in the field of residential loans. Those three things
taken together would make me wonder a little as to whether or
not you hadn't perhaps considered the desirability of putting your
funds out into channels of investment which would perhaps come
back nearer to' the policyholder and to the K-cnlity where the money
came from.
Mr. Polk. I think we have gone on the theory that safety of in-
vestment was the desirable point to work toward and haven't
looked at it from the standpoint of putting the money back in a
particular locality where it came from.
Mr. GrsrxT,. In other words, 'this matter of safety, rather than
diversification in a territorial sense of types of investment, was the
matter of inteiest?
Mr. Polk. I think so.
INfr. Geseix. In the matter of safety, as I remember back in the
days Avlien I was study i!\g economics, one thing they used to tell
me was that diversifi^-ation is a pretty important thing. We miss
it in your city accou7it, don't we?
Mr. Polk. Wp do. In view of existing circumstances, the ques-
tion could very well V>e rai.sed as to whether that was wise business
judgment, but when those loans weio made back in the twenties,
before my day, I imagine what prompted the committee and the
board to make those loans was that New York real estate was con-
sidered the best, investment that any-one could put their money into.
No one ever contem[)lated the time when New York real estate would
be in the condition it is at present. That may have been bad busi-
ness judgment. Not only was that true of New York capital seeking
this kind of investment, but all over the country they were coming
to New York for mortgages, and from abroad.
Mr. Gesell. In other words, it was an awfully ^ood basket but
you were still putting all your eggs in it, weren't youY
Mr. Polk. Yes.
Mr. Gesell. And what about your policy now?
Mr. Polk. Oh. evpr since '27 we have been trying to diversify.
Mr. Gf3ell. That is interesting. You haven't had much success?
Mr. Polk. No.
Mr. Gesell. Why haven't you?
Mr. Polk. Agaiii I have to speak from hearsay partly, Mr. Gesell.
In '27 Avhen the first survey was made and Mr. Shields, then manager,
was sent out into th*' field to see what could be done, very little could
be done at that time because of the demand for money. Good mort-
gages in these localities were immediately gobbled up by the local
people. In other words, that was not the psychological moment to
get it spread out. We made the survey two or three times, and Mr.
Shields, I think about that time or later, secured the services of a
CONCENTRATION OF ECONOMIC POWER 15067
number of agencies who were supposed to send mortgages in, but
that was not very successful. But the survey was made again, and
then of course in '33 and '34 no one was making many real estate
mortgages anywhere, particularly out of town. That was a field
that was unknown territory so far as our experts were concerned,
and it was a risk we hesitated to take in that time in view of the
trying situation in '32 and '33 and '34; but now we are taking a
certain number of mortgages where we can get them in the suburb.s
and in the cities where we can get them, and we are distinctly in
the market.
We are now setting up an organization to go even more inten-
sively into that.
Mr. Gesell. Then^you feel on the basis of the experience you
have had that there are some advantages to be gained from a broader
diversification ?
Mr. Polk. Oh, distinctly.
Mr. Gesell. And you are lining up your investmeiit program in
that way?
Mr. Polk. Yes.
Mr. Gesell. I would be a little interested to know, Mr. Polk — I sup-
pose you have had a chance to look at this "Exhibit No. 2250" ^ a little?
Mr. Polk. Yes.
Mr. Gesell. In your day-to-day work as a director, had you realized
that on some things the Mutual was as much out of line with the otlier
companies as these tables have disclosed?
Mr. Polk. Probably not, because I don't think we ever had the
figures brought to our attention. We knew, of coui'se, we were out of
line because we had this New York real estate, and particularly some o 1"
these large properties, like the Belmont and the old Vanderbilt prop-
erty on Fifth Avenue, and one or two unimproved pieces that we put
rather large mortgages on. So we knew we were out of line, but exactly
how much I didn't know. I knew we Avere undoubtedly out of line.
Mr. Gesell. On this question of the sale of property, coming to the
period where you are faced with the problem of managing or getting
rid of the properties you have had to take over, can you give us a little
fuller idea of what the trustees' policy is with regard to the disposition
of real estate ?
Mr. Polk. I think that the policy of the trustees of our institution
is probably the" policy of all the institutions in New York. In other
words, if you have a piece of property that is completely insolvent,
you had better get rid of it as quick of you can, regardless of wliat
you paid for it. Of course, that more particularly applies to these
smaller properties. Then if. you have something in the nature of a
wasting asset, gradually sliding downhill, you had better get rid of
that. Of course, it may be making a little money, but it is in a
neighborhood that is changing and that had better go.
If you have property that is well situated, even though it isn't earn-
ing much, we don't think that New York real estate id permanently
down, and we feel as the courts have indicated, and have defended in
these various questions that have come before it, that the fair market
value is what a willing purchaser would pay a willing seller. But, of
course, there are not many willing purchasers these days. So there
1 Hearings, Part 10-A.
15068 CONCENTUATION OF ECONOMIC POWER
you had better hold your property until you can ^et somewhere near
wliat its real value would be. In other words, if you have confi-
dence-
Mr. Pike (interposing). That is what impresses me, Mr. Polk. It
seems that the result of the business judgment is that you are .waiting
for a real-estate market to do some selling.
Mr. Polk. Not entirely. For instance, we have sold 109 properties
out of 417. I didn't realize it was as many as that. We have done very
well on those sales.
Mr. Pike. Yes ; but still you have sold only 15 or 16 percent.
Mr. Polk. Yes ; it would be the height of tolly to sacrifice a piece of
property like the site of the Belmont.
Mr. Pike. Oh, I didn't mean to criticize the policy, but that seems to
be the essence of the judgment; that there aren't enough willing buyers
around now, and we are waiting.
> Mr. Polk. We may^ unfortunately, have made an error in business
judgment. We had large units. The purchasers for large units are
few and far between.
Mr. Pike. That is what I meant by waiting for the market.
Mr. Polk. Therefore we think it is bad business policy for us to sell
at this time.
Mr. Pike, I don't question the wisdom of the policy.
Mr. PoLi . But it is one of those things one never knows.
Mr. Pike. It is hard to tell.
Mr. Polk. We don't think the grass is going to grow in the streets
of New York, in other words.
Mr. Gesell. But your policy and problems with respect to the dis-
position of real estate are in part the problems created by your, loan-
ing policy, aren't they?
Mr. Polk. Exactly.
Mr. Gesell. The fact that you loaned in large amounts now places
you with a job of getting rid .of these big properties, which is more
difficult than little properties?
Mr. Polk. When they were taken on there was great competition
for those loans in those days. I know I would have thought, if I
had been on the committee at that time, that we had done rather well
<rei[ing those large loans.
Mr. Gesell. And the fact that you have loaned all in one area
perhaps makes the job of getting these willing purchasers even more
difficult?
Mr. Polk. Of course, there are a great many willing sellers in
Manhattan at the present moment, and not many willing purchasers.
Of course, they know these properties are hanging over the market,
and if they feel these various insurance companies and savings banks
are going to dump the properties
Mr. Kades (interposing). Mr. Polk, in the light of the fact that
the company' is not averse to holding real estate in urban areas, has
the real-estate committee ever considered the possibility of securing
an outlet for its funds through the construction financing of large-
scale housing projects for modest rental ?
Mr. PoLK. Have we ever considered them?
Mr. Kades. Yes.
CONCENTRATION OF ECONOMIC POWER 15069
Mr. Polk. Not the large-scale housing, but the F. H. A. loans we
are reviewing again, now.
Mr. Kades. I am sorry, sir, I didn't understand what you said.
Mr. Polk. I have a bad voice. We have not considered the large
loans for large developments. That is a little bit out of our line,
but we are considering the F. H. A. loans.
Mr. Kades. I didirt mean, sir. loans for large developments; I
meant the actual construction for investment purposes, of large-scale
housing projects, similar to that of the Metropolitan in the Bronx.
Mr. Polk. Oh, no. We have not done it so far.
Mr. Kades. Has it been considered ?
Mr. Polk. Yes ; not very seriously. It is .being considered again
now.
Mr. Gesell. One of these problems with respect to sale is this
whole problem of valuation, isn't it ?
Mr. Polk. Yes.
Mr. Gesell. If you value your properties at a high price and feel
3^ou should not take a loss on the average, you may have much greater
difficulty getting rid of your properties, may you not ?
Mr. Polk. That would be true, but I think we take each piece of
property by itself.
Mr. Gesell. You see, these tables would indicate that of all of the
26 companies, your company is next to the highest in the valuation
of its real estate, if you take a percentage of gross income.^
Mr. Polk. Oh, yes. Of course, as Mr. McLaughlin pointed out, if
you take out one or two properties out of that, you can bring ^he
return on gross income down very rapidly.
Mr. Gesedl. It is about 14 percent now and it would be something
to bring it down to 5.8, which is the figure of the New York Life.
Mr. Polk. That is a very brilliant record.
Mr. Gesell. Is it a matter so much of brilliance, Mr. Polk, as just
realism ?
Mr. Polk. I would prefer not to characterize it.
Mr. Gesell. It is a matter of what your approach has been to prob-
-lems of valuation, isn't it?
Mr. Polk. Yes; but I think, for instance, where you have large
units, each problem is diflferent. I think we have a very different
problem, for instance, from most, of the other companies.
Mr. Gesell. You mean because you have more large-sized prop-
erties ?
Mr. Polk. I think that makes a very different picture. By the
same token, if the turn comes we will get out very rapidly.
Mr. Gesell. Because a few sales will get much more of your port-
folio out ?
Mr. Polk. Yes. ,
Mr. Gesell. Well, I was interested in this schedule which came
before your committee showing your various properties, both the
book value and the assessed value, the value of the properties deter-
mined by two independent appraisers, and the value approved by
the committee.^ Now, this schedule showed, by and large, as ot
» See Hearings, Part 10-A, p. 234.
2 "Exhibit No. 2335," on file with the committee.
124491 — 41— pt. 28 25
15070 CONCENTRATION OF ECONOMIC POWER
December 31, 1938, that these properties had a total book value of
$52,833,000, that they were given a book value of $51,279,000 follow-
ing the appraisals, but that the appraisals were in many cases, even
the highest of them, less than the book value given the properties by
the committee.
Mr. Polk. Yes — that is, by the subcommittee. We were overruled.
Mr. Gesell. This was as of 1938.
Mr. Polk. Oh, 1938 ; I beg your pardon.
Mr. Gesell. You were overruled in 1939, were you not, but in
1938 your recommendations on the valuations of these properties
went through?
Mr. Polk. Yes.
Mr. Gesell. And those recommendations were for book values in
many cases higher than the highest of the two independent ap-
raisals?
Mr. Polk. We went over each separate piece of property and there
are two reasons why that figure is higher' than the high appraisal.
One was that, for instance, where we were writing off against prop-
erty and the write-off had been a write-off the year before, we
would write off this year, and the question was whether we would
write down to the appraisal or whether, if we were moving in that
direction, that wasn't sufficient.
Mr. Gesell. In 1939 you wrote down to the highest appraisal?
Mr. Polk. You take that question of value. We had two ap-
praisals. I am quite certain that if we had gone out and got another
appraiser we would have had a much higher value. I know, of the
two appraisers we had, I think there is a spread of about $5,000,000
between the two.
Mr. Gesell. Yes ; there is, but here is a property, for instance, on
Twenty-first Street, where both appraisers gave you a $200,000 value,
and you valued it at $250,000.
Mr. *PoLK. There must have been some special circumstances.
Mr. Gesell. That is No. 26128.
Mr. Polk. Probably income on the property. If you give me a
list of those, Mr. Gesell, I will be glad to get the sheet.
Mr. Qesell. I am sure if we went down the whole thing we would
have quite a time on each one.
Mr. Polk. I thin^ probably the income return on that justified
the higher appraisal.
Mr. Gesell. Let me ask you this, your valuations are made before
or after the declaration of the dividend ?
Mr. Polk. Before.
Mr. Gesell. Is that correct, Mr. Polk. When is the dividend
date?
Mr. Polk. No, they make an estimate before, and the actual valua-
tion is made afterwards.
Mr. Gesell. So you are in this position, are you not : You declare
your dividends, let us say, in November, some time in the month
of November, and your final valuation of your properties doesn't
take place until after the year ends ?
Mr. Polk. The final declaration of the dividend, yes.
Mr. Gesell. The final valuation of the property takes place after
the year-end, does it not?
CONCENTRATION OF ECONOMIC POWER 15071
Mr. Polk. The iSnal valuation after the year-end, yes.
Mr. Gesell. And, your dividend recommendations-
Mr. Polk (interposing). In 1938 it was before the end of the year^
I am c ' ■..'.te sure. In 1939 it was not.
Mr. 'jrESELL. As a general practice, what is your procedure in that
regard ?
Mr. Polk. I think back over a period of years you would find that
it was before the end of the year.
Mr. Gesell. Your dividend recommendations, then, come after the
write-downs are taken on your property ?
Mr. Polk. Sometimes, and sometimes before; about that time,
except in 1938. In 1938 I think it was late.
Mr. Gesell. It seems to me that in any event you declare dividends
before you value your properties; it must be very difficult to take
a realistic position.
Mr. Polk. As a matter of fact, it is not, because this ^ear we
went down considerably lower than the figure we first arrived at.
Mr. Gesell. Is it the policy of the Mutual, on properties where it
thinks it deserv^es a profit, to hold out until it can obtain that profit,
and not to sell on a basis where it will break even ?
Mr. Polk. I should say the policy would be to break even, but there
may be exceptions to that rule. One or two that you cited are excep-
tions. I don't re-call the particular instanc-es, but I should say, gen-
erally speaking, if we got out even, that- would be all we could hope
to do.
Mr. Gesell. If you got out at book, you would be satisfied ? ■
Mr. Polk. In most instances, yes.
Did you ask when we wrote up our properties? I don't think we
ever have written up our properties.
Mr. Gesell. I didn't ask you that, but since you raise it, I think you
have. I believe there are cases on this schedule,^ at least a few, where
you did write up ^ the lowest appraisal, if your book was below.
Mr. Polk. I think our total write-up is $250,000 against a write-
down of $15,000,000.
•• Mr. Gesell. On an over- all, there isn't any question that you wrote
down.
Mr. Polk. I think if we wrote up at all, there must have been some
special circumstances. ^
Mr. Gesell. Here is*a property, 27177, that you wrote up $20,000
from a book value of 220 to the highest appraisal of 240. That is
360-72 West Fifty-fifth Street, and 830 Forty-ninth Avenue. That
was written up $20,000. I don't think it is important.
Mr. Polk. No ; I would be very glad to drop you a line about that.
(Senator O'Mahoney resumed the 'chair.)
Mr. Gesell. There are several others. One is written up $61,000,
so I guess there have been some cases.
Mr. Polk. There may have been,
Mr. Gesell. I have one further questior ^r. Polk, and I will have
finished. Taking into account these va.i4j.^ matters we have been
discussing, do you believe that the Mutual Life has made an adequate
disclosure to its policyholders of the condition existing in its city-
mortgage loan and real-estate account?
I "Exhibit No. 2335," on file with the committee.
15072 CONCENTRATION OF ECONOMIC POWER
Mr. Polk. I should think so, with the write-oflP we made this year,
and with the statement we put in our book.
Mr. Gesell. You misunderstood ; not have you adequately fulfilled
your trusteeship, but have you adequately disclosed the condition of
the account to the policyholders; not have you been conservative.
Mr. Polk. It seems to me we have. I mean, we have a write-down
this year of $6,000,000, I think, and we continually speak of the re-
serve as a contingency fund against further real-estate write-offs. As
a matter of fact, we don't think we will have ever to make those, be-
cause that property is in our hands and we don't have to sell it.
Mr. Gesell. Do you believe, for example, that the policyholders
should know the degree of concentration which exists in your ac-
count? You see, we have been discussing here the fact that over a
period of years you have had this concentration, and now, from the
glorious point of hindsight perhaps it wasn't so advisable. What
about the matter of disclosures to policyholders during that period?
Mr. Polk. Tliere would be no objection to it. As a matter of fact,
I think it is a question of value, whether that property would have
been any more valuable if it had been, for instance, in other cities.
It all comes down to what the policyholder is interested in, the pro-
tection he is going to get. For instance, the concentration makes our
property a little narc^r to sell, and as you say, hindsight is better
than foresight, but I don't think we are withholding any information
from our policyholders.
Mr. Gesell. I am just trying to consider with you the whole
character of the annual report of most insurance companies to their
policyholders, whether or not from the point of view of some of these
items in the field of investment there should not be perhaps a greater
disclosure?
Mr. Polk. I can see no objection to it, where the various mortgage
loans are located. I can't see any objection to that at all.
The Chairman. Well, any policyholder who desired to know about
it would be advised, would he?
Mr. Polk. Oh, certainly.
The Chairman. There wouldn't be any withholding of informa-
tion?
Mr. Polk. There is no secret about it ; as a matter of fact, all our
competitors know it. ;
The Chairman. The judgment of the company would be that the
most valuable would be in the concentrated area?
Mr. Polk. That is right.
The Chairman. Now, then, Mutual policyholders are to be found
in how many States of the Union ?
Mr. Polk. I imagine all the States.
The Chairman. So that all of the policyholders who are paying
premiums into the Mutual are contributing to this tremendous in-
vestment in New York City real estate ?
Mr. Polk. Certainly.
Mr. Gesell. It was that fact that prompted me to ask whether or
not you might not have felt it would be more to the interest of the
policyholders to disclose this particular policy over the years.
Mr Polk. Well, Mr. Gesell, again that was the line you opened on
a little while ago. It is a question in my mind whether at the time
CONCENTRATION OF ECONOMIC POWER 15073
those investments are made — I don't think for one moment trustees
considered they were putting money back in New York because it was
New York, for the love of the home town; they were putting money
in New York because it was then considered, New York real estate,
the best investment a person could make.
The Chairman. It is also true, I suppose, that most policyholders
have no desire to make any study of the investments by their com-
panies, and they are willing to entrust that responsibility and that
duty to the companies ?
Mr. Polk. Yes.
The Chairman. Now, whether or not it is a good thing in the last
analysis, as Mr. Gesell says, is a matter for judgment after the fact?
Mr. Polk. Surely. Doubtless.
Mr. Gesell. I am trying to pose to Mr. Polk the question of the
adequacy of the reports of these various companies to their policy-
holders, not with the idea that anything has been withheld or con-
cealed, but simply to determine
The Chairman (interposing). I understand.
Mr. Gesell. Often from hindsight we might look at the matter.
Mr. Polk. I can't see the slightest objection to that being put out.
Mr. Gesell. I think perhaps it is true, don't you, Mr. Polk, that
there may have been less development in the field of liberalization of
policyholder reports than there has been in certain stock companies.
For example, take Mr. Brown's company, Johns-Manville, of your
own board; he has gone quite a bit further than the Mutual in ex-
plaining intricacies of the operation of his company to his stock-
holders, has he not ?
Mr. Polk. Yes. As a matter of fact, Mr. Gesell, I always believe
in putting out as much information as the policyholders will read.
My observation is they read very, very little, but that is no reason
why it shouldn't be put out, and those people who do wish given that
opportunity to read.
Mr. Gesell. It is always the fellow who reads who raises questions ?
Mr. Polk. He raises questions.
Mr. Gesell. I wondered whether in the years you have been on the
board the directors have considered the question of liberalizing or
changing the report to policyholders ?
Mr. Polk. I am sure it would be the attitude of the board, to put
any information in there that would interest the policyholders, that
the policyholders would desire to have. It may be we have been old
fashioned about it, and haven't approached it more enthusiastically
on our own account, but there is not the slightest objection to giving
that information. Of course, we do aside from our annual report
get out the investment report and, of course, we have to give to the
superintendent of insurance a complete list of all our securities.
Mr. Gesell. Oh, yes.
Mr. Polk. I know that doesn't answer your question.
Mr. Gesell. All right.
The Chairman. Has the insurance department of the State of
New York ever raised any questions about this ?
■ "Mr. Polk. Never.
The Chairman. Has the insurance department of any State in
which you operate ever raised any question?
15074 CONCENTRATION OF ECONOMIC POWER
Mr. Polk. Never been raised at all.
The Chairman. To what extent do the insurance departments of
the various States make inquiry into the character of investments ?
•Mr. P6lk. Well, of course, we have to make a very detailed report
to the State of New York — every item of property — and they can
come in and express their views as to character, as to our valuations,
and as to how we are managing it, and all that^is very thoroughly
reported to the New York State office.
The Chairman. That is true of the New York department?
Mr. Polk. And the same information is sent to every State, to the
superintendent of insurance of every State.
The Chairman. Is that sent to the superintendent of insurance
in response to inquiries from these other States, or is it sent as a
.matter of course?
Mr. Polk. As a matter of course. .
The Chairman. You follow the practice, therr, of submitting to
the insurance departments of the various States the same reports that
you eventually maJie to the department in New York State ?
Mr. PatK. Exactly.
Mr. GSSEU.. Of course, there are some States which have special i;e-
quirements in addition to that?
Mr. Polk. I don't think any are more strict than New York.
Mr. Gesell. I think Mr. Howe indicated there is one company,
New England Mutual, which filed four different statements of sur-
plus.
The Chairman. Now, do the other States ever raise any questions
with respect to the report?
Mr. Polk. Not that I recall; no.
The Chairman. It is the tendency, then, or at least it has been
the practice, rather, for the insurance departments of the various
States to accept without question the report made by the State of
New York?
Mr. Polk. As far as I know, Senator ; yes.
Mr. Pike. New York is regarded as about the strictest State in its
requirements, is it not, one of the strict States ?
Mr. Polk. I think so, but I don't want to make invidious com-
parison among the States.
Mr. Kades. Mr. Polk, would you favor making as much informa-
tion available to policyholders as to creditors?
Mr. Polk. Beg your pardon?
Mr. Kades. Would you favor making as much information avail-
able to policyholders as to creditors ?
Mr. Polk. As to creditors?
Mr. Kades. I understood you to say earlier that your creditors
know. Did I misunderstand you?
Mr. Polk. Thank heaven; no. I said our "competitors."
Mr. KLades. Then substituting the word "competitors," don't you
think the policyholders as a matter of policy ought to have the same
information ?
Mr. Pcijc. Oh, yes; but they get the information as we get the
information about them, from their reports to the State superintend-
ent of insurance, I imagine.
CONCENTRATION OF ECONOMIC POWER 15075
Mr. EIades. And any policyholder that wants it could obtain it
from the State superintendent of insurance?
Mr. Polk. Of course, as Mr. GeseU says, that may not be all. It
isn't necessary to convince me on that; if they want it, they can
have it.
The Chairman. No further questions? Mr. Polk, we are indebted
to you for your testimony.
Mr. Polk. Thank you very much, sir,
Mr. Gesell. No more witnesses for today.
The Chairman. Then you are ready to go over until tomorrow?
The committee will stand in recess until 10 : 30 tomorrow morning.
(Whereupon, at 4:40 p. m., the committee recessed until 10:30
a. m., Tuesday, February 20.)
INVESTIGATION OF CONCENTEATION OF ECONOMIC POWEE
TUESDAY, FEBRUABY 20, 1940
United States Senate,
Temporary National Economic Committee,
Washington^ D. C.
The committee met at 10 : 45 a. m., pursuant to adjournment on
Monday, February 19, 1940, in the Caucus Room, Senate Office Build-
ing, Senator Joseph C. O'Mahoney presiding.
Present: Senators O'Mahoney (chairman) and King, Representa-
tive Sumners (vice chairman), Messrs. Pike, Henderson, Kades, and
Brackett.
Present also : Representative Vincent Harrington, of Iowa ; James
V. Hayes, Department of Justice; Gerhard A. Gesell, special counsel;
Ernest Howe, chief financial adviser ; Helmer Johnson, attorney, and
Arthur J. Leary, accountant investigator. Securities and Exchange
Commission.
The Chairman. The committee will please come to order.
Mr. Gesell. The first witness this morning is Mr. Smith.
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, Smith. I do.
TESTIMONY OF GEORGE W. SMITH, PRESIDENT, NEW ENGLAND
MUTUAL LIFE INSURANCE CO., BOSTON, MASS.
Mr. Gesell. Will you state your full name and your position for
the reporter, please, sir?
Mr. Smith. George Willard Smith, president. New England
Mutual Life Insurance Co., Boston.
Mr. Gesell. Mr. Smith, will you tell us how long you have been
associated with the New England Mutual?
Mr. Smith. I started with the New England Mutual 35 years ago
as a clerk in the actuarial department.
Mr. Gesell. And you left the company for a while, I believe, did
you not?
Mr. Smith. I left the company after 5 years and was then assistant
actuary, and later actuary of the Massachusetts insurance depart-
ment. I was then called to New York and was actuary of the Asso-
ciation of Life Insurance Presidents, and in 1922, 1 came back to New
England Mutual as vice president. I have been with it since that
time and was made president in 1929.
15077
15078 CONCENTRATION OP ECONOMIC POWER
Mr. Gesell. Now, the New England Mutual has its home offices
in Boston, does it not?
Mr. Smith. Tliat is correct.
Mr. Gesell. In how many States do you operate?
Mr. SurrH. We operate in 39 States.
Mr. Gesell. Thirty-nine States.
Mr. Smith. In 39 States.
Mr. Gesell. Just so we can refresh our recollection from these
tables a little, can vou tell us what its assets are and how. much
insurance it has in force?
Mr. Smffh. The figures?
Mr. Gesell. The '39 figures will be fine.
Mr. Smith. The insurance in force on December 31, 1939, was
$1,573,841,000, represented by 410,375 policies.
The Chairman. Four hundred ten thousand?
Mr. Smith. 410,375. The assets were $468,860,455.
Mr. Gesell. Your company is almost exactly in the middle of
this group of 26 that are covered in the investment analysis, is it
not?
Mr. Smith. I believe so.
Mr. Gesell. From table 102,^ I observe that your mortgages ac-
count for 10 percent of your portfolio, rather of your admitted
assets, and that your real-estate accounts for 7.64 percent of your
admitted assets, thus making your real estate and mortgages 17.6
percent of your total assets or portfolio. Those mortgages and real
estate are entirely on urban properties j is that correct ?
Mr. Smith. The mortgages are entirely on urban properties, but
here is a narrow field, because the mortgages are entirely on busi-
ness properties in urban centers.
Mr. Gesell. And you have no farm properties at all ?
Mr. Smith. We have no farm properties.
Mr. Gesell. Or farm mortgage loans?
Mr. SMrrH. No farm mortgage loans.
Mr. Gesell. Before coming to a discussion of your city mortgage
real estate holdings, I want to get some idea of the machinery that
you have for puttmg money out on city mortgages. Do you have a
branch manager system or a correspondent system, or what type of
system do you use?
Mr. Smfih. You might call it a correspondent system. It con-
sists largely of old-established mortgage offices in the 42 cities in
which we operate.
Mr. Gesell. Now, you use correspondents entirely for loan pur-
poses ?
Mr. Smith. We do; with the exception that during the past 2
years
The Chairman (interposing). May I interrupt, Mr. Gesell? You
have 42 offices?
Mr. Smith. Wie take them from general mortgage offices, usually,
in some 32 cities.
The Chairman. You operate in 42 cities?
Mr. Smith. Yes, sir.
The Chairman. Where are those cities?-
1 See Hearings, Part 10-A, p. 102
CONCENTRATION OF ECONOMIC POWER 15070
Mr. Smith. I cannot tell all the cities. I can give you the ones
that occur to me: Chicago, Kansas City, St. Louis, Houston, San
Francisco, Denver, Detroit, Rochester, Norfolk, Va.
llie Chairman. Would it be proper to say that you operate in the
principal urban centers of the country?
Mr. Smith. I would say that we operate in the principal urban
centers with the exception of two or three of the more prominent
centers such as New York. We do not operate in New York City.
The Chairman. Philadelphia?
Mr. Smith. We do not operate in Philadelphia.
The Chairman. You have 410,000-plus policyholders?
Mr. Smith. Yes, sir.
The Chairman. In how many States ?
Mr. Smith. Thirty-nine States.
Mr. Gesell. You say you use correspondents entirely? Do you
have any contract in writing with these correspondents ?
Mr. Smith. I do not know that we do.
Mr. Gesell. Your reply to the investment questionnaire states that
you have no correspondents under written contract. What type of
arrangement do you have with them?
Mr. Smith. The usual arrangement has been that they will give
to us mortgages or submit to us mortgages on business properties of
the type which they think would fall within our coverage.
Mr. Gesell. And there is no imderstanding between you and them
as to what the quality of those mortgages shall be, or what guarantees
they make in submitting them to you, or anything of that sort — ^just
a verbal understanding that you are looking for a certain kind of
mortgage?
Mr. Smith. Insofar as I know.
Mr. ,Gesell. Can those correspondents submit to you loans for
their own account as well as loans. which they broker?
Mr. Smith. I do not know of any sT^h case that has come to us,
although it is possible that it may have because it would come to the
mortgage department. It is not the general practice, certainly.
Mr. Gesell. You mean it is not the general practice for them to
submit their own loans?
Mr. Smith. Corrects
Mr, Gesell. But there is no prohibition against them submitting
their own loans ?
Mr. Smith. I can't answer.
Mr. Gesell. The questionnaire states the correspondents are per-
mitted to make first, or junior mortgage loans for themselves for
their own account, which would indicate there were at least some
cases where they have made them for their own account.
Mr. Pike. That doesn't mean, though, that those loans are sub-
mitted to the company, does it? I didn't quite get the implication
of that.
Mr. Gesell. That is what I am trying to find out, whether they are
simply permitted to make loans for their own account while acting
as correspondents for thfr New England Mutual or whether they are
permitted to submit loans for their own accounts.
Mr. Smith. As a matter of fact, they submit loans to the New
England Mutual but not ior their own account.
Mr. Gesell. Who mak^s the appraisals on the loans that you make?
15080 CONCENTRATION OP ECONOMIC POWER
Mr Smith. The appraisal is made sometimes by independent ap-
praisers and sometimes made by our correspondents in the various
^^ Mr Gesell. Most frequently it is correct, is it not, that the corre-
spondents make the appraisals on the loans themselves?
Mr Smith. Up to the past few years that has been the practice.
Mr Pike. No check by the company on the appraisals?
Mr. Smith. There is a frequent check by the company on ap-
praisals.
Mr. Gesell. How often is that?
Mr. Pike. I would be interested to know.
Mr. Smith. That is not done in all cases, but we frequently have
two appraisals made of some property which is under discussion.
Mr. Pike. You mean two independent appraisals?
Mr. Smith. Two independent appraisals and one independent ap-
praisal different from that of our mortgage connection.
Mr. Pike. But not directly by yourself. You don't have an organ-
ization which appraises directly ?
Mr. Smith. We do not; no.
Mr. Gesell. And as a general rule, these mortgages come to you
appraised by the correspondent himself?
Mr. Smith. That is correct.
Mr. Gesell. And in the run of cases, unless you have some dispute
as to the property, they are not checked by home office employees or
independent appraisers?
Mr. Smith. The home office mortgage department will always, in
the course of their routine visits, look over the property and from
their own knowledge will check up the appraisal, but they are not
looked upon as independent appraisers.
Mr. Gesell. And, of course, that check is after-the loan is made,
isn't it, in the matter of the regular servicing of the loan ?
Mr. Smith. It is not always afterward. It is frequently done
before the loan is acted upon.
Mr. Gesell. Who pays for the ^appraisals in the regular cases?
Is it true that the borrower pays for those appraisals at the time the
loan is made?
Mr. Smith. The borrower has paid in many cases in the past. In
recent years the company has paid for many of the appraisals.
Mr. Gesell. In the cases where the correspondent makes the ap-
praisal and submits it, in those cases it is usually the borrower who
f )ays for it, is it not ?
Mr. Smith. I believe that is true.
Mr. Gesell. Do the cor respoi .dents submit to you earning figures
on these properties at the time a loan is under consideration ?
Mr. Smii-h. They submit the earning figures on the properties in
question.
Mr. Gesell. Are those earning figures checked by your own staff in
any way?
Mr. Smith. Frequently.
Mr. Gesell. How is that done?
Mr. Smith. It is frequently done by visit and a check on the actual
rents or other income from the property.
Mr. Gesell.' That is prior to the making of the loan ?
CONCENTRATION OF ECONOMIC POWER 15081
IVIr. Smith. Frequently.
Mr. Gesell. There are cases where that check is not made, I take
it?
Mr. Smith. We have a great many very old loan offices whose in-
tegrity has never been questioned as to the figures which they have
given.
Mr. Gesell, And in those cases where you have come to rely from
experience on what the correspondents submit, your custom is not to
check on the figures they make available ?
Mr. Smith. That would be checked on the next visit of the repre-
sentative.
Mr. Gesell. After the loan has been made.
Mr. Pike. Suppose you are loaning on a new building on which
there has been no appraisal, then you have to estimate the income
from that building — that is, if you loan on such a building?
Mr. Smfth. We also would rely upon the earnings of buildings in
the surrounding locality.
Mr. Pike. The going rate in the area. Your home office then must
have a considerable familiarity with the general conditions in each
city in which it loans.
Mr. Smith. In this type of loan we have a very exact knowledge of
conditions.
Mr. Pike. In your home office?
Mr. Smith. At the home office ; yes, sir.
Mr. Gesell. On many cases I suppose when these earning figures
are submitted, it is important to know the duration of the leases
which give rise to such earnings. Do you check into those leases in-
dependently or depend on the correspondents there ?
Mr. Smith. We check very carefully into the leases. We depend
partly on the correspondents but we check very carefully into the
leases, substantial leases which enter the income account.
Mr. Gesell. Your correspondent system is geared, as I understand
it, almost entirely for the purpose of making loans on business prop-
erty in cities?
Mr. Smith. At the present time.
Mr. Gesell. You have no farm investment, I believe you said ?
Mr. Smith. We have no farm investment.
Mr. Gesell. Why is that, Mr. Smith ?
Mr. S»^ith. The sole reason is that we started many years ago to
lend on mortgages on business properties and we have not gone to
another field extensively as yet.
Mr. Gesell. That is hardly a satisfactory explanation. You in
effect say that you haven-'t loaned on farm property because you felt
you ought to put your money in city property. I wondered what
type of studies you had made of the farm situation and what factors
there were that particularly impelled you not to go into that field.
Mr. Smith. The two contributing thoughts which have been pre-
sented many times in our finance committee meetings have been,
first, that the field was very well covered, and second, that to go into
farm mortgages would require a very much larger organization and
a change in our office control.
Mr. Gesell. You mean first of all the competition was pretty stifi'
for that type of loan and there were other lenders well organized
15082 CONCENTRATION OF ECONOMIC POWER
loaning in that type of prqperty, and secondly, if you had to set it
up you would have to change materially your field organization?
Mr. Smith. That is correct.
Mr. Gesell. What consideration was given of the desirability of
your going into that field simply because of the necessity you might
feel of getting money back into the areas where it had come from?
I take it you sell policies in farming conmiunities and to farmers and
in typical farming States.
Mr. Smith. That is correct. We send money back into those locali-
ties, however, by investments in those States throughout the country.
Mr, Gesell. You mean through bonds, primarily?
Mr. Smith. Interstate bonds of various types, public utilities.
Mr. Gesell. Did you? give any consideration to that question of
whether it would be desirable to put the money back in a little more
direct way into the particular locality where it had come from ?
. Mr. Smith. Our money comes very largely from cities. We have
a very small rural policyholder group, and our money has gone back
substantially to the cities through our business property loans.
Mr. Gesell. Is that one of the reasons that your company makes
loans on these city business properties, the fact that your money did
come primarily from cities?
Mr. Smith. That probably may have been a primary reason when
our mortgage business was more active. In recent years the question
of competit on and tte field being so well covered has also come into
the picture.
The Chairman. You say probably. Do you tjiink, Mr. Smith, that
that thought was in the minds of the managers at the time when
investment in urban property was decided upon as a good policy,
that is to say, the thought of investing in the communities in which
the policyholders lived?
Mr. Smith. We have alw,ays been, as I have just stated, largely an
urban company.
The Chairman. Yes; I understand. that.
Mr. Smith. It is my understanding — I can't say because I was not
present at meetings many years ago, but it is my understanding it
was the opinion of our finance officers and finance conmiittees tnat
we could best bring the moiiey back to many localities through urban
business loans.
The Chairman, Then you think there was a conscious policy of
attempting to invest in the areas from which the premiums were
derived?
Mr. Smith. That has always been true. The New England Mu-
tual being a very old company was the first life-insurance company
to come into many States for investment.
The Chairman. And you think it was done consciously for the
primary purpose of securing investment in the localities from which
the premiums were being derived, or was it because of your judgment
that urban property afforded the best real-estate investment, Mr.
Smith? I can see, for example, that the two things might not har-
monize. A policy of investing in the locality from which the pre-
miums come might not result in giving you the best investment, al-
though it would be, of course, a service to the area which produced
your revenue, I can see, on the other hand, that the investment of
CONCENTRATION OF ECONOMIC POWER 15083
funds in highly profitable, highly successful urban business property
might be, from many points of view, the best sort of investment for
the funds, and that it might be the judgment of management that it
would be better for the policyholders to invest in a wealthy com-
munity rather than in a community in which the policyholders lived.
In other words, the two theories don't necessarily harmonize. So I
am wondering whether there was a conscious choice upon the part of
management between the two?
Mr. Smith. At the time the mortgages were taken — not these par-
ticular mortgages, but at the time our mortgage field was extended
to certain urban localities, it was with the idea of having mortgages
in the Middle West and the Far West, the South, to a limited extent
in the East, because through that means we cduld put our money
to work in those localities directly, and that has been done rather
continuously over a long period. ' ^
The Chairman. Why do you say rather than the East?
Mr. Smith. The East has been pretty well covered by banks, as far
as the larger cities of the East in our type of mortgages. We, for
example, have very few mortgages in^ Boston, because there is very
little demand that comes to. us for mortgages there. They are
taken care of by savings banks to a large extent. That is also
true of Philadelphia, and we never have entered New York to any
extent for mortgage placement.
Mr. Gesell. Do you -have correspondents in those cities?
Mr. Smith. In Boston the only correspondent would be through
our home office.
Mr. Gesell. You see, you say there has been no* demand. If you
are not geared to touch the needs of a particular community, I can
see why you perhaps would never get. to that community.
Mr. Smith. At the present time we are securing some mortgages
from the New England area through our own efforts through our
mortgage department, and we are attempting to extend that quite
materially.
Mr. Pike. Does counsel intend to go into the reason for not lend-
ing on homes and apartment houses?
Mr. Gesell. That is next on the list, Mr. Pike, You have very
few residential loans, only $89,000 worth, I believe.
Mr. Smtth. That is right.
Mr. Gesell. You say your money has come primarily from cities.
That prompts me to ask the question why you haven't gone into the
field of residential loans.
Mr. Smith. The same reason applies there as applied in farm
mortgages ; the field is so- well covered.
Mr. Gesell. The field of residential loans is so well covered?
That is very interesting. In what communities, particularly, Mr.
Smith?
Mr. Smith. It is covered in our New England area very thor-
oughly. It is covered in many parts of the country by loaning
organizations, life-insurance companies.
Mr. Gesell. Well, there have been recently, for instance, consid-
erable possibilities of getting into the small-home field through the
purchase of F. H. A.'s. That is correct, is it not?
Mr. Smith. That is correct.
15084 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. Your company is one of the companies which has
not gone into the F. H. A. field of investment, is it not?
Mr. Smith. That is correct. Txie law doesn't permit us to do so.
Mr. Gesell. I notice there are several other companies here which
have found that a rather important field of investment. Npw, you
say the law doesn't permit you in Massachusetts.
Mr. Smith. The Massachusetts law was amended 6 months ago so
that F. H. A. loans might come into the investment field of life
insurance, but prior to that time, the limitations in our Massachusetts
law were such that we were not allowed to go into the F. H. A.
field.
Mr. Gesell. How does it happen that the John Hancock has in-
vested in them every y6ar since 1935 ? Have they violated the law ?
Mr. Smith. Maybe on a different valuation basis. I can't answer
that,
, Mr. Gesell. They • operate in Massachusetts, do they not, Mr.
Smith?
Mr. Smith. Correct.
Mr. Gesell. The same city as you do ?
Mr. Smith. That is right.
Mr. Gesell. Their reports to us indicate they have been purchasing
F. H. A.'s in a total amount of $364,000 worth in the period from
'35 to '38.
The Chairman. Do you recall the provision of the Massachusetts
law which was interpreted ?
Mr. Smith. I don t recall exactly the provision, but we had a pro-
vision that the loan should not exceed 60 percent of the value of
the property, and many of the F. H. A. loans have been in excess
of 60 percent. It is possible that very carefully selected F. H. A.
loans may have been below 60 percent, and come into the portfolio
of other companies in that way.
Mr. Gesell. Did I understand you to say within 6 months the
Massachusetts law has been modified- in this respect?
Mr. Smith. I have been told so, that it has been changed during
the year 1939.
Mr. Gesell. To what percentage ; or do you know ?
Mr. Smith. I c.nnot tell you the exact percentage.
Mr. Gesell. Well, now, what about apartment houses? You
don't have any apartment houses at all, I notice, in this table.^
Mr. Smith. We have no apartment houses.
Mr. Gesell. Why have you not gone into apartment houses?
Mr. Smith. The general statement holds true that we have had a
very narrow mortgage field and we have not extended it.
Mrr Gesell. All we are seeking, Mr. Smith, is not to criticize you
because of that fact, but to find out why you have felt it desirable
to narrow your field to such a limited type of investment.
The Chairman. The point, Mr. Smith, is simply this: You' told
us that your feal-estate- investments are in business properties, and
counsel is trying to .-determine what considerations moved you to
make that selection and to stay out of certain other fields which
other companies have gone into. There must be some reason for it.
It doesn't involve the slightest criticism of your policy at all.
1 See Hearings, Part lO-A, p. 208.
CONCENTRATION OF ECONOMIC POWER 15085
Mr, Smith. It has been partly that we have not increased our
home -office organization and the field organization to cover those
three classifications; that is, the farm-loan field, which we hav^
1 hought was very well covered, the residential field, which we have
t nought was well covered also, and the apartment-house field, which
've have had no experience in and which we are not particularly inter-
ested in going into.
The Chairman. You mean that your staff was so trained that in
your opinion it was better qualified to handle business loans than to
enter these other fields?
Mr. Smith. That is true.
Mr. Gesell. Let me see if we can approach it this way for a
moment : Do you get as much money out every year in the field of
mortgage loans as you desire?
Mr. Smith. We do not.
Mr. Gesell. If that is true, I think the questions as to why you
haven't gone into other fields are even more appropriate, Mr. Smi^h.
If you are looking for avenues to put your funds in and have a
restricted policy offsetting that, I am prompted to ask even more
pointedly why you haven't gone into some of these other fields of
investmiBnts. It would be a matter of training your staff perhaps to
accommodate them to a new type of investment but I should think
if you wanted to get your funds out that would be highly desirable.
Mr. Smith. We have thought it a question to investigate very fully
and we are investigating various forms of mortgages, more fully than
we have in the past few years. It is more beneficial for a compf^y
to enter a new field of mortgages at a time when the rates are satis-
factory as irfcome and when the valu.ations are normal, rather than to
enter new fields of mortgages under somewhat abnormal conditions
such as those which prevail today. In other words, the rate on mort-
gages is lower than it has been for a long period, and the valuations
are very hard to determine equitably.
Mr. Gesell. In other words, with conditions such as we have been
finding out exist at the present time in the mortgage field, it takes
"Very trained men to make a success of that type of investment. Is
that your point, and that there isn't quite as much leeway for mis-
takes and experimentations and the adaptation of your policies to
the problem?
Mj. Smith. I would answer that by saying that a company which
has a going organization — a well-trained field organization — for these
other types of mortgages could go forward under conditions that
exist today satisfactorily, perhaps, but a company which takes up
that new field of mortgage coverage may do so at some loss.
Mr. Gesell. How much money do you want to get out in this
mortgage loan field? ■
Mr. Smith. A larger proportion than we now have.
Mr. Geseii.. But how much, everything being possible, how much
would you like to get out in the mortgage loan field ?
Mr. Smith. It is very difficult to give an exact figure. We would
like to see our mortgage account increase each year safely.
Mr. Gesell. And how much of an investment would you like to
get out if you could make safe investments? How much money
would you like to get out ?
124491 — 41 — pt. 28 26
15086 CONCENTRATION OF ECONOMIC POWER
Mr. Smith. Five to ten million dollars a year, perhaps.
Mr, Gesell. In recent years, how much have you been getting out?
Mr. Smith. Very much less than that. We haVe been getting out
between one to three, probably.
Mr. Gesell. So there is a leeway of from four to two million
dollars more a year which you would like to invest if you were able to
do so safely?
Mr. Smith. That is correct.
(Senator King assumed the Chair.)
Acting Chairman King. I suppose the record of the H. O. L. C,
taking over so many thousands of homes and having foreclosed so
many of them because of the inability of the owners to pay, and
the experience of those who loaned upon apartment houses, particu-
larly in the large cities, New York, Washington, and elsewhere,
which have not been very satisfactory, had some influence in deter-
mining the policy which your company would make with respect
to loaning upon homes and upon apartment houses?
Mr. Smith. Well, that was what I intended to bring out in say-
ing that in going to a new field. undc present conditions, it is more
difficult than it would be under normal conditions.
Mr. Gesell. Of course, your policy with respect to farms, residen-
tial loans, and apartment-house loans, dates back over many, many
years, does it not?
Mr. Smith. It does.
Mr. Gesell. How old is the company?
Mr. Smith. It was chartered in 1835.
Mr. Gesell. How long has it been since you have been loaning
in the residential loan fields and the apartment-house field and the
farm field ?
Mr. Smith. We have never had farm loans, to my knowledge.
Mr. Gesell. In the entire history of the company ?
Mr. *Smith. In the entire history. We have had very, very few
resioence and very few apartment-house loans in the last 40 years.
Mr. Gesell. So that the recent experience that Senator King
refers to would be more likely something that would make you hold
back from going into these fields at the present time, but it wasn't a
determining factor in your going into them in the first place.
Mr. Smith. I think it is probable that we shall enter some of these
fields at least when normal conditions exist.
Mr. Kades. Mr. Smith, did I understand you correctly to say that
one of the primary reasons why you did not enter the farm-mortgage
field was that you would have to create a supplementary organization
that would be rather large and expensive?
Mr. Smith. That is one of the reasons.
Mr. Kades. Would that be true if you used the correspondent
system and made the loans on the basis of appraisals and investi-
gations submitted to you by correspondents?
Mr. Smith. I think it could be done in that way, but I know very
little about the farm-loan machinery and I am not able to answer
the question exactly. ^
Mr. Kades. You don't have any doubt concerning the soundness
of the correspondent system?
Mr. Smith. I know very little about it. I am not able to express
an opinion on it at all.
CONCENTRATION OF ECONOMIC POWER 15087
Mr. Gesell. You use the correspondent system entirely, you testi-
fied, as far as your city loans are concerned ?
Mr. Smith. Our city loans ; yes.
Mr. Gesell. You mean you don't know anything about the farm
correspondent system?
Mr. Smfth. No.
Mr. Gesell. What about the city correspondent system for the
apartment-house loans?
Mr. Smith. I assume it would work out in a similar way for the
correspondent system for business properties,
Mr. Gesell. I should assume so too. I wonder why you haven't
used it.
Mr. Smith. I can only say it is one of those reasons that we have
thought the cities were well-covered, that that field was well-covered.
We are exploring it at the present time.
Mr, Gesell. Now, table 201 would indicate that 24.20 percent of
your mortgage account rests in the city of Chicago, and table 219
would indicate that over 33 percent of your real estate is in the city
of Chicago.'^ Can you acquaint the committee with the facts which
have led to that particular concentration in that area?
Mr. Smith. On page 201, that shows that we have $10,473,000 in
Chicago. Can you give me the otlier page?
Mr. Gesell.. The other is 219, which is the real-estate account.
Mr. Smith. One goes with the other very largely. We have had
a very active correspondent in Chicago.
Mr. Gesell. That was what I had in mind. The fact that you
have so many loans there has been because of the character of the
correspondent rather than because of nny policy determined upon by
the board of directors per sc to pat its money there, is that correct?
Mr. Smith. That is generally the case.
Mr. Kades. I beg your pardon, sir, I didii't get the answer.
Mr. Smith. There is ijo determined amount set by the board of
directors for any city.
Acting Chairman King. I ass-ime the directors or the board, before
-they determine to make loans in Chicago, or any other place, ootained
all the information they could pertaining to financial conditions in
those districts, particularly Chicago, and the real-estate market, par-
ticularly with respect to business property and home properties, and
determined that it would be a safe risk to make loans there. By that,
I mean, did you act exclusively upon the judgment of a correspond-
ent, or did your board of directors make any independent investiga-
tion or inquiry as to the wisdom of making loans in that section?
Mr. Smith. The members of our finance committee of the board
of directors have investigated conditions in person by going to Chi-
cago at various times., Our treasury officials are in Chicago many
times a year, and we have been actively ^n touch with conditions in
Chicago for many, many years.
Acting Chairman King. Then you weren't dependent alone upon
the correspondent?
Mr. Smith. We were not.
Mr. Gesell. You, in other words, passed upon the individual
merits of the loans before making them. The correspondents would
1 See Hearings. Part 10-A, pp. 201 and 219.
15088 CONCENTRATION OF ECONOMIC POWER
determine that, I understand, but I believe you said quite specifically,
that the reason you have so much real estate and so many loans in
Chicago was because the correspondent there was particularly ener-
getic in getting such loans.
(Senator O'Mahoney resumed the Chair.)
Mr. Smh-h. That is correct. I might add, however, that -we have
a type of loan in Chicago which comes to us because we specialized
in that particular class. If we specialized in apartments — some
apartment house loans would come to us from Chicago. As we have
had a substantial number of business property loans in Chicago in the
Loop district, it has been natural that many mortgages wliich were
in prospect should come to us rather than perhaps to some other
company.
Mr. Gesell. That comes back to the fact that originally you put
a lot of money in the Loop, doesn't it? Do I understand that was
determined mostly because of the type of correspondent you had
rather than the result of a considered policy determined upon in
advance by the board of directors as to what cities and what locali-
ties it was going to put its money in ? That was simply a matter of
policy, wasn't it?
Mr. Smith. The cities are decided upon by the finance committee
of the board. In the cities the type of property and the location is
decided upon also. For example, in Chicago the Loop district has
been a section which we have a large percentage of our business
mortgages in.
Senator King. A few loans in the Loop district would consume a
large part of the loans which you made in the whole city, would it
not?
Mr. Smith. It could easily do so.
Mr. Gesell. But did the board of directors determine in advance
that it wished to have this degree of concentration in the city of
Chicago, 24 percent of the mortgages, or was that the result of the
other factors?
Mr. Smith. That was the result of the other factors.
Mr. Gesell. The determination of the board was, "We will loan in
Chicago."
Mr. Smith. That is correct.
Mr. Gesell. And then there was a check on each loan as it was
submitted.
Mr. Smith. That is correct.
Mr. Kades. What is the extent of the correspondent's financial
interest in the making of the loan ?
Mr. Smith. The correspondence is very voluminous. It consists
of letters back and forth, telephone conversations.
Mr. Kades. You misunderstood my question. I mean the corre-
spondent, the agency Avhich I understood placed the loan. What
does the correspondent get paid for placing the loan ?
Mr. Smith. The correspondent receives a fee, usually, or has re-
ceived a fee in the past for placing the loan,
Mr. Kades. How much?
Mr. Smith. That I cannot say.
Mr. Gesell. Who pays him the fee?
Mr. Smith. The fee in some cases has been paid by the borrower
in the past.
CONCENTRATION OF ECONOMIC POWER 15089
Mr. Kades, You have no idea of how much he is paid ?
Mr. Smith. There is a differential in the amount of the interest
which goes to pay the correspondent for his services.
Mr. Kade&. Can you give me the range of that differential?
Mr. Smith. It would be within one-half of 1 percent, from one-
quarter to one-half of 1 percent. It covers the original commission
and servicing of the loan.
Mr. Kades. One-half of 1 percent per year?
Mr. Smith. Total.
Mr. Kades. Did I understand that the correspondent is paid one-
half of 1 percent of the principal amount at the time the mortgage
is made ?
Mr. Smith. If the interest was 4i^ percent, the correspondent
might receive a differential of one-fourth percent per year.
Mr. Kades, Then he does receive that each year?
Mr. Smith. Each year during the course of the loan.
Mr. Kades. Then it is very much in the interest of the correspond-
ent to place as many mortgages as possible ?
Mr. Smith. It is to his interest to do so.
Mr. Kades. And in the light of that, you don't maintain a review
staff in the home office to review each loan ?
Mr. Smith. We do.
Mr. Kades. I understood you to say you only made spot checks.
Mr. Smith. Oh, no; I didn't make myself plain. Every loan is
very carefully examined, and visits are made to all of our loans in
frequent cases by a home-office staff.
Mr. Kades. How many correspondents do you have in Chicago?
Mr. Smith. We have two at the present time.
Mr. Geseu^. Can you put these loans back with the correspondent
within a designated period if they are not satisfactory?
Mr. Smith. I do not know that we have that provision.
Mr. Gesell. You have no written contract, so I suppose you can't,
isn't that right?
Mr. Smith. I do not know that any action of that kind has been
taken.
Mr. Gesell. Can you tell us in how many cases the commission
to the correspondent has been paid for by the borrower ?
Mr. Smith. I cannot, sir.
Mr. Gesell. Is it the majority of your loans?
Mr. Smith. I cannot answer that.
Mr. Gesell. One other thing, turning to table 202 and the tables
that follow, I noticed that there are many, many States in which
you have a very small investment, such as, for example, Alabama,
Nebraska, New Jersey, and Virginia.^ How do you service those
loans? We heard testimony here the other day on the farm
field that it was necessary to get about $5,000,000 into a locality to
justify the type of intensified service that was necessary to properly
handle those loans. Now, you have city loans of vgry small amounts
in some of these territories, and I was wondering how you serviced
them and how you managed them.
Mr. Smith. In the smaller cities we service them through our gen-
eral mortgage office. In the larger cities they are serviced through
the office which gives us the loan, or another management office.
* See Hearinge, Part 10-A, pp. 202-206
15090 CONCENTRATION OF ECONOMIC POWER
Mr. Geseix. You mean you rely in the smaller places at least upon
the correspondent servicing the loan.
Mr. Smith. We rely on the correspondent, plus the servicing
wiiich comes from the home office and through the visits of home-
office mortgage men.
Mr. Gesell. Those must be rather infrequent, are they not, those
trips, because of the expense that would be involved in sending a man
from Boston way out to one of these States to look after an invest-
ment of three or four or five thousand dollars?
Mr. Smith, Yes: we do not send one out for that small amount.
Mr. Gesell. So, in effect, where you have in a locality such a small
investment you must rely almost entirely upon the correspondents for
the servicing, is that not correct?
Mr. Smttk. Veiy largely.
Mr. Gfseii<. With respect to the size of your loans as indicated by
table 207, my figures from that table would indicate that over 74
perceTit of your loans are $100,000 or above.^ I take it that is the
result of the fnct that you have been in this restricted field of busi-
ness-property loaning. That is much greater than, for example, the
Prudential which has much more money to get out than yourselv.es
but yet has some 44 percent of its loans under $10,000.
Mr. Smith. That is correct. Our average is around $100,000.
Mi-. Gesell. Is that the result of your policy to loan on business
properties ?
Mr. Smith. It comes as the result of that.
Mr. Gesell. You can't find business properties to loan on below
this $100,000 in any substantial amount?
Mr. Smith. We do find them. Of course, the average being $100,-
000, there are some below and some above.
Mr. Gesell. There are 74 percent above, so it can hardly be said
to be the average. You have relatively few below $100,000.
The Chairman. I note from this table that the company appears
to ha\'e only $280,000 in loans of less than $10,000.^
Mr. Gesell. Yes, that figure is about 0.6 percent of the entire
amount.
The Chairman. So, in connection with the servicing question a
moment ago, it is quite apparent with such a small amount in small
loans the servicing problem is not particularly difficult.
Mr. Gesell. I don't believe that- is apparent. Senator, in view of
^he fact that we were discussing the question of loans being far away
'"om the home office and scattered widely through many territories
^j, d not close to any loaning office.
The Chairman. But it would seem to me a company of the size
of the New England could select $280,000 worth qi business property
loans of such a high grade that the servicing probably would not be
very necessary or important in connection with it, meaning they
wouldn't have to be supervised by long distance trips. But it is a
small matter.
Mr. Gesell. I was asking whether or not you were able to find
business properties that would amount to less than $100,000.
Mr. Smith, We do find a number of them, but the number does
not loom large in our totals.
^ See Bearings, Part 10-A, p. 207.
CONCENTRATION OF ECONOMIC POWER 15091
Mr, Gesell. Do you seek them, actively seek them, or are your
correspondents pretty well advised that they should give you these
larger loans?
Mr. Smith. We are seeking them now and have been for the last
2 years.
Mr. Gesell. Prior to that time you did not seek them," is that
correct ?
Mr. Smith. Prior to that time, general mortgages submitted were
larger than, say $25,000.
Mr. Gesell. -Turning to table 211, I notice that you have 21.48
percent of your mortgages delinquent 3 months or more, and that
6.67 percent of your mortgages are over 3 years delinquent.^ Have
you any comments you wish to make on those figures?
Mr. Smith. This particular type of property has been going
through an experience which is not necessarily the experience of
other types of property. One reason for the delinquent interest, the
overdue interest, has been the increased taxes which have come so
largely on business properties, and also the inability to raise rents.
Those two factors have had a substantial bearing both oii interest
which is overdue and also on foreclosures.
Mr. Gesell. So that in effect, the fact that you have such a large
number of mortgages delinquent is the result in part of your having
loaned in this restricted field of investment?
Mr. Smith. I believe that is correct.
Mr. Gesell. Now, with respect to the capitalization of interest,
turning to table 214, I note there that your company has capitalized
more interest on urban mortgages than any of the companies shown
on table 214, an amount equal to $2,381,000.^ Will yoU explain to us
just how you capitalized this interest and what are the factors that
impelled you to do so?
Mr. Smith. The interest shown as capitalized on the table in ques-
tion should not be included in the table of mortgages, as that inter-
est, with the exception of the year 1938, has never entered our mort-
gage account and has not been capitalized.
Mr. Geseli.. Will you explain how it got there ?
Mr. Smfph. In filling out the questionnaire, the amount of intere-st
showii for the years 1932, 1933, '34, '35, and '36, is the amount of
interest which was capitalized to our real-estate account when those
mortgages came to us through foreclosure.
Mr. Gesell. You mean that at the time you foreclosed the mort-
gage and there was interest delinquent on that mortgage, the amount
of the delinquent interest was added to the value of the real estate?
Mr. Smith. That is correct.
Mr. Gesell. It is a capitalization of interest, regardless of whether
it is capitalized to the mortgage or capitalized to the real estate.
Mr. Smith. That is true, but it should not be capitalized twice
as it appears to be in this record.
Mr. Pike. Were those items taken into income, Mr. Smith?
Mr. Smith. They were not taken into income. This was kept as
a separate account, separate from income.
Mr. Pike. So that at the end of the foreclosure you would have
the face of the mortgage, plus accrued interest unpaid during the
1 See Hearings, Part 10-A, p. 211.
» Ibid., p. 214.
15092 CONCENTRATION OP ECONOMIC POWER
proceedings, plus taxes that had been accrued and paid you, and
you would take that in as the total?
Mr. Smith. That is correct.
•Mr. Gesell. Wliat do you mean, it wasn't taken into income?
How do you do it without taking it into income?
Mr. Smith. We have kept an exact account of the interest which
had accrued on these mortgages but it has come through our mort-
gage account.
Mr. Gesell. Where does it go ? What do you do with it ?
Mr, Smith. It was the amount overdue which was kept track
of but did not enter as an accrued item.
Mr. Gesell. The capitalization of it means that you have taken
it in, doesn't it?
Mr. Smith. We took it into our real-estate account.
Mr. Gesell. So to that extent it was taken into the income
account ?
Mr. Smith. At the end of that period.
Mr. Gesell. So that it does have a direct effect upon your com-
pany's earnings statement, does it not?
Mr. Smith. At the end of that period.
The Chairman. At the end of what period ?
Mr. Smfih. At the time the mortgage entered our foreclosure
account.
The Chairman. And how often would that happen?
Mr. Gesell. It happened in the case of all of it, did it not, Mr.
Smith?
The Chairman. Does it happen at the end of each year?
Mr. Smith. Only at the time the mortgage entered the fore-
closure account.
The Chairman. Now, of course, as mortgage A ^oes through this
bookkeeping account in 1 year and mortgage B m the next year
and mortgage C the next year, I don't mean to imply there was any
duplication, but how often does this capitalization of interest show
itself upon your books, annually? In other words, when a mort-
gage has been foreclosed, when do you put the delinquent interest
into capital?
Mr. Smith. Only once, at the time the property comes to us.
The Chairman. Whenever it comes to you ?
Mr. Smith. That is correct.
The Chairman. Does it not show then as income ?
Mr. Smith. It would come to us then through income, capitalized^
I am not a bookkeeper so I ma}' not be exactly correct.
The Chairman. Neither am I; tha" 's why I am trying to get this
thing clear. You seemed to indicate that the table ^ was incorrect
because it showed that this was capitalized and that the unpaid inter-
est is taken account of as though it were income. Now, I want to
know on what basis you make that criticism, because if it is wrong, of
course we would like to know. But it doesn't appear from what you
have said yet that it is incorrect.
Mr. Smith. My point was that the table gives the impression that
we have capitalized that interest into our mortgage account, and
therefore shown our mortgages at a higher figure. But we ua^'e also
> Se^uJIearlngs, Part 10-A, p. 214.
CONCENTRATION OF ECONOMIC POWER 15093
capitalized the same amount of interest and added it to our real estate.
Mr. Gesell. When in fact you have simply capitalized the interest
at the time the mortgage was taken over into real estate on fore-
closure, and therefore you have only shown your real estate greater
than it was instead of both your mortgages and real estate ?
Mr. Smith. That is correct.
Senator King. When you obtained title to the property then you
capitalized it?
Mr. Smith. That is correct.
Senator King. Suppose the property at that time, when you ob-
tained your title, was very much less in value than the obligation
which was due you, including the interest, would you enter it then
as the value, the entire value of the loan and the interest?
Mr. Smith. That is essentially an old accounting — not an old ac-
counting practice but an accounting practice which was in operation
in the company up until 1936. During 1936 capitalization of interest
was discontinued.
Mr. Gesell. You continued it after that didn't you, in your mort-
gage account?
Mr. Smith. In our mortgage account we capitalized $30,000 in
1938.
Mr. Gesell. That is right, so, though you discontinued it at the
time the, mortgage was taken over into real estate you did continue
to make some capitalization on the mortgages themselves of this
interest ?
Mr. Smith. In this instance I understand — I am not equipped with
all the details — that there was a particular reason in that ona mort-
gage for putting in $30,000. That is not a general practice. We do
not capitalize interest on mortgages.
Senator King. Assume that a piece of property is foreclosed, the
amount due at the date of foreclosure is $10,000, including the delin-
quent interest. Now, when you entered that upon your books would
you capitalize the $10,000, notwithstanding the fact that at that time
the property, by reason of depreciation, was worth only $8,000?
Mr. Smith. That was the practice up to 1936.
Senator King. To capitalize at the amount due the company?
Mr. Smith. Well, on the basis that the company wanted to know
the amount due the company, plus accrued interest and taxes.
Mr. Gesell. It must also have been done because you wanted to
raise your income, was it not ? It had that difference.
Mr. Smith. The question of cost was the controlling reason.
Mr. Pike. I see that you have a reserve of $2,000,000 against your
urban mortgage account.^ When was that put on, if I may ask?
Mr. Smith. I believe that was put on — it has been added to, but
it was put at $2,000,000 in 1938.
Mr. Pike. That canceled in effect about 80 percent of the interest
capitalization. You capitalized two million four of interest and put
on a two million reserve against the urban-mortgage account.
Mr. Smith. That is true.
Mr. Pike. I don't know whether there is any connection between
the two or not.
1 See Hearings, Part 10-A, p. 229.
15094 CONCENTRATION OF ECONOMIC POWER
Mr. Smith. There is some connection. We have put up the $2,-
000,000 as a special fund for depreciation. We have also charged
down $600,000 during the year 1939. TChe total amount is $2,600,000.
Mr. Pike. That is since these tables were made ?
Mr. Smith. Yes.
Mr. Kades. When a mortgage goes into default, how does the
correspondent become paid? For example, you stated earlier on a
4I/2 percent interest-bearing mortgage, the correspondent would get
one-fourth of 1 percent. When the interest goes into default, how do
you settle with him ?
Mr. Smith. We have paid the offices which service these mort-
gages in default a monthly fee in the last few years.
Mr. Kades. You mean after the mortgage goes into default in
interest, the correspondent no longer is utilized and you set up your
own office?
Mr. Smith. It may be the same office through its management de-
partment, it may be another office, but we pay a fee to the office for
servicing such mortgages which have come through foreclosure.
Mr. Pike. It then becomes a problem in real-estate management.
Mr. Smith. It then becomes a problem of real-estate management ;
yes. As I say, it may be the same correspondent in some cases, but
it is more frequently the management department of that office or a
different management department.
Mr. Gesell. How often do you appraise your real estate ?
Mr. Smith. I cannot give an exact answer to that because appraisals
are frequently made at the time of extension or during the course
of the loan.
Mr. Gesell. After foreclosure how often do you appraise your real
estate ?
Mr. Smith. There is no definite answer that I can give.
Mr. Gesell. Do you employ independent appraisers to appraise
your real estate after foreclosure?
Mr. Smith. It is not our custom to do so.
Mr. Gesell. Do you regularly appraise all of your properties ?
Mr. Smith. We have no plan of appraising all properties at the
present time because we regard present-day appraisals as of little
value in establisliing the real value of the property for sale.
Mr. Gesell. How do you establish it?
Mr. Smith. Partly on the basis of location, partly on the basis of
the building, partly on the basis of the land, and partly on the basis
of the tenant that leases the building. There are other factors that
come into it.
Mr. Gesell. Those are the same things it seems to me that an
appraiser takes into account, are they not?
Mr. Smith. I believe they all come into an appraisal.
Mr. Gesell. Then you say in effect that you have your own way
of telling what the property is worth ? That is what it comes down to.
Mr. Smith. I would say that the appraisals are made at different
times and tjiere is no statement that could be made about a regular
plan of operation.
Mr. Gesell. Let's go over to table 242 here.^ Your real estate is
carried at 12.25 times gross income, is it notr?
' See Hearings, Part 10-A, p. 242.
CONCENTRATION OF ECONOMIC POWER 15095
Mr. Smith. That shows in this table.
Mr. Gesell. There are only 3 companies in this table of 26, I be-
lieve, that have a higher valuation measured on that basis. ^ Take
the stores and apartments, for example, you carry them at 19.51
times gross income. Do yor believe that is a conservative valuation ?
Mr. Smith. I am unable to tell you about the particular properties
in that classification.
Mr, Gesell. Take your auto sales showrooms, carried at 24 times
gross, do you believe that is a conservative valuation? Or your
vacant property, carried at 45 times gross ?
The Chairman. Does the study, Mi-. Gesell show — of course, it is
not apparent on the table — at what time or what average time these
properties were acquired, how many years prior to 1938 ?
Mr. Gesell. That is a table that shows for the real estate — table
220, I believe is the number — which shows for the real estate the
amount held prior to 1929 and the amount acquired each year there-
after.^ On the basis of those figures, you will notice that 38.65 per-
cent— that is a computation from the figures of the New England
statement — have been held over 5 years. Our figures indicate they
have more real estate held over 5 years than any of the top 15
companies.
The Chairman. More than 38 percent?
Mr. Gesell. More than 38 percent.
The Chairman. What could be said as to whether or not the gross
income in 1938 approximated the income from the same properties
in the preceding years? Was there a decline in the income but no
decline in valuation, in other words?
Mr. Smith. Our gross income was practically the same. I haven't
the figure in mind, except that I do have the figures of net income in
mind. The nei income on all of the real estate owned was 2 percent
and a very small fraction, for both 1938 and 1939.
The Chairman. What I am getting at, Mr. Smith, is, for example,
this item of automobile sales showrooms which you are carrying at
24.7 times gross income. Does that represent an unusual condition as
of 1938, or does it represent a normal condition ? Is that the normal
ratio? Did your income, for example, from automobile salesrooms
fall off after you had acquired the properties?-
Mr. Smith. It did. We have an example of that in Kansas City,
where we have several automobile salesrooms, and there has been a
loss of tenants in those particular salesrooms due to a moving a block
or two away of the automobile showroom area.
The Chairman. That would mean, then, though your income fell
off, you did not reappraise your property or scale it down to meet the
reduced income?
Mr. Smith. Because another tenant may come in next year which
makes it unnecessary.
The Chairman. In other words, you are living in hopes that it
may come back.
Mr. Smith. It is difficult to bring it up every year through the loss
of a tenant.
Mr. Gesell. How much have you written off on your real-estate
account?
1 Ibid., pp. 230-254.
a Ibid., p. 220.
15096 CONCENTRATION OF ECONOMIC POWER
Mr. Smith. A very small amount.
Mr. Gesell. And it is true, is it not, that these values are qujte high,
Mr. Smith, there is no question about that ?
Mr. Smfth. 1 think it shows in the table the values are higher
probably than would be recognized by a sale in today's market.^
Mr. Gesell. How much would you say your real-estate account is
overvalued ?
Mr. Smith. I do not know that it is overvalued in the long run.
On the basis of selling on today's prices it would be overvalue(;i. On
the basis of the future, I have strong doubt whether it would be over-
valued.
Mr. Gesell. How much would you say it is overvalued on the basis
of present-day conditions?
Mr. Smith. I have no idea.
Mr. Pike. It rather strikes me that whereas in farm mortgages we
have got down to fairly realistic valuations, that in the valuation of
the urban property insofar as we have gone into it, these appraisals
represent or include quite an element of hope for conditions to come
back, and one element you mentioned, Mr. Smith, this increase in
taxes which is deductible from gross income, it seems fairly doubtful
the realization of a hope that that item will drop off so as to give us
more net. We have only touched this urban thing, but the general
impression is to me that we in some way hope to get back on the net
income to the 1920's to justify these appraisals, whereas in the farm
mortgages by and large the rosy spectacles have been taken off.
I don't know that that is a fair statement, but I am getting that
impression, that in the urban real estate the appraisals represent more
than an analysis of present-day conditions.
Mr. Smith. I might say that the foreclosure trend came to this
type of mortgages a year or two after it came, or several years after
it came to the farm, and a year or two after it came to the dwelling
house mortgages. We, therefore, have reason to assume that it will
be slower in coming back to a normal balance.
Mr. Pike. You think you are a little behind, and attached to that
have been the factors of increased taxation and often lower rents ?
Mr. Smith. On the question of valuation, I say it is impossible to
give a present-day valuation on locations which are good going loca-
tions, and that is evidenced by some of our sales.
We know that some of our properties here must be sold at a loss
compared to the value we carry them on the books, but there are also
many properties there that will be sold at a substantial profit. I have
one in mind this last year, for example, which came to us at $100,000
in one of our cities. We received a bid of $125,000 for a sale price.
On this type property, the first bid is always an asking bid. You
have to hold out for what you consider to be the proper value of the
property. We refused to accept it except to say we think it is worth
more money and how much more would they give us. In the course
of the week, we had exchanged telegrams four times and we sold it
inside of 4 days after the first bid came to us, to the same man, for
$175,000.
Mr. Gesell, Of course, Mr. Smith, it is a little hard for me to
understand the theory upon which you overvalue some properties, be-
> See Ilearliigs, Part 10-A, p. 242.
CONCENTRATION OF ECONOMIC POWER 15097
cause you realize that there may be some profits in others. It seems
to me a realistic way to do would be to mark your property down,
and if you do make a profit as a result of conditions, that you could
then properly show that profit at that time, rather than having the
condition of the account concealed behind the valuation practices em-
ployed. You follow me on that, I presume?
Mr. Smith. I follow you on that. I disagree on the theory be-
cause if you mark down all of your properties to what you may
consider is the present market price, in view of abnormal conditions
you are practically confined to that present book value in any bid as
a sales price.
Senator King. Wouldn't it be rather difficult with a fluctuating
market, with the fluctuating prices for commodities as well as in real
estate, farms, urban properties, large established business houses —
wouldn't it be rather difficult to make an appraisement every day or
two to adjust the values that you carry on your books to the fluctu-
ating values represented in the market?
Mr. Smith. I think it would be an impossibility.
Mr. Gesell. Let's go over here to New York Life Insurance Co.
and see if it is an impossibility. They show there a real estate car-
ried at 5.8 times gross.^
Senator Kino. And then adopt a policy or practice that it may be
normal or subnormal or above normal. It might not be the policy
which every business or every individual desires to follow, or was
required to follow along sound business lines.
Mr. Hendfjjson. I think, Senator King, one of the things we have
been trying to got at, and I think Mr. Pike made an indication oi it,
was how long ycu let on overvtiluation stay — what is the proper time,
having in mind the obligation to policyholders and also to your land,
and the laws regulating the holding of real estate, to take your lick-
ing and at what time you should take your profits.
Senator King. In view of the fact that we said we were at the
bottom of the depression and wo are u)) the fiscending scale and are
soon to get back to normal or above normal, I am inclined to feel
that people are justified in realizing some ol the optimism that
exists in the country. I should think that, after all, your judgment
should be predicated upon the bottom prices.
Mr. Henderson. In some of this you have a measurement of real
value in terms of what its income is, Senator, over this whole period,
and Mr. Gesell has pointpd out the case of one company which has
used three or four times the appraisal value of another company;
and he is also stressing that there is a lack of uniformity on the
appraisal of these things .which I think is a very interesting matter —
to know what the value of assets back of insurance policies is.
Senator King. If you ever used experts upon the stand to deter-
mine the value of mining properties or stocks, you have realized the
changing views and the uncertainty of the human mind.
Mr. Gesell. One way we can get at this question of valuation may
be to see how much of your properties you have sold. Let's look at
table 223.^ Your company has sold less in its real estate than any
of the other 26 companies, has it not ?
1 See H^arinss, Part lO-A, p. 232.
»Ibid., p. 223.
15098 CONCENTRATION OF ECONOMIC POWER
Mr. Smith. In this class of i)roperty there are very few oppor-
tunities to sell at the present time. In the larger mortgage field
of foreclosures, you would find a very much better result.
The Chaikm.an. The Massachusetts law requires a sale after 5
years, does it not, Mr. Smith?
Mr. Smith. Except with an extension which may be granted.
The Chairman. Have you found it necessary to obtain extensions?
Mr. Smith. We have in several cases.
Mr. Gesell. You must have in 38 percent of your real estate.
The Chairman. You say in several cases.
Mr. Smtth. Many cases.
The Chairivian. How close an examination does the Massachusetts
commissioner give to properties of this character and tiie sale of
this character ? '
Mr. Smith. He gives very careful attention to it.
, The Chairman. Have you had any difficulty in getting extensions
that you requested?
Mr. Smith. There is often a hold-up of some long period until the
Massachusetts fJepartment can make a study of the question and give
its opinion about the advisability of extensions.
The Chairman. Is it yoiir testimony that there is great difficulty
at the present time in disposing of urbaft business property?
Mr. Smith. There is great- difficulty in disposing of urban prop-
erties at the present time, of this type, because there are so few offers
to purchase.
Mr. Gesell. In other words, Mr. Smith, mjiny of the properties
we are discussing here all go back to the original loaning policy of
the company, do they not — the fact that you have concentration in
certain areas, that you are having difficulty in moving a property,
that you have greater interest delinquencies, that you have to hold
your property longer, that you have it valued higher, is all a result
of the fact that you have had a very restricted loaning policy ?
Mr. Smith. That is correct,'! am very sure.
Mr. Gesell. Now, how do you price this stuff that you want to
sell? Do you quote a price publicly or do you hand out prices to
brokers, or how do you do that?
Mr. Smith. We are constantly trying to find purchasers for the
properties at whatever price they will give.
Mr. Geseil. Do you set prices on these properties?
Mr. Smith. We do not set them.
Mr. Gesell. You do not set prices on the properties ?
Mr. Smith. Wlien the offer comes to us, we will consider a price.
Mr. Gesell. How can you sell them if you haven't set a price?
It seems to me you put an awful lot of initiative in the hands of
the buyer.
Mr. Smith. In the case of some properties that we believe should
be sold below the value at which they are carried, we make efforts
to have a price submitted.
Mr. Gesell. But there is no set price ; for instance, if I. wanted
to buy property from you, I could not go and say: "Here, they hold
these buildings; here is what they want for them. This looks like a
good bargain; I'll buy them." I can't do that. Is that correct?
Mr. Smith. Our real Estate man would know the cost we have on
CONCENTRATION OF ECONOMIC POWE. 15099
our books. A case came up a few days ago. We sold a property for
$20;000 which stood on our books for $50,000.
Mr, Gesell. The question is, though : How do you price, if you do,
your property so that anyone interested in buying will know what he
has to pay? It is a question, is it not a buyer taking the initiative
and then bargaining the matter out witli your representatives?
Mr, Smith. It is very largely a case of bargaining with our repre-
sentatives, but it is impossible to try to sacrifice these properties at
the present time to the disadvantage of the interests of our policy-
holders.
Mr. Gesell. Don't you know what price would be to the advantage
of the policyholders at the present time? I am sure you do.
Mr. Smith. A price which would give us at least as much as we
had in the property.
Mr. Gesell. Would it not help the disposal of the properties if you
set those prices out and indicated what you wanted for them ?
The Chairman. JVIy own reaction is that that might i^.ot be the
effect. If it is true that there is a slow market, there probably would
be no advantage in setting the low prices which you would be willing
to take.
Mr. Smith. Tliat is true in practice, without question.
Senator King. I think the psychology would be bad. Immediately
people would say: "They are selling this property for $5,000 and
it cost them ten, and all the rest of the propei'ty in this vicinity
must go down in value."
Mr. Smith, It has an effect on the surrounding value.
Senator King. Absolutely ; upon your other holdings. That is the
way it strikes me, not being a feal-estate man.
Mr. Gesell. That is very interesting. If Senator King is cor-
rect, that means that companies such as yours are really in a posi-
tion to dominate the whole question of real-estate prices in the com-
munities where they have been operating. Do you think that is true ?
Mr. Smith. It isn't true in our case, I know.
Mr. Kades. Do your mortgage correspondents handle other ac-
counts than yours?
Mr. Smith. In some cases.
Mr. Kades. Wouldn't it be in the interest of those correspondents,
then, not to sell your property ?
Mr. Smith, We have had no case of that kind come to our atten-
tion.
Mr. Kades,, But there is a possibility of a case of adverse interest,
isn't there, when your agent is also the agent for others ?
Mr. Smith. That very, rarely happens, and when an agent wishes
to make a sale, it is a question, usually, of selling for one company.
Senator King. A few million dollars' worth of property in Chi-
cago or New York would be a good deal like one swallow making
a summer; it wouldn't determine the value to any very great extent
of all surrounding property, particularly when that property is
not owned by persons who want to sell, or don't want to sell.
Mr. Gesell. .That means then, does it not, Mr. Smith, if Senator
King's observation is correct, if you did advertise these prices, it
would not have any effect on demoralizing the market ?
15100 CONCENTRATION OF ECONOMIC POWER
Senator Kino. It might or might not, but I would rather trust
the man who has some responsibility to their stockholders than I
would trust some empirical approach to the situation — I am not
indicating there is any empirical approach here.
Mr, Gesell. Have you any special organization set up, Mr. Smith,
to sell real estate?
Mr, Smith. In the home office we have br0"u^ht in men whd are
technically trained during the last 2 years to mcrease the sale of
real estate.
^Ir. Gesell. How maT;y such men do y<j\\ have?
Mr. Smith, We have two such men brought in in the last 2 years.
Mr. Pike, How much of a territory can they cover, Mr, Smith?
Mr, Smith, They cover the entire country,
Mr, Pike. They work through the correspondents, I presume?
Mr, Smith, We have some one of our real-estate officers traveling
through the country all of the time,
Mr, Gesell, Has your property had a net income or deficit?
Table 227 indicates that you have had a net income of 2,07 in 1938.^
Mr, Smith, That is true,
Mr, Gesell. Am I correct in saying that much of that net income
is attributable to a particularly good piece of property which you
have in Houston, Tex,?
Mr, Smith, That is correct,
Mr. Gesell, From these figures that you submitted to us, I note
that of the net cash income for the period from January' 1, 1930,
through r icember 31, 1938, this particular Houston property has
paid you ^650,000 out of a total net cash income of $962,000, So,
it has been a pretty important property for you, has it not?
Mr, Smith, It is a contributing property.
Mr. Gesell, Without that, your real estate would have operated
at a loss, would it not, at a deficit?
Mr. Smith. I haven't seen the figures, but there would not be a
deficit although the figures would be, much smaller.
Mr. Gesell, That completes any questions I had on the real-estate
matter. There is One other thing I wanted to discuss with you.
Our tables show that your company has had the greatest increase
in premium income of any of the 26 companies, and that in terms
of increase in assets, it has grown almost as rapidly as any other
company. The premium income has increased 57 percent, the
assets have increased 84 percent since 1929, according to our table.
Also, I notice from the sales questionnaire reply that you had
rather significantly increased the agency force of your company, it
growing from 610 agents in 1926< to 1,320 agents in 1934. That
all indicated to me that your company i's iij a period of a sales
program, or is out in an effort to get new business and increase its
size, or something of that sort. I wonder if you had any comments
you wanted to make that would explain those figures lo us.
Mr, Smith, 'I would be very glad to give you some of the reasons
which account for the growth during the past 10 years if you would
like to have me give them to you.
Mr. Gesell, Yes, I would.
»See Hearings, Part lO-A, p. 227.
CONCENTRATION OF ECONOMIC POWER 15101
Mr. Smith. The New England Mutual, as you know, is what is
known as an ordinary company, doing ordinary types of business,
no industrial nor group, and no substandard.
Mr. Pike. What do you mean by substandard business, Mr. Smith ?
I don't quite understand that.
Mr. Smith. Substandard business might be defined as business on
individuals who have some departure from normal.
Mr. Pike. Physically, you mean ?
Mr. Smith. It might be an overweight, for example, 40 pounds
overweight.
Mr. Pike. Would that include people in extra hazardous occupa-
tions ?
Mr. Smith. It might include those, also.
Mr. Pike. That is a recognized branch of business which you
don't do?
Mr. Smith. Which we do not do. The New England Mutual
has, during this period, increased rather substantially its insurance
in force and has written a fair amount of new business, has a sub-
stantial increase in assets.
You asked for the reasons, and I can say that they are several,
which relate to certain characteristics of this particular company.
One of those is that we are known to have what is called a liberal
policy contract.
Mr. Pike. In what respect would that- be, Mr. Smith ?
Mr. Smith. A liberal policy contract in our case might mean, or
does mean, that we give, for example, the full reserve as a cash sur-
render value without a surrender charge.
Mr. Pike. "Say as against 90 or 95 or some other figure?
Mr. Smith. Some other figure.
Mr. Gesell. Have you been somewhat inore liberal in your medical
examinations ?
Mr. Smith. I should say that we have not, as shown by our
mortality.
Mr. Gesell. You haven't been taking risks turned down by other
•companies ?
Mr. Smith. Occasionally we will take one turned down by other
companies, but probably more cases turned down by us are taken
by other companies. I think we find we hear from our agents that
other companies are more generous, and their agents claim we are
more generous. It is somewhat a matter of opinion.
Mr. Gesell. Have you been on a vigorous sales drive ?
Mr. Smith. We have not had what you call a vigorous sales drive,
because we have never urged our policyholders to buy more insurance
than could be properly applied to th^ individual. In other words, we
have a very active sales effort to place the amount of insurance which
the man needs, but no inore, and that is shown by a very satisfactory
termination record.
Mr. Gesell. Someone sent me the other day a sheet entitled
"Payton's Pilgrim's Progress" from your Los Angeles agency, which
"says two things that interested me very much. It refers to the fact
that dividends or rather rates are about to be increased, and it bears
the caption, "Tell 'em and sell 'em a hundred days more," and quotes
you as having said to the general agents assembled at Banff that
124491— 41— pt. 28 27
15102 CONCENTRATION OF ECONOMIC POWER
any agent who doesn't sell and any man who doesn't buy life insur-
ance even if he only remotely needs it between now and the first
of the year is a fool.
That indicated to me there was a certain amount of sales activity
going on in the company, and I wondered whether you had anything
m particular you wanted to say about that. I don't know whether
you have seen "Payton's Pilgrim's Progress" or not.
Mr. Smffh. I haven't seen that. I do not recall the exact quotation.
That is not new, I presume.
Mr. Gesell. It bears no date. It was new to us. I beg your
pardon, it bears the date of September 22, 1938.
Mr. Smith. I think I made a comment not exactly in those words
some time before the new policies came out in 1939.
Mr. Gesell. Is it your practice to put on a sales campaign just
before rates change?
Mr. Smith. No ; it is not. I think I might mention other facts, if
you wish to have them, about the company; which do have a distinct
bearing on our sale of ordinary insurance during the last 10 years.
In mentioning a full reserve, I do not mean to imply in any way
that a surrender charge is not justified. It just happens that the
New England Mutual was the first company away back in 1908 to
give the full reserve as a surrender value, and its terminations have
always been low since that time, and of course those surrender values
buy a larger amount of paid-up insurance and a larger amount of
extended insurance and, therefore, the policyholder has regarded
this as a valuable part of the policy and has so held it. I think one
other reason — ^and there are many of them — is that our men are very
carefully selected. Our general agents are very carefully selected
and are men of some substance. They in turn have selected a very
fine body of men, agents, a large number of whom are college men,
and they have given us rather uniform production during the 10-year
period.
Mr. Gesell. Wliere have you got all these agents? In 1926 you
had 610, and in 1934 you had 1,320. Where do you get them, from
other companies, or recruit new men?
Mr. Smith. A large part are recruited new. We have some from
other companies.
Mr. Gesell. How do you set these men up, give them special allow-
ances ?
Mr. Smith. We give them a very careful training course, and gen-
eral agents sometimes give a special allowance, depending on circum-
stances. The company makes no arrangement for allowances for
agents.
Mr. Gesell. I notice here a report on agency action that was for-
warded to us by your company in which — or rather minutes of the
agency meeting — it fs stated with respect to the Nashville office —
"On July 15, 1938, Mr. Edward A. Boalt, CLU, became general
manager at Nashville, succeeding David G. Brandon, deceased June
2, 1938. Mr. Boalt has been given a regular office expense allowance
of $6,000 a year, $500 a month, and a special organization allowance
for his first 3 years as follows : First year, $3,000; second year, $2,700;
tliird year, $2,400." What type of allowance is that?
Mr. Smith. That is what we call an organization allowance. It
is the general practice among companies, the necessary practice, to
CONCENTRATION OF ECONOMIC POWER 15103
give an additional amount during the first 3 years of building; that
is, when you are establishing your agency when new expenses come
and when you have to haVe some additional help to instruct men.
Mr. Geseix. Is that amount used entirely for organizational ex-
penses or does it include perhaps the payment of renewal commis-
sions to a man who severed renewal commissions that he had coming
to him from another company?
Mr. Smith. That is used entirely for organizational expenses.
Mr. Pike. Does that mean, Mr. Smith — I am afraid I am a little
out of order — that you have gone into several new territories diiring
the last 10 years ? You speak of Nashville as an organization thing.
You have gone into new States or new areas ?
Mr. Smith. That is one factor which comes into our picture. We
have established 10 or 12 new agencies or reorganized old agencies
by placing new men there, and the contribution of those new agencies
has been substantial. It has helped out our production quite mate-
rially.
Mr. Pike. And in going into a new area, the expenses until you
are well established would be rather more than normal, would they,
presumably ?
Mr. Smith. They would. The first 3 to 5 years they are mo^e than
normal and they come down in a decreasing scale.
Mr. Pike. And you want to get your new agencies producing when
you go into a new territory.
Mr. Smith.. We place more weight upon starting an agency on a
firm basis than we do upon the business the first 2 or 3 years.
Mr. Ge'sell. I have no further questions of this witness.
The Chairman. Do the members of the committee desire to ask
any questions?
Mr. Henderson. I think, Mr. Chairman, Mr. Smith was doing a
little selling of his company and we interrupted him. There were
some other good reasons why he made this grand gain. I don't know
whether he had any more he wants to get in before he is attacked by
the committee. Do you have some more ?
- Mr. Smith. I appreciate your remarks, Mr, Henderson. I was
afraid it would be looked upon as if I were trying to sell my company,
which is not the case in any way.
Mr. Henderson. I don't say that would be a bad thing at all. I
have been here about 170 days, and I have felt some very substan-
tial selling campaigns were done. I think it is a healthy thing.
Mr. Smith. I would like to say that the New England Mutual —
and this again is a thing which may sound like propaganda but it
isn't. . '
The Chairman. We know what propaganda is. [Laughter.]
Mr. Smith. The New England Mutual, as you perhaps know, was
the first chartered mutual life insurance company m this country and
secured its charter in 1835 from Massachusetts. Our men have an
enthusiastic belief in the ideals of our type of insurance, which is a
practical asset to them in their business, because that same belief in
the integrity of the company and in the trusteeship of over a century
is conveyed to policyholders, who in turn believe in the company, and
over 50 percent of our business last year was obtained from old policy-
holders of the company.
Mr. Henderson. Is that the new policies that were written ?
15104 CONCENTRATION OF ECONOMIC POWER
Mr. Smith. That was the new business last year — over 50 percent
was obtained from old policyholders of the company.
We have had, it is true, perhaps, a substantial part, a larger part
than would be our share, in the last 10 years, and that percentage
has increased since 1929. At that time we had 1.6 percent of the
business of the companies reporting to the Association of Life In-
surance Presidents, and last year we had 2.4 percent. It has been
increasing throughout those years.
But it does come back to certain aspects. We always make a kind
of gospel with every one of our agents to have regard for one of the
first statements made by the original founder before life-insurance
companies were known m this country and we impressed upon them
that due to the vision that the founder of this company had in
1835 when we were in a depression corresponding more nearly to the
present depression than any other the country has ever experienced,
that he had the vision to see what life insurance could do for this
country in bringing out and placing in practical demonstration the
thrift and self-reliance and independence of this American Kepublic.
I believe, and I am very glad to say here, that the spirit of inde-
pendence of the American people is perhaps best indicated and
demonstrated through their purchase of life insurance, so they will
not be dependent upon the State or country. I also know from
the figures which you have at your disposal that if the life-in:urance
companies, great and small, had not paid out to policyholders these
vast millions during the past 10 years, that calls would have been
made upon the Government to an amount which can hardly be esti-
mated at the present time, and it comes back largely to the statement
of our founder back in 1844 :
The object is equality among the members and a participation of the advan-
tages of the company, whatever they may be, in the proportion of the amounts
contributed, and it is no part of the plan that some shall be benefited at the
expense of others.
The Chairman. That was a very sound declaration of policy.
Mr. Smith. That is the original explanation of mutuality at that
time, and we have placed upon our agents a responsibility of carrying
on our business under the lines of mutuality and fair treatment and
trusteeship which we hope this company represents.
The Chairman. And may I add that the purpose of the study
which has been carried on by this committee, not only in the life-
insurance field but in every other field, has been to see what im-
provements could be made in effecting general benefits for all of the
people of the United States in the operation of the economic system
m the traditional manner of independent, free enterprise.
Mr. SMrrH. I appreciate that.
The Chairman. The committee will stand in recess until 2 o'clock.
(Whereupon, at 12 : 30 p. m., a recess was taken until 2 p. m. of the
same day.)
afternoon session
(The hearing resumed at 2 : 10 p. m., upon the expiration of the
recess.)
The Chairman. The committee will please come to order.
Mr. Gesell. The witness this afternoon is Mr. Van Schaick, of
New York Life.
CONCENTRATION OF ECONOMIC POWER 15105
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. Van Schaick. I do.
TESTIMONY OF GEOEGE S. VAN SCHAICK, VICE PRESIDENT, NEW
YOEK LIFE INSURANCE CO., NEW YORK, N. Y.
Mr. Gesell. Will you state your full name and your position in
the New York Life Insurance Co.?
Mr. Van Schaick. My name is George S. Van Schaick. I am
vice president of the New York Life Insurance Co., in charge of the
real estate and mortgage loan departments.
Mr. Gesell. How long have you occupied that position?
Mr. Van Schaick. I came with the New York Life — was elected a
vice president in May of 1936, and after serving on the real estate
and mortgage loan committee until the end of that year, J should say
December of that ye/^r, I was given this assignment, December 1936.
Mr. Gesell. Yo/ were at one time commissioner of insurance for
the State of New York, were you not?
Mr. Van Schaick. Yes.
Mr. Gesell. During what period of the time?
Mr. Van Schaick. I was appointed, I was sworn in as commis-
sioner on March 4, 1931, and resigned on May 10, 1935. The posi-
tion there in New York, while it is the commissionership of insurance,
usually the official is referred to as the superintendent of insurance.
Mr. Gesell You are by profession an attorney, are you not?
Mr. Van Schaick. I am a lawyer; yes.
Mr. Gesell. Coming to the mortgage and real estate account of
the New York Life Insurance Co. and referring to table 102, I note
that the mortgages of the New York Life constitute 16.47 of the totai
admitted assets, and that the real-estate accounts for 5.12 percent of
the admitted assets, making the combined account somewhat in excess
of 21 percent.^
Mr. Van Schaick. That is right as of the end of the year 1938.
"Would you like the figures as of the end of '39?
Mr. Gesell. I would.
Mr. Van Schaick. December 31, 1939,. percentage of real estate
to assets was 4.46, percentage of mortgages to assets 16.67, making
a total of 21.13 pei'cent total assets.
Mr. Gesell. In other words, mortgages had gone up slightly and
real estate had gone down somewhat more?
Mr. Van Schaick. Yes.
Mr. Gesell. Are those all city mortgages and city real estate?
Mr Van Schaick. No; the tables will indicate we have a small
mortgage loan portfolio.
Mr. Gesell. Farm mortgage?
Mr. Van Schaick. Small farm mortgage portfolio.
Mr. Gesell. Are you loaning on farms at the present time?
Mr. Van Schaick. Yes. I might qualify that by saying not to any
great extent but we are making farm loans.
Mr. Gesell. Has your mortgage account been increasing in recent
years ? ,
1 See Hearings, Part 10-A, p. 102.
15106
CONCENTRATION OP ECONOMIC POWER
Mr. Van Sciiaick. Yes.
Mr. Gesell. Approximately how much money has been invested
in the account from year to year?
•Mr. Van Sciiaick. I think I have the figures here. Well, in 1939
we have a combined amount of business, residential and farms, of
$43,560,000, 'giving the round numbers.
Mr. Pike. Those were the purchases for the year, sir?
Mr. Van Schaick. These were the mortgages made in that year.
In '38 it was a little larger than that, the combined result, $54,161,000;
in '37, $40^50,000; in '36, $24,534,000; '34, $7,765,000; '33, $3,849,000;
'32, $7,726,000; '31, $43,086,000; '30, $61,228,000.
Do you wish me to go further?
Mr. Gesell. That gives an idea. You were loaning quite heavily
m t!ie early years of this 10-year period and dropped down very low
and since then have been gradually coming up?
Mr. Van Sciiaick. That is right.
Mr. Gesell. Are you able to loan at the present time as much
money as you a, ant on city mortgages and farm mortgages?
Mr. Van Schaick. No.
Mr. Gesell. Do you have an amount which you attempt to §et
out each year, some amount set aside?
Mr. Van Schaick. No; I never heard of anything of that sort in
our company. We know that there are plenty of Hmds for invest-
ment. We realize that as manj' good loans as we can produce will
probably be acceptable and there has been '"o necessity of coming
to any quota under present conditions, at ittisu since I have been
with the company.
Mr. Gesell. Looking at it from a broad point of view, how much
more do you think it would be consistent with the policy of the com-
pany for you to invest than you are now able in these accounts ?
Mr. Van Schaick. I wouldn't venture a figure other than the
limit of the New York statute which I think is entirely appropriate.
As I recall it, I think it is 40 percent of the admitted assets.
Mr. Gesell. So that would mean appreciably more than that
amount.
Mr. Van Schaick. Oh, yes.
Mr. Gesell. What kind of arrangement do you have for placing
your loans and getting you your loans ? Do you use a correspondents
system or branch-oflfice system?
Mr. Van Schaick. We function through correspondents thiough-
out the country.
Mr. Gesell. Are they under contract with you?
Mr. Van Schaick. Yes.
Mr. Gesell. Do they appraise the property before the loan is
made, or do you appraise it independently?
Mr. Van Schaick The answer to that question is probably both,
because we do appraise it independently, and I think the correspond-
ents make their own appraisal before submitting the offer. Then our
set-up is such that we have an appraiser situated in different parts
of the country, rather the 12 regions covered by a man known as a
mortgage-loan manager, who is himself an appraiser, and before the
offering comes to the home office, it has been the considered judgment
hi the correspondent it is something that meets our standards, it has
teen passed upon as far as appraisal goes, and other matters, by the
CONCENTRATION OF ECONOMIC POWER 15107
mortgage-loan manager, and then comes in for the inspection of the
home office.
Senator King. The correspondent is your own representative?
Mr. Van Schaick. No — well, he is our representative in a broad
sense, but the correspondent is not a direct employee of the company.
Senator King. I understand you to say you have some" person
out there.
Mr. Van Schaick. We do ; we have a mortgage loan manager who
is the direct employee of the company and is really the home office
out in the jBeld in these respects.
Mr. Gesell. What do you account as the reason that you are not
able to get as much money out as you wish? I take it it doesn't
lie in your system of securing loans.
Mr. Van Schaick. Well, there might be a number of reasons, and
perhaps it is somewhat my own feelmg of what the policy ought to
be which I think is in accord with the general policy of our company.
Mr. Gesell. You mean your feeling as to the type of loan you
will take?
Mr. Van Schaick. Yes. We have seen our mortgage loan port-
folio increase since the very depths of the depression. It has been
the policy of the company to be very particular in regard to the type
of mortgages it would take. We have been pretty particular.
Mr. Gesell. In other words, you are saying that there is a limited
supply of first-class high-grade mortgages which would meet the re-
quirements of your company?
Mr. Van Schaick. Yes ; and in addition to that we are not willing
to meet certain competition which is existing at the present time.
Mr. Gesell. What do you mean by that?
Mr. Van Schaick. Well, if you go back to the days when the
trouble came in this field and in other fields, much of it came from
over-appraisals, too sanguine, too much optimism as to what was
going to happen. I think I said back in '33 and '34 that one of the
things which must never happen again is this competition for loans
due to too optimistic appraisal. I think we are keeping away from
that, possibly too much, but that is our policy.
Mr., Gesell. You mean then that when you refer to competition,
the fact that other lenders, not necessarily insurance companies, but
other lenders are willing to make more liberal loans on the prop-
erties than you are?
Mr. Van Schaick. It seems so to us, at times.
Mr. Gesell. Now, you have been one of the heaviest purchasers
among the 26 companies of F. H. A.'s, have you not?
Mr. Van Schaick. Yes.
Mr. Gesell. That appears, I believe, on table 195.^ You held as
of 1938, according to this table, 34,000,000 of F. H. A.'s.
Mr. Pike. Fifty-one.
Mr. Gesell. I am sorry, 51,000,000, which is greater than that of
any other company. Have you increased your ownership of F. H. A.'s
since '38?
Mr. Van Schaick. Yes.
The Chairman. These are all F. H. A. insured mortgages?
M;:. Gesell. That is correct, insured under title II.
1 See Hearings, ^art 10-A, p. 195,
15108 CONCENTRATION OF ECONOMIC POWER
The Chairman. I mean as shown by table 195.
Mr. Gesell. Yes.
What were the reasons which prompted you to go into that invest-
ment, m&y I ask, Mr. Van Schaick?
Mr. Van Schaick. It seemed to us at the time they were offered
and when the insurance law was amended very promptly to permit
the companies to make this investment, that it offered probably the
safest outlet for money in the real-estate field, real-estate mortgages,
that was available. I think the amendments went through while I
was still at the department. I think the department sponsored
them. We felt from the beginning that here was an excellent out-
let for money from the standpoint of security.
Senator King. And you took into account, of course, the advan-
tages that would result to the borrowing fraternity, that is, peo-
ple who wanted to borrow money on their homes, and so on.
Mr. Van Schaick. Oh, yes; I think we all were quite keen^for
the social implications of it, as well as the opening that it gave to
investments.
Mr. Kades. Is the rate of interest on those mortgages the same or
lower than on mortgages that are not insured by F. H. A. ?
Mr. Van Schaick. I haven't the figure here but I would say tKey
would run a little under our regular portfolio.
Mr. Gesell. What type of property other than those which would
be formerly covered under F. H. A. has your company been loaning
on? In other words, have you taken business properties like New
England Mutual has, or do you loan on apartment houses or loft
buildings or theaters, or what type of property do you loan on?
Mr. Van Schaick. We will loan on apartments, particularly new
apartments, and that has been a very, very fine type of loan in the
field of business loans. We will loan on business properties such
ELS stores, and the like, that will not be of such type as to be classed
as specialty business properties. Was your question confined to
business properties?
Mr. Gesell. What other types do you loan on ?
Mr. Van Schaick. We are loaning on residences rather extensively.
Mr. Gesell. What is the average size of your loan?
Mr. Van Schaick. I think it is about $2,500.
Mr. Gesell. That is on residences?
Mr. Van Schaick. Yes. Mr. Thorne corrects me, it is about
$5,000.
Mr. Gesell. Now, have you been contracting or expanding the ter-
ritory in which you loan?
Mr, Van Schaick. No; we haven't been expanding it.
Mr. Gesell. Have you been contracting it?
Mr. Van Schaick. No ; not since I came with ihe company, at anj
rate.
Mr. Gesell. These tables would indicate there is a pretty big
degree of diversification, some 42 States in which your company
loans at the present time.^
Mr. Van Schaick. Yes; but we are not loaning in that number
at present. Some of those would be rather isolated cases which would
put a lo^an in a particular State.
» See Hearings, Part lO-A, pp. 202-206
CONCENTRATION OF ECONOMIC POWER 15109
Mr. Gesell. About how many States, roughly, would you say your
company is loaning in ? ^
Mr. Van Schaick. V/e have 12 mortgage loan managers. You
had a table there, Mr. Thorne, that would sliow me something on
that.
Mr. Thorne thinks that about 38 States would be a conservative
answer. There would be 117 correspondents and they sometimes
operate outside of their own States.
Mr. Gesell. And they operate often in more than one State?
Mr. Van Schaick. That is right. The correspondent in southern
California would operate in Arizona, and so on.
Mr. Gesell. And you haven't found from your experience over
the past years any necessity of really contracting the area in which
you have been loaning on city property ?
Mr. Van Schaick. Well, I would answer that question this way,
that we have made a very careful study of where our bad experiences
were, and have tried to profit by that, but in any general territory
I can't say that we have curtailed except as we did in the farm field.
Mr. Gesell. Now, coming to this question of handling of fore-
closed real estate, may I ask a rather broad question, and ask you
to explain the New York Life Insurance Co.'s approach to its fore-
closed real estate problem, how it handles it, how it values its real
estate, what its attitude is toward the problem of sale ? I am seeking
to get information similar to that which we were pursuing with Mr.
Smith here this morning.
Mr. Van Schaick. I might say in answer to your question that
we have approached this question as the handling of an asset which
is an involuntary asset, one which we couldn't have invested in in
the first place. We have had to take it to protect an investment
which has gone bad, and we have realized that it was a liquidating
problem and salvaging proposition.
Mr. Gesell. You have not thought that since you were thrust into
the real estate field that you were in any way charged with the re-
sponsibility of managing these properties over a long period of time
for the income that you could obtain from them ?
Mr. Van Schaick. Only over such period of time, and for the
income that we could obtain from them as long as we are compelled to
hold them ; but we have recognized that we must move out of them
under the policy of the State, with all convenient speed, without
unnecessary sacrifice, and we know and realize that some properties
will have to be held longer than others, but on the whole, everything
is just temporarily held.
Senator King. Did the State law contemplate or provide for a
reasonably prompt liquidation of properties which you were com-
pelled to take over under foreclosure?
Mr. Van Schaick. Yes ; the provision of the statute was that fore-
closed property, as well as real estate held for company purposes,
which are no longer needed for company purposes, should not be
held for more than 5 years unless you would get a certificate from
the superintendent of insurance- to the effect that the interests of the
company would be sacrificed by forced sale. The provision of the
law is a little peculiar in its wording. The certificate of the superin-
tendent is as I have indicated, but the purport of the law is that it
15110 CONCENTRATION OF ECONOMIC POWER
is a temporary matter and you must move out, and if you don't, the
practice is to go to the superintendent and show what you have done
and how you have tried to dispose of it, and ask him for indulgence
of further time before your property would be an unauthorized asset.
Senator King. If you failed to adopt reasonable means to liquidate
the property you would be subject to criticism by the insurance
commissioner?
Mr. Van Schaick. Yes; very decidedly.
Mr. Gesell. This problem of getting rid of the properties .is tied
up pretty closely with the problem of valuation, is it not?
Mr. Van Schaick. Yes.
Mr. Gesell. Your properties, I not,u>e from our tables, are carried
at a lower valuation than those of one else.^ With that in mind,
can you give us some idea of what jOur valuation policy has been
and how that relates to the whole question of disposal of these prop-
erties in an orderly and rapid fashion?
Mr. Van Schaick. To approach the question, I might say that at
the beginning the policy with regard to foreclosed real estate is a
developing policy. It isn^ anything that is established one day, but
it develops as a depression or depression conditions continue longer
than one anticipates, and it is a constantly developing policy in
light of change and changing conditions.
We approached this with the idea, first, that the most important
thing with an involuntary asset, not authorized as an initial invest-
ment, was the matter of valuation, the thought being that we wanted
to make sure as far as we could in uncertain conditions that we
didn't hold out an asset that we didn't have by overvaluation. And
then after we got the matter of a proper valuation on the books of
the company for statement purposes, to then realize that it is our
duty to conserve that asset, to build it up by building income or
building desirability, and put it in such shape that it might be readily
sold if a market develops, but in the meantime, as long as one has to
hold it perhaps longer than he would ordinarily do, or want to do,
if the income is built, why so much the better for the person who
holds the real estate. That, I think, is the basis of our approach
to the subject.
Mr. Gesell. It is a matter first, then, of writing down the prop-
erties and being willing to take losses?
Mr. Van Schaick. Well, that looms very large in the picture.
Mr. Gesell. And, second, it is a matter of then developing a
machinery which will result in really selling the property?
Mr. Van Schaick. That is right.
Mr. Gesell. Now, on the question of write-downs, how big have
the write-downs been in the case of New York Life?
Mr. Van Schaick. I have the figures here which show that in 1931
there was a write-down of $2,740,000.
The Chairman. What year was that?
Mr. Van Schaick. This is in 1931. I will give just the round
numbers if that is agreeable.
In '32 a write-down of $2,967,000, and in '33 a write-down of
$2,300,000; in 1934 there was nothing except the depreciation which
was being taken on the home-oflBce building, what we call the print-
1 See nearings, Part 10-A, p. 232.
CONCENTRATION OF ECONOMIC POWER 15111
ing building, and then there is one other parcel which comes in
where depreciation was taken later known as the Elm Valley Farm,
a convalescent place for employees.
On December 31, 1935, there was a blanket write-down in addition
to this of $5,000,000, and on December 31, 1936, there was a blanket
write-down in addition to that of ^" ^00,000. The real estate wa?
written down, but written down as a whole, but there was no special
allocation of those figures.
Mr. Gesell. By "blanket write-down" you mean it was written
down on an over-all basis, not as an individual propert}^ ?
Mr. Van Schaick. That is right.
Mr. Pike. You said "in addition to." Would that make $15,000,-
000 that year?
Mr. Van Schaick. No; the $5,000,000 came in at the end of '35,
and the $10,000,000 at the end of '36.
Mr. Gesell. It was through those write-downs, was it not, that
you were able to bring your property to the low valuation shown on
these tables?
Mr. Van Schaick. No; because there was more to that program
and I should continue with it, because at the end of '37, nothing was
added to the blanket write-down, the $15,000,000; but as part of
our sales j)rogram, realizing that it was necessary to put prices
on residential property, we had priced all of our residential prop-
erty, and it was obvious that the book value should at least be
written down on individual properties to the price which we were
holding them for the public so there was an additional write-
down there of $1,961,000 to meet the established sale prices in that
year, and that took care of one large case where we had foreclosed
and put a price pretty low. But it amounted to that figure.
The Chairman. What was the total of these write-downs from
1931 on?
Mr. Van Schaick. Shall I not continue for 1938, and then get the
total, Senator?
The Chairman. Certainly.
Mr. Van Schaick. The question arose in '38 in this matter of a
developing policy, as to the desirability of continuing a blanket
write-down, and it was talked at our conferences and with mem-
bers of the finance committee and with the officers of the company
through the year about moving to a different basis of getting this
properly allocated. The great reason aj^ainst it was one which was
mentioned in testimony here, as I recall it, either today or yesterday,
that it might have an adverse effect upon the sale of property to
bo pretty realistic about what figure you might put on, and yet
the more we thought it over, the more it seemed' that it was neces-
sary. There were a good many embarrassments that came up from
the fact that when you wanted to discuss the actual book value
of the property you were doing it on one basis and yet you didn't
know how much of the blanket write-down that you might allocate
to it.
And so we decided, as the year 1938 came to a close, that we
would make an allocation and we approached it in two different
ways. We first had attempted to obtain through our own forces a
figure of what seemed to be the current value on each one of our
properties. It was a tremendous piece of work, but at the same
15112 CONCENTRATION OF ECONOMIC POWER
time it seemed as though we could work out a program that would
have the same general effect, and perhaps put us on a little sounder
ground. We realized that in some cases, in a ^ood many cases,
there had been in the putting on of a book value initially foreclosure
costs — back in the old days there had been some cases of adding
accrued interest, very little of that as the years went on. The fore-
closure costs and taxes came into the picture, so that there were a
number of instances in our portfolio where the book value exceeded
the face of tlie mortgage at the time of foreclosure.
And so at the end of '38 we decided as the first step in this pro-
gram that we would mark down to the face of the mortgage at the
time of foreclosure, and that took a figure of $7,744,000 in round
numbers.
Then another thing that had been bothering us very much on
this matter was the long continuance of depressed conditions, we
will say, and as we went to sell and found some pretty weak spots
in our portfolio in the matter of prices, we realized that this ques-
tion of obsolescence had been coming on here with tremendous force,
and it was a question in our mind of having some policy that would
recognize this obsolescence feature over a period of years.
Without going into the detail as to how the matter was worked
out, the suggestion came from our vice president and actuary, Wil-
liam MacFarlane, who had had negotiations with the Government on
the matter of proper basis of depreciation of some of our proper-
ties for tax purposes — they weren't all alike, there would be different
rates which jvould fit in one class and another rate in another.
Nevertheless, we felt that a depreciation of the improvement end of
the property over a period of years would be the thing to do.
So, we decided to mark off 3 percent a year of the value of the
building or the improvement on this property from the time of
acquisition. We ^ot that allocated cost of the building by taking
the nearest appraisal which we had before acquisition where the
values were separated, the land and the building, and then we
took our cost and applied that same percentage to that, and so we
marked off 3 percent for each of those years from the time of ac-
quisition down to December 31, 1938, which took a figure of approxi-
mately 10,000,000 — or to be more specific in round numbers the fi^re
of 10,871,000. Then we had to go down to established sales prices.
We had been continuing and been revising those prices. That took
284,000, practically 285,000.
Then we had another item which came into the picture at that
time. We had been receiving from the State insurance department
of New York appraisals upon various of our properties throughout
the country. I might say that in '34 there was set up for the first
time in the insurance department of New York an appraisal bureau
manned by very competent real-estate men chosen from civil service,
and a bureau which has very fine facilities for making disinterested
appraisals. We had received and had been very much interested in
comparing the appraisals which we received from the insurance de-
partment on all our properties. They made appraisals, and then
where they didn't have what they called complete appraisals, they
would give us their estimates of what various properties were wortn.
We felt that it would be fine to review and see just how, with our
CONCENTRATION OF ECONOMIC POWER 15113
reduced figure, we would come out in reference to the appraisal of the
supervising authority. At that time we took only properties of a
hundred thousand and more in value, and we found that in some
cases the State appraisal was at a higher figure than our own figures.
We paid no attention to that, but where we found the State appraisal
was below our figure, we thought that we would take an additional
step that year and we wrote down to State insurance appraisals on
all properties of a hundred thousand and more where they were
above our figure. We wrote down a figure of $5,626,000 for this
purpose and in getting the total of what came at the end of '38 as a
result of that, there was a matter of $31,082, which was an up,
because wherever we have a contract of sale wiiich is for more than
our book value, that is the only up which we take, but when we get
down to a contract of sale, we take that into consideration. It gave a
figure for 1938 of $25,286,593, which includes the depreciation on all
the company-owned properties. That isn't entirely on foreclosed real
estate.
Does that give you what you wish, Mr. Gesell ?
Senator King. Twenty-five million in 1 year, you mean?
Mr. Van Schaick. No; 15 million had been set up as a blanket
over 2 years, but it was the allocation in 1 year of the 15 million.
Mr. Gesell. What is the total of all these right there ?
Mr. Van Schaick. The total of the write-downs from '31 when I
gave it to you, including the ups to which I referred in the manner
of contracts, is $50,374,664.12. That is at the end of December 31,
1939, because we have added more this year than I have enumerated.
In 1939 we. not only wrote to sales prices which had been established,
but we also took the rest of the State insurance appraisals, we went
on down below the hundred-thousand lot and have met the State
insurance department appraisals, and then in addition to that, we
took the depreciation on the home office and some special cases that
were — I meant to say it included, Mr. Bottome thought I said it
excluded the home office ; no ; it includes the depreciation on the home
office, but it did include — well, I had somiething in mind there; my
thoughts got away from me for a moment. -
Senator King. The 50 millions you ha?^t just given, that includes
the reduction, depreciation, mark-down on property of less than a
hundred thousand?
Mr. Van Schaick. I beg your pardon.
Senator King. Did the 50 million to which you have referred
include mark-down on properties valued at less than 100,000, you say ?
Mr. Van Schaick. Yes; it did.
Senator King. The entire real estate ?
Mr. Van Schaick% That is right ; that 50 million gives the program
from '31 on.
. Senator King. On all of your real-estate holdings?
Mr. Van Schaick. On all of our real-estate holdings.
The Chairman. May I interrupt here to ask Mr. Howe about
table 220, which I take it is intended to represent the total amount
of urban real estate owned by the 26 companies? ^
Mr. Howe. That is right, as of December 31, 1938.
1 See Hearings, Part 10-A, p. 220.
15114 CONCENTRATION OF ECONOMIC POWER
The Chaiuman. Now, table 232 gives us a total book value as of
December 31, 1938, for the New York Life Insurance Co., of $97,-
489.891,1 whereas the total on table 220 is $108,105,000. "What is the
exphmation of that apparent discrepancy?
Mr. Howe. The explanation, Senator, is that the figures gjven on
page 232 apply only to real estate which, on December 31, 1938, had
been held for one full year or more.
Mr. Gesell. I understand it is necessary to include only properties
held that lung. The reason is the fact you are comparing the income
to tlie value. Unless you have a year's income from which you can
base your figures, you don't have that.
The Chairman. I see.
Senator King. The real-estate operations were largely controlled
by the laws of the State, I assume from your statement? That is
to say, the character of security which you are permitted to take, and
tjlie loans which you are permitted to make, are in line with the State
Department ?
Mr. Van Schaick. Oh, yes.
I wanted to make a correction. Counsel calls my attention to a
misstatement which I made in answer to the question about capitali-
zation, where we had written down on the face of the mortgage.
There had been included in those figures foreclosure costs in many
cases and delinquent taxes, but never accrued interest. If I gave
the impression to the contrary, I want to correct it.
Mr. Gesell. "VVliat is your attitude toward this capitalization of
accrued interest? Do you think that is a goo^ practice?
Mr. Van Schaick. No.
Mr. Gesell. Wliy not? .
Mr. Van Schaick. We don't consider it a good practice, although
we think that there are certain circumstances where a funding of
interest may be perfectly in order.
Are you asking as to real estate or mortgages?
Mr. Gesell. I was asking as to real estate. I'm sorry I didn't
make that clear.
Mr. Van Schaick. The answer is "No" to the question.
Mr. Gesell. Why isn't it good practice to capitalize it?
Mr. Van Schaick. It doesn't go into the vAlue of the property
in the slightest degree, something never received.
Mr. Henderson. I wasn't quite clear on your answer to Senator
King. I think he asked about acquisition, whether all the acquisition
was in terms of the State law, and I think your answer was *'Yes."
But the matter of what write-down you should take, there was no
specific State law on that — that was an exercise of judgment, and
the company business policy, was it not ?
Ml'. Van Schaick. Yes; I understood Senator King's question to
refer to the taking of these mortgages in the first place as to whether
they were made in accordance with law.
Senator King. That is what I intended.
Mr. Van Schaick. And my answer to your question, Commissioner
Henderson, is also, in the affirmative, that there is no provision of law
which outlines the particular write-down practice that you should
take.
' Ibid., p. 232.
CONCENTRATION OF ECONOMIC POWER 15115
Mr. Gesell. Now, your practice in writing down these properties
appears to have been premised on the consideration that if on the
sale of the property you made more than your book value, you would
have lost nothing by being re^-listic in terms of write-down. Is that
not correct?
Mr. Van Sohaick. Yes ; and that was the experience in '39.
Mr. Gesell. And you prefer writing down the properties and
seeing on the ultimate sale whether or not you made a profit rather
than holding the property at a high price against the expectation
that you will be able to sell at that price.
Mr, Van Schaick. Yes ; but always with the thought in mind that
we want, in fixing the price, to be in accord with present conditions
as much as we can — we don't want ta overdo it; but on the other
hand, if we are going to err, we would rather err on the low side
than the high side.
Mr. Gesell. How do you go about pricing these things for sale,
these properties for sale? Do you have a published list of prices
which anyone can go to?
Mr. Van Schaick. In the residential field we have, as I said before,
put a price on all of our holdings and those prices have been reached
by consultation ; we consult the correspondent, get his ideas ; we have
the mortgage-loan manager's ideas, and then we have our own field
man's ideas; those come in, they are studied by a committee at the
home office, everything is taken into consideration, the history, what
we know about that general location, and all, and we try to reach
what seems to be a proper figure.
Mr. Gesell. How do you advertise that price?
Mr. Van Schaick. Those prices are given to our mortgage man-
agers, who in turn give them to the brokers, and there has been an
increase in our advertising program.
Mr. Gesell. You mean that these prices on residential properties
are a matter of public record for anyone interested in purchasing
them?
Mr. Van Schaick. I wouldn't call it a public record, but anyone
can see them who wants to see them at the brokers.
Mr. Gesell. You do the same thing with you?;- larger properties
like apartment houses, theaters, hotels, and office buildings?
Mr. Van Schaick. No ; although I might explain that we do this :
Everything is for sale, but the way we have approached the income
properties has been to call in our mortgage-loan managers, point
out that we wanted to sell them with particular emphasis on our
class-C properties — I will explain in a little while, perhaps you will
reach it, as to our classification of properties — and while we haven't
an established sales price, we do, in many cases where we are par-
ticularly interested to move it, give a price — the superintendent of
real estate will give a price to the mortgage-loan manager that he
will recommend. Nobody is bound by it, but at least it is something
to talk about in these • large situations, or in income-property
situations.
Mr. Gesell. You mean, then, that there is some advantage in being
positive and definite about the price if you are anxious to move a
piece of property?
Mr. Van Schaick, I am not a real-estate salesman at all, but I
have always understood if you are going to expeof results, you have
15116 CONCENTRATION OF ECONOMIC POWER
to have some degree of positiveness about what you are holding the
property at.'
The Chairman. Wliat has been the attitude of the superintendent
of insurance with respect to this problem of valuation and sale?
Mr. Van Schaick. Well, the reports of the superintendent of in-
surance over the past several years have stressed the problems in
real estate and in foreclosed real estate particularly. They have been
rather general in the suggestions which have been made, but while
that is a message which is conveyed to the legislature, nevertheless
it is always taken as a message to the companies; we all get a copy
and we all read it with interest, and the thought, I think it is fair
to say the thought has been expressed that greater attention ought
to be paid to this problem of realistically handling the problem.
The Chaibman. There seems to be considerable diversity of judg-
ment on the part of the companies with respect to the valuation which
should be placed upon real estate thus held, and the degree to which
it should be marked down. What I was inquiring about was whether
or not there was any attitude upon that particular question by the
State departments of insurance.
Mr. Van Schaick. Well, all I could say in answer to that, Senator,
is that our program has been commended, and commended rather
highly.
The Chairman. But the department does not impose any rule upon
the companies in fixing their values.
Mr. Van S jhaick. No ; I don't think so. There may be in this
last report just released yesterday a suggestion that the companies
ought to move out of their poorer properties.
The Chairman. In developing this policy which you have described
to us in such detail of continuous write down, you were not under any
compulsion from the State Department of Insurance in doing that,
were you?
Mr. Van Schaick. No.
Mr. Pike. I didn't get, if you did mention, Mr. Van Schaick, what
your sales were in '39. The thought is coming to me up to the end of
'39 with the write-down and the realistic policy that you haven't
succeeded in moving much real estate.
Mr. Van Schaick. Let me approach it this way, Mr. Pike, if I may :
We classify our properties as a part of our program in A, B, and Q
properties and classifications, and our emphasis has been put on mov-
ing the C properties because of a realization that if we don't look out,
in any program of this sort we would move out of our good proper-
ties and be left with the bad, so the emphasis has been put on the C
properties. In 1939 there were 820 properties sold. Of this, in the
income gi-oup, there were 18 A's, 66 B's, and 57 C's. So as to get
your percentage of C's, you will see that that was 57 out of 360 at the
beginning of the year, or 16 percent of the C's.
On residences, we sold 14 A's, 279 B's, and 255 C's.
That was 255 out of 806 C's in that classification, or 3i2 percent of
our C residences held at the beginning of '38.
Now, we sold in 1939 properties having a book value of 8.55 of
book value of properties owned December 31, 1938. The book value of
properties sold was $9,875,000, in round numbers, and the sales price
was $11,167,000. Also, there were 116 properties for which con-
CONCENTRATION OF ECONOMIC POWER 15117
tracts for sale or leases with option to purchase were entered into
prior to January 1, 1939, and were completed and closed out during
1939 with a sales price of $669,000.
Mr. Pike. So that your sales program really got under way in '3^
more than it shows in this particular compilation ?
Mr. Van Schaick. Yes, we had a feeling that it wasn't as good as
we would like to have it but it was consistent with the policy of
"keeping the stream moving," which is the expression we have been
using in the department.
Mr. Pike. Then you do feel also that the real estate which you
have left represents perhaps the higher grade of your holdings in
that you have given particular effort to moving off the poor stock?
Mr. Van Schaick. That depends on how well we succeed in moving
the poorer classes, but you will see from that that even with emphasis
on C's, a certain number and ■even more, of other classifications will
move.
Mr. Pike. Of course, >they want your better ones, naturally ?
Mr. Van Schaick. Yes.
The Chairman. But table 221 would indicate that you succeeded
in moving a total of $6,470,000 worth of urban real estate.^
Mr. Van Schaick. Through 1938. This was '39. This wasn't
added. This was the next year's operations.
Mr. Gesell. Table 223 expresses that in terms of percentages, Sen-
ator, and may be more helpful to you.^
The Chairman. And the big movement took place in 1939?
Mr. Van Schaick. Well, it is larger, but we thought we did pretty
well in '38, too, but we hope to have it raised.
Mr. Kades. Mr. Van Schaick, since your write-down policy is not
based upon any legal requirement, would it be fair to say that
one of the moving considerations in that policy was the attempt to
avoid distorting the value of the real estate insofar as policyholders
and prospective policyholders were concerned?
Mr. Van Schaick. I think that is a fair statement, and I might
say in connection with it that perhaps my own attitude of a former
insurance commissioner led somewhat to my very great feeling along
that line. I had had something to do with valuations that were out
of kilter in bygone years, and knowing something of it, it is some-
thing that perhaps I put more emphasis on myself personally than
some others. I don't say that it is any better policy than someone
else's, there are various ways of looking at it. It is only that in our
case that is where the emphasis happens to be.
Mr. Henderson. Mr. Van Schaick, I am very much interested in
what you said about this question of statements, and as a commis-
sioner of insurance, a superintendent of insurance, you must have
thought many, many times of how information ought to be gotten to
a policyholder which would clearly portray what the assets were be-
hind the contract. I wonder whether you would, for the committee,
give us the value of any of your thinking along that line. Take it
this way: I start with the proposition, very frankly, that the ordi-
nary statement of an insurance company that goes to the policy-
holders is not completely revealing, to say the least. Is there any
> See Hearings, Part 10-A, p. 221.
=> Ibid., p. 223.
124491— 41— pt. 28 28
15118 CONCENTRATION OF ECONOMIC POWER
possibility of getting a better form of statement? Has any work
been done on giving a running idea to the policyholder of these
changes that are taking place, and things that are of great signifi-
cance to him?
Mr. Van Schaick. I think about the only thing I can say, Com-
missioner Henderson, is that I have here what the New York Life
does. It was indicated to me that I might be asked that question,
and I can show you what is done. There has come to my attention
this year a statement — and I think I see it on the table here — of the
Massachusetts Mutual, where an attempt is made to perhaps popu-
larize the presentation of facts, because so many people, just from
seeing figures, do not get them.
I would only answer your question in a very general way. You
ask it of me as a former commissioner. I would say, "Yes, I would
be glad to see something done along the line of simplification of
information for the public."
Mr. Henderson. It is particularly true in the period of changing
values, isn't it? I expect, over a period of time, when there is no
real question as to the assets behind policies, that the ordinary state-
ment that has been going out from most insurance companies is —
well, it is a financial accounting of some kind. It is not a mana-
gerial accounting, certainly, and I wonder whether there has been any
work done on it? Do the State commissioners do any work on the
matter at all?
Mr. Van Schaick. I haven't heard, Commissioner, whether that
subject has been taken up by the commissioners or not. I really
must just give you my own general thought on the matter and
say that I think that this is something that can be done^ and perhaps
should be done along those lines, but I am not familiar with any-
thing that has been done.
•Mr. Henderson. I don't suppose that the commissioner of a large
State 'gets many complaints from policyholders, however, as to the
adequacy of the report?
Mr. Van Schaick. No, not many. There is a complaint bureau
in the New York department, but it has to do very largely with
adjustments, not in the life insurance field but ia other fields. But
occasionally there will be something, but it is pretty occasional.
Mr. Henderson. Something perhaps not so formidable as the
Convention Form, which, of course, isn't accessible to the policy-
holder— something between that and the bare statement of balance
sheet items is probably desirable. I expect it would run more in
the nature of reading matter, would it not, for an annual report
to be of real value?
Mr. Van Schaick. I think, if I may confine my remark to my
own departments, that policyholders might^he very much interested
in what is being done in real estate and mortgages, a simple state-
ment of what the policy is, because
Mr. Gesell (interposing). I take it you mean what the results
of policy are ?
Mr. Van Schaick. Yes ; what the results of the policy are.
Mr. Henderson. Let me ask you this : I suppose in that, the man-
agement is between a desire to be frank and a desire not to scare
the policyholder. That is, admittedly if in any one year they went
to great lengths to tell what the situation was in any metropoli-
CONCENTRATION OF ECONOMIC POWER 15119
tan area, what the difficulties of sale have been and the like, the
policyholder would take it as an alarming matter, would he not?
Mr. Van Schaick. Yes; and you have to guard against that,
because you may recall that in the history -of the country here, we
had a run on life insurance at one time, and while it didn't affect
the stability of companies, there is a danger which comes from ever
circulating anything that alarms people. It is a financial institution
as a bank is a financial institution.
Mr. Henderson. We have the same thing, of course, as to the
prospectus in the S. E. C, in the matter of truth in securities', and
of course we are finding that a frank statement is the best thing.
We don't require in those statements that, an alarmist point of
view be taken, or that superlatives be used on anything encouraging
and favorable to the issue, and I suppose something in the nature of
a complete statement and a frank discussion to the policyholders is
what the tendency ought to be.
Mr. Van Schaick. I think I am not in disagreement with what
you express. Commissioner.
Senator King. As commissioner in the State of New -York — and
if this is a little too personal I will not ask you to reply — did you
find that many of the insurance companies failed to comply with
the law and to make such reports as met the requirements of the
statute ?
Mr. Van Schaick. Oh, no ; the reports had to be made and they
had to comply with the law or the insurance commissioner took
charge.
Senator King. Did you have occasion to reprimand — that is pr5b-
ably too strong a term— criticize any insurance companies for fail-
ing to comply, perhaps inadvertently, with the provisions of the
statute and require them to submit additional reports ?
Mr. Van Schaick. That would be a pretty difficult question to
answer. Senator. There are a multitude of matters coming over
the desk of a commissioner every day; there are matters which
come up of error or perhaps carelessness or something of that sort
-where communication is made to a company. It would be hard to
differentiate as between the ordinary business communication and
perhaps a suggestion in some communication that this is not in order
and should be corrected. I just would say in answer to that that
with the multitude of transactions necessarily there were such in-
stances as you indicate, but nothing of a sort that would need to
concern, because, after all, we felt that there was a pretty whole-
some respect for law.
Senator King. Generally speaking, it was your view that the
companies submitting reports compjied with, or attempted to com-
ply with the statute, and that the insurance business, by and large,
was conducted by the insurance^ companies in a manner that met ,
with the general approval of the insurance commissioner? .
Mr. Van Schaick. That is right.
Mr. Henderson. I don't want my question to be thought of as
flowing out of the Senator's remark. It is something I wanted to
ask you anyway. In view of the analysis which Mr. Howe made
of the convention form and insurance accounting, it seems to me
from the discussions in recent days concerning the different modes of
valuation and of write-downs and the like permitted to each com-
15120 CONCENTRATION OF ECONOMIC POWER
pany, that there is a wide latitude and a wide discrepancy in prac-
tice as between the companies which the present convention form
doesn't meet, isn't that true?
Mr, Van Schaick. Well, I am not an accountant, Commissioner
Henderson, and I hesitate to make a.: comment outside of my own
field, but I would say this, that I woi i be the first to recognize that
there are weaknesses in the present set-up, weaknesses which ought to
be corrected, and perhaps can be corrected, and one of the weaknesses
has to do with the matter of uniformity and modern accounting.
It was something we were interested in when I was back at the
department. I was quite keen to have what is known as the conven-
tion committee on blanks bring in experts to see if there is anything
in modern thought and modern accounting that would improve that
general situation.
Mr. Henderson. Take the situation you have outlined today,
$50,000,000 of reduction in value. I gather it was within the com-
panies' latitude to make that, say, $25,000,000, perhaps some lower
figure. That is, you had a definite policy of recognizing that certain
things had transpired and making a judgment as to whether there
was going to be a recuperation. You could have made a difference
there of about $25,000,000, at least. Now, that is a sizeable item.
Even if New York State, for example, in its own accounting on sur-
pluses and the like, had required that, it is possible that some of the
other States would not have required it, or even might have required
a stiffer one, isn't that true?
Mr. Van Schaick. Yes.
Mr. Henderson. And so if you had all the convention reports of
all the insurance companies, regardless of where domiciled, you really
couldn't get an accurate comparison wliich would reflect the moti-
vating business policy.
Mr. Van Schaick. I am not entirely sure that I follow you com-
pletely, but I would sa;y it in general it is true it is sometimes diffi-
cult to interpret from tne reports made just what the policy is,
although this write-down of our real estate, is clear in the statement
which we have made to every insurance department in the United
States, with the exception of Texas where we don't do business.
Mr. Henderson. There is no doubt that the write-down is clear,
but I say that reflected a business judgment which you carried into
your balance sheets.
Mr. Van Schaick. Yes.
Mr. Henderson. Now, if you had made a business judgment in
which you said, "We will take only half and gamble on the recovery
of assets and the like for the other half," it would not have been
reflected in the convention form.
Mr. Van Schaick. No ; except by a lower figure.
Mr. Henderson. There would have been a higher figure in the con-
vention form. What I am saying is that so far as the comparison
based upon the convention reports of different companies with dif-
ferent policies is concerned, you dbn't get a complete comparison and
a complete reflection of what the business judgment has been.
Mr. Van Schaick. I think that is true.
Mr. Gesell. And it is also difficult to tell, is it not, whether, for
instance in the case of New York Life, your write-down was taken
because your real estate was in much worse shape than the other
CONCENTRATION OP ECONOMIC POWER 15121
companies, or whether your write-down was taken by reason of the
conservatism of your management?
Mr. Van Schaick. I think your figures in these tables of Mr.
Howe's would indicate that it wasn't because we were in worse shape
by any means.
Mr. Gesell. I wasn't trying to, suggest you were. I was only
trying to say it is pretty difficult for someone without the benefit
of such figures as we have here before us today to tell whether it
was because your real estate was in bad shape or because you were
adopting a conservative-management policy.
Mr. Vak 'chaick. Yes ; I think that is probably so.
Mr. H ERSON. I have a question, Mr. Chairman. You spoke
a little wnJe ago of how different companies came through the
depression, and particularly the New York companies, if I recall,
did come through very well and you were there during a large part
of that period. Mr. Van Schaick, I would be interested, and per-
haps the rest of the committee would also, in some idea of the
moratorium legislation, and the things -vhich led to the convention
values, and the reasons that suggested themselves to the commis-
sioners in establishing surrender values and modifications on policy
loans. I don't like to suggest that you discuss that as a vice presi-
dent of the New York Life, but could we draw on your experience
at all for that?
Mr. Van Schaick. I would be very glad to if I won't tire you. It
is a pretty big order, Commissioner.
Mr. Henderson. Cut it down so it doesn't tire you.
Mr. Van Schaick. Of course, the two subjects which you suggest,
while they were related, came at entirely different times and pre-
sented two different phases of the depression. The matter of con-
vention values which confronted insurance commissioners in 1931
came to a head in October of that year, as I recall it, due to a
particularly low day on the exchange, when I, as a new superin-
tendent, had the chief examiners come in and say, "What will we
do with these companies?" — not life companies, it was the casualty
companies and the fire companies that were particularly affected
because of the large portfolios of common stocks which were held
at that time. It was a question which was put up almost in a
moment as to whether at that critical time there was to be a whole-
sale taking over of essentially sound companies because of, you
might almost term it, gyrations of a stock exchange, and aft^r
canvassing the matter very carefully, it happened that the New
York Commissioner — then, as now, the chairman of the committee
on valuations of what was then the National Convention of Insur-
ance Commissioners, now called the National Association of Insurance
Commissioners — called in the commissioners who were near at hand,
Massachusetts and Connecticut and New Jersey, Pennsylvania,
Illinois, and we worked it out. I used as the basis of it the very
best thought I could get hold of, some of which went back to the
World War days when they had similar problems.
Mr. Henderson. Had there been any thought given by the na-
tional convention to the probability of just such an acute crisis?
Mr. Van Schaick. There had only been one meeting that I had
attended, it was a midsummer meeting, I think it was in June of
'$1, when that subject didn't come up, and that is the only one I
15122 CONCENTRATION OF ECONOMIC POWER
can tell you about because that was my first meeting, and this broke
in October. , , , , i
What we worked out was the thought that the stock exchange
was — after all, there was nothing sacred about a stock-exchange quo-
tation. It is the best we have under ordinary circumstances to
reflect the b\iying and the selling end of a transaction, but realizing
that the bottom had dropped out of the market, that didn't reflect
it any more, and it seemed a very proper thing— it might sliock
people at first suggestion, but, nevertheless, on thinking it through
one could see that it wasn't so out of line to take not the stock-
exchange quotations of a particular day, but the range of the market
over a period not too remote and get a more normal period to use
as, not the current market, but the fair market on those securities.
And so we worked out a formula through the use of financial
experts that were called in and knew more about it than we com-
missioners did, and we took a range' of the market, as we said, not
too remote, which I think wasn't too remote, which we substituted.
First it was presented to the executive committee of the commit-
tee of valuation of the convention by telegram; they acquiesced in
it; I put it into effect in New York immediately because I had to
do something, and by early December of that year we presented
it to the convention and it was passed with only three dissenting
votes.
Now, that is the formula which Professor Bonbright in Jiis very
valuable treatise on valuation of properties refers to as one which
might better have been a recognition by the commissioners that_ they
were doing an arbitrary thing, but what Professor Bonbright missed,
I think — and I intend to tell him so when I get the opportunity —
was that the commissioners couldn't do an arbitrary thmg at that
time. They had to find some basis of valuation. It was not an
arbitrary figure; it was a standard of valuation, and I think that
there is some testimony in these proceedings — Mr. Howe referred
to it, I think Mr. Gesell as counsel referred to it — in which there
was some implication thrown out that this was an arbitrary matter.
It was not. It was a standard of valuation that was adopted in
place of the stock -exchange quotations which were out of kilter at
the time.
Pardon my getting emphatic about it, but I haven't thought of
this in some time, but they were rather strenuous days.
Mr. Henderson. You were there?
Mr. Van Schaick. I was there ; yes.
Senator King. The stock exchange was perhaps more arbitrary
and capricious than that formula you worked out.
Mr. Van Schaick. The stock exchange itself didn't have much to
do with it. It was trying to put into effect the thing we read about
in law books, that fair value is ascertained by the willing seller
under no compulsion to sell and the willing buyer under no com-
pulsion to buy, but those didn't exist on the stock exchange in those
days, and the old idea went right out the window,
Mr. Henderson. May I ask you about two questions on that? In
the insurance contract, the policy contract, there is no requirement
as there is in the investment trust certificate that you shall maintain
a certain ratio of values gotten from an exchange, and so forth, to
the policy. I am quite sure of that. Now, as to the insurance law,
CONCENTRATION OF ECONOMIC POWER 15123
is there a requirement that valuation shall be taken from an ex-
change ?
Mr. Van Schaick. No; the superintendent of New York had the
responsibility of valuing according to market value, and it was un-
fortunate that there wasn't a real power of discretion given the
superintendent. He had to take the risk of this thing's working. I
think the new code has obviated that. I think that is taken care of.
Mr. Henderson. It is lodged with the superintendent now?
Mr. Van Schaick. He is given the discretion to do it now, and that
we didn't have at that time. We had to find a basis on which to
operate, which the courts would sustain as reaching market value.
Senator King. If you had accepted the action of the stock exchange
that particular day, and ratified that action, it might have induced
lower values and a spiral decline that would have been catastrophic.
Mr. Van Schaick. There would have been a dumping of securities
to reach a liquid position under those circumstances that would have
made a debacle even worse than we had.
Mr. Gesell. How about moratorium legislation?
Mr. Van Schaick. Moratorium legislation was entirely different,
because the life companies in New York weren't affected by this
convention value to any great extent. They were in many respects
with regard to preferred stocks, and in minor matters, but when it
came to the moratorium, there was the situation which was brought
about by the banking burden of the country being thrown on the life
insurance companies almost overnight. Hete we had the circum-
stances which led up to it. You will recall that as we left '32
behind and got into January, I think it was in February that the
Michigan situation arose, the Michigan moratorium came along, and
then you had your situation in Maryland and Indiana and several
other States, leading "right up to Inauguration Day, and then when
New York came on with its moratorium on March 4, and the Presi-
dent's proclamation followed on the Monday following inauguration,
when all the banks were closed and we had the bank holiday, where
were people going to go for ifheir funds? Here was the banking
burden of the country thrown on the life insurance companies, and
as liquid as they were, and in as fine condition as they were, no
company that invests money can be enough liquid to take care of a
situation like that, and consequently I remember one instance of a
man coming from the West by airplane to get there and get his
money out of one of the large companies. It had the characteristics
of a run.
What did we do? As I came back from Washington, I talked
with the Governor over the phone ; we got together on Sunday morn-
ing and decided that we needed emergency legislation. We continued
that on Monday. We had the legislative leaders of both parties
there. We drafted this legislation known as chapter 40 of the Laws
of 1933, afterward known as that; we had some of the insurance
executives in at the Governor's home; we had advisers of various
kinds ; we got the legislative leaders there from Albany. That night
we had to send the bill up by plane ; it went through the legislature
that night; they stayed in session all night; it came down by plane;
was signed the next day; and it'was only then we had the authority
to go ahead and declare a moratorium. -
It was pretty sweeping legislation but it was carefully drawn.
15124 CONCENTRATION OF ECONOMIC POWER
Mr. Henderson. What did it give the right to do ?
Mr. Van Schaick. It gave the right to do pretty nearly every-
thing. If you would be interested, I have it here, it is very short.
I iDut it m.
Mr. Gesell. Have you a copy of the legislation there ?
Mr. Van Schaick. I have a copy of what I said about it in a report
which I made on the administration of delinquent title and mortgage
companies. There is a paragraph here as to what chapter 40 was.
It is two paragraphs on page 5 of this document which I have.
Mr. Gesell. Perhaps you might read that for the record, if you
don't mind.
Mr. Van Schaick. There is just one paragraph that will give it
to you. [Reading:]
Chapter 40 of the Laws of 1933 was adopted as an emergency matter giving
the Superintendent of Insurance power to prescribe rules and regulations for
the conduct of the business of all insurance and further^ giving him authority
to vary or suspend the provisions of the insurance law in the general pfcblic
interest. The statute has been extended by amendment to be effective imtil
March 1, 1936.
That doesn't give as much of that as I thought it did. [Reading
further :]
On the day and the hour 'that that statute became effective, full responsibility
for the exercise of these emergency powers was formally placed on the Superin-
tendent of Insurance by letter from the Governor under date of March 7, 1933,
as follows :
"With reference to the emergency powers given you as Superintendent of
Insurance of the State of New York, I place the responsibility for the exercise
thereof on you as Superintendent and shall expect you to make such use thereof
as in your judgment will promote the general welfare."
Mr. Henderson. In general, what could you suspend?
Mr. Van Schaick. Here were policy provisions which provided
for the loans and surrender values on life insurance policies.
Mr. Gesell. In other words, those were in a sense the provisions
of the policy which placed the insurance companies in the banking
business ?
Mr. Van Schaick. That is right.
Mr. Gesell. They were the ones that were standing the heaviest
stress in this time of banking emergency ?
Mr. Van Schaick. Yes; that is right; and the order of the super-
intendent of insurance was to forbid the making of loans or paying
these surrender values except — now, we were very much concerned
about the hardship which was going to result just immediately
with so many people ^dependent upon these things, and so there
was an exception made for small cases where people needed $100 —
up to $100. ;
Mr. Gesell. Those were the so-called dire needs ?
Mr. Van Schaick. Yes; those were the dire-need cases, but in
the industrial end they were liberalized because even the $100 limit
in New York wasn't put on the industrial cases.
I would say there wouldn't be an industrial policy that would
involve a hundred dollars, but the aggregate in a family would
sometimes be more than that.
Then we took a number of other exceptions, I think it was re-
ferred^to in some of the testimony here, where reference was made
to .the fact that there was an exception for the payment of premiums
CONCENTRATION OP ECONOMIC POWER 15125
un an insurance policy. Well, if the implication was thrown out
to that question, as I think it might have been read in that testi-
mony, that that was some special favor shown the insurance com-
panies, that wasn't the situation at all. We didn't want, as a result
of this thing, people to lose their insurance by the result of it, and
those who were dependen Don keeping their insurance in force,
we were very anxious tha^ che insurance should be — the integrity
of it should be maintained as far as the going policy was concerned.
Then there are other exceptions, but I think it is not necessary
to go into them.
Mr. Gesell. In other words, under that exception, the policyhold-
ers could surrender one policy or more, or borrow on their policy
in order to keep their premiums paid up ?
Mr. Van Schaick. That is right.
Mr. Gesell. And to prevent the lapse of insurance.
Mr. Henderson. There is no doubt in your mind, is there, Mr.
Van Schaick, of the necessity for some formal legislation authorizing
commissions in times of emergency to have that power?
Mr. Van Schaick. I quite agree with you. If Government can't
function and can't handle an emergency, then we have just got
to throw up our hands. The fact that w6 could and did handle
this particular emergency, regardless of what department did it,
and who did it, has always appealed to me as a very fine illustra-
tion of how Government could and should function in an emergency.
That moratorium which was put on on the 7th of March was mod-
ified from time to time in New York and went off entirely in Sep-
tember, and there wasn't a ripple when it went off — such as when a
closed bank opens sometimes there might be a new run; nothing of
that sort at all.
Mr. .Henderson. Did the action taken by the leading State, New
York, tend to uniform action on the part of other States ?
Mr. Van Schaick. Well, I might say this, that New York worked
very closely in touch with the other States in that matter. The ex-
ecutive committee of the Commissioners met ; I think the convention
met on this particular subject, and after we found that various States
had different forms of moratoria, we made an attempt to bring about
uniformity, and at that convention, I think it was in July of that
year, 1933, we met and had what we termed-^there was a little com-
promise in some respects, but pretty generally — the model plan. It
helped bring about more uniformity. What we did in New York, we
didn't quite go along; we came back and liberalized ours to be in
accord with that, but where we were more liberal than the first
one, than the convention was, we stood on the one we had pro-
mulgated with the amendments.
Mr. Henderson. Mr. Van Schaick, I have been asking a number
of insurance men a question on size. This is the first time we have
had an insurance executive who was also on the regulatory side at
one time. Do you have any observations as to whether or not the
job of supervising is increased by the magnitude and size of the
companies?
Mr. Van Schaick. Oh, I would categorically answer that ques-
tion— perhaps I should explain it this way, if I understand your
question. The greater the insurance institution — ^I am speaking of
15126 CONCENTRATION OF ECONOMIC POWER
the insurance institution as a whole — is increased the more the super-
visory responsibility is increased.
Mr. Henderson. I can see in this period of moratorium, because
of tlie relation of its assets and investments to the whole question of
markets and current values, that it is an important item. But in
the ordinary days, is there any increase in the problems according
to the individual size of the company, other than just the sheer
increase in the burden of work ? That is, if one company is 10
times the size of another, does it merely take 10 examiners, .or are
there other problems that flow out of the size ?
Mr. Van Schaick. I don't think of any just now. Commissioner
Henderson. I do have a comment on that general subject that I
would be willing to make, which I have sketched out here, which
is very brief.
I was asked that question, and I said that the greatest drawback
to large size as I have seen it rests in the difficulty of governmental
supervision. I do not mean that large companies take a less amount
of supervision than small ones, which is not the case, but rather the
staggering size of the task of an examination and the length of
time it takes to complete such examination after it is started.
An example in another field might be pointed out in reference to
the large title and mortgage companies. When trouble came and
present current information as to financial condition was needed from
day to day, the staleness of periodic statutory examinations was a
great drawback. It is true that some of that was due to an inade-
quacy of staff in. regard tO' numbers, but the larger the companies
in that field the more difficult it was to have current information as
to their condition.
I never found any lack of cooperation in supervision because of
size, nor any tendency to overawe State departmental employees.
Such employees are not of the character to be overawed, anyway.
By and large the large companies were unusually ready and willing
to give any help that the Department asked.
As to limit to ultimate growth — this was a question which was
discussed informally — and where that point should be, I cannot say,
as I have given no real study to the problem. As to the difficulty
of and length of time jiecessary for examinations, that calls for
increased facilities in the respective insurance departments.
In the moratorium, I might say that in some respects, size was
helpful.
Mr. Henderson. The fewer the people you had to deal with, the
more quickly it was possible to deal with them ?
Mr, Van Schaick. Made it mor.e quickly, but in the East here
with our larger companies, we didn't have as great a problem by
reason of that bank holiday as in some other sections of the country.
That would be as far as I would went to comment on that, but it
is true that size, then, was very helpful. There is a withstanding of
adverse conditions, and I think also that the matter of size is helpful
on this very problem that we have been discussing before we got
diverted, on handling a real estate and trouble mortgage problem.
The Vice Chairman. The witness made a very interesting state-
nient which I would appreciate his amplifying, that iSj the size and
bigness of these eastern companies increased their ability to with-
stand the shock of that condition. I believe that is the statement.
CONCENTRATION OF ECONOMIC POWER 15127
Mr. Van Schaick. I made that statment, and I perhaps, if I had
stopped to think, would have hesitated, because it put me, in the
position as one connected with a large company of saying something
that perhaps might be inappropriate.
The Vice Chaikman. I don't think any member of the committee
would have any suspicion that that would probably be true. As one
member of the committee, I am interested in that, how it comes about
that a big company, which has possibly, if I understand it, propor-
tionate liabilities to little companies, could withstand the shock of an
emergency more easily than a relatively small company could with-
stand a comparatively small shock.
Mr. Van Schaick. I can't tell you, and I never have studied it,
Congressman Sumners. All I can tell you is our observation at the
time, and I don't want to be in the position of differentiating between
the companies that were under my jurisdiction at the time. They all
came through in good shape.
The Vice Chaieman. If you would rather not go into it, I won't
press it.
Mr. Van Schaick. I don't want to be in the position of dodging
any question, but I would hate to get into a discussion of the relative
merits of large companies and small companies. I know many small
companies of wonderful standing.
The Vice Chairman. What I was trying to get at was how it
comes about the element of size enables an insurance company to
withstand better than 'a small company. I am not asking my ques-
tion very well. But how does it come about with reference to a gen-
eral condition. Nation-wide, that the big company withstands the
shock better than the little company. If you would rather not go
further into it, all right.
Mr. Van Sjchaick. I would say this, that I think there ordinarily
is a cushion for the shock. It is hard to explain it, because relatively
you would say that the cushion ought to be ample for the smaller
shock that comes to the smaller company.
The Vice Chairman. That is what struck me.
Mr. Van Schaick. I think it works the other way. I think you
have got to have enough of a cushion to save the bump, and then a
relative size of the cushion comes in afterwards.
The Vice Chairman. If a small fellow fell on a little cushion, he
wouldn't necessarily mash it down any further than a big fellow
on a big cushion, would he? I won't press it any further.
Mr. Van Schaick. I am sorry not to be very satisfactory in my
answer to you, but I really don't want to go into that.
Mr. Gesell. Would it help if you defined what you mean by a big
company and a little company?
The Vice Chairman. I know what that is, unless you want to help
counsel.
Mr. Gesell. That's all that is necessary. I will ask you about
it later.
Senator King. Isn't it a fact that during the depression when it
hit us in 1932 and '33, the littl6 banks in the country met the on-rush
with less ability than the big companies? The little banks, as I
recall, thousands of them failed; they didn't have the cushion, they
didn't have the resources, they didn't have the securities which the
larger companies had.
15128 (30NCENTUATI0N OF ECONOMIC POWER
Mr. Van Schaick. I think that is a fair statement.
Mr. Gesfxl. I have no further questions of this witness.
The Chairman. That seems to me to be a very important question.
It may indeed be the most important of all the questions that are
coming before this committee. There alwa^j's has been a great deal
of discussion with respect to the relative social value of size as such.
Are we to gather from your statement that you have the impression
that size is of itself socially advantageous, and when I say socially
advantageous I mean from the point of view of all who are con-
cerned, because obviously it is better for policyholders and for thpse
who are involved in financial dealings of any kind with an insurance
company to have a company which can withstand shock than a
company which is less likely to withstand shock. Now, do you wish
us to get the impression from what you said that it is your opinion
that size in itself is an advantage?
Mr. Van Schaick. About the only comment that I would want to
make, Senator, is that size has many advantages, but beyond that, I
would prefer not to go into the discussion of the relative advantages
one way or the other. I am familiar with the general discussion on
the matter of size, and it is a pretty long and pretty large subject.
About all I can say iSj size has, to my observations, many advantages,
and I referred to it incidentally in the moratorium matter because
it was quite apparent then.
The Chairman. You know we are constantly, those of us who
are in the legislative branch, running into various phases and aspects
of this question. For example, there is now pending in the confer-
ence committee of the House and the Senate what is known as the
transportation bill. As it passed one of the Houses, the Senate, it
would authorize the Interstate Commerce Commission to take traffic
away from large railroads in order to give that traffic to small rail-
roads. In other words, this bill now in Congress grants to a com-
mission of the Federal Government the power to take business away
from big through routes and give that business to small and weak
short routes. Now, there is obviously an exercise of government
power of tremendous significance. The demand that this authority
shall be given to the Interstate Commerce Commission to take away
the business of the big cpmpanies and give it to the little companies
comes to Congress from the executives of the little companies, I
haven't a doubt in the world that most of those executives who are
making that demand upon Congress believe that they don't want
Government interference with business, and yet they are asking for
just exactly that when they ask for legislation of this kind.
Therefore, I say to you, it is a matter of far-reaching importance,
but I gather from the qualifications that you have now made to your
testimony you do not desire this committee to say or to draw the
conclusion that out of your experience as a life-insurance executive,
and as superintendent of insurance for the State of New York, that
it is your opinion that size is definitely more beneficial to all the
factors involved. You merely say that it has factors of advantage.
Mr. Van Schaick. Yes ; and I think involved in the question gets
to be what you mean by size and where are you leading and all that.
I think there are so many factors in the matter that I would prefer
CONCENTRATION OF ECONOMIC POWER 15129
to leave what I said as I said it. Perhaps as I read it I will wish
that I had availed myself of your opportunity.
Senator King. I am compelled to go to another committee and
before leaving I want to express appreciation of the testimony given
by Mr. Van Schaick.
Mr. Geselx,. Do you feel there are disadvantages to size?
Mr. Van Schaick. Yes; there are disadvantages to everything in
this world, as far as I can see.
The Chairman. No other witnesses this afternoon?
Mr. Gesell. No other witnesses this afternoon.
Congressman Harrington. Mr. Van Schaick, wouldn't you say the
possible advantage was the management factor in determining the
ability of a company, either large or small, to withstand what we have
gone through rather than size?
Mr. Van Schaick. Well, I can answer your question, Congressman,
by going back again to the old days, if I may, and perhaps it would
be more appropriate for me to do so by saying wliat I said on more
than one occasion that the greatest asset that any company could
have was good management and it didn'it appear in the balance sheet,
but nevertheless was the most important thing involved in the whole
set-up of a great financial institution.
. That is just a general comment which I have made time and again,
and I stand by it.
The Vice Chairman. Let me ask this question: The big compa-
nies— I assume that one of the things which you would enumerate,
if you did enumerate at all, would be that a big company probably
is m a better position to employ the better managel-ial ability, better
trained managerial ability than small companies?
Mr. Van Schaick. Well, it is difficult to answer that "yes" or "no,"
Congressman, because I know so many wonderful people in small
companies doing a perfectly wonderful piece of work. On the other
hand, in my own two departments I have a feeling that I can reach
out and get the very best people available and it gives me a great
deal of satisfaction, but that does not reflect in any way upon the
tremendously fine caliber of employees of companies much smaller
than the one I happen to represent.
The Vice Chairman. Would you be able to enumerate these many
advantages which are associated with big companies ?
Mr. Van ScHaick. I don't know as I would want to attempt that.
The Vice Chairman. I was wondering, without pressing it too
much, if you would be able to help us on that. This is serious. Sena-
tor O'Mahoney, as everybody else here, knows we are constantly con-
fronted with that very same proposition.
Mr. Van Schaick. Now, Congressman, just let me make this state-
ment and I hate to be so unsatisfactory as a witness. I was asked
the question if I could make any comment on size. Here I am, a
vice president in charge of the real-estate and mortgage loans of one
of the large companies. It would be totally inappropriate for me
to go into the relative matters of this argument for size or that argu-
ment against size, but in order not to turn down the request entirely,
I said I would make a comment upon what did seem to be appropriate
and 1 pointed out in the memorandum which I read, the meager
15130 CONCENTRATION OF ECONOMIC POWER
comment that I felt would be appropriate and that I could make,
but some time when you and I are at dinner, we will discuss this
question of size but I don't think
The Vice Chairman (interposing). What I was trying to do was
to give you a chance to brag on your company with the hope that I
might get an answer.
Mr. Van Scha^ck. I have the invitation but I don't want to do it.
The Chairman. We are very much indebted to you, Mr. Van
Schaick,
Mr. Van Schaick. Thank you, and I appreciate very much the
courtesy and it has been a grand time.
The Chairman. Before recessing, the Chair wishes to call attention
to the fact that late in January, on January 22, to be exact, as a
result of inquii-ies which were coming to the committee, to the exec-
utive secretary and to the Chairman, from members of Congress,
Fith respect to this insurance study, the Chairman wrot^ a letter to
Congressman Ed. Taylor in which this paragraph appeared
[reading] :
Several months ago this committee issued a public invitation to industry to
make presentation to the committee of its own views in its own way. This
invitation was accepted by the oil industry and by the steel industry. I think
an examination of the record in the former case will support the statement that
a more complete and authoritatiye study of the oil industry has never been
made. I trust that the same may be true of the steel industry the hearings
upon which ire still in progress.
This invif ition has been open to the insurance industry. It is still open
and at the next executive meeting of the committee it will be my purpose to
propose that a special invitation be extended to tlie insurance industry to
present to this committee its own story in its own way. In order that you may
know the manner in which such hearings are conducted, I am attaching a copy
of the procedure which the committee has laid down. * * . *
On February 6, the committee held an executive meeting, at which
I carried out the suggestion which was contained in my letter to
Congressman Taylor. And on the next day, as chairman of the com-
mittee, I issued a statement detailing -what had happened at the meet-
ing. From this statement I read the following paragraph [reading] :
Another matter which the Committee considered was the criticism which has
been made to members of Congress and others about the insurance hearings.
This criticism has been unfair and untrue.
That, of course, was an expression of opinion on the part of the
chairman.
I may make the qualifying statement here that I felt, and still
feel, that most of this criticism has been based upon the complete
misapprehension of the purpose of the committee and of the method
which it has employed. But be that as it may, continuing the quota-
tion [reading further] :
"As I have said, all insurance witnesses have had a full opportunity to
make any statement they desired and to be accompanied by counsel while
testifying. But, so there will , be no possible complaint, the Committee has
authorized me to direct the attention of the insurance industry to the fact
that they may make an application to be heard in rebuttal of the testimony
so far introduced before the Committee. I now wish to assure the companies
that their application will be accepted within the limitations of our pro-
cedure, as followed in the milk hearings, the oil hearings and the latter
part of the steel hearings, where the United States Steel Corporation pre-
sented its own research."
CONCENTRATION OF ECONOMIC POWER 15131
On April 10, 1939, when the committee adopted this procedure
witli respect to industry, I issued a statement from which I desire
to make several quotations [reading] :
"To indicate the manner in which this program has been developed, it
may be stated that Mr. Axtell T. Byles, President of the American Petroleum
Institute, the largest trade association in the oil industry, has consented to
seek the cooperation of various leaders in the industry. These persons will
be given the opportunity to present prepared statements to the Committee
and then will be subpoenaed to appear in person at the projected hearings.
The Committee will call other witnesses in order to make certain that an
adequate presentation is made of all available information with respect to
the manner in which the oil industry is conducted. * * *
"The Committee's offer is made without limitation as to the content of the
testimony or reports, except that the material presented includes data re-
quested by the Committee and that opinions, including any criticism that
may be made of existing governmental or intra-industry policies, be supported
by actual evidence. * * *
'It is the hope of the Committee that the presentation of the oil hearings — "
I will omit that.
Written statements will be filed with the Committee at a specified date in
advance of hearings, so that the members of the Committee and its staff
may thoroughly review the material which is to be presented. The witnesses
will then be informed well before the hearings as to the general nature of
the questions to be asked by or on behalf of the Committee.
The order of appearance of witnesses will, of course, be directed by the
Committee, and every effort will be made to arrange the hearings in such
a manner as to afford the most effective and fair presentation of conflicting
views.
It should be understood that the Committee has not as yet planned similar
presentations by any other industry or business. It will, however —
and I read this in order to make clear that this invitation has been
open —
entertain applications for similar hearings. It was felt that the oppor-
tunity should be offered, leaving entirely to business and industry the decision
whether this procedure would be helpful.
I call the attention of the committee and those who are. assembled
here to the fact that this invitation is still outstanding and that
the insurance industry may take advantage of it if it so desires.
Naturally, there is a limit upon our time. The committee has hoped
that its public hearings would be concluded by the termination
of this session of Congress and that its report would thereafter be
prepared. The time between the adjournment of this Congress and
the end of this year will scarcely be more than adequate to review
all of the material which has been brought in, so I make this addi-
tional suggestion, that if the insurance industry desires to take
advantage of this opportunity, the application should be presented
to the committee, let us say, within the next 10 days or 2 weeks.
Mr. Gesell, do you have any comment?
Mr. Gesell. Not at all.
The Chairman. The committee will stand in recess until tomorrow
morning at 10 : 30.
(Whereupon, at 4:05 p. m., a recess was taken until Wednesday,
February 21, 1940, at 10:30 a. m.)
INVESTIGATION OF CONCENTEATION OF ECONOMIC POWEE
WEDNESDAY, FEBRUARY 21, 1940
United States Senate,
Temporary National Economic Committee,
Washi/ngton, D. C.
The committee met at 10:45 a. m., pursuant to adjournment on
Tuesday, February 20, 1940, in the Caucus Room, Senate Office Build-
ing, Senator Joseph C. O'Mahoney presiding.
Present: Senators O'Mahoney (chairman), and King; Messrs.
Henderson, Pike Lubin, Kades, and Brackett.
Present also: Jesse Jones, Administrator, Federal Loan Agency;
James V. Hayes, Department of Justice; Gerhard A. Gesell, special
counsel; Ernest Howe, chief financial adviser; and Helmer John-
son, attorney. Securities and Exchange Commission.
The Chairman. The committee will please come to order. The
first witness?
Mr. Gesell. The witness today is Mr. F. W. Ecker.
The Chairman. Will you be sworn, please? ;
Mr. EcKE§. I have been sworn.
Mr. Gesell. That was in connection with housing?
Mr. EcKER. That is right.
TESTIMONY OF F. W. ECKER, VICE PRESIDENT, METROPOLITAN
LIFE INSURANCE CO., NEW YORK, N. Y.
Mr. Gesell. For the purposes of the record, will you state your
name and your position with the Metropolitan, Mr. Ecker, please?
Mr. Ecker. My name is F. W. Ecker. I am vice president of
Metropolitan Life Insurance Co., and have general supervision of
the investments of the company, under the direction of our chair-
man and president.
Mr. Gesell. How long have you been the vice president in charge
of investments?
Mr. Ecker. Since 1936.
Mr. Gesell. Prior to that time, what was your position' in the
company ?
Mr. Ecker. Prior to that time I was treasurer, and prior to that
time assistant treasurer.
Mr. Gesell. Now, you have in your charge, I understand, both
the city mortgages and real estate and the bond portfolio of the com-
pany.
Mr. Ecker. Under my general supervision; yes.
15133
] 24401 ^41— pt. 28 29
15134 CONCENTRATION OP ECONOMIC POWER
Mr, Gesell. Well, now, I wanted first to consider with you for
a short time the city mortgages and city real estate of the company.
Perhaps you might turn to the table and get some idea of the ac-
count. Table 104 indicates that the urban mortgages and real estate
of the company represent approximately 23.9 percent of the total
adhiitted assets as of December 31, 1938.^
Mr. EcKER. That is farm and urban,
Mr, Gesell. That is urban entirely, page 104,
Mr. EcKER. Table 104 in the book that I have is mortgages, fore-
closed liens, and real estate both farm and. urban,
Mr. Gesell. The total for both farm and urban is 28 percent.
Mr, EcKER, That is right.
Mr, Gesell. The statement represents both farm and urban. The
urban represents a little over 23 percent.
Mr. EcKER. I would say that was correct, I haven't made a cal-
culation.
Mr, Gesell. The point I was attempting to make from this table
was that the city mortgage and real estate represents much more of
the company's portfolio than does the farm investment concerning
which we were having some testimony last week.
Mr, Ecker. Yes. Our farm investment is only about 3 percent of
the assets.
Mr. Gesell. Is your city mortgage account expanding at the pres-
ent time?
Mr, Ecker, Right at the present time I would say it is about static.
Of course, there was quite a period of time where it was declining.
It is about even now.
Mr. Gesell. Table 194 - would indicate that you had urban mort-
gages of $1,169,000,000 in 1929, and that at the end of '38, you have
$902,000,000, During the period from '36 to '38, your account ap-
pears to have remained pretty well static.
Mr, "Ecker. Yes,
Mr. Gesell, Why is that, Mr. Ecker? I assume that you still
want to loan on urban properties?
Mr, Ecker. Oh, yes ; there is a table 'here ^ that indicates the
amount that we have loaned. Of course, that is due to the economic
conditions with which we are all familiar. There have been, of
course, numerous foceclosures.
This table does not include our contract sales which in a way are
a type of mortgage. If you add our real estate and our mortgages
and contract sales, you will find that the decline in the total picture
is not very great.
Mr. Gesell, How much money are you investing in city mort-
gages— new money — in recent years, approximately how much a year ?
Mr. Ecker. The figures are right here. Table 196, I think, covers
it,3 You see we put out in '38 about $55,000,000, $60,000,000, sixty-
odd million dollars in '37, $31,000,000 in '36,
Mr, Gesell. How much would you like to get out ?
Mr, Ecker. Oh, we would like to improve that amount. We would
like to put more out.
' See Hearings, Part 10-A, p. 104.
»See Hearings, Part 10-A, p. 194.
' Ibid., p. 106.
CONCENTRATION OF ECONOMIC POWER 15135
Mr, Gesell. In terms of the total portfolio, what percentage do
you feel should rest in city mortgages and real estate?
Mr. EcKER. Under normal conditions, we have put approximately
50 percent of our available funds in mortgages and apprbximatelv
50 percent in bonds and stocks. At the present time the New York
law, I believe, limits us to a total holding of 40 percent, as I recall it.
Senator King. Of real estate?
Mr. EcKER. No; mortgages.
Mr. Gesell. And the mortgages and real estate now, as we saw,
are about 28 percent.
Mr. EcKER. That is right.
(Senator King assumed the chair.)
Mr. Henderson. Mr. Ecker, does that 40 percent include also what
you took ; reduced to possession ?
Mr. Ecker. No; that is the mortgages.
Mr. Gesell. In other words, if conditions permitted, you would
have a substantial fund which you wished to place in city property ?
Mr. Ecker. Oh, yes; if there were a demand, but there has not
been a demand in recent years. As you know, and as Mr. Henderson
knows, industry has not been expanding and demanding new capital
for expansion purposes, and it has been much the same in the mort-
gage field.
Mr. Gesell, I notice, for example, that you are one of the com-
panies which has not any investment in F. H. A. mortgages.
Mr. Ecker. -That is correct.
Mr. Gesell. That is a question I have raised with other witnes^S;
I would like to have your reason why you haven't gone into that
field.
Mr. Ecker, We have, of course, considered this subject from time
to time. Our general policy is this, that we will consider those
mortgages, and we have considered them from time to time. Gen-
erally speaking, on the low-cost-housing type of mortgage we have
preferred to make our contribution in that field by makmg a direct
investment, owning the entire property and doing that rather than
to make a 90-percent loan with somebody else doing the constructing,
and so forth. We felt it was a safer and sounder type of investment
for our company to make.
Mr. Gesell. And you have, for that reason, turned to housing
developments ?
Mr. Ecker. Yes; and of course we have been in that field for a
good many years. We were one of the earliest companies to make
loans to the state housing commissions for low-cost housing, and as
you also recall, I testified too, when I was down here before, we
built in 1922 the largest low-cost-»housing development that had
been built up to that time.^
We did that as a demonstration that private capital could go into
that field.
Mr. Henderson. Mr. Ecker, when yt)u go into those low-cost
housing projects, I mean some of your more recent ones, there is not
only new money, that is, it is not a refunding operation at all
Mr. Ecker (interposing). That is right.
* See Hearings, Part 11, p. 5129 et seq.
15136 C0NCE>TRAT10N OF ECONOMIC POWER
Mr. Henderson. But you get a tremendous amount of secondary
and tertiary spending out of that ; don't you ?
Mr. EcKER. Yes; undoubtedly.
Mr. Henderson. That is, if you are going to get into economic
terms, there is a multiplier to it?
Mr. EcKER, Undoubtedly. We felt we were doing a very sound
thing all around. In the first place making a sound investment for
our company ; in the second place we were helping the unemplo3nnent
situation which was bad; and in the third place we were offering peo-
ple of modest means the most attractive homes to live in that I believe
nave ever been offered.
Mr. Henderson. And one of the additional spendings required
is all the utilities and roads — I mean in some of the projects — streets,
paving, extension of gas lines, extension of electric-light lines; that
is, there is a lot of spending that isn't apparent, particularly in your
more recent developments?
Mr. EcKER. Well, in all developments of building, it is one of our
primary industries and it is one of our most important industries,
and the development goes right back through the manufacturer, in
the first place the retailer and the manufacturer, and back to the mine,
so to speak.
Mr. Henderson. Have you ever made any calculations as to what
the multiplier is on the money put up ?
Mr. Ecker. I have not. The W. P. A. made some calculations on
that, but I haven't. One of the governmental departments did that.
Mr. Henderson. I think the W. P. A. did.
Mr. Ecker. Didn't they say 5 to 1 ?
Mr. Henderson. It runs pretty high. It is higher than the multi-
plier generally assumed on Government spending because of the
peculiar nature of the project. When you get a big project, you
na^e in reality to build a new city in some of the cases.
Mr. 'Ecker. Yes, sir.
Acting Chairman King. Like a stone thrown into a silent mill
pond ; the ripples extend clear to the periphery.
Mr. Ecker. You can't tell how far they go.
Mr. Henderson. I think particularly in this case. Senator, a lot of
the investments are really reinvestments ; isn't that true ?
Mr. Ecker. As far as bonds and stocks are concerned, almost
entirely.
Mr. Henderson. There is no ripple produced except whatever there
is in the exchange process that goes on about 10 o'clock some morning
and after that the visible evidence of it is practically gone.
Mr. Gesell. I think the committee might be interested in table 258,
which shows for the 26 companies investments in housing projects.^
That table indicates that the Metropolitan and the Prudential are the
only two companies which have gone into that field, and the Metro-
politan is in to a greater extent than the Prudential, taking into
account what the value of the housing project will be when their con-
struction is completed. That is an investment of $10,000,000, is
it not?
Mr. Ecker. Of course this was up to the end of 1938. You can
see that we put into our Long Island City housing, as it is called,
my recollection is about 7i/^ million, which is gradually being amor-
* See Hearings, Part 10-A, p. 258.
CONCENTRATION OF ECONOMIC POWER 15137
tized. In 1938, we just at that time were getting started in this other
situation, our investment there, of course, will be considerably higher
than this before we get through. My recollection is it is around
25 million in that situation alone today. ,
Acting Chairman King. For my information, do yon buy a tract
of land and then build the houses and then sell to persons who ^esire
them?
Mr. EcKER. We buy the tract of land, yes ; and then in this instance
we have constructed apartments which will be rented to some 42,000
people, probably.
Acting Chairman King. How does the tenant finally obtain title,
- if he does ?
Mr. EcKER. Oh, no ; we expect to hold this. We have invested in
this as a permanent investment. It was under a special act of the
legislature which gave us the right in this type of imdertaking.
Acting Chairman Kjno. Benefits then derived by the occupants
are low rents and permanency if he desires to remain there.
Mr. EcKER. Yes, sir; and, we believe, a good landlord.
Mr. Henderson. Did you say 42,000?
Mr. EcKER. Yes, sir.
Mr. Henderson. It suggests to me a little survey I made once in
North Carolina of 30 or 4D cities, somewhere right in that range of
population. So you get an idea of what is done in one of these
developments.
Mr. Gesexj.. What are your plans "for the future with respect to
these housing developments, Mr. Ecker?
Mr. Ecker. Mr. Gesell, of course, that will depend on our expe-
rience, an(J I don't mean by experience that we have got to wait a
long time. We want to get this to the point where we are sure,
from a practical demonstration, that it is tne success that we believe
it will be ; and, if that is so, I anticipate that we will expand further
in that field.
Mr. Gesell. It is indicated by table 260 that you have had a very
substantial return on the housing projects; over 6 percent in 1938.^
So if that holds true I assume that you will expand ?
Mr. Ecker. I presume so.
(Senator O'Manoney resumed the Chair.)
Mr. Gesell. And in expanding will you go beyond the State of
New York?
Mr. Ecker. I would anticipate so; yes.
Senator King. Have you figured the obsolescence in computing
your profits?
Mr. Ecker. In this figure of 6^ percent, no, sir ; this is a gross figure
before taking into account amortization of the investment.
Mr. Gesell. I take it from your hesitancy concerning your future
plans that you consider this still in the experimental stage.
Mr. Ecker. I wouldn't say so, and yet on things of this sort you
can't be absolutely sure until you see just what does happen. There
are, of course, in all new undertakings many a slip between cup and
lip.
Mr. Gesell. I understand your position to be that you have de-
cided on this big housing project development in preference to
» See Hearlnga, Part 10-a., p. 260, *
15138 CONCENTRATION OF ECONOMIC POWER
F. H. A. mortgages, feeling that there is greater good accomplished
in the housing development ?
Mr. EcKER. That is one of the reasons.
•Mr. G'esell. I take it implicit in that statement is your feeling
that a company such as yours has the responsibility of putting out
some of the* mortgage money, so-called, into a field which will be of
benefit, housing-wise, to the people who are policyholders?
Mr. EcKEK. Oh, yes; both policyholders and the country which
are, of course, to a sizeable extent the same. Our first consideration
is safety of principal, and after that we do certainly take into con-
sideration the social aspect involved. We went into the general field
of housing in 1920. At that time you will recall there was quite a
shortage of housing, and particularly for the people of moderate
means. At that time we undertook a program of setting up through-
out the country a group of mortgage-loan correspondents, built up
some 77, and we now operate through those mortgage-loan corre-
spondents in some 1,200 communities, making loans on homes and
smaller apartments. From 1920 on we have put out in that field
about a billion and a quarter millions.
The Chaibman, What is the type of these correspondents? ,
Mr. EcKEB. Well, they are real-estate firms, trust companies, indi-
viduals, in some instances ; people who have had experience in urban
loans.
The Chairman. In how many instances are they individuals, and
in how many instances are they corporations?
Mr. EcKER. When I say "individuals," I am speaking of real- estate
firms. I don't believe I can answer that question.
The Chairman. You have some trust companies, you say?
Mr. EcKER. Yes, sir.
The Chaibman. Banks?
Mr. EcKER. Yes.
The Chairman. Would you say that they constitute a substantial
proportion, or a small proportion, or a large proportion?
Mr. EcKEB. I think as the development started at first they were
a fairly substantial proportion ; I am not sure that that is so today.
Our idea at first was to go out through the country and find organi-
zations that had had experience in making sound mortgage loans of
a trust character.
The Chaibman. You were seeking to find organizations?
Mr. EcKEB. That is right; yes — people with experience.
The Chaibman. But my thought was to determine whether you
were working through individuals or through organizations ?
Mr. EcKEB. Both, Senator, is all I can answer.
The Chaibman. I wonder if it would be inconvenient for you to
have the facts examined at your office.
Mr. EcKER. No; I have tliem right here. We can give you the
facts and will be very happy to.
Of course, there are individuals which operate under firm names.
I would imagine that most of them are either firms or corporations,
but in some instances there are just a few people in the corporation,
^s what I mean. Here is the entire list of the seventy-seven, I believe.
Mr. Gesell. You are interested in a break-down really of that list,
are you not?
CONCENTRATION OF ECONOMIC POWER 15139
The Chairman. That is right.
Mr. EcKER. Would you like to see the list?
The Chairman. Thank you.
Mr. Kades. Are any of the correspondents on a salary basis, Mr*,
Ecker? _ ^^"'
Mr. Ecker. No, sir.
Mr. Kades. Do you consider that a desirable wa^ of making mort-
gage loans, to have correspondent^ on a salary basis?
Mr. Ecker. Well, our attitude on that is this: You understand —
or perhaps I haven't made it clear — ^in addition to our correspond-
ents we have field offices, some 11 field offices outside of the Jiome
office which are in key cities throughout the country, and those men
are on salary basis, and their job is to check on the work of the
correspondents, you see.
Mr. Gesell. The correspondent, I understand, is the fellow who
makes the loan, and you rely pretty much for the servicing of the
loan on your branch managers?
Mr. Ecker. No, sir ; the correspondent makes the loan and does the
servicing.
Mr. (jesell. What does your manager do ?
Mr. Ecker. He does appraisal work, and where we have to fore-
close, he goes over the situation with the correspondent and makes his
recommendations along with the correspondent as to what rehabilita-
tion work must be done. He follows up trouble cases. There are
innumerable details that a branch manager has to take care of.
Mr. Gesell. How many loans — and I am now back in the general
mortgage account — what percentage of your loans are for construc-
tion purposes and what percentage of them are on going buildings,
have you any idea with respect to that ?
Mr. Ecker. Yes; I have those figures. There are a good many
figures involved here and I don't believe we have that break-down
in mind, but undoubtedly I can get it for you.
Mr. Gesell. I was interested more in a rough estimate than I was
in any precise figure.
Mr. Ecker. Of course, it is true also that our figures might not
indicate the number that are construction loans, because ordinarily
out throughout the country the loan, or at least the arrangement
for the building loan, is made hj the correspondent and we take
up the loan on completion. So it is because the correspondent is
assured of our money that he can go ahead and make the building
loan.
Mr. Gesell. And he advances money for construction purposes?
Mr. Ecker. Yes ; that is true ; he or someone else in the community.
The Chairman. An examination of the list which Mr. Ecker
has handed me shows that they are all corporations.
Mr. Ecker. They may be coi-porations, but I think you will find —
I certainly don't want to mislead you on that, but it is my definite
impression that among these firms that are corporations there are
individuals; I mean they are real-estate firms.
The Chairman. I have no doubt of that, Mr. Ecker. I think
that is quite apparent. In many cases a real estate agent incor-
porates himself. There is no question about that.
Mr. Ecker. Yes.
15140 CONCENTRATION OF ECONOMIC POWER
The Chairman. But the great preponderance of your corre-
spondents, from that list, appear to be mortgage companies, banks
and trust companies.
•Mr. EcKER. That is correct; yes.
The Chairman. In other words, it is another phase of the insti-
tutional haridling of this financial business.
Mr. EcKER. That is true, Senator. We went out to pick organi-
zations that had had experience in this field, and that is where we
found them.
The Chairman. The reason I asked the question is because the
longer this study has progressed, the more convinced I have become,
personally — and I am speaking now only for myself — that the cen-
tral question in our modern economic problem is merely the adjust-
ment of an individual to the organizations which carry on our eco-
nomic life, and that is a question which it strikes me can be solved,
I rather think, comparatively easily, but we have^ failed to recogfiize
the powerful fact in our economic life that the corporation as ^
corporation, an organization, in other words, occupies the dominant
position, and we are constantly trying to fit people into these organi-
zations.
Pardon the interruption.
Mr. Hayes. Mr. Ecker, do you know how many States there are
which have adopted legislation similar to that in New York which
would permit you to enter into housing projects comparable to
those you have entered into in New York ?
Mr, Ecker. No; I would have to ask counsel on that. I am not
familiar with that.
Mr. Hates. It is my impression that very few States have done so.
Mr. Ecker. I think so, up to date, but this may very well be a
development.
Mr. Kades. Mr. Ecker, I understood Mr. Rogers to say the other
day that Metropolitan had shifted from the correspondent system
of making loans secured by farm mortgages to branch offices.^ That
shift evidently hasn't taken place in connection with your urban
mortgages. Would you be able to elaborate on the reason for shift-
ing in one instance and not the other?
Mr. Ecker. I think I can. The operations of the two depart-
ments are somewhat different in this way. I think Mr. Rogers
testified to the fact that the real reason why they shifted there
was because of the importance of real estate holdings, and the neces-
sity of farm management, and since they have to build such a size-
able organization to do that, that making mortgage loans as well
could be handled through those same offices.
You will recall, however, that he did testify to the fact thai the
mortgages were brought to them by the local organizations in a
wav similar to our correspondents.
In like manner, in our urban mortgage field we have built up
our field offices which do more or less the rehabilitation work, and
so forth, which is done by our branch office system in the farm
mortgage field. Does that answer your question?
Mr. Kades. Yes.
See testimony of Mr. Qlen R. Rogers.
CONCENTRATION OP ECONOMIC POWER 15141
Mr. Gesell. Now, continuing, let's run through these tables for
a moment, Mr. Ecker. Table 201 indicates that you have a rather
heavy concentration of urban mortgages in the city of New York,
some 48 percent of your mortgages being in that city, or $427,000,-
000.^ I wondered if you had some comment you wished to make
with respect to that ?
Mr. Ecker. It is in line with our general policy of investing our
funds where our funds come from.
Mr. Gesell. And your investment there would be the result of
the fact, then, that that difference, that 48 percent of your policy-
holders come from that area.
Mr. Ecker. No ; this is only a portion of our investments.
Mr. Gesell. I realize that.
Mr. Ecker. The best way of indicating what the policyholders'
interest is in a certain State, for example, is to look at the reserve on
business in force in that State. In New York State, our reserve on
business in force is over $1,000,000,000.
Mr. Gesell. That doesn't answer my question at all.
Mr. Ecker. I am sorry.
Mr. Gesell. I was trying to find out why you had so much urban
mortgage money in the city of New York. I quite understand the
necessity of keeping your reserves and your premium in balance, but
you have more money in New York real estate, as far as your urban
mortgage account is concerned, than you do in any of these other
big centers.
The Chairman. What page are you looking at ?
Mr. Gesell. Page 201.^
You understand I am not criticizing. I am asking why.
Mr. Ecker, There are several reasons for that. In the first place,
I think you will find with almost all corporations, that they ordi-
narily have a very sizable percentage of their loans in the immediate
area. It may run from 40 to 50 percent, some place in there. Now,
the reason is obvious, that if it is a good area to lend in and there
is a demand for money there, because it is the most readily super-
vised ; your best people, that is your people at the top of the organi-
zation are more lamiliar with values close by than elsewhere. Also,
I would like to point out
Mr. Gesell (interposing). Now, may I ekborate on that point?
You keep the other in mind. I don't want to cut you short on it.
Now, m effect, that means, does it not, that more city money,
mortgage money, has gone into New York areas because of the fact
that the larger companies all have their home offices in that area?
Mr. Ecker. No — well, I can't speak for the other companies, but
as far as we are concerned, we are very much interested in out of
New York City territories, and if you will notice on one of these
6ther tables you will see that we have loans in — I think it is 44 of
the 48 States."
Mr. Gesell. Very well diversified. However, 74 percent of your
loans is in these particular metropolitan areas shown on table 201,
and 47.7 percent, or almost half, is m the city of New York.* So
> See Hearlnga, Part 10-A, p. 201.
' Hearings, Part 10-A.
> Ibid., pp. 202-206.
* Ibid., p. 201.
15142 CONCKNTRATION OF ECONOMIC POWER
without regard to whetlier you have put money in other States, we
do have a concentration in New York, do we not? I am just trying
to find out why, that is all.
Mr. EcKER. I wouldn't say that that is New York City. I just
don't know without looking into the details further. You will recall
that the question in the questionnaire to which this is an answer, was
worded "the metropolitan areas."
Mr. Gesell. New York metropolitan areas.
Mr. EcKER. Yes. And the same was true of these other cities. I
don't know what has been done in the other situations, but in our
answer to that question, we took the metropolitan area of 50 miles
around New York City. That includes all the loans within that
area.
Senator King. That includes, of course, Broo^ .1, I suppose.
Mr. EcKER. Oh, yes; and Newark. It includes xjans in New Jersey,
you see, within 50 miles, and Westchester, and Long Island, and all
that area.
Mr. Gesell. Is it partly the result, the fact that that is where
your company is, and there is a certain degree of facility in handling
these loans close to the home office?
Mr. EcKER. Possibly in part, but also these other factors that I
have spoken of.
The Chairman. You were about to add one of those factors when
Mr. Gesell pursued this particular line, and you made note of it at
the time, you remember.
Mr. EcKER.' One of the factors at that time I had in mind was to
clear up just what we meant by the New York ipetropolitan area.
Mr, Gesell. What other factors are there? I haven't caught
them.
Mr. EcKER. I did state, of course, as tQ the ftwit that a billion
dollars of our reserve, in excess of that, is in that area.
Mr. Henderson. We certainly ought not overlook the fact that
there are a lot of people who wanted to build buildings in New York,
and I suppose that is a factor.
Mr. EcKER. These investments all the way through follow the
demand. The demand has been in New York City ; it has been else-
where in our instance, too.
Senator King. The population of the metropolitan district of New
York would approximate 8 or 9 million, would it not ?
Mr. EcKER. Yes.
Senator King. That would be a great deal more than in a large
number of States combined?
Mr. EcKER. Yes.
The Chairman. There has been a significant change in the char-
acter of urban development and suburban development in the last
10 years, has there not, with the coming into general use of the
automobile ?
Mr. EcKER. Yes.
The Chairman. People have tended to move out of the central
districts into the surrounding country. Is that not so ?
Mr. EcKER. Yes.
The Chairjman. Has that not had an effect upon this problem of
investment in metropolitan property?
CONCENTRATION OF ECONOMIC POWER 15143
Mr. EcKER. Of course, in this instance all of that is included in
the New York area here.
The Chairman. Of course, it is necessarily in here since the qifes-
tionnaire was dealing with metropolitan areas which recognize no
city boundaries.
Mr. EcKEE. That is right.
The Chairman. Has your experience led you to any judgment
with respect to the effect of this gradual spreading out upon real
estate values?
Mr. EcKER. It is a trend in certain situations, particularly, which
we are watching very closely ; yes, Senator, it is important.
The Chairman. Does this very large percentage of investment in
metropolitan real estate which this table shows reflect a judgment
upon the part of the Metropolitan Life that the metropolitan areas aro
likely to continue to grow and that investments in this type of prop-
ety are, let us say, the better kind of investment ?
Mr. EcKER. Now, Senator, in making all loans, at the time the loan
is made, one of the very, important points that we give consideratioii
to, is the trend in that particular location at that time.
Senaor King. May I ask a question? Has your company taken
into account the fact — I assume that it is a fact — that there is a
tendency now toward decentralization of industry? Too many of
our industries have been packed, if I may use that expression, into a
small area and they have had excessive taxes, and some municipalities,
and I should not indicate them, but I have them in mind, together
with other problems, social in character, have induced, nave they
not, sort of a reexamination of the propriety of the question, the
expediency and the social advp,ntages of decentralization, moving out
into the country and moving from New York City to Philadelphia,
Chicago, some of these big bities, some of the industries out into
the country? ~ .
Mr. EcKER, Yes; very decidedly; that is one of the factors that
has been given considerable consideration. This business of invest-
nient is not a static thing; it is changing constantly in every field
of investment. We have to change along with the times.
The Chairman. But there must be some specific reason, some I
might almost say overpowering reason whidh has impelled Metro-
politan to concentrate so largely in the city of New York. Now, is it
your faith in that city, or what is it ?
Mr. EcKER.-I think you would find that as far as concentration
goes
The Chairman (interposing). When I say the city of New York,
I mean the metropolitan area.
Mr. EcKER. Yes. We had a greater concentration formerly than
we have now.
Mr. Gesell. Now, is one of the reasons that has prompted the con-
centration in New York and the other metropolitan areas in any way
the average size of the loans which you have made ? I have in mind
the figures shown on table 207, which indicate that over 53 percent
of your loans are over a half million ^ollars.^
Mr. EcKER. It is true that there are big buildings in New York, and,
1 See Hearlmrs. Part 10-A. d. 207.
15144 CONCENTRATIpN OF ECONOMIC POWER
consequently, big loans on them in comparison with a number of other
sections of the country.
Mr. Gesell. I was getting at it a little the other way. It is the
policy of your company to make big loans, then I take it those loans
must of necessity go more to the city of New York. I wondered
whether that was the way it worked ?
Mr. EcKER. No; we are anxious to make good loans wherever
they are.
Mr. Gesell. You have an amazing number of loans over a half
million dollars in size.
Mr. EcKER. I question that as far as "amazing number." We have
an amazing number of loans of small amount. We have, my recol-
lection is, 58,000 loans under $25,000; about 50,000 under $10,000.
There is where the amazing number comes.
Mr. Gesell. I wouldn't agree with you, Mr. Ecker, on that. Over
half your loans are over half a million dollars in size.
Mr. Ecker. In amount.
Mr. Gesell. And that means that over half your money that you
are lending on city mortgages is going into mortgages of over this
half -million-dollar amount, does it not?
Mr. Ecker. It is correct according to the table here that approxi-
mately 50 percent in amount of our mortgage-loan portfolio is in
loans of five hundred thousand or more.^
Mr. Pike. That total number of loans wouldn't add up to over 500
loans, as near as I can make it.
Mr. EcKER^ You are probably right. I have some figures on that.
The Chairman. Do you have any idea of the number of loans that
would appear in each of these categories, Mr. Howe ?
Mr. Ecker. I have, so far as our company is concerned.
The Chairman. I think that would be very informative.
Mr. Ecker. As to the loans of $500,000 and more, we have approx-
imately 300 to 350 loans. The bulk is 56,000 loans of under $10,000
each; 1,800 between $10,000 and $25,000, giving a total of 58,622 of
under $25,000.
The Chairman. 56,000 under $10,000.
Mr. Ecker. If you want the exact figures here, 56,822 loans under
$10,000 and 1,800 in the $10,000 to $25,000 class, makes a total of
58,622.
The Chairman. As I understand you now, we have 56,822 under
$10,000, and 1,800 between $10,000 and $25,000.
Mr. Ecker. That is right.
The Chairman. Making a total of 58,622 under $25,000.
Mr. Ecker. That is correct.
The Chairman. What is the total number of loans?
Mr. Ecker. 61,027.
The Chairman. So the difference represents all of the loans above
$25,000.
Mr. Ecker. That is correct.
Mr. Frederick H. Ecker. Might I contribute an observation that
would be in line with your inquiry, and explain this situation ?
The Chairman. We would be very glad to have you.
' Ibid.
CONCENTRATION OF ECONOMIC POWER 15145
Mr. Frederick H. Ecker. Over a period of years there has always
been a supply of local money to take care of the small loans through-
out the country, and as we sought diversification and distribution,
the opportunity was more in the larger loans in locations outside
of New York than for small loans; and our opportunity was to
make the larger loan because local funds did not take care of
the large loans, they took care of the small loans, and, as a matter
of fact, in experience we had a better rate of interest, we had a
larger margin of safety on those loans than on the smaller loans.
The competition in locations away from New York would result
in small loans being readily obtainable only at a higher percentage
of property values than we felt was safe. In the largar loans we
hadn't that competition and that builds up to some extent this record
of a large number of loans in other cities that are in excess of $10,000.
The Chairman. Let me ask our adding machine, Mr. Howe, to
make a little computation for us. On the basis gf the figures which
Mr. Ecker has just given us, it would appear that 58,622 loans have
been made in an amount represented by the addition of the first
four columns on page 207, and 2,405 loans have been made in an
amount represented by the addition of the last eight columns ex-
clusive of the total on that page.^ Do I make myself clear, Mr.
Howe?
Mr. Howe. Yes.
The Chairman. I would just like to have the total of the first
four columns, that is to say, the total amount of all loans in the
$25,000-and-less class, and then the total of all loans in the class
of $25,000 and up as shown on this table.^
Mr. Gesell. While that is laeing done, might I ask Mr. Ecker,
senior, a question along the lines following here. Table 207 sug-
gests to me, Mr. Ecker, that your tendency to go into the larger
loans must not have been entirely the result of the demand, and
prompted somewhat by policy, in view of the fact that a company
somewhat comparable to yours, the Prudential, has so much larger
amounts of its money placed in the loans below $25,000, as you
can see from that table .^ I assume to some extent it is a matter of
management policy and not entirely the result o:^ demand.
Mr. Frederick H. Ecker. It was a matter of demand and oppor-
tunity with us as to what our experience was. ,
Mr. Gesell. "You then did not have any opportunity to go into
these lower loans?
Mr. Frederick H. Ecker. We had more opportunity to go into
the larger loans, because the demand was such that we were able to
place our money in the- larger loans more advantageously at that
time than in the small loans; hut ,w^e have always loaned small
amounts to a large extent, as the number would indicate.
Mr. Gesell. Not to as large an extent as the Prudential, so I am
wondering whether you did not have the opportunity to loan, or
you did not loan because it was a matter of policy ?
Mr. Frederick H. Ecker. It was a matter of supply and demand ;
it wasn't policy,
» Hearings, Part 10-A, p. 207.
a Mr. Howe subsequently submitted the figures. See, infra, p. 15184.
•See Hearings, Part 10-A, p. 207,
15146 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. I wonder why the supply goes to one company and
not to another.
Mr. Frederick H. Ecker. I can only give you our experience.
We had a better rate or interest, more satisfactory security, per-
centagewise, in the larger loans.
Mr. Gesell. So you felt it was a matter of management policy?
Mr. Frederick H. Ecker. Both. The smaller loans were not avail-
able. We found they were not available to the extent the larger
loans were, and I am speaking of conditions that obtained prior
to 1929.
Senator King. Some insurance companies and some lending com-
panies are diverted perhaps in the beginning of their career into
certain fields of activity and other corporations go into other fields,
so that one would have sort of a monopoly in one field and another
a monopoly in the field of very large loans.
Mr. Frederick H. Ecker. Senator, you are exactly right; they
tuild up facilities in different fields. At one time one insurance
company had practically all its loans in municipal and State obli-
gations. They had an organization that was qualified to take care
of those investments. These companies are so large that they have a
big organization to take cate of practically every field, specialists in
the railroad and the municipals and governments, in public utilities,
and so on, covering the whole-field.
The Chairman. The Chair will make note of the fact witn pleas-
ure that Mr. Jones has joined our company. We will be very glad
to have him participate in the' questioning if it so pleases him.
Mr. Henderson. Mr, Ecker, getting at this question Mr. Gesell
asked, Did you have a type.of set-up which would bring the demand for
small loans into your organization or the demand for larger loaiis into
your organization different from some of the others— Prudential, for
example?
Mr. Frederick H. Ecker. The question is one of expanding those
facilities, and it may well be that another company may have ex-
panded facilities along one line more than we have.
Mr. Henderson. What I am getting at, you wouldn't want this
committee to believe that Prudential is any smarter than you are, if
you ever set out to get small loans?
Mr. Frederick H. Ecker. It is quite possible they are ; but, of
course, we use our best judgment.
Mr. Henderson. You could have used your judgment and built
an organization which would have gone after the small loans?
Mr. Frederick H. Ecker. It has been testified to, that we have.
Mr. Henderson.
Mr. Henderson. But you could have gotten a larger percentage of
those if you had wanted to? ■
Mr. Frederick H. Ecker. I doubt it. If we could have given all
our attention to those, it is quite possible. We sought to take the
best of the supply that was offered to us.
Mr. Gesell. Was one factor prompting your decision the fact
that you had so much money to get out that you could get it out
better if you put it out in larger chunks?
Mr. Frederick H. Ecker. Prior to 1929 I should say "No." There
was demand for more money than there was a supply of money.
CONCENTRATION OF ECONOMIC POWER 15147
The Chairman. I understood you to say that prior to 1929 there
was available, in your opinion, sufficient money to supply the total
demand for small loans.
Mr. Frederick H. Ecker. There was so much that there was keen
competition locally for those investments and there was practically
in nearly all locations an ample supply of local funds for those re-
quirements.
The Chairman. Of course, there were constant representations to
those of us who were in Congress and in other public offices that the
interest rates on small loans were far in excess of what they might
otherwise be. You remember all the discussion about commissions
which were charged for loans and the high rate of second mortgages ;
the condition which existed in the city of Washington, for example,
prior to 1929, almost amounted to a scandal so far as the rate of
commission on top of the interest that was charged for comparatively
small loans. Has that come to your attention, or am I incorrectly
advised ?
Mr. Frederick H. Ecker. I think you are not incorrectly advised.
At the time I speak of, we were getting better rates on the large ones
than the net rates that came to us on small loans through correspond-
ents. As we developed our organization over the country, to which
reference has been made, it was one of the things to which we gave
particular attention, that our correspondents could riot charge an
unreasonable commission. Maybe that is the reason we got less of
these loans ; I don't know.
The Chairman. What was the difference in the interest charge
upon small loans and large loans, if any ?
Mr. Frederick H. Ecker. Net to us we had in those days better
rates on the larger loans. We had another condition. Senator, which
perhaps militated against our small loans. Twenty-five yetirs or
more ago we started requiring amortization payments, installment
payments on small loans. I think perhaps I was a pioneer in doing
that. It has shown to be a very advantageous thing. We have had
thousands of small home owners that have kept their property
through this depression because throughout the years they have been
making installments. Now, we required that.
The Chairman. In other 'wordSj you are telling* us that the Metro-
politan initiated the plan of requiring amortized payments to retire
the principal on the loan ?
Mr. Frederick H. Ecker. I believe aiiiong the loaning institutions
we initiated it.
The Chairman. What was the policy that you brought into prac-
tice with respect to commissions ? I understood you to say a moment
ago that you placed a limit upon the amount of commission that your
agents might charge?
Mr. Frederick H. Ecker. I had in mind the observation you have
just made and, so far as our representatives were concerned, we were
unwilling to permit them in using our money to charge unreasonable
commissions. We have gotten down to a basis now of about a half
of 1 percent.
The Chairman. What was your basis in 1929 ?
Mr. Frederick H. Ecker. Probably the same. The local practice
may have been 1 percent, and frequently a similar demand when
15148 CONCENTRATION OP ECONOMIC POWER
the loan was renewed. That was a part of our amortization plan.
Instead of the borrower having to renew his loan every 3 or 5 years,
and pay a commission for doing it, we encouraged the longer-term^
loan with installments, and then he was comfortable and knew hf^
would not have to renew his loan maybe at an unfavorable, time 3
years from the time he made it.
The Chairman. What was the longer term loan ?
Mr. Frederick H. Ecker. Up to 15 years.
The Chairman. And what was the short terra ?
Mr. Frederick H. Ecker. The short term was 3 or 5 years, and on
all loans over 5 years we required amortization.
The Chairman. And what proportion of these small loans fell into
the 5-year and upward class?
Mr. Frederick H. Ecbler. You mean now you are speaking of the
correspondent loans?
, The Chairman. No ; the loans of which you are speaking,
Mr. Frederick H. Ecker. The small loans?
The Chairman. Yes.
Mr. Frederick H. Ecker. Those were made through correspondents
throughout the country. I can't give you a break-down as to the
amount, but practically all that we made we required the installment
plan on.
The Chairman. What I was trying to get at was what proportion
of these small loans now are handled in the long-term or the amor-
tized plan?
Mr. Frederick H. Ecker. Practically all. Senator, of our loans
have the amortization provision.
The Chairman. Of course, when you instituted this practice^ most
of your loans were in the 3- to 5-year class ?
Mr. Frederick H. Ecker. They were ; and that probably militated
against our immediately getting out a large number, a large amount
01 money on small loans, because we made that a condition to taking
the loans.
The Chairman. Do I understand you to express the principle that
the adoption of the amortization plan may have contributed to hold-
ing down the number of small loans you could make ?
Mr. Frederick H. Ecker. It might have in the beginning ; I think
it has become such general practice now that " loubt if it has any
influence.
The Chairman. It would seem to me that that would be a most
desirable plan from the point of view of the borrower.
Mr. Frederick H, Ecker. But the agents that you speak of through- •
out the country that were getting commissions were probably better
off with the opportunity to renew a loan at the end of 3 years and
again get his commission.
The Chairman. And the short-term loan of 3 to 5 years was
much more likely not to be paid off, was it not, than the long-term
loan with the amortization fee?
Mr. Frederick H. Ecker. I suppose that is so; but there was an-
other factor, I think, entering that situation, that individuals who
were making loans for small amounts did i^ot want installment pay-
ments. Trustees may find it inconvenient to have a small percentage
of their funds coming in each year, and for their purpose, they chose
the 3- or 5-year loan.
CONCENTRATION OF ECONOMIC POWER 15149
Now, with our volume of business, it ■« as sort of grist coming into
the mill, additional income for investment, and we were thinking
of the result in security rather than any inconvenience in having
additional funds to invest.
The Chairman. In other words, what you are outlining to us is
that it is easier for an institution or for the Government to amortize
a loan than it is for an individual?
Mr. Frederick H. Ecker. You mean as a loaner?
The Chairman. As a loaner.
Mr. Frederick H. Ecker. It is with the Metropolitan; yes, sir;
easier than for an individual. I mean to illustrate exactly, that if
a trustee for an estate has 4 or 5 percent of the loan co-ming in every
year, he can't invest those small amounts, and he is in a better posi-
tion to have definite dates when they fall due.
The Chairman. Yes ; I think that is quite clear.
Mr. Gesell. May we get back to the witness on the stand, if the
committee please?
Now, with respect to these small loans and large loans, Mr. Ecker,
which have had the best performance in terms of an over-all result?
Mr. Ecker. I think that has been testified to; that with us to date
the performance would seem to indicate that the larger loans have
been even more satisfactory than the small ones, all things taken into
consideration.
Mr. Gesell. There are fewer delinquencies there, ara there?
Mr. Ecker. I wouldn't say as to that. I am speaking of a study
that was made over quite an extended period of time. You see on
this delinquency question, those are situations where the answer is
not yet told. For example, in recent years we have had approxi-
mately 100 millions of mortgages that were carried as delinquent
which were subsequently brought up into good standing.
Mr. Gesell. May I, on the delinquency question, review one or
two questions with you so we will come to an understanding as to
the figures.
Table 211 would indicate that your company has a rather high
percentage of delinquencies in its mortgage account, over 15 percent
of the mortgages being delinquent more than 1 year; over 21 percent
being delinquent 3 months or more; and as many as 6.6 percent
being delinquent from 2 to 3 years.^
Now, Mr. -Rogers, when he was on the stand, was at great pains
to point out to us that in the case of the farm delinquencies, those
delinquencies were being made up as indicated by the fact that the
interest collected was at a higher percentage than the interest being
charged on the new loans. In the case of the urban account, going
to those corresponding figures, I notice that you have been collecting
less than the interest that is being charged, which indicates delin-
quencies are not being made up very fast.
Mr. Ecker. I don't know whether it indicates that or not.
Mr. Gesell. I was only adopting Mr. Rogers' own argument to
put to you.
Mr. Ecker. I know for a fact that our delinquency situations are
getting cleaned up.
1 See Hearings, Part 10-A, p. 211.
124991— 41— pt. 28 30
15150 <;un;centkation of economic power
Mr. Gesell. It must be that tJiere are new delinquencies occurring
then, coincident with those that are being cleaned up; is that not
(rue?
Mr. EcKER. No; that is not necessarily true. There are numerous
things that might account for it. Just which tables are you re-
i'erring to?
Mr. Gesell. First of all, I want to call your attention to the con-
tract rate table which is table 197.^
Mr. EcKER. Yes.
Mr. Gesell. And then to the table on page' 216, of interest col-
lected.^
You see, for instance, in '38 your figure for all mortgages, the
interest rate, is 4.86, and the interest collected is 4.64. Similarly
throughout the years indicated there, you have been collecting a rate
of interest less than that carried on all your mortgages.
Mr. EcKER. Well now, Mr. Gesell, I would like to take a few
minutes and delve into this whole subject a bit, and could I preface
thatXI^cause it is so applicable — and I preface it with a statement
that *. "M ding to the newspaper account —
The S. E. C. cautioned, in making the data public, that an examination of
the tables as a whole is important to an adequate understanding of the relative
position of any given company
Mr. Gesell (interposing). Yes; we feel that very strongly, Mr.
Ecker; in fact, that is why we are having you down here to help
explain the figures.
Mr. Ecker (continuing reading) :
undue emphasis should not be given to any set of figures which are indicative
of only a portion of the facts.
Mr. Henderson. Are you suggesting that we are giving an undue
emphasis?
Mr. Ecker. Certainly not, Mr. Henderson. All I am pointing
out is that it is very difficult to take any one of these figures and
compare the results of the various companies or get an indication
of the results pf that particular company from that table.
For instance, here rs the sort of thing that I am referring to. You
take here on table 216 that you have just referred to; now you will
notice there that that says gross interest collected. Noav, in our
situation, because of our method of operation, as far as correspond-
ent loans are concerned, that is net interest. That is the interest
we get in after the correspondent has taken off his commission of
half of 1 percent.
Now, if we, on the other hand, kept our books on the basis where
the entire gross interest came to us and then we paid an expense
to him, or at least we paid him his commission as an expense, that
would show up a very different figure.
Mr. Gesell. What companies keep the books the other way, will
you name them?
Mr. Ecker. I am sorry, I don't know.
Mr. Gesell. Do you know whether there are any other companies
that keep their books that way?
' See Hearincs, Part 10-A. p. 197.
2 Ibid., p. 2l5.
CONCENTRATION OF ECONOMIC POWER 15151
Mr. EcKER. I am told there are.
Mr. Gesell. What are they?
Mr. F. W. EcKER. Mr. Gesell, I am not in a position to testify as
to the practices of other companies. You will notice another thing.
There are some companies in which their general practice, appar-
ently, is to sell their properties with a large purchase money mort-
gage. You will notice from tho table on contract sales that we have
oustanding 50 percent of the contract sales of all of these companies,
indicating, that in general our practice is to use the contract sale
method to a greater extent than these other companies.^
Now, the contract sales are not included in this figure. It is my
understanding they are not. Neither is the income from contract
sales included in real estate.
Mr. Frederick H. Ecker. In neither place.
Mr. F. W. Ecker. In neither place.
Mr. Henderson. I would like to get back to the delinquency angle.
The Chairman. Is that correct; the witness' statement, Mr. Howe,
with respect to these tables, correct that the contract rate of interest
is not included in the table at page 216, on contract sales, rather? ^
Mr. Howe. Senator O'Mahoney, the interest on contract sales is
not included in this table, that is right. It is interest on mortgages
only.
The Chairman, So if it were, if those two interest items were
combined, it would show a different result, would it not;?
Mr. Howe. Yes; depending on whether the interest on contract
sales is higher or lower than the interest op mortgages.^
The Chairman. Surely.
Mr. Henderson. Let me ask this, Mr. Howe : Is that percentage
applied also against the properties, urban mortgages, and contract
sales? In other words, is the figure which we see here, which is 4.64,
applied against a total value of mortgages and contract sales ?
Mr. Howe. No ; it is applied only against mortgages.
Mr. Henderson. In other words, this is the income. from the urban
mortgages ?
Mr. Howe. That is correct.
Mr. Geseix. As the title indicates.
The Chairman. Yes.
Mr. Gesell. I would like to get back to the discussion I raised
with Mr. Ecker when he completes his general discussion.
Mr. Ecker. To go back to that point, just to get a picture of
our operation, I would like to digress just for a minute to say that
there are various methods of handling real-estate mortgages. We
could have foreclosed promptly. We did not feel that that was
in the interest of the borrower, and our experience has been that
it did not affect detrimentally our interests.
Now, generally_ speaking, what we do is this: When a prop-
erty becomes delinquent, we do not foreclose promptly. We en-
deavor to work out the difficulties with the 6wner, and after a
reasonable period of time, it becomes evidefit that (1) that property
is going to come back into -Tood standing, or (2) that that property
1 See Hearings, Part 10-A. p. 218.
«lbid., p. 216.
3 Ibid.
15152 CONCKNTRATrON OF ECONOMIC POWER
is going so far tlie other way that there is only one thing for us
to do and that is to foreclose, or (3) is to make a readjustment of
the situation with the borrower, and we have done that.
Mr. GfiSELL. Then your exphmation
Mr. EcKER (interposing). Now, I am only about one-third
llirough, if I can finish.
Mr. Gesell. I am anxious to get back to the question I asked.
Mr. EcKER. I want to stick to your question, Mr. Gesell, abso-
hitely. What is your question again, as to delinquencies, isn't it?
Mr. Gesell. Yes.
Mr. EcKER. Why do our delinquencies show up larger than some
of these other companies?
Mr. Gesell. That is correct. Did I understand the foreclosure
policy is the first point you want to make with regard to that?
Mr. EcKER. That is item 1, I should say, yes. Now, item 2 — again
I can't answer as to other companies, but there are possibilities of
including in delinquency figures mortgages in one company which
would not be included m another. I .will give you an example of
what I mean. In certain States, when a property owner was in
default of taxes and tax arrears had accumulated for several years,
State laws were passed whereby that property owner could spread
those past taxes over a period of years for the future.
Now, if he was up to date on those payments, he really was up
to date on his taxes, and it would be perfectly proper not to con-
sider that loan as a delinquent loan.
However, in our company until all past-due taxes had been
made up that is carried as a delinquent loan.
Mr. Gesell. I must interrupt to ask how that affects the figures
show^n on 211? ^
Mr. Ecker. All right, 211 again is misleading for this purpose.
Mr. Gesell. Just a moment.
Mr. Ecker. Two hundred eleven has a comparative figure.
Mr. Gesell. Just a moment, Mr. Ecker, let's keep to a line of
questions. I am not trying to cut short your explanations, and I
know you have sat here long enough to know people can go on ex-
plaining things here until nightfall, but I do want to get a specific
question in here. How doies this question of taxes as it affects de-
linquencies alter the figures shown on 211, as far as your company
is concerned?
Mr. Ecker. I am glad you brought that out, Mr. Gesell, because
our practice is to have the borrower apply the earnings of the prop-
erty to the payment of taxes first, even though that increases the
delinquency in interest. That may be the practice with all com-
panies.
Mr. Gesell. You will note over on 212, as I am sure you are famil-
iar, that we have a special table with respect to delinquencies as to
both taxes and interest.^
Mr. Ecker. Exactly.
Mr. Gesell. And there again your company shows the same rel-
ative position as it shows on 211.
Mr. Ecker. I wouldn't say in the same relative position.
1 See Hearincs, Part 10-A, p. 211.
2 Ibid., p. 212.
CONCENTRATION OF ECONOMIC POWER 15153
Mr. Gesell. I think the figures indicate that it has the third
greatest amount of delinquencies on either table, does it not?
Mr. EcKER. I am sorry, I think if you will make an analysis of
that picture, that comparatively speaking, you will see that the
-delinquencies show up better, or at least that there is an improve-
ment in our relative position when you change from the table on
211 to 212.
Mr. Gesell. Will you show me where that is?
Mr. Hekdekson. May I ask a question there? As I see it, on page
211, as to mortgages with interest delinquent 3 months or more, Met-
ropolitan is almost twice the average. On mortgages with interest
delinquent 1 year or more. Metropolitan is again almost twice the
average.
Turning to page 212, in this case, Metropolitan is a little less
than twice the average. Isn't that correct?
Mr. EcKER. As a mathematical computation, I don't doubt that
is correct. I am trying to explain the reasons.
Mr. Henderson. Is there anything wrong with the mathematical
computations ?
Mr. EcKER. No, sir; I am not questioning them. As far as our
company is concerned we checked them and have no objection to
them.
Mr. Henderson. That is one thing I understand, a calculation like
that.
Mr. Ecker. I agree that that is the showing on these tables.
Mr. Henderson. All right.
Mr. Ecker. The thing I am pointing to is that I think one can
derive a very misleading conception of the operations of the Met-
ropolitan Life Insurance Co.'s mortgage portfolio by just referring to
such a table as that.
Mr. Henderson. If you want to say this, that it would be a dis-
advantage for a prospective policyholder to buy a policy on any
one of these tables, I would certainly agree with that.
Mr. Ecker. There is one table that won't justify that.
Mr. Henderson. Even on that.
Mr. Ecker. All right. Well now, Mr. Henderson, to get back,
I just want to bring out that what is indicated here is policy:
One, we could have foreclosed promptly, we would have no delin-
quencies. Two, we could have reset the mortgage very quickly.
Mr. Henderson. You could have ballooned the delinquency.
Mr. Ecker. Yes. For example, if it was a 5-percent mortgage, if
it was paying 4 percent on account of 5, we could have said : "That
is all right, we will cut down the mortgage, we will reset this inter-
est at a 4-percent rate."
There are times when we have done that, but it is, generally
speaking, after a period of time when it has been demonstrated that
the property is really not in a position to pay the 5 percent.
Mr. Gesell. On that
Mr. Ecker (interposing). May I just finish this, please? For ex-
ample, let me give you some more indications here. If you will turn to
table 212, to show you what is really involved here is a lag of time.^
Refer to table 212, and you will find in the first column there that
1 See Hearings, Part 10-A, p. 212.
15154 CONCENTUATION OF ECONOMIC POWER
mortgages with unreimbursed tax advances are $19,970,000. Within
12 months of that period, fifteen and a half million of that amount
was repaid to us by the borrowers. Now, let's go on to the next one.
Mr. Henderson. Of course, in order to get a valid comparison like
that, we would have to have the same information for the other 25
companies.
Mr. EcKER. Sure.
Mr. Gesell. I might point out to the committee that table 218,
entitled "Work-out cases" is an attempt to show with respect to these
defaulted mortgages those that are working out and those that are
not, and there again tliQ Metropolitan seems to have a rather large
amount of cases which are not working out.^
Mr. EcKFU. Exactly. That is in line with our policy.
Let me point out one other question, and then I will stop, Mr.
Henderson.
Look at this column 4, 184 million face amount.^ _ For instance,
I know — I .doubt whether the S. E. C. knows because they haven't
had the opportunity of studying these things in detail — but I know
that included in that situation there are 80 millions of mortgages
I hat paid us in excess of 4 percent in 1938 in cash. I know, further,
that the entire account averaged 314 percent, or in excess of 3i/^
percent.
All I am pointing to is that they are delinquent, we are working
along v/ith the borrowers, but don't draw from that fact a conclusion
that our mortgages have not been just as well made, or that they
are not just as well handled. They may be being handled in a dif-
ferent way.
The Chairman. It occurs to the chairman to remark that possibly
by reason of the size of your investment as was brought out by Mi.
Van Schaick yesterday^ you may be in position to carry delinquencies
better than smaller companies might. Is there any possibility of
that?
Mr. Eoker. I think that is true, and also, of course, it his been
testified her©, and the figures show, that in some situations delinquent
interest has been capitalized. That isn't done with us; it is carried
as delinquent interest.
The Chairman, In other words, you have here the illustration of
the>big fellow and the big cushion and the little fellow and the little
cushion that was drawn by Congressman Sumners yesterday.
Mr. Ecker. I wasn't here yesterday, I am sorry. ^
Mr. Gesell. Let's turn to 213 while we are discussing how these
cases are working out.^ What do you wish to say wuth respect to
that? That shows over 54,000,000 of your mortgages in default in
which the income is not sufficient to pay all charges except prin-
cipal, which is a rather large amount.
Mr. Ecker. Well, no, obviously again it doesn't mean anything
unless you know what the situation is. If a mortgage was a 5-percent
mortgage and it was paying 414 percent on account of 5 percent, it
still would be in that column.
Mr. Gesell. You say you don't capitalize
' Tbid., p. 213.
7 Ibid., p. 212.
' Ibid, p. 213
CONCENTRATION OF K<X)NOMlC POWER 15155
Mr. EcKER (interposing). I would just like to repeat that as I
testified early in this discussion, within recent years there have been
100,000,000 of these mortgages that have been in default and have
subsequently come out of it. We believe that this type of handling of
mortgages pays — pays both for the borrower and pays for us.
It might also be of interest to tlie committee here that over a period
of 20 years we have averaged on a cash basis, taking into considera-
tion all losses and all profits and all write-downs on mortgages and
real estate together, and all expenses of handling that, 4.23 percent.
Now, we are satisfied with that, we think that is a pretty good show-
ing for trustee investment.
Senator King. Do you regard those delinquencies to which counsel
has called your attention as in any way impairing your financial
structure or as being uncollectible? Are they marked i)ff as un-
collectible ?
Mr. EcKER. No, sir, those mortgages are much in the same category
as the Baa or Ba bonds that Mr. Howe was speaking of the other
day. Those are the mortgages that are in a tempomry period when
you don't know just which way they are going. They may go into
default, in which case they are handled on a different basis, or they
may come into absolutely good standing again.
I would like to point out that in our accounts, any mortgage which
has any interest which is delinquent for as much as 6 months, or
more than 6 months, all of the interest in that account is taken out
when we are figuring our assets. In other w^ords, it is not just the
interest that is overdue 6 months or more, but if a mortgage has
interest that is overdue 6 months, any portion of it is overdue 6
months, then the entire amount of interest is deducted as an asset.
That is just an indication of the conservatism with which we handle
accounts.
The Chairman. How much more do you have, Mr. Gesell? It is
after 12 o'clock.
Mr, Gesell. I had hoped to take up with Mr. Ecker both the real
estate account and the bond account. I think in view of the progress
we are making, perhaps we had better take up only the real estate
account today and come back to the bond account at a^ later date.
On that basis, we can recess now quite conveniently.
The Chairman. The committee will stand in recess until 2 o'clock.
(Whereupon, at 12 :10 p. m., a recess was taken until 2 p. m. of the
same day.)
AFTERNOON SESSION
The committee resumed at 2:20 p. m. on the expiration of the
recess.
The Chairman. Did Mr. Howe make the tabulation that I asked
for ? ^ Would you be good enough to put it in the record ?
We were referring to the table on page 207.^
Mr. Howe. That's right. I understood your question. Senator,
ta refer not to the principal amount of loans, but to the number of
individual loans which the Metropolitan had on its books on Deeem-
1 See p. 15184.
= Sep Healings, Part 10-A, p. 207.
15156 CONCKNTRATION OF ECONOMIC POWER
>
ber 31, 1938. That total 61,027 loans, of which 58,622 were of a size
of $25,000 or less, 2,405 were of a size of $25,000 or more.
The Chairman. That was the testimony of Mr. Ecker.
Mr. Howe. That's right, and the percentages which I understood
you to ask for
The Chairman (interposing). No, I was asking for the totals first,
because that was this table 207. Table 207 divides the total of 902,-
000,000 into 12 different classifications, less than 2,000, between 2,000
to 5,000, five to ten, ten to twenty-five, and so on. So I was asking
you to compute the total of all loans under $25,000. Just add those
four figures together.
Mr. Howe. I misunderstood you, Senator. I can do that quickly.
I also have the percentage in each group.
The Chairman. Well, that would be interesting but my point was
to show what was the total amount loaned to the 58,622 borrowers
who had $25,000 or less each and what was the total ^imount of the
2,405 borrowers who had loans of more than $25,000 each.
Mr. Howe. I am sorry, I misunderstood you. I will get that
for you.
TESTIMONY OF F. W. ECKER, VICE PRESIDENT, METROPOLITAN
LIFE INSURANCE CO., NEW YORK, N. Y.— Resumed
Mr. Gesell. Now, before the recess, Mr. Ecker, we were discussing
interest delinquency. I had one or two more questions on that before
we moved on.
Mr. Ecker. What table are you on now ?
Mr. Gesell. Well, we were on a series of tables commencing wnth
the table on 210 and running over to 213, I believe.^ Let me ask you
this, did you scale .down interest on your city properties after the
times got troublesome?
Mr. Ecker. In some instances. As I testified this morning, ouv
ordinary procedure would be not to scale down immediately but to
give a certain period of time to see in each individual case whether
the property would recover and be able to pay its full interest,
whether it would be necessary to foreclose or whether a readjustment
of the interest, resetting the mortgage, was desirable.
Mr. Gesell. I take it your practice wa§ then to let the delinquencies
accumulate for a longer period of time, as you testified, than some
other companies and not to scale dowMi as early?
Mr. Ecker. I tliink that may be so from the indications in the
tables.
Mr. Gesell. You mentioned the capitalization of delinquent in-
terest and I gathered that you wish to make quite a point of the
fact that you had not capitalized delinquent interest?
Mr. Ecker. No; I was just mentioning that fact as an indication
of the differences between companies and the way we keep our books.
Mr. Gesell. What is your attitude toward the capitalization of
delinquent interest?
Mr. Ecker. Since we don't do it, it is safe to assume we prefer
not to do it.
'See Hearings, Part 10-\, pp. 210-21:?.
CONCENTRATION OF ECONOMIC POWER 15157
Mr. Gesell. Yes. I was seeking the reasons.
Mr. EcKER. Well, I don't know that I can give you the reasons.
We just think it is better bookkeeping for us not to.
Mr. Gesell. Is it purely a matter of bookkeeping or does it go
deeper into the matter of policy than that ?
Mr. EcKER. I suppose it is a matter of policy in our company.
Mr. Gesell. Well, why don't you do it ?
Mr. EcKER. Just as I have said, it is all part of our policy. That
is a portion of our policy not to do it. Another portion of our policy
is in rehabilitation to charge it out as an expense and not write up
the value of our properties. We don't write them up at all.
Mr. Gesell. That is the point I was getting at. You regard the
capitalization of interest in effect a write-up of the property, do
you not?
Mr. EcKER. It is a write-up of the property. "Wliether it is justi-
fied or not I am not testifying.
Mr. Gesell. It would be in every interest of conservatism, I take it,
not to do so.
Mr. Ecker. Generally speaking, I suppose so.
May I add there, as we have seen, some companies apparently do
write it up and then later write it down again. Now, that is just a
different policy.
Mr. Gesell. Your feeling is that the better practice is not to write
up the delinquent interest and if you do get it back on the eventual
sale of the property, then is the time to take it into your books, not
before ?
Mr. Henderson. Then is when it really represents income.
Mr. Ecker. Yes.
Mr. Hayes. And is it because of a desire to exclude from possible
inclusion in the income account items not actually received ?
Mr. Ecker. That is true.
Mr. Gesell. Is that part of your principal reason, or where does it
come into the picture?
Mr. Ecker. I would say that is all part of the picture very de-
cidedly.
Mr. Gesell. Now, you talked about resetting mortgages in con-
nection with our construction of scales down here. How much re-
setting has there been? I know that is a difficult question. Have
you reset many mortgages?
Mr. Ecker. Quite a few,
Mr. Gesell. Could you hazard a guess as to what percentage of
the portfolio it represents?
Mr. Ecker. I am afraid I couldn't. I could get that for you.
Mr. Gesell. Let me get at it this way perhaps. When you reset
the mortgage and the mortgage is delinquent as to interest at the
time it is reset, do you take that delinquent interest into account in
resetting the mortgage?
Mr. Ecke|{: Well, take it into account in what way ?
Mr. Gesell. Would your tendency be to issue the new mortgage
for the face' amount of the previous mortgage plus delinquent
interest ?
Mr. Ecker. No, sir, we do not do that.
Mr. Gesell. I was directing my questions in that direction to see
15158 CONCENTRATION OF ECONOMIC I'OWEIi
whether perhaps in that way delinquent interest came into your book.
I take it you do not handle your mortgages that way?
Mr. Eckp;rt. No.
Mr. Geseli>. You reset for the same face amount of the mortgage
as it was before, at a lower interest rate?
Mr. EcKER. Sometimes at a lower interest rate.
Mr. Gesell. For a longer term?
Mr. EcKER. The ordinary resetting is a reduction of interest, and
it is possible, I say, in some instances, at an increase in the amortiza-
tion rate.
Mr. Gesell. But no addition to the principal to take care of de-
linquent interest?
Mr. EcKER. Oh, no.
Mr. Hates. Does delinquent interest appear anywhere in your
books other than your mortgage records? Does it enter into your
accounting system?
Mr. EcKER. Of course, we keep an account of it as far as our
statement to the insurance department, which is our official statement,
is concerned. It is shown in that, and a deduction is made of that
as an asset, as I explained this morning — maybe I didn't make it
quite clear. We deduct as an asset all the interest involved on any
mortgage which has more than 6 months' interest overdue.
Mr. Hates. You mean deduct that from the asset value?
Mr, EcKER. Yes. You see, having gotten into the asset value the
amount of the interest that is accrued, then we take it out below.
Mr. Hates. As I understand your practice, then, you do record it
on your books, but for statement purposes and insurance department
purposes, it is shown as a deduction from the asset value.
Mr. EcKER. That is correct, it is an asset not admitted, so-called.
Mr. Gesell. Now, with respect to your real-estate account, city
real estate, has the amount of the city real estate your company owns
diminished in recent years? I think that information is on 217.^
That table indicates it has held rather constant in the last 3 years,
has it not?
Mr. EcKER. Yes; somewhat.
Mr. Gesell. And the foreclosures on the other hand have precipi-
tously decreased, have they not, in recent years ?
Mr. EcKER. Yes; foreclosures are not as heavy as they were, de-
cidedly not.
Mr. Gesell. Are you experiencing any difficulties in moving your
properties; selling them?
Mr. EoKER. I think that that is pretty clearly indicated in the
sales, that we are constantly selling property.
Mr. GeseLl. You are referring, I take it, to table 223.^
Mr. EcKER. You will notice one situation there, namely that the
bulk of our sales have been made since 1935.
Mr. Gesell. Yes.
Mr. EcKER. We sold very little at the depth of I he depression.
Mr. Gesell. Yes.
Mr. EcKER. We fell it was unsound from the standpoint of the
real-estate market as a whole to dump leal estate under the existing
'See Hearings, Part 10-A. p. JIT.
' n)i<l.. p. SSi.
CONCENTRATION OF ECONOMIC POWER 15159
conditions, and the price which real estate would bring at that time
didn't seem to us to be a reasonable price for the values of the
property.
Mr. Henderson. Right on that point, Mr. Ecker, you do have as
a continuing policy on the disposal of real estate a qiiestion as to its
effect on the total real-estate market of which you are a part?
Mr. Ecker. Oh, yes; we feel that the action of the insurance com-
panies generally — and it has been prettj true, of the large institu-
tional holdings of real estate generally, that it has been a very
favorable influence on the real-estate market. If they had all dumped
real estate at the depth of the depression, or it had been pushed on
the market at once, it would have just demoralized the real-estate
market and had extremely unfavorable repercussions and results on
the individual owners of mortgages and real estate.
Mr. Henderson. Would have had an effect on the holdings that
didn't dump?
Mr. Ecker. Oh, yes; it would have affected us the same as others.
It was not in anybody's interest.
Mr. Henderson. That is, taken together the holdings of insurance
companies, savings banks, and other institutions say, in New York, are
a part of the total holdings sufficient to make a dent, whichever way
they go.
Mr. Ecker. Our desire is to have an orderly liquidation of this real
estate.
Mr. Henderson. If you did all at one time adopt a policy of not
selling, it would enhance real-estate values, would it not ?
Mr. Ecker. We can't very well do that in insurance companies
because of the law and the supervision the insurance department
makes of our operations.
Mr. Henderson, That means that after you have gotten up to a
place where you have a considerable amount of your property held
after a period of 5 years or more, you have, you might say, the finger
of suspicion pointing at you all the time ?
Mr. Ecker. Yes. There is a continuing urge there to dispose of
the real estate, that is the law.
Mr. Gesell. Well, now, will you give us some idea of what your
sales procedure is from a mechanical point of view, what you do to
sell the property?
Mr. Ecker. Yes.
Mr. Gesell. First of all, from the testimony that has gone before
I think you appreciate we are interested in how you price properties,
how you advertise them for sale, what the price is on the properties
in relation to book value, what appraisals you make of the properties
between the time they are foreclosed and the time they are disposed
of, matters of that sort.
Mr. Ecker. I will try to cover it, and if I miss anything, you ask
me about it.
Mr. Gesell. I will.
Mr. Ecker. In the first place, when a piece of property is fore-
closed— let's take first our operations throughout the country that
are handled through our correspondents — when the piece of prop-
erty is foreclosed, it is necessary to foreclose, then tlie correspondent,
of course, makes anotJier inspection of the properly and our field
15100 CONCENTRATION OF ECONOMIC POWER
representative makes an inspection of the property. As I testified to
before, you remember we have these various fiekl offices. They de-
cide on what, in their judgment, is a proper rehabilitation program to
be undertaken, without going into details on that. Their report comes
into the home office, where it is again reviewed. In the home office,
our correspondent loan section is divided among four territories and
it is reviewed bj' the supervisor in charge of that territory and his
assistants. After that review is made, the recommendation is made
to the financial officers and subsequently the authority from our real-
estate committee is given to go ahead and rehabilitate the property.
Then, or at least during this period, another item that is looked
into is a proper value to put on that property. Now, that is, I
would say, two values are put on it. It is quite customary in real
estate to put an asking price and also let your sales representative
know your taking price. Now, generally speaking, this taking price
is a price that takes into consideration market conditions at the time,
but also has very much in mind what the real intrinsic value of that
property is. It is obvious from this table here that we are looking
at, namely table 223, as to what happens under those circumstances.^
We felt this property was worth more than the current market in
the depth of the depression, as you can see.
Mr. Gesell. And you had very few sales?
Mr. EcKER. Very few sales. As we come out of that picture, th jre
is a continuous liquidation of this property and that has been going
on ever since.
Mr. Gesell. Well, now% the property is appraised at the time
it is taken over, I take it?
Mr. EcKER. Yes.
Mr. Gesell. Now, let's say you have got a property 3 or 4 years
and haven't been able to get your asking price. Is there a reap-
praisal ?
Mr. EcKER. Oh, yes. These properties are reappraised every year.
They are gone over by an appraiser.
Mr. Gesell. By your own appraiser?
Mr. EcKER. Yes; by our own people, and in the case of a corre-
spondent, by the correspondent.
Mr. Gesell. You reappraise those properties each year?
Mr. Ecker. Yes, sir.
Mr. Gesell. To determine whether or not conditions have changed
to make your asking price out of line?
Mr. Ecker. Oh, yes. If a property has not moved over a reason-
able period of time, the asking price is lowered. I miglit pohit out
in this connection during this period here we have sold, as you can
see, 96 millions of real estate and that has been sold at a profit of
7 or 8 percent.^
Mr. Gesell. Now, do you advertise these prices or just your asking
price or only your listed price?
■ Mr. Ecker. Well, ordinarily ri^ht in line with the usual custom
in the real-estate field, the price is not put into an advertisement.
But our properties for sale, the individual properties, are advertised
by our correspondents, and in the larger cities on direct loans the
» See Hearings, Part 10-A, p. 223.
2 Ibid.
CONCENTRATION OF ECONOMIC POWER 15161
real-estate firm that is in charge of handling that piece of property
does at times advertise. If you wonld like to see one of the adver-
tisements, I have one here, if you would be interested in seeing it.
Mr. Gesell. They advertise a description of the property, I pre-
sume, and the price?
Mr. EcKER. I don't think the price, generally.
Mr. Gesell. Just a description of the property?
Mr, EcKER. Sometimes the price, possibly the asking price, but
not generally.
Mr. Gesell. Well, now, on some of these properties you had them,
like everyone else, for some period of time, did you not?
Mr. Ecker. Yes.
Mr. Gesell. Over a 5-year period. For instance, your hotels, I
noticed on table 230 that you have hotels having a book value around
$10,000,000.^ How do you operate those hotels in the interim when
you are awaiting sale?
Mr. Ecker. Well, ordinarly — you see, this hotel business is a very
specialized business — we will either rent the hotel to another com-
pany or will employ a hotel firai, the American Hotels chain, for
example, or the Knott chain, or someone of that character, to oper-
ate our hotels. It all depends on the particular hotel. Again it
is a case basis. All these things are on a case basis.
Mr. Gesell. You don't participate in the direct management of
the hotels yourself?
Mr. Ecker. We supervise in this way, that we have gone out to
pick out the manager that we feel is best qualified in each particular
field.
Let me just explain that a little bit further. As far as our direct
loans, those are the larger loans, are concerned, when one of those
is foreclosed — and the same thing is true of hotels — we attempt to
pick out the real-estate firm in that city which is best qualified to
deal with that particular type of real estate. In New York, for
example, a real-estate firm which is excellent for the west side would
not be suitable for a property on the east side, or one which specializes
in loft buildings would not be our choice for a Fifth Avenue apart-
ment, for example. The same thing is true of hotels. We go out
to pick the people that we feel can operate them best, but on our
own staff we do have trained hotel men. All through the real-
estate field and real-estate mortgage field the same as through our
bonds and stocks, we have men in each division who are trained in
their particular field. In fact, I think some of our men are giving
courses on the subject in colleges.
Mr. Gesell. I assume th-at in most of those types of properties,
such as apartments and business properties of one kind or another,
those are usually handled by the lessee, are they not, not going
through the hands of any kind of a managing organization?
Mr. Ecker. I don't know just what you mean.
Mr. Gesell. Let's say you have a big apartment house, you again
contract that out to some manager to run for you ?
Mr. Ecker. Oh, no. Generally that is owned by us and we receive
all of the net income, of course, but we use a real-estate firm as
managing agent.
1 See Hearings, Part lO-A.^p. 230.
15162 CONCENTRATION OF ECONOMIC POWER
Mr. Henderson. You use somebody like Brown, Wheelock, and
they can perform for you about the same kind of a service as they
would for a cooperative apartment?
Mr. EcKER. Yes, probably, except that in a cooperative apart-
ment, practically speaking, they handle the situation with very
little technical supervision. In our instance, that is not so. We
have our own maintenance men on our own staff, for example; \ve
have experts in elevator, engineering, architecture, heating and
ventilating engineers, and people of that sort.
Mr. Henderson, You have people who go around to all your
properties ?
Mr. EcKER. Yes, sir.
Mr. Henderson. With Brown, Wheelock, they will hire the staff,
the elevator operators, and engineers. You don't do that.
Mr. EcKER. Rehabilitation is what I am really referring to, or if
the figure shows up that the property is not being operated as eco-
nomically as it should — you see, we have a tremendous advantag^e in
liaving other similar properties that we are making comparisons
with, and if one isn't showing up, we go and find out what is wrong
with it.
Mr. Gesell. Let's take the case of the Gotham Hotel as one for
discussion. According to your convention form statement, you ac-
quired the Gotham back in 1932 at an acquisition cost of $2,377,000.
It was carried at the' end of '38 at a book value of $2,000,000, and
has lost money in '37 and '38 in increasing amount. You have a list
price on that property of $3,500,000.
Mr. EcKER. Do you know that property, know the location?
Mr. Gesell. I never stayed there.
Mr. EcKER. You ought to stay. It is a good hotel.
Mr. Gesell. I wonder if it is a good hotel. It seems to.be losing
money.
Mr. Henderson. Mr. Ecker, when your agents come in from the
field, do they go to the Gotham?
Mr. Ecker. It is too expensive for them.
Mr. Hates. I notice it is in the plural, "Gotham Hotel Properties."
Is that just the Gotham ?
Mr. Ecker. Yes. Of course, you recognize that in all of these
situations there is the expense of rehabilitation, except in rare
instances. .Rehabilitation costs, except in rare instances, is taken
out of the income. I do not put myself up as an expert on real-estate
properties. We have men who are much better qualified in our
organization than I am on that.
Furthermore, I am happy to give you any information on any par-
ticular properties I know about, but I am not prepared to testify
on^the details of any particular property.
Mr. Gesell. Well
Mr. Ecker (interposing). Just a minute. Now, in this particu-
lar situation, quite a substantial improvement was made. We made
ouite a substantial expenditure in putting stores in on the ground
floor and changing the dining room, and so forth. Tlie Irotham is
now under lease, it is my understanding. It is now under lease and
that lease is for the hotel itself. We get the income from the stores.
Mr. Gesell. I was referring to the Gotham just trying to get at
COxNCENTUATlON OP KCONOMIC POWEll 15163
this line of (questioning. Some of these properties have unquestion-
ably been losing money. I think we can agree on that, can we not?
Mr. EcKER. Our hotel situation as a whole, those properties
on which we have mortgages as well as those which we have fore-
closed in real estate — taking the hotel picture as a whole, it is showing
a nice return, however.
Mr. Gesell. That is probably not true of the foreclosed property,
is it?
Mr. EcKER. Probably not.
Mr. Gesell. Our figures would indicate on an over-all basis you
are losing on those foreclosures.
Mr. EcKER. You see, a hotel is very much like certain heavy goods
industries. A hotel has a very sizable amount of fixed operating
expenses. Now, by fixed expenses, I mean the number of employees
they have to have to give the type of service that that hotel is sup-
j:)Osed to give. As a consequence, when the vacancy ratio increases and
it drops below a certain ratio, you are in the red. As soon as it goes
up above that ratio, you run into the black very fast on a percentage
basis. We have been going through a difficult period with our hotels,
there is no question about that.
Mr. Henderson. Mr. Ecker, I am interested in this. We have
taken up what you do with your hotels and what you do with your
apartments, -but on table 230 it shows that you have riding academies,
theaters, department stores, you have a stock exchange building — I
don't presume you run a stock exchange ? ^
Mr. EcKER. No.
Mr. Henderson. Although you have a large enough volume of
business, I think, to pretty much carry some of the smaller ones.
Mr. Ecker. We don't buy any stocks except preferred, you under-
stand that, of course.
Mr. Henderson. Even so, that would go very well. A couple of
exchanges have passed out of existence, starved to death, they claim,
by New York. I think your business would have kept them alive.
Now, let's start right down here. On the apartments, you lay
them off with a management conc*^m and have your own specialists
watching what happens ?
Mr. Ecker. That is right.
Mr. Henderson. Your apartment hotels?
Mr. Ecker. It is much the same ; yes.
Mr. Henderson. And then apartments with business?
Mr. Ecker. Much the same.
Mr. Henderson. Business buildings?
Mr. Ecker. Yes. ->
Mr. Henderson. We will skip clubhouses.
Mr. Ecker. You don't need to skip it. I will be glad to go into
the clubhouse.
Mr. Henderson. It is such a small
Mr, Ecker (interposing). Yes; it is a very small proportion of
the assets, but that is really on ground values. I should have stated
with the Gotham Hotel, that ground is worth considerably in excess
of what that hotel is on oiir books at. You are familiar with the loca-
tion of the Gotham Hotel on Fifth Avenue?
*See Hearings, Part 10-A, p. 230.
1516^ ('().\(;entration of economic towkr
Mr. Henderson. I happened to stay there before I worked with
the Government.
Mr. EcKER. Go now and you will find it is a better hotel now than
it was.
Nevertheless, of course, there isn't a demand for that property right
today, but there is no question that that property has real value. The
demand is going to come back in this -country. We are not always
going to be in a period such as we have been going through.
Mr. Henderson. From all the statements you have made today, I
think I can subscribe to that 100 percent.
You certainly don't manage a clubhouse, or do you ?
Mr. Ecker. As a matter of fact, that is taken over by some Gov-
ernment agency, so it is tax-exempt at the present time, and the land
value, I believe, supports tliat $158,000. The riding academy is the
same thing.
Mr. Henderson. What I am trying to get at — I don't want to get
off the point — was whether you exercise direct management, whether
you run any of these. How do you get the supervision to insure that
your interests are protected?
On the department stores, how do you handle those?
Mr. Ecker. We receive their reports periodically. We have in the
^5ecu^ities end men who have a good deal of experience in maki.ig
department-store loans.
Mr. Henderson. Do you watch the Dusiness of the department
stores^ Do you have anyone like the specialists who are in the organ-
izations of department stores who watch out for your interest ?
Mr. Ecker. As I say, in our securities end of our organization
we have people who are very faitiiliar with department-store opera-
tion. Of course, we use such firms, also, on the outside, I mean
accounting firms, that are familiar with such matters.
Mr. Henderson. We have been through hotels. How about the
riding academy?
Mr. Ecker. The riding academy is a piece of property on Sixty-
sixth and Sixty-seventh Streets, on the West Side of New York,
200 by 200 — it runs through the hlock there. At the time the loan
was made, no value was given to the improvement at all. That was
a land value loan, and what I have said about the Gotham is (squally
applicable here. That is a very desirable piece of ground.
Mr. Henderson. Do you take any part in the management of the
riding academy?
Mr. Ecker. No.
Mr. Henderson. That is what I am getting at here.
Mr. Ecker. We get an income from that which covers taxes at least.
Mr. Henderson. And then on the summer hotels, do you exercise
any managerial functions in the policies as to guests and the like?
Mr. Ecker. No ; of course not.
Mr. Henderson. You say "of course not." You do manage farms.
Mr. Ecker. Yes ; that is quite true.
. Mr. Henderson. I am trying to get at this. Here is a cross-section
of bi^siness activity of wliich you become involuntary owner and you
h,ava certain responsibilities. In some cases in the farms you find it
is beat to walk right in and take the managerial responsibility. I am
jusi trying to get at in this whole list of things how you perfonn that
service, that function.
CONCENTRATION OF ECONOMIC POWER 15165
Mr. EcKER. Well, generally speaking, in tlie urban mortgage and
real estate field, we do not operate along the same forms. We use
the local organizations, the local real estate firms. Itut we do giv0
very close supervision.
The Chairman. Do you have an urban real property management
division as you have a farm property management division ?
Mr. EcKER. Yes, we do; and the urban real property division is
again split up into various subdivisions, as I started to explain.
The Chairman. What Commissioner Henderson is trying to de-
velop is to what extent this urban management division actually con-
trols and directs the operation of the urban property. The operation
of the farms is pretty closely developed by your crop rotation pro-
gram, as described by Mr. Rogers. NoWj how about this other?
Mr. EcKER. It is not on the same basis. As I said, we have used
the local firms to do the actual operating, and keep the day-to-day
check on it, so to speak, but we have a supervisory force. In this
division there are some 550 people, that is exclusive of accounting
and exclusive of the legal aspect of the work. We have this force
which is split up in various ways. As I have said, there are 11 field
offices. In those field offices are men who are specialists in main-
tenance and also a part of their ]ob is to go around and talk with
the brokers and pep up interest in sales departments, and so forth.
The Chairman. Those are employees of your company?
Mr. EcKER. Of the Metropolitan, that is right; they are on our
pay roll.
The Chairman. And they are supervisory employees?
Mr. EcKER. That is right.
The Chairman. Now, the actual tenants who are in the properties,
what is their relation to Metropolitan?
Mr. EcKER. Well, in a great many instances they probably don't
know that the Metropolitan is there. Brown, Wheelock, as you men-
tioned, is the man that they know in the picture, you see.
Mr. Henderson. Suppose the Theater Guild wants to put on a play.
You have a vacant theattr. Do they go to somebody in your organi-
sation ?
Mr. Ecker. Let me go Ato this for just a minute. In the first
place, you have been mentioning the few specialties that we have here
in the aggregate — as you yourself pointed out it doesn't represent
more than a fraction of 1 percent of the total of our assets, but I am
glad you mentioned them because it gives me an opportunity of
speaking of two things. The summer hotels, for example — we did
not make the loan on those properties at all.
There was an organization up in New York State known as the
Golden Seal, and the insurance department of the State of New
York asked us to take, over the assets and reinsure the policyholders
of the Golden Seal. You are familiar with that, are you?
Mr. Henderson. Yes.
Mr. Ecker. After some discussion, we undertook to do that. On
those particular properties, for example, there are 11 properties, 11
of these summer hotels. They originally were carried as mortgages
of the Golden Seal for $243,000. We put them on our books at
$146,000. Since that time, out of the 11 we have sold 6, so that we
124491-^1— pt. 28 31
151 06 CONCENTRATION OF ECONOMIC POWER
have 5 left, and at the end of '39 that item is down further. We
made a couple of sales, I think, last year, so that item is down now
to $35,000 or $40,000.
You also spoke of the theater here. The theater came to us — well,
there are two theaters, but practically all of it is in one theater, one
out in Pittsburgh, and the loan was made by the Pittsburgh Life.
You recall about the Pittsburgh Life. We Avere again asked to take
over the assets of the Pittsburgh Life and work out that situation.
Mr. Gesell. Who asked you to do that?
Mr. EcKER. The insurance department of the State of New York.
I should add that in both of those instances the policyholders lost
nothing.
The Chairman. But with respect to the management of the
theater?
Mr. EcKER. It is on a lease.
The Chairman. So the lessee has the judgment with respect to
how to manage the theater. Is that right ?
Mr. EcKER. No; what we have done there is to lease it. It is a
movie theater under lease, I don't know what we will do with it,
whether we can get more for it by some
The Chairman (interposing). The point of the question is: Does
the Metropolitan manage, or does the lessee manage ?
Mr. EcKER. No; the lessee.
The Chairman. It is the lessee who manages the theater, the lessee
who manages the hotel?
Mr. EcKER. Yes.
The Chairman. The lessee who manages the apartment houses?
Mr. EcKER. Yes, sir.
The Chairman. What terms does such a lessee ordinarily have,
wha<. term of authority?
Mr. EcKER. Well, it all depends on the type of property. Now, in
the cafee of an apartment, it is generally a percentage of the rent, of
the leases that they have made.
The Chairman. No; I mean, how many years?
Mr. EcKER. Oh, how many years. I see. Well, on these income-
producing properties we will make whatever term lease we feel is
beneficial to the value of that building. If we can make an advan-
tageous lease and thereby establish a good value for the property, we
will make a long-term lease. If we are in a market
The Chairman (interposing). What do you call a long-term lease?
I ask that question because you still have the law requiring disposi-
tion in 5 years,
Mr. Ecker. Yes; but you see, I am thinking of income-producing
properties, where they are leased to tenants in those properties. Let
me make this point: Take an apartment, for example. I am not
talking about leasing that apartment to someone else as a whole. I
am talking about the management concern, as Brown, Wheelock, or
various others, of their making leases on apartments in that apart-
ment building. Those leases are what I am speaking of as leases.
The Chairman, You don't make those leases ?
Mr, Ecker, We own the property and continue to own the property
until we have sold it.
The Chairman. You don't make those leases? Those leases are
m3,de by the management concerned?
CONCENTRATION OF ECONOMIC POWER 15167
Mr. EcKER. That is right, but they are made after we apprdve
them.
The Chairman. I see. Now, how long does a management con-
ccncern have a contractual right to run such a building?
Mr. EcKER. During good behavior, I should say.
The Chairman. Then it is just a lease at will?
Mr. EcKER. No; it is not a lease at all. That isn't a lease at all.
We employ them to manage a certain building for us on an agency-
fee basis.
The Chairman. The agent then is an employee of the Metropoli-
tan?
Mr. EcKER. If you are not asking me a legal question, I guess
the answer is "yes."
The Chairman. I don't know. I don't want to try to aSk a legal
question. One of your company shakes his head in response to
my question. Won't you answer it, sir?
Mr. EcKER. He is not sure.
The Chairman. Oh, that is all right. He can shake his head. I
don't mind.
Mr. Ecker. He is not sure of the question now.
Mr. Gesell. Let me perhaps ask a few questions that may help.
The Chairman. May I just say this first, Mr. Gesell. You see,
this is the comparison that is shaping up in my mind. When Mr.
Rogers was on the stand he described in great detail the manage-
ment plan for handling farms. The tenant farmer has a 1-year
lease. He receives a 5-year crop-rotation program, and he must,
in managing the farm, in growing his crops, follow the general
advice of your supervisor ?
Mr. Ecker. That is right.
The Chairman. To what extent does that same plan apply with
respect to the handling of urban property ?
Now, that is all we are trying to get at.
Mr. Ecker. I would say it is fairly comparable on small homes,
where, during our ownership, they are leased on short-term lease,
pending sale. But the income-producing properties which we own,
the leases made for various portions of the space therein, are not
on short-term — they may be on short-term or they may be on long.
The Chairman. I can understand, because they go with the build-
ing.
Mr. Ecker. Yes.
Mr. Gesell. What sort of reports do you get on hotels? Do you
have the right, for example, to determine wliat class of patronage
the hotel will take ?
Mr. Ecker. Yes ; I would say in picking, or at least in approving
to whom we Will rent a hotel or lease a hotel, that would be a most
serious consideration.
Mr. Gesell. In other words, you can determine whether you are
going to set up this hotel to take care of high-class trade, middle-
class trade, or horse-racing trade ?
Mr. Ecker. We endeavor to fit it to thi^ particular hotel involved.
For example, the Gotham would not make a good business, com-
mercial traveler's hotel, whereas some other might.
15168 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. Have you jurisdiction to say as to any particular peo-
ple who may wish to rent a room or some space in the hotel, whether
or not they can so rent it?
Mr. EcKER. No,
Mr. Gesell. Can you tell us a little what type of decisions you
have as to who shall sell them eggs and who shall sell them butter
and where they shall buy their rugs and who shall wash their
windows and all those questions of management, do you determine
that or does the person who has the property under lease determine
that?
Mr. EcKER. We determine that they shall be handled on a com-
petitivfe-bid basis, on items of that character.
Mr. Gesell. You keep some control over that, in other word^^ in
the sense that you set up the terms under which the items shall be
bid for?
Mr. EciCER. It must depend on the individual case that is involved.
I can't make a general answer.
In some situations, the hotel is rented or leased to a hotel concern
outright. At that timCj then, the entire management is in thejj
hands, just the same as if all we held was a mortgage on the prop-
erty, so to speak.
Mr. Gesell. Yes.
Mr. EcKER. In other instances the hotel company is operating it
for our account, and our supervision there, of course, is much more
direct.
Mr. Gesell. Do you have pretty detailed operating reports which
you receive from them?
Mr. EcKER. Yes; yery.
Mr. Gesell. Eoom rental reports and that sort of thing?
Mr. EcKER. Sure; very detailed. As I testified, some of our men
are technically trained. We have men in our comptroller's division
who ate our hotel men and come out of hotel organizations, and have
specialized in the subject.
Mr. Henderson. Now, take the troubles that go with ownership,
that is, thfe disputes down below. Do you have many people appealing
to you and trying to get you to adjudicate a difficulty because you are
the owner?
Mr. EcKEii. As fair as I am concerned, no, I don't think so, Mr.
Henderson. I don't know if you could give me an example of what
you have in mind.
Mr. Henderson. Let's say in one of these things you have a dispute
on union organization, or something like that. Would the union
sometimes come to you because you are the residual owner ?
Mr. EcKER. I would say generally not, because that is within the
jurisdiction of the operating concern.
Mr. Henderson. But you do at times, I suppose, get the bothers
that go with management?
Mr. EcKER. We have bothers, yes — yes, that go with management;
yes, sir.
Mr. Hayes. Mr. Ecker, the third largest item on table 230 has not,
I believe, been mentioned in this discussion, that is, dwellings, aggre-
gate 52,000,000.^ What are dwellings, 1- or 2-family houses?
Mr. Egeer. Technically, they run up to 4-family houses.
1 See Hearings, Part. 10-A, p. 230.
CONCENTRATION OF ECONOMIC POWER 15169
Mr. EcKEK, Yes; but the bulk are one and two.
Mr. Hates. What is your management policy in connection with
dwellings ?
Mr. EcKER. Those are very largely handled by our correspondents,
you see. Those are made through this correspondent organization..
Mr. Hayes. Are they mostly correspondent loans ?
Mr. EcKER. Yes; most of them.
Mr. Hayes. Do you have any of them around the metropolitan
area of New York?
Mr. EcKER. Not a great many ; a certain number.
Mr. Hayes. Would they, too, be correspondent loans ?
Mr. EcKER. No ; they would be handled direct from the home office.
Mr. Hates. Is there any other territory , outside of metropolitan
New York where the management would reside in the home office?
Mr. EcKER. No.
The Chairman. You are speaking of these as loans. They rep-
resent property owned?
Mr. EcKER. Yes. 1 should have said that they are property owned,
but they are handled by the correspondent.
The Chairman. Then you shed yourself of managerial respon-
sibility with respect to these dwellings?
Mr. EcKER. Only supervisory. It is true that our correspondents
sometimes have two organizations, one for handling real estate
and one for making new loans. But practically speaking, it is a
correspondent's job.
Mr. Gesell. Now, I wanted to consider with you
Mr. Hayes (interposing). Before you go into that, Mr. Gesell,
on these correspondents, the handling of these dwelling properties
by correspondents, are those correspondents in the same position
to your company that, for instance, a real-estate firm, like Pease and
Elliman would be in a New York apartment ?
Mr. EcKER. Not qliite. The correspondents here are mortgage-
loan correspondents for a certain territory, and they have the ex-
clusive right of making dwelling loans for us in that territory.
Mr. Hayes. I mean with respect to the management.
Mr., EcKER. And with respect to the management, too, but our
rfiethod of getting supervision is through these field officers and also
having supervisors and the assistant supervisors that I spoke of
in the home office that go out through these territories to go over
the properties also. In addition, there are maintenance men that
go out as well and check up on it.
Mr. Hayes. Isn't that substantially what you do in the manage-
ment of an apartment house?
Mr. EcKER. Except that the correspondent is a long-term arrange-
ment, generally speaking, and exclusive for a certain territory. As for
the apartment house, the particular real-estate firm has jurisdiction
only over that particular apartment house. There may be another
real-estate firm managing the apartment house up the street or on the
next block.
Mr. Hayes. As far as the work performed is concerned, they are
substantially the same?
Mr. EcKER. Very much.
15170 CONCENTRATION OF ECONOMIC l nVER
Mr. Gesell. Now, I wanted to considt.- with you ^^or a short time
some of the larger mortgages of the comj^any on wliich interest is
overdue. Let's take the first five such mortgages as shown in the
questionhaire as being the largest on which ir> -^rest is overdue as
of December 31, 1938.
Mr. EcK^. Do you have a page on this?
Mr. Gesell. I referred to the questionnaire,
Mr. EcKER. Oh, yes.
Mr. Gesell. I have a summary of the questionnaire which might
help you, if you wish to look at it.
Mr. Ecker. Yes. I have in mind what you asked about.
Mr. Gesell. Largest of those mortgages in which interest is over-
due is the Empire State, is it not ?
Mr. F. W. Ecker. That is right.
Mr. Frederick H. Ecker. May I. speak about that, because I am
familiar with that particular transaction ?
Mr. Gesell. I have no objection at all. I would just as soon
examine Mr. Ecker, Sr., with respect to the Empire State as anyone
else,
Mr. Frederick H. Ecker. That really should not be classified ^s
a past-due mortgage or overdue interest, because it has been dealt
with in the manner that the witness referred to where there has
been an adjustment of interest. That loan has not been actually
in arrears tor taxes or for interest, but the interest was adjusted;
during the period we have had the property, we have had 2.82
percent interest during all the period. We felt that the loan was
very well based when it was made, and we are satisfied as to the
value and that the project was well financed, and we feel today
that if we ever had to take that property, it would not result in a
loss. No, that is a sample of a very large loan's effect.
Mr. Gesell. Might I suggest to the committee, please, if Mr. Ecker
is to testify here, we proceed in an orderly fashion by question and
answer on the subject and that he may explain in any way he
wishes as we come topic to topic.
Senator King. You asked about the Empire State.
Mr. Gesell. I have no objection to it.
Senator Kino. There is no impropriety in his giving his opinion
of it.
The Chairman. I think Mr. Ecker will answer the questions as
you propound them without hesitation.
Mr. Gesell. You say
The Chairman (interposing). I say I have nd doubt he will an-
swer the questions.
Mr. Gesell. Mr. Ecker, that was a mortgage for $27,500,000, was
it not?
Mr. Frederick H. Ecker. Yes.
Mr. Gesell. When was it made ?
Mr. Frederick H. Ecker. My recollection is it was made in
the latter part of 1929. It has been discussed or negotiated before
that but the acceptance of the loan was actually given then.
Mr. Gesell. Our record indicates the loan application was made in
November '29, and was authorized by the real-estate committee in
December of '29.
CONCENTRATION OF ECONOMIC POWER 15171
Mr. Fredekick H. Ecker. That is correct, and that is the record;
but it was discussed earlier than that,
Mr, Gesell. Now, what type of mortgage was it? What were
the terms of the mortgage as to interest and principal payments?
Mr, Frederick H. Ecker. Is there any objection to my saying that
we first agreed to make a loan of $24,000,000 on a 50-story loft build-
ing?
Mr. Gesell. Not at all.
Mr. Frederick H, Ecker. Subsequently — as a matter of fact, the
financing of that operation was not accomplished and we subse-
quently agreed to loan $27,500,000 on an 85-story office building.
That is the building that is there today.
The Chairman. What is the difference between a loft building and
an office building?
Mr. Frederick H. Ecker. A loft building is one in which the
floors are open and used for loft purposes, for light manufacturing;
and the office building, of course, is for offices, needing a great deal
more construction.
The Chairman. Was this discussion with respect to the loft build-
ing begun before, long before the old hotel was taken down ? It was,
was it not ?
Mr. Frederick H. Ecker. Yes; it was before the old hotel was
taken down.
Mr. Gesell. Now, what were the terms of the mortgage finally
made?
Mr. Frederick H. Ecker. The loan we finally made of $27,500,000
was at 6 percent during construction, as I remember, it, and for a
short time 5I/2 percent, and 5 percent thereafter. The term, accord-
ing to my recollection, and please remember I am speaking solely
from recollection, the mortgage was made to expire in 1950. You
probably have the record there.
Mr. Gesell. It was to be 5I/2 percent up to '40 and 5 percent after
that.
Mr. Frederick H. Ecker. If that be the terms, I know there was
an interval in which it was to be 514 percent,
Mr, Gesell. What were the provisions with respect to amortiza-
tion of the loan?
Mr. Frederick H. Ecker. There were' provisions and the exact
amount I would have to refer to the record for. You probably have
it, haven't you, Mr. Gesell ? It was something like 2 percent a year,
as I recall it, but the actual figure I would like to refer to the record.
Mr. Gesell. Now, when was an appraisal made of the building?
Do you recall the latest one you had ? It was in 1929, was it not?
Mr. Frederick H. Ecker. When the loan was made. May I say
that when an application is accepted it is always conditioned „upon
plans and specifications, when they are finally drawn, being made
satisfactory to us. In this instance wlien the plans and specifica-
tions were brought to us they were approved, gone over, checked in
detail by Tboth engineers and architects. That was satisfactory. The
architect gave us his opinion of what it would cost to build that
building. We subsequently checked that with the builder. We were
satisfied that the cost of the building would be in accordance with
our appraisal.
15172 CONCENTRATION OP ECONOMIC POWER
Now, you ask what appraisal was made since. We have known
the history of the property as it has gone along. There would be
no object in going back and reappraising it. We have had reports,
maybe mbnthly, maybe quarterly, from the accountants that keep the
records, keep the books of the office building. So that we know what
the income Kas been right along, what the experience has been. There
would be no object in going over it and reappraising it. We know
as much ourselves about it as anybody outside could know.
Mr. Gesell. I haven't asked you about reappraisal. I asked you
when the property was appraised and for how much ?
Mr. Frederick H. Ecker. I thought you said the last appraisal.
It was appraised when we agreed to make the loan and there my
recollection is that we valued the land at $17,000,000. and that we
valued the building at $29,000,000, making $46,000,000 m all.
Mr. Gesell. That is the last appraisal?
Mr. Frederick H. Ecker. May I just say an important considera-
tion there was to be satisfied that the undertaking had ample finan-
cial arrangements made. That certificate came to us from sources
that we had relied upon and subsequently found to be correct, that
$27,500,000 was the first mortgage, $12,500,000 to be raised by tjie
sale of a secondary interest bond, perhaps an adjustment bond, and
$10,000,000 in cash, making a provision for financing to the extent
of $50,000,000 for property which we estimated would cost $46,000,000.
Mr. Gesell. That was the last appraisal that has been made on
the property, was it not, the one made at that time ?
Mr. Frederick H. Ecker. We kept track of it from day to day
and have our opinion of the situation and the value of it. There
wasn't any time when we haven't known about it.
Mr. Gesell. Was it the last appraisal, sir ?
Mr. Frederick H. Ecker. Do you mean a formal written appraisal,
reviewing the value of the land, reviewing the value of the building ?
There has been none. We made our appraisal as we were given the
operation of the property.
Mr. Gesell. What value is the property carried at now on the books
of the company ?
Mr. Frederick H. Ecker. Of our company ?
Mr. Gesell. Yes, how does it show ?
~ Mr. Frederick H. Ecker. Do you mean as a mortgage?
Mr. Gesell. Yes.
Mr. Frederick H. Ecker. The mortgage is carried at twenty-seven
million instead of twenty-seven million five hundred. That was a
part of the adjustment under which we received $500,000 on account
of the principal.
May I proceed with my recollection of this transaction ?
The Chairman. I am sure it would be acceptable.
Mr. Frederick H. Ecker. This building was finished during
the beginning of the depression, which has been more deep and
longer than could possibly have been anticipated. The building has
not realized what was expected of it in the way of rentals. It is ex-
cellently located, two great terminals, the Pennsylvania on the west
and the New York Central on the east, at Thirty-fourth Street, which
is a focal center, and if we had normal times, it is our judgment that
building would have been rented and paying well as an investment.
CONCENTRATION OF ECONOMIC POWER 15173
Under the conditions that have obtained, it has not been a success.
They have not been able to rent it. The income has been quite in-
sufficient to pay the interest on the mortgage. We have only the
obligation of the building company itself, and the security of
the building. The property did not produce income enough to pay
the interest, and that has been one of the cases referred to where
there was an adjustment made.
The Chairman. You feel that tenants looking for a good office
location might well turn their eyes to the Empire State Building?
Mr. FREDiaacK H. Ecker. I do think so. It is a convenient loca-
tion. It is a very unusual building, the highest building in the world
and spectacular in its construction and its apj)earance, and it attracts
a gr'^at deal of attention. I was going to say inasmuch as the income
was not enough to pay the interest on the mortgage, we have in the
first place accepted a lesser amount, 3 percent, 2 percent, 2i^ percent,
and we charged up,- did not mark oft, the difference between what
we received and the accumulating interest, until a subsequent date
when it was necessary for the owners to make some material changes in
the building, advance some money for taxes, advance some money to
make alterations for tenants involving some two or two hundred fifty
thousand,dollars, and we then agreed at a conference with the owners
of the building that if they would give us five hundred thousand
dollars, the addition to be applied to the principal, we would fix
the interest rate at 2i/2 percent and would make that adjustment, and
cancel the accumulated interest which we continued to carry on our
books.
Now, as a further matter of negotiation we did not write off all
that interest, but agreed we would write it off provided the future
installments of interest were made in accordance with that agree-
ment, as, for instance, there was 2 1/2 percent to be paid on the first
of March, I believe, '37 — I am not sure of the date — and if that were
paid at the time, we would cancel some million dollars of the accu-
mulated interest. If the next interest were paid, something more
would be canceled. So that we carried it along, did not forgive
them, and did not write out of our books the entire accumulated un-
paid interest, and would only do so providing the future payments
of interest which we agreed should be paid were met as they fell due.
Now, if we had foreclosed — I trust this is 'a matter you recognize
as part of the situation— at the time of the first default, we would
have owned that building. We are satisfied we could not have secured
any better return on it than the management of the building, which
is very capable, and it would have made the difference to us that had
we become the owner we would not have received some $3,800,000. In
other words, we are better off by $3,800,000 by carrying on this policy
" of adjustment of interest, and I say during the time we have had it
the actual return to us has been 2.82 percent.
Mr. Henderson. That is on the face value of twenty-seven million ?
Mr. Frederick H. Ecker. Twenty-seven million five, and now it is
twenty-seven million.
Mr. Gesell. Do you recogni-ze this paper which I show you as
containing the terms of the interest adjustment which was made ?
Mr. Frederick H. Ecker. I do. I believe that states what I just
explained.
15174 COXCENTUATION OF ECONOMIC POWER
Mr. Geseix. I wish to offer this document for the record.
The Chairman. It may be received.
(The document referred to was marked "Exhibit No. 2301" and is
included in the appendix on p. 15524.)
Mr. Gesell. The total amount of the interest adjusted amounts to
$10,000,000?
Mr. Fredp:rick H. Ecker. No ; four million two hundred sixty -two
thousand.
Mr. Gesell. You are talking about back interest there, are you
not?
Mr. Frederick H. Ecker. Yes; because we had received all but
tliat.
Mr. Gesell. But then you also made an adjustment as to future
interest, did you not?
Mr. Frederick H. Ecker. We made a future interest adjustment
wlien we agreed to carry that loan at 2^ percent and to forgive the
$4,000,000 in installments which had been accumulated and unpaid.
Mr. Gesell. Taking into account both what you forgave, which was
owing, and the adjustment you made for the future, it amounted to
$10,000,000, did it not?'
Mr. Frederick H. Ecker. That I don't know. We agreed it would
be 2^2 percent until a date in 1943 which would appear in that docu-
ment, if my recollection is right, and from then on it was to be 4
percent.
The Chairman. You mean, Mr. Gegell, write down interest total
there?
Mr. Gesell. That document shows that for the period from Sep-
tember 1, 1937, to September 1, 1938, 1 year, the interest was reduced
to 2 percent from 5 percent, making a difference of 3 percent, or
$810,000, on the amount of the mortgage; that fot the period from
September 1938 to March '45, a period of 4I/2 years ■
Mr. Pike (interposing). '43.
Mr. Gesell. '43, the interest was reduced to 21/2 from 5, which
makes the total interest of 11 percent, or $3,037,500.
The Chairman. Was this sacrifice of interest?
Mr. Frederick H. Ecker. That is the calculation of interest in the
future, not in the pa^t. • I spoke of the interest accumulated in the
past, and I think Mr. Gesell is projecting that and saying we might
have collected that in the future.
Mr. Gesell. Exactly, I am asking how much interest you gave up,
both past and future, by this adjustment in the terms of the mortgage.
I don't think it is a question of projection; it is a question of fact.
Mr. Frederick H. Ecker. We certainly gave up nothing in the
future. We didn't have it.
The Chairman. This is clear. It 13 a matter of fact. That interest
up to date, which was not received, is an actual income which was
sacrificed.
Mr. Frederick H. Ecker. $4,262,000.
The Chairman. And that interest which is represented by the dif-
ference between the original rate and the new rate is a sacrifice of
future interest.
Mr. Frederick H. Ecker. Our board of directors authorized the
continuance of that mortgage at 2i/^ percent, and you can't say they
CONCENTRATION OF ECONOMIC POWER 15175
were entitled thereafter to get 5. That was an adjustment that was
made.
The Chairman. The total of all of the,se items, according to your
computation, was about $10,000,000?
Mr. Gesell. It is exactly $10,000,000.
The Chairman. But it remains true that part of that is interest in
the past and part of it is interest which you might have obtained if
there had been no adjustment.
Mr. Frederick H. Ecker. If we hadn't agreed to take a lesser
amount, which is, of course, entirely within the power of the board
of directors to do.
The Chairman. In other words, the work-out of this particular
piece of property resulted in the Metropolitan sacrificing a certain
rate of interest for a certain period.
Mr. Frederick H. Ecker. That is quite rijrht. To charge or say
that we lose interest' for the future is like saymg that when we have
foreclosed any piece of property that had interest to run for 20 years,
that we have lost interest for 20 years. We haven't.
Mr. Gesell. But you didn't foreclose here either, did you?
Mr. Frederick H. Ecker. No ; we made a much better adjustment.
We got 2.82 percent on the mortgage while we owned it. We gained,
in our best judgment, $3,800,000 which we would have actually been
out of pocket during this period if we had owned the property during
the time we have not disturbed the ownership.
Mr. Gesell. Who negotiated adjustment? Did you negotiate for
the Metropolitan?
Mr. Frederick H. Ecker. For the Metropolitan, of course. I had
the authority to do so.
Mr. Gesell. I am not questioning your authority to make such
negotiation. I don't think that was implicit in my question. Who
negotiated for the Empire State?
Mr. Frederick H. Ecker. Two men. One was ex-Governor Smith,
of New York, who was president of the Empire State Building Co.,
I think is the name of the corporation, and Mr. Brown, who has an
official position with the company, I don't know what it is.
Mr. Gesell. Who initiated the negotiation ? Did the Metropolitan
or the Empire State ?
Mr. Frederick H. Ecker. Oh, the Empire State.
Mr. Gesell. On what basis did they come to the Metropolitan?
Mr. Frederick H. Ecker. We had been having statements, as I
say, at intervals from the accountants, regarding the operation of the
property, and they did not have income enough to pay our interest
and came and said so, and on previous occasions, they hadn't money
enough to pay the interest and the adjustment made was on the con-
dition that the stockholders of that company some way provided the
deficits.
Mr. Gesell. Who controlled the tenants of the building?
Mr. Frederick H. Ecker. I presume the corporation of which ex-
Governor Smith was president.
Mr. Gesell. Who are the people really interested in the Empire
State Building?
Mr. Frederick H. Ecker. You mean to say the stockholders?
Mr. Gesell, Yes.
15176 CONCENTRATION OF ECONOMIC POWER
Mr. Frederick H. Ecker. Well, I have seen a list of them since
we made the loan, I did not know them, other than one John
Raskob and Governor Smith. I think prior to that I did not know
actually who the stockholders were. Mr. du Pont is interested, but
I do not know now whether he is a recorded stockholder of the
company.
Mr. Gesell. Did the stockholders of the Empire State control who
the tenants of the building were to any extent ?
Mr. Frederick H. Ecker. I don't know. The corporation must
have controlled it. Whether the stockholders did, I don't know, only
to the extent that the stockholders, I presume, elect the board and
the board does.
Mr. Gesell. You understand what I mean? Who brought the
tenants in there? Did the tenants come into the building to some
extent because of the nature of the stockholding interests in the
building?
Mr. Frederick H. Ecker. Oh, I could only surmise that. Gover-
nor Smith was prominent, of course. He was president of the cor-
poration, and I presume he did a good job, as good a job as could
have been done.
Mr. Gesell. When this matter came to you, was there any discus-
sion that if the Metropolitan took over the building the tenants
would leave the building?
Mr. Frederick H. Ecker. No.
Mr. Gesell. No mention of that whatever?
Mr. Frederick H. Ecker. None whatever.
Mr. Gesell. Were you given an opportunity to foreclose had you
wished to? I know you had a legal right. Was it put up to you
that way?
Mr. Frederick H. Ecker. It wasn't discussed. We could foreclose
or we could accept that adjustment, and we felt it was to the interest
of the company to accept the adjustment. There wasn't an actual
proposal, "You take this or you must foreclose." It was just a state-
ment, "You have known that the building isn't earning sufficient to
pay the interest. There isn't any other source from which to raise
it, except we can give you these contributions that will make up the
lack of earnings in the building to pay the amounts which we are
proposing to pay."
Mr. Henderson. That was the half billion you spoke of, was it ?
Mr. Frederick H. Ecker. Altogether three-million-eight-hundred-
thousand-odd, $3,800,000,000, over the whole period of time.
Mr. Henderson. Where did that come from? .
Mr. Frederick H. Ecker. It was brought to us by the Empire
State Building Corporation ; who supplied the money, I don't know.
Mr. Henderson. You didn't ask questions?
Mr. Frederick H. Ecker. I do not know.
Mr. Henderson. You as owners of the property had 44 percent,
and you had as a cushion for your loan something like $17,000,000?
Mr. Frederick H. Ecker. There was a cushion for our loan of
$23,500,000.
Mr. Henderson. I mean on the building itself.
Mr. Frederick H. Ecker. Oh, the building and the corporation's
finances and ability to carry on that building.
CONCENTRATION OF ECONOMIC POWER 15177
Mr. Henderson. Did you have any claim to that extra six? That
is what I am getting at.
Mr. Frederick H. Ecker. No; only the obligation of the corpora-
tion. You see, in a building, or any enterprise of that magnitude, it
could hardly be expected to be put on a paying basis immediately.
A building of that size would take 2 or 3 years in normal times,
maybe 4 or 5 years, before it would be satisfactory.
Mr. Henderson. So, the corporation had to have sometliing in
excess of its actual cost?
Mr. Frederick H. Ecker. That is what gave us confidence in the
operation; yes.
Mr. Henderson. Do you know whether there was any return paid
on the $12,000,000?
Mr. Frederick H. Eckek. My understanding is there was never
a penny paid to any interest that was secondary to ours.
Mr. Hj;nderson. I gather that you had a very important judg-
ment to make, ana you decided that if you refused the possession
you would probably not have an excess of value over your mortgage —
that is, some part of the $12,000,000 and some part of the
Mr. Frederick H. Ecker. (interposing). We were satisfied we
wouldn't have income equal to that which was being paid to us.
Mr. Henderson. As ybu looked at it as to capitalization of in-
come.
Mr. Frederick H. Ecker. As we looked at it then, afid as we
see it now, if we could have dOne no better than the management
of that building has done, we- would have suffered a loss of $3,840,-
000. ^ '
Mr. Hendei^on. That is, you could not have, you might say, taken
a second lien and sold for anything which
Mr. Frederick H. Ecsaai (interposing). It is our judgment that
under conditions that obtained in New York and have continued
to obtain, we could not.
Mr. Henderson. Here is a $27,500,000 loan, now, as you had a for-
giveness of accrued interest.
Mr. Frederick H. Ecker. A balance that hadn't been paid.
Mr. Henderson. A balance they didn't pay?
Mr. Frederick H. Ecker. Yes,
Mr. Henderson. That represents a sizable part of the admitted
assets?
Mr. Frederick H. Ecker. We never carried it, and that is what
I had reference to. It somewhat distorts this amount of interest
unpaid. That really should .not have been interest in arrears, be-
cause we made the adjustment; but technically it was, and there-
fore we included it there.
Mr. Henderson. But on the principal amount, you carried the
principal amount? ' \
Mr. Frederick It. EcKiat.' Carried the principal amountibut no
part of the interest. " -
Mr. Henderson. And that was the substantial assets item?
Mr. Frederick H. Ecker. $27,000,000.
Mr. Henderson. Now, on any part of your assets taken on the
whole distribution, did you have at any one time a similar kind of
decision to make as to whether you would take over or take an ad-
15178 CONCENTRATION OF EX::ONOMIC POWER
justment? You wouldn't have in $27,000,000 of farm mortgages at
any one time, I guess. You mi^ht in connection with
Mr. Frederick H. Ecker (interposing). In sum total, we might
have much more than that, but no other instance where in a single
item there was $27,000,000 involved.
Mr. Henderson. I don't recall, for example, whether you have
holdings in any one corporation that got into similar difficulties that
amounted to that.
Mr. Frederick H. Ecker. I am sorry, Mr. Henderson.
Mr. Henderson, Whether you had, say, in a railroad or some other
corporation, as large an item where you had a similar decision as
to whether you would take over.
Mr. Frederick H. Ecker. In the railroad situation you cannot take
them over. We have more than 27 million in some of the prop-
erties. But you couldn't take it over as you would a piece of real
estate and hold it and operate it.
I would be glad to say again that it is our best judgment that that
is not a loan on which we will lose any money. We have a lower rate of
interest, we have a better rate of interest than Government bonds
paid us during that time, but, as for the future, if we must foreclose
and take that property in the future, I sincerely believe it will not
result in any loss.
Mr. Henderson. What is the average rate which is carried by your
policy contracts?
Mr. Fre' erick H. Ecker. Do you mean the rate at which our
premiums • re calculated?
Mr. Henderson. Yes.
Mr. Frederick H, Ecker. It has been testified to that the pre-
miums are made up of course of mortality tables, interest tables, and
expense ratios. On interest return, 3 percent is the lowest basis on
which our premiums are calculated, .
Mr. Henderson, If you got 2i^ percent to maturity, then you
would be short about one-half of 1 percent on this,
Mr. Frederick H. Ecker, That isn't true with insurance. You
see, there are two other factors. You might lose on the interest but
make up on mortality or a saving on expense,
Mr, Henderson. I know, you make it up, there is no doubt of that,
but it isn't up to the rate you have to get. There is an average on all
assets.
Mr. Frederick H, Ecker. That is true on an asset of nearly
$1,000,000,000 of Government bonds, and that is true of conditions
today. We have nearly one billion of Government bonds. that like-
wise do not pay 3 percent.
Mr, Henderson, How much of your assets are earning less than the
3 -percent I'ate?
Mr, Gesell, I think Mr, Howe's figures showed a little over 31
percent,^
Mr. Henderson, So it is in that category that has to be made up by
ihe other 69 percent ?
Mr. Frederick H, Ecker, That is right.
The Chairman. This particular item is in tlie 30 j^rcent?
' So(» "Kxliibit No. 2260," appendix, p..iri-J96.
CONCENTRATION OF ECONOMIC POWER 15179
Mr. Henderson. It would fall into that; yes.
Mr. Frederick H. Ecker. Our life insurance, it has been testified
to, is a long-range business. There are times in which the earnings
are less, the interest is less. There have been times in which the mor-
tality was very much greater than the tables on which we calculate
our premiums, but over a long range we get the average back. If we
don't in mortality, we expect to do it in interest.
MrV Henderson. On that point, suppose that particular section
flourishes and they do get on a very good basis, can you increase the
interest rate?
Mr. Frederick H. Ecker. Not over 4 percent. We have agreed
that it should be 2^ percent until a date in 1943, but if they do have
earnings in excess of that 2i/2 we get it in reduction of the principal.
They cannot pay out any money on any secondary interest, stock, or
what not. And it goes to 4 percent in 1943.
Mr. Henderson. The rate goes to 4 percent at that time?
Mr. Frederick H. Ecker. Yes, sir; and any earnings over 21/2
percent we get. Any earnings over the 4 percent we get until some-
thing like $7,750,000 of principal is paid. ' That is in that memo-
randum.
Mr. Henderson. That would mean you had about 7 years — sup-
pose you got the 4 percent, you would have 6 or 7 years in which you
would have 1 percent over your assumed rate of income.
Mr. Frederick H. Ecker. A good many investments, Mr. Hender-
son, made during this period will not yield us 4 percent for the next
7 years.
The Chairman, On the whole, your income is 'still substantially
more than your disbursements'?
Mr. Frederick H. Ecker. Oh, yes.
The Chairman. Your assets are increasing, are they not, all the
time?
Mr. Frederick H. Ecker. Our assets are increasing. Of course,
the company has a large surplus. I hesitate to refer to that because
Mr. Gesell says it came up from time to time. But our earnings on
surplus of over 309 millions of dollars are earnings which can be
used to make up a deficiency of interest on reserye; that you know.
Mr. Gesell. At the time you took this investment, did you have
an opportunity to share it with anyone else ?
Mr. Frederick H. Ecker. No ; nor would we if we had.
May I say there over long years of experience we found it better
policy not to share a mortgage investment with anyone. If you have
partners it isn't so easy to deal with — your financial adviser will
tell you that, that you anight have a partner that would want to
foreclose, and you maybe wouldn't want to foreclose. It is more
advantageous in a mortgage loan to either have it all or none.
Mr. Gesell. So there was never any consideration given at tlip
time this investment was made as to whether anyone else should go
^vith you on the risk?
Mr. Frederick. H. Ecker. There wasn't the slightest consideration
given to that. Of course, it wouldn't be our business to suggest it.
Either they wanted it or they didn't.
Mr. Gesell. Was this proposition brought to you, or did you
se«k it?
15180 CONCENTRATION OF ECONOMIC POWER
Mr. Frederick H. Ecker. Oh, it was brought to us.
Mr. Gesell. The plans were all laid down when the building was
brought to you?
Mr. Frederick H. Ecker. Sketched plans, outlined plans of what
the building wa? to be. Our acceptance is subject to working plans,
specifications being made satisfactory.
Mr. Geselx,. Did you to some extent have a voice in what kind of
a building this would be and how it would be constructed, and so
forth?
Mr. Frederick H. Ecker. Yes ; if it wasn't satisfactory to us we
didn't make the loan.
• Mr. Gesell. I mean
Mr. Frederick H. EdKER (interposing). But that is very definite,
that is a complete control.
Mr. Gesell. That would be on the construction determined upon
but I am thinking more in terms of plans and specifica.tions.
Mr. Frederick H. Ecker. The plans and specifications must be
satisfactory or we were not obligated to make the loan. There we
employed our own engineers and our own architect to advise us.
Mr. Gesell. What was the judgment of the board of directors with
respect to making an investment of this tremendous size, this mort-
gage risk?
Mr. Frederick H. ^Ecker. It isn't tremendous in respect to our total
assets. That is a relative term. Twenty-seven million to a company
with five billion of assets isn't any greater than $10,000 might be- to a
proportionately smaller institution.
Mr. Gesell. I suppose it is one of the biggest investments of its
kind ever made by anybody.
Mr. Frederick H. Ecker. On a single building,- yes; but not a
single project.
Mr. Gesell. Then you will pardon me for calling it a big in-
vestment.
Senator King. Rockefeller Center- called for over a hundred mil-
lion of bonds; did it not?
Mr. Frederick H. Ecker. We have 36 million of bonds there. Th^
investment is some 78 million in addition to that.
The Chairman. You have 36 million?
Mr. Frederick H. Ecker. Thirty-six million.
The Chairman. Of bonds on Rockefeller Center?
Mr. Frederick H. Ecker. We have.
Mr. GeseLl. That was not a mortgage, though, was it ?
Mr. Frederick H. Ecker. It was the investment made under the
provisions of the law, with the obligation of the solvent corporation
secured by adequate collateral. There is a slight difference between
that form of investment and the mortgage.
The Chairman. Under the New York law you can buy bonds which
are secured by real estate
Mr. Frederick H. Ecker (interposing) . One could.
The Chairman. More easily than/ you could give a real-estate
mortgage.
Mr. Frederick H. Ecker. Not more easily, but you could buy it
just as readily.
CONCENTRATION OF ECONOMIC POWER 15181
Mr. Gesell. What was the judgment of the board of directors
with respect to — what were the considerations with respect to put-
ting
Mr. Frederick H. Ecker (interposing). It was the judgment of the
real estate committee rather than the board, if that is what you mean,
because under our bylaws and in compliance with the laws of the
State of New York, no loan or purchase may be made that shall not
first have been authorized by the board or a committee of the board
appointed to supervise such investment.
Mr. Gesell. Wliat was the judgment of the real estate, committee
with respect to making
Mr. Frederick H. Ecker (interposing). Unanimously.
Mr. Gesell. I have been trying to finish a question, Mr. Ecker.
Mr. Frederick H. Ecker. I am sorry.
Mr. Gesell. What was the judgment of the real estate committee'
with respect to making an investment of this large amount in the city
of New York, and was there consideration given as to whether it
would be more desirable to put this amount of money out to work with
a broader diversification?
Mr. Frederick H. Ecker. In just the form you asked the question.
I must answer it by saying that the favorable action by the committee
was unanimous.
Mr. Gesell. What consideration was given in the meeting of the
board as to whether it would have beeii more desirable to diversify
these funds?
Mr. Frederick H. Ecker. That particular question was not dis
cussed, but this was a matter that was considered very carefully by
the real estate committee, on which we have two very outstanding
real estate experts, and they were consulted and they have given their
best consideration to this transaction.
Senator King. I assume you did have diversified loans ?
Mr. Frederick H. Ecker. At that time, , sir, we were having as
many as one thousand at each meeting.
Senator King. That is applications for loans which you consid-
'ered ?
Mr. Frederick H. Ecker. That we accepted. That would include
all these
Mr. Gesell (interposing). How long did one of those meetings
last?
Mr. Frederick H. Ecker. That was* correspondents' loans, every-
thing included.
Mr. Gesell. How long does one of those meetings last?
Mr. Frederick H. Ecker. From 1 to 3 hours, depending on the
business to be transacted. '
Mr. Gesell. And you would consider at one of those meetings
as many as a thousand loans?
Mr. Frederick H. Ecker. Counting our correspondent loans. Now,
there is a diti'erence in considering a single loan of a large amount
and a volume of loans from a correspondent which is accepted
under an arrangement made with these correspondents, and those
arrangements are known to the committee; and which, may I say,
have been carefully gone over, combed over, by the experts we
124491— 41— pt. 28 32
15182 CONCENTRATION OF ECONOMIC POWER
have in our real-estate division, and they having passed on each of
those loans, they come with the recommendation of the comptroller
and his assistants to the real-estate committee.
Mr. Gesell, Now, I want to discuss some of those other mort-
gages. Which of you gentlemen wishes to testify ?
Mr. Hayes. Before you leave the one you are on, there is one
question that occurs to me in connection with the Empire State.
Do I understand you are even at the present time receiving financial
statements showing the operations of that building?
Mr. Frederick H. Ecker, We do.
Mr. Hates. Do those financial statements disclose the inability
presently of that building to pay the 214 percent presently provided
for?
Mr. Frederick H. Ecker. Yes, sir ; they do disclose that the income
is insufficient. It doesn't today yield 21/2 percent, and there is a
contribution from someone each time interest has fallen due to make
up the payment we receive.
Mr. Hates. You are not in position to forecast the possibilities
of that building in 1943 to pay the 4 percent?
Mr, Frederick H. Ecker. No; except the gradual improvement in
conditions, and our best judgment is in 1943 it will be on a paying
basis.
Mr. Hayes. And if it is not in a position to pay 4 percent at
that time, it will make it necessary to have a recasting.
The Chairman. It occurs to the chairman to remark that if the
T. N. E. C. is to succeed in the objectives it undertook, perhaps the
Empire State and a lot of other properties will be making money
in 1943.
Mr. Gesell. Now, with respect to these other mortgages, Mr, F. W.
Ecker, do you wish to testify with respect to these other mortgages?
Mr. F. W. Ecker. What are they ?
Mr.* Gesell. What about 20 Wacker Drive, the Chicago Opera
House ? Are you familiar with that property ?
Mr. F. W. Ecker. I know we have had an average income there
of 3.44 percent.
Mr. Gesell. That was a loan of $10,000,000 made in 1928, was it
not?
Mr. F. W. Ecker. :That is right.
Mr. Gesell. And the interest on that ranged on the terms of the
mortgage from 5i/^ to 5 percent ?
Mr. F. W. Ecker. I don't know whether I have all the details
here or not. Yes ; I think that is right,
Mr. Gesell. The questionnaire return indicates that there is
$1,225,000 of interest past due as of December 31, 1938.
Mr. F. W. Ecker. Yes. I think that is right. I haven't that
figure right here.
Mr. Gesell. And taxes of $19,000 delinquent as of that time.
Mr. F. W. Ecker. Nineteen thousand dollars on a $10,000,000
property ?
Mr. Gesell. That is what the questionnaire shows.
Mr. F. W. Ecker. I don't know just why that would come about,
but that is possible.
CONCENTRATION OF ECONOMIC POWER 15183
Mr. Gesell. Why have you not foreclosed in the case of that
piece of property?
Mr. F. W. EcKER. For the similar reason that that property if
working itself out also.
Mr. Gesell. Will you explain how it is working itself out?
Mr. F.- W. EcKER. I say, we have averaged 3.44 percent over a
period of time. There was a time when it was paying the full in-
terest of 51/^ percent, and then it dropped on down. As to just the
details of it, "^ know that an arrangement was made fairly recently
to adjust the interest there, and at that time we received additional
collateral.
Mr. Gesell, I have no further questions with respect to the Metro-
politan's urban mortgages and real estate," if the committee please,
and I think it is too late to take up the question of the bond account
at this time.
The Chairman. Are there any other questions?
Mr. Kades. Do I understand, Mr. Ecker, that none of your real-
estate loans are ever passed upon by the board of directors?
Mr. F. W. Ecker. Oh, no. The real-estate loans are passed upon
by our real-estate committee, which under our bylaws is the authority
to handle such matters as are delegated to them; but the action of
the real-estate committee is approved by the board of directors at
a subsequent meeting, or ratified, rather.
Mr. Kades. Are they ratified specifically or in bulk ? For example,
Mr. Ecker, Sr.j said he took up 1,000 loans at one real-estate committee
meeting. Are the entire 1,000 loans ratified in bulk, or is any particu-
lar loan passed upon?
Mr. F. Wf Ecker. The purpose of this arrangement is so that the
total of 25 directors won't have to sit down and spend as much time
as the real-estate committee does, and of course they are not specialists
in real estate any way, but the minutes of the meeting of the real-
estate committee are presented to the board in typewritten form.
They may take them with them or go through them at the meeting,
or any action that they desire, and those minutes are ratified and
confirmed and approved, whatever the legal term may be.
Mr. Kades. Was the loan on the Empire State Building ever ap-
proved by the bord of directors?
Mr. F. W. Ecker. My assumption is that only in the same manner
that I speak of.
The Chairman. Are there any other questions? You are through
with Mr. Ecker?
Mr. Gesell. Until next Tuesday.
The Chairman. Do vou want to proceed with the bond story next
Tuesday?
Mr. Gesell. Next Tuesday, We have a discussion of cash balances
scheduled for next Monday.
The Chairman. Do j^ou want a session on Friday, Mr. Gesell ?
Mr. Gesell. If it is ]ust the same with you, I would like to go over
until Monday.
Mr. Henderson. Mr. Ecker and I have decided that.
Mr. Gesell. If you can recess until Monday it will be very satis-
factory.
15184 CONCENTRATION OF ECONOMIC POWER
The Chairman. Let me express my appreciation to the witnesses,
one and all, for their time this afternoon.
Mr. Frederick H. Ecker. One witness expresses his appreciation
to Mr. Gesell for allowing him to help.
The Chairman. Mr. Howe, have you completed your computa-
tion ? '
Mr. Howe. Yes; I have, Senator.
The Chairman. Will you please put it in the record, then ?
Mr. Howe. Of the $902,022,000 unpaid principal amount of mort-
gages owned by the Metropolitan Life Insurance Co. on December
31, 1938, $191,086,000 represented loans in the amount of less than
$25,000 each. There were 58,622 of these loans. $710,936,000 repre-
sented the unpaid principal amount of loans of $25,000 or more.
There were 2,405 of these loans.
The Chairman. The committee stands in recess until 10 o'clock
on Monday morning.
(Whereupon, at 3 : 30 p. m., the committee adjourned until Monday,
February 26, 1940, at 10 a. m.)
^ See supra, p. 15155.
INVESTIGATION OF CONCENTEATION OF ECONOMIC POWER
MONDAY, FEBRUABY 26, 1940
United States Senate,
Temporary National Ecxdnomic Committee,
Washington^ D. G.
The committee met at 10 : 30 a. m., pursuant to adjournment on
Wednesday, February 21, 1940, in the Caucus Room, Senate Office
Building, Representative Hatton W. Sumners presiding.
Present: Representative Sumners (vice chairman) ; Senator King;
Representative Reece ; Messrs. Lubin, Kades, Henderson, Pike, Kreps,
and Brackett.
Present also : Harry D. White, Department of the Treasury ; Ger-
hard A. Gesell, special counsel ; Ernest Howe, chief financial adviser ;
and Hebner Johnson, attorney, Securities and Exchange Commission.
The Vice Chairman. The committee will come to order. Are you
ready to proceed, Mr. Gesell ?
Mr. Gesell. I am ; yes, Judge Sumners.
One or two matters have come up with respect to the hearings
last week which I would like to clarify before we get started this
morning. Mrt Thomas A. Buckner, of the New York Life, who
testified, has sent me a letter calling attention to one or two slight
inaccuracies he made in connection with his testimony in giving
figures, and he has asked this letter to be included in the record so as
to clarify his testimony. I think that is desirable.
The Vice Chairman. The letter may be included.
(The letter referred to was marked "Exhibit No. 2302" and is
included in the appendix on pp. 15524, 15525.)
Mr. Gesell. When Mr. George Van Schaick was on the witness
stand a question was raised as to what the exact wording of chapter
40 of the laws of 1933 of the State of New York was. The com-
mittee will recall that that was an act giving emergency powers to
the superintendent of insurance. I now have a copy of that chapter
of the laws and, in response to the suggestion of the committee,
would like to offer it for the record.
The Vice Chairman. It may be included in the record.
(The document referred to was marked "Exhibit No. 2303 and is
included in the appendix on p. 15525.)
Mr. Gesell. Furthermore, I have a letter from Mr. Vincent P.
Whitsitt, Association of Life Insurance Presidents, advising the com-
mittee with respect to the attitude the association took in regard to
15185
15186 CONCENTRATION OF ECONOMIC POWER
legislation involving real estate or real estate mortgages. That
should be offered for the record.
(The letter referred to was marked "Exhibit No. 2304" and is
included "in the appendix on pp. 15526-15527.)
Mr. Gesell. Now, today if the committee please, we are going
to consider life-insurance company cash balances, and just to refresh
the committee's recollection, referring to "Exhibit No. 2250," the com-
mittee will observe, on table 102 of the exhibit, the percentages of
cash held by the various 26 companies in relation to their total
admitted assets.^
It will be observed that the percentage of assets in cash ranges
from 5.02 percent in the case of the Penn Mutual down to as low as
0.71 percent in the case of the Western and Southern.
Table 98, which is also in evidence before this committee, shows
on the very top line the increase in cash which has occurred since
1929, cash rising from $102,000,000 'in '29 to $665,000,000 in ISSS.^'
The committee will also recall that Mr. Howe in testifying introduced
"Exhibit No, 2264" which is in the record, which shows that cash
increased for the average of the 26 companies from 0.69 percent of
the assets in 1929 to 2.74 percent of the assets as of December 31, 1938.^
There are two other tables relating to cash balances.* These are
also in evidence before the committee and show the cash balances
for each of the 26 companies for the period '29 to '38 and in addition
the interest income on cash balances received by the various com-
panies. Those interest earnings are shown on 107.
The first wii less this morning is Mr. Saylor.
The Vice Chairman. Mr. Saylor, will you take the stand ? Do you
solemnly swear that the testimony you are about to give will be the
truth, the whole truth, and nothing but the truth, so help you God?
Mr. Satlor. I do.
TESTIMONY OF GEORGE SAYLOR, VICE PRESIDENT, CHASE
NATIONAL BANK, NEW YORK, N. Y.
Mr. Gesell. Mr. Saylor, will you state your full name and your
position for the record, please, sir?
Mr, Saylor. I am George H. Saylor, vice president. Chase National
Bank, located in the Metropolitan branch and in charge of that
branch.
Mr. Gesell. What is the Metropolitan branch of the Chase bank?
Mr. Saylor. One of the 33 domestic branches.
Mr. Gesell. Where is it located?
Mr. Saylor. At Fourth Avenue and Twenty-third Street, New
York, in the building of the Metropolitan Life.
Mr. Gesell. You say it is in the Metropolitan Life Building?
Mr. Saylor. That is right — one of them,
Mr. Gesell. The Metropolitan is the biggest customer of that
branch, is it not?
Mr. Saylor. It is.
Mr. Gesell. How long have you been connected with the Metro-
politan branch?
' Sep Hearlnfjs. Part lO-A. p J 02
' Tbid., p. 98.
■ See appendix, p. 1549.J.
♦ See Hearings, Part 10-A, pp. 106-107.
CONCENTRATION OF ECONOMIC POWER 15187
Mr. Saylor. Since 1928 actively, and inactively even before that.
I have been in charge since 1933.
Mr. Gesell. Now, can you tell us whether or not the Metropolitan
is the biggest customer of the Metropolitan Bank?
Mr. Saylor. It is the largest customer of the Metropolitan branch.
Mr. Gesell. What type of account does it carry there? Will you
give us some idea how that is handled?
Mr. Saylor. It is purely a checking account. There are no loans,
of course, but there are many transactions because of its size ; cashing
checks and making deposits, checking, all the transactions that take
place between large corporations and banks.
Mr. Gesell. What we want to get is some idea of wha:t those
transactions were. That is a checking account, you say?
Mr. Saylor. Checking account.
Mr. Gesell. How much does the balance run ?
Mr. Saylor. There is in possession of Mr. Aldrich all of those bal-
ances which were given.
Mr. Gesell. Yes; I have that information. I just thought if you
could give us a round figure as to what the balance runs it would
help at this time. It is in the neighborhood of $30,000,000 or $40,-
000,000, is it not?
Mr. Saylor. Yes; it would be all of that. Mine is secondary
information. It was all furnished.
Mr. Gesell. Very well. I will come to that.
How many checks do you clear a year, have you any idea, for the
Metropolitan ?
Mr. Saylor. I might give you the information on a monthly basis.
Mr. Gesell. Certainly.
Mr. Saylor. In the month of January there were 910,000 separate
transactions ; the checks paid in that month were $569,000.
Mr. Gesell. That is more or less typical of what happens from
month to month, is it not?
Mr. Saylor. I would say this was an average month.
Mr. Gesell. What are the totals for the year? Do you happen
to have those ?
Mr. Saylor. No, because we made it up only for the month ot
January, but if it is a normal month we multiply 910,000 by 12;
10,000,000 separate transactions.
Mr. Gesell. About 10,000,000 separate transactions.
Now, I would like to oflfer for the record at this time a schedule
which has been prepared from the Convention Form Annual State-
ment of the Metropolitan Life Insurance Co., which is filed with all
the various State insurance officials. This is simply a schedule show-
ing the balances carried by the Metropolitan Life Insurance Co. in
the various brackets, the portions of those balances carried in interest,
those carried not of interest, the total balances, and the amouAt of
insurance received. This schedule shows that the total deposits in
New York City amounted, as of December 31, 1938, to $80,198,422.30.
Tliat is balances not at interest. Balances at interest total $16,950,-
000, making their total New York City balances $97,148,422.30.
The total amount of money on deposit with the Chase Bank,
according to these figures, was $31,063,878 not at interest, and
$3,000,000 at interest, or a total of $34,063,878.
15188 CONCENTRATION OF ECONOMIC POWER
(The schedule referred to was marked "Exhibit No. 2305" and
is included in appendix on pp. 15527-15528.)
Mr. Gesell. Now, Mr. Saylor, can you give us some idea of the
history of the Metropolitan branch of
The Vice Chairman (interposing). Mr. Gesell, right in that con-
nection, could you, by a few questions, disclose the general char-
acter of the accounts for which these checks were drawn? May
I ask you what items in the main did this enormous number of
checks cover. Was it to pay salaries and liabilities under the
policies through your bank?
Mr. Saylor. Well, they paid claims. I will be frank with you.
I am not an operating oflicer, so these details are not in my possession.
They refer to pay-roll checks, checks paid over the window, and for
paymg claims, things of that sort.
The Vice Chalrman. Have you any idea what additional expense
your bank incurs in order to handle this account V
Mr. Saylor. I have no idea of the expense.
The Vice Chairman. Who does?
Mr. Saylor. The last report was made up in that connection by the
auditing and controllers department, and I have never had a copy
of it. .
The Vice Chairman. But who in your bank has any idea what
it costs you in clerical help and office space and general equipment
to handle 10,000,000 checks a year?
Mr. Saylor. The controller's department.
The Vice Chairman. Who is he? Where is he?
Mr. Saylor. He is in New York.
The Vice Chairman. Send a wire up there and get him to tell
you, will you?
Mr. Saylor. Will you repeat what you want? It will be diffi-
cult for me to tell him. It will be difficult for me to tell him unless
you repeat it to me.
The Vice Chairman. You testified that you handled about
10,000,000 checks a year for this company, and it is showing a lot
of money on deposit. If I were handling your case, I would try
to show how much expense I incurred to handle that account I
thought maybe you had the evidence.
Mr. Sayix)r. I think that has been done.
The Vice Chairman. Then it is all right.
Mr. Saylor. We can get it.
The Vice Chairman. I won't press the question.
Mr. Gesell. Perhaps we can get at it this way a little, Mr. Saj'lor.
Is the account with the Metropolitan branch a profitable account
for Chase?
Mr. Saylor. I believe it is, if it could loan the money, that is.
Mr. Gesell. You say, if it could?
Mr. Saylor. Yes.
Mr. Gesell. Let's take the realities of the question. I take it
from your question or your answer that it can't. So is it profitable
for the branch or not profitable?
Mr. Saylor. I would say it is profitable.
Mr. Gesell. Can you give us an idea how profitable the account is ?
CONCENTRATION OF ECONOMIC POWER 15189
Mr. Satlor. I would like to look at the report that is made up in
that connection, which I think is available here, but I haven't got it.
Mr. Gesell. If it is here in the room, I would like you to get hold
of it.
Was there a special study of it ?
Mr. Saylor. I believe there was a study made, Mr. Gesell. The
25rofit may have ranged between $200,000 or $300,000. I have no copy
of the report. I made no study of it and could make it up myself
anyway,
Mr. Gesell. Can you give us some idea of the history of the
Metropolitan branch, of why it was established, or where it was
and how long it has been in operation, some of the background
information concerning it? It went way back to the days of the
Armstrong Committee, didn't it?
Mr. Satlor. I wouldn't know much about it. All I know about
the Metropolitan Bank is that it became a part of the Chase National
Bank in 1921.
Mr. Pike. What was it before that, Mr. Saylor?
Mr. Saylor. The Metropolitan Bank.
Mr. Gesell. And that bank was taken into the Chase at that time ?
Mr. Satlor. That is right.
Mr. Gesell. Are you familiar with the advisory committee?
The Vice Chairman. Just a minute. Did the Metropolitan Bank
have this account at the time it was taken in by the Chase?
Mr. Satlor. The Metropolitan Bank did have the Metropolitan
Life account, yes.
Mr. Gesell. There is an advisory committee to the Metropolitan
branch ?
Mr. Satlor. There is.
Mr. Gesell. Who are the members of that advisory committee?
Mr. Satlor. I am not prepared to give you that information. I
think Mr. Aldrich has the information.
Mr. Gesell. You, as the manager of the branch, don't know who
the members of the advisory committee are?
Mr. Sati^or. Yes, I know who they are.
Mr. Gesell. Will you tell us, please?
Mr. Satlor. Mr. F. H. Ecker, George E. Warren of Chase, vice
president; H. D. Campbell, Mr. Aldrich, chairman of the board of
Chase; and myself as vice president of the Chase; Mr. William
De Bost, who is president of the Union Dime Savings Bank; Mr.
Zacher, who is president of Travelers Insurance Co.; and more
recently, Mr. Tanner of Tanner, Silcocks & Friend.
Mr. Gesell. What does that advisory committee do ?
Mr. Satlor. I would prefer to have Mr. Aldrich describe the ad-
visory committees to you. I know what this one does.
Mr. Gesell. I would prefer to have you answer my question, sir,
which is from the point of view of the manager of this branch. What,
as far as you know, does the advisory committee do?
Mr. Satlor. It advises. It listens to reports submitted of the
operation of the branch.
Mr. Gesell. How often does it meet?
Mr. Satlor. Once a month except in the summertime.
15190 CONCENTRATION OF ECONOMIC POWER
Mr, Gesell. And what does it advise about?
Mr. Saylor. Whenever anything of interest arises, whenever any
discussions take place that call for advice, the committee comments.
The Vice Chairman. About what?
Mr. Satlor. Well, the answer to that is there is not a great deal to
give advice on.
The Vice Chairman. What have you got it for, then ?
Mr. Satlor. I didn't create the committees.
The Vice Chairman. Beg your pardon?
Mr. Satlor. They are for the associations.
The Vice Chairman. You don't need company, do vou? For
what? ^ ^^ y
Mr. Satlor. I still say I didn't create the advisory committee and
I would like Mr. Aldrich to answer that question.
The Vice Chairman. We understand that thoroughly, but you are
a sworn witness and if you have the information we would like you to
give it. If you refuse to give it, we will have to see what we can
do about it,
Mr. Satlor. There is no refusal. You say, "Why do you have
them ?" I can only give you my personal idea.
The Vice Chairman. That is all we want.
Mr. Satlor. I say the associations of these men mean much to us,
they are broad-gaged businessmen, attorneys, etc. If anything comes
up where we need the advice of others they are there to give it to us.
The Vice Chairman. About what subjects do you usually consult
them?
Mr. Satlor. There are not a great many of them before the advisory
committee of a branch.
The Vice Chairman. I didn't ask you how many. I said, what
do you consult them about, speaking generally? And you know.
Mr. Gesell. You are a member oi uie committee, are you not ?
Mr. Satlor. Why, yes.
The Vice Chairman. Are you going to answer?
Mr. Satlor. I am trying to think it out. You are asking questions
that are a little difficult.
The Vice Chairman. Difficult why?
Mr. Satlor. Because I am trying to think of a subject on which
they might advise.
The Vice Chairman. Is it that difficult to find out what those
fellows have been doing all these years?
Mr. Satlor. Well, the loans; I say the loans are submitted — loans,
discounts, foreign exchange, and other matters. They listen to those
reports and discuss those when they feel like it. They advise us if they
have anything to advise us on, there isn't an awful lot to advise on.
Mr. Gesell. Are they in effect a board of directors of the branch ?
Mr. Satlor. In a sense. I think there is no legal responsibility.
Mr. Gesell. Beg your pardon?
ISIr. Satlor. In a sen.se they are a l)oard of directors; in this case
members of. the board of directors of the Metropolitan Bank were
continued as an advisory committee of the Metropolitan Branch of
the Chase Bank.
Mr. Gesell. Are the actions of the Metropolitan Branch also ap-
proved by the board of directors of the Chase Bank?
CONCENTRATION OF ECONOMIC POWER 15191
Mr. Saylor. They are.
Mr. Geseix. So that in the case of this branch you have two groups
you bring these matters up with, both the advisory committee and
the board of directors?
Mr. Saylor. I would like to make this statement, that approval
is by the board of directors of the head office.
Mr. Gesell. That is, of the bank, of the Chase Bank ?
Mr. Saylor. Yes. The approval is at the head office, that is the
board of directors. These reports are submitted to the members of the
advisory committee but they are approved by the board of directors
of the bank.
Mr. Gesell. There must be something special to come before the
advisory committee if they meet every month. There must be some
function they perform. What do you do, discuss how you can get
business ?
Mr. Saylor. That comes up at times.
Mr. Gesell. Tell us about that. What kind of advice do these
men lend you in that regard?
Mr. Saylor. If they have any suggestions to make, prospects, or
anything like that, they make them.
Mr. Gesell. I would like you to be a little more specific, sir, and
give us some concrete examples of the matters that have come before
the committee.
The Vice Chairman. May I say now, the committee has no dis-
position to pry into the details of your proceedings to a degree that
would be embarrassing to disclose to your competitors, at the mo-
ment at least, but we do feel that, to be candid with you, you know
more about this thing than you are telling.
Mr. Saylor. There is no disposition on my part to withhold any-
thing. . An advisory committee in a Branch is a somewhat different
body than directors of the bank. They listen to the various reports.
If they have comments they make them. The approval is by the board
of directors. There are not many things that come up in an advisory
committee that can be discussed.
Mr. Pike. The advisory committee has no power, has it?
Mr. Saylor. It has no power. It has no legal status.
Mr. Pike. It can discuss conditions, but little beyond that?
Mr. Saylor. Little beyond that. I mean if they bring anything
up, we of course are only too glad to consider it.
Mr. Gesell. What kind of things do they bring up ?
Mr. Saylor. There are not many things that are brought up.
Mr. Gesell. Well, what things are brought up, Mr. Saylor?
Mr. Saylor. Perhaps new business; perhaps some comments on
the Chase Safe Deposit Co., or something of that sort; business that
could be developed.
Mr. Gesell. Is this group helpful in getting new business for the
Metropolitan Branch?
Mr. Saylor. To some extent ; not to a large degree.
Mr. Gesell. Will you give us some idea of how they have gotten
new business for the branch?
Mr. Saylor. Simply recommending that somebody is available to
open an account, to solicit it.
Mr. Gesell. You mean they give you leads to follow up?
15192 CONCENTRATION OF ECONOMIC POWER
Mr. Satlor. They might give leads, but not a great many, to be per-
fectly frank.
Mr. Gesell,. Well, now, perhaps we can come back to this branch
with Mr. Aldrich.
Mr. Henderson. Let me get this straight. I am not clear on it at
all. You have this advisory committee, and that was continued after
the Chase took over in 1921, is that it?
Mr. Saylor. The board of directors of the Metropolitan Bank,
and it was continued as an advisory committee of the Metropolitan
branch of the Chase.
Mr. Henderson. Who owned the Metropolitan Bank before the
Chase bought it? Was it an independent bank or was it a branch
of another bank?
Mr. Saylor. That is something I don't know, Mr. Henderson.
Mr. Henderson. You mean you don't know?
Mr. Saylor. I don't know who owned it before the Chase ac-
quired it.
Mr. Henderson. You mean it has never come up in all your time
there?
Mr. Saylor. If you are asking me percentages I can't answer
your question. If you ask me who owned some of it, I would say
naturally Metropolitan Life owned part of it.
Mr. Henderson. Metropolitan Life owned it until 1921 ?
Mr. Saylor. Yes. I don't know the percentages.
Mr. Henderson. I don't ask what were the percentages. I just
asked for information.
Then the trustees of that bank — were they trustees or direc-
tors— ^ —
Mr. Saylor. They were directors.
Mr. Henderson. Became an advisory committee for the Metro-
politan branch of the Chase bank?
Mr. Saylor. That is right.
Mr. Henderson. And they have continued up to the present time?
Mr. Saylor. Right.
Mr. Henderson. Do the other branches of the Chase Bank, as far
as you know, have an advisory committee ?
Mr. Saylor, Some do,. Mr. Henderson; some do not. There is no
regularity about it.
Mr. Henderson. But this committee meets every month except in
summer ?
Mr. Saylor. That r.i right,
Mr. Henderson, Do you have pretty good attendance ?
Mr. Saylor. The committee has been very small and the attend-
ance has only been about 70 percent, due to the age of one of the
members who has not been able to attend. We are adding members
now.
Mr. Henderson. And your testimony is that it is not a very im-
portant function to serve, they don't bring in much business; Mr.
Zacher doesn't bring in much business ; is that it ?
Mr. Saylor. That is true.
Mr. Gesell. Can you tell us, Mr. Saylor, what your duties are as
manager of this branch ?
CONCENTRATION OF ECONOMIC POWER 15193
Mr. Saylor. Principally a loaning officer, with very little to do
with the operating details. I supervise the credits of two other
branches.
Mr. Gesell. Well, now, are you the person who solicits new ac-
counts for the branch ?
Mr. Satlor. One of them. We all solicit them.
Mr. Gesell. And are you the man who is most in contact between
the branch and the Metropolitan Life Insurance Co. ?
Mr. Saylor. Not necessarily. The activity requires several of our
officers to be constantly in touch with the Metropolitan Life.
Mr. Gesell. Would it be correct to say that you are the principal
contact man between the Metropolitan and the Chase Branch?
Mr. Saylor. In point of rank; yes.
(Representative Reece assumed the chair.)
Mr. Gesell. You have occasion to consult with officials of the
Metropolitan quite regularly about matters affecting the account?
Mr. Saylor. That is true.
Mr. Gesell. What sort of matters do you take up with the Met-
ropolitan Life Insurance Co. ? I suppose, first of all, you engage in
efforts to get new business from them.
Mr. Saylor. That is not a very active department, getting new
business from the Metropolitan Life.
Mr. Gesell. What particular type of things do you take up?
Mr. Saylor. I take up with the various officers requests by our
bank correspondents or depositors for business from the Metropolitan
Life. That might be from one department or another of the Met-
ropolitan Life.
Mr. Gesell. You mean that people write to the Chase Bank and ask
the Chase to help in getting some business or working out some kind
of arrangement with the Metropolitan, and you take that up with the
Metropolitan on behalf of the Chase?
Mr. Saylor. I do.
Mr. Gessell. Now, I would like to run through some of those
various matters with you at this time. First of all I wish to show
you two memorandums from your files of the Chase relative to
real estate receiverships, and ask you if you recognize those mem-
orandums?
Mr. Saylor. I do.
Mr. Gessell." Who is Mr. Kiep, cf the new business department,
who signed the first of the two memorandums ?
Mr. Saylor. He was a business solicitor.
Mr. Gessell. He was one of the men active in getting business,
is that it?
Mr. Saylor. That is true.
Mr. Gessell. Of the Chase?
Mr. Saylor. Of the Chase. He probably left the bank 6 or 7
years ago.
Mr. Gessell. This memorandum is dated July 29, 1932, entitled
"Metropolitan Life Insurance Company Real Estate Receiverships,"
and signed by H. A. Kiep, Jr., New Business Department [reading
"Exhibit No. 2306"] :
Had a talk with Mr. Frederick Ecker, Jr. reference bank accounts of receivers
who are appointed by the courts to administer properties on which the
15194 CONCENTRATION OF ECONOMIC POWER
Metropolitan Life Insurance Company holds mortgages which are in default.
He talked Vvith Mr. Norton, comptroller in charge of these matters. Mr.
Norton will instruct the company's attorneys to request the courts to desig-
nate Chase Bank depository. Mr. Ecker suggests that there may be oc-
casional situations where cash collections are the rule, such as hotel prop-
erties, where the nearness of a branch to iwint of collection might be the
determining factor. In such cases, in event we do not have a nearby branch,
they might refrain from designating any bank. However, in all others they
will request the court to name this bank depository for the receiver. Mr.
Ecker also said if there are any specific cases we wish to see him about
not to hesitate to do so.
There is a subsequent memorandum which says [reading "Exhibit
No. 2307"J :
Today I had a telephone call from Mr. Saylor, vice president. Metropolitan
Branch, and he .said that he had just seen a copy of Mr. Kiep's memo of
July 29th wherein Mr. Kiep mentions contacting the Metropolitan Life
Insurance people regarding possible future business. Mr. Saylor said that
inasmuch as he was the prime contact with Metropolitan he wishes us to
confer with him before making approaches such as this. I • explained to
him the general situation and why the move was made, but "^ think it might
be well for you to advise Mr. Kiep and suggest to him hereafter to check
in with Mr. Saylor before contacting any Metropolitan Life people.
I wish to oflfer these memoranda for the record.
Acting Chairman Reece. They may be admitted.
(The memoranda referred to were marked "Exhibits Nos. 2306 and
2307," and appear in. full in the text on pp. 15195, 15196.)
Mr, Gesell. Can you elaborate on these memoranda a little, Mr.
Saylor, and tell us more of the surrounding circumstances?
Mr. Satlor. Of course, I didn't figure in this personally, except to
the extent that when it reached my attention that Mr. Kiep had
approached Mr. F. W. Ecker I at that time, suggested that perhaps
in the future it would be well to contact with me. That wasn't
because I was selfish and wanted to make these contacts, but that I
knew various officers in the Metropolitan Life and thought I could
direct anybody who wanted to go there to the proper man.
Mr. Gesell. You would know whor best to see.
Mr. Saylor. In this case you note Mr. Ecker called for Mr. Norton.
Had Mr. Kiep come to me 1 would have sent him to Mr. Norton.
Mr. Gesell. Had you discussed matters of this sort from time to
time with the Metropolitan, arranging to be appointed depository
for a receiver on a property in which they had an interest ?
Mr. Saylor. I had never discussed it with them, and in connection
with this niemorandum I believe the investigation showed that Chase
never received anything as a result of this conversation.
Mr, Gesell. It is true, is it not, that the Chase has been a deposi-
tory for receivers on Metropolitan property?
Mr. Saylor. I can't answer that without reviewing the records.
It is entirely possible.
Mr. Gesell. Now I wish to show you a letter dated August 22,
1938, signed by Mr. S. Armstrong, vice president, addressed to Mr.
Frederic'iC W. Ecker, and two related letters, and ask you if you
recognize those as coming from the file.
Mr. Saylor. I recognize those as coming from the file.
Mr. Gesell. Does this represent another type of request which is
sometimes made of the Metropolitan b^ the Chase?
con(;entration of fx'Onomto power
15195
15196
CONCENTRATION OF ECONOMIC POWER
2 o
CONCENTRATION OF ECONOMIC POWER 15197
Mr. Saylor. It is the only one that I recall of that particular type.
Mr. Gesell. You mean the only one that you recall that was made
by writing, or the only one that was made?
Mr. Saylor. It is the only one I recall by writing, and I don't
remember any conversations.
Mr. Gesell. This is a letter from Mr. S. Armstrong, vice president,
to Mr. Frederic W. Ecker, dated August 22, 1938, and states [read-
ing "Exhibit No. 2308"] :
A short time ago we wrote to Mr. I. B. Tigrett, President of the Gulf, Mo-
bile and Northern Railroad Company, offering the facilities of our Trust
Department in connection with any services which might be required in carry-
ing out the proposed consolidation with the Mobile & Ohio RaUroad Company.
The press reports indicate that if this consolidation is carried through, two
new mortgage indentures will be created and we would like to be appointed
trustee under one of them.
If you would put in a good word for the Chase whenever a favorable oppor-
tunity presents itself, the courtesy would be much appreciated.
(The letter referred to was marked "Exhibit No. 2308" and appears
above.)
Mr. Gesell. There are two additional letters, in one of which Mr.
F. W. Ecker advises that [reading from "Exhibit No. 2308-A"] :
The whole inatter, however, is still in preliminary stages and I would,
therefore, suggest that you communicate with us on the subject again at a
later time. In the meantime, I am referring your communication to the
Secretary of our Committee with the request that it be brought up for con-
sideration by the Committee at the appropriate time.
I would like to offer this for the record.
(The letters referred to were marked "Exhibits Nos. 2308-A stnd
2308-B" an(i are included in the appendix on pp. 15528-15529.)
Mr. Gesell. Mr. Saylor, I want to next show you correspondence
dated October 6, 1936, and ask if you have ever seen that before.
Mr. Baylor. Yes, I have.
Mr. Gesell. I notice this letter, writter by Mr. James A. Arm-
strong, assistant manager of the Times Square Branch of the Chase
National Bank, to the assistant cashier, contains one or two sentences
Jbhat I want to discuss with you. The letter says [reading] :
The writer communicated with you at the time because we had discussed
with the Treasurer of the Knott Management Corporation the question of put-
ting the account on a paying basis.
That is evidently an account with the Times Square Branch
and he stated the account was placed with us at the request of the Metropolitan
Life Insurance Company, for whom they were managing the hotel.
I want to ask you whether it is usual for the Metropolitan to
arrange to have hotels in which it has an interest keep their accounts
with Chase's depositories? '
Mr. Saylor. Not necessarily. I have no recollection of any plan
of that sort.
Mr. Gesell. I don't ask you that. Have there been cases, however,
where the Metropolitan has recommended that the Chase Bank be
the depository of the funds for hotels such as this?
Mr. Saylor. I would need proof of that by consulting the records.
Mr. Gesell. I am not here trying to prove things to you. I am
asking you to give us information.
Mr. Saylor. I will give it to you if I have it.
124491-r-41— pt. 28 33
15198 CONCENTRATION OF ECONOMIC POWER
Mr. Gesfxl. I am asking you now what information you have with
regard to the matter under inquiry?
Mr. Saylor. I still would have to see evidence that I could use to
report to you.
Mr. Gesell. I take it, then, that you have no evidence, other than
this letter, of the fact that the Metropolitan had encouraged hotels
to keep accounts with Chase depositories, is that correct ?
Mr. Sayi/)r. That is correct.
Mr. Gesell. Now, I believe you said that there were times when
correspondents or people acquainted with the Chase asked the Chase
to try to get some business arrangement worked out with the Metro-
politan, and that you handled such arrangements?
Mr. Satlor. That is right.
Mr. Gesell. I want to show you some correspondence from your
files relative to the Pennsylvania Dixie Cement Corporation, and ask
you if you recall seeing that correspondence before?
Mr. Saylor. I have seen it.
Mr. Gesell. Now, this is a case where the Metropolitan Life In-
surance Co. was constructing a new building, was it not?
Mr. Saylor. It is.
Mr. Gesell. And the Cement Corporation wrote and asked that
you put in a good word for them with the Chase in the hope that
they might get the cement contract on that' building from the con-
tractor who had it under contract.
Mr. Saylor. Put in a word with the Metropolitan Life, yes.
Mr. Gesell. And this letter from Mr. Wing says [reading from
"Exhibit No. 2309"] :
We are very anxious indeed to secure this cement order. Three of your di-
rectors, namely Messrs. F. H. Ecker, N. Carlton and J. O'Brien, are on the
Board of Directors of the Metropolitan. I presume because of this you are prob-
ably in position to have the owners speak a word in our behalf to the contrac-
tors wbo will buy the cement Of course we do not expect them to pay a
premium;- but our price and everything else being equal we certainly trust you
can get your three directors to prevail upon the proper officials of the Metro-
politan Life Insurance Company to say a word to these contractors in our
behalf.
Following that you w^ere advised that the Pennsylvania Dixie Ce-
ment Corporation kept a balance with the Chase, were you not, by
Mr. Van Sant, assistant cashier ? ^
Mr. Saylor. Right.
Mr. Gesell. And did you then take up the matter with the Metro-
politan ?
Mr. Saylor. I took up that matter and two other cement company
requests.
Mr, Ge.*ll. On the Pennsylvania Dixie Cement request your letter
states [reading from "Exhibit No. 2309-B"] :
We are informed that it is too soon to make any decision in this connection
but that later on when the matter is reviewed Pennsylvania-Dixie Cement Cor-
poration will receive consideration.
I Mr. Saylor. I have since learned that none of those cement
companies received any business.
Mr. Gesell. That was something we were unable to find out.
1 See "Exhibit No. 2309-A," appendix, p. 15529.
CONCENTRATION OF ECONOMIC POWER 15199
You received other requests from other cement companies, did
you not?
Mr. Satxor. I think there were three all told.
Mr. Henderson. You say you have since learned. ~ flow did you
happen to learn it?
Mr. Satlor. I asked the Metropolitan Life; I was curious.
Mr. Henderson. You'^ot curious after this matter came up in
connection with these letters?
Mr. Sayix)r. Oh, yes; I wondered whether anybody did get any
business, how it could work out, whether three of them could get
it where three were interested.
(The letters referred to were marked "Exhibits Nos. 2309, 2309-A,
2309-B, and 2309-C" and are included in the appendix, on pp. 15529-
15530.)
Mr. Gesell. You indicated one way it might work out in your '
letter to Mr. Ecker of February 10, 1938, did you not? This letter,
which you have identified, reads [reading "Exhibit No. 2309-D"] :
This is a confirmation of my telephone message to you this afternoon that
the Pennsylvania-Dixie Cement Corporation have asked us to say a good
word in their behalf in connection with using their cement in your new
building. This company is a good customer of ours and maintains good
balances. We shall also be obliged for any consideration you may be able
to give their request.
I have now written you three letters along this line in connection with
cement. I do not know that it will make any difference but in the order
of their importance to us the Lehigh-Portland Cement Company maintains
the largest balances, Lone Star Cement Corporation next, and the Pennsyl-
vania-Dixie Cement Corporation, last. I do not know offhand whether 5V6
have accounts from other cement companies but if this will be of any use
to you in reaching your decision later on, I shall be glad to supply addi-
tional information.
I wish to offer this correspondence for the record.
Acting Chairman Reece. It may be admitted.
(The letter referred to was marked "Exhibit No. 2309-D" and
appears in full in the text above.)
Mr. Henderson. Who told you to go to Metropolitan to find
-out whether any of these three companies got. the cement contract ?
Mr. Satlor. I asked Mr. Madden.
Mr. Henderson. And he looked it up for you?
Mr. Satlor. He knew, apparently.
Mr. Henderson. When the Metropolitan is building you are rather
busy, aren't you, with all your accounts?
Mr. Satlor. Not as many requests come in as you might think.
Mr. Henderson. There is a sort of note in that "I have now
written you three letters along this line in connection with cement." ^
I just wondered whether you didn't get weary sometimes. There
is a note of weariness ,in that line.
Mr. Satlor. I think they were very patient with me, Mr. Hen-
derson, and when you look at these records, all of them are routine
in connection with bankingj whether it is Metropolitan Life or other
depositors seeking information. (Tt comes along; it is passed along in
the ordinary Course of business, and if they do one thing we report it
back ; if they do another we report it back.) It is nothing more than
routine throughout the bank.
1 See "Exhibit No. 2309-D," above.
15200 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. Let's take up this question and see how routine this is.
Do you recognize this memorandum from Mr. GaflEord to yourself
dated June 9, 1931?
Mr. Satlor. I do.
Mr. Gesell. Is this one of those routine matters you refer to?
Mr. Saylor. I consider it routine.
Mr. Gesell. Who is Mr. Gafford?
Mr. Saylor. Mr. Gafford is a second yice president of the Chase,
interested mostly in soliciting bank accounts.
Mr. Gesell. this says [reading "Exhibit No. 2310"] :
Re : Union Trust Company, East St. Louis, Illinois.
I am calling for help. Attached is a letter just received from Mr. F. J.
Shay, Cashier of the Union Trust Company of East St. Louis with reference
to Metropolitan Life's account in that city.
I have talked to Mr. Schlafly, Chairman of the Board, on several occasions
and he has definitely agreed to give us the principal New York account of his
bank if we can help him obtain some commercial business. I feel sure acqui-
sition of the Metropolitan account would bring this about at once. There are
four banks in East St. Louis and yet Chase does not have a correspondent
there. Union Trust has the best location in the business district. It is a
substantial bank. R. B. Mellon and Mr. Davis of Aluminum Company of
America which has a plant nearby, are substantial stockholders. Would you
feel like presenting this matter to your friends in the Metropolitan at some
convenient time?
(The letter referred to was marked "Exhibit No. 2310" and appears
above.)
Mr. Gesell. Here is a case where one of the vice presidents is ask-
ing that you solicit the account of the Metropolitan for a bank in
order that the Chase can in turn work out a correspondent relation-
ship with a bank in East St. Louis, is it not?
Mr. Saylor. It is. It is an isolated case.
Mr. Henderson. You said it was a routine case, and I understand
you were giving me an explanation of a previous answer that this is
the kind of thing that is happening all the time.
Mr. Saylor. It is still routine, taking these matters up with them.
Mr. Henderson. You mean it doesn't happen every day that you
get a letter or a memo as you did from Mr. Gafford about this
particular thing, -trying to get a correspondent in East St. Louis f-
Mr, Saylor. That is a little different from the rest of them, yes.
Mr. Henderson. It is a little different, but you get something of
this order practically every day ?
Mr. Saylor. Not practically every day, Mr. Henderson. I was
looking back
Mr. Henderson (interposing). If it isn't a bank it is a cement
company; if it isn't a cement company it is a hotel management
company, or something like that?
Mr. Saylor. They don't come in that often; that is the point I
am making. Looking back now, I suppose there has been just one
in 3 weeks.
Mr. Gesell. Well, now, do you recognize the other related corre-
spondence attached to that?
Mr. Saylor. Yes, I do.
Mr. Gesell. What happened in this case, Mr. Saylor? Metro-
politan transferred its account, did it not?
CONCENTRATION OF ECONOMIC POWER 15201
Mr. Satix)r. We were asked, I think in 1931, in June, to try and
get a Metropolitan account for the Union Trust Co. There was no
action taken on it until September, when the Metropolitan Life said
they were going to open an account. I understand that in 1928 — I
don't have all of this correspondence — we had been approached
before, or rather the local agent of the Metropolitan Life, when asked
if he would change from one bank to another, said no. At the time
we came into the picture in June, 1931, the agent changed his mind
and the account was opened then.
Mr. Henderson. Did the agent change his mind or have it changed
by someone?
Mr. Saylor. I couldn't reply to that. That is something for the
Metropolitan Life organization to answer.
Mr. Gesell. The facts are, are they not, Mr. Saylor, that in Sep-
tember the Metropolitan switched its account from the Southern
Illinois National Bank and placed it in the Union Trust Co.?
Mr. Saylor. Yes, but there may have been various reasons I
wouldn't know about.
Mr. Gesell. Did you answer my question ?
Mr. Saylor. I said "Yes."
Mr. Gesell. I wish to oflfer this correspondence for the record.
Acting Chairman Reece. It may be admitted.
(The letters referred to were marked "Exhibits Nos. 2310-A to
2310-E and are included in the appendix on pp. 15531-15532.)
Mr. Gesell. That correspondence indicates that the Union Trust
Co. lost the account a little later on, and there was a new solicitation
by the Chase and the account was again put back in the Union Trust.
That is correct, is it not?
Mr. Saylor. No, I don't recollect it that way.
Mr. Gesell. May I have the correspondence, please? How do you
recollect it, sir?
Mr. Saylor. I recollect that in June, when we took the matter up
with the Metropolitan Life, the account was opened ^some time
later, in September) and I understand it was their agent s desire to
switch.
Mr. Gesell, I asked you whether it was not a fact that the Union
Trust Co. lost the account after it was established in 1931, and that
in 1933 there was a new solicitation by the Chase, and the account
was reopened?
Mr. Saylor. I frankly can't answer that. I have no record of the •
Union Trust Co. closing its account after it opened in 1931. I do re-
call correspondence in 1933 which says that "we have instructed our
local agent to open an account." It is a little bit confusing to me.
Mr. Gesell. That would indicate that the account must have
dropped out and been reopened.
Mr. Saylor. It might be that. I haven't any record of it. I
know it opened in October, 1931. After that I am not informed.
It could be a separate type of account, a new account.
Mr. GeSell. Records submitted to us by the Metropolitan Life
indicate that this account was closed in March of 1933, and reopened
in June of 1933.
Mr. Saylor. If it was reopened in June 1933, I recall no contac<"
15202 CONCENTRATION OF ECONOMIC POWER
with the Metropolitan Life asking that it be reopened. At least I
haven't the information here.
Mr, Gesell. There is correspondence just offered in the record
where they advised you of that fact, is there not ? ^
Mr. Saylor. Simply that they advised us that they were going to
open.
Mr. Gesell. Now, do oflScers of the Metropolitan solicit accounts
with the Chase ?
Mr. Saylor. I would say there was no active solicitation at all.
Mr. Gesell. Is there any inactive solicitation?
Mr. Saylor. I don't know that. I mean, there are no records.
Mr. Gesell. You seem to take the position, Mr. Saylor, that I am
trying to prove things to you. I am trying to get information from
you ; I am not trying to prove anything.
To your knowledge, do officers of the Metropolitan Life solicit
accounts for the Chase ?
Mr. Saylor. No.
Mr. Gesell. Have you ever had any knowledge in that regard at
all, any instance of it?
Mr. Saylor. There is a record in the correspondence here that oi;ie
officer solicited something many years ago.
Mr. Gesell. That is the correspondence you see in my hand, I
take it?
Mr. Saylor. I don't know ; it is in 1924. t
Mr. Gesell. 1931, that is. That says that Mr. Ecker solicited the
account of the Mountain States Bank for the Chase, does it not?
Mr. Saylor. In 1924.
Mr. Gesell. Is that the one you refer to ?
Mr. Saylor. Yes ; in the second to last line.
Mr. Gesell. And you have no other information in that regard
at all?
Mr. Saylor. I have not.
Mr. Gesell. Now, I next want to consider with you two memo-
randums involving your discussions with Mr. Fackner, comptroller
of the Metropolitan Life Insurance Co. in 1930, relating to the First
National Bank of Atlanta, Ga. Do you recall those two memo-
randums which I show you now?
Mr. Saylor. I have seen them before.
Mr. Gesell. Will you explain to me what that is all about?
Perhaps I might read to the committee the memorandum you have
identified while you are studying the situation. It is a memorandum
from Mr. Saylor to Mr. Fackner, comptroller of the Metropolitan
Life, dated February 20, 1930, and says [reading "Exhibit No. 2311"] :
At the request of Mr. McHugh, Chairman of our Executive Committee,
Mr. Ollesheimer or I desire to introduce to you Mr. John K. Ottley, Pres-
ident of the First National Bank, Atlanta, Georgia.
The First National Bank is a recent merger of the Fourth National, of
which Mr. Ottley was President, and the Atlanta & Lowry National Bank.
The Atlanta & Lowry National, I believe, controlled the Trust Company
of Georgia, with which you are doing business. I think the stockholders of
the Fourth National were practically identical with the stockholders of the
Atlanta Savings Bank, which transacts a real estate mortgage business.
Within the past week I understand the Trust Company of Georgia has ar-
ranged to acquire all the stock of the Atlanta Savings Bank, the directors
1 See "Exbibit No. 2310-C," appendi.x, p. ]55.'}2.
CONCENTRATION OF ECONOMIC POWER 15203
of the latter having approved the arrangement. The stockholders will votfe
later but they are expected to confirm.
Mr. Ottley, who I believe is also Vice President of the Atlanta Savings
Bank, will no doubt have with him a Mr. Work, General Manager of the
Real Estate Loan business of the Atlanta Savings Bank. Mr. Ottley is also
very familiar with that branch of the business. I am telling you all this
because they gave me the story but they undoubtedly will also tell it to
you. They do not know I am getting in touch with you in this way. Mr.
Ottley will explain the purpose of his visit
Mr. Ottley said the group interested in the First National Bank is prob-
ably the most powerful banking group in Georgia. The Chase National Bank,
I think, will be selected as the principal correspondent of the First National.
Their balances with us now are running around $2,000,000. In the past
we have had accounts both from the Atlanta & Ix)wry National and the
Fourth National. We should like to help these people all we can.
G. H. Satlor.
Febetjaey 19, 1930.
I now understand that it is satisfactory to you to see Mr. Ottley at 10 : 30
a. m., Monday, February 24. If I am at my desk when he calls, I shall
take the liberty of introducing him to you.
G. H. Sayloe.
February 20, 1930.
(The letter referred to was marked "Exhibit No. 2311" and ap-
pears in full in the text on pp. 15202-15203.)
Mr. Gesell. The second memorandum is the one that particularly
interests me, Mr. Saybr. It is dated February 27, 1930, which is
just a week later than the first memorandum. It is captioned,
"First National Bank, Atlanta, Georgia." [reading "Exhibit No.
2311-A"] :
Both Mr. Fackner —
that is, the Comptroller of the Metropolitan —
and Mr. Ottley —
the Atlanta banker
said they were satisfied with the result of their discussion. As I understand
it, the Trust Company of Georgia had only one insurance connection — that of
the Metropolitan Life — and the Atlanta Savings Bank had relations with the
New York, Mutual and one or two smaller New England insurance companies.
It was arranged that for the time being the Trust Company of Georgia and the
Atlanta Savings Bank would not combine their operations. In other words,
they wbuld continue to represent as heretofore,- but should Mr. Ottley wish to
merge the two companies, he will first call on Mr. Fackner and discuss the
matter.
(I take it that is the Trust Company and the Atlanta Savings
Bank.)
(The memorandum referred to was marked "Exhibit No. 2311-A"
and appears in full in the text above.)
Mr. Gesell. Now, those memoranda would indicate to me pretty
clearly, Mr. Saylor, that because of the fact that these two
banks, which were to merge, represented different insurance inter-
ests, it was felt desirable not to merge them, and it was further
agreed that no merger would take place until the Comptroller
01 the Metropolitan Life had been consulted. Is that a correct in-
terpretation ?
Mr. Satlor. I don't know, because I simply introduced one friend
to another.
Mr. Gesell. You wrote a memorandum that would indicate you
knew a great deal more than that, the one I just read, of February
15204 CONCENTRATION OF ECONOMIC POWER
27, in which you outlined the terms of the agreement between these
individuals whom you introduced.
Mr. Saylor. They were simply repeated to me.
»Mr. Gesell (reading from "Exhibit No. 2311-A") :
It was arranged that for the time being the Trust Company of Georgia
and the Atlanta Savings Bank would not combine their operations. In other
words, they would continue to represent as heretofore but should Mr. Ottley
wish to merge the two companies, he will first call on Mr. Fackner and discuss
the matter.
Can you tell us a little of the background of that and explain what
happened.^
Mr. SayLiOr. I can give you 116 more than appears in these memo-
randa. I was not present at any discussion that took place.
Mr. Gesell. I wish to offer the memoranda for the record.
Acting Chairman Reece. They may be admitted.
Mr. Gesell. Whom did you get the information from?
Mr. Saylor. I would say Mr. Fackner. I have to draw on my
memory. I am not certain, but I presume that is it.
Mr. Gesell. Wliat importance was it of the Chase to make a
memorandum such as you did ?
Mr. Saylor. No special reason — to keep my associates informed.
Mr. Gesell. Why did' you make the memorandum?
Mr. Saylor. To keep them informed of what was taking place.
Mr. Gesell. The net effect of this was as I have stated, w^s it not,
that tliese two banks did not merge without Mr. Fackner being
consulted ?
Mr. Saylor. That is what the memorandum reads. I am — wait a
minute. If Mr. Ottley wished to merge the two companies "he will
first call on Mr. Fackner and discuss the matter." ^ That doesn't
mean it has any relation to the merger.
Mr. Gesixl. Why would Mr. Fackner have to be consulted about
the merger of two banks in Atlanta, Ga. ?
Mr, Saylor. He wouldn't have to be. I can't tjilk for Mr. Fack-
ner, nor did I sit in on that conversation. I would simply say that
Mr. Fackner was passing on the handling of his insurance business
in relation to these banks.
Mr. Gesell. That is the point I want to get into. It is very con-
fusing for one bank to represent two insurance interests, is it not,
outside of New York?
Mr. Saylor. I don't know. I have never been in that position.
Mr. Gesell. Wasn't that one of the questions that was raised by
the correspondence and these conversations?
Mr. Saylor. The question would appear to have been raised.
Mr. Henderson. Are you mad about something, Mr. Saylor? I
just wondered if you wanted to get something off your chest.
Mr. Saylor. Not a thing.
Mr. Henderson. This is as good a place to have it out as any I
know.
Mr. Sayix)r. Not at all. I am just at a disadvantage; it is the
first time I have ever been a witness, except once in my life. It is a
little bit new to me.
1 For additional information on this, see testimony of Mr. F. W. Eckcr infra pn
15133 ff. • ' t^i
» See "Exhibit No. 2311-A," infra, p. 15203.
CONCENTRATION OF ECONOMIC ^OWER 15205
Mr. Henderson. Maybe that's it. You gave the impression some-
one who is smoldering. We hate to see them smolder. We would
rather have them on fire.
Mr. Saylor. I assure you, Mr. Henderson
Mr. Henderson (interposing). All right. Maybe we will get along
better.
Mr. Gesell. There are cases, Mr. Saylor, &re there not, where when
the Metropolitan changes an account from one bank to another, it
advises you, in order that you may communicate with the bank and
take such advantage as there is out of advising the bank that a
change is to be made ?
Mr. Satlor. They have advised us occasionally when they have
opened up accounts ; sometimes, so we might keep them informed re-
garding the condition of the bank, but many times they have written
us to say that they did not want us to say that we had initiated a
change, and there is evidence of that in this correspondence.
Mr. Gesell. You are referring, I take it, to the correspondence
with regard to the Empire Trust & Savings Bank, are you not, which
I sho"^ you here?
Mr. Satlor. I wasn't referring to that, Mr. Gesell, I was referring
to correspondence
Mr. Geseix (interposing). I guess you were referring to the other
one, the First National Bank and Riverside Trust Co. There the
memorandum states: "He did not want us to indicate that we in-
itiated tl-.e change and I told him we would never take that position." ^
Is that the one?
Mr. Saylor. That is one of them, but there is still another one, the
St. Louis County Bank and the Clayton National Bank of Missouri,
in 1935, two letters from Mr. Washington to me. His letter of
March .7 reads in part [reading] :
In view of Mr. Boyle's memorandum of March 4 —
Mr. Boyle is a representative of Chase —
I want to emphasize that our decision in this matter has resulted entirely
from information furnished by the Manager of our Clayton office. As you,
of course, know, we would not be influenced in such a matter as this by the
Chase's correspondent relationships. ". shall n^apreciate it if you will have
Mr. Frost—
Another Chase representative —
make it perfectly plain to the officials oj' the St. -i^Muis County Bank that this
is the case.
On March 27 he wrote me [reading f ui'th'jr] :
For your information and in confidence, we decided to make this change
because of the very small ratio of capital funds 7.u the St. Louis County Bank
to its deposits, this being a case where the somewhat inadequate capital funds
are not offset by such other factors as extrene liquidity, the St. Louis County
Bank, as a matter of fact, having fixed assets about equal to its capital, and
in addition, a considerable amount of mortgage I6ans.
President Schmid, of the St. Louis County Bank, had 'Written us that the
bank had no immediate intention of increasing capital, and we wrote him that
our Manager's account would be closed in accordance with the company's policy
of maintaining its accounts in banks with adequate capital.
1 See "Exhibit No. 2313-B," appendix, p. 15536.
15206 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. Do you recognize this correspondence which I show
you with respect to the Empire Bank?
Mr. Saylor. Yes.
Mr. Gesell. This was a slightly different kind of situation, was
it not? Mr. George of the Metropolitan, treasurer, wrote you on
December 7, 1929, as follows [reading from "Exhibit No. 2312-0"] :
In May of this year we had some correspondence and discussion relative to
the possibility of placing our Gross Park district office account with the Empire
Trust and Savings Bank, one of your correspondents.
At that time I did not feel warranted for various reasons in opeiling an
account with the Empire Trust and Savings Bank. Recently, however, the
matter has again been broached by Mr. L. A. Phillips, the Manager of our Gross
Park District, and I have concluded to approve transferring his account to the
Empire Trust and Savings Bank.
I am glad that we have this opportunity to establish a connection with one
of your correspondents.
You then wrote Mr. Purdy, vice president of the Chase Head Office,
and said [reading from "Exhibit No. 2312-D"] :
Mr. George has very kindly informed '-^s that the Metropolitan Life has
decided to place their Gross Park district office account with the Empire Trust
& Savings Bank, Chicago. I jsltu sure that he is willing that we shall* make
some capital out of this.
Will you please return the correspondence to me after you- have made the
copies you may desire?
You then wrote Mr. George and said (reading from "Exhibit No.
231^E") :
Thank you for your letter of December 7, informing us that you have decided
tj place your Gross Park district office account with the Empire Trust & Sav-
ings Bank, Chicago. We hope the Empire Trust will see in this change a
manifestation of our friendly influence with your company and at the same
time will not next week ask us to get them an account from the United States
Treasury. I more than appreciate your kindness in calling our attention to
this new banking connection of your company.
Mr. Henderson. I missed that. Who was that from ?
Mr. Gesell. Mr. Saylor to Mr. George.
Mr. Henderson. Mr. Saylor says
Mr. Gesell (interposing and reading from "Exhibit No. 2312-E") :
We hope the Empire Trust will see in this change a manifestation of our
friendly influence with your company and at the same time will not next
week ask us to get them ^u account from the United States Treasury.
The next letter is from Mr. Purdy of the Chase Home Office to
Mr. Saylor, saying (reading from "Exhibit No. 2312-F") :
We have received your favor of the 9th instant enclosing correspondence
regarding the Metropolitan Life-Empire Trust & Savings Bank of Chicago
matter, which as requested we return herewith. We are glad to have the
privilege of writing our friends at Chicago and appreciate the friendly consid-
eration of the Metropolitan Life Insurance Company,
A final memorandum in the files (reading from "Exhibit No.
2312-G") :
Referring further to your memorandum regarding the Empire Trust & Sav-
ings Bank of your city, we are pleased to state that todav we were advised bv
the Metropolitan Life Insurance Company that they are going to place their
Gross Park district office account with the Empire Trust & Savings Bank, and
It will be in order for you to so adv se them.
Mr. Saylor. I think their local manager recommended that too.
Mr. Gesell. That wasn't the point I avus considering with you. It
was rather, is it not true that on occasions the Metropolitan gives you
information concerning how they are going to handle their bank ac-
CONCENTRATION OF ECONOMIC POWER 15207
counts in order that you may, as you say, make capital out of that
information ?
Mr. Sayloe. We make very little capital out of it because very few
accounts were placed at our request.
Mr. Gesell. That again does not answer my question. This was
an account that was not placed at your request. This was an account
that was placed because the Metropolitan manager wanted the ac-
count put in that bank.
Mr. Saylor. That is right.
Mr. Gesell. The Metropolitan, however, advised you of what they
were going to do in order that you might communicate with the bank
and, as you say, make such capital out of it as you can. That is
right, isn't it?
Mr. Saylor. Eight.
Mr. Gesell. You have identified this correspondence with respect
to the First National, Riverside, have you not ?
Mr. Saylor. Yes.
Mr. Gesell. I oiffer the correspondence re Empire Trust and
Savings.
Acting Chairman Reece. The correspondence offered may be ad-
mitted.
(The correspondence referred to was marked "Exhibits Nos. 2312
and 2312-A to 2312-G" and is included in the appendix on pp. 15533-
15535.)
Mr. Gesell. Do you recognize that other correspondence?
Mr. Saylor. I do.
Mr. Gesell. I would like to offer this correspondence on the River-
side, N. J., First National Bank for the record, and I have no further
questions of this witness.
(The. memoranda referred to were marked "Exhibits Nos. 2313,
2313-A and 2313-B" and are included in the appendix on pp. 15535-
15537.)
Acting Chairman Reece. Are there any questions by the members
of the committee? If not, you may be excused, and thank you very
kindly.
(The witness, Mr. Saylor, was excused.)
Mr. Gesell. Mr. Espinosa, will you take the stand a moment?
Acting Chairman Reece. Do you solemnly swear that the testimony
you shall give in this proceeding shall be the truth, the whole truth,
and nothing but the truth, so help you God?
Mr. Espinosa. I do.
TESTIMONY OF JOSE R. ESPINOSA, ACCOUNTANT, SECURITIES AND
EXCHANGE COMMISSION, WASHINGTON, D. C.
Mr. Gesell. Will you state your name for the record?
Mr. Espinosa. Jose R. Espinosa.
Mr. Gesell. You are an expert accountant attached to the staff
of the Securities and Exchange Commission?
Mr. Espinosa. I am.
Mr. Gesell. Did you obtain from the Metropolitan Life Insurance
Co. information concerning the history of district depositories of
that company from January 1, 1931, to April, 1939?
Mr. Espinosa. I did. .
Mr. Gesell. Did you then prepare schedules setting out that in-
formation and furnish those schedules to the Chase National Bank
15208 CONCENTRATION OF ECONOMIC POWER
requesting information as to which banks the Chase had as
correspondents ?
Mr. EspiNOSA. I did.
Mr. Gesell. Will you describe what type of schedule you sub-
mitted to the Chase Bank?
Mr. EspiNOSA. The schedule listed the district depositaries of
the Metropolitan Life Insurance Co., excluding those district de-
positories for New York City and vicinity. I then handed this
schedule to the Chase National Bank and asked them to fill in on the
schedule whether or not any of these banks were correspondents of
the Chase, also to state whether or not the Chase bank had a corre-
spondent in that particular city.
Mr. Gesell. And from the information that you received from
these two sources, have you prepared the schedule which I now
show you entitled "District Depositories of Metropolitan Life In-
surance Company Related to Chase National Bank Correspondents"?
Mr. EspiNOSA. I did.
Mr. Gesell. That schedule, as far as you can determine, is cor-
rect and accurate?
Mr. EspiNOSA. It is.
Mr. Gesell. I wish to offer this schedule for the record.
Acting Chairman Reece. The schedule may be admitted.
(The schedule referred to was marked "Exhibit No. 2314" and is
included in the appendix on p. 15537.)
Mr, Gesell. I will now ask you whether these documents before
you are the documents upon which that schedule was based?
Mr. EspiNOSA. They are.
Mr. Gesell. I offer these documents to be filed with the commit-
tee in support of the schedule just introduced.
(The documents referred to were marked "Exhibit No. 2315" and
are on file with the committee.)
Mr. Gesell. I have no further questions of this witness.
(The witness, Mr. Espinosa, was excused.)
Mr. John L. O'Brian (counsel, Metropolitan Life Insurance Co.,
New York,N. Y.). As counsel for the Metropolitan, in connection
with that I desire to state on behalf of the Metropolitan that of
these 268 banks here shown as correspondents of the Chase through-
out the country in which the Metropolitan has accounts,^ 186 of
that number are also correspondents at the same time of competitors
of the Chase in New York City with which the Metropolitan is also
doing business.
Mr. Gesell. I think that helps clarify that exhibit.
I should like to offer at this time a schedule entitled, "Directors
Interlocking Chase National Bank of the City of New York and
Metropolitan Life Insurance Co., January 1, i928 to December 31,
1939, inclusive." This schedule has been prepared from informa-
tion furnished us by the Chase and from information furnished
by the Metropolitan and contained in its annual reports.
Acting Chairman Reece. It may be admitted.
(The schedule referred to was marked "Exhibit No. 2316" and
is included in the appjendix on p. 15538.)
Mr. Gesell. That is offered, as are all these exhibits, subject to
check and correction at anv time.
1 "Exhibit No. 2314," appendix, p. 15537.
CONCENTRATION OF ECONOMIC POWER 15209
The next witness is Mr. Aldrich.
Acting Chairman Reece. Do you solemnly swear that the testi-
mony 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. Aldrich. I do.
TESTIMONY OF WINTHROP WILLIAMS ALDRICH, CHAIRMAN OF
THE BOARD, CHaSE NATIONAL BANK, NEW YORK, N. Y.
Mr. Gesell. Mr. Aldrich, will you state your full name and posi-
tion for the record, please, sir?
Mr. Aldrich. Winthrop Williams Aldrich, chairman of the board
of the Chase National Bank.
Mr. Gesell. How long have you occupied that position, Mr.
Aldrich?
Mr. Aldrich. Sinch April 1930.
Mr. Gesell. You are also a director of the Metropolitan Life In-
surance Co., are you not, sir?
Mr. Aldrich. Yes.
Mr. Gesell. When were you elected a director of the Metropoli-
tan Life?
Mr. Aldrich. October 26, 1937.
Mr. Geseij:,. On what committees of the Metropolitan Life do
you serve?
Mr. Aldrich. I am on the finance committee. I also sit at times
on some of the other committees, but principally the finance com-
mittee.
Mr. Gesell. That is your particular assignment.
Mr. Aldrich. Yes.
Mr. Gesell. The Chase National Bank has carried credit bal-
ances for the nine largest insurance companies, as indicated on this
schedule furnished by your officers, is that not correct?
Mr. Aldrich. Yes ; I haven't seen the schedule before but I as-
sume that is correct.
Mr. Gesell. I should like to offer this schedule not to be printed,
but for the record, and to submit for printing a schedule which sum-
marizes the information contained in those scheduies.
Acting Chairman Reece. They may be admitted.
(The detailed schedule referred to was marked "Exhibit No. 2317"
and is on file with the committee. The summary schedule referred
to was marked "Exhibit No. 2318" and is included in the appendix
on p. 15540.)
Mr. Gesell. The Chase Bank also has interlocking directors with
several of the larger insurance companies, has it not ?
Mr. Aldrich. I don't know what you mean by the word "inter-
locking."
Mr. Gesell. There are common directors as between the Metro-
politan and the Chase, are there not ?
Mr. Aldrich. Mr.«Ecker is director of the bank and I am director
of the insurance company and there are other directors who have
been directors of both companies in the past. Mr. Newcomb Carlton
would be on there.
Mr. Gesell. You have a common director at the present time, have
you not, with the Mutual Life Insurance Co. of New York? Mr.
Robert C. Stanley?
15210 CONCENTRATION OF ECONOMIC POWER
Mr. Aldrich. Yes; I think he went on the Mutual Life sometime
in the last month or two, I don't know just when.
Mr. Gesell. Then you have, have you not, a common director with
the Prudential Life Insurance Co., Mr. O'Olier?
Mr. Aldrich. No, Mr. D'Olier is not on our board. Mr. Bayne is.
Mr. Gesell. Mr. Howard Bayne is on your board?
Mr. Aldrich. Mr. Howard Bayne is on our board.
Mr. Gesell, And Mr. D'Olier was but has resigned ?
Mr. Aldrich. That is correct.
Mr. Gesell. In the case of the Equitable of New York there are
common directors, are there not?
Mr. Aldrich. Mr. Parkinson is a director of the bank and I believe
Mr. Cutler is a director of the insurance company.
Mr. Gesell. Mr. Cutler is of the bank ?
Mr. Aldrich. He is a director of the bank.
Mr. Gesell. I have, here schedules showing common directors that
have existed between the insurance companies mentioned 'at any time
from January 1, 1928 to December 31, 1938. These schedules are just
to give the exact dates supplementing Mr. Aldrich's testimony. I
should like to offer them for the record.
(The vice chairman. Representative Sumners, assumed the Chair.)
The Vice Chairman. They may be received.
(The schedules referred to were marked "Exhibit No. 2319" and are
included in the appendix on p. 15541.)
Mr. Gesell. I wanted to ask you to give us some idea of the Chase
National Bank, how big it is, how much cash it has on hand. Give us
a little idea of how it operates.
Mr. Aldrich. Well, of course, the amount of cash on hand varies
from time to time.
Mr. Gesell. Taking a convenient balance sheet date. I have here
your '38 statement, which indicated cash $861,000,000.
Mr. Aldrich. I don't seem to be able to find it. This memorandum
I have shows an excess of service, not the total cash.
Mr. Gesell. That is the 1938 statement. Give us some idea.
Mr. Aldrich. This statement shows that — it is the 1939 statement,
as a matter of fact — our total assets at the end of the year 1939 were,
approximately $3,000,000.
Mr. Gesell. You mean $3,000,000,000?
Mr. Aldrich. Yes.
Mr. Gesell. And how much cash on hand did you hold as of that
balance sheet date?
Mr. Aldrich. I imagine we had about, well, it is rather difficult
for me to say off hand, but we have about
Mr. White (interpo.sing). I happen to have a 1939 statement.
Mr. Aldrich. I would rather talk from that, if I could.
It is $1,293,000,000.
Mr. Gesell. That is the cash.
Mr. Aldrich. Cash in bank.
Mr. Gesell. Now, the Chase has branches throughout the country
or only in the city of New York?
Mr. Aldrich. Only in the city of New York.
Mr. Gesell. And outside of the city of New York it has corre-
spondents ?
CONCENTRATION OF ECONOMIC POWER 15211
Mr. Aldrich. That is right.
Mr. Gesell. Will you tell us what is a correspondent, what type
of banking connection is involved?
Mr. Aldrich. Well, a correspondent is a bank that carries a de-
posit with us and with whom we have relations which include all
sorts of banking transactions.
Mr. Gesell. The correspondence relationship leads to facilities
and services between the two banks, does it not?
Mr. Aldrich. That is correct.
Mr. Gesell. Now, coming back to the insurance connections- ■
Mr. Aldrich (interposing). I might say that on December 30,
1939, our deposits were $2,803,000,000.
MitGesell. And in 1938, from this statement?
Mr. Aldrich. $2,500,000,000.
Mr. Gesell. And the schedule introduced shows that as of De-
cember 31, 1938, you had $123,000,000 on deposit from these nine
large insurance companies, and as of 1939, $175,000,000 on deposit.
Now, I want to ask you some general questions about
The Vice Chairman (interposing). What percentage is that of
the total deposits?
Mr. Aldrich. The total deposits?
The Vice Chairman. What percentage of your total deposits were
these insurance deposits?
Mr. Aldrich. I would have to figure, the total deposits
The Vice Chairman (interposing). As of January 30.
Mr. Aldrich. As of December 30, 1939, were $2,803,000,000.
The Vice Chairman. I have that, but I don't' want to have to
figure it up.
Mr. Gesell. We will compute it for you.
Mr. Aldrich. I don't like to try to compute it myself.
Mr. Gesell. We will compute it.
Senator King. I understand it is 6.3 percent of your deposits that
are those insurance companies.^
Mr. Aldrich. Yes?
Senator King. If that is not right, we can correct it in the record.^
Mr. Gesell. Now, how did these eommon directqrghips come about,
Mr. Aldrich?
Mr. Aldrich. Well, it is principally because of mergers. Mr.
Ecker and Mr. — well, to start a different placr, Mr. Parkinson
was a director of the Park Bank and he became a director of the
Chase National Bank when Chase merged with the Park Bank. Mr.
Howard Bayne was a director of the Seaboard Bank, which was
merged with the Equitable Trust Co., and became a director of the
Chase Bank when the Equitable was merged with Chase. Mr. Ecker
and Mr. Newcomb Carlton were directors of Chase originally.
Mr. Gesell. Looking at it from the other point of view, how did
it happen that Chase directors became directors of insurance com-
panies? Wliat are the factors that bring that about?
Mr. Aldrich. You will have to ask the insurance companies that.
I don't know.
Mr. Gesell. Well, you are a director of an insurance company.
What were the factors that led to your becoming a director?
^ See correction, infra, p. 15218.
15212 CONCENTRATION OF ECONOMIC POWER
Mr. Aldricii. I was not a director when those factors were con-
sidered. <
Mr. Geskll. When your name was considered, you mean?
Mr. Aldrich. Yes.
Mr. Gesell. Let me get at it this way f Are there advantages to
tlie bank in liaving its representatives on the boards of insurance
companies?
Mr. Aldrich. I should say not. I can't see what they are, if any.
Mr. Gesell. You can see no advantages?
Mr. Aldrich. No.
Mr. Gesell. Are there any disadvantages that you can see?
Mr. Aldrick. No; I shouldn't think there were any disadvantages.
Mr. Gesell. What would prompt a man such as yourself to be-
come a director of the Metropolitan?
Mr. Aldrich. Well, looking at it frohi a personal point of view,
the reason I would want to be on the Metropolitan board would be
because I would consider I could do a great service by doing it.
Mr. Gesell. Service to whom?
Mr. Aldrich. To the community,
■ Mr. Gesell. And you would go on the Metropolitan board as a
matter of public service?
Mr. Aldrich. Yes.
Mr. Henderson. Would you distinguish between your directorship
there and your directorship of other organizations that were, say,
commercial 05 industrial organizations?
Mr. Aldric h Only in degree. It is a bigger situation, more widely
spread.
Mr. Gesell. You are a director of both the American Telephone
& Telegraph and Westinghouse Electric, are you not ?
Mr, Aldrich. Yes.
Mr. Henderson. Didn't you say it would be a matter of degree
there? You would go on A. T. & T. and Westinghouse?
Mr. Aldrich. I would say A. T. & 1. is also an opportunity for
great public service.
Mr. Henderson. Westinghouse?
Mr. Aldrich. To a minor degree.
Mr. Henderson. Would there be any banking advantages with
it also?
Mr. Aldrich. I shouldn't think so ; no.
Mr. Henderson. You don't think the knowledge of A. T. & T.
financial affairs is of any assistance?
Mr. Aldrich. I think it is of assistance to me in being able to see
the economic picture perhaps more clearly from the Nation-wide point
of view, to be connected as a director with institutions that have a
national scope, but outside of that, I don't think so.
The Vice Chairman. Mr. Aldrich, wouldn't, if nothing more, an
intimate acquaintanceship with your colleagues on these boards tend
to bring business to your bank?
Mr. Aldrich. Well, it never has been so in my experience ; I thmk
possibly because of the fact that that relationship of the Chase National
Bank at the time I came into the banking business was so widely spread
there was not probably much opportunity in that respect.
The Vice Chairman. You mean someone had gone ahead creating
proper relations?
CONCENTRATION OF ECONOMIC POWER 15213
Mr. Aldrich. Probably so. The fact is our bank has such wide
contacts that I have had very little to do, in my banking career, with
establishing new contacts.
The Vice Chairman. Isn't it sound policy from the standpoint of
your bank's interest, to keep contacts, your lines thrown out, and re-
tain contact with these big organizations that deposit a lot of money,
whose accounts are worth a lot to any J)aiik ?
Mr. Aldrich. I think it is unquestionably true that it is a desirable
thing to have personal and banking contacts as wide, as possible, but
that would not be to me the controlling motive.
Mr. Gesexj:.. Does the bank encourage its men to accept insurance
directorships ?
Mr. Aldrich, No.
Mr. Gesell. When a member of your board is offered a director-
ship of an insurance company- does he, as a matter of custom, usually
consult with you or with other members of the Chase Bank before
he takes that position ?
Mr. Aldrich. I think that that would be true if he were an officer
of the bank, he would talk to me before he became a director of any
other company, but if he were simply a director of the bank he would
not.
Mr. Gesell. He would not?
Mr. Aldrich. As a matter of fact, I didn't even know that Mr.
Stanley, who was a director of the bank," was on the Mutual board?
Mr. Gesell. Mr. Stanley.
Mr. Aldrich. Mr. Stanley was a director.
Mr. Gesell. So that you would have some opportunity to discuss
the matter with any officer before he. took such a step.
Mr. Aldrich. I don't think that an officer of the bank would be
apt to take a directorship in any other company without speaking
to me about it.
Mr. Gesell. Why is there the distinction l?etween the director and
the officer?
Mr. Aldrich. I believe the director would probably think it was
•none of my business.
Mr. Gesell. The officer would feel it was because you were a su-
perior officer of the organization?
Mr. Aldrich. Yes.
Mr. Gesell. Does the bank have any insurance men on its board ?
Mr. Aldrich. I should say not as such. I think that the insurance
men who are on our board are all men that I would want to have
on the board if they were not on it, and of course the advantages
to the bank of having insurance men on the board are very apparent.
In the first place, the heads of these great insurance companies have
all had very wide experience, especially in the investment field, and
they have all had the opportunity to observe the whole picture of
the economics of the Nation, and they are all men whom I believe
to be of high character. They would, therefore, be the type of men
that I would like to have on the board. Looking at it from the
point of view of the bank, they have one great advantage, and that
is that they have nothing to sell to us.
In a great many instances, men who have great knowledge in the
investment field have things that they want to sell, and therefore are
124491— 41— pt. 28 34
15214 CONCENTRATION OF ECONOMIC POWER
particularly desirable as bank directors. That does not apply to
heads of insurance companies.
not
the heads of insurance companies.
Mr. Gesell. Therefore, you feel you can get perhaps more impar-
tial investment advice?
Mr. Aldrich. Well, better informed advice than most people have,
and completely impartial.
Mr. Gesell. You say they have nothing to sell. Where does the
Chase carry its group insurance?
Mr. Aldrich. We carry our group insurance with the Metropolitan
and the Equitable, I believe.
Mr. Gesell. When was that contract sold?
Mr. Aldrich. I am talking about things they advise us about. I
am talking about investments and things of that kind.
Mr. Gesell. I see.
Are there any other advantages that come besides this impartial
investment advice from having insurance people on the board?
Mr. Aldrich. Oh, I think there are a great many advantages
besides that. I thought I had made that clear. I think their knowledge
of the general situation, their experience, and their wisdom gen-
erally, are extremely valuable.
Mr. Gesell. From the strictly business point of view, is it helpful
to the bank in any way?
Mr. Aldrich. Well, not that I can think of, particularly.
Mr. Gesell. There are definite business advantages to the bank
in having a close connection with an insurance company, are there
not, such as we have considered here this morning?
Mr. Aldrich. Well, frankly, it seems to me that those things are
trivial.
Mr. Gesell. Well, as individual things perhaps they are trivial.
I mean, generally.
Mr. Aldrich. Even in their total eflfect.
Mr. 'Gesell. Such matters as getting bank accounts for real-estate
receivers, getting appointments as trustees? Such as getting ap-
pointments as trustees under mortgage?
Mr. Aldrich. I don't think we ever got anything like that.
Mr. Gesell. You would feel that your requests to them, coupled
with your close connection with the bank, gave you no preferred
position in that regard at all?
Mr. Aldrich. I should say not. I would say myself not in the
slightest degree, but I suppose there have been cases when it has had
some effect.
Mr. Gesell. We had one pretty definite case, didn't we, where a
bank account was taken away from one bank and given to another
because of a solicitation of your officers ?
Mr. Aldrich. We have over 3,000 correspondents over the country.
The reason we have those correspondents is because of the relations
we have with the banks themselves, not anything that the Metro-
politan Life or any other life-insurance company can do for us.
Mr. Gesell. One of your officers said, "If we can get the Metro-
politan account for the Union Trust Co., then we can get the Union
Trust Co. as a correspondent." ^ That was a pretty clear-cut state-
ment, it seemed to me.
^ See "Exhibit No. 2310," supra, p. 15200.
CONCENTRATION OF ECONOMIC POWER 15215
Mr. Aldrich. As a matter of fact, I doubt very much whether
the Union Trust Co. is one of our correspondents. That particular
branch may be.
Mr. Gesell. I believe it is so shown on the schedule.
Mr. Aldrich. I am inclined to believe that it isn't.
Mr. Gesell. Let's get that large schedule.
Have you given any consideration, Mr. Aldrich, to some of the
possible conflicts that can arise out of such a close banking relation-
ship as your company appears to have with the Metropolitan?
Mr. Aldrich. Such as what?
Mr. Gesell. Well, you have got a large account from them, have
you not?
Mr. Aldrich. Yes.
Mr. Gesell. Let's assume the bank gets into difficulties of some
sort, needs the cash, and the Metropolitan needs the cash, isn't that
something that would present a rather difficult situation?
Mr. Aldrich. Well, we haven't ever got into a position where we
were in difficulty because of a lack of cash, but it we did it would
mean we were unable to meet our obligation.
Mr. Gesell. Taking the situation where the Metropolitan desires
to withdraw its account and you, as an officer of the bank, realize if
they do it may embarrass the bank in some way, it seems to me there
is some degree of conflict. .
Mr. Aldrich. We have $1,293,000,000 in cash and their account at
top is $75,000,000. We have an excess reserve of $600,000,000 at the
present time.
Mr. Henderson. You are talking about a contemplated situation,
but haven't there been situations in jnore recent history where there
is a conflict between the interest of the depositor and the interest of
the bank?
Mr. Aldrich. I don't know what you are referring to.
Mr. Henderson. I am asking you whether there haven't been
conflicts.
Mr. Aldrich. Between the interest of the depositor and the interest
of the banks?
Mr. Henderson. Yes. Haven't there been times when there weren't
excess reserves, as there are now, and where there was a decided
necessity for maintaining the cash position of the banks ? The insur-
ance companies ran into it and the drain on them was so great they
had to take steps to check the amount of withdrawals which they
had.
Mr. Aldrich. We never have had to do that. Of course, the banks
generally were closed at one time.
Mr. Henderson, I don't want to 'review a lot of painful history
to you, Mr. Aldrich, but I think certainly the history of the Detroit
banks and certain accounts there and the history of some of the New
York strains would indicate that could very definitely happen. I
am surprised that you can't see it. There could be very definitely a
conflict of interest. I am surprised you can't see it.
Mr. Aldrich. If an insurance company called on a bank for cash
and the bank couldn't give it to them, the bank would have to close
its doors. There is a conflict of interest perhaps, but the conflict of
interest comes where the bank can't meet its obligation.
15216 CONCENTRATION OF ECONOMIC POWER
Mr. Henderson. If one were a director of both institutions, he
would be making a decision on his part, as director of the insurance
company, to call on the bank for an action which would close the
bank, would he not?
Mr. Aldrich. That would be true in regard to the situation which
could exist whether or not he is a director.
Mr. Henderson, Not as far as that individual is concerned?
Mr. Aldrich. If any depositor of a bank knows that his with-
drawal deposit would close the bank, he has to take into considera-
tion the question of whether he wants to have a deposit with an
insolvent bank or whether he wants to leave his deposit in a going
concern. The fact that he is a director makes no difference whatever.
Mr. Henderson. That decision is going on in one man's mind.
There isn't a difference where there are two people concerned?
Mr. Aldrich. His primary interest would be his own company.
Mr. Henderson. Certainly the primary interest, and you indicate
the fact that he has a secondary interest. I can understand why he
would take one interest and one decision as against another, but I
can't understand anyone's saying it would be the same thing, there
is no conflict of interest with an interlocking director.
Mr. Aldrich. Frankly, the question of what would happen if a
bank was insolvent has never crossed my mind.
Mr. Henderson. It doesn't necessarily have to be insolvent, does it?
Mr. Aldrich. It would be insolvent if you couldn't pay your obli-
gations on demand. You would have to close the bank.
Mr. Henderson. Oh, suppose all depositors
Mr. Aldrich (interposing). I don't know what good it is for me
to discuss with you the question of what would happen if a bank
couldn't meet its obligations. As a matter of fact, it seems to be
perfectly clear that one of the reasons why the insurance company
have their deposits with large institutions is that they are very
liquid 'and because of that fact they don't have to face that situation.
That is the very reason I assume that the insurance companies want
to carry their principal accounts with banks where that thing couldn't
happen.
Mr. Henderson. We were discussing the general question of
whether there is a conflict of interest, and you keep putting it on the
question of solvency.;
Mr. Gesell. I plead guilty to that.
Mr. Aldrich. He asked me what would happen if an insurance com-
pany wanted to take its deposit out and couldn't. I said the bank
would have to close its doors. I don't think it is a question of con-
flict of interest at all.
Mr. Gesell. Let's take the day-to-day relationship. The bank is
in a landlord-tenant relationship with the Metropolitan.
Mr. Aldrich. As far as the Metropolitan Branch is concerned.
Mr. Gesell. It rents space from the Metropolitan. The Metro-
politan has your group insurance, along with the Equitable?
Mr. Aldrich. Yes.
Mr. Gesell. You have a very active account at the Metropolitan
Branch, involving some 10,000,000 transactions a year, I believe Mr.
Saylor said?
Mr. Aldrich. Yes.
CONCENTRATION OF ECONOMIC POWER 15217
Mr. Gesell. Now, in all that day-to-day conduct of business, do
I understand that you say that you feel the dual interest of any of
the directors who must decide questions involving that relationship
or policy affecting that relationship doesn't present any matters in
conflict at all?
Mr. Aldrich. Yes.
Mr. Gesell. Would you say the same, even when we get into a
situation such as existed in 1930, where there were seven common
directors as between the Metropolitan and the Chase National Bank ?
Mr. Aldrich. Yes; I would.
Mr. Gesell. How many directors do you have?
Mr. Aldrich. We had at that time, I think, 83.
Mr. Gesell. Eighty-three, That was a result of all the banks
taken over?
Mr. Aldrich. Yes.
Mr. Gesell. And the Metropolitan has about 24, is it?
Mr. Aldrich. I don't know.
Mr. Henderson. How many do you have now, Mr. Aldrich?
Mr. Aldrich. The Banking Act of 1933 limited the number of
directors you could have to 25, which relieved us of a considerable
amount of embarrassment. We now have, I think, 23.
Mr. Henderson. So you really had a number of spares in 1933.
Mr. Gesell. Now, Mr. Aldrich, can you explain this advisory com-
mittee to us a little and the history surrounding the development of
the Chase's interest in the Metropolitan Branch?
Mr. Aldrich. Well, I don't know anything about the original
merger of the Metropolitan branch with Chase.
Most of these advisory committees we have inherited. They are
supposed to be local, the groups of men who are interested in that
part of the city where the branches are located. They are supposed
to have some special knowledge of the character of the business as
carried on. They meet monthly, and they go over the loans that are
made in the branches, and the discounts that are made in that par-
ticular branch. They have no power to authorize the branch to make
a loan. That, of course, lies with the board of directors. Their func-
tion is to talk with the officers of the branch about all of the problems
in that branch, including the credit of individual companies which
may be borrowing money in that branch, and to a certain degree I
think they help the branch officers in getting new business and that
sort of thing.
I have to admit that I never have felt they had any very important
function.
Mr. Henderson. This was another of those many things you in-
herited when you took over, was it ?
Mr. Aldrich. I personally don't think I would have started* the
branch advisory boards. We haven't started any since I have been
the head of the bank, and we have abandoned two.
Mr. Henderson. I think some of the disinheritances you have ac-
complished are very worthy. This may be another you will want to
take into account.
Mr. Aldrich. I will tell you^ where I think they have served a
really definitely good purpose in the case where a branch is in a
particular part of the city, say, where there is some fur trading or
15218 CONCENTRATION OF ECONOMIC POWER
some special trading. If you get on your branch advisory board two
or three men who know thatl)usiness, they are very helpful to the
branch officers.
Mr. Henderson. You mean if you get in a region where business
is particularly done on fast-moving credit, I suppose the advisory
committee would be very helpful.
Mr. Aldrich. That type of thing. I think particularly of the fur
trade and garment trade. They really have a function in those parts
of the city. In some of the downtown sections they have a real func-
tion where we have shipping and things of that kind. Of course
they are all men of high character and high standing in the city, and
to that extent it is a good thing for us to have them on the advisory
boards, because it has that connection, the business connection.
I must admit that to me they haven't any very great importance.
Mr. Gesell. Do matters involving. the Chase National Bank come
before the financial committee of the Metropolitan?
Mr. Aldrich. I have never seen a case.
Mr. Geselx,. Does the finance committee determine the allocation of
funds as between various banks ?
Mr. Aldrich. Not that I know of. I would say the answer is de^-
nitely no. Purely a matter of investment. I mean by that that the
finance committee handles investments.
The Vice Chairman. Who does determine the allocations of de-
posits ?
Mr. Aldrich. I don't know.
Mr. Gesell. Does it come before the main board of directors ?
Mr. Aldrich. The question of when an account is going to be open
comes before the main board of directors.
Mr. Gesell. What about which accounts shall have the most money
and which shall be kept active and which accounts shall be kept inac-
tive, and which accounts shall be carried at interest and which accounts
shall not be carried at interest ?
Mr. Aldrich. I can't answer that.
Mr. Gesell. Those matters haven't come before you in your
capacity ?
Mr. Aldrich. Not in any way. The question of authorizing the de-
pository does come before the board.
The Vice Chairman. Who periodically checks up on where the
money of these insurance companies- is placed?
Mr. Aldrich. You mean in the insurance company?
The Vice Chairman. Where are you on the board ?
Mr. Aldrich. I am on the board of the Metropolitan, and I don't
know the answer to that.
Mr. Gesell. I might say. Judge, this afternoon we are going to
have the treasurers of three companies on to discuss that matter at
some length.
Our figures show that insurance deposits were 6.2 percent of your
total deposits.^
Mr. Pike. '39 or '38?
Mr. Gesell. '39 figures.
Can you put all this cash that you have, 6.2 percent — insurance cash
I am talking about— or $15,000,000 that was shown in 1939, at work?
1 Supra, p. 15211.
CONCENTRATION OF ECONOMIC POWER 15219
Mr, Aldrich. Of course, you can't. One of the diflficulties of deal-
ing with the question is how much an account costs or allocating
things to a particular account. That is made very difficult by the
fact that you cannot take any particular sum of money out of your
:otal assets and say that you can use that sum for this, or you have
got a pool of funds, and you can't possibly identify any particular
thing m those funds. It is very difficult, in the over-all picture, the
cost of the operation of the bank, to say, "This is the cost of operating
a particular deposit." Of course, you can take, in the case of the
Metropolitan branch, the total cost of operating a branch and allocate
a certain percentage of that to the Metropolitan deposit, by reason of
the fact that that was a certain percentage of total deposits in the
branch, and get a rough figure that way, but the same thing is true
of your total over-all picture.
If you have got, as we have now, $600,000,000 of excess reserve, you
might say that we will allocate $100,000,000 of our assets to excess re-
serves. On the other hand, you can say that of every single account
you have in the bank, you can't possibly identify one account as dis-
tinguished from another.
Mr. Gesell. Of your total deposits, what percentage would you
say were out to work ?
Mr. Aldrich. Well, again, we have $2,800,000,000 of deposits; we
have about $600,000,000 of excess reserves.
Mr. Gesell. That means that there are $600,000,000 that you hold
that you could put out did conditions permit ?
Mr. Aldrich. Well, yes ; that is correct. What it literally means
is that we have approximately $600,000,000 on deposit with the Fed-
eral Reserve banks more than the law requires us to have to cover the
required reserve against our deposits. But the country as a whole
has $6,000,000,000. We have about 10 percent of the total excess re-
serves in the country.
Mr. Gesell. Mr. Aldrich, from the point of view of a director of
the Metropolitan I presume that you would be in a position to tell us
what prompts Metropolitan placing such a large amount of its funds
in New York City.
Mr. Aldrich. Well, as I understand it — it is strictly true that I have
never investigated the manner in which the Metropolitan determines
where it keeps its deposits. In answering that question, I am just
speaking from my knowledge and may be saying something contrary
to what will be told you by the officers of the insurance company — but
I assume they keep that amount of cash in New York because there is
where they have their principal working balances and that at the
present time there are two factors in the situation — one is that they
want to keep a large amount of cash on hand because of the war situ-
ation and the general economic situation, and perhaps another reason
is that they find it as difficult as we do to find investments for that
cash. I don't know ; I ought not to try to spea k for the officers of the
Metropolitan because I just plain don't know.
Mr. Gesell. I take it that we would be in agreement that the cash
has accumulated for several reasons, among which is the inability to
invest the funds. The schedule that we have in evidence showed in
1938 that $97,000,000, roughly, out of $108,000,000 are in New York
City.^
1 "Exhibit No. 2305," appendix, pp. 15527-15528.
15220 CONCENTRATION OF ECONOMIC POWER
Mr. Aldrich. I must admit that I am surprised to see the small
percentage of the total assets of these insurance companies that are
being kept cash, from the schedule that you put in this morning.^ I
would have thought it was larger.
Mr. Gesell. I oelieve those tigures are right. We have discussed
them hereto'fore.
Mr. Aldrich. I don't know, of course.
Mr. Gesell. I was wondering whether or not some of this money
perhaps couldn't get to work if it was put out in smaller banks
throughout the country. What are your opinions on that, sir?
Mr. Aldrich. Well, of course, in the first place, it would be im-
possible, as I see it, to carry on an account of the character of the
principal account of Metropolitan, where it has 10,000,000 items going
through annually in a group of small banks scattered throughout the
country. It has got to be in one pla^e.
Mr, Gesell. I think we are in agreement on that, but these ojkher
big balances are pretty much inactive accounts.
Mr. Aldrich. Well, at the present time, as I said, there are $6,000,-
000,.000 of excess reserves throughout the country, and, of course, the
excess reserves of the New York banks are very largely caused by the
banks throughout the country keeping deposits with the banks in
New York. Our balances from our account banks are considerably
larger than the balances from the insurance company, very much
larger.
Mr. Gesell. Your correspondents are, by and large, the larger and
stronger banks, are they not?
Mr. Aldrich. No; I wouldn't say that. We have over 3,000 cor-
respondents. They are all, we hope, strong banks.
Mr. Gesell. Would it be your considered opinion that there are
not small banks throughout he country which could use, let's say, a
deposit of five or ten or twenty-five thousand?
Mr. Aldrich. Generally speaking, I think that the banks of the
country, at the present time, have more money than they can use; I
think that is almost universay.
Mr. Gesell. You don't believe, then, that there are small banks in
need of funds?
Mr. Aldrich. I wouldn't dare say that there were not, but I should
say that this statement is true, that with the excess reserves of the
country about $6,000,000,000, the thing we are suffering from more
than anything else at the present time is a plethora of money rather
than any shortage.
Mr. Gesell. L>o you believe as a matter of broad social policy that
it might be more desirable even in the situation wliich prevails at
the present time, for a large institution like the Metropolitan to
diversify its funds more than it has?
Mr. Aldrich. Diversify? Do you mean keep cash balances or
diversify its investments?
Mr. Gesell. No; its cash balanced; put some money in Kansas
City, in New Orleans, and all the middle-sized cities around the
country where no home office deposits are carried at the present time.
Mr. Aldrich, I should say that, looking at it from the point of
" "Exhibit No. 2318," appendix, p. 15540.
CONCENTRATION OF ECONOMIC POWER 15221
view of the Metropolitan, they should keep their balances in the
places where they need them for their business, and I take it that
they do do that. I literally don't know, one thing about where or
how the Metropolitan keeps its bank accounts.
Mr. Gesell. I am a little surprised at that. You being so promi-
nent in the banking community, I would have thought you would
have been consulted by the Metropolitan as to matters of banking
policy.
Mr. Aldrich. Well, as a matter of fact, if the Metropolitan wanted
to know whether a bank was of the character that it was safe for
them to put their fimds in it, they would undoubtedly consult the
Chase National Bank and they might very well do it through me.
It would depend a good deal upon who was doing it.
Mr. Gesell. You would check to see whether a bank was a good
bank?
Mr. Aldrich. Yes; but they would not, I think, take up with me,
unless it were at the point where they were about to open a deposit,
the question of whether they should have a deposit in one city rather
than another or one town other than another. As a matter of fact,
that is a detail which probably would be handled by the officers with-
out consultation.
Mr. Gesell. Without coming to the board?
Mr. Aldrich. Well, up to the point where they open the account.
Mr. Gesell. Until a specific recommendation was made?
Mr. Aldrich. Right; I should think so. There again I am not
sure.
Mr. Gesell. And your answer to my question as to whether it
would be desirable for an institution like the Metropolitan to diver-
sify its cash balances to a greater extent than has been done was, I
believe, that you believe it is good policy for the Metropolitan to
keep its funds where it does business, where it has need of the funds?
Mr. Aldrich. I should think that the Metropolitan would be
guided by its own needs from a business point of view as to where
it kept its funds.
Mr. Gesell. I suppose we are in agreement that there are large
deposits of the Metropolitan at the present time which are not tapped
from year to year and which are for all intents and purposes inactive
deposits ?
Mr. Aldrich. I should think that the Metropolitan must keep, on
the average, a large sum of money in cash, which it would keep on
deposit with the banks, and undoubtedly that would mean some of
those accounts would be, as to their residual amount, inactive, but
as a matter of fact I don't know of any company in the country that
has more active bank accounts than the Metropolitan.
Mr. Gesell. That would apply to its district accounts particularly,
would it not?
Mr. Aldrich. You are getting into a field there that I don't know
anything about.
Mr. Gesell. Let's take the $3,000,000, for example, that they have
with the Chase. That part of the balance is at interest. That, I
take it, is a time deposit which rests with the Chase for a period of
time; it is not an active deposit?
15222 CONCENTRATION OF ECONOMIC POWER
Mr. Aldrich. Yes.
Mr. Gesell. Wouldn't it perhaps be helpful to have that $3,000,-
000 resting, say, in Fort Worth, Tex., or in Tampa, Fla., or in Kansas
City, or some place else ?
Mr. Aldrich. It certainly would be helpful to us at the present
time if they did, because we wouldn't have to pay interest on it.
Mr. Gesell. And your position would be that they would be unable
to place this money at interest at any other bank outside the city of
New York?
Mr. Aldrich. I don't know know whether they could or not: but,
you see, the Banking Act of 1933 provides that you cannot pay mter-
est on a demand deposit 5 therefore the only way they can get any
interest is on time deposits; and in a situation like this, where we
have $60,000,000 of excess reserves, any additional deposit that we
have is simply a liability, because we have to pay a twelfth of 1
percent on it to the Federal Deposit Insurance Corporation, and the
bigger our deposits are the less money we make at the present time.
Mr. Gesell. Do you believe that funds can be deposited at interest
more easily in New York City than they can outside ?
Mr. Aldrich. No; I do not.
Mr. Gesell. Then, coming back to my question
Mr. Aldrich (interposing). I should think you could deposit funds
at interest anywhere. I haven't looked into it, but I can't imagine
a bank wanting to add to its excess reserves by taking time deposits
and paying interest on them.
Mr. Gesell. Coming back to my original question, then, do you
feel it would be desirable for the Metropolitan to make such a deposit
as this outside of the city of New York if it could make such a
deposit at interest?
Mr. Aldrich. I would say that as far as the Metropolitan is con-
cerned, if they could get interest on a time deposit and they have
the money available, the thing they should do would be to get as
much interest on it as they could.
Mr. Gesell. And let's say they would get the same interest for a
bank outside of New York, or in New York, where, from a point of
view of broad policy, would it be more desirable for the funds to rest?
Mr. Aldrich. From the point of view of the Metropolitan, I
shouldn't think it would make any difference if they could get the
same interest, and the bank is equally as reliable.
Mr. Gesell. From the point of view of social policy, do you feel
it would be more desirable for those funds to get out or New York?
Mr. Aldrich. I don't think at the present moment any such ques-
tion of social policy arises, because the excess reserves all over the
country are so great there is just no question about it.
The Vice Chairman. A man who goes into a bank now who wants
to have anybody smile at him goes in to borrow some money, and not
deposit it.
Mr. Aldrich. That is certainly true, particularly if he wants to
deposit it on time.
The Vice Chairman. I have had them speaking to me lately.
Mr. Gesell. I have no further questions of Mr. Aldrich.
Mr. Kades. What interest do you pay on your time deposit of the
Metropolitan ?
CONCENTRATION OP ECONOMIC POWER 15223
Mr. AiiDRicH. There is some correspondence which has been given
to your people about this very deposit which my recollection showed
that we had a conversation with the Metropolitan as to what the
interest rate should be, and whether it would be a quarter or a half
of 1 percent, and we didn't want to take it at a half of 1 percent
because of the fact that we couldn't buy any Federal obligations at
that time which would make it compensatory to take it; in other
words, we would lose money on it if we took it, and the question was
whether half of 1 percent should be reduced to a quarter of 1 percent.
What our rate is at the present moment on time I couldn't answer,
but it must be under a half of 1 percent, I should think, and even
then it wouldn't be compensatory, because we find it almost impos-
sible to earn a half of 1 percent on our total resources.
Mr. Kades. For how long a period of time are the time deposits,
as a rule, in the case of the Metropolitan?
Mr. Aldrich. I can't answer that. I think it is 6 months, 6 months
and a day, I understand. There are some technical regulations there
in connection with time deposits which are intended to prevent banks
from avoiding the statutory provision that you can't pay interest on
deposits, therefore you have got to have certain specific regulations
in regard to time deposits that clearly differentiate them from de-
mand deposits, and the banks naturally come right up to the edge of
that line in making a time deposit.
Mr. Kades. According to the schedule that Mr. Gesell introduced
earlier, as of December 31, 1938, the balance not at interest of the
Metropolitan with the Chase was over $31,000,000. Of that amount,
how much would you have estimated would be withdrawn within 6
months ? ^
Mr. Aldrich. Well, you see, it is a constantly revolving fund. It
is hard, to realize that our total deposits will go up and down fifty to
eighty to ninety million dollars a day. Sometimes the activity in that
account is such that they might draw on us for $20,000,000 in 1 day.
Mr. Kades. Do you know what the lowest level was during the
year 1939?
Mr. Aldrich. 1939?
Mr. Kades. This figure is as of December 31, 1938.
Mr. Aldrich. I think you have a schedule of that.
Mr. Gesell. Yes, I do ; and I offered it in the record, and the total
deposits show on this schedule at $175,000,000 as of December 31, 1938,
for all companies, of which $64,000,000 is deposit of the Metropolitan.^
The amount on time and demand is not shown.
Mr. Aldrich. You are asking for the total amount on demand, aren't
you, or the lowest total amount on demand ?
Mr. KJVDES. That is right.
Mr. Aldrich. I should think it was substantially, say, $25,000,000
as a guess ; I don't know.
Mr. K^ADES. It would not be less than twenty or twenty-five million
out of the thirty-one million?
Mr. Aldrich. I honestly don't know the answer. I don't dare answer
the question. It is substantial, but I don't know what it is.
1 "Exhibit No. 2305," appendix, pp. 15527-15528.
a "Exhibit No. 2318," appendid, p. 15540.
15224 CONCENTRATIOxN OF ECONOMIC POWER
Mr. Kades. The reason I asked the question, Mr. Aldrich, was be-
cause atjcording to the same schedule there seems to be a relationship
between the amount of balances kept by the Metropolitan Life Insur-
ance Co. not at interest and the amount kept at interest.^ For ex-
ample, with the New York Trust Co. there was $6,000,000 not at in-
terest, $2,000,000 at interest, approximately one-third. In the Central
Hanover Bank & Trust Co., $6,000,000 not at interest, $2,000,000 at
interest, also a third. Bankers Trust Co., $6,000,000 not at interest,
$2,000,000 at interest, also a third. National City Bank of New York,
$6,000,000 not at interest, at interest $2,000,000, also one-third. The
First National Bank of New York City, $5,000,000 not at interest,
none at interest. J. P. Morgan & Co., $3,700,000 not at interest, bal-
ance at interest $1,250,000, also approximately one-third. Chemical
Bank & Trust Co., $3,500,000 not at interest, $1,000,000 at interest,
also one-third. Guaranty Trust Co., $3,500,000 not at interest,
$1,000,000 at interest, also a third, and so on. Is there any reason which
you can state why the ratio of one-third or thereabouts is not kept in
connection with the deposit in the Chase?
Mr. Aldt?tch. I don't know anything about that.
Mr. Henderson. I want to go back for a moment, for the purpose
of the record, to this interlocking directorate. We may have gotten
into some confusion there, but I happen to be administering some
acts. We have the Trust Indenture Act, we have the Securities and
Exchange Act, we have the Utility Holding Company Act, and we
Imve just sent up a series of reports on investment trusts. I happen
to have listened to testimony here, I have read the Pecora hearings
and the like and I do find constantly that there is a conflict. Maybe
I should have offered it as my testimony rather than asking if you
didn't see it. I offer that for the record as the reason why I made the
statements I did to you.
Dr. LuBiN. Mr. Aldrich, wohld you know offhand the approximate
number of depositors in your bank who are accustomed *^^- have
deposits of amounts in excess of 50 or 60 million dollars ?
Mr. Aldrich. No; I wouldn't. We have quite a number
Dr. LuBiN. You do have quite a number?
Mr. Aldrich. Yes.
Dr. LuBiN. Whose day-to-day balance would run on the average
consistently 50 or 60 million dollars?
Mr. Aldrich. One or tw^o occur to me right away, the Metropolitan
Life, the city of New York — you say in excess of $50,000,000 ?
Dr. LuniN. Yes.
Mr. Aldrich. I take that back, not quite a number. The Equitable
Life. Those are the only ones I can think of.
Dr. LuBiN. In other words, of the three deposits, two of them are
msurance companies.
Mr. Aldrich. That is right.
Dr. LuBiN. Has the Metropolitan any time asked the Chase to
permit it to increase its balance on deposit for interest, time deposit?
Mr. Aldrich. Time deposit? I think — yes, I think it has. Isn't
that in that correspondence?
Mr. Gesell. Yes : I believe so.
1 "Exhibit No. 2305," appendix, pp. 15527-15528.
CONCENTRATION OF ECONOMIC POWER 15225
Dr. LuBiN. Did the bank accept its request for permission ?
Mr. Aldbich. I think not.
Mr. Gesell. I think there are some cases where they did and some
where they did not.
Mr. Aldrich. It depends a great deal on what the rate of interest
is that they ask. Naturally, we don't like to take time deposits that
are going to result in a loss to us.
Dr. LuBiN. Would you know whether in the recent year, let's say
in the past 12 months, any request has been made by Metropolitan
to do that?
Mr. Aldrich. This particular thing they are talking about was
within the last 2 years.
Dr. LuBiN. And you refused to permit it?
Mr. Aldrich. I believe so, yes.
The Vice Chairman. Any other questions, gentlemen? Is there
any reason why Mr. Aldrich may not be excused ?
Mr. Gesell. None whatsoever, so far as I am concerned.
The Vice Chairman. I assume this committee will meet about 2 :30,
won't it?
Mr. Gesell. I have one thing I would like to put in the record
before Mr. Aldrich leaves. The question came up as to whether the
Union Trust Co. of East St. Louis was or was not a correspondent of
the Chase. Records indicate that from '31 to '33 they were a cor-
respondent having money with the Chase Bank.
(The witness, Mr. Aldrich, was excused.)
The Vice Chairman. We will reconvene at 2 : 30.
(Whereupon, at 12:40 p. m., a recess was 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 re-
cess, Representative B. Carroll Reece presiding.
Acting Chairman Reece. Are you ready to proceed, Mr. Gesell ?
Mr. Gesell. Yes, I am.
Acting Chairman Reece. The committee will please come to order.
Mr. Gesell. The first witness this afternoon is Mr. Washington.
Acting Chairman Reece. Do you solemnly swear the testimony you
shall give in this proceeding shall be the truth, the whole truth, and
nothing but the truth, so help you God?
Mr. Washington. I do.
Acting Chairman Reece. Be seated, please.
TESTIMONY OF LAWRENCE WASHINGTON, ASSISTANT TREAS-
URER, METROPOLITAN LIFE INSURANCE CO., NEW YORK, N. Y.
Mr. Gesell. Mr. Washington, will you state your full name and
your position for the reporter, please, sir ?
Mr. Washington. Lawrence Washington, assistant treasurer.
Metropolitan Life Insurance Co.
Mr. Gesell. What are your duties, Mr. Washington, as assistant
treasurer ?
15226 CONCENTRATION OF ECONOMIC POWER
Mr. Washington. My duties have to do with the cash transactions
of tlie company, handling its receipts, disbursements, banking ar-
rangements.
Mr. Gesell, You are the man who handles the day-to-day banking
arrangements for the Metropolitan, are you not?
Mr. Washington. Yes; I operate them. I, of course, do not decide
questions of banking policy. I am the operating officer.
Mr. Gesell. Who determines where you shall deposit money, or
matters of that broad policy nature?
Mr. Washington, You refer, of course, to the company, the direct
company accounts?
Mr. Gesell. Yes.
Mr. Washington. The senior financial officers — treasurer, and vice
president Ecker.
Mr. Gesell. And you are the man who carries those policies into
eifect?
Mr. Washington. I am.
Mr. Gesell. Now, I wanted, first of all, to get from you a little better
idea of just what kind of account this is that the Metropolitan has
with the Chase Bank. How much is on time, how much is on demand,
what are the factors that determine the size of the account, and how
is it handled?
Mr. Washington. .The company's home office active checking ac-
count is in the Chase. That is the company's only really active United
States home-office account. All the company checks for different pur-
poses drawn at the home office in New York are. drawn on the account
in the Chase. All funds coming into New York are deposited in the
Chase. So that regulates the size of the deposit in the Chase at any
time, how much we get in and how much we pay out.
We, of course, do have large, so-called reserve accounts in many of
the New York banks, but the fluctuations occur in the Chase account
and they are, of course, very large.
Mr. Gesell. Now, the other accounts that you refer to are, by and
large, inactive accounts?
Mr. Washington. They are inactive accounts.
Mr. Gesell. The money is kept there waiting some large investment
or some change in policy ?
Mr. Washington. Quite right.
Mr. Gesell. And the only active New York account is the Chase
account.
Mr. Washington. Yes. In the company's home office. Of course,
we have subsidiary accounts for our farm-loan offices and things oi
that sort.
Mr. Gesell. You have district office accounts.
Mr. Washington. They are all over the country ; yes.
Mr. Gesell. Now, the balance at the Chase fluctuates, you say. What
has been the minimum balance there on demand in recent years ?
Mr. Washington. I think the lowest balance in the last few years
was around $4,000,000.
Mr. Gesell. Around $4,000,000. Generally at what level does it
stay?
Mr. Washington. Well, it would fluctuate anywhere between,
$4,000,000 was the low point — say, between that point and the high.
CONCENTRATION OF ECONOMIC POWER i5227
I couldn't give you that oflfhand, I suppose it ran up to $50,000,000 or
$60,000,000 at times, maybe over that.
Mr. Gesell. It ran over that. According to the records that the
Chase Bank submitted it was up over $100,000,000 in '38 and '39 as of
June 30.
Mr. Washington. 1938 and 1939.
Mr. Gesell. Also in 1934 it was over $100,000,000.
Mr. Washington. You are asking me about our balances. Of course,
those figures would not at all check with the figures given you by the
Chase because when we draw a check on a bank it goes out of our ac-
count. So far as the Chase is concerned, it doesn't go out of the account
until it clears, so that you wouldn't expect any accurate check between
those figures.
Let me see what my own figures show for that period. What was
that date, Mr. Gesell?
Mr, Gesell. I had as of June in 1934, 1938, and 1939.
Mr. Washington. Well, our figures never showed that much in
June 1938. The top figure was $103,000,000 and that included time
too, so it would have been $97,000,000 at that time; in June 1937, our
largest balance in the Chase was $65,000,000. That was $59,000,000
on demand, as we had $6,000,000 on time. In 1936
Mr. Gesell. Yes.
Mr. Washington. $55,000,000 less $6,000,000 ; that is $49,000,000. In
1935— $59,000,000 on demand. In June 1934 our total funds (I haven't
got them separated for that year), were $104,000,000.
Mr. Gesell. That gives some idea of the fluctuation of accounts.
Mr. Washington. Very wide fluctuations.
Mr. Gesell. How much hate you been carrying on time in the
account ?
Mr. Washington. In the Chase ?
Mr. Gesell. Yes.
Mr. Washington. Until sometime in the fall of 1938 we had
$6,250,000.
Mr. Gesell. Had you tried to put more money on time with the
Chase?
Mr. Washington. I have not. Whether one of .the other financial
officers entered into negotiations of that sort, I don't know. I never
did.
Mr. Gesell. You had made no negotiations to put more in ?
Mr. Washington. No.
Mr. Gesell. Now, generally speaking, with respect to your other
bank balances, I think, as Mr. Kades developed with Mr. Aldrich this
morning, the amount of. balance at interest and the balance not at
interest are about in the ratio of 3 to 1.
Mr. Washington. At the present time; yes. Of course, until the
fall of 1938 it was about fifty-fifty.
Mr. Gesell. Wliat determines how much you have on demand, how
much you will have on time in these various accounts ?
Mr. Washington. As far as I am concerned, the senior financial offi-
cers determine that.
Mr. Gesell. And you have no knowledge as to what lies back of
that?
Mr. Washington. No.
15228 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. You just carry it out? .
Mr. Washington. Right.
Mr. Gesell. I take it that by the senior officers you mean the treas-
urer, do you not?
Mr. Washington. Treasurer and vice president Ecker.
Mr. Gesell. What do you do, Mr. Washington, when you receive
these requests from Mr. Saylor, such as we had in the record this
morning? I noticed most of them were directed to you or involve
conversations with you.
Mr. Washington. You mean with reference to our district office
banks ?
Mr. Gesell. With reference to district office banks and the other
type of thing.
Mr. Washington. The other type of thing doesn't come to me, I
believe ; that is those that were discussed this morning.
Well, I can clarify, that for you, I think. It is a very common
practice among banks throughout the country, if they are seeking
an account at the Metropolitan Life, they don't know us particularly
but they do know their New York correspondent bank, so they write
to their New York correspondent bank to put their request before -us,
and the New York correspondent bank, whether it be the Chase or
some other bank, does so. Ordinarily, we do what I would describe
as going through the motions.- We look up the account and tell them
that the present banking arrangement is perfectly satisfactory but
that later on if we have to change the account we will give the bank
consideration.
There are, of course, other cases. We may be on the point of
changing a bank account or considering it or opening a new office.
That becomes known in the city where the office is to be opened and
the banks there try to get the business, and may very likely again
approach us through their New York correspondents. We decide the
case purely in the interest of the Metropolitan Life principally to
get a strong bank, the nearest 'one to .the district office. Sometimes it
happens that we will select a bank which the Chase has recommended
to us. I suppose more often that is not the case. One thing has noth-
ing to do with another. We pay no attention whatsoever to requests
coming through the Chase. They aren't really Chase requests. As a
general thing, they are simply requests of the banks forwarded to us
by the Chase. We pay no attention to them at all and select the
depository on the basis of the soundness of the bank and convenient
location.
(The vice chairman, Eepresentative Sumners, assumed the chair.)
Mr. Gesell. What was the factor that led to the change in the
Union Trust Co. of East St. Louis?
Mr. Washington. My file is a little bit more extensive than that
brought up this morning. It goes back to a situation 2 or 3 years
prior to the date the Chase interested itself in the matter. In 1928,
the manager of our East St. Louis office wrote us and said the bank
he was then using was 1,400 feet away from the office, while the First
National and Union Trust Co. were 400 feet away, and it would be
more convenient to deal with a nearby bank.
Mr. Gesell. As I recall the change that we discussed this morning,
it took place in 1931, 3 years later. Was it a result of that request?
CONCENTRATION OF ECONOMIC POWER 15229
Mr. Washington. No.
Mr. Gesell. All I want is for you to tell us the reason why the
changes were made.
Mr. Washington. The change was made to put the account into a
more convenient bank, to put it in what I regarded at that time as a
stronger bank, and on our manager's recommendation. He sold some
insurance to the bank, and I think his recommendation was influenced
by that.
Mr. Gesell. Have you that recommendation there, sir?
Mr. Washington. Yes.
Mr. Gesell. May I have it?
Mr. Washington. These files are awfully nice to put things in but
hard to get things out of.
Mr. Gesell. I would be glad to read it into the record but not destroy
your file. But I want to see it.
Mr. Washington. That letter, of course, is only a very small part of
this story.
Mr. Gesell. I want the whole stor^ .
That is the letter dated July 1, 1931, to Mr. George signed by the
manager stating [reading] :
Since my letter of June 22, Mr. Schlafley has discovered he had over fifty
employees connected with the bank and I made arrangements with him to close
this group. There is a prospect of corporation insurance in this bank which
would far offset any loss we might sustain through changing our deposit, and they
would also furnish us hiessenger service. If agreeable with you I am willing to
go ahead with the change.
Is that the letter you referred to ?
Mr. Washington. Yes; that is one. I want to give you a little
fuller picture of that situation, however.
You will remember the banking situation was a little bit disturbed,
putting it mildly, at this time, that is in 1931. Shortly before)
hese transactions took place, I had gone out to Chicago, St. Louis,
and other centers to talk with the principal banks there, to get
their opinion of the position of the banks we were using and
the other banks, and I acquired a good deal of information of one
sort and another on that point. Among others, it was felt gen-
erally that the Union Trust Co. was a bank more likely to stay open,
hold up, than the other bank. Whether that was justified or not, I •
don't know.
So that I was rather seeking an opportunity at that time to better
our banking situation. Furthermore, as soon as we looked into this
matter, as I say, we saw that our manager was dealing with an
inconveniently located bank.
Mr. Gesell. You could have seen, that from looking back to your
account, the letter you received in 1928.
Mr. Washington. That is how we did determine that.
Mr. Gesell. That is how you found it out in 1931? I don't un-
derstand that.
Mr. Washington. When in 1931 the Chase took up with us the
request of the East St. Louis bank — I believe it was coupled with a
statement of the East St. Louis bank that they were centrally lo-
cated, that they were thinking of taking out some insurance policy
with us, and I looked at my file. The letter of 1928, of course, showed
that that bank was, as I said, not only badly located from our point of
124491.:-41— pt. 28 35
15230 CONCENTHATION OF ECONOMIC POWER
view, but at that time I was of the opinion the other bank was the
stronger bank.
Mr. Gesell. Does this question of the selling of insurance have an
effect on where you place your bank accounts ?
Mr. Washington. For the last 4 or 5 years we haven't even con-
sidered it. I should say prior to that time, other things being equal,
out of two banks that were eq^ually desirable we would use the one
with which we were doing busmess.
Mr. Gesell. You mean if one bank had a group insurance policy
and the other didn't, the money would be placed where the group
insurance policy was?
Mr. Washington. Other factors being equal, the one being as con-'
venient and as strong as the other, yes; whether it was group insur-
ance or any other insurance.
Mr. Gesell. If an officer of one of the other banks took out a sub-
stantial policy, you would be inclined to favor his bank with the
deposit ?
Mr. Washington. Other things being equal, yes.
Mr. Gesell. Wljen was that policy changed ?
Mr. Washington. That is putting it rather strongly. It was never
a definite policy.
Mr. Gesell. You said up to a few years ago.
Mr. Washington. The last 4 or 5 years we have not considered that
matter at all. I don't know whether we have had occasion to —
whether there have been cases in which things were absolutely
equal. If such an occasion should come now and we were opening a
new office and had to open a bank account or there was a change of
location, as between two banks equally strong, equally convenient, I
think we would be inclined to give it to the bank that was doing
business with us.
Mr. Gesell. What is the attitude of the company with respect to
policy'loans where you know that a bank in which you have a deposit
is about to make a loan on a Metropolitan policy? What happens
in a case like that ? Do you permit those loans ?
Mr. Washington. We have absolutely no interest in whether any
bank makes any loan on Metropolitan policies or not.
Mr. Gesell. Do you recall this correspondence, sir? ^
Mr. Washington. ; Yes.
Mr. Gesell. That would tend to indicate something a little differ-
ent, would it not?
Mr. Washington. I don't think so.
Mr. Gesell. Will you explain what happened in that situation,
then, sir?
Mr. Washington. Yes. We had an agent at that time out on
Staten Island whom I didn't know, and don't know now. Raymond
Jones, vice president of the Bank of Manhattan, whom I have known
for many years, and, of course, had a great many business dealings
with
Mr. Gesell (interposing). Your company has an account with his
bank, does it not?
Mr. Washington. Yes. He called me up and said that Mr.
Ketzer had endeavored to arrange some loans — some policy loans — t'
1 "Exhibits Nos. 2320 to 2320-B," Infra, pp. 15231-15232.
CONCENTRATION OF ECONOMIC POWER 15231
be made by the Bank of Manhattan at a low rate of interest. To do
that, I believe, he had gone to a branch of the Manhattan in which ho
had an account and obtained a letter of introduction to another
branch, outlined the situation to them, and they had said they would
make such a loan at a given rate of interest. I lorget what it was. It
wasn't low enough to suit our representative, and the deal was not
consummated.
He then wrote a letter of criticism to the Bank of Manhattan and,
as I remember it, was quite critical of its policy of not loaning on
policies at a lower rate of interest and so getting the business -wiich
he said he would have obtained for the bank.^
Mr. Gesell. That is the letter you refer to, is it not?
Mr. Kades. While we are waiting, would you tell us who Mr.
Ketzer is?
Mr. O'Brian. He is an agent of the Metropolitan Life.
Mr. Washington. Yes; that is the letter.
Mr. Gesell. I didn't mean to interrupt you.
Mr. Washington. These loans that our agent was endeavoring to
get the Bank of Manhattan to take were not on policies of the Metro-
politan Life; they were policies issued by otner companies. Mr.
Jones called me up and said that he was much disturbed that a
representative of the Metropolitan Life should have occasion to criti-
cize the Banli of Manhattan. He outlined the circumstances of the
case to me, and I told him that from what he told me it appeared our
agent had acted out of his province and had been overzealous, that if he
would send me up the correspondence I would go into the quest^wi
more thoroughly. He did send me up the correspondence at that
time. I discussed the agent's action with the superintendent of
agencies. He agreed with me that he w^s acting entirely out of his
field, that he should act neither as a loan broker nor a bank manage-
ment critic, and a letter was written to the agent informing him of
what the policy of the company was in such, matters, that he should
not criticize bank policies and he shouldn't endeavor to act as a loan
broker.
- Senator King. Was he reproved by the company because of his
action ?
Mr. Washington. I would call it a reproof; yes.
Mr. Gesell. The letter is among these you have identified ? ^
Mr. Washington. Yes. The letter is in there.
Mr. Gesell. I can read the correspondence for the record.
The letter from the Metropolitan agent, Mr. Ketzer, to Mr. Philip
Licht, of the Bank of Manhattan, dated June 15, 1938, to which Mr.
Washington refers, states [reading "Exhibit No. 2320"] :
Enclosed you will find a letter of introduction to Vice-President Kavanaugh
as requested by you.
It is a shame that this man's request for a loan of $20,000 at 3% was given
such poor consideration in view of the fact that he is Vice-President of Young
& Rubicam, whose salary is $50,000 a year. He was willing to open an account
with the Bank of Manhattan and it was possible that he could transfer the
Young & Rubicam account to your branch oflBce at 41st and Madison Ave.
Mr. Eldridge desired this loan for the purpose of liquidating loans now existing
against his life insurance policies and he was willing to assign all of his policies
to the Bank of Manhattan, which would have fully protected your bank in either
1 "Exhibit No". 2320," infra, pp. 15231-15232.
• » "Exhibit Nx). 2320-B," infra, p. 15232.
15232 CONCENTRATION OF ECONOMIC POWER
the event of his death or in the event that he could not repay the loan, because,
as you know, an assignee has the right to borrow or cash surrender any assigned
policy without permission of the insured.
Mr. Kavanaugh was willing to grant Mr. Eldridge a 4% loan, but I was able
to secure a loan for him at 2%%.
I do wish to thank you for your courtesies and to assure you that I am deeply
appreciative of same.
The letter dated June 20, 1938, to Mr. Washington from Mr. Ray-
mond E. Jones, vice president of the Bank of the Manhattan Co.,
reads [reading "Exhibit No. 2320-A"] :
You asked me to send you the name of your agent who had endeavored to
arrange a loan at one of our branches against policies of your Company.
I have explained to you the policy of our Bank in the matter of loans on life
insurance policies, particularly when the companies are friendly to us. As you
know, we find it difficult to obtain good loans today, but nevertheless do not feel
that we should take policy loans away from the insurance companies where the
business rightfully belongs. Perhaps the best way to explain the incident is
to send you the enclosed letters which please treat in confidence.
If you have any suggestions which you might care to make regarding the policy
which we are trying to pursue in this matter I shall be glad to hear from you.
And the letter written by the superintendent of agencies of the
Metropolitan to Mr. Ketzer, dated July 6, 1938, reads [reading "Exhibit
No. 2320-B"] :
It has come to my attention that in connection with a recent canvass of Mr.
Clarence E. Eldridge, to whom you sold substantial life insurance policies, you
endeavored to make arrangements under which Mr. Eldridge could borrow from
banks on his life insurance policies in order to liquidate loans held by life insur-
ance companies. It was even reported to me that in at least one instance you
criticized a bank for offering what you deemed unsuitable terms for such a loan.
This Company has very close relations with many of the large banks in New
York City and elsewhere. Some of these banks for reasons of their own do not
look with favor upon life insurance policies as collateral, and some of them out of
regard for the life insurance business decline at least to solicit this type of
business.
Your activities In connection with Mr. Eldridge's life insurance have proved a
cause of embarrassment to the Company, and I can only regard them as being
beyond your province. I must very definitely request that in the future you
abstain from dealings of this nature with banks until you have communicated to
the Home Office just what you propose to do, and have obtained its approval.
I would like to offer this correspondence for the record.
(The letters referred to were marked "Exhibits Nos. 2320, 2320-A
and 2320-B" and appear in f^U in the text on pp. 15231-15232.)
Senator King. Have you any statement you would like to make,
Mr. Washington?
Mr. Washington. I would like to say one word to clear up this
Ketzer matter. Of course, I have nothing to do with the matter of
policy loans. However, you probably heard the last paragraph of
the letter from Mr. Jones, in which he said something to the effect
that it wasn't the policy of the bank to make life-insurance loans,
and rather invited me to comment on that.^
I called him up and told him that so far as the Metropolitan Life
was concerned, it didn't care a particle whether the Bank of Man-
hattan or any other bank made loans on life insurance or anything
else ; that that was part of its own management problem. I may say
that that is very definitely the policy of my company. It has been
communicated to me by my superior officers, and time and time again
1 "Exhibit No. 2320-A," supra, p. 15232.
CONCENTRATION OF ECONOMIC POWER 15233
I have told inquiring bankers that we certainly had no objection
whatsoever to their making loans on life insurance if they thought
that was good business.
Mr. Henderson. You do regard it as a company matter if an agent
criticizes a bank?
Mr. Washington. Well, we certainly don't want our agents kick-
ing up trouble with banks ; no.
Mr. Henderson. Even when it is not within the company's busi-
ness ?
Mr. Washington. Oh that is not quite true of this case.
Mr. Henderson. I understand the transaction had nothing to do
with the Metropolitan. The policy loans weren't on policies with
the Metropolitan.
Mr. Washington. Well, except that of course Mr. Ketzer was
known to the Bank of Manhattan principally and only as a repre-
sentative of the Metropolitan Life Insurance Co.
Mr. Henderson. They knew he was not making the transaction as
a representative of the Metropolitan, didn't they ?
Mr, Washington. The Bank of Manhattan evidently was under
the impression that these were Metropolitan loans. They were not.
They were loans on policies of other companies, and we wouldn't
want our agents to go barging into insurance policies of other com-
panies anyway. Their business, according to our view of the matter,
is to sell life insurance on its merits to people who can aflford to pay
for it.
Mr. Henderson. Supposing he is a Metropolitan agent and he
didn't like the way the gas company ran its affairs, and the vice
president of the gas company happened to be a friend of yours and
called you up. Would you discipline the agent in that case?
Mr. Washington. Oh, no, indeed. Ketzer's activity in this case
was life-insurance business. Commissioner.
Mr. Henderson. It was life-insurance business, yes; but it had
nothing to do with the Metropolitan. It seems to me that it was as an
individual.
Mr. Washington. It seemed to be clear that his operations con-
cerned the writing of more insurance for the Metropolitan Life
Insurance Co. That was his object. He was endeavoring, appar-
ently, to persuade one man to take his bank account away from a
bank in wnich it then was, and that of his company, and put them jn
the bank of the Manhattan company in order, indirectly, that out
of this transaction Mr. Ketzer could write some life insurance.
Mr. Henderson. That is almost identical to a transaction that was
happening between the Chase Bank and some of the correspondents
of the Metropolitan this morning, isn't it?
Mr. Washington. Sorry ; I don't see any similarity.
Mr. Henderson. Somebody was trying to get somebody to make a
change in order that somebody coula get some business, and that is
just about what this agent did in this case, it seems to me. I am
not saying whether it was good or bad, but it looks to me as if it is
the same kind of transaction.
Mr. Washington. I am not characterizing it either. We felt the
agent had been overzealous and acted outside of his province in
criticizing the bank, and we told him not to do it any more. He is
15234 CONCENTRATION OF ECONOMIC POWER
one out of 20,000 agents. My criticizing Mr. Ketzer for getting in-
volved with the Bank of Manhattan naturally doesn't represent any
company policy of any sort.
•Senatoi- Kino. Call your next witness.
(The witness, Mr. Washington, was excused.)
The Vicb'Chairman. The next witness.
Mr. Gesell. Mr. Greaves.
The Vice Chairman. Mr. Greaves, will you stand up to be sworn,
please ? Do you solemnly swear that the testimony you are about to
five will be the truth, the whole truth, and nothing but the truth, so
elp you God?
Mr. Greaves. I do.
TESTIMONY OF HENRY GKEAVES, TREASURER, THE EQUITABLE
LIFE ASSURANCE SOCIETY OF . THE UNITED STATES, NEW
YORK, N. Y.
Mr. Gesell. Will you state your full name arid your position for
the record, please, sir?
Mr. Greaves. Henry Greaves, treasurer, The Equitable Life Assur-
ance Society of the United States.
Mr. Gesell. How long have you been treasurer of the Equitable,
sir?
Mr. Greaves. For 3 years. :
Mr. Gesell. You say you have been treasurer for 3 years?
Mr. Greaves. Three years.
Mr. Gesell. What are your duties as treasurer, sir ?
Mr. Greaves. I have charge of collections, custody of funds, and dis-
bursements.
Mr. Gesell. What do you have to do with the determination of
where the Equitable shall put its money, what bank accounts it will
use?
Mr. Greaves. In the first place, the depositories are authorized by
the finance committee under section 14 of the bylaws.
Mr. Gesell. Who makes recommendations to the finance com-
mittee ?
Mr. Greaves. The treasurer.
Mr. Gesell. You mean yourself?
Mr. Greaves. Yes.
Mr. Gesell. You then do have some authority in the determination
of bank accounts, in that you make recommendations to the finance
committee?
Mr. Greaves. In the determination of bank accounts?
Mr. Gesell. Yes.
Mr. Greaves. I make recommendations to the finance committee.
In the first place, no recommendation is made to the finance commit-
tee of any bank that has not been thoroughly analyzed and found
to be sound.
Mr. Gesell. But who selects the banks? Are you the fellow that
selects them and recommends them to the finance committee?
Mr. Greaves. In some instances I have selected them.
Mr. Gesell. Who else selects them besides yourself?
Mr. Greaves. It might be ray suggestion of a certain bank, or it
CONCENTRATION OF ECONOMIC POWER 15235
may be a suggestion from one of our managers, or may be a suggestion
from a bank itself.
Mr. Gesell. Now, the balances of the Equitable as of December 31,
1938, amounted to how much money?
Mr. Greaves. December 1938, cash balances on the Society's books
were a total of $111,760,476.84.
Mr. Gesell. Your company reported to us $112,794,000.^
Mr. Greaves. These are home-office accounts.
Mr. Gesell. And of that 112, 111 were home-office accounts?
Mr. Greaves. That does not include cashiers' accounts or any
similar accounts.
Mr. Gesell. Now, was that money held, by and large, in New York
City, the home-office accounts?
Mr. Greaves. The home-office accounts principally were held in
New York City.
Mr. Gesell. How much of the total were held in New York City ?
An approximation of it will suffice, sir.
Senator Kino. Don't you have a balance sheet there?
Mr. Greaves. No, sir; I haven't.
Mr. Gesell. Would you say about 90 percent of the money was held
in New York City?
Mr. Greaves. About 85.
Mr. Gesell. About 85 percent? In how many cases did vou have
an active account out of that, one in which you were checking and
actively using, and how many of those were just inactive accounts
where the money was left on deposit ?
Mr. Greaves. In New York City?
Mr. Gesell. Yes.
Mr. Greaves. In New York City, well, I should say we had prob-
ably six active and perhaps — that was 1938, though, don't forget
that — the rest inactive.
Mr. Gesell. How many inactive?
Mr. Greaves. The inactive or practically inactive
Mr. Gesell (interposing). How many accounts would be active?
Mr. Greaves. About 10.
Mr. Gesell. Where did you keep your inactive accounts ? Just
give us some of the banks ; you don't have to name them all. Let me
run down the list : Chase Bank, was that active or inactive ?
Mr. Greaves. Active.
Mr. Gesell. Guaranty Trust?
Mr. Greaves. Active.
Mr. Gesell. Bank of New York?
Mr. Greaves. Inactive.
Mr. Gesell. Bankers Trust?
Mr. Greaves. Active.
Mr. Gesell. Bank of the Manhattan Co. ?
Mr. Greaatis. Somewhat active, but what we would term inactive.
Mr. Gesell. Central Hanover?
Mr. Greaves. Central Hanover? Inactive.
Mr. Gesell. Chemical Bank & Trust Co. ?
Mr. Greaves. Inactive.
Mr. Gesell. Continental Bank & Trust Co. ?
1 See Hearings, Part 10-A, p. 100.
15236 CONCENTRATION OF ECONOMIC POWER
Mr. Greaves. Inactive.
Mr. Gesell. Corn Exchange Bank & Trust Co. ?
Mr. Greaves. With the exception of the petty cash account, in-
active.
Mr. Gesell. In the Corn Exchange, for example, you had $500,000
just on deposit there during that entire time, did you not?
Mr. Greaves. The entire time of '38 ?
Mr. Gesell. Yes.
Mr. GreiWes. Is it so reported ?
Mr. Gesell. Yes.
Mr. Greaves. Yes.
Mr. Gesell. How much money would you say, Mr. Greaves, your
company needed to conduct its day-to-day business? Does it need
$112,000,000?
Mr. Greaves. Perhaps I can give you that. We have had experi-
ence in the last 2 years wliich showed the desirability of maintaining
a strong cash position.
Mr. Gesell. You say you found it desirable to keep a strong cash
position?
Mr. Greaves. Our experience has taught us that in recent years,
first in order to meet any emergencies that might arise by the demand
liability features of our contracts, and in order to take advantage
of investment opportunities. Witness last September when, in the
market drop, we purchased over $50,000,000 of securities-^and in
addition to that I can give you an idea. Here are checks drawn
daily: One check, 1938, June 29, $11,000,000; July 27, one check,
$24,500,000; August 2, $24,500,000; August 12, $14,013,000; August 23,
$25,000,000; October 20, $20,000,000; December 19, $25,000,000; De-
cember 27, $19,500,000; December 28, $10,000,000; December 30,
$12,000,000.
The Vice Chairman. Are those checks drawn in payment of se-
curities which you purchased?
Mr. Greaves. Investmeni In '39, March 21, $14,500,000 ; March 28,
$11,500,000; April 4, $24,000,000; June 13, $16,000,000; June 20, $13,-
500,000; June 23, $25,000,000; June 27, $29,000,000; July 3, $19,500,-
000; July 18, $15,500,000; July 25, $10,000,000; August 15, $15,000,000;
September 27, $10,500,000; October 26, $10,000,000; November 28,
$50,000,00a; December 5, $38,000,000; December 12, $12,000,000; De-
cember 26, $21,500,000. That is probably for securities purchased,
that would be one item. There may have been other securities.
Mr. Gesell. Now, will you tell us about how much you take in in
a day?
Mr. Greaves. That varies. It varies from, 1 should say, half a mil-
lion to a million, plus the total securities on the. first of the month.
Mr. Gesell. What is your answer, about a half million or a
million a day?
Mr. Greaves. From insurance receipts.
Mr. Gesell. Coming back to my question, how big a balance do
you think is necessary for your company to maintain to conduct its
business ?
Mr. Greaves. That I am unable to answer, as to how much cash is
necessary. We feel that we should be liquid and keep large cash
balances.
CONCENTRATION OF ECONOMIC POWER 15237
Mr. Gesell. I understand that. Do you feel you have got too much
cash, too little cash, or just the right amount?
Mr. Greaves. We have more cash than we would have if we could
get favorable investments.
Mr. Gesell. That is what I am getting at. How much less would
it be? It is $112,000,000 as of December 31, '38. If that is too much,
what is about right?
Mr. Greaves. Well, I have always thought that an institution the
size of the Equitable should have — ^I should say this is only my per-
sonal opinion, it has never been discussed, I have never discussed it —
around $25,000,000 at least.
Mr. Gesell. Somewhere around $25,000,000?
Mr. Greaves. Yes ; more than that if it were like business was in '29
or those days. Don't forget our contracts call for tremendous amounts.
Senator King. What do you mean by your contracts, your life
insurance policies?
Mr. Greaves. Yes; and annuities.
Mr. Gesell. You see what I am trying to ^et at. It is just how
much of this cash you need and how much of it is the result of your
inability to get it out into channels
Mr. Greaves (interposing). As I say, I have not figured out the
actual necessity. I think it is more than actual necessity as to what
the insurance company would need. From one day to another we
don't know what we may need. We n]iay turn around tomorrow and
buy $50,000,000 of securities. If we didn't have the $50,000,000 we
couldnt buy them.
Mr. Geseel. Yes; and looking at it another way all your policy-
holders "might come in some day and cash all their policies at once
so you would have all cash. It seems to me there is a big range.
Mr. Greaves. I think your ideas are a big range from mine.
Mr. Gesell. I think so, too.
Senator King. Was not the question discussed by your board of
Urectors as to what cash should b© maintained as available to be
Irawn upon for investment, meeting obligations at any time? Is it
left entirely to you, and having been left entirely to you, that you
have no opinion?
Mr. Greaves. I am not a member of the board, I am not a member
of the finance committee, but I judge in rectot years it is just as I
stated.
Senator King. Answer my question.
Mr. Greaves, We feel that we should be in a very liquid position
today.
Senator King. Undoubtedly that is right, but the question I asked
was whether or not that had been discussed by the finance committee
or the directors and you had been instructed as to the amount of
cash balance which you keep on hand.
Mr. Greaves. I never was instructed as to the amount of cash
balances to keep on hand.
Senator King. Did the directors or the finance committee in your
presence ever discuss the question of the retention of cash and how
much should be made available at all times?
Mr. Greaves. In my presence in the finance committee they fre-
15238 CONCENTRATION OF ECONOMIC POWER
quently discussed our cash balances, not from the standpoint of how
much we had to have, but that we had it.
Senator King. Was there any discussion in that finance committee
when you had as much as $112,000,000 that you ought to get rid of
some of that, loan it out and buy securities ?
Mr. Greaves. We would like to get rid of it if we could.
Senator King. That was discussed, wasn't it?
Mr. Greaves. Plenty of times.
Senator King. You weren't desirous of keeping idle money, there
in any large amounts?
Mr. Greaves. Not if we could get the investments.
Senator King. And if there was $112,000,000, that would not be
necessary, would it, in ordinary conditions ?
Mr. Gre.\ve8. Not in ordinary times; no, sir. If we could invest
the funds they wouldn't be there.
The Vice Chairman. You didn't get near enough the danger line
that you were having any conference about whether or not you had
enough money?
Mr. Greaves. Well, I can say this : Sometime ago, back in 1929, '30,
and '31, there was a question or whether we would sell securities or not
in order to get plenty of cash, because we had been investing, I think,
all the cash down to $2,000,000 previous to 1929. Two or three million
dollars was the total cash balance.
The Vice Chairman. You had to figure on scouting around and get-
ting some more money,
Mr. Greaves. But we didn't have to; we didn't sell anything; we
came through and built up our cash. That is one of the experiences we
had.
Mr. Henderson. You have a half million dollars to a million dollars
coming in every day ?
Mr. Greaves. We didn't have a half million dollars or a million
dollars in those days. I am speaking of today.
Mr. Gesell. Let me see if I can develop this a little further. I
notice that you get no interest in any of these New York accounts.
Mr. Greaves. Right.
Mr. Gesell. Is it the policy of the company not to seek interest in
these accounts, or do you. seek interest and are unable to get it?
Mr. Greaves. I don't know what the policy is, but as I stated before,
we felt that we ought to be in a highly liquid position to take advan-
tage of investments as well as any calls from policyholders, so that if
we wanted time deposits we could very well invest that cash in short-
term securities.
The Vice Chairman. Isn't this an answer to his question? They
had about $3,000,000 at one time and didn't consider it a sufficient
emergency to put their securities on the market. Is that what you
said ?
Mr. Greaves. Yes.
Mr. Gesell. I accepted that. I am on another point now. I was
now asking as to what is the policy of the bank with respect to putting
his money at interest. None of these New York bank accounts get any
interest.
Mr. Greaves. Policy of the company, you mean? You said the
policy of the bank. Policy of the Equitable Life?
CONCENTRATION OF ECONOMIC POWER 15239
Mr. Gesell. I beg your pardon. I mean the Equitable Life Assur-
ance Society of New York.
Mr. Greaves. Right.
Mr. Gesell. What is its policy with respect to getting interest?
Do I understand you to say that it wants all its money immediately
available on demand?
Mr. Greaves. Yes. We would like to have the money on demand.
If we wanted it on time deposit we would invest in short-term securi-
ties.
Mr. Gesell. Here, for instance, in the Bank of New York, your
schedule shows that you put $1,000,000 in that bank in July in 1938
and it sat there as a million dollars all the rest of that year at no
rate of interest.
Mr. Greaves. Right.
Mr. Gesell. Do you mean to say that the company is so concerned
about the fact that it may have to use its liquid position that it
wouldn't want to put that in under a 6 months' basis or a year's
basis?
Mr. Greaves. We want it there in case we do have to have it. I do
say that we want it there in case we do have to use it. I gave you an
illustration as of last September. We didn't know how long that
thing was going to last, any more than anybody did, and if it went
further and kept up we would have invested a great deal more money
just in those few weeks, in 2 or 3 weeks we invested over $50,000,000.
Mr. Gesell. And in 2 or 3 weeks you would have taken in around
21 million, wouldn't you?
Mr. Greaves. I don't know, it all depends.
Mr. Pike. You take the attitude, Mr. Greaves, that it isn't worth
while to take up $1,000,000 for 6 months for the $150,000 gross income
that wijl bring as against having it free to spend any time you want
it, even though you can't see the occasion right away?
Mr. Greaves. Yes; and of course it might not mean anything, but
it is always in the back of my head that the banks personally would
only do it for us as a favor. They don't want to tie up an account.
Mr. Gesell. You mean the banks in New York?
Mr. Greaves. The banks in New York, and I understand generally
speaking. The small banks, the very small banks — perhaps looking
into them, we might not even want to have an account — would ask
for a time deposit in order to get some money.
Senator King. Isn't it a fact that many of the banks over the past
6 months, perhaps the past year and during the past few months, are
writing letters to their depositors, savings and time, asking them to
take the money out, they can't pay them any interest?
Mr. Greaves. I haveii't heard that.
Mr. Gesell. May I ask what prompts the company to put such a
large amount of its funds in New York City ?
Mr. Greaves. To have it in New York where it is more convenient
than when it is out in other parts of the country.
Mr. Gesell. I am afraid the buzzer made it difficult to hear.
Mr. Greaves. Because they want to have the funds in New York,
large amounts, rather than out in the country.
Mr. Gesell. Why ?
Mr. Greaves. Because it is handier, you can get it right away.
15240 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. You can send a wire and get money from the west coast
almost in no time at all, can't you, these days?
Mr. Greaves. I don't know.
Mr. Gesell. Mr. Greaves, you are treasurer of a big insurance
company.
Mr. Greaves. I know we can telegraph funds, but I don't know
whether they telegraph funds to us. les ; they do.
Mr. Gesell. Then if you could send just a wire or ask your local
bank to call its correspondents out there and shift these funds by
wire, I can't see what the advantage of having these funds in New
York is.
Mr. Greaves. All right, perhaps I can answer you in another way.
I think up to the present we feel we have done quite a good deal of
putting funds out.
Mr. Gesell. With 85 percent in New York City ?
Mr. Greaves. Indeed, with 15 percent out through the country.
Mr. Gesell. You feel 15 percent is a good diversification ?
Mr. Greaves. I know it is a great deal more than we used to have.
Mr. Gesell. That is very interesting. Has that been the result of
some recent policy ?
Mr. Greaves. No policy, just the fact that we have had so much
money and we have been more receptive to suggestions from our agents
and the banks outside of the city of New York.
Mr. Gesell. You mean suggestions from your agents for deposits
that will help them sell insurance?
Mr. Greaves. Well, I wouldn't say that. They may get insurance
and promote the Equitable's insurance business, and then, of course,
there. is another side of it. We have bank accounts outside of New
York City to facilitate the paying of money to policyholders, and I
might read to you in that connection
Senator King (interposing). I assume you have policyholders in
nearly all States.
Mr. Greaves. We have bank accounts
Senator King (interposing). I am asking about policyholders.
■ Mr. Greaves. Yes; in all States, I should say, and we have bank
accounts in, I should say, including the District of Columbia, I think
it is 41 States.
Here, is a letter from the Commissioner of Insurance of the State of
Massachusetts, to comjianies transacting insurance in. Massachusetts
[reading] :
It has come to ray attention that certain companies are paying claims under
. policies covering property and' interests in Massachusetts by the use of checks
drawn on or drafts payable at banks located in Central and Western States,
which causes delay to the claimants in collecting the amounts due.
Claimants are entitled to receive payment of their claims with a minimum of
.delay in the collection of checks and drafts.
I ask each company to make arrangements so that not later than June 20 all
checks or drafts issued in settlement of Massachusetts claims will be payable
at banks located within the Commonwealth or adjoining states so that the check
or draft when presented for collection will, in the ordinary course of business,
reach the bank at which it is payable not later than the business day following
the day on which it is deposited.
Each company is requested to inform me of its present practice regarding
checks or drafts issued in payment of Massachusetts claims. Companies which
now pay Massachusetts claims by checks or drafts payable at banks locate<J in
CONCENTRATION OF ECONOMIC POWER 15241
other states are requested to inform me what arrangements will be made begin-
ning July 20 to expedite the prompt payment of Massachusetts claims settled by
check or draft.
Mr. Gesell. Do I understand you to say that you believe that hav-
ing 15 percent of your home-office deposits outside of New York is
a good diversification of those deposits?
Mr. Greaves. Fifteen percent of total deposits?
Mr. Gesell. Yes.
Mr. Greaves. The total cash?
Mr. Gesell. Yes; you believe that is an adequate diversification?
Mr. Greaves. I think it is adequate for the present, anyway. I am
not saying that we won't open other accounts. In fact, we have been
opening accounts, and they are taken up as they come up.
Mr. Gesell. What are the factors that prompt you to open ac-
counts outside New York?
Mr, Greaves. If the bank is sound after it has been analyzed, if we
feel that we can use it — you mean an active account?
Mr. Gesell. Any kind of an account other than the accounts that,
are necessary to conduct the day-to-day business. w
Mr. Greaves. Active accounts that will facilitate things, if possible,
for people who live in that community. We have active accounts in
places where we have cashiers' accounts. The prime thing is, Do we
have a bank account where we have a cashier?
Mr. Gesell. Do you put some of your accounts in active accounts
outside of New York to assist you in the sale of insurance ?
Mr. Greaves. Maybe it does assist in Equitable business interest
with the agents.
Mr. Gesell. That isn't answering my question. Is that one of the
things that prompts the placing of funds?
Mr. Greaves. I don't recall any particular bank where we actually
put funds in — perhaps there are one or two instances — where we
were going to get business. I think that we have had them where
we have already had business.
Mr. Gesell. You mean where the bank wrote the group policy, or
something of that sort, you would then favor the bank by putting
deposits there?
Mr. Greaves. Af tei" the group was written. We certainly wouldn't
put it before the group was written, as far as I know.
Mr. Gesell. -But after the group was written you would ?
Mr. Greaves. Provided the bank was a first-class bank. It
wouldn't be done just for that purpose.
Mr. Gesell. What has the group got to do with it, then?
Mr. Greaves. It would, be one of the considerations. It is one of
them, but not altogether for that purpose.
Mr. Gesell. You mean it would have to be a sound bank ?
Mr. Greaves. A sound bank and the people out there would get more
policyholders.
Mr. Gesell. You mean help sell insurance?
Mr. Greaves. Yes.
Mr. Gesell. I don't see anything particularly wrong with that.
Mr. Greaves. I like to help the business interest of the Equitable,
promoting the business interest of the Equitable Life.
Mr. Gesell. Do you recall having seen this letter, sir ?
15242 CONCENTRATION OF ECONOMIC POWER
Mr. Greaves. Yes.
Mr. Gesell. This is a lelter addressed to Mr, Parkinson, of the
Equitable, by Mr. Cecil Frankel, associate agency manager of Los
Angeles in 1937. It says [reading from "Exhibit No. 2321-B"] :
You will recall when I was in New York I discussed our banking situation
with you. We are carrying our account In the Bank of America, which at one
time was covered by Group Insurance carried in our Society. The Bank of
America is wholly owned by Transamerica. Several years ago the Bank of
America cancelled our Group Insurance coverage and placed the business in
their own Occidental life. The Occidental Life, not being in the Group Con-
ference, quoted a much lower rate to our main Group patron in Los Angeles —
the Union Oil Company — and wrote the Accident and Health Insurance which
we had developed and would have written had it not been for the lower rate
quoted. .
Since the Farn^ers & Merchants Bank is the only bank in Los Angeles that
carries Group Insurance with us, I believe it only fair that we do some
business with them, not necessarily the entire account but part of it, as a
reciprocal gesture. The President, Mr. Rossetti, has mentioned this matter on
.several occasions. I hope you will give it favorable consideration-.
The Vice Chairman. Let me see if I can't help a little bit about
all that testimony. You have an agent out in the community, and
he tells you that the people that have had your account are doing
business with some other insurance company, and he is your agent,
trying to get business with your company. Why does it take so
much testimony to make everybody know you are a good company
and you have a good' agent and you feel kindly toward him and the
banks are equally solvent? Why don't you let him put the money
where it will help him to get some business? , If I were an agent
working for a company that wouldn't do it, I would quit the company.
Mr. Greaves. That is one consideration of doing it.
The Vice Chairman. Just lay it out on the table. ; You don't have
to have a whole lot of figures and statistics for anybody to know that.
Senator King. Is there anybody here who knows anything more
about the technique of your transactions, handling your funds, than
you do?
Mr. Greaves. Handling the accounts? No; I don't think so.
What are you asking, the technique?
Senator King. Well, the plans which are followed, the loans which
are made, where you leave your funds, and if so, why. Are you
the best expositor of the policies and practices of the company ?
Mr. Greaves. Yes; the practices of the company.
Mr. Gesell, I wish to offer the correspondence relating to this
particular account for the record.
(The documents referred to were marked "Exhibits Nos. 2321 and
2321-A to 2321-E" and are included in the appendix on pp. 15541-
15544.)
Mr. Gesell. I have no further questions of this witness.
Mr. Pike. I have just one. I should perhaps have asked it of the
previous witness.
On this matter of n^aximum cash, I notice the Metropolitan it is
always in June. Is there such a thing as a drive to get in agents'
commissions usually by insurance companies in June?
Mr. Greaves. I don't know. No; 1 don't think that is the case
with us.
Mr. Pike, I wondered why the cash was at a peak in June,
Mr, Greaves, It may be just on account of the interest coupons and
the maturities of funds. It may just have happened that way. Of
CONCENTRATION OF ECONOMIC POWER 15243
course, December is generally a heavy month for receipts from
agencies. December is probably one of the heaviest months.
Mr. Gesell. I have no further questions.
^Senator King assumed the chair.)
Acting Chairman King. What do you do with that 85 percent of
jour funds which you hold in New York?
Mr. Greaves. It is distributed in 16 banks.
Acting Chairman Kjng. In the metropolitan area of New York?
Mr. Greaves. Yes.
Acting Chairman King. And it is available, of course, for sight
drafts or checks ?
Mr. Greaves. Yes.
Acting Chairman King. What are your investments daily in stocks
and bonds, so as to delete that rather large reserve ?
Mr. Greaves. As read off in that statement. That gives it to you.
Acting Chairman King. Would there be a continuity?
Mr. Greaves. That is exactly as it was, those figures that I gave you.
Acting Chairman King. What are your cash deposits now in the
banks of New York, approximately ?
Mr. Greaves. Today?
Acting Chairman King. Oh, during the past few days or week or
month ?
Mr. Greaves. Somewhere around $150,000,000 or $160,000,000.
Acting Chairman King. Are you making any investments?
Mr. Greaves. Trying to every day.
Acting Chairman King. The reason you have such a large cash bal-
ance in the banks there is because you do not find securities which
you deem proper to purchase ? *
Mr. Greaves. We have not been able to acquire the securities W6
would like to purchase.
Mr. Pike. At the price you would like to pay ?
Mr. Greaves. At the present rate we don't. As I sav, I have noth-
ing to do with the investment end of the business. All I have is the
cash, but I do know that life-insurance companies like to invest in
long-term securities. We don't consider the present rate is right. So
we only invest what we have to invest to keep up our earnings on
the assets.
Mr. Pike. I suppose your investments in part are largely deter-
mined by the r'estrictions imposed by the laws of New York?
Mr. Greaves. They have to be.
Mr. Pike. Do you get any interest upon your time deposits ?
Mr. Greaves. We have no time deposits in New York.
Mr. Pike. Do you get any interest upon any savings deposits ?
Mr. Greaves. We have no savings deposits.
Mr. Pike. I believe the only interest your company receives is the
foreign-bank account?
Mr. Greaves. Right.
Mr. Henderson. Would they take any more deposits, those foreign-
bank accounts?
Mr. Greaves. Probably. We wouldn't give them any more.
Mr. Henderson. I think you are wise there. You are carrying about
$150,000,000 or $160,000,000?
15244 CONCENTRATION OF ECONOMIC POWER
Mr. Greaves. It goes up and down conservatively.
Mr. Henderson. You had as low as two or three million in the late
twenties ?
Mr. Grea\'es. Prior to '29.
Mr. Henderson. You never had to sell any securities at any time
in order to meet any of your out-payments?
Mr. Greaves. No, sir. As I remember, we didn't sell any for that
purpose.
Mr. Henderson. You want to keep liquid and take advantage of
opportunities, and that is one of the reasons you have such a large
balance at the present time?
Mr. Greaves. Yes.
Acting Chairman King. You would. rather have a large balance
and proper securities?
Mr. Greaves. We vould rather have a large balance than money
invested at rates which we believe too low.
Mr. Henderson. Wouldn't you rather get some interest than no
interest?
Mr. Greaves. You might get some interest and wake up some day
and find yourself with the book value of your securities several points
above the market.
Mr. Henderson. You mean on account of the cost, what you paid
for them. Well, it comes down to a question of where you can find
investments for that'money, as much as anything.
Mr. Greav :8. As I say, we have invested as much as we have to
invest at the present rates.
Mr. Henderson. You mean in order to earn your contract ?
Mr. Greaves. But that is out of my control. I don't want you to
think I have anything to do with the investment side at all.
Mr. Henderson. You have more idle funds than the total assets
of some insurance companies. If they had anywhere like that idle
amount, they couldn't meet their contracts, could they ?
Mr. Greaves. I don't know about that.
Mr. Henderson. Suppose you had admitted assets of $150,000,000
and you didn't earn anything on it, it went to the banks, you couldn't
meet your contracts, could you ?
Mr. Greaves. We owned assets of $150,000,000, and we had it all in
cash.
Mr. Henderson. If you had it all as you have, $150,000,000.
Mr. Greaves. If that represented our assets we certainly wouldn't
be earning anything.
Mr. Henderson. I know it doesn't. I am trying to get at some idea
of the tremendous size of this business. $150,000,000 means, even in
these days, quite a substantial sum.
Mr. Greaves. Well, to me it is. I don't have to go to $150,000,000.
Mr. Henderson. Still it is large to me.
Mr. Gesell. I have no further questions.
Acting Chairman King. Are there any other witnesses?
You are excused, Mr. Greaves.
(The witness, Mr, Greaves, was excused.)*"
Mr. Gesell. We have one more.
Acting Chairman King. Who is he ?
CONCENTRATION OF ECONOMIC POWER 15245
Mr. Gesell. He is the man who occupies a similar position in the
New York Life. I don't believe Mr. Meyers has been sworn in.
Acting Chairman King. Do you solemnly swear that the evidence
you give will be the truth, the whole truth, and nothing but the truth,
so help you God ?
Mr. Meyers. I do.
TESTIMONY OF ALFRED H. MEYERS, VICE PRESIDENT AND TREAS-
URER, NEW YORK LIFE INSURANCE CO., NEW YORK, N. Y.
Acting Chairman King. State your name and position.
Mr. ]VS:tees. My name is Alfred H. Meyers. .1 am vice president and
treasurer of the New York Life Insurance Co.
Mr. Gesell. What are your duties as treasurer?
Mr. Meyers. Under the direction of the finance committee, I have
general supervision of the funds and investments of the company.
Mr. Gesell. Are you responsible for making the recommendations
to the finance committee as to how the company shall handle its bank-
ing funds, its cash funds?
Mr. Meyers. I am.
Mr. Gesell. Do you select the banks and make the determination
as to the type of deposit that will be made in those banks?
Mr. Meyers. I do.
Mr. Gesell. Now, what are the present cash balances of the New
York Life?
Mr. Meyers. As of today ?
Mr. Gesell. Take the end of the year or any convenient time.
Mr. Meyers. Well, I think $70,000,000 right at present.
Mr. Gesell. Schedules 106 and 107 show that as of 1938 cash bal-
ances of your company were $50,466,000, and that on those cash bal-
ances you earned during the year $43.^ That is correct, is it not?
Mr. Meyers. It is.
Mr. Gesell. Where are the greatest bulk of those funds kept — in
New York City?
• Mr. Meyers. In New York City.
Mr. Gesell. What percentage would you say are in New York City ?
Mr. Meyers. Well, I should estimate it at 80 percent, or somewhere
about that, possibly between 80 and 90 percent.
Mr. Gesell. Now, have you a distinct policy as to how you are going
to handle these funds in New York City, how much you keep in each
bank?
Mr. Meyers. Well, we have a sort of routine system for maintaining
our bank balances in the different banks. We have what we are
pleased to call our five main banks of deposit, where we keep all bal-
ances over stated balances we keep in our other accounts, if that is
clear.
Mr. GE8EI.L. I think it is.
Your five principal banks of deposit so-called are the Chemical, the
Chase, the New York Trust Co., the Bankers Trust, and the Central
Hanover ?
Mr. Meyers. That is correct.
» See Hearings, Part 10-A, pp. 106 and 107.
124491— 41— pt. 28 36
15246 CONCENTRATION OF ECONOMIC POWER
And you have probably fifteen other banks in which you keep
funds?
Mr. Meters. No; I think there would be more than that, Mr.
Gesell. General accounts now.
Mr. Gesell. I am talking about home office accounts.
Mr. Meyers. In home office accounts I think we have 28 altogether.
Mr. Gesell. You keep $2,000,000 in the Irving Trust, do you not?
Mr. Meters. I think that is about right, two or two and a half
million.
Mr. Gesell. You keep $2,000,000 in J. P. Morgan & Co. and the
National City Bank and in the Guaranty Trust. Is that correct?
Mr. Meters. That is right.
Mr. Gesell. And $2,000,000 in the Bank of New York?
Mr. Meters. That is right.
Mr. Gesell. And there are two banks in which you keep $1,500,000,
the Northern Trust Co. of Chicago and the Wells Fargo Trust Bank
of San Francisco, and the rest of the banks for home office accounts
have around a half million, $500,000?
Mr. Meters. That is right.
Mr. Gesell. And in these five principal branches of deposit, how
do you determine how much each bank should get ?
Mr. Meters. Well, they are pretty evenly divided with respect to
the Chemical, the Chase, and the New York Trust, and the other two,
the Bankers and the Central, are slightly under that, a million or
two.
Mr. Gesell. Am I correct in saying the Chemical and Chase and
New York Trust are maintained at a level of approximately $2,-
000,000 each in excess of the Bankers and Central Hanover?
Mr. Meters. Exactly right, Mr. Gesell.
Mr. Gesell. All of these funds are deposited, are they not, on a
demand basis?
Mr. 'Meters. All.
Mr. Gesell. You have no time deposits?
Mr. Meters. None.
Mr. Gesell. Will you tell me what the philosophy or policy is
back of having three banks in which you keep two million more than
in two other banks, and two banks in which you keep so much more
than these other accounts that we have discussed ? You seem to have
a definite pattern and I want to understand how it works.
Mr. Meters. Under normal conditions I would say that would be
the condition that prevailed up to about 1931. We had three work-
ing accounts. Chemical, the Chase, and the New York Trust. Prior
to that time we had the Bankers Trust and the Central Hanover Trust,
which we discontinued when we moved uptown. The first three banks,
old working accounts, performed extra services for us and we corre-
spondingly give them a larger balance than we would the other
accounts.
Mr. Gesell. What extra services are those?
Mr. Meters. They collect coupons and out-of-town items and fur-
nish us cash for pay rolls.
Mr. Gesell. And do they want these large balances ?
Mr. Meters. I have never heard any expressions from them one
way or the other.
Mr. Gesell. They never said they didn't want them?
CONCENTRATION OF ECONOMIC POWER 15247
Mr. Meyers. They ne\'er said they didn't. I wouldn't expect them
ever to say that.
Mr. Gesell. Why do you keep so much money in New York?
Mr. Meyers. Why, I suppose that is a pretty good system for a life
insurance company that has
Mr. Gesell (interposing). Why is it a pretty good system?
Mr. Meyers. The ultimate disposition of all the cash we gather is its
investment, and since New York is our investment headquarters, I
would expect that is where the bulk of our money should be.
Mr. Gesell. How much, all other things being equal, would you
like to ke'^p ? How much cash do you really need ?
Mr. Meyers. I couldn't answer that question, obviously.
Mr. Gesell. I don't know why that is obvious. You are the chief
financial man. I should think you would have some idea what the
amount of cash necessary to run the business is.
Mr. Meyers. No ; I couldn't answer that. I say this, that we have
in mind the purpose in maintaining cash balances would be, first, to
meet whatever investment engagements we had outstanding, and
second, sufficient to meet any demand from policyholders, and third,
with investment conditions as they are, to have sufficient money on
hand to take care of any investment opportunities that may offer.
(The Vice Chairman, Eepresentative Sumners, resumed the Chair.)
Mr. Gesell. Now assuming that you are able to invest your money,
how much cash would you want to have"?
Mr. Meyers. I couldn't answer that question because I can't meas-
ure whatever demand might spring from our policyholders during
such conditions as we have been going through for the last 6 or 7
years.
Mr. Gesell. You must have reached some decision that you at least
have enough cash.
Mr. Meyers. Well, 1
Mr. Gesell (interposing). Or do you think you haven't got enough
cash?
Mr. Meyers. I haven't heard anything definite on that other
than
Mr. Gesell (interposing). Whom would you hear it from? You
are the chief financial officer.
Mr. Meyers. We have discussed from time to time in the finance
committee the amount of cash we should carry and the general feeling
Avas that with a company of our magnitude, when we carried about 2
percent of our assets in cash, that that wasn't too much.
Mr. Gesell. And that is about the figure you have reached, is it,
2 percent?
Mr. Meyers. Whether consciously 'or unconsciously, I think it runs
right around 2 percent.
Mr. Gesell. Have you reached 2 percent from the fact that you
have 2 percent, or do you reach 2 percent because you have analyzed
the busmess and found that is what you need ?
Mr. Meyers. Well, Mr. Gesell, conditions change from time to
time, and as investment opportunities appear to be coming along you
would naturally keep more on hand than you would under other con-
ditions. I can onl}^ cite last September as the best indication of that.
Mr. Gesell. I thought that most every insurance officer that we
called dowp here would tell us about how anxious they are to get out
15248 CONCENTRATION OF ECONOMIC POWER
more cash and invest more cash than they have been able to do. I take
it from what you say that is evidently not quite the situation in your
company.
Mr. Meyers. I didn't want to be understood as making any state-
ment of that kind. I said part of this balance would be sort of a
reserve for any favorable investment opportunities that would offer.
Mr. Gesell. Assuming that you could get your money out, how
much cash would you want to have ?
Mr. Meyers. I would never under present conditions — and this is
only my own opinion — like to see our cash get below $30,000,000 —
30 or 40 million dollars.
Mr. Gesell. You see, all I am trying to get at is some measure of
your ability to invest, in other words, the difference between what
you want to have for the purposes of running a business as opposed
to what you feel you have to have now, awaiting favorable invest-
ment opportunity. And you think about 30 million is rock bottom?
Mr. Meyers. I would assume that that would be the lowest, the very
lowest.
Mr. Gesell. Why does not your company deposit its money on a
time basis ? I don't mean all of it, but some of it.
Mr. Meyers. I think we have always had the idea, Mr. Gesell, that if
you had cash it should be what I am pleased to call "spot cash," that is
immediately available. If you have a time deposit, you have merely a
short-term investment and we have made our short-term investments
independent of our cash balance, that is through short-term securities.
Mr. Gesell. You mean that you have kept your money on demand
because you want to be able to get your hands on it immediately ?
Mr. Meyers. That is right.
Mr. Gesell. Am I right or wrong in having in the back of my head
the idea that you could deposit your money on a time basis with a bank
and if you withdrew it you would simply withdraw it and forfeit the
interes't which you otherwise would receive?
Mr. Meyers. I think you are mistaken about that.
Mr. Gesell. You think that is nOt correct ?
Mr. Meyers. As I understand, the Reserve Board ruling is that you
cannot withdraw time deposits.
Mr. Gesell. What is the shortest period you can make your time
deposits for?
Mr. Meyers. I haven't had any experience with time deposits, and I
couldn't tell you. I understand about 6 months is the average period.
Mr. Gesell. What about putting accounts outside of New York?
Your company seems to have a very definite policy not to put more
than a small percentage of its funds outside of New York, that is the
home-office cash balances. I wondered what is back of that policy?
Mr, Meyers. We keep enough outside of New York to meet our
needs, and a reasonable surplus over that.
Mr. Gesell. I have here some correspondence that promoted that
question, Mr. Meyers, and I would like to call it to your attention.
Here is a letter dated May 27, 1938, from your agency director in
Savannah, Ga., addressed to Mr. George B. Cortelyou, Jr., one of your
assistants [reading] :
Dear Mr. Cortelyou : I don't know whether yon will be interested in a
message which I am authorized by the Citizens and Southern Bank to pass along
CONCENTRATION OF ECONOMIC POWER 15249
to you. They state that they will accept up to $200,000.00 time deposit from us
and allow us 1% percent on it. While to draw the interest the money must
remain on deposit 12 months, it would be subject to withdrawal on demand
without any interest credit.
It just occurs to me that you might wish to avail yourself of this offer.
And the reply, which is written several days later, states [reading] :
We are in receipt of your letter of May 27th advising us that The Citizens and
Southern National Bank will accept up to $200,000 as a time deposit and that
they will allow 1%% interest on such deposit if left with the bank for a period
of twelve months or longer.
It has long been a policy of this Company not to maintain dormant balances
in the local depositories of our Branch Offices for the purpose outlined in your
letter. In only a very few cases, such as the case in Savannah where a dormant
balance was necessary to permit the Company to benefit by the Clearing House
exemption for accounts in excess of a stated minimum, has a dormant balance
been allowed in order to absorb certain charges which would otherwise be made
against the account.
Here was a bank that seems to want a little money and a bank in
which you haven't deposited any money. Obviously, if they wanted
it at interest, and it w^as against the policy of the company to deposit
money at interest it could have been deposited with the bank on a
demand basis. That would have been acceptable to them. I wonder
why a bank of that standing, particularl}^ would not be given oppor-
tunity to have those funds if it desired them?
Mr. Meyers. Well, my understanding of that would be that that
would be their way of getting an account from us Avhich we had no
need for otherwise, and so far as their willingness to pay us 1^ per-
cent on a 12 months' basis and the money to be available to us when
we wanted, I think he is mistaken that he would be allowed to do that.
Mr. Gesell. Here is a bank that wanted a deposit from you of
$200,000.
Mr. Meyers. They all do, Mr. Gesell.
Mr. Gesell. That is very interesting.
Mr. Henderson. You say they all want a deposit from you ?
Mr. Meyers. In my experience witJi the New York Life Insurance
Co. I don't think we have ever been solicited for bank business more
than in the last few years.
Mr. Henderson. Have you any money in the Chase?
Mr. Meyers. Oh, yes.
Mr. Henderson. Maybe you and Mr. Aldrich ought to get together.
He said it would be a real favor to him if you took some out of there.
Maybe you and Mr. Aldrich can get together and put some out in the
rest of the country. You have all these requests coming in, and he
said it would do him a real service to whittle down some part of that
31 million they have in New York, and maybe we have found some-
thing liere.
Mr, Gesell. These banks are really soliciting deposits froiji you,
are they?
Mr. Meyers. Oh, yes ; there isn't any question of that.
Mr, Gesell, In soliciting a deposit, I take it they want the funds.
In t'^ conduct of the banking business they are looking for the money.
'^. Meyers. They are looking for the money ; yes.
Mr. Gesell. Are they looking for some ancillary benefits that go
with it?
Mr. Meyers. No; they want the account.
15250 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. That would indicate there was some need for funds?
Mr. Meyers. No ; not at all. It wouldn't occur to me that way for a
minute.
•Mr, Gesell. Will you explain what seems to be an anomoly?
Mr. Meyers. I think they rather like to have the prestige of having
the New York Life Insurance Co.'s account on their books.
Mr. Gesell. You mean for advertising purposes ?
Mr. Meyers. I don't know for w^hat purpose but that is what they
represent to us.
Mr. Gesell. You mean they say, "We have an account of the New
York Life Insurance Co. and thus are in good shape"?
Mr. Meyers. You would have to ask them about that. That is the
story they put out.
Mr. Henderson. I think we ought to get hold of Mr. Saylor here,
too. He is the person people take things up with in getting them fixed
with the Chase. I think we have something here of which we ought to
take advantage — all that money lying there wasting away and people
getting prestige out of it. Now, there in Dallas, Fort Worth, Sacra-
mento, and a few of those other places they could at least say, "We have
the New York Life's account." That might stir up a little business.
If they had the account they might be a little more anxious to loan it,
too, wouldn't they?
Mr. Meyers. They would have to testify to that, Mr. Henderson.
I wouldn't know. ^
Mr. Henderson. I'll bet if the Citizens and Southern had it — their
name has come up in several connections here — they would be pretty
active about it. If the Citizens and Southern got that $200,000 from
you they would be pretty active.
Mr. Gesell. I wondered why you don't give some of these banks
the money. They ask for it and they Avant it and you have it and it
isn't doing any particular good sitting there in some New York bank.
Why don't you let them have it?
Mr. Meyers. We haven't any need for the service ; we have a bank-
ing accommodation that serves our needs.
Mr. Gesell. What need for the service of J. P. Morgan & Co. do
you have? You have 2 million there.
Mr. Meyers. Our accounts in New York City are probably under
normal conditions more than we would need.
Mr. GESEiJi. That isn't an answer to my question, sir,
Mr, Meyers. I hadn't finished, Mr. Gesell.
Mr. Gesell. I beg your pardon.
Mr. Meyers. When our accounts increased and the need for liquidity
arose, we had larger accounts than we normally carried, we adopted the
policy of spreading our accounts among more banks than we had for-
merly carried, and probably more than we would need under ordinary
conditions. And that is why your list
Mr. Henderson (interposing). Wliy wouldn't it be a good thing to
spread ii out ;i little bit more, then? You get your money from all
over the count! y, don't you?
INIr. Meyers. That is true.
Mr. Henderson. Have you ever considered that as a company
policy ?
CONCENTRATION OF ECONOMIC POWER 15251
Mr. Meyers. Not with respect to cash exclusively, but with respect
to our entire investments we have, of course.
Mr. Henderson. There are some States which require you to invest
a certain amount of the intake in State investments ?
Mr. Meyers. No ; not that I know.
Mr. Henderson. Aren't there some?
Mr. Meyers. Just Texas, I think, is the only State.
The Vice Chairman. Don't you count that ? [Laughter.]
Mr. Meyers. Judge, I'm sorry, we don't do business in Texas for
that reason.
Mr. Gesell. These are three requests you have obtained from small
banks, are they not, sir, asking for funds, little banks writing in saying
they would like $5,000 and they are insured with the Federal Deposit
Insurance Corporation and they could use the money ?
Mr. Meyers. Yes ; those letters have come to us.
Mr. Gesell. I would like to offer these for the record.
The Vice Chairman. They may be received.
(The letters referred to were marked 'Exhibits Nos. 2322, 2322-A
and 2322-B"' and are included in the appendix on pp. 15545-15546.)
Mr. Henderson. It would be fairly expensive to break up the total
amount you have and put it out in amounts of $5,000 and keep track
of it. You would be at considerably more expense.
Mr. Meyers. Yes. I don't know that that would be a factor, though.
Mr. Henderson. You want it right there in New York where you
can get at it quickly, is that it?
Mr. Meyers. That would be under normal conditions true enough.
Mr. Henderson. How long has it been since we have had what you
call normal conditions?
Mr. Meyers. I would not be as disturbed about not putting small
balances throughout the country under present conditions when
money is very easy and there seems to be an abundance of it all over,
than I would be if things got ti^ht and we had to draw it back for
any reason from those communities. Then I would suspect that we
might be in for a little trouble.
Mr. Henderson. You would get a lot of ill will out of it?
Mr, Meyers. We might even get worse than that if the thing got
bad. I could well imagine that if we had, say, a lot of money in
these smaller communities and things began to tighten up and we
had to withdraw that money into New York we might make trouble
for t'lem.
Mr. Henderson. That is what I mean.
Mr. Meyers. Exactly.
Mr. Henderson. How far off do you think that is ?
]\^r. Meyers. I haven't any idea, sir.
Mr. Henderson. Do you keep track of what the excess reserves
are?
Mr. Meyers. Oh, in a general sort of way.
Mr. Henderson. Is that the kind of condition you mean?
Mr. Meyers. I don't know. My experience with the New York '
Life has been that when we have had any of these tight situations
they have always come out of a clear sky and without any advance
notice. I couldn't prophesy.
15252 CONCENTRATION OF ECONOMIC POWER
Mr. Henderson. It is better' to keep about $70,000,000, most of it
close at hand, and take a chance on that ?
Mr. Mei-ers. That would be my idea.
JVIr. Gesell. Here is the kind of thing I had in mind, Mr. Meyers.
You said all these fellows, or most of them, seemed to want the
account because of the prestige involved. Here is a little bank, the
Merchants and Farmers Bank out in Statesville, N. C, that writes
you on April 22, 1938 [reading] :
At this season of the year our bank has right heavy demands for funds to
carry over through the crop season until fall, and it occuued to us you might
consider placing $5,000.00 to $10,000.00 with us on 2% deposit for ninety days
or 2^/^% six months.
We would be very pleased to have this favor from you as it would help us
greatly in many ways to have you as one of our depositors or patrons. Also,
it may prove to be some benefit to you in the future as you have many friends
and policyholders in our tovA'n and community who are interested in our bank.
There seems to be some real demand for funds in that little com-
munity to carry over some crops or something of that sort.
Mr. Meyers. Except that it runs counter to our policy of never
opening accounts except in the cities in which we have branch offices.
Tliat has been a well-defined policy of the company back over ajl
the years.
Mr. Gesell. And that would be why the funds would not be de-
posited with a bank such as this ?
Mr. Meyers. That is correct.
Mr. Gesell. I have no further questions for this witness.
The Vice Chairman. I don't think we will ask him any more ques-
tions now. A very important matter, I think, has been suggested —
it has not been made very clear — and that is with regard to concen-
tration of these funds held at no interest when there is at least some
demand for funds in communities where they say they need the
money and would pay some interest. Of course, we recognize that
it isn't the business primarily of these insurance companies to be
taking care of the banking needs of banks ; they have their facilities
through the Federal Reserve and their correspondent banks. I am
wondering if to any degree the added difficulty in keeping track of
the condition of many banks scattered through the country as against
the difficulty in keeping track of a few banks near the place of the
home office, cuts any figure in the determination of policy, but there
doesn't seem to me to have been anything suggested by any of these
answers to the queries indicating that that was in the picture.
Mr. Meyers. I think probably. Judge, I could help a little on that.
If we go back, say, prior to 1931 (I am speaking now only of our
own company), the amount of cash that we had in the bank was
just about enough to let us get by on as we gathered it from our
different branch offices and brought it into New York. We kept it
as closely invested as we dared. Now, we had a situation that came
up in 1932 whereby you know, as has b^en testified here, the demand
sprang up for cash from all sources, and this policy of ours, because
we have, larger balances now, is a continuation of that policy that
served us in all of those years and brought all of our funds for invest-
ment— which is their primary purpose, after all — into New York.
Now if we could see the next 5 years, as clearly as we see the last 5
years as we are sitting here today, it isn't at all unlikely that we might
CONCENTRATION OF ECONOMIC POWER 15253
revise our system and revise our policy. The fact of the matter is, it
was a continuation of an old policy in the face of the uncertainties
that have prevailed within that period.
The Vice Chairman. Of course, this committee only wants to get a
clear picture and to understand the facts..
Do I understand your answer to mean that at the present time you
are operating under a condition to which you are not accustomed, it is
not the usual condition, but an abnormal accumulation of surplus
money, and that you are not engaged in the finding of places where
you may put that money temporarily to some advantage to the bank
and some profit to you, because you do regard that this condition is
possibly temporary, or more or less temporary ? Do you consider that
if developments should indicate that this condition is not as temporary
as you may at the present time have opinion it is, that these vast sums
of money concentrated in New York might be distributed where they
would be of economic value in the country, where they could be put to
use, put to work? I don't know whether these big deposits that you
have with these banks are indirectly available for these uses, or what
sort of notion you gentlemen with great financial experience have about
it, but there is a matter of public policy involved in a situation, if it
obtains, under which funds which are necessary for the healthy opera-
tion of local businesses are withheld from local communities, if that be
true.
Mr. Meyers. Without being a banker, I would suspect that a lot of
the money from the interior finds its way into New York as deposits
from the banks who get it in the first place, so that it would seem to me
that quite a bit of it would sift back to New York in any event.
The Vice Chairman. I am afraid that is true, that a lot of times
banks in the small communities instead of putting the money out at a
low rate of interest in those communities send it to New York and get
a low rate of interest, to use in New York in an active market for trans-
actions on the Exchange.
Mr. Meters. I would not like to give the impression that we have
not increased our balances outside of New York. We have within the
last few years; we have opened an additional account in Chicago, we
have opened one in San Francisco, I think we have opened one in
St, Louis since 1932, and that has brought larger deposits in those
centers than we had under normal conditions.
The Vice Chairman. Are there any further questions?
(The witness, Mr. Meyers, was excused.)
Mr. Gesell. That completes the hearings for today.
The Vice Chairman. The committee wilj stand in recess until to-
morrow at 10 o'clock.
(Whereupon, at 4 :10 p. m., a recess was taken until 10 a. m., Tuesday,
February 27, 1940.)
i
INVESTIGATION OF CONCENTRATION OF ECONOMIC POWER
TUESDAY, FEBRUARY 27, 1940
United States Senate,
Temporary National Economic Committee,
Washington^ D. C.
The committee met at 10:05 a. m., pursuant to adjournment on
Monday, February 26, 1940, in the Caucus Room, Senate Office Build-
ing, Representative B. Carroll Reece, presiding.
Present: Representative Reece (acting chairman); Senators
O'Mahoney (chairman) and King; Representative Sumners (vice
chairman) ; Messrs. Henderson, Lubin, Kades, Pike, and Brackett.
Present also: James V. Hayes, Department of Justice; Gerhard
A. Gresell, special counsel ; Ernest Howe, chief financial adviser ; and
Helmer Johnson, attorney. Securities and Exchange Commission.
Acting Chairman Reece. The committee will come to order, please.
Are you ready to proceed, Mr. Gesell ?
Mr. Gesell. Yes, I am. Congressman Reece.
Acting Chairman Reece. Call your first witness.
Mr. Gesell. The first witness this morning is Mr. Stedman, of
Prudential. Mr. Stedman has not been sworn.
Actiijg Chairman Reece. Do you solemnly swear that the testi-
mony you shall give in this proceedmg shall be the truth, the whole
truth, and nothing but the truth, so help you God ?
Mr. Stedman. I do.
TESTIMONY OF JOHN W. STEDMAN, VICE PRESIDENT, PRUDEN-
TIAL INSURANCE CO. OF AMERICA, NEWARK, N. J.
Mr. Gesell. Mr. Stedman, will you state your full name and your
occupation for the record, please, sir?
Mr. Stedman. John W. Stedman.
Mr. Gesell. That is S-t-e-d-m-a-n?
Mr. Stedman. That's right; vice president, Prudential Insurance
Co. of America.
Mr. Gesell. And how long have vou been vice president of the
Prudential?
Mr. Stedman. Since 1918.
Mr. Gesell. What particular department do you have in your
charge ?
Mr. Stedman. The bond department, securities-investment depart-
ment.
Mr. Gesell. How long have you been in charge of that department,
sir?
Mr. Stedman. Since I came to the Prudential in 1915.
15255
15256 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. And do I understand that you have any responsibility
over the mortgage-loan section of the company's investments?
Mr. Stedman. None whatever.
Mr. Gesell. That is under Mr. Rogers' charge, who was here
before ? ^
Mr. Stedman. Yes.
Mr. Gesell. Well now, first of all this morning, can you give
us some idea of what type of investment organization the Prudential
has, how many men it has, what type of service they are in position
to perform with respect to analyzing investments and matters of
that sort?
Mr. Stedman, The staff employed in the original investigation
and analysis and subsequent following of investments is composed
of four divisions — railroad, utility, industrial (including miscella-
neous), and municipal. Each division is headed by an engineer or
specialist, a graduate of some first-class technical school or college,
who before I induced him to come to Prudential had had nearly 20
years' experience in his chosen field. My idea was that by grafting
on his special training and point of view an investment knowledge
and outlook I would secure a real adviser who could correctly inter-
pret for me the figures produced by statisticians.
Mr. Gesell. In other words, you have a trained railroad man and
trained public utility man, a man particularly experienced in munici-
pals and industrials, to head up these four divisions ?
Mr. Stedman. Yes.
These specialists and advisers are each assisted by statisticians,
younger men, whom we have trained according to our own ideas.
Mr, Gesell. How big a group does the entire division that you
haA'e in your charge amount to-^that is, professional employees?
Mr. Stedman. There is the vice president, second vice president,
and two managers. That is four. There are four specialists — eight.
And each specialist has an average of two assistants, perhaps three.
I would say more. Sixteen. Then there are stenographers and
secretaries, I think about five in a department.
Mr. Gesell. Do you have all of your investment analysis work
centered at the home office?
Mr. Stedman. Yes.
Mr. Gesell. Do you have any men in the field who have any re-
sponsibility for the selection or analysis of investments?
Mr. S'noDMAN. We have one man with headquarters in Chicago at
our mortgage loan branch office. He was established there nearly a
year and a half ago to canvas the field for small industrial loans. He
is an older man. He has had a good training. He does a certain
amount of analytical work, but that is all checked at the home office.
Mr. Gesell. Otherwise the work all centers in the home office, all
the analysis work?
Mr. Stedman. Yes. You see, we send out these specialists or engi-
neers to inspect and look over properties before we make our invest-
ments. They inspect on the ground and report afterward.
Those men are able to give me a pretty shrewd "horseback" opinion
or appraisal of the value of a public utility or an industrial property.
Mr. Gesell. I want to come in a moment to a little more detail as
to how you analyze an issue and just what the considerations are.
^ Mr. R. R. Rogers, supra.
CONCENTRATION OP ECONOMIC POWER 15257
First of all, I would like to turn for a moment to table 102 and 103
in order that we can get some idea of your bond portfolio.^
According to table 103, as of December 31, 1938, 54,75 percent of
your entire admitted assets were in bonds and stocks, including Gov-
ernments; that is correct, is it not?
Mr. Stedman. That is correct.
Mr. Gesell. With respect to each class, let me run through them
with you a moment. In the case of Governments which account for
over 21 percent of your entire bond portfolio, may I ask whether
3'our Governments are increasing or diminishing?
Mr. Stedman. That percentage has increased ; 23 percent in 1939 —
22.9, to be exact.
Mr. Gesell. And it has been increasing, has it not, during this
10-year period?
Mr. Stedman. Steadily.
Mr. Gesell. Now, with respect to political subdivisions, are they
increasing or decreasing? I am not so much interested in the '39
figures, Mr. Stedman, as I am in having some idea whether there was
an increase up to the '38 period.
Mr. Stedman. I have the figures here.
Mr, Gesell. I believe the question was, have your political sub-
division bonds been increasing or diminishing?
Mr. Stedman. I see that in 1939 it was 3.37 percent of the total
admitted assets ; in 1938, 4.32. It did run up in 1934 to 5.88 percent.
Mr. Gesell. That was the high?
Mr. Stedman. That was the high, '34.
Mr. Gesell. Now, with regard to rails, they, I take it, have been
diminishing ?
Mr. Stedman, Yes; they have been steadily diminishing,
Mr. Gesell. Have your equipment trusts been increasing or dimin-
ishing?
Mr. Stedman, They fluctuate a good deal. Unfortunately, I don't
think I have them separated from the railroad figures except in your
tabulation here, if I can find it.
Mr. Gesell, That is all right, Wliat about the utility bonds?
Have they been increasing or diminishing ?
Mr. Stedman. The equipment trusts have increased in probably the
last 4 years, but they run off every year, a large volume being -I'epay-
fible serially, and it is hard to follow them.
Mr. Gesell. What about your utility bonds ?
Mr. Stedman. Well, our expansion in utility bonds has been not
nearly as great as that of some of the other companies in your tabula-
tion. In fact, since 1929 or '30 the relative portion has run down from
about 111/^ percent to 11,3 percent. They were as high as 111/4 percent
in 1935 and 113^ percent in 1933,
Mr, Gesell, Now, with regard to the industrials, I take it they have
been increasing,?
Mr, Stedman. Yes ; that has shown quite a
Mr, Gesell (interposing). What has been the increase over the
period ?
Mr, Stedman, In 1929, 4i^ percent ; 8i^ percent at the end of 1938.
That has fallen in '39 to about 71/2 percent.
Mr, Gesell. Now, with regard to this whole portfolio, it looks to me
1 See Hearings, Part 10-A, pp. 102-103.
15258 CONCENTRATION OF ECONOMIC POWER
as though Governments and municipalities, utilities and industrials
are increasing, and the rails are decreasing.
Mr. Stedman. Yes. The utilities are not increasing, they are about
steady or a little below.
Mr. Gesell. So that your big expansion is in the industrials and in
the Governments, and municipals?
Mr. Stedman. Yes.
Mr. Henderson. Mr. Stedman, I missed the organization of jour
analysts. Do you have ; public utility man ?
Mr. Stedman. The bond department is divided into four divisions
headed by engineers, graduates of technical schools with perhaps 20
years of training in their own chosen field, who were brought into the
Prudential. They have their special point of view, and on that I
have tried to graft an investment outlook and knowledge, so that
they can be real advisers, and they are helped by two, three, or four
statisticians.
Mr. Henderson. What are those four divisions ?
Mr. Stedman. Railroad, public utilities, municipal, and industrial.
Industrial includes miscellaneous.
M. Henderson. And you don't divide your Governments?
Mr. Stedman. Governments don't require any investigation or
analysis. The municipal credit specialists follow Canadian pro-
vincial and Dominioji credits, and in the United States the State,
county, and municipal, but not the United States Government — then
there ar ^ two managers and one second vice president, and one of the
manage s is particularly active in the buying and selling.
Mr. Henderson. On your preferred stock, mainly preferred stock
of industrials?
Mr. Stedman. There is some preferred stock of • industrials and
some public utility, and some guaranteed stocks. Of course, they fall
under their respective divisions.
Mr. Henderson. They are divided into divisions?
Mr. Stedman. But the buying and -selling is not done by divisions ;
the divisions are only for investigation.
Mr. Gesell. That is an investment analysis?
Mr. Stedman. The buying and selling is really in charge of one of
the managers of the department.
Mr. Gesell. How much does the company invest in a year in bonds,
Mr. Stedman, in round figures? About how much do you get out a
year?
Mr. Stedman. I can give you the exact figure if I can find it.
The gross investment, of course, is large.
!Mr. Gesell. I was merely looking for the new money figure.
Mr. Henderson. I would like to know uhe gross.
Mr. Stedman. About $180,000,000 for 1939.
Mr. Gesell. The gross?
Mr. Stedman. That is the net.
Mr. Gesell. What is the gross figure ?
Mr. StedmaN. The gross figure is $354,000,000.
Mr. Henderson. About two to one.
Mr. Gesell. Is the company able to invest all the money which it
wants to invest in bonds?
Mr. Stedman. No.
CONCENTRATION OF ECONOMIC POWER 15259
Mr. Gesell. How much do you want to get out, as a matter of gen-
eral policy ?
Mr. Stedman. Of course, it deponds upon the relation between the
supply of mortgage loans and bonds.
Mr. Gesell. Your bonds represent 54 percent ?
Mr. Stedman, Yes.
Mr. Gesell. Of the portfolio?
Mr. Stedman. Only 33 percent of total securities is in bonds other
than Governments.
Mr. Gesell. What percentage would you like the portfolio to be
other than Governments?
Mr. Stedman. I suppose an ideal size for the bond department would
he attained if there were only a small differential between mortgage
loan rates an bond yields. There usually is at least half of 1 percent.
If that were reduced, say, to a quarter, I think it would be quite
desirable to have it 50-50.
Mr. Gesell. About half in bonds other than Governments and half
in mortgages?
Mr. Stedman. Of course I am talking of ideal size. I would like to
see the Governments very materially reduced, as they used to be.
Mr. Gesell. Would it be fair to say, do you think, that other things
being equal, if there were an adequate supply of the right type of
m vestment for you to take you would like to invest twice as much
money in bonds as you are now investing?
Mr. Stedman. By bonds do you mean other than Governments?
Mr. Gesell. Other than Governments.
Mr. Stedman. Yes ; I think that might be.
Mr. Gesell. In other words, Vou like to get out how much?
Mr. Stedman. Well, I should think at least $300,000,000 net.
Mr. Gesell. Three hundred million net?
Mr. Stedman. Yes.
Mr. Gesell. The net figure of $190,000,000 was minus Governments
or including Governments?
Mr. Stedman. Including Governments.
Mr. Gesell. So that it is really twjce as much.
Mr. Stedman. Well, of course I would like to see the day when we
wouldn't have to buy low-ryield Governments.
Mr. Gesell. Would you say that your Governments at the present
time represent^ to som.e extent your inability to invest in other
channels ?
Mr. Stedman. .Yes.
Mr. Gesell. I notice from table 106 that your cash in this 10-year
period has risen from approximately $11,000,000 to $95,000,000 ^ and
that your Governments as shown by table 113 have increased from
$47,000,000 to $802,000,000.2 How much of that cash account, first of
all, would you say represents money which under favorable condi-
tions you would like to have invested ?
Mr. Stedman. Well, from the $95,000,000 under normal conditions
I should suppose could be subtracted $50,000,000.
Mr. Gesell. So let's say $40,000,000 in the cash account which under
normal conditions, favorable conditions, you would want to have out.
1 See Hearings, Part 10-A, p. 106.
" Ibid., p. 113.
15260 CONCENTRATION OP ECONOMIC POWER
In the Government account of $802,000,000 of United States Govern-
ments, hownnich of that under normal conditions would you like to
have out in bonds other than Governments or in mortgage loans ?
(The Vice Chaimian, Representative Sumners, assumed the chair.)
Mr. Stedman. Gross investment in Governments last year was
$171,000,000. Our net investment was $119,300,000. I should hope
that we could cut our net investment in Governments down very ma-
terially, to perhaps not more than $25,000,000.
Mr. Gesell. Not more than $25,000,000?
Mr. Stedman. Yes.
Mr. Gesell. That would be your total investment or yearly invest-
ment ?
Mr. Stedman. Yearly.
Mr, Gesell. So that
Mr. Stedman (interposing). Of course, this is so theoretical.
, Mr. Gesell. It is not entirely theoretical, Mr. Stedman. I am try-
ing to find out how much, what difficulties you are having in investing
your money. This seems to be one way to get at it. I realize that
it won't be possible to get such money out, but under the type of port-
folio you would really like to have, how much are you overstocked in
Governments, is the problem. Would you say there are probably
$500,000,000 Governments that should be elsewhere — taking rough
figures ?
Mr. Stedman. Instead of having the Government portfolio amount
to approximately 23 percent of our total admitted assets, it would be
preferable to have it not exceed 10 percent.
Mr. Gesell. So that there would be probably about $400,000,000 in
Governments ?
Mr. Stedman. Yes.
Mr. Gesell. Which you would like to put elsewhere ?
Mr. Stedman. Yes. It is more than that today.
Mr. Gesell. More than that today. At least we have about half a
billion dollars, do we not, in cash and in Governments, which under
normal conditions you would want to have elsewhere ?
Mr. Stedman. Yes.
Mr. Henderson. Could I ask a question ?
Mr. Gesell. Yes.
Mr. Henderson. If you had Government bonds on income property,
such as toll bridges, toll roads, things which were self-liquidating,
would thai affect your judgment as to how much you would want in
Governments?
Mr. Stedman. You mean by Governments, Federal Governments?
Mr. Henderson. Yes.
Mr. Stedman. Of course, we have port authorities and such things
that are secured by tolls.
Mr. Henderson. I might put it another way. Does your preference
for other than Governments run to the source of the income ?
Mr. Stedman. It is always well to have a debt sustained by earning
power.
Mr. Henderson. That is one factor you have in mind ?
Mr. Stedman. That is certainly a factor in the relatively large vol-
ume of purchases of municipal revenue bonds in the last 3 or 4 years.
It is true there is a lower yield in the general obligations, but we
CONCENTRATION OF ECONOMIC POWER 15261
thought where revenue issues were soundly set up they were desirable
investments.
Now, until the credit of the Federal Government is impaired, I don't
see that it makes the slightest difference whether the bonds are secured
or sustained by earning power.
Mr. Gesell. I take it, if there is some half a billion dollars worth of
money which you would like to put elsewhere, that there is an inade-
quacy of supply, that you are not able to find the type of investment
that you want at the present time ?
Mr. Stedman. There is an inadequacy of supply of bonds that yield
what we call a fair return.
Mr. Gesell. Bonds that meet the standards you feel are necessary
in the fulfillment of your obligation to the policyholder.
Now, I want to ask you about what standards you apply in your
investments in- a moment, but, first of all, let me ask you this: Do.
you have some plan, at tne beginning of the year, as to how much
money you are going to put into utility, how much into rails, how
much into Governments, how much into these other classifications?
In other words, do you determine a working program at the ban-
ning of some period, and then try to put that into effect by your
purchases as the year runs out ?
Mr. Stedman. No ; we do not have a program at the beginning of
the year.
Mr. Gesell. May I ask why?
Mr. Stedman. Well, it would be quite theoretical. We wouldn't be
able to properly fill up our requirements in one category. We might
run over in another, and yet another form of investment might be
highly desirable. We are really subjected, in large part, to tiie eco-
nomic currents, 2 ad, of course, the factors o^ supply and demand.
Mr. Gesell. In other words, at the present time it is pretty much
a matter of getting all you can. Is that right?"
Mr. Stedman. It is at the present time.
Mr. Gesell. What about before 1929 ? Did you have a plan before
1929, a planned portfolio you, would set up and be able to follow,
within broad ranges, at the end of the year ?
Mr. Stedman. No ; we had no plan. Our finance committee always
kept in touch with the supply 01 offerings, either in mortgage loans
or bonds or preferred stocks. Periodically, at least once a month,
the bond department reported to the finance committee its activities
during the prior month, and compared it to the same month th^
previous year. As I say, periodically, the finance committee inquired
what was coming into the market, ana about what yield, and it inquired
at the same time about the mortgage-loan field, and if some ottering
was thought to be particularly desirable, though it might be obtainable
at a yield perhaps a half or even 1 percent below sound mortgage
loans, an exception might be made in that case. i
Representative Reece. Would it interfere for me to ask a question ?
Mr. Gesell, Not at all.
Representative Reece. What considerations influence the amount
of Governments which you require?
Mr. Stedman. Well, the finance committee has adopted the policy
of keeping about $100,000,000 in cash on hand in these rather uncer-
tain times. We^ try to invest all the investible funds, exo&pt that
124491— 41— pt, 28. 37
15262 CONCENTRATION OF ECONOMIC POWER
$100,000,000 of cash, and if we can't find desirable investments that
are sound, that yield as much as Governments, we return to the
Government market.
Mr. Gesell. In other words, using a phrase that I have used before,
it is to some extent just the measure of your inability to invest in
Government accounts.
The Vice Chairman. May I ask a question, please? Of course,
primarily you try to get a bond that is safe and will bring the highest
revenue you can get ?
Mr. SaPEOMAN. That is our desire.
The Vice Chairman. That is almost anybody else's desire that has
a little money and wants to buy something.
Mr. Stedman. The highest return consistent with sound security.
The Vice Chairman. Then you try. of course, to scatter your in-
vestments more or less in that field wnere it is safe and you get the
best revenues?
Mr. Stedman. That is right.
The Vice Chairman. Now, you build up a large holding of Govern-
ment bonds, as I understand your testimony ; that is the place where
you put your money where it is just a choice in the main between
carrying money that is bringing in no revenue and money that is
bringing some revenue, that you can get out quickly if you can find
a place to put it that will bring you more revenue, is that right?
Mr. Stedman. That is correct ; yes.
The Vice Chairman. I am trying to boil this down, you know, and
get it where we common folks can use the information that you are
giving. What you have in one portfolio or put in another portfolio
I imagine is a good deal like a man out on a farm who has a chance
to buy all sorts of livestock ; normally he would scatter it all around,
but if there was a particularly good investment in sheep then he
would buy more sheep, when otherwise he would have bought hogs
had they been a good price. That is about the way it sizes up when
you get away from all these maps and charts and schedules and
figures.
Now, you spoke a moment ago with regard to the solvency of the
Federal Government if its credit is impaired. Isn't there another
thing that enters into that picture ? Suppc«e the credit of the Federal
Government should not become impaired but that it should become
more profitable for the person whose money is invested ii) a Federal
obligation to take that money out of that investment and put it into
some— I suppose you would call it a productive enterprise; he ^ants
to open up a factory or any other thing. If a great many people
want to do that thing, then there naturally would come to be a great
deal of these Federal obligations on the market.
Mr. Stedman. Yes.
The Vice Chairman. If a man had $5,000 in these bonds and he
drew that money out and invested it where he could get 5 percent he
would want to get rid probably of these bonds. What is the picture
If you want to discuss it— and I think we would be interested in i^-'
what would be the situation if we should have a general condition in
the countiy where industry would revive and confidence would revive
and people would begin to want to do the things which people here-
tofore have normally done with their money? Wliat would happen
CONCENTRATION OF ECONOMIC POWER 15263
to these bonds and what would happen to the institutions that have
these enormous quantities of bonds in their portfolios ? I don't know
whether I ought really to ask you that question, or whether you want
to answer it.
Mr. Stedman. I will be glad to try to answer it.
The Vice Chaikman. As I tell you, I am not quite sure whether I
ought to, ask it.
Mr. Stedman. Of course. Government bonds would be carried in
our annual statement at the amortized value. The market might be
below the amortized value, but we have been through some pretty
serious times. The question of liquidity is not at all a serious one
with a life-insurance company, and I think if that question were to
ever arise we could discount our bonds with the Federal Reserve
bank to raise cash, but on our annual sta,tement they would be car-
ried at the amortized value.
If Government bonds declined
The Vice Chairman (interposing) . Now, what do you mean by
"amortized value"?
Mr. Stedman. The premium at which they were bought, and the
average price is above par, is extinguished over the term, a little each
year. That is called amortization.
The Vice Chairman. After the World War, Federal bonds went
down to 83 or 84; something like that.
Mr. Stedman. You mean the price? Yes, they did; and we bought
them, and we would buy them again.
The Vice Chairman, But you couldn't make much money selling
these 80,000,000 at that price, could you ?
Mr. Stedman. We wouldn't need to sell.
The Vice Chairman. That is what I am trying to get at, because
the time would come when you could hold those wnds and get your
money out of them when the Government got ready to pay.
Mr. Stedman. After all, the eight-hundred-odd million of our Gov-
ernments mature in from 2 to 25 years. They are running off grad-
ually. They are not all long-term bonds, and whatever may happen
in the next 5 or 10 years — I don't try to look ahead, but we would
certainly have that amount reduced by maturing issues. Whether
we shall go back into them depends on economic conditions, the sup-
ply of other investments, and the price at which Governments them-
selves are selling.
The Vice Chairman. And eventually you would get your money?
I mean you would get the face value of your bonds ?
Mr. Stedman. We would get par.
The Vice Chairman. And with that money, whatever it is, you
could pay your obligations?
Mr. Stedman. Meet our contracts.
The Vice Chairman. So you couldn't break these insurance com-
panies by reason of reduction in the price of bonds?
Mr. Stedman. No, sir.
The Vice Chairman. I think it is a pretty good idea to put that in
the record.
Mr. Gesell. Judge Sumners, you might be interested in some statis-
tics we have here.
The Vice Chairman. Not many of them.
15264 CONCENTRATION OF ECONOMIC PUWEK
Mr. Gesell. Table 140 will show you the maturities of the United
States Government bonds owned by the Prudential/ which might be
of some interest to you in view of your line of questioning.
The ViOE Chairman. Thank you.
Mr. Gesell. Well now, so far we seem to have this picture, Mr. Sted-
man, that you are not able to invest as much money as you want to in
bonds other than Governments ; that the supply was not adequate, and
in fact you had no particular plan of investment that you set aL the
beginning of the year because it was a question of getting what you
could, which was of the quality you desired.
iVow, the next question I would like to pose for discussion is what
your standards are in the purchase of securities, and I think we might
take some of these classifications shown on table 103 as a convenient
starting point.^ Let's take public utility bonds as an example. What
kind of a public utility bond will you buy, what type of information
must you have about it, what type of public utility must it be?
Mr. Henderson. In the first place, do you buy holding companies
at all?
Mr. Stedman. We have some investments in holding companies.
Mr. Henderson. Do you buy them currently ?
Mr. Stedman. Within a year, yes; we bought some bonds that, I
think, Eun for 20 years, and will be retired by a sinking fund or serially
within that tgrm.
Mr. Henderson. Do you buy debentures, is that it?
Mr. Stedman. Yes.
The Vice Chairman. And eventually you would get
Mr. Henderson. You buy preferred stock of holding companies?
Mr. Stedman. No.
Mr. Henderson. Do you buy any common?
Mr. Stedman. No.
Mr. Gesell. You have my question in mind, have you, Mr. Sted-
man?
Mr. fEDMAN. May I tell you what we do when a public-utility
investment is presented ?
Mr. Gesell. Yes; that will cover it.
Mr. Stedman. Our public-utility engineer inspects and roughly
appraises the property and reports on its condition and the eflScienoy
of the management, the growth, and industrial diversity of the terri-
tory served.
Mr. Henderson. Just a minute. If you are buying a bond of a
holding company, do you send your own engineer out over all the
properties of the holding company?
Mr. Stedman. Yes; that is, he is familiar with the operating com-
panies that are the backbone of the holding company.
Mr. Henderson. I just wanted to make sure that I understood,
Mr. Stedman. Oh, yes. The character and size of the load, par-
ticularly in relation to its generating capacity, the percent of power
pirchased.
Mr. Henderson. You are going a little too fast for me — 1 am very
much interested in this. Can you start back there? Would you
mind if I ask questions as we go alon^?
ISee Hearlncs, Part 10-rA, p. 140.
2JWd., p. 103.
CONCENTRATION OF ECONOMIC POWER 15265
Mr. Stedman. He roughly appraises the property when he goes
out to look at it.
Mr. Henderson. He undertakes to get a physical valuation?
Mr. Stedman. Yes; he sizes up the management' public relations,
the company.
Mr. Henderson. You must keep, then, in public relations, a long-
term file. You can't just go out on one day, for example, and get
an idea of what the public point of view is concerning Associated Gas,
for example, can you ?
Mr. Stedman. We have no investment in Associated Gas.
Mr. Henderson. You say he appraises the management and the
public relations?
Mr. Stedman. Chiefly he looks at the plant and sees what con-
dition it is in, the maintenance policy of the company. Now, he
makes inquiry in the principal communities of others than the man-
agement about how the company is regarded. He gets an idea of
their public relations.
Mr. Henderson. You are talking mainly about a subsidiary now?
Mr. Stedman. I am talking really about an operating company.
We have very few holding company investments. I think I am cor-
rect in saying the amount is three. There may be four.
Mr. Henderson. Suppose you found an operating company which
li8Qally had a reputation for good management and had good public
relations with the community, its rates were fair, but still the top
holding company did not have a reputation for good management
and for good public relations. Would you, all other things being
equal, buy the operating company bonds?
Mr. Stedman. It depends, I think, upon the degree of the efficiency
of the management of the holding company.
Mr. Henderson. The efficiency of the holding company?
Mr. Stedman. Of the management, yes ; their ideas as to the rela-
tions of the parent company with its subsidiaries.
Mr. Henderson. You undertake to find out, I suppose, whether they
have management contracts, whether the holding company has oper-
ating contracts?
Mr. Stedman. Yes. We look at the dividend policy particularly,
and, of course, we look at upstream loans.
Mr. Henderson. You do look carefully for upstream loans?
Mr. Stedman. Yes.
Mr. Commissioner, we might consider first-mortgage bonds of a
utility that was a subsidiary of a holding company whose practices
were not considered ideal. We wouldn't buy the debentures or the
preferred stock, but we do look at the margin of safe tj of those bonds
and we do look particularly at the rates chaiged in the territory
served and compare those rates with rates chaiged by similar com-
panies in similar locations.
Perhaps some of these points would be cleared up if I go on.
I was speaking about the inquiries made by our public-utiUty
engineer. He inquires as to the likelihood of prevalence of public
competition and finally the company's relation to and its relations
with its parent company, if any. With this report, if favorable, is
coupled a study of the balance sheet and income accounts for usually
a 10-year period, our scrutiny being directed principally at main-
15266 CONCENTRATION OF ECONOMIC POWER
tenance, depreciation, and dividend policy. If this study shows that
the return earned on a fair value of the property is reasonable, after
adequate depreciation and maintenance, and is derived from rates
charged consumers which are about the average or lower than the
average for similar companies in similar locations, and that the bal-
ance available for interest has averaged over the 10-year period an
amount equal to at least, say, 10 percent of the mortgage debt, I would
rather express that margin in percent of debt than interest times earned
because the rate of interest in,6 years has dropped at least 2 percent
Mr. Henderson (interposing). Where do you get that 10 percent
figure you want to see over the 10-year period ?
Mr. Stedman. We want to see that the gross income, the amount
available for the payment of interest, should average over the 10-year
period at least 10 percent of the mortgage debt. Now, if there were
5-percent bonds that would be a 2 times coverage; 4-percent bonds,
2% times coverage ; 3 percent bonds, 314 ; but the utility may have to
go back some day to selling 4i/^-percent bonds and we don't want to
see that margin too low at present.
We want to make sure that the margin over debt service is also
large enough to absorb a shrinkage of gross revenues er an increase
in expenses.
After all that, we then give consideration to the provisions and
covenants in the indenture which do not in every case completely
protect the mortgage debt against dilution.
Mr. Henderson. Will you say that again?
Mr. Stedman. We give consideration to the provisions and cove-
nants in the indenture securing the bonds because not in every case
does it completely protect the mortgage debt from dilution.
Mr. Henderson. You mean there might be an open end?
Mr. Stedman. No; I have reference more to the escrow provision
which countenances the issuance of "additional bonds up to, say, 70
percent of the net property additions instead of 70 percent of the
difference between gross capital expenditures and depreciation ac-
cruals. That is an important provision. We would like to see that
as strongly drawn as possible.
Would you be interested in an illustration ?
Mr. Henderson. Yes; I certainly would.
Mr. Si'EDMAN. If we were to start with a $100,000,000 public-utility
company capitalized 45,000,000 in bonds, 25,000,000 preferred stock,
and the balance in common
Mr. Henderson (interposing) , You are not talking about an ideal,
are you now?
Mr. Stedman. Well, this is a hypothetical case.
Mr. Pike. Are there any actual ones anywhere near that, Mr. Sted-
man?
Mr. Stedman. I am not sure I couldn't find some.
Mr. Pike, I am not sure, either, but I don't happen to retoember
any at the moment.
Mr. Stedman. T haven't on« in mind, if that is what you mean.
Mr. Pike. The Consolidated Gas might have something in that
proportion. They haven't any preferred, though.
Mr. Stedman. Consolidated Gas of Baltimore?
Mr. Pike. I mean Consolidated Edison of New York. They
haven't any preferred.
CONCENTRATION OF ECONOMIC POWER 15267
Mr. Stedman. Oh, yes.
The Vice Chairman. Suppose you go ahead with an illustration.
The horse may not be the same color but, 1^'s see how it runs.
Mr. Stedman. If it were decided to depreciate that company at the
rate of 3 percent per annum over a 10-year period, there would be
$30,000,000 of depreciation accruals. Now, if the retirements of the
property amounted to $1,000,000 a year, there would be $10,-
000,000
The Vice Chairman (interposing). What do yjou mean by retire-
ments ?
Mr. Stedman. Property worn out or taken out of service.
The Vice Chairman. I know what that means. Go ahead.
Mr. Stedman. Now, if you can issue bonds
Mr. Henderson (interposing). You say if you had a million retired
each year?
Mr. Stedman. That would be $10,000,0Cf0, and the net addition to
that property would be $20,000,000.
Mr. Henderson. That is, if they spent all the accrual ?
Mr. Stedman. Yes ; if they spent all the accrual.
Now, with an escrow provision that provided that 70 percent of the
net property additions $20,000,000 could be put out in bonds, that would
be $14,000,000 that could be put out in bonds and yet you have a prop-
erty that is still, after depreciation, worth only $100,000,000 and yet
you have added to the $15,000,000 of original debt $14,000,000 more.
So that is a provision that we like to look ai, and although it isn't always
the way we want it, there are other factors, the territory served, the
earning power, the margin of safety that govern our final selection.
Mr. Henderson. Do you undertake to get any certain amount of
cushion — that is, ratio of preferred and common to the indebtedness?
Mr. Stedman. Mr. Henderson, I think we look at earning power
very largely. We like of course a cushion of preferred-stock hold-
ers, if it is not too large, because preferred-stock holders ought to be
given preferred consideration, and a company might strain its re-
sources to continue its preferred dividends rather than let them go
into arrears. So that perhaps too large a preferred issue is not so ideal
from the bondholders' point of view.
Mr. Henderson. But do you undertake to capitalize earning power ?
Do you use any basis for capitalizing the earning power at all ?
Mr. Stedman. No ; we contrast earnings or earning power with what
we think is the fair value of the property.
Mr. Henderson. You see, in the work we have on reorganization
under the Chandler Act, when there is to be a reallocation of the
assets
Mr. Stedman (interposing). In reorganization, that is a different
matter.
Mr. Henderson. I know, but I was wondering whether you hud any
formula for capitalization of earnings ? You say you look more at
earning power. You are looking mainly at the excess which is avail-
able for services.
Mr. Stedman. Of course, if you are considering a reorganization
case, I think One should give the benefit of the doubt to the old security
holders that have to take a licking, and hope that earnings may im-
prove, and on that basis perhaps capitalize at a lower rate of intet^-t
rather than a higher.
15268 CONCENTRATION OF ECONOMIC POWER
The Vice Chairman. If there is too much earning power, isn't there
danger of that earning power's attracting competitive activity? It
would seem to me that largely would determine the desirability oi the
loan.
Mr. Stedman. There is not much competition in the public utility
except from public ownership.
The Vice Chairman. Then that condition would be eliminated and
you get back to the proposition of earning power to determine
Mr. Stedman (interposing). When I say earning power, I am
looking at the margin, the power to earn a margin over the interest
requirement on the first mortgage debt. Too great earning power is
likely to be taken away from the utility by a State commission — too
great.
The Vice Chairman. I understand.
Mr. Stedman. So it is important to arrive at a fair value of the
property.
The Vice Chairman. I got you the first time.
Mr. Henderson. Do you keep any record on the new issues of
utilities that come out which would indicate how many of them
would meet your standards?
Mr. Stedman. By now they are, of course, old issues. We are
pretty familiar with each issue, and we follow each investment, and
in those companies that meet our requirements we make investments,
which are followed, the earnings are kept up to date and the changes in
the property account and in the capitalization.
Mr. Gesell. I think what Mr. Henderson was trying to get at was,
of the utility issues that are offered from year to year, what percent-
ages can you take ? I mean, what percentage would fall within these
requirements that you have set up ? It would be a very small
percentage, would it not?
Mr. Stedman. No; I don't think so. I think it would be a fairly
large percentage.
Mr. Henderson. Put it this way : If we applied the same test that
you do before we would permit a bond to be issued, we would turn
down many issues, would we not?
Mr. Stedman. I don't know.
Mr. Henderson. I know ; I know very well.
Mr. Stedman. I can't tell you what percentage.
Mr. Henderson. There are a number of very definite things that
you take into consideration that we can't. One of them is the
character of management.
Mr. Stedman. We are trustees of the policyholders.
Mr. Henderson. We can't turn one down if it doesn't happen
to suit us on a right ratio as between bonds, common and preferred.
Mr. Stedman. Well, I understood Mr. Gesell wanted an approxi-
mate yardstick. Those percentages are flexible. You have to weigh
the pros and cons.
Mr. Henderson. How far up would you go on indebtedness on a
property? Have you got any limit there at all as to what cushion
you ask? Would you buy if there were 90 percent indebtedness?
Mr. Stedman. Ninety percent indebtedness?
Mr. Henderson. Yes.
CONCENTRATION OF ECONOMIC POWER 15269
Mr. Stedman. Of what we consider the fair value of the property ?
Mr. Henderson. Yes.
Mr. Stedman. Oh, no.
Mr. Henderson. Eighty?
Mr. Stedman. No.
Mr. Henderson. Seventy ? We're getting to the danger line ?
Mr. Stedman. Very close to that, somewhere.
Mr. Henderson. In other words, you want somewhere around 30
percent of cushion ?
Mr. Stedman. We want at least that.
Mr. Henderson. Do you care who owns that cushion? Does it
make any difference to you whether it is owned by a number of divers
holders or whether it is concentrated ownership such as you get with a
holding company ? Does it make any difference at all ?
Mr. Stedman. It all depends on the character of the management
of the holding company.
Mr. Henderson. Then it does make a difference?
Mr. Stedman. Yes.
Mr. Geseix. Have you completed the various definitions of this
yardstick ?
Mr. Stedman. Yes ; I think I have covered that.
Mr. Gesell. Perhaps we might, if you have no further questions,
turn to another type of investment.
Mr. Henderson. I have literally dozens of them, of course, but I will
support counsel.
Mr. Geselxi. We have quite a bit of ground to cover today. Let's
take your industrial issues. Can you give us some kind of yardstick
that you apply in the purchase of industrials ?
Mr. Stedman. In the case of an industrial investment, the industrial
engineer before inspecting the plant or plants talks with the manage-
ment. Usually, he endeavors to size up the principal executive oflScers,
and particularly their understudies, and to acquire as much prelimi-
nary information as possible regarding the efficiency of organization,
the nature of the business, its competition, sources of raw material,
the location of plants with respect to labor, access to raw material
and to markets. We invariably require a detailed certified public
accounting audit.
Mr. Gesell, For how many years?
Mr. Stedman. A 10-year period. Perhaps sometimes we want them
to cover an entire business cycle in some particular industry.
Mr. Geseul. That, if I may pause on it, is a very interesting point.
You want a 10-year certified balance sheet of an industrial, or perhaps
longer, in order to get a test of the company's experience through a
business cycle or over a representative number of years. That would
seem to me to bar from the reservoir of capital which you have, many,
many business ventures, especially new business ventures, would it not ?
Mr. Stedman. New business ventures ; yes.
The Vice Chairman. Right on that point, will you develop whether
or not an indisposition to purchase the securities of a new business
venture is controlling?
Mr. Stedman. It would not be in our judgment suitable for the
funds of life insurance; in other word^, it is not a trustees' investment.
15270 CONCENTRATION OF ECONOMIC POWER
The Vice Chairman. Would no other consideration balance against
the absence of a 10-year record ?
Mr. Stedman. I think when we look back over the past 10 years I
have to say "No."
The Vice Chairman. I think that is one of the most interesting
facts that has been brought out in this whole hearing.
Mr. Gesell. Perhaps I can develop it a little bit further, Judge.
Let me ask you this: We hear a great deal these days about loans
to small-business men. Have you tried to make loans to small-
business men?
Mr. Stedman. Yes ; we have.
Mr. Gesell. Can you tell us what you have done in that regard,
and what success you have had?
Mr. Stedman. I spoke of our having stationed in Chicago nearly
a year and a half ago a man whose function it was to find, if possi-
ble, small industrial loans. We didn't want to go much below one
hundred thousand, possibly fifty, and considered small industrial
loans to be limited by the figure of a million dollars. Our hope was
that we might make the loan as a mortgage loan, secured by a first
mortgage, and write the necessary covenants on the paper. The
expense of a small issue providing for a corporate trustee could not
be borne. It would not be economical. The rate would be too high
for the borrower. In a word, we have had practically no success.
Mr. Gesell. How many such loans have you made, sir?
Mr. Stedman. We have made exactly two.
Mr. Gesell. How many was this man able to find that he brought
to you that he thought would be worthy of your consideration ?
Mr. Stedman; He brought us about 30 to 35 loans. He did con-
sider himself about 30 more that he did not think suitable to bring
to pur attention.
Mr. GESEXii. So that there were 65 loans, of which 30 or 35 came
to you, and on only 2 of which you were willing to advance the
money ?
Mr. Stedman. That was his part. We did have applications for
similar loans, for loans of similar size, directly to the home office.
Mr. Gesell. How many of those were there?
Mr. Stedman. About 68.
Mr. Gesell. None of those was satisfactory, or did you make some?
Mr. Stedman, One of the two loans we made directly, but used our
man in Chicago to cover a great deal of inspection on the ground,
talks with the management, the negotiations ; but it originated, really,
before he had gotten under way.
Mr, Gesell. So that of the; approximately 120 propositions that
came to you, you were able to take two ?
Mr. Stedman. We were able to take only two from the point of
view of a trustee.
Mr. Gesell. That is what I was next going to ask. That was be-
cause you felt that in handling the funds that you held in trust for
the policyholders, you would be entering into some kind of risk, or
taking some kind of a chance which wouldn't be warranted?
Mr. Stedman. Very few of the loans were for increasing any work-
ing capital. Many of the loans were simply to retire high-rate pre-
CONCENTRATION OF ECONOMIC POWER 15271
ferred stock or high-rate debt. They just wanted to get a low rate, a
rate much too low to be comuiensurate with the risk. Sometimes we
couldn't get the necessary audits.
Hr. Henderson. Did you keep any record as to the rates being paid
by some of these businesses for the money they wanted to refund ? An-
other section, the Investment Banking Section of the S. E. C, looked
into whole cities and got as much information as we could. Sometimes
we would find money costs running from 11 to 20 percent, even for busi-
nesses that were borrowing $100,000 to $250,000. Did you keep any
record at all of these interest charges ?
Mr. Stedman. No; I don't think we can tell you what businesses
of that nature would be charged.
Mr, Henderson. You would be striking merely the rate for which
the existing contract called and not all the expenses, the sideline
arrangements and special bonuses that the company had to pay in
order to get the loan?
Mr. Stedman. Yes.
Mr. Gesell. I interrupted you, I think, when you were acquaint-
ing the committee with your industrial yardstick.
Mr. Stedman. Yes.
The ViOE Chairman (interposing). While you are interrupted, if
I may be permitted, did anybody in your organization, during the
time or as a result of that experience, formulate any notion with ref-
erence to any sort of organization by which the credit requirements
of those small activities could be serviced safely ?
I appreciate that this is aside from this inquiry and I wouldn't
expect you, unless you just happened to know, to be able to answer
that question,
Mr. Stedman. No; we did not. I am afraid I can't help you on
that. Certainly a large percentage of the capital these borrowers
wanted should be venture capital and supplied by the sale of stock,
Mr. Pike. Is that the typical thing you found in going through
these small loan applications, that they wanted what was really ven-
ture capital on mortgage terms?
Mr. Stedman. Not perhaps typical, but a sizeable percent.
Mr. Gesell. Now, will you continue with your discussion of what
you looked at in taking these industrial issues ?
Mr. Stedman, I was saying that we did require a certified public
accountant's audit for a 10-year period. We like those audits that
the auditors give to the chief executives and the board of directors,
not merely certificates as to balance sheets and income accounts.
Mr. Gesell. You want detailed operating figures.
Mr. Henderson. It is an interesting point you made there, Mr.
Stedman, because I don't know whether you are familiar with the
requirements of what we call the '33 act, the Registration Securities
Act. We are not entitled to ask that the prospectus contain anything
except the certifiied balance sheet. In other words, an investor who
is investing in a security of a registered company gets the formal
certified statement. In your position, you are not satisfied with that.
You want to know the real audit detailed to the cliief execut ive officers,
as I understand.
Mr. Stedman. We want it. We don't always get it.
15272 concentraTTdn of economic power
Mr. Henderson. No; but it would be a nice thing if everybody
could get it, wouldn't it? Isn't there something lacking in the audit-
ing practice that you hit on here as far as investors are concerned?
You get really an audit of management practice, if you can, don't
you?
Mr. Stedman. If we can ; yes. Of course, we don't succeed except
when we buy at private placement, as a rule.
Mr. Geseix. In direct negotiation of the issue?
Mr. Stedman. Yes.
Mr. Henderson. In small loans, to get audits of that kind in the
last 10 years would have put you to considerable expense, would it
not? Many of them seem to have them, but, of course, some did not.
Mr. Gesell. Will you continue, Mr. Stedman?
Mr. Stedman. Now, these audits, our industrial engineer — I am
talking more particularly about the direct negotiations by private
placement — goes over with the treasurer of the company, in order to
learn how the company has weathered the depression, and notes the
changes in the balance sheet and such important items as cash, which
we like to see over the period not allowed to run off to a^ dangerously
low picture; inventories, which should not represent undue propor-
tion of current assets ; notes payable, which we feel should be, except
in a few wholly seasonal industries, liquidating loans, and which
should not be outstanding too many years if we are not to infer an
insufficiency of working capital; net working capital, which, if con-
sistently maintained, would indicate the business was a going concern
and would constitute the best security for our loan ; capitalexpenditures
and retirements by years, which reveal the extent of modernization;
funded debt, which, of course, we like to see decreasing rather than
increasing.
Now, in analyzing the income account, we would not naturally prefer
too wide fluctuations in net sales, and we would prefer the ratio of
operating cost to net sales to be fairly steady and not to consistently
decline over the period. Depreciation should remain reasonably con-
stant through the lean as well as the fat years. Gross income, the
balance available for interest, should average over the 10-year period
in an amount expressed as a percentage of the proposed loan, equal to
between 12 and 15 percent, or at least three times interest coverage.
If there are deficits in this period, they should be confined to a
figure less or equal to the accrual for depreciation and not occur in more
than 2 or possibly 3 years of the 10 when other similar industries were
depressed.
Becavse earning power is the basic security for our loan, able man-
agement ranks ahead of physical security. By the same token, a serial
or amortized loan, payable over 10 or 15 years, though unsecured, if
protected by the promises of management, embodied as covenants in
an indenture, is as acceptable to us as a first-mortgage bond, provided,
of course, the company covenants not to mortgage its property at a
later date without at least allowing us t3 share in the lien. That is
rather detailed, but those are the requirements we look for. Then, of
course, they are rather ideal. As I said before, we weigh the pros
and cons.
Mr. Gesell. It does result in youi- taking only the cream of the in-
dustrial issues, does it not ?
CONCENTRATION OF EC<WOMIC POWER 15273
Mr. Stedman. Yes.
Mr. Gesell. And it leaves those in the lower brackets of quality look-
ing elsewhere for capital ?
Mr. Stedman. Yes.
The Vice Chairman. I was going to ask, What do you mean by
sharing in the new issue? Do you have in your covenant any agree-
ment as to your percentage of proportionate sharing in the new issues ?
Mr. Stedman. Share ratable.
The Vice Chairman. I beg your pardon?
Mr. Stedman. We share with the holders of the first mortgage
that has been put on the property. The holders of the unsecured
loan that we make will share with them ratably in that security.
Mr. Geseix. Now let me ask you this: What rate of return do you
have to earn on your investments, looking at the company as a whole ?
Mr. Stedman. Looking at the company as a whole, you mean all
our investments?
Mr. Geseix. Yes ; what must you earn ?
Mr. Stedman. You mean mortgage loans?
Mr. Gesell. Taking all your investments, what must the company
earn to meet its contract requirements ?
Mr. Stedman. Well, our vice president and actuary is here. He
has been sworn. I would much prefer to have him answer that ques-
tion.
Mr. Gesell. What is the fi^re, Mr. Howell ?
Mr. V. Howell (vice president and actuary of Prudential Insur-
ance Co.). I assume that you mean, what rate must be earned to meet
our contracts provided policy dividends are completely eliminated.
Is that your thought? That is very important.
Mr. Gesell. You have to meet a rate of return from year to year,
do you not? You promise your policyholders.
Mr. Howell. Yes; we have no set rate, but the lower the return,
the lower the dividends to the policyholders.
Mr. Gesell. Assuming your present dividend schedule, what do you
have to earn?
Mr. Howell. We have to earn our percent.
Mr. Gesell. What is that, taking all your policies as a group?
Mr. Howell. In a general way it is about 3i/^ percent.
Mr. Gesell. That is the figure I want.
Mr. Howell. I might point out that the effect of earning the
lower rate would simpl}^ be the lower dividends in the future.
Mr, Gesell. That is right. You give leSs back to the policyholder.
Now, Mr. Stedman, what rate of return do you try to earn on the
bonds you purchase, excluding Governments, of course.
Mr. Stedman. I will tell you the rate we earned for 1939. Answer-
ing your question, I would have to say that we must get the highest
rate consistent with sound security.
Mr. Gesell. What did you earn in '39 ?
Mr. StedmAn. Three point three. I think, to be exact, 3.29.
Mr. Pike. Is that on new purchases or total bonds?
Mr. Stedman. Total.
Mr. Pike. What is the average rate of yield for those you bought
m 1939, have you got that?
Mr. Stedman, It is an approximation, but it is a little under 2.70.
15274 CONCENTRATION OF ECONOMIC POWER
Mr. Pike. That is the industrial utilities ?
Mr. Stedman. Yes; of course, it includes the Gover-nment pur-
chases, which were very extensive.
Mr. Pike. I meant to eliminate those if we could.
Mr. Stedman. By classes, utility purchases were 3.32%. Our indus-
trial, miscellaneous, because of the serial nature and the short-term,
average term, about 2.70%.
Mr. Gesell. You bought some rails, didn't you, sir ?
Mr. Stedman. Yes; the railroad return is the composite return on
railroad bonds and equipment trust certificates. We bought very, very
few bonds and the equipment trust certificates that had an average term
of perhaps 5 years or 6, 6 or 7, so that yield is low, and is 2.91%.
Mr. Gesell. What about municipals?
Mr. Stedman. Two point eight four percent.
Mr. GESEiiL. Let me ask you a few questions about this question of
diversification. What is the maximum amount of money that your
company will invest in any one issue of bonds ?
Mr. Stedman. When you ask about diversification, do you refer to
the diversification as among types or classes, or as among individual
companies ?
Mr. Gesell. I would take it there are at least four types of diver-
sification, as to size of issue, as to companies, as to type of issue, and
as to place or locality where the money eventually goes.
First of all, with respect to the problem of any one issue, I take
it you don't want to havie too much money in one issue of bonds, and
my question was. What is the largest amount that your company
is willing to invest in the issues of any one company ? We will come
to the other matters in a second.
Mr. Stedman. That would depend entirely on the credit of the
company. If the debt was relatively low and the earnings had been
steadily increasing and the equity had been increasing in the property,
we would not consider it imprudent to take the entire loan offered by
the company representing its entire outstanding debt. But, of course,
we could reach a point where that might weaken the diversity of the
portfolio.
Mr. Gesell. Perhaps this would help. Have there been examples
where you have been offered an opportunity to invest in a particular
issue, and felt that because of your holdings in that issue, or because
of the size of that issue, you didn't want to take all that was offered
to you ?
Mr. Stedman. Yes.
Mr. Gesell. Will you tell us some of those cases, so that we may get
an idea ?
Senator Ejng. Do you think that you ought to identify them ?
Mr. Stedman. You don't want them by name, do you?
Mr. Gesell. Yes.
Mr. Stedman. I didn't suppose that you would want that in the
public record.
The Vice Chairman. If there would be any embarrassment to you
to do it I don't see any reason for doing it. Do you have a reason for
having the names of these companies put in the record ?
Mr. Stedman, We like to protect the names of our borrowers.
The Vice Chairman. Do you have any reason for it ?
CONCENTRATION Off ECONOMIC POWER 15275
Mr. GESEUi. No; I don't even know what his testimony, the testi-
mony of this gentleman, is going to be.
The Vice Chairman. I can appreciate what his testimony would
be, that there are some concerns whose issues he didn't take.
Mr. Gesell. I was asking him about companies, part of whose
issues he did take. I stand on the committee's desire.
Senator King. You are not seeking to develop •an inference in that
question that because they didn't take it all, we must infer that he
doubted the strength
Mr. Gesell (interposing), Not at all.
Senator King. Because that would be unfair, it seems to me.
Mr. Gesell. That was not in niy mind.
The Vice-chairman. The witness has already tbstified that they
did take some, and some he hadn't taken, and unless counsel has
some special reason, it seems to me that we shouldn't put in the
lecord the names of concerns whose entire issues he didn't take.
Mr. Gesell. Very well. Then you just tell us examples, Mr. Sted-
man, without giving the names of the companies, if that is possible.
Mr. Stedman. You mean, giving amounts?
Mr, Gesell. Yes; I want some idea of places where you were
offered an investment and turned down a portion of it because you
felt you would be putting too many of your eggs in one basket, and
it doesn't go to the credit of the company at all.
Mr. Stedman. I don't know that I am prepared to give you figures.
I don't believe I remember the size of the total issue that was offered.
I am thinking more particularly of those that were offered at private
sale. I do know that of some large issues, running perhaps to 75 or
100 million, we have limited our purchases to, say, 25 million.
Mr, Gesell. That is, where you had an opportunity to take 75
million, you limited your participation to 25 and "someone else took
the other 50?
Mr. Stedman. No. As a matter of fact we did not have the oppor-
tunity to buy as much as that. I don't think we have ever had the
opportunity of buying more than 30 or possibly 40 million. I was
thinking of issues that were brought to us; we were asked to par-
ticipate with others and we were asked to name the amount that we
would like, and we have named the amount, sometimes, of 25 million,
and it wou^d be cut dowxi to 15. Generally we haven't gone over 25
million, but those are not issues that are offered to us alone.
Mr. Gesel^. But where you have had some flexibility
Mr. Stedman (interposing). We have had smaller issues offered to
us solely, and we haven't hesitated to take the entire issue.
Mr. Gesell. What is the smallest single issue that you buy ? Will
you go down as low as $100,000?
Mr. Stedman. We have bought, in the year 1939, from 329 vendors,
and we have bought as low as $2,000 in our effort to replace bonds
that had been redeemed. Those were cases of issues, registered issues
offered publicly by bankers, and we have combed the country to try and
replace, and we have bought as low, as I say, as two bonds. If you
refer to how low would we go on a registered issue, a new issue, I doubt
if we would want to go much below half a million dollars. We very
frequently buy bonds over the counter, or on the New York Stock
Exchange, in amounts as low as 10, 15, 25, or 30.
15276 CONCENTRATfON OF ECONOMIC POWER
Senator King. Thousand ?
Mr. Stedman. Thousand dollars.
Mr. Gesell. That gives us some idea of the range of your invest-
ments. Within the particular classifications of utilities, rails, and
industrials and the other classifications we have been considering, do
you try to place your investment in as many companies as possible
where you can get an investment that will meet your requirements?
In other words, do you like it spread over the industry ?
Mr. Stedman. Oh, yes; we do.
Mr. Geselxu And as to locality, let's take public utilities as an ex-
ample. Do you try to invest as best you can in utilities located in all
sections of the country?
Mr. Stedman. Well, we consider it our secondary duty to policy-
holders, when possible, to return their money to them, but I think
in the case of public utilities we buy everything that meets our stand-
ard that comes along.
Mr. Gesedll. And don't have much consideration of locality because
of the limited nature of the supply ?
Mr. Stedman. Well, we look at the security, the credit of the com-
pany, first.
Mr. Gesell. You see a contrast
Mr. Stedman (interposing). We have bought recently bonds in the
Southwest, and bought other bonds in Ohio and wherever they come
out.
Mr. Gesell. Your Mr. Rogers^ when he was on the stand, for ex-
ample, talking about the handhng of his farm mortgage account,
talked pretty specifically about trying to place money in as many
States as possible and attempting to diversify that investment, and
I take it because of the limited supply in the bond field vou are unable
to be as conscious of that particular phase of diversification as you
might be in the investment of money in mortgages?
Mr. Stedman. Yes; I think it is true that our investments are well
scattered, that in relation to our business written we have^mnch more
in the West and South, Northwest, than we have in the Eastern States.
Mr. Gesell. What about considerations of marketability and ma-
turity in the purchase of issues? Do you take those considerations
into account?
Mr. Stedman. I would like to be rather precise in answering that
question. I have reduced some of my ideas to writing.
Marketability to insure liquidity in coping with economic crises has
been proved by experience to be unnecessary. The situation that de-
veloped toward the end of 1932 and culmmated in the March 1933
bank holiday was a test that is hardly likely to recur. At the end of
1932, the amount of cash subject to call by our policyholders was prob-
ably about one billion four hundred million, yet the large increase
that year in policy loans plus the surrendered policies was only 278
million, and yet our assets increased by more than the increase in policy
loans for that year. I think we even invested 31 million in bonds, net
investment.
Owing to the severe restrictions imposed by the New York State
Department, the outgo in 1933 was a little less than in the year before.
CONCENTRATION OF ECONOMIC POWER 15277
Without the restrictions it undoubtedly would have been larger, but
not in m^ opinion so large that we could not have coped with it.
The point I would make is that if the economic dislocation were tp
be in the future even more severe, the crisis will be met by emergency
legislation permitting borrowing from the Federal Reserve bank on
high-grade securities as well as on Governments.
(Senator King assmned the chair.)
Mr. Henderson. In addition to the moratorial legislation? You
can meet the crisis by the moratorial legislation and the ability to
borrow from the Federal Reserve ; isn't that right ?
Mr. STia)MAN. Yes.
Mr. Henderson. The two things taken together would mean that
you don't have to place emphasis on instant marketability ?
Mr. Stedman. Not on liquidity. Marketability for the purpose of
enabling us to dispose of investments, about the future value of which
we have doubts, is an attribute of some value. Although about 63
percent of our holdings are listed on the New York Stock 'Exchange
and over 20 percent have an over-the-counter market, it must be recog-
nized that large blocks of bonds can be sold only in rising markets, and
that in the past few years, markets for other than the highest grade
issues have been very thin indeed. When confidence in the business
outlook returns, speculation will revive and markets for the lower-
grade issues, such as our defaulted railroad bonds or the new securities
received therefor, will be then created.
As to the 17 percent of our holdings which have no quoted market,
this fraction is made up almost entirely of high-grade bonds bought
at private sale, both utility and industrial issues, the latter largely
repayable sefirially or through sinking fund from 5 to 15 years, and so
well safeguarded by indenture provisions and covenants that they
would today demand a ready market at very much higher prices than
their cost, did we have to part with them under present conditions.
The effect of the fact of this matter of marketability is that when
the Prudential might wish to sell a large part of its assets, many if
not all other insurance companies, and perhaps the savings banks and
conmiercial banks of the country, would undoubtedly also be sellers.
Then, of course, the market gives ground and breaks and finally the
bottom drops out and resort has to be made to legislation, or discount-
ing of high-grade bonds at the Federal Reserve bank,
Mr. Gesell. I take it from what you say that marketability isn't
much of a factor in the case of your company, at least in its purchas-
ing of bonds from year to year. It is not pne of the prime con-
siderations that you have in mind when you take an issue; you are
looking more for security ?
Mr. Stedman. We are.
Mr. Gesell. And for the reason that you have indicated you don't
anticipate that in the future, even, ther^ is going to be much of a
necessity for your having a marketable portfolio ?
Mr. Stedman. That is out judgment.
Mr. Gesell. And I suppose you would feel that, holding such
large blocks of bonds as you do, even if you had looked for marketa-
bility when you purchased them, the necessity of disposal at one time
which would throw other sellers as well as yourselves on the market
124491— 41— pt. 28 38
15278 CONCENTRATION OF ECONOMIC POWER
would result in probably destroying the market in any event and the
marketability factor would disappear?
Mr. Stedman. Yes ; I think you have described it perfectly.
Mr. Gesell. With respect to maturity, Mr. Stedman, how much of
a factor is that ?
Acting Chairman King. Do you mean the difference between long
and short?
Mr. Gesell. That is right, whether you try to stagger the maturity
of your issues and want long terms or short terms.
Acting Chairman King. I suppose that would involve whether you
preferred long or short, and what your experience was, whether you
purchased more long or more short, and if there was any advantage
or disadvantage in either.
Mr. Stedman. In periods of low money rates we would ordinarily
prefer short-term loans. At the present time the supply of capital far
exceeds the demand, the yield is forced so low on short-term loans by
bank competition that we select instead intermediate maturities, usu-
ally in the industrial field, ranging between 10 to 15 years. We can't
get intermediate maturities in the public-utility field except in rare
instances. Occasionally we even go to 20 years in the industrial field.
That is in the expectation that conditions will so change that we can
reinvest at a much higher yield, thereby averaging for the longer term
of 20 to 40 years a yield of perhaps 1 to 2 percent above that prevalent
today. We are really long-term lenders, but in a situation like this,
when all yields are low, we prefer, as I said, the intermediate maturities.
Mr. Gesell. So that you can get out of them and into something
with a higher interest rate which you hope will be coming in the
future?
Mr. Stedman. We hope we may have that opportunity.
Mr. Gesell. With respect to the whole question of the outlet of
your funds, it is true that the outlet for your funds is diminishing,
is it nbt, from year to year? As we saw, there is less debt, taking
industry as a whole ; you are not investing in the railroad field, you
are not increasing your public utilities, you are having difficulty with
your industrials, and you are not investing in rails. That suggests,
it seems to me, another topic we might consider for a moment, namely,
whether there are new outlets for your funds which will offset this
shrinkage and whether or not you feel the present investment laws
might be changed or liberalized in any way which would give you
new avenues in which to invest.
Mr. Stedman. I am not an economist.
The ViOE Chairman. Then maybe you can tell us something about
it. [Laughter.]
Mr. Stedman. I can't see, of course, for a few years certainly, much
of a prospect that one would call bright for the lenders of long-term
capital. As to le^slation, I think we are satisfied with what we
have. We would like it to have as much latitude as is reasonable and
leave it to the discretion and ability of the finance committees and
investment officers to pick and choose and not be confined by straight-
jackets, particularly when the difficulties are so great.
Mr. Gesell. You w^ould feel, then, that the present investment laws
under which you operate, namely, the laws of New Jersey, are suffi-
ciently liberal for your purposes, and even if they were removed you
CONCENTRATION OF ECONOMIC POWER 15279
would probably be still investing in the same fiield in which you are
now investing?
Mr, Stedman. I think that is correct.
Mr. Gesell. You don't purchase common stocks, do you ?
Mr. Stedman. We do not.
Mr. Gesell. What about that as a field in which you might put
some of your funds? Would you feel that it is a possible field for
investment or would you rather feel it is a venture of capital specu-
lative in nature and therefore not advisable for a trustee to put money
in? ■ ^. .
Mr. Stedman. We are very substantial collective creditors in the
country's economy. I think we are inclined, to shy away from re-
sponsibilities of becoming collective partners in enterprise.
I can see that there would be perhaps some very small chance of
loss if we were to put a few eggs in that basket, but I think perhaps
it might be difficult for the actuaries to carry on their calculations
if our surpluses were to gyrate up and down too extensively.
Mr. Gesell. Maybe the actuaries have gotten you into your trouble,
Mr. Stedman, by having you sell so many of these investment con-
tracts with guaranteed rates of interest on them which you have
obligated yourselves to pay from year to year quite without regard
to whether or not you are going to be able to do it.
Mr. Stedman. I think you have to look at the long-range picture
and the average return over a 10- or 15-year period, and today I
think we must, certainly hope that before perhaps another .5 or 7 years
have elapsed there may be opportunities to invest at higher rates.
Mr. Gesell. Where are those opportunities going to afise?
Mr. Stedman. As I said, I am n9t an economist, but I believe I
could conceive of the outcome of the war in Europe being on such
a basis that capital from this country might flow out to Europe and
other countries in very large volume. That would perhaps be venture
capital, but it would leave a void and we would be only too glad
to rush in and fill that void.
Mr. Gesell. Well, what about the home scene?
Mr. Stedman. I am afraid you are getting beyond my depth.
Mr. Pike. Isn't that a pretty serious problem, Mr. Stedman?
Roughly, over the last 10 years up to and including '38 you had an
increase in admitted assets of just under $1,600,000,000; you had an
increase in Government bonds of about $750,000,000, or something
imder $800,000,000; you had an increase in real estate owned of
$100,000,000 or thereabouts, a substantial increase in cash. That
makes up well over your total net increase in admitted assets during
the period, not one of which pays its board. In the 10-year, period
you have not been able to invest half tof your net increase on a paying
basis.
Mr. Gesell. You mean, I take it, a basis which would meet the
contract requirements?
Mr. Pike. That is roughly what I mean. I say "paying its
board," — ^2^4 on the Government bonds roughly, say 1 to 2 percent
on the real estate, nothing or practically nothing on the cash.
(The vice chairman resumed the chair.)
Mr. V. Howell (vice president and actuary, Prudential Insurance
Co. of America). Would it be permissible for me to interpolate?
15280 CONCENTRATION OF ECONOMIC POWER
Mr. Gbsell. Certainly, Mr. Howell. I suppose you want to tell
us again about the fact that you could continue very easily by reduc-
ing your dividends?
Mr. Howell. Yes; I think your remark was in order to meet con-
tract requirements. If you just modify that to say "and continue to
pay dividends on the present scale."
Mr. Gesell. I accept that as a very helpful sugg^tion.
- Mr. Pikj:. That is why I said "pay its board." You are paying
your board at a given rate and your income, tne increase in cash^ over
half of it is less than that going rate — this is jiot an isolated instance,
but over a 10-year period.
Mr. Henderson. To put it another way, are we dependent upon an
increase in the future of interest rates for a continuance of the exist-
ing practices of insurance companies Jn respect to their commitments?
Mr. Howell. May I answer that?
Mr. Henderson. Certainly.
The Vice Chairman. I suggest, gentlemen, that with regard both
to the questions and answers we- ought to be very cautious right where
we are now.
Mr. Howell. If I understand your question correctly it is: Are we
dependent upon aji improvement in future conditions to maintain our
present structure?
Mr. Henderson. That is correct.
Mr. Howell. I would say^
.Mr. Henderson (interposing). Mr. Stedman has been talking about
thfe prospect at some time in the future of getting up to 4% per-
centr money again. I was just trying to get at an assessment of how
much we are dependent upon that expectancy.
Mr. Howell. I should say we are not in the least dependent upon
it to continue our structure of life insurance. If the present interest
rates continue indefinitely there will be an increase in the net cost of
insurance in participating companies, but still the company is funda-
mentally quite sound.
The Vice Chairman. People will have to pay more premiums if
you can't earn on the money you have got. Why isn't that the
answer ?
Mr. Howell. It is, essentially, except they will have to pay either
more premiums, or they will get less dividends back.
The Vice Chairman. If the dividends don't meet it and they want
to carry insurance and you people who are handling their money
can't make any money on what you have got, people who want in-
surance have just got to pay higher policies.
Mr. Howell. That is right as far as new insurance is concerned.
As far as existing insurance is concerned they will get less back in
the way of dividends.
Mr. Gesell. To take it another way, you would have to take more
money from the policyholders in order to meet your commitments to
the policyholders.
Mr. Howell. That is it.
The Vice Chairman. Why, of course. You can bring all the actu-
aries in the world in and you can't beat that, that is all there ds to it.
I Laughter.]
Mr. Gesell. Mr. Howell is an actuary.
CONCENTRATION OF ECONOMIC POWER 15281
The Vice Chairman. You can't get around that. Either he has
got to make the money on the money for which he is trustee, he has
^ot to pay people less on their dividends or charge more for his
insurance. You gentlemen can get in a huddle from now to dooms-
day, and you canx beat that conclusion.
Mr. Henderson. What I was getting at, Mr. Chairman, and I think
it was addressed to Mr. Gesell's question, is : How tangible is this hope
that we will get a higher interest rate? What is it dependent on?
Mr. Stedman pointed out that if the war in Europe ever got settled
we might loan quite a bit of money, quite a bit of venture capital
mi^ht go there, and that would maybe create a void for trustee funds
which they would be glad to supply and could supply. I would re-
gard that as a rather shaky possibility. I would hate to put my ri^
of the future on the proposition that we were going to make some
more bum loans to Europe. That is about the size of it. I just was
wondering whether he saw anything developing really with this mort-
gage on American industry, utilities, rails, farms, and so forth, con-
cerning the prospects for investment in the future.
Mr. Stedman. Mr. Commissioner, I did not refer to Grovernment
loans to Europe, but the lending of private capital to European and
other countries and industries. There would be a tremendous de-
mand for the rebuilding, perhaps, of the world, and there are capi-
talists who certainly would be tempted by the high money rates that
would have to be paid. That would create a void here. That was
only one possibility. I do think I am not so discouraged with the
business outlook as to believe that we won't have a very material
increase in prosperity. When it will come it is hard to say. I hope
it will come within 5 years. I think there is room for very great
expansion in production.
Mr. Henderson. Let me put it this way : Does this staff that you
have, which is appraising management, doing investment analysis,
also attempt to make a guess as to what the future outlooks for capi-
tal are likely to be? Do they undertake to estimate what the puWic
utilities would need, given a rise in net income? Do you undertake
to do any business forecast or national expansion forecast ?
Mr. Stedman. In the utility field I think we have a rather good
idea what might be done. In the railroad field there are many prob-
lems still to be settled there. In the industrial field I don't believe
that can be gaged. The bond department does not include an econom-
ist. We do consult them, but we don't make perhaps the studies that
Congress can make in the department itself.
Senator King. Have not some of our troubles been the result of bad
advice by economists ? That is my vieAv. I would rather have a good
practical man, Henry Ford and those who have built up our industries,
than many of these economists.
Mr. Henderson. You are going to have to have economists.
Dr. LuBiN. Mr. Chairman, no economist has ever been responsible
for throwing 50,000 people out on the street.
Mr. Gesell. There is one other topic to be considered before we con-
clude with Mr. Stedman, and that is the problem of the sale of bonds.
Turning to table 136, Mr. Stedman, I notice that your company in
this period from '32 to '38 has sold many more bonds than any other
15282 CONCENTRATION OF ECONOMIC POWER
company.^ In fact, as I make a rough calculation on this schedule, it
would indicate that 20 percent of the bonds sold by these -26 companies
were sold by the Prudential Life Insurance Co. in the period from
1932 to 1^38, and that suggests to me that you have a pretty definite
philosophy with respect to the desirability of cleaning out a portfolio
and selling bonds, and I want to know what you had to say about it ?
Mr. Stedman. We are given greater credit than we deserve in that
table because I think there have been included some exchanges that
were not perhaps bona fide sales, but we do, of course, fellow our in-
vestments very closely. I think that it wouldn't be. strictly correct to
say that we sell securities when the outlook for the obligor becomes
unsatisfactory due to conditions or causes which we thmk may be
only temporary. On the other hand, if we do not feel reasonably sure
the situation will improve, the bond department after making sure
that the market has not already discounted the future as we foresee it,
recommends to the finance committee that the bonds in question be sold.
And when we have made ud our minds, we do not hesitate to sell, even
at a loss.
Mr, Gesell. Well now, let me see if I can point it up a little. Do you
believe that a cleaning out of the portfolio is essential to the mainte-
nance of a good portfolio?
Mr. Stedman. You don't mean a total cleaning out?
Mr. Gesell. No ; I mean a weeding out of inferior issues.
Mr. Stedman. Well, constant supervision, after all, constajit vigil-
ance, is the price of security. Constant supervision will result in a
weeding-out process.
Senator King. A temporary sickness of a corporation might not
induce you to weed out the securities of that corporation but if it is a
persistent illness, and indicates it is lasting in the category, you would
be rather alert in disposing of that security at as good a rate as you
could obtain ?
Mr. Stedman. Yes; unless the market, we think, has gone lower
than what the level of the industry might be revived at, or the sal-
vage value that we might obtain. Sometimes markets fade very
rapidly.
Senator King. It is a little difficult to generalize with respect to
the securities of a large number of corporations. Some business ac-
tivities respond very quickly to economic changes, others do not, and
some become sick temporarily, and. others become sick permanently;
so a wise, prudent manager, the holder of investments, has to watch
the market carefully, to watch the rise and fall in the economic sit-
uation and the business situation, and then determine, using his best
judgment, whether he should clean out, weed out some of these infe-
rior securities, or whether he should retain them, hoping for a rise in
the future.
Mr. Gesell. Well
Mr. Stedman (interposing). Let me subscribe to those views.
Mr. Gesell. Let me elaborate, Mr. Stedman, a little on that.
Do you sell bonds to make a profit?
Mr. Stedman. No ; we never sell bonds to make a profit.
Mr. Gesell. You never sell bonds to make a profit. When do you
sell?
1 See Hearings, I'art 10-A, p. 136.
CONCENTRATION OF ECONOMIC POWER 15283
Mr. Stedman. We sell when we are convinced that the security has
been impaired.
Mr. Gesell. Well, now
Mr. Stedman (interposing). Permanently.
Mr. Gesell. Let's say a bond is down to 90. I take it you usually
won't sell.
Mr. Stedman. Oh, yes; we might sell at 90. If we thought the
salvage value was only 30 or 40 or 60, we wouldn't hesitate to sell.
Mr. Gesell. Are you able to sell all the bonds you want to sell ?
Mr. Stedman. As I have said, markets have been pretty thin. It
is pretty hard to sell large amounts except on a rising market.
Mr. Gesell. That is one of the difficulties, is it not, with a portfolio
the size of yours, that when you do come to a situation where you
feel you want to sell, to really dispose of what you hold will wreck
the market that the bond may have?
Mr. Stedman. That is something we have to reckon with.
Mr. Gesell. Xow, do you sometimes dispose of bonds by getting
together a group or going to an investment banker and having him
distribute them to the public?
Mr. Stedman. We have never sold to a group. We have sold to a
single firm, to a banker, a dealer, but we have never had occasion to
sell to a group.
Mr. Gesell. What about the question of your book value; does
that enter into your selling program? In other words, are you al-
ways in a position to take the losses that you will have to take if you
sell a bond when you believe it should be sold ?
Mr, Stedman. I think that has been true thus far.
The Vice Chairman. May I ask a question without interrupting?
Mr. Gesell, Certainly.
The Vice Chairman. You said a moment ago that you wouldn't
sell a bond for a profit. Would that be true if, in the judgment of
your expert, some particular situation had developed that would have
normally increased the price of that bond?
Mr. Stedman. I think I should have qualified my statement by just
that, that some factor might run up the price of one issue. But at
the present time, if I may continue, unless we can find an outlet for
the money, we might continue to hold the bond, though it was out
of line.
Senator King. If the best judgment of your organization was to
the effect that that bond, which you had purchased at a reasonable
price and that had advanced in value, and that you could sell at a
profit, might decline by reason of conditions affecting the peculiar cor-
poration which had issued the security, would you not sell then?
Mr. Stedman. I think only if we could reinvest in a security, say,
of like quality, like term, at a reasonable yield.
Senator King. Well, if a reasonable appraisal of the immediate
future or not too remote future indicated that that bond would mate-
rially decline in value so that you would sustain a loss instead of
a profit?
Mr. Stedman. Oh, that is very different.
Senator King. Then you would sell, I assume. Is that right ?
Mr. Stedman. Yes.
Mr. Gesell. I have just one further question. It really involves
a little review of everything we have discussed. You do not find an
15284 CONCENTRATION OF ECONOMIC POWER
adeauate supply for your funds, you have difficulty sometimes in sell-
ing because you hold such large blocks that they will adversely affect
the market. Supposing I were to ask you this question : Would your
investment problem be as difficult if you were half as large? What
kind of an answer could you give us?
Mr. Stedman, If you mean If the Prudential were to be split into
two companies, I think the. {>roblera would still confront the two
companies.
Mr. Gesell. You mean because there would be just as much money
being invested, and you would be competing with your better half,
so to speak?
Mr. Stedman. Yes.
Mr. Ge8ei,l. But what if your company was just half as large, and
you didn't split your company, and had two companies of the
smaller size? Let's suppose you were a smaller company.
Mr. Stedman. Under present conditions?
Mr. Gesell. Yes.
Mr. Stedman. There are advantages in our size that I think out
weigh the disadvantages that we have mentioned with regard to
selling. On the other hand, we can, as a large buyer, participate
in private sales to advantage.
Mr. Gesell. So you would feel
Mr. Stedman (interposing). Which much more than otisets any
disadvantage.
Senator Kino. Could I ask a question here? Do the smaller com-
panies, from your acquaintance with them, experience difficulties
analogous to those you experience — ^I am assuming you do expe?rfence
difficulties. Probably I ought not to base my question ontnat as-
sumption, but at any rate do the smaller companies meet the same
problems in greater or less degree than the larger companies?
Mr. Stedman. You are referring more particularly. Senator, to
selling?
Senator King. No; all the problems incident to carrying on the
investigation.
Mr. Gesell. Investment problems?
Senator King. Investment problems.
Mr. Stedman. Small companies I don't think can afford to spend
so much money on analysis, research, and investigation. The cost per
bond invested in any 1 year would.be considerably more than in the
larger company. That I think is perhaps a factor to consider. I
think otherwise we pretty much share the difficulties and the ad-
vantages.
Mr. Gesell. How much do you invest a day, a working day?
Mr. Stedman. I have that figure.
Senator King. Do you mean now, or over a loAg period?
Mr. Gesell. Yes.
Mr. Pike. Is it a fair commentary, while he is looking that up,
to ask, or perhaps make the statement, that as long as there is no
need for liquidity, which Mr. Stedman has said, the principal handi-
cap on size pretty well disappears from the investment point of view.
In other words, when you don't need, when you don't have to look
forward to, forced selling, the handicap we would ordinarily think of
pretty well is gone.
CONCENTRATION OF ECONOMIC POWER 15285
Mr. Stedman. Yes.
Mr. Gesell. How much do you invest a day, a little over a million
dollars a day ?
Mr. Stedman. It is about a million, six hundred thousand a day —
that is, a working day.
Mr. Gesell. Now, do I understand you to say— —
Mr, Stedman (interposing). Sundays and holidays excluded.
Mr. Gesell. Do I understand you to say that if you had only to
invest $800,000 a working day, that your problem would be still as
it is, it won't be any less? '
Mr. Stedman. If there was another reservoir of capital competing
with us, I think that problem would be as great.
Mr. Gesell. And if there was not?
Mr. Stedman. It would be, under present conditions, easier, if you
i-educe the demand by so much.
Mr. PiKB. You could get 6 percent on everything, then.
Mr. Gesell. I have no further questions of this witness.
Senator Kino. I want to ask one question, if I may. It may not
be germane to the investigation. What effect, if any, if you care to
express the opinion, has the large indebtedness — I don't say that by
way of criticism — of the Federal Government and the low rate of
interest which its securities command had upon the investment of
your company as well as other insurance companies ?
Mr. Stedman. The effect? Of course, the Federal Government is
faced with the refunding of maturing obligations. It is interested,
therefore, in keeping money rates low. I think that capital is en-
titled to a fair return, just as labor is. I don't think that at the
present time that return is fair.
Senator King. I didn't hear that last.
Mr. Stedman. I don't think at the present time the return on
capital is fair. It is not commensurate with the risks.
Senator King. I was referring more particularly to Government
issues — the effect of these large Government issues and the recurring
refinancing of maturing obligations on the investment market,
whether it caused it to fluctuate, whether it made the securities of
corporations less desirable in the market. Have you any information
that leads you to prefer the validity, if I may use that expression,
of the Federal securities, to securities of corporations or individuals,
and to that extent I am inquiring as to what effect the large amount
of Federal securities has had on the investment market, or does have?
Mr. Stedman. It is the scarcity of the demand for capital as it
has existed for some time that has kept the rates low, and the Gov-
ernment has been very much the beneficiary, as they have been very
much the largest borrower. Now, if the Government were to meet
with competition it would have to pay a higher rate.
Senator King. That is to say, if there were a large capital invest-
ment for the development of industries, new industries or expansion
of those already in existence, then there would be competition in the
market, and for that reason it might make the borrowings of the
Government cost the Government more?
Mr. Stedman. That would be so.
The Vice Chairman. Any further questions?
15286 CONCENTRATION OF ECONOMIC POWER
Dr. LuBiN, I was very much interested, Mr. Stedman, in your
statement relative to the return to capital, in view of the risks that
are involved. I take it from going over this record of the Securities
and Exchange Commission that as far as your company is con-
cerned, the losses that you have had to take on investments that you
have made, let's say, since 1934, when the interest rate started really
dropping, were almost insignificant, were they not?
Mr, Stedman. We took some pretty large losses in 1935, '36, and '37,
when we sold 20 million of railroad bonds.
Dr. LuBiN. But they were prior investments, investments you had
made 'be fore 1929?
Mr. Stedman. Yes.
Dr. LuBiN. In terms of the investments you have made since, at
these low rates of interest, apparently the losses were insignificant?
Mr. Stedman. The losses; yes.
Dr. LuBiN. Even in terms of your comparison between your book
value and your market value, the difference is relatively insignificant,
is it not?
Mr. Stedman. That would be so, certainly as regards market value,
and at a time of very low money rates.
Dr. LuBiN. The same, of course, was true prior to 1930, wasn't it,
of most of your investments ?
I mean, the losses you took over a period of 20 years preceding
1929 were insignificant as compared to all of your investments?
Mr. Stedman. Yes; I think that is true until, of course, we met
with the adversity that has affected the railroad section of the port-
folio.
Dr. LuBiN. So that fundamentally, in terms of your whole port-
folio, your risk is pretty insignificant, is it not? Let me put it this
way: If you take your investment portfolio for -the last 30 years,
the total losses to your company, even after the write-downs in the
early thirties, were a very small fraction of your total investments,
were they not?
Mr. Stedman. I suppose that is so. I can tell you that we have
written down, taken losses in, railroad securities amounting to over
82 million, or write-downs. Now, much of that may be recovered
if the industry is rehabilitated and stabilized.
Dr. LuBiN. But in terms of your total assets and the investments
you have made over a period of 30 years, that 82 millions is a rela-
tively small fraction, is it not?
Mr. Stedman. That I can't give you in percent. I should think
you were correct.
Dr. LuBiN. So that in terms of the experience of your company,
your risk has been very small, at least the way it has worked out,
has it not?
Mr. Stedman. I think that is true.
Dr. LuBiN. So the question then is whether 3 percent or 2.7 per-
cent is a sufficient return to capital where the risks, at least those you
have had to take over a period of two generations, have been very
small.
Mr. Stedman. That is the question ; ves.
Dr. LuBiN, And as compared to other types of investment, you
CONCENTRATION OF ECONOMIC POWER 15287
still feel that the return on these gilt-edged investments is not suffi-
cient ?
Mr. Stedman, Yes; I do.
Dr. LuBiN. Mr. Chairman, there is just one final question I would
like to ask Mr. Stedman. I was very much interested in your analy-
sis of the factors that you take into consideration in making these
intermediate loans. You listed a whole series of things like cash
position, sales, inventories, and so forth. In making a loan of that
sort, and I ask this question because of my personal interest, do
you ever take into consideration the status of labor relations in the
organization to which you are going to make your loan? In other
words, the attitude of employer and employee, whether or not it is
a peaceful relationship or whether there is possibility of a strike or
difficulties arising which may interfere with the ability of the cor-
poration to meet its liabilities.
Mr. Stedman. I doubt if we have given that consideration.
Dr. LuBiN. Thank you.
The Vice Chairman. I believe you have stated that the average
of your risk is less than the average risk of the person engaged in
industrial activity or handling securities, the usual run of securities,
in this country. You take the gilt edge or the cream that is offered,
as far as you can judge it?
Mr. Stedman. I haven't any figures to give you, but I think that
is so.
The Vice Chairman. No further questions.
Mr. Stedman. Mr. Chairman, I might add, in further answer to
Mr. Lubin, that the labor situations, we hoped, were a temporary
matter, and we have looked at the industry for its rather permanent
long-range prospects.
The Vice Chairman. You mean any particular labor dispute you
regard as a temporary matter?
Mr, Stedman. We hope it will be a temporary matter, buying as
we do, senior securities. If we were buying common stocks, it might
decidedly have something to do with it, but in buying senior securi-
ties, we have not given any thought but that it is a temporary situa-
tion that will be ironed out.
The Vice Chairman. We are very much obliged to you, sir.
We will stand in recess until 2 : 30.
(Whereupon, at 12 : 25 p. m., a recess was 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
recess.
The Chairman. The committee will please come to order.
Mr. Gesell. Mr. Beebe is the witness this afternoon.
The Chairman. Has he been sworn ?
Mr. Gesell. He has not.
The Chairman. Do you solemnly swear the evidence you shall
give in this proceeding shall be the truth, the whole truth, and noth-
ing but the truth, so help you God ?
Mr. Beebe. I do.
The Chairman. You may be seated, Mr. Beebe.
15288 CONCENTRATION OF ECONOMIC POWER
TESTIMONY OF DWIGHT S. BEEBE, VICE PRESIDENT AND FINAN-
CIAL MANAGER, MUTUAL LIFE INSURANCE CO. OF NEW YORK,
NEW YORK, N. Y.
Mr. Gbsell. Will you state your full name and your position for
the record, please, sir?
Mr. Beebb. Dwight S. Beebe. I am vice president and financial
manager of the Mutual Life Insurance Company of New York.
Mr. Gesbll. How long have you occupied that position, Mr. Beebe ?
"h^r. Beebe. Since August 1, 1928.
Mr. Gesell. Are you in charge of the bond portfolio of the com-
pany?
Mr. Beebe. Yes.
Mr. Geseix. Under the supervision of the finance committee?
Mr. Beebe. Of the finance committee.
Mr. Gesell. Do you have charge over the mortgage investments ?
Mr. Beebe. Not at all.
Mr. Gesell. Simply the bond portfolio?
Mr. Beebe. Solely the bond portfolio and the stocks.
Mr. Gesell. I wanted to review several matters with you this after-
noon, Mr. Beebe. First of all, I wondered if you might tell the
committee something about the work which was done by insurance
companies in handling the receivership of the Rock Island Railroad,
which I understand was a road in which many insurance companies
had an investment, in order that the committee might get some idea
of what is done in the case of a security which goes into default, which
is held by life insurance companies.
Mr. Beebe. In June of 1933 the Rock Island filed a petition in
bankruptcy and shortly thereafter I invited the senior financial
officers of 11 of the life-insurance companies which were the largest
institutional investors in the obligations of the Rock Island, to meet
informally with me in order to discuss what we should do in order to
j)rotect our interests.
At that meeting it was decided that it was important for these in-
stitutions to sponsor committees, committees which would be consti-
tuted by investors. The first committee formed was the First and Re-
funding and Secured 4i/2-percent committee, and I was elected chair-
man of that committee.
Mr. Gesell. Were those the senior obligations?
Mr. Beebe. They were not the senior ooligations on the road, but
they represented the largest creditor interest, 144 millions.
Mr. Gesell. Was that the security in which the insurance companies
had invested the heaviest?
Mr. Beebe. I believe the insurance companies' investments were
more or less equally divided between the First and Refunding issue and
the general mortgage, and the General Mortgage committee was also
formed, and started at that informal meeting which I called, and the
chairmanship was taken by the Equitable Life, and likewise the New
York Life withdrew and stated that they would sponsor a committee
for the Burlington, Cedar Rapids & Northern. In other words, there
were three committees sponsored or initiated at that meeting, to be
iihder the leadership of life insurance companies.
CONCENTRATION OF ECONOMIC POWER 15289
Following that meeting, as far as our committee was concerned, the
First and I^funding conmiittee, we approached the savings banks and
asked them to designate a i;epresentative to sit on the committee, to
represent all the savings banks' interests, and then we sought investor
representatives for the individual bondholders, and we invited Speyer
& Co. to designate a member, because that investment firm had been
responsible for selling more bonds of the particular issue we repre-
sented than any other investment house in the years gone by.
In order to have a representative for the individuals who left their
bonds with trust companies, we canvassed the holdings of the large
trust companies in New York City and also in Chicago, and decided
that we should invite the Guaranty Trust Co. to designate a repre-
sentative on our committee, and that was the way we formed and
made up the membership of our committee. There were four life
insurance company representatives and one from the savings banks,
and two representing the individual bondholders.
Following that decision of the membership of that committee, I
myself made a report to Commissioner Mahaffie and Director Sweet
of our intention to form a committee, and we received no objection
from the Commission at all.
Upon my return I then made a call on Mr. Hayden, who was chair-
man of the board of the Rock Island, and informed him that we pro-
posed to form a committee not only for the Refunding issue but other
interests intended to form committees for the General Mortgage and the
B. C. R. & N.
Mr. Hayden informed me that under the Bankruptcy Act he did
not believe that committees were necessary, and duf ing the conversa-
tion inquired when we propose'd to announce the formation of these
committees. I said in the very near future.
Mr. Gesell. That is Mr. Charles Hayden, of Hayden, Stdne ?
Mr. Beesb. Mr. Charles Hayden, now deceased. About 3 days after
that conference with Mr. Hayden there appeared a notice in the news-
papers, much to our surprise, that reorganization managers had been
appointed for the Rock Island, consisting of Hayden, Stone ; Chase
Securities; and Dillon, Read, and made the announcement that pro-
tective committees would not be necessary. Following that announce-
ment we moved very rapidly with the formal announcement of the
formation of our committees, and solicited deposits of bonds.
In our comiriittee, of which I am chairman, the issue represented
amounts to $144,000,000, and we received deposits representing
slightly over 50 percent of that amount from over 5,000 depositors
scattered throughout the United States, and some in Europe.
This was the first phase of the work that we had to undertake in
connection with this Rock Island affair.
Our next problem occurred when, after the formation of the com-
mittees, we wanted to investigate the condition of the road, and what
was its problem. We sought information. The information which
we sought filtered through Mr. Hayden's office. It was very slow, it
was very meager. Consequently, we felt that we could not be effec-
tive unless we had access to the railroad's or the debtor's records and
ample and sufficient information. We then decided to take steps to
go to the court and ask for the appointment of railroad trustees. All
15290 CONCENTRATION OF ECONOMIC POWER
the committees joined in this application to the court to have railroad
trustees appointed, to be impartial, and represent all the interests of
the creditors and the debtor. The court did appoint three railroad
trustees, the president of the railroad, Governor Lowden, and Mr.
Fleming.
That I should describe as the first phase of our work. That occu-
pied the period during 1933 and 1934. The trustees were appointed
November 1933.
Mr. Pike. That was before the maturity of the Refunding?
Mr. Beebe. That was before the maturity of the Refunding, but
there was a default on the Refundings.
In the second phase of our work we ran into a problem which I
had never experienced bfefore. Our committee reached the conclusion
that the operating results of the Rock Island indicated that the
management must be strengthened. We never realized that problem
iaced us in ^he first instance, but the operating results were so out
of line with other carriers in that region that we were convinced
we had a serious problem, and that was to strengthen the manage-
ment.
Our committee was not alone in reaching this decision, and it was
rather a unanimous opinion that developed gradually in all the com-
mittees that something must be done to improve operating results of
the Rock Island, y^e felt that possibly the management question
was the important one.
A very interesting development followed that. The chairmen of all
the other creditor groups met at my request to, consider* what should
be done, and appointed a committee of three, of which I constituted
one of the members. Mr. Fisher, of the Equitable, was one member;
the chairman of the General Mortgage Committee, and Mr. Benson,
chairman of the Equipment Committee, was the third member.
Mr. Henderson. Mr. Benson represented the savings banks?
Mr. Beebe. He was then acting as chairman of the Equipment Com-
mittee. He is president of the l)ime Savings Bank.
Mr. Pike. The equipment trusts on the road ?
Mr, Beebe. The equipment trusts on the road. They were in
default.
This committee, or the special committee of three, then had a meet-
ing with the trustees of the railroad, and we discussed this problem,
and they shared our feelings at that meeting that something should
be done, and the question then was how to proceed, because not any
one of the special members on this subcommittee, nor the railroad
trustees themselves, had ever been confronted with the problem or
task of selecting a president of a railroad. We decided at this
meeting on a program which fortunately worked out splendidly.
We decided that the trustees should appoint one member of another
special committee and that the chairmen of all the creditor groups
should be requested to select another member, and those two would
canvass the field to report upon a candidate whom they felt would
qualify as an operating executive of this Rock Island system.
I happened to be selected by the creditor interests to represent
them on this special committee of two.
This committee of two, consisting of Mr. Fleming, the Rock Island
trustee who was designated by the other two, and myself, then re-
CONCENTRATION OF ECONOMIC POWER 15291
quested each committee to submit a list of names that they thought
should be considered. We even requested Mr. Gorman, president of
the railroad, to submit a list, and this list of names amounted, I be-
lieve, to 19 or 20 of the senior operating oflficers on western roads
who might be familiar with the operating conditions on the Rock
Island.
Then Mr. Fleming and I were faced with the task of how. to
determine the best qualified, suitable executive from this list to recom-
mend to all the creditor interests. We decided upon a panel or
jury to make the test, and on this panel we had Mr. Hale Holden
of the Southern Pacific, Mr. Ralph Budd of the Burlington, Mr.
Lawrence Downs of the Illinois Central, Mr. Fred Williamson of the
New York Central (but he had been on the Burlington and was
familiar with that region), and two bank presidents, Mr. E. E.
Brown, president of the First National in Chicago, and Mr. Jackson
Reynolds, president of the First National, New York.
Then Mr. Fleming and I called on each one of these members of
this jury and asked them! to select from that list the first three men
they felt best qualified to handle this job on the Rock Island, and
also to indicate to us the reasons why the other names were not
suitable, in their opinion. After callmg upon each one of these
members of the so-called jury panel, we summed^ up the results and
Mr. Durham, Mr. E. M. Durham, Jr., was the first choice.
The next question was to secure* the approval of the R. F. C., be-
cause they had veto power in the appointment of anyone with a
salary of anything over $4,800, and so the trustees met Mr. Jones in
New York and submitted the name of Mr. Durham, and Mr. Jones
took hold of that problem anS called up Washington, talked with
his staff here, talked with one or two railroad executives he knew,
and then turned to the trustees and said, "Gentlemen, you have made a
fine selection, I will go along with you 100 percent."
With that approval and endorsement, the trustees went to the
court and asked for the appointment of Mr. Durham.
Mr. Gesell. Do I understand that this suggestion was being made
against the opposition of the existing management ? In other words,
you were attempting to replace the management, were you not?
Mr. Bbebe. Yes; we were trying to strengthen the management.
Mr. Gorman was the president of the railroad and the chief oper-
ating head. Hfe was over 70 years of age; he was probably one of
the best liked men in the railroad industry. Through his good will
he had built' up a great deal of business for the Rock Island, and
the creditor interests did not want to injure Mr. Gorman one bit,
and he realized and favored this appointment when it was decided
upon.
But we did not consult the debtor when we made our selection.
We informed him of our choice and what we proposed to do.
Mr, Gesell. That is the point I wanted to bring out.
Mr. Pike. The debtor is what person?
Mr. Gesell. I take it you mean Mr. Hayden ?
Mr. Beebe. He was the principal representative of the equity.
Mr. Pike. Yes ; the so-called equity.
Mr. Beebe. That is right.
Mr. Gesell. Then what happened after that?
15292 CONCENTRATION OF ECONOMIC PO^ER
Mr. Beebb. Another part of the second phase,' we "were faced with
the equipment problem. The road was short of cash and it had been
unable to pay off its maturing installments of principal and it was im-
portant to get that matter cleared up as soon as possible, and so I worked
as representative of my committee with Mr. Benson, chairman of the
Equipment Committee, trying to work out a plan whereby we could re-
fund all the equipment issues and clean up the past due principal
installments and set up a refunding issue that would lower the
interest rate, which on the old issues averaged about 4.6% and if I re-
call correctly that particular refunding issue reduced the interest to
about 33/2 percent---3i/^ percent from 4.6. That was accomplished,
and the next important part of the second phase that I recall were dis-
cussions with our new chief operating officer as to what was the future
for the Rock Island, what did it need in the way of rehabilitation,
what abandonments should be considered.
We wanted to know, that before we could determine upon a plan of
reorganization, and we were just as anxious to have a plah as soon as
possible as was the Commission or any other party.
Mr. Durham had been on the roaxi for atx)ut a year before I saw
him and met with him and his entire staff to discuss the whole prob-
lem of the future of the Rbck Island system, and I pointed out the
question of the rehabilitation and the C[uestion of abandonments.
And during this second phase, as I call it, of our work, there was
pressure, of course, from the Commission, to have a plan filed, and
from the court. The court finally stated that a plan had to be filed by
some interest in '36 (this was in '36) or else the trustees must file.
Well, ther* was not sufficient information available for any of us to
make up i. sound, equitable and fair plan, but it was much better
to have some other party rather than the trustees, it seemed to us at
that time, file a plan, and the debtor did file a plan in order to comply
with the court's order, which plan, I might say, was not acceptaole
to any creditor interest. But it did meet the requirements of the
court, and hearings were held on that .plan before the Commission and
tivery party objected at those hearings.
The third phase, is the last phase, which leads up to the plan which
our committee sponsored and supported before the Commission in
July of '38. This third phase covers the period from '38 to '39. The
new management had been able to show results in the operations that
were perfectly amazing. Mr. Durham, after a year, brought in Mr.
Farrington from the Burlington. He is chief operating man under
him. He got McPartland from the Western Pacific, superintendent of
motive power. He got Brown as general manager, and throughout the
whole organization he brought in a live staff that revivified the entire
propertv.
Mr. Gesell. In effect, you were running a railroad, through men of
your selection ?
Mr. Beebe. We had a man who was running a railroad.
Mr. Gesell. And he was checking with you on matters of policy?
Mr. Beebe. No ; with his railroad trustees on matters of policy.
Mr. Gesell. He wasn't consulting yon on matters of policy?
Mr. Beebe. Not on matters of policy. I should say that if he
wanted to borrow money, he informed us that he wanted to borrow
money, and then we had our day in court.
CONCENTRATION OF ECONOMIC POWER 15293
Mr. GESEiiL. You talked about going down and consulting with
the operating men of the railroad concerning what lines should be
abandoned, what rehabilitation should be done. That suggested to
me the question of whether or not you were not being consulted on
matters of operating policy.
Mr. Beebe, No ; not exactly on such matters. I wasn't trying to dic-
tate or represent for my committee specific policies regarding the opera-
tions of that road. I was trying to point out the problems which
we thought had to be solved before we could file a plan and we
wanted Mr. Durham to hasten as rapidly as possible in covering
these principal points which we needed to have answered before we
could sponsor a plan. Is that clear ?
Mr. Gesell. Yes. I think it is just a matter of terminology.
Probably we shouldn't use the word "policy."
Mr. Beebe. Now, in this latter phase, we had to develop a formula
for the segregation of earnings by mortgage districts and a formula
which was called the
The Chairman (interposing). May I interrupt you? I was going-
to ask whether in your conferences with the new manager you disr
cussed, or any of your associates from time to time discussed, ways
and means of increasing the receipts of the railroad or of decreasing
its expenditures?
Mr. Beebe. Our discussion centered upon decreasing expenditures.
The Chairman. You did discuss ways and means of operating a
road in such a manner as to decrease expenditures ?
Mr. Beebe. Yes.
The Chairman. I think that is what Mr. Gesell had in mind when
he was talking about your forming policies.
Mr. Beebe. I think I can illustrate exactly what I have in mind
when I say abandonments. We felt there were a great many miles
of very light traffic lines that were siphoning away the cash of the; sys-
tem, and if possible, we felt the management should endeavor to see
whether abandonments could not be pushed which might elim^ate
some of the operating deficits on these small branch lines.
Mr. Pike. Small as traffic producers. Some are pretty long as
far as rails are concerned.
Mr. Beebe. Some of them are pretty lonj. The number of miles
abandoned, I think, are around 300 or 400 miles. We had questioned
whether abandonments might not run up to as many as 1,500 miles.-
Mr. Gesell. 'You were down on the operation side of this a little,
weren't you? I think I remember your telling how you rode in
railroad cabs down miles of track and checked railroad tallies and
operating results.
Mr. Beebe. Oh, yes. I have been over the Rock Island in the
cab of one of their new Diesel locomotives. I covered, last October,
2,400 miles by day. We have a rehabilitation program or improve-
ment program in our plan, amounting to $22,000,000. We want to
see how that money is being spent on grade revision work, on strength-
ening their bridges, and in making up deferred maintenance on the
cars and alterations to stations. We also want to get the feel of
the territory and scan the station receipts, which we do on those
trips, and get close to the management. If you live with the prob-
lem, you can see their problem and understand the points they bring
124491 — 41— pt. 28 39
15294 CONCENTRATION OF ECONOMIC POWER
up in their discussions, why they need money for this purpose and
that purpose, and there is a big problem on the Rock Island today
as to whether we should not spend $16,000,000 to build a new short-
cut between Muscatine and Trenton which will give us a grade of five-
tenths of 1 percent east-bound. Now, the old ^ade was up to 1.3%
with curves running 3 or 4 degrees. The savings on this new line"
will amount to $2,000,000 a year. You spend $16,000,000 and the
operating men tell us they can save $2,000,000 a year. We see such
problems on the ground, and it is important that we should.
They have need for a new bridge at Kansas City that they ought to
build for a million and a quarter.
The Chairman. Do you have any study of the effect of the Intei'-
state Commerce Act upon the business of the road"?
Mr. Beebe. Not from the traffic end, Senator ; no.
The Chairman. From what end ?
Mr. Beebe. Well, I do not think that I am qualified to judge the
effect of the rulings and regulations of the commission.
The Chairman. Of course, there are a great many matters of legis-
lation that are suggested from time to time with respect to the
amendment of the Interstate Commerce Act, and there are several
bills, as a matter of fact, now pending before Congress. I won-
dered whether your interest in the railroad took you so far as to lead
to the formation of an opinion with respect to the virtues or lack of
virtue in pending legislation ? Apparently, you haven't dealt with
that at all.
Mr. Beebe. We haven't tried to lend any weight to legislative
changes in the powers of the I„ C. C. We have discussed with the
managements their problems under the rules and regulations, trying
to get both sides of the question. We have taken no active part.
Mr. Gesell. I think, Mr. Beebe, we have a pretty good idea of
what the problem was and how it was met. If you could complete,
as rapidly as possible, how the final result came, of what was done,
we will proceed to the rest of the examination.
■ Mr. Beebe. In this third phase we had to get a formula for segrega-
tion of earnings. We had to have a traffic study which would give
us an idea of what the reasonable prospects were in future for gross
revenues from which we could make an estimate of future net earnings
and determine the size and character of the capitalization.
Then we had also to go into the preparation or have the manage-
ment prepare for us cash receipts, and disbursements estimated
for the next 4 years.
Mr. Pike. Including the rehabilitation ?
Mr. Beebe. Including the improvement program, how that was to
be financed. That gave us the measuring rod for the amount of
new capital that had to be raised for the reorganization. With
these facts assembled we constructed a plan, and that plan with all
the supporting documents was filed in July — July 20, '38 — and then
I and my staff had to take the stand lefore the Commission and
-support our plan. The plan was filed, as I say, in July of '38.
The examiner's report came out about a year later. We had to file
then, briefs on exceptions ana answering briefs and then the Com-
mission, the full Commission— I think it is the only instance in
which the full Commission sat — ^heard the argiiment,. and the hear-
CONCENTRATION OF EJCONOMIC POWER 15295
ings were tlosed. That was .last December. We are now waiting
for a report from the Commission.
Mr. Pike. The plan there was filed. Possibly it has been modified
since, but where do you end up as a life-insurance comj)any holding
the group of securities you do? What sort of securities do you
come out with at the other end of the horn ?
Mr. Beebe. There will be first-mortgage bonds for a small part
income-mortgage bonds for a second part, preferred stock and com-
mon stock. .
Mr. Pike. Following that, what would be your position' in regard
to those securities other than the first-mortgage bonds with the
New York State Insurance Department? Would you have 5 years
to get rid of those as you would if you had foreclosed real estate?,
Mr. Beebe. We will have time to dispose of them. The commis-
sioner has always given us time to unload after reorganization when
we are forced to take securities which were not of tne- character
we would select if we had our own choice.
^ Mr. Pike. I hadn't seen that come out.
Mr. Beebe. I expect we would want to dispose of our equities
when the earning power of the road brings the market price up.
Mr. Gesell. Mr. Beebe, getting back to the question of the bond
portfolio, I have about six points I want to cover with you. First
of all, can you tell us how much the company invests in bonds each
year, new money?
Mr. Beebe. It would run between 50 and 70 million dollars for the
last 2 years.
Mr. Gesell. That gives me an idea. Is that as much money as
you want to invest?
Mr. Beebe. No.
Mr. Gesell. How much would you like to invest?
• Mr. Beebe. At this time we would like to be able to find suitable
investments to employ all of our available cash .down to say about
$30,000,000.
Mr. Gesell. How much cash will that involve?
, Mr. Beebe. We have been carrying about $30,000,000 of excess cash.
Mr. Gesell. Your table would indicate that you had $61,000,000 in
cash as of December 31, 1938.^ You say that about thirty of that is
excess ?
Mr. Beebe." About $30,000,000, at the present time, I would consider
as excess cash. In 1929 our cash balances normally ran between three
and four millions. The situation has changed today. We have
demand obligations today that we did not have in 1929.
Mr. Gesell. I take it that you have Governments which you would
wish to put elsewhere?
Mr. Beebe. Our short-term Government position we would rather
have invested in long-terms.
Mr. Gesell. How much?
Mr. Beebe. About $102,000,000.
Mr. Gesell. About one hundred two million in Governments
would like to get out iilto other bonds?
Mr. Beebe. That is correct.
1 See Hearings, Part 10-A, p. 100.
15296 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. You have about 30 million in cash which you would
like to have out in bonds?
Mr. Bei':be. Yes; or real estate mortgages.
Mr. Gesell. Now, may I ask whether your bond account is the
percentage you wish it to be of the total portfolio? Table 102 indi-.
cates as of December 31, 1938, your total bonds were 60 percent —
60.46 percent of the total admitted assets.^ Do you wish to increase
your bond account in relation to total admitted assets or not?
Mr. Beebe. We would not object to an increase in the proportion of
our admitted assets in bonds, if we could employ the funds in sound
investments at a satisfactory rate. Experience has shown that the
percentage of admitted assets invested in bonds as compared with the
percent invested in real estate mortgages varies during the economic
cycles. Take back in the easy money period, 1898 to 1904, our cash
balances were running about the same percentage of our admitted
assets that they are today. At that time, apparently bonds were not
favored on account of the low rates and we invested more in real
estate mortgages for short-terms. We also had call loans at that time
which were largely to brokers.
"When you come to the period I914r-17 when the Government
was financing, you will find our bond account increases and our
real estate investments decrease, or real estate mortgages decrease.
It varies with the market conditions and where you can find invest-
ment outlets.
Mr. Gesell. What do you do to find out about bonds that you might
purchase? What sort of a system do you have of locating possible
bond investments? Do you wait for them to come to you or do you
seek them?
Mr. Beebe. The principal source of bonds is from new issues or
private placements. We are not purchasing bonds over the counter.
Mr. Gesell. I take it, then, that if you buy principally from the
issuer or from the bankers, that you wait for the issuers or the
bankers to come to you, is tnat correct?
Mr. Beebe. Yes; they come to us.
Mr. Gesell. And you have confidence, I presume, that they will
come to you because of the size of the amount of the money you
have, and they know you are always ready to invest, is that correct?
Mr. Beebe. Well, prior to the release of a registered issue, we con-
tact the members of the selling group and tell them, provided the
price is satisfactory, we will be interested in an ofi'ering. On the
morning of the offering date, we will handle over 200 calls in an
hour from dealers all over the United States.
Mr. Gesell. Wanting to sell you?
Mr. Beebe. Wanting to sell us small lots, unfortunately, and not
large lots.
Mr. Gesell. What about loans to small business enterprises? Do
you seek those at all?
Mr. Beebe. We have had very few requests for small business loans
and we have not sought them because we have considered that they
were not suitable for an institution handling trust funds.
Mr. Gesell. Have you made any such loans?
Mr. Beebe. Not to my knowledge.
CONCENTRATION OF ECONOMIC POWER 15297
Mr. Gesell. What is the lowest amount of a loan you would make,
usually ?
Mr. Beebe, I beg your pardon.
Mr. Gesell. What is the smallest block of bonds you will buy,
usually, other than, of course, those that you may pick up here and
there in the market?
Mr. Beebe. Two hundred and fifty thousand is about the approxi-
mate minimum amount for a corporate issue. In some of the munici-
pal issues we have started an investment with a smaller amount than
that. Our largest purchase of any one issue has been 10 million.
We usually register our appetite for an issue by an amount equiva-
lent to 1 to 5 percent of the debt of the obligor.
Mr. Gesell. In municipals, do you pick them up from dealers?
Mr. Beebe. No, it is not feasible usually for us to do so because
the dealers with odd lots have not the supporting papers or a full
transcript of the proceedings which we require before we are will-
ing— and the papers must be passed upon by our general counsel —
before we will accept delivery of the purchase of municipal bonds.
Mr. Gesell. Do you buy them then from a banker or do you buy
them at public bidding?
Mr. Beebe. We buy them usually through a banking group.
Mr. Gesell. Why don't you bid for them?
Mr. Beebe. We would rather have the banking group stand the
market risk, and we like to have the option to be able to turn the
bonds back if we find anything wrong with the legal papers.
• Mr. Gesell. And it is for those reasons that you haven't bid
publicly when the municipals are offered directly from the munici-
pality ?
Mr. Beebe. That is right.
Mr. Evades. Aren't you able to bid subject to legality?
Mr. Beebe. There may be cases where they have permitted that,
but I am frank to say right now that I do not think so.
Mr. Kades. Is that the principal reason why you don't bid di-
rectly ?
Mr. Beebe. That is the primary reason. It may be that the issue
larger than we. want in its entirety or it may be too small.
To find an issue offered for sale which by its quality is the right
size for us ' , buy, there are very few cases, I think, as I recall it now.
Mr. Kal^s. Those cases which there are usually are cases in which
the opinion of bond counsel of recognized standmg accompanies the
issue, isn't that so?
Mr. Beebe. Yes.
Mr. Kades. So that the legality doesn't concern you so much in
the cases of the larger issues, or the issues of the larger municipali-
ties?
Mr. Beebe, There must be a legal opinion with each issue, but
we go behind that legal opinion and recheck the opinion of counsel
which is furnished with the bonds.
Mr. Kades. There isn't any inclination on your part not to com-
pete with the banking syndicates in the purchase of bonds?
Mr. Beebe. Oh, no; we have bid directly on equipment trust issues.
There we usually submit a bid through an agent and allow him
an eighth or a quarter, and he runs the risk of having the bonds
turned down by our general counsel.
15298 CONCENTRATION OP ECONOMIC POWER
Mr. Gesexl. Now, do you have a plan at the beginning of the
year as to how much money you are going to invest in bonds and
what type of bonds you are going to buy within these different
classifications?
Mr. Beebe. Yes. We do have a system which has been of great
value to us during the past 4 years. It is in the form of a tentative
investment program wnich we discuss with the finance committee
as soon as possible after the turn of the year.
In this program we indicate the amount of cash which we may
expect from maturities and redemptions and sales which we have
in mind recommending during the year. We also indicate the amount
of cash which we will receive from, payments on account of mort-
gages, maturities and amortization payments, plus an estimate of the
net operations from the insurance business after taking care of policy
loans. By this we arrive at a total cash figure which gives us an
approximate idea of what our problem is for the year, and then we
endeavor to measure the extent to which we will be &ble to reinvest
that amount of money in municipal obligations, in railroad equip-
ments, in public utilities, and industrials. And then we also submit
a budget, showing the cash position which we^had at the beginning
of the year, will have at the end of the year, and the amount which
we cannot invest in corporates or municipals, we have to allocate to
new Governments.
Now, it is important — very important — ^both to the finance com-
mittee and especially to my staff, to have a clear understanding at
the beginning of the year as to the size of our investment problem
and especially if we have to buy a sizable amount of United States
Government bonds to keep our cash employed, we cannot expect to
purchase any substantial amount of them on subscriptions when new
issues are tendered, because we are limited in our subscriptions, so
that we will have to w^ork during the year in the market. It is
very helpful to have some idea as to how many Governments will
have to be purchased during the year so that you can schedule out
the pu) chasing program throughout the entire year and get the benefit
of the swings in the market.
Mr. Gesell. Mr. Stedman, when he was on this morning, testified,
as I recall, that there was such an inadequacy of supply that it was
rather difficult to plan any program in advance and it was fairly
necessary to take such good investments as came along, in the hope
that you would be able to get the money out. I take it even with
a plan such as you discuss you still' have that problem, do you 'not?
Mr. Beebe. We have that problem. Of course, we keep track of
our budget against the actual experience on a cumulative basis
monthly, so that if opportunities are presented for investment not
anticipated, that means we can lighten our Government purchases.
It all comes down to that, if you can get the yield in quality some
place else. Our position in Governments today is large. We are doing
our share there.
Mr. Pike. Of course you can always peddle your Governments if
an unexpected opportunity does come up.
Mr. Beebe. That is right.
Mr. Pike. There is a good market there certainly.
CONCENTRATION OF ECONOMIC POWER 15299
Mr. Beebe. An excellent market there, especially in the short terms.
I might point out, in connection with the budget, that to me it is
one of the most important jobs or tasks of the financial department,
because I think that in order to get the best advice and keep your
finance committee fully informed of what your problem is, you should
have a good review each year of what progress has been made during
the past year and what the problem looks like for the coming year.
Now, in this budget and the schedules appended to it, we have the
earnings on each class of admitted assets, and their trends.
We also have our liquid position, and we show the change in the
classes of securities over a period of years to find out whether we
are getting the diversification that is awfully essential in order to
have a sound portfolio, and also bring up to the attention of the
committee at that time the securities which I have earmarked for
careful consideration during the year, because I think that I may
want to recommend that they be transferred from the amortizable
to the non-amortizable classification ac the end of the year.
Mr. Pike. You think they may be going a little sour ?
Mr. Beebe. I am not sure. I have gOv them earmarked; they are
right on the margin. I want them to know what I am thinking
about. My staff is concentrating on special studies to reach conclusions
upon which we can make recommendations at the end of the year.
It keeps your finance committee keenly alive to the whole problem.
Mr. Gesell. Perhaps we can elaborate on this by asking you to
describe a little the type of standards which you apply in investing
in certain classifications of securities. We discussed with Mr. Sted-
man this morning standards in the purchase of utilities and indus-
trials. Could you give us some idea of what your standards are in
those two fields, what type of security you will take, what type of
company it must be ?
Mr. Beebe. In the light and power industry? I think Mr. Sted-
man when he was discussing the utilities was discussing electric light
and power. Utilities have a different yardstick, whether you are dis-
cussing a water-company bond, whether you are discussing a tele-
phone-company bond, whether you are discussing an artificial gas-
company bond or a natural gas-company bond, or electric light.
Mj". Gesell. Working in the Commission, I get to think of utilities
in terms of electricity. Will you tell us about light and power?
Mr. Beebe. Light and power. I think it would be most helpful —
which is what I want to try to be — if I discussed these standards
along the lines that I present them to the finance committee to give you
the picture. You have first to consider one element, of course, the
price and quality, terms, maturity of the bond, whether there are
amortization provisions, whe'"..er they are adequate in your opinion.
I mean by amortization provisions that I am talking about a true sink-
ing fund, not a purchase fund or an improvement fund, but a true
sinking fund. The capitalization in our opinion is a very important
element to consider in the utility investment or any other investment,
a properly balanced structure. In other words, we do not consider
sound a preponderance of debt.
Mr. Pike. What would you call a preponderance, anything over
50 percent?
Mr. Beebe. No. In light and power if over 60 percent we are
getting on the heavy side definitely. The ideal in equity would be aU
15300 CONCENTRATION OF ECONOMIC POWER
common. We can't have the ideal, but we do not want an abundance
of preferred in relation to the common. I think Mr. Stedman's
statement was excellent — the constitution of the equity position, ho^
it should be divided.
Our yardsticks show that our best companies, with good capitali-
zations which we have in the light and power, are 50 percent debt and
50 percent in the equity, and our fair ones, of which we have few,
60 percent debt, 40 percent in equity. When you get beyond those
limits you are getting into a quality which we may not consider we
can purchase.
Mr. Pike. On that point, Mr. Beebe, let's say here is a company
with 60 percent debt and 40 percent equity but half of that 60 percent
is made up of old divisional bonds so that you are in the rear 30 percent
of the 60. That is frequently true in utilities.
Mr. Beebe. That is true.
Mr. Pike. Would you prefer probably not to be in that company?
Mr. Beebe. Probably the divisional bonds that you refer to in a situa-
tion like that would have maturities coming due within 10 or 15 years
if it was the junior issue that we had under consideration for the
same company.
If we are satisfied with the credit standing of that company, the
stability of its earning power, it would have without much question
the ability to refund those underlying divisional bonds when they
matured and their maturities were staggered I do not think wc
would hesitate buying the junior refunding or general mortgage.
Mr. Gesell. How long must the company have been in business?
How many years do you require a certified balance sheet for ? What
kind of record must it have management-wise?
Mr. Beebe. We like to look at a 10-year record of utilities. We
will work with a 5-year record. On consolidations sometimes you
cannot get a true picture back of 3 years, but you will study the
reports of the constituent companies and if you are satisfied with that
then you will accept the consolidated figures possibly for a 3-year
period, but that is unusual.
Mr. Gesell. Do your men make field investigations of the proper-
ties, of its management, of its public relations, and matters of that
sort?
Mr. Beebe. Yfes ; that is most important, but not always in connec-
tion with a pnrclhase. We are continually going over some properties
in the field and we probably will have in connection with a refunding
issue a report ivithin 12 months or maybe 24 months, and that would
be adequate in connection with the refunding issue, but \n connection
with an entirely new property in which we have never had an invest-
ment before, we do not feel that we can interpret the figures and feel
satisfied that we know enough about it. We want to get on the prop-
erty and see what those figures really mean.
Mr. Gesell. And I take it you want to get back at the operating
figures and not the balance sheets that are released to the public?
Mr. Beebe. That is right, we want detailed operating figures and
' we furnish a special questionnaire which they fill out in order that
we can get the figures that we require and in the detail that we
require.^
Mr. Gesell. Have you such a questionnaire with you ?
CONCENTRATION OF ECONOMIC POWER 15301
Mr. Beebe. I haven't one but I can furnish it.
Mr. Gesell. Is it a lengthy document?
Mr. Beebe. It is a different tj^pe for each different type of utility
company.
Mr. Gesell. Might we have a sample one for the record ? ^
Mr. Beebe. You certainly may, sir.
Mr. Gesell. What other standards do you apply? I interrupted
you, I am sorry.
Mr. Beebe. Discussing the capitalization and the proper balance.
The Chairman. I am glad to note, Mr. Beebe, that the T. N. E. C.
is not the only organization that issues questionnaires. (Laughter.)
Mr. Gesell. I appreciate those kind words.
Mr. Beebe. We have found them very useful.
The Chaibman. I think we will all agree on that.
Mr. Gesell. Did you mean you had found the ones you have issued
useful or the ones we have issued?
The Chairman. There is usually a pretty good rule in law; never
ask a question if you don't know what the answer is.
Mr. Gesell. I think I know the one this time.
The Chairman. Proceed.
Mr. Beebe. Having considered that the capitalization is in bal-
ance, not out of line, we look at the terms of the indenture, the con-
tract that we are considering purchasing. Mr. Stedman com-
mented upon the escrow provisions. It is most important that they
should be conservative, wisely constructed, and we do not favor an
escrow provision which is at a higher ratio than 70 percent. I mean
by that, they should not draw down bonds against net property addi-
tions for a larger percentage than 70 percent. We much prefer to see it
around 66%. We analyze the sinking-fund provisions; whether we
consider the amortization is adequate for the type of company. In
the telephone companies issues there are no amortization. If you want
to purchase or consider a bond where the debt is on the high side, it
is well to have some amortization, and it seems especially true to me
today that, when these utility companies, by and large, are taking
advantage of the low interest costs to refund their indebtedness, that
part of the saving in interest should go to the amortization of the
debt rather than to be passed on to the consumers.
Mr. Pike. Do you like this method of amortizing the debt that
would be junior to you? Let's say you do 30 million in firsts, which
you buy, and 15 million in debentures spread over, say, as many
years, to be retired a million a year, so that the amortization would
be junior to your position. That is fairly typical, isn't it?
Mr. Beebe. If our mortgage debt is small enough — that is not amor-
tization debt — of course, we have a preferential or senior porition.
If anything should happen to the property we would clamp right
down on it with a small debt, I would assume, based upon your
illustration.
Mr. Pike. It is like the old custom in housing of amortizing a
second mortgage before you touch the first.
Mr. Beebe. I think that it is sound financing. There is a great
deal of it going on at the present time.
^ The •sample forms requested were subsequently submitted and entered in the record as
"Exhibits Nos. 2334 and 2334-A." See, infra, p. 15382, and appendix, pp. 15560-15562.
15302 CONCENTRATION OF ECONOMIC POWER
Mr. Pike. Yes; that is what I meant.
Mr. Beebe. That is where the banks are intruding or taking our
investments from us. They want to get part of the present issue
in 1-, 5- to 10-year serials and then sweeten our mortgage position
by giving us a smaller mortgage and the same lien, but we have to
take a low rate.
Mr. Pike. I guess some complain that you are also taking invest-
ments away from banks and individuals where they doivt get a
chance to get in at all on refunding?
Mr. Beebe. Well, you have a shifting of your investments when
the supply is limited, going from one person to another, and not
any of us are entirely satisned.
Mr. Gesell. Are there other standards you find, Mr. Beebe, in
these electric utilities?
Mr. Beebe. A very important factor is to be sure you have a
fair relation between your amount of debt and the fair value of
your property. I can spend a great deal of time discussing that.
We estimate our own values on the bare-bone-cost basis and the rela-
tion of debt, the amount of debt to that value of ours. The best
companies range 50 percent and under, and the maximum we have
gone up to is 65, but that means we are considering the necessity
for amortization. We have to study carefully the character of the
property, whether it is integrated, a wholesaler or distributor. When
you get into a light and power company and you have only a wholesaler
you have nothing but a power plant. The permanency of that invest-
ment, the question of obsolescence, is. a factor you have to take into
consideration. A thoroughly integrated company which is concen-
trated, seems to have most protection. The widespread distributor, the
type that has municipal competition, is usually a high-rate com-
pany. It has to be. You get more stability, and I think sounder
factors, out of your closely integrated unit.
Mr. Pike. You would rather stay away from anything that is
concentrated in either end — stay away from pure generation and
pure distribution?
Mr. Beebe. We like to have a balanced system because I think
your factors will show that on a steam -base system, fully inte-
grated— I mean it generates all the power which it sells and doesn't
buy — you have a pretty good balance of 50-50 between your plant
facilities and your distribution.
That means that if you are able to buy, for instance, from a Govern-
ment development, power cheaper than you could generate it and you
have a 50 percent debt against the value of your total plant, of which 50
percent is in your distribution system, you are 100 percent protected
on your debt.
The Chairman. Do you insist on direct ownership of the plant ?
Mr. Beebe. Not in every case. Some of the properties are only
distribution and have no plant facilities whatsoever, sir.
The Chairman. Do you insist on ownership or operation of the
■plant or, in other words, do you draw any distinction between op-
erating companies and holding companies?
Mr. Beebe. I am talking only about operating units.
Mr. Gesell. You will buy holding companies, won't you?
CONCENTRATION OF ECONOMIC POWER 15303
Mr. Beebe. We have maintained an investment in two holding
companies which recently sold refunding issues, the North American
Co. and the American Gas & Electric.
Mr. Gesell. By and large you stay away from them, I take it ?
Mr. Beebe. By and large they do not offer us the. quality of invest-
ment we would like to have. We may buy a few.
Mr. Pike. You picked pretty good ones for your two holding
companies.
The Chairman. In other words, you find that the holding company
doesn't meet the standards as readily as an operating company —
these standards which you have been discussing?
Mr. Beebe. That is true, sir, and you are buying into a position
which is the equity of the operating companies and the pool earnings
of a lot of operating companies. You have no security. You have
the amount of earnings which filter through in the form of dividends.
You are buying, therefore, an interest in the form of an obligation,
subject to all the senior debts these underlying properties may have
or be forced to build up over a period of time.
The Chairman. You want the senior obligations, in other words,
and you don't want bonds which are secured by equities?
Mr. Beebe. Yes, sir.
Mr. Pike. You may remember some years ago there was a bond
issue out on the Pittsburgh utility, the Duq[uesne, which had pre-
ferred stock in the operating company, and its owner, the Philadel-
phia Co., took the common stock behind the preferred as collateral
for the bond issue and the bond isue was sold at a considerably lower
yield than the preferred stock, which was a jump ahead of it.
Mr. Beebe. Right. We bought the preferred stock. I remember
that.
Mr. Geseix. Have you finished the standards, or are there some
additional ones? I want to cover them all.
Mr. Beebe. Another factor that has to be considered is the fran-
chise situation, whether you have adequate franchise protection for
the life of the bonds, and that in a way gives you protection against
municipal ownership — that is, in a way. We have got to be sure that
this company is not subject to competition which may be detrimental
to it.
Mr. Gesell. You mean that it is not around where the T. V. A.
is, or something of that sort?
Mr. Beebe. I have in mind municipal ownership. Yes; a Govern-
ment project that might destroy the value of an operating plant
and in that way dilute your security. In other words, in the devel-
opment of the power business you have had a lot of destruction of
capital as the strong units and small plant systems have been hooked
together. You build a large steam plant in another place and power
is furnished from that source for the new system and the value of
these small plants is washed out, or should be.
Mr. Pike. That happened all through the Middle West develop-
ment, say during the 1920's.
Mr. Beebe. That is right.
Mr. Pike. They used to pick up little "midnight,'' 80-horsepower
companies, 20 of them together, and put in a 10,000-horsepower unit,
and the little plants were just no good from then on.
15304 CONCENTRATION OF ECONOMIC POWER
Mr. Beebe. They had no value at all to the system when it was
hooked up.
The rate structure we have to examine, and that is something we
give great consideration to. We study the average rates by classes
and compare them with utilities operating in the same territory, to see
whether they are on tlie high side or the low side, and then judge
the rate of return this company can earn on the fair value of its
property based on its present rate scales. If we have a margin
there that is conservative, then we feel we have possibly a pretty
good set-up.
On the earnings record, we want to see a healthy growth, we want
to see a reasonable diversification and stability and good expense
control. It is most important, above all, as Mr. Stedman mentioned,
to look at the gross dollar, to see that there is an adequate amount
that goes back m to take care of maintenance and depreciation, and
also the dividend record should be conservative enough to permit some
surplus to be available for keeping up the property and mortgage
debt sweetened.
Mr. Gesell. How many electrical utility issues that come out can
meet these standards? There are great numbers that can't, are
there not?
Mr. Beebe. I should say the majority of them could. If you are
speaking of size of issues, not number
Mr. Gesell (interposing). I am talking about number of issues,
because 1 good issue could oflFset 50 bad.
Mr. Pike. You mean recent issuesi
Mr. Gesell. Yes.
Mr. Beebe. We have found — my experience has been — that a great
many issues which, say, 5 years ago were not so good, did not meet
these tests, upon refinancing have been able to improve their picture.
In part, it has been due to the Public Utility Holding Act, I think,
and it has made us feel that possibly unwise holding company man-
agement might be terminated and there would be more confidence in
the operating units.
Mr. Pike. Wouldn't you say for some reason or other — Mr. Hender-
son has gone- -there haven't been very many poor utility issues put
out in the last few years ? There has been pretty good quality. The
public hasn't really been interested in poor ones if you wanted to put
them out, but there haven't been many poor ones. I can't remember
one in the last 5 or 6 years that has been bad,
Mr. Beebe. I think the companies that have sold refunding issues
in the last few years have improved their capital set-yps.
Mr. Gesell. Then you might say, whether part of this development
has been due to the S. E. C. or not, that there is an expanding field
for insurance investment in the field of electrical utilities ?
Mr. Beebe. Some. It is not great. We have been able to add new
units to our public utilities. Not many. We have added a few.
Mr. Gesell. With respect to the industrials
Mr. Pike (interposing). There is one more question I would like
to ask, Mr. Gesell, if you don't mind. This whole question of what
you are going to do with these funds now, say, that railroads and real
estate are not: as available as before, what new outlets you are going
to seek, bothers me a good deal and Mr. Stedman testified this morn-
CONCENTRATION OF ECONOMIC POWER 15305
ing that he saw no particular place where he could recommend widen-
ing, let's say, of the Jersey laws, or saw no particular place where
his company wasn't using about as fully as he thought it should the
present leeway given it.
We have had a tremendous development in the last 10 or 12 years —
and I might say there the quality of issues has rather improved — in
another sort of semiutility, the natural gas system, the long trans-
mission lines, and so on. Have you paid any attention to that type
of thing which seems to be gaining in importance ?
Mr. Beebe. That is one of the new types of utility bonds — we have
gone into it. It required considerable study to gain the assurance
that we had to have to feel that that type of utility obligation would
be suitable. I, myself, went out into the gas fields, took rock
pressures myself to see how it is done, and I watched the construction
of the line by the Columbia G. & E. from its gas fields to Washington
and up to Baltimore. And then I wanted to get into their accounting,
because the question
The Chairman (interposing). Did I understand you to say you
watched the construction of the lines?
Mr. Beebe. I went over the line as it was being constructed, yes,
sir.
The Chairman. That was a comparable activity to the one you
have described a little while ago with respect to the railroads, the
Rock Island?
Mr. Beebe. Yes, sir.
The Chairman. And how about with respect to other companies
of which you hold the bonds?
Mr. Beebe. Yes, I have been down in the steel mills, gone through
the steel mills, gone through the rubber companies. We have to get
very close to municipal financing and State financing — it may not be
myself, it inay be a member of my staff whp will cover these various
industries.
The Chairman. In other words, you have on your staff exp&rts,
operating experts, in each of the businesses of which you hold
securities ?
Mr. Beebe. Specialists in those lines.
The Chairman. Or specialists who can easily acquire that
knowledge ?
Mr. Beebe. Yes, sir. Our department is divided into four divi-
sions the same way that Mr. Stedman described his department this
morning ; that is, we have a public utility division headed by a utility
analyst or specialist; we have an industrial division, municipal divi-
sion, railroad division, and" we have a civil and electrical engineer
who can be transferred to the utility division or the industrial divi-
sion, wherever he is needed. In the railroad division Jve have several
experts, one who has had experience, a lot of practical experience —
been as high as assistant to the president of one of the railroads in
years past. I would call him the higher type of railroad statistician
that a president would have available in the inner room, next door
to his own office, to keep him posted on the railroad's operations.
The Chairman. Just as the company has a farm expert to manage
farms, as in the case of the Metropolitan and Prudential, so here
in the industrial field you have similar experts who would be com-
15306 CONCENTRATION OF ECONOMIC POWER
petent, if called upon, to manage operations of the various com-
panies the securities of which you hold?
Mr. Beebe. I wouldn't say they are wholly competent to manage
them. For instance, with our investments in the United States Steel
Corporation, we haven't any man that would be competent to manage
the Steel Corporation, but we have men who are competent to sit
down with the management, discuss their problems, go over their
properties and get a general idea as to the condition of maintenance,
whether there are any bottlenecks — you get bottlenecks in the steel
industry through your bloomer, you may not have the capacity —
whether it is a thoroughly integrated industry.
The same way with a water system.
Mr. Pike. They are qualified to appraise matters, at any rate.
Mr. Beebe. They are qualified to appraise and inspect and give
us a real report as to the fair value or a property and the quality
of its management.
The Chairman. Do the nianagers ever indicate a feeling that your
experts are not qualified to manage?
Mr. Beebe. No, sir.
The Chairman. You wouldn't want to leave that impression when
you say your experts are really not qualified to manage these
properties ?
Mr. Beebe. No, we get most friendly cooperation.
The Chairman. Surely, I would expect that, naturally.
Mr. Gesell. I was about to ask you to give us some idea of the
standards for industrial business. If you could just hit the high
points for us and tell us
Mr. Beebe (interposing). Capitalization. I will just give you
these points very briefly. It is a very limited field, by the way, in
the industrial field, where you can find obligations to qualify under
the laws and really rate as highrgrade obligations. It is a very
small field. -I have very interesting figures on how small it is in
issues of 2 million or more.
Mr. EIades. If you don't mind my interrupting you at that point,
would you care to comment on whether the laws relative to invest-
ments in industrials ought to be liberalized?
Mr. Beebe. I think that our law is liberal enough for us to pur-
chase any sound, high-grade industrial bonds we would consider
suitable for our investment purposes. You know that on January
1 of this year a new insurance code went into effect in New York
State, and- this new code does liberalize, in my opinion, the ability of
the life companies to purchase industrial obligations. I think we
ought to go very carefully in liberalizing laws and lowering
standards.
It is not that I have fear of strong companies. It is the weak
companies that vfould take advantage oi liberality.
I don't believe you realize what a small field or what a limited
supply, I should say, is available in high-grade industrials. It is
very limited.
Mr. Kades. It is not the restrictive enactments of the legislature,
then, but the restricted outlets for the investments that deters you
from going to any great extent in the investments?
CONCENTRATION OF ECONOMIC POWER 15307
Mr. Beebe. It is the supply. It is not there.
Mr. Geseli;. You mean the supply that meets your standards?
Mr. Beebe. Supply that meets our standards.
Mr. Pike. Some types of companies have recently come into your
standards. I will ta^^e, as an outstanding example, in the industrial
establishments through the last few years, the oil companies. In the
early thirties some companies who stand very well at the moment
had their debts offered on the Exchange at 25 cents on the dollar. At
that time I think the life companies hadn't paid much attention to
oil accounting, and some of these oil companies almost bought them-
selves out of their own troubles from their depletion fund. Recently,
since that experience, oil bonds have proven most attractive — let's
say 234 's sells above par — and I think several of the large life com-
panies have gone into the market perhaps more than any other type
of industrial.
Mr. Beebe. They represent the largest investment in our industrial
list.
Mr. Pike. The change in realization perhaps.
What I am getting at is. Aren't there some more of those things
lying around where a close study would reveal that they are more
suitable for insurance-company investments than the insurance com-
panies have previously thought? There was a certain slowness in
seeing that, and it was quite an obvious thing several years before
they started buying them.
Mr. Beebe. It seems to me that the oil industry has been one that
in a period of depression they contract their debt and pay it off
out of their large depletion and depreciation funds, and then in a
period of expansion they come into the market and borrow. Now,
in the amount of debt outstanding in the oil companies, I should think
that it had not increased very much in the last few years, but you
must bear this in mind, that a great many of the oil-company obliga-
tions were not legal for us.
Mr. Pike. I expect that is true.
Mr. Beebe. That kept us from buying more back during the early
period of the depression, because under the law at that time the
companies had to earn, when you are buying an unsecured obliga-
tion, at least 4 percent on their outstanding capital.
Mr. Pike. Which was a sort of a rule that was a good general
rule, but in some particular cases wasn't a very good rule, in this
particular case, let s say, where you could show no earnings over a
period of years and yet pay off every single obligation you had out
of your depletion fund.
Mr. Beebe. Another type"of company that is similar, that we have
gone into recently, and a type of industrial security which really
helps the small borrower, are the obligations of the financing com-
panies.
Mr. Pike. That is artother thing I wanted to mention.
Mr. Beebe. I think that class of industrial security represents, or
provides, investments for the life companies which in turn filter
through to the individual who needs credit on his receivables, inven-
tories and so forth. In other words, we do make small loans on a
wholesale basis through the financing companies.
15308 CONCENTRATION OF ECONOMIC POWER
Mr. Pike. The consumer credit thing has grown while these other
avenues have been narrowing down, and you have availed yourself
of that?
Mr. Beebe. That is a new development where you will find that
the life companies have, put a great deal of money to work when
it is required. But when there is not a demand for their money
their debt immediately disappears, they pay it off, because the term
of their commitments is about, I think, 12 months.
Mr. Gesell. We were discussing standards for the purchase of
industrials.
Mr. Beebe. Well, on capitalization, I say 40 percent bonds and
60 percent stock, and a general rule, in relation to plant, at least
50 percent, not more than that. Of course, there are some companies
that have practically ;o plant, that fall in the industrial line. If
you are dealing with steel obligations, obligations of steel corpora-
tions, that would apply.
Net working capital to funded debt : I want to see maintained a ratio
of 11/2 to 2 times. We would like to see a coverage for the interest
over a 10-year period which will run around 3 times, on the aver-
age. The indenture provisions we consider most important for
industrial bonds. We usually like to find a 100-percent amortization
provision. Some of the oil companies have none; in others you will
have a 60-percent range in amortization. The higher the grade of
company, the less willing the corporations have been to grant favors
to the credi ors or grant protective provisions in their indentures.
Mr. Gesi j.. What kind of balance sheet do you require, Mr. Beebe ?
Mr. Beebe. We want, for industrials, always a detailed general
balance sheet.
Mr. Gesell. For how many years?
Mr. Beebe. For 10 years.
Mr. Pike. You meant a consolidated balance sheet ?
Mr. Beebe. Consolidated general detailed balance sheet.
Mr. Gesell. For 10 years. I think I can see. why you say the
field is somewhat limited by your standards.
Mr. Beebe. I would like to point out why I say the field is limited,
and this was a report which I made to the finance committee cov-
ering the opportunities we had to make investments. I wanted them
to know, I wanted to know myself, and this is a report! made to
them on the seventeenth of January [reading] :
In December, 1939, there was a total of ninety-five issues of industrial
bonds outstanding in the amount of $2,000,000 or more and rated Bit, or better
by Standard Statistics. The principal amount outstanding of these ninety-flve
issues was $1,882,000,000. The break-down of these issues by ratings showed
that those rated Alt, of eight companies, thirteen issues, $435,000,000; those
rated Al, nine companies, twelve issues, in the principal amount $454,000,000;
those rated A, sixteen companies, nineteen issues, principal amount $448,000,000;
and those rated Bit, better forty-four companies, fifty-one issues, $543,000,000.
That totalled $1,882,200,000.
Of the ninety-five issues totalling one billion eight hundred million-odd, only
thirty-six issues with a principal amount of $486,000,000 were either selling
below their redemption prices or non-callable, and therefore available for
us to purchase,
And this omits the consideration of the question of the legality
of any of those issues that are included in that $486,000,000.
The ratings on the 36 available issues were as follows : Those rated Alt,
which we could buy if we wanted to. possibly, were 3 companies, 4 issues,
CONCENTRATION OF ECONOMIC POWER 15309
$41,000,000. Those rated Al, 3 companies, 5 issues, $176,000,000. Those rated
A, 2 companies, 3 issues, $40,000,000. Those rated Bit, 25 companies, 26 issues,
$227,000,000.
Of the available bonds rated A or better, representing 8 companies, we already
have investments in 5. Bonds of the other 3 companies are noncallable and
selling at prices much too dear for us.
So I think you gather from that what a limited supply there is m
the market now for us of bonds which are rated suitable by this serv-
ice or according to our own judgment for us to buy. In the steel
classification I think there is only one bond that is rated AA, They
are all only rated A.
Mr. Gesell. This raises the question again, then, where are you
going to put this money, Mr. Beebe ?
Mr, Beebe, I think that is rather a dangerous field for me to tread
in, but we have the feeling very definitely that we are getting a lot
of competition that would not normally be here. In other words, you
mentioned venture capital, and I think there is venture capital com-
peting with us in a great many ways.
Mr, Pike, You mean because they can't find anything else to do
with it?
Mr, Beebe, It is seeking security at any price. It is the type of
capital that will not assume risks unless reasonably certain of a fair
profit,
Mr, Pike. It is no longer venture capital ?
Mr, Beebe. It is seeking security at any price, I think it is in your
Government "baby bonds." I think your venture
Mr, Pike (interposing). If you said "ex-venture" capital you
would probably be right,
Mr, Beebe, Potential. We have it in the insurance that if left with
us — and the amounts under supplementary contracts represent some
of that — money that, under a different environment I think would
seek employment elsewhei;e, which in turn would expand our field and
lessen our pressure.
Mr. Gesell, Well, now, of course, you mention supplementary con-
tracts. That is money that you are, in effect, bringing to yourselves
in part by the terms of the contracts you offer. Perhaps if it wasn't
possible for that money to go to supplementary contracts it might
find its way more into venture activities,
Mr, BEEBE^It is left with us through the choice of the policyholder.
He has no use for it, or the beneficiaries of the policyholder.
Mr. Gesell. I suppose that is true, but it is simply a degree of
emphasis on that type of program.
Mr. Beebe. Of course, that is not a substantial amount. In the
case of the Mutual I think our amount is about 80 millio. •=:.
Mr, Kades, Mr, Beebe^ I understood you to say when you were
discussing railroad experience, that there was a good deal of railroad
equipment that was in need of repair and modernization, and that
operating cost could be saved by reconstructiqn of that railroad
equipment.
Now, you also stated that you were interested in purchasing
equipment trusts and you had purchased equipment trusts. Can you
account for the lack of volume in equipment trusts, in the light of the
circumstances which you stated ? Why aren't there more equipment
trusts on the market than there are at the present time? They are
124491 — 41 — pt. 28 40
15310 CONCENTRATION OF ECONOMIC POWER
not in any way affected by the defaults in the mortgage bonds or
■tlebentures.
Mr. Beebe. I think it is a question of the need of new equipment.
I think that is the answer to that question. As the railroads have
increased their efficiency, they have been able to make greater use of
the equipment they have, and therefore their requirements for new
equipment have not been increasing as we should hope they would;
but if they have, if the railroads en]oy a much larger volume, I think
we will find more equipment issues in the market.
Mr. Kades. Well, Mr. Beebe, some testimony before the Senate
Banking and Currency Committee last year developed the fact that
over 40 percent of freiglit cars were over 30 years of age, and that
70 percent of steam locomotives were over 20 years of age, and
figures of that sort, which would indicate there was a real lack of
proper rolling stock.
Mr. Beebe. Well, I think the railroads would be glad to buy new
equipment to replace any equipment that they have today, but it
isn't necessary. In the Rock Island case, with which I am more
familiar than with some of the others, vfe have provided in our
improvement program for $2,750,000 for freight power. However,
we have found that by strengthening the bridges we could use some
of our old power to run longer distances, carry^greater loads, and
make better time, and consequently we are not going to require
that expenditure of $2,750,000, "On the other hand, we have, pur-
chased a great many Diesel switchlhg locomotives, which have been
found to be a great saving, and the railroad has been maintaining its
competitive position by placing in operation new streamline trains,
and they have been financed by equipment trust issues.
In the Wabash, another road I am familiar with, they are borrow-
ing $2,800,000 now from the R. F. C. to rebuild freight cars, but I
have not had any of the chief executive officers of the railroads
I have conferred with whom, indicate that they wanted to fii^ce new
equipment issues and couldn't do so. They just didn't need to do so at
this time.
Dr. LuBiN. Mr. J3eeb§, I was very much interested in Mr. Gesell's
question as to where you are going to invest your money. In view
of the testimony that has been presented to . this committee from
leaders of various important industries, one got the pretty general
conception that the last 10- years have witnessed a rather radical
change in the method of financing them. In other words, through
surplus accounts, and particularly through depreciation accounts,
they have found themselves in a position — and "Some six or seven
representatives of very important industries were here and testified
to this effect — where they don't have to go into the market to borrow.
They finance themselves. ' It was true of General Motors, and the tre-
mendous expansion they had undertaken. In part it was true of the
-United States Steel, General Electric, and firms of that sort. They
are the type of organization that would normally be considered
gilt-edge organizations for the purpose of investment of insurance
companies.
If that trend should develop or continue to develop at the present
existing rate, where will the insurance companies turn for their
investment ?
CONCENTRATION OF ECONOMIC POWER 15311
Mr. Beebe. The type of institution or corporation you referred
to have not had obligations outstanding at any time that I know of.
They have always been able to finance themselves from their earn-
ings and out of their depreciation funds. General Motors has never
financed with debt that I know of.
Mr. Pike. In 1911, I think they did.
Mr. Beebe. 1911? I am sorry.
Dr. LuBiN. Of course, the United States Steel did — a very large
amount.
Mr. Beebe. The Steel Corporation financed at one time with debt,
but wisely retired it before the depression. I think it is hard
for me to realize that our basic national industries will be able to
meet their cash capital requirements entirely out of their earnings
and depreciation funds, if we are in a normal period of expansion.
Dr. LuBiN. But even in the late twenties many of these corpora-
tions converted their fixed obligations to common stock. .They sold
common stock and then called a lot of their fixed obligations, did
they not, or retired them when they became due? If that general
tendency grows, namely to shift from fixed obligations to other
types — and evidently that tendency has been under way now for
almost a decade — aren't we going to find ourselves in the position
where the pool upon which the insurance companies can draw for
investments will be considerably curtailed as years go on ?
Mr. Beebe. It already has been curtailed. I would say this, that
we must not overlook the fact that we will have, I believe, other
outlets for our funds through real-estate-mortgage loans, and you
then have the F. H. A. and the housing developments, speaking of
the entire insurance picture and not of any one company.
Dr. LuBiN. In other words, does that mean we should look for
less diversification as time goes on?
Mr. Beebe. Well, I think that I would like to go behind this theory
that you have mentioned^ and say that your theory must be premised,
it seems to me, upon a more or less static condition for this country,
and it is rather hard for me to believe that 130,000,000 people that
we have. here are satisfied with what they have in the way of homes,
in the way of furnishings, in the- way of railroads and automobiles.
Dr. LuBiN. I think my theory is based upon the reverse assump-
tion, namely, that you will have after a period of time a greater
growth in the consumption of the things that you mentioned, but
that as industry gets back into more complete operation, because of
past experience, the trend will be to finance themselves through obli-
gations which are less fixed than in the past. That trend is already
evident. In other words, even if you take the new issues, the new
investments of 1936 and 1937, you will find that relative to years of
equal industrial production in preceding decades fewer new issues
were put on the open market.
In other words, these people expanded their output through oth-
ers, and even in the period of prosperity in the Jate twenties, many
of these corporations, like the big copper companies — I know one in
particular — took their sole common stock and used the common stock
for fixed obligations. In other words, there is a growing feeling
on the part of industry that the less your fixed indebtedness the
more easily you can adjust yourself to fluctuations.
15312 CONCENTRATION OF ECONOMIC POWER
Mr. Beebe. I think that is wise, too. Now you are talking about
one small field in which we have invested, aren't you?
Dr. LuBiN. Yes.
Mr. Beebe. You are talking about industrial securities, and they
have Jiever amounted to very much in the way of an investment field
for life insurance companies.
Mr. Pike. It is unfortunately true enough, Mr. Beebe, that the
two largest fields in 1929, which were real-estate mortgages and rail-
road obligations, have decreased in total amount more substantially,
and by and large, I think you might say decreased in desirability
along with several of the railroad obligations, and have just gone
out from legal possibilities, so that you must — while none of us can
invent 1 panacea or 1 particular outlet that will suit — be looking
pretty high if you can add up 20 little ones that will make up for
that lessened outlet It is still pretty good. You have got to be
searching. You know you have.
Mr. Beebe. We are searching, and it is difficult today, but I think
that if you get a change of environment — I mean throughout the
whole world — that some of our troubles, our investment troubles,
are going to disappear.
The Chairman. You don't assume, do you, Mr. Beebe, that the
mere fact that members of the committee direct questions to you on
this matter indicates an assumption on their part that the develop-
ment of our economic system is static?
Mr. Beebe. Oh, no.
The Chairman. Well, of course, that was the assumption you put
In Dr. Lubin's mouth. It is an assumption that has been put, let
me say, in the mind of this committee by some individuals who don't
apprehend what the committee is trying to do.
Mr. Beebe. I never intended that.
The Chairman. I know. I merely wanted to make it clear at this
point, since this particular discussion was opened by that statement
on your part. We have a very definite situation which is reflected
by the figures presented here, figures which are not q^uestioned,
namely that the assets of all of these companies have been increasing
at a tremendous rate, almost, I think it is estimated, over a billion
dollars a year, since 1929, and yet obviously the difficulty of finding
investments has become — I mean proper sources of investments —
constantly greater and at the same time every expert from the com-
panies will testify there is a minimum limit for your investment.
Mr. Buckner of the New York Life, for example, testified, in re-
sponse to my questions, that a loaii, an issue of less than $100,000 was
not particularly attractive.
I don't know that I heard your minimum limit. What is the
minimum limit of Mutual ?
Mr. Beebe. We buy $250,000 of an issue.
The Chairman. I see. Here you have a field of little businessmen
throughout the country, wdio do not and cannot have access to these
reservoirs of popular savings. Of course, it is perfectly obvious an
insurance company, which is administering trust funds, cannot prop-
erly invest in what is called adventure issues. Naturally you must
have security, but to those of us who are in Congress and who are
CONCENTRATION OF ECONOMIC POWER 15313
receiving letters and denuands and petitions of one kind and another
from small-business men throughout the country, who find them-
selves^ unable to secure sources of capital loans, it is a very important
question, and when we seek to obtain enlightenment upon it, it is
not because we assume that things are static and must be regarded as
being hemmed in ; it is because we are trying to find a way to broaden
the opportunity of the average person to get into business and to ex-
pand and to do the things which we recognize must be done if our
continued upward march is to be maintained.
Do I make that clear?
Mr. Beebe. Yes.
The Chairman. I didn't intend to go into a lecture here, but it is
the point of view that at least is hedd by the chairman, and I know
by every member of the committee with whom I have discussed the
matter.
Mr. Gesell. Might I ask at this time, Mr. Chairman, how late
you wish to sit today? This would be a convenient time to discon-
tinue with Mr. Beebe. You will recall that we had hoped to call
Mr. F. W. Ecker. Our schedule is very full for the rest of the
week, and it means we have to excuse him, unfortunately, at this
time, unless the committee Avishes to sit late to hear him.
The Chairman. What would Mr. Ecker testify on ?
Mr. Gesell. The topics would be in general those we covered with
Mr. Stedman and Mr. Beebe, simply to get the point of view and
; observations of another company executive. There would be no
new material.
The Chairman. Well, the chairman is under obligation to appear
before the Finance Committee tomorrow morning at 10 o'clock
on the reciprocal trade extension program, and I have got to do a
little preparation for that this evening, so I don't think I want to
stay any later. If you have no objections, I would suggest to the
committee that perhaps we might excuse Mr. Ecker, if his testimony
is merely accum.ulative.
Mr. Gesell. That will be satisfactory with us, Mr. Chairman.
The Chairman. I wonder if it would be satisfactory to Mr. Ecker.
Mr. Ecker is present.
Mr. John L. O'Brian (counsel. Metropolitan Life Insurance Co.,
New York). No; I think not, Mr. Chairman. I think Mr. Ecker
would prefer to testify. He has been here all week and from the
viewpoint of his company he should be given a hearing.
The Chairman. Inasmuch as Mr. Ecker wants to testify, we
permit him to testify.
Mr. Gesell. Mr. Ecker has not been under subpoena; he has not had
to be here. I have one or two more questions I will develop of Mr.
Beebe and then call Mr. Ecker.
The Chairman. Very good.
Mr. Gesell. Mr. Beebe, what about the sale of bonds? Do you sell
bonds for profit?
Mr. Beebe. No.
Mr. Gesell. When will you sell them?
Mr. Beebe. We sell bonds when we consider it advisable to do so,
taking into consideration the price which we possibly can obtain,
regardless of whether it is a loss or not and we are convinced in our
15314 CONCENTRATION OF ECONOMIC POWER
owxi minds that it is to the best interests of our policyholders to take
that loss in order to liquidate that investment.
I might say as to sales, one factor which a company like a life
company must take into consideration is that a sale represents per-
manent loss, whereas the fact that a bond may depreciate in value,
might even default, might in the future result in a greater recovery
in a sale subsequent to default than prior to default.
Mr. Pike. Do you find it perhaps frequently true that in companies
in receivership, especially rails, bonds sell at a much lower times earn-
ings rate than similar securities in companies which are still tech-
nically solvent, but which are in no better inherent position 'i
Mr. Beebe. Yes; and' the astonishing thing today is in connection
with those rails which have defaulted — they sell at prices I think that
average around 10 or 11, which is so much lower than they ever sold
in past year when the bonds of the same roads were in default. The
prices used to hold up around 50 or 60. Today they have vanished,
Mr. Gesell. Do you take the book value of your bonds into account
in considering the question of whether or not you will sell them ?
Mr. Beebe. Do you mean do we measure our loss before we sell
them ?
Mr. Gesell. That is right.
Mr. Beebe. It has been our policy generally not to consider it
advisable to sell at a price less than 70.
Mr. Gesell. Less than what?
Mr. Beebe. Less than 70. In other words we have to sell in 'a
rising market in order to dispose of a volume of securities.
Mr. Gesell. That is a very interesting point. You mean that you
have usually such a quantity of bonds that if you attempt to dispose
of them when the market is on the down-grade you will simply de-
press the price more and find yourself taking losses greater than you
anticipate or even think necessary considering the character of the
security ?
Mr. Beebe. No, I would rather say that in a rising market you have
more buyers when you are a seller, and consequently you are enabled
to dispose of bonds in volume. In a static market no volume sales
could be made.
Mr. Gesell. And the problem is one created to some extent by the
size of your holdings, is it not ?
Mr. Beebe. And the time element.
Mr. Gesell. Yes; I should think the greater amount of a particular
issue you held, the more difficult it Would be to dispose of it, and the
stronger your market would have to be.
Mr. Beebe. Yes; we need a stronger market for a longer period
of time, that is true.
Mr. Gesell. Is it true that on some occasions the company will
not sell a bond in which it has a loss and which it thinks is of poor
quality because it does not wish to take that loss at the particular
time?
Mr. Beebe. I would like to explain this sales policy further which
might bring that point out.
Mr. Gesell. All right, sir.
Mr. Beebe. I said that our experience had been that if we can
sell a bond we desire to dispose of it in a market of 70 or better.
Between 70 and 50 we usually encounter a very thin market with
CONCENTRATION OF ECONOMIC POWER 15315
only speculators operating. Our experience also shows in the past
where a bond is worth 50 in the market, it is to our advantage to
hold it even though it defaults and see it through reorganization,
and the record is very interesting in that connection because in each
case where we held a railroad bond which went through receivership
and was reorganized, the company gained in the price, if you measured
the price 2 years following reorganization as compared with the sale
2 years prior to default.
Mr. Gesell. I think that partially answers my question. I gather
that there may be times when you feel that the market is so thin
that an attempt to dispose of a security of questionable worth would
result in a loss greater than you believe merited, therefore you would
hold onto the security?
Mr. Beebe. We would, definitely, sir.
Mr. Gesell. I have no fu^cher questions of this witness.
The Chairman. Does the committee have any other questions?
If not, Mr. Beebe, we are very much indebted to you. Thank you
so much for your ready responses.
(The witness, Mr. Beebe, was excused.)
Mr. Gesell. Mr. F. W. Ecker.
TESTIMONY OF F. W. ECKER, VICE PHESIDENT, METEOPOLITAN
LIFE INSURANCE CO., NEW YORK, N. Y.
Mr. Ecker. When I was last on the stand it was my understanding
that Mr. Gesell requested that I would appear again at a later date
to answer any questions on our bond and stock operations, and I
am prepared to go ahead and endeavor to answer any questions that
the committee cares to ask.
The Chairman. Are you ready to proceed, Mr. Gesell?
Mr. Gesell. Yes; I am.
How much money does yoar company invest in a year in new
money in bond issues, Mr. Ecker?
Mr. Ecker. Well, if you mean by that, Mr. Gesell, what new
money goes into bond issues, in the neighborhood of $200,000,000.
Mr. Gesell. That is annually?
Mr. Ecker. Yes.
Mr. Gesell. Has that been more or less steady in recent years?
Mr. Ecker. More or less, I would say.
Mr. Gesell. Is it able to invest as much as it wishes?
Mr. Ecker. I would say not at the interest rate desired.
Mr. Gesell. Given proper interest rate how much would you wish
to invest in bonds?
Mr. Ecker. Well, I would say under normal conditions, as I
think I testified to before, under normal conditions we ordinarily put
about 50 percent of our available funds fn real estate mortgages
and about 50 percent in bonds.
Mr. Gesell. How mucli investment would that mean for the bond
account ?
Mr. Ecker. If it were only the new money it would be about $100,-
000,000 in each, but you see what has been going on because of eco-
nomic conditions^ is a tremendous refunding of outstanding issues.
One of the tables, for example, illustrates that point.
I am looking for the amount invested in 1929 versus 1938.
15316 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. You mean the redemption?
Mr. EcKER. Table 93. The type of thing that I am speaking of
is very well illustrated on this table.* For example, you see the
foot of the right-hand column under 1929, which shows a total avail-
able for investment of $2,087,000,000, and in 1938 the similar figure
is $4,315,000,000, indicating a doubling up of the amount available
for investment. Now, the fact of the matter is that the Metropol-
itan's assets increased less in '37 '38 than they did in 1928 '29, and for
these 26 companies, their assets in '28 '29 for example, or at least in the
year '29. increased $1,283,000,000, and only 10 million more in the
1937-38 years.
The Chairman. Mr. "Ecker, may I interrupt? It would appear
from this table to which you have made reference that, as you say,
the amount available for investment almost doubled, it increased
from $2,087,914,000 in '29 to $4,315,590,000 in '38, and when we look
at the Metropolitan, we find that this item increased from $478,-
645,000 in 1929 to $888,322,000 in 1938. That is correct, isn't it? ^
Mr. Ecker. Yes.
The Chairman. We also find that the income over disbursements
for the Metropolitan in 1929 was $305,361,000, whereas in 1938 that
excess had fallen off to $209,498,000.^
Mr. Ecker. That is exactly the point I am making.
The Chairman. That is what I thought. Now, inasmuch as the
excess of income over disbursements showed a decline during this
period, what is the source from which the increase of the total avail-
able for investment came ?
Mr. Ecker. It is due to economic conditions rather than the
growth of these companies. It is bonds and stocks being refunded
at lower interest rales, to a very sizable extent.
The Chairman. But the gross receipts from bonds and stocks in
1929 for the Metropolitan amounted to $62,358,000.
Mr. Ecker. And $441,000,000 in '38.
The Chairman. That is right, $441,809,000 in '38. Now, what is
the explanation of that very substantial increase?
Mr. Ecker. Well, I. say it is very largely the fact of refunding
at lower interest rates because of the low interest money market
that we are in. In addition to that, there is a maturity of short-
term securities. And in like manner, you will notice in the next
column, or the next two columns, if you will go over to real estate,
in 1929 the investment in real estate was $5,000,000." In 1938 the
investment in real estate was $50,000,000. To a very sizeable
extent
The Chairman (interposing). Wait a minute, you say the in-
vestment in real estate?
Mr. Ecker. I should say the gross receipts from real estate; I am
sorry.
The Chairman. Because these receipts, I assume, include not only
income by way of interest but also whatever may be received by
way of sale?
' See Hearings, Part 10-A, p. 93.
a Ibid., p. 92.
»Thid., p. 11
' Ihiil., p. <.r.\.
I
CONCENTRATION OF ECONOMIC POWER 15317
Mr. EcKER. Yes.
The Chairman. Refunding, disposition in any way. Is that not
correct ?
Mr. EcKER. Gross receipts. If real estate, for instance, is sold,
and the form of asset is converted into a purchase money mortgage,
there is really no change of cash there at all. It is no investment
problem.
The Chairman. Are we to attribute this very large increase in
bonds and stocks to refunding — that is to say, to the receipt of prin-
cipal sums which are not in turn reinvested ?
Mr. EcKER. They are in turn reinvested, but it is due to economic
conditions, not to growth of companies.
Mr. Kades. Mr, Ecker, on table 5 the figures show that Metro-
politan, in 1929, had a. little over $3,000,000,000 in admitted assets;
in 1938, four billion nine.^
Mr. Ecker. Yes, sir.
Mr. Kades. So that the growth was a factor.
Mr. Ecker. Oh, yes.
Mr. Kades. Of some importance.
Mr. Ecker. Oh, yes. Now, look ; all I am endeavoring to clear
up here was, Mr. Gesell was asking the amount available for invest-
ment, or the amount invested, and I wanted to make clear just what
that was.
Mr. Gesell. You must have misunderstood my question, Mr.
Ecker, because I was trying rather to get not the amount available
for investment but to get some measure of your inability to invest,
what money you are putting into cash and Government bonds for
example, which under other circumstances you would be putting out
into straight bond investments, into mortgage investments, into other
lines.
Mr. Ecker. Well, we would be putting out approximately the
same amount that we have been putting out, Mr. Gesell, but we
would have been putting it out, I hope under normal conditions, at
a better rate of interest than we have been putting it out.
Mr. Gesell. In 1938 you had $108,000,000 in cash. How much of
that cash did you need to run your business?
Mr. Ecker. We felt that $108,000,000 was approximately what we
should have in cash under the circumstances and the conditions of
the time.
Mr. Gesell. So, unlike other companies that we have been dis-
cussing, there is no lag there. That was all cash that you wanted
to have in cash?
Mr. Ecker. Under these conditions ; and I think most of the com-
panies have testified to that same point.
The Chairman. What item are you referring to now?
Mr. Gesell. With respect to bonds. United States Government
bonds, shown on table 113; United States Government bonds have
grown from $35,000,000 to $868,000,000 in this period from 1929 to
1938.2
Mr. Ecker. Yes, sir.
1 See Hearings, Part 10-A, p. 5.
2 See Hearings, I'art 10-A, p. 113.
15318 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. How much of that is a growth which has resulted from
your desire to purchase United States Government bonds, and how
much is it the result of your inability to put the funds elsewhere?
Mr. EcKER. It is hard to differentiate just what portion, Mr. Gesell.
I would say both were factors. In this period of time, for example,
one field, as far as our investment is concerned, has been pretty well
closed, namely investment in bonds of cities and States and political
subdivisions. Now, the reason has been that on the high-grade issue of
that type, the interest rate has fallen to such a low rate because of
their tax exemption that it is either at or below the rate on Govern-
ment bonds, or approximately the same rate as on Government bonds.
As far as our investments are concerned, we derive no more advan-
tage from tax exemption on a State obligation or the obligation
of a city than we do on the obligation of thq United States Govern-
ment, and consequently we naturally would prefer tlie Government
obligations under those circumstances.
Mr. Gesell. Well, now, I assume that under better economic con-
ditions, to use your phrase, you wouldn't want to continue to put your
money in Government bonds to the extent you are, because they don't
pay a satisfactory interest rate?
Mr. Ecker. That is correct.
Mr. Gesell. Now, the simple question, Mr. Ecker, is how much
of this can you estimate as an amount which would have gone else-
where were it not for the economic conditions to which you refer?
Mr. Ecker. Well, this is purely an offhand opinion, but I would
think that under more normal conditions we might carry in the
neighborhood of 10 percent of our assets in Government bonds, pos-
sibly somewhat less. We didn't formerly carry as much as that. It
would depend.
Mr. Gesell. And your investment at the present time, according
to table 102, in United States Governments, is 17.57 percent,^
Mr. Ecker. That is right.
Mr. Pike. You would cut down from 800 million to 500 million.
Dr. LuBiN. Do you pay surtaxes to the Federal Government?
Mr. Ecker. We pay a tax, not surtaxes. It is a tax based on our
income from interest, dividends, and rents, less certain deductions.
Dr. LuBiN. What difference would it make to you, then, whether
you had a State bond which had tax exemption or a Federal bond, if
the net yield was the same ?
Mr. Ecker. It would not make any difference. That was my point.
Dr. LuBiN. Yet, you say that that avenue is not open to you ?
Mr. Ecker. Yes; the avenue is not open because, ^t the same rate
of return, we would prefer to have a Government obligation, and as a
matter of fact, because of the tax-exempt privilege, the higher-grade
State obligations and municipal obligations sell to yield even less than
United States Government bonds.
Mr. Gesell. What Federal taxes do you pay, Mr, Ecker? I don't
mean you as an individual, I. mean your company. Do you pay a
Federal income tax — your company?
Mr. Ecker. There is an income tax applicable to us.
Mr. Gesell. Do you pay any tax?
1 Ibid., p. 102.
CONCENTRATION OF ECONOMIC POWER 15319
Mr. EcKER. That would depend on the particular year which you
are referring to.
Mr. Gesell. What about recent years? Have you paid a Federal
income tax?
Mr. EcKER. I think the deductions have offset the tax payable, but
from your questionnaire you will see that we pay quite substantial
taxes.
The Chairman. Of course, th(»se deductions, Mr. Ecker, are speci-
fied in the law, and you are entitled to take deductions, so the ques-
tion, of course, includes that. Now, I understand that for some years,
because of the state of the law, you don't have Federal income taxes
to pay — the Metropolitan?
Mr. EcKER. That is right.
The Chairman. Was that true in 1938?
Mr. EcKER. I don't handle taxes myself, and I am not certain on
that subject.
Mr. Gesell. Well, now, let me ask you this, Mr. Ecker, as the next
point I wish to cover. Do you have at the beginning of the year some
kind of plan with respect to how much money you want to put into
utilities, how much into rails, and how much into these various
classifications ?
Mr. Ecker. No, sir; not in that form.
Mr. Gesell. How do you map out your investment program at the
beginning of the year, if you do?
Mr. Ecker. We have general policies as to the type of investments
which we would like to make, but our actual purchases must be in
accordance with what is available, the available supply, and of course
that changes from time to time.
Mr. Gesell. Your position, then, is somewhat similar to that of
Mr. Stedman?
Mr. Ecker. I would say so ; yes.
Mr. Gesell. What' about loaning to small businesses? That is
another point we have been considering.
Mr. Ecker. Yes; we have considered a great many of such loans.
We have actually obtained very few. When you are speaking of
loans to small business, just what do you mean by that? What are
you inquiring about — two million, two and a half million down, or
five hundred thousand down, or what?
Mr. Gesell. Let me get at it this way. What is the lowest amount
that you will purchase other than bonds that you might pick up over
the Exchange or in the market?
Mr. Ecker. Well, we haven't any definite low limit, but I would
think
Mr. Gesell (interposing). To use Mr. Beebe's phrase, what is
your appetite? What is the range of your appetite?
Mr. Ecker. Well, I think the smallest one we have made is $150,000.
We have considered some lower than that.
Mr. Gesell. Generally speaking are your loans from two million
up ? Would you say that was correct to say ?
Mr. Ecker. Yes; I would say that this is what has been our ex-
perience. We have had quite a number, not a large number, of such
applications, but a certain number of them, and we have really hon-
estly looked at them in an effort to make the loans. We have found.
15320 CONCENTRATION OF ECONOMIC POWER
I think I can give you three examples of the type of situation that
we have run into. For instance, I remember one not so long ago, a
fire brick company, a very good small company, and we were all set
to make the loan, but we felt that to do that type of business we
should have at least 4 percent interest and they could obtain the
money from their local banks at 3V2 percent interest, so we didn't
get that loan.
The Chabman. Why did you feel that you would have to have 4
percent, whereas the local banks could make it at 31/2 ?
Mr. EcKER. It was a small loan to start with, and we have, prac-
tically speaking, the same expenses of investigation in a small loan
that we have in a large loan, and also in that whole category there
is more risk involved in that type of loan, Senator.
Mr. Pike. There is a continuous service expense in that type of
loan, too, isn't there?
Mr. EcKER. Yes ; I would say so. One must of necessity follow the
operations pretty closely.
Mr. Pike. You don't have the financial services sending you the
earnings every month or every 6 months? You have to really keep
on your own initiative in following that up?
Mr. EcKER. In all of this type of financing that we do we require
the borrower to send to us their statements at quarterly or semi-
annual intervals, and then an audited report at least once a year.
Mr. Pike. And in that case it wouldn't have been as expensive
to the local banks.
Mr. EcKER. Oh, no, because they are right on the ground and they
knew the background.
Just to continue — —
The Chairman (interposing). May I, just a moment, interrupt?
What impresses itself upon my mind in connection with this study
of the opportunities of small business is this, that most of the insur-
ance companies gather their premium incomes from persons who are
taking out small policies — $5,000 policies, $2,500 policies, and under.
Metropolitan, for example, has a lot of $1,000 policies. Isn't that a
fact?
Mr. EcKER. Yes, sir; and less.
The Chairman. And less than that. A large proportion of the in-
come of the insurance companies is therefore derived from persons
of small means, but upon the other hand the businessman who wants
a small loan, for reasons over which perhaps the insurance companies
have no control, is unable to find a reservoir of capital with the
insurance companies. Isn't that the fact?
Mr. EcKER. That is true as far as small loans are concerned of
the type you are speaking of.
May I elaborate a little bit on that point?
The Chairman. I was going to ask you just one other question,
and that is, how many loans do you suppose you have under, let us
say $1,000,000?.
Mr. EcKER. My impression is about six or seven that were under
that at the time made.
Now, just to get back to your point, of course, first when we
invest we must invest for safety of principle first, and get the best
return that the going market will give as a secondary consideration.
In addition to that we do try to put our money back into sections^ of
CONCENTRATION OF ECONOMIC POWER 15321
the country from which it has come, in a general way. Now, in our
instance, with the exception of the Northeastern Seaboard States,
where there is an ample supply of capital, apparently, our invest-
ments are generally speaking in excess of our reserves on business
in force in the other sections of the country.
The Chairman. In making that computation do you take into
consideration the investments which you have in railroads which go
through those communities?
Mr. EcKER, Everything; that is true.
The Chairman. And you take into consideration, then, the indus-
trial loans?
Mr. EcKER. Yes.
The Chairman. Of companies which served these various States
in which you have your reserves. That naturally would follow.
Mr. EcKER. That is right. We don't feel it is practical, naturally,
to loan back to the particular individuals, nor do we feel that it is
possible to take any particular class of investment and see that
that is segregated according to our policy reserves throughout the
country.
The Chairman. But from the point of view of the State, in many
instances one would find that the control of the fund which was
invested, say, in the railroad, doesn't lie within the borders of the
State, but lies elsewhere, as for example, in the State of Wyoming.
If I remember correctly, the ratio of investment, or the reserve, to
the premiums is about $1.47, and a substantial portion of that is
due to the investment in the railroads which traverse the State,
the Union Pacific Railroad and the Burlington, both of which, oi
course, are managed altogether outside of the State.
Mr. Ecker. That is true, of course, but you will also find that
the State does benefit
The Chairman (interposmg). Oh, unquestionably.
Mr. Ecker. In fact, there are many sections of the country where
the railroad taxes are the principal support of the schools, and so
forth, in that location.
The Chairman. Yes, indeed.
Mr. Ecker. But as far as our investment goes for these small
policyholders that you are speaking of, they want the investment
safe, and that is where the difficulty comes. I think our better field
in this economic structure, as far as making capital available to
small industries is concerned, is not in the very small loans but in
the loans, say, from one million and two million up to five million,
some place in there, where we can save the expense of bond issues
and public distribution, arid even in that group the expenses in-
volved relatively are high. I think that is a better field for us under
all the circumstances than in the loans of, say, $200,00p on down.
Mr. Gesell. You had some other examples?
Mr. Ecker. I have a few here.
Mr. Gesell. How many of those small business loans do you
have?
Mr. Ecker. I asked you the question first so that I would know
just what you Avere speaking of.
Mr. Gesell. Loans below 2 million.
The Chairman. He said there were five or six below one million.
Mr. Ecker. This tabulation shows two below $500,000, that is
15322 CONCENTRATION OF ECONOMIC POWER
$150,000 and $185,000, and four between $900,000 and a million, and
then there are eip;ht in the next group between one million and
two and a half million.
Mr. Geseix. Do you have the tabulation of how many you have
in the range we were dis^^ussing a moment ago?
Mr. EcKER. No; I haven't that tabulation.
Mr. Gesell. I suppose it would be an amount considerably in
excess of below two million?
Mr. EcKER. Yes ; I think that is a better field, it would be a larger
amount than indicated here, just how much I don't know-.
Mr. Gesell. One matter that was mentioned in the course of your
previous testimony that I wanted to come to was the question of
your investment in Rockefeller Center. That is carried on your
records as a bond investment?
Mr. EcKER. Yes, that is right.
M. Gesell. Do I understand the situation correctly, namely, that
the land on which the building is built is leased to Rockefeller Center
by Columbia University on a very long-term lease?
Mr. EcKER. A portion of it is ; yes ; a substantial portion of it.
Mr. Pike. Is it the major portion?
Mr. Ecker. Yes.
Mr. Gesell. And that Rockefeller Center, Inc., is a corporation
which has as its asset the lease and the buildings ?
Mr. EcKER. Yes, and certain other assets, I believe.
Mr. Gesell. And they have issued bonds against the lease, is that
correct, which you hold?
Mr. Ecker. They have issued, a bond issue which is secured by
mortgage of the buildings and all their interest in that situation, yes.
Mr. Pike. And a mortgage on the leasehold ?
Mr. Ecker. And a mortgage on the leasehold, yes.
Mr. Gesell. Who owns the building?
Mr. Ecker. Rockefeller Center Corporation.
Mr. Gesell. Are they security for your investment?
Mr. Ecker. Yes; they are on the bond.
Mr. Gessell. In other words, if you foreclose on the bond, you have
the buildings?
Mr. Ecker. Yes.
Mr. Gesell. That investment has been satisfactory from your point
of view, has it not?
Mr. Ecker. Oh, extremely. We have been receiving 5 percent
interest in a period when it was very difficult to put money out at as
good a rate of interest, and I think our peak investment in it was
43 millions, and that has been reduced now about 10 millions, I think.
The Chairman. Do I understand that your loan to Rockefeller
Center is secured by the real estate?
Mr. Ecker. Oh, yes.
The Chairman. Just as your loan on the Empire State Building is
secured by that building?
Mr. Ecker. Not quite the same.
The Chairman. What is the difference between the two?
Mr. Ecker. That is a. mortgage issue while this is a mortgage on the
building, it is not a mortgage on the fee because they didn't own the
fee. It is a mortgage on the building and the leasehold.
I
CONCENTRATION OF ECONOMIC POWER 15323
The Chairman. You mean the Rockefeller Center is a mortgage
on the building and on the leasehold ?
Mr. EcKER. That is right.
The CHArRMAN. Because the land is held under lease and the fee is
not held by the company which owns the building?
Mr. EcKER. That is correct.
The Chairman. But you do have complete security in the building?
Mr. EcKER. Yes.
The Chairman. Now, the company which erected the building is
one of the Rockefeller companies, is it not?
Mr. EcKER. Well, as to the ownership of the common stock of
that, you mean?
The Chairman. Yes.
Mr. EcKER. I have always assumed it was owned by Mr. Rocke-
feller or one of his interests. Frankly, I don't know just where the
ownership is.
The Chairman. Do you know who owns the fee ?
Mr. EcKER. Yes, the fee, as testified to, is owned by Columbia Uni-
versity, largely. A portion of the fee is in the Rockefeller Center
group and comes under our lien.
The Chairman. Did you testify as to the amount of this mortgage ?
Mr. EcKER. Yes; I testified that the peak we had outstanding was
in the neighborhood of 43 millions, and that has been reduced ap-
proximately 10 millions.
The Chairman. So that at the present time, this loan on the Rocke-
feller Center is about 33 million dollars?
Mr. EcKER. That is right, yes, sir.
The Chairman. You see, the picture that shapes
Mr. Frederick H. Ecker (interposing), Thirty -five million.
Mr. F. W. Ecker. I am sorry. I was speaking from memory.
The Chairman. When we are in these big figures, 2 million one
way or the other doesn't make much difference.
But here is $35,000,000 loaned by the Metropolitan to a Rockefeller
institution. You were saying a moment ago that the little policy-
holders who by their premiums contribute this sum, want you to
invest it carefully, and of course you do, and I can't imagine any-
thing more safe and secure than a loan to the Rockefellers — but here
we have policyholders who are paying the Metropolitan on policies
of $1,000 and less contributing $35,000,000 which is loaned to the
Rockefeller outfit.
Mr. Frederick H. Ecker. And get 5 percent interest.
The Chairman. That is true ; it is a very good loan.
Mr. F. W. Ecker. I don't- think our policyholders object to as good
a loan as this, at 5 percent interest.
The Chairman. But it emphasizes the pictures which has been
cieveloping here throughout the inquiry, that the insurance com-
panies, all of them, gather in the savings of the masses of the people
and those savings, accumulated in great reservoirs, then become the
sources of capital by the strongest industrials, by the strongest States
by the wealthiest corporations in the country, and the Government
itself.
Mr. F. W. Ecker. It is a way by which the smaller man through-
out the country can invest his money, we like to believe, well.
The Chairman. If I weren't in danger of being misunderstood,
I would say it was a very excellent illustration of collectivism.
15324 CONCENTRATION OF ECONOMIC TOWER
Mr. F. W. EcKER. Yes; it is.
Mr. Gesell. Let nie ask you this: Is Mr. John D. Rockefeller ob-
ligated on this mortgage, on the paper in any way ?
Mr. F. W. EcKER. Indirectly. Is there any objection to my going
into that?
Mr. Frederick H. Ecker. No, no objection.
Mr. Gesell. The reason I asked, and you can limit your answers
so as to relate to this matter, the figures which we have indicate that
Rockefeller Center has operated at a very substantial deficit as of
December 31, 1938, runnmg into some thirty-nine million. That
money has been made up by contributions, I understand, from Mr.
Rockefeller. Now, I wondered whether he was making those con-
tributions out of the goodness of his heart, or whether he was bound
under the terms of the agreement which your company has on this
particular project.
Mr. F. W. Ecker. Undoubtedly the figures that you have in mind
there are the total operating expenses in excess of the operating in-
come over the life of the undertaking to date.
Mr. Gesell. Yes, the deficit from operations.
Mr. F, W. Ecker. In all undertakings of this sort, it is anticipated ^
that there must be a period of time, and particularly one as large as
this, before the operation will be on a profitable basis. The figures
you have there will show either that it is there now, or practically
there now — well, maybe you are not as up to date on the picture as I
am, Mr. G .'sell. But irrespective of that, you asked a particular point.
Mr. Rock feller's interest here is that he guarantees the taxes and the
rental, and he does have a junior iiiterest that he has to take care of.
Mr. Gesell. He is bound only to that extent, not to the extent of
the contributions he has made to this project, is that not true?
Mr. Pike. That means the rental to Columbia University?
Mr. Ecker. Yes.
Mr. Frederick H. Ecker. Being familiar with it, may I explain
that, if I may, because I had to do with it from the beginning;
The Chairman. Certainly.
Mr. Frederick H. Ecker. Mr. Rockefeller, Jr., is obligated on
the lease to Columbia University to pay the rental and the taxes,
and our security, therefore, if that obligation is -met, is better than
it would be if we had only a mortgage on the ground. Then we
would have to pay the taxes. Mr. Rockefeller's obligation is to pay
the taxes on that property irrespective of the improvements there
are on it, and under our arrangement that provision, under the lease
of obligation to Columbia College, inures likewise to our benefit,
and if Columbia College should say to him, "You needn't pay any
rent to us," he woidd still have to pay the taxes and all those
expenses that are agreed on should come before our mortgage.
Mr. Gesell. He has still made additional contributions, has he
not, Mr. Ecker, in excess of the amount that has been necessary to
cover rent and taxes?
Mr. Frederick H. Ecker. ]My understanding is the investment
there is probably seventy-eight or eighty millions in .excess of the
thirty-five millions which we now have in the property.
Mr. Gesell. And thirty-nine of that has been loss?
Mr. Frederick H. Ecker. And they are anxious, if we would take
the money, to pay it off tomorrow. I happen to know, from the
CONCENTRATION OF ECONOMIC POWER 15325
inquiry that the S. E, C. i)eople have made into that — a very proper
inquiry into this transaction — that they were ready to show those
making that inquiry the United States blonds which they have to pay
off the mortgage if we would take it.
They are paying it off under its terms serially. It will all be
paid off before the lease expires, and there is a right of renewal
under the lease irrespective of that,- and at the rate it is being paid
off it will all be paid off before the lease on the property expires.
If we had to take the property today, if we would take it with
all the improvements upon it, with no expense for taxes^
The Chairman (interposing). Ten million dollars has already
been paid off, you say?
Mr. Frederick H. Ecker. Yes; approximately that.
The Chairman, During what period?
Mr. Frederick H. Ecker. Practically during the development of
the operation. Our first loan was made — this is purely from recol-
lection— about the year 1930, the first advance. We advanced under
the bond issue on an agreed-upon schedule as the improvements were
carried on. We have not advanced as much as we might have been
called upon to advance because Mr. Rockefeller preferred to build
the buildings without having any bonds issued.
Now, this isn't a bond issue that may be subsequently extended
nor are those bonds that have not been issued sold. They are can-
celed. There can be no other bonds put on the property, either
ahead of or ranking pari passu.
Mr. Gesell. There seemed to be some question as to who owned the
buildings. I gathered you disagreed with Mr. F. W. Ecker in that
regard ?
Mr. Frederick H. Ecker. I don't think so. I said it was owned
by the corporation that issued the bonds.
, Mr. Gesell. Those buildings, are they security for your investment?
Mr. Frederick H. Ecker. The whole enterprise in which this in-
vestment is made is security for our investment", yes.
Mr. Gesell. That includes the buildings and the leasehold?
Mr. Frederick H. Ecker. Yes; and we have the advantage of the
guaranty of the payment of the rent on the leasehold. We would
not have to pay it if that guaranty is good.
Mr. Pike. The leasehold free of tax and free of rental?
Mr. Frederick H. Ecker. Yes, sir.
Mr. Pike. And that, as I remember it, was one of those typical
New York 21 years, four renewals, things, was it?
Mr. Frederick H. Ecker. I only know that the term extends be-
yond the expiration of our mortgage securing the bonds.
Mr. Gesell. Now, with respect to the sale of bonds, Mr. Ecker,
what is your policy in regard to sale?
Mr. F. W. Ecker. Generally speaking, our investments are made
to hold for their life. We do at times dispose of securities when we
feel that the obligor is, well, apt to run into real permanent difficul-
ties. Of course, in consideration of sale we must also take into con-
sideration the market. As I think Mr. Beebe testified to, there are
situations where in sizing up the situation you say, well at this market
level, I would prefer not to sell. I would prefer to ride through.
124491 — 41— pt. 28 41
15326 CONCENTRATION OF ECONOMIC I'OWEIl
Mr. Gesell. Will you sell for a profit?
Mr. F. W. EcKER. Possibly on rare instances, but very, very rare.
Mr. Gesell. At about wluit price do you begin to consider sale
below pur? Do you sell i>t 90, 80, 70, or where do you begin?
Mr. F. W. Ecker. We would sell irrespective of price if we felt
that it was a situation that was not apt to pay out.
Mr. Gesell. And if you felt, I take it, that the market was such
as to absorb the sale when you tried to sell it?
Mr. F. W. Ecker. Yes, and if we felt that the market was above
tlie intrinsic value of tlie security.
Mr. Gesell. Do you run into situations fairly frequently where
3'ou wish to sell securities but feel that the market won't absorb
them at the price?
Mr. F. W. Ecker. Not a great many ; some, j^es.
Mr. Geseix. Have you ever sold through investment bankers — 1
mean taking tlic block of bonds and making an offering of it, dispos-
ing of it that way?
Air. F. W. Ecker. I don't recall any situation (juite like that. I do
recall one a number of years ago where we sold to an investment
banker a block of bonds that we had — and you are asking whether he
then redistributed it?
Mr. Gesell. Yes.
Mr. F. W. Ecker. I assume he did.
Mr. Gesell. I was, of course, distinguishing between that and hav-
ing him act as a broker for you and try to get rid of it piecemeal.
Mr. F. W. Ecker. Yes.
Mr. Gesell. I have no further questions of this witness.
Mr. Pike. I have just one. It is getting monotonous now.
How do you feel, Mr. Ecker, about the possibilities of replacing to
some extent those investment avenues that have not closed up, but
narrowed niore or less for you in the last 10 or 12 years? It seems
to be very fundamental in this investment work with the assets of
the companies as a whole having gone up 60 percent in the decade
ending in 1938, the principal investment outlets have declined in
their ability to" take your funds. What is your feeling about that?
Mr. F. W. Ecker. Twofold. In the first place we arc constantly
looking for new avenues. You spoke of one which I think we were
one of the first insurance companies to go into in recent years, that
is the natural gas industry and natural gas pipe lines.
Mr. Pike. One of the few^ things that has grown very much in the
last few years.
Mr. F. W. Ecker. As you knO'W, tlieir history had been such that
it didn't attract pure investments.
Mr. Pike. There was a lot of wildcatting.
Mr. F. W. Ecker. A very careful study was made of the whole
picture and we decided it was sound 'for us to go into, and from
that time on we have made a number of such loans. There are other
situations which a few years ago we wouldn't have thought were our
type of investment and have shown up very well and that we are
considering today.
But more important than :dl that, it seems to me, is the effect of
economic conditions. Now, for example, in the 8 years prior to 1932,
the figures given me which are from authoritative sources were in the
CONCENTRATION OF ECONOMIC POWER 15327
neighborhood of new issues of corporate bonds and notps a vp.rajgrinfi:
around $3,600,000,000, as I remember it.
Mr. PrKE. That is as distinguished from refunding, Mr. Ecker?
Mr. F. W. Ecker. I am coming to that in just a moment.
Now, the new issues of that character have been less than half of
that for this second period of 8 years. As to this other point which
is most important, in the former period almost 80 percent was new
capital and a little over 20 percent was refunding, and in this latter
period, those ratios are almost reversed. That is the economic times
through which we have been passing in the last 10 years. We just
don't believe they are going to keep up.
Mr. Pike. Yes ; you are entitled to believe that.
Mr. F. W. Ecker. Might I cover one other point.
You were not here yesterday. Senator, but one of the letters read
into the record in Mr. Saylor's testimony indicated — and if you would
like me just to repeat it so you have the picture; it was this. The
memorandum read into the record was [reading "Exhibit No.
2311-A'^i]:
Both Mr. Fackner and Mx- Ottley said they were satisfied with the result^
of their discussion. As I understand it, the Trust Company of Georgia had'
only one Insurance connection — that of the Metropolitan Life — and the Atlanta
Savings Bank had relations with the New York, Mutual and one or two smaller
New England insurance companies. It was arranged that for the time being
the Trust Company of Georgia and the Atlanta Savings Bank would not com-
bin6 their operations. In other words, they could continue to represent as
heretofore but should Mr. Ottley wish to merge the two companies, he will first
call on Mr. Fackner and discuss the matter.
Mr. Fackner was one of our comptrollers and he had charge of
our correspondent loans. The intimation might have been taken
from the way this was read into the record that one of our officers
would have something to say as to whether two banks merged or
not. I wanted lust to clear up that memorandum and fexplain the
circumstances wnich surrounded it.
The Trust Company of Georgia had for some time been our mort-
gage loan correspondent and it was owned by one of these banks
that was going into a merger. A similar company had acted as
mortgage loan correspondent, or at least in a similar capacity, for
the New York, the Mutual, and one or two other New England com-
panies. Our comptroller, this man who is referred to, is dead now,
but there can be no question from our investigation of this situation
that what really took place was that he said to Mr. Ottley :
Now, since this bank has been our sole mortgage loan correspondent, has
operated for us and no other insurance companies, if you are going to merge
such an institution with another which is serving other insurance companies
at the same time, then we have to look at this situation and discuss it with
you and decide whether for our protection we should take our account else-
where or whether we feel that under those circumstances you could continue
to give us the type of service that you have given to us heretofore.
Do you see? The memorandum is rather misleading.
Mr. Gesell. I think that is an extremely helpful explanation and
is completely in line with any inferences drawn from the document.
Mr. F. W. Ecker. We just want to clear that on the record be-
cause other inferences mjght have been drawn.
' Supra, p. ].'2o;',.
15328 CONCENTRATION OF ECONOMIC POWER
The Chairman. You have heard the testimony of Mr. Beebe with
respect to the degree of supervision over the operations of indus-
trial companies to which loans had been made ai undertaken by
the Mutual. What have you to say about that?
Mr. F. W. EcKER. Well, which portion of his testimony? Dc
you mean as to the investigation ? . . .
The Chairman. The degree of supervision exercised by the insur-
ance company to protect the bonds.
Mr. F. W. Ecker, Do you mean the investigation made prior to
investment or during investment? I am afraid I didn't hear that
portion of Mr. Beebe's testimony.
The Chairman. The testimony indicated, for example, with re-
spect to the Rock Island, that quite a close watch was kept upon
the operations of that road. Now, to what extent do you watch
the operations of the indu.strial companies in which your funds are
invested ?
Mr. F. W. EcKER. We follow the situation very closely, as I ex-
plained. We receive quarterly statements generally
The Chairman (interposing). That is financial. I mean do you
have your expert engineers?
Mr. F. W. EcKER. Oh, yes; we have a similar organization to
those that have been testified to.
The Chairman, I assumed that would be your answer.
Mr. F. W. EcKER. We do not direct the operations of the indus-
trial corporations to whom we loan that money, of course.
The Chairman. You watch what is going on ?
Mr. F. W. EcKER. Oh, decidedly, yes.
The Chairman. To what extent? Tliat is what I am trying to
get at.
Mr. F. W. EcKER. To what extent?
The Chairman. Yes.
Mr. F. W. EcKER. Constantly.
Mr. Gesell. You get, I assume, information periodically con-
cerning the operations of the business and you check up to see
whether there ar^ any changes in management policy going on
that may affect your investment and make it necessary for you to
liquidate ?
Mr. F. W. EcKER. We attempt to follow the properties in which
we have invested, very closely, and we do send people out in the
field to investigate.
Mr. Gesell. Do you get figures with respect to the businesses which
are not generally available publicly? I mean do you get a chance to
look at operating statements and matters of that sort?
Mr. F, W. EcKER. Well, yes; our engineers go over the whole
picture.
The Chairman. AVhat was the suggestion you wanted Mr. Ecker
to make, Mr. O'Brian?
Mr. O'Brian. I was asking him if his supervision wasn't about the
same as that testified to by Mr. Stedman.
Mr. F. W. Ecker. I would say it was.
Mr. O'Brian. He has substantially the samie organization.
CONCENTRATION OF ECONOMIC POWER 15329
Mr. Frederick H. Ecker. Mr. Stedman testified at length to the
organization he had to take care of investments, to consider them in
the first place, and to follow them up after the investments were
made, that eternal vigilance is tjie price of safety, and we have in
our company about the same organization as that wliich he described.
The Chairman. Of course, it is common, it is a traditional saying
with respect to investment that you watch the basket in which you
put your eggs, and I just wanted to see to what extent you were
watching these baskets of eggs.
Dr. LuBiN. Mr. Ecker, you made the statement, in reply to Mr.
Pike's question, that it is your opinion that the outlets for these in-
vestments will increase as economic conditions change. Do you feel
that the interest rate — well, let me put it this way ; is your company
operating on the thesis that interest rates will also rise ?
Mr. F. W. Ecker. Over a period of time, yes. We believe that.
Dr. LuBiN. Are you operating on that theory?
Mr. F. W. Ecker. We are not relying on that for the safety of our
contracts; no.
Dr. LuBiN. What leads you to come to the conclusion that the
interest rates will rise?
Mr. F. W. Ecker. Well, they always have. These cycles of interest
rates have gone up and down much like the waves of the ocean, over
a good many years, and we think that history will in all probability
repeat itself.
Dr. LuBiN. You don't feel there might have been some changes in
the picture which might, in a sense, delay for a long period of time,
let's say, a current rate of 5 or 6 percent?
Mr. F. W. Ecker. Oh, I am not attempting to give an idea as to
just what the interest rates will be, specifically, but there was a good
deal of talk in 1929 that we were in a new era, 1928 and 1929, that
the old theories were all gone, that you could buy public utility stock
at 40 or 50 times its annual earnings, and so forth, of course it wasn't
worth it right then, but if you wanted to buy it you had to buy it
then and the earnings would, within a reasonable period of time,
catch up to the market. On paper you could demonstrate that was so.
The gross revenues increased about 12 percent each year. The net con-
siderably more, so that over a period of time, say in five years, the earn-
ings would warrant the current market. In much the same way
todays —
The Chairman. I was remarking chat the newspapermen were
gathering at the exit. They don't want to miss anything, but they
don't want to remain. [Laughter.]
Mr. O'Brian. Mr. Chairman, thank you for remaining after the
hour and going to this inconvenience to accommodate us.
The Chairman. When do you want to meet in the morning?
Mr. Gesell. It is scheduled for 10 : 30.
The Chairman. The committee will stand in recess until 10 : 30
tomorrow morning.
(Whereupon, at 5 : 30 p. m., a recess was taken until Wednesday,
February 28, 1940, at 10:30 a. m.)
INVESTIGATION OF CONCENTKATION OF ECONOMIC POWER
WEDNESDAY, FEBRUARY 28, 1910
United States Senate,
Temporary National Economic Committee,
Washington, D. C.
The committee met at 10:50 a. m., pursuant to adjourmnent on
Tuesday, February 27, 1940, in the Caucus Room, Senate Office Build-
ing, Mr. Sumner T. Pike, Department of Commerce, presiding.
Present: Mr. Pike (acting chairman), Senator O'Mahoney, chair-
man ; Messrs. Lubin, Kades, Henderson, and Brackett.
Present also: James V. Hayes, Department of Justice; Gerhard
A. Gesell, special counsel, and W. S. B. Lacy, financial economist.
Securities and Exchange Connnission.
Acting Chairman Pike. The committee will please come to order.
Are you ready to proceed?
Mr. Gesell. Yes ; I am, Mr. Pike.
Acting Chairman Pike. Call your first witness.
Mr. Gesell. Today we will hear testimony from life-insurance
agents and general agents. Last November the committee will recall
the committee sent a questionnaire on sales and agency practues to
the 68 life-insurance companies having more than $l()0.0()(i,()()0 of
insurance in force. Replies to these questionnnires luivc been re-
ceived, on the basis of wliich Ihe Connnission staff Ims piepai'ed a
few tabulations which T \\isli to »ller for the record at tliis time as
an aid to the testimony which is to follow. Mosi of the re])lies are
incomplete, due to the fact that companies did not submit nnich of
the information requested. The tabulations are, therefore, based on
information from a smaller group of companies than that originally
receiving the questionnaire. The material is as complete as the infor-
mation submitted permits.
The first table which I wish to offer, which will be designated
No. 2823, is entitled "Life Insurance Plans," and shows for a list of
r»I companies llie number of ordinary life-insurance ])hins offered,
and then by classification, ])oth in n:ime and percentage, the 5 most
])opulaf plans sold by I he com})anies during the year lt)8S.
Acting Chaiijnan 1*ike. It may be received.
(The table refencd to was niarked ''Exhibit No. 2828" and is
included in the apjJendix on pp. ir>54:7-lo550.)
The second schedule Avhich I wish to offer for the record is entitled
'""Wliole 'I'ime Soliciting Agents, Contracts Made, Teiniinated and
in Force." This table will be known as "Exhibit No. 2324." It
shows for the years '34 1o '88 inclusive the number of appointments
made dnring (lie yeai-, the total contract terminations during the
ir)33l
15332 CONCENTRATION OF ECONOMIC POWER
year, and the number of contracts in force at the year end. This
material is compiled from replies received by 45 companies and the
names of the companies are listed on "Exhibit No. 2324-A" which
I wish to offer at the same time.
Acting Chairman Pike. They may be received.
(The scliedules refei-red to were marked "Exhibits Nos. 2324 and
2324^A" and are included in the appendix on p. 15551.)
Mr. Geseli.. The third table, to be known as "Exhibit No. 2325,"
is entitled "Cost of Selecting and Tiaining Agents" and shows for
a group of about 10 companies the training costs of those companies.
Acting Chairman Pike. It may be received.
(The table referred "to Avas marked "Exhibit No. 2325" and is
included in the appendix on p. 15552.)
Mr. Gesell. I next have four tables all relating to the subject of
agents' compensations, these tables to be known as "Exhibits Nos,
2326, 2327, 2327-A, and 2328." respectively. They are entitled "Com-
pensation of Agents" and show both by amount of riioney and in a
percentage basis, various amounts received in categories, together
with the highest commissions paid (and a list of companies) to the
whole-time and part-time agents.
I might sav tluit these figures. i)articularly those contained in "Ex-
hibit No. 2326" and "Exhibit No. 2327" show information for whole-
time agents employed at any time during the year 1938. For that
reason the compensation figures may appear to be somewhat lower
than they would be if we showed figures for whole-time agents era-
ployed during the entire year. I do want to say, however, that the
Commission requested information from the companies showing that
compensation information for agents employed during the entire year,
but that the companies were not in a position to give us that
information.
Acting Chairman Pike. They may be received.
(The tables referred to were marked "Exhibits Nos. 2326, 2327,
2327-A, and 2328" and are included in the appendix on pp. 15552-
15555.)
Mr. Gesell. "Exhibit No. 2327-A" lists the 27 companies from
which the cornpensation information has been obtained.
The first witness this morning is Mr. Zimmerman.
Acting Chairman Pike. Do you solemnly swear that the evidence
you shall give in this proceeding shall be the truth, the whole truth,
and nothing but the truth?
Mr. ZiMMERMAx. I do.
TESTIMONY OF CHARLES J. ZIMMERMAN, PRESIDENT, NATIONAL
ASSOCIATION OF LIFE UNDERWRITERS, CHICAGO, ILL.
Mr. Gesell. Will you state your full name and your address for
the record, please, sir?
Mr. Zimmerman. Charles J. Zimmerman, 1 North La Salle Street,
Chicago, 111.
Mr. Gesell. What is your official position in the National Asso-
ciation of Life Underwriters?
Mr. Zimmerman. I am president of the association.
Mr. Gesell. My understanding is that a new president is appointed
each year and you are the president for this year.
Mr. Zimmerman. Yes; he is elected each year.
CONCENTRATION OF ECONOMIC POWER 15333
Mr. Gesell. How do you make your living ?
Mr. Zimmerman. By selling life insurance and managing an
agency in Chicago.
Mr. Gesell. You are a general agent in Chicago?
Mr. Zimmerman. Yes, sir.
Mr. Gesell. For what company?
Mr. Zimmerman. Connecticut Mutual Life Insurance Co.
Mr. Gesell. How big an agency do you have?
Mr. Zimmerman. The second largest in the company at the mo-
ment ; it produces in excess of 5 million.
Mr. Gesell. How many agents do you have?
Mr. Zimmerman. Twenty-one.
Mr. Gesell. Is it the biggest general agency in Chicago?
Mr. Zimmerman. No, sir ; not by any means.
Mr. Gesell. Tell us how long you have been selling insurance.
Mr. Zimmerman. Since 1926.
Mr. Gesell. Did you start out as an agent and then become a
general agent?
Mr. Zimmerman. I started as an agent in New York and became
a supervisor and then a general agent.
Mr. Gesell. What companies have you been with?
Mr. Zimmerman. I have been with the same company all the way
through.
Mr. Gesell. With the Connecticut Mutual? G
Mr. Zimmerman. That is right.
Mr. Gesell. Will you tell us a little about the National Associa-
tion of Life Underwriters, what kind of an organization it is, who
its members are, how it functions, what its objectives are, informa-
tion of that sort?
Ml-. Zimmerman. The national association is an organization made
up of life-insurance salesmen, supervisors, and general agents rep-
resenting legal reserve life-insurance companies. It is a field organ-
ization. It is about 50 years old; as a matter of fact, it will be 51
years okl in September, I believe. It is composed of about 30,000
members, or somewhat over 30,000 members, dues-paying members.
It is represented in 48 States, the District of Columbia, Hawaii,
and it has 348 local associations, which compose the national asso-
ciation. In other words, membership in a local automatically makes
you a member of the national association.
The objectives of tlie national association I think T might best
describe by reading to you from the constitution and bylaws. They
are very brief.
This is article II, section 1, part 1, of the bylaws [reading from
"Exhibit No. 2329"] :
To support tind maiutain the principle of legal reserve life insurance.
To advance public knowledge of legal reserve life insurance and its uses.
To promote the adoption and application of higher standnrds of ethical con-
duct in the profession of life underwritinji and the business of life insurance.
To increase the knowledge of agents concerning legal reserve life insurance,
its uses and its sale.
JCo provide through local associations for rendering community service and
for forming enduring friendships.
To create and maintain a sound public opinion, to promote cooperation and
good viil], and in all other ways to promote the best interest of legal reserve
life insurance.
15334 OONCENTHATION OF KCUNUAUC POWER
May 1 enter that?
Mr. Gesell. Yes. I would like to have that for the record.
Acting Chairmtwi Pike. It may be received.
(The booklet referred to was marked "Exhibit No. 2329" and is
included in the appendix on pp. 15555-15556.)
Mr. Zimmerman. We also have a code of ethics which 1 would hke
to enter in the record; I don't believe it is necessary to go into
detail on that. <. i • • i
Mr. Geseix. I would like also to offer this code of ethics in the
record.
Acting Chairman Pike. It may be received.
(The card referred to was marked "Exhibit No. 2330" and is
included in the appendix "on p. 15556.)
Mr. Zimmerman. I would also like to offer the objectives of the
association for 1938.
Mr. Gesell. I will hold those out for a moment.^ We will come
to that in special discussion.
You say you have about 30,000 members. Are they both soliciting
agents and general agents?
Mr. Zimmerman. Yes ; they are both soliciting and general agents.
'J'he great majority, I should say perhaps twenty-five to twenty-six
thousand, are soliciting agents,
Mr. Gesell. What about home office employees of agency depart-
ments?
Mr. Zimmerman. Home office employees are not eligible for what
we call regular mein})ership. They may bo associate members. There
is a very small group of those.
Mr. Gesell. Strictly an organization for the field men?
Mr. Zimmerman. That is right.
Mr. Gesell. Do you have members who sell industrial insurance
as well as ordinary insurance?
Mr. Zimmerman. Yes; we do.
Mr. Gesixi,. Is your membeiship by and large made up of men who
sell ordinary insurance?
Mr. Zimmerman. Yes; in the majority.
Mr. Gesell. As president of this organization you have traveled
all over the country, haven't you?
Mr. ZiMMEK>rAN. Yes, sir.
IMr. Gesell. You have seen agents from different companies and
in different cities, and have gotten sonie idea of what their problems
are ?
Mr. Zimmerman. Thai is right.
Mr. Gesell. Can you give us some idea of how closely you are in
lontact Avith the ag(>nts' problems?
Mr. ZiMMEKiMAN. [ luive visitcd in tlu' last 4 mouths probably 60
or 75 local associations throughout (ho counti-y. At those associa-
tions wo liave an opportunity to moot in each case with, first of all,
the entire association momborship. Tliat is a formal meeting, usually
with a talk; then we moot with the officers and directors of the associa-
tion; that is an informal meeting at which we discuss field problems
and association problems; and tlion a third meeting with the general
1 Siib8C(|iiPiitl\ crilcri'd ;is "Kxliiliit No. L'::."!:;," iiil'i;!. p. l.",:loT. S«o .-iiiixMiilix. p. |."..'.ri!>-
ir.r.do.
CONCENTRATION OF ECONOMIC POWER 15335
agents and managers in which we discuss managerial problems which,
of course, are also field problems, so we get a pretty good cross-section
of what is going on thi'oughout the country.
Mr. Gesell. I take it agents write you and you see them in your
travels, have dinners with them, and things of that sort?
Mr. Zimmerman. That is right.
Mr. Gesell. First of all, I wanted to discuss with you a little what
an agent has to do, what kind of knowledge he has to have before
selling insurance, what kind of services he has to perform to service
his policyholders, and matters of that sort.
Mr. Zimmerman. Well, the job of the agent is quite complex. I
would say that certainly one oi his functions is to sell life insurance.
His function is to sell life insurance intelligently, fitting the insur-
ance to the particular problem of the prospect. In many cases it
is necessary for the agent to show that there is such a problem
, existent, because the average man is pretty busy, and he doesn't take
time to think about any such problems. Having shown that the prob-
lem is existent, it is necessary for him to show that there is a solution
to the problem ; if that happens to be a life-insurance solution, which
it is in some instances, he naturally makes a recommendation that
life insurance be purchased to solve that particular problem.
Then it is necessary for him, in many instances, to correlate
that life insurance with the man's other real and personal prop-
erty. For example, he may advise a man to have his will drawn or
redrawn. He may advise him to set up a trust agreement in order
to handle certain problems, he may advise that he set up a business-
insurance agreement of some sort so that if he should die as a
partner, for example, the surviving partner or partners can pur-
chase his inter«>st, and his estate get a fair return for it.
He has to be well versed, or should be, at least, in matters of
taxation, if he is going to enter into large-income brackets. That
is part of his job. Another part of it, leaving sold the business,
is to conserve it from time to time.
Mr. Henderson. On the iax -side, what do you mean, familiar
with taxes?
Mr. Zimmerman. In coimection with taxes? Well, there is a
great deal of misunderstanding, in regard to tax problems. A great
many men do not know, for instance, that there are certain tax exemp-
tions which they can legally take advantage of ; for example, $40,000 of
life insurance is exempt from Federal estate tax. He also has an ex-
emption of forty thousand of real and personal property.
Now, the estate should be set up so the man may legally tjike
advantage of the tax exemptions given him by the law.
In addition, there is a good deal of misunderstanding; many men
think that life-insurance premiums paid by a corporation may be
deducted from income tux. That is not true, st) the agent's job
is not only to point out the tax exemptions but to point out those
items that are taxable under the law, both income and estate.
He is also required to be familiar with the inheritance taxes
or estate tax^es in the State in which he operates.
Mr. Gesell. Before we come to the question of the conservation
of the business and the servicing of the policyholder, there lias been
increaeing emphasis, has there not, on programming?
15336 (CONCENTRATION OF ECONOMIC POWER
Mr. ZiM>fERMAN. Yes; that has in the last 10 years, and par-
ticularly in the last 5 years, been emphasized to a very great ex-
tent. It seems to l>e a logical way of selling.
Mr. Gesell. As I unclerstand programmmg in its simplest terms,
it means, everything else being possible, the agent sits down soon
after a child is born and works out his educational program and
his protection program and his retirement program and helps him
fix up his estate, and really takes him from the cradle until after
he is dead.
Mr. ZiMMERsrAN. Yes; that is true. You see, a great mariy people
buy life insurance on a hit-or-miss basis. Now, a programming job
is an endeavor on the part of the agent to tie all of those policies in
various companies into one pattern in order to carry out the man's
objectives. I could illustrate that with a recent example of program-
ing. For example, here is an individual who had bought life insur-
ance as a single man over a period of 10 years, then he became mar-
ried and was expecting a youngster. The situation changed. A pro-
graming job then consisted of going to him and asking him what his
objectives were. They vary for different individuals, naturally. In
this particular instance, he felt, first of all, that he wanted to leave
enough insurance in cash to pay what we call clean-up expenses. In
other words, he can't pay his way into the world but he wants to pay
it out of the world and leave a clean slate for the beneficiary to start
with.
In the second place, he wanted to continue his full salary for a
period of 3 years to his wife — we caH that a readjustment fund —
realizing she would have to readjust herself to a lower standard of
living eventually, but he didn't want to have that happen overnight.
In the third place, he wanted to have his wife receive a minimum
income in this instance of $150 a month while this youngster was
growing up, feeling that was the minimum she could get along on.
Then he w'anted to give this youngster a college education, so that
required a plan for that particular purpose.
He wanted to pay the mortgage off on the home so his wife could
live on the same side of the railroad tracks.
He also wanted to have an emergency fund, realizing that he was
giving minimum figures all the time and should there be a serious
illness or emergency of some other nature, she could have some fund
to draw on to meet that.
And finally, he wanted to have a retirement fund for himself.
He gives you the picture and then you take the raw material of
these policies and you come back and show him whether he has suffi-
cient insurance to do that job or whether he is lacking.
Mr. Gesell. And what changes should be made?
Mr. Zimmerman. And what changes should be made.
Mr. Gesell. And I suppose that work has become particularly
complicated in recent years with the development of educational
programs, retirement programs, annuities, and that type of coverage.
• Mr. Zimmerman. Yes; the 'field is continually expanding in its
requirements of specialized knowledge.
Mr. Gesell. Do you find in cases similar to those that you have
talked about, for example, that Avhen you get to this policyholder,
he may have one policy in one company and one in another, and his
program may be particularly difficult to adjust because he hasn't been
CONCENTRATION OF ECONOxMlC POWER 15337
with just one agent but has been subject to the influence of many
different sellers?
Mr. Zimmerman. Yes; you usually find he has a variety of policies,
and it then becomes a question of coordinating the policies in the
various companies into that particular pattern.
Mr. Gesell. I suppose the agent must be familiar with all the
different plans of insurance which are covered, must he not, by Fis
company ?
Mr. Zimmerman. Yes; he should have an exact knowledge of those,
and those of other companies as well.
Mr. Gesell. That must make quite a job, Mr. Zimmerman. I
noticed on the exhibit we offered, for example, 102 different plans
of insurance offered by the Lincoln National, 125 different plans of
insurance offered by the Mutual Life, 92 plans offered by the Ameri-
can United — just pulling the figures out at random.^
Mr. Zimmerman. It isn't as complicated as it would seem, Mr.
Gesell, because after all there are only four basic policies, and I
think an analysis of sales would show that perhaps 8 or 10 policies
in the company's kit would be most generally used. Now, these other
policies are inserted there to meet particular requirements in many
cases.
Mr. Gesell. And your agent certainly must have to know those
policy forms so that when he bumps into a policyholder who has
those particular requirements, he says, "I remember. Form 2226,
and here it is."
Mr. Zimmerman. Yes. If he has a knowledge of the fundamentals,
however, that becomes comparatively simple, I would say.
Mr. Gesell. Coming to the servicmg side of this question, I inter-
rupted when you were just saying that it is tiie agent's job to con-
serve the business.
Mr. Zimmerman. Yes; the agent quite of^en has to reaffirm a man's
good intentions, and sometimes he has to do that for various reasons —
I mean, economic conditions have changed, or there has been' the
loss of a job, or simply the man has become unsold on what he bought.
There are a number of things which make it necessary for the agent
constantly to keep in touch with the policyholder to conserve the
business which he and other agents have originally put on the books.
There are many other things which, of course, he has to give
service on. For example, the policyholder makes a loan, or he wants
a change of beneficiary, or to change his income agreement, . or in
some instances change the plan of insurance, or add features to his
policy, such as family income, waiver of premium, double indemnity
which he didn't have originally, perhaps didn't need; sometimes it
is necessary to give advice as to when a policy lapses, whether to'
take paid-up or extended insurance. In some instanpes it is neces-
sary to finance him.
Mr. Gesell. What was that?
Mr. Zimmerman. That is off the record, I hope.
Mr. Gesell. You said in some instances it was necessary even to
finance him — I suppose you mean help him get started with the
program ?
Mr. Zimmerman. And help him keep it.
1 "Exhibit No. 2323," appendix, pp. 15547-15550.
15338 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. I suppose the provision of settlement agreements are
other things the agent must do?
Mr. Zimmerman. Yes, because a man's picture continually changes.
He goes througii life, gets married and has youngsters, they grow
up, and there is always -^ different situation.
Mr. Gesell. And the agent must give advice, must lie not, as to
how the policyholder will handle his dividends, whether he will put
them bacK in paid-up additions, use them to reduce the premiums,
or take them in cash, or some other way ?
Mr. Zimmerman. That is right.
Mr. Gesell. And methods of premium payment I presume the
policyholder needs advice on? He may start off on an annual basis
and want to get on a quarterly basis.
Mr. Zimmerman. That is right, or vice versa.
Mr. Gesell. And does the agent render any service in connection
with the payment of claims?
Mr. Zimmerman. Yes; in almost all cases he renders that service
in taking the claim papers out to the beneficiary, the attending
physician, getting the affidavits from the undertaker, whatever the
requirements > are, and he sees that the proper settlements are made ,
and the claim check paid.
Mr. Gesell. You feel the agent is important to the company in
the handling of claims, that it has to depend on the agent to get
accurate facts and make sure there is rapid payment?
Mr. Zimmerman. No; I don't believe that is necessary, but I do
feel this, that many insurance policies are left in cash and the service
of the agent in advising the beneficiary as" to whether to take cash or
take one of the income agreements is invaluable.
Mr. Gesell. Then, I suppose that the agents to some extent have
to look after what we called the orphaned policyholders, policyholders
who are sold by one agent and he has left the business and now the
policyholder is agentless?
Mr. Zimmerman. That is right, that is one of their functions,
Mr. Gesell. Is it the usual practice for the general agent to
assign some agent in his office to service that particular policy-
holder?
Mr. Zimmerman. Yes; that is the procedure. In our own organ-
ization, and I think this is true in most, we ask our agents to service
these policyholders, orphaned policyholders. An agent has the
right to decline that if he wishes to. Most of them, however, want
to service those policyholders on the basis of, first of all, rendering
a service to the individual and, secondly, as a possibility for future
business.
Mr. Gesell. We get quite a few lettei's from agents telling us
about the extra curricular work they have to do, standing in line for
theater tickets and sending flowers and buying birthxiay presents.
I suppose there is a lot of that?
Mr. Zimmerman. Well, that depends on the method of operation.
Some agents give a good deal of extra-curricular service and others
tend strictly to their knitting and think it is up to the individual to
get his own theater tickets.
Mr. Gesell. Now, coming down to a little more specific discussion,
Mr. Zimmerman, we have come across in our work certain prob-
CONCENTRATION OF ECONOMIC POWER 15339
lems which appear to exist in the agency field, and I want to get
your ideas on it. One of those problems is the problem of turn-
over. For example, a table which was introduced, shows that after
December 31, 1938, there were 43,452 agents in the 45 companies
shown there, and during that year the companies took on over 15,000
and terminated over 16,000 agents.^ And there seems to have been
in the years prior to that, as shown on this schedule, an equal
amount of turn-over of agents coming in and out, leaving the busi-
ness all the time. Are we right in considering that one of thf>
problems which is facing the agency side of the business?
Mr. Zimmerman. Yes; that is absolutely right. It is a serious
problem.
Mr. Gesell. What are the causes of it, Mr. Zimmerman ?
Mr. Zimmerman. Well, there are many causes of turn-over which
apply, I should say, equally to all sales organizations. I speak now
of the life insurance business because it is the only one with which
I am familiar as regards sales. One cause of turn-over undoubtedly
is lack of fitness for the business itself.
Mr. Gesell. You mean a man was poorly selected originally.
Mr. Zimmerman. That is right. Another cause of turn-over would
be lack of earnings, proper earnings, which, of course, gets back to
lack of fitness in many cases. In some instances, however, it gets
back to the fact that the individual dislikes the business so he won't
do the job adequately, he doesn't hit the ball hard enough.
Mr. Gesell. Inability to make a living?
Mr. Zimmerman. That is right. In some instances it gets back
to the fact that the individual himself is perhaps temperamentally
unsujted for sales work. He has never tried it before, thinks he
would like it, and we think he would like it, but as he gets into it
we find out he doesn't like it and is not fitted for it, again.
In some' instances it is due to the f act,^ of course, that the' man
is dishonest — those are rare instances, but we run across- them-r— or
unethical. There again it calls for elimination of the man.
Mr. Gesell. I suppose those are like cases of smallpox or getting
an inheritance, a very small percentage?
Mr. Zimmerman. They are rare; that is right.
Mr, Gesell. Most of it gets back to the selection and the ability
of the man to fit himself into the business?
Mr. Zimmerman. That is right. The life-insurance business is not
an easy sales business. As I have said in developing the things that
the agent does, it requires, I think, a high degree of, oh, perhaps
not only salesmanship, but I think a higher degree of trusteeship in
many senses than other lines of business. It requires a greater degree
of imagination because we are selling an intangiblie. So it is not
an easy business.
Mr. Henderson. Mr. Zimmerman, as you perhaps know, I sent
out a letter myself to a lot of agents and I asked them about this
turn-over thing. I think I ought to say that I have been reading
the answers to questionnaires for a good many years; in fact, it has
been one of my jobs, and I don't know when I have gotten as much
real thrill out of reading letters, or gotten as much real satisfaction
from returns as I did from these questionnaires.
' See "Exhibit No. 2324," appendix, p. 15551.
15340 CONCENTRATION OF ECONOMIC POWER
One thing — I don't know how we are going to be able to use it,
but one thing struck me. It runs along in two or three of the
answers I have selected here. A fellow says he "believes the constant
turn-over and entrance of new agents into the business hinders the
sale of life insurance. It cheapens the profession."
That struck me this way; I wondered how it would strike you.
It would clieapen the medical profession or the legal profession if
there was a constant change of men. In other words, if 85 percent
of the lawyers who started out in practice left the bar in less than 2
years, it would certainly be a blight on the legal profession. It
would be the same thing if a retail dry-goods merchant had a con-
stant change of personnel ; it would certainly be a bad reflection on
that type of work.
Is there any general prevalence of feeling about that?
Mr. Zimmerman. Yes ; there is a very de:finite feeling on the part
of the better field men — and when I say the better field men I mean
the men who have been in the business for a period of time, who are
doing a better than average job, both from the standpoint of earn-
ings and service— that turn-over is a serious problem, that it makes
it a little more difficult for the good man to do his job.
Mr. Henderson. He is an insurance agent, and this fellow who
has only been there a month is an insurance agent, both of them
selling insurance, and the things which the neophyte does that draw,
you might say, ridicule or opprobrium on him, reflect on the fellow
who has r lade it a serious profession.
Mr. Zimmerman. I don't think the problem is so much one of the
induction of new men, because we .are always going to have that — it is
necessary for the growth and the strength of the business to replace
normal lapsation through death and sickness and men leaving the
business — as it is of letting men who are unfit hang on too loi\g instead
of getting them out of the business at a very early stage before they
can do a good deal of damage. I think that is a more serious problem
because after all we do have to have beginners and if they begin on
the right level, in other words if a man new in the business doesn't
try to do a taxation job or program job, he can render a real service
to many smaller policyholders in the lower-income bracket.
I would like to add, that we recognize this as a serious problem to
the extent that after a number of years of discussion, our association
was, I think, perhaps primarily instrumental in having a great many
companies subscribe to what is known as the Agency Practices Code,
one of the features of which provides for the elimination of the unfit
agent, and some definite progress is being made in that direction.
You will notice from your chart here that, for example, the number
of appointments made during the year are decreasing, and that the
number of terminations are increasing,^ which
Acting Chairman Pike (interposing). No; I don't see that, Mr.
Zimmerman. I don't see that the number of terminations are
increasing.
Mr. Zimmerman. Pardon me, what I mean to say is that the num-
ber of terminations are greater than the number of appointments,
so you end up with a smaller agency force each year, which means
that you are first of all more caieful in your selection, and in the
• See "Exhibit No. 23'>4," appendix, p 3 0551.
CONCENTRATION OF PX^ONOMIC POWER 15341
second place you are becoming increasingly aware of the necessity of
eliminating the unftt.
Acting Chairman Pike. That is one interpretation you could put
on the figures.
Mr. Hendebsox. That is what I was going to ask. Is the reduc-
tion due in part to the decline in the sale of new life contracts ?
Mr. Zimmerman. I should say not. I should say that primarily
this is" due to a very definite improvement in the selection of men,
and a very, definite consciousness, an increasing consciousness -of the
problem involved in turnover here.
Mr. Gesell. It must be a matter of degree, after all. If you are
still taking in 15,000 and firing 16,000 a year, when you have your
whole staff ai 43,000, you have a long way to go.
Mr. Zimmerman. That is true, we have a long way to go and no
institution has reached perfection, no sales field has reached it, nor
will it. I have here some figures which go back a little, bit, but I
took a look at them — a comparison of our turn-over in comparison
with other sales lines. They are figures put out by the Dartnell Serv-
ice. They list here 18 sales lines in which life insurance was seventh
best in turn-over among the 18.
Acting Chairman Pike. Are they all sales lines where the pajnnent
is made by commission?
Mr. Zimmerman. Yes; these are all commission sales lines, that is
right. Of course, the fact that the other fellow is not doing a good
job and you can pat yourself and say, "We are better than he," is not
a cause for satisfaction, but it is at least something we should realize.
We are very introspective in the life-insurance business, se]f -analyti-
cal; we recognize these problems and are trying to solve them.
Mr. Gesell. It strikes me that sort of a comparison shows a lack
of recognition of the problem, if I may say so. If you go around
and sell somebody an icebox, or if you go around and place two or
three Fuller brushes in Mie kitchen, you haven't initiated a contract
or an arrangement which is going to have anywliere near the social
consequences of placing a life-insurance policy in a house. There is
no question about that, is there?
Mr. Zimmerman. That is perfectly true.
Mr. Gesell. And wouldn't you say a life-insurance agent was a
different kind of fellow than the fellow that sold Fuller brushes or
sold magazines to work his way through college, or that sold com-
modities like that where it was a question of placing one commodity
in a household as against the programming and servicing of a policy-
holder such as you have described here to us today?
Mr. Zimmerman. Yes.
Mr. Gesell. It seems to me there is a vast difference.
Mr. Zimmerman. I think our selling requires a greater knowledge,
and it is on a higher plane than most other lines.
Mr. Gesell. Tlien the (Comparison is pretty faulty, isn't it? If
you are not doing any better job than some of ithese lines that are
putting on men to sell ice boxes or Fuller brushes, whatever you
want to include in that line, you are not doing a job which is com-
mensurate with the social responsibility involved.
Mr. Zimmerman. Mr. Gesell, I would say this, that we certainly
are not satisfied with the job we are doing. We have a long way to
go in that direction. I do think, as a matter of fact, I'lcnow, that|
124491 — 41— pt. 28^ 42
15342 CONCENTRATION (W ICCONOMIC I'OWKU
progress is being made. We are aware of the problem as an asso-
ciation; I bolievti the conipaiiies are uwnre of it. I believe we will
never hit perfection, naturally, but I do believe we can solve this
thing over a period of time.
Mr. Geseix. What are the disadvantages of turn-over in the life-
insurance business? It leads to lapse, first of all.
Mr. Zimmerman. Yes; in some cases, it leads to lapse and in some
cases it leads to dissatisfaction on the part of the policyholder
because perhaps he has been incorrectly sold, sold the wrong type
of i^rotection. It leads to expense, economic waste.
Mr. Gesell. Raises net cost, doesn't it?
Mr. Zimmerman. Yes.
Mr. Geseix. It also means that the man like yourself running a
general agency is spending all his time trying to break in a few
fellows and make them fit into the organization, and spending very
little time on the development of the good men who are in the
organization.
Mr. Zimmerman. That is apt to be a trend if you are not careful.
Mr. Gesell. We had a letter in the record here from Mr. Duff
of the Equitable, who has a pretty big general agency, I believe,
and he indicated that practically the majority of his time was spent
with an insignificant portion of the men w^hom he was trying to
get into the business.^
Mr. Zimmerman. That is a very large agency, and perhaps that
is Mr. Duff's exclusive function, the selection of men or the tram-
ing of men. J wouldn't know the details of that. But I would say
this, that there is a danger in the average agency of devoting too
much time to the man who requires it because he is not as well
fitted as certain other individuals.
Mr. Gesell. Do you think there are too many agents in the coun-
try, too many life-insurance agents?
Mr. Zimmerman. No ; I do not. I think there are not enough good
agents. I think there are too many in toto, perhaps, too many who
are not qualified for the business. "^
Mr. Gesell.' I would say we received in response to the letter
which we sent oul probably a couple of thousand replies, and in
almost every reply, the agent said he thought there were too many
agents. I am rather surprised you disagree.
Mr. Zimmerman. I think I qualified my remarks and said I didn't
believe there were too many good agents in the business.
Mr. Gesell. I asked you Avhethei- you tliought there Avere too
inany airents in the business. -
Mr. Zimmerman. That would be pretty hard to judge, Mr. Gesell.
T don't think there is any way of judging it, as a matter of fad.
For example, we are in an expanding market in the sense that we
haven't begim to reach a saturation point. To me it would be quite
conceivable that a group of^ agents — let's say there are approxi-
mately 135,000 full-time agents in the business today — that we could
have 135,000 agents producing twice the volume of business that
is being produced today, in which case all of them would be making
a good living out of the business. In other words, I can't agree with
1 .Soe Henrings, Pnrt 1.'?, "Exhibit No. 1334," iipponUix, p. 6901.
CONCENTRATION OF ECONOMIC POWER 15343
the premise there are too many agents. I can agree with the fact
that there are too many unfit agents in the business.
Mr. Gesell. I think that gets at it.
Mr. Henderson. Just a minute. You say you are in an expand-
ing business. New business has been on the decline for quite some
time.
Mr. Zimmerman. The figures rhow that new business declined
from 1930, which was the high light, I think, down to 1933 or '34,
since wliich time there has been a gradusQ improvement, with 1937 or
1938 I believe again the high spot, followed by a slight ' falling off
in '39. I say it is an expanding business, Mr. Henderson, on this
basis, that there are many functions which life insurance performs
where we have not scratched the market. I refer, for example, to
pension trusts.
Mr. Henderson. What you mean is that it could expand?
Ml'. Zimmerman. That is right.
Mr. Henderson. There is the chaii of the new business, and that
is decidedly a downward trend.^ T don't believe we are far apart,
Mr. Zimmerman. What I am pointing out is that new business, as
it is presently written, has been on the decline, and I think you are
emphasizing what the president of Penn Mutual was talking about,
potentiality, or the number of things for which security could be
provided via the insurance method.
Mr. Zimmerman, That is right.
Mr. Henderson. Maybe that emphasizes, too, that if you are really
going to get that expansion, you probably won't get it with this kind
of turn -over, and you won't get it with a retention of men who are
qualified, you might say, to sell an ordinary life policy to somebody
who was going to buy it sometime anyway.
Mr. Zimmerman. I would say that" that, of course, is in the realm
.of theoiy. We wouldn't know the answer. I would say it would be
more difficult to get the expansion under present conditions with that
set-up as it is than it would if we were able to eliminate that problem.
Mr. Henderson. While I am on the subject, I notice one of the things
in these letters is the pride some of the men take in being a life under-
writer and a chartered life underwriter, and the professional status
that they seem to get. I read part of one letter ^vhere one agent said
that this turn-over does interfere with its being considered a profes-
sion. I didn't get quite clear what your comment was on that. Do
the men in the higher brackets particularly regard this as a profession ?
Mr. Zimmerman. Oh, absolutely.
Mr. Henderson. You don^ regard it as a salesman's job, do you?
Mx. Zimmerman. No; although selling is naturally one of the
essentials of the job, but we regard it as a profession on the basis
that the interests of the policyholder and clients are always put
uppermost, with the selling end of it as a. secondary matter.
Mr. Henderson. It isn't a get-your-foot-inside-the-door kind of
selling, is it?
Mr. Zimmerman. That is never necessary if you are doing the job
intelligently.
' See Hearings, Part 10-A, pi 27.
15344 CONCENTRATION OF ECONOMIC POWER
Mr. Henderson. Isn't that emphasizing the desirability you havt
pointed out of a higher gi-ade of person?
Mr. Zimmerman. That is right.
Mr. Henderson. Maybe we have too many agents as such with the
existing volume of business, maybe we don't have enough agents for
the kind of service that you contemplate. Is that it?
Mr. Zimmerman. I think that is an accurate statement. It is my
opinion, at least, on the question, and I think the opinion of most
field men,
Mr. Henderson. Since we are dealing with existing conditions I
would like your comment on what kind of pressures are put on men
in the low-income brackets under existing conditions to produce.
There seems to be running all through these letters the feeling that
there was a limitation. Most of them thought there was a saturation
point on existing business.
Mr. Zimmerman. Well, the economic pressure of course, is the most
drastic that is put on any individual in the low-income group who
isn't earning sufficient money, let us "Say, to meet his requirements.
Naturally that is the most important pressure that is put on the indi-
vidual who is not doing a good job of selling life insurance, as it is
tSie in any other line or profession.
. Mr; Gesell. I think perhaps if we develop a little about selection
and training before getting into compensation, Mr. Henderson, it
will be a bit more easy to follow.
What should you do to properly train an agent, Mr. Zimmerman ?
Should he have a mandatory training course, first of all ?
Mr. Zimmerman. Well, absolutely, he should be required to study
the fundamentals, the functions, the mathematical background, the
actuarial background of life insurance; he should know something
about the histoT-y of the business; he certainly should know about
various types of policies, which needs they will fit. We call that a
preliminary training course. He should know incidentally how to
conduct himself before the public so that he makes a good impres-
sion ; in other words, he has to know something about selling, which
many men don't wl^en they come into the business.
Mr. Gesell. How long should that take?
Mr. Zimmerman. That is a matter of opinion. I think that should
range anywhere from, let's say, 2 to 6 weeks, and it depends a good
deal on the type of training. For example, it is a lot easier to train
a man if you take him individually than it is if you take a group of
six or eight men and train them. If you take six or eight you are
going to hjive to devote more tinie to it and take a longer period.
Mr. Gesell. I assume there must be a lot of this lump training
going on considering the number of men being taken on eacn year.
Mr. Zimmerman. Surprisingly — I ^ay surprisingly because the
matter of training I think is greatly misunderstood — tremendous
progress has been made in that direction, in the last 5 years par-
ticularly. I know of no company that does not have a training
course.
Mr. Gesell. I can tell you that out of 57 companies answering
our questionnaire 36 don't have a mandatory course. A minute ago
you said you thought a mandatory course was essential.
Mr. Zimmerman. I would say this, Mr. Gesell, that my own com-
- pany has a training course. It is not mandatory for the simple
CONCENTRATION OF ECONOMIC POWER 15345
reason that the company as a mattei; of common sense knows that
the general agents will use that training course, or one equivalent
to it and as goorl, in the training of new men. There be no com-
pulsion on that basis.
Mr. Gesell. Then you wish to withdraw what you said with
respect to a mandatory training course?
Mr. Zimmerman. I should say it was mandatory on the basis of
the general agent naturally training every man that came into the
business, but the point is that it is only logical that he do it rather
than that he be compelled to do it. There is no need for compulsion
in that -direction.
Mr.- Gesell. Do you feel that all general agents, people you have
seen around the countryside, are thoroughly qualified without direc-
tion or suggestion from the home oflSce to adequately train an agent ?
Mr. Zimmerman. Well, there again L would say no.
Mr. Gesell. We have got quite a few answers which indicate the
companies haven't any information or knowledge as to what type
of training courses the general agents are givm^ and in fact m
some cases even whether they are giving any training course. If
the general agents aren't qualified to handle that in all cases, there
again is perhaps a place where ii, needs strengthening. Is that not
correct?
Mr. Zimmerman. That would certainly be true. On the other
hand, I do say here again we could go a lot further than we have
gone, but tremendous progress has been made in that direction. I
would like to add that in that case I have some very interesting
figures on the basis of life-insurance men in addition to their own
company training wanting to get even more advanced training. For
example, in the last 2 years there have been over 32,000 life-insurance
men who at their own expense have enrolled in courses sponsored by
the Life Underwriters' Association so that they can have a more ad-
vanced type of training and perhaps get some slants which their own
company training would not give them.
Mr. Geseli.. That kind of training, though, is the kind of train-
ing where a man learns to program, learns about income, retirement,
and so on, by and large ?
Mr. Zimmerman. Yes ; it starts with fundamentals and goes into
more advanced fields.
Mr. Gesell. Do you think a man ought to be turned loose with
a rate book within 2 or 3 weeks after he has joined a company ?
Mr. Zimmerman. I would say this, speaking again of our own
ogency, that we think in 3 weeks we can teach a man enough about
the fundamentals of the business so that with the average prospect
whom he will call on he can do a pretty constructive job. He nat-
urally is not an expert along any line. But in addition to that we
will send someone out with him on joint Avork to see whether he is
qualified or not. If he isn't, we bring him back for a little more
training.
Mr. Gesell. You said that you thought one of the causes for turn-
over was the fact that men were inadequately or improperly selected
and poorly trained. You now are telling us that you think the selec-
tion and training is of pretty high quality and yet we have still a very
serious turn-over. I am somewhat caught on the horns of a dilemma
trying to understand just what vour position is.
15346 CONCENTUATION OF ECONOMIC I'OWER
Mr. Zimmerman. Here again I would like to say, Mr. Gesell, that
■ teal progress has been made in the matter of training; as a matter of
fact I think perhaps more has been made in that direction than any
other. We are still a long way from perfection. On the matter of se-
lection the same thing is true. We have made progress in the selection
of a<Tents. P"or example, we are today, using — and have been doing it
only for the last 3 years because the material has not been available —
the Insurance Aptitude Index test, the Verne Steward test, an I. Q.
lest, and the Strojig adaptability test in vocational guidance, and
1 hings of that nature. We are making progress. We are never going to
reach a point, Mr. Gesell, in our business or any other where we can
pick a man and say, "this fellow will succeed in business." We can
do a better job (han we are doing today and I think we are beginning
to do a better job.
Mr. Geseix. What about the licensing provisions in various States?
Do the}-^ help on this question of selection? Do you find you want to
take on agents when time and time again the State insurance depart-
ments turn them down because they can't meet their requirements of a
particular State ? "
Mr. Zimmerman. No; we don't find that, and X don't think it is pos-
sible to do that, Mr. Gesell.
Mr. Geseix. What do those licensing laws do besides get taxes?
Do they weed out anybody at all?
Mr. Zimmerman. Yes. There are eight States, for exami:)le — J
believe the number is eight now — which require an examination.
Mr. Gesell. Is that one of those examinations where you give an
agent 20 questions and sa}' you are going to ask him 10 and he looks
over the questions and answers and goes in and takes the exam ?
Mr. Zimmerman. I personally have taken three of those examina-
tions, four of them, I guess, and as an experienced life insurance man,
because when I started in the business no examination was required,
I still found it necessary to do some study in connection with them.
You can never make an examination of that type, Mr. Gesell, difficult
enough to eliminate a great many men.
Mr. Gesell. That is the point I am getting at.
Mr. Zimmerman. No examination will do that. You can make
them stricter but here again I think there are two factors to take
into consideration. One is a fundamental knowledge of life insur-
ance, and the other is the mental attitude of the individual toward
the business.
Mr. Gesell. Well, it seems to me there are three. Those two I
agree with you on, and it seems to me there is one other. What about
this bringing in of an agent who hasn't any financial security what-
soex'er and before he is adequately trained turning him loose to sell
insurance when he has to sell to live? Do you think that is a healthy
thing?
Mr. Zimmerman. Decidedly not.
Mr. Gesell. That is happening.
Mr. Zimmerman. Yes.
Mr. Gesell. The States have no requirement as to the financial
backing that an agent must have before he takes on the business of
l)eing a life-insurance agent, have tbev?
CONCENTRATION 01'' ECONOMIC POWER 15347
Mr. Zimmerman. No ; they have not.
Mr. Gesell. And companies have no such requirement, have they,
generally speaking?
Mr, Zimmerman. Well, companies are beginning- to put in require-
ments, Mr. Gesell. Foi- example, many companies now require an
agent to fill out what we call a confidential information form, in
addition to the fact that he has to take these tests. In many in-
stances— I speak of my own company again — if he doesn't rate on
the aptitude index test at least C, Ave can't put him under contract.
In the same way, the company would call our attention to the fact,
if we were foolish enough to submit an application of a man who was
broke and we weren't going to finance him, that he should not enter
the business.
Mr. Gesell. We have heard a great deal in these letters, almost a
unanimous opinion from these thousands and hundreds of agents,
that a guaranteed mininmm salary for a few years, 2 or 8 years,
when a man is getting started so he doesn't have to go out and beg,
borrow, or steal, and kick open doors to sell insurance, would be a
healthy thing, yet the companies report to us only one or two in-
stances where there is such a thing as a guaranteed mininumi salary
in effect. What do you think about it ?
Mr. Zimmerman. I think the entire matter of compensation, Mr.
Gesell, is a very complicated matter. Anything based on salaries
M'ould have to be in the experimental stage.
Mr. Gesell. Why is that?
Mr. Zimmerman. Because there hasn't been enough experience with
it as yet.
Mr. Gesell. We had a man here on the stand who told us how it
had worked in his company for several years.^
Mr. Zimmerman. I think I am familiar with that testimony, and
I think it has worked for a couple of years, hasn't it ?
Mr. Gesell. Yes.
Mr. Zimmerman. I would say that isn't a very long period of time
(m which to judge an experhnent. Personally I have some ideas on
compensation, but any change in compensation, I think, Avould have
to come slowly and gradually.
Mr. Gesell. What are your ideas ? You are a well-informed agent,
perhaps more informed right now than perhaps any agent in the
country. What are your ideas ?
Mr. Zimmerman. I appreciate the compliment, but these are my
ideas, Mr. Gesell, and there is a great deal of disagreement in the
business as to certain things. For example, many men would oppose
any permanent salary plan — in fact, I "think most men would.
Mr. Gesell. Let's get our definition clear, I am not talking about
a permanent salary plan, I am talking about some kind of a guar-
anteed minimum salary for a period of 1, 2, 3, not more than 5
years, which would give a man some degree of security while he was
learning the business, in the interests of not improperly selling in
order to make a living, and that is what I am talking about,
Mr. Zimmerman. Might I say this, then, that these ideas are mine,
not original with me, but mine as I hold them, and they don't reflect
' See testimony of Mr. Arthur Coburn, Hearings, Part 13, p. 6586, et seq.
15348 CONCENTRATION Ot' ECONOMIC POWER
the opinion of the association or of tlie field forces generally, neces-
sarily. I think there is a definite feeling on the piLVt of the field
forces, first of all, that any change in compensation cannot come out
of the policyholder's pocket, it cainiot be at his expense; in the sec-
ond place, that it cannot be at the expense of the older man in favor
of the new man ; and in the third place, that it must come within
certain limitations as set out by law, for example. On that basis, one
of the criticisms of our business is the fact that the man who does a
good job in his first year in the business, for example, still receives
a very small cash income. Perhaps he pays for 100,000, which is a
good job, and receives $600 or $700 in cash. Well, that is not enough
to live on. Perhaps he* has a standard of living of $1,200 or $1,500,
so somebody has -to make up the difference. Either he makes it up,
which often he can't do, or the general agent or manager makes it up,
and sometimes he can't, so you have that problem. Then you have
the problem, I think in many instances, of men who have come into
the business and who have gone out of it and are still continuing to
receive what we call a renewal commission for rendering service
which obviously they can't render. That is an economic waste.
Mr. Gesell. I want to come to the renewal commission problem in
a moment, but I want to keep on this question of some kind of a
salary for new men.
Mr. Zimmerman. I believe — again my own personal belief — that
a salary plan for perhaps 3 years to 5 years at a maximum on ,a
decreasing scale, a minimum salary plus commission, to give the
added incentive to go out and hit the ball, would be a desirable thing
for the business, on the basis that it would help this man — take the
pressure off of him in many instances — to go out and do a job; the
pressure would still be strong enough, the incentive for him to do
the job, because of the fact that he could earn additional commis-
sion; and in the second place, it would enable us to get better men
into the business.
Mr. Gesell Now, we are beginning to get down to something,
I think. If you pay a man something so he can live when he first
comes into the business, you are going to be able to offer your job
to a clitferent clientele, aren't you? You are going to be able to
get more college graduates, for example. You are going to get more
people who want to look at it as a profession, as a career.
Mr. Zimmerman. That is right.
Mr. Gesell. And as a result you are going to have over a period
of time a better trained, more prbfessional, agency crowd. Isn't
that right?
Mr. Zimmerman. I think that is true.
Mr. Gesell. In addition you are going to have men who are
not going to be under the serious economic compulsion of going out
and placing a policy for the sake of bringing home some food at
night.
Mr. Zimmerman. That is right It will take the pressure off.
Mr. Gesell. And you feel very definitely that pressure is there
on the new men, do you not?
Mr. Zimmerman. It is on some of them, yes; it is on too many of
them, let's say.
Mr. Gesell. We are talking, I understand, about the pressure
CONCENTRATION OF ECONOMIC POWER 15349
that is inherent in the situation, not the pressure that comes from
some guy pounding the table in front of the agent.
Mr. Zimmerman. That is right.
Mr. Gesell. And you would feel that if this was a minimum, just
as the word indicates, and a man might go above that if he were
a successful agent and were placing insurance through some com-
mission arrangement, that that would be desirable in that it would
keep a man alert and interested in improving his status.
Mr. Zimmerman. Yes; that is my personal opinion.
Mr. Gesell. Why are you so hesitant to state the position of
your association?
Mr. Zimmerman. On that particular matter?
Mr. Gesell. Yes.
Mr. Zimmerman. The entire matter is under study, Mr. Gesell.
There is a committee which has beeii appointed known as the com-
mittee on agents' compensation, a very powerful committee. We,
as an association, have made no recommendations. I, as an in-
dividual, have made recommendations. As a matter of fact, this is
a very complicated subject.
Mr. Gesell. Why is that?
Mr. Zimmerman. A great deal of information is lacking on it,
and for that reason, I don't think our association should put itself
on record as favoring 1, 2, 3, 4, 5. We can express opinions, and I
think when I express my personal opinion that I am perhaps ex-
pressing the opinion of a majority of our members.
Mr. Gesell. I think you must be, from the type of replies we
got in the returns. There is almost a unanimous opinion on that
among not only new men who would naturally feel that way but
among established agents.
Let s get into this compensation matter a little more. Generally
speaking, how is an agent compensated?
Mr. Zimmerman. He is compensated on a first-year commission
plus a so-called renewal or service commission basis which usually
runs for 9 years in addition to the first year.
Mr. Gesell. Does he get that renewal regardless of whether or
not he stays with the company ?
Mr. Zimmerman. That depends on the company. In many in-
stances he does.
Mr. Gesell. You mean after he leaves the company, he still gets
the renewals?
Mr. Zimmerman. That is right.
Mr. Gesell. Even if he is wor"king for another company?
Mr. Zimmerman. Oh, yes.
Mr. Gesell. What is the renewal commission for?
Mr. Zimmerman. There are two concepts of it. One concept is
that this is deferred first-year commission. I think the sounder
concept is the second, that it is a service commission.
Mr. Gesell. I think I would ceriainly agree- with you there. How
do you pay a service commission to a man wlio is no longer with
the company? How is that justified?
Mr. Zimmerman. You can pay it to a man no longer in the com-
pany because if he remains in the territory, even with -another com-
pany, Ije will still service his own policies and- his clients.
15350 roXPFA'TIlATlON OF ECONOMIC I'OVVEU
Mr. (jESELL. Whom does he service fhem for. thp <ompany hp
happens to ho with or the. t-onipaTiy ho w:is with ^
Mr. ZiMMEKMAN. He will be ethical enough to service them for
the interests of the policyholder.
Acting Chairman Pike. That is quite a. strain.
Mr. Zimmerman. No; because he wants to give that service, and
he knows only by giving that service will he continue to enjoy the
good will of that policyholder for the getting of new business.
Acting Chairman Pike. And the company he is with will recognize
that?
Mr. Zimmerman. Yes ; I don't believe there is any problem there.
I think perhaps the problem there w^ould be for the man who gets out
of the business, where he can't render the service and still receives a
compensation.
Acting Chairman Pike. There is a real problem there. I think I
agree with Mr. Gesell that there is a distinct doubt as to whether that
thing should stay with the agent who leaves, unless you take the first
concept, that it is part of his first-year commission.
Mr. Gesell. I was wondering this, Mr. Zimmerman : You talked
about the services a little while ago and you talked about revision of
settlement agreements, dividends, assignments, changing situations,
claims, matters of that sort. Those don't end at any given period, do
they?
Mr. Zimmerman. That is right, and we are continually serving the
policyholders and policies of other companies.
Mr. Gesell. How big is the first-year, commission, and how big is the
renewal, generally speaking? I know there is wide variation.
Mr. Zimmerman. There is wide variation. Usually there is a
proportion of about 8 to 1 between tlie first-year commission, probably
9 to 1 between first-year and renewal commission.
Mr. Gesfxl, What would you think about paying an agent a little
lower first-year commission and stretching his renewal connnissions
out over a longer period?
Mr. Zimmerman. Well, personally I think that would be a good idea
again. There would be some opposition to it, naturally, but I think
there might very well be a reduction, let's say of 10 percent in first -
year commissions, with the renewal commission or service commission
paid as long as the policy is a premium-paying policy.
To me, there is no logic in the fact that when I get to the tenth year,
my service commission stops, because quite often I have to do as much
service in the twelfth or thirteenth year as I do in the sixth or seventh.
Mr. (lESELL. There is no logic in it to me, either, Mr. Zimmerman.
You think it would be a healthy thing to reduce the first-year com-
mi.ssion and extend the renewal conmiission over a longer period ?
Mr. Zimmerman. I do.
Mr. (jesell. Do you feel that woidd affect the good agent? Would
it raise his compensation or would it lessen it?
Mr. Zimmerman. The good agent has had a problem, particularly
in the last 10 years, the problem of servicing old policyholders, aiul
undoubtedly it has affected the compensation of many of the best
agents who have a large volume of business on the books, on the
basis that so nuich time is required for service. You see, we have
ho.en going through this economic cycle where people have had lo
CONCENTRATION OF ECONOMIC POWER 15351
make loans, and so forth, and he has had to give a lot of tuixe to serv-
ice, so he could not devote the usual amount of time to getting new
business. Therefore his income has suffered.
Mr. Gesell. Would you take a renewal commission away from a
man when he went to another company?
Mr. ZwrMERMAN. No ; I would not. I would perhaps decrease it.
Now, Mr. Pike, that is a question that you asked, too. I want to
make this point clear : This is again my opinion.
Acting Chairman Pike. I think perhaps Mr. Gesell meant if he
went to another company and stayed in a territory where he physi-
cally could service the thing.
Mr. Zimmerman. I would, Mr. Gesell, favor perhaps a consider-
able reduction, but I don't think life-insurance men as a whole ever
want to give up their independent status and independence of action
in moving. In other words, if you place too great a penalty on
change, then you reach a point where you just lose your freedom
of action.
Mr. Gesefx. There has been a great dcAelopiuent along just that
line, such as the Nylic plan, to kc^ep an agent from jumping around
from one company to another.
Mr. Zimmerman. Generally that is a good thing, but it can be
carried to extremes, to a point where an agent can't express his
own opinion in making a change when he so desires.
Mr. Gesell. On these renewals, what is the difference between a
vested and a nonvested renewal?
Mr. Zimmerman. A vested renewal is one which you continue to
get, regardless of circumstances, and an unvested renewal is one
which would stop under certain conditions.
Mr. Gesell. Is it true that there are companies where, when an
agent leaves, those renewals continue but vest in the general agent
and no longer pay to the agent?
. Mr. Zimmerman. Yes; that is true in certain instances.
Mr. Gesell. Isn't that a pretty difficult situation to contend with ?
If I were a general agent and needed a little cash, I think I would
be inclined to bring in a lot of people to sell their uncles and families
and in-laws, and then just as soon terminate them and have the ad-
vantage of the renewals that are vested.
Mr. Zimmerman. There is a current danger there. Very frankly, I
think those cases are the exception to the rule.
Mr. Gesell. You think they could exist, however?
Mr. Zimmerman. They do exist. Usually even when the general
agent gets these so-called forfeitures he would use them in the devel-
opment of new men rather than swell his own income or something of
that nature.
I would like to bring this point out in this connection again. If
we take away a vested renewal and make it a true service renewal,
as long as the policy is a true premium-paying policy, then you must
substitute something for it, and the substitution must be a contribu-
tory pension plan for our field men, and there is a very vocal demand
for it.
Mr, Gesell. That is an interesting point. I was in these letters
quite interested to see that in the life-insurance business where social
security and questions of pension are held pretty much uppermost in
15352 CONCENTRATION OF ECONOMIC POWER
every respect, that tliere is'no system for the agent which gives him
any security. He is not under social security, is he?
Mr. Zimmerman: In most instances, no.
Mr. Gesell. And there is very little development along the pen-
sion-line system for agents, isn't that right?
Mr. Zimmerman. That is right.
Mr. Gesell. And yet, by and large, the home offices have developed
that to a great extent for the home-office employees.
Mr. Zimmerman. Yes ; most of them are under social seci;rity, and
in many instances there are other provisions.
Mr. Gesell. I suppose that an agent who is a producing agent, an
effective agent, and gives his life to the business, may find as he
approaches old age that he has more difficulty in selling insurance, he
has exhausted his circje of influence, or whatever you fellows call it,
and his renewals begin to run out, and he has nothing to tie back to
at all.
Mr. Zimmerman. That is a real problem, and as you get older —
selling requires physical strength among other things — you are bound
to begin slipping, and so you must have, you should have, something
to offset it. Theoretically, you may say, "take your own medi-
cine"
Mr. Geseix (interposing). Take some insurance.
Mr. Zimmerman. That is right, and we do. On the other hand,
these pension plans, contributory pension plans, have been very suc-
cessful in industrial organizations, other organizations, and I think
the field men of the country very, ver.y strongly would desire a plan
of that kind for themselves.
Mr. Gesell. Do you think that better men would come into the
business if they had some kind of economic security to look forward
to later on ?
Mr. Zimmerman. Yes, I do. It is quite surprising, in interview-
ing college graduates particularly — that is, seniors at college — to
find out within the last 10 years the emphasis that is placed on
.security, almost to the extent of placing it above opportunity.
Acting Chairman Pike. We have heard quite a lot about it m
the last few years.
Mr. Gesell. You fellows have helped educate us.
Mr. Zimmerman. That is right.'
Mr. Gesell. How would this thing work? Would you feel that
at a certain age an agent ought to have some kind of regular pension
system, or would it be some basic change in the commission system
as such in later years?
Mr. Zimmerman. It would be, in my opinion, a contributory pen-
sion plan which was vested in the agent.
Mr. Gesell. Is it true that agents have to have a lot of out-of-
pocket expense to carry on their business?
Mr. Zimmerman. Tliere is some expense; I should say, as agen-
eral rule, it would be about 10 percent of gross income. That is a
guess.
Mr. Geseix. Is it the tendency of an agent, when he has a good
year, to use the difference to build up new business?
Mr. Zimmerman. If he is forward looking, yes; then he begins to
invest in himself because he is in business for himself.
• CONCENTRATION OF ECONOMIC POWER 15353
Mr. Gesell. I take it that would be one of the reasons why a lot
of agents when they reach retirement age don't have an awful lot
aside.
Mr. Zimmerman. Yes ; that is one reason for it, they have invested
in the business r heavily. There are other reasons — this matter of
getting older and beginning to slip on that basis.
Mr. Gesell. What about, briefly, the compensation of the general
agent ? How is he usually compensated ?
Mr. Zimmerman. He is usually compensated on an overwriting
commission basis.
Mr. Gesell. What do you mean by that? He gets a percentage
commission on what his men sell ?
Mr. Zimmerman. That is right.
Mr. Gesell. Then, I take it he gets a commission on what he
sells himself?
Mr. Zimmerman. Yes.
Mr. Gesell. Does he get also some kind of a minimum guaranteed
salary?
Mr. Zimmerman. In some instances in the early years.
Mr. Gesell. And he has, in some cases, the right to the renewal=
of men who leave his service?
Mr. Zimmerman. Yes ; in some instances that is true.
Mr. Gesell. Are there desirable changes in the method of com-
pensation of the general agent?
Mr. Zimmerman. I don't believe that you can go into the question
of changing an agent's compensation without also getting into the
question of changing the general agent's compensation. Perhaps
they wouldn't have to be as drastic changes. I don't know.
Mr. Gesell. Have you some ideas in that regard?
Mr. Zimmerman. I have very few, except I would IH^e to have a
cohtributory pension plan for general agents, naturally.
Mr. Gesell. On this compensation matter, the way it is working
out now — we have talked about what ought to be done; we haven't
perhaps talked as much about how it ought to be working out now—
it is not working out very well, is it ?
Mr. Zimmerman. Mr. Gesell, the average earnings are below what
we would like to see them.
Mr. Gesell. Our figures, which, of course, take into account the
man who has not been with the company the entire year but who is
a whole-time agent, indicate that 50.82 percent of the whole-time
. agents are making $250 or less.
Mr. Zimmerman. Yes.
Mr. Gesell. And you get up here in the higher brackets and find
only about 7 percent of the agents making over $3,000.
Acting Chairman Pike. May I ask one question? ,Have you any
indication in these replies, Mr. Gesell, as to the, sizes of the com-
munities where these agents work? I don't suppose that was in the
questionnaire.
Mr. Gesell. No.
Acting Chairman Pike. Ir. my little town in Maine there is one
agent for all the insurance written. He couldn't make a thousand
1 See "Exhibit No. 2327," appendix, p. 15553.
15354 C().\(;k.\tua'J'io.\ <>k locijNOiMKj i'Owkk
Hollars a year. It. mnsf hp hiip f-f n lol of rural comjunnitifr
Ihioiipjhout the country.
Mr. Gesell. 1 think that is brought <Mit pretty well. We had a
letter from one fellow in some little town out in the Northwest who
said he had the best year of his life when he made $765 and he was
very satisfied, that was a very fine compensation and it met his needs
in his locality.
You understand the companies do not even have figures which show
compensation for agents who have been in a whole 3^ear, least of all
figures which show them by territory.
Mr. Zimmerman. May I say in connection with that study, Mr.
Gesell, that whereas we would like naturally to improve the aver-
age earnings of the men in the business, that study, I think I should
explain, counts, includes, all men who have come into the business.
For example, it is a 1938 study. I would say that perhaps of the
agents included in that study as much as 40 percent of tliat group
would be first-year men.
Acting Chairman Pike. You always have 30 to 40 percent first-year
men?
Mr. Zimmerman. It usually runs about 35 percent. That in itself,^
from the standpoint of earnings, brings that average way down.
Mr. Gesell. It is a continuing condition, Mr. Zimmerman, it is
thei'e every year.
Mr. Zimmerman. Except that it isn't a fair comparison in my
opinion, because here is a man who came into the business in Decem-
ber of 1938 he hasn't even come through his training course, yet he
is included .n that particular stu(ly. He has been put under contract,
but he has had no opportunity to make an income. I should like to put
into this a study made by my own company which excludes the first-
year men.
Mr. Gesell. We would be glad to have something like that.
Acting Chairman Pike. We Avould be glad to have something more
illuminating.
Mr. Gesell. I thought I made it very clear that we asked specifi-
cally for the other figures by the companies.
Mr. Zimmerman. This shows up the income on a mjuch better basis
than 3'our own chart, and it is a fairer statement-because you have to
eliminate the first-year men. I read an article in the World-Tele-
gram a couple of years ago that the average attorney earned less than
$500 in his first year. That is a startlingly low figure.
Mr. Gesell. I think these figures more or less substantiate this
chart, Mr. Zimmerman, rather than change it. Here we have got
agents, whole-time agents 2 years or more, a total of 112 such agents,
an'd their average earnings were $875. Those are 2-year men.
Mr. Zimmerman. Yes; but that is a far cry from $250 a vear.
Mr. Gesell. The first year is $237.
Mr. Zimmerman. That is first-year men, that is right. I think
the bottom table gives the second, third, fourth, fifth year and after
earnings.
Mr. Gesell. Yes; the average for the third year is still below a
thousand dollars. I would like to offer this schedule for the record.
Acting Chairman Pike. It may be received.
CONCEMllATION OF ECONOMIC POWER 15355
(The table referred to was marked "Exhibit No. 2331" and is
iiickided in the appendix on pp. 15557-15558.)
Mr. Zimmerman. I want to add these things in connection with
earnings and compensation, that no one has ever made a complete
study of this subject. I think it is something that should be done.
Mr. Gesell. Will you tell us how you are going to do it?
Mr. ZiMMERBiAx. All right. I think it is going to be a difficult
thing to do but I want to point out these factors. First of all, our
company has made a study
Mr. Gesell (interposing). Just a minute, Mr. Zimmerman. Will
you tell us how you are going to make a study of compensation when
the Companies themselves do not have the figures? I want that
explained to me.
Mr. Zimmerman. Mr. Gesell, I think that your questionnaire asked
for the earnings of all full-time men under contract, 1938. Is that
true?
Mr. Geseli^. Also I asked the break-do wii, in fact the schedule you
liave offered is a break-down, that was asked for in our questionnaire.
Your company happened to be one that had the figures. There are
only two or three that did have.
Mr. Zimmerman. Mr. Gesell, that information can, of course, be
gotten, but that still would not tell the complete story, for these
reasons: That a great many men have income from other sources
outside their own company. As evidence of that, two studies have
been made, one by my own company, in which we took into con-
sideration 133 men of whom we found, just selected at random, 71
had income from other life-insurance companies. Another study
recently made of 197 men showed just under 50, percent had income
from other sources. That must be taken into consideration. Then
there are some men who have income, let's say, from writing accident
and health or general insurance, and so ^forth, and so the entire
•picture would look somewhat better. We are not satisfied with jt.
Mr, Gesell. I don't suppose anybody could be satisfied with a
record of men who had been in the business 3 years and were still
making less than a thousand dollars on the average from the sale
of insurance.
Mr. Zimmerman. I think, Mr. Gesell, that is right. We are not
satisfied, and we want to improve this.
Mr. Gesell. You take these highest compensation figures and they
are, by and large, amazingly low.
Mr. Zimmerman. Yes, that is true. The life-insurance business,
however, does offer certain things which no other line offers to the
man, and I think the average individual — it is just like law or medi-
cine, though not to the same extent — is willing to take some financial
sacrifices in those early years if in the later years he is going to be
able to overcome that and average up.
Mr. Gesell. There may be this difference, don't you think ? I know
when I went into law i didn't read as many advertisements about
how I was going to make myself a millionaire overnight. I see
advertisements continually in the papers of life insurance agents
being offered the opportunity of making such a substantial livelihood.
It doesn't look as though that is working out, does it'^
15356 CONCENTRATION OF ECONOMIC POWER
Mr. Zimmerman. Well, the honest story is that income is necsB
earily going to be low in tne early years.
Mr. Gesell. The fact is that the honest story is on the average
it is going to be less than a thousand dollars in your company after
3 years.
Mr. Zimmerman. According to the schedule there that is true
and still that is not the whole story, Mr. Gesell, because there would
be some other income coming in.^
Mr. Gesell. To sum up on these things that we have been talking
about, I want to see if you would agree with four or five points.
If there wese less turn-over of agents, you would have less lapse?
Mr. Zimmerman. Yes; you would have less lapse, and yet it
wouldn't affect it materially, in my opinion.
Mr. Gesell. If you had less turn-over of agents, there would be
lower net cost of insurance, would there not ?
Mr. Zimmerman. That is perfectly true.
Mr. Gesell. If you had better selected agents, there would be less
lapse, would there not?
Mr. Zimmerman. Yes.
Mr. Gesellx If you had better selected agents, there w:ould be lower
net cost, would there not?
Mr. Zimmerman. That is true, Mr. Gesell.
On this matter of lapse I would just like to say a word.
Mr. Gesell. Certainly.
Mr. Zimmerman. Because there is a general feeling, I think, that
a great many lapses are due to pressure selling or inefficient selling.
Now, admittedly some lapses are. due to that. Here again I have a
study made by my own company covering some 3,000 cases showing
the causes of lapse,^ and dissatisfaction,, which in general would
mean that the agent had not properly serviced the case^ was re-
sponsible for 2.13 of the lapses, only 2 percent.
Mt". Gesell. I was bein^ very careful here to point up the other
reasons that had to do with lapse other than pressure of business
which you are attributing to me and which I have not mentioned yet.
I have talked about turn-over and selection of agents. Let's go on
here a little.
You have agreed that if we had less turn-over and better selection
of agents, we would have less lapse and lower net cost. Is that right ?
Mr. Zimmerman. That is right.
Mr. Gesell. If you had better trained agents, there would be less
laps-e and lower net cost, would there not?
Mr. Zimmerman. Yes.
Mr. Gesell. If there were' less emphasis on the first year's com-
mission, particularly in the case of inexperienced agents, there would
be less lapse, would there not?
Mr. Zimmerman. Yes ; that would be a factor.
Mr. Gesell. If you paid a guaranteed minimum salary to men
coming into the business until they had trained and proven them-
selves, you would have less lapse ?
Mr. Zimmerman. On the assumption that you attract better men,
do a better job of training and supervising, that is right.
1 Sep "Exliibit No. 2.",.".]," appendix, pp. 15557-15558.
» See "Exhibit No.- 2332," appendix, p. 15559.
CONCENTRATION OF ECONOMIC POWER 15357
Mr. Gesell. If you had longer renewals and lower first-year com-
missions, wliich you discussed with me, there would be less lapse,
more persistent business, lower net cost ?
Mr. Zimmerman. Very frankly I think that would be a minor
item. I think the average agent realizes that only by doing a good
job of quality business, helpmg the policyholder keep it going, and
servicing it, can he in the long run build a sound clientele.
Mr. Geseix. Though you might feel it minor, you would still
agree, would you not, that if you paid a man a real servicing com-
mission and stretched it out over a longer period of time, you would
have less lapse, more persistent business, and lower net cost ?
Mr. Zimmerman. I think primarily you would have from the
standpoint of the agent a payment for services which he is today
rendering but not being compensated for.
Mr. Gesell. What I am seeking is a direct answer to my question
as to whether or not including all these other factors • you have
mentioned, there would not be less lapse, more persistent business,
and lower net cost.
Mr. Zimmerman. Yes. On the lapsation I would say to a very
small extent, again.
Mr. Gesell. You said there were too many, in your opinion, inade-
quately trained agents, poor agents, in the country at the present
time?
Mr. Zimmekman. Unfit agents.
Mr. Gt»ell. Unfit agents. If you had fewer unfit agents you
would have less lapse, would you not ?
Mr. Zimmerman. Yes.
Mr. Gesell. You would have lower net cost?
Mr. Zimmerman. Yes.
Mr. Gesell. I have no further questions.
Mr. Zimmerman. I would like to put this in the evidence as a study
on lapse.
Mr. Gesell. We take every study on lapse that is offered us, Mr.
Zimmerman. This is for the Connecticut Mutual?
Mr. Zimmerman. That is right.
Acting Chairman Pike. It may be received:
(The table referred to was marked "Exhibit No. 2332" and is
included in the appendix on p. 15569.)
Mr. Zimmerman. May I offer something for correction? I think
I referred to the fact that our association is composed of field men
and general agents; that should include managers and superintendents.
There are a great many of those.
Mr. Gesell. We are very much obliged to you.
I am sorry, I promised Mr. Zimmerman to introduce the objec-
tives of the association and I overlooked it. I would like to have
them offered.
Acting Chairman Pike. They may be received.
(The document referred to was marked "Exhibit No. 2333" ana
included in the appendix on pp. 15559-15560.)
Acting Chairman Pike. We will recess until 2 o'clock.
(Whereupon, at 12: 15 p. m., a recess was taken until 2 p. m. of the
same day.) :
124491 — 41— pt. 28 43
15358 CONCENTltATIO:N OF ECONOMIC POWEU
AFTEBNOON SESSION
The committee resumed at 2 : 15 p. m., upon the expiration of the
recess.
The Chaikman. The committee will please come to order. Will,
you call the first witness, Mr. Gesell?
Mr. Gesell. The first witness this afternoon is Mr. Lambert.
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. Lambert. I do.
TESTIMONY OF DENISON DAVID LAMBERT, AGENT, TRAVELERS
INSURANCE CO., WASHINGTON, D. C.
Mr. Gesell. What is your full name please, sir?
Mr. Lambert. Denison David Lambert.
Mr. Gesell. With what company are you connected, Mr. Lambert?
Mr. Lambert. The Travelers Lisurance Co. and its subsidiaries.
Mr. Gesell. Are you a general agent or an agent ?
Mr. Lambert. Plain, ordinary agent.
Mr. Gesell. How long have you been a life-insurance agent ?
Mr. Lambert. Since 1922.
Mr. Gesell. Have you worked in the District here all that time ?
Mr. Lambert. All the time ; yes, sir.
Mr. Gesell. With the Travelers all that time?
Mr. Lambert. With the Travelers, yes.
Mr. Gesell. We were discussing with Mr. Zimmerman this moriig
ing several points that I wanted to get your views on, and the others
who are to follow you.
First of all, let me ask you one or two questions about the liirn-
over. What kind of turn-over do you have in your office?
Mr. Lambert. In comparison to other offices, it is rather small. I
should say.
Mr. Geseli.. About what percent, have you any idea?
Mr. Lambert. Roughly, out of 50 office agents, I should say that
two or three are not with us at the end of the year due to some
reason or other, either going to some other city to do business or not
succeeding.
Mr. Gesell. Do you find that there is quite a turn-over among
agents in the District?
Mr. Lambert. Yes; I think there is, because when I was looking
for business their faces seemed to disappear quite rapidly at times.
The Chairman. Perhaps the other agents feel that your face
doesn't disappear rapidly enough. [Laughter.]
Mr. Gesell. Have you any idea as to what can be done about
this matter of turn-over?
Mr. Lambert. I think the system that the Travelers uses is one
way to cut down agents.
Mr. Geseix. What is that?
The Chairman. You mean to cut down agents' turn-over.
Mr. Lambert. Agents' turn -over, excuse me.
CONCENTRATION OF ECONOMIC POWER 15359
The Travelers has a training course that they have the agents go
through.
Mr. Gesell. Is that a mandatory course'^
Mr. Lambert. Yes. As I understand it, I believe it is a 6-nionth
course.
Mr. Geseul. Do I understand also the Travelers has a requirement
that the agents must be able to support themselves for a certain
period of time?
Mr. Lambert. I think they prefer that an agent is able to take
care of himself, but if a man shoAVs considerable promise and it
looks as though he is going to get ahead I presume they would
make an exception.
Mr. Gesell. But they try to take on men who are able to support
themselves?
Mr, Lambert. They try to take on men who are able to stand the
gaff in the first few months.
Mr. Gesell. What about this question of compensation? Do you
think the present method of compensating agents is satisfactory?
Mr. Lambert. I think it is satisfactory with the exception that I
think the commissions should be continued longer than the usual
renewal period.
Mr. Gesell. What is the renewal period in the case of your
company ?
Mr. Lambert. We have 9 years.
Mr. Gesell. Why do you think it should be continued longer, Mr.
Lambert?
Mr. Lambert. Well, I think it should be continued longer so
that agents when they get to be older and unable to produce as much
business could have some sort of a pension from the company, which
has been, say, taking this small extra commission and holding it for
■ that purpose.
Mr. Gesell. You hav^ no pension system for agents in your com-
pany?
Mr. Lambert. No.
Mr. Gesell. And you are not under Social Security.
Mr. Lambert. No.
Mr. Gesell. Do you look at this renewal commission as a service
commission or as a deferred first-year commission?
Mr. LameSErt. I look at it as both.
Mr. Gesell. Which do vou consider the more important element of
the two?
Mr. Lambert. On some policyholders it becomes very much a serv-
ice item and on others, with no trouble coming from them, it is en-
tirely a part of the first-year commission when I have no work to do
in connection with ;it.
Mr. Gesell. Would you feel one reason for extending the renewal
commission would be because it would encourage more services to
policyholders after the policy has been sold?
Mr. Lambert. Well, the small extra commission that I Avould
advocate would be in the nature of 21/2 percent or something
like that. I feel that with an extra small commission like that, when
a policy is about to lapse and the salaried employees of a company
have be*n unable to prevent the man from lapsing, the agent, if that
15360 CONCENTRATION OF ECONOMIC TOWER
commission is going to come to his benefit later on, will make an at-
tempt to prevent a lapse, and the agent has the best chance of prevent-
ing a lapse because he is the man that sold the policyholder in the first
place.
Mr. Gesell. So if he receives this commission which is really
labeled as a service commission, there is more emphasis put on it in
that direction, you might have as a result more persistent business?
Mr. Lambert. I think it would cut down lapses very much.
Mr. Gesell. Do you think the first year commission being as large
as it is has an effect on lapse? I mean, is there a tendency because of
high first-year commission to place policies in order to get that com-
mission without regard to whether or not they will renew from time
to time?
Mr. Lambert. No; I don't think so.
Mr. Pike. May I ask a question? How long must a policy remain
in force for the agent to get and keep his first-year commission?
Mr. Lambert. Well, the first-year commission is payable as the
premium is paid during the first year and after that there is no more
first-year commission.
Mr. Pike. Suppose it is on a quarterly basis?
Mr. Lambert. If the man pays two quarters and stops, the agent
gets commission really on the two quarters.
Mr. Geseijl. What is the first-year commission?
Mr. Lambert. It is graded. It is the New York standard scale.
Mr. Gesell. You say it is graded. You mean you get a different
commission
Mr. Lambert (interposing). On different policies.
Mr. Gesell. Different kinds of policies?
Mr. Lambert. Different kinds of policies.
Mr. Gesell. Doesn't that have a tendency for you to sell the kind
of policy you get the biggest commission on?
Mr. Lambert. I can see your point there. I can see if two policies
are very similar and one policy pays a smaller commission and an-
other policy pays a larger commission, I suppose that I am as human
as anybody else and would naturally lean toward the higher com-
mission form of policy even though I tried to be unprejudiced in the
matter. I don't believe that that works any particular harm, how-
ever, because
Mr. Gesell (interposing). Do you feel it more desirable to have
the first-year commission tlie same on all forms of policies?
Mr. Lambert. Well, I understand that they do that in England,
and I intend to go over the policies that I had sold, that is through
the past period of 10 years, to find out how that would affect me per-
sonal! v, and I haven't done that. I suppose it would take an actuary,
probably, because I wouldn't know what would be the rate of first-
year commission that applied to all policies.
Mr. Gesell. Do you feel it is desirable or undesirable to have these
different commission rates on different kinds of policies?
Mr. Lambert, I think probably it is equitable tlie way it is.
Mr, Pike, Could you give any idea of how those work out? I
can see, for instance, on a certain form of policy, say on a whole-
life policy, you have a higher commission in percentage than you
might have, let us say, on an endowment policy, yet the first-year
CONCENTRATION OF ECONOMIC POWER 15361
premium on the endowment policy would be so much higher that
you would get more money. I haven't any idea.
Mr. Lambert. An endowment policy as compared to an ordinary
life policy has a smaller commission.
Mr. Pike. A smaller commission in dollars?
Mr. Lambert. In dollars. If you say a hundred-dollar endowment
premium
Mr. Pike ( interposing) . No ; I mean the face amount of the policy,
not the premium. Suppose you were writing, say, $10,000 ordinary
life and $10,000 endowment.
Mr. Lambert. If it is a 20-year endowment policy and an .'.ordinary
life policy, there is a 10 percent differential in the coinrai^'ions.
Mr. Gesell. In favor of the endowment ?
Mr. Lambert. In favor of the straight life.
Mr. Pike. How would your commission in dollars in endowment be,
still higher?
Mr. Lambert. I hate to answer that because I don't know at what
age.
Mr. Gesell. The same age.
Mr. Pike. Take 35.
Mr. Lambert. If you take a man 60 years old in ordinary life and
20-year endowment they are almost the same.
Mr. Pike. You don't sell many endowments at 60 years?
Mr. Lambert. No.
Mr. Pike. Take an age you would sell more.
Mr. Lambert. I should say — I am a little at a loss without a rate
book. I should say roughly at 35 a 20-year endowment with my
company would run about $45 a thousand and 40 percent would be
$18, if I figure it correctly. An ordinary-life policy at 35 would be
in the neighborhood of — I don't know, about $24, 1 should say, and
50 percent would be about $12.
Mr. Pike. That is what I meant. In spite of a lower rate you
still got a higher commission on endowment ?
Mr. Lambert. That is right.
Mr, Gesell. What about this problem of lapse, Mr. Lambert?
What do you think are the primary causes of lapse ?
Mr. Lambert. A man's condition changes, frequently, so that he no
longer needs insurance. That is one of the hardest cases of lapse to
stop.
Mr. Gesell. You would call that economic circumstance, or some-
thing of that sort?
Mr. Lambert. Yes.
Mr. Pike. If you were giving him just service you would encour-
age him to lapse?
Mr. Lambert. Yes ; there was a man not very long ago with whom
I agreed that I didn't see any need for him to continue it. If you find
a man who is hard up as far as funds are concerned and has to let
it lapse, he has to do that.
Mr. Gesell. To what extent do you consider lapse the result of
selling? Is there some overloading of the policyholder?
Mr. Lambert. I don't see that the selling has any relation to the
lapse unless a person has been high-pressured, and there is so little
high-pressure that I don't think that is a factor.
15362 CONCENTKATION OF ECONOMIC lOWEU
Mr. Gesell. You don't think that is a big factor ?
Mr. Lambert. No ; I don't.
Mr. Gesell. I liave no further questions.
The Chairman. Do the members of the committee desire to ask any
questions of Mr. Lambert?
Thank you very much.
(The witness, Mr. Lambert, was excused.)
Mr. Gesell. Mr. Krafft.
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. Krafft. I do.
TESTIMONY OF HAROLD D. KRAFFT, GENERAL AGENT, PROVI-
DENT MUTUAL INSURANCE CO., WASHINGTON, D. C.
Mr. Gesell. What is your full name, plcaso, sir?
Ml-. Kkaffi'. Harold D. Krafft.
Mr. Gesell. T\^th what company are you connected?
Ml-. Krafft. The Provident Mutual of Philadelphia.
Mr. Gesell. Are you general agent or agent ?
Mr. Krafft. I am a general agent.
Mr. Gesell. For the Provident Mutual here in Washington?
Mr. Krafft. In this territory.
Mr. Gesell. How long have you been general agent?
Mr. Krafft. Three and a half years.
Mr. Gesell. Were you an agent before you became a general
agent ?
Mr. Krafft. Some years ago, yes.
Mr. Gesell. With the Provident?
Mr. Krafft. No.
Mr. Gesell. What company were you with?
Mr. Krafft. I was with the Equitable of New York as an agency
assistant or unit manager before I went with Provident.
Mr. Ges|}ll. Mr. Krafft, I want to ask you about some of these same
topics that" We have been discussing here today. First of all, about
the problem of the new agent, the selection and training of the new
agent, have you some ideas on that you would like to give the com-
mittee ?
Mr. Krafft. You are entering a rather big field when you go into
the question of selection and training of the new agent.
Mr. Gesell. You have to select agents and train them all the time
as a general agent. I thought perhaps you could give us some idea.
Mr. Krafft. Yes, we do; and there has been a distinct develop-
ment in that field over recent years. Not so many years ago, the
entire desire was to get a quantity of men into the life-insurance
field.
Mr. Gesell. You mean by that
Mr. Kratet (interposing). Numbers of agents.
Mr. Gesell. Take on a Tot of agents and some of them would suc-
ceed and that way you would build up an agency ?
Mr. Krafft. That is right. During recent years, we have found
that that was not successful from the point of view of the company.
CONCICNTRATION OF ECONOMIC POWER 15363
from the poiiit of view of the general agent himself, and so selection
has entered the picture.
The Chairman. How long since ?
Mr. Krafft. That has been going on over the period of about the
last 8 or 10 years, that definite attention has been given to that.
In that selection, we tried to pick out men of different caliber than
we did some years ago. By that, I mean men who have a reasonable
chance of success in the business over a period of time. In. addition
to the usual selections made by the general agent and the members
of the general agency, we have been going a step further through the
use of aptitude tests to see if it were possible to get an advance indi-
cation of that man's ability in the life-insurance business. Recently
we have given more consideration to his contacts and his position in
the territory. Through every method we have tried to select men
who would be permanently successful.
Mr. Gesell. I take it that means you selected fewer men ?
Mr. Krafft. We have.
Mr. Gesell. Do you look into the financial standing of the agent?
Mr. Ejiafft. Very carefully.
Mr. Gesell. Must he have some independent resources?
Mr. Kjrafft. We prefer that he have enough independent resources
to keep him close to his normal standard of living for a period of
months.
Mr. Gesell. Why is that?
Mr. Krafft. Because we recognize that during that early period of
time, it will be impossible for him to earn what he would need.
Mr. Gesell. And as a result, what will happen?
Mr. Krafft. Will you rephrase the question ?
Mr. Gesell. As a result, what will happen if he hasn't got some
means of his own?
Mr. Krafft. Then it will become the general agent's problem to
give him assistance if he is deserving of assistance during that early
period.
Mr. GeseIjL. But given a man who can't get assistance from his
general agent and hasn't much resources of his own, would you agree
there would be a tendency for that man to go out and mis-se]l policies
in an effort to get a living?
Mr. Krafft. I can't agree with you on the use of the word "mis-
sell." I can say he would go out under more pressure to sell than
he would under normal conditions.
Mr. Gesell. And thus the likelihood of mis-selling would be
greater ?
Mr. Krafft. There is a likelihood he wouldn't answer the needs of
(he policyholder.
Mr. Gesell. What do you feel about the question of minimum
guaranteed salary in the early years, along the lines we were discuss-
ing with Mr. Zimmerman this morning?
Mr. Krafft. During the early years I have always felt there was
a definite period where a change m our schedule could be made that
would make it better for the man coming into the business.
Mr. Gesell. You mean then that it would be desirable to pay some
kind of a minimum guaranteed salary?
15364 coN( ;entration of economic power
Mr. Krafft. It would be desirable to make a change in the com-
pensation schedule.
Mr. Gesell. You mean either pay him a lot more for selling a pol-
icy or ijive him some kind of a salary?
Mr. lOiAFFT. Give him an additional salary, either from commis-
sion sources — by that I mean discounting unearned advance
premiums.
Mr. Pike. That would be something like a drawing account?
Mr. Krafft. It would be somewhat in the nature of a drawing
account,
Mr. Gesell. There have been a lot of dangers in the matter of the
drawing account, have there not?
Mr. Krafft. Yas; there are.
Mr. Gesell. It seems to me I recall quite a bit of criticism of that
'way back in the Armstrong days.
Mr. Krafft. There has been.
Mr. Gesell. Wouldn't the salary procedure obviate 'many of those
difficulties ?
Mr. Krafft. A salary procedure would undoubtedly obviate a lot
of that difficulty.
Mr. Gesell. What period of time to you think the agent should
have that type of assistance ?
Mr. Krafft. That is a hard question to answer because each man:
who comes into the life-insurance business is an individual, an(^
some will have a financial background and others will not. It would
have to differ with each man brought into the business.
Mr. Gesell. You mean you might have some arrangement which
would pay him until he was in a position to go it on his own?
Mr. Krafft. To go on his own.
Mr. Gesell. Do you think you would attract a higher quality of
men to the profession of a life-insurance agent if he had some such
guaranty in the earlier years?
Mr. Krafft. I think undoubtedly it would improve the men com-
ing into the insurance business.
Mr. Gesell, You select agents all the time for your agency?
Mr, Krafff, Yes,
Mr. Gesell. Is that your practical experience, that if you do have
something like that to offer them, you will get a better type of man?
Mr. Krafft. I would have to answer that from the other angle,
that the man who has a financial background and comes into the
business is more likely of success.
Mr. Gesell. That is very interesting. You mean those that have a
little stand-in at the beginning
Mr. Krafft (interposmg). Yes.
Mr. Gesell (continuing). May take a little more time in learning
and get to be better agents?
Mr. Krafft. They will develop iilto better agents.
Mr, Geseix. And do you sometimes meet resistance from agents
whom you would otherwise employ because of the fact that you are
unable to give them any such guaranty in the early years?
Mr. Krafft, Yes; that is true.
Mr. GESiax, Now, taking it 'way on the other end, if you could
CONCENl^RATlON OF ECONOMtC POWeR 15365
offer to a man who came to the life-insurance business some type of
security in his old age, do you believe you would get a better type
of man?
Mr. Krafft. I think that would make a difference.
Mr. Gesell. You recall Mr. Zimmerman said today that was his
practical experience in the field, that a lot of people asked about
security and wanted security.
Mr. Kjiafft. They do; and I feel there is a place in the Social
Security program for the life-insurance agent.
Mr. Gesell. Would you perhaps try to get that security on the last
end of the agent's career through some changes in the compensation
schedules which would give more emphasis to renewal commissions
and less to first-year commissions?
Mr. Krafff. I don't know that the security at retirement enters the
picture there as much as perhaps a change in the existing commission
. schedule which would give higher renewals.
Mr. Gesell. Will you elaborate on that a little ?
Mr. Krafft. Taking the first part of the question as I understood
it, it seems to me that an opportunity exists for life-insurance agents
to be included under Social Security, in view of the fact that it is a
social program and they should be included.
However, on the other part of it, a change in the commission sched-
ule which would increase renewals or compensation during the life-
time of the policy would undoubtedly stabilize the earnings of the
agent.
Mr. Gesell. You mean by that that if a man knew that he was to
get some kind of a commission as long as his policies persisted, and
that that commission was in the nature of a service commission for
what he did, it might have a very beneficial effect in that it would
bring him a more stable agency force and give some degree of sta-
bility in later years ?
Mr. Krafft. That is correct.
Mr. Gesell. Would you feel that a lower first-year commission
would be necessary to offset a more extended renewal commission ?
Mr. Krafft. I believe, Mr. Gesell, we are getting into a question
there that is beyond me, the question of the limitations with regard
to commission payments to agents. I am not qualified to answer
that. If it could be done so that it would not affect the cost of the
protection to the policy owner, I would say "Yes."
Mr. Gesell. Do you experiment with salaried agents in your own
general agency?
Mr. Krafft, I do not, no.
Mr. Gesell. Why not?
Mr. Krafft. For two reasons. I have had no experience with it and
I haven't a financial position that would enable me to experiment
with it.
Mr. Gesell. You obviously believe in it from what you have said
here this afternoon.
Mr. Krafft. I think there is an opportunity there.
Mr. Gesell. Isn't your position probably that of a lot of other
general agents — without some kind of financial support from theii
company, they couldn't put such a program into effect?
15366 CONCENTKATION OK ECONOMIC POWER
Mr. Kjjafft. I believe there would be many in that position.
Mr. Gebell. Would you, with some kind of arrangement from your
company, be willing to initiate that kind of a program in your agency,
give it a try?
Mr. Krafft. The answer would have to be "Yes."
Mr. Gesell. Similarly, are there in the case of your agency things
you would like to do from the point of view of training which you
are unable to do because you do not have the same type of financial
support?
Mr. Krafft. I don't believe that holds true with regard to my
agency in training, as I have been extremely interested in that sub
ject of training over a period of years, and I have possibly acted,
myself, in the capacity of an instructor in various lines.
Mr, Gesell. As I recall you telling me one time, you have been
extremely "hypped" on that subject for a long time.
Mr. Krafft. I would have to disagree with the word "hypped,''
but I have been vitally interested in it because I believe that is a
definite advance that has to be made in our business.
Mr. Gesell. I have no further questions of Mr. Krafft.
The Chairman. Do the members of the committee desire to ask
any questions?
Thank you very much, Mr. Krafft.
(The witness, Mr. Krafft, was excused.)
Mr. Gesell. Colonel Crawford.
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. Crawford. I do.
TESTIMONY OF LAWRENCE C. CRAWFORD, INSURANCE BROKER,
WASHINGTON, D. C.
Mr. Gesell. Will yoii siate your full name, please, sir?
Mr. Crawford. Lawrence C. Crawford.
Mr. Gesell. With what company are you associafed, Mi-. Craw-
ford?
Mr. Crawford. I am principally associated with the Travelers of
Hartford.
Mr. Gesell. Are you licensed as an agent with them?
Mr. Crawford. I am.
Mr. Gesell. With what other .companies are you licensed as an
agent?
Mr. Crawfoijd. I have a licunse with the Aetna and one with the
Prudential.
Mr. Geseix. Do you also hold a broker's license?
Mr. (^R^VWFORD. I do.
Mr. (lESELL. Would you consider that you arc primarily a brokei-?
Mr. Crawford. I prefer to consider myself as a broker,
■ Mr. Gf.sfjJj. How long have you been in the business of being a
broker?
Mr. Crawiord. About 15 years.
Mr. GRstxL. Here in the District?
Mr. Crawford. Yes.
CONCENTRATION OF ECONOMIC POWER 15367
Mr. Gesell. 1 suppose as a broker you sell not only life insurance,
but other forms of insurance as well.
Mr. Crawford. I sell everything except ocean marine.
Mr. Gesell. And you say your coimection is with the Travelers?
Mr. Crawford. Yes.
Mr. Gesell. Will you explain how that works out?
Mr. Crawford. I have an agency contract with the Travelers and
I produce a certain amount of life and casualty business, in return
for which I have accommodations, offices, in the Travelers office.
They give me accommodations and telephone service and things of
that kind, in proportion to the premium volume which I produce
on all lines for them.
Mr. Gesell. Did I understand that when you approach a policy-
liolder, you are an independent in tliat you may place the policy in
any company you desire?
Mr. Crawford. Absolutely.
Mr. Gesell. In accordance with his wishes?
Mr. Crawford. Absolutely.
Mr. Gesell. Mr. Crawford, we have never had a life-insurance
broker on the witness stand here and if you will tell the committee
a little about a broker, what he is and what he does, and what you
think about a broker, and what his function is in the life-insurance
business, I think it would be very interesting.
Mr. Craavford. I will be very glad to, Mr. Gesell.
I think in the first place that the sale of life insurance by brokers
means that the policyholder or the prospective policyholder is not
necessarily limited to the offerings of one company. He gets the
best that the market affords, within reasonable limits. It has worked
very successfully in the casualty and fire business, and I see no rea-
son why it shouldn't be to the advantage of the purchaser of insurance
in the life-insurance business.
Mr. Pike. It is not very customary, though, is it, in life insurance?
Mr. Crawford. It is not very customary. There are a number of
large brokers and it is growing,. I think.
It has always seemed to me that it is very much more logical, since
the policyholder pays the premiums, that the salesman, the producer,
should represent the policyholder rather than the company.
Mr. Gesell. You mean by that that when you come to a policy-
holder, you have not the line of any one company to offer, and there-
fore you are a little freer to select policies which would meet his
own needs?
Mr. Crawford. Yes; that is exactly what I mean. Many people
that 1 approach want participating insurance, some want nonpar-
ticipating insurance. I am fairlv free to place policies in either
kind the policyholder desires, and in approaching the policyholder,
I try to make it perfectly clear — or the prospect — that it is not really
the cost of the contract that I think is the most important. I think
the most important things in the life-insurance contract are the policy
provisions.
Mr. Gesell. Will you explain that a little more for us? Is there
such a variety in policy provisions that you really need somebody
to broker those policies?
Mr. Crawford. Yes; I think there are a great many things in the
15368 CONCENTRATION OF ECONOMIC POWER
ordinary life policies — take the leading 20 — in the way of options,
settlement agreements, and also underwriting provisions. For ex-
ample, you nnd many companies whose disability provisions will
exclude disability resulting from military and naval service in time
of war. There are other companies whose disability provisions don't
have such limitations in them, and consequently I thmk it would be
wrong to sell a man in the Army a disability provision, a contract
with a disability provision that was "out" in the event of military
and naval service in time of war when he can get exactly as good a
disability provision, with exactly as good a company, without such
a limitation in it.
Mr, Pike. Even though he were just a Reserve officer.
Mr. Gesell. Give us some other examples, will you. Colonel
Crawford ?
Mr. Crawford. I had a woman call me up the other day and ask
me to come out and write some 20-payment life insurance on her
17-year-old boy. She asked me what company I was going to put
it in, and I told her I didn't know, I was going to see what was
the best the market afforded. I queried one or two companies and
I found there was only one company that would give that type of
insurance, 20-payment life, with a disability provision and double
indemnity in the event of accident, to a 17-year-old boy, and nat-
urally I took an application out and sold her a 20-payment life in
that particular company. The question of the relative cost of the
two contracts never entered into the argument or the discussion
at all. It was just a question of what; was the best coverage for that
particular prospect, and that is the way I think a brokerage contract
enables a man to operate.
Mr. Gesell. Let's have some more examples. This is very in-
teresting, and if there are some more examples that you can give us as
to why you think you are able to give this different type of service,
I should like to have them.
Mr. Crawford. It is especially important at this time, I think,
because of the war-service limitations that the companies have put on.
I had a customer, who is a marine officer, write to me from the
Pacific coast the other day and he wanted an additional $5,000 life
insurance. He had the maximum in Travelers that I would nor-
mally have put him in, he couldn't get any more, and I began to
hunt around to see where else I could put him. The first company
I approached wouldn't write disability and double indemnity or
accident on an officer in the service. Therefore, I dropped it and
found a company that would.
Mr. Gesell. lliCt's take it from another point of view. If you are
called in by a policyholder to program him or to adjust his schedule
of policies, do you find because you are a broker and perhaps a
little more acquainted with the different lines offered by the different
companies, that you are able to give any different service than you
would be if you were an agent for just one company?
• Mr. Crawford. Oh, yes; the fact that I do have to deal with a
good many different companies in my activities as a broker enables
me, I think, to become more familiar with the policies of other
companies. As illustrative of that, I would like to point out that
here is a compendium of the different practices of the companies
CONCENTRATION OF ECONOMIC POWER 15369
in connection with settlement options and underwriting provisions.
That is^not all of them. That is gotten up by the Chartered Life
Underwriters Chapter of New York for the guidance of people who
are doing programming. I refer to it only because I want to il-
lustrate how many different options and settlement agreements there
may be in an ordinary-life contract that comes from the different
companies. There are only four kinds of contracts : term-insurance,
ordinary-life, limited-pay, and endowment, and everything else is
just a combination of those, but there is a compendium that shows
15, 20, 25 companies with different settlement options.
Mr. Gesell. There is quite a disparity between the provisions, is
there not ?
Mr. Crawford. Yes ; in a general way there is.
Mr. Henderson. Suppose a client comes to you for programming
and he, for example, has taken his policies while a single man and
paid no attention to them, and has acquired a family, and so forth.
Your judgment tells you that perhaps he ought to drop some
insurance, take other kinds, and the like. Do you work it out for him ?
Mr. Crawford. Oh, yes; I had a man come in the other day, he
had been recently married, he had $2,000 10-year endowment insur-
ance, and I recommended he drop it and take $10,000 5-year term
because that is all he could afford.
Mr. BfeNDERSON. Do you run into any trouble with the companies
on that? Do you get accused of switching, or is there a technical
distinction there that lets you out of any charge of switching?
Mr. Crawford. Mr. Henderson, whenever I recommend that a man
drop a policy, or whenever I write a policy replacing another con-
tract, it always shows in the application that tnis is a replacement,
and I always accompany the application ^with a letter from the assured
or from the applicant saying that this substitution is his own idea
and he knows what he is doing and he wis|;ies it done that way, and
there never has been any question raised.
The Chairman. There are some substitutions, however, in which
the policyholder doesn't know what he is doing? Is that a fair
inference from what you say?
Mr. Crawford. That is the common report, Senator; yes, I think
there are.
The Chairman. And is that what is meant by twisting?
Mr. Crawford. That is it.
The Chairman. Are we to understand that twisting is a device to
the disadvantage of policyholders which some agents"indulge in?
Mr. Crawford. Yes.
The Chairman. And which is generally condemned by the in-
dustry?
Mr. Crawford. Absolutely.
The Chairman. You are not defending that ?
Mr. Crawford. No, no, no. I think that tkere are many times
when it is to the policyholders' advantage to drop a policy, but
when that situation occurs there isn't any reason at all why the
policyholder and the company and everybody else shouldn't know
it, because it is something that will stand the light of day.
The Chairman. Do the companies always know when a policy
is being dropped in another company?
15370 CONCEiNTKATION OF ECONOMIC POWEll
Mr. Crawford. They always do when I write it.
The Chairman. I understood that from what you said, but I mean
as a general practice in this method. Is it possible for a company
to write a new policy substituting for an old one without knowing it?
Mr. Crawford. Yes; it is possible, if there is falsification in the
submission of the application.
The Chairman. I meant assuming that the application was filled
out properly and according to rule.
Mr. Crawford. Not if it is filled out properly and according to
rule, because every application that I have ever seen, or else every
medical statement, has the question: Does this contract replace any
existing insurance?
The Chairman. That appears in every application, does it, of
every company with which you have had any experience?
Mr. Crawford. It either appears in the application or in the state-
ment of the medical examiner.
ITie Chairman. So would it be h correct infei-cucc that twisting
could not take place if it were not at least tolerated by the company
writing the substitute policy ?
Mr. Crawford. Yes^ sir; if the^ application is honestly made out..
The Chairman. I see a man in the audience shaking his head
about that, so there must be some debate.
Mr. Crawford. Well, of course, you must remember. Senator, I
am not a company official and just how the companies act on those
applicatior s and just what they do with them and how much scrutiny
they give chem I don't know. All I know is the common practice
among the agents and the particular practice with reference to the
applications that I send in.
Mr. Gesell. It is very much a matter of definition, is it not, what
is twisting and what is replacement? As I understand the statutes
they mostly read that twisting is switching a policyhxDlder from one
policy to another by misrepresentation or an omission to state some
material fact, whereas replacement, putting a policyholder out of
one policy and into another without misrepresentation, with com-
plete disclosure, is a perfectly regular practice that takes place all
the time.
Mr. Crawford. I think so; yes.
The Chairman. The distinction as you define it I think is quite
clear. All I was trying to determine was, whether the application
is so written that a company writing the substitute policy has reason
to know that it is a substitute policy or whether that can be
concealed.
Mr. Crawford. Not if the questions are honestly answered.
Mr. Gesell. The chairman will recall the testimony before the com-
mittee with regard to an intercompany agreement known as the re-
placement agreement, signed by many, many companies, under the
terms of which a period is given whereby one company who is about
to write a policy replacing that of another company corresponds with
that other company and notifies them in order that tl e agent of the
other compkny may go and attempt to conserve the business and to
determine whether or not a twist or a pure replacement exists.^
1 See testimony of Mr. Frank L. Jones, HoarinKS, I'art 3 0, pp. 4648 to 4668.
CONCENTRATION OF ECONOMIC POWER 15371
Mr. Pike. I think there is one way to avoid that, an honest way :
To take out the new policy and wait 2 or 3 months before canceling
the other.
Mr. Crawfokd. It is nonetheless a false answer to the question:
Is this proposed insurance replacing any existing insurance ? If you
know you are gomg to do it, it is just as much falsification as if you
know you have done it.
The Chairman. Would the brokerage system open the door to that
sort of practice?
Mr. Crawford. I don't see that the brokerage system would open
the door to it any more than the agency system does. There is noth-
ing ill an agency contract that makes a man any more upright than
ill a brokerage contract, I think.
The Chairman. No ; people are pretty much alike, whatever line of
business they are engaged in.
Mr. Gesell. Will all companies take brokerage business ?
Mr. Crawford. No; it is very difficult sometimes to place policies
on fi brokerage basis.
Mr, Gesell. Will you explain what happens in those cases and why
it is difficult to place them?
Mr. Crawford. Well, the companies have two reasons which they
give which I confess have never seemed to me to be very logical.
One of them is that it protects their own agents. My answer to that
is that I think business should be conducted for the benefit of the
public and not for the benefit of the agents. What is best for the
public is best for the business as a whole.
The other answer they give is, or the other reason, that it increases
the mortality, that they get loaded up with unfavorable or border-
line cases, that they don't get the whole story from the broker as they
do from their agent. The reason I think that is not logical is because,
as I said k minute ago, there is nothing in an agency contract that
makes a man any more upright than a broS:erage contract, and if the
companies get a sour risk from an agent, or one or two of them,
they soon throw him out. If they did the same thing with brokers,
the same result would, I believe, come about.
Mr. Gesell. Is there any way you can place business in a company
that won't take brokerage?
Mr. Crawford. In some companies you can place business that
won't take direct brokerage.
Mr. Gesell. What is the practice?
Mr. Crawford. By splitting the commission with an agent of that
company. In other companies that have a very well disciplined
agency force you simply c"an't place brokerage, "they simply won't
take it, that is all.
Mr. Gesell. But in the companies that haven't suph a well-disci-
plined agency force, you say split commissions — I take it you mean
the business appears to the company as coming from the agent, he
has a participation in it with you?
Mr. Crawford. That is right.
Mr. Gesell. Are there any other angles to this brokerage business
that occur to you ?
Mr. Crawford. Of course, I would like to point out that in the
operation of a brokerage business from the public standpoint it is
15372 CONCENTRATION OF ECONOMIC POWER
very important that the brokers be bonded or carefully supervised
because the public is at the mercy of an unscrupulous broker. When
the public pays money to a broker, if the broker makes away with
it he has no recourse, whereas if he pays it to an agent the company
is bound by the payment .to the agent.
Mr. Gesell. Is that true even though the agent is an independent
contractor, for purposes of Social Security?
Mr. Crawford. I don't think there is any question in the world
but that money paid to a man holding an agency contract the com-
pany is responsible for, and I don't think it has ever been questioned ;
I have never heard it questioned.
Mr. Gesell. Do you feel the present requirements with respect
to the bonding of brokers are adequate ?
Mr. Crawford. Unhappily we have no such requirement in the
District of Columbia, and we are working for such a requirement
today,
Mr. Gesell. I have no further questions of this witness.
Mr. Hayes. One question occurs to me, Mr. Crawford. Several
times as a prospect I have had an experience such as this, that an
agent supposedly a whole-time agent of a particular company, would
attempt to sell me insurance," and for some reason or another I
wouldn't like the particular contract in his company that he offered.
In every such instance — and it happened, I should say, four or five
times all told — he has countered that remark with the suggestion that
he could place it in some other company for me. Do you know
whether or not supposedly whole-time agents actually do engage in
some sort of brokerage of that character, and do they do it on a
split commission basis or just how do they arrange it when they
place insurance in companies other than their own ?
Mr. Crawford. Agents very frequently place policies in companies
other than their own.
Mr. Hayes. Whole-time agents?
Mr. Crawford. Wliole-time agents, for just the. reasons you give,
and sometimes in order to get it placed in other companies they have
to split the commission with an agent of the other company. Other
times the company will accept it as brokerage, but it is a perfectly
legitimate activity of a full-time agent, because he says to his com-
pany, "Well, this prospect won't nave my policy and there is no
reason why I should lose the commission, therefore I am going to
place it in the other company."
Mr. Hayes. I was merely curious to know how extensive was the
practice as far as you knew. Would you say it is fairly extensive?
Mr. Crawford. Yes; I think it is fairly extensive, although it is
not legal unless the man is licensed as a broker.
Mr. Hayes. Let me get that straight. Do you mean it is not
legal for him to do that?
Mr. Crawford. It is not legal for that company to pay him a
commission unless he either has a brokerage license or an agency
license.
Mr. Hayes. You mean the second company with which he places
the insurance, unless he places it through one of their agents?
Mr. Crawford. That is right.
Mr. Gesell. Agents freauently do carry licenses in several com-
panies just to be able to place tne business outside of their own?
CONCENTRATION OF ECONOMIC POWEP 15373
Mr. Crawford. Yes, indeed.
The Chairman. Are there other questions? We are much indebted
to you.
(The witness, Mr. Crawford, was excused.)
Mr. Gesell. Mr. Maloney.
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. Malonet. I do.
TESTIMONY OF JAMES A. MALONEY, AGENT, FIDELITY MUTUAL
LIFE INSURANCE CO., WASHINGTON, t. C.
Mr. Gesell. Mr. Maloney, what is your full name, sir?
Mr. Maloney. James A. Maloney.
Mr. Gesell. With what company are you coniiected ?
Mr. Maloney. Fidelity Mutual Life.
Mr. Gesell. Here in the District?
Mr. Maloney. Yes.
Mr. Gesell. How long have you been an agent?
Mr. Maloney. I have been an agent for I6V2 years, a general agent
for 3V^, and I am back as an agent now.
Mr. Gesell. All the time with the Fidelity, or with different
companies?
Ml-. Maloney. No; I was I6V2 years with the Equitable and 31/2,
approximately 4, with the Fidelity.
Mr. Gesell. How long have you sold insurance here in the Dis-
trict?
Mr. Maloney. Twenty years.
Mr. Gesell. I want again to cover these same topics with you
• that I have covered with everyone else, Mr. Maloney. Is there much
of a turn -over in your office?
Mr. Maloney. When I was manager there was.
Mr. Gesell. You are manager no longer?
Mr. Maloney. That is right.
Mr. Gesell. There is not a turn-over now as heavy as before ?
Mr. Maloney. The new manager hasn't been in long enough to
determine, I don't think.
Mr. GESEtli. What were the reasons for the turn-over ?
Mr. Maloney. I think bad judgment in the selection of men. I
think I was guilty of that.
Mr. Gesell. In addition to that, were there any reasons ?
Mr. Maloney. I think that is the main reason.
Mr. Gesell. Do you have a wide range of men to select from ?
Mr. Maloney. Yes.
Mr. Gesell. And you believe that the reason for the turn-over
was mainly the inability to choose good men.
Mr. Maloney. I would say it is the difficultj^ of drawing into a
business the type of man which the companies have been trying to
get, but which they are having difficulty in getting, and which we,
as managers, experienced difficulty in trying to put them under con-
tract.
Mr. Gesell. Why is it difficult to get them in f
Mr. Maloney. Well, there are a lot of reasons for it, probably.
1244&1 — 41— pt. 28 44
ir)374 <'onc.i:nti;a'i i<».\ oi- ioconoaik^ powku
The insurance business possibly hasn't the same, you might say, high
standing that I tliiuk it shonld have, primarily because of the large
turn-over.
Mr. Gesell. Is it partly because the men don't see any sure earn-
ings ahead of them when they first come in?
Mr. Maloney. I don't knuw that that is it entirely. Tliere is a
certain amount of uncertainty about the business which it is difficult
to overcome, and I think' it takes a particular type of man to sell
life insurance, and it is veiy difficult to find that type of man.
Mr. Pike. Do you think you can tell him in advance of actual
experience ?
Mr. Maloney.' T have used tests of various kinds and I have selected
them with college degrees, and I haven't found that it helped much.
Mr. Gesell. What do you think about the possibility of getting
better men through giving some kind of a mininnim guaranteed
salary in the early years?
Mr. Maloney. I think that would be very helpful, for this reason,
that it would put sort of a rein on the manager in his selection if it
were necessary for him to put up, or the the company to put up, a
certain minimum amount; that there would be considerably more care
exercised in the appointment of men than there is at the present time
when there are no salary advances.
Mr. Gesell. You mean the agent or manager of the companj'
would have a stake in the man?
Mr. Maloney. They would have to make a very careful decision.
Mr. Gesell. What is one of the factors in taking on men, the de-
sire to increase volume?
Mr. Maloney. The desire to take on -men is the same as that in
any other business, to^increase one's income. If he is a manager,
he wants a larger income. If he is an agent, he goes into the busi-
ness because he thinks he can make a larger amount there than
elsewhere.
Mr. Gesell. Is it the tendency of managers to take on a lot of
men to increase their own volume?
Mr. Maloney. I have heard that there were — I don't know whether
there are now — two schools of thought, one where a large number
of men might bring in a large volume; and then there was another
school of thought where selection was the paramount factor, and I
think in recent years that it has been pretty well proven that selec-
tion is more important than numbers.
Mr. Gesell. Do you think you would get a better selection if there
was some kind of salary, such as. we have been discussing?
Mr. Maloney. I don't know whether you would or not, but it would
certainly be conducive of a little more care.
Mr. Gesell. Do you think there is a tendency for new men com-
ing in with no financial means and with no type of salary guarantee,
to sell insurance or misplace insurance just for the sake of making
a living?
Mr. Maloney. My experience has been that the average man is
essentially honest, and I have found in my 20 years very, very few
men in the insurance business who were dishonest.
Mr. Gesell. I didn't mean to say that it would be dishonest to
try to sell somebody instirance, but if a man has to make rent, if a
CONCENTKATION OF ECONOMIC POWEll' 15375
man has to make gas bills, and if a man has to make things of that
sort, he is more apt to be a little strenuous in placing a policy and a
little less apt to fit his program to the policyholder's needs; don't
you think that is true?
Mr. Maloney. I don't think it is true at all with a man who recog-
nizes his own capacity to sell, because it never becomes necessary
for him to cut those sharp corners.
Mr. Gesell. We are talking about the new men now, untrained
men, beginners.
Mr. Maloney. I don't know, I wouldn't like to answer that. I
would say off hand that he would be pretty honest as a whole.
Mr. Gesell. Do you think the method of compensation should be
changed ?
Mr. Maloney. I don't think it should be reduced. [Laughter."]
The reason I say that is because there has been a lot of discussion
about it, and particularly reducing the first-year comnjission and
extending it over a longer period of time.
Mr. Gesell. What do you think of that?
Mr. Maloney. I would be opposed to that, personally, for the rea-
son I think the Social Security could take better care of our needs
and there would be certain minimums that we could look forward
to, whereas if we attempted to do that by prolonging the commis-
sions, our incomes to a great extent would be dependent on the lon-
gevity or the economic disasters that might affect people, with a
resultant loss of our policyholders upon whom we would depend
for our annuity. I don't think it would be very satisfactory.
Mr. Pike. You would want to get policies on younger people than
you were, if j^ou wanted to be sure to get through.
Mr. Maloney. They wouldn't do it then because there would be
too many things that would interrupt the continued process of that
.policy over a period of time, say 20 years.
Mr. Pike. Yes ; it is quite clear you would have a constant detrition
in your period of policies.
Mr. Maloney. And as you got older you would bo unable to re-
place them.
Mr. Gesell. I have no further questions of this witness.
(The witness, Mr. Maloney,' was excused.)
Mr. Gesell. Mr. Crowley.
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. Cbowley. I do.
The Chairman. Please be seated, Mr. Crowley.
TESTIMONY OF THOMAS R. CROWLEY, CROWLEY & MARR, GEN-
ERAL AGENTS FOR THE PENN MUTUAL LIFE INSURANCE CO.,
WASHINGTON, D. C.
Mr. Gesell. Will you state your full name, please, sir?
Mr. Cbowley. Thomas R. Crowley.
Mr. Gesell. With what company are you connected?
Mr. Crowli':y. I am a member of the firm of Crowley & Marr
and we are general agents for the Penn Mutual.
15376 CONCENTRATION OF ECONOMIC POWER
Mr, Gesell. Here in the District?
Mr. Crowley. Here in the District.
Ml'. Gesell. How long have you been general agents for the
Penn Mutual?
Mr. Crowley. Since January 6, 1931.
Mr. Gesell. Were you in the insurance business before that time?
Mr. Crowley. Yes, sir.
Mr. Gesell. As an agent or general agent?
Mr. Crowley. As both.
Mr. Gesell. How long have you been selling insurance?
Mr. Crowley. I have been selling insurance since January 1919.
Mr. Gesell. With the Penn Mutual, or with other companies as
well?
Mr. Crowley. With two other companies prior to the Penn Mu-
tual, but for a very short time with the other two. I have been
with Penn Mutual since 1922.
Mr. Gesell. What do you think of this problem of turn-over of
agents? Would you agree that it is a/ problem?
Mr. Crowley. Yes; I do agree that it is a problem.
Mr. Gesell. What causes it?
Mr. Crowley. Well, I think you will find that turn-over with
most agents occurs — I am speaking for ourselves, and when I say
"ourselves" I mean our office, I don't know much about the other
fellow — in the first 2 years. If we had a 2-year tenure of time in
which to educate and supervise a man we might expect little turn-
over. In that first 2 years it comes, in large measure, and I should
say with our own case it comes through inability to select.
Mr. Gesell. Is it all a matter of selection or is it also a matter
of training?
Mr. Crowley. It is a matter of both. It is a matter of three
things; it is like a three-leaf clover. You have your selection, you
have your training, and you have your all-important supervision.
Mr. Gesell. Are you able to bring to your agency the kind of men
you would like to bring?
Mr. Crowley. We can bring the type of men we would like to
bring. Just pursuing your question a little further, we don't bring
them in the number we would like to bring them.
Mr. Gesell. That is what I was getting at. What is the reason for
that? Is it because perhaps you can't oner them anything definite at
first ?
Mr. Crowley. No ; I don't think that is the reason, to be very frank
with you, because we have offered them something definite.
Mr. Gesell. You have?
Mr. Crowley. Yes.
Mr. Gesell. You have tried the salary plan ?
Mr. Ckowley. We have.
Mr. Gesell. Have you found it successful?
Mr, Crowley. We have not.
Mr. Gesell. How long have you been using it?
Mr. Crowley. About 18 months.
Mr. Gesell. Do you find you have just as much of a turn-over
with the salaried man as with the other kind of man ?
Mr. Crowley. I should say yes.
CONCENTRATION OF ECONOMIC POWER 15377
Mr. Gesell. What kind of salary do you pay them ?
Mr. Crowley. We try to pay him a salary that he would figure he
could live on.
Mr. Gesell. What does it run ? Is it different for each man ?
Mr. Crowlet. It might be different for each man. In no case has
the salary been less than a hundred dollars a month and in no case
has it been greater than one hundred and fifty, to give you the exact
figures.
Mr. Gesell. How long do you guarantee it?
Mr. Crowlet. Well, we start off under our arrangement for 3
months, based upon a certain specific performance. If that per-
formance goes along, we will go for another 3 months, and so on. We
will continue for 2 years. We never have, though, continued for 2
years.
Mr. Gesell. Then you would feel that it is a matter more of train-
ing and of supervision ?
Mr. Crowlet. That is what I think.
Mr. Pike. Would you start that salary with the training period or
wait until he had gone through the training period before starting it ?
Mr. Crowlet. We have done it both ways. I don't know that it
makes a great deal of difference.
Mr. Kades. That salary isn't in the nature of a drawing account?
Mr. Crowley. That is a salary.
Mr. Kades. Straight salary?
Mr. Crowlet. Yes.
Mr. Gesell. Do you feel the licensing requirements for agents
are sufficiently stringent?
Mr. Crowlet. I don't know that I do.
Mr. Gesell. I take it from that you mean you don't think thej^
are sufficiently stringent?
Mr. Crowlet. That is right. I think they could be more stringent
here in the District.
Mr. Pike. In what regard, Mr. Crawley ?
Mr. Crowley. I think they could search more thoroughly into
an agent's actual knowledge of the application of the business rather
than such questions as how many days of grace and what have you.
Mr. Pike. The technical knowledge isn't the all-important thing?
Mr. Crowlet. That is right, I think.
Mr. Gesell. How long a training period do you give a man
before you let him take a rate book and go out and try to sell?
Mr. Crowlet. Well, we keep him in the office approximately 2
weeks, during which time we try to give him a working knowledge
of the various policies and their application. From then on it is a
constant process of education. I should say in 2 weeks' time he
would have a pretty fair technical knowledge of the 90 percent of
cases that he will eventually sell, 90 percent of the policies that he
will eventually sell.
Mr. Gesell. Is he kept under supervision after that first 2 weeks'
period ?
Mr. Crowlet. Yes, sir. He is constantly imder supervision from
then on.
Mr. Gesell. I meant especially sharp supervision?
Mr. Crowlet. Oh, yes ; yes.
15378 OOriC^ENTUATION OF ECONOMIC TOWER
Mr. Gesell. "What do you do, have hun come in and tell you the
problems he has met, case histoi-y stuff?
Air. Cro"\vlet. Yes; exactly. In addition to that, we have a
report system which he fills out no that we may have some idea of
his weaknesses, and the report system also helps us to bring out ours
in the supervising.
Mr. Pike. Do you send other men with him to help him close?
Mr. Crowley. We do Mhere he has made appointments. We don't
go out just canvassing.
Mr. Fike. But if he says, "Here is a tough one and I wish you
would help me," you do?.
Mr. Crowley. That is right.
Mr. Gesell. Do you think there are any changes which could be
made in the compensation system which would assist in the allevia-
tion of some of these problems we have been talking about?
Mr. Crowley. I don't know that there is any great, change in the
compensation system that can be made. There might be some im-
provement in the first 2 years. In my opinion, you have to have
an agent 2 years before you know whether you have got an agent or
whether you haven't.
Mr. Gesell. What about the other end with regard to pension
plans, social security, and so on?
Mr. Crowley. I, of course, am very mnch in favor of a pension
plan, not only for my agents, but I would like to have one for our-
selves. I thmk that, however — and I do want to say this — any
pension plan that might be devised should be a contributory one
Detween the company and the agent and should be self-supporting.
Mr. Gesell. Do you find that men may hesitate to come into the
business as agents because of the absence of such type of plan or
program for the latter part of a career that they might have?
Mr. Crowley. I have never definitely known that to be the case,
but on the other hand I believe it would be a decided asset in induc-
ing the proper kind of man to come in.
Mr. Gesell. It would help select?
Mr. Crowley. I think so.
Mr. Gesell. I have no further questions.
Mr. Pike. I have two questions. One may seem facetious. You
don't think that insurance agents in general would be good cus-
tomers for these policies we frequently see advertised assuring one
how easily one can buy retirement at ^55 or $100 a month? '.
Mr. Crowley. I don't believe the average insurance agent would
be a very good customer for that policy because I don't think he
could afford to buy it.
Mr. Pike. That is the ]ioint, tliat is the trouble. The other ques-
tion: Do you feel you have carried this salary experience long
enough? You haven't filled out your experimental period, have you?
Mr. Crowley. No; I have not.
Mr. Pike. But you feel definitely disappointed in the way it has
worked ?
Mr. Crowley. Well, it certainly has not worked so far.
Mr. Pike. And it had better improve pretty quickly or it will
prove unsatisfactory ?
Mr. Crowley. It will jirove that I won't do it any more.
CONUENTIIATION UF ECONU.MIC I'UVVEU 15379
The Chairman. Do you have any opmion with respect to various
majtters which have been discussed here by the agents who have been
called, differing from the opinions expressed by any of them?
' Mr. Crowley. Well, I differ somewhat from one agent who spoke
this afternoon with relation to brokerage business, and herein is where
I differ: I have been in the business since 1919 and I have never
really met one.
Mr. Gesell. Never really met a broker ?
Mr. Crowley. That is right. I have never really "met one. The
reason I say that is because every broker that I have met has always
had some main company affiliation and that main company has done
90 percent of his business.
The Chairman. In other words, you mean it is a title rather than
a practical method of doing business ?
Mr. Crowley. That is my opinion, sir.
The Chairman. Have you met many who call tliemselves brokers ?
Mr. Crowley. A great many, not locally here, but I know a great
many that call themselves brok n-s.
The Chairman. Are they numerous in the country at large?
Mr. Crowley. At large I would say no; there are quite a few in
New York City.
The Chairman. When you say you have met a great n..".ny, how
many?
Mr. Crowley. Oh, I guess I know 50.
The Chairman. And in each instance these men primarily serve
one company?
Mr. Crowley. That is right; th.it is my opinion. I say that is
right — that is my opinion.
Mr. Gesell. Mr. Crowley, do you think there are too many agents
in the District?
Mr. Crowley. No.
Mr. Gesell. You don't think that there are too many agents here?
Mr. Crowley. No ; I don't think there are too many here.
Mr. Gesell. How numy do you think there are?
Mr. Crowley. This is only a guess ; I am speaking of life-insurance
agents, I am not speaking of the number of licenses that are out. I
should say 250.
Mr. Gesell. Well, there are about 2,000 licenses out.
Mr. Crowley. I wouldn't doubt that.
Mr. Gesell. Would you agree, then, that there are too many
licensed agents?
Mr. .Crowley. I will agree with that.
The Chairman. Sometimes I liave lieard the taxi drivers say there
are too many taxis in this town.
Are there any other questions of Mr. Crowley?
Mr. Kades. Have you arrived at any conclusions as to why the
salary plan hasn't worked?
Mr. Crowley. Yes; I have. If I might divert just a moment
and tell you why I have reached my conclusions, I think that I have
been sold in putting these men under a salai*\' contract b}' the man's
anxiety to come In the business because he was getting a salary. Had
(he salary been nMnoA'od entirelj' from the picture and had he been
convinced that this Avas his business and tlTis was the tliinij he wanted
15380 CONCENTRATION OF ECONOMIC POWER
to do, and then I had said, "If you want to do this I will make it
possible for you to do it through the salary," I might have had a bet-
ter experience. I have gone about the thing myself in the wrong man-
ner. Instead of getting a man who wanted to make a career out
of the business I have thus far gotten men who wanted a salary.
Mr. Gesell. Then, you would feel .perhaps that you hadn't given
the plan a fair test.
Mr. Crowley. 1 think that is probably true.
(The witness, Mr. Crowley, was excused.)
The Chairman. Are there any other witnesses this afternoon?
Mr. Gesell. No others this afternoon.
The Chairman. The committee will stand in recess until 10 : 30
tomorrow morning,
(Whereupon, at 3:30 p. m., a recess was taken until 10:30 a. m.,
Thursday, February 29, 1940.)
INVESTIGATION OF CONCENTBATION OF ECONOMIC POWER
THUBSDAY, FEBRUARY 29, 1940
United States Senate,
Temporajry National Economic Commtitee,
Washington, D. C.
The committee met at 10 : 50 a. m., pursuant to adjournment on
Wednesday, February 28, 1940, in the Caucus Room, Senate Office
Building, Representative B. Carroll Reece, presiding.
Present: Representative Reece (acting chairman) ; Senator O'Ma-
honey (chairman) ; Representative Williams, Messrs. Kades, Pike,
Lubin, Henderson, and Brackett.
Present also : Senator Josh Lee, of Oklahoma, Gerhard A. Gesell,
special counsel ; Ernest Howe, chief financial adviser ; Helmer John-
son, attorney; and H. A. Blomquist, chief investigator. Securities and
Exchange Commission.
Acting Chairman Reece. The committee will come to order, please.
Are you ready to proceed, Mr. Gesell ?
Mr. Gesell. Yes, I am.
There are two or three matters left over from previous hearings
that I want to take account of for a moment. First of all, we intro-
duced for the record "Exhibit No. 2300" showing information con-
cerning the 10 largest urban real estate properties owned by the
Mutual Life Insurance Co. as of December 31, 1938.^ On the previous
exhibit introduced we simply showed one of the two appraisals which
had been made on the property. ^ The Mutual Life has requested that
the exhibit be modified to show both appraisals on the propertv by
independent appraisers, so I would like to offer this in lieu oi the
exhibit already introduced.
Acting Chairman Reece. It may be admitted as suggested by
counsel.
Mr. Gesell. When Mr. Beebe, of Mutual, was on the stand, the
committee requested that he supi)ly forms used by the Mutual in ob-
taining information from certain types of utilities in which the
Mutual was considering an investment. I am referring to two
such forms. The first form is \^hat is known as the "Water Company
Confidential Report for Insurance Companies." I understand that
that form is sent out to water companies.
The second form, which is known as "Report for Insurance Com-
panies," is sent to light, power, and gas companies. There are six
pages to this form, and wnen the companies engage in the combined
service of bpth electric light, power, and gas, all six pages are sent,
1 Supra, facing p. 15r,23.
16381
15382 OONqENTUATIOX OF ECONOMIC POWER
according to the information that the Mutual has given me. How-
ever, if tne company concerned is engaged only in the electric light
and power busLiieiiS, then pages 1, 2, li, 4, nnd 5 are sent. If the
company is engaged only in the gas business, pages 1, 3, and 6 are
used.
I would like to offer these reports for the record, in accordance
with the previous arrangement.
Acting Chairman Reece. They may be admitted.
(The forms referred to w^ere marked "Exhibits Nos. 2334 and
2334r-A," and are included in the appendix on pp. 155(50-15567.)
Mr. Gesell. There is one other matter involving the Mutual Life
that has to do with its urban real-estate account. The connnittee
will recall when Mr. Polk Avas on the stand, I discussed the real
estate of the Mutual at that time, and neglected, however, to offer
for the record a schedule showing for each of the Mutual Life's urban
real-estate properties in the city of New York held December 31,
1938, the book value, assessed value, appraised values, and adjust-
ment of book value approved by the real estate committee at the end
of the year. It will be recalled tliat this schedule was discussed with
Mr. Polk, trustee of the Mutual Life.
I should like to offer it to be filed with the committee at this time
as an exhibit. I should like to state that the schedule shows the New
York City properties of the Mutual had a book value as of December
31, 1938, prior to adjustment, of $49,672,006.35; an assessed value for
1938 of $60,989,500; a value according to appraisal by Brown,
Wheelock, Harris & Stevens, Inc., of $34,304,500, and an appraised
value by Horace Ely & Co. of $43,039,700, and a new book value as
adjusted by the real estate committee December 31, 1938, of
$48,099,750.
It should be pointed out in connection with the aoove figures that
one property having a book value of $3,168,000 and an appraisal
value of $2,850,000 by Horace Ely & Co. was not appraised by Brown,
Wheelock.
I do not wish to print the schedule but wish it to be given an
appropriate number and filed.
The Mutual Life has advised that as of December 31, 1939, the
book value of the balance of these properties remaining unsold was
reduced by a lump sum adjustment by an Ely appraisal.
Acting Chairman Reece. Is it your desire to have this printed?
Mr. Gesell. It is not. With the summary I have given, I think
it is unnecessary to print it, but I think it should bo given an exliibit
number.
Acting Cluiirman Reece. Very well.
(The schedule referred to was marked "Exliibit No. 2335" and is
on file with the committee.)
Mr. Gesell. The first witness this morning is Mr. Alfred M. Best.
Acting Chairman Reece. Will you be sworn, please?
Do you solemnly swear the testimony you shall give in this pro-
ceeding shall be tlie truth, the whole truth, and nothing hut the truth,
so help you God ?
Mr. Best. I do.
CONCENTKATION OF ECONOMIC 1*0 WER 15383
TESTIMONY OP ALFRED M. BEST, PRESIDENT, ALFRED M. BEST
CO., INC., NEW YORK, N. Y.
Mr. Geseix. Will you state your full name and address for the
lecord, please, sir?
Mr. Beot. Alfred M. Best, 75 Fulton Street, New York City.
Mr. Gesell. And what is your principal occupation, sir?
Mr. Best. I am president of Alfred M. Best Co., Inc., publishers
of insurance works.
Mr. Gesell. Will you give us a little idea of the type of insurance
publication that your organization distributes, particularly in the
life field «
Mr. Best. In the life field we have a large annual volume of re-
ports covering the history and operating results of life-insurance
companies, fraternal orders, and so forth, operating anywhere in the
United States. We have a small publication called "Best's Recom-
mended Life Insurance Companies," a simple tabulation of some of
the principal items, that is pocket size, and we have the life edition
of the Best's Insurance News that we publish monthly.
Mr. Gesell. Your organization receives detailed information con-
cerning the financial condition and the operations of legal-reserve
companies from year to year, does it not ?
Mr. Best. Yes; the larger companies file with us the same con-
vention form statements which they give to the insurance depart-
ments, together with some additional data that we find necessary
for the preparation of our reports.
Mr. Gesell. Do you also receive further information from sources
in the field. State insurance departments, and other sources of that
character, by correspondence with the companies directly?
Mr. Best. Oh, Yes.
Mr. Gesell. How long have you been in this business, Mr. Best ?
Mr. Best. Forty years.
Mr. Gesell. Over that period,- then, I take it you have become
quite familiar with the general' operating problems in the life-
insurance business?
Mr. Best. Yes ; I think I can say that.
Acting Chairman Reece. Did Mr. Best found this company?
Mr. Best. Yes ; I did, and have been president of it ever since.
Mr. Gesell. I wanted to consider with you today, Mr. Best, one
particular phase of the life-insurance problem, namely, the retire-
ment of life-insurance companies and the failures of life-insurance
companies which have taken place in the period since 1930. Am I
correct in saying that you have from your records in these various
sources that you have indicated compiled information in response
to our request with regard to life-insurance .companies which failed
in the period from 1930, giving particular reference to a group of
companies where on the basis of your information you estimated
that the initial loss to policyholders was in excess of $1,000,000 ? ^
Mr. Best. I have done that.
Mr. Gesell*. How many such companies are there, taking the pe-
riod from 1930 to 1939?
1 See "Exhibit No. 2336," appendix, pp. 15568-15569.
15384 CONCENTRATION OF ECONOMIC POWER
Mr. Best. There are 19 companies on the tabulation.
Mr. Gesell. Those would be 19 companies where the initial loss to
policyholders in Efccordance with your figures and estimates was
|l,000,000 or more?
Mr. Best. That is correct.
Mr. Gesell. Are you acquainted through the material you have
with the reasons and causes for some of these failures?
Mr. Best. Yes.
Mr. Gesell. I would like to discuss them with you, taking them
case by case. Do I understand that thfere were no failures in the
year 1930, falling in this category?
Mr. Best. That is correct.
Mr. Gesell. The first failure took place in the first part of 1931 ?
Mr. Best. Yes.
Mr. Gesell. That is the Home Life Insurance Co., of Little Rock,
Ark. Is that correct ?
Mr. Best. That is right.
Mr. Gesell. Will you, to begin withj state for the committee some
of the problems and considerations which are involved in estimating
or computing what the loss to policyholders may be in thB case of a
life-insurance failure?
Mr. Best. That has already been done in the memorandum attached
to the schedule.
Mr. Gesell. That is the memorandum that I have before me now?
Mr. Best. Yes; entitled "Policyholders' Losses in Life Company
Failures, Period January 1, 1930, to January 1, 1940."
Mr. Gesell. Would you kindly summarize some of those princi-
pal reasons for us, using the memorandum as a basis, if you wish ?
Mr. Best. Very well.
In the first place, it is necessary to use as a basis for any estimate
of the indicated initial loss to the policyholder the policy reserve
figures from the latest available statement prior to the time of the
reinsurance of the failed company subject to a lien. There may be
a considerable lapse of time between the appointment of a Receiver
for such a company and the final reinsurance of the business, and
during that time there is a tendency for policyholders to lapse their
insurance at a greater-than-average rate, and consequently it is prob-
able that as of the date of reinsurance the reserve would actually be
less than indicated by the last previous available statement.
Mr. Gesell. That is because in the period when the company is
in difficulty pplicyholders are apt to start getting their money out
before the receivership occurs?
Mr. Best. Yes; and even though they can't get their money out,
if their reserve is a small amount they just lapse the policies.
Mr. Gesell. And cea^e paying — —
Mr. Best (interposing). Yes. Now, the second very important
point is that the lien in such a reinsurance cannot possibly affect
money which the policyholder has already borrowed on his policy.
He has received that money and used it.
Mr. Gesell. In other words, if he has made a policy loan, he has
in effect taken out a portion of his reserve; therefore lie can't lose it?
Mr. Best. That is correct; nevertheless in the accepted system of
life-insurance accounting, policy loans are treated as assets and the
CONCENTRATION OF ECONOMIC POWER 15385
reserve against those policies is carried gross among the liabilities.
Mr. Gesell. Is not reduced by the amount of loan?
Mr. Best. Is not reduced by the amount of the loan. That of
course does not affect surplus. The assets are increased, the reserve
liability is increased, the surplus remains the same.
Mr. Henderson. Take an absurd, hypothetical basis to see if
I understand that. If you had, say, a billion dollars in reserves and
policy loans of $800,000,000—1 realize that is an absurdity— you would
show assets in the way of loans and still show a reserve of a billion
dollars ?
Mr. Best. That is true. That being the fact, the first important
correction in the figures in order to make this sort of an estimate
is to deduct from the reserve figure all policy loans and premium
notes and in this tabulation that has been done, and you will notice
that it makes a very large difference, varying in different companies
because the percentage of policy loans to assets and to reserves varies
among the companies. That is a very important item.
Mr. Gesell. You have taken that into account in these figures we
are going to discuss ?
]V&. Best. That is true; but there I had to stop, and I could not
take into account in the tabulation another item which is of very
considerable importance.
Mr. Gesell, What is that?
Mr. BEST.^That is the fact that in many of these reinsurances
some of the business was taken over not subject to the lien ; in other
words, it was exempted from the lien. As an illustration, in the
Qpntinental Life of St. Louis, reinsured by the Kansas City Life,
about half of the business of the Continental then in force was rep-
resented by what are known as registered policies and the reserves
on those policies were On deposit with the Missouri Insurance De-
partment. The Kansas City Life, for whatever reason, was willing
to assume that part of the business without imposing any lien aga|inst
the reserves. Now, the effect of that in round figures is as follows:
The tabulation will show gross reserves of $13,000,000 and a 50 per-
cent lien, which to the uninitiated might indicate a loss tp the
policyholders of 50 percent of $13,000,000 or $6,500,000. When we
deduct the policy loans, however, from the reserves and then apply
the lien to the remainder, the 6i/^ million shrinks to 4I/2 million. I
corresponded with the Kansas City Life to ascertain the actual
amount of lien imposed and it was two-million-four -hundred-odd-
thousand dollars. I mention those particular figures as showing
how wide the difference might be.
Mr. Gesell. How important this particular f Victor is?
Mr. Best. How very important that particular item may be.
Acting Chairman Reece. Will you permit an interruption?
We are glad to have with us Senator Lee, of Oklahoma, who has
followed the work of the committee' with a great deal of interest.
Mr. Best. There is another item which is of great importance,
and that is that in almost every one, in fact I thmk every one, 01
these 19 cases, and almost all other reinsurances where a lien was
imposed, the contract provided that if a policyholder died within
a stipulated period of years the lien would be waived and the claim
paid in fulL That, of course, would mean that the beneficiary of
1538j6 concentration ok E(h3nomic rowEfi
a policyholder who died within that period of years after the re-
insurance would lose nothing.
Mr. Pike. He would get more than his share of the reserve?
Mr. Geskll. In other words, if there was a 50-percent lien at-
tacliiiif; at the time of the reinsurance, a policyholder might die
following that lien and his beneficiary still get the full benetits
under the policy?
Mr. Best. That is correct.
Mr. Geseix. In certain circumstances as provided by the particular
reinsurance agreement.
Mr. Best. And that runs into a considerable amount. It is worth
considering.
Then, there is still another item, and that is the interest paid
by the policyholder on the lien.
Mr. Gi^SELL. I think to iinderstand this item you have to go a
little more into detail Avith respect to how one of these reinsurance
arrangements works out.
Mr. Henderson. Who holds that lien? That is what I am inter-
ested in.
Mr. Best. The reinsurer, the company which takes over the busi-
ness, assumes it subject to these liens and agrees otherwise to carry*
out the terms of the contract so assumed.
Mr. Henderson. Is there an impounding that takes place?
Mr. Best. It is simply a bookkeeping account.
Mr. Henderson. It is not deposited with a trust company, or any-
thing like that?
Mr. Best. There is no special segregation of assets as a rule. The
entire assets of the failed company usually go into a pool which
the reinsuring company endeavors to work out to the best advantage
of the policyholders of the failed company.
Mr. Gesell. Setting up this item on its books as one item of the
particular account?
Mr. Best. That is right. That must be done, otherwise the as-
suming company would have to set up in its liabilities the whole
amount of the reserves under the policies taken over. It would
have no corresponding assets to offset it, and consequently its surplus
would be reduced by the difference between the actual value of the
assets at the time of the reinsurance and the total amount of reserve
liability.
Mr. Pike. You sort of hope that the mortality saving will clear
that out during the life of the people taken over?
Mr. Best. Yes; tlie mortality savings and general earnings of the
fund.
Mr. Gesell. You were about to discuss this interest item.
Mr. Best. Yes. That interest item is of considerable importance,
but in my judgment not nearly as great as might be first considered.
It is a rather intricate thing, but following your suggestion, I would
explain Uiat under these contracts, the companv taking over the busi-
ness by reinsurance, charges interest on the lien. It must do that
because the lien represents a portion of the reserves which should
be on hand at the time of the reinsurance in sound, earning assets.
Mr. Henderson. Who pavs the interest?
Mr. Best. The ]iolicyholder pays the interest.
CONCENTRATION OF ECONOMIC POWER 15387
Mr. Gesell. Of the reinsured company?
Mr. Best. The policyholder of the reinsured company.
Mr. Gesell. This is a fact, if I understand you correctly, that in
effect increases the loss. The other items we have been discussing
tend to diminish the loss. This would tend to increase it. Is that
not correct?
Mr. Best. That is true.
Then, going back for a moment to that matter of interest, it mi^ht
appear that all of the interest paid by a policyholder whose policy
is subject to the lien is a loss to him and should be added to the face
amount of the lien which was placed on his particular policy, but
that is not true. As a matter of fact, the interest so collected is
credited in part to the reserves under each policyholder's policy,
thus increasing his surrender values, and the rest of it goes into the
general fund of assets out of which it is hoped that future recoveries
and earnings will enable the assuming company to reduce, and
ultimately extinguish, tlic lieu.
Mr. Gesell. In other words, if a 3^-i^)ercent interest rate happens
to be earned on the reserve
Mr. Best (interposing). That is the usual figure in companies of
this type.
Mr. Gesell. And there was an arrangement for a 6-percent
interest
Mr. Best (interposing). Yes.
Mr. Gesell. In the reinsurance contract^ where do the 2i/2 per-
cent go?
Mr. Best. That would undoubtedly show up finally in the general
fund of assets taken over at the time of the reinsurance from the
failed company, and there are other reasons, too, which perhaps it
isn't necessary to go into, purely accounting and actuarial, which
make me feel that the item is not as important as it seems on the
surface."
Mr. Gesell. Are there other factors which must be taken into
accomit in computing policyholder losses of these failed companies'?
Mr. Best. Yes ; there is one more that I haven't mentioned that is
very important. Any sound company reinsuring the business of a
failed company under such conditions as we are discussing naturally
sees to it that the values then placed on the assets are conservative
values. They may go too far in the writing down of those assets,
and subsequently, when the assets are sold, they realize more than
the figure at which they were estimated as the basis of the reinsurance
and the imposition of the lien.
Mr. Gesell. In other words, when we talk in these hearings about
initial loss, that is the loss that takes place at the time the lien
attaches, but it may be that in the history of tlie reinsurajicc ar-
rangement the contract would be so advantageous that that lien
can be reduced?
Mr. Best. That is true.
Mr. Gesell. And the loss ultimately worked out would be con-
siderably less than the initial loss?
Mr. Best. That is true, and, of course, the exact reverse uf thai
is true. If tlie assets ultimately work out at values lower than
those assumed at the time of reinsurance, somebody is going to lose
15388 co^'ciBNTRATlON of economic power
the difference, presumably the company which assumed the rein-
surance.
Mr. Geseix. Is it your point that the lien may be reduced or in-
creased, depending to some extent upon the method used in the valu-
ation of the reserve taken over at the tjme the reinsurance contract
is entered into?
Mr. Best. Yes; that is a factor.
Mr, Gesell. That is the factor that affects whether or not the lien
goes up or down — the primary factor?
Mr. Best. Yes. It is true also that reductions of the liens have
taken place in relatively few cases. In some they have been quite
extensive. There is one small company, the Register Life of Iowa,
the business of which was first reinsured in another Iowa company
and finally in a California company, and in that case there have been
five reductions of a lien which at the outset was 100 percent of the
reserve, and those five reductions amount to 52 percent of the original
lien.
Mr. Gesell. So that it really ends up with a 48-percent lien?
Mr. Best. Forty-eight percent, in addition to which the California
company now handling that fund estimates somewhere between 25
and 26 percent of that original 100 percent lien is represented by the
value of the funds still on hand.
Mr. Gesell. We had in previous hearings cases where a company
followed ^hat same reinsurance track, only the lien was increasing
each time.
Mr. Best. Yes ; there are relatively few of those. Some of the con-
tracts, of course, provide for the. reinsuring company increasing the
lien if that becomes absolutely necessary, but that is not usual.
Mr. Gesell. It is true, is it not, that these adjustments in the lien
after the initial lien is fixed affect the surviving policyholders much
more favorably if the lien is reduced than others who may have died
or surrendered policies from the original group ?
Mr. Best. As already pointed out, if death occurs within the
period of years following the reinsurance within which it is stipu-
lated that the lien will be waived, then the policyholder who dies
suffers no loss so far as the lien is concerned other than possibly a
loss of the payment of interest.
Mr. Henderson. May I ask a question there? When you say
"policyholder," do you mean policyholder of the old company ?
Mr. Best. Of the old company, the failed company.
Mr. Henderson. I am interested in what the advantages are for the
reinsurer in taking over a company whose reserve is impaired. Is it
appropriate to ask the question now, Mr. Gesell?
Mr. Gesell. Yes ; I think it is.
Mr. Henderson. What does the company gain? In a number of
circumstances it was evident the other day with the Metropolitan
that some property came over on account of their taking over a com-
pany at the request of the superintendent of insurance in the State of
New York. What I am interested in is, where there is a voluntary
move, what is the gain which the company makes ?
Mr. Best. Well, first the increased volume of business has a tend-
ency to make the operating expenses a little lower ; that is, per unit
of insurance carried.
CONCENTRATION OF ECONOMIC POWER 15389
Mr. Gesell. It is frequently said, is it not, Mr. Bestj that this re-
insurance arrangement is a much cheaper way of acquiring business
than building it up through an agency ?
Mr. Best. Yes; I was just about to say that; that is the other prin-
cipal reason for taking on the business in that way, and of course it is
not as ri^ky for the reinsurer as it might look if the revaluation of
assets is done on a sound basis. For what net liability the reinsurer
assumes, it gets adequate assets.
Mr. Henderson. "V7hat risk does it take? It takes a risk, maybe,
on the decline in the value of the assets representing the reserve?
Mr. Best. Yes; that is true, just as it would on any asset that it
purchased.
Mr. Henderson. But, in general, it takes over these policy con-
tracts and runs them right in with the rest of its business?
Mr. Best. Well, usually there is a separate account kept for the
benefit of the policyholders in the old company. There is a little ad-
ditional accounting cost involved in that.
Mr. Henderson. What do they do about the agents ?
Mr. Best. Well, if the agents are in territories where the assuming
company can make use of them they like to hold them, particularly
if the agent has a fairly good record of production.
Mr. Henderson. They do get some trained staff?
Mr. Best. They usually get a value there.
Mr. Gesell. That is a pretty valuable item, is it not, particularly
in a small company?
Mr. Best. Yes; it is. It is very important.
Mr. Hejtderson. It probably gets the additional business of new
writings which come from having that number of policyholders on
the books?
Mr. Best. Yes; and the smaller the company taking over the busi-
ness of another company the more important the increase of business
becomes from the point ©f view of cutting down expenses. That is
particularly true, of course, where there isn't any lien involved.
Mr. Henderson. That expense item is a rather large one, as I re-
member. • What was it in the first table Mr. Howe introduced for the
percentage of outgo which went for administrative?^ It looks to
me as ii,^on this supposition you make, a small company has a
working ma;rgin in there which is pretty high.
Mr. Best, -Yes ; I could illustrate that very simply, I think. A
short period of years ago I made a study of two small life-insurance
companies, each with about $150,000,000 of business in force. The
businesses were of about the same character, the assets were of about
the same character, and neither company was making any real
progress. They were just stymied. A careful calculation indicated
that if those two companies were consolidated and all unnecessary
duplication of expense eliminated, immediately they would show an
earning which would run ultimately to around $250,000 in excess of
what they would jointly make operating separately. That is just an
illustration.
Mr. Gesell. I understand your position to be, Mr. Best, that this
growth in business, acquisition busmess in reinsurance, is particularly
helpful to the relatively small company?-
1 See "Exhibit No. 2258," appendix, p. 15493.
124491 — 41 — pt. 28 45
15390 CONCENTRATION OF ECONOMIC POWER
Mr. Best. Yes.
Mr. Gesell. As the company gets larger, reinsurance has less ad-
vantage to it?
Mr. Best. That is correct.
Acting Chairman Reece. Is the advantage which the reinsuring
company obtains by its opportunity to take over a group of trained
agents reflected on the books in any way?
Mr. Best. Not at the time. It probably would be in the future
operating figures. If the acquisition of the business of the agents
resulted m a reduction of expense, of course that would show up in
future statements.
Mr. Pike. There is no item comparable to goodwill ever entered
on those things?
Mr. Best. No ; no such item.
Acting Chairman Reece. But the policyholders of the reinsured
company derive no benefit from any advantages which the reinsuring
company may derive from acquiring this group of trained agents?
Mr. Best. Except that the reinsuring company will probably handle
the assets of the reinsured company better and at less expense than
that reinsured company could have handled it for itself if it had not
gone out of business. They do get that advantage.
Mr. Gesell. Mr. Best, let's start discussing some of these specific
cases.
Mr. Pike. There is one question I would like to ask. Suppose I am
a policyholder in a company that is reinsured with, let's say, a 50-per-
cent lien on it. Suppose I had a cash surrender or a loan value of,
say, $500, before the sad news came along. I am entitled, then, with
a 50-percent lien in a new company, to a $250 loan value?
Mr. Best. Yes; that is true; and then the contract almost in-
variably provides that additions to reserve accumulated out of future
premiums are of course not subject to lien, and increase the amount
which the policyholder may borrow or obtain on surrender.
Mr. Pike. Then, possibly, eventually my cash-surrender value
might get back to what it would have been on the original policy
if that lien was eaten up?
Mr. Best. Yes;* it is a fact that history does fecord some cases
where a substantial lien at the time of reinsurance was completely
worked out so that the persistent policyholders lost nothing. The
only ones in those cases who lose are the ones who are not persistent,
and get less than the surrender value which they would otherwise
obtain.
Mr. Pike. Or didn't have any cash -surrender value in the first
place?
Mr. Best. Yes ; and then they don't lose.
Mr. Gesell. The first I believe you said was the Home Life In-
surance Co., of Little Rock, Ark.
Mr. Best. Yes.
Mr. Geseix. That company was reinsured by Central States Life
Insurance Co., of St. Louis., Mo., on March 31, 1931, was it not?
Mr. Best. Yes.
Mr. Gesell. It went into receivership in January of '31.
Mr. Best. Yes.
Mr. Gesell. The rate of the lien was 50 percent.
CONCENTRATION OF ECONOMIC POWER 15391
Mr. Best. That is true.
Mr. Gesell. And the gross reserves of the company were $3,436,000,
and $2,439,000 after adjusting for policy loans and premium loans.
Mr. Best. That is correct.
Mr. Gesell. And your estimate of the indicated initial loss was
$1,220,000? ■
Mr. Best. Correct.
Mr. Gesell. What do your studies and your expert knowledge of
these matters indicate to be the reasons why the Home Life Insur-
ance Co. failed?
Mr. Best. That is an imusual situation.
Mr, Henderson. I can say, Mr. Best, that I think in all these
cases what we are really interested in, is your judgment of the dangers
and conditions that did bring about the failure, because naturally
the obverse side of that is the security of the policyholder, one of
the things which lend real protection.
Mr. Best. Yes ; and any light I can throw on a subject so important
I will be very glad to contribute.
In this case, the Home Life was controlled by certain interests
who had a whole chain of small banks scattered up and down the
State of Arkansas.
Mr. Gesell. That was Mr. Rogers Caldwell, was it not?
Mr. Best. Well, Caldwell was in Nashville, Tenn. He was inter-
ested in this, he had bought the control of this company from Mr.
A. B. Banks, of Little Rock, who was in control prior to Caldwell
going in and buying an interest, both in .the banks and in the insur-
ance companies, this company and two others, one a fire company
and one a casualty company. I think in this particular case it can
be said that it just toppled down when the banks went, nothing else.
Up to that time, the company had done extremely well.
Mr. Gesell. You mean its affairs, because of this common owner-
shipj were so entangled with those of the banks that when the banks
got into difficulty, it took the insurance companies with them?
Mr. Best. I mean their holdings in bank stocks were too much.
Mr. Gesell. And that was the result of the promotional interest
being also interested in promoting the banks?
Mr. Best. Yes; I suppose so. I have no knowledge, of course, on
that, as to why they bought them.
Acting Chairman Reece. May I ask if the portfolios of the com-
pany had been manipulated in such a way as to be advantageous to
the insurance companies and disadvantageous to certain other inter-
ests that were connected with the company?
Mr. Best. No; if what you have in mind is any intentional dis-
honesty, I would say no. I think it was iust very bad judgment.
Mr. Gesell. Bad investment judgment?
Mr. Best. Bad investment judgment, of a particular type in this
instance.
Mr. Gesell. Of a particular type, namely thattof putting too much
bank stock into the portfolio of an insurance company?
Mr. Best. That is right.
Mr. Gesell. The next one was one that I think is pretty close to
soipe of us here in Washington, the National Benefit Life Insurance
Co., right here in the District.
15392 CONCENTRATION OF ECONOMIC POWER
Mr. Best. Yes.
Mr. Gesell. That went into receivership in September of 1931,
did it not?
Mr, Best. That is true.
Mr. Gesell. And does your information indicate that the loss
probably was welj'in excess of $1,000,000?
Mr. Best. Yes; although in this instance we haven't as much de-
tail as we had on the other companies.
Mr. Gesell. What were the factors connected with that failure ?
Mr. Best. This was a company operated by Negroes, and without
doubt it was bad investments in this case, also, which resulted in"~ihe
closing up of the company, and general all-around bad management.
They just didn't know anything about running a life-insurance
company.
Mr. Gesell. What were some of the bad investments?
Mr. Best. It seems to me for one thing they had a home office
building. I am speaking from memory now and it is some time ago.
That home office building represented about, 4 or 5 times the surplus
of the company, the last time I saw the figures, and that was just
one item.
Mr. Pike. You find oversize home-office buildings every now and
then in the small companies, do you not ?
Mr. Best. In the small companies, that is true. I don't think it
is a good practice, either.
Mr. Gesell. Those were all the failures in 1931, the Home and
National Benefit?
Mr. Best. Correct.
Mr. Gesell. The first in 1932 is on the list as the Inter-Southern
Life Insurance Co., of Louisville, Ky., is that correct?
Mr. Best. That is right.
Mr. Gesell. That company was reinsured by the Rome Life Insur-
ance Co. of Louisville in August of '32?
Mr. Best. Eight.
Mr. Gesell. Having gone into receivership in April of '32?
Mr. Best. Yes. .
Mr. Gesell. And the net life reserves, that is after adjusting the
policy loans and premium notes, were close to thirteen million —
twelve million nine hundred sixty-one?
Mr. Best, That is right.
Mr. Gesell. Again a 50-percent lien?
Mr. Best. Again a 50-percent lien.
Mr. Gesell. And the loss you estimate in the case of that company
was how much?
Mr. Best. Six million four hundred and eighty-four thousand
dollars.
Mr. Gesell. Can you tell us sometMng of the factors which led
to the failure of the Inter-Southern Life Insurance Co. ?
Mr. Best. That is an extremely involved situation. This com-
pany had been in business a long time and had passed into the control
of the Caldwell interests .in NashviDe. The Caldwell interests
started in interesting themselves in various other life insurance com-
panies scattered throughout the country, as they interested them-
selves in everything else, newspapers and banks, everything.
CONCENTRATION OF ECONOMIC POWER 15393
This company purchased a very large amount of the stocks of
other life insurance companies so that it became quite top heavy
from that angle.
Mr. Gesell. Were those companies which Mr. Caldwell was also
interested in?
Mr. Best. Those were companies in which Mr. Caldwell was also
interested, and the investments were large.
Mr. Gesell. Some of them were purchased from Caldwell himself,
were they not?
Mr. Be^t. Yes; or from Caldwell & Co., that is true, or perhaps
from some other company in which Caldwell was interested. The
fact is, I should say, the controlling factor in the failure of that
company was the investment in the stocks of other life insurance
companies.
Mr. Gesell. That is again failure as the result of bad investment
practice?
Mr. Best. Bad investment practice.
Mr. Gesell. And would fall more or less in the same category as
the Home Life failure, only in the case of the Home Life we had
bank stocks ; in the case of the Inter-Southern Life we had insurance
stocks?
Mr. Best. That is true.
Mr. Pike. And in each case you had Rogers Caldwell, or just
this one?
Mr. Best, i beg your pardon?
Mr. Pike. In ^his latter case you had Rogers Caldwell. It really
goes to a man.
Mr. Best. We had Rogers Caldwell in both of them.
Mr. Pike. That is what I was thinking; he was common to both
of them.
Mr. Henderson. That means a lot of these failures weren't just
bad guesses on investments such as we have been treating here — that is,
you go through and do the best you can with investment analysis
and buy securities for the portfolio, and then for reasons not under
your control, something happens. In a lot of these cases, this over-
riding, interlocking management would say, "You buy this company
and you buy that company because we are interested in it, and not
because of the security."
Mr. Best. Yes ; that is true. To make the whole picture complete,
I could say this : I know that the intent of Mr. Caldwell with whom
I discussed the matter many times was to acquire a considerable
number of rather small life insurance companies and consolidate
them into one or two big companies, which was in itself a perfectly
sound pro-am, and that he intended to do that entirely with
outside capital. He did not originally start off with the idea of any
pyramiding by having company B buy stock in company A, and C
buy stock in B or A, or both, but Mr. Caldwell ran mto a situation
where that plan could not be carried out.
It was impossible at this time. You all remember what the times
were, and so, where some of these companies had purchased these
stocks, he is not the only one that did that sort of thing. He pur-
chased them believing it to be a purely temporary expedient, and
resorted to in order that a desirable purchase could be made which
15394 CONCENTRATION OF ECONOMIC POWER
otherwise could not be made. They found that this was not a tem-
porary thing, that it was in there permanently.
The curious thing about all of these failures is that usually there
isn't deliberate, willful, bad faith involved. There is terribly bad
judgment involved in a good many of them.
Mr. Henderson. I gather from that, what you mean is, it isn't
a case of a villain starting out to rook somebody. Occasionally the
situation gets tight and human nature fails and falters; is that it?
Mr. Best. No; what I mean is that an investment of a life insurance
company in stocks of other life insurance companies was made in
this case and in other cases in good faith so tar as the intent to
ultimately take them out again was concerned, and for that matter in
the belief that they themselves were sound investments.
Mr. Gesell. But here was a case, was it not, where a man under-
took to pyramid life-insurance companies with policyholders' and
stockholders' funds of those same insurance companies, rather than
getting capital from outside, and that is what led Hira eventually
mto his difficulties?
Mr. Best. Yes; there were considerable stockholders' funds in
that picture. They ran into a good many millio^s of dollars. There
were, in fact, policyholders' funds as well.
Mr. Pike. That suggests to me that here is one case where State
regulation has fallen down in the life-insurance field.
Mr. Best. Well, that, of course, we have seen in almost every field
of endeavor.
Mr. Pike. 1 mean, there is a chance to take a company operating
in one State, through a piece of financial jugglery perhaps in an-
other State ending up with bad results for everybody, including the
juggler.
Mr. Best. Well, the company is governed primarily by the laws
of its home State.
Mr. Pike. Yes; but its stock may be very well taken over by a
company in another State, o^ '^as been in this case, I take it.
Mr. Best. Yes ; of course, ..idt is true.
Mr. Pike. And sometimes when you cross State lines you wonder
who is going to run the show.
Mr. Best. Of course in that case the company making the purchase
would again have to comply with its own State laws, and the element
of judgment enters in again^ and in none of these cases were they
ujilawful.
Mr. Pike. But the results were very unfortunate.
Mr. Best. Xes ; of course. The stock of any company
Mr. Pike (interposing). It violated a well-known principle that
companies should not have in their investments equities of other
companies engaged in the same line of business.
Mr. Best. That is a very sound investment principle.
Mr. Gesell. The next one on the list in 1932 is the Mississippi
Valley Life Insurance Co. of St. Louis, which was reinsured in the
American Life and Accident of St. Louis, Mo., the Detroit Life
Insurance Co. of Michigan, and the Republic Life Insurance Co. of
Dallas, Tex. The Mississippi Valley Life Insurance Co. went into
receivership on April 25, 1932 ; is that correct ?
CONCENTRATION OF ECONOMIC POWER 15395
Mr. Best. '32.
Mr. Gesell. And the loss in that case resulting' from a 100-percent
lien was $2,970,000; is that correct?
Mr. Best. That is right.
Mr. Gesell. We have had some testimony about the Mississippi
Valley Life in our hearings already, Mr. Best, and are somewhat
familiar with its early history.^ To what do you attribute its ulti-
mate failure — in this case very complete failure?
Mr. Best. Th( company's investment practices were very bad, to
begin with.
Mr. Gesell. 1\ what regard?
Mr. Best. My "ecollection is that it seemed as if everything they
selected was the wrong thing. They did have some real estate in-
volved there that they never should have had, and their expenses
were excessive, too. From almost every point of view that was a
very badly managed life insurance company.
Mr. Gesell. Just because of bad management ?
Mr. Best. That shows what happens when you have that kinii of
management.
Mr. Gesell. In the final analysis it appeared that that manage-
ment had been continuing for some period of time, did it not?
Mr. Best. They had been in there for a considerable period of
time.
Mr. Pike. As I remember that case, it looked to be maiiaged for
the personal profit largely of the managers rather than for the
benefit of the policyholders. If there was any degree of manage-
ment, it was to the benefit of the managers.
Mr. Best. I think in that case there might fairly be imputed
something a little worse than merely bad business judgment.
Mr. Pike. It looked to me that they used better judgment in their
own behalf than they did for the policyholders, from the record.
Mr. Best, Yes.
Mr. Gesell. The next is the Old Colony Life Insurance Co. of
Chicago, 111., reinsured in the Life and Casualty Co. of Chicago, 111.,
and going into receivership on September 20, 1932, again, a case of
100-percent lien, complete loss, which you estimate at $3,719,000.
Is that correct ?
Mr. Best. That is correct.
Mr.. Gesell. What can you tell us about that failure ?
Mr. Best. That was asset; trouble, primarily. They had a very
large office building, which made trouble. There again the expenses
were somewhat excessive, but definitely that was bad investments.
Mr. Gesell. Bad investments. Were they investments in concerns
or enterprises in which the management was interested, or just bad
investments ?
Mr. Best. No; not to my knowledge.
Mr. Gesell. Just bad investments?
Mr. Best. Yes, sir; I might say speculative investments — ^not spec-
ulation for the benefit of the particular operator, but the company
itself was speculating in some of those investments.
1 See testimony of Messrs. J. D. DeBuchananne and Paul Temple, Hearings, Part 13,
pp. 6688, and 6736, 6741-6744.
15396 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. The last one in '32 was the Security Life Insurance
Co. of America, of Chicago, 111., reinsured in the Central Life In-
surance Co. of Chicago, 111., in September of '32, having gone into
receivership in April of '32. There was a case again of 100 percent
lien on the policies, was it not?
Mr. Best. That's right.
Mr. Gesell. And a loss to policyholders, according to your esti-
mates, taking into account policy loans and other factors, of
$6,726,000?
Mr. Best. Yes.
Mr. Gesell. That wag Machir Dorsey's company, was it not?
Mr. Best. That is true.
Mr. Gesell. Can you tell us a little about that failure?
Mr. Best. Yes; the security was an old company and it operated
for a great many years very successfully. It was purchased, it was
sold and purchased by a New York City banking house for clients
of theirs, who then, after owning it for several years, sold it to
Mr. Dorsey. That unquestionably was a failure due to bad invest-
ments. They had a lot of stocks of other life-insurance companies,
too.
Mr. Gesell. They had bought, as I recall, among other things, into
this Inter-Southern Life Insurance Co.?
Mr. Best. Yes; they did, and that is a long story. I don't know
whether you want it to go into the record or not.
Mr. Gesell. I might say that there is one we are still fairly activelj'
engaged in pulling together. We may be still at that in 1945, I am
not sure.
Acting Chairman Keece. May I ask if, in a case of these companies
where there is a 100 percent loss to the policyholders, did the rein-
suring companies lose anything, or did they derive any considerable
profit from the reinsurance?
Mr. Best. They might derive some profit in the form of reduced
operating expense. They couldn't lose anything, because with a lien
of 100 percent against the liabilities if the assets realized nothing they
were not out of pocket. TJhey will undoubtedly realize something.
How much, even at this da.^, I haven't the remotest idea, but under
those conditions I think that the assuming company did get some
benefit from taking over that block of business. They probably still
have today policyholders who came in through that transaction.
Acting Chairman Keece. You suggest they could not have lost p,ny-
thing. If the company had been insolvent at the time it was rein-
sured, might it not have been possible for them to have lost some-
thing?
Mr. Best. You mean, if the Security had been insolvent or the Cen-
tral insolvent? I didn't understand the question.
Acting Chairman Reece. If the company reinsuring had been in-
solvent, that is, if it had insufficient assets to meet the liability to the
policyholders.
Mr. Best. I don't see how taking on the reinsurance could have
changed that situation so far as the assuming company is concerned.
Mr. Gesell. In that kind of situation, where the 100-percent lien
exists, when you take over the assets of such a company you take
over no obligation?
CONCENTRATION OF ECONOMIC POWER 15397
Mr. Best. No obligation.
Mr. Gesell. So it is a question purely of whether or not you can
realize anything on those assets over a long period ?
Mr. Best. That is it. You get a few agents, some policyholders,
some future premiums.
Mr. Gesell. Can you give us a little more idea of the kind of in-
vestments the Security Life had which led to its troubles ?
Mr. Best. There again the principal difficulty was investment in
stocks of other life insurance companies which never should have
been made. It was a pyramiding situation. That, too, was done,
so I am informed by the people who were in control of the situation,
purely as a temporary expedient. They were planning to set up an
institution with somewhere around 10 millions of resources as a
holding company, and it was to purchase all of these insurance stocks
which found their way into the Security ; it was to clear out on Mis-
souri State stock, which was owned by the Inter-Southern, and it
was then to consolidate the Security and two other smaller com-
panies into one, and there was a plan provided for some additional
capital funds. If that all had been done, of course, whatever shrink-
age in value took place, therefore, on these insurance stocks would'
have fallen on the holding company, not on the Security or its policy-
holders.
Mr. Gesell. They also bought some pretty bad Waukegan prop-
erties, did they not?
Mr. Best. There was a great deal of notoriety given to that trans-
action. There were indictments. I believe, however, that they were
acquitted on that charge.
Mr. Gesell. We put this case of the Security Life in what we might
call the "Caldwell" category, do we not? It is much the same kind
of failure as we saw in the case of the Home Life and the Inter-
Southern.
Mr. Best. It definitely ties into the case of the Inter-Southern.
Mr. Gesell. The next was the Northern States Life Insurance Co.,
of Hammond, Ind., was it not?^
. Mr. Best. That also was one of the Dorsey companies.
Mr. Gesell. That was reinsured in the Lincoln National in March
of '33, after a receivership in December of '32, is that not correct?
Mr. Best. That is right.
Mr. Gesell. And there we had a 60-percent lien on the policies,
did we not?
Mr. Best. That is right.
Mr. Gesell. And an estimated loss on the basis of your computa-
tions of $3,676,000?
Mr. Best. That is right.
Mr. Gesell. What were the factors which led to the failure of the
Northern States Life Insurance Co.?
Mr. Best. The Northern States, to the best of my recollection, had
no holdings in the stocks of other life insurance companies, or if so,
they were of trifling amount. It was depreciation of assets which
made the company insolvent, but it was the sort of general run of
the assets rather than any specific single large item or class.
^ See, .infra, n. 15410, for discussion of the Illinois Life Insurance Co., which was next In
order in "Exhibit No. 2336."
15398 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. Then you would say bad investments ?
Mr. Best. Bad investments.
Mr. Pike. Is that one of the companies where the Lincoln Life
held shares as collateral for a loan?
Mr. Gesell. I do not believe so.
There was, again, some real estate in the case of the Northern
States, was there not?
Mr. Best. That is true.
Mr. Gesell. Now, we come to one that has got to be quite a famous
one, the case of the Missouri State Life Insurance Co., of St. Louis,
Mo.
Mr. Best. Yes.
Mr. Gesell. That company was taken over in September of '33
by a newly formed company known as the General American Life
Insurance Co., of St. Louis, was it not?
Mr. Best. Yes.
Mr. Gesell. It went into receivership on August 28, 1933 ; is that
not correct?
Mr. Best. That is true.
Mr. Gesell. There was a 50 percent lien in the case of that failure ;
is that not right?
Mr. Best. Yes.
Mr. Gesell. And an estimated initial loss of $38,017,000?
Mr. Best. Yes; that is correct.
Mr. Gesell. Can you tell us a little about the Missouri State
failure?
Mr. Best. Yes. The first thing that I want to say about it, how-
ever, is that this is one of the companies in which a portion of the
business was not affected by the lien, and by correspondence with the
company in preparation of this statement I learned that the actual
lien was a little over 32 millions, whereas my table shows 38 millions.
Mr. Gesell. That would be a case similar to the one of the Con-
tinental that you discussed in your qualifying testimony?
Mr. Best. Yes ; and then you see this reinsurance was as of Sep-
tember 7 aiid the reserve figure with which we worked is the pre-
ceding December 31, and in that interval there was a very heavy run
on that company for policy loans and surrender values. The com-
pany had made a large investment in the stock of another life-
insurance company which turned out in that case to be one of the
best investments tliey ever had, and it still is.
Mr. Gesell. That is the investment
Mr. Best (interposing). In the Southwestern Life of Dallas, Tex.
Mr. Henderson. Wlien you talk of investment in another life
insurance company you are always talking about investment in a
stock company?
Mr. Best. That is true.
Mr. Henderson. There is no way they can make an investment in
a mutual, is there ?
' Mr. Best. None whatever. They can purchase stock of a proprie-
tary company.
The company had changed hands — the Missouri State had changed
hands several times, creating considerable speculation on the part
of the public, particularly among insurance men, and there had been
some rather poor judgment exercised — no particular item.
CONCENTRATION OF ECONOMIC POWER 15399
Mr. Gesell. This is a case you were in as a consultant, is it not,
in some phases of this problem ?
Mr. Best. No, I wasn't, not so far as that company -v> as concerned.
There is a little memorandum about that but I don't believe it is
correct, at any rate I haven't the slightest recollection of it.
Mr. Gesell. But you were familiar with the Northern States
Security and Inter-Southern proposition?
Mr. Best. Yes.
Mr. Gesell. Can you give us some idea of the investments?
Mr. Best. I should say that the Missouri State failed first because
of a sort of general laxity, lack of conservatism, in making its invest-
ments, not of any particular one type.
Mr. Gesell. Bad management.
Mr. Best. I still criticize the ownership of a stock of another com-
pany, but it turned out all right in this case. It is worth more now
than they paid for it. But it was also undoubtedly very hard hit by
the policy loans and runs which it endeavored to meet. That was
very heavy, due partly to the general economic condition, which was
mighty bad at that time. That was nearly the peak of the demand
for policy loans in life companies. Partly, however, because of a
little uncertainty on the part of policyholders concerning the com-
pany itself. There was no single very large investment which went
sour, or anything of that sort. They are still working with these
assets of what they call the old fund, the old Missouri State Life
assets, and American is endeavoring to work around. They have
effected some reductions in the lien.
Mr. Pike. I have a vague memory, Mr. Best, that they also were
lax in their writings.
Mr. Best. Well, their underwriting experience was not bad. It
wasn't outstandingly good, but that might be a fair criticism. There
was a period when they were a little easy about the business they
accepted.
Mr. Gesell. The next case is that of the National Life Insurance
Co. of the United States, of Chicago, 111., taken over by the Hercules
Life of Chicago, in January of '34, following receivership in Octo-
ber of 1933.
Mr. Best. Correct.
Mr. Gesell. There, there was a 50-percent lien and an estimated
loss of $16,549,000, was there not?
Mr. Best. Yes.
Mr. Gesell. What led to the failure of that company ?
- Mr. Best. First and foremost, the fact that it owned something
over 12,000 shares of stock of the Continental Illinois Bank, and
that stock never appeared in the statement of the National Life at
anything like the top-quoted market. Of course, it was absurdly
high. That stock, as I recall, got up to pretty nearly a thousand
dollars a share and tumbled to $20.
Mr. Gesell. So when it started to tumble, it depleted the assets
of the National Life?
Mr. Best. -Yes; also in that particular case, during the imme-
diately preceding years there was a pretty substantial amount taken
out in dividends by the stockholders.
Mr. Hendjkson. How did they come to have these 12,000 shares?
Mr. Best. They just acquired it from time to timp
15400 CONCENTRATION OF ECONOMIC POWER
Mr. Henderson. Was interlocking of directors responsible for it?
Mr. Best. No; no such reason was responsible so far as I know.
They had stock in both the big banks as an investment pure and
simple.
Mr. Gesell. Would it be a case where you . would classify the
causes of failure then either as bad investment judgment or bad
valuation of assets or maybe just economic conditions? Or would
you say it was speculative investment?
Mr. Best. Well, I said a moment ago, and let me clarify it, that
they had investment in stock of both the big banks, I mean the
Continental and the Merchants, which subsequently were consoli-
dated, and that is how they came to have such a very large block of
the consolidated companies.
Mr. Pike. It was too concentrated an investment no matter how
good it looked when they bought it ?
Mr. Best. Exactly. It was far too large for a company of this
size. There were some other investments which were somewhat
speculative in nature, a piece of real estate up on Michigan Avenue
that was purchased I think from the president of the company, and
I don't think he made any profit out of it. I think they were a
little too good to themselves in the matter of dividends and weak-
ened the company. Primarily what put them out of business was
the tremendous shrinkage in value of that immense block of stock.
Mr. Henderson. You mean dividends to the stockholders?
Mr. Best. Of dividends to the stockholders, yes. This was a non-
participating company.
Mr. Gesell. As a matter of fact, we haven't had the failure of a
mutual company yet, have we?
Mr. Best. No, we have not.
Mr. Henderson. In this whole group of 19 how many were mutuals ?
Mr. Best. I can't tell you that accurately. I think there are none.
Mr. Gesell. Let's see if we get any mutuals as we go through this.
I believe there are none.
Mr. Best. Small companies usually start on a stock basis. It is al-
most impossible nowadays, under present competitive conditions, to
start a mutual company at scratch.
Mr. Pike. Somebody would have to put up the original cushion
and you couldn't get policyholders to do it.
Mr. Best. Somebody must do that, yes.
Mr. Gesell. The hst in 1933 is again one which we have considered
in some detail here in the hearings, that of the Koyal Union Life In-
surance Co. of Des Moines, Iowa, which was reinsured by the Lincoln
National following receivership in June of '33. That is again a
case of a 50-percent lien and an estimated loss in this case ot $11,-
724,000. Is that correct?
Mr. Best. Yes.
Mr. Gesell. What would you say were the causes of failure of the
Royal Union?
Mr. Best. Royal Union had no stocks of other companies, it didn't
have any large investments of bank stocks. It had a sort of general
mixture of assets. It reinsured quite a number of other companies
and from those companies inherited rather a hodge-podge of assets.
Mr. Pike. They were over- valued, do you think?
CONCENTRATION OF ECONOMIC POWER 15401
Mr. Best. They took them over without any liens, and they turned
out to be overvalued.
Mr. (jESELL. I'hey also paid off pretty heavy amounts of cash to
their own personnel and officers as commissions on those reinsurance
transactions, as ,we heard in the record.
Mr. Best. I don't recall whether they paid any of their own people,
that I don't remember.
Mr. Gesell. That is a matter of record here. Was there any
other factor in the failure that you know?
Mr. Best. No; just assets primarily.
Mr. GrESELL. Bad investments again?
Mr. Best. Bad investments again,
Mr. Gesell. This would be mostly bad investments through- the
reinsurance rather than the direct investment?
Mr. Best. Yes.
Mr. Henderson. I am just wondering — it may not be a fair ques-
tion— how long before it actually became evident to the public that
the Koyal was in difficulty did you know about it? Our records
seem to indicate it ran quite a number of years back. Royal is the
one in which they always took on as an officer the departing or retir-
ing superintendent of insurance, isn't it?
Mr. Gesell. That is correct.
Mr. Henderson. I was just wondering, as someone who follows
these things pretty closely, how long you knew it or suspected it?
If it isn't a fair question just drop it.
Mr. Best. It is a perfectly fair question, I didn't know you were
going to ask it and I don't like to answer questions of that sort
unless I am positive of my facts. It is usually a perfectly simple
matter, through a close analysis of the statement of a company of
that type, or any other life insurance company, to arrive at a pretty
fair guess as to the stability and the soundness of the management,
and I think we knew for several years prior to this final collapse,
Mr. Pike, You sniffed this thing quite a while before it happ6*ned,
I imagine?
Mr. Best. Yes; we knew pretty well.
Mr. Gesell. You were at that time rating companies, were you
not, and you withheld a rating on this company?
Mr. Best. Yes; that is my best recollection, we didn't ratp. them
at all.
Mr. Henderson. But the policyholder doesn't get those ratings.
Mr. Best. Occasionally, they do ; not all of them. I wish they did.
Acting Chairman Ri^ce. Has the lien on this company been reduced
any as yet?
Mr. Gesell. What do you recall in that regard? Has the lien
been reduced in the case of the Royal Union?
Mr. Best, I don't recall.
Mr. Gesell. I haven't information,- but I can find out for you.
Acting Chairman Reece. No; don't bother,
Mr. Best. I think in the case of the Northern States the Lincoln
increased the original lien, which they had a right to do under the
contract. It is the only one I remember where that took place,
Mr, Gesell, Coming to '34, we have the Independent Life In-
surance Co. of Nashville, Tenn., first on the list, which was taken
15402 CONCENTRATION OF ECONOMIC POWER
over by the Standard Life Insurance Co. of Jackson, Miss., in May
of 1934, following receivership in February of '34. There, there was
a hundred percent lien, according to your records, and a loss to policy-
holders of $1,179,000. Is that correct?
Mr. Best. That is correct.
Mr. Gesell. What can you tell us about the causes for that failure ?
Mr. Best. My recollection of this is that it was an industrial com-
pany with rather generally incompetent management, a relatively
small concern, and again with wrong investments primarily.
Mr. Gesell. We seem to come to tnat in almost every case so far.
Mr. Best. Necessarily; it is self-evident that that would be what
was responsible for nearly every life insurance failure. There are
other things, but that is the principal thing.
Acting Chairman Reece. There is still one point about these com-
panies where there is a hundred-percent lien. It was stated a while
ago there was no way by which the reinsuring company could sustain
any loss. Is the transaction simply one of the reinsurance company
taking over all the assets' there may be without any obligation to
anyone ?
Mr. Best,, Well, they take them over without assuming any obli-
gation to make policy loans or pay surrender values or give extende(J
insurance or paid-up insurance in accordance with the terms of the
original contracts ; in other words, the whole reserve liability is wiped
out.
Mr. Gesell. They do meet claims?
Mr. Best. They do meet claims as they occur, but of course I
wouldn't s; y whether these 100-percent liens there is a provision for
waiving it in the event of death, but it can be -done ; there is a method
by which it could be done with safety to the reinsuring company,
which could simply purchase term insurance to cover that lien and
pay a premium for it out of the money that the assets taken over
would earn, but again I would say that they take no risk under those
conditions.
Mr. Pike. You did, however, mention one with rather bad over-
valuation of assets taken in without lien.
Mr. Best. Yes.
Mr. Gesell. What was the character of these investments that
were bad in the case of the Independent Life ?
Mr. Best. I don't recall that one as clearly as I do some of the
others. It was a small institution.
Mr. Gesell. Well, we will classify it as bad investments.
Mr. Best. That was 6 years ago.
Mr. Gesell. The next was the Peoria Life Insurance Co., of Peoria,
111., was it not?
Mr. Best. That is right.
Mr. Gesell. That company was reinsured with a 50-percent lien
and a loss to policyholders initially of $6,580,000. Is that correct?
Mr. Best. Yes.
Mr. Gesell. What can you tell us about the causes for that failure?
Mr. Best. Peoria Life had some pretty heavy real-estate invest-
ments. It was, as I recall it, in a large hotel, their home office build-
ing, and others that ran up to a pretty substantial sum. Of course,
in all of these matters nothing has been said this morning to the
effect that even investments that might have been selected with rea-
CONCENTRATION OF ECONOMIC POWER 15403
sonably sound judgment went sour during this particular period of
years. That doesn't mean that the assets we are talking about were
selected with sound judgment, because I do not think they were, but
what really happened was that the depression didn't wreck these
companies ; it did two things, it subjected them to more than normal
demands for cash, as in the case of the Missouri State Life that I
mentioned, and it brought out into the open the deficiencies in the
assets which they owned which might otherwise not have become
known ; conceivably they might have worked themselves out, in many
cases.
Mr. Henderson. Eight in that connection, Mr. Best, could I have
the total of the losses of these 19 companies ?
Mr. Best. Yes. The tabulation shows $138,000,000.
Mr. Henderson. That is initial loss?
Mr. Best. Indicated initial loss to the policyholders in these 19
failures.
Mr. Henderson. Do you know what the assets of the 19 companies
were?
Mr. Best. No.
Mr. Gesell. The gross life reserves you have here.
Mr. Best. Yes; we have the gross life reserves, which were
$352,048,000.
Mr. Henderson. One thing that struck me during these hearings,
particularly in the study we made of these 26 companies, was that
here were these 19 we are dealing with which lost $138,000,000 and
they had this ^oss reserve of
Mr. Best (interposing). Three hundred and fifty-two million.
Mr. Henderson. I made a rough calculation on the 26 companies
which had something like $24,000,000,000 of assets, and it seemed to
me that, taking into account all the realized losses and giving effect
pretty liberally to the overvaluations which we traced, and giving
effect to' practically everything that you ca'h think of, if they had to
liquidate, which is what takes place with the 19 companies we have
been discussing — assuming there was a market for reinsurance so
you didn't have to dump the securities on the market — there would be
less than a billion dollars to cover all the realized and unrealised
losses. I believe I am correct in this, Mr. Gesell, I'm quite sure it
is under a billion dollars in this 10-year period of the worst experience
investments ever suffered. I think that is an extraordinary record as
far as the integrity of insurance assets is concerned.
In the message the President sent to Congress, out of which this
study came, he drew a parallel between the investment trusts and
the insurance company funds.^ Now, there is this parallel, and we
are seeing today and have seen in specific matters over a period of
time, more and more the integrity of the insurance company depends
upon its investment policy.
Now, if you were just to compare. what this loss is — ^I don't have
the total of all the horrible losses that took place in investment trust
properties, but I recall we sent up one report to Congress not 2
weeks ago in which there was a loss of $370,000,000. One investment
trust alone, in other words, had, I think, a realized loss which was
40 percent at least of all the loss that might have taken place in all
1 S. Doc. No. 173, 75th Cong., 3d Sess. Entered in the record as "Exhibit No. 1."
See Hearings, Part I. appendix, p. 185, at p. 190.
15404 CONCENTRATION OF ECONOMIC POWER
these 26 companies. It is an amazing record as far as investment
policy is concerned.
Well, now, in that, of course, if you were making an estimate in
the 30's, '34, '35, when these people had to go on the hook, there was
isome prospect that they, might have worked out, but in most of the
cases you recited today, they wouldn't, would they? There was
thimble-rigging in a lot of this stuflF.
Mr. Best. The last question is a little hard to answer, for this rea-
son. You are comparing the investment trust with the life-insurance
companies. I have heard people say the savings bank is in much
the same position as the life-insurance company, l)ut that is not true.
The life-insurance company is in an enviable position for thp reason
that it has collected every day more than sufl5cient to meet its needs,
and held it until they were sure they didn't need it, and what they
don't need they hand back, but in l^he interval they have the money,
Mr. Henderson. In other words, there are two things which the
insurance company has that the savings bank doesn't have, at least
two things: It has a contract with the policyholder which requires
him to make those payments if he wants to keep his policy intact, and
then it collects an excess which gives it a working margin, and if it
doesn't need thatv-and in most cases -it doesn't — there is a return to
the policyholder.
Mr. Best. That is perfectly true.
Mr. Henderson. That tends to strengthen
Mr. Best (interposing). Strengthen the life company.
Mr. Henderson. The life company as an investment institution,
doesn't it?
Mr. Best. That is, of course, why the life-insurance companies
have survived this whole depression so comfortably.
Mr, Henderson. That is one of the reasons, but you take as be-
tween some of these investment trusts whose record can be laid out
page after page, it was management there, it was razzle-dazzle and
thimble-rigging and abuse of trusteeship and the like which were
responsible for a lot of those losses.
Mr, Pike. We are getting down to the same thing in these we are
going over this morning.
Mr. Henderson. That is what I think, this is the fringe of the
group, and we talk about bad investments. In the early part when
you were talking about some of these companies, you said there was
good faith there, but they put themselves under the possibility, the
potentiality of temptation, didn't they?
Mr. Pike. Yes; they did.
Mr. Henderson. That a mutual company couldn't have done, or
a strong company that was looking over a period of years wouldn't
have done. It would have said, "My trusteeship doesnt permit me to
put the funds of my policyholders in any place where my own per-
sonal advantage has to be served by either keeping these things in or
transferring them, taking some more of the policyholders' money."
Mr. Best. That would be a fair characterization of the correct at-
titude whether a company is stock or mutual, big or little. There
must be a recognition of the trustee relationship in the handling
of the funds. '
Mr. Gesell. And it was really the lack of recognition in these few
cases which led to the difficulties?
CONCENTRATION OF ECONOMIC POWER 15405
Mr. Best. I think it was. That is my judgment. To complete the
comparison, you were speaking of the investment trusts; my recollec-
tion is that about this same period there were over 14,000 banks closed
with a loss of some 3^ billions indicated initial loss, using the same
phrase we have here.^ That again compares unfavorably with this
figure. I started to correct 138 million and say that we must take out
8 millions of that for the record ; first, 2 million for the Continental
Life, because of the registered policies, and then 6 million in the case
of the Missouri State Life, so we have $130,000,000 to deal with here.
Mr. Henderson. That would represent a loss of $130,000,000 out of,
roughly $350,000,000?
Mr. Best, Of these assets, roughly ; yes.
Mr. Gesell. I think you have computed, Mr. Best, have you not,
that it is less than 1 percent of the average amount of the assets of
the legal-reserve companies during the decade we are discussing?
Mr. Best. Yes.
Mr. Henderson. But they were in these 19 companies. That is the
point.
Mr, Best. But if we are considering the stability of the life insur-
ance business as a whole, then let us look at the figures of ther entire
life insurance business, and it is a fact that even though this loss that
is indicated here is the better part of it, probably is, something should
be added for various things, the ones not listed, perhaps, but it will
be found it represents somewhere between one-half and two-thirds of
1 percent, or between one-half and three-fourths of 1 percent of the
average amount of assets of life insurance companies during that
period, which is an astonishing fact.
Mr. Pike. More astonishing is the fact Commissioner Henderson
was getting at, that in the 19 worst companies the loss has not been as
great a^ in the average investment trust. As a shame-faced fellow
who has been connected with a few investment trusts, I think that is
probably true.
Mr. Gesell. If the committee please, I would like to get over with
Mr, Best before the recess
Mr. Henderson (interposing). I have one more remark to make. I
want it clearly understood that when I was estimating what the total
life loss outside has been, I probably didn't indicate how fast some of
those good assets are coming back to valuation.
Mr. Best. Yes.
Mr. Henderson. You look at how much under water they were in
1932 and how they came back and the present excess, and they< are
coming back. I am taking the most liberal estimate of potentiality
of loss there might have been, and it is a remarkable record.
Mr. Best. Yes. It confirms my own belief in the remarkable ability
of the investment departments of these large life insurance com-
panies to select investments with great skill. They have made a
fine record.
Mr. Henderson. I don't know whether you noticed it the other
day, but in talking to those responsible for investment analysis I
made the remark that if we applied those standards on the registra-
tion of securities or the issuance of securities under public utilities,
See "Exhibit No. 2336," appendix, p. 15568-15569.
124491 — 41-^pt. 28 46
15406 CONCENTRATION OF ECONOMIC POWER
we would be in hot water all the time, because a lot of them wouldn't
get by.
Mr. Gesell. Finishing these cases, we hav,e next the case of the
Register Life Insurance Co., of Davenport, Iowa, which failed with
a 50-percent lien in '34 and a loss of $1,779,000.
Mr. Best. Yes.
Mr. Gesell. What were the factors in that failure?
Mr. Best. Some bad mortgage loans in Montana, primarily. It was
a relatively small company.
Mr. Gesell. Did that tie into some personal advantage the officers
were getting?
Mr. Best. None whatever, it was very honorable management ; they
just made a bad guess in where they put their money and away
they went. '
Mr. Gesell. In '35 the only failure we have is that of the Pacific
States Life Insurance Co., of Denver, Colo., is it not, which went
into receivership in '35. The loss there was $2,686,000 and 100-
percent lien,
Mr. Best. Yes.
Mr. Gesell. What were the causes of that failure?
Mr. Best. My recollection is not as clear on that one as on a great
many of these others. I recall that it \Vas again asset trouble, but
just what trouble I am not quite sure. There was more than that
to it too. The company never was a well-managed concern from
the time it started.
Mr. Gesell. How long was it in business before it failed ?
Mr. Best. I can't remember that.
Mr. GEL.ELL. Several yea,rs?
Mr. Best. Yes; several years.
Mr. Gesell. In most of these cases, Mr. Best, would it be fair
to say that you, through your work, were in a position to realize
that a failure or some real serious financial difficulties were forth-
coming before they hit the light of day?
Mr. Best. In most cases that is true.
Mr. Gesell. And sometimes for a considerable time?
Mr. Best. Yes; there would be evidences of deterioration.
Mr. Gesell. That seems to me, taking it one way, rather a pretty
sharp criticism of regulatory machinery in certain cases. If you
with your information, sitting there, were in a position to know
that these failures were impending and that difficulties were very
severe, one would expect a regulatory official to have that same in-
formation.
Mr. Best. Of course, the feeling that a company was headed for
failure on our part — that feeling on our part would, of course, be on
our own opinion, based on our method of analyzing. Someone else
might not agree with us. In most cases we turned out to be right,
it is true.
Mr. Gesell. It comes down to this, either that the regulatory au-
thorities should get more acquainted with your method or they weren't
very well up to date on what was going on. Isn't that a fair state-
ment?
Mr. Best. As far as these companies were concerned, of course, there
is room for criticism of the lack of strictness.
CONCENTRATION OF ECONOMIC POWER 15407
Mr. Gesell. In State regulation?
Mr. Best. In certain States. You will notice that they are confined
to relatively few States, too. There was none of this trouble in Massa-
chusetts or New York or Connecticut or Wisconsin, or many other
States — ^there was no difficulty at all.
Mr. Gesell. It is a matter, of course, of the particular State depart-
ment.
Mr. Best. Yes, and remember, please, also — let's get the record com-
plete— the perioa we are dealing with, and that there were an awful
lot of people during tliat perioa who were hanging on and sending
good money after bad and thinking they were going to pull something
out that finally blew up in their faces.
Mr. Gesell. The next one in 1936 is the Federal Reserve Life In-
surance Co. I don't think there is any reason for discussing the rea-
sons for that failure because we gave that a very intensive examination
here.^
What about the Continental Life Insurance Co., of St. Louis, Mo. ?
Mr. Best. There was a curious set-up that was involved, the presi-
dent's interest in a bank in St. Louis in which the company had very
large deposits,
Mr. Gesell. Is that the case where the man had the bank on one
floor and the insurance companv on the other and ran the same assets
up and down the back elevator?
Mr. Best. I wouldn't say any such thing. I am under oath.
Mr. Gesell. I remember hearing a lot of discussion of that.
Mr. Best. Anyhow, there was an insurance company and a bank
and the president was heavily interested in both and controlled both.
He made some very bad investments and finally it had to be taken over,
and finally reinsured.
Mr. Gesell. Was the insurance company being used to benefit the
banking position ; was that the difficulty ?
Mr. Best. Each one wais used for the benefit of the president.
Mr. Gesell. And the loss in that case, with a *50-percent lien, was
$4,582,000; is that correct?
Mr. Best. Which I have asked you to reduce to $2,400,000.
Mr. Gesell. For the reasons you indicated. -
Mr. Best. Because part of the business was in registered policies,
and that was the actual lien.
Mr. Gesell. Now, we have the next to the last one on this list,
namely, the Detroit Life Insurance Co., of Detroit, Mich., which failed
with a 60-percent lien and a loss of $3,444,000. Wnat were the factors
in that case?
Mr. Best. They had a lot of bonds which stood up fairly well. Most
of the loss was on mortgages. There were many foreclosures, and the
losses were on mortgages and foreclosed real estate rather than the
bonds in that instance, but again it was assets.
Mr. Gesell. Bad investments?
Mr. Best. Bad investments. *
Mr. Gesell. Bad management?
Mr. Best. Bad management.
Mr. Gesell. There were none in '37 and '38 ?
Mr. Best. None in '37 and '38. ^
' See Hearings, Part 13, p. 6607 et seq.
15408 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. And only one in '39?
Mr. Best. Yes.
Mr. Gesell. The American Life Insurance Co., of Detroit, Mich.,
with a 75-percent lien and a loss of $7,702,000; is that correct?
Mr. Best. That is true.
Mr. Gesell. What were the factors behind that failure?
Mr. Beot. The largest one was certain very, very large mortgage
loans made in the Kio Grande Valley in Texas, where they grow grape- /
fruit. '
Mr. Gesell. Was there again some personal interest of the manage
ment in this case, or just bad investments?
Mr. Best. I don't think it was a financial interest on the part of the
president, but I think he got a notion that he wanted to build a Garden
of Eden down in the Rio Grande Valley, and he was the one to do it.
Mr. Pike. Was it one of those citrus developments ?
Mr. Best. Yes ; millions of dollars were invested by this small com-
pany, and ultimately they just simply all went sour. You are probably
all familiar with the experience of Hidalgo County, Tex. It is classic.
Mr. Gesell. The summary of these 19 cases, where the losses Tyere
$1,000,000 and more initially, in eflFect was that the companies had
gross life reserves in the neighborhood of $352,000,000 ; that they had '•
policy loans and premium notes outstanding in the neighborhood of
$111,000,000; that the net reserves were $240,000,000; that tl)6 average
lien was 57.4 percent ; and that the indicated initial loss, allowing for
the $8,000,000 adjustment which you have brought to our attention
today, was $130,000,000.
Mr. Best. That is correct.
Mr. Gesell. Are the details with respect to some of the dates of the
receiverships and the amounts of reserves in individual cases on this
schedule which you prepared ?
Mr. Best. They are.
Mr. Gesell. I wish to offer this schedule for the record.
Acting Chairman Reece. It may be admitted.
(The schedule referred to was marked "'Exhibit No. 2336" and is
included in the appendix on pp. 15568-15569.)
Mr. Gesell. There is one additional failure that I want to consider,
since it involves one of the 26 companies shown in "Exhibit No. 2250" '
that we have been giving so much attention to; that is, the Pacific
Mutual failure.
Mr. Best. Yes. I did not include that in my list because life-insur-
ance policies were not affected.
Mr. Gesell. That is right ; there was no loss to policyholders.
Mr. Beot. That is right; to life insurance policyholders.
Mr. Gesell. It is, however, a case of a company which got into
difficulties, and since it is somewhat out pf the ordinary and different
from these other cases we have been distussing, I would like you to
give us some idea as to the factors which led to that company^s diffi-
culties and receivership.
Mr. Best. They were underwriting rather than investment.
There were some investment troubles, but in view of the total amount
of assets they were negligible in importance.
1 Hearings, Part 10-A.
CONCENTRATION OF ECONOMIC POWER 15409
The company a good many years ago, over 20, undertook to issue a
type of insurance policy called noncancelable disability insurance.
These policies were issued after medical examination at rates which
varied and increased with age, and the coverage extended to certain
stipulated ages; first, 65; afterward cut down to 60; finally, I think in
some cases, to age 55. Under those policies, the company undertook to
pay certain sums of money per month to the policyholder in the event
of this total permanent disability from any cause whatever, whether
illness or accident.
Now, the company's actuaries when they began this enterprise —
for which I, unfortunately, was somewhat responsible, because I re-
alized the importance of that kind of coverage and went up and down
the land for several years before that, endeavoring to find someone
who would undertake the issuance of it. From the public point of
view, it was a very valuable thing.
They made a very serious mistake in estimating their premiums.
Mr. Pike. They hadn't had the experience with the moral hazard?
Mr. Best. There Was a totally different moral hazard involved.
When they started I pointed out, thinking it over, that the moral haz-
ard was a very important factor; that is, the coverage should not ex-
ceed a reasonable percentage of the well-established earning power of
the applicant. Instead of that, they did, in fact, issue policies where
the monthly payments were equal to as much as 75 percent of the cur-
rent earnings of the applicant. It should have been far lower. .
In the second place, there should be a long waiting period for
which no indemnity would be paid, on the theory that the company
could not afford to insure a man who couldn't get along without the
company for, let us say, 6 or 12 months, and the company didn't
do that either. It issued policies in which there was a 1 or 2 or 3
months' waiting period, and then if it was agreed that permanent
disability was established, then they went back and paid for that
period.
The result was that the premiums initially charged were found to
be only 20 percent of what they should have been, and from time to
time they kept increasing them, but they finally reached a point where
the burden was so terrific that they had to be placed in receivership,
and the company was reorganized under a very peculiar method.
A new company with $3,000,000 of capital and surj)lus, as I recall
it, or four million, was established, and that four million was pro-
vided out of the assets of the old. All of the stock was held by
the insurance commissioner for the benefit of the policyholders of
the old company.
Mr. Pike. That is just the disability policyholders ?
Mr. Best. Yes. Now, the new company took over the business
of the old one exactly in accordance with the terms of the original
contracts except under these permanent disability policies, and in
those cases, the amounts of disability were reduced by varying per-
centages, so that it put them all on the same basis as to future premi-
ums in relation to coverage.
Mr. Gesell. This was a failure then, in other words, which re-
sulted from bad underwriting practices?
Mr. Best. Bad underwriting judgment.
15410 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. And we had no instance of that in these 19 cases we
■ were discussing?
Mr. Best. No ; we saw an indication here and there of rather loose
acceptance of business, but nothing to compare with this. It is a
different matter.
Mr. Gesell. It is true, is it not, in addition to these 19 cases we
were considering, there were other companies which failed where a
lien was imposed on the reserve or a reinsurance arrangement made
which resulted in adjustments or restrictions adversely affecting the
policyholders ?
Mr. Best. That is true. In the 10 years there were 141 mergers and
reinsurances of life-insurance companies. That includes the 19
which are on tliis tabulation. In quite a number of other cases —
what Mr. Gesell has said is correct — there were losses to policy-
holders of just the same type we were discussing here, but in most
of those cases, most of the 141, and I mean more than half, there
wasn't any loss to policyholders.
Mr. Gesell. We have prepared a tabulation from information sub-
mitted by Mr. Best, who submitted us a schedule of life company
retirements, 1930 to 1939, which I would like to offer for the record
but not for printing.
Acting Chairman Reece. It may be received.
(The tabulation referred to was marked "Exhibit No. 2337" and
is on file with the committee.)
Mr. Gesell. That schedule we have used to prepare a summarjv
schedule, which shows the names of 45 companies during this period
which retired with a lien on the reserves or adjustment or restrictions
adversely affecting the policyholders. That is 45 which includes the
19 out of a list of approximately 200 retirements over the period.
And I would like to have this summary schedule of places, where
there was a lien or some type of loss, printed in the record. It is
prepared from the document which I offered a moment ago.
Acting Chairman Reece. It may be received for printing.
(The schedule referred to was marked "Exhibit No. 2338" and is
included in the appendix on pp. 15570-15572.)
Mr. Best. You overlooked one here, the Illinois Life.^
Mr. Gesell. That was not intentional. What is the loss in the
Illinois Life?
Mr. Best. The Illinois Life was a pretty large one. There were
some interruptions when we were looking at that particular place.
Mr. Gesell. I am glad you brought it to my attention.
Mr. Best. The Illinois Life was reinsured in the Central Life In-
surance Society of Des Moines in July 1933, after being placed in
receivership November 28, 1932.
On the basis already explained, there is an indicated initial loss to
policyholders, represented by a 70-percent lien, of $15,276,000.
Mr. Gesell. What is the loss?
Mr. Best. $15,276,000.
Mr. Gesell. ']''hat was one I was sure I would not have overiookea.
Mr. Best. I thought not.
Mr. Gesell. What were the causes of that failure ?
> See "Exhibit No. 23.S6," appendix, pp. 15568-15569,
CONCENTRATION OF ECONOMIC POWER 15411
Mr. Best. Very heavy investments in the securities of two hoiel
concerns in Chicago, the La Salle Hotel, an investment that was
made many years prior to the, failure, and the Stevens lIo1;el, in
which the principal officers and the controlling stockholders of the
Illinois Life were the prime promoters. They made an investment of
many millions of dollars.
Mr. Gesell. In their own enterprise?
Mr. Best. In their own enterprise, and in their experience with the
first one, with the La Salle, it had been excellent. They made a great
deal of money out of that investment, so they became overambitious,
built this enormous Stevens Hotel, with some'^hing like 4,000 rooms,
and at about the time they got it built the depression hit, and thev
have never filled the 4,000 rooms.
Mr. Pike. That hotel has never seen daylight yet.
Mr Best. I think not. Those were the principal things.
Mr. Gesell. That cor eludes any questions I have of Mr. Best.
Mr. Henderson. I have some.
Acting Chairman Reece. Have you noticed any general tendency,
in the case of the smaller companies particularly, to invest too much
money in their home offices?
Mr. Best. That has been evident in quite a number of cases. It
is an unwise thing, particularly because m many cases the buildings
are one-purpose buildings and can't be wsed for any other purpose
than the home office of that particular company or some other
company.
Mr. Pike. Frequently an element of local pride.
Mr. Best. That's it; a monument to the founder.
(Mr. Pike assumed the chair.)
Mr. Henderson. Mr. Best, most of these companies were organized
under the laAvs of States away from the eastern seaboard; isn't that
a fact?
Mr. Best. True.
Mr. Henderson. And all of them were stock companies?
Mr. Best. Yes.
Mr, Henderson. And none of them was a very large company?
Mr. Best. No.
Mr. Henderson. And all of them had difficulty with both manage-
ment and with their portfolios ?
Mr. Best. Yes; the trouble .with the investments tying right back
to the wrong kind of management.
Mr. Henderson. And several of them were due to what I call the
old razzle-dazzle, thimble-rigging kind of thing, and also — well, you
take this case of the Rio Grande. A fellow wanted to build a big
Utopia there with policyholders' money; wasn't that it?
Mr. Best. Just about.
Mr. Henderson. Anotlier fellow wanted to have a big lake shore-
front hotel that would be a monument, and that with the policy-
holder::' money.
Mr. BiyST. Yet, curiously, in both those cases the ruin of the life-
insurance \company involved the ruin of the owners of the life-
insurance company, too. It represented virtually all of their assets.
Mr. Hendkrson. I just wondered whether — you are familiar with
the 250 small companies as well as the large ones, aren't you ?
15412 CONCENTRATION OP ECONOMIC POWER
Mr. Best. Very familiar.
I would like to say for the record that we have scattered around
this country in almost every part of it relatively small companies
which are very splendidly managed.
Mr. Henderson. You evidently thought I was edging up to the
Question of whether it was size that -had anything to do with these
ailures. I was.
Mr. Best. Size helps, for the reason that there is a sufficient income
to justify the engaging of adequate management brains, and in some
of these little companies that have 20 millions or 25 millions of busi-
ness in force, the premium income just will not provide a sufficient
amount of money to buy management.
Now, on the other hand, there are companies from here to Port-
land, Oreg., that, in our opinion, are just as sound and accomplishing
just as good results as the very best of the big ones. I wanted to be
sure that was made clear.
Mr. Henderson. I gather what you would say is that the difficulty is
not in the size, however, but you require a certain size in order to hire
ability?
Mr. Best. That is the first point.
Mr. Henderson. And ability can be hired ?
Mr. Best. Yes.
Mr. Henderson. But you can't hire integrity, can you?
Mr. Best. That is true ; and there is no method that I know of by
which you can make a stupid person intelligent.
Mr. Henderson. It gets down, then, to something of the protec-
tions that are necessary as against both stupidity and venality, doesn't
it?
Mr. Bes^. Yes.
Mr. Henderson. I am just wondering whether or not, in your mind,
the fact that most of these items of skulduggery occurred outside of
the eastern seaboard indicated the supervision was more scrupulous,
better trained, more exact, than it was in the West, or in the newer
States?
Mr. Best. No ; in some of the newer States the supervision has been
excellent, in some it has not. In adjoining States it would not be ; it
would be lax. It is largely the matter of the personal equation plus
the insurance code.
Acting Chairman Pike. There is a little politics in that, too, Mr.
Best?
Mr. Best. Very good. I should say that the best thing that could
happen would be for every employee of an insurance department to
be compelled to pass a civil-service examination so that he would be
competent to do his job when he went out on an examination or on
anything else, and would be secure in his job if he behaved himself.
Mr. Gesell. Is it your experience that there are insurance Tnen out
examining companies for insurance departments who are incom-
petent to the task?
Mr. Best. I haven't, of course, personally had contact with them to
any great extent, but I am told again and again that some of the men
who appear from some of the departments are not competent. It is
not surprising. The point is that the very things that wrecked these
companies have been quite well recognized, particularly in some of the
CONCENTRATION OF ECONOMIC POWER 15413
States where the worst record was made, and recognized in the form
of a revision of the insurance code, making it much more strict than
it was before.
Mr. Gesell. I suppose you have in mind particularly the revision
in the State of Illinois ?
Mr. Best. I have. That is what I was thinking of.
Mr. Henderson. What about Tennessee? Have you noticed any
change there?
Mr. Best. No; we have no company trouble in Tennessee.
Acting Chairman Pike. The Tennessee people just bought those
and got them in trouble.
Mr. Best. The men that bought the companies were from Ten-
nessee, but they aren't Tennessee companies. There are some very
excellent companies in Tennessee, very fine companies, very successful.
Mr. Henderson. Is there quite a difference in the quality of super-
vision from one State to another?
Mr. Best. Oh, yes; there naturally would be. As I was saying, if
the code is fundamentally correct, if all the States would follow the
general theory which is embodied in the codes of the most conserva-
tive States, where we have been handling these problems for many,
many decades, and successfully, too, with a very good record of
failures prevented, and then enforce them, then they don't have
trouble.
Mr. Henderson. In most of these failures we looked at, which
^ pplement the testimony we have had, the companies didn't go
wrong mainly in the writing of their usual policies ?
Mr. Best. No.
Mr. Henderson. Where they went wrong is in the trusteeship and
in the general competence of management of funds, isn't that it?
Mr. Best. Yes.
Mr. Henderson. And that is likely to be increasingly so, isn't it?
Mr. Best. Yes; I am thinking of your use of the word "trustee-
ship." There again comes up the question of good faith and bad
faith in the makmg of these investments, and, as I pointed out, in a
freat many of them I think it would be unfair to impute bad faith,
t was all bad judgment, you see. I have to be very careful how I
answer a question of that sort.
Mr. Gesell. I come out with this conclusion on that. There were
some clear cases of bad faith, quite a few cases of just bad judgment,
and quite a few shadowland cases?
Mr. Best. Just about right.
Mr. Henderson. It is time to adjourn, Mr. Gesell, but I think the
staff ought to include Mr. Best in the list of those whom we are going
to talk with after the conclusion of these hearings. Pathologists such
as he would undoubtedly be of considerable assistance.
Mr. Geseix. Naturally, this testimony, which was rolled through
fairly easily today, has taken some preparation on Mr. Best's part,
quite a good deal, in fact. We do appreciate his turning over the
facilities of his office to our men, and using his own knowledge of
his files to pull this story together.
I have just one other question which I would like to ask. Do you
know how many policyholders were involved in these failures?
15414 CONCENTRATION OF ECONOMIC POWER
Mr. Best. No; it could be ascertained. In some cases, even rela-
tively small eompajiies, the number was rather surprisingly large.
Mr. Gesell. That was the point I wanted you to make. Though we
may be talking about relatively small companies, when you get down
to John Q. Public and individuals, many, many individuals may be
concerned.
Mr. Best. There again, whether they are large or small, it depends
on what you compare it with.
Acting Chairman Pike. I think the committee, including those
who have had to leave, are very much obliged to you, Mr. Best.
We will adjourn until 2 o'clock, Mr. Gesell?
Mr. Gesell. Yes; if thgit is convenient.
Acting Chairman Pike. Very good.
(Whereupon, at 12:35 p. m., a recess was taken until 2 p. m. oi
the same day.)
afternoon session
The committees resumed at 2:20 p. m. on the expiration of the
recess.
Acting Chairman Pike. I think, in fairness to the witnesses, we had
better start. The committee will please come to order.
Mr. Gesell. I have one or two documents to offer for the record
at this time, if the committee please. The other day we heard testi-
mony concerning bond portfolios and some testimony touching on
the handling of bonds in default. This afternoon I should like to
offer for the record a schedule shovfing the representation of the
largest life insurance companies, that is to say the 26 companies
shown in "Exhibit No. 2250," ^ on bondholders' protective committees.
This schedule, which was compiled from company replies to ques-
tionnaires, shows that on December 31, 1938, 91 one of 26 companies
were represented on 65 bondholders' protective committees, 47 of
which represented the bondholders of defaulted railroad issues. The
extent of the insurance companies' participation in these committees
is' indicated' by the fact that the Metropolitan was a member of 25
committees and held over $123,000,000 par value of the bonds repre-
sented by the committees.
Prudential was a member of 19 committees and held 64 million
par value of represented bonds, while New York Life was a member
of 20 committees and held 91 million par value of bonds represented
by the committees.
In the case of 16 of the railroad committees, the committees were
formed primarily to represent institutional holders. , The other 31
railroad committees, of which one or more insurance companies was
a member, were general committees. On one committee, that of the
Chicago, Milwaukee,' 13 life-insurance companies holding 76 million
par value of Chicago, Milwaukee bonds were members. Twelve life-
insurance companies were members of the New York, New Haven
committee.
• The total par value of bonds owned by the insurance companies and
deposited with committees of which they were members was
$490,404,000.
This schedule, as in the case of other schedules prepared from
» Hearings, Part 10-A.
CONCENTRATION OF ECONOMIC POWER 15415
questionnaires, is offered subject to correction and is prepared on the
basis of the material submitted us by the companies.
(Senator O'Mahoney assumed the chair.)
The Chairman. It may be admitted.
(The schedule referred to was marked "Exhibit No. 2339" and is
included in the appendix on pp. 15573-15577.)
Mr. GeselLi. We have also prepared schedules showing the atten-
dance at meetings of directors of the five largest companies for the
period 1929-39. These schedules on directors attendance were com-
piled from information submitted us by the companies and are
offered in further development of testimony Avhich has been taken.
The Chairman. Is that subject for correction?
Mr. Gesell. Yes.
(The schedules referred to were marked "Exhibits Nos. 2340 and
2340-A to 2340-D" and are included in the appendix on pp. 15578-
,15581.)
Mr. Gesell. There is one other series of figures which I believe
the record should contain on life-insurance investment. The sched-
ule I have on hand is prepared by the Association of Life Insurance
Presidents for its member companies and shows the distribution
of life insurance admitted assets by States and by type of asset.
This will give some idea of the relationship which exists between
reserves, premiums, and disbursements and investments by States.
I did not feel it warranted the expense of the committee to bring
a member of the association down for the purpose of offering that
schedule. It was submitted to us by the association and is part of
their regular service in that connection.
The Chairman. These are the figures, I take it, from which Mr.
Davenport has prepared a tabulation.
Mr. Gesell. I believe he prepared certain tabulations for your per-
sonal use from those figures. Those are a little more complete than
the ones you obtained and are the official figures.
The Chairman. But it is just an analysis of the figures given out
by the Association of Life Insurance Presidents?
Mr. Gesell. That is correct. They are given out in a little more
general terms for public information and this is the detail.
The Chairman. It may be received.
(The schedules referred to were marked "Exhibits Nos. 2341, 2341-A
and 2341-B" and are included in the appendix on pp. 15582-15593.)
Mr. Gesell. Mr. Howe is returning to the stand this afternoon to
complete his statement. The committee will recall that we fell- behind
the schedule, and to convenience witnesses who were waiting to testify,
Mr. Howe's testimony was broken into two parts. He will now com-
plete his statement.
(Off-the-record conference.)
The Chairman. You may proceed.
TESTIMONY OF EENEST HOWE, CHIEF FINANCIAL ADVISER TO
THE INSURANCE SECTION, SECURITIES AND EXCHANGE COM-
MISSION, WASHINGTON, D. C— Resumed
Mr. jGesell. Your testimony this afternoon, Mr. Howe, will relate
to the subject of net cost of insurance and matters relating to it, will
-it not?
15416 CONCENTRATION OF ECONOMIC POWER
Mr. Howe. It will. One of the important considerations in the
purchase of insurance as with other services, commodities, or invest-
ments is that of the cost. With this in mind, tables on net cost of
insurance to policyholders have been included in "Exhibit No. 2250"
in the pages which follow page 281.^
Mr. Gesell. Those schedules commence at page 282, do they not?
Mr. Howe. The explanation commences at page 282 and the actual
tabulations commence at page 284.
None of the tabulations included in "Exhibit No. 2250" require
more careful consideration than the so-called net-cost tables, it is,
therefore, desirable to call the attention of the committee to the ex-
planation of this data wjiich appears on pages 282 and 283 of the
exhibit. However, I will not take the time of the committee to read
these qualifications at the present time as I think that they will
become evident as the testimonv proceeds.
A simple example will clarify the method of determining net cost
most frequently used in the business in the sale of insurance. The
first policy listed on pages 284 is a whole life participating policy
sold by the Aetna. At age 25 the gross annual premium as shown in
column 1 is $20.48 per thousand. Thus in the period of 10 years the
policyholder will have paid the company 10 times the gross annual
premium, or $204.80. This is shown in column 2. There is no sure
way to determine what the dividends will be on the policy, but the
salesman has a scale furnished him by the company which will serve
as an illustration. This illustration shows the amount of dividends
which would be paid during the 10-year period on the assumption of
the payment of dividends in accordance with the current scale. On
table 284 it appears that the 10 years' dividends on the basis of the
1939 dividend scale would be $42.60. By subtracting these dividends
from the premiums paid, the policyholder may estimate that to main-
tain the policy in force on this basis would cost him $204.80 less
$42.60 in dividends or $162.20, which is shown in colunm 4. This is
the 10-year. net cost on a policy continued basis. If the policyholder
wishes to determine the 10-year net cost policy surrendered, this is
simply derived by subtracting the tenth year cash value — which he
gets back if the policy is surrendered — from the 10-year net cost
policy continued. In tne case of the example chosen, the tenth-year
cash value is $89 and is deducted from the tenth-year net cost policy
continued , -vhich is $162.20. This leaves a balance of cost on a policy
surrendered basis of $73.20. It will be observed that all of the factors
in the calculation are established by contract except dividends. The
dividends are the uncertain factor.
In the preparation of net cost and discounted net cost tables, there
have been taken into account all policy provisions susceptible of
mathematical evaluation on this basis. There are, however, differ-
ences in policy contracts which cannot be so evaluated. Further-
more, such differences may be material from the point of view of
some policyholders.
Mr. Gesell. What are some of those, Mr. Howe ?
Mr. Howe. Well, they have to do frequently with provisions in con-
nection with the war, the war clause, and other provisions which
might be material to policyholders in certain circumstances.
' See Hearings, Part 10-A. pp. 281-298.
CONCENTRATION OF ECONOMIC POWER 15417
For this reason, a policy with a net cost higher than the lowest net
cost policy may best fulfill the needs of a given policyholder.
In spite of the qualifications which have been made and those
which will be stated as this discussion of net cost proceeds, these
tables have been .inserted in the tabulation because in our opinion they
do provide the most practical and understandable approach to the
consideration of net cost from the policyholder's point of view.
Tables 286 and 287 show net cost on whole life policies at age 35,
an a^e which is frequently used as typical.^ In examining the gross
premium charges on the two pages it will be seen that the lowest gross
premium is that of the Western and Southern's special nonpartici-
pating policy — sold only in amounts greater than $1,000. This pre-
mium is $(20.01 per thousand. That will be seen on page 287. The
Hartford stock companies, that is the Travelers, Aetna, and Connecti-
cut General, all have the same gross premiums on their nonparticipat-
ing policies. If this premium — which is shown as $21.42 per $1,000 for
whole life at age 35 — ^is used as a base, it will be seen that the gross
premiums charged. by other companies vary from 106,83 percent of
the Hartford nonparticipating rate, in the case of the Lincoln Na-
tional's standard nonparticipating policy, to 93.42 percent in the
case of Western and Southern's special nonparticipating policy.
Premiums of particpating policies, on the other hand, vary from
$22.56 per $1,000, in the case of the Metropolitan's special, to $28.11
in the case of whole life policies of the Equitable, Mutual, and New
York Life. Thus gross premiums on these participating policies at
age 35 are from 5.32 percent to 31.23 percent higher than the Hart-
ford nortparticipating rate.
Dividends, of course, depend to some extent upon the level of gross
premiums. Other factors being equal, companies which collect nigh
gross premiums are in a position to pay higher dividends. The
dividend, ds we have seen, is primarily a return of premium.
The 10-year net-cost policy continued reflects the extent to which
high dividends offset high premiums.
Examination of this data for such 10-year net cost on a policy-
continued basis for standard participating policies at age 35 shows
that cost varies from $197.96 for the policy of the Northwestern Mutual
to $234.01 for the Mutual of New York. This may be compared with
the fixed contractual net cost of the Hartford nonparticipating
policies of $21420.
In reducing net-cost calculations on a policy-continued basis to net
cost on a policy-surrendered basis, the additional factor to be con-
sidered is the surrender value. Surrender values, like gross premiums,
are fixed in the policy contract, but there are differences between com-
panies in the provisions made,
Not only do reserves themselves differ between companies but sur-
render charges are different in different companies. The New England
Mutual and Mutual Benefit, for instance, pay the full reserve if the
policy is surrendered in the third year. In other words, they have no
surrender charge thereafter. The Northwestern Mutual and Penn
Mutual pay the full reserve beginning in the tenth year. Other com-
panies, such as Travelers Insurance Co., assess surrender charges, in
certain cases, up to and including the nineteenth year.
1 See Hearings, Part 10-A, pp. 286-t287.
15418 CONCENTRATION OF ECONOMIC POWER
It is not surprising, therefore, to find that cash or surrender values
differ. As is reasonable to expect in view of their low gross premiums,
the cash values of the Hartford nonparticipating policies, with minor
exceptions, are the lowest shown, being approximately $111 per thou-
sand at the end of the tenth year. Among the standard participating
policies the highest cash value showii at the end of the tenth year
occurs in the case of the policy of the John Hancock at $148 per thou-
sand. This cash value is about $2 higher than the cash value on the
policies of 11 other companies.
Of the participating companies shown on page 286, the Phoenix
Mutual charges the lowest gross premium ($24.58 per thousand) and
pays the lowest cash value ; namely, $130 per thousand.^ The highest
gross premiums ($28.11 per thousand) are charged by the Equitable,
Mutual, and New York Life, who pay next to the lowest surrender
values shown on the page ; that is, $131.
Bearing these facts in mind, let us now consider the net-cost data
ahown on tables 286 and ^87.^ From table 287 we see that of the)
standard nonparticipating policies, sold in the amount of $1,000 or
more, the policy of the Equitable of Iowa has the lowest net cost and
that of the L/incoln National the highest. This is true both in the-
tenth and twentieth policy years and irrespective of whether the policy
is surrendered or continued.
Of the participating policies shown on pages 286 and 287, the lowest
net cost on a policy-surrendered basis at .the end of the twentieth year
is shown by the Metropolitan's special policy.^ This is $2.91 per thou-
sand. At the end of the tenth policy year, however, on a policy-
surrendered basis, the John Hancock's special participating policy and
the whole-life policy of the Northwestern Mutual are lower.
Of the standard participating policies sold in the amount of $1,000
or more, as shown on page 286, on the policy surrendered at the end of
twentieth-year basis, the Metropolitan's whole-life policy paid up at
age 85 shows a net cost of $36.20, which is the lowest of any policy
included in the tabulation.^ Next in point of low: cost, at $59.81 "per
thousajid, is the policy of the Northwestern Mutual. On a 20-year
net-cost policy-continued basis, the policies of these two companies
indicated in the table also show the lowest net cost. However, on a
policy-continued basis there is very much less difference between them,
as the Metropolitan's net cost is $384.94, as compared with $387.39 for
the Northwestern Mutual. For the same policies at age 25, on a
10-year net-cost policy-continued basis, the policies of the North-
western Mutual, the Provident Mutual, and the National Life of Mont-
pelier, Vt., are less than the net cost of the Metropolitan's policy. On
a 10-year net-cost policy-surrendered basis, as shown by table 284, the
policies of 10 companies have a lower net cost than that of the Metro-
politan.* These 10 companies listed in order of lowest net cost are
the following: Northwestern Mutual, Provident Mutual, National
Life of Montpelier, Vt., Penn Mutual, Mutual Benefit, State Mutual,
New England Mutual, Connecticut Mutual, John Hancock, and
Equitable of New York. On the other hand, on a net-cost policy-
surrendered end-of-twentieth-year basis, the policy of the Metropoli-
1 See Hearings, Part 10-A.
' Ibid., pp. 286-287.
» Ibid., p. 286.
« Ibid., p. 284.
CONCENTRATION OF ECONOMIC POWER 15419
tan again appears as having the lowest net cost. Thus it will be
abundantly evident that by selection of the basis upon which net-
cost comparisons are made a wide variety of results may be obtained.
As has been pointed out on page 282 in the foreword to the net-cost
and discounted pet-cost tables, the net-cost figures which we have just
been discussing have been derived in the manner generally used by
publishers of insurance data and by life-insurance agents in the solici-
tation of business. As has been pointed out in the foreword, this
method of deriving net costs is subject to the objection that $1 of
premium paid, or dividends received, in the early years of the contract
is given equal weight with $1 of premiums, dividends, or cash values
in the later years of the contract. This disregards the element of
interest. As a result, this method of deriving net costs shows com-
parative figures which generally favor (1) participating policies over
nonparticipating policies; (2) high-premium participating policies
over low-premium participating policies; (3) participating policies
which pay extra or special dividends at quinquennial durations, or in
the later policy years over those participating policies under Avhich
annual dividends increase from year to year and are not supplemented
by extra or special dividends. It was in order to minimize these
inequalities that the discounted net-cost tables were prepared.^ In
these tables premiums paid are not considered as equivalent to their
aggregate amounts, but such premiums paid during the period were
discounted back to the time of issuance of the policy at an assumed
rate of 3% percent per annum.
Mr. Gesell. Where do the discounted tables appear ?
Mr. Howe. The discounted net-cost tables appear on page 300.^
Mr. Gesell. Commencing on 300 ?
Mr. Howe. Yes ; commencing on page 300.
Similarly, dividends and the amount available upon surrender of the
policy at the end of the period were discounted back to the time of
issuance' of the policy at the same assumed rate. The data from tables
on. page 286 and page 302 has been selected to show the differ^ces
which result by the use of the 3i/^-percent discount factor.^ By com-
paring the net costs on the policies surrendered at end of twentieth-
year basis, it will be seen that the discounted net cost in the case
of the Guardian Life is $160.04 as compared with the undiscounted
the cost of $108.75. Thus, the discounted net cost is 147.16 percent
of the undiscounted net cost. This is the smallest variation shown
in the cases of any of the policies listed on pa^es 286 and 302.
The largest variation between discounted and undiscounted net cost
on the policies surrendered at the end of twentieth-year basis occurs
in the case of the policy of the Metropolitan Life. The undiscounted
net cost is $36.20 while the discounted net cost is $116.13, Thus
the discounted net cost is 320.80 percent of the undiscounted net cost.
A still more striking comparison may be made from the Metropolitan's
special policy which is shown on table 287 and table 303.^ The un-
discounted net cost of policy surrendered end of twentieth year is
$2.91. The discounted net cost is $89.26. Thus, the discounted net cost
is 3,067 percent of the undiscounted net cost. This highly unusual
situation is oqpasioned by the unique dividend system of the Metro-
1 See Hearings, Part 10-A, pp. 300-314.
2 Ibid., pp. 286 and 302.
» Ibid., pp. 287 and 303.
15420 CONCENTRATION OF ECONOMIC POWER
politan. Apparently this company is the only company included in
the list of the 26 currently under consideration which pays a cash
settlement dividend, provided premiums have been paid for at least 17
years prior to surrender. This cash settlement dividend in the case
of whole-life policies and endowments of 30 years or more (which
classification includes the policies considered in tables 286, 287, 302,
and 303)^ begins at 1 percent of the policy reserve in the seventeenth
year and increases to 6 percent in the twentieth year. Thereafter it
increases to 10 percent in the thirteenth year and succeeding policy
years. This settlement dividend is not fixed by contract but has
been paid in addition to any other dividends upon the policy. As will
readily be seen, however, it has a very pronounced effect when used in
the computation of net cost on a policy-surrendered basis, especially
when the discount factor is not taken into account.
On considering the discounted net-cost policy surrendered end of
twentieth year which is shown in column 11 of table 302, it will be seen
that the Metropolitan's policy with a net cost of $116.13 is the lowest of
those shown by any of the companies.^ The net cost of the North-
western Mutual on this basis is $125.41 and other low-cost companies
in the order of ascending costs are the Provident Mutual, the National •
Life of Montpelier, Vt., the Prudential, the Penn Mutual, the New
York Life, and the Equitable of Iowa.
In column 9 which ^hows 20-year discounted net costs, policy con-
tinued, the lowest net cost is that of the. Northwestern Mutual which
shows a net ^",ost on this basis of $290.04 per thousand.
Company executives have made two principal objections to the net-
cost material in "Exhibit No. 2250." ^ The first of these objections
emanates principally from mutual companies selling participating
insurance. The objection is that the tables are neither a' reliable esti-
mate of what may be expected of the future nor are they a 'chronicle
of what has actually happened in the past.
This, of course, is true. No method has yet been evolved for divin-
ing the future ; and the experience of the past, by reason of the un-
precedented decline of interest rates, has been excluded from the tables
because historical net-cost figures do not represent either the present
position or the future outlook. Policies issued in 1919 were sold on a
basis often not available to purchasers today. Gross premium rates
have been increased and cash values decreased in many cases. Reserves
have often been provided on a lower interest assumption than that in
use 20 years ago. This historical basis is therefore just what it pur-
ports to be — pure history. The 1939 dividend scale was adopted for
inclusion in the book of tables for the reason that it does at least pro-
vide the best available criterion of the 1939 position.
Even as an indication of the 1939 position, however, the net-cost
tables are subject to the important qualification that those companies
which have conservatively valued their assets and rr":erves and reflected
such valuations in a lower dividend scale may appear to have higher
net costs than those whose valuation practice has been less conservative.
Furthermore, in cases of companies whose 1939 dividend scale was
abnormally low for any reason, the costs will be higher than would
otherwise appear.
1 Ibid., pp. 286, 287, 302, and 303.
» Ibid., p. 302.
• Ibid., pp. 281-314.
CONCENTRATION OF ECONOMIC POWER 15421
Nevertheless, it is felt that the net-cost data, considered together
with the information appearing in preceding tables (which should
shed some light on the relative conservatism of the various companies) ,
provide a certain general standard for measurement of recent oper-
ating results of the companies.
The Mutual Life Insurance Co. of New York, which reduced its
dividends substantially in the year 1939 and increased them again in
1940, has emphasized the shortcomings of net-cost calculations
based upon. a single year's dividend scale in a letter to Mr. Gesell dated
February 1, 1 940, and ' has furnished the Securities and Exchange
Commission .^'ith historical net-cost data for all of the standard par-
ticipating policies — sold in the amount of $1,000 or more, which poli-
cies are included in tables 284 to 298.^ The Commission has de-
cided that in the interest of informed discussion these calculations of
the Mutual Life, together with the company's letter, might be included
in the record.
Mr. Gesell. I w;ould, in accordance with Mr. Howe's statement, like
to offer at this time for the record the letter of the Mutual Life Insur-
ance Co. containing its discussion of the net-cost problem, particularly
from the point of view of the way a dividend reduction may affect the
calculations.
1 should also like to offer for the record the historical net-cost com-
putations prepared by the Mutual actuaries, which Mr. Howe has been
referring to.
The Chairman. This was referred to the Mutual actuaries and the
representative of the company ?
Mr. Gesell. That is correct; and they have no objection to this
material being included in the record.
The Chairman. It may be received.
(The documents referred to were marked "Exhibits Nos. 2342 and
2343" and are included in the appendix on pp. 15594-15603.)
Mr. Howe. A direct comparison of the historical net cost figures
appearing in the Mutual Life schedules with the net cost data in "Ex-
hibit No. 2250" is now possible.
Mr. Gesell. In other words, Mr. Howe, what you propose to con-
sider is the differences which may exist between this historical method
of computing net cost and the method which has been pursued by the
Commission in these tables ?
Mr. Howe.- That is correct.
Mr. Gesell. Did I understand correctly that your position is firm
on the proposition that the procedure which has been adopted here
is, taking all the factors which you have mentioned into consideration,
more preferable from the point of view of the policyholders looking
to it for the purpose of purchasing insurance ?
Mr. Howe. That is my considered opinion, Mr. Gesell.
A general impression of what the comparison reveals may be had
by comparing thfe net cost — ^policy surrendered end of twentieth year
for whole-life policies at age 35. This data on the 1939 scale appears
on page 286 of "Exhibit No. 2250." The historical net cost in the case
of the Mutual is $76.30,^ or 57.12 percent of the net cost derived from
the 1939 scale. On the historical scale the Mutual Life ranks thir-
1 See Hearings, Part 10-A, pp. 284-L98.
2 Corrected to $76.50, Hearings, Part 29, p. 15766.
124491— 41— pt. 28 47
15422 CONCENTRATION OF ECONOMIC POWER
teenth instead of twenty-third on the 1939 scale. In the case ot other
companies the historical net cost varies from 66.85 percent of 1939 net
cost in the case of the Northwestern Mutual to 111.61 percent for the
Jolm HuncocTc and 164.44 percent foi- (he Pacific Mutual.
In the case of the Pacific Mutual, the hio^h historical cost is un-
doubtedly explained by the financial difficulties of the company lead-
ing to its reorganization on July 22, 1936. In the case of other com-
panies, however, the comparison, while interesting, may not be as sig-
nificant as might be imagined. The provisions of the historical policy
are frequently different from the 1939 policies with which they are
compared. The use of different premium rates and frequently a 3-per-
cent reserve basis on the 1939 policy as compared with a 3V2-percent
reserve basis on the 1919 policy tends to minimize the difference be-
tween the two on the basis of the 20-year net cost policy surrendered
basis. Furthermore, the use of different dividend formulae and espe-
cially different historical special or settlement dividends may change
the results enough to produce apparently startling but actually incon-
clusive comparisons.
Mr. Gesell. The comparisons are made on this schedule which I
show you, are they not?
Mr. Howe. That is correct.
Mr. Gesell. I wish to offer this comparative schedule for the record.
The ChaiRxMan. The schedule may be received.
(The schedule referred to Avas marked "Exhibit No. 2344" and is
included in the appendix on p. 15604.)
Mr. Howe. The second objection (most frequently voiced by leading
nonparticipating companies) is that in comparing net costs of partici-
pating policies with net costs of nonparticipating policies, fundamen-
ally different contracts are involved and consideration of tliis funda-
mental difference should be given proper weight. In the first place,
nonparticipating companies contract to provide life-insurance protec-
tion for a fixed annual premium during the entire life of the contract.
This is in sharp contrast with participating companies which charge
higher gross premiums than they believe they will need, returning the
excess to the policyholder in the form of dividends. Tlius nonpar-
ticipating contracts provide for a definite net cost stipulated by con-
tract while participating policies provide for an arrangement under
which net costs may fluctuate as conditions change. Furthermore, it
will be recalled thac tlie level of gross premiums charged on nonpar-
ticipating policies is lower than that used on participating contracts.
Nonparticipating companies contend furtlier that because of the pei'-
sistent decline in interest rates, participating companies in the future
may be obliged to cut their dividend scales even below the 1939 basis
and urge that it is unfair to compare their inflexible net costs with
participating net costs under these circumstances. Only the future can
demonstrate how valid this argument mray be.
Mr. Gesell. Let me interrupt you a moment there, Mr. Howe, to see
if I understand this argument of the nonparticipating companies.
They say, in effect, that when you buv a policy from them you know
what it is going to cost you, and no matter what changing conditions
may arise, you have this particular price premium that you must pay
which is fixed in the contract?
Mr. Howe. That is right ; absolutely fixed.
CONCENTRATION OF ECONOMIC POWER 15423
Mr, Gesell. And if economic changes come about which will require
them to raise their rates, they can raise rates on new policyholders but
can't touch you because you have a contract with them ?
Mr. Howe. That is correct.
Mr. Gesell. On the other hand, you are in the case of the partici-
pating company given a hypothetical situation such as the committee
was discussing with Mr. Howell and Mr. Stedman when they were on
the stand the other day. It may be necessary for the participating
companies .to reduce dividends in order to meet their policy contracts.
Mr. Howe. That is right.
Mr. Gesell. And the nonparticipating companies argue they feel
that is a likelihood and therefore someone who has a contract with
them has the advantage of knowing now what he is going to have to
pay for all time ?
Mr. Howe. That is right.
Mr. Gesell. And the fellow that goes into a participating company,
so they argue, is faced with the possibility that economic conditions
can change the amount of the dividend return which he gets, and there-
fore affect the net cost of his policy ?
Mr. Howe. That is right. Another way of expressing it is that one
is a fixed contract and the other a cost-plus contract.
Mr. Pike. He has a ceiling on his gross premium?
Mr. Howe. Yes ; he has a ceiling on his gross premium in the par-
ticipating company, that is correct.
Mr. Pike. Ajid it might depend upon how you view interest rates
as to which policy you would rather have?
Mr. Howe. And a variety of things.
The Chairman. Arguments can be made on both sides of this
question.
Mr. Howe. Effective arguments can be made on both sides.
Mr. Henderson. We might rephrase that and say effective argu-
ments are made.
Mr. Howe. Vehemently^!
Mr. Gesell. It is a discussion that has been going on for years,
is it not?
Mr. Howe. It is. There is nothing new about that.
Mr. Henderson, Is there anything, Mr. Howe, in financial organi-
zation that is at all like this set-up of the mutual companies, this
cost-plus arrangement, you really might say ? There is no such thing,
is there?
Mr. Howe. Not that '± kno^^ of in any financial field. You can
say to some extent that a mutual savings bank is similar, but only
to a limited extent.
Mr. Gesell. It really results from the whole theory of mutuality,
doesn't it?
Mr. Howe. Certainly. Of course you are familiar with cooper-
ative merchandising and all that kind of thing.
Mr. Henderson. But on a scale like this, where the dominating
element, you might say, the overwhelming proportion of assets are on
a mutual basis, there is nothings like that m a financial organization
at all, is there ?
Mr. Howe. I- don't think that there s any concentration of assets
15424 CONCENTRATION OF ECONOMIC POWER
on a mutual scale anywhere in the world comparable to these Ameri-
can mutual life insurance companies, as far as my knowledge is
concerned.
Mr. Pike. There are mutual companies in the fire field, in no way
near the same scale, with a dividend policy, again not on the same
scale.
Mr. Howe. That is right, but fire companies by the very nature of
their business do not accumulate reserves in the same manner life-
insurance companies do.
In order to form a correct impression of relative net costs even on
the basis of the foregoing assumptions, the operating policies of man-
agement must be surveyed. Some companies may improve the rela-
tive appearance of their net-cost figures by paying more dividends
than current earnings would seem to justify. On the other hand,
other companies, by realistically valuing their assets, conservatively
calculating their liabilities, adding to contingency reserves, and
paying out smaller amounts in dividends than are currently being
earned may in a given year or period of years appear in a less
favorable light than their less conservative competitors.
For this reason it is necessary to examine company policies with
respect to writing off asset losses, and strengthening policy reserves,
contingency reserves, and surplus. Account must also be taken of
losses past, present, and prospective from unprofitable contracts
outstanding or being written.
Mr. Gesell. Let me see if I get this point ; as I see it you are about
to go into a new line of discussion. So far you have been talking
about the straight mathematical computations.
Mr. Howe. That is correct.
Mr. Gesell. You have said that if you compute it this way, this is
the way it looks ; if you compute it that way, that is the way it looks.
Mr. Howe. That is correct.
Mr. Gesell. Now you intend to present for the committee's con-
sideration some of the operating problems in the business which affect
net cost calculations that you have in these tables, and operating factors
which must be taken into account in looking toward the future ?
Mr. Howe. That is right. ,
Tables 86 and 88 show the write-offs of asset value which have been
made by the various companies during the 10 years ended December
31, 1938.^ These write-offs have amounted to $893,839,000 for the 26
companies. Offset against these write-offs are gains based upon dif-
ference between book value and sales or redemptions price of bonds,
stock, and real estate in the aggregate amount of $174,520,000. This
makes a net asset loss (part of whic^ is an unrealized loss) of $719,-
319,000 for the 10-year period. The extent to which greater write-
downs might be made in the cases of some companies has been dis-
cussed in previous hearings and does not need to be reviewed again,
but should be borne in mind in this connection.
An outstanding example of conservative valuation of assets, as has
already been brought out, is found in the case of the New York Life
Insurance Co. Not only is that company outstanding in the conser-
vatism of its admitted Iksset values but a further step in that direction
» See Hearings, Part 10-A. pp. 86 and 88.
concentration\ of economic power 15425
has been taken by the company in 1939. This has been done by the
establishment of a contingency reserve which on December 31, 1939,
amounted to $50,000,000.
The break-down of this reserve is as follows :
a. Difference between the actual market value December 31, 1939
($44,450,000) and the value carried in assets ($72,273,000) of all
bonds quoted at 70 or lower on December 31, 1939 $27, 823, 000
Mr. Pike. That was merely reducing that classification to market ?
Mr. Howe. That is right. In other words, these marginal bonds
that I talked about in my earlier testimony — -they have said, "In case
any of those bonds in the border-line classifications get below 70,
although we will continue to carry them among our assets at the
investment value, we will set up a reserve for any of them which are
selling under 70." That is a new departure in conservatism in that
direction.
The second portion of the reserve :
b. Allowance for a 10% depreciation in market value of Preferred
and Guaranteed Stocks (Market value December 31, 1939,
$86,064,795) $8, 606, 000
c. Reserve for possible losses in Bond and Mortgage Loans held De-
cember 31, 1939.
Those are mortgage loans. It has nothing to do with the bond
account. This reserve was $12,000,000.
d. Miscellaneous Reserve including possible losses due to depreciation
in Canadian Currency $1,571,000
Mr. Gesell. That reserve for possible losses in the bond and mort-
gage-loan account is particularly interesting. Do you know of any
other company which has set up a reserve which is specifically ear-
marked as a reserve against losses which may arise from mortgage
loans ?
Mr. Howe. There is no other example which has come to my atten-
tion with the exception of one relatively small one. In the annual
statement of the Connecticut General in the year 1938 there was a
very unusual item, namely, a deduction of $235,000 as against valua-
tion of mortgages, but, so far as I know, that is the only other effort
which has been made to revalue mortgages at a lower amount than
their face value.
Mr. Gesell. Of course, companies do have general reserves against
which losses in the mortgage-loan account mi^t be charged ?
Mr. Howe. Their surplus, of course, is available for any contingency
which may have developed.
Mr. Pike. Among one or two earmarked things, there was the
$15,000,0(X) of the Metropolitan against mortgage losses.
Mr. Howe. That is a lump-sum reduction in the book value of the
real estate. Please don't let me be misunderstood, Mr. Pike. It has
been very customary to write down the value of real estate, but here
the New York Life Insurance Co. not only has gone pretty far in
reducing valuations of their real estate, but now they are reaching back
another step.
Mr. Pike. For contingent losses?
Mr. Howe. Contingent losses on the mortgage account, and that is
the thing which is somewhat of a new departure.
15426 CONCENTRATION OF ECONOMIC POWER
To set up, as the New York Life Insurance Co. has done, as indicated
"by item a, the difference between actual market vakie December
31, 1939, and the value carried in the assets of all amortized bonds
selling at 70 or lower in the form of a contingency reserve — so far as
my knowledge goes — is a new and highly commendable departure in
post-1929 methods of bond valuation, although the Prudential for
some years has carried certain bonds at market which they miglit have
amortized, thus achieving a somewhat similar result.
Item c, which is a reserve for possible losses on mortgage loans, is
also a new departure. In general, mortgages are carried at their face
amount irrespective of the value of the underlying security or the
amount or character of their delinquency. While there was apparent
justification for this practice before moratorium legislation relieved
many mortgages of the necessity of paying amortization, events of
recent years indicate the desirability of reconsidering this practice.
By the establishment of this contingency reserve the New York Life
pioneers in .recognition of a possible impairment in underlying mort-
gage security. Obviously companies employing such conservative
practices may appear less favorably than they deserve in net cost com-
parisons. It should be pointed out, however, that,a part of the reserves
mentioned above have been set up since the 1939 dividends were
declared, and to that extent do not affect the net cost calculations in
"Exhibit No. 2250."
In addition to asset valuations, the basis upon which reserves are
calculated is an important factor in the determination of operating
earnings available for dividend distribution. In this connection two
factors are significant, the original basis upon which reserves were
set up and the extent to which they have been increased or strength-
ened by change in basis.
The increases in reserves due to change in basis during the 10
years ended December 31, 1938, are shown on Table 79. These
increases in reserves are largely the result of voluntary action by
the companies. There is not even a line in the Gain and Loss Ex-
hibit as it was used prior to 1939 which requires that these data be
given. Some companies, however, realizing the importance of the
information, have inserted.. 'it in their convention blanks. In the
case of other companies, the information was obtained by direct
(questions from the Securities and Exchange Commission in its
investment questionnaires. It will be seen from the table ^ that dur-
ing this period of 10 years, the companies have increased their
reserves due to cl;iange in basis in tKe amount of $241,969,000. This
has, of course, penalized their operating earnings during the period
by a like amount. It is evident, therefore, that companies which
have increased reserves materially will show poorer earnings records
than those which have not adopted as conservative a practice in
this regard. The fact should constantly be borne in mind when
considering the operati)ig results of the companies.
It may be interesting to note that of the $45,858,000 increase in
reserves due to change in basis set up by the Metropolitan during
this period, $22,794,000, or approximately 50 percent, is the amount
applicable to industrial business. In the case of the Prudential,
> See Hearings, Part 10-A, p. 79.
CONCENTRATION OF ECONOMIC POWER 15427
which has increased its reserves clue to change in basis in the amount
of $67,565,000, $64,655,000, or 95.7 percent, has been set up on ac-
count of industrial business. In tlie case of the John Hancock,
which has increased reserves $2,123,000 due to change in basis,
$1,712,000 of the amount was for industrial business. This is 80.5
percent of the amount set up. In the case of the fourth industrial
company, the Western and Southern, of the $624,000 increase in
reserves due to change in basis, $410,000, or 65.7 percent, was set
up on account of reserves on industrial business.
Mr. Henderson. I don't know whether I have quite got this. You
say "the increase in the reserves." From what account did they
come, surplus?.
Mr. Howe. You can say they came out of surplus or you can say
they came out of current earnings, just as you can say a dividend is
paid out of surplus or paid out of current earnings.
Mr. Henderson. Of course, in paying out a dividend you carry
it to earned surplus, usually, before you make the charge.
Mr. Howe. This is the same thing. It is an income deduction.
Mr. Pike. These companies never show earnings statements, do
they? They always just show comparative balance sheets — I mean
to policyholders.
Mr. Howe. They have a statement which is called the gain and
loss exhibit. In general I think it is true that gain and loss ex-
hibits are not distributed to policyholders. That is my understand-
ing.
Mr. Pike. As a policyholder, I have never seen one.
Mr. Howe. I don't think I ever saw one in a policyholders' annual
statement. They are, of course, in the statements to the insurance
commissioners.
Mr. Pike. More or less like banks. They really publish com-
parative balance sheets.
Mr. Howe. That is right, but nevertheless in figuring out the
amount of money which they have available for dividend distribu-
tion, this increase in reserves is a deduction against earnings.
Mr. Gesell. These reserves are charged to income in the year they
are set up, isn't that the fact?
Mr. Howe. That is right, unless there happens to be less income,
and then they would be charged to surplus. In ordinary procedure
they are charged in
Mr. Henderson (interposing). Take the Prudential. In that case
they increased their reserves 67 million plus.
Mr. Howe. That is right.
Mr. Henderson. And 64 million of that was on account of the
industrial business,
Mr. Howe. That is correct.
Mr. Henderson. Does that mean that in one j^ear, out of the total
income Avhich they got from all policyholders and all other income,
they allocated or set off $64,000,000 more than they had in the
year previous?
Mr. Howe. No; this is the total figure. Commissioner, for the 10-
year period.
Mr. Gesell. You are speaking from table 79, are you not, Mr.
Howe?^
1 See Hearings, Part 10-A. p. 79.
15428 CONCENTRATION OF ECONOMIC POWER
Mr. Howe. I am, and if you want to see the detail of the thing
Mr. Gesell (interposing). Table 79 would show that there was
an amount set aside, in the case of the Prudential in all but 2 of the
years, in the case of Metropolitan in n.ll but 1 of the years for the
period shown on the schedule.^
Mr. Howe. These increases have not Deen made all in 1 year,
but have been made gradually over the period, but if you will look
at the tables which follow page 265, you will see a classification of
these increases in reserves by lines of business.^ Table 265 shows
the amount for industrial insurance, table 266 shows disability bene-
fits in industrial policies, table 267 accidental death benefits in indus-
trial policies. The total of those three tables is the figures which
are given here for the amount of increase in reserves due to change
in basis on industrial business.
Mr. Henderson. Getting down where a layman can understand
it, what does it mean? Why did they do this? What would be the
common assumption of why that was done?
Mr. Howe. Well, of course, it struck me as an interesting fact,
and I don't know enough about the basis on which they set up their
reserves to justify it. There is this, however, to be said.
The Chairman. Wliat do you mean when you say "to justify it"?
Mr. Ho"WE. I probably used the- wrong word, Senator; I mean to
fully explain it.
It is true. Commissioner Henderson, that during the last 10 years,
. as I understand it, the Prudential has extended retroactively certain
benefits to industrial policyholders, and as they have done so, it may
be that they have felt that it was desirable to strengthen their indus-
trial reserves. That may be the explanation of it.
Mr. Geseix. That applies in the case of all of the industrial com-
panies. They have made retroactive benefits to their policyholders,
have they not?
Mr. Howe. To a greater or lesser extent, I think that is true.
Mr. Henderson. You mean, they have added to wliat the original
contract called for?
Mr. Howe. Yes ; they have changed the policy in some instances, ex-
tending benefits to the new policyholders who come in. Then they
have said, "We will also extend those same benefits to all the policies
on our books."
Mr. Henderson. That is a more liberal policy, and then this is the
conservative practice to offset that ?
]\fr. Howe. To offset that; that is correct.
Mr. Pike. Put in enough funds to meet those extra benefits ?
Mr. Howe. As much as they can do.
Mr. Gesell. One of those retroactive benefits tl^at has been granted
quite frequently in the industrial companies has been a liberalization
of the cash values, surrender values?
Mr. Howe. That is my understanding; yes,
Mr. Gesell. The committee will recall that when Mr. Williams, of
Western and Southern, was on the stand there was introduced a sched-
ule showing all retroactive benefits -granted by that particular com-
pany, and t think if anyone is interested it will give some idea of the
nature of those provisions,''
' Ibid., pp. 2t!.''., 2G6. and 267.
'See "Exhibit No. lOlC." Hearings, Part 12. appendix, p. 6301.
CONCENTRATION OF ECONOMIC POWER 15429
Mr. Henderson. I still want to know where that money came from.
Did it come out of the common income ? Take this 67 million of Pru-
dential over this period. Did that come out of the money received
on industrial policies?
Mr. Howe. I think so, yes; because the industrial business has
shown a surplus.
Mr. Henderson. Does that reduce the amount available for divi-
dends ?
Mr. Howe. Yes ; definitely. When you set up these policy reserves
you definitely reduce the amount which is available for dividend dis-
tribution.
Mr. Henderson. Does it reduce the amount available for dividends
only for the industrial ? I know it naturally would reduce the amount
available for all policies if it were done on a common-pot basis. Would
this particular increase in reserves apply to the dividends that might
be paid on industrial policies only ?
Mr. Howe. Of course, it is a problem that is almost impossible
to answer categorically, but I believe that is true. Commissioner
Henderson, for the reason that if you will look at table 24, which
shows the net change in total surplus from industrial insurance after
the payment of dividends, you will see that there was an increase in
surplus and contingency reserves on the part of the Prudential over
the lO-year period of $32,448,000.^ Now, that is after setting up this
$67,000,000 reserve, 64 million of which came out of the industrial
business, so that in view of the fact that they have a residual surplus
there, I t)iink it is very safe to assume that this $64,000,000 came out
of the income from industrial policyholders exclusively.
Mr. Pike. Is there an abrupt change in the dividend policy or the
rates on industrial between '32 and '33? There seems to be an
absolute break-off on all those companies at that point. That is
on 24.1
Mr. Howe. If you will look on table 23, Mr. Pike, you will see
the amounts of dividends which were paid by the companies on
industrial insurance,^ . and you will see that the amount is a fair
amount.
Mr. Pike. I see no break there, but following back I find the same
break between '32 and '33 in table 22 ; that is, the Metropolitan went
up in those 4 years, 47, 51, 67, 74, abruptly down to 59 and then to
46.^ It looks as though somewhere early in '33 there had been either
a drop in rates or there had been something happen in that field.
Mr. Howe. I think you will find that a partial explanation of that
is the asset situation. I believe that they took some asset losses
during the years following 1933, and that that may account in some
measure for the difference between those figures during that later
period and the figures in the earlier period.
Mr. Pike. It shows up in the other large industrial companies.
Mr. Howe. On the other hand, if you will examine again those
gain-and-loss exhibits, you will see that during the years '32, '33, and
'34 there were rather large ^ains from surrenders.
Mr. Pike, It seems the industrials had a break-off that I didn't
see through the other policies.
1 See Hearings, Part 10-A, p. 24.
* Ibid.; p. 23.
» Ibid., p. 22.
15430 CONCENTRATION OP ECONOMIC POWER
Mr. Howe. I'm sorry I don't know the definite explanation.
The Chairman. In any event, you are pointing out that the
reserves themselves have been increased ?
Mr. Howe. Yes ; and strengthened is another way of looking at it.
Table 89 shows the increase or decrease in contingency and special
reserves.^ Except in cases in which detail has been supplied, this is
one of the most troublesome items on the entire gain-and-loss exhibit.
It is often entirely impossible to tell whether these reserves are simply
for accrued or unpaid taxes, whether they are designed to supplement
policy reserves, whether they are asset valuation accounts, or whether
they are merely earmarked surplus. Some companies, indeed, show
no surplus at all on their balance sheets, classifying the entire amount
of their surplus as contingency reserve. In spite of questions specifi-
cally designed to elicit the information which were contained in the
investment questionnaires, we are not able in all cases to classify these
reserves satisfactorily as liabilities, asset deductions, or surplus. All
of the 26 companies except the Equitable of Iowa had contingency
or special reserves at some time during the 10-year period. In the
aggregate the amount of these reserves increased $188,891,000 during
the period. Of this sum $92,526,000, or approximately '49 percent,
represented the 10-year increase in contingency reserves of the Pru-
dential alone.
Table 90 shows that the amount of all surplus, other than that classi-
fied as contingency reserves, increase $199,461,000 during the lO-year
period. Of this increase, $132,314,000 was the increase in the surplus
of the Metropolitan.^ This was 66 percent of the total increase in
surplus reported by all 26 companies.
Mr. Pike. That just means really that one company carried this
increase and called it sl ^plus and another carried it and called it
contingency?
Mr. Howe. That is right. The Prudential carried $92,000,000 to
contingency reserves and the Metropolitan carried $132,000,000 to.
surplus.
Mr. Pike. Operating in different States there might be some legal
requirement.
Mr. Howe. There is a legal requirement with respect to contingency
reserves in New Jersey. I am not familiar with the detail of it, but
that is true.
Mr. Kades. In connection with your analysis here, in which you
say that the nicrease or decrease in contingency and special reserves
is a very troublesome item, do you get any help from reports of inde-
pendent auditors or don't these companies have them?
Mr. Howe. That is an interesting subject. Of the 26 companies
whose figures are considered in this book, 13 have auditing firms come
into their offices. Of those 13 some merely check the cash and the
bonds and mortgages and pay no attention whatsoever to tlie liabili-
ties. In other cases the auditors correspond with the State insurance
departments, and judging from their certificates obtain a certificate
f^om the State department saying that the liability reserves are all
rio-ht. They also get a certificate from the actuarial department of
1 See Hearings, Part 10-A, p. 89.
' Ibid., p. 90.
CONCENTRATION OF ECONOMIC POWER 15431
the respective companies. When it comes to income accounts, in gen-
eral the auditors don't bother with that. They simply concern
themselves either with the assets alone or with the assets and liabili-
ties. Sometimes they do go into the income and disbursements ac-
count, but very seldom into a true income account for the business.
The result is that these contingency reserves which are all right on
the balance sheet don't bother them because it is in the income end
of the statement that they commence to cause their trouble.
Mr. Pike. There is where you wonder if most auditing firms would
be competent to do this particular job, that is, to go much farther.
As you know, in the industrial company the auditing firm will come
in and look and go through very carefully, and in the end will be
left with a doubt as to that most important item of depreciation,,
and in this case the auditing firm could come in and do a good job
on the valuation of assets. It is a real question whether it would
be competent, whether any auditing firm would be competent, to
give a good judgment as to the proper valuation of reserves, that
is to handle the actuarial figures, reserves being somewhat similar
to the depreciation and other reserve set-ups that an industrial com-
pany would have.
Mr. Howe. Yes; in connection with the supplemental investment
questionnaire we asked the companies to supply copies of any audits
which they might have had made during recent years. I was very
interested in perusing those audits, and I didn't find any case in
which an auditor had done anything whatsoever with respect to the
actuarial liabilities, the reserves, except to refer to the actuarial
department and the State insurance commissioner, and they take his
word for that.
Mr. Pike. A very important function they either didn't cover or
couldn't cover, one of the two.
Mr. Howe. I assume that they don't have actuaries to do that work
independently.
Mr. Pike. We have found in two or three cases fairly recently that
a certificate of an auditor is not a conclusive statement, conclusive
proof, that a company is in good shape.
Mr. Henderson. Yes ; we have found a couple at the S. E. C.
[Laughter.]
What I am interested in, Mr. Howe, on this net cost, is this. You
are the one who has been all through this. Do you know what is the
cheapest policy to buy?
Mr. Howe. It is a most difficult thing to determine.
Mr. Henderson. That answers part of my difficulty but it doesn't
answer my question. I asked you something you ought to be able
to give a yes or no answer on.
Mr. Howe. Yes ; I think I can figure out from this book what
companies I would like to purchase additional insurance in.
Mr. Henderson. What he says is, he can figure out. I ask him,
does he know.
The Chairman. When he says he can figure out, he evidently means
he could make an ar^ment that would satisfy him. That is really
what you mean, isn't it?
Mr. Howe. That is right.
15432 CONCENTRATION OF ECONOMIC POWER
The Chairman. And you wouldn't pretend to say that somebody
else couldn't make, an argument that would end in the selection of a
different company^
Mr. Howe. I certainly would notj Senator. It is a matter of
judgment, after all, in the final analysis.
The Chairman. In other words, we are still leaving a little room
for the agents to sell their own wares.
Mr. Henderson. In the main, you stand by your computations
using the 1939 basis?
Mr. Howe. I think that is the best that can be done. Of course, it
should be said, Mr. Henderson, that these net cost figures are produced
from the point of view of an individual policyholder. Now, if you
want to commence to compute net costs from the point of view of a
group of policyholders, then adjustments must be made for mortality
and for lapse and surrender, but that is a different problem from
this one.
Mr. Henderson. Then the additional item is this, that even given
these net cost figures, you have to be thinking in terms of the company,
you have to be thinking in terms of its practice in valuing assets ?
Mr. Howe. Eight.
Mr. Henderson. You have to be thinking in terms of how it takes
its trusteeship ?
Mr. Howe. Right.
Mr. Henderson. You have to be thinking in terms of what its policy
of investment has been in recent years ?
Mr. Howe. Right.
Mr. Henderson. In other words, the quality of management is still
quite a factor in the purchase of insurance ?
Mr. Howe. It is a tremendous factor, and I hope to have a chance
to elaborate the respective operating losses for certain unprofitable
lines of business, which is a further extremely important consid-
eration.
. Mr. Henperson. I suggest we take that up tomorrow and probably
finish by noon, can we not?
The Chairman. The committee will stand in recess until 10:30
tomorrow morning.
(Whereupon, the committee recessed at 3 : 30 p. m., until 10: 30 a. m.,
Friday, March 1, 1940.)
INVESTIGATION OF CONCENTRATION OF ECONOMIC POWEE
FRIDAY, MARCH 1, 1940
United States Senate,
Temporary National Economic Committee,
Washington, D. C.
The conunittee met at 10:45 a. m., pursuant to adjournment on
Thursday, February 29, 1940, in the Caucus Room, Senate Office Build-
ing, Representative Hatton W, Sumners presiding.
Present: Representative Sumners (vice chairman); Senator O'Ma-
honey (chairman) ; Representative Williams; and Messrs. Pike, Hen-
derson, Kades, and Brackett.
Present also : James V. Hayes, Department of Justice ; Gerhard A.
Gesell, special counsel ; and Helmer Johnson, attorney. Securities and
Exchange Commission.
The Vice Chairman. The committee will pleace come to order.
Mr. Gesell. Mr. Howe, will you resume the stand, please, sir ?
The committee will recall that yesterday evening Mr. Howe com-
pleted a portion of his statement with respect to the net cost of insur-
ance policies, and today his statement continues with a discussion of
operating results by lines of business.
TESTIMONY OF ERNEST J. HOWE, CHIEF FINANCIAL ADVISER TO
THE INSURANCE SECTION, SECURITIES AND EXCHANGE COM-
MISSION, WASHINGTON, D, C.-Resumed
Mr. Howe. During our discussion yesterday there were some ques-
tions directed to me on the subject of independent audits made of these
26 leading life-insurance companies, and so I thought that it mi^ht
be interesting to let the committee know which of the 26 companies
employ independent auditors and which ones do not; in other words,
which ones rely exclusively on the examination of the State insurance
departments.
The Aetna has an audit by Stag^, Mather & Hough, in which they
count the cash and count the securities, check the real -estate deeds, and
examine the mortgages, and they obtain a certificate from the insur-
ance department with respect to the liabilities.
The Bankers' Life of Iowa does not have an audit. The Connecti-
cut General employs Mr. Waterman and Mr. Smith, whose certificate
as to what they do with respect to counting cash securities, real estate,
mortgages, and so forth, is not specific, and no statement is made in
their certificate whatsoever with respect to having verified in any
way the liabilities or income and disbursements of the company.
15433 -
15434 CONCENTRATION OF ECONOMIC POWER
The Equitable of New York employs Haskins & Sells, who make
a general examination, count and test the assets, and confer with
the insurance department with respect to the liabilities.
The Equitable of Iowa has no audit. Guardian Life has no audit.
The John Hancock has jio audit. The Lincoln has no audit. The
Massachusetts Mutual employs Scovell, Wellington & Co., who verify
the assets and correspond with the State insurance department with
respect to the liabilities.
The Metropolitan Life Insurance Co. has no audit. The Mutual
Benefit has no audit. The Mutual of New York employs Haskins
& Sells, who count the cash and securities, examine the real estate and
mortgages, and verify the liabilities with the State.
The National Life of Montpelier, Vt., does not have an audit. The
New England Mutual employs Patterson, Teele & Dennis, who exam-
ine the assets but make no mention of the liabilities.
The New York Life does not have an audit. The Northwestern
Mutual employs Peat, Marwick, Mitchell to test assets and check
Avith the State insurance department with respect to the liabilities.
The Pacific Mutual uses Peat, Marwick, Mitchell & Co., but the
extent of the ^udit is not clear from the certificate.
The Penn Mutual uses Lybrand, Koss Bros. & Montgomery, which
although the scope of the audit has changed somewhat in recent years
the latest audit includes a count and check of all the assets as well as
a verification of the liabilities through correspondence with the
insurance department.
Phoenix Mutual has no audit. The Provident Mutual employs
Lybrand, Ross Bros. & Montgomery, who check the assets and cor-
respond with the insurance department with respect to the liabilities.
The Prudential uses Stagg Mather & Hough, which makes a pretty
thorough check of cash securities, real estate, mortgages, .premium
income, interest, and policy loans, and corresponds with the insurance
department with respect to tlie liabilities. They also make a rather
extensive check of income and disbursements.
The State Mutual uses Cooley & Marvin, who examine the assets
and check the liabilities.
The Vice Chairman. I am sorry to have interrupted, but my in-
quiry of counsel was why you couldn't have put i-t in the record, but
I understand you are giving it in response to some request made
yesterday.
Mr. Howe. That is correct, Mr. Chairman.
The Travelers Insurance Co. of Hartford, Conn., does not employ
auditors. The Union Central employs Haskins & Sells, and has also
employed at different times Stagg, Mather & Hough. They count
the cash and securities, examine the real estate and mortgages, but
no mention is made of premium income, interest, policy loans, policy
reserves, or income and disbursements.
The Western and Southern does not use an auditing firm.
Mr. Henderson. Do you recall any financial grouping that does
not have a greater amount of audit than insurance companies?
Mr. Howe. No; I really do not.
Mr. Henderson. It is customary in the case of financial houses to
have even more audit than you do in an industrial concern, is it not?
Mr. Howe. I think that is customary. Of course, the offset to it
is that they do h " '^^se triennial or more frequent examinations,
CONCENTRATION OF ECONOMIC POWER 15435
and in response to our questions some companies said they didn't
wish to go to the expense of an independent audit in view of the
job which the States were doing.
Mr. Henderson. In other words, it gets down to the place where
there is a tremendous responsibility resting on the public audit ?
Mr. Howe. A very great responsibility rests on the public, or on
the officers representing the public.
Mr. Kades. Mr. Howe, I want to make sure I understand what
you mean when you say an insurance company has no audit. By
that do you mean that the insurance companies which you mentioned
as not having had an audit, have never had an independent audit,
or don't have it regularly?
Mr. Howe. Well, so far as our records go they have never had
an audit. Now, of course, when you conunence to say "never" that
implies a very long period of time and I am not prepared to testify
what may have happened a long time ago, but I think the figures
which I have given here would certainly be typical pf the last 10
years.
Mr. Pike. There is something in the idea that a State examination is
an independent audit of a sort.
Mr. Howe. Why, certainly.
Mr. Pike. So when you say you have never had an independent
audit
Mr. Howe (interposing). It is not parallel to the situation of an
industrial company which is not supervised by State authorities.
Mr. Pike. Not at all, it is more comparable to that of a bank.
Mr. Henderson. Do banks have independent audits?
Mr. Howe. Some of them do.
Mr. Henderson. How about investment banking firms ?
Mr. Howe. So far as I know they almost all have independent
audits. ' .
The Chairman. What is the significance of the statement, what
is the impression that is desired to be conveyed by the statement
that there are not independent audits when we all know that there
are State examinations?
Mr. Gesell. Mr. Chairman, this informati(^ is submitted in re-
sponse to a specific request by a member of the committee, and there
is no argument involved. ■
The Chairman. I am not arguing, I am trying to find out what is
presented.
Mr. Howe. I just think, in view of the practical question that was
raised, it is interesting that some companies seem to regard an audit
as essential and others do not. It is a matter of management policy,
so far as I can see.
The Chairman. This audit of which you are speaking was an audit
which is independent of the examination by the public authorities
appointed by the several States?
Mr. Howe. That is correct, and these auditors are hired by the
respective companies. ^
The Chairman. Then it is not intwided by the answer to convey
the impression that there is no examination in the public interest?
Mr. Ho\vE. No such implication is intended, and I think I stated
that they are examined by the State. However, Senator, these com-
panies which, have audits have a more frequent examination, I think
15436 CONCENTRATION OF ECONOMIC POWER
in general, than companies which do not have audits, because the
State examines them in the ordinary course only once in 3 years,
whereas the audits in general are annual or sometimes semiannual
affairs.
Mr. Gesell. And it is. true, is it not. Mr. Howe, that a State exam-
ination is not an audit? There isnx any question about that, is
there? Have you ever seen a State examination that was an audit?
Mr. Howe. Well, I think there is some degree of parallel object in
an audit and a State examination, but they are, after all, different
things.
Mr. Pike. I would like to bring up the point I tried to make yes-
terday, that it seems to me the most miportant thing in the examma-
tion of a life insurance company is not counting its assets. The real
story in a life insurance company is on the liability side in their great
item of reserves which make up most of their liability.
Mr. Howfi. That is correct.
Mr. Pike. I doubt seriously if there is an independent auditing firm
in this country that is really capable of giving a proper estimate of
those reserves. There may be, but I think that is where the efficiency
of an examination is, either good or bad, right in that item of re-,
serves, not in counting physical assets or checking petty cash, that
sort of stuff. That is my belief. I just state that as a personal
opinion.
Mr. GE8r:ji. It is true that there are other liabilities, other than
reserve lialilities, that someone ought to check.
Mr. Pike. Yes ; there are other liabilities, but the real story is in
the reserve figure.
Mr. Howe. There are other liabilities than the policyholders' re-
serves, they do not bulk as large in proportion to the total liabilities
as the reserves do. •
Mr. Henderson. Doesn't it get down to about two things? You
have this triennial audit or examination and in the cases of the fringe
companies such as we had yesterday, without any real notice to stocK-
holders or any certificate of an auditing firm ; if they are interested in
manipulation or rinky-dink of any kind they have 3 ye^rs practically
to get away with it unless somebody pick^ it up out of the annual
report.
Mr. Howe. Well, or unless the State Insurance Department elects to
go in there more frequently.
Mr. Henderson. That is what I said, unless they pick it up out of
some complaint. On the other hand, it does emphasize the tremen-
dous responsibility laid upon an actuary, and also it emphasizes the
extraordmary professional character of the actuary and further ex-
emplifies the real integrity of the actuarial profession. Isn't that
about it?
Mr. Howe. Well, certainly. I iriean, there is nobody else who can
figure these liabilities except the actuaries.
Mr. Henderson. And they are employees of the company ?
Mr. Howe. For the most part, except the actuaries which are em-
ployed by the State department. The accounting firms in general do
not have actuaries. There are some consulting actuaries, but as far as
these audits are concerned I find no reference to the fact that an inde-
CONCENTRATION OF ECONOMIC POWER 15437
pendent actuary has been employed to check the liabilities. It may
have been done, but there is no reference to it in any of these audits
which I have checked.
The Vice Chairman. Mr. Howe, what becomes of the report of the
auditor? What happens to the report of the concern that audits the
books ?
Mr. Howe. Two things may happen to it, Mr. Sumners. It may go
to the auditing committee, so-called, which is a committee of the board
of the insurance company ; or it may go to the president of the insur-
ance company, but so far as my knowledge goes, it is never circulated
among policyholders or stock-company stockholders.
The Vice Chairman. So the only advantage of an independent audit
would be to advise those in responsibility as to the condition of the
company, speaking generally ?
Mr, Howe. That is about right. As was testified earlier, in the case
of the Northwestern Mutual, tney call in a committee of policyholders
who select an auditing firm to audit the company, and in that case
the audit report is given to that committee of policyholders, but I
think that is unique. The general rule is the other one which I started.
The Vice Chairman. When was this testimony with reference to
the Northwestern ?
Mr. Howe. I think that was in the first series of hearings.^
The Vice Chairman. I identified that. These stockholders that are
called in — my recollection is, they were recommended in the first in-
stance by agents of the Northwestern in the field.
Mr. Howe. I think that is correct.
The Vice Chairman. And they went up to headquarters and stayed
2 or 3 days. I remember very well that testimony.
Mr. Gesell. I think it was testified that the audit report that was
prepared under those circumstances was sent to the policyholders.
The Vice Chairman. I don't remember that.
Mr. Howe. At least th& summarized report wag sent to the policy-
holders.
The Vice Chairman. I wasn't impressed that those stockholders
that were brought out of the field, recommended by the agents of the
company, and who went up to headquarters for 2 or 3 days, ever really
were able to have very definite and well-advised, independent judg-
ment as to what they were doing after they got there.
Mr. Howe." They did have the right, however, or at least it was so
testified, if I remember it correctly, to select the auditing firm, and
there is some advantage in that.
, The Vice Chairman. Was it that?
Mr. Howe. That is true ; yes, sir. They selected the auditor and a
different auditor is selected quite frequently.
The Vice Chairman. I would like to ask whoever is in charge of
the. testimony to get that for us, before the close of the hearing, if you
have somebody who can do that ?
Mr. Henderson. Not to pursue this matter relentlessly, because I
think we are all a^eed that a tremendous technical responsibility
has been met in this interval audit— that is what it amounts to
See Hearings, Part 4, p. 1500.
124491 — 41— pt. 28 48
15438 CONCENTRATION OF ECONOMIC POWER
Mr. Howe (interposing). Plus the type of state supervision
Mr. Henderson (interposing). A thing such as happened in the
case of one insurance company with those policy loans — you remember
those policy loans of a company which had a reinsurance deal
. Mr. Howe (interposing) . I don't know that I identify the company.
Mr. Henderson. I don't recall the series of transactions, but they
had them twice in the assets, and I think I can easily demonstrate that.
I missed calling attention to it at the time. They may have had the
note from the policyholder and another item, but I mean it escaped
for about 3 years. Of course, the better companies, most of the
companies, wouldn't carry it that way. That is about the size of it.
Mr. Howe. Well, auditors generally perform a function, it seems to
me; many privately owned businesses have independent auditors for
the purpose of informing the chief executives as to what might pos-
sibly have escaped in the ordinaiy routine of internal recording.
Mr. Henderson. When Mr. Stedman was talking about what tb3y
wanted in the case of industrial loans, he said they wanted not the
certificate which was made public, but the reports of auditors to the
chief executives, so that they would get an appraisal of operating
results.
Mr. Howe. I think that is a usual desire on the part of the people
who are lending money.
Mr, Kades. Could you tell us a little bit more about the extent
of the examination by the State supervisory authorities ? I am not
at all clear as to what they do. Is it analogous to the post audits of
the Comptroller General?
Mr. Gesell. If I may interrupt, I don't believe Mr. Howe should
undertake to testify with respect to the character of examinations con-
ducted by State insurance departments, not only because there is
tremendous variety as between departments
Mr. Kades (interposing). I think you are right.
Mr. Gesell. I might say that we are making an analysis of exam-
ination reports made by States, and that analysis will be available
for the benefit of the committee.
Mr. Kades. 1 thjnk you are right.
The Vice Chairman. We have got testimony now, if it has any ob-
ject at all, that would seem to bear upon the question as to whether
or not these companies were sufficiently and properly examined, and
there is testimony here that two sorts of examinations are had. One
is by private auditors and one is by governmental agencies. He may
not know about that and I may be wrong about it.
Mr. Henderson. Mr. Chairmaii, I take it Mr. Gesell meant that
we have questionnaires which have been sent to the State insurance
commissioners with the request that they answer if they so wish.
A number of them have taken advantage of that, and from that
there will be information as to the State audit, which will be made
in the form of a report, but I think it is not available now for any
testimony by the current witness.
The Vice Chairman. Well, that would be important.
May I ask this question : Do you know whether or not the States
that have jurisdiction with reference to these insurance companies
have more frequent audits than the 3 years which you pientioned, if
those in responsibility in those States deem that there should be
more frequent audits?
CONCENTRATION OF ECONOMIC POWER 15439
Mr. Howe. Ohj they have the option to make more frequent audits
if they wish to, is my understanding, , Mr. Chairman.
The Vice Chairman. Do they have any preliminary reports of any
sort 'which would guide them m the determination as to whether or
not a more frequent audit should be made, do you know? If you
don't happen to know this
Mr. Howe (interposing). Of course, you are familiar with the fact
that Statements like this are filed every yeai* by tTie companies so
that the State insurance commissioner has information supplied by
the companies to him knnually, and in some cases semiannually in
less detailed form.
The Vice Chairman. Would you state for the record in as few
sentences as you can conveniently do it, what that rather voluminous
document is that you exhibited?
Mr. Howe. That is the convention form of annual statement, to-
gether with the schedules which are attached thetetOj which includes
a statement of assets and liabilities, a statement of mcome and dis-
bursements, a statement of gain and loss, appended to which is an
exhibit of changes in surplus, and then there are the schedules which
show the purchases and sales, book value, and so forth, of real estate,
a schedule of mortgages, a schedule of bonds and stocks owned, a
schedule of bonds and stocks purchased and sold, and then officers'
salaries, and a variety of other schedules.
The Vice Chairman. To what degree would that schedule differ
from what you would expect to be the report of an auditor who had
examined an insurance companiy?
Mr. Howe. That is largdy a compilation of figures, whereas the
examination reports are usually more narrative in form, analyzing
the material wnich appears in the annual reports and which has
developed as a result of the examination of the State departments.
The Vice Chairman. You mean the auditor's report would be more
voluminous and more in detail than that?
Mr. Howe. It wouldn't i)e a larger, heavier volume. It is more
narrative in form.
Mr. Henderson. It would represent an examination and clarifica-
tion, also.
The Vice Chairman. What would be the difference in informative
value of the two, this report and the auditor's report?
Mr. HowE^ I think, for instance, of one situation with respect to
which I testified a while ago. In one State examination of the Met-
ropolitan, the examiner went into the costs of handling policy loans
from the point of view of the company and broke the interest down
to show that three-fourths of 1 percent was cost, and all that sort
of thing. There is a great deal of analysis which goes into
The Vice Chairman (interposing). That is the auditor's report
you speak of?
Mr. Howe. No ; I am speaking of the State examination report.
The Vice Chairman. But I was directing your attention at the
moment to this document which you have just exhibited, and which
is the annual report, I believe you said
Mr. Howe (interposing). That is correct.
The Vice Chairman. Of the company to the agency to which it
must report in a State.
Mr. Howe. That is correct.
15440 CONCENTRATION OF ECONOMIC POWER
The Vice Chaibman. Now, my question was : As I understand these
questions and this statement, it bears upon the question of the suffi-
degree, that report or that statement is defective msofar as the in-
formation given is concerned, and I would like to say that I do
appreciate the difference between that statement which would be
regarded as somewhat ex parte and the statement of an independent
auditor— I can appreciate that. t«! i •
Mr. Gesell. Judge Sumners, perhaps some of the difficulty arises
from the fact that Mr. Howe spent almost a day on the stand discuss-
ing the inadequacies of the convention form annual statement. It is
something of a technical subject, and if you wish, we can review that.
The Vice Chairman. No; I don't. I will back out.
Mr. Gesell. We have presented certain deficiencies which we con-
sider in the convention form annual statement.
The Vice Chairman. That is the difficulty of coming into a hearing
after a good deal has gone on. I withdraw the last question.
Mi". Henderson. I think we can cover some of that in our report,
and will do so. I might add just as a clincher on this— you referred
to the annual statement, the convention form, as an ex parte state-
ment. It is certified bv the officers of the company. Now, an inde-
pendent auditor would go in and undertake as lar as possible to
verify the accuracy of the postings of the assets and the liabilities,
and then under his own signature would give you an independent
certificate, you see, on which reliance could be placed. That is the
difference with the insurance auditor. We require at the S. E. C,
as you know, that there be not only the information supplied by the
company that is seeking registration, but that there be an independ-
ent auditor's certificate of the accuracy of the statements.
The Vice Chairman. Mr. Howe, I won't pester yoii any more. You
just go ahead.
Mr. Gesell. J have the testimony here, while we are on this subject,
Judge Sumners. You requested Mr. Cleart's testimony and I have
the volume and the pages marked on this sheet for you.
Mr. Howe. If the committee wishes, we might revert to the matters
we were discussing yesterday. I had arrived at the point where I said
that the losses which have been or may be realized in various lines
of business are an important consideration for prospective policy-
holders, as well as for existing policyholders.
The annual statements of life-insurance companies classify their
operations into not more than eight lines of business. This is an
arbitrary and unsatisfactory classification. Ordinary insurance, for
instance, is subdivided into three types of operations designated "ordi-
nary," "total and permanent disability included in ordinary policies,"
and "accidental death benefits included in ordinary policies." Indus-
trial insurance, which carries similar provisions, is accorded only one
omnibus classification. The statements provide no division between
annuities arising out of settlements of life-insurance policies and
other individual annuities and lump together in indissoluble totals
the operating results of immediate annuities, fully paid deferred an-
CONCENTRATION OF ECONOMIC POWER 15441
nuities, and annual premium deferred annuities. Both life insurance
and annuities are dividend in the statement between individual con-
tracts and group contracts, but no segregation between individual
and group contracts is given for accident and health.
It should be stated, in the" case at least of the Metropolitan, they
have, although it is not called for in the form, segregated their ex-
hibit of changes in surplus between individual and group accident
and health business. On the other hand, the Ecjuitable Assurance
Society of the United States, which does both individual and group
accident and health business, or did at least, and has some individual
accident and health policies remaining on its books, and is also active
in the group accident and health business, does not show either of
these lines of business in their exhibit of changes in surplus.
In the case of the Travelers Insurance Co. of Hartford, Conn.,
which is extremely active in the accident and health business, which
they designate as the casualty business, a curious form of annual
statement is presented in which the casualty business and the life
business is divided into two separate departments, irrespective of the
fact that the full assets of the company are liable for all of their
policies, and certain assets are carried in the casualty department
which might not be appropriate as life-insurance investments, and
even such matters as the salaries of executives are disclosed only in
part.
As one turns to schedule G of the life-insurance form, you find a
schedule of officers' salaries. It is immediately evident that those are
not the full officers' salaries, and that they are only the portion of
the officers' salaries which are applicable to the life department, so
that the -natural implication is — well, let's turn to the miscellaneous
blank which covers casualty business and see what the rest of the
salaries are. But when you turn to the miscellaneous blank you find
there is no schedule for salaries there, and so you aro up a blind alley.
There are many other factors in respect to this convention form
which could stand elaboration, but I won't take any further time on
that.
In spite of this classification of business, it will be necessary to fol-
low it for the reason that it would be virtually impossible to recon-
struct the companies' records on the basis of a new classification of
lines of business so that information so classified for the preceding
10 years could be had.
While it is interesting to examine these operating results classified
by lines of business, it must be borne in mind that the results of any
given company are based to a lar^e extent upon methods of expense
allocation which are not standardized by the companies, even more
important, by the method of allocation adopted by the various com-
panies in absorbing asset losses as between lines of business, anl also
by the extent to which individual companies have increased their
reserves due to change in basis. The often-ref erred-to paradox of the
accounts is that those companies which have been most conservative
in the valuation of their assets and in the strengthening of their re-
serves will appear at a disadvantage as compared with companies
whose assets are less conservatively stated and whose reserves have
not been strengthened to the same degree. Furthermore, companiea
which have set up contingency reserves to offset valuations or to in-
crease policy reserves will appear to better advantage than those which
15442 CONCENTRATION OF ECONOMIC POWER
have directly revalued assets on the asset side of the balance sheet or
who have increased their reserves by change in basis.
Tables on pa^es 22, 30, 36, 42, 50, 57, 64, and 69 show for the respec-
tive lines of business the "Net change in total surplus before deduction
of dividend payments to policyholders." ^ The words "total surplus"
are used in a special sense to indicate the sum of surplus and con-
tingency and special reserves, but refer only to the change in surplus,
contingency, and special reserves resultii^ from the operations of the
line or business under consideration. In lajman's language, these
tables are designed to indicate the annual earnings of each line of busi-
ness available for the payment of dividends. It is believed, however,
that these figures in some instances overstate the earnings available
for such distribution because of the fact, as previously stated, that con-
tingency reserves and special reserves in some cases should be classified
as asset valuation accounts or additions to liabilities rather than sur-
plus. This would result in a corresponding decrease in earnings. As
we wish to avoid any understatement of earnings in 'the tables and
as the proper subdivision of contingency reserves between true liabil-
ities, asset valuation accounts, and surplus proved to be impossible
to make, contingency and special reserves were included as though
they were all surplus in the data used in the preparation of tables from
18 to 71.^
In spite of these qualifications, certain broad impressions of the
operations, however, certain broad impressions of the operations of
the respective companies may be had from the tables showing operati-
ing results, by lines of business.
Mr. Henderson. I think you have to do a little better than that.
You say "in the technical," and then you say "in the layman's lan-
guage," and I still am not quite clear on what you are saying.
Who determines what the special surplus item is to be for each line
of insurance? The company itself ?
Mr. Howe. The company itself.
Mr. Henderson. It has some standards to go on by reason of whether
or not the insurance departments in previous years have permitted
that type of allocation.. Is that correct?
Mr. Howe. Well, the insurance departments have certain standards
with respect to the valuation — some of them have with respect to the
valuation of certain assets, and the companies must follow that.
Mr. Henderson. Do you mean that you could have a valuation of
an asset in X state different from that m Y state ?
Mr. Howe. In some cases that is trlie on border-line bonds.
Mr. Henderson. I mean in some types of assets.
Mr. Howe. That is right.
Mr. Henderson. Is there a large leeway? Is that what you are
saying, that there is a large leeway within the individual company as
to how it will set up this surplus item as between contingency reserves
and special reserves and surplus?
Mr. Howe, That is right. It is virtually entirely in the discretion
of the company as to how they will set those things up.
Mr, Henderson. That means, then, if I gather correctly, if a com-
pany is ultraconservat cve, shall we say, as far as the general state-
ments are concerned it appears at a disadvantage ?
» See Hearlngi, Part 10-A.
• Ibid. pp. 18 to 71.
CONCENTRATION OF ECONOMIC POWER 15443
Mr. Howe. Yes; because if their assets are valued lower and their
liabilities are valued higher that would obviously- penalize the operat-
ing earnings.
Mr. Hendekson. And therefore leave less for dividends ?
Mr. Howe. Right.
Mr. Henderson. What I am thinking about is that by the time that
gets out to the insurance agent with his rate book, practically all he
has is the figures; he hasn't any qualifying statement that we are
more conservative than anybody else," has he ?
Mr. Howe. No; he doesn't have any possibility of breaking down,
in most cases, contingency reserves. In spite of specific questions to
the companies, we haven't been able to get an adequate idea of it.
Mr. Henderson, In other words, our staff couldn't get them ?
Mr. Howe. We haven't been able to. That doesn't apply to all com-
panies. In some cases we have had very adequate replies.
Mr. Henderson. But in order to get a comparative picture which
would be fully realistic, we haven't been able to do it ?
Mr. Howe. That is right. In discussing the various lines of b^i^i-
ness we might refer first to indv: itrial insurance, which will be found
in "Exhibit No. 2250" in the tables beginning with table 18.
In examining the tables on industrial insurance, it will be observed
that the nuniber of policies in force has decreased 8.37 percent since
1929 and that the industrial insurance of the Metropolitan has de-
clined 9.22 percent and that of Prudential has declined 12.4 percent,
while in the John Hancock and the Western & Southern, the number
of policies has increased 12 percent and 5 percent, respectively.^
Probably the most striking thing about the table is the fact that out
of 70,309,000 policies, 61,000,000, or 85 percent, are in the Metropol-
itan and Prudential.^
Mr. Henderson. You didn't find out how many people that repre-
sented, did you ?
Mr. Howe. No.
Mr. Henderson. Insurance companies themselves usually do not
know; isn't that correct?
Mr. Howe. My understanding is that they have to estimate that.
Mr. Henderson. They keep it on a policy basis.
Mr. Howe. That is true.
Mr. Henderson. And not on an individual basis.
Mr. Howe. That is right; so that a given individual may own
several policies, and without an immense amount of tabulation they
couldn't determine it.
Mr. Henderson. It may run as high as 20 in 1 family ?
Mr. Howe. Yes.
Mr. Henderson. I don't suppose that is an average.
Mr. Howe. There are cases of that kind which have come to our
attenti.^n.
Mr. Pike. You remember that se^/eral of the Metropolitan people in
their testimony mentioned 29,000,000 policyholders where they show
here 41,000,000 policies. That might give us a possible idea.
Mr. Gesell. I was going to say that we have the estimates. If I
may have that green book a moment, I can give you the policyholders
estimated by the Metropolitan and Prudential.
1 See Hearings, Part 10-A, pp. 18-24.
> Ibid., p. 18.
15444 CONCENTRATION OF ECONOMIC POWER
I have those policyholders' figures from "Exhibit No. 255." ^ In
1937 the M'-tropolitan estimated that it had 27,111,000 policyholders ;
Prudential estimated that it had 21,300,000 policyholders; and the
New York Life, the third largest company, estimated it had 2,000,000
policyholders.
Mr. Hates. Industrial insurance only?
Mr. Gesell. No ; total.
Mr. Howe. Industrial insurance in force increased 11 percent dur-
ing the period from 1929 to 1938. The increase in the Metropolitan
was 12 percent ; the Prudential, 8 percent ; the John Hancock, 12 per-
cent ; and the Western & Southern, 8 percent.
It will be noted that the amount of industrial insurance in force
was $7,641,000,000- in the Prudential, as against $7,550,000,000 for the
Metropolitan. The Metropolitan, however, collected $3,248,000,000 in
premiums, as compared with $3,030,000,000 for the Prudential.
Mr. Pike. How do you clear that in your mind ?
Mr. Howe. The only explanation — I am guessing — —
Mr. Pike (interposing). But you have been around a bit, and your
guess would be probable.
Mr. Howe. A possible explanation lies in different methods of divi-
dend distribution which are used by the companies. The Metropoli-
tan uses a cash-dividend system, and the dividends are usually applied
to the payment of premiums on the policies, whereas a common method
used by the Prudential is that the dividend is applied to the purchase
of additional insurance.
Mr. Pike. One thought came to me — that possibly the Metropolitan
went in a little bit more heavily for endowment types.
Mr. Howe. That may be also. It is a complicated question. It
would have to be analyzed in great detail to know exactly what it is.
Of the $996,000,000 paid in dividends to industrial policyholders
during the period, $431,000,000 was paid by the Metropolitan and
$495,000,000 by t.he Prudential.
The contribution of the industrial department to the combined sur-
plus of the four companies writing industrial insurance was $163,-
967,000. Of this amount, $101,986,000 was added to the surplus of the
Metropolitan.
Mr. Henderson. Mr. Howe, the four companies had one hundred
and sixty-three million over and above contingency and special reserves
and regular reserves ?
Mr. Howe. Contingency reserves, special reserves, and surplus : that
is right.
. Mr. Henderson. What do j^ou mean ? This was added to the sur-
plus. That is what I am getting at.
Mr. Howe. The balance of $163,000,000 remained in surplus, con-
tingency reserves, and special reserves after the payment of dividends
on industrial policies for this period.
Mr. Pike. And after the setting up of these additional reserves I
believe you referred to yesterday ?
Mr. Howe. Yes; after setting up reserves due to change in basis,
which are added to the liabilities, as distinguished from these con-
tingrncy reserves, some of which are of the same nature.
» See Hearings, Part 4, p. 1562.
CONCENTRATION OF ECONOMIC POWER 15445
Mr. Pike. Sometimes unidentifiable, say?
Mr. Howe. That is right.
Mr. Henderson. Suppose this $101,000,000 of the Metropolitan had
been in a stock company. Would that represent $100,000,000 of
earnings ?
Mr. Howe. Yes ; I think so ; that is right, I think so.
Mr. Pike. To be declared in dividends ?
Mr. Howe. It could have been declared in dividends to the policy-
holders had they wished to declare it.
Mr. Henderson. In other words, they made this amount of money
in this period ?
Mr. Howe. That is right, after the payment of the dividends to their
policyholders.
Mr. Henderson. The industrial business is a profitable line of
business ?
Mr. Howe. Well, I don't see any losses here. There were some losses
in the case of the Prudential in '33, '35, '36, '37, and '38, in the case
of the Metropolitan in '37 and '38, but rather than losses that is an
excess of dividend payments over earnings.
Mr. Henderson. That is, they chose to keep on paying the regular
type of dividend rather than reduce it ?
Mr. Howe. That is right, yes; they just drew down on surplus to
this relatively slight extent during these periods.
Mr. Pike. You note that practically all this surplus was built up Id
the four years '29 to '32 inclusive ?
Mr. Howe. That is right.
Mr. Pike. It is almost exactly equal to the total, from '32 on it broke
about even.
Mr. Howe. That is right, but on the other hand you must realize this
is the balance after dividends.
Mr. Pike. Yes ; but I am still curious about that break in '32 and '33,
from '32 on, in the industrial list.
Mr. Howe. I wish I could give you an adequate explanation.
Mr. Pike. I don't suppose it is -available. But there it is.
. Mr. Howe. There is this same question in the various lines of busi-
ness— furthermore, the problem of distinguishing between costs in-
curred by the ordinary department and the industrial department is a
difficult one, and the figure for surplus earned respectively by the
industrial and ordinary departments must be qualified by the state-
ment that it involves such allocations as the companies have made.
Mr. Henderson. As they have chosen to make ?
Mr. Howe. Yes; they have chosen to make. I suppose there are
some limits within which they are directed as to the allocations they
will make, but in a very large extent I think they are within the
discretion of the management.
Mr. Pike. You remember that came up in what was the cost of
gasoline in the oil hearings.^ Allocation always presents difficulties
when you don't want to be responsive.
Mr. Howe. In the case of the Prudential Insurance Co. of America,
for instance^ an analysis of the contingency reserves established for
the purpose of asset valuation shows the following allocation between
' See {learings, Parts 14 to 17A.
15446 CONCENTRATION OF KCONOMIC POWER
ordinary and industrial business: 1931, ordinary, $733,000; industrial
business, $9,267,000; total, $10,000,000.^
Mr. Henderson. That is about 14 times as much for the industrial.
Mr. Howe. Yes ; that is ri^ht.
Mr. Henderson. Was the mdustrial about 14 times as much as the
ordinary?
Mr. Howe. About equal, 50-50, in the reserves.
Mr. Henderson. Is tnis from the income in that year?
Mr. Howe. These amounts appear in the contingency reserves and
are not a deduction so far as these tables are concerned; but in the
actual accounts of the companies this allocation, being an asset de-
duction although set up. in the form of contingency reserve, is
definitely a deduction from earnings.
Mr. Henderson. But does that represent a single year?
Mr. Howe. Yes ; it represents the year 1931.
Mr. Henderson. What I am trying to get at is that here is the al-
location for asset valuation, 14 times as much for the industrial
as for the ordinary.
Mr. Howe. Yes.
Mr. Henderson. Now, in the current business of that year on any
basis, income or whatever it happened to be, did their industrial out-
run the ordinary by a ratio of 14-to-l?
Mr. Howe. You say "income." Let's look at the total premium
income. The total premium income from industrial insurance for
the Prudential in 1931 was $326,578,000. The total premium income
from the ordinary department in the -year 1931 was $209,386,000.
Mr. Henderson. Roughly, a 3-to-2 ratio.
Mr. Howe. The reserves are about 50-50.
Mr. Henderson. That is the reserves that have been established in
previous years?
Mr. Howe. Yes; the reserves at the year-end.
Mr. Gesell. This means in effect, does it not, that there is money
being taken, from the industrial-policy holders to assist the ordinary-
policy holders?
Mr. Howe. Well, there is inference to that effect.
Mr. Henderson. Well, wait a minute. Why do you say "inference"?
Mr. Howe. There may be some logical basis for this allocation, but
I can't see it.
Mr. Henderson. It is posted on the company's books this way ?
Mr. Howe. No, no ; liabilities don't get on the company's books.
Mr. Henderson. I remember now, you said they didn't get on the
company's books. Where is this ?
Mr. Howe. This is a memorandum which gets into the annual state-
ment in the form of a contingency reserve. I mean, when they make
up the annual statement they just put it in the annual statement, and
when they work out the gain-and-loss exhibit they put it there; but
those things don't reflect the books.
Mr. Henderson. That is between 10 and 11 million dollars set up
as a contingency reserve because of the potentiality of a reduction
in the valuation of certain assets?
' In connection with discussion of allocation between the Ordinary and Industrial
departments of the special contingency reserve for fluctuation In security values set up
by Prudential. See letter under date of March 5, 1040. from Valentine Howell, vice
president, Prudential Insurance Company of America, to the Committee, which appecrs in
appendix, p. 15633-15634.
CONCENTRATION OF ECONOMIC POWER 15447
Mr. Howe. That is right.
Mr. Henderson. And 14 times as much was taken from the indus-
trial as from the ordinary?
Mr. Howe. As from the ordinary.
Now, in the year 1932 the contingency reserve was $46,000,000, of
which 5 million was allocated to the ordinary and 41 million to the
industrial business — a total of 5 million to the ordinary and 41 to the
industrial. That is a total of 46 million.
In the year 1933, 2 million was allocated to ordinary and 30 million
to industrial, making a total of 32 altogether.
In 1934, 39 million was allocated to the industrial and 2 million to
the ordinary.
Mr. Henderson. Thirty-nine and two?
Mr. Howe. Which is a total of 41.
Mr,vHENDERS0N. That is 20 to 1, roughly.
Mr. Howe. Then, in 1935, 2 million was allocated to ordinary and
23 to industrial.
In 1936, 2 million was allocated to ordinary and 4 million eight
to industrial.
Mr. Henderson. Two to one.
Mr. Howe. Then, in the following years, this method of handling
contingency reserves was discontinued.
Mr. Henderson. So it runs from a ratio of 2 to 1, to 20 to 1, roughly ?
Mr. Howe. Roughly, that is right. Now, in addition
The Vice Chairman (interposing). Is that right or wrong? Should
it or should it not ?
Mr. Howe. Judge, I can't figure out any reason why there should
be such an allocation of asset losses. One would normally suppose
that asset losses would be allocated approximately in proportion to
the reserves on the various lines of business.
Mr. Henderson. What you mean is, if the industrial reserve and the
ordinary reserve are about the same
Mr. Howe (interposing). One- would expect that the asset losses
would be allocated about that way.
Mr. Henderson. One more thing. This is their segregation of assets
for the reserve?
Mr. Howe. No ; segregation of assets.
Mr. Henderson. But this shows that in some cases as much as 20
times a contingent loss was assessed against the industrial as was
assessed against the ordinary.
Mr. Howe. That is correct.
Mr, Pike. It looks like the way the Pennsylvania charges rent to the
Long Island in the station in New York.
Mr. Henderson. It may be, Mr. Howe, because here is where the,y
had their money. Isn't that it? If you are going to do this, you
would look to the thing that was a good earning.
The Vice Chairman. Let an ordinary person get hojd of Mr. Howe
for just a minute. Let's see if we can't find out for us. My friend
Henderson and they all understand what you are talking about, but
translate that into just plain ordinary English, and let's see if we can
get at what you are talking about. Here are two classes of insurance.
Mr. ,HowE. That is correct.
The' Vice Chairman. Ordinary insurance and industrial insurance.
Mr. Howe. That is correct.
15448 CONCENTRATION OF EJCONOMIC POWER
The Vice Chaibman. Does the company make a greater or less per-
centage of profit out of its industrial or out of its ordinary insurance?
Mr. Howe. Tlie ti-ouble with answering that question is, it depends
on how equitably the allocations are made from one
The Vice Chairman (interposing) . No ; it doesn't. Here is a fellow
that goes out in the field and he brings in 10 policies of industrial and
another one brings in 10 policies of ordinary, and that is carried on the
books, and that results in profits or loss.
Mr. Howe. Well, the industrial business has, so far as the fibres
which we have are concerned, been uniformly profitable. The ordinary
business has too, but some of the lines of business attached to the
ordinary have proved unfqrtunately unprofitable.
The Vice Chairman. Wait a minute ; let's not leave where we were
until we start from there to somewhere else. Do I understand now
that, speaking generally, the industrial insurance is more profitable
than ordinary insurance, speaking generally? That is to say, you
write some insurance and you get some premiums and you have some
losses. Now, from which do you have the greater net profit?
Mr. Howe. I think in general the industrial business.
Mr. Pike. It certainly looks that way.
The Vice Chairman. Now, then, let's go on from there. I can
understand that, and I believe my friend, Williams, understands it.
Representative Williams. I am not sure whether I do or not. I still
don't understand whether or not you claim that the books tell that.
The Vice Chairman. Now, wait a minute.
Mr. HovHB. No ; you can't tell it f rom-that.
Representative Williams. There you are again. You can't tell as
to whether or not they make a better and a greater profit out of the
industrial than they do the ordinary.
Mr. Howe. You can't tell conclusively, but the figures would cer-
tainly indicate that the industrial business is the more profitable.
The Vice Chairman. Well, all right. We have got that. Is there
any difference in the element of hazard, where the thing is set up
properly, between conducting an ordinary insurance business and an
industrial insurance business?
Mr. Howe. The differences in hazard are all adec^uately collated.
I mean the industrial mortality is higher than the ordinary mortality,
and so on, but the margins of the business
The Vice Chairman (interposing). Then the answer is, "no," isn't
it?
Mr. Howe. No.
The Vice Chairman. Then that is that, isn't it? There are two
answers.
Now, what are these insurance companies doing with reference to
those two classes of insurance that they ought not to do, or what are
they failing to do with reference to those two classes of insurance
which they ought to do?
Mr. Howe. Judge, I would love to be able to answer that question,
but I certainly think it would take
The Vice Chairman (interposing). You can't?
Mr. Howe. It is certainly far beyond me.
The Vice Chairman. That is an answer. You check out on that.
CONCENTRATION OF ECONOMIC POWER 15449
Mr. Pike. You still think there is something, though ?
The Vice Chairman. Wait a minute ; don't take my witness.
Well, now, what else ought we to know about it ?
Mr. Howe. I think that in looking at these figures, one must bear in
mind that the results
The Vice Chairman (interposing). You don't want us to go crazy,
man, so we can't do anything at all. We want to get now Irom you
some usable stuff.
Mr. Howe. You are just sympathizing with me. I have been testi-
fying as to the difficulty of making sense out of these statements.^
The Vice Chairman. Yes. We know that. I wouldn't tackle that
thing over there at all.^
Mr. Henderson. I think we have got that much out of it, Judge.
The Vice Chairman. What — two answers?
Mr. Henderson. No; I think you have the further thing in what
Mr. Howe has said. I think it just sums up what he spent a day of
testimony in saying, that even if you had*that tremendous report over
there, and you were a qualified statistician, and you were a qualified
analyst, and you had the supplemental memos, such as we were able
to get, those statements would not represent an exact picture of the
status of insurance company assets and particularly would not rep-
resent to the public which lines of busmess are profitable because
they do not show which lines of business carry tne heavy and the
light allocation of losses and expenses. Isn't that correct, Mr. Howe ?
Mr. Howe, That is right.
Representative Williams. What are we going to do about it? I
don't know what we are going to do about that.
The Vice Chairman. May I ask one more question ? Let me keep
my witness, and brother, keep Witness Henderson off the stand
there.
Now fo'r the next question: We fully appreciate the difficulty.
What ought to be done — let me ask it this way : Is it necessary, m
the public interest, that there be a different system of bookkeeping,
a different system of allocation, or different sorts of reports made
from those which are ordinarily found with reference to the insur-
ance busings?
Mr. Howe. I am very strongly of that opinion.
■ Mr. Gesell. Mr. Howe has very definite opinions on that, but I
think it is a matter, on Which we are presenting facts, and not stating
opinions. .
The Vice Chairman. It is true, and that question probably' would
involve a statement of an opinion that might not be proper at this
stage of the hearing. I can appreciate that. At the same time, if
there is anything further that can be put in the record in this con-
nection, that would be beneficial — alhd I state this in all seriousness —
to those of us who do not claim to be experts at all with reference
to insurance matters, I personally and my colleagues here would like
to have that — just a plain statement, a helpful statement to us, vis-
ualizing the thing that wouldn't be embarrassing to ydu.
Mr. Howe. I greatly wish that this imm^jisely complex subject
could be reduced to simple terms. I confess I am utterly unable to
do it. The ramifications of the thing
1 Convention form of annual statement.
1545i3 CONCENTRATION OF ECONOMIC POWER
The Vice Chairman (interposing). You are doing fine. You are
making a very helpful witness this morning and I appreciate it.
Mr. Howe. But to get the vaguest outline, Judge Sumners, as to
what is happening to $24,000,000,000 worth of assets is a very diflScult
job.
Representative Williams. Are these annual statements that are
filed Dy the different insurance companies in general along the same
lines? Are they all of the same kind and character, or do they vary
over a wide field in the form ?
Mr. Howe, There is a uniform form which is provided by the Na-
tional Association of Insurance Commissioners, and then they have,
however, no legal standing with respect to their right as an associa-
tion to enforce the use of their form. However, tne commissioners
themselves, with minor modifications, do require the use of that form
of annual statement. The companies, however, in certain cases, add
additional information not called for in the form, and in some cases
don't fill out the form completely. I'mean
Representative Williams (interposing). Well, then, it seems to me
that in following this recommendation of the national association
is where the trouble is, and it looks to me like that being the founda-
tion of it, there is where the trouble lies if it is a trouble in filing
these — what appear to me, of course, to be such statements that not
only the ordinary layman cannot understand them but perhaps the
specialist himself doesn't thoroughly understand them.
Mr. HowE. There is great difficulty in understanding them, I will
(ell you that.
Mr. Pike. I think it is fair to say that I worked for a group of in-
surance companies 4 or 5 years, and except for the two or three pages
that covered the subject I was familiar with, I never was able to get
within shooting distance of understanding them. There were appar-
ently two or three people in the shop who did, and I don't think
anybody else did — well, perhaps the president knew what those state-
ments meant.
Representative Williams. To me it is an almost unbelievable situ-
ation to have statements filed that the men who are engaged in the
business themselves don't seem to thoroughly understand, much less
the outside world. How can they expect us to understand them or
know anything at all about them?
Mr. Howe. Not only is it necessary to understand them, Congress-
man Williams, but in order to get the significant figures which an
ordinary businessman would want from a report of this kind, it would
take a statistical staff of about a dozen men about a week to add up
the figures and arrange them in such form as to give you simple
business answers to your questions.
Mr. KIades. Didn't a witness testify that of these companies, one
showed four different surpluses to four different State commissioners
of insurance?
Mr. Howe. That occurred in one case. So it really becomes quite^
difficult to be specific about it.
Mr. Henderson. You have been in the investment-banking business
and had to analyze a lot of financial statements. If it Were a case
of buying a piece of property, or a case of buying a goin^ concern,
information such as is in that memorandum on the application to
CONCENTRATION OF ECONOMIC POWER 15451
the contingency reserve for asset valuation would be almost necessary,
would it not? It runs in one case there $41,000,000.
Mr. Howe. Certainly it would be necessary.
Mr. Henderson. And it does represent even for large organiza-
tions a tremendous sum?
Mr. Howe. Yes.
Mr. Henderson. There is no suggestion that there has been "rinky
dink" in this?
Mr. Howe. Not at all.
Mr. Henderson. It does emphasize, however, that those for whom
the insurance companies are trustees have a tremendous job in
getting over to those policyholders what the exact status of their
investments are?
Mr. Howe. That is right.
Mr. Henderson. Suppose we go on to some of these other lines.
The Vice Chairman. Let's get this. Here is an insurance com-
pany— let me just make this one try — that has outstanding policies.
I assume their actuaries have been able to give them a pretty clear
notion as to what premiums they must charge and what reserves they
must set up.
Mr. Howe. That is right.
The Vice Chairman. All right. Now, then, they have certain in-
vestments, and I assume probably there is presented the greatest
difficulty in knowing just what those investments are worth. Possibly
there have been some tests, especially of those investments that are
listed on the stock exchanges ; and then they have farms and all that
sort of thing. Well now, it seems to me as a layman that the major
facts which any examining agency would want to know would be
whether or not their structure was sound from the standpoint of
reserve to insurance that is outstanding; and then it would want to
know the value of their holdings. Now, what other big, comprehen-
sive factwould be necessary for an ordinary person to know in order
to have a pretty fair notion of the solvency of the concern and how
it is carried on. Of course, the overhead would cut some figure there.
Mr. Howe. Yes, Judge; and it seems. to me in addition to a balance
sheet with the assets and liabilities stated in a conservative manner,
most people are interested in an earning statement of a business,
whether it be a life-insurance business or any other business, to
determine whether losses are being incurred.
Mr. Gesell. To determine where the losses are being incurred, is
that what you mean ?
Mr. Howe. To determine whether and where.
The Vice Chaiemai^. Their earnings are from two sources, aren't
they ? The income from premiums I assume you would class as
earnings, and then the revenue derived from their investments.
Mr. Howe. That is correct.
The Vice Chairman. And of course anybody would want to know
about that.
Hr. Howe. Then you want to know about the disbursements and.
the expenses.
The Vice Chairman. Yes ; the overhead ; you would want to know
about that.
Now, then, you start out here and I assume there wouldn't be very
much difficulty in determining whether there was a proper relation-
15452 CONCENTRATION OF ECONOMIC POWER
ship between reserve and outstanding business. You have certain
tables that pretty well
Mr. Howe (interposing). The actuaries have a way to work that
out.
The Vice Chairman.. So it would present very little difficulty to
a trained actuary?
Mr. Howe. It would present no difficulty to a trained actuary.
The Vice Chairman. And then the next question would be the
value of the assets; I, as just a layman, would want to know what
they had.
Mr. Howe. That is right.
The Vice Chairman. Then of course you would want to know
the stability of those investments. Probably I don't use the proper
term, but 1 mean whether you would expect to come back month
after next and find them pretty stable.
Mr. Howe. Yes; the relative security of the investments.
The Vice Chairman. Yes; that is what I am trying to say, the
relative security.
Then, as you have mentioned, and as everybody would want to
know, you want to know the relationship between overhead and^
income.
Mr. Howe. That is right.
The Vice Chairman. Why wouldn't those big blocks of facts
make up about what the ordinary layman would want to know?
Mr. Howe. Don't you think. Judge" Sumners, that the ordinary
layman would also want to know, in view of the fact that these
people are e igaged in, depending on how you classify them, from
8 to 12 lines of business, in whicH lines of business they were making
money and in which lines they were losing money ?
The Vice Chairman. Yes; you would. I assume there would be
two angles of interest there. One would be the general public in-
terest, the person who Was interested as a policyholder, a stockholder,
whatever tnat is.
Mr. Pike. We had a good example yesterday, where one line of
business broke the Pacific Mutual. The disability business broke the
Pacific Mutual. It was losing its shirt while making good in the life
business.
The Vice Chairman. In a way that is true of all business, because
all businesses may lose on one account and make on another. Pre-
sumably, a conservative management would try to get away from the
thing they were losing on, or make a higher charge for that service,
or balance it up as far as possible.
Mr. Howe. Yes.
Mr. Gesell. And it is correct, Mr. Howe, that your testimony to-
day, with the portion you are just starting, is directed toward exam-
ining what lines of business have been profitable, what lines have
been unprofitable, perhaps whether or not one group of policyholders
is carrying too big a load for another group of policyholders, and
whether there has been proper allocation between these various types
and lines of businesss?
Mr. Howe. That is the main thrust of the testimony I have in
mind.
The Vice Chairman. Let's have it.
Mr. Hates. Mr. Howe, there is one thing that isn't at all clear to
me — I suppose I am dense — ^but I am curious to get the practical
CONCENTRATION OF ECONOMIC POWER 15453
effect of this rather wide variation in ratio between the amount of
contingency reserve taken from ordinary and the amount taken from
industrial insurance. Did I underetand you in answer to a question
by Congressman Williams to testify that those figures do not appear
on the books of the company but are only used for statement
purposes?
Mr. Howe. Yes. You see, I testified awhile ago that insurance
companies use double-entry bookkeeping only for their so-called
ledger assets, and that the nonledger assets, the not admitted assets
and the bulk of the liability accounts do not appear within the struc-
ture of the double-entry bookkeeping. They are simply memoranda
which are set off over here, and when statement time comes, they are
inventoried to determine their amount, which is, of course, entirely
different from the general accounting control which is established over
liabilities in other lines of business. In other lines of business if
there is to be a change in any one of the liability accounts as well as
the asset accounts, that change must be supported by a written memo-
randum or the bookkeeper won't make it, but here the tellow who
make's/up the statement on the order of the officers is not under that
same accounting procedure.
Mr. Hayes. All right, now, following that, assume these contin-
gency reserves are set up for the purpose of taking care of any losses
in asset valuation, not provided for by specific reserves, such, for
example, as the reserve for depreciation?
Mr. Howe. That is right. This is just something in addition.
There are eight different spots where they can handle this asset
valuation business, you see, and this is the last one.
Mr. Hates. Now, when such losses not specifically provided for by
particular reserves occur, are they anywhere, either for statement
purposes or on the books of the company, charged against these
contingency reserves?
Mr. Howe. No; I don't think so. However, contingency reserves
are sometimes changed from year to year and you will see a reduction
in contingency reserves; I mean, you will see a decrease in contingency
reserves one year and an increase in other years, so they are not static.
Mr. Hayes. So it is not a question in the year 1937, then, of adding
to a reserve that had been put up in 1936, or taking from it ; it is a
question in 1937 of setting up what then would be a proper contin-
gency reserve regardless of what the figures were in 1936?
Mr. Howe. That is right, and the difference, you see, will appear
as either an addition to income or as a deduction.
Mr. Hayes. What is the practical effect of that, speaking particu-
larly of the difference in percentage taken from industrial as against
ordinary revenues ? What is the practfcal effect of that on the indus-
trial policyholder as against the ordinary policyholder, if any ?
Mr. Howe. Well, it tends to show a lower income from the indus-
trial business than would have' appeared had the allocaton been
made, on the basis, say of 50-50 — 50 percent on the ordinary and 50
percent on the industrial.
Mr. Hayes. Is that used for fixing the rates on insurance or for
calculating dividends.
Mr. Howe. That has a bearing only on dividends.
124491— 41— pt. 28 49
15454 CONCENTRATION OF ECONOMIC POWER
Mr. Gesell. It means, does it not, that the industrial policyholders
pet less dividends than they would have had they not made such a
larpe contribution, peihaps a disproportionate contribution to these
contingency reserves?
Mr. Howe. It seems to me that is likely to be the practical effect.
Mr. Hayes. That is what I am curious to get at, what is the prac-
tical effect. Is that the only effect?
Mr. Howe. Yes; I think that is the only one.
Mr. Henderson. Industrial policies are usually the small policies
iud the policies of low-income people, isn't that correct?
Mr. Howe. That is right.
Mr. Henderson. So if there is. any heavier burden of allocation on
them, they are in effect carrying part of the load for the higher
income brackets?
Mr. Howe. Well, Ihey are carrying it for the ordinary policyholder,
and he certainly is usually in a better financial position than the
industrial policyholder.
Mr. Gesell. Can you continue with your statement, Mr. Howe?
Mr. Howe. In connection with these allocations, I just want to add
this one further thought, that this particular apportionment of the
contingency reserve which I have been alluding to was an appor-
tionment only as between the ordinary business and the industrial
business, and that there was no appoi'tionment of that asset loss at
all to annuities, group insurance, disability, accidental death.
Mr. Henderson. What?
The Vice Chairman. Will you state that again? That is a most
interesting statement.
Mr. Howe. Of these apportionments which I have been mentioning,
the total amount was divided between so-called ordinary business and
industrial business, and there was no apportionment of any part of this
asset loss to group insurance, to annuities, to disability reserves, to
accidental-death reserves, or, of course, to accident and health, which
reserves are quite small.
The Vice Chairman. Were they in any way taken care of? I am
afraid I can't ask that question just as I have it in mind.
Mr. Henderson. Do you want me to try to ask it for you ?
The Vice Chairman. I don't know. What I am trying to find out
is this : Is there any comparable arrangement or protection with refer-
ence to these groups of insurance which you have just mentioned as not
having been taken care of at all in that allocation ?
Mr. HowTE. No; they just don't share any of the deduction
Mr. Pike (interposing). You didn't mean not taken care of; you
meant they didn't bear any of the burden.
Mr. Howe. That is right.
Mr. Gesell. In other words, there were set up contingency reserves
from money of ordinary and industrial policyholders against which
all types of policyholders might have recourse in case there were asset
losses.
Mr. Howe. That is right.
Mr. Henderson. It means that the lines other than ordinary and
industrial do not carry a part of that burden?
Mr. Howe. That is correct.
Mr. Henderson. Althougli the assets representing these reserves did
include the reserves for those lines of business?
CONCENTRATION OF ECONOMIC. POWER 15455
Mr, Howe. That is correct.
Mr. Gesell, Now you come to ordinary jjisurance.
Mr. Howe. I will try to get along a little faster.
The Vice Chaibman. You are doing fine.
Mr. Howe. The predominance of the Metropolitan and the Pruden-
tial is also shown m the number of policies in force in the ordinary
department. These two companies had 12,971,000 ordinary policies in
force December 31, 1938, or 46.68 percent of the total number of ordi-
nary life-insurance policies outstanding in the 26 companies.
In examining the table of ordinary insurance in force, one is im-
mediately struck by the more rapid growth of the companies writing
industrial insurance.^ Whereas ordinary insurance in force for the
entire 26 companies increased 4.3 percent during the period, the Metro-
politan's ordinary insurance increased 33.6 percent; the Prudential's,
38.8 percent; the John Hancock's, 17.8 percent; and the Western &
Southern's, 23.8 percent. The' only company writing exclusively ordi-
nary insurance which approached the record of the great industrial
companies was the New England Mutual, which increased its ordinary
insurance in force 28 percent diiiring the period.
Table 27 shows that the first-year-premium income from ordinary
insurance for the 26 companies for the year 1938 amounted to $224,-
646,000 compared with $275,261,000 for 1929.- This is a decline of
18.83 percent,
Mr. Gesell. Let me see, Mr. Howe; we are again discussing this
unique feature of the insurance business, are we not, whereby growth
can continue though new business written declines ?
Mr. Howe. That is correct.
Mr. Gesell. And that results from the accumulation of the reserves
against the persistent policies?
Mr. Howe. Yes.
, Mr. Gesell. In other words, the sale of new industrial i^isurance has
been declining to the amount o£ 18.83 percent, as you indicate ?
Mr. Howe. New ordinary insurance, Mr. Gesell."
"Mr. Gesell. New ordinary insurance — whereas there has been still
a growth in the size of the companies ?
Mr, Howe. That is right. , -
Mr. Gesell. And I remember from your over-all figures, there was a
10-percent increase in insurance in force in these 10 years as against a
63-percent increase in assets.
Mr. Howe. That is correct.
Two companies — the New England Mutual, whose first-year pre-
mium income increased 71.85 percent during the period, and Mutual
Benefit, whose first-year premium income from ordinary insurance
increased 62.99 percent in the period — have shown a much more rapid
growth of first-year premium income than most of the companies
shown in the tabulation. It is interesting to note, however, from table
28, that while the total premium income of the New England Mutual
increased 58 percent during the period, the totab premium income of
the Mutual Benefit declined 10.6 percent.®
It will be noted that total premium income from ordinary insurance
1 See Hearings, Part 10-A, p. 26. , • •
a Ibid., p. 27.
3 Ibid., p. 28.
15456 CONCENTRATION OF ECONOMIC POWER
of the 26 companies amounted tx> $18,823,789,000 during the 10-year
period from January 1, 1929, to December 31. 1938.
Mr. Gesell. In other words, in that period, from the sale of ordinary
insurance alone, these 26 companies took in over 18 billion dollars?
Mr. Howe. That is correct.
Mr. Pike. Of which about 9 billion something stuck with them —
about 9 billion four. That is their net increase in admitted?
Mr. Howe. Oh, yes; that is right; but of course they had industrial
premium income.
Mr. Pike. Oh, yes; that is right.
Mr. HoAVE. This is only a portion of the premium income.
Of this amount, 27.94 percent was collected by the Metropolitan and
the Prudential, and 57.03 percent was collected by the first five com-
panies.
In dividends paid to policyholders, however, the two leading com-
panies paid only 21.41 percent of the total paid by the 26 companies.
The first 5 companies, however, paid 57.50 percent of the total divi-
dends paid. It should not be concluded from these figures, however,
that the dividend records of the Metropolitan and Prudential are less
satisfactory than those of the New York Life, Equitable, and Mutual.
These last 3 companies have the highest gross premium rates of any of
the leading American companies and they are, therefore, in a position
to return a larger proportion of gross premiums as dividends.
The table on page 32 shows that the increase in surplus after pay-
ment of dividends on ordinary insurance amounted to $546,796,000.^
This figure, however, should not be compared with the increase in
surplus from industrial insurance because of the fact that consoli-
dated in the figure for industrial insurance are the results of industrial
disability contracts and industrial accidental death provisions. If
the results of disability and accidental death benefits are combined
with those of ordinary insurance, of which they are a part, the increase
in surplus from operations of ordinary insurance becomes $196,000,000
as compared with $163,000,000 for industrial insurance.
Mr. Pike. That is largely due to the great loss in disability ?
Mr. HoAVE. That, is largely due to the great loss in disability.
Mr. Henderson. I didn't get the total of that allocation to contin-
gency reserves. Did you have a footing on that ?
Mr. Howe. I am sorry, I don't have these figures added here. They
can be prepared for you very quickly.
Mr. Henderson. Let me ask this. If this had been done, say, on a
50-50 basis, which is the relative reserve position, or a 3-2 basis, which
was the income basis for one year, would the surplus have been in-
creased ? Would the surplus for industrial insurance be increased ?
Mr. Howe. The surplus with respect to industrial insurance would
have been increased providing the sam^ dividends were paid, or more
dividends might have been paid on indtistrial insurance.
The Vice Chairman. May any part of this increase on industrial
insurance be traced directly or indirectly to intervening legislation?
Mr. Howe. I am afraid I can't answer that.
Mr. Henderson. In this period, I think it was testified the industrial
companies were increasing the benefits paid to the old policy-
» See Hearings, Part 10-A.
CONCENTRATION OF ECONOMIC POWER 15457
holders by reason of the fact that they were writing new industrial
policies with more liberal provisions, and they made them retroactive.
Mr. Howe. That is right. That was brought out yesterday.
Mr. Henderson. In other words, the industrial insurance carried a
heavier burden so far as the benefit provisions are concerned, in addi-
tion to all these things ?
Mr. Howe. That is right. There is one thing I can say in response
to Judge Sumners' former question which I think is purely factual.
That is, that the sales of industrial insurance have fallen off in star-
tling fashion in 1939. I mean, they are down, if I recall the figure,
something like 30 percent as to sales as compared with the year before,
and some students have ascribed that unusual action of industrial in-
surance as compared with the action of ordinary insurance, for in-
stance, to the recent laws in New York having to do with the sale of
endowment policies of an industrial type, and so forth.
The Vice Chairman. What I was particularly inquiring with refer-
ence to was whether or not legislation having to do with the relation-
ship between the employer and the employee had had anything to do
with the volume of inBtu-ance, industrial insurance, but I withdraw
that question.
Mr. Howe. I am soTvy I can't answer that.
The Vice Chairman, will withdraw that.
Mr. Howe. Now, the fact that some lines of business occasionally
turn out to be unprofitable has been mentioned, and the great historic
example of that is disability, disability benefits as they ara spoken of,
included in ordinary policies, from which the business has suffered a
loss of some $408,000,000 — that is, these 26 companies— -during the last
10 years.. That loss has fallen rather unevenly upon the companies,
and it seems to me that in view of the magnitude of the loss it might
be well to digress here for a moment and give the committee some idea
of the history of disability coverage which may give them some idea
or some clues as to the causes for this very important phenomenon in
the insurance business in the last 10 years.
To get a broad picture of the losses which most life-insurance com-
panies have experienced in writing what is known as total and perma-
nent disability benefit, it is necessary to keep in mind the nature of
the coverage which it is intended to offer and to survey' the historical
development of the coverage from the time it was first issued by a
legal-reserve life-insurance company.
Total and permanent disability as strictly construed implies a con-
dition which completely prevents the affected individual from engag-
ing in any occupation whatsoever for compensation, gain, or profit,
and does not permit any possibility of recovery from the condition.
In these respects it differs from the usual form of accident and sick-
ness policy, principally issued by the casualty companies, which gener-
ally grant indemnities for other conditions that disable the insured
only partially; that it>, do not stop his income completely or merely
disable him temporarily.
If the phrase "total and permanent disability" were construed liter-
ally, there would be relatively few conditions that would fall within
the scope of its meaning, but it has acquired with the passage of time
15458 CONCENTRATION OF ECONOMIC POWER
a far broader meaning, partly through the action of the companies
themselves, which at first interpreted the language liberally and later
extended its meaning in the wording of the contracts, and particularly
through the decisions of the courts, which, in the opinions of certain
observers, went far beyond the intent of the contrjicts in their con-
structions of the language.
The fraternals were the first to issue the total and permanent dis-
ability benefits in connection with life-insurance polices. The benefit
they provided was quite limited, consisting of payment of half of the
face amount of the policy at the time of disability, with the payment
of the balance being deferred until death. Total and permanent dis-
ability was construed literally.
It was in 1896, almost 20 years after the total and permanent disa-
bility clause had first been adopted by the fraternals, that it was first
adopted in this country by a life insurance company, the Fidelity
Mutual. Rates were based upon Hunter's Disability Table, which
had been prepared from the experience of three fraternals. The
benefit was a nominal one, consisting merely of the waiver of pre-
miums under the policy or, .in lieu thereof, at the option of the insured,
payment of the face amount of the policy in the form of an annuity
based upon the mortality of disabled lives.
No other company adopted this disability benefit until almost 10
years later, when the Travelers began to issue a clause that provided
merely for waiver of premiums. In 1910, other companies began to
adopt the same disability benefit being issued by the Travelers. It
was 2 or 3 years later that the trend toward liberalization of disa-
bility benefits first manifested itself. A few companies began to
provide what is known as installment disability benefit. There were
several variations of this plan, but basically it provided that upon
disablement the insured would become entitled to annual payments
each in the amount of 5 or 10 percent of the face amount of the
policy, such disability payments being deducted from the benefit
payable at death or maturity of the policy. Hence, if the disability
continued for 20 years, if 5 percent annually were being paid or
for 10 years if 10 percent annually were being paid, the entire face
amount would be paid out, and there would be no further disability
payments, nor would there be a death or maturity benefit. However,
in one variation of the plan, the disability payments were continued
even though they aggregated more than the face amount. This was a
further extension of the benefit, iijdicating the form of disability
coverage which, after great elaboration, was to be adopted generally.
The first income disabilitj^ benefit that did not reduce the amount
payable at death or maturity was introduced in 1915 by the Penn
Mutual. It constituted a radical innovation. The income-disability
payment was an annual payment of 10 percent of the face amount,
the first payment to be made a year or more after proof of disability
w^as filed with the company.
In 1920 the benefit was extended consideratSy when the income-
disability payment was changed to 1 percent per month and the
payments were made to begin 1 month after proof was filed. Further
liberalizations followed quickly. In 1921, companies began to use
what is known as the 90-day clause. This was the point at which
large losses began to be incurred. The 90-day clause, in eflfect, pro-
CONCENTRATION OF ECONOMIC POWER 15459
vided that the insured would be deemed permanently disabled if total
disability had continued for 90 days, even if it were evident that the
total disability were only temporary and there was little or no possi-
bility of its being truly permanent. The value of the income-
disability benefit thus was increased considerably.
Mr. Pike. They certainly wanted business badly when they wrote
that in.
Mr. Howe. It is a very interesting process to see how they start
and put in a few more.
Mr. Pike. We see that in veterans' pensions, service-connected disa-
bilities.
The Vice Chairman. It is really more diflScult to get well when
you are being paid a pretty big premium,
Mr. Howe. That is brought out very definitely; it is very much
harder to get well.
Soon thereafter it also became customary to provide that the first
income disability payment b^ made immediately when proof was
filed. The year 1922 saw the introduction of a disability clause in
which the income disability payments were increased as duration of
the disability increased. Onfe type of increasing-indemnity clause
provided that the payments would be increased 10 percent for each
completed year of disability, reaching a maximum of 10 percent for
the sixth year of disability and thereafter.
Another type adopted hjriwo large companies, the New York Life
and the Mutual Life of New York, provided that the payments would
be increased 50 percent after 5 years of disability, and another 50
percent after 10 years of disability, so that the payments made in the
eleventh year of disability and thereafter were double the amount
initially paid.
Mr. Gesell. That made it even harder to get well, didn't it?
Mr. Howe. Very much harder.
Mr. Pike. A premium on staying in bed.
Mr. Howe. These clauses proved very costly to the companies.
Later a number of companies began to issue a disability provision
which provided for payments covering the 90-day waiting period.
Throughout the entire period prior to 1922, rates for disability bene-
fits had, in general, been based on Hunter's Disability Table derived
from the experience of the fraternals. So long as the benefits pro-
vided were payable only in the eve'C of true total and permanent
disability, the net premiums, based on Hunter's table, were generally
sufficient. But, with the adoption of the 90-day clause, followed by
liberal interpretation of total and permanent disability, premiums
based on Hunters table l:)ecame clearly inadequate. Premiums had
been increased, but the additional premium was usually more than
offset by the extension of benefits. This became evident when, in
1926, a study was made of intercompany disability experience. As a
result of the study, premiums were increased once again, but the
losses on disability continued to increase and further changes were
clearly necessary. A committee of actuaries appointed in part by the
superintendent of the New York Insurance Department and in part
by the National Convention of Insurance Commissioners, after study-
ing the problem of disability recommended standard provisions which
would result in more uniform practice and make it possible to as-
15460 CONCENTRATION OF ECONOMIC POWER
semble statistics which would be suitable for premium and reserve
calculations.
Most of the large companies followed the recommendations and
changes which were eflfected in 1930.
Mr. Gesell. These losses you have talked about of $40o,5 16,000
have all taken place since
Mr. Howe. January ''■ 1929.
Mr. GeseivL. Almos* ince the time of your study.
Mr. Howe. This is just the history of the background, as to how*
they got these contracts outstanding,
Mr. Pike. You can se.e they apparently peaked in '32 and '33, and
thev are gradually getting over the hill in getting those contracts
])uid out.^ They dropped off substantially in the last 5 years.
Mr. Ho^\nE. The principal changes effected in 1930 were (1), an
increase in the waiting period from 90 to 180 days; (2) the elimina-
tion of dit^iibility payments for the first 3 months of the disability;
(3) the reduction of a limiting age by which disability must occur
from 65 to 60; (4) limitation of disability income benefits to 1
percent per month without any increase by duration of time; (5)
adoption of stringent election rules in regard to women, such as
elimination of income disability, and restriction in amount of cov-
erage granted; (6) withdraw^al of disability clause providing in-
demnity merely if the insured were unable to perform the duties
Gi his own occupation. This had proved particularly costly when
issued to professional men, such as doctors, lawyers, dentists, arid
so forth.
Along with these changes in benefits, increases in disability premi-
ums were also made. The basis for the rate change was the 1926
intercompany study. This study was not an altogether satisfactory
guide, since it had been based on both limited and rather heterogene-
ous data. The companies which contributed their experience to the
study had offered widely different types of coverage, and in addition
had differed substantially in interpreting the disability clause select-
ing risks and adminstering claims. As a consequence, the data had
been divided into three broad classifications, one of which, called
class 3, showed the experience under the 90-day clause of those com-
panies which had been most liberal in administering disability cov-
erage.
Premium rates adopted in 1930 were based on this class 3 experi-
ence. Furthermore, most of the companies began to charge female
risks either one and one-half or two times the disability premium
rates charged for males, since the experience with respect to women
had been so bad.
The drastic changes made in 1930 did not bring the desired results.
Losses continued to mount. Hence, in 1932, many further changes
were made. A luimber of companies eliminated the income disability
benefits altogether, and thereafter restricted their disability coverage
to the premiimi waiver benefit.
Mr. Henderson. That is the new business. They couldn't eliminate
it on the contracts outstanding.
Mr. Howe. No ; they can't eliminate it on the contracts outstanding.
' Sec Hearings, Tart 10-A, p. 36.
CONCENTRATION OF ECONOMIC POWER 15461
t3f those that continued to write income disability, many reduced
the benefit to one-half of 1 percent per month, some provided for the
payment of 1 percent for only a limited time, and one-half percent
thereafter, while some provided that the monthly income should
cease altogether after a limited period.
In addition, other provisions of the disability clause were restricted
generally. The waiting period was increased from 4 to 6 months.
The limiting age of the coverage was reduced from 60 to 55 if income
disability was granted, and virtually all companies stopped issuing
income-disability benefits to women.
Finally, new premium rates were adopted. They were based on
the class 3 experience, increased by 65 percent or more in the case of
the income benefit, and increased by 50 percent or more in the case
of the premium-waiver benefit.
Also, the charge for premium waiver issued to women was gen-
erally adopted as double the rate for men.
Along with the drastic changes in coverage and rates which had
resulted from the companies' study of their costly disability experi-
ence, there had been a growing realization of the special underwrit-
ing problem inherent in the writing of disability benefits. This had '
manifested itself in many ways. It had become evident that the
issuance of disability benefits to women had been especially costly.
In addition, overinsurance of risks had been common, and especially
costly when excessive income-disability benefits had been issued.
Hence, eventually there were drastic limitations upon the amount of
disability coverage granted.
Furthermore, as the companies' own disability experience accumu-
lated and was analyzed, it became apparent that the writing of dis-
ability benefits involved certain occupational and moral hazards
which were either lacking or operated with less effect in the under-
writing of death benefits alone.
(Off-the-record discussion.)
The Vice Chairman. What we were just saying, Mr, Howe, and
I hesitate to make the suggestion; is, we have to go back to the House
in a few minutes, and these gentlemen who are to remain here are
very much more familiar with the details of matters with regard to
which you are testifying than we are, and the suggestion was that if
in, say, the next 10 mmutes, there was something from this study
which you feel would be helpful to us, if you would interrupt this
narrative of yours, and tell us about it, we would appreciate it. I
appreciate the difficulty.
Mr. Howe. Well, Judge Sumners, the situation with respect to
annuity contracts of life insurance companies is a very interesting
one.
The Vice Chairman. May I ask a question, too, about how these
insurance companies who issued these annuities, at a time when they
were getting a great deal more money in return on their investments,
are able to carry on now, who have these permanent obligations?
Mr. Howe. Well, of course, they are very strong. The situation
which I was about to point out is right along that line. A large
proportion of the immediate annuities, those are the ones where you
put in $10,000 and immediately start to draw so many dollars per
month* for life
15462 CONCENTRATION OF ECONOMIC POWER
The Vice Chairman (interposing). Would you permit me to ask
a question so we can get started? They take $10,000 and they agree
to give you so much per month, or tliey agree in certain contingencies
to Degin to give you so much per month. Now, those agreements,
I assume, were based originally upon the assumption that they would
continue to earn a certain amoluit of money on their investments.
Mr. Howe. That is right, they were, definitely.
The Vice Chairman. How are they doing about the thing when
the earnings on their investments have proportionately shrunk?
Mr. Howe. They have no option except to pay those contracts,
because in most cases they are firm contracts, not participating con-
tracts, but they are straight nonparticipating contracts. They are
firm contracts, even in the case of mutual companies, so that if a
loss results from this thing, all they can do is to take it from the
earnings of the other departments of the business.
The Vice Chairman. Now may I ask you another question. Have
they been compelled in practice to draw upon earnings from other
activities of the business?
Mr. Howe. Table 57 shows the net change in surplus before divi-
dend payments by loss of $42,452,000 from its annuity business for
these companies in the last 10 years.^
Mr. Pike. That is before dividends, and in 59 it shows 65,000,000
after dividends.^
Mr. Gesell. And that loss has come from other lines of business,
has it not?
Mr. Howe. That is right.
Mr. Kades. Does that $42,000,000 that you refer to on page 57
mean that $42,000,000 that might otherwise have gone out in divi-
dends to reduce gross premiums to life-insurance policyholders did
not go out in that form ? ^
Mr. Howe. I think so, yes.
Mr. Pike. Money that they didn't have.
Mr. Howe. Money which otherwise might have been distributed
for dividends or used for other purpi)ses, to increase surplus.
The Vice Chairman. Was thei-e a considerable period of time
when this was a profitable sort of insurance?
Mr. Howe. Judge Sumners, it has always been the case that as
interest rates go down and mortalit}^ improves they are working
against the profit in the annuity business. In the life-insurance
business the improvement of the mortality increases the profit, but
the improvement of the mortality in the annuity business works
against the business, so it has never been a very profitable line of
business at any time.
Mr. Gesell. The point you were emphasizing which perhaps Judge
Sumners has not quite realized is that in most of these companies
the insurance is participating. Amuuties, however, are nonparti-
cipating.
Mr. Howe. That is correct as far as certain types of contracts are
concerned.
Mr. Gesell. As a result in those cases the j^ol icy holders in these
mutual companies are engaged in the annuities.
1 See Hearings, Part 10-A, p. 57.
' Ibid., p. 69.
» Ibid., p. 67.
CONCENTRATION OF ECONOMIC POWER 15463
Mr. Howe. That is right, they are virtually stockholders in a non-
participating annuity business.
Mr. Gesell. When that has a loss they take a loss.
The Vice Chairman. When it has a profit they get a profit. I
assume there must have been some time in the history of the business
when it must have been profitable or they wouldn't have continued it.
Mr. Howe. We have made a study of it since the Roman Empire.
First the Dutch Government got burned in it and then the British
Government got burned in it. It hasn't been very profitable at any
time.
Mr. .Pike. I can't get it in my head how they paid dividends after
net losses.
Mr. Howe. That results from the different kinds of annuities, as
I understand it. The immediate annuities are one kind of thing, the
deferred annuities are something else.
Mr. Gesell. I believe, Mr. Pike, it also results from the fact that
for a while companies were under the apprehension tliat they were
required to pay dividends on annuity business when they suffered a
loss because of the necessity of equally distributing dividends among
all classes of policyholders. There has been a recent case which has
upset that theory.
The Vice Chaikman. We are very much obliged to you, Mr. Howe.
You have been a very interesting and helpful witness and I am sorry
I can't be here this afternoon.
The committee will recess until 2 o'clock.
(Whereupon, at 12 : 45 p. m., the committee recessed until 2 p. m. of
the same day.)
afternoon session
The hearing was resumed at 2 : 10 p. m. upon the expiration of the
recess, Mr. Sumner Pike presiding.
Acting Chairman Pike. Are you ready to proceed, Mr. Gesell?
Mr. Geseli.. Yes; I am.
Mr. Howe, I think it would be well for .you to return to your dis-
cussion of the history of disability insurance and continue with your
prepared statement.
Mr. Howe. The advent of the depression accentuated the underwrit-
ing hazards implicit in disability insurance, and no doubt was an im-
portant factor in the substantial increase in disability claims which
occurred during the thirties. As earned income shrank or completely
vanished, companies found that in many instances the potential
monthly benefit of an individual in event of disablement exceeded his
actual monthly earnings. Meanwhile the public had become insurance
wise, and quite aware of the potential benefits of the disability cover-
age. As a result, an increasing number of claims began to be filed,
many of them of doubtful validity.
The decisions of the courts were also of great influence. Their inter-
pretations of the contracts were quite liberal, exhibiting a tendency to
give
Acting Chairman Pike (interposing). May I ask there, Mr. Howe,
were perhaps the juries a little liberal too?
Mr. Howe. I think possibly if you want to divide it, the juries were
also liberal.
Acting Chairman Pike. That is the usual reaction.
15464 CONCENTRATION OF ECONOMIC POWER
Mr. H(n\^. I think tliat is a fair statement.
As a consequence, the companies found themselves liable on claims
which tliey had nd intention of covering in their disability contracts.
Even where they were able to defend dubious claims the costs of such
defense were no inconsiderable item and, together with the mounting
costs of administering claims under the payments which were being
made, with the necessity of regular check-up and review in order to
verify the continuation of total disability, they added to the substantial
disability losses incurred.
The depression had not only increased the incidence of claims but
also their duration. There was a tendency for claimants to malinger
and extend their claims as. long as possible, all of which required more
thorough and hence more costly investigations on the part of the
companies.
In the development of their disability business companies haa
undoubtedly been led through severe competition to adopt the increased
benefits and liberalized clauses which subsequently proved so unfor-
tunate.
In many instances it was probably the disability benefit, not the death
benefit, which the insured was purchasing. ■
The effects of competition were greatly reduced in 1930 when the
standard provisions for disability coverage which had been promul-
gated by the National Association of Insurance Commissioners were
adopted generally by the companies, but the errors in judgment which
had been made previously resulted in a continuation of the unfavorable
disability experience which in 1932 caused most of the companies to
eliminate the income benefits altogether and further modify severely
the disability benefits which they continued to offer.
Since then some of the large companies which discontinued issuance
of income disability in 1932 have resumed the issuance of the benefit in
a modified form and today 10 of the 26 largest companies are issuing
income disability benefits on a restricted basis. Two large companies,
the Mutual Benefit and the Northwestern Mutual, have consistently
refused to issue disability benefits on the basis adopted by the other
companies, and have shown a profit on this coverage over the 10 years,
1929 to 1938. The Northwestern Mutual has been issuing disability
benefits since 1916, but has never issued income diability. The Mutual
Benefit did not issue any disability benefits whatever until 1929 and,
when it did enter the field at that time it adopted provisions which,
while permitting both income and premium w^aiver benefits, differed
substantially in terms from the clauses offered by other companies.
The Mutual Benefit disability provision is unique 'in many re-
spects. The most important are two distinctive departures from the
practices of other companies: (1) The definition of total disability in
terms of loss of earned income rather than mere inability to work; and
(2) the prorate clause which enables the company to reduce the dis-
ability benefits payable under the contract if and to the extent that
the disability coverage carried in all companies exceeds the earned
income of the insured during the stipulated period immediately prior
to the occurrence of disability. t\
(Senator O'Mahoney took the Chair.)
Mr. Howe. Through (he use of these two provisions the Mutual
Benefit apparently has been successful in eliminating a substantial
part of the moral hazard involved in the writing of incorae disability
CONCENTRATION OF ECONOMIC POWER 15465
coverage and thus has avoided the serious losses incurred by other
large companies.
Among the other companies of the 26 largest, there are extensive
differences in the amount of loss sustained on disability during the
10-year period, 1929 to 1938, inclusive. The variations in experience
are to be expected in view of the wide diversity in coverage, espe-
cially during the period prior to 1930. However, by comparing the
various disability clauses and published rules which were being used
on January 1, 1929, by the different companies, it is possible to get
some indication of the factors that have contributed toward mini-
mizing or augmenting the losses sustained.
It is significant that the New York Life and Mutual Life, the only
companies of the group that issued an income disability clause pro-
viding for benefits which increased with the duration of the claim,
show the greatest loss ratio over the period 1929-38. Undoubtedly
the incentive for greater ultimate disability benefits attracted espe-
cially unfavorable risks and has resulted in the accentuation of the
hazard of malingering.
It is also worthy of note that two of the companies which showed
moderate loss ratios, the Massachusetts Mutual and the New England
Mutual, were virtually the only companies of the. group that as late
as 1929 had not yet adopted the 90-day clause but were still using the
earlier, more literal clause, requiring total and permanent disability
and were commencing the disability payments as of the date of proof
rather than the date of the beginning of disability.
It is also significant that the two companies menticiied as having
comparatively moderate loss ratios both limited the maximum amount
of disability coverage below that granted by the larger companies.
Those companies which imposed the lower limits of coverage show
substantially lower loss ratios as a group than the larger, more liberal
companies.' Among the latter group were the five largest companies,
Travelers and Aetna, all of which show higli-loss ratios in the aggre-
gate. The most favorable ' loss ratio of these larger compani^ is
shown by the Prudential, and a possible explanation may be found
in the fact that in 1929 this company was the only one of the group
that was not dating back the income payments to the inception of dis-
ability. The Prudential was also including the premium waiver and
installment disability benefits in all policies issued at that time and
has since continued to include a restricted disability benefit in all
policies issued. This practice has apparently operated to reduce to
some extent the force of selection against the company which is likely
to be more pronounced when the entire choice lies with the insured.
Another of the large com'panies, the John Hancock, shows a high
loss ratio, even though the limit of coverage was restrictecf. A possi-
ble explanation is suggested by the fact that in 1929 it was the only
company among those using the 90-day clause that continued the in-
come disability coverage to age 65. The others terminated it at age 60.
The difference in age limit possibly affected the John Hancock experi-
ence to an appreciable extent, since the incidence of claims rises very
steeply at the older ages and particularly so when a 90-day clause is
used.
The foregoing analysis of individual company practices and proba-
ble effect of its loss ratio should be considered merely as affording a clue
to the explanation rather than the explanation itself of the diverse
15466 CONCENTRATION OF ECONOMIC POWER
experience. As previously indicated, a great many factors have en-
tered into the determination of the resultant loss ratio and the explana-
tion offered nuist necessarily l)e incomplete.
In 1932 and subse^iuently, changes were made in coverage and rates.
These, changes seem to have placed the issuance of disability benefits on
the basis whereby the rates were apparently adequate for the coverage.
Companies have continued to show large losses, but that was to be
expected in view of the substantial amount of disability benefits issued
(luiiniT the twenties when coverage and practices were liberal and rates
ina(U'(|uate.
Mi-. Pike. They have fixed their rates so they come out all right,
but they haven't much business yet?
Mr Howe. That is right ; there hasn't been a great deal of business
done since the rates were moved up and the restrictions made more
severe.
Mr. Pike. There is a sharp break that looks as though it took effect
in 1931.^
Mr. Howe. You will notice that in 1931 the first year premium in-
come for disability benefits in ordinary policies for these 26 companies
amounted to ^8,108,000, whereas in 1932 it had dropped to $3,900,000..
Mr. Pike. That is what I nieant; it looked as if the rule they had
fixed up in '30 hadn't gone into effect until some time in '31 or early '32.
Mr. Howe. That is right ; and then you see there is a further decline
in 1933 as compared with '32, for in 1933 the first year premium income
from disability benefits in ordinary policies amounted to $1,821,000,
which may be compared with $8,108,000 2 years earlier in 1931.
It will be seen from table 36 that the total loss from disability of the
26 companies amounts to $408,516,000 for the period.^ The New York
Life and the Mutual of New York show by far the largest losses in
this connection. This has been explained by their use of a 'provision
which increases the amount which the as^red may receive if his dis-
ability has been established for 5 years and again increases if the
disability has been established for 10 years.
It will be observed from table 37 that with the exception of the
New England Mutual for the period from 1929 to 1934, and the
Mutual Benefit for the period 1932-38, no dividends were paid by
any of the 26 companies upon disability provisions of their contracts.^
In fact, a negative dividend factor has been included by nine compa-
nies in the dividend formula on account of disability. It is not known
how much difference this negative dividend adjustment on account of
disability has been in the case of all companies.
It is evident from the operating losses even after this dividend ad-
justment that the losses on disability benefits have been one of the
major operating misfortunes of the decade. The amount lost on
disability is an amount equivalent to over 56 percent of the $719,319,000
of asset losses experienced by the companies as a result of the de-
pression.
Mr. Pike. This is in addition to those losses?
Mr. Howe. Oh, this is in addition to those losses. Tliose are asset
los.ses." I am comparing two quite different things but merely in order
to give some concept of the magnitude.
> Spo HearlnKS, Va.H 10-A, p. 33.
' n)id., p. 30.
• Ibid., p. .37.
CONCENTRATION OF ECONOMIC POWER 15467
Mr. Pike. It might have sounded as if that were a part of a larger
total business.
Mr. Howe. It is in addition.
Mr. Kades. Did I understand you to say 56 percent ?
Mr. Howe. Y^s; the disability losses were an amount which was
equivalent to 56 percent of the asset losses as shown by the companies
during this period.
Accidental death benefits in ordinary policies, which are frequently
referred to as double indemnity for accidental death, have made a
steady contribution to surplus with minor exceptions. It should be
stated, however, that there seems to be some doubt as to whether this
section of the company's business will ultimately prove to be profitable
due to the fact that there has been noticed a tendency for loss to in-
crease with the age of the assured. This tendency has been recognized
by many companies and additional reserves to the extent of $22,483,000
have been set up since 1932.
Group life insurance : The leading purveyor of group life insurance
is the Metropolitan with $3,505,000,000 of group life insurance in
force on December 31, 1938. This is 30.4 percent of the total group
life insurance outstanding among the nine companies which are ac-
tively engaged in this business.
In order of importance the Metropolitan is followed by the Aetna
with 17.55 percent, the Equitable with 17.29 percent, the Travelers
with 16.60 percent, and the Prudential with 11.96 percent of the group
life insurance in force.
Total premium income from group life insurance has increased
from $84,000,000 in 1929 to $129,000,000 in 1938. . This is an increase
of 54 percent as compared with an increase of 6.06 percent for indus-
trial insurance and 2.9 percent for ordinary insurance.
Mr. Pike. The first-year premium, however, has dropped in half
during the J)eriod ?
Mr. Howe. That is right.
Group life insurance has proved profitable for all companies a(!tive
in the field during the last 10 years. The largest profit, amounting to
$8,161,000, has been made by the Travelers. Other companies making
substantial profits are :
Metropolitan $7, 135, OOO
Aetna 6, 772, 000
Equitable w 5„ 263, OOO
. Accident and health insurance includes group accident and health,
and is called casualty by Travelers, accident and liability by Aetna, and
accident and health and corporate by Pacific Mutual.
Of the' $996,000,000 premium income received during the 10-year
period ended December 31, 1938, $536,000,000, or over 54 percent was
premium income to the Travelers Insurance Co. Other leading com-
panies in the business were Aetna, which collected 21.8 percent, and
the Metropolitan, which collected 15:75 percent. The accident and
health business has in general been profitable to all participants
except the Equitable and Connecticut General.
I have left the discussion of annuities to the last of the discus-
sions of the lines of business because I wish to develop to some extent
the history of the annuity business in order that a better appreciation
of the significance of the annuity figures may be had. The exten-
15468 CONCENTRATION OF ECONOMIC POWER
sive devel()i)iiH'iit of the annuity business us a branch of the legal
reserve life-insurance companies in the United States is a phenomenon
of comparatively recent times. While the amount of annuity premi-
ums received by the companies has shown in general a consistent
increase from year to year since 1866, the first year for which the
amount of annuity premiums is available, it was not until about 15
years ago that the volume of annuity premiums began to attain sig- '
"nificant proportions. Moreover, the real mushroom growth has taken
place only during the latter half of the 15-year period. Starting
with an aggregate of only $41,000 in annuity premiums in 1866, th^
volume rose to a temporary high of approximately $11,000,000 in
1904, but during the period 1905 to 1915 it dropped off substantially,
with the result that it did not pass the 1904 high until about 1916. ^
Following more or less steadily a rapid growth until 1931, durin'g
which year approximately $100'.000,000 of annuity premiums were
received by the companies, it began to skyrocket in an unprecedented
manner, reaching a level of almost half a billion dollars in 1935.
Since then it has tapered off somewhat to approximately 400 mil-
lions in 192S. The amazing increase in annuity premiums is brought
out forcibly by the fact that the annuity premiums of the 1 year,.
1935, approximated, in fact "slightly exceeded, the total annuity
l^remiums for the period 1866 to 1927, inclusive, while the aggregate
annuity premiums 1928 to 1938, inclusive, were more than 6 times
as large as t le aggregate annuity premiums during the period from
1866 to 1927.
Similar statistics for life-insurance premiums show a quite different
history. While the amount of .life-insurance premiums increased
steadily and quite uninterruptedly throughout the entire period from
1866 to 1928, the period of greatest growth was the 1920 decade. In
1866 annuity premiums were only about one-tenth of 1 percent of the
amount of insurance premiums. During the next 50 years, annuity
premiums averaged about II/2 percent of life-insurance premiums,
and in no year amounted to as much as 5 percent of life-insura[nce
premiums. In 1920 annuity premiums had fallen to less than 1 per-
cent of life-insurance premiums, but in 1935 they rose to a point
where they amounted to over 15 percent of life-insurance premiums.
Since 1935, annuity premiums have declined somewhat.
By 1920 it was generally recognized that there was need for a new
table of annuitants' mortality to replace McClintock's Table, prepared
in 1896, which had been more or less used generally by American com-
panies up to that point. Consequently, there was a study made by
Dr. Arthur Hunter of the mortality experience solely on American
annuitants up to 1918, and the result w^as the publication of the Amer-
ican Annuitants Table. Compared with the early McClintock Table,
the new table indicated increases of 6 to 12 perc^jnt in the value of
annuities issued to males at the older ages and up to 20 percent in-
crease in the female values, but only at the very old ages. For the
most part, female rates were not affected. The new experience had
included only immediate single life annuities without any guarantee
or refund provision, the type of annuity which apparently had largely
predominated up to that time; and since this kmd of annuity was
almost always issued at the older ages, the results of the 1920 study
were of considerable importance.
CONCENTRATION OF ECONOMIC POWER 15469
Many interesting commentaries emerged in the discussion of the 1920
mortality table and the resultant tables. It was noted that the mor-
tality had been more favorable to companies when considered in terms
of the amount of annuity rather than the number of annuitants. This
phenomenon was to be repeated in later annuity investigations and
mdicates an important divergence from life-insurance mortality
experience, which has consistently shown a less favorable result from
the standpoint of the company, namely, higher mortality, by amounts
of insurance than by lives.
Mr. Henderson. I am not quite sure I ^et that.
Mr. Howe. There are two ways, Commissioner Henderson, to figure
mortality. One is in terms of number of individuals and the other
is in terms of the amounts of their contracts.
Mr. Henderson. I see. Which of them has the longer life ? Which
group ?
Mr, Howe. In the case of annuities the mortality has .been more
favorable when figured on the amount involved in the contract rather
than the number of annuitants.
Mr, Pike. You mean rich people die quicker ?
Mr. Howe. Apparently; but in life insurance the experience has
been the other way.
Mr. Pike. They last longer?
Mr. Howe. No ; they are on a difi'erent side of the risk in the annuity
business than in the life-insurance business, but in the life-insurance
business the same tendency manifests itself in the fact
Mr. Pike (interposing). Yes; they still drop out.
Mr. Howe. That is right ; the people with the larger policies die
sooner.
Mr. Gesell. In other wqrds, it is better for a company to write a
life policy on someone who dies sooner than an annuity?
. Mr. Henderson. It would be better for them to write a life policy
on the rich and the endowment on the poor; is that it?
Mr. Howe. No; the mortality on the large life insurance is heavier;
therefore we have had this discussion about the elimination of jumbo
risks and all that kind of thing. That same characteristic manifested
in terms of annuities reflects itself in increased earnings to the com-
pany on the annuity contracts because the possessor of the large con-
tracts die sooner, so the liability of the companies is less.
The Chairman. What is the reason for that tendency? Of course,
I understand that is altogether outside of the scope of your inquiry.
Mr. Howe. Senator, I don't know. In discussing it with the presi-
dents of some companies with whom I talked, they say that the big
executives, for instance, who carry large amounts of insurance, work
very hard, burn themselves out, and they just simply discover from
their statistics that they have a less favorable mortality from the point
of view of the companies than the average-sized policies.
Mr. PiBa:. I am glad I quit work.
The Chairman. Well, of course, it is generally felt that when
security is obtained by an individual, the tendency to longevity is
increased.
Mr. Howe. Oh, that has been very noticeable in annuitants' mor-
tality. Senator, that when they have the assurance, particularly people
who must rely exclusively on the annuity— when they have the assur-
124491 — 41 — pt. 28 50
15470 CONCENTRATION OF ECONOMIC POWER
ance of an annuity income for life, it seems to increase their comfort,
and also their longevity.
Tlie Chairman. Yes; but the greater the assurance they have, the
more quickly they die, according to this tendency.
Mr. Howe. That is right.
Mr. Pike. It j^robably means that those larger annuity holders had
other resources ; they would probably get along pretty well, anyway.
Mr. Howe. I assume that is the way ; but, anyway, they have dis-
covered that fact in computing these tables.
The Chairman. Mr. Howe, may I interrupt ? I am very sorry that
it is necessary for me to leave again. I wanted particularly to be
prestMit throughout the entire presentation of this testimony of yours,
because I know how valuable it is and I know how^ much work you
have given to the preparation of this data. But it is absolutely essen-
tial for me to be in attendance on the Appropriations Committee this
afternoon because certain matters are coming up with respect to the
Sugar Control Act, which is of profound importance to the people of
my State, and of the West, so I must be there.
But I am taking advantage of this interruption to express my per-
sonal appreciation of the splendid work that you have done, and I
want also to speak of Mr. Gesell. I don't know when I have seen a
case better presented, when I have seen facts better marshaled and
more lucidly developed than this insurance study has been under your
leadership, Mr. Gesell, and I do feel that the record should contain
this inadequate tribute to what you and the members of your staff
have done. I think that this work will stand for quite a little while.
I think it will stand analysis, too. Already it has been subjected to
some considerable analysis — we all know that — and it has certainly to
date stood the test. And I feel that your personal presentation of
the entire study is one of which you should personally feel rather
proud, and I am glad to have had the opportunity of presiding during
most of the presentation.
Mr. Gesell. Thank you very much, sir.
The Chairman. The compliment goes to you and to all the members
of your staff.
Mr. Henderson. Mr. Chairman, before you go, I wonder if you
could help me a bit on a matter of these letters which we have
gotten from the agents. I don't believe you were here when I spoke
about them. The letters are still coming in, and they are all very
full and all very frank. I think we have over 2,000 of them by now.
We have had less than five, I believe, which I would call sarcastic
letters. . I don't mean that out of the other 1,997 there haven't been
some sharp statements, but I mean taken as a whole there have only
been three or four which have been sarcastic in content.
We expect to make an analysis of them and make it a part of our
report. But I am in a little bit of a difficulty because I picked out
about 50 which I felt were truly representative — that is to me they
were — and I don't think I picked those entirely because they were
favorable or critical or anything like that, but those I felt were
giving an honest, frank, and complete statement.
I was going to suggest that we put about 10 letters in the record
and put the other 40 into the committee files for future students.
CONCENTRATION OF ECONOMIC POWER 15471
The Chairman. How many have you received in all ?
Mr. Henderson. About 2,000. I am wondering whether we could
decide this afternoon that some of them would be admitted, and if I
could get your help in this selection of what should go in.
The Chairman. I would suggest that probably the best way of
handling that would be to have these letters presented to a subcom-
mittee which will analyze them and then choose some to be pub-
lished in the record.
Of course it is obvious that you can't print them all in the record,
and I understand froYn your statement that you merely desire to
have some representative letters appear.
Mr. Henderson. One of the main reasons I suggest that, is in
my readings of the Armstrong report it is plain to see that Chief
Justice Hughes rested very heavily in some instances on the full
and complete statements of agents, and naturally w^e have not.
We have had a greater reliance on the economic and financial ma-
terial, but these are refreshing letters.
The Chairman. Suppose we have a subcommittee examine them
and make the selection.
Mr. Henderson. All right.
The Chairman. With the understanding that the letters which
this committee will offer will be printed in the record.^ That
will relieve the S. E. C. of any possibility of criticism on the ground
that it is taking only certain special letters to put in, and the com-
mittee as a whole will review those that are to go in.
If that is agreeable we will proceed that way.
I am sorry to have to leave.
(Mr. Pike took the Chair.)
Mr. Howe. It was also noted that up to 1920, there had been little
active solicitation of annuity business, that as a consequence most
of the annuities had been purchased by rather than sold to annuit-
ants. This had resulted nn a definite selection against the companies
and had necessitated an increase in rates.
Up to this time, the annuity business was still comparatively negli-
gible in -amount and the life insurance company officials properly
noted that not much additional experience of a favorable nature was
needed to offset the unsatisfactory results of the past.
However, there were several warnings against uidue optimism with
respect to the future. The experience of the Sun Life of Canada was
cited. It had actively canvassed for annuity business in Great Britain
at low rates but showed a low mortality and significantly, according to
the Sun Life experience, the mortality on female annuitants had run
lower than that shown by the new American Annuitants' Table.
Then, too, there was the problem of anticipating what improvement
in mortality, especially at the older ages, might be expected in the
future. Following the publication of the American Annuitants' Table,
it served as the basis for new rates that were adopted. It is interesting
to observe that the interest rate observed in this connection was usually
4 percent, it being assumed that with new investments then returning
at least 5 percent, the entire consideration of a single premium imme-
^ The letters selected by the subcommittee were entered in the record as "Exhibit Nos.
2587 to 2604," and are included in the appendix on pp. 15634-15641.
15472 COXCKNTUATION OF ECONOMIC POWER
diate annuity being invested directly, that there would be a margin ol
excess interest to serve as a backlog against further unfavorable mor-
tality which might arise.
It was recognized that this was not a very satisfactory method, that
companies did not know definitely how much they had gained or lost
thereby in the past, and that it was essentially unsatisfactory in the
light of the revelation that the Sun Life experience on British female
annuitants showed even then significantly lower mortality than th.it
indicated by the new American Annuitants Table.
At this time, too, there began to be a growing awareness of the
liberality of the annuity option included in the settlement provisions of
life insurance policies then being issued and previously issued. The
usual option selected embodied a life annuity with a minimum number
of payments guaranteed, varying from 60 to 240 at the option of the
payee, and the choice could be exercised either by the insured in
advance or by the beneficiary at the time of the claim settlemenr.
Most of the companies were allowing this option in 1920 on the basis
of the American Experience Table derived from the experienoe on
insured lives and in addition gieatly overstating such mortality, alto-
gether an unsatisfactory basis.
Acting Chairman Pike. You mean the annuity options were based
on the American Experience Table?
Mr. Howe. Yes ; the American Experience Table.
Acting Chairman Pike. What is the date of that? I would like to
refresh my memory on it.
Mr. Howe. 1868, I believe it was.
And in addition, they were granting the same return whether the
payee were male or female, notwithstanding the fact that female
annuitants' mortality was substantially lighter than male mortality,
that most beneficiaries were females, and that these female beneficiar
ies could select against the company by exercising their choice at the
time the claim ' Kame payable.
It was true- tnat there was an offset on the side of conservatism
in the low interest rate of 3 or 3l^ percent which was usually as-
sumed, and in the .fact that because of the guarantee provision, the
effect of the annuity mortality would be deferred for an average of
10 years or more, thus reducing the force of selection against the
company.
Reported discussions of actuaries in 1924 reveal an increasing senti-
ment for -the revision of the annuity option provision. It was ad-
mitted that the option was chosen in only a negligible percentage
of policies, but the possibility of -future popularity was implied, and
the element of discrimination was cited, namely, that those who se-
lected the option were benefitting at the expense of those who did
not. Criticism was directed against the use of a low interest rate
to offset adverse mortality, confirmed 'by most individual company
experiences, and it was pointed out that improvement in annuity
mortality was continued, perhaps accentuated by medical advances,
increasea by self-selection and by freedom from anxiety on the part:
of annuitants. As the American Experience Table was being used
for the annuity settlement option, it was evident that the error
would be even greater since the deferred life annuity portion was at
the older ages, where the variation in the American Experience Table
from true annuity mortality is the greatest.
CONCENTRATION OF ECONOMIC POWER 15473
Ssntiment at this time apparently favored the adoption of a
modern annuity table, such as the American Annuitants, with a dis-
tinction between males and females and a moderate rate of interest,
in view of the uncertainty of the future, but reference was made to
the hesitation on the part of the companies because of the competitive
situation.
Acting Chairman Pike. That was done about 1924 — ^years later?
Mr. Howe. Yes.
Acting Chairman Pike. Of course, a lot of those contracts are still
running with options still open. L
Mr. Howe. Oh, yes. There was also somewhat of a reconsiaera-
tion in 1924 of the proper rate basis for life annuities that were
being sold. One Canadian company, the Sun Life, doing a sub-
stantial volume of annuity business, but mainly on British lives,
indicated that it found the business profitable, but only because of the
interest differential, and suggested caution in calculating earnings
for the future. The Northwestern Mutual stated that it had begun
the sale of annuities in 1894 and at the end of 25 years had had only
224 annuities in force.
The company had sustained only a small loss on this business, but
because of the bother attendant upon the small volume, and particu-
larly because of its fears as to ultimate annuity mortality, it had
discontinued the sale of immediate annuities. However, it expected
to resume the sale of these annuities, apparently for competitive
reasons.
The first group-annuity contract had been written in 1921. To-
gether with the private pension plans which had had an accelerated
growth from the end of the nineteenth century, the group-annuity
business gave promise of ultimately attaining sizeable proportions, but
already it was noted that none of the existing annuity tables, including
the modern American annuitants, properly reflected the experience
under retirement plans, which provided annuities taken out at younger
ages and, in general, with long-deferred periods.
The underwriting aspects of this branch of the annuity business are
also different in that the coverage is on a group basis with part of the
premiums contributed by the employer.
Acting Chairman Pike. And practically no selection?
Mr. Howe. Practically no selection.
By 1930 recognition of the peculiar characteristics of retirement
plans had manifested itself in the adoption of a new mortality table
known as a combined annuity table, which had been constructed em-
pirically by combining insured lives mortalities at the younger ages
with annuitants' mortality at the older ages. The American annui-
tants table had been derived from experience on American annuities
issued primarily to the older ages. It understated the mortality on
the younger ages substantially. But the sale of deferred annuities to
a significant degree — both through group contracts and on an indi-
vidual basis — was developing, and the need for a better mortality
guide resulted in the preparation of the combined annuity table. It
was necessary to construct it on an empirical basis, since there was no
real experience available.
The trend toward increased sale of deferred annuities was only one
manifestation of the general trend toward emphasis on security, which
15474 CONCENTRATION OF ECONOMIC POWER
if not altogether the result of the disillusioning experiences of the early
depression years, was given impetus by the depression.
There began a boom in the sale of annuities of all types, not only the
old standard form of single-premium, immediate annuity but also
annual and single-premium, deferred annuities and endowment insur-
ances combining substantial life coverage to a specified age and retire-
ment annuity thereafter.
Acting Chairman Pike. This was about the same time? These are
the sorts of things that bring large amounts of cash to companies.
They began to press on these forms of insurance about the time that
the investment business^ including foreclosures and drops in interest
rates, and so forth, having to keep liquid to meet surrender values and
borrowings, hit them?
Mr. Howe. That is right. The peak was in 1935, which is a year in
which some of these investment difficulties were manifest.
Acting Chiarman Pike. That suggests that at least during that
period tlie. sales tail was wagging the insurance dog in a way where
salesmen had got control of the sales influence and had been allowed to
take control ot the policy of the company, because the company as an
investment institution should not be trying to encourage the receipt of
large amounts of funds which it couldn't invest profitably. That
would be my off-hand interpretation of that.
Mr. Howe. That seems to be the fact.
Acting Chairman Pike. You have seen it in a great many large
businesses, where salesmen get control and hit for volume, and m
the long run, the company doesn't make as much money as they
did when they didn't let the sales boys take charge.
It seems perhaps indicated by new forms of policies that they
brought in a lot oi money that they didn't use.
Mr. Howe. They brought in a great deal of money which our pre-
vious testimony has shown they have had some difficulty in invest-
ing. '
Acting Chairman Pike. Yes.
Mr. Howe. In addition, a greater proportion of life-insurance
policies began to be written with a continuous monthly income benefit
which operated to guarantee the beneficiary a fixed income for life re-
gardless of her age at the time of the death of the insured, and selec-
tion of the life annuity options by either the insured or the bene-
ficiary showed a decided increase. One company, the Penn Mutual,
reported that in comparing 1931 with 1930, it found that single
premium retirement annuities had' increased 3 times and" annual
premium retirement annuities 10 times. The retirement annuity
had replaced the old-style deferred annuity and had proven much
more attractive, because it involves merely a sinking fund accumu-
lation of net premiums before deduction of loading during the de-
ferred period, with cash values and participation in dividends and
various forms of optional annuities offered at the retirement age,
whereas, the old defierred annuity had included none of these fea-
tures designed to attract investments and had been a much more
rigid contract.
As a consequence, another company, the Prudential, was able to
report that whereas from each thousand quotations given on the
old-style deferred annuity contract only one or two sales resulted,
CONCENTRATION OF ECONOMIC POWER 15475
in 1934 it was issuing 100 retirement annuities a week. With this
development came all sorts of complications. Companies were di-
vided in their opinions as to whether it was a healthy development
and should be encouraged or if, on the other hand, it would ulti-
mately prove disastrous and should be restrained. All seemed to
agree that it was a peculiar outgrowth of the depressed state of
the investment market, and that in effect, the retirement annuities
were being purchased to a considerable degree merely for the
purpose of providing a haven for idle money, and without any real
intention of ultimately procuring an annuity.
In other words, the retirement annuity was being used as a sav-
ings account. On the other hand, it was felt that it reflected at
least partially a real growth of a desire for old-age security. In
any event it was evident that the growth was coupled with a fear
of most other types of investment. Other aspects of the problem
added to the confusion. The companies were passing through a
period of strain occasioned by the unprecedented volume of cash
withdrawals and loans. The retirement and other annuities pro-
vided a ready source of liquid funds. i
But they paused when they considered how it might prove a
boomerang at a later date when, if higher interest rates and more
favorable investment opportunities returned, they might be faced
with heavy withdrawals of cash values under retirement annuities.
Acting Chairman Pike. Those annuity things contain, usually,
cash-surrender values?
Mr. Howe. Oh, yes; these retirement annuities contain, for the
most part, cash-surrender values.
Acting Chairman Pike. It is interesting to see how a person who
sees that he has no good outlet for an investment feels he has
solved his problem when he has shoved that thing off on somebody
else.
Mr. Howe. That is right.
Acting Chairman Pike. It is the same thing.
Mr. Howe. They were swayed, also, by agency considerations. The
depression had materially reduced the volume of new life insur-
ance, and they were concerned with the problem of somehow main-
taining the income of their agents so far as possible, hence the com-
panies that emphasized the sale of annuities had developed elab-
orate sales material and granted liberal production credits for annu-
ity business. Ultimately the agents became so annuity-conscious the
companies felt they were neglecting on that account the full pos-
sibilities of selling life insurance, and restraints of various sorts
were imposed. Tax advantages of the annuities were no longer
stressed, limitations were imposed on the amount of annuities issued
to one person, and as far as possible, the conversion of retirement
annuities to life-insurance policies was encouraged.
Acting Chairman Pike. I think they also got out of, say, single
premium annuities, or at least tried to.
Mr. Howe. They would reduce the amount which we would ac-
cept from an individual.
Acting Chairman Pike. I remember a year ago, an agent coming
to me and saying, "If you don't get under the wire you can't do it in
one premium, you will have to do it in five." I "didn't intend to
do it in either.
15476 CONCENTRATION OF ECONOMIC POWER
They were going to stop that.
Mr. Howe. 1 think that is right. They commenced to set max-
imums of the amount they would accept from any one individual.
While these restrictions acted somewhat as a brake on annuity sales,
the volume of new issues remained at a relatively high level. More-
over, there were two increasingly important actuarial aspects of the
annuity problem, one of which had always existed and the other of
which cropped up because of the new developments.
The interest calculation was reappraised in the light of decreasing
investment yields, mounting investment losses, and high rate of
refundings. There was some doubt of the wisdom of basing the
rate for a single premium immediate, annuity on the long-term inter-
est rate prevailing at the time of issuance, and there was a special
problem posed in a determination of the proper interest assumption
for the annual premium retirement annuity involving as it did the
investment of small sums over a long period of time, as in the
case of a life-insurance contract.
The result was the adoption of more conservative interest assump-
tions, the substitution of participating retirement annuities for non-
participating contracts which had been based on higher guaranteed
rates, and in a few instances the replacement of nonparticipating sin-
gle premium immediate annuities by similar contracts on a partici-
pating basis.
Acting Chairman Pike. Throwing some of the risk back on the
assured.
Mr. Howe. That is right, on the regular mutual life insurance
theory.
There was considerable reluctance to place immediate annuities
on a participating basis since it was felt that they would then be
less salable because the annuitant is interested in obtaining the largest
possible guaranteed return, but a few companies, including the two
largest in point of individual annuity business, the New York Life
and the Equitable of New York, adopted the participating forms.
The other important actuarial phase of the annuity problem was
again the matter of annuity mortality. Even before the onset of the
boom in annuity sales there had been a growing realization that the
earlier experiences were becoming somewhat out of date due to
progressive lightening of annuitants' mortality. During the 1920's
studies made l3y the individual companies had indicated a lighter
mortality than that indicated by the American Annuitants' Table,
the mortality baing more pronounce'd in the case of females. As a
consequence consideration was given to the matter of annuity re-
serves. A study of annuitants' mortality made in 1933 and repre-
senting an extension of an earlier study made in 1928 confirmed the
general feeling as to the improvement of both male and female
mortality.
Apparently, as a result of this study, rates were revised upward
through adoption generally of a 3-% percent interest rate and the use
of a modification in respect to the American Annuitants' Table where
male annuitants were rated 1 year younger than their true age. A
male annuitant age 35 under this method would pay a rate of age 34,
which, of course, would be higher. This in itself had the effect of
increasing rates about 71/2 to 8 percent. Female annuitants were
CONCENTRATION OF ECONOMIC POWER 15477
rated 5 years younger than the true age, 5 years being deemed the
measure of differential between male and female annuitants.
Acting Chairman Pike. Did they ask the girl how old she was and
subtract 5 years from that?
Mr. Howe. Evidently that was the procedure.
In the meantime studies of the experience under life-annuity opera-
tions of insurance policies had finally led to the general adoption of
a modern annuity table as a basis for the guaranteed return, with
lower returns in the case of female payees and further restrictions to
minimize the selection against the company on the part of bene-
ficiaries.
After the 1933 change in annuity rates, two additional changes were
made in 1935 and 1936. As interest rates continued to decline the
mortality showed up even less favorably. The American Annuitants'
Table continuedto be used but with further modifications and a lower
. rate of interest was assumed.
In 1937, a further investigation was made of the experience on
over 100,000 annuities. It revealed again the continuing trend to-
ward lower mortality, especially in the case of females. It was
found that the experience under immediate annuities involving a
guaranty (refund or cash refund) in the event of early death — a
form which had sprung up comparatively recently and had enjoyed a
rapidly increasing popularity, probably because of its greater invest-
ment appeal — was more favorable than under the immediate annui-
ties without refund.
In 1938 a new annuity table made its appearance. It will be seen
that this is just a series of one table after another.
Acting Chairman Pike. They take a lot of bites at this cherry.
Mr. Howe. This was the 1937 Standard Annuity Table which had
been constructed empirically by merging the experience on certain
group life policies at younger ages with a modified American Annui-
tants' Table at the older ages.
As finally adopted generally by the large companies, it was further
modified by rating males 1 year' and females 6 years. That is, a 5-
year differential was assumed to reflect the difference in annuity
mortality between males and females. The new table was adopted
by most large companies as the mortality basis for all types of
annuities, annual premium or single premium, immediate or deferred,
with refund or without refund, group or individual.
It was also adopted with some modification as the basis for life
annuity operations on life insurance contracts. An interest rate
not exceeding 3 percent was generally assumed.
Despite the many limitations and rate increases imposed on annuity
business from 1933 to 1938 the volume remained substantial. Per-
haps, as was suggested, the changes in rate always lag somewhat
behind the change in the investment market, so that annuities were
always relatively attractive. Today the rates charged by most of
the large companies on single premium immediate annuities without
refund are 25 to 29 percent higher on males, 31 to 33 percent higher
on females, -in comparison with the 1929 rates charged by most of
the companies.
It is interesting to observe also that the current rates compared
with those charged in 1814 by an early American corporation, The
15478 CONCENTRATION OF ECONOMIC POWER
Pennsylvania Co. for Insurances on Lives and Granting Annuities,
reveals an increase based on respective ages from 55 to 71 percent in
the case of males and from 77 to 116 percent in the case of females.
As the sale of annuities has become general the hope of actuaries
that selection against the companies would thereby diminish has not
been definitely realized, but on\y the future can reveal the ultimate
eflfect of this growth as well as the ultimate level of annuity mortality.
Acting Chairman Pike. Is it a fair question to ask if from the re-
sult of your studies the future looks very bright, or would you rather
not express an opinion on that point?
Mr. Howe. It depends, of course, largely on the trend of interest
rates, but it doesn't look so very bright to me.
Acting Chairman Pike. Let's leave the matter of interest rates out.
There seems to be room for plenty of opinions there. The trend of
mortality is continuous and unmistakable as far as we have any
record.
Mr. Howe. That is right.
Acting Chairman Pike. You would think that in trying to adjust
year by year, some bright fellow in the actuarial business instead of
taking those figures would have done a little projecting as they used
to do in the stock market, discounting.
Mr. Howe. I don't know what the process is. At any rate, they
apparently felt it necessary to increase their assumption.
Acting Chairman Pike. This business of taking a revision five times
a decade looks as though they hated to interfere with the sales de-
partment in selling what was a very fine article of goods apparently,
they hated to have themselves brought up to realities which they must
have felt were there all the time^
Mr. Howe. Of course, I don't know what the actuarial process was.
Mr. GESELii. You undoubtedly recall testimony on this subject in
which we traced the intercompany agreements held to bring about
these rate increases, and the desire for noncompetitive rates and uni-
form rates seems to have been, from that testimony, one of the domi-
nant considerations.
Acting Chairman Pike. But it is such a serious thing here; the
amounts are large, they took a terrific beating in disability, the moral
hazard came in, much to their surprise and disgust, plus. the legal
thing, but here is a purely physical trend. I assume these companies,
like doctors, have available to them all the statistics of longevity
that they have been making profit of in the life insurance side for
a good many years. It seems almost incredible that in such a short
period they would have to change their minds five or' six or seven
times in the same direction, which seems to reflect a pretty obvious
trend. I don't mean to do injustice to the openness of their minds,
but it is evident that their minds w^ere not very open to what seemed
a very clear thing.
Mr. Howe. There were always certain actuaries in the business
who were concerned about the trend in annuity mortality. That
"shows clearly in the record.
By looking at the tables we see that as of December 31, 1938, as
shown in table 53, there were outstanding annuities providing for
annual payments to annuitants of $431,619,850.^ The amounts shown
1 See Hearings, Part 10-A, p. 63.
CONCENTRATION OP ECONOMIC POWER 15479
included $103,000,000 per year, now payable under contracts fully
paid for by annuitants, $54,000,000 per year payable after future dates
under deferred annuity contracts fully paid for by annuitants, and
$274,000,000 per year payable after future dates under deferred
annuity contracts which have not been fully paid for by annuitants.
Of the individual annuities in force December 31, 1938, 36.5 percent
had been issued by the Equitable of New York, 11.5 percent by the
New York Life, 5.04 percent by the Mutual of New York, 4.75 percent
by the Prudential, and 4.74 percent by the Travelers. Other com-
panies accounting for more than 4 percent of the total amount of
annuities in force were the Penn Mutual and the Massachusetts
Mutual.
It is worthy of note that in the year3 1934, 1935, and 1936, first-
year premium income on individual annuities exceeded first-year
premium income on ordinary insurance for the 26 companies as a
.whole.
Mr. Gesell. That means they took in more money on annuities than
selling ordinary insurance in those years ?
Mr. Howe. Yes.
Acting Chairman Pike. That is where it differs from your state-
ment a little while ago, which was 15 percent.
Mr. Howe. That is right. In 1934 the first -year premium income
from ordinary insurance was $227,000,000; individual annuities, $288,-
000,000. In 1935, ordinary insurance first-year premium income was
$286,000,000; individual annuities, $323,000,000. In 1936, ordinary
insurance, $243,000,000; individual annuities, $250,000,000.
Mr. Gesell. I think we might request that there be inserted in the
record at this point the exact figure for those years according to the
schedule that we have in front of us.^
Mr. Kades. Mr. Howe, how do you classify the so-called retirement
policies, as ordinary insurance or annuities?
Mr. Howe. The word "retirement" has two meanings in this con-
nection. There was one type of policy which is referred to as the re-
tirement income policy. The other is the retirement annuity. Retire-
ment income policy starts off to be insurance, and it is e^entially an
endowment contract. Then as the reserve increases, it forms a transi-
tion and becomes a deferred annuity for awhile.
Acting Chairman Pike. But you do carry full protection in in-
surance?
Mr. Howe. Carry full protection in the early period. A retire-
ment annuity, however, is simply, a deferred annuity contract which
pays the annuitant an income for life after a stipulated retirement
Mr. Pike. He will get nothing if he dies in the meantime ?
See the following table:
-
Ordinary
Insurance
Individual
Annuities
1934 . -
$227, 636, 000
286, 400, 000
243, 177, 000
247,481,000
224, 646, 000
$288, 218, 000
1935..
323, 920, 000
1936
250, 986, 000
1937 - '
182, 506, 000
1938
173, 327, 000
15480 CONCENTRATION OF EC( WOMIC POWER
Mr. Howe. Nothing, except the beneficiary frequently gets the pre-
miums back, or something like that.
Mr. Kades. The* latter type you would classify as annuity and
the former type as ordinary insurance?
Mr. Howe. That is right.
Now we might speak of group annuities for a moment. The
Metropolitan alone has 56.8 percent of the $102,000,000 annual income
group annuities in force December 31, 1936; Prudential holds 24.29
percent; and these two companies, together with Equitable, hold
92.86 percent of the group annuity business.
Acting Chairman Pike. There is a question I would like to ask.
This number runs well over a half million in 1938; does that mean the
number of group policies, or more probably the number of people
protected in the group ?
Mr. Howe. That is another one of the unusual features of the
convention blank. In referring to group life-insurance contracts the
number which is given is the number of contracts, master contracts,
with the companies. When they come over to group annuities they
give you that number of master contracts, but they also give you the
number of certificates, which involves tne number of individuals.
The number given here is the number of individuals.
Mr. Gesell. What table are you referring to f
Acting Chairman Pike. That is table 60.^
Mr. Howe. The table is table 60.
Acting Chairman Pike. I am interested in that and wonder if you
happen to know whether most of those group annuities are the out-
come of what had previously been company pension plans, or do
you know?
Mr. Howe. I don't know what the origin was, whether that has
been the sales technique that has been used or not. I do know, of
course, that in certain cases retirement plans initiated by industrial
companies and carried by them have now been turned over to life-
insurance companies.
Acting Chairman Pike. You remember some years ago several of
the old Standard Oil former subsidiaries of the pipe line were all
ready to go out of business; they had pretty substantial book sur-
pluses and no more use for their fixed property — they thought, at the
time; they have changed their minds since — but they hadn't put on
their books the actuarial liability from their pension plans and in
some cases when they tried to reinsure the pension plans they found
that surplus looked quite different, and I think in one or two cases
couldn't do it. Luckily, I believe, most of them kept 6n going and
now they are getting some business from the Illinois fields; but I
wondered if you happened to know how typical that sort of thing is?
Mr. Howe. The three major companies' aggregate amount of group
annuity business in force has increased 86 percent from December 31,
1934, to December 31, 1938.
The group annuity business has contributed a gain in surplus in
the case of the Metropolitan, Prudential, and John Hancock, the three
great industrial companies, but has not in general proved profitable
to other companies in the field.
' See Hearings, Part 10-A., p. 60.
CONCENTRATION OF ECONOMIC POWER 15481
A substantial portion of the annuity business written hj mutual
life insurance companies is written on the nonparticipatmg plan.
With respect to this business, life insurance and other policyholders
of mutual companies have a proprietary interest in the success of
the annuity operations. To the extent that such nonparticipating
annuity business produces a profit, other policyholders will be bene-
fited in the form of reduced costs. To the extent that this nonparti-
cipating annuity business may prove to result in losses, such losses
must be borne in the case of mutual companies by the remaining
body of policyholders. Thus, the annuity business and especially the
nonparticipating annuity business takes on a unique importance to
life insurance policyholders.
In view of these facts, it is appropriate to consider annuity reserves.
The report of the Committee to Study the Need for a New Mortality
Table and Related Topics, which is dated June 21, 1939, and was
prepared for the National Association of Insurance Commissioners,
makes the following statement with respect to reserves on annuities
on page 121 thereof [reading] :
The Committee is not convinced that the adoption of any particular annuity
mortality table would establish a safe annuity reserve basis for any fixed
period in the future. The laws of most States actually permit the commis-
sioner to value annuities on tables based on life insurance experience and
which are not only obsolete but unsafe for annuity calculations. The recom-
mendation of the Committee, therefore, is twofold. First, the Model Bill pro-
posed specifies a minimum table and rate of interest for annuity valuation.
The Combined Annuity table of mortality is specified therein as a level below
which reserves must not fall. While this is recommended for adoption it is not
regarded as adequate except in special circumstances but no higher standard
is set because this is now the current requirement and the committee has made
no studies on annuities.
Acting Chairman Pike. In other words, they are looking after
more bites, in this same cherry?
Mr. Hovi^. That is the way I understand .this; yes. [Continuing:]
Second, the Committee recommends that each commissioner require, vnider
the authority of the provisions of the proposed bill, increasingly stringent
valuation bases to be specified in annuity contracts in conformity with improv-
ing annuity mortality experience as developed from time to time. At present,
except in special circumstances, this should be the 1937 Standard Annuity
Table hereinbefore mentioned.
Table 274 of "Exhibit No. 2250" shows annuity reserves for the
26 companies as they were carried in their annual statements on Decem-
ber 31, 1938, and also shows the amount by which annuity reserves
were increased due to change in basis of calculation from 1929 to
1938, inclusive, as well as contingency reserves set up in connection
with annuity contracts as shown by annual statements of December 31,
1938.
Compared with the total annuity reserves is a figure for estimated
reserve which, according to figures supplied by companies answering
the supplemental investment questionnaire, would result for annuity
contracts in force on December 31, 1938, if all of each company's an-
nuity contracts involving life contingencies (including original and
supplementary annuity benefits but excluding disability contracts)
were revalued on the basis of mortality, interest, and other assumptions
under which each company is now issuing annuity contracts.
15482 CONCENTRATION OF ECONOMIC POWER
Acting Chairman Pike. Here the Metropolitan and Equitable did
not answer?
Mr. HovvE. That is correct.
Mr. Kades. Is there any reason for that; special reason?
Mr. Howe. They sai.d they didn't think the information was
significant.
Mr. Kades. Do vou think it is significant?
Mr. Howe. I think so ; yes.
Mr. Kades. That is why the question was asked, I suppose.
Mr. Howe. That is right.
The total annuity reserves of the 22 companies replying to this ques-
tion as shown by table 274 were $1,619,000,000, and the amount of esti-
mated reserves under the assumptions referred to are shown as $1,800,-
000,000.^ This difference of $181,000,000 is the increase which would
result from such a method of valuation in the reserves of the companies
which had 55.8 percent of the annuity business in force December 31,
1938. Although it seems clear that in the cases of some companies
increases in annuity reser^'es appear to be desirable, the assumption is
not justified that an increase in reserves of the magnitude shown in
the table is necessary.
Mr. Henderson. What you mean is that somewhere between no in-
crease and $181,000,000 is probably necessary as the increase to get
the reserves on the existing basis of selling annuity contracts ?
Mr. Hov e. That is right.
Mr. Ge? XL. Of course it would be more than $181,000,000, would it
not, if we had the full information as to annuities, particularly since
the Equitable is very prominent in that field and sells a type of annuity
which I understand is most in need of this type of reserve heind it ?
Mr. Howe. Yes ; it would seem the figure would be substantially in-
creased if the Equitable had elected to answer the question.
Acting Chairman Pike. They are by far the biggest annuity
company ?
Mr. Howe. Yes ; by far.
In furnishing these estimates, certain companies have stated that
in their opinion reserves as high as those required on the basis used
for valuing annuity contracts currently being sold are unnecessary
for all annuity contracts in force. The reasons outlined for this
opinion are that funds derived from the sale of annuities in the past
have been invested at rates not now obtainable and that, therefore,
the interest assumptions employed in computing reserves on the cur-
rent basis are lower than those which are, necessary for former as-
sumptions. This reason seems to be subject to the qualification, as
has previously been shown, that large amounts of funds invested m
former years are not now earning interest at the original rates by
reason of the large amount of refunding which has taken place in
recent years.
Of the annuity contracts involving $431,000,000 annual income
payable to annuitants which were outstanding in the 26 companies
on December 31, 1938, over 63 percent were annual premium deferred
annuities. With respect to these annuities it has been pointed out
that it is possible that ia considerable portion Aiay be surrendered, in
» See Hearings, Tart 10-A, pp. 274.
CONCENTRATION OF ECONOMIC POWER 15483
which case the companies will not be obliged to fulfill their contracts
when the retirement age occurs. Furthermore, it is stated that it is
not necessary to set up reserves on all outstanding annuity contracts
on the basis of the 1937 Standard Annuity Table (modified) for the
reason that this table was comp)iled from experience on newly selected
lives and hence includes practically no impaired lives. There is, of
course, some validity to these hypotheses.
It should be stated, however, that in the field of annual premium
deferred annuities, it would seem that a special necessity for increas-
ing annuity reserves occurs for the reason that payments are currently
bemg accepted on contracts written in former years on the basis of
premiums less than those charged for business currently being
written.
Acting Chairman Pike. That means they assume considerably
higher interest returns on the premiums invested?
Mr. Howe. That is right.
Acting Chairman Pike. And, of course, high mortality, too?
Mr. Howe. That is right.
Acting Chairman Pike. In those cases they both work against the
company, whereas in insurance one offsets the other to a great extent.
Mr. Howe. That is right, that is the fundamental difference be-
tween the annuity business and the life-insurance business from the
life-insurance company's point of view. In annuities the decline in
the interest rate and the decline in annuity mortality both work to
increase the cost, whereas in life insurance, the decline in mortality
tends to decrease the cost and the decline in the interest rates tends
to increase it, so there is an offsetting factor in life insurance and not
an offsetting factor in annuities.
Acting Chairman Pike. They add together, rather than subtract-
ing from each other?
Mr. Ho\<^e. That is right.
In connection with the discussions of annuity contracts, it may also
be germane to point out that many life-insurance policies contain
modes of settlement which give to the assured or the beneficiary the
right to elect or accept annuity payments in lieu of cash or other
method of settlement. As these modes of settlement have in many
cases been drawn on a basis more favorable to the annuitant than
are now obtainable from the company, it seems reasonable to inquire
whether or not these annuity options do not constitute a contingent
liability of which some recognition should be given in the balance
sheet.
Acting Chairman Pike. Those things won't come up until the
maturity of the life-insurailce policy in which they are incorporated-,
so it may be many years?
Mr. Howe. That is right, they won't appear in thp balance sheet
until the option is. exercised and the annuity goes on the books as
the result of receipt of the proceeds of the life-insurance policy.
Acting Chairman Pike. Of course, they will get some benefit from
mortality until the deadline, and then they will begin to be hurt.
Mr. Howe. That is right.
Mr. Gesell. Mr. Howe," since the Equitable failed to give this
information, I thought perhaps you might wish to refer to that
Convention Form annual statement that I hand you and give the
^5484 CONCENTRATION OP ECONOMIC POWER
committee some idea of just how their annuities are carried in the
various tables used in evaluating the annuity reserve.
Mr. Howe. There are several mortality tables and interest assump-
tions chronicled here involving total annuity reserves in the amount
of $1,840,636,604. An analysis of the reserves as given in the 1938
annual statement is like this : ^ American Experience Table a^ 31/2
percent — now, we remember the American Experience Table is a life-
insurance tabic — $649,873; American Experience Table at 3 percent,
$24,742,389; McClintock's Table at 31/2 percent, $54,330,697; Mc-
Clintock's Table at 3 percent, $2,036,117; the Combined Annuity
Table at 31/2 percent, $63,579,148.
Mr. Gesell. Those are all very old tables in the lighp of present
experience, are they not?
Mr. Howe. Yes; they are all tables not being currently used and
as we read down we are getting further and further toward the newer
tables.
The next classification is Combined Annuity Table at 3i/4 percent,
$14,482,607 ; the Combined Annuity Table (first modification) at 31/2
percent, $56,810,962; Combined Annuity Table (second modification)
at 314 percent, $13,613,806; Combined Annuity Table (second modi-,
fication) at 3 percent, $109,365,461; American Annuitants' Select
Table at 31/2 percent, $240,445,802 ; American Annuitants' Select Ta-
ble at 3 percent, $67,225,397; American Annuitants' Select Table
(first modification) at 3 percent, $269,241; 1937 Standard Annuity
Table at 31/2 percent, $10,928,971 ; 1937 Standard Annuity Table at 3
percent, $27"883; 1937 Standard Annuity Table (second modification)
at 3 percent, $823,360.
Mr. Gesell. On what table have they the greatest amount of their
annuities valued?
Mr. Howe. The American Annuitants' Select Table at 3^2 percent,
which is $240,000,000.
Mr. Gesell. I interrupted your statement. Will you proceed? I
believe it is true, is it not, that no case has come tp your attention in
which reserves for annuity settlements have been established ?
Mr. Howe. That is correct.
It has been pointed out that the improvement in mortality which
has been experienced in recent years has increased the factors of
safety which are inherent in life-insurance contracts. In fact, in
these contracts the gains from mortality, loading, and surrenders are
such that even though the interest rate declines to the point where
a gain from interest no longer appears in the gain and lose exhibit-
the companies will nevertheless be able to offset their losses in interest
with gains from mortality and other sources. In the case of annui-
ties, however, this same improvement in the mortality is an expense
rather than a saving to the companies, and the decline of interest rates
and the improvement in mortality instead of offsetting each other as
they do in life-insurance contracts are working together to increase
the cost of providing annuity protection on the part of the com-"
panies. This situation, of course, has been recognized and has re-
sulted in several increases in annuity premium rates in recent years.
The fact' that these increases have been necessary, however, empha-
1 From annual statement for the year 1938 of the Equitable Life Assurance Society
of the United States, p. 5.
CONCENTRATION OF ECONOMIC POWER 15485
sizes the fact that the companies now find themselves to an important
extent in the position of guarantors of interest rates as well as
insurers ag^ainst life contingencies.
Acting Chairman Pike. With the loss, if any, to be assessed against
the-
Mr. Howe (interposing). Life-insurance policyholders.
Acting Chairman Pike. Yes.
Mr. Howe. In general.
Mr. Henderson. When you speak of the increase in rates, you mean
an increase in the new business rates?
Mr. Howe. That is right. The rates on the contracts in force, of
course, remain at the original contract rate.
This situation maj^ ultimately call for a revision of the present
policy of issuing annuity contracts with guaranteed rates of interest
and the substitution therefor of interest factors actually earned from
year to year.
One further factor regarding the guaranty of fixed rates of interest
may appropriately be considered. This is the practice of contracting
to pay fixed rates of interest on supplementary contracts not involv-
ing life contingencies. These are contracts under which life-insur-
ance companies undertake to pay beneficiaries the proceeds of their
life-insurance policies in installments with interest over a fixed
period of years. Although such optional modes of settlement
whereby beneficiaries could leave funds with life-insurance companies
were introduced at the close of the last century, little use was made
of them until the twenties. Since 1929 such deposits have increased
from $241,000,000 to $1,182,000,000, or 390 percent, in the case of the
26 companies under discussion.
Mr. Henderson. That represents the extent to which they have
become investment trusts, does it not ?
Mr. Howe. With respect to these supplementary contracts, that is
right, and, of course, a f^iature of them is that he is guaranteed the
interest rate, but the holder of the supplementary contract in most
cases, if he likes, may withdraw the funds. In other words, if inter-
est rates go up, the beneficiaries may have a tendency to withdraw
the funds. If interest rates go down they leave the money with the
companies, as they may.
Mr. Henderson. It is in the nature, in part, of a senior security
of an investment trust.
Mr. Howe. Except that in a senior security of an investment trust
you don't have the right to check out the money.
Mr. Henderson. If you check out, you get the value of the fund at
that particular date.
Mr. Howe. The senior investment in an investment trust, a bond or
something, you sell and get what you can for it, but here is a firm
contractual right. You can draAv this money out and terminate the
contract or leave it in and draw the interest.
Acting Chairman Pike. There is a long-term option to get out or
stay in, as you please, under conditions which nobody can foresee?
Mr, Howe. That is right.
Mr. Gesell. It is a little as though savings banks were to guarantee
an interest rate on deposits.
Mr. Howe. That is right, for long periods of years.
124491 — 41 — pt. 28 51
15486 CONCENTRATION OF ECONOMIC POWER
Although in many cases this is unquestionably a socially desirable
method of payment of life insurance claims, the question as to
whether financial institutions should guarantee a fixed return on such
funds for periods up to 59 years is a genuine one in view of the low
prevailing level of interest earnings. It is doubtful, for example,
whether any trust company would undertake to pay 3 or 3i/^ percent
on such funds.
It is obvious from the foregoing that the question of life insurance
reserves is one which should be given careful consideration by life
insurance companies. Many companies have made increases in their
policy reserves due to changes in bases in recent years. We have
shown that during the period of the last 10 years, reserve increases
due to change in basis have totaled $242,000,000. Great disparity,
however, exists between different companies regarding the degree to
which such reserves have been strengthened. The New York Life
Insurance Co., for instance, has increased its policy reserves on indi-
vidual annuities by the amount of $13,400,000 sirice ,1935. The
Equitable, however, with over three times as much individual annuity
business in force, has increased its reserves $3,911,000 in the period
since 1931. Other examples of important differences in reserve prac-
tice with respect to almost every line of business could be given.
The responsibility of the actuary of the legal reserve companies in
determining the "amounts, if any, by which reserves should be in-
creased is a very important one and it is to be hoped that the desire
to pay liberal dividends to policyholders or stockholders will not deter
the strengthening of reserves in cases in which the actuary's intimate
knowledge of the facts indicates that such is the conservative course.
Mr. Gesell. Now, if the committee has no questions, that com-
pletes the presentation at this time.
Acting Chairman Pike. Are there any questions from any mem-
bers of the committee?
Mr. Henderson. I wanted to get in the record, Mr. Chairman, these
totals of what Mr. Howe was reading this morning of the allocations
for contingency reserve by the Prudential for several years to pro-
vide for a contingency depreciation in asset valuation. How many
years were they?
Mr. Howe. The years 1931 to 1936, inclusive— 6 years.
Mr. Henderson. For 6 years the total was about $160,800,000, and
from the ordinary the allocation was $13,733,000, and from the indus-
trial $147,070,000.
One other observation: I don't believe we were quite clear, Mr.
Howe, this morning when we were discussing the accounting and the
auditing which is done by the States. The impression may have been
created, which I am sure you didn't want to create, and I certainly
would not want to allow to remain, that the audit performed by most
of the State insurance commissions of which we have knowledge is
perfunctory. It takes, in some cases, 3, 4, 5, and 6 months, does it
not?
Mr. Howe. In some cases it takes over a year.
Mr. Henderson. It takes over a year to make one of these triennial
audits, and at the end of that time undoubtedly the insurance depart-
ment with a competent staff has arrived at a pretty accurate knowl-
CONCENTRATION OF ECONOMIC POWER 15487
edge of the insurance company and where its assets are overvalued or
undervalued or properly valued, isn't that correct ?
Mr. Howe. I want to answer the question affirmatively, Mr. Com-
missioner, that many of these estate examinations are very detailed
and appear to be excellent jobs. With respect to the question of valu-
ation which you mention, however, the standards of valuation which
may be adopted are rather flexible with respect especially to certain
types of assets. -Take, for instance, the question of real-estate mort-
gages and real estate. On December 31, 1938, in these 26 companies,
there were about $6,400,000,OjOO of real-estate mortgages and real
estate.
Mr. Henderson. That is about one-quarter of their total assets.
Mr. Howe. As shown on the books ; yes. There is virtually no rule
for the valuation of that section of the portfolio. Mortgages are
ordinarily carried at their face amount, as I have pointed out, irre-
spective of the security under them or whether or not they are de-
linquent, and with respect to real estate, no firm rules of valuation
are set down, so that these valuations may vary in important degrees.
It is only fair to say that the National Association of -Insurance
Commissioners has a committee on real-estate valuations which has
done some things in certain real-estate valuations — spot checks have
been made in the State of New York, and things of that kind, but
there are no real standards with respect to valuation.
Mr. Henderson. I think that was brought out by the correspond-
ence you and Mr. Gesell sent to me the other day, in which two State
commissioners had issued a valuation on a sizable real-estate holding,
and it varies — how much was it, Mr. Gesell, 40 or 50 percent, was it not ?
Mr. Gesell. Substantially that, I believe ; yes.
Mr. Henderson. There are no real standards of valuation. You
don't get it, you can't get it, of course, as you do on bonds. You
haven't got markets for them.
Mr. Howe. That is right; it is a more difficult thing to value than
bonds are in most cases.
Mr. Henderson. Perhaps I should have included, then, this matter
on valuations, but a real insurance staff, however, examining the com-
pany for that length of time, would get to know the comp^-ny's opera-
tions pretty well ?
Mr. HowB. Yes; there are very few cases where an audit by inde-
pendent auditing firms will last for a year or more continuously with-
out interruption.
Mr. Henderson. I just wanted to get that clear.
Mr. Howe. There is one thing, Commissioner Henderson, that I want
to say about these contingency reserves in order that there may be no
misapprehension with regard to the totaling of these figures. The
figures for contingency reserves which I gave are the balance-sheet
figures as of December 31, so that the earnings will be affected only
to the extent of the increase or decrease in these reserves from year
to year. So it isn't fair to add up the total balance-sheet figures and
assume that the effect on earnings has been the total of the balance-
sheet figures for all these years; but the effect on the earnings has only
been the difference between the reserve at the beginning of the period
and the reserve at the end of the period. •
15488 CONCENTRATION OF ECONOMIC POWER
Mr. Henderson. That is right.
Mr. Hayes. Those are not accumulations?
Mr. Howe. That is rifjht. In other words, I don't xvant to leave the
impression these are increases or decreases in reserves.
Mi-. H.AYES. So I understood the testimony this morning, they were
not accumulations?
Mr. H(nvE. That is right. I wanted to be sure in adding up these
figures we didn't ohtain the other impression.
Acting Chairman Pike. If there is nothing more, I expect we had
better adjourn.
Mr. Henderson. You say that with seeming reluctance.
Acting Chairman Pike. Yes. I am very sorry. I think Mr. Howe
and Mr. Gesell have been commended enough.
The committee will adjourn to the call of the Chair.
(Whereupon, at 3 : 40 p. m., an adjournment was taken subject to the
call of the chairman.)
APPENDIX
"Exhibit No. 2250", introduced on p. 14702, was printed separately ay
Hearings, Part 10-A.
"Exhibit No. 2251" appears in text on p. 14703
[Statistical data on whicli this chart is based are included in Hearings, Part 10-A]
"Exhibit No. 2252" appears in text on p. 1470G
[Statistical data on which this chart is based are included in Hearings, Part lO-.A.]
"Exhibit No. 22.").'i" appear.s in text on p. 1470.S
15489
15490
CONCENTRATION OF ECONOMIC POWER
;3
5 g 05
as3
CO ^OS
CCCDN
iSS
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00 CD
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28g
<Oeo ^
»c o o
CO OS CO
l-H t- <0
rCoo oT
oTwc
1 Cff C8
1 o «>
a-o- a.'
— >>(0 -^
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s ^
la's •
'~ 2 3 = S O
o o
CONCENTRATION OF ECONOMIC POWER
15491
- H« II O
CO t-- »o CO <-H II o
So
S?5
CO ^
CO W
00 00 00
5 O 00
b c S
;-5--j « ^
.2Q<!
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15492 CONCENTRATION OF ECONOMIC POWER
"Exhibit No. 2255" appears in text on p. 14709
Exhibit No. 2256
iriiiirt based on following statistical data, "Exhibit No. 2255," appears in text on p. ]
[Prepared by the Securities and Exchange Commission Ini^urance Study Staff]
Neio Paid-for Life Insutance — Exclusive of Revivals, Increases, Dividend Addi-
tions and Accepted Reinsurance — ^y U. S. Companies {These companies had
82 per cent of the total business outstanding in all U. S. lec/al reserve com-
panies on December SI, 1938)
Period
Ordinary
Industrial
Group
Total
1913
$1, 651, 162, 000
1, 616, 833, 000
1,721,. 546, 000
2, 127, 07.5, 000
2,466, 121,000
2, ,571, .508, 000
4, 483, 75&, 000
5,417,908,000
4, 462. 9:ffl, (XK)
4, 91.S, 464,000
5, 879, 4.57, 000
6, 256, 029, 000
7,253,168,000
7, 607. 645, 000
7, 677, 963, 000
8. 083, 910. 000
8,684,131,000
8, 396, 968, 000
7,409,81.5,000
5, 931, 327, 000
5, 085, 757, 000
5, 528, 884, 000
5. 580, 960, 000
5, 371, 239, 000
5, 591, 842, 000
4, 867, 428, 000
5, 015, 701, 000
$622, 909, 000
662, 600, 000
697, 532, 000
703, 743, 000
737,810,000
793, 187, 000
934, 807, 000
1,116, .522, 000
1,2.57.759,000
1,418,801,000
$20, 828, 000
4.5. 474, 000
47,122,000
78, 720, 000
178, 336, 000
246, 656, 000
425, 574, 000
425, 737, 000
111.083,000
276. 42H. 000
$2, 294, 899, 000
1914 . -
2, 324, 907, 000
1915 --
2. 466, 200, 000
1916 --
2, 909, 538, 000
1917 -
3, 382, 267, 000
1918
3,611,351,000
1919
5, 844, 140, 000
1920
6,960 167,000
1921
.5,831,781,000
1922
6, 608. 693, 000
1923
1, 720, 054, 000 520. 045. 000
8 119 ,556 000
1924
1,963, ,554,00(1
2,359,174,000
2, 566, 0.59, 000
2,667,331,000
2, 692, 520, 000
2, 898, 157, 000
2,851,129,000
2, 797, 163, 000
2, 477, 268, 000
2. 320, 874, 000
2, 527, 227, 000
2, 521, 284, 000
2, 695, 602, 000
2, 640, 144, 000
2, 176, 620. 000
1, 484, 095, 000
597, 765, 000
998, 784, 000
1,050,605,000
824, 373, 000
1, 336, 329, 000
1, 185, 364, 000
1,092,165,000
796, 164, 000
627, 140, 000
357, 206, 000
497, 037, 000
665, 142, 000
584, 795, 000
760, 932, 000
476,451,000
803,101,000
8,818,348 000
1925
10,611,126,000
1926
11.284,309,000
1927
11,169,667,000
1928.. . . ..
12, 112,759,000
1929
12. 767, 652, 000
1930
12,340,262,000
11,003,142,000
1931
1932 . .
9, 035, 735, 000
1933
7, 763. 837, 000
1934....
8, 553, 14s, 000
1935 .
8, 767, 386. 000
1936
8, 651, 636, 000
1937
1938
8,992,918,000
7, 520, 499, 000
1939
7, 302, 897, 000
Source: The Association of Life Insurance Presidents.
"KxniiuT No. 2257" appears in text on p. 14714
CONCENTRATION OF ECONOMIC POWER 15493
Exhibit No. 2258
[Chart based on following statistical data, "Exhibit No. 2257," appears in test on p. 14714]
[Prepared by the Securities and Exchange Commission Insurance Study Staff]
Total Income and Disbursements of Tioenty-five Leading Legal Reserve Life
Insurance Companies, 1929-1938
Percentage
of Total
Income:
Premium Income. -.
Investment Income-
All Other Income. --
Total Income -
Disbursements:
Dividends to Policyholders
Death Claims
Disability Claims
Matured Endowments
Annuities
Other Payments to Pol icy holders .
Surrender Values Paid
Commissions to Agents _
Other Agency Compensation
Other Operating Expenses..
Investment Expenses
All Other Disbursements.
Total Disbursements,
$31,384,356,000
8, 473, 264, 000
2, 822, 263, 000
73. ,14
19.85
6.61
42, 679, 883, 000
100.00
4, 576, 819, 000
1 !. 26
7, 784, 283, 000
24.25
935, 299, 000
2 91
1,204,919,000
3.75
573,009,000
1.79
762, 572, 000
2,38
7, 384, 823, 000
23.01
2. 662, 513, 000
8.30
890, 338, 000
2.77
2,146,162,000
6.69
1, 162, 302, 000
3.62
2,011,862,000
6.27
32, 094, 901, 000
From: Exhibit of the Cnanges in Surplus: Companies Annual Statements.
Exhibit No. 2259
[Prepared by the Securities and Exchange Commission Insurance Study Staff]
Long-Term Investments of 26 Life Insiironre Companies in Relation to Lonq-
Term Debts in the United States, 1930, 1934, 1931
1930
(Millions)
1934
(Millions)
1937
(Millions)
Holdings of 26 Life Ins. Cos. (Admitted Asset V^lue):
Public Debt:
$297
516
$1,699
940
$4,264
State and Local
1 283
Total Public...
813
2,639
5,547
Private Debt:
2,432
276
1.476
1,749
4,718
2,360
352
1,674
1,075
3,956
2,276
908
Industrial ..
Public Utility.
2 532
Farm Mortgage
746
3,698
Total Private
10, 051
9,417
10, 160
Grand Total Held by 26 Ins. Cos
11,464
12, 056
15, 707
Estimated Total Long-Term Debts (Par Value):
Federal
14, 454
17, 437
27, 944
18, 823
36,715
State and Local
19, 152
Total Public
31,891
46, 767
55, 867
Railway
13, 400
10, 800
14. 000
9,100
37, 200
13,413
8,800
13, 597
7,645
30, 845
13, 109
Industrial .._.
7 762
Public Utility
13, 874
Farm Mortgage. - -.. .
7,082
Urban Mortgage ..
28 508
Total Private .
84, 500
74, 300
70 3?:
Grand Total Long-Term Debt
116,391
121,067
126 202
15494
CONCENTRATION OF ECONOMIC POWER
Long-Term Investments of 26 lAfe Insurance Compa/nies in Relation to Long-
Term Debts in the United States, 1930, 1934, /937— Continued
PERCENTAGE OF TOtAL LONG-TERM DEBTS OF VARIOUS CLASSES HELD BY 26
LIFE INSURANCE COMPANIES
1930
(Millions)
1934
(Millions)
1937
(Millions)
Public Debt:
2.1
3.0
6.1
5.0
11.6
6.7
2.5
5.6
9.9
Private Debt:
18.1
2.5
10.5
19.2
12.7
17.6
4.0
12.3
14.1
12.8
17.4
11.7
Public Utility - - ---
18.2
10.6
13.0
12.6
12.7
14.4
9.8
10.0
12.4
Source: Based on figures submitted by the 26 companies and figures obtained from the Department of
Commerce.
Exhibit No. 2260
[Prepared by the Securities and Exchange Commission Insurance Study Staff.]
Bonds and Debentures of Five Major Oil Companies and Four Major Rutber
Companies: Total Outstanding Amounts Held by the 26 Largest Life Insurance
Companies in 1929 and 1938. State at Par Value
Companies
Oil Companies -
Gulf Oil Corporation (Pa.)...
Shell Union Oil Corporation (Del.)...
Socony-Vacuum Oil Company, Inc.
(N. Y.)
Standard Oil Company (N.J.)
Texas Corporation (Del.)
Rubber Companies:
Firestone Tire and Rubber Co. (Ohio).
Goodrich (B. F.) Co. (N. Y.)
Goodyear Tire and Rubber Co.
(Ohio)
United States Rubber Co. (N. J.)
Bonds and debentures '
1929
Held by
26 Life
Insur-
ance
Com-
panies
Thoua.
$7,064
7,120
5,726
4,940
6,220
0
311
1,000
650
Total
Out-
stand-
ing
Thous.
$65, 414
126, 335
69,000
120,000
100,000
0
21, 572
58, 031
78, 636
1938
Held by
26 Life
Insur-
ance
Com-
panies
Thous.
$50, 000
31, 950
83,200
31,831
4,950
12, 497
100
40, 100
44, 000
Total
Out-
stand-
ing
Thous.
$50, 000
82, 427
125,000
135,000
60,000
48,500
44,047
50,000
44,000
Percentages of the
Total Funded
Debts Held by 26
Life Insurance
Go's.
10.8
5.6
8.3
4.1
6.2
0
1.4
100.0
38.8
66.6
23.6
8.25
25.8
80.2
100.0
' Exclusive of notes payable.
' Less than one-tenth of one percent.
Source: Poor's and Moody's Manuals.
"Exhibit No. 22G1," appears in Hearings, Part 13, p. 7093
"Exhibit No. 2262," appears in Hearings, Part 13, p. 7095
CONCENTRATION OF ECONOMIC POWER 15495
"Exhibit No. 2263," appears in Hearings, Part 13, p. 7096
Exhibit No. 2264
[Prepared by the Securities and Exchange Commission Insurance Study Staff]
Schedule A. Assets — Types Owned — Admitted Asset Value in % of Total
Admitted Assets as of December 31, 1929 and December 31, 193S
Cash_ ,......-..
U. S. Oovernment bonds
Other Government bonds
U. S. political subdivisions
Other political subdivisions
Raiiroad bonds
Railroad equipment trust
Public utility bonds
Industrial & miscellaneous bo Is
Total bonds
Total stocks ..1
Mortgages.- .-. -.
Real Estate- .
Policy loans...
Collateral loans,
Otherassets- '
Dec. 31. 1929
Dec. 31, 1938 '
.69
2.74
2.03
18.63
1.08
.88
3.20
5.63
1.60
1.14
15.78
9.38
2.47
1.17
8 73
12.22
1.43
4.92
36.32
53.97
2.48
2.17
41.70
19.17
1.87
7.30
12.91
11.62
.03
.01
4.00
3.02
100. 00
100.00
Source : Based oa Insurance Investment Questionnaire.
Exhibit No. 2265
[Prepared by the Securities and Exchange Commission Insurance Study Staff]
Schedule B. Investments of Life Insurance Companies as of Dec. 31, 1938, in
Cotnpanies Whose Officers or Directors Interlock With the Insurance Com-
panies
Metropolitan
Prudential.....
New York Life
Equitable of NY
Mutual of NY
Northwestern
Travelers
John Hancock
Perm Mutual
Mutual Benefit
Mass. Mutual..
Aetna
N. E. Mutual
Union Central
Provident Mut
Conn. Mutual
Conn. General
Phoenix Mutual
Bankers Life
National Life.
Pacific Mutual
State Mutual
Equitable of Iowa
Western & Southern.
Lincoln National
Guardian Life
Totals.
Number of
Companies
Bonds
Face Value
Book Value
$210, l.'^S, 700
63, 384. 000
114.949,800
89, 028, 000
129. 487, 000
26, 455, 000
8. 343, 000
14, 057, 000
29,219,000
1, 995, 000
1,092,000
7, 559, 400
13, 035, 000
300,000
10, 176, 700
0
83,000
829.000
0
0
956, 500
617,000
0
0
0
0
$721, 726, 100
$203, 252, 513
61,229,215
104, 453, 856
86, 400, 555
108, 595, 785
25, 875, 870
4, 827, 014
14,077,tJ9
30, 703, 460
1, 903, .534
1,00.5,815
7, 289, 621
12, 789, 159
■ 305,9,52
9, 679, 924
0
70, 216
737, 309
0
0
884, 325
629,333
0
0
0
0
$674, 710, 515
Note. — Investments in subsidiaries of companies interlocking excluded.
Source: Based on Insurance Investment Questionnaires.
Shares
228,600
37, 950
124, 770
58,860
36,600
0
253, 826
28,088
7, 150
6,185
16, 400
673, 871
45,329
1,060
300
35, 030
16, 453
13, 576
0
3.947
97, 468
21, 166
0
0
0
0
1, 726, 623
15496
CONCENTRATION OF ECONOMIC POWER
Exhibit No. 2266
Schedule C. Amount, and Percentage of Total Assets Earning Less Than the
Interest Required for Policy Reserves as of December 31, JOSS
[Prepared by the Securities and Exchange Commission Insurance Study Staff]
Metropolitan
Prudential
N«w Yorlc Life
Equitable of NY....
Mutual of NY
Northwestern
Travelers
John Hancock
Penn Mutual
Mutual Benefit
Mass. Mutual
Aetna ---
N. E. Mutual
Union Central
Provident Mutual..
Conn. Mutual
Conn. General
Phoenix Mutual
Bankers Life
National Life
Pacific .Mutual
State .Mutual
Equitable Iowa
Western & Southern
Lincoln National —
Guardian Life
Ledger Assets
871,937
722, 474
576, 782
231, 391
390,664
243, 786
831, 857
911,026
682, 966
659, 740
632, 089
670, 296
428,404
362, 594
336, 918
326, 259
243, 825
231, 926
220,768
199,588
197. 690
177,842
176, 651
167. 644
132,888
129, 425
23, 657, 420
Amt. of such
Assets earning
less than Int.
required
1,556,191
1, 170, 635
840, 133
602,647
494, 244
252, 789
460, 477
239, 922
222, 361
191,769
141,667
237, 567
131,744
100, 627
108, 064
57, 786
74, 957
85, 622
65, 769
46,544
52, 195
49, 071
47, 691
77, 490
28,460
43, 802
7, 378, 224
% of Ledger
Assets earning
less than int.
required
31,94
31.45
32.60
27.01
35.54
20.32
55.36
26.34
32.66
29.07
22.41
41.66
30.75
27.75
32.07
17.71
30.74
36.06
29.79
23.32
26.40
27.59
27.00
46.22
21.42
33.84
31.19
Int. necessary
to maintain
reserves in % of
Ledger Assets
3.22
3.18
2.81
3.03
2.92
2.85
3.49
3.09
2.98
2.90
3.13
3.34
2.96
3.37
3.28
3.08
3.27
3.26
3.34
2.99
3.47
2.89
3.26
2.90
3.06
2.96
Source; Investment Questionnaires.
Exhibit No. 2267
(Prepared by the Securities and Exchange Commission Insurance Study Staff)
.Schedule D. Policy Loans and Income Therefrom
[In thousands of dollars]
Policy
Loans as
of 12/31/38
Percent of
Admitted
Assets
Interest on
Policy
Loans in
1938
Percent of
Investment
Income '
lO-yr. total
of interest
on Policy
Loans
$52R, 414
333, 395
349,263
253, 869
159, 587
185. 535
122,216
91,785
89. 176
97, 264
78. 963
70. 458
,59, 681
58, 360
44,313
38, 963
23, 612
29,325
10.65
8.78
13. 19
11.23
11.40
15.05
12. ."a
9.96
12.69
14.36
12.19
11.34
13.70
15.59
12.79
■ 11. .59
9. .W
12.35
$.W, 178
17,276
20,513
14,645
9,326
11,395
6,549
5, l.'i2
5, 254
6,139
4,835
4,252
3, 495
3. 670
2. 625
2. 257
1,383
1,702
16.84
12.65
20.75
IH. 59
19.72
23,61
19. 66
16.01
21.23
25. 27
20.68
19.60
23. 35
25.28
20.17
17.93
15.95
20.85
$240, 817
136, 449
199, 238
Equitable of N. Y
141,121
Mutual of N. Y : -
97,280
118,745
57,623
44, 853
55, 530
Mutual Benefit
73, 146
47,720
37, .540
N. E. Mutual
34.291
44. 259
26,093
21,068
12, 075
Phoenix Mutual
15, 546
CONCENTRATION OF ECONOMIC POWER 15497
Schedule D. Policy Loans and Income Therefrom — Continued
[In thousands of dollars]
Policy
Loans as
of 12/31/38
Percent of
Admitted
Assets
Interest on
Policy
Loans in
1938
Percent of
Investment
Income
10-yr. total
of interest
on Policy
Loans
$39, 390'
27, 059
35, 695
27, 986
27, 866
8,694
22, 404
21, 137
17.25
13.19
15.33
15.34
15.29
5.07
15.14
15.90
$2, 339
1,669
2,505
1,694
1,619
493
1,344
1,165
26.99
21.04
29.44
25.64
23.54
7.48
25.66
23.51
$19,052
17, 218
5,344
State Mutual . -
17,471
14,501
Western & Southern
3,806
Lincoln National j
11,620
Quardiah Life
10, 642
Totals
2, 822, 410
11.62
163, 474
18.66
1, 503, 048
Source: InvestmensHables #9, #102, #108, #109, "Exhibit No. 2250."
Exhibit No. 2268
[Prepared by the Securities and Exchange Commission Insurance Study Staff.]
Schedule F. Mortgages Owned as of Decemier SI, 19S8, Delinquent 3 Months
of More as to Interest
Delinquent
Farm
Mortgages
% of all
Farm
Mortgs.
Owned
Delinquent
Urban
Mortgages
% of all
Urban
Morgs.
Owned
Delinquent
Farm &
Urban
Mortgages
% of all
Mortgs.
Owned
Mort. Int.
due & un-
paid as of
12/31/38
Metropolitan
$14, 661, 000
11,626,000
698, 000
12, 014, 000
None
owned
8, 165, 000
6, 244, 000
15, 719, 000
813, 000
10, 695, 000
None
owned
2, 509, 000
20.65
6.91
11.03
16.81
$193, 207, 000
39, 241, 000
47, 756, 000
11,553,000
22, 579, 000
7, 357, 000
3,111,000
3,114,000
7, 573, 000
7, 289, 000
12,411,000
1,110,000
9, 318, 000
2, 821, 000
6, 494, 000
1, 495, 000
390, 000
2, 059, 000
110,000
558, 000
7, 721, 000
3, 135, 000
None
3, 865, 000
465, 000
14, 968, 000
21.42
5.11
11.14
5.45
10.04
3.25
8.19
3.29
7.33
9.76
11.51
2.73
21.48
4.26
11.42
1.59
1.05
6.94
.87
.89
11.11
8.91
$207, 868, 000
50, 867, 000
48, 454, 000
23, 567, 000
22, 579, 000
15, 522, 000
9, 355, 000
18, 833, 000
8, 386, 000
17, 984, 000
12,411,000
3,619,000
9, 318, 000
14, 987, 000
7, 149, 000
2, 927, 000
1, 686, 000
4, 188, 000
5, 307, 000
2, 116, 000
8, 170, 000
3, 135, 000
2,111,000
3, 888, 000
950, 000
14,968,000
21.36
5.43
11.14
8.31
10.04
5.03
13.53
11.65
7.80
14.88
11.51
5.45
21.48
12.45
12.01
2.68
3.59
8.41
12.21
2.83
13.25
8.91
4.56
5.59
2.66
33.68
$21, 852, 633
6,162,751
New York Life
3, 890, 933
2, 344, 627
580, 809
Northwestern . . .'
Travelers...
John Hancock
Penn Mutual
Mutual Benefit
9.94
20.12
23.51
19.31
23.19
r, 706, 689
1, 248, 768
2, 026, 392
Ml, 133
2, 249, 569
1, 093, 397
9.71
580, 660
New England Mu-
tual
296. 421
Union Cen tral
Provident Mutual. .
Conn. Mutual -
Conn. General
Phoenix Mutual
Bankers Life
National Life
Pacific Mutual
State Mutual
12, 166, 000
655, 000
1, 432, 000
1, 296, 000
2, 129, 000
5, 197, 000
1, 558, 000
449,000
None
owned
2,111,000
23, 000
485, 000
None
owned
22.51
24.60
9.24
12.95
13.93
16.94
12.85
20.63
1, 601, 9.54
72, 246
277, 310
57, 576
93, 026
608, 467
147, 954
200, 387
45, 702
6.73-
1.17
14.79
54, 527
Western & Southern
Lincoln National
5.72
1.43
33.68
17, 652
113,294
71,844
Total ---
110, 643, 000
14.71
409, 700, 000
10.52
520, 345, 000
11.22
47, 536, 721
Source: Tables 56, 57 and 58 of the Investment Questionnaire replies and 1938 Annual Statements to
State Insurance Departments.
15498
CONCENTRATION OF ECONOMIC POWER
Exhibit No. 2269
[Prepared by the]Securities>nd Exchange]ComiiiissionInsurance';Study Staff.]
Schedule G. — Interest Due and Accrued on Bmids wnd Mortgages
(1)
Interest due and ac-
crued on bonds
owned 12/,31/38
which are in de-
fault as to princi-
pal or interest
(2)
Interest due and
unpaid on mort-
gages owned as of
12/31/38
Total jCol-
umns
(1) & (2)
$32, 824, 619
18, 185, 513
16, 406, 481
13,510,245
8, 794, 372
8, 283. 282
1, 565, 259
3, 407, 867
1.014,534
2, 978, 667
3,117,345
3, 837, 641
2, 525, 410
None
920,620
479, 751
178, 665
424, 526
790, 740
619, 066
None
487, 397
264,115
11, 106
15,883
"100, 827
$21, 852, 633
6, 162, 751
3, 890, 933
2, 344, 627
580,909
1, 706, 689
1,248,768
2, 026, 392
141, 133
2, 249, 569
1, 093, 397
580, 660
296.421
1,601,954
72,246
277, 310
200,387
57, 576
93, 026
608, 467
147, 954
45, 702
54,527
17,652
113,294
71,844
$,54, 677, 252
Prudential -
22, 348, 264
New York Life --
20, 297, 414
Equitable
15, 854, 872
9, 375, 181
9, 989, 971
2,814,027
5, 434, 259
1,155,667
Mutual Benefit
5, 228, 236
Massachusetts Mutual
4, 210, 742
Aetna .
4, 418, 301
2, 821, 831
Union Central -
1,601,954
Provident Mutu;.l ^
992,866
757, 061
Pacific Mutual ..
379, 052
Connecticut Ocneral .
482, 102
Phoenix Mutual
882,766
Bankers Life of Iowa .. ..
1, 227, 533
National Life of Vermont
147,954
State Mutual.
i33, 099
Equitable of Iowa. .. .
318,642
Western & Southern .
28, 758
Lincoln National...
129, 177
Guardian Life
172, 671
$118, 743, 931
47, 536, 721
$166, 280, 652
Source: 1938 Annual Statements to State Insurance Departments
Exhibit No. 2270
[Prepared by the Bureau of Agricultural Economics]
Farm Mortgage Deht* — Total Amounts Outstanding as of January 1, and
Annual Interest Charges, for Indicated Years
[Millions of Dollars]
Year
Total Out-
standing
Total Inter-
est Charges
Year
Total Out-
standing
Total In-
terest
Charges
1910
3,208
3,522
3,930
4,348
4,707
4,991
5,256
5,826
6.537
7,137
8,449
10,221
10, 702
10,786
10,665
203
225
252
276
296
314
341
378
417
476
574
653
680
679
647
1925
9,913
9,713
9,658
9,757
9.757
9,631
9,458
9,214
8,638
7,887
7,786
7,639
7,390
7,214
7,071
612
1911
1926 . .
698
1912
1927
593
1913
1928
590
1914
1929
582
1915
1930 -
672
1916
1931
659
1917
1932
534
1918
1933
483
1919 .-... .
1934
446
1920
1935
411
1921
1936 -
385
1922
1937
370
1923
1938
367
1924 ...
1939
•Estimated.
Source: Bureau of Agricultural Economics.
CONCENTRATION OF ECONOMIC POWER
Exhibit No. 2271
[Chart based on following statistical data appears in text on p. 14862]
15499
Cash farm income and farm-mortgage debt, 1910-39 and value per acre of farm
real estate, 1912-39
Year
Index of cash
farm income
(1910-14=100)1
Index of farm-
mortgage debt
(1910-14 = 100)'
Index of value
per acre of farm
real estate
(1912-14=100)3
1910
Percent
98
94
101
106
102
108
131
180
227
244
212
137
144
161
171
185
178
181
186
190
150
106
79
91
114
127
144
154
137
140
Percent
81
89
100
110
119
127
133
148
166
181
214
259
271
274
270
251
246
245
247
247
244
240
234
219
200
197
194
187
183
179
Percent
1911... ,...
1912 : .
97
1913 .
100
103
103
108
117
129
1914
1915 . .
1916..
1917
1918 .. . ....
1919.... _...
140
1920
170
157
139
1921 1
1922
1923
1924 .
135
130
127
124
1925
1926.
1927 .-
119
1928 .
117
116
115
106
1929
1930
1931
1932...
89
73
76
79
82
85
85
84
1933....
1934..
1935
1936
1937
1938...
1939
• Calendar year.
* January 1.
' March 1.
Including Government payments.
15500
CONCENTRATION OF ECONOMIC POWER
ExHiniT No. 2272
[Chart based on following statistical data appears in text on p. 14863]
Average interest rates on outstanding farm mortgages, January 1, 1913, 1923,
1933, and 1939
State and Reographic
division
1913
1923
1933
1939
State and geographic
division
1913
1923
1933
1939
Maine
Pet.
7.3
5.1
5.3
5.3
5.6
5.5
Pet.
6.6
5.1
5.3
5.8
6.0
5.9
Pet.
6.1
5u3
5.4
5.9
5.9
5.9
Pet.
5.2
5.0
4.9
5.3
5.0
5.3
South Carolina
Q eorgia.
Pet.
7.8
7.7
7.7
Pet.
7.2
7.2
7.2
Pet.
6.6
6.9
7.1
Pet.
4.9
5.4
Florida _
5.4
South Atlantic
6.6
6.6
6.0
6.0
7.1
6.7
6.3
5.8
5.7
6.6
6.2
Rhode Island
5.1
Connecticut
5.9
5.8
7.9
8.2
4 8
5.7
5.8
5 8
5.2
Tennessee.-
4.8
5 2
5.5
5.5
5.4
5.7
5.9
5.7
5.9
5.9
5.9
5.3
5.2
5.2
Mississippi ...,
5.3
East South Central...
Arkansas
-Louisiana. -
Oklahoma
7.0
6.4
6.0
6.6
6.4
6.3
6.7
Pennsylvania
5.0
Middle Atlantic
5.5
5.7
.5.9
T2'
5.8
5.7
6.1
5.5
5.2
5.1
4.7
4.7
4.9'
4.7
7.8
7.6
6.3
7.9
7.2
7.0
7.3
7.5
5.4
5 3
Ohio
5.8-
5.8
5.4
5.8
5.4
6.2
6.1
6.0
6. 1
5.8
5.3
Texas - ---
5.3
Illinois
West South Central.-
7.4
7.6
8.2
8.6
7.0
8.4
8.0
7.9
7.8
7.4
6.6
5.3-
Wisconsin' . .. .
7.4
7.5
7.8
7.0
7.5
7.8
7.0
7.0
6.8
6.6
6.1
6.6
7.3
6.8
6.7
6.5
5.6
->.5
6.0
5.9
5.8
6.4
6.7
6.4
6.1
6.4
5.8
4.8
5 2
4 9
5.7
5.5
6.1
7.2
6.2
5.6
5.7
5 8
5.4
5.4
5.9
6.0
5.6
5.5
5.9
4.5
4.7
5.4
4.6
4.7
4.6
4.9
4.7
~5.1
5.1
4.7
4.8
5.0
Colorado.
5.4
New Mexico-
5.6
Arizona
5.3
Utah .
5.1
Nevada
5 7
Nebraska-.
7.7
7.5
6.5
7.3
6.7
6.2
6.6
5.4
Washington
West North Central
fi 1 1 .^. fi
7.0
6.8
6 7
5.2
.
5. 1
Delaware .. .
5.6
5.7
5.9
6.1
6.0
5.9
5.9
5.9
5.9
6.0
5.9
5.9
5.9
5.8
5.9
California-
5.6
Pacific
United States.
Virginia
6. 8 1 6. 8 1 6. 5
6.1 1 6.4 . 6.0
5.5
West Virginia j
North Carolina ^
5.0
"Exhibit No. 2273," apipears in text on p. 14866
(N ^
!^
^ ."S
V i
£■ .s
CONCENTRATION OF ECONOMIC POWER
15501
•SO
•an
5 I
5 ■=
CO 5
-■— q>c5-««o
'^ ^ "-^ "-^ •-* '— "-H ♦-h' •^^ c* e^ C4 1-^
FH1-l^*oOQOo^*toe0 40oo^»4oeooococ>eo«QO'*N
c^ QO 0 00*0 OS eo<o
CD ^« 00 ^H OS
■*»OCDtOCDeO»0»0'«J<«ci»-iS^
o
CC50 oo'0''
252i«S^SS22;2;212;S2'^'^'^'^'='°'='=><=*«'«'<'>»^-
>oooo■>J<•s>«>rtvoo■-l•-•oo«oomoc^«o■<^'v<co»e
i i6 "^ to \ii -^ '•^ ^ -^ ■, '
lilSgfgiiii5||i§SS|g|§ii5i^|§2
2 -a
5S
« O M N- N. T). lO 00 to M lO 00 -W-^ 00 0<» O M » 9» 00 00 <0 -H N 00 «^ ■«. <0
^5J^ggfogg§ss§^sgssai=S2iii§«§iig
r-irt.-<.-i«MNMoie^e^p,-^^-^j
•aH
M« V-*-*iou3a3tCodooooo5<»(»'oiaar<»orodh-rtC|s:t>:i>r(>:
124491— 41— pt. 28
0'-ic»PO'*»oeor^ooG&o^H
SJ3 S S 2 — 22 "5 S S H S3 2 S « fc 9S 95 <= -^ «■< " -wn <o t. 00 o>
II
1 1
5 §
e . H
few o
15502
CONCENTRATION OF ECONOMIC POWER
Exhibit No. 2275
Farm-Mortgage Debt Held by Life Insurance Companies — Total Amounts and
Percentage of Total Farm-Mortgage Debt Outstanding in the United States
and Designated Regions, January 1, 1910, 1915 and 1920-39
[Id thousands of dollars]
United States
North Atlantic '
East North Central '
Year
Amount
Percent
Amount
Percent
Amount
Percent
1910
386,961
669,984
974, 826
1, 205, 778
1, 432, 367
1, 656, 203
1, 792, 145
1,942,624
2, 030, 301
2, 123, 664
2, 172, 863
2, 138, 980
2, 105, 477
2,059,221
2,007,361
1,869,160
1,661,046
1,268,900
1, 054, 770
936, 454
896,470
887,336
12.1
13.4
11.5
11.8
13.4
14.4
16.8
19.6
20.9
22.0
22.3
21.9
21.8
21.8
21.8
21.6
21.1
16.2
13.8
12.7
12.4
12.6
611
479
172
164
610
671
923
667
614
459
403
333
604
443
472
567
662
636
619
481
683
1,228
0.2
.1
(•)
(•)
.1
.1
.2
.1
.1
.1
.1
.1
.1
.1
.1
.1
.1
.1
.1
.1
.1
.2
78,837
120, 957
145, 903
169, 670
198, 877
222,929
270, 118
311,226
340, 467
368,449
380,349
379, 647
370,366
370, 976
369, 700
348, 820
317,581
249, 716
213, 402
189, 469
187,111
194, 923
9.7
1916 .
10.7
1920
8.8
1921
5.6
1922
9.8
1923
10.7
1924
12.9
1925 -
16.1
1926
18.0
1927
19.9
1928
20.2
1929 -
19.8
1930 -
19.7
1931
20.4
1932
21.0
1933 ^ -
21.0
1934
20.9
1935
16.3
1936 .-,
14.1
1937
12.9
1938
13.0
1939
13.9
West North Central «
Southern *
Western'
Year
Amount
Percent
Amount
Percent
Amount
Percent
1910
264,423
414,006
621,258
760, 166
881,247
943, 787
1, 095, 222
1,184,712
1,236,271
1, 286, 180
1,315,813
1, 289, 363
1, 224, 577
1, 194, 974
1, 164, 038
1,074,022
938,961
692, 395
569, 958
495,291
455, 609
440,024
19.9
20.4
17.7
17.4
19.2
20.4
23.7
27.7
30.8
33.8
34.9
34.6
34.3
34.4
34.5
34.8
34.0
25.7
21.8
20.1
19.2
19.2
43, 149
109, 691
175, 608
236,783
306,309
333, 810
363, 400
377,068
381, 553
393,421
396,260
387,030
409, 008
397,343
388, 363
354, 742
319, 76P
248, 389
211,507
197, 675
196, 828
198, 897
8.6
14.0
11.3
12.8
15.6
17.1
19.1
21.0
19.9
19.1
18.6
18.6
19.8
19.8
19.9
19.6
19.0
14.6
12.6
12.1
12.3
12.7
9,941
24,851
31,886
39,106
45,424
55,106
62,482
69,051
71,496
76, 166
81,038
82, 707
101,022
95,485
94,788
91,009
84,176
67,864
69,384
53,548
56,339
62,264
3.5
4.1
1920
2.6
2.7
1922
3.0
3.7
1924
4.4
6.2
1926
6.5
1927
8.7
1928 ,
6.0
6.9
1930
6.8
6.3
1932
6.3
6.3
1931
6.4
6.4
1936 .-
4.8
4.3
1938
4.5
1939
4.3
' Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, Connecticut, New York, New
Jersev, Pennsylvania.
> Ohio, Indiana, Illinois, Michigan, Wisconsin.
» Minnesota, Iowa, Missouri, North Dakota, South Dakota, Nebraska, Kansas.
* Delaware. Maryland, Virginia, West Virginia, North •Carolina, South Carolina, Georgia, Florida,
Kentucky, Tennessee, .\labama, Mississippi, Arkansas, Louisiana, Oklahoma, Texas.
» Montana, Idaho, Wyoming, Colorado, New Mexico, Arizona, Utah, Nevada, Washington, Oregon,
California.
• Less than .06 percent.
Source: Bureau of Agricultural Economics.
CONCENTRATION OF ECONOMIC POWER 15503
Exhibit No. 2276
[Chart based on following statistic-.l drta appears in text on p. 14874]
Estimated number of farms changing ownership by forced and voluntary sales,
per 1,000 of all farms, by geographic divisions, 1926-39'^
Year
North
Atlantic
East
North
Central
West
North
Central
South
Atlantic
East
South
Central
West
South
Central
Mountain
Pacific
ITnitec
States
Forced: >
1926...
1Z3
18.9
30.8
19.6
16.4
18.7
60.2
20.6
21.6
1927...
12.0
20.4
32.0
21.0
21.7
19 9
45.3
20.1
23.3
1928...
11.5
20.7
32.4
23.3
20.0
18.5
39.4
19.9
22.8
1929...
11.7
19.1
25.9
23.0
15.2
15.2
29.1
17.5
19.5
1930...
12.6
22.3
27.6
23.2
16.1
16.8
29.4
15.2
20.8
1931...
12.7
24.0
31.3
32.2
25.9
22.4
36.4
25.0
26.1
1932...
17.4
34.3
62.6
47.1
50.6
40.2
43.5
37.8
"41.7
1933...
26.0
43.9
72.0
59.5
63.5
51.2
52.8
44.1
54.1
1934...
24.5
32.0
50.9
40.7
44.9
34.3
44.1
37.1
39.1
1935...
22.5
23.5
40.6
24.5
30.6
22.9
35.7
24,6
28.3
1936...
20.2
22.1
38.0
21.3
26.9
22.0
36.0
.25.8
26.2
1937...
16.0
19.0
31.7
17.6
22.4
20.2
33.4
23.1
22.4
1938...
13.9
13.5
27.0
13.6
14.0
16.6
27.3
19.1
17.4
1939...
13.4
13,5
26.9
13.4
12.4
15.6
24.2
17.6
16.8
Volun-
tary:
1926...
35.0
25.8
23.0
28.0
33.5
34.7
32.0
35.6
29.6
1927...
35.8
25.8
24.3
24.2
29.3
31.1
33.7
36.3
28.3
1928...
34.0
24.0
23.9
20.0
27.5
27.9
34.8
34.3
26.3
1929...
28.8
21.0
22.4
18.3
23.4
25.5
35.6
28.3
23.5
1930...
29.0
20.8
22.9
18.2
23.9
24.2
38.7
30.1
23.7
1931...
26.2
18.6
18.9
14.5
19.4
16.7
24.8
22.1
19.0
1932...
21.6
16.8
14.2
12.3
17.2
15.4
17.6
22.3
16.2
1933...
21.4
15.6
13.8
15.3
18.9
17.6
16.8
21.3
16.8
1934...
20.0
16.5
15.5
17.6
19.1
18.8
17.5
20. V
17.8
1935...
19.3
18.7
17.7
18.5
22.1
18.8
20.2
25.0
19.4
1936...
22.7
23.9
22.5
22.7
31.8
23.0
25.9
33.3
24.8
1937...
29.1
33.9
28.1
28.0
39.5
27.3
32.1
42.6
31.5
1938...
27.1
29.0
26.9
28.2
37.4
27.1
32.3
41.4
29.9
1939...
26.1
27.1
26.3
26.8
36.2
26.4
30.0
37.0
28.2
'Years ended March 15.
' Including loss of title resuming from tax delinquency, foreclosure, bankruptcy, default of contract, and
sales and surrender of title to avoid foreclosure.
15504 CJONCENTRATION OF ECONOMIC POWER
Exhibit No. 2277
Farm Foreclosure Sales — Estimated Number per 1,000 Farms Mortgaged to
Each Type of Lender on January 1, 19S5, From January 1934 through Sep-
tember 1939,^ By Year and Quarter
Year and quarter
Insurance
Com-
panies
Federal
Land
Banks
and
Land
Bank
Commis-
sioner
Individu-
als
Com-
mercial
Banks
Miscel-
laneous
Aggregate
for All
Lenders
Year:
1934 . . .
92.5
67.7
49.7
34.2
29.2
25.5
26.9
19.7
21.4
19.4
18.9
16.3
14.1
13.3
13.8
9.9
12.7
10.7
9.6
6.7
7.2
9.1
8.1
5.3
6.7
8.3
7.3
4.8
4.7
11.8
15.7
13.1
13.4
0.4
1.0
1.8
1.5
2.6
3.3
3.0
2.9
3.8
4.6
3.8
3.5
3.2
3.8
3.2
2.9
3.0
3.0
3.4
3.1
4.0
5.2
4.1
34.3
28.6
24.6
20.0
17.3
10.2
8.4
6.8
8.9
8.1
7.8
6.2
6.4
6.2
6.4
5.6
6.3
6.0
5.0
4.3
4.7
5.1
4.7
3.6
3.9
4.1
3.6
2.8
36.9
36.9
34.5
30.4
25.9
9.2
9.6
8.4
9.7
9.3'
10.0
8.4
9.2
8.0
9.3
9.0
8.2
9.4
7.3
6.7
7.0
7.2
6.5
6.1
6.1
6.4
5.9
4.6
29.7
26.7
18.5
13.2
9.8
8.9
7.8
6.1
6.9
8.1
6.3
6.6
6.8
6.4
5.2
3.6
3.3
3.9
3.8
2.6
2.9
3.3
2.6
1.9
2.1
3.2
2.5
1.4
.27.8
1935
26.1
1S36 -
23.3
1937 --
18.6
1938 _
16.4
Quarter ended
1934—
7.6
June .
7.1
Sept -
6.1
Dec . -
7.0
1936-
March
7.2
J^nf) ,.
7.0
Bept
6.0
Dec - —
6.9
1936—
6.1
June , - - - --
6.4
Sept
6.3
Dec — -
6.5
1937-
March- . .. -
6.3
Jn^n
6.0
Sept- -
4.0
Dec - --
4.2
1938—
March- ...
4.6
June
4.5
Sept J -
3.6
3.7
193fr-
4.6
June. -. .. .. .
4.5
3.3
■ Based on reports from c(mntles including from 22 to 30% of the farms in the United States.
Source: Farm Credit Administration.
"Exhibit No. 2278" appears in text on p. 14878
CONCENTRATION OF ECONOMIC POWER
Exhibit No. 2279
15505
Estimated Amount of Proceeds of Federal Land Bank and Land. Bank Com-
missioner Loans, May 1, 19SS — Jamtary 1, 1937, Used to Refincmce First and
Junior Mortgages Held iy Life Insurance Companies and by All Lenders, and
Amount of Farm-Mortgage Loans Held iy Life Insurance Companies and All
Lenders, January 1, 19S3
Geographic
Division
Loan Proceeds Used to
Refinance
Mortgages Held by
Life In-
surance
Com-
panies
(1,000
Dollars)
All Lend
ers
(1,000
Dollars)
Percent
Used
to Re-
finance
Loans
of Life
Ins. Cos-
Outstanding Farm-
Mortgage
Loans, Jan. 1, 1933
Life In-
surance
Com-
panies
(1,000
Dollars)
All Lend-
ers
(1,000
Dollars)
Percent
Held
by Life
Insur-
ance
Com-
panies
Percent Which Loan
Proceeds Used to
Refinance Mort-
gages of Life In-
surance Companies
and All Lenders
Are of Mortgages
Held, January 1,
1933
Life In-
surance
Com-
panies
All Lend-
ers
New England- _
Middle Atlantic
East North Central
West North Central.
South Atlantic _
East South Central-.
West South Central.
Mountain
Pacific-
United States..
6
44
59, 270
166,260
7,127
13,545
44,362
5,739
9,465
16, 747
35,648
324, 596
592, 138
86,896
73, 712
178, 779
66,335
129, 308
(')
0.1
18.3
28.1
8.2
18.4
24.8
8.7
7.3
29
538
348,820
1, 074, 022
42,947
76,959
234,836
30, 216
60,793
185, 799
459, 317
1, 657, 756
3, 082, 199
423,008
366,538
1,020,388
, 540,400
902, 978
(')
0.1
21.0
34.8
10.2
21.0
23.0
S.6
6.7
20.7
8.2
17.0
15.6
16.6
17.6
18.9
19.0
15.6
9.0
7.8
19.6
19.2
20.6
20.1
17.6
1Z3
14.3
305, 818
1, 504, 159
20.3
1, 869, 160
8, 638, 383
21.6
16.4
17.4
Twenty States with Largest Amount of Mortgages Held by Life Insiu'ance
Companies, January 1, 1933
Iowa
Illinois
Texas
KanSas---
Nebraska
Minnesota
Missouri
South Dakota.
Indiana
Oklahoma
Ohio
Tennessee
Washington, - .
North Dakota.
Wisconsin
Kentucky
California
Georgia
Mississippi
Oregon.--
52, 654
28,300
33,809
3^139
22, 452
26,037
9,327
15,504
14,407
9,359
8,952
6,944
3,184
7,147
6,163
5,230
3,399
3,349
562
2,883
Total- 292,801 1,249,970
161, 198
106,243
128,915
94, 144
94, 535
102, 559
35, 879
44,756
48,393
33, 001
45, 173
21,277
14,368
59,068
85, 322
29,639
97, 586
19, 127
11, 433
17,354
32.7
26.6
26.2
35.2
23.7
25.4
26.0
34.6
29.8
28.4
19.8
32.6
22.2
12.1
7.2
17.6
3.0
17.6
4.9
16.6
456, 995
178, 576
151, 710
147, 940
123, 986
116, 381
108,261
95,990
87,269
62,208
51, 259
29,859
26,543
24, 469
23,492
22,840
20,589
19, 135
17, 050
13,661
23.4 1,778,213
982,484
534, 070
626, 915
409,963
487, 687
410, 753
352, 970
246, 432
235, 491
251,011
241, 308
96, 581
152, 639
192, 010
454, 115
101, 219
622,904
83,833
87, 965
127, 435
6, 697, 685
46.6
33.4
24.2
36.1
26.4
28.3
30.7
39.0
37.1
24.8
21.2
30.9
17.4
12.7
5.2
22.6
3.3
22.8
19.4
10.7
26. S
11.5
15.8
22.3
22.4
18.1
2?. 4
8.6
16.2
16.5
15.0
17.6
23.3
12.0
29.2
26.2
22.9
16.6
17.6
3.3
2L1
16.6
16.4
19.9
20.6
23.0
19.4
25.0
10.2
18.2
20.6
13.1
18.7
22.0
9.4
30.8
18.8
29.3
16.7
22.8
13.0
13.6
18.7
> Less than .05 percent.
Source: Bureau of Agricultural Economics.
15506 CONCENTRATION OF ECONOMIC POWER
Exhibit No. 2280
Acauired Farm Real Estate Held by Leading Lending Agencies, January 1,
1929S9
[In Thousands of Dollars]
1929.
1930.
1931.
1932.
1933.
1934.
1936.
1936.
1937.
1938.
1939.
Federal Land
Banks and
Federal Farm
Mortgaee
Corporation '
26,478
29,517
36,931
53, 658
83, 336
96,774
96, 780
120, 091
135, 178
132,288
139, 440
Life
Insurance
Companies '
88,305
120, 020
151, 229
219, 947
316,931
465, 072
600, 873
646, 280
713, 166
705, 207
702, 861
Joint Stock
Land Banks'
15,236
19,685
22, 202
37, 957
71,741
85, 740
81,700
78,202
72, 781
62, 030
53,885
All Atitive
Insured
Commercial
Banks *
(•)
(•)
(•)
(•)
(«)
(«)
(•>
» 74, 166
69, 525
56,311
49, 143
Three State
Credit '
Agencies •
19,540
26,860
33,511
39,008
47, 4.54
66,094
60, 270
61,531
68,444
72,040
73, 301
' Investment, Including sheriffs' certificates and judgments. Excluding prior liens.
• Investment— partially estimated. ..,,...t„.,.
> Carrying value of real estate, including sheriffs' certificates and judgments. Real estate held by banks
In receivership included at book value.
• Investment. Rural Credit Board of South Dakota, Bank of North Dakota, and Department of Rural
Credit of Minnesota.
• Data unavailable.
' June 30.
Source- Bureau of Agricultural Economics.
Exhibit No. 2281
Farm Investment of Life Insurance Companies — Amounts and Percentage of
Total Holdings Represented by Fann Mortgages and Farm, Real Estate Oumed;
Total Farm Investment, January 1, 1929-39
[In Millions of Dollars]
Year
Total Farm Mort-
gage Debt
Farm Real Estate
Owned
Total Farm Invest-
ment
Amount
Percent
Amount
Percent
Amount
Percent
1929
2,139
2,105
2,069
2,007
1,869
1,661
1,259
1,056
936
895
887
96.0
94.6
93.2
90.1
86.6
73.1
67.7
62.0
66.8
65.9
65.8
88
120
151
220
317
465
601
646
713
705
703
4.0
5.4
6.8
9.9
14.6
21.9
32.3
38.0
43.2
44.1
44.2
2,227
2,225
2,210
2,227
2.186
2,126
1,860
1,701
1,649
1,600
1,690
100.00
1930
100.00
1931
100.00
1932 -.
100.00
1933
100.00
1934.
100.00
1936
100.00
1936
100.00
1937
100.00
1938
100.00
1030 -. ...
100.00
Source: Bureau of Agricultural Economics.
QONCENTRATION OF ECONOMIO POWER
Exhibit No. 2282
June 1937
15507
Bulletin 362
Corporate-'Ow^ned Land
in lo^va, 1937
By W. G. Murray and H. W. Bittinq
lOOO &C<HS
Figure 3.— Land holdings of insurance companies, January 1937.
1550F
CONCENTRATION OF ECONOMIC i.ov*ii,U
AGRICULTURAL EXPERIMENT STATION
IOWA STATE COLLEGE OF AGRICULTURE
AND MECHANIC ARTS
December 1938
CONCENTRATION OF ECONOMIC POWER
Exhibit No. 2283
15509
Research Bulletin 248
Farm Mortgage Foreclosures
in Southern lovv^a
1915-1936
By William G. Mubray
<;:;X::x.4;;:::::<;:: Prwn^rs inv«?;,- '-■'- -. ^ •■ i:!;::-
'■yy^-^'.-^
\u2^
1915 19IS 1921 1924
A6RICULTURAL ECONOMICS CM*»T A- 38010
1933 1936
IOWA STATE COLUEOE
Figure 4.— Percentage distribution of acreage foreclosed by types of mortgage holders, 1915-36.
TABLE 3— PERCENTAGE DISTRIBUTION OF ACREAGE FORECLOSED
MORTGAGE HOLDERS, 1915-36
BY TYPES OF
Period and year
Private
individ-
uals
Insur-
ance com-
panies
B&nks
Loan
com-
panies
Federal
Land
Bank
Joint
stock
land
banks
Others
Total
Period I:
1915 ..„
68.8
81.0
79.6
79.3
55.0
84.1
71.1
70.7
63.2
60.4
63.4
42.5
41.2
37.4
29.5
30.2
25.3
22.6
16.1
17.6
16.6
18.4
21.4
10.7
15.6
17.5
31.7
10.6
- 17.5
17.2
23.6
20.2
22.8
21.2
21.3
18.1
19.2
16.0
15.1
10.0
12.0
7.7
10.6
10.2
5.0
4.3
1.6
1.8
13.1
4.8
1.4
.8
1.4
.2
1.6
2.9
1.7
2.8
1.0
1.5
2.8
1.7
2.0
8.4
2.7
1.8
1.4
1.5
2.8
2.8
4.3
100.0
1916
2.6
2.4
100.0
1917
100.0
1918
100 0
1919
100 0
1920
3.8
4.0
5.8
4.9
10 5
16.8
23.9
27.8
29.2
26.0
40.2
38.8
43.0
51.5
55.5
38.3
39.3
100.0
Period II:
1921
3.8
3.4
4.4
4.5
4.2
7.1
3.6
2.3
.9
1.3
1.3
.5
.4
.1
.5
.3
.7
1.2
1.1
2.9
1.3
2.2
3.6
0.5
15.0
8.5
14.2
11.9
10.0
10.6
17.7
10.7
100 0
1922.
100.0
1923
100.0
1924 __
.5
100 0
1925
100 0
1926
.3
.8
1.5
1.0
1.1
3.5
10.6
8.5
5.7
13.5
16.8
100 0
, 1927
100 0
1928
100 0
1929
100 0
1930
100 0
Period III;
1931
100 0
1932
100 0
1933
100 0
Period IV:
1934
100 0
1935
100.0
1936
100 0
Total..
36.3
30.7
15.7
2.2
4.6
8.2
2.3
100 0
15510
CONCENTRATION OF ECONOMIC POWER
^U*6;;Zl2-<ly/^l20;; ATT
nWA STATE COLLEOC
iO \^ LEGEND
I I Under lOO
2004. Over
ACRICULTURAL ECONOMICS CHAAT A-3S0II
Figure 6.— Number of farm mortgage foreclosures by insurance companies, 1915-36.
AGRICULTURAL EXPERIMENT STATION
IOWA STATE COLLEGE OF AGRICULTURE
AND MECHANIC ARTS
Exhibit No. 2284
December 1939
Research Bulletin 266
Corporate Land Foreclosures,
Mortgage Debt and Land
Values in lovv^a, 1939
By William G. Muebay
1933
1935
1937
1939
lewo Siflit Celltft
FiGURK 1.— Percentage of farm land tn Iowa owned by insurance companies and other corporations, Sept.
1933 and Jan. 1936-37-39.
CONCENTRATION OF ECONOMIC POWER 15511
TABLE 2— LAND HOLDINQS OF CORPORATIONS BY TYPE OF CORPORATIONS,* 1933-3.
Type of corporation
Acreage
(000 omitted)
Percent of all farm land
in Iowa owned by cor-
porations
1933
1935
1937
1939
1933
1935
1937
1939
Tnf«iirftnf>n Piis
1,343
536
76
256
332
145
2,044
499
129
276
317
166
2,510
388
189
253
290
181
2,752
347
232
253
241
219
3.9
1.6
.2
.85
1.0
.4
6.0
1.5
.4
.8
1.0
.4
7.4
1.1
.6
.7
.9
.5
8.1
1.0
Federal land bankt
.7
Joint stock and banks
.7
Land, Invest, and motge. cos . . ..
.7
Misc _
.7
Total .
2,688
3,431
3,811
4,044
7.9
10.1
11.2
11.9
• Data for 1933 center approximately on September, for all other years center on January.
t Includes Land holdings of Federal Farm Mortgage Corporation.
I I (-l4%)-(-0l%l
0-1.4%
^S l.5%-2 9%
■■ 30% a Over
loaa Stole Collect
Figure 3.— Increases or decreases in corporate average 1937-39, as a percentage of all farm land.
15512
CONCENTRATION OF ECONOMIC POWER
Figure 5.— Location and extent of land in the various classes of soil erosion in Iowa.
AGRICULTURAL EXPERIMENT STATION
IOWA STATE COLLEGE OF AGRICULTURE
AND MECHANIC ARTS
Exhibit No. 2285
Relationship of Farm Mortgage Deit to Farm Value as Revealed by Foreplosures
in 5 High- and 5 Loio-Value Counties in Southern Iowa 1915-1936 and acreage
Sold and Deeded hy Corporations in These Same Counties January 1935 to
January 1939 '
Southern Iowa
5 High-
Value
Counties
6 tow-
Value
Counties
Value of land and buildings per acre (Federal Census):
1925-.- :
1930...
1935...
Average debt p«r acre (1916-1936) of foredosure judgments obtained by:
Insurance companies. ._....
Federal Land Banks-. .'.
Joint Stock land banks :
Corporate-owned hind Januar7-t939 as percentage of all farm land
Acreage owned by corporations Jaauary 1935
Deeded by corporations in 4 years ending January 1939
Acres deeded as percentage of acreage on hand January 1935
' Source: Iowa Agr. Exp. Sta., Ames, Iowa.
Five high-value counties are: Pottawattamie, Mills, Fremont, Montgomery, Page,
Five low-value counties are: Ringgold, Decatur, Wayne, Clarke, Lucas.
$170
146
85
119,000
44,000
37%
$93
70
36
$63
55
60
25%
317,000
64,000
17%
CONCENTRATION OF ECONOMIC POWER 15513
Exhibit No. 2286
' [Prepared by the. Securities and Exchange Commission Insurance Study Stafl]
Farm Real Estate Under Contract of Sale as a Percentage of All Farm Real
Estate Oioned as of December 31, 1938, Inclusive
Company
State of domicile
Per-
cent
Company
State of domicile
Per-
cent
Bankers Life
Iowa
33.93
30.78
27.18
26.66
19.38
18.09
15.22
14.20
13.62
12.47
Travelers
MetropoUtan
Western & Southern
Phoenix Mutual
Penn Mutual
Connecticut Mutual
National Life ..
Connecticut
New York
Ohio
9.09
Ohio -
7.86
7.85
Indiana
Connecticut
Pennsylvania.. -
Connecticut......
Vermont.
Pennsylvania...
Connecticut
New York
4.38
Northwestern Mutual
Prudential ..
Wisconsin.
New Jersey
Massachusetts. .
Connecticut
New York
New Jersey
2 86
1.83
1.56
Provident Mutual
Connecticut General
EqaitableN. Y
.54
New York Life
.39
Mutual Benefit
.15
Source: Tables 180 and 181 of Operating Results and Investments of the Twenty-six Largest Life Insurance
Companies, "Exhibit No. 2250."
"Exhibit No. 2287," appears in text on p. 14923
"Exhibit No. 2288," appears in text on p. 14927
'Exhibit No. 2289," appears in text on p. 14928
Exhibit No. 2290
Farm, Sales as Reported ty Farm Conference Meinbers
[Prepared by the Securities and Exchange Commissiop Insurance Study StaS]
Cost
No. of
Sales
4, 622, 415
859
6, 746, 000
886
8, 607, 523
1,220
8,939,320
1,382
7, 603, 178
1,140
7,712,628
1,143
11, 704, 133
1,557
16,823,655
2,191
14, 825, 041
1,968
15, 717, 306
1,873
13, 870, 743
1,610
18, 310, 151
2,319
Acres
Sold
Selling
Price
Selling
Price
Per
Acre
Gain or
Loss
Per
Acre
Sales as
Per Cent
of Farms
Owned
Total Gain
or Loss on
Farms Sold
1933
Quarter:
1st
2nd...-
3rd-...
4th
1934
Quarter:
1st
2nd....
3rd....
4th-...
1935
Quarter:
1st
2nd....
3rd.-..
4th....
122, 632. 16
167, 836. 69
249, 410. 28
259, 447. 10
199, 572. 09
232, 269. 00
294, 806. 31
416, 903. 90
344,440.86
353,061.20
314, 763.1)4
436, 705. 14
3, 337, 393
4, 749, 449
7, 580, 063
7, 565, 942
6, 401, 062
6,433,161
10, 482, 133
15,023,392
12, 061, 833
13, 289, 907
12, 141. 781
16,085,063
27.21
28.30
30.39
29.16
32.07
27.70
35.56
36.04
35.02
37.64
38.57
36.84
-10.48
-5.94
-4.12
-5.29
-6.02
-5.51
-4.15
-4.32
-8.02
-6.88
-5.49
-5.09
2,25
3.85
3.91
3.56
3.64
3.19
4.20
-1,285,185.03
-996,949.93
-1,027,570.00
-1,372,475.15
-1,201,423.98
-1,279,802 19
-1,223,446.18
-1,801,024.84
-2,762,415.69
-2,429,061.05
-1,728,049.08
-2,222,829.16
15514 CONCENTRATION OF ECONOMIC POWER
Farm Bales as Reported by Farm Conference Members — Continued
Cost
No. of
Sales
Acres
Sold
Selling
Price
Selling
Price
Per
Acre
Gain or
Loss
Per
Acre
Sales as
Per Cent
of Farms
Owned
Total Gain -
or Loss on
Farms Sold
1936
Quarter:
ist
2nd
9,058,921
10. 570. 973
15,804,638
26, 601, 674
12,005,875
13, 496. 716
17.704,107
13, 581, 957
13, 648, 139
1,226
1,422
1,995
3,267
1,427
1,473
2,015
1,720
1,757
210, 159. 78
261,954.00
343. 780. 78
576, 587. 51
276. 492. 00
303.264.00
357, 040. 00
285,669.00
310,178.00
7, 744, 069
9, 280, 419
13,507,111
22,701,943
11,04,5,096
12,117,290
15, 791, 057
11,474,438
11,238,496
36.85
35.35
39.29
39.37
39.95
3.996
44.23
40.17
36.23
-6.26
-5.00
-6.68
-5.03
-3.47
-4.55
-5.36
-7.38
-7. 70
2.02
2.29
3.38
6.46
2.84
3.18
4.21
3.30
3.63
-1,315.600.22
-1,309,770.00
3rd
4th
-2. 296, 455. 61
-2,900,235.17
1937
Quarter:
1st
-959, 427. 24
2nd
-1,379,851.20
3rd
-1,913,734.40
4th
-2, 108, 237. 22
1938
1st Half
-2,388,370.60
Totals and
Averages...
265,955,093
34,450
6,316,972.84
230,032,098
36.41
-5.69
..-35,909,913.
Source: Farm Mortgage Conference Bulletins.
Exhibit No. 2291
[From the files of The Lincoln National Life Insurance Company]
May 31, 1929.
Mr, JmiAN Pbice,
President, Jefferson Standard Life Insurance Co.,
Greensboro. North Carolina.
Dear Julian : Thanks very much for your letter of the 29th.
What I am about to say is neither in criticism nor meant to press the matter
of a loan in any way that might embarrass you.
It is hard to understand the attitude of the loan committees to collateral
loans such as the one I seek. We recently loaned approximately $200,000 to
friends of yours and mine, officers of another life insurance company, on their
stock as collateral, and I had a dickens of a time to get my finance committee
to consent to a loan on life insurance stock. That is the one collateral they
understand better than any other. They will make a loan on a farm or a
business property at 5^/^% and think they have a cream loan. When we
foreclose we have the devil's own time to get rid of the security. If, how-
ever, we should have to foreclose on the collateral loan we made, we could
find a market in ten minutes for the collateral.
A loan on Lincoln Life stock at 6%, payable 3% semiannually, is better
and .safer and more liquid than a loan on any piece of real estate could pos-
sibly be. Our stock is traded in every day in Chicago, Hartford, Connecticut,
and Fort Wayne, and 130 is the lowest it has been in many months. Your
committee ought to know all about the merits of a loan on such collateral,
just as mine should.
I should like, of course, to get a loan from you if I can, but I don't wish
to embarrass you in the least and let me repeat that I fully understand the
attitude of some of the members of your committee because the attitude of
mine seems to be very much the same.
I am enclosing copy of a report made to me by our statistical department
on April .30th which shows that .vour company and mine have just about the
worst records in the United States for the ratio of farm real estate owned
to farm loans outstanding, and yet we both go right ahead and make them
Just the same.
CONCENTRATION OF ECONOMIC POWER 15515
We have already absorbed a half million in losses on account of farm fore-
closures and will easily have another half million, or possibly more, to absorb
gradually during the next two or three years. And yet, because for many,
many years they have been the best loans one could make, some of the mem-
bers of the finance committee would continue putting all our money in real
estate loans. I look for a slump in city loans to gradually set in and when
it does I suppose we will have another million of losses to absorb. Thank
goodness, however, we have an earning; capacity of well over a million a
year and we v^ill be able to absorb these losses without any shock or un-
pleasant publicity.
If you haven't read circular No. 60 issued by the United States Department
of Agriculture last December on the Farm Real Estate situation for 1927-
1928, I suggest that you get copies of it for each member of your finance
committee.
It has been my observation that we insurance men have given very careful
study to the statistics of every phase of our business except that of loans,
but the persons in charge of the loan end of the business seem to feel that
they know the statistics of the business without any particular study of
past history and present and future trends. Believe me, I have gotten the
members of our finance committee into a different frame of mind than here-
tofore and we are getting out the same statistical studies of the real facts
on farm and city loans as we have for years of mortality, agency costs, etc.
If our loan committee had been statistically minded during the past ten
years and had made the same careful study of that part of the business as
we have of the insurance features of the business, we would have been about
two million dollars better off than we will be before we get thru with all
the foreclosures we have had and will have in years to come on loans now on
the books.
It may interest you to know that we are now having an independent survey
made of al our foreclosed farms (we have no foreclosed city loans and never
have had). The survey is being made by Mr. Hull, President of the Grange
Life of Lansing, Michigan. You may not know him, and his life insurance
company is a small one, however, he is a national authority on farm economics.
He was president of the Michigan Grange for years and has lectured for twenty
years on farm subjects. He is chairman of the board of the Detroit branch
of the Federal Reserve Bank, has been a farmer all his life and is an all-
around successful big busijiess man. Mr. Hull has not made his report yet
as he is looking over the farms at the present time. I anticipate, however,
that he will blow our loan committee clear out of the water with the result
that we will really save hundreds of thousands of dollars in years to come.
With kindest personal regards, I am.
Sincerely yours.
AFH : MD.
Ends.
P. S. — You will understand, of course, that I am not publishing to the
world what I am freely and frankly telling you as a friend. I am giving
you these facts because I think they may possibly be of some use to you m
guiding and educating the minds of some members of your finance committee.
A. H.
"Exhibit No. 2291-A," introduced on p. 14945, is on file with the committee.
"Exhibit No. 2292," appears in text on p. 149^65.
'Exhibit No. 2293," appears in text on facing p. 14967.
'Exhibit No. 2293-A," appears in text on facing p. 14967.
1551j6 concentration of economic power
"Exhibit No. 2293-B," appears in text on facing p. 14967.
'Exhibit No. 2294," appears in text on p. 14970.
•Exhibit No. 2295," appears in text on p. 14986.
Exhibit No. 2296
[From the files of the Metropolitan Life Insurance Company]
E. H. Lougee
mobtgaoe bankeb
Branch Offices : Sioux City, Iowa ; Omaha, Nebr. ; Sioux Falls, S. Dak.
102 South Main St.
Council Bluffs, Iowa
August 24, 1931.
(Handwritten) 8/31/31
Glenn E. Rogers,
Ass't Manager, Farm Loan Division,
Metropolitan Life Insurance Co.,
New York City.
Dear Sir: I have your letter of the 21st instant with comparative statement
of interest due and unpaid on August 22, 1930, $29,635.90 and on August 21,
1931, $71,871.46.
There is interest due on many loans on the first day of May, June, July and
August and many of these borrowers have depended upon their small grain
from which to pay the interest. The fact that wheat is worth only about 310
and oats 15 to 170 accounts for so many delinquent interest items due during
those months. With only an average crop and with such low prices, it is not
possible for the farmer to pay very much interest until later in the year when
his hog crop or his corn is ready for market.
We hear a great deal of complaint about the lending companies charging
5%7o interest under such conditions. There never was a time when the farmers
needed consideration like right now. I wonder if your company has any
thought of reducing the interest rate to 5%. (Handwritten) No B.
Yours truly,
E. H. Lougee.
EHL:B.
(Handwritten:) To Mr. B.—GER.— 8/26/31.
Exhibit No. 2296-A
[From the flies of the Metropolitan Life Insurance Company]
August 31st, 1931.
(Handwritten:) 9/2/31. J. M. H.
Mr. E. H. Lougee,
102 South Main Street, Council Bluffs, Iowa.
Dear Sir: We are in receipt of your letter of August 24th in which you
inquired if we have given thought to reducing the interest rate on our mort-
gages from 5%% to 5%. We realize that any interest charge is difficult for
some farmers to meet. The difference, however, between 5% and 5^/^% is
scarcely the determining factor as to a farmer's success.
We have not given consideration to reducing the rate from 5%% to 5%
and in the event we admit the total inability of farriers to pay the chances
CONCENTRATION OF ECONOMIC POWER 15517
are that we would decide to make no further farm mortgage investments.
Probably we should come to this conclusion. We have, however, looked upon
the present situation as more or less a temporary one and not as a complete
condemnation of the desirability of farm investments. 5%% interest is a
reasonable rate, although at times we appreciate it that a lot of farmers have
been favored with a. '^7c rate.
Yours very truly, ,
, AssAstant Manager.
GER : MCE.
Exhibit No. 2296-B
TFrom the files of the Metropolitan Life Insurance Company]
Branch OflScej Sioux Falls, South Dakota
E. H. LOUGEE
MOBTOA6E BANKERS
102 South Main St.
Council Bluffs, Iowa, October 10, 19S2.
Mr. Glenn E. Rogebs, Mgr.,
Farm Loan Division,
Metropolitan Life Insurance Co.,
New York City.
Deab Mb. Roqees : I have received your very ably written letter of September
26th, addressed to Branch Offices and Financial Correspondents, and also, your
personal letter to me of the same date.
I can readily see that you understand thorougWy the wretchea condition
that the farmers of the Middlewest are in today, and that I do not need to
dwell upon that situation. I am very glad to note your very considerate and
humane attitude toward these farmers.
With oats at eight to ten cents a bushel, corn quoted all the way from eight
cents to thirteen cents, and hogs worth about three cents on the farm, the
situation looks hopeless to most farmers. The entire income from the farm
will not do much more than give to the family a living, meet the necessary
expense of operation of the -farm, and pay the taxes thereon. Very little, if
any, will be left for payment of interest this year.
Under these conditions, many of the most substantial fai-mers, those who
have been successful in the past, have become completely discouraged, and
hardly a day goes by that there are not one or more farmers in this office,
offering to us a deed to their farm.
There are days when I sit at my desk practically all day and discuss with a
farmer, one after another, his problems, and this is also true of Mr. Hall and
Mr. Bernau. I have had the farmer come in here with his wife and in some
cases, with the children' who could not be left at home, and sit with me for
an hour and tell to me their troubles. Quite naturally, the wife will, in many
cases, be in tears throughout the entire interview. They come for the purpose
of surrendering their homes.
. After I have carefully gone over their affairs with them, have a good picture
of their assets and their liabilities, if their condition warrants it, I try to
encourage them and send them home with the idea, that as long as they stay on
the farm and do the best they can, and play the game square with us, that we
will play fair with them and give them every opportunity to pay out. I have
had many cases where the wife has sat here with the tears running down
her cheeks, and I have sent her home with a smile on her face, with new
hopes, new ambitions, and a belief that eventually they VTiU be able to work
out of their troubles.
I assure you that this is not a pleasant task, but it seems to be a necessary
one.
In cases where our borrower is so heavily financially involved tt.'at there is no
chance for him to work out, having perhaps a ^cjond and a third mortgage, and
owing money at the bank, with all of his personal property and I js cropy mort-
124491—41 — ^pt. 28 53
15518 CONCENTRATION OF ECONOMIC POWER
gaged I say to him that it is not for his good that we conUnue to carry his loan,
without foreclosure, and that we shall commence foreclosure of his mortgage at
once, and clean house for him. ^ ^^. ^
I then say to him that the Metropolitan will become the owner of this farm, and
when it Is the owner, the farm will be for sale, and that there is no man in the
world to whom the company would rather sell the farm than back to the man from
whom they took it. I am extremely cautious not to say anything to him that could
be construed as binding upon the company, telling him that in talking to him, I
do not speak for the company as I am not authorized to do so, but from my ex-
perience with the company, I have a pretty good idea of about how the company
would deal with a man.
I say to him that the most definite statement that I could make to him would
be that I will recommend to the company so and so, and that I am inclined to
think that the company would give consideration to my recommendation. I sug-
gest to him that the farm might be repurchased on a long time contract, with
reasonable annual payments.
I find this to be very satisfying, and encouraging to many of them. I have had
some cases where there was no delinquent interest or taxes, and where the title
holder has oflfered to me a deed, with the rent for 1932 ; but in most cases, where
deeds are offered, there is both delinquent interest and taxes, and the farmer can
see no chance of paying same.
We have one case where we have a loan for $8500.00 on 135 acres of land, quite
well improved, in this county. This farm is owned by a man about 35 years of age,
and his wife is about the same age. Ten years ago, she received $10,000 from
her father's estate, and they invested it in this farm. They came into the oflBce,
with the full determination of giving to us a deed to the farm. I queslioned them,
as to their personal property, and as to how much they were owing elsewhere, and
learned that they owed only $215.00, and that to a bank, and that the bank had
a mortgage on their personal property, including hogs. We have a mortgage on
the 1932 crop. We suggested to them that they go to the banker, and say to the
banker — "You own the pigs, Lcugee owns the corn. If the corn is fed to the pigs,
when the pigs are sold as hogs, the money should be divided, and that will be
satisfactory to Lougee."
The banker declined to do this, saying that when the hogs are sold, we want
all of the proceeds until our indebtedness is fully paid. The woman sat here by
my desk with the tears running down her face. I told them the story about the
conditions back in about 1894 to 1896, and some of the experiences that some of
our borrowers went through at that time, and how, by holding onto their farms,
when permitted by the mortgagee, they came out into the clear and eventually
saved a good equity in the farm.
I said to them — "You pay the first $215.00 that you get, either from the sale of
hogs, or from our corn, to the bank, and clear that indebtedness, and then never
owe the bank anything again. And when you have any money coming in after
that, bring it in to apply on your interest." I sent them home happy. This case
will, I am very sure, work out all right, and they will eventually pay their interest.
You have asked me in your letter of September 26th, to tell you very frankly
what, in my opinion, I would do in the situation, if I occupied your position with
the company.
I have given this question very careful consideration. My very earnest recom-
mendation to the company would be that the gross interest rate to the farmer
during this period of extremely low prices, be reduced to 4%, permitting the
correspondent a participation of y2 of i% in this rate.
From the man who is owing interest due, say last March 1st, I would accept
4% in settlement of the interest due at that time. I would wait until March 1st
of next year, to give any consideration to a reduction in the rate for the period
ending March 1st. 1933. And I would then be governed by conditions as I found
them next March.
There is another borrower whose interest was due March Ist, 1932, and he paid
it. To that man, I would say on March 1st, 1983— "We will accept 4% interest for
the year ending March 1st, 1933."
If I had found it necessary to reduce the interest due March 1st, 1933, to the
first borrower, then I would reduce for the second borrower the interest due to
him on March 1st, 1984. In this way, I would be giving the same treatment to
both borrowers. I think all borrowers should be treated alike.
In reducing the interest rate, you would give encouragement and put new life
into hundreds and hundreds. of farmers who today are completely discouraged,
and who want to give up their farms. The result would be that many of these
farmers would remain upon their farms, and make every effort to meet the pay-
CONCENTRATION OF ECONOMIC POWER 15519
ment of their interest and their taxes. They would feel that the great Metro-
politan is huumane, and in fact, has a deep interest in its borrowers. The result
would be a greatly reduced number of foreclosures, and a greatly encouraged
army of borrowers, instilled with new hopes, new life, and new ambitions.
I would make new loans at a gross rate of 5^4%. with a participation of
V4: of 1% to the correspondent. The farmers of the Middlewest were accustomed
to borrowing money on their farms for many years at 5%, and to now charge them
5%% on new loans, as we are doing, is discouraging, and they feel that they
are being distressed, but they submit to the rate because they must have the
inoney.
In the extension of loans, and in the making of new loans, I would not re-
quire any annual curtailment until the end of the second year, and then not
more than 2% of the amount of the principal. As a matter of fact, I do not
believe it is necessary in the new loans that we are making, to require any annual
curtailment. These loans are being made on present day values, and how can
they fail.
I have submitted your two letters of September 26th to Mr. Green, to Heliry
Hall, to perhaps half a dozen of my field men, and sent a copy of your personal
letter of September 26th, to Eldin, as you had requested me to do,
Henry Hall wrote his reply to your question, a:nd I am enclosing.it herewith.
I have just received Eldin's reply addressed to you, this morning. He did not
touch upon the question of relief to the distressed, but has dwelt at length upon
our operations in the Sioux F^lls oflSce. I am enclosing his letter.
Every one of the field men with whom I have talked, and to whom I sub-
mitted the question that you asked of me, has given to me the same a:^wer
without any suggestion from me as to what my answer to your question would
be. The answer in every case has been to reduce the interest rate to a low
rate, for a period of one year, letting each year take care of itself, suggesting
that when prices have again become normal, and it is warranted, that we could
require payment of the contract rate.
In Henry HaU's letter, he has recommended th^t loans now past due, and
maturing during the next year, be permitted to run past due until about October
1st, 1933, without requiring renewal of the loan. This would relieve the bor-
rower of the payment of any commission at this time, or other expenses. I have
suggested that the correspondent have a participation of % bf 1% per annum,
in. all loans so carried past due, to help defray the expenses of the operation
of the business. % of 1% per annum would not under present conditions, pay
the expense of operating this business.
• I think you must have a pretty good idea of about what the situation is with
us at Sioux Falls. We are making very few new loans, and renewing few. And
yet we have three men in the field, working almost entirely on collections. The
oflSce is running behind every month. Something ought to be done by the
company, to help pay the service charge during these times, when it is impossible
to meet expenses from operation income.
Tours very truly,
E. "H. Louoeb.
EHL/HF
End.
Exhibit No. 2297
[From the files of the Metropolitan Life Insurance Company]
October 24th, 1934.
Mr. M. L. Bowman,
Ewecutive Ohairmcm, Iowa Farm Debt Advisory Council,
Des Moines, Iowa.
Deab Sib: I am in receipt of your letter of October 15th quoting extracts from
a letter addressed to one of your Debt Advisory Cororaitteemen by Mr. Lougee
and also your letter of October 18th wit;h which you enclosed copy of a letter
from Mr. A. F. Dean to Mr. Adrian L. Bowers.
Mr. Lougee, Financial Correspondent for the Far^j Loan Division of this
Company in Iowa, has a large organizatloh handling a considerable volume of
business other than our own. His operations cover a wide, area extending into
other states.
We know that Mr. Lougee has personally attended a number of meetings with
debtor committees of various types^ However, we can appreciate that it would
15520 CONCENTRATION OF ECONOMIC POWER
be Dractlcally impossible for him to personally attend all of the Debt Advisory
Committee meetings now being held in various counties in his territory.
A though he has heretofore endeavored to handle all such matters personally
we feel certain that Mr. Lougee would be willing to delegate to the individual
field men the duty of attending the Farm Debt Advisory Committee meetings
called in their several territories. This arrangement would not be as satisfac-
tory to Mr Lougee as if he personally could meet with the committees but
would place at their disposal such information as the field man might have and
would furnish a personal contact. 4. ^. ,. >,
On the other hand, if the committee could send a representative to Mr.
Lougee's office where he has the complete files and records on each case, probably
more satisfaction would result. The full and accurate information as to each
delinquent borrower's status would then be available for conference purposes.
We know that Mr. Lougee has, in several instances, written rather long letters
to local committeemen setting out the full history of the cases in question. Un-
doubtedly, these letters give the committees as much information, if not more,
than the local field representative would be able to give since Mr. Lougee not
only has the benefit of the field men's reports in his office but has access to
other sources of Information not at their disposal.
We assume from your letter that you desire to have some one from Mr.
Lougee's organization meet with the local committees. We are, therefore, asking
him to have his field men attend such meetings when requested. We trust that
such cooperation or Itr. Lougee's part will prove satisfactory.
In conclusion, we .vish to reiterate our sincere desire to cooperate with the
Farm Debt Advisory Council in every practical way. As I review my corre-
spondence with you, it appears that the only difference between our position and
yours lies in the question of whether we or our borrower shall make the first
approach to the conciliation board. We are very strongly of the opinion that
It is for the borrower and not for us to solicit the good offices of the board, and
to that end, we are glad to advise a borrower, who is in difficulties regarding
his mortgage, that he may wish to communicate with the board. On his so
doing, we shall be glad to enter into conference in the fullest spirit of coopera-
tion. Our course is Ukely to result, in many instances, in adjustment of the
problem without resort to the board, which course, in itself, serves to conserve
the time of the board for those problems which must be dealt with by it.
I do hope that you will appreciate our spirit of genuine helpfulness in the
matter and that you will agree with me that the sole point of difiEerence lies in
the initiation of the approach.
Very truly yours,
f
Vice President and General Counsel.
LAL:F
Exhibit No. 2298
[Prom the files of the Metropolitan Life Insurance Company]
Executive Committee. — State House : Governor Clyde L. Herring ; Ray Murray, Secretary
of Agriculture ; D. W. Bates, Superintendent of Banking ; Dr. W. G. Murray, Iowa
State College ; M. L. Bowman, Executive Chairman
District Coordinator B. — District One — W. W. White, Spirit Lake. District Two — A. W.
Wolf, Hampton. District Three — Reed Carl, Tipton. District Four — C. D. Moore,
Urbana. District Five — H. E. Cornish, ?'erry. District Six. — Adrian L. Bowers, Le-
Mars. District Seven — Quintan Wood, Logan. District Eight — Chas. E. Malone,
Atlantic. — District Nine — Ray E. Schwartz, Burlington
State Committee. — Ray Murray, Secretary, Department of Agriculture ; D. W. Bates,
Superintendent, State Banking Department : Henry Nollen, Representing Insurance
Companies ; B. F. Kauffman, State Banking Assdciation ; Charles E. Hearst, President,
Iowa Farm Bureau ; Glenn B. Miller, President, Iowa Farmers' Union ; Franz M. Fazel,
President, Iowa Fruit and Vegetable Growers Association ; Ralph Smith, Master, Iowa
Farm Grange ; R. K. Bliss, Director, Iowa State Extension Service ; W. H. Thompson,
Secretary, Farmers Grain Dealers Association ; W. G. Murray, Iowa State College ;
J. N. HorHcker, President, Iowa Live Stock Marketing Association ; Charles Sexton,
President. TCowa Sheep and Wool Growers Association; Knute Espe, Secretary, Coopera-
tive Live Stock Shipping Association ; Ralph Sherman, President, Iowa Beef Producers
Association ; M. D. Gilbert, United Farmers ; Fred Larrabee, President, Iowa State Dairy
Association; Kirk Fox Successful Farming; WilHam Drips, Wallaces' Farmer and Iowa
Homestead ; John Chalmers, President, Farm Holiday Association ; Thomas J. Guthrie,
President, Iowa State Bar Association ; J. S. Russell, Des Moines Register and Tribune ;
Ray Anderson, Cedar RapMs Gazette ; Lou Mighell, Progressive Farmers' Union ; Marlon
Coppoch, President, Iowa Corn and Small Grain Growers' Association
CONCENTRATION OF ECONOMIC POWER 15521
Iowa Fabm Debt Advisoby Council,
Des Moines, iQwa, Octoier 29, 1934-
Mbtbopoutan Life Insurance Company,
New York City.
(Attention: Leroy A. Lincoln, Vice President and General Counsel.)
Dear Sib : This wUl acknowledge receipt of your letter of October the 24th.
Quoting from your letter as follows :
"We are very strongly of the opinion that it is for the borrower and not for us to
solicit the good offices of the board, and to that end, we are glad to advise the
borrower, who is in difficulties regarding his mortgage, that he may wish to com-
municate with the board. — I do hope that you will appreciate our spirit of genuine
helpfulness in the matter and that you will agree with me that the sole jwint of
difference lies in the initiation of the approach."
It becomes necessary for us to say again that we believe it to be very unfor-
tunate that you take the position you do in this matter.
With the exception of yourselves, the Connecticut Mutual, and the Equitable
Life of New York, all the other companies that we made the request of are
cooperating with us in connection with Governor Herring's request, and we can
see no good reason why your company would not be glad to do likewise.
These "confidential ihatters" about foreclosure proceedings are something that
we do not know anything about. Not very much in the way of confidential pro-
ceedings in connection with these foreclosure matters, and particularly so when
the foreclosure gets in action.
We regret that it has become necessary in our judgment to notify the debtors in
Iowa with regard to those companies who will not cooperate in accordance with
Governor Herring's request, for while you might in your letter state to them that
there is a County Farm Debt Advisory Committee, to whom they can go, yet we
know that many of these debtors because of their depressed feeling in connection
with foreclosure proceedings frequently do the very thing they should not do, and
which would be avoided in many instances were we able to get in touch with them.
And at the same time the final result as far as your company is concerned would
be fair and just, and that is all we ask.
Our committees are public spirited individuals who are working without pay,
and making a sincere effort to be absolutely fair both to the creditor and the
debtor. We cannot ask them to make special trips down to the office of Mr.
Lougee to take up these matters, and we do not hesitate to say that we are sincere
in our belief that you are not acting in accordance with what would be in the best
interests of your company to refuse to cooperate fully as the other life insurance
companies who have agreed to do, are doing in connection with our work.
Thanking you for your letter, we are
Very respectfully yours,
Iowa Fabm Debt Advisoby Council,
M. L. Bowman, Executive Chairman.
MLB : DD
P. S. — We appreciate your asking Mr. Lougee to have his fieldmen attend such
meetings as requested. We of course sincerely hope that this will be done.
M. L.
Exhibit No. 2299
[Plats illustrating following statistical data, numbered "Exhibits Nos, 2299 and 2299-A
to 2299-E," appear in text on pp. 15015-15018]
[From the Metropolitan Life Insurance Co.]
Form F. L. 220C. Oct. 1935. Printed in U. S. A.
Metropolitan Life Insurance Company — Rotation Chart
R. E. No. 8554X
Loan No. X42839
Type of Rotation REcoMMENDEa) — Rotation No. 1 Years
Rotation No. 2 Years
M. M. Oqlesby,
Montgomery Count"; Tennessee.
15522
CONCENTRATION OF ECONOMIC POWER
BOTATIOn' NO. 1
Approximate Size of Fields Acres
i93g.
IMO.
1941.
1942.
Field A, A' 67a
Bm. grain, corn &
tob. 20a lesp.
47a.
Sm. grain, lesp.
and grass.
Lesp. and grass . . .
Corn 52a, tobacco
16a.
Sm. grain, lesp.
and grass.
Field B, B' 67a
Corn.
Sm. grain, lesp.
and grass.
Less and grass
Lesp. and grass...
(Torn 62a, tobacco
15a.
Field C, C, C", 67a
Lesp.
Com 52a, tobacco
16a.
Sm. grain, lesp.
and grass.
Lesp. and grass...
I^esp. and grass. .
Field D, 72a
Wheat (27), lesp.
and grass.
Grass and lesp...
Corn 57a, tobacco
16a.
Sm. grain, lesp.
and grass.
Lesp. and grass...
Field E
ROTATION NO. 2
Approximate Size of Fields Acres
Field E 66a
Woods.
Field F 8a
Woods.
Field O, G', O" 11a
Woods.
Field 22a
Lots and waste.
Field ...
(If more than two separate rotations are recommended, use additional pages
of this chart.)
Rbmabks : Name substitute crops that, in emergencies, can be used.
Form F. L. 220C. Oct. 1936. Printed In U. 8. A.
Meteopolitan Life Insubance Company — ^Rotation Chart
R. B. No. 4358X
Loan No. X25221
Ttpe of Rotation REOOMMBNOEa) — Rotation No. 1, 3 Years
Rotation No. 2, 4 Years
Graham, Ogle Co., IV
rotation no. 1 — corn, corn, OATS-ORBEN MANURE
Approximate Size of Fields 80 Acres
Field A 80
Field B 80
Field C 80, Lots 4 A
Field E
1939
Com
Oats, Green manure
1940
Com..
Oats, Green manure
Com
1941
Oats, Green manure
Com
1942
Com
Oats, Green manure..
1943
Com ^
Oats, Green manure
Green manure — Green manure from sweet clover or Habam turned under.
Exhibit No. 2300
(Prepared by the Mutual Life Insurance Company of New York]
Mutual Ldfe Insurance Company — 10 Largest Urban Real Estate Properties Owned (Acquired in Satisfaction of Debt)
27190 135 Broadway, N. Y. C.
Offices and bank.
27268 30 5. 67th St., N. Y. C.
Stores and art gallery.
24360 M E. 42d St., N, Y. C.
Vacant except 1 store.
27851 742 Filth Ave., N. Y. C.
Stores and Lofts.
28483 10 Oracle Square, N. Y. C.
Apartments.
27964 1730 Broadway, N. Y. C.
Hotel, auto showroom
and vacant land.
28309 34 VV. 19th St., N. Y. C.
Loft.
28463 575 Lexington Ave.,
N. Y. C. Stores and
apartments.
28297 The Manhasset, N. Y. C.
Stores and apartments.
28507 1890 Broadway, N. Y. C.
Parking lot & car sales.
Book
Value
(12/31/38)
$900,000
2, 492, 000
3, 200, ()00
3,1 vJO
2,400,000
1, 66i; 000
1, 050, 000
1, 774, 750
920,000
1, 000, 000
18, 665, 750
in Book
Value by
Adjust-
ment
249
508, 301
>3,042, 350
277, 821
431, 941
111,328
724, 649
14.3,718
56, 117
Date
Title
Taken
4-27-38
4-18-38
6-12-34
8-30-34
10-28-37
10-28-32
6-26-36
5-24-34
8-18-32
6-10-35
Date of
First
Default
1-1-35
4-1-34
U-1-33
11-1-33
6-1-34
5-1-32
11-1-32
11-1-32
5-1-31
9-1-34
Date of
Latest
Appraisal
9-20-38
9-27-38
9-27-38
11- 1-38
10-17-38
9-27-38
10- 1-38
9-28-38
10- 1-38
9-29-38
550, 000
1, 100, 000
1, 800, 000
2, 000, 000
2, 600, 000
3, 250, OOO
(')
2, 850, 000
1. 700, 000
1, 900, 000
8.50, 000
800,000
1, 000, 000
1, 000, 000
Brown,
Horace
Brown,
Horace
Brown,
Horace
Wheelock, Harris, Stevens, Inc.
S. Ely <S Co
Wheelock, Harris, Stevens, Inc.
S. Ely & Co
Wheelock, Harris, Stevens, Inc.
S. Ely & Co
Horace
Brown,
Horace
S. Ely & Co
Wheelock, Harris, Stevens, Inc.
S. Ely & Co
Wheelock, Harris, Stevens, Inc.
S. Ely & Co
[, Wheelock, Harris, Stevens, Inc.
sS. Ely& Co-
, Wheelock, Harris, Stevens, Inc.
)S. Ely & Co....
Brown,
Horace
Brown,
Horace
Wheelock, Harris, Stevens, Inc.
S. Ely & Co
Wheelock, Harris, Stevens, Inc.
S. Ely* Co
14, 276, 000 Brown, Wheelock, Harris, Stevens, Inc.
16,660,000 Horaces. Ely & Co
}$1,100,000
i 2,000,000
} 3,250,000
} 2, 860, 000
} 1, 900, 000
1,500,000
776,000
1,000,000
850.000
1,000,000
$560,000
1,800,000
2,600,000
2,869,000
1, 700, 000
1,260,000
750,000
1,000,000
800,000
1,000,000
14,200,000
1938
Gross
Reve-
nue
$28,606
98, 413
0
76, 755
19i331
18,250
112, 897
102, 662
126,720
15,460
804,034
1938 Net
Income
Before
Div. Dep.
Book
Times
Gross
1938
-$91,429
3L46
41,567
25.32
-Hi 314
0
-32,366
41.27
13.000
12.35
-2,593
34.42
11.027
9.30
39,567
17.29
13, 817
7.26
-28,380
64.72
-160, 104
23.09
Book Value
(12/31/39)
sale.
A portion of these premises were sold 6-1-35 and therefore $3,041,500 of this amount is a reduction du
> No appraisal made by Brown, Wheelock, Harris, Stevens, Inc.
^ $68,604 was capitalized since appraisals.
Pro rata write-ofl of these ten properties made as of December 31, 1939, ^1,906,647.
-Appraisals of all these properties except 27,851 were ordered simultaneously from Brown, Wheelock,
Harris, Stevens, Inc., and Horace S. Ely & Company, all such appraisals to be made as of October 1, 1938.
Brown, Wheelock, Harris, Stevens, Inc. are the Company's regular appraisers of new mortgages. Their
appraisals of the real estate acquired in satisfaction of debt were made under their reg-rlar retainer without
additional compensation.
124491—40 (Face p. 15r)2.S)
As of December 31, 1938 total book value of these premises was $18,565,750. The total of the higher
appraisals was $16,725,000 and the total of the lower appraisals was $14,200,000. As of Decembe. 31, 1939, the
total book value of these ten properties had been increased by adding $68,604 representing capita! expenditure?
made on five of these between October 1, 1938 and December 31, 1939, the book value on the latter date being
$18,634,363.71. After deducting their pro rata share of a lump sum decrease by adjustment made in the book
value of all real estate owned by the Company at December 31, 1939 and acquired prior to the year 1939, the
aggregate book value of these ten properties was $16,659,102. This book value was, therefore, slightly under
the total of the higher appraisals, after adjustment for capital expenditures.
CONCENTRATION OF ECONOMIC POWER
BOTATION NO. 2 — CORN, OATS, BED CL. MIX.
Approximate Size of Fields 18 Acres
15523
Field D 20
Field E 20
Field F 16
Field O 15
Field H 6
1939
Oats, Red cl. mix.
Clover
Com
Perm. Past.
1940
Oats, Red cl. mix.
Clover
Com .
Com .
1941
Com
Oats, Red cl. mix.
Clover
■f «
1942
Com . .
Oats, Red cl. mix.
Clover ■
« <i
1943
Oats, Red cl. mix.
Com.-
>< •■
Red clover mixture-r-Mlxture red clover, alsike and timothy.
(If more than two separate rotations are recommended, use additional pages
of this chart. )
Ramabks: Name substitute crops that, In emergencies, can be used. In
Rotation # 1, 40 acres soybeans may be substituted for 40 acres oats and sweet
clover sown in 40 acres of corn at last cultivation for green manure crop.
Exhibit No. 2301
[From tbe files of the Metropolitan Life Insurance Company]
[Copy]
Loan #119517
There was submitted to the Committee a proposal received from the mort-
gagor, in connection with which it was stated that, pursuant to committee ac-
tion, all instalments provided by the mortgagor to and including the instalment
due September 1, 1939, had previously been postponed to the due date of the
mortgage (March 1, 1950), and that through acceptance on account of interest
of payments at less than the contract rate, certain arrears of interest have
accrude.
After a discussion of the matter on motion the committee authorized the
following modification of the obligations of the mortgage.
On March 1, 1938, the mortgagor shall pay to the Company the sum of
$5(X),000, in anticipation of the instalment payments which shall accrue com-
mencing March 1, 1940.
The mortgagor shall pay semi-annually, beginning March 1, 1938, interest at
the rate and for the periods indicated as follows:
Period : Rf^te
September 1, 1937, to September 1, 1938 , ^— 2%
September 1, 1938, to March 1, 1943 2i/o%
March 1, 1943, to March 1, 1950 . 4%
From and after March 1, 1938, and until the principal of the loan shall have
been reduced to the amount to which payment of the instalments in accordance
with the terms of the mortgage would have reduced such principal, the mort-
gagor shall make no payments for or on accouOt of interest or princiiMil of
junior mortgage indebtedness or for dividends to stockholders, but shall pay to
the company on account of the principal indebtedness secured by the mortgage,
semi-annually on successive interest payment dates, all of the net earnings of
the mortgaged property in excess of operating expenses which shall include
upkeep, replacements, tenant changes, general overhead expenses, taxes and
first mortgage interest, until the sum of $7,750,(KK). shall have been paid by
such means.
In consideration of the foregoing payments, and upon condition that no de-
fault therein shall occur, the Company will receive payment of interest at the
15524 CJONCENTRATION OF ECONOMIC POWER
rates specified as in full for the respective periods, and will waive payment and
cancel the obligation of arrears of interest on dates and in amounts as follows:
Immediately $1, 062, 500
September 1, 1938 900,000
September 1, 1939 1 700, 000
September 1, 1940 600, 000
September 1, 1941 500,000
September 1, 1942 . 500,000
Payments of said excess of the net income of the property shall be received
by the Company in lieu of the instalments of principal provided to be paid
by the mortgage and shall be applied first in anticipation of instalments accru-
ing on or subsequent to September 1, 1940, which shall not have been paid from
other funds.
The mortgagor shall pay for the U. S. documentary tax stamps required to
be affixed to the agreement evidencing the foregoing modification.
I, Francis J. Geist, Assistant Comptroller of the Metropolitan Life Insurance
Company, hereby certify that the foregoing is a true and complete copy of a
minute from the transactions duly passed by the Real Estate Committee of
said Company at a meeting held on the 30th day of December, 1937, at which
a quorum was present.
December •30th, 1937.
(signed) Francis J. Geist,
Assistant Comptroller.
The foregoing modification of the consolidated first mortgage held by the
Metropolitan Life Insurance Company covering the Empire State Building on
Fifth Avenue at 33rd and 34th Streets, New Yorli City, is hereby approved and
accepted.
Dated at New York City, December 30th, 1937.
Empikej State, Inc.,
(signed) By Alfred B. Smith,
President.
Exhibit No. 2302
Office of chairman of the board. W
New York Life Insurance Company,
51 Madison Avenue, New York, N. Y., February 21st, 1940.
Mr. Gerhard A. Gesell,
General Counsel, Securities and Exchange Commission,
Washington, D. C.
Dear Mr. Geseix : In my testimony before the TNEC on the 12th instant, in
response to the questions you put to me regarding policy loans, interest rates,
and expense of making the loans, I responded with answers based upon my
memory of the situation of some years ago. Upon my return I have checked
into the facts of the current situation and find same quite at variance with
some of my answers. For these reasons I would like to advise you as follows : —
First — The expense as near as cail be ascertained in the making' and
handling of policy loans during 1939 was approximately ^^ of 1% which
I gave from memory.
Second — The average policy loan including premium lien notes as of the
end of 1939 was $433. In my testimony I think I gave the approximate
average $400.
Third— On December 31st, 1939 the number of policies with loans or
premium lien notes was about 26% of the total number of policies in force,
but excluding new policies with no loan value would make the ratio ap-
proximately 30%. In my testimony I placed the ratio at %, and subse-
CONCENTRATION OF ECONOMIC POWER 15525
quently I appear to have agreed with you that the ratio might be some-
where between % and %.
I would like to file this with you if I may, as a correction of the testimony I
gave.
Respectfully yours,
Thos. a. Bucknee,
Chairman of the Board.
Exhibit No. 2303
Chapteb 40 OF THE LtVws OF 1933, State of New York Which Became a Law
ON Maech 7, 1933
An act in relation to the powers of the Superintendent of Insurance during
the existing emergency.
The People of the State of New York, represented in Senate and Assembly,
do enact as follows :
Section 1. It is hereby declared that a public emergency exists affecting the
health, comfort and safety of the people of the State, growing out of the
abnormal disruption in economic and financial processes, the declaration of a
banking holiday by this State and by other states and by the Federal Govern-
ment the inability of insurers to carry on in a normal and ordinary manner
the functions of their business owing to the situation now existing with ref-
erence to currency, specie and checks, and other facts and circumstances
curtailing and hampering the conduct of the business of insurance in a normal
and ordinary manner.
Section 2. During the period of the emergency as hereinafter defined, the
Superintendent of Insurance shall have the power to suspend any provision
of the insurance law in whole or in part. In addition to such powers and not
in limitation thereof, he shall also have power during such period to make,
rescind, alter and amend rules and regulations imposing any condition upon
the conduct of the businesis of any insurers which may be necessry or de-
sirable to maintain soimd methods of insurance and to safeguard the interests
of policyholders, beneficiaries and the public generally during such period. In
the discretion of the Superintendent of Insurance, such rule or regulation
may be published in a manner to be prescribed by him or may be otherwise
brought to the attention of the insurer affected in a manner to be prescribed
by the Superintendent of Insurance.
Section 3. Such rule or regulation may be inconsistent with existing law, and
in such event shall supersede such existing law inconsistent therewith.
Section 4. Such rule or regulation of' the Superintendent of Insurance adopted
pursuant to this act shall become ineffective upon the termination of such emer-
gency and thereupon all the existing law which may have been suspended or
superseded pursuant to this act shall become effective.
Section 5. The period of the emergency herein provided for shall be from the
date of the taking effect of this act until such date as the Legislature may, by
joint resolution, designate to be the termination thereof or, if the Legislature be
not in session, the date so designated by proclamation of the Governor.
Section 6. Any violation of the provisions of this act, or of any rule or regula-
tion adopted by the Superintendent at Insurance pursuant thereto, shall be a
misdemeanor.
Seotion 7. The word "insurer" as used in this act includes all corporations,
associations, societies, orders, partnerships and individuals to which any provision
of the insurance law is applicable.
Section 8. If any section, part or provision of this act shall be declared uncon-
stitutional, or invalid, or ineffective by any court or other authority of competent
jurisdiction and power, such declaration shall not affect any other section, provi-
sion, or part thereof.
SEcmoN 9. This act shah take effect immediately.
15526 CONCENTRATION OF ECONOMIC POWER
Exhibit No. 2304
ViNCBNT P. WHIT8ITT Manager and General Counsel
Bhocb E. Suzppbbd, Actuary
CHABLE8 F. CRBbWBLL, Statistician
KoBBKT L. HooG, Assistant General Counsel
Fkank De F. Ross, Attorney
BoBBKT B. Cbanb, Assistant Secretary
The Association of Life Ins.uranoe Pbbsidejnts,
Number 165 Broadway, New York, February 21, IHO.
GF3HABD A. Gesell, Esq.,
Special Counsel, Insurance Section, Monopoly Study,
Securities and Exchange Commission, Washington, D. C.
Dear Mr. Geskll : Referring to the inquiry contained in your letter of February
8, I may state that the following Minute was adopted by the Executive Committee
of this Association on December 20, 1932:
"Resolved, that the Association in addition to assembling and reviewing
bills relating to real estate and real estate mortgages, and distributing such
bills to member companies, shall hereafter actively oppose all bills of that
character which affect the integrity of real estate mortgages by impeding or
preventing the collection of principal and/or interest according to the terms
^ of the contract or by radically extending periods of redemption or otherwise
by proposed legislative action weakening the security of real estate mort-
gages ; that in adopting such course, the oflScers of the Association shall take
Into consideration the extent of member companies' investment interest in
the respective states; and that for the effective purposes of this resolution
all member companies be requested to arrange for the cooperation of their
mortgage field representatives."
You ask whether this Minute has at any time been modified or revoked. It has
never been revoked. It has, however, been materially modified by interpretations
and through practical application.
I quote the following interpretations from the Minutes of the same meeting of
our Executive Committee, held on December 20, 1932 :
"Following the adoption of the report and resolution, further discussion
was had regarding interpretations to be placed upon the language of the
resolution by the Association oflicers in carrying out its terms with the result
that the following appeared as the consensus of opinion :
'(1) Legislative proposals requiring life insurance companies to dispose of
real estate within a period of five years or less — without a proviso for ex-
tension of such period by state officials — would fall within the purview of
the resolution and the Association should take action thereon.
'(2) The Association should continue to circulate in its Blue Bulletin
Service copies of real estate mortgage proposals and title legislation as here-
tofore, but in the case of bills upon which the Association was taking action,
proper indication of this fact would be given in each instance.
'(3) As to proposals "radically" extending periods of mortgage redemp-
tion, any extension of an existing two-year period would fall within the
resolution, and in the case of a proposal for a redemption period, or extension
thereof, where the total period would not exceed two years, the Association
officers were to be guided by local circumstances and advice from legislative
representatives.
'(4) The Association should not take action on bills relating to the Fed-
eral Home Loan Bank system or the Federal land banks or joint stock land
banks, or similar proposals where the Association would be in a position of
opposing measures on the grounds of competition from Federal govern-
mental agencies.
'(5) Proposals such as United States Senate Bill No. 4995 by Senator
Harrison amending the Reconstruction Finance Corporation Act providing
for loans to mortgagors for the purpose of taxes on the condition that the
mortgagee agrees that the Reconstruction Finance Corporation should have
paramount lien, should not be opposed by the Association.' "
As is natural in undertaking a new field of activity, it was necessary for the
officers of the Association, In carrying out the terms of the above-quoted Resolu-
tion, to feel their way and to determine policy in tlie light of developments. As a
matter of practice, therefore, for instance, it developed that, instead of presenting
opposition to all types of mortgage moratoria proposals, there was a tendency
CONCENTRATION OF ECONOMIC POWER
15527
to concentrate efforts on securing amendments so that the laws, when enacted,
would not Impose undue hardships by way of undermining or impairing the
security of farm mortgage investments of life insurance companies. In other
words, it was recognized that certain types of mortgage moratoria would not
unreasonably hamper mortgage lenders in preserving the security of their in-
vestments.
Illustrative of this, was the so-called Minnesota type of mortgage moratorium.
After the Minnesota law was upheld by the United States Supreme Court in
Home Building and Loan Association v. Blaisdell, similar proposals were pre-
sented in other states. These were generally considered fairly reasonable and
generally were not opposed.
A further modification of the original Resolution developed in 1935. It will
be recalled that the moratoria laws were emergency measures enacted for a
one or two-year period. As the expiration dates approached, many proposals were
introduced extending the original moratoria acts for other like periods due to
the continuance of the emergency. Our general policy in such instances was not
to oppose.
When the original Frazier-Lemke Act was pending in Congress, representa-
tions against its enactment were made by this Association, in behalf of its mem-
bers and their policyholders, in the belief that some of its terms were suflSciently
burdensome to impair the security of farm mortgages held by member com-
panies, and thus would prove detrimental to the interests of the policyholders.
After the enactment of the first Frazier-Lemke Act, further analysis was made
of its terms, and counsel was employed by the Association to assist in the presenta-
tion of the case of Louisville Joint stock Land Bank v. Radford to the United
States Supreme Court, which court by unanimous decision, in an opinion written
by Mr. Justice Brandeis, held the Act invalid.
The passage of the second Frazier-Lemke Act, which incorporated provisions
substantially correcting many of the defects in the first Act, was not opposed
by this Association.
The above, I believe, summarizes the important modifications of the original
Resolution adopted by our Executive Committee on December 20, 1932, about
which you inquired.
Very truly yours,
Vincent P. WHixsmT,
Manager and General Counsel.
VPW/MT
Exhibit No. 2305
[Prepared by the Securities and Exchange Commission Insurance Study Staff]
Metropolitan Life Insurance Company — Balances Carried in Each Bank or Trust
Company as of December 31, 1938
Name and Location of Bank or Trust Company
Balance Not
At Interest
Balance at
Interest
Total Balance
Amt. of
Int. Rec'd
during
year
The Chase National Bank of the City of New
York, New York City
'31,063,878.02
6,116,181.61
6, 104, 782. 84
6, 063, 666. 23
6,075,185.06
5, 045, 869. 66
3, 776, 934. 92
3, 595, 948. 08
3, 584, 159. 79
3, 037, 486. 84
2,024,058.35
1, 262, 760. 60
1,012,114.19
755, 525. 15
406, 629. 95
200,000.00
71,241.02
2,000.00
3,000,000
2,000,000
2,000,000
2,000,000
2,000,000
0
1,250,000
1,000,000
1,000,000
1,000.000
1,000,000
0
260,000
250,000
200,000
0
0
0
34, 063, 878. 02
8,116,181.61
8, 104, 782. 94
8, 063, 666. 23
8,075,185.06
5,046,869.65
6, 026, 934. 92
4,595,948.08
4, 684, 169. 79
4,037,486.84
3, 024, 058. 35
1, 262, 760. 60
1, 262, 114. 19
1, 005, 525. 15
606, 629. 95
200,000.00
71,241.02
2,000.00
22, 694. 35
9, 898. 39
7, 694. 19
9, 795. 04
10, 261. 76
0
The New York Trust Co., New York City
Central Hanover Bank & Trust Co., NYC
Bankers Trust Company, New York City
The Nat'l City Bank of New York, NYC
First National Bank, New York City
J. P. Morgan & Company, New York City
Chemical Bank & Trust Co., NYC.
4, 982. 88
7, 327. 71
3,790.72
7,412.29
4, 794. 44
0
Guaranty Trust Co. of N. Y., NYC
Bank of New York, New York City ..
Bank of The Manhattan Co., NYC
Irving Trust Company, New York City
Manufacturers Trust Co., New York City
Corn Exchange Bank Trust Co., NYC. . .
1,851.43
1,816 08
The Marine Midland Trust Company of New
York, New York City
618. 88
Lawyers Trust Company, New York City
Federation Bank & Trust Co., NYC
0
0
Bronxville Trust Co., Bronxville, N. Y
0
Total deposits, New York City
80, 198, 422. 30
16, 950, 000
97, 148, 422. 30
92, 838. 16
15528
(X)NCENTRAT10N OF ECONOMIC POWER
Metropolitan Life Insurance Compa/ny — Balances Carried in Each Bank or Trust
Oompam/y as of December SI, 1938 — Continued
Name anu i^ocatlon of Bank or Trust Company
The Union Trust Co. of Pittsburgh, Pittsburgh,
Pennsylvania ... .
Continental HI. Nat'l Bank & Trust Co. of Chi-
cago, Chicago, lU
Mercantile Commerce Bank & Trust Co., St.
• Louis --
Bank of America Nat'l Trust & Savings- Assoc,
San Francisco.
The Bank of Calif. Nat'l Association, San Fran-
Crocker First NaVl Bank of San Francisco, San
Francisco, Calif...
The Anglo Calif. Nat'l Bank of San Francisco,
San Francisco .
Total deposits in U. 8. outside of New York
City
Royal Bank of Canada, Montreal-
Royal Bank of Canada, Ottawa
Royal Bank of Canada, Vancouver.
Total deposits, Canada.
Total Deposits
Balance Not
At Interest
2, 035, 561. 64
1, 000, 000. 00
103, 376. 74
126, 000. 00
629, 953. 97
721, 996. 03
123, 276. 38
4, 739, 164. 76
4,422,674.53
462, 377. 63
3, 867. 40
4, 888, 919. 56
Balance at
Interest
2,000,000
0
0
0
0
0
0
2,000,000
89,826,506.62 18,950,000
Total Balance
4, 035, 561. 64
1, 000, 000. 00
103,376.74
125, 000. 00
629, 953. 97
721, 996. 03
123, 276. 38
6, 739, 164. 76
4, 422, 674. 53
462, 377. 63
3, 867. 40
4, 888, 919. 56
108, 776, 506. 62
Amt. of
Int. Rec'd
during
year
20,000.02
0
0
0
0
0
0
20, 000. 02
112, 838. 18
Source: Schedule £ Metropolitan Convention Form Annual Statement 1938.
"Exhibit No. 2306," appears" in text on p. 15195
"Exhibit No. 2307," appears in text on p, 15196,
"Exhibit No. 2308," appears in text on p. 15529
Exhibit No. 2308-A
[From the flies of the Chase National Bank]
[Copy]
Metropolitan Life Insxtbance Company.
New York City, August 25, 19S8.
Mr. Samuel Aemstrong,
Vioe-President, The Chase National Bank, Trust Department]
11 Broad Street, New York, New York.
My Deab Mr. Armstrong : This will acknowl.'dge your letter of August 22nd,
In which you request consideration of the Chase Bank in connection with the
Trusteeship of bond i'-'-ues to come out of the Mobile & Ohio reorganization.
It Is my understanding that your institution is the Trustee of the issu« of
Mobile & Ohio Refunding and Improvement Mortgage bonds which should
certainly warrant it* consideration in connection with any new issues. The
Vbole matter, however, is still in preliminary stages and I would, therefore,
suggest that you communicate with us on the subject again at a later time.
In the meantime, I am referring your communication to the Secretary of our
Committee with the request that it be brought up for consideration by the
Committee nt the appropriate time.
Very truly yours,
(Signed) F. W. Bckeb,
Vice President.
CONCENTRATION OF ECONOMIC POWER 15529
Exhibit No. 2308-B
[From the files of the Chase National Bank]
[Copy]
The Chase National Bank of the City of New York,
11 Broad Street, Aurust 26, 19S8.
Frederic W. Eckeb, Esq.,
Vice President, Metropolitan Ldfe Insurance Company,
New York, New York.
Deae Me. Eckeb: Thanli you for your letter of August 25, 1938. We will
adopt your suggestion and communicate with you later when the Mobile & Ohio
reorganization is nearer to the time of consummation.
You -are correct in your understanding that the Chase is trustee of the Re-
funding and Improvement Mortgage bond issue and we agree that this should
be a consideration in favor of appointing it trustee of one of the new issues.
Sincerely yours,
Samuel Abmsteong, Vice President.
Exhibit No. 2309
[From the files of the Chase National Bank]
Pennsylvania Dixie Cement Corporation,
60 East 42nd Street, New York, February 8, 19S8.
Mr. George D. Graves,
Vice President, The Chase National Bank,
Grand Central Branch, Lexington Ave., JfS St., New York, N. Y.
De3AR Mr. Graves: As you undoubtedly know, the Metropolitan Life Insurance
Company contemplate the construction of a new 28 story unit at Madison Square,
from 24th to 25th Streets, here in New York.
It is indicated that Starrett Bros. & Eken, Inc., 40 Wall St., New York, will
probably be the contractors and will purchase to complete their contract approxi-
mately 25,000 bbls. cement.
We are very anxious indeed to secure this cement order. Three of your
directors, namely Messrs. F. H. Ecker, N. Carlton and J. O'Brien, are on the Board
of Directors of the Metropolitan. I presume because of this you are probably in
position to have the owners speak a word in our behalf to the contractors who
wUl buy the cement. Of course we do not expect them to pay a premium ;* but
our price and everything else being equal we certainly trust you can get your
three directors to prevail upon the proper officials of the Metropolitan Life
Insurance Company to say a word to these contractors in our behalf.
Whatever you can do to help us will certainly be very much appreciated.
• Sincerely yours,
(Signed) W. S. WIng.
Exhibit No. 2309-A
[From the flies of the Chase National Bank]
USB THIS PORM FOE ALL COKEESPONDBNCB WITH HEAD OFFICE OR BRANCHES
The Chase Nationai. Bank of the City of New York,
^ grand central branch
New York, February 9, 1938.
Mr. F. W. Gehle,
Second Vice President, Head Offlce.
Re Pennsylvania-Dixie Cement Corp.
Dear Mr. Gehle: We enclose a letter which we have just received from the
Pennsylvania-Dixie Cement Corporation in connection with a new building which
the Metropolitan Life Insurance Company contemplates erecting at Madison
Square between 24th and 25th Streets. The Pennsylvania-Dixie Cement Cor-
15530 CONCENTRATION OF ECONOMIC POWER
poratlon has had an account with us since March 18, 1931, with balances averaging
as follows, with no loans :
1936 $257, 700
1937 376, 300
Jan. 1938 308,600
While we would like to 'do something for the Pennsylvania-Dixie Cement
Corporation in this connection, we appreciate the fact that it might be impossible
to handle but are forwarding the letter to you for the benefit of your suggestions
and advice.
Yours very truly,
(Signed) L. Van Sant,
Assistant Cashier.
Enclosure.
(Hand written:) Telephoned Mr. Van Sant, who will await word from G. H. S.
before contacting Penn-Dlxie Cement Corp.
F. E. V.
2/10/38
Exhibit No'. 2309-B
[From the files of the Chase National Bank]
Februabt 10, 1938.
Metkopolita;^.
Mr. L. Van Sant,
Assistant Cashier, Grand Central Branch.
Re Pennsylvania-Dixie Cement Corporation.
Deab Mb. Van Sant: Referring to your letter of February 9, addressed to
Mr. Gehle, this will confirm my telephone message to you this afternoon to the
effect that we were glad to recommend the Pennsylvania-Dixie Cement Corpo-
ration to the proper officer in the Metropolitan Life Insurance Company in con-
nection with the new building the latter company intends to erect. We were
informed that it is too soon to make any decision in this connection but that
later on when th'" matter is reviewed Pennsylvania-Dixie Cement Corporation
will receive consideration.
Yours very truly,
G. H. Saylob, Vice Presideni.
I am returning herewith Mr. Wing's letter to Mr. Graves.
Exhibit No. 2309-C
[From the files of the Chase National Bank]
Metropolitan Life Insueance Company,
New York City, February Ui, 19S8.
Mr. Geoboe H. Saylor,
Vice-President, The Chase National Bank, Metropolitan Branch.
Deab Me. Sayix)b: Thank you for your note regarding the Lehigh-Portland
Cement, Lone Star and the Pennsylvania-Dixie Companies. We are pleased to
have your endorsement regarding them.
Sincerely yours,
F. W. EcKEB, Vice-President.
EP
CONCENTRATION OF ECONOMIC POWER 15531
'Exhibit No. 2309-D," appears in text on p. 15199
"Exhibit No. 2310," appears in text on p. 15200
Exhibit No. 2310-A
[From the flies of the Chase National Bank]
June 15, 1931.
Mr. F. J. Shay,
Cashier, Union Trust Company, East St. Louis, Illinois.
Deab Me. Shay: Mr. Gafford is absent from the bank on a business trip. I
assume he sent a temporary aclinowledgment of your letter of June 5 but in any
event we desire to let you know that the Metropolitan Life Insurance Company
has informed us they are communicating with their manager in your city relative
to his banking arrangements and that they will keep us informed of any develop-
ments. This is for your information. I question whether it would be wise for
you to tell the manager that you know his head office intends to communicate
with him. In other words, it is our thought it might embarrass him in some way
and perhaps the best thing would be to rely on the general advantages you have
to offer, knowing that at the same time an investigation is being made and that
the matter of your obtaining an account is being considered. We have expressed
the hope that you will receive some of the business and trust the decision will be
favorable.
Yours very truly,
G. H. Sayloe, Vice President.
Exhibit No. 2310-B
[From the flies of the Chase National Bank]
The Chase National Bank of the City of New York, •
September 28, 19S1.
Mr. Paul A. Schlafly,
Chairman of the Board, Union Trust Company,
East St. Louis, Illinois.
Deae Mb. Schlafly: We are very glad to learn that the Metro"politan,Life
Insurance Company has finally decided to do some business with your *good
institution. We hope this relationship will prove satisfactory and assure you it
was a pleasure to add our recommendations to your own effort in obtaining this
account.
How are you coming out with the Virginia-Carolina Chemical Company? Is
Iheir construction work progressing and do you think of anything further which
we can do in your behalf? You already have, I believe, an account from our very
good friends, Armour & Company. If you think of other names with which we
can assist you please let me know. I believe you realize by this time that we
have your interest at heart and that the future will offer further opportunities
for us to be of assistance.
With warmest personal regards, I am
Yours sincerely,
Eabl R. Gapfobd, Second Vice President.
(Handwritten:) Mr. Saylor: Thanks for your help.
ERG : DK Gaffobd.
15532 CONCENTRATION OF ECONOMIC POWER
Exhibit No. 2310-0
[From the flies of the Chase National Bank]
La WRENCH Washinoton, Assistant Treasurer „ „ „ . ,
Frederick H. Eckeb, President
Metropolitan Life Insurance Company,
New York City, June 27th, 1933.
Mr. Geougk H. Saylor,
Vice President, Chase National Bank,
Metropolitan Branch,
New York, New York.
Dear Mr. Sayix)r: We have instructed the manager of our East St. Louis,
Illinois Di-strict to open an account in the Union Trust Company, East St.
Louis, Illinois.
Very truly yours,
L. Washington, Assistant Treasurer.
A. H.
AH
Exhibit No. 2310-D
tFrom the files of the Chase National Bank]
June 29, 1933.
Mr. H. C. HARTkoPF,
Vice President, Union Trust Company,
East St. Louis, Illinois.
De.^r Harry : Referring to correspondence between us sometime ago regard-
ing a Metropolitan Life account, we are informed that New York has given
the Manager of the East St. Louis, Illinois District instructions to open an
accoimt with you. If this has not yet been done, I know you will be glad to
be informed in advance.
With kind regards.
Yours sincerely,
M. Hadden Howell,
Vice President.
Exhibit No. 2310-E
(From the files of the Chase National Bank]
June 29, 1933.
Mr. L. Washington,
Assistant Treasurer, Metropolitan Life Insurance Company,
New York City.
Dear Mr. Washington: Your letter of June 27th addressed to Mr. Saylor
Is received in his absence on vacation. You inform him that you have in-
structed the Manager of your East St. Louis, Illinois District to open an
account with the Union Trust Company, East St. Louis. We are glad to know
of this and thank you sincerely for passing the word on to us. May I thank
you for Mr. Saylor for your courtesy in the matter.
Yours sincerely,
M. Hadden Howeix.
Vice President.
"Evhibit No. 2311" appears in text on pp. 15202-15203
"Exhibit No. 2311-A" appears in text on p. 15203
CONCENTRATION OF ECONOMIC POWER 15533
Exhibit No. 2312
[From the files of the Chase National Bank]
Memobandtjm to Mb. G. H. Sayix)r, Vice President, Metropolitan Branch
Deiab Mr. Satlob: In Mr. Purdy's absence we have received the following let-
ter from Mr. H. K. Gilbert, of Chicago.
"Mr. R. F. Kopperschmidt, President of the Empire Trust & Savings Bank,
(Chase account), asked me today if we could be of any help to him in getting
an account from the Metropolitan Life Insurance Company.
It appears. they have opened an oflBce recently adjacent to the bank premises
at Crawford Ave., and School Street, and that the local Agent is using a bank
some four miles away for his deposits.
In view of the good character of the Empire Trust & Savings Bank and the
facilities which they have available at hand, they suggest that it would be
reasonable for the Insurance Company to use them rather than the bank now
patronized. They will appreciate it if you will bring the matter to the attention
of the Metropolitan Life Insurance Company for such action as they think
feasible.
If they are interested, Mr. Kopperschmidt will be pleased to submit full de-
tails as to their standing, condition, etc."
The Empire Trust & Savings Bank of Chicago has maintained an account
with us since April 1928, showing average balances of $4,400 for the past six
months, and $6,100 for 1928. According to our records, the Credit Department
forwarded a report to the Metropolitan Branch on March 26, 1929 for the benefit
of the Metropolitan Life Insurance Company.
H. N. Detttmeb,
Banking Relations Dept.
May 17, 1929.
Exhibit No. 2312-A
[From the flies of the Chase National Bank]
Metropolitan • Mat 20, 1929.
Mr. H. N. Dettmer,
Banking Relations Dept., Head Office.
Deab Mr. Dbptmeb : Referring to your memorandum of May 17, 1939, in regard
to the desire of the Empire l^rust <& Savings Bank, Chicago, for a local account
from the Metropolitan Life Insurance Company, I enclose, copy of a letter which
I received today from Mr. George, Treasurer of the Metropolitan Life. I have
no objection to Mr. Gilbert reading the letter but there is very little informa-
tion in it .that he can use in discussing the matter with the Empire Trust &
Savings Bank. I think he should confine his statements to the fact that we
approached the Treasurer of the Metropolitan Life on behalf of the Empire
but were informed that they do not wish to make any change in their rela-
tionship with the Commercial State Bank, which furnishes armored car mes-
senger service ior that account and for other business which the Metropolitan
Life has in Chicago. If they were to take away their account with the Com-
mercial State Bank they believe it would interfere with the other business which
that bank is handling for them.
I do not wish to give the Empire Trust any basis for an argument because
we are in no position to try to influence the Metroi)olitan Life against their
wishes. Therefore, Mr. Gilbert, of necessity, will have to admit inability to help
the Empire in this instance.
Yours very truly,
George H. Saylor, Vice President.
Enclosure.
124491 — 41 — pt. 28-
15534 CONCENTRATION OF ECONOMIC POWER
Exhibit No. 2312-B
[From the flies of the Chase National Bank]
Hknry W. Gkoeoe, Treasurer
Metbopolitan Life Insurance Company,
Neio York City, May 20, 1929
Mr. G. H. Saylob,
Vice-President, Chase National Bank,
Metropolitan Branch.
HE : Empire Trust and Savings Bank, Chicago, III.
My Deae Mb. Saylob: Tlie account referred to is ttiat of our Gross Park
District and is served" by tlie Commercial State Bank, which furnishes armored
car messenger service for this account and another in Chicago. If we were to
take this account aw..y from that Bank they would probably decline to give
service to the other account and then we would be in a fix as there is no bank
located conveniently to the second ofl5ce.
The Empire Bank has been In existence for less than two years and its flnan-
(ial strength is not such as to recommend it to us as a depositary. They
offered to give us a Surety Bond if we would give them the account but we have
not found this a desirable thing to do in the past.
Because of the favorable arrangement we have with the Commercial State
Bank we prefer not to make any change.
Very truly yours,
H. W. Geobge, Treasurer.
Exhibit No. 2312-C
(From the flies of the Chase National Bank]
Henry W. Georgb, Treasurer
Metbopotjtan Life Insubance Company,
Neiv York City, December 7, 1929.
Mr. G. H. Saylob,
Vice-President, Chase National Bank,
Metropolitan Branch.
Deab Mb. Saylob: In May of this year we had some correspondence and dis-
cussion relative to the possibility of placing our Gross Park district office account
with the Empire Trust and Savings Bank, one of your Correspondents.
At that tiriie I did not feel warranted for various reasons in opening an
account with the Empire Trust and Savings Bank. Recently, however, the mat-
ter has again been broached by Mr. L. A. Phillips, the Manager of our Gross Park
District, and I have concluded to approve transferring his account to the Empire
Trust and Savings Bank.
I am glad that we have this opportunity to establish a connection with one of
your correspondents.
Very truly yours,
H. W. Geobge, Treasurer.
L. W.
Exhibit No. 2312-D
[From the flies of the Chase National Bank]
Metfeopolitan December 9, 1929.
Mr. W. E. Puedy,
Vice President, Head Office.
Deab Mr. Pukdy : Mr. George has very kindly informed us that the Metropolitan
Life has decided to place their Gross Park district office account with the Empire
Trust & Savings Bank, Chicago. I am sure that he is willing that we shall
make some capital out of this.
Will you please return the correspondence to me. after you have made the
copies you may desire? .
Yours sincerely,
GeU'Bge H. Saylob, Vice President.
Enclosures.
CONCENTRATION OF ECONOMIC POWER 15535
Exhibit No. 2312-E
I From the files of the Chase National Bank]
Decembkb 8, 1929.'-
Mr. Henet W. George,
Treasurer, Metropolitan Life Insurance Company,
1 Madison Avenue, New York City.
Dear Mr. George: Thank you for your letter of December 7, informing us
tliat you have decided to place your Cross Park district office account with
the Empire Trust & Savings Bank. Chicago. We hope the Empire Trust will
see in this change a manifestation of our friendly influence with your company
:ind at the same time will not next week ask us to get them an account from
I lie United States Treasury. I more than appreciate your kindness in calling
Dur attention to this new banking connection of your company.
Yours very truly,
Geoboe H. Baylor, Vice President.
Exhibit No. 2312-F
[From the files of the Chase National Bank]
Use this form for all correspondence with branches.
The Chase National Bank of the City of New York,
57 Broadway, New York, December lOf 1939
George H. Saylob, Esq.,
Vice President, Metropolitan Branch.
Dear Mr. Saylor: We have received your favor of the 9th instant enclosing
correspondence regarding the Metropolitan Life-Empire Trust 'k Savings Bank
of Chicago matter, which as requested we return herewith. .Ve are glad to
have the privilege of writing our friends at Chicago and appreciate the friendly
consideration of the Metropolitan Life Insurance Company.
Yours very truly,
W. E. PuRDY, Vice President.
P— H
Enc.
Exhibit No. 2312-G
[From the files of the Chase National Bank]
Memorandum
Dbiar Mr. Gilbert: Referring further to your memorandum regarding the
Empire Trust & Savings Bank of your city, we are pleased to say that today we
were advised by the Metropolitan Life Insurance Company that they are going to
place their Gross Park district office account with the Empire Trust & Savings
Bank, and it will be in order for you to so advise them.
W. E. P.
Dejo. 10, 1929
Exhibit No. 2313
[From the files of the Chase National Bank]
Memorandum to Mr. Boyle
First National Bank,
Riverside, New Jersey:
No doubt you will find in your files copy of your memorandum to me of June 5,
1935 and additional memorandum in reference to the standing of the above bank ;
also copy of my memorandum of June 26, 1935.
Mr. Washington telephoned me today and said that at one time we had asked
him if the Metropolitan Life could place an account #ith the First National as a
help in our solicitation of that account. They might now be disposed to change
from the Riverside Trust Company to the First National but would first like to
15536 CONCENTRATION OF ECONOMIC POWER
know how It fits In with our plans and what the standing of the First National
Bank is. ». ^ ^
I'lease make the necessary investigation and give me the benefit of it.
G. H. Satlob.
December 1, 1937.
Exhibit No. 2313-A
[From the files of the Chase National Bank]
Memorandum to Mr. Sayix)e, Vice President Metropolitan Branch
Re: First National Bank
Riverside Trust Company
Riverside, New Jersey.
This will acknowledge receipt of your memorandum in which you indicate
that the Metropolitan Life Insurance Company might be disposed to tran.sfer
their account from the Riverside Trust Company to the First National Bank and
are interested to know whether by so doing they would enhance our chances of
obtaining an account from the First National Bank. As you probably know, we
are not favored with an account from either institution, and while the First
National Bank indicated to Mr. Aumack that they were anxious to obtain the
local account of the Metropolitan Life Insurance Company, there was no inti-
mation that they would reciprocate by establishing a correspondent relationship
with us in the event the Metropolitan Life Insurance Company complied with
our suggestion. I discussed this matter with Mr. Van Kleeck, and he doubts
whether we could broach the matter to the First National Bank at this time in
view of the fact that it is apparent the Metropolitan Life Insurance Company
are contemplating switching their account in Riverside for reasons best known
to themselves. In other words, while we appreciate their willingness to be
helpful, the lapse of time would be an obstacle in reviving the matter at this
time. Mr. Van Kleeck has suggested that we undertake a review of our file on
both institutions, which we are doing, the result of which will be submitted to
you in the course of the next few days.
J. BoTLE, Credit Department.
December 2, 1937.
Exhibit No. 2313-B
[From the files of the Chase National Bank]
Memorandum to Mb. Washington
I am sending you herewith a report on the Riverside Trust Company and one
on the First National Bank, both of Riverside, New Jersey. Neither of these
banks transacts business with us. It was in June, 1935, when one of our officers
thought it might help us obtain an account from the First National if the
Metropolitan Life opened an account with that bank. I do not know whether
we could make capital out of your placing an account with the First National
at this time but it is a possibility and if you decide to favor that bank and will
let me know, the change might accrue to our advantage. We, of course, would
not make a direct statement that we; were instrumental in having the business
placed with them unless you thought we could properly say that we were con-
sulted and were glad to recommend the First National. Would there be any
objection to this.
^ G. H. Satlor.
December 10, 1937.
Referring to the above memorandum, Mr. Washington telephoned me today
Uiat they were transferring their account from Riverside Trust Company to the
First National Bank, Riverside, New Jersey. As a possible help to us he is
willing that we say to the First National that we were consulted by the Metro-
CONCENTRATION OF ECONOMIC POWER
15537
politan Life and were glad to recommend a relationship. He did not want us
to indicate that we initiated the change and I told him we would never take
that position. This was reported to Mr. Van Kleeck.
G. H. Satix)b.
December 13, 1937.
Exhibit No. 2314
[Prepared by the SecUiities and Exchange Commission Insurance Study Staff]
District Depositories of Metropolitan Life Insurance Company Related to
Chase National Bank Correspondents ^
Total Met-
ropolitan
Deposi-
tories In
State
Chase' Corre-
spondent—
Has Ac-
count
Does Not
Have Ac-
count
Number of Local-
ities in State
Where Metrcpol-
itan Has Deposi-
tory But Chase
Has No Corre-
spondent
Alabama —
Arkansas
Connecticut
Delaware.
District of Columbia
Florida
Georgia
Indiana
Iowa
Illinois
Kansas
Kentucky
Louisiana
Maine-
Maryland
Massachusetts --
Michigan
Minnesota
Mississippi
Missouri -.-
Nebraska --
New Hampshire
New Jersey -.
New York
New York (Metropolitan Area).
North Carolina
Ohio -
Oklahoma
Pennsylvania
Rhode Island
South Carolina
Tennessee
Vermont -
Virginia
West Virginia
Wisconsin..
Totals.
1
106
Note.— 45% of the Metropolitan depositories are Chase correspo; -i^nts. If allowance is made, however,
for the 106 localities where Chase has no correspondents of depositories in the remaining localities 54% are
Chase correspondents.
' District office accounts of the Metropolitan Life Insurance Company in New York City are not included
in the above schedule. There are 71 such district accounts which are distributed as follows: Chase National
Bank 3; Chemical Bank and Trust Company .3; Corn Exchange Bank and Trust Company 10; Bank of
Manhattan Company 18; Public National Bank and Trust Company 4; Brooklyn Trust Company 9;
Irving Trust Company 1; Title Guaranty and Trust Company 1; Manufacturers Trust Company 10;
National City Bank 12.
Source: Information submitted by Metropolitan Life Insurance Company and Chase National
Bank.
"ExHiBrr No. 2315," introduced on p. 15208, is on file with the committee.
15538 CONCENTRATION OF ECONOMIC POWER
Exhibit No. 2316
[I'reparcd by the Securities and Exchange Commission Insurance Study Staff]
Dikex;tors lN'n':KLocxiNO Chase National Bank of the City of New York and
Mbttropolitan Life Insuhanoe Company, January 1, 1928-Dbcember 31, 1939,
Inclusive*
1928:
Olleshfimer. Henry (interlocking since November 1921)
Ecker, Frederick H. (interlocking since February 1917)
Wiggin, Albert H. (interlocking since April 1915)
Schwab, Cliarles M. (interlocking since November 1922).
Milbank, Jeremiah (interlocking since April 1927).
1929:
Ollesheimer, Henry
Ecker, Frederick H.
Wiggin, Albert H.
Schwab, Charles M.
Milbank, Jeremiah
Carlton, Newcomb (interlocking since March 1929)
1930 :
Ollesheimer, Henry
Ecker, Frederick H.
Wiggiu, Albert H.
Schwab, Charles M.
Milbank, Jeremiah
Carlton, Newcomb
Whito, F. Edson (interlocking since August 1930)
1931:
Ollesheimer, Henry
Ecker, Frederick H.
Wiggin, Albert H.
Schwab, Charles M.
Milbank, Jeremiah
Carlton, Newcomb
White, F. Edson (deceased January 15, 1931)
1932:
Ollesheimer, Henry
Ecker, Frederick H.
Wiggin, Albert H.
Schwab, Charles M.
Milbank, Jeremiah
Carlton, Newcomb
1!»33 :
Ollesheimer, Henry (deceased November 6, 1933)
Ecker, Frederick H.
Wiggin, Albert H. (resigned Chase National May 24. 1933)
Schwab, Charles M.
Milbank, Jeremiah
Carlton, Newcomb
1934 :
Ecker, Frederick H.
Schwab, ("harles M. (resigned Chase National, January 9, 1934)
Milbank, Jeremiah (resigned Chase National, January 9, 1934)
Carlton, Newcomb
1935:
Ecker, Frederick H.
Carlton, Newcomb
•Directors interlocked for entire rear unless otlierwise indicated.
CONCENTRATION OP ECONOMIC POWER 15539
1936:
Ecker, Frederick H.
Carlton, Newcoinb
1937:
Ecker, Frederick H.
Carlton, Newcomb
Aldrich, Winthrop W. (interlocking since October 1937)
1938:
Ecker, BYederick H.
Carlton, Newcomb
Aldricb, Winthrop W.
1939:
Ecker, Frederick H.
Carlton, Newcomb
Aldrich, Winthrop W.
Source : iDformation sul)initted by Metropolitan Life Insurance Company and Chase
National Bank
"Exhibit No. 2317," introduced on p. 15209, is on file with the committee.
15540
CONCENTRATION OF ECONOMIC POWER
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CONCENTRATION OF ECONOMIC POWER 15541
Exhibit No. 2319
[Prepared by the Securities and Exchange Commission Insurance Study Staff]
Directors Interlocking Mutual Lite Insurance Company of New York and
Chase National Bank During Period Januart 1, 1928 to Decembeb 31,
1938
Name of director and period of ilTterlocLing :
Cornelius Vanderbilt, August 24, 1929 to October 26, 1938.
Frank L. Polk, October 29, 1930 to May 24, 1933.
Robert C. Stanley, since January 26, 1937.
Directors Interlocking Prudential Insurance Company of America and
Chase National Bank During Period January 1, 1928 to December 31,
1938
Name of director and period of interlocking:
Howard Bayne, since May 31, 1930.
Roy E. Tomlinson, May 31, 1930 to June 2, 1930.
Franklin D'Olier, May 31, 1930 to November 30, 1938.
Directors Interlocking New York Life and Chase National Bank During
Period January 1, 1928 to December 31, 1938
Name of director and period of interlocking:
John J. Milburn, August 24, 1929 to August 11, 1930.
Directors Interlocking Equitable Life Insurance Society of the United
States and Chase National Bank Dubing Period January 1, 1928 to Decem-
ber 31, 1938
Name of director and period of interlocking :
Bertram Cutler, since May 31, 1930.
Bugehius H. Outerbridge, August 24, 1929 to November 10, 1932.
Thomas I. Parkinson, since August 24, 1929.
Source : Information furnished by the companies.
"Exhibit No. 2320" appears in text on pp. 15231-15232
"Exhibit No. 2320-A" appears in text on p. 15232
"Exhibit No. 2320-B" appears in text on p. 15232
Exhibit No. 2321
'[From the files of The Equitable Life Assurance Society of the United States]
George A. Rathbun, Manager
Suite 614, Merchants Natl. Bank Bldg.
6th & Spring Streets
Los Angeles. Cal.
Member Quarter-Million Club 1920
The Equitable Life Assurance Society of the United States
120 Broadway, New York
W. A. Day, President
Los Angeles, August 2nd, 1921
Mr. A. R. HoRR;
Treasurer, Equitable Life Assurance Society,
120 Broadway, New York, N. Y.
Deiak Mr. Hobe. Some years ago you will remember I requested you to change
our bank account from the Farmers & Merchants National to the Merchants
1 5542 CONCENTRATION OF ECONOMIC POWER
Nationnl because the aforenamed mentioned bank did not seem to appreciate our
account to the extent that they would assist us in any way.
Since that time they have been cultivating us more or less and within the last
two weeks have shown very good faith in the Equitable, and that they do not hold
a grudge, by taking out Group insurance to the extent of $219,000.
For some years after our account was withdrawn we carried a balance at this
hank and I have wondered If It would be possible to again carry an account with
them under the same conditions as to interest as before. If so, I think it would
be a good investment because I believe these people will now throw their influence
our way when they can do so.
I, of course, would not want to interfere with our present arrangement with
the Merchants National, but thought it might be good business to open up this
second accoimt which need not be checked against by the Cashier.
Sincerely yours,
G. A. Rathbun.
GAR-T.
Exhibit No. 2321-A
[From the flies of The Equitable Life Assurance Society of the United States]
August 11, 1921.
Mr. Geobgb a. Rathbun,
Manager, Equitable life Assurance Society,
Merchants National Bank Building,
Los Angeles, California.
Dear Me. Rathbun : I have your letter of August 2ud and much as I should
like to comply with your request that we open an account with the Farmers
i<c Merchants National Bank, our Finance Committee vigorously opposes any
suggestion to carry unnecessary bank accounts ; i. e., accounts that are not needed
in the administration of the Society's business. Your request would certainly
be turned down if it were presented to the-Finance Committee for the reasons
stated.
Tours very truly,
A. R. H.,
Treasurer.
ARH-MW
Exhibit No. 2321-B
[From the files of The Equitable Life Assurance Society of the United States]
Cecil Feankbl
Associate Agency Manager
Alex A. Dewar Agency
Suite 001, 111 W. Seventh Street
Los Angeles, California
Telephone : Trinity 8311
Member Group Millionaires' Club
The Equitable Life Assurance Societtt of the United States
home office new tobk
Thcmas I. Parkinson, President
Los Angeles, March 2, 1937.
Mr. Thomas I. Parkinson,
President, Equitable Life Assurance Society,
SOS Seventh Avenue, New York, N. T.
Dear Mr. Parkinson : You will recall when I was in New York I discussed our
banking .situation with you. We are carrying our account in the Bank of America,
CONCENTRATION OF ECONOMIC POWER 15543
which at one time was covered by Group Insurance carried in our Society. The
Bank of America is wholly owned by Transamerica. Several years ago the
Bank of America cancelled our Group Insurance coverage and placed the business
in their own Occidental Life. The Occidental Life, not being in the Group Con-
ference, quoted a much lower rate to our main Group patron in Los Angeles —
the Union Oil Company — and wrote the Accident and Health insurance which
we had developed and would have written had it not been for the lower rate
quoted.
Since the Farmers & Merchants Bank is the only bank in Los Angeles that
carries Group Insurance with us, I believe it only fair that we do some business
with them, not necessarily the entire account but part of it, as a reciprocal ges-
ture. The President, Mr. Rossetti, has mentioned this matter on several occa-
sions. I hope you will give it fav^jrable consideration.
I very much appreciated the few minutes I spent with you in your office. I
hope we may have the pleasure of seeing you in California during your vacation.
With kindest personal regards, I am.
Yours sincerely,
Cbch. Frankel.
CF.M
Exhibit No. 2321'-C
[From the files of The Equitable lAte Assurance Society of the United States]
The Equitable Life Asburancb Society of the United States
Office of
P. H. Richmond, Assistant Treasurer
Dated at New York : March 9, 1937.
Replying to yours of
For : Mr. Henry Greaves, Treasurer.
Subject: Banking arrangements — Los Angeles, California.
We are returning a letter from Cecil Frankel addressed to President Parkin-
son in regard to the Farmers & Merchants National Bank, Los Angeles, Cali-
fornit. Also attached are reports we have secured from various New York
banks in regard to the subject institution.
In 1913 the Home Office account and Cashier's Working Fund account were
carried with the Farmers & Merchants National Bank. In 1916, at the instiga-
tion of Mr. George Rathbun, the Society's manager in Los Angeles at that time.
who stated that this bank failed to, co-operate with our agency forces, the
accounts were transferred to the Merchants National Bank and a balance of
approximately $5,000.00 was permitted to remain with the Farmers & Mer-
chants National Bank until 1919. In 1921 Mr. Rathbun informed us that the
Farmers & Merchants National Bank had taken our Group insurance with the
Equitable and he requested that an account again be placed with this institu-
tion since he believed that they would throw their influence to the Society
whenever possible. His request was not approved since the account was not
needed for the administration of the Society's business. As the result of a
series of mergers involving the Merchant National Bank and several other
banks, the Society's accounts are nbw carried with the Bank of America
National Trust & Savings Association.
You will note from the attached reports that the Farmers & Merchants Na-
tional Bank is very highly regarded and rated as one of the outstanding
banking institutions on the Pacific coast.
There is no necessity for an additional account in Los Angeles insofar as
banking requirements are concerned since our present depository meets all
our needs.
F. H. Richmond, Ass't. Treasurer.
RK: DE W
15544 CONCENTRATION OF ECONOMIC POWER
Exhibit No. 2321-D
(From the flies of The Equitable Life Assurance Society of the United States]
The Equitable Life Assubancb Society of the United States
OfBce of
F. H. Richmond, Assistant Treasurer
Dated at New York, March 11, 1937.
Replying to yours of
For : Mr. Harry Greaves, Treasurer.
Subject: Banking arrangements — Los Angeles, California.
It has been recommended that The Farmers & Merchants National Bank of
Los Angeles would be a desirable depository for the Society in Los Angeles,
California.
This bank, which was founded in 1903, ranks third in size in Los Angeles
and is rated as one of the outstanding banking institutions on the Pacific coast.
Chase National Bank states that it is ably managed and is one of the best
banks in Los Angeles. Guaranty Trust Company says that it is one of the
best banks in the country and comments on their enviable record through
good times and bad. National City Bank reports the management to be capable
and experienced and unqualifiedly recommends it as a depository.
We suggest, if agreeable to you, that authority be obtained from the Finance
Committee to use The Farmers & Merchants National Bank of Lds Angeles,
Los Angeles, California, as a depository for the Society's funds.
F. H. Richmond, Ass't. Treasurer.
RK: DEW
Exhibit No. 2321-E
[From the flies of The Equitable Life Assurance Society of the United States]
March 22, 1937.
Mr. Victor H. Rossetti,
President, Farmers d Merchants National Bank,
Los Angeles, California:
Deab Mb. RossErri: It is a pleasure to inform you that our Finance Com-
mittee has approved the Farmers & Merchants National Bank of Los Angeles,
California, as a Home Office depository for the Equitable.
Enclo.sed herewith I hand you check on the Wells Fargo Bank & Union
Trust Company of San Francisco, in the sum of $25,000.00, being the initial
deposit to an account to be styled "The Equitable Life Asstjrance SeoETY of
THE United States." No checks may be drawn against this account, except
upon signature and countersignature of which we shall inform you later.
If you will be kind enough to have sent directly to F. H. Richmond, Assist-
ant Treasurer, sufficient cards to enable us to supply you with eight specimen
signatures and ten specimen countersignatures, we will complete and return
them to such oflBcer as you may designate, together with full instructions.
It is my earnest hope that the establishment of these relations may be advan-
tageous to both the Farmers & Merchants National Bank and to the Society.
Yours very truly,
H. G.,
Treasurer.
FHR : HP
ENC: 1 Check.
CONCENTRATION OF ECONOMIC POWER 15545
Exhibit No. 2322
[From the files of the New York Life Insurance Company]
Frank F. Brooks, President Henry K. Holmes, Asst. to President
Clyde C. Taylor, Vice President Oscah Wilson, Assistant Cashier
J. Howard Arthur, Vice Prest. & Cashier Thos. B. Htjdson, Assistant Cashier
William H. Fawceti', Vice President Geibr C. Ore, Assistant Cashier
Robert Wardrop, Charman of Board Hdbdet E. Smith, Assistant Cashier
P. W. Morgan, Vice Chairman of Board
FiKST National, Bank at Pittsburgh,
Pittsburgh, Pa., November 27, lOS.'f.
Mr. Harold Palagano,
Treasurer, New York Life Insurance Co.,
51 Madison Ave. Madison Square, New York, N. Y.
Deab Mb. Palagano: In looking over your recent statement we note you
have a great deal of surplus cash on hand and we are vrriting you with
the thought in mind that perhaps we could interest you in placing a portion
of these funds with us in a Time Account, upon which we will allow you
interest at the rate of one percent per annum, same being credited to your
account on a quarterly basis and the funds being subject to thirty days
written notice of withdrawal.
We have quite a few customers who have placed their surplus funds with
us in this manner, which seems to work out very satisfactory for them and
feel sure it would do likewise for you. In order that you may familiarize
yourself with our institution we are enclosing a copy of our recent statement
and trust our suggestion may receive your favorable consideration.
Your very truly,
Wm. H. FAwcEn'T,
Vice President.
WHF/a.
(Handwritten:) Removed from Treasury file, 3/3/39. Westbey.
Exhibit No. 2322-A
[From the files of the New York Life Insurance Company]
Member
Federal Deposit Insurance Corporation
The3 Continental Industrial Bank
"a state savings bank"
39 Pufllic Square, N. W.— Public Square Bldg.
Cleveland, June 26, 1936.
New York Life Insurance Ca,
51 Madison Ave., New York, N. Y.
(Attention: Harold Palagano, Treas.)
Gentlemen : We wish to direct your attention to the attractive return this
bank affords for the deposit of part of your surplus funds. We pay 2%%
interest from the date of deposit to the date of withdrawl, plus the two-mill
State Tax levied against all deposits in the State.
Your deposit would be insured up to $5,000.00 by the Federal Deposit Insur-
ance Corporation, of which we are a member. Considering the low yield of
short term Government Bonds, and the danger in market fluctuations, we ask
your consideration with the belief that a deposit from your institution in this
bank would be mutually beneficial.
Thanking you for your consideration, we are,
Very truly yours,
The Continental Industrial Bank,
Roy M. Hexteb, President.
RMH/MM
(Handwritten:) Removed from Treasury file 3/2/39.
Westbejy.
15546 CONCENTRATION OF ECONOMIC POWER
Exhibit No. 2322-B
[From the flies of the New York Life Insurance Company]
Ofkicebs Diebctobs
Krazieb Ream. I'reeldent Fhazibb RBAMt>
W. H. Lacstbn, Vice President A. C. Lacstbn
A. C. LAf 8TBN, Treasurer W. H. Ladstbn
<;ko. F. Mbyeb, Cashier Geo. F. Mbybr
ALMA M. Gosa, Ass't Ci^hler Alma M. Goss
The Amebican Bank,
Port Clinton, Ohio, April 20, 19S8.
New York Life Insubancb Co.,
51 Madison Avenue, New York, N. T.
(Attn : Treasurer.)
Ge2<tlbmen : Does your company have a surplus of inactive funds which you
would like to Invest safely, and at the same time realize a good return? If so,
you will be interested in this letter.
The American Bank of Port Clinton, Ohio, invites deposits from organiza-
tions such as yours, or from their affiliates.
Interest is paid at the rate of 2%% per annum, with maturities of six months
pr one year. We issue a savings book covering your deposit. Ftinds in our
bank are insured by the Federal Deposit Insurance Corporation up to $5,000.00
for each depositor. Our FDIC number is 9867.
A deposit in our bank embodies the three essentials of a good investment:
(1) safety, (2) good interest return — we pay the Ohio State Tax on deposits —
and (3) short maturity.
Since March 15, 1891, The American Bank has been operated in a conserva-
tive manner. For forty-seven years, through good times and bad, deposits in our
bank have always been worth 100 cents on the dollar. A statement of our condi-
tion as of December 31, 1937, is enclosed.
For a sound, non-fluctuating investment, payable on a short maturity, you
could not do better than to make a deposit with us. You may rest assured that
your deposits will receive prompt and careful attention. May we hear favorab'"
from you soon?
If you desire any further information, do not hesitate to communicate with us.
Very truly yours,
The American Bank,
A. C. Laustbn, Treasurer.
(Handwritten:) To Mr. BurlU. File. To "p" Misc. Bk. File. WPB.
( Handwritten : ) Removed from Treasury Dept. files 3/8/39.
Westebt.
CONCENTRATION OF ECONOMIC POWER
15547
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CONCENTRATION OF ECONOMIC POWER
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CONCENTRATION OF ECONOMIC POWER
Exhibit No. 2324
15551
Whole Time Soliciting Agents ' Contracts Made, Terminated and in force, 45
Companies
[Preparefi by the Securities and Exchange Commission Insurance Study Staff]
Year
Number of
Appointments
Made during
Year
Total Contract
Terminations
during Year
Number in
Force Decem-
ber 31
1934
19,055
18,413
17, 010
15,676
15, 745
22, 178
19,965
19,434
17,507
16,297
48, 775
47,155
45,429
43,967
43,452
1935 . - - - -
1936 -. - -
1937 —
1938
■ Does not include General Agents, Branch OflBce Managers; Supervisors, or other Sales Promotion
Assistants.
Note.— The above schedule includes all companies which supplied adequate information for the question
to which the schedule relates.
Source: Information submitted by the companies in response to sales questionnaire.
Exhibit No. 2324-A
Companies Included in Table Entitled Whole Time Soliciting Agents *
Contracts Made, Terminated *• and in Force
Midland Mutual
Minnesota Mutual
Mutual Benefit
Mutual, N. Y.
Mutual Trust
National Life & Accident
National Life
New England Mutual
New York Life
Northwestern Mutual
Northwestern National
Occidental
Penn Mutual
Phoenix Mutual
Provident Mutual
Prudential
Reliance
Southwestern
State Life Insurance.
Travelers
Union Central
Volunteer State
1.
Acacia
24.
2.
Aetna
2.5.
3.
Alliance
26.
4.
Bankers Life
27.
5.
Bankers Life Inc., Nebr.
28.
6.
Business Men's
29.
7.
Calif. -Western States
30.
8.
Central Life Assurance
31.
9.
Connecticut General
32.
10.
Connecticut Mutual
33.
11.
Continental American
34.
12.
Continental Assurance
35.
13.
Country Life
36.
14.
Equitable, Iowa
37.
15.
Franklin Life
38.
16.
General American Life
39.
17.
Great Southern
40.
18.
Guardian Life
41.
19.
John Hancock
42.
20.
Indianapolis Life
43.
21.
Jefferson Standard
44.
22.
Kansas City Life
45.
23.
Lincoln National
15552
CONCENTRATION OF ECONOMIC POWER
Exhibit No. 2325
[Prepared by the S<?curities and Exchange Commission Insurance Study Staff.]
Cost of Selecting and Training Agents*
Name of Company
Acacia
Business Men's Assurance.
Central Life -
Equitable Iowa
Great Southern -
Guarantee Mutual— Neb..
Lincoln National
Mutual— N.Y
Penn Mutual
Southwestern --
Total Cost
During 1937
$45, 110. 00
10, 203. 48
» 27,215.87
10, 654. 24
4, 173. 33
386, 613. 74
592, 096. 00
250, 405. 77
78, 325. 90
Cost per Agent Appointed
during 1937
Based on All
Agents
Appointed
$254.86
47.68
70.89
21.88
189.05
11.89
131. 75
313.00
388.82
842.21
Based Only on
Those Who
Remained
under Contract
throughout 1938
$867. 52
179, 01
200.12
57.02
1,081.70
40.11
252.62
596.00
1,526.86
2, 175. 44
" Estimated cost to company only. . ^„ ,, o • .v, i ♦■ • *
• Does not include General Agents, Branch Office Managers, Supervisors or other sales promotion assist-
ants. This schedule does not include agents soliciting Industrial business.
Note.— The above schedule includes all companies which supplied adequate information for the question
to which the schedule relates.
Source: Information submitted by the companies in response to sales questionnaire.
Exhibit No. 2326
[Prepared by the Securities and Exchange Commission Insurance Study Staff]
Compensation of Agents ^ for the Year 19S8
[Amounts in Dollars]
Compensation classification
Whole time agents
Part time agents
Others
Number
Amount
Number
Amount
Number
Amount
3,331
8,828
2,712
2,866
1,809
1,210
862
585
793
389
322
136
70
10
0
0
1,612
3,811
691
633
155
65
20
15
12
3
1
1
1
0
0
0
2,458
9,128
1,179
670
236
74
48
32
19
13
14
0
Under $250
735, 169. 73
983,990.17
2, 058, 777. 74
2, 229, 552. 43
2,098,009.37
1,931,684.62
1, 599, 835. 21
2,702,496.91
1,714,213.86
1,883,877.50
1,114,449.53
903,361.83
261, 516. 26
0
0
286, 476. 29
243, 422. 84
370,086.53
191, 131. 14
111,011.42
45, 367. 75
41, 368. 53
41,362.17
12,360.04
5, 442. 00
7,441.30
10, 105. 00
0
0
0
581,470.01
250 to 499
413,846.53
600 to 999
459, 406. 22
1,000 to 1,499
279, 109. 93
1,500 to 1,999
128, 195. 82
2,000 to 2,499 ...
106,783.26
2,500 to 2,999..^
3,000 to 3,999
87,185.89
63, 558. 38
4,000 to 4,999
56, 725. 49
g.OOO to 6,999
85,015.50
7,000 to 9,999 .
32, 592. 50
10,000 to 19,999
11,959.00
20,000 to 49,999
20, 024. 00
50,000 to 99,999
81,565.00
100,000 and over
Totol
23,923
20, 216, 935. 16
6,920
1,365,575.01
13,878
2,407,437.53
■ This schedule does not relate to General Agents, Branch Managers or Industrial Agents. The designa-
tion "Other" includes Brokers and Surplus Line Agents.
Note.— The above schedule includes 27 companies which supplied adequate information for the question
to which the schedule relates.
Source: Information submitted by companies in response to sales questionnaire.
CONCENTRATION OF ECONOMIC TOWER
Exhibit No. 2327
[Prepared by the Securities and Exchange Commission Insurance Study Staff.]
Compensation ' of Whole Time Agents ' foe the Yeas, 1938
15553
Percentage of Total ^Number of Agents and Percentage of Total Compensation
Classified by Compensation Groups
Compensation Classification
Percentage
Number Amount
Cumulative Percentage
Number Amount
Cumulative Percentage
Number Amount
No compensation
Under $250
250-499
600-999.
1,000-1,499
1,500-1,999.
2,000-2,499.
2,500-2,999
3,000-3,999
4,000-4,999
5,000-6,999
7,000-9,999.
10,000-19,999
20,000-49,999
50,000-99,999
100,000 and over..
Total
13.92
36.90
11.34
11.98
7.56
5.06
3.60
2.45
3.31
1.63
1.35
.57
.29
.04
.00
.00
3.64
4.87
10.18
11.03
10.38
9.55
7.91
13.37
8.48
9.32
5.51
4.47
1.29
.00
.00
13.92
50.82
62.16
74.14
81.70
86.76
90.36
92.81
96.12
97.75
99.10
99.67
99.96
100.00
.00
.00
3.64
8.51
18.69
29.72
40.10
49.65
57.56
70.93
79.41
88.73
94.24
98.71
100.00
.00
.00
100.00
86.08
49.18
37.84
25.86
18.30
13.24
9.64
7.19
3.88
2.25
.90
.33
.04
.00
.00
100.00
96.36
91.49
81.31
7C.28
59.90
50.35
42.44
29.07
20.59
11.27
5.76
1.29
.00
.00
100. 00
100.00
' Includes only commissions paid by declarant company
' Does not include General Agents, Branch Office Managers, Supervisors, or other Sales Promotion
Assistants
Note. — The above schedule includes 27 companies which supplied adequate information for the question
to which the schedule relates.
Source: Information submitted by companies in response to sales questionnaire.
Exhibit No. 2327-A
Companies Included in Schedules Relating to Compensation of Whole Time
Agents
9.
10.
11.
12.
13.
14.
Acacia
Bankers Life Co.
Berkshire Life
Business Men's Assoc.
Calif.-Western States
Central Life
Connecticut General
Connecticut Mutual
Continental American
Equitable Life of Iowa
General American
Great Southern
Guardian Life
Indianapolis Life
15. Life Ins. Co. of Va.
16. Lincoln National
17. National Life & Accident
18. Occidental
19. Penn Mutual
20. Phoenix Mutual
21. Prudential
22. Reliance
23. Southland
24. Southwestern
25. Travelers
26. Union Central
27. West Coast
15554 CONCENTRATION OF ECONOMIC POWER
Exhibit No. 2328
[Prepared by the Securities and Exchange Commission Insurance Study StafF]
Highest Commissions' Paid Agents" 1938
'(Amounts in Dollars]
Name of Company
Amrrican United.
Bankers Life
Bat"<ers Life Insurance.
Berkshire
Business Men's
Calif .-Western States.
Central Life
Columbus Mutual-
Connecticut General.
Connecticut Mutual.
Continental American.
Country Life
Equitable— Iowa. . .
General American.
Great Southern.
Guardian Life..
Home Life...
Indianapolis.
Jefferson Standard.
Life Insurance Co. of Virginia.
Lincoln National
New York Life
Northwestern National.
Occidental.
Pan American.
Penn Mutual..
Phoenix Mutual.
I'rudential
Reliance...
Southland.
Status
I Includes only commissions paid by declarant company.
Asslstont"" General ARents, Branch OfTice .Manapcrs
' Whole and Part Time Agents combined.
Whole Time.
Part Time. . .
Whole Time.
Part Time...
Whole Time.
Part Time. . .
Whole Time.
Part Time...
Whole Time.
Part Time...
Whole Time.
Part Time...
Whole Time.
Part Time...
Whole Time.
Part Time...
Whole Time.
Part Time...
Whole Time.
Part Time...
Whole Time.
Part Time...
Whole Time.
Part Time...
Whole Time
Part Time...
Whole Time
Part Time...
Whole Time
Part Time...
Whole Time
Part Time...
Whole Time
Part Time...
Whole Time.
Part Time...
Whole Time.
Part Time. . .
Whole Time.
Part Time...
Whole Time.
Part Time. . .
Whole Time.
Part Time...
Whole Time..
Part Time...
Whole Time. .
Part Time...
Whole Time. .
Part Time
Whole Time. .
Part Time
Whole Time. .
Part Time
Whole Time. .
Part Time
Whole Time.
Part Time...
Whole Time..
Part Time...
Whole Time. .
Part Time...
Highest
$13,182.79
l.GH.OS
10, 575. 85
7, 862. 09
2, 047. a
12,045.86
427.95
7, 507. 79
1,351.80
23, 002. 00
31,040.00
508. 59
4, 182. 94
697.94
3 12,761.89
12,680. 12
805. 97
14, 699. 00
Tenth From
Highest
.$0, 363. 62
116.02
4,378. 19
7, 374. 77
2, 835. 73
9, 788. 57
9,580.17
3, 751. 27
5, 254. 62
990. 11
15,847.13
13. 722. 00
1,093.00
10, 199. 25
18, 948. 58
2, 326. 58
9. 120. 65
3,815.93
5, 107.05
1. 602. 84
17,945. 10
2, 172. 08
25, 076. 05
18, 382. 05
2. 423. 63
15, 638. 95
3 fi. 528. 85
23, 237. 00
4,221.00
11,963.00
11,586.00
10, 105. 00
27, 997. 51
2. 039. 14
36, 463. 70
5, 725. 19
626.02
4, 892. .%
2(i0. 63
3, 402. 14
931. 19
6, 669. 00
8, 749. 50
270.91
2, 616. 95
346. 76
' 4, 728. 46
m
7, 932. 56
439.54
5, 437. 70
206.09
4,609.00
5, 995. 99
1,066. .57
2, 619. 92
446. 62
5,181.03
5, 905. 00
346.00
5, 155.45
5. 485. 26
883.92
4, 706. 48
1, 673. 54
1, 845. 79
566.53
8, 200. 92
1, 151. 24
18, 453. 62
4,867.51
473. 24
5, 458. 56
' 1. 464. ,^7
10, 790. 00
1,618.00
6.360.00
5,-832. 00
3, a54. 00
10.639.99
1, 065. 14
7,030.30
Supervisors, or othor Sales Proinolion
CONCENTRATION OF ECONOMIC POWER
Highest Commissions Paid Agents 1938 — Continued
15555
Name of Company
Status
Highest
Tenth From
Highest
Whole Time
Part Time
Whole Time
Part Time..
Whole Time
Part Time
Whole Time
Part Time.
$24, 100. 04
2, 753. 52
15,304.05
3, 740. 67
16, 479. 00
2, 302. 00
* 10, 068. 33
* 1, 763. 36
$8, 495. 39
Union Central ..-.. ._.
1,491.11
5, 695. 75
Volunteer State -
818. 84
6, 496. 00
West Coast -
162.00
« 5, 726. 63
« 691. 89
* For the United States only.
Note: The above schedule includes all companies which supplied adequate information for the question
to which the schedule relates.
Source: Information submitted by the companies! n response to sales questionnaire.
Exhibit No. 2329
Purposes of the National Association of Life Uxderwritebs
1939-1940
PROVISIONS OF THE BY-LAWS
Article II, Section 1, Part 1
To support and maintain the principle of legal reserve life insurance.
To advance public knowledge of legal reserve life insurance and its uses.
To promote the adoption and application of higher standards of ethical con-
duct in the profession of life underwriting and the business of life insurance.
To increase the knowledge of agents concerning legal reserve life insurance, its
uses and its sale.
To provide through local associations for rendering community service and
for forming enduring friendships.
To create and maintain a sound public opinion, to promote cooperation and
good will, and in all other ways to promote the best interest of legal reserve
life insurance.
PUltPOSES FOR 19 39-1940
Realizing fully our responsibility to the public, to the 64 million American
owners of life insurance, to the institution and to our membership, we propose :
1. To discharge our obligation to defend and preserve the rights of 64 million
Americans who own a twenty-seven billion dollar stake in an institution
V hich affords them an opportunity to create their future economic security
through their own efforts and upon their own initiative.
2. To preserve, in that connection, the right of the American public to be served
by the life insurance agent, through creative, intelligent salesmanship,
fundamental to the American way of free enterprise.
3. To continue to raise the standards of selection, training and performance of
the life insurance agent, in order:
(a) That American life values may be more adequately insured, and
(b) That the life insurance agent may enjoy full public confidence,
based on the part which he plays in the social and economic life
of his community and of the nation.
4. To develop all possible means for using our membership to disseminate sound
information regarding the institution of life insurance and to use our
strength and influence to protect policyholders and beneficiaries from being
misled by those who seek, for their own selfish interest, to tear down legal
reserve life insurance.
15556 CONCENTRATION OF ECONOMIC POWER
5. To emphasize quality as well as quantity in an aggressive effort to strengthen
and extend our membership; to intensify and broaden our service to local
associations, in meeting their problems and in promoting their service
to Individual members.
NATIONAL ASSOCIATION OF LIFE UNDERWBITQBS
11 West 42nd Street, New York City, N. Y.
Exhibit No. 2330
Thf, Life Undebwrithr's Code of Ethics
My Credo:
Life insurance is essential to the financial protection of our Nation's citizens.
The universal recognition of its value is a direct result of the high sense of trus-
teeship which is the dominating characteristic of the operation of life insurance
companies.
The purposes and ideals of life insurance demand a certain definite standard of
conduct on my part as a life underwriter if I am to merit and receive a public
confidence comparable to that which is now accorded a well-managed life insur-
ance company.
So that there may be no uncertainty about the invariable practices to be fol-
lowed in measuring up to this standard, I adopt, as a general guide the following
Code of Ethics :
/ believe that it is my responsibility:
1. To hold my business in high esteem and honor its prestige.
2. To keep my clients' needs always uppermost.
3. To respect my clients' confidence and hold in trust personal information. ;
4. To render continuous service to my clients and their beneficiaries.
5. To use all prox)er methods in enthusiastically persuading clients to protect
insurable needs.
6. To present accurately and completely every fact essential to my clients'
decisions.
7. To develop my ability and improve my knowledge through constant study.
8. To work consistently and according to a program, and to devote myself
exclusively to this business, as a career.
9. To be fair in my relations with colleagues and competitors, always placing
the clients' interest first.
10. To understand insurance laws and regulations and to observe them in
letter and in spirit.
11. To endeavor to submit only the applications of persons conforming to the
physical, moral and financial requirements of my company.
12. To be loyal to my associates, my agency and my company.
THE NATIONAL ASSOCIATION OF LIFE UNDE21WRITER8
CONCENTRATION OF ECONOMIC POWER
15557
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15558
(X)NCRNTRATION OF ECONOMIC POWER
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CONCENTRATION OF ECONOMIC POWER
15559
Exhibit No. 2332
[Prepared by The Connecticut Mutual Life Insurance Company]
Exhibit S. Question 73, Cause of Termination — Lapses in 1936
Number
Average
Size
Average
Dura-
tion To
Lapse
% of Total Giving
Reasons
Number Amount
1. (o) Finances
(h) Need for cash
2. Total finances
3. Unemployment-- .-
4. No need for insurance
5. Replacement in Conn. Mut...
6. Replacement elsewhere
7. Insured's address not known.,
8. Dissatisfaction
9. Legal recission
10. Canceled by owner or assignee
11. Class of Wellesley..
12. Marriage
Total giving reasons
No reason given
Total _
(1, 869)
(292)
($4, 987, 499)
(902, 437)
($2, 669)
(3, 091)
(5.02)
(11.31)
(61. 50)
(9. 61)
(56. 43)
(10.21)
2,161
143
108
179
124
105
50
5,889,936
268,580
564,390
650,600
602, 454
187.978
144,331
43,200
377, 340
24,500
84,688
2,726
1,878
5,226
3,635
4,859
1,790
2,887
7,200
5,717
500
1,764
71.11
4.71
3.55
5.89
4.08
3.46
1.64
.20
2.17
1.61
1.58
66.64
3.04
6.38
7.36
6.82
2.13
1.63
.49
4.27
.28
3,039
5,294
8,333
8, 837, 997
16,533,184
25.371,181
2,908
3,123
3,045
6.26
4.90
5.40
100.00
100.00
Note. — Item 5 shows replacement in the Connecticut Mutual, for example, where the policyholder!)
have accumulated considerable loans and desired to start over with new insurance.
Exhibit No. 2333
1938-1939 OBJEcrrvEs of the National Assckiation of Life Underwritlbs
L RESPON8IBIUTY TO THE AGENT
To continue oui- efforts to raise the standards of performance of the men and
women in the life insurance business through :
1. Emphasis upon .such activities as will bring to the agent the prestige to which
he is justly entitled because of the part he plays in the social and economic
life of his community and of the nation.
2. Encouragement of research and study by the General Agents' and Managers'
Section of methods and practices which will serve the agent — and strengthen
the American Agency System.
3. Development and promotion of the use of educational and training clinics by
local associations.
4. Promotion of a more widespread and effective use of selective tests and pro-
cedure as applied to men and women entering the business.
5. Continuance of the effort to secure the adoption and application of the Agency
Practices Agreement by all legal reserve life Insurance companies.
6. Cooperation with and encouragement of our membership, in a greater partici-
pation in the activities of the American College of Life Underwriters and the
National Chapter, C. L. U.
II. RESPONSIBILITY lO 1 HE PUBLIC
In full realization that we have a responsibility to bring to the public a
further knowledge of legal reserve life insurance, we propo.<c :
1. To more fully discharge our obligation to see to it that the life values of
the American public arc more adequately insured.
2. To develop all possible means for using our membership to dis.seminate sound
information regarding the institution of life insurance.
3. To aid the companies in every possible way in bringing pertinent facts about
life insurance to the public.
4. To use our strength and influence to save policyholders and beneficiaries from
being misled by those who .seek, for their own selfish interest, to tear down
legal reserve life insurance.
- 5. To einphiisize the rosiionsibility and opportunity for cooperation between our
association, tlio coiupanics. and all groups and organizations within and
without our hnsiness in serving the life insurance polic.vowners of America.
15560 CONCENTRATION OF ECONOMIC POWER
m. BESPON8IBILITT TO 1 HE OEGANIZATION
We shall continue to work for the improvement and development of the or-
ganization structure of the local, state and national associations by:
1. Emphasizing quality as well as quantity in an aggressive effort to strengthen
and extend our membership.
2. Extending and intensifying our service to local associations in meeting their
problems and in promoting their service to their individual members.
3. Making an intensive effort to aid all associations in strengthening the present,
and developing future, leadership.
4. Striving for 100% representation at local and state associations of the Mid-
year Meeting and the Annual Convention.
5. Making full use of our celebration of the Fiftieth Convention and Golden
Anniversary— to promote a progra.u throughout the year appropriately to
recognize past years of accomplishment, and establish new highs in service
to the American public, our companies and our membership.
Exhibit No. 2334
[From the files of the Mutual Life Insurance Company of New York]
Water Company Cone-identiajl Rkport for Insuranck Companies, Year Ending
December 31, 19
Line
1. Company Date Incorporated
2. Individual Furnishing Information
3. Names of Subsidiary Companies and Leased Companies included in this report
on a consolidated basis :
(Note A).
Holding Company Affiliation .
Company's accounts audited annually by ; •
Please Attach Copy of Printed Annual Report and Detailed Balance Sheet as of
December 31.
If attached annual report does not give details of capitalization by issues, please show
this in separate exhibit.
CX)NDENSED INCOME ACCOUNT
6. Operating Revenues-
7. Operating Expenses (Excluding Maintenance)
S. Maintenance
It. Taxes, (Incl. $ Income Taxes)
10. Total Operating Expenses, Maintenance and All Taxes.
11. Net Earnings
12. Non-operating Income (Note B)
13. Balance
Fixed Charges :
14. Leased Plant Rentals
15. Interest on Funded Debt
115. Other Interest Cliargos
17. Interest Charged to Capital (Credit) _.
18. Amortization of Bond Discount and Expense
19. Other Charges (Note C)
20. Total Fixed Charges
21. Balance
22. Appropriations for Retirements and Replacements (Deprecia-
tion) ^ ,
23. Balance for Dividends and Surplus
24. Preferred Dividends (Cash or Stock)
25. Balance for Common Dividends and Surplus
26. Common Dividends (Cash or Stock) :
27. Balance to Surplus
28. Surplus January 1, 19
CONCENTRATION OF ECONOMIC POWER
15561
29. Surplus Debits for Year (Note B) $
30. Surplus Credits for Year (Note B)
31. Surplus December 31, 19
Note A: If data for any company is included for less than full 12 months* period,
please so indicate.
Note B : Attach exhibit showing detail of major Items.
Note C: Sinking fund charges should not be included in Item 19, but should be
included in Item 29.
Pbopebtt value (Commission or other rate base, valuation, historical cost, etc.
brought down to December 31 with detailed explanation)
(Use Reverse Side if Necessary)
Water Company Confidential Report for Insurance Companies.
(Company)
Detailed Income Account — Water Department Only, Year Ending Dec. SI, 19-.
Amount
gallons) j^gp 31
OPEKATrNG REVENUES
Line
$
4. Flat Rate Sales to Commercial Consumers --
7. Sales to Other Water Utilities
12. Total Operating Revenues (See Line 6, Page 1)
$
Transmission and Distribution
Mains
OPEEATING EXPENSES AND MAINTENANCE
Size
Kind of
Pipe
Length in
Peet
13. Costof Water Purchased.
14. Source of Water Supply
15. Fuel .
16. Pumping (excluding Fuel)
17. Purification
18. Transmission and distribution
19. Commercial and New Business
20. General and Miscellaneous
21. Uncollectable Bills .
22. Total (Excl. Taxes and retirements (Note D).
$
Note D.: The figure on Line 22 page 2, should equal the
sum of the figures on Lines 7 and 8, Page 1.
OPERATING STATISTICS
Population of Territory Served (Estimated)
Number of Meters ia Service
Number of Flat Rate Customers
'
Total Number of Active Customers
Total Number of Taps Installed
*"
Water from "Gravity Systems. . (M gallons)
Water Purchased ..... ..(M gallons)
Water Sold.... (M gallons)..
Per cent Unaccounted for. -
Maximum Daily Pumpage (M gallons)
Total -
15562
CONCENTRATION OF ECONOMIC POWER
PLAKT FACILITIES
Pumping Capaeitv (gallons per 24 hrsr):
Low Service
Distributive -
Relay
Total -
Filter Capacity (gallons per 24 hrs.)..
Storage Capacity (gallons):
Reservoirs, Settling Basins, etc.
Tanks and StandpTpes
ToUl-
Raw Water
Clear
Water
Total
Exhibit No. 2334-A
(From the flies of the Mutual Life Insurance Company of New York]
lAs revised November 1, 1939.
Lne
Report for Insurance Companies, Year Ending December 31, 19-
1 . Company Date Incorporated :
2. Individual Furnishing Information:
3. Names of Subsidiary Companies and Leased Companies included in this
report: (Note A)
4. Holding Company Affiliation :
5. Estimated Population served (a) Total.-- (b) Electric Service .'_
(c) Gas Service
Please attach copy of printed Annual Report and Balance Sheet as of December 31
CAPITALIZATION*
Average for Year"
6. Mortgage Debt (Note B) (a) Company
(b) Subsidiaries
7. Debentures, Notes, etc. (a) Company
(b)- Subsidiaries
8. Preferred Stock (a) Company
(b) Subsidiaries
9. Minority Interest in Capital and Surplus of
Subsidiaries
10. Common Stock ( Shs. Dec. 31)
11. Total Capitalization.
12. Surplus
At of December SI
$
(a) Earned
(b) Capital or
Paid in
•If attached annual report does not give detail of capitalization by issues, plea,se show this in separate
exhibits.
"Averages should be sum of values at end of each of the 12 months divided by 12.
CONCENTRATION OF ECONOMIC POWER 15563
UTILITY PLANT
(If actual segregation is not available, please estimate or show %)
Gross Additions Net Additions
during Year during Year As of December St
13. Electric $ $ $
14. Heating . . _-
15. Gas ^ --
16. Railway and Bus.. --_
17. AH Other - -
18. Intangible
19. Total.
20. Electric-
21. Gas
22. Railway arid Bus.
23. Another
RESERVE FOR DEPRECIATION (OR RETIREMENTS
(If actual segregation is not available, please estimate or show %)
24. Total-
NoTE A:— If data for any company is included for less than full 12 month period, please so indicate.
Note B: Additional mortgage bonds issuable and/or of Company $
held in treasury as of December 31, 19 of Subsidiaries $
This information is furnished only pursuant to your request and i snot intended for use in connection with
any sale or purchase of, or any offer or solicitation of offers, to buy or sell, any securities.
Company
Detailed Income Account, Electric Department Only, Year Eliding December SI, 19..
OPERATING REVENUES
, Sales to Ultimate Consumers
Number of
Customers
Line AmoimH K. w. h. Dec. St
1. Residential or Domestic $ I
2. Rural (Distinct rural rates only)-- -_
Commercial and Industrial:
3. Small Light & Power (Retail) - ...
4. Large Light & Power (Whole-
sale)-.-.
5. Public Street & Highway Lighting- .
6. Other Public Authorities
Railroads (Motive Power):
7. Street & Inter urban Railways- -
8. Electrified Steam Railroads . - *
9. Interdepartmental
Sales for Resale:
10. Municipal Distribution- Sys-
tems . ^
11. Other Electric Companies
(Note A) -,---
12. Rural Cooperatives __--
13. Other Electric Revenues - i
14. Total (Note B) $.
15. Farm Service (Included above).
15564
CONCENTRATION OF ECONOMIC POWER
OPERATING * MAINTENANCE EXPENSES
16. Production (See Line 17, Page 4, Column 1) .$
1 7. Transmission
1 8. Distribution
19. Customers' Accounting & Collecting
20. Sales Promotion ' '
21. Administrative and General
22. Total (Excluding Taxes & Depreciation) $
" If net of merchandising operations is included, please indicate amount of profit or loss $
Note A:— If sales of power under interchange agreements are included in Item 11 and not on
Line 12, page 4 please set forth in separate exhibit showing purchaser, revenue and kwh.
Note B:— So-called dump or excess power sales from hydroelectric plants included above, should
be detailed below:
Included in Item
Number Revenue Received K. w. h. Sold
Company
Condensed Income Account, Year Ending December 31, 19
Line
1. Operating Revenues --- $-
2. Maintenance -
3. Other Operating Expenses (Including Rent
for Leased Properties $.. -) -
4. Provision for Depreciation or Retirements
(Note A) -
5. Taxes (Incl. $ ._ Income Taxes) .
6. Other Revenue Deductions (Including
Amortization of $ - --.) -
7. Total Operating Revenue Deductjons-... -
8. Net Operating Revenues.- -
9. Other Income (Note B) ,. .
Total Electric Heating Gai
Railway All
and Bus Othert
Revenue Passengers Carried.
Notes
Gross Income --
Income Deductions:
Interest on Long-Term Debt _
Amortization of Debt Disc. & Exp. (Net)
Taxes Assumed on Interest -
Other Interest Charges A. Estimated depreciation to be claimed
Interest C barged to Construction (Cr.) on Federal Income Tax Return $ . .
Other IncQme Deductions (Note C) 1.. B. Attach exhibit showing details of major
items.
Total Income Deductions C. Includes full subsidiary preferred divl-
19. Net Income.. dend accruals of $._ -.. and
20. Preferred Dividends (Note D) minority interest of $.
21. Common Dividends (Note D) D. If other than cash, state particulars.
22. Miscellaneous Reservations of Net Income
(NoteB)
23. Balance to Surplus.
24. Surplus Januarv 1
25. Other Surplus Debits (Note B)
26. Other Surplus Credits (Note B)
27. Surplus December 31
18.
Payroll charged to total op-
erating and maintenance
expenses "
Payroll charged to construc-
tion
Payroll charged to clearing
accounts and merchandis-
ing _
Total payroll $-
Company
CONCENTRATION OF ECONOMIC POWER 15565
Analysis of Electric Power Costs, Year Ending December SI, 19
Total Costs K. w. h.
1. Steam Generation — Owned Plants. $
2. — Leased Plants.
3. Hydro Generation — Owned Plants .
4. — Leased Plants. —
5. Internal Combustion Generation
6. Purchased Power (Note A)
7. Leased Plant Rentals
9. -
10. Interchange: (Note B)
11. Received if Line 17 differs
12. Delivered (Cr.) from Line 13
due to appor-
_, , _ ^ , • tionment of
13. Total Power Costs -. power costs to
J4_ _ _ _ __ other depart-
•jc'"" ~ ---- -- ments, balanc-
10. ing items should
16. be shown on
Lines 14 to 16.
17. Cost of Power to Electric Dept
18. Company Use
19. Lost and Unaccounted for
20. Electric— Sold
ELECTRIC STATISTICS
Average for Year As of DectTnber SI
21. Number of Electric Customers
22. Number of Active Electric Meters
23. Maximum System Demand during Year — Kw.
24. Annual Load Factor — %
Coal Oil
(Short U«# . aas
Tons) bbls.) (M.C.F.) ■
25. Average Cost of Fuel per Unit '^'^Sl®'
26. Amount of Fuel Burned during year . ^pwately
27. Average B. T. U. per Unit ,.. for each
28. Average B.T. U. per K. VSi. H. Generated tyi'e of
, fuel used.
Pole Miles . Circuit Miles
Steel Un. Steel Un-
Tow- Wood der- Tote- Wood der-
ers Poles ground ers Poles ground
29. Transmission System Owned : — volts -.i-
30. volts -'---
31. .-.-.volts ....
32. volts ....
33. volts
34. Distribution System ..l.
35. Substations: — Located at Generating Plants.
36. Transmission Substations
37. Distribution Substations
No. of Sub- K.V,A.In-
stations stalled Capacity
38. Total : ...
Note A: — Attach exhibit showing k. w. h., costs and sources of purchased power.
Note B:— Attach exhibit of details by companies.
Company
124491— 41— pt. 28 56
15566 CONCENTRATION OF ECONOMIC POWER
Power Plant Statistics
Oeneratino Capacitv
Owned
\amt and Location of Plant
SUam,
Hydro
or Int.
Comb.
Number
of
Unit*
K. W. Capacitv
Pel
Unit Total
It Month»
Ended Dec. SI
K. W. H. Net
Oeneration
Grand Total-
Plants
AU
Purchased
KW.-.-
Power —
Total Available Capacity— K. W.
(a)
NoTK:— Please indicate by footnotes or otherwise all units placed in operation during current year,
(a) Should equal Total of Items 1 , 2, 3, 4, and 5, Page 4, Col. 2.
Steam,
Hydro
or Int.
Location Comb. K. W.
New Plants or additional Units under Construction
To be placed in Service
Date
■ Company
DETAILED INCOME ACCOUNT, GAS DEPARTMENT ONLY, Year
Ending December 31, 19
Number of Cm-
lorrurt, Dec. SI
Amount
Operating Revenues:
Line
1. Residential Sales
2. House Heating Sales
3. Commercial Sales
4. Industrial Sales
5. Other Sales
6. Sales to Other Gas Utilities.
7. Other Gas Revenues
M.e.f.
8.
Total.
Operating & Maintenance Expenses:
9. Gas Production — Coal Gas
— Less Revenue from Resid-
uals
— Net Coal Gas Cost
13. Net Cost of Gas Produced. /..''ii'"""]]]
14. Gas Purchased — (a) Manufactured Gas
(See Note)— (b) Natural Gas
(c) By-Product Gas
10
11.
12.
15.
Total Cost of Gas.
CONCENTRATION OP ECONOMIC POWER 15567
16. Transmission ^--
17. Distribution
18. Customers' Accounting & Collecting.
19. Sales Promotion
20. Administrative and General
21. Total (Excluding Taxes & Deprecia-
tion) $
Siatisiics:
22. Gas Produced— MCF (Details see Items 9 and 12)
23. Gas Purchased — MCF (For detail see Items 14a, b, c).
24. Total Gas Produced and Purchased — MCF
25. Gas Lost and Unaccounted for — MCF (Incl. Co. Use
of MCF) :■-
26. Gas Sold— MCF (Same as Line 8, Col. 3, above) (Aver.
B. T. U. per CF )
27. Maximum 24 Hour Sendout— MCF .L
(Date)
28. Coal Carbonized— 12 Mo Tons , Aver. Cost
$ per
Ton
29. Total Coke Sales— 12 Mo Tons Aver. Rev.
$ per
Ton
30. Coke on Hand Dec. 31— Short Tons Carried at
$ per
Ton
31. Generator Fuel Used — 12 Mo Tons Aver. Cost
$ per
Ton
32. Gas Oil Used— 12 Mo Gallons Aver. Cost
._c per Gal.
Leoted Owned
33. Production Capacity — MCF per Day —
CoalGas :
34. Water Gas -. - ---
35. Number of Gas Storage Holders -
36. Storage Holder Capacity — Cubic Feet '
A vtragt for Year At of Dee. Si
37. Miles 6f Gas Main — Distribution.
Transmission — (a) Owned _ .
(b) Leased-.
38. Number of Gas Customers
39. Number of Active Gas Meters
Note:— Please change all headings appropriately if Company is on a thertn basis. Attach exhibit show-
ing MCF, cost and source of gas purchases.
"Exoe'2'9 No. 2335," introduced on p. 1^82, is on file with the committee
15568 CONCENTRATION OF FX'ONOMIC POWER
Exhibit No. 2336
[Prepared by Alfred M. Best Company, Inc.]
Policyholders Losses in Life Insurance Failures — Period of January 1, 1930, to
January 1, 1940 (Includes Only Companies Where Initial Loss is Estimated
To Be In Excess of $1,000,000) All Figures are in Thousands as of Last State-
ment Available
Name of Company and Date
of Reinsurance
Date of Re-
ceivership or
Retirement
Date of Last
Statement
Available
Gross
Life
Reserve
Policy
Loans
& Pre-
mium
Notes
Net
Life
Reserve
(Less
Policy
Loans
& Pre-
mium
Notes)
Rate of
Lien
%
Indi-
cated
Initial
Loss
(None).
1930
1931
Home Life Ins. Co., Little
Rock, Ark.— Reinsured in
Central States Lile Ins.
Co., St. Louis, Mo. March
31, 1931
National Benefit Life Ins. Co.,
Washington, D. C. (Negro
Company)
1932
Inter-Southern Life Ins. Co.,
Louisville, Ky.— Reinsured
in Kentucky Home Life Ins.
Co., Louisville, Ky. Aug. 8,
1932
Mississippi Valley Life Ins.
Co., St. Louis, Mo.— Rein-
sured in three companies,
American Life fi Accident, St.
Louis, Mo., Detroit Life Ins.
Co. of Michigan, and Repub-
lic Life Ins. Co., Dallas, Tex
Old Colony Life Ins. Co., Chi-
cago, 111.— Reinsured in Life
4 Casualty Co., Chicago, 111.
Security Life Ins. Co. of
America, Chicago, 111.— Re-
insured in Central I,,ife Ins.
Co., Chicago, 111., Septem-
ber 15, 1932..
Jan. 1931
Sept. 24, 1931
Apr. 16,1932
Apr. 25,1932
Sept. 20, 1932
Anr. 18,1932
Dec. 31,1929
$3, 436
$997
$2, 439
$1,220
Details not available but less probably well in excess of
$1,000,000
Dec. 31,1931
Dec. 31,1931
Dec. 31,1931
Dec. 31,1931
1933
Illinois Life Ins. Co., Chicago,
111.— Reinsured in Central
Life Assurance Society, Dcs
Moines, Iowa, July, 19.33.
Northern States Life Ins. Co.,
Hammond, Ind.— Reinsured
In Lincoln National Life Ins.
Co., Fort Wayne, Ind.,
March, 1933
Missouri State Life ins. Co.,
St. Louis, Mo.— This com-
pany was taken over by the
newly formed General
American Life Ins. Co., St.
Louis, Mo., Sept. 7, 1933
National Life Ins. Co. of
U. S. A., Chicago, 111.—
Taken over by Hercules Life
Ins. Co., Chicago, Dl., Jan-
uary 1934
Royal Union Life Ins. Co., Des
Moines, Iowa— Reinsured in
Lincoln National Life Ins.
Co., Fort Wayne, Indiana...
t increased to 60% in 1939.
' This figure was modified by Mr. Best in his testimony, text, p. 15398. A corrected figure of a little over
$32,000,000 was given.
Nov. 28, 1932
Dec. 13,1932
Aug. 28, 1933
Oct. 17, 1933
June 26, 1933
Dec. 31,1931
Dec. 31,1931
Dec. 31,1932
Dec. 31,1932
Dec. 31,1932
$18, 043
$5, 082
$12, 961
t50
3,663
693
2,970
100
4,577
858
3,719
100
8,979
2,253
6,726
100
29,796
7,973
21,823
70
7,791
1,664
6,127
60
123, 583
47, 550
76, 033
50
47, 705
14, 608
33, 097
50
33,094
9,647
23,447
50
$6,481
2,970
3,719
6,726
15, 276
3,676
' 38, 017
16, 549
11,724
CONCENTRATION OF ECONOMIC POWER
15569
Policyholders Losses in Life Insurance Failwes — Period of January l, 1930, to
January 1, 1940 (Includes Only Companies Where Initial Loss is Estimated
To Be in Excess of $1,000,000) All Figures are in Thousands as of Last State-
ment Available — Continued
Name of Company and Date
of Reinsurance
Date of Re-
ceivership or
Retirement
1934
Independent Life Ins. Co.,
Nashville, Tenn. — Taken
over by Standard Life Ins.
Co., Jackson, Miss., May
1934
Peoria Life Ins. Co., Peoria, Dl.
— Reinsured in Life & Cas-
ualty Co., Chicago, lU.—
Combined company con-
tinued under title Alliance
Life Ins. Co., Peoria, 111.
Aug. 13, 1934
Register Life Ins. Co., Daven-
port, Iowa— Taken over
under management contract
by Guaranty Life Ins. Co.,
Davenport, Iowa, Sept. 26,
1934
1935
Pacific States Life Ins. Co.,
Denver, Colo. — Reinsured in
Occidental Life Ins. Co., Los
Angeles, Cal. & Life Ins. Co.
of America May 18, 1935
1936
Federal Reserve Life Ins. Co.,
Kansas City, Kansas— Rein-
sured in Occidental Life Ins.
Co., Los Angeles, Cal. June
14, 1936
Continental Life Ins. Co., St.
Louis, Mo. — Reinsured in
Kansas City Life Ins. Co.,
Kansas City, Mo. July 26,
1936
Detroit Life Ins. Co., Detroit,
Mich. — Taken over by the
newly organized Life Ins.
Co. of Detroit, Mich. March
2, 1936
1937
(None)
1938
(None)
1939
American Life Ins. Co., De-
troit, Mich. — Taken over by
the American United Life
Ins. Co., Indianapolis, Indi-
ana November 17, 1939
Totals
Feb. 19,1934
Nov. 15,1933
Apr. 8, 1934
Apr. 20,1935
May 25,1936
May, 1934
June, 1935.
Date of Last
Statement
Available
June 7, 1939
Dec. 31,1932
Dec. 31,1932
Dec. 31, 1933
Dee. 31, 1933
Dec. 31, 1933
Dec. 31, 1935
Dec. 31,1933
Gross
Life
Reserve
$1,417
Policy
Loans
& Pre-
mium
Notes
$238
Dec. 31,1936
5,166
7,318
13, 076
Net
Life
Reserve
(Less
Policy
Loans
& Pre-
mium
Notes)
$1, 179
13, 159 50
Rate of
Lien
%
Indi-
cated
Initial
l4>ss
1,000
1,938
3,912
1,876
13, 894
S52, 048
9,164
5,740
3, 624 10, 270
111,570 240,478
$1, 179
6,580
50 1, 779
2,686
2,690
> 4, 582
3,444
7,702
'138,000
' This figure was modified by Mr. Best in his testimony, text, p. 15398. The corrected figure is $2,400,000.
' As a result of adjustments for the indicated initial loss to policyholders, in the case of the Missouri State
and Continental Life Insurance Companies, this total was reduced for approximately $130,000,000. See
text, p. 15405.
"Exhibit N. 2337," introduced on p. 15410, is on flle with the committee.
15570 CONCENTRATION OF ECONOMIC POWER
Exhibit No. 2338
[Prepered by the Securities and Exchange Commission Insurance Study Staff] ■>
LiF-E Company Retirements, 1930-1939 (inclusive)— Whekein Liens Were Im-
' posed on Reserves, ob Adjustments or Restrictions Adversely Affected
Policyholders
1939
American Life Insurance Company, Detroit, Mich.: This company, which was
placed in receivership June 7, 1938, was taken over November 17, 1939 by the
.\merican United Life Insurance Company of Indianapolis, Indiana, under a
management-reinsurance contract which provided for a lien equal to 75% of
the net equity of the American Life Insurance Company policies.
Cincinnati Mutual Life Insurance Compapy, Cincinnati, Ohio: This small legal
reserve company, formerly operating on the fraternal basis as the Knights
Templars & Masonic Mutual Aid Association, was taken over by the Life In-
surance Company of Detroit, Detroit, Michigan, October 12, 1939 under an
nrrungment which provided for a 50% lien on equities of the Cincinnati Mutual
policyholders.
Texas Mutual Reserve Life Insurance Company, Tyler, Texas: This small
company was placed in receivership September 8, 1939 and the business re-
insured in the Western States Life Insurance Company, Dallas, Texas, Sep-
tember 22, 1939 — assets were insufficient to cover reserves and the Western
States Life made an adjustment in the issuance date of new policies to take up
the difference between the reserves and the assets. '-
1938
Agricultural Life Insurance Co.. Bay City & Detroit. Mich.: Custodian (May
20, 1938) appointed — company still operating but under restriction as to cash
values, etc.
Union Reserve Life Ins. Co., Phoenix, Ariz. : Taken over on company's request
Feb. 26, 1938 by Arizona Corporation Commission — business later reinsured in
Fidelity Life of Phoenix with 100% liens against reserves.
Federal Union Life Ins. Co., Cincinnati, Ohio : Receiver appointed in 1935 but
business reinsured in All States Life, Montgomery, Ala. in June, 1938 with
modifications in policy equities.
Roman Standard Life Ins. Co., Manistee, Mich. : Placed in Insurance Depart-
ment's hands in 1937 — business reinsured in Great Northern Life Ins. Co.,
Chicago and Milwaukee Aug. 12, 1938 — new policies issued based on pro rata
assignment of equities after valuation of remaining assets.
1936
Federal Reserve Life Iiis. Co., Kansas City, Kan. : Receiver appointed May
25 and business reinsured in Occidental Life Ins. Co. of Cal. June 14 with
tentative lien of 50% on net equities and lien interest at 4i/4%.
Pacific Mutual Life Ins. Co. of California : Reorganized July 22 and business
taken over by new Pacific Mutual Life Ins. Co. as of that date with considerable
modifications of benefits under non-cancellable disability income policies — Life
I policies were taken over intact.
Bank Savings Life Ins. Co., Topeka, Kan. : Placed in receivership October 9,
1935: business taken over by Victory Life Ins. Co., Topeka, Kansas F'ebruary
25. 1936 with 25% liens on net equities.
Continental Life Ins. Co., St. Lo'uis, Mo.: Placed in hands of Insurance De-
partment in May, 1934 and business reinsured in Kansas City Life Ins. Co.,
Kansas City, Mo. July 26, 1936 with 50% lien on all equities.
Detroit Life Ins. Co., Detroit. Mich. : Placed in receivership in June, 1935 and
taken over by newly organized Life Insurance Company of Detroit with 60%
liens on net equities March 2, 1936.
1935
Pacific States Life Ins. Co.. Denver, Colo. : Taken over by Insurance Department
for liquidation April 20. All business except old Chicago National Life business
and all business written through Chicago OflSce of Pacific States was reinsured in
Occidental Life, Los Angeles, Cal. May 18 with 100% liens against net equities-
Chicago National business and Chicago Office business reinsured in Life Insur-
ance Company of America, Columbus, Ohio under similar conditions.
CONCENTRATION OF ECONOMIC POWER 15571
1934
Independent Life Ins. Co., Nashville, Tenn. : Conservator appointed Feb. 19
and business taken over by Standard Life Ins. Co., Jackson, Miss, in May with
100% lien against the full tabular reserve.
Our Home Life Ins. Co., Washington, D. C. : Reinsured in Illinois Bankers Life
Assur. Co., Monmouth, 111. in April vi^ith 100% liens on reserves — receiver had
been appointed in January.
Peoria Life Ins. Co., Peoria, 111.: Receiver appointed Nov. 15, 1983; business
reinsured by Life & Casualty Company of Chicago August 13 — policies subject to
50% lien on net equities — combined company continued under title Alliance Life
Insurance Co., Peoria, 111.
Register Life Ins. Co., Davenport, Iowa : Receiver appointed April 8 — taken over
under management contract by Guaranty Life Ins. Co., Davenport, Iowa Sept. 26
with 50% lien on policies.
State Life of Illinoi.s, C^hicago : Receiver appointed July 19; business taken over
by Old Republic-Credit Life Ins. Co., Chicago with 80% lien on net equities.
Surety Life Ins. Co., Kansas City, Mo. : Insurance Conunissioner appointed
receiver April 27 — liquidation not yet completed — considerable loss to policy-
holders is expected.
1933
American National Assur. Co., St. Louis, Mo. : Cohsolidated with Central States
Life of St. Louis June 27 under latter title — moratorium of 3 years on cash and
loans imposed on policies of both companies.
Illinois Life Ins. Co., Chicago, 111. : Receiver appointed Nov. 28, 1932— In July,
1933, the business was reinsured in Central Life Assur. Society, Des Moines, Iowa
with 70% liens against the reserve.
Northern States Life Ins. Co., Hammond, Ind. : Placed in receivership Dec. l.S,
1932; business reinsured in Lincoln National Life Ins. Co., Fort Wayne, Ind.,
March 22, 1933 with 60% liens against the reserve.'
Victory Life Ins. Co., Chicago, III. : Placed in receivership July 6, 1932; business
reinsured in newly formed Victory Mutual Life Ins. Co. June 21, 1933 with 60%
liens against the reserve.
Lincoln Reserve Life Ins. Co., Birmingham, Ala. : Placed in receivership Jan. 11
and business reinsured in Protective Life Ins. Co., Birmingham with a 100%
reserve lien.
Missouri State Life Ins. Co., St. Louis, Mo. : Placed in hands of the Superin-
tendent of Insurance Aug. 28 ; business later taken over by newly formed General
American Life Ins. Co., St. Louis (Sept. 7) under a purchase agreement with
50% liens against the Missouri State reserves.
National Life Ins. Co. of U. S. A., Chicago, III. : Placed in receivership Oct 17 —
company taken over in Jan. 1934 by Hercules Life Ins. Co., Chicago, with 50%
liens against reserve equities.
Royal Union Life Ins. Co., Des Moines, Iowa : Placed in receivership June 26
and reinsured in Lincoln National Life, Fort Wayne, Ind. with 50% liens on
reserves.
Union National Life Ins. Co., Charleston, W. Va. (formerly Gem City Life) :
Ohio Insurance Department took over company May 9 and on July 1 business re-
insured in Lincoln National Life — policyholders were issued 5 Year Non-Con-
vertible and Non-Renewable Term policies, liens being imposed on equities.
1932
Chicago National lAfe Ins. Co., Chicago. 111. : Reinsured in Pacific States Life
Ins. Co., Hollywood, Cal. and liens covering impairment were placed on policies.
First National Life Ins. Co., Montgomery, Ala. : Placed in receivership March
16 — business reinsured in Liberty National Life, Montgomery with liens for full
amount of reserve.
Inter-Southern Life Ins. Co., Louisville, Ky. : Receivership April 16 — business
later reinsured in newly organized Kentucky Home Life Ins. Co. of Louisville
with 50% liens against reserves.
Mississippi Valley Life Ins. Co., St. Louis, Mo. : Placed in receivership April
2."! — business reinsured in three companies, American Life & Accident, St. Louis
with 100% liens against reserve; Detroit Life took over Ordfflary policies and
issued 4 and 5 Year Term policies ; Republic Life of Texas took over Ordinary
Life policies issued by Two Republics Life and certain other cor tracts and im-
posed 100% liens against reserve.
15572 CONCENTRATION OF ECONOMIC I^OWER
National B.>nefit Life Ins. Co.. Washington, D. C. : Permanent receiver ap-
pointed February 2U— apparently business not reinsured and company liqui-
dated—no doubt 'los.ses to policyholders incurred.
Old Colony Life Ins. Co., Chicago, 111.: Receivership Sept. 20— business rein-
sured by Life & Casualty Co. of Chicago with 100% liens against reserve.
Security Life Ins. Co. of America, Chicago. 111. : Receivership April 18; business
later reinsured in Central Life Ins. Co. of Chicago with 100% liens on reserve.
1981
Community Life Insurance Company, Little Rock, Ark.: Receiver appointed
August 10, 1D:U, and company affairs liquidated. Since company was impaired
it is possible policyholders sustained some loss.
Farmers Life Insurance Company, Denver, Colo. : Purchased by Pacific States
Life Insurance Company, Hollywood, Cal. and business merged with latter con-
cern which later failed with very heavy loss to policyholders.
First National Life Insurance Company, St. Louis, Mo. : Reinsured in Missis-
sippi Valley Life Insurance Company, St. Louis, Mo. August 18. 1931— latter com-
pany failed with very heavy loss to policyholders at a later date.
Home Life Insurance Company, Little Rock, Ark. : Became financially involved
through failure of chain of Arkansas banks and receiver wils appointed Jan-
uary 16, IJKil and business reinsured in Central States Life Insurance Company of
St. Louis, Mo. March 31, 1981— a lien of 50% was placed against Home Life
policies.
National Benefit Life Insurance Company, Washington, D. C. : This Negro com-
pany was placed in receivership September 24, 1931 and reports of court showed
impairment of over $3,000,000 — it is likely that heavy losses were sustained by
policyholders.
1930
Citizens Life Insurance Company, Huntsville, Alabama : Placed in receivership
in May, 1930 for liquidation and business later reinsured in Liberty National
Life Insurance Company, Birmingham, Alabama, with liens attached to take care
of the deficiency in the assets.
Elkhorn Life & Accident Insurance Company, Norfolk, Nebraska : Merged with
Pacific States Life Insurance Company, Hollywood, California, in December,
1930 — at this time no liens or restrictions were placed on policies, but later the
Pacific States Life Insurance Company failed with :' great loss to policyholders.
Lewis & Clark Life Insurance Company, Great Falls, Montana : Reinsured in
Mountain States Life Insurance Company June 6, 1930 — no liens or restrictions at
date of reinsurance but Mountain States Life changed its name later to Pacific
States Life and failed with great loss to policyholders.
Lincoln Security Life Insurance Company. Eureka Springs, Arkansas : Placed in
receivership in October, 1^30 — it is likely that policyholders suffered some loss.
Details not available.
Union National Life Insurance Company, Kansas City, Missouri: Reinsured in
Mountain States Life Insurance Company. Hollywood, Cal. (Later changed to
Pacific States Life) April 7, 1930 — Pacific States Life failed later on with great
loss to policyholders.
Source : Information submitted by Alfred M. Best Company, Inc.
CONCENTRATION OF ECONOMIC POWER
15573
OS
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15574
CONCENTRATION OF ECONOMIC POWER
ss
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CONCENTRATION OF ECONOMIC POWER
15575
155 8 5-Sb
15576
CONCKNTRATION OF ECONOMIC POWER
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CONCENTRATION OF ECONOMIC POWER
15577
268, 838
42, 970
16,467
2,176
11,604
2,500
34,548
117,449
118,306
19, 350
700
60,867
27,866
161,218
2,626
79
3,121
21,416
2,000
24,412
6,761
675
41,741
15, 697
97, 195
40,683
8,182
50, 670
2,130
2,676
17, 894
M
S
^
38,202
8,593
5,472
914
5,878
1,791
16, 600
72, 118
71,391
5,420
633
15, 824
13,-543,
2,579
79
1,046
9,600
1,923
7,868
778
500
35, 985
13, 650
25, 846
16, 563
3,668
If ^ CO
800
953
500
60
1,500
896
2,650
7,839
7,500
1,500
200
3,702
4,280
4,884
950
55
100
76
625
727
160
89
1,190
35
2,005
760
360
50
50
300
605
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1
3
'«
C
a
1
O
=3
J3
0.
a
c
Ph
'5
Pi
1
.3
O
Pi
03
1
CO
i
&
'5
«
•a
3
"a
o
15578 CONCENTRATION OF ECONOMIC POWER
Exhibit No. 2340
(Prepared by the Securities and Exchange Commission Insurance Study Staff]
Metropolitan — Attendance at Meetings, Board of Directors
19%
1930
1931
1932
1933
1934
1939
1936
1937
1938
1939
Meetings scheduled for year
13
13
13
li
13
12
12
12
12
12
12
Director
Wlnthrop W Aldricb
2
9
7
10
7
11
0
12
12
12
13
10
2
8
0
9
12
1
10
12
1
11
12
0
11
12
1
12
10
2
9
12
1
12
12
2
11
12
1
12
7
10
0
1
1
6
1
11
12
8
12
12
U'Alton C. Coleman
0
Cox
9
1
William W. Crocker
3
9
4
13
10
6
10
1
13
0
13
0
11
0
11
0
7
9
9
0
9
2
Harry W Craft
0
John W Davis
1
12
10
4
11
.12
10
11
11
10
9
9
»
8
10
8
10
11
10
12
Williain L DeBost
g
Robert W. deForest
Frederick H. Ecker
12
11
7
9
8
9
6
12
I
11
4
8
11
7
10
4
10
1
9
12
8
12
5
11
0
0
Frederick W. Ecker
10
4
12
4
0
3
0
11
4
12
4
7
Mitchell D. Follanabee
10
6
U
13
4
12
4
13
2
13
6
12
Samuel W. Fordyce
e
7
6
11
5
5
0
A mory Houghton..
7
Fream Klrby
5
8
7
6
6
7
5
10
9
2
9
6
8
2
10
Joseph P. Knapp
Louis St. Laurent
8
7
?
Leroy A. Lincoln
George Mc A neny
2
11
10
12
12
ii
10
11
10
12
9
10
11
10
12
9
9
9
10
11
1
7
10
11
12
11
9
11
11
12
11
Richard K. Mellon
Carroll P M«rTiftni
8
11
7
10
8
9
8
8
4
Jeremiah Mllbank
12
io
11
ii
• 11
10
Ernest E. Morris
2
Frank B. Noyes
1
8
8
3
2
10
10
5
2
10
10
3
5
11
11
0
5
10
11
1
Morgan 0 ' Brien
11
9
11
6^
Henrv O'Hesheimer
Charles M. Schwab
0
0
0
0
1
0
Francis M. Smith
6
0
4
L. A. Tachereau
0
6
2
9
11
0
0
0
0
0
0
0
0
W. B. Thompson
F. Edison White
1
4
10
Albert H. Wlggln
S
9
6
9
12
7
Arthur Wllllamq
8
8
4
Source: Information submitted by the Metropolitan Life Insuremoe Company.
Exhibit No. 2340-A
[Prepared by the Securities and Exchange Commission Insurance Study Stafl]
Prudential — Attendance at Meetings, Board of Directors
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
Meet • gs scheduled for year
12
12
12
12
13
13
13
13-
13
13
13
Director
J. S. Alexander
10
7
8
11
6
C. A. Austin
J. H. Bacheller
8
12
10
11
11
13
11
12
9
11
11
.9
12
10
12
i2
11
9
13
18
9
fi
C. r. Barnard
5
9
3
ii
18
12
9
9
Howard Bayne
g
F. A. Boyle
C. B. Bradley
2
4
9
11
8
11
J. A. Campbell
12
12
10
8
11
11
10
i2
9
9
is
11
9
13
9
9
13
8
6
3
13
9
7
6
11
8
9
7
W. P. Conway
7
Hendon Chubb
8
g
n. W. Dodds
«
CONCENTRATION OF ECONOMIC POWER 15579
Prudential — Attendance at Meetings, Board of Directors — Continued
1920
1930
1931
1932
1983
1934
1935
1936
1937
1938
1939
Meetings scbedaled for year
12
12
12
12
13
13
13
13
13
13
13
Director
2
9
2
9
F, P, Prnfei'l
9
10
12
11
2
2
11
10
9
10
10
9
6
9
A H Elder
10
A. D. Forst -
8
10
11
12
Felix Fuld
0
10
1
6
J. K. Qore -.
10
10
11
10
1
Edward Gray
W. E. Oreen . . ....
J.A.Hartford
io
10
13
10
1
13
9
Alfred Hurrell
9
9
10
10
io
11
10
10
9
12
11
13
2
11
13
10
13
E.J.in....
E. L. Katzenback.
13
Walter Kidder
2
E. K. MUls
9
11
11
11
12
13
13
12
6
C. P. Messlck .
9
10
13
A. H. Moore . ..
9
4
11
13
10
10
10
11
O. W. Mnnslck
10
10
11
12
11
9
9
10
12
9
10
12
12
11
12
8
10
10
11
7
Franklin D'OlIer.-..
10
12
10
11
13
9
11
13
12
5
10
H. Q. Parker
9
J. E. Reynolds
8
12
D. O. Thomson •.
1
8
10
9
10
11
10
11
10
13
10
7
11
13
12
10
1
10
10
R. E. Tomllnson
10
10
10
6
9
9
10
A. C. Wall.... -..
9
Source: Information submitted by the Prudential Insurance Company of .\merica.
Exhibit No. 2340-B
(Prepared by the Securities and Exchange Commission Insurance Study StaS]
New York Life — Attendance at Meetings, Board of Directors
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938-
1939
Meetings schedule for year
13
12
12
12
12
12
12
12
12
12
:i2
Director
Lawrence H. Abbot
11
9
5
Alfred L. Aiken
10
11
11
John E. Andrus
11
12
12
12
12
6
6
10
6
10
7
11
10
10
9
9
8
James Rowland Angell
9
8
12
12
12
10
10
8
10
8
11
8
9
10
8
10
8
8
8
6
9
8
9
10
10
9
7
9
8
10
11
8
U)
10
9
8
9
Nathaniel F. Ayer.
Arthur A. Ballantine ..-
. 8
8
8
9
10
10
Cornelius N. Bliss
4
9
10
12
6
10
12
10
10
12
12
9
9
11
7
11
9
10
10
Henry Bruere.
11
Mortmier N. Buckner
Thomas A. Buckner _.
Nicholas Murray Butler...
12
10
9
8
8
9
10
9
9
li
11
3
11
10
11
Charles A. Cannon
10
Calvin Coolidge...
8
12
JO
12
George B. Cortelyou..
William H. Danforth
12
10
11
10
12
9
10
10
12
6
12
11
12
■ 8
12
10
12
5
12
9
• 12
7
12
7
12
7
Robert E. Dowling.. _.
12
James O. Harbord..-
11
5
Walter W. Head
11
9
4
Myron T. Herrick
Charles D. Hilles ....
HaleHolden
7
9
9
9
9
8
10
8
10
7
11
12
6
11
5
6
11
10
7
10
9
6
11
9
Herbert Hoover _
6
Charles Evans Hughes
3
8
8
8
3
8
6
10
10
8
10
9
7
2
9
10
10
9'
6
10
10
.10
10
1
6
8
6
Alba B. Johnson
7
11
6
10
9
6
6
1
6
6
Percy H. Johnston
8
7
8
7
6
4
7
Willard V. King
9
Darwin P. Kingsby. . .
Richard I. Manning
John O. Milbum '. .
Oerrlsh H. MUliken
9
6
8
7
8
9
9
10
S
15580 CONCENTRATION OF ECONOMIC POWER
yew York Life — Attendance at Meetings, Board of Directors — Continued
1020
1830
1931
1932
1933
1934
1935
1936
1937
1938
1939
Meetings scheduled for year
13
12
12
12
12
12
12
12
12
12
12
ZXrerfor— Continued
10
10
11
6
9
U
4
4
12
12
7
4
9
3
11
12
12
7
Fleming U Revell
3
1
6
5
5
6
9
8
12
8
10
4
12
10
9
io
12
10
12
9
9
lu
6
12
9
11
7
9
9
10
9
8
9
7
9
8
8
6
7
9
8
Ridley Watts
9
7
11
9
11
Source: Information submitted by the New York Life Instuance Company.
Exhibit No. 2340-0
[Prepared by the Securities and Exchange Commission Insurance Study Staff]
Equitable — Attendance at Meetings, Board of Directors
>
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
Meetings scheduled for year
12
12
12
12
13
13
13
13
13
13
13
Director
Henry M. Alexander
7
9
10
8
4
5
7
.7
11
11
10
8
0
3
3
8
11
9
10.
9
1
6
9
10
11
11
3
11
2
5
6
10
7
11
12
William Seaman IJainbridge
Charles D. Harney -
Edward C. Blum
Ralph Budd
9
8
10
11
6
9
9
8
9
10
8
11
10
11
11
11
9
10
6
8
5
6
12
0
11
2
Joseph P. Chamberlain .
4
8
6
9
7
1
3
2
J. Reuben Clark, Jr
10
Bertran Cutler
4
• 4
■ 5
7
11
Francis B. Davis, Jr.
5
Robert J. Dodds
9
10
9
J. C. B. Ehringhaus
6
William T Orfth^m
7
3
11
10
7
10
4
11
10
8
7
11
11
11
9
10
11
7
7
10
10
4
1
1
6
11
8
11
10
0
12
John F. Harris
5
6
5
5
7
4
4
9
8
6
Robert C.Hill
12
8
■ 10
9
8
11
10
10
10
9
10
10
9
• 5
9
10
Francis K. Kernan
6
Richard W. Lawrence -l...
12
Sam A. Lewisohn
3
0
6
11
7
3
11
10
6
11
6
10
11
10
5
11
6
9
10
11
2
1
5
10
10
10
7
11
7
3
9
9
1
1
5
5
10
8
11
8
0
9
10
11
9
9
. 11
7
6
10
10
3
1
I
1
11
11
0
9
11
11
9
10
10
7
4
11
10
4
0
3
6
11
9
11
11
0
8
Russell B. Lowe
12
John T. Manson..
11
9
2
8
10
8
1
8
12
8
0
4
11
10
2
10
10
Edwin P. Maynard . . .
10
George V. McLaughlin..
12
John Bassett Moore ....
12
George Wei wood Murray
7
John Lord O'Brian
8
12
12
4
11
12
5
11
12
3
11
11
3
1
7
11
11
4
0
10
Thomas I. Parkinson
11
Leonard Peckitt
12
John J. Pelley.
7
Horace D. Pillsbury
2
0
1
0
Seward Prosser
6
William Roberts
11
7
• 10
12
n
9
11
6
12
11
12
9
9
4
12
12
9
11
9
6
10
U
11
10
8
8
11
11
11
4
6
11
8
11
11
0
11
William J. Roddey :...
3
William Skinner.
9
Jesse Sllngluflt .
12
O. Carroll Todd... .
11
John H. Walbrldge. . . .
0
Source: Information submitted by The Equitable Life Assurance Society of the United States.
CONCENTRATION OF ECONOMIC POWER
Exhibit No. 2340-D
[Prepared by the Securities and Exchange Commission Insurance Study Staff]
Mutual Life of New York — Attendance at Meetings, Board of Directors
15581
1928
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
Jkleetinps scheduled for yr.
12
13
12
13
12
13
12
13
12
13
12
14
Director
Charles E. Adams
10
11
10
13
10
10
2
3
12
12
6
7
11
11
5
4
J. S. Auerbacb
11
1
6
4
0
U
13
10
6
11
12
11
12
12
12
12
George F. Baker
George F. Baker, Jr
7
6
0
7
11
11
3
0
3
1
5
1
7
1
1
1
Newton D. Baker
-
Edwin W. Beatty
0
7
11
8
0
6
12
9
0
8
12
8
12
6
12
9
0
S
11
3
E. J. Berwind
Charles S. Brown --
0
LewisH. Brown.
6
10
9
5
9
10
1
9
6
10
8
10
10
WUliamM. Bullitt
W. Gilson Corey, Jr
5
6
9
6
6
7
5
10
12
11
Joseph H. Choate, Jr
Emory W. Clark
9
4
2
10
5
1
9
5
2
10
6
11
6
6
3
13
10
8
7
9
10
0
12
10
9
6
12
8
3
9
5
10
7
3
9
5
11
9
4
10
7
0
11
8
9
5
13
10
6
James C. Colgate
10
S. Sloan Colt -.
g
Charles P. Cooper
12
Cyrus H. K. Curtis
6
9
0
6
5
10
0
4
4
11
0
7
Grafton D. Gushing
Arthur V. Davis..
13
13
13
10
12
11
2
John W. Davis
7
5
5
5
8
5
7
6
1
g
F. Trubee Davison
11
Lewis W. Douglas .-.
1
0
9
8
7
8
8
6
1
9
7
0
i5
7
0
4
13
6
8
0
11
11
6
Charles E. Dunlap
9
Stanley Field
0
2
1
2
1
12
David F. Houston
Lewis Iselin
12
1
3
4
2
10
5
0
ii
12
13
9
12
12
13
10
13
F. A. Juillard
3
9
1
12
0
0
0
0
R.C. LeflSngwell
C. H. Markham
3
12
Alfred E. Marling
10
9
10
12
2
Theodore F. Merselis
George P. Miller
0
0
4
Nathan L. Miller
6
9
8
1
8
4
8
9
10
4
6
8
8
4
9
10
12
3
6
9
10
6
6
William D. Mitchell
8
Poland S. Morris.-
7
2
11
John K. Ottley
2
1
9
11
7
11
3
4
Charles A. Peabody
9
6
12
3
11
6
2
4
10
11
11
8
9
2
4
11
6
6
8
6
5
8
6
7
6
9
8
11
fi
10
6
9
4
8
7
11
9
8
S
11
. 4
8
10
10
6
11
7
9
8
9
0
Frank L. Polk
11
William C. Potter
g
Elihu Root, Jr
9
12
Henry Lee Sbattuck
6
John Sloane
13
■Leroy Springs
6
8
4
0
Robert C. Stanley.".
8
8
9
3
12
Robert T. Stevens
5
10
4
10
10
6
13
Henry W.Taft
8
7
2
11
8
5
8
5
10
6
0
7
10
8
10
3
11
7
g
Myron C. Taylor .
3
Harry B. Thayer
Edwin Thorne....
12
11
10
8
0
John C. Trophagen
3
9
7
8
g
W. H. Truesdale
U
6
10
0
13
9
9
12
7
10
0
6
11
0
9
11
0
11
12
Paul Tuckerman . . ■.
11
10
8
10
7
6
9
0
8
0
4
Cornelius Vanderbilt
Rodman Wanamaker
Vanderbilt Webb
4
9
10
11
Thomas H. West, Jr......
0
6
8
6
4
10
6
4
8
6
1
Daniel Willard
4
10
9
3
2
7
5
4
10
11
2
1
1
0
Thomas Williams..
8
9
3
Edwin W. Winter
Clarence M. Wooley
4
7
10
6
6
1
3
1
3
Source: Information submitted by the Mutual Life Insurance Company of New York.
124491 — 41— pt. 2S
15582
S s
03
CONCENTRATION OF ECONOMIC POWER
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CONCENTRATION OF ECONOMIC POWER
15593
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15594 CJONCENTRATION OF ECONOMIC POWER
Exhibit No. 2342
Hauohton Bell Louis W. Dawson
Assistant Oeneral Counsel Vice President and General Counsel
The Mutuai, Life Insurance Company of New York
law department
34 Nassau Street, New York
.E^BRUARY 1, 1940.
Gerhard Gesell, Esq.,
Special Cou/nsel, Insurance Section
Securities and Exchange Commission, lJf2Jt K Street NW.,
Washington, D. C.
Dear Mr. Gesell : I am writing to you* as I stated today in our conversauun
here that I probably should do, regarding the "net cost" tables following page
281 of the statistical summaries prepared by the Securities and Exchange
Commission from answers to the Investment Questionnaire and Supplemental
Investment Questionnaire.
We are convinced that if these "net cost" tables (pages 284-314, inclusive)
are published in their present form, they are likely to furnish uninformed per-
sons with material for making misleading, unfair and improper comparisons
between different companies. The possible consequences could be very harmful,
and we strongly urge that you give the matter further consideration.
The tables ap now printed do not show either the past cost of life insurance^
or the likekly future cost for any of the companies listed. Dividend scales in*
life insurance companies, especially in the last decade, have been changed with
great frequency and, in some companies, every year. Companies do not expect
a given scale to be maintained beyond the year for which it is declared. There
is no basis in experience, therefore, for projecting one year's dividend scale,
such as the 1939 scale, for ten or twenty years into the future and assuming
that the likely future cost of life insurance can be determined from such calcula-
tions. No company publishes its current annual dividend scale with the idea
that it in any way represents an estimate of likely future results. The dividend
material of all the companies emphasizes this fact, and the agents of the com-
panies are instructed that such figures cannot be used as the basis of any esti-
mate or representation.
As a practical matter, it is necessary for the companies to inform their field
forces of the current dividend scale, i. e., the dividends payable in the current
year on policies issued 1 year ago, 2 years ago, 3 years ago, etc., in order that
they may deal intelligently with the holders of previously-issued policies. Sum-
maries of results based on one year's scale serve the useful purpose of illus-
trating to policyholders and prospective policyholders the comparative effect of
exercising the various dividend options from which the insured may choose under
the provisions included In his policy. Such illustrations are not furnished,
however, as estimates of future results and great care. is exercised that they
shall not be so interpreted. The New York Insurance Law contains, and has
for many years contained, a provision which would make any estimate of this'
kind by an insurance agent illegal.
It is true that "net cost" summaries on the basis of current dividend scales
are available in various independent publications of insurance data. These
publications are undoubtedly used almost exclusively by insurance agents and
are not often purchased by uninformed persons. Because ag6nts are instructed
in the proper use of dividend figures, there is not the same likelihood of wide-
spread misconception as may result from the publication by a governmental
agency of similar figures with all the authority with which they would be
invested. Moreover, these independent insurance publications generally incluae
actual dividend histories as well as the current dividend scales and" thereoy
give a much fuller basis for a true understanding of dividends and net costs.
Furthermore, these in.surance services are published annually and even the
results on "current" scale basis are available over a period of years and the
situation is quite different from that created by the publication of one set of
figures based upon the projection of one year's dividend scale.
Publication of your "net cost" summaries based on dividends paid in the
single year in.SO will be particularly injurious to this Company, because it
will solhouette our very high net costs is that one year against the lower
costs in that year of the other companies. Publication of such summaries
CONCENTRATION OF ECONOMIC POWER 15595
based on the actual exi)erience over several years would give us a very differ-
ent comparative rank.
Our objection, however, is not based solely on the effect on this Company,
but is a fundamental objection to the use of such tables based upon only one
year's "net costs." We believe that the fallacy in the use of such tables is
twofold. In the first place, the experience of companies may vary widely in
one year, both with their own exi)erience over a longer period and also with
their long-range comparative exi)erience with other companies, due to such
factors as taking a substantial gain or loss through the sale of assets or by
necessary adjustments in the valuation of assets in the particular year. In
the second place, the results expressed in the "net cost" summaries may be
greatly influenced through comtrollable policies pursued with regard to the
application of surplus earnings. Thus, taking one year alone, such surplus
earnings might be allocated differently by different companies. One company
might use, them to a greater extent than another in voluntarily writing down
its assets or voluntarily increasing its contingency reserves, whereas in that
one year another company might apply its gains to the payment of dividends.
The former would represent a more conservative policy aimed at affording
greater security to policyholders and, other things being equal, also increasing
its ability to pay higher dividends in the future. In the "net cost" summaries
however the company adopting this more conservative policy would be penal-
ized. It seems to us therefore that the use of such "net cost" summaries
based on one year's dividends is likely to be misunderstood or actually mis-
leading. We do not think that this defect can be cured, as a practical matter,
by explanatory testimony or even by explanatory text inserted in the sum-
maries. These final tables will undoubtedly be taken to represent the net results
of the whole series of preceding tables and are the one portion of the statistical
summaries likely to receive widest publication.
I understand that you have considered that figures based upon actual divi-
dends paid over a period of years in the past would be apt to mislead because
of the substantial change in interest rates that has taken place. This argu-
ment would be valid only if the results of such calculations were used to estab-
lish absolute net costs. The tables as they now appear, however, will natu-
rally be used for establishing comparative net costs for different companies.
Used in this way, they will be far more misleading, for the reasons stated,
than tables based upon a past period of years.
Faced with this situation, it seems to us that either the net cost tables should
be eliminated from the summaries entirely, because of their inherently mis-
leading character, or, in order to minimize this defect, additional tables should
be inserted based on the actual dividends paid over a period of years- and
safe-guarded by explanatory text pointing out the danger of using therii for
establishing absolute net costs.
Very truly yours,
HAtTGHTON BeU.,
As8ista/nt (general Counsel.
HB:PD.
Copy to Mr. Ernest J. Howe, Chief Financial Adviser, Insurance Section.
Securities and Exchange Commission.
15596
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CONCENTRATION OF ECONOMIC POWER
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Exhibit No. 2344
IPrepared by the Securities and Exchange Commission Insurance Study Staff]
Vet Cost— Policy Surrendered End of 20th Tear
Aetna
Banken Life
Conn. Oen'l
Conn. Mut
Equitable NY...
Equitable Iowa..
Guardian Life...
John Hancock...
Mass. Mutual...
Metropolitan....
Mutual Benefit.
Mutual NY
National Life
N. E. Mutual...
N. Y. Life
Northwestern...
Pacific Mutual..
Penn Mutual...
Phoenix Mutual
Provident Mut.
Prudential
State Mutual...
Union Central-.
Historical
Net Cost
1030 Scale
nistorlcal
Net Cost
as a Per-
centage of
Net Cost
Based on
1939 Scale
$97.90
$81.14
82. 88%
95.82
90.67
94.62
92.44
89.56
96.88
87.94
7Z47
82.41
89.60
51.48
57.46
78.67
73.92
93.96
108.75
73.92
67.97
88.80
88.71
99.90
91. Q7
45.12
61.21
36.20
41.41
114.39
88.99
53.78
60.43
133.94
71.32
63.25
65.01
62.17
95.63
85.39
55.67
66.19
66.09
33.05
50.00
69.81
35.19
68.84
80.49
118.96
147. 78
72.58
51.19
70.53
93.22
69.76
74.82
61.50
55.19
89.74
67.33
59.68
88.64
91.52
62.47
68.26
105.91
90.45
86.40 •
Source: Information furnished by the companies.
SUPPLEMENTAL DATA
The following material appears at this point in connection with a
statement of Senator O'Mahoney, supra, p. 14699.
Tempobabt Nauonal Ecx)nomio Committee
Apex Building
Washington
Following is a letter by Senator Joseph C. O'Mahoney, Chairman of the
Temporary National Economic Committee^ to Representative Eklward T. Taylor
of Colorado in connection with the Temporary National Economic Committee's
insurance studies.
The letter is being made public in response to a number of inquiries on the
.'iame matter.
Attached are certain documents referred to in Senator O'Mahoney's letter.'
CONCENTRATION OF ECONOMIC POWER 15605
[Copy]
Joseph C. O'Mahonby
Wyoming
United States Senate
Washington, D. C.
January 22, 1940.
Hon. Edwaed T. Tayxob,
House Office Building, Washington, D. C.
Deab Mb. Tayloe: Mr. James R. Brackett, Executive Secretary of the Tem-
porary National Economic Committee, has handed me your letter of January 15
with enclosures from two of your constituents commenting upon the study of
insurance which has been presented to this committee by the Securities and
Exchange Commission. Since both of these letters give expression to certain
misapprehensions which are now current with respect to this study, I shall ven-
ture to discuss the matter in more detail than might otherwise seem necessary.
I shall also take the liberty of making the letter public.
In the first place let me say that as long ago as November 14, 1939, in re-
sponse to an inquiry from Hon. George E. Allen, Commissioner of the District
of Columbia, who had an engagement to speak to the Massachusetts Insurance
Society the following week, I wrote him a letter with respect to these reports.
In that letter I said:
"I am most happy to authorize you to say on my behalf that there isn't the
slightest basis for the intimations appearing in certain insurance journals that
the committee, or any member of its staflE, is promoting any scheme for govern- ,
ment competition with the insurance industry ♦ * ♦
"As has been indicated by the message of President Roosevelt in which he
recommended this economic study and by frequent statements of the chairman,
statements which have never been controverted by any member of the com-
mittee or its staff, the sole objective of the committee is to proxnote free, private
enterprise. Statements to the contrary are wholly unwarranted."
These statements are as correct today as when I wrote them. Moreover,
before my letter to Mr. Allen was placed in his hands I submitted it to Commis-
sioner Leon Henderson of the Securities and Exchange Commission and to Mr.
Gerhard A. Gesell, Special Counsel for the Securities and Exchange Commission,
who has presented the insurance study ta our committee. Neither of these
gentlemen offered any objection to the letter so that it may be taken not only
as the expression of the chairman of the Temporary National Economic Com-
mittee, but also as the expression of those members of the committee and of its
staff who are associated with the Securities and Exchange Commission.
If you wUl examine again the letters which you have received you will find
that like others which have been sent to other members of Congress they
rely not upon anything that has been recommended by this committee, but
solely upon the predictions, assumptions, suspicions and fears of the writers
as to what the committee may do. No one knows better than you how per-
fectly impossible it is to disprove the accuracy of a prophecy yet practically all
of the allegations which are now being circulated among members of Congress
are based upon predictions of what the Committee intends to do. I can only
say to you that I have no reason whatever to place any credence in these direful
predictions.
Upon investigation- 1 find that the letters now coming to members of Congress
from persons engaged in the insurance industry and from a few state commis-
sioners appear to have been based upon a memorandum recently distributed to
the industry by Colonel C. B. Robbins, Manager and General Counsel of the
American Life Convention with ofllces in Chicago. Colonel Robbins was good
enough to place a copy of this memorandum in my hands last Saturday. I have
since read it and find in it and in the special bulletin and form letter which
15606 CONCENTRATION OF ECONOMIC POWER
accompanied it at least several statements which are not substantiated by any
facts which have come to my knowledge. Let me list some of them :
1. The covering letter transmitting the American Life Convention pamphlet
explains its circulation with the statement :
"It was thought advisable to warn them (members of Congress) of the desire
of some members of the Temporary National Economic Committee for federal
supervision of all life insurance together with the taking over by the govern-
ment of industrial insurance and merging it with the social security system."
•1. 'i'he letter implies that it is the purpose of the committee, or some of its
members, to abolish the agency system of selling life insurance.
3. These inferences are carried throughout the pamphlet with certain additional
inaccuracies as, for example, the following prophecy which, so far as I can find
out, is altogether without foundation :
"Any proposal for Federal supervision and control would not emanate from
policyholders — its source would be purely political — and should cme of the prin-
cipal purposes behind it be to secure indirect but effective dominion over the
thirty billion dollars held in trust by the companies, its accomplishment would be
a calamity."
4. The pamphlet sets forth that the insurance business "has been subjected to
an injurious and unfair attack" and that "No opportunities have been given for
companies to reply to insinuations in questions as to their practices, nor have the
witnesses been permitted to make full statements while answering trick questions
propounded to them by the Counsel."
There are other inaccuracies which could be noted as, for example, the state-
ment in the covering letter that the Securities and Exchange Commission has 64
investigators at work among the companies while, as a matter of fact, the Secur-
ities and Exchange Commission advises me that at the present time it has only
8 investigators in the field and has never had more than 12. Let me, however,
deal with these important statements which I have listed.
1. No member of the committee, or of Its staff, has ever intimated to me that
the government should take over industrial insurance, nor has any suggestion
ever been made to me by any person associated with this committee that industrial
insurance should be merged with the social security system. Moreover, the com-
mittee has never discussed any such proposal at any meeting and it has never
made any recommendation at all.
It is true that Senator Wagner of New York has been quoted in the newspapers
as favoring a federal annuity system under the Social Security Board. It should
be noted that Senator Wagner is not a member of this committee and therefore
his views cannot be imputed to the committee. Moreover, his proposal has never
been discussed by the committee.
2. With respect to the allegation that this committee wants to undermine the
agency system', I am glad to be able to assure you that there is not the slightest
foundation for any such report. I know of no member of the committee or of the
staff who has even intimated such a proposal.
3. The suggestion that one of the principal purposes behind the study is to
enable the federal government to secure domination of insurance company re-
serves is utterly fantastic. Even if such a proposal were suggested, arid no such
suggestion has been made, I do not hesitate in expressing my opinion that this
committee would never for one moment consider submitting any report or any
recommendation which would in the slightest degree lend color to this assertion.
4. With re.spect to the charge that witnesses have been compelle(J to answer
trick questions and that no opportunity has been given to the companies to reply to
insinuations, let me say that in the insurance hearings, as in every other hearing,
every witness was given full opportunity to be accompanied by his lawyer on the
stand. In most ca.ses the witne.s.ses knew in advance the type of question that was
to be submitted and the general tenor of the examination. From the very outset
the committee has taken every precaution to give the fullest opportunity to every
witness and to every company. It may be worth while noting that only last week
at the conclusion of the study of cartels, two very distinguished business execu-
tives, Mr. Cornelius F. Kellcy, hendof the Anaconda Copper Company, and Mr.
E. T. Stannard. President of the Keruiecott Copper Companv, both publicly com-
mented at the hearings upon the fairness with which the Committee had acted
and the fairness of the hearing itself.
Let me assure you that we have not been con.scious of any purpose or desire to
be otherwise with the representatives of the insurance industry. Several months
CONCENTRATION OF ECONOMIC POWER 15607
ago this committee issued a public invitation to industry to make presentation to
the committee of its own views in its own way. This invitation was accepted by
the oil industry and by the steel industry. I think an examination of the record
in the former case will support the statement that more complete and authorita-
tive study of the oil industry has never been made. I trust that the same may be
true of the steel industry the hearings upon which are still in progress.
This invitation has been open to the insurance industry. It is still open and at
the next executive meeting of the committee it will be my purpose to propose
that a special invitation be extended to the insurance industry to present to this
committee its own story in its own way. .In order that you may know the manner
in which such hearings are conducted, I am attaching a copy of the procedure
which the committee has laid down for such an industrial presentation.
It is just as true now as it was in the beginning of these hearings that the
only purpose of the committee has been to make an objective study of our economic
system. You may, with perfect confidence, thus assure all persons who make
inquiry of you.
I venture to add here the opinion which I have expressed upon many occasions,
that economic freedom is just as essential to the happiness and prosperity of our
people as religious and political liberty, that the extreme need of our time is the
elimination of all restraints upon economic opportunity and that business itself
needs the liberation of the natural person from regimentation from economic
forces as well as his protection from regimentation by government. Both busi-
ness and government are intended to serve people. My interest in the work of
the Temporary National Economic Committee and, so far as I have been able to
observe, the interest of every member of the committee has been to preserve this
economic freedom.
Sincerely yours,
JCOM: M
[Copy of Special Bulletin Referred to in Paragraph 7 of Senator O'Malionoy's Letter]
Special Bulletin
American Life Convention
Executive Offices
230 North Michigan Ave. Chicago
Special Bulletin December 1, 1939
Life Insurance Should Be Supervised, RbguI/ATed and Governed by Law in
THE States
Enclosed herewith is a copy of the pamphlet just issued by the Conveption,
prepared by a Committee composed of Messrs. C. A. Craig, T. A. Phillips and
Claris Adams, working in conjunction with Convention Headquarters.
The pamphlet has been examined, edited and approved by the Executive Com-
mittee of the Convention. It is being sent to all Vice-Presidents of the Con-
vention, together with a letter, a copy of which is enclosed with this bulletin,
and which is self-explanatory.
Should you desire more copies of this pamphlet, kindly notify Convention
Headquarters and we will mail them to you for use by your oflBcers and agents
in the" manner in which you think will be most useful.
C. B. Robbins,
Manager and General Counsel.
[Copy of form letter referred to in Paragraph 7 of Senator O'Mahoney's letter]
[Copy]
American Life Convention,
Deceml)er First, 1939.
Dear Mr. : A resolution was passed at th? last annual meeting
of the American Life Convention, directing the Executive Committee to prepare
a vigorous and effective campaign of education for the purpose of advising
15608 CONCENTRATION OF ECONOMIC TOWER
members of Congress of a possible purpose behind the present investigation by
the Temporary National Economic Committee in Washington. It was thought
advisable to warn them of the desire of some members of the Temporary Na-
tional Economic Committee for Federal supervision of all Life insurance, to-
gether with the taking over by the Government of industrial insurance and
merging it with the Social Security System. During the course of the inves-
tigation Savings Bank Life Insurance has been held up as a model institution
in view of the fact tliat no agents' commissions are paid, and the Agency System
of selling life insurance has been severely criticized.
Pursuant to this resolution, the enclosed pamphlet has been prepared, and
approved by the Executive Committee, with the thought that each State Vice-
President of the Convention would contact, through personal interviews, the
members of Congress from his state, and give them a copy of the pamphlet for
their information. He could also ascertain the attitude of the members of Con-
gress towards the objectives of those members of the TNEC who desire Federal
supervision and absorption by the Government of industrial insurance. I am
sending you under separate cover twenty-five (25) copies of the pamphlet.
Should you desire any more from time to time please advise us and they will
be forwarded to you promptly. Inserted in the pamphlet you will find a mimeo-
graphed copy of a recent address by Hon. James M. McCormack, Commissioner
of Insurance and Banking for the State of Tennessee.
The companies in are likewise members of the Convention.
I am sure that they will cooperate with you in this matter, and if you will
contact them, asking that they see the Congressmen nearest their home oflBces,
the work of Interviewing all the members of Congress from your state will be
distributed so that your task will be considerably lessened. I am sending each
company a copy of this letter so that they may be advised as to what is being
done.
May I have your assurance that you will see to It that every member of Con-
gress and both Senators from your state are interviewed by you or by one of
the executives of the member companies in your state.
We do not believe Congressional members of the TNEC are in sympathy
with the critical attitude of tlie Departmental meml)ers in the investigation — •
criticism seems to come largely from the Securities and Exchange Commission •
and other Departmental members of the Committee.
It will also be interesting to you to know that, at the present time, we are
informed that the SEC has sixty-four investigators among the companies,
obtaining minute information as to conduct of the oflices of the companies,
examining files, etc. You are probably familiar with the questionnaire which
was recently sent to all state Insurance Commissioners, inquiring closely into
the conduct of the various State Departments. It is our undertsanding that
this questionnaire will be considered at the Commissioners' meeting in Biloxi,
Mississippi, December 6-9, inclusive.
Copies of the pamphlet are being sent to non-member as well as member
companies and if you know some executives of non-member companies in your
state, I am sure they will assist in the work of contacting members of Congress.
I enclose a list of the Congressmen and Senators from your state. Will you
please advise me from time to time, as you have interviewed them, what the
results of your efforts have been.
If you desire further information, or if we can be of any assistance to you,
please write me and I will be delighted to give you anything whit^h the Con-
vention has on this matter.
Cordially,
C. B. ROBBINS,
Manager and Oeneral Counsel.
CONCENTRATION OF ECONOMIC POWER 15609
[Copy of pamphlet referred to in Paragraph 7 of Senator O'Mahoney's letter]
LiFB INS0RANCE
Should be Supervised, Regulated and Governed by Taw in the States
Ameeican Life Convention
Executive OflSces, 230 N. Michigan Avenue, Chicago Illinois
This pamphlet is issued in pursuance of a resolution of the American Life
Convention, adopted at its Annual Meeting in Chicago, Illinois, on October 4,
1939, the resolution being as follows :
"Whebeas, the American Life Convention did on the 5th day of December,
1905, adopt the following resolution :
" 'Resolved, That we are opposed to any interference with state supervision
and control of Life Insurance companies, that Federal supervision is not ex-
I)edient, * * *. We endorse strict state supervision,' and
"Whebeias, on the 10th day of October, 1914, the Convention did approve the
following declaration :
" 'Inasmuch as an insurance congress is to be held at San Francisco in 1915,
at which congress the subject of Federal supervision of Life insurance is likely
to be one of the topics under discussion, we recommend that any delegate or
delegates of the American Life Convention to said insurance congress be in-
structed to advocate at all seasonable times the original declaration and the
subsequently reiterated expressions of the American Life Convention in favor
of state supervision and against Federal supervision, and to oppose all efforts
to commit the insurance congress to Federal supervision, whether by consti-
tutional amendment or otherwise,' and
"Whereas, under the existing system of State supervision in the most trying
times in the country's history by the faithful discharge of obligations. Life
insurance benefits accruing to living insureds and beneficiaries of the deceased
have unquestionably greatly relieved the economic stress and demonstrated the
soundness of the institution of Life insurance, and
"Whereas, the record of performance of Life insurance is proof of the eflB-
ciency and adequacy of state regulation;
"Now THEREFORE, the American Life Convention, compos'^d of 154 Life insur-
ance companies, with home oflBces in 40 states of the Union, and the District of
Columbia, does reaffirm its previous declarations of principle affecting examina-
tions, favoring State supervision and opposing Federal regulation; and beJt
"Resolved, that an organized effort be made to tnore fully inform the public,
and that the Executive Committee of the American Life Convention be and is
hereby authorized to take such action as by it may be deemed to be advisable to
conduct a vigorous and effective campaign of education."
UFB IN8TJRANCE3 SHOULD BE SUPERVISED, RBGXTLATED AND GOVERNED BY LAW IN THE
STATES
Life insurance is an institution serving sixty-five million American citizens
through more than three hundred companies domiciled in virtually every state
in the Union. Through this instrumentality the people of this country have
accumulated savings of approximately $450 per policyholder. This is the result
of a century of effort through individual initiative and is an achievement of
free enterprise. In many ways it is uniquely an American institution, for while
there are Life insurance companies in every nation in the world, almost two-
thirds of all Life insurance is held by thrifty Americans.
The amazing growth in Life insurance didn't just happen ; it was due to a num-
ber of causes. People came to realize that the system on which it was founded
provided the greatest measure of safety for those seeking etonomic security.
15610 CX)NCENTRATION OP ECONOMIC POWER
This public confidence was due to strict investment laws and thorough super-
vision in the various States, to the wise management of companies themselves,
and to the earnest and conscientious efforts of two hundred thousand Life under-
writers who are the apostles of optimism, spreading the gospel of Life insurance
and its benefits to every nook and corner of the nation.
Prior to the recent great depression Life insurance had successfully weathered
the disastrous effects of the 'crises of 1857, 1873, 1893 and 1907, meeting its obli-
gations in full, while other financial institutions had failed in great numbers, with
consequent losses to their investors and depositors. When the crisis of 1929
started the great depression, Life insurance met this greatest stress of all with
the same degree of reliability and solvency.
During the darkest days in the early years of the depression the Life insurance
companies paid out to their policyholders $8,360,000 per day, and for the total
of this period, ending in 1938, the sum of $23,590,268,703. They are continuing to
meet their responsibilities and discharge their obligations with a full measure
of financial honor. For more than half of our population, consisting of frugal
and thrifty i)eople who endeavor to provide not only for their loved ones in
case of death, but for their own old age as well, Life insurance is the greatest
Social Security in the world.
While a few companies had their reserves impaired by reason of the tremendous
fall in the value of securities, the total loss to policyholders by reason of liens
imposed upon their reserves in' companies which failed, amounted to less than
two-thirds of 1 per cent of the total sum entrusted to the companies by their
policyholders.
It is unfortunate that this magnificent structure which has been built by the-
thrift and frugality of our citizens, and maintained through strict State laws,
thorough supervision and able management, should be subjected to an unjust and
unfair attack.
The investigation now being carried on by the Temporary National Economic
Committee wis primarily authorized for the purpose of investigating monopoly
in the Unitei States. The actual investigation of Life insurance as carried on
through the instrumentality of the Securities and Exchange Commission has
wandered far afield from this stated purpose and from the original intent of the
investigation as proposed in the message of the President to the Congress sug-
gesting an investigation, from the resolution of Congress itself authorizing it, and
from the statement of William O. Douglas, then Chairman of the Securities and
Exchange Commission, made on February 6, 1989, in which he defined ^he purpose
of the investigation. Until recently it has been difficult to evaluate the motives
behind the Securities and Exchange Commission investigation- After starting
out with an investigation of the election of Directors in mutual companies, the
Committee passed to an investigation of premium rates, lapsation, agency turn
over, agency commissions, and in fact, has run the gamut of nearly every phase
of Life insurance activity except that which it was authorized to investigate, and
the investigation itself has been critical to the extreme. No opportunities have
been given for companies to reply to insinuation^ in questions as to their prac-
tices, nor have the witnesses been permitted to make full statements while answer-
ing trick questions proiwunded to them by the Counsel. In fact, the tenor of the
investigation is that of a pro.secution i-ather than an impartial inquiry, and any-
thing of a critical character lias been head-lined and publicized through every
facility at the command of the Securities and Exchange Commission. The entire
course of the investigation as conducted and the attitude of those charged with
conducting it, would indicate that the ultimate object of the investigation is to
build up a case against State supervision and for Federal control of the business.
The evidence introduced in regard to Industrial Life insurance would indicate
an intention to recommend the introduction of a bill which has as its object the
virtual elimination of all private Industrial Life insurance in the United States
by enlarging the scope of the activities of the Social Security Board to provide
for such Industrial Life insurance at the expense of the taxpayers of the United
States.
The United States Government entered the Life insurance business during
the war as a means of Life insurance protection for the men engaged in military
service. The total war risk insurance issued to 4,529,000 individuals at one time
amounted to $39,60f),000,000, and the total amount of premiums paic' on this in-
surance to September 30, 19,39, is $453,973,000, and there has been paid in death
and total permanent disability claims thereunder the sum of $2,048,000,000, and
CONCENTRATION OF ECONOMIC POWER 15611
about $218,000,000 more will be required to complete the monthly installment
benefits under this insurance. United States Government Life insurance since
the war has decreased to $2,546,144,568, and has been carried on with the entire
cost of administration paid from the general fund of the United States Govern-
ment raised through taxation. Nevertheless, the cost to policyholders is little
if any less than that which could be obtained in a number of representative
private companies.
Should the United States Government take over the business of Industrial
Life insurance and merge it with the Social Security Act the overhead cost
thereof would be borne by the people of the United States through taxation,
just as the overhead cost of the present government Life insurance is borne.
The natural inquiry which comes to the mind of any impartial observer i.s
the question as to any necessity of interfering with and upsetting the present
magnificent structure of Life insurance, in order to have the Government of
the United States, with an enormous cost to its people further enlarge its
activities in this field, and the further question as to why it is necessary
for the Federal Government to endeavor to regulate, supervise and control
Life insurance companies when the very record of the institution of Life insur-
ance itself speaks louder than any words can speak for the efl3ciency of State
regulation, and the wise protection afforded policyholders by the various laws
throughout the States governing Life insurance.
Let us now consider, briefiy, the reasons why supervision of Life insurance
should be maintained under State jurisdiction rather than Federal jurisdiction.
ADVANTAGES OF STATB SUPERVISION
The State system of regulation by Commissioners enables quick decisions on
timely subjects and the decentralization of this system makes possible the appli-
cation of individual attention to special circumstances within each particular
locality. The exigent natifre of the business demands that the oflSces of author-
ity be instantly available when needed. State Commissioners, being local men
familiar to the community, are accessible to the policyholder, the small company
and the large company alike.
's^ecessary regulatory adventures in new fields, although designed to be bene-
ficial, may be disastrous for lack of means to judge their effects. Under
decentralized State supervision the consequences of these mistakes are localized
and the very sine qua non of in&urance — wide distribution of risk — proves the
worth. By withdrawal, from a State, the strength of a national structure may
be saved from the well-intended but misguided requirements of a single super-
visory authority. No escape would be possible from the errors of a Fecjeral
authority.
The dangers which would beset the industry should such an abundance of
power and responsibility be centralized in one person's hands, are manifest.
Today, these decisions, so vital to the security of the entire nation are the
product of the independent observations of the Commissioners of forty-eight
States, the District of Columbia and the territories, brought together in the
national meetings and frequent conferences of the National Association of
Insurance Commissioners, to be sifted and tested by the experience of men
familiar with peculiarities of each corner of the country. State supervision is
good or bad, according to the merits of the best of the Commissioners, ■v^hereas
Federal Supervision must be good or bad according to the qualities of one man,
unchecked by the work of coordinate oflBcials.
The National Association of lusurance Commissioners, which comprises within
its membership the insurance governing body of every State and territory in the
Union, has its comm'ttees dealing with every phase of Life insurance, and a
system of coordinati(ii' of laws, rules and regulations has been built up by this
body which has sync ironized the general supervision of Life' insurance, while
leaving State laws fr^e to deal with conditions peculiar to any one State. The
growth of Life insurfcnce in volume and its'strength attest the efliciency of this
method of supervision.
DISADVANTAGES INHERENT IN TRANSFER OF <X)NTROI-
Transltion to Federal supervision would mean the abandonment of a great
body of common law which time alone can replace. Tears of litigation have
15612 CONCENTRATION OF ECONOMIC POWER
so thoroughly tested and interpreted the now generally standardized provisions
of the State insurance codes that obligations may be undertaken with the
degree of certainty which is essential to a business founded on legal relation-
ships. Policy forms and general practices have been developed and designed
to conform to those laws so construed.
Companies doing business in several States would be answerable to one
authority — the Federal Government — while a company doing business entirely
within its home State would be answerable to another — the State government.
The competitive advantage to be had in diflferences between the laws governing
a nationally supervised and a locally supervised company operating in the same
State will foster a rivalry for legislative favoritism. A business now united
in its appeal for just and non-discriminatory legislation would be divided in a
struggle for regulatory advantage.
DISADVANTAGES OF FEDERAL SUPERVISION
Federal supervision would serve only to centralize still further the power of
our central government where there is already too much centralization.
There is no indication that a National Administrator of insurance would be
any more eflBcient than State Commissioners.
The past record of Federal administration of various commercial activities,
such as the railroads and the national banks, certainly has nothing to commend
it by way of success.
Life insurance recognizes the need of supervision for its own good as well as
in the interest of policyholders and the public. I*- *': mostly concerned, however,
in the quality of supervision and naturally shrinKt»~from dual supervision. It '
does not believe that all State laws (both case and statutory) governing the
relation between insurer and insured can be replaced by a body of Federal
laws, and only in such case can we have Federal supervision. Supervision and
regulation must derive authority from the same source whence come the laws
regulating the business supervised.
It is utterly impossible to have a centralized Federal Code which could gov-
ern the investment functions of the companies' business, for the reason that
conditions differ so widely in various parts of the" country that what is advisable
under conditions in New York, and now permitted by law there, would be inad-
visable under conditions prevailing in some western or midwestern State and
its laws.
Centralized control of Life iu.surance by a single governmental agency natu-
;ally arouses apprehension of political tampering with the Investment of trust
funds of the most sacred character. We frankly fear that the power of coercion
inherent in supervision by a single Federal bureau might be used to force, the
financing of Federal projects, economic experiments and pet political schemes by
successive administrations.
Any proposal for Federal supervision and control would not emanate from
policyholders- — its source would be purely political — and should one of the
principal purposes behind it be to secure indirect but effective dominion over
the thirty million dollars held in trust by the companies, its accomplishment
would be a calamity. Few things are more important to more people in
America than keeping politics out of Life insurance. The decentralized nature
of State supervision minimizes such a danger. The centralized character of
Federal control would magnify it.
If it is proposed to superimpose Federal supervision upon State supervision,
as has been vaguely hinted by some members of the Temporary National
Economic Committee, you would have Federal supervision making a decision in
one State which would be contrary to the decision it would have to make
another State, due to the divergence of State laws, and the .vhole matter of
supervision would be involved in such a mass of contradictory decisions that
the only result would be a continued harrassing of companies who would be
trying to serve two masters at the same time.
PRESENT STATUS OF LIFE INSURANCE AS DETERMINED BT THE SUPREME COURT OF THE
UNITED STATES
The status of insurance as commerce was first brought before the Supreme
Cou^t of the United States in 1863, and that Court decided, in the case of
CONCENTRATION OF ECONOMIC POWER 15613
Paul V. Virginia, 8 Wall. 168, that insurance contracts were not articles of
commerce in any sense of the word, and the decision in that case was not
questioned until 1913, when the Supreme Court in deciding the case of New York
Life Ins. Co. v. Deer Lodge County, 231 U. S. 495, held :
"The character of a policy of insurance as a personal contract is not
changed by their number or the residence or the parties, by centralization
of control at the home office, by employment of agents with limited au-
thority, nor by great and frequent use of the mails,"
and decided that Life insurance was not commerce. This line of decisions has
been upheld in more than twenty cases by the Supreme .Court, and as recently
as 1938. The Honorable Frank N. Julian, Superintendent of Insurance of
Alabama, and then President of the National Association of Insurance Com-
missioners, in discussing this line of decisions, said, last December :
"Shall the sound decisions of our highest courts be set aside, that new
powers may be taken over and lodged in centralized Federal Bureaus?
Shall the rights of the State.be ruthlessly cast aside? Shall the supervi-
sion through State Departments — a plan that for 70 years has proven- its
worth and aided in building the greatest insurance system in the world-
be relegated to the long list of powers usurped by Federal Agencies? Shall
the great institution of insurance be placed beside those business enterprises
that cannot develop because of red tape * * *?"
SUMMARY
To summarize the Life Insurance business is being conducted economically
and with a degree of financial honor and integrity unsurpassed by any other
financial institution. It has grown and prospered under State supervision until
it has become the greatest financial institution of the United States, and has
grown because the people have confidence in it. Federal supervision at best
would be an illogical and probably an unconstitutional arrogation of power to
the detriment of State sovereignty and State rights.
Peocedtjek with Respexit to Heaeings Before the Temporary National Eco-
nomic Committee by Various Member Departments and Commissions Under
Section 3 (b), Joint Resolution No. 113, 75th Congress
(Adopted November 18, 1938)
r.- hearings on reports
It is the view of the Executive Committee that as a general practice, it will
not be necessary or desirable to have public hearings on reports submitted to the
Temporary National Economic Committee by the various departments and com-
missions. Certainly as respects reports based 'on material deduced at public
hearings, a public hearing on such a report would be wholly unnecessary. As
respects statistical and general economic reports, the same conclusion seems
obvious. There may be, however, some types of reports on which there should
be public hearings. In such cases it is recommended that the procedure for
presentation of the report at a public hearing be worked out by the Committee
case by case.
n. hearings on investigations
It is our conclusion that hearings based on data and evidence, collected as
a result of investigations and assembled by the various departments and com-
missions represented on the Committee, be conducted in the following manner :
A. These hearings will be before the full Committee, or sub-committee, as the
case may be, and presented by the representatives of the department or com-
mission which conducted the investigation.
B. The list of witnesses to be called wili be prepared and submitted by the
department or commission which has conducted the investigation.
G. Each witness will appear under subpoena and testify under oath.
D. In all examinations of witnesses, the rules of evidence shall be observed,
but liberally construed.
124491 — 41— pt. 28 59
15614 CONCENTRATION OF ECONOMIC POWER
E. Witnesses will not be allowed to substitute prepared statements for
testimony; nor will prepared statements dealing with facts be allowed to be
introduced at the hearings except with the consent of the department or com-
mission making the presentation, unless the Committee in a particular Instance
otherwise orders.
F. At a later stage in the hearings, opportunity will be afforded interested
persons to present to the Committee their views as to what solution or solu-
tions of particular problems would be desirable or necessary. The agenda for
presentation of such suggestions should be prepared in the first Instance by the
respective departments, and commissions and presented to the Committee for
approval before such hearings are held.
(Adopted February 9, 1939)
The Temporary National Economic Committee has adopted certain additions
to its Statement of Procedure which are designed to routinize the reception of
various material which may be submitted for the Committee's Official record.
The additions follow:
1. Material requested by Committee members from witnesses at hearings,
and later submitted by witnesses, will be introduced into the record at a subse-
quent convenient hearing with a direction to the reporter that it be inserted
in the officially printed record in conjunction, insofar as possible, with the
hearings with which the material is considered.
2. Unsolicited material apropos to previous hearings or of general character
otherwise relevant to the Committee's work and voluntarily offered by inter-
ested persons at other times that during hearings will be received by the
Chairman or the Executive Secretaiy and the question of its inclusion in the
record be decided by the Executive Committee subject to review by the full
Committee. When such material is accepted for the record it should be intro-
duced as outlined in paragraph 1 above.
In both instances, it is requested that the material be addressed to the Execu-
tive Secretary, Temporary National Economic Committee, Apex Building, Wash-
ington, D. C.
(Adopted June 2, 1939)
PBOCEDXJBE FOB StrBCOMMITTEE HEABINOS
Resolved : The Executive Committee is authorized to approve and set the
date for
(a) subcommittee hearings, and
(b) special subcommittee hearings
when in their discretion such methods seem advisable in developing relevant
data for the Co9imittee.
SUBCOMMITTEE HEAEINGS
Subcommittees shaU be appointed by the Committee and shaU include a repre-
sentative of the agency under the auspices of whicji the hearings are to be
held and a member of Congress.
Subcommittee hearings shall be conducted by the Committee representative
of the agency and the Congressional member shall act as chairman of such
subcommittee. Any other member of the Committee interested in the matter
on which hearings are being held shall automatically become a member of such
subcommittee by his attendance at the hearings.
The subcommittee hearings called pursuant to the resolution shall be public.
The same rules shall prevail relative to the conduct of the hearings as prevail
for the full Committee hearings.
SPECIAL SUBCOMMITTEE HEABINGS
The Committee is further authorized to appoint special subcommittees of
one member or more to hear relevant material in the nature of a deposition.
The stenographic transcript of such a hearing shall be run off in triplicate,
one copy to remain in the custody of the department or agency for whom the
hearings are held, one copy to be filed with the Executive Secretary, and one
copy to be furnished the witness of his attorney. The Committee reserves the
right to make public the testimony so developed should it so desire.
CONCENTRATION OF ECONOMIC POWER 15615
The witness fees for all individuals called before such subcommittee or for
such designee hearing shall be paid for by the Committee. Any expenses in-
curred for stenographic aid shall likewise be borne by the Committee.
The following schedule is included herewith in connection with the
testimony of Ernest Howe, supra, p. 14700 S.
15616
CONCENTRATION OF ECONOMIC POWER
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15625
15626 CX)NCENTRATION OF ECONOMIC POWER
The following memorandum is included at this point in connection
with Mr. Stevenson's testimony on p. 14763 ff.
Memorandum SuBMiTTEa) by John A. Stevenson, PREisiDEWT, the Penn Mutual
Life Insur.\nce Company, to the Temporary National Economic Committee.
Febeuaby 29, 1940
classification of bisks — new business controls
In classifying applicants for life insurance, it is usually found that by far the
great majority have no physical impairments of any consequence, whereas a
comparatively small percentage have one or more specific impairments. The first
group comprises what is ordinarily known as the "standard" risk.
In the second group will be found some risks which, even though they are
impaired, may be insured by the charge of an additional premium to cover the
extra hazard. These are ordinarily known as "substandard" risks. Also in the
second group will be found some risks which are so seriously impaired that the
extra hazard cannot be anticipated with any degree of accuracy and, therefore,
the risk cannot be covered by an additional premium charge. Such cases are
known as "unacceptable" risks.
An example of a "substandard" risk, where the extra hazard can be anticipated
with a reasonable degree of accuracy and therefore covered by an extra premium
charge, would be tb-i case of a man with a history of stomach ulcer. An example
of an "unacceptable' risk, where the impairment is so great that the extra
hazard cannot be measured with reasonable accuracy, would be one in which
there was a diagnosis of heart disease. However, the chief management problem
does not lie in the field of substandard and unacceptable risks because well
established and carefully checked statistics are available for the classification of
these cases.
The greater problem comes in connection -with that large group of cases which
have no serious impairment; namely, the standard group. To illustrate this
point, let us consider three standard risks :
Case Number 1 is a man, age 35, who is of normal build, has never been
seriously ill and in all ways |)asses a first-class physical examination. His
father died at age 58 of heart ligease and his mother is still living at age 59.
He is a typical normal standard risk. '
Ca^e Nuinber 2 is a man o^ 46 wtio has never been seriously ill, is of good
build and passes a perfect pllysical Examination. His father and mother are
still living at ages 81 and 76, respectively. He is also a standard risk, but
because of this exceptionally good family history, he is a somewhat better
risk than Case Number 1.
Case Number 5 is a man, age 30, who passes an excellent physical exami-
nation, but is just slightly under normal weight. His family history shows
that both his mother and sister died of tuberculosis. This combination of
circumstances makes the risk somewhat more hazardous than Cast Number 1.
While these three cases all fall within the standard classification, the last case
(Number 3) is commonly known as the "borderline" risk.
There is some difference between the cases which are typical normal standard
risks, like Case Number 1, and those which, like Case Number 2, are a little better
and those which, like Number 3, are a little worse. The degree of difference is
comparatively slight and, in the usual volume of standard business, it will be
' found that the large jtercentage of the risks are normal, the balance being about
'equally divided between the other two groups.
It will be seen, however, that if a company received a very large proportion of
its standard risks from the borderline area, as illustrated by Case Number '3,
then its mortality would be higher than if, among its standard group, there were
not such a large proportion of borderline cases.
The management control of this problem involves classifying these variations
of standard risks for the Company as a whole, for each General Agency and
for each personal producer (agent). The General Agents and agents whose
records are good are encouraged as much as possible whereas those with poor
records receive corrective attention. This method of anticipating the future
effect of present operations gives the management fairly complete control over
new business from the standpoint of the mortality to be expected.
This method of control is included in what may be called the Penn Mutual
Merit Plan, under which certain expense allowtinces to General Agents and
CONCENTRATION OF ECONOMIC POWER 15627
Branch Managers are conditional upon the quality of business they submit to
the Company. This plan consists of six adjustable factors, three of which are
concerned with mortality and three with factors affecting expenses. The fol-
lowing thr€e factors are related to mortality :
1. There must not be a disprojwrtion amount of borderline business,
2. The proportion of unacceptable cases submitted must not exceed a
stated maximum.
3. The proportion of large risks must not exceed a given percentage of
• the total volume. ' '
The remaining three factors have an effect on expenses :
4. The average policy must equal or exceed a stated amount.
5. The average premium per $1,000 of insurance must equal or exceed a
stated amount.
6 The flrst-yeaf lapse rate must not exceed a stated percentage.
An analysis of each Ged^ral -Agent's and Branch- ivianager's business is made
monthly. The analysis is cumulative aud, at the ^L'^ o^ each year, those \vi-j>
have qualified for the full twelve months under the Merit i-ian receive addi-
tional expense allowances which, under the supervision of the Company, are
to be used in the further development of the type of good business they have
already produced.
Those not qualifying receive such helpful advice or correction as the circum-
stances warrant. Thus, by means of a short-range analysis, the long-range
results are anticipated with reasonable accuracy. An effort is made to develop
production operations from which good results are anticipated, and to check
those from which the anticipated results appear to be poor. .
The Company also attempts to anticipate the probable persistency of new
business by use of a Rating Chart, The Life Insurance Sales Research Bureau
evolved this chart after a study of about 16,000 policies covering about $60,-
000,000 of insurance over the first two policy years. This study showed that
certain factors in a case, known at the outset, had a bearing on i)ersistency
positively and negatively. By testing each of these factors, the relative signif
cance of each was determined and points vrere allowed to each factor.
The use of thfe Rating Chart results in an immediate benefit from directing
the soliciting agent's attention to the elements affecting i)ersistency, so that
Jhere is ajQ improvement in the general quality of his business. yVt the sa"ie
time, the data being accumulated will eventually serve as means of checking
and adjusting the Rating Chart so that it may become a more effective aid in
appraising new business from the standpoint of persistency.
MAINTENANCE OF A COMPETENT PRODUCING ORGANI^gATION
Selection of Field Personnel. — The Penn Mutual's policy, in selecting field
personnel, is to emphasize recruiting through personal contacts of the General
Agent or Branch Manager and his staff rather than through advertising or other
less personal means. The Company believes that better selection results from
this method and that, through its use, the emphasis is placed on higher average
production per man rather than on number of men recruited.
The following procedures are included in the selection program :
1. Each new agent is investigated as to his background and character by
means of a credit report.
2. A surety company bond is required.
3. Such additional personal or business references must be furnished as
the General Agent may consider necessary.
4. By means of an "Aptitude Index," the factors involved in the indi-
vidual's background and personality are rated.
The Penn Mutual recruited more men with high ratings (greater success
probabilities) in 1939 than in 1938, although fewer new contracts were made.
While total production from new men in 1939 was less than in 1938, the 1939
recruits showed a higher average production per man and a lower first-year
turnover rate.
It is assumed that the selection process extends through the first two or
three years of the new agent's field work. During that time, he actually serves
a period of apprenticeship. In 1939, approximately one-third of the Penn
Mutual's full-time agency contracts had been in force less than three years, but
15628 CONCENTRATION OF ECONOMIC POWER
this group of contracts accounted for 80% of the contract terminations during
the year.
No data appear to be available which indicate satisfactorily the relation of
termination rates of agents' contracts to terminations occurring in other lines of
business which are comparable to insurance and which involve direct selling.
Because of the human factpr involved, no sure method has been found (nor, per-
haps, ever will be) to determine in advance whether or not a new agent will be
able to adapt himself to the business of selling life insurance even though his
background and personality would .seem to forecast success.
Training and Supervision. — The Penn Mutual's primary training course is de-
signed to cover the fundamentals of life insurance. At the same time, it enables
new men to recognize the needs of the average buyer and to serve him intelligently
through appropriate life insurance plans. This course is usually given in the
General Agency or Branch Ofl3ce, to one or two new men at a time.
Since the primary training course gives the new man the educational back-
ground necessary for actual work in the field, it enables the Company to make an
early appraisal of the new agent's aptitude for the business of life insurance
selling. The course serves, therefore, as an important aid in the selection of new
agents.
Training continues beyond the primary period, being so closely integrated with
supervision that there can be no clear-cut division between the two. This more
advanced training takes various forms :
1. Most Agencies have regular meetings at which educational material is
presented ; conduct "clinics" for discussion of certain phases of the salesman's
work ; provide individual instruction in cases where this seems advisable to
meet an agent's needs.
2. A library is usually maintained at the Agency from which special
studies or readings are recommended to individual agents.
3. Schools are conducted in the Agencies by representatives from the Home
OflSce.
4. Training activities are extended through educational conferences and
conventions.
5. Agents are encouraged to complete the course of study required for the
designation of Chartered Life Underwriter (C. L. U.) awarded by the
American College of Life Underwriters.
It has been the policy of the Company since 1931 to appoint Managers and Gen-
eral Agents from within its own ranks. Members of the field force who appear
fitted, therefore, are given training in the Home Office and in the field to enable
them to assume management positions. During their stay in the Home Ofllce,
time is allotted to enable them to become familiar with each department of the
Company. When this part of the training program has been completed, they are
assigned to assist in managerial work in various Agencies over a period of six
months to a year, after which they may be given definite managerial responsi-
bility. The training for managerial work emphasizes at the same time the
importance which the Company attributes to the training and supervisory
processes within the Agency.
Compensate Plans. — An adequate plan of compensation for agents should, we
believe, meet the following requirements :
, 1. The scale of compensation should attract men possessing the necessary
qtialifications for life insurance selling by providing earnings comparable
with those offered by competing occui>ations.
2. The method of compensation should enable the successful agent to make
financial progress commensurate with his accomplishment.
3. Some auxiliary income (whether salary or some other form) should be
available to new agents during the period when their actual earnings from
commissions may not provide adequate income for actual needs.
The problem of making sufficient income available to new men until their actual
earnings are built up to the point of adequacy is solved in many instances by the
making of advances against future commission earnings. This probably is the
most common form of financial assistance and has been widely used.
The Penn Mutual began the development of a salary type contract for new
full-time men in 1935. The salary contract for the new man gives him a mini-
mum income for as much as two years, conditioned upon his meeting minimum
production requirements, while he is being trained and developed. Tliis salary
plan cannot, of course, make a new man successful — its function is to provide a
CONCENTRATION OF ECONOMIC POWER 15629
level income during his apprenticeship period, provided he shows satisfactory
progress. The results of the Penn Mutual's salary plan thus far have not indi-
cated any advantage of this plan over other plans of providing financial assistance
to new agents, but further experiment would be necessary before any specific
conclusions could be drawn.
Studies have been made, not only of results under the Company's own salary
plan, but also of data concerning various plans for the compensation of agents as
reported by the Life Insurance Sales Research Bureau. Continued research is
being devoted, by the Company, to this important problem.
Memorandum submitted by Union Central Life Insurance Co. in
regard to Item of $10,954,000 shown for that Company on page 177
of Hearings, Part 10-A.
Memorandum
The discussion of an item of $10,954,000 of unpaid mortgage loan interest capi-
talized for the years 1933 to 1938, inclusive, appearing opposite the name of the
Union Central on Table 177 of Part lOA might be interpreted by the laymen to
mean that the Company had capitalized such interest to the extent that it
exceeded the combined capital, surplus, and contingency reserve at December 31,
1938. This would positively not be true.
We have prepared the following facts and supporting statements and, in addi-
tion, we have brought the figures up to date to December 31, 1939.
(Exhibit "A") This exhibit is self-explanatory and is chiefly significant in that
it reveals that of the total interest capitalized as reported, 47% of the total as
of December 31, 1939 had been collected in cash or written off the Company's
books.
It will be noted that approximately 72% of the total capitalization of interest
rested in the real estate account. In strict accordance with Company policy, the
book value of each parcel or property acquired ( this would include any and all
capitalization) must be and is backed by an independent appraisal of each unit.
The appraisals were and at preseiit are made by qualified appraisers having no
interest in the sale or purchase of the properties. The appraisers were investi-
gated as to their integrity, ability, and experience, as well as their familiarity
with the locality to which they may be assigned. Many of these men are gradu-
ates of Agricultural Colleges, and all have had training in the appraisal of farms ;
most of them under the Federal Land Bank system. All appraisers submit
their reports without knowledge of the Company's investment in the property
appraised.
Some of the factors considered in making Company appraisals are types of
soil, subsoil, topography, drainage, location, community value, climatic condi-
tions, earning capacity, the agricultural history of the community and the char-
acter of the people; also the methods of transportation and' facilities for market-
ing farm products ; various conveniences in a community, such as electricity,
mail delivery, telephone, local business, social, educational, and religious organi-
zations. The appraisers are also instructed to familiarize themselves with the
price which farmers have paid for land over a period of years, as well as the
customary terms of rental and the income received therefrom. The appraisers
attempt to get the opinion of farmers as to existing land values and the prices
farmers could afford to pay for land when crop prices are normal. Finally, to
evolve all these factors into a value which would be a good consistent sale price
at which the land being appraised would sell, as between a willing owner and
a willing buyer for a property of this type and condition, upon terras usual for
similar types of property in the community, based on a reasonable marketing
effort.
As a direct result of this appraisal policy, the Company has written down real
estate values on its books for the years 1929 to 1939, inclusive, in the total amount
of $12,429,117.00, a write down in excess of total interest capitalization, in both
the real estate and mortgage accounts. In addition to this write down, for the
same eleven year period, mortgage loan and sales contract interest was charged
off in the total amount of $16..396,187.00. The amount of the above totals that
pertains to the years 1933 to 1989, inclusive, is $7,989,129.00 write down in real
124491— 41— pt. 28 60
15630
CONCENTRATION OF ECONOMIC POWER
estate values and $10,590,020.00 mortgage loan and sales contract interest
charged off.
The Union Central did not capitalize at will during the depression years but
actually wrote off amounts far in excess of those retained, and retained only after
appraisal substantiation.
For the year ended December 31, 1939, the Company foreclosed Farm and
City Mortgages representing a total cost on the books before final write down of
$9,'. 64,304.43. After charging off principal interest, and advances, the properties
moved into real estate account at a book value of $8,414,831.59, or at a book value
of 92.83% of total cost. These amounts are set forth in Schedule "B" attached.
Capitalization of interest without a definite and comprehensive program could
well be criticized, but in the case of The Union Central we did have such a pro-
gram of operation. We feel that the record shows that the plan has been highly
successful and very much to the benefit of our policyholders.
G. A. Gesell : rhr
Exhibit "A".
-Mortgage Loan Interest Capitalized With Amounts Subsequently
Liquidated in Cash or Write-Off
INTEREST CAPITALIZED
By Foreclosure to
Real Estate A/C
In Mortgage A/C
By Adj. of Mtgs.
Total
1933 .
$230,714.08
1, 249, 514. 18
1, 113, 743. 06
419.712.56
153, 381. 35
33, 804. 57
$230, 714. 08
1934
1, 249, 514. 18
1935 -..
2,066,683.93.
2, 756, 654. 34
1,687,978.01
1, 242, 074. 67
3, 180, 426. 99
1936 -
3,176,266.90
1937
1,841,359.36
1938
1, 275, 879. 24
1939.
7, 753, 290. 95
534, 922. 29
3,200,869.80
10, 573. 44
' 10, 954, 160. 75
645, 495. 73
8,288,213.24
3,211,443.24
11, 499, 656. 48
« As reported In S. E. C. Report.
DISPOSITION OF THE $11,499,656.48 AS OF DECEMBER 31, 1939
Real Estate Owned a/c —
Farm $4,274,469.37
City . 41,928.21
Sub-Total 4,316,397. 58
Real Estate Sold on Conti'act:
Farm 773,043.57
City . 63,802.48
Sub-Total . 836, 846. 05
Balance Purchase Money Mortgages:
Farm 326, 854. 33
City i 62,675.97
Sub-Total 389, 530. 30
Rearranged, Extended and Adjusted Mortgage Loans:
Farm 521,026.06
City 19, 979. 70
Sub-Total . 541, 005. 76
Total Capitalized Interest Uncollected and remaining in Accounts 6, 083, 779. 69
Total Capitalized Interest liquidated in cash or write-oflF 5, 415, 876. 79
11,499,656.48
Concentration of economic power
15631
Exhibit "B." — Real Estate Acquired from Mortgage Account for the Twelve
Months Period Ended Dec. SI, 19S9 {Farm and City Combined)
Percent to
total Book
Value
Percent to
Total Cost
of Acquisi-
tion
Summary of Book Value:
Principal -
Interest-
Advances an(J Costs
Total Book Value
Summary of Total Cost of Acquisition
Principal Written Off
Interest Written Off
Advances Written Oft
Total Charged Oft
Total Cost-
$7,309,881.82
534, 922. 29
570, 027. 48
8, 414, 831. 59
180, 748. 92
366, 453. 02
102, 270. 90
9,472.84
9, 064, 304. 43
86.87
6.77
6.36
2.15
4.35
1.22
107. 72
80.64
6.29
5.90
1.99
4.05
.1.13
The following material is included at this point in connection with
the testimony of Norman J. Wall, supra, p. 14857 ff.
Percentage of total farm-mortgage deM held. January 1, 19S0 and 19S6, and
percentage of total distress farm transfers accounted for, 1930-35, iy various
lender (froups, for selected States
state and Lender
Percentage
of total
farm-mort-
gage debt
held Jan.
1,1930
Percentage of total
distress farm trans-
fers 1930-35 1
Percentage
of total
farm-mort-
gage debt
Properties
. Acreage
held Jan.
1, 1036
Iowa:
Banks '
Percent
11.0
41.9
6.7
7.2
33.2
Percent
9.7
35.7
3.2
7.4
44.0
Percent
8.9
40.5
3.2
9.1
38.3
Percent
7.3
33.6
. Federal land banks and Land Bank Commissioner.
Joint stock land banks ' » . .
33.6
2.3
Individuals and otheis
23.2
All lenders
100.0
100.0
100.0
100.0
Missouri:
Banks'
11.7
32.5
7.0
4.4
44.4
10.8
22.4
2.0
1.4
63.4
9.7
25.4
•1.8
1.8
61.3
7.3
Insurance companies
25.0
Federal land banks and Land Bank Commissioner.
Joint stock land banks ' . ... . ...
22.8
1.7
Individuals and others . . .
43.2
All lenders . ..
100.0
100.0
100.0.
100.0
South Dakota.
Banks'
4.7
38.8
10.5
3.2
42.8
6.5
36.7
4.3
1.3
51.2
6.4
35.4
7.2
1.3
49.7
1.7
Insurance companies
17.6
Federal land banks and Land Bank Commissloner.
- Joint stock land banks '
40.9
.6
Individuals and others . . .
39.2
All lenders
100. 0
100.0
100.0
100.0
Nebraska:
Banks ' -
10.3
28.6
9.3
5.1
46.7
13.5
19.6
1.5
,3.9
61.5
15.0
19.9
2.0
4.4
58.7
6.2
Insurance companies . .
17.7
Federal land banks and Land Bank Commissioner.
Joint stock land banks '
36.8
.8
Individuals and others
38.5
All lenders !.
100.0
100.0
100.0
100.0
* Based on all types of distress transfers for selected groups of counties.
" All open and closed national, State, and mutual saving.s banks.
' Including banks in recei\'ership.
15632
(X)NCENTRATION OP ECONOMIC POWER
Percentage of total iarm-inortgage debt held, January 1, 1930 and 1936, and
percentage of total distress farm transfers accounted for, 1930-35, by various
lender groups, for selected States — Continued.
state and Lender
Percentage
of total
farm-mort-
gaee debt
held Jan.
1,1930
Percentage of total
distress farm trans-
fers 1930-35 '
Percentage
of total
farm-mort-
gage debt
Properties
Acreage
held Jan.
1, 1936
Kansas:
Banks '
Percent
9.9
30.4
8.0
4.2
41.5
Percent
13.8
32.9
2.2
.8
50.3
Percent
16.2
36.0
2.5
.8
44.5
Percent
7.2
Insurance companies
21.4
Federal land banks and Land Bank Commissioner.
Joint stock land banks '
39.6
1.5
Individuals and others
30.3
All lenders
100.0
100.0
100.0
100.0
' Ba.sed on all types of distress transfers for selected groups of counties.
2 .\11 open and closed national, State, and mutual savings banks.
' Including hanks in receivership.
Acquired farm real estate held by leading lending agencies, by Farm Credit
districts, January 1, 1939
Farm Credit district
Federal land
banks and
Federal Farm
Mortgage
Corporation i
Life insur-
ance com-
panies »
Joint stock
land banks '
All active
insured com-
mercial
banks *
State credit
agencies
Springfield
1,000 dollars
3,091
2,741
916
2,675
4,095
5,830
51,063
34,062
13, 143
3,678
3,335
14,811
1,000 dollars
93
1,263
17, 911
38,267
10,589
105,164
80, 576
334, 475
46, 218
40, 367
8,366
19, 572
1,000 dollars
1,525
464
1.864
2,923
381
6,712
.5,032
24,717
2,928
6,278
32
1,029
1,000 dollars
6,615
5,750
2,322
7,323
3.044
6.409
4,788
1,932
1,327
2,322
6.356
955
1,000 dollars
Baltimore
Columbia
Louisville
New Orleans
St. Louis
St. Paul
« 36, 144
Omaha
« 37, 157
Wichita.
Houston
Berkeley
Spokane _
Total...
139, 440
702, 861
53,885
49, 143
73,301
' Investment, including sheriffs' certificates and judgments. Excluding prior liens.
• Investment— partially estimated.
' Carrying value of real estate, including sheriffs' certificates and judgments. Real estate held by banks
in receivership included at book value.
• Book value. Based on location of banks and not on location of real estate security as in case of other
lender groups.
' Investment. Department of Rural Credit of Minnesota and Bank of North Dakota.
• Investment— estimated. Rural Credit Board of South Dakota.
Interest charges payable on farm mortgagfes held by various lender groups,
United States, ;,f or selected years
Year
Federal land
banks and
Land Bank
Commis-
sioner '
Joint stock
land banks '
Life insur-
ance com-
panies
Commercial
banks »
Individuals
and others
All lenders
1910 _
1,000 dollars
1,000 dollar »
1,000 dollars
22,385
41,292
63,277
116,917
117,825
65, 072
50,473
1,000 dollars
27,637
49,104
86,910
81,483
63,664
30, 826
31,642
1,000 dollars
153, 166
223,859
402, 147
330, 267
290,777
187, 461
168, 181
1,000 dollars
203 188
1915
314,255
574,090
611,612
571 776
1920
1925 . . .
17,621
63,529
63.760
114,916
101. 234
4,135
29,416
35,750
12,689
5,650
1930
1935
410.964
1938
' Excluding Puerto Rico. Does not include amounts paid by Secretary of Treasury to this lender group as
reimbursement for interest-rate reductions granted borrowers.
> Including banks in receivership.
• 1910-30 open State and national banks. 1935 and 1938 insured commercial banks.
CONCENTRATION OF ECONOMIC POWER 15633
The following letter appears at this point in connection with the
testimony of Ernest Howe, supra, p. 14700 ff.
Valentine Howell
Vice President and Actuary
The Prudential Insurance Company of America
Home OflSce, Newark, New Jersey
March 5, 1940.
Hon. Joseph C. O'Mahoney,
Chairman, Tempwary National Economic Committee,
Washmgton, D. C.
Dear Sir: The record of the proceedings in connection with the testimony of
Mr. Howe before your Committee on Friday, March 1, indicates that there was
considerable discussion as to the allocation between the Ordinary and the Indus-
trial departments of the special contingency reserve for fluctuation in security
values set up by The Prudential during the period 1981 to 1966, inclusive.
It was not made clear to the Committee that this reserve was set up in anticipa-
tion of possible asset losses ; that when such losses were actually realized they
were allocated directly out of the earnings of the year in proportion to the securi-
ties standing to the credit of each department ; and that such losses were never
charged against the special contingency reserve. This contingency reserve was
set up out of surplus purely as a precautionary measure and while it was in ex-
istence its method of allocation had an effect upon the relative surplus in the two
departments, but when it was finally eliminated in the year 1937 it had been auto-
matically returned to surplus in the same amounts as originally allocated there-
from, and the two departments were in exactly the same position as though such
reserve had at no time been held.
The reason for apportioning the investment contingency reserve unevenly be-
tween the Industrial and the Ordinary departments was' that the surplus of the
Ordinary department had already been artiticially reduced following the intro-
duction in 1928 of a new monthly Intermediate policy, which to a large extent
was written upon the class of lives which previously took out Industrial insurance.
These policies were collected upon the debit of the Industrial agents in amounts
of insurance averaging $600 per policy, and, although segregated by the Company
in the Intermetliate Monthly Premium department, were classified as Ordinary
insurance for annual statement purposes. They were, however, written in the
great majority of cases in substitution for Industrial policies as was indicated
by the resulting decrease in the amount of Industrial insurance issued by the
Company.
On the level premium reserve basis the issue of new insurance results in very
substantial losses to surplus, so that, through what was in effect a transfer of a
considerable section of the Industrial new business to the Ordinary department,
by the year 1931 the Ordinary statement surplus had been artificially decreased
by $20 million and was less than $11 million, whereas the Industrial surplus had
been correspondingly increased, the figure being $59 million in 1931 as compared
to $34 million in 1927 prior to the issue of this business. It should be emphasized
that this decrease was entirely artificial and entirely temporary in its nature, as
with added years of renewal income the surplus in the Intermediate Monthly
Premium branch improved from this deficit of $20 million in 1931 to a surplus
of over $10 million in 1939.
It will thus be seen that, as compared with the Industrial branch, the Ordinary
department had in effect an investment in this Intermediate new business of ap-
proximately 20 millions of dollars which would be realized as that business grew
older. It therefore seemed proper to meet this condition by dividing the invest-
ment contingency reserve in such proporti(5ns that a large part of this reserve was
held in the Industrial department. But, as stated before, when anticipated in-
vestment losses were realized, such losses were allocated between departments on
their proper basis, so that when this investment contingency reserve was returned
to surplus through final elimination in 1937, there was not one cent of loss of any
character for the entire period the allocation of which was in the nature of an
arbitrary division between the two departments.
I state this again because there appeared to be some confusion in the minds of
the Committee between a loss and a reserve for a loss, it apparently not being
fully understood that when a reserve is held at the end of the y^r it effects a
reduction in the earnings of that year, but if it is eliminated the bllowing year
15634 CONCENTRATION OF ECONOMIC POWER
a corresponding increase in the earnings of the following year from this source
results, so that over the two-year i)eriod one operation cancels the other.
I am aware that you have Indicated that requests to have written information
placed in the record should be approved with caution because such testimony is
not subject to cross examination. However, I believe this matter to be of con-
siderable importance to both The Prudential and the Committee, and respectfully
request that in event this letter be not accepted as part of the record, I be per-
mitted to testify on this matter before the Committee. I am sending copies of this
letter to each member of the Committee, and to Mr. Gesell.
Very truly yours,
Vaientinb Howeix,
Vice President and Actuary.
The following letters" "Exhibits Nos. 2587 to 2604" were entered in
the record and are printed at this point in connection with testimony,
supra, p. 15339.
Exhibit No. 2587
Leon Henderson
Commissioner
Seoumties and Exchange Commission
washington
Febkuahy 9, 1940.
Dems, Sie: In connection with the study of life insurance which this Com-
mission is conducting for the Temporary National Economic Committee we are
assembling much information with respect to sales and agency practices. To
date most of our information has been obtained through the testimony of com-
pany executives or through questionnaires a .iwered by Home OflBce oflBcials.
On many important agency matters, companies have advised that they do not
have material of the character we requested.
Recently there has been a widespread feeling created among life insurance
agents to the effect that it is the purpose of the life inFurin'-e hearings to under-
mine the agency system. I can assure you this is not true. As Senator Joseph
C. O'Mahoney, Chairman of the Committee, stated recently, there is not the
slightest foundation for this statement. I, for one, am convinced that the agency
system of a life insurance company when properly managed provides the back-
bone for the entire business. Both the legislative and administrative members
of the Committee have shown great interest in matters affecting the well-being
of a life insurance agent. For example. Committee members were surprised and
concerned to learn from the testimony of one oflBcial of a large life insurance
company that our of approximately 4,000 contracts with whole-time agents
employed during the calendar year 1938, 1,636 were terminated, the principal
cause for termination being lack of production, and that from a study made by
that company over 49 per cent of the whole-time agents working in a metro-
politan area earned $1,200 or less and 31.4 per cent of the agents earned $750 or
less. By reason of this information and other facts which have come to the
Commission's attention it desires to obtain further insight into agency problems.
The basic purpose of the Temporary National Economic Committee is to .study
"concentration of economic power" and' its relation to maintenance of free
private enterprise. An examination of the life insurance business is an essen-
tial part of such a study inasmuch as no business in the United States commands
a greater aggregate of capital or has a more substantial effect upon the national
economy. This is strikingly apparent from the fact that the five largest legal
reserve companies command over 54% of the $27,000,000,000 of assets of such
companies. Given this concentration of economic power, it becomes important
to know as much as possible of the causes which have brought it into existence.
There is also the question of employment. For example, agency turnover has
a direct relationship to this important problem and indeed there are many
other questions within the scope of the Committee's study which will be elimin-
ated by an examination of agency practices. Principal among these are the fact
that the sales methods used have a direct relation to problems of competition in
the business and that sales practices have a direct bearing upon the consumption
of the insurance service by the public.
I am writing you in the hope that (Inough you and other agents the Com-
mission may obtain additional information on any critical problems whloh you
may feel from your own personal observations are confronting the life ixisurance
CONCENTRATION OF ECONOMIC POWER 15635
agent at the present time. The Commission has already received many letters
from life insurance agents which have been most helpful to it in its study and
it is partly for this reason that I thought you might be interested in stating
your views. Accompanying this letter you will find a sheet listing several ques-
tions which we consider to be of special interest such as compensation, turn-
over, training, selection, part-time agents, etc. Undoubtedly, there will be other
matters which occur to you and upon which you will wish to comment.
Recently we have been conferring with a group of general agents and agents
in the District of Columbia in the hope that with their assistance and the aid
of their testimony some better understanding of sales and agency practices may
be obtained. We should like to supplement this testimony with additional in-
formation from agents in other sections of the country. If you wiU kindly
write in your own way your views on the topics mentioned above, or on any
other matters of importance affecting the life insurance agent which you wish
to bring to the Committee's attention, it will be greatly appreciated. A return
envelope addressed to Gerhard A. Gesell, Special Counsel of the Commission's
Insurance Section, is enclosed to facilitate your reply. No postage is necessary.
We should like to hear from you by February 19 if possible.
If you wish you may indicate in your letter that you desire your name to be
treated confidentially and it will not be released under any circumstances.
Please be assured that this Commission and the Committee are vitally interested
in this matter and sincerely anxious to have the benefit of your advice and
your cooperation.
Very truly yours,
(Signed) Lbx>n Hendebson.
Leon Henderson.
Attachment.
TOPICN3
1. Are you a whole-time agent or a part-time agent? Do you earn income
from any source other than life insurance?
2. How many years have you been in the life insurance business?
3. What has been your average annual income in recent years and the average
annual income of other agents in your territory? Have your earnings increased
or diminished in recent years?
4. Have you any observations on the question of agents' compensation, for ex-
ample, do you believe a guaranteed minimum salary particularly for new agents
is desirable or have you any ideas as to how the method of compensation can be
changed such as, for example, the reduction of first year commissions and an
increasing emphasis upon renewal commissions?
5. Is there a large turnover of agents in your oflSce and what do you think are
the factors responsible for this turnover? In this connection you might discuss
whether the continual entrance of new agents in your ofl5ce hinders or helps
the sale of life insurance in your territory.
6. Do you believe that the present methods adopted for selection and training of
agents in your oflBice are satisfactory and if not what suggestions do you have to
make in this connection?
7. What are your views on the subject of the part-time agent?
8. Is the obtaining of new business emphasized in your oflSce and if so do you
think this feature is over-emphasized, under-emphasized or suitable?
9. Do you believe the market for life insurance has become to some extent
saturated or that a lock of balance exists between the size of the market and the
number of agents attempting to sell therein?
Exhibit No. 2588
February 21, 1940.
Dear Sir: Your letter and questionnaire requesting a reply by February 19
were received Saturday noon, February 17.
After a weekend of study and analysis as to the type of information you are
seeking, I specifically answered your questionnaire as follows :
1. I am a full time life insurance agent and my entire income is derived from
my life insurance activities.
2. I have been in the life insurance business for 24 years, being identified with
the * * * Agency of the Northwestern Mutual Life Insurance Company all
that time, as * * *.
15636 CONCENTRATION OF ECONOMIC POWER
My entire business career, therefore, has been in the life insurance business
and with one company and one agency.
• ^ * * • * •
My average income from life insurance during the past five years has been
approximately $8,500, of which $2,400 represents my salary as Supervisor.
My earnings have decreased in the past two years, materially so during the
past year, because (a) I found life insurance more diflacult to sell because i)eople
were uncertain and therefore unwilling to make long term committments for
premium payments, — (b) when business is difBcult, more time is necessary to
encourage, work with, and supervise the activities of agents, new and old, and
therefore there is less time for personal selling.
4. Because for a number of years I have been identified with the inducting,
training and supervising of new men coming into the life insurance business, and
because I have been identified with the School of Business, ♦ * * conduct-
ing a ten-week seminar with selected seniors who were taking the insurance
sequence, I naturally have given considerable thought to agents compensation.
This is a particularly important problem during the early years in which a
young man finds difficulty in establishing himself in the life insurance business
through lack of experience, lack of confidence in his authoritative knowledge,
lack of an adequate and properly developed and qualified field <of prospects, and
lack of the. sustaining income over frequent discouraging dry spells which
renewals on previously written business would have aiTorded.
This Agency has tried numerous experiments here, particularly with what
were believed to be qualified young men, recently graduated from the University
(three-fourths of the men in this Agency are college '-graduates) but none of
these exi)eriments have worked out.
It is unfortunate that the apprentice in any field has practically been legis-
lated out of existence. I believe that particularly life insurance offers splendid;
opportunities to the properly qualified young man who has completed his college
and university education, for the life insurance business needs the trainejl
minds of ambitious young men who have dedicated themselves to a career in
life insurance if life insurance is to render adequately that type of service the
public needs and is entitled to.
Maybe some of the many interesting suggestions of reduced first commissions
and increased or extended renewal commissions would help stabilize the older
agent, but would conversely make definitely necessary some combination of
salary and commissions to enable the newer agent to survive his difficult first
period.
Maybe this is very desirable and possibly some suitable method of accom-
plishing this can be worked out that will permit life insurance companies to
stay well within the acquisition cost formula for new business.
I have no definite suggestions to make but I do hope that some solution will
be found that will both financially sustain the rank and file of the older agents
over low productive year's and old age, and will permit many well qualified
younger and newer agents to survive the difficult first years of acquiring
knowledge of product, skill in merchandizing, and an ability to create and
maintain a market.
5. Unfortunately we do know that there is a large turnover in the life in-
siirance business. Even in this Agency which has conscientiously tried to build
a successful Agency on ability rather thai? on numbers, and where no corvtract
is offered to any but carefully selected and investigated men, qualified by tests,
who wish to enter life insurance as a career work and who are carefully
supervised throughout their entire affiliation with this Agency, — still we find
that there is a larger turn over than is desirable.
Much of this turnover is caused by some of our most successful agents being
offered and accepting positions such as General Agents, Supervisors, Home
Office officials, etc., and by many other successful agents who have moved to
different localities and climates, many of whom still remain in the life insur-
ance business and a great number of these with this Company.
The heaviest turnover comes in the group of young men right rtut of school
whom the General Agent is trying to develop as career men in life insurance
to eventually take the place of other older, successful agents who leave, either
for promotion or change of residence. Unfortunately, these young men have
had no opportunity to display in their effective class room work many of
the necessary qualities or characteristics which require .several months of
actual selling activity to disclose. Proper viewjKiints and work habits must
CJONCENTRATION OF ECONOMIC POWER 15637
be developed and until they have actually been tried, it is impossible to de-
termine whether they are there or lacking. Sincere efforts are made to help
correct any faults or detriments disclosed, and if these efforts are not successful,
such contracts are quickly cancelled, so that the young men who has proved
to be unfit by field test for the life insurance business may quickly adjust
himself to some other calling without consuming too many months of those
valuable years immediately following college.
It is unfortunate that several of these yovmg men who showed definite pos-
sibilities were compelled to leave the life insurance business because of the
inability of the General Agent to further finance them.
In not one instance does a young man leave this Agency after contract has
been cancelled without first having a pei-sonal interview with the General
Agent, where it is emphasized to him that he isn't a failure, but that un-
fortunately he did not have some of the qualifications or characteristics neces-
sary for success in life insurance, the lack of which would be no barrier towards
his success in some other field.
If, however, the major fault is the common one of inability to work or to
profitably control his business time, we caution him that the immediate and
complete correction of this fault is necessary in whatever business or activity
he engages, whether it be salary, commission, or in his own business.
There have been occasions when older men, successful salesmen in other .
lines, fail in the life insurance business because they find it difficult to sell an
intangible rather than a tangible, because they are exposed to more turn downs
and delays, because in life insurance they must do creative selling, and because
the unit sale in life insurance is much smaller, they take their disappointments
of refusals or rejections very hard.
Incidentally, I might here mention that it has been much easier to supervise
agents new and old by insisting that they do certain things than it now is under
the interpretation of the Social Security Commission that these agents are
"independent contractors;" now we can only "suggest" that they do certain
things.
While we do, therefore, have our turnover problems in this Agency, I believe
that this has been minimized by the continual refusal to contract any man
merely because he wants to get into the life insurance business until something
better comes along, or to contract him because he might bring in a few thou-
sand dollars of business. Many a good investment man has knocked at our
doors during these past few years, but this Agency has never contracted one
because the experience of other companies and agencies has proved that they
wish merely to mark time until activity reopens in their own business.
We know also that seldom can we make successes out of the other companies
failures. Naturally we have made many mistakes. We have seen many a man
who seemed to have to a high degree many of the qualifications we were looking
for, fail in this business, while many a man who seemed at the time the contract
was signed to have far fewer advantages, has become remarkably successful.
Now men coming into the Agency, if they are aggressive, cooperative, and
particularly if they are soon successful, are an asset to the entire Agency force.
When newer men sit around the office because they are unwilling to or unable
to work profitably, when they begin to rationalize their lack of success by com-
plaining about factors outside of themselves, — they are a detriment to the
Agency. This applies also to the older agent who has become nonproductive
and finds solace in complaints and faults in everybody and everything, but never
in himself. If anything, such a disgruntled, inactive older agent is a far more
serious detriment to an agency than the newer, timid, inactive agent, for these
latter can still be corrected, or eliminated, while the correction or elimination
of the older agent is a far more serious problem.
6. Selection at best is a gamble, and all a General Agent can do is to practice
definite rules and to exercise long-term judgment and hope and work that this
judgment will be vindicated. I believe that the rule universally practiced in
this Agency that no man be contracted unless he now meets certain require-
ments; unless he indicates the ability to work for and acquire the necessary
future qualifications; unless he passes with a sufficiently high grade certain
aptitude tests;' unless we have a very creditable inspection report upon him;
unless his health and family pictures are such that he will have a chance to
succeed ; unless in character and personality he will fit into the family pictute
of the Agency ; unless the man has given us several convincing reasons why he
15638 CONCENTRATION OF ECONOMIC POWER
wants to go into the life insurance business ; unless he has evidenced an earnest
ambition to succeed in life insurance ; unless the General Agent would have
been willing to employ this man and pay him a salary if this were possible, —
no contract is made.
No agent, when once contract is made, is permitted to go into the field until
after three weeks of intentive education, personal training, and examinations
have been completed. Emphasis in training is placed on developing the ability
to recognize and diagnose needs and the acquiring of knowledge and skill to
properly prescribe for those needs. Then for the next three week period, the
agent is in the field on about a half time basis, making definite analysis and
having personal discussions on each call and interview. Following this period,
the agent is on a thirteen week personal reporting system to the Agency De-
partment at Milwaukee in which the Agency cooperates in a follow through of
suggestions and recommendations. From that point on, the agent continues to
receive sought or forced supervision in his life insurance work.
7. I do not believe that the part time agent or broker has any place in the
life insurance selling program, even in the smaller towns and villages. I
believe that the insurance buyer in the smaller communities is entitled to
exactly the same service from a well trained agent as is the resident of the
metropolitan areas. Our oflice does have several part time men in sn>all com-
munities, but they have proved unprofitable to the Agency and I believe, in many
instances, unprofitable to the buyer. This Agency has not employed a part time
man in our major centers since 1918.
8. Yes, the obtaining of new business is emphasized in this Agency and I
imagine will continue to be emphasized so long as the General Agent and the
agents are convinced that properly sold and programmed life insurance offers
the only proved certain method by which 90% of the people can acquire, through
their own initiative and enterprise, a guaranteed estate that will definitely pro-
vide the minimum income requirements for dependents and for old age. New
business will be stressed because the low cost of high quality protection is
retained by the constant acquiring of new risks, fresh from the Medical Exam-
iner. New business will be emphasized so Jong as we know that without the
acquiring of new business, a company, an agency, and an agent is gradually
liquidating old business.
But acquiring new business is not emphasized at the expense of conservation
or of service. New business is necessary for the growth of the agent in terms
of proper service and an enlarged clientele. Constant effort is necessary in
this Agency, as in others, to impress the agent that he must widen his circle
of work, that he must adopt plans arid work methods which will take him out of
a certain restricted small circle of activity into a broader field of selling activity
so that a larger part of his annual production will be on new lives.
Never, however, does this Agency emphasize quantity at the expense of qual-
ity for it recognizes that a large volume of business which does not stay on the
books is an unprofitable business to the agent, to the Agency, and to the com-
pany, and too often develops adverse centers of infiuence.
The ambition of the General Agency of this Agency, encouraged and abetted
by the attitude of the Agency Department of this Company, is to establish a
progressive successful agency of a limited number of capable and successful
agents, placing an adequate amount of properly written, programn>ed and serv-
iced life insurance on the lives of qualified, insurable prosi)ects whose needs and
plans are known.
Because the emphasis is here placed on quality business through quality
agents, this Agency today is ranking its agents on actual commissions earned.
The agent's attention is focused more on the factor of his first and renewal
commissions than on the amount of volume written, because first commissions
earned indicate present activity in the field, and a careful watch of renewal
commissions indicates the proper servicing and programming of insurance to
meet the changing needs of clients.
Commission earnings, however, is merely an efficiency guage, for never is
t-he agent permitted to place his own interest above that of the insured, — nor
to forget the best interests of the policyholder is always paramount.
Knowing, however, from .satistics and from personal experience that for a tre-
mendously large percentage of tlie people, life in.surance forms that sole estate
that is left, and realizing that every policy of life insurance properly sold to
a person needing life insurance will benefit that person and his dependents far
more than any commissions on that insurance can possibly benefit the agent, —
CONCENTRATION OF ECONOMIC POWER 15639
this office will stress the acquiring of new insurance compatible with its require-
ment that this insurance be quality, persisting insurance.
9. I do not believe that the market has been saturated. On the contrary,
I believe that most people are way under insured and that many new oppor-
tunities in business and estates have been created for life insurance solutions.
I do believe, however, that there are too many unqualified men in the life
insurance business, inadequate in knowledge to render proper service, who are
burning up territory and creating adverse centers of influence.
This is the short-lived group with a very high turnover who do considerable
harm, both to the institution of life insurance and the proper prestige of the
qualified life insurance agent. We hear a lot about high pressure salesmen and
while this term may be applied to the group just described, we must recognize
the fact that unfortunately men do not buy life insurance, — they are sold life
insurance.
The American public does believe in and has confidence in life insurance both
as an institution and as a practical, certain means of solving their important
financial and estate problems, yet very little of this vast amount of insurance
would be in force today for the benefit of the insured and the dependents, if
some authoritative agent had not overcome the competition of some immediate
or personal comfort or luxury by earnestly convincing the man that he should
prepare, by premium payments today, for tomorrow's contingencies.
The Agency System is only justified by the knowledge that men of their own
volition will not buy life insurance, will delay sacrificing some current enjoyment
for some future eventuality, — that men need authoritative service to determine
plans for solving their needs, and primarily that men must be led by some con-
vinced agent to act now.
While it is true that even properly placed and programmed life insurance may
lapse or terminate due to some future unforseen financial readjustments or family
circumstances, we must acknowledge that there are many more instances where
today widows and children are enjoying income benefits of the insureds who died
early in their life insurance coverage, some of them fresh from the Medical
Examiner within the period of one year.
Many times I have seen men come into the cashier's office with maturing poli-
cies or full paid dividends, sincerely complaining that the agent had not sold
him twice as much insurance as he did, when a careful check of our records show
the great difficulty the agent had in convincing the man to act favorably in
placing the original contract.
This office does not believe in "high pressure" methods, but it does recognize
the necessity of the agent, by conviction and persuasion, to influence a prospect
to act now if need for action is indicated.
While the poor agents throw a block against the better equipped man, while
there has been a distinct falling off of 4)usiness during these past few years (as
records of the leading companies must show) which decrease in business comes
in large measure from factors without the business, such as local and national
business and economic factors, world conditions and competition, even by the
Government itself in baby bonds, etc. — the market is not saturated so long as
men must provide income for the living needs of their aependents and their own
old age and so long as capable underwriters can convince men to sacrifice part
of the present for the needs of the future.
Probably the best evidence that men are so disturbed by present conditions
that they are unwilling to plan premium committments too far ahead, is the
large number in this Agency, as well as throughout the country, who are buying
more single pay life and endowment contracts than ever before, and that the
insureds, with annual premiums, are converting these into single pay policies
wherever possible. Unfortunately, the larger number are not financially in the
iwsition to do this, but yet are affected by the philosophy of no long-term com-
mittments. Most of these are wishfully waiting for a return of so called
"normal" times, — when interest rates will prove more attractive to idle capital, —
when enterprise and business will expand, — ^when the horizons will broaden and
brighten, — and when they f.n look more hopefully towards the future.
Life insurance will continue to require hard, determined effort ; selling condi-
tions will continue to be difficult, at least throughout this year, for the presiden-
tial election years are always years of uncertainty and delay. Unquestionably
there will continue to be a high mortality among the numbers of present life
insurance agents. The present market, far from saturated, will be more recep-
tive to the competent services of the capable underwriters who will survive and
15640 CONCENTRATION OF ECONOMIC POWER
those who will be recruited after a far more rigid and serious selection and
training.
• * * • « * *
I realize that this letter may not be read in its entirety. I have answered at
length the questionnaire submitted because (a) I believe the Commission is sin-
cere in its eCforts tot get a complete picture and cross-cut of certain conditions
in the life insurance business and (b) I believe that my 24 years in various
capacities in one agency have given me a fairly intimate knowledge of the various
factors affecting the problems itemized in this questionnaire.
For fear you may believe that my observations may be influenced from a
managerial or agency executive viewpoint, permit me to state that I resigned
the first of January as Agency Supervisor to devote my entire time to personal
selling in the field, because I found that the present difficulties of selling and
my need for increasing my personal income preclude my giving but part time
work and effort to that field Which produces by far the largest percentage of
my income.
Therefore I have no official or executive position in this Agency, nor no finan-
cial interest in the Agency. I am merely a Special Agent as are the other agents,
and depend upon my personal efforts to provide living income for my family.
Yet I could not have been associated for so long a i)eriod with an Agency with-
out having rather intimate knowledge of the Agency, of the agents, and of the
purpose and viewpoints of the General Agent * * *.
He is an inspirational leader of highest repute in the community, nationally
known in life insurance circles, and has the love and loyalty of every man con-
nected with his organization. As previously mentioned, his ambition is to have
nn effective Agency of a limited number of agents, adequate and competent to
serve fully the needs of this community, and every agent a successful agent. In
his efforts to accomplish this, he had made personal and financial sacrifices for
proper housing, adequate facilities, etc.
This is not a large Agency. There are 26 full time agents, most of whom have
been under contract here over 15 years, some of them under contract as long as
30 years. There always has been a close knjt, cooperative, friendly and helpful
spirit in the Agency, with each agent interested in the success and progress of
his fellow agent, which attitude is very helpful to any men coming into the
Agency and joining the Agency family, as well as to older men who have gotten
into a rut. There is a personal interest and a deep loyalty for the Agency, for
each agent realizes that he has a definite asset in being associated with a suc-
cessful Agency.
I could not have been associated for 24 years with this Agency without realizing
that each of us has a real loyalty and admiration for the Company we represent,
the Northwestern Mutual Life Insurance Company of Milwaukee. We know
from some of our own distressing personal experiences that the officers and
administrators of this company seriously guard the great trust imposed upon
them to administer the affairs of this Company for the best interests of the
present policyholders, who are the Northwestern Mutual.
While recognizing the importance of the establishment and maintenance of an
effective Agency force, the Company's primary consideration has been first and
last for the insured.
I believe that the Company has been able to build a fine, loyal, permanent
Agency force because it has always treated its agents fairly and has protected
them wherever possible.
The Northwestern Mutual has never stressed volume. It unquestionably has
lost a lot of business by refusing to accept brokerage business, but it has helped
the Northwestern Mutual agent by making his franchise more valuable thereby.
The Northwestern Mutual has never adopted temporary expedients and has
not adopted sales plans or policies that were not sound or compatible with good
underwriting. I doubt whether any other Company or any other Agency force
with a lesser degree of loyalty than this would have had the persistent courage
to refuse to write disability insurance during the ten-year period in which that
was so universiilly featured. Unquestionably tlie Company lost a large amount
of potential Northwestern Mutual ins\irance during that period and the North-
western Mutual agent lost a large number of neces.sary commi.ssion dollars. But
the officers of our Company convinced us that they were right and we now have
another striking evidence of the far sighted conservatism of the Northwestern
Mutual.
True, we should be less than human if at times we did not rebel at what we
thought was a too rigid attitude. Declinations, particularly on substantial ap-
CONCENTRATION OF ECONOMIC POWER 15641
pMcations on which we have worked for a long time, are terribly disappointing
and discouraging. Often we have resented the refusal of the Company to make
personal exception where such exception might permit us to place substantial
insurance, but in the long run we know that the Company is right in its attitude
of "special privileges to none" and that that Company which is known as a
"policyholder's" Company, is also a good agent's Company.
Yes, we are proud of our Agency of which five members have been presidents of
the Minneapolis Association of Life Underwriters, and we are proud of our
Company for its strong convictions and courage, and we are proud of the institu-
tion of life insurance because we sincerely believe that life insurance and the
good life insurance agent is performing a very necessary service to the pujblic
of the country.
Of course, we know that neither the agent nor the company nor the institution
is faultless. Just as in any other business or profession, or in the various
departments and bureaus of the government itself, can be found many minor
incidents or conditions which could be improved or remedied. Through my
membership on numerous local and national committees, I know that companies,
agency oflBcers, and the National Association have worked seriously for several
years to improve the selection and training of agents, the conservation of business,
and the agents' compensation.
It is unfortunate, however, that the American conception that "every man is
innocent until proven guilty" does not stand up in public opinion. No matter
whether a man brought up before a grand jury for questioning is exonerated,
that man is viewed suspiciously by his fellow townsmen.
Therefore, I feel that it is very unfortunate that the T. N. B. C. investigation
of life insurance, which I choose to believe was entered into in good faith for
the purpose of being helpful, has been so widely publicized that in spite of pro-
testations of the officials of this investigation, the public has been led to believe
that there is something definitely wrong with the institution of life insurance.
The Company oflBcials and agents alike will welcome the disclosure and sug-
gestions and corrective measures for those minor faults which your impartial
investigation may reveal. I believe you will find, however, that the majority
of these faults are the result of strong competition rather than the result of
the "monopolistic control" of the leading companies.
But I close voicing the earnest hope, not as an agent but as a policyhblder,
that the further publicity of the investigation and with the eventual summary
findings will be such that men will not lose that strong confidence with which
they have turned to this great institution to personally achieve, to the best of
their ability, security for dependents and for old <age.
For personal reasons, I do not wish my name used.
Sincerely yours,
Exhibit No. 2589
FEBRUAftT 16, 1940.
Dbab Sib: In answer to your letter of February 9, 19iO, I am pleased to
give you my views on the topics mentioned in your letter.
I am very pleased with your statement regarding the agency system of life
insurance when properly, managed. I am afraid that the companies were
spreading this propaganda amongst agents to frighten them — but they can't
fool them.
I will now answer your questions :
1. (a) I am a whole-time agent.
(b) I also have income from general insurance.
2. Over twenty years selling life insurance. Last nineteen; years with same
agency. .
3. (a) In my own case over $4,000.
(b) The income of other agents in my agency has greatly diminished,
especially the old timers. This is mainly due to the fact that after nine years,
for business on the books, the agent no longer receives any renewals, although
much service in connection with servicing policyholders has to be given by the
agent. This is very unfair, as everybody from the President of the Company,
down to the office boy receives his regular pay without cuts. In other words,
everybody gets something out of the premiums collected except the agent
whose efforts are responsible for premium income. More than 50% earn
much less than $3,000 a year. Very conservatively speaking, out of a total of
15642 CONCENTRATION OF ECONOMIC POWER
over one hundred agents domiciled in our offices, at least fifty earn less than
$2,000 a year. Some much less than $1,500.
(c) Although my own earnings have increased in the last two years, they are
not nearly as much as they have been in 1925 to 1932.
4. Yes. My observations on the question of agent's commissions or compensa-
tion are as follows : I do not believe that a salary should be paid to a new agent.
A salary would attract too many adventurers and otherwise lazy persons, who
had nothing at stake and nothing to lose, and soon they would be out. The agency
would then be out money and the policyholder would be left without the agent's
services. Of course if a more careful selection of agents would be undertaken by
our companies, properly training them and not sending them out in the field until
they were fully equipped and educated in the proper manner to care for the needs
of the prospective clients, the company could pay a small salary during the
training period only. Then they should receive the regular rate of commissions.
It is my belief that the new men, after their training period and when they are
ready to go into the field to sell, should receive an advance against their future
earnings, which is only fair if the company wants to have first class men because
they must live like human beings, and it is not always easy to earn sufficient
commissions during the first year in the business to make a decent living. It is
also my belief that the present basis of commissions are entirely wrong and inade-
quate, as far as the agent who makes life insurance his life work, is concerned.
Permit me to elaborate on this' question of compensation, because in the final
analysis it concerns the policyholder's welfare.
Some time ago, the Secretary of my Company discussed in the Agency Bulletin
the question of'lapsation which is always a problem under the present system.
Being a close observer of these problems, I wrote to give my personal observations
as follows :
"This question of lapsation will always be with us unless the companies change
their method of doing business. The truth of the matter is that in the rush for
new business, a great game of kidding each other has sprung up. By that I refer
to the practice of life insurance companies to release their monthly statements,
showing the amount of new business written, while nothing is being told of old
business being cancelled or lapsed.
"Because of this situation, the general agents kid the companies, the agents kid
the general agents and the companies kid the public. What good does a company
derive from writing $100,000,000 new business in a twelve month i)eriod, when
more than the amount written in the same period is cancelled and lapsed. This
kind of business gets the company nowhere.
"You state in your article, 'with new policies there is a drain on surplus for a
few years in setting up required reserves. Only after a number of years does a
policy become, so to speak, self-supporting and begins to get out of the "red",
from the company's standpoint.'
"If this is true, then why doesn't the company take steps to remedy this situa-
tion? The trouble is many of the company's executives haven't the guts to start
something which will benefit all concerned. I shall explain what I mean.
"All emphasis is put on the securing of new business, and it is heralded all over
the land, forgetting entirely the importance of increasing the business in force.
To my mind, increasing the business in force, if it is done properly and without
pressure, should be the paramount duty of the heads of the agency department
of a life insurance company.
"You may say that this is being done by the Conservation Department of the
companies. That is true, but it would be unnecessary to have this extra depart-
ment, if agents in the field would know that they are expected to conserve busi-
ness. Of course, under the present system, an agent may write a half million new
business in a year, and the company will spread his name all over the Agency
Bulletin. At the same time the same agent may cancel out or lapse a like amount
or more during the same year and nothing is said about it. The company even
pays him for doing it, when he should be penalized.
"As to the high-pressure salesmanship, which you mentioned in your article,
I think that it can be traced directly to the companies' glorifying the agents who
qualify for the quarter million and half million dollar clubs. Under the rules of
these clubs, only new business counts. Regardless of cancellations and lapses,
I can't see any justification in this kind of encouragement.
"As a policyholder, I am also interested in the exi)ense account of the Com-
pany. By this method of giving agents recognition for new business only, the
company will have most of its i)Olicies in the 'red' for a long time to come.
CONCENTRATION OF ECONOMIC POWER 15643
Sooner or later this system wiU have to go, and a 'new deal' for life insurance
companies and policyholders wUl take its place. The sooner the better.
"Next, the Company should make up its mind that agents do not exist merely
on glory, and that they are entitled to some method of compensation in addition
to first year and renewal commissions for nine years of 5% which are now paid.
You wiU have to admit that it would be more profitable to the company to pay the
agent something, even if it is only an additional 5% from the 11th year on and for
the life of the policy, to keep the old business on the books, rather than pay him
50% for rewriting the business. Besides, the new business written is not always
as good as the business that was already on the books and out of the 'red.'
"On the other hand, you can't blame an agent, who has no more financial interest
in keeping a policy in force, especially as the company will pay 50% commission
on rewritten business. He has to live, so he takes the easiest way out.
"If we would adopt such a plan for compensation for agents, that of paying life
long renewals, the agents' income would never diminish to the starvation line and
he would gladly keep the old business on the_ books, which in the end would mean
less overhead for the companies and cheaper rates for policyholders, because more
policies would get out of the 'red.' If only somebody will have the courage to
start something — then watch the results."
* * * a week later I received the following reply :
"(Personal)
"Dear : I have been reading with a great deal of interest your letter of
March 28th, which has been going the rounds here.
"In principle I agree with your ideas all the way through. I do not think that
the trouble is lack of courage. It is rather lack of means.
"Our aim in conducting the busuiess is profit, for it is only through profit that
we can improve dividends to policyholders. The best methods of compensation
and recognition of the agency organization are to emphasize those things which
are profitable and penalize for those things which are not. In other words, the
agent who makes money for the Company should make money for himself.
"We have many times considered how we could link up the individual agent's
conservation record with his new business record. Two years ago I laid this prob-
lem before the Executive Committee of the Five Hundred Thousand Dollar Club
but the committee felt that it was not possible to write this into our rulest
"Increase in business in force is not a perfect figure for recognition. It gives
an advantage to the new agent but penalizes the old agent who most absorb the
terminations on a considerable volume of business in force. This would scarcely
be fais. Perhai)s you have a suggestion.
"We are also faced with a number of obstacles in eompensation. The limitations
of the New York law do not always permit us to pay for what is profi'^ble.
Furthermore, as a rule, anything which is given the agent as under the Nylic plan
is usually accompanied by something which is taken from him. I believe that
most agents feel that they would prefer that their commissions be disbursed to
them as under our present plan than if our commissions were disbursed under an
annuity plan. I assure you that our ears are not closed to a new idea.
Sincerely yours,
(Signed) * * • Vice President."
I suggested that the laws be chapged so a company will be permitted to pay for
business that is profitable. What does your committee think of this suggestion?
5. The turnover of agents in our oflSce is much "less than the average. That
is mainly due to the fact that we are a better than average agency. Being in
business over twenty-five years and having been founded by a great personality,
it was only natural that he should attract a better than average class of men.
The founder of our agency was always interested in the welfare of his men. and
as a result he was rewarded by the greatest show of loyalty that was ever ac-
corded a General Agent and for that matter to any head of an organization.
However, since his death, in 1934, this agency is jugt anothjer agency now. Not
doing the business if formerly did and very few new men are being taken on.
Although those few who have been taken 6n, 90% of them are no longer with us.
This is due mainly to lack of proper selection and supervision and a great lack
of personal interest in the new' agents. The older agents need it also for it would
help keep their morale up and their spirits high. Naturally, when new men are
taken on it does not help the other agents in the same territory much. Unless
they are men who come from other companies and they are already established.
Otherwise new men hurt the business rather than help it. The new man has to
15644 CHDNCENTRATION OF ECONOMIC POWER
sell on basis of frienuship, and often he gets a policy from a friend just to help
him out. However, if this same new man were properly trained, he would not
have to ask for business on the basis of friendship, but rather on the basis of his
friend's needs. That always results in a better relationship between salesman
and client. This business can use many men who would be willing to learn,
provided the companies woyld in turn be willing to provide fine educational
facilities to the right men.
6. No. I do not believe the present method of selecting and training of all
agents in our oflSce at present is satisfactory. Although a small beginning in the
right direction has already been made. Not by the company, however, I am re-
ferring to the new law which requires an agent to pass an examination before
he can receive a license to sell life insurance. While the examination is not very
hard to pass, it will prevent the unscrupulous general agent or manager from
hiring every Tom, Dick and Harry. It will put the brakes on every failure in
other lines to get himself licensed and sell life insurance. Regardless of his lack
of knowledge of the greatest business in the world. Our agency, although limited
by lack of agency supervision, does provide opportunities for training to those
who want to take advantage. We have a class for those who want to prepare for
the degree of Chartered Life Underwriter. This is a very extensive course and
is greatly desired by men who want to m^ke life insurance their life work. It
would be very hard on the companies, if all agents were required to have a C. L. U.
degree before they could be licensed to write insurance. But the policyholders
would be the beneficiaries. Of course in time we may come to that too. I am in
favor of it.
7. We don't rieed them.. Full time agents are starving now.
8. Yes. It is always talked about. New Business ! New Business ! Over-
emphasized. It certainly is not desirable.
9. No. The market for life insurance In my opinion, has not become saturated.
The only fault lies with the problem of too many untrained and ignorant agents.
The untrained and ignorant agent is mostly .employed by the industrial com-
panies, but the companies writing ordinary business have plenty of those too. I
will say this, in my opinion the high pressure methods employed by the companies
selling industrial insurance is a crime. Many times an industrial agent will sell
a 50^ policy to a mother on the life of a child, while her husband, who is the
bread-winner has no insurance. That 500 would buy a $1000 ordinary life policy
for her husband. However, that does not suit the industrial company. The
husband is not home, so why bother. It is so much easier to brawbeat and
bulldoze an ignorant woman into buying a savings policy for her child. There
is your trouble. Only in this respect do I agree with Mr. Siegel, (who in my
opinion is strictly a phony ) who robs these poor ignorant people of thousands of
dollars in fees, for something that they can get gratis, if they would only run to
the oflSces of the industrial companies as readily as they run to Mr. Siegel's oflSce.
According to the papers reporting the hearings, Mr. John A. Stevenson said
that the reason the comi)anies are still using the antiquated mortality tables, is
because the agents desire it so they can have larger commissions. If Mr. Steven-
son did say such a thing, I am very much surprised. After all, the agents have
no say in this matter. I know that for years most agents wanted to have the
newer uptodate mortality table used so policyholders will get the benefit of lower
premiums. The companies just don't like to make any changes unless they are
forced by law. Therefore, I am glad to see the New York Legislation doing some-
thing about it now.
I wish your commission could find out what's behind the companies' objec-
tions to include the agents in Social Security benefits. After all, are we not
mainly responsible for the executives getting their pensions at retirement?
All this comes out of policyh"51ders premiums and the pensions are pretty
liberal at that. One of the reasons advanced by the companies, is that we
are independent operators. That is the bunk. Why do we have to sign a
contract with the company to which the General Agent or Manager is a party
and usually it runs for a period of ten years.
Then another practice which refutes the companies' assertion that we are
independent operators, is this. In the course of years with an agency, an
agent may become Indebted to the General Agent or Manager, only to the
extent of advances against his renewals. This may be due to sickness and
other unforseen contingencies.
If an agent so indebted wants to make a change, say he has an offer from
another company which would benefit him more than his present connection,
he has no chance to take advantage of his opportunity. The General Agent
CONCENTRATION OF ECONOMtC POWER 15645
of the other company will first get in touch with his present General Agent
to find out if it is Okay to hire him, but his present General Agent will say —
"oh no, you can't have him — he owes us some money which we advanced".
And the other company can't have him even if it wants him. So what kind of
independence is this? There is such au agreement (not in writing of course)
amongst all the General Agents in New York. It happened to me, so I know
what I am talking about.
About four years ago, another life insurance company offered me a General
Agency and the only way I was free to go was to pay up at once what I owed
my agency at that time, which I could not do. So I lost a fine opportunity.
I have since repaid everything and I am now free to go somewhere else, if I
want to. But think of jthe other poor slaves. Maybe the commission can give
publicity to this nefarious practice or even stop it.
I wish to avail myself of the privilege of having my name treated confi-
dentially although I will not hesitate to testify regarding the above.
Very truly yours.
Exhibit No. 2590
[Copy]
February 21, 1940.
Deab Me. Henderson. Tour letter of February ^th was received by me today
and I am delighted to be of service to your Commission as well as to the
country in general, and the life insurance business in particular.
I am a whole-time life insurance agent of the Massachusetts Mutual Life
Insurance Company, although I broker business through a great many other
companies. I have been in the life insurance business 18 j'ears and my
average annual income in commissions in recent years has been approximately
$10,000.00. My earnings have increased in recent years, although some years
have been better than others. I have a salary of $1,000 a year as an officer of
a small corporation, which is the only other earned income that I have. As I
am not a general agent, I do not know what the average annual income of
other agents in my terrtiory would be, but I am sure that it is very small.
. I believe that a guaranteed minimum salary for new agents is desirable
because better agents would be selected if salaries were paid. I believe the
insurance business could be benefited as a whole by having better agents,
and by offering men a salary until they are launched into the business would
be one of the ways of obtaioing a higher grade type of agent Moreover, the
general agents would be more particular as to the type- of man they employed
if they had to make an investment in the agent instead of the agent taking
the gamble on commissions only.
We all .agree that the cost of insurance can be reduced by selling the business
properly and having the business stay on the books instead of having policies
bought then surrendered, new policies bought, and the procedure continued.
With a few rare exceptions, I personally have not had this experience, but I
know that I am in the small minority in this respect.
It seems to-me that the first year commission could be reduced and a bonus
paid for business that is continued in force. Furthermore, I believe that com-
missions should run longer than 10 years. The same service is expected and is
given 12, 15 and 20 years after a policy is bought, and there is no reason why the
agent should not be compensated for same. In the long run it would be a wise
procedure to pay the agents who originally placed the business on the books for
as long as premiums are paid on the contracts.
It seems to me that insurance premiums could be reduced, particularly if two
things were done, i. e. (1) a modern up-to-date mortality table used, and (2) by
paying a smaller first year commission and spreading the commission over a
longer period. Furthermore, commissions are supposed to be based on the ordi-
nary life contract. Policies with higher premiums, sucli, as 20 payment life, are
supposed to pay the agent more money than the ordinary life, but in many com-
paniesthis is not true. In other words, Ithink the whole schedule of commissions
should be revised, and in no case, with the exception of term insurance, should an
agent get a smaller commission than that which is paid on the ordinary life basis.
Furthermore, a great many companies reduce the commission after a certain age.
For example, many companies pay the same commission on iwlicies issued at age
63 that they do on age 60, even though the premium is greater. In other \^ords,
124491 — 41— pt. 28 61
15646 CONCENTRATION OF ECONOMIC POWER
there is a penalty for doing business on older men, although the same mortality
table and acquisition cost is in the premium. This does not seem fair to me.
Because of the investment problem of the insurance companies, they have done
everything to discourage agents selling annuities and single premium policies,
and today are jjaying approximately Vi of the commission that they formerly paid.
The life insurance business is supposed to be a non-profit sharing business for
the benefit of the public, and if there is a need for annuities, the companies should
fill that need at the lowest possible cost. As most of the agents are having a
difficult time making a living, I think it is poor policy to cut commissions as they
have steadily done for many years, which has made the situation as regards the
agents even more diflScult.
I believe that there is a terrific amount of money wasted through the General
Agency system: (1) In advances to agents who leave the business and the gen-
eral agent or company is left holding the bag; (2) through the training of agents
who are not adapted to the business; (3) through advertising, sales contests and
inefficient methods of obtaining business ; and (4) by business that is not properly
sold so that it is not continued in force. If this waste could be stopped, the ac-
quisition costs of insurance would be reduced, with the corresponding result that
the public would obtain insurance at a lower cost.
There is a large turnover of agents, not only in my office, but in every office in
my locality, and from what I am told, in the whole country. The main factor
responsible for this is that general agents are anxious to make a showing and,
therefore, take every available man who is unemployed and give him a contract
to sell life insurance. A great many of these men are not equipped to sell in-
surance and sell their friends and relatives and then drop out of the business,
with the result that the business does not stay on the books. I think that the crux
of the whole matter is in picking salesmen who, first, have character, second,
selling ability, and, third, an aptitude for the life insurance business. The life
insurance business takes no capital and so if a man is out of a job, he turns to
this business to make some money. I believe that the continual entrance of new
agents in my office and in other offices, hinders the sale of life insurance not only
in my territory, but in all territories.
I started in the business as a part-time agent, and I am grateful for the oppor-
tunity of having been able to start as I did. It seems to me that it is satisfactory
to allow men to be part-time agents while learning the business and to see whether
they have an aptitude for same. However, I do not think that in the larger cities
that part-time agents should be allowed to stay in the business beyond a proba-
tionary period.
I think the obtaining of new business is overemphasized in my office, and
in most offices.
I do not believe that the market for life insurance has become saturated
or has anywhere near reached the saturation point. There is a real need for
life insurance among the people of our country and if we had more insurance
in force we would h^ve less need for relief, orphan asylums, homes for the
aged, etc. However, I believe the number of agents attempting to sell insur-
ance is altogether beyond the number necessary, and I believe the business
could be much more efficiently handled and maintained by a smaller corps
of more able underwriters.
Further, I believe that there are too many companies in the life insurance
business. In my opinion, safety should be the prime requisite of an insurance
company and if several hundred of the smaller companies were to go out of
business or merged into larger units, I think it would be better for the business.
It seems to me that fifty well-managed life insurance companies could serve
the United States much more efficiently than the hundreds of companies now
in business.
I would like to state that I am for federal stipervision of the life insurance
companies if that means that it will be in place of, and not besides, state
supervision. A great many states have not only inadequate insurance laws,
but poor insurance laws and the public is not properly protected. Furthermore,
the fees for licenses and the taxes of insurance companies to the various states,
are in excess of the amount necessary for the state supervision. If this could
be eliminated, it would tend to make the cost of insurance less. Furthermore,
the examination of the various insurance companies by the various states is
a very expensive and inefficient way of doing business. With federal supervi-
sion and the federal government checking these companies, this cost also could
be reduced substantially.
CONCENTRATION OF ECONOMIC POWER 15647
I wish that you would treat my letter confidentially, but if there are any
additional questions that you would like answered, I would be glad to do so.
Or, if you would like me to appear before any hearing, I would be' glad to do
so at my own expense.
Yours' very truly,
Exhibit No. 2591
Mt Dbab Mr. Hendbsson : In reply to your letter of February 9th and the
questionaire • attached :
(1) I am a whole-tiide agent. I do not earn income from any source other
than life insurance.
(2) I have been in the life insurance business two years and eleven months.
(3) My average annual income from first year commissions during this period
has been $1,400. I have no information as to the average income of other
whole-time agents in this territory. We have a few whole-time agents whose
income is between $3,000 and $5,000. We have some agents whose Income from
production and supervisory work exceeds $10,000. The income which I have
derived from life insurance selling is slightly smaller than the salary I received
from my last job.
(4) I believe a guaranteed minimum salary for new agents is desirable. My
answer to this question should be considered in • the light of my very limited
experience in the business. A reduction of first-year commissions would seem
to me to be very detrimental because it is the very small income during the
first few years that is now keeping capable young men out of the business.
The compensation recently inaugurated by the Northwestern National Life
Insurance Company appears to me to be greatly superior to the plan now in
general use.
(5) There ig no turnover of agents in our ofllce. In the Penn Mutual office
where I worked during my first eleven months in the life insurance business,
there was a very large turnover. This was due to recruiting methods under
which any man who would accept a contract was given one, and the failure
of the supervisor to keep his promises regarding help which he was to give the
new agents. That supervisor is no longer with the Penn Mutual. Their prac-
tice seems to have changed radically since the time I was with them. The
continual entrance of new agents into this territory hurts the sale of life in-
surance in some degree because they build up a resistance by their unskillful
methods. Also, they cause ascertain amount of dissatisfaction by their lack of
knowledge.' This feature, however, should have very little, if any, bearing on
rules regarding the entrance of new men into the business. Our primary
interest must be that the insuring public is well served. Service should be thp
standard by which recruiting is judged.
(6) The present methods adopted for selection and training of agents by the
general agency in which I work are very satisfactory. The very high stand-
ards maintained have resulted in the entrance of very few new men into this
agency (the Kansas City Agency). The training methods leave nothing to be
desired. This jjuestion is answered from the standpoint of the agent. It has
seemed to me sometimes that the Company is unnecessarily handicapping Itself
in the production of new business by failure to recruit. However, that is a
matter of Company management, and the present system certainly works to my
benefit.
(7) There may have been a time when the part-time agent was justified.
The development of automobiles and hard roads has certainly eliminated any
justification. The public can be better served by a full-time professional man
than by any part-timer. It is possible now for a full-time man to travel about
rapidly and cheaply enough to service everyone in this territory. The part-
timer is a menace to the insuring public, and a nuisance to the fuU-timie agent.
He is a leech living on the prestige built up for the institution by well qualified
men. His work constantly tears down that prestige.
(8) The obtaining of new business is emphasized in this office. The emphasis
is constantly on a high quality of new business. I believe the feature is
suitable.
(9) The market for life insurance is so many times greater than the present
amount of insurance in force that I cannot visualize an end. In 1909 a friend
of mine in northern Indiana', who had made a considerable success -selling
15648 CONCENTRATION OF ECONOMIC POWER
automobiles, sold out his agency and went into another business because the
public had at that time, he said, "bought all the automobiles they were going
to buy." From the testimony of Mr. John A. Stevenson, President of the Penn
Mutual, before your committee, .md from life insurance magazines, I learned
that the American public is now putting away in life insurance premiums almost
exactly the same sum that it spends for liquor, and approximately half the
sum that it spends for tobacco. Our own Company's figures indicate that two-
thirds of our payments go to living policy holders and only one-third to bene-
ficiaries. We have, it seems, been able to presuade American men to set aside
for the benefits of their widows and orphans one-third the amount they pay
for alcoholic liquor, and one-sixth the amount they spend for tobacco. Not a
very impressive record.
The best information available indicates that more than 50% of the property
values of the United States are Insured. I am told that the figure in Topeka
is 70%. Equally authentic information indicates that not more than 10%, and
perhaps only 7%, of the human life values of the United States are insured.
It would seem that our market Is far from saturated.
You have suggested that the agents express their own opinions as to phases
of the life insurance business. It is my opinion that if the Temporary National
Economic Committee were forthwith to discontinue its sessions and destroy
all Its records that they would be contributing more to the welfare of the
American people vhan any other action It might take. This is not because there
is anything In your records that a well-managed life insurance company neetl
fear, but because the constant reaching out of government to take control of
private business has kept us In the worst and longest depression this country
has ever known.
If your Committee has any genuine desire to be of service to the American
investing public, there is one place you can start immediately. That is in the
investigation and eventual control of the sale of insurance in all its forms
by mall and radio. This racket is quite outside the power of the State Insur-
ance Department to control.
Exhibit No. 2592
Dear Mr. Henderson : I was rather glad to receive your letter of February 9
with respect to the whole subject of sales and agency practices of life Insur-
ance companies. Incidentally, your letter did not arrive until this morning,
and it has therefore, not been possible to get my reply to you by February 19
as requested.
In as much as I Intend to the best of my ability to answer in as much detail
as possible It occurs to me that you might be interested In a description of the
writer. Brlefiy then, I am married with two dependent minor sons, and a self
supporting adult daughter. I am 42 years of age. I was born of a Swedish
father and a Scotch American mother, and as an educational background, I
completed two years of college.
1. I am a full time life underwriter. My Income, however, is supplemented
by commissions from :
(a) Annuities
(b) Accident and Health Insurance
(c) Group Insurance
(d) General Insurance
2. I have been In the life insurance business for 16 years as of last De-
cember.
3. My average annual Income during the past ten years approximates $3,500.
In brief detail, my Income since entering the business is as follows :
1924 $1700 plus (first year in business)
1931 $9000 plus
1933 $2200 plus (bottom of depression)
1939 $6000 plus
The average annual Income of other agents in this territory has undoubtedly
been less than $1,200 per year. This statement Is based on a general knowl-
edge of conditions locally among life underwriters, rather than a detailed
knowledge among insurance men as individuals. The general picture, of course,
will show decidedly decreased earnings from 1929 to 1933, and some increase
from 1933 to 1939.
CX)NCENTRATION OF ECONOMIC POWER 15649
4. From the point of view of the new agent a guaranteed minimum salary
would undoubtedly be desirable. From the point of view, however, of estab-
lished agents, it might result in i)enalizing them. It has been my experience
that changes in methods and plans for compensating agents have invariably
resulted in lesser compensation for the same production.
My conviction is that a flat commission of say 10% over a longer period of
years than the present ten year contract would work out to the best advantage
of the insureds, insurance companies, and the field men. Most of my asso-
ciates and competitors in this business would not agree with this suggestion.
The weakness in it is that field men are entrely unorganized for collective bar-
baining, and probably would not receive their fair share of the benefits result-
ing from the better persistency thus secured.
Several years ago, I read an article to the effect that in a certain company
ordinary life policies on the average lapsed at about the 10th year, limited pay
contracts on the average at about the Ilth year, and endowment contracts
lapsed on the average at about the 12th year. Along with the facilities avail-
able to your commission, the exact figures on this point can no doubt be
secured, and a rather interesting and logical conclusion arrived at.
5. The writer has been under contract in his present connection for T^^ years.
The number of new men under contract during this period has been about 16,
of whom one is at present earning an average of about $3,000 per year. The
other 15 have failed. The ratio of successful new men to the number placed
under contract in this agency is, therefore, one to sixteen.
The factors responsible for this turnover are as follows :
a. Insufficient funds with which to finance period of becoming established (with
consequent worry and inefficiency).
b. Insufficient education in insurance (both as to quantity and quality).
c. No particular minimum production requirements (on this point, it is to be
noted that my Company, for example, has a minimum requirement for payment
of full renewal commissions of $8,000 in new premiums, and an agent, for example,
who pays for but $2,000 of new premiums is penalized by the loss of his 7th to
10th year renewals inclusive. Many managers are satisfied to let agents with
sub-standard production continue along because of the fact that these "residuals"
revert to them.
d. No reasonable sales ability established before being placed.
The continual entrance of new agents in our office is a detriment, though the
company would undoubtedly sign up several more likely youngsters with little or
no urging (we have had as many as 13 under contract at one time). Our office
facilities such as desk space, and particularly secretarial service are cramped, and
insufficient as is. When in the past our forc^> was more than double its present
size, there was constant bickering and wrangling about prospects.
I might add that our office is at present composed of four full time agents whose
average annual earnings approximate $3,500, and one part time woman agent
whose average annual earnings approximate $300.00.
The best answer, I believe, as to whether or not the continual entrance of new
agents into our office hinders or helps the sale of life insurance in this territory
is evidenced by the fact that the five agents above mentioned last year paid for a
total of about $25,000 in new premiums, whereas, in 1934 (a year not uncom-
parable with 1939) 13 men (composed of three established life underwriters and
ten new men) paid for $21,000 in new premiums. In my opinion, the doubling of
our force, at the present time, would result in a smaller total production from the
entire group.
6. I believe that the present methods in use for the selection and training of
agents in our office are satisfactory. Emphasis is here placed on present methods
because those used heretofore were not satisfactory, and the probabilities are with
the removal of the present manager that the previous unsatisfactory methods
would be resumed.
I believe that the methods used generally (by all companies, including my own)
are unsatisfactory. Corrections could be made as follows :
a. By determining that funds from some source are available (without going
into debt) with which to finance the period of becoming established.
b. By educating adequately for the insurance business.
c. By rigidly adhering to reasonable minimum production requirements (some
such arrangement for example, as allowing full renewals to a first year man in
the business based upon a first year production of new premiums of approximately
$1,200, and to a second year man based upon a second year production of approxi-
mately $2,400 in new premiums, and to a third and subsequent j-ear man based
upon a third and subsequent year production of approximately $3,5(X).
15650 CONCENTRATION OF ECONOMIC POWER
7. In my opinion, there is no place in the field of life underwriting for part-time
agents. Twisting, rebating, misrepresentation, incomplete and unfair compari-
sons, and all of the other evils incidental to this business flourish where the ill-
trained, uneducated, ill-financed part-time insurance agent abides. In my 16 years
in the business, I have yet to meet the first part-time agent whoever became even a
good class "B" life underwriter, and it is my conviction that the very few excep-
tions to this rule are those exceptions which prove the rule.
8. In my opinion, the obtaining of new business in our office as presently man-
aged is suitable. In the past, the obtaining of new business has been widely over
emphasized largely by contracting too many men who had no prospects of ever
achieving satisfactory minimum income in life underwriting. In the future, under
another manager, the odds are that it probably would be again over emphasized.
9. I do not believe that the market for life insurance has become saturated, to
any noticeable degree, at least.
It is my conviction that a definite lack of'balaTice exists between the size of the
life insurance market and the number of agents attempting to sell therein. As
you probably know, 80% of the business is now being written by 20% of the life
underwriters (probably the better trained and better equipped group). If we
could have another 30% of the life underwriters trained to do as good a job as
the top 20% and eliminate the lower 50%, a situation would undoubtedly result
much more satisfactory to the public and the companies. '
The writer is not surprised that the company executives and home office
officials who have thus far testified before your Commission have plead that
they do not have the material which you have requested of them. We, in the
field, continually receive evasive and incompleted ansjwers to questions which
are asked. I have never been able to ascertain for "example how many life
underwriters the Connecticut General has under contract. I have before me, the
Honor Roll list of 1940, and I note that 168 agents have qualified. What per-
ci^ntage this represents of the total agents under eofatract, I do not know, and
Ib 7% years, have not been able to ascertain. I have also before me the list
of those qualifying for the "President's Club", and find that this list is com-
posed of 48 agents whose average first year premiums amount to $8,000, which
means that in first year commissions, they earned, approximately $3,200. On
the average, I assume that their renewal commissions would equal a like
amount so that a general conclusion would be that these 48 top agents enjoyed
an annual gross income last year of about $6,000 plus. Generally speaking, I
would say their business expense ran somewhere around $1,000, and their net
income therefore, approximately $5,000 plus.
The writer has not been one concerned with any efforts on the part of the
TNEC to undermine the agency system. In fact, he has been amused by the
change of attitude on the part of the company executives. Years ago, you
know, it was a rather common practice to advocate Federal control as opposed
to state supervision. Today, the broadsides eminating from all home offices
(so far as I know without exception) are blasting away at the possibility of
any Federal control whatsoever. Frankly, it is my opinion, that until such
time as we have unified control, we will continue to have situations arising
such aa in Illinois during most of the depression (I refer, of course, to the
fact that company after company went under until the situation became intoler-
able, and was finally corrected by the passing of new and improved legislation
pertaining to insurance). The situation here in Ohio, for that matter, was none
too good. At least two Ohio companies ' went into receivership, several were
absorbed, and I don't know how many dozens of the 40 odd companies which
went into receivership elsewhere were doing business in Ohio at the time of
their bankruptcy.
The figures which you quote concerning a large life insurance company are
not surprising to anyone who has been in this business for any length of
time. The only question in my mind is, "Were they typical or were they better
than the average?"
I believe that the proposition of having the TNEXD study life insurance and
life insurance companies is sound, and wonder if it would be pertinent to inquire
as to why it is that those of us working in the field and representing companies
which write group life insurance are unable to buy group life insurance although
our companies tell us it is a good service to sell, or why those of us representing
companies which write group accident and sickness insurance and group hos-
pitalization insurance are unable to buy these services although we are told
they are good services to sell, or why those of us representing companies which
write group pension insurance are unable to buy this service although we are
CONCENTRATION OF ECONOMIC POWER 15651
told it is an excellent service to sell. (Any man employed by my company on
the home office pay roll whose income, and years of service are approximately
the same as mine, is entitled to all of the above benefits. We field men are
not.) In speaking of concentration of economic povrer, I believe that the above
is a good manifestation of it in the insurance business.
One of the largest problems confronting the life insurance agent at the
present time is his insecurity. Aa you know, a very small precentage of our
American i)eople ever achieve even the most modest degree of financial independ-
ence, and I have a deep conviction that if your commission will attempt to get
at the facts, it will be discovered that a substantially smaller percentage of life
insurance agents ever achieve this goal. A check up of the records will show, I
believe, that the home office officials of the various companies literally spent
thousands of dollars in preventing their agents from being included under the
benefits of the Social Security Act. They have classified us as independent
operators. Other than for the purpose of excluding us from Social Security, I,
for one, am at a loss to know from whence derives the so called independence.
I have been actively interested in insurance organizations ever since I entered
the business over 16 years ago, and to my own knowledge, can list less than a
half dozen men who have achieved in a life time of effort in this business, even
the most modest degree of financial independence.
Another point which, in my opinion, is pertinent and important would be
arrived at by asking some member of your commission to examine the con-
tracts which the life insurance companies place before us for signature when
we enter the business. Even the most cursory perusal of these contracts will
readily indicate to you that they are biased, one-sided, and unfair. We agents,
being without collective bargaining power, either sign them or remain out of
the business. It is my opinion that no man, dealing with another man on a
basis of equality, fairness, and reasonableness, would ever sign these agents'
contracts.
Because of the frankness and detail used in answering your letter, I believe it
advisable to request that my name and connection be held confidential. Please
be assured that I will be happy to answer any further inquiry which you might
wish to send me. I hope that the length of this letter has not detracted too
much from whatever value it may have for your purposes
Sincerely yours,
Exhibit No. 2593
Febrttaet 17, 1940.
Deab Sib: In reply to your letter of February 9, 1940, relative to my expe-
riences in the life insurance business, I am giving you, in so far as I can, the in-
formation you have requested.
• «***•*
1. I entered the life insurance business in 1930 * * • without having bad
any previous experience in the life insurance business and with no preliminary
training before being licensed, although I had had approximately twenty-five
years experience in selling which covered various lines. I was deeply in debt
when I entered the life insurance field and my Company financed me for a period
of approximately two years investing a sum of approximately four thousand
dollars before I was placed on strictly commission basis. This money has since
been repaid and my income now comes almost wholly from renewals and first
year commissions * ♦ *.
2. I have been in the life insurance business since December, 1930, which
makes this, the year 1940, my tenth year.
3. My average income has been between four and six thousand dollars and has
naturally increased as I have constantly put a fairly good volume of new business
on the book every year and I have been fortunate enough to have had a renewal
ratio of between eighty-five and ninety-five per cent, which naturally has been a
factor in gradual increases of income. Agents in my employ, as-well-as other
General Agents in this vicinity, as a rule have not done as well, which J attribute
in great part to the fact that they have not worked at their job as assiduously
as I have and again some of them are in the wrong business.
4. My financing, when I went into the business, was done by a former manage-
ment of the Company and while they have made good money on my operations,
the present management would never have considered making this investment.
From the very start I have advocated that Agents should be paid a minimum
15652 CONCENTRATION OF ECONOMIC POWER
salary commensurate with his deeds, which of course would be paid on a mini-
mum production in order to keep the Company safe as to their outlay in Agent's
salary and my opinion is not changed in the slightest. In the almost ten years
I have had in the business, I still maintain and have written several articles
for magazines along this line, but up to the present time the Companies have
been very slow in adopting what I consider a fair rate of compensation for the
type of men they desire to interest in the life insurance business.
I do not know that I would decrease the "amount of first year commissions to
Agents, but I do think that the Agents should have a longer interest in the
business that stays on the books than the nine years the usual contract provides,
because, as long as the Agent stays with the Company and that policy remains
on the book, he is constantly called on to service that business and I think he
should have a considerably longer period of renewals than the present contract
provides for. In my own case, I have one of the old type contracts which provide
for nineteen year renewals.
Under this section of item four, I would like to make a few observations and
they are this, that the Companies are steadily growing stronger financially, Home
Office salaries from President down are well on the increase but the Agent in the
field is the man that has to carry the burden because under the present set-up, if,
for some reason beyond his control, the business does not come in, he is the one
that is left holding the bag and to try to run a life insurance 'company without
the Agents assistance apd the Agents, would be like trying to nni a Government
without the monetary assistance of the tax payers, whicli you know could not
be done and life insurance companies simply would not amount to very much if
the agents did not go out and get the business. ,
5. My office has had about the same experience in Agent turnover as the rest
because in the desire to build a sizeable agency force, we have naturally placed
under contract people that did not fit in and only trial and error could determine
this because some times the least likely to succeed are the ones who, in some
cases, turn out to be good producers and vice versa. In this connection, it is
my opinion that there are too many men in the life insurance business due io
the fact that the Companies Home Office organizations, in order to Justify their
salary and positions, are constantly urging more production and the only answer
to that is to put on new men with the result that under Home Office pressure,
new men are constantly being recruited into the business but very few of them
are worth having and in a short while they fade from the picture leaving the
Company the gainer by whatever business they have written.
6. The only method we have for selecting and training the Agents is to try
to induce people we believe will make good Agents to come into the business
without any financing from the Company and the training is altogether on our
personal contact and coaching as we have no prescribed training course for
Agents, consequently, we do not have a large agency organization because it is
rather difficult to induce men to come into the business on a strictly commission
basis unless he has a wide family connection that are so placed that they will
be a constant feeder for him and the Company has repeatedly refused to do
any financing of new agents regardless of their possibilities.
7. I have consistently opposed the appointment of part-time Agents in any
city that is large enough to support one or two good men on a full time basis
but I know it has been the practice of a large number of Companies to spot
part-time Agents any and every where hoping that they might write a little
business, which of course would mean irtoney to the Company as they Would
have been put to no expen.se in the acquiring of this business and the part-
time Agent will usually take up two or three good cases a year through personal
friendship or business contacts that should go to a full time Agent.
8. The emphasis in my organization is about equally divided between the
securing of new business and seeing that old business renews.
9. I do not believe that the market has become saturated from a life insurance
standpoint because I am constantly finding people who carry a small amount
of insurance but yet do not have enough for their families in the event of their
untimely passing but as stated in previous paragraphs, I am firmly convinced
that there are too many men under contract to solicit the life insurance busine^
and that the job could be done eijually as well with a smaller force.
Digressing from your printed questions. I have some observations that may
be of interest to you or may not, and one is about the howl that has been
raised by Industrial Insurance Companies relative to your investigation and
also by some of the larger Eastern Companies as-well-as some domiciled in the
West. I have always found that when I wanted to find out something about
CONCENTRATION OP ECONOMIC POWER 15653
a person that they did not want me to know that they attempted to block my
investigation and I think this is true in the present instance.
I have always held that Industrial rates were entirely too high for what the
buyer gets for his money and I have not changed my mind on that in the
slightest, just as I have had to fight the sales practices and methods of Mutual
Companies relative to their socalled "Dividends" and the size of the Company.
To say that the policy Holders Control Mutual Companies is fine in theory but
I think you have already developed the fact that the rank and file of -i)olicy
holders in Mutual Companies amount to very little when it comes tx> perpetuat-
ing in office, those that were first installed. I believe a recent decision of the
Supreme Court of the United States has held that "Dividends can not be called
dividends" and I refer to the suit of the Mutual Benefit Life Insurance Com-
pany, vs. Herman Herald, Collector of Internal Revenue for the State of New
Jersey, which was decided in favor of the Company and made it necessary for
a rather large sum to be refunded to Mutual Companies that had been pre-
viously collected on their "Dividends" and in this connection I am enclosing
you part of the page cut from the National Underwriter under date of January
26, 1940 wherein the New York Life Insurance Company is listing "Dividends"
for the next twenty years on six different forms of policies. Now, if any com-
, pany can forceast twenty years in advance what their "Dividends" will be,
I think they ought to be given a job of running the Government so that they
could forecast exact conditions of the Country twenty years from now.
Personally, I think all insurance rates are entirely too high and I believe if
rates were somewhat lower, that it would result in people carrying more insur-
ance even though the money outlay would not be any greater. One has but lo
look at the annual statements of practically all Companies to realize that there
is something wrong with the picture.
Relative to State or National Supervision, I can readily understand why
State Insurance Commissioners would oppose any move for Federal Regulation.
They do not want to lose their jobs and State Supervision can be very good or
it can be very bad, for instance, I would cite the fact that the Insurance Depart-
ment of the State of New York will not let Examiners from other states make
examinations of those Companies domiciled in the State of New York and
there are other states, I am informed, whose supervision is rather lax and
most anything can get by. I do not advocate Federal control, but I believe
the field is wide open for some much needed reform. I believe North Carolina
is about as strict in some respects as any other state and new agents that
come into the business, must stand a written examination and pass before
being licensed, but I am of the opinion that pressure can be brought on our
own Insurance Department to favor certain Companies.
For your further information, would like to advise tliat I have served as
President of the Local Underwriters .Association and have been National Com-
mitteeman for the past six years, having attended the last five national con-
ventions of the National Life Underwriters Association and I am well aware
of the pressure that has been brought, or attempted to be brought, iiv .these
meetings to off-set the effect <>f your investigations and I would be just as
strongly opposed to any attempt that contemplated the elimination of the
agent from the Life Insurauc.^ picture. While I do not know it all by any
means, I have very sound convictions that the Insurance Companies would
not amount to much if the Agents did not go out and get the business as I
have stated in a previous paragraph. -
I have written you at quite some 'length in reply to your letter, which I
ask you to consider strictly confidential and if there are any further questions
that I can answer for you, I will be glad to do the best I can.
Yours very truly,
Exhibit No. 2594
February 12th.
Re: Attached article taken from the St. Louis Post-Dispatch of Febi'uary 11th.
Dear Sib: — I have not received a questionnaire but, since I believe that the
life insurance agent or solicitor is the r-. al forgotten man of our economic
system, I welcome the invitation.
I have been in the life insurance business, off & on, in various capacities
since 1918. At present, I am general agent for a life company and broker
15654 CONCENTRATION OF ECONOMIC POWER
all types of insurance. Because I have recently opened my own office in a new
territory, a comparison of incomes with previous years would not reflect the
true state of affairs. But I do know that, of the men putting full time into
the life insurance business in this territory, not over 10% are making a living.
I am excluding the industrial men where income is augmented by their collec-
tion commissions.
It is a matter of common knowledge that life companies contract men indis-
criminately in the hope that they will at least write a few of their friends and
relatives,--and that they niiffht develop into producing agents even tho the
percentage who come thru is pitifully small. When it is openly said that such
agencies as the New York Life St Louis Branch is operated on that basis with
a stream of new men coming in one door as the so-called failures go out the
other, this practice is pretty well established.
This practice results in a lower income to those agents who are capable,
.- low standard of service ta the policy holders of the temporary agent, and
a large percentage of poor underwriting by men who know little or nothing
about covering a risk with the right type of contract.
The part-time agent is a thorn in the side of any agent. He is usually an
employed person who wishes to increase his income by chiselling in on his
own purchases or those of his friends; or he is an executive or politician who
can see an easy and possibly legitimate way to get his cut.
In order to eliminate these evils, part-time agency contracts should not be
issued to anyone. Agents should be carefully selected & trained. They should
receive some income during the training period ; a fair income during a proba-
tionary period; and then given a full-time contract at a basic' salary plus
commission on business over a certain amount. I believe that the companies,
the insured & the agents would all gain under such an arrangement.
I can confirm your findings in your investigation of the Industrial Life
field and could add dozens of cases to those already in your files as to almost
criminal underwriting. There is no question about the pressure put on agents
for new business ; there is no question about the results. I have felt the one,
and experienced the other. This type of insurance should be drastically cur-
tailed as to amount of insurance on each Individual life and should be repre-
sented for what it is ! — burial insurance for industrial workers unable to buy
standard insurance.
Frankly, I am not in sympathy with the companies' contention that Federal
supervision means Federal control — nor do I believe that the movement for
Federal Supervision will end up a Socialistic form of government as outlined
in "Nation's Business." State Supervision was, more or less, lax until eight
or ten years ago and, while it has improved because State Laws were revised,
there is no reason why Federal Supervision along the lines of Supervision over
the Banks should not be promulgated.
I wish you success in your work, assure you that I will take every oppor-
tunity to explain the situation to the general public as I understand it, and
ask you to let me help in whatever way I can.
Very truly yours,
Exhibit No. 2595
Febbuabt 20, 1940.
Deab Sib: The letter from Mr. Leon Henderson of the ninth was' received on
the nineteenth.
1 am happy to give you what information I can in answer to your nine
topics of discussion.
Number 1 : I am an Associate General Agent. All of my income is from
the Life Insurance business.
Number 2: I have been in the business thirteen years.
Number 3 : My income has been on a guaranteed basis, running from $225.00
a month to $5,000 per year.
" Number 4 : I am of the opinion that the present method of compensation
for life insurance agents is out of date and not at all practical. The present
system dates many, many years back and in spite of the change in every other
line of selling, and the adoption of newer methods, the life insurance business
has remained as it was.
A guaranteed minimum salary for new agents is necessary either now or
some time in the future if our present Agency System is to survive. Many
of the new agents going in now are going in on an advance or drawing account
CJONCENTRATION OF ECONOMIC POWER 15655
which in many ways is a salary, however, the agent has this disadvantage and
mental hazard to overcome and that is he realizes that any deficit must be re-paid
if he does not make the grade.
I know of no other selling organization that has such a handicap for a
new man.
For the past few years, I personally, have felt that a system of compensation
based on smaller first year commissions and increased renewal commissions
would be the only salvation for present agents and, at the same time enough
lure to attract high type men. I feel that if first year commissions averaged
about 25% and the same amount for renewals for a period of five years, making
a total of six years altogether, and then 2%% renewal for the next fourteen
years, making a grand total of 20 years the agent would have an interest in
the policy, would be a far better system. This is close to the system operated
by the fire and casualty agents. They have a uniform commission running
the life of the policy. Their average living conditions are much higher than
the average living conditions of life insurance agents.
This system would keep out a lot of men who jump in the business to write
a few big policies and then immediately leave the business.
It would also tend to encourage an agent to select higher type business so
that it would remain on the books and build a nice renewal income for him
and keep him from working for large premiums and first year commissions
and not caring a lot what happens afterwards.
It would also tend to cut down the evil of re-bating of which we have a lot
in this business, especially with the companies who have high first year
commissions.
The agents are called upon by companies constantly, to do service work for
which they receive no pay at all. They are constantly having to settle death
claims; handle loan agreements, change of beneficiaries, etc. which takes quite
a bit of their time and in my thirteen years of experience, has meant very
little in the way of new business for the agents. It means more to the Com-
pany than it does to the agent. The agent would feel more like doing this
type of errand running if he had a substantial interest in the policy.
The Actuaries will probably say that a revolutionary change of this kind
would upset the apple cart and would actually be unsound. In answer to this,
I feel that the Actuaries can figure out anything that they care to.
This would also aid General Agents who bring new agents into the business
to finance them on a much sounder basis than they now have.
At present, the large first year commission and extremely small renewals
is unsound and as out of date as the old Model T Ford cars.
Number 5: There is a lot of turnover of agents in all oflSces. I don't believe
that the Life Insurance Companies 'and the oflBces are altogether to blame
for this. Many of the men who come into the Life Insurance business have
been unsuccessful in other ventures. They have been merchants, school
teachers, salesmen in other lines of selling; and because there has been no
way in the world of telling whether or not a man could sell Life Insurance,
contracts have been given to about 100% of the applicants. Some of the most
successful have been men who appeared at first to be the least likely to succeed.
As to the second part of question 5, I believe that the constant turnover
and continual entrance of new agents into the business, hinders the sale of
Life Insurance. It cheapens the profession. It would cheapen the legal pro-
fession, the medical profession, or mofet any other professional line of endeavor
if there were a constant change of men. In other words, if 85% of the lawyers
who started out to practice, left the bar in less than two years, it would
certainly be a blight on the legal profession. It would be the same way if a
Retail Clothing merchant had a constant change in his sales personnel, it would
certainly be a bad reflection on that type of work.
Then, in most cases, the older agents resent the ballyhoo and attention
shown a new agent. The new man comes in excited and eager to do something
and the old agents tell him not to get excited ; to keep his feet on the ground ;
or that the business is hard, or in general they discourage them.
Number 6: I believe that the newer methods adopted for the selection and
training of agents in our oflBce is satisfactory. We are making a des.perate
effort to secure men who we believe will be successful and believe it or not,
we have turned away several men in the past few years.
Number 7 : Except in towns of less than five thousand population, I am
against the Part-time Agent. The Part-time Agent has a part to play and a
lot of families would have gone unprotected had it not been for the Part-time
15656 CONCENTRATION OF ECONOMIC POWER
Agent and it's impossible for a Full-time man to work in these smaller towns
and make a living. The cDnipaiiies are too eager for new business and they
allow their managers and general agents in the field to appoint entirely too
many part-time agents. They appoint these part-time agents without serious
investigation and in many eases they are simply contracts placed in order to
write business on the members of their own firm. •
Recently, in a town of approximately five thou.sajid population, an owner of
a chain store was in the market for approximately $200,000 of Life Insurance
on himself and other executives. He began to shop around. One of the agents
writing for a New York company told him that he would get him a contract
with his company and give him a part of the commission. An agent with a
company not operating in the state of New York said that he could have his
company give the man a part-time contract and give him a lot more commission.
A third agent who is, I am told, related to the prospect, and is with still an-
other company, got the man a contract with his company so that he could get
all the commi-ssion. The company accepted the contract and the business. I
have seen numerous instances where this has beeu done and the companies
OK these contracts.
Part-time contracts have been placed in banks, manufacturing plants, depart-
ment stores, general merchandise stores and the agents appointed therein have
their fingers on local gossip so that they know every time anyone buys life insur-
ance and they thereby cut full-time men out of business. This part of our busi-
ness is wrong.
Number 8 : We place a lot of emphasis on new business. I do not say that it's
entirely over-emphasized but with the long first year commission .set-ups, the
companies and naturally the agents are interested in obtaining new business
rather than the conservation of old business.
Number 9: No one knows the true answer to this question. I believe, however,
that the saturation point has just about been reached on the type of men who are
able to pass the strict requirements of the Life Insurance companies. In other
words, in our town we have a population of approximately 100,000 — 40% of
whom are negroes. Of the remaining 60%, there are approximately 30,000 women
and children which leaves approximately 30,000 men and boys. Of these 25% are
uninsurable one way or another. Then, if we take the foreign element from these
figures, we get down to about ir>,000 desirable prospects. Divide these among 250
agents, and you have approximately 60 prospects per agent. This means that an
agent, on an average, does not have enough first class prospects to see, but yet, if
you take the amount of insurance in force in our city and divide it among every
inhabitant, you reach a very small policy per person and then we see that the
saturation point is very far from being reached. But, if you take away the unin-
surables, babies, foreigners, negroes, etc., it would reach a pretty high policy
average per person.
The Life Insurance men's competitor today is not another Life Insurance man
but automobiles, radios, night clubs, entertainment, etc. A man earning $150.00
pays $35.00 house rent. $35.00 for groceries. $30.00 for a car, $15.00 for its upkeep
and $10.00 for clothes. These five items run $125.00. This leaves $25.00 for
utilities and other necessities and there isn't a lot left for Life Insurance.
Secondly. I believe there is a lack of balance between the size of the market
and the number of agents trying to sell therein.
I hope this letter has not been too long. The writer has been active in asso-
ciation affairs, twice president of the local chapter and twice president of the
state organization and has visited in a number of other southwestern cities. I
nave attended seven National Conventions and I think I know that the situation
is not at all rosy. I have in the thirteen years of my experience, recruited and
trained scores of men and have followed through with them on their activities.
I have visited their hfimes often and I know their problems pretty well.
I believe that the Home Offices are at last awakening to the fact that something
has to be dfine to make it possible for a man to come into this business and earn
a living. My own personal opinion is that a lot of Home Office men .see agents
and local Agencies with their best dresses on. When one of the.se men visits
throughout the Company, a contest is given in his honor, the agents put on a fresh
tie and shine their shoes and are more or less on dress parade. These Officials
.seldom visit in an agcnfs home or talk to him. juivately. and they know little
about his success in the conununit.v. Tlien. when the large Conventions are held
and the Star Producers are invited, we find excitement and .joy prevailing to the
utmost but at that time, only a very few of the rank and file of the agents are
CONCENTRATION OF ECONOMIC POWER 15657
there. I am convinced that all the Home OflSce Agency men are sympathetic with
the men Jn the field and will do everything within their power to assist them.
Exhibit No. 2596
February 17, 1940.
Dear Mr. Henderson : Your interesting letter received today and will answer
immediately so you may have my reply by the 19th as requested. However, I
believe a little longer consideration on my part might produce something
better.
To answer in the order of your suggested topics I am and have been a
whole time agent in Minneapolis for 19 years. I have no other source of
income. ^
2. I have been ,vith the * * * since 1908. ^ * * Went through all the
jobs in that office and was sent to Minneapolis in February 1914 as Cashier. Re-
mained there in that capacity until July 1919 when I was transferred to Des
Moines, Iowa as an Agency Organizer where I remained for ten months. Did
not like the territory, the branch office conditions or any other conditions
under which I had to work so * * * and went in the field as an agent
where I have been ever since. Lead this branch my second year and have lead
and been among the leaders several times . since. Am a C. L. U. (degree
awarded by the American College of Life Underwriters) * * *
3. This question does not mention whether you want gross or net income.
The companies always like to talk about the agent's gross income but this
is materially reduced by overhead of many kinds. He has ta take care of
all these expenses in our company. I know one of our ' agents who drives
75,000 miles annually to get his business which of course is extreme but the
average agent will use his car at least 5000 miles even in a city. Then there
is postage, stationery, stenographic help, printing, club, entertaining, lunches
and plenty of other things, all of which cost money. My average net income
has been about $5,000.00 recently. Earnings are less than in years prior to
1931 but a few good breaks or bad ones always deteripines whether you w'll
have a good or bad year. The average agent's income in my company is
about 40% of what it was in 1928 and 1929. I know of no single case among
the salaried employees whei-e the salary is lower than it was in 1929.
4. I believe everyone is liiore efficient if they have a definite income so they
can apply themselves to the work to be done and not be harrassed by financial
problems involving the very fundamental necessities of food and shelter. I
appreciate that this cannot be done on any uniform basis as unfortunjitely
we do not have uniform human beings which makes most of the difficulties,
in my opinion, when you try to plan uniform economies of any sort. Because
men are unequal in ability you must have some method of rewarding the people
of greater ability with greater income or they will go some other place where
they will be better rewarded for their services. I believe a definite salary with
commission paid on excess volume of business over a certain amount would
tend to produce better and happier agents. With agents on a salary basis
the companies would be more careful in their selection to begin with and they
could exercise some authority over their daily efforts, the lack of which is
one of the weak points In the agency system. It would also serve still Another
purpose in that it would force the companies to get rid of the unfit while under
the present system they often allow them to remain for years, either for
sympathetic reasons or indifference, neither of which is good for the man
himself.
5. Our particular company has the best agency contract of any life insurance
company that I know about in that it provides a life income after 20 years
based on production during those twenty years. It also provides for forfiture
in the event of leaving the company whieh tends to reduce the turnover in
our company especially if they remain in the business over two or three years.
The turnover the first two or three years is high in all companies as unfor-
tunately thero is no way to tell a good life insurance salesman by looking at
him or talking with him. I believe definitely that the great number of new and
inexperienced agents turned loose on the public hinders the sale of life in-
surance by making the approach of the capable man more difficult. The public
at large still thinks there ought to be a bounty on life insurance agents, be-
cause so many agents just waste people's time after they are given an audience.
15658 CONCENTRATION OF ECONOMIC POWER
I also believe the branch ofiBce system with the head of it on a salary basis
is the better and less expensive than the general agency system provided the
companies pay enough salaries and get capable men. General agents are usu-
ally selected because of their personal ability to produce. They know nothing
about handling men or details which is very important in developing an
organization and they usually dislike it to the end that they hire some low
salaried individual to whom they turn over this work. Naturally the low
salaried person is not very competent or he would not take the position.
6. I do not believe the selection and training in our office is very satisfactory
or that it is in very many companies. In our particular office the organizing
is done by two men both of whom are fine fellows personally but incompetent
for the work they are trying to do. Neither one knows much about handling
men which is most Important and my particular company does not pay enough
money to the men doing this kind of work. The right kind of men should
know the business thoroughly and should also have successfully sold it them-
selves and you can't get these men for $200.00 a month. In many cases we
pay less.
7. I believe the part time man should be eliminated except for perhaps a six
months period, for training and to give the man an opportunity to find out for
himself whether he likes the business aqd can make a living in it before he
breaks his other ties. Much rnisunderstanding and poor underwriting comes
from this group who render no service, are unfit and usually are chiselers of
some sort or another.
8. It is necessary to emphasize new business as that is the only profitable
operation in ari agency. . There is nottiing wrong with this if the agents are
capable and selling insurance to fill the needs of people. I believe that some-
times the agents carry their contests too far by trying to write insurance
to win a contest rather than by trying to take care of a need of the insured,
but contests do tend to stimulate some agents which I suppose justifies them.
9. I believe the number of agents should be limited. It is the only business
that I know of which anyone can get into with absolutely no experience or
any preliminary training. A business as important to the lives of half the
people of 013 • country as life insurance is should call for nearly as much
qualification "S a lawyer or doctor. Many people never use a lawyer in their
entire lifetime. The same is true of a doctor but practically every person
ultimately owns some life insurance.
To add to your suggested topics might I say that life insurance. can never
be widely distributed except by agents. It takes capable and resourcelul
men to induce people to protect their' dependents and to provide for their own
old age even when they want this protection and have the money to pay for it.
Procrastination seems to be a good part of human nature.
I believe one of the simplest methods you could use to promptly improve
the agency system would be to make the companies responsible for the acts of
their agents, pay the agents a minimum salary sufficient to take care of their
primary needs with commissions for excess volume, have a rather rigid qualifi-
cation examination before agents be granted a license and limit the number
of agents to the number of people in the various states.
Much of the misrepresentation and other difficulties the public experiences
with agents is because the agent is in desperate financial circumstances and
I believe this situation would be removed if the above suggestions could be
adopted.
Much thought is constantly given to the new agent but I believe one of the
most tragic things of this business is the plight of the old agents who spend their
lives in the business. There is something about the business which is not true
of other businesses and that is that men usually reach their maximum produc-
tion in six or seven years after which it remains level for a time and then
gradually fades out. There are plenty of explanations for this course of events
one of which is that the agent must devote more and more of his time to the
service of his old clients for which he receives no income, that he has less
vitality and energy for getting around, newer and younger agents in his own
and other companies filter into his business from all sides and his zest for
selling, which Is never easy, dies out entirely. He has then reached an age
where he is only valuable for what he knows and the insurance business only
pays on what you produce. The business is seldom remunerative enough
for even successful men to accumulate enough to retire by the time this usually
happens. So called successful men have to live on a certain scale to obtain
CX)NCENTRATION OF ECONOMIC POWER 15659
a fair volume which requires them to spend their excess earnings to produce
the volume they do.
Something should be done about this as these are the men that make the
whole institution possible, who lighten life's problems for literally millions
of widows and children and also for men and women in their old age when
they no longer are able to work. You could replace every man and woman
in every other part of the insurance business from the officers to the office
boys over-night but you could not replace the agents in years yet all the
others are secure in their income and positions until 65 when they are retired
on pensions on which they can live. They get paid for what they know even
though they often have little to do while the great group that makes all this
possible are usually in desperate circumstances as your own investigation
has already disclosed.
All these things are known to the companies and general agents and man-
agers as I have talked with many of them about it many times. They all agree
that something should be done about it yet year after year after year goes
by and just exactly nothing is done. Whether they don't know what to do
or whether no one wants to take the initial step, I don't know.
This is a rather lengthy letter but I do not believe a short one would give
you very much information. I hope you may get something out of it to
justify the time taken to read It through.
If I can be of any further service I would appreciate your calling on me.
Exhibit No. 2597
Febbttabt 21, 1940.
Deab Mb. Hbndebson : I regret that I have been unable to answer your letter
of the 9th until today because I have been out of the city, but I am glad to give
you any information that I can. For purposes of convenience, I will answer to
the best of my ability, in numerical order, the questions which you have asked.
(1) I am now a general agent for the Penn Mutual Life Insurance Company,
operating in * "■ * I have been a full-time agent, a supervisor and a general
agent. My entire income comes from life insurance.
(2) I have been in the life insurance business since 1926, or approximately
14 years.
(3) My average annual earnings in recent years has been approximately' $10,-
000 per year. This has fluctuated somewhat, primarily because in the last two
years I have taken over an agency in a territory which was pretty well run down.
Consequently, investment was required before the territory could be productive.
Therefore, my income has been reduced as far as cash earned income in the
last two or, three years. •
(4) I have many observations to make regarding agents' compensation. Since
1930 I have been experimenting with various changes in this compensation.
During the last 10 years I have tried guaranteed minimum salaries for new
agents, straight drawing accounts for new agents, combinations of salaries and
commissions, and as yet have been unable to find a system that is completely
hole-proof.
I am of the opinion that this type of experimenting has been going on with
many of our leetding companies over approximately the same number of years
and there is a definite feeling that some head-way is betng made in solving this
problem for the new agent. I am not convinced, however, that a change is
necessary. It might be helpful for new men to have some financial assistance,
but it is not a solution to the problem of their being successful in the life insur-
ance business. Fortunately, in -my opinion, the agency business is an indepen-
dent enterprise where a man is granted a franchise to sell a product and his earn-
ings are not limited by anything except his willingness to work and ability to
produce. Salaries, if they were granted, would put a definite, limitation on his
Earning possibilities, as the cost involved would necessitate the successful man
supporting some of the losses incurred by tbe unsuccessful -man. It is possible
that some change in renewal compensation might be helpful for the older agent.
(5) There is considerable turn-over in my office right at the moment, but that
is due to the fact that a rebuilding job is being done. It has been my observa-
tion that it takes approximately 18 months to 2 years to develop a man so that
he can be successful in the life insurance business. During those two years he
is learning the business and serving as an apprentice, the same as a young doctor
serves as an interne or a young lawyer serves in a law office. There are
many cases where a man finds that he is not fitted for the life insurance bust-
15660 OONCENTKATION OF ECONOMIC POWER
ness, after he has tried it for a short time. I think that that is largely respon-
sible for the so-called turn-over. There is not much turn-over of men who have
passed two years of experience in the life insurance business. In fact, I have
agents wirh me who have been in the business as long as 40 years and they are
still successful in the life insurance business.
Constant induction of new men is necessary in my territory because the haz-
ards of business in a community are the same in the life insurance business as
in any other business. Many men start in all businesses when they are young
and make changes to other businesses in which they are better adapted, and
there are bound to be changes in the life insurance business for the same reasons.
In addition, all the other things that apply to business in any walk of life
require a new crop of younger men starting in that particular field. I doubt that
anyone would question the advisability of medical schools and law schools con-
tinuing to turn out young men each year even though the field may be over-
crowded at times. In my opinion, that is what we are doing when we induct
new men into the life insurance business.
(6) I do not believe that the methods of induction and selection and training
in our office are perfect, but they are much better than they were formerly.
Today we are using psychological tests and intelligence tests in addition to per-
sonal recommendations and investigation of habits and morals, etc., before we
will allow a man to enter the life insurance business. We will not contract
with a man who does not grade in the A or B classification required by these
tests. In other words, we are using every known means available to secure a
high-type, well qualified man to represent us. There is still room for improve-
ment and reseaTch is constantly being done by us individually as well as collec--
tively to make better selection. New York state has recently passed an examina-
tion requirement for license which I think will help materially in the selection
of new organization.
(7) I am completely opposed to the idea of part-time agents in any territory
where there is sufficient opportunity for a njan to make a living. I have a
few part-time agents in the small rural towns, and I am of the opinion that
they do not do a good job of under-writing, even though they do make occa-
sional sales. In the towns of 50,000 or over we have no part-time agents and
have not had any in years.
(8) New business is most important in the life insurance field but I do not
believe that it is over-emphasized either by me or by the company. We are
trying to secure our share of quality business. By our share I mean a proper
ratio for a company of our size in the territory.
(9) I do not believe that the market for life insurance has become saturated.
Perhaps you are familiar with the recent survey made by the Curtis Publishing
Co. A large number of the people on whom they called- voluntarily said that
they would like to increase their life insurance by two-thirds. I am of the
opinion that if careful, well thought-out plans were presented to the average
person, he wovild then be able to increase his insurance substantially. In
various parts of the country there is no doubt but: that there is a larger number
of agents than there should be to do such a job. I do Jiot think that applies
to our local situation. We have in this agency a definite stated maximum
number of men we believe should represent us in each territory, and as soon
as we reach that maximum all new appointees will be replacements of unsuc-
cessful men in the organization. I think that many other general agents with
whom I am acquainted feel that a limited number of high quality agents is
far better than a large number of poorly trained representatives. I am
convinced that the trend in agency building is in that direction.
I sincerely hope that the answers to these questions will be of some help
to you in your survey. If I can be of further assistance, I will be glad to
contribute.
Yours very truly,
Exhibit No. 2598
February 14, 1940.
Dear Sir: In answer to yours of February 9, 1940, I have been employed
with my company, * * *_ since December 6, 1926. I am a full-time agent
and receive no income from any other source.
My average annual income has been approximately $2,000. My income
for the past few years has been above my own average and above the income
of brother agents of my district.
CONCENTRATION OF ECONOMIC POWER 15661
I am with a detached staff of five agents and an assistant manager; one
other agent and myself of our staff received letters from you. We tveo who
received the letters are the highest paid agents of our staff.
I attribute my earning above the average of my district to the fact that
I am inspired by the great need of money for medical care of my wife who
is a victim of migraine. I have had her treated by twenty-seven doctors.
The need for extra cash has driven me beyond a reasonable pace, and has all
but cracked my health. I have set a pace that I cannot continue. I have
sacrificed evenings and Sundays that justly belong to my family, church, etc.
I work approximately sixty hours each week.
I have a weekly premium debit of $263.00 ; a monthly premium debit of
$280.00 ; and 93 ordinary policies — a total of 600 accounts. I receive 12%
of weekly premium collections; 4%% of monthly premium collections; and
only 1% of ordinary collections. For collections on loan payments and interest
I receive no commission. My commission on a first year increase weekly
premium is 37% — 13 week contract; commisson on ordinary — 20 to 35%.
My district has averaged sixteen agents. There is now only one man who
was in the district when I began. We have had approximately fifty turn-
overs since I have been connected with the company. It is generally under-
stood by the agents that they cannot stand the push, drive, and pressure.
My company gives all new agents about two weeks' training.
We were given in June, 1938, a contract which is somewhat more liberal to
the agent in that the service salary was increased and the commission de-
creased. My company also gives the new agent a guaranteed minimum salary.
The obtaining of new business is over emphasized in our district as we are
compelled to give a written explanation for any week we fail to sell an ordinary
contract ($1,000 or over). (See enclosed exhibit #1.) Each of the agents of
our district must complete the answers to this questionnaire for each week he
fails to sell an ordinary contract or each day he fails to sell an industrial con-
tract. We are requested to make pledges from time to time as to the amount
of new business we will produce in a given time, and are reminded of same in the
manner shown on exhibit #2 enclosed.
The evil, or result, of working under the above-mentioned pressure is that
through fear of debasement or criticism we sometjmes bring too much pressure
to bear in our sales presentation and over insure or sell a rtiisfit contract.
I think that in view of the new Social Security set up and our modern present
day group insurance coverage (most every employee of the different industries
on my debit have a minimum of $1,200 Group Insurance) the market for life
insurance is, to a great extent, saturated, and if our company doesn't make some
concession we will find onrseiTes facing a crisis.
I am of the opinion that an increase in the agents' service salary would tend
to reduce the lapse rate and give the agent more time from production to give
the policy holder the service he deser^-es.
I think some of the great assets of our company should be given to the agents
to better serve the many policy holders we now have rather than oyer emphasize
the production of new policy holders to the point that we over insure or make
misfit sales. An agent with my company is salesman — collector — accountant— and
service man.
Debits shouia be reduced, service salaries increased and a small per cent for
accounting should be considered ; thus giving us more time for service and less
pressure on selling, and also an increase in renewals.
Please accept this as an earnest attempt to give you the true data you desire.
I shall appreciate your treating this as strictly confidential.
Please return the attached matter as I have a hobby of keeping all my
correspondence.
Yours truly,
IMPORTANT
In re,— Your pledge of $33,000. PLACEiy Ord. & One Placed Acci. From Sept. 6,
1937 thru Dec. 1937.
Mk. — :
Dear Sir : In view of the above and our Company's increased requirement, for
1938 Sales Congress qualification, — How do You explain the fact that y<)u'VE
124491— 41— pt. 28 62
15662 OONCENTRATION OF ECONOMIC POWER
allowed another week to go by with You "Blank" in Ord. production &/or
Writing, and "Blawk" on Accident written???
How many Ord. convasses did You make during the writing week that ended
last night? Give date of Each canv. You made? Full Name of the prospect?
Amt.? & Plan You Canvassed him for?
How many Ord. PrOvSpecting interviews did You make during the Writing
week that ended last night? Give Date of each? Full Name of the Prospect?
Amt.? & Plan? You canvassed him for?
Please have Your Exact & Definite reply on my desk Nor later than next Wed-
nesray A. M., Oct. 27th., 1937.
Thanks and regards,
Your for Success,
Exhibit #1.
10-22-39;
I am surprised that you only made one ordinary canvass (each) Thursday and
Friday. That does not indicate to me that you care very much about fulfilling
the company program of one ordinary sale each week. You realize that the
responsibility of the record of this staff is on my shoulders and I therefore must
insist that you make a sufficient number of ordinary canvasses each and every
week to give you an ordinary sale each and every week, and I know of no
better time for you to do that than on Thursday and Friday, but you cannot do
it on two canvasses.
This old stuff of "leave It to me" and "I will arrive" is getting to be the
bunk with me, for I'm looking for results and not excuses. You will please give
me a written statement outlining just what I may expect of you each day and
each week. It is necessary that I have this so I may know what course and
action to follow in my responsibility and supervision of your activities.
Regards,
Exhibit #2.
Exhibit No. 2599
Securities and Exchange Commission,
Washington, D. O.
Gentlemen : In answering your recent questionnaire I am confining myself to
personal experiences rather than generalities as it is quite possible that some
companies are seeking to correct some of the present day evils. The writer's
experiences are confined to socalled "Old Line Companies" and here he found
home office executives reluctant to face facts, in fact, one can really say that
they are so encrusted' with tradition that it is difficult for this perpetuated
clique of executives to see the bare truths of present day conditions.
I prepared myself for the profession at Wharton School of Accounts and
Finance and upon completion of my studies in 1929, I immediately entered the
fire and casualty branches of the insurance industry. From 1929 to 1936 inclu^
sive, my incomie rose from $1500. to $4cS00. I went through all phases of produc-
tion, as salaried .salesman, special agent and district manager and in the latter
two capacities it was my privilege to supervise some 100 agents.
In 1937, I abandoned the Fire and Casualty fields in favor of Life Insurance.
Although prepared to suffer a drop in income, I must admit I had no idea that
my first year income would amount to $396.58. In the second year I fared some-
what better, rising to $688.36. On the strength of my accomplishment, I was
honored with the post of Supervisor of Agenj^s in four (4) counties. Although
prepared to leave the ^^ife field, I accepted the position as I realized it woxild
give me an opportunity to study the agency system of Life Insurance but after
three months of futile attempts to correct some of agency practices, I gave up
and established my own agency. In my first year on my own, as broker and
agent, I ran up my annual income to $3700. This year I hope to hit the $6000
mark.
I found in tliis two year's excursion into the life field that the average income
of agents for this particular company was less than $500 and the condition is
about the same in other general agencies in this territory. Turnover of agents
was pathetic.
Despite my seven years insurance experience, my failure in the life venture
CONCENTRATION OF ECONOMIC POWER 15663
was assured due largely to inadequate and improper trainiug plus pressure for
production. In less than six months, I witnessed a complete turnover of per-
sonnel and as I look back over this jjeriod, I can't help but conclude that a system
of recruiting which demanded immediate production from the novice, encouraged
failures on a large scale. In fact it almost appears as if the comipanies deliber-
ately oi)erated on the theory of wholesale recruits to maintain production, figur-
ing each recruit was good for at least $25,000. among his friends and relatives.
Each new recruit is asked immediately for a list of his friends and relatives for
the purpose* of solicitation in the company of the agency's high pressure super-
visor. You are expected to begin practice on your friends and briefly your sales
argument is as follows : "Bill, I've become a special agent for . life
company. I need your application as a demonstration of confidence in me.
Frankly I don't know much about life insurance as yet but I do know that you
cannot go wrong in buying miore life insurance." And poor friend who is put
on the spot usually comes across with a $2500. 'testimonial' application and a
year or two later when you leave the field, the policy is lapsed. An effort is-
made to revive this contract but this effort consists of a 'training' call by some
new recruit, who has been sold on the idea that it may become the source of new
business someday ! Needless to say, the recruit receives no compensation for
his efforts even though successful in reinstating the policy. By this time, from
other sources, you have learned that an agent renders many a free service in
connection with old policies.
Having refused to cooperate in the matter of exposing ray friends to the high
pressure supervisor, I naturally fell for a good lot of this "free servicing".
Apparently many other companies follow this practice for .yesterday in
checking a financial statement of a billion dollar company, I noted that this
company, with pride, proclaimed that commissions paid to agents amounted to
only 5.3 cents of a premium dollar. And I also noticed that salaries to home
oflSce employees amounted to 2.4 cents ! Either pretty high priced 'chair warm-
ers' or an underpaid sales force.
Briefly, the three major evils are:
1. Improper selection of agents;
2. Inadequate training of agents;
3. Inadequate remuneration.
Secondary evils are wholesale licensing of agents without regard to market —
the part-timer in disguise (a full time agent who is appointed simply because
of contacts and makes no effort to learn the business but preys on the work
of career men, example, the retired minister, executive, black sheep of a promi-
hent family, etc.) — then we have the varying comimission scales between metro-
politan centers and smaller cfties and towns — then the regtrictions as to number
of companies an agent may represent — then we have the unethical practices
resulting in discrimination against smaller and newer companies who offer
improved contracts of insurance — and finally the danger of quota requirements,
that is, stress on new business rather than keeping in force insurance already
sold.
Inasmuch as you will, no doubt, have a wealth of information to cope with
these secondary evils, I am confining my recommendations to the three major
evils :
IMPROPEB SELECTION OF AGENTS
Each General agency should have a Personnel Director to weed out appli-
cants for sales positions rather than accept as agents every Tom, Dick and
Harry who evinces a desire to "try" life insurance. We must appreciate the
fact that the life agent is a combination of salesman, counselor and physician.
Unlike the physician and counselor, he must go out to sell his services and like
the counselor and physician, he must have the courage to lay the cards on the
table. So it takes a man or woman of intestinal fortitude to do a good Job.
Admittedly, this will raise "cain" with present set-ups. The alternative is a
system of "underwriter-counselor" with the privilege of hiring solicitors to bring
in clients but without authority to consummate contracts.
In recruiting, we should be prepared to present both the good and bad side
of our business — speak candidly about the tough, lean years ahead of the re-
cruit— the necessity for capital to finance him during this critical period — and
finally, a willingness on the part of the company to underwrite a sizeable portion
of this capital expenditure. A proper presentation of the facts will discourage
the "try anything" applicant. And investment on part of the company will
act as a brake on wholesale recruiting.
15664 CONCENTRATION OF ECONOMIC POWER
INADEQUATE TRAINING OF AGENTS
Enforce a strict oflSee training period of 3 niontlis at home oflBcc or a field
oflBce set-up for tiiat purpose. Supplement this with at least one month in
the office of the general agent and for the balance of the first year maintain a
strict control over activities — daily discussions of prospects, s:iles problems, etc.
We vpould also like to recommend a tightening of State Examinations and
furthermore Federal licensing if activities go hcyond state lines.
INADEQUATE BEMUNEBATION
Retain the commission plan but modify it to provide higher renewal commis-
sions for the duration of the policy. We recommend this in view of the high
ratio of lapses which are due largely to the fact that the agent has no incen-
tive to keep the business in force. Example: We write a small policy for Bill
Smith who lives 15 or 20 miles from the base of our operations. The policy is
5 years old. We have a stake, renewals of 5'/r for the remaining 5 years under
our contract. In all, the actual remuneration would amount to $5.00, so lapse
results. Would you drive the distance or would you use the phone? Example
#2 : Supposing John Jones purchased a 20 year Endowment when unmarried
and without family re.sponsibilities. Six years later he assumes family respon-
sibilities. He wants more protection. He presents his problem to you. You
can do one of two things — revamp his endowment and give him 2% times more
protection on whole life plan without increasing his premium outlay or you
can cancel his endowment policy and tcrite new insurance. If you rewrite
his insurance you gain nothing by the transaction as you continue to receive
the renewal rate of commissions only for the balance of period covered under
your commission contract. But if you write new insurance, you receive full
first year commissions and renewals for 9 years. What would you do? (Most
write new insurance.) Example #3: John Doe dies and you are handling the
proceeds under the policy. The beneficiary wants to invest the money. She
has heard about annuities. Can she leave the money with the Company and
draw an income for life? "Of course you can. That's why I'm here." But
does the agent tell the beneficiary that there are options which she may exer-
cise under the policy or does he explain a new annuity contract. The first
method does not yield a commission but the second method does. Which
would you follow if you enjoyed a meagre income? "A new annuity contract
ensues."
What is so sacred about life insurance that its sales agents must of necesJsity
deprive themselves of comforts of life, etc. in order to maintain lo'w cost? The
stock and bond broker charges fees commensurate with services rendered. The
merchant and doctor and lawyer does likewise. And incidentally, raising com-
missions doesn't necessarily means raising costs for a well paid man has a
knack of turning' out a larger volume, mote efBciently and with less capital
expenditure.
In conclusion life insurance companies should welcome this governmental
inquiry "if their shirts didn't need airing." Life insurance companies owe their
present strength to our Federal Government for during the World War Wash-
ington popularized insurance to such an extent among soldiers, their widows,
etc. that itwas a field; day for the life agent up until 1930. And again the
government stepped into the breach and gave it a boost with Social Security.
As the Honorable Charles Evans Hughes pointed out in 1905, life insurance
was merely enriching those in the uppfer brackets who could continue to carry
insurance through the lean years as well as the prosperous period. The per-
sons for whom insurance was primarily designed, the average person who
banded together from early Roman day.s — the Roman Collegia — to give life
to the present mammoth size companies, is ^till in the position of losing his
valuable protection every 7 to 10 years for his fortune fluctuates with the
for-tune of the Nation and he doesn't have enough resen'e to see him through
the critical period so he must cash in life insurance. And instead of permitting
that man to re-instate his policy after surrender, the companies tell him he
must purcha.se new insurance and again pay towards the overhead costs which
he helped assume when he purchased his original contract at higher premium
rates. This companies deny but do they permit the condition to exist if some
profit does not inure to the surviving policyholders. Maybe I only know
enough of the fundamentals not to know the real story.
Perhaps I am too dense to grasp the fact that 60,000,000 Americans own
life insurance. I cannot possibly see any equity in a group policy without cash
CONCENTRATION OF ECONOMIC POWER 15665
values. I cannot possibly see equities in industrial insurance for most of the
policies in force do not enjoy cash values until the pth, 7th or 10th years.
And as these two groups constitute the greater number of the 60,000,000
Americans, where does the "owning" come in. These are the 60,000,000
Americans to whom the life insurance companies appeal when the Government
steps into the picture to regulate their practices. A mythical 60,000,000 group
of owners! The same situation exists in life insurance as does in many a
private corporation, — you have a voice in the management until you try to
exercise that right.
My sincere wishes go to this brave committee for I am a buyer of insurance
as well as a sellor, and I would like to know more about the institution of
insurance.
Very truly yours,
P. S. As I fear no consequence^ this letter may be used, if it has any value,
in any manner deemed fit by the committee.
Exhibit No. 2600
February 16, 1&40.
Gentlemen : I am glad of the opportunity given me by your letter of February
9 in connection with your Commission's study of the Life Insurance business.
t answer to topic 1 : I am a full-time agent, and do not earn income from
any other source than Life Insurance.
Topic 2: Have been in the business 9 years.
Topic 3: I am not in a position to state exactly my average annual income
except that my first year's earnings were between $1,300. and $1,400., and have
increased some each year until tlie past year's earnings were $2,010. However,
there has been an average annual transportation cost to be taken out of this
of about $600. I am not in a position to know about the average annual income
of agents in luy territory. I do know, however, that my production has been
among the upper 10 or iri% of the agent.s in the branch through which I work.
Topic 4: My observations on the question of agents' compensation — I am not
convinced tliat a guaranteed minimum salary, even for new agents, is desirable,
or that a change in the ratio of renewal commissions to first year commissions
would improve the situation. I have spent the entire 9 years that I have
been in the life insurance business with the * * *,' and have in that time
been thoroughly disillusioned as to the value of the * * » agent's contract.
For example : When a new agent is hired, be is told that according to the con-
tract he is entitled to a life income after 20 consecutive years of service, during
which time he must produce a certain volume of business, annually, but is not
told, I believe, that this certain volume must be paid on a full annual basis'
during each and every * * * year. I have known of agents failing to
qualify for * * * by a narrow margin of $2,000 or $3,000 worth of business.
According to the letter of the contract, this disqualifies them' and they must
start over from there for a 20 year period before they are entitled to
their * * * pension. It is altogether possible to write three times the
required volume of business within the year and still not have the required
volume paid for on the full annual basis. If an agent quits or leaves the
services of the company for any reason, after any number of years less than
20, none of the money that has been set aside to build his * * * i)ension is
payable to him. It would seem that if an agent is entitled to an income after
20 years of service, that he should be entitled to some compensation for 10
years, 15 years, or 18 years of faithful service, but the contract fails to make
any such provision.
Topic 5: There is a large turn over of agents in the Branch Office through
which I work, due, I think, to the fact that too many men are hired as life
insurance agents who haven't the remotest possibilities of becoming successful
agents. They may be Jiired because of the belief by the agency men that they
liave a circle of friends who tliey can write some business for, or they may be
influenced to take a contract by the firm with which they have other connec-
tions, in order to write insurance for the other members of that firm. Wherever
this is the case, it would seem to be an injustice to the agents who are making
life insurance their full time life-work because the chances are very great that
after this circle of friends or business associates have secured what life insur-
1 Stars indicate Committee delectlons.
15666 OONCENTRATION OF E(X)NOMIC POWER
ance they desirei that this agent will quit the business, and the service and
conservation work in connection with the policies will fall on the aforesaid
class of agents. I believe that the continual entrance of new agents in the
business hinders the sale of life insurance more than it helps it unless a very
careful selection is made as to the type of new agents entered, and their purpose
in entering. During the recent period of unemployment, hundreds of men have
entered the life insurance work with the thought of staying only until they
could securi' other employment. Many of them have had no success at all.
Many others nave written insurance for a small circle of friends and acquaint-
ances, and due to their lack of knowledge of the business have made unwar-
ranted statements and promises in connection with the policies they have
sold. This has had a very detrimental effect on life insurance as a business.
I firmly believe that life insurance selling should be a profession, and that a
man should be required to -pass an examination that would prove beyond any
question of a doubt that he had sufficient knowledge of the business to be
capable of giving the public the kind of service, advice, and information that
they have a right to exi)ect from an institution as great as the institution of
life Insurance has grown to be. In other words, a license to sell life insurance,
in most states, means nothing more or less than that someone has paid the
license fee to obtain a license for the holder.
Topic 6: Topic 6 has been partially answered in the abov4 but, one of the
present methods used for the training of agents, in the oflSce with which I am
connected, is to send them out with old agents to call on the new agents pros-
pects, and if any business is written it is shared by both agents on a 50-50
basis, which on the face of the thing, and in the beginning, seems fair enough,
but through experience I have learned that the chances are very great that the
new agent will not continue in the services of the company, and, that after he
leaves, the old agent has those policies to service and conserve just as much
as if he had written them alone, yet he gets only half of the renewals
and ♦ * * on the policies. The renewals and * * * that would have
gone to the new agent, had he stayed with the company, apparently, revert to
the company. It would seem to me that the servicing agent should receive
some compensation for his services on policies in his territory, even though
they were put on the books by another agent who is no longer with the company,
or with the help of another agent who is no longer with the company.
Topic 7: On the subject of part-time agents, it is my belief that in a great
many cases, the part-time agent may reap the benefit of the full-time agents
efforts. For example: The full-time agent convinces a man that he has a need
for life insurance and he goes over to talk it over with his banker, who in
some cases, is a part-time agent. In which case, the banker may agree that
the thing suggested is a fine thing, but that he (the banker) -can take care of
it for him. The same thing applies to part-time agents in a great many other
lines — schoolteachers, athletic coaches, preachers, attorneys, etc., but the service
and conservation work always falls back on the full-time agent.
Topic 8: The obtaining of new business is emphasized in our oflSce to a
suitable extent, I believe. However, I believe the obtaining of new business
through new agents or new organization, as it is referred to, is over-empha-
sized. I mean by this that probably . most of the business obtained by the new
agents — too many of whom stay only a short time— would eventually be put on
the books by the old agents and full-time agents if they were given the same
leads and help by the company that is ^iven to the new agents, and at less
expense, I think, to the company.
Topic 9 : I do not believe that the market for life insurance has become satu-
rated, but I do believe that there is a lack of balance between the size of the
market and the number of men holding agency contracts and attempting to sell,
therein. I believe if the public knew that when a man appeared with a license
to sell life insurance that it was proof, or at least some evidence that he was
capable of helping solve his life insurance problems, that the interviews would
be granted very much more freely, with the ultimate result that much more life
insurance would be purchased.
Although this has no direct bearing on any topic suggested, I cannot help but
feel, as I read history,- that if the advice of John A. McCall had been heeded
some 40 odd years ago, many mistakes could have been avoided — also, many
failures, among companies and agents, including banks and trust companies.
Had this advice been heeded, I believe we would have had less than one-fourth
as many life insurance companies as we now have with as much life Insurance
in force in the United States, furnishing employment to as many people, with
CONCENTRATION OF ECONOMIC POWER 15667
virtually no history of failures and consolidations, instead of tlie situation as
it exists, today, wherein we have some 350 so-called legal reserve life insurance
companies, too many of which are trying to take refuge under the sheltering
wing of the "institution of life insurance." These facts are forcefully brought
out, I consider, by the testimony of some of the oflScials who have testified
before your committee, including Arthur Hall. The fundamental purpose of
sound life insurance is protection to homes, and savings for later years. The
year 1940 is no exception.
Please treat my name confidentially as indicated in the last paragraph of your
letter.
Hoping this is a satisfactory answer to your letter, I am
Yours truly,
Exhibit No. 2601
February 14, 1940.
Dear Sib: Receipt is acknowledged of your letter of February 9, 1940, with
attached questionnaire enclosed. My answers and comments follow.
Question I. Periodically, I am or have been a full-time agent, particularly prior
to a development of the oil industry in * * * during 1938-1939. During the
two years last mentioned I have earned some income from oil speculation to the
neglect of my life underwriting.
Question II. I have been in the life insurance business five years.
Question III. When pursued consistently and with diligence, my annual in-
come, based on first-year commissions, has been about twenty-four hundred dol-
lars. My earnings far exceed the average of other agents in this territory.
Question IV. I believe that a guaranteed minimum salary for new agents is
desirable. This would eliminate companies signing on "policy peddlers" doomed
from the beginning to failure, and would serve to. develop competent Life Under-
writers. I would not reduce the first-year commissions to increase renewal
commissions.
Question V. There is a large turnover of agents in our Agency and I believe the
same true of every other agency of every insurance company in the United States.
The continual entrance of new, untrained agents in the profession definitely
hinders the sale of life insurance and embarrasses the service of the competent
underwriter. New, untrained agents do not understand the contracts they are
peddling and cannot avoid serious m jrepresentation regarding them. This
creates an odium on the profession.
Question VI. The method of training agents in our office is satisfactory, but
the talent of the majority of those given ontracts is sometimes seriously defi-
cient. The guaranteed minimum salary, a.- J gested above, would largely elim-
inate this promiscuous giving of contracts to uil applicants.
Question VII. I am definitely against a part-time agent. He is the cancer of
the profession. Without intelligence or information he sells his family, a few
friends, folds up and is "Gone with the Wind," and leaves in his wake ill-fitting
and messed-up life programs.
Question VIII. The obtaining of new business is emphasized, but not overdone,
I believe-
Questi6n IX. I do not believe that the market for life insurance is saturated.
I do believe that the number of agents attempting to sell it is excessive. I be-
lieve this situation would be corrected if the qualification requirements, by State
or Federal process, were seriously stiffened. This would serve immediately to
eliminate the incompetents who are almost wholly responsible for over-selling.
A small percentage of their sales remains on the books for the duration of the
first year.
COMMENT
I believe that some correctional action should be taken in regard to the prac-
tices involved in the sale of Industrial Life Policies. The article sold is of stand-
ard nature but by reason of the premium collection practice, it usually costs the
purchaser thirty to forty per cent above standard rates. Generally, industrial
policies are sold to the less fortunate of our citizens.
Here in , ♦ * * the State examination for a Life Underwriter, or any
insurance agent or broker is a joke. The State Department of Insurance has
published a pamphlet listing twenty questions with answers thereto. This is
available to anyone upon request. The applicant knows in advance that he is
15668 OONCENTUATION OF ECONOMIC POWER
going to be asked ten of these twenty questions, and nothing more. It goes
without saying that any high school boy, with the pamphlet in hand and after
one hour's study, could pass with a one hundred per cent rating, the examina-
tion for the Life Underwriters required in * » *.
For obvious reasons I would prefer that you treat this letter as strictly con-
fidential.
Yours very truly,
P. S. — The part-time agent more often than not indulges in rebate of com-
missions. Here in my town sonje years ago, one of the wealthiest men here,
engaged solely in the lumber business, accepted a contract from the Mutual Life
of New York for the pui-pose of writing his own and several of his brothers' and
families' life insurance. Within the immediate family he placed about $200,000
worth of business and to my certain knowledge he never sold a policy elsewhere.
This practice is not unusual and its purpose obvious.
Exhibit No. 2602
February 17, 1940.
Dear Sir*. I am pleased to give you the following information and ideas,
as my attempt to answer your questionnaire, regarding life insurance agents.
#1. Full time Agent. Small income from undivided one-half of one hundred
acres of land, crops burnt up last six years, and the income from the land has
hereby been sufficient to pay taxes.
#2. 17 years in the life insurance business.
#3. (a) About $1,000. Work most of time among farmers. Lapses very hea^y
in recent years, account crop failures, cutting first year and renewal commissions
to a very low figure. Overhead expense very heavy on country work. Worked
at a loss for the past five or six years.
(b) Aside from the earnings of a half dozen men in my Agency, who possibly
earn from $3,000 to $6,000 per annum, the figures quoted in the second paragraph
of your letter would apply to the rest of the Agency force, in my opinion.
(c) Income has remained about the same in recent years, due to long hours
of harder work, due to short crops.
#4. (a) No observations as to the new man.
(b) As to agents who have been in the business a number of years, and who
have established policyholders of which they no longer receive renewals, but
which they must continue to service, I am in full accord with the viewpoint of
one of the successful mgn, in this Agency, who has been with the company
many years, and has been a Supervisor for the company, and is now a regular
National Club member.
His plan, as I tinderstand it, is the best of anything I've heard of. He believes
that the sale of life insurance should be put on a Commercial selling basis, that
agents are necessary, to search out and educate the public as to their needs,
that agents should be under a constant system of Compulsory Home Office
Training, and under a system of Compulsory Time Control, and compensated
to the extent that their minimum home expenses will be assured them.
His plan for new men, as I understand it, calls for careful selection, to
begin with, that such new men be carefully trained before they be allowed
to solicit the public, and a minimum guaranteed salary paid them for the
first year they are in the business, at the end of which time, if they met
the required tests, they be allowed to continue to represent the company
under the plan of finance and system of time control and training, used
for the older men in the business. For men who have been in the business,
I understand, one year or longer he advocates a drawing account of $100.00,
minimum, and $250.00, maximum, per month. Such drawing account would
be against first year commissions. This drawing account, as I understand
his idea, would be adjusted, up or down every three to six months, as necessary,
depending on the salesman's record for the period-of time.
He advocates the installation of a clerk in each Agency, to handle reports,
and to see that the system of time control of the salesmen is rigidly adhered
to. He advocates Sales Training Schools, to be conducted from the Home
CONCENTRATION OF ECONOMIC POWER 15669
Office, in each Agency, twice yearly, with charts, lectures and motion pictures.
He advocates agents' pensions to be paid for jointly by the agent and the
company under some plan of extension of renewals on old business, such
extended renewals to be applied to the purchase of an annuity for the agent.
Under his plan there would be less proselyting of agents, between companies,
and less talk among agents about General Agencies. He believes, as I do,
that if a man has a guaranteed level income, the chance to make more
money, if he is qualified, and the assurance that he will have a retirement
pension when retirement age comes, he will be ready to adopt life insurance
salesmanship, as a life career, and he will be ready and willing to do the
things necessary to make all this possible.
His plan appears to be a plan for the men and women who are planning
insurance estates and annuities for the American public. The life insurance
salesman's freedom is his worst enemy, unless he can control his time. Very
few men -are executives but most men can follow a plan laid down for them.
I have attempted, in the foregoing, to express the idea of a man who
has been a leader, in this territory and the company as a whole, for many
years.
#5. (a) Turnover larger, in my opinion, than necessary.
(b) Factors responsible for this turnover:
1. Lack of proper finance,
2. Lack of self-supervision,
3. Lack of proper training.
(c) On the theory that 20% of agents do 80% of the business, new agents,
in my opinion, do little more than help the experienced or trained agent to
finish the job of actually writing the business. New agents are necessary,
but should be carefully supervised.
#6. My answers to questions #4 and #5 pretty well answer topic num-
ber 6.
#7. Life insurance more and more is becoming a business which calls for
a high degree of technical training on the part of its salesmen, and for this
reason I do not believe there is any place in the business for the part time
man.
#8. Emphasized, but not to the extreme.
#9. (a) No. The market for life insurance, in my opinion, is far from
being saturated. The amount of life insurance owned by the great majority
of men is wholly inadequate to their family needs.
(b) I still feel that as long as about 20% of the agents sell about 80%
of the business, life insurance sales work, as a career offers a fine opportunity
to trained men and women.
I desire that my name be treated confidentially.
Very respectfully yours,
Exhibit No. 2603
Dear Mb. Geseix : I have followed the reports of your various meetings in
the trade journals with much interest. My personal opinion is that the life
insurance companies have increased their assets more due to lack of confi-
dence in other means of investment • rather than because they happen to be
who they are. I know in my own "experience that a large amount of my
business has been high-premium and single-premium business which came to
the insurance companies because the policyholder had lost faith in other forms
of investment or felt unqualified to select good investments. In other words,
the tremendous growth of the insurance assets is simply an effect rather than
a cause.
I am confident that these examinations that are being made will bring
about some wholesome changes, but I do feel that concentration of wealth
in a few companies" control is not the only evil that should be remedied.
Just so happens that I was born and raised in * * * and am proud of
it, but I am certainly not proud of our insurance laws. In the state of Mas-
sachusetts forty-eight life insurance companies have been licensed to do busi-
ness. New York about fifty-five, and out here where we have a much smaller
population and I imagine a smaller i>er capita income, we have one hundred
and fifty-four life insurance companies licensed to do business. Unfortunately,
15670 CONCENTRATION OF ECONOMIC POWER
many of these companies do not have the stability that they should. Their
standards are comparatively low and apparently the good local state com-
panies— and thank goodness we have a few — are unwilling to cooperate in
a movement of housecleaning because they feel that their business in force
as well as new business would suffer during that period. The only way
of overcoming such a situation is by some means of federal supervision.
Either forcing it onto the state or scaring them into it.
As a General Agent as well as Personal Producer, I have seen the effects
of high-pressured salesmanship in our business. Personally, I am in favor
of contracts that have lower cash values thus removing the temptation to
surrender these contracts for their cash and losing the insurance protection.
The law does not permit what I believe a popular contract and one that would
fit the needs for the public would be one that the reserve of which would
not be available for cash surrender value. This contract, if the policy-holder
was unable to carry out his. obligation to pay premiums, should go into an
automatically paid-up contract. In this way this insures the policyholder
against not having any insurance at the time of his death. When people
are under pressure they have the temptation to get their cash value with
the idea of taking out another policy when times get better, and many times
that don't happen and their families and the public suffer on that account.
Another criticism I have is that many companies use dividend illustrations
in order to show net cost and take a twenty-year period of time, yet I think
it is agreed that the average policy only stays in force about seven years, so
to this extent, at least, the companies fail to use the law of averages as they
do in many of their other calculations.
Furthermore, in soliciting prosi)ective agents they again do not use the
law of averages but show the prospect how much money can be made in this
business under various agency contracts. They do not again show this pro-
spective agent the terrific turnover in the agency force.
I think, in conclusion, ah interesting study, if you folks have the time
would be to show the number of companies doing business in the various
states and the per cent of business in force in the large major companies
in that state or done by a few of the larger ; and also show the large number
of local companies that are organized and exist for a few years and then
are reassured or in some cases become insolvent. * * ♦ j tried to get a
W. P. A. project along this line, but got very little or no cooperation out of
the State Insurance Commissioner for fear that the facts that would be
uncovered would be very revealing and embarrassing. If it were at all pos-
sible, I would be glad to cooperate with your committee along such a study
here in our own state.
Trusting I have given you a couple of worth-while Ideas, I remain
Yours very truly,
Exhibit No. 2604
De-ar Mr. Henderson : I am in receipt of your letter of February 9th and I
am very glad to answer the questionnaire you enclosed. Following are my
answers to the various questions arranged in the order in which they appear
on the blank.
1. I am engaged in the life insurance business on a full-time basis and I
have no other source of earned incomQ.
2. I have been in the life Insurance business for ten years.
3. My average annual income in recent years has varied from $3,800 to
$4,600. The average annual income of other agents in this territory will vary
from $750 per year to better than $10,000 per year. Aptitude for the life insur-
ance business and the length of time in which a man has been engaged in this
business are usually the governing factors. In other words, the man who is not
qualified for life insurance selling can never hope to earn more than a very
meagre living, whereas the agent who is qualified can earn a comfortable living
and one that should increase with his length of experience in the business.
Puring the last two years my earnings have been larger than they were for
the years immediately preceding.
4. The only advantage I can see to a guaranteed minimum salary for new
agents is that it would tend to force some companies and some agencies to do a
more careful job in selecting new men than they are doing at the present time.
This would tend to put a stop to mass induction methods which are based on
the theory of the ".survival of the fittest." On the other hand, where new men
are selected with care and then given proper training and supervision they have
CX)NCENTRATION OF ECONOMIC POWER 15671
no need of a gTiaranteed minimum salary, for their commission earnings during
the first year should be reasonable, even though they will not be as large as in
later years.
A small reduction in first year commission with increasing emphasis on
renewal commission might have a desirable effect in improving the quality of
the business written and the service rendered by the agents thereafter. How-
ever, any substantial reduction in first year commission would have a very
detrimental effect, as it would force many agents to substantially increase their
production if they hoped to survive, and this would undoubtedly result in an
increase in undesirable high-pressure selling tactics.
5. The turnover of agents in our ofiice is so small that it is almost negligible.
Aside from death and retirement, the only agents in our organization who have
failed and left the business were forced to do so because they were lazy and
unwilling to put in a reasonable day's work, or were not willing to adjust their
methods to modern selling conditions.
The entrance of new agents helps the sale of life insurance and only hinders
where the new man is obviously unqualified for the business and hence muddies
the water for the competent agent who may come along later. Occasionally, an
old-time agent who is "coasting on his oars" may be envious of the success of
a new man, but if he is honest with himself he will have to admit that this is
because the newer man is working harder and doing a better job than he is.
6. New agents in our oflSce are very carefully selected and then given a thor-
ough course of training. In this connection I have no criticism to offer, other
than that we would like to see this process more widespread with all companies
and all agencies. I feel that no man should be permitted to enter the business
unless he can measure up to certain minimum standards as determined by the
Steward Test or other competent selective devices.
7. I believe that the part-time agents should be eliminated from the business,
except in very small towns and rural communities. For the most part, such
men are poorly trained and not competent to render a worthwhile insurance
service to the public. We have no part-time men in our local organization.
8. The obtaining of new business is given reasonable emphasis in our office
because a certain amount of new business is necessary if an agent is to earn
a satisfactory living. The emphasis, however, is on quality of business rather
than volume, and I feel that is where the emphasis should properly lie.
9. I believe the market for life insurance has a long way to go before it will
reach the saturation point. Most people are grossly under-insured and they will
not buy life insurance of their own volition. They need the services of a com-
petent agent who can educate them as to the uses and value of life insurance
and then assist them in setting up a reasonable program which will be within
their capacity to pay for. As far as -number of agents is concerned, there are
not too many at the present time. However, a gradual improvement in the
type of agent employed, as well as an improvement in the training and super-
vision given to him, will benefit both the business and the public alike.
I trust that these answers will be of some value to your committee in this
investigation.
Yours very truly,
The following statement on li:fe insurance is added to the hearings
on that subject by order of Senator Joseph O'Mahoney, Chairman
of the Committee. It is offered as supplemental data furnished after
hearings had been completed.
STATEMENT ON LIFE INSURANCE
Prepared for Filing With the Temporary National Economic Committee
(Copy)
August 13, 1940.
Hon. Joseph C. O'Mahoney,
Chairman, Temporary National Econom,ic Committee,
Washington, D. C.
De.\r Senator O'Mahoney: In behalf of the signatory companies, the attached
Statement on Life Insurance is submitted, with offer of proof, for inclusion in
15672
CONCENTRATION OF ECONOMIC POWER
the record of the proceedings of your Committee. The 151 companies which are
submitting the Statement represent 60.9% of the tobil assets of all life insur-
ance companies in the United States and 63.7% of the total life insurance in
force in such companies.
According to the press, the Securities and Exchange Commission plans to
submit to the Committee several monographs on life insurance. We respect-
fully request leave to reserve the right to submit further information to your
Committee in ciise the contents of these monographs are of such a character as
to make thisi action advisable.
Sincerely yours, ^
Leboy a. Lincoln,
Chairman.
Leboy A. Lincoln,
President, Metropolitan Life Insurance Company.
Laurence F. Lee,
President, Peninsular Life Insurance Company and
Occidental Life Insurance Company of North Carolina.
M. Albert Linton,
President, Provident Mutual Life Insurance Company.
T. A. Phillips,
President, Minnesota Mutual Life Insurance Company.
E. E. Rhodes,
Vice-President, Mutual Benefit Life Insurance Company.
To the Tempoeaby National Economic Committee:
The undersigned life insurance companies respectfully submit the annexed
statement and ask that it be included in the official record of the proceedings
before your Committee.
This statement is presented for the purpose of supplementing and, in some
instances, correcting the record already made by the Securities and Exchange
Commission in pre.senting to your Committee its witnesses and exhibits relating
to life insurance.
It would be impossible in any statement of reasonable brevity to answer all
the inferences suggested in the present record, or to deal with all of the matters
upon which more adequate evidence might be presented. While the annexed'
statement does not purport to be either exhaustiv or comprehensive, it presents
facts and views of the undersigned in relation to some of those aspects of the
life insurance hearings which appear to be most in need of elucidation or
correction.
We are prepared to confirm the factual material, here submitted, by the testi-
mony of competent witnesses before the Temporary National Ek;onomic ('om-
niittee, if your Committee deems this course desirable.
Aetna Life Insurance Company
Hartford, Connecticut
Morgan B. Brainard, President
All States Life Insurance Company
Montgomery, Alabama
W. C. Jennings, President
Alliance Life Insurance Company
Peoria, Illinois
A. J. Schmidt, Executive Vice-
President
American Home Life Insurance
Company
Topeka, Kansas
W. M. Hobbs, President
American National Insurance Company
Galveston, Texas
B. Wcrkcnthin, Vice-President
American Union Life In.surauce
Company
St. Joseph, Missouri
R. L. Douglas, President
American United Life Insurance
Company
Indianapoli.s, Indiana
Oeorge A. Bangs, President
Amicable Life Insurance Company
Waco, Texas
A. R. Wilson, President
Atlantic Life Insurance Company
Richmond, Virginia
J. W. Sintori, Jr., Vice-Jt- resident
Atlas Life Insurance Company
Tulsa, Oklahoma
Johnson D. Hill, President
Bankers Health and Life Insurance
Company
Macon, Georgia
/'. L. Hay, President
Bankers Life Company
Des Moines, Iowa
Oerard 8. NoUcn, President
CONCENTRATION OF ECONOMIC POWER
1.5673
Bankers Life Insurance Company of
Nebraska
Lincoln, Nebraska
Howard S. Wilson, President
Bankers National Life Insurance
Company
Montclair, New Jersey
Ralph -H. Lomi^bury, President
Beneficial Life Insurance Company
Salt Lake City, Utah
George J. Cannon, Executive Vice-
President
Berkshire Life Insurance Company
Pittsfield, Massachusetts
Fred H, Rhodes, President
Boston Mutual Life Insurance Company
Boston, Massachusetts
Jay R. Benton, President
Business Men's Assurance Company
Kansas City, Missouri
W. T. Grant, President
California Western States Life
Insurance Company
Sacramento, California
O. J. Lacy, President
Capitol Life Insurance Company
, Denver, Colorado
Clarence J. Daly, President
Carolina Life Insurance Company
Columbia, South Carolina
A. B. Langley, President
Central Life Assurance Society
Des Moines, Iowa
Fred P. Carr, Chairman of Board
Central Life Insurance Company
Fort Scott, Kansas
T. F. Skinner, Secretary
Central Life) Insurance Company of
Illinois..
Chicago, Illinois
Alfred MacArthur, President
Colonial Life Insurance Company of
America
Jersey City, New Jersey
Charles F. Nettleship, Vice-
President
Colorado Life Company
Denver, Colorado
W. L. Baldwin, President
Columbian National Life Insurance
Company
Boston, Massachusetts
Francis P. Sears, President
Columbus Mutual Life Insurance
Company
Columbus, Ohio
D. E. Ball, President
Commonwealth Life Insurance
Company
Louisville, Kentucky
Homer W. Batson, President
Connecticut General Life Insurance
Company
Hartford, Connecticut
F. B. Wilde, President
Connecticut Mutual Life Insurance
Company
Hartford, Connecticut
James Lee Loomis, President
Conservative Life Insurance Company
Wheeling, West Virginia
Clem E. Peters, President
Continental American Life Insurance
Company
Wilmington, Delaware
Adolph A. Rydgren, President
Continental Assurance Company
Chicago, Illinois
Rollin M. Clark, Vice-President
Continental Life Insurance Company
Washington, D. C
H. A. Bartholomew, President
Cosmopolitan Life Insurance Company
Memphis, Tennessee
H. W. Durham, President
Durham Life Insurance Company
Raleigh, North Carolina
/Sf. B. Coley, President
Empire Life & Accident Insurance
Company
Indianapolis, Indiana'
James M. Drake, President
Ef|uitable Life Assurance Society of
United States
New York, New York
Thomas I. Parkinson, President
Equitable Life Insurance Company
Washington, D. C.
Gilbert A. Clark, Vice-President
Equitable Life Insurance Company of
Iowa
Des Moines, Iowa
F. W. Huhbell, President
Farmers & Bankers Life Insurance
Company
Wichita, Kans.
H. K. Lindsley, President
Federal Life Insurance Company
Chicago, Illinois
Hon. Isa^c Miller Hamilton,
Chairman
Fidelity Mutual Life Insurance
Company
Philadelphia, Pennsylvania
Walter LeMar Talbot, Pxesident
Fidelity Union Life Insurance Company
Dallas, Texas
^arle B. Smyth, President
First National Life Insurance Com-
pany
New Orleans, Loujsiana
C. E. McFarlarid,' Secretary
Franklin Life Insurance Company
" Springfield, Illinois
Charles E. Becker, President
Gate City Life Insurance Company
Greensboro, North Carolina
O. F. Stafford, President
15674
CONCENTRATION OF ECONOMIC POWER
Girard Life Insurance Company
Philadelphia, Pennsylvania
Albert Short, President
Great American Life Insurance
Company
Hutchinson, Kansas
Will 8. Thompson, President
Great National Life Insurance Com-
pany
/ Dallas, Texas
8. .J. Hwy, President
Great Northern Life Insurance Com-
pany
Chicago, Illinois
E. O. Royer, President
Great Southern Life Insurance Com-
pany
Dallas, Texas
E. P. Greenwood, President
Guarantee Mutual Life Company
Omaha, Nebraska
J. W. Hughes, President
Guaranty Life Insurance Company of
Florida
Jacksonville, Florida
George J. Guimond, Vice-President
Guardian Life Insurance Company of
America
New York, New York
James A. McLain, President
Gulf Life Insurance Company
Jacksonville, Florida
Sumter L. Lowry, Jr., Chairman
Home Beneficial Association
Richmond, Virginia
M. D. Nunnally, President
Home Friendly Insurance Company
Baltimore, Maryland
Charles H. Taylor, President
Home Life Insurance Oornpany of
America
Philadelphia, Pennsylvania
Basil S. Walsh, President
Home State Life Insurance Company
Oklahoma City, Oklahoma
Joe D. Morse, President
Imperial Life Insurance Company
Asheville, North Carolina
Gay Green, President
Independent Life & Accident Insuram-e
Company
Jacksonville, Florida
J. H. Gooding, President
Indianapolis Life Insurance Company
Indianapolis, Indiana
Edward B. Raub, President
Industrial Life & Health Insurance
Company
Atlanta, Georgia
E. T. Dobbs, Executive Vice-Presi-
dent
Interstate Life & Accident Company
Chattanooga, Tennessee
J. R. Leal, Secretary
Jefferson Standard Life Insurance Com-
pany
Greensboro, North Carolina
Julian Price, President
John Hancock Mutual Life Insurance
Company
Boston, Massachusetts
Guy W. Cox, President
Kansas City Life Insurance Company
Kansas City, Missouri
W. E. Bixby, President
Kentucky Central Life & Accident In-
surance Company
Anchorage, Kentucky
E. E. Speckman, President
Kentucky Home Mutual Life Insurance
Company
Louisville, Kentucky
Ellsworth Regenstein, President
Knights Life Insurance Company of
America
Pittsburgh, Pennsylvania
Joseph E. Reiman, President
Lamar Life Insurance Company
Jackson, Mississippi
P. K. Lutken, President
Liberty Life Insurance Company
Topeka, Kansas
Charles A. Moore, President
Liberty National Life Insurance Com-
pany
Birmingham, Alabama
Frank P. Samford, President
Life & Casualty Insurance Company
Nashville, Tennessee
A. M. Burton, President
Life Insurance Company of Virginia
Richmond, Virginia
Bradford E. Walker, President
Lincoln Income Life Insurance Com-
pany
Louisville, Kentucky
A. L. Noe, President
Lincoln Liberty Life Insurance Com-
pany
Lincoln, Nebraska
Joseph Albin, Secretary
Manhattan Life Insurance Company
New York, New York
J. P'. Fordyce, President
Manhattan Mutual Life Insurance
Company
Manhattan, Kansas
8. A. Bardwell, President
Massachusetts Mutual Life Insurance
Company
Springfield, Massachusetts
P. J. Perry, President
Metropolitan Life Insurance Company
New York, New York ,^
Leroy A. Lincoln, President
Michigan Life Insurance Company
Detroit, Michigan
Ij. J. Treanor, Vice President
Mid-Continent Life Insurance Company
Oklaharaa City, Oklahoma
R. T. Stuart, President
Midland Life Insurance Company
Kansas City, Missouri
Daniel Boone, President
CONCENTRATION OF ECONOMIC POWER
15675
Midland Mutual Life Insurance Com
pany
Columbus, Ohio
Oeorge W. Steinman, President
Midland National Life Insurance Com-
pany
Watertown, South Dakota
F. L. Bramble, Secretary
Midwest Life Insurance Company
Lincoln, Nebraska
W. W. Putney, President
Minnesota Mutual Life Insurance Com-
pany
St. Paul, Minnesota
jf*. A. Phillips, President
Missouri Insurance Company
St Louis, Missouri
H. O. Zelle, Executive Vice-Presi-
dent
Monarch Life Insurance Company
Springfield, Massachusetts
Clyde W. YovAig, President
Monumental Life Insurance Company
Baltimore, Maryland
Leo P. Rock, President
Mutual Benefit Life Insurance Company
Newark, New Jersey
E. E. Rhodes, Vice-President
Mutual Trust Life Insurance Company
Chicago, Illinois
E. A. Olson, President
National Fidelity Life Insurance Com
pany
Kansas City, Missouri
W. Ralph J^ones, President
National Guardian Life Insurance Com-
pany
Madison^ Wisconsin
Oeorge A. Boissard, President
National Life & Accident Insurance
Company
Nashville, Tennessee
C. A. Craig, Chairman of the\ Board
National Reserve Life Insurance Com-
pany
Topeka, Kansas
Holmes Meade, President
New England Mutual Life Insurance
Company
Boston, Massachusetts
Oeorge Willard Smith, President
New World Life Insurance Company
Seattle, Washington
John J. Cadigam,, President
North American Life Insurance Com-
pany of Chicago
Chicago, Illinois
E. 8. AshbrooJc, President
North American Reassurance Company
New York, New York
Lawrence M. Cathles, President
Northern Life Insurance Company
Seattle, Washington
D. B. Morgan, President
Northwestern National Life Insurance
Company
Minneapolis, Minnesota
0. J. Arnold, President
Occidental Life Insurance Company (of
California )
Los Angeles, California
D might L. Cl<irke, Executive Vice-
President
Occidental Life Insurance Company (of
North Carolina)
Raleigh, North Carolina
Laurence Lee, President
Ohio State Life Insurance Company
Columbus, Ohio
Cla7ns Adams, President
Old Line Life Insurance Company of
America
Milwaukee, Wisconsin
J. E. Daggett, Vice-President
Oregon Mutual Life Insurance Company
Portland, Oregon
W. C. Schuppel, Executive Vice-
President
Pacific Mutual Life Insurance Company
Los Angeles, California
A. N. Kemp, President
Pacific National Life Assurance Com-
pany
Salt Lake City, Utah
Carl R. Marcusen, President
Palmetto State Life Insurance Company
Columbia, South Carolina
Ashley C. Tobias, Jr., General
Counsel
Pan-American Life Insurance Company
New Orleans, Louisiana
E. O. Sinvinons, Executive Vice-
President
Paul Revere Life Insurance Company
Worcester, Massachusetts
Charles A. Harrimgton, President
Peninsular Life Insurance Company
Jacksonville, Florida
Laurence Lee, President
Penn Mutual Life Insurance Company
Philadelphia, Pennsylvania
John A. Stevenson, President
Peoples Life Insurance Company
Washington, D. C.
W. W. Chiswell, President
People's Life Insurance Company
Frankfort, Indiana
E. 0. Burget, President
Philadelphia Life Insurance Company
Philadelphia, Pennsylvania
Clifton Maloney, President
Phoenix Mutual Life Insurance Com-
pany
Hartford, Connecticut
Ai'thur M. CoUevs. President
Progressive Life Insurance Company
■ Atlanta, Georgia
R. A. Craighead, President
Provident Life Insurance Company
Bismarck, North Dakota
F. L. Conklin, Vice-President
Provident Mutual Life Insurance Com
pany
Philadelphia, Pennsylvania
M. A. Linton, President
15676
CONCENTRATION OF ECONOMIC POWER
Puritan Life Insurance Company
Providence, Rhode Island
Henry D. tiharpc. President
Reliance Life Insurance Company
Pittsburgh, Pennsylvania
W. M. Outhrie, Assistant, Auditor
Scranton Life Insurance Company
Scranton, Pennsylvania
Walter P. Stei->ens, President
Seaboard Life Insurance Company
Houston, Texas
Burke Baker, President
Security Life and Trust Company
Winston-Salem, North Carolina
E. L. Davis, President
Security Mutual Life Insurance Com-
pany
Lincoln, Nebraska
T. A. Sick, Vice-President
Security Mutual Life Insurance Com-
pany
Binghamton, New York
F. D. Russell, President
Southeastern Life Insurance Company
Greenville, South Carolina
W. Frank Hipp, President
Southern Life & Health Insurance
Company
Birmingham, Alabama
J. H. McCary, President
Southland Life Insurance Company
Dallas, Texas
A. Morgan Duke, President
Southwestern Life Insurance Company
Dallas, Texas
C. F. O'Donnell, President
Standard Life Insurance Company of
America
Pittsburgh, Pennsylvania
J. D. Van Scoten, Vice President
State Capital Life Insurance Company
Raleigh, North Carolina
Irving F. Hall, President
State Life Insurance Company
Indianapolis, Indiana
Robert E. Sweeney, President
State Mutual Insurance Company
Rome, Georgia
Oeston Garner, President
State Mutual Life Assurance Company
Worcester, Massachusetts
Chandler Bullock, President
Texas Life Insurance Company
Waco, Texas
William D. May field, Vice-President
Tharp-Sontheimer Industrial Life &
Burial Insurance Company
New Orleans, Louisiana
F. S. Onlliher, Vice-President
Travelers Insurance Company
Hartford, Connecticut
L. E. Za-chcr, President
Union Life Insurance Company
Richmond, Virginia
Mrs. Florence H. Lawler, President
Union Mutual Life Insurance Company
Portland, Maine
R. E. Irish, Vice President
United Benefit Life Insurance Company
Omaha, Nebraska
Miles Schcaffer, Secretary
United Fidelity Life Insurance Com-
pany
Dallas, Texas
D. Easley Waggoner, Vice-President
United Life & Accident Insurance
Company
Concord, New Hampshire
John V. Hanna, President
United Life Insurance Company
Jacksonville, F16rida
L. C. McCabe, President
United Life Insurance Company
Salina, Kansas
Jay W. Smith, Vice President
United States Life Insurance Company
New York, New York
George M. Selser, Vice-President
Unity Life Insurance Company
Columbia, South Cai'olina
J. R. Hoile, President
Universal Life & Accident Insurance
Company
Dallas, Texas
W, Brodnax, President
Universal Life Insurance Company
Richmond, Virginia
R. F. Holman, President
Victory Life Insurance Company
Topeka, Kansas
W. J. Bryden, General Manager
Volunteer State Life Insurance
Company
Chattanooga, Tennessee
Robert F. Evans, Vice-President
Washington NatiQnal Life Insurance
Company
Evanston, Illinois
H. R. Kendall, Chairman of the
Board
West Coast Life Insurance Company
San Francisco, California
F. V. Keesling, President
Western Life Insurance Company
Helena, Montana
R. B. Richardson, President
Western Reserve Life Insurance
Company
Austin, Texas
A. F. Ashford, President
Wisconsin Life Insurance Company
Madison, Wisconsin
N. J. Frey, President
Wisconsin National Life Insurance
Company
Oshkosh, Wisconsin
C. R. Boardman, President
CX)NCENTRATION OF ECONOMIC POWER
15677
The signatory companies include the folloivinff whose authorieatiwi was
received after this Statement had gone to press:
Lafayette Life Insurance Company
Lafayette, Indiana
Edward B. Raub, Jr., General
Counsel
Eureka-Maryland Assurance Corpora-
tion
Baltimore, Maryland
Joshua N. Warfield, President
National Life Company
Des Moines, Iowa
William Koch, President
Home Security Life Insurance Company
Durham, North Carolina
Bascom Baynes, President
Home Life Insurance Company
New York, New York
Jcmies A. Fulton, President
American Reserve Life Insurance Com-
pany
Omaha, Nebraska
Raymond P. Low, President
Reliable Life Insurance Company
Saint Louis, Missouri
B. L. Tatman, President
Suwannee Life Insurance Company
Jacksonville, Florida
White L. Moss, President
Republic Natignal Life Insurance Com-
pany
Dallas, Texas
Theo. P. Beasley, President
Texas Prudential Insurance Company
Galveston, Texas
S. E. Kempner, President
American Savings Life Insurance Com-
pany
Kansas City, Missouri
F. P. Sizer, Jr., President
Ohio National Life Insurance Company
Cincinnati, Ohio
S. J. BlashiU, Secretary
Pilot Life Insurance Company
Greensboro, North Carolina
E. C. Green, President
Great American Life Insurance Com-
pany
San Antonio, Texas
Charles E. Becker, President
American Mutual Life Insurance Com-
pany
Des Moines, Iowa
A. JJ. Hoffmun, President
Standard Life Insurance Company of
the South
Jackson, Mississippi
L. K. Arrington, Executive Vice
President
124491 — 41— pt. 2S
[1] The Test of Life Insurance — Safety
The safety record of life insurance during the past 10 years is without parallel,
notwithstanding the worst depression in modern history. Policyholders want
safety, and experience demonstrates that the Institution of Life Insurance has
not failed them, either in good times or bad.
The total assets of life insurance companies which suspended operations during
the decade 1929-1938 amounted to only about 2% of the assets of all life insur-
ance companies. The word "suspended" is used because in the vast majority of
these cases the mechanism of reinsurance, developed by the Institution of Life
Insurance, has minimized losses to policyholders. As only a part of the assets of
the suspended companies was impaired, the potential loss to policyholders was
not 2%, but less than 1% of the policy reserves. The impaired reserves are
being rebuilt by the reinsuring companies so that the maximum aggregate loss
has already been reduced to 6-10 of 1%.
As a rule, the principal disadvantage to policyholders in suspended companies
is the temporary loss of the right to surrender policies for cash or to borrow on
cash surrender values for varying periods of time. Potential losses on impaired
reserves are being reduced by the reinsuring companies and when such reserves
reach proper standards, this right again becomes available.
The safety record of life insurance, from the standpoint of the respective
States, is interesting. During the 10-year period, 192&-1938, 30 out of 45 States,
in which home offices of life insurance companies were [2] located, had a perfect
record because not a single company domiciled therein suspended operations.
The companies domiciled therein in these 30 States had over 85% of the total
assets of all legal reserve life insurance companies.
SAFETTY — THE BESTn:.T OF SOUND SITPBBVISION
This record of safety is not a fortuitous circumstance. It is the result of the
practical application of principles and methods of operation which have been
tested by a number of depressions and continually improved by private initiative
and competition among life insurance companies. Due credit also must be given
to the several States for the way in which they have protected the public
interest and encouraged sound life insurance management.
By the State Legislatures. The record of life insurance for safety is the
cornerstone upon which the confidence of the American people in this institution
is based. From the time of the adoption of the Constitution, insurance has been
a matter exclusively within the province of the respective States. As a life
insurance contract is a local contract, our State insurance laws have been
designed to protect the public interest in the light of local conditions.
Legislatures are alert for improvements and, year in and year out, are con-
tinually adjusting life insurance legislation to the economic and social needs of
their respective localities. The various State Legislatures and Insurance Com-
missioners act as checks and balances upon each other, particularly in connection
with Ill-advised insurance legislation or rulings. Furthermore, the States gen-
erally are in position to observe exi)eriments in a particular State before acting,
and this tends towards fewer but sounder insurance laws.
The Securities and Exchange Commission has put into the record a few excep-
tional and isolated incidents [3] wherein the* conduct of certain insurance offi-
cials was open to question. Its investigators had to go back some years to locate
these incidents, which apparently were put into the record to show defects in
the State system of supervision of insurance. State laws have been continuously
strengthened, but there naturally is a limit to the matters upon which legislation
can be brought to bear successfully.
In no case is it possible, of course, to instill into men by law a high standard
of ethics or good business judgment, nor can any type of supervision be relied
on to prevent all dishonesty or stupidity. For example, the vice-president of
15678
OONCENTRATION OF ECONOMIC POWER 15679
a certain national bank, working in collusion with a national bank examiner,
was alleged to have actually stolen and embezzled various sums of money. Of
course both were indicted, as they should have been. But certainly no fair-
minded man would view this unfortunate case as evidence of the weakness
either of Federal laws or of Federal supervision of national banks. The' most
that can be said about such rare incidents as were placed In the insurance
record is that they are a commentary on individual concepts of ethics and not
upon State laws or State insurance supervision.
By the Insueance Commissionees-^ Every State has some insurance regu-
latory body whose function is to administer insurance laws in the public in-
terest. These administrators, usually called Insurance Commissioners, have
very real jwwer throu^ their authority to license or refuse to renew licenses
to insurance companies, through their inquisitorial and investigatorial powers,
their authority to publicize the results of the periodic examinations of the
internal affairs of life insurance companies by public auditors or examiners,
and to request receiverships for local companies. ,
The Commissioners act together through the National [4] Association of In-
surance Commissioners on matters of common interest This organization
serves as a clearing house for information, studies broad problems, and fosters
imiform insurance legislation. The Commissioners realize only too well that
absolute uniformity is a vise which can restrict development, whereas uniformity
in principle is flexible and permits of adjustment to local conditions in the
respective States. To illustrate, the banks closed in 1933 and it was necessary
to protect policyholders against runs upon the companies. The Commissioners
met and adopted principles dealing with moratoria. As a result, many of the
States, upon the recommendations of their Commissioners, adopted legislation
which in principle conformed to the recommendations of the National Associa-
tion of Insurance Commissioners. Other Commissioners took no action, how-
ever, when local conditions in their States were of such a character that undue
drains upon life insurance reserves were not anticipated as a result of the bank
holiday.
In viewing the work of the Commissioners, it should always be borne in mind
that the regulation of any one company is seldom exercised solely by one
Commissioner, regardless of how eflQcient his Department may be, but nearly
always by a substantial number of Commissioners. As a result, most companies
must operate under the supervision of a number- of Commissioners, each T)f
whom has in mind the local situations in his particular State. This form of
supervision has been one of the primary reasons for the success of the State
supervisory system, j ^
By Private Enterprise. Probably one of the most -salutary factors, ever-
present in helping to protect the public interest, is the competition which exists
among life insurance companies. In a desire for public favor, agents are con-
tinually portraying to the public the advantages of their respective companies.
When in competition, they are not slow to point out the strengh of their com-
panies. [5] Day in and day out there is the continual education of the public
by the agents on the importance of safety in life insurance, and efforts by home
oflBce oflScials to find ways and means to improve further the safety structure of
theii respective companies.
The legal reserve system of life insurance springs from the imperative need
of safety. No life insurance company on a legal reserve basis has ever failed
because of this system. When difficulties have developed, they invariably have
been traceable to human frailty or lack of management experience, usually in
the field of investments.
The impelling force of competjtion is an effective stimulus to sound manage-
ment. The essence of life insurance competition is the continual effort to assure
the highest standards of safety, liberality, and service for policyholders at low
cost. Competition among more than 300 legal reserve companies — between par-
ticipating and non-participating forms of insurance — between large and small
companies — between Canadian and American companies— all this leads to the
constant introduction of new and progressive policy benefits. One progressive
idea after another is initiated, first by one company and then by others. When
1 For further information about some of the activities of the Insurance Commissioners
see statement filed May 27, 1940, by 13? r^> '•- •: rnce companies, for inclusion In the
record of the Temporary National Economic Comm*. ... Shearings.
15680 CXDNCENTRATION OF ECONOMIC POWER
such ideas have passed the experimental stage and their value to the public
has been demonstrated, competition usually forces their general adoption. The
companies act not only as a check upon each other but also as a stimulus, because
it must be remembered that the position of a life insurance company is never
static. Once the management of a company fails to keep its competitive position,
other companies promptly forge ahead of it in public favor. Competition among
companies is healthy and has played an important part in the development of
the proven record of safety, liberality, and service of the Institution of Life
Insurance.
[6] The Services of Directors
Certain phases of the services of life insurance company directors were con-
sidered in the course of the hearings. To measure these properly, one should
look at the results secured, because, under the law, directors are responsible for
the conduct of the affairs of the companies. There is little in the record about
the contributions of directors to the stability and success of the Institution of
Life Insurance.
While the hearings before the Tempory National Economic Committee were
still in progress, the Securities and Exchange Commission, In its Fifth Annual
Report (1939), stated that the testimony demonstrated that directors of mutual
life insurance companies are practically self-perpetuating groups, and that it is
virtually impossible for the policyholders to elect a director who has not been
selected by the existing management. The report also stated that in some cases
the directors have used their influence to bring the patronage of the insurance
companies, of which they were directors, to law firms, banks, and other business
enterprises with which they were connected.
These generalizations are based upon the most meager amount of trifling testi-
mony, and upon an infinitesimally small number of instances referred to in the
hearings. On the other hand, information about the checks and balances which
State laws, Insurance Commissioners, and policyholders exercise to insure capable
performance by companies was barely touched upon in the record.
The State Legislatures and State Insurance Departments provide various
checks on the performance of the [7] companies. Directors must conduct the
affairs of their respective companies in accordance with State insurance laws
and the rulings of the Insuraniie Commissioners. Furthermore, although life
insurance is generally regarded as one of the most thoroughly supervised of all
business activities, there is little testimony in the record dealing with this
important subject. For example, the searching inquiries, incident to a joint
periodical examination conducted by the Insurance Department of several dif-
ferent States, constitute an exhaustive audit of the financial transactions, the
bookkeeping and accounting methods, the investment policies, the management
policies, and the conduct of officials and directors. In addition, each year
every company is required to file reports of its activities, and these reports
are constantly under analysis by members of the Stbte Insurance Departments.
Other important checks, exercised by the public upon directors, result from
the quasi-public character of the business, the wide publicity given to the oper-
ations of the various companies, and the opportunity constantly afforded for
the public to satisfy itself as to the efliciency and trustworthiness of the com-
panies' management."* The right to publicize the results of Insurance Departmental
examinations is a most potent factor in the State system of supervising insurance.
Adverse reports on a company tend to impair its standing and undermine the
confidence of agents and policyholders. Furthermore, if anything detrimental
to policyholders of a mutual company develops, the Commissioners' reports will
stimulate appropriate action by policyholders through their legal right to change
the management. Legislators have surrounded this power with various safe-
guards in the interests of policyholders, including the encouragement of continu-
ity of sound management.
[8] "self-perpetuating directors"
Continuity of Sound Management Essential. All records show that in the
well-established life insurance companies there has been for many years a con-
tinuity of management which includes not onlj' officers but also directors. This
results from the intrinsic character of the business, which involves the consider-
ation f^f calculations and expectations, both as to contracts and as to invest-
ments on a long-range basis. The continuity of the contracts themselves, many
of which run for more than a generation, emphasizes the advantage of con-
sistency and continuity in management. The long record of life insurance com-
15681
15682 ■ CX)NCENTRATION OF ECONOMIC POWER
panics shows that continuity of management has not resulted in irresponsibility,
neglect, or wrongdoing, but has ueen so efficient and progressive as to bring
about a steadily increasing and widespread public confidence.
The good depression record of life insurance could not have been made except
by men of broad business experience, long contact with insurance problems, and
imbued with a high sense of integrity and responsibility. The history and result
of this policy of continuity in itself demonstrates the danger of making changes
too quickly in the personnel of such a unique and intricate business. In timeq
of stress, it is particularly valuable for these companies to have men of broad
experience — lawyers, bankers, industrialists, economists', and statesmen — avail-
able as directors.
Directors are chosen for their experience, their knowledge, their reputation
for integrity, and their critical qualities of disinterested judgment. Attendance
at board meetings is not the- only test of a director's usefulness. Many directors
serve their companies actively on various '"committees. Some directors may re-
side at a distance and serve to give their company a local point of view in
consultation on matters of policy.
[9] It is erroneous to deprecate this policy of continuity in management by
terming it "self-perpetuatioon." In most of the mutual savings banks, the gov-
erning boards are by law entrusted with the responsibility an^ power to choose
and elect their successors. Conspicuous examples of the same policy are found
in the boards of many great universities in relation to both their property
rights and the determination of educational policies.
The record contains tentative suggestions that so-called public directors of
life insurance companies be designated, presuniably by some public authority.
The Superintendent of Insurance of the State of New York has strongly criti-
cized this suggestion because of the inherent danger of pf^Utical abuse. The
question was also raised as to whether "paid" directors should be appointed to
devote their full time to the company. This suggestion also was criticized by
the New York Superintendent on the ground that it would be equivalent to
increasing the number of officers instead of encouraging outside participation in
management. There is no evidence in the record supporting the view that mofe
highly paid directors would improve the character of management. If direc-
tors were more highly paid, they might lose their status as disinterested critics
and advisers of the management.
S.\FEGUARDiNo ELECTIONS. The hearings directed specific attention to the
method of electing directors of mutual life insurance companies in the State of
New York. When a sufficient number of policyholde!:3 desire to change a com-
pany management, the Insurance Commissioner is required by law in New York
to supervise the election. Policyholders are informed of their legal rights in
this respect : for example, domestic mutual companies are required to print upon
their premium receipts and receipt books an appropriate statement indicating
that the policyholder hi^j the right to vote in person or by proxy, stating the time
and place of the [10] next annual meeting and advising that groups of policy-
holders have the right to nominate one or more independent tickets.
As policyholders in mutual companies, incorporated in New York, have the
right to file nominations and elect directors, the Superintendent of Insurance
is authorized, in his discretion, to require the company to furnish a list of
policyholders on application to him by 25 policyholders. Independent nomina-
tions may be made by any group embracing one-tenth of 1% of all policy-
holders with policies of $1,000 or more. But the performance of the life insur-
ance companies has apparently been so satisfactory to policyholders during the
past 35 years that only onp other State, Wisconsin, has deemed it necessary to
provide in detail by statute for the nomination and election of directors. Since
1905, in New York State, there have been only three contested elections.
Neither a State law nor intensive company efforts necessarily result in large
scale voting by policyholders. The questions asked in the hearings before the
Temjwrary National Economic Committee, criticizing by inference the present
laws and regulations of New York relating to company elections, are answered
by the fact that when management conducts the companies solely in the inter-
ests of policyholders, the latter do not want a change and cannot be forced
to interest themselves in changes. The practical difficulties of increasing policy-
holder participation in elections is fully dealt with in the report of the l,ew
York Superintendent of In.surance for 1939. He called attention to the sub-
stantial expense involved, which would decrease dividends to the policyholders
in mutual companies, and to the clean record made by the companies, as an
answer to suggestions that wider participation by policyholders is necessary.
CONCENTRATION OF ECONOMIC POWER 15683
In his latest annual report, the New York Superintendent of Insurance also
emphasized that, in considering any changes in the laWj care must be taken not
[11] to encourage attacks by those seeking control for their own selfish purposes.
Competent government control, both in legislation and supervisory machinery,
has been developed for the specific purpose of protecting the interests of policy-
holders and relieving them of responsibilities for which they ordinarily are
not equipped. These policyholders have a right to rely, and do rely, upon
State officials, and particularly Insurance Departments, to watch the perform-
ance of their companies and give publicity to their affairs. Hon. Charles E.
Hughes, the counsel for the Armstrong Committee of the New York Legislature
which investigated life insurance in 1905-06, said, 20 years later :
"It is well that policyholders should have the opportunity to correct
improper management, and their power though latent must be real; they
must have the final control. But if they undertook to manage affairs
directly, they would make a mess of it. How to obtain the safeguard of
ultimate control by those whose interests are at stake, and the continuity
and efficiency of expert management, without the intrusions and insin-
cerities of politics or the fantasies of dreamers, that is the great problem.
It has been solved to a gratifying degree in your case."
Further answer to the questions raised in the hearings is that it is difficult
to see how greater policyholder i)articipation could improve the soundness of
the managerial methods or increase public confidence. The special character of
this business was never sufficiently emphasized in the hearings. Hon. Louis H.
Pink, New York Superintendent of Insurance, in his report of 1939, answered
many of these criticisms in detail and in particular said :
"Directors of life insurance companies are trustees for policyholders and
the public. It can only be harmful to the interests of policyholders if the
[12] managements of our great life insurance companies are too easily sub-
ject to change."
Referring to the criticism that the present laws do not make participation
in elections sufficiently easy for the policyholders, the Superintendent also
said:
"No matter what is done in the way of additional notice, it is question-
able whether any great increase in voting by policyholders will result."
"inteblooking" directors
Confusion was created in the record by the use of the phrase "interlocking"
directors and at no place was the phrase defined. The term was used to sug-
gest that members of the boards of directors of life insurance companies were
also members of boards of other companies from which were purchased sup-
plies, services, or investments. Insinuations were made that the presence of
one director on two different boards inevitably results in conflicts of interest
or in some kind of sinister unity of business managements.
The record of the hearings contains no proof and no suggestions that any
laws hlave been violated by any life insurance director or that any tendency
toward monopoly has resulted when a director has served on more than one
board. The record analyzing the 26 largest companies suggests no instance in
which a director of a life insurance company controlled or selfishly infiuenced
the decisions of his fellow directors, either in that company or in any other
corporation.
Certainly there can be no complaint of "interlocking of directorships among
life insurance compaines. Out of 533 directorships of 31 of the larger life
insurance companies, only eight are filled by men who are on the boards of
more than one of these companies.
The criticism, that in some cases directors used their influence to obtain busi-
ness for firms or institutions with [13] which they were connected, is best
answered by the intensive efforts the Securities and Exchange Commission
devoted to this phase of its investigation and the extremely meager evidence
offered on this subject. The scantiness of the testimony in contrast with the
size of the Institution of Life Insurance, in itself demonstrates how rare were
these instances, vi'hich in the main were of trivial character. In none of the
few transactions specified does the record make any suggestion that the policy-
holders suffered loss or disadvantage. Whatever may be the theoretical view
of the result of a man's acting simultaneously as a director of two or more
15684 CONCENTRATION OF ECONOMIC POWER
companies, in the analysis of the 26 largest companies there was no proof of
any material conflict of interest on the part of any director, much less a
conflict of interest which did harm to the interest of the policyholders.
The State statutes strictly regulate the conduct of directors and oflScials in
various ways, for example with respect to commissions and brokerage charges
upon loans made by the companies, and these laws have been complied with. A
further answer to criticism in the record is found in the fact that the constant
supervision by State oflScials provides a sufficient safeguard against the possibility
that a director or officer may profit inCJproperly by reason of his directorship.
The Committee's Examiner put in evidence a table showing the investments of
the 26 largest life insurance companies in the securities of other companies, one
or more directors of which were directors of the insurance companies. Although
the witness testifying to these investments disclaimed any.-intention to criticize
these purchases because of-thei* character or because anything improper took
place, it was asserted that they showed "a' degree of concentration of mutuality
and inter-dependence." *
Life insurance investments are strictly limited by laws [14] aiming to secure
the safest possible types. The broad scope and diversification of life insurance
investments emphasize the desirability of selecting as directors men of char-
acter and varied experience in different kinds of business. If men of this caliber
are chosen us directors, the other companies in which they are interested would
ordinarily be well-managed companies and might well have outstanding the
highest tyi)e of security in the fields to which the investments of the life insur-
ance companies are limited. There is no evidence in the record that in any of the
26 largest companies whos"e investment policies werd particularly scrutinized
by the Securities and Exchange Commission, any director suggested, recommended,
or participated in by vote, the purchase by his life insurance company of securities
which resulted in personal profit to him. The only testimony on this point is
directly to the contrary and does not support the statement that there exists ""
degree of concentration of mutuality and inter-dependence."
The skill and integrity of management in the all-important field of investments
amply justify the comment of Commissioner Henderson that the showing made by
the 26 largest companies "in the 10-year period of the worst experience that
investments ever suffered" was "an extraordinary record as far as the integrity
of insurance assets are concerned."^
RESULTS INDICATE CONFIDENCE OF POLICYHOLDERS
In short, the answer to the"" criticisms and inferences suggested in the hearings,
with reference to directors, is found in the admirable record of performance by
the life insurance companies and in the further fact that the directorates of life
insurance companies contain the names of so many men widely respected for their
sense of responsibility and integrity. All of these important [15] facts also re-
flect the efficacy of the present form of State supervision of life insurance.
The extent of public patronage in itself demonstrates that policyholders are
satisfied with the existing management and have entire confidence in the safety
of their contracts. Today about half of the total population is protected by life
insurance and, except for a brief period during the worst of the depression, the
number of policyholders has been constantly increasing. The percentage of total
population now owning life insurance is about four times larger than it \yas 40
years ago. On the average, each policyholder owns about twice as much life
insurance as in 1900. Equally significant is the substantial volume of new business
received by most companies from old policyholders.
» Supra F. 14805 ; see Exhibit No. 2265, appendix, p. 15495.
* Supra p. 15403.
[16] Size and Its Economic Aspects
Certain statistics and testimony were presented which showed the scope of
the life insurance business with particular reference to the amount and concen-
tration of insurance assets as well as the present size of the larger life insurance
companies. This evidence implied that insurance companies are exercising con-
trol over the national economy in such a manner as to require restrictive
limitations.
These inferences are in part the result of a failure to put in evidence pertinent
facts as to life insurance, such as those relating to its historical development,
the growth of national wealth and savings, information about the important part
life insurance investments have played in the national social and economic
development, and various trends which show that over a period of years the
larger companies have a declining percentage of the total assets of all companies
and that the growth of life insurance companies outside the Northeastern States
has been increasing. In short, the testimony and suggestive questions may be
answered by an analysis of the actual use of life insurance assets and the effect,
if any, which the size of the companies and their assets have had upon the
national economy.
OOMPAEATIVE GBOWTH OF MFE IN8UBANCE
In the years between 1900 and 1939, total life insurance in force in United
States companies grew from $8,600,000,000 to $113,800,000,000. In 1900, there
were 76,000,000 people in the United States, of whom only [17] 10,000,000 owned
life insurance. By the end of 1939, the population was 131,000,000, of whom
64,000,000, or approximately one-half, owned life insurance. In 1900, the cor-
responding average per capita coverage of those who owned any life insurance
was approximately $850. Today it is slightly more than double that figure, or
about $1,775.
Thus it is seen that the growth of life insurance is accounted for by two facts :
first, the average person owning life insurance today has slightly more than
double the amount owned in 1900 ; and second, one-half the i)opulation owns life
insurance today, whereas only between one-seventh and one-eighth of the popula-
tion had any life insurance in 1900.
It was suggested in the hearings that so much life insurance has been sold that
the market is now saturated. This is not the case. A recent survey by the
Curtis Publishing Company shows that 50% of the present ordinary policyholders
interrogated, and over 60% of the industrial policyholders, believed that they
were not adequately insured.
Until the depression, the assets of all United States legal reserve life insurance
companies grew at approximately the same rate as savings and time deposits in
banks, and at a slower rate than the assets of all building and loan associations.
The respective rates of growth are shown on the chart on page 18.
The customer growth of several other types of business has far exceeded that
of life insurance during the years of America's greatest economic growth. The
chart on page 19 compares the rate of growth of the customers in life insurance
with the growth in passenger-car registrations, domestic electric customers,
telephones, homes with radios, and gas customers. This shows that life insurance
owners have increased at about the same rate as telephone subscribers, slightly
faster than gas customers, but not as fast as owners of passenger autos, domestic
electric customers, or homes with radios.
[20] The growth of life insurance assets is interrelated with the level pre-
mium method of life insurance operation. Since this method is discussed in
some detail in a later section, it is sufficient to point out here that the level
premium basis requires the accumulation of reserve funds in order that con-
tractual obligsftions of the companies may be discharged upon their maturity.
As these reserve liabilities grow, the assets of the life insurance companies
must grow correspondingly.
15685
15686
CONCENTRATION OF ECONOMIC POWER
[18]
Assets of formal savings institutions in U. 8.
. I I I I
1910 '15 '20 '25 *30 '35 19^0
Sources : Spectator Co., American Hunkers Association, U. S. Treasury, etc.
This chart sjiows how the rate of growth of life company assets compares with the
rate of growth of other ttnancial institutions bacic to 1910. (All Curves Plotted on
L,ogantnmic or 'Ratio, ' Scale to P"'acllitate Comparisons as to Relative Rate of Change )
CONCENTRATION OF ECONOMIC POWER
15687
fl9] The rate of customer-growth of various types of business compared unth
that of life insurance
I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I
■*' I ■ ■ ■ ' I ■ ' ■ ■ I ' ■ ' ■ I ' ' ■ ' ' ■ ■ ■ ' I ■ ■ ■ ' I ■ ' ' '
1900
*05
N6
*20
'ZS
"30
"35
1940
Sources : Association of Life Insurance Presidents, Automobile Manufacturers Association,
U. S. Censuseft, etc.
This chart shows how, over the years, a greater and greater number of people have
recognized the value of life insurance by becoming policyholders. (All Curves Plotted on
Logarithmic, or "Ratio," Scale to Facilitate Comparisons as to Relative Rate of Change.)
15688
CONCENTRATION OF ECONOMIC POWER
All of the money which a life insurance company takes in will be ultimately
paid out. The money received for life insurance, together with all increments
(With the exception of a total for the entire industry of %o of 1 cent of every
dollar of income during the last ten years), is either paid to policyholders or
beneficiaries, paid back as dividends to policyholders, added to the reserve to
assure the payment of claims at maturity, or used in the various expenses of
the business. The %o of 1 percent is paid as dividends on the capital supplied
to those comoanies which have stockholders.
- LEGAL LIMITATIONS OF NEW BUSINESS
The size and growth of life insurance companies was the subject of legisla-
tion about 35 years ago. The first statute on this subject limited the amount
of new ordinary insurance, which the companies in the largest classification
could write, to $150,000,000 aijnually. As the weaknesses in this artificial ceil-
ing became apparent, it was decided that as a matter of public policy the
limitation on new business should be related to legally prescribed maximum
standards of expense. Accordingly, in 1910, the law was amended so that the
limitation on new business was related to the amount of renewal insurance
expenses on ordinary business. Later such limitation was changed so that the
volume of new business is definitely related to first year expenses.
[21] The Insurance Commissioner is authorized to suspend the legal limita-
tions under certain conditions. If, after an examination or investigation of the
agency operation of a company, it is found that the business is being prop-
erly and economically conducted and that the statute dealing with' the expense
limitations is being complied with, the limitations may be suspended in accord-
ance with the law. It is interesting to note that companies with about 83%
of the total life insurance in force are subject to such statutory provision, which
relates the maximum increase in new business in any year to their economy
of management. Several States impose limitations on expenses which have the
effect of limiting the amount of new business a company may write. Com-
panies which are not subject to legal limitations on new business watch their
acquisition costs so that they may not be af a disadvantage with their competi-
tors.
LIFE INSUBANCE ASSETS AT WORK
Emphasis was placed in the hearings upon the fact that more than 74%
of life insurance assets were held by companies domiciled in the Northeastern
States, and the inference was drawn that the "control" of such assets in these
localities was contrary to the national interest. The witnesses presented by the
Securities and Exchange Commission laid emphasis upon the locale of the
home oflices, but failed to give consideration to the actual wide geographical
dissemination of investments. The table on page 22 shows how important it is
when considering the assets of companies domiciled in the various States, to
take into account the distribution of the total life insurance investments in
different parts of the country.
[22]
Classification of assets (December 31, 1937)
Regions
Percentage of
total assets of
all U. S. com-
panies beld
by companies
domiciled in
the indicated
regions
Percentage of
total assets of
U. S. compan-
ies invested in
the indicated
regions
1. New England
17.8%
63.5
9.4
3.9
1.9
.7
1.1
.2
1.5
5.4%
2. Middle Atlantic
30.0
3. East North Central-
21.3
4. West North Central
12.2
5. South Atlantic
9.6
e: East South Central ,
6.4
7. West South Central
6.4
8. Mountain
2.7
9. Pacific
7.0
Total.".
100 %
100 %
CONCENTRATION OF ECONOMIC POWER 15689
Although the assets of the companies domiciled in New England represent
iT.8% of the assets of all United States legal-reserve life insurance companies,
nevertheless there is invested within that area only 5.4% of such total assets.
rhe Middle Atlantic region (New York State, New Jersey, and Pennsylvania)
hows that companies domiciled there have 63.5% of the total assets of all com-
anies, but only 30% of all the companies' assets are invested there. Altogether,
1 he New England and Middle Atlantic States contain the domicile of companies
I wning more than 81% of all life companies' assets; still those regions enjoy,
) I assets at work, about 35%, or considerably less than half of their total assets.
1 he needs of the New England States for capital from life insurance are relatively
small.
On the other hand, the three groups of States which the census classifies as
Southern have less than 4% of all the life companies' assets on the domicile
basis; but [23] that region enjoys the investment, within its borders, of more
than 21% of all companies' assets. Similarly, the two groups of North Central
States total 13% on the domicile basis, but 33% on the basis of actual life insur-
ance funds at work. The figures shown in the last column of the table on page
22 relate to the assets of all companies, and not merely to the assets of the
companies domiciled in a particular geographical section.
Furthermore, comparison of this column with extensive economic data, sim-
ilarly organized, would reveal conclusively that life insurance investments are
disseminated among these nine regions in a way which conforms in general with
the capital needs of the respective sections of the country.
About one-half of the total reserves of companies domiciled in the New England
and Middle Atlantic States arise from premiums paid by policyholders residing
in those areas. Over 69% of the reserves of these companies are invested in
other areas.
Accordingly, it is clear that life insurance funds are not concentrated in the
localities of the larger companies' home offices. On the contrary, they have con-
sistently been flowing into those sections where the country has been developing
capital needs.
Life insurance companies in their investment operations are restricted both by
managerial choice and by law to the best-grade investments. Their position as
quasi-trustees would permit no other course of action. As such, they seek pri-
marily safety of principal, together with as adequate and stable investment
income as possible. Competition for seasoned investments is keen among life
insurance companies and between them and other investing agencies.
The existing methods of investment give free play to the flow of funds accord-
ing to the law of supply and demand. Life insurance funds, within the principles
of safety, enunciated above, have always flowed to that part [24] of our ecogomy
in which they are needed most. This is true both as to types of investments in
which the funds have been placed, and as to the geographic areas where needed.
In fact, the character of life insurance company investments has always varied
in response to changing economic trends. For example, when the railroad indus-
try had become seasoned, substantial amounts of life insurance funds flowed into
the underlying types of railroad bonds. Later, as the public utility industry
developed, and still later as industrial enterprises of one type or another grew
to investment caliber, life insurance company investment funds have also become
important factors in their progress.
CONCENTRATION OF LAKGEE COMPANIES IN THE NORTHEASTERN STATES
As indicated previously, emphasis was placed, during the hearings, on the fact
that the great bulk of insurance assets are held by a relatively small number of
companies located in the Northeastern States. No study was presented of the
economic factors responsible for the relative growth of the various companies in
the business throughout the country.
The economic life of America began in the Northeastern States, as a Securities
and Exchange Commission witness pointed' out in the savings and investment
hearings.' Business organizations of most types are older in these sections of
the country than elsewhere. There is likewise a substantial geographical con-
centration of life insurance companies in the Northeastern area — not with re-
spect to the number of companies, but with respect to their size. This is due
primarily to the age of the companies in these locations ; the median age of the
* See testimony Dr. Davenport, Hearings, Part &, p. 3770 et seq.
15690 CXDNCENTRATION OF ECONOMIC POWER
16 largest New York area and New England companies, [25] which the witness
stressed, is about 90 years.
It is significant that as the rest of the country has developed, there has
been a rapid establishment of life insurance companies in the newer areas.
Practically all life insurance companies started during the past 35 years have
located in areas outside the Jf^ortheastern States.
The number of companies has increased from 76 in 1900 to more than 360
today. During the formative and growing years of the newly established com-
panies, much material bearing on mortality exi)erience, underwriting practices,
administrative and management problems has been made available to them by
the older companies. This material has aided in their development and has
helped bring about a wider distribution of companies over the United States.
The companies of the Northeast are growing at a slower rate than the smaller
companies. In 1881, assets held by companies domiciled in New England, New
York and New Jersey, constituted 90% of the total assets of life insurance
companies. By 1900, companies there domiciled held only 83% of assets, and
by 1936 the ratio had dropped to 76%. In 1881 life insurance companies were
domiciled in only 16 States. Between 1901 and 1911 there were 23 additional
States that hg,d life insurance companies domiciled wilihin their borders. One
hundred and thirty-one life insurance companies now in existence were founded
during the past 20 years, and 90% of these companies are located outside New
England and the Middle Atlantic States.
Another answer to the charge of undue concentration is that, in their growth,
the individual companies throughout the United States have been highly com-
petitive. Ther6 has been a tremendous shift in the relative position of Individ--
ual companies, as will be seen by referring to the chart on page 26, which deals
with life insurance in force. The company which was largest in 1900 has now
dropped to third place. In 1900, it had 14% of the [27] life insurance in force
among all companies, but today has only 6%. The company which was second
in 1900 is now in the ninth position, and the company which was third in 1900
is now in fourth position. The company which is first today was fourth in
1900, the second company fifth, and the third company first, while the fourth
company was third and the fifth company was 16th. Likewise, the company
ranking 38th in size in 1900 has moverf up to 14th position.
It is to be noted that the older companies are growing at a slower rate. In
1900, the younger companies had 15% of the total insurance in force ; they now
have nearly 25% of the total. The five leading companies of 190O held 63% of
all life insurance company assets; today the proportionate share of those iden-
tical companies is down to 29% of the total.
LIFE INSURANCE ASSETS AND ECONOMIC CONTROL
Life insurance companies in their capacity as investors are primarily creditors.
Except temporarily in certain si)ecial situations, such as default, life co-apanles
as creditors take no part in the management of business in which they have
investments. Furthermore, their investments include an insignificant percentage
of common stocks — less than % of 1% for the country as a whole. In many
States, the laws prohibit such investments. Life insurance companies rarely
have voting powers in corporations to which they lend money, and so do not
and cannot "control" the economic life of the country.
It was implied that the size of the investment operations of life insurance
companies in bonds is such as to give them an undue power over the national
economy. No such power exists, as may be seen from the chart on p'age 28.
In not one of the investment classes shown does the largest life insurance com-
pany investor hold more than about 5% of the total investment of all investors
[29] combined. And in no one class does the entire life insurance business, em-
bracing over 300 campanies, hold as much as 25%. In most investment classes
the proportion held by the largest single life insurance company, and by all life
insurance companies combined is less than those just mentioned — being 2% to
3% for the largest single holder and 10% to 15% for the companies combined.
The picture may be more readily visualized by noting that investors other thmi
life insurance companies account for 76% to 91% of every one of the major
investment classes charted.
CJONCENTRATION OF ECONOMIC POWER
15691
[26] How companies have shifted since 1900 in comparative rank and percentage
share of total life insurance in force
100,0%
(RANK OF THE 16 ^
1900 LEAOERSy
-At
CO. A I
CO.B
/rank OF THE 16 \
I 1936 LEADERS/
CO.C 3 -
C0.0
15.5%
CO.E
N
\ /
\ / ^^
\
\
/
/
/
/
I CO. D
100.0%
2 CO.E
^ 3 CO. A
\
\
\
— *- — — "■" ~~" v^r~ "y ~ ^\~
/
/
CO. c
9 CO.B
23.3%
/.
0.0%
^
0.0%
Source: Official annual statements of the companies.
This chart provides evidence of the Iseen competition . characteristic »' the life insur-
ance business. It also shows how the smaller companies (black area have been able
tofncrease substantially their percentage share of total life insurance in force.
15691^
UONCENTRATION OF ECONOMIC POWER
EaiBONEX>US DATA BEOABOINQ CONCENTRATION
A number of statistics ofifered in evidence by the Securities and Exchange
Commission were taken from secondary sources not wholly reliable for compara-
tive purposes, for instance, the statistics in Exhibit No. 221 ' showing relative
importance of savings institutions. Furthermore, the chart based on these
statistics contains an error "of one billion dollars.
Other presentations of statistics contain substantial errors, such as Exhiibt
No. 227 ^ comparing total new issues of bonds and notes with new issues acquired
by the 10 largest life insurance companies annually, 1930-1938. The statistics
of total new issues were talten by the Securities and Exchange Commission from
the Commercial and Financial Chronicle. Acquisitions by the companies were
[28]
Comparative percentages of bonds and mortgages held by life insurance
oom-panies and all other investors, December SI, 19S7
ALL INVESTORS OTHER
THAN LIFE COMPANIES
key:
LAR3EST
LIFE COS. OTHER HOLDER
THAN LARGEST AMONG
HOLDER LIFE COS.
^ D
PERCENT
40 50 eo
U S. GOVERNMENTS
LOCAL GOVERNMENTS
RAILS
PUBLIC UTILITIES
INDUSTRIALS
(INCL. MISCELL.)
FARM MORTGAGES
URBAN MORTGAGES
40 50 eo
PERCENT
Source : T. N. E. C. Proceedings, and official annual statements of the life insurance
companies.
This chart shows that investors other than life insurance companies have the over-
whelming share of holdings in each of the major investment classes shown above.
taken from their records, which plainly show that they included a number of
classifications not reported in the Chronicle, such aS registered bonds acquired
in exchange for coupon bonds, securities acquired in exchange on a reorgani-
zation, and many miscellaneous types of issues, etc.
The data which the Securities and Exchange Commission treats as comparable
in Exhibit No. 227 are not comparable in at least six ways ; and all six overstate
the [30] percentage of tlie 10 life companies' new purchases of the total bond
flotations. Applying the six corrections, the figure for l.)34, for instance — in-
stead of 52.5%— is found to be not much over one-third as great as was claimed
for the 10 companies. Even the Securities and Exchange Commission's own
> Hearings, Part 4, pp. 1189, 1513.
» Ibid., pp. 1222, 1520.
CMDNCENTRATION OF ECONOMIC POWER 15693
figures, as presented a year later,^ show that the ratio for 1934 was only 23.7%
of all new issues — and that percentage was for 25 companies, not merely 10.
Yet the Securities and Exchange Commission's witness, in his testimony pre-
senting his revised results, did not, at any point, seek to alleviate the grossly
unfair exaggeration which had been impressed upon the minds of the Committee
a year before,' when Exhibit No. 227 had been introduced. Other objections
could also be raised — for instance, to the economic abnormality of a period
like 1930-38; in several of those years, the total for corporate bonds and notes
floated was phenomenally smaU, thus inevitably accentuating the life companies'
apparent percentage dominance in the bond market.
The facts set forth under the heading of Size and Its Economic Aspects
demonstrate " that the {rend is not toward, but away from, concentration of
life insurance assets, measured either geographically or by size of individual
units. Furthermore, there is no control over the national economy by life
insurance companies. Instead they are serving as an ever-present but silent
ally in efforts to improve continua,lly the social and economic structure of our
country.
1 Hearings, Part 10-A, p. 125.
" Hearings, Part 4, pp. 1222, 1520.
124491—41 — pt. 28
[31] Misleading Definitions
Ordinary, industrial, and group insurance are the three types of life insurance.
Their definitions are commonly understood to mean :
1. Ordinary — Life insurance for the individual who can afford to pay premiums
for $1,000 or more of life insurance on an annual, semi-annual, quarterly, or
monthly basis. This insurance is designed to protect the family in the event of
the death of the policyholder, to assure the education of children, to provide funds
to pay off a mortgage or for retirement in old age, to pay estate taxes, and for
many other purposes. The average amount of the ordinary policy is about $2,150.
2. Industrial — Life insurance for those who cannot afford ordinary insurance,
but can pay small weekly premiums or slightly higher sums on a monthly basis.
The purpose of industrial insurance is, in general, the same as ordinary, except
that the amount of insurance involved is smaller ; for example, the face value of
the average industrial weelily premium policy is about $250.
3. Group — Life insurance arranged by an employer to insure his employees
under a master contract.
Great stress was placed by the Examiner for the Securities and Exchange
Commission in trying to characterize industrial insurance as "burial" insurance.
Nothing could be more erroenous, because Industrial policyholders have the same
hopes and ambitions as ordinary policyholders, the only difference being the
former are usually in more modest circumstances. Accordingly, we [32] find the
proceeds of industrial insurance policies being used for substantially the same
purposes as ordinary.
Misleading statistics also were presented by the Commission. Throughout the
hearings, statistics were repeatedly put in evidence and testimony was offered on
the basis of the 10-year period 1929-1939. As this period included the wxjrst
depression of modern times with all of its accompanying demoralization of earn-
ings, living conditions, investment values, etc., it embraced an abnormal period
of operation in the business of life insurance.
This method of presenting testimony has minimized and obscured the progres-
sive achievements and the trends of improvement in the business of life insurance
during the last half dozen years. In and of themselves, these provide an answer
to many of the criticisms made during the hearings.
15694
[33] Life Insxxrance Lapses
The record built by the Securities and Exchange Commission on the subject oi
lapses clearly implies that life insurance companies are responsible for them.
This of course is not in accordance with the facts. There is little in the record
about the intensive efforts of the companies to keep terminations of policies at a
minimum consisting with the welfare of policyholders ; in fact, the reduction of
lapsation is one of the major objectives of every life insurance company.
The record is based on a number of incorrect assumptions about the nature of
lapses, for example, that a surrender represents a "frustration" of the purpose
of the policyholder in arranging for life insurance ; that rapidly growing com-
panies show the highest lapse ratio ; that every one but the company loses on a
lapsed policy, and that lapses are caused by the desire for growth of companies
and by agency pressure.
The testimony was further confused by the frequent use interchangeably of
two entirely different kinds of "lapse" — (a) termination o"f a policy not having
cash or other nonforfeiture value (which is a "lapse"), and (b) termination with
nonforfeiture value prior to maturity (which is known as a "surrender"). A
nonforfeiture value is generally allowed at the end of the second or third year.
BASIO CAUSES OF LAPSES AND 8UEEENDE38B
The experience of the life insurance companies indicates that the most im-
portant causes of lapsation and [34] surrender are unfavorable economic factors.
It is common knowledge among life insurance companies that as the curve of
general business conditions goes down, lapses and surrenders go up. As business
improves, such terminations decline.
The fact is little known that even the United States Government's own lapse and
surrender experience with its "converted" life insurance is subject to the effects
of economic conditions. The veterans who chose to convert from the war risk
term policies to the standard forms are a relatively small and self-selected
group; yet their net voluntary termination rate trebled between the prosperous
year 1929 and the depression jear 1933. The theory that the dominant cause of
voluntary terminations is "over-selling" does not square .with the facts, for the
Government's converted insurance — where there is no real "selling" — can hardly
be said to suffer from "over-selling." In the light of the Government's own ex-
perience, it is not unnatural that the life insurance companies' experience likewise
varies in response to general economic conditions.
The situation is illustrated by the history of ordinary insurance, as shown by
the chart on page 35. This covers the depression of 1921 and the longer and
more severe depression of the early 1930's, in addition to certain minor reces-
sions. To make the situation still clearer, the dotted index of general business
is here inverted, so that high points indicate not booms but depressions, corre-
sponding to high points in the termination-rate index. This index, between the
moderately good year 1919 and the depression year 1921, went up from under
60 to 115% of its 1919-1939 base as 100. Later the index fell to 90 in response
to improved conditions, but after 1929 rose rapidly to a peak of nearly 170 in
1932. Later it. fell steadiy to under 70 in 1937, and, after a moedrate increase
in 1938 resulting from temporarily worse economic conditions, dropped in 3939
to the lowest figure in two decades. The curve for [36] industrial termination
rates follows a similar course.
It is easy to understand why, with the advent of hard times, lay-offs, unemploy-
ment, and general uncertainty about the future, people should reduce their finan-
cial obligations — either voluntarily or by force of circumstance. Naturally, a
small financial obligation — as for example, a new life insurance policy — is more
likely to be terminated than obligations where much more seems at stake. For
instance, many people are apt to lapse a recently purchased policy rather than to
give up an automobile or household furniture bei*- g bought on installment, or
to fail to meet taxes or mortgage payments on a l* '.ne. 'In the vast majority of
15695
15696
CX)NCENTRATION OF ECONOMIC POWER
[35] Life insurance "voluntary" termination rates compared iPith economic
activity, 1919-1939 — Ratio of net lapses, plus surrenders, to insurance in force.
Ordinary (excluding group) insurance of all U. 8. legal reserve life insurance
companies combined
ECONOMIC ACTIVITY, IWVtHTEO,
(% OF ''NOHMAL")
RELATIONSHIP OF NET LAPSE, PLUS
SURRENDER" RATIOS OF I/40IVI0UAL
YEARS TO THE I9l«-ie3t AVERAQC
Sources of basic data : Spectator Co., and Standard Statistics Co.
This chart shows how closely life Insurance lapses, plus surrenders, reflect the course
of economic conditionfi in industry.
CONCENTRATION OF ECONOMIC POWER 15697
cases, policyholders who terminate life insurance give such reasons as that they
couldn't keep it up, couldn't afford it, didn't have the rnqney, were out of a job.
Another important cause of lapsation is the instability of human intentions.
Many policyholders buy life insurance with the firm resolution to protect their
families. Later some current desire on the part of the policyholder or beneficiary
proves to be stronger than the apparent need for life insurance ; hence, a lapse.
Obviously, life insurance companies cannot control either the vacillations of
human nature or the economic fluctuations which experience demonstrates are
the major causes of the terminations of life insurance i)olicies by lapse and
surrender. Furthermore, it will be found that policyholders, with very few
exceptions, attach no blame to the agent or the life insurance company because
changed financial circumstances force them to give up a policy or because they
merely change their mind about the value of the life insurance and decide to use
the money for something else — perhaps, for example, a radio or a new car —
that appear to give more immediate and tangible satisfaction.
[37] LIFE INSXmANCE AND OTHER TYPES OF TB»M1NATI0NS
Life insurance policies are subject to the same influences or conditions, which
tend to cause terminations, as affect many other types of financial commitments
that people make. In comparison with these other types, life insurance makes
a very favorable showing as regards termination rates.
Building and Loan Associations. These have characteristics in common with
life insurance. Shareholders make regular deposits in a manner similar to
premium payments of policyholders. In both there are repeated opportunities
for termination. A chief difference between the two financial institutions is that
life insurance is sold by salesmen, while building and loan shares are bought
chiefly through initiative of the purchaser. The experience of building and loan
shares drew the following comment by Dr. Donald H. Davenport in "The Co-
operative Banks of Massachusetts," (April 1938)':
"Maturity marks the success achieved by the holder in the undertaking to which
he originally subscribed. Numerous events may occur to interrupt and defeat
such a savings program. Therefore it is not surprising that only a fraction of the
subscribers to serial shares succeed in holding their shares until the shares
mature."
Of course, some of these same factors affect persons who are paying for life
insurance. The Life Insurance Sales Research Bureau selected a group of 12
building and loan associations for comparison with life insurance, with the
primary requireinent that they be sound, going institutions which had weathered
the depression successfully. None had any substantial percentage of frozen assets
and all were chosen on the basis of capable management. Located in Pennsyl-
vania and New Jersey, some are in larger centers and some in smallter communi-
ties. They ranged in assets from $70,000 to nearly $4,000,000, the average being
$1,000,000.
[38] This survey compares the termination rates of these 12 associations dur-
ing the first two contract years with the termination rates of certain life insur-
ance companies. The results indicate that the termination rate for building and
loan shares was 17% in the period of 1935-38, as compared with 16% in 20
of the older life insurance companies. After the first two years, the termination
rates for the building and loan associations were considerably higher than for
life insurance. On the basis of the experience of the years 1935-38 inclusive,
the termination ratios indicate that only 36% of the building and loan shares
originally taken would remain in force 10 years. On the basis of rates that may
be considered normal life insurance termination rates, the amount of life insur-
ance in force 10 years would be very substantially higher.
Installment Sales of Automobiles. These sales offer another example. In
1938, over 15% of the automobiles sold on installment were taken away from
the owners because of default in installment payments. In such cases, there is
likely to be considerable loss, generally the down payment (often one-third) of
the purchase price plug whatever installments have been paid. Resale prices
seldom are high enough to return any of the purchaser's equity. This termina-
tion rate, considered in relation to the heavy potential forfeiture, and the fact
that most people will give up a car only as a last resort, is of interest in compari-
son with the early termination rate of life insurance. Payments for life insurance
extend over a long period and the material benefit may be less immediately ap-
15698 CONCENTRATION OF ECONOMIC POWER
parent than in the case of tangible property, so that more self-denial is required
to maintain insurance in force.
Christmas Club Programs. The experience of banks is also enlightening.
Only persons who, of their own accord, are dete'-mined to save will Join a bank's
Christmas Club. The effort to complete the program need be [39] continued only
for 50 weeks, as against an indetermin"ate number of years in the case of life
insurance. Yet it is the experience of more than 40 leading savings banks
that a large percentage of these Christmas" Club accounts are never completed.
Different banks reported that the proportion of starters who failed to finish
flanged from 25% to 70%.* For one half of the banks the termination experi-
ence was 54% or more. It was also found that the delinquencies ran definitely
higher in the smaller weekly pasTnent classes than in the middle-sized and
larger commitments. Furthermore, delinquencies tended to run high in the
early months of the life of the club.
United States "Baby Bonds." Even obligations of the United States Gov-
ernment, purchased voluntarily without the services of a salesman, are subject
to the ssime inherent tendency on the i)art of individuals to discontinue an
established program. United States "Baby Bonds" mature in a relatively short
period of 10 years, and are purchased by a single payment without the necessity
of making subsequent periodic payments. Nevertheless, ov^r 25% of such
bonds purchased in 1935 had been surrendered for redemption before the end
of 1939. Moreover, the proportion of such surrenders is highest for the pur-
chasers of the smallest bonds and is progressively less for efach larger denomi-
nation. On the average the proportion is about twice as heavy for the smallest
as for the largest denomination.
"pkesstjbb" sixunq
The assumption by witnesses, of the Securities and Exchange Commission that
lapses are due to the overloading of policyholders as a result of agency "pressure"
methods is not in accord with the facts, as is indicated by [40] a number of
studies that have been conducted in recent years by company managements in
their effort to improve the i)ersistency of new issued insurance.
For example, a survey was recently made among 5,000 Boston families pay-
ing $2 a week or more for premiums on industrial policies. This survey
showed th'at the lapse rate of recently issued industrial policies in these
families was much smaller than the average for industrial families as a whole.
Othe. studies lead to the conclusion that the lapse rate is lower than the
average, not only in families spending the larger absolute lamounts for life
insurance premiums but also in those families spending a higher than average
proportion of their income for weekly premiums. An investigation to deter-
mine the relative persistency of weekly premium insurance according to the
percentages of family income paid for this insurance, showed th^at among the
groups spending the higher portions of income for weekly premium insurance
the persistency of the business was better. For instance, the early lapse rate
in families using less than 1% of their income for weekly premiums was
almost twice as high as for families spending betreen 1% and 4%, and over
2% times as high as for families spending 4% or more of their income for
weekly premiums. This study also indicated that for families with approxi-
mately the same income, the early lapse rate of weekly premium policies was
more than twice as high where the policy was the only weekly premium policy
in force in the family as on policies written in families that already had some
weekly premium insurance in force.
The fact that there may be a number of industrial policies in a family, even
several policies on some members of the family, does not indicate that the
family has been overloaded with insurance. Many families, especially those in
the lower income groups, cannot adjust their budget so as to purchase at one
time an adequate insurance program. Such families generally purchase a [41]
small policy and at later dates, after they have been able to absorb in their
budget the outlay for their first policy, add other i)olicies to their program and
in this manner develop step by step more nearly adequate insurance protection.
This progressive development of an insurance program in the family fre-
quently results, of course, in there being several policies on the life of some,
•This experience Is reported In the December 19.37 Issue of "Bankers Maeazine," pp.
493-496, In an article by Professor W. H. Steiner, Chairman of the Department of
Economics of Broolclyn College, and E. Shapiro.
CJONCENTRATION OF ECONOMIC POWER 15699
especially the older, members of the family. Rather than indicating any over-
sale of insurance this fact illustrates the desire of tlje agent to sell at one
time only as much insurance as he believes the family can maintain.
Experience has demonstrated that the most difficult period to keep insurance
in force is after a family, without insurance, has bought its first policy.
On the other hand, families already paying the more substantial amounts
for insurance are the ones who most thoroughly appreciate its benefits. They
buy It because they want it, and having bought it, they keep it. Conversely,
those who are less thrifty or can see little value in life insurance are less
inclined to buy it in the first place and are more likely to lap'-d such small
amounts of insurance as they may buy.
TEBMINATION BATES AND GROWTH OF COMPANIES
Both the evidence produced by a Securities and Exchange Commission witness
and comments by Its Examiner express the view that "lapse" is closely related to
the speed at which companies are growing, or more specifically to the rate at
which new business is being placed on the books. The Commission's witness
conceded that any such alleged relationship was not necessarily a fixed one.
In fact, it is a highly variable one, as is borne out by studies of the Life Insur-
ance Sales Research Bureau. For example, in a group of 18 important com-
panies, classified according to the ratio of new ordinary business to ordinary
in force, it was found that the two companies having the highest and the lowest
lapse rates, respectively, [42] fell within the top five as to ratio of new business
to business in force. And a study of 45 companies disclosed similar startling
anomalies. Such facts cast grave doubts on the validity of any generalization
as to the influence of new-business ratios on lapse rates.
"feusteation" of policyholoebs
The Examiner accepted the statement of a witness of the Securities and
Exchange Commission that terminations of life insurance, excepting termina-
tions resulting from death, maturity, and expiry, are a "frustration" of the
original purpose of the policyholder in taking out the insurance. The fact
is that every policy, even when lapsed, represents the fulfillment of some
purpose of the buyer. He has at least accomplished a limited period of pro-
tection against death. For the most part, even the individual who lapses
accomplishes far more than such temporary protection. Who can say that
in the very large volume of insurance' surrendered during the past 10 years —
and particularly in the depth of the depression — life insurance did not render
as helpful and beneficial aid through payments in cash to living policyholders
in times of individual need, as it would have if the policies had matured by
death of the insured?
Many persons take out whole life insurance with the intent of maintaining
this insurance protection until retirement age, then surrendering part of it and
using the cash value thereof to augment retirement income. Frequently a man
who carries a substantial amount of ordinary life insurance will surrender part
of it or discontinue paying premiums and take a smaller fully paid-up policy
upon the death of his wife or other depedent for whose protection the insurance
was carried.
Many policyholders who desire life insurance protection throughout their
lives prefer to limit the period of premium payment to a specific number of years,
such as [43] 20 years. The normal method would be to take a 20-payment life
policy, but many policyholders prefer additional protection during the premium-
paying period. This is accomplished by taking out a whole life insurance
policy for the full amount of protection that they desire immediately and then
after 20 years discontinuing premium payments and taking a fully paid-up policy
for a reduced amount. Although the difference between the original amount
and the reduced amount of paid-up insurance would constitute a termination by
decrease, the original purpose for which the insurance was taken out had been
fulfilled.
Many industrial endowment policies written on the lives of children are taken
out, not only to provide insurance on their lives, but also to build up a small
fund for the child when it starts out in life. The most common form of these
policies is the 20-year endowment. A policy written, say, at age 5 would thus
matur.^ ;. age 25. Many of the children get married before the maturity date
of such policies and take the cash value of their policies at thaf time. It is an
15700 OONCENTRATION OF ECONOMIC POWER
extreme assumption to state that the purpose of such policies has been frus-
' trated.
Similarly, a witness of the Commission considered a 10-year endowment policy,
upon which all premiums had been paid and then matured, as having com-
pletely served its purpose, which, of course, it had. However, he considers as
"frustration" a case where the policyholder originally took out a 20-year endow-
ment policy for $250 on a 10-year-old child. It was surrendered for the cash
value of about $97 after 10 years, when in "effect the policyholder converted his
insurance into 10-year endowment insurance for $97, plus additional protection
of $153 for the 10 years.
There are numerous other cases where insurance surrendered or decreased is
by no means a frustration of the fundamental puri)ose of the insurance; for
example, business insurance policies are often cancelled because of [44] unfore-
seen contingencies occurring after the issuance of such policies, and temporary
insurance purchased to cover a mortgage niight properly be discontinued by the
policyholder if be were able to pay his obligation prior to the expiry date of
his policy.
TERMINATIONS, NEW INSURANCE, AND GAIN IN FORCE
Much of the statistical data in the record was designed to Support the thesis
that life insurance does not adequately fulfill its purpose because of the high
ratio of issue to increase of insurance in force. These statistics, in some
instances, were incorrect, and in others they obscured the actual facts. For
example, a Securities and Exchange Commission w,itness testified that "to
achieve this increase in the insurance in force, insurailce companies had to sell
seven times this amount of new business. This seven to one relationship be-
tween the new business written and the gain in the amount of insurance in
force is a reflection of the large proportion of terminations of insurance each
year."
This conclusion is incorrect and the statistics are misleading for the following
reasons :
1. Statistics Based on Abnormal Bxpekienoe. The 10-year period se-
lected includes the definitely abnormal experience of the depression years,
particularly 1931 to 1934. During these four years the companies wrote a
somewhat reduced amount of new business and experienced a decrease in
the insurance in force because of the heavy demand for cash values from
policyholders who, in many cases, had been thrown out of employment
and whose chief resource in time of need was their insurance policies. Dur-
ing this period, the companies paid out over 4^4 billions of dollars in cash
surrender values, and because the incomes of many people were materially
reduced, they were compelled to reduce [45] their insurance. Thus any
termination ratio derived from this 10-year period is misleading as to the
normal course of the life insurance business.
2. Statistical Errors. The amounts of new business shown in Exhibit
No. 680,^ which totaled $160,000,000,000 for the 10-year period, are overstated
to the amount of more than $19,000,000,000. This overstatement arises
through the erroneous inclusion in the figures of the following classes of
items which are not "new business written" :
Revivals — i. e., business which has been reinstated to its original -terms
by the insured's resuming his premium payments at some time after the
policy had been canceled because of temix)rary failure in premium payments.
Increases — one major source of "increase" is the reinstatement to its
original basis of a policy which because of temporary default in premium
payment had been temporarily "decreased," that is, continued for a reduced
amount of insurance.
Reinsurance of business in bulk — i. e., old business which has been rein-
sured in bulk by a new company.
The table on page 46 show's the ratio of new business to gain in force
on the basis of the testimony of a Securities and Exchange Commission
witness which has been corrected for statistical errors for the periods
1928-1937, 1920-37, and also for the latter period excluding the depression
years 1931-34.
Prom these and similar figures for individual years it can be seen that,
under normal conditions, about $2 of new business is written for each $1
» Hearings, Part 10, p. 4733.
CX)NCENTRATION OF ECONOMIC POWER
15701
of gain in force. This is very different from the 7 to 1 ratio claimed by
the witness for the Commission.
[46]
New Business •
GAm In
FOECE •
Batio of New
Business to
Gain in Force
Pebiod
On Basis
Testified to
by SEC
Witness
Corrected
Figures
On Basis
Testified to
by SEC
Witness
Corrected
Ratios
1928-37 . --..
160,038
263,040
203,233
140, 705
235,304
184,329
22,550
73, 692
83,097
7.10
3.57
2.45
6.24
1920-37
3.19
1920-30 and 1935-37
2.22
In millions of dollars
3. Ratio of New Business to Gain in Life Insurance in Foboe Does Not
CoREEOTLY REFLECT TERMINATIONS. There is no true significance in the ratio
between the issue for a particular year or other period and the gain in insur-
ance in force. The gain in force is affected by the terminations of the entire
business, including that issued many years before. As the general insuring
public becomes more nearly fully protected, the increase in the amount of
insurance is bound to slow down, and this will make the ratio increase.
For example, if. every person were fully covered for the amount he really
should have and no insurance were canceled except by death or maturity,
then the only increase in insurance would come from increased needs or
an increase in the population. In other words, as the general insuring
public becomes more nearly fully protected, the ratio of new insurance to
old is bound to become smaller, and the ratio of total terminations to new
insurance is therefore bound to increase. Consequently it is clear that any
ratio of issue to gain has no meaning in relation to lapses.
[47]
MATURITY, DEATHS, SURRENDERS, AND LAPSES
The data presented regarding the distribution of terminations were also mis-
leading. The witness stressed the fact that out of the terminations in recent
years, the ordinary policies becoming payable by death of the insured or ma-
turity of an endowment comprised from 7.65% to 11.57% of the total termina-
tions, depending on business conditions. He concluded from this that the great
majority of ordinary insurance policies are allowed to lapse or are surrendered
and that only a small portion are carried to termination by death or by ma-
turity as endowments, as originally planned.
The bulk of the insurance which forms the basis for this testimony "repre-
sents policies of comparatively short durations, in which the voluntary termi-
nations predominate and in which death claims are at their lowest point. This
method of analysis by the witness is incorrect because it focuses only on those
policies which had been terminated, and fails to take into consideration the
huge number of seasoned policies which are still outstanding and which have
long since passed the crucial early petiod in their history when lapses or sur-
renders are most likely to occur. Furthermore, under these seasoned policies,
the policyholders are older and therefore approaching the time when the effect
of the mortality rates becomes more and more pronounced.
It is difficult to imagine testimony that could be more misleading. The errone-
ous character of this method of presentation is illustrated by an example :
Suppose a company had been issuing new ordinary whole life insurance of
$1,000,000 per year in each of the last 15 years and that the termination rates
on this insurance were those which may be considered normal for the life in-
surance companies which transact the bulk of ordinary insurance in this coun-
try. These rates may be considered a fair approximation of the experience
of the [48] companies on life business in normal times. Under these rates about
13% of each year's new issues would be discontinued voluntarily, that is by
causes other than death or maturity, within one year after issue ; about 8% of
the business entering the second year after issue would be discontinued volun-
15702
CONCENTRATION OF ECONOMIC POWER
tarily within that year; and thereafter the termination rate would decline
gradually, year by year, until a level rate of about 2.5% of each year's business
in force would be experienced at the 15th and later years. Assume that the
policies voluntarily terminated during the first two years terminated without
cash value and are to be classified as lapses ; that those terminated voluntarily
during subsequent years are surrendered for cash. Also assume that the death
rate shown by the American Men Select mortality table will prevail.
Based on these termination rates, what proportion of those new issues of
$1,000,000 per year for 15 years will still be in force at the end of that period,
and how much will have been terminated for various reasons? Making the
necessary calculations, it appears that about $8,700,000 or almost 60% of the
$15,000,000 Issued is still iu force. The remaining $6,300,000 of insurance was
terminated as shown by the first bar on the chart on page 49.
[49] Termination experience of ordinary life insurance, issue of $1,000,000 per
year for 15 years
I I LAPSES(V0LUNTARY TERMINATIONS IN 1st AND 2o POLICY YEAR.)
KEY t }^^^y^ SURRENDERS (VOLUNTARY TERMINATIONS AFTER 30 POLICY YEAR.)
HH DEATHS
<5 10
o o
^9
I
47%
43%
0%
1%
47%
20%
46%
52%
34%
10
a
<
< O
TERMINATED
IN FIRST
FIFTEEN
YEARS
TERMINATED TOTAL
THEREAFTER TERMINATIONS
This chart shows that of the terminations in the first 15 years — lapses repre-
sented 47%, policies surrendered for cash 43%, and deaths only 10%. The
recent experience of 14 companies shows an identical picture. This concen-
tration on the terminations in the early years, which is only one part of the
true picture, demonstrates what the Securities and Exchange Commission's
witness did in his presentation, because he ignored the policies outstanding at
tYie end of the period.
A very important part of the picture, which makes it complete, is what hap-
pens to the business remaining in force after completing the first 15 years of op-
eration. This is shown by the second bar on the chart. Most of this business
has passed through the period of rela[50]tively heavy lapse and surrender
Making the calculations, we find that in future years, of the 60% of the insur-
ance issued which remains in force at the end of 15 years, about 52% will be
CONCENTRATION OF ECONOMIC POWER
15703
terminated by death and 47% by surrender for one reason or another, while
only 1% will be by lapse. This part of the picture was ignored in the hearings.
The last bar in the diagram gives the complete picture for the whole period.
Lapses represent only 20% of the total terminations. Cash surrenders for
all purposes, including those cases where the insurance had fulfilled its use-
fulness, total 46% ; and the insurance terminated by death is 34%. Since a
very large proportion of the policies surrendered for cash had been kept in
force for many years and had fulfilled completely or to a very considerable ex-
tent the purjwses for which they were originally taken out, it is clear that by
far the larger part of life insurance purchased has carried to completion the
intended objectives of policyholders.
TERMINATIONS IN RELATION TO PREMIUMS PAID
The chart on page 49, analyzing insurance terminations by mode, still does
not measure the true financial significance of the various modes of termina-
tion, because the statistics deal with face amounts of insurance instead of with
premiums paid by policyholders. The figures, used by a witness of the Com-
mission, attribute equal importance to a lapse after one month's premium has
been paid, to a surrender for cash after payment of premiums for say 25 years,
and to a death claim. The really important and significant question is : How
much of the total premium money paid by policyholders is paid on policies that
lapse, how much on policies that surrender, and how much on policies maturing
by death?
In order to portray the more significant distribution of terminations accord-
ing to the total premium money [52] paid by policyholders, a calculation was
made for a company whose distribution of terminations by amounts of insur-
ance was the same over the whole period as that shown by the third bar of the
chart on page 49. The resulting comparison, based on $1,000,000 of life insur-
ance issued during each of 15 years, is shown in the table below and in the
chart on page 51.
Distribution Based On
How INSUEANCE POLICTES TERMINATE
Amounts'o''
Insurance
Premiums
Paid
Death -.
34%
46
20
57%
41^^
IJ-i
Total
100%
100%
Assuming that there is a loss to the policyholder in the case of lapses
(third group), the actual loss is not 20% of all insurance issued, as testified
by a witness of the Commission, but must be less than 1.5% of all premiums
paid, as p&rt of these premiums is required for the cost of protection while
the policies were in force.
The terminations of industrial business during the year 1937 for one large
company have been analyzed in order to ascertain the financial significance
to the policyholder of the various modes of terminations. These data, being
based only on terminations, do not project into the future the probable expe-
rience on policies which have remained in force, and so are subject to the
error previously mentioned in that they overemphasize the terminations by
lapse and surrender. However, even with this overemphasis, it is found that
of the premiums paid since issue on the industrial policies terminating in 1937,
2.7% had been paid on the policies that lapsed. For 1938 and 1939, this per-
centage would be even less. On the other hand, 28% had been paid on policies
which terminated by death or maturity.
[53] Further evidence of the misleading nature of the testimony of the wit-
ness in reference to the small percentage of terminations through death claims
is found in a recent study of a group of ordinary policies whose histories are
complete. The policies, issued during the years 1845 to 1865 inclusive by one
of the larger companies, have all gone off the books, the last policy having
been terminated by de&th in 1937. We thus have a complete record, covering
92 years, of the policies Issued during a period of 21 years. Total number of
policies issued during the period mentioned was 35,765, of which a small pro-
15704
CONCENTRATION OF ECONOMIC POWER
portion was on the endowment plan. Fourteen thousand and eighty-eight
policies became payable by the death of the insured, and 147 endowment policies
became payable at the end of the endowment period. It will thus be seen
that 39.8% of the total numl)er of policies were paid either as death claims or
endowments at maturity.
If there were excluded from the number of policies issued the number upon
which no premium was paid and which therefore were never placed in force,
[51] Terminations of ordinary whole life insurance
BASED ON AMOUNT OF INSURANCE
/^LAPSE IJ4%
BASED ON AMOUNT OF PREMIUMS PAID
The lower picture ia more significant than that based on amount of insurance.
and if there were added to the number of policies which terminated either by
death or by maturity the number of term policies which fulfilled their pur-pose
by being carried to the expiration of their terms, the showing with respect to
the percentage of policies which were terminated by lapse or surrender would
be still more favorable.
It is clear that the testimony regarding lapses and surrenders was grossly
misleading.
[54] The Cost of Life Insurance
When life insurance can be sold , cheaper, it will be done, because it is good
business to sell at the lowest possible cost consistent with safety, liberality
of benefits, and proper field service. Furthermore, competition among the com-
panies is so keen that there is an everpresent urge on the part of management
to find ways and means of providing better protection at lower cost.
The elements entering into the cost of life insurance have been attacked by
testimony in the record ; for example, there was even some doubt expressed
as to whether reserves are necessary. However, there is scarcely a word in
the testimony about the reasons which led State Legislatures to make reserves
legally mandatory. As a substantial proportion of every premium on a i)olicy
of life insurance, other than term, is needed to create these reserves, let us
examine them more closely.
WHY LIFE IN8UBANOE BESEIRVES ?
In the early days of life insurance, policies were issued chiefly on a step-up
premium basis. As the policyholder's age increased, the premium became larger
each year, and because of the increased rate of mortality there came a time for
many policyholders when they could not afford to maintain their insurance in
force. The need for some method which would assure a reasonable level pre-
mium, the paymeit of claims, and stability for the life insurance [55] companies
was met by the legal reserve basis for life insurance. The demonstrated sound-
ness of this method over the years led to its widespread adoption by life
insurance organizations.
Under the legal reserve basis for life insurance, a level premium is charged.
This is based on the principle that the policyholder shall pay more in the early
years in order to pay less in the later years, as illustrated by the chart on
page 56. In issuing a level premium policy, the company guarantees that
regardless of future fluctuations in mortality, interest rates, or expense, the
annual cost; to the policyholder shall not exceed the agreed premium. The
reserve is the amount of money which, together with future premiums and
interest, will insure the ability of the company to carry out iwlicy obligations
on its entire business. This is the primary reason why reserves are reqiiired
by law.
The total policy reserve held by a company is a composite of the reserves
held on the policies issued in each of the previous years of the company's
existence. Although the total policy reserve may increase from year to year
as the company becomes older, the reserve on a group of policies issued in a
given year does not increase indefinitely.
Considering a group of whole life policies issued in a given year, the premiums,
plus interest earned on the reserves, will be more than sufficient for perhaps the
first 25 years to pay current claims, etc., so that the aggregate reserve on these
policies is increasing. However, as the duration increases and the policyholders
become older, the claim rate will increase. Premiums and interest will no longer
be sufficient to meet policy claims, and it will be necessary to draw upon the
reserves to meet this deficiency. The aggregate reserve held on these policies
will then decrease. In other words, the tide comes in for a time and then
begins to go out. When the last policy in this group goes off the books of the [57]
company, the reserve will have been entirely paid out.
A simpler example is that of the 10-year endowment.^ On these policies
a company's income from premiums and interest for the first nine years is
much greater than its outgo for claims, etc. ; but at the end of 10 years the
entire reserve is needed in order to pay all remaining policyholders the face
amount then due.
15705
15706
CONCENTRATION OF ECONOMIC POWER
Reserves Are Not Profits. Misleading material placed in the record by a
witness for the Securities and Exchange Commission gave rise to newspaper
stories which told of the large profits made by the life insurance companies.
These so-called profits were referred to as "velvet," a word which to the
layman denotes unearned funds. The alleged profits were supposed to repre-
sent the difference over a period of years between the total income and expendi-
tures of the companies. The fact of the matter is this difference represents,
almost entirely, reserves which State laws require the companies to maintain
and, to a very small degree, contingency funds or surplus to guard against
unforeseen developments. As these funds are held for the benefit of policy-
holders or their beneficiaries, it is obvious that in no sense of the word do they
represent profits.
[56] Net annual premium on (A) term basis versus (B) level premium oasis
1 240
220
200
180
160
140 in
a
<
12:0 -I
_)
o
100^
80
60
40
20
60 n
(b) level-
1
(0
/
/
/
«/
^
CO
/
/
^Ji
^ /
^/
A
PREMIUM BASIS
35 40 45 50 55 60 65
AGE
70
75 80 85 90
This chart shows the net annual premium for $1 000 of term insurance at ages 35 to 85,
contrasted with the net annual level premium for tne same amoun*- of whole life insurance
b^slnning at age 35. Based on American Experience table, at 3%.'
If the insurance in force in a company is increasing, the assets generally
increase rapidly, not as "profit" but solely to offset the increasing liabilities.
Even if the insurance in force is gradually decreasing, the reserves necessary
to maintain solvency may increase for a time and then decrease.
NEW MORTALITY TABLES AND LIFE INSURANCE COSTS
The record overemphasizes the importance of a new mortality table in
relation to the cost of life insurance. It has been assumed that the adoption
of a new table would result in a lower cost.
[58] Mortality tables are specified by State law hs minimum valuation stand-
ards primarily to ascertain that the companies maintain adequate reserves
on the insurance in force. While the companies must maintain reserves on
CONCENTRATION OF ECONOMIC POWER 15707
such legally prescribed basis, they may use any mortality table deemed suitable
in determining premiums.
This subject has had most careful consideration by a Committee of the
National Association of Insurance Commissioners. After months of study,
one of the conclusions reached by the Committee, and announced within the
past year, was that:
"The net cost of insurance to policyholders in the aggregate would
probably not be reduced by the use of more modern tables for valuation
purposes, since reserves would tend to be increased and nonforfeiture
benefits would probably not be decreased to any appreciable extent. But
there would be some rearrangement in the incidence of premiums, sur-
render values and dividends according to plan, age and duration of insur-
ance leading, possibly, to greater equity in the distribution of the cost of
insurance among policyholders."
Savings in mortality are forecast by the actuaries of stock companies in
determining fixed premiums so that their policyholders may benefit, while any
savings from mortality in mutual companies are reflected in dividends to policy-
holders.
COST OF INDUSTRIAL. UTE INSUBANCE 18 NOT EXCESSIVE
Great emphasis has been placed upon the alleged excessive cost of industrial
insurance by witnesses of the Securities and Exchange Commission. The char-
acter and operating costs incident to this form of insurance, the efforts of the
companies to reduce these costs, and public [59] investigations in connection
therewith are scarcely dealth with in the record.
In measuring the price of any form of life insurance, a clear distinction
must be made between the different types. The price of any form depends
upon the class of ri§k covered, the services rendered, and the size of each
unit sold. However, repeated comparisons have been made of industrial insur-
ance with ordinary, without regard to the important differences between these
forms of insurance.
Expenses for Industrial Insurance. A number of factors enter into the
necessary difference in expense between weekly premium industrial and ordi-
nary insurance. The portion of the premium needed, for the expense of issuing
and handling the average weekly premium industrial policy of $250, must
obviously be greater than that needed for the average ordinary policy of $2,150.
The weekly; collection of premiums at the home of the insured alsa must
obviou^y. be more expensive than the monthly (^r less frequent) crediting of
premiums.
Mortality on Industrial Risks. Industrial life insurance, being intended for
small buyers and sold with premiums payable weekly or monthly, is purchased
principally by wage earners. Since the mortality rate on these workers is sub-
stantially greater than on the buyers of standard ordinary life insurance, the
cost of industrial insurance must exceed considerably that of ordinary insurance,
but for the same reason the value of the protection granted is greater. In a
comprehensive study, by one of the State Insurance Departments, of the com-
parative mortality of industrial and ordinary policyholders of one large company,
it was found that the death rate of persons insured under industrial policies
was 40% greater than for those insured under staiidard ordinary policies. The
higher mortality rates of the lower income groups is [60] illustrated in the death
rate per 1,000 lives according to social economic classes.* These vary as
follows :
Professional lnen__ ^ 7. 00
Proprietors, managers, and officials ; 7. 38
Clerks and kindred workers ]^ 7. 40
Agricultural workers : ^ 6. 21
Skilled workers and foremen 8. 12
Semi-skilled , workers 9. 86
Unskilled workers 13. 10
All gainfully occupied males 8. 70
*"Death Rates hy Occupation" Edited by Jessamine S. Whitney, Statistician of the
National Tuberculosis Association.
Insurance Companies Strive to Reduce Costs. Effort is being made to re-
duce the industrial death rate for the group as a whole. Toward this end.
15708 CONCENTRATION OF ECONOMIC POWER
some of the companies furnish industrial policyholders with visiting nursing
service and information regarding first-aid and health preservation. In addi-
tion the companies participate in public health programs and encourage efforts
which tend toward greater longevity. The health activities of the companies
undoubtedly have been a potent factor in helping to improve the expectancy
of life throughout the Nation.
A very large proportion of industrial families prefer weekly premiums and
probably would be unable to purchase and maintain insurance on any other
basis. And this is not hard to understand, because the great majority of
wage earners are paid at weekly intervals. This is borne out by data recently
Ijrepared by the U. S. Bureau of Labor Statistics and published in its August
1939 Monthly Labor Review.^ This survey covered over 137,000 establishments
employing 7,000,000 workers. It showed that 98% of these were paid at semi-
monthly or shorter interals, and two-thirds weekly. Of manufacturing wage
earners, some 99% were paid semi-annually or more frequently, and 69%
weekly.
[61] The higher expense rate necessary to conduct weekly premium business,
as compared with ordinary, arises to a substantial degree from the higher ex-
pense incident to collecting small premiums, at frequent intervals, at the homes
of the insured. This is the most convenient or most economical method for
the majority of industrial policyholders. There is today, and probably wil'
continue to be for many years, a large proportion of the families in the lower-
income groups who would fail to set aside a part of their income for life insur-
ance were it not for the regular systematic visit of the insurance agent to col
lect the small,' weekly premiums.
To reduce the cost for industrial policyholders who do not need this service,
a number of the industrial companies allow a refund of 10% of the weekly
premiums that are paid continuously for one year directly to a branch office.
This opportunity to reduce costs was introduced some years ago by one com-
pany which now has about 30% of weekly premiums paid directly to its offices.
The law of one State was recently amended to require a stated refund credit
for direct payment to a company office.
To reduce the cost for policyholders able to pay premiums on a monthly
(rather than weekly) basis for somew'hat larger amounts, some industrial com-
panies have introduced monthly premium policies for amounts of insurance less
than $1,000 which now constitute an important part of their business. The
companies also are issuing ordinary insurance for amounts of .$1,000 or more
with premiums payable at monthly intervals. Obviously, the expense of
monthly premium industrial insurance is less than weekly, and therefore policy-
holders who can afford to pay premiums on a monthly basis can get more insur-
ance per dollar of premium.
Insurance Department Investigation of Costs. A special study of indus-
trial insurance in one large com[62]pany recently made by a State Insurance
Department was not put in evidence. A comparison was made in that study
between the net outlay for industrial insurance and for ordinary insurance,
based upon a grouping of policies statistically weighted to represent an average
of plans and ages for the respective departments, taking into account premiums,
dividends, and cash values.
As presented in the report of this study, the average excess of the weekly
premium industrial net ^cost over that of ordinary insurance of a comparable
mortality was, expressed as a percentage of the industrial gross premium, as
follows :
Over a 5-year period 14%
Over a 10-year period - 15%
Over a 15-year period 15%
Over a 20-year period , 14%
As the examiners for the Insurance Department pointed out in their report,
this extra cost of about 15% of the premiums can be reduced to about 5% by
taking full advantage of the 10% refund credit for direct payment of premiums
by policyholders who do not need the collection service at their homes. When the
differences between ordinary and industrial insurance are taken -into considera-
tion, it is found — as expressed by the Examiners of the State Insurance Depart-
ment in the conclusion of their "report based on 18 months of study — that "these
costs are not excessive in view of the services rendered."
Vol. 49, pp. 311-324.
CONCENTRATION OF ECONOMIC POWER 15709
COMPETITION KEEPS COSTS liOW
the American system of life insurance, there are two general types of
otainary, industrial, and group insurance offered to the buying public: (1)
policies on the guaranteed cost basis, sometimes referred to as nonparticl^ating
and usually issued by stock companies; and (2) policies on the mutual or par-
ticipating basis, the latter [63] type charging a larger gross premium and later
reducing the cost by premium refunds or yearly dividends to policyholders
base<) on current experience. In each case, the premium charged represents a
computation of the future cost. The non-participating premiima is a conserva-
tively low estimate which, if later experience proves it to be insufficient, must
be made good by the ^guarantee of the stockholders, for which their stock is
pledged. The participating premium is higher to provide a safety margin
which will take the place of the guarantee of the capital stock in non-
participating insurance.
The constant competition betw^n the "guaranteed cost" and mutual com-
panies is of distinct benefit to the insuring public. The two forma act on each
other in the nature of checks and balances. The non-participating companies,
with their lower initial premiums, provide a check against larger initial costs
or premiums by mutual companies than are consistent with sound princiirtes of
the business. On the other hand, the participating companies, which return tO'
policyholders all mairgins not required by considerations of safety, provide a
check against the charging by non-participating companies of higher guaranteed
costs than necessaiy.
"gain" on lapse ob subbendeb
The testimony of a Securities and Exchange Commission witness, as to
companies' "gain" from lapsation and surrenders, was predicated on an ap-
parent misunderstanding of the principles of level premium insurance, and
erroneous assumptions that the reserve constitutes the policyholders' "savings"
and that a so-called bookkeeping "gain" on lapses or surrenders represents
profits to the companies.
The Insurance Commissioners of the several States require the companies
to submit, in connection with their annual statements, a "gain and loss" exhibit.
The prl[64]mary purpose of this exhibit is to analyze the change in the surplus
account as it stood at the end of the previous year and at the end of the
current year. Prior to 1939, the companies were called upon to tabulate the
reserves on policies surrendered during the year for their cash value or on
.account of which paid-up and extended insurance was granted as well as the
amount paid in cash or applied on indebtedness of such policies, together with
the initial reserves on extended insurances and paid-up insurances. The differ-
ence was set forth as the "gain" from policies surrendered for cash or on
accoimt of which extended or paid-up insurance was granted. They also were
called upen to tabulate the "gain" during the year from reserves released on
lapsed policies on which no cash or other value was allowed and also the
"gain" from changes and restorations made during the year.
When a policy is issued, a company must meet the costs of acquisition,
including the agent's commission, the medical examiners' fees, inspection fees,
and home office exjjense. It must also set up the required legal reserve. The
sum of these items in the aggregate will exceed the first-year premiums received.
There is accordingly a charge against the surplus account, but this is merely
a bookkeeping item. When a policy is terminated by lapse, there is likewise
a transfer from the reserve account to the surplus account, but this Is merely
a reversal of the other entry, and there is no more a "gain" arising from this
transaction than there was a "loss" when the transfer was made from the
surplus account to the reserve account.
Accordingly, it is clear that the reserves on lapsed and surrendered policies,
less the amofints allowed as surrender values, do affect a company's surplus
accoimt, but the word "gain," as used in this connection, is not synonymous
with the word "profit."
The form of "gain and loss" exhibit, to which reference has been made, was
thoroughly understood by those familiar with life Insurance. However, as it
gave rise to [65] misunderstanding by others, the Insurance Commissioners
adopted a new form of "gain and loss" exhibit in connection with the annual
statements for the year ending December 31, 1939. This revised form of
exhibit continues to provide the Insurance Commissioners with such informa-
tion as they need to analyze the companies' accounts.
124491 — 41— pt. 28 65
15710 CONCENTRATION OP ECONOMIC POWER
SxJBBBNDEB VALUES. The Suggestion has been made that provisions in respect
to surrender values are not fair to policyholders. In studying these questions,
the pertinent facts as to relative equities between the withdrawing policyholder
and the remaining policyholders, were not placed in evidence by the Securities
and Exchange Commission. The fact was also overlooked that no motive
exists to give advantage to one class of policyholders at the expense of another
class. Policy provisions are designed to adjust equitably between classes of
policyholders the many relevant factors.
The surrender charge is a deduction made from the policy reserve In deter-
mining the cash surrender value. The statutes of many States specify the
maximum surrender 'charge that may be deducted under this method of bal-
ancing equities between the withdrawing policyholder and those who continue.
These deductions are made in order to apportion equitably the cost of acquisi-
tion and other expenses not repaid by the withdrawing policyholder. The
longer the policy is in force, the smaller is the balance due from each policy
to surplus. The surrender charge is reduced from time to time uiitil finally
there is none.
[66] The Agency System
Few classes of business men have contributed as much to the social and
economic welfare of the United States as life insurance agents. Day in and
day out, they have preached the gospel of thrift, security, and protection. Their
services havp grown progressively with changing public needs. As a result, the
American public has th^e largest per capita amount of life insurance \n the world ;
in fact, it has about 65% of all life insurance in existence. This is a tribute to
the American agency system, which has played such a vital i)art in helping to
make life insurance thoroughly appreciated and in expanding the institution's
opportunities for public service.
The Securities and Exchange Commission, in building its record before the
Temporary National Economic Committee, practically ignored the social and
economic value of the work of the agent and failed to call representative agents
to testify about their service to policyholders; nor did the Commission arrange
for policyholders to appear before the Committee to portray the stability which
agent's efforts have brought to American life. Instead, the Commission made
light of laudatory letters from policyholders and its witnesses criticized the
agency system as an unnecessary exi)ense and an important contributing factor
towards lapses for which policyholders pay. In addition, the Examiner of the
Securities and Exchange Commission charged life insurance management with
not having encouraged the sale of life insurance by non-agency methods.
Companies were accused, in effect, of being interested only in a continual
volume of new business produced by [67] high-pressure methods, which were
alleged to be conducive to a high degree of lapsation. The service of the agent,
after the policy is sold, was belittled and renewal compensation for this service
question. In short, it appears that the Securities and Exchange Commission
sought to build a record which would strongly tend to condemn the American
agency system.
The contribution of the Institution of Life Insurance to the public welfare
depends upon the extent to which it is used, and experience has taught valuable
lessons on how to bring this service to the largest number of people. One of the
most important of these lessons is that life insurance must be sold. It is not,
except in insignificant amounts, voluntarily bought. It is, moreover, sold only
by individual solicitation by Agents, not by mail or over the counter.
No evidence, other than that on savings bank life insurance in two States,
was introduced by the Commission to show that exi)erimeirts have been con-
ducted more or less constantly to britig about the distribution of life insurance
without &n agency force. The results, accumulated during the past 100 years,
indicate clearly that the principle of selling the service, rather than waiting for
people to come and buy, is one important reason for the broad distribution of life
insurance.
The Experience in England. Life insurance is sold on an over-the-counter
basis by the "oldest life insurance company in existence, the Equitable Life
Assurance Society of London. This organization was formed 178 years ago.
Yet in 1938 it issued only 1,939 policies and 4,867 annuities. According to The
Eastern Underwriter^ the reason for this limited scope of usefulness Is that
^'the company has no agents, and pays commission to no one for the introduction
of business ... It either comes direct or through the introduction of members
and other connections ... At the close of last year, the total funds of [68]
the Equitable amounted to £12,034,776."
In contrast with this, the Prudential Assurance Company of England was or-
ganized in 1848. In 1854, it appointed its first agent, and since that time Its
agents have actively solicited new business. At the end of 1938, it had assets
of £346,139,159, and Its business In force totaled £878,6391082.
The Sun Life Assurance Company of (;^nada built its field organization along
the lines of the American agency system and has operated in England for 45
years. In 1938 its new business in that country totaled £39,556,055.
1 October 6, 1»39, Part 2, page 92.
15711
15712 CONCENTRATION OF ECONOMIC POWER
The futility of selling life insurance through postoffices has also been demon-
strated. The British post-offlce savings bank insurance plan was introduced
about 1865. Under the plan, the right to issue life insurance contracts was
granted by the British House of Commons to the British post-oflSce savings
banjcs. After many years of effort, there were only abont 12,000 of these post-
office savings banks contracts in force, while the British life insurance com-
panies Issuing weekly premium contracts alone had more than 72,000,000 con-
tracts In force. The British post-office savings banks discontinued the writing
of in^surance at the end of 1928.
iNSxittANCE BY MAIL. In America the experience of the best-known life in-
surance company which distributes life insurance by mail is a clear indication
of the inadequacy of this system. Five years after starting business, that com-
pany had $62,700,000 of life insurance in force at the end of 1910, and this
includes the reinsurance in that year, of $58,500,000 of another company. By
the end of 1938, Its total insurance In force had dropped to $46,500,000, $16,200,000
less than in 1910. It wrote only $3,600,000 of new business in 1938.
[Follows page 68]
[Copy]
AUGXTST 12th, 1940.
Hon. Joseph C. O'Mahonet,
United States Senate,
Washinffton, D. C.
My deab Senator O'Mahoney : On the eve of the delivering to you the state-
ment on Life Insurance prepared for filing with the Temporary National Eco-
nomic Committee and bearing the signatures of some 150 life insurance com-
panies, attention has been called at the very last minute to an error in the figures
used In the second paragraph on page 68. Referring to the new business of the
Sun Life Assurance Company of Canada, in England, the last sentence of the
paragraph reads : "In 1938 Its new business In that country totalled £39,556,055."
It transpires that the figure mentioned embraces all the new business of that
company throughout the world and that no figures are available for England
as such, but that the new business written by the Sun Life of Canada in 1938
In the United Kingdom totalled £4,419,311 (Bourne's Insurance Year Book for
1940).
It is regrettable that such an error should occur and should have to be cor-
rected in this fashion but I see no other practical way to make the correction
and I respectfully request, and I am sure I do so on behalf of all signatory
companies, that this letter be Included In the records of your Committee along
with the statement which we have requested to have so included.
Very truly yours,
t Signed) Lebot A. Lincoln,
Chairman.
State iNsxntANCE. State insurance also has been tried. In Wisconsin a State
insurance fund was organized in 1911. The Commissioner of Insurance, in
1919, reported to Governor Philipp, "The Insurance Department [69] has kept up
a continuous campaign for business through circularizing available lists." In
urging the discontinuance of the State Insurance Fund, Governor Philipp stated,
"This fund -Is based upon the theory that desirable life Insurance risks voluntarily
seek insurance. That theory is unsound — they do not do so. If this enterprise
is to prosper and grow, as It must ta, have a normal experience, It must have
an organization for soliciting business."
Mail-Obo&b CnsTOMEBS. A further experience was that of a large mall-order
house, conspicuous for customer alleglence, financial stability, and a reputation
for giving value to the buyer. Its life insurance company started business in
February, 1934, and retired in May, 1938. : In 1937, the final year of their
experience, this organization, after having offered life Insurance through mail-
order catalogs to nearly 10,000,000 regular customers and 40,000 employees,
wrote only $6,500,000 of new Insurance. Its vice-president said that this
"excursion into life underwriting looms large as Exhibit A in support of
present-day life insurance management for life insurance companies and the
necessity for the American agency system. If the American public is to insure
and remain insured for the benefit of its dependents." '
' The National Undoncriters, Nov. 17, 1039, page 2
CONCENTRATION OF ECONOMIC POWEB 15713
Savings Bank Life Insxjbance. New experiments in savings bank life in-
surance are now being made. Tlie Massachusetts sjivings bank plan was
started more than 30 years ago. The sale of Massachusetts savings bank in-
surance has been promoted not only by publicity campaigns and advertising,
and by the employment of several field instructors who spend their entire time
promoting savings bank insurance, but also by the use of a system under which
employers and their representatives serve in a sales capacity without compen-
sation, thus performing a limited number of the functions of the life insurance
agent. Despite this active search for new [70] business, this plan has now in
force less than 3%% of the total insurance in force in that State.
EFFOBTS TO IMPROVE THE AGENCY SYSTEM
Just as the needs of individuals change, so do those of the public at large,
Accordingly, the services of agents must keep pace with its varying needs, if
they are to fulfill their responsibilities to policyholders. As agents who are
best equipped to adjust life insurance to the varying needs of policy hold CiS are
most successful, competition is an ever-present force which continually demands
further improvements. As a res;: It, agency practices are in a normal state of
evolution, affected by current conditions and continuously improved efficiency.
Several of the more important activities which tend toward better and better
service may be of interest.
Selection of Agents. Considerable attention is being given to attracting the
right type of men to agency work. More and more is being demanded of agents
by policyholders, so that their work is becoming increasingly specialized.
Because of this, the companies have placed greater emphasis upon selection
of agents and upon making this form of employment even more attractive.
Misfits lose their own time and cost the companies money, so that we find
methods, such as aptitude tests, being used in an endeavor to predetermine
potential sales and service ability. The point iS) companies realize more than
ever the importance of selection, and feel that they are making progress with
the far from exact science of appraising the human qualifications necessary
for a good agent.
Training Agents. There is excellent "team play" among the agents, their
underwriters associations, and the companies to equip most effectively all who
render field service to policyholders. Some of the best Ideas and organized ef-
forts have sprung from the practical experi[71]ence of alert agents. Effective
training covers not only sales but service methods.
One of the important trends in sales education is the further development
and sponsorship by a large number of companies of methods which show agents
how to present comprehensive life insurance programs to prospects and policy-
holders. These require initial analysis of the prospect's present insurance, his
family needs, and his complete financial picture, including current income, before
recommending a new purchase of life insurance.
A number of companies now have approximately one-half of their new business
written under optional modes of settlement, through which insurance will be
paid out in income rather than in a lump sum. By this means, the insurance
program is adapted to the individual requirements of the prospect and his desires
at the time he purchases the insurance. Through the agent's contact with these
policyholders, these settlements are altered as changes occur in the policy-
holder's individual situation, giving the public a form of service which is not
available through life insurance sold over the counter or through the mall.
After sales are made, agents serve policyholders in numerous matters of im-
portance to them and their beneficiaries. This day-by-day service of agents
is not always appreciated until after a claim has been paid or other policy
benefits availed of.
Among the many new facilities which have been provided for the education
of agents, are :
1. Courses of study developed by insurance companies, not only for new agents,
but also for old agents and their general agents or managers. Many companies
maintain special training departments and systematically issue educational maga-
zines and booklets.
2. The American College of Life Underwriters. This was organized 13 years
ago and requires high scho[72]lastic standards for admission. Practical field
experience, as well as examinations, are required to achieve the designation of
Chartered Life Underwriter. Three or four years may be necessary to com-
15714 CONCENTRATION OF ECONOMIC POWER
plete the required courses. The college also offers a wide range of correspond-
ence courses of study. Many companies support the college and assist promising
agents to defray their expenses in taking the course. A large number of agents
are enrolled in one or more courses in the college.
3. Well-organized insurance courses in colleges and schools of commerce
throughout the country.
Many States have taken an interest in the qualifications of agents as a pre-
requisite to licensing them. Today, life insirrance agents are subjected to super-
vision in every State and in many States they are required to pass a written
examination in order to obtain a license. As against this, is the anomaly that
employees of such outside distributors of life insurance as savings banks are
not trained, as agents are, to help policyholders get the most out of their con-
tracts. Accordingly, they are in a position to give only a perfunctory service.
The law does not even reqjiire licenses for those who sell savings bank life
insurance, nor does it require training, examinations, or special consideration
for such persons, as. do the laws of many States with reference to the agents
of legal reserve companies.
TuKNOVEB OF AGENTS. Much strcss was placed upon the alleged high turnover
of agents as a source of lapses, unnecessary expense, and poor service to policy-
holders. But complete figures were not put in the record by the Securities and
Exchange Commission to show the definite and steady improvement in this re-
spect for the' business as a whole. Furthermore, no evidence was produced to
bring out the excelleat methods being used by various companies either to reduce
or keep turnover down to very low percentages.
[73] No company wants an unjustifiable turnover ,of agents. Accordingly,
companies are analyzing the underlying causes continually — and vrlth real re-
sults. A review of companies having more than 80% of industrial insurance in
force showed that from 1935 to 1938, the agents' termination rates declined ap-
proximately 50%. There has been also a 12%% improvement during this period
in the termination rates of full-time agents of 45 ordinary companies.
SEU.ECTI0N OF BusiNfEss AND UNDEffiWEiTiNG RuLES. Competent agents exercise
a responsibility in helping the company to select risks which conform with the
home office underwriting rules. These are adopted usually to protect the interest
of existing policyholders in the company.
The first underwriting step is taken by the agent when he properly adjusts
the type and amount of insurance to the needs of the policyholder, endeavors
to see that the total insurance in the family is distributed in accordance with
some soundly conceived program, and is satisfied that the policyholder is not
overinsured and can afford the proposed insurance. It is clear, therefore, that
the agent lays the foundation for the subsequent relationship between the policy-
holder and the company. Material progress has been made in bringing about a
more effective appreciation of the importance of sound underwriting to policy-
holders as well as to agents.
The application of underwriting rules by agents is tested and checked regu-
larly by many home offices. The effectiveness of these rules in preventing a dis-
proportionate amount of family income from being spent for insurance, at the
time policies are purchased, is indicated by the results of studies of families In-
sured under iniustrial policies. It was found that the total amount paid for
weekly premiuu insurance in the families studied was less than 3% of the
family income. This was true not only for the entire group studied, but also for
those families in lower income groups wh^re the income was [74] less thar" $30
per week. Another study, made of families insured under industrial policies, to
determine the nature of the distribution of all types of life insurance among
various members of the family, indicated that the total amount of all kinds of
life insurance per insured breadwinner was $1,440, as compared with $564 for
his wife and $380 for each child, and that in less than 5% of the cases was there
no insurance on the head of the family.
Conservation Activities. As the economic and family status of numerous
policyholders "• continually changing, many companies have established depart-
ments for advising agents and policyholders as to the best means of adapting
insurance to meet changing needs and conditions. These departments suggest
changes in mode of premium payment, changes in plan, reduction in the
amount of insurance, and ways and means of reinstating policies in order
that life insurance protection may be continued or restored. Of course this
service is without charge. Substantial amounts of time are devoted by agents
to services of this type, as well as to efforts to prevent terminations.
CONCENTRATION OF ECONOMIC POWER 15715
CONTESTS AND POOE BUSINESS
Much has been said about contests producing new busin ss of poor quality and
high l<ipsation. This is not in accord with the facts because it has been the ex-
perience of many companies that contests, proi)erly conducted, serve many valu-
able purposes without abnormal lapsation. Sales contests are recognized as a
desirable method of sales management in practically every successful type of
business. Among the benefits arising from contests are these :
1. Group competition is a stimulus to make each agent, step up to his own
higher level of personal capacity and ability, with the result that his earnings
are increased.
[75] 2. Contests provide an urge for getting things done today and an aid in
overcoming procrastination.
3. Contests are an incentive for getting the agent to apply his training and
improve his individual technique. They aid in directing his attention to
possible sources of business, developing n<»w insurance plans, and adapting life
insurance to the inaividual need of each prospecfT
^4. Contests result in more than usual distribution of life insurance, thus
benefiting the public.
Many company executives can testify, based upon the lapse rate durmg tne
first two years, that insurance sold during contests 7S as well sold as new
business secured during non-contest periods and is subject to no greater danger
of termination. Further evidence can be adduced to show that modern life
insurance sales contests bring out the best qualities of agents.
COMPENSATION OP AGENTS
One would infer from the record that the present method of compensating
agents is designed to stimulate a volume of "high pressure" business, with bad
lapse experience and high turnover of agents. As to the effect of compensation
upon lapses and tamover, the fact is that both the lapse and turnover records
of the Dusiness ab^a whole have been improving. Obviously, the inferences
in the record are unfair to both the companies and the agents.
The Commission failed to introduce into the record much basic information,
such as a comprehensive statement as to how the average earnings of established
full-time agents compare with the incomes of those engaged in sales activities in
other fields. Furthermore, much of the information on agents' earnings was
inadequate; for example, the method of collecting data made it impossible to
determine accurately the total earnings of [76] agents, as many have sources of
income from other activities.
The work of an agent is threefold : to write new business, to service existing
policyholders, and to keep lapses at a minimum. The latter two functions
may be regarded as conservation activities.
The compensation paid by most tompanies for the writing of ordinary busi-
ness is slightly more than half of that which may ultimately be earned. The
agent has the opportunity, if the business persists to maturity, to make almost
as much over the renewal commission period — say nine years — as he received
for writing the new business, thus encouraging him to keep that business
in force.
The methods of compensating agents vary among companies and types of
insurance ; for example, one ordinary company weights persistency factors even
more heavily in determining its agents' compensation than the more usual
method outlined above, whereas industrial agents generally earn a much
larger part of their income from commissions for service activities than would
be possible in ordinary insurance. The methods of determining the compen-
sation for ordinary agents have been under investigation for some time by
companies, as well as by a committee of the National Association of Life
Underwriters and the Life Insurance Sales Research Bureau.
As the major part of the insurance in force is subject to State laws which
limit acquisition costs, it is clear that the maximum which can be paid by the
companies is fixed. Regardless of this limitation, responsible agents and the
companies agree that the only way the companies can pay more money to the less
successful agent is to increase the cost to policyholders or to level down the earn-
ings of the other agents. Obviously, neither of these methods is equitable either
to policyholders or to agents. It seems apparent, therefore, that any increase in
comrTTlpensation for the less successful agent is (Jjependent upon improving the
valTt& of his work. Previously in this Statement- refe ence has been made to
some of the activities which help agents ijnproy^ the quality of service to the
public.
[78] Life Insiibance Accounting
Life insurance accounting has not only been strengthened by the test of
time but has kept pace with those modern developments which prove to be
applicable to the business. Today, accounting methods are a constant aid
to management, not only from a bookkeeping standjwint but in helping to
keep operating costs low and in analyzing investment results. However, the
Securities and Exchange Commission presented a witness to criticize the form
of reports made to the public authorities and the accounting methods employed
by the life insurance companies. This witness was not an expert accountant
and was without practical experience in the field of insurance accounting.
The testimony alleged, in part, that the annual statements uniformly used
in reporting to the State regulatory authorities were unintelligible, that the
accounting systems of the companies were archaic and not; in accord with
customary practice in comi^iercial accounting. Furthermore, some companies
had no independent ^.audits made, the witness testified, and the methods used
in setting up and iu carrying contingency reserves were confusing and mis-
leading.
The clearest answer to much of this testimony may. be secured by studying
the annual statements made to the State supervisory officials and the type of
accounting records used by life insurance companies generally. None of these
were adequately described, and this failure leaves false impressions in the
record.
Annual Statements. The form of annual statement or report, customarily?
used and commonly termed the "convention blank," is recommended by the Na-
tional [79] Association of Insurance Commissioners and is the result of many
years of experience. A standing committee of this Association meets regularly
for the purpose of considering and recommending changes in the convention
blank. The laws of the various States require the filing of a statement in a
form to be prescribed by their respective supervising insurance officials.
In its present form, this statement represents the ideas of the various Insur-
ance Departments and the insurance business, backed by more than 50 years
of practical experience and continual adjustments to the changing needs of a
growing business.
The witness stressed the thought that the "man in the street" could not
understand the annual statement. ' This convention form was not designed
to present information in ropular form to the general public but to give informa-
tion to State Insurance Departments for study by their experts. Many com-
panies however, publish annual reports of the preceding year's operations for
their policyholders' information.
All data demanded annually by the State supervisory officials in the pre-
scribed uniform annual statements supplement the work of the periodical
examinations made by them in the offices of the companies.
The form of this statement was designed by the supervisory officials of the
various States for the purpose of furnishing them with factual information
which, in their opinion, is pertinent in making an exhaustive audit and
investigation of every essential phase of the life insurance business. The form
of annual statement calls for information classified under more than 300 items,
and in addition requires detailed schedules which break down individual classi-
fications in such a manner that they shall accurately reflect the actual business
operations and furnish the supervisory officials with details necessary for
making a comprehensive analysis and audit.
These details, contained in each life insurance com-r80]pany's annual state-
ment, embrace the important features of the company's business operations.
The statement gives very detailed information regarding income, disburse-
ments, assets and liabilities. It shows yearly changes in the number of
contracts and amounts for various kinds of life insurance and annuities.
Typical examples of the schedules are those showing real estate owned,
purchased, and sold — the actual cost, book and market value, as well as
15716
CONCENTRATION OF ECONOMIC POWER 15717
adjustments in book value — and amount of rentals and expenses; mortgages
owned, and mortgage loans made, increased, discharged, and reduced — including
amount, and where applicable, description of property, yield, and interest
overdue ; bonds and stocks owned, purchased, or sold — including rate of interest,
maturity, book and par value, cost, amortized value, and the Insurance Com-
missioners value ; bank balances ; claims resisted and reasons therefor. The
schedules also contain information on all salaries, compensation, and emolu-
ments paid oflScers and directors, as well as all sums — except bona fide
commissions to agents — ^paid to any employee, person, firm, or corporation in
excess of $5,000; commissions and collection fees of $5,000 or more paid in
connection with loans or properties; expenditures for legal services and legis-
lative matters ; rates of annual dividends and method of calculation thereof, etc.
Assembling the detailed data and preparing the annual statement often
requires several months of intensive work, as it contains thousands of separate
figures and items of information. These forms are bulky, but an inspection
by anyone familiar with the business will show that they are in no sense
unintelligible or confusing, and that they have been performing the functions
for which they were designed.
The witness wrongly assumed that the form of these annual statements was
.affected by the kind of accounting methods employed by the various companies.
The form of the convention blank prescribed by the State super[81]visory au-
thorities and the individual methods of accounting employed by the various
companies are entirely separate matters. The companies, as a matter of
necessity, keep their accounts in the manner which will enable them to comply
with the requirements of the State Insurance Departments. However, it is
impractical for the companies to have uniform internal accounting methods
because of their different problems. For example, a small company writing
ordinary insurance needs only a simple system, while a large company writing
ordinary, industrial, and group must have a more complex one. The real test
is not to be found in particular methods or formulas of accounting, but in the
satisfactory results which have been achieved consistently through long periods
of years.
Accounting Peacticies. The witness stated that life insurance companies
do not follow certain practices of ordinary commercial accounting. Many
of his statements about practices in commercial accounting are erroneous. His
illustration that "funds expended for . . . the purchase of a million dollars
in bonds are not accounted for in this statement in any way" leads to the
false impression that life insurance companies do not show information which
is available in the published annual statements of an ordinary commercial
enterprise. The life insurance annual statement does contain a complete record
of bond transactions, while the income statements of many commercial busi-
nesses do not disclose, on their face, .details of changes in items of asset ahd
liability. However, there is no necessary relation between commercial account-
ing and insurance accounting, as each should be adjusted to its own type of
business.
There is also testimony to the effect that the amount expended annually for
investments by life insurance companies is nowhere shown as a specific schedule.
This is contradicted by an examination of Schedules A, B, C, and D of the so-
called convention report filed by each [82] company in every State in which it
operates, which set forth in detail investments in real estate, mortgage loans,
collateral loans, bonds and stocks. These are subdivided into various classifi-
cations with full details of transactions including costs, sales, and adjustments
in book value. More complete information is made available in these schedules
than is presented in public reports of any comparable financial institutions
of which we have knowledge.
Pbemium Income. The witness gave "a few example of a very simple
sort ... to illustrate the unwieldy and inconsistent character of the informa-
tion in the convention statement." One example referred to the figures given
for premium income, which is subdivided into fii:^st-year and renewal premium
income for ordinary business, while industrial insurance premium income is
given in total and is not subdivided into first-year and renewal.
There is a fundamental difference in the accounting methods followed for in-
dustrial and for ordinary business, ~ which logically leads to a different reporting
procedure. All records of ordinary premium payments are kept in the home
ofilce for individual policies, while records of industrial premium payments are
kept in the field and are accounted for in the Lome office only in bulk. Under
15718 CONCENTRATION OF ECONOMIC POWER
the debit system, the agent makes one report weekly or monthly of the total In-
dustrial premium payments on all the policies for which he is resjwnsible, with-
out segregation between premiums for the first and subsequent years. Conse-
quently, a separation of premium income into first-year and renewal cannot be
directly obtained at the home office for industrial business, but can be readily
obtained for ordinary business from the individual policy records. If such a
subdivision is desired for industrial premium income, reliable approximations
can easily be made from other records that are available. Supervising authori-
ties are aware of this fundamental difference in practice, and the details of infor-
mation [83] required by the convention statement have been designed accordingly.
It is clear that to keep the industrial records in the manner suggested in the
testimony, would not only be unnecessary but would ddd to the cost of
industrial insurance.
GROtTP LiF-E Insubance. The policy exhibit on group life in the annual state-
ment was criticized on the ground that the figures applied only to master policies
in force and this made it impossible to determine the lapsation exi)erienced among
group certificate holders. In the ordinary sense of the term, there is practically
no lapsation of certificate holders. The insurance premium is paid customarily
monthly, covering the period insured. At the end of the month, the certificate
holder has had insurance protection and he continues it provided he is still
employed, or, may elect to convert his policy to ordinary insurance if his em-
ployment ceases. The exhibit does show the amount of insurance terminated
on individuals, which gives an index of the amount of turnover. Practically
all terminations in gro&p insurance (which are called withdrawals) arise from
termination of employment. Very few employees discontinue their group insur-
ance while still employed.
Supplementary Contracts. It was further charged in the testimony that the
annual statement included in death claims, the moneys which are set aside at the
time of death to comply with supplementary contracts. These contracts contain
the conditions under which the proceeds of a life insurance policy at death, or
maturity, are left with the company for subsequent payment to designated per-
sons as annuities, installment payment over a period of years, or otherwise.
Those familiar with insurance practices kndw that when a death claim is paid,
that ends the transaction, and that when a new contract, technically known as a
supplementary contract, is accepted, the funds representing the obligations under •
the new contract appear as income in the com[84]pany's books. To illustrate,
let us consider a supplementary contract for an annuity. The proceeds of the
death claim are used to purchase an annuity, and the insurance company includes
that sum in income and sets the money aside for that purpose. In other words,
one contract is liquidated and a new transaction begun, and both are recorded
properly.
CoNTiNGENov Reservejs. The witness was unable to explain the reason for,
or the basis of, the contingency and special reserves, and presented confusing
testimony with regard to the allocation of contingency reserves to the various lines
of business. In most cases, contingency reserves are set up to take care of
unforeseen contingencies, or specific contingencies on which there is not suflScient
experience to base a specific reserve. In part, they are set up on the recommenda-
tion of the actuaries in an attempt to evaluate the future from past exi)erience
in such a way as to prevent any sudden, unfavorable shock to the company's
business. The State authorities are particularly watchful as to the source and
use of contingency reserves and are careful to emphasize the proper allocation
of expenses or losses to the proper branch of the business.
The testimony gives the impression that in some companies the division of
earnings is made to the detriment of the industrial business and for the benefit
of the ordinary business. The witness overlooked the fact that it is the practice
of industrial companies to maintain separate accounts, which reflect the ex-
perience of the business of the industrial and ordinary departments.
Intercompany Comparisons. The criticism that the form of annual state-
ment prevents comparisons between companies disregards the fact that the
statement is in the analytical form. required by the State insurance authorities.
Experience indicates that the schedules in the annual statement are wholly accu-
rate and adequate for the purposes for which they are submitted. They can be
made the basis of comparison between companies, [85] provided there is used In
their analysis the same care and discrimination aS' exercised by the State regrula-
tory authorities. However, the tables prepared by the Securities and Exchange
CONCENTRATION OF ECONOMIC POWER 15719
Commission, embraced in Exhibit No. 2250/ were demonstrably inadequate and
unfair when used during the hearings to compare companies.
The unfairness of using only a statistical table for criticizing companies is
clear from one illustration. In analyzing one of the exhibits of the Commission
which compared companies, its witness criticized the practice of capitalizing in-
terest on delinquent mortgage loans by some companies. He failed, however, to
give supporting evidence to prove that, in the actual cases where this had been
done, there was inadequate security behind the mortgage loans, or that the policy-
holders suffered in any way. Further, the witness gave no consideration to deter-
mining how much of this so-called capitalized interest had been charged off by
adjustment of bools value, or losses on sales, or had been affected by profit on
sales.
Audits by the State Insurance Depabtment. An erroneous impression was
created by the witness' criticism that some companies failed to employ inde-
pendent auditors, suggesting a lack of proper audit — especially of liabilities. The
major item in liabilities is policy reserves. These reserves are computed by the
companies' actuar 'd, and they are completely verified by the State Insurance
Departments on the basis of full and complete data. These audits may extend
back to the original application for the policy and to the premiums paid. Other
items, both of assets and liabilities, are investigated with similar thoroughness
in every examination made by the State Insurance Departments. In fact, repre-
sentatives of the public not only audit but also investigate management as well.
^ Hearings, Part 10-A.
[86] The Valuation of Investments
The valuation of life Insurance assets has been the subject of legislation in
many States and has continuously been given the closest scrutiny by State
Insurance Commissioners. The Securities and Exchange Commission failed
to emphasize this during the hearings or in its published statistical statement
on life insurance investments. Instead, the method of valuing investments was
attacked.
A life insurance policy is a long-term contract based on certain actuarial
calculations. As a consequence, life insurance companies are primarily Interested
in the average rate of return from their investments over an extended period
of time. Their purchases of securities are generally based on the expectation
of holding such securities to maturity. They are vitally concerned that the
interest on such investments be paid when due and the principal met at ma-
turity, but with these conditions of safety satisfied, market fluctuations in the
meantime are of secondary importance. Were such investments affected to any
sizable extent by current market fluctuations, there would be a tendency toward
speculation which would be alien to the life insurance business. . Furthermore,
the income available for distribution would be then subject to wide fluctuations,
being rapidly increased in periods of high bond prices and as drastically de-
creased in periods of low prices.
The States have properly recognized the importance of a stable form of valua-
tion " in the life Insurance business. As a consequence, most States have re-
quired by law that amply secured corporate obligations and govern [87] mental
securities, having a fixed term and rate of interest and not in default, are
to be valued on an amortized basis. The vast bulk of the life Insurance com-
panies' security investments fall within this category. The States have, with
equal propriety, recognized that where the interest or principal of certain invest-
ments is not reasonably assured, such securities are not subject to amortiza-,
tlon and must be carried at market value. As a consequence, all bonds in default
and those which, even though meeting their interest requirements, are not held
to be amply secured, must be valued at market value. The soundness of this
policy is not impaired by the fact that on exceptional occasions of chaotic
market conditions the Insurance Commissioners have set market values based
on averages for a period of time rather than on the market quotation at the
Statement dat:e. Subsequent market action has proven the soundness of this
procedure. In order to have uniformity of determination as to what securities
may be considered as not amply secured, the Insurance Commissioners have
generally relied on the opinions of the outstanding bond rating organizations.
During the hearings, particular attention was devoted by the Securities and
Exchange Commission to those two categories of bonds rated as Baa and Ba,
even though not in default. The Commission dwelt at some length' on the as-
sumption that since these two categories of securities were permitted to be car-
ried on an amortized basis, they appeared in the companies' statements at a
figure above their then market value. The Commission failed to bring out, how-
ever, that in the case of the 26 companies under study only 5.6% of the oompanies'
assets were included in the higher of these two categories, namely Baa, and only
2.1% were in the Ba classification. Nor did it point out that had such Baa
securities been carried at market value, the assets of the companies involved
would have been reduced only % of 1%, and had such Ba [88] securities been
carried at market value, assets would have been reduced only approximately
% of 1%. The unfairness of criticizing one particular category of the com-
panies' assets is emphasized by the fact that had this type of valuation used
by the Commission been applied to all of the security investments of the com-
panies under consideration, their current market value would have been two
hundred million dollars above are value at which such securities were carried
in the companies' statements.
As to foreclosed urban real estate, the Commission apparently attempted to
intimate that this asset was overvalued in the companies' statements, based on a
15720
CONCENTRATION OF ECONOMIC POWER 15721
theory that foreclosed real estate should be valued at a certain number of times
gross revenues from the properties. Such rules of thumb cannot be broadly
applied to foreclosed real estate properties. For example, a certain portion of
the real estate held by life insurance companies is going through a period of
rehabilitation. Obviously in such a period, the earning power of the property is
not normal. However, the soundness of the companies' valuations is reflected
In the aggregate prices received for properties sold, and it is interesting to note
that in the case of the investments of the 26 companies specifically studied,
these prices exceeded book value by a reasonable margin. The inconsistency
of the suggested method of valuation of urban real estate is further evident
from the Commission's own tabulations. From these figures, it is evident that
in the case of companies with sales of urban real estate in excess of $60,000,000,
the aggregate sales were actually consummated at a higher ratio to income than
the ratio indicted by the book value of the real estate held.
One" basis for checking the valuation of real estate is that used by the State
Insurance Commissioners. They employ independent exi)erts to value Individual
pieces of real estate. By this method, an indication of the value [90] of the
„>«;entire foreclosed real estate portfolio of an insurance company is obtained.
The implied weakness in life insurance investment valuation practices, upon
which the Securities and Exchange Commission concentrated, is insignificant in
comparison with the proven strength of the insurance companies. At the end
of 1938, the 26 companies studied by the Commission were protected by a surplus,
including contingency funds of $1,294,000,000. This fund would absorb any
unforeseen contingencies arising from losses due to investments or adverse
mortality experience. An even more forceful picture of the inherent str&ngth
of these life insurance companies would be gained from reviewing their experi-
ence from 1929 through 1938. During this period the companies were able to
increase surplus and all contingency funds by over $300,000,000, and to pay divi-
dends to policyholders of $4,508,000,000 and to stockholders $82,390,000. Obvi-
ously, these latter funds represented additional cushions which were available
if needed.
[90] AcTUABiAi, Conferences
The Securities and Exchange Commission conducted the hearings in such a
way as to give the impression that there were collusive and secret conferences
of actuaries which preceded the alleged adoption of anticompetitive agreements
among the companies.
The Examiner for the Commission did not put into the record complete infor-
mation about conferences of actuaries; for example, that no one company has
adequate data on many basic matters, such as mortality, and that, in the interest
of safety, it is the custom of the business for actuaries to bring together infor-
mation iind the experience of their companies in an effort to build the broadest
iwssible basis for judgment. Furthermore, the Commission failed to develop
adequately that such conferences do not affect competition because their results
are not binding, in any sense, upon the respective companies, that many confer-
ences were the result of requests from State insurance authorities, and that
actuaries normally confer on various subjects, such as the adequacy of rates,
problems associated with permanent and total disability benefits, and annuities.
Neither did the Examiner explore sufficiently the extent to which competition
in the life insurance field exists, nor did he show that as a result of such
competition charges to policyholders for ordinary, industrial, and group insur-
ance vary by companies; to illustrate, reference to a standard insurance publica-
tion indicates that out of 197 companies listing their ordinary premium rates,
163 had different costs under a 20-payment life policy issued at age 35.
However, in its annual report for 1939, the Securities [91] and Exchange
Commission, while hearings before the Temporary National Economic Committee
were still in progress, stated:
"Test nony demonstrated that insurance companies have entered into
anti-coLipetitive agreements and understandings. Efforts of companies to
fix group Insurance rates, non-participating ratos for ordinary insurance,
uniform annuity rates, and to establish uniform settlement option agree-
ments and uniform surrender value programs were explored."
The statement is presumably based partly on testimony given with respect
to certain actuarial conferences, partly on erroneous inferences drawn from this
testimony, and partly on the failure to include in the record certain basic infor-
mation. Most of these conferences either were the result of direct requests made
by the State insurance authorities, or were conferences of which the authorities
had knowledge or had given specific approval. The hearings did not develop
fully the extent of the interest of State insurance authorities and failed to pre-
sent an adequate statement of the facts relating to it. Furthermore, throughout
the hearings, the Commission did not record certain important differences be-
tween the operations and objectives of life insurance companies and ordinary
Industrial corporations which would have made clear both the necessity for the
conferences and the active interest of State regulatory authorities in main-
taining insurance company operations on a safe basis.
LIMITATIONS ON LIFE INSURANCE OPERATIONS
Life insurance companies are not free to complete in any manner which would
involve the intrinsic safety of policies. An appreciation of these limitations is
necessary to understand the purposes of the conferences of actuaries and the
Interests of State supervisory authorities.
The first major limitation on life insurance companies [92] relates to reserves.
For the most part, a life insurance company's liabilities are contingent in the
sense that they will accrue over a long i)eriod of years and it is not known
when an individual claim will mature. The investments made to meet these
liabilities for future benefits make up by far the greatest proportion of a
company's assets. The assets required to meet these contingent liabilities are
called "reserve" funds. The "surplus" built by a life insurance company merely
15722
CONCENTRATION OF ECONOMIC POWER 15723
constitutes a factor of safety over and above the reserve funds, both of these
being needed to assure the payment of future benefits. The maintenance of
reserves on a prescribed basis is a statutory requirement. If the reserve funds
became impaired, the company would be insolvent and the Insurance Depart-
ment of the States of its domicile would have to step in. However, the Insur-
ance Department checks most closely the reserves maintained by each company,
so that corrective steps may be taken to avoid impairments.
Another limitation of importance deals with acquisition costs of new business.
The extent to which life insurance companies may expend their funds in an
effort to obtain new policyholders is directly limited by laws which govern the
operation of life insurance companies with about 83% of the business in force.
These and other legal limitations, such as those restricting the amount of new
business, are designed to permit companies to grow in a normal but safe manner.
These limitations have been ' operating for more than a generation and have
played an important part in the safety record of life insurance. They contrast
sharply, though, with the latitude in which the usual type of commercial corpora-
tion operates.
A life insurance company, however, is free to select the market which it will
cover, both with respect to economic levels and to geographical limits. The
ramifications of differing policies of operation are numerous and varied. One
company may prefer to sell to a selected or [93] preferred market and to cover
the country. Another company restricts its business to a portion of the country.
Some endeavor to spread their production over the largest number of persons
possible by aggressively urging the general public to insure. These companies
make the benefits available not only to the economically and physically favored,
but to the less fortunate and less healthy. All of these general policies of
operation call for dynamic action, constant search for new fields of opportunity,
and readiness to try out new methods within fixed limits.
Competition has resulted In many benefits to policyholders through experi-
mentation in liberalizing policy provisions. Early restrictions upon travel, sui-
cide, and occupation have been removed. In the absence of fraud, statements
in the application are no longer warranties. The period of grace for payment
of premiums and the incontestability clause have been developed. New types
of policies, such as educational, family income, group, and other special types
of policies, have been devised under competitive pressure. These and many other
benefits have accrued to the public under competitive conditions, long prior to
the enactment of compulsory legislation.
Such improvements resulted from the experimentation possible under the sys-
tem of State regulation. Group insurance, for instance, was first experimented
with by permission of one Insurance Commissioner. The experiment was cl«sely
supervised, and after actual trial proved it successful, group insurance was* gen-
erally adopted into the laws of other States as well. So also many other pro-
gressive changes have resulted from supervised experimentation in one State,
by actual trial and evolution, and, when proven sound, adoption by other com-
panies and other States has followed. Similarly, the adverse effects of other
experiments, which in actual trial were unsuccessful, were confined to small
localities. The fact that a single State or a single company may, under State
supervision, attempt new concepts and new methods is [94] in itself a guarantee
of progress for the insurance business and its policyholders.
The processes of freedom of action In those areas where such freedom con-
tributes to the general interest, the restrictions In other areas, such as reserves,
and the limitations upon the acquisition cost of new business and investments
have worked satisfactorily and produced a surprising record of safety and pro-
gress. The point in developing briefly the limitations upon the operations of com-
panies is to show the close interrelations which exist between the State super-
visory authorities and the companies in matters, such as safety, where the public
welfare may be affected.
COOPEBATION UNDE» STATE SUPERVISION
The efforts of the legislatures and the courts to limit collaboration and coUiision
between business concerns are aimed to prevent restraints of trade. These aims
have only a limited application to the life insurance business, since collaboration
between actuaries, for example, is limited to a few special phases, such as deter-
mining limits of safety. In these matters, the public interest is further protected
by the State insurance authorities.
15724 CXDNCENTRATION OF ECONOMIC POWER
The requirement of safety in life Insurance is essentially different from any
similar requirement in other businesses. If a manufacturer sells an article of
merchandise at a "bargain price" which proves to be inadequate, the purchaser
has his merchandise at the "bargain price," regardless of what happens to the
company. He is not directly concerned as to whether or not the company fails
because of the inadequate price he paid. On the other hand, when a man buys
a life insurance policy, he ordinarily pays premiums to the insurance company
over a period of years in anticipation of having a benefit paid back to him or his
beneficiary at some time in the [95] future. If the insurance company sells a
policy at an inadequate rate and is unable to fulfill its obligations to policyholders,
the purchased has no bargain. Even if the insurance company can meet its obli-
gations, an inadequate rate on a particular type of policy simply means that other
policyholders must make good the difference. Accordingly, adequacy of rate is
of primary importance to the entire insuring public.
The proper conduct of life insurance requires the application of calculations
on a basis determined by experience and judgment. Consequently, conferences of
actuaries commonly concern themselves with past experiences in life contingencies,
interest rates, and other factors, as well as judgment as to their future trends.
In conferences where such matters of judgment are under discussion, the expe-
rienced actuary will give weight to opinions expressed by other actuaries of
proven ability and thus each obtains a broader base for his own independent
judgment. Sound judgment regarding the future is necessarily diflacult, so that
the greater the degree of collaboration In discussing relevant matters, the greater
is the degree of resulting safety to the public.
CONFERENCES ON ANNUITIES AND OPTION AT MODES OF SETttEMENT
The Commission failed to emphasize in the hearings that the primary concern
of the State Ins\irance Departments supervising life insurance has always been
the adequacy of provision for liabilities, which is inextricably abound up with
adequacy of rates. In the case of slngle-tremium annuities, for instance, the
initial reserve liability is equal to the net single premium for the risk. As indi-
cated previously, it Is seldom that any one company has sufficient data of Its own
on which to construct a mortality talkie satisfactory for general use ; hence. It
has been common practice for many years to pool the experience [96] of several
companies. Insurance Departments have naturally fostered such collaboration
among the actuaries of the various companies - to secure for themselves and
for other companies the most authoritative Information. Tills has been par-
ticularly necessary for annuities, where the paucity of data and the nature of
the mortality and Interest trends haye created problems difficult for any single
company to solve.
The chief object of life insurance supervision is absolute certainty that the
benefits contracted for will be paid. To this end State laws have emphasized the
matter of conservative valuation of liabilities, and have fixed a minimum
standard of reserves to be held. As a result of many years of accumulated
experience in the life insurance business, various mortality tables have been
constructed, and there has been no difficulty in deterrdining proper mortality
standards for life insurance reserves. However, relatively few annuities were
Issued In this country prior to about 1925, and the experience thereon has beea
scanty as compared with life Insurance. Moreover, Improving mortality In-
creases the cost of annuities, and the trend of improving mortality during the
past few decades has made the problem of determining the Droper reserve lia-
bilities for annuities especially difficult.
In view of these facts, the New York Insurance Department in 1927 requested
the Actuarial Society of America to Investigate annuitants' mortality. Similar
Investigations had been made in 1896, 1905, 1911, and 1920 by actuaries of the
companies at the request of various State insurance authorities. At the request
of the New York Insurance Department, a Committee of the Actuarial Society
studied the experience of 31 companies, between 1928 and 1930 and prepared an
annuitant mortality table known as the Combined Annuity table. This table was
discussed with the Insurance DepartmenJ; and on its recommendation was incor-
porated In the laws of New York and other States as a minimum valuation
standard [97] for annuities issued after December 31, 1930.
Rates for Immediate annuities depend almost entirely on mortality and the
Interest rate at which the premium can be invested at. the time of pajTnent.
The factor of expense is almost negligible in relation to the benefits paid out.
OONCENTRATION OF ECONOMIC POWER 15725
After the Combined Annuity table was completed, interest rates began to
decrease, thus presenting a new problem. As interest rates decreased, the
matter of a conservative table of annuitants' mortality became even more
important, because any loss resulting from increased longevity would no Jouger
be offset by the high interest rates earned during the 1920's. So in 1933 the
Insurance Department of New York requested the actuaries of several com-
panies to make a further study of current annuitants' mortality. The In-
surance Department was concerned because of the old Section 97 (now 213)
of the New York Insurance Law prohibiting the issuance of any jwlicy, "that
did not api)ear to be self-supporting on reasonable assumptions as to interest,
mortality, and expense." The actuaries of the companies exchanged data
during 1933, not only pn annuitants' mortality but on all factors entering into
the annuity rate, including the interest rate which was declining steadily.
Discussion of interest rates in 1933 also led to discussion of the similar
problem involved in optional settlement clauses. Under these provisions of
policies, the companies frequently, guaranteed payment of a stated interest rate
after the death of the insured or guaranteed payments in the form of an
annuity. The continuation of low interest rates raised a doubt regarding the
rate of interest which should be guaranteed in the future, and as to the ade-
quacy of rates for settlement annuities. The consideration of these problems by
the actuaries had the full approval of the New York Insurance Department,
which was properly concerned about the same matters.
Again in 1937, we find the State supervisory authorities urging actuarial con-
ferences, when the New York Super [98] intendent of Insurance formally re-
quested the actuaries to study and take definite action on the problems of policy
loans, interest on policy loans, options, and guaranteed interest rate. (Exhibit
No. 784.)' Subsequently, the views expressed at the meetings >vere reported
to the Department.
There was nothing secret about the actuaries' conferences and their con-
sideration of these problems. The fact is that they were meeting periodically,
and the conclusions arrived at were made known both formally and informally
at actuarial meetings attended by representatives of various State Insurance
Departments. The new annuity rates adopted by the companies from time to
time were filed with the State Insurance Departments. The specific changes in
the policy provisions regarding surrender values, guaranteed interest rates,
and other matters were disclosed to the Insurance Departments whenever ap-
plication was made for approval of changes in policy forms. Similarly, the
adoption of these changes by a number of companies was announced from time
•to time in the insurance press.
During the hearings, those*who asked questions mistakenly sought to establish
a similarity between the purpose and effect of conferences among actuaries, and
agreements between manufacturers intended to keep prices at "an abnormal level.
It was emphasized, for instance, that in 1933 three non-participating companies,
which have about 5% of the total life insurance in force, adopted uniform rate-;
for such policies as all three were currently issuing.- This involved a slight in-
crease in rate, varying according to the plan of insurance and age, but averaging
about 3%. Uniform rates of these same three stock companies were again re-
vised in 1935 and 1937. Both of these revisions involved approximately the
same average Increase as in 1933. These rate increases resulted from the rap-
idly falling interest rate available on new investments and the refunding of [99]
old investments at lower interest levels.
On analysis, the action of these three particular companies is not fairly
subject to criticism. The calculation of rates for non-participating policies
involves the expecred interest rate during a long future period, the mortality
rate exi)ected to be experienced based on the present standard of underwriting,
and also the expected expense rate in the business. These expenses include
taxes, which are obviously outside the control of the company and the amounts
of which are always uncertain. The first two factors will be approximately
the same for the three companies because they are operating in the same way,
cover the same standards, and in many other respects 'are much alike. Their
expense rates are not materially different. The Important item of commissions,
for example, is practically identical because the commission scale is subject to
the legal limitation on expense in connection with acquisition costs.
Prior to 1933, the three companies referred to had in effect very similar rates,
with the result tha* the variation was unimportant, amounting usually to only
1 Hearings, Part 10, p. 4860.
124491 — 41— pt. 28- 66
15726 CONCENTRATION OF ECONOMIC POWER
a few cents. However, to have the proper perspective, it is important to note
that the rates referred to during the hearings were filed with various Insurance
Departments and were publicized in insurance publications. Furthermore, these
companies are at all times in active competition with each other and also with
many of the 300 non-participating and participating companies in the United
States.
To sum up, the State supervisory authorities realize the value of actuarial
conferences, and have encouraged their use in connection with matters which
they regarded as potentially detriniental to the welfare of policyholders.
The Commission improperly focused attention upon these conferences in its
apparent endeavor to prove they were collusive and secret, and that the com-
panies had entered into anti-competitive agreements.
[100] Conferences on Gboup Insurance
The testimony gave rise to the inference that the insurance companies had
combined to establish a uniform cost for group insurance, resulting in the
elimination of competition on the basis of cost. This is not the case.
Group life insurance', as it is now understood, was first introduced in the
year 1911. At first it was a field involving a certain degree of experimentation.
Such severe competition soon set in that the New York Superintendent of
Insurance became concerned with the tendency to cut initial rates unduly,
resulting in rates below those which the Department felt the companies could
safely charge and continue to do business. Accordingly, in the interest of the
general body of policyholders, the Superintendent called a conference of repre-
sentatives of companies writing group insurance. This was followed by legis-
lation in New York concerning group life insurance premiums. In accordance
with such legislation, a minimum group life insurance basic initial premium
rate was established by the Superintendent of Insurance in order to insure
that the initial rates charged would be amply adequate to provide safety and at
the same time be reasonable.
Thus, historically, the fact that the companies charge the same initial premium
rates for group life insurance is a direct result of State legislation passed in the
interest of the insuring public. For other forms of gi-oup insurance, which had
their major development subsequent to that of group life insurance, there has
not been any statutory regulation of premium rates, except the requirement of a
number of States that accident and health rates must be filed with the Insurance
Department. The lack of such regulation is undoubtedly due to the fact that
the actuaries, recognizing the difficulties encountered in the early days of group
life insurance, contributed claim experience to form basic tables. All forms of
group insurance, except group annuities, are [101] usually one-year term insur-
ance, and the claim rate is by far the principal factor determining the premium
rate, as interest is a negligible factor.
The combining of the general experience has been accompanied by suc-
cessive reductions in initial premium rates for both group life and group
accident and health insurance. The trend of the extra premiums under
group life insurance policies, as promulgated by the Superintendent of Insur-
ance, for industries having »a mortality rate higher than average, has been
downward, and the basic group accident and health rate, for industries having
average experience, has been reduced a number of times, the latest reduction
having been made in 1937, amounting to 14% on the most popular plan of
insurance/
The uniformity of the initial premium rates for group insurance among the
various companies does not mean that the cost of insurance is the' same or that
competition is eliminated. The initial premium rate is not the determining fac-
tor in the ultimate net cost to the group policyholder. In the case of both mutual
and stock insurance companies, group insurance is written on an experience-
rating basis, which means that the experience of each group policy is reviewed
annually and the premium is adjusted or a dividend is payable (or both) , as war-
ranted by the actual experience under that particular group and the business as
a whole. The actual net cost for any year for a given policy of group insurance
thus depends on the difference, for that policy, between the premiums charged
for that year and the dividend paid or rate reduction granted, if any, for that
year. The latter in turn depends largely on the actual experience of the indi-
vidual group — which cannot be determined until after it has actually been in
force for the complete policy year. It is also affected by the expenses incurred
by the insurance company, and such expenses vary among the companies. The
method of computation of such dividend or rate reducti|On also differs by com-
panies, [102] and it is very unlikely that two companies having the same claim
experience would pay the same dividend. It is clear that the real cost of group
insurance is the net cost to the policyholder at the end of each year.
15727
15728 CONCENTRATION OF ECONOMIC POWEB
Accordingly, the fact that the Initial prenoium rate for both group life and
group accident and health insurance is uniform in many companies does not
mean that the cost of the insurance in such companies is the same and does not
not affect the competition among the companies based on cost. Actually, the
keenest competition exists in the field of group insurance, and ability to reduce
costs without Impairing safety is a controlling factor.
Group life Insurance in force has increased from $1,700,000,000 in 1920 to
nearly $14,000,000,000 in 1939. The number of employees insured ii the same
period has increased from approximately 1,700,000 to nearly 9,000,000. As group
insurance has grown, the expense of handling th^ business — the principal item
under the control of the company — has been steadily reduced. The companies
wbicb can most effectively keep costs down have a distinct competitive ad-
vantage. For the seven United States companies writing the largest amount, the
expense rate for group life insurance, including taxes, has been reduced from
16.2% of the premium income in 1925 to 11.8% in 1930, 9.5% in 1935, and 8.8%
in 1938.
In general. State supervision has not recognized any necessity for the deter-
mination of the amount of life insurance premiums except in setting the mini-
mums. The explanation of failure to fix maximum premiums lies in the unique
character of the life Insurance business. In effect, competition is based upon the
actual net cost
NO ANTI-COMPEnnVE BUSINESS PRACnCBS
Some testimony also was offered as to arrangements relating to interchange of
medical Information, prevention of twisting policies, and similar trade practices.
None of [103] these are anti-competitive either in intention or effect ; on the con-
trary, they ere in the interests of the policyholders. That they have had no
effect upon competition is convincingly shown by the intense competition every-
where manifested in selling all types of life insurance. The Committee's Exhibit
No. 2250,' and particularly that section which contains the calculations showing
net cost of the most common types of policies to policyholders In 26 companies,
in itself demonstrates the freedom of this business in all of its significant aspects
from any artificial restraints resulting from actuarial conferences.
1 Hearings, Part 10-A.
[104] Legislation Adverse to Poucyholdees
One might infer from tlie annual report of the Securities and Exchange Com-
mission for 1939 and the testimony developed by the Commission in the record
of the Temporary National Economic Committee, that the companies should do
nothing when legislation detrimental to policyholders is proposed. No other
inference is possible from the criticism of the Commission, which was based
on isolated cases and ignored thousands of others which typify customary
legislative procedure of the companies. The Commission did not put in the
record the exact character of the bills involved, their potential detrimental
effect upon policyholders, or their legislative history.
Life insurance companies, like Individuals and corporations in other lines
of business, have occasion to appear before legislative committees which are
considering proposals affecting life insurance. They have a responsibility to
present facts concerning legislation that may affect any interest of their policy-
holders. Accordingly, they concern themselves with the presentation of argu-
ments on the merits of proposed bills, and their contributions to the discus-
sions of such proposals, quite frequently by way of valuable assistance In
perfecting the form of the legislation under consideration, are most generally
welcomed by committee members.
Exi)enses Incurred in such presentations, principally by way of counsel fees,
are fully itemized in Schedule K of companies' annual statements filed with the
Insurance [105] Departments as required by law and thus are subject to the close
scrutiny of the State Insurance authorities. Mpreovep^ the amounts and the
character of such expenditures are at all times subject to .the most comprehensive
inquiry by Insurance Department examiners. Life insurance companies welcome
the utmost inquiry into the natiire of their legislative appearances and into the
expe"'"tures involved.
15729
[106] The Test of Experience
We wish that it were possible to bring to the Committee the heartfelt expres-
sions of appreciation of thousands upon thousands of policyholders and benefi-
ciaries whose experiences prove conclusively that the Institution of Life Insur-
ance did not fail them in their time of need. However, we shall conclude this
statement with some excerpts from an address made by the Hon. Charles E.
Hughes. It will be recalled that in 1905-06 he was Counsel for the Armstrong
Committee of the New York Legislature which investigated life insurance
Much constructive legislation was enacted as a result of that investigation. In
December 1926, when Mr. Hughes was in private life, he delivere^l an address on
the suliject of "The Life Insurance Enterprise from the Standiwint of the
Public." After speaking of the growth of the companies during the preceding 20
years, he said:
"This expansion, it is most gratifying to observe, has b^n achieved with
wise conservatism in management, without undue expenditures in obtaining
business, and with the returns to policyholders that are consistent with
safety. I believe that there is no safer or better managed business in our
country than yours."
Elsewhere in his address, he said :
"Manifestly the interests are too vast and those dependent upon your man-
agement are too many, to permit such enterprises to be conducted without
legal restrictions and appropriate public supervision. The State undertakes
to supply these. It would be the highest misfortune if confidence in this
supervision [107] were shaken by attempts to make the supervisors the pro-
t4g6s or lackeys of those who are supervised. It would be equally dis-
astrous if State sui)ervisiou were incompetent, capricious, and constituted
an interference rather than a help. Supervision of the life insurance busi-
ness is not as difficult an administrative duty as railroad rate-making, for
example. But it does demand a high degree of technical knowledge, and
it absolutely requires honesty and intelligence. I am glad to believe that in
the past 20 years there has been a great improvement in the administration
of State Departments of Insurance. Proper measures of protection are
better understood and more wisely applied. There is not only co-operation
between the life insurance companies in the interest of policj'holders and
to secure improvement in direction and management, but there is a better
and more intelligent- co-operation between the States and the insurance
companies than in the past.
"From the millions of policyholders you would get strong criticism if you
were remiss, but you are also assured of powerful support against mischievous
assaults upon management which they recognize to be conducted in their
interest. We have a fortunate balance — mutual undertakings under compe-
tent direction, with confidence in the integrity of management and a whole-
some public supervision which is no\^ as little menaced by political Inter-
ference as any great public undertaking in democracy can well hope to be."
The situation today is even better than it was pictured by Mr. Hughes in 1926.
Since then, the companies have passed through a prolonged period of depression
and have emergetl therefrom with an outstanding record of safety and service.
This record would not have been possible if it had not been for the sound
policies adhered to before the depression began.
15730
[108] Table of Contents
Page'
Thh Test of Life Insubancb — Safext 1
Safety — The Result of Sound Supervision 2
The SE21VICBS of Directors 6
"Self-Perpetuating Directors" 8
"Interlocking" Directors , 12
Results Indicate Confidence of Policyholders 14
SIZE AND Its Economic Aspects 16
Comparative Growth of Life Insurance 16
Legal Limitations of New Business 20
Life Insurance Assets at Work 21
Concentration of Larger Companies in the Northeastern States 24
Life Insurance Assets and Economic Control 27
Erroneous Data Regarding Concentration 29
Misleading Definitions 31
Life Insurance Lapses 33
Basic Causes of Lapses and Surrenders 33
Life Insurance and Other Types of Terminations 37
"Pressure" Selling 39
Termination Rates and Growth of Companies 41
"Frustration" of Policyholders , 42
Terminations, New Insurance, and Gain in Force—^ 44
Maturity, Deaths, Surrenders, and Lapses 47
Terminations in Relation to Premiums Paid _ 50
The Cost of Life Insurance 54
Why Life Insurance Reserves? 54
New Mortality Tables and Life Insurance Costs 57
Cost of Industrial Life Insurance Is Not Excessive 58
Competition Keeps Costs Low 62
"Gain" on Lapse or Surrender 63
The Agency System 66
Efforts to Improve the Agency ?.v5tem 70
Contests and Poor Business..- '. 74
Compensation of Agents — 75
Life Insurance Accounting 78
The Valuation of Investments 86
Actuarial Conferences 90
Limitations on Life Insurance Operations 91
Cooperation Under State Supervision 94
Conferences on Annuities and Optional Modes of Settlement 95
Conferences on Group Insurance 100
No Anti-Competitive Business Practices 102
Legislation Adverse to Policyholders 104
The Test of Experience 106
15731
The following memorandum bj' Gerhard A. Gesell, is included at
this point in connection with the preceding "Statement on Life In-
surance,"
MEMORANDUM
October 28, 1940.
To : Temporary National Economic Committee.
From : Gerhard A. Gesell, Special Counsel, Insurance Section, Securities and
Exchange Commission.
Re: Statement on Life Insurance.
Pursuant to the request of Chairman O'Mahoney the Commission's staff has
examined the Statement on Life Insurance prepared for filing witn the Temporary
National Economic Committee by a group of life insurance companies and "pre-
sented for the purpose of supplementing and, in some instances, correcting the
record of the hearings on life insurance before the Committee. <
The staff of the Cormais&ion wishes to make it clear that it is not in full
agreement with the yarious statistical interpretations and comments contained
in the Statement on Life Insurance. Indeed it is quite apparent that wide
differences of opinion exist. The Statement is primarily a somewhat argumenta-
tive interpretation of information presented during thfe course of the hearings
rather than a factual analysis of the accuracy of the information itself. This is
well indicated by the Statement's use of facts established in one portion of the
hearings to prove the supposed, inaccuracy or inadequacy of another portion oC
the hearings. Furthermore the Statement frequently seeks to set up as facts,
and then to attack as inaccurate, inferences quite unjustifiably read into th)s
record by the companies' special research staff. A casual question by a member
of the Committee is often treated as if the query were a deliberate recommeuda-
tion of the full Committee based upon a careful study of all facts presented in the
record. For these reasons it seems futile to engage at this time in an extended
discussion of the various opinions expressed by the companies.
A detailed analysis of the hearings prepared by the staff of the Commission
prior to receipt of the Statement on Life Insurance will be found in the forth-
coming Committee monograph containing the complete report of the Commis-
sion's staff on all phases of the insurance study. This report will be based
primarily upon the sworn testimony. When the report appears it will be possible
to compare the position taken by the insurance companies signing the Statement
with that of the Commission's staff and each Committee member will then be in
a position to weigh independently the merits of the respective points of view
expressed.
It should be pointed out that the Statement on Life Insurance is not signed
by many leading companies whose representatives appeared at the hearings.
Among such companies not signing the Statement are the following: Acacia
Mutual Life Insurance Company, The Prudential Insurance Company of America,
The New York Life Insurance Company, The Mutual Life of New York, The
Northwestern Mutual Life Insurance Cojnpany, The National Life Insurance
Company of Vermont, and the Western and Southern Life Insurance Company.
Assets of these companies total over $10,000,000,000.
The Statement presents supplementary material which in some respects is a
contribution to the Committee's factual study and provides further insight Into
problems considered in the course of the hearings. In only a few instances,
however, Is this supplementary material cited to source and for this reason it
has not been possible to check the accuracy of the Information given. Indeed
in some cases even the names of the companies whose experience is cited for
purposes of example are not made known.
15732
CONCENTRATION OF ECONOMIC POWER 15733
It Is submitted that the Statement of the companies is factually incorrect in
a few respects indicated immediately below :
(1) On page 21 it is stated, "The witnesses presented by the Securities and
Exchange Commission laid emphasis upon the locale of the home offices, but
failed to give consideration to the actual wide geographical dissemination of
investments." The committee's attention is called to Exhibits No. 2341, 2341-A,
2341-B.' These exhibits contain a detailed analysis by states and territories of
the distribution of life insurance investments and the distribution of reserves,
premiums and disbursements. The material presented in these Exhibits was
taken from information assembled by the Association of Life Insurance Presi-
dents, which incidentally constitutes the most detailed data on this subject
available.
(2) On page 37 there is a quotation from a publication by Dr. Davenport
entitled "The Cooperative Banks of Massachusetts." This quotation is intended
to demonstrate that even one of the Commission's own representatives recog-
nized that depositors in the cooperative b^nks were frequently unable to carry
through their program due to economic circumstances ; the inference being that
a similar situation exists in the case of life insurance and is accountable for
high lapse rates. On page 45 of the publication of Dr. Davenport referred to,
however, there appears the following statement which the companies entirely
ignored but which is most pertinent to the point in issue :
"There is reason to believe that the typical cooperative bank has been
so eager for deposits in the past that it has not been sufficiently careful
in the selection of new members. Taking out a serial share involves a
contract on the part of both the bank and the new member. The high
turnover of members even in good times indicates that many were accepted
as members who should have been sent to a savings bank. Members should
be accepted only if they understand the nature of their obligations and
if they can give some evidence of being able to carry out their part of
the contract. A high turnover of serial shareholders adds unnecessarily
to the expense of doing business and is an element of instability."
(3) On page 13 of the Statement the point is made that the record does not
contain any suggestion that policyholders suffered loss or disadvantage as a
result of the activities of directors who used their influence to obtain business
for firms or institutions with which they were connected. In fact the record
reflects many instances where policyholders suffered as a result of such activity
by directors. For example, the Committee's attention is called to testimony con-
cerning the activities of officers or directors of the following companies : Federal
Reserve Life Insurance Company, Illinois Bankers Life Assurance Comjwny,
Monumental Life Insurance Company, and Shenandoah Life Insurance Company.
Acknowledgment is willingly made of the following specific factual errors in
the insurance hearings which the Statement on Life Insurance uncovered.
(1) It is true that .Exhibit 221* includes a chart which overstates the assets
of the life insurance companies in the amount of approximately one billion
dollars. The supporting schedule, also an integral part of this Exhibit, cor-
rectly states the amount of assets. The error was inadvertent and does not
materially change the effect of the chart as an examination of it will readily
indicate.
(2) Exhibit 227,* which was introduced in the very early stages of the hear-
ings, was taken from secondary but wholly reliable statistical sources then avail-
able. It is correct that the figures contained in this Exhibit are not in all
respects comparable. More exact figures relating to the same subject were
introduced subsequently and appear at page 125 of Exhibit 2250.* These latter
figures are as accurate as the subject matter permits. The inconsistency betwen
the two sets of figures was overlooked on the occasion of the introduction of
Exhibit 2250 and should have been noted.
(3) The criticism and analysis of figures contained in Exhibit 680," which com-
mences at page 44 of the Statement and continues through page 46, also deserves
some comment. While the Commission's staff is unwilling to agree with the
opinion of the companies that the period from 1935 to 1937 is the only period be-
tween 1920 and 1937 which reflects normal conditions vis-a-vis terminations, new
1 Supra, appendix, pp. 15582-15593,
2 Hearings, Part 4, pp. 1189, 1513.
« Ibid., pp. 1222, 1520.
* Hearings, Part 10-A.
" Hearings, Part 10, p. 4733.
15734 CONCENTRATION OF ECONOMIC POWER
insurance and gain force, it does acknowledge that the figures contained in this
Exhibit with respect to the amount of new business may have been overstated
through the inclusion of rivivals, increases and reinsurances of business in
bulk. It is a debatable question, however, as to whether the overstatement is
as large as indicated by the companies and in any event it should be pointed
out that the resulting differences in the ratio of new business to gain of business
in force following the adjustment is very slight according to the companies' own
table contained on page 46 of the Statement.
The Conjinission will not interpose any objection to the introduction of the
Statement as an exhibit in th« record of the hearings provided this memo-
randum is also accepted for introduction in the record as an accompanying
exhibit.
INDEX
Page
Actuarial Society of the United States 14791, 14800
Aetna Life Insurance Co 14705,14845,14846,14930,15366,15433,15465,15467
Agency Practices Code 15340
Aldrich, W. W . 15227
Alfred M. Best Co 15383
American Central Life Insurance Co 14935-14937,14945
American Conservation Co 14762
American Institute of Actuaries 14791, 14800
American Life Insurance Co 14939,15408
■American Life and Accident of St. Louis 15394, 15397
American Petroleum Institute 15131
Armstrong, S , 15197
Association of Life Insurance Presidents-^ 14699, 14709, 14712, 14731, 14998, 15185
Bank of the Manhattan Co 15230-15235
Bank of New York 15235,15239
Bankers Life Co 14805, 14823, 14903, 14930, 15044, 15433
Bankers Trust Co 15224,15234,15245,15246
Banking Act of 1933 15222
Banks, A. B 15391
Bayne, Howard 15211
Boalt, Edward A 15102
Brandon, David G 15102
Brown, B. E - 15291
Buckner, Thomas A 15185, 15312
Budd, Ralph 15291
Burlington, Cedar Rapids & Northern Railroad 15288
Burnett, Philip 14766
Byles, Axtell T 15131
Caldwell, Rogers 15391, 15395
Carlton, Newton 15211
Central Hanover Bank & Trust Co___: 15224, 15235, 15245, 15246
Central Life Insurance Co. of Illinois ' 15396
Central Life Assurance Society ^\ 15410
Central Mortgage Co 15002-15004
Central States Life Insurance Co , 14936, 14939, 14942, 15390
Central Trust Co. [Topeka, Kan.] 15002,15003
Chartered Life Underwriters Chapter of New York 15369
Chase National Bank of the City of New York 15186-15249
Chemical Bank & Trust Co 15224, 15235, 15245, 15246
Chicago, Rock Island & Pacific Railway Co_'_ 15288-15292, 15310
Citizens & Southern National Bank__J- 15250
Coburn, Arthur 15847
Connecticut General Life Insurance Co 14705, 14930, 15433, 15467
Connecticut Mutual Life Insurance Co 14731,
14805, 14811, 14832, 14846, 14930, 15333, 15357, 15418
Continental American Life Insurance Co 14766
Continental Bank and Trust Co. of New York 15235
Continental Illinois National Bank & Trust Co 15399
Continental Life Insurance Co 15385, 15405, 15407
Corn Exchange Bank & Trust Co 15236
• Cortelyou, George B., Jr '. 15248
De Buchanannfe, J. D 15395
Detrick, Charles R 14731
Detroit Life Insurance Co 15394, 15407
DiUon, Read 15289
II INDEX
Page
Dime Savings Bank, Canton, Ohio 15290
Downs, Lawrence _ 15291
Durham, E. M - 15291
Echer, Frederick H 15323-15325
Ecker, Frederic W 15197, 15211, 15228
Emergency Farm Mortgage Act 14877, 14880, 14963, 14987
Empire State Building _• 15322
Equitable Life Assurance Society of the Uniled States 14705,
14731, 14750, 14757, 14759, 14818-14834, 14846, 14850, 14903, 15027,
15044, 15210, 15214, 15224, 15234-15242, 15288, 15290, 15342, 15373,
15417, 15418, 15434, 15441, 15456, 15467, 15476-15486.
Equitable Life Insurance Co. of Iowa - ^9m, 14823, 15420, 15430, 15434
Equitabl9 Trust Co : 15211,15216
Fairless, Benjamin F... : 14761
Farm Mortgage Conference 14921, 14828, 14930
Federal Farm Loan Act 14867
Federal Reserve Act _ 14867
Fidelity Mutual Life Insurance Co 14930,15373
First National Bank of Atlanta, Ga 15202
First National Bank of the City of New York 15224
Frankel, Cecil 15242
Fra?ier-Lemke Act 14995, 14996
General American Life Insurance Co ^ ■ 15398
Glasg-Steagall Act 14812
Gorman, James E _: 15291
Gual anty Trust Co. of New York 15224, 15235, 15246, 15289
Guardian Life Insurance Co. of America 14802, 14805, 15419, 15434
Haflfner, R. R 14762
Hayden, Charles ^ 15289
Henning and Baker, law firm 14762
Hercules Life Insurance Co , 15399
Holden, Hale 15291
Home Life Insurance Co 15384, 15390, 15392, 15395, 15397
Howell, V 15273, 15279, 15423
Illinois Bankers Life Assurance Co 14762
Illinois Life Insurance Co . ; 15410
Independent Life Insurance Co 15402
Inter-Southern Life Insurance Co 15392-15397
Interstate Commerce Act 15294
lo.wa Debt Adjustment Act 15040
Irving Trust Co 15246
Jefferson Standard Life Insurance Co 14937
John Hancock Mutual Life Insurance Co 14705,
14707, 14822, 14826, 14827, 14846, 14903, 15084, 15418, 15422, 15427,
15434, 15443, 15444, 15455, 15465, 15480.
Jones, Frank L : , 15370
Jones, Raymond 15230, 15232
Kansas City Life Insurance Co : 15385
Lemke bill 14756
Licht, Philip ^___ 15231
Life and Casualty—! 15395
Lincoln National Life Insurance Co 14705,
14803, 14805, 14822, 14903. 14930, 14934, 14935, 14939, 15337, 15397,
15400, 15401, 15418, 15434.
McAvoy, James A 14936, 14939, 14945
Maclean, Joseph B 14791, 14792
Massachusetts Mutual Life Insurance Co 14829, 14833, 15434,15465, 15479
Massachusetts Savings Bank ; 14838
Merchants & Farmers National Bank 15252
Merriam, Carroll B 15003,15004.
Merriam, Jack 15003
Metropolitan Life Insurance Co 14702-14707,
14757, 14750, 14786, 14805, 14812-14834, 14846, 14850, 14920. 14930,
14947, 14948, 14964, 14967. 14974-15008, 15033, 15034, 15041, 15044,
15133, 15136, 15143-16156, 15165, 15166, 15175, 151&i-15189, 15201-
15233, 15305, 15313-15317, 15414-15434, 15441-15445, 15455, 15456,
15467, 15480, 15482.
INDEX III
Page
Metropolitan National Farm Adjustment Credit Management Co 15029
Missouri State Life Insurance Co 15398-15405
Mississippi Valley Life Insurance Oo 15394
Morgan, J. P. & Co - 15224, 15246, 15250
Multiple Dwelling' Law ^ 15062
Murray, William G 14964, 14967, 14981, 14982, 15028, 15029
Mutual Benefit Life Insurance Co ^ 14731,
14826, 14^7, 14846,14930, 15417, 15418, 15434, 15466
Mutual Life Insurance Co. of New York , 14730,
14759, 14791, 14806, 14818-14833, 14845, 14976, 15027, 15051-15053,
15061-15067, 15210, 15213, 15288, 15312, 15327, 15337, 15381, 15417
15421, 15434, 15456-15466, 15479.
National Association of Insurance Commissioners ._ 14800,
14839, 14842, 15121, 15450, 15459, 15464, 15481, 15487
National Association of Life Underwriters 15332, 15333
National Benefit Life Insurance Co 15391,15392
National City Bank of New York 15224, 15246
National Life Insurance Co. of Montpelier, Vt— 14823, 14930, 15418, 15420, 15434
National Life Insurance Co. of the United States ■. 15399
New England Mutual Life Insurance Co 14829, 14833, 14835, 14849
15074, 15077, 15082, 15101, 15103, 15417, 15418, 15434, 15455, 15465, 15466
New York Life Insurance Co 14726,
14730, 14731, 1474&-14750, 1475&-14759, 14808-14819, 14828-14834,
14846-14850, 16097-15121, 15185, 15245-15250, 15288, 15312, 15327,
15414-15426, 15434, 15444, 15456, 15459, 15465, 15466, 15479, 15486.
New York State Insurance Departnient 14814
New York Superintendent of Insurance 14841
New York Trust Co 15224, 15245, 15246
North American Co 15303
Northern States Life Insurtince Co ^__ 15397, 15401
Northern Trust Co. [Chicago] ^— ^ 15246
Northwestern Mutual Life Insurance Co ; ^- 15417,
16418, 15422, 15434, 15437, 15464„15473
Northwestern National Life Insurance Co : 14819,
14825-14827, 14832, 14846, 14903, 14930, 15027, 15044
O'Brian, John L 14992,15208,15313,15329
Old Colony Life Insurance Co _' 15395
Pacific Mutual Life Insurance Co 14705,
14707, 14811-14813, 14824, 15422, 15434, 15467
Pacific States Life Insurance Co 15406
Park Bank 15211
Penn Mutual Life Insurance Co 14760, 14763, 14779-14785, 14804, 14819,
14823, 14829, 14846, 14930, 15186, 15343, 15375, 15417-15420, 15434, 15474, 15479
Pennsylvania Co. for Insurance on Lives and Granting Annuities 1 15478
Pennsylvania Dixie Cement Corporation 15198
Peoples Life Insurance Co . 14934-14945
Peoria Life Insurance Co 15402
Phoenix Mutual Life Insurance Co ^_^ 14930,15418,15434
Pioneer Mortgage Co., of Oklahoma . J_ 15002
Pittsburgh Life Insurance Co " 15166
Price, Julian , . 14937
Provident Mutual Life Insurance Co. of Philadelphia _"__ 14812,
14833, 14930, 15362, 15418, 15420, 15434
Prudential Insurance Company of America 14704-14707,14750-14759,14818,
14819, 14825-14833, 14846, 14850, 14903, 14930, 14974-14976, 15027-15051, 15136,
15146, 152].0, 15255, 15264, 15282, 15284, 15305, 15366, 15414, 15420, 15426-15430,
15443, 16445, 15455, 15456, 15465, 15467, 15474-15480, 1548€f.
Public Utility Holding Act 15304
Raskob, John 15176
Register Life Insurance Co 15388, 15406
Republic Life Insurance Co 15394
Reynolds, Jackson ^ _ 15291
Rogers, Glenn E 15034-15040,15050,15140,15149,15165
Rogers, R. R _ ^_ 15256, 15276
Rome Life Insurance Co ___. 15392
Royal Union Life Insurance Co 15400.
IV INDEX
Page
Ryan, Thomas M 14934, 14935
Saylor, George , 15202, 15250, 15327
Seaboard National Bank 15211
Securities and Excliange Act 15224
Security Life Insurance Co. of America ,v 14940,15396,15387
Shepherd, G. O I 14791-14798
Smith, Alfred E 1517C
Smith, Victor Roy 14791
Southern Illinois National Bank , 15201
Southwestern Life Insurance Co 15398
Speyer and Co - 15289
Standard Life Insurance Co. of Jackson, Miss 15402
State Mutual Life Assurance Co 14829, 15418, 15434
Stedman, J. W 15300, 15304, 15305, 15328, 15423, 15438
Sugar Control Act 15470
Sun Life Assurance Co. of Canada 15473
Taylor, Ed :- 15130
Temple, Paul . 15395
Travelers Insurance Co_-,— 14702, 14705, 14791, 14808, 14811, 14835, 14846, 149^,
15044, 15358, 15359, 15366, 15417, 15434, 15441. 15465, 15467, 15479
Trust Company of Georgia ' : 15327
Trust Indenture Act _ 15224
Union Central Life Insurance Co 14803,
14813, 14826, 14827, 14849, 14853, 14&54, 14903, 15434-
Union Trust Co 15201,15214,15215,15225,15228,15229
United States Steel Corporation 14761, 15130, 15306, 15310, 15311
Utility Holding Company Act c 15224
Van Schaick, George :_______, 15185
Wall, Norman 14909
Wallace, Henry A 15029
WaUace, Ralph -^ 15014
Wells Fargo Bank and Union Trust Co . 15246
WesteiM and Southern Life Insurance Co 14705, 14707,
14804-14806, 14822, 14823, 14845, 15186, 15427, 15443, 15444, 15555
Whitsltt, Vincent P 15185
Williamson, Fred 15291
Wilson, Harry R 14935, 14936, 14939
Wilson, R. E J 15003
Zimmerman, Charles J 15332, 15358, 15365
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