WAR FINANCE CORFORATION.

COMMITTEE ON WAYS AND MEANS,

HOUSE OF REPRESENTATIVES, Washington, D. C., February 18, 1918.

Pursuant to notice the Committee on Ways and Means met at 10.30 o'clock a. m., Hon. Claude Kitchin (chairman) presiding. Present: The chairman and Messrs. Rainey, Dixon, Hull, Garner, Collier, Dickinson, Oldfield, Crisp, Helvering, O'Shaunessy, White, Fordney, Moore, Green, Sloan, Longworth, Martin, Hawley, and Treadway.

Present also: Hon. W. G. McAdoo, Secretary of the Treasury, and Hon. Paul M. Warburg, vice governor of the Federal Reserve Board. The CHAIRMAN. Gentlemen, while the Secretary of the Treasury has made a statement before the Finance Committee of the Senate with respect to this bill, yet, no doubt, each Member has not had an opportunity to read that statement, and then a great many questions may occur to the minds of the Members of this committee that did not occur to the minds of the Members of the Senate committee and upon which the Secretary was not asked any questions. I have therefore asked the Secretary to appear and make a statement before this committee so that any Member may ask any question relative to the bill and its provisions that seems proper to him.

Mr. Secretary, I am going to ask you just one broad question: Will you please state the main purposes of this proposed legislation and the main reasons to your mind that make this legislation necessary?

STATEMENT OF HON. WILLIAM G. McADOO, SECRETARY OF THE TREASURY.

Secretary MCADOO. The proposed act to incorporate a War Finance Corporation should be regarded primarily as a measure to enable the banks, both national banks and State banks and trust companies. to continue to furnish essential credits for industries and enterprises which are necessary or contributory to the prosecution of the war. The Government's borrowings, particularly during the period immediately preceding and following each Liberty loan, have tended to preempt the credit facilities of the banks and often to prevent them from giving needed and customary help to quasi-public and private enterprises. Many instances have been brought to the attention of the Secretary of the Treasury and of the Federal Reserve Board where industrial plants, public utilities, power plants, railroads, and

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others have found it difficult, if not impossible, to obtain the necessary advances to enable them to perform vital service in connection with the war because essential credits, ordinarily available to them, are being absorbed by the Government itself.

In Europe central banks are permitted to grant to banks and bankers loans upon stocks and bonds upon certain well-defined terms. I would like to direct your particular attention to that statement because that indicates the fundamental purpose of this bill. In Europe, I wish to repeat, central banks, which correspond to our Federal reserve banks in a sense, are permitted to grant to banks and bankers loans upon stocks and bonds upon certain well-defined terms. But here the Federal reserve banks are not permitted to do that, the Federal Reserve Act having specifically contemplated advances of that character only upon what we call liquid or commercial paper, and therefore the Federal reserve banks are not permitted to rediscount any paper for other banks which is secured by fixed investments.

The Federal Reserve Act does not provide for these and the War Finance Corporation is designed as a war emergency to fill this gap. The provisions of the Federal Reserve Act which permit Federal Reserve banks to rediscount and purchase commercial paper and paper secured by the Government's obligations have had the effect of forcing the banks to discriminate against loans on ineligible paper, even where such loans were vitally necessary for war purposes, in favor of loans on commercial paper even where they represented activities or enterprises not related to the war and which might well be curtailed during the period of the war. It is believed that the proposed bill has been wisely and conservatively conceived as a war measure to give relief from this condition during the war. The banks of the country would, no doubt, scrutinize with the utmost care both the loans themselves and the security therefor and would exercise their individual judgment upon the borrower's credit before assuming a liability for the amount of the loan, and also because they would be under the necessity of advancing, out of their own resources, 25 per cent of the amount loaned. The bill would authorize advances to a bank of only 75 per cent of the amount loaned by the bank on the notes or obligations of persons, firms, or corporations whose activities. are necessary or contributory to the war.

The bill contemplates that the War Finance Corporation shall lend money to banks, both National and State, which are making loans to enterprises conducted by persons, firms, or corporations producing materials or supplies, or doing anything else which is necessary for or contributory to the war. If a bank, for instance. should loan money, we will say, to a munitions company and take the company's six months' note with the company's bond as collateral security, that note would not be eligible for rediscount in the Federal Reserve banks; but the War Finance Corporation in such circumstances could advance to the bank against the note of the munitions company, so secured with that bank's indorsement on it, 75 per cent of the face of that note.

The provision of the bill permitting direct loans by the corporation in exceptional cases is intended to provide for those rare instances where it may be made to appear to the corporation that a