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February U, 19U6.
The Honorable Robert F. Wagner,
Chairman, Banking and Currency Committee,
United States Senate,
Washington 25, D. C.

Dear Senator Wagner:
On behalf of the Board I am enclosing two statements
with regard to S. 1592 now pending before your Committeet Be*cause of the Federal Reserve System's responsibilities in the
broad field of credit, we desired to set forth the reasons why
we feel it would be desirable to reconsider certain provisions,
particularly the proposal contained in the legislation to provide easier credit terms on new housing in the lowest price
ranges. While the Board is i i entire sympathy with the stated
objectives of the bill and is in accord with many of its provisions, it is our judgment that its enactment without revision would add to already serious inflationary pressures.
One of the enclosed statements deals with the easy
credit proposals. The other statement deals with various
provisions of the measure to which we have previously expressed
objection. We would appreciate having these statements made a
part of the official record of the hearings before your Committee.
Sincerely yours,
(Signed) M . S . Eccles.
M. 3. Eccles,
Enclosures 2

Section 1+02 of S. 1592 would amend Section 203 of the National
Housing Act so as to permit the Federal Housing Administration to insure
loans for as much as 95 Pe** cent of the value of the property, the loans
to run for 32 years, at U per cent interest. Such insured mortgages
would be available only on houses built under FHA inspection, and would
not exceed $
This section is proposed as part of a long-range Federal housing
policy, but its enactment now or in the near future would strengthen the
serious inflationary pressures in the housing market. It would not contribute to meeting the immediate need for both an increased supply of
houses and better housing for families of low income*
The housing crisis is typical of the inflation problem generally.
It is due to the fact that the demand vastly exceeds the supply, There is
a large accumulated shortage of housing units. At the same time, incomes
have never been so high as in the past few years, and never before has the
general public had available such tremendous amounts of cash and readily
convertible assets, Y f e credit is required, borrowers have been able to
obtain increasingly easy mortgage terms from banks and other lenders who,
having ample funds, are eager to supplement their government security
holdings with higher yield investments* A ready availability of cash resources has thus combined with the unprecedented need for houses to bring
about the inflationary situation in the housing field.
To add to thi§ dangerous pressure at this time by a still further
easing of credit terms would make the inflationary danger all the greater
without providing any new supplies whatever of houses on the market. The
difficulty lies not in credit terms, which have been reduced substantially
in the past decade, but in the immediate and prospective shortages of
building materials of various kinds and of manpower* Any realistic attack
on the problem must look to remedies for these shortages a3 well as to
solutions of the special difficulties created by antiquated building codes,
by monopolistic practices affecting building materials as well as the
building trades, by jurisdictional conflicts, and by similar restrictions
which make for inadequate construction at excessive cost.
Availability of credit is thus not the factor which limits
additions to the supply of housing, and may not be for some years to come.
While materials and manpower are short, further liberalization of credit
terms would merely add to inflationary pressures. T/Vhethor further easing
of credit terms would be desirable at some future time when the demand for
housing is not in excess of tho supply of manpower and materials is another
question, and ono which should be considered in the light of conditions
then. Certainly at this time it would be illusory and misleading to the
general public to enact legislation which in effect would serve only to
intensify tho demand factor without adding anything whatsoever to the supply
side of the equation. If it is desired to increase the proportion of houses
built in the lowest price ranges, action along lines of material allocation
would appear to hold more promise.

Sections 301 and 302
Section 301 would authorize Federal savings and loan associations to lend or invest their funds in any mortgage or obligation
which is insured under Title I or Title II of the National Housing Act,
as amended. This would change existing law in two important respects.
It would permit such an association to make loans on homes located more
than fifty miles from its home office, and permit it to participate in
the financing of large-scale rental housing, without regard to the
limitation which now restricts the aggregate of such loans to 15 per cent
of the assets of the association.
These provisions should not be enacted. Savings and loan associations have traditionally been local thrift and home financing institutions, gathering investment funds of individuals from the local community
and lending them out to home owners and prospective home owners within the
local community. This is clearly the basic function which Congress intended
Federal savings and loan associations to perform, although it permitted them?
as a matter of operating flexibility and to meet unusual situations, to engage in other lending activities within well-defined limits.
This element of flexibility is proper and useful, but if operations now permitted as exceptions to the rule should become the general
rule, the >asic function described above would be fundamentally altered.
Therefore, the loans made on properties outside the association's locality
(i.e., beyond 50 miles) should remain within the 15^per~cent-of^assets
Furthermore the financing of large-scale,rental housing should
continue to be subject to the 15-per-*cent-of-assets limitation. Such financing is essentially different froxa the financing of homes for owners
and prospective owners* The borrower, in the case of rental housing, is
not a home owner. He is an investor in a business enterprise just as is
the hotel owner. Thus, the financing of large-scale rental housing is essentially business financing, which it was XIOYGT contemplated savings and
loan associations would undertake. The Federal Home Loan Bank Board has,
we think quite properly, recognized this fact bocause, although the present
law would permit Federal savings and loan associations to make any non-home
loan within the 15-per-cent~of ^-assets limitation, the Board, by regulation,
has imposed severe restrictions on tho rental housing loans which they may
make. It has limited such loans to 50 P©r cent of appraised value, except
in the case of small apartments (5 to 12 families) for which the limit is
60 per cent, even though they are insured under the National Housing Act.
For these reasons, the blanket authorization of Federal savings
and loan associations to lend any amount anywhere on insured mortgage^,
which is contemplated by section 301 (and the corresponding previsions
in section 302), should not be enacted.

- 2 Section $03
The purpose of section 3^3 is to increase the amount of money
which the Federal Home Loan Banks may borrow in the money market by widening the range of Bank assets on the basis of which debentures may be issued. The law as it now stands restricts the amount of debentures which
the System may issue to the amount of advances to members secured by loans
of the types prescribed by Congress in section 10(a) of the Federal Home
Loan Bank Act* Thus, the power of the Home Loan Banks to obtain funds in
the money market is geared to the volume of the advances to tho member
institutions secured by loans of tho best type,, namely, loans which qualify
under section 10(a). It seems obvious that the present provision furnishes
the Home Loan Bank System with borrowing capacity more than adequate to
enable member institutions to meet the demand for such loans in communities
where share accounts are insufficient* Within the limitation which relates
debentures to capital, tho Home Loan Banks can now issuo debentures on a
one-forgone basis for the entire amount of 10(a) loans rediscountodf In
what way could a demand arise which could not bo mot under the present provision? Only if member institutions should wish to rediscount other types
of paper (or obtfin unsecured advances) in considerable volume. Suoh other
paper would include mortgage loans on business properties, apartment houses,
and other non-home properties, us well as loans made on the security of
share accounts. It seems apparent that Congress did not intend that such
paper should form the basis for obtaining additional funds in the market.
With the possible exception of loans on the security of share accounts, this
is a type of financing that should be hold within tho 15-per-cont-of-assets
limitation, as already pointed out herein, and therefore that should not be
encouraged by giving such paper, when discounted at a Home Loan Bank, the
same access to market funds as is enjoyed by 10(a) paper* In fact, the
power to include such other paper in the debenture base would have the inevitable effect of eliminating the relative desirability of louns under
section 10(a) which are clearly the most appropriate type of loan for mutual
thrift and home financing institutions.
The proposed amendment would also include in the debenture base
of the System all Government obligations owned directly by the Federal Home
Loan Banks* This provision would permit Government obligations, including
those held as part of the Banks1 reserves, to bu counted in the debenture;
The present law in our opinion is over-generous in providing that
required reserves may be invested in earning assets (the reserves of commercial banks and those of the Federal Reserve Banks may not be in earning
assets) and the proposed amendment would go even further by allowing the
reserves to be again multiplied by forming a base for the issuance of debentures.
There is nothing in the present law which restricts the power of
the System to raise money to perform the functions it was established tf
perform, namely, to provide a reservoir of funds on which member institutions

-3 can draw when the demand for sound home mortgage loans in their communities
exceeds the amount of share investment. Without issuing debentures, the
Banks can make advances out of their own capital, as well as from deposits
they may have from member institutions which have more share capital than
mortgage loans. When demands on the Banks exceed these resources, the System
may borrow from the money market the entire amount of section 10(a) advances
from the Banks to their members,
Bearing in mind that Federal savings and loan associations are
forbidden by law to accept deposits and that the holder of a share in such
an institution should not expect the same liquidity as the owner of a
deposit in a commercial bank, it seems obvious that the Federal Homo Loan
Banks should not nood to raise funds on the basis of assets other than
loans of the typos described in section 10(a) of the Federal Hone Loan Bank
Act, The most likely use for such funds would bo to make unsecured advances to member institutions to enable them to meet demands for share withdrawals - an operation which is clearly inconsistent with the nature of share
accounts and the uniform charter provisions of Federal associations governing withdrawals.
Section J03 is therefore open to objection on the following
principal grounds; first, because it would broaden the base for debentures
in such a manner as to encourage lending by member institutions of types
which are inappropriate for local mutual thrift and home financing institutions; second, because, by including paper not conforming to section 10(a)
as well as Government obligations owned directly by the Federal Home Loan
Banks, whether as part of their reserves or not, it would make available to
the Banks far more funds than they need in order to perform their functions;
and third, because it is desirable that the reserves of the Federal Home
Loan Banks, which are already invested in earning assets, should not be
used as a basis for further generation of credit.
The argument which has been advanced that the Federal Home Loan
Banks have not participated us fully in the financing of the war as they
would if Government obligations could be included in the debenture base, is
not convincing. The Treasury has said repeatedly that it does not want
institutions to borrow money in order to purchase Government bonds•
The reserve which Congress has said should some day reach 5
cent of the Federal Savings and Loan Insurance Corporation's insured risk
was, on June JO, I9l\U, after 10 years of operation, only O#57 per cent of
the insured risk* Section JOG would reduce the insurance premium due from
insured institutions by one-third, and would consequently slow down the
rate at which the reserve is accumulated. In a period when losses were
high, the reserve would be sadly deficient.
It might bo argued that the right to assess insured institutions
for losses and operating expenses could bo used to moot larger losses, but

-hapart from the fact that tho Corporation has never yet used this power of
assessment, it is doubtful that assessments after largo losses have started
would bo effective in yielding the amount of revenue that would be required
(since the amount of assessment for any one year is limited) or could, in
such a period of widespread strain, be conveniently paid by the institutions,
Indeed, it is contrary to all insurance principles to attempt to assess the
insured after the risk insured against has materialized.
One of the arguments advanced in support of this proposal in
previous years was that the risk insured by the Federal Savings and Loan
Insurance Corporation is about the same as that insured by the Federal
Deposit Insurance Corporation, and that therefore the premiums should be
similar. However, the risk is far from being the same.
In the first place, banks insured by the FDIC as of June 30,
19U5, had cash and United States Government securities totaling $112 billion
as against total deposits of $13U billion, leaving a balance of $22 billion
as the only part of their deposits involving risk of loss to the FDIC.
Capital accounts (capital, surplus, undivided-profits and reserves) totaled
$8 billion. The ratio of capital accounts to these remaining deposits was
therefore 1 to 2»7» By comparison,, institutions insured by the Federal
Savings and Loan Insurance Corporation, as of December Jl, I9I4U* h&d cash
and United States Government securities totaling $1.5 billion as against
total private repurchasable capital (shares), including deposits and investment certificates of $U billion, leaving a balance of $3 billion^ The
undivided profits and reserves of the insured institutions tanounted to
approximately $0*36 billion, u ratio of 1 to 8. On this basis, the cushion
provided by the capital accounts of institutions insured by tho FDIC is
three times as great as that provided in the case of accounts insured by
the Federal Savings and Loan Insurance Corporation.
In the second placo? the comparison of the risks should be on
the basis of the insured accounts of the institutions and not their total
assets. The capital accounts of institutions insured by the FDIC amounted,
in 19U3» to 20 per cent of the insured deposits, while tht* capital accounts
of institutions insured by the Federal Savings and Loan Insurance Corporation amounted to only about 9 per cent of its insured accounts. In other
words, a comparison on this basis, without taking into account the cash and
United States Government seourities whioh wou 1 d tend to reduce t i risk? would
show that the cushion in the case of the FDIC is over twice as great a 3 in
the case of the Federal Savings and Loan Insurance Corporation.
Finally, the difference is further accentuated by the fact
whereas virtually all of the share accounts and deposits of the institutions
insured by the Foderal Savings and Loan Insurance Corporation are covered by
insurance, only about 38 Vor cent of the total deposit liabilities of insured banks are insured by the FDIC (its Annual Report for 19U3 indicates
that 36 billion are insured out of a total of 9h billion)* T^is means that
the effective premium rate of tho FDIC is approximately l/5 of one per cent
of insured deposits. Consequently, even if tho other factors were equal,

-5 the rate for the Federal Savings and Loan Insurance Corporation should bo
raised instead of lowered in order to make it comparable with that of the
The Federal Savings and Loan Insurance Corporation has 100
million dollars of Government-furnished money. This is, in effect, a
subsidy. At the present time, when the national debt is so great and
such earnest efforts are being made to increase Government receipts it
would be more prudent to permit the rate to remain where it is with the
ultimate view of repaying this 100 million dollars to the Treasury when
possible, rather than to reduce the rate in tho face of all the factors
outlined above<