20-percent liquidity, there would be no money available for private financing of needed construction such as defense or veterans housing and it would then be necessary for the Government to make direct loans or erect the housing. 4. The proposed increase in the liquidity requirement for the Federal Home Loan Bank System is out of line with the other phases of this mortgage credit situation. Inquiries we have made indicate that, aside from modest curtailment of the FHA and VA-loan insurance or guaranty programs as ordered by the President, no mortgage-credit restrictions of major importance have been made except by the Home Loan Bank Board. For example, there have been, to date, no adjustments ordered by the Federal Reserve Board on commercial bank reserves required to be held at the Reserve banks. This is not in criticism of the Federal Reserve Board; on the contrary, we present this as further evidence that much is being done by the supervised credit institutions of the country (savings and loan associations and banks) to curtail extensions of mortgage credit, without Government controls. We are, of course, concerned with the fact that unsupervised mortgage lenders will not be affected by any specific credit controls on real-estate financing-only through the reduction, which is still modest, in FHA and VA insurance and guaranty provisions. This is another reason why we feel that one-sided action against a single segment of the home financing field is unwise and unnecessary. In summary, it is our judgment that an increase in the liquidity requirements is not needed and is substantially out of line with other actions which have been taken or are proposed. There is no need to amend section 5A of the Federal Home Loan Bank Act at this time. Respectfully yours, OSCAR R. KREUTZ, Executive Manager. STATEMENT OF H. S. TAYLOR, PRESIDENT, OGLEBAY, NORTON & Co., CLEVELAND, OHIO My name is Harrie S. Taylor, president of Oglebay, Norton & Co. of Cleveland, Ohio, which company has been engaged for over 96 years in the iron ore industry. About 1 year ago I had the privilege of appearing before Senator Fulbright's subcommittee of the Senate Banking and Currency Committee on Senate bill 2344. At that time, when our country was in a theoretical peacetime economy, I endeavored to show the need for the development of the low-grade iron ores of the Lake Superior district commonly referred to as taconites in Minnesota and as iron ore formation or "jaspers" in Wisconsin and Michigan. In that statement I pointed out: (a) The great strength of this country was made possible through the use of the wonderful iron ore deposits in the Lake Superior district and that the expanding economy of this country, together with the impact of two world wars, had brought about a rapid depletion of these iron ore deposits; (b) The necessity of developing the taconites to replace the high-grade direct shipping ores, especially the open pit ores from the Lake Superior district; (c) To make the taconite ore suitable for blast furnace and other furnace use, it is necessary to beneficiate about 3 tons of crude taconite to make 1 ton of high-grade iron ore analyzing approximately 641⁄2 percent iron, dried; (d) To beneficiate the taconites requires a large capital investment for plant facilities, namely, from $15 to $20 of capital for each annual ton of output or $15,000,000 to $20,000,000 for each million tons of annual output; whereas, the capital requirement for an open pit mine for direct shipping ore is only about $3 to $5 per annual ton of output or $3,000,000 to $5,000,000 for 1,000,000 tons of ore. In that statement, I was thinking of the need of developing the taconites primarily for a peacetime economy and based my calculations as to the tonnage of taconites that should be developed on an average production of iron ore of 78,000,000 gross tons a year, but I pointed out that the development of the taconites would be necessary to aid the iron-ore supply in times of an emergency. Little did I realize that within the short span of 1 year this country would be confronted with that emergency and, so, instead of an average annual production of 78,000,000 gross tons of ore, the requirements of iron ore from the Lake Superior district to meet the military and domestic needs for steel could easily be in excess of 85,000,000 gross tons. This increase in the production of iron ore will more rapidly deplete the open pit direct shipping ores and, so, instead of the present need to build plants for the production of 5,000,000 tons of iron ore annually from the taconites, it is very possible that plans should be made for facilities to produce from 10,000,000 to 15,000,000 tons annually. In order to produce 15,000,000 tons of taconite, plant facilities costing not less than $300,000,000 would have to be constructed. This is a very large amount of money for the producers of iron ore to obtain in a short period of time. The beneficiation of taconites has been studied for many years and already millions of dollars have been expended by companies interested in taconites in experimentation, pilot plants, and the acquisition of lands, water rights and other essential rights necessary in this work. Tests indicate that the use of iron ore produced from taconites, by reason of the high iron content, increases the capacity of a blast furnace; thus the use of beneficiated iron ore would enable the blast furnaces to produce more pig iron without expansion in blast furnace facilities. Furthermore, the richer beneficiated iron ore produced from taconite would be very helpful for mixing with or sweetening, so to speak, those direct shipping ores which have an iron content of less than 50 percent of iron natural. Consequently, it appears essential that Congress should encourage the construction of plants to beneficiate taconites in order not only to replace the shortage, but also to improve the quality of the direct shipping iron ores. The Congress of the United States could be very helpful in encouraging the construction of plants to beneficiate taconite by adding to section 302 of Senate bill 3936, now under consideration, the wording of either Senate bill 3948 or Senate bill 3949 so there would be specific authority to make loans for the construction of facilities to beneficiate taconites or iron formation. If Congress, on the other hand, in its good judgment, does not consider it advisable to amend section 302 as above proposed, I then urge that at least the report of this committee should contain a directive with respect to section 302. Such directive could indicate that one of the purposes of the enactment of section 302 was to make loans for the development and production of iron ore from taconites or iron formation. Such loans should cover a very large percentage of the cost of the facilities and be for a long term with a provision for repayment on a unit of production basis, that is, on each ton of iron ore produced from the beneficiating plants, a fixed amount would be paid to apply on interest and amortization of the loan. I do not know whether any producer of ore will be required to take advantage of a right so granted, but it would be unfortunate, indeed, if in times of emergency such as this when it is urgent that we go forward with the building of plants to beneficiate the taconites that a producer of ore would be unable to do so by reason of being unable to obtain the necessary money from either private sources or the Federal Government. Hon. BURNET R. MAYBANK, UNITED STATES SENATE, Washington, D. C., July 22, 1950. Chairman, Senate Committee on Banking and Currency, United States Senate, Washington, D. C. DEAR SENATOR MAYBANK: I wish to draw your attention to S. 3948, a bill which I have introduced to authorize the Reconstruction Finance Corporation to extend financial assistance to private enterprise to promote the development, production, and utilization of taconite and other minerals important to the national defense and valuable to the national economy. I wish also to advise you that I have incorporated the provisions of this bill in an amendment which I intend to offer to S. 3936, the bill immediately pending before your committee, which includes, among other important emergency needs, provisions for financial assistance for expansion of productive capacity and supply. I respectfully urge that consideration of the need embodied in the legislation I have proposed is particularly timely and I hope that the committee will give consideration to these measures. I shall especially appreciate action by the committee to obtain immediately a report from the Reconstruction Finance Corporation and the Bureau of Mines relative to the feasibility of these proposals in order that due consideration may be given to them in connection with the emergency legislation now pending. Because of the existence of huge reserves of iron-bearing formations in Minnesota and the Lake Superior district, which may become the ores of the future, and with which I am immediately familiar because of the extensive research that has been conducted by the mines experiment station of the University of Minnesota, agencies of the State government and independent mining companies, I wish to draw your attention particularly to the importance of development and utilization of taconite and other low-grade iron ores. The processes involved in taconite concentration are costly and require large capital expenditures in plant and equipment. This capital expenditure must be amortized over a long period of years and the present limits on maturity of RFC loans would be too short for adequate development. It is for that reason that the proposed proposal embodied in the measures which I am calling to your attention is necessary if the Federal Government is to assist in this vital development of our mining resources. The same circumstances would, to a large extent, prevail with reference to other needed minerals where the development, production, and utilization involves extensive reserves of relatively low-grade ore deposits. While the necessity of importing ores from the rich foreign deposits that have recently been discovered may be admitted, the important consideration, in my opinion, is that this Nation would sacrifice its self-sufficiency and weaken the national defense and the national economy if we depended entirely upon foreign sources for future supplies and neglected development of our own country's almost limitless reserves of lowgrade ores. I believe that the Senate Committee on Banking and Currency would do a great public service by examination of the need for the Government assistance to private enterprise which is proposed in the bills which I have just introduced. I sincerely hope such consideration will be given. Sincerely yours, Hon. BURNET R. MAYBANK, United States Senate, Washington, D. C. EDWARD J. THYE. JOSEPH WALKER & Co., Columbia, S. C., July 24, 1950. Dear BurneT: I received your wire Friday afternoon after my talk on the telephone with Mr. Smith. I take it from this wire that you are aware of the detrimental features to the cotton industry contained in the bill. I received this morning a copy of Mr. Lamar Fleming's letter to you and there is nothing I can add to this. Another very fine statement dealing with the Government's regulations of futures margins on commodity exchanges was made by Mr. E. F. Creekmore, New Orleans, before the Senate Committee on Agriculture in 1947 and I am enclosing it herewith. Yours sincerely, JOSEPH WALKER. STATEMENT OF E. F. CREEKmore, RepresENTING AMERICAN COTTON SHIPPERS ASSOCIATION, BEFORE THE SENATE COMMITTEE ON AGRICULTURE AND FORES TRY I am E. F. Creekmore, president of E. F. Creekmore & Co., Inc., with headquarters in New Orleans. I have been actively engaged in the purchase and sale of actual cotton for more than 40 years. During that time I have had the opportunity of knowing, working with, and, for 10 years, working for cotton farmers in all cotton-producing States. The American Cotton Shippers Association, founded in 1923, has as its members, through its affiliated State and regional associations, more than 95 percent of all cotton dealers operating in the cotton States. I have been requested by its officers to present its members' views on S. 1881. S. 1881, if enacted, will authorize the Secretary of Agriculture to regulate futures margins on commodity exchanges up to 100 percent. This authority has heretofore been the unchallenged responsibility of the directors of the cotton exchanges. Mr. Anderson in his statement to the Joint Committee on the Economic Report requesting the amendment to the Commodity Exchange Act, stated: "The proposal to strengthen regulation of speculative trading on commodity exchanges is directed especially to the purpose of curbing inflationary speculation by the large mass of small traders, most of whom are not even remotely connected with the business of merchandising or processing commodities. The act contains authority for fixing limits on the trading and commitments of indi * * * vidual speculators. Such limits, however, affect principally the speculative trading of large operators. They do not affect the mass trading of the thousands of small traders." Mr. Anderson's statement indicates that he is satisfied with the present authority to curb the speculative trading of large operators and that the amendment requested by him is to curb the activities of the small traders. Is this the beginning of a movement to provide one set of regulations for large operators and another for the small operators? If such is the intention and if the precedent is established, will the same policy be eventually adopted to govern all lines of business? It has been our belief that the Congress intended, as rapidly as possible, to relax wartime controls, to eliminate governmental regimentation, to again permit freedom of enterprise, and to encourage initiative and incentive. If our belief is correct, S. 1881 should not be approved. The record published by CEA as of October 15, 1946, at which time speculation in cotton was probably at its peak, hardly justifies the concern expressed by Mr. Anderson as to the mass trading of the thousands of small traders. As of that date there were only 1,839 so-called small speculators long in all cotton markets. Cotton farmers' transactions in cotton futures are more or less nominal but they are vitally interested in the efficient operations of the cotton exchanges. Excessive margins practically eliminating the speculator, will cause an inactive market. Such a market will widen the spread between the price received by the farmer and the price paid by the mill. Cotton merchants' and cotton mills' operations in buying and selling cotton are much the same. Under normal trading conditions they feel free to buy actual cotton, realizing they can promptly offset their purchases or sales with the sale or purchase of futures. With a dull and inactive market, with quotations between trades ranging from 10 to 25 points and at times very much more, the probable loss in hedging must be anticipated and deducted from the purchase price. The farmer would receive that much less for his products. Farm commodities having the benefit of futures exchanges are handled at a surprisingly low cost-much lower than the cost of handling commodities not enjoying the same facilities. Any cotton merchant feels that his operations for the year are very satisfactory if he shows a net profit of 1 percent of the value of the cotton handled. None will complain if it is one-half of 1 percent. Based on our experience and observation we believe it is the small speculators whose activities tend to make an orderly, active, and efficient market responsive to prospective supply and demand. The record indicates their diversity of opinion. Their purchases and sales in comparatively limited volume create an active market but are rarely responsible for substantial sharp advances or declines in the market. We believe the trading of the large operators, within the limitation of volume established by CEA, is of value to the efficiency of the market. It should be remembered that there is a diversity of opinion among large operators as to course of the market, just as there is among small traders. Diversity of opinion is what makes an active, responsive, and efficient market. For sometime prior to May 1947, through regulations promulgated by CEA, speculators were limited to 180,000 bales of any one market. This limit was reduced to 30,000 bales last May. Under the existing act CEA has the authority to reduce the limit to 1,000, or even to 100 bales. Such action would prove disastrous to the price level and would widen the spread between the price received by the farmer and the price paid by the mill, but no greater disaster than the imposition of 100-percent or even 50-percent margins. With the current level of cotton prices at around 34 cents, original margins of 50 and 100 percent, necessarily deposited at the time of the trade, would be as follows: 100 bales, at 50 percent margin. $8,500 85,000 2,550, 000 17, 000 170, 000 5, 100, 000 Senators from cotton-producing States are more or less familiar with the financial condition of the average cotton speculator; farmers, ginners, supply merchants, oil-mill operators, professional and business men, many of whom own or have interests in farms. We believe it is unnecessary to elaborate on the absurdity of any speculation being continued if such margins become effective. If there is concern over the wisdom or foolishness of the individual small speculator, it is wasted concern. There are too many alternate methods of spending money to justify such paternalism. Consideration therefore should only be given to the effect of the small speculator on the futures market as a hedging medium. The record indicates virtual universal agreement that the speculator is extremely useful. You cannot unduly limit the speculator, hinder him with undue regulations, cause him to be fearful of sudden and unwarranted governmental rulings and expect him to render essential service just when needed. Unless he is free to buy and sell according to his judgment, with freedom from fear, he will not trade simply to balance the long and short hedge contracts of merchants and mills. The small speculator who is ordinarily long is the most valuable speculator for as a class he is most likely to be the one who buys the merchants' and mills' hedges in the fall when the crop is moving and sells out in the spring when cotton goes to the mill. We do not know whether as a class the small speculator makes money but we do know that he renders the farmers a real service, and is entitled to something for his contribution to economical distribution. No legislation can eliminate speculation. We have it and will continue to have it in all walks of life regardless of any laws enacted, but legislation can drive a controlled and well-regulated speculative activity into an uncontrolled, more dangerous and probably into a very harmful operation. Banks, as conservative as they generally are, are glad to make loans on unhedged cotton with a margin of 25 percent or at the parity loan value. Experience has caused the cotton trade to rely on the belief that the loan value establishes a minimum value on cotton. Excessive margins on futures trades would result in some speculators turning to actual cotton rather than futures. The average speculator, however, has not the facility to class, buy, store, insure and sell the actual cotton. Cotton taken up on futures contracts has been classed, stored, insured, and can be delivered at any later date on futures contracts. The speculator largely takes over rather than creates risk. The cotton crop this season with the carry-over amounts to 14,000,000 bales. Domestic consumption and exports to October 31 amounted to only 2,539,000 bales. On that date someone had the price risk on about 11,500,000 bales. Who was carrying this risk? The risk is widely distributed over the entire producing, distributing, and processing system. The farmer has it until his cotton is sold. The merchant and the cotton mill have it except to the extent they can balance their purchases of cotton against the sale of cotton or cotton goods. Merchants and mills have some material offsets through sales but generally there is a net balance upon which they must either take the price risk or transfer it. The only method of transfer is to sell or buy futures upon a futures exchange. On November 1 the total open interest on all cotton exchanges was 3,001,000 bales. A part of this open interest represented offsetting positions of mills and merchants. The balance was carried by speculative interests. The major portion of the cotton crop is picked and ginned within 3 months. A large part of it is sold at the time it is ginned. The weight of the movement, without the usual speculative long interest, would cause a downward swing in price levels during each harvesting season. The small farmer, unable or unwilling to carry his cotton, would be the chief sufferer. Speculators are not responsible for the price level of commodities. They may at times accelerate an advance or decline. Had the majority of speculators sold rather than bought during the past few years, values might have been held in check temporarily but the inevitable working of the law of supply and demand would have brought prices to the approximate level justified by world conditions. Administrator Mehl of CEA confirms our views in his statement before the Joint Committee on the Economic Report. He said: "It is not believed that speculation is a basic factor in determining the general level of prices in the long run." We believe no man, however able and familiar with the operations he may be, should have the authority to regulate margins. The directorate of the New Orleans and New York Cotton Exchanges are composed of both futures brokers and cotton merchants. They are charged with the responsibility of regulating proper minimum margins. Differences of opinion sometimes arise as to the proper margin requirements. Firms have the privilege and at times some firms have thought it necessary to |