RATE OF INTEREST ON LOANS

The CHAIRMAN. What is the amount of the interest?

General HINES. The interest now averages 4.41 per cent throughout the United States. The law requires that the interest charged be 2 per cent above the Federal rate for 60-day paper in the Federal reserve district in which the loan is made. But in no case can a rate be charged of more than 4%1⁄2 per cent, except that the law was not changed with reference to redemptions from banks. That was left as it was-6 per cent.

Mr. AYRES. That is where they get a loan from the bank?

General HINES. Yes, sir. When they changed the rate of interest in increasing the loan value from what it was each year, 90 per cent of the reserve, up to 50 per cent of the face, they changed the rate of interest so that it would be 2 per cent above the Federal rediscount rate in a given district, but not exceeding 41⁄2 per cent, but not did change the rate to the banks.

Mr. AYRES. That is compounded, however, is it not?
General HINES. Yes, sir; it is compounded.

Mr. ARNOLD. To what extent are the borrowers paying interest? General HINES. They are not paying very much in cash. It is accruing on their loan; and I have some information of the amount that they have paid back since we started to make loans.

Mr. ARNOLD. That is covered back into the general Treasury? General HINES. No, sir; that goes into the fund; about $11,000,000 repayment on loans and interest, together.

Mr. AYRES. Taking the average certificate, how much is the actual bonus, and how much is earned by the certificate in the 20-year period?

General HINES. The veteran with somewhat over a year's service, half of which was performed overseas, might be entitled to an adjusted-service credit of $397, and if he had died previous to making application for his adjusted-service benefits, that would be the amount payable to his widow. However, this credit in the average case would be sufficient to purchase an adjusted-service certificate in the amount of $1,000; that is, the $397 bonus would purchase a $1,000 adjustedservice certificate.

The difference between $397 and the $1,000, or $603, is made up of the 25 per cent additional credit added for deferred payment and compound interest at the rate of 4 per cent per annum which the Government is crediting the veteran on the basis of the reserve maintained against the outstanding certificates. Thus any statement that the Government is charging interest on money already due is not a correct representation, because the face amount of the certificate is not payable, unless death interposes, until the expiration of 20 years from the date of issue, and during the intervening period the veteran is being credited on the reserve with the compound interest at the rate of 4 per cent per annum.

Mr. AYRES. That is a very fair and very simple explanation. It ought to be easily understood, but whether it will be is a question. General HINES. It is probably the most misunderstood benefit that exists to-day.

It might be well also to remind those gentlemen that are advocating a change in interest that this fund, operating as it has been operating up to November 30, has earned for the fund, in interest,

$123,404,000, which shows the extent to which the interest is a factor in the whole thing.

The CHAIRMAN. Those are the investments that have been made with the sum set aside?

General HINES. You see, we had the appropriation made by Congress invested in Treasury certificates, short-term certificates, which were drawing 4 per cent compounded annually. Then, whenever we would redeem these notes from the banks, we would pay off from the fund, and those certificates would go in the adjusted-service fund.

STATEMENT IN RE DEFICIT CAUSED BY LOAN

The CHAIRMAN. General, there has been an impression created throughout the country that the action taken by Congress in making this 50 per cent loan is what caused the large deficit which we now have.

General HINES. I think that statement, of course, is unfair. It shows a lack of knowledge. What happened was this: The Treasury Department was required to convert the short-term paper in that furd, amounting to over $800,000,000, into cash up to the extent that we have made loans, all except the $23,000,000 remaining. In doing that, and then at the same time probably indicating to the outside financial world that the Government was faced with a deficit, the two things probably had a material bearing on the money market. The deficit of the Government, or the extent to which the bonus contributed to that, amounts to that additional $112,000,000 that was appropriated really a year ahead of time. So I think it would be unfair to say that the $800,000,000 which you authorized to be converted from investments to cash created a deficit. That is not correct except to the extent of the $112,000,000. But if we go any further and attempt to pay off the balance, then it will be necessary to raise $2,600,000,000.

The CHAIRMAN. And, of course, any appropriation that may be made now-for instance, this $200,000,000-is new money?

General HINES. Yes, sir; this is new money.

The CHAIRMAN. That is not a part of the $2,600,000,000 that you mentioned?

General HINES. No, sir.

Mr. AYRES. This is to pay off the loans.

General HINES. Of course it would have a bearing on the amount that you finally have to pay; because if they borrowed all of this $200,000,000, and then we attempted to cash them off, those loans would be deducted. So it would be a part of the balance of $2,600,000,000.

BASIS OF ESTIMATE REQUESTED

The CHAIRMAN. You do not anticipate that the banks will send in all the certificates that they now hold?

General HINES. Yes; I do, Mr. Chairman. I anticipate that if conditions continue you will find the banks will do exactly that.

The CHAIRMAN. Then you are of the opinion that it will be necessary to come back later at this session for an additional appropriation? General HINES. We are going to ask in the regular annual appropriation bill for $150,000,000 more for this very purpose.

The CHAIRMAN. I meant for this fiscal year.

General HINES. Yes; for this fiscal year. Not for 1932, no; for 1933.

The CHAIRMAN. You are asking that under this loan?

General HINES. Yes, sir. We are asking for $150,000,000 more for loans and death losses, for the fiscal year 1933.

The CHAIRMAN. What is it that causes you to think that these applications will be delayed?

General HINES. We do not feel that they will be delayed. We are asking for $200,000,000 now to carry us to June 30.

The CHAIRMAN. I understand. In other words, you are figuring on so many a month coming in?

General HINES. Yes, sir; that is right.

The CHAIRMAN. Now, does that mean the applications or the time that it takes to pass on them?

General HINES. No; it means this: There are a certain number of them that have a loan value now. In other words, if they all borrowed to-morrow all they could, they could borrow $563,000,000. But they are not all borrowing.

The CHAIRMAN. I understand.

General HINES. But there is a certain number that come along each month. Now, this $200,000,000 will carry us up to June 30, when the new appropriation bill will become effective. There may be a balance or there may not be.

The CHAIRMAN. Then your estimate is based on the 2-year period? General HINES. Only under the adjusted service and dependent pay. We feel that the number of additional new certificates that may be issued from now on will be very few, but there will be a number that will mature and will have been issued more than two years and will be eligible for loans, which will come along and borrow, and some of those that are now eligible will borrow, and we are basing our estimate upon what our past experience has been since we started to make 50 per cent loans.

The CHAIRMAN. And, based on that, you feel reasonably sure that you will need every dollar of this $200,000,000 between now and June 30?

General HINES. Yes, sir. The only item that I feel there is any question about would be your $75,000,000, and I think the chances are the banks will commence to turn that in.

CASH REPAYMENTS RECEIVED FROM VETERANS

This table shows the cash repayments received from veterans applying to loans on adjusted-service certificates up to November 30, 1931.

(The table referred to is as follows:)

Cash repayments received from veterans applying to loans on adjusted-service certificates as of November 30, 1931

Adjusted-service certificate fund:

Cash repayments from veterans applying to direct loans

Principal
Interest

Total..

$1, 126, 756. 74 25, 349.96

1, 152, 106. 70

Adjusted-service certificate fund-Continued.

Cash repayments from veterans applying to redeemed loans—

Principal.

Interest

Total...

Total cash collected, adjusted-service certificate fund

United States Government life insurance fund:

Cash repayments from veterans applying to loans made on adjusted-service certificates

Principal.

Interest

Total..

Grand total collections, both funds..

$1, 188, 621. 14 48, 897. 26

1, 237, 518. 40

2, 389, 625. 10

11, 051, 477. 11 625, 558. 28

11, 677, 035. 39

14, 066, 660. 49

General HINES. This statement shows the cash repayments from veterans the principal that they paid back in this first group, $1,126,756.74, with interest, $25,349.96; then the cash repayments from veterans on redeemed notes-that is, bank notes-another $1,188,621.14. So the total cash collected in that manner from the adjusted-service certificate fund was $2,389,625.10.

Now, the United States Government life insurance fund, the cash repayments and interest amounted to considerably more, and much of that matured before this last 50 per cent loan. That amounted to $11,677,035.39, making the total from the beginning, both to the adjusted-service certificate fund and to the Government's converted insurance fund, $14,066,660.49.

Mr. WOODRUM. Out of a total of how much loaned?

General HINES. Out of a total of over $1,220,000,000.

The CHAIRMAN. General, you said you were asking, in addition to this, for $150,000,000 in the regular bill.

General HINES. Yes, sir.

The CHAIRMAN. Do you expect that to clean it up?

General HINES. I think it will, unless something else agitates this thing.

The CHAIRMAN. I meant with reference to the 50 per cent.

General HINES. No; it could not clean it up, because you would. still have eligible for loans about $213,000,000. Now, we are using our experience, and unless more veterans borrow than have up to date, we ought to be in good shape. The fund would probably, from that time on, take care of the normal demands for loans.

The CHAIRMAN. I take it that that would increase to a certain extent, because they are still applying for certificates.

General HINES. Yes; but they can not go much further. The eligibility of the veterans who can apply is getting very close. We estimate that there are probably 9,000 that are still eligible that have not applied.

The CHAIRMAN. Now, based on what you have already loaned and what you are asking here and in the permanent bill for the next fiscal year, what will be the total amount that will be required to meet this 50 per cent loan?

General HINES. It would be $213,000,000 more.

The CHAIRMAN. I know. Then what is the total amount? You have loaned about $870,000,000 now, have you not?

General HINES. Yes, sir; It would be $1,709,000,000.

The CHAIRMAN. How closely does that compare with your estimates?

General HINES. My estimate before the Ways and Means Committee, Mr. Chairman, was that in the six months following the enactment of the bill 75 per cent of the veterans would borrow, and it would cost a billion dollars. I think I missed it by a very few million. dollars.

The CHAIRMAN. That is a fine guess.

General HINES. There is one factor that entered into it that I did not have before me at the time, which might have influenced it a little, and that was the shift from the banks to the fund and from the converted insurance to the fund, which changed it a good deal. The CHAIRMAN. You think you can not get on with anything less without having to come back for more money at this session?

General HINES. Mr. Chairman, this is my judgment. I am perfectly willing to go with the committee on any amount.

The CHAIRMAN. I understand.

General HINES. I want to cooperate with you, but I feel that it is my business to give you my best judgment.

The CHAIRMAN. Of course, this is a matter that can not be reduced. These veterans are by law entitled to their loans.

General HINES. And when they demand them, we have to make them.

The CHAIRMAN. When they demand them, you ought to be in a position to pay them?

General HINES. Yes, sir.

ADJUSTED SERVICE AND DEPENDENT PAY

The CHAIRMAN. Now will you take up your next item, General? General HINES. The next item, Mr. Chairman, is the adjusted service and dependent pay.

Section 401 of the World War adjusted compensation act provides that there will be paid to each veteran, as soon as practicable after the receipt of an application in accordance with the provisions of section 302 but not before March 1, 1925, in addition to any other amounts due such veteran in pursuance of law, the amount of his adjusted service credit, if, and only if, such credit is not more than $50.

Section 601 provides that if the veteran has died before making application under section 302 or, if entitled to receive adjusted service pay, has died after making application but before he has received payment under Title IV, then the amount of his adjusted service credit shall, as soon as practicable after receipt of an application in accordance with the provisions of section 604 but not before March 1, 1925, be paid to his dependents.

Section 603 provides that the payments authorized by section 601 shall be made in ten equal quarterly installments, unless the total amount of the payment is less than $50, in which event it shall be paid on the first installment.

Section 608, approved July 3, 1926, provides that if the veteran died while in service and before July 1, 1919, and if an adjusted service credit has been or is, after this section takes offect, certified to the director, then the sum of $60 shall be paid in a lump sum to the dependents of such veteran in the same manner as provided in sections 601 and 602 of this act.