Carrying the Carriers

Carrying the Carriers

Last week the Senate had its first good look at a concrete example of railroad relief by Reconstruction Finance Corp. The sight brought forth, in addition to critical shot & shell, a serious warning that, under the R. F. C.'s loan policy, the Federal Government might sooner or later be forced into the railroad business as owner and operator of the nation's weaker lines.

At a series of White House conferences last month President Hoover imposed upon the Interstate Commerce Commission and Reconstruction Finance Corp. a financial formula for carrying the carriers through the Depression (TIME, March 28). His purpose was that no railroad should be allowed to slump into receivership if the relief agencies of his Administration could prevent it. The test case on which the Hoover formula was based arose from an application by the Van Sweringens' Missouri Pacific to R. F. C. for $23,250,000 in quick cash, of which $4,300,000 had already been granted.

Missouri Pacific owed a Manhattan banking syndicate (J. P. Morgan & Co., Kuhn, Loeb & Co., Guaranty Trust Co.) $11,700,000 payable April 1. A bank's primary business, of course, is to keep trade and industry lubricated with short-term loans--helping a merchant over this seasonal hump, tiding a corporation across that temporary pinch. No good banker likes to risk tying up his stock-in-trade to the uncertainties of the far future. His professional success depends on a quick turnover of credit. This fundamental rule impelled M. P.'s bankers to decline to extend its loan. In the Administration's policy they saw no conscription of their professional banking judgment, much less of their working capital.

For assistance M. P. turned to R. F. C., where its application for funds to take up its bank loan precipitated a policy row. Eugene Meyer, R. F. C.'s chairman, contended that the bankers should continue to carry their clients through hard times and not try to unload their private loans on the Federal Government. Charles Gates Dawes. R. F. C.'s president, argued that the U. S. should take up these loans for the carriers so that the bankers could have their cash to continue their regular short-term financing of business & industry. The I. C. C., which under the law must pass on all rail applications for loans before R. F. C. can act, was inclined to side with Chairman Meyer. The row was carried to the White House where the President devised a compromise under which R. F. C. and the bankers would both carry the M. P.

Upshot of the President's mediation was that R. F. C. extracted from the Manhattan banking syndicate an agreement whereby it would extend one-half of the M. P.'s loan until Oct. 1 provided R. F. C. would take up the other half. Then R. F. C. did the bold and unprecedented thing of adopting a resolution approving this loan plan and forwarding it to the I. C. C. The I. C. C. was thus put in the awkward position of having its mind made up for it in advance by R. F. C.

Grudgingly the I. C. C. fortnight ago approved the M. P.'s application for $12,800,000 of which $5,850,000 was to go to the banking syndicate and $6,950,000 to be used to pay back operating expenses ($2,150,000), taxes ($1,000,000) and interest charges on money borrowed to buy rolling stock. But, declared the Commission majority, "We are taking the action here with some reluctance. We are not convinced that the Reconstruction Finance Corp. should be expected to take up bank loans of tfiis character. [But] we yield our own views to those of that body." The Commission recalled that big fees to their bankers had been justified by the railroads in the past on the ground that their bankers would be ready to help them out in a crisis. The I. C. C.'s tart comment: "We have heretofore thought that theory to have more merit than this transaction appears to indicate."

Joseph Bartlett Eastman, "radical" member of the Commission, scoffed at the idea that the R. F. C. loan was necessary to avert a Missouri Pacific receivership, argued that the road's bankers would be restrained by the "repercussions" of such action.

At the Capitol last week Senator Borah, no expert in railroad finance, was the first to raise a warning cry against what he called the "Missouri Pacific-Morgan loan." According to him "every form of pressure within reason and perhaps decency was used to bring about this decision" by the I. C. C. Was R. F. C. set up, he asked, for private bankers to dip into the public treasury?

More shrewd and wise in the ways of railroad financiers than Senator Borah is Senator James Couzens, chairman of the Interstate Commerce Committee. When he opened fire on R. F. C.'s policy, the Senate sat up and paid sharp attention. He declared that Joseph Randolph Nutt, treasurer of the Republican National Committee and close associate of Cleveland's railroading Van Sweringen brothers, had probably been more "effective" in getting railroad loans than anyone else. Senator Couzens' major point was that R. F. C.'s loan to M. P. exceeded by some $350,000 the market value of securities pledged as collateral.* Said he: "I have no knowledge of Congress' having declared a policy of Government ownership of the railroads, and yet the loan to the Missouri Pacific and others that have been approved and others still pending clearly indicate to me that, if the loans are continued in the same manner as they have been in the past, many of these properties will eventually revert to the Government or the Government will lose its investment. The Government will find itself in possession of the least desirable and least profitable railroads."

While Senator Couzens was introducing a bill to strip R. F. C. of all authority over rail loans, I. C. C. was balking at an application by Baltimore & Ohio R. R. for $1,000,000 with which to pay off private bank loans due April 26.

*For $12,800,000 M. P. put up the following: $15,050,000 of its own gold bonds (worth about $5,000,000); 114,750 shares of Texas & Pacific Ry. stock (worth about $1,800,000); $1,900,000 of New Orleans, Texas & Mexico Ry. bonds (selling for about $600,000); $1,000,000 in Denver & Rio Grande Western R. R. bonds (worth about $360,000); and 1,600 shares of Fort Worth Belt Ry. stock (quotation unavailable).

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