TRANSPORTATION: 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.