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March 16, 1936

MEMORANDUM ON BUILDING-COMPANY PROPOSAL

The President on Friday asked for an expression of views on
the idea, of which' there has lately been some public discussion, that
a limited number of large home-building companies might be organized
with governmental assistance—one, say, in each Federal Reserve
District—to build houses in stifficient volume to effect important
economies in land, building-material, and labor costs•
That the price of housing in the United States is unduly
high in comparison with other prices entering into the cost of living
has long been evident• That building costs during the depression remained unduly high, and out of line with production costs generally,
has likewise been evident. On these points there seems to be no
difference of opinion among various schools of economic thought that
on other questions sometimes differ very widely.
Moreover, the President goes to the crux of the industrial
aspect of the housing problem when he contrasts the lack of economical
methods of production in home-building with the methods characteristic
of other major branches of industrial production. There is no homebuilding industry in the United States in the same senae as there has
been in recent years, for example, in Great Britain, or as there is in




-z this country an automobile industry, a radio industry, etc.
The failure of the American genius for larger-scale production
to assert itself in the housing field was emphasized by the President's
Committee on Housing in the reports made to him in the spring of 1934.
The essential causes of this failure, however, as the Presidents
committee then pointed out, were to be found largely in the high
speculative costs of land and building resulting from unsound and uneconomic methods of financing—from the failure to develop realistic
and practical lending practices that would make the economical development of the housing industry possible*
The essence of the problem, then, is to devise economyproducing financial mechanisms that will (a) facilitate the operations
to which the present technological state of the industry is geared, (b)
meet the income status of families that can pay for houses only in weekly
or monthly installments, and (c) provide a mortgage system under which
an integrated home-building industry can be developed• The recommendations of the President's committee in 1934 were predicated on this conception of the essential problem*
In other words, the committee approached the problem from
the point of view of cause-and-effect, and recommended a complete revamping of
the financing practices that have caused home-building in the United
States to lag far behind other industries in developing economical




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and efficient methods of production.
The idea that it is somehow possible to create a new kind of
home-building industry out of hand, and set it up overnight with governmental financial aid, is a novel conception recently advanced by
Mr* Allie S. Freed of New York, who is chairman of an organization
known as the Committee for Economic Recovery. Mr. Freed has proposed
that one or two home-building companies be established in each of 20
cities, each company having a minimum capital of $1,000,000, 3/4 of
which would be subscribed by the Government if adequate private subscriptions were not forthcoming.

The idea is apparently original with

Mr. Freed and seems to have been inspired by the fact that the British
housing boom of recent years has been accompanied ty the formation of
well-financed companies that build low-priced houses in large numbers.
A comparatively small number of these companies account for a large part
of the British home-buiMing activity.
What Mr. Freed has apparently failed to discern, however, is
that the formation of these companies was a result of the revival of
home-building and home-buying. Home-building as an important private
enterprise had largely disappeared in Great Britain during the war and
post-war periods. In consequence of this, Great Britain, alone of all
the important commercial nations, failed to experience a post-war




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building boom. When a variety of circumstances combined to produce the
long-delayed revival of building activity, private companies were organized because they saw a prospect of profit; and because of this prospect of profit the companies were able to raise their capital by private
subscriptions or else by selling shares in the open market•
In other words, the British housing industry has been going
through a sort of de-socialization process for the past fifteen years.
It is only in more recent years that there has taken place in Great
Britain the revival of building that corresponds in its cyclical relationship with the American construction boom of the 1920fs»

The fact may be

nothing to boast of in the light of the nature of our performance, but
it is nevertheless a fact, that in building activity we are ten years
ahead of Great Britain, not five years behind her#

The recent British

boom has been the more spectacular, however, first because it has occurred
at a time when in our own country the construction industry has been
severely depressed, second, because of the huge volume that has finally
resulted from the long-arrested demand, and third, because of the highly
creditable nature of the British performance•
The building-company idea advanced by Mr. Freed and accepted
by some of his associates (the more practical-minded rejected it and
declined to join him in his recent report to the President) has no
counterpart in British or American industrial experience* A nation-wide




- sindustry, comprised of large and efficient operating units, does not
spring suddenly into existence trained and equipped for large-scale
purchasing and large-scale production. Nor can it be made to do so
by an offer on the part of government to supply the bulk of the working capital for 20 to 40 operating units•
In the field of home-building, as in the field of unemployment, it is a condition and not a theory by which the Administration
is confronted• Whatever the defects of the housing industry in the
United States, the industry is nevertheless a going concern* It is
made up of thousands of small business enterprises—land developers,
operative builders, building-material dealers, etc.—spread over an
enormous geographic aria which itself contains a great number and great
variety of urban communities. There is no comparative analogy to all
this in the British picture•
We have no practical choice, therefore, but to take our housing
industry as we find it* We have to adapt our legislation to the industry as it is in March, 19S6—not as it may be 5 or 10 years hence or
as the British housing industry was 5, or 10, or 15 years ago* For us
to do otherwise would be to throw confusion and uncertainty into an
industry that is plainly on the upgrade, and to defeat by a false hope
of much lower prices the very activity and employment that it is our
essential aim to stimulate*




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The evident desire of the President, as indicated on Friday,
is that such housing legislation as he may recommend to Congress at
the present session shall represent an integrated program to be incorporated in a single bill and to have three principal objectives•
These objectives may be summarized as follows:
1. To further stimulate private construction of dwellings
for families in the middle-income groups*
2. To encourage the economies that would result from
larger home-building operations than operative builders are
at present equipped to undertake.
5. To encourage and assist the movement for slum-clearance
and for the rehousing of families in the lower-income groups•
Fortunately these are also the precise objectives of the
principal measures he is now being asked to consider by his housing
advisors.