Franklin D. Roosevelt

Excerpts from the Press Conference

January 14, 1938

THE PRESIDENT: I don't think I have any news in particular. I found the memorandum [Wendell L. Willkie memorandum]. I guess it was Pete who was asking about it.

Of course we have been working on the subject since this memorandum was left. That was away back in November— November 23rd—and there has been a lot of water which has gone over the dam since then. This whole memorandum, of course, is based on treating the utilities as a whole, not differentiating between the four inches and the ninety-six, and we have got a new definition now in the minds of the public. It is the same old story about trying to lump all business together. We have got away from it now, but this memo was based on the old-fashioned idea of lumping all the utilities into the same category. There is nothing particularly new about it. It is marked, "Confidential," so I cannot give you the thing textually.

Q. Will you work on this one now? [Giving the President a newspaper clipping containing the memorandum referred to.]

THE PRESIDENT: Sure; I did not know it had come out. That is fine. I had no objection to its coming out, but the darned thing is marked Confidential, so I did not know.

Q. It came out while we were in Florida.

THE PRESIDENT: In the first place, this memorandum indicates that it expresses his own personal views and proposals, acting on behalf of The Commonwealth g: Southern Corporation. It does not speak for anyone else.

It goes on to say, "In my judgment, the greatest immediate requirement of the utility industry is a large inflow of common capital indispensable for much needed additional construction."

I think that is perfectly true in regard to the operating companies—a great majority of the operating companies.[Reading] "I have certain suggestions which I believe will immediately stimulate such investment and make possible a large construction program with a considerable increase in employment.

"One of the factors of great importance to the investor in the utility industry is a stable method of property valuation. You have recently recommended what I understand to be the 'prudent investment' method. The utilities of the country have issued most of their securities . . . under court rulings which have required that in fixing the value of utility properties, the reproduction cost must be one of the elements considered."

Of course, that immediately brings up one subject which he does not mention in this, and that is the amortization of securities. If, as a practical purpose, the securities of the operating companies which had been issued under the former rulings of the Supreme Court had been amortized, you would not have very much difficulty with the capital structure at the present time.

[Reading] "I think the chief objective is to find a method that will induce the investment of capital in the industry. I am fearful that the retroactive application of any new method would be disturbing to the capital market."

Again speaking of the operating companies, if an amortization or sinking fund had been set up on the senior securities when they were issued which, of course, we think now is a sound thing, you would not have any trouble in the way of disturbing the capital market.

[Reading] "On the other hand, the utilities, if informed in advance, can adjust themselves to a new method to be applied in the future.

"In order to reconcile conflicting ideas, therefore, while at the same time avoiding such disturbance, I have to suggest the following formula:

1. That the utilities immediately eliminate from their capital structures all write-ups heretofore claimed by the Federal Trade Commission."

Again you have to differentiate between the operating company and the holding company and, frankly, I don't know enough of that particular Federal Trade Commission report—it was not on all of them, it was on some of them-to give an intelligent answer to that particular suggestion. Some of it may be all right and some may not. Of course it would have to be gone over again be[ore you would get to a final decision.[Reading]

"2. That the utility valuation under the rule established by the courts apply either up to this date or to the date of the commencement of your first term as President and that after such date and for the future the prudent investment method be adopted."

Of course that is impossible, because if the thing is wrong now or has been wrong since the 4th of March in 1933, I cannot see where you have any right morally to compound a felony by law, with the Government saying that the crimes of the past will be entirely forgotten and forgiven and that we will leave the water or the wind in the existing capital. Two wrongs do not make a right. I think that is perfectly obvious.

[Reading] "But an understanding as to the method of valuation is, in my judgment, only one of the clarifications necessary in order to establish a relationship between the government and the utilities which will restore investment confidence in the industry. There are certain questions in the mind of the prospective utility investor—"

Again the question of the utility investor

[Reading] "—with reference to such things as the action to be taken under Section 11 of the Public Utility Act of 1935; the procedure of selling power to be practiced by federal agencies such as the Tennessee Valley Authority, and the accounting practices to be followed by those agencies; the future policy of the Federal Government with regard to the making of gifts and loans to municipalities to build duplicate utility systems.

"In order to answer these questions in the public mind, may I suggest the consideration of the following program:

1. Clarification of the Public Utility Act of 1935 as follows:

(a) Retention of all its regulatory provisions over financing and accounting practices, issuance of securities, relationship between operating companies and holding companies, etc.

(b) Modification of. . . the. . . 'death sentence.'" Of course, there you come right down to the heart of it. In other words, he wants the four-inch tail to be legalized for all time to come. We cannot agree on that, ever.

[Reading] "2. Determination of the following policies for the Tennessee Valley Authority and other similar federal projects."

Well, there are a whole lot of them, six of them, in this memorandum and the answer is two-fold: In the first place, we are all agreed that the percentage of territory, population and power affected by Government projects is somewhere between 12 and 15 per cent of the total, and the other 85 per cent is not affected by any Federal power manufactured at the present time. That is an old story.

In those areas, the 12 to 15 per cent of the Nation, we are trying to work out—for instance, Mr. Ross, out on the Columbia, is trying to work out a satisfactory arrangement with the local utilities.

The other point raised is as to the loan and grant methods to municipalities that want to put in their own power plants. The very simple answer on that is the Government recognizes the right of any municipality to put in its own power plant if the vote is so determined. That is just plain American form of government. You cannot get away from it and they do not pretend they can. Even Mr. Willkie said, "Of course not; they have the right to do it if the state gives them the right." It is not a Federal problem at all.

Q. What they say is that you are subsidizing them with that 45 per cent grant?

THE PRESIDENT: All right; if they want to complete a new highway, we give them WPA labor; if they want a new sewer system built, we give them WPA labor; if they want a new water works, we give them WPA labor. I think the Supreme Court has made it fairly clear that there is not very much difference. You cannot draw the line in one place and not draw it in the other.

Q. Isn't there a difference in the sewers and the highways? They do not compete with private industry from the practical standpoint.

THE PRESIDENT: Well, I am talking about constitutional law. That is plain constitutional law.

Q. Yes, I realize that, but you are also talking about a very practical—

THE PRESIDENT: Well, on the practical end, of course the ideal is this: That if a municipality wants to build its own power plant, it will offer a fair price for the existing private utility, and if the utility turns it down, its facilities have got to be paralleled. That is perfectly simple.

Q. Mr. President, to go back to your phrase of a moment ago, "water and wind in the capital structure of these corporations," do you know of any device, short of a wringer, that can reduce that at the present time?

THE PRESIDENT: In the case of operating companies or holding companies?

Q. Either. Either is in the same condition.

THE PRESIDENT: Of course there isn't a universal rule but, in the case of the operating companies, the amount of wind or water is comparatively small. In talking with operating company executives, in the cases we have talked about, the individual cases, we have come to the conclusion that the amount of wind or water is so comparatively small that some method can be found for forcing it out without hurting the operating company. Now, in the case of the holding companies, you have an entirely different picture, because there is such a very large percentage of water.

Q. Do any of the holding companies amortize?

THE PRESIDENT: That I don't know. I would say, offhand, that a great majority of them do not.

Q. I believe there are something like twenty-five municipal plants that may be created now by following the Supreme Court decision on the PWA case. Is it the intention to allow grants to those municipalities where they already have existing private facilities?

THE PRESIDENT: Under the old law—I think this goes back to 1934—their applications were treated just like all other applications, and where it looked as if the bonds were sound, the thing went through just like any other local improvement. Then the thing was taken to the courts and the money was hung up on a peg for them. In other words, we had a moral obligation to go through with the original allotment if the courts said we should. Now the courts have said that we should, that it is the constitutional thing to do. So, we are taking the money off the peg and giving it to them under the original allotment, in good faith.

Q. Doesn't that in each case, or in most cases at least, permit competition with private capital?

THE PRESIDENT: I don't know. They may be buying out in a great many cases. I think you will find that probably in a great many of these cases of municipalities building their own plants, that they will not duplicate lines, that they will work out some form of purchase from the local private company.

If you remember, in the case of Knoxville, they worked out in that case with the Electric Bond & Share subsidiary a price, and the price was approved by 98 per cent of the bondholders, 97 per cent of the preferred stockholders and 95 per cent of the common stock holders. The thing was all ready to work, all ready to go through, whereupon, although there was full knowledge that they had spent months on this, and with the full knowledge of the Electric Bond g: Share officials in New York City, they got the local ice company and some of the minority two per cent of the stockholders to throw the thing into the Court, where it has been tied up ever since.

There was a substantial agreement on the price in that case and you will find a good many other cases where there was substantial agreement on the price.

Q. You were making a contrast between operating and holding companies and you said that in the case of holding companies there is an entirely different situation and then somebody asked you a question. Have you concluded your statement about that?

THE PRESIDENT: Except this: I suppose the easiest way of putting it, of putting the holding company case, is this: What we are trying to do, frankly, is to eliminate the power in the four per cent tail. I have had these people come in to me, heads of operating companies, and say, "We are ready to shoot."

"Can you raise the money locally?"

"Sure we can."

"Well, why don't you?"

"Because the holding company in New York does not let it go through; they want to do the financing there."

You will find lots of cases there where the president of the operating company is in good shape to go ahead and the holding company is holding it up. That is another reason for the term, "holding company."

Q. To hold up. (Laughter)

THE PRESIDENT: Now, of course, you cannot have a generic statement about all holding companies, because they all differ, each one, from the other. Some of them have quite a lot of equity, without any question, and others have very little equity, as in the case where about six hundred million dollars' worth controls thirteen billion dollars' worth of utility capital. That just can't go on. I think they all recognize it.

Q. Is bankruptcy the way to eliminate the power?

THE PRESIDENT: No; oh, no! There are various ways out.

Q. Sir, are you leading up to eliminating holding companies entirely?


Q. Is that a fair question?

THE PRESIDENT: Yes. Now, an investment trust is a different thing from a holding company. I give you that as a suggestion-as long as the investment trust does not vote its stock.

Q. You said all holding companies. Is that even of the first degree?

THE PRESIDENT: Why have any at all?

Q. Does that extend to other lines of industry?


Q. How could that be done, Mr. President?

THE PRESIDENT: You take on the question of banking holding companies, that is another very good illustration. You find a situation in a good many parts of the country where in a very large geographical area practically all of the banks are controlled by some holding company. The little local bank is going. It is a bad thing. Why can't a bank in a community, that is able to support a bank, run itself under proper supervision by the Federal Government, which we give today? It has depositors' insurance and a careful checkup at all times.

Q. Will legislation be proposed, Mr. President?

THE PRESIDENT: I don't know; I haven't got to that yet.

Q. Will it be by the taxing power, Mr. President?

THE PRESIDENT: I don't know; I haven't got to that yet.

Q. You suggested that in your message of June, 1935?


Q. Mr. President, does that mean the branch banks?


Q. You know there are chain banks?

THE PRESIDENT: That is a very different thing.

Q. Mr. President, is this what you call docking the dog's tail?

THE PRESIDENT: I would not call it that. I'd say, "cutting the muscle in the dog's tail."

Q. It might be a case of cutting the tail of[ right back of the ears, Mr. President.

THE PRESIDENT: I would hate to destroy his looks, you know; he could have a perfectly good tail if you cut the muscle in it.

Q. Mr. President, you said a few minutes ago that money had been hung on the peg for some of the municipal plants. Do you intend to appropriate any more money for the same purpose?


Q. No more?

THE PRESIDENT: I have nothing in the Budget at all on it.

Q. Have you made any decision with regard to your supplemental national defense program?

THE PRESIDENT: I have been too busy. I am going back to the House now, as soon as the Conference is over, to write it.

Q. Can you tell us whether that will include items for the Army as well as for the Navy, or simply Navy?

THE PRESIDENT: You are ahead of the game; wait until Monday or Tuesday. . . .

Q. Mr. President, have you had any reports indicating any change in the business situation?

THE PRESIDENT: That is too general a statement. You had better go and ask the Central Statistical Board about that. It is a mighty long subject. Some places are picking up, in others they are standing still and in one or two they are still going down. The general trend is a good deal better than it was before Christmas. . . .

Franklin D. Roosevelt, Excerpts from the Press Conference Online by Gerhard Peters and John T. Woolley, The American Presidency Project

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