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BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM

FOR THE PRESS

A p r i l 8 , 1948
A t t a c h e d i s t h e t e x t o f a l e t t e r f r o m t h e Board
o f Governors t o S e n a t o r Charles W. Tobey, Chairman o f t h e
Senate Committee on Banking and C u r r e n c y , c o n c e r n i n g gene r a l h o u s i n g l e g i s l a t i o n , p a r t i c u l a r l y S» 2317 and amendments t o S. 866, f o r r e l e a s e i n m o r n i n g newspapers o f F r i d a y ,
A p r i l 9,

1948.

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
A p r i l 5 , 19U8.
Senator Charles W. Tobey
Chairman, Committee on Banking
and Currency
Senate O f f i c e B u i l d i n g
Washington, D. C.
Dear Mr. Chairman:
The Board has been a d v i s e d t h a t y o u r committee i s c o n s i d e r i n g
g e n e r a l h o u s i n g l e g i s l a t i o n , p a r t i c u l a r l y S. 2317, i n t r o d u c e d by Senator
McCarthy, and amendments t o S. 866 proposed by S e n a t o r F l a n d e r s .
The Board i s i n sympathy, o f c o u r s e , w i t h t h e m a j o r o b j e c t i v e s
o f such l e g i s l a t i o n , and i s i n a c c o r d w i t h some o f t h e p r o v i s i o n s o f t h e s e
bills.
We f e e l , however, t h a t i n v i e w o f t h e b r o a d r e s p o n s i b i l i t i e s o f t h e
F e d e r a l Reserve System i n t h e f i e l d o f c r e d i t , we s h o u l d c a l l a t t e n t i o n t o
s e v e r a l u n d e s i r a b l e f e a t u r e s o f t h e proposed l e g i s l a t i o n , some o f w h i c h we
have had o c c a s i o n t o comment on p r e v i o u s l y .
I n t h i s c o n n e c t i o n I am enc l o s i n g a copy of o u r statement o f November 2 5 , 19^7 on H o u s i n g Finance t o
t h e J o i n t Committee on t h e Economic R e p o r t .
The p r o s p e c t f o r i n f l a t i o n i s even g r e a t e r now t h a n i t was l a s t
November. There i s s t i l l a s h o r t a g e o f many goods i n r e l a t i o n t o t h e l e v e l
o f income, and, because o f t h e imminent r e d u c t i o n i n t a x e s , coupled w i t h our
commitments under t h e European Recovery Program and t h e r e c e n t program c a l l i n g f o r a l a r g e i n c r e a s e i n m i l i t a r y e x p e n d i t u r e s , t h e Government must
a n t i c i p a t e a d e f i c i t rather than a surplus.
There i s thus a d d i t i o n a l reason
f o r t h e Government t o t a k e a l l s t e p s p o s s i b l e t o reduce i n f l a t i o n a r y p r e s s u r e s ,
p a r t i c u l a r l y t h o s e g e n e r a t e d by an excess o f c r e d i t .
F o r t h e s e reasons t h e Board i s opposed t o some o f t h e p r o v i s i o n s
o f t h e b i l l s b e f o r e y o u r committee w h i c h w o u l d i n t e n s i f y i n f l a t i o n a r y
p r e s s u r e s by making a d d i t i o n a l c r e d i t a v a i l a b l e and t h u s i n c r e a s i n g t h e demand f o r b u i l d i n g l a b o r and m a t e r i a l s .
I n a d d i t i o n , some o f t h e i r p r o v i s i o n s w o u l d reduce t h e c a p a c i t y o f t h e f i s c a l and c r e d i t agencies o f t h e
Government t o cope w i t h e i t h e r f u r t h e r i n f l a t i o n o r f u t u r e d e f l a t i o n .
The Bpard i s p a r t i c u l a r l y concerned about t h r e e p r o p o s a l s cont a i n e d i n these b i l l s s
f i r s t , c r e a t i o n o f a Government-financed secondary
m a r k e t f o r mortgages a l r e a d y u n d e r w r i t t e n by t h e Government! second, cont i n u a t i o n o f t h e u n d e s i r a b l e m o r t g a g e - i n s u r a n c e program under T i t l e V I o f
t h e N a t i o n a l H o u s i n g A c t ; and t h i r d , a d d i t i o n t o T i t l e I I o f t h e N a t i o n a l
Housing A c t o f a permanent program o f e x c e s s i v e l y easy mortgage c r e d i t .
C r e a t i o n o f a Government-financed secondary market w o u l d be d i r e c t l y i n f l a t i o n a r y a t t h i s t i m e , because, tyr making a v a i l a b l e $500,000,000
f o r t h e purchase o f mortgages, i t w o u l d r e p r e s e n t added Government spending




S e n a t o r C h a r l e s W. Tobey

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2

A p r i l 5 . 19U8

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and i n c r e a s e d demand f o r new h o u s i n g w h i c h i s a l r e a d y e x c e s s i v e , c o n s i d e r i n g t h e a v a i l a b l e s u p p l y o f l a b o r and m a t e r i a l s .
F u r t h e r m o r e , one o f t h e
o b j e c t i v e s a t t h e t i m e t h e Government mortgage i n s u r a n c e and g u a r a n t y
programs w e r e i n s t i t u t e d was t o e l i m i n a t e t h e need f o r d i r e c t mortgage l e n d i n g b y t h e Government, p a r t l y b y r e m o v i n g some o f t h e r i s k s t o l e n d e r s and
i n c r e a s i n g t h e n e g o t i a b i l i t y of mortgages.
I f p r i v a t e lenders are u n w i l l i n g
t o h o l d o r buy g u a r a n t e e d and i n s u r e d m o r t g a g e s , perhaps t h e s o l u t i o n i s t o
i m p r o v e t h e q u a l i t y o f t h e mortgages o r i n c r e a s e t h e r e t u r n t o l e v e l s w h i c h
make mortgages a t t r a c t i v e compared w i t h o t h e r i n v e s t m e n t s .
T i t l e V I o f t h e N a t i o n a l H o u s i n g A c t , by making c r e d i t a v a i l a b l e
on e x c e s s i v e l y easy t e r m s , has c o n t r i b u t e d t o t h e l a r g e r i s e i n house p r i c e s
and b u i l d i n g c o s t s , and has encouraged b u y e r s t o go t o o d e e p l y i n t o d e b t .
We b e l i e v e t h a t b o t h b u i l d e r s and b u y e r s s h o u l d have l a r g e r e q u i t i e s i n
t h e i r p r o p e r t i e s i n an i n f l a t i o n a r y p e r i o d l i k e t h e p r e s e n t , and t h a t i t i s
b o t h f e a s i b l e and d e s i r a b l e t o r e t u r n t o t h e terms o f f e r e d u n d e r T i t l e I I as
f a r as mortgages on houses f o r owner-occupancy a r e c o n c e r n e d .
The Board has
no o b j e c t i o n t o t h e c o n t i n u a t i o n o f T i t l e V I f o r r e n t a l h o u s i n g , p r o v i d e d
safeguards are m a i n t a i n e d a g a i n s t excessive loans i n r e l a t i o n t o v a l u e .
S e v e r a l o f t h e p r o p o s e d changes i n T i t l e I I o f t h e N a t i o n a l H o u s i n g
A c t a r e s u b j e c t t o t h e same c r i t i c i s m as t h e p r e s e n t T i t l e V I p r o g r a m .
Mortgages on s m a l l houses f o r 95 Ver oent o f v a l u e and r u n n i n g f o r 30 y e a r s
a r e e x c e s s i v e and so a l s o a r e I j O - y e a r mortgages o f 90 and 95 p e r c e n t o f
value f o r r e n t a l housing.
B a s i c a l l y , these t h r e e proposals are of a type which would,be
a p p r o p r i a t e f o r c o m b a t i n g a s e r i o u s d e f l a t i o n , and a r e t h e o p p o s i t e o f t h o s e
a p p r o p r i a t e i n an i n f l a t i o n a r y s i t u a t i o n such as we f a c e t o d a y .
Measures
such as t h e s e s h o u l d be r e s e r v e d t o c u s h i o n d e f l a t i o n s h o u l d i t l a t e r d e v e l o p .
O t h e r w i s e , t h e o n l y measures a v a i l a b l e w o u l d be d i r e c t Government l e n d i n g o r
s u b s i d i e s , on a l a r g e enough s c a l e t o p r o t e c t t h e r e a l e s t a t e and h o u s i n g
m a r k e t f r o m a s e r i o u s c o l l a p s e such as d e v e l o p e d i n t h e e a r l y t h i r t i e s .




Sincerely yours,
(Signed)

M. S.

M. S. E c c l e s ,
Chairman p r o t e m .

Eccles.