View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

. CREATION OF A SYSTEM OF FEDERAL
HOME LOAN BANKS

HEARINGS
BE]!'ORE A

SUBCOMMITTEE
OF THE
COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
SEVENTY-SECOND CONGRESS
FIRST SESSION
ON

H. R. 7620
A BILL TO CREATE FEDERAL HOME LOAN BANKS, TO
PROVIDE FOR THE SUPERVISION THEREOF
AND FOR OTHER PURPOSES

MARCH 16, 17, 18, 21, 22, 23, 24, 25, 28, 29, 30, 1932

Printed for the use of the Committee on Banking and Currency

118286

UNITED STATES
GOVERNMENT PRINTING_ OFFICE
WASHINGTON: 1932


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL
HOME LOAN BANKS

HEARINGS
BEFORE A

SUBCOMMITTEE OF THE
COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
SEVENTY-SECOND CONGRESS
FIRST SESSION
ON

H. R. 7620
A BILL TO CREATE FEDERAL HOME LOAN BANKS, TO
PROVIDE FOR THE SUPERVISION THEREOF
AND FOR OTHER PURPOSES

MARCH 16, 17, 18, 21, 22, 23, 21, 25, 28, 29, 30, 1932

Printed for the use of the Committee on Banking and Currency

113235


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

UNITED STATES
GOVERNMENT PRINTING OFFICJII
WASHINGTON : 1982

€Or,:IMITTEE ON BANKING .A~ CURRENCY
HOUSE OF REPRESENTATIVES
SEVENTY-SECOND CONGRESS, FmST SESSION

HENRY B. STEAGALL, Alal)ama, Chairman
CHARLES H. BRAND, Georgia.
LOUIS T. McFADDEN, Pennsylvania.
WILLIAM F. S'I'EVENSON, South Carolina. JAMES G. STRONG, Kansas.
T. ALAN GOLDSBOROUGH, Maryland.
ROBERT LUCE, Massachusetts.
GUYE. CAMPBELL, Pennsylvania.
ANNING S. PRALL, New York.
JEFF BUSBY, Mississippi.
CARROLL L. BEEDY, Maine.
MICHAEL K. REILLY, Wisconsin.
JOSEPH L. HOOPER, Michigan.
FRANK HANCOCK, North Carolina.
GOD!l'REY G. GOODWIN, Minnesota.
CLYDE WILLIAMS, Missouri.
BENJAMIN M. GOLDER, Pennsylvania.
FRANCIS SEIBERLING, Ohio.
PERCY H. STEWART, New Jersey.
WESLEY E. DISNEY, Oklahoma.
WILLIAM L.-TIERNEY, Connecticut.
0. K. WEED, Clerk

SUBC~:IU.UTTEE ON

H.

R.

7620

MICHAEL K. REILLY, Wisconsin, Chairman
CLYDE WILLIAMS, Missouri.
ROBERT LUCE, Massachusetts.
FRANK HANCOCK, North Carollna.
GUY E. CAMPBELL, Pennsylvania.

D


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME
LOAN BANKS
WEDNESDAY, MARCH 16, 1932
HOUSE OF REPRESENTA1.'IVES,
SURCOMMITTEE OF THE COMMITTEE,
ON BANKING AND CURRENCY,

Washington, D. 0.
The subcommittee met, pursuant to call, at 11 o'clock a. m., in the
caucus room of the House Office Building, Representative Michael
K. Reilly presiding.
_Present: Re:(>resentatives Reilly (chairman of the subcommittee),
Hancock Williams, Luce, and Campbell.
The subcommittee thereupon proceeded to the consideration of the
'bill (H. R. 7620) to create Federal home loan banks, to provide for
the· supervision thereof, and for other purposes.
[H. R. 7620, Seventy-second Congress, first session]
A BILL To create Federal Home Loan Banks, to provide for the supervision thereof, and
for other purposes

Be it enacted, by the Senate and House of Representatives of the Unite&
States of America in Congress assembled!, That this Act may be cited as the

" Federal home loan bank act."
DEFINITIONS

SEO. 2. As used in this act( 1) The term " board " means the Federal home loan bank board.
(2) The term "Federal home loan bank" means a bank established by the
board under authority of this•act.
·
·
(3) The term "State" includes the District of Columbia and the Territories
of Alaska and Hawaii.
(4)· The term "member" (except when used in reference to a meinb~r of
the board) means any institution which has subscribed for the stock of a Federal home loan bank, and includes any institution which has, in lien of subscribing for stock, deposited cash or securities, as authorized in section 5 ( e) .
(5) The term "home-mortgage loan" means a loan made by a member upon
the security of a home mortgage.
(6) The term" home mortgage" means a first mortgage upon real estate upon
which there is located a dwelling for not more than three families, and shall
include such classes of first liens other than mortgages as are commonly given
to secure advances on real estate by institutions authorized under this act to
become members, under the laws of the State in which ·the same are located,
together with the credit instruments, if any, secured thereby.
("7) The term "unpaid principal" when used in respect of a loan secured by
a home mortgage means the principal thereof less the sum of (1) payments
made on such principal, and (2) in cases where shares of stock pledged as
security for the loan may, fo the extent tliey are paid, be applied toward discharging the principal of the loan, the amounts P!lid on such shares either
-directly or by credit of dividends, or otherwir;;e.
1

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

2

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS
FEDERAL HOME LOAN BANKS

SEC. 3. As soon as practicable the board shall divide the continental United
States and the Territories of Alaska and Hawaii into twelve districts. Such
districts shall be apportioned with due regard to the convenience and customary
course of business of the institutions eligible to and likely to subscribe for stock
of a Federal home loan bank to be formed under this act but no such district
shall contain a fractional part of any State. From time to time the board may
adjust such districts and may create new districts, but the total number of
such districts shall remain twelve. Such districts shall be known as Federal
home loan bank districts and may be designated by number. As soon as
practicable the board shall establish, in each district, a Federal home loan
bank at such city as may be designated by the board. Its title shall include
the name of the city at which it is established.
CAPITAL OF FEDERAL HOME LOAN BANKS AND SUBSCRIPTION THERETO

SEC. 4. (a) Such of the following as are duly organized under the laws of
any State or of the United States, and are subject to inspection and regulation
under the banking laws, or under similar laws, of the State or of the United
States, shall be eligible to become a member of a Federal home loan bank:
(1) Building and loan associations, cooperative banks, and homestead
associations ;
(2) Any of the following whose time deposits and financial condition, in the
judgment of the board, warrant their making such home mortgage loans as, in
the judgment of the board, are long-term loans: Savings banks, trust companies,
and other banks ; and
(3) Insuranee companies.
(b) An institution eiigible to become a member under this section may become
a member only of the Federal home loan bank of the district in which is
located the institution's principal place of bqsiness, or of the bank of a district
adjoining such district.
SEC. 5. (a) As soon as practicable after the enactment of this act, the board,
with the approval of the Secretary of the Treasury, shall determine the minimum capital of each Federal home loan bank which shall be not less than
$5,000,000. The board shall, as soon as pi,acticable thereafter, open books in
each district established under section 3 for subscription to the capital stock
of the Federal home loan bank of the district.
(b) The capital stock of each Federal home loan bank shall be divided into
shares of a par value of $100 each. The minimum capital stock shall be issued
at par. Stock issued thereafter shall be issued at such price as may be fixed
by the board.
( c) The original stock subscription for each institution eligible to become
a member under section 4 shall be not less than $2,500, plus an amount equal to
1 per cent of the aggregate of the unpai4 principal of the subscriber's home
mortgages. The board shall from time to time adjust the amount of stock
held by each member so that, as nearly as possible, such member shall at all
times hnve invested in the stock of the Federal home loan bank at least an
amount calculated in the same manner as in the case of the member's original
stock subscription.
(d) Stock subscriptions other than by the United States shall be paid for
in cash, or by certified check, and shall be paid for at the time of application
therefor, or, at the election of the subscriber, in installments, but not less
than one-fomth of the total amount payable shall be paid at the time of
filing applicaion, and a further sum of not less than one-fourth of such total
shall have been paid at the end of each succeeding period of four months.
(e) If the law of the State under which an institution described in section
4 operates does not permit such institution to subscribe for stock in the
Federal Home Loan Bank, the board may permit such institution, in. lieu of
subscribing for st<>l!k, to deposit with the bank an amount of cash, short-term
debenture bonds issued by the bank, or Federal Government securities, equal
to the amount of the required. stock subscription of such institution had it been
authorized to subscribe for stock. The board shall prescribe terms and conditions under which such deposits are made so that the obligations of the
institution to the bank will be adequately secured. Upon such deposit sueh
institution shall become a member for the purposes of this act. Upon the
enactment of State legislation authorizing the subscription to Federal Home

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL ROME LOAN BANKS

3

Loan Bank stock by such member, the bank shall issue to such member an
amount of stock equal to the value at that time of the property deposited
with the bank by such member under this subsection. In the case of any
instituti(m which has become a member under the provisions of this section,
if the law of the State under which it operates does not at the end of fortytwo months after the enactment of this act permit stock subscription by such
institution, such institution shall cease to be a member, and the same provisions shall apply with respect to the termination of its relations with the
Federal Home Loan Bank as apply in the case of the withdrawal of members under subsection (i) of this section. The board shall not permit the
acceptance of cash or securities in lieu of subscriptions to stock after State
legislation has been enacted authorizing the institution to purchase Federal
Home Loan Bank stock, or after forty-two months after the enactment of
his act, whichever is earlier.
The board shall prescribe regulations under which institutions enabled to
become members under authority of this subsection shall, as nearly as practicable, have the same rights, privileges, powers, and benefits, and be subject
to the same conditions, limitations, restrictions, and liabilities as institutions
which have become members by reason of their purchase of capital stock of
Federal Home Loan Banks. For the purposes of the foregoing provision.,
whenever any reference is made in this act to amounts of capital stock subscribed for, amounts required to be deposited under this subsection shall be
held to be included, and if the reference is to amounts of capital stock paid
in, amounts deposited under this subsection shall be held to be included.
(f) The Secretary of the Treasury shall subscribe, on behalf of the United
States, for such part of the minimum capital of each Federal Home Loan
Bank as is not subscribed for by members under subsections ( c) and ( e) of
this section within thirty days after books have been opened for stock subscriptions as provided in subsection (a). Payments for stock subscriptions by
the Secretary of the Treasury shall be subject to call in whole or in part
by the board, with the approval of the Secretary of the Treasury, at such
time or times as may be deemed advisable. The aggregate amount expended
by the United States for the purchase of stock under this act shall not execed
$150,000,000, and such sums as may be necessary for such purpose are hereby
authorized to be appropriated out of any money in the Treasury not otherwise appropriated. Each Federal Home Loan Bank receiving such payments
shall issue receipts therefor to the Secretary of the Treasury, and such receii;ts
shall be evidence of the stock ownership of the United States.
·
(g) After the amount of capital of a Federal Home Loan Bank paid in by
members equals the amount paid in by the Secretary of the Treasury under
subsection ( f), such bank shall apply annually to the paymPnt and retirement
of the shares of the capital stock held by the United States, 50 per centum
of all sums thereafter paid in as capital until all such capital stock held by
the United States is retired at par. Stock held by the United States may at
any time, in the discretion of the Federal Home Loan Bank, and with the
approval of the board, be paid off at par and retired in whole or in part; and
the board may at any time require such stock to be paid off at par and retired
in whole or in part if in the opinion of the board the Federal Home Loan
Bank has resources available therefor.
(h) Stock subscribed for otherwise than by the United States, and the
right to the proceeds thereof, shall not be transferred or hypothecated except
as hereinafter provided, and the certificates therefor shall so state.
(i) Any member may withdraw fr0111 membership in a Federal Home
Loan Bank six months after filing with the board written notice of intention
so to do, and the board may, after hearing, remove any member from membership if, in the opinion of the board, such member has failed to comply with
any provision of this act or the regulations of the board made pursuant thereto.
In any such case, the indebtedness of such member to the Federal Home Loan
Bank shall be liquidated, and the capital stock in the Federal Home Loan
Bank owned by such member shall be surrendered and canceled. Upon the
liquidation of such indebtedness such member shall be entitled to the return
of its collateral, and, upon surrender and cancellation of such capital stock,
the member shall receive a sum equal to its cash paid subscriptions for the
capital stock surrendered, except that if at any time the board finds that the
paid-in capital of a Federal Home Loan Bank is or is likely to be impaired
as a result of losses in or depreciation of the assets held, the Federal Home
Loan Bank shall on the order of the board withhold from the amount paid

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

4

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

in retirement of the stock a, pro rata share of the amount of such impairment
as determined by the board.
(j) A Federal Home Loan Bank may, with the approval of the board,
permit the disposal of stock to another member.
(k) No dividends shall be paid on stock subscribed for by the United
States, but all other stock of any Federal Home Loan Bank shall share in
dividend distributions without preference.
MANAGEMENT OF BANKS

SEc. 6. (a) The management of each Federal Home Loan· Bank shall be
vested in a board of eleven directors, all of whom shall be citizens of the
United States and bona fide residents of the district in which such bank is
located.
(b) Two of such directors shall be appointed by the board. The terms of
such directors shall expire one year and two years, respectively, from the
end of the calendar year 1932, and their successors shall be appointed by the
board for terms of three years.
(c) Nine of such directors, three of whom shall be known as class A directors, three of whom shall be known as class B directors, and three of
whom shall be known as class C directors, shall be first appointed by the
board, and shall serve until the end of the calendar year 1932. Their successors shall be elected as provided in subsection ( d) , and of such successors
first elected one of each such class shall ser,e for one, two, and three ye:1rs,
respectively. Thereafter all such directors shall serve for three years. Directors of classes A, B, and C. whether appointed or elected, shall be chosen
from among persons connected with the home-financing business.
(d) The board shall divide the members of each Federal home loan bank
into three groups which shall be designated as groups A, B, and C, which
groups shall represent, respectively, and as fairly as may be, the large, mediumsized, and small members, the size of such members to be determined according to the net value of their holdings of home-loan mortgages. The board ma_y
revise the membership of such groups from time to time. Of the directors
elected as hereinafter provided, each class A director shall be an officer or
director of a member in group A, each class B director shall be an officer or
director of a member in group B, and each class C director shall be an officer
or director of a member in group C. Each member shall be entitled to nominate suitably qualified persons for election as directors of the class corresponding to the group to which such member belongs, and shall cast one vote for
each director in its class. The directors of each class shall be nominated
and elected in accordance with such rules and regulations as may be prescribed
by the board.
(e) Any director appointed or elected as provided in this section to fill a
vacancy shall hold office only until the expiration of the term of his predecessor.
(f) The board shall designate one of the directors of each bank to be chairman, and one to be vice chairman, of the board of directors of such bank.
(g) If at any time when nominations are required, members shall hold less
than $1,000,000 of the capital stock of the Federal home loan bank, the board
shall appoint a director or directors to fill the place or places for which such
nominations are required until the expiration of the next calendar year or, in
the case of a vacancy, until the expiration thereof, whichever period is the
shorter.
(h) Each bank may pay its directors reasonable compensation for the time
required of them, and their necessary expenses, in the performance of their
duties, in accordance with the resolutions adopted by such directors, subject
to the approval of the board.
(i) Such board of directors shall administer the affairs of the bank fairly
and impartially and without discrimination in favor of or against any member,
and shall, subject to the provisions hereof, extend to each subscriber applicant such advances as may be made safely and reasonably with due regard
for the claims and demands of other members, with due regard to the maintenance of adequate credit standing for the Federal home loan bank and its
obligations, and with due regard to the orderly provision of credit to aid in
the conduct of home financing in the various communities within its district,
and within the district as a whole.


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM .OF FEDERAL HOMK LOAN BANKS

5

(j) The board shall cause to be made from time to time· examinations of
the laws of the various States of the United States and the regulations and
procedure thereunder governing conditions under which institutions of the
kinds which may become subscribers of banks hereunder are permitted to be
formed or to do business, or relating to the conveying or recording of land
titles, or to homestead and other rights, or to the enforcement of the rights of
holders of mortgages on lands securnig loans, or otherwise. If any such
examination shall indicate, in the opinion of the board, that under the laws of
any such State or the regulations or procedure thereunder there would be
inadequate protection to a Federal home loan bank in· making or collecting
advances under this act, the board may withhold the establishment or prevent
or limit the operation of any Federal home-loan bank in such State until satisfactory conditions of law, regulation, or procedure shall be established. In
any State where State examination of members is deemed inadequate for the
purposes of the Federal home loan banks, the board shall establish such· inspection, all or part of the cost of which may be considered as part of the cost of
making advances in such State. The banks and/or the board may make
studies of trends of home and other property values methods of appraisals, and
other subjects such as they may deem useful for the general guidance of their
nolicies and operations and those of subscribers.
ELIGIBILITY TO SECUBE ADVANCES

SEO. 7. Any member in a Federal home loan bank shall become eligible
to apply for advances from such bank upon the granting of an application for
permission to apply for such advances. Such application shall be in such form
as shall be required by the Federal home loan bank with the approval. of the
board. Such Federal home loan bank may at its discretion deny any such
application, or, subject to the approval of the board, may grant it on such
conditions as the Federal home loan bank may prescribe.
ADVANCES TO MEMBERS

SEc. 8 (a) Each Federal home loan bank is authorized to make advances
to members who have become eligible to applY therefor, as provided in section
7, upon th~ security of home mortgages, such advances to be made subject
to such regulations, restrictions, and limitations as the board may prescribe.
Any such advance shall be subject to the following limitations as to amount( 1) If secured by a home mortgage given in respect of an amortized home
mortgage loan which was for an original term of eight years or more, the
advance may be for an amount not in excess of 60 per centum of the unpaid
principal of the home mortgage loan ;
(2) If secured by a home mortgage given in respect of any other home
mortgage loan, the advance shall not be for an amount in excess of 50 per
centum of the unpaid principal of the home mortgage loan;
(3) In no case shall the amount of the advance exceed 40 per centum of
the appraised valuation of the re!ll estate. securing the home mortgage loan.
(b) No home mortgage shall be accepted as collateral security for an
advance by a Federal home loan bank if, at the time such advance is made
(1) the home mortgage loan secured by it has more than twenty years to run
to maturity; or (2) the principal sum of the home mortgage loan secured by
it exceeds three-fourths of the appraised valuation of the real estate securing
such loan if the loan is amortized, or exceeds 60 per centum of the appraised
valuation of the real estate securing such loan if .such loan is not amortized;
or ( 3) the unpaid princip(ll of such home-mortgage loan exceeds $15,000. Por
the purposes of this subsection and subsection (a) the appraised valuation of
real. estate shall be established by such certification by the borrowing member
or such other evidence as the board may require. For the purposes •of this
section each Federal home loan bank shall have power to make, or to c.ause
or require to be ma-de, such appraisals and other investigations as it may
deem necessary. No home mortgage otherwise eligible to be accepted as collateral security for an advance by a Federal home loan bank shall be accepted
if any director, officer, employee, attorney, or agent of the Federal home loan
bank or of the borrowing member is personally liable thereon, unless the
board has specifically approved such acceptance.
.
(c) Such advances shall be made upon the note or obligation of the member
secured as hereinafter provided, bearing such rate of interest as the board

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

6

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

may approve or determine, and the Federal home loan bank shall have a
lien U]!)on and shall hold the stock of such member as further collateral security
for all indebtedness of the member to the Federal home loan bank. At no
time shall the aggregate outstanding advances made by any Federal home loan
bank to any member exceed twelve times the amounts paid in by such member
for capital stock subscribed for by it.
(d) The applying subscriber shall enter into a primary and unconditional
obligation to pay off all advances, together with interest and any unpaid costs
and expenses in connection therewith according to the terms under which they
were made, in such form as shall meet the requirements of the bank and the
approval of the board. The bank shall reserve the right to require at any time,
when deemed necessary for its protection, deposits of additional collateral
security or substitutions of security by the member, and each member shall
assign additional .or substituted security when and as so required. Subject to
the approval of the board, any Federal home loan bank shall have power to
sell to any other Federal home loan bank, with or without recourse, any advance
made under the provisions of this act, or to allow to such bank a participation
therein, and any other Federal home loan bank shall have power to purchase
such advance or to accept a participation therein, together with an appropriate
assignment of security therefor, including a proportionate part of any proceeds
of the retirement of capital stock of the selling bank subscribed for by the
member to which such advances were made.
GENERAL POWERS AND DUTIES OF BANKS

SEO. 9. (a) Each Federal home loan bank shall have power, subject to the
approval of the board, (1) to borrow money, to give security therefor, and to
pay interest thereon, and (2) to issue bonds and debentures having such maturities as may be determined by the board, secured by the deposit of home mortgages.
(b) The board shall prescribe rules and regulations governing the assignment, deposit, custody, substitution, and release of home mortgages securing
such bonds and debentures, the forms and terms of such borids and debentures,
and the conditions under which they may be issued and retired, including any
option with respect to payment and retirement thereof in advance of maturity,
and such regulations shall provide for the deposit in trust, under "such terms
and conditions as it may deem advisable, of the home mortgages securing such
bonds and debentures.
( c) Such deposits in trust shall be so maintained that the aggregate unpaid
principal of the homi:: mortgage loans secured by the home mortgages deposited
as security for any issue of bonds or debentures shall, as nearly as possible, be
at all times not less than an amount equal to 190 per centum of the total out1,tanding amount of such issue. Cash deposited under authority of subsection
(d) shall be included in the computation of the aggregate unpaid principal of
home mortgage loans under this subsection.
(d) The board may at any time require any Federal home loan bank to
deposit additional home mortgages or to make substitutions of home mortgages
to secure such bonds and debentures, except that when in the opinion of the
board home mortgages are not available for such purpose, it may permit, for
such limited periods as it may deem advisable, the deposit of cash in lieu of the
deposit of substitute or additional home loan mortgages.
(e) The board shall approve or determine the rates of interest to be paid by
the Federal home loan banks upon the notes, debentures, or bonds which it may
issue except that no bond or debenture issued within seven years after the
e:dactment of this act shall bear a rate of interest in excess of 5½ per centum
per annum, and no bond or debenture issued thereafter shall bear a rate of
interest in excess of 5 per centum per annum and shall provide such margins
between interest rates received upon advances made to members and interest
paid upon obligations which the Federal home loan bank may issue as will
cover expenses of operation and reserves and, under such 'regulations as may be
provided by the board, some part of such reserve may be devoted to retirement
of the stock subscribed by the United States.
(f) The Federal Home Loan Banks shall be jointly and severally liable for
the payment when due of all bonds and debentures, and of notes and other
obligations issued by any Federal Home Loan Bank, and interest thereon, in
accordance with their terms: Provided,, That this shall not prevent any par-


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

7

ticular Federal Home Loan Bank, when specifically so authorized by the board,
from borrowing funds tempor.arily under the terms of obligations which shall
expressly state in substance in such manner as shall be approved by the board
that the liability therefor is confined to the issuing bank. The Federal Home
Loan Banks shall from time to time in accordance with rules, regulations, and
orders of the board make adequate agreements and arrangements among themselves for meeting the payment of the bonds, debentures, notes, or other obligations on which they are jointly and severally liable, and the interest thereon,
but such agreements and arrangements shall not restrict in any respect the
joint and several liability herein established.
(g) Each Federal Home Loan Bank shall have power to accept only- such
deposits as ar.e made by members of such bank, or by other Federal Home
Loan Banks. Such deposits shall not be subject to check, and no rate of
interest in excess of 3 per centum per annum shall be paid thereon. No Federal
Home Loan Bank shall transact any banking or other business not expressly
authorized by this act.
(h) The board is authorized and empowered to permit, or, whenever in the
judgment of at least four members of the board an emergency exists requiring
such action, to require, Federal Home Loan Banks to rediscount the discounted
notes of members held by other Federal Home Loan Banks, or to purchase the
bonds issued by any other Federal Home Loan Bank, or to make deposits with
other Federal Home Loan Banks. In any case in which the board requires the
purchase of bonds, the board shall fix the price therefor, or requires the acceptance of a deposit, it shall fix the-security therefor. The rediscount rates and
the rates of interest to be paid upon deposits shall be fixed by the board.
(i) Each Federal Home Loan Bank shall at all times have an amount equal
to the sums paid in on outstanding capital subscriptions of its members, plus
an amount equal to the current deposits received from its members, invested
in (1) United States Government securities, (2) interest-bearing deposits in
banks or trust companies, and (3) advances with maturity not greater than one
year made to members, upon such terms and conditions as the board maY'
prescribe.
(j) Such part of the assets of each Federal Home Loan Bank (except reserves and except sums provided for in subsection (i)) as such bank may deem
available therefor, may be invested otherwise than in advances to members.
Such investments shall be made subject to such regulations, restrictions, and
limitations as may be prescl'.ibed by the board.
INCORPORATIONS OF BANKS, AND CORPORATE POWERS

SEC. 10. The directors of e1;tch Federal Home Loan Bank shall, in accordance
with such rules and regulations as the board may prescribe, make and file
with the board at the earliest practicable date after the establishment of such
bank an organization certificate which shall contain such information as the
board may require. t:pon the making and fl.ling of such organization certificate
with the board such bank shall become, as of the date of the execution of its
organization certificate, a body corporate, and as such and in its name as
designated by the board it shall have power to adopt, alter, and use a corporate
seal ; to make contracts ; to purchase or lease and hold or dispose of such real
estate as may be necessary or convenient for the transaction of its business ;
to sue and be sued, to complain, and to defend': in any court of .competent
jurisdiction, State or Federal; to select, employ, and fix the compem,ation of
such officers, employees, attorneys; and agents as shall be necessary for the
transaction of its business, subject to the approval of the board; to define their
duties, require bonds of them and fix the penalties thereof, and to dismiss at
pleasure such officers, employees, attorneys, and agents; and, by its board of
directors, to prescribe, amend, and repeal by-laws, rules, and regulations governing the manner in which its affairs may be administered ; and the powers
granted to it by law may be exercised and enjoyed subject to the approval of
the board. The president of a Federal home loan bank may also be a member
of the board of directors thereof, but no other officer, employee, attorney, or
agent of such bank, who receives compensation, may be a member of the
board of directors. Each such bank shall have all such incidental powers, not
inconsistent with the provisions of this act, as are customary and usual in
corporations generally.


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

8

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS
EXEMPTION FROM TAXATION

SEc. 11. Every Federal Home Loan Bank, including the capital and reserve
or surplus therein and the income derived therefrom, shall be exempt from
Federal, State, municipal, . and local taxation, except taxes upon real estate
held, purchased, or taken by said bank. The bonds and debentures issued by
each Federal Home Loan Bank shall be deemed and held to be instrumentalities
of the Government of the United States, and as such they and the income derived
therefrom shall be exempt from Federal, State, municipal, and local taxation.
SEC. 12. When designated for that purpose by the Secretary of the Treasury
each Federal Home Loan Bank shall be a depositary of public money, except
receipts from customs, under such regulations as may be prescribed by said
Secretary; and it may also be employed as a financial agent of the Government;
and it shall perform all such reasonable duties as depositary of public money and
financial agent of the Government as may be required of it.
SEc. 13. Obligations of the Federal Home Loan Banks issued with the
approval of the board under this act shall be lawful investments, and may be
accepted as serurity for all fiduciary, trust, and public funds the investment or
deposit of which shall be under the authority or control of the United States or
any officer or officers thereof. The Federal reserve banks are authorized to act
as depositaries, custodians, and/or fiscal agents for Federal Home Loan Banks
in the general performance of their powers under this act.
RESERVES AND DIVIDENDS

SEC. 14. Each Federal Home Loan Bank shall carry to a reserve account semiannually 50 per centum of its net earnings until said reserve account shall
show a credit balance equal to 100 per centum of the paid-in capital of such
bank. After said reserve has reached 100 per centum of the paid-in capital
of said bank, 25 per centum of its net earnings shall be added thereto semiannually. Whenever said reserve shall have been impaired below 100 per
centum of the paid-in capital it shall be restored before any dividends are
paid. Each Federal Home Loan Bank shall establish such additional reserves
and/or make such charge-offs on account of depreciation or impairment of its
assets as the board shall require from time to time. No dividends shall be
paid except out of net earnings remaining after all reserves and charge-offs
required under this act have been provided for, and then only with the approval of the board. The reserves of each Federal Home Loan Bank shall
be invested subject to such regulations,· restrictions, and limitations as may
be prescribed by tbe board. If a Federal Home Loan Bank be dissolved or
go into liquidation without transfer of its assets to another Federal Home Loan
Bank, there shall be paid to the United States any reserves or surplus remaining after the payment of all debts, and after payments to members of
any amounts paid in by them for stock of such dissolved or liquidated bank,
not exceeding the par value thereof, and accrued dividends on such stock.
FEDERAL HOME LOAN BANK BOARD

SEC. 15. For the purposes of this act there shall be a board, to be known
as the " Federal Home Loon Bank Board," which shall consist of five members
appointed by the President r:11. the United States, by and with the advice and
consent of the Senate. Each member shall devote his time not otherwise
required by the business of the Unitaj States principally to the business of
the board. Before entering upon his duties each of the members shall take
an oath faithfully to discharge the duties of his office. Nothing contained in
this or in any other act shall be construed to prevent the appointment as a
member of the board of any officer or employee under the United States. The
President of the United States shall designate one of the members of the
board to serve for a term of two years, one for three years, one for four
years, one for five years, and one for six years from the date of the enactment
hereof, and thereafter the term of each m/ember shall be six years from the
date of the expiration of the term for which his predecessor was appointed.
Whenever a vacancy shall occur among the members the person appointed
to fill such vacancy shall hold office for the unexpired portion of the term
of the member whose place he is selected to fill. Each of the members of the
board shall receive a salary at the rate of $12,000 per annum: Pr<>mded, That
any member receiving from the United States any salary or compensation

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

9

for other services shall not receive as salary as a member of the board any
amount which would make the combined salary or compensation paid to him
exceed $12,000 per annum. The President shall designate one of the members
as chairman of the board. The chairman shall be the chief executive officer
of the board and in his absence or disability the duties of his office shall be
performed by some one of the other members to be designated as acting chairman by the chairman in such order as he may determine. The board shall
supervise the Federal home loan banks created by this act, shall perform
the other duties specifically prescribed by this act, and shall have power to
adopt, amend, and require the observance of such rules, regulations, and
orders as shall be 'necessary from time to time for carryj.ng out the purposes
of the provisions of this act. The board shall have power to suspend or
remove any director, officer, employee, or agent of any Federal Home Loan
Bank, the cause of such suspension or removal to be communicated in writing
forthwith to such director, officer, employee, or agent and to such Federal
home loan bank.
ADMINISTRATIVl!l EXPENSES

SEC. 16. (aT There is hereby authorized to be appropriated the sum of
$500,POO for salaries, travel and subsistence expenses, rents, printing and

binding, furniture and equipment, law books, books of reference, periodicals,
newspapers, maps, contract stenographic reporting services, telephone and telegraph services, and all other necessary expenses of the board, together with
expenses preliminary to the organization and .establishment of the banks
created hereunder, until the end of the calendar year 1932.
(b) The board shall have power to levy semiannually upon the banks, and
they shall pay, on such equitable basis as the board shall determine, an assessment sufficient in its judgment to provide for the payment of its estimated
expenses for the half year succeeding the levying of each such assessment,
beginning with the first half of the calendar year 1933. All expenses of the
board incurred in carrying out the provisions of this act, as determined by it,
beginning January 1, 1933, shall be paid from the proceeds of such assessments,
and if any deficiency shall occur in such fund at any time between such semiannual assessments the board shall have power to make an immediate assessment against the banks to cover such deficiency on the same basis as- the
original assessment. If any surplus shall remain from any assessment after
the expiration of the semiannual period for which it was levied, such surplus
may be deducted from the next following assessment.
SEC. 17. The board shall have power to select, employ, and fix the compensation of such officers, employees, attorneys, and agents as shall be necessary
for the performance of its duties under this act without regard to the provisions of other laws applicable to the employment or compensation of officers,
employees, attorneys, and agents of the United States. The board shall be
entitled to the free use of the United States mails for its official business in\
the· same manner as the executive departments of the Government; and shall
determine its necessary expenditures under this act and the manner in which
they shall be incurred, allowed, and paid.
EXAMINATIONS AND REPORTS

SEc. 18. The board shall from time to time, at least twice annually, require
examinations and reports of conditions of all Federal Home Loan Banks in
such form as the board shall prescribe and shall furnish periodically statements based upon the reports of the banks to the board. For the purposes
of this act, examiners appointed by the board shall be subject to the same
requirements, responsibilities, and penalties as are applicable tu examiners
under the National bank act and the Federal reserve act, and shall have the
same powers and privileges as are vested in such examiners by law.
UNLAW~'UL.ACTS, AND PENALTIES

SEo. 19. (a) Whoever makes any statement, knowing it to be false; JJr whoever willfully overvalues any security, for the purpose of influeneing in any
way the action of a Federal Home Loan Bank or the board upon any application, advance, discount, purchase, or repurchase agreement, or loan, under
this act, or any extension thereof by renewal, deferment, or action or otherwise, or the acceptance, release, or substitution of security therefor, shall be
punished by a fine of not more than $5,000, or by imprisonment for not more
than two years, or both.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

10

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

(b) ,vhoever (1) falsely makes, forges, or counterfeits any note, debenture,
bond, or other obligation, or coupon, in imitation of or purporting to be a note.
debenture, bond, or other obligation, or coupon, issued by a Federal Home Loan
Bank; or (2) passes, utters, or publishes, or attempts to pass, utter, or publish, any false, forged, or counterfeited note, debenture, bond, or other obligation, or coupon, purporting to have been. issued by a Federal Home Loan Bank,
knowing the same to be false, forged, or counterfeited; or (3) falsely alters
any note, debenture, bond, or other obligation, or coupon, issued or purprting
to have been issued by a Federal Home Loan Bank; or ( 4) passes, utters, or
publishes, or attempts to pass, utter, or publish, as true any falsely altered or
spurious note, debenture, bond, or other obligation, or coupon, issued or purporting to have been issued by a Federal Home Loan Bank, knowing the same
to be falsely altered or spurious, shall be punished by a fine of not more than
$10,000, or by imprisonment for not more than five years, or both.
(c) Whoever, being connected in any capacity with the board or a, Federal
Home Loan Bank, (1) embezzles, abstracts, purloins, or willfully misapplies
any moneys, funds, securities, or other things of value, whether belonging to
it or pledged or otherwise intrusted to it; or (2) with intent to defraud the
board or any Federal Home Loan Bank, or any other body politic or corporate,
or any individual, or to deceive any officer, auditor, or examiners of the
board or a Federal Home Loan Bank, makes any false entry in any book/,
report, or statement of or to the board or a Federal Home Loan Bank, or,
without being duly authorized, draws any order or issues, puts forth, or assigns
any note, debenture, bond, or other obligation, or draft, mortgage, judgment,
or decree thereof, shall be punished by a fine of not more than $10,000, or by
imprisonment for not more than five years, or both.
( d) It shall be unlawful for any individual, partnership, association, or corporation (1) which is not a Federal Home Loan Bank to use the words "Federal home loan bank," or a combination of all such words, as a name or a
part of a name under which he or it shall do business ( except in the case of
a name under which business is being done at the time of the enactment of
this act), or (2) which is not a Federal Home Loan Bank, to advertise or
represent in any way that he or it is a Federal Home Loan Bank, or to publish or display any sign, symbol, or advertisement reasonably calculated to
convey the impression that he or it is a Federal Home Loan Bank, or (3)
which is not a member, to advertise or represent in any way that he or it
is a member, or to publish or display any sign, symbol, or advertisement reasonably calculated to convey the impression that he or it is a member. Violations of this section shall be punishable by a fine of not exceeding $1,000, or
by imprisonment of not exceeding one year, or both.
(e) The provisions of section 112, 113, 114, 115, 116, and 11-7 of the Criminal
Code of the United States (U. S. C., title 18, secs. 202 to 207, incl.), in so far
as applicable, are extended to apply to contracts or agreements of any
Federal Home Loan Bank under this act, which, for the purposes hereof,
shall be held to include advances, loans, discounts, and purchase and repurchase agreements ; extensions and renewals thereof ; and acceptances, releases,
and substitutions of security therefor.
(f) The Secret Service Division of the Treasury Department is authorized
to detect, arrest, and deliver into the custody of the United States marshal
having jurisdiction any person committing any of the offenses punishable
under this act.
SEO. 20. (a) In order to enable the board to carry out the provisions of
this act, the Treasury Department, the Comptroller of the Currency, the
Federal Reserve Board, and the Federal reserve banks are hereby authorized,
under such conditions as they may prescribe, to make available to the board
in confidence for its use and the use of any Federal Home Loan Bank such
reports, records, or other information as may be available, relating to the
condition of institutions with respect to which any such Federal Home Loan
Bank has had or contemplates having trasactions under this act or relating
to persons whose obligations are offered to or held by any Federal Home Loan
Bank, and to make through their examiners or other employees, for the
confidential use of the board or any Federal Home Loan Bank, examinations
of such institutions.
·
(b) Every institution which shall apply for advances under this act shall,
as a condition precedent thereto, consent to such examination as the bank or

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

11

the board may require for the purposes of this act and/or that reports of
examinations by constituted authorities may be furnished by such authorities
to the bank or the board upon request therefor.
(c) Section 5202 of the Revised Statutes of the United States is amended
by adding a clause as follows:
" Ninth. Liabilities incurred under the provisions of the Federal Home Loan
Bank act."
SEC. 21. Each Federal Home Loan Bank shall have succession until dissolved
by the board under this act or by further act of Congress.
SEO. 22. Whenever the board finds that the efficient and economical accomplishment of the purpOE1es ot' tbis Act will be aided by such action, and in
accordance with such rules, regulations, and orders as the board may prescribe,
(1) 1_my Federal Home Loan Bank may establish a branch or branches within
the district in which such bank is located, or (2) any Federal Home Loan
Bank may be liquidated or reorganized, and its stock paid off and retired in
whole or in part in connection therewith after paying or making provision for
the payment of its liabilities. In the case of any such liquidation or reorganization, any other Federal Home Loan Bank may, with the approval of the
board, acquire assets of any such liquidated or reorganized bank and assume
liabilities thereof, in whole or in part.
SEO. 23. If any provision of this act, or the application thereof to any person
or circumstances, is held invalid, the remainder of the act, and the application
of such provision to other persons or circumstances, sahll not be affected
the!J!bY,
.
SEO. 24. Any institution organized under any law of the United States,
including the laws relating to the District of Columbia, shall be authorized
to subscribe for stock of a Federal Home Loan Bank if otherwise eligible to
make such subscription under the terms of this act, any provision in any
such law to the contrary notwithstanding.
SEO. 25. The right to alter, amend, or repeal this act is hereby expressly
reserved.

Mr. REILLY (presiding). This is a meeting of a subcommittee of
the Committee on Banking ·and Currency of the House of Representatives appointed for the purpose of considering H. R. 7620,
to create Federal home loan banks, and so forth.
At an informal conference of the members of this committee, it
was decided that in as much as the Senate of the United States
had conducted extensive hearings on an identical bill as is now
before the subcommittee, that this subcommittee would consider
testimony taken on the Senate hearing on the pending bill.
In view of such determination on the part of the subcommittee,
we do not care to hear any witnesses who appeared and testified at
the Senate hearing unless they have some additional testimony to
offer. The subcommittee does not desire to bar any person interested in this bill from appearing and giving his views except that
it is deemed unnecessary and a waste of time to hear the t.estimony
of those who have already testified on a similar bill and which testimony is available for the use of the committee.
·
What is the vote of the committee on that?
Mr. WILLIAMS. That is my view.
Mr. REILLY (presiding). Mr. Campbell, what do you think?
Mr. CAMPBELL. That is my view, Mr. Chairman.
Mr. REILLY (presiding). Mr. Hancock? .
Mr. HANCOCK. Yes; that is entirely satisfactory.
Mr. REILLY (presiding). The bill before this subcommittee bears
the name of Representative Luce, a niember of this subcommittee.
The Chair understands that Mr. Luce has spent considerable time
and studY. in the preparation of this bill, and I know the subcommittee will hear with profit whatever Mr. Luce may have to say on
the pending bill.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

12

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

STATEMENT OF HON. RO:BERT LUCE, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MASSACHUSETTS

Mr. LucE. Mr. Chairman, as sponsor of the bill in the House, I
will attempt to give you a concise statement of the bill, with a word
or two about its history.
In 1913 Congress created the Federal reserve system, a system
based upon membership-a compulsory membership by all of the
Federal banks and an optional membership by State banks. The
purpose of that system was twofold, an emergency purpose, in
order that there might be a reservoir of credit available :for commercial banks in times o:f stress, and the continuing purpose that
the system might function to give the country adequate currency
without exposing it to the danger of inflation. That system was
based upon the rediscount of commercial paper-short-time paper
arising out of business transactions ·and some transactions connected
..
.with agriculture.
Thtee years later Congress created the -Federal farm loan system
with the purpose of :furnishing to agriculture access to greater
credit, thus improving the opportunities for individual farmers
and at the same time reducing the average rate of interest throughout the country on farm· loans.
That system now has something more than a billion dollars of
mortgages and an estimate resulting from an investigation .semiofficial in nature indicated that it had reduced the average rate o:f
the total of farm mortgage interest throughout the country by one
and a half per cent.
·
The creation of these two systems suggested that a similar system
might furnish credit in the building field.
The idea took shape within the Department of Labor in the
administ~ation of President Wilson and that department formulated and presented a program to be applied to the home-building
field, embodying the same principles that had been applied to the
commercial field and to the agricultural field. The time was not
ripe. The measure did not prevail. It started a discussion which
has been continuous among those particularly interested in this
subject, grad1=1ally arousing more and more interest and resulting
in some State activities, notably in New York, where a land bank
was formed. Very recently in my own State of Massachusetts, a
system accomplishing or meant to accomplish a part of what is
now before you has been put into effect, the Supreme Court having
vouched for its constitutionality. The same proposition is under
consideration in New Jersey. I have not heard the latest :pews as
to where it stands. These are tentative steps toward combining the
institutions particularly concerned, so that they may buttress each
other and get the protective advantages that have accrued from the
Federal reserve and the Federal land bank system.
The country-wide emergency with its prospect of great distress
gave emphasis last year to the need for immediate action in order
to expand the credit facilities in the building field. The occasion
:for this will undoubtedly be laid before you in detail by witnesses.
It has already been set forth in the Senate hearings. Summarizing,
the need may be said to spring from the withdrawals of deposits

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREl,A.TION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

13

from all sorts of banking institutions large and small, whether
for the purpose of hoarding or for the necessities of domestic life.
This feature of the building situation became prominent in a
conference held here last fall by representative men of high standing
interested in the general subject of home construction. As a result
of that the President issued a statement in November, urging action
in the direction contemplated by the bill here pending, and in his
opening message at the beginning of the session of Congress, early
last December, he put this paragraph, to which I ask your attention
while I read it. It is not long, and it covers the ground most
succinctly. The President said: ·
,I recommend the establishment of a system of home-loan discount ban~s
as the necessary companion in our financial structure of the Federal reserve
banks and our Federal land banks.

My I interject and ask particular attention to the fact- that h~
begins by advising us to do the same thing here that w_e have done
for commerce and agriculture. He goes on saying:
,
Such action will relieve present distressing press1,1re against home and
farm property owners. It will relieve pressures upon and give added strength
to building and loan associations, savings banks, and deposit banks, engaged
in extending such credits. Such action would further decentralize our credit
structure. It would revive residential . construction and employment. It
would enable such loaning institutions more effectually to promote, home
ownership. I have discussed this plan at some length in a statement made
public November 14, last. This plan has been warmly indorsed by the recent
National Conference upon Home Ownership and, Housing, whose members
were designated by the governors of tlle States and the groups interested.

As is customary in the matter of the more important Executive
proposals, one of the departments, this time the Department of Commerce, undertook the preparation of a bill. At the opening of the
session it was given to Senator Watson for introduction in the Senate
and to myself for introduction in the House. Neither of us-and I
am sure that I speak for the Senator as well as myself-claims the
slightest credit for the preparation of the bill. When it was handed
to me I was told that it had been drawn in some haste, and that
undoubtedly changes would be necessary. Upon examining the bill
this was quickly evident, and, upon further study, it proved that the
bill need to be wholly recast, to be changed in some and to be rearranged
in many particulars. Therefore, I went to the legislative drafting
service, and Mr. John O'Brien, who sits at your left, was assigned to
assist me. I want to attest for the record the very remarkable help
that he has given in mastering a most complicated subject and preparing a far better bill than the original bill. Mr. O'Brien did not
have all of the tim~ that was desirable, and I gather from reading
the Senate hearings that there were some particulars brought to attention where further changes in matter of technical detail are desirable.. He will be with us through the hearings, and can furnish a
more accurate statement in point of detail than I can. I am sure
he will be very glad to assist us. He had to do this work more
hastily than would be wished by reason of the desire on the part of
the Senate subcommittee to proceed at once. It was important that
they should proceed with the revised bill in hand rather than the
original bill, and so he worked, and those of us who labored with him
worked, under high pressure, for days. I gave to it as many hours
as I could, without probably much help in matter of technique, but
contributing, as far as I could, from my experience of a dozen years

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

}4

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BAJ:ifKS

in observing the criticisms made before the Committee oh Banking
and Currency in the matter of the details of the Federal farm loan
system and of the Federal reserve system. Many little questions
have come up in that committee as to the framework of the laws
concerned. You must remember that the Federal reserve system was
novel. Indeed, both systems were novel. There was no experience
in this country to fall back upon. Inevitably, occasion to improve
the machinery developed from time to time. Possibly I helped a
little in the present matter by putting at the command of the draftsman the results of such observation as I had made. Also, representatives of the large interests directly concerned helped materially from
the fund of their own practical experience. However, the details of
the bill, as originally drafted and as reconstructed, were largely
drawn from the farm loan and Federal reserve bills. There has
been some contention in the Senate hearings over matters of machinery, with criticism by witnesses probably not informed as to the
sources of the provisions in the pending bill. There is in matter of
machinery little in this bill that has not been already tested through
the years during which the farm loan and the Federal reserve
systems have been in operation.
Perhaps I would better not try to anticipate witnesses with any
resume of objections to the bill. They will be developed as we go
along. I would, however, take a minute or two to explain the general purposes that. the President's advisers had in mind and that
he himself in his statements given out since then has confirmed.
·There are three general purposes in the bill. The first is to relieve
the present emergency, it being thought by the proponents of the bill
and confirmed by developments, at least so far as I have knowledge, that the Reconstruction Finance Corporation will not suffice
to meet the needs here involved, and that there should be added
this further provision for temporary relief. The needs are instant
because of the lamentably large number of financial institutions
that are at the present moment in dire distress by reason of their
inability to raise money on perfectly good security. I will testify
from my own experience. I received two days ago a letter from a
cooperative bank in Massachusetts in which I have been a shareholder, regarding some of my shares that are now maturing. The
president of the association wrote to me telling me of the facts and
asked me if I would be willing to leave my money there, accepting
a matured share certificate in its place. Further testifying from
my own knowledge of the situation, not long ago I received from a
constituent in the town of Brookline, one of the wealthiest towns
in the world, a letter telling me of a neighbor who had just moved
into an absolutely new $10,500 house. Desiring to borrow $7,000,
he had visited 12 savings banks, and 11 of them had refused to make
a loan under any conditions. That indicates the situation in my own
region, a situation produced by withdrawals, whether for hoarding
or for domestic needs in the case of persons in comparatively humble
circum_sta~ces _who a~e out of work. These withdraw:als are putting
every mshtution which lends money on mortgages m my State in
the position of dire need of opportunity to raise money on perfectly
sound securities. As you go through the Senate hearings you will
find that situation reported again and again in practically every part
of the country.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

15

As an emergency measure the system here proposed is needed not
alone to help these institutions meet applications for withdrawals,
but also to enable them to resume business, inasmuch as they are
practically now out of business fo'r the time being so far as concerns
loaning money with which borrowers may remodel or buy homes.
That presents a situation which makes time an important element.
If I have seemed from time to time unduly anxious to push this
matter, it is because every day hundreds of foreclosures are taking
place. Men are losing their homes and the savings of a lifetime are
being- swept away. The quicker we give such relief as may be
withm our power to give, the less the loss and the suffering.
The second purpose of the bill is to provide against repetitions
of such emergencies as this. The major recessions in business in the
last 115 years have averaged to come about once in 20 years, with a
minor recession in between. It was to anticipate these recessions in
business that the Federal reserve system was created. The same reason exists for creating this system.
The third purpose of the bill is to furnish permanently to the
home-building field the same credit facilities that have been furnished
in the ·agricultural field and the commercial field. I may be forestalling witnesses by saying that the necessity for a permanent system is one of the issues that developed sharply in the Senate hearings.
Undoubtedly some witnesses will tell us it is desirable and some will
think otherwise. It is one of the high lights of the question. For
my part I favor a permanent supply of more building capital. There
has been an attempt in this bill, and I think a successful attempt, to
anticipate the danger which will be stressed of financing building
booms. We have given in this bill much more power to the central
authority than is given in either the Federal reserve or the farm-loan
system. The confident expectation is that the President will appoint a board composed of wise and experienced men strong enough
to use that power and to prevent the resources of this system from
being put at the command of speculators and the instigators of real
estate booms. The bill has been drawn to anticipate.every such situation as we could imagine.
I think I would better not go into the details, but allow the witnesses to develop those features. I want, however l. to point out that
we have drawn a bill here which follows the midctle course. Those
who hav~ studied the subject carefully will be able to point out that
we have neither gone to the extreme advocated by some or the opposite extreme advocated by others as to figures in the bill, the amount
that may be borrowed, its relation to the security, the amount o:f
capital to be invested, the sources of the capital, and so forth.
The objection has been and will be raised that this is putting the
Government still further into business, it perhaps not being fully
understood that in the formulation of the system we have provided
that all of the capital lent by the Government shall sooner or later
be repaid by the system, as was provided in the Federal :farm-loan
system. Such money as the Government lent to the farm-loan system was, except for an insignificant J?Ortion, wholly repaid prior to
the present depression. This depression caused the need for ,the additional capital that was lent to the system by the first of the reconstruction measures that we have passed at this session, a loan we
113235-32-2

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

}6

·cREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

are confident will also be repaid. So, it is not in contemplation here
that this will ultimately cost the taxpayers any money. We are
lending to the home-loan system, such money as it does not itself
furnish up to the total of $150,000,000. So for the sake of accuracy
it will be well to emphasize that it should not be spoken of as an
appropriation by the Government or the giving by the Government
of that amount of money. We are lending that part which the members of the proposed system do not themselves advance.
The question of whether the Government should ask interest upon
the money will be discussed and ought to be discussed and considered.
When the farm loan system was created it was believed by Congress
that it was clothed with a public purpose and that it was to the
social advantage of the whole community that the sysem should come
into effect and function. Congress said our contribution toward this
was to lend the initial capital. I do not know if that policy was wise,
and I am not going to argue it, of course, at this moment; It is a
matter to be arguea and considered~ The precedent is that where
Congress aids in the institution of a system designed for the general
welfare, it is not unreasonable for the Government to ·forego interest on its contribution.
·
Now, a word about the membership in this system. Mind you,
the Federal reserve system had for its basis existing commercial institutions, including many banks of great resources. Every national
bank was required by law to become a member, with membership £or
other banks, many of which at once joined. When, three years later,
the farm-loan system was created we found no such basis, and so we
created a foundation by making as a part of the structure freshly
created local associations, cooperative in their nature, with very little
capital of their own. Such is still the basis of the machinery of the
farm-loan system. Now, in the home-building field we find already
established a great variety of institutions that already have in their
possession mortgages. So, we do not have to create any institution,
but take for our basis associations of several kinds, with resources
great in the aggregate. Most numerous are t4e cooperative associations framed on a system that has been successfully functioning
through more than a hundred years. So, in place of the newly
created farm-loan associations we have here for our basis chiefly
what are known as building and loan associations, or, in my region,
cooperative banks. Our purpose is to allow these institutions and
the other financial institutions admissible to rediscount their mortgages. The impression has been spread abroad that we were trying
to create here a system under which the Government would lend
money to individuals. That has never been contemplated and will
not be possible under the bill. We are doing precisely the same thing
that the Federal reserve system does for the man in business, giving
him a place to rediscount. We think that under suitable restrictions
mortgages will be just as safely and effectively used as commercial
paper, the backing for bonds for the raising of funds.
We point to the fact that the Federal Farm Loan Board has more
than a billion dollars of invested money, lent to farmers for. the purposes of agriculture. We believe that similar success may be accomplished with this home-loan system.
That, in general, is the layout of the bill. To sum up, in the light
of our own experience and observation, we have taken the pertinent

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

17

parts of the farm loan and Federal reserve acts and combined them
for the purpose of furnishing resources to the home-building field in
order to help many distressed financial institutions, and even protect
them in future emergencies, and I enlarge the facilities for the
building of homes.
N0:w, a word as to my own share in it. Somebody had to decide in
the matter of a large number of minor differences between the Federal-reserve and farm-loan machinery. It fell to me to take that part.
The work was done under high pressure. I had to make many decisions offhand, and I am not conceited enough to think that I advised wisely in. every instance, but I did the best I could, and my
decisi?Iis, of C()U~e,·wil.l be su~jec! to the revisi.ons of this _comi:1ittee
or the full eomnnttee with no hkehhood of hurting my feelings m the
slightest if sonie:of the snapshot judgments I was compelled to made
in.matters of minor detail are l'.eversed. That is all. ·
Mr.· R:im:LY~ I tbank you, Mr; Luce, for your statement.
~o~, Mr; O'~rien.., gave.to the Senate com~ittee an explanation of
the bill. It was ratner long because .he was interrupted.
.
·Now, I wonder if the committee would warit at tliis time a supple~
ment to Mr. Luce's' statement as to just how the bill 'works out and
what the plan ail~ theor:y:is, so that 'it will be set up in front of this
report and be·ava1lable for the Members of'the House to develop the
,vorkirigs, and how the banks ·are supposed to construe out, and the
technical portions of the bill.
.
Mr:,OAMPBELL.. I think that wonld be very well, Mr. Chairman.
Mr. REILLY. Now, tell us that, Mr. O'Brien, to supplement what
Mr. Luce has told us.
·
STA?EDN1' -OF JORN O'BRIEN, ASSIST.ANT COUNSEL, OFFICE OF

THE LEGISLATIVE COUNSEL, H-OUSE OF REPRESENTATIVES

·· Mr: O'BRIEN. The bill contemplates the establishment of 12 banks
which are to be located in regions established. by the board. The
board is to consist of five people appointed by the President by and
with the advice and consent of the Senate. The board has general
supervision over the activ1\;ies of the banks and their issuance of
bonds and making of loans. Twelve banks are to be established and
the capitalization is to be derived from two sources. The first source
is from those institutions which are eligible to become members of
the banks. The minimum capital of each bank is to be fixed by the
board. Each of the 12 banks is to have a minimum capital of $5,000,000. Upon the establishment by the board of a bank in one of the
regions, the institutions eligible to become members will subscribe
for stock. Such part of the minimum capital of the bank as is not
subscribed by institutions eligible to become members of the bank
within 30 days after th~ establishment of the bank will be subscribed
by the United States, but in no event is the·capital subscribed by the
United States to exceed $150,000,000. The institutions eligible to be~ome members of the Federal home loan banks are described on pages
3 and 4, section 4. The institutions eligible to subscribe are institutions organized under the law.s of any State or of the United States,
and which are subject to inspection and r.egulation under the banking laws, or under similar laws of the State or of the United States.
The first class of such institutions includes building and loan associations, cooperative banks, and homestead associations. The sec
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

18

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

ond cla~s of such institutions includes such sav~gs banks and trust
companies and other banks as the board determmes have such time
deposits and are in such financial condition as to warrant their making such home-mortgage loans as the board regards as long-term
mortgage loans.
The third class of institutions eligible to subscribe comprise insurance companies. An institution is eligible to become a member of
the bank of the district in which is located its principal place of business or of the bank of a district adjoining such district.
The capital stock of the Federal home loan banks is to be issued at
par, each share to be worth $100. The amount of capital stock which
each member is to be obliged to subscribe to in ,order to become a
member is fixed by the bill to be $2,500, plus an amount equal to 1
per cent of the aggregate of the unpaid principal of the subscribers'
home mortgages.
Now this item of unpaid principal is extremely important. The
unpaid principal is described by the seventh paragraph of the second
section of the bill to mean the amount of the principal sum of the
loan which made by the institution to the borrower, minus the amount
which he has paid on that loan, or, in case the borrowing arrangement is the one frequently made by building and loan associations;
that is, an arrangement by which the borrower pays for the shares
which he purchases, minus that amount which he lias paid on those
shares and the amount of the dividends paid on those shares to him
whi~h has been credited to _the loan1 or :wh!ch may be at any ti~e
credited to the loan. I pomt out the s1gmficance of the " unpaid
principal," because that is not only- the basis of the stock subscription of members but it is also the basis on which the member may
borrow of the Federal home loan bank. Stock subscriptions by the
United States are to be subject to call by the board with the approval
of the Secretary of the Treasury.
There is authority in the Board to determine the time at which
the subscriptions of the United States shall be paid. Stock subscriptions of the United States are not to share in dividends but all
other stock subscriptions are. There is a provision made for the retirement of the stock held by the Unined States. The retirement
begins when the members have paid in an amount equal to the
amount paid in by the United States as stock subscriptions. This is
a specific example: Suppose the minimum capital stock of one particular bank is fixed at $12,000,000. Suppose the Secretary of the
Treasury subscribes to the difference between $9,000,000, which has
been put up by members 7 and the $12,000,000, which is $3,000,000;
upon the members' subscribing to that addition.al $3,000,000 of stock,
the stock of the United States is begun to be retired and that process
is continued until the entire amount of the stock subscribed by the
United States is retired at par.
There are in some States laws regulating banks and building and
loan associations which would prohibit them from becoming members of this banking system. Provision is made for such members by
permitting them in lieu of subscribing to stock to deposit either Federal securities-that is, either Federal bonds, or other obligations
of the United States, or short-term debentures issued by the bank
itself, or cash. That provision, however, is temporary. In no event

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

19

ie any such member to remain a member of the system more than
42 months after the enactment of this act or later than the time
when the State Legislature has enacted an act authorizing such institution to become a member of this system by stock subscription.
Those members who become members in this manner are treated all
the way through the act as if they were members regularly
subscribing.
The banks are to be managed by a board of 11 directors, all of
whom are to be citizens of the United States and residents of the
districts in which the banks is located. Two of the directors are to
be appointed by the board. There is also a provision made for
staggering ternis of the directors. Nine of the directors are to be
elected by the member institutions. Those nine directors are divided
into three classes, A, B, and C, and, correspondingly, of course, the
members are divided into three classes, namely, A, B, and C. The
member are divided into classes on the basis of their size, and their
size is to be determined on the basis of their holdings in home mortgages, the holdings to be determined by reference to the unpaid
principal to the home mortgages which the institution owns. As I
say, these nine directors are elected by the members. All the directors elected by the members are to be,chosen from persons connected
with the home finance business. There is a provision by which, whenever the members pf the bank hold less than $1,000,000 of the capital
stock of the Federal home loan bank, the board will appoint directors
who are next to be elected directors, because in such a case the interest of the members of the bank, of course, is diminished and, correspondingly, theoretically at least, the interest of the United States
becomes greater.
I might speak next of the system by which members secure
madvances from the bank. When speaking here of members I am
speaking only of the bank members. I speak of members not only
as members becoming members by reason of subscribing for their
stock, but also members who have become so by reason of their deposits of government obligations, short-term debentures, or cash.
A member, in order to obtain the privilege of receiving advances
from the bank, must apply for permission to· receive such advances.
The bank may, in its decretion, deny the application, or, subject to
the approval of the board, may grant the application under such
terms as the bank may prescribe.
Now, the securities upon which the banks are to give advances,
and on which the members are to receive advances are mortgages on
real· estate upon which is located a ·dwelling for more than three
:families. The mortgage must be a first mortgage. When a member of the system comes· to the bank for the purpose of obtaining
advances, it has to enter into a primary obligation to pay off the
advances when due and to deposit additional security. The amount
which the member can receive from the bank on its discount of the
mortgage which the member owns is set out, the limitations are set
out, in section 8 of the bill which is what we find here on page 15.
In the first place, no mortgage can be accepted for the purpose
of making advances thereon if the loan secured by it has more than
20 years to run from the time the mortgage is sought to be discounted
·to its maturity.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

20

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

The second condition is that the unpaid prinicipal sum of the
home mortgage shall not exceed three-fourths of the value of the
real estate secured if the loan is amortized, or shall not exceed 60
per cent of the value of the real estate if the loan is not amortized.
The third limitatioµ is that the unpaid principal of such home
mortgage can not exceed $15,000. Now, in the case of an unamortized loan which would have an original term of eight years or
more the banks may lend money not in excess of 60 per cent of the
unpaid principal of the loan. I might explain that the theory of
that is that eight years or more is the dividing line between longterm and short-term loans, ·and in addition, " amortizing " means
a loan the principal obligation of which is discharged by regular
payments substantially equal in amount, so that you have the situation by which the ordinary man makes the ordinary arrangement
to pay over a number of years a rather definite .sum, or a rather
equal sum, which will result in the loan being terminated and the
obligation discharged at the time the maturity accrues.
:
Now, in the case of any other loan-that is, a loan which is not
amortized or an amortized loan which has a maturity of less than
eight years-advances can not be for more than 50 per cent of the
unpaid principal of the mortgage.
The third limitation is that in no case may advances made by the
bank to the member exceed 40 per cent of the appraised valuation
of the real e.state securing the home mortgage loan.
Provision is made for ascertaining the value of the real estate
under regulations prescribed by the board. A.s I have said, advances
may be made upon the note of members bearing such rate of interest
as the board may prescribe.
There is also a provision by which one bank can transfer to another bank the obligations which that bank holds with respect to
mortgages. The banks themselves have the power to borrow money
and to give security for that money and pay interest through the
fasue of bonds and debentures, having such maturities as may be
determined by the board. The security which may be given by the
banks for their borrowing is the mortgages which the banks haYe
received from the members. Limitations are made upon the security which may be given to this extent; that is, in case a bank
wants to borrow money and issue bonds therefor provision is made
that the unpaid principal of .the mortgage security for those bonds
shall at no time be less than 190 per cent of the outstanding bond
issue, and that security is to be, as I say, mainly mortgages which
the bank has received from its members. Provision is made for cash
being deposited in lieu of mortgage jn certain limited classifications. The board is also given authority to require the bank to
deposit additional and substitute collateral, of course, for the issue
of its bonds.
The board is given power to determine the rate of interest which
may be paid upon notes, debentures, and bonds which may be issued
by the bank,. but no bond or debenture issued within seven years after
the enactment of the act shall bear a rate of interest in excess of 5½
per cent per annum, and thereafter no bond or debenture shall bear
a rate of interest in excess of 5 per cent per annum. The board is
to provide such margins between interest rates received upon advances made to the members and interest paid upon obligations which

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

21

the Federal home land bank may issue sufficient to cover expenses of
operations and reserves, and, under regulations provided by the
board, some part of the reserves may be devoted to retirement of the
stock subscribed by the United States. All of the banks are to be
jointly and severally liable for payment when due of all bonds and
debentures and notes and other obligations issued by all of the banks
together with interest thereon, but there is provision made by which
a particular bank can, with respect to a particular borrowing, which
must be temporary in its nature, expressly state that in such a case
the liability is limited to the borrowing bank.
Each bank is given power to accept deposits, but those deposits
can be accepted only from members of such bank or from other Federal borne land banks. Such deposits are not to be subject to check,
and no rate of interest in excess of 3 per cent may be paid thereon.
No Federal home loan bank shall transact any banking business or
any business not expressly authorized by the act.
The board is given authority upon the affirmative vote of at least
four of the members of the board, whenever an emerfency exists, to
require one bank to rediscount the discounted notes o members held
by another bank or the bonds issued by another bank or to make deposits with another bank. In such cases the board is empowered to
fix the price of the bonds, and if it requires a deposit to fix the security therefor, the board is also given authority to fix the rate of interest
upon deposits.
A further provision provides that each bank shall at all times have
invested in United States securities, interest bearing deposits in banks
or trust companies and in advances with maturity not greater than
one year made to members an amount equal to the sums paid in on
outstanding capital subscriptions of its members, plus an amount,
equal to the current deposits received by that bank from its members,
The bank has authority to invest part of its. assets, except the sums
of which I have just spoken in other securities, other than to members, and the board is given authority to regulate that. The banks
themselves will be corporations having the usual corporate powers.
The capital, surplus, and income of Federal home loan banks shall
be exempt from taxation, both Federal, State, municipal, and -local
taxation, except, of course, real estate held, purchased, or taken by
the bank is to be taxed. The bonds and debentures of the home loan
banks shall be deemed and held to the instrumentalities of the Government of the United States, and the income derived therefrom shall
be exempt from Federal, State, municipal, and local taxation. This
provision is exactly the same as in the land bank law.
The bank may, when designated by the Secretary of the Treasury,
become employed as a financial agent of the Government. Obligations of the home loan banks are to be lawful investments, and may
be accepted as security for fiduciary, trust, and public funds.
The Federal reserve banks are also authorized to act as depositories
or fiscal agents for Federal home loan banks as provided under this
act.
The Federal loan banks shall carry to reserve account semiannually
50 per cent of their net earnings until the reserve account shows a
credit balance equal to 100 per cent of the paid-in capital of the bank.
After that reserve account has reached 100 per cent of the paid-in

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

22

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

capital, 25 per cent of its net earnings shall be added thereto semiannually. Provision is made, too, for the nonpayment of dividends
during the time that the capital is impaired below 100 per cent.
The board is to consist of five members appointed by the President
by and with the advice and the consent of the Senate. The salary
of the members of the board is fixed at $12,000 per annum. The
usual provisions are made in the bill for staggering the terms of the
members, which terms, after the first appointments, are to be for
six years. Provision is made by which any officer of the United
States who is appointed as a member of the board shall not receive
a combined salary of more than $12,000 per annum. The ·board is
also given authority to control the officers and employees of the home
loan banks by suspending or removing them.
An appropriation is authorized for $500,000 for expenses of the
board for the year 1932, and, thereafter, the expenses of the board
are to come from proportionate assessments levied upon the banks
semiannually to pay the expense of the board.
The board is given the usual powers to select its employees without
regard to civil-service classification and the board is also given the
authority of franking privileges of the mails. Examinations of the
banks by the board is provided for under regulations prescribed by
the board. An elaborate system of penalties is contained in the
bill, which penalties relate to the ordinary unlawful acts in connection with banking business. There is a special provision
contained in the bill by which an individual, partnership, or corporation which is not a Federal home loan bank may not use the words,
" Federal home loan bank," or a combination of all such words as the
name under which it is doing business, except if it is doing business
before the enactment of this act under that name. In addition to
that an institution which is not a member is not permitted to advertise
that it is a member, and no institution that is not a Federal home
loan bank may represent that it is a Federal home loan bank. Various provisions are made for enforcing the criminal penalties.
In order to carry out the provisions of the act, the Treasury
Department, the Comptroller of the Currency, the Federal. Reserve
Board, and the Federal reserve banks, are authorized under conditions
which they may prescribe, to make available to the board for its use
and for the use of any Federal home loan bank reports, records, or
information, that may be available relating to the condition of
institutions with respect to which the Federal home loan banks have,
or contemplate, having transactions under this act, or relating to
persons whose obligations are offered to or are held by any Federal
home loan bank, or to make through their examiners, or employees,
for the confidential use of the board, or any Bank, examinations of
those institutions. Provision is also made by which obligations
incurred under this Act are lawful obligations of national banks
under the national banking act.
The board is given authority to authorize the Federal home loan
bank to establish branches, but a branch may be established only in
the district in which the bank is located. The board is also given
authority to provide for the liquidation of any Federal home~loan
bank. The usual provision is made with respect to separability in


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

23

cases of unconstitutionality. As I understand it, under the law of
the District of Columbia relating to building and loan associations
and the cooperative banks and institutions of that sort, they do not
now have the power to subscribe for the stock of an institution such
as the Federal home loan bank. Specific provision is made which,
in effect, is an amendment to the District of Columbia law by which
those institutions can subscribe for this stock if they are otherwise
eligible to subscribe. A similar provsion is made with respect to
institutions organized under the laws of the United States. The
right to alter, amend, or repeal the act is expressly reserved.
Mr. REILLY (presiding). If any members wish to ask Mr. O'Brien
any question to clarify what the bill means, he will answer them,
except as to the policy of the bill.
Mr. O'BRIEN. I might say, Mr. Chairman, that there are a good
many minor details I have omitted in discussion, but I think I have
touched the major points.
Mr. REILLY. You have given us a general outline of what the
bill is, and it will help us in reading the bill to understand it. Than_k
you. Mr. O'Brien, If you can stay with us we will be very much
obliged.
Mr. HANCOCK. Is it the intention of the committee to confine their
attention to this bill at this time or will the committee consider
other similar bills? I was wondering whether it would be wise to
consider them jointly or separately or just what the committee would
want to do about it.
Mr. CAMPBELL. 'I was talking to Mr. Crosser, and he has a similar
bill of this character.
Mr. HANCOCK. I do not think he would insist on hearings on his
bill, but he would like to be heard on the home loan bank proposition
at this time.
Mr. REILLY. Yes, we can hear Mr. Crosser. If he has any ideas
that may convince us that his ideas should be substituted, we will
consider them.
Mr. WILLIAMS. Yes; invite him to come before the committee and
present his views.
Mr. REILLY. Yes.
Mr. LuCE. Mr. Chairman, in order that we might have as wide
a spread of judgment bearing on the features of this bill ~s po~sib~e,
I asked the Department of Commerce to send out a quest10nna1re m
the matter and this was done, and I have here photostats of the results
as far as secured, which are of much importance. If it is inconvenient for you to take them to your office now, I will give them
to you later.
·
Mr. REILLY. The committee will adjourn until 2 o'clock.
(Whereupon, at 12.05 o'clock p. m., an adjournment was taken
until 2 o'clock p. m., of the same day.)
AFTER RECESS
The committee reconvened at 2 o'clock p. m., pursuant to the
taking of recess.


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

24

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

FURTHER STATEMENT OF HON. ROBERT LUCE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MASSACHUSETTS

Mr. LucE: Mr. Chairman, I woulq like to supplement my statement of this morning by furnishing the results of a questionnaire
sent out by the Department of Commerce to which eight thousand or
nine thousand replies were received, showing or giving a complete
statistical statement of the situation to which we are addressing
ourselves.
Mr. REll,LY. Later on you ought to put in what that shows, interpre-t that.
Mr. LucE. I will put in an interpretation of it.
THE DEPARTMENT OF COMMERCE QUESTIONNAIRE

The Department of Commerce sent out the following circular letter and questionnaire, accompanied by President Hoover's statement
of November 13, 1931:
Dl!iPARTMENT OF COMMERCE,

Washington, January 15, 1932.
Circular letter to Presidents of Banks, Building and Loan .Associations, and
other Mortgage Institutions.

DEAB SIR: The inclosed material in regard to the proposed system of 12
Federal home loan discount banks is sent you at the request of Representative
Robert Luce, who has introduced in Congress a bill designed to carry out
the suggestions outlined by President Hoover in the att~ched statement.
l\:lr, Luce, a member of the House Committee on Banking and Currency,
which will hold hearings on the measure, has asked this department to ascertain the probable effects of the system upon the operations of local mortgagelending institutions. Accordingly, a questionnaire is attached which I hope
you may fill in and return.
A full response from local institutions that make mortgages on homes should
throw much light on the probable usefulness of the proposed measure.
Thanking you for your cooperation in this matter, I am
Very sincerely yours,
R. P.

LAMONT,

Secretary of Commerce.
TExT

OF

PRESIDENT

HooVEB's STATEMENT ON THE PROPOSED
OF HOME LOAN DISCOUNT BANKS

ESTABLISHMENT

(November 13, 1931)
I shall proPose to Congress the establishment of a system of home loan discount banks for four purposes :
1. For the present emergency purpose of relieving the financial strains UPoD
sound buildIDg and loan associations, savings banks, deposit banks, and farm
loan banks that have been giving credit through the medium of small mortgage
loans upon urban and farm properties used for homes ; thereby to relieve pressures upon home and farm owners.
2. To put the various types of institutions loaning on mortgage in a position
to assist in the revival of home construction in many parts of the country and
with its resultant increase in employment.
3. To safeguard against the repetition of such experiences in the future.
4. For the long-view purpose of i;;trengthening such institutions in the promotion of home ownership, particularly through the financial strength thus made
available to building and loan associations.
The immediate credit situation has for the time being in many parts of the
country restricted severely the activities of building and .loan associations,
deposit banks, including country banks, and savings departments, savings banks


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

25

:and farm loan companies in such fashion that they are not only not able to
extend credit through new mortgages to home and farm owners, but are only
too often unable to renew mortgages or give consideration to those in difficulty
with resultant great hardships to borrowers and a definite depreciation of
real estate values in the areas where such pressures exist._
A considerable part of our unemployment is due to stagnation in residential
,construction. It is true. there has been some overbuilding in certain localities
in the boom years. But even in these localities the inevitable need is obscured
by the tendency of the population to huddle temporarily due to unemployment.
The real need steadily accumulates with increasing population and will become
evident and insistent as we come out of the depression. The high importance
-0f residential construction as a matter of employment is indicated by the fact
that more than 200,000 individual homes are erected annually in normal .times,
which with initial furnishing contribute more than two billions to our construction and other industries. This construction has greatly diminished._ Its
revival would provide for employment .in the most vital way. As a people we
need at all times the encouragement of home ownership, and a large part of
such action is only possible through an opportunity to obtain long-term loans
payable in installments. It is urgently important, therefore, that we provide
some method for bringing into continuing and steady action the great facilities
of such of these great national and local loaning concerns as have been under
])ressure and should provide against such difficulties in the future.
The farm-mortgage situation presents many difficulties to which this plan
would give aid.
I have consulted with representatives of the various groups granting credit
on mortgage loans for the home and farms as well as Government officials and
other economic agencies, and as a practical solution from the various needs and
the various ideas advanced I propose the following general principles for the
,creation of an institution for such purpose :
(a) That there be established 12 home loan discount banks (if necesary),
one in each Federal reserve district under the direction of a Federal home loan
board.
( b) The capital of these discount banks shall be initially of minimum of five
to thirty millions as may be determined by the Federal board upon the basis
-of the aggregate of such mortgage loans and probable needs of the particular
district.
(o) The proposed discount banks to make no initial or direct mortgages but
to loan only upon the obligations of the loaning institutlons secured by the mortgage loans as collateral, so as to assure and expand the functioning of such
institutions.
(d) Building and farm loan associations, savings banks, deposit banks, farm
_1oan banks, etc., may become members of the system after they have satisfied
the conditions of qualifications and eligibility that may be fixed by the Federal
board.
(e) The mortgage loans eligible for collateral shall not exceed $15,000 each
:and shall be limited to urban and farm property used for home purposes.
·(f) The maximum amount to be advanced against the mortgage collateral
not to exceed more than 50 per cent of the unpaid balance on unamortized or
short-term mortgage loans and not more than 60 per cent of the unpaid balance of amortized long-ter_m mortgages, and no advance to be made on mortgages in default. Such loans are to be made on the basis that there are sound
appraisals of the property upon wl:l.ich such mortgages have been made. In
other words, given sound appraisals, there will be advanced in the case of
short-term or unamortized loans 25 per cent of the appraisal and in case of
amortized long-term loans, 30 per cent of the appraised value of the property.
(g) The discount banks as their needs require from time to time to issue
bonds or short-term notes to investors to an amount not to exceed in tlie
aggregate twelve times the capital of the issuing bank. The bonds of these
'Cliscount banks would be thus secured by the obligations of the borrowing in·stitutions, the mortgages deposited as collateral against such obligations and
the capital of the discount banks. These bonds to be acceptable for security
for Government and postal deposits. The result would be a bond of high grade
as to quality and security.
(h) If the aggregate initial capital of the discount banks should in the beginning be fixed at $150,000,000, it would be possible for the 12 banks to
finance approximately something over $1,800,000,000 of advance to the borrowing institutions, which could be further expanded by increase in their capital.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

26

CREATION OF A SYSTEM OF FEDERAL HO:M:E LOAN BANKS

( i) It is proposed to find the initial capital stock 1 for the discount banks
in much the same way, in so far as is applicable, as the capital was found for
the Federal reserve banks-that is, that an organization committee in each
district should :first offer the capital to the institutions which would participate
in the service of the bank. And as was provided in respect to the Federal
reserve banks, if the initial capital is not wholly thus provided, it should be
subscribed by the Federal Government; and further, somewhat as was provided in the case of the Federal land banks, other institutions using the facilities of the discount banks should be required to purchase from time to time
from the Government some proportionate amount of its holdings of stock, if
there be any. In this manner any Government capital will gradually pass
over to private ownership, as was the case in the Federal land banks.
The above details of the proposal are put forward as suggestions in order
to give clarity to the central idea rather than as inflexible conclusions. The
whole plan would necessarily be subject to the action of Congress, and many
parts of it will no doubt need development.
There is no element of inflation in the plan but simply a better organization
of credit for these purposes.
This proposed institution does not in any way displace the National Credit
Association, which occupies an entirely different field of action.
DEPARTMENT OF COMMERCE,

Washvngton, D. a., January 15, 1932.
When you have replied to the following questions, please mail to the Secretary of Commerce. Washington, D. O., in the attached addressed envelope,
which requires no postage :
1. Would the facilities provided by the proposed home loan discount banks
for borrowing on your home mortgages add desirable flexibility and . security to the conduct of your institution?-----------2. Would operation of the discount banks increase the amount of credit now
available for legitimate use in your community? ___________ _
3. Is there a demonstrable need for actual home construction, either new
houses or remodeling work, that could be undertaken in your community
if credit facilities were widened at the present time? ___________ _
If so, could you estimate the probable extent of such contemplated
construction? _______________________________ ~-------------------------4. Would the facilities afforded by the proposed discount banks help to relieve
the dangers of foreclosures on urban homes and farms? ________________ _
5. If the proposed system had been in operation, to what extent do you think
foreclosures, local bank failures, etc., could have been avoided during the
past two years? ___________________ •----------------------------------6. It would be helpful in interpreting the results of this questionnaire if rou
furnish
theof
following
information
for your institution:
Number
home mortgages
_________________________________________
_
Outstanding
principal
amount
of
mortgages
now
held
__________________
_
Total assets ________________________________________________________ _
7. General comments=-----------------------------------------------~-----Type of institution (check one):

1. National bank - - - - - 2. Building arid loan, savings and
loan, homestead association,
or cooperative bank, etc. 3. Mutual savings bank
4. Stock savings bank - - - 5. State bank - - 6. Loan and trust company

7 ------------------------------

Signed _____________________ _
Title _______________________ _

Name of institution _________ _
Street _____________________ _
----------------------------

City _______________________ _
State______________________ _

Some attention has been directed to restrictions in some State laws that might now
prevent certain types of institutions from rurchasing stock in the home loan discount
banks. It is expected that this obstacle wU be surmounted in the legislation now being
considered by temporary provisions, pending the time when necessary changes could be
made in State laws.
1


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

27

A summary of the replies, with breakdown of them by States1
appears -in full in part 4 of the hearings of the subcommittee ot
of the Senate Committee on Banking and Currency, March 9, 1932.
It is of importance to reprint here only the following:
Question 1
Yes

No

Question 2
Yes

No

Question 3
Yes

No

Questlon4
Yes

Total_------------------------National banks ______________________
Buildlng and loan associations _______
Mutual savings banks________________
Stock savings banks__________________
State banks __________________________
Loan and trust companies____________
Mortgage bankers____________________

5,898

1,796

6,525

1,974

4,264

4,479

6,935

1,415
1,415
110
79
2,633
217
29

506
267
76
35
764
51
97

1,772
1,452
110
84
2,822
231
54

607
223
79
38
901
57
69

1,033
1,040
30
53
1,965
126
17

1,291
691
181
74
1,962
172
108

1,635
1,146

-

No

--

-71
85

2,759
208
31

2,217
613
423
106
44
876
66
89

The replies to question 5 could- not be tabulated, but a summary of
them may be found on page 651 of part 4 of the Senate hearings.
It is to be noted that the bill now beforti us, not having been perfected, did not accompany the questionnaire, and no inference may
be drawn that judgment was passed on the details of the bill. The
instructive things are the general attitude toward the proposal of
the President, the information as to the situation in all parts of the
country, and the opinion as to the matters covered by the questions
asked. Answers came from every State and Alaska, with distribution corresponding nearly enough to populations and banking resources to warrant the assumption that the summaries give a fair
picture of the whole situation.
The total of assets reported was $17,338,707,113.
It is also to be noted that while the bulk of the testimony before
the Senate subcommittee related to the situation and needs of building and loan associations, more than three-quarters of these replies
came from National and State banks, savings banks, and other institutions handling ~ortgages, with about three-quarters of them apparently approving the purpose of this bill.
It would appear that the men at the head of a little more than
three-quarters of these ihstitutions believe t):iat the facilities of disrnunt banks of the class proposed would add desirable flexibility and
securitv to the conduct of their institutions, and increase the amount
of credit now available for legitimate use in their communities.
The 8,743 answering are about equally divided as to whether there
is a demonstrable need for actual home construction, either new
houses or remodeling work, that could be undertaken in their communities if credit facilities were widened at the present time. This
may confirm the impression to be gathered from the testimony before the Senate subcommittee that the need varies greatly. Some
localities report real need for more housing; some stress the need for
remodeling.
Some witnesses before the Senate subcommittee
thought there had been overbuilding in their particular localities.
Few faced the question of whether the huddling now taking place
may not impair judgment on this question, and whether when the
credit jam is broken and employment conditions become normal
again, there may or may not be -need for more housing.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

28

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

The figures as to replies to question 4 are particularly significant.
They show that nearly three-quarters of the those answering believe
that the proposed system would help relieve the dangers of foreclosures, which are the most distressing feature of the present
situation.
Answering question 5 about 3,000 were of the belief that if the
proposed system had been in operation in the last two years, foreclosures, local bank failures, etc., would have been avoided to greateror less extent.
It seems fair to point out that although it would appear some
localities feel the need of the proposed system more than others, it
does not follow that provision should not be made for the evident
need of those that are suffering the more. "'When three-quarters of
the most cautious and conservative group in the country, the banking
group, say in effect that the purpose of this bill should be accomplished, it may be taken that the need is widespread and urgent.
Mr. REILLY. We will hear Mr. William E. Best.
STATEMENT OF WILLIAM E. BEST, PRESIDENT UNITED STATES
BUILDING AND LOAN LEAGUE, BEAUMONT, ALLEGHENY
COUNTY, l'A.

Mr. REILLY. I understand that you appeared before the hearings
in the Senate i
Mr. BEST. Yes, sir.
Mr. REILLY. Now, we do not care to have any repetition of that
testimony, because we will consider it, but if you have anything
additional to offer here we would be pleased to hear it. If you have
nothing additional, and if you can summarize in a short time what
you have said here we will be pleased to hear you.
Mr. BEST. In order to save the time of the committee, Mr. Chairman, I am prepared to offer here a very brief statement, or sumary, which I would like to read and file.
Mr. REILLY. Proceed.
Mr. BEST. The common folks are looking to thi~ Congress to pass
the Home loan bank bill. Not one but several measures involving
not millions but billions of dollars have been passed to assist banks.
Building and loan associations are peculiarly institutions dedicated
to thrift and to encouraging home ownership. The members or investors approximate 10,000,000, practically all of whom are small
savers; in fact, the average savings account of building and loan
associations to-day is less than $720.
Public policy has led to the establishment of the Federal reserve
system to serve the commercial interests of the country: and the farm
owner or buyer has been provided with the Federal farm loan system to supply agricultural credit. To-day the institutions in the
cities which serve the small savers and finanee home needs have no
finance system to help them serve the people in the small towns and
cities. The Government should not hesitate to do for the ordinary
urban population what they have successfully done for the commercial and agricultural interests.
In addition to the 10,000,000 investing members in building and
loan associations, there are approximately 2,000,000 people in the
United States paying for their homes on the building and loan plan.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

29

Eighty-eight per cent of the resources of these associations, amounting to $7,790,835,1'71, is invested in mortgages, substantially all of
which are on homes. The institutions of these people are an increasingly important unit·of the financial structure of this country
and the home loan bank measure would provide for them in a
manner similar to the provisions made for other financial groups.
The United States Building and Loan League was organized just
prior to the first World's Fai:i; in Chicago in 1892. To-day it incl~de~ 45 State leagues . a~d represents over 6,000 of the lea_din_g
bu1ldmg and loan assoc1at10ns m every State, both through md1··
vidual memberships and through affiliated State leagues.
The. Home loan bank bill has been considered in detail by most
of our State leagues, and, with one exception, they have unqualifiedly indorsed its principles and its present form. The United
States Building and Loan League, represented by its directorate,
following a conference of some 200 of the leading building and loan
officials held in Washington at the time of the President's Conference
on Home Building and-ilome Owership, adopted a resolution, which
in part declared that :
In times of depression when unemployment impairs the ability of our people
to save systematically and causes them to draw heavily on their accumulated
reserves, not only is the capacity of. the building and loan associations to
fully serve their patrons severely taxed, but the heavy calls to refinance
resulting from the demands for repayment by institutions holding straight
mortgages, whose funds are subject to immediate withdrawal, create a situation which makes necessary the establishment of a home-financing reserve
system not only for temporary emergencies but for permanent needs as well.
The building and loan as~ociation is a creature of the laws of our several
States separate and apart from every other type of financial agency. Its
beneficent purposes have given it universal recognition. In any proposed set-up
for a rediscount or reserve institution, the functions and services of the
building and loan associations should be preserved and no different financial
types should be included so as to embarrass the standing and capacity of
those savings and home financing organizations which have so successfully
served the people of the United States and for whose plan no substitute or
superior has ever been conceived.
In a Nation composed so largely of wage earners and persons of moderate
means it is apparent that home qwnership must be achieved through financial
institutions lending sufficient sums on the security of the home and on the
faith and ability of the borrower to pay small amounts out of his earnings as
received to cover interest charges, taxes, insurance, and a portion of the.
principal.
The building and loan association provides this means of home financing
without excessive costs and charges, and offers a time-tested plan of small,
periodic payments spread over a sufficiently long period of time to obviate
renewals or the calling of substantial sums of money.
No straight mortgage or other plan of short or long maturity could have
accomplished such successful results in home ownership.

The officers of the United States Building and Lo~n League~ as:
well as thousands of our membership, have studied the home loan
bank bill and find it admirably adapted to supplying not only pres~
ent but future needs of the home-financing organizations. The bill
is satisfactory in form and principle and we urge its passage without change of its salient features. It will place resources at the
command of the home-financing institutions, which will lead, first,
to lower costs of mortgage credits, and, sel!ond, to higher percentage
loans to the sturdy, honest, home purchaser, thus gradually eliminating the onerous and costly second mortgage. We distinctly feel
that this strengthening of the local home-financing institutions will

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

30

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

immediately and permanently work to the benefit of the small
savers and the purchasers and owners of homes.
Mr. ChairmanJf it suits your convenience, I would suggest that
you call on Mr. .1rriedlander-1 who will present additional summary
items on behalf of the United States Building and Loan League, and
then if there are any questions the members wish to ask we will be
pleased to answer.
Mr. REILLY. Mr. Friedlander.
STATEMENT OF I. FRIEDLANDER, CH AIB.MAN ADVISORY COMMITTEE ON STATE LEGISLATION OF THE UNITED STATES
BUILDING AND LOAN LEAGUE, AND PRESIDENT OF THE GIBRALTAR SAVINGS AND BUILDING ASSOCIATION, HOUSTON, TEX.

Mr. REILLY. You also appeared before the other hearingsi
Mr. FRIEDLANDER. Yes, sir; just incidentally.
Mr. REILLY. Now, I make the same statement to you that I made
to Mr. Best, that if you have anything additional to offer, we will
be glad to hear you, or, if you wish to summarize in a short time
the arguments you want this committee to consider, we will be
glad to have them.
Mr. FRIEDLANDER. I have been asked, Mr. Reilly, to attempt to
cover the arguments, to sum up the arguments, for the building and
loan proponents of this measure and also to attempt, inasmuch as
we had no occasion to cross-examine the witnesses of the opposition
before the Senate committee to meet some of the objections which
were raised by leading witnesses there against the bill.
Mr. REILLY. Yes; I would like to hear it.
Mr. FRIEDLANDER. I believe that you will find that, while it may
take some time, it will probably conserve the time of the committee,
in that we are attempting to get it done with a few witnesses rather
than with many.
No committee of Congress would seriously consider an attempt to
repeal either the Federal reserve laws or the Federal land bank
enactment and substitute in the place of both, or either, any temporary expedient for relief of credit, such as the recently enacted
salutary Reconstruction Finance Corpor~tion bill. And yet, the
opponents of the Federal home loan bank bill, offered by the President as a permanent system of credit for the proper financing of
homes, might properly, i~ they were consistent, make such a proposal, for every ~rg1;1ment '!hich ha~ been made against this measure,
1£ you would d1gmfy their assertions as " argument," was made
fore the committees of the House and the Senate at the time these
against both the Federal reserve and the Federal land bank acts before the committees of the House and Senate at the time these acts
were considered. The strenuous opposition arguments were likewise made by the identical interests that now so violently oppose this
measure.
Antagonists of the efforts to decentralize the commercial credit
structure of the Nation, through the enactment of Federal reserve
systems, made desperate efforts to prove to the Banking and Currency Committees of Congress 20 years ago that orl1y temporarly relief measures were needed, and that, with the end of the then tem
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

31

porary credit stringency, commercial credit, which had passed safely
through the Civil War and other distress periods of finance, would
need no additional or different system.
In a similar way every conceivable effort was made three years
later to delay and then to defeat all suggested remedial legislation
designed to create the Federal land bank system, a system of reserve
credits to serve the great agricultural interests of the country.
Even as the great banking interests of New York 20 years ago
strenuously opposed the enactment of laws creating a system that
would give a comparatively i:wen and ample flow of credit to all parts
of the country as, when and where needed, and deprive the giant
banking interests of that city ot their practical monopoly of commercial credit dictation, so now do the gigantic life insurance companies of -that same city and section, acting through their lending
agents, the Mortgage Bankers Association, oppose the home loan
bank bill before you, and for similar reasons.
_
The same specious and spurious arguments are being made against
this bill and are a part of the· voluminous Senate hearings records,
as were made against both of these great constructive acts, one of
which stands as a monumental work of financial achievement to
a former chairman of this committee, the Hon. Carter Glass, of
Virginia.
It may not be amiss to recall this little matter of past financial
history to the attention of this committee so that proper and due
consideration may be given to the dire predictions which are made
by self-serving experts before congressional committees whenever
financial measures are proposed for the benefit of the unorganized
common, every-day folk. Such measures uniformly meet the opposition of those selfish interests that such measures tend to drive from
special privilege monopolies.
That you may compare the opposition that has developed to the
rounding out of our credit structure through the enactment of a
reserve credit agency for home-financing to the opposition made to
the creation of the Federal reserve system, may I not quote a few excerpts from the authoritative History of the Federal Reserve System, written by Dr. Henry Parker Willis, of New York, who served
as technical adviser to the Committee on Banking and Currency of
the House of Representatives in the preparation of the Federal
reserve act. Senator Glass, who appointed Doctor Willis in such
capacity as expert in the technique of banking credits, wrote an
introduction to the book of Doctor Willis1 from which book I quote.
Quoting the Hon. A. B. H'e.Pburn, chairman of the Board of the
Chase National Bank at the time of the passage of the Federal reserve act and who also was chairman of the currency corumittee of
the American Bankers Association, Doctor Willis quotes in his
book:
The bankers did not desire anything that would put the Government further
'.rhat being the case, it was necessary for him to
modify his general statement that what was desired was a central banking
system organized upon European lines. Such a system, in fact, was by no
means what the bankers desired. They were willing to see the organization
of a central banking system, but only upon condition that it should be confined to emergency uses.
in the banking business.

113235--32----3


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

32

OREA.TION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

The same argument being made against the establishment of this
credit system at this time, we find presented, which forms part of
the Senate committee hearing, in which the interim committee of
the American Bankers' Association to-day oppose a permanent credit
structure for home financing, wanting only'' emergency needs" taken
care of through the Reconstruction Finance Corporation.
I shall only give you a few sentences from this very interesting
history to show you that previous committees of Banking and Currency of this body had to meet the self-same bugaboos from the
self-same and related interests that you will be called upon to listen
to in opposition to this measure.
According to the author there were three lines of attack made
by the bankers against the Federal reserve bill. The first and
most obvious plan of attack was that seeking to discredit the bill
as drafted on account of its "amateurishness." It may be well to
note at this point that the Ohio Bankers' Association made such
an attack UJ?On the home loan bank bill before the Senate committee considermg it and offered amendments that would emasculate
it and defeat its worthy purposes.
Quoting Doctor Willis again:
The second method of criticism consisted of charges directed against the
intent or effect of the bill in general terms. It was sought to show at first
that the influence of the measure would be to produce a very great contraction
of the currency and hence a severe panic. In singular contradiction to this
effort was the attempt to make out a case for an inflationary tendency on
the part of the bill. The doleful predictions and hopelessly pessimistic forecasts thus put forward at first had a great effect upon the minds of the
committee members, but as soon as it became evident that there was a contradiction between the inflation and the contraction schools of thought, members of Congress not unnaturally refused to be frightened.

And here we find a parallel in the consideration of the home loan
bank bill before the Senate committee, for we see some mort~age
bankers and insurance companies raising the scare of "inflation"
of " over-building," while others charging that the terms of the
bill are so restrictive that they could not possibly offer an expansion
of credit that would be helpful to the institutions or to the homeowners.
Dr. Willis says further thatAnother effort to influence the situation was, however, set on foot in New
York. The plan determined upon was that of arousing alarm about the price
of United States bonds.

And, whil~ I will not pursue this line of !l,ttack in detail, I merely
call your attention to the remarkable similarity of argument here
with the great concern expressed by one of the chief opponents
of the bill, Mr. Hiram F. Cody, who attempts to make this same
point against the home loan bank bill in his summation of arguments
against it, being his point No. 4 of his testimony.
I want to give you a summation of this chapter of the history
in Doctor Willis's own words :
There is the obvious indication that the bankers no more than other sections
of the community were inclined to follow the public interests and that they
did their utmost to defeat or emasculate a measure that was subsequently
considered to be conspicuously sound and beneficial. Their opposition, moreover, was directed at the characteristic elements in the measure and had it
been successful would entirely have deprived the bill of any effectiveness or

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

33

merit. This is. an important fact of financial history, desening to be care~
fully borne in mind. It effectually unmasked a hypocrisy, which had for long
years maintained! that the bankers of the country were seeking only the wellbeing of the business world or of the Nation, a view which had been rnry
•currently and very widely adhered to throughout the country.
.
.
The Federal reserve act was perhaps the first measure of broad mternat10nal
si"nificance which was completed and eventually brought to passage with
th"'e direct consistent, and steady opposition by the banking interests which
were most materially affected by it, and which nevertheless within a comparatively short time proved its utility not merely to those interests, but to
the Nation as a whole.

This i8 hitfory that stands out boldly as persuasive proof tha~,
having been wrong in their. opposition to the enactment of a credit
measure, with which details ,and effect they were, or should have
been, more intimately familiar with than with the home-financing
mortgage business, upon which subject their experience is narrowly
restricted that they may be likely wrong in their present opposition
to thiS! measure.
It should be borne in mind by this committee that this bill is
before you as a result of the recommendation of President Hoover
to Congress in his regular message and in his· later special message
dealing with the economic condition, in each of which messages he
urgently recommended the passage of a bill of this character. He
stressed the need for such enactment as a pcnnanent mea3ure to
take its place as a complement to the two great re.;;erve credit
systems already successfully and beneficially operating, namely, the
Federal reserve system and the Federal land bank system. He also
stressed the beneficial effect that would arise from the relief given
under present emergency conditions to the home-financing institutions and to the hard-pressed home owner, vd10 is being sorely tried
and severely harrassed by threatened ancl actual foreclosing of homes
by the thousands throughout the country, due to contracted credit
conditions. He did not offer this rriea.sure as an alternative for the
Reconstruction Finance Corporation or vice versa, but as a companion measure to it, and in his announced program sugge8ted the.
use, if necessary, of $150,000,000 of Government. funds as initial
capital for this banking structure.
1Ve are for the home loan bank act because?
First. There is a distinct need for the completion of our credit.
structure that the requirements of the aspiring home owner may
Le properly met by the· extension of home-financing credit to hiin
at low costs. We should face the ugly and discomforting fact that
home ownership in the United States is falling sadly behind and
that we are drifting into a Nation of tenants. The percentage of
homes owned and occupied by the owners has been slipping now for
30 years. 'rhe percentage figures for the year 1900 census for the
entire United States _were 46.1 per cent of families owning thBir
own homes; by 1910 1t had fallen to 45.8 per cent; and by 1920 it
had again been reduced to 45.6 per cent-not such a great loss but
any loss in this wealthy. and growing country is too much.
'
The facts released from time to time by the Census Bureau since
J ~nyary 1, 1932, bearing upon this subject of home ownership and
g~vmg the 1930 census figures, are even more startling in their sig~
mficance. Only about one-fourth of the States have had their fio-ures
completed, but a few typical ones from different sections ol' thi,.,
great country will evidence even greater losses in percentage of

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

34

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

home ownership in these States in the period from 1920 to 1930that 10-year period of our greatest prosperity.
To illustrate, and I have taken States from different sections of
the country : In Maine the loss was 4.9 per cent for the 20 years from
1900 to 1920; the loss for the years 1920 to 1930, for the 10-year
period, was the same, 4.9 per cent, the same in one-half the time.
In Wisconsin, Mr. Chairman, your State, your loss in home ownership from 1900 to 1920 was 2.6 per cent, and in this great period
of prosperity your loss in home ownership from 1920 to 1930 was
6 per cent in one-half of the time.
In North Dakota the loss was even greater. From 1900 to 1920
the loss was 13.9 per cent, and from 1920 to 1930, 10 years, in onehalf the time, the loss was 10.6 per cent.
In Alabama, in the South, the gain from 1900 to 1920 was 1.1 per
cent, and the loss from 1920 to 1930 was 1.03 per cent.
In Utah, the Far West, the loss from 1900 to 1920 was 7.5 per
cent, and in half the time, from 1920 to 1930, they had a loss of ~-6
per cent.
The main reason for this loss in home ownership, when there
should have been a distinct gain under the conditions prevailing
the past 10 years, is an insufficient amount of the proper kind of
home-financing credit, the long-term, amortized, low-cost credit without the discouraging and costly features of short-term, commissionburdened, and second-mortgage type of promotional home financing.
The home loan bank bill is offered for the purpose and is designed
to serve the purpose of proper home-financing needs, and will, if
enacted into law, in our judgment convert the steadily decreasing
percentage loss of home ownership in the urban towns and cities of
the country into an increasing percentage.
Second, because it forms a part of-and an important and integral part of-the President's comprehensive program for economic
recovery. The investment in the homes of the country is a significant and imposing portion of our national wealth. The paralysis
which has overtaken values due to credit conditions which this bill
is designed to relieve must be removed before business conditions
can recover. I want to commend this committee for the important
part which it played in so quickly passing the Glass-Steagall bill
to broaden the eligibility provisions of the Federal reserve act.
At the same time I desire to emphatically express the opinion that
it is just as important that the life savings of millions of people,
that were put into equities in small homes throughout the Nation,
should be preserved from total l9ss. The prevention of further
deflation in values upon these modest homes due to contracted
credit conditions should receive similar consideration by the enactment of the Federal home loan bank bill to that accorded banks and
their customers, which dictated the speedy passage of the GlassSteagall bill. All credit to you £or doing what you could to save
tfie savings of people invested in margins of stocks and bonds, by
preventing enforced further liquidation of these securities; now, let
us have similar ,~onsideration for the savings of families invested
in homes.
Third, the next 10 years will see a further drift of capital formerlv emploved in the home-financing field away from such fields.
The · sad experience of private individuals holding mortgages on

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION 01!' A SYSTEM OF FEDERAL HOME LOAN BANKS

35

homes, who, under present conditions, find themselves unable to use
such notes as collateral and unable to find a market for them will
prove sufficient to discourage ·a future investment of this nature.
The closirig of banks by the thQusands, at least half of them ascribed
to " frozen conditions " due to inability to turn into cash mortgages
held in their portfolios, has removed millions of capital that had
been employed in this field, and the lesson of these banks will not
be lost upon other banking institutions, who will not follow such a
hazardous course of investment with the demand funds of their
customers unless some reserve agency of this character is set up to
give liquidity to mortgage investments. Life-insurance companies
are facmg the possibility of largely reduced income by reason of
the enormous lapsations, which will naturally follow the stupendous
totals of policy loans that have rapidly mounted to imposing percentages upon their balance sheets. This will reduce their lending
facilities in this field. Building and loan associations, which have
had to disappoint their millions of investors when, due to present
extraordinary conditions, they have been unable to maintain a
reputation of 50 or more years of returning the investment within
a reasonable notice, will find their incomes reduced and their lending
abilities materially reduced unless they can establish a credit agency
that will bring new funds such as would reach them through the
beneficent effects of the home loan bank bill. There have been
hundreds of mortgage companies that had developed during the
" easy times," which received their funds from the sale of mortgages
and bonds, which are no more, and whose sorry records will prevent
for years to come the development of other corporations of the same
character.
Fourth, because thousands of men now unemployed can again
be gainfully employed if the credit facilities of the home loan bank
bill are .speedily put into action to furnish money for needed repairs
and additions and modernization of homes already erected. Thousands of other citizens having jobs and having saved for years with
the intention of building when conditions were " right" would build
now, when labor and materials are the cheapest they have been for
years, if they could secure assistance in credit channels without
bonuses and without incurring the dangers of short-term financing.
Fifth, because through the mobility of credit afforded by this bill
and the continuous supply of available credit upon proper terms,
interest rates upon the best security of proven experience-the security of the home of the family-will be reduced and funds will
be available through local lending agencies that are attuned tu the
sympathetic consideration of their own fellow citizens.
Sixth, because the millions of investors in building and loan assoc
ciations and policyholders in life insurance companies are entitled
to have the safeguard of a credit reserve system to which these
corporations may go and use the mortgage securities into which the
customers' funds have been placed and secure, by the assignment of
such mortgages, upon a safe and workable reserve credit basis, the
cash with which to return them their investment when they need it.
Seventh, because having induced thousands upon thousands of
good honest citizens to undertake home ownershiJ? the wrong wayby a short-term mortgage now coming due-it 1s incumbent upon
the mortgage brokers a~d life insurance companies to lend every

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

36

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

assistance in the establishment of a system whereby these citizens
may save their equities by finding credit upon a proper basis
through amortized long-term loans.
Eighth, because the experience through which thousands of homeowners are going in the loss, by foreclosure, of their homes, home
ownership will be permanently injured as a national objective unless through the establishment of a credit system designed to prevent the recurrence, the public m:ty know that such conditions can
not again prevail.
Ninth, because unless there be a restoration of confidence in realty
values hundreds of towns and cities having heavy bonded indebtedness and which depend upon the collection of ad valorem taxes upon
real estate, principally homes, for the repayment of their debts and
interest, will have their credit permanently destroyed. Property
owners are failing and refusing to pay taxes under the present demoralized conditions of realty values, and the home-financing institutions are unable to advance the money for them for the simple
reason that they do not have the surplus funds with which to make
any loans even as necessitous as they may be. The millions of people
who have placed their all in the purchase of a home must once again
£eel secure in their investment and have the courage to continue
towards the full accomplishment of home ownership.
Tenth, the home-mortgage bank system will eliminate the costly
and burdensome second mortgages. Assuming intelligent purchases
of a home by a sturdy and reliable person, the moral risk being
high, advances up to 70 and 80 per cent of sound value will become
the practice of local lending institutions, in order to obtain such
preferred. loans and to keep their funds employed. The necessity
of high-cost second mortgages will be thus eliminated.
Now, in the hearing before the Senate committee, an attack was
made by representatives of the Mortgage Bankers' Association. I
think it is but fair to this committee that you understand that a
mortgage banker is not what we ordinarily call a banker in the commonly accepted sense of the term. In Texas no one is permitted to
use the word banker, or bank, unless they are really a bank, and the
Mortgage Bankers' Association are mortgage loan corporations rep~
resenting largely life insurance companies of America. I state that
authoritatively because I have here a pamphlet containing the roster
of members of the Mortgage Bankers' Association of America under
date of August 1, 1931, and I find listed the membership, first and
:foremost at the top of the list of the classification of insurance
company members, which are as follows: The Aetna, the Massachusetts Mutual, the Metropolitan, the Equitable, and ab_ont 30 others,
and the Union Central, and then we find affiliated and local groups,
of which there are about 15 or 20, and· there follows by cities a list
of the mortgage bankers, most all of them listed as security companies and bond companies and mortgage companies, and individuals. There are very :few of them that are banks in the commonly
accepted sense of the term. Now, naturally, this bill undertakes, as
I said before, to. decentralize home financing credit. The only
agency that we have to-day that is doing intersectional home financing from one city, where the home office is located, throughout the
count7, are the life insurance companies, and it is very easy to see
that i funds be placed in the hands of your local banks and your

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

37

local trust companies and your local building and loan association,
the power existing in a few institutions in the United States to
control largely the policies and the rates of mortgage loans will be
broken through the passage of this act, and, of course, these gentlemen representing those life insurance companies, and receiving commissions again and again on those loans and the commissions on
the rel}ewals of those short-time loans are vitally interested in opposition to this measure.
I have referred to the interim committee report of the American
Bankers' Association. I have nothing to add to what I have said
there. Now, I think it is sufficient to note that they fought long
and stubbornly in opposition to the Federal reserve act. Whatever
any critic may say about that act, the Lord only knows what would
have happened in this country had we not had it during this time.
I just want to add this, that I do not believe the interim committee, and I do ,not know who composes it, but I d,o not believe
they are representative of the thought of the United States even
among the bankers. That is evidenced by the fact that Mr. Luce
has introduced into the record replies to the questionnaires received
from the bankers of the country, showing a ratio of 3 to 1 of those
who replied in favor of the relief of this character. I have not
looked over the tabulation of States, but I will venture to say that
those replies come from the highways and byways of this nation,
from the little towns, where, after all, about the only credit facility
that is offered for home financing in those crossroad towns are the
local banks.
Now, then, I am going to take up I think the principal argument
made by the principal antagonists of this bill as Mr. Clark, the vicepresident of the Mortgage Brokers' Association, and, I believe,
chairman of the legislative committee, summed up their opposition
in numerical terms. He states first, in discussing our contention
or the contention of the proponents of this bill, that we say it would
decrease foreclosures. His answer to that is: " On the contrary, it
would increase foreclosures, due to the lack of any sympathetic
interest in local communities, as best evidenced by the fact that the
Federal land banks, organized on a basis similar to the one proposed,
have foreclosed and taken from the owners millions of dollars'
worth of farm homesteads."
Now, the Federal farm loan act does not need any defense at my
hands, but what are the figures 1 The mortgage loans on December
31st, of the Federal farm loan or land banks amounted to $1,162,000,000, and the real estate judgment and foreclosure amounted to
$38,000,000, which is approximately three per cent, and I want to
tell you that the Federal land banks must have shown a great deal
of consideration for the farmers of this nation, because I went
over a few statements of the life insurance companies which deal
in mortgage loans and few show a very much smaller percentage
of property on their statement than 3 per cent.
The joint-stock land banks have $530,000,000 in loans. I do not
have their figures as to foreclosure, but I want to answer that
statement by saying that evidently Mr. Clark has not read this
bill, because, had he read the bill he would not have made such a
silly objection to it. The bill does not take away that sympathetic

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

38

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

interest on the part of local financing i~stitutions. 'VY"e do ~ot
propose, under this Act, as Mr. Luce explamed to you this mormng
to send money down to a town and lend it direct to an individual.
The building and loan association or life insurance company, and
the bank continues to function just as it did before, and when it
discounts a mortgage note the original bank or building and loan
still is under the obligation to pay that obligation. The bank
only uses that man's note as security and there is no change in the
relationship or contacts existing between the man that borrowed
then and the man that borrows from institutions now. So, there
is nothing to that argument.
The second claim attributed to we proponents is that it would help
home borrowers to get mortgage credit not now available. [Reading
from Clark testimony:]
On the contrary, mortgage credit not based on sound business judgment is
as dnngerous to the 'borrower as it is to the lender. Ovedending on mortgages
means inability to refinance at maturity.

Now, the inference there is that there is plenty of mortgage money
available, and if you just want money you can borrow it. This is
that inflation argument. As a matter of fact, the criticism made
by the Ohio bankers and others to this bill was that the limitations
. put into that bill of holding down the credit to twelve times the
amount of stock and the limitation of 40 per cent of the value of the
property and limitations of that character which with respect to
the lending were too restrictive. Further, as a matter of fact, there
is no mortgage money in this country to-day. You will note in
goin~ througli that testimony submitted to the Senate committee
hearmgs, you will find reports from all over the country, and you
will find some reports stating that there is a surplus of houses. Well,
now, we are not advocating the building of any more houses unless
there is need for them, but if there is need for them in any community
in this country there should be a source of credit supply ready for
the man who needs a home, to take advantage of the present prices
to build that home and to get it at a fair price.
Mr. Clark, in his testimony, stated that there was plenty of money
available. I have a newspaper clipping from New Haven, where he
comes from, a statement that of the building and loan association
published, statin_g that they have applications for loans on file now
for $150,000 without any: money available for home financing, and
I believe the record will show that another gentleman followed
Mr. Clark and also made some statements to show about how much
money is available even in New Haven. The fact of the matter is
I want to discuss that testimony just a minute. I believe he said
that his company is a mortgage companyh and had an authorized
capital of $300,000 and that they only ad $80,000 paid in. I
believe those were the figures. The record on that will bear me out.
He says we have loaned millions of dollars.
Now, you gentlemen are on the Banking and Currency Committee,
and if he has loaned millions of dollars on the basis of $80,000 in
capital, he has had a source of credit, and he has had a source of
credit that was more elastic than we J?Ut in this bill. In other words,
he has been operating under conditions, gentlemen, that so far as
inflation is concerned, would make your bill, Mr. Luce, look insigni:6.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

39

cant. He has used credit o:f millions, upon $80,000 of capital. Building and loan associations can not do that. They have no place to go.
Evidently it was insurance company money.
Now, then, next it is claimed that it would release vast amounts
o:f :frozen funds invested by savings banks and building and loan
associations in mortgages for the mortgage brokers, Mr. Clark said:
We claim that the Reconstruction Finance Corporation was created for the
purpose of releasing J)l"esent credit assets and affording other assistance to
savings banks and building and loan associations, as well as other institutions
needing financial relief, and no additional legislation is necessary.

That, gentlemen, may be out o:f confidence in the directors o:f the
Reconstruction Finance Corporation, I can't judge, but I do know
that the Reconstruction Finance Corporation can not begin to solve
the small mortgage problem in America. A questionnaire and credit
survey made by the United States Building and Loan League shows
that there is needed at this time to unfreeze and to put into normal
condition the home financing institutions in this country nearly
one-hal:f of the total amount which Congress appropriated for the
entire Reconstruction Finance Corporation, and, o:f course, they
have the railroads to look after, and they have the banks to look
a:fter, and they have the commercial companies to look a:fter, and
they have the depositors in closed banks to look after.
Now, then, if those gentlemen can show ns that the Reconstruction
Finance Corporation is going to take one-hal:f o:f the total o:f $2,000,000,000 authorized by Congress and put it into all the home
financing institutions, then I will tell you they can help the emergency situation, but that will still leave the necessity for a permanent
institution to prevent the recurrence o:f the same thing. There is
another thing, too, about the Reconstruction Finance Corporation.
They have adopted a policy of not making a loan :for more than six
months. I want to tell you, gentlemen, that the building and loan
associations do not need for their use any six months credit. They
can not afford it, because, at the end o:f six months they will be in
the same shape that they are in now.
I will tell you something else, that word has gone out that the
money which is being loaned to building and loan associations by
the Reconstruction Finance Corporation is money to pay back banks.
They do it to pay the banks back and not the building and loan
associations. They are no better off and their customers are still
waiting to get a loan or to make a withdrawal i:f all of the money
that they can get goes to pay back the bank they have borrowed
:from.
Fourth, it is claimed that such a system would tend to restore public confidence in home buying, thus giving support to a depressed
real estate market, and the Mortgage Brokers say:
We claim that confidence in home buying can be restored only by proper
selling and sound loaning methods, neither of which would develop from the
proposed plan.

Well, no need to discuss that. We agree with him on sound selling, but we do state that where there is known credit and finance,
certainly the sale o:f a piece of property or the purchase of a piece of
property, that certainly the extension of that credit will not further
depress prices. It certainly will help to stabilize them.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

40

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Fifth, it is claimed that it would create a central credit system. for
mortgage finance which ultimately would bring about standard
practices, stabilize conditions and protect home owners' investments.
The Mortgage Brokers and the insurance companies sayWe claim that the plan will not provide a workable central credit system for
mortgage financing. Its stated purpose is to loan funds to building and loan
associations and other institutions.

Now, then, as to whether it would be workable or not workable,
we have the word of the building and loan association experts that
will appear before you that the plan is perfectly workable. It is
modelled after the Federal reserve system and the Federal farm
loan bank system, both of which have proved very feasible and workable, and it is true that there are no direct loans. The fact of the
matter is that we have a better set-up here than the Federal land
bank, because there you had practically making a direct loan to the
farmer. Congress had to create a type of building and loan association in th~ country districts through which to put into effect cooperative :financing. You have already got building and loan associations organized and operating, and you have got billions of dollars of assets back of this system, ready to use this system, and for
that .reason it is workable.
Mr. HANOOOK. May I ask a question at this stage?
Mr. REILLY (presiding). Probably you had better let him finish
his statement, Mr. Hancock.
Mr. FRIEDLANDER. Further than that we will state it is perfectly
workable in New York State where State land bank reserve system
was created and set up by and for building and loan interests and
has proven successful now for about 14 or 15 years.
Mr. REILLY (presiding). I think I made a mistake on this ruling.
In view of the fact that the gentleman is taking up different points
I think if Mr. Hancock has a question he might ask him now.
Mr. HANCOCK. It is perfectly all right to wait. I have been very
much interested in the impressive statement made by the gentleman
and I am interested to know what his view is with respect to the
difference between the operation of that system of banks as proposed
by this bill from that of the Federal land bank system, and especially,
on this point : What is there about the system proposed in the home
loan discount bill that will insure a continuous flow of funds to be
used in the financing of homes? I ask that question because you
referred just now to the fact that the Federal land banks and 1ointstock land banks had more than $530,000,000 of outstanding mortgages. You did not state, however,· the percentage of foreclosures.
I think you stated with respect to the Federal land bank that only
about 3 per cent were under foreclosure or had been foreclosed.
Mr. FRIEDLANDER. That is correct.
Mr. HANCOCK. Now, you have both systems. You have the Federal land bank system to-day, and y_ou have the joint-stock land bank
system, and both are frozen up.- Neither one can operate in the interests of agriculture and neither one has a dollar, so far as I understand, available for new loans to farmers. Irrespective of the assurances that they have given us that their policies during this crisis
would be liberal, they are continuing daily to put into effect foreclosures, wiping out life savings with its inevitable devastation.
Now, what is there about this system, and of course you should know

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

41

more about it than I do, and that is the reason I am asking you £or
information and constructive help-What is there about this system
that would insure us against the condition that exists to-day with
respect to the Federal land bank system1 which you and Mr. Luce
claim this system is partially fashioned after?
Mr. FRIFDLANDER. In the first place, the system is partially fashioned after the Federal land bank, and also principally fashioned
after the Federal reserve bank system.
Mr. HANCOCK. Yes.
Mr. FRIEDLANDER. The Federal land bank s~stem, as you recall, is
one that is composed only of borrowing associations created for the
purpose of borrowing money. There is no operating institution with
substantial assets. With the Federal land bank system there are only
the joint stocks operated there and borrowers, that is, individuals put
in 5 per cent and take out an additional 95 per cent in place of it as
a loan. Now, we say this is different because it is patterned after the
Federal reserve bank. We are operating in this institution upon 11,
base of building and loan associations which intend to use this
institution as a reserve credit institution, for both long and short
time credit and placing our money there on deposit when we have
no need for it in loaning operations.
Mr. HANCOCK. May I ask a question right at that point? •
Mr. FRIEDLANDER. Yes.
Mr. HANCOCK. Up to this present crisis, due to restrictions in banking credit and to degeneration in values and as a result of one cause
or another, has there ever been a time up to this day, this hour,
when a good building and loan association could not secure from its
local bank all the funds that it needed at reasonable rates of interest?
Mr. FRIEDLANDER. Yes; I imagine those conditi<>ns have existed
many times every year when they could not do it, depending entirely
upon local banking conditions. However, building and loan associations £or business reasons ought not to have to depend solely upon
rival systems of credit into which there sometimes creeps the danger
of competitive feeling, and we do not feel that the home owner should
be subjected to that character of feeling.
Mr. WILLIAMS. Let me ask you in that connection if that is not
true in our land bank system with reference to the farmer?
Mr. FRIEDLANDER. With reference to what?
Mr. WILLIAMS. Being subjected to a competitive system, about
the land banks getting into various competition in the country, getting into competition with the local banks and local loan agencies?
Mr. FRIEDLANDER. Yes; but they have to depend more or less upon
the Federal bank in many respects. The question asked me was
whether or not the building and loan associations could not get
from the local banks all of the money they need.
Mr. WILLIAMS. Your answer is that the building and loan associations ought not to be dependent upon them?
Mr. FRIEDLANDER. Yes, sir. The home owner is dependent there
upon the building and loan as.sociation.
Mr. WILLIAMS. That is not exactly the same situation as the
:farmer.
Mr. FRIEDLANDER. I can not see where the farmer gets tied in with
the local bank.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

42

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. WILLIAMS. I will tell you where he gets tied in with it, from
the fact that the local banks carry 88 per cent of the £arm loans
of the country. That is where he gets tied in with the banks.
Mr. FRIEDLANDER. Then the Federal land bank has not put the
banks out of competition.
'
Mr. ,v1LLIAMS. And the £act is it has not relieved the situation at
all, materially, ha.sit?
Mr. FRIEDLANDER. I would sav that it has. I am not a critic 0£
the farm land banks.
Mr. vVILLIAl\IS. Are you willing to place the reputation 0£ this
institution upon the record, or are you willing to place it upon the
record made by the farm land banks and the Federal joint-stock
land banks?
Mr. FRIEDLANDER. You have gone a little beyond it when you talk
about the joint-stock land banks. The joint-stock banks were associations made up of private capital at the time of the pas~age of
the farm land bank, and I would not at all want to place 1t upon
the record of the joint-stock land banks. As far as the Federal
land bank is concerned, I am quite an admirer of it. 0£ course,
we know agriculture has gone through a grievous session in the
Federal land bank case. The Federal land bank is not responsible
£or that.. I call your attention, also, to the £act that Congress has
set up a system of intermediate credit bank.s to relieve the farmer
of the necessity 0£ depending upon the local banks. That does
not come in in connection with our situation.
Mr. WILLIAMS. I want to ask you about the intermediate credit
system, are you familiar with that?
Mr. FRIEDLANDER. Somewhat.
Mr. WILLIAMS. What happened to them after that, that is, to
the £armer now?
Mr. FRIEDLANDER. 0£ course, I am not an expert on £arm relief.
Mr. WILLIAMS. You referred to that as one of the agencies of
the Government for relief of the farmers 0£ the country.
Mr. FRIEDLANDER. I am talking purely about legislative relief. I
want to say that I think the security of the home owner in a city or
town is probably superior to the type of security which is behind
your Federal land bank bonds. I also want to make. this point that
in this act you have got behind the bonds that will be issued not
only the morgage security, which is aU you have got behind your
farm loan bonds, and the capital of the bank itself, but you have
in addition the obligation of the borrowing institution which makes
a great big difference.
Mr. WILLIAMS. Getting back to the credit agenc)+, do you know
at present that the intermediate credit banks are not able to furnish
farmers of this country loans 0n an interest rate below 9 per cent?
Mr. FRIED ANDER. I knew they were limited under the law.
Mr. WILLIAMS. They are in some States, and they·can't furnish it,
for the reason that they can't furnish it except by violating the
usuary laws.
Mr. HANCOCK. Do you know that the farm land banks charge 8
per cent on extensions upon loans to all their borrowers now?
Mr. FRIEDLANDER. I do not know about that, but I venture to say
the farmers would be worse off but for its establishment.


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

V

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

43

Mr. HANCOCK. Do you think that system has encouraged him to
borrow more money than he would have borrowed otlwrwise ~
Mr. FRIEDLANDER. It may have in cases. I think that is thP vi0e of
the short term.
Mr. HANCOCK. The reason I propounded my question is not to
leave the impression that I am unfriendly to the idea incorporated
in this bill, but I would like to have you distinguish, if you can, and
tell us the difference between the operation of this proposed system
and the Federal land bank system and the joint-stock land bank
system, because, in my humble opinion, if you have any hope in the
world £or the success of this bill you had better divorce it from those
two systems as quickly as possible. Reference to them would not be
calculated to inspire faith in the value and need of the home-loan
bank system proposed in this bill.
Mr. FRIEDLANDER. The Federal land bank system, as stated a few
moments ago, could not get under way until Congress had passed,
of course, at the same time, a bill which provided for the incorporation of national farm loan associations. National farm loan associations are nothing in the world but a group of farmers who want to
borrow money getting together and agreeing to put in a nominal
sum of money, having agreed to put in a nominal sum of money,
which is 5 per cent of the amount they expect to borrow. and if they
borrow $2,000, they put in $100. That is all the stock they take, and
that is all of the additional collateral that is behind those bonds, is
that stock. They come to your Federal land bank and borrow the
money. Now, any of these banket:s around here will tell you that
5 per cent is not a very high amount to make safe a loan, and they
are perfectly willing- to borrow just as much as they can get, but
when a man comes mto this he does not go to the home loan bank
and has nothing to do with the operations of that bank. He comes to
the building and loan association, he goes to the country bank or
the life insurance company, and he borrows $2,000. This law here
has nothing to do with that except the effect that it might have upon
interest rates by reason of coml?etition. That man has to make a
loan with the local loan institutions, just as though this home loan
bank system never existed, and it only produces reserve credit by
which that institution may borrow 50 per cent or 60 per cent of the
face of the note, providing the amount is not in excess of 40 per cent
of the value of the security.
Mr. HANCOCK. Is .the system as prol?osed here intended primarily
for service to building and loan associations and kindred organizations¥
Mr. Fmm>LANDER. We think it is.
Mr. HANCOCK. Your argument may be applicable to the joint-stock
land banks in response to Mr. William.s's question, but what about the
intermediate credit banks; there is something more behirid that i
Mr. FRIEDLANDER. In the intermediate credit banks they have
bonds behind them-Mr. WILLIAMS. Pardon me, but do I understand you to say that
these Federal land bank loans have not anything but 5 per cent of
the stock back of them¥
Mr. FRIEDLANDER. Plus the mortgage security.
Mr. WILLIAMS. Undoubtedly; and the Government inspects that
and approves it.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

44

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. FRIEDLANDER. Yes; the Government has a right to inspect the
security. The point I am making is that in addition to the security
which the Government has in the land bank it has also all of the
assets of the borrowing association back of its obligation to repay
this loan. That is the point I make.
Mr. WILLIAMS. That ought to make it all the stronger.
Mr. FRIEDLANDER. That is it.
Mr. WILLIAMS. It ought to make the loan all the netter.
Mr. FRIEDLANDER. Yes; that is the point I make.
Mr. WILLIAMS. Can you account for the fact that those bonds are
~elling for 75 cents on the dollar~
Mr. FRIEDLANDER. The Federal land bank has notMr. WILLIAMS (interposing). Has not what back of iU
Mr. FRIEDLANDER. Has not anything back of it except the intrinsic
security itself and the small amount of stock of the local association.
Mr. WILLIAMS. It has the mortgages and the stock of the association back of it.
Mr. FRIEDLANDER. Yes. Now, then, here is the difference. Take a
merchant who goes to, let us say, the First National Bank of this city
and borrows $100,000, and the First National Bank takes a note of
that merchant and of the Federal reserve bank borrows the money
upon which that note of $100,000 is paid. The First National Bank
has got to take up that obligation and pay the Federal reserve bank.
There is the mam difference between this system which is set up
upon that basis and the Federal land bank system. There is no
intermediary force in between there that will safeguard that
collateral.
·
Mr. REILLY (presiding). Mr. Friedlander, as far as I understand
the law, under this bill the bank only loans 40 per cent on the mortgages.
Mr. FRIEDLANDER. Yes.
Mr. REILLY (presiding) . .And the securities?
Mr. FRIEDLANDER. Yes.
Mr. REILLY (presiding). So, it ought to be 40 per cent better off
than the farm land banks.
Mr. FRIEDLANDER. Yes.
Mr. REILLY (presiding). I do not think there is any question at
all but what securities issued by this bank wiH be better than in the
farm land bank, as far as that is concerned.
Mr. FRIEDLANDER. I want to state this about the matter of the decrease in the bond market. Let us not charge tliat up to the Federal
land bank system. It has probably enough faults of its own to ta~e
care of. Even direct Government obli~tions have gone down to
$85. Let us not say it is because the Federal land bank has been a
success or has not been a success. Certainly it is not any argument
because Liberty bonds have gone down to $85 that the United States
Government should adopt some other way of fina:Q.cing itself.
Mr. WILLIAMS. It is some indication of the price that these bonds
may bring if put on the market, isn't it?
_Mr. FRIEDLANDEI!. Yes; if they were floated right at this time, it
m1g-ht be, although I think they would command the highest price
bee nuse they have security back of them .
. Mr. WILLIAMS. What do you think they would bring on the
market now~
·

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

45

Mr. FRIEDLANDER. That would be purely a guess.
Mr. WILLIAMS. I understand that; that is the reason I am asking
you.
Mr. FRIEDLANDER. Yes.
Mr. WILLIAMS. You have to raise the funds that way. I am asking
you, for the reason that you must raise the funds in that manner.
Mr. FRIEDLANDER. Yes.
Mr. WILLIAMS. You must loan those same funds back to the home
owners.
Mr. FRIEDLANDER. Yes, sir.
Mr. WILLIAMS. What do you figure as the spread between the
interest paid on your debentures and the loans made to the home
owners1
Mr. FRIEDLANDER. These banks should operate on a basis of one-half
.
to 1 per cent.
Mr. WILLIAMS. One-half to 1 per cent!
.
Mr. FRIEDLANDER. Yes.
Mr. WILLIAMS. Don't you know that none of these other banks
operate on that .narrow a margin~
Mr. FRIEDLANDER. They have a different type of bank.
Mr. WILLIAMS. Yes, sir. .
Mr. FRIEDLANDER. You will find the testimony before the Senate
hearing shows a very small cost of operation in the Land Bank of
the State of New York. I think it runs $22,000 per year.
Mr. 'WILLIAMS. I do not understand what you mean by the land
bank.
Mr. FRIEDLANDER. The Land Bank of the State of New York is a
reserve credit bank for building and loan associations in that State:
created by State law and has operated there for 13 or 14 years.
Mr. WILLIAMS. Purely a private institution~
Mr.. FRIEDLANDER. No; a public institution. It has a special State
act creating it and its securities are accorded preferred tax status
in New York.
Mr. WILLIAMS. Do I understand the State of New York has put
its money into the operation of that bank 1
Mr. FRIEDLANDER. I do not think the State of New York has
directly put its money in there, although, I understand the ,State
of New York is probably the largest purchaser of the bonds of that
bank with State funds.
Mr. WILLIAMS. That is not in the sense in which I mean a public
institution. From the standpoint of the government of the State,
is it putting its funds into it for the purpose of operating it~ I
am asking the question whether it is or not.
Mr. FRIEDLANDER.. No; I do not think it is endowed or subsidized
by the State.
Mr. WILLIAMS. Not subsidized i
Mr. FRIEDLANDER. No.
Mr. WILLIAMS. It is siIIlply an institution authorized under the
laws of the State of New York.
·
Mr. FRIEDLANDER. 'l'o do certain thin~s. It is subject to examination and inspection by the State Banking Department and in that
respect it is a public institution.
'
Mr. WILLIAMS. Undoubtedly, as is every other bank in the State.
Mr. FRIEDLANDER. Yes.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

46

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. WII,LIAMS. In that respect it is like every other bank.
Mr. FRIEDLANDER. Yes.
Mr. HANCOCK. Mr. Reilly referred to the fact that the security
behind one of these loans would probably be better than the security behind the loans of the Federal Land Bank, and that under
this act not more than 40 per cent ()f the appraised value could be
loaned, is that right~
Mr. FRIEDLANDER. Yes.
Mr. HANCOCK. Now, do you know what per cent of the appraised
value on farms is usually the basis of loans¥
Mr. FRIEDLANDER. I understand about 50. per cent is the way they
operate.
Mr. HANCOCK. And, in the last analysis that would, of course,
depend upon the competency of the appraisal, would it not i
Mr. FRIEDLANDER. There is a big difference in appraisals. I am
sorry I have not yet been able to make it clear, but if you will permit
me, I will try to.
Mr. RANCOCK. Just let me ask this question: You have this difference, that a farm is supposed to be a piece of property that produces
income. Your home does not produce income, does it¥ It rather
saves rents.
Mr. FRIEDLANDER. No; the people that live in it produce the income,
but the property itself does not.
Mr. HANCOCK. Of course, I know that a farm without a good
man on it to work it would have little value.
Mr. FRIEDLANDER. Yes. The main point of difference in the matter of security, Mr. Hancock, is the difference in the intermediate
borrower. In other words, let us say, that your security is exactly
the same as between two pieces of property. Let us say that a man
on the farm has a $10,000 farm and the man living in the city has
a $10,000 home. There is no dispute about the absolute value of
either one of them and that the man on the farm borrows 50 per
cent, which is $5,000, which he borrows from the Federal land bank.
The Federal land bank b.as $5,000 security for its $5,000, plus $250
in stock, which that .gentleman puts up in his local association. All
right. Now, let us take the other case, that of the man living; in
the c~ty. He has a $10,000 piece of property. Let us say he borrows $5,000. He does not borrow it from the Federal Home Loan
Bank at all. He borrows $5,000 from the building and loan association. Now, the building and loan association ~f the:y want to get
any money on that note they have got to go and give this note of the
building and loan association to the bank for $5,000.
Mr. HANCOCK. That is a very satisfactory and clear distinction.
Now, let. me ask you another question.
Mr. FRIEDLANDER. They can borrow $5,000. They have that much
more securitv.
Mr. HANCOCK. As I understand it, these banks are supposed to be
Federal instrumentalities, aren't they~
Mr. FRIEDLANDER. Yes.
Mr. HANCOCK. Why are they called Federal instrumentalities 1
Is not that just a casual circumstance i
Mr. LucE. May I answer that question i
Mr. HANCOCK. Yes, sir.


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

47

Mr. LuOE. Only as they are established to he public agencies or
instruments.
Mr. HANCOCK. I was thinking, Mr. Luce, if there was not some
deeper reason for that denomination.
Mr. LucE. May I finish, please, Mr. Hancock. The. Supreme
Court supported the constitutionality of the Federal :farm loan act
by reason of the fact that its banks were instrumentalities of the
Government. My recollection is that it was the Supreme Court
itself that coined that phrase in supporting the constitutionality of
the Act, and while I am on that subject it might well he made a
matter of record that this was the reason also for making them
depositories of public funds.
Mr. HANCOCK. I understand that, hut I thought the main purpose
was to secure special tax privileges.
Mr. LucE. That exemption from taxation could not he sustained,
unless, as the Supreme Court held, they were instrumentalities of
Government.
Mr. HANCOCK. As soon as the Government has been refunded the
amount of money it has advanced to set up these banks, the banks
become, for all purposes, private enterprises, do they not?
Mr. FRIEDLANDER. There is no provision in the law that I recall
which makes any change in the organization set up of the bank,
even after the retirement of Government capital. In other words,
the board at Washington still functions in the supervision.
Mr. HANCOCK. Does not the board have more authority as long
as the Government has money in the bank than it does after the
Government's money is withdrawn 1
Mr. FRIEDLANDER. I do not see any distinction in the bill of that
character at all except when members have less than $1,000,000
invested in one of the 12 banks.
Mr. HANCOCK. Do they not have more authority with_ respect to
the appointment o:f directors i
,
Mr. FRIEDLANDER. The board at Washington, for the first year,
in order to get the· system into immediate operation and take care
of the emergency, has the right to appoint, I believe, all the directors, and where the capital of the members falls below $1,000,000
in each hank.
Mr. HANCOCK. I am not anticipating any situation like that which
I have in mind, but I want your reaction to this. You probably
are aware of the fact that there are some joint stock land hanks
to-day in this country that are engaged in purchasing their own
securities at depreciated prices. They are using their funds, which
we believe they should take to serve agriculture, and are in effect
compromising with their creditors.
That does not apply to all the banks, but the testimony adduced
before our committee showed conclusively that there were some
banks to-day, joint stock land banks, that are using the funds which
they derive from the resale of lands acquired under foreclosure,
with which to purchase their own securities at between 30 cents
and 40 cents on the dollar.
Do you think a situation of that kind could possibly arise in connection with the proposed home loan bank system whereby the bank
would operate to protect the private stockholders in the banks
113235-32---4

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

48

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

against the interests of those who had borrowed, and especially in
a crisis, an economic and financial crisis as we now unfortunately
face?
Mr. FRIEDLANDER. I would say that if you felt that a situation of
that kind could arise under· this act; and I do not think it could,
that it ought to be safeguarded before the bill is passed.
Mr. HANCOCK. That is exactly what I am concerned with, and
only in the interest of the bill if this legislation is needed and can
be worked out on a sound basis.
·
Mr. FRIEDLANDER. I think that that could be taken care of if you
have a fear of that kind.
Mr. HANCOCK. Have you any suggestion to make about thaU
Mr. FRIEDLANDER. I would like to give that a little thought, Mr.
Hancock, and I would be very glad to discuss it with you.
Mr. CAMPBELL. Is it not a fact that the building and loan association applying for a loan from the bank created under this act
would have to put up two for one security?
Mr. FRIEDLANDER. I intended, before I got away from that, to make
the point a little bit clearer. I first wanted to get that situation clear
in your mind. Under the terms of this act, only $3,000 of $5,000
notes could be advanced to the borrowing institution, instead of having a $5,000 in notes against $10,000 worth of property, you would
have $10,000 notes on city property against a $3,000 obligation.
Mr. WILLIAMS. Let me ask you this, to see if I understand this:
As I understand this bill, there is no established percentage of ownership between the Government and the member institutions.
Mr. FRIEDLANDER. I beg your pardon, Mr. Williams; I did not
quite understand you.
Mr. WILLIAMS. You are setting up an institution here which provides for stock subscribed by the Government and by member institutions.
Mr. FRIEDLANDER. Yes, sir.
Mr. WILLIAMS. Is there anything in the bill which provides the
percentage of ownership which each one of them shall have in the
institution i
Mr. FRIEDLANDER. The bill provides that the Federal board at
Washington shall fix the minimum capital stock of any bank, which
shall be at least $5,000,000, and that then they shall open their books
for subscription in the same manner in which the Federal land banks
and the Federal Reserve Bank system were set up,. and that part up
to $150,000,000 that was not subscribed by the institutions that desired membership, that that would be subscribed by the Governme,nt,
and that as these other institutions came in later on, as they needed
the facilities of the bank or as they found the bank was successful,
and came in, that one-haif of their stock payments should go in retirement of the Government stock subscriptions, but there is nothing
in the bill that sets up any relation or. related percentage as between
the stock ownership of the Government and the stock ownership of
the individual institutions.
Mr. WILLIAMS. In other words, if the member institution should
subscribe $100,000 each of the stock, the Government would be obligated to subscribe for $4,900,000 remaining.
Mr. FRIEDLANDER. Yes, sir; and the Government would have that
money right there in its Treasury, or in the treasury of the bank, that

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

49

could not be put out or used unless these affiliated institutions came
in with the proper seeurity.
·
Mr. WII,LIAMS. But in that event it would be practically a Government institution.
Mr. FRIEDLANDER. It would, but under the $100,000 which you suggest being put in-Mr. WILLIAMS (interposing). I have used that merely as an illustration.
· Mr. FRIEDLANDER. Under the terms of this act, those members owning $100,000 could not get more than twelve times in loans, no matter
how much collateral they put up. In other words, the amount they
can borrow is based upon their stock subscription. In the first place,
their stock subscription is based on the assets of the company which
comes into membership. In other words, it is not left entirely up to
them. It is not left entirely to the individual bank or building and
loan association as to how much they will subscribe for in the way
of sto~k of this bank and get membership privileges in it. They must
subscribe for $2,500 wor,th of stock in the first place, plus a sum equal
to 1 per cent of-their eligible mortgage notes subject to discount under
this act.
Mr. WILLIAMS. I understand that; yes. Suppose the whole amount
amounted to $100,000 i
Mr. FRIEDLANDER. Then the total amount of borrowings of those
institutions would be $1,200,000, for which they would have to. put up
practically $2,000,000 worth of mortgages on their note obligation
to repay the amount.
Mr. WILLIAMS. Now, do I understand that these member institutions, in order to get membership in it, have to put up security not
to exceed-well, the security they put up is determined now 1 I am
not clear on that.
Mr. FRIEDLANDER. Their membership; in the first place, let us divorce their borrowings from their membership.
Mr. WILLIAMS. I am doing that.
Mr. FRIEDLANDER. They apply for membership and they must subscribe and pay in within the period of a year-they all get a year
in which to make their full_ payment-they must put in, let us say,
an association of $1,000,000, having all of its assets in mortgage loans
on homes of individual amounts not in excess of $15,000 apiece.
Now, that concern must subscribe to $2,500 plus 1 per cent.
·
Mr. WILLIAMS. I understand that.
Mr. FRIEDLANDER. One per cent of the million dollars.
Mr. WII,LIAMS. What do they put up as security for that sub
scription i
Mr. FRIEDLANDER. They put up cash.
Mr. WILLIAMS. They pay for iU
Mr. FRIEDLANDER. They pay for it; yes, sir. They must pay onefourth in cash, and then they have three other payments, but
they must put up the $2,500, plus one-fourth o:f the other amount
in cash, and the stock must be paid for at stated times.
Mr. HANCOCK. Let me get one thing further; because your argument is v:ery interesting to me and very helpful.
The CHAIRMAN. Mr. Hancock, let him finish, and then we will
take that up.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

0

50

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. HANCOCK. I thought you said we would take those matters
up at this time?
· The CHAIRMAN. We will take them up on his arguments.
Mr. FRIEDLANDER. No. 6 0£ the opposition points, I believe, is next.
It is claimed that by encouraging long-term home financing, it
would tend to eliminate the short-term 3 and 5 year loans which
now prove so costly and dangerous to the home buyer. "We submit that long-term home financing on a semiannual or monthly
payment basis £or periods ranging from 5 to 16 years is, and has
been, available for many years for home owners desiring to take
advantage thereof."
Now, that is just a matter 0£ :fact, whether it has been or not. We
contend that there is no fond at this time for home-mortgage financing ·:for the average citizen of this country. We do say that there
has been, up to a very recent time, some fonds :for home financing
in some selected communities upon some selected property from
selected persons. The property has to be a new home, just erected.
It has to be on certain streets. It has got to have certain facilities.
In some instances, it has to l1ave two bathrooms. It has got to conform to modern architecture. It is this type 0£ a loan which the
life-insurance companies say, "We will take this loan for about 40
per cent 0£ the actual value of the house and the lot."
Now, then, if that is adequate financing, we will admit that probably there is some of it to be had, but that does not touch the rank
arid file of the people of this country. There is a limitation, a minimum limitation, which they will even accept. They say they do
not want any loans under $4,000 or $5,000. Why, the average income 0£ the citizens 0£ this country will not permit them to own
homes that would stand a $4,000 or $5,000 loan at this time, and we
say to you that there is a very, very divergent opinion, we make an
overwhelming opinion, on the part 0£ those who believe they know
that there is not at this time adequate home-financing £unds.
Mr. LucE. Will you not enumerate the restrictions set up by the
big life-insurance .companies on the nature 0£ their loans?
Mr. FRIEDLANDER. I just mentioned a :few 0£ them.
They will not take an old home. We can not all have new homes
every year. I:f some o:f us do get new automobiles every year, not
me, but we can not get new homes every year, and unless you have
a brand new, spanking home, they will not loan the money on that
while it is being built. They will not take that risk. Some of their
mortgage-banker :friends will have to take that risk for them while
it is bemg constructed and, after it is constructed, and after they
have passed upon the individual and the architecture, then they
say they will not take less than $4,000 or $5,000, and it has to be on
this street, and then they say, "We will loan you 40 per cent to 50
per cent of the value o:f the property."
Mr. LucE. And did you mention the £act that they will not loan
in places of less than 50,000 inhabitants?
Mr. FRIEDLANDER. They do not loan in places 0£ less than 50,000
inhabitants, and, as we say, that does not constitute an ample, sufficient, available supply 0£ home-financing :funds, and that is a situation that this Congress ought to be interested in.
It is claimed that if all home-financing institutions become members of the
system, funds for home financing would be increased by frorri 30 to 40 per

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS·

51

cent. We submit that home-financing institutions that have been properly
managed will not need memhership in the system. Institutions that need funds
-can not afford to purchase membership in the regional bank under the terms
specified.

As to whether or not a well-managed institution would· need the
system at this time, I think that we have a pretty well-managed
institution down home. I am egotistical enough to believe that, and
our institution is a $10,000,000 instituti()n.
After a loan is made, some things occur -which :force the institution to take back the property-a :family breaks up, or something
o:£ that kind, but I think the percentage o:£ mistakes in our balance
sheet will measure up very well with the mistakes in the balance
sheets o:£ institutions very strongly opposed to this bill. I will
say this, that our institution at this time needs the home loan bank
bill very much, and that although it would call :for an investment o:£
$100,000 in the stock o:£ the bank, we stand ready to-day to subscribe
and put our money up and go into the system in order that our
customers, people who have placed money with us, may get the
advantages o:£ the· credit which they need at this time.
Mr. WILLIAMS. What is your reaction to the situation that exisits
here now, with the Government :facing a deficit o:£ two and a hal:£
billion dollars, as to appropriating $150,000,000 more :for this private
enterprise~
Mr. FRIEDLANDER. Well, the answer to that is simply this: I:£ the
Government, through the investment, not the gift, of $150,000,000
would have been the means o:£ having saved the closing o:£ hal:£ of
the banks that closed in the United States last year, it would have
been money well invested for the people. I think that is the answer,
and I think you gentlemen have shown that there is the answer in
the liberality with which you have advanced money here to cover
situations which are not even as grave as these, which :face the homes
of America. I think your appropriation of $125,000,000 to the Federal land bank at this time indicates that. I think your Reconstruction Finance Corporation advances and other appropriations
probably reflect that sentiment in Congress.
Mr. WILLIAMS. I:£ you heard some of the arguments over here on
the revenue bill that are going on now, you would see the terrible
straits we are in to raise money.
Mr. FRIELANDER. I know you are between the devil and the deep
blue sea; I admit that; and yet, at the same time, I do think that
presently the problem, inasmuch as it is not a gift, it is an advance,
as Mr. Luce presented the matter to you this morning, the thought
occurred to me, what are we asking the Government to do in this
emergency, so far as the emergency feature of this act is concerned,
and that seems to be, the opponents make the difference between the
emergency and the permanent need.
.
As to the permanent ·need, we could take some time to develop
these plans out o:£ our own funds, but what are we asking the Congress to do to meet the emergency of the home owners of America~
Two things: One, a speedy action, because it is a crisis, which the
opponents admit, and we seek to solve it.
The second is that we ask the Government to appropriate so much
of the initial capital as is necessary so that these institutions may
get to working immediately, and to forbear dividend participation,

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

02

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

principally for this reason. so that these institutions will be selfsupporting from the first, and attract other institutions into them
so that the Government can get its money and get out" that much
more quickly that way than they would if they did participate in
dividends.
Mr. WILLIAMS. To what extent have the building and loan associations of the country participated in the loans rrom the Reconstruction Finance Corporation up to date?
Mr. FmELANDER. Of course, you understand that the Reconstruction Finance Corporation operations, I believe, are confidential.
Mr. WILLIAMS. I do not mean the individual at all.
Mr. FmELANDER. The other day a statement went out over the
press that the Reconstruction Finance Corporation had loaned sixtyeight and a half million dollars to banks and building and loan
associations, and that is a verv impressive figure, but I think I am
safe in saying that, of the sixty-eight and half million dollars loaned
to banks and building associations, less than two and a half million
dollars of it was loaned to building and loan associations. In other
wards, it is sort of a proposition of having a chicken stew, one part
chicken and one horse-that is, one chicken and one horse-and we
happen to be the chicken end of it, very, very small, Mr. Williams.
so far as relief is concerned.
The point I made a while ago is, if the only relief which the building and loan gets is to take money which goes to the bank, and ini.;tead of owing the bank. it owes the Reconstruction Finance Corporation, you have not given any relief to these people waiting for
and needing the money, and- to the people who will not borrow money
from these institutions, you are not giving any relief by relieving
the banks of an obligation and substituting the obligation to the
Reconstruction Finance Corporation, and I understand that there
has been a limitation made by the Reconstruction Finance Corporation; that is, to the extent to ·which building and loans can expect to
receive aid from the Reconstruction Finance Corporation.
We do not blame them for it.
Mr. WILLIAMS. I do not know now if this is already in the record.
If it is, I do not care to encumber the record. I have not read the
Senate record as to the extent of the homes in this country now of
the kind described in this act-3-family homes and dwellings. How
many are there in the United States i
'
Mr. FRIEDLANDER. As described in this act, well, of course, that
includes 1, 2, and 3 family dwellings.
Mr. WILLIAMS. Yes; up to that limit.
Mr. FRIEDLANDER. I think the last census return showed that there
are something like 20,000,000 in the United States.
Mr. WILLIAMS. What percentage of them is now mortgaged 1
Mr. FRIEDLANDER. The figures, I think, will show that more than
50 per cent of the homes are mortgaged.
Mr. WILLIAMS. And what per cent of that business is handled by
the building and loan associations?
Mr. FRIEDLANDER. The building and loan associations' total resources are $9,000,000,000. I think that the figures given by the
Mortgage Bankers' Association are that there are $27,000,000,000 invested in the homes of the people of the Nation, so that about onethird of the total is held by building and loan associations.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

53

Mr. "\VILLIAMs. About one-third of 50 per cent-the building and
loan associations would have, on that basis, 16%?
,Mr. FRIEDLANDER. About 331/a per cent.
Mr. WILLIAMS. Of the loans ?
Mr. FRIEDLANDER. Yes .
. Mr. WILLIAMS. But there would be 16% per cent of the homes of
the country being carried now by the building and loan associations
of this character, I mean?
Mr. FRIEDLANDER. I would prefer to present to the committee those
figures.
Mr. WILLIAMS. That is perfectly all right. Perhaps it is already
in the hearings.
Mr. FRIEDLANDER. I think probably the figures are in there, but
to make sure we will present the figures to the committee.
Mr. WILLIAMS. You have stated here, as I understand you, that
you are simply here representing the unorganized folks.· Whom do
you represent here?
Mr. FRIEDLANDER. I did not state that I was here representing the
unorganized folks.
.
Mr. WILLIAMS. I understood you to say that there were these great
organizations opposing this, and the others were rather unorganized.
Mr. FRIEDLANDER. I stated that whenever a proposal is made before Congress that you will find groups opposmg the wishes of the
unorganized group. I will say this, that the building and loan association comes closer to really representing the home owners of America than any other group in America, for this practical reason : We
do not sell any mortgages. If we make a loan, we retain those mortgages, and notes, until they are paid, from 10 to 12 years later. We
have nothing to sell. We do not build any houses. The building and
loan associations do not build a house. We are bound to be on the
home buyers' and the home builders' side, because those homes represent our security. He is the man that I am talking about that is
unorganized.
Mr. WILLIAMS. What percentage of the funds of the building and
loan associations is used for buildmg houses?
Mr. FRIEDLANDER. You mean for building new houses?
Mr. WILLIAMS. Yes.
Mr. FRIEDLANDER. I should say, judging from the statistics in our
State, and jn the Southwestern group, which your State is a partI, last year, was the president of that group of building _and loan
associations, and I am familiar with conditions in Missouri, Kansas,
Texas, Oklahoma, Louisiana, and Arkansas-that about two-thirds
of the funds of the building and loan institutions are loaned upon
homes that are ~lready erected. In other words, about one-third goes
into new loans.
Mr. WILLIAMS. The associations have considerable other activities
outside of simply loaning on homes, have they not?
·
Mr. FRIEDLANDER. Not that I know of. That is their principal
activity. They are not permitted to invest their money in any other
way.
Mr. Wn.LIAMS. Do you not sell certificates and stocks?
Mr. FRIEDLANDER. Yes; that is where we get the money to loan.
Mr. Wn.LIAMS. That is what I mean, and you have stockholders
who are not necessarily borrowers.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

54

CREATION OF A SYSTEM

O}'

FEDERAL HOME LOAN BANKS
I

Mr. FRIEDLANDER. There are about four savers in a building and
loan association to one borrower, and the association is a cooperative institution, and the men who save the money furnish the funds
which the other one-fourth borrow, and they divide the profits.
Mr. WILLIAMS. Of course, the building and loan associations are
put to a strain sometimes to pay off these certificates and stocks. I
am not familiar enough to know just what you call them, the
obligations.
Mr. FRIEDLANDER. The stock certificates.
Mr. WILLIAMS. The stock certificates that are held by the purchasers, whoever they are.
Mr. FRIEDLANDER. Yes, sir.
Mr. WILLIAMS. And that is one of the purposes, of course, of this
legislation.
Mr. FRIEDLANDER. That is one of the needs of the legislation; yes,
sir. A man having saved his money in a building and loan association, making his investment there, of which there are approximately: 10,000,000 in the United States, under the present conditions finds himself faced with the necessity and need of recapturing some of those savings at a time when the association, having a
pile of mortgage notes in its vault, can not do a thing in the world
with them.
Mr. WILLIAMS. In other words, if he called on them now for it.
the building and loan associations could not need it, just like the
small banks, and it is to meet that emergency that you are asking
this legislation.
Mr. FRIEDLANDER. That is one of the emergencies that confronts
us.
Mr. WILLIAMS. Is not that th.e main one~
Mr. FRIEDLANDER. That is the acute emergency at this time, and
that faces not particularly the building and loans. It is the building and loan customer, the community. As an illustration of that,
I saw an editorial in the El Paso Times several days ago, just before
I came up here, in which the citizens' committee, one of these community committees, appealing through the El Paso Times to the
people who Mr. Luce described this morning as those who may
want their money to hoard it or do not need their money for living
purposes, to not take their money out of the building and loan associations, so that the building and loan associations could go out and
lend more of that money to people who wanted to improve their
property and to lend money to people who wanted the money to live
by. Now, then, there is a community situation there! The demands upon those institutions are so great, and you understand
when those demands are upon them they can not make loansall they can do is take every dollar that comes in there and fay it
to these people as fast as they can give to to them. Some o them
ha-ve been waiting 4, 6, or 12 months to get their money. You can
not force the borrower to pay back the money any faster than his
contract calls for, and the building and loan association can not
use his mortgage for credit because there is no place to-day where
they can turn to and get credit.
Mr. WILLIAMS. Do you recognjze an overbuilt situation now, at
least in some parts of the United States?

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

55

Mr. FRIEDLANDER. Yes, sir. I will say this, that I do not think
the overbuilding condition is there as to the extent that is claimed
by the opponents of this bill. Frequently overbuilt condition is due
to the huddle condition, as pointed out by the President to the home
ownership conference. The son-in-law to-day is living with his
father, and you have two or three families huddled together, and
there is an apparent overbuilding that does not really exist.
Mr. WILLIAMS. There would be very little chance for that kind of
a fellow, with all due respect to him, to go out and build a home.
Mr. FRIEDLANDER. Absolutely, and you will not find the responsible
lending home financing institutions of the United States claiming
that they are going to misuse this bill for the purpose of building any
new homes where the necessity is not there. There is no advantage at
this time in doing that.
Mr. WILLIAMS. That is not even one of the primary purposes of it.
Mr. FRIEDLANDER. No, sir; it has been the bugaboo that has been
brought out for the purpose of attempting to defeat this bill.
Mr. WILLIAMS, Let me ask you this question, and perhaps I will
quit for a while, at least. What is your suggestion with reference to
the building and loan associations in States whose law does not
permit them to subscribe to this stock, or to put up their securities
to obtain the loans i
Mr. FRIEDLANDER. Well, the bill attempts to take care of the situation with refrence to the associations that are unable to subscribe to
stock.
Mr. WILLIAMS. By putting up the inoney, of course, I understand.
Mr. FRIEDLANDER. By putting up the money equivalent to the
amount of stock, or Government bonds.
Mr. WILLIAMS. After all, there is no difference between that and
stock, is there ?
Mr. FRIEDLANDER. Yes, there is.
Mr. WILLIAMS. I wish you would explain that. I can not see that
difference.
Mr. FRIEDLANDER. Well, the difference, as I see it, is this, that if you
have a law-a building and loan association-and we have that in
Texas as well as in Missouri, that does not permit a building and loan
association to invest its money in the stock of another enterprise, there
is nothing in the law that prevents us from making a deposit in bank.
Now, this is a bank.
Mr. WILLIAMS. I understand that situation, but in effect they are
simply putting up the money, are they not, whether they get the
stock or a receipt for it?
Mr. FRIEDLANDER. They are certainly making a deposit.
Mr. WILLIAMS. There is really no difference, is there 1
Mr. FRIEDLANDER. Yes.
Mr. WILLIAMS. I do not see it yet, I confess, in practical operation.
Mr. FRIEDLANDER. I think there is a big difference. However, the
broad answer to that is thisMr. WILLIAMS. Pardon me. That is not really the point I have
in mind. It is the other.
Mr. FRIEDLANDER. The borrowing¥
Mr. WILLIAMS. Yes. I see no difference in that, as far as that is
concerned.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

56

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. FRIEDLANDER. Well, probably not. Maybe that is only a technicality that will permit it. We will get to the other.
As I understand it, in some of the States there is a provision in the
law that expressly forbids building and loan associations to pledge
their collateral as security for a loan. I understand that there has
been an amendment suggested to the Senate Committee. If not,
there will be. They are, I think, taking amendments now in .consideration of that matter. They will meet that condition. However,
my personal opinion is that that condition should be met in the
States where it arises. This Congress is asked to legislate for the
entire United States. Now, after the passage of the Federal rernrve
_ bank act, which permitted the affiliation of State banks, it became
necessary in many States to amend the State banking laws which
permitted banks to affiliate with the Federal reserve system.
Now, if the building and loan associations in Texas or in Missouri
or Arkansas or any other State feel that there is an advantage in
belonging to this institution, then they certainly should not object
to amending the laws of that State to enable them to come into this
institution and make the institution a sound one for this reason; It
is not fair, and it is not workable, to ask my institution in Texas to
invest $100,000 in the stock of this corporation which is going to
lend money, and leave me up in the air as to where they are going
to get security for that money. In other words, I do not think it
is fair to the affiliating corporations to expect some of them in some
States to put up security and not expect or demand of those in every
other State to do the same thing.
And I say this, that the most far-reaching objection to it is that
I do not believe you can sell your bonds if your prospective bondholders understand that in some States you are going to waive the
requirement to put up security, because the building and loan associations or the banks or insurance companies of that State object to
giving security.
Mr. LucE. May I inject a statement on this point? In my
opinion, in passing judgment upon the details of the bill, that consideration was uppermost, and it seemed to me of paramount importance that we should safeguard the institution in order that the
bonds might be sold.
Mr. WILLIAMS. Let me suggest this. As I understand it, my
State is one of those.
Mr. FRIEDLANDER. I think so; yes.
Mr. WILLIAMS. All building and loan securities or obligations
rather are nonnegotiable. I will leave it as it was there-securities.
You are, no doubt, more familiar with that than I am. They are
nonnegotiable. I understand that the legislature of our State, after
a very thorough consideration, decided that was one of the· best
safeguards that could be applied. I understand also that there are
a number of States in the same condition. Do you think it is a wise
public policy on the part of this Government to say to them that
they must amend and change their laws notwithstanding the fact
that it is not their judgment about it, in order to conform to a law
passed by us here?
Mr. FRIEDLANDER. No. We, as I understand it, are not saying
that to the building and loan associations of your State.
Mr. WILLIAMS. Either that or stay out.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

57

Mr. FRIEDLANDER. vVell, that is true.
Mr. WILLIAMS. Well, I would say that would be a rather unfair
:attitude. Let us get into the reason for that.
Mr. FRIEDLANDER. The building and loan association operating in
a State that has a law of that kind, the reason behind it is that the
shareholders of the association will, have no preferred borrowings
ahead of them. In other words, that all of the assets of that company will be there intact to pay the stockholders. Now, you must
make up your mind in Missouri, arrd in any other place, that either
that is going to be your policy, or that you are perfectly willing, if
you borrow money, to put up collateral, because I do not see that
there is any difference. If you borrow money in Missouri, what
difference does it make whether you physically assign the security
protecting it, or whether you do not. After all, you have to pay the
,obligation, and the assets are standin~ back of it, and after all is it
not just a matter of whether you want to change your laws or not.
Mr. WILLIAMS. There is a difference in principle in it, I think,
ihat I can see.
Mr. FRIEDLANDER. All right.
Mr. WILLIAMS. There is more or less of a trustee relationship in
the building and loan association, and they have considered it a wise
policy, as you say, to keep all those assets available for the payment
-of those people for whom they hold it in trust.
Mr. FRIEDLANDER. Yes.
Mr. WILLIAMS. Rather than to invest it in a fund where they
would be compelled to come in on a level with the others.
Mr. FRIEDLANDER. That is an argument against their coming into
the system at all.
Mr. ,V'ILLIAMS. Yes.
Mr. FRIEDLANDER. As I understood it, your argument was against
their putting up. collateral. It would seem to me that as long as
they are borrowing money,.if they are permitted to borrow money-1
it does not make any material difference whether they are required
to put up collateral or not, so far as your associations and your State
is concerned.
Mr. WILJ:.IAMS. Are building and loan associations borrowers in
Missouri?
Mr. FRIEDLANDER. Yes.
Mr. WILLIAMS. mat security do they givej
Mr. FRIEDLANDER. They give their own notes.
Mr. CAMPBELL. mat is back of that i
Mr. FRIEDLANDER. All the assets of the company. I think this can
be safeguarded, though ; I think I can see a reason for an amendment
to your State law permitting the assignment of securities for collateral to either a State or the Federal reserve system, and then all
the balance of your securities can remain nonnegotiable.
Mr. WILLIAMS. To what extent does that condition exist throughout the country 1
Mr. FRIFDLANDER. I think the State of Nebraska is one State where
they can not assign the securities. My personal opinion is that practically all States that have sessions of the legislature are going to
change that in order that the building and loan associations may
participate in the Reconstruction Finance Corporation act. I understand they are demanding securities before they make any loans,

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

58

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

and i£ they expect to get any 0£ that money, I think they will change
the law.
·
Mr. WILLIAMS. It exists to a wider extent than just two States, does
it not 1
Mr. FRIEDLANDER. I think Nebraska and I think Missouri, and
there is some question about Pennsylvania. We had some discussion
about it to-day, at noon. I do not know. There may be some other
States, but it is not as general as probably you might believe. I
think most 0£ the States permit it. I think that it has been held that
they are permitted, where the law does not expressly prohibit it.
I£ an association is permitted to borrow money, and nothing is
said about collateral, it naturally follows that they would be permitted to put up collateral.
Mr. WILLIAMS. You would not take the position that they could
put up collateral i£ the collateral on the £ace 0£ it were nonnegotiable 'I
Mr. FRIEDLANDER. 0£ course, there is a difference between being
nonnegotiable and being assignable. There are many building and
loan notes which, upon their £ace, are not negotiable, because of the
indefinite maturity date of those notes. In other words, they depend
upon the maturing of the stock, and yet, at the same time, the
courts have held that those notes are assignable.
Mr. WILLIAMS. If they are made payal:He directly to some individual or institution, of course, they would be nonnegotiable, and
not to the order.
Mr. FRIEDLANDER. Well, there is some question about that in my
mind.
Mr. WILLIAMS. There is no question about that in my mind, as a
legal proposition, if they are made payable to the order.
Mr. FRIEDLANDER. That they could not be assigned 1
Mr. WILLIAMS. They are then negotiable.
Mr. FRIEDLANDER. Yes.
Mr. WILLIAMS. If they are payable to John Jones, they are not
negotiable.
Mr. FRIEDLANDER. Well, of course, that is getting into. a legal
question on this matter that I can not settle. It would seem to me
that you would have to formulate a national policy. It seems to me
that after all this system has got to be set up on a basis whereby
when you seek to borrow the money £or the purposes of the system,
that the bonds which you offer are going to be salable. It seems to
me that to be salable, they necessarily must have collateral back of
them, and that those associations, whether they be in Texas or Missouri or New York or any other State, that except to avail themselves of the credit facilities of the institution, will have to amend
their laws to do it. Now, then, if they do not do it, they are no
worse off after the system than they are now without it. They
still can borrow money from their local banks.
The CHAIRMAN. Are there any other objections you want to
answer, Mr. Friedlanded
Mr. FRI-EDLANDER. I think that just about covers it.
The CHAIRMAN. Mr. Hancock.
Mr. HANCOCK. Mr. Friedlander, I started to ask you just now a
question applicable to subsection (d) of section 8 on page 17. The
thought behind all of my questions this afternoon has been that I
might bring out certain suggestions that would make this bill more

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

59

desirable. I am favorably impressed with the principle underlying
the bill, and I believe in the worthiness 0£ its objective. My experience here, however, makes me feel that it is necessary in legislation
of this kind that we deal somewhat more in detail with the administrative features. Justifiably or not, I have been greatly disappointed with respect to the operation of several new governmental
agencies.
Now, for that reason, I am wondering if some provision should
not be included in the bill that will take care of the matter of unpaid
costs when it comes to the payment of the subscriber to the bank,
and also whether some provision should not be included in the bill
that would permit the subscriber to pay his debts to the bankt from
which he has borrowed, with the debentures of the issuing ban.Ir.
Now, I have recently been impressed with the situation here in
connection with our joint-stock land banks that I mentioned just
a few minutes ago. I understand that under the operation of the
Federal land bank system, in the event of default in the payment
of one of the members of the association, the association has the right
to use the bonds issued by the Federal land bank in payment of the
defaulted payment of the individual borrower, a member of the
association. I am wondering whether it would be practical if some
arrangement could be made in connection with this legislation that
would enable the- subscriber to the association, to whom an advance
had been made, to use the debenture or bond of the bank from which
the loan had been secured in payment of that debt at maturity. The
main thing I have i.n mind is this. I am interested in seeing the borrower get the benefit of this legislation, and not alone the stockholder
in the member bank whose earnings or profit are regulated and should
be dependent on proper management.
Mr. FRIEDLANDER. You understand, of course, that in the event of
the liquidation of any one of these banks, that any amount in the
resources of that bank in excess of the paid-in capital by the subscribing member, goes to the Government. It would seem to me
that there would be no motive behind, and I think I can see what you
have in mind, there is no motive, as I understand it, in taking ·advantage of your borrower for the purpose of piling up the surplus in
that bank and distributing it among the shareholders of that bank,
because the surplus profits go to the Government.
Mr. HANCOCK. I do not know whether this is entirely applicable
or not. Here is the situation. You have your local farm associations
that are the medium through which the individual borrows from
the Federal land bank.
Mr. FRIEDLANDER. Yes.
Mr. HANCOCK. And there have been so many foreclosures that my
understanding is that a great many 0£ those associations have gone
out of business, closed shop.
Mr. FRIEDLANDER. Yes.
Mr. HANCOCK. That leaves the bank owning the bank, so to speak,
instead of the association, which was the original purpose of the act.
Mr. FRIEDLANDER. Well, the vice of Federal farm loan act, as I
said before, was the fact that you have a makeshift device, composed
only of borrowers, with nothing back 0£ them at all, making those
loans in the first place, and turning them over to the Federal land
bank. There is nothing of that kind here. In the first place, the

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

60

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

affiliating institutions, whether they are banks, or life insurance
companies, or what not, have got to be qualified. To get in under
this act, they have to be s,ubject to examination. You have not got
the same thing.
Now, as to the matter of policy of being able to take the stocks
and use them in liquidation of the debt, I do not think that is permitted in building and loan circles in any State that I know of.
Mr. HANCOCK. I do not refer to the stock. I referred to the bonds
or debentures.
Mr. FRIEDLANDER. Or the bonds or debenture:,;.
As I understand it, you have a bill now in Congress that would
permit that to be done. I do not believe it can be done under the
present Federal land bank act.
Mr. HANCOCK. It is done under certain conditions with respect
to the Federal land banks, but not with respect to joint stock banks.
Is not that right, Mr. Reilly?
The CHAIRMAN. Yes.
Mr. FRIEDLA:N"DER. I am not familiar with that subject. I do not
care to express an opinion on that without giving it some thought.
Mr. HANCOCK. I am presenting it so you can give it some thought.
The CHAIRMAN. Did you have anything to do with the preparing
of this bill?
Mr. FRIEDLANDER. Only in making some suggestions with reference to it.
The CHAIRMAN. How was $150,000,000 selected as the sum that the
Government should put up ?
Mr. FRIEDLANDER. That followed the suggestion of President
Hoover.
The CHAIRMAN. Do you think that sum is necessary?
Mr. FRIEDLANDER. I would think that it would be; yes.
The CHAIRMAN. Well, the Federal farm loan banks have issued
eleven hundred million dollars of bonds on a sixty-five million dollar
capital.
Mr. FRIEDLANDER. Yes.
The ·CHAIRMAN. Up to the time the last one hundred million was
appropriated for it.
Mr. FRIEDLA:N"DER. That may account for one of the reasons why
the bonds are selling below par. Maybe they oversold bonds in
proportion to the capital of the bank. You see, they can, under
the Federal land bank act, sell bonds up to twenty times their capital
This bill limits it to twelve times. In other words, it is more contracted than the other in the matter of security.
The CHAIRMAN. Is it necessary to the working of this act that they
should be tax-exempt bonds?
Mr. FRIEDLANDER. I would say that it would be necessary in order
to sell the bonds. About the only bonds that can be sold these days
are that type of bond.
The CHAIRMAN. What would be the difference, supposing this bill
was passed without a tax-exemption provision, what would be the
difference in the sale price of the bonds that way and with the taxexempt provisions?
Mr. FRIEDLANDER. It would probably cost about 1 per cent more.
The CHAIRMAN. One p~r cent more because the income is taxed?


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

61

Mr. FRIEDLANDER. Yes. I think it has as much to do with tho
prestige of the bonds as it has to do with the actual difference in the
cost.
The CHAIRMAN. There is a great deal of sentiment to-day among
people against the issuing of any more deceptive governmental instrumentalities by any banking institutions. Several people I know
bought land-bank bonds who thoug_ht they were Government instrumentalities, and they find out they are not Government instrumentalities. Why should the National Government any longer through
any institution carry on any more deceptive financing?
Mr. FRIEDLANDER. My opmion is that the Government at no time
should deceive its citizens, and I do not think that it did so in the
matter of the Federal land-bank bonds. People may have bought
them with that idea in mind, but certainly the Federal land banks
did not say that they were guaranteed by the United States
Government.
The CHAIRMAN. What does the statement, "Government instrumentality," means to an ordinary buyed
Mr. FRIEDLANDER. I do not know. You know people have bought
a lot of things they would have been better off if they had not
bought, and I think they are more fortunate in the investment in
Federal land-bank bonds than lots of other things.
The CHAIRMAN. What do you think about the proposition of the
banks being obligated to pay the interest on the $150,000,000?
Mr. FRIEDLANDER. As I said, in presenting the matter, it is not
jntended, of course, for the Government to permanently own stock
in these banks. The object of limiting the Government, or, rather,
exempting the Government stock from earnings is as a means of
having these banks earn money from the start so that you can get the
institutions in here and get the Government out, which I assume you
gentlemen want.
·
The CHAIRMAN. That is all true, Mr. Friedlander, but could not
they do that if they only pay 2 per cent interest on the loan?
Mr. FRIEDLANDER. They might. Of course, after all, the bill follows the precedent established in the Federal land banks. That is
all. It may be a bad precedent. I am not de6a,ting that with you.
The CHAIRMAN. The question is, can we not start something now,
and not :follow a precedent?
Is it a necessary part of this bill, to make it workable, that the
Government shall donate $150,000,000 free of cost for many years
to this bank ?
Mr. FRIEDLANDER. My judgment is that it is not necessary. I so
stated in my testimony before the Senate committee.
The CHAIRMAN. What is your judgment, then? What would be
a reasonable interest?
Mr. FRIEDLANDER. I would say 2 per cent would be a reasonable
interest.
The CHAIRMAN. Why should the stockholders of this bank draw
any interest until the Government was paid up?
Mr. FRIEDLANDER. Well, that is a matter of policv. The Federal
reserve act, I think, put a limitation of .6 p(')r cent° on. The stockholders receive 6 per cent and all over that went to the Government.
I think that is a matter of policy.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

62

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

The CHAmMAN. In the Federal reserve banks, the Government
got a lot of money out of it, but the Government will get nothing
out of this bank except that $150,000,000 back. The Government
has drawn more than $150,000,000 out of the Federal reserve bank.
Mr. FRIEDLANDER. Yes.
The CHAmMAN. Why should not this l:iill provide that before paying any dividends to stockholders, the Government be paid back¥
Mr. FRIEDLANDER. Well, I assume i£ the Congress passes this bill
the object of it is, of course, to provide mainly a source of home
financing funds £or the people of the country that need it, and I
would say that the Government contribution, which is a forbearance
of return on $150,000,000 £or a few years, is a very small contribution
to make to the setting up of a permanent reserve system of that
character.
The CHAIBMAN. Well, I am asking these questions for information.
I will ask you another one.
Under the terms of this bill, the capital stock would have to be
$300,000,000 before anything would come back to the Government,
would it not i
Mr. FRmDLANDER. No; I do not so understand that.
The Chairman. I think by the terms of the bill the Government
can be obligated immediately to put in $150,000,000 and there is no
money to be paid back to the Government until the contributions
of stockholders equals that sum.
Mr. O'BRIEN. That does not mean the Government needs to put
in the $150,000,000.
Mr. WILLIAMS. It is a matter of the excess over what the member
banks themselves put in.
The CHAmMAN. I know, but the board of directors have the right
to fix the capital stock. The minimum shall be so much.
Mr. FRIEDLANDER. The board has that right.
The CHAIRMAN. Who fixes iti
Mr. O'BRIEN. The Federal board in Washington.
The CuAmMAN. All right, it fixes $5,000,000 as a minimum.
Mr. O'BRIEN. Yes.
The CHAIRMAN. They get $150,000,000.
Mr. FRmDLANDER. If nobody subscribed anything, they could call
upon the Government for $150,000,000.
The CHAmMAN. I do not so understand that. The Government has
got to subscribe the excess.
Mr. FRIEDLANDER. Over that which is subscribed by the affiliating
institutions. The excess between what they subscribe and the
$150,000,000.
The CHAmMAN. Under what conditions, under this bill, would the
Government be obligated to put in $150,000,000 i
Mr. FRIEDLANDER. Only if there were no institution in America
that subscribed to any stock. In other words, if nobody took any
advantage of it at all.
Mr. WILLIAMS. I do not understand it that way.
Mr. O'BRIEN. That is not right, either. I can explain it.
The CHAIRMAN. All right, Mr. O'Brien, explain it.
Mr. O'BRIEN. The board in Washington fixes the minimum capital
of each bank-fixes the capital, rather, not minimum capital, of each
bank. That capital may be not less than $5,000,000. The books for

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

63

stock subscription are opened. Members subscribe for stock. Now,
the Government pays into each bank the difference between the
capital fixe·d by the board for the bank and the amount which is subscribed by members but the Government does not pay in more than
$150,000,000. The Government stock begins to be retired at the time
when the stock subscriptions of the members equal the amount of the
capital fixed by the board for each bank.
The CHAIRMAN. Then, if the board should fix tha capital stock of
the banks so as to require the Government to put up $150,000,000,
you would have to wait until the total capital stock was $300,000,000,
before the Government would be paid back a cent, assuming the
Government is going to put in $150,000,000.
Mr. O'BRIEN. Yes.
The CHAIRMAN. Then there is no money goes back to the Government until the stockholders have subscribed another $150,000,000~
Mr. O'BRIEN. That does not mean that the capital stock need
be $300,000,000.
The CHAIRMAN. Assume they have put in that much money, what
-they are allotted under this bill; nothing will come back to the
Government until $300,000,000 total has been subscribed.
Mr. O'BRIEN. If it is true that the capital stock of all the banks
is $300,000,000.
Mr. CAMPBELL. Suppose the capital stock is fixed at $5,000,000,
and half of that is subscribed after six months lapses. At the
beginning, only $1,000,000 was subscribed, and the Government had
subscribed for the other $4,000,000.
Mr. O'BRIEN. You are assuming a case. In each of the 12
banks, the minimum capital is fixed.
Mr. CAMPBELL. I am taking one for an illustration.
Mr. O'BRIEN. $5,000,000 is the c~pital fixed.
Mr. CAMPBELL. Yes.
·
The subscribers within 30 days subscribe for a million dollars,
and the Government put up $4,000,000.
Mr. CAMPBELL. Suppose more associations come in and subscribe
for more stock. They can not exceed $5,000,000.
Mr. O'BRIEN. No.
Mr. CAMPBELL. The Government then would be retired out of it.
Mr. O'BRIEN. Just as soon as $5,000,000 is paid in by members,
the Government goes out.
Mr. CAMPBELL. Then they could not have $150,000,000 out at any
one time.
Mr. O'BRIEN. They might.
The CHAIRMAN. The point is this, they ...may not use $150,000,000.
I think there ought to be some way that that could be brought
out. They might only use $65,000,000.
Mr. CAMPBELL. If there was a probability that none of the stock
would be subscribed for, then the legislation is futile.
The CHAIRMAN. I do not see why the $150,000,000 was put in
there, because that is one of the objections that the members have
to this bill, and there is a probability it would never be more than
$5,000,000 to a bank.
Mr. WILLIAMS. What is your judgment as to the amount it will
take~
113235---32--5

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

64

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. FRIEDLANDER. I stated a few minutes ago that to meet the
need, so far as the needs of the emergency are concerned, the unfreezing of the home financing institutions of this country would take at
least half of what the Reconstruction Finance Corporation have had
appropriated to its credit and capital. The chances are the very
establishment of these banks would so give confidence to these institutions that would come in that you would never need it, but I
do not believe' they would be overcapitalized on the basis of
$150,000,000.

Mr. WILLIAMS. If they were organized and the minimum of
$5,000,000 was established, it would do really very little good.
Mr. FRIEDLANDER. The object, of course, of the $!1,000,000 was this:

There are some sections of the country where the needs are greater
than others, where there are larger amounts invested in homes than
in others. Take in your larger cities and areas, and where the authors
of the bill did not want the Federal bank at Washington to be in
a :{)Osition to say: " We will establish a million dollar bank up iri
W 1sconsin to take care of four or five States," and "We will establish a $50,000,000 bank in New York City," so they put a minimum
so that this would be widespread throughout the United States, and
its effect be given to all sections of the country.
Now, then, they have that difference between the $60,000,000 and
$150,000,000, which they can use if they find a necessity in certain
sections for a higher amount than $5,000,000. That was the object
of the bill.
Mr. CAMPBELL. How much money that is loaned out would have
2 to 1 security?
Mr. FRIEDLANDER. Three to one security.
Mr. HANCOCK. Do you think that our 'best thought and effort now
should be directed toward some permanent long range economic
planning rather than the continuation of so much psychological
legislation? I notice you referred to the · psychological effect. I
believe that word has been overplayed lately. It has been worked to
death according to my notion.
Mr. FRIEDLANDER. At least, we have not seen much benefit flow
yet from that psychology.
· Mr. HANCOCK. I do not mean to reflect upon anybody at all.
Mr. FRIEDLANDER. That is the reason we are presenting and insisting upon this plan as 'a permanent matter.
Mr. HANCOCK. Would it not be better to start on a smaller scale,
contemplating increasing the structure, if necessary, rather than for
merely psychological effect? Should we· not begin now to consider
the possible harmful effect that further remedial legislation will
have on Government securities?
·
Mr._ FRIEDLANDER. Well, we certainly want to unfreeze the institutions, because otherwise you destroy confidence before you begin,
and that, of course, is the emergency feature.
· The CHAIBMAN. Mr. Friedlander, how many institutions are there
that you think would take advantage of this law? That would be
a kind of an estimate.
Mr. FRIEDLANDER. That would be speculation. I would say that
the building and loan associations where they would be permitted
under the law to take advantage of it, would very largely take advantage. Now, in New York State, they have the State land bank

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

65

system up there, which has worked very well for New York State,
and yet we find the largest institutions in New York State for this
bill. That is true all over the country. I could not give an estimate
of it, but so far as the building and loan associations are concerned,
they are for the bill. So far as the banks are concerned I understand of those who li.ave replied, they are three to one for the bill.
The insurance companies, I understand, are about fifty per cent for
the bill. I think you will find the smaller life insurance companies
throughout the country are for the bill. I know that in our section,
the National Standard Life Insurance Co., of Houston, has gone on
record in telegrams to their respective representatives here, asking
support of the bill. The Life Insurance Co., of Beaumont, which is
just about 50 miles from Houston, is for the bill and have so wired
their representatives. A smaller insurance company at Houston,
Tex., is for the bill. I think you will find that there is a pretty wide
participation in the bill when it is passed.
Mr. WILLIAMS. In that connection, concerning the questionnaire
that was sent out, I have not had a chance to look at it, even. The
institutions that have answered that questionnaire-did they have
the bill before them at the time i
,
Mr. FRIEDLANDER. I do not think they did. I think the questionnaire was on the basis of the need for an institution of this kind,
and whether they would like to see one set up.
Mr. WILLIAMS. Preceding it was a statement from the President i
Mr. FRIEDLANDER. Yes; the statement of the President as to its
purpose.
Mr. WILLIAMS. I understand now from your statement that they
did not have this particular bill before them when they answered
the questionnaire.
·
Mr. FRIEDLANDER. I do not think they did, no. That is my understanding. Is that correct, Mr. Luce i
Mr. LuCE. Yes, the nature of the questions, did not call for a
knowledge of the details 9f the bill.
Mr. WILLIAMS. It can hardly be considered an answer to this
bill, then.
·
Mr. FRIEDLANDER. I do not say it was, no.
Mr. WILLIAMS. The reason I am asking is because I did not have_
an opportunity to read it.
The CHAIRMAN. I presume it is an answer to what they thought
of the necessity for this legislation, in their judgment.
If that is all, Mr. Friedlander, thank you very much for your
testimony.
We will adjourn until 10.30 o'clock a. m.
(Whereupon, at 4.30 o'clock p. m., the subcommittee adjourned.)


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS
THURSDAY, MARCH 17, 1932

HousE OF REPRESENTATIVES,
SuBCOMMIT.l'EE OF CoMMITTEE ON BANKING AND CURRENCY.

Washington, D. 0.
Hearings were resumed on H. R. 7620 at 10.30 o'clock a. m., Hon.
Michael K. Reilly presiding.
Mr. REILLY. The subcommittee will be in order.
The subcommittee will hear Mr. Stevenson now for a few
moments.
STATEMENT OF LAWRENCE T. STEVENSON, OF PITTSBURGH,
PA., PRESIDENT NATIONAL ASSOCIATION OF REAL ESTATE
BOARDS
Mr. REILLY. Give your name, please.
Mr. STEVENSON. L. T. Stevenson, president, National Association
of Real Estate Boards, Pittsburgh, Pa.
Mr. Chairman, I have a short statement on behalf of my organization which I would like to present at this time.
I am the president of the National Association of Real Estate
Boards. I appear before you as the spokesman of this association
and by authority of its duly appointed delegates, directors, and
officers, to advocate the early passage of the Federal home loan bank
bill.
Our association consists of 543 local real estate boards, united in
one nation-wide organization. Our local membership includes
16,000 firms and individuals engaged in the real estate business, and
24,000 firms and individuals, who because of their interest in real
prop~rty and home ownership have affiliated themselves with us,
making a total of 40,000 members. In connection with· our 1ocal
real estate boards, we have created property owner divisions in 119
cities, which are working with the real estate boards in protecting
the interests of the home owners, especially in tax matters. In these
local property owner divisions, there was in 1931 a total enrollment
of 14,000 real estate and home owners. Our association, with its
local and State units, is representative, therefore, not only of the
real estate business, but of those who own real estate and the home
owner.
For years we have sought, through the simplification of archaic
State legislation, to reduce the cost of home acquisition. Through
tax research conducted by able men at the University of Chicago,
who are accumulating facts concerning State and local tax systems
and through activities of our 32 State organizations, we have tried


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

67

68

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

to reduce the un:fair tax burden. We have tried to reduce the tax
burden which to-day everywhere penalizes home ownership, and
which is generally admitted to be un:fair. Through the development
of real estate license acts, we have sought and in a measure succeeded,
in eliminating those who prey upon the home buyer.
. Our association has long recognized that methods of home financing throughout the country have been cumbersome and costly. The
home buyer has had to pay excessive interest rates in many communities. Home financing funds have been badly distributed throughout the country. Too many home owners have had to borrow money
for short terms without the assurance that their loans could be renewed or extended. As a consequence, the ownership of a home,
which we and many others have been advocating, has proven in
many cases a source of difficulty and insecurity instead of peace of
mind and security.
We believe that the home loan bank bill is the most constructive
measure for the development and encouragement of home ownership in the United States which has ever been brought forward, for the
following reasons :
·
It will meet present emergency needs, first, by stopping foreclosures. The fragmentary figures which we have been able to gather
from 84 cities indicate that probably 150,000 :families lost their homes
last year through foreclosures occasioned largely by the inability of
home financing institutions to function normally, and give the necessary extensions or renewals for home loans. We believe that the
reserve system set up by the home loan bank bill will go far toward
correcting this situation.
Second, if foreclosures can be checked, the demoralization of the
home market will be checked. Thousands of properties offered for
sale at the amount of the mortgage throughout the country, depress
all real estate values. In my city of Pittsburgh 60 homes were recently offered for sale in one day by one company at the amount of
the mortgage, and the disastrous effects of this action were felt
throughout the city.
I would like at this time to give you a picture of the foreclosure
situation in my own' city. These are actual :facts pertaining to foreclosures over a period of six years. In other words, starting in 1926,
in the county of Allegheny, in which the cit_y of Pittsburgh is located,
with a population of a million and a quarter people, there were foreclosed in 1926, 406 mortgages. In 1927, there were foreclosed 605
mortgages; in 1928, 759; in 1929, 909; in 1930, 1,279; and, in 1931,
1,555. In January of this year, there were foreclosed 156; in February, 221, and the present list which is out, which was printed last
Saturday, carried a total of 230. In the last two months, February
and March of this year, out of 221 in February, there were 171 homes
of the character of the property we are talking about in this bill.
This present list which was published for the first time last Saturday
shows that of our March foreclosures, a total of 230, there were 194
homes. Giving you a complete summary of this March situation
there were 194 homes, 9 apartments, 16 stores, 7 vacant lots, 1 listed
as a building, 1 as a stable, and 1 as a storage house; making a total
of 230 right at my home.
Our city is only a normal city, probably above the average of cities
as we see them, but there are many cities that I find in my travels

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

69

where the foreclosures are even greater in number than they are in
the city 0£ Pittsburgh, and I know I am giving you the. actual £acts
concerning, what we would all agree must be a normal city, or one a
little above a normal city.
. Third, this measure, i£ adopted, will enable millions 0£ depositors
in banks and building and loan associations to once more draw upon,
.their savings in home financing institutions, which they can not now
do, thus restoring purchasing power, which will be helpful to the
eptire business community and aid iri restoring noi.:.mal conditions.
Fourth, by aiding home financing institutions to £unction normally, we believe this measure will stop the rising interest rates on
home financing fonds which are now everywhere prevalent throughout the country, and which are providing an added obstacle and
djfficulty for the home buyer.
.
I would like to add here that I had a letter £rom Johnstown,
Pa., where a writer told me that he had been endeavoring to
get some mortgage money and he had finally located a man that
they claimed had· $700,000. They agreed they would lend on
homes, on the condition that the interest rate was to be six per cent,
one per cent extra charge £or service, and three per cent brokerage
£ee £or one year; in other words, ten per cent first mortgage money
for one year.
.
I honestly believe that were this bill not pending, we would
find much more 0£ a" racket" in the mortgage field to-day than we
are actually finding.
The proposed system will meet permanent needs, first, because
it will facilitate better distribution 0£ home financing £unds throughout the country. The bill wisely provides that the regional home
loan banks may do business with one another, thus enabling £unds
to be transferred £rom regions where there is a surplus to regions
where £unds are needed. This would correct a; present great injustice. There seems to be no good reason why a home buyer in
one State, who is a good and sound credit risk, should be compelled
to pay two per cent or thtee per cent higher interest than a similar
home buyer in another State, merely because 0£ greater geographical distance from financial centers. Funds accumulated in financial
centers are· derived from all parts 0£ our country and credit, especially £or home buyers, should be made equally available in all
parts 0£ the country.
Second, the home loan bank system will at all times stabilize the.
operations 0£ home financing institutions which are members, thus
preventing recurring emergencies.
Third, the reserve system provided would create confidence in
home financing institutions, thus encouraging depositors and savings
which .would provide at all times a more adequate supply 0£ £unds.
Fourth, through the supervision provided by the bill, first mort-,
gage financing £or homes would tend to become more uniform
throughout the country and sound and conservative practices could
be developed.
Fifth, the establishment of a sound basis 0£ first mortgage financing for homes would simplify very greatly the problem 0£ junior.
financing., whenever it may be necessary. I£ the first mortgage.
loan has been made upon a £air valuation and prepayments are
distributed over a long enough period 0£ time, so as to not be burden
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

70

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

some, it will be possible for the home owner who needs additional aid
to obtain it without the risks which now lead to excessive and usuri•
ous charges. The present widespread practice is that too many
home buyers assume a short-term first mortgage and a short-term
second mortgage, simultaneously, and the burden is often more than
they can bear.
Thousands of our members have spent their entire business lives
in home financing, and in home development. It is our deliberate
judgment that the home loan bank system is more sorely needed as ·
a permanent measure than as an emergency measure. Home ownership throughout the country is receding. We believe that if
Congress enacts this measure, it will turn the tide.
We do not :feel that the type of credit, offered by the Reconstruc•
tion Finance Corporation can appropriately be used for long terms,
which are necessary to aid home owners. We have also heard it
frequently stated that the :funds o:f the Reconstruction Finance Corporation will hardly be adequate to meet the many demands from
railroads, banks, and other lorge institutions whose solvency must
be maintained.
Every day's delay in the passage of this bill and the creation of
the home loan bank system, which it provides for, will mean additional homes lost to their owners and additional discouragement
on the part o:f the substantial average American. Congress has been
wise and expeditious jn helping to stabilize measures designed to
aid the big banks-the great financial institutions. Here is a measure which is designed to help the great masses of our people-the
home owner.
Our association asks respectfully that you consider it favorably
and that you act upon it as quickly as possible.
Mr. REILLY. That is all you have to offed
~fr. STEVENSON. Yes, sir.
Mr. REILLY. Thank you.
STATEMENT OF NATHAN WILLIAM MacCHESNEY, GENERAL
COUNSEL NATIONAL ASSOC'IATION OF REAL ESTATE BOARDS

Mr. MAcCHESNEY, Mr. Chairman and gentlemen of the committee,
my name is Nathan William MacChesney, of Chicago. I am a
lawyer by profession, and am a bank, trust company, and life insurance company director and counsel. I am here representing the
National Association of Real Estate Boards, as its general counsel.
Mr. REILLY. Did you appear before the Senate committee?
Mr. MAcCHESNEY. I did not. I was there, but I did not appear
before them. However, Mr. Chairman, I have been over all o:f the
testimony that was offered before the Senate committee, and have
been over the various drafts of the bills and the various statements
and pamphlets that have been issued with reference to them. It is
my purpose to briefly state to you what I regard as the constructive
suggestions and criticisms that were made in that testimony, under
about 15 or 18 headings, and to suggest to you where we think perhaps the bill might properly be modified to meet those constructive
suggestions and where we think the suggestions, as a matter of :fact,
would harm rather than help the bill.
Mr. REILLY. That is what the committee would like to hear.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS·

71

Mr. MAcCHESNEY. I would like, for the purpose of the record, to
call your attention to the text of President Hoover's statement; under
date of November 13, in which he stated the four purposes of the
act as1. For the present emergency purpose of relieving the financial strain upon
sound building and loan associations, savings banks, deposit banks, and farmloan banks that have been giving credit through the medium of small mortgage
loans upon urban and farm properties used for homes, thereby to relieve
pressures upon home and farm owners.
2. To put the various types of institutions loaning on mortgage in a position
to assist in the revival of home construction in many parts of the country and
with its resultant increase in employment.
3. To safeguard against the repetition of such experiences in the future,
4. For the long-view purpose of strengthening such institutions in the
promotion of home ownership particularly through the financial strength thus
made available to building and loan associations.

Now, those four purposes we think are served by this proposed
le()'islation and just a word as to one or two aspects of them.
1:n the first place, as to the need for strengthening the financial
institutions and giving them relief, I think no one will deny that
in the light of conditions obtaining throughout the country there
is a very large number of financial institutions in distress. There
is Ohio, with its 90 or 91 building and loan associations taking
notice, and Cook County, where I came from, in Illinois, where
Chicago is situated, with 105 or 106 small banks having closed
their doors, a very substantial portion of them because they had
frozen assets based upon real-estate securities, and that is not in
many cases bec.ause they have not been soundly managed, as some
of the opponents of this proposal would state, but because peoI_>le
have not been in a position to do their normal investing in securities
of any kind, so that these institutions, some of which paid out as
high as 60 or 70 per cent of their deposit liability before closing their
doors, had on hand perfectly sound mortgage securities which in
any ordinary times would have been passed onto the investors
through purchase by customers of the banks.
·
With reference to the foreclosure situation, may I state-because
I take it you gentlemen prefer to have a man talk about something
he knows something about, rather than guess at it-that even in
our own county the number of foreclosures in the city of Chicago
exceeds that which has ever been known before. The history of
foreclosures in Cook County is rather typical, so far as I have been
able to check it, of the other communities where our organization
has offices, and we have coming through our office, because of our
representation of certain communities, mortgage foreclosures very
widely scattered over a group of some six or seven States.
The first situation in Cook County was that the speculative buildings got into trouble, the buildings which were built with a very
narrow margin, large buildings. Then, in the second year of the
depression, the soundly financed, large enterprises of the new type,
like office buildings and buildings of that type, where the demand
for space had fallen off so that they could not meet their fixed
charges, even though soundly financed, got into trouble, and that
spread to a point where most of the hotels, for instance, in the
city of Chicago, due to a lowered occupancy and operating income,
are to-day in trouble-I would hate to say how large a percentage.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

72

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

I would not claim that our city is in better shape than others,
as Mr. Stevenson has with respect to Pittsburgh. I think perhaps
that Chicago, due to a variety of circumstances, is in a somewhat
worse position.
The large number of foreclosures being filed are with reference
to the class of properties dealt with in this bill, of the small-home
owner, because the banks where they normally did their financing
are out of business. Their securities are being liquidated. For instance, if I may give one case, the State Bank of Chicago, which was
a large institution, we will say with $40,000,000 worth of mortgages
on hand, was affiliated through the usual arrangements with a series
of small banks. The State Bank of Chicago was consolidated with
the Forman National Bank, and the Forman National Bank merged
with the First National. As a matter of £act, they went out of
business between twilight and dawn, but in order to save a catastrophe the bank which took it over guaranteed $12 1500,000. They were
largely in the mortgage business. When the woman who made her
little mortgage at the small bank, or the State Bank of Chicag~
or the Forman, now goes into the First National, she is referred
to the liquidating agent at one of the other trust companies, 11nd
the usual response is, "We are sorry, but we can not renew the
loan," and that is going on all over the country with reference tq
foreclosures, because the source of credit has been absolutely frozen
up.
It is my observation that the statement that was made that there
is plenty of credit money available is absolutely untrue under pres~
ent conditions. I say that because I know, as a life insurance counsel, that there is a considerable number of life insurance companies
in this country where their policy loans have reached a point where
they absorb their premium incomes, and they are out of the market.
There is another group of co~panies as to which that is so nearly
true that they have practically withdrawn from the market. There
is a third group of companies, and I imagine the Metropolitan Life
Insurance Co. is one of them, where they have a very large surplus
still available for investment, but there are many companies where
they, recognize that even though they are not in such a position, the
demand for premium loans has reached a point wher_e, if it continues, they will be in a. position of having to sell their securities
in order to realize the money to loan to their policyholders, and
under those conditions they realize that if they were mortgage loans
they would have to be sacrificed.
I wa8 discussing this question with on~ of the companies with
which we are associated, a life insurance company, with large investments, within a week, and their average policy loan has risen
within a period of 24 months over 500 per cent. I think that is
rather significant as to the background of need.
One of the other questions covered by the President of the United
States in his statement was the question with reference to the promotion of home ownership. It has been claimed that there is no
need .for the promotion of home ownership at this time, and that
the sole effect of this legislation would be to increase still further a
bad condition of inflation and of overbuilding. Well, God knows,
perhaps what we need to-day is a little moderate inflation, under
strict control, to overcome an abnormal deflation; and I am not a

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

73

radical when I say that. 1.'he finance commission of the House
of Lords of England, under the leadership of Lord McMillen, one
of the ablest judges of all England, stated that that was the absolute sine qua non in England of a recovery of economic stability-,
and that is the feeling in many places, but there has been misrepresentation as to the actual conditions with reference to home ownership and occupancy before the committees and in public statements.
1.'he fact of the case is that the actual provision for individual family occupancy is not so great as has been contended. I understand
that the Department of Commerce states that there are about
30,000,000 families in this country, with 25,000,000 residential units,
and about 13,500,000 home owners. 1.'he President has called attention to the fact which we know in our own experience that through.
,out this country there is a huddling of families, so that if the opportunity for employment were to come back shortly, there would be
a positive shortage, but the national association had a survey made
·of the actual present conditions, not based upon hope, but upon the
conditions as tliey exist, and it is stated thatI.n measuring the present supply of residential space the survey shows that
"doubling" of two or more families in units intended for a single family is
practically counterbalancing the effect of the present practical cessation of
residential construction. It is thus masking what other conditions would in
many cities be an undersupply of desirable single family dwellings. With this
counterbalance, 84 per cent of the cities report the normal supply or short;
'71 per cent showing an equilibrium of supply and demand, 13 per cent an
.actual present shortage, and 16 per cent an oversupply.

You will find that survey, which I think you would like to examine, at page 550 of part 3 of the Senate hearings upon this bill.
Now, gentlemen, there are two or three headings under which I
desire to take this matter up with you, if I may, and in view of some
of the questions raised yesterday I should think that if any of the
.gentlemen have some particular question to ask, it might be well to
ask it as we go along, as I am going to deal with certam specific sections of the bill.
· May I turn first to one or two queries that were made by the chairman of this committee 1 I would like to answer them, as I take it
that they represent some of the things that the committee is thinking
about. I would like to give our impression of this m:it.ter first. How
will the bill help private mortgagors and mortgagees?
Now, first, it will help the private mortagor because he will be
able to go to institutions like the banks or the building and loan
associations and renew his loan, because those institutions under this
bill will have an outlet and therefore they can without further freezing their assets, and with due regard to their other obligations, renew
that loan. 1.'hat is the way it helps the mortgagor.
As to the private mortgagee, and I assume that that means the
man who lends his own money to the so-called mortgagor, I think
the bill as written perhaps is not as broad in its terms as it should be,
and I want to discuss that in a minute, if I may.
·
The so-called mortgage banker, as denominated by that term, is
not really a banker. Under the laws of various States, he wquld not
be allowed to use the term "bank." He performs a useful function,
and is really a broker or jobber. He is a middleman, but he does
business mostly upon other people's money. 1.'he ordinary mortgage

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

74

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

broker does not have a large amount of capital. He makes loans
from the limited amounts of capital on hand and sells those loans, or,
in the old days, he used to go to the bank and borrow money on his
notes, putting up the mortgages as collateral £or his notes, and as he
sold the mortgages he was able to pay off his notes. But under
present conditions the banks are not making such loans to the extent
that they used to do it, and they probably will not again do it until
they have overcome the present situation, which makes it very difficult
for the private mortgage broker of limited capital to do business.
The £act of the case is that under the Federal reserve system the
banks have become less inclined to make real-estate loans rather than
more inclined. I had the privilege of coming down here and representing Mr. Hurlburt of the Illinois Bank of Chicago, the Marshall
Field Bank, at the time that bill was under consideration as the
Aldrich bill originally, and later when it actually went through, and
one of the arguments that was made was that because the banks
would be able to rediscount a considerable amount of collateral notes
secured by collateral they would £eel freer to make noneligible loans
because they knew at least part of their assets were thoroughly liq~id.
In practice that has not proved to be true. The banker, havmg
been enabled by the Federal reserve act to redisconnt a substantial
amount of his paper, instead of being inclined to make more real
estate loans to people than before, has practically taken the position,
as every borrower knows, that they want eligible collateral, and the
banks generally in my city, and I know that is true in New York,
are refusing to make loans except on eligible collateral, that is,
collateral eligible £or discount at the Federal reserve banks. Under
the Steagall bill, which has just been passed, it is provided in section 10 that in certain cases, until March 3, 1933, with institutions
of less than $5,000,000, where there is no other collateral available,
that they may loan on promisory notes secured to the satisfaction
of such Federal reserve bank, which apparen_tly enables a bank to
regard notes secured by mortgage paper as eligible under those
provisions, but there is no reason why sound mortgages should be
relegated to the cat and dog provision under the Steagall Act. They
are a sound investment, and there should be an institution where
they can in normal times continuously be rediscounted. Personally I
see no reason why the mortgage broker, and this represents the views
of the officers of the National Association of Real Estate Boards,
but I have not had time to discuss it generally-I see no reason why
a provision should not be made in this bill by enlargement to take
care of the mortgage broker under this bill by a provision, for
instance, that there should be eligible for rediscount at this bank,
in addition to mortgages, notes taken by member banks secured only
or exclusively by eligible home loan mortgages. If that were done,
it would mean-and this is in reply to your question, Mr. Chairman, as to what this could do for the individual mortgagee-it would
mean ~hat the individual mortgagee or the mortgage broker could
take his mortgage for $10,000 to his bank, a member of this in~titution, and he c:i:mld borrow $5,000, so that on that $10,000 mortgage,
1£ t~e ame~dm~nt that I suggest were made, that bank in turn could
red1scou~t 1t with the Federal home loan bank for the sum of $5,000,
because it would be not less than 50 per cent of the underlying
collateral. The bank would have all of its money back, instead of

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

75

half of it, and the Federal loan bank would be secured as contemplated by the act now, and the broker would have gotten out 50 per
cent of his investment as contemplated by the act.
Mr. REILLY. His bank would have to be a member of this organization.
Mr. MAcCHESNEY. And, in turn, the Federal loan bank that we
propose to set up would have 3-name paper instead of 2-name paper,
namely, the signer of the mortgage, the broker, and the banker,
so that it would increase the strength of the collateral and at the
same time widen the base and give relief to the individual mortgagee which you spoke of yesterday, and I make this suggestion
in order to meet that view, and you will find that suggestion following the Chairman's suggestion that something of that kind perhaps ought to be considered.
I checked through the Senate hearings, and I find at page 626 of
part 3 a statement submitted by John A. Cutchins, of Richmond,.
Va., in which he says:
On pages 14 and 15, under the heading "Advances to members," it seems
to me that there are several amendments which might well be considered,
especially from the viewpoint of the home loan bank as a permanent part of
our financial structure. Without attempting to supply the language necessary
to carry into full effect the suggestions I shall make, it would seem to me
advisable that instead of the original term of eight years or moxe, as indicated
in line 5, on page 15, that there should be an original term of not more than
15 years, and I feel that there could be added to that paragrap4_ a clause somewhat as follows : " or 90 per cent of the amount of the mortgage, should such
amount be less than 60 per cent of the unpaid principal of the home-mortgage
loan."

Then he says, skipping two or three paragraphs that are not
material to this point :
I think there should be added, to the class of paper eligible for rediscount,
short-term credits to banks on customer paper, based on real estate holdings,
and it might be well to consider wqether or not, even at this time, an enlargement of the scope of this rediscount privilege should not be provided; that
is to say, it might be most helpful to business generally and to the operation
of commercial banks to enable them to rediscount paper on small stores, say
upto $10,000 of mortgage loan, which might not be in the class that would
appeal either to the large insurance companies or to similar investors.

So far as an enlargement of the paper secured exclusively by home
loan mortgages eligible for rediscount under the terms of the bill is
concerned, we are prepared to say that we favor that enlargement in
order to take care of the mortgage broker under those conditions.
Mr. REILLY. Will you submit an amendment to the committee j
Mr. MAcCHESNEY. In exact language 1
Mr. REILLY. Yes.
Mr. MAcCHESNEY. Yes; I will be glad to do so.
With reference to the question of tax exemption, which is the
second notation I have here as to the inquiries that you made, the
language of the bill, of course, provides that there shall be tax
exemption, and in order to bring that about there are two statements
made, first that they shall be regarded as instrumentalities of the
Government, and, second, that the bank shall be a depositary.
In response to an inquiry from Mr. Monks, of the Guardian
Trust Co. of Cleveland, objecting to the fact that it was to be made
an additional depositary, Senator Watson called attention to the
fact that it was necessary in order to justify the statement that they

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

76

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

were to be governmental securities, instrumentalities of Government,
and that he did not think that the banks would be harmed by that
provision.
Of course, as to whether these securities should be tax exempt
or not is a matter, first of policy, and second of practical fact.
As to the policy, that policy was determined, so far as the public
announcement of the bill was concerned, by the President of the
United States, who favored tax exemption because he felt that as a
practical matter, as I understand it, that without tax exemption at
this time the bonds could probably not be sold in sufficiently large
quantities. Mr. Luce can perhaps give the background of that
better than I can, but I understand that it was fully discussed and
it was felt that in order to float these securities and to make them
attractive it was necessary at this time to make them tax exempt,
and that inasmuch as we are faced now with -a great emergency in
a crisis, and inasmuch as we are setting up an institution which,
private in form, is public in nature, the Government would be
justified in giving this aid.
There was a question that was raised in the Senate hearing which
I perhaps ought to dispose of here, and that was the question under
section 11, which was dealt with on page 39 of part 1 of the Senate
hearings, as to whether this carried with it exemption from taxation
of the mortgages rediscounted. I do not understand that that is
true. Certainly there is no intention on your part that it should
be true, and I do not believe from the reading of the bill that it is
true, because these mortgages are discounted and not sold and
therefore the title does not pass, and I can not see how the taxexemption profit would carry over.
Of course, the whole question of tax exemption leading to probably somewhat extravagant expenditures because of the large
amounts of money available for public purposes has been discussed
widely, and one of the things that everybody has to consider these
days is the cutting down of public expenditures, municipal, State
and Federal. Nevertheless the esssential thing is to get this under
way and establish this situation, and the tax exemption for securities
of this kind, it seems to me, is much more justified than tax exemption of securities issued, for instance, for public works or things
of that kind which carry securities in large amounts, municipal,
State and Government, whereas this goes into an ·operating bank
and the plan itself contemplates a gradual retirement by the Government of its money, so that the only support the Government is going
to continue to give to it will be this tax-exempt privilege.
Mr. REILLY. This bill is based upon the Federal reserve act, I
take-it?
Mr. MAcCHESNEY. Yes.
Mr. REILLY. The Federal reserve act provides that the Government
gets some profit i
Mr. MAcCHESNEY. I am going to deal with that next, the return
on the Government's capital. So far as I know, and I speak for the
officers of the National Association who are here, and we have discussed this matter very carefully-personally I see no reason if the
Government is going to advance up to $150,000,000, why the Government should not receive precisely the same dividend returns while
that money is in there a.s the private investor. Personally I favor

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

77

it, and I think our people would have no objection to it, and I certainly would not quarrel with the committee i£ they were to strike
out the provision which provides that no dividends shall be paid
to the Government but that dividends shall be paid on all other stock.
You will find that in section 5, subsection (k), on page 10 0£ the
bill, reading as follows :
No dividends shall be paid on stock subscribed for by the United States, but
all other stock of any Federal home loan bank shall share in dividend distributions without preference.

As far as I am concerned, as I say, I would not quarrel with the
committee i£ they should amend that section to provide that all
stockholders, including the United States Government, shall share
in dividend distributions without preference.
I think that answers your question, Mr. Chairman.
Mr. REILLY. Yes.
Mr. MAcCHESNEY. The fourth question 0£ which I made a note
is that the language with respect to the instrumentalities 0£ Government is put in there to specifically lay the foundation £or the
tax exemption which I have already discussed.
Mr. REILLY. Have you given consideration to the £act that there
might be something written in on that point after that to apprise
the buyer as to just what that means 1
Mr. MAcCI-IESNEY. Well, now, let me say this. 0£ course, the
people in this country have suffered terribly in depreciation 0£ securities. I happen to be a trustee, among other institutions, of
an institution that has approximately $1,000,000 0£ endowment.
That endowment was invested by a finance committee consisting of
a member 0£ one 0£ the leading investment houses 0£ the United
States, a leading banker 0£ Chicago, a leading stock broker, and
the head of one 0£ the great industrial corporations 0£ America,
as well as a lawyer of some experience. Those investments show that
the stocks have depreciated in value over a "24 months period of
75 per cent, that the bonds bought for that endowment fund have
depreciated 42 per cent, and that the average depreciation of the
investments of that fund of approximately $1,000,000 is 40 per cent
under that kind of management.
I can take one of the great universities of the country, with approximately $75,000,000 0£ endowment, and point out to you that
its shrinkage of investment prior to 1929 was less than 1 per cent,
that on January 1, 1930, the shrinkage of investment. was 3.5 per cent,
that on January 1, 1931, the shrinkage of investment was 8.5 per
cent, and that on January 1, 1932, its investment had shrunk 39.5
pet cent.
Now, gentlemen, under those conditions, the fact that people have
invested in Federal land bank securities and something of that kind
and that those securities have shrunk in value is not surprising, and
I do not think it necessarily shows that there is something wrong
about that.
Mr. REILLY. But that is not the question. Certainly they have
shrunk, but the fact is that bankers have sold these bonds by particularly calling to the buyers' attention that they were Government
instr,umentalities, and by giving the people the idea. that the Governm~nt was back of them.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

78

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. MAcCHESNEY. My experience has been, and I have had a good
deal 0£ it, that the average bond salesman does not know much about
the bonds he is selling, and does not know what the language 0£ the
bill is upon which the securities are issued.
Mr. REILLY. What impression would an ordinary buyer get from
an inscription or a legend, "Governmental instrumentality 1"
Mr. MAoCm!SNEY. That does not ordinarily show on the bond.
Mr. REILLY. I think it does.
Mr. MAoCHESNEY. I think not. Anyway, Mr. Chairman, may I
say this, that the word "Federal," if you get down to that, used in
those cases, and here also, gives much more of an impression to the
uninitiated and uninformed buyer. As a matter of fact, no honest
banker, no intelligent bond man would pass these on as Government
securities.
Mr. REILLY. Could not something be written in that bond, so that
the man who reads it would know what he was getting 1
Mr. MAoCHESNEY. I would want to consult with the very competent draftsman who drafted this bill, but it might be possible to saymay I turn to that section there 1
Mr. O'BRIEN. I do not think that, if you are going to do that, you
ought to put it in the instrumentalities provision.
Mr. MAoCHESNEY. Section 11, page 23, lines 16, 17, 18, 19, and 20,
reads:
The bonds and debentures issued by each Federal home loan bank shall be
deemed and held to be instrumentalities of the Government of the United States,
and as such they and the income deri_yed therefrom shall be exempt from
Federal, State, municipal, and local taxation.

I have not considered what the effect would be upon the constitutionality of the tax exemption, but waiving that question for the
moment as between lawyers, it might be possible to add a phrase there
that they are not guaranteed by the Government and do not carry the
direct obligation thereof. I do not think that that would affect it;
I do not believe a statement that such is the fact would affect the
constitutionality of it, but I have not gone into it. Have you, Mr.
O'Brien1
· Mr. O'BRIEN. If you wish to carry out Chairman Reilly's suggestion, why do you not put a provision in the section which deals with
the issuance of bonds, prohibiting there being, on the face of the bondt
any statement to the effect that the United States does guarantee
the bonds or any statement reasonably calculated to convey that
impression~
. Mr; MAoCnESNEY. That can be done, although I do not like the
" reasonably calculated to convey that impression," because that is
a. very dangerous thing.
Mr. REILLY. Is it necesary to put that on the bond at all~
Mr. MAoCHESNEY. No. You can provide-Mr. REILLY, I may be mistaken, but my information is that that is
right on those bonds, Federal land bank bonds and other bonds.
·Mr. MAoCHESNEY. It is not on the outside of the bond.
" Mr. REILLY. But, Mr. Witness, the sellers called the buyers' attention to the fact that they are Government instrumentalities in order
to sell them. I have in mind one case where a man bought several
thousand of these bonds from his bank and he was given the impres-


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

79

sion, from his attention being called to that fact, that the Government
of the United States was back of them.
Mr. MAcCHESNEY. The interests that I represent are in thorough
accord with you on that; we do not want these bonds passed on
under any misrepresentation, and we are perfectly willing that there
shall be added something to negative that.
Mr. REILLY. I raised the question so that you could consider it, and
~f it is possible without defeating the intent, I think it should be put
m.
Mr. MAcCHESNEY. I make the suggestion, and I think it would
accomplish the purpose, that you could go so far as this: " That if
any part of this language with reference to instrumentalities shall be
used, the entire section shall be quoted " such as auditors sometimes
use to protect themselves, bi saying that " no part of this shall be
used separate from its text. '
Mr. Williams asked a question with reference to banks and building and loan associations and in some States not being able to
subscribe to stock in other institutions. That was discussed quite
fully yesterday. Of course, there are States in which they can not
do that. I must say that I agree with Mr. Friedlander, that peo:ple
who borrow money from this institution should go in on a parity
and that therefore if the majority of people who borrow must rediscount the collateral and therefore put the Federal home loan bank
in the position of a preferred creditor as against the other creditors
of_ those institutions, that everybody should be compelled to do so
as a basis of the use of the institution.
Mr. WILLIAMS. Have you information as to the extent to which
that applies in the various States, and how many States are affected
by that law~
Mr. MAcCHEsNEY. I attempted to make a check of that, but did not
have time; but, as I understand it, about seven States, Mr. Williams,
unless you take the position that a previous authority is required.
I mean to say, as I understand it, that this applies to about seven
States, where there is a negative dealing with it, that is, they are
prohib,ited from doing it. I should say, in the absence of a prohibition, they probably would be allowed to subscribe. The question
has been raised whether or not, in the absence of a permissive right
to subscribe, some affirmative legislation would be necessary, but I
do not believe that is true.
·
May I now, in passing from those specific inquiries, pass to two or
three questions that were raised yesterday by members of this
committee1
Mr. WILLIAMS. Before you proceed, and while I am thinking of
that, you say that there are seven States to your knowledge that are
affected by it~
Mr. MAcCHESNEY. I understand so; yes.
Mr. WILLIAMS. Would you care to put them in the record 1
Mr. MAcCHESNEY. I would not want to without checking it, but
as I understand it, they are Missouri, Nebraska, Kansas). New Jersey,
and there is one other eastern State and one western ;:;tate. There
may be somebody here that has that exact information. We would
be glad to get it for you, and furnish it to the Committee.
113235---62---6

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

80

CREATWN OF A SYSTEM OF FEDERAL HOME LOAN BANKS

I am just told that Texas is one. That would be the other western
State.
Mr. FRIEDLANDER. Texas has the right to assign the mortgage.
Mr. MAcCHESNEY. There was a question 0£ difference raised here
yesterday between the right to assign and the right to·put them in the
channels as a negotiable instrument.
_ Mr. WrLLIAMS. It has just been suggested that Connecticut is perhaps one 0£ the States.
Mr. MAcCHESNEY. It seems to me that it is perfectly apparent that
under this law, where it is provided that securities may be put up,
that, when the securities are put up, the institution putting them up
shall be regarded as the same as a member, and that that privilege
shall cease whenever the law is passed permitting subscription or
at the end 0£ 42 months.
With reference to questions asked by members 0£ the committee
yesterday, Mr. Hancock asked, "Why is this system better than the
Federal £arm land bank system?"
I should say that there are two things that might be involved in
that question, from my understanding 0£ it. The first is that it does
not make direct loans. It rediscounts the loans, which means that
it is a safer institution, that its bonds, therefore, are safer, and that
it has that sympathetic knowledge and personal contact, nevertheless and notwithstanding that it is so removed, because it works
through the local institutions and not direct. It was criticized because
it was said it lacks a sympathetic contact. My observation is that
the average money lender is not a philanthropist, but jumping over
that point 0£ view £or the moment, it does maintain the local relationship, because it operates as a bank of rediscount and not a direct
lending institution.
With reference to safety, it is a better system than the Federal
land bank system from the standpoint of the investor. ·without
taking your time to read the provision, the iand bank system securities
provide £or joint and several liability on those bonds, but they only
provide £or that after complete liquidation and ascertainment 0£
liability, which is so postponed that it does not maintain the price,
whereas this legislation provides £or a joint and several liability.
That you will find in section 9 ( £), on page 19. You will find that
the language there is as follows :
The Federal home loan banks shall be jointly and severally liable for the
payment when due of all bonds and debentures, and of notes and other obligations issued by any Federal home loan bank, and interest thereon, in accordance
\vith their terms.

This would apparently make them a much more desirable investment. So it is better for the investor from that point of view.
Mr. REILLY. What effect on the desirability of these investments
is the £act that the borrowing institution only gets 60 per cent at
the most on its bonds? Does that increase the value?
Mr. MAcCHESNEY. Yes; very much indeed.·
Mr. REILLY. The farm loan banks get 100 per cent.
Mr. MAcCHEsNEY. Yes; with a security 0£ stock.
Mr. REILLY. With a security 0£ mortgages.
Mr. MAcCHEsNEY. Yes.
Mr. REILLY. This bank, I understand, would only sell bonds to
the extent 0£ 50 or 60 per cent.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

81

Mr. MAcCHESNEY. With a 90 per cent 0£ margin. So that, as a
matter 0£ fact, these securities are very much better from that point
0£ view. They are better secured. They are sure 0£ prompt payment,
and they have all the elements that pretend to make a sound
investment.
Mr. Chairman, you also asked, what spread must there be betwe.en
the interest on the bonds issued by these proposed banks and the rate
eharged. the borrowing institution. Well, it is provided, 0£ course,
in ,the act itsel£, for a spread, as you probably know-this is on
page 19, subsection (e), commencing with line 14And (the board) shall provide such margins between interest rates received
upon advances made to members and interest paid upon obligations which the
Federal home loan bank may issue as will cover expenses of operation and
reserves and, under such regulations as may be provided by the board, some
part of such reserve may be devoted to retirement of the stock subscribed by
the United States.

;r do not know what the chairman had in mind. 0£ course, he
may have had in mind the situation that has arisen with reference
t<> farm mortgage rediscounts at the Federal reserve banks. I know
that the Governor o:f Iowa was in Chicago recently at a conference
with some of us with reference to a question as to whether something
could not be done for the Iowa farmers to lower the rate that they
were paying. He said that they were paying, under the guise of
interest, a commission in one way or another 0£ from 8 to 11 per cent
for their money, and he came to discuss with the Federal reserve
bank in Chicago ~he possibility o:f something being done to lower the
cost 0£ those funds to the farmer. He was shown all of the Iowa
investments in the Federal reserve bank, and was shown that the
money was loaned to the Iowa institutions at something less than
3 per cent, and that the spread occurred in Iowa, due to the fact
that the institutions were small or inefficiently operated or were
gouging or whatever you want to lay the cost to.
It would seem that the question of necessary spread that would be
fixed in this case, which in this case would be fixed and not left to
discretion, would depend somewhat upon the volume 0£ business.
There .is a suggestion here by a banker from Cleveland, Mr. Monks,
that it could be operated for less, probably; that it would not need
so much money. I should say that one-ha!£ of 1 per cent should
cover it.
Mr~ REILLY. What spread have the farm loan banks~
Mr. )\facCHESNEY. I think it is the same as this bill.
,. Mr. REILLY. Many o:f the friends of the :farm loan banks state that
the trouble with the banks originated when they were not given
~u:fficient spread to start with; that there should have been a larger
margin to provide a fund.
Mr. MAcCHESNEY. These Federal reserve banks are supposed to be
~n~fficiently large units. They are not like a small bank.
Mr. REILLY. I mean the land banks; they claim that the Federal
la11d banks were not permitted a sufficient spread.
Mr. MAcCHSNEY. But we are talking about a spread for the district loan bank here, and the spread would not have to be so large,
bf:lc~U:se it is a large institution, because it would be a sufficiently
large µnit to get a low operating cost, which is not true of a smaller
institution.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

82

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. Hancock asked if there was any provision in this bill that
would prevent the banks from using funds derived from the sale of
foreclosed properties to purchase their securities i I understand that
the Federal land banks are doing this in some instances. Of course,
that situation does not arise here at all. That question, I think, grew
out of a misrepresentation in the pamphlet issued by the Mortgage
Bankers Association with reference to the foreclosures, intimating
that this was going to put the Government in the foreclosure business, which was an undesirable position for the Government of the
United States to occupy with reference to its citizens.
In the first place, it is not going to put the Government in the
foreclosure business, and, in the second place, the provisions of this
bill provide for substitutions and empowers this institution to call
upon the discounting institution to substitute, so that if a mortgage
was defaulted they would immediately call upon the borrowing institution member to replace it with something else and it would go
back to the borrower and that borrower would have to substitute
good collateral for it.
Mr. HANCOCK. Does not that same situation exist with the Federal
land banksi
Mr. MAcCHESNEY. Not as I understand it.
Mr. HANCOCK. They are required from time to time to substitute
and to keep their res,.erves up to the iimit.
Mr. MAcCHESNEY. Yes; but they do the foreclosing.
Mr. HANCOCK. That is true.
Mr. l\facCHEsNEY. The difference there is that they do the foreclosing, whereas here this gets outside of the system. That is the
point that I am making. This goes back to the building and loan
association or to the local bank, where it is just where it is now.
What I am saying, so far as the foreclosure situation is concerned,
is ·that this bill, in contradistinction from the land bill, does not
change the situation at all, because if the layman defaults it goes
back to where it is now.
Mr. WnLIAMS. But, after all, if your member institution was not
able to put up the solvent security, what shape would it be in 1
Mr. MAcCHESNEY. That is a long question, but it is a fair question. However, it takes some time to answer it.
In the first place, this gives a right to examine that institution,
its solvency and position, and presumably if this bank is on the
job it does not wait until a borrower gets into that situation before
taking action. In the second place, they would hold these mortgages by way of collateral, and their first action would be brought
against the institution, and under those conditions, under the laws
in most States, the foreclosure would take place in the name of and
on behalf of the borrower and not the institution.
Mr. REILLY. Is it not a fact, that these Federal home loan banks
would never have to start a foreclosure proceeding unless the
borrower went broke~
Mr. l\'.(AcCHESNEY. That is absolutely true, and even then I doubt
if they would start it.
•
Mr. REILLY. To protect themselves they might have to do it.
Mr. CAMPBELL. Would not the borrowing institution have additional collateral or interest in the bank making the loan, inasmuch as


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

83

they owned their securities and had subscribed their money to
these banks f
Mr. REILLY. They might have borrowed so heavily and gone
broke so that this bank might be holding the bag.
Mr. CAMPBELL. But all o:f their mortgages would not be out. They
have $2,500 for a membership :fee, and 1 per cent o:f their capitalization.
Mr. MAoCHESNEY. As the chairman says, it could not happen
unless the borrowing institution went broke. The probability is
that they would have ample warning o:f it and the substitution
would occur probably before that. But I want to call your attention to the :fact that under the process o:f liquidation ordinarily
the collateral is sold to satisfy the note as a banking proposition,
and the foreclosure would take place by the purchaser o:f the collateral under the note and not by the bank which held the rediscount. That is the way we do it now in banking circles. I can not see
where it would ever get to a point where this bank would :foreclose,
because the bank does not take title to the collateral itsel:f. In :fact,
under the normal form o:f collateral now, a bank can not buy the
collateral, but must offer it for sale and the purchaser o:f the collateral would foreclose.
Mr. REILLY. I think it is very remote, too, when the bank would
have to foreclose.
Mr. MAcCHESNEY. I think it is impossible. As I think o:f the
process under which collateral notes are made, they are made on a
note which requires not that the bank shall forfeit, 'but offer :for
··
sale.
So much :for the questions that were asked yesterday, but there are
a :few questions that were a.sked by the Senators which I think it
might be illuminating to discuss for a moment, beca_use they have
a direct bearing upon the, matter.
I have first a notation with reference to interest to the United
States. We have covered that, because we are prepared to :favor the
participation o:f the Government in the profits while the money remains, upon precisely the same basis as other investors.
Mr. REILLY. I think that is a very :fair proposition.
Mr. MAoCHESNEY. Second, Senator Couzens raised a question with
reference to the $15,000 limit in the bill, and I want to discuss that.
You will note the distin~uished S~nator's s~g:gestioi:i- with 1;eference
to that matter. Senator vouzens said that origmally it was his understanding that this rediscount privilege should be limited to homes
not worth more than $30,000, and where the mortgage should be not
more than $15,000. Now, that bill is not so drawn, and we do not
think it should be. We think the bill is right as it is. In other
words, i:f the extent o:f the mortgage is $15,000, it ought to be possible
for the home owner to get that relief, and :for the institution which
holds the mbrtgage where that is the unpaid balance, even though
the original mortgage might have been beyond the limit, and that
is the way it is now. In other words, the unpaid balance should
determine, and not the original amount o:f the mortgage. There are
many such cases.right now, and in that event, o:f course, the loan would
be that much stronger. In other words, it would be a much better
loan as the bill is now written, and we see no reason why a man who

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

84

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

had a house that cost $35,000 or $40,000 when the prices were high
and where the mortgage was originally, say, $20,00o; and he had
paid down, say, about $10,000 why he should lose his $40,000 home
for failure to get a $10,000 mortgage when, if his house had only
cost $20,000, he would have been given relief.
So, in reply to that, we want to say that we favor the bill as
written, which makes the unpaid balance at the moment determinative of its eligibility for rediscount.
' Mr. WILLIAMS. On page 2, a home mortgage is defined.
Mr. MAcCHESNEY. Subsection 6.
Mr. WILLIAMS. Is there any limitation there as to the amount
of land involved?
Mr. MAcCHESNEY. Not as to the land.
Mr. WILLIAMS. On which the dwelling is located?
Mr. MAcCHESNEY. No.
Mr. ·WILLIAMS. Then, under the bill here, they may restrict collateral to a home standing on 1,000 acres of land?
Mr. MAcCHESNEY. Yes.
Mr. 1VILLIAMS. And on any farm land- throughout the Nationi
Mr. MAcCHESNEY. Yes; if the home as such is worth it, I suppose.
Mr. WILLIAMS. Is that it?
Mr. MACCHESNEY. vVhat?
Mr. WILLIAMS. Is that the intention of this act, to make it apply
to dwellings regardless of the place where located?
Mr. 1"1:AcCHESNEY. This act primarily is intended to give relief to
urban homes, but, as a matter of fact, it covers farm lands as well,
but it would have to be on the home.
Mr. WILLIAMS. You mean the home indepen_dent of the land upon
which located?
Mr. MAcCHESNEY. That could not be done, but may I call your
attention to the general situation? The average farm mortgage is a
mortgage of the farm as such, and, generally speaking, includes
the improvements thereon, but it looks primarily to the land. This
mortgage would be a mortgage on the house as such, and would
incidentally include the land.
Now, there is no limitation as to how large the yard should be.
The gentleman from Texas might regard 1,000 acres as a reasonable
yard, but we would think that was rather large in Illinois.
Mr. REILLY. These mortgages are going to be regular home mortgages.
Mr. MAcCHESNEY. These mortgages are going to be regular
home mortgages.
Mr. REILLY. Yes; but it takes in the home and the land.
Mr. MAcCHESNEY. Certainly it would take the land mider it, but
the point is that the average building mortgage is different from the
average :farm mortgage. That is what I am getting at. The farm
mortgage, in language, usually covers the land, and, incidentally,
the improvements; whereas this covers the improvements and, incidentally, the land.
Mr. WILLIAMS. Let me ask you what -kind of a description you
would put in a mortgage under this act if enacted?
Mr; MAcCHESNEY. Of course, you would have to describe it by
legal reference the same as in any other mortgage.
·

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

85

'Mr. WILLIAMS. I:f it involved 1,000 acres of land, you would describe that land?
Mr. MAcCHESNEY. Mr. Williams, I suppose that if I were in the
money-lending business, I might. I hope not; not on the ordinary
home loan, we would not expect to cover 1,000 acres of land, if it had
any value. That is a possibility, I admit.
Mr. WILLIAMS. Just as a practical proposition, how else could
you do it unless you had a separate survey?
Mr. MAcCHESNEY. I should say, if this loan were made, in the
normal course of business on the farm house as a house there would
have t.o be a substantial showing of value, in the house itself, and it
would be unlikely-it is possible-that there would come under the
terms of this bill a mortgage on 1,000 acres of land, including a house
on a $15,000 maximum home loan mortgage.
Mr. LucE. May I interrupt at this point?
This question arose in the conferences preliminary to the redrafting of the bill. I suggested the question by reason of the fact that I
happen to have a summer home which is surrounded by a consideriible area of land, indeed about 200 acres, but the land is the unimportant part of the property. The house is worth three times as
much as the Jand, and in trying to think of such a definition as you
arid Mr. Williams have in mind, I could not succeed, and thought it
might be better, instead of attempting to put a limitation in the act,
to leave it to the central board to handle by regulation.
Mr.' 1\-IAcCnESNEY. I think that answers the question. Now,
another question that was raised, of course, was the question of tax
exemptions. We have already discussed that. Paragraph fourth is
the question of appraisals-as to who is to make the appraisals. I
think the bill as written is adequate on that matter. It provides for
appraisals by the borrowing institution, which a certificaton of
value, with the right of inspection and check-up upon the part of
the. discounting bank. It is all the authority that is necessary;
and that is comparable to what an insurance company does in the
checking up of loans offered by its correspondents without the necessity of an initial appraisal and the expense of it.
,
Mr. REILLY. These banks, you feel, will take no securities that are
not goodi
Mr. MAcCnESNEY. No.
Mr. REILLY. You think that they have good judgment?
Mr. MAcCHESNEY. Yes. Absolu_tely.
Mr. CAMPBELL. There is no need of their accepting any until they
have been proven as sufficient.
Mr. MAcCnESNEY. No. Proven securities.
Section .9 ( e) was one section discussed with reference to reserves.
" Some part of such reserve may be devoted to retirement of the
stock subscribed by the United States."
· The question was raised as to whether these notes should be desig~
nated as reserves or profits. I don't quite know what the gentleman
had in mind who raised that question. I rather thought the question was not very clear. I thought that the gentleman who asked it
had in mind the practice of banks in transferring certain earnings
to surplus where it would not be available perhaps for distribution;
and that what he had in mind was that the reserve was used or was
equivalent to a fixed surplus which could not be borrowed. I don't

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

86

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

so read the bill. The bill gives authority to use the reserves :for the
retirement of the Government interests, as I read it in section 9.
There was a question asked as to subsection (g), section 9:
Each Federal home loan bank shall have power to accept only such deposits
as are made by members of such bank, or by other Federal home loan banks.
Such deposits shall not be subject to check, and no rate of interest in excess of
3 per cent per annum shall be paid thereon. No Federal home loan bank
shall transact any banking or other business not expressly authorized by this
act.

With reference to that question, Mr. Chairman, there is some
difference of opinion which I am going to discuss in connection with
the statement of Mr. Monks, who, as his statement clearly indicates,
is the vice president of the Guardian Trust Co., of Cleveland, Ohio.
The question was whether it should be a depository or not.
I :feel that in view of the :fact that we are trying to meet a public
situation where there has been a breakdown of the financial system
of this country, this bank-should be a bank of deposit; but that perhaps, in fairness to the bankin~ interests of the country, assuming
that they are going on to function, as, of course, we think they are,
there should be placed some limitation upon their deposit capacity
and perhaps also that an interest rate should be fixed which would
not be too hard a competition for the banking institutions in normal
times.
With that in view, we would not object-we would not urge itbut we would not object to a modification which would limit the
deposit. In the first place, leave it as it is as a gross depository for
the Federal home loan banks themselves. But then we would not
object to the right of the members to deposit in the bank if that
right to deposit were limited to the obligations of such member to
such bank, with the idea that if they had an obligation there, they
would not be put in the position of depositing to meet it as a reserve
and having that other bank fail and then. being unable to meet the
obligation. They should have a right to deposit their funds in this
institution up to their obligation to pay so as to meet it when due:
Also we would not object, it seemed wise to the committee, in
the light of the Senate hearings, and the discussions which have
taken place, that they should cut the interest :from 3 per cent to
2 per cent on the ground that 2 per cent is more nearly the Government rate, as evidenced by savmgs banks and the so-called confidence or baby bonds that are being issued and so :forth because perhaps 2 per cent is a fair rate under those conditions, because the
Government while paying 3-their last loan was 33/4 per cent-that
however is on a bond which may go to 80, and which has gone· to 82
and 85 in the past, whereas this is a guaranteed interest rate, and
therefore is more in line with these bonds which were just issued
by the Government, which guaranty, upon 60 days' notice, to repurchase the bonds at par. Those bonds only draw 2 per cent, so
it would seem that the 2 per cent rate might perhaps remove the
objection of the bankers of the country to creating a rival deposit
system.
Mr. REILLY. Is it necessary for the working of the bill in your
judgment that these banks should have the right to receive deposits
from their members 1
Mr. MAcCHESNEY. Mr. Chairman, you will get me into trouble.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

87

Mr. REILLY. I don't care to get you into trouble at all.
Mr. MAcCHESNEY. If I were permitted to talk to you ~ver the
table, I would say, "No," personally.
Mr. REILLY. Who is back of this proposition 1
Mr. MAcCHESNEY. As I say, many of the institutions feel that, in
order to meet their own financial obligations as financial institutions,
they ought to be in a position where they have an assured depository
certainly up to the amount of their obligations.
In.,other. words, the necessity for this, as I see it, is based upon
two factors: First, the fear of the solvency and ability of the banking
system as it now exists; and, second, a desire perhaps in the rivalries
between different classes of institutiona to have a separate line of
depositories distinct and different from commercial banks.
Now, as far as we are concerned, we are not insisting that it be
a bank of deposit. We think it would add to the attractiveness
of the system if it were. I am saying that, I think, from the standpoint of bankers, that they would not be hurt, but that the other
people would get the benefit if these deposits were limited to obligations and the interest rate were put more nearly at the Government
rate.
•
Now, there are two very important factors, before I get into Mr.
Monks's testimony, that I want to call attention to, and perhaps a
third suggestion with reference to the bill.
Section 4, subsection ( c) :
The original stock subscription for each institution eligible to become a member under section 4 shall be not less than $2,500, plus an amount equal to 1
per centum of the aggregate of the unpaid principal of the subscriber's home
mortgages.
'

Mr. Friedlander, in his testimony yesterday, and one or two other
gentlemen, referred to that as the unpaid principal of the eligible
mortgages. "Eligible," you know, appears on line 7, but line 2 of
subsection ( c) does not carry over to mortgages.
It is very clear to me that this language should be amended, Mr.
Chairman, to carry out its thought. In the first place, Mr. Monks,
of the Guardian Trust Co., suggested that that 1 per cent be cut to
one-half of 1 per cent so as not to make it too onerous on small
institutions. The point involved is, for instance, take an institution
that holds thirty-six million. The institution that I represent holds
about sixty million in mortgages. But take the thirty-six million.
Under this they would pay $2,500 plus $300,000 in order to become
a member. It might be that of that thirty-six million only ten million
would be mortgages of less than $15,000.
Now, it seems to us that that must have been the intention. But
subsection ( c) of section 4 does not cover it. Nor is it covered by
the definition of home mortgages in subsection ( 6) of section 2. This
was to be based upon the unpaid principal of the subscriber's home
mortgages.
We would insert the words for the moment to cover that, following the word "mortgages" in line 10, "having not more than
$15,000 unpaid balance."
In other words, we don't believe that for the purpose of determining the question of eligibility to membership in the system, they
should go in advance into the question as to whether the particular
mortgage is eligible or not; that is, as to whether it is the character

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

88

CREATION OF -t,.. SYSTEM OF FEDERAL HOME LOAN BANKS

of improvement that they want to take. or it is the nature of moral
security•that they want, or under or over 40 per cent of appraised
value, or whether it is more than 50, or whether it is an amortized
or an unamortized mortgage. In other words, there are certain
questions in the rough and ready fixing of the member's eligibility
which would be gone into in advance, but that where an outstanding
, institution like the one which I represent, which holds thirty-six
million of mortgages, for them to say, "We hold thirty-six million
of mortages, of which so many, representing so much money, represent mortgages upon which the unpaid balance is less than $15,000,"
and for them to show that it can meet the other conditions, then it
would be theoretically eligible.
.
Mr. O'BRIEN. Would you also ignore the 20-year provision of
section 8 which fixes the life of the loan? Take lines 17 to 19,
page 15.
Mr. MAcCHESNEY. No. I think that might be also inserted, in
other words, be amended. Later. we are going to suggest that we.
think 20 is correct. A suggestion has been made that it be changed
to 15. We think 20 is the correct figure.
We also -suggest that this provision that only mortgages of less
than $15,000 shall be eligible be changed to mortgages less than
$20,000.
Mr. O'BRIEN. That is the standard of eligibility at present?
Mr. MAcCHESNEY. Yes. We think that is desirable because of
institutions which have forty or fifty .million dollars' worth of
mortgages, but the main bulk of them are not eligible at all, where
the cost of belonging to the system would exceed any possible
benefit. I am sure that is not the intention.
The other suggestion is that section 4, subsection (g), page 8:
After the amount of capital of a Federal Home Loan Bank paid in by
members equals the amount paid in by the Secretary of the Treasury under
subsection (f), such bank shall apply annually to the payment and retire:ment of the shares of the capital stock held by the United States 50 per
centum of all sums thereafter paid in as capital until all such capital stock
held by the United States is retired at par.

We agree that this language needs clarification, because from that
it might well be that whenever it reaches the amount of the Government-for instance, the illustration you suggested was that if the
private subscription be a million and the Government subscription
be a million, that repayment would start at four million instead of
five, whereas that was not the intention. The language can be very
·.
easily clarified.
.
Mr. REILLY. Why should not the board have power, the governing
board to be provided in Washington, when in its judgment the bank
did not need all of its money, to provide for the payment back 0£
some part of it to the United States Government, and not wait until
the bank had paid in what the United States Government had paid
in, assuming that the bank did not need the money?
··
Mr. MAcCnESNEY. The trouble with that is that i:f you create this
institution, I suppose it ought to have the minimum pool upon which
it can stand. "X"ou don't know when an emergency is going to arrive;
This institution is filled up. Say it becomes stabilized on its owl).
capital from its own members and the Government retires-I think
the modification that is suggested is that the Government shaH g~t

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

89

a return. The Government is not penalized because the Government
will get the same return as the members. It is going to be to the
interest 0£ the people to retire the money; whereas, before that suggestion was made, it would be to their interest to get the Government's money in an unnecessary amount.
Mr. REILLY. I think that i£ we have equality 0£ interest the banks
would retire Government money when they find that they don't
need the money.
Mr. MAcCHESNEY. I think so.
Section 5 (k), page 10, line 8. We have already discussed that.
That was a question 0£ equality to the Government with the other
depositors.
. Gentlemen, that covers the questions that arose in the Senate.
Now, except £or one matter that I want to cover, which I think i!'I
i:i:nportant and which perhaps is the most illuminating testimony
that was given-the testimony is all interesting, of course, to you
gentlemen, and it is valuable; but this is absolutely essential to the
committee, beca.use it sets out in a nation-wide way the need £or
this in the various communities.
. · After all, the proponents 0£ the measure, their views, were very
largely embodied in the legislation as presented; and the criticisms
were 0£ three kinds: First that it was not needed, and, second, it
was so badly needed that it would put everybody out 0£ business
because it would grow .so rapidly; and third, criticism by the mortgage bankers, ·so called, or mortgage brokers, which I think is a
legitimate criticism. That is, they are in the position 0£ a jobber
who. is being hard pressed everywhere and being driven out o:f business, or the individual banker.
.
But. it so happens.that their private business interests may be in
('onflict with the public and social interests; and under those conditions I think they have got to yield, however unfortunate it may be.
But with the suggestions I have made here this morning I think they
will be in a better position than they ever were, if they are allowed
to. redjscount their notes secured by these mortgages. Their position
will be strengthened, and they can go ahead and render the very
valuable service that they have been rendering in the past.
·
The fourth line 0£ criticism came from the bankers of the country'. 'l'he most constructive of these came from Mr. Thomas Monks,
0£ Cleveland, the vice president 0£ the Guardian Trust Company,
representing the Ohio Bankers Association, found at page 347 £or his
fi,t:st hearing and page 355 £or his sec~md hearing before the Senate,
part
I am going through those, if I may, somewhat in detail, for
your benefit.
First, as to membership, Mr. Monks suggested the rewriting of
subsections 1, 2, and 3 of section 4, which you will find his_ suggestions on page 248 of his testimony. You will find the section that
J;te _1>roposes to amend on page 4 of the act.
He proposes to amend. it so that it will read as follows:

2:·

Subsection (1) Building and loan associations, cooperative banks, and homestead associations.
·(2) S1\vings banks, trust companies, national banks, and other banks; and
(3) ·Insurance companies. ·
(4].0ther financial institutions whose time deposit!'! and financial condition
il;l: ,t11ie j,udwent of ..the .board. warrant making home-mortgage loans.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

90

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

We favor that amendment, but we see no reason why the second
subsection to it should limit it in the way that it does. In other
words, Mr. Monks proposed striking out the following language:
(2) Any of the following whose time deposits and financial conditions, in
the ,judgment of the board, warrant their making such home-mortgage loans
as, in the judgment of the board, are long-term.

In other words, they have given no right under this 'bill as of right
to savings banks and trust companies and other banking companies
to go into this system, whereas the absolute right is given to building
and loan associations and to the insurance companies.
I understand the reason for that is that there are some irresponsible small banks that perhaps ought not to undertake this obligation. It seems to me that is more or less a gratuitous insult, as I
think it over. On the whole, banks and trust companies are as
soundly and ably managed as building and loan associations and insurance companies. There is no reason why under the inspection
system and all that it pertains to, why any institution that is a
properly assured bank should not have a right to come in.
Mr. LuCE. May I say that in considering that matter I called
attention to the fact that in our large cities thel'e are numerous
banking institutions of a petty nature, largely conducted in the
interests of foreign-born residents for the transmission of funds
to their home countries. In my own city they have caused a deal
of trouble; more trouble than any other class of banking institution. It was wholly with that possibility in mind that that was
worded in that way.
Mr. MAcCHESNEY. We will concur with that. But the class of institution which this language is sought to deal with is on the wane,
like the irresponsible private banker. Legislation which is now
pending in this Congress, which has passed the committees, fixes
the minimum as $50,000, I believe; and the general tendency all
over the country is to feel that the very small institutions ought
to go out of business. In other words, the institutions such as you
are now discussing can not exist on a legitimate banking business,
because the overhead exceeds any legitimate profits that it may
make; and they are not properly in the banking field.
Mr. HANCOCK. What would you define as a small institution that
you say ought to go out of business 1
Mr. MAcCHESNEY. Well, where the capital is, as we used to have
in our State, $5,000. We now require a minimum of $25,000 in
the country and $50,000 in the city of Chicago. I think that is small
enough.
I am not now advocating the big octopus absorbing institutions.
The point is that institutions with sufficient capital which are doing
a legitimate banking business can earn a return, which varies in different communities depending upon what the president of the bank
thinks that he ought to have, and a lot of other things.
Mr. WrLLIAMS. What is the change in that amendment that is
suggested over what is written here?
Mr. MAcCHESNEY. It strikes out lines 6, 7, 8, and part of 9, so
as to make savings banks, trust companies, and other banks eligible
without their bemg prepared to make long-term mortgages in the
judgment of, the board. It gives them the absolute right to join.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

91

It takes that language and drops it down into a new subsection ( 4)
under the heading " Other financial institutions whose time deposits
and financial conditions, in the judgment of the board, are longterm loans."
In other words, if they are institutions which do not qualify as
banks, maybe some of the institutions that Mr. Luce had in mind,
would be qualified in your State as banks, under your law. That
would not be true in our State, where the word "bank "-no imititution can use the word " bank " unless it is incorporated as such
either under the National or State law and has certain minimum
capital requireinents. These other institutions which are largely
ticket-purchasing agencies and immigrant forwarding agencies,· are
not banks. They might be financial institutions. These institutions
would still be subject to the restrictions provided for by this bill
under section 4, which limits it to such institutions but removes
regular banks and trust companies from its limitations. Does that
make that clear 1
Mr. HANCOCK. Yes.
Mr. MAcCHESNEY. Point 2 is stock subscriptions. You will find
that suggestion on page 349 of his testimony, where he suggests that
the subscription should be limited to one-half of 1 per cent instead
of 1 per cent. You will find that dealt with in subsection ( c) of section 4 of the act on page 5. His thought being that what we want to
do.is to getinstitutions into this system; and that the small institutions
putting up $2,500 for membership, feel at present that that might
freeze that much capital to the detriment of the little institutions.
I think we have removed that somewhat by the proposed language
which will limit the assessment to the unpaid balance.
The seconQ. pro~osal is that inasmuch as we are going to provide
for a return of dividends, that we are not going to postpone that
indefinitely, and perhaps the bank can afford to go along. But I
think the committee should consider that suggestion for the benefit
of the small institutions, where it will be freezing a certain .amount
of its capital by way of membership fees, which might not be needed.
Mr. REILLY. Why should not the bill be provided with a sliding
scale for the initial payments 1 Why should a small bank be required to put up $2,500 when a big bank would not be required to
put up any more, and make the payments based largely upon their
mortgage secUTities 1
,'Mr; MAcCHESNEY. You could do that instead of cutting the percentage, if you wanted to.
Mr. REILLY. Yes. Make it for the small bank $500 or $1,000.
Mr.. MAcCHESNEY. I would say $1,000.
Mr. REILLY. And make those big institutions put up more.
Mr. MAcCHESNEY. From $1,000 to $1,500, say.
Mr. REILLY. Yes.
Mr. MAcCHESNEY. That is a way of getting at it. I was just calling attention to it, because I think, gentlemen, if you will devote
your time to this particular statement in the testimony, you will
find most of the criticisms and the constructive suggestions there.
Now, Mr. Monks makes a suggestion on pages 349 and 350 with
respect to pages 11 and 12 of the act, being subsection ( d) of section 6, where it is provided that there shall be three groups of
· directors-and I think this is important, gentlemen, and I favor the

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

92

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

change-which provides for three groups of directors to be nominated by the membership and shall classify themselves into three
classes-large, medium, and small.
Mr. Monks suggests instead of that, the board shall divide the
members of each of the Federal home loan bariks into two groups
which shall be designated as A and B, which would represent respec:
tively, and as fairly as may be, the large and small members, the
size of such members to be determined according to the net value of
their holdings of home-mortgage loans; I should say, "holdings of
home-loan mortgage loans" which as to the unpaid balances and
period of maturity are eligible for discount.
"The class A and class B directors, whether appointed or elected,
shall be chosen from the officers and directors of the member institutions. Class C directors, whether appointed or elected, shall bechosen from among persons actively engaged in commerce, agriculture, or some business, or industrial pursuit."
I think that is a great improvement. I have discussed it with our
people, and they favor it. In other words, instead of having threeclasses of directors, all of them from financial institutions, you have
two classes of directors from the financial institutions, the large and
the small, and the medium which goes both ways; and we have a
third class derived from business itself.
Now, we all know that men in the financial business after all havea special slant. Banking is a business. It is not a public institution.
It is not an eclectic business. Bankers know very little about theproductive forces of the country. It is only in very exceptional cases
that they do. No bank would make up its board of directors that
way. If it did, no man who was not a fool would put his money in
the bank, if its board of directors was composed of the vice presidents
of the bank. ·what they do is to get men from different lines of
business; and naturally they reflect these different actual business
conditions in the board. That is what this is supposed to be-to
apply the same banking principles of any sound bank in making
up its board of directors; and we favor it.
Mr. LucE. I may point out generally that whatever change will
be made in this regard will not _satisfy everybody. We have had
the subject repeatedly under discussion in the Committee on Banking
and Currency in connection with the Federal Reserve and Farm Loan
systems. We have made some revisions that we thought were improvements. Whenever we make a change then somebody wants
another change made. Personally, I never thought it was worth theattention that we have had to give to it.
Mr. MAcCHESNEY. Well, it is a difficult problem; but I think the
present financial conditions show that on the whole banker management of industrial institutions is not sound management. I am willing to stand on that-that a banker should be a man who thinks first
and always of safety rather than of progress or initiative. And if
he is sound to the extent of being a sound banker, he may not be the
man to develop a business; and I think we have got to have that other
type on the board.
This suggestion comes from a banker:, so I don't think it is an
unfriendly statement.
Mr. CAMPBELL. Is he :fairly conversant with building and loan
operations?

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

93

Mr. MAcCHESNEY. I imagine he is.
Mr. CAMPBELL. Where would he acquire this knowledge if he confined himself to this banking institution?
Mr. MAcCHESNEY. I don't mean that. There is nothing here to
prevent a building and loan man from getting on the board.
Mr. CAMPBELL. Except his su12:gestion with respect to the building
and loan associations; that you are going to ignore the building and
loan associations.
Mr. MAcCHESNEY. No. This does not propose to ignore them, Mr.
Campbell. Perhaps you didn't catch what I said .
.,Mr. CAMPBELL. You say his suggestion is more weighty than that
coming from any other source?
Mr. MAcCHESNEY. No. I didn't say that. Don't misunderstand
me. What I said was that this was not an unfriendly statement to
the bankers, because it came from the bankers.
In other words, normally you would think that a banker would
favor having three bankers on the board instead of two bankers and
business man. But this suggestion that one be a representative of
business and commerce, came from a first-class banker, which indicates that it is not an unfriendly thing toward the bankers. That is
what I mean.
There is nothing about this to prevent a building and loan association, in which we are very vitally interested, in which I think
you are vitally interested, nothing unfriendly toward the building
and loan associations. I do think you should bring a m~n from other
lines of business in on the board in order to get the point of view as
to questions of building and development.
Mr. CAMPBELL. Mr. MacChesney, pardon me, but the building and
loan associations have a history of over a hundred years?
Mr. MAcCHESNEY. Yes.
Mr. CAMPBELL. Without any great disaster ever overtaking them i
Mr. MAcCHESNEY. Yes.
· Mr. CAMPBELL. The banks have been in existence only since 1863,
and see how many depressions we have had and what they are responsible for to-clay.
Mr. MAcCHESNEY. Let us understand each other. I am not a
banker. I am here representing the real-estate interests of this
country, and I am here representating the group of people who,
including building and loan associations, favor this bill.
Now, my statement was merely a statement to show you that I am
not a Bolshevik, appearing here against the bankers; but that this
originated from an eminent financial source.
Mr. CAMPBELL. The real-estate men of the United States have
indorsed this bill.
Mr. MAcCHESNEY. Yes. We are making-Mr. CAMPBELL. You have said that the suggestion from the banker
in Cleveland with respect to the amendment will alter the bill very
materially; change it from its original purpose?
Mr. MAcCHESNEY. Not at all, Mr. Campbell.
Mr. CAMPBELL. You are making a suggestion there that would
affect all the banks in the country.
Mr. MAcCHESNEY. We think it is in their interest. Let us understand each other. I have been general counsel for the real-estate
interests of this country for more than 20 years ; and I represent their

a


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

94

CREATION OF A SYSTE~ OF FEDERAL HOME LOAN ~ANKS

point of view. It is not a narrow point of view. It is the point of
view of endeavoring to make this the soundest legislation possible;
and if a suggestion that we think meets the requirements came from
the devil himself, we would incorporate it.
Mr. CAMPBELL. We don't mean to bring the devil into this,·but we
mean to bring in the building and loan associations, who have a history of over a hundred years.
Mr. MAcCHESNEY. Nobody is attacking their position.
Mr. CAMPBELL. But the proponents of the bill have not been consulted with respect to these amendments.
Mr. MAcCHESNEY. I beg your pardon. I am here representing
some of the principal proponents of this bill.
Mr. CAMPBELL. My understanding was that this ca:rne from the
President after conference with men throughout the country.
Mr. MAoCHESNEY. That is the very reason we are here. I take it
that this is not something that was conceived on Mount Sinai and
handed down.
Mr. CAMPBELL. No; but it is just as sacred coming from where it
did as being offered by a banker in Cleveland.
Mr. MAcCHESNEY. I have always had a profound respect for anything originating from the President. So don't misunderstand me.
Mr. CAMPBELL. This bill was drafted after consultation with the
best authorities that he could get in the country.
Mr. MAcCHESNEY. I happen to be one of those authorities that
were consultep., so I think they were good.
Mr. CAMPBELL. You are sticking to your original idea, aren't you!
Mr. MAcCHEsNEY. Mr. Campbell, I believe this committee is sitting here to try to perfect this bill and make this the best bill possible.
These are suggestions coming from people who are somewhat opposed
to the bill. "\Ve are going through it and indicating to you gentlemen
how far we think you can go without damaging the original features
of this bill or improving them.
There are some suggestions that he makes that we are very much
opposed to. Don't misunderstand me. If you will give me a chance,
you will find that we don't adopt all of the suggestions that he makes,
by a good deal. But when he makes a good suggestion, we adopt it.
I would say, for instance, that we would adopt a good suggestion
coming from a Democrat if I thought is was a good suggestion in
spite of the fact that I am a Republican; and I take.it that the Democratic members of this committee would take something from our
side that had merit.
Mr. REILLY, Your statement indicates very good judgment on your
part.
Mr. MAcCHESNEY. Mr. Monks on page 351 suggests striking out
lines 3 to 7 on page 15 of the bill, and substituting the following :
(1) If secured by a home mortgage given as security for an amortized homemortgage loan having a maturity date not exceeding 10 years, the advance may
be for an amount not in excess of 60 per cent of the unpaid principle of the homemortgage loan.

Now, we think that the term of 8 years in there is better than
the suggested change of Mr. Monks, because, generally speaking,
the so-called short-term mortgages a.re made for 3, 5, or 7 years. I
don't know where they got eight, but it comes up above the short-term
mortgage; and we see no reason for changing it.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

95

I am taking Mr. Monks as a basis, Mr. Campbell, because he did
cover all the objections coming from .those sources. Therefore it
gives you a compendium for you gentlemen to consider.
Suggestion No. 5. Mr. Monks on page 352 of his testimony suggests striking out line 23 on page 16 of the bill, which reads as follows, commencing with line 21:
At no time shall the aggregate outstanding advances made by any Fereral
home-loan bank to any member exceed twelve times the amounts paid in by
such member for capital stock subscribed for by it.

He suggests striking out entirely the part that limits it to
twelve times.
As a matter of fact, the limitation in the other case for the Govern-.
ment is twenty times. Certainly it would be to the interests that I
represent and be to the interests of building and loan associations,
which we also represent here-we are allies if not a consolidated
army-to have the advances increased above twelve times; and I
don't see myself why it should be limited to twelve times.
The fact of the case is that advances made upon this basis are
really in fact sounder than advances made under the Federal reserve
system as far as recapture of the actual capital is concerned. And
therefore Mr. Monks's suggestion that they be wiped out entirely.
Our suggestion would be that it be put on a parity with the Federal
reserve, under which they can borrow up to 20 times the amount.
We see no reason for discrimination against a sound security of this
kind. We think it should be on a parity with the other act.
Mr. LucE. Wasn't it 12 years in the farm loan i
Mr. MAcCHESNEY. Twelve years in the farm loan, but 20 years in
the Federal reserve.
There is a distinction, may I say, with reference to the farm loan.
I am a farmer, and I know something about it. A farm loan is made
on the theory that the farm will produce money and make that a
sound mortgage. And unfortunately it has got to a state in this
country where to a very large extent that is no longer true.
But you can not say that same thing is going to occur with these
urban mortgages, unless you are going to assume that the country has
gone to the dogs and we are not going to get back to a normal industrial basis agam. Because here the earnings will be independent of
the property, whereas there the earnings are dependent upon the
property. Here you have the property plus the earnings in the urban
mortgages. In the farm loan you have the property and its earnings.
;\\fr. LuCE. As far as that 12-year provision goes, are you in favor
of wiping it out entirely~
Mr. MAcCHESNEY. We think there is merit in Mr. Monks's suggestion i but we are not prepared to advocate going to the extent of wiping 1t out entirely and making it unlimited. We suggest that the
figure be 20 instead of 12.
'
No. 6 on page 356 of his testimony. Mr. Monks suggests striking
out on.page 20, beginning with line 16, the following:
(g) Each Federal home loan bank shall have power to accept only such deposits as are made by members of such bank, or by other Federal home loan
banks. Such deposits shall not be subject to check, and no rate of interest in
excess of 3 per centum per annum shall be paid thereon.
113235-Bl!-:--7


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

96

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Our position is a position of disagreement with that. That is to
say, we think the deposit feature should be retained. I have already
expressed our views in full on that. At least up to the extent of the
obligation, in order to make a sure source of revenue. Also that the
rate sho~ld be lower so as not to make it unduly competitive.
No. 7, page 356 of his testimony. Commencmg on page 23, line 21
he suggests striking out "This shall be depositary of public money.';
Of course, we think that is necessary as a basis for the statement
with reference to the instrumentality of the Government, and that
the President favors and the proponents of, this bill favor as necessary to put it into operation, a tax exemption; and therefore it is a
necessary feature.
He suggests as point No. 8 on page 357, with reference to page 24,
line 15, that the word "reserve" be changed to "surplus."
Now, as a matter of fact, I have explained, as I understand it, the
difference between a reserve and a surplus. Perhaps some of you
gentlemen have a different view about that. But this reserve was intended to be available for the retirement of the Government obligation, the obligation to the Government, and so forth. But a surplus,
as I understand it, in banking parlance, becomes a fixed surplus,
which can not be used. It would seem that certainly under our general laws much of of an operation than is given' a mere reserve, which
is set up on the books and is usable for any purpose. Under our
banking law a surplus becomes a fixed part of the capital and can
not be used after it is transferred to surplus. It becomes fixed.
Question 9 on page 357. Mr. Monks suggested that on page 24,
line 19, beginning on line 18, be added "10 per cent of net earnings " to " reserve " or " surplus " instead of 25 per cent after the
reserve has reached 100 per cent of the paid-in capital as per the
Federal reserve system.
That is a question of judgment. We have no opinion one way or
the other. It would seem that 10 per cent as provided in the Federal
reserve act would be adequate. But we think it is gives an additional
margin of safety; and the bill as written is satisfactory to us in
that respect.
Question No. 10, page 358. Mr. Monks suggested that on page 33,
line 4, we should strike out lines 4 to 8, inclusive, reading:
or relating to persons whose obligations are offered to or held by any Federal
home loan bank, and to make through their examiners or other employees, for
the confidential use of the board or any Federal home loan bank, examinations
of such institutions.

We favor the striking out of those words, Mr. Chairman. There
has been some discussion of that before the Senate. That seems to
be the view point of some of the Senators on the committee also.
It would seem this is. security for a collateral loan. It comes upon
a piece of property that has been appraised not to exceed 40 per cent,
secured by a home occupied by the borrower and the mortgage
signed by him. It is rediscounted with the Federal institution as
collateral to a note or obligation by that institution.
Now, section 20 gives full authority under such condition. Commencing with line 22, page 32under such conditions as they may prescribe, to make available to the board
in confidence for its use and the use of any Federal home loan bank such
reports, records, or other information as may be available, relating to the condi•

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

97

tion of institutions with respect to which any such Federal home loan bank
has had or contemplates having transactions under this act.

That is all right. They can examine building and loan associations
in my town or your town or the individuals of the bank or trust
companies; and they can examine the property. But I can see no
reason why they should go back of that and ask to make an examination relating to persons whose obligations are offered.
In other words, I see no reason why they should examine the confidential income tax returns and other information of the Government of the customers of those building and loan associations or
banks. That sort of thing is disturbing. It is apt to become a
snooping process, and is wholly unnecessary. We don't see that it
adds anything to the act. I don't want to be misunderstood about
that. Apparently this man, who is in the banking business, does·
think that it is a necessary safeguard.
No. 11, page 358. Mr. Monks desires to eliminate the use of the
term " bank " on the ground that nonbanking members could not
properly use it in certain States.
Mr. Chairman, I don't know what he has in mind except that he
may be thinking that building and loan associations could not use
that term. I don't agree with him. I think the bill is perfectly all
right. In other words, there is no reason why a financial institution which is not itself a bank, but is a member of this system, can
not use the statement "Member, Federal home loan bank system."
It does not designate itself a bank. I would undertake to say that
in our State, where the use of the word " bank " is limited, that it
would not have a:r;ty application to this situation. And we think it is
right as written.
No. 12, page 359 of the testimony. He suggests eliminating on
page 3, lines 10 and 11, as follows :
but no such district shall contain a fractional part of any State.

If you will turn to that, I want to say just a word on that. He
calls attention to the situation in Kentucky, where the Federal reserve
system splits the State in two. We think that is very undesirable.
We think that building and loan associations and banks having
charters under the laws of the State, should be kept as a unit. In
other words, we stand on the good Democratic doctrine of State
unity and rights. We don't think the States should be broken up
under the system.
Mr. REILLY. You and your organization are assuming to be good
Democrats right through.
,
Mr. :J\1AcCHESNEY. No. 13, page 359, which is in the second part of
his testimony. Mr. Monks asked the question as to where institutions
doing interstate business would discount.
What he had in mind there-I am bringing this out, gentlemen,
because these questions will arise. I think it will be helpful to dispose of that thing-he raised the question about the Metropolitan
Life Insurance Co., for instance, where it would belong to the discounting bank in New York City. I assume that it is in New York
City. I imagine that they make loans all over the country. They
make loans in Chicago, Los Angeles city, or Saint Louis. Where will
they discount their mortgages i Will it be in the district bank where


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

98

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

the property is located, upon which the mortgage is held, or will it
be in the district where the principal is doing business i
Now, the act contemplates that the discounting shall take place
in New Y or-k under conditions such as that.
Mr. REILLY. The home of the owneri
Mr. MAcCHESNEY. The home of the lender, the lending institution.
We think that while there may be some advantage about being
able to discount in another place, the act is right as written, because
the examining institution some on reserve bank, should have the necessary credit facilities to make the investigation and see whether that
mortgage is all right and not have the investigations scattered all
over the country and perhaps run the risk of improper inspection.
No. 14, page 360. Mr. Monks suggested that on page 5, line 4 1
having to do with the price at which the stock is issued, subsection
(b) of section 5.
The capital stock of each Federal home loan bank shall be. divided into
shares of a par value of $100 each. The minimum capital stock shall be issued
at par. Stock issued thereafter shall be issued at such price as may be fixed
by the board.

Now, Mr. Monks raised the question "but not less than par."
There was some discussion as to that-as to whether the right should
exist to allow subsequent members to purchase stock at less than par.
We have no convICtion on that point. The question asked by one
of the Senators about that was that perhaps people would not buy
at par. But it was pointed out that the stock-and I would like to
get the reaction of Mr. Luce on this as to whether there was any discussion on that-Mr. Monks suggested that it shoµld be added" but
not less than par for subsequent stock."
.
Mr, LucE. In the conferences that I have attended there was no
discussion of that.
Mr. MAcCHESNEY. He raised a good point about this-that this
was not a security offered to the public. Under this bill the building loan associations and banks are going to go in initially and they
have to pay par for their membership. Under this it would be possible for the board to let in a subsequent member at less than par.
His point is that these assets are built up by this initial membership,
and they certainly should not have them shared with other people
by selling below par. It was not for investment purposes that this
stock was issued, but by way of membership.
I think there is some merit to that suggestion. It is not vital
one way or the other. But it would seem fair to the building and
loan associations and banks which go in there and subscribe $100
a share for the purpose of being eligible for the rediscounting of
their paper; and they build up resources there that they should not
be subjected to the possibility that the stock will later be sold at
less than par. If the right is given to the board to fix the price, it
should b~ a right to fix the price above par so as to take into consideration the building up of the reserves by the original members.
Mr. LucE. Mr. Chairman, that is taken from one of the other laws.
I was studying this, Mr. Monks' suggestion; and I reached the same
conclusion that he did in the matter.
Mr. MAcCHESNEY. May I say, Mr. Luce, it was written very long
ago, but it had reference in that case to stock to be sold to the public;


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

99

where, as ,in this case, there is a differentiation. It is not investment
stock. It is membership stock. So it does make a difference.
Mr. REILLY. So the only question on that was as to whether they
should have a right to sell it for more or less.
Mr. MAcCHESNEY. More, not less.
It ought to be a fixed membership. The only question there would
be that if these people by the use of these facilities may build up a
substantial reserve, instead of distributing it in dividends, if they
want to allow subsequent members to come in at par-and I don't
think that is the conduct of an institution of that kind-they should
make a complete distribution of the earnings as dividends, because
there was no building up of savings, because subsequent to the earnings of the reserve, it.has been built up at your expense.
Mr. REILLY. Y or idea is to leave it to the board to fix it any place
above par?
·
Mr. ]\,fAcCHESNEY. Yes.
Mr. REILLY. But not below par?
Mr. J\,fAcCnESNEY. So as to take care of the building up of the
earnings by the members already in.
No. 15, page 361 of Mr. Monks' testimony, which relates to page
5, ( c) of_ section 4. He suggests that that be redrafted as follows:
The board shall, from time to time, adjust the amount of. stock held by
each member so that, as nearly as possible, such member shall at• all times
have invested in the stock of a Federal home loan bank 1 per cent of his home
mortgages plus $~,500 entrance fee.

Now, that is merely a reframing of the language; and I think we
have agreed that that would be preferably changed.
Mr. O'BRIEN. I don't see any difference between them.
Mr. MAcCIIESNEY. There is no difference in meaning, but I think
the language is clearer. The language in the present act isshall be not less than $2,500, plus an amount equal to 1 per centum of the aggregate of the unpaid principal of the subscriber's home mortgages.

Taking that with the lanfuage of the act, "having not more than
$15,000 unpaid principal,' it does seem to us that the language suggested makes the meaning clearer, although the meaning is exactly
the same.
No. 16, page 361 of his testimony, relating to page 6, subparagraph (e) of the act. He.says it should be clarified and rewritten to
read:
The board shall prescribe terms and conditions under which such deposits
are made so that tbe obligations of the institution to the bank would be adequately secured.

That commences in line 7, which now reads:
The board shall prescribe terms and conditions under which such deposits

ar~ made so that the obligations of the institution to the bank will be adequately secured.

He goes into that question there and suggests a modification of it.
He says:
If their stocks or bonds tbat they pledge are put in escrow, or something of
that sort, temporarily, until the law of the State is changed so that they can
become a member, there ought to be some specific•way of taking care of that
written in there.


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

100

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

But he also has in mind there the question of the liquidation1
which he has under point 17 on page 362. He thinks first that it
securities are put in in lieu of cash, there should be an escrow department built up for their protection; and under his point 17 with
reference to page 5, subparagraph (i), he raises the question as to
what becomes of bonds in case the member withdraws from the
system.
As it is now written, it provides for the return in cash. He suggests that there should be a specific provision for the return of the
specific securities that were put up in lieu of cash in case there is a
withdrawal pending the passage of an act permitting subscription.
That would be an ordinary and orderly business principle to which
I can not see any objections. It is an administrative principle. In
other words, the language of the act with reference to the repayment of the member is based upon the supposition that the member
has paid cash, whereas for the first 42 months he may have put up
securities and they hold them to his account and return them to him
if he does withdraw.
,
No. 18 on page 362 of his testimony relates to page 10, line 8, subparagraph (k). We have already discussed that. We favor putting
the Government upon the same basis. That is a question of whether
the Government should be put on a different basis as to 'dividend
distribution. We think not.
No. 19' is his statement with reference to his position. At page
363 of his testimony, I want to call your attention to what he says.
In response to a question by Senator Watson, he makes this
suggestion :
Well, if these suggestions are adopted, or many of them adopted, that you
might consider vitrl suggestions, woultl your group then favor the measure·t
Mr. MONKS. I think I am justified in saying to you that if everybody goes
in on ·an equal basis-

That has reference to section 2, with reference to these banks and
trust conipaniesand everybody is taken care of, no preference is shown-yes, sir.

Now, gentlemen, we think from our standpoint, representing the
interests who believe this bill is vital legislation, it is worth while
your giving consideration to the various suggestions so that the people back of them may cooperate in its passage and in its operation,
and· everybody will feel that they have been fairly treated in a great
constructive measure of this kind.
I want to thank you on behalf of the interests that I represent
for this very courteous hearing.
Mr. LucE. I suppose that the gentleman may not want to come
back here later. If I could ask him two or three questions before
we a<;ljourn, it may suit his convenience.
In the matter of instrumentalities and deposits you have, of
course, made it clear that under the decisions of the Supreme Court
provision for them is necessary.
Mr. MAcCHESNEY. Yes.
Mr. LucE. In the matter of taxation, however, I would ask your
judgment as to whether, when the system has been declared an instrumentality of the Government, assets or debenture1:,1 could be
taxed by any State or local government, no matter what we do here Y

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

101

Mr. MAcCHESNEY. Whether they could be taxed?
Mr. LuCE. Whether they could be taxed.
Mr. MAcCHESNEY. My judgment on that question, which was
raised by Senator Couzens, in the Senate, with reference to the taxexempt feature of the securities-whether that carries with it the
tax exemption of the mortgages. Is that it?
Mr. J.,ucE. No, I am not driving at that. Suppose we should say
that the securities shall be exempt from taxation, could we thereby
compel States, counties, or municipalities to forego taxation 1
Mr. MAcCHESNEY. No. You could not.
Mr. LucE. That is, then, the tax-exempt matter would relate only
to taxation on the part of the Federal Government?
Mr. MAcCHESNEY. Oh, no. You misunderstood me. If they are
an instrumentality of the Federal Government, they are not taxable.
If the Government left them taxable as far as it was concerned, it
could not make the communities declare them tax exempt. But if the
Government declares them to be tax exempt, that carries all down the
line.
Mr. LucE. But can we deprive the States or the municipalities of
the power of taxing?
Mr. O'BRIEN. Isn't the proposition something like this: That the
law of tax exemption in the case of State taxes and Federal instrumentalities is derived from the Constitution; and if Congress
creates a Federal instrumentality, without _permission from Congress, the States can not tax the Federal mstrumentality. With
permission from Congref'ls the States can. But there is nothing to
prevent Congress from taxing its own instrumentalities, while the
Constitution prevents the States from taxing the same instrumentalities. Have I made that clead
Mr. LucE. Yes.
Mr. MAcCHESNEY. If it becomes a Government instrumentality,
then the States can not tax it.
Mr,. O'BRIEN. Unless Congress permits it.
Mr. MAcCHESNEY. There is another way that this could be done
if it is desired. This could be made tax exempt over a certain
amount. For instance, they could provide that it would be tax
exempt up to a given amount from any one holding or for a certain
period of time. I haven't seen it passed on as to time, but the
amount has been passed on specifically by the courts.
Mr. LucE. Many of the persons who wrote to me-my name
having been attached to the bill I have a great mass of correspondence-protested, and some of the witnesses at the Senate hearings have protested, against the Government's going into business ..
Now, if we required the system to pay interest on our advances,
would that not be charged to be as an investment and not a governmental as distinguished from a commercial proposition 1
Mr. MAcCHESNEY. It is provided, of course, by the same act by
which you do that that the money shall be repaid.
Mr. LucE. Shall be repaid, but the act does not put the Government in the attitude of an investor 1
Mr. MAcCHESNEY. May I answer that 1
Mr. LucE. Certainly.


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

102

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. MAcCHESNEY. I think that putting the Government on a
parit:v with private investors would be considered, generally speaking, fair. There is no reason why it should put in your money and
mine and give a11 the profits to somebody else. That is what they
are doing-:from what the Government puts in, unless it is essential
to accomplish a public purpose; and I can not see that it is essential
to accomplish a public purpose.
I am not very much impressed by this argument that it is to the
best interests o:f the country that the Government shall not go into
business, which is :from commercial people as a whole and not :from
the banks and real estate and insurance companies. I don't see why
it should be limited to big institutions, and should not filter down
the line to those who are being sgueezed out because o:f lack of mortgage financing under these pressmg conditions.
Under this the Gverment is going on the theory that we are in a
world-wide panic, the worst that the country has ever seen; and
that this is not any time :for passing out a dole or :for helping individuals; but a time to reestablish the solvency o:f our institutions;
and that those ought to be the solvencies o:f institutions who are taking care o:f the little man as well as the big man. That is what this
bill does. It takes care o:f the home owner under $15,000. .
Mr. LucE. I quite agree with you. But as regards that situation,
when we created the Federal Farm Loan System, we took the attitude o:f being a bounti:ful, help:ful, eleemosynary institution, _so to
speak; that we put the resources of the Government temporarily at
, the command o:f the :farmers o:f the country through interest in
them.
\
Mr. MAcCHESNEY. That is true.
Mr. LucE. Would not that spirit be destroyed by taking the position o:f the money lender and demanding interest~
Mr. MAoCHESNEY. I think it would, i:f you demand the interest on
the Government obligation ahead o:f everything else. But i:f you
say, "We are putting in our capital to help you do this thing, and
don't ask anything that you don't get," I don't think it applies. I
think that i:f you would demand that the Government get its interest first and that the other people wait, that would be one thing.
But i:f you go on an equal basis o:f partnership to help, that is
another.
O:f course, the :farm-mortgage situation, I think, is reaching rapidly in this country a condition where the urban situation is quite
desperate. The report from the Iowa Tax Commission shows that
taxation on :farm lands was very largely reaching a point where it
absorbed about 21 or 22 per cent o:f the income; and that the urban
situation is about the same.
Now, it has been per:fectly apparent that the actual value of the
farms of this country has gone through a process of gradual destruction. Unless we can reestablish confidence in the farm and
enable these people, through normal financial institutions, to hold on
to their homes we are going to wipe out the savings to an extent
that the country is going back fi:fty years in its economic conditions.
I think that on the one hand the Government has to be as generous
as it can afford to be, because the situation is desperate. But I think
also that it should temper that generosity with the :fact that it is in
desperate need o:f revenue to meet its obligations; and therefore any
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

103

thing that does not fix the burden upon the other fellow but merely
puts the Government on a parity, is fair to them.
Mr. REILLY. There is a difference' between the Federal farm loan
act and this act. There are no private investors reaping the benefit
under the Federal farm loan act. That goes to the borrowers. Here
the private investors are reaping the benefit. They put in $130,000,000, and there is about $6,000,000 tribute to private investors. Am I
not right?
Mr. MAcCHESNEY. Well, I would not call it tribute.
Mr. REILLY. Then it is a gift 1 It is a gift of at least $6,000,000
interest a year.
Mr. MAcCHESNEY. I think if it is necessary in the social and public interests for the Government to make it successful, it would be
justified in putting in their capital. I would dislike very much to
i::ee it put in any other interest obligation which would have to be met.
But, personally, I would see one objection to that. I know that
this Congress is going to be under pressure both to get appropriations and under criticism for failure to hold them down. It seems to
me that this is the fair middle ground.
Mr. REILLY. You take the Federal reserve act. The Government
made money out of that. It made $150,000,000 out of the Federal
reserve act.
Mr. HANCOCK. And got private capital to do it.
Mr. REILLY. That is one of the best investments that the Government has ever made-the Federal reserve act.
Mr. HANCOCK. And I don't think they are entitled to a nickel of it.
Mr. REILLY. They never should have made it.
Mr. MAcCHESNEY. Of course, you have the other side of the problem, where you have an increasing income tax, faced with the sales
tax which may reach down into the cost of living of the people; and
you have got to balance one thing against the other.
Mr. REILLY. We are very much obliged to you.
Mr. LuCE. Where would be the flaw in an allegation that the more
interest you take, the longer it will be before the principal is repaid i
Mr. MAcCHEsNEY. There would not be any flaw in it if you provide the thing that we have considered quite seriously. We thought
of suggesting the possibility that the Government could be repaid its
capital without a participation in the interest prior to the distribution of dividends to private investors. Theoretically that would be
absolutely the fairest way to do it--that the Government would put
its money in to start it out, and will get its money back and leave
the institution to get a return. The objection to that is from our
point of view that these institutions are putting up this money for
the purpose of getting increased liquidity. What they need is economic resources. If they put up this money-$2,500 plus 1 per
cent-and they could not get it back for from 1 to 10 years, until the
Government was paid, then they would have a frozen asset that is
frozen.
Mr. WILLIAMS. I would like to ask ,a question. What, if anyi
effect has the Glass-Steagall bill on the home loan activities of the
countryi
Mr. MAcCHESNEY. It has not had time as yet.
.
Mr. WILLIAMS. What in your opinion will be the result of it?

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

104

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. MAcCHESNEY. From a reading of the provisions of that bill,
House 92031 section 2, subsection 10 ( b) , and section 10 (a) , it would
seem that tnat means that the home owner who has his mortgage to
renew could never get another accommodation, because this bank
can only use that once as collateral when it has got less than $5,000,000 capital; and when it is in such a desperate situation that it has
no eligible collateral whatsoever, and when a majority of the board
·are willing to vote that it is in that condition, that they ought to
accept his collateral.
Now, what this ought to be, this ought to be a collateral, not a
preferred collateral, but it ought to be a collateral in view of its
real value, in fact, substantially greater, where the building and loan
association and the bank, and under my suggested amendment the
mortgage broker will be able to discount his notes at the bank; will
be able to come in and get that discounted when he needs it in order
to save disaster.
This Glass-Steagall bill does not help the mortgage owner one iota.
It does not help the building and loan association. It does not help
the individual mortgagee. It simply saves that institution, the bank,
which has exhausted all its available assets, from disaster.
Mr. WILLIAMS. What about liberalizing that law and making it
take care of your situation 1
Mr. MAcCHESNEY. It would seem, Mr. Williams, that what is
needed in this country is what they have in every other civilized
country in the world; and that is alongside of your commercial
bank a long-credit reserve system.
Now, this system is a very limited system. It is limited to homes
occupied by people, not more than three families, and not exceeding
$15,000. Now, there are no such limitations in other countries.
This country is short-every financier, every political economist and
every public man who has studied the question will tell you that
this country is woefully short on long-term credit facilities as
opposed to commerical facilities.
We have developed on the one hand the great commercial banks
to an extent that has given us confidence in them. But w6 have not
developed on the other hand the great international banking houses
which we need. We began to have doubts about it, but this situation
has shown us that they were not as smart as we thought they were.
They let the people of this country into terrible losses.
What we need in this country are great long-term legitimate
commercial-banking institutions. My judgment is then when this
bill is put into effect, the time will come when no sane man will
say but what it ought to be enlarged, and that no sane man will ever
say it ought to be repealed.
('Whereupon at 1.05 o'clock, p. m., a recess was taken until 2.30
o'clock p. m.)
AFTER RECESS

(The subcommittee met at 2.30 o'clock p. m. pursuant to recess
taken.)
Mr. REILLY. We will first hear Mr. Sherlock, and he may proceed
if he is ready.


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

105

STATEMENT OF CHESLA C. SHERLOCK, MANAGING EDITOR
LADIES HOME JOURNAL, PHILADELPHIA, PA.

Mr. REILLY. Please give your full name, your address, and the
position you occupy.
Mr. SHERLOCK. My name is Chesla C. Sherlock; I am managing
editor of the Ladies Home Journal; Philadelphia, Pa.
Mr. Chairman, may I say in the beginning-Mr. REILLY. Just a moment. Did you appear before the Senate
hearings1
Mr. SHERLOCK. Yes, sir; I did. May I say this for the purpose
of the record, that after I testified before the Senate committee I
took the pains to make a trip across the country again, to check up
and verify on some of the points that were brought out by the opponents of this bill. I was as far west as Minneapolis. I conferred
with 15 or 16 of as outstanding leaders in the building industry,
in finance and in business generally as I could find and reach, in
order to review and to assure myself on points brought out by the
opponents of this bill, and I am here, Mr. Chairman and gentlemen,
only to present new material, if I may do so.
Mr. REu;,LY. Very well.
Mr. SHERLOCK. May I say something in rebuttal i And I might
say for the purpose of the record, that since the Senate hearing I
have had two letters from Senator Couzens asking information on
one or two points which he himself is in doubt about, and I assume
all the Members of Congress will be in doubt on those points. I
re:fer particularly to page 603, of part 3, of the hearings before
the subcommittee of the Committee on Banking and Currency hearings, on which Senator Couzens makes this statement [reading]:
During the whole growth of the Nation, the greatest growth that we have
ever seen-

This latter meaning home ownership and home financingthis has been taken care of before.
What I do not understand is this.

I think these people--

Meaning those who are in favor of this bill, as I assumehave gone off on

a tangent, because we are in a depression.

Now, Mr. Chairman, if I may say this, that we have not taken
care of home ownership in this country during the past 87 years,
because the percentage of home ownership has constantly decreased;
and, so far as I have been able to find from the governmental agencies here in Washington, we have no records behind 1850 on the
percentage of home ownership. We have shown a constant decrease
all the way down, and the Senator from Michigan and those who
are minded as he seems to be over this question are in error when
they say this has been taken care of all through these years, because
it has not. The cold facts are there.
Mr. Chairman, in 1920-and, so far as I know, those are the last
statistics we have on home ownership in this country-we had only
40 per cent of the families of the country owning their own homes.
Mr. REILLY. Just there, do you not think, as it has been suggested,
that the coming in of the automobile and the attractiveness of the


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

106 CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS
apartment house and the disinclination of some women to busy
themselves with the household duties are responsible for a decrease
in home building i
Mr. SHERLOCK. Mr. Chairman, I can not agree with you.
Mr. REILLY. In home owning1
Mr. SHERLOCK. As editor, in close contact with the women of
this country for the past 11 years, I can not agree with you. The
woman was never born who started out as the head of a family that
did not want a home of her own.
Now, the competition for the family dollar has been so easy and
every other thing that we can buy under God's sun-.Mr. REILLY. Don't you think the automobile has been a very strong
competitor of the home i
Mr. SHERLOCK. I do not agree with you, Mr. Chairman. I think
that the automobile has contributed more to home ownership than
anything has that has come along. Take }O or 15 or 20 years ago
we thought it was a competitor. It is not. Whyi It provides easy
transportation out to the suburbs, if you please, so that more people
can live up to the old Anglo-Saxon idea of a detached house for every
:family. And I tell you, if I may say so, emphatically, Mr. Chairman,
the automobile has contributed more to home ownership in the last
10 years than anything that has ever happened in this country.
There are other things that have detracted from it; I am frank to
admit that, but, as sure as I stand here, I am sure of that fact.
Mr. REILLY. My belief is, Mr. Sherlock, that years ago before the
coming of the automobile people used to put their money into a home,
and now the automobile and the garage has absorbed that money.
Mr. SHERLOCK. I do not agree with you, Mr. Chairman. It has
provided cheap transportation for the second third, if I may so
characterize it, of our family population, so that they could go out a
distance of 2 or 3 miles where they could a:fford to have a home of
their own; and without transportation you can never put this Nation
on a basis of home ownership. The automobile has contributed that.
It has opened up vastly more land for homes which people can get
out in the suburbs where they can live up to this old Anglo-Saxon
idea of the detached house for every family.
I want to say this-and this is repeating what I said before the
Senate committee-that we have got to get back to that basis or the
American market is going to constantly diminish and be contracted
down until this whole Nation is in tenantry; and then where do we
stand i
I am surprised that Mr. Cody over here and so on, and the interests
that he represents, absorbing only the top third of our family population, and I would like to lay a wager with him right now that if
this bill is enacted and easier credit is afforded to the second third of
our family population, that 15 years from now the Association of
Mortgage Bankers that he represents will be doing a bigger volume of
business than they have ever done before. Yet the very gentlemen
who come here opposing this act come here because they are afraid
of limited competition, and they do not see over into the years ahead.
Mr. Chairman, I have been diverted, and_ I am sorry 2 on that point.
As I said in the beginning, I am here representing 3,000,000 women
immediately now.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

107

Since I appeared before the Senate subcommittee, I also took pains
to send out under cover that nobody could ever attribute to the Ladies
Home Journal, to find out whi:ither mortgage money was available
or not. That questionnaire went to 117 communities, and with the
exception of two-Hartford, Connecticut, and Providence, Rhode
Island-the evidence is th&-t there is no first mortgage money available to-day anywhere in the United States.
On the point of second mortgage money, it is available only in one
community, according to this questionnaire reaching 117 cities, and
in that community they are asking a discount of 60 to 80 per cent,
Mr. Chairman.
Mr. LucE. What do you mean by that? I do not understand you.
What do you mean by " discount of 60 to 80 per cent?"
Mr. SHERLOCK. That is the way the questionnaire came back, Mr.
Luce, worded that way.
Mr. LucE. That is one of your technical phrases of which, as a
layman I do not understand the meaning.
Mr. SHERLOCK. I would assume, being a layman myself and not
being a statistician or a banker, however, if you want to borrow on
a 1,000 second mortgage you probably get $400 or something like that.
Mr. LucE. I see. I understand now.
Mr. SHERLOCK. $400 or maybe $200, depending on what they
thought of you as a risk. But the point is there is not any money
available.
·
Mr. LucE. That was second-mortgage money?
Mr. SHERLOCK. Second-mortgage money, which I was talking
about. In other words, one segment of finance has completely
collapsed.
As I made this trip around the country-and I would like to put
these names into the record, if I might, Mr. Chairman-I talked to
many of these leaders I mentioned a little while ago: Mr. Fred
\Veyerhauser, of the Weyerhauser lumber interests in St. Paul,
Minn.; Mr. B. G. Dahlberg, of the Celotex Co., in Chicago; Mr.
Henning, of the United States Gypsum Co., in Chicago; Mr. Wade
Leach, of the General Motors Acceptance Corporation, in Detroit;
Mr. Frederick H. Ecker, president, Metropolitan Life Insurance Co.
in New York City; Mr. George B. Cortelyou, president, Consolidated Gas Co. and director in some 25 other corporations, according
to his statement, and member of the finance committee of the New
York Life Insurance Co.; Mr. Lewis Brown, president of the JohnsManville Co., in New York City; Mr. Q. T. Stevenson, National
Association of Real Estate l3oards; Mr. William E. Best, president
of the United States League of Building and Loan Associations;
Mr. William H. Mason, vice president of the Masonite Corporation;
Mr. W. N. Upson, of the Upson Co., Manufacturers of Wallboard,
at Lockport; N. Y.; and Mr. Putnam__, of the John Hancock Mutual
Life Insurance Co.; and others who cto not occur to me now.
With the exception of two on that list, I found that they are all
in favor of the enactment of this bill. Mr. Ecker and the other
insurance gentlemen are opposed to it, I think for obvious reasons.
. Mr. CHAIRMAN. I have said one or two times I was. here representing 3,000,000 women. Yesterday, before I left the office to come down
,here in response to your invitation, a letter was put on my desk in

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

108

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

the day's mail, from a subscriber to the Ladies Home Journal. She
said-and it is so vividly burned in my mind that I am quoting it
verbatim to you, I am sure:
We have worked for the past five years for our home. We have squeezed on
clothes and everything possible, and by doing that we were able to pay off
the second mortgage fully this year. But, now, they have told us, as the first
mortgage is coming due also, that we may pay $750 down now, reduce the
principal that much, and add service fees and costs, which means that we must
raise a total of more than $1,000, and we can not do it. We are going to lose
our home. What can we do about it?

In the same mail, Mr. Chairman-and I may say there· were seven
other letters in that one mail, and being minded of the rule about
the record and so on, I brbught just one. Having told you that, I
would like to insert this letter in the record, if I might.
Mr. REILLY. Without objection it may go into the record.
(The letter referred to is as follows:)
Ho:&et:E BUILDERS Co.
New York City, March 15, 193!.

SUBURBAN

MB.

CHESLA C. SHERLOCK,

Ladies Home Journal, Philadelphia, Pa.
DEAR Sm: A fortnight ago you made an interesting broadcast in which you
urged building, in view of the recent enactment of Congress, which is calculated
to help prospective home builders.
Just at this time we are experiencing considerable difficulty in securing firstmortgage loans for people owning lots in Westchester County.
If you have any information on the subject of obtaining loans, would you be
kind enough to forward it to us? It would be greatly appreciated, and we
thank you in anticipation of an early, reply.
Very truly yours,
SUBURBAN HOME BUILDING Co.,

C. A.

LEE.

That is from New York City.
The point is that Senator Couzens is in error when he says that this
has been taken care of splendidly in the past 87 years. I am surprised that so many of our people have been able to pay for a home
under all the hurdles that have been raised up.
Mr. Chairman, I do not know your profession, but if I might
divet here a moment and point out to you that the reason why there
are so many other things in the world that families can buy and
buy easily is due to the fact that our legal base and thinking towards the partial-payment idea was changed away back there about
18 years ago, so far as any purchase under chattel mortgage is
concerned.
Once upon a time the law profession, as I understand it, was absolutely united that the buyer should be protected whether he bought
chattel or bought real estate, although he had more protection thrown
. around him if he bought real estate. Then the automobile came into
the picture, and so many of us wanted automobiles that it was made
easy for a buyer to buy and easy for the seller to protect himself in
case the buyer defaulted.
The point I am getting at is this, that me must make it as easy for
a person to buy a home, if we have to change the entire legal base,
Mr. Chairman. And the people who are out here in this second third
of our population, which represents the big American market, have
got to have the opportunity to realize that ambition, which means
more to this country and means more to industry and more to the

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

109

future all over this country than anything else, and the way to .start
is right here with this bill, and that is why I am here.
I do not want to put anything else in the record-that is, on the
other side-but that one £act that Senator Couzens is in error when
he made the statement that it has been abundantly taken care of in
the past.
The £act that greater numbers of people own their homes to-day
than they did in 1850 is irrelevant, because there are more families in
the country to-day than there were then.
·
Mr. REILLY. The next name on our list is Mr. La Roque, and we
will be glad to hear him.
STATEMENT OF 0. K. LA ROQUE, DEPUTY INSURANCE COMMISSIONER, IN CHARGE OF BUILDING AND LOAN BUREAU.,
RALEIGH, N. C.

Mr. REILLY. Please state your full name, the position you occupy,
and your address.
Mr. LA RoQUE. Mr. Chairman, my name is 0. K. La Roque. I
happen to be the deputy insurance commissioner :for the State of
North Carolna, in charge of the building and loan bureau of that
department; address, Raleigh, N. C.
I appeared before the Senate committee and shall promise you to
make my statement very brief. I will not touch on matters touched
on there, if possible, and my testimony is printed in full, of course.
I would, if I could have permission, suggest the possible insertion
of an article which appeared in the United States Daily of issue
January 30 on the subj~ct of Supervision of Building and Loan
Associations in the State of North Carolina, which gives some explanation of their workings and their supervision that may be of
some assistance to you gentlement who may not be building and
loan men. I think it might be of some interest to have this in the
record. It is not a long article, but I do not want to insist upon
that.
Mr. REILLY. I do not see what the supervision of the building
and loan societies has to do with this hearing.
Mr. LA ROQUE. It is entirely :for you to say.
Mr. REILLY. You might give us the substance of the article, giving
us a statement of things within your own knowledge about the building and loau associations in your own State.
Mr. LA RoQUE. I was only suggesting the insertion of the article,
and I would be glad to do as you say.
The building and loan association is a cooperative organization
purley and simply. It is a non-profit organization. Something has
been said about making profits for the private organizations. The
building and loan associations' profits are divided equally among
their shareholders, borrowers and nonborrowers alike; Something
has been said about the stock of the building and loan associations,
the stock certificates. In my hearing before the Senate committee,
at the bottom of page 533, Exhibit 1, is a copy of the stock certificate
in use, which shows its absolute mutuality. The organizations are
absolutely in my State solvent and safe, but as thoroughly nonliquid
as it is possible to get.


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

110

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. REILLY. Right there, do they £unction in the way of making
loans at this time?
Mr. LA RoQUE. No, sir; they can not £unction and make loans at
this time.
Mr. REILLY. Is there within your knowledge any demand for
loans?
Mr. LA RoQUE. Yes, sir; there is considerable demand that cannot be supplied.
In addition to that, Mr. Chairman, may I not say that they are
right hard put at this time, for the reason that their borrowers are
unable to keep up the payments on the loans on the stock pledged
to secure the loans that have previously been made. That automatically makes it hard to get the money to mature stocks, and when
they mature, and, of course, the maturity of the stock is dependent
upon the receipts, and if they mature this stock on time all of their
receipts must be used for that purpose, thus retarding the growth
of the associations and the service they are rendering in the community in which they are operating. It is to get the funds to provide this relief, in order that the associations may use their receipts
for maturities and use this additional funds for making loans where
necessary.
Mr. WILLIAMS. May I ask a question?
Mr. LA RoQUE. I am delighted to be interrupted at any moment
by members of the committee, of course.
Mr. WILLIAMS. I have not been able to get much information on
this, and I am satisfied you have it.
Mr. LA RoQUE. I will be glad to give it to you, if I have it.
Mr. WILLIAMS. Just in connection with what you are saying, how,
if at all, will this institution help those who are already borrowers
from you?
Mr. LA RoQUE. In this manner, may I suggesU
Mr. WILLIAMS. Yes.
Mr. LA ROQUE. A.n association in North Carolina l9ans money
on real estate and requires additional collateral stock the par value
of which is equal to the amount of the loan when it is matured. In
other words, the payments are made on the stock and not on the
loan.
Mr. WILLIAMS. Your loans are amortized?
Mr. LA ROQUE. Yes, sir.
Mr. WILLIAMS. Extending over a period of how long?
Mr. LA RoQUE. It is an indefinite maturity in reference to the
maturity of the stock i it runs from 7 to 12 years.
Mr. WILLIAMS. It 1s based on monthly payments?
Mr. LA RoQUE. It is based on weekly or monthly payments.
Mr. WILLIAMS. Of so much?
Mr. LA RoQUE. Yes, sir.
Mr. WILLIAMS. That has been running, we will say, for some
time?
Mr. LA RoQUE. Yes, sir.
Mr. WILLIAMS. How will the borrower, I ·will call ·him, get the
benefit of this act?
Mr. LA ROQUE. I think I can show you in just a moment.
Mr. WILLIAMS. A.11 right.


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

111

Mr. LA ROQUE~ I will use $4,000 as illustration of the loan. Say
you borrowed from the association $4,000, and have given a mortgage. You subscribed for and got 40 shares of stock. On that stock
you pay $40 a month and $20 per month interest on the loan, and
6 per cent is the rate of interest in our State. That is a total of
$60 a month payments on the stock and interest as long as that loan
runs. You receive back, of course, your pro rata share of the earnings, and therefore in that manner reduce your interest in the long
run.
You have made payments on that stock to the extent, I will say,
of $2,000. You have now reached the point where you can not
keep up those payments, and in order to, protect the other shareholders in the associations who are not borrowers, the associations
must necessarily secure some funds from some place or :foreclose
your mortgage.
.
If. they can not get the money from some source to help them
mature their stock, they can credit your loan with the $2,000 paid
in, withdraw the stock, make a new loan, and you are paying them
$30 per month instead of $60 per month.
Mr. WILLIAMS. You mean refinance it?
Mr. LA ROQUE. Exactly.
Mr. WILLIAMS. With the loan you get from this home loan bank?
Mr. LA RoQUE. That is refinancing for smaller amounts, thus
reducing your payments and taking the money from that source to
take the place of that $60 matured and maturing and nonborrower
stock.
Mr. WILLIAMS. It is not clear to. me. What difference would it
make? In what way would that help them to refinance?
Mr. LA ROQUE. Well, it would mean this difference, Mr. Williams-Mr. WILLIAMS. They have already the indebtedness there, have
they not~
Mr. LA ROQUE. The borrowed
Mr. WILLIAMS. Yes.
Mr. LA ROQUE. As the indebtedness to the association?
Mr. WILLIAMS. Yes.
Mr. LA RoQUE. Yes, sir. He has a credit in the association on
his stock of $2,000 in that particular case that they can not deliver
to him unless they can get some funds to retire this matured stock,
this " free stock," we call it.
Mr. WILLIAMS. How will we finance him and put him in any better
shape than he is now?
.
Mr. LA ROQUE. It will reduce his payment to $30 instead of $60 a
month.
Mr. WILLIAMS. And extend it over a longer period of time?
Mr. LA RoQUE. It will extend it over a longer period of time;
yes, sir. He will start over with a new loan of $2,000 instead of the
original loan of $4,000.
Mr. REILLY. What becomes of the other $2,000?
Mr. LA RoQUE. The other $2,000 is credit, credited, and the stock
withdrawn, and the credit applied on his loan. In order to do that,
Mr. Chairman, the associations must have some funds to use to
113235-32--8


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

112

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

mature free stock, the nonborrowing stock, when it reaches its
maturity date.
Mr. WILLIAMS. The primary object is to get money to pay off the
obligation that comes due?
·
Mr. LA RoQUE. That is correct, and at the same time relieve those
borrowers who can not keep up their present payments. If those
borrowers could keep up their present payments, Mr. Williams, in
this particular case it would not be necessary to borrow money from
any source to take its place, for the reason that his payments coming in automatically every month would automatically come in to
help pay the man who has not borrowed. It is a rather complicated
explanation, I will admit.
Mr. WILLIAM. I do not see yet how the borrower is benefited.
Suppose he can not meet his obligation, as you say. What is done
with him?
Mr. LA ROQUE. We are refinancing and cutting the loan in half,
and reducing the payments so that they are instead of $60 per month
~~~~

.

Mr. WILLIAMS. Under the present plan, without this aid, what
do you do with him?
Mr. LA RoQUE. We have to foreclose on that property.
Mr. WILLIAMS. To what extent are you foreclosing?
Mr. LA RoQUE. Our real-estate holdings in North Carolina in
building and loan associations has increased approximately $1,000,000 last year. It was $2,000,000 the year before, and it is $3,000,000
now.
Mr. WILLIAMS. You,: real estate?
Mr. LA RoQUE. Our r~al-estate holdings which the building and
loan associations have.
Mr. WILLIAMS. As the result of foreclosures?
Mr. LA RoQUE. As the result of foreclosures; yes.
Mr. WILLIAMS. What per cent 0£ the business does it represent?
Mr. LA RoQuE. Our total real-estate holdings represent about 4 per
per cent of the total resources 0£ the associations.
Mr. WILLIAMS. Running about on a par with the Federal land
banks?
Mr. LA RoQUE. I presume so. I understand it is about 4 per cent.
Mr. WILLIAMS. I am honestly and earnestly inquiring about the
aid.
Mr. LA RoQUE. I appreciate you are.
Mr. REILLY. That is very important.
Mr. LA RoQUE. I fully appreciate your question and the interest
you have in it.
May I ask that I make one explanation that does not go into the
record, because it is a matter entirely within our State?
(Informal conversation thereupon took place which the reporter
was directed not to record.)
Mr. LucE. Following along in the line of the questions which have
just been put by Mr. Williams and the chairman, you have spoken
of the cutting off of your income by the present crisis. I have been
told that about four out 0£ -five 0£ the members of the building and
loan associations are investors, and one out 0£ five borrowers. Those
proportions may not be exact, but, using them for the time being,


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

113

let me ask how :far, by reason o:f withdrawals, has the investing wing
of the business diminished 1
Mr. LA ROQUE. I can give you one or two instances. I have in
mind one association whose normal income is about $38,000 per
month. Their income has dropped to $20,000 per month. Some of
those payments come from borrowers who have been unable to keep
up their payments. But I do not want to mislead you on that--a
great number of the nonborrowing members have necessarily stopped
because they did not have the money, and now the rainy day they
have been saving for has come and they need the money. The bank
closes; their money was in the bank, and the only thing they have
left was this rock, this building and loan association. So they had
to go there to ask for some money to pay their taxes, and buy food.
That is not an unusual instance. There are numbers of those.
I have in mind one association that has borrowed from the Reconstruction Corporation $400,000 in North Carolina. I do not think
that the Reconstruction Corporation has a better-secured loan in
their entire portfolio. That has saved that organization. But here
is what the organization is up against now: They have got to pay
that money back within three years. We speak of six months.
That is true that they make loans for six months, but undoubtedly
they may be renewed from time to time. But the reconstruction
act fixes three years, of course, with the privilege to extend it to
five years. Now, that association which borrowed that $400,000 must
repay it monthly as they make collections from their members on
the collateral pledged, and that is a very proper provision, of course.
The Reconstruction Corporation must have security for their advances. In order to do that in three years, to pay back $400,000
plus the interest on it at 5½ per cent, it will require, I would say,
from $12,000 to $14,000 a month. The total income of that association is between $20,000 and $25,000 a mc;mth, and you take $12,000
to $14,000 out and it leaves very little to take care of the withdrawals
and maturities every six months and other necessary expenses and
disbursements of the association.
You can readily see their business will begin to stagnate. If
that same organization, however, had been able to go to the Federal
home loan bank and borrow $400,000, put up as collateral with that
bank $800,000 of unpaid balances on home mortgages, which it says
were valued at $1,200,000, your home loan bank would have as security for that $400,000 a potential value of $1,200,000, and an additional lien on all other assets of the concern, of course, as a creditor,
and it would enable that association to go along, and its payments
would be extended over a period of 8 or 10 years rather than 3 years,
and that organization could continue to function because a small part
of their income would necessarily be used to retire this indebtedness
with the home loan bank.
That brings us to the question of security on the bonds of the home
loan bank.
We have in North Carolina-I speak more of North Carolina
because I am familiar with it. I have been over the Southeast pretty
well, but North Carolina is home-this situation: I have worked out
an instance in round :figures-and you gentlemen are interested in
facts and :figures and not in sentiment. In North Carolina we have a

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

114

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

limit o:f 30 per cent that an association may borrow-30 per cent of
its outstanding installment. stock. They can not borrow any more
than that, and then only for the purpose of making loans in the regular course o:f business to members, or paying matured stock. They
can not borrow to meet withdrawals. They can only borrow to make
loans and borrow to mature stocks; and they have used their receipts~
of course, to meet withdrawals.
We will assume that association has $100,000 worth of loans in its
portfolio, mortgage loans, and outstanding stock $100,000. That
propertly value would be $135,000, based on 75 per cent. They could
borrow under our law $30,000--or 30 per cent of the outstanding
stock. They would have .to pledge with this bank $60,000 collateral
on those loans. That would repay a property value of $80,000, which
is three-fourths, of course.
The bonds would be issued to the extent of $30,000 to protect that
loan. Those bonds would be secured not only by that $60,000 collateral, with a value of $80,000, by all the assets of that association,
because the only creditors the association has is its holders o:f its bills
payable. They would actually, in addition to their $80,000 value
in property on the $30,000 bond issue, $100,000 assets of that association, along with the potential value of $135,000 in the property.
All of that fixes to some extent, I think, the value of the bonds.
Mr. Williams seemed surprised when the suggestion was made
about one-half of 1 per cent covering expenses. I think I
worked that out, Mr. Williams, to some extent. In North Caroli,na bills payable averaged for 10 years about 4 per cent of the
total resources. Assuming that that would apply to the United
States in general, it would mean $320,000,000 of building loans the
country would use. Assuming that other organizations-savings
banks, trust companies and insurance companies-would use an
equal amount, it would be about $600,000,000. Divide that into
12 banks would give $50,000,000 per bank, and $5,000,000 minimum
capital per bank. On the $50,000,000 capital one-half of 1 per cent
profit would be $250,000. Then notice your capital of $5,000,000
minimum at 3 per cent Government bond return will give you
$150,000 income from that ssource, making $400,000 total income.
Then pay your dividends of 6 per cent to your stockholders. The
member banks, building and loan associations on their investment of
$5,000iOO capital would give $300,000 for dividends, which would
leave :i,100,000 for expenses of operations of each of those banks. I
think that is very liberal. l had no idea it would cost anything like
that to operate. Those are maximum figures, Mr. Williams, I think.
Mr. WILLIAMS. Do you mean that to be the operating expenses?
Mr. LA RoQUE. Yes.
Mr. WILLIAMS. Spread between the cost of the bonds and the cost
of operating expenses?
Mr. LA RoQuE. I mean the spread between the interest payments
on the bonds and the interest received from loans made by the banks.
In ·other words, you are paying 5 per cent on your bonds and you
are loaning to the associations at 5½ per cent.
Mr. WILLIAMS. In that connection, I would like to get these facts
if I can : How much do you fjgure on being used alone for the operations of this bank, $50,000,000 to each one of them?

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

115

Mr. LA ROQUE. A minimum of $50,000,000 to each bank; yes, sir.
Mr. WILLIAMS. That would mean how much?
Mr. LA ROQUE. $600,000,000.
Mr. WILLIAMS. $600,000,000 throughout the United States?
Mr. LA RoQUE. As a minimum figure.
Mr. WILLIAMS. That would be, of course, to all the member institutions scattered out?
Mr. LA RoQUE. Yes, sir.
Mr. WILLIAMS. Could you give us your own judgment as to how
many of those institutions would be in this set-up?
Mr. LA RoQUE. There is no way I could tell that.
Mr. WILLIAMS. Let us have your opinion about that.
Mr. LA RoQUE. Frankly, I suggest this : There are 230 building
and loan associations in North Carolina, and I think I can safely
say-I am in very close touch with them, though my own is a supervisory capacity-I could safely suggest that 150 of those associations
would want to be in this bank system and would be delighted to
become stockholders.
In addition to that, there are several banks and trust companies
in North Carolina who will also be delighted to become stockholders-how many, of course, I do not know.
Mr. WILLIAMS. Would you think as many as half of the institutions of that kind throughout the country would come into this
organization 1
Mr. LA RoQUE. I would think so. But that statement, of course,
is simply an opinion, Mr. Williams.
Mr. WILLIAMS. I understand that. But from your experience you
would probably have a better idea about it than we would.
Mr. LA RoQUE. I would be delighted to recommend it to every
single one of them.
Mr. WILLIAMS. How many building and loan associations are
there in the United States i
Mr. LA ROQUE. I do not know. I think I have heard it said there
were between 11,000 and 12,000. I am not certain as to that.
Mr. WILLIAMS. Do you know the number of other eligible
members?
Mr. LA RoQUE. No, sir; I am sorry I could not tell you. The
bank reports would give that information-savings banks and trust
companies.
Mr. WILLIAMS. Do you know whether or not that is contained
in any of these reports or hearings anywhere 1
Mr. LA RoQUE. I do not know that it is.
Mr. WILLIAMS. Can you get that information for us?
Mr. LA RoQUE. I presume I could in the office of the Comptroller
of the Currency. I assume they would have that information.
Mr. WILLIAMS. I, for one, would like to have some facts, and so
far as I can find we have not yet had any.
·
Mr. LA RoQuE. I think Mr. Pole could give you that information.
I would be very glad to ask him for it in your behalf.
Mr. WILLIAMS. What are the extent of the home loans throughout
the country 1 I believe we asked that yesterday. Do you know that Y
Mr. LA RoQUE. No, I really do not. I can only give you the,,;
amount in North Carolina and give you the percentage, and it might
apply to other parts of the country.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

116

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

. Mr. WILLIAMS. Then I will ask you to state the entire amount of
home loans in North Carolina.
Mr. LA RoQUE. In building and loan associations, $76,000,000 out
or $85,000,000 total resources. Applying that to the building and
loan, seventy-six-eighty-fifths is about 90 per cent of our resources
which are invested in home mortgages, and if there were $8,000,000,000 in building and loan in the country, 90 per cent would be
about $7,500,000,000. When we get into those big figures I do not
know exactly what I am talking about anyway.
Mr. WILLIAMS. Do I understand you would say that the loans of
the country would amount to $8,000,000,0001
Mr. LA RoQUE. The building and loan resources of the United
States are about $8,000,000,000.
Mr. WILLIAMS. The question is the extent of home loans.
Mr. LA RoQUE. Yes, sir.
Mr. WILLIAMS. Not only in the building and loan associations,
but the amount of home loans in the entire country, was the first
question.
Mr. LA RoQUE. I could not tell you.
Mr. WILLIAMS. Have you that information as to North Carolina 1
Mr. LA RoQUE. I have that only as to building and loan associations in North Carolina.
Mr. WILLIAMS. Do you know what percentage of the home loans
of North Carolina is carried by your building and loan associations i
Mr. LA ROGUE. I have not got that percentage, Mr. Williams, but I
will say that the great majority of the small home loans in North
Carolina are in the building and loan associations and savings banks;
the insurance companies have the larger ones, :fortunately for us in
these times.
Mr. WILLIAMS. You can not give us the percentagei
Mr. LA RoGUE. No, I could not. I am sorry.
Mr. WILLIAMS. And, of course, you Cian not do that as to the
countryi
Mr. LA RoQUE. No, sir; I am sorry I am not informed on that
particular point.
Mr. REILLY. Why would not all of your building and loan associations go into this system i
Mr. LA RoGuE. I think they would, with the exception of a very
few, very small ones. We have some few in our State of $8,000,
$7,000, or $12,000 resources. Of course, they are too small; they
have just begun to operate, and it would not be of any particular
interest to them to come in yet, until they grow some.
Mr. HANCOCK. Mr. La Roque, may I ask you this~ Is your advocacy of this based upon its need at this time as an emergency measure
or as a permanent plan, finally i
Mr. LA RoQUE. Upon both. It is especially urgent now and, for
instance, Mr. Hancock, our building andloan associations for a number of years have been from 6, 8, 10, and 15 months behind in making
loans. A man has to apply for a loan, and it takes him sometimes a
year and a half before we can reach it and get the money to make
that loan with-Mr. HANCOCK. Let me ask you a question at this point: Before
this financial crisis came on did our building and loan associations

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

117

have any trouble in borrowing up to 30 per cent, the limit they are
able to borrow under the law, as a general rule1
Mr. LA ROQUE. .As a general rule, no. But it was for a short time,
of course.
Mr. HANCOCK. Just a minute or two ago you referred to the question of refinancing, that is, permitting a man to retire his stock and
to make another application and apply for whatever balance he owed
in the form o:f a new loan. That is not ordinarily a proper function
of building and loan operations, is it j
Mr. LA RoQUE. No.
Mr. HANCOCK. That is extraordinary.
Mr. LA RoQUE. That is an extraordinary situation to meet an extraordinary condition.
Mr. HANCOCK. .And, of course, it is the fact that as the average
borrower's income has been gradually reduced it is necessary that
some arrangement be made to enable him to reduce the monthly payments upon his obligations i
Mr. LA RoQUE. Exactly so.
Mr. HANCOCK . .And if a measure of this kind went through and
funds were available, it would have the practical effect of making
him a 9-year loan instead of 6-year loan 1
Mr. LA ROQUE. Exactly so. There are some exceptions where- it
would be 12 years instead of 6 on -account of extending the loan.
Mr. WILLIAMS. Can you give us the extent to which they are in
default now i
Mr. LA ROQUE. I can give you one instance, Mr. Williams, of one
of the larger associations in the western part of the State. We
found last June that 60 per cent of their total loans were past due
from 60 days to 9 months.
Mr. WILLIAMS. Involving how much capital, would you sayi
Mr. LA RoQUE. $1,500,000 out of $12,000,000.
Mr. WILLIAMS. In one institution i
Mr. LA RoQUE. In one institution.
Mr. WILLIAMS. Can you give us the figure over the State, if not
all over the Nation 1
Mr. LA ROQUE. I could not give it all over the State, I have not
~ot that information. I did not get it alto~ether on that. We have
m our annual report the amount of accrued. interest and the amount
credited to the borrowers, but I did not consolidate it for our annual
statement.
Frankly, Mr. Williams, if I might generalize on that: In practically every single examiner's report we get now the long list of exceptions is delinquent loans. We list every loan delinquent 60 days
or more and then with a star 6 months or more, and we do not apportion in our profits the interest due over six months, and it is an
enormous amount, comparatively speaking.
Mr. WILLIAMS. Have they generally matured stock in your State
for which funds are not available to pay off 9
Mr. LA RoQ:UE. Yes; in the past they have been able to borrow
that money from the banks to mature that stock, if necessary.
Mr. WILLIAMS. To what extent does that exist now¥
Mr. LA RoQUE. Our bills payable are $2,500,000 at this time
against $3,400,000 a year ago, and we need money more now than
then.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

118

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. WILLIAMS. You mean the building and loan associations
would require that amount 0£ money to put the balance-Mr. LA ROQUE. To pay debts; this $2,500,000. That, 0£ course,
is not an enormous figure in an association 0£ $85,000,000-$2,500,000 is not big.
Mr. WILLIAMS. I understand that. I was wondering where we
were going to get with this $600,000,000 throughout the United
States.
Mr. LA RoQUE. As a matter 0£ £act, we have only got 3% now
0£ bills payable. So with that we would not use the whole $600,000,000, but under the bill we could run a billion, eight hundred
thousand, that is, twelve times the $150,000,000 capital.
Mr. WILLIAMS. But I understand you need how much in North
Carolina?
Mr. LA ROQUE. $2,500,000 will meet our bills payable.
Mr. WILLIAl\1. That is building and loan associat10ns?
Mr. LA ROQUE. Yes, sir.
Mr. WILLIAMS. To say nothing about the other home loans?
Mr. LA RoQuE. Yes, sir.
Mr. HANCOCK. How far behind are the building and loan associations at this time in respect to new applications £or loans?
Mr. LA RoQuE. Oh, they are two years behind, generally speaking.
There are one or two instances, Charlotte, £or example, that has no
demand £or loans practically. But that is the only place I know of
where they are up.
Mr. HANCOCK. How much do those applications involve, would
you estimate?
Mr. LA RoQuE. I would Iiot know how to estimate that, Mr. Hancock. I think it would be a big amount.
I will tell you one reason, Mr. Williams, on that-one advantage
0£ having money now. Something has been said about overbuilding
and surplus property. Now is the time that a man wants some
money to buy some surplus property at a discount, and i£ the building and loan associations had the money many a poor devil could
be buying himself a home £or $1,000 or $1,500 that would easily
cost $2,500 or $3,000 or $3,500, and if he could get the money he
could buy surplus property and begin immediately to build up the
values of that real estate in the community.
Mr. WILLIAMS. Then it is more for the purpose 0£ taking vacant
houses in than for the purpose of building new ones?
Mr. LA RoQuE. I think, as a matter of fact, it is very proper
to take vacant houses in before building new property.
Mr. WILLIAMS. What is your opinion as to the necessity now .for
starting a building program in this country?
Mr. LA RoQuE. In some cases it is very necessary, that is, in some
localities; that depends entirely on the community. I might cite
in North Carolina that up to 1930 the building and loan associations
in North Carolina financed an average of 6,000 homes per annum.
In 1930 they financed 4,500, and in 1931 they financed 3,000-the
figures show 3,444 homes financed in 1931, but, as a matter of fact,
over 500 of those were refinances of my own knowledge so that I
speak of 3,000.
Mr. WILLIAMS. Have you any figures showing the vacant dwelling
houses in your State?

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

11 g

Mr. LA ROQUE. No; I have not. The vacant dwellings, except in
some localities, is a negligible quantity. Asheville, for instance, has
a good many vacancies. The building and loan association owns
a good deal of property in Asheville. Fortunately for the building
and loan associations in Asheville, during the boom period the big
insurance companies came in there and took all the large loans,
$40,000, $50,000, or $60,000, and the building and loan association
loans were confined to $2,000, $3,000, $4,000, or $5,000 homes. Now
they have those $2,000, $3,000, $4,000, and $5,000 homes and are seUing them every day, while the insurance companies are trying to
keep somebody in their $50,000 homes to take care of them. We
were very fortunate.
Mr. WILLIAMS. I was just wondering about the purpose of this
bill. I have been deluged by communications from material men.
They seem to think if this bill establishes a home loan bank they will
get a pretty big part of it.
Mr. LA RoQuE. Now, I should think, in the first place, they are
probably under the wrong impression, to a certain extent. It is
also true in some instances they ·are probably not, because in some
places there is demand for new buildings-I'do not know just where,
but this coun~ry is a big place, _and, of course, tl!-ere are som~ places
where there 1s demand for• new construction, but not particularly
in North Carolina, though in some parts of North Carolina we do
need new construction, while in other parts we do not. But we need
this money to help them take up the vacant property that is appreciating the value of that property, because the minute the house is
being occupied the value goes up, and when you overbuild you depreciate the value of the security that you already hold. That was one
reason I do not think the building and loan associations will attempt
to overbuild.
Mr. WILLIAMS. Primarily it will assist the man who already has
a loan and his obligations to the building and loan.
Mr. LA RoQUE. Yes, sir; that is, during the emergency. When
this emergency is over-and I hope it will be some day-Mr. WILLIAMS. We all hope so.
.
Mr. LA RoQuE. We are bound to reach that corner sometime, but
when we do it is going to be necessary to have a building program,
:for t~e ver~ reas_on that wh~:n ~ ma~ loses his j_?b he immediately goes
and lives w'1th his mother or father or mother-m-law or father-m-law
and two or three families mix up in one little house, and as soon as
they begin to get work and move out they are going to move back as
they wanted to live in the beginning.
Mr. WILLIAMS. Necessarily they will have to get a job and have
some kind 0£ an income before they start to build a home?
Mr. LA RoQuE. Yes, sir; that is true. May I get back to one
question 0£ the strength 0£ those bonds? The difference between
this and the farm loan act and the others, and particularly the
joint stock-I ai:n not going to discuss that, because I am not
altogether familiar with all its workings, and I know i£ the system
is sound, assuming it is sound, a great many places it £ell down on
the job. In this case we have a greater security for bonds than
the Federal land bank. The Federal land bank makes those loans
for 33 years; our loans are made for 6, 8, 102 or 15 years and the pay:..
ments are made weekly or monthly, that 1s, se1£:liquidating. Any

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

120 CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS
depreciation on the property is more than offset by the weekly or
monthly payments. The land bank payments are usually made
every six months, and the loans, in this instance, are made to sound
and solvent financial institutions, with additional assets greatly in
excess o:f the amount borrowed, whereas the national :farm loan
associations have only 5 per cent o:f the stock as additional margin,
in addition to the value of the property.
May I suggest-I am not going to get into the legal field, Mr.
Williams, particularly with you gentlemen who are lawyers, but
you brought up the point of the right to pledge mortgages in your
State. I heard the gentleman say there were States. I harmenP<l to
have a conversation with a gentleman from your State, a Mr. Hall,
on that subject, and he told me that his attorney general had
rendered an opinion that while papers in your State of buil<ling
and loans were nonnegotiable that they did have a right to pledge
as collateral those papers. That is, of course, the legal opinion,
and the difference between those two gentlemen that I will not bring
out at this hearing.
Mr. WILLIAMS. Did he tell you what he thought of that opinion?
Mr. LA ROQUE. He did not think much of it.
Mr. w·n,LIAMS. Neither do I.
Mr. LA RoQuE. I want to suggest this ;. In North Carolina we have
no specific right to pledge, but there is no prohibition against pledging. and the right to borrow carries with it the right to borrow on
such terms and conditions as the board o:f directors mav deem
proper, and they have the rights of corporations generally-the
general corporation law applies when not in conflict with the building and loan, and they have the right to pledge under that.
In your case, however, your banks and trust companies and insurance companies do have the right to pledge, I will assume.
Mr. WILLIAMS. I am not sure.
Mr. LA RoQUE. I just assume that, of course, because they are
members of the Federal reserve system.
Mr. WILLIAMS. You mean to put up their securities to borrow
money?
Mr. LA RoQUE. Yes.
Mr. WILLIAMS. There is no question about that.
Mr. LA ROQUE. This act applies to savings banks, trust companies,
and insurance companies as well as buildings and loans, and my
judgment is that our mutual friend, Mr. Hall, before long will be
perfectly willing to arrange some provision in his law by which
they would be collateral for this particular bank.
Mr. WILLIAMS You understand the positions of the States where
they passed that law and the principle back of that idea, of course?
Mr. LA RoQUE. Yes, sir.
Mr. WILLIAMS. They seem to think their principle is sound?
Mr. LAROQUE. Yes, sir.
Mr. WILLIAMS. But that is a matter about which difference of
opinion might exist.
Mr: LA RoQUE. That is a legislative matter, of course; that is
entirely up to the general assembly to change or not change.
Mr. WILLIAMS. But do you think it is in a way holding a club over
the legislatures in the various States~
Mr. LA RoQUE. Oh, no; I would not suggust that, of course.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

121

Mr. WILLIAMS. That is a rather strong term, of course, but it is
rather trying and is to a large extent dictating the policy of the
State on that question.
Mr. LA RoQUE. That same situation was used and that same club
was used and dictation was used in the establishment of the Federal
reserve act, by which the States had to pass legi~lation enabling
State banks to become members. It was a club, but not in the
obnoxious sense of the use o:f the term "club."
Mr. WILLIAMS. It is, after all, the central government controlling
the policy of the State government.
Mr. LA ROQUE. That is good democratic doctrine, sir. I am with
you and the associations do not need to come in. Membership is
purely optional.
Mr. WILLIAMS. That is good doctrine.
Mr; LA RoQuE. Good doctrine of State rights. But we have about
forgotten about what State rights means anyway.
There are a good many things they could discuss, but you gentlemen are interested in and know those things.
Mr. REILLY. You heard the discussion this morning on the proposed am.endment to this law. Have you anything to say on these
amendments 1
Mr. LA RoQUE. I can not agree there should be anything done to
let down the bars to any and every institution that wants to come
into it. -My judgment 1s, Mr. Chairman on that, that this bill is
intended to help and to serve the little men, the small home owner.
He is the backbone of our Nation. When our country went to war
with Germany we found over there those old Frenchmen fighting,
and we did not find Frenchmen living in apartments and tenements.
They were fighting for ·their homes; they were no fighting for
tenements and apartment houses or boarding houses. We want to
establish that same situation in our country, where all of our people
have homes for their own, and they will ·fight for them against other
Nations. Of course, we will fight for them anyway, for that matter.
We will fight for somebody else's home now.
But we want to fix this so that the little_ man will be protected, in
my judgment if you· let down the bars to any and every institution
that Wllnts to come into this thing, you are going to fix it so that
the big institutions are. going to jump in and gobble everything up
and the little fellow will get very little after all.
Y-olir judgment is this with reference to the amendments to those
sections : I suggested to Senator Morrison in the Senate hearing an
amendment to one section there, which provides for the naming of
the institutions which are eligible. That section provides that certain institutions are eligible for membership. It says on page 3,
Mr. Williams, section 4--Mr. WILLIAMS. I think I know what it is.
Mr. LA RoQUE (reading):
Such of the following as are duly organized under the laws of any State or
of the United States, and are subject to inspection and regulation under the
\)anking laws, or under sim,ilar laws, of the State or of the United States,
shall be eligible to become a member of the Federal home loan bank.

I do not think any concern ought to be allowed in which is_ not
subject to.examination and supervision of the State authorities.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

122

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Here are the ones which are eligible:
Building and loan associations, cooperative banks, and homestead associations;
Any of the following whose time deposits and financial condition, in the
judgment of the board, warrant their making such home mortgage loans as,
in the judgment of the board, are long-term loans.

I think that is a good provision. I think, however, if there is
any questiQn raised-the only question raised in that connection,
as I recollect it, in the Senate hearing, was about tlw discrimination
under which the building and loans could come in without being
subject to the judgment of the board. I think it is entirely proper
to add that same provision as to building and loan associations
and add to insurance companies.
Mr. REILLY. You propose an amendment to the bill providing
that all members or organizations joining the system are to be
subject to approval of the board of directors 't
Mr. LA RoQUE. That is, such whose time deposits, as in the judgment of the board warrant their making such home mortgage loans.
I do not think a commercial bank without time deposits ought to
make mortgage loans. The bank failures we have had in.North
Carolina come very largely from the banks without sufficient time
deposits who made too long real estate loans and could not keep
them up.
·
Mr. REILLY. What are the banks going to do with their money't
Mr. WILLIAMS. Where is the home owner going to get the loan 't
Mr. LA ROQUE. Mr. Williams, I said not every commercial bank.
The home mortgage is not a commercial banking proposition. You
gentlemen fully agree on that, I know. The commercial bank without time deposits and all demand deposits, certainly should not be
allowed to make mortgage loans to any extent. The national-bank
act provideS' that national banks can make only mortgage loans to
a certain percentage of their time deposits or capital and surplus,
which is a very wise provision, in order to keep them in such condition that they would have short-time paper that could be convertible
into cash more quickly than a mortgage loan.
Those banks that have such time deposits as enable them to make
these mortgage loans, then they would have this as a r~servoir
from which they could draw in time of need.
Mr. WILLIAMS. What do you mean by" time deposits~"
Mr. LA RoQuE. In savings banks they have a provision for 30
or 60 or 90 days for notice for withdrawal.
Mr. WILLIAMS. They have to be subject to withdrawal on notice't
Mr. LA ROQUE. Subject to withdrawal on notice.
Mr. WILLIAMS. That does not mean that is necessarily a permanent fund extending over a period of ten years 1
Mr. LA RoQUE. No. But as a matter of fact, we know, that
savings banks-Mr. WILLIAMS, And may be drawn out the same as demand
deposits.
Mr. LA RoQuE. That is true, after a time. The National Government recognizes that and permits the banks to make real-estate
loans under certain conditions up to a certain percentage of those
time deposits. I was formerly a national-bank examiner and am
somewhat familiar with that end of it.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

123

Mr. WILLIAMS. I had more in mind the State banks.
Mr. LA RoQUE. Of course, what is good for the national banks
would be good for the State banks.
Mr. WILLIAMS. I mean by that, the ordinary, every-day commercial bank in the State that transacts the business, and especially
the country banks in the small towns must have and does have
home loans and farm loans.
Mr. LA RoQUE. Yes, sir; time and again; and they also have, Mr.
Williams, those savings deposits. The small town bank builds up
a nice little savings account.
Mr. WILLIAMS. But they are comparatively small, in most cases,
at that.
Mr. LA ROQUE. The percentage is fully as good as in the larger
cities-the percentage of time deposits to demand deposits.
Mr. WILLIAMS. I am not entirely satisfied that that part of it
makes a great deal of difference.
Mr. LA RoQUE. I do not think so. My suggestion in that connection is instead of taking out that provision which gives to the board
the right to decide whether they should come in or not, whether
their condition is such that they should be allowed to come in,
instead of taking that out, just let it app_ly to everybody, building
and loan as well.
The amendment I suggested is as follows :
In sec_tion 4, page 4, strike out lines 4 through 11 and insert in lieu thereof:
"(1) Building and loan associations, savings and loan associations, cooperative banks and homestead associations, which in the judgment of the
board make long-term home mortgage loans and whose financial condition is
satisfactory to such board.
"(2) Any of the following whose time deposits and financial condition, in
the judgment of the board, warrant their making such home mortgage loans
as, in the judgment of the board, are long-term loans--savings banks, trust
companies and other banks;
"(3) Insurance companies, which in the judgment of the board, make longterm home mortgage loans and whose financial condition is satisfactory to
such board."

Mr. HANCOCK. Mr. La Roque, what do you think of the suggestion
that has been made to amend the act so as to enable mortgage
brokers to become members 1
Mr. LA ROQUE. I do not think much_ of that. Now, I do not want
to be understood there as casting any reflection on mortgage brokers.
I do not mean it in that sense. A mortgage broker is in business,
and a legitimate business for personal gain, and a very open business, of course. Then his business as a rule is that of making loans
and very often building homes himself. They buy vacant lots and
build houses on them and sell those houses at a good profit. If they
do not, they are foolish, of course, and then, in addition to that, they
make those loans and they sell those lands to insurance-companies and
other concerns. If they cannot sell them for the full amount, they
sell them for what they can get, and take a second mortgage for
the balance. The second mortgage, Mr. Williams, has been one of
the worst things that ever happened to this country, wherever it
has been used, because we all know that the second mortgage borrower has to pay an enormous rate of interest through commissions
and discounts.


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

124

CREATION OF A SYSTEM OF FEDERAL

HOME

LOAN BANKS

Mortgage brokers, as a rule-I am speaking generally-their capital invested 0£ their own is very small in comparison with the
amount 0£ business that they do. And, for that reason, I do not
think that they should be classed with the banks, savings banks,
trust companies, and building and loan associtions. I£ they want to
dispose 0£ their mortgages, and they are good mortgages, they can
sell them to the banks and to the other concerns that have a right to
membership under this bill, who are in the legitimate business of
financing home owners on a reasonable basis.
Mr. WILLIAMS. Is not the main trouble we are in now the fact that
these commitments were made on a very much inflated market 1
Mr. LA RoQUE. What commitments?
Mr. WILLIAMS. These obligations to pay were made at a time
when earnings were mttch higher than they are now, and it has
found us where we are.
Mr. LA RoQuE. There is no doubt about that.
Mr. WILLIAMS. Whether it was inflated then or is deflated now,
that is the trouble.
Mr. LA RoQUE. Senator Vandenberg used a new word in the Senate the other day. He said " reflation." Status quo, so to speak.
Status quo has another meaning as well.
Mr. WILLIAMS. In our country it does.
Mr. LA ROQUE. In mine, too.
The CHAIRMAN. Have you anything £urther to offer1
Mr. WILLIAMS. I want to ask just one question in seriousness
here. This bill provides for a member institution, in order for a
·
member institution to come in, a flat fee of $2,500.
Mr. LA RoQuE. That is not a fee. It is a subscription to stock.
Mr. WILLIAMS. Well, all right, that is what they have to pay to
get in.
Mr. LA RoQUE. Yes, sir.
Mr. WILLIAMS. What do you think about graduating that 1
Mr. LA RoQUE. I do not think that would be necessary for this
reason, Mr. 1Villiams: In the first place, a bank can only borrow, I
mean a building and loan or a savmgs bank can only borrow from
the regional bank at twelve times the amount of their subscriptio~,
and the more stock he subscribes, the more he is going to be able to
borrow from that bank, and it is to his advantage to have his subscription to stock as high as he can get it, so that he can get additional funds. Do you not think so 1
Mr. WILLIAMS. On the other hand, is not $2,500 a rather large
fee, initiation fee, to get into this institution, rather large for a little
fellow, and it is intended to help him primarily, as you say. Do
you not think that is just a little high on him?
Mr. LA ROQUE. I do not think so. In the first place, let us get
away from that initiation-fee idea. It is an investment in stock.
Mr. WILLIAMS. It does not make any difference what you call it.
He has to pay that much to get in.
Mr. LA RoQUE. Yes, sir.
Mr. WILLIAMS. That is it.
Mr. LA ROQUE. But he should get interest on it just the same as
making a mortgage :for a $2,500 loan at 6 per cent, and it is assumed
that this will pay him 6 per cent interest on his investment, just the
same as interest on a mortgage for an equal amount.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

:CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

125

Mr. WILLIAMS. But it withdraws that much money from his
institution.
Mr. LA RoQUE. It withdraws it from direct loans to individuals,
and puts it in an organization so that he can loan $30,000 to those
'
people.
Mr. WILLIAMS. But it takes that much to start on.
Mr. LA ROQUE. Yes; but that $2,500 investment, rather than intiation, in addition fo getting 6 per cent interest on that, he will borrow $30,000 with that as a basis, and I think, as a matter of fact, he
had better make it $2,500 so as to help increase his borrowing capacity. The average association which does not need as much as $30,000
would not need this bank anyway.
Mr. WILLIAMS. What is your idea as to the necessity of appropriating the entire $150,000,000 ~
Mr. LA RoQuE. I think the greater the amount of capital, the
greater good will will be accomplished. Now, I frankly do not believe the Government will ever have to put up half of that. I have
in mind the calculations that are made to-day on North Carolina.
North Carolina building and loan associations themselves will subscribe for $1,000,000 of that fund. The savings banks and other
concerns in that State will subscribe for almost, I would not say quite
that much; probably a half million. But, applying that generally
throughout the country, building and loan associations throughout
this country would subscribe to $100,000,000 of that amount, not
within the first 30 days but I would say within six months at the
outside. I do not really believe at the present time that the Government will ever have to put up over one-half of it. It is a good thing,
and the associations are going in it, and if it is not a good thing it
ought never to be started anyway.
I am assuming those members of the building and loan associations would have good common sense and my judgment is not any
better than theirs, and that they would be delighted to come into a
thing of this kind to provide the funds for their cities and their commumties, and God knows they need it. I speak reverently when I
use that expression, of course.
The CHAIRMAN. Thank you, Mr. La Roque.
Mr. LA RoQUE. I thank you gentlemen for the opportunity.
STATEMENT OF WILLI.AM C. ERMON, PRESIDENT EQUITABLE
HOMESTEAD ASSOCIATION, NEW ORLEANS, LA.

Mr. ERMON. My name is William C. Ermon, of New Orleans, La.
I am president of the Equitable Homestead Association of New
Orleans, having served as president for 23 consecutive years. I am
also president of the New Orleans Homestead Clearing House Association, an organization of homesteads in New Orleans which exchanges credit information and other data for the benefit of all of
the homesteads in New Orleans, and I am here after a meeting of
three hundred homestead men in New Orleans who indorse this bill
in toto.
I also represent at this hearing the Louisiana Homestead and
Building and Loan League of the State of Louisiana.
At page 504 of the proceedings before the Senate Committee is an
exhibit presented by Mr. Clark in which the information is given

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

}26

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

regarding various States, and the replies indicate whether the different States and cities are overbuilt.
In the exh-ibit, shown as New Orleans, is the name of Mr. J. P.
Hogan, and Wilfred G. Gehr. I have been in New Orleans 52 years,
and I never heard of either of those gentlemen. Two of the Congressmen from New Orleans-neither of them know them. One
United States Senator does not know them. The managing editor of
the Times-Picayune, our newspaper, was not acquainted with them.
I am at a loss to know how men unknown in the home building and
financing industry could have gotten information that New Orleans
is overbuilt.
There is one other corporation used in the exhibit, the Canal Bank
& Trust Co. The Canal Bank & Trust Co. has not, to my knowledge;
taken a loan on a home in its whole existence. At least, their vice
president recently told me they never had, and, as far as official
records go, I never have noticed any.
I claim New Orleans is not overbuilt, and I am fairly active in
the affairs of New Orleans. Perhaps, if you make a measurement
building for building, we have too many buildings, but a great many
of them are not modern, and a great many need modernization, and,
Mr. Williams, if you have gotten many letters from the building supply men in New Orleans, you have gotten them because those gentlemen, I have information, are endeavoring to arrange for the modernization of those buildings, and we had encouraged that all we know
how, primarily in an effort to assist the unemployment situation.
I visited recently the office oi the welfare committee and there
it was found that of the men that the weliare is aiding, that a: majority consists of carpenters, tinsmiths, paperhangers, and plasterers,
and men employed in the building trades of our city, and for that reason we made a special appeal to the building supply men to take as
part payment on any orders for building supplies, and in some cases
as full payment on orders for building supplies, all homestead stock,
which represents stock-in most cases it is on the withdrawal list,
and which the holders of the stock who desire to make improvements
to their buildings can not get the money for. I make that explanation in justice to the building supply men. Ii they have asked you to
support this bill, they have done it at our urging, and after our efforts
to get them to start the wheels of commerce going again.
In our town and in our State the question oi a State loan barik:,
which is similar to the legislation you are now considering, has
been the live issue for several years. We have watched closely the
operation of the New York State land bank, and our legislature in
1930 gave us affirmative authority to subscribe for stock in either a
Federal or a State loan bank similar to what we are now urging. A
Federal home loan bank is needed to prevent. a recurrence of our
present situation where the building and loans find themselves in a
position of being called upon to pay interest to the commercial banks
as high as 8 per cent per annum, and this only after a lO per cent
deposit is maintained, making the interest charge 8-fo- per cent.
Much can be said on that ieature, which approaches dangerously
close to a violation of the usury law.
Now in out State, we are operating under the Napoleonic code,
and a notary public is quite an important individual under that code;

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

127

in fact, next to the mayor of the town. They are limited in number
and heavily bonded, and are, in a large measure, what yqu would call
trust officers, I imagine, in a common-law State. They make investments, examine titles, and act as general trust officers, and many of
those men handle millions of dollars. In the past one of our notaries
has. handl~d _considerably more m?rtgages than any building an_d
loan associat10n has. Now, the time has been reached when his
clients, because of the failure of business and because of the failure
of the sugar crop, and I suppose you are familiar with that, these
men, clients of this notary, want their money, and the notary publics
and others similarily situated'are making demand on the people who
have had straight mortgages. Daily, and I mean that literally, daily
I have from 3 to 10 people who approach me in my capacity as
president of the New Orleans Homestead Clearing House Association and ask me to get loans for them, and of the 55 associations
in our town I am unable at this time to find one that can acco.mmodate
these people.
Mr. Williams asked a question as to how the borrower is benefited
by this thing, and I think Mr. LaRoque answered that fairly well,
but let me tell you of a condition that has come under my personal
observation before I left home, when I was at the home of a friend
whose home is worth $15 1000 in normal times, and who at one time
had a $6,000 mortgage, which has been paid down to $4,500. Now
he says, " I see you are advocating to help the unemployment situation by urging us to modernize." He said, "I need $1,500 worth of
repairs to this home." It is a beautiful home, in the so-called garden
district. He said, " I need modernization, but where am I going to
get the $1,500 j Why do you not provide the means of getting that
for me~ If I go to a loan company such as the Morris plan, you
make me pay it back in 10 months to a year. I can not stand that."
A few homesteads will open up, and that is synonymous to a building
and loan. " If you make me a loan of $1,500 and bring back my loan
to $6,000 where it was originally, I can very easily spend $1,500 and
start $1,500 in the channels of trade."
We were unable to accommodate that man. It was simply out of
the question, and there are literally thousands of people like that in
our town.
,
Now, in the district where I was born and raised, the old part of
New Orleans, there are literally thousands of houses that have· no
baths, and no plumbing connections whatever. If we could accommodate those people with a few hundred dollars in each case, we would
·start the wheels of commerce going, and they would be made happy,
and we would begin to start a pay roll going around our town.
I heard some reference here to the Reconstruction Finance Board.
I came up here eE;pecially to ·appear at the Reconstruction Finance
Board and to protest against the personnel of the local advisory committee.
Where do the homestead men come in~ I have not yet been ~ble
to get a blank to apply for a loan. Only after I reached Washington
did I learn of a loan made to a homestead in North Carolina. Up
to. this moment we have not been able to get substaritial considera·
tion at the Reconstruction •Finance Board.
. 11323~2,--;-9


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

128

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

I am going back to-morrow to do some more fighting. Perhaps
we will get somewhere. Up to now we have not gotten anywhere.
Mr. HANCOCK. How long has an application been filed with them 1
Mr. ERMON. We have had no blanks up to this good minute.
Mr. HANCOCK. Have you tried to get application blanks 1
Mr. ERMON. Yes, sir. They are not printed yet. They have not
left Washington yet. They had not left at midnight last night.
That is a banker's party.
Mr. HANCOCK. You say it is what1 I do not quite understand you.
Mr. ERMoN. It is a banker's party. It is all for the bankers.
Excuse my slang, but that is what I mean. It is controlled by the
bankers in our town, and I would like to be particular to say this,
that not every man on the advisory committee is unfriendly to
homesteads, but the head of the thing is not only unfriendly but
unfair to the homesteads. He was not even fair in an explanation
of the meaning of the Reconstruction Finance bill wh~n he made an
address in New Orleans recently. I protested against his being on
the board at all.
Mr. WILLIAMS. Just a question for information concerning that.
Are they getting out a special form for the homesteads or building
and loan associations to make the applications on 1 Is that what you
mean1
Mr. ER~ION. Yes, sir. We were not in it at all. We sent a wire
of protest immediately to President Hoover, then.
Mr. WILLIAMS. They are specifically mentioned in the act.
Mr. ERMON. They are positively, but we might just as well not be
in the act. There is no building and loan man on the boards anywhere in the country. The five men in my county are tarred with
the same brush, and the head of the thing is unfriendly. I am a
responsible citizen of New Orleans, and I am not telling it secretly.
There are four generations of my family there.
Mr. HANCOCK. Was your name suggested for the committee 1
Mr. EnMoN. It may have been.
The CHAIRMAN. What is that organization you are talking about
there, the Electric Bond & Share 1
Mr. ERMON. That is the parent company that controls all the street
railroads in a great many cities in the South. They control our
street railway, electric company, and gas company, and the man
who is the head of our committee is chairman of the city board of
liquidation. He is the chairman of the Electric Bond & Share
public service corporation. He is chairman of the bankers' clearing house and is chairman of Uncle Sam's committee. He has his
foot on our necks in every organization there, and I am jealous.
I want to distinguish between jealously and enviousness. I propose
to have a part in the management of things in my town.
Mr. WILLIAMS. Do you have any fear that if we set up this organization it might get in. control of that kind of men 1
Mr. EnMoN. I guarantee you that it will not.
Mr. HANCOCK. ,ve were assured that this new organization-the
Reconstruction Finance Corporation-would take care of the little
fellows in distress as well as the railroads and big banks, though
we knew they would come in as secondary beneficiaries.
Mr. EnMON. I wish I had been sworn as a witness, so that it would
carry more force, if that would be possible.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

129

Mr. WILLIAMS. I am not doubting what you say, not a bit, because
I have heard it from other sources.
Mr. ERMON. We were not askea. to publish it in the newspapers,
because publicity would not do either of us any ~ood, but that is
not my way of doing business. I slammed it all right in the newspaper, his letter and my reply-excuse me for digressing that far.
To us a mortgage broker is no different than a merchandise broker.
They do very little business down there. They make some few residential mortgages, but they limit them to a certain section of the
city. They limit them as to the character of construction. They
limit them as to their age, and, as one man facetiously remarked very
recently, you can not get any money from the large life insurance
companies unl(lss it is on the shady side of the street .between the
hours of two and four.
I have seen some correspondence since coming here which shows
how utterly impossible it is to get a loan from ,a life insurance
company, and, with your permission, I will file this in the record.
The man involved in here has very recently been elected a State
senator.
The CHAIRMAN. What is there in that that is of value to the
'
committee?
Mr. ERMoN. Just simply that they turned down the loan.
The CHAIRMAN. Your statement goes just as far as that.
Mr. ERMON. A $4,200 loan was applied for on a house worth
$11,000, as I recall it. There was a homestead loan originally of
$9,300, paid down to $4,200, and the life insurance company turned
it down.
The CHAIRMAN. Well, why did they turn it down? Is there any
evidence?
Mr. ERMON. It just says:
We regret very much to advise you on account of the age of the security
offered for the loan, that it is rejected by the ~1etropolitan Life Insurance
Company, to whom we submitted it. We thank you for referring this business
to us.

.The CHAIRMAX. Then the life insurance company limits their
loans as to size, age of buildings, and its location in the city.
Mr. ERMON. That is correct. They will make no loans whatever
below Canal Street in the old quarter, absolutely none, a!}d the place
where they will loan is an entirely new section in the upper part of
the city.
Mr. WILLIAMS. You are representing what you call the homestead
association?
Mr. ERMoN. Yes. There are 55 of them in New Orleans.
Mr. WILLIAMS. Can you speak for the whole State?
Mr. ERMO.N. Yes, sir; I am authorized to speak for the whole State.
Mr. WILLIAMS. How many have you in the State?
.
. Mr. ERMON. I think maybe I can tell you. We probably have n.
hundred and fifty. I would not be certain about that. I can give you
the. figures, I th1tlk _you are driving at, $115,000,000 in the city and
$170,000,000 in the State, are their resources.
Mr. WILLIAMS. What per cent of the whole loans of the State
does that represent i


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

130

CREATION OF A SYSTEM OF FEDERAL HOME· LOAN BANKS

Mr. EiiMoN. That is very difficult to answer. I have never seen
any calculations on that basis, and I understand the Federal Government has issued none since 1920. I will make this statement, Mr.
Williams,· that 90 . per cent, certainly 80 per cent, of the homes in
New Orleans were at one time or another in the homesteads.
Mr. WILLIAMS. What other institutions are engaged in the home
loan business~
Mr. ERMON. So far as New Orleans'is concerned, it amounts to
nothing. It is negligible. The life insurance companies have a
great many commercial loans, however.
Mr. WILLIAMS. I am speaking purely of home loans.
Mr. ERMON. They have next to none. I should say certainly not
as much as 2 per cent. Now, in the State, it is a different situation.
Mr. WILLIAMS. What about your local banks¥
Mr. ERMON. The local banks have next to none, so far as I know.
Mr. WILLIAMS. Then your homestead associations practically control the home loans.
Mr. ERMON. Oh, unquestionably, certainly 98 per cent.
Mr. WILLIAMS. Of your State.
Mr. ERMON. Of the city. Now, of the State, there is insurance
competition in Shreveport, active insurance competition, and I should
say m our State, I guess the homesteads control 90 per cent.
Mr. WILLIAMS. What per cent of your loans are in arrears now¥
Mr. ERMON. I can give you the exact figures. That was given in
my previous testimony.
Mr. WILLIAMS. If it is alre1,1,dy in, do not bother.
Mr. ERMON. It is in the record. We have about 66% per cent
up to date, about 15 per cent or 16 per cent that are three months
behind, but uniformly behind, and 15 per cent to 16 per cent we
have taken over and are carrying in the property account. My
concern is a $2,000,000 concern, and I believe is representative of the
situation in New Orleans.
Mr. WILLIAMS. Do I understand from that that about 35 per cent
of them are in arrears¥
Mr. ERMON. Yes 1 sir.
.
Mr. WILLIAMS. And about 15 per cent of them have been taken
over¥
Mr. ERMON. We have taken them either by foreclosure or otherwise, and they are carried in our property account.
Mr. WILLIAMS. And that represents the loan, in dollars, of how
much¥
Mr. ERMON. In our case it would run around a little over $300,000
and probably behind is a little over $300,000, and the amount of
good loans is $1,300,000. Our homestead did not have a foreclosure
for fourteen and a half years, and never had a bad debt for fourteen
and a half years, until this depression hit us.
Mr. HANCOCK, How long do you permit a loan to be. delinquent¥
Mr. ERMc:iN. Under our contract, the borrower has six months.
Other homesteads have three months. I want _to-come to a particular question of yours of yesterday.
Mr. HANCOCK. Yes.
Mr. ERMON. Under our contract with the borrower, our stock is
considered as cash, and we accept it at one hundred cents on the dol
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

131

lar as cash in the settlement of our loans. I believe for that reason
our company is probably a little bit better.
Mr. HANCOCK. Is that paid-up stocki
Mr. ERMON. Whether it is paid up or not, we can make it paid
up. We can momentarily borrow the money from another source
and mature it and get it back in a short time, get it back the same
day. Ours operates quite differently from yours in North Carolina.
It is dollars and cents which are turned over to us, and which we
apply on the· pledged stock, and ultimately liquidate the loan in
that way.
Is that clear 1
The CHAIRMAN. Do you not have in New Orleans quite a few
partnerships and persons who make, so to speak, mortgage loans i
Mr. ERMoN. The notary publics I spoke of, Mr. Chairman, have
hanq.led, that business in the past. When I was a boy, the notary
publics controlled about 90 per cent of that business, but the
homesteads have gradually taken away that business from the notary
publics, and these notary publics have become associated with the
homesteads. We are a real homestead city.
As I stated in my previous testimony, there are not two dozen
prominent men or institutions in our town not connected with the
homestead movement in one way or another.
· The: CHAIRMAN. In my State we have a great many commission
and real estate men who make loans and have loaned millions of
dollars.
Mr.· ERMON. Not outside of 2 per cent, in our judgment, on
homes. They have been active in commercial property, where we
do not enter. My association has one commercial property. We
are limited, as we interpret the law, to making loans on dwellings.
Other homesteads have interpreted the law to permit them to loan
on business places, and have so done, much to their sorrow. We have
mostly small houses. A 3-family house-I know of only one
in New Orleans. The duplex is a new thing with us. It has not
yet gotten popular. Our climatic conditions are quite different.
Mr. WnLIAMS. How does your definition of dwelling compare
with what is in this act~
Mr. ERMON. I know personally of only one 3-family home
and· there are a relatively small number of duplexes or so-called
2-family homes. It does not mean anything to us. Its relative
volume is nothing. The majority of the homes in the poorer section
are double houses. A thrifty man usually goes in and buys a double
house and lives on one side and rents the other side, and when he
has paid for it ultimately, he gets a single house.
The CHAIRMAN. Is that all you have to offer?
Mr. ERMON. No, sir; I would like to make some other observations, if you please.
The CHAIRMAN. Proceed.
· Mr. ERMON. I am a traffic man by profession, a traffic specialist,
a rate expert, as you probably understand it. I know something
of the .Interstate Commerce Commission and the Shipping Board,
and so forth, and I just want to Gall your attention to. the fact as
to how generous the Government has been with the rail ca.rriers
fo maintaining the Interstate Commerce Commission, mµch to the
help·· of the railroads, maintaining proper rates, and so forth, en
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

132

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

abling the rail carriers to pay interest on their bonds, and dividends
on their stocks, and how the Government has put up money by
advancing millions of dollars for the Shipping Board.
Now, the Government is lighting the airways in order to facilitate
commerce, and all we are asking here is for the Government to loan
11s for a short time $150,000,000, in order that the biggest industry
nf all, representing $100,000,000,000, as I see it, shall start something which is going to be a help to the average poor man. There
are 120,000,000 people in the country, and if there are four to the
family that means 30,000,000 homes, and if you say $3,500 is a fair
average p~ice for a home, you have $10q,ooo,ooo,ooo, against which
we are askmg you to loan us for a short time.
In my State I am satisfied that the Government wm have to put
up little money, because practically eYery homestead will avail
themselves of this home-loan bank.
I would like to make this observation, that I am no more in favor
of Government ownership than anyone here. I am glad to call yotJr
attention to the fact that the inland waterways, the act creating that,
provides that when it has been demonstrated that transportation on
the inland waterways can be feasibly and economically done, that
the Government shall retire from that.
·we are asking for exactly. the same thing here. Incidentally,. it
might be well to remark here how much the Government has spent
to maintain these waterways1 how much they have spent on the St.
Lawrence project, investigatmg, and how much they will spend on
the Florida canal. There never was anything more worthy than that
canal.
,,.,.e are asking that the same practice be followed here, and it will
get the Government out of it as quickly as possible.
Mr. "Williams asked whether we ought not to pay the Government
for the money that is in there, and of course, the off-hand answer is
Yes, but you are going to embarrass us at the outset if you charge us.
In order to make certain that the Government gets out of it, why
not give it to us for a limited number of years?
The CHAIRMAN .. How many 1
Mr. ERl\ION. Well, I do not know. I will develop that in a
moment.
The CHAIRMAN. How long, under this bill, would you like to have
the money without cost 1
Mr. EnMoN. Forty-two months.
The CHAIRMAN. Is it not a fact that under this bill the Government might be in there 20 years 1
Mr. ERJ.\,ION. No, sir; I can not say that at all. You are complaining of the operations of law, not the law itself. Let us get at
~his thing properly. If you put up the $150,000,000, remember that
1s a maxunu1n.
The CHAIRMAN. Yes, it ought to be.
Mr. ERMON. Well, too, it is so provided in the bill. By no trick
of the imagination can I see that much going up.
Mr. WILLIAM. We had a maximum in the Federal land banks
also, but they incre~sed it, $125,000,000, here in this Congress.
Mr. ERMON. I have only one answer for that, and that is that it is
a vast operation. We can not be Warned for that. You might just
as well ·stop all legislation if you say one bill was not properly op
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAli BANKS

133

erated. If my section is representative of the situation, I am certain
that you will never get as much as half of that much money up. If
you have any doubt about it, why not scale it down, and say if you
do not pay it .back within a certain time, whatever time is reasonable,
that you will pay a certain interest.
May I respectfully suggested, however, that after 42 months it
should be graduated. It should begin at 2 per cent, which is what
you . are paying on the baby bonds, and after one year it could be
3 per cent, 4 per cent, 5 per cent, or 6 per cent, until it gets to a point
wh~re it is to the interest of the building and loan associations to pay
back this money.
I am anxious to get the Government out of business and not in
business.
The money that we will get from this home loan bank, when we
get it, will be used to pay bills payable, to the commercial banks. We
are reducing them every day. Nevertheless, they will have some of
those loans on their hands quite a little while. My concern only
owes the bank $6,000. But we owe $150,000 to a large insurance
company of New Orleans, the Pan American Life Insurance Co.
who are really homestead people.
·
I can not think of anything else that would be helpful.
Mr. HANCOCK. Have you yourself made any effort to borrow any
money from the R. F. C. ¥
Mr. ERMON. Yes, sir; I am up here fighting for it now. We have
made an effort in the past to borrow money in Chicago, and I went
to Chicago as a representative of the New Orleans homestead interests,
and canvassed the situation, and while I can not prove what I am
going to say to you, I have a strong suspicion that the banks at Now
Orleans has discounted us before we got there, and we came back
without the money.
Mr. WnLIAMS. Are the banks of your city against this bill?
Mr. EnMON. There is no record on it. I imagine they would like
to keep the homesteads in debt to them.
Mr. WILLIAMS. I am asking for my information.
Mr. ERMON. I should say every institution has indorsed this bill,
the board of trade, the association of commerce, and other kindred
organizations, but the bankers have not indorsed it, but, to be fair to
them, I should say that they have not opposed it. I know the two
Congressmen from New Orleans are whole-heartedly for it, and I
know one of the Senators is for it, anyway.
The CHAIRMAN. Who else wants to appear here?
Mr. LA RoQuE. May I ask the committee to offer that amendment
in writing, to be inserted in my testimony?
The CHAIRMAN. Yes; you may file the amendment.
Who else of the building and loan people wants to appead
Mr. FRIEDLANDER. Mr. Williams yesterday asked me to try to
ascertain some figures as to outstanding mortgages or loans in the
United States.
Mr. WILLIAMS. I made that inquiry, yes.
·
Mr. FRIEDLANDER. The best information I can get, Mr. Williams,
is the census report of 1920, and that is, of course, pretty old. The
census figures of 1930 are not yet available. I can give you their
figures. In 1920, and, by analogy, you might be able to apply themin 1920 the number of homes, not on farms, in the United States, was

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

134

CREATION OF A SY,1,TEM OF FEDERAL HOME LOAN BANKS

17,604,072. The number rented, not occupied by owners, was 10,188,111, and those occupied by owners was 7,041,283, or 40.9 per cent.
The value of the homes occupied by owners was $14,099,000,000
and the mortgage carried against those homes amounted to
$6,000,000,000.
Nbw, at that particular time the building and loan association
volume of mortgage loans against the homes in the United States
amounted to approximately two and one-half billion dollars. At
this time the amount of building and loan mortgages amount to
approximately $8,000,000,000. I have no idea that the general number of homes has increased in the same proportion, or that the mortgages have increased. If they have, there would be about eighteen to
twenty billions of dollars of mortgages against the homes of America
at this time. I believe I used that figure yesterday, somewhere
approximately $20,000,000,000, but that is the nearest figure I cart get.
Mr. WILLIAMS. Thank you for that. The fact is that it has very
materially increased since 1920.
Mr. FRIEDLANDER. I think so. I think the proportions have increased. In :fact, the census figures from 1900 to 1920 showed a
corresponding percentage of mortgages on homes which was outrunning the mcrease in the percentage of actual homes. In other
words, the mortgages were getting bigger.
I believe that there were more homes built and sold on a basis of a
smaller margin of actual equity than there were prior to that time,
so I believe that would bring about that general situation.
Of course, you understand that that $6,000,000,000 oustanding
in 1920 had no reference whatever to any mortgage on any dwellings, but that were not occupied by the owner. In other words,
any rental prov.erty is not included in that figure. That is as close
as I could get it.
The CHAIRMAN. Thank you, Mr. Friedlander.
STATEMENT OF EUGENE W. LEWIS, DETROIT, MICH.

Mr. LEWIS. I do not know as I can contribute anything to the sum
total of human knowledge on the subject.
The CHAIRMAN. Who do you represent, and what is your businessj
Mr. LEWIS. I am in the manufacturing as well as in the banking
business, and the suggestion that I come here has come to me from
several quarters, the National Real Estate Association, as well as
some of our banking people over there in Detroit, and probably
originates in the fact that in 1925 I set up a financing plan for revolving funds for house building. I was one of the eight delegates
appointed from the United States by Secretary Kellogg to appear· at
the International Congress on Public Works and Building Industry
in Paris. At that time we took up this sketch which we find somewhat in accord, quite in accord, with what is proposed today, and
that probably accounts for my presence here.
My contribution to your subject can, perforce, only be along certain gener!tl ~ines, as I am not actively engaged in this business. at
·this time, and, with your permission, I will just touch some of the
,places which I have marked here, while listening thjs morning•
.That constituted my reasoning at. the time: w~ made. this proposition,
·
.and _whicl,l. I believe are pertinent to~day ill this matter.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

i35

The reasons for such an enactment as you gentlemen are discussing
here are, first, to make working capital at a fair rate of inter~st
available to the builder-available at the time he most needs 1t.
That _is something that is most important, as I found in my own
experience.
Second, to furnish a plan whereby it may become possible for the
prospective home owner to have the use of accumulated savings of
his own and of others over a fairly long period of time, and against
which he may credit his future earnings.
; Third, to supply a safeguarded form of investment security that
will be sound, elastic and more liquid than the present form of
securities arisng frorri house building operations.
It is singular that the building of homes, as such, has not, up ·to
this time, been actually regarded as an industry. A sign of the
times, however, is present in the action taken two years ago at the
session of the International Chamber of Commerce in London, in
which by formal resolution, such recognition was demanded.
Commercial banks make loans today to corporations engaged in
fabrication of various materials into fixtures, machinery and commodities, many of them consumable. In other words, it is possible
to obtain loans against the production of things which do not exist
and against that which may be consumed and out of existence before
maturity of the loan and before the obligation of credit is
extinguished.
We even have a form of credit established in the United States
based on the raising of livestock, where, up to 75 or 80 per cent of
the appraised value of the livestock is loaned under certain condi~
tions. Again, we have discount corporations whose paper is accepted for rediscount on a basis of 80 per cent of sale price, the
obligations arising from retail sales of motor cars.
Yet, we know of no building corporations engaged solely in the
business of building and selling homes that are regarded in the
same light as the manufacturer and, as such, eligible for similar
form of credit, even though such corporations are dealing, not in
consumable commodities nor in perishable equipment, but on the
eontrary have as initial security the very foundat10n of our wealth" land." This is singular when it is considered that the building
industry of _any country bulks well at the top with the greatest of
its industries, and yet is not regarded as an industry and has Iio
1' bulk " or volume financing available for the prosecution of its
busi_ness, but must depend entirely upon its individual building
units and upon local conditions and opportunities for supplying
furids for its sustenance.
- The financial pages of the newspapers are filled daily with news
regarding all phases of industrial financing, railroad financing,
public utility and municipal financing, but we read practically noth~
ing relative to financing the construction and ownership of the home.
We must facilitate the flow of capital to the point of this great
need a:rid there make it available, under the varying conditions that
may exist in any portion of the country, irrespective of those con-:
ditions. The financial machinery that exists to-day with respect
to this important industry presents a very backward condition witli
its antiquated methods, frozen credits and unwieldy 1,1nits :of time·

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

136

CREATION· OF A SYSTEM OF FEDER.AL HO.ME LOAN BANKS

and denomination. At least this is the situation in the United
States.
It would seem, therefore, that an industry that balances so finely
such desirable economic and industrial essentials should have a national center of gravity.
In the United States practically all of the small homes are built
from the sum which represents the difference between the amounts
received for wages or salaries and the amounts spent for living;
this amount then represents the thrift of the Nation. These savings
are found in savings banks, trust companies, building and loan associations, postal savings banks, and similar depositories and are,
only to a limited extent, available for individual building-construction loans and mortgages.
General practice and good banking suggests that the bulk of these
deposits be loaned at short maturities in order to keep a stabilized
liquidity rather than tie them up in frozen loans over the longer
periods necessary to accommodate the builder and the owner of the
small home; therefore, when the demands of commerce and industry
are urgent these funds flow quickly and regularly to meet this shorttime demand, to the disadvantage and detriment of the great industry, which, probably more than any other, caters to the upbuilding of our economic assets. Moreover, this situation arises just at
the time of greatest demand for housing, as that need is coincident
with industrial expansion.
Should there be demand for such funds in any particular sections
of the country, beyond the ability of that section to supply, the home
builder's ambition in that section is very greatly curtailed if not
actually made impossible of consummation. There may be ample
funds and credit in other section, but completely unavailable because
of lack of the intimate knowledge necessary to the establishment of such credit and utter lack of proper financial machinery
or organization through which to present proper form of investment
security instrument, as will convey to all of us, in terms of common
understanding, that this :form of investment :for our funds is just
as secure and profitable in one section as another.
In the aggregate our savings deposits represent a huge amount,
which it is believed would be more completely available for home
building when invited into investment in properly secured form
under national enactment and supervision. It is plausible to think
that this may be done in a manner that does not involve Government
outlay or liability, but would only contemplate its activities in a
supervisory manner. Obviously, it is desirable that the National
Government should not be put into the building business or other
private business enterprises having to do with the matter, our
Government should engage. in no practice that would slow up or
destroy private initiative or make private capital indifferent, but
it can, through a proper department, act as a clearing house and
directing or supervising medium :for presenting protected forms of
investment in the shape of bonds to the nation's savers, collectively,
and assist in circulating the proceeds back to the prospective home
builder and owner. Such a plan, clearly, should be so devised as
to aid and supplement existing agencies rather than handicap or
destroy them.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FE.DERAL HOME LOAN BANKS

137

The independent building gl'oups I have not heard touched on
here this morning. Through Michigan we have a great many largt
incorporated building concerns that make a specialty of building and
fin~nciing. Now, they buy lots in a city like Detroit, and build 1>.
considerable number of houses, 15, 20, 30, or 40 at a time.
Now, obviously, such effort is only designed and ·only prosecuteu
when there is a demand for homes.
Therdore, such building of a speculative character for profit i~
only done at the time when the demand exists.
Now, another thing that I did on this subject in 1925, if you are
interested in this thought, I had four general groupings of membership provided :for. They were not thrown together. There was a
group that: contained all building alld loan and 'other mutual
associations, and group No. 2 had all the savings banks, trust companies, and so forth, and group No. 3 had mortgage companies, or
land contract companies, and such groupings that were obviously
not under the banking department, and Group No. 4 contained
regularly organized and capitalized and responsible building enterprises which had to do with both construction and financing. There·
are many such in various parts of the country. I find that that
varies in different sections, in some sections you find none of it and
in others it is quite extensively engaged in. As I said, they have
produced a large number of homes, in fact, the majority of them.
It would seem that some provision, perhaps, might be made for
the membership of that element in organized form.
I am skipping along here in the high places.
The moment we recognize that construction of hm_1.ses with its
correlative problem of financing is an industry and give it a national
center of gravity as such, through an enabling act that will at
once stabilize, equalize, and standardize its values and practicesthat moment there will flow to it and become available the same
executive and administrative ability in corporate and organized form
with consequent financial stability as is found in competitive effort in
other leading industries, such as steel, lumber, etc.
So-called "bulk financing" will be possible as soon as it js
established as an industry and the practical eye of the banker and
the investor are attracted to it because of its stabilized and liquid
features. The house as a single unit for financing, necessarily must
be put on an appraisal value as a basis of loan, that will not, even
under tp.e most adverse financial conditions, offer the slightest chance
of risk.
This provides the plan in detail here.
Some of the general methods of the plan, as I saw them at that
tim~, were brought out here.
A resume of the benefits that might be derived from institution
of the regional banking idea might be said to include the following:
Asknowledgment, financially, of an industry, of an activity that
in a financial way ranks near the top of the leading industries of
any country.
·
A great step in stabilization of government by assisting the majority of our peoples to become satisfied home owners, thus making
more secure our economic foundation.


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

138

CREATION OF A SYSTEM: OF FEDERAL ROME LOAN BANKS

The conversion of frozen long-time credits with their unwieldy
units as to time and denomination, into stabilized and standardized
form of security with consequent liquidity and marketability.
An advanced step in a plan to make funds continuously available
in any locality where housing need exists irrespective of local financial conditions. ·
The aiding, abetting, and assisting of every legitimate agency now
engaged in the business of catering to this need in any form, that
may qualify under the enactment and the augmentmg of their
facilities.
The inducement and encouragement to organize new corporations,
new agencies, and groups to engage in the work.
The inducement tofrivate initiative and private capital to lend
itself to this effort, an we all agree these are two of the outstanding
and necssary requisites to national growth.
The abandonment of the old single building unit basis of appraisal
for mortgage valuation, the collective use of these units with added
values behind them, and the raising of this appraisal value to a point
more consistent with its real worth, as collateral.
The facility and ability to originate and dispose of a stabilized
and commercial form of investment security that is understandable
to all possible investors, many of whom would not under present
conditions think of investing their funds in home building enterprises.
The making available of a safe form of investment which will
make a strong bid for funds of such institutions as Postal Savings
banks, some of the large insurance companies, trust funds, and similar deposits which have not heretofore been available for this
purpose.
It will be understood that in setting up the plan as suggested that
all figures wherever used are merely for purposes of illustration and
that no attempt has been made at definite calculation, as financial,
- local, and other conditions as they exist in our different countries
would make this impossible in a general presentment of a subject
of such magnitude and importance. Rather the desire has been
to roughly sketch and outline the idea in skeleton form for what it
may be worth as a basis for developing further thought on the
subject.
·
The crying need for housing is always met with a series of retarding. influences which begins and ends with a lack of funds and a
lack of liquid equities, due mostly to ,the long maturities involved
and with no satisfactory manner provided :for revolving funds, once
they are invested.
·
Now, your proposal here, I have not read clear through. I read
half way through it this morning while sitting here listening. There
were two or three things brought_ up by some of the gentlemen tp.at
were talking here that it -occurred to me that perhaps you would
want to give considerable thouglit to before you presented them for
-.
public criticism.
One was the problem of making these banks banks of deposit. I
would question very much the desirability of doing that. We hav.:e
already plenty of banks. We have plenty of competition in a bank:
ing way. There are too many banks in some sections right now, and

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

0

01,'tEA~ION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

139

it would hardly seem desirable, as I see it, to inject another chain of
banks into the picture. It might be in order to require deposits of
those who had contracts with your banks, to a certain amount, to
cover their possible extended liabilities to that regional bank, but _it
would not seem desirable to go further in that field.
There was also something said about the fee for joining, as Mr.
Williams puts it, the dues or membership fee, or whatever· you care
to _call it, and I believe that your bill here provides that there shall
be an additional sum of .1 per cent of_ the outstanding balance of
all mortgages that institution holds. It would seem that whatever
percentage you use should be applied only to the face value of mortgages up to your limit of $15,000, not outstanding balances, but the
face of mortgages up to $15,000, if that is youi; sum. Personally I
had a notion that $15,000 was a little high, and that probably $10,000
would be a little better.
·
,.. Another point I heard discussed here this morning was the desirability of raising your bonding ratio up to 20 to 1, and the thought
was expressed that the Federal reserve act is so based. I would
draw your attention to the fact that your Federal reserve act deals
entirely with our most liquid form of credit, 30, 60, and 90 day commercial paper, whereas these proposals here deal with the lowest and
most extended form of credit that we can have to apply in our
banking transactions. A 12 to 1 ratio, -as I would figure it out, is a
conservative ratio. Certainly 20 to 1 would be the maximum, as I
.
see it.
I hav.e a note here," Small banks.'' I do not know what it meant.
I think there was some question someone raised as to the desirability
or eligibility of a small bank to participate.
.
Now, clearly, if these privileges are not to be obtained by small
banks, or are not extended to the:rp.-, you will miss .a great deal of
the prime objectives of the enactm_ent. How they srould be tied
to yol, by membership, and by what groupings and-·how much it
would cost them, of course, I am .not prepared to discuss. That is
the technique of the thing, but this thing has two real objectives fot
its bem.g a legitimate proposal, and a. helpful constructive thing, or
not. One is to extend to the.gr-eatest.num.ber of people, our average
people, the protection and privileg~ and opportunity to ow~ a home.
Now, we must go just as far\ as :s:Lie· banking and good practice
will permit us to do in making that possible!
. ·
.
The other is to make possible a revolving fund for the liquidation
of t}lose funds, for no averag~ ~a11 ca,nl out of the. difference between
~is income arid what it costs him to liv~, possibly hope to ~av~ enough
m a ~ery few short years to buy a home; It necessarily means a
long-time credit operation and, as I have said here, gentlemen, the
time that the building demand is the greatest is at the time that our
industry and commerce is going at full pace .
. Now, as a plunger, you are sitting at your desk and a man comes
in and wants to borrow $100,000 for 90 days, and over at the
other end of the desk are gentlemen who want to borrow $10,000
a.piece for 10 years apiece. Which loan are you gojng to take 1 It
does not take you long. You have liquidity here and turnover, and
you are going to make your big l~an, but any progressive banker
knows that in so far as he helps his town and helps the people to

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

140

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

lay solidly their economic foundations, he is certainly doing something for himself and his institution.
Now, if he knew that he could take these 10 loans, or any given
number of them, and could discount, rediscount, those _instruments,
and had the facilities for doing it, why, it is obvious that he would
be :found making more of such loans than he would at the height of
his building time, which is the exact time that the average man or
woman has the opportunity to build a home or own one. So, I
think, by and large, that you gentlemen here can do but one thing,
furnish a machine through and by which we will for the first time
have a positive and a continuous place where we can discount from
time to time these loans that now are troublesome to look after.
Banks make them because they feel that they should. They would
prefer many times to make o~her kinds of loans, but they must make
so many of these loans. Then, again, if I can refer to the sore place
that a lot of us have been sitting in in the last couple of years with
mortgages out, payments in arrears, and depositors on the other
hand thinking you are running a cash institution and not a credit
institution, and wanting to withdraw their money, you have the
alternative of foreclosing mortgages, which you can not do without
forever shutting your front gate. Now, clearly, with such machinery
as this, if this plan had been going since 1925 or 1926, we would have
avoided a great deal of the grief that we have all had to go through.
There is no reason at all why the United States Government, if
it makes a contribution, should not receive dividends or interest on
its investment, just the same as any other investor, and he sits in a
preferred position and will be retired as you reach a certain stage of
development in your business.
The thought is that it is pretty easy to regulate the other fellow's
money and legislate the other fellow's money and spend the other
fellow's money, but I have always found when you put up a similar
amount yourself alongside the other fellow's tb,at
all have a
pretty keen interest in how it is going to be handle .
Now, as I said in the beginning, I do not believe that I can contribute anything to human knowledge on this subject, and I hope
I have not detracted anything from it.
The CHAIRMAN. That is all you care to state?
Mr. LEWIS. That is all, thank you.
The CHAIRMAN. We will adjourn now until 10 o'clock to-morrow
morning.
(Thereupon, at 4.45 o'clock p. m., the committee adjourned until
10 a. m., of the following day.)


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

lou

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS
FRIDAY, MARCH 18, 1932

HousE OF REPRESENTATIVES.
SuBCOl\IMITTEE OF THE CoMMITTEE ON
BANKING AND CURRENCY.
Washington, D. 0.
The subcommittee met, pursuant to adjournment in the room
of the Committee on the District of Columbia, House Office Building,
at 10 o'clock a. m., Hon. Michael K. Reilly ( chairman of the subcommittee) presiding.
Mr. Reilly. The committee will be in order and we will hear first
this morning the statement of Mr. Bodfish.
STATEMENT OF :MORTON BODFISH, EXECUTIVE MANAGER
UNITED STATES BUILDING AND LOAN LEAGUE, C11ICAGO, ILL.
Mr. REILLY. Give your full name, address, and state whom you
represent.
Mr. BODFISH. My name is Morton Bodfish. My home is in
Chicago. I am executive manager of the United States Building
and Loan League. Mr. Best spoke at some length concerning that
organization. It contains practically all of the leading building and
loan associations in the country and parallels in the building and loan
field the American Bankers Association in the banking field. At the
outset, Mr. Chairman,-Mr. REILLY. Let me ask you this question: Did you appear in the
other hearings before the Senate committee?
Mr. BODFISH. Yes, I appeared in the other hearings and presented
some figures concerning the nature and extent of building and loan
operations only.
I want to address myself this morning particularly to amendments
to the bill, Mr. Chairman. The bill, (H. R. 7620) in the judgment
of the building and loan people, is excellent in form. It is well
drawn and· we would be absolutely satisfied with the measure just
as it was introduced. We feel that it achieves all of the purposes
that were set out in the President's statement. At the time the
orginal bill was introduced, the old 5090, we had a number of. our
building and loan people study that measure, and we submitted to
this committee and to the Banking and Currency Committee in
the Senate a number of amendments that we thought were essential to make the bill useful from a building and loan _point of view.
I am happy to state.that the principles and policies of those amendm:ents have been embodied in the redPP.fted bill, which is now H. R.
7620 and which is before you.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

141

142

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

In suggesting amendments to 5090, Mr. Chairman, we kept before
us continuously the sound and comprehensive statement that had
been made by the President, November 14, as we wanted to only
make suggestions that were in keeping with his proposals and not
to make. suggestions that were selfish to our particular interests
alone..
.
_. :
I might say that the building and loan people have been studying
this matter of reserve credits and banking relations for many years.
As Mr. Luce indicated at the beginning of the hearing, a proposal
was developed back in President Wilson's administration. At that
time a number of our building and loan leaders were called into
conference; a bill was drafted and introduced, which gained rather
wide support in building and loan circles, although it never became
a law.
·
_Since ~here has been an intimation that l~gi~lation of this .~ind
might wISely be enacted, we have had our bmldmg alld loan people
assembled a- number of times. We have discussed just what points
would be essential in a reserve structure that would serve our homefinancing institutions that are advancing one kind of credit. And,
by the way, we are only interested in one kind of credit, ad that is
a monthly repayment, long-term installment mortgage.
There are something over seven and three quarters billion dollars
·of building and loan funds loaned on this type of mortgage and this
type of mortgage alone. I want to impress upon the committee
that we have no foreclosure problems excepting those that grow out
of a borroweT being unable to meet his monthly payments. In other
words, building and loan mortgages are all drawn on a monthlypaytµent basis, and when the borrower has fulfilled his contract the
debt is completely extinguished. Therefore, we have no mortgages
in building and loan associations that run for one year or two or
three years, in which, at the end of that period we say "Mr. Borrower, you must pay this debt off· completely; you must take it to
some' other institution and have them refinance it," as - is being
done by commercial banks and other financial institutions at the
present time.
I think the important problem in the foreclosure situation is the
fact that we have· permitted unsound banking· and financial principles to develop in banks. We have loaned people of modest income
mon~y on their homes on a one and two year basis _in this country,
and tb.eri the economic situation changed and ~he instjtution which
.made 'these loans said, " Well, we must get more ·liquid," . and we
have banks that are priding themselves in bein.g 60 or '70 per cent
liquid,· and when it said to Mr. Home· Borrower,." Regardless of
your·collateral;_regardless of the £act that you have a perfect payment I'«:cord for two years, your, mortgage'is now due and you must
pay ti~ th,e $2,000; $3,000, or $5,000." That sort of th_ing does ·not
happen anywhere und;er any" co:pditioiis' jn the building- aiitl- loan
associations. It is discouragirig-honie owning ambitions fifli tragic
.extent.
'
.· .
.
'.,
;
.. The_ amoryized or installment mortgage has characterized. builq.mg_- an_d loan ad':a!l_ces for. _oye_r 100 years _and muc!i ?f the approval
w~1dh our associat10ns enJoy grows o,:ut_ of ou~ ri~1d a~herence ·_to
this type of advance. I further believe that· this type of home
financing which the President desires to encourage in the long run.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

143

I would like to mention another thing about building and loan associations. Our institutions are local and with few exceptions are
oper?,ted without the usual incentives of profit. The building and
loan association is essentially a cooperative enterprise, Mr. Chair:man. It is probably the greatest example of successful cooperative
financing in the world. The profits are completely distributed to
the participating members; and when I say "participating members " that means all of the members.
Let us first comment on the Senate hearings with regard to amendments. In my judgment there was a remarkable absep.ce of ~riticism
of the details, policies, and principles of this measures during the
Senat~ hearings. By and large, its fundamentals were unquestioned,
except by some groups that, in my judgment, do not have a point of
view of the long-term financing that you gentlemen are interested
in enco~raging.
A number of the witnesses spoke emphatically of the excellence of
the measure and a number of them that were from building and loan
circles are men who have given a great deal of time and study to
legislation affecting home financing.
Now, as we see the objects of the measure, they are two. You
gentlemen have brought them out: The immediate situation and the
permanent need, and I want to emphasize the fourth point in the
President's statement regarding this measure. He said:
For the 1-0ng-view purpose of strengthening such institutions in the promotion
of hon;ie. ownership, particularly through the financial strength that is made
available to building and loan associations.

Now, why do I emphasize that 1 I think the reason the President
made that statement is that he had his eye focused upon the needs
of the home buyer and the home owner, namely, that the building
and- loan association is the one type of home financing institutions
which for a hundred years has been making long-term monthly re~
payment installment mortgages. And, gentlemen, that is the only
kind of credit which the man of small means, of low income, should
use in making a home purchase, and I think it is very clear from the
President's statement that what he wanted to encourage was_ the increase of the supply of funds available for that kind of a loan, feeling that an increase in that kind of credit would increase ·home
ownership on a sound basis.
I am a little sorry that Mr. Williams is not here, because I was
goip.g to adopt onef of his statements as more or less my text in discussing amendments. At one point in the hearings yesterday he
s_aid: '
Weli, look what has happened with our Federal farm loan system. Look
what they just came to us and asked· for:
·
·

Now, we would like to take that statement for our text, and when
I say that 'I mean the building and loan associations. . We want this
structure erected in a sound, conservative ·way, in which it.will function without coming down here 5 years late:r or 10 years)ate:r, or_ the
first-time we have another depression, or before we get out of this on~,
and say to you gentlemen-well, to q11ote Sha~espeare, " S~ve me,
Cas~ius, or I sink."
·
il323~2--10

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

144

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Building and loan is not here asking a hand-out in any sense of
the word. We merely feel that there should be set up a reserve
structure-a banking system, if you please, which will serve the home
financing institutions of the country; and the comments I am going
to make on the amendments proposed are going to be from the point
of view of taking care of the immediate situation, the permanent
need and keeping this structure conservative and sound enough so
that it will not be a " white elephant " on the hands of you gentlemen
who create it and so that it will never come back to plague you later.
Mr. REILLY.. Just a second there.
Mr. BODFISH. Surely.
Mr. REILLY. Do you know how many building and loan associations you have in the country1
Mr. BODFISH. We have 11,767.
Mr. CAMPBELL. How many have you as members of your
organization 1
Mr. BODFISH. We have as members of our league, through
individual associations and affiliated State leagues, something over
6,000, which represent something over 80 per cent of the assets in the
country.
Mr. REILLY. How many of those, in your judgment, would take
advantage of this law~
Mr. BooFISH. It is my judgment that institutions whose assets
total over half and probably three-fourths of the total resources, if,
Mr. Chairman, it is drawn in a conservative fashion so that it will
be· a sound banking system. We do not want to mingle our sound
and safe building and loan associations with unsupervised institutions, that is, institutions that are not -subject to public inspection,
and we do not want to mingle our sound building and loan associations with semisolvent banks or anything of that kind. We want
you to make the standards high, and you can not make them too high
for us, because we can meet them.
Mr. REILLY. How many individual members have you got in your
association i
Mr. BODFISH. In the organization i
Mr. REILLY. Yes.
Mr. BoDFISH. There are some 6,000 associations.
Mr. REILLY. I do not mean that. I mean how many mortgages or
loans have you 1
Mr. BODFISH. I will give you three figures: We have 10,000,000
investing members, members merely saving from week to week and
mo!lth to month. )Ve have 2,000,000 _people w!io. are buying
their homes and paymg for them today m the bmldmg and ·1oan
associations on the monthly repayment mortgage installment plan.
These mortgages total $7,760,000,000.
Mr. REILLY. Then there are 12,000,000 people affected by this bill 1
Mr. BODFISH. Absolutely, as far as building and loan associations
are concerned.
~r. REILLY. And 10,000,000 ai:e affected sometimes by their inab1hty to get.the money out when they need iH
Mr. BoDFISH. That is correct.
•
Mr_. ~EILLY. And the other 2,000,000 as borrowers from your
associations~

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

145

Mr. BODFISH. That is correct. Now, speaking of the question of
the eligibility of institutions, we consider it a matter- of prime importance that no institution be permitted to participate in th,s
:system which is not subject to regular inspection and examination
on the part of public authorities. I do not believe that any savings
thrift mstitutions should have the savings of the common people
•Of this country unless the officers of that institution are subject to
periodic check. We have enough defalcations in our banks and that
sort of thing with examinations, and we feel that is an essential
principle in erecting this structure.
NoVI', General MacChesney yesterday-and, by the way, I do not
bring to your assistance any of the legal skill or excellence of legal
scholarship the General has-spoke to the proposals that had been
made by Mr. Monks, of Cleveland, Ohio, representing the large
Guardian Trust Co: there. Mr. Monks had raised the question
in his testimony that there was discrimination between the institutions. He said that the building and loan associations were permitted to come in without being subjected to the "judgment of the
board " as to whether they were an institution worthy to participate
in the benefits of this system, while, when it come to the banks,
the banks were subject to the qualification of passing the review of a
hoard and being subjected to the judgment o:f the board as to
whether they should participate.
Mr.•REil,EY. Right on that proposition, what difference would it
make to this organization when the bank has the right to pass upon
the character of the securities presented by a home loan bank :for
rediscount?
Mr. BODFISH. As participants?
Mr. REILEY. What difference would it make whether those were
inspected or not?
Mr. BODFISH. Just this, Mr. Chairman: I am a saver in a number
of building and loan associations. The fact is all my modest savings
are in building and loan associations and I do not want the associations in which I have my modest savings to be affiliated with a system
in which there are institutions of, let us say, questionable management. In other words, if you get two rotten apples in the barrel, I
do not know but what the rest o:f them are rotten; and it seems to
me this is the place where you should follow rigorously the parallel
o:f the Federal reserve system. The Federal reserve system permits
membership of no institution that is not subject to examination and
inspection, both by State banking examiners and officials ,and by
national banking examiners and officials.
When. the question of discrimination came up in the Senate ·hearing, we immediately concurred that we have no desire for any privileges with regard to memberships that are not extended to other institutions. Following the suggestion of Mr. La Roque, who proposed
an amendment making all of the institutions who become members
subject to review by the board, the United States Building and Loan
League adopted Mr. La Rogue's amendment to the membership clause
which applies examination and judgm~nt of the board to the admis.sion of every eligible institution, and we heartily endorse it; , I have
·several copies of that amendment here, and as it is a fundamental
of the bill I would be glad to have you gentlemen look at it just for
:a. moment [submitting same to the committee].

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

146

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

I. Some comment has been made regarding the portions of the bill describing
the institutions eligible to become members. It is assumed that sound principles of finance and banking should be observed in this important section (section 4). Real-estate loans to home owners and home buyers should be longterm loans. Further, banking institutions should have a reasonable amount of
time deposits to warrant their making loans which can not be called in times of
distress or periods of contraction to attain liquidity. Their second line of
defense should be the Federal Reserve System. Commercial banks which have
no tim~ deposits should use the Federal Reserve System entirely rather than
the home loan bank system.
Building and loal} associations make nearly all their investments in longtime home mortgage loans. Insurance companies, to be eligible, should similarly be such as make home mortgage loans.
In section 4, page 4, strike out lines 4 through 11 and insert in lieu thereof:
" (1) Building and loan associations, savings and loan associatio"ns, cooperative banks and homestead associations, which in the judgment of the board
inake long-term home mortgage loans and whose financial condition is satisfactory to such board.
"·(2) Any of the following whose time deposits and financial condition, in
the judgment of the board, warrant their making such home mortgage loans as,
in the judgment of the board, are long-terin loans-savings banks, trust companies and other banks ; and
" (3) Insurance companies, which, in the judgment of the board, make longterm home mortgage loans and whose financial condition is satisfactory to such
board."

In the bill as originally drafted, in section 4, the item, " which in
the judgment of the board make long-term mortga*e loans and whose
financial condition is satisfactory to the board ' applied only to
·banks. We think it is desirable that that apply also to the hailding
and loan associations, and especially important that it apply to insurance companies. You will notice insurance companies appeared
in the old bill just as "insurance companies." I think scrutmy by
the board is particularly important in the case of insurance compa'nies, because what is· an insurance company? We have fire, life,
casualty, fraternal, title, and even some matrimonial insurance companies in Chicago.
· We feel that this system should put its stamp of approval only
upon highly creditable and well managed ~nterprises, and we are
very willing to subject ourselves to any examination of the board.
I might say that our proposal, Mr. Chairman, follows the principle
set up in the Federal Reserve Act, which in section 322 says .that the
:Federal Reserve Board may prescribe the rules arid regulations upon
which applications are made and members admitted to the.system.
And the section goes on further to say:
In acting upon such applications, the Federal board shall consider the financial condition of the applying bank, the general character of its management,
and whether or not the powers are consistent with the pu~poses of this chap_ter.

And we feel that that is .a princpile that sho_uld be p1,1,r11lleled in
the home loan bank system, and we strongly urge that the ame~d"
:ment proposed by Mr. La Roque should be adopted in the bill.
· ;we want this board to have some power. We feel it can have·a
influence on the mortgage practicei; around the country; that to
:a certain ex;tent it is going to represent the public.po.-int of _view a~ _to
what is sound ahd proper and reliable in the· whole hoine_-financmg
fiel~ and, as such, we want it t:o be in position to say :

·real

:Mr. A your institution- is· not serving the best interests of your cmtimunity
and its home owners; and we do not care to extend to)7QU the .benefits of tbis


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

}47

system any more than we admit a pawn broker into the Federal reserve system
merely because he is a money lender.

I think it is the traditional point of view of building and loan
associations, Mr. Chairman, that safety is the first consideration, and
we will be very glad to match the record of our institutions when it
~omes to safety with that of any other financial institutions, and we
want that principle of absolute safety extended into this measure.
I think, in connection with the participation of banks in this
measure, it is particularly important that they have scrutiny by the
board, as I know many of our building and loan associations would
hesitate to participate if they felt that any appreciable number -of
the banks that are similar to the 2,200 that went by the way this past
year were going to be_ placed in the same financial system and made
more or less partners m a general enterprise.
Mr. LucE. Mr. Bodfish, before going on to the next suggestion,
will you tell us whether you had any particular reason for repeating
three times that restriction, instead of placing it in line 2 on page 4;
thus covering all of the powers-I can not really see any difference
in the application of the idea-and whether you did that for emphasis, or was there some special reason in your mind~
Mr. BODFISH. Mr. Luce, there was no special reason in mind.
It was originally in No. 2, and I suppose the processes of our minds
were " if we want to make it apply to all, we will just put it in No..
1 and No. 3 also." There was no particular purpose except that the
"time depositor" qualifications apply only to banks.
Mr. LucE. It would be all right, then, to make it read, beginning
at the bottom of page 3, line 24, " subject to inspection and regula_.
tion under the banking laws, or under similar laws, of the State or
of the United States, and which inthe judgment of the board make
long term home mortgage loans, and whose financial condition is satisfactory to such board.
Mr. BODFISH. Yes. We do not :feel that this system should be in
any way, Mr. Luce, a dumping ground for weak banking assets or
semisolvent institutions and that sort of thing. You are creating a
great and important bank structure, and I think your suggestion
would be very much better draftsmanship, and we would, of course;
be quite willing to approve and follow it.
Mr. LucE. You did not mean to make quite clear any difference
in the application of that class by reason of scattering it 1
Mr. BODFISH. Absolutely not. It is practically identical in language all the way through.
~
I should like to invite your attention to one other addition, which
is an incident. You will note in No. 1, which enumerates the different titles under which building and loan associations operate-they
are generally known as building and loan associations, but in Mr;
Luce's and a couple other States of New England they are known
as· cooperative banks, in Louisiana they are known as homestead
associations. We said "building and loan associations, cooperl!,tive
banks and homestead associations," and we failed to mention savings
and loan associations. In the States of New York and Washington:
these institutions are known entirely as savings and: loan associations,
and in this amendment, Mr. Luce, we merely i,ncluded tp.e: term
"savings· and loan associations."
·1 .

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

}48

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. LucE. I have received from some title and guaranty companies expressions to the effect that they wished to be included. How
about ·that? They are in some localities essentially banking institutions or part banking institutions.
Mr. BoDFISH. I think, Mr. Luce, the test is entirely whether they
are in a position to extend long-term mortgage credits to home
owners, which, after all is the permanent objective of this bill.
They. would be included now either as banking or as insurance
corporations.
Mr. WILLIAMS. Mr. Bodfish-Mr. BODFISH. I have one additional thought in that connection,
if I may finish, Mr. Williams-that in some States the title companies:
are subject to absolutely no inspection and examination. They are
classified as insurance companies and as such they make their annual
reports, but they are not subject to inspection and examination in
the way in which savings banks or building and loan associations
and the cooperative banks are examined. I think within those
limitations it would be perfectly proper to include them.
Mr. LucE. ·would it be better to specify it here or could that be
saved by an omnibus clause in here-" and other institutions "?
Mr. BoDFISH. I am afraid of omnibus clauses, Mr. Luce. I think
that the participants in this institution, just as in the Federal reserve
system, should be named " building and loan associations, etc.,'1
" banks, etc.," and " title companies," if necessary. Yon might put
title companies in the category of banks if they are exercising banking functions, and make them subject to the restrictions applying
to banks, in the capacity of making long-term loans.
y OU asked a question, Mr. ,vmiams?
Mr. WILLIAMS. Yes. I was ju~t wondering what your standard
of measurement is in determining whether or not one of these financial institutions is warranted in making long-term home mortgage
loans.
Mr. BODFISH. The banking principle involved there, Mr. Williams, I think, is as follows: It is a question of, Does this financial
institution which is making application for membership have time
deposits? We know in banking that you have what are called
commercial or demand deposits and time and savings deposits.
We know as a matter of banking experience that savings or time
deposits are much less subject to frequent withdrawal. When a man
puts money in a savings account he puts it there because he intends
it is going to stay there for awhile; and, as a matter of banking
management, you can lend that type of funds on longer term collateral than you can the funds that are in the commercial department or subject to check. I think that is the banking principle involved and 1t is recognized in several places in the Federal reserve
act. And, by the way the Comptroller of the Currency in compiling
his statistics differentiates in describing the assets of national banks
between commercial funds and time and savings funds. ),fost country banks, for example, Mr. Williams, the small banks, which are
the banks that should participate in this rather than the large banks
that have access to the Federal reserve system, have a maJority of
time and savings deposits and in fact only pay interest on time
and savings deposits.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

149

Mr. WILLIAMS. I appreciate that, of course. But, after all, in
the period over a long term o:f years the balances do not vary a great
deal, do they, as long as it is a good financial institution? It may
vary during the different seasons of the year, but. covering a long
period •of time it does not make much difference, does it?
Mr. BooFISH. I think it does, Mr. Williams. I think what we are
getting at here is the difference between a savings bank and a commercial bank. We have found out of years of banking experience
that a savings bank can invest a larger· portion of its funds in what
are known as nonliquid securities or in investment securities than
can a commercial bank.
Mr. WILLIAMS. What I mean to suggest is, if you are going to
try to include a bank just because it has got the major part of its
assets in time depositsMr. BODFISH. I do not think the purpose is that at all.
Mr. WILLIAMS. If you do, you will exclude most of the country
banks, at least in my part of the country.
Mr. BooFISH. I do not think, Mr. "Williams, that the purpose is
exclusion. The purpose is to include in this measure a sound banking principle. We have found in this past year that where a bank
that had primarily commercial money, subject to check completely,
it should have its investments or its assets, if you please, in absolutely liquid securities. That is fundamental banking and where
banks have taken and balanced checking account funds versus three,
four, or five year real estate loans they have gotten into difficulty.
, Where they have balanced a savings account funds which are put
in the bank with the expectation of leaving it. That is my savingst
not my week-to-week balance, with which I am going to pay the
grocery bill and gas bill-where they have such balanced timedeposit accounts against, say, three, four, or five year mortgage
loans, it will function all right. I think that is a problem of bank
management; and, in my judgment, the objective here is not exclusion. As I see it, this measure should invite and include the
majority of small country banks and should exclude to a large extent
the large commercial banks in the cities which, as I say, have no
place in this picture, and should rely upon the Federal reserve
system, for their reserve credits.
Have I satisfactorily answered your question?
Mr. Wn.i.IAMS. Well, of course, I do not know that I am convinced on that subject, because I can not, as I say, covering a period
of years-I recognize the fluctuations at various seasons of the yearI would object, it seems to me, to making that the "main test,
whether or not a bank could come in, because I think that will exclude a great many banks in my section of the country, if you are
going to apply that test simply of time deposits, and I was wondering why that was out in there. It seems to me it would make no
difference to the member if the board determined that the bank was
in position to make long-term loans, why, of course, that is all right.
But, then, to specify long-term deposits may be questionable.
·
Mr. BoDFISH. The objective, as I comprehend it, is entirely ,,ne of
carrying out the sound principle of bank management. You know
for decades the national banks were not permitted at all to make real
estate loans, and the reason for that was not a question of the soundness of the loans, but it was a question of their putting_ commercial

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

150

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

deposits subject to check in relatively non-liquid securities, and the
purpose is certainly not, so far as we are concerned, that of ex.clusi~n of t~e SJ!-lall country banks, because we feel a certain P!J,!tnersh1p or kmsh1p to the small country banks. They make loans in the
small towns and cities quite similar to the loans the building and
loan associations make in small cities.
·
Mr. REILLY. ·Mr. Bodfish, are you satisfied with the bill as written i
Mr. BODFISH. Absolutely.
Mr. REILLY. You are satisfied with the limitations?
Mr. BODFISH. Yes, sir.
Mr. REILLY. What particular institutions would this proposed
amendment let in?
Mr. BODFISH. The amendment proposed by Mr. Monks?
Mr. REILLY. Yes.
Mr. BODFISH. I think it would let in anything and anybody practically who cared to consider themselves money lenders on mortgage
security.
Mr. REILLY. Regardless of the kind of a mortgage they made?
Mr. BODFISH. Regardless of the kind of mortgage. We think the
small home owner, of limited means-and we are very emotional
about this, if you please-should never borrow money on his honie
oil the 1-year mortgage which he may be called upon for payment
a year later.
I was amazed by this testimony before the Senate committee, in
which one of the leading opponents of this bill, Mr. Clark, of New
Haven, made the statement that his mortgage company made demand
mortgages; in other words, that ,home borrower is subject to the
judgment of the money lender as to when he will have to make the
payment of that mortgage.
·
· Mr. REILLY. If you are in favor of small home owners having the
advantage of this bank, why do you favor $15,000 limit for the mortgage in there?
Mr. BODFISH. There is just one reason, Mr. Chairman, and .that is
this : Out in our part of the country and in other parts of th~ country,
we have quite a lot of home ownership that grows out of the ownership of a 2-family house. A man will buy a" two-flat," as we call it.
He will live in one part and rent the other half, and we think that it
is just as worthy a type of home ownership to encourage as is the
single-family detached house, although the single-family detached
house should be the principal objective of this bill. Were it not for
taking carG of some of those cases probably the $15,000 unpaid principal limitation could in all propriety be lowered. Our mortgages
averaged, Mr. Chairman, for the whole country, some $3,700. That
is the class of people which we deal with, who buy and build $5,000,
$5,500, and $6,000 homes. There are some localities in which land
values are considerably higher than in others. You take, -for example, Chicago, and a little 5-room brick bungalow will represent
$11,000 or $12,000 real estate value, where in Columbus, Ohio, a similar structure would be worth $6,000 or $7,000.
Mr. LucE. Mr. Chairman, may I put in at this moment the statement that when the bill was under study I suggested the c~ange from
2-apartment to 3-apartment houses, and I take the whole responsibility for it.. I did it because in my locality a large number of w~at
we call "three-decker" or "three-flat" apartment houses are bmlt.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

151

Often a man will build such a house, occupy one apartment and rent
the other two, and in time pays for his home. I made that change
with the expectation that the committee would consider it and, if in
its judgment it was thought the limitation should be for 2'.-apartmen't
houses, I should not demur at all. That was thrown into the basket
for consideration .
. Objection having been made on that score in the Senate hearings,
I thought it would be well to have the situation before you as I have
stated it.
Mr. REILLY. My question comes from my thought that the small
home owner could not very well put up a $301000 buiH:linf
Mr. LuCE. That, too, is a matter for the committees judgment.
Of course, in any event I have no prejudice in the matter. It occurred to me that the volume of mortgages that would 'be let in under
that provision would not be extensive and would not be a serious
factor. Very likely I was wrong in it. You will remember I told
you that I had to make many decisions of a snap-shot variety,. and
undoubtedly erred in some of my own conclusions. I said I would
lay it before the committee.
Mr. REILLY. I am just asking for information.
Mr. WILLIAMS. I would like to ask for my information as to the
plain meaning of the beginning of section 'l. I confess I do not
understand what that means. I would like some man to explain
that.
Mr. BoDFISH. What page, Mr. Williamsj
Mr. WILLIAMS. It is on page 14.
Mr. BODFISH. May I defer the explanation to a little later in my
statement~
Mr. WILLIAMS. If that will not be too long. So far as I am concerned you can defer it althogether. I do not care whether you
explain it or not.
Mr. BonFISH. I will be very glad to take it up.
Mr. WILLIAMS. Use your own pleasure about taking it up at all.
Mr. BODFISH. I am very anxious and willing to discuss it with you
as we interpret it.
The second major proposal in regard to the structure of the bill
advanced by Mr. Monks was this so-called entrance fee of $2,500 and
1 per cent capital subscription which you discussed yesterday, Mr.
Williams. Mr. Monks suggested a half of one per cent capital subscription or participation on the part of the members, instead of the
1 per cent as now written in the bill. General MacChesney, speaking for the National Association of Real Estate Boards, confirmed
that suggestion made by Mr. Monks .
. Now, in some ways we are perfectly willing, gentlemen, to have
the capital to be furnished by members placed as low as $500 or 500
cents. But our suggestion in this matter is to keep vividly in mind
that one of the important things was to have members put in capital
in order to get the Government out. We are 'perfectly willing, with
our nine billions of assets, to ask our institutions to put in 1 per cent
of their home loan mortgages.
T would call to your attention the fact that in building and loan
associatforis we have over 88 per cent of our assets or resourses in
residential mortgages. It it not like a bank which may have $10,~

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

152

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

000,000 resourses and only a million or two in mortgages. It means
we are making a major capital contribution, and we question the wisdom of the policy of reducing the capital subscription; We are perfectly willing to make any concession in point of view which you
gentlemen suggest, but if the objective is to get the Government out,
let us not get the pa_rticipation down to where it is too nominal.
There are several other points in that connection. The original
bill as introduced carried 1½ per cent. It has already been reduced
one-half of one per cent. A committee of our United States Building and Loan League, called the committee on reserve· credits and
banking relations, which has been studying this problem in prin-ciple for some two years recommended to our group that the par.s
ticipation be 1½ per cent or more. In the case of the Federal
reserve system, as I recall, it is 3 per cent of the capital and surplus,
and a required reserve deposit, which must be 7 per cent of commercial deposits and 3 per cent of time deposits-must be maintained. I think the essence of the thin~ there is we want to cooperate
in getting the Government out of this picture after it has started
the bank system and we are perfectly willing to put in substantial
capital into the whole proposition, if it continues to be built on
,strong conservative lines so that our best institutions, as well as the
ones that are in immediate need of borrowing will feel they want
to come in immediately and participate.
I would like to call your attention also to the question which was,
raised by one of the members of the committee yesterday, as to the
repayment of capital to the Government, and I would like especially
to direct your attention to the provisions on page 8 lines 20 to 24,
which•reads as follows:
Stock held by the United States may at any time, in the discretion of the
Federal home loan bank, and with the approYal of the board, be paid off
at par and retired in whole or in part; and the board may at any time require
such stock to be paid off at par and retired in ·whole or in part if in the
opinion of the board the Federal home loan bank has resources available
therefor.

That is an unqualified power on the part of the Board to retire
·Government capital from these banks and we urge that it remain in
order to facilitate withdrawal of Government funds.
There is another important point in this proposition; it seems to
me that what you are starting to create here is this banking system.
The President asks for 12 home loan banks; and if they are going
to function as banks and steady and stabilize and build public confidence and create standards of eligible collateral and mortgage practice in the home-financing field, they have got to'have enough capital
to function as banks. It can not be done on just a few dollars from
the participants and a lot of dollars from the Government. We do
not want this thing to be like some of your national farm associations, if I may speak in slight criticism, merely little borrowers'
mutual, in which a bunch of folks who want to borrow and nothing
~lse get together to pull out a lot of money without putting in
anything in particular.
Mr. REILLY. Would you be able to estimate the amount of capital
put in by your associations, the number that you claim would join
;i.nd the amount paid.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

153

Mr. BODFISH. In the first place, Mr. Chairman, we want to keep
in mind that a building and loan association is a sort of local cooperative enterprise. It does not move with the quickness and rapidity
of a large banking institution, and you will not find the building
and loan associations with one fell swoop moving into this system.
But give us a period of three years-make this system strong and
,conservative, put the best banking principles into it, and within
three years it is my judgment that the building and loan associations will have contributed at least $100,000,000 of capital to these
banks, if not more. That is, assuming you do not cut the participation to where it is only one-half of 1 per cent or less. And, of
eourse, the measure must be kept strong and vigorous. Otherwise
our best-managed institutions might not care to participate.
Mr. REILLY. ,vhat do yon consider the participating margin
ought to be?
Mr. BODFISH. That is, the percentage of capital that a member
:should put into the bank?
Mr. REILLY. What will the local building and loan association
make by discounting with the bank?
Mr. BODFISH. Of course, Mr. Chairman, in contrast with banks,
building and loan associations do not make anything. We are not
profit institutions; we are cooperative institutions, distributing all
our returns to our participating members, both borrowers and investors.
·
Mr. REILLY. Well, then, would your organization take advantage
of this law if they made nothing by puttmg up their bonds to get
money in order to become more liquid ?
Mr. BODFISH. It is my judgment that our institutions would use
this system if they could get additional funds to refinance short-term
mortgages that are being brought to them, to finance remodeling and
to finance home building, if this system can lend us the funds at the
rate we get them from our participating members or investors.
Mr. REILLY. Without any extra profits?
Mr. BODFISH. I am not interested in profits in our institutions.
In practically all of the building and loan associations in this
,country, the officials-the men active in the management et ceterawill not. profit in any way by the fact that their association has one
million in assets, a million and a half in assets, or two million in
assets. They are on salaries. It is not like a capitalized bank, where
it is a question of making dividends for a few shareholders and that
sort of thing. We have a form of cooperative enterprise, and a form
that in the past has received encouragement at the hands of ·congress
and legislative bodies, and we hope it will continue to be encouraged.
It is not perfect, but we think it is pretty fine so far.
Mr. WILLIAMS. You do not mean to say that you do not hope to
make dividends?
Mr. BODFISH. We absolutely hope to make dividends.
Mr. WILLIAMS. What is the difference, after all, between that and
:a stock concern?
Mr. BODFISH. There is a lot of difference, Mr. Williams, in who
gets the dividends; that is a few as compared with all participants.
Mr. WnLIAMS. That is all right. You have to make dividends if
you are a going concern.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

154

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. BODFISH. If we are going to continue investments or savings.
Mr. WILLIAMS. You hold that out to certificate holders that they
will receive dividends on them?
Mr. BODFISH. Yes, sir.
Mr. WILLIAMS. Then you evidently intend to make something out
of the investment. You are not running on hot air, are you, and you
are not running witho_ut receiving a profit on the business? You get
a profit on the investment, do you not?
Mr. BODFISH. Yes; absolutely.
Mr. WILLIAMS. That is what I understand the chairman's question
to be. What do you expect to make out of the investment?
Mr. BODFISH. But, Mr. Williams, the difference in the investment
we are talking about is where the profit goes?
Mr. WILLIAMS. That is not what I am talking about. I am talking
about how much profit you make, what you anticipate making.
Mr. BODFISH. We want to continue-Mr. WILLIAMS. There is no difference who gets it, but what do you
make out of it?
· ·
Mr. BODFISH. Out of the building and loan associations?
Mr. WILLIAMS. Yes ..
Mr. BonFISH. The shareholders around the country by and large
receive 4~/2, 5, to 6 per cent on funds invested in the associations, all
proportioned to the profits-of the association.
Mr. WILLIAMS. Absolutely. It depends upon how much the cooperative efforts make as to how much each man gets out of it?
Mr. BODFISH. Absolutely.
Mr. WILLIAMS. The question is, What does that amount to 1 You
say 4, 5, or 6 per cent.
Mr .. BODFISH. From 4½ to 6 per cent, I would say. Have I answered your question, Mr. Chairman?
Mr. REILLY. I just wanted to find out this: Under the Federal
reserve system there are a whole lot of figures on the banks participating in the privilege. Evidently the banks wiH not participate if
they do not make something. That has been the incentive for the
banks to rediscount with the Federal reserve banks. I want to get
your views as to how your institutions would look upon that.
Mr. BODFISH. I think our institutions would use this system more
extensively if they were able to get funds from these banks, let us
say, at 1 per cent less than they can get them from investing
members.
Mr. WILLIAMS. W)lat would be your hope as to what rate you
could get the funds from this bank, or what is your idea about that?
Mr. BODFISH. It would be my judgment that the bonds can be sold
on probably a 4, 4¼, or 4½ per cent basis. I base'that ju<lgment,
Mr. Williams, on the experience in the land bank of the State of
New York, and many of the suggestions that we made in our previous amendments grew out of the 18 years' experience of that State
institution, which has carried on many of the functions that you
..
contemplate in this Federal home loan bank system.
Mr. Wrr,LIAMS. Then you expect to get the money at somewhere
between 5 and 6 per cent?
Mr. BODFISH. I would think we would get it at 5 per cent. Th.ese
banks, if the experience in New York State is worth anything at all,
can operate on less than one point margin. The whole thing is very

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN .BANKS

}55

sii:nple---the operation of this sort of a bank. There are no uniformed doormen, nQ inarble pillars or anything of that kind. The
land bank of New York, which has about $16,000,000 outstanding
loans at the present time, is housed in office space in New York City
that costs $1,700 a year. That is the whole physical plant.
Mr. WILLIAMS. If this money cost you 5 or 6 per cent and you
:would only get 4½ to 5 per cent back on it, you would not be on a
very sound operating basis, wquld you~
Mr. BoDFISH. From our borrowing members we get interest usually
around 6 per cent. ·Probably the typical loan rate of building and
loan associations a!]. over the country is 6 to 6½ per cent, 1,ome of
·
them 7 per cent.
Mr. HANCOCK. l\fr. Bodfish, it takes a pretty well managed building and loan association to earn 6 per cent for its stockholders, does
it not~
Mr. BoDFISH. It does.
Mr. HANCOCK. You have to keep all of your money working all
the time¥
Mr. BODFISH. Every dime of it, practically.
Mr. HANCOCK. Do you know what is the average operating expense or overhead expense of a building and loan association¥
Mr. BODFISH. From one-half to three-quarters of 1 per cent.
Mr. HANCOCK. Is it not much less than that of most of the other
financial institutions¥
Mr. BODFISH. I would say it is less than other financial institutions,
with the possible exception of the mutual savings banks, which I
think operate on about the same cost or overhead as the building
and loan associations.
Mr. HANCOCK. Outside of the necessary clerical assistants, as a
general rule an association has only one or two paid officers; is not
that right¥
Mr. BODFISH. That is true.
Mr. HANCOCK. Usually the secretary is the only salaried officed
Mr. BODFISH. Practically the only one.
Mr. HANCOCK. Here is what I would like to have in the record.
Would you mind taking a concrete case, beginning with the applica~
tion and going right through and explaining just exactly the fractical way that a man would secure money by utilizing a bank o this
kind and the advantages involved over those which now exist i
Mr. BODFISH. When you say" a man," you mean a membed
Mr. HANCOCK. I ain·talking about a man who goes to the building
and loan association and assuming that the building and loan association cannot lend him the money at the time, what would be the
procedure¥
Mr. BoDFISH. Of course, that man can have no direct dealings with
the bank system no mor~ than the grocerman can deal direct with
the 12 Federal reserve banks. But, let us say that this Mr. Brown
comes to the building and loan association, say, The Gates City
talking about one we both know· about, and his home, let lis say, is
worth $6,000,, fajr · market -value. He -,vants $4,000 to $4,500 on a
monthly repayment loan, and he places an application with the association. Two or three members of• the board of directors of the
association f!O out and look at the property, and, as a rule, they know
the man. They want to know something about his character and

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

156

CREATION OF A SYSTEM: OF FEDERAL HO.ME LOAN BANKS

his job, because the successful building and loan plan has grown out
of lending money to people that had little cash but a whole lot of
character-usually the institutions are very familiar with the conditions in their cities and the people-some of the directors will know
the man's wife and what priced hat she buys and all this, that 11:nd
the other thing.
They will say:" Fine, Mr. Brown, you ought to have a loan, but
we do not have the money. However, we have here in our association $2,000,000 worth of mortgages that we have already made. If
you can just wait about two weeks or three weeks or four weeks, we
will take some of our prime mortgages, and we will take them to the
Federal home loan bank of district No. 3, of which we are a member,
and we will put up mortgagets two for one. We will take, let us
say, $100,000 worth of mortgages and we will come back with $50,000~
which we will then be ready to loan to you and a number of othermen who are equally deserving citizens of our community."
It seems there is the simple mechanics of it. Then, with those
mortgages deposited as collateral at home loan bank No. 3, that
bank is going to issue bonds against those mortgages assuming
that it does not have immediate funds on hand. The association
is going to pay back the loan tha:t the bank has advanced to them
over a long period of time, probably a period of time proportionate
with the duration of the loan they are going to make Mr. Brown,
maybe over a period of 8 or 10 years.
You see, one of our great problems-Mr. HANCOCK. Here is the point I want to clear up: From your
knowledge and observation of home finance plans, how does therate o:f interest charged by a building and loan association comparewith the rate of interest charged by a mortgage company?
Mr. BODFISH. The rate of interest, Mr. Hancock-Mr. HANCOCK. I am talking about on the loan to the borrower
Mr. BonFISH. The rate of interest-this is going to be a compara-tive statement, probably-is frequently higher. The nominal cost
is almost always less. I received a telegram this morning from
Portland Oreg., in which the mortgage banking group there who
advertise 6 per cent interest have apparently set their commissions;
on construction loans at 7 per cent, but that does not mean it would
give a man a 6 per cent interest rate. If you take an advancediscount of 3, 5, or 7 per cent at the beginning, it makes his actual'
cost of money anywhere up to 7, 7½ 8, or 8½ per cent.
Mr. HANCOCK. Mr. Bodfish, are there any safeguarding provisions in this bill that would protect the borrower against the payment of. large brokerage commissions? What I had in mind was
just this: Most of the homes built in my community have been built
through the building and loan associations. However, I know of
a number of borrowers who had resorted to financing through a
mortgage company doing business in my State. I had occasion to
work out the comparative rates of interest between those two loans.
Tlre building and loan association received a rate of interest of
6 per cent, payable weekly or monthly, at the option of the boITower_
The borrower from the mortgage company, according to my best
estimates, was paying between 11½ and 14 per cent. He made
his payments semiannually, on a plan like the Federal land bank.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

}57

The difference in the rate of interest was anywhere from 5 to 'r
per cent.
Now, what I am concerned with is, could this system be used in
any way that would prevent the member bank, say, or a savings.
bank, from saying to John Brown or Henry Jones, ·" Well, I can
arrange to get you this money, but you will have to pay a brokerageof $250."
Mr. BODFISH. We do not think that the bill, Mr. Hancock, would
permit that.
Mr. HANCOCK. What is there in the bill that would protect theborrower in this respect? I£ such a restriction is provided I haven't
run across it.
Mr BODFISH. Of course, the suggestion was made by the witness
for the National Association of Real Estate Boards yesterday that
the brokerage function be encouraged.
Mr. HANCOCK. I know the paper would speak in terms of thelegal rate of interest but that affords no protection against a
brokerage charge or fee.
Mr. BODFISH. Yes.
Mr. HANCOCK. But there is a way, when you borrow $5,000 you
give the borrower the check or $4,750. Now, that $250 spread over
a period of years increases the interest rate so much. However. that
is not actually reflected in the bond trust security. I want to know
if there is any provision in this bill to protect against that practice t
Mr. BODFISH. I think there is a provision, Mr. Hancock, in that
the board is given very broa.d powers to prescribe rules and regulations and the character of mortgages that may be presented for
rediscount. They can take a ·very positive position as to the terms
of those mortgages, probably the interest cost and that sort of thing.
I refer particularly to section (b), on page 18.
Mr. HANCOCK. I looked at that.
·
Mr. BODFISH. I want to say this unqualifiedly, that if there is anything that can be put in the bill that will stop this brokering of loans,
to the ultimate great increase of cost to the home owner and home
buyer, we are all for it, because you know we do not have that sort
of thing in building and loan and we do not want it.
Mr. HANCOCK. You referred a minute ago to "demand " mortgage.
I never heard of that before you mentioned it; and you referred to
Mr. Clark as having stated before the Senate committee that his
company made demand mortgages. Such a system would encourage
refinancing, would it not?
Mr. BODFISH. Upon what does the mortgage banker-broker livet
First, from making loans; second, renewing commissions; renewed
every 1, 2, or 3 years.
Mr. HANCOCK. In other words, every time _you can make them
come due it means a refinancing, and with a refinancing it means an
additional commission 1
Mr. BODFISH. Precisely. We think that thing is absolutely undesirable. From the point of view of the home owner and as sound
public policy, I think the Government, in setting up this institution,
should take every practical step possible to discourage and eliminate,
if possible, that sort of thing. I am very unqualified in my statements to that effect.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

}58

CREATION OF .A SYST-EM OF FEDERAL HOME LOAN BANKS

Mr. HANCOCK. If that should occur frequently and the rate of
interest which some of the mortgage companies have charged in the
past were to be applied to the loan, the original borrower would be
about as bad off as the frog who got up 1 foot and went back 2 feet,
would he not Y
'
Mr. BODFISH. I think so, or worse; I do not know. He would
probably live in a home and have a decreasing equity for a 'while, or
until he gives up.
.
Mr. HANCOCK. That would amount really to a transfer of ownership rather than a loan, would it not Y
·
·
Mr. BonF.rSH. Yes. There is another point here that I think merits
consideration of the committee : There is a decided difference between the banker's point of view. with regard to mortgages and the
building and loan point of view. How does the banker or, let us say,
the insurance company also, look at a mortgage Y They lok at it
purely in terms of investment collateral. The shorter term it is
the better it is from the point of view of their investments and their
kind of funds; and I am going to come to that later.
Mr. Monks proposed the distinction between long-term and shortterm mortgages be absolutely eliminated from the bill as drawn, and
that these discount banks be in a position to rediscount 1-year and
2-year mortgages, or any kind of mortgages; and when he proposed
the elimination of that clause, Senator Couzens asked him, " Does
this mean you want to discount one and two year mortgages i " And
Mr. Monks did not answer, but went on to another point. That is
one of the things that is harassing the home owner to-day, He made
a one or two year mortgage. Now, the banks have had withdrawals
and difficulties, and they say," We want our money. You go somewhere else and get it," and thousands of worthy home owners are
coming to the doors of building and loan associations wanting longterm installment mortgages to-day and, of course, one of the reasons
we want this bill is that we want to be in a position to serve those
people on a sound basis.
Mr. WIILIAMS. When you say" we," you mean the building and
loan associations Y
Mr. BoDFISH. Yes.
Mr. WrrLiAMs. Will not that have the effect of forcing the banks
out of this business entirely 9
Mr. BODFISH. Absolutely not.
Mr. WILLIAMS. Why not¥
Mr. BonFISH. Because the sort of banks you have out in your community, Mr. Williams, small country banks, are making 3-5-year
mortgages. I do not object to that at all. The thing I do object to
is the kind of mortgages Mr. Monks has in his institb.tion$16,000,000 of one-year maturity, callable at the end of one ·year; at
the option of the lender. He says" We extend them. We carry them
on. That is the practice in the communtiy." But the option as
to carrying them on is wi~h the big ~an.ks and not with the borrowers.
Mr. WILLIAMS. Referrmg to the-little ones: To what extent do the
.banks of Missouri loan on 5-year mortgage home loans Y
Mr. BoDFISH. I think if we would take the small banks in the
State of Missouri-I do not care anything about the great big ones,
·
because they are in the Federal reserve system-
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CJ.t:mATION QF )1. SYSTEM OF FEDERAL HOME LOAN BANKS

159

Mr. WII,I,IAMS. That is what I am talking about.
Mr. BODFISH. I think you would find at least 30 per cent of their
assets are in 3-5-year real estate mortgages.
Mr. WIILIAMS. I do not think ther is one in my district of that
kind, and I say that having had considerable experience.
Mr. BODFISH. What term are they made :for¥
Mr. WII.LIAMS. One year, as a rule.
Mr. BODFISH. I ain surprised, and I think it is very unsound :from
the point of view of the home purchaser. Do they have them pay at
the end of the yead
Mr. Wu..LIAMs. Oh, no; as the gentleman said, they extend them
from year to year.
Mr. BODFISH. Oh, but is at the option of the banks¥
Mr. WII..LIAMs. Oh, yes.
Mr. BODFISH. I wonder what is happening to those mortgages in
case those banks ·have heavy withdrawals.
Mr. WII..LIAMS. They are taking care of them as well as anywhere
else.
Mr. BODFISH. There is another point in connection with that onehalf of 1 per cent capital subscription instead of 1 per cent that I
think should come to the attention of the committee. As General
MacChesney directed his attention to that of Mr. Monks, I want
to direct your attention to the fact that Mr. Monks not only wanted
to decrease the capital contributed by members, which would slow
up getting the Government out of this; and, at the same time, he
wanted to take the lid clean off as to loans. He said " Eliminate
entirely the 12-times restriction on loans that is in the bill."
It seems to me that it is highly impportant that the borrowings in
this system be limited so that when the sun shines again and we get
into normal times, this system will not be used as a device for
unbridled real estate inflation; and we consider that limitation one of
great importance.
We do not object to the suggestion made by General MacChesney
yesterday, in which he suggested 20 times. We lean over to the
more conservative point of view, because if you have $2,500 flat
1 per cent of the capital, and you permit the association to borrow 12
times that, that permits them to borrow about 15 per cent of their
resources, and most o:f the State laws restr.ict our building and loan
associations to borrowing to 15 to 20 per cent of their total resources.
In your State, Mr. Hancock, it is 30 per cent o:f installment stock;
in your State, Mr. Williams, it is 10, as I recall, and .20 per cent i:r;1.
Wisconsin, et cetera.
.
..
We think in those borrowing the present limitations to be retained
in the bill, or certainly the lid should not be taken clear off.
There is another question in connection with that stock subscription: If a member puts in 1 per cent and borrows the maximum
12 times, he has contributed to the ban:king system, which stands.back
of the bonds, 8½ per cent of the amount that he had borrowed;
In the farm loan system that is 5 per ceiit, l\hd 11pparei}.tly it has
not put sufficient capital in the hands of the 12 land. banks to have
them maintain the ~ar],{et :for th~ir bonds .and maintain public
confid~nce in them. -11a235-32-,..-11


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

}60

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

I want to comment just a moment on the amendments that were
proposed yesterday. We feel that there is somewhat of a kinship
between the point of view of the real estate people and ourselves.
Mr. REILLY. Just a moment, Mr. Bodfish. How much more time
do you expect to use~ We want to give you all the time necessary to
make your statement full and complete, but it is a question whether
we can: give all the time you will require to-day. There is a man
lrere from Baltimore who wants to get back to that city to-day, and
if you will suspend now we will permit him to go on, and thm1 when
we meet again Monday you can resume your statement.
Mr. BODFISH. I know the gentleman, and I will be very glad to
yield to him.
·

STATEMENT OF HARRY E. KARR, GENERAL COUNSEL REAL
ESTATE :BOARD OF :OALTllIOll.E AND ASSOCIATION OF BUILDING ASSOCIATIONS OF THE STATE OF MARYLAND
Mr. REILLY. Give your narn~ in full, Mr. Karr, and state the name
of your association and the position you occupy.
Mr. KARR. My name is Harry E. Karr. I am general counsel for
the real estate board of Baltimore, and for the Association of Building Associations of the State of Maryland.
We have nothing to criticize in the bill. The only matter which
we come before you for is in connection with two provisions in the
bill: First, one provision which provides that no association or
.bank or building association can ask credit under this Federal home
loan bank bill unless the State provides for supervision of those
particular institutions.
.
In the State of Maryland we have no supervision of the building
associations. That has never existed with us. There have been several attempts made to bring the building associations under strict
State supervision, but our own experience has been such that we have
proceeded better without the supervision.
I do not think that so far as the State of Maryland is concerned
it will ever come under State supervision, so far as building aEsociations are concerned. So that our first suggestion is to offer an amendment allowing us to have the benefit of this bill, but subject to such
supervision as the board itself may lay down.
Mr. Wn,1,IAMS. Would ·it interfere with you just at this point to
explain briefly what you mean by "building associations 1"
Mr. KARR. All building associations are all mutual building associations. They are more or less of the neighborhood type of building
associations. They are not what are known as national associations,
nor do they go out and sell stock and things of that sort. But they
are an aggregation of individuals who get together and form these
associations, and the most of them are run from the neighborhood
standpoint.
Mr. WILLIAMS. Mutual affairs, but incorporated i
Mr. KARR. They are entirely mt1tual, and they are incorporated
under our State laws.
Mr. WILLIAMS. Do they have stock1
Mr. KARR. They have paid-up stock only in this sense that a subscriber will subscribe and, say, he does not want to borro~ but wants
to deposit. He will subscribe to so many shares. Most of the shares

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

16)

are either $100 or $130. · They pay in on those shares either at the
rate of 20 cents a week or 25 cents a week. If it is a $100 share, the
rate is 20 cents a week, and if it is $130 share the rate is 25 cents a
week. They can allow their money to stay there until those shares
are fully paid 1 and then they- have the right to withdraw it at any
time, subject simply to a notice that in event more people are trying
to withdraw than what they have funds to cover, they take them in
accordance with the way in which they come in and ask to withdraw.
When one makes a loan they subscribe to so many shares. Say they
want a loan of $1,300, they will subscribe for ten shares.' That would
be paid back at the rate of 25 cents a week per share, until the loan
was liquidated, and that would cancel the stock subscription.
Mr. I{ANCOCK. How long does it take to mature?
Mr. KARR. The $130 share would take about1 eight and one-half to
nine years; the $100 share will mature a little bit short of that. ·
Mr. HANCOCK. What has been the success within the past severr
years of the building and loan associations?
Mr. KARR. In what respect?
Mr. HANCOCK. So -far as failures are concerned.
Mr. KARR. None, with the exception of one or two which have
failed because of speculations.
Mr. HANCOCK. You say you have never had State supervision?
Mr. KARR. We have not.
Mr. HANCOCK. Then why do you say that you could get along
better without it if you have never had it?
Mr. KARR. Well, I can only answer that in this way, that the record
of the Maryland building associations is, I think, as fine, if not finer,
than the record of practically every building association of any
State.
Mr. HANCOCK. What is your chief objection to State· supervision
of building ~ssociations?
Mr. KARR. The first objection is because they are all operated on
a mutual basis, and the most of the State making such supervision
would practically mean they would have to be able to earn and pay
an average of 6 per cent. These associations have averaged a little
bit better than 6 per cent, up to 61/s and 6¼ per cent, the money
being paid back, and they pay to free shareholders 6 per cent on
their money. They undertake to make no profit, however.
Mr. HANCOCK. Do you know how many States in the United
States require supervision of building associations?
Mr. KARR. All of them, I think, with the exception of South Carolina or North Carolina_, I do not know which, and Maryland.
Mr. HANCOCK. North Carolina does require supervision.
Mr. KARR. Well, South Carolina and Maryland are the only States.
Mr. HANCOCK. They are the only two?
Mr. KARR. Yes, so far as I know.
Mr. HANCOCK. It is then your judgment that those two have a
better plan than the 46 States that do require supervision¥
Mr. KARR. I did not say that at all. That is beside the question:
that is not the test at all. The test is whether or not a community or
State has been able to conduct its affairs and operate a certain line
of business on the basis that is most successful to .them. I do not say
that supervision is not a very wise thing. In many respects it is.
But I am simply' saying from the standpoint of the State of Mary
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

162

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

land we have found supervision is not necessary with us, so far as
building associations are concerned.
Mr. HANCOCK. You represent your State association?·
Mr. KARR. Yes.
Mr. HANCOCK. Are you speaking :for all the associations of Maryland?
Mr. KARR. Yes, sir.
Mr. WILLIAMS. To what extent do they carry home loans?
Mr. KARR. You mean to what extent they pay home loans-investments of the building associations in home loans~
Mr. ,VILLIAMS. Yes.
Mr. KARR. I should say 95 per cent, if not more.
Mr. WILLIAMS. I mean with what respect to the entire home loans
of the State, what per cent of it is carried by your institutions or
building associations~
Mr. KARR. That, gentlemen, I will only have to give you a guess on,
but I would say probably around 50 or 60 per cent1 if not higher.
Mr. WILLIAMS. Do you think they carry the majority of the home
loan mortgages of your State?
Mr. KARR. Undoubtedly. The building associations of Maryland,
and especially of Baltimore City, are the institutions which have put
Baltimore in the lead in so far as home ownership is concerned.
Baltimore to-day and :for many years has been the ranking city in
the United States in the matter of home ownership, and that home
ownership is traceable to two distinct things: First, our ground rent
system and, second, our mutual building associations. Our mutual
building associations have a record, to my personal knowledge, of
35 years. In that time I have never known of any building association in the State of Maryland to fail except under such conditions as
amounted to absolute thievery, which State supervision or any other
type of supervision you choose to have would not prevent.
Mr. WILLIAMS. I was going to ask you if those securities represent
funds paid back?
Mr. KARR. You mean our mortgages~
Mr. WILLIAMS. Home owner loans.
Mr. KARR. Yes.
Mr. CAMPBELL. Mr. Karr, do you not consider your building associc..
ation as receiving better supervision under the present system than
they would be under the State~
Mr. KARR. I do.
Mr. CAMPBELL. Therefore, it is hardly correct to say they are not
under supervision. The fact is they are under rigid supervision i
Mr. KARR. I think they are under very much better superivison
than what we would have by State supervision, because all of our
associations are, as I say, mutual associations in neighborhoods where
the people themselves know more about that association and give it
a better supervision than any State supervision you can have. It is
absolutely a community proposition, and the community is alive,
watching and knowing what is going on in respect to its neighborhood association.
Mr. WILLIAMS. Is that true all oved
Mr. KARR. No; that is not true. When you undertake to set up
State supervision a lot of people rely upon that State supervision to
protect them.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREA,TION O.F A SYSTEM OF- FEDERAL ROME LOAN BANKS

163

Mr. WILLIAMS. I mean as to the principle 0£ mutuality as to these
building associations throughout the country, the principal thing is
State supervision. In what respect, in other words, is this different
£rom the rest of the building and loan associations_ throughout the
countryi
·
.
Mr. KARR. I have not analyzed it yet, and I would not undertake to
answer that question, except that I do know there are differences in
the various States, depending on the manner in which associations
are set up.
,
Mr. WILLIAMS. As to w:hether or not State supervision is a matter
of opinion in the State; that is all there is in it 1
Mr. KARR. Yes.
Mr. HANCOCK. One of the chief objections to State· supervision,
from your standpoint, would be the cosfl
Mr. KARR. That is right;
Mr. HANCOCK. Can you give us any figures as to the cost of State
supervision in the 46 States where it exists i
Mr. KARR. No; I can not.do that.
Mr. HANCOCK. Then why did you say that would affect earnings
when you admit you know nothing about it 1
Mr. KARR. I only know that from the standpoint of going into the
costs when we had an inspector investigate several times the matter of
putting building associations under State supervision.
Mr. HANCOCK. You do not know that it is a fact that the cost of
supervision in the States where it exists is negligible, do you i
Mr. KARR. I can only answer in this way, it is well known that
where you have State supervision in a great many matters that your
losses and failures in the various institutions is of a very high percentage, and you have here in the State. 0£ Maryland a percentage
loss which is the percentage of loss which is negligible. In the next
case we have had no losses except caused by absolute thievery. So
when you have that situation and when you have banks and institutions of that sort where you have State supervision that are just
~oing by the bo~rd one after another, you ha';e too ~uch supervision
·m this country m a great many matters. It 1s far m excess of what
is needed, and what the people need to-day is what we do in the State
0£ Maryland, and that is that we ourselves know what is going on.
Mr. WILLIAMS. Are your State banks supervised i
Mr. KARR. They are; yes, sir. We have about 12 or 15 of them
at the present time in the hands of receivers, which £ar exceeds
the building associations. At the present time I only know of three
building associations which are in the hands of receivers.
Mr. HANCOCK. Do you think their failure is due to State or Federal supervision or related to it in any way?
Mr. KARR. You are getting over into the realm of a question that
one could discuss all day. I think this, that very largely the matter
of supervision gets itsel:f into a set of rules and regulations and that
sort 0£ thing, and while it starts off just like a new broom, perfectly
beautiful, it gradually becomes an old broom and a lot of things
happen i~ this s1;1pposed sup~rvision tha~ finally, when you getdown to 1t there 1s not anythmg left to 1t. There are too many
cracks for things to seep through.
Mr. WILLIAMS. That is pretty well answered.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

164

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. LucE. What has been the most difficult and embarrassing
situation that has confronted the Committee on Banking and Currency in the last seven years was presented oy this very question of
supervision. It -has been ~ost sharply brought to our attention and
has puzzled us very much. When the land bank system was established and it was given out that its banks were instrumentalities o:f
the Government, investors, relying upon that assurance and on the
assurance by the brokers selling the bonds and stocks, that the
syste:m was under Federal supervision, put in large sums o:f money,
and in '?Ile instance, at least, investors in• my own district,· relying
upon this assurance, coming :from one o:f the oldest and best established brokerage firms in Boston, invested and lost $3,000,000, or
$4,000,000. Similar loss took place elsewhere.
One o:f my colleagues in previous year~ informed us that the savings o:f a lifetime on his part, $30,000 or $40,QOO would completely
disappear unless we came to the relief o:f the situation.
That was due almost entirely to the negligence o:f the United
States Government in the inspection and supervision of Federal
joint-stock land banks. The contemptible :failure of the Kansas
City joint-stock bank, due to the rescality o:f its president, who has
since then been sentenced to Atlanta, was due to the :failure of the
United States to go through with its duty, and to supervise adequately.
e on this committee, or rather those o:f us who have
been here some time, sat idle, and my conscience has chided me ever
since. Congress would not :furnish money enough to provide proper
·inspection o:f these banks. We did not know about it ; that is the
only plea we can make as members o:f this committee, that we did
not know what was going on. We assumed that the Federal Land
Bank Board was able to ·do its duty and was supervising these
institutions. It did not do that efficiently. Their plea of concession and avoidance was to the effect that thev did not have the
money to do it thoroughly. The :fact of the disaster remains.
Now we are confronted with the question of whether in good conscience the Government ought to make good to the investors who
assume that the implied promises of the United States in the matter
of supervision would be carried out.
So we here are going to have some difficulty in persuading the
older members of this committee to let down the bars. You come
here and say: " Let us alone. Do not require States to do any
supervising, but you do it." You put it on the United States Government to do it, and I tdl you, sir, with this example before us
of the misery c~used by our :failure to do it, we are going to be very
reluctant to abandon any of the· protection that the investors of
this country have a right to expect. You are setting up your judgment against that of 46 other States, all of which believe that a man
who buys a bond known as an instrumentality of the Government
should have a right to expect every precaution that can be taken.
Mr. KARR. Yes. That is it. In the first place, I don't think the
l;nited States GoYernment has any right to put out any security of
any sort, kind, character, or description that is not a Government
security in the .fullest sense of the word; a direct obligation of the
United States Government.
M:r. LucE, I agree with you.

,v


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL ROME LOAN BANKS

165

Mr. KARR. I do not think that the United States Government has
any right to set up institutions of this character and delude people
into the idea that they are being supervised by a Government board
the same as government securities. I think if you allow the people
themselves to judge whether the security is good or is bad, such as
we do in the State of Maryland, where we don't have any supervision, and everybody knows whether .or not our building and loan
assciation is good when they deposit their money. They know there
is not any supervision. It stands or falls upon the credit of its own
institution, wp.atever it is.
And that is what it should do. When you undertake to supervise
these things, you can not do it. It is utterly impossible. Unless the
United States Government is divorced out of this bill, and every
Federal loan bank in the matter of supervision will set up an inspection which is a Federal supervision, and will inspect every institution where the Government deals with it, only upon that being done,
and divorced entirely from the Federal home-loan banks or from
the Federal farm loans, that is the only way that you will ever get
this character of supervision or any kind of supervision which the
United States Government ought to let securities be put out under.
Mr. LucE. 1;ou make a distinction between that and the corps
of examiners of the Comptroller of. the Currency?
Mr. KARR. I am not talking about the Comptroller of the Currency
of national banks. I am talking about under your Federal farmloan banks. In this case you are asking for State supervision,
which may mean something or it may_ mean nothing. You are saying that the Government is going to approve that which is being
done not by you, but by a different political entity-one of the States.
Now, some particular State may have the finest sort of supervision.
It may have a man.at the head who investigates these various financial institutions and knows what he is doing, able and capable of
doing the thing correctly and properly. On the other hand, you
may have set up a political system which will invite men in there
who do not have the qualifications to carry on this particular work.
Mr. LucE. Absolutely.
Mr. KARR. As I say, if the Government of the United States is
going to stand back of these bonds, let them sell for what they are
worth on the market in the way that the people will judge as to the
proper handling of them; and let the board itself so handle its business that it will gain public confidence, and you will have no trouble
with them.
But when everybody can hide behind this beautiful thing of State
supervision and national supervision, which is not any supervision,
that is the reason why your farm loan bank bonds are down where
they are. That is why you have wrecks all over this country. But
if you let it be known that they are not supervised or nationally
supervised, the people themselves would find out what sort of a class
of man was running that particular institution.
Mr. LucE. How can an investor in Boston accomplish that?
Mr. KARR. The bonds are going to find their market according to
just what they are worth and according to the class of men that are
operating them.
·


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

166

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

We have in this·country gone along hiding ourselves behind this
idea of having supervision of this, having supervision of that, and
supervision of the other thing; and everybody has a perfect alibi.
But people deal with you or with me because they happen to know
the character of men we are, and they deal with some of. the institutions that we are connected with, outside 9f the line of some of these
State affairs, they deal with them upon what 1 Upon the credit of
that particular house.
A.rid there is no reason why that should not be in this instance,
unless the Government itself 1s going to delude the people into believing, people who don't know. Many of them bought farm loan,
bank bonds, because they thought they were direct obligations of the
United States ·Government; and you led those people into that very
trap.
I say that is why you ought not to have all this supervision. If
you are going to have supervision of all these various boards that
you are ~oing to set up, then set up in another separate bill a national
supervision in addition to the department, that has a right to make
an inspection, and that is not in the slightest way controlled by the
board handling the funds, just as you have today with your
Comptroller.
Mr. LucE. That is an interesting suggestion. I thank you for it.
Mr. KARR.· I mean, I think that you have got to do one of two
things. You have either got to let these bonds stand on their own
bottom and in accordance to what people know about those particu-:lar institutions, because anything that you set up here in the way· oi
a State or national supervision is simply deluding the people into
believing that they are buying a security of the United States Gov~
ernment, when they are not.
Mr. LucE. Do you think it would be practicable to put on the
market debentures with that uncertainty 1
Mr. KARR. I don't think there would be any question. The market
would find its level.
Mr. LuCE. The market might find its level; but if the level were
below par, you wouldn't sell any bonds.
Mr. KARR. What have you already done 1 What have you done
for the farm-loan bank bonds~ You have had all sorts o.f supervision. You have State supervision and whatnot. ·what has
happened to them~
Mr. LucE. The farm-loan system itself is sound. The value of the
land behind these securities is for the time being depressed.
Mr. KARR. Yes.
Mr. LucE. But if this country is going to survive and we are not
going to the bow-wows, I think-·
Mr. KARR. I don't think we are. I think we are having a little
struggle, but we are not going- to the dogs.
Mr. LucE. So the present situation is hardly instructive.
Mr. KARR. But you have supervision of your farm loan banks.
Mr. LuCE. We have had no trouble with the farm loan banks.
The trouble was with the joint-stock land banks.
Mr. KARR. The joint-stock land banks 1 You have supervision
there also~
Mr. LucE. But I have just explained that we had it for some years
in name only, and we got into trouble;

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM: OF FEDER.AL HOME LOAN BANKS

167

Mr. KARR. That is it exactly. You are coming back exactly- to
what I said a few minutes ago. All these things go beautifully when
they start, because they are new brooms. But people don't make
inspections because they fall into the habit of saying, " Oh, that is
all right"; and they don't: pay any attention to them. They -say,
" You have got a Comptroller up there to do that. Anything that
is put out by the United States Government has got to pass his inspection first, and nothing can get through his office unless he is perfectly satisfied that it is in strict compliance with the law." Isn't
that true¥
Mr. LuCE. Oh, yes.
Mr. KARR. Now, many times he has held up monies going out that
were n,ot in strict compliance with the law. That is the reason why
if you are going to undertake to set up and supervise these various
boards and institutions that are going into this thing, you have got
to do it under another separate department, which ought to be absolutely divorced from the institution itself that is set up.
Mr. LuCE. That is a consideration to which I have never given any
thought.
Mr. KARR. I don't think the State supervision amounts to a thing.
I think it is just one of those catch phrases that is only going to
delude you and finally land you into trouble, because the men who
sit on the board are going to rely upon the State supervision.
Of course, the board itself has power to go out and undertake a
separate and distinct check-up and audit. But in 99 cases out of 100
you know and I know that this board is going to do like all other
boards have done that ever existed. They are going to be controlled
to a certain extent by the people at home who send down and sa:y,
"This institution is 0. K. It has the State 0. K. on it." There 1s
not going to be much question about that.
Mr. LuCE. That is just why I wanted to get your distinction.
Mr. KARR. Yes. State supervision does not mean a thing. But
Federal supervision by the board itself and check-up by the various
institutions-that is all I have asked for. I am perfectly willing to
stand on that. If the board says that any of our institutions can
not show a clean bill of health that would entitle them to come in;
all right, they have to stay out.
Mr. LuCE. I don't think I am quite clear on your position. We
say there should be national supervision and State supervision. You
say that there should be only national supervision or no supervision¥
Mr; KARR. I say that to rely on the State supervision does not
niean a thing.
Mr. LucE. Then what do you think about national supervision i
Mr. KARR. You ha:ve national supervision in the sense that this
board itself has a right to check up any institutions with which it is
going to do business.
Mr. LucE. The bill gives complete powers to the board.
Mr. KARR. To the board itself; yes.
· Mr. LucE. That is national supervision 2 isn't it¥
Mr. KARR. That is the kind of supervision that we are perfectly
willing to come under.
,
Mr. LucE. Well, but your·criticism against it was that it was no
good.


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

168

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. KARR. I don't say that. I say that the board is supervising
itself. I think that is where we are falling into the error.
Mr. LucE. Then you would have national supervision under a
separate agency?
Mr. KARR. I think if you want to protect the public of the United
States; yes.
Mr. LucE. All right.
Mr. KARR; If you want to have that. All I am asking you is not
to do away with the national supervision as set up under this bill.
We are perfectly willing to have that. But we are asking that you
don't bar us simply because we don't happen to have State supervision.
Mr. HANCOCK. Your discussion of that, or, rather, your answers
to the questions asked by Mr. Luce were very interesting and illuminating to me. I am just wondering whether you would be willing
to say that the term "under Government supervision" to-day has
any real meaning or value.
·
Mr. KARR. Well, ask your own constituents whether they feel that
way.
¥r, HANCOCK. They are not here now. I want to get your opinion
while you are here.
Mr. KARR. They will answer you.
Mr. HANCOCK. I have the pleasure of talking to them right much
o:f the time. You do not get here often, you ·see-Mr. KARR. Do you think it has1
Mr. HANCOCK. I want your judgment about it. You are the witness. You have come here and brought us an entirely new idea and
fresh thought about the true meaning or no meaning of Government
supervision-not so new either; but you have developed it a little
differently :from anybody else.
Now, every national bank in this country, when it issues a statement, it has at the bottom of it "Under Government Supervision."
Do you think that carries any real weight or assurance of soundness
and safety1
Mr. KARR. I don't think it amounts to a tinker's dam. Excuse
the language.
Mr. HANCOCK. You certainly have answered my question in a
straightforward manner.
Mr. KARR. As to this matter of State supervision, there are 1,000
or more building associations in Maryland, with a total capital of
about $200,000,000 are not under State supervision in the sense that
they are subject to regular inspection and supervision by the State
banking department or any State agency. They are organized and
operate under the laws of the State and are recognized as mutual
domestic building associations, entitled to tax exemption under both
Federal and State laws.
Ninety per cent of all the home owners in Baltimore and a large
percentage in other sections of the State have been dependent upon
these associations to finance the purchase of their homes; and the
fact that a larger percentage of the homes in Baltimore are owned
by their occupants than in any other large city is due to the extremely
economic financing facilities of these a$'Sociations.


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

169

These associations have borrowed many millions 0£ dollars from
local banks, but no bank, so £ar as we know, has ever lost a penny
on such loans.
The extremely narrow margin 0£. profit on which these associations
operate makes it almost, i£ not entirely, impossible £or them to pay
for the sort of State supervision which would have any effect in increasing the safety of funds invested in their shares. The record
of the Maryland associations, extending over more than half a century, in so far as safety of funds invested in their shares is concerned, is far better than that of the State supervised associations
in many other States-certainly far better than the re~ord of banks
subject to State and Federal supervision from the standpoint of
losses to investors or depositors. Practically all of the very few
failures of small building associations in Maryland have been due
to causes which could not have been prevented by the sort of supervision provided in most States. More money was lost in the failure
of a single small State supervised bank in Baltimore in 1931 than
has been lost through all building association failures in the State
during the past ten years.
In view of these facts and the fact that one of the proposed amendments gives the discount bank board unlimited power to inspect
and supervise institutions applying for ;membership, it seems to us
that the Government as well as all other stockholders would be justified in recognizing the existing laws of the various States as being
adequate.
After this barrier comes another which, unless removed, would be
just as effective in depriving most of the mortgage loan institutions
of .Maryland of the privilege of participating m the benefits of the
proposed ·discount bank.
·
Ninety per cent of all the mortgages in Baltimore on small homes
are _subject to what are known as gro1:1nd rents, and while we consider these mortgages as first mortgages, we are certain that from a
technical standpoint these liens could not be construed as first liens
under the provisions of the bill.
A ground rent is not a mortgage, but represents a lease for ninetynine years, renewable forever; and all such leases made on residential
property since 1888 are redeemable at the will of the leaseholder on
30 days' notice after a period of five years at a price arrived at by
capitalizing the definite annual ground rent at 6 per cent.
The only practical effect of these ground rents is that they increase
the annual carrying charges on the property. The same practical
result would be presented if the city should at any time increase its
tax rate to a comparable degree.
In loaning money on these leaseholds, it is the practice of building
associations to deduct the capitalized value o-f the ground rent from
the amount which would be loaned on the same property in fee
simple. In addition to this, the associations require the borrower
to include in his weekly payments a pro rata part o-f all taxes, public
charges, and the ground rent.
This plan of financing the sale of small homes has proven safe and
sound over a long period of years. It represents a local custom of
long standing; difficult if not impossible to change.
Certainly in view of the splendid record which our building associations have made in loaning money on these mortgages and the

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

170

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

fact that the discount bank could not loan in excess of 60 per cent of
the balance due on such mortgages, there would be no possibility of
loss to the discount bank on such loans.
Mr. LucE. I think there is a provision to take care of that in the
bill.
Mr. :lu:RR. I have studied over the amendments. I have not seen
the new draft of the bill.
Mr. LucE. I will ask Mr. O'Brien to assure you of that.
Mr. KARR. Mr. O'Brien knows my views, because I spoke before
the Senate Committee; and I have sent over to Senator Goldsborough and to Mr. Goldsborough, our Representative.
Mr. LuCE. According to your statement you would not have much
use for the bill at all as it is. We will certainly try very hard to
fix that. Probably Mr. O'Brien can call your attention to that.
Mr. KARR. If the bill does not take care of that, may I have the
privilege of putting into the record our views on that subject~
Mr. REILLY. Yes.
Mr. KARR. The proposed amendments as submitted on behalf of
the Real Estate Board of Baltimore and the Maryland League of
Building Associations. Their committee on home loan banks bills
is composed of the following:
Robert G. Merrick, chairman, president Maryland Title Securities Co.
Robert Biggs, attorney Loyola Building Association.
Wm. S. Dubel, president Maryland League of Building Associations.
Charles C. Duke, president Provident Savings Bank.
Morris Macht, home builder.
Morton, Prentis, president First National Bank.
Chas. H. Roloson, jr., president Central Fire Insurance Co.
Maurice E. Skinner, attorney West Baltimore Building Association.
Karl F. Steinmann, attorney.
C. K. Wells, jr., home builder.
Anton Svejda, secretary Bohemian American Building Association.
Theophilus White, president the Continental Co.

(Whereupon, at 12 o'clock noon, an adjournment was taken until
Monday, March 21, 1932, at 10.30 o'clock a. m.)


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN
BANKS
MONDAY, M:All.CH 21, 1932

HousE OF REPRESENTATIVES,
SUBCOMMITTEE OF THE COMMITTEE
ON BANKING AND CURRENCY,
Washington, D. 0.
The committee met, pursuant to adjournment, in the caucus room,
House Office Building, at 10.30 o'clock a. m., Hon. Michael K. Reilly
( chairman of the subcommittee) presiding.
Mr. REILLY. The committee will be in order. We will this morning hear Mr. Bodfish, to conclude his statement commenced last
Friday.
STATEMENT OF MORTON BODFISH-Concluded
Mr. BODFISH. Mr. Chairman, on Friday, on behalf of the United
States Building and Loan League, I covered some five or six points.
Also I stated that : ( 1) The bill in our judgment, with the exception
of some very incidental perfepting amendments which we had submitted, and we are urging, was in excellent form. (2) There was a
desire on the part of building and loan associations to have the measure drawn on a conservative, sound basis, so that you would have
none of the problems that you have had with one of the other financial systems. (3) We desire to emphasize the J?Oint of view expressed by the President in his point No. 4, in which he desired that
this system be so set up that it would encourage home financing
largely of the type that was now being done by building and loan
associations.
Before speaking specifically to the bill, I do want to -answer, for
the benefit of Mr. Williams an:d the inquiry that he raised at the
beginning of the testimoney. He inquired as to the number of financial institutions in the country which would be eligible to participate
in this system, and I have brought with me this morning the report
of the Comptroller of the Currency, in which it is indicated that
there are some 13,000 banks-State banks, savings banks, and institutions ·of that character.
_By the way, for the benefit of the reporter, that appears on page
3 of the Report of the Comptroller of the Currency, 1931. On page
ll'l the number of.mutual savingsbanks_summatizedt_with snppo_rting statistics, of which there 654. On page 143 of the report of
the Comptroller of the Currency there is a sumary table of building


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

171

172

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

and loan statistics, indicating that there are 11,777 building and loan
associations, and it shows there distribution by States as follows:
BUILDING AND LOAX ASSOCIATIOXS IX THE FNITED ST),TES

Statistics relative to all building and loan associations in the United States
haYe been obtained through the courtesy of the secretar? of the Uniterl States
Bnil<ling and Loan League, with headquarters at Cinrinnati, Ohio, and are published in the following statements:
Nmn bcr of building and loa,n associatlions, total meml>ership, and total assets,
etc., for the year ended in 1930, by States
Number
of a.ssociations

State
Pennsylvania ______________________
Ohio _______________________________
New Jersey-----------------------_____________________
Ma.ssachusetts
California __________________________
Illinois _____________________________
New York _________________________
Indiana ____________________________
Wisconsin ______ ---- _______________
10. Maryland'--- ______________________

Total
membership

4

50. HawaiL---------------------------1

11,767
10

12,336,754
14,174

8,824, 119, 159
4,492,766

TotaL _______________________ -- --

11,777

12,350,928

8, 828, 611, 925

11.
12.

209

ttd~i~fu.~a==========================

~!: wii~!~~~::::::::::::::::::::::::::I
15. Oklahoma _________________________ l
16.
17.
__I
-18.
19.
20.
21. D!st~iqt of Columbia---------------i

ii:;~~~S- --------------------- ___

:}:li!;!ifiiii====================i

it g~~~~~-=-=_:_::-~=====::::::::::::::::I
-------1

25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.

Iowa _____________ -- ---- -- --Arkansas __________________________
Minnesota ____________________ . ____
West Virginia ______________________
Rhode Island ______________________
Oregon ____________________________
Alabama ___________________________
Carolina'------------------South
____ -___________________
Connecticut
Maine _____________________________

~fs~f:si;pc~::::::::::::::::::::::
Florida ____________________________
Delaware __________________________
New Hampshire ___________________
North Dakota _______ • _____________
Wyoming __________________________
South Dakota _____________________
Georgia ____________________________
New Mexico _______________________
Idaho _______________ - __ -__ ----- ___ Arizona ____________________________
Vermont ___________________________
Nevada ____________________________
Tennessee _________________________

20

12
23
37
18
14

9

14
I


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

1

933
307
398
188
1,150
242
102
67
83
82
154
155
161
73
235
24
92
68
24
74
66
78
63
8
31
40
1.50
44
36
27
47
41
68
43
29

Decrea.se.

assets

$1, 371, 223, 429 1 $28, 776, 571
1, 244, 266, 926 1 39, 398. 950
1, 211, 941. 913
60,438,950
562, 718, 248
19,063,250
33,294,374
510, 520, 4\lO
21. 649,950
470,0i3, 267
18,587, 734
440, 729, 014
15,460,102
306, 870, 182
290, 625, 985
7,844,583
220, 000, 000
5,000,000
12,068,234
210, 920, 602
18,203,024
182, 358, 292
6,094,556
167,199,813
1 14, 75..1, 601
148, 706, 763
139, 804, 195
14,587
I 2,272, 754
134, 743, 150
175,901
132, 362, 649
8,122,553
118,928,259
108, 261, 370
2,944,412
l 3,655,683
92,192,374
6,994,284
75,404,000
1,561,002
60,439.644
6,016.760
60,034.372
3,962,561
55,642, 704
49,708,190
662. 541
44,737,088
1, 135, 722
3,092,436
42,514,855
I 5. 575,338
36,252,147
3, 713, 789
31,541,252
2,248,436
30,569,103
I 836. 318
29,434,882
500. 000
27,000,000
1,436,084
26,166,906
1,491,643
25, 000, 000
867,295
21,235, 125
599,180
20,462,096
18,399,386
2. 866,554
I 3,829,616
17,828,835
15,488, 721
1,457,674
13,793,064
1,066,215
13,385, 735
2,433,196
l 1,292, 790
9. 829,096
910,998
6,350,585
890,007
6,039,453
305,818
5,111,330
5,639, 8761,164,878
423,555
4,838.421
4, 749,000
682. 575
1,256, 702
2. 076, 372

1,540.585
2,583,767
1, 198, 177
513,431
600,000
945,500
595,865
429,447
304,861
330,000
282,031
200,930
210,722
225,000
255,000
184, 760
210,283
182,900
298,844
95,915
75,253
66,730
121,854
95,263
65,343
72, 717
106,038
58,800
44,480
52,000
41,340
34.000
38,000
30,000
45,163
30,000
25,100
13,500
19,700
17,670
20,000
18. 400
10,274
16,731
5,350
8,565
7,250
6,325
2,890

3,445
791
1,561
227

1.
2.
3.
4.
5.
6.
7.
8.
9.

Increase in
membership

Increase in

Total assets

1 109,415
195,142
11,823
15,767
162,416
27,500
2,767
1 20,926
1,454

-----------16,257
13,566
I l, 950
27,638
110,679
13,120
11,655
12,400
5,028
l 9,143
3,210
1. 730
4,831
I 31,273
922
t 2. 554
13; 484
1 8,500
2,459
1,000
11,160
1,000
5,192
1,000
1,435
500
3.800
1 3,000
I

200

I
I

462
400
12,350
I 606
1,648
303
1,665

550
385
1,530
225,545

128, 964, 939

-------------- ------------

• Estimated.

128, 964, 939

I

225,545

173

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mortgage l-Oan investments of building and loan a,all()Qia,tiona, by Sta-tea
Total mortgage loans out•
standing
States
1929

Alabama•.•••••.••••••.•.•••••••....••....•••..
Arizona •..••••••••..•.••..•.•••••.......•...•..
Arkansas••.•••••••....••.•••••.••.......•.•.••.
California •••••••••......•••••••••.••....•...•.•
Coloralio •.•...••........•••.••••••••••••....•..
Connecticut....•••......••.•.•••••••.•••.•.•.•.
Delaware ..•..•••.•..•..••••..••••••.••.....•..
District of Columbia....•.•••.••.•.•.........••
Florida.•••..•..•••.••.•..•..••••.......•....•.•
Georgia ••.•.•••••...•.......•...•.•.•...•...•..
Illinois ....•.•••••••...••••••.••••.•.•••.•...••.
Idaho •....•.•.••.•.••••..•..•..••.•.•...•.••••.
Indiana •....•.•.••..•..••••..•.••.•...•..•••••.
Iowa ......•.•..•.•••••••.••.•...•.•••.•.••....•
Kansas ..••..•.••.•.••.. ·.•••.•......•..· •......
Kentucky ....•..•.••.•.....•.••...............
Louisiana .....••.••••.•.•.•••.•......•.........
Maine ..•..••.••••.••.•.•...•.•.•.......•...•..
Massachusetts •.••..•.•...•.....••....•.••....•
Michigan •••..•...•.•.•...•.....•...........•..

1930

Increase of
mortgage
loans out•
standing
over pre•
vious year
$2,006,408

Per cent
mortgage
loans to
assets,
1930

$25, 63!, 807
3,968,295
37,965,108
416, 802, 996
4.J,117,257
22,752,873
12,062,400
65,163,001
17,074,400
4,457,486
415, 100, 738
4,001,215
282,837,023
45,081,130
107, 956, 918
lffi, 611, 540
173,887,938
22,048,158
502,637,271
147,942,994
33,234,090
17,891,290
178,416,924
18,281,801
139,870,118
745,974
12,196,619
1,062,722,473
4,064,291
380, 170, 540
88,585,047
10,384,000
1,146,545,352
127,719,842
22,538,321
1,203,429,788
25,915,049
4,793,245
(')
122, 886, 727
42,716,239
3,883,293
52,837,266
83,864,684
36,954,310
269,287, 737
9,405,286
230, 301,417

$23, 628. 399
4,223,338
38,298,681
437, 418, 591
48,083,886
23,885,216
13,336,806
70,894,000
12,494,954
5,228,700
432, 685, 967
4,245,105
275,644,799
45,081, 525
110,102,244
116,012,235
161, 525, 736
23,300,000
506, 592, 629
144, 208, 587
35,652,466
18,410,000
184,861,283
18,866,046
128,154,297
1,686,236
12,098,813
1,084,435, 555
4,381,924
388,561, 119
84,166,336
11,863,386
1,094,263, 694
126, 838, 296
24,450,000
1, 162, 605, 163
29,380,561
5,350,585
15,686,774
119,681,266
41,688,060
4,472,771
54,259,081
80,293,571
32,181,472
271, 636, 626
8,801,579
218, 545, 600

I

..

7,790,835,171

7, 760, 163, 958
3,870,716

I

30, 67i, 213

88. 0
91.6

Total....................................

7,790,835,171

7,764,034,674

130,671,213

88.0

~W:~iigi.. ..................................

Montana .••..••.•...•.........••••.•.••....••..
Nebraska •..•.•............••...••••......•.••.
Nevada .•.....•.•....•........••......•...••••.
New Hampshire •....••...•...........•.....•..
New Jersey••...•.•..••••.••••....•...••..•••.•
New Mexico •••..•.•.••••••..••••••••••.•.•••..
New York •.•.•.•...•••...••••••••..•••.....•.•
North Carolina •....••....••••..••.•..•...•.•..
North Dakota.••.••.••.....•••..•.•...••.....••
Ohio ....•.•...•.•••.•.....•.•••.•...........•..
Oklahoma ••.•.•.•.....•...•.••..•...•.......•.•
Oregon •••.••....•.•.•..•....•..•••.•...........
Pennsylvania ••.•.•.•.••.•••••.••••...•.......•
Rhode Island ••••.•••••...•.•••••••.•.•........
South Dakota••.•.•.•.•..••.••••••••.••.•..••..
Tennessee .....•.•.•.••...•••••.•••••..·..•.•.•••
Texas ....•••••••..•••.•...•..••.•••...•.•......
Utah ••..•...•••••••.•........•..••••....•.••...

ir:~!t:::::::::::::::::::::::::::::::::::::::
Washington.•.•..•••......•.•.••..•••..•......•
;r:Jo~:Jinia••••.•.•......•.••••.••..•.....•..
Wyoming .••..••••..•.•.•.•...•••.•..••.•..•...
Other States.••.•.•.••....•.•...•.........•.•..

Hawau•••.....•.•.•.•......•..•.......•...•.•...•..............

1 Decrease.

255,043
333,573
20,615,695
2,966,629
1,132,343
1,274,406
5,730,999
I 4,579,446
771,214
17,495,229
. 243,800
1

7, 1112, 224

396
2,145,326
7,400,695
I 12, 362, 202
1,251,842
3,955,358
13,734,407
2,418,376
518,710
6,444,359
584,245
I 11,716,821
940,262
197,806
21,713,082
317,633
8,390,579
I 4,418,711
1,479,386
t 52, 281, 658
I 881,546
1,911,679
I 40, 824, 625
3,465,512
657,340
(')
13,205,461
11,028,179
589,478
1,421,815
I .3, 571,013
14,772,838
2,348,889
I 603,707
3,930,957

80. 3
87.3
80.3

85.7

80.1
91.3
86.2
94. 0

70.1

86.6
92.1
75.3
89.8
90. 7
83.2
97.6
88.6
93.2
90.1
86.3
83.9
90.0
87. 7
88.9
86.2
81.2
87. 7
89.6

85. 7

88.2
91.3
88. 7
88. 0
89.3
80. 0
84. 8
93. 5
84. 3
85. 3
88.9
74. 9
94.2
89.8
74. 2
88. 8
93.5
89.6
88.5

• Included in other States.

Mr. REILLY. How many are there in your organization?
Mr. BODFISH. Our organization represents over half of these associations. We have some 44 State leagues affiliated with our national building and loan associations, which include in all over 6,000
building and loan associations. Practically all of the other institutionsMr. LucE. What is· the total of national and State banks?
Mr. BODFISH. National banks 6,805; State banks, loan and trust
companies and savings banks 13,728, mutual savings banks 600, and
private banks 284.
Mr. LucE. About 20,000?


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

174

CREATION OF A SYSTEM QF FEDER.AL HOME LOAN BANKS

Mr. BODFISH. 22,071 on June 30 1931.
,
Mr. REILLY. Just a moment. lre all those banks mortgage institutions i
Mr. BODFISH. No; a part of them are commercial banks which do
not, and, in our judgment, should not do a mortgage loan business.
I would say a majority of them numerically make some real-estate
mortgages and some home loan mortgages. But it is primarily the
savings banks·, both the capitalized and the mutuaJ savings banks,
who make home loan mortgages, as contrasted with the larger banks
who do primarily a commercial business.
There was some discussion also on Friday. regarding the nature
of time deposits, demand deposits, and savings deposits, and for
the benefit of the record I would like to call your attention to the
fact that the Comptroller of the Currency summarized these· deposits
in all of the· banks in the :United States on page. 59. The pamphlet
is entitled " Text of the Annual Report of the Comptroller of the
Currency, December 7, 1931." His summary is as follows:
A classification of the demand and time deposits in each class of
reporting banks follows :
Dema.nd and time deposits in each class of. "6anks, June 30, 1931
[In thousands of dollars]
Demand d_eposits
Number of Individual State, coun• Oertiflbanks deposits ty, and mu- ·cates
of
nicipal
subject to
check
deposits deposits

Other
demand
deposits

Total

State (commercial) banks ....•.•.•.... 12,259
Loan and trust companies••....••..... 1,469
Stock savings banks........•...•.••...
654
Mutual savings banks.......•.••••....
600
Private banks.••••...•••...•...•.•••••
284

3,963,659
5,918,088
110,007
3,463
22,943

443,450
242,115
103
1,792

100,293
132,.429
3,363
56
1,741

1,063

4,581,490
6,493,383
114,195
3,718
27,539

Total ..•••••••••••••.••••...•••• 15,266
National banks .....•...•....•........ 6,805

10,018,160
8,660,076

687.660
1,162,450

237,881
132,953

276. 624
150,406

11,220,325
10,105,885

Grand total ...•••••..•••...••••. 22,071

18,678,236

1,850,110

370,834

427,030

21,326,210

200

74,088
200,751
722

----------

Time deposits
State,
county,
and
munic!pal deposits

Time
deposits,
Deposits
Depos• evidenced
Certlfl•
open
ac- Postal
its of
by sav• cates of counts, savings
other ings
pass
deposit
Christ•
deposbanks
books
massav•
its
ings, etc.

Total

---

-----State (commercial) banks. 45,356 1,433 3,698,208 1,287,788
Loan and trust companles ...•..........•..... 67,623 J0,282 2,967,771 268,583
Stock savings banks.•..•. 68,188
933,154
88,931
85
Mutual savings banks •••.
764 -------- 10,016,799
426
Private banks••••••••..••
10 -------17,155
12,285

Total
demand
and time
deposits

222,351

19,816

808,989
2,441
13,135
2,094

33,895
·2,209

----------------

5,274,952

9,856,442

4,157,143 10,660,526
1,085,008 1,199,203
10,031,124 10,034,842
31,544
69,083

Total ..•••••••••••. 171,941 11,800 17, 633, 087 1,668,013 1,049,010 55,920 20,579,771 31,800,096
National banks .•••••..•. 372,022 148,149 6,031,314 1,311,635 509,365 207,205 8,679,590 18,685,475
Grand total ••••..•. 543,963 159,949 23,664,401 2,969.-548 1,658,375 263,126 29, 169, 361 150,486, 671


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

175

On Friday we were discussing some specific amendments of the
bill which had been proposed by Mr. Monks, of the Ohio Bankers
Association, and which amendments have been commented upon by
Mr. Mac Chesney, representing the National Association of Real
Estate Boards. Now, the National Association of Real Estate Boards
and our organization are one mind as to the need for this legislation,
as to the ultimate ends to be obtained and as to the desirability of the
present measure. ·we do not concur with them entirely regarding
some of the details and suggestions that they have in mind. I think
that a different point of view is perfectly proper, as they are inter·ested entirely as beneficiaries in increasing the supply of loanable
capital in the home-mortgage field. We are interested in that, too.
But we are also in the position of being to a large extent the folks
who are going actually to participate, put up the money, and bring
our institutions into the system. So we are rather vitally interested
in and affected by some of the details which I think they are not so
interested in.
When whe stopped Friday I was about to discuss the management
of the banks. You will recall that some comments were made in the
Senate hearing on the management of banks by Mr. Monks and here
by General MacChesney. I want to point out first that the bill now
provides that as long as the members of the system contribute only a
minority of the capital, the control remains in the hands of the
Federal board through its appointment of all the directors of the
local bank, a policy to which we subscribe. ,v-e do not feel that
members should substantially control the 12 banks, or, I mean, the
members should not control the 12 banks unless they have made a
substantial capital contribution. Both Mr. Monks and General Mac~
Chesney were rather disturbed, or adhered to the view that there
should be· more.participation in the management of the 12 banks on
the part of the public. There was the feeling that additional directors should be selected from other lines of endeavor rather than
the home-financing business.
·
It seems to me that both these gentlemen have overlooked a very
important provision in the act. The public interest is already represented on the board of directors of each of the 12 banks. The
bill provides that two of the directors, without qualification as to
their interest, activity, business experience, or any qualification
whatsoever, are to be appointed by the Federal board to serve on
each of the boards of the 12 banks; and, as I say, there are no qualifications on those two directors whom we had assumed were to
represent the public interest.
Mr. Monks and General MacChesney proposed that three additional directors be selected to represent the public point of view.
We are not so sure that that is desirable. We feel that the three
groups that are now estab_lish_ed ~re diesi_gned to distribute th~ m~nagement so that the larger mstitut10ns will have no more voice m the
conduct of the affairs of each of these banks than the smaller or
middle sized institutions; and for that reason the bill, in our judgment, very wisely provides that all the members shall be divided
into three classes, and that three directors be selected from the larger
institutions; and the larger institutions are determined entirely on
113235--32--12

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

176

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

the basis of their home loan mortgages and their capital contribution
to the banks without regard to whether they are insurance companies,
banks, or building and loan associations; and then have three directors from the medium-sized associations or banks and three from
the smaller institutions which are participating. This insures a
voice to all members and the eleven directors would be as follows:
Two representing the public and the Federal board; and three,
three and three representing the large, the medium-sized and the
small participants or members of the system.
Mr. Monks seemed to object to directors of necessity being chosen
from the home-financing business. He said that he did not know
what it meant to be in the home-financing business. Well, I submit
that that is a very simple thing. A man is in the home-financing
business if he is an officer or director in an institution that is making
Joans to home owners. It is all very simple, and I doubt if any
question would be raised on that score.
Now, we absolutely disagree with their proposition that a representation of all pursuits of business on the board is desirable. I am
not competent to discuss proper banking practice, but I am not so
sure that the practice of our commercial banks or our savings banks
in going out and picking up individuals from different business
pursuits, and the building of a wonderful fagade in the form of a
directorate is entirely the best practice and policy. I am not so sure
but what the banks that have moved most steadily through this depression were banks that were managed by excellent bankers rather
than by indifferent directors who only attend meetings once a month.
We feel that if this institution is to serve primarily the needs of the
home owner and develop the type of credit he should have, which
we believe is long-term installment credit, you can probably best do
that by having all your directors, outside of those two who represent
the public interest, selected from people who are familiar with the
home-financing business. So much for that.
I want to comment for a moment on the advances that shall be
made to members. There was suite a bit of discussion in the Senate
hearing regarding the advances to members, and Mr. Williams asked
a question about them on Friday. The first important thing in the
question dealing with advances to members is the distinction between
long-term and short-term loans. As we said Friday, there is a difference between the bank and the building and loan point of view
when it comes to long and short-term loans. Judged from what I
prefer to call the "banker point of view "-and I do not say it in
disrespect-the shorter the loan the better the collateral. That is
true from the point of view of good banking management, but that
is not necessarily true from the point of view of the home owner or
the home buyer, and building and loan associations without exception take the point of view that the sound and proper type of loan
for the home owner and home buyer is the long-term, weekly,
monthly, or even, in rare cases, quarterly repayable installment
mortgage.
This bill, in the sections that appear on page 15, as I recall, sets
up a distinction between long-term monthly repayment installment
mortgages or amortized mortgages, as we call them, in the building
and loan business, and all other mortgages. The bill says that when
a member institution brings mortgages to its bank for discount that

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

177

on long-term monthly repayment mortgages the bank is to give them
more money, a larger advance in proportion to the amount o:f collateral submitted than it is to give them on 1, 2, or 3 years term or
straight mortgages.
Now, what is the justification :for thaH It seems to me that hal_:f
o:f the justification for the participation o:f the Government in this
type of enterprise, the justification for the Government setting up
this sort o:f a banking system, to increase the credit in the homemortgage field, is in order to encourage the long-term type o:f financing; and the way this bill attempts to encourage that is to say to
the institutions that make that type of mortgage, " We will lend
you-we will advance you a little more money per dollar o:f collateral
submitted than we will lend to the institution that submits short-term
or submits straight mortgages.
Now, the justification for that, gentlemen, is entirely a matter of
social policy, and home ownership is concerned. We have :found that
the one way to turn out a man with his home debt :free is to make
him a mortgage that reduces a little bit each month. Make him a
mortgage that the can just keep paying on each month, until
finally he has absolutely cleared the debt. He can not do that in one
year; he can not do it in two years, and he can not do it in three
_years, if he is a man o:f small and ordinary means. It takes a man
o:f the get-rich-quick variety to buy a home and be able to pay :for it
completely within two or three years.
Mr. REILLY. Right there, is it not a fact that it is the policy o:f
th~se building and loan societies to write the kind o:f mortgage that is
most advantageous to the borrower?
Mr. BODFISH. Absolutely.
Mr. REILLY. Then, why do they write a short-term mortgage
when it would be more advantageous to write a long-term mortgage 1
Mr. BoDFISH. The building and loan associations do not write
any short-term mortgages, Mr. Chairman, but the banks do. Good
banking practice indicates that the shorter the term of the collateral,
or the shorter the term of the mortgage, the better it is from the
point of view of the bank. But that is not true of building and
loan associations. Our mortgages are made on the long-term installment basis, without exception. I think that is desirable public
policy, and to a large extent justifies the system and practices that
the Government is attempting to encourage through this bill.
Mr. REILLY. I have received a :few letters from building and loan
people protesting against the provision limiting the amount of
money that they can get on mortgages to 60 per cent. In these
writers' opinions that ought to be raised, and it can be raised s_afely
with the set-up you have :for this bill~
Mr. BODFISH. Yes. There are two things involved there, Mr.
Chairman : In the first place, we want to urge that no limitation
be placed upon the percentage of mortgage in relation to the value
of the property; in other words, as the bill now reads, a mortgage
is not eligible :for rediscount i:f it exceeds 75 per cent of the value of
the property. The 60 per cent applies, as the bill is now written, to
the proportion o:f the unpaid principal that the bank can advance
to a borrowing member. Now, it might be possible to raise that a
bit yet, but in the main we feel that we want to keep the mortgage

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

178

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

collateral that is submitted and that underlies these bonds seasonedr
prime collateral, so that as they are deposited with the trustee or
registrar for the benefit of the bondholders, the bondholders will
consider that their bonds are just as prime security as there is outside
of the direct obligations of the Government. I think the succei:;s
.of the system will turn largely around the bonds being secured,
beyond au· measure of doubt, and consequently they will be very
popular and very marketable.
With respect to that point, the men in building and loan circles
who have been discussing this matter of the requirement of mort_gages for rediscount to the 60 per cent have attempted to redraft
page 15. As now written it seems to me a bit confusing in some
ways, and we have attempted to clarify it by redraft. The redrait
reads as follows, starting on line 3-this is, of course, advances that
may be made by each of the 12 banks to any of their applying
members [reading]:
limitations as the board may prescribe. Any such advance shall be subject
to the following limitations as to amount:
.
(1) If secured by a home mortgage given in respect of an amorti,ed homemortgage loan which was for an original term of eight years or more, or in
cases where shares of stock, which are pledged as security for such loan,
mature in a period of eight years or more, the advance may be for an amount
not in excess of 60 per centum of the unpaid principal of the home-mortgage
loan ; in no case shall the amount of the advance exceed 40 per centum of the
value of the real estate securing the home-mortgage loan.
(2) If secured by a ·home mortgage given in respect of any other homemortgage loan, the advance shall not be for an amount in excess of 50 per
centum of the unpaid principal of the home-mortgage loan ; in no case shall
the amount of such advance exceed 30 per centum of the value of the real
estate securing the home-mortgage loan.
(b) No home mortgage shall be accepted as collateral security for an actvance by a Federal home loan bank if at the time such advance is made (2)
the home-mortgage loan secured by it has more than 20 years to run to
maturity; or (2) the unpaid principal of such home.

Those are the provisions that are in the bill at the present time,
with this one exception. At the present time the bill says that no
mortgage may be submitted for callateral that exceeds 75 per cent
of the appraised value of the real estate. Well, it seems reasonable
that when you are only advancing 60 per cent of the unpaid principal
and the amount that you advance can not exceed 40 per cent of the
value of the real estate, it does not make any difference whether the
face of the mortgage is 75 per cent or 80 per cent or even 85 ·per cent,
and we therefore suggest that rephrasing in order to eliminate that
one particular restriction, which I want to say in all frankness was
written into the bill at our suggestion, as we raised it in one of the
amendments that we submitted to each member _of this committee
some months ago when the original bill was first advanced.
Mr. LucE. That brings us back to the same thing that happened
in the Senate; that shuts out all the mortgages that were in the Senate pointed out as to those people with big asset~.
Mr. BooFISH. To go ahead: In section 2, in the suggested rewriting of page 15, we merely deal with all the other mortgages that
might be discounted. That in the straight mortgages or amortized
mortgages for terms of less than 8 years, if there be such. Beyond
that we do not suggest change in any of the other provisions with
regard to advances.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

179

I wonder, Mr. Williams, if I have answered the question that you
raised with me Friday regarding the eligibility of the advances 1 I
want to assist all I can.
Mr. WILLIAMS. I do not now recall what I asked about it.
Mr. BoDFISH. You referred to page 15 and raised an inquiry.
Mr. REILLY. At the. present time, the Federal land bank advances
money up to 95 per cent of the mortgage. The joint-stock land
bank advances money up to 100 per cent of the mortgage. In this
bill you have assets of the-borrowing company equal to 8 per cent
of the mortgage. That has been testified.
Mr. BODFISH. Invested in stocki
Mr. REILLY. You have the stock of the corporation. Now I can
not understand why it was necessary to limit to 60 per cent of unpaid
principal and 40 per cent of the value of the property on loans made
to this bank to the home-loan banking institution. It seems to me
you are crippling unnecessarily the loaning or the borrowing ability
of the home loan banks, making it 200 per cent. Why is it necessary
to offer securities for sale with 200 per cent of the property value
behind them i
Mr. BoDFISH. Of course, our objective and our approval of the two
for one, which is what it amounts to practically, of collateral behind the bonds is our desire to contribute to making these bonds
absolutely the primest security that there is. We are very zealous
and proud of the safety record of the building and loan associations,
and we do not want this system, which is going to be participated in
broadly by building and loan associations, to ever have anything
which will reflect upon it and cause its -bonds to fall below par or
anything of that kind.
·
I might say, that in the case of the land bank of the State of New
York, which is a sort of example in this sort of banking has been
operated for a few years. Those bonds have not had a broad market,
but they have remained right at par all through this depression
period, and they put up collateral, as I recall, on the basis of about
one and a half for one, instead of 190 per cent; that is the minimum
in this bill. We urge that you sin, if at all, on the side of conservatism in this enterprise. We do not want to use it as an instrumentality fur permitting undue expansion. As a matter of fact,
our building an~ loan associations, Mr. Chairman, in many States
are restricted in their borrowing to 10 or 20 per cent, and in some
cases 30 per cent of their resources.
.
Further discussing the long-term installment mortgage, we feel
that it has a number of advantages for the home owner and home
buyer. It gives him a chance to pay the mortgage without any renewals or renewal cost, and without any of tlie worries of having
a one or two year mortgage refinanced or renewed. He does not
have to shift his mortgage from one institution to another. As a.
matter of fact, we feel that experience has proven it is the only wise
thing for the small borrower to have this type of mortgage.
And I want to point out one thing that happened in the Senate
testimony: Mr. Monks, representing the Ohio Bankers Association,
I think, asked that this preference between long-term and short-term
mortgages be entirely eliminated from the bill, and Senator Couzens·
asked .:Mr. Monks, " Do you want to discount 1 and 2 year mo+t-:

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

180

CREATION OF A SYSTEM: OF FEDERAL HOME LOAN BANKS

gages i" And he did not answer the question. We think it would
be somewhat aside from the ends that are desired in this bill if it
should become a device for encouraging unduly 1 and 2 year mortgages. I do not mean 1 and 2 year mortgages exactly in the legal
sense--! mean in the practical operating sense.
Mr. WILLIAMS. On the other hand, that would practically cut them
out of participation in it. Will not that be the practical effect of it?
Mr. BODFISH. Well, I do not think so; and I think there is another
side to that, Mr. Williams.
Mr. WILLIAMS. Well, is not that really the situation, though? Will
not that be the practical result?
Mr. BODFISH. Well, it is going to establish a decided preference
for the other type of mortgage. I do not think it will cnt them out,
because those mortgages are eligible for rediscount under the clause
which deals with mortgages other than long-term amortized-they
can raise money on them. But there is this distinct preference for
the monthly long-term mortgage. So I would not say that that
would be cut out; I do not think it is necessary or desirable to do
that.
Mr. WILLIAMS. The Ohio Bankers Association~ as I understand it,
is against this bilH
Mr. BoDFISH. Well, I would be perfectly willing to stand and make
the statement that the Ohio bankers are unqualifiedly against this.
measure, unless it is rewritten for the convenience of the large, commercial banks in that State, who are engaged, to a certain extent, ip.
making 1-year mortgages. One·of the gentlemen who testified before
the Senate on behalf of the Ohio Bankers' Association, in an inaccurate and irresponsible way, attempted to villify building and loant
is a vice president of a large commercial bank that hasn't £my mort,
gage loans eligible under this bill. I do not believe that the gentlemen who appeared before the Senate hearings represented the small
banks and the savings banks of the State of Ohio, and I speak with
some knowledge as I was a resident of Ohio for several years. They
are opposed to anything which strengthens the instalJment-mortgageinstitutions, which are the building and loan associations. I do not
believe that this bill should be changed to accommodate the type of
institution that already has the Federal reserve system designed toservice them. It is my judgment that these gentlemen would not
approve the measure unless it is redrawn in a way to make it useless
to building and loan associations and all the preference :for long-time
and installment home financing removed. I dislike to make any reference to the sincerity of individuals appearing as witnesses, but
the gentlemen who have appeared on behalf of the Ohio Bankers
Association have a selfish interest in the matter and desire to defeat
this measure, if possible.
Mr. WILLIAMS. Are not the banking associations generally opposed
to this bill in its present form 1
Mr. BoDFISH. I do not think that is true. So far aR I know. the
smaller banks which it is designed to take care of, and who are the-ones who are expected to participate in it, because such bankers do
not have the type of collateral that they can go to the Federal
reserve with, are enthusiastic about this measure. I would refer to,
the testimony of several bankers before the Senate committee.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

181

Mr. WILLIAMS. Can you give me one in my own State that is foriU
·
Mr. BODFISH. I am not acquainted with the banks in your Stater
Mr. Williams. I will say in all fairness that the Missouri Bankers.
Association has gone on record in opposition to the measure. I think
you will find before we are through that the American Bankers
Association will go on record in opposition to this measure. They
have asked in an official communication to the Senate committee that
action on this be delayed, and that no permanent institution be set
up, and, if I may express an opinion there--of course, I am biased
and I am emotional about it; I realize that-but I think .after all
the things you gentlemen have done to try to save the commercial
banks of America, including the $2,000,000,000 of the Reconstruction
Finance Corporation and other items, and I have heard no objection
to their getting another $200,000,000 in the Glass bill ( and without
return to the Government, by the way, as. the bill is drawn) that
the bankers by and large should retire and not object to our institutions having some recognition and a chance to develop our own place
to go for reserve credits.
Mr. CAMPBELL. You think they ought to don sackcloth and gointo retirement?
Mr. BODFISH. Yes; I think they ought to don sackcloth and put
ashes on their heads and retire and do penance, Mr. Campbell, fura long time, because, wittingly or unwittingly, they are responsible
for a year and a half of the prolongation of this present depression.
Mr. WILLIAMS. I now come back to the question I have asked a
number of times : What per cent of the home loans do the banks of
the country carry? You seem to think they ought to be eliminated.
What percentage of the home loans of the Nation to-day are they
carrying?
Mr. CAMPBELL. You mean the commercial banks?
Mr. WILLIAMS. Yes; banks of any kind as distinguished from
building and loan associations; and I might include in that insurance companies-if you know.
Mr. BODFISH. I have no figures on it, Mr. Williams.
Mr. WILLIAMS. Have you any judgment on it?
Mr. BODFISH. My judgment is that from 40 to 45 per cent of the·
small home loans of this Nation are in the hands of building and loan
associations. Back in 1920, which was the last figures we have on
the total volume of mortgages on small homes, there was something
like $4,000,000,000 of those mortgages at that time; building and loan
assets were approximately $2,500,000,000, which indicated then that
we had approximately half of the small home loan mortgages. The
balance of those are distributed between private investors and insurance companies to a large extent, although they get into the larger
mortgages, even though they be on homes and among banks.
Mr. WILLIAMS. Have you any way of furnishing us that information~
Mr. BooFISH. By States?
Mr. WILLIAMS. Yes.
Mr. BooFisH. I would be delighted-Mr. Wn.LIAMS. Have you any way that you know oH Is that;
information available, to your knowledge i

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

182

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. BODFISH. I do not think it is available by States, for this
reason, Mr. Williams, that the State ba.nking reports carry realestate loans in a single category, and you do not know whether they
are farm loans, whether they are loans on business property, whether
they are loans on large homes or on the small homes.
The Comptroller's report summarizes the loans and discounts,
by States, on pages 42 and 43. In the text of the annual report,
on page 45, the report takes the total loans and discounts of the
6,658 national banks and breaks them down into different kinds of
loans. The loans and discounts of national banks in this latest report
are approximately half their total resources, the balance being cash,
bonds, etc. Of the one-half of the national-bank resources, which are
in loans and discounts, only 9.72 per cent are invested in real-estate
loans other than loans on farm lands. This item would include all
real-estate loans, except farm loans, regardless of their size or nature.
It would include loans on business properties, stores, and any type of
real estate., including, of course, such residential or home mortgages
as the banks might have. All, of course, are for the duration of five
years or less. State commercial banks on the same date, June 30,
1931, had real-estate loans, other than farm loans, of $1,357,000,000;
loan and trust companies had an .additional $1,232,000,0Ci0; the
stock savings banks had $88,000,000; mutual savings banks, $5,729,000,000; private banks, approximately $5,000,000. I would estimate
that our building and loan associations have at least twice as many
home loan mortgages in dollars as you find in all banking institutions. The home loan mortgages that are eligible under this act
that are held by banking institutions are held primarily by the small
banks in the small towns and small cities.
Again, I want to emphisize that these banking statistics do not
separate loans on homes, which would be eligible under the home loan
bank bill, from the other city real-estate loans on, for example,
wealthy people's homes, business property, etc.
.
Mr. WILLIAMS. !_understand that the Cen_g1s Bureau attempted to
make that differentiation; am I right on that?
Mr. BODFISH. In the figures they are now compiling, as I understand it, they are showing the size of the mortgages on each home that
was owned or occupied, and they show the amount of rent paid by
each tenant of the occupied 'home. But I do not think that· those
Census :figures indicate the type of institution that is the mortgagee.
Am I correct, Doctor Friedlander, in that? You are familiar with
those figures. They do not indicate insurance companies, banks, or
building and loan associations do they?
Mr. WILLIAMS. Do they indicate the total amountj Let us have
that if we can get it-on home loan mortgages in this entire Nationi
Mr. BoDFISH. ·we have it in 1920, as I recall the national figures.
They can compile it for 1930.
Mr. FRIEDLANDER. They are total mortgages and not honie loan as
such; they are not segregated.
Mr. WILLIAMS. There you are. You say you can not show that at
all. I am asking for information.
.
~
Mr. FRIEDLANDER. They ·show total teal-estate loans, but are not
segregated as to home moi:ts:age~ and m.ortgages on hotels· a.:n:d so on.
Mr. WILLIAMS. They do-not differentiate as to farmsj

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM. OF FEDERAL HOME LOAN BANKS

183

Mr. Fn~~m;ANPE~. They distinguish between farms and" all. othe11,"
"All other-" are in one group; homes .and business properties and so
on are in ~nother group.
Mr. WILLIAMS, That would be of very little value that way.
. Mr. CAMPBELL. It was stated _here the other day that. there was
$20,00Q,0_Q0 1000 in home loans of all sizes, and that. over 40 per cent
was held by the building and loan associations.
·
Mr. WILLIA)~Is. I think it was.stated by somebody-I do not.know
whether it is on the record or not-however~ I think it was. only an
esti_mate-that there were twenty billiqns,
Mr. BODFISH. If you ask my judgment I would say that there. we1;~
probably twenty billion of home l<>ans of ;the size that would ca.U for
rediscount under this measure .
. . Mr. WILLIAMS. That _is what my inquiry has been directed to. If
that information is available in any shape, to my mind that is an
importaµt thing.
Mr. REILLY. I ·think Doctor Friedlander put in the record the
figures on those mortgages. .
.
Mr; FRIEDLANDER. I gave you the figures on th~ 1920 census; and
then estimated on what the increase in billions would be. If the other
mortgages increased at the same proportion it would ·be about twenty
billion. That was purely an estimate, however.
Mr. REILLY. I understand there has been no tabulation of the
1930 census on that point yet.
.
.
Mr. BODFISH. I do not think the basic data is in the 1930 ~nsus.
To continue to speak to another of Mr. Monks' proposals in con;.
n,ection with these advances to members: In referring to line 20,
page 15, he urged th~t absolutely no mortgage should exceed 60 per
cent of the appraised value of the real estate and be eligible as to
collaterals to the home loan banks. Now, that, in the first place, is
contrary to the objects of the legislation; it is contrary to the objectives of the President and, for an important reason: We all get
very concerned by the second mortgage problem in this country;
we talk about the " onerous charges " and the " commissions " and the
" bonuses " and the " premiums " and that sort of thing. We feel
that in building and loan associations-and I would illustrate particularly by the States of Louisiana, Massachusetts, and New Jerseythat we have proven that with sufficiently abundant supply of first
mortgage credits on a long-term instalment basis that you eliminate
this second mortgage evil. The second mortgage evil develops where
you have 50 and 55 per cent of first mortgage loans, the type that is
typically made by banks and by the insurance companies, and, of
course, no home builder or home borrower, or few of them at least,
have 45 to 50 per cent down payment to make. We feel it is a sound
transaction if they have 20 to 25 per cent, and the building and loan
associations in those States where we have a large volume of assets
are financing that home purchaser who is ready to put 20 or 25 per
cent of his own funds in the home-owning transaction ; we are ready
to finance him for the balance.
Now, the inclusion of Mr. Monks' provision that any mortgage
which exceeds 60 per cent of the appraised value would be eligible
for rediscount would discourage and possibly eliminate from this
bill .the exact thing that the bill is attempting to accomplish, namely,

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

184 CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS
to increase the supply of capital in the hands of the local lending
agencies, in order that they may make, let us say, lower costs. and
make more liberal home mortgage loans, and eliminate the costly,
undesirable, and unsound second mortgage problem.
Mr. REILLY. How could you discount a mortgage at 60 per cent
under this bill wh{ln the limitation is 40 per cent of the appraised
value?Mr. BODFISH. What Mr. Monks was supposing is this: There are
two limitations in this bill. One is a percentage of the unpaid principal and the other one is a percentage of the value of the real
estate.
Mr. REILLY. But in no event can it be above 40 per cent of the
value of the real estate.
Mr. BODFISH. That is true. Now, let us take a $10,000 home and
we will say that the limit that can be advanced by the banks to a
member is $4,000, or 40 per cent. As the bill is written now, I, as a
member of a home loan bank, can bring in $7,500 first mortgage and
get that 40 per cent or $4,000 on it. Mr. Monks proposes that I be
not permitted to bring in any mortgage that is in excess of $6,000 and
get $4,000 on it.
Mr. CAMPBFLL. His system would disqualify the greater proportion of mortgages¥
Mr. BODFISH. It would disqualify three-fourths of the building
and loan mortgages of this country.
Mr. CAMPBELL. His same purpose is accomplished by the restriction placed on the amount that can be loaned on these mortgages.
Mr. BODFISH. So far as safety is concerned it is completely unfair.
Mr. REILLY. Does he give any reason for that?
Mr. BODFISH. Absolutely no reason. But I can tell you the reasons. The reasons are that the banking institutions such as his own
seldom exceed 50 per cent of the appraised value in the mortgages
they make.
Mr. REILLY. It appears that he wants to handicap and interfere
with the operation of the loaning by home loan banks?
Mr. BoDFISH. Precisely. Of course, as we said, it eliminates a
large portion of the mortgages held by building and loan associations, and we feel, from the experience we have had, that we can
make 66% cents, 70 per cent and, in some cases 75 or 80 per cent
mortgages to the small home owner, the fellow, as we said, who has
little money but lots of character; and we submit our safety record
as to the soundness of that type of financing, and that is the type of
financing this bill is designed to encourage.
Mr. LucE. Not only for the benefit of the committee but for the
benefit of anybody reading the record, I would like to put in here
the statement that when our associations were starting in Massachusetts, a 66% limit was put upon their loans, while 60 per cent was
the figure upon our savings banks. Now we have put it up to 80 per
•cent on amortized loans, showing that the 50 years' of experience with
the system has lead our very cautious legislature to believe that an
amortized loan may safely have an 80 per cent valuation.
Mr. BoDFISH·. The safety record of the Massachusetts cooperative
banks, which is what we call the building and loan associations in
the Bay State, is an enviable one, Mr. Chairman, to say the least.
'They have never lost a dollar to a shareholder, to my knowledge.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDEIµL HOME LOAN BANKS

185

Mr. W1LLIA:\<IS. Is their system in Massachusetts different from the
general systems throughout the country i
Mr. BoEFISH. There is practically no difference. Originally they
called them cooperative organizations and cooperative building and
loan associations, and then gradually they got to calling them "cooperative banks." But their system is essentially the same as that
that is in vogue in other parts of the country. They are very rigorously limited by State law. They have a very excellent statute; it
has been patterned after in a great many parts of the country.
I think that is sufficient regarding Mr. Monks' proposals in that
regard, with one more comment: The reason that we can make so
high percentage loans is the fact that we are local institutions in contact with the borrowers. Most of them have been savings investors
in our institutions for years before they buy or build their home and
that sets up a human relationship, we call it the "moral risk" in the
building and loan management. It has led to the safety record that
we have established in making these kind of loans, which can not be
made by. distant money lenders. They can not be made and serviced
by the insurance companies who have to operate through a local
broker as their agent and that sort of thing. Home loan credits to
:fully serve the borrowers must be decentralized and local building
and loan associations accomplish that decentralization.
The next item, with regard to amendments, which I wish to bring
to your attention, is the item of the $2,500, the so-called " membership fee" that was discussed. I think the object of putting the $2,500
membership fee in the bill originally was to hasten capital into the
system, to get more money in, and which has the second objective of
getting the Government out.
l\fr. Williams raised the question as to $2,500 being too high for
the small institution, "$2,500 plus one per cent." I would say as far
as.I can see we have no objection to that being 1 per cent of the home
loan mortgages, with $2,500 as a minimum rather than as a "$2,500
plus." That is all I have on that point, unless there are questions.
On page 20, line 16 of the bill, there is a provision which says
that [ reading] :
Each Federal home loan bank i<hall have power to accept only such deposits
as are made by members of such bank, or by other Federal home loan banks.
Such deposits shall not be subject to check, and no rate of interest in excess of
3 per centum per annum shall be paid thereon. No Federal home loan bank
shall tran~act :my bankiug or other business not expressly authorized by this
act.

There haYe been questions raised by the large commercial bankers
as to the propriety of that provision, and I want to defend it a
moment for your benefit. In the first place, gentlemen, you are
setting up a system of banks. They are to be named banks and, as
far as servicing their members is concerned, they function as reserve
banks for the members. Let us assume for a moment that I am an
investor in a building and loan. association. I have invested my
savings in that association because I wanted my money to go into
the home financing business. So I decided that building and loan
would be a safe place for me to put my earnings.
Now, that being true, I see nothing but selfishness in the point of
view of the commercial banker when he says that even though the
:funds that have been given to this building and loan association by

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

186

C'REATION· OF A SYSTEM OF FEDERAL HOME LOAN BANKS

its investors were intended for home financing, "if you have more
than you need in the home financing business, the only place you can
put them is in our commercial banks." .
We submit that there is no reason why these 12 banks should not
receive deposits from their members of surplus funds-the funds
that they are accumulating for the retirement of indebtedness, et
cetera. We have absolutely no desire that they carry on a commercial
banking business. The language of. the bill prohibits checking accounts or anything of that character. This becomes merely a reserve
depository which may be used by members of the system within
·
limitations imposed by the board.
Mr. REILLY. Is such a provision in this bill necessary for the
operation of this law?
Mr. BODFISH. I think it is very necessary, Mr. Chairman for this
reason, that the object of this bill is increase and conserve money
in the home financing business, and it will be one of the provisions
which will invite participation on the part of building and loan
associations; and there is the further thought that one of the things
which the bill attempts to do is to shift money from one territory to
another occasionally where there is, let us say, in New England, a
surplus of funds and there is a lack of sufficient funds in the Wisconsin area, for example. The device for transferring those funds
is that a member of the association merely deposits some money in
the New England Home Loan Bank, that is, in my Federal home
loan bank, and that Federal home loan bank deposits it or lends
it to one of the other Federal home loan banks, which may have more
demand for funds than they can meet at the present time. In my
judgment the elimination of that provision would estop that flow
of surplus credits from one part of the country to another.
Mr. LucE. Mr. Bodfish, it seems to be the general belief that the
Supreme Court ruling in the matter of joint stock land banks makes
it necessary in order to support the constitutionality of this bill that
there shall be some degree of power to accept deposits.
Now, the question may be seriously considered as to the extent of
the interest that shall be paid thereon. In the matter of postal savings banks we have trierl to keep the Government out of competition with commercial banks by maintaining a low rate of interest, 2
per cent. From time to time suggestions have been made on the floor
of the House that we raise that rate of interest, ancl invariably, so
far, they have been choked off on the ground that any larger rate of
interest than 2 per cent would result in competition by the Government with private enterprise. \Vould it do serious injury to this
bill if that 3 per cent were changed to 2 per cent, corresponding with
the postal savings?
Mr. BODFISH. I do not think so. I think 3 per cent would be a
little more desirable, but I see your point of view.
You see, our institutions are mutual and cooperative institutions,
and it is highly important that practically every dollar of their
money be employed with some return, and we want to have the 12
banks in position to give them enough return to encourage them to
put their surplus home financing funds in the hands of the 12 banks
whose whole purpose is to steady and assist the home financing
business.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CltEATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

187

Mr. CAMPBELL. Those deposits will be subjected to demand at all
times?
Mr. BODFISH. Well, I would say they would probably be subject
to withdrawal like time deposits by the member, b:ut not subject to
check.
Mr. CAMPBELL. That is what I meant, not subject to check, but
subject to withdrawal.
Mr. BoDFISH. Yes, and this :feature increases the :funds in the
hands of the 12 banks and will assist in supporting the bond structure and assist in building up the strength of the 12 banks.
Mr. Monks made the point that that would take money out o:f the
commercial, agriculural anl industrial pursuits, and, as General MacChesney indorsed it to a certain extent we submit that the members
of the building and loan associations intended that their money
should come out of the commercial, industrial and agricultural pursuits when they bought shares in the building and loan association.
Again, we have absolutely no desire to engage in the commercial or
general banking business. All we want is our own place to go :for
funds, and we want a sufficien_t depositary power to permit it to function successfully.
Mr. CAMPBELL. Funds are coming :for that source, now, are they
not?
Mr. BODFISH. Absolutely.
Mr. CAMPBELL. So it makes no difference.
Mr. BODFISH. There is another point I wish to make regarding the
:functioning of these 12 banks, and it is this : There is a distinction
between the banker and the building and loan point of view, and this
is brought about primarily due to the :fact that the banker looks upon
the home loan banking system merely as a place to go and discount
some mortgages. He has his reserve system in the Federal reserve
system where he can pile up credits, where he can keep some o:f his
cash should an emergency arise, and the only thing he sees in the
•
home loan bank measure is tbe bond borrowink privileges.
Now, in building and loan associations we have a slightly different
situation.. We have been denied access to the Federal reserve system-;-do not misunderstand; we do not want access to the Federal
reserve system-we :feel we have a different kind o:f business, and
even in the Federal reserve system our " notes payable " have been
denied eligibility. If we borrow :from a commercial bank the commercial bank cannot take those notes and rediscount them. But in
our institutions we do sometimes have demands :for credit and :for
funds in excess o:f what the associations have on hand, and we want
to be in position to supply those demands without causing undue
delay to the savings members, because that is what encourages them
to place their :funds in building and loan associations and use our
institutions. We feel that the home loan bank system will serve that
need which is peculiar to us, namely, a device for ·storing up some
reserve credit, and :for pooling some of our cash together and using
it _cooperatively in servicing our savings members.
That :feature of the thing is important and is designed to help
our saving members_, while the bond issue :feature is designed pnma:rily, as I see it, tor the borrowing members who make demands
f()r the loans. In line with this comment, we do not accept General

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

188

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

MacChesney's suggestion that these amounts deposited be limited to
the borrowings o:f a member. In other words, i:f a member is borrowing :from the bank, that is just the time when he has the least
money to deposit, and we would urge that that suggestion be not
adopted.
Just one more comment on that: Mr. Monks, or one of the witnesses representing the Ohio Bankers· Association, indicated that
those deposit :features take money out o:f the local com1nunity. Now,
we submit that our commercial banking friends have not been particularly careful about keeping money in their own communities.
They sustained the call market and their bond purchases are not
always confined to industries operating in their own communities,
and we are willing to match the building and loan record with theirs.
any time on this issue o:f keeping money in the local community.
Any deposits that we make would not be of large amount; they
would probably never exceed more than 2 per cent, at most, 0£ the
assets o:f an association, which is an incidental, you will grant me.
Mr. Monks, on page 357 of the record, discussed changing the
phraseology o:f the bill so that the banks built up " surplus " intead
or "reserves." Now, we strongly urge that the present languagebe retained, and that these banks accumulate reserves. The distinction is again one o:f those differences between the banker and building loan point o:f view. Surplus is money that can be distributed
as dividends or as stock dividends to shareholders or stockholders.
Reserves are accumulation 0£ :funds £or the "rainy day," and are
built up entirely to increase the safety o:f the institutions. In building and loan association without exception we build reserves rather
than surpluses, and by and large we can make no distribution
whatsoever o:f those reserves. Of course, a banking surplus can be
distributed, and in the light o:f the safety and strength and conservatism o:f this banking system as it is now suggested, we urge
that we adhere to the principles o:f reserves rather than o:f surplus.
Mr. WILLIAMS. I think that is a difference without a distinction.
especially in some States. I think the statement that surplus ca:ri
be distributed under the banking laws depends upon the States, that
is, the State banks.
Mr. BODFISH. We can distribute our surpluses in the banks in
Illinois, but we can not distribute our reserves in building and loan
associations.
Mr. WIILIAMS. I say, there is~ difference in the State laws. I am
very sure that Ol}.l' State can not distribute surpluses without authority.
Mr. BODFISH. I would defer to your knowledge, o:f course.
In passing, I might comment on the fact that Mr. Monks also
indicated that the reserve requirements for compelling distribution
to reserves out of net earnings were too high. I think that is a.
point that the committee should consider and discuss. I can not
refrain, however, from commenting on his argument. He indicated
that if the bank semiannually took 25 per cent of its earnings and
allocated them to reserves, at the end of the year it would have placed
50 per cent of its earnings in the reserve account. I am far from
certain as to~ whether this is exactly correct because usually 25 per
cent for the first six months and 25 per. cent for the second six months
is 25 per cent for the year. We concur in the wisdom, however, of

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

· CREATION

m'

A SYSTEM OF FEDERAL HOME LOAN BANKS

189

reducing the reserve requirements, in spite o:f the inaccuracy o:f Mr.
Monks's mathematics.
There is some thought among building and loan people that conic.ideration should be given to lowering the reserve requirement.
We want again conservatism and safety, but they should not be
so high that they impair the earnings o:f the banks unduly.
Mr. Monks's testimony-and General MacChesney corroborates
his statement-dealt also with supervision and examination. His
testimony appears on page 258 o:f the hearings, and he re:fers to
page 32 o:f the bill. He takes this position: He says that inasmuch
as you are loaning on mortgages, the value o:f the property is the
basis o:f the loan, and that he does not believe any further information is needed. Now, we in the building and loan field stand unqualified by :for examination o:f member institutions; and, by the
way-Mr. REILLY. Is that requirement :for the benefit o:f the building
and loan people, or :for the banks i
Mr. BODFISH. I think that requirement is for the benefit o:f this
banking system. Certainly any well-managed member institution
participating wants to know that the other institutions that are in
this system are well managed, are subject to examination and that
there will not be practices or tragedies developed that will embarrass
them as a member. It is merely applying to this banking system a
well-established principle that is applied in the Federal reserve
system:
Mr. REILLY. There are probably two States who have no provision
for inspection o:f building-and-loan organizations. What would you
do with those States i
Mr. BODFISH. Well, here we are speaking o:f examination o:f members a:fter admittance, and I would say that the thing to do is to
provide that they must have some sort o:f examination. The present
bill provides, Mr. Chairman, that the Federal board may examine
any member institution and require a member institution that is
going to borrow to :formally consent to examination.
Mr. REILLY. I understan!l the bill specifically provides that no
member institution can become a member unless it is subject to
examination.
Mr. BODFISH. That is true at the present time.
Mr. REILLY. That question came up this morning and I had some
information about it. There are three or four hundred private mortgage loan institutions that have several thousand home mortgages.
They can not come under the terms o:f this bill as it is now.
Mr. BODFISH. We think that is highly desirable, Mr. Chairman,
that such institution not be permitted to come under this bill.
Mr. REILLY. Why~
Mr. BonFISH. Because any institution that is handling the savings
of the public should be subject to the scrutiny o:f public auditors who
are functioning in the public interest. I think that is a :fundamental
principle in banking practice. Our supervision in this country is not
perfect, but where would we be with our banks at the present time
if they had not had some sort of supervision and inspection?
Mr. WrLLIAM:S. According to the gentleman from Baltimore who
testified about the conditions in Maryland, they would be better off

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

190

CREATION OF A· SYSTEM OF FEDERAL HOME LOAN BANKS

.without one. However, I do not entirely agree with him in that, but
I want to ask you this question: To what extent in the entire coun~
try do they have a separate examination of the banks and the building and loan associations~
Mr. BODFISH. You mean-Mr. WILLIAMS. Whether or not the same examining agancy ex~
amines both of them, or whether it is different.
Mr. BODFISH. In a number of States there are separate building
and loan departments. In Illinois, for example, my State, the ·supervision is all under the auditor of public accounts. He has three divisions: Banking, building and loan and insurance divisions. There
is a variety of arrangement in the different States.
Mr. WILLIAMS. I mean, does the same man or the same central
authority examine the banks who has examined the building and
loan associations i
Mr. BoDFISH. In general, I would say yes; 'it is a similar examination.
Mr. WILLIAMS. What is your information on that~ Do you give
that as· authority¥
Mr. BODFISH. I would be very glad to illustrate with any State
with which I have knowledge. In Illinois, as I say, we have an
auditor of public accounts, who is in charge of the examination of
all financial institutions. In his department he has three divisions:
banking, building and loan and insurance.
Mr. WILLIAMS. By means of one department he examines them all i
Mr. BonFISH. He examines them, and he is the ranking official
responsible.
·
In New Jersey, for example, you have a commissioner of banking
with a separate commissioner in charge of each bureau-insurance,
banking, and building and loan-:-each commissioner with the same
salary.
·
As I say, the well-managed building and loan associations who are
going to participate in this system and hope to participate in it,
want to know that the other members of the system are :properly
conducting their affairs and that they are in sound condition, just
exactly as the Federal reserve systeµi examiner its participating
members.
I am practically through. There are a number of perfecting
amendments, as we call them, that were submitted at the close of
the Senate hearings. The majority of them appear with little suggestions of language that we wanted to make for the. benefit of the
drafting counsel and the consideration of the committee. However,
in those amendments there were two things that I feel that I should
discuss. One of them deals with the conditions, Mr. Williams, that
prevail in your state with regard to limitation upon the mutual
building associations, pledging or assigning their securities.
'l'he United States league urges that an amendment be included
in the act, which will permit the capital placed in the banks by members to be loaned on short-term loans on less than a year to members
without assigned mortgages as collateral. This will particularly
help the States of Missouri and Oklahoma, where there are peculiarities in the State laws preventing them from assigning· their mort·gages. This niight be helpful to 5 or 6 other States, also, out of the

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

}91

48, which have unduly restrictive laws as to the borrowing of money
by building and loan associations. It should be noted· that this
amendment deals only with the funds that are placed in the 12
banks by members and in operations where the money loaned to associations so secured from the issue of bonds, of course, associations
would have to be in position to assign mortgage collateral. Mr.
Williams, that is the proposal that the gentleman from your State
desires and we see no reason why it should not be written into the
bill. It will be entirely helpful and not hurtful. On page 622 of the
Senate hearings, first item 17, we submitted an amendment and it
was in form approved by the gentleman from your State, Mr. Williams, who has been discussing it with you.
Of course, it is important to note that it includes only mutual institutions without creditor liabilities. The amendment 1s as follows :
On page 21, subsection (3) of (i), section 9, line 18, after the word "prescribe " add the following:
"Provided, however, That such advances mny be made without collaternl
security to members whose creditor liabilities, exclusive of all advances from
Federal home loan banks, do not exceed 5 per cent of the ussets of the member receiving such aclv11nce or advances under the provisions of this subsection."

You see, if you have a $2,000,000 building and loan association,
the thing is all shares; there are not any debtor-creditor relations in
the sense_ that you have them in a bank. In a $2,000,000 bank you
would probablf have $50,000 or $100,000 stock, and the balance
would be deposits, a creditor liability. This is a thing that is peculiar to mutual- and cooperative organizations such as our building
and loan associations, and we urge the inclusion of that amendment
to assist the early functioning of this system and the admission of
the institutions in several States who can not, as I understand it, at
the present time assign mortgages. We feel it is a perfectly rea sonable request, and here, as in the Senate, we sponsor ~ts adoption.
l\fr. "\°VILLI.AMS. Have you a copy of that amendment?
l\fr. BODFISH. Yes. It appears in the Senate hearings, and I have
it as we submitted it. I would be glad to furnish a copy to you.
Mr. WILLI.AMS, I would like to have it. However, if you can refer
to it in the Senate hearings that will answer my purpose.
Mr. BoDFISH. Pa.g_e 622.
Mr. WILLIAMS. Which book?
Mr. BODFISH. That puts it in the third volume. On that same page
at item 18, we urge the inclusion of a section which would permit
the affiliation of an additional class of members. In the State of
Ne.; York there is already a reserve system for home financi;ng institutions functioning on a State basis, similar to the one you are
here creating for the Nation. That State has sufficient assets to support its own system. That is not true of all the other States in
the country. One has recently been established in Mr. Luce's State,
Massachusetts. There has been a proposal, and I anticipate one will
also \)e established in New Jersey.
·
Mr. REILLY. Are those banks based on the theory of this bill?
Mr. BODFISH. Very largely; as a matter of fact, many of the principles that we urged be included within this bill when we submitted
amendments to you gentlemen earlier, were taken from the experiences of the land bank of New York.
118235--3~13

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

192

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. REILLY. How long has the New York land bank been
operating~
Mr. BODFISH. I think about 16 years.
Mr. REILLY. There is then no real need for this bill in New
York.
Mr. BoDFISH. My judgment of that is this: There is a need even
in New York. I will say this in all fairness, that the savings and
loan associations, as they call them in New York, have moved more
steadily through this depression period than the associations in any
other State. They have come more closely to functioning normally
and we feel that is largely due to the influence and the assistance
of that land bank. However, right to-day it is not capable, in my
judgment, of expanding its funds sufficiently to care for all the
·needs, and the reason is primarily this: That their bonds carry no
tax preference features and as a result that they have a very
restricted bond ·market.
Mr. REILLY. As I understand it, in New York, under the New York
law, it is a private corporation operating without any tax-feature
privilege or without any State funds.
Mr. BODFISH, I would say it is quasi public, Mr. Reilly, in that it
was created by special act of the State legislature.
Mr. REILLY. I know; but it gets no special privilege in the way of
tax-exempt bonds or debentures or State aid for money.
Mr. BODFISH. That is true; although I think the bonds are exempt
from all State taxes.
Mr. LucE. On pages 46 and 47 of the Senate record and following, Edward MacDoughall, president of the Queensboro Corporation
of New York City, gave the reasons why this is also pertinent for the
record.
Mr. WILLIAMS. I understood you to say that that same system
could not prevail in other States. Is that your statement~
Mr. BODFISH. I would say there are not sufficient building and loan
assets in my State to support a State institution alone; in New York
they have approximately half a billion dollars of building and loan
assets.
Mr. WILLIAMS. They also, of course, have more homes and use for
them than in a sparsely settled State.
Mr. BODFISH. Of course, your typical home in New York City is
an apartment that does not come within the purview of their homefinancing activities.
We feel that the amendment permitting those State reserve systems
to affiliate with the national system and function in conjunction
with and in cooperation with it is desirable both from the point of
view of the long-time permanent functioning institution and from
the viewpoint of the Federal home-loan banks getting into early and
effective operation.
,
Mr. LucE. I asked you at the pre"fous hearing how you felt
about the mortgage title and guaranteeing. What is your judgment
on that~
Mr. BODFISH. Well, I think there is no reason why they should not
be permitted to participate if they are rigorously examined, inspected
and supervised in the same manner that the banking institutions
are, and if they meet the requirements as to making home mortgage

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS 193
loans. I suppose they would qualify 'primarily as insurance companies. I might say that by and large, however, at least out our
way, they have been short-term lenders rather than long-term lenders.
They often broker insurance funds and that sort of thing. I do not
see that they can be debarred if they meet the requirements of
inspection, examination, and capacity to do long-term business and
their financial condition is good. Of course, I think the participation
in the system is going to be greater if it is somewhat restricted to
institutions that are specialized in home financing. We must not
try to put too many different kinds of things together or else we
will defeat some of our main purpose and discourage participation
on the part of purely home financing institutions.
Mr. REILLY. What do you think about the testimony that has been
given on the proposition of charging the banks interest on Government advaces in order to let the Government out of this banking
system~
Mr. BODFISH. I have an 'bdd judgment of that, Mr. Chairman. I
think that the quickest way to get the Government out of this banking system, as far as its advancing of money is concerned, is to keep
the capital subscription up to one per cent and to put the Government
funds in as an advance or loan without return, so that this system
can pay reasonable dividends to participating members right from
the start. It is my judgment-and it is :purely a judgment-that if
Government capital would go in there without return, as purely an
advance, to help get this bank started running-Mr. REILLY. It would be the first time the Government ever did
anything like thaH
Mr. BODFISH. Absolutely not, as I understand it.
Mr. REILLY. When 1
Mr. BoDFISH. You just gave $125,000,000 to the Federal farm-loan
system. You originally set up and started that institution.
Mr. REILLY. The Federal farm-loan system is a private institution
for the benefit of the mortgagors. No private people make any
money out of it. The Federal reserve system started with a Government loan, but was paid right back. That is for the benefit of
the banks and the Government makes money out of it. If the Congress passes this bill, it will be the first time I know of where the
Congress has put in money where private investors will get the
benefit from it.
Mr. BODFISH. Of course, Mr. Chairman, as far as building and
loan associations are concerned and the cooperative banks and the
homestead associations, they do not come within the category of
private capital. What we have is cooperative form of institution.·
Mr. REILLY. It is cooperative, but there will be others in there
besides the cooperatives. A mortgage bank that will go in will get a
benefit from this proposition that mortgagors will not get.
Mr. BODFISH. That is true.
Mr. REILLY. In this bill you provide for establishing something
that has never been accomplished before during the history of this
United States Government. Do you, Mr. Luce, contend otherwise i
Mr. LucE. That is true, Mr. Reilly, but as I have been contending, if the Government lends capital to the system, repayment is
coming out of the surplus, and therefore the more interest the Gov
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

194

CREATION OF A SYSTEl\1 OF FEDJ<JRAL HOl\fE LOAN BANKS

ermnent gets the longer it will take to get repayment of capital
will it not?
'
Mr. REILLY. That is true, but as this bill is drafted now they get
$150,000,000 and nobodv knows when the Government can get
out of it.
•
Mr. BODFISH. But everybody who comes in to participate and get
any benefit has to contribute to the retirement of that Government
capital.
'
Mr. REILLY. Providing when the banks are up to the same amount
of money the Government has in it-. Mr. Bo~FISH. Yes, as we get more money, and if we can make
1t• attractive. that accelerates the retirement of the Government
capital.
·
Mr. REILLY. Why should the membership get any interest on
theii: investment in this bank before the Government is all paid up?
Mr. BODFISH. I can only speak, Mr. Chairman, for the building
and loan associations and their point of ~iew, of course. Our institutions operate on very, very narrow margins. The typical spread
between the rate we pay our investing members and our borrowing
members is from 1 to 1½ per cent at the most. That narrow spread
necessit~tes that we keep practically all of our capital employed
at all times; for example, to-day when your banks are boasting
that they are 50 or 60 per cent liquid, the building and loan associations all over the country right to-day have practically 90 per cent
of their resources invested in home mortgage loans just as they did
at any other time. The balance-that is, 10 per cent-(1) they accumulate some reserves, and (2) have a little cash on hand, and (3)
make stock loans to inYesting members. Our building and loan
associations with their mutual and cooperative nature can ill afford
to take a fairly substantial portion of their money and put it into
an inactive or noninterest-bearing employment, and that is what
we would force them to do for a number of years if we did not give
them some dividend return.
Now, what would the result of that be? The people that were
pressed to the point of having immediate borrowing needs, that
would not debar them :from coming into the system. But there are
hundreds of sound, well managed mstitutions that we want to make
a part of this system not because they have immediate borrowing
needs, but so that the system will have an influence on their business
practices, and so it will make them more sure of themselves that they
will be taken good cure of when the time o:f need does come. Those
institutions may not be very ready to put capital into an institution from which they can get no return, as they may not have immediate need for the system.
Mr. REILLY. I am looking at the fact that the one great objection
of this bill is the Gon·rmnent o:f the United States is putting up
$150,000,000-how long the money will be used nobody can tell at
the present time__:._while building and loan investors are going to
enjoy some of that, a substantial percentage is going to institutions
that are not cooperative building and loan organizations, and, as I
said, that is establishing a precedent. It may be the emergency
demands it, but you will be up against the hard fight in the House,
and I do not see any reason why there should not be a rate of inter
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

195

est provided from which both sides would draw equally, and then
the ;rest go to pay the Government back.
Mr. LucE. Mr. Chairman, I am not inclined to take issue except
in one particular. This present Congress seems disposed to throw
principles out of the window. The other day it passed a bill to
furnish money to private individuals to buy stock in farm-loan
associations, and while this bill does not go so far as to advance
individuals any money, yet if we are going to take precedents as an
example we could go the limit.
Mr. REILLY. That is because o-f the ur1bou11cled sympathy -for those
who are badly pressed for funds.
Mr. BODFISH. Mr. Chairman, to show the same sympathy for the
hard-pressed small home owner we desire to serve-and there is another phase also, and you referred to it in your statement-the emergencies o-f the situation probably justify the Government in exten~ling the cost of that capital to them for three or four or five years m
steadying and righting the whole small mortgage field and home
financing business. After all, 1ve do not want to save dollars and
lose hundreds in our present business situation.
Mr. LucE. But in view of the objectivrs of the bill, as we all understand them, interest makes no serious difference. This is not to be
primarily
money-making enterprise. So that if the system is
started with 2 or more per cent, or whatenr it might be, having
interest charges would not be a serious injury to it.
Mr. BODFISH. I do 1iot think it wonlcl b~ a serious injury to
the system, but I do think it would greatly retard the rapidity
with which we could get an immediate participation all over the
country and get it to functioning. ·•we are not iuterested in this thing
for profit; as a matter of -fact, I think I am authorized to say that
if there are any reservations on that score i11 the minds of the committee it 1vould be perfectly satisfactory to us to have you put a
limit on the dividend that comes to the participating members-say
6 per cent-so that it would not become the source o:f improper profit.
But I do think that it is important that i,1 <·onuection with our
building and loan associations that we do not have to face a situation
that the participants of the Federal resene system had, in that they
received no dividend returns -for three or three and a half years; and
Mr. Reilly well understands the nature of our institutions is differPnt from a banking im,titntion, and we want to be in a position to get
our institutions into the svstem immedintelv and without undue
delay.
•
·
Mr. LucE. There is another angle to it, Mr. Bodfish: The Government lends you money say at 4: per cent. You have a spread of 1 per
cent or 1½ per .cent, you lend at 6 per cent, and therefore you will
make something on every dollar the Government lends you.
Mr. BODFISH. Oh, yes; that is true.
:Mr. LucE. And the point is that the delay might he unfortunate.
)fr. BonFISH. I think the emergency o:f the situation almost justifies some expenditure in getting this banking system quickly into
operation.
Mr. 1VILLIAMS. Have you anticipated or ii; it your idea that the
members of this institution will be rather consistent and constant
borrowers from it or just during the period of depression?

a


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

196

CREATION OF A SYSTEM OF FEDERAI., HOME LOAN BANKS

Mr. BODFISH. I think there will be :fairly constant borrowing from
the system. I think we have got a period ahead of us in which funds
are not going to be as plentiful in the home financing channels as
they have been in the past 20 years, and I think we are going to need
some of the funds from the system with regularity to carry on our
normal business.
Mr. WILLIAMS. The question of what dividenas would be paid by'
the institution would depend, of course, upon the extent to which it
loaned money and the extent to which it borrowed?
Mr. BooFisH. I think, Mr. Williams, once this system is in operation there is no question but what there would be sufficient demand
for services to give the 12 banks that return which will support their
activities and pay a reasonable dividend to shareholders.
Mr. WILLIAMS. To what extent do you finally anticipate the institutions of the country would go into this bank j
Mr. BoDFISH. Yon mean the amount of capital they will contribute.
Mr. WILLIAMS. Yes; finally. Have you an idea as to that?
Mr. BoDFISH. My judgment, offhand, would be $450,000,000 to
$500,000,000.

Mr. WILLIAMS. And in order to make a return on that there would
necessarily have to be rather consistent and constant borrowings on
the part of members to pay any dividends at all?
Mr. BODFISH. That is true. If the building and loan associations
alone borrowed all of the $450,000,000 they would be borrowing less
than 5 per cent of their resources.
Mr. WILLIAMS. But if there should come a period of prosperity
which we all hope for in this country, when the borrowing would
not be necessary, then where would your capital investment be 1
Mr. BODFISH. I think your capital is there, and these banks will
contini1e to employ it if necessary at lower rates, which will influe~ce
and lower the general cost of capital in the home financing field
which is one of the desirable things that this banking system should
bring about. ·
Mr. REILLY. Do you expect $500,000,000 capital to be paid into this
bank? Was not that your former statement?
::\fr. BODFISH. I would say, considering the institutions that are
included and that will probably participate, I anticipate that when
this thing is really under way and steady going there will probably
be $fi00,000,000 capital.
Mr. REILLY. The Federal banks have taken $1,100,000,000 of bonds
on $65,000,000 capital. How could you use that much capital?
Mr. BoDFISH. I think that is one of the reasons that the Federal
land banks are where they are.
Mr. REILLY. You have the other provision. You.only give 60 per
cent and they giye 100 per cent.
Mr. BoDFISH. I think that is one of the reasons that their bonds
are down. Their underlying bank structure does not have the funds
and the resources to support the market for their bonds. I think
that there will be many periods in which this bank system will be
operating without any yolume of bond issue outstanding. The bond
issue is the expanding device to get more funds in times of unusual
demands or great need.
Mr. REILLY. Is it your idea this bank will operate largely on capital and not the sale of bonds?

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

197

Mr. BODFISH. Yes; I think there will be many periods, Mr. Chairman, in which the principal capital employed will be the capital of
the banks rather than any large volume of bond issue.
Mr. REILLY. A witness appeared here the other day who said heretofore there was a necessity for a billion dollars to loan to the institutions that would borrow from this bank.
Mr. BODFISH. There is right to-day. Of course, I consider this a
very unusual situation; at least I hope it is. But we could use a
billion dollars in the small mortgage field to-day and it would be to
the benefit of the small home owner almost entirely, as he has no
·
source of credit at the present time.
Mr. REILLY. The greatest part of that will have to be gathered
from bond sales, will it not?
Mr. BODFISH. Absolutely, but I think that volume of bonds wo~ld
decrease when we got into a prosperity period.
Mr. LucE. That has been the experience of the Federal reserve
system, has it not 1
Mr. BODFISH. Yes.
Mr. LucE. There was a time about five or six years ago when the
witnesses before the committee worried about the fact that the Federal reserve system might not pay its expenses, and there was a great
deal of disturbance over that. It fluctuates, does it not, according to
the business situation of the country1
Mr. BoDFISH. Yes; very much so.
Mr. LucE. I also want to get a chance to brin:g in here the fact that
it fluctuates according to local conditions. The Senate hearings disclosed that situation, numerous witnesses saying, "We do not need
this thing," and numerous other witnesses saying, "We do need this
thing." Further, a study of the reports of the answer to the questionnaire sent out by the Department of Commerce indicates the same
thing, that they vary according to the local situation, and they vary
from time to time, and I have supposed that this system would work
much the same way. There was one witness who went through the
fluctuations of business cycles, and he seemed to show that about once
every 10 years there would be an important need for this sort of
thing, and then it would go down and come up again.
Mr. REILLY. I think sometimes they could get all the money they
want locally.
Mr. BODFISH. I have about two minutes in which I want to make
one more comment. I notice again that the Glass bill provides for
$200,000,000 and without return to the Government of the capital.
Of course that was originally paid into the Government, I suppose,
by the earnings of the Federal reserve banks.
Mr. REILLY. Where does it goi
Mr. BoDFISH. It goes to this closed bank pool.
If fundamental amendments are further suggested, Mr. Reilly, wo
would like an opportunity to discuss them, because we are very much
interested in the details and structure of the bill. Beyond that I
think our testimony is complete at this point.
Mr. Hancock asked me a question the other day which I would like
to answer :for the record, and that is this : He asked where and how
this money would be used, and I enumerated several things to him :
The payment of withdrawals, remodeling, and making alterations to

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

198

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

buildings where needed, and there is a very substantial need £or £unds
to purchase some of these vacant houses that some of the opposition
witnesses are so concerned about.
On behalf of the president of the United States Building and Loan
League I wish to submit a brief statement of perfecting amendments
which ;e would urge you to consider in your final deliberations on the
home loan bank bill. I have discussed several of these amendments
in my testimony this morning. Undoubtedly the legislative drafting
counsel can and will make great improvement in the language which
we have submitted and we will be quite satisfied with those that you
approve being placed in such form and language as he advises.
1-<l.(lGESTED PERHX'l'IN'G A~rnx1n1~:XTS

The home loan bank bill in its present form has heen submitted to a large
number of building and loan associntions and their State and local organizations. A number of amendments have been advanced which will assist in
perfecting the bill. In the main, the suggestions which follow do not concern
or affect the policies or principles established in the bill.
I. Some comment has been made regarding the portions of tile bill describing the institutions eligible to become members. It is assumed that sound
principles of finance and banking should be obsened in this important section
(sec. 4). Real estate loans to home owners and home buyers should be longterm loans. Further, banking institutions should have a reasonable amount of
time <leposits to warrant their making Joans which can not be called in times
of distress or periods of contraction to atta:n liquidity. 'Their second line of
defense should be the Federal reserve system. Commercial banks which have
no time deposits should use the Federal rescne system entirely rather than
the home loan hank system.
Building and loan associations make nearly all their inve;;;tments in long-time
home mortgage loans. Insurance companies, to be eligible, shoulll similarly
be such as make home-mortgage loans.
In section 4, page 4, strike out lines 4 through 11 aml insert in lieu thereof:
" (1) Building and loan associations, i-avings arnl lonn ai<snciations, eooperatfre banks. and homestead associations, ,vb ch in the judgment of the board
make long-term home mortgage loans and whose financial condition is satisfactory to such board.
" (2) Any of the following whose time deposits and financial condition, in
the judgment of the board, warrant their making such home-mortgage loans
as, in the judgment of the board, are long-term loans: Savings banks, trust
companies, and other banks ; and
" (3) Insurance companies which, in the judgment of the board, make longterm home mortgage loans and whose financial condition is sati;;;factory to
such board."
II. Building and loan associations in l\faryland, although not un<ler supervision, are anxious for recognition in the measure and their representatives
in the Senate and House have advanced amendments to the bill to permit their
part.cipation. This will necessitate the recognition of the ground-rent system,
which is very widespread in Baltimore, as well as some device for permitting
participation without supervision, or permitting participntion for a period until
supervision of building and loans, similar to that existing in -46 other States,
can be obtained.
In order to recognize the ground-rent feature, the following amendment
seems satisfactory and in keeping with the spir:t of the measure:
Section 2, page 2, subsection (6), line 12, insert after the word" estate," the
following:
'' In fee simple, or leasehold under a 99-year renewable lease providing for
the payment of a definite ground rental, and "
III. Building and loan offic:als and attorneys have studied carefully the
definition of "unpaid principal" and feel that it is fairly satisfactory, although
some additional language will make absolutely clear the recognition of the
condition that prevails in most States, in which borrowers accumulate credits
on shares, which shares are ultimately used to retire the loan.


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

199

In section 2, page 2, subsection (7), after line 24, insert the following:
"or where under the contract of loan such shares at maturity cancel the
loan,"
IV. A clear definition of " amortized home-mortgage loan " is desirable.
Therefore, in section 2, page 3, after line 2, add a new subsection ( 8), as
follows:
" (8) An 'amortized or installment home-mortgage loan shall, for the purposes of this act, be a home-mortgage loan to be repaid or liquidated in not
less than eight years, by means of substantially equal regular periodical payments made (1) o~ account of shares or shares of stock pledged as collateral
for the repayment of such loan, or (2) on account of the principal debt."
V. In a number of States, particularly in New York State and the State
of Washington, building and loan associations are almost exclusively known
as "savings and loan associations." As the three important names, under
which building and loan associations are incorporated and conducted, appear
in section 4, lines 4 and 5, it would seem wise to avoid any confusion or misapprehension by including the term "savings and loan associations."
Therefore, in section 4, page 4, subsection (1), line 4, after the word "associations," insert the following:
"savings and loan associations."
VI. The proYision appear;ng on page 4, lines 12 to 16, has raised considerable
question and comment as to the effect and desirability of the phrase " or of the
bank of a district adjoining such district." Building and loan officials have
suggested the important poss;bility of undesirable institutions joning out of
range of those institutions most familiar with their practices. To a certain
extent, this outweighs the proximity, or convenience, argument.
The following language might be added to the sentence ending line 16, page
4, subsection (b) :
"if demanded by convenience and then only with the consent and approval of
the board."
VII. In section 5, subsection (e), page 6, lines 15 and 16, there appears to be
an indefiniteness or ambiguity of language, which could be remedied.
VIII. In section _5, subsection (i), page 10, line 2, the words "to be" should
be inserted after the word "amount," to achieve the intent sought to be
conveyed.
IX. It would seem in keeping with the policy of the bill that a member, with
the approval of the board, should be permitted to dispose of its stock not only
to another member but also to an eligible subscriber.
Therefore, it is suggested that to section 5, subsection (j), page 10, line. 7,
after the word "member," be added the words "or eliglbile subscriber."
X. In section 6, subsection ( d), page 11, some question has been Faised as to
the language exactly accomplishing the intent of the section. The intent was
to group into three groups all of the members without regard to the nature of
the institutions, the grouping to be determined entirely by the size, and the size
to be determined entirely by the sum of the unpaid principal of the home-loan
mortgages held by the member. Some slight rearranging or additional study
will suggest a way of eliminating any possible misinterpretation.
XI. As the term " unpaid principal " has been defined as used throughout the
act, it would seem wise to rely upon the clearness of meaning of that term
rather than to include a new term, " net value."
Therefore, in section 6, subsection ( d), page 11, line 14, strike out the word
"net," and in line 15, the word "value," and insert in lieu thereof the words-·
" total amount of the unpaid principal."
XII. In section 6, subsection (d), page 11, line 15, the term" home-loan mortgages " appears. In the definition appearing on page 2, line 9, the term is
" home-mortgage loans.'' Apparently this is a transposition.
XIII. It has been advanced that, in section 8, particularly in subsection (b),
subsection (2), the language eliminates certain long-term amortized mortgage
loans, the thought being that during stress periods real-estate values may be
somewhat depressed, causing current appraisals to rather closely approach the
unpaid principal, although 50 per cent of the unpaid principal can very safely
be advanced.
The preference to the long-term monthly-repayment amortized mortgage, outlined by the President, and the protection of the bondholders can be achieved
by rewriting several sections. This is most clearly shown by reproducing in
this memorandum a completely revised page 15. Some additional language
appears in subsection ( 1), in order to care for the building and loan practice

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

200

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

which accumulates credits on shares, to be used for the ultimate retirement of
the mortgage loan.
"limitations as the board may prescribe. Any such advance shall be subject
to the following limitations as to amount(1) If secured by a home mortgage given in respect of an amortized homemortgage loan which was for an original term of eight years or more, or in
cases where shares of stock, which are pledged as security for such loan, mature
in a period of eight years or more, the advance may be for an amount not in
excess of 60 p_er centum of the unpaid principal of the home-mortgage loan; in
no case shall the amount of the advance exceed 40 per centum of the value of
the real estate securing the home-mortgage loan.
(2) If secured by a home mortgage given in respect of any other home-mortgage loan, the advance shall not be for an amount in excess of 50 per centum
of the unpaid principal of the home-mortgage loan; in no case shall the amount
of such advance exceed 30 per centum of the value of the real estate securing
the home-mortgage loan.
(b) No home mortgage shall be accepted as collateral security for an advance
by a Federal home-loan bank if, at the tjme such advance is made (1) the
home-mortgage loan secured by it has more than 20 years to run to maturity;
or (2) the unpaid principal of such home--"
In order to have clearly before committees and drafting counsel the principles
and wishes of the President in the above matter the following is quoted from
the published text of President Hoover's statement on the proposed establishment of home loan discount banks of November 13, 1932:
"(f) The maximum amount to be advanced against the mortgage collateral
not to exceed more than 50 per cent of the unpaid balance on unamortized or
short-term mortgage loans and not more than 60 per cent of the unpaid balance
of amortized long-term mortgages, and no advance to be made on mortgages in
default. Such loans are to be made on the basis that there are sound appraisals
of the property upon which such mortgages have-been made. In other words,
given sound appraisals, there will be advanced in the case of short-term or
unamortized loans 25 per cent of the appraisal, and in case of .amortized longterm loans 30 per cent of the appraised value of the property."
XV. In section 8, subsection (d), page 17, lines 19 to 21, there remains some
language that is apparently carried over from an earlier draft of the bill, when
the theory in regard to the subscription for capital stock was different. In
the present bill the assumption is that members purchase stock in the same
fashion as the banks purchase stock in their Federal reserve bank and remain
members rather than retire their stock and cease to be members of the system
as 'borrowings are repaid or discontinued.
It would seem wise, therefore, to strike out, in line 19, the language after the
word " therefor " and substitute a period for the comma ; also .all of lines 20
and 21.
·
XVI. Section 9 deals with the general powers and duties of the banks. Subsection (b) of section 9, on page 18, deals with the board's power to prescribe
regulations for the assignment, deposit, and custody of collateral-securing bonds.
It has been suggested, and with some wisdom, th.at a specific provision be inserted at this point providing for a "registrar" and duties with regard to the
handling of collateral, or a specific provision authorizing the board to act as
trustee and to carry out the duties of tru1:1teeship.
XVII. There are a number of States in which home mortgages of building
and loan associations are nonnegotiable or nonassignable. Where all sums
paid in by members on shares in associations in such St.ates do not sustain a
creditor liability and borrowed money is a first lien upon all its assets, a shortterm Joan could safely be made, under such conditions, upon the direct note or
obligation of such association.
·
On page 21, subsection ( 3) of ( i), section 9, line 18, after the word " prescribe," add the following:
"Provided, h-Owever, That such advances may be made without collateral
security to members whose creditor lialiilities, exclusive of all advances from
Federal home loan banks, do not exceed 5 per cent of the assets of the member
receiving such advance or advances under the provisions of this subsection."
XVIII. There is one St.ate which has a State agency similar in principle and
procedure to the proposed Federal home loan banks. Two others have such
agencies before their State legislatures at the present time. It has been wisely
proposed that these agencies be permitted to affiliate as members with the


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

201

Federal home loan bank system. The following amendment will accompli$1
that purpose with due recognition of the needs of the Federal system:
"SEC. -. Organizations, the membership of which is confined exclusively to
(1) building and loan associations, savings and loan associations, cooperative
banks, or homestead associations; or to (2) savings banks, trust companies, or
other hanks; or to (3) insurance companies, if the membership therein composes
more than a majority in number of the institutions of such class organized
Jmder the laws of a State, if such organizations are organized for the purpose
of providing sources of credit for members and if such organizations are subject to inspection and regulation under the banking laws or under similar laws
of the State, shall be eligible to become members under this act by subscribing
and paying for such an amount of stock as the board may determine. In all
other capacities they are members for the purposes of this act and subject to
any additional rules and regulations as may. be prescribed by the board relating
to such State organization or agencies."
Several other 1tems which are not essential to the effective functioning of the
system might be given attention. For example, the limitation on salaries other
than members of the board ; a separate limit upon the banks with regard to
their power to issue bonds; a provision authorizing the Treasury to prepare
forms of bonds and act as custodian of the plates and dies; a distinct procedure
in connection with membership applications, etc.

Mr. WARREN. I do not want to testify, but may I ask as to whether
or not the brief that was submitted by Judge Stickle on behalf of
the New Jersey Building and Loan League at the Senate hearings
is to be printed, and, if not, may I have the privilege of having 1t
printed in the record of this committee? My State has 14 per cent
of the building and loan a,ssets of the country, and we are in disagreement with the bill in its present form; and a brief has been
filed on behalf of the league by Judge Stickle, and we would like
very much to have that considered by your committee. I think Mr.
Luce has had a copy of that brief sent to him by Judge Stickle.
Mr. LucE. Is it in the record?
Mr. WARREN. It is not in the· printed pamphlet. I do not know
whether it will be included in a subsequent volume, but I would
like to have you have that brief before you.
Mr. REILLY. How large a brief is it?
Mr. vVARRJ<JN. I think it is about 20 pages of typewriting.
Mr. REILLY. Can you not come before the committee and give us
the substance of it?
Mr. \VARREN. Can you not do it, Judge?
Mr. STICKLE. I can furniBh a copy to each one of the members, of
the committee, if you want it.
Mr. REILLY. I think you better furnish a copy to all members of
the Banking and Currency Committee.
Mr. WARREN. We are in disagreement with the building and loans
~sking a ~ole from the povernment. We see n~ reason why the capital furmshed by the Government and the capital furnished by the
associations up to the time of repayment should not get the same
return.
Mr. LucE. Loan or dole ?
Mr. WARREN. It certainly is a dole if it does not bring a return.
Mr. REILLY. Did you te.stify before the Senate committee?
Mr. W~RREN. Yes, sir.
Mr. REILLY. Is not that information in the Senate committee
hearings-we will be here at 2 o'clock; wiUyou be .back then 1
Mr. WARREN. I did not come to te.stify; but if you gentlemen desire me, I will do so, and Mr. Stickle will come with me.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

202

CREATION OF A. SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. LucE. I am told it may be printed in another volume.
Mr. REILLY. I know, but I would like to ask these gentlemen some
questions, and if convenient they may return at 2 o'clock.
(Thereupon, at 12.30 o'clock p. m., the committee recessed until
2 o'clock this afternoon.)
AFTER

RECESS

Upon the expiration of the recess, the hearing was resumed at 2
o'clock p. m.
STATEMENT OF FRED G. STICKEL, JR., REPRESENTING THE NEW
JERSEY BUILDING AND LOAN LEAGUE
Mr. REILLY. "\Ve will hear you for a short time on this bill. I
understand that yon have testified at the other hearings 1
Mr. STICKEL. I did.
Mr. REILLY Give us sort of a resume of the high points· as you
view this bill, and its defects, if any, as you view them.
Mr. STICKEL. I have been in this building and loan business as lawyer, director, and stockholder for over 20 years. I filed a brief with
the Senate committee, and I shall try to epitomize what I said
therein.
The purpose of this bill, as I see it, is a dual one; first, to take care
of an emergency, and second, to provide £or the future-for future
building, £or emergent purposes, and for expansion purposes. The
emergent need arises ont of the £act that some of the eligible member institutions, like the banks, made mortgage loans-short-term
mortgage loans-during that hectic period when we all tried to get
rich, and when their liquidity needs arose they found it necessary
to call their mortgages to increase their liquidity, and that produced
foreclosures and some hardship among the home owners.
The building and loan situation does not arise for the same purpose. The building and loan mortgage is a noncallable, selfcancelling, and a profit-sharing mortgage, the kind of home-loan mortgage
that we should have, and that is one :function of the building and
loan. The other £unction is to teach systematic thrift for a rainy
clay; and if you are to teach systematic thrift you must recognize as
an inherent part of that teaching the :fact that when a man saves he
wants to be able to get his money when the rainy day arrives that
he saved for and that has resulted in the recognition of the right
of an investing shareholder to withdraw his money on reasonable
notice. In our State it has been recognized for over 30 years as part
of the legislative policy of the State, and it has been recognized to
the extent that after 30 days' notice the associations may apply half
of their monthly reeeipts, and after that period of 5 months it is
possible that a suit may maintain if. a "'.'ithclrawing shareholder _is
not then paid, and there are such smts pending. Consequently, rn
our State the needs are more emergent and more emphatic, perhaps,
than in other State8, because a withdrawing shareholder whose shares
are not paid after six months may sue, with the attendant consequences, one of which must be obYious to you, and I do not think I
ought to state it.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

203

A maturing :,;hareholder, one who has paid in his shares, and with
profits, his shares having now arrived at a maturity value, also may
be said to become a creditor. Therefore you have those two potential creditor obligations, and in our State-they are :;ubstantial to-day,.
very substantial.
We think that this agency should, as one· of its chief functions,.
seek to meet the emergent demand of the banks which causes it to
foreclose if it can not liquidate upon short-term paper, and we think
the emergent needs of the building and loans should be met, namely,
with money to meet withdrawals and maturities, so as to avoid applications :for liquidation of associations, and also to do social justice in
that those who are applying for withdrawal in many cases need their
money as much as the man who has his money in a bank that has
become defunct.
These emergent needs, as I conceive it, can only be met through
this agency. I do not think the Reconstruction Finance Corporation
has anywhere nearly enough money to meet the needs of the building
and loan as;:;ociations throughout the United States. Certainly that
has been our experience, so far as the building and loan associations
in New Jersey are concerned; and, indeed, as I understand it, the
Reconstruction Finance Corporation was not organized for the purpose of helping building and loan associations so much as it was for
helping banks and railroads, and such aid as the building and loan
associfttions are to get, I imagine, is incident to the desire to maintain
the banking institutions and because the relationship between the
building and loan associations and the banks is such that danger to
the building and loan associations reflects on simi]ar financial institutions like banks.
Therefore this agency, it seems to me, should supplement the tem,porary chara-cter of relief that may be given by the Reconstruction
Finance Corporation, and therefore it seems to me that as an expression of legislative policy this bill should indicate that its primary
and dominant purpose is to take care of the existing emergency, and
when that emergency has been taken care of, there may then be need
for taking care of other needs that may arise or exist in the country.
To use or to divert the funds of the bank, such as was proposed, for
new construction, at the expense of existing agencies, certainly would
neither be wise nor sensible. The existing agencies, all of them,
whether banks or building and loan associations, have a considerable quantity of real estate on hand, the necessary result of the times,
and until that has been liquidated and disposed of, new construction
in such territories would probably not be necessary. _So, I repeat,
that it seems to me that the dominant and primary purpose of this
bill should be to meet the conditions that have arisen in these eligible
member institutions to enable them to meet their immediate needs
and purposes.
I have gone over the bill with considerable care in its various
stages, particularly the original, but the very much improved bill
which was evolved in the Senate-·
Mr. LuCE. In the Senate 1 That is not giving us much credit.
Mr. STICKEL. I will be very glad to amend that, because I understand that the credit is due to the House; but the point that I wanted
to make was, whatever its source, it is a big improvement over the

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

204

CREATION OF A SYSTEM OF FEDEEAL HOME LOAN BANKS

original bill, and in going over it there seemed to me to be some
essential amendments and some desirable amendments that should
be made. These amendments I have indicated in my brief.
.
First, briefly, one of the amendments I' suggest is that you define
an amortized mortgage, or an amortized mortgage loan, because in
some States, includmg that, I think, of the chairman, the payments
made under the mortgage contract are made on the shares and not
upon the mortgage debt itself, and not until the shares arrive at their
maturity value do they cancel the debt.
The obligation is a dual one.. You become a member and buy
shares, and you borrow money from your member association and pay
interest on your debt. You make your payments on your shares, and
when your shares, plus the profits, have arrived at a maturity value
equal to your loan they are canceled.
Mr. REILLY. What amendment would you suggest to the bill W
Mr. STrc.KEL. I have in my brief an amendment which I think
defines what constitutes an amortized mortgage or an amortized
mortgage loan.
Mr. REILLY. We will take cognizance of that brief.
Then, I think the definition of " unpaid principal " is deficient, in
that it fails to recognize the situation which I have just described,
namely, that the payments are made on account of shares and not on
account of the debt, and I have in several instances suggested amendments that would correct that, which I do not think is necessary to
read, because you will have them.
Another suggestion I have made is this: In some States, building
and loan associations and banks have banded together to create reserve systems of their own. We have one pending in New Jersey, a
building and loan reserve, and there has been one, as I understand
it, enacted into law in Congressman Luce's State.
Mr. LuCE. Yes.
M;r. STICKEL. State banks and building and loan associations.
It ought to be possible, where such financial institutions have been
foresighted enough to try to solve their own problems and to form
State agencies, to be able to link up with your Federal agency and
to borrow from the . Federal agency as a building and loan State
unit, rather than to make the bank contact 1,561 units, as in our
State, and I have drafted an amendment which would make that
possible.
Mr. REILLY. In other words, you want an amendment so that the
c~ntral bank of New York may becc;ime a member of this organization i
Mr. STICKEL. That is correct, or of any other State, and I have an
amendment to that end.
Another matter is that under the bill a subscriber who can not
~ubscribe to stock must stand any loss or reduction in the value of
securities deposited by it pending authority from its State to purehase the stock of the bank. There may be some good reason for
that, but I did not see it.
Mr. REn..LY. What difference would it make i He would only
have to put up more security, and he would get it back finally. That
provision would require him to put up in instances more than the
par value of the securities.
Mr. STICKEL. That refers to a stock subscription.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEl\'I OF FEDERAL HOl\'IE LOAN BANKS

205

Mr. REILLY. I know, but he has to put up some cash, and the rest
securities, or all securities.
Mr. STICKEL. I do not stress it. I call attention to it for what it
may be worth. In our State we have the legislature in session and
we have had a law enacted so that we may join, and we do not have
to put up stock.
Another point is that the bill seems to prevent a member bank of
disposing of its stock to an eligible association. I do not know the
necessity for that. It ought to be possible for a member of the bank,
if it wants to sell its stock to an eligible association, to do so. As it
stands, it can not do so, and that might interfere with mergers and
similar combinations of member banks that want to transfer. As
drawn, an eligible member must become an actual member before
the stock could be sold to it, and then it perhaps would not want it.
Now, then, on page 13, line 5, there is a legislative expression of
policy, which I am inclined to think debars loans, or may debar loans
for withdrawals or for policy loans. It is an expression of policy
which I do not think goes far enough, and it either should be eliminated altogether-Mr. REILLY. What is the language of that part of it 1
Mr. STICKEL. It says :
Such board of directors shall administer the affairs of the bank fairly and
impartially and without discrimination in favor of or against any member,
and shall, subject to the provisions hereof, extend to each subscriber applicant
such advances as may be made safely and reasonably with due regard for the
claims and demands of other members, with due regard to the maintenance
of adequate credit standing for the Federal home-loan bank and its obligations,
and with due regard to the orderly provision of credit to aid in the conduct
of home financing in the various communities within its district, and within
the district as a whole.

Of course, the payment of money to associations to enable the
shareholders to withdraw property could not be said to be extending
credit to aid in the conduct of home financing. It would be taking
money out of the associations and not putting it in.
Mr. REILLY. Your understanding is that that provision would not
permit the loaning of money, on the rediscounting of mortgages for
the purpose of taking care of payments of taxes and the payments
of withdrawals 1
Mr. STICKEL. I think it would be a matter of very grave doubt,
and I tliink it would be greatly strengthened if you would say, " and
with due regard to the liquidity needs of the subscribers and particularly those arising out of applications for policy loans, share
loans, maturities and withdrawals of stock or deposits."
If it means to give us that relief, there should not be any objection
to stating it plainly and not leaving it to the courts to determine
the question. The ambiguity should be removed.
Mr. LucE. But the more you specify, the more you invite the doctrine of exclusion. Possibly the provision could be reworded with
less danger of that.
Mr. STICKEL. Yes. I have no pride of language, but I think the
aDJ,biguity ought to be removed, either by expunging it altogether
or by making.it say what you mean.
Now, in another section, if a member is denied the right to borrow
money from the bank, should not the subscription be at once returned,

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

206

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

and if you fail to so provide, is there not a danger that it will keep
institutions out of the bank? vVhy should the Federal bank retain
the subscription of a member to whom it has indicated it will not
loan any money. There is language in the. act that does exactly
that, but I do not think you mean that.
Mr. CAMPBELL. If they presented eligible securities-Mr. STICKEL (interposing). Then, under the act, the board must
determine whether a member is a member and if it can borrow money,
and if it does not put that member on the eligible list-and it may
refuse to put it on the eligible list under the act-why not return
its subscription, because the bank is no good to it then.
Mr. CAMPBELL. I think it should be done.
Mr. STICKEL. I think that is a matter to look into.
It seems to me also that the board should be given the power to
be the trustees under the act for the holding of bonds, and that the
Federal banks might have similar power. I do not especially emphasize that, but it may be well to think of.
Mr. REILLY. You mean a board instead of a registrar?
Mr. STICKEL. Yes. In other words, the power ought to exist. I
do not say it should be done in every instance, but the board ought
to have the power to act.
Mr. REILLY. What benefit would that be?
Mr. STICKEL. It would simply mean that the board would have
a little better control over the situation, and instead of taking an
outside agency to control the matter, the board would keep the matter
in control itself.
. Page 21, paragraph J, certainly gives unnecessarily broad power
to invest unused funds, under which those in control could do almost
anything, even to playing the stock market, if they wished. There
is no limitation at all. The same applies to the reserves on page 25.
Mr. REILLY. That is, reserves that the bank has on hand?
. Mr. STICirnL. Yes, and the unused funds. It seems to me that
there ought to be some limitat~on as to what such funds could be
put into, instead of leaving it as wide as it is.
Mr. LucE. "\Ve have had, in past years, a good deal of discussion
in the committee on the principle involved there. Sharp differences
of opinion have arisen as to whether we have done well to leave the
Federal Reserve Board with so much power, and I suspect they are
going to rise again in our discussions on the Federal Reserve Board
situation. There have been those who have criticized the board for
not acting to the extent of its powers, and others have said that we
ought to order the board to do certain things. That is conspicuous
at the moment in the matter of Mr. Strong's bill to stabilize the
currency, where he desires to direct the Federal Reserve Board to use
all the powers it has for stabilization. The board has hitherto been
reluctant to accept such directions, and has opposed the bill. Every
time you put another restriction upon or give another direction to
the dominating board, you are inviting trouble. Much is to be said
that the best policy for the Government is, as far as possible, to
pick the best administrative officers to be had and then let them use
their judgment.
.
Mr. STICKEL. So far as I am concerned, I mention it merely as a
matter of policy to be determined by this body, rather one which I

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CRE.\.TION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

207

think is vital to the bill. I 1lo not think it is vital to the bill one
way or another, because I :feel as you do, that we can trust those that
the members of these banks shall select to administer their affairs. I
mentioned it because I did not know whether that is· expressed policyt
or whether it was an oversight. H it is expressed policy: I ('an see
advantages, and also disadvantages.
·
Mr. LucE. You went so far in vour remarks as to intimate that
these powen; might be used by the· central board for lending money
to be userl in the stock market.
Mr. STICKEL. It would be possible.
Mr. LrcE. It would be possible, but is it conceivable?
Mr. Snc1rnL. No, I do not think it is.
Mr. LucE. Then why pay regard to it in legislation?
Mr. STICKEL. I have always :felt that there ought to be wide powers
given to administrative bodies, with some ultimate limitation. I
do not believe in trying to· make detailed limitation. I think limitations should be as general as they can possibly be, but there ought
to be some things that they could not do. That is what I had in
mind.
Some of our members in onr State rather dislike the idea that
each bank should be liable :for the debts or management of each other
bank; that is, New Jersey banks would be liable for the <lebti,
of the Minnesota bank, and vice versa. That is probably a matter
of policy, and, so far as I am concerned, if it must be in the bill I
should not oppose it, but I would prefer that it be out.
Mr. LuCE. At the present moment, the only think that saYes the
Federal land banks is a provision of that kind.
Mr. STICKEL. It is? I do not know that that is so.
Mr. LucE. You were aware that some of the banks have been in
such dangerous position that they had to call for relief from the
other banks ?
Mr. STICKEL. Yes, I knew that.
Mr. LucE. It is a matter of pnblic knowledge. That is one of
the important elements of nilue in the Federal farm loan bonds.
Mr. SncKEL. Then there are one or two other amendments which
I will refer to in the brief, and to which I do not think it will be
necessary to present. They are largely in connection with the effect
of the language now used in defining what is unpaid.
Mr. REILLY. What difficulty can there be about defining unpaid
principal?
Mr. STICKEL. There is no difficulty at all.
Mr. REILLY. That arises because of the fact in some cases a man
pays up on his stock, and there is nothing paid on the principal of
the mortgage itself?
Mr. STIOKEL. Exactly.
Mr. REILLY. I think any court would construe the unpaid principal
as the difference between his stock certificate and his mortgage.
Mr. STICKEL. But that is not the fact, because until the shares of
stock arrive at a maturity value, there is no payment on account of
principal. There is no intermediate point, and the courts could not
construe it at variance with the actual contract.
113235---32--14


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

208

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. REILLY. I take it that when a man goes to a loan bank in
your State with the idea of building a home, he has certain payments
that he has made on certificates?
Mr. STICKEL. As a matter of fact, when he applies for the loan he
becomes a member at the same time, in most cases, that he takes out
shares.
Mr. REILLY. But when he gets around to the point of building-Mr. STICKEL. When he gets to the point of building, he takes out
his shares at the same time. He comes to the association and says,
"I want to borrow $10,000." They say, "Very well; take out 50
shares of stock," and as a part of the contract of loan he takes out
50 shares of stock and agrees to pay $50 a month on the shares and
$50 a month interest on the $10,000 he borrows, and that procedure
continues running parallel, $50 on shares and $50 on interest, the
stock having been assigned as further collateral security for the
debt. When the payments on the shares, plus the profits which he
gets on the shares and which he gets equally with every other shareholder attain a maturity value of $10,000, it serves to cancel _the
debt, but it does not do so at any intermediate point, and because of
that it is necessary that the language be clarified so that it will clearly
bring associations in the United States that do business that way
within the benefits of the act.
Mr. REILLY. These loan banks, as a rule, start to build a house for
a man before he has paid any money, except to buy some stock in
that way?
Mr. STICKEL. Oh, yes; he does not pay any money when he subscribes, because the payments are monthly. For instance, I come to
an association to-day, and I want to borrow $10,000. I may have
no investment at all in that association, but I must become a member.
I become a member by taking out, we will say, 50 shares of stock,
and then they will look at the property which I offer as security,
and, when satisfactory, they may loan me up to 80 per .cent of the
value of the property. So I must put in 20 per cent of my own
money.
Mr. REILLY. Where does he get the 20 per cent of the moneyi
Mr. STICKEL. That is his own money. He has to put 20 per cent
of his own money into the transaction.
·
Mr. CAMPBELL. That could be a lot, could it not~
Mr. STICKEL. Of course, that 20 per cent is frequently saved in
the association. In other words, he sometimes saves up to $2,000 in
the association. He withdraws that and pays it to buy the land or to
make a payment on the house, and then he comes to the association
and borrows the remaining 80 per cent. The association wants security for that, and so it takes a mortgage on the real estate as
security and then, in order to make a loan from this mutual association, he has to become a member. They say, "You will have to
take out that number of shares of stock that, at maturity, at $200
a share, will cancel your debt."
That is the reason we think our method of saving money and
getting a home is an admirable one, and one that the people of the
United States should be educated to when getting a home, not to go
to a bank and take out a 1-year mortgage or a mortgage for three
years and at the end of 3, 6, or 9 years find that they have just as

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

209

much 0£ a debt as they ever had, and that money that they were
going to save was meanwhile used to buy a car. In our agency they
·
have to pay monthly, and they share in the profits.
Mr. REILLY. In other words, you take the money away from them
so fast that they can not get enough to buy an automobile?
Mr. CAMPBELL. That is a benefit, is it not?
Mr. STICKEL. We think it would be better for them to have a house,
over their heads.
Mr. WILLIAMS. I am not entirely clear as to whether the home
builder can start with nothing except the land. 0£ course, he must
have that on which to build.
Mr. STICKEL. Yes. He may start with nothing except the land.
In other words, he comes in and says, "I have a piece 0£ land, and
here are my plans. I want a construction loan." They look at the
plans artd the land, and the appraisers in the building and loan
determine from that how much they want to lend him. They may,
as a legal matte_r, loan up to 80 per cent, but as a practical matter
they usually loan between 70 and 80 per cent.
When he knows how much he is going to get he has to supply the
rest to build his home.
Do I make myself clear?
Mr. WILLIAMS. I do not know that you do. In other words, he
would have to raise 20 per cent 0£ the money?
Mr. STICKEL. Yes.
Mr. WILLIAMS. And furnish the land?
Mr. STICKEL. Not necessarily 20 per cent and furnish the land.
He has to furnish 20 per cent in value, the difference between what
he can borrow from the association and what his land and building
will cost him.
Mr. WILLIAMS. He may start a home on nothing except the land?
Mr. REILLY. If the land is worth 20 per cent of the total value.
Mr. STICKEL. That is true.
Mr. REILLY. Under that plan, where does the second-mortgage
shark come in?
Mr. STICKEL. He rarely comes in, because we will loan him in New
Jersey so much of the value of the property, because of the monthly
amortization, that the average borrower succeeds in raising enough
money to pay 20 per cent, and the instances where the second mortgages are necessary are rare, but even in those instances the fa_ct that
he may pav his payments monthly and reduce the building and loan
mortgage monthly makes it an admirable mortgage contract, because
when he has paid that down far enough he can frequently go back to
the building and loan and reinstate his loan, recast his loan, and get
enough money out of the building and loan to pay for his second
1
mortgage.
Mr. WILLIAMS. What are the interest rates?
Mr. STICKEL. Six per cent on the amount loaned, and he pays in
many States a premium to get the loan, and it is because of the
premium he pays, plus the 6 per cent that he pays on the foll amount
of his debt at all times, that the building and loan associations are
able to make a profit, in good times, of sometimes as much as 8 or
9 per cent, and that profit is, in turn, allocated to his shares. So,
although he pays 6 per cent for his money, sometimes he earns 8
or 9 per cent on his shares.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

.210

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. ·wrLLIAMS. ·what does the loan cost him?
Mr. STICKEL. Six per cent.
Mr. vVILLIAMS. You say he gets some of that bark in dividends?
Mr. STICKEL. Yes; dividends on his shares.
Mr. WILLIAMS. And he also pays a commission?
Mr. LucE. No.
Mr. WILT IAMS. Does he not pay a commission for the loan?
Mr. STICKEL. He pays a premium of 3 per cent which, in turn,
goes into the common funds and is divided among all the stockholders. Sometimes he pavs that in a lump sum, and sometimes
periodically.
Mr. \VILLI.AMS. In other words, your buildings and loan associations in your State are operated in behalf of the home builders
on a 6 per cent basis, or less, to him?
Mr. STICKEL. Ye.s, sir.
Mr. WILLIAMS. His loans, then, cost him over 6 per cent?
Mr. STICKEL. Oh, no.
Mr. WILLIAMS. How much under that?
Mr. STICKEL. As much as 4 or 4½ per cent, over the period.
Mr. WILLIAMS. How does it run in your State? How much does
it actually cost the home builder?
Mr. STICKEL. About 4 or 4½ per cent where they charge a premium, but in many of our associations they do not charge a premium
at all.
Mr. Lum. I interrupted Mr. Williams because in my State the~~
do not charge any premium.
Mr. STICKEL. Many of our building and loan associations do not
charge premiums at all. Sometimes it is only 1 per cent; sometimes
it is 2 per cent. Some associations have a rule that they will not
make any charge, and sometimes, as I said, there is a premium, that
is payable monthly, a few cents each month, in addition to their
monthly payments. One is the gross premium plan, and the other
is the minimum.
Mr. CAMPBELL. He .shares in the earnings on that premium that
he pays, and at maturity he receives all of it back?
Mr. STICKEL. Exactly. Then the profits of the association go into
a common fund, and our associations are limited as to the amount
of money that they may spend for expenses. In our State it is
about one-half of 1 per cent, and we keep the expenses down to a
minimum. Our boards of directors, for instance, get $5 or $10 a
meeting night, and they meet once a month, and in many in.stances
never, and the only paid men are, as a rule, the secretary and the
treasurer. The other payments are very small.
Mr. WILLIAMS. I understand that your urgent need is for money
to pay off the matured certificates and the withdrawals from your
institutions?
Mr. STICKEL. That is true. If we could get sufficient money from
some governmental source to meet maturities and withdrawals at one
fell blow, it would stamp out much of the hysteria, panic, and fear
that exists now, because it has been our experience in many instances
that when these shareholders know that they can get the money they
do not want it. But there is a great number of people that have
found it absolutely necessary to get these savings, people who are
not in a hysterical state. They are people who are up against it, who

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS 211
need the money for living expenses, and those people are entitled to
consideration, as I have said, quite as much as the fellow who is in a
failed bank.
Our condition to-day is due to the failure of the banking group.
In our State, in 1925, the bankers agreed with us that we could
borrow 30 per cent of our installment dues to meet the situation there,
where we had to keep our money invested in long-term loans, and
had to be ready to pay our investing shareholders out of assets, and
that situation was met by the borrowing capacity agreed upon with
the banks. To this day we have tapped that legal capacity only 37
per cent. I£ we tapped it to the extent of 50 or 60 per cent, we could
pay every withdrawal at maturity in the State, but the bank credit
has failed us and they are asking the banks for further loans, but in
many instancEs the banks refuse to make more loans to us, even to
meet maturities, and in one county at least 10 banks have failed altogether, with the building and loans having their money tied up.
Those situations could be met, and if met wonl<l prevent a serious
financ:al situation.
Mr. \VILLIAJHS. In normal tinws, when' do yon get your money to
carry on operations?
Mr. STICKEL. From onr receipts plns the borrowing capacity :from
the banks.
Mr. WILLIAMS. To ,diat extent do vou borrow :from the banks?
Mr. STICKEL. Thirty per cent of Otll' installment <lues, and in that
State to-day we o"·e the banks $63,000,000.
Mr. WILLIAMS. Are you consistent borrowers 1
Mr. STICKEL. We have been consistent borrowers in that State,
and the banks have regarded our paper as the finest kincl of paper.
In fact, we think they have loaned us too much money, and I do not
think the future will find us borrowing as much as we did. I think
that is one of the lessons that has been taught both to the banker and
to the building and loan man.
We have an amendment to our law in the legislature now that
would prohibit the contjnuance of the policy of borrowing on shortterm paper to make long-term leans.
Mr. REILLY. \Vould that interfere with the proper functioning of
all your associations 1
Mr. STICKEL. No; it will not. The proper £unction of our associations is to use our assets to invest in long-term mortgages.
Mr. REILLY. In other words, under your ability to borrow, you
have made loans that you should not have made?
Mr. STICKEL. Pnder our ability to borrow, in which 011r banking
friends encouraged us, we borrowed money on demand paper, in
short-term loans, and inyested it to make long-term loans to our
members ; yes.
This bill, in my judgment, is an excellent bilL It has splendid
potentialities, but I think it could be made an even more useful
instrumentality if it clearly appeared that its primary purpose was
to meet existing '!onditions, to ·make that the paramount, evident
purpose; and then when you come to the time when it is thought
that money is needed to help in building new construction, and for
expansion purposes, I hope that such changes will be made in this
bill to encourage the use of that money for the kind of a mortgage

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

212

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

that a man ought to obtain to get a home; the kind of· a mortgage
that, by monthly payments andfrofit sharing will ultimately remove
that jacket, and not the kind o mortgage that at the end of a year
may be called, or the kind where at the end of three years he may
have to pay another premium to let it stand, or at the end of 15 years
be as big as when first put on.
Mr. REILLY. You have thoroughly studied this bill. What money
can be used by this home loan bank for the purpose of rediscounting
bonds or mortgages of a local association?
Mr. STICKEL. Do you mean how much money it would take?
Mr. REILLY. What money belonging to the association?
Mr. STICKEL. I am afraid I do not quite understand you.
Mr. REILLY. In that bank there will be money put in by the joining members.
Mr. STICKEL. Yes.
Mr. REILLY. And there will be money put in by the United States.
Mr. STICKEL. Yes.
Mr. REILLY. For what purposes are those two funds available?
Mr. STICKEL. The subscriptions of members are earmarked for
emergent purposes, short-te:r,:m purposes. There is no earmarking
either of Government funds or of the proceeds of bonds. By inference, it would be possible to use the Government funds and the proceeds of bonds :for other than liquidity purposes, although it is possible that the board would conceive that it had the power to use them
:for liquidity purposes; but the earmarking of a part of the fund for
liquidity purposes may, by negation or exclusion, indicate that the
balance is not so usable.
Mr. REILLY. In other words, when the institution is organized, we
will say that there is $100,000,000 put in by the Government and its
members, before the sale of any debentures. Could not that money
be loaned to the members :for the purpose of liquefying their assets
and to pay withdrawals, as well as to take care of maturing certificates and taxes?
Mr. STICKEL. I wish that the language were unquestioned on that
point.
Mr. REILLY. What is there in the language of the bill, as you construe it, that would make it appear otherwise?
Mr. STICKEL. I think the fact that only part is definitely so earmarked may leave the impression in the minds of the board that the
rest of it is needed :for expansion purposes.
Mr. REILLY. And that is why you suggested that language a little
while ago?
Mr. STICKEL. Yes; that is the reason why I thought there ought
to be a legislative declaration of policy in this bill that would clearly
indicate that it should be used to meet the emergency that is now
existing.
May I have this brief included in the record?
Mr. REILLY. Let me see it.
It is rather long; do you want all of this included?
Mr. STICKEL. There are certain amendments suggested in it that
I did not refer to.
Mr. REILLY. Suppose that you shorten it, and then send a copy
to each member of the committee.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

213

STATEMEN-T OF JOHN C. HALL, OF ST. LOUIS, ,MO., PRESIDENT OF
THE ST. LOUIS BUILDING AND LOAN ASSOCIATION

Mr. REILLY. Give your name and· address.
Mr. HALL. My name is John C. Hall, of St. Louis, Mo., I am
president of the St. Louis Building & Loan Association, and a member of the legislative committee of the United States League.
Mr. REILLY. Did you appear before the Senate committee, Mr.
Hall?
Mr. HALL. Yes, sir; very briefly.
Mr. REILLY. We are going to read those Senate hearings, so just
confine yourself to something new, or to sort of a short summarization of your views.
Mr. HALL. I will do that.
The success of the Federal home loan bank bill depends in a
measure on the number of States in the Union whose building and
loan associations can participate. Under the law, as it is now
drawn, there are a number of States in the Union where the building
and loan associations will be unable to participate in the provisions
of this act, especially where the power of borrowing money is concerned.
For the past 100 years in building and loan association work, the
laws of the various States have provided generally that they shall
lend their money on nonnegotiable deeds of trust or mortgages. That
has been changed from time to time in the different States, but that
condition prevails largely to-day, and it has been the practice that
when these associations borrow from banks for temporary purposes,
they give their unsecured note as security, on the theory that the
relationship of debtor and creditor does not exist between the building and loan association and the shareholders. Therefore those from
whom the building and loan association has borrowed are preferred
over the shareholders of the association. Some States have changed
that, as I say, and they do actually deposit as collateral security
certain deeds of trust or mortgages.
Mr. REILLY. What do you propose to remedy that situation?
Mr. HALL. I have an amendment here.
If you will permit me to name the States as I have them that can
participate-Mr. WILLIAMS. That can or can not?
Mr. HALL. Both.
Mr. REILLY. Do you have that amendment in the Senate hearings?
Mr. HALL. Yes.
Mr. REILLY. Then we do not need it here. We will study the
other hearings.
Mr. HALL. I have sent out a questionnaire to the State secretaries
of the leagues of all the States, asking them whether or not their
States could participate in the provisions of this act. I have heard
from about half of them. I have them summarized very briefly
here and will tell you what they can do.
Th~ following States are prohibited by law from filing their notes
or mortgages, all being nonnegotiable: Missouri, Pennsylvania, Illinois, Vermont, Oklahoma, Florida, and Iowa.
Mr. CAMPBELL. Pennsylvania does not prohibit it. There is no
prohibitory statute in Pennsylvania.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

214 CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS
Mr. HALL. The letter from the secretary o:f the State league so
indicates.
Mr. CAMPBELL. Mr. Best, the P,resident o:f the United States Building and Loan Association League, told me that it is not prohibited
in Pennsylvania, and that they are doing it there.
Mr. HALL. I am quoting the letter from the secretary of the State
league. That is the authority :for my statement.
Mr. CAMPBELL. But I have it from the president of the United
States Building and Loan Association League.
Mr. HALL. I understand that; but the secretary quotes the law in
this letter.
Mr. CAMPBELL. I do not take exception to that. I am stating what
Mr. Best told me in the last week.
Mr. HALL. You can very easily verify the accuracy o:f this gentleman's statement.
Mr. REILLY. Does your amendment provide that your association
in Missouri can join on its own note, without putting up security?
Mr. HALL. That is right.
Mr. REILLY. You do not think that that would be workable in this
law, do yon?
Mr. HALL. I do not see why it should not.
Mr. REIi.LY. That certain associations should come in merely on
their notes and others would have to put up securities?
Mr. HALL. They have done it :for r do not know how many ;ears
and are doing it to-day. They are doing it in the District o Columbia to-day, borrowng on their unsecured notes.
Mr. CAMPBELL. That is, borrowing from the commercial banks?
Mr.· HALL. Yes.
Mr. REILLY. "\Vould that not be a discrimination?
Mr. HALL. No.
Mr. REILLY. To require institutions in my State, :for example, to
put up soourities, and not make that requirement o:f Missouri?
Mr. HALL. But you are putting up all the securities when you
are bor-rowing on your unsecured notes.
Mr. REILLY. But then the bank would be on the same basis as
other creditors.
Mr. HALL. The creditors are limited to 10 per cent of your
resources.
Mr. REILLY. But when an association in "\Vi'sconsin puts up its
securities, those securities become pre:ferred.
Mr. HALL. Yes.
Mr. REILLY. But down in your State, if one o:f your institutions
should go wrong, then this bank would have to take its luck with the
rest of the creditors.
Mr. HALL. ThCl creditors are limited.
Mr. REILLY. But the security is there if they ever went wrong.
Mr. HALL. You would have to do that if you put up specified deeds
-0:f trust. Suppose that you borrow $100,000 and require $200,000
worth o:f security; that is your immediate security. And suppose
that they make loans to others, and put up deeds of trust. Where
<lo you come in there?
~Ir. REILLY. The bank has this definite security.


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS 215
Mr. HALL. Yes; but suppose they lend $200,000 to a private bank
in addition to this, and $200,000 to another one, and take that collateral out; you only have the collateral on your note.
Mr. REILLY. That is twice 200 per cent. That ought to be enough.
Mr. HALL. That may be, but you are junior to the other creditor
just the same.
Mr. REILL¥. As I understand it, this 200 per cent goes to that
bank to satisfy this obligation.
Mr. CAMPBELL. On a collateral note.
Mr. HALL. That is true, but suppose they turn around and borrow
another $100,000 from another bank and put $100,000 more securities.
Mr. REILLY. That does not affect this at all.
Mr. HALL. It takes out from the notes the additional securities
that the association owns.
Mr. REILLY. No; it takes out.securities that go to the creditors of
the bank, but it does not affect the Federal loan bank.
Mr. HALL. But all of your securities are bonds and nonnegotiable
building loan mortgages, every one of them. There has never been,
so far as I can find out, any bank anywhere that has ever lost a
dollar that it has loaned to building and loan associations. That is
a statement that I have heard made. It is being done :frequently.
It is done in Missouri, Illinois, and all those States.
Mr. LucE. There are other institutions that are concerned. How ·
about them?
Mr. HALL. H they have not nonnegotiable securities, of course they
cliuld pledge them. It would only affect those that are limited.
Mr. LucE. Take a State bank, for example.
Mr. HALL. Yes.
Mr. LuCE. What is the Missouri law in that re~ard-the same as it
is with regard to a building and loan association~
Mr. HALL. No; the State banks invest all in negotiable securities.
You would not have that problem come up with anybody else except
the building and loan associations. and that is the only way out that
I know of, and unless something like that is done these States will be
out from the beginning. There is a number of other States where
they must amend their State laws before they can participate, which
takes away the immediate value or benefit of this act-Indiana,
North Dakota, Alabama, and Kansas.
Mr. LucE. Let us get back to Missouri. In Missouri a building
and loan association can not pledge its securities?
Mr. HALL. No, sir.
Mr. LucE. Can a mutual savings bank~
Mr. HALL. Yes; as far as I know.
Mr. LuCE. Why do you object to having the law read the same for
the two institutions?
Mr. HALL. I have no objection to that if they were to amend it,
but it is written differently now.
.
Mr. LucE. I know it is, but when this bill was brought in it was
acknowledged that perhaps 25 States would have to pass legislation
to conform to this one system. That is inevitable, because these
institutions have grown up under 48 different jurisdictions. If we
had undertaken to meet all of the variations, we would have had to
have an encyclopedia. 
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

216

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. HALL. I agree with you on that.
Mr. LucE. Why are we open to criticism if we say that the provisions which most of the States believe prudent ought to be accepted by
the other States in order to protect the bonds that are issued 1
Mr. HALL. There are many objections that might be raised by
different States as to certain details, but this is a fundamental objection, that it is going to affect so many of them, that it is going to
interfere with the successful operation of this law.
Mr. REILLY. Does this law go further and say that it shall be
objectionable~
Mr. HALL. 'l'hat is all it says.
Mr. REILLY. I do not know how that would prevent it from being
pledged for a loan.
Mr. CAMPBELL. Deposited for a loan. They could deposit them.
Mr. HALL. Our Missouri courts have held that it is not assignable.
Mr. REILLY. We have nonnegotiable paper in Wisconsin, which
simply means that if you take it you take it subject to all equities.
Mr. CAMPBELL. And hold it until it matures.
Mr. REILLY. No; I can have a note that is nonnegotiable, and can
sell it to anybody else, but he takes it subject to all equities. In other
words, he can not set up that he is an innocent purchaser.
Mr. HALL. The same question is coming up with the Reconstruction Finance Corporation; they are confronted with the same problem. That law provides that money shall be loaned on sufficient and
ample security. Now, the building and loan associations of any
number of States have made applications for loans, and you can find
out better than I can-I have not been here long enough to check
11p-as to how many States have been successful. Certainly Missouri
has not, and Oklahoma has not, and Illinois has not. Whether they
will be put in later or not I do not know, but they have held, I am
told, that they have no right to assign or pledge certain specific deeds
of trust, and if the same proposition prevails there, it will naturally
follow that those objections will be made here.
·
Mr. LucE. That is an added incentive for the States to change
their laws.
Mr. HALL. It is a question in my mind whether you can make a
law retroactive that will affect all the deeds of trust that are now
nonnegotiable.
Now, I have a list of the States that can qualify, and even some of
them are questionable as to whether they can come under it generally
or not on account of the details as to how they can borrow, and under
what conditions, which would prevent them from borrowing from
the Reconstruction Finance Corporation.
In Massachusetts Mr. Luce-in 1932-they amended their law
there to permit them to borrow from the Federal home-loan bank.
Prior to that time they could borrow from banks, trust companies,
and certain defined institutions, but not from this institution.
Gentlemen, the value of this bill to building and loan associations
is the immediate relief that is going to be available. The question
of permanency is another matter entirely, but the immediate relief
is what is needed. Our legislature does not meet until 1933, and the
law could not become effective until along in September, 1933, and
there is an urgent need for funds to-day.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

217

Mr. LucE. I would not have you think for a moment that I have
:any hostility toward what you are after. If you can offer an amendment that can hold water, I am with you.
Mr. HALL. I have prepared one, and it is in the record and there
is also the amendment prepared by Mr. Lieber. Both of them should
be considered together.
Are you interested in these other States, whose laws are conditional as to whether they can come in¥
Mr. REILLY. I think, if you have information on that, you may put
it in the record.
Mr. HALL. States which must amend their laws before associations
,can borrow from the Federal home-loan bank are Indiana, North
Dakota, Alabama and Kansas.
The following States are restricted by law from borrowing in any
:amount for any purpose: Nebraska and Maine.
·
The States where the associations can qualify under the present
law are Massachusetts, the District of Columbia-many, however,
have nonnegotiable deeds of trust and mortgages, and still borrow
from the banks without collateral security. In addition to _Massa,chusetts and the District of Columbia, there are Tennessee, Mississippi, Maryland-and in Maryland the general practice is for the
banks to lend without collateral; New York-and the praotice
there is for the banks to lend without collateral; Connecticut-the
same is true there; Arkansas, hut the secretary feels that the State
law must be amended before they can come in under this act, but
he does not say why; New Mexico, Kentucky-the securities commission has ruled in Kentucky that the building and loan associations
,can not pledge their securities-and Texas.
Now, I have only heard frQm a little over half of all the States.
I can not speak for the rest.
Mr. LucE. Before you go on, it happens that this noon, at luncheon, I was disclosing to a western member the fact that his State
would probably not be able to come in, but would have to change
its laws. His answer was, "I am :for it, anyhow." Is there any
reason why the members from these States which can not instantly
get the full advantage of the bill should stand on the point that
we ought not to pass the bill?
Mr. HALL. N<;l; I do not think there is. But, to be perfectly
frank, I do not see any real reason why this amendment should
not be adopted, because, in my opinion, I think it really strengthens
the bill.
Mr. LucE. Your amendment, however, might not apply to all of
the variations in laws.
Mr. HALL. Yes.
Mr. LucE. It might in some States and might not in others.
,
Mr. HALL. It would.
Mr. LucE. But, on general principles, if this law helped some
States, even if not instantly all States, should we hesitate to pass
the law because it may not immediately serve the purpose of all the
States in the Union 1
Mr. HALL. Putting it that way, of course, if the law is desirable,
and I am not sure that it is, even though it only affected but three
of the States, and you can not get it through with this provision,
perhaps it would do some good in the other States, but it has to have

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

218

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

a certain number of States behind it in order to let this machinery
function properly and not at too great a cost.
Mr. LucE. I think you may be perfectly assured that it will bethe desire of the Committee on Banking and Currency to get around
all of these obstacles as far as it is possible so to do, and Mr. Bodfish.
has urged an amendment which accomplishes your purpose.
Mr. HALL. I think so.
Mr. CAMPBELL. With safety?
Mr. LucE. With safety.
Mr. HALL. Just a mon1ent and I will conclude on this. You asked
a question of the last witness about the disposition of the funds being
put in here by the United Sfates Government and by the members~
The funds are secured under this act from two sources-that is, the
stock subscriptions and the deposits that the members make, which
includes the Government. The second way is by the sale of bonds
and debentnres.
Now, the ,;alability of those bonds and debentures which are to be
sold to the public is going to depend largely on the character of
security behind them. They are going to be scrutinized carefully
by the investment attorneys who advise large clients who might buy
them. Now, gentlemen, i£ you put any building and loan collateral
behind them where the question is not absolutely 100 per cent certain,
you are going to have the question come up in the minds of the attorneys who advise their clients as to the purchase of them.
This amendment does not come in under that section at all; it
comes in under the section that I referred to in the beginning,
which answers a question ~rou asked awhile ago as to what is going
to become of the funds supplied by the Government and by the
members. I am not asking that thi.s be made 100 per cent as to
those that can come in nuder this bill, but I am simply asking that
we can come in for temporary loans.
Let me read subsection (i), on page 21. It is very brief.
Each Federal home-loan bank shall at di time" Jr1yp nn amount, ,'11ua 1 to•
the sums paid in on outstanding ('apitnl :suh,.:criptiom; of its mcmhers-

That includes the Governmentplus an amount, equal to the current deposits received from its members,
invested in (1) United States Government securities, (2) interest-bearing deposits in banks or trust companies, nrnl (3) advances with maturitr not greate1·
than one year made to member>', upon ;;ueh terms and conditions Hf' tlw bonrd
may prescribe.

I take it that that refers back to section 8 on page 14, which provides that loans shall only be made on the security of home mortgages. I_ assume that thnt runs clear through the aet, and yvu can
not take Just one section.
The amendment goes right in there, and applies only to the money
secured from members, not the investing public, and it reads briefly that it can be loaned to members without collateral security where
the laws of the States under which they operate require them to invest all of their funds in nonnegotiable deeds o-f trust and notes.
Mr. Lieber's amendment provides further that the creditor liability
shall not be more than 5 per cent over the amount of its shares.
We would only be permitted to borrow £or one year. It would
not affect the market value of your debentures and bonds, and would

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

219

come solely from fonds secured from these sources. I£ 1\'e can in
the meantime amend our State laws. then we can come in under the
rest 0£ the act, but it does give irnn1ecliate relief, which is the most
important thing to-day that you could possibly have, and in Missouri we could not get an amendment until the latter part of 1933,
and you gentlemen know that it is hard to get any kind of a bill
through the legislature.
Mr. CAMPBELL. W oulcl you recommend to the State legisiature
that they amend their law so as to get the foll benefit of the act?
Mr. HALL. Certainly.
If you care to qualify it further, you can also require that that
amendment shall not be valid after the 42-month period, the same
as you have £or the investing 0£ fonds.
,v-e can not subscribe £or stock in this institution, neither can
building and loan associations in many 0£ the States, but you take
care 0£ that by saying that they can make a deposit 0£ au- equal
amount and in 42 months they must amend their laws so that they
can buy stock.
Mr. CAMPBELL. Only the fonds of subscribing members are aYnilable for loans.
Mr. HALL. Yes, sir.
Mr. CAMPBELL. But when it comes out of the sales of the proceeds
of debentures or bonds-Mr. HALL (interposing). It has nothing to do with what I am
arguing here.
So far as the actual safety 0£ the investment 0£ these fonds is
concerned, all you have to do is to take the experience of the banks
in all 0£ these States, and even in the States where they have ne~otiable mortgages they lend to them without security. ,v-hen the uovernment retires, or gets out its $150,000,000, and you gentlemen expressed some doubt as to when that would be, then there will not be
a great deal of money in this fund that I am talking about now, so
that I can not see where it would interfere in the least with that
limitation. I know it will do a tremendous amount of good, and
unless you do it, then all of these States where there is some question
about the negotiability of these notes coming into the general provision would affect the salability of those securities, and that is the
most important point in the whole thing, in my mind.
Mr. CAMPBELL. Mr. Williams raised the question a moment ago
that these nonnegotiable mortgages and instruments which thev now
hold could not be made negotiable by an act of the legislature.
Mr. HALL. I have my doubts whether they can, but there are
various opinions on that. I doubt whether the passing of an act now
making building loan deeds of trust and mortgages assignable would
affect those already in force. Then, we are not makmg any new
loans at the present time.
The reason for this nonnegotiable feature was, in the first place,
a safety measure. It reduces the probability of theft or embezzlement on the part of the officers of an association to a minimum, and
it prevents the pyramiding of the assets of a building and loan association, prevents getting them out into the commercial field and repledging them, which they can not do under the present law.
Mr. LucE. Whose vested rights would be impaired by retroactive
legislation~

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

220

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. HALL. Well, there might be objection on the part o:f some
borrower that he had made his loan at the time when the law provided for no assignments. Our courts have held that, and I doubt
very much, unless this situation were cleared up, whether the attitude o:f the attorneys making recommendation on the legal phases
of this act would be one o:f approval.
Mr. LucE. If the man has borrowed, he can not lose a thing.
Mr. HALL. No; he can not lose a thing ex.cept that he has his interest in the shares of stock, his investment in the sinking fund. He
is an investor as well as a borrower.
Mr. LucE. You think, then, that the shareholders, whether borrowers or not, might believe that their rights had been invaded?
Mr. HALL. I do not think it is a serious objection, but it might be
brought up. It is serious enough that perhaps it would not stand
the test o:f recommendation :for investment. I :feel really that unless
something like this is done, it is going to interfere with the sale of
vour securities.
• Mr. CAMPBELL. Under the Missouri law they are limited to 10 per
cent1
Mr. HALL. Ten per cent of our resources. That is all we can
borrow.
Mr. CAMPBELL. On their notes i
Mr. HALL. Yes; and an examination o:f the various laws will show
you that there is a limitation :from 10 to 20 per cent. I think that is
the general rule. Perhaps 15 per cent would be the average. In
Missouri and Illinois it is 10 per cent; that is all we can borrow.
The borrowing of a building and loan association, gentlemen,
rohould be an incidental part of its business. It should get its own
funds, generally speaking, from the sale o:f its stock. There are
certain seasonable times, times like this, when it could readily borrow
money for various purposes, but it should be incidental to its main
purposes.
Mr. REILLY. What are the assets o:f the building and loan associations in Missouri i
Mr. HALL. About $220,000,000.
The associations in Missouri are now borrowing :from banks where
they need it, and the banks are lending it promptly. Some States
are not so fortunate. Some States need this badly. They are in
desperate condition and should have immediate relief.
I would suggest that if you would inquire from the Reconstruction
Finance Corporation as to what progress is being made in connection
with loans that they are making to building and loan associations,
the same question exactly would come up and you could see what
would happen under this bill, because this is more specific, that there
must be an actual pledge of deeds of trust or mortgages.
Mr. CAMPBELL. I have heard o:f one loan from the Reconstruction
Finance Corporation to a building and loan association.
Mr. HALL. In what State was that 1
Mr. CAMPBELL. I think it was stated here the . other day that in
North Carolina they had borrowed $400,000, all for the banks; it
just bassed between them and the banks.
Mr. WILLIAMS. I would like to ask you a question, Mr. Hall.
I understood you to say that borrowing by the building and loan
associations was rather incidental. Is that correct~

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

221

Mr. HALL: It should be; yes.
Mr. WILLIAMS. What would be the necessity of borrowing by
building and loan associations in a period of general prosperity or
under normal conditions i
Mr. HALL. Well, I can only answer that by a guess. Certainly
there is an immediate need for it, and it may last for several years.
H it comes to the point where there is a suplus of funds and a scarcity
of loans, there would not be the demand for loans from this bank
by building and loan associations.
Mr. WILLIAMS. In the light of your experience as a building and
loan association man, what would you say has been the history of it j
Mr. HALL. Our experience, during the past 11 years that we have
been in business, was that in 1928 and 1929 we did not borrow any
from the banks. Since that time we have had a small loan. At the
present time it varies up and down. It is a seasonable thing. The
old practice was to borrow in the spring, when the building period
was on, and then to pay it off during the winter.
As to how long this condition will last during which we will need
this money, that can be answered about the same as the answer as to
when we are going to find the "corner'' that we are going to turn
around. I do not know.
Mr. WILLIAMS. In what shape would this bank be in if the time
should come when you would not need to borrowi
Mr. HALL. You would be in the shape of having an organization
not doing much business in lending, with no one to borrow if the
loans were limited to members. You would perhaps have to retire
some of your debentures. I presume that they will be worded so
that they can be retired under certain conditions.
Mr. CAMPBELL. That would not be an unhealthy condition i
Mr. HALL. No; it would not, unless the operating expenses should
become top-heavy.
Mr. CAMPBELL. There is no fear of that.
Mr. WILLIAMS. I do not know about that, if we did not need it
at all.
Mr. HALL. Of course, if you were not making any loans at all it
would be like having a store and not selling any goods. You could,
perhaps, cut down the organization at that time.
Mr. LucE. As I remember the figures, it only costs about $27,000
a year to run the New York land bank.
Mr. HALL. Yes; I understand that that is very economically run.
Mr. CAMPBELL. If this meets the emergency and if it were made
permanent, would it not prevent a recurrence of this condition~
Mr. HALL. I did not understand.
Mr. CAMPBELL. H we made this permanent1 would not this legislation preclude a condition arising like we are m to-day 1
Mr. HALL. Well, it should have that effect; yes. It should have an
effect of more easily stabilizing conditions.
Mr. CAMPBELL. Do you not think that the board of directors of this
institution will see that there is not any building program started;
in other words, that they will take_ care of the relief needed in the
emergency rather than encourage new building 1
Mr. HALL. I would hope so; yes.
Mr. CAMPBELL. We need have no fear about that.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

222

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. HALL. No. I would hope that that would be the policy of
the board.
Mr. CAMPBELL. Do you not think that the President of the United
States will exercise good judgment in appointing men in that place'!
Mr. HALL. I would think so. I did not have that in mind until I
answered the question that we were talking about on the general
e have the same problem in the local assodemands for funds.
ciations. Sometimes you have too much money and too few loans
and then the conditions are reversed. They are reversed now.
e
have many applications for loans that we· can not make and there
are some very distressing conditions where people are losing their
homes by the hundreds because they can not get their loans renewed.
Any funds coming in now at the present time would be a relief to
any association and··would be a tremendous relief to the home owner
anu the public, and that is why I am so earnest about the immediate benefit which I think will be brought about by this amendment.
Mr. REILLY. Is there anything further, Mr. Hall?
Mr. HALL. That is all I have, unless you want to ask me any questions or if that takes care of the information that I can give yon on
this amendment.
Mr. 1VILLIAl\IS. There is a question about that amendment that I
am not clear on. A number of States are in the same sta.tns as Missouri, in that they can not come into the organization, as provided
for in the bill, for the reason that their securities are nonnegotiable.
Mr. HALL. Yes.
Mr. "\V"rLLIAMS. And there was another group of States that yon
gave. from which I got the impression that they could not come in
for some other reason.
Mr. HALL. Yes. They mnst amend their laws bPfore they can
come in.
Mr. WILLIAMS. In what way? I did not catch that.
Mr. HALL. Well, take Kansas, for instance. This is a technical
thing, but it is similar to the condition in Massachusetts, and jnst
that one little section in your law, Mr. Luce, had to be changed. Tlw
Kansas law gives the right to borrow, and they may assign, pledge,
or sell their bonds with the approval of the banking commis,-ioner.
but only :for three purposes: First, for paying, withdrawing. or
maturing shares; second~ for liquidating the association, and the~can temporarily pledge with other building and loan associations
:for a loan for the exclusive purpose of making more mortgage loan!"
to their members. In other words, if an association there borrowed
from the Federal home-loan banks, it could not use any of those
funds to make loans with; it could only use them :for the purpose of
paying, retiring, or withdrawing shares, and, of course, they would
want to amend that to let them use it :for any purpose, certainl~·
for making loans. That is what they need more than anything Pl"P·
The Alabama law provid~s for negotiable mortgages, that they ean
pledge the same as security for borrowed money, but on fnncl:c;
secured by pledge of mortgages, the same must be used exclusivel>·
for withdrawal or retirement of shares and for no other purpose.
Mr. REILLY. Is not that the biggest need of a building and loan
association?
Mr. HALL. Oh, yes; they need that.
Mr. REILLY. That is the most pressing proposition.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

,v

,v

CREATION OF A SYSTEM OF .FEDERAL HOME LOAN BANKS,

223

Mr. HALL. That, and the demand for loans.
Mr. REILLY. The demand for loans will not put them into a.
bankruptcy court.
Mr. HALL. You can not do that, a.nyway.
Mr. REILLY. In any State¥
Mr. HALL. You passed an act in this Congress which prevents
building and loan associations from going into bankruptcy.
Mr. REILLY. They are nearly as bad off as building and loan associations in other States that can .be put in receivers' hands when they
fail to take up obligations that are due, or fail to pay dividends.
Mr. HALL. I do not think you can put them in bankruptcy in any
State.
Mr. REILLY. You can throw, them into receivership.
Mr. HALL. If they are insolvent. You can take all the time you
want to pay withdrawing members, under every law that I have
ever heard of.
·
·
Mr. REILLY. I do not think so.
Mr. HALL. I am inclined to. differ with you, because I am quite
sure that under any State law ,you can take all the time you want
to pay your withdrawing shareholders, because the law provides
that a certain percentage of your receipts can be used for paying
withdrawing sJ:tareholders, and you simply go on notice, as hundreds
of them are gomg to-day all over the Umted States. I do not know
about Wisconsin, but I think you will find that that condition prevails in your law. I did not hear from the Wisconsin secretary.
Mr. REILLY. I would not say particularly about the Wisconsin 'law,
but I have had letters from building and loan people that stressed
that fact.
Mr. HALL. I feel quite sure that they are in error there. If they
are insolvent, of course they must be put into bankruptcy, but not
on account of failure to pay on demand. Of course, the man wanting his money out of a building and loan association, and needing it,
should be taken care of, but the man who needs a loan on his home
to save him from foreclosure, and who can not get it renewed, is in
worse shape. You are taking his home from hi;m.
Mr. WILLIAMS. The primary purpose of this bill is to protect the
home owner.
Mr. HALL. I would think so.
Mr. WILLIAMS. Is that not really the intention of it~
Mr. HALL. He can take his building and loan shares and borrow
on them from anybody who thinks they are all right, but he can not
do anything on his mortgage that he can not renew. And every
home you take away from a man just results in a situation where
that man will never again try to buy a home. That is the type of
citizen we do not want in this country.
·
The other States that I referred to her~ must amend their laws for
similar reasons· in order to come in.
Mr. WILLIAMS. I :think it is important to have in the record the
reasons for that, because there will be Representatives who will depend on us for this information.
Mr. HALL. In North Dakota the law permits associations to assign
or sell mortgages. They can not, however, pledge more than one
and one-half times the amount of collateral for the amount borrowed.
113235-32--15

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

224

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

In other words, they can not pledge more than $150 for every. $100
they borrow, and the home-loan bank would require a greater amount
of collateral than that.
Mr. CAMPBELL. They could. only borrow $90.
Mr. HALL. Yes.
In Indiana they have both nonnegotiable and negotiable mortgages.
The general practice is that the bank loans on unsecured notes. The
law provides that notes may be assigned with the approval of the circuit court. The general opinion of the building and loan men, and of
the attorneys for them, is that the law must be amended before they
can come in and take advantage of the provisions of this bill. However, the reasons they did not give me in their letter.
Those are the four States.
Mr. CAMPBELL. You mentioned something about Maine, and one
other State, I think.
Mr. HALL. Maine and Nebraska. Thev can not borrow at all.
Mr. REILLY. You have only heard so far from half of the States?
Mr. HALL. That is all. The people in Kansas, for instance, said
that-they could come in all right, and they sent me a copy of the
law, but I found this limitation, and it is almost identical in form
with the one in Massachusetts.
Mr. LucE. I have the impression that the Massachusetts law was
copied in some particulars by other States.
Mr. HALL. No doubt.
Mr. LucE. Undoubtedly such is the source of that phraseology.
Mr. HALL. It provided that they could borrow from banks, trust_
companies, insurance companies, and others of that character, being
the only ones that they naturally would expect to borrow from.
Then came along this Federal home loan bank bill, which was not
included, and they have taken care of that this year, I think last
month.
Mr. CAMPBELL. Do you not think that there will be a movement on
the part of the building and loan people to have those laws amended
so that they can get the benefit of this act?
Mr. HALL. Oh, yes.
Mr. CAMPBELL. Just as the banks throughout the country have had
the State laws changed so that they can join the Federal reserve
system?
Mr. HALL. Undoubtedly. That is why the 42-month provision
was put in the bill, so that they could buy stock in it. There are
more prevented from buying stock than there are from pledging
their notes and deeds of trust.
Mr. CAMPBELL. When those laws were passed originally., they
hardly had reference to this kind of stock.
Mr. HALL. No; but it states how they can invest their funds.
Mr. CAMPBELL. If you could confine it to that--Mr. HALL (interposing). Yes; I think there will be a general
movement among all the States. Maybe when they go through it
with a fine-tooth comb, they will find other reasons why they can not
loan, and those will have to be taken care of by amendments to the
State laws.
Mr. CAMPBELL. We want to find reasons for lending the money
'
to get out of a bad situation.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

225

Mr. LucE. When the conference of those interested in the matter
of redrafting this bill was held, we were handicapped by not having
information concerning Missouri and several other States and the
many building and loan witnesses from different States, who appeared before the Senate subcommittee, gave us assurance that there
would be no difficulty in connection with the immediate participa~
tion of a large number of States. I for one am very grateful to Mr.
Hall for bringing these facts before us; and, by the way, let me say
that in the Senate hearings that conference, which was wholly unofficial, is referred to at times as the "House Subcommittee," which
was an error.
Mr. REILLY. It was one of the unofficial coinmittees of the House.
Mr ..LucE. 0ne of the. mwfficial Gommittees of .the House.
Mr: REILLY. The same as the unofficial committee on the repeal
of the eighteenth amendment.
·
Mr, LuoE. In view of Mr. Hall's suggestions, I am hopeful that
the _42-month provision can be rtdrawn by Mr. O'Brien to meet your
rteeds.
' Mr. HALL. I think it can be, and, as I say, we are perfectly wilfo1g
to come in under the short-term loan of one year, or even take the
42-month provision. My personal opinion is that the bill will .be
better if it lets us in at the main part of it, but thaL pe::'h'.lps, ·witl
meet .too much opposition. I am speaking directly for Missouri.:. :
Mr. REILLY. Do you not think that the sale of the debentures of
this o'i:·ganization will be seriously handicapped if the idea got out'
that there was nothing back of it except the stock of. the banks and
the promissory notes of these institutions?
·
..
Mr. HALL. It would be, for the reason that ym1 would have· to
earry around an expert with you all the time to explain what y<m
mean by that. It is an abstract thing, and hard to explain, regardless of the fact that for the last 100 years the banks have been le~ding to them and never lost a dime. Even then it is hard to get the·
i9-ea over. I did not make any headway before the Senate Co.tpmittee, for the reason that it came to them all of a sudden, "What~
Loan without collateral? y OU can not do that;" and I was through
before I got started; but the condition exists. just the same, and
whether you like the amendment or not, you have the same condi-,
tion to deal with in the bill as it is now written. You have those
States to do business with, and it would do more than anything else·
to fore~ them to amend their laws so that they could come properly
under 1t.
•
Mr. CAMPBELL. There is no likelihood of any involvement by having this amendment in there, is there?
.
Mr. HALL. I do not think so. I have given it quite a good deal
of study, and I have almost gotten to be a'· bug" on the ~ubject. but
I can not see any reason why it would do anything to hurt the
situation.
Mr. WrLLi:AMs. But your amendment would not relieve the situation as to all of these States, would it?
Mr. HALL. Not Maine and Nebraska, who can not borro.w at all.
They will have to amend their laws. But' as to those who are limited
as to the pledging of their securities, t.hey g;ve them the generalright
to borrow for all corporate purposes, and some of them pledge their·

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

226

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKB

securities for a certain thing. I think this would take care of most
of them. We can borrow, and all of them can borrow money, so far
as I know, except these two States in the Union.
Mr. WILLIAMS. Did I understand that there are some other States
that have laws that prevent them from borrowing from an institution like this 1
Mr. HALL. Some of them are restricted; but that could be changed.
Massachusetts has that, and so has Kansas.
Mr. tVnLIAMS. That would require a change in the law 1
Mr. HALL. That is true.
Mr. WILLIAMS. And there are other States, as I understand you,
that could not borrow from the institution for the purpose of making
other loans or paying off loans tqat do exist 1
Mr. HALL. Yes.
Mr. WILLIAMS. Your amendment would not relieve that situation,
would it?
Mr. HALL. Not immediately.
Mr. WILLIAMS. Have you any suggestion as to how to reach them¥
Mr. HALL. I do not know how to give them immediate relief,
because they are prohibited generally from borrowing, except for
certain purposes.
·Mr.WILLIAMS. Then we have two States that have no exception,
and for that reason they can not come in at all, and your amendment
would not reach them 1
Mr. HALL. No; not at all. I think that there are, perhaps, innumerable amendments that the different States would like to introduce to take care of minor defects, and no doubt you have had many
of them presented, but this is of such major importance that I do
offer it, because it would be a great help and an immediate help.
Mr. CAMPBELL. It goes as far as you think it is possible to go 1
Mr. HALL. Quite.so.
Mr. CAMPBELL. And it meets as many emergencies as it is possible
to meet?
Mr. HALL. It meets the greatest numbe_r.
I would be glad to give you a memorandum of what I have learned
from the different letters as they come in.
Mr. CAMPBELL. How long ago did you send them out 1
Mr. HALL. About 10 days, I think; but some are a little slow in
answering.
Mr. REILLY. They probably have to get an opinion from the
Attorney General in many instances.
.
Mr. HALL. Lots of them do, and lots of them do not want to
answer, perhaps, but there will be more of them coming in.
Mr. REILLY. We are very much obliged to you, Mr. Hall, and if
you will give us some more information along that line we will be
2:lad to receive it.
·- {Subsequent to his appearance before the subcommittee, Mr. Hall
left with the subcommittee the following memorandum:)
STATElS THAT COULD QUALIFY UNDEa FEDEBA.L HOME LOAN BANK BILL WITH
POSSIBLE CHANGE IN STATE LAWS

North, GaroZina.-General practice is to pledge mortgages when required, but
l1orrowing is often done on unsecured notes. ·The law is silent as to power to
pledge mortgages and deeds of trust and may have to be amended.


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

227

.Miohigan..-The general practice is that associations make loans on both
negotiable and nonnegotiable notes and mortgages. Some have by-law provisions prohibiting the assiwiment of mortgages as collateral. Associations generally borrow from banks on unsecured notes (without collateral). Effort will
be made at a special session of the legislature this year to clear up the situation by necessary amendment.

Mr. REILLY. Is there anybody else that wants to be heard in :favor
o:f the bill 1 If any of you gentlemen against the bill want to start
now, you may do so.
·
STATEMENT OF HIRAM S. CODY, OF CHICAGO, ILL.

Mr. REILLY. Give your name and address and whom you represent.
Mr. CODY. Hiram S. Cody, of Chicago, appearing simply to read
the statements of absentees.
Mr. REILLY. Have any of these men appeared before the Senate
committeei
Mr. CoDY. There were about 40 witnesses desiring to be heard in
opposition to the bill when we were c9ncluding the Senate hearings,
and in order not to prolong those hearings, we did not call the witnesses, although the opponents of the bill had presented only fl
witnesses, as against 34 in favor of the bill. The hearings had gone
on for some time, and those witnesses that I have just referred to
were not called; and for the same reason, in these hearings, we have
asked your permission to submit these statements from those who
would be glad to come if they were called, but it would take several
days' time to hear them, and as we have a number of witnesses
coming for to-morrow and the next two days, we believe that that
will cover the presentation. .
The first statement is from Senator Charles O'Connor Hennessy,
who is described in the official book of the United States Building
and Loan League as one who has made significant contributions to
building and loan practices, and who will be known especially for
his excellent and constructive efforts in guiding the affairs of the
legislative committee of the United States League to many a significant and successful conclusion which has protected and strengthened building and loan principles.
Then this memorandum goes on to say that the chapter on national
legislation in this volume indicated the extent of Senator Hennessy's contribution to the legislative background of building and
loan.
The Senator says(Mr. Cody thereupon read Mr. Hennessy's statement, which was
later expunged from the record.)
•
Mr. REILLY. Did he not appear before the committee at the
hearings1
Mr. CODY. No, sir.
Mr. REILLY. Did not Mr. Hennessy give extended testimony before
·
the committee before j
Mr. CoDY. No, sir. He filed a statement; and in that connection,
with his statement Senator Hennessy presented an article-Mr. REILLY. It must be the other Hennessy.
Mr. CODY. He presented before the United States Building and
Loan Convention an article on this general subject. There are two

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

228

CREATIOX

()I<'

A SYSTEM: OF FEDERAL HOME LOAN BANKS

sfoiemc>nts in the Senate proceedings; the proponents of the bill have
filed his address, which, on reading, would give you the impression
that he is in favor of this bill, but if you will look at the appendix
von will find his later statement.
" l\Ir. Lvn:. I have on my desk several hundred letters, I should
say, ·from persons of responsibility and standing in their communities approving this bill. I had not thought of asking their insertion iri the rec6rd, and I am wondering whethc>r we would betterl;sttiblish the precedent.
~fr. R,m,r,Y. I have the same number, and I was wondering
whether those letters ought to go in. I have a great many letters
in my office on one side or the other. I think what this committee
is interested in hearing are arguments as to the merits of the bill
mt>l't\ thrin n rrnln's view as to whether it is propaganda, or what it
1hay be.
l\fr. CooY. That is what we intend to present.
Mr. REILLY. As far as this hearing is concerned, and the other
hearingj the matter has been a debate; and I think this committee is
interC'ste,1 more. in arguments on the merits of the bill, pro and con.
Jfo ConY. That will be the nature of the testimony that will" start
t~Hnorrow morning. While many of these are not arguments, I
se(' yom point, and if you will permit me merely to give the names
it will snn\ a lot of time.
Ml'. R1m,LY. ,ve are trying to deal with facts. If the facts have
not bePn presented correctly, something to show that they ar<> not
facts ought to be presented now.
:Mr. ConY. I see the point.
~fr, H.F.TLLY. 1 do not think that '".e had better file that letter.
.fo~t give the names of the men.
Mr:· LccE. In your teRtimony hP:fore the Senate committet•, on
page 140 of part 1, you set forth three things that the advoC'Hte:of this bill co:iitend. The second was this:
That it will help the manufacturers of building supplies and members of
Acciirdiug to estimates made public by the Federal
Government, it would be possible to construct 3,000,000 reiaidences within the
ne:xt five years, if the plan should be put into effect.
the building . trades.

\Vill you inform me as to what branch of the Government made
that statement j
~fr. ConY. I will be glad to. The New York Timei,;, of December
6, contained a 2-column, square-boxed article, stating that reports
1i1iHlc to the Federal reserve and the Treasury Department indicatetl
that a,000,000 residences could be constructed as a result of this
hill. I will .be glad to get you a copy of that clipping, and endearnr
to run that down through the Federal reserve nnd the Treai,;11ry
Department, to come to the sourcp of thut report.
HoweYer, in the latter part of the testimony, l\fr. Nelson, execntfre
secretary of the N atioua.l Asociation of Real Estate Boards, said
that the estimate of the Department of Commerce was 2,000,000 new
residences intsead of 3,000,000 new residences, arnl, even without
goinµ: further on th~ other, the opponents of the bill would accept
that correction, if such_ is intended, and take the- 2,000,000. Buf
if you have a house that you want to sell or rent in ,one block, and
there are two othe_r hou_ses empty in that block, one new reHidence
in that block is contrary to your best interests.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

229

Mr. LuoE. I have been told that search in the Department of
Commerce has failed· to disclose any such statement.
Mr. CooY. I will be glad to run that down, and get you first a
copy of the New York Times.
Mr. Ji.uOE. I have lived long enough not always to believe newspaper reports.
Mr. ConY. It was a report to the Treasury Department and to the
Federal reserve that seemed to give it authenticity in this case. I
think they would hardly dare use any figures unless they were correct.
Mr. LuOE. You accepted this statement by making it, "According to estimates made public by the Federal Government "; you
took a newspaper report and relied on it?
Mr. ConY. In view of the fact that they referred specifically to
a paper in which it came, we felt safe in using the estimate in good
faith.
. Mr. LuoE. The estimate is a gross exaggeration. It could not have
been made in the language to which it was later changed. The
Senate print has it, "According to estimate made, it would be possible
to construct * * * if the plan should be put into effect "; but
any probability of that sort of thing is a different matter.
Inasmuch as the circulation of the statement has put it into the
minds of many of my colleagues, who are greatly disturbed by it,
precise accuracy in the matter is exceedingly desirable.
Mr. ConY. We understand that; 2,000,000is the present estimate of
the Department of Commerce, and we accepted that.
Mr. LuoE. You accepted a statement that it is possible to construct
2,000,000 homes?
Mr. ConY. We understand that the Department of Commerce
states that it would be possible as a result of this legislation to construct 2,000,000 homes.
Mr. CAMPBELL. In places where needed.
Mr. ConY. I presume that that would be the point.
Mr. CAMPBELL. They would not be built where there were abundant residences and buildings available.
Mr. ConY. The difficulty is that if the credit is available it is
difficult to control that to the districts where there is a real economic
need for it.
Mr. CAMPBELL. The board must do that.
(Thereupon, at 4.20 o'clock p. m., after an informal discussion off
of the record, the subcommittee adjourned to Tuesday morning,
March 22, 1932, at 10 o'clock.)


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME
LOAN BANKS
TlJFSDAY, MARCH 22, 1932

HOUSE OF REPRESENTATIVES,
SUBCOMMITI'EE OF THE
COMMITTEE ON BANKING AND CURRENCY,
Washington, D. 0.
The subcommittee met, pursuant to adjournment, in the caucus
room, House Office Building, at 10.30 o'clock a. m., Hon. Michael K.
Reilly (chairman of the subcommittee) presiding.
Mr. REILLY. The committee will be in order,, and the first statement this morning will be by Mr. Oakman.

STATEMENT OF ROBERT OADAN', DETROIT, MICH.
The CHAmMAN. State your full name and your residence.

Mr. OAKMAN. My name is Robert Oakman, Detroit, Mich.
Mr. REILLY. Mr. O!tkman, I understand you appeared before the
Banking and Currency Committee of the Senate 1
Mr. OAKMAN. Yes, sir.
.
Mr. REILLY. Of course, if you have anything additional to offer
not contained in your testimony there, we will be pleased to hear it.
Mr. OAKMAN. I think I have something additional. I have read
everything that has been published in the hearings, and there are
two points in connection with the bill that have not been brought
OU!; or probably three points, and I would like to state them.
i:;o far as I can find there has been nobody that undertook to
show how the Federal Home Loan Bank could pay. It is not in
the record at all. But I have the material here to show how it will
pay. Speaking of the Senate bill, the objection has been made that
the home loan bank could not pay its way and will become a burden
upon the Treasury. Now, let us consider this subject by way of
conservative example. The Federal home loan bank is started with
a cavitalization of $5,000,000; $1,000,000 is paid in by the component
institutions for stock and $4,000,000 by the Government; that is the
example.
Member banks would receive 6 per cent collected from the payments on current advances, or $60,000. The district bank would
receive 6 per cent on its capital investment, or $240,000. This latter sum would represent a gross profit.
The expense would not exceed one-half of 1 per cent which would
net 5½ per cent profit on $4,000,000, or $220,000 profit. I will not


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

231

232

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

go into details, but you can refer to this and see how it is arrived at.
It is conservative to assume, supposing the bill were passed to-day,
the amount of the mortgages taken over by the district bank would
reach $10,000,000. So that after the first of the year the district
bank would have earned $550,000 a year over and above all expenses.
The banks would receive 12 per cent collected from the amortized
mortgage payments during the year, and this sum would be available for mortgages, constituting a revolving fund, which would add
to the earpings of the district bank.
The bill as it now stands provides that there shall be 12 district
banks each with a capital of $5,000,000, making a total of $60,000,000.
Assuming that each bank would have paid in $1,000,000 by local
members, or a total of $12,000,000, the Federal home loan bank would
have an earning power of four times twelve, or $48,000,000, and this
sum based on a net interest of 5½ per cent would earn $2,640,000 a
~~

.

.

.

Some of the smaller district panks may not use up the entire $5.,.QQ0~000 and others would use more than that amount. The money not.
used by small banks may be turned over to another member bank
which can use the money. At this rate of profit a year, that is,
$2,640,000, the Government would be paid back in full for the money
borrowed from the Treasury in 20 years, even if there is no increase
in mortgages discounted.
There would be no loss on bonds or debentures at 5½ per .cent, as
the Federal bank would make the direct sale under the bill as it i~
to-day. The fact that member banks must guarantee the payment of
their own mortgages is another convincing reason why the Federal
home loan bank will be a success.
That has not been touched on by anybody.
There should be a sinking fund and a reserve fund in each district
bank.· Net profits for the first year of the district bank shall go into
the reserve fund. The ·second year 50 per cent of the net profits of
each district bank shall go into· the reserve fu'nd and 50 per cent into
the sinking fund. These are simply suggestions here,. as you see.
Thereafter all the net profits shall go into the sinking fund. Payments to the Government shall be made once a year out of the sinking
fund.
.
.
Member banks shall be paid interest received on mortgages which
they have pledged less than the one-fourth of 1 per cent which shall.
be paid them in stock. They _should also receive dividends on their
stock.
The underlying principle on which the Federal home loan bank is
based is that it will be a profit-producing institution from the very
beginning of its operation. The profits must come out of the interest
paid upon the mortgages pledged, and as there is no interest to be
charged for the Government's investments in this.bank, it will have
profits of at least 6 per cent less one-half J)er cent on all mortgages.
The large life insurance companies and other large lenders on
mortgages have only one agent in each city and all applicants must
apply to their agent, bank, or trust company, but under this bill all
strong solvent banks may become members and retain their own_
customers. That is new, too. Where there is only one agent in a·
large city, banks, trust companies, and building and loan associations


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN .BAN~S

233

mtjst make applications to the local agent and pay a commission of
2 per cent ,or more in order to have their eligible mortgages accepted.
It is provided that 5 per cent on stock held by member banks shall
be paid before the net profits are computed for the sinking fund and
reserve fund.
Just another point: The bill already provides as follows [reading] :
The bonds and debentures issued by each ]l'ederal home loan bank shall- be
deemP.d and held to he instrumentalities of thP. Government of the Vni.ti!d
States, and as such, they and the income deriv:ed therefrom shall be exempt
from Federal, State, municipal, and local taxation.
-

That is simply to wind that up· there. I will not go any further on
tfo1t, although I have much to back it up. I have had .conferences
with some bankers at Detroit and others and we have examined thjs
and fought it out and none has been _able to puncture it at a~l so f~r
as the earning power of · the bank 1s concerned, and I thmk thu,
example was very conservative.
In another item I have said this: It is more important to sa\te
homes already built than to furnish money for new homes_. Tp.e
shortag~ of home-mortgage money for these purposes has· done tre~
mendous injury to the construction business, which is among the
prime industries of the country. The passage of a genuine Federal
home loan bank bill would immediately put to work thousands of the
tmem}'>loyed.
'
.
As Senator Watson has said, the individual home is, after a~l,
pretty much the basis of society, so why not encourage home
building?
.
Here'is a matter that I think is very important: It has been stated
that the local trust companies and banks ought to furnish inoney fotsuch purposes. I am satisfied that they would if they could.
_
Strong· solvent banks throughout the country, such_ bi;inks .and
trust companies as we have in Detroit, are not lending money -on
mortgages; Irt the first place, they have been carrying their full
quota of mortgages allowed by law, and, besides, taking o:ver real
estate that must be sold within a short t.ime in order to satisfy t~e
bank examiners.
·
Yon see, when they take over mortgages and become real-estate
hold~rs inside of a year or two they have ~o put them in mortgages
and in assets.
Again there is the hysteria of hoarding caused by the closing of
many sofvent banks, and hoarding became a passion of timid peop}e;
a:s well as some of the large mortgage-loaning companies.
The;n speaking about the banks striving for liquidity: It is ah
impossihility to get a single dollar out of the banks for mortgag~s;
in fact-and this is no exaggeration-you can not go into banks, or
you could not on last Saturday in Detroit, when I left, with a $10,000
home and borrow enough nioney on it to pay taxes. That shows what
the fellows in the East have done through hoarding their money in
the high places. So there is no place left for a workingman to· go
and get his mortgage extended.
These mighty life insurance companies-here is an important thing,
too, _that has not been brought out-who are enjoying the.benefits of
Government to an extent greater than has been granted to any corporation in the history of this country, do not seem to be disturbed
over this terrible situation. This is a new saying. These people do

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

234

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

not realize they have already been granted a station and power t4at
are most extraordinary, and in times like these they do not give a
man· a chance to keep his home. It is a terrible condition to have
those great institutions, witp millions, yes, billions behind them,
to shut off and say, "We will not lend you a dollar in this community and that community, even if it would be in the best interests
of the country."
.All of the great banking institutions which lend money on mortgage credits are not opposed to this bill, as is shown in the testimony
before this committee by Mr. Wilson W. Mills, chairman of the
board of directors of the First Wayne National Bank, of Detroit.
In answer to Senator Morrison's question: " Do lou favor this
bill, or are you opposed to it 1 " Mr. Mills answered: 'I am in favor
of the bill." Mr. Mills's bank has a very large reserve and carries
between $155,000,000 and $160,000,000 of mortgages, practically all
of them on improved property, such as homes. His bank has deposits .of $460,000,000 to $470,000,000. The opinion of Mr. Mills,
the master mind of such a gigantic institution, is worthy of the
deepest consideration. This bank has not forgotten the interests of
the common people.
.
I want to state that there are really two fundamental principles
underlying this bill. The vital point about the bill is this: That
money must be had in order to make it successful. .A limitation of
borrowing should not be put upon banks or trust companies who
want to borrow so high that they can not afford to borrow or that
they will not borrow.
-Section 8 is really the most vital part of the bill. It provides 60,
50, 4Q, and 75 per cent. It means that you can borrow 25 or 30 per
cent of the value of the real estate-I think it will take about five
minutes to discuss that, because it is the vital part of the bill. There
are only two really vital points: First, whether the banks will pay
if started; and second, whether frozen assets can be thawed out.
Mr. REILLY. Do you object to the limitation as to borrowing
power1
Mr. OAKMAN. The limitation of the amount that you can get upon
the value of the property 1
.
Mr. REILLY. How much do you think it ought to be 1
Mr. OAKMAN. I think 50 per cent of the cash value of the property
apJJraised at the time you ask for the loan. It does not make any
difference whether it is hard times or good times, or whether the
mortgage is old or young. .All the time you are seeking value, and
any other conception of lending money upon mortgages is wrong.
It can not be done by percentages. .A :m.,ortgage given in 1927, when
prices were high, can not be fixed by percentages. The value of
that mortgage can be ascertained just as easily as a new mortgage
can be ascertained to-day, because all the time the appraiser is seeking value and not percentages.
Mr. LucE. May I interrupt you there 1
Mr. OAKMAN. Yes, sir.
Mr. LucE. We have had a pretty big scare by the great drop in
values in real estate, especially in the Northwest. We have seen
examples of many thousands of properties in the West and in the
South that are selling to-day far below 50 per cent of what they
were appraised at only a few years ago 9

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

235

Mr. OAKMAN. Oh, yes.
Mr. LucE. Would we be justified in taking that 50 per cent figure,
in view of the situation in which all the farm loan banks now find
themselves by reason of this depreciation i
Mr. OAKMAN. Of course, that makes two questions. The first is
very easy. That is, what you have in the cities is just the same as
they have in the West. It would not be fair to take the 50 per cent
of the old valuation. But, now, suppose there is a new mortgage
to-day. Say, a man out West wants a mortgage upon his :farm that
has been depreciated 30, 40, or 50 per cent. Instead of getting a
mortgage of $5,000 on a $10,000 valuation made three or :four years
ago, he can only ask for a 50 per cent mortgage on the $5,000 valuation. This valuation is made at the time the advance is made for
him. It brings it right up to date. There is not any possible chance
to escape it.
Mr. LucE. Yes; but our question is, in the course of the next 10
years the price level on real estate may again get up to a swollen
figure. If, then, this law is on the statute books 10 years from now,
there would then be the danger of the repetition of what we have
just gone through, would there not i
Mr. OAKMAN. That is an important point. Swollen figures would
be treated very much the same as they are now. A .home-loan bank
would be as urgent a necessity 10 years hence as it is now.
But I feel certain that the member banks would in the future
.Prevent to a great extent the repetition of our present difficulties.There is nobody on earth more close to values than the fellow
living in the community. He knows the value of the property at
the time the mortgage is asked for. Inasmuch as .he must guarantee
it, he is not placing any mortgage on that which will make him any
weaker in the future.
Then, many of these banks, es~ecially the large ones, have millions
of money in what we call the ' morgue," that is, mortgages taken
over and converted into real estate. That must be moved. They are
not going to .hurt themselves, and they have mortgages now away
beyond the level that they are supposed to retain under the law.
During hard times throughout the country the bank commissioners
say, "Well, get them down as fast as you can."
Those mortgages must be ·taken care of. It do,es not make any
difference what that mortgage reads, the banker will find out what
is the value of the property behind the mortgage, and that is the
basis on which the loan will be made.
He knows when building is going to be increased and he knows
also whether there is going to be overbuilding. We do admit that
there has been overbuilding and there always will be more or less in
some places; for instance, in Detroit there is one section which is
overbuilt, an old section, and old .homes by the thousands are going
to be torn down. Yet there is a market for new homes.
Mr. LucE. You will appreciate, Mr. Oakman, that if we are overcautious it will be because " the burned child dreads the fire."
Mr. OAKMAN. There is no question about that. I went throu~h
some other panics, and to think of them makes me shiver. I have
visited nearly every State in the Union. I have seen hardships~ awl
I have known what the other fellows have done. The crooks ha v.!
skinned me. But the day of the racketeer in mortgages is prac
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

236

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

tically over in this country. The people have learned a serious
lesson.
Now, we have had our lesson in Detroit. Now, as a matter of
fact, there is, and always will be an extra charge for second mortgages in some instances; in other instances there is none. There is
none in the regular banks. I am a di:rector in one of the largest
companies in the country in that line; I am also a director of a bank;
and I know. Here is what we do: A customer comes in and we know
he is all right, and we find that his property has gone down under
what it was three or four years ago. If he wants to mortgage we
make the mortgage fit the value of the land. Then we take back
the second mortgage and carry that mortgage upon terms that may
be agreed upon by the borrower and the bank. That is the rule.
I carry possibly 1,200 second mortgages, which would run into
about $1,600,000. · There is not a single one of those mortgages that
draws more than 6 per cent interest, the same as the original first
mortgage. But you can not stop.racketeering, only to the extent that
pe'ople now know more than they did. That point has not heretofore
been· fully discussed.
Another matter that has not been discussed is the importance of
having a bank of this kind for rehabilitation and for the repair of
homes, which would employ hundreds of thousands of men.
There is not a place that you can go to unless you go to the United
Sfates Government to carry a man through certain situations.
Suppose you figure that a bank wants to borrow a million dollars.
The bank must put up $1,911,000.
Mr. REILLY. How much securities should a bank be obliged to put
up to borrow money from this bank or building and loan association
to borrow money from this bank j
Mr. OAKMAN. I could not answer on the building and loan association matter.
Mr. REILLY. They have all got to be on the same basis.
Mr. OAKMAN. Then I would answer this way: That a mortgage
coming in would mean 50 per cent on the face of the mortgage-50
per cent of the value of the property ascertained at the time the loan
is asked for. That applies whether times are high or low or medium.
It makes an absolute ce1:tainty of financial arrangement that has
stood the tornadoes_ of distress for a hundred years in this country.
and you find last fall it was reported that the loss on mortgages
throughout the United States was about 1.32 per cent. As a matter
of fact, those mortgages checked suffering in the West and checked
suffering in Florida. They were on 15 to 20 story buildings, and so
forth. I would stake my life on it that if those mortgages were confined to homes of the working men there would not be a one-thonsan.dth part of 1 per cent loans on mortgages in the entire United
States based on 50 per cent of value.
Not only do the banks carry on this thing-it has been carried 011
for ages-but the bank itself must guarantee it, and it is up to the
district bank to see that that banks does not get any more money
than it can take care of.
Mr .. REILLY. Right on that point, how much do you think the bank
ou~ht to loan on a mortgage valued at 50 per cent i
Mr. OAKMAN. There is an item in there allowing a $15,000 mortgage for a working man's home. I thought my suggestion was very

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SY.STEM OF FEDERAL HOME LOAN BANKS

237

liberal at about $6,000 or $7,000 mortgage on that working man's
home. In other words, I do not think a bill like this should be in
competition with the larger concerns.
Mr. REILLY. Leave out that point. Assume we were considering 50
per cent valuation at the time of the loan, how much money should
this Federal bank loan to the member bank on a. mortgage?
Mr. OAKMAN. I would make it not less than $'r,000.
Mr. REILLY, What percentage of that mortgage~
Mr. OAKMAN. That is the thing that is a curse to the bill.
Mr. REILLY. What are your views on it i That is the proposition.
Mr. OAKMAN. I think it is a fool proposition. It is a proposition
that does not mean anything. It is uneconomic; it is unsound.
There is not any possible way of arriving at the value of a mortgage
percentage.
Mr. REILLY. Now, take this proolem: Suppose I represent a home
loan bank. I have taken a. hundred thousand dollars of mortgages
to this district bank. How much would they give me on it, valued at
50 per cent, takinging 50 per cent of the value? How much should
the bank loan me, in your judgment; what percentage of that?
.Mr. OAKMAN. That is if you• are engaged in the home loan
business?
Mr. REILLY. Yes.
Mi:-, OAKMAN. Explain further.
Mr. REILLY. Shoul!;l it·be 40, 50, 60 per cent, or what?
Mr. OAKMAN. If it was secured on the base o:f value, you ought
to get 50 per cent of the full value of the property.
Mr. REILLY. Would it be 60 or 40 per cent?
Mr. OAKMAN. Of the unpaid balance?
Mr. REILLY. Of the unpaid balance.
Mr. OAKMAN. Which means 30 or 35 per cent.
Mr. REILLY. My-purpose is to get your views on how far they
should go; that is all.
Mr. OAKMAN. Of course, I would make merely a guess, if I was
answering about building and loan associations, because I have not
had any experience in that line.
Mr. REILLY. Then take a mortage bank.
Mr. OAKMAN. Well, if it was a mortgage bank, I can not conceive of any other way, with all my experience in the business-any
way of figuring the value of the mortgage, except based upon the
value of the real estate, and, inasmuch as it has lasted for generations and generations and found to be correct. I would lend 50 per
cent upon the value of the property, whatever that would be in
percentage.
Mr. WILLIAMS. Let me see if I understand you. FQllowing the
line of questions that the chairman has been asking you, representing a mortgage bank, suppose you went to this home loan bank with
a hundre dthousand dollars of mortgages. You would expect to get
$100,000 loan from thos~ mortgages. Assuming that they represented the value of $200,000, you would expect not 50 but 100 per
cent on the mortgages?
Mr. OAKMAN. Yes; exactly.
Mr. WILLIAMS. If the security back of them represents a valuation
of $200,000?
Mr. OAKMAN. Exactly.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

238

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. WII..LIAMS. That is the way I understand you.
Mr. OAKMAN. That is exactly-it.
Section eight contains the most vital defect in the bill.
The weakness in section 8 is that value has been replaced by guess
work percentages. The provision in section 8 " in respect to an
amortized home mort~age loan, which was for an original term of
eight years or mor~ ' the advance may be for an amount not in
excess of 60 per cent of the unpaid principal of the home mortgage
loan," seems to be discrimination. Why a 5-year mortgage should
be ".fined" for being three years younger than an 8-year mortgage,
surpasseth my understanding. It may be a case of old wine being
more choice than young wine. This whole mess may be cleaned up
by eliminating all that portion .of section 8 pertaining to percentages,
·down to and including the clause that prevents a workingman from
borrowing more than fifteen on his humble home. The clause in the
same section, page 16, and reading as follows "At no time shall the
aggregate outstanding advances made by any Federal home loan
bank to any member exceed 12 times the amount paid in by such
member for capital stock subscribed for it," should be stricken out of
the bill and the following should be inserted instead :
Each Federal home loan bank is authorized to make advances to
members who have become eligible to apply therefor; for the security
of home mortgages, such advances to be made subject to such regulations, restrictions, and limitations as the board may prescribe. Any
such advance shall be subject to the following limitations as to
amount.
No amortized mortgage whose unpaid principal exceeds 50 per
cent of the value of the real estate appraised at the time the advance
is petitioned for, shall be eligible for a loan. ·
Mr. REILLY. The chairman sent a telegram yesterday to Mr. Frederick H. Ecker, president of the Metropolitan Life Insurance Co.,
inviting him to testify before this subcommittee or to send a representative. Mr. James L. Madden is here this morning to represent
Mr. Ecker. I sent the telegram because Mr. Ecker was chairman of
the finance committee of the President's conference on home building
and home ownership and some people desired that he should appear
at this hearing.

STATEMENT OF l.AHES L. MADDEN, TmRD VICE PRESIDENT
METROPOLITAN LIFE INSURANCE CO., NEW YORK CITY
.Mr. REILLY. Give your full name, the position you occupy and your
address.
Mr. MADDEN. My name is James L. Madden, third vice president
Metropolitan Life Insurance Co., New York City.
Mr. Ecker has instructed me to convey to you his desire to cooperate with you gentlemen to the fullest extent because he realizes that
you are endeavoring to secure a factual background upon which you
may base lour decision. ·As chairman of the finance committee of the
Presidents conference on home building and home ownership, Mr.
Ecker directed an investigation of the fundamental principles involved in the bill which you now have before you, using both the
facilities of the committee as well as our own research staff for this
purpose. In addition he is interested in this proposal as the presi
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

239

dent of our company which invests substantial sums in home mortgages.
You gentlemen appreciate that as the custodian of funds contributed by policyholders throughout the United States and Canada,
that due caution must be exercised in investing these moneys. At the
same time the Metropolitan strives to improve continually its
methods of investment to the end that they may fulfill an increasingly
important role in our social and economic structures without diminishing in any way our paramount consideration, namely the safety
factor. Accordingly Mr. Ecker was glad to have investigated the
fundamental principles underlying the bill you now have before you,
in the thought that if they really would improve the financial ·status
of home owners and senior mortgage financing institutions, the measure would be in the public interest and should be supported. In this
event a factual investigation would justify this conclusion. It is
apparent, therefore, that Mr. Ecker had two reasons for being interested, first, as chairman of the finance committee of the President's
conference on home building and home ownership, and next as Pr~sident of the Metropolitan Life Insurance Co.
As the telegram from your chairman was received late yesterday
afternoon we have not had an opportunity to prepare any formal
statement, and therefore it is our purpose only to indicate briefly
the object and scope of our investigation and then to answer such
questions as you gentlemen see fit to raise. Before proceeding,
though, I would like to take cognizance of a statement which the preceding speaker made in reference to life insurance companies and his
allegations of their practices which are detrimental to home ownership. Certainly this can not be reconciled with the actual practices
of life insurance companies as portrayed by public records. In addition to increasing the amount of funds invested in city mortgage!!
last year, about $1 out of every $20 received by the American people
last year came from these companies. In other words, a tremendous.
sum of money-$2,500',000,000-was paid by these institutiop.s, much
of which undoubtedly was spent for the maintenance of homes, for
the payment of interest and taxes, and for other purposes to safewiard home ownership. In addition the foreclosure rates of life
msurance companies, with over $4,000,000,000 of city mortgages, was
about 1 per cent.. Then, too, a substantial part of the new mortgage
investments of the life insurance companies went to local institutions
which were in trouble, the exact amount we have not figured but
which has been estimated by others as being in the neighborhood of
about $70,000,000. Instead, therefore, of the life insurance comRanies being open to the accusation which has been made, they have
' done their bit" in the public interest during a period when many
other credit agencies were having difficulties.
Reverting now to my purpose for being here as the representative
of Mr. Ecker, factual investigations of the underlying principles of
the bill which you now have before you were made in the hope that
we would find in the arguments advanced in favor of this measure
sufficient substance to enable mortgage lending institutions to improve their services to home owners. That our own interest is very
real is apparent from the fact that the Metropolitan has made loans
in probably every State in the United States with the exception of
113235--432--16

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

240

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

three, and that we have invesed about $449,000,000 in mortgages on
homes out of our total city mortgage portfolio of about $1,289,000,000
and exclusive of about $201,000,000 invested in farm mortga.ges.
Our investigations indicate that this particular measure as drawn
will be detrimental to the home owner instead of helping him,; that
generally speaking it will not facilitate the renewal of mortgages and
reduce foreclosures; in fact, it will tend to make the existing trying
situation more difficult through depreciating existing values and
undoubtedly in many cases increasing foreclosures. So much :for the
effect upon owners of encumbered properties. But now a word in
reference to the effect upon owners of unencumbered homes, who,
according to the latest information we have. are greater in number
than owners of encumbered property. In this case the objectives
underlying this bill, if carried out, will bring about a shrinkage in
the savings of thrifty and aged people which have been stored in
their homes.
Mr. REILLY. That statement is based upon the :fact, however, that
in your judgment this bill will encourage excessive home building?
Mr. MADDEN. Yes; but there are other reasons, too.
From the standpoint of mortgage lending agencies it is apparent
that the title of the bill is misleading because the proposed banks are
discount banks and will not render direc,t service to home owners.
In order to learn just how helpful this bill would be to mortgage
lending agencies in improving their service ,to home owners we con~
sulted with building and loan associations, mutual savings banks,
commercial banks, life insurance companies, and other types of mort,
gage banking institutions. We went to some of our European,
friends for factual information about their mortgage banking institutions. In the course of these phases of our investigation we paid
particular attention to the arguments of the proponents of this bill,
namely, that it would improve the liquidity of mortgages, insure a
broader distribution of mortgage funds, and reduce interest rates.
In addition we weighed the merits of the proposed national stand:-,
ardization of home mortgage finance in comparison with the existing competitive situation under the supervision of the respective
States. We studied the contingent guaranty of the bonds of the
proposed home-loan banks by the Federal Government :from the
standpoint of the effect upon the credit of the Government, the avail,.
ability of funds in times of depression, and the soundness of this particular method of financing private enter:r>rise which should either be
self-supporting or cease to do business. We investigated the justification :for setting up under this measure a co:r;npetitive banking sys~
tern with our existing financial structure, the availability of mortgage funds in connection with the gene'ral economic credit situation,
and the possibilities of the Reconstruction Finance Corporation:
Certainly the answers to the foregoing and other questions would
indicate the value of the structure contemplated in the bill you have
before you. In point of :fact, though, our conclusions indicated that
from the standpoint of mortgage-lending institutions, generally
speaking-and I add this qualification because I realize there is
small minority in favor of this particular proposal-this particular
bill is unnecessary.
Under present conditions there is a need :for an emergency institution which will " unfreeze " all types of sound assets regardless of

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

a

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

241

their nature in order to provide cash. There are undoubtedly many
cases where banks with assets primarily in bonds would be willing to
lend money to home owners providing they could " unfreeze " their
bond account. We must not lose sight of the fact, though, that the
cause of the emergency need for credit by industry and commerce is
essentially the same as that of those home owners whose local institutions are unable to satisfy their demands and that the problem in
these cases arises from frozen portfolios o:f investments for which
there is practically little or no immediate market, or one in which
quotations are known to be below :fair values. Mr. Ecker realized
the need of an emergency institution to meet this situation and accepted an invitation from those in charge of the Reconstruction Finance Corporation bill in the Senate to appear in behalf of that
legislation.
To summarize, we believe this bill.is detrimental to the well-being
of home owners, that it is unnecessary from the standpoint o:f the
mortgage-lending institutions, and that only a relatively small percentage of the approximately 32,000 mortgage-lending institutions
in the United States have indicated any particular desire for .it.
There is no need for the home-loan banks as an emergency measure
because the Reconstruction Finance Corporation is more competent
to render the "unfreezing " service which is necessary. As for the
need of the home-loan banks as a permanent institut10n, we believe
that they not only can not be self-sustaining, but they are unnecessary.
In fact, a number of States are indicating a degree of leadership,
which we think is preferable to this proposal. For example, in New
Jersey we find the building and loan associations developing an interesting plan for meeting the problems which are peculiar to them
because o:f local conditions and their State laws. In New York for
many years the building and loan associations have successfully operated their own discount bank, which works in conformity with the
customs and laws of that State. Then, too, the savings banks of that
State have·recently taken constructive action to safeguard their institutions in the event of an emergency. In the State of Massachusetts
from which Congressman Luce conies-Mr. REILLY. Mr. Madden, other States have not done that..
Mr. MADDEN. Quite true; but if a demand existed, why did they
not take some action~
Mr. REILLY. Because this is an emergency.
Mr. MADDEN. Then the Reconstruction Finance Corporation will
take care of them.
Mr. REILLY. What information have you as to what the Reconstruction Finance Corporation has done to date for the building and
loan people 1
Mr. MADDEN. The corporation has not completely organized as yet,
but it appreciates the need of helping certain building and loan associations. Durini the past several weeks the officers of the corporation have been looking for competent men with a mortgage background. In fact, I am informed that certain representatives of
building and loan societies have been consulted on this matter. Furthermore, I do understand that regardless of this difficulty, the Reconstruction Finance Corporation has authorized loans to some
building and loan associations. In consideration of -the time within

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

242

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

which the Reconstruction Finance Corporation has existed and the
organization problems which it is facing, this emergency body has
been doing a sple~did piece of work.
Mr. REILLY. Do you consider the Reconstruction Finance Corporation as having sufficient fundsMr. MADDEN. Absolutely.
Mr. REILLY (continuing). To undertake the liquefying of all bonds
and mortgages and things of that kind i
Mr. MADDEN. Absolutely, and in the event it develops that it has
not, then it would be easier to provide that body with additional
funds than to set up the home-loan discount banks as competing
agencies for mortgage discounts.
Mr. REILLY. There are 7,000 building and loan associations in this
country.
Mr. MADDEN. There are approximately 12,000.
Mr. REILLY. Are they not suffering to-day from frozen assets?
Mr. MADDEN. Nationally speaking, the building and loan associations are sound, but in some localities they are frozen.
Mr. LucE. You said this would be detrimental to home owners. I
do not quite understand what you had in mind in that regard.
Mr. MADDEN. In our opinion this bill will be detrimental to the
interests of home owners. Just to illustrate, one may, let us assume
a home owner has a piece of property worth $10,000. Under present
conditions this property has depremated probably 20 to 25 per cent.
A number of new homes are put up in this neighborhood as a result
of this bill-one of the purposes of which is to stimulate new building. What is the effect upon this home owner?
Before considering this particular case, let us briefly review the
housing situation generally. In view of the surplus homes which
have resulted from foreclosures.and reduced incomes, there is a relatively small market for new houses. We are aware of the estimates
of the need of new buildings made by proponents of this measure,
and although we are a national mortgage lending. institution with
the necessary facilities for keeping our hand upon the pulse of the
demand for new housing, we are not in accord with the estimates
advanced in behalf n~ this measure. We know only too well the
difficulties which mortgagealending institutions alone are having in
trying to dispose of homes at prices with which new ho.mes can not
compete.
Then, too, we must realize that a study of the past 10 years and
our expected increase in population during the next decade tends to
lead one to believe that the construction industry will function at a
slower tempo for a period of time in the future than it has since
1920. If this is so, it will be most unfortunate to try to curb the
economic readjustments through legislative processes and Government and subsidies. As evidence supporting this viewpoint, we find
that from 1920 to 1930 there were from two to three million homes
built. In 1925 the greatest number of houses were constructed.
From that date until the present there has been a decline. You will
recall that during 1926, 1927, and 1928 the American people had
plenty of money so that the decline was not due to lack of :fonds. It
is a reasonable assumption that the downward trend reflects a gradual slowing-down process which naturally would result after the


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

243

normal supply of houses was restored because of the shortage of
home building which accumulated during the war.
There is a definite relationship between the increase in population
and the demand for housing under riormal circumstances. Between
1920 and 1930 there were about 16,648,000 new people in the United
States. During 1930 and 1940 it is estimated that our population
will be increased about 7,906,000, or about half of the increase during
the last decade. It is readily apparent that the demand for housing,
based upon the housing trend and the growth of population, necessarily will be below the number of homes constructed during the last
10 years. Now, we are well aware of the argument that there is
much huddling due to economic conditions, but we believe that this
huddling is substantially less than the number of homes which are
available for sale either as the result of foreclosures, weak home
ownership, the reported drift of veople to the farms, and other causes.
Now, if, in view of the foregomg, you i_nject into the present situation a new building program, you will make the problem of disposing
of existing foreclosed and other properties much more difficult, and
in addition in the case of the man whose home is worth $10,000 and
which has already depreciated about $2,000 because of economic condition, you are bound to decrease further the value of his particular
house when you build additional homes in his neighborhood, because
we know that the home-buying public prefers new houses to others.
Furthermore, a man's property is very apt to be depreciated because
of obsolescence.
Mr. REILLY. So your princ:pal objection to this bill is that it will
unduly .increase home building and depreciate the value of homes
already built 1
Mr. MADDEN. That is one objection.
Mr. REILLY. Is not that your principal objection 1
Mr. MADDEN. No; there are other objections; for example, we
believe that the existing competitive situation under which the four
major leading institutions are working under the supervision of their
respective States, is superior to the proposed standardized and nationally controlled system. Intensive competition among banks,
building and loan associations, mutual savings banks, and "insurance
companies is in the public interest because it tends toward improved
service to home owners, flexibility in meeting the varying demands
of home owners, and compliance with the laws and customs of the
respective States. Contrast this with the system proposed in this
bill whereby an effort is made to force home owners to take longterm mortgages, and mortgage-lending institutions to comply with
the fixed requirements which will be made by the proposed home loan
board in Washington.
Furthermore, you must realize that all of the benefits alleged by
the proponents of this bill can be made effective only i:f the mortgagelending institutions generally go into the home loan banks system.
In other words, the success or failure of the proposed home loan
banks is going to depend upon the extent to which these banks are
used by mortgage-lending institutions. Although we have endeavored to determine the extent of the sel).timent in favor of this bill,
we find that only a small minority of the mortgage-lending institutions are for it. The American Bankers Association has gone on
record against it, and various State banking associations have taken

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

244 CREATION OF A SYSTEM OF FEDERAL HOME LOA.N BANKS
similar action. Numerous building and loan associations are opposed
to it. The mutual savings b~nks, generally speaking, do not see the
need for it, and the same situation prevails among life insurance
companies.
Mr. REILLY. Then, if the mortgagealending institutions do not use
it, there will not be an overbuilding of homes.
Mr. MADDEN. There will be an overbuilding of homes in the communities serve"1. by a small minority of mortgage-lending institutions. If then _the majority of the mortgage-lending institutions do
not use the home loan banks, what have you done? You have imposed upon the financial structure of the country, at a time when
industry needs funds for capital improvement, a potential supply of
about $1,800,000,000 of tax-exempt securities.
Mr. REILLY. But if they get $1,800,000,000 they are going to function, ~nd s?m~bod:y must be usi~g it.
it_ functi<;ms, acco:ding to
your idea, 1t 1s gomg to result Ill an unJustifiable mcrease m home
building. that will depreciate homes already constructed.
Mr. MADDEN. That is right.
Mr. REILLY. With the result that the home owner's house will go
down in value, and he will be in a worse position ; that is your theory?
.
Mr. MADDEN. That is right.
Mr. REILLY. .And if it does not work, that situation will not come
into existence at all?
• Mr. MADDEN. Let us assume that this small percentage of lending
institutions do use the home-loan banks and start a new home-building program, which is one of the objectives of the bill, in the particular areas within which they function. Then the home owners in
those areas are goi11g to suffer.
Mr. REILLY. They may or ma:y not.
Mr. MADDEN. It is our viewpomt that they will.
Mr. REILLY. I take it no home-lending institution is going to build
a home for a man when they have homes to sell, as they have a lot
of them to-day, or unless a man has some money to put into a home.
I ·should think that would be a fundamental proposition to guide
~o~e-le_nding financing. I£ y~m represented a buil~in~ and loan
rnstitut10n, and I came there with some money and said, ' Mr. Madden, I want to build a home." You could not put me off, and you
should not put me off, on the ground that my home building would
depreciate another man's home?
Mr. 'MADDEN. If your local institution were frozen, the Reconstruction Finance Corporation would take care of that particular
case. The advocates of this particular bill claim that it will facilitate home building generally. We question very seriously whether
home building should be generally stimulated even if there were not
a surplus of home at present, unless such stimulation is based upon
strong home ownership. We must realize that the .American people
have been urged to buy homes largely on a shoe string, and this practice underlies much of our trouble to-day. .An analysis of foreclosures indicates the loss of homes through foreclosures is due first to
unemployment; second, too heavy second mortgages; and third, taxes
and assessments.
Mr. REILLY. Right on that point: I submit that the home-loan
institutions are doing more to eliminate the second mortgage than
any other money-lending institution in existence.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

If

CREATION OF A SYSTEM OF FEDERAL HO.ME LOAN BANKS

245

Mr. MADDEN. ·I do not believe they are, for this reason-Mr. REILLY. Are not the home-loan banks the only banks that will
lend a.man a sufficient sum of money to eliminate a second mortgagel
Mr. MADDEN. They do not, and can not, lend him enough money
to eliminate the second mortgage, because the American people have
been taught to expect to buy homes largely on a shoe string; in £act,
you can buy homes on a 10 per cent down payment. The finance
committee of the President's conference on home building· and home
ownership recommended that ori the average a home buyer should
pay 25 per cent down at the time of the purchase, and it was criticized by one of the proponents of this bill because of this presumably
·drastic requirement.
·
·. ·
·This is no criticism of the building and loan -associations. I ain
not thoroughly sold upon them, and I believe that as an institution
they have rendered a real service to the American people. In principle they are soun.d, and I thinkthat if the building and loan e:x:ecu- ·
tives wanted their own reserve bank and were willing to set it up
without Government funds· or Government· ·subsidies, we would
strongly indorse their proposal.
Many building and loan societies lend generally up to 75 or 80 per
cent of the value of the property, and many others lend substantially
lower percentages. ·Confining our thoughts, though, to the fornier
class, a prospective purchaser wants to buy· a home and offers to pay
10 per cent down. Where is he going to get the other 15 per cenU
There obviously is a need for second mortgages. The second-mort~
gage business· ~as ~harged exorbitant r3:tes for their services, but the
fundamental risk 1s so· great that relatively few of them have been.
able-to survive. Therefore you come to what in our opinion is the
major limiting £actor to the development of real home ownership,
and that is the solution of the second-mortgage problem. Certainly
the proposed home-loan banks are not designed to correct this.
Mr. LucE. With all courtesy, Mr. Chairman, I do not think he has
answered your question.
•
Mr. REILLY. Let me put the question another w~y. The building
and loan men appearing here testified that they do away with the
second mortgage by discouraging a man to build a home until he ha$
about 20 per cent of the cost.
Mr. MADDEN. Yes; I understand the question, and I answered that
only some building and loans advance 75 or 80 per cent of the cost
and that, in any event, usually the salesman gets to the customer
before the building and loan association.
Mr. REILLX. It does not make any difference who gets to the customer first, because the building and loan associations discourage the
man who wants to build a home until he has about 20 per cent, and
then they loan him 80 per cent, thereby doing away with the necessity for a second mortgage.
Mr. MADDEN. But I thought I answered that question by pointing
out that everi those building and loan associations which render thi's
service can not possibly reach all of the people, and when they do
their service is sound. I also endeavored to indicate that the salesman usually meets the customer first, and therefore the prospect
frequently is committed to buy the house upon a 10 per cent down
payment. Now, somebody has to put up the difference of 15 or 20
per cent. I tried to emphasize my point by referring to the criti
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

246

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

cism of the finance committee of the President's conference on home
building and home ownership when it recommended t!iat there should
be in the average case a 25 per cent down payment.
Mr. LucE. Mr. Madden, you said this bill will increase foreclosures.
The Senate committee and we here. have had a crowd of witnesses
tell us that the foreclosures are due to a lack of funds on the part of
the various lending agencies. How may the supply of more funds
lead to foreclosures ¥
Mr. MADDEN. As to the lack of funds, the Metropolitan Life Insurance Co. last year invested about $138,000,000 of new money in
mortgagesMr. LucE. May I explain right there~ We also have a mass of
testimony in the Senate and in the House bearing on that question,
and I think any impartial man reading that testimony will draw the
conclusion that the situation is spotted; that in some parts of the
·country there is a great scarcity of funds. In most parts of the
country there is a material scarcity of funds, and that in a very small
part of the country there are plenty of funds. Now, let us assume
that we have these varying views as to shortage of funds. Getting
down to the question of where there is a shortage of funds, how,
then, can the supplying of funds increase foreclosures i
Mr. MADDEN. If I may deal with the shortage of funds first, I will
then be better able to answer your question. Starting with our own
experience, we know that we invested about $138,000,000 of new
money last year in city mortgages, and of that sum $49,000,000 was
invested in first mortgages on homes-$26P00,0OO on the older type
of homes and $23,000,000 on new homes. A number of insurance companies and building and loan societies to our knowledge also have
invested new money in mortgages during the last year. So far as the
statement goes that there is no money, there is ample evidence that
there has been new money-Mr. LucE. In places.
Mr. MADDEN. We are doing a national business.
Mr. LdcE. I will read the evidence from Shreveport; I will go
through this testimony and furnish you with 40 instances to refute
that statement.
Mr. MADDEN. We are giving the facts of which we have direct
knowledge, and as I further develop this thought you can see how
our information checks with yours.
·
Mr. REILLY. What percentage do you loan on a house i
Mr. MADDEN. Usually around 50 per cent, although there have
been times in the past when under certain circumstances we have
loaned up to 60 per cent.
Mr. REILLY. Can you not imagine there will be a demand for a
higher percentage of loans than you make? For example, suppose
a man wants -to get 60 per cent on his house; he could not get that
from your company?
Mr. MADDEN. We have made loans on the basis usually of 50 per
cent, and if he wants more than this he will have to go to some other
agency.
Mr. REILLY. But your testimony is that you seldom or never give
60 per cent on a house 1
·
Mr. MADDEN. We aim to be conservative.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

247

Mr. REILLY. You do just as other people do; you do just as the
majority of mortgage lending companies; they do not want to go
above 50 per cent under any circumstances. There is a great need
apparently, as Mr. Luce has said, according to our testimony, for
money that will give a higher percentage on a building than an
institution such as yours can give.
Mr. MADDEN. Various mortgage lending institutions specialize
upon different types of mortgage service to home owners. The Metropolitan thoroughly believes in the principle of amortization on
home mortgages because we think that ultimately every home owner
should own his own home. Our company, therefore, is essentially
rendering an amortized mortgage service to home owners. The
building and loan associations hold the same viewpoint. The attitude of mortgage-lending institutions toward home owners is that
you have to deal with them as they are, which means that they have
a variety of ideas upon the type of mortgages which they want.
Some want straight loans while others want amortized loans; some
want short-term loans while others desire long-term loans, and the
mortgage-lending institutions collectively provide them with the
facilities they desire.
Mr. REILLY. The condition I am trying to develop is that there is
a big lending field that your company does not cater to.
Mr. MADDEN. I admit it, but I want to point out to you that no
one agency can cater to it because the demands of the home owners,
which should be the governing :factor in any mortgage-lending system, require a variety of types of loans. The American people
should be able to get what they want in the way of mortgage service.
Mr. REILLY. There are 2,000,000 people getting loans entirely different from what your institution can furnish 1
Mr. MADDEN. We will agree with you.
Mr. REILLY. They say that these institutions are in hard circumstances because 0£ unliquid funds. This bill provides a method
whereby funds can be liquefied and the idea is that the liquefication
-will enable the banks to meet withdrawal demands of people who
need money now because of their present condition, and this will
enable them to £unction otherwise, and if possible to lend some
money to build where there is a nian of character coming along with
money.
Mr. MADDEN. Who are these 2,000,000 people 1
Mr. REILLY. They are 2,000,000 people who are members of the
building and loan associations.
•
.
Mr. MADDEN. All right.
Mr. REILLY. These are the borrowers; there are 12,000 building
and loan associations.
Mr. MADDEN. It is doubtful if these 2,000,000 people demand these
banks because our building and loan friends tell us that their associations are by no means united behind this proposal.
Mr. REILLY. We do not say that the building and loan associations
are all for this. We assume that there are certainly building and loan
aissociations which do not need this bill just as many people do not
need the Reconstruction. Finance Corporation. But we have had
here the officers of the building and loan associations, the secretary
and president, who testified that the building a:rid loan associations
are badly in need of this kind of an institution.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

248

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. MADDEN. Then let them. have their own reserve bank to be
;financed by themselves; let the Reconstruction Finance Corporation
take care of their immediate needs. . As to the building and loan
reserve bank, in our opinion it should be run as one of the four competing mortgage lending systems, because we must remember that
the home owner should be given what he wants.
Mr. REILLY. This does not interfere with that.
Mr, MADDEN. I do not share that viewpoint, but as far as the emergeney is concerned, the Reconstruction Finance Corporation will take
~are. of _building and loan associations and banks .and other lending
.mstitut1ons.
Mr. REILLY. Assuming that the Reconstruction Finance. Corporation can ·not take care of them and is not taking care of them and will
not take care of them, is this bill worthy· of consideration 1
Mr. MADDEN. I do not think so, because the Reconstruction
Finance Corporation was set up to take care of them.
Mr. REILLY. We will assume the Reconstruction Finance Corporation bill had not been writteri, would you be opposed to this bill 1
Mr_ MADDEN. I would have to think abo1it it. I am inclined to
think I would, because in principle it is detrimental to the home
owner, and in principle it is detrimental to the continued development of mortgage financing on the four competing system basis
which is now operating under State supervision.
·
Mr. REILLY. Then, again, the only reason I can see that it can be
detrimental to the home owner would be that it would encourage
excessive and unnecessary building or home construction.
Mr. MADDEN. No.
Mr; REILI,Y, How otherwise could it affect the home owner~.
Mr. MADDEN. In various ways, for example, it is alieged that this
bill will facilitate the renewal of mortgages, which certainly is misleading to a substantial part of the public.
Mr. REILLY. I do not mean that. What I have in mind is the
problem of hurting the home owner.
Mr. MADDEN. It will hurt the home owner through overbuilding.
It will hurt him in other ways, too; for example, it is going to force
him to accept particular agencies and the methods called for by this
bill rather than what the home owner wants .
.· Mr. REILLY. Why, when he can get from your institution anything
he wants1
Mr. MADDEN. Assuming his application meets our requirements, he
~an get an amortized loan upon his home; but if he wants a straight
loan, he must go to the banks.
Mr. REILLY. The bill does not take from him any opportunity he
has.
Mr. MADDEN. It does because he now can shop around.
Mr. REILLY. Assuming that this bill became a law to-morrow,
would it-deprive.a man who wlints to borrow money to build of any
opportunity he has to-day~
Mr. MADDEN. I should say yes; it would hurt the man because his
opportunities for selecting the particular type of mortgage service
he desires would be strictly limited under this bill. One of the
alleged reasons :for this measure is that it will nationalize the mortgage structure. It is argued that all home loans should be made in

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A· SYSTEM OF FEDERAL HOME LOAN BANKS 249
.a nationally standardized manner. We differ with this fundamental

~oncept because we believe that competition is the best public servant.
Mr. REILLY. Does this interfere with competition?
MF- MADDEN. It does, because five men would absolutely control
the national standards and they would dominate completely yow·
local regional banks.
.. .
Mr. REILLY. But your local regional banks do nothing but satisfy
local demands.
Mr .. MADDEN. No; the local banks. would have to do what the board
of five men in Washington wanted them to do.
.
Mr. REILLY. Then you are objecting to the method, of organization i .
Mr. MADDEN. Yes; because it does not give the local,home owners
a chance to get anything but ail amortized mortgage except on a
penalized basis.
Mr. REILLY. Suppose that this law is on the statute books to~day
and I want to build a home.. I have $2,000. Wh.:ire does this law
.interfere with my choice of methods building a home i
Mr. MADDEN. From the standpoint of the ultimate objective of the
bill, you will have only one type of mortgage loan that you will be
able to get, and that is -an amortized loan of eight years or niore.
· Mr. REILLY. But I can go to the bank.
·
· .
l\fr. MADDEN. A bank can not become a member of the proposed
home-loan banking system unless it makes long-term mortgage loans,
and suppose you want a 5-year mortgage or less. Then too, assume,
as usually is the case, that yori have to get a second mortgage. · :
Mr. REILLY. I can go in my town to a local institutio11 privately
managed.
Mr. MADDEN. The fact remains that there is a limited number of
private banks, but regardless of this, the man would have to arrangq
for the second-mortgage money.
·
·
.Mr. REJLLY. Not under the building and loan plan.
Mr. MADDEN. But I have tried to make it clear that the American
people have been sold to a substantial degree on buying homes on
shoe strings, and that even those building and loan associations
which would advance up to 75 or 80 per cent do riot eliminate the.
second-mortgage problem. Where will the borne owner get the rest
of his money 1
..
Mr. REILLY. But if he has $2,000 he can go to the building and
loan association, and if they have the money to loan him.. - .
·
. Mr~ MADDEN (interposing). There are building and loan associations that have money, plenty of them.
Mr. REILLY. But a lot of them do not have it.
Mr. MADDEN. But a review of the situation reveals those with funds
are working to correct conditions within their own fields. The build~
ing and loan people know their own problems, their own strength
and weaknesses, and they know the State laws under which they have
to operate. Take New Jersey, for example-,Mr. REILLY (interposing). But there are New Jersey people here
arguing for this bill.
·
·
Mr. MADDEN. Individually, but collectively they have been devel~
oping plans for their own particular discount organization to function within the State of New Jersey, which indicates that they be~
lieve that they can take care of their own p,roblem.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

of

250

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. LucE. Did you know that within a few days tl{e New Jersey
legislature turned it down 1
Mr. MADDEN. Then it is possible for them to organize along other
lines, such as the method followed by the National Credit Corporation.
Mr. LucE. Why did you say that to put money at the command of
a lending institution will increase its foreclosures 1
Mr. MADDEN. I did not make that statement. I said that from the
standpoint of many home owners, I believed that foreclosures will
be increased.
Mr. LucE. Did you say, or did you mean to say, that to put more
money at the command of a lending institution will increase foreclosures~
Mr. MADDEN. At times; yes.
Mr. LucE. Tell us why.
Mr. MADDEN. History is a good barometer of what you often might
expect in the future. Accordingly we might study the history of
the farm-loan field. When the readjustment came in agriculture,
the- prices of commodities were high-Mr. LucE. We know all about the laws existing because we live
with them.
Mr. MADDEN. I am answering your question with an exact I?arallel.
Up to this time, production costs were high, standards of livmg had
increased, and the indebtedness assumed during the boom time was
tremendously high. With the sharp fall of commodity prices a radical readjustment had to take place. Then about $2,000,000,000 were
thrown into the a~ricultural situation b_y the land banks. In our
opinion, the injection of that fresh credit only tended to make the
farmers' problem much more difficult than it otherwise would have
.been. Without that money, the readjustment undoubtedly would
have been sharper but to-day agriculture would be in a sounder
position. The effect, therefore, of the additional credit was to prolong the economic readjustment. It is believed that if the present
depression continues much longer, and if the home-loan banks are set
up, the same condition will prevail in the home field.
Mr. REILLY. His point is that if we pass this law it will lead to
such reckless and increased lending that in the future there will be
more foreclosures.
Mr. MADDEN. Substantially, that is the idea.
Mr. REILLY. But suppose that this law were passed to-day. In the
next year or so, how would it affect foreclosures 1
Mr. MADDEN. I would not have had much effect because the home
loan banks will not be operating.
Mr. REILLY. But suppose they were operating within a year. If
this bill is passed, it ought to get going within a year. What would
be the immediate effect 1
Mr. MADDEN. It is just a question of how soon the credit inflationary process will start. I do not know exactly when that will be, but
so far as the trend goes it is my opinion the putting into effect of the
underlying objectives of this particular bill will certainly bring
about the trend.
Mr. REILLY. That is because you claim that it would lead to more
reckless lending on home building, and in the future foreclosures
would come fast 1

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

251

Mr. MADDEN. Yes, but there are other reasons. This bill can not
do for the home owner any more than the existing mortgage lending
agencies and the Reconstruction Finance Corporation either are now
doing or will do. The real trouble to-day arises from the £act that
many people unfortunately can not pay .their interest or taxes, yet
this bill has been publicized as a means of facilitating mortgages and
reducing foreclosures to home owners. A.s a result we have people
coming to our office and after referring to the publicity, ask us how
they might avail themselves of the service of this new Government
bank. In the :friendly discussion which follows, it has become apparent that in each of these cases the economic situation underlies the
particular difficulty and there is nothing that the home loan banks
or any other mortgage lending agency can do. The fundamental
difficulty is not with mortgages per se but with the economic situation.
Mr .REILLY. That is what is making this bill necessary, the present
economic situation.
Mr. LucE. Now, Mr. Madden, you said that there was no demand
for this bill.
Mr. MADDEN. I said that based on our survey among building and
loan associations, savings banks and other institutions, that we were
informed there was no real demand.
Mr. LUCE. I should modify my question. I think my note referred to some statement you made that there was no demand for
money.
Mr. MADDEN. No demand for money?
Mr. LuoE. No legitimate demand :for credit.
.
Mr. MADDEN. There is a slackened demand for credit but there is
still some demand as is plain :from the fact that our own company
loaned about $49,000,000 last year on homes, out o:f a total city mortgage investment of about $138,000,000.
Mr. LuoE. You certainly used the words "no demand :for this
bill."
Mr. MADDEN. This is what I intended to convey. Based upon our
survey, we :found only a small per~entage o:f the mortgage lending
institutions in :favor o:f this bill-Mr. LucE (interposing). Your statement was that :from your investigation there is no demand :from these people?
Mr. MADDEN. In so :far as the particular mortgage-lending institutions consulted, that is right, but, o:f course, we have been aware
of the support given to the bill by a limited percentage of other
mortgage-lending institutions.
Mr. LucE. The Department of Commerce asked this question o:f
some thousands of institutions:
Would the operation of the proposed discount hank~ increase. the amount of
credit now available for legitimate use in· your comn;uaity?

To that question 6,525 o:f them answered yes and 1,974 answered
no. How do you account :for the :fact that 6,525 banks, associations;
loan and trust companies, and mortgage bankers said that there
was opportunity £or legitimate use of mortgage funds in those
communities?
Mr. MADDEN. I can account for it in part, I believe.
Mr. LuCE. Go ahead.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

252

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. MADDEN. First let us see whether the number of these replies
is large enough to portray the real viewpoint of mortgage-lending
institutions generally in reference to this bill. There are about
32,000 mortgage-lending institutions in the United States, and the
particular questionnaire referred to has been reported as having
gone to about 29,000 or 30,000 of them. It is obvious, therefore,
that only a small percentage of these institutions replied in favor
of the bill. To illustrate: It has been said that only about 1,600
building and loan associations out of the 12,000 in the United States
have expressed a favorable reaction in reference to this measure.
Mr. LucE. You are not answering my question. I do not want
to know about the people who did not answer the question. I asked
vou to explain why 6,525 institutions answered yes.
~ Mr. MADDEN. I am endeavoring to answer you in my own way.
Mr. LucE. But I do not like to have you bring in people who did
not answer.
Mr. MADDEN. But they have a very definite bearing upon a correct
viewpoint of the attitude of mortgage-lending institutions generally
toward this bill.
Mr. LucE. I do not care about the bearing. I want my question
answered.
Mr. MADDEN: A number of these organizations read the statement
of the purposes underlying this bill which ,was attached to the questionnaire, but not the bill itself, because this was not included.
Nothing was said about the Reconstruction Finance Corporation in
the statement or questionnaire. The institutions, therefore, thought
that the principles set forth in this statement would help them ~o
"unfreeze" their mortgage portfolios, but you would not have received the response from the banks which you did-·
Mr. LuoE. How do you account for the fact that between 6,000
and 7,000 of these people had this opinion?
Mr. MADDEN. I believe that they expected that this bill would be in
accord with the statement inclosed with the questionnaire-Mr. LuoE (interposing). I have not asked you about this bill.
This bill was not before them when this question was put up.
Mr. MADDEN. Yes; it was.
Mr. LucE. This questionnaire is dated January 15.
Mr. MADDEN. It refers to the bill specifically. Let me read the
questionnaire. It reads, " Would the facilities provided by the proposed home-loan d-iscount banks "-which is what we are discussmg-" for borrowing on your home mortgages add desirable :flexibility and security to the conduct of your institution? "
Mr. LucE. Yes; but the home-loan banks referred to were those
which were in aninchoate, unformulated condition, as suggested by
the President.
Mr. MADDEN. Why did you refer to the bill in the letter?
Mr. LucE. There is no reference.
Mr. MADDEN. In the letter there is a reference to the bill introduced by you.
·
Mr. LuOE. I have not the letter here and it is immaterial anyhow,
but it still diverts me from my question. I am trying to get back
to a straight answer to the to the question why between 6,000
and-7,000 people wanted some institution of this kind set up.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

253

Mr. MADDEN. The answer to that is that most of these people,
undoubtedly with wholly or partially frozen mortgage portfolios,
believed there was a need for some institution which would " unfreeze" their portfolios, but it does not necessarily follow that they
are for this home loan banking system as set forth in this bill.
·
Mr. REILLY. They had the old bill. What is the difference between
the old bill and this one i
Mr. MADDEN. Will you permit me to complete my answer to the
other question first i In not having this particular bill inclosed
with the statement of the general principles underlying the President's program which was attached to .the questionoaire, many
of these people thought, based upon our discussions with some
bankers-·
Mr. REILLY. They had the old bilL
Mr. MADDEN. Some of them may have, while others had the new
bill and undoubtedly the vast . majority had rio bill because: no
measure was inclosed with the questionnaire. You will find most
of the favorable results of your questionnaire came from bankers.:
When they: secured copies of the bill now before you and found
out the difference between it and the statement inclosed with the.
questionnaire, such as the competitive features which have nothing to do with mortgage discounting, many of them undoubtedly
changed their view because the American Bankers Associati1;m
recently has gop.e on record against this bill.
·.
Mr. LucE. As I say again, I am not asking about those who did
not, but about those who did.
Mr. MADDEN. As we do not know what particular institutions
replied to the questionnaire, we can only generalize and I have·
endeavored to do that. In view of my explanation, you must weigh
the 6;500 favorable replies against the 24,000 who were either opposed
t'o the bill or not sufficiently interested to fill out the questionnaire~
Mr. LucE. That does not answer my question.
Mr. MADDEN. That is the best I can do, offhand.
Mr. LuCE. I asked why these 6,500 said they wanted something
of this sort, and you come in and say there is no demand for it.
Mr. REILLY. Not as their investigation shows .
.Mr. MADDEN. I have pointed out that there is no real demand forthis bill, and this is substantiated by the small percentage of the
replies to your questionnaire which indicate a favorable attitude
toward it. Now as to the sources of the favorable reactions.
NationaUy, the building and loan associations are sound, but tlie
local associations in certain areas functioned under management
methods _which when combined with economic conditions, haye
resulted in freezing their portfolies. State banks too nationally are
sound, but in certain areas have invested very heavily in mortgages,
although they must have realized that there would be trouble when,
heavy demands for deposits were made. As a result when you.
analyze the financial structure of building and loan associations
and State_ banks on a State basis, you will find that the support for1.his measure comes from those sections where the building and loan
institutions and the State banks with sizeable volumes of mortgage
investme:nts have been wholly or partially fr.ozen for reasons which
do ·not relate to mortgages. Nationally, therefore, there is nothing
wrong with the building and loan associations or our banking struc
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

254

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

ture. In fact my recollection is that banks nationally have only about
8 per cent of their deposits invested in mortgages. The answer, therefore, is that undoubtedly many of these local institutions whose
mortgage loans are frozen would favor the bill, but they come
primarily from certain definite localized areas. Therefore, we submit that this committee should interpret this evidence in conjunction
with the failure of approximately 24,000 mortgage lending institutions to reply to the questionnaire.
Mr. LucE. That is all right; of course we ought to, but I am trying
to find out about what these people thought.
Mr. MADDEN. I do not know specifically who answered the questionnaire.
Mr. LucE. I will tell you one thing about the matter of localized
areas. These replies have been broken down .by States, and as I
glance down the columns, just to give you the high lights, I see that
every State in the Union and Alaska answered and that the replies
were roughly proportionate to the population in the States. Ohio
appears to lead, with 511 replies; Pennsylvania is next, with 44'7;
then Illinois, with 429; and then there are a number of them with
200 replies-here are eight States with more than 200 replies.
Mr ..MADDEN. Each of those eight States is in a concentrated area
where the situation of the building and loan associations and the
State banks has just been described, and their condition should not
be allowed to color the national :picture.
Mr. LucE. With 6,500 institut10ns scattered throughout 48 States
in proportion to population your concentrated area is bounded on
the north by Canada, on the west by the Pacific, on the south by the
Gulf, and the east by the Atlantic. That is the " concentrated area "
and that is the area we are legislating for.
Mr. MADDEN. If you will study the reports of the Comptroller of
the Currency and the Federal reserve system on the percentage of
mortgage investments to deposits and the percentage of property
owned to capital and surplus, you will find these eight particular
·
States-Mr. LucE (interposing). There are 48 of them.
Mr. MADDEN. No; the point is that, as far as the concentration of
mortgage investment.s on a volume and percentage basis goes, the
demand for this bill comes largely from the areas containing these
particular institutions previously referred to.
Mr. LucE. But I point out that these 'are scattered throughout the
whole country, roughly in proportion to population.
Mr. MADDEN. That may be; but I am pointing out that the eight
States which you have read to me, and I have not seen that-Mr. LucE (interposing). Do you want some of the others?
Mr. MADDEN. Read them in the order of their importance.
Mr. LucE. Here are those in the hundred class: Arkansas, California, Kansas, Kentucky, Massachusetts, Nebraska, North Carolina, Oklahoma, Texas, and Virginia. If that is concentration, for
Heaven's sake, what is not?
Mr. MADDEN. I still maintain that the major volume of support
for this bill comes from limited particular areas, and I base my
remark upon a study we made of the volume of mortgages and
property owned in comparison with total deposits and capital and
surplus, respectively, of banks: as well as information dealing with

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

255

building and loan associations, and the results thereof explain why
the first five States you mentioned have given the highest percentage
of replies in favor of this bill.
Mr. LucE. And they also correspond to the largest population in
the country.
Mr. MADDEN, That does not change my statement.
Mr. LucE. But I am trying to point out that with such an array
of figures as this, roughly proportionate to population, the attempt
to say that this is a localized demand seems to be untenable.
Mr. MADDEN. We maintain that this is largely a localized matter,
because the building and loan associations and the banking structure
are nationally sound, so you can see from an economic standpoint
this is a matter of viewpoint.
Mr. LucE. No; it is a matter of our conception of mathematics.
Mr. CAMPBELL. You mentioned the American Bankers' Association.
Mr. MADDEN, Yes, sir.
,
Mr. CAMPBELL. Do you know they opposed the Federal reserve
system~
Mr. MADDEN. I am not familiar with any of the background of the
American BankePs' Association.
Mr. CAMPBELL. They did. They opposed the Federal reserve
systen1.
Mr. MADDEN. This is not a reserve system. It can not be compared
with one.
Mr. CAMPBELL. I know, but the American Bankers' Association,
which you have quoted, have been opposed to this bill.
Mr. MADDEN~ They have been said to represent 20,000 banks.
Mr. CAMPBELL. They misrepresent about 95 per cent of them.
They are responsible for the conditions which exist to-day. I want
to correct you on your idea with reference to the Reconstruction
Finance Corporation. It was not passed with the idea 9£ helping
building and loans.
Mr. MADDEN. It says so in the bill.
Mr. CAMPBELL. I grant you that, but it was put in there to catch
votes. It has not made a loan to a buildi~g and loan association yet
that has not been passed immediately to the banks or that will not.
It only helps them to pay the banks.
Mr. MADDEN. We are business men and are not familiar with legislative technique and therefore with the motive of putting building
and loan associations in the bill, but I would think that the Government administrative agency would carry out the law. In fact, the
building and loan associations evidently expect some assistance from
this institution because only recently they have recommended a man
to pass upon building and loan mortgages which are to be discounted
by the Reconstruction Finance Corporation.
Mr. CAMPBELL. But solely to pay the banks.
Mr. MADDEN. Regardless of the motive, it is quite clear that the
buildingand loan associations are getting money and will continue
to get it.
Mr. CAMPBELL. To repay the banks.
Mr. MADDEN. Not being a building and loan man, I can not comment upon the motive or uses.
113285---32--17

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

256

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. CAMPBELL. Every loan is contingent upon the fact that they
shall pay the banks.
Mr. MADDEN. Undoubtedly you know more about them than I do.
Mr. CAMPBELL. That is what the Reconstruction Finance Corporation is doing to-day.
Mr. MADDEN. A.11 I know is what the corporation is supposed to
do and that the building and loan associations are taking proper
steps to get loans.
Mr. CAMPBELL. It is discretionary with that board as to what loans
they shall make. The object in passing that bill was to liquify the
assets of banks, first, and next the railroads, and they have not
enough money to go all along the line. There is just as much demand
for this bill to help the building and loans and the home owners as
there was on the part of the banks and the railroads for the Reconstruction Finance Corporation.
Mr. HANCOCK. Mr. Madden, I was not here when you commenced
your testimony. You are connected with the Metropolitan Life
Insurance Co.~
Mr. MADDEN. Yes, sir.
Mr. HANCOCK. You said in your testimony that last year you
loaned about $49,000,000 for the construction of homes.
Mr. MADDEN. I said that last year we loaned in new money about
$138,000,000 in city mortgages, of which $49,000,000 went on homes.
Of the latter sum, about $23,000,000 was invested in about 5,000
loans on new homes and about $26,000,000 was placed in about 9,000
loans on older homes.
Mr. HANCOCK. You started to give us the average loan.
Mr. MADDEN. It runs around $3,500, as a quick estimate.
Mr. HANCOCK. You stated a few minutes ago that competition was
the greatest public servant-is that right~
Mr. MADDEN. Yes.
Mr. HANCOCK. Do you contend that the I_>assage of this bill will
eliminate competition among mortgage-loanm~ a~enc_ies1_
Mr. MADDEN. I contend that the passage of this bill, If the proponents carry out their national standardization idea, is not in the
interest of the home owner. Next, it is maintained that from the
standpoint of mortgage-lending institutions, the State of Massachu.setts probably is showing us how to meet our mortgage problems
in so far as they exist by introducing bills to set up a central discount
bank for cooperative banks in that State and a separate central
discount bank for the savings institutions there. In other words,
the executives in the mortgage-loan business in Massachusetts realize
that it is necessary to maintain their separate entities and in the
public interest to improve the service of their own competing systems. The proposed home loan discount banking system will interfere with further development along this line.
Mr. HANCOCK. You impress me as knowing something about what
you are undertaking to tell us, but your answers are more or less
evasive. I want to know whether it is your opinion that the passage
of this bill will eliminate competition among home-loaning agencies~
Mr. MADDEN. I think the passage of this bill will be detrimental to
the present competitive situation for the· reasons I have advanced.
Mr. HANCOCK. You mean it will be detrimental to your company?
Mr. MADDEN. ~o, sir. So far as our company is concerned, we do
not care whether 1t passes or not.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

257

Mr. HANCOCK. You have no interest in the pa~age of this bill, so
far as your company is concerned i
Mr. MADDEN. We are down here by invitation to answer your
questions.
Mr. HANCOCK. I think your testimony has been very helpful, but
I would like to know how much interested you are.
Mr. MADDEN. We believe that this bill should not be passed. As
I said while you were out, we think it is detrimental to the interest
of the home owner, and as far as mortgage-lending agencies generally are concerned, it is unnecessary. Mr.-Ecker believes that the
Reconstruction Finance Corporation will take care of the present
emergency. As to the need of a permanent institution, he thinks that
in normal times there will be no need for it. Who is going to discount good mortgages in normal times i As to the present emergency
and the need for this home loan banking system, where would it get.
money in times of depression i If your land banks can not get
money on its bonds now, how could this institution i
Mr. HANCOCK. You think that the facilities of the Reconstruction
Finance Corporation would meet the present emergency so :far as
small homes are concerned 9
Mr. MADDEN. I certainly do.
Mr. HANCOCK. There is another thing that I would like to hear
from you, in order that I may appreciate the weight of your testimony here. D.id I understand you to say a while ago that as a
general rule the building of a new home in a gi_ven area or residential
section .had a tendency to depreciate other homes already existing in
that particular area i
Mr. MADDEN. Yes, sir. The answer to that is the building of new
homes in a given area does tend to depreciate the value of existing
homes because the buying public prefers new homes. Invariably
there are new things in new homes, such as the kitchens being painted
and equipped in a more modern way, more up-to-date bath-room
improvements-Mr. HANCOCK (interposing). Do you not think that the most
powerful argument we can advance in any way is the law of
emulation9
Mr. MADDEN. What do you mean by emulation 9
Mr. HANCOCK. Modeling after. Do you not think that going into
a community and painting a house, rejuvenating it, and all that
kind of thing is a more powerful argument in favor of civic improvement than all the lectures telling the facts that you may have~
Mr. MADDEN. Surely; providing you really can afford to do it,
but there is a question as to whether the people to-day have the
money to make improvements of that type now.
Mr. RE~LY. Thank you.
Mr. MADDEN. Gentlemen, I want to express to you our appreciation for the opportunity to cooperate with you through answering
questions, and it is sincerely hoped that the information given will
be helpful. There has been no desire to set forth any viewpoint
which is detrimental to any agency or to urge any preconceived ideas,
but only to give you our viewpoint as we have developed it from our
own investigations.
(Thereupon, at 12 o'clock noon, an adjournment was taken until
Wednesday morning, March 23, 1932, at 10.15 o'clock a. m.)

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

OREATION OF A SYSTEM. OF FEDERAL HOME
LOAN BANKS
WEDNF.sDAY, MARCH 23, 1932

HouSE OF REPRESENTATIVES,
SUBCOMMITTEE OF THE COMMITTEE ON BANKING .AND CURRENCY,
W asMngton, D. (J.
The subcommittee met, pursuant to adjournment, in the caucus,
room, House Office Building, at 10.15 o'clock a. m., Hon. Michael IL
Reilly ( chairman of the subcommittee) presiding.
Mr. REILLY. The committee will be in order, and I will ask Mr~
Rosenbaum to come forward, please.

STATEMENT OF EDWIN 1. ROSENBAUM, NEW YORK CITY
Mr. REILLY. Give your full name to the reporter.
Mr. RosENB.AUM. Edwin J. Rosenbaum.
Mr. REILLY. Where do you live i
Mr. RosENBAUM. New York City.
Mr. REILLY. What is your business 1
Mr. RosENBAUM. At the present time I am retired; I am doing
nothing.
Mr. REILLY. Who are you appearing here for 1
Mr. RosENB.AUM. For myself.
Mr. REILLY. Representing nobody but yourself1
Mr. RosENBAUM. No one whatsoever; no, sir.
Mr. REILLY. Did you appear before the Senate committee on this
matter1
Mr. RosENBAUM. No1 sir.
Mr. REILLY. Now, will you proceed to tell the committee what you
know about the subject of home-loan banks i
Mr. ROSENBAUM. Mr. Chairman and gentlemen of the committee,
I respectfully submit to your earnest consideration first, that over
$300,000,000 can be released with sound banking for the purchase of
food and clothing in the proposed home-loan bank bill.
Second, such provisions are necessary, otherwise the bill is w
menace to property owners and can not accomplish its purpose.
President Hoover has suggested that bonds aggregating $1,800,000,000 shall be sold for home-loan banks. The bank shall rediscount straight mortgages up to 30 per cent of the appraised value
and amortized mortgages up to 40 per cent of their appraised value.
There should be added a third class; namely, amortized home loans
where amortization is suspended, but interest and taxes, and so forth,
are maintained. When the principal of the loan does not exceed


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

259

260

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

50 per cent of the present appraised value, this type of loan should
be eligible :for rediscount.
The average amortized home loan running 14 years, the principal
being reduced at 7 per cent per annum, is 98 per cent extinguished
over a 14-year period. We shall call it 100 per cent :for convenience,
and divide it into two 7-year periods. In so much as 100 per cent
of amortization payments :for seven years previous to the stock
market debacle are a complete loss, practically only those loans will
be eligible for rediscount which have been on the building and loan
books for seven years.
An average loan of $6,000 will have been reduced to $3,000, on
which the building and loan or bank can borrow $1,500. The mort•
gage of $6,000 I have now reduced to $3,000. The annual amortiza•
tion of $6,000 at 7 per cent equals $420; the interest charge on $3,000
at 6 per cent equals $180, a total of $600.
Now, if that $3,000 is treated as a straight 3-year loan the $42')
amortization can be used by the mortgagor.
This benefits the unemployed home owner and a very substantial
number of home owners working for reduced wages or under the
stagger plan.
In the case of a home owner who started with a $15,000 mortgage
and has reduced it to $5,000, for example, the result is almost startling. At 6 per cent interest he pays $300 per year; at 7 per cent
annual amortization on $15,000, he pays $1,050 per year, which is
enough to feed himself, wife, and three children.
Possibly two-thirds of the contemplated bond issue of $1,800,000,000 or $1,200,000,000 will be loaned on this type of loan and at
$1,500 each would lift a burden from 800,000 home owners; an
average of $420 each relinquished from amortization would produce
a spending power of $336,000,000 per year for purchase of :food and
clothing. This would stimulate business, it would stimulate consumption, it would stimulate employment, it would stimulate and
stabilize the market for small homes; it would work a step toward
recovery.
The Metropolitan Life Insurance Co. points with pride to a
straight mortgage, now cancelled, which was on their books for 47
years; the Mutual Life Insurance Co. was recently paid a mortgage
that ran :for 85 years, but they h~ve a mortgage still robust at 78
years.
The suspension of amortization when the loan is amply secured,
is not a charity; it is iron-clad banking. But, according to the
present plan, no loan on which amortization has been suspended is
eligible for rediscounting.
The statement that part of the funds raised should be used for
further construction is a grievous error, and does not merit the consideration of any one conversant with existing conditions. There
must be approximately fo1;1r million vacant houses and apartments
to-day. Any new construction must be absorbed and it further aagra0
vates the present unsound condition.
To guard against the plan that part of these bonds should be
~tilized for new construction, there should be incorporated a clause
m the home-loan bank charter that no bank or building and loan
association using the privilege of the home-loan bank should be per-


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

261

mitted to loan for new construction; that upon their making such
loans, the loans discounted by the home-loan bank shall be due and
payable. This does not preclude them :from making new loans on
properties built previous to the formation of the home-loan banks.
Wjthout this clause we shall eventually develop a situation similar
to the farm condition. The Federal Government encouraged the
farmer by lending him money, and then on account of the overproduction which the very loans developed, it set up a farm board
with a few hundred million dollars to help rescue him, and how
unsuccessfully is self-evident.
If the present banking facilities can develop such overproduction
as now exists, then neither Federal capital nor governmental encouragement are necessary for building construction. The home
loan banks are formed to meet a national emergency, and when that
emergency ends, the less they function the better for the country.
They are formed to help real estate and home owners, not to crush
real estate with further overproduction.
· It has been my privilege to discuss the foregoing recommendations
with the bankers representing a very substantial volume of capital;
only the building and loan assaciations have taken exception to them.
Their exception is based on the fact that they do not believe there
should be legalized permission to relinquish amortization. That the
home owner should come to them and pray for remission of amortization. That the best thing for the home owner is to get his home
paid for. I grant that he should get his home paid for, if possible.
This home loan bank bill emerges from national calamity. The
voluntary release of amortization as outlined will provide sufficient
money to :feed 2,000,000 people. If the major part goes into food it
will stimulate food consumption, help the farmer and industries allied
to farming; if it goes into shoes and clothing, it will provide a
stimulus to prices and employment in those industries. If it goes
into construction, the present home owners can not eat the new
bricks and mortar.
The building and loan associations want to satisfy their customer
who has saved a few thousand dollars to purchase a new home; this
is very laudable. But for every hundred thousand new homes built,
there will be a hundred thousand vacancies in existing apartments
or houses; the new cons11ruction must be absorbed, and 1t is absorbed
through lowered values of existing properties. The spirit of this
act is to help the present home owner facing foreclosure and hunger,
not to help the potential home owner with funds that make his position impregnable.
This does not preclude new construction, but it does preclude new
construction through the sale of these bonds and the privilege of
rediscount.
The Federal Government knows the economics of production, overproduction, and further production. We must try for once the economics of consumption which makes production necessary. Senator
James Watson, just previous to published criticisms of the home
loan bank bill by the American Bankers Association, stated that none
of the money raised would be used for new construction. That is
not my interpretation o:f the bill. The building and loan associations can discount the mortgages on hand and use the proceeds of
those discounts for new construction. An explicit provision must be

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

262

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

made to prohibit this unsound banking and its potential menace to
the property owner. And further, the morale and courage of the
American home owner must be sustained and strengthened by a provision that when his home loan is amply secured, he can use the
further payments during a limited time £or the purchase of food and
clothing for his family. This provision is not mandatory; the banks
shall determine when the loan is amply secured. This provision
merely puts on record that mortgages, which are amply secured, are
not ineligible £or rediscount when only amortization payments are in
default.
The bonds which are amply secured constitute gilt-edge securities,
but the home loan bank should not be set up as a permanent institution along proposed lines. Provision· should be made for the retirement of the major part of outstanding bonds within 12 years. H
this reservoir 0£ credit, created through the sale 0£ home loan bank
bonds is continued indefinitely, when an emergency arises again,
there must be created another reservoir 0£ credit to save the situation. For instance, i£ this bank had been functioning during the
past 10 years, when this present emergency arose, its credit would
have been absorbed long ago, and another and larger credit would
have had to be found to meet the emergency. Again you have the
analogy in the £arm banks and the continuous increases 0£ credit
voted by Congress.
Now there can be no denial 0£ this reasoning. One billion, eight
hundred million is a large amount 0£ money. But our national
wealth has been estimated at $400,000,000,000, 0£ which real property comprises over 54 per cent, so that $1,800,000,000 is less than 1
per cent o:f the total value of all real property ; but confining this
to our present 12,000,000 home owners at $7,000 each, we get $84,000,000,000, of which $1,800,000,000 is about 2¼ per cent. That this
credit would have been absorbed in further overproduction long
before the market debacle, there can be no possible question.
After a given number of years this bank must £unction as a skeleton organization.
It may be superfluous to add-- that no appraisal of a property
should be accepted that was made more than six months previous to
the formation of the home loan bank.
Mr. REILLY. Mr. Rosenbaum, what was your business before you
retired?
Mr. RosENBAUM. Well, I was in the stock market a number of
years, and I have been in the construction business.
Mr. REILLY. Construction business?
Mr. RosENBAUM. Yes, sir.
Mr. REILLY. Your principal objection to this bill is that it will
result in the overproduction of homes?
Mr. RosENBAUM. Yes, sir-no; further than that, it aggravates
the present overproduction; the result is here already.
Mr. REILLY. It would result in the bringing about 0£ a situation
that you think now is overproduced ?
Mr. RosENBAUM. Yes, sir.
Mr. REILLY. I£ the bill is to be passed, have you any suggestions
as to any amendments?
Mr. RosENBAUM. ·wen, the suggestions I submitted are here, Mr.
Chairman.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTElVI OF FEDERAL HOlVIE LOAN BANKS 263
Mr. REILLY. Thank you, Mr. Rosenbaum.
Mr. CAMPBELL. Mr. Chairman, I would like to ask a question.
Mr. RosENBAUM. Yes, sir.
Mr. CAMPBELL. Suppose a man has saved up a couple thousand
dollars, and he wants to build a home. Would you deny him the
right to build a home if he wa11..ts to do so instead of having to buy
one of the homes already built?
Mr. RosENBAUM. I think he should have to buy a home already
built.
Mr. CAMPBELL. It is not what you think about it, but what the
man wants to do.
Mr. RosENBAUM. Those are the facts.
Mr. CAMPBELL. I do not care anything about what are the facts.
He wants to build a home according to the ideas he has had for a
long tiine. Would you deny him that right?
Mr. RosENBAUM. I certainly would.
Mr. CAMPBELL. Has he not a right to go and borrow· money and
u.se that money as he sees fit to build a home?
Mr. ROSENBAUM. ·wm you permit me to answer you?
Mr. CAMPBELL. Yes, sir.
Mr. RosENBAUJ.\L I think that the spirit of this proposed act certainly emanates from a condition where homes were facing foreclosme and people actually facing want and hunger, and those are
outstanding features in our economic condition to-day. I think
that the money will accomplish a great deal more good and answer
its primary purpose in establishing this act to help those men who
are losing their homes and whose families are facing want and
hunger. But that is the spirit of it.
Mr. CAMPBELL. ·whose credit is that?
Mr. RosENBAUM. It is the Government's credit.
Mr. CAMPBELL. In the case of any man using his own money and
his own credit, you would not permit that man to make a loan to
get that? You mentioned about a number of vacant houses?
Mr. RosENBAUM. Yes, sir.
Mr. CAMPBELL. There are probably thousands of pieces of pror.erty that have not been occupied for five years and which never will
be occupied, because people. have moved away from that community
and it will never again be a residential section; and yet those vacant
houses are unoccupied, and that condition exists in most cities
throughout the country from year to year.
Mr. RosENBAUM. If that is the condition, why aggravate it?
Mr. CA"MPBELL. Because people want homes in that section of the
country.
Mr. RosENBAUM. Then, we are going to use this money in order
to satisfy the individual whim o-f some people?
Mr. CAMPBELL. It is not a whim. You take the slums part o-f
New York, from which people are moving outside the city, are they
not? Again, take Pittsburgh, and they are moving to the outside
sections, moving away from the congested section, getting out in
the country where transportation is easy, and they are vacating
homes that have been occupied for 50 years.
Mr. RosENBAUl\1. I think in the final analysis that the way provided to permit new construction through this bill is really a
menace-
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

264

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. CAMPBELL. Then, Mr. Rosenbaum-Mr. RosENBAUM. Will you permit me to answed
Mr. CAMPBELL. That was not the idea, to bring about construction.
The purpose was to set up an aid for the building and loan association.s similar to that which exists just in the case of banks, for
which we passed the Reconstruction Finance Corporation act; we set
up that machinery to take care of the banks and the railroads.
Mr. RosENBAUM. I think in the final analysis the bill is a menace
to the banks.
Mr. CAMPBELL. Which banks?
Mr. RosENBA UM. The savings banks.
Mr. CAMPBELL. They have not said so; the majority of them have
been here recommending this.
Mr. RosENBAUM. The savings banks?
Mr. CAMPBELL. Yes; and according to the questionnaire sent to
them.
Mr. RosENBAUM. I can not help it if they do, but certainly it is a
menace to the life-insurance companies.
Mr. CAMPBELL. All the small life-insurance companies are favoring this bill, although some of the l,arge New York life-insurance
companies are not.
Mr. ROSENBAUM. Very few of them, unfortunately, are profound
students of economics. In the final analysis, with the tremendous
further production by the banks for every purchaser of a home.
Mr. CAMPBELL. Are you a profound student of economics~
Mr. ROSENBAUM. I do not know that I am profound.
Mr. CAMPBELL. You did not qualify at first as that, when you
came here to give us those suggestions.
Mr. RosENBAUM. I did not think it was necessary.
Mr. CAMPBELL. Is tha£ your occupation i
Mr. RosENBAUM. That is not my occupation.
Mr. CAMPBELL. Is it your profession?
Mr. RosENBAUM. That is not my profession.
Mr. CAMPBELL. You are venturing into that field now i
Mr. ROSENBAUM. Yes, sir.
Mr. CAMPBELL. Then why not say you are giving it as a student
of economic conditions-a. profound student of economics?
Mr. RosENBAUM. I think in the final analysis-I say this think is a
menace to the banks.
Mr. CAMPBELL. We have a condition concerning us. We do not
need information about the final analysis; we need suggestions to
remedy this condition.
Mr. ·RosENBAUM. If you will permit me to get at---Mr. CAMPBELL. You had your long say, and now I am trying to
show you the fallacy of your argument.
Mr. RosENBAUM. I left that out, because if there is a further production and-Mr. CAMPBELL. You are putting up a straw man and tearing him
down. There is no contemplation of carrying on any extensive
building program here. We have a provision that will control this.
Yon are emphasizing the fact that it will bring about additional
homes that will not be occupied.


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

265

Mr. RosENBAUM. I think that money should go to the man who is
:facing :foreclosure and starvation, instead of to the man who is in an
impregnable financial condition.
Mr. REILLY. How could it go to such a man~
Mr. ROSENBAUM. How can it go to him~
Mr. REILLY. Yes.
Mr. RosENBAUM. They can relinquish amortization. There are
thousands of banks in this country that have closed their doors,
and when the receiver of these banks calls their loans that money
must be met somewhere and the money must go along those lines
where it is absolutely req_uired. In some sections of this country
they really have no bankmg facilities whatsoever.
Mr. REILLY. Supposing you were sitting on a building and loan
board in a town of 25,000 to 30,000 people, would you encourage the
construction of buildings that were unnecessary~
Mr. RosENBAUM. The answer to that is the situation as it now
exists, Mr. Chairman. I have talked to quite a few bankers on this
thing, and I have discussed it with bankers who represent over
$6,000,000,000 in capital, some with building and loan associations,
i:.ome with savings banks, some with li:fe insurance companies, and·
each one seems to feel that he can determine individually whether
there is an economic necessity :for that particular type of home or
building which their institution intends to lend, and, judging by the
actual acts and the loans they have made, practically none of them
were competent to determine it. It is unfortunate, but it is an outstanding :fact.
In New York City they say," Well, we have a certain few millions
o:f dollars, I think, in the land banks, where the building and loan
associations can turn :for further discounting their mortgages," and
they point to that and say tha£ it has been functioning very admirably. In this particular section this man spoke of, in Westchester County, which is considered, I believe, one o:f the finest residential sections of the country, those properties are offered at :from
50 .to 55 cents on the dollar, and there is no sales price.
Mr. REILLY. Do you not recognize the :fact that a great many
building and loan associat~ons to-day are in need of money to meet
the requirements o:f withdrawals
Mr. ROSENBAUM. I say it is necessary, understand, to meet existing
conditions; but I do not :feel and I do not think it is absolutely indefensible that any o:f this money should go into :further construction.
The withdrawal is entirely different.
Mr. REILLY. There ought to be written into this bill the absolute
prohibition of the use of any of this money :for further construction~
Mr. RosENBAUM. Absolutely.
Mr. REILLY. That defeats one of the principal purposes :for which
the bill was written.
Mr. RosENBAUM. The purpose may have been unsound from the
beginning. The :fact that it was the announced purpose for this bill
does not necessarily mean that that purpose is sacrosanct and that it
can not be impeached.
Mr. WILLIAMS. It is your understanding that one o:f the announced
purposes of this bill was to encourage home building 1
Mr. RosENBAUl\L That was the announced purpose; yes, sir.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

:266

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. WILLIAMS. And there was a great deal of stress placed on that
in the beginning, at least, and this movement for the establishment
of this home loan bank~
Mr. RosENBAUM. Yes, sir.
Mr. WILLIAMS. Now, I will ask you if that purpose has not been
entirely abandoned, or practically so, by the proponents of this
measure?
Mr. RosENBAUM. That I am not in a political position to determine.
Mr. CAMPBELL. I think my colleague is in error as to that. It has
not been abandoned at all. Wherever new homes are required it is
to provide means to get them.
Mr. REILLY. Let the witness answer as far as he knows. That is a
matter of opinion.
Mr. ROSENBAUM. I do know much: That just previous to the published criticism by the American Bankers' Association Senator Watson made a public statement, which I read in one of the New York
papers, that. people were laboring under a misa:pprehension that any
o.f this money was to be used for new construction. Such is not the
,case. I have read this bill, and the bill reads that the loans can be
made on homes-finished homes, as I interpret it. But if a building
·and loan association has on hand a volume of collateral which is
:already on finished homes they can discount that collateral and use
the proceeds of that for new construction, which is the same identical
thing.
.
Mr. REILLY. If in their judgment it is good business policy~
Mr. RosENBAUM. Never mind their judgment. Their judgment
bas been thoroughly unsound as to the volume of new construction
that this is all the country can absorb, not only small building and
loan associations, but with the major banks besides and the insurance companies; I will include them in that, too.
Mr. REILLY. Do you not think the present surplus of housing
facilities is due largely to the panic and depression that doubled up
bomes?
Mr. RosENBAUM. I certainly do not. I think it has been, aggravated by that. Mr. Walter Stabler, who was comptroller of the
Metropolitan Life Insurance Co., and who I had the pleasure of
meeting for a short time, stated about five or six years before the
stock market broke that the country was already overbuilt. I made
the statement, and I said to Mr. Stabler three years before the stock
market broke that the country was already overbuilt; and that constant and continuous schemes of building continued.
Mr. REILLY. Do you not think that overbuilding was largely due
to the promotion .of several divisions by corporations outside of the
legitimate building and loan institutions¥
Mr. RosENBAUM. Largely promoted by that~
Mr. REILLY. Yes.
Mr. RosENBAUM. Whatever the cause was, the credit was there,
understand, and the credit was abused. It does not matter whether
it was by the building and loan associations, where you can buy
homes that they made loans on, I think, in Westchester County for
50 to 55 cents on a dollar, where I have seen building and loan associations actually sell their loans for 40 or 50 per cent for the loans
they had made on them on account of pressure for funds. We can

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

267

not get into whether A did it or whether A, B, C, D, E, or F did it
collectively; they all did it.
Mr. REILLY. Is there anything further, Mr. Rosenbaum i
Mr. RosENBAUM. If you feel it is necessary for me to qualify as
an economist on this I will be more than pleased to do so. I did not.
intend to do that; I did not think it was necessary.
Mr. CAMPBELL. Well, we have had sufficient.
Mr. REILLY. You have made your statement in the record and'
given your reasons, and we will take it on that. Thank you, Mr.Rosenbaum.
Mr. ROSENBAUM. Thank you, sir.
STATEJ4ENT O!F MANNING STIRES, NEW YORK CITY

Mr. STIRES. I am an attorney practicing my profession in New
York City, living in Westchester County, and for the last six or
seven years have made it a hobby to build houses, and I built during
that peripd 33 homes throughout Westchester County for sale, and I
might be called to that extent a speculator.
I am rather interested in the viewpoint of the last speaker. There
has been a great depreciation in values in Westchester County, but I
wouldn't be able myself to go out and find anything in Westchester
County that could be picked to 45 or 50 per cent of the value that
existed a couple of years ago.
Our county, like probably all counties, has been more or less handicapped by unwise development, by builders, by speculators.
The purpose of this bill is not to give encouragement to speculators; it is to give encouragement to the man who wants to build hisown home, and unless it can :facilitate that object and reduce his cost
it is not going to be a permanent benefit. As one speaker said yesterday, or rather in opposition to what he said yesterday, I can not
see how in any respect this piece of legislation or the creation of this
bank is going to interfere with State legislation, whether it be in
New York State or any other State. They are going to :function
under their State laws just as they are :functioning to-day, with
merely this Federal reserve system to supplement their present :facilities.
I have been writing and speaking on this very subject :for a year·
and a half, and some of my stuff has been published as long ago as a,
year. So I am not a novice on this particular subject.
There are soine phases that I think might perhaps be improved~
In the first place, I do not think there is anything to be gained by·
hurry, because I do not believe you are going to get your membership under your bill under our laws. Take New York State·:
Neither a building and loan association nor savings bank, nor life
insurance company could become members until there is enabling·
legislation. You have exercised the foresight of attempting to provide :for just that contingency by saying that pending, within a· fixed
period, enabling legislation, an institution otherwise eligible might
make a deposit and get the benefit of the act. But you are not a·
bank. You expressly state it is not a bank, and that any money de-posited shall not be subject to check. Well, the same law which regulates the investments of institutions such as savings banks and life·
insurance companies-all insurance companies, but paxticulacly· lif.e·

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

268

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

insurance companies and building and loan associations-I do not
think it contemplates the making of a deposit that is not in a bank in
the ordinary sense.
Mr. LucE. May I interrupt you there1
Mr. STIRES. Yes, Mr. Luce.
Mr. LucE. The gentlemen from Ohio criticized this bill. They said
that under their State law they could not proceed because it is to be a
bank.
Mr. STIRES. I presume it is a pretty difficult thing to pass a bill
that is going to fit under the cover of the laws of every State.
Mr. WILLIAMS. Let me ask you this question at that point.
Mr. STIRES. Yes, sir.
Mr. WILLIAMS. I believe that is new testimony, so far as I am
concerned, that New York can not come in. For what reason1
Mr. STIRES. The statutes governing investments of savings banks,
life insurance companies, and building and loan associations limit
the investment so closely that they could not buy stock of this bank,
and if they can not buy stock of this bank they can not be members.
Now, unless they could get around that, there is a necessity for
'enabling legislation, and, of course, there will be enabling legislation
when this bank is once started.
Mr. WILLIAMS. Do you state that upon authority and knowledge
of the New York law that they can not come in as the law now is,
under this provision 1
Mr. STIRES. I state that as a 'member of the bar of New York
State, having studied this act and having studied the act germane to
the institutions which are under discussion. I did not bring my
books wi~h me; I left them at the club. But the limitations are very
rigid. There can be question but that they can not buy the stock of
this bank until they have enabling legislation.
Mr. WILLIAMS. Have you made that investigation as applying to
other States i
Mr. STIRES. No; I have not, sir. I have talked with some lawyers
in other States and received an impression similar to my own, but I
do not know whether they have ~iven it careful thought either.
Mr. WILLIAMS. You have given that particular matter special
study, have you~
Mr. STIRES. I have, sir, and I am very certain that a life insurance
company, a savings bank, and building and loan association can not
buy the stock of this home-loan bank until there can be enabling
legislation.
Mr. CAMPBELL. In New York State~
Mr. STIRES. In New York State.
Mr. CAMPBELL. HavE} you an amendment to suggest to cover thaU
Mr. STIRES. I do not know how you can cover it, sir. That is why
I said I do not think there is any great rush. You are sure to get
the enabling legislation as soon as a session of the legislature can be
convened. It is improbable that there will be a special session called
for the purpose, however. But it is because of the fact, I am so
satisfied-of course, it is going to take you an appreciable length of
time to get functioning after you get this bill passed and get your
mo~ey and all that, and it may be ~hat a year may be consumed, in
which case you have not lost any time, because by the time you are

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

269

ready to function you can get your enabling legislation, because I
can not conceive-well, just like the legislature allows them to invest
in farm-loan bonds after the farm loan act was created, and this is
such a wonderful avenue for aid and benefit of the institutions that
they would, to my mind, make such a piece of legislation almost
unanimous.
Mr. REILLY. There is nothing we can do in this bill to remedy the
New York situation~
Mr. STIRES. You can not.
Mr. REILLY. Until they pass the enabling legislation~
Mr. STIRES. You can not, sir. Now, then-Mr. CAMPBELL. Would you suggest that the New York institutions
take advantage of this legislation as soon as they can do so~
Mr. STIRES. Absolutely. Now, there is one thought I had which
answers this geneleman's request for s:uggestions. If you would
permit during the try-out period, say, a year or a year and a half,
any institution which is otherwise eligible for membership, and
unable to become a member, because of lack of legal authorityuse the facilities of the institution, you could immediately give them
help, and I do not know why there is any particular reason that you
should not give them a little help now, except that you might say
they will not have the same interest; they will not be members of
the board of directors and have the same welfare motive that they
might have if they were represented by the membership on the board
of directors. But I also think that the greater gain to be accomplished would more than offset that initial handicap.
Mr. LucE. We have given this matter a good deal of study. The
bill attempts to meet the situation, but in behind all the time has
been the factor of the debentures and bonds that mav be issued, and
the question arises constantly, Can you borrow money if we extend
this grace, so to speak~ It is of paramount importance that the
bonds shall be bullet proof and fire proof and protected in every way
possible, and some of us have feared the sort of thing you suggest in
its effect on investors.
Mr. STIRES. Mr. Luce, the man that accepts a piece of paper which
we call a dollar bill that is_issued by the Federal reserve bank gives
very little thought to the fact that the regional banks are run by a
board of directors elected by the bank. They look upon the Federal
reserve system as a governmental institution, and they take those
pieces of paper, which are nothing more or less than promissory
notes, at face value, because they have confidence in their Government. This is a semigovernmental institution, too, and i:f this institution puts out a security which can be made flexible-and that is
the point I wish to come to next, if I may-you ought to find the
same degree of response from the public as to the reception of those
securities that you find with respect to any other governmental
activity, as long as we have a Government in the United States that
stands up.
Mr. LucE. But, you see, we have staring us in the :face the fact that
the farm-loan bonds are selling at a discount and the joint-stock land
banks' bonds are away down.
Mr. STIRES. Yes, sir.
Mr. LucE. And some of us on the Banking and Currency Committee have :for some time been inclined to consider at least the de
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

270

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

sirability of putting the Government behind those bonds just where
you think they should be behind these bonds.
Mr. STIRES. Yes.
Mr. LucE. But so far nobody has ventured even to put in a bill
suggesting that we make good the losses to bondholders in our system
of farm-loan banks.
Mr. STIRES. That brings me up to the second point I want to bring
to your attention. I very much doubt whether you will find a market
for these bonds or debentures that will be sufficiently responsive to
give you the money you want at a reasonable return. In the first
place, real-estate bonds as such are thoroughly discredited. They
are discredited, first, because everybody who has a real-estate bond
has suffered a loss, and, second, because of their utter lack of flexibility. The big institutions which have been putting out these bond
issues on important ·buildings could not maintain a market for them,
with the result that when the trouble came and people had to get
money, in their desire to realize something they kept dropping,
dropping, until to-day you can buy some really first-class real-estate
bonds at 50 cents on the dollar. That is an absurdity. Because and
only because of that condition I think any bond that may be~ offered
by such an institution as this proposed bank is going to have a great
handicap in putting them across to the public. I think you may
accomplish the same result and not even have them tax exempt, making them more flexible, and this is my line of reasoning: Going
back to the Federal reserve system, the public takes the dollar bill
issued by the Federal reserve system because it represents money.
They can use it for any purpose that they have occasion to, and if
they hoard, they hoard, generally speaking, those pieces of paper in
place of gold. If everybody that has a dollar bill in this countryour entire circulation-should call for it in gold, we could not pay
it; and the only reason that the public keeps taking those pieces of
paper is because you and I when they come around to us just as freely
accept them as they accepted them in the first place. In other words,
it is ·a circulating medium which is completely flexible for all
purposes.
During all this period of bank distrust, where even the biggest
banks have felt some uneasiness and the public generally have looked
with skepticism on banking institutions, the one class of banks that
has stood up the strongest is the savings banks. It is one strange
analogy that a type of bank which manifestly has so large a proportion of its deposits invested in a frozen security, nevertheless it is
considered by the public as the soundest.
Now, I only recall one run on a great savings bank in New York
City, and that did not last over a day, and it was not closed-I mean
the other savings banks just helped out and it was all over right
awav.
The answer, to my mind, is, first, they have confidence in the policy
of a savings bank. They are running no risks with their money;
they are putting it into investments which they consider to be prime
and they also have the confidence that if they want to get their money
they can walk up to the window and get it, regardless of the fact
that the bank may put a moratorium for 60 days on deposits. In
other words, they have confidence in real estate and they have con-


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

271

fidence in their ability to walk up and get their money. In other
words, that pass book is a flexible thing. If you could give to the
investing public a security by this home-loan bank which would possess that degree of flexibility, then, in my judgment, you have got
something that would sell and reach down into the pockets of the
very type of people whose money you want to get, because it is that
money which so largely now is hoarded and will always be hoarded,
and that is the population which either immediately or in the near
background are :foreign born. They are more apt to be thrifty than
our native-born children a couple times removed from foreign soil.
Mr. REILLY. What is it you could have as an amendment to this bill
that would make those bonds more workable i
Mr. STIRES. I would have the bank issue a sort of demand notes.
Mr. REILLY. The bank issue them?
Mr. STIRES. Yes, sir-demand notes of any convenient denomination-$5 or $10 up, drawing a rate of interest which would be fixed
from time to time by the board just as the savings banks fix their
rates of interest at different times. The question is, Are they all
going to come at once to get their money?
Mr. REILLY. The promoters of this bill contemplate there will be a
requirement of a billion dollars.
Mr. STIRES. Yes.
Mr. REILLY. Would you have this bank operate on $1,000,000,000
of demand notes?
Mr. STIRES. Why not?
Mr. REILLY. I am asking you.
Mr. STIRES. Because just so long as the people think they can ~et
their money they are going to leave it alone, and if you start out with
the predication that the Government is using this as an instrumentality that these demand notes which are issued by. this bank may be
exclianged for cash on demand, you will have very, very little demand.
Mr. LucE. May I call your attention to the fact that your proposal
is coming before the House from a dozen different directions, and I
believe conspicuously as to the proposal that we pay the balance of
the bonus with just that sort of thing? So far the House has not
indicated any willingness thus to expand the currency.
Mr. STIRES. This would not be currency.
Mr. LucE. It is demand notes. Of course it is currency. Mr. STIRES. No ; it is not issued by the Government; it is issued by
this bank. It bears interest at some rate, and you may adopt such
detailed regulations with respect to difference in rate as demand is
made within the said time, just like the savings banks do. But it is
nothing but an ordinary piece of paper such as the commercial institutions may themselves issue.
Mr. LucE. Is it legal tender?
Mr. STIRES. Certainly not. But the point is, I can put this in my
sock, and it is not hoarding any more than i-f I took a share of stock
and did the same thing; that is not hoarding and is not doing the
country any harm. But to the extent that its paper brings out of
my sock a dollar bill which, in turn, immediately through the banks
goes into commercial circulation, and then I have helped to relieve
conditions.
113235--32--18


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

272

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

I am certain in my mind, and I think it is something worthy of
consideration, that if you would take a cross section 0£ opinion of
competent economists you find they would agree that as long as the
public could be certain that they would get their money they would
not want their money.
If I may be borne with, I want to speak of a couple little details.
I think the size of your loan, $15,000, is unnecessarily large. If you
are making a home loan on a residence for a man in close circumstances who is least able to help himself. The larger the home, the
easier the man can finance it, because he has connections, and I do
not think you ought to have it for a 3-family house, because I do not
think the man should be encouraged to have a 3-family house, but
should be limited to a 2-story dwelling, and I think a $10,000 loan
is adequate.
If you really want to broaden· this field and attract to the field
the biggest untapped source of money for home lending, you have
got to increase the percentage loanable to the member banks on the
mortgages which are rediscontinued.
You will not attract the commercial bank in New York State by
this bill. None of them will become members. In the first place,
the word "mortgage" is anathema to them anyway, and, in the
second place, the only investments they do make-I am now speaking
of metropolitan New York rather than the State generally-is
limited to New York City proper. It is the rare exception that you
will find a New York trust company going out 0£ New York City
proper with their loans, and the only loans they do make are for
trust accounts, and in New York City is the one place where you
do not have very many applications for home loans. H you want
to get that class 0£ institutions to become interested, you have got to
enable them to get a comeback of their money in an amount fairly
approximate to the amount they have put out.
Now, the Federal reserve will take from a member bank the
promissory note I make, if I am a rated business individual, and lend
to the member bank a hundred cents on the dollar. There is an
unsecured piece of paper based on nothing but assets structure and
a period 0£ experience, and here is a secured piece of paper that has
something basically as a first lien that you say can only be rediscounted to the extent of 50 or 60 per cent; and you are not going to
attract commercial banks.
Mr. REILLY. Is it desirable to attract those bankers?
Mr. STIRES. Why should it not be?
Mr. REILLY. They are not engaged in the amortized loan business
This bill is not designed to attract such institutions.
Mr. STIRES. Then, if that is the case-Mr. REILLY. I understand, Mr. Luce, it is not?
Mr. LucE. It is not expected that the big city banks will greatly
use the system, unless it be in exigencies like the present, when they
may be in distress for lack of cash and want to get mortgages rediscounted.
Mr. STIRES. The reason I had in mind you wanted to attract them,
Mr. Luce, is because you want to reduce the cost of money. You take
the Prudence Co.; they charge 5 or 6 per cent bonus to get money.


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

273

Take the Metropolitan Life Insurance Co. ; you can not get them to
take a mortgage on an individual house; they take a mortgage on
groups and blocks. You take the other big life insurance company
over in Newark, the Prudential; you can not get them to take a
mortgage in Westchester County unless you go to their own brokers
that charge you 5 or 6 per cent bonus.
That is expensive money, and it is an unfair burden to put· upon a
man who wants to build his house.
The mortgage loan and title companies all charge 3½ per cent
up to whatever the traffic will bear for the money, and I think that
you ought to attract a different class of institutions, if for no other
reason than to break down these burdens they are putting upon borrowers, which I think are unfair and unnecessarily high.
Mr. WILLIAMS. I would like to ask you a question before you quit.
How does the home-loan bank of New York operate, with success!
As I understand, they have now under the State law a central system
there of some kind, have they noU
Mr. STIRES. I think not, sir.
Mr. WILLIAMS. Have they not some kind of an organization under
the State law along the line suggested in this bill, something of that
naturei
Mr. STIRES. You mean as a legal structure!
Mr. WILLIAMS. Yes.
Mr. STIRES. Certainly not; at least I never heard of it.
Mr. WILLIAMS. You never heard of it~
Mr. STIRES. No, sir. It has been suggested by a number of witnesses held up as a model.
There may be an association of banks that operate its own clearing
house but there is certainly no legal entity I have ever heard of, and
if there is it is in some part of the State far removed from New York
City. I would be interested to know about it.
Mr. WILLIAMS. You will find this record full of references to it by
men who claimed to know.
Mr. STIRES. I do not.
Mr. WILLIAMS. All right; if you do not know anything about it, I
do not want to ask you any more about it.
Mr. STIRES. No, sir; I am ignorant as to that.
Mr. LucE. Is tnere anything in this bill that would commit such
kind of financing as you have advised!
Mr. STIRES. No; I do not think so.
Mr. REILLY. Who is next to be heard~

STATEMENT OF R. GRAEME SMITH, CONNECTICUT GENERAL
LIFE INSURANCE CO., HARTFORD, CONN.
Mr. REILLY. What is your name?
Mr. SMITH. -R. Graeme Smith, of Hartford, Conn., and I have
quite a thorough statement to make on the subject.
Mr. REILLY. Did you appear before the Senate hearings i
.Mr. SMITH. No.
Mr. REILLY. Are vou for or against the bill i
Mr. SMITH. I am· opposed to the bill.
Mr. REILLY. Proceed.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

27 4

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. SMITH. In preparing this statement, I have carefully read the
bill and have gone over thoroughly in detail all the testimony given
before the Senate subcommittee.
I am opposed to this legislation because it appears to be unnecessary, unsound, and in my opinion will not serve the purposes of the·
home-owning public. Furthermore, it seems to be that the following thoughts are well founded in reason:
1. Until such funds of the Reconstruction Finance Corporation as
are allocated to the relief of frozen mortgage assets are exhausted,
or until Congress refuses to augment such funds by future appropriation to the temporary Reconstruction Finance Corporation, we
see no emergency need for Federal home loan banks.
2. We believe great difficulty will be encountered in selling bonds
of the home loan bank system, particularly in view of the investor's
experience with Federal land bank bonds. We believe that the
home loan bank bonds would not sell at a low enough interest rate
to benefit more than one class of institution that would be privileged
to discount mortgages. We believe this will be particularly true
after the flotation of bonds for the Reconstruction Finance Corporation, for the deficit and for farm relief.
3. We believe that the sale of home loan bank bonds, tax exempt 1
is class legislation, discriminatory in character. It would further
deplete tax income to the Federal Government, the States and the
smaller goYernmental units at, a time when income is being sought
from every source. It would add greatly to total governmental or
quasi governmental indebtedness, thns tending to depreciate outstanding Government obligations.
4. We doubt the safety factor in operation of proposed Federal
home loan banks, pointing to the experience of the Federal land
banks, which during the current depression, find their bonds depreciated, no market for new bonds, no money to lend and the necessity of calling on Congress for additional help to keep their doors
open. Just as the Federal land bank system failed to assist in the
present emergency, so we believe the Federal home loan banks would
fail to meet future emergencies.
5. We are opposed to a further extension of Government activity
into prirnte business. We feel that the regulatory power of Federal home loan bank system would lead to a further invasion of
Federal authority into the field of State rights.
6. We oppose inflation of mortgage credit, stimulation of buildin~,
and the resultant future depressing in value of existing home equities through an oversupply of homes.
Mr. LucE. May I interfere as you go along1
Mr. SMITH. Yes, sir.
Mr. LucE. If you wish to make a connected statement, I am quite
willing that you should go on.
,
Mr. SMITH. I prefer to make a connected statement, and jf I may
he permitted to ~eep on this way when I am through I would be glad
to answer questions.
Mr. LuOE. All right; I will make some memoranda here and inquire later.
.
Mr. Sl'lnTH. We maintain that when liquidation has pursued its
course, priYnte mortgage lending can and will adequately finance

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

275

1·eal estate when, as and if real estate warrants financing, on a
sound economic basis.
Any criticisms or objections which I might make regarding the
bill itself would be of secondary importance to my expressed oppo.sition to the legislation itself. Many valid detailed criticisms of the
bill have been made. I concur with those raised by Mr. E. J. Adams,
of the Federal Trade Commission, as expressed in the hearings before the Senate subcommittee Tuesday, January 26, 1932, and as set
forth in Part II of the record of those hearings.
And I will say there that I have before me a digest of his suggestions, which I will be glad to take up after this testimony, if you
care to have me do so.
Mr. CAMPBELL. We have it in the record?
Mr. REILLY. Yes.
Mr. SMITH. I refer only to Mr. Adams's criticism of this bill and
not to his substitute plan, to which I have given little thought. It
seems to me that Mr. Adams has pointed out, after much deliberation,
the many fundamental weaknesses of this bill. In addition, he has
epitomized his opinion by saying unequivocally, "There is not dollar's worth of relief or help in this bill for the home owner." Anyone who carefully studies this measure will .realize that it is drawn
for institutions. The home owner may or may not indirectly benefit by it. As I will point out. later, he may very directly suffer from
it, should it be enacted. It is without provision for any guarantee
that the participating institutions will pass its benefits on to the
home owner. There is nothing to prevent these institutions from
using the system to realize cash from mortgages in order to pay
stockholders, or depositors, or creditors, to build up reserves or to
engage in any other line of business.
That is, to pay the money back to their stockholders, or to pay
dividends to stockholders, or to pay their depositors or to pay their
creditors, or to build new also, office buildings, or to engage in any
other line of business, new or otherwise.
It proposes a system that rests on existing mortgage-lending institutions and, however its purpose may be veiled by sentimental talk,
those institutions will feel its effect. The home owners' place in
the picture is uncertain. Why, then, consider this measure designed
to help the home owned Why call it a home loan bank? My
point is that the proposed system would be purely institutional in
character.
When this measure was first proposed to Congress, there prevailed
great confusion as to its aims. That is on the part of the public.
Was it primarily intended for emergency relief or was it to set up
a permanent additional mortgage structure? The President included it in his emergency relief program. Providing no other
governmental agency had been set up, there might have been a valid
reason for establishing some such system as this to meet the emergency. However, the Reconstruction Finance Corporation has come
into being aml provides for the defreezing of mortgage assets-if
the Reconstruction Finance Corporation is meeting the emergencyof all mortgage-lending institutions. It has received many requests
for discounting mortgages, is now engaged in setting up a nationwide organization for that purpose and has, I believe, actually

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

276

OREATJ;ON OF A SYSTEM OF FEDERAL HOME LOAN BANKS

advanced funds to this end. As the Reconstruction Finance Corporation is meeting the emergency, this proposed measure is necessarily going to be permanent in character.
Every Congress for the past 12 years has had before it some such
measure as this, and never once has any Congress brought one of
these measures out of subcommittee. This, in spite of the fact that
these Congresses were sitting during a period of unparalleled residence construction, during a period of great demand for mortgage
money, during a period of prosperity, when a system such as this
could more easily have been set up, and during. a period when the
state of mind of the country was more calm and sane. They saw no
need for such a system. Why, then, should this be considered on a
permanent basis during a period of stress such as this?
If this system is designed to provide additional credit facilities,
its enactment should be delayed until such need is definitely ascertainable. It should not be created in order to. foster and stimulate
mortgage borrowing, but rather it should await the time that mortgage borrowing can not be taken care of by other agencies. Certainly,
we face no period of construction which will call for mortgage funds
in an amount which our existing institutions can not supply during
normal times.
,
Both political parties in Congress have for months been passing
legislation to protect existing institutions. Both parties have been
busy preserving, strengthening, and bolstering up by remedial legislation the banks, the building and loan associations, and the insurance
companies through the passage of the Reconstruction Finance Corporation and the Steagall-Glass bill, and other measures. Neither
party has designed or enacted these measures to produce new business at the cost of old business. Why, then, should Congress reverse
itself and stimulate home ownership when, in so doing, it may seriously endanger existing homes and existing home owners?
Let us review the forces that have been behind this measure. The
finance committee of the President's home ownership conference did
not propose a Federal discount or bank bill.
·
I might say there, gentlemen, that the committee was appointed by
the President, a representative committee, in May, 1931, and worked
consistently, having at its command, not only private investigation
sources but those of the Department of Commerce, and after due deliberation did not include in its financial report to that extensive
home ownership conference any proposal for such a bill as this. They
wenti only so far as to state that they would support the President
in any remedial measure. Emphasis should be placed on the word
"remedial," and so far as is known, they have not in any way supported this measure.
Constant reference has been made to the questionnaire sent out
by the Department of Commerce to lending institutions over the
country, with the inference that favorable replies to this questionnaire meant approval of the plan. Such could not be the case. In
sending out the questionnaire, no copy of the bill was included.
Therefore, no one could know what he was answering.
I might inject there that the bill was not even printed at that time
in its present form.
The questionnaire was accompanied by an appeal of President
Hoover for home ownership, which had been issued at least some

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

277

weeks prior to the drafting of H. R. 7620, and which made no specific
reference to this measure. It has seemed to me that the questions,
asked by the Department of Commerce were pointed and leading
toward favorable answers. At the time the questionnaire was sent
out, the Reconstruction Finance act had not been passed and had
not been amended to take care of defreezing mortgage assets. You
may draw your own conclusions as to the value of such a questionnaire and the answers thereto.
Nearly two and one-half months have elapsed since the hearings
on this measure began in the sub-committee of the United States
Senate and you have doubtless had time and opportunity to size
up the proponents and opponents of this measure. One point is
significant-of the six types of institutions which could be members
of this system, one, and only one, through the medium of certain
building and loan officials has striven for its passage. To be sure
the Nebraska League of Building and Loan Associations is in opposition to the measure, while those of Missouri, Minesota, and 11 other
States have made clear that they can not avail themselves of such
a system because of State laws~ Nevertheless, in spite of these handicaps, the burden of furthering this legislation has been assumed by
the Building and Loan League. They have presented what appears
to be a very fair cross-section of opinion within their organization.
Has it not occurred to you that it is significant that the bankers
who would be members under this bill have not passed a resolution
through their American Bankers Association favoring the measure
and have not sent accredited representatives down to you to favor
it? Has it not occurred to you that the savings bank officials who
would be members of this organization have never passed a resolution in favor of this through the American Bankers Association
and have not appeared in favor of it? Has it not occurred to you
that the trust department officials have not appeared in favor of
the measure? Has it not occurred to you that the Mutual Savings
Bank through their association-mind you, they would also be members-have not passed a resolution, nor have they appeared in favor
of this measure, and neither have the Life Presidents' Association,
or the American Life convention-five out of six have not appeared
in favor of it? Does it seem reasonable that this can be sound or
necessary legislation for institutions if five out of six types involved
do not urge you to pass it? If five out of six do not come out officially in favor of it? They must be impelled by reasons that have
not as yet been revealed, and these may well beFirst. Each local association could discount at 5 per cent their
mortgages that bear 6 to 13 per cent interest, thus assuring a handsome profit.
Second. There has long existed, and is constantly growing, a conflict of interest-I almost called it a running fight-between the
building and loan associations and the banks and it is naturally
irksome for the building and loan associations to be dependent upon
the banks for borrowing fun,ds. This system would allow the build-.
ing and loan associations to free themselves from the scrutiny and
business judgment of the banks.
Third. By providing the building and loan associations with their
own depositoi;y and by providing them with a method of automat
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

278

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

ically raising cash from their mortgage holdings, it will allow them
to accept deposits arid further invade the field of banking. In view
of the fact that nothing in this measure forces them to pass on to
their mortgage loan borrowers the benefits of rediscounting, why,
then, should they not work ar~lently for this bill?
In passing we should mention the National Association of Real
Estate Boards, though they are not involved in the bill and would
not be either members or beneficiaries of the system. Their opinion
seems somewhat divided because the Denver, St. Paul, and Kansas
City real-estate boards are opposed to the measure and the mortgage and finance division of the national association has never
approved the measure. However, they have appeared before you in
the interests of new residence construction.
In presenting my opposition to this measure, I am not speaking
for those other interests which oppose it. However, to justify my
right to appear before you, I should like to make clear the connection between the institution of life insurance, with which I am
:.t;,i:,ociated, and the home and home owner. It has been said that
the life-insurance companies have 50,000,000 policyholders. Presuming that these are thrifty individuals, we may go further and
believe that they include a great majority of the home owners of
the country. Now, a large part of the life-insurance assets of this
country are genuinely owned by a large portion of these policyholders. Mutual insurance interest.; lend money to home owners and
insure home owners.
It is safe to assume that insurance interests have at least two to
three times as many direct contacts with American home owners
as any other business institution.
The life-insurance companies lend over the length and breadth of
the land, in a vast number of communities, distributing their investment funds to the greatest benefit of all. They lend freely and
extensively to home owners in numerous sections of each city, to the
extent that they have investment funds available.
On these loans, the life-insurance companies charge a base rate
of interest. The correspondents, or intermediaries who negotiate
and service the loans, charge a fair cash commission or take a participation in the interest rate, but in either case, the total gross rate
to the home owner is seldom, if ever, over 6½ per cent per annum,
and usually runs 6 per cent. It must be borne in mind that this
charge, over and above a base rate, is made to defray the expense
of doing business in many communities, through intermediaries, who
join with the insurance, company in a working partnership arrangement with the home owner.
In this connection, it is interesting to note the additional amount
of work which the insurance companies are assuming to-day in an
effort to work out the home owners' mortgage problems. Great
forbearance is being shown in cooperating with honest, conscientious
borrowers who to-day, through decreased earnings or misfortune.
are not able to meet their full interest, tax, and prmcipal payments:
All companies are adding to their field forces for the purpose of
directly interviewing, assisting, and giving advice to these delinquent
borrowers. Providing a borrower is physically maintaining his
property, is not diverting funds to other uses that should be applied
on his indebtedness and is making every conscientious effort to pay

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

279

what he can, the companies are uniformly being lenient with him
and wanting him every concession consistent with sound business
principles.
,
To the best of my knowledge and belie£ all lire-insurance companies that I know anything o:f first hand are to-day renewing loans
that mature. Most of them are making new loans through their
correspondents ; that is, through the regular channels o:f business.
Furthermore, during the past six months the insurance companies
have, partially at the request of the administration, purchased great
numbers of mortgages (probably in excess of $80,000,000) from
banks and building and loan associations who needed to secure cash
and it is worth noting that in these cases the insurance companies did
not take advantage of the situation to charge a discount.
The insurance companies are doing what they can to meet the
trying situation. With this background, I am more firmly convinced than ever that attention is being centered on the wrong phase
of the mortgage situation in the urging of this legislation.
At the present time, mortgage lenders everywhere are having to
foreclose on a certain number o:f properties. In the case of insurance
companies, these houses are immediately repaired and rehabilitated.
I:f they can not be sold readily, as is usuallY. the case to-day, they
must be rented. The effect o:f such properties on the whole realestate market, and particularly on the home market, is as inevitable
as it is un:fortunate and regrettable. As the number of these properties increases, there will be ample opportunity for any prospective
home owner to secure a first rate home in good condition, at a low
price and on most reasonable terms. What better stimulation to
home owning can be furnished by artificial means~
My honest conviction, based on extensive and constant travel, upon
regular reports by our correspondents, and upon careful investigation by our traveling field men, is that there is a distinct oversupply
of housing in every one of the 33 cities and towns in which we
lend, and that has been and is the prevailing opinion among the
mortgage executives o:f life insurance companies who keep closely
in touch with the situation in all parts o:f the country. Not only
are there vacant houses, but vacant apartments, one competing directly with the other for tenants and the apartments competing
indirectly with houses :for purchasers. In every community that I
know of, there are some unsold new houses. At the cost of repetition,
let me state that there is an increasing number o:f rehabilitated,
repossessed houses in each community. In view of all this, it seems
that too much stress has been laid upon the miracle of creating home
owners by providing easy credit through some Federal lending system. The means and the material for creating new home owners
are already at hand. If a man is a potential home buyer, he has
never had better opportunity than to-day as regards choice of available property, low price, and easy terms.
Will an institutional Federal lending system give the potential
home buyer a better opportunity or will it perform that miracle we
all so devoutly look for; that is, the creation o:f more potential home
buyersi
Upon the constant insistence of the proponents of this bill, it is
necessary to touch upon the supposed relief which this measure will
give to the distressed home owner. I think we will all agree that

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

280

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

there is no way for any banking system to assist a man who is not
able to meet his interest payments and taxes. Certainly, no homeloan bank system can put money in his pocket to pay these items.
Certainly no cooperative or governmental agency can take over his
loan if he can not pay them. How is this proposed system to give
relief 1
Now, granting there is no relief in this bill for the man who is
delinquent, how is it proposed, how is the proposed system to give
relien
The proponents stress the plight of the man whose loan matures.
It has not come to my personal attention that lenders have been
foreclosing properties solely because a loan can not be refinanced at
maturity. Granting, however, that such cases have occurred, I am
of the firm belief that they will be far less frequent, and eventually
nonexistent, when a great deal more property is taken over by foreclosure. Why any lender should figure that he can put himself in a
better position by taking over a piece of property, rather than
extending or renewing a loan, is more than I, as a practical mortgage
man, can see. My prediction is that the time is at hand when every
lender will realize that he is less liquid with a property than with
an obligation. Bankers, receivers for closed banks, building and
loan associations, insurance companies and savings banks will realize
this.
I have seen receivers for closed banks-a loan matures and they
send out a notice "You have to pay this loan right now," and the
man comes rushing into our office and he says: " Graeme, I have got
to have that money. You have just got to help me out. Get that
money or they are going to take my house away from me." I say,
"Now, don't get excited. Just go back and tell them they can have
the house." He goes back and the next day he has a new loan, his
loan has been extended three or five .Years at a fair rate of interest,
and he has probably paid $100 or $150 on the principal, and the
receiver for the bank is infinitely better off with the extended obligation with his $100 or $150 than he is in taking over a piece of real
estate. That may not have prevailed generally up to now, but as
we all take more and more real estate-and everybody realizes it
can not be sold-no lender will foreclose solely on the basis of the
maturity.
Personally, I do not know a single life insurance company that has
or would call maturing loans and actually foreclose if the borrower
was up on his payments and was keeping the property in good
condition. _
That question I have asked some 16 to 18 life companies.
Mr. LucE. Mr. Smith, you can be seated, if you wish. I may
interrogate at some length.
Mr. SMITH. All right, sir. May I continue my statement 1
Mr. LucE. Yes.
Mr. SMITH. I think, if a painstaking check were made of firstmortgage foreclosures at maturity, you would find factors other than
the maturity governing the lender's action.
It seems to me that this talk about the dire position of the home
owner with a maturing loan does not hold water.. It sounds to me
like th.e only possible argument that proponents of the bill could
muster up to use in stressing the relief which some Federal lending

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

281

agency could provide. If such relief is needed, we in the life insurance field have not found it out.
In conclusion, I would state that this bill, is institutional in character and the possibility of its helping the home owner indirectly
is rather slight. New loans are being made to-day. Delinquent
loans can not be assisted by any new lending age;ncy. Maturing
loans will have to be taken care of by the present lenders, who will
find it advantageous to do so, rather than to have real estate in their
poOrtffolhio.
· types of ms
· t't
. th'1s b'll
1 u t'ions ment·10ned m
t e six
1 an d wh'1ch
could become members of this organization, with this measure,
officials of only one type have endeavored to convey the impression
that their members' units are behind this measure.
For the temporary emergency the Reconstruction Finance Corporation will provide quick and ample means for defreezing mortgage assets. On the grounds that this Federal home loan bank bill
will create a permanent governmental structure, we oppose it becaus~
of tax exemption, Government in business, and stimulation· of unnecessary new houses. We doubt the ability to sell the bonds at a low
enough interest rate and we doubt the successful operation of the
banks.
As for the home owner, we say, let there be a need first and a system
afterwards. I trust that there will not be created a system' in a vain
e:ffort to create a need for new homes that are not needed.
I wish to thank the committee very much for having so graciously
indulged me in presenting my views on the bill under consideration.
Mr. LucE. You have made an admirable statement of the views
on this matter taken' by the life-insurance companies.
Mr. SMITH. Thank you.
Mr. LucE. Who, together with the mortgage association, furnish
the only consolidated body of opposition that this bill has met. I
have read the Senate testimony also and should judge that you in
your statement have covered every argument there presented.
Is it your intention, is it the intention of the life insurance interests, to confine their argument here to your statements, or are there
other life-insurance people to be heard i
Mr. SMITH. Mr. Representative, I would not know. I am appearing as an individual for my company. There has been no agreement between the life companies of an official character.
Mr. LuCE. What I am inquiring for-Mr. SMITH (interposing). I would not know if anybody else
were to appear.
Mr. LucE. What I am inquiring for is to ascertain whether, for
the sake of conserving time and not extending argument, I may
address all my inquiries bearing on this life insurance phase of the
situation to you, or whether there are others who will want to be
heard 1
Mr. SMITH. To the best of my knowledge and belief, Mr. Luce, no
one else froin the life companies will appear before this committee.
Mr. LuCE. Then I can go ahead and gratify my curiosity.
Mr. SMITH. Yes.
Mr. LUCE. By addressing you¥
Mr, SMITH. Yes.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

282

CREATION OF A SYSTEM OF FEDERAL HOME LOAN· BANKS

Mr. LucE. Now, let us begin at the beginning. The Presidentt
after calling the conference which we all know about, committed
himself to the support of some program for furnishing additional
credit in the home-building field for relieving the •present emergency. Your statement discloses no sympathy in any aspect whatever or upon any point whatever. It discloses no sympathy with
any of the recommendations, even those of the President. Am I
accurate in saying you are opposed to this thing-lock, stock. and
barrel~
Mr. SMITH. Yes, sir.
Mr. LuCE. Very well. Then we will, for the lock part, put the
President against yourself.
Mr. SMITH. Mr. Representative, could I say there that we were
heartily in support of the remedial measure for the purposes of the
emergency, and were glad to see that Congress was wise enough to
vest the · Reconstruction Finance Corporation with the power to
discount mortgage loans with banks and trust companies, and building and loan associations, and life insurance companies, if needed.
We were in sympathy with the President on that.
Mr. LuCE. i: meant to inquire about that later on; but inasmuch as
you have mentioned the subject, I would like to inquire as to your
thought about the Reconstruction Finance Corporation program.
Mr. SMITH. There are several remarks I would like to make on
that subject. I do not want to go into a discussion of it.
Mr. LucE. Do you know any facts about how much money they
will lend to this field 1
Mr. SMITH. They apparently ha.vein mind, although I am speaking without any official record, about $250,000,000, so I have heard.
Mr. LucE. The allegation has repeatedly been made here that such
allocation is designed to enable these institutions to repay their borrowings to the banks. Do you know anything about that 1
Mr. SMITH. Mr. Representative, there is no trace of such a stipulation on the part of the Reconstruction Finance Corporation. Mr.
Dawes has been asked to appear before the Senate subcommittee, as
you know, and is going to appear before them, I understand, at some
future date to explain what the·Reconstruction Finance Corporation
has done and what it is going to do about the mortgage situation.
Mr. LucE. Well, I am glad you have quoted that because I meant
to say I am Yery sure that this committee will not proceed in the
matter until it knows actually 'what the R. F. C., as we call it, is
going to do, and so we will hold in abeyance, if you please, all arguments for or against the bill on that score, until we have the information upon which that may be based.
·
Mr. REILLY. Assuming that the Reconstruction Finance Corporation is not going to be able to remedy existing conditions, is this bill
necessary?
Mr. SMITH. As a temporary bill; yes. Or some change could be
made in the Reconstruction Finance Corporation act, and an additional specific appropriation made for it.
Mr. LucE. I am assuming that will not be done. I am assuming
that the Reconstruction Finance Corporation is unable to handle this
situation. So, assuming, is such a measure as this, as an emergency
measure, desirable, in your judgment?

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM O:F FEDERAL HOME LOAN BANKS

283

Mf. SMITH. Yes, sir; temporary relief is needed. Could I interject one point there?
Mr. LucE.. Certainly.
Mr. SMITH. In our city two banks needed assistance from the Reconstruction Finance Corporation in discounting mortgages. Arrangements were made. A month has gone by and the men in those
· banks tell me they are not going to need the help once they know
they can get it.
Mr. WILLIAMS. That is one of the results we hoped for. That is
good.
Mr. LucE. The less these things have to work, the better for the
public, as has been said on the floor of the House.
In the fourth paragraph of the statement you have just laid before
us-

Mr. SMITH. Is that the first page? .
Mr. LucE. Yes; the first page, No. 4, you say, there would be no
market for new bonds. In the sixth paragraph, y-ou begin, "We op~
pose inflation of mortgage credit," and at other places you say " this
thing won't work anyhow." How can there be any inflation if the
money can not be borrowed and if tne thing won't work i
Mr. SMITH. Under the provisions of this act, one type of institution can avail itself of the functioning of the bill, certain building
and loan assocations in certain districts-take the State of Ohio, for
example, can jump in and gobble up a great amount of money and
put on a building boom in the State of Ohio that will manifestly
affect all the other institutions operating in that State, and by that
act alone they can do immeasurable harm in certain communities.
Now, to do it, to be sure, they would have to have money, and it is
inviting the money for them to do that in local communities that I
say difficulty would be had in selling the bonds.
Mr. LucE. If there is no market for the bonds, the institution will
not function.
Mr. SMITH. It can to the extent of $125,000,000.
Mr. LucE. It can, and that is fut in the control of the central
board to apportion to the best o its judgment as to th.e needs of
various communities, and if we can ever trust men, and I think we
can, may we not assume that these men will wisely distribute that
money with an eye to the very situations that you fear 1
Mr. SMITH. It depends upon who is consulted in selecting the men.
Mr. LuCE. Now, Just jump on to another of your statements bearing upon the same thing.
Mr. SMITH. Yes.
Mr. LuCE. In the first paragraph on the next page you say," There
is nothing to prevent these institutions from using the system to
realize cash from mortgages in order to pay stockholders, or depositors, or creditors, to build up reserves or to engage in any other line
of business."
Mr. SMITH. Yes.
Mr. LuCE. In the light of the experience of this country in 150
years or more, is it conceivable that any public board under the
control of the President of the United States will do such preposterous things as you here suggest and as was suggested in the Senate
hearing? Should the possibility that our public officials may prove

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

284

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

delinquent debar us :from giving them authority to render a public
service~
Mr. SMITH. Mr. Representative, can I make an answer to that 1
Mr. LucE. Yes; I would be glad to receive any explanation possible.
Mr. SMITH. The Reconstruction Board has been subject to a little
criticism here upon the possibility that in making loans to building
and loan associations they have required that the money paid out to
building and loan associations be paid to banks. Now, the essence
of that criticism is that any governmental body should attach conditions to moneys advanced. Just assuming therefore that no governmental body should do that, I think there is in accord with your
:feeling-your Federal hoine loan board should sit here and a building and loan association would bring in $500,000 o:f mortgages and
borrow $200,000 and there is nothing, providing, o:f course, your
board is not going to stipulate how they will use that money, there is
no reason wq.y the building and loan association can not go into its
statement and put in a safe deposit box department, and build a
beautiful one with the $250,000, and never pass it on to the mortgage
borrower.
Mr. LucE. There is absolutely nothing in the way except common
sense.
Mr. REILLY. Would you do that i:f you were sitting on a building
and loan board?
Mr. SMITH. I:f I were sitting on a building and loan board. That
involves my personality. I probably would not, but I can see where
a building and loan association, three years :from now when the
emergency is over, i:f it is ahead o:f itself a 40 per cent profit annually
in the operation o:f the safety deposit box, with no stigma attached,
do you suppose they would :forego the opportunity?
Mr. CAMPBELL. In their history o:f over 100 years have any been
accused o:f doing such an apparently unreasonable thing, the building and loan institutions o:f the country 1
Mr. SMITH. I do not think this situation has arisen.
Mr. CAMPBELL. You suggested it would arise. Has it ever arisen~
Mr. SMITH. I am not :familiar enough with their practice to know
it.
Mr. CAMPBELL. As compared with the banks' experience, does not
the building and loan association compare :favorably?
Mr. SMITH. Bankers could do the same thing. I am not accusing
the building and loan agency. I am not attacking them.
Mr. CAMPBELL. You seem to be directing quite a little o:f your
statement to that.
Mr. SMITH. That is because they were the only proponents that
have come down solidly :for the bill.
Mr. LucE. You mean they have appeared before the committee.
You do not know o:f the hundreds o:f letters we have received :from
people in our districts to whom we may properly give heed.
Citizens demand this. Your policyholders demand it. You say
that the American Bankers Association has not indorsed it. The
American Bankers Association objected strenuously to the enactment o:f the Federal reserve system. Were they wise or unwise
at that time?

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

285

Mr. SMITH. Well, I heard the testimony yesterday, Mr. Re]?resentative, and I made inquiry of the American Bankers Associat10n and
found that the records show that they opposed certain provisions in
the original Federal reserve act and that subsequent to their opposition those provisions were changed and then they were for the act.
Mr. REILLY. No; I think you are mistaken. The bankers opposed
the Federal reserve bank right up to the last moment.
Mr. CAMPBELL. They fought it to the last moment. Were they
right in fighting it?
Mr. SMITH. Well, not in my opinion.
Mr. CAMPBELL. Well, are they right now in fighting this, or wrong?
Mr. SMITH. I think they are right.
Mr. CAMPBELL. They are just as apt to be wrong now as they were
then. Five years now, after this is established, the life insurance
companies will be commending Congress for doing it.
Mr. LucE. You go Qn to say that the President included it in his
emergency relief program and you have met the question suggesting
itself, so I will not pursue that. The next paragraph beginsEvery Congress for the past 12 years has had before it some such measure as
this, and never once has any Congress brought one of these measures out of
subcommittee.

Simply to have it on record that your information is incorrect in
that matter, I would say that I happen to have been on this committe for just 12 years and I never heard of any such proposition as
this in the course of that time.
Mr. REILLY. I might say, right there, that a bill was introduced
in 1926 based on the Federal farm loan act whereby, without any
Government assistance, groups of men could get together and work
out the same proposition for farm loans for homes. That never
came before. any committee of Congress, so far as I know.
Mr. SMITH. Mr. Chairman, I think you will find, in the Senate
hearings, a statement by one of the building and loan officials regarding the history of this movement, that in 1919 the first of these bills
was introduced in Congress, and he goes on then and brings it up.
Now, again in the Senate hearings, either a Senator or a Member of
the House of Representatives, or an official in Washington, testified as
to the date and the number of his bill, and we have none of the bills.
The representative service that our company subscribes to has for
the past three or four years provided us with those bills. We do
not keep them, but we might be able to dig up the records to show
them, but for the last three or four years we have been notified that
those bills have been gotten out and I do not believe printed. I do
not know that they were printed.
Mr. LucE. The first bill to which you refer was brought in just
before I entered Congress 13 years a~o. There may have been bills
in the Senate; we do not often come m contact with them.
Mr. SMITH. I see how that could happen.
Mr. LuCE. And, I have never noticed anything in the Senate, but
I feel sure that in the House there never has been any subcommittee
entrusted with a bill of this kind in the 12 years that I have been
here.
Mr. SMITH. Would it be possible, Mr. Representative, that they
might not have been referred to a committee?

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

286

CREATION OF A SYSTE1"I OF FEDERAL HOME LOAN BANKS

Mr. LuCE. Your statement hereMr. SMITH (interposing). I do not say it has been brought before
a subcommittee.
Mr. LuCE. It is unimportant anyhow.
Mr. REILLY. You do not think that is an important factor in this
bill, because we never had an emergency like this -before.
Mr. SMITH. No. I have finished my testimony. I will just answer
questions.
Mr. LuCE. On page 4, in t~e paragraph numbered 1, you say:
Each local association could discount at 5 per cent their mortgages that bear
6 per cent to 13 per cent interest, thus assuring a handsome profit.

What is the basis· of your belief that any building and loan association will lend money at 13 per cent interest?
Mr. SMITH. In a book called" Elements of the Modern Building
and Loan Associations," land economics series, edited by Richard
'f. Ely, Ph. D., LL. D., director of the Institute for Research in
Land Economics and Public Utilities, approved for standard real
estate course by American Savings Building and Loan Institute,
United Y. M. C. A. Schools, National Association of Real Estate
Boards.
Authors, Howard F. Clark, Ph. D. (Wisconsin), associate professor of engineering economics, University of Wisconsin, and Frank
A. Chase, educational director American Savings Building and Loan
Institute. A textbook prepared as. a part of the educational program of the United States League of Building and Loan Associations, this book being prepared under the directi9n of the textbook
committee of the league.
·
There is a little inaccuracy in the text of mine, that I feel just a
trifle guilty about, but was unable to correct at the last minute.
There are four States in the Union where the actual rate of interest
the building and loan associations charge to the borrower is slightly
under 6 per cent. I believe Delaware is the lowest, with something
around 5.15, and then there is one State at 5.47, and one at 5.79, and
one at 5.84, and of the other 44 States, they go all the way up to
about 14½ per cent.
Now, of course they have what is ostensibly a rate called a model
rate, I think. I am a little uncertain about that. Then, their book
goes on and explains how to charge premiums and bonuses that
bring the actual rate up above that.
Mr. LucE. Building and loan associations charge premiums and
bonuses~
'
Mr. SMITH. The Department of Commerce, I believe in 1931, prepared. a study of that which showed that the-I am on pretty thin
ice here, trying to rely on my memory-I think it showed a bonus
or a premium about, around 2.74 per cent per annum, but I would
rather not have that in the record inasmuch as it takes me without
any substantiation here. It is part of the Department of Commerce
prepared materials for 1931.
Mr. LucE. Well, in my State I never knew of more than a 6 per
cent charge, and I have been a member of these organizations for
40 years and helped start one. In all the Senate hearings nobody
every brought out any such figures, and your statement as to anything like 13 per cent is absolutely novel.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTE-;\I OF FEDERAL HOME LOAN BANKS

287

Mr. SMITH. Well, there is the authority :for it.
Mr. LucE. I think that those representing the building and loan
associations can perhaps explain it later. I am very positive that
as a rule the customary rate in the eastern part of the conntry, at
any rate, is 6 per cent. Howwrnr, we can verify that later.
In the third paragraph there it says that this measure will allow
building and loan associations to accept deposits and further invade
the field of banking. The testimony in the Senate ,ms to the effect
that Ohio was the only State of the Union where the taking of
deposits for banking purposes is permitted. vVould you be willing
to restrict your statement to Ohio?
Mr. SMITH. To the limit and extent of my kno,vledge, Ohio is the
only State that I personally know about where deposits as such can
be made, but what I had in mind there, Mr. Representative, was that
of the 12,000,000 members of building and loan associations, in round
figures, 10,000,000 are pur~ly stockholders and not mortgage loan
borrowers, and they haYe been giving the American public the
impression that that stock could be redeemed at any time, and in so
doing they in effect make all their institutions deposit institutions.
Mr. LucE. Well, yon ought to, I imagine, qualify that by referring
to time deposits.
Mr. SarrTn. vVelL I qualified it, Mr. Representative, in my deliver.v
of it. You will find it in the record. I said to accept deposits in
one form or another, when I gave it before the committee.
Mr. LucE. I did not notice that, but the fact remains there is no
testimony before the Senate or House committee as yet to the effect
that the deposit system prernils in any of the States other than
Ohio--the system of banking deposits as usually understood by that
term.
Mr. S:\IITH. It may: but I do not know of anv other State.
Mr. L1:cE. ·we ha,•e not been informed that 1t exists in allY otlwr
State. I am ;.:11re the Senate witness said it did not exist 'in any
other State.
In the last lines on that page, you say:
In view of the fact that nothing in this measure forces them to pass on to
their mortgage loan borrowers the benefits of rediscounting, why, then, should
they not work ardently for thiR bill'/ Is there anything in the I!'edPrnl
reserve system that forces tlw banks to for<'e on to their depositors any of the
benefits of the Federal reserve system?

Mr. SMITH. Well, I am not well enough acquainted with the Federal reserve svstem to know.
Mr. LucE. And the danger that you intimate here is something
of a bugaboo, is it not?
Mr. s~nTH. No, Mr. Representative; because this refers not to
the Federal home loan banks, but to the institutions that finally get
the money from the Federal home loan banks.
Mr. LicE. Yes; but those institutions, the building and loan institutions, or the mutual institutions, they are existing for the benefit
of their membership, mutual institutions for the mo~t part-that is,
nonprofit-making corporations.
Mr. S1,nTH. Yes.
0

113235--32--19


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

288

CREATION· OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. LucE. That exist for the benefit of their membership. Is it
quite £air to suggest that those who conduct these mutual institutions
will not use their resources for the benefit of their membership?
Mr. SMITH. Mr. Representative, if I can answer that directly in
this way, the advances of the Federal home loan banks would be for
the mortgage business, would they not 'l That is why you create
them. Five out of every six members of the building and loan associations are stockholders, and only one out of six is a mortgage
borrower. My sentence says:
In view of the fact that nothing in this measure forces them to pass on to
their mortgage loan borrowers the benefits of rediscount, why, then, should
they not work ardently for this bill'/

Mr. LucE. Well, your suggestion is simply inconceivable to anybody who has any connection with the actual working of these institutions. That is all I can say.
Mr. SMITH. I do not say they would do these things.
Mr. LucE. But you are bringing up liugaboos here, possibilities
that common-sense precludes.
Mr. CAMPBELL. The borrower would be bound to receive his pro
rata benefit or profit.
Mr. LucE. On the next page, the paragraph reads, omitting the
nonessential part of the first sentence :
The life insurance companies lend over the length and breadth of the land,
m a vast number of communities, distributing their investment funds to the
greatest benefit of all. They lend freely and extensively to home owners in
numerous sections of each dry, to the extent that thPy have investment fnndf'.
available.

What is the significance of " numerous sections "?
Mr. SMITH. We have certain sections in every city in which we
do not lend.
Mr. LucE. Is that true of the institutions that the people themselves form for lending purposes?
Mr. SMITH. I do not know just which you mean.
Mr. LucE. I mean to ask if the. building and loan associations
have sections of communities or classes of people to which they will
not lendi
Mr. SMITH. I do not know.
Mr. LucE. Well, your observation, I mean. Is it your observation that the building and loan associations are universal in their
helpfulness, within reason, of course?
Mr. SMITH. In my talks with the building and loan associations~
there is a great deal of caste and more or less pride among them.
Very often an officer in association coming in to talk to me will
say, " Of course, now we are not in the position these others are in
because we lend out here in Beverly Hills or Highland Park," and
they will point to it with great pride, and they will limit their loans
right to Highland Park, and the chances are they will be in a better
condition than some associations that may lend down in the swamps.
· Mr. LucE. I never heard of such a thing before in connection
with building and loan associations, and I have been somewhat
close to their conduct in my own neighborhood. I doubt if that
prevails throughout the rest of the country. It may, however.
Now let me ask you some more questions bearing on this one point
because an allegation has been made that the life insurance compa
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

289

nies pick an<l choose as to thei11 loans. Do you lend on any old
housesl
Mr. SMITH. Yes, sir.
Mr. LucE. How old?
Mr. SMITH. Well, we have loaned on houses as ol<l as 100 years.
Mr. LucE. ·Yes; but if a new loan was requested on such a house,
would you lend it?
Mr. SMITH. Well, I am trying to think of loans that have gone
over my desk in the last six months.
Mr. LucE. Let us not confine ourselves to instances. Is it your
practice to use age as a £actor in loaning?
Mr. SMITH. Yes; when it is coupled with the effect on the neighborhood of a lot of old houses. But an old house per se might very
readily get a loan to-day in our office. It might be 60 years old,
if it is in a good district where people would want to move to.
Mr. LucE. The testimony in the Senate was to the effect that this,
however, was not customary with the big life insurance companies,
to lend on old houses? Would you contest that?
Mr. SMITH. I would say it was customary for the life insurance
companies• to lend on some old houses in limited quantities. Mr.
Madden's testimony yesterday showed that, I believe, that of $23,000,000 .of residence loans, about $8,000,000 were on old houses.
Mr. LucE. Old at the time the loan was made?
Mr. SJ\,IITH. Yes. Those were loans in the last few years.
Mr. LucE. Then, we will set that down as " Evidence on that subject contradictory." We have it, then, that the large life-insurance
companies pick and choose to the extent of sections and in some
degree of the age of houses. Are there other particulars in which
they discriminate against part of the community?
Mr. S:i\HTH. Mr. Representative, every loan is taken up in great
detail and business judgment is used in every available aspect of the
property and the borrower and the location and transportation.
Mr. LucE. lVell, so far as it can be commended, that is at the
recourse of every lending institution?
Mr. SMITH. Yes.
Mr. LucE. Is it not true that in order to meet the needs 0£ all the
people the building and loan associations per£9rm a useful £unction
in lending £or certain classes, areas, sites, and ages, that you will
not take?
·
Mr. SMITH. As I said in the beginning, I think the building and
loan associations are very worthy institutions.
Mr. LucE. In the next paragraph you say that the total gross rate
to the home owner is seldom, if ever, 6½ per cent, and usually runs
6 per cent. That is the gross rate :for insurance-company money
and in it r s1-1:ppose you include commissions, bonuses, and all other
expenses?
Mr. SMITH. Yes.
Mr. LucE. That is in direct contradiction to the testimony of numerous witnesses in the Senate committee. How do you reconcile it?
Mr. SMITH. Those witnesses were endeavoring to build up a case
for other types of institutions.
Mr. LucE. Do you intimate th!),t they did not tell the truth?


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

290

CREATION OF A S YSTE::\'[ OF FEDERAL HOME LOAN BANI{S

Mr. S:;\nTir. No. indeed. I indicate that all intE•rest rates are a
matter of a n•ry careful computation. It takes actuari(•s to do it,
and it is not pos;;ible for each witness to know actuarial computations
and to haYe n_rnde a study over the country of the practices of insurance cmnpan1es.
Mr. Lum. But, yon are speaking here of the practiee?
:Mr. SMITH. Yes.
1fr·. Lr;cE. In ,d1ich yon say that the total gross rate to the home
O'wner i;.: sel<lom, if eYel\ onr 6½ per cent. I point out to you that
numerous reputable witnesses have testified directly to the contrary.
}\fr. S:mnr. That is their privilege. It is m~r opinion against
them,.
Mi·. LrTE. Then, somebodv is inaccurate?
'
3fr. SMITH. Yes.
)fr. LucE. On the next page, down toward the bottom of the page,
in the next to the last paragraph, you said:
I think we will all agree that there is no way for any banking system to
a:-sist n mnn who is not able to meet his interest payments ancl taxes.

1Ve have been informed that it is tlrn practice. at least of some
building an<l loan institutions. when a man can not meet his interest
awl taxes, to wipe out the mortgage and replace it with a new one
by which the payment of interest is very materially reduced. That
has not come to your attention?
Mr. SMITH. No, sir.
1\fr. LucE. On the next page, you say that in your opinion "this
bill is institutional in character and the possibility of its helping
the home owner in,lirectly is rather slight. Few loans are being
made to-day."
I have checked up numerous statements in the Senate hearings
that I do not want to take the time to go over, but, that are directly
to the contrarv. 1Yitnesses have come before us and said that new
loans are not· being made in their localities. May it not be that
your information is spotty in its nature~
Mr. Sl\IITH. Of course, that is a possibility, Mr. Representative,
but in thinking this over and preparing this, I have talked with a
great number of the large life-insurance companies, nearly all of
which lend in a great number of communities. Now, the composite
nicture in all of the communities that all of the life-insurance companies lend in, would pretty nearly cover every community in the
country, and I find that they are making loans.
Mr. LucE. But, the witnesses tell us they are not.
Mr. Sl\nTH. First, those are witnesses who may not have been able
to get a loan where the loan itself was not acceptable on the merits
of the loan.
Mr. LucE. Your statement here is not confined to what the insurance companies are doing, but it is a general statement relating to
the subject that new loans are being made.
Mr. SMITH. In our city the trust departments are making loans.
I have seen loans go through the savings banks. We have made
loans. We are making them all over the country. They are coming
over my desk and being passed in the normal flow of business.
Mr. LucE. One witness said that Hartford and Providence are the
only places in the United States to which that applies. Now, assum
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN 13ANKS

291

ing that the previous witnesses have been prejudiced in their statements in these matters, will you accept me as a witness, possibly
prejudiced? I will inform you that I received a letter within a short
time :from a constituent in the wealthiest town in the United States,
Brookline, telling me of a neighbor who had just moved into a new
house costing him $10,500, and desired to make a loan of $7,000; that
he went to 12 savings banks and 11 of them :refused under any
circumstances to make any loans. I can buttress that with numerous
statements to like effect :from my letter files.
We are getting, from members of the House with whom we discussed these things, from every quarter of the countr3r, the same
reports, that new loans are in many places not being made. Among
them are members of this committee from the South, one of them
:from Alabama, for instance, who, will tell you that in a group of
counties every bank has failed, and there is not a dollar to be had.
·we get so many of these stories that I feel you are misinformed in
this matter of new loans.
Mr. SMITH. Mr. Representative, my statement pertains to the fact,
as I say there, new loans are being nrnlle. New loans are being;
made. '\Ve a:re making them.
Mr. LucE. Let us not quibble over them. You meant to tell the
com~ittee that to-day there is no shortage of money?
Mr. SMITH. I do not say that. I say new loans are being made,
Mr. Representative, and the insurance companies have taken $80,000,000 of loans that they have purchas~cl in blocks from building
and loan associations and banks in the last six months in addition
to keeping their regular flow of mortgages flowing.
Mr. LucE. "\,Vere those new loans?
Mr. Sl\IITII. Those were loans the building and loan associations
and the banks had. Those institutions were frozen. They had to
have money. The president called up one of the big life-insurance
officials and he got in touch with one of the life-insurance officials,
and a meeting was held and it was decided the life-insurance companies had to pinch-hit in the emergency, and they did that in addition to their regular lending.
Mr. LucE. That statement has nothing to do with your intention to
intimate to the committee that there is no shortage of money for
loans. I won't say you intended it. I will say that you permitted
the reader or the listener to draw that inference :from what vou said,
while we know the contrary is the fact.
·
Let us go on to the next point. You object to this because it puts
the Government in business. 1'Tould vou have us abolish the Federal
reserve system ?
•
Mr. SMITH. No; but two wrongs do not make a right.
Mr. LucE. Do you think the Federal reserve svstem is a useful
institution 1
·
··
Mr. SMITH. Very.
Mr. LucE. Then it is not a wrong, is it~
Mr. SMITH. Well, the p.rinciple of it, I might disagree with the
principle of it and still say it has done and is doing a world of good.
I might say that the same thing could have been accomplished by
another move.
Mr. LuCE. Would you say it 1


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

292

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. SMITH. That would be a personal opinion and would not be
relevant to this discussion. It would not be on the home loan bank
system.
Mr. LucE. Is it not fair to point out to you that, as in the case of
the Federal Farrµ Loan Board, the intention here is not to keep the
Government in business, but by lending institutions to enable the
people to help themselves?
Mr. SMITH. Of course, Congress has gone back in the farm loan
business by advancing $125,000,000.
Mr. REILLY. We are much obliged to you, Mr. Smith.
Mr. LucE. I have a number of other onestions to ask, Mr. Chairman.
Mr. REILLY. I think we will adjour{i at this time,· and come back
at 2.30.

STATEMENT OF THOMAS F. CLARK
Mr. CLARK. I haYe been asked by Mr. Stires, ~fr. Chairman and
gentlemen, the witness who prece(led Mr. Smith, and who had to
make a train-Mr. Stire,.; made a statement to the effect that ,vhen a
person applied to the Prudential Insurance Co. o-f America at Newark, N. J., for a loan in 1.Yestchester, that he was referred to a correspondent in 1.Vestchester County, to whom he ,vas obliged to pay
to get that loan a bonus of 5 per eent £or its expense. I asked Mr.
Stires, after he saitl that, what the circumstances were that gave
rise to such an 01Jinio11. He said, "I wanted. to build: I wanted
to get constructi~n money." He ·sai(l, "I realize 110w I made a
mistake. that I should not have inclnde<l the cost of construction on
top of the cost of the ;-ervice charge that the correspondent makes."
He said "I know that there is a limit on that charge and it is not
5 per cent or 6 per ce!1t, and that 5 per cent or 6 per ce1,t coYers all
the expenses in C'OllllPC'tion with the loan." He said, "I will make
that correction." He came to me jnst before he left aml asked me
if I ,vould make it for him.
Mr. REILLY. He will get a copy of his testimony.
Mr. CLARIL I ,V<ml<l like this in the re.cord, so that he ,vill know
·
that I complied with his request.
.!\fr. REILLY. All witnesses can get a copy of their testimony, and
let it state what they wanted to state.
Mr. LucE. Are you going to take the stand as a witness?
Mr. CLARK. I expect to dnring the week after the opponents have
completed their testimony.
Mr. CAMPHF.LL. Did yon appear before the Senate?
Mr. Cumc I (f d.
Mr. LucE. I wish to ask him some questions bearing on his Senate
testimony.
l\fr. RosF.XBAL\!. )fr. Chairman. in manv sections of the country
where institutions lwre chsPC1 their doors and there are no banking
facilities, and practically all of the building and loan associations
are out of funds bPsides, how will this bank meet the demand for
those loans that are faci11g foreclosure? In other words, an institution has to be a member institution in order to have the privilege of
relliscount.
Mr. REILLY. ,,rill you be here after lunch?


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

293

Mr.'RosENBAUM. Yes, I will.
Mr. REILLY. Then i:f you will be here at 2.30 o'clock, we will hear
what you have to say :further.
We will now recess until 2.30 o'clock.
(Whereupon, at 12.30 o'clock, a recess was taken, the committee
to reconvene at 2.30 o'clock to-day, March 23, 1932.)
AFTER RECESS

The subcommittee met at 2.30 o'clock p. m., pursuant to the taking
o:f recess.
FURTHER STATEMENT OF R. GRAEME SMITH
Mr. LucE. Mr. Smith, do the practices of the insurance companies
vary as to these restrictions placed upon the kinds of houses they
will make mortgages on j
Mr. SMI'.-['H. Yes, sir. It is a matter o:f company policy with each
company.
Mr. LucE. I have here the testimony o:f Mr. Robinson, o:f Ohio,
a man of high standing in the banking world, who intimates that
they-this is his own phraseology: " The insurance companies won't
make a loan in some parts of that suburb. Why 1 Because the
. houses happen to be 15 years o:f age. I don't blame the insurance
companies. It is a sound policy." That might not be true of other
companies in that same neighborhood 1
Mr. SMITH. Yes, sir.
Mr. LucE. Now, Justin Matthews, president o:f the Metropolitan
Trust Co., of Little Rock, Ark., said this: " The insurance companies
o:f course are making loans there but they are only loaning on certain types o:f new houses, and there is a 9;eat need felt for some
agency whereby these loans can be handled. '
Again, it may be a matter o:f policy as to what types of new houses 'l
Mr. SMITH. Yes, sir; perhaps in Little Rock, Ark., there might
be only three or four of the companies lending. It might be that
in years to come there will be to or 15 companies lending there.
After all, it is like the operation of any business. You can only conduct your affairs in a certain number of places, and cities vary
according to the companies that happen to be lending there.
Mr. LuCE. Here is the statement of Edward A. MacDougal, president of the Knickerbocker Corporation, Jackson Heights, New York
City. He says: "You can not get anything from the life insurance
companies or banks of any kind, no. All they can do is to take
care of refinancing people who are in distress. This is the most
serious situation that has ever confronted the industry that had to
do with building." That is a pretty strong statement from New
York City.
Mr. SMITH. Yes ; but it does not necessarily have to be founded
on facts. Mr. MacDougal may not have been acquainted with the
operations of all the companies in Greater New York. It so happens that the New York companies, from my knowledge, are still
making loans in Greater New York. Mr. MacDougal might not
have been able to get money on account of some characteristics of the
particular loans that he wanted to get. ,He may not be able to get

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

294

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

loans n~w that he did get formerly, on account of some change in
the transportation or in the neighborhood he is building in, or other
thin.gs. After all, those companies, as all companies, have to distribute their money equitably. They may have let Mr. MacDougal
have a great deal of money in the past. Now he comes again and
they say," Now, Mr. MacDougal, it is only fair that we should give
our money to some of these other people."
Mr. LucE. But, these statements like his have been made by numerous witness in the Senate hearings, broad, sweeping statements, saying that no mortgage money is to be had, and I think I would be
justified in saying tliat about my own neighborhood, Boston, and its
vicinity. At leastJ the testimony I get from such people as have
informed me in the matter, and there have been quite a number, are
all to the effect that no money is now being loaned on mortgage in
that region.
Mr. Sl\nTn. The ,vay you could find it out would be to look at the
schedules of the companies that they have to publish every year.
They give in detail in every State just what has been lent.
Mr. LucE. But, this thing has come so quickly.
Here is a statement by James McCarthy, president of the Home
Savings & Loan Co., of Youngstown, Ohio. It is a quarter of a page
and so I will not read it in full. It is on page 488 of the Senate
hearings. Mr. McCarthy, who seems to be a man of substance and
enterprise, aYerrecl that he tried to refinance a group of mortgages·
amounting to half a million dollars or a little over with the Penn
Mutual, and the agent said he would take it up with his company
and consider the loan, and then he nenr heard anything more
from it.
Mr. Sl\nTH. The agent who that woulcl come through is, I believe,
going to testify before your committee.
Mr. LucE. Good.
Mr. SMITH. Probablv to-morrow.
Mr. LrcE. I suppose we will be sitting to-morrow. Here is one
of the most interesting statements made by a gentleman from your
own State, the statement of Arthur A. Crandall, vice president of
the Connecticut State Association of Real Estate Boards, Stamford,
Conn., and, by the way, the number of letters, telegrams, and statements from the real estate people of Stamford, Conn., would indicate
that ye, u haYe not been fully informed as to the extent o:f the support
of organizations gfren to this bill. I:f I understood you correctly,
you said it was confined to the building and loan associations.
Mr. SMITH. I said o:f the institutions that would be members of
the home loan bank system. I went on in another paragraph and
mentioned the real estate boards, although I said they would not be
members o:f the home loan bank system, and therefore would not
enter into a direct consideration on the point in question.
Mr. Lucl,. One of Mr. Crandall's statements seems to confirm my
own observation. "I am struck, Senator, with the fact that these
strong institutions who do not need help comprise practically the
only opposition to the bill."
Have you any comment to make upon that?
Mr.- SMITH. Yes, I would like to comment on that. I think all
of you gentlemen will agree that my attitude in this matter has been


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

295

calm and the last thing in the world I want to do is to be destructive. It is my personal opinion that there is strong opposition to
this bill. I think if you will call for the resolution 0£ the Mutual
Savings Bank Association, 0£ the American Bankers Association, and
i£ you will examine the procedure 0£ the savings banks division, and
i£ you will get in touch with each 0£ the five out 0£ the six groups
0£ institutions that would be members 0£ this organization, you will
find that there is pretty general opposition. However, I would
rather not stand on that. I would rather say, as I said this morning,
does it not occur to you that it is rather strange that out 0£ the six
types 0£ institutions which would be members 0£ this home loan bank
system, which would rise or £all on its merits, only one out 0£ the
six have come down here to urge this? There has been no resolution
from the other associations and no accredited representatives 0£ the
other groups. I would rather put it in that negative way than to
say," Where is the support for the bilH"
Mr. LucE. I£ you will come up to my office, I will show you several hundred letters that will indicate your opinions might be
changed by observing the signatures and the nature 0£ the occupations of the people. Information is not only brought to this committee through the hearings but through the use 0£ the mails. That
condition and many other particulars has made this the busiest
session 0£ Congress in many years.
I think it might be £air to point out to you that the purposes 0£
the bill, at any rate in the replies to this questionnaire, were approved by 110 mutual savings banks with 70 against, by 1,415
national banks with 506 against, by 2,633 State banks with 764
against, by 79 stock savings banks with 35 against, and by 217 loan
and trust companies with 51 against. The figures in £ull appear in
the £ourth volume 0£ the Senate hearings which has just come £rom
the press.
Mr. SMITH. In regard to the answers to the questionnaire, that
questionnaire was sent out without any copy 0£ the bill so that no
one knew what they were voting on when they got it. It was accompanied by an appeal from the President which had been issued
weeks prior to the drafting 0£ any measure, just as the President's
appeal. Everybody that got it thought it was an administration
matter and did not want to come out against it because at that time,
in the crisis, everybody £elt they should get behind the President.
In the third place, the Reconstruction Finance Act at that time had
not been passed and had not even been amended to include a rediscounting privilege £or banks and for insurance companies and building and loan associations.
Mr. REILLY. There is no question, Mr. Smith, that the Reconstruction Finance Corporation can not meet the wants of the building and loan associations. They would not have the money. The
statement has been made by men who seem to lmow that it will take
a billion dollars at least to 1iqui£y these mortgages institutions so
that they can function. It is beyond any possible power 0£ the Reconstruction Finance Corporation to -furnish such £nnds. You
know that.
Mr. SMITH. I know it would not be able to £urnish a billion
dollars.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

296

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. REILLY. That is what the men who come in here say, it will
take a billion dollars of funds to liquify these mortgage institutions
so that they can function.
Mr. SMITH. Mr. Chairman, I take it that the intent of the Reconstruction Finance Corporation and the intent of this bill and these
hearings, is to help the mortgage borrower.
·
Mr. REILLY. That was the intent, but they never carried it out and
do not intend to carry it out.
Mr. SMITH. With these building and loan associations, five out of
six of the people involved are depositors. Now, if the building and
loan associations get help and turn that help back to the stockholders, to the five out of six, and do not turn it over to the one out
of six of mortgage borrowers, there will not be much money anywhere to take care of it. But, the Reconstruction Finance Corporation will have enough money and can function far better in an emergency in taking care of this one-sixth. That is your worthy homeowning mortgage borrower. It is not going to take so much money.
These building and loan associations are in far better shape than
we think.
Mr. REILLY. I hope so.
Mr; SMITH. And, the psychological effect of being able to get
money forestalls the actual use of that money. vVe see it everywhere.
Mr. REILLY. Do you not think there are a great many people withdrawing from loan associations because of necessity?
Mr. SMITH. Yes, I think there are a great many in the absolute,
but I think there are a lot more not withdrawing because they feel
they can not get their money if they withdraw. Those people
if they read the certificates on their stock, they know they can not
get that money. If they were led to suppose they were depositors
in that building and loan association, they have a right to be furious
because they can not get their money, but it is not the purpose of the
home loan bank to carry back to depositors or stockholders their
money. The purpose of the home loan bank bill I take it is for the
home owning mortgage borrower, the one man out of six in the building and loan associations, not the other five out of six, who are simply
stockholders.
Mr. REILLY. Do you not think it would help a borrower in a
building and loan association to have the financial situation of his
company such that they could get money on their frozen assets to go
on and function without putting him out of his home?
Mr. S1\nTH. He can get that help to-day from the Reconstruction
Finance Corporation.
Mr. REILLY. You know that is absolutely impossible.
Mr. SMITH. It is being done.
Mr. REILLY. The testimony is they have received help to pay back
their bank loans.
Mr. SMITH. Mr. Chairman, I wonder if anyone from the Reconstruction Finance Corporation has testified to that effect?
Mr. REILLY. We will have somebody from the Reconstruction
Finance Corporation before this committee before we close our hearings, but that is what men tell us who have looked into the matter.
Mr. SMITH. Well, I do not know, of course, who they are or to what
extent they have looked into the matter. I presume it would be
rather difficult for anybody to get accurate word from the Recon
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

297

struction Finance Corpora,tion unless they appeared before you
gentlemen. It seems to me anyone making statements about the
Reconstruction Finance Corporation would put ·himself in a rather
embarrassing position.
Mr. REILLY. I do not think so.
Mr. SMITH. I think the April 1 statement 0£ the Reconstruction
Finance Corporation will show just how much they have lent to
building and loan associations.
·
Mr. REILLY. Surely.
Mr. SMITH. It is true that in 24 out of 48 States, I believe I am
right, they have found that the laws are such that the Reconstruction
.Finance Corporation can not discount mortgages, or, to put it another way, that the building and loan associations can not discount
them. In 13 States they have found that the building and loan associations ean not borrow, and I believe I am right in saying that in
11 other States the building and loan associations do not have the
right to pledge, which, inferentially, mean they have no right to
borrow.
Mr. LucE. How is the Reconstruction Finance Corporation going
to help?
Mr. SMITH. In the other 24 States. The same thing will hold true
of your Federal home loan bank bill, though.
Mr. LucE. Yes; it will.
Mr. SMITH. So you see it works either way.
Mr. LucE. There are 12,000,000 members of the building and loan
associations who are mostly, you will admit, persons in moderate circumstances. About one man in six in the country is unemployed, so
that probably about 2,000,000 stockholders in building and loan associations are in greater or less need of cash. 1'Vould it be wholly
covering the ground if you said the only _purpose of this bill was to
help that part of the membership that 1s borrowing and not that
part of the membership consisting of members who may have need
to withdraw their money?
Mr. Sl\IITH. I can see your point, Mr. Representative, exactly. I
say to you that from the standpoint of broad public policy, no; but
we are sitting here on a piece of real estate legislation, mortgage
legislation, that has to do with the mortgage aspects and the plight
of 2,000,000 stockholders of the building and loan associations, it
seems to me, comes under a consideration of unemployment legislation or relief through the dole, or relief through public works, or
something like that. It should not come under mortgage legislation.
e are sitting here for real estate mortgages, homes, and properties.
Mr. LuCE. Mr. Smith, to use the words of the old adage, "Any stiok
to beat a dog." We are not going to theorize when men are starving
or need money to clothe their children: we are going to help them,
if we can, in any reasonable way.
Mr. REILLY. Is that all, Mr. Smith?
Mr. Sl\nTH. Yes; unless there are some questions.
Mr. REILLY. Thank you very much, Mr. Smith.
Mr. SMITH. Yes, sir; thank you very much.
Mr. EDWIN J. RosENBAUM (again)-Mr. REILLY. Do yon want to make some statement, Mr. Rosenbaum i
Mr. RosEN.BAUM. If you please, )fr. Chairman.

,v


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

298

CREA'.1.'ION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. REILLY. Proceed.
Mr. RosENBAUM. In parts of the country where the banks have
closed their doors, where there are practically no banks functioning,
or where 50 per cent of the banks are in receivership, this particular
bill does not £unction at all and does not meet the emergency that
exists there, and I can cite specifically a city like Philadelphia. I
believe half of the banks are closed in Philadelphia. The same conditions is in a measure true of Chicago. I know that down in Monmouth County, on the Jersey coast, practically every bank closed
their doors there, and I think only one is left open, and those mortgages are coming due, or will come due, and the receiver there-this
bill will not function in a community of that character.
Mr. REILLY. You mean building and loan banks have closed?
Mr. RosENBAUM. Banks have closed. It is much more vital than
the closing of a building and loan association.
Mr. REILLY. That does not affect this bill.
Mr. RosENBAUM. Of course, this bill can not function there.
Mr. REILLY. There may be cases like that, undoubtedly.
Mr. RosENBAU:!\>L ,Vhei1 3,600 banks have closed in the past two
years, it is a very vital consideration. It is not something, understand, where you can say just building and loans. There have been
building and loan associations and banks. There were 3,600 banks
alone, and this bill does not meet that situation. I believe the Reconstruction Finance Corporation does in a measure meet it, but
their resources are certainly insufficient.
Mr. REILLY. I do not think there is anything you could put in
this bill to help that situation. This bill could not be changed to help
that situation. They have other bills, I nnderstanrl, under consideration to help closed banks.
Mr. RosENBATI3I. But, helping a closed bank, understand, and getting a continuing mortgage for a man is an entirely different proposition, where this man needs financing over a period o-f years. The
:fact that they help the closed bank, that may help them up to 50 per
cent of the resources they have on hand, but that does not help the
owner of the home except to the 50 per cent perhaps of his mortgage.
There is nobody who will carry the other half because they are not
in existence to carry it. There is a real vital shortage of mortgage
capital stock.
Mr. REILLY. Is that all you have to offer?
Mr. RosENBAUM. Yes, sir.
Mr. RE1LLY. Thank you.

STATEMENT OF THOMAS E. MONKS, VICE PRESIDENT OF THE
GUARDIAN TRUST CO. OF CLEVELAND, OHIO
Mr. REILLY. Now, Mr. Monk, you testified before the Senate
committee?
Mr. MONKS. Yes, sir.
Mr. REILLY. Now, I think the committee will be pleased if you will
just confine yourself to new matter in answering. Give your address
and who you are representing.
Mr. MoNKS. Thomas E. Monks, Cleveland, Ohio, vice president
of the Guardian Trust Co., here representing the Ohio Bankers'
Association.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

299

There are just a :few statements I want to make, and then I want.
to submit a bill here, the original o:f 35, S. 35, which was introduced
by Senator 1Vatson on December 9, the same day that Congressman
Luce presented H. R. 5090. There were never any hearings held on
those bills. Under date o:f January 7, S. 2959 came out under Senator
Watson and H. R. 7620 by Mr. Luce appeared January 13, 1932.
These hearings were started before the Senate committee on January
14 and the gentlemen that testified before the Senate committee I
think were all o:f the opinion that they were testifying on S. 35,
H. R. 5090.
Mr. LvcE. Right there, Mr. Monks, I think you must be in error.
Mr. MONKS. ·wen, that is the first day it came out, on January 14,
the first hearings were held January 14.
·
Mr. Lum. I am not contesting that.
Mr. MoNKS. January 14, 16, 19, 20, and 21.
Mr. LucE. An explanation o:f the new bill, -the :fact that it was a
new bill, and a different bill, was the first thing that Senator Watson
laid before the committee. You may find it on page 11 of volume 1.
If anybody did not know that this was a different bill it was a misfortune, I am sure, which I regret, but it was not through any :failure
on the part o:f Senator )Vatson to let the people know that this was a
new bill.
Mr. MONKS. Here is what I am saying to the members o:f this committee. Gentlemen, on February 15 or 16, I appeared before the subcommittee on Banking and Currency o:f the Senate on S.2959, and
presented in.any amendments and corrections to the bill which were
made by the Ohio Bankers Association, which it is my pleasure to
represent at this hea'ting.
While in Washington at the hearing in February, I made it my
business to see and talk to members o:f both the Senate and the House,
to Cabinet members and to bankers, members of the American
Bankers Association, on S. 2959. It was the opinion o:f the majority
o:f those with whom I talked that this subject of Federal home loan
discount banks was much better set up and covered in Senate bill 35
by Senator Watson and House bill 5090 by Congressman Luce, which
had been introduced December 9, 1931, and more in conformity with
the President's statement as issued November 13, calling :for legislation o:f this kind to be enacted, than either S. 2959 or H. R. 7620
introduced later. In fact, we could not understand why S. 35 and
H. R. 5090 were discarded without ever a hearing upon them, when
jt is generally admitted by all that they had been drafted in accords
ance with the President's views as set forth in his November 13
statement.
Upon our return to Ohio, after the hearings before the Senate
committee on S. 2959, and in view of·the unanimous feeling on the
part of the different persons conferred with, that S. 35 and H. R.
5090 were drafted in accordance with the President's statement, -we
had our attorney take S. 35 and H. R. 5090 and amend and correct
them accordingly, so we are here asking that your honorable committee consider the original Luce bill 5090, as introduced, and that
the hearings to be conducted will be on that bill.
We submit the following amendments, corrections and additions to
the bill and our reasons for asking for t]J.e same.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

300

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. REILLY. Have you uot submitted those amendments to the
Senate?
·
Mr. l\foNH:s. No, this is on S. 35.
l\Ir. REILLY. Did you not appear and testify against the Senate
bill, the same as this bill before us?
Mr. MONKS. No, I appear on S. 2959.
Mr. REILLY. Yes; that was the last bill.
Mr. MoNKS. I am talking now about S. 35 and H. R. 5090.
Mr. REILLY. I do not think you ought to mix us up on that. l\fr.
Monks, if you have any statement to give this committee wherein
the Watson bill was better than this bill or what you would like to
put in from the Watson bill into this bill, I think that would help
the committee.
,
Mr. MoNKS. I am here in a constructive way and I am submitting
yon these amendments and then I am submitting you the original
bill S. 35 and the Luce bill, H. R. 5090, with all these amendments
typed in it.
Mr. RF,ILLY. We want these amendments applied to this bill. Now,
the Senate has heard the last bill and we would have great difficultv
in doing anything with the Watson bill or the forii1er Luc{) bili.
What we would like to have is what part of the Watson first bill
ought to be put into the "ratson second bill, or what part of Mr.
Luce's first bill should be put into his second bill to make it conform
to your ideas of what the bill ought to be. If you have some reasons
why certain things of the Watson first bill or the Luce first bill
ought to go into this bill. that will be enlightening to the committee.
Mr. MoNKS. Well. I can tell vou this. We believe that the first
bill was drawn in tl1e interests of all concerned. We do not lwlie,·e
the second bill is drawn with that intent and purpose.
Mr. REILLY. Now, why?
Mr. MoNKS. In H. R. 7620, the second bill introduced, on page 4,
start on page 3, it says:
Such of the following as are duly organized under the laws of any State or
of the United States, and are subject to inspection and regulation under the
banking laws, or under similar laws, of the State or of the United States, shall
be eligible to become a member of a Federal home loan bank :
First. Building and loan associations, cooperative banks, and homestead
associations ;
Second. Any of the following whose time deposits and financial conditions,
in the judgment of the board, warrant their making such home mortgage loans
as, in the judgment of the board, are long-term loans: Savings banks, trust
companies, and other banks ; and
Third. Insurance companies.

Then it goes on to say:
.A.n institution eligible to become a member under this section may become
only of the Federal home loan bank of the district in which is located the
institution's principal place of business, or of the bank of a district adjoining
such district.

Mr. REILLY. Your objection to this bill is that it does not let
financial institutions in without the judgment of the board in the
first instance ~
Mr. MoNKS. I will say to you as chairman of this committee that if
this bill is to be passed, it should be passed with equal rights to all
and special privileges to none.


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BA:NKS

301

This bill as drawn is purely a building loan bill. I have Mr. Luce's
letter here of January 18 to Mr. H. C. Robinson, seBior Yice president
of the Guardian Trust Co., in which he says:
1Yhere there is a question of doubt these things will be called to tile attention
of the committee and it will be given full opportunity to decide. Inasmuch as
President Uelarius and Executive Manager Bodfish of the building and loan
associations were present all the time, I think I had the help of the men rnoi<t
experienced in that field in such matters a~ the one at present umler
consideration.

Now, gentlemen, I will ask you in all fairness to the people that
the President's statement says are to come in, why were they not
all invited to the rewriting of this bill if the first bill was not the
right bill?
Mr. LucE. Mr. Chairman, that seems to call for a statement. I cm,
arnm·er it by saying that these gentlemen were not Johnny-on-thespot. I should have been delighted to have had you with me, but
nobo<lv came.
l\Ir." :Mo::rn.s. Were we a<lYised that this bill was to be rewritten?
1\-fr. LrcE. I felt under no obligations to advise anybody. I didn't
advise M:r. Celarius or Mr. Bodfish. They were here. They gave me
most useful help at very great sacrifice of strength and time. I
should be very sorry to have you suppose that these gentlemen were
not helpful in the extreme. I should also be very sorry to have you
imagine for a moment that I would not have delighted in your help
or that of anybody else who would have put in the hours and hours
and hours that we did.
Mr. MoNKS. I will say to you, Mr. Luce, that had we been notified
that this bill was to be rewritten, we would have been glad to haw
stayed here for months and to have helped you. We would have
had some of the best legal talent that this country could produce.
Mr. LucE. I think it most unfortunate. But you took no pains
to find out what was being done.
Mr. MONKS. I beg your pardon?
Mr. LucE. I deem it most unfortunate that you took no pains to
find out what was being done in the matter of this legislat-iYe.
Mr. l\foxm,;. We can not take pains to find out what is being done
when we don't know what is being done and were not advised of it.
Mr'. LucE. But you made no inquiry. Go on, Mr. Chairman.
Mr. REILLY. Proceed with your reasons why the limitations of the
first bill should apply to this bill.
Mr. MoNKS. Because we believe all the way through that the first
bill is a better-drawn bill to all concerned than the second bill.
Mr. REILLY. Why?
Mr. MONKS. I have told you.
Mr. REILLY. You have told us it is better because it took in more
people. Why should those institutions go in?
Mr. MoNKs. Because, if you are going to help the people that
you started out to help, they should be free to be helped -one the
same as the other.
Mr. REILLY. You have a loan institution?
Mr. MONKS. Yes, sir.
Mr. REILLY. What .sort of loans do you make?
Mr. MONKS. We make real-estate loans, commercial loans.
Mr. REILLY. Mortgage loans?
Mr. MONKS. Yes, sir.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

302

CRE_.\.TION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. REILLY. For how long periods 'l
Mr. MoNKS. Most of our loans are made for one year, and then
they run along and they keep up their interest and taxes and payments. That is the habit in Ohio or the custom.
We have always felt in the past that after a loan had run a year,
it then became a due loan if ,ve cared to ask for the payment of it.
We have been writing mortgages in that kind of a manner in the
34 years that our bank has been in existence-37 years; and up to
3 years ago I don't think we ever had but two foreclosures in our
institution. We have at the present time about 36 million dollars
of mortgages.
Mr. REILLY. How many institutions does the second bill cut out?
Mr. MoNKS. How many does it cut out? It only puts in building
and loan associations and cooperative banks and homestead associations.
Mr. REILLY. The rest haYe got to go in on the judgment of the
board?
Mr. MoNKS. Yes, sir. And the board would be composed of building and loan people.
Mr. REILLY. Unless they put up a million dollars, it would be composed largely of Government direction. The United States Government directors would very likely determine who would come in in the
first instance. Isn't that so, Mr. Luce?
Mr. LucE. Yes.
Mr. REILLY. Because they would not have any voice at all unless
they had a million dollars.
What else do you object to in this bill?
Mr. MoNKS. We object to the 8-year term mortgage in there, mortgages that have to run eight years. We object to the bank-Mr. REILLY. Now, wait. What more do you want to put in there of
limitations?
Mr. MoNKS. No limitations.
Mr. REILLY. Any kind of mortgage?
Mr. MoNKS. Any kind of mortgage that is fit to be rediscounted
should be taken into consideration.
Mr. REILLY. What is your third objection?
Mr. MoNKS. We object to the way the board of directors are set
up. I gave that statement. You will find that in my testimony
before the Senate.
Mr. REILLY. You might as well get that all in here, all of your
objections.
·
Mr. MONKS. I will give you that now. Page 11, line 6, 7, and 8 ~
The directors of classes A, B, and C, whether appointed or elected, shall be
from among persons connected with the home financing business.

We do not know what the definition of " home financing business ,,.
would be. And, furthermore, we believe we can make a recommendation as to the provisions. for directors that will be an improvement
over the present provision as proposed in the bill.
We therefore suggest that, starting with line 22 on page 10, section {c) , and on page 11 section ( d) and lines 1 and 2 on page 12,
all be stricken out; and that the following be substituted:
(c) Nine of such directors, three of whom shall be known as clas·s A
directors, three of whom shall be known as class B directors, and three of
whom shall be known as class C directors, shall be appointed by the board

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

303

and serve uatil the end of the calendar year 1982. Tlleir successors shall lte
elected as provided by subsection ( d) ; and each such successor first elected
out of each class shall serve for one, two, and three years, respectivelr.
Therealter all such directors shall sene for three years.
S1w. (d). The board shall divide the members of each of the Federal JF;me
loan banks into two groups, which shall be designated as A and B, wllich
groups shall represent, respectiveh·, and as fairly may bP, the large and small
members, the size of such members to be determined according to the net
value of their holdings of home mortgage loans. The board may revise the
membership of such groups from time to time. Class A and class B directors,
whether appointed or elected, shall be chosen from the officers or directors of
the member institutious. Class C directors, whether appointed or elected,
shall be chosen from among persons actually engaged in commerce, agriculture. or some business or industrial pursuit. No class of director shall be
an officer, director, or an employee of any member. Each member shall be
entitled to nominate a suitably qualified person for election as director of a
class corresponding to the group to which such· member belong and one suitably qualified person for election as a director of Class C. The directors
of each class shall be nominated and elected in accordance with such rules and
regulations as may be prescribed by the board.

No~, here are our reasons: You will note from the above that we
have eliminated class C directors from the membership, and substituted therefor members drawn from those actually engaged in
commerce, agriculture, or some other business or industrial pursuit.
This set-up follows somewhat after the Federal reserve act, which
has worked very satisfactorily. The group C directors would be
expected to furnish the outside view on general business conditions
which would, we believe, be very helpful to the management of all
the banks in determining business policies. Furthermore, these directors could be generally regarded as representing the public interests when the time came to offer the bank's debentures in the market.
We are of the opinion, Mr. Chairman, that that is a much better
provision for electing directors in this bank than the ones that are
now in the bill.
Mr. REILLY. What other objection have you to the bill i
Mr. MoNKS. As to setting up the Federal centralized bank, line
16, section (g), why do they take deposits, and why would they pay
3 per cent i This whole section from line 16--Mr. REILLY. I understand you put that in the other hearing. You
may say in a general way what you want in the bill so we will know
what you want. Then we will go and read your testimony. Do you
want us to pay on deposits?
Mr. MONKS. We don't want to have a bank there at all. There is
no need of another centralized bank.
Mr. REILLY. You don't favor these Federal banks taking deposits i
Mr. MONKS. Absolutely not.
Mr. REILLY. All right. You are opposed to that i
Mr. MONKS. vVe believe it is a bad thing for commercial business
and industrial business. We can see no reason why they should set
up another bank to take deposits in competition to all the commercial banks and savings banks and trust companies and evervbodv
doing a commercial business to-day and the national banks. •'
•
Mr. REILLY. Do you believe that if there are Government deposits,
the banks should pay interest i
Mr. MoNKS. On the Government deposit i I certainly do. They
ought to get a dividend just the same as the stockholders get.
113235--32--20

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

304

CREATION OF A SYSTEM OF FEDERAL HOl\'CE LOAN BANKS

Mr. REILLY. How is that 1
Mr. MONKS. I think the Government ought to be paid a dividend
just as well as the stockholders in the bank.
Mr. REILLY. Is that all the amendments that you have 1
Mr. MONKS. Yes, sir.
.
Mr. REILLY. Assume that all those amendments were put into this
bill, would you be satisfied with the bill then 1
Mr. MoNKS. I think we would be satisfied with the bill.
Mr. REILLY. Do you think there is a necessity for the bill 1
Mr. MoNKS. I certainly do.
Mr. REILLY. Do you think it would do some good if it worked
according to the way that you would amend it 1
Mr. MoNKS. I certainly think it would.
Let me say this, too: l just want to give you these figures here.
I have given the figures in the State of Ohio for 463 country State
banks and 50 city banks and 41 unincorporated banks, a total of 554
banks. That does not include any national bank.
Out of their total depesits, 63 per cent of the amount that is in
savings accounts in those 554 banks are now in real-estate loans.
Out of the total deposits in those 554 banks, commercial deposits and
everything, 31.8 per cent of all the deposits are in real estate loans.
If you are going to help business, you haYe got to help your banks
that have been catrying these real estate loans; and you can not set
this bank to function only for building and loan associations.
At the present time, building and loan associations in Ohio-we
can give you a few figures about them. There are 791 building and
Joan associations in the State of Ohio, with assets of $1,248,000,000.
Forty-eight per cent of them at the present time, with 19.8 per cent
of the total assets, are functioning-making payments on their deposits; 52 per cent of them, with 80.2 per cent of the assets, are not
making any payments;
The amount of deposits and accrued interest that they have is
$508,000,000. The amount of paid-in capital stock is $132,000,000.
The amount of running stock in dividends is $502,000,000. The rePerw fund and untliYided profits is $59,000,000. Their bills payable
are $25,000,000. Their real estate loans are $1,100,000,000. The
average rate of interest on deposits is 4.4 per cent. The average rate
paid upon stock is 5.75. The average rate of interest on loans is
6.65.

The amount of taxes that they paid was as follows: Their personal
property tax was $17,300. Their taxes on all real estate was $692,000.
Their income taxes were $89,000. Their special assessments were
$7,000. Their other taxes $11,000. That is a total of 791 building
and loan associations with assets of $1,250,000,000, of taxes paid in
Ohio of $817,000, just as much taxes as our one bank pays.
.
Mr. LucE. May I comment there that in my State we think the
value of these associations so great that the stockholders are exempted entirely from taxation; and the Federal Government ha'!
thought their value as a social factor so great that they exempt $300
from every man's income from these associations. In other words,
the Government, State and Federal, have held that these institutions
are of such great value to the community that they are deserving of
exemption from taxation in part or in whole.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

305

Mr. MoNKS. Mr. Luce, don't get me wrong. I am not saying that
they are not of value to the community. The time is coming-and
it is fast approaching-when you are going to look to building and
loan companies pretty much to take care of your real estate loans.
I am not here saying that they are not of value. But what I am
saying here is that they are not entitled to any more rights than any
other institution. as a financial institution.
Mr. Luck The Governments, State and local, have taken the opposite view.
Mr. MONKS. The Government got hornswoggled. You know that.
You know that Nick Longworth was the cause of it.
Mr. LucE. I don't know anything about that.
Mr. MONKS. You know. You were here at the time. You know
that Nick put something over on you.
Mr. LucE. If Mr. Monks will not object to my calling attention
to the fact that while-well, I will be careful. While he objected to
the second bill in toto, comprehensively, to meet his whole objection
he now suggests six changes, I think, upon the making o:f which it
will meet with his approval.
Mr. MoNKS. I have offerecl more than that. There is more than
that in my testimony. I think there are 19 corrections or amendments that I have asked for. I didn't rehearse them, because your
chairman asked me not to go over them. But they were in the
previous hearing.
Mr. REILLY. They are all in the. other record.
Mr. MONKS. Yes, sir. I want to correct you when you said that
I .made six corrections.
Mr. LucE. I meant this morning and this afternoon.
Mr. MONKS. Because I was limited by your chairman.
Mr. REILLY. Are there any questions of the committee?
Mr. WILLIAMS. No. I believe not.
Mr. REILLY. We will study your testimony in the other record.
Mr. MONKS. I would like to have this entered in the record too,
please [offering a redraft o:f the original bill to Mr. Reilly.]
Mr. LucE. I shall object to that.
.
·
Mr. REILLY. Mr. Monks, I don't think it cuts any figure as far as
a consideration of this bill is concerned.
Mr. MoNKS.. I think, Mr. Chairman, i:f you want to be fair here
with us, you ought to listen to our side o:f the situation. We didn't
get a chance to be heard before Mr. Watson's committee. We want
to be heard now before this committee.
Mr. REILLY. What was in the first bill does not cut any figure with
this bill. It is what should go into this bill. Evidently in the two
drafts the admission to membership has been cut down materially.
Now, we will consider all your statements where they should go in.
Mr. MoNKS. I think I have just as fair a right representing the
Ohio bankers to come in here and put in what we think this bill
ought to contain, not having been asked-Mr. REILLY. You have got it in vour other record. We have got it.
We have it all.
•
Mr. MoNKS. Not having been invited to appear before this hearing, I think we have a right to be heard.
Mr. REILLY. You have been heard. You offered all that at the
other hearing, didn't you~

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

306

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. MoNKS. Yes, sir. And I am now proposing, because you con-fined me to 2959, I am proposing a bill which I think is a much better
bill than the bill you are considering.
Mr. REILLY. We will have that bill.
.
Mr. LucE. May I say that the bill to which he refers is not before
this committee. The full committee has referred to this committee
the new bill. I£ you are desirous to have the first,bill printed with
your changes, I have no doubt that your Congressman will introduce
it and so get you a clean printed copy of it. ·
Mr. REILLY. This committee will consider and can consider at our
session his suggestions about the old bill.
Mr. MONKS. Mr. Luce, I am not going to ask this Government to
go to a large expense to have this bill reprinted and all this and have
another hearing. I am submitting this here to you gentlemen with
a formal request that it be put in the record and that you give it
consideration, inasmuch as we were not called in when the second
bill was written, which was within 30 days of the first one.
There could not have been an awful storm o:f objection raised in
30 days. There must have been some reason for changing the bill
to the second one. So that inasmuch as we were not even asked to
appear at any one of those groups that were represented here, I think
in :fairness to us you folks ought to accept this and put it into your
record and give it consideration.
Mr. LucE. I don't think you understood what I have said, Mr.
Monks. Under the parliamentary procedure·o:f the House it is customary for Members to introduce practically any bill that is put
in their hands. I haye introduced two bills in this matter. The
iommittee has decided not to consider the first bill. It is now considering the second bill. I£ you should desire another bill considered, if the chairman of the committee, Mr. Steagall, who is
responsible for this hearing, should decide to give you a hearing,
you will get it. But we have 110" authority or power to consider any
bill except the one that the foll committee has referred to us.
Mr. MoNKS. I would think that the committee would have the
right-Mr. REILLY. I would take the suggestion, if I were you, Mr. Monks,
that Mr. Luce suggested. I would have your Congressman introduce
that bill as amended. I£ the committee as a whole ,or the subcommittee approves your bill, they can substitute it or do anything
they want.
But we can not print bills in our record here, and we can not take
_testimony on bills other than this,one. We are practically considering just one bill here; and there is no reason why that bill can not
be amended to contain all the good points of the original bill if
you think it is a better bill so far as the committee agrees with you.
Now, as far as I see from your statement, the fundamental thing
is the exclusion o:f the organizations that you represent in the first
instance. That is right, isn't it?
Mr. MoNKS. That is right.
Mr. REILLY. That is your :fundamental objection~
Mr. MoNKS. That is the first one.
Mr. REILLY. That is the biggest one 'I
Mr. MONKS. No. It is not. They are all big.
1


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

307

Mr. REILLY. That is the most important one in the length of
time-Mr. MoNKs. No. I want to say that they are all big. They are
all important to the other five institutiom, that are represented.
Mr. REILLY.
e will consider that. '\Ve have that testimony. You
put it in this morning. Is there anything further that you ltave
to offed
Mr. MoNKS. No, sir.
Mr. REILLY. Thank you, Mr. Monks.

,v

STATEMENT OF CHARLES H. MYLANDER, REPRESENTING THE
OHIO BANKERS' ASSOCIATION
Mr. MYLANDER. I also represent the Ohio Bankers' Association.
I happen to be a vice president of the First National Bank of Cin-cinnati.
Mr. REILLY. Commercial bankers 1
Mr. MYLANDER. Ohio Bankers' Association.
Mr. REILLY. Are thev commercial bankers~
Mr. MYLANDER. It is composed of savings banks, commercial
banks, private companies, and all of the types of the institutiom;
mentioned in this bill other than building and loan associations.
I want to supplement some of the things that Mr. Monks has said
and add a little bit to my testimony before the Senate committee.
First, I want to clear up, if I can, an impression that perhaps may
have been unpleasant in the colloquy between Mr. Monks and Mr.
Luce. As Mr. Monks has said, the original Luce and vVatson bills
were introduced; and notification of that was given, of course,
through the press and through the usual legislative services.
When hearings were called on the Home loan bank bill, it was the
belief of most. of us in Ohio at least that thev were called on the
original bills; and when Mr. H. C. Robinson 'of Mr. Monks' bank,
appeared before the Senate committee early in the proceedings, it is
true that the new lJill was then before the committee. But it was
not even printed at that time, as I understand.
Mr. LucE. I think there were a few copies that came up from the
printer in the course of the day.
Mr. MYLANDER. I may be corrected in that. I suppose they came
up dming the day.
At any rate, Mr. Robinson has had no opportunity to examine the
bill and suppose that he was testifying on the first bill. Consequently
Mr. Robirn,on expressed cons:derable approval of the original bill.
On his return and having his attention called to some of the features to which we object, you immediately received word from Mr.
Robinson and :from the Ohio Bankers' Association that we were opposed to the second bill in the form in which it was introduced. I
want to get that before this committee £or the reason that there is
conflicting testimony from Ohio on the Home Loan Bill. That is the
reason for it.
I think that I should say to this committee first that I want to
indor~e and reiterate everything that I said before the· Senate
comm1 ttee.
Mr. REILLY. Just wait a minute. When you were talking before
the Senate committee, d~d you have in mind the last bill~

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

308

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Mr. MYLANDER. Oh, yes.
Mr. REILLY. And you addressed your remarks to that?
Mr. MYLANDER. To the last bill; yes, sir. I do want to add somethings to what I said before the Senate.
The first thing that I have is to comment on some of the reasons
whith have been advanced in favor of this measure.
I am unable to see where the passage of this bill is going to stop
foreclosures. It has been said a good many times by proponents of
the measure that it will stop foreclosures. In my short life as a
banker it has been my experience that the man who can not pay his
indebtedness to a financial institution of any kind is foreclosed upon
whether secured by real estate or stocks or bonds or merely his owu
personal promise to pay. The debtor~ in other word,-. is supposed
to pay; and when he ran not, the financial institution takes steps to
protect itself.
,
I£ a mortgage is in default, as I understand the provisions of this
bill, it will not be available for rediscount. Consequently, if there
are large numbers of mortgages held by the inember institution of
this system, they will not be able to take advantage of its provisions 1
only with their good mortgages.
Mr. LucE. We have just appropriated, I th'nk it was, $125,000,000
to meet precisely this situation in the £arm loan associations; and
Congress has taken the ground that it is permissible, even under good
banking, to be lenient in the manner of payment. 1Vhether that is a
wise policy or not, it is the attitude that Congress has taken toward
a large section of the country.
Mr. MYLANDER. And I think it is the attitude, Congressman, that
most financial institutions engaged in lending money are takingthat they are beipg just as lenient as possible.
Mr. LucE. What we are trying to do is to make it possible.
Mr. MYLANDER. But are you doing it under this bill?
Mr. LucE. I think so. By furnishing so much more money available. That is what we intended.
Mr. MYLANDER. But will the defaulted mortgage be available for
rediscounting?
Mr. LucE. But the defaulted mortgage of the building and loan
association can be refinanced and perhaps bring it down, we hope,
to an amount of monthly interest to be paid EO that it will make it
possible for many borrowers to get along, where now they cah not
meet the Shylock demands.
Mr. MYLANDER. Do you n1ean-let me see if I get your statement
correct-that the mortgage now in the building and loan association
on which the borrower is unable to pay on it, can be reduced to a
point where he can pay on it?
Mr. LucE. By issuing a new mortgage. For example: say that the
face of the mortgage is $10,000, and a man has reduced it down to
$4,000, say. He is obliged to make the same monthly payments that
he had at t_he ~tart. They wipe out that and issue a new mortgage for
$4,000, which m turn would have a term of 12 or 15 years. Therefore
the monthly payment on that mortgage is by so much reduced and the
interest so much reduced.
Mr. MYLANDER. But is there any necessity for setting up a corporation of this kind to do that?

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

309

Mr. LucE. That is only one feature of it, of course.
Mr. MYLANDER. Certainly. I understand. But the point_ I am
making is that the mortgage which is in default and on which the
debtor can pay nothing, that so far as I have been able to see in the
bill, there is no assistance for that particular debtor.
Mr. LucE. I agree with you.
Mr. WILLIAMS. Did you say that you agree with him?
Mr. LucE. As to any mortgage that is in default and the debtor
can not pay anything.
Mr. WILLIAMS. There is no way to save him.
Mr. LucE. If he can not pay anything, I don't see how we can
save him.
•
Mr. REILLY. If I were loaning money on mortgages and I had
plenty of money to carry the mortgages on, I would be less likely
to foreclose or to press a good loan than I woultl be if I, was in
straitened financial circumstances.
·
Mr. LucE. Yes. That is what I mean. I agree with that.
Mr. REILLY. And the fact that these home loan mortgage institutions or any kind of institution can liquify some. of its mortgages
and get immediate cash ought to have a tendency to make them go
slower on a man who is unfortunately back but whose loan is good.
Mr. MYLANDER. I agree with you in every word you say, Mr.
Chairman, but that· is going right on back to my conclusion that
the debtor who can not pay anything, the fellow who is out of
work and up against it and has no money, that there is nothing in this
bill to help him.
Mr. REILLY. Only that it makes the institution to be in' a better
financial condition.
Mr. MYLANDER. Yes, sir.
Mr.· REILLY. It will help them to liquify some 0£ their assets.
Mr. MYLANDER. Yes, sir.
Mr. REILL-r:. Andi£ they want to favor those men,,they can.
Mr. MYLANDF.R. They can.
Mr. LucE. I think I can reconcile what Mr. Mylander was saying-Mr. MYLANDER. I think I can, too.
Mr. LucE. By pointing out that if the man is evidently beyond
redemption-that is what we were told in respect 0£ some of those
farm loans-then we can 1wt help him. But if he is a substantial
citizen who is £or the· moment broke, then your statement applies.
Mr. WILLIAMS. I understand that the primary purpose-it has
been so stated here several times-is to obtain money with which to
pay or to meet withdrawals and to pay off matured obligations or
certificates in the building and loan associations so as to pay obligations to the banks. Now, if that is true, what material benefit can
come to the man who is in default on his mortgage?
Mr. MYLANDER. I can not see it. I can not find any benefit.
Mr. WILLIAMS. I can't either. I can not see that, and nobody
has explained that to me yet.
Mr. MYLANDER. I don't want to enter into this discussion at the
other end of the table.
The second thing that I can not quite get through my head is how
this bill is going to eliminate the person who has caused most of the
trouble to the small home owner, namely, the holder of the second

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

310 CREATION OF

A

SYSTEM OF FEDERAL HOME LOAN BANKS

mortgage; not the holder of the first mortgage. Out in our State
at least the big bulk of our foreclosures have come from the owners
of the second mortgage and not the owner of the first mortgage on
the property. And I don't believe that there is anything in this
bill that is going to eliminate the second mortgage on real estate.
It is true that there is a provision in the bill that where an amortized loan is made, it may go up to 75 per cent of the value. But
if homes are to be sold again, as they were in the last 8 or 10 years
in the State of Ohio, on a down payment of about 5 per cent of the
value, there will be a second mortgage.
Mr. LucE. We have very few second mortgage.son homes in New
England, as far as I have observed. So I don't feel competent to
discuss them. But I have read and heard of them in this testimony,
and I quite agree with you about a second mortgage being an objectionable thing. !3ut can you suggest any way to get rid of it?
Mr. MYLANDER. No, I can not, ~fr. Congressman: But to me, in
reading the reports of the President's conference on home building,
it was the second mortgage evil that was complained of much more
than the first mortgage evil.
In other words, there has always been plenty of money available
on good first-mortgage loans up to the last five or six months. I am
not going to say that there is plenty of money available for good
first-mortgage loans to-day, because I don't think that that is true.
I think there are lots of communities where there is no money available for anything to-clay. You can not borrow money on a gold
dollar. On the other hand, let us get out of this situation a little
bit, and there will most likely be money available for good, conservative, first mortgages.
But that is not what the fellow, the poor devil that wants
to buy or build a home, myself, for instance-I am going to buy a
house, if I can, while these prices prevail. I can get the first mortgage perhaps; but it is the spread between the first mortgage and the
cost of the house that I can not get. And that is the thing that if
you can find some way to work that out, that will be what will
stimulate further home owning.
Mr. LucE. Do you think home owning of that sort ought to be
stimulated? We thrifty Yankees don't look at it in that light.
Mr. MYLANDER. We thrifty Germans of Cincinnati don't look at
it in that light, either, Mr. Congressman. But that has been the
way in which most of the new construction in the State of Ohio in the·
last 10 years has been financed. It has been on a down payment of
less than, far less than 25 per cent.
Mr. CAMPBELL. The first mortgage to the building and loan association may represent 75 per cent?,
Mr. MYLANDER. It may represent 50 or 60 or 75 per cent.
Mr. CAMPBELL. Then he borrows on a second mortgage?
Mr. MYLANDER. H~ borrows on a second mortgage.
Mr. CAMPBELL. Representing the difference between the appraised
value and the building and loan association mortgage?
Mr. MYLANDER. No. He borrows as much as he can on the second
mortgage.
Mr. CAMPBELL. All right. He uses all of that money to go into
the house?
Mr. Mn.ANDER. No.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

311

Mr. CAMPBELL. Some of it he may spend otherwise?
Mr. MYLANDER. Yes.
Mr. CAMPBELL. All right. He has received, then, from the building and loan association 75 per cent?
Mr. MYLANDER. Yes. That is right.
Mr. CAMPBELL. Seventy-five per cent of the value of the property.
He receives perhaps 35 or 40 per cent of the value of the property
on the second mortgage ?
Mr. MYLANDER. Oh, no.
Mr. CAMPBELL. What per cent would he receive?
Mr. MYLANDER. That is not my understanding. They would not
loan him that much money. Certainly it would not be more than
the other 25 per cent. In some cases it is not more than 15.
Mr. CAMPBFLL. Then he has borrowed 100 per cent of the value
of the property?
Mr. MYLANDER. Yes.
Mr. CAMPBELL. I can not see what he loses if they foreclose.
Mr. MYLANDER. No, sir.
Mr. CAMPBELL. He has received 100 per cent of the value of his
money?
Mr. MYLANDER. '.fhat is exactly the man that I am talking about.
Mr. CAMPBELL. He has received 100 per cent of the value of the
property, as I understand.
Mr. MYLANDER. That is exactly the type of mortgage that has
caused a lot of our trouble in Ohio.
Mr. REILLY. Isn't it a fact that any home owner or farmer who
has a first and second mortgage on his premises that is 3 or 4 years of
age, that he has absolutely no equity in the place; he is beyond help,
especially if the mortgage dates prior to the slump?
Mr. MYLANDER. Yes. And it is the type of mortgages, Mr. Chairman, dated prior to the slump, that are in distress to-day.
Mr. REILLY. And there is no help for them.
Mr. MYLANDER. I can not see any.
Mr. CAMPBELL. And if they are in distress now, five years from
now that class will still be in distress.
Mr. REILLY. They were in distress before the slump, but they didn't
know it.
Mr. WILLIA~1s. What per cent, Mr. ,vitness, do you think are in
that condition, in that shape-just beyond help, beyond hope?
Mr. MYLANDER. You have had a lot of testimony here from people
in the mortgage loan business as to the percentage of their mortgages
that are in distress.
Mr. WILLIAMS. Well, I don't know what it is.
Mr. MYLANDER. I don't know that you have had so much testimo11y
here, but I heard a lot of it before the Senate committee in the two
days that I was there.
Mr. VVILLIAMS. What is your opinion about it?
Mr. MYLANDER. I don't know. I haven't any idea, because tht
bank with which I am connected has but very few real estate mortgages on its books; and practically all of those were taken to secure
prior debts and so on. So :from a personal standpoint I know very
little about it.
The next point that I want to make is that I am a little bit surprised after the previous contact that I have·had with this commit
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

312

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

tee, that the mutual savings banks are so far shut out 0£ the provisions 0£ this bill. It is my understanding-and you will correct me
in this, Mr. Luce, i:f I am wrong-but it is my understanding that
under the laws 0£ most 0£ the New England States, where the mutual
savings banks flourish, their mortgages run only £or a period 0£ one
year.
Mr. LucE. I don't think so.
Mr. Mn.ANDER. Or 3 years at the outside. They don't make an 8
or 14 year amortized loan like the builq.ing and loan associations do.
Mr. LucE. No, they do not, but as to the other end 0£ it, what term
is usual, I am uninformed. I had not know that the 1-year mortgage
was customary there.
Mr. MYLANDER. I am giving you information that I got from Mr.
Albee, deputy manager 0£ the saYings bank section. He told me
that the normal term 0£ mutual savings bank mortgages, he thought,
was one year. As Mr. Monks said, that they were Just automatically
renewable thereafter. They were due, but never called £or.
'
Mr. LucE. It may be so. But it has not come to my knowledge. Mr. MYLANDER. But under the provisions 0£ the bill as drawn certainly the mutual savings banks operating on that basis would be
barred, Because a home loan mortgage is defined in this bill as .one
having a mortgage term 0£ 8 years or more.
Mr. LucE. "Te made the distinction between the lonk term and the
short term. But I was not aware that short-term mortgages were
shut out. May I ask Mr. Bodfish that?
Mr. BoDFISH. The short-term mortgages are included, but preference is given to mortgages over eight years.
Mr. LucE. That is as I understood it. I am sure you won't find
that short-term mortgages are excluded.
Mr. MYLANDER. They are not excluded. No. But, as I understand the mutual savings bank loan, it is an amortized loan, one
just payable in installments, both interest and principal, from time
~o time. It gradually is paid down practically the same as a buildmg and loan association loan.
Mr. LucE. No. We have nothing 0£ the sort as far as I know.
Mr. MYLANDER. If I am wrong about it I will withdraw my objections and go along·.
Mr. LucE. My understanding is that under the mutual savings
bank loan whenever a mortgage comes due, the bank will accept a
payment on account to reduce the mortgage. But I know 0£ no
mutual savings bank that agrees to accept a monthlv payment
extending oYer a period 0£ years.
•
Mr. MYLANDER. Aren't they quarterly payments i
Mr. LucE. That never has come to my knowledge. I had supposed
that amortization was with us confined to what we call the cooperative banks. But again I speak without any knowledge beyond casual
observation £or many years.
Mr. MYLANDER. I am glad that I brought up the point, because I
think it is one that ought to be given consideration by this committee.
Mr. LucE. I would be the last man in Congress to keep out the
mutual savings banks.
Mr. MYI,ANDER. Tha.t is what I thought.


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

313

0£ course, this provision does keep out what we know as savings
banks out our way. They·are not mutual, but are stock savings banks.
But their business is savings and deposit~, and they lend money on
mortgages, with the regular amortization automatic requirement,
which does not make them for a period 0£ eight years. They may
be £or a much shorter period; seven or five.
0£ course, it keeps out entirely the national banks, which can not
lend £or more than five years on real estate.
Mr. LuoE. Still I can not understand why it keeps them out.
Mr. MYLANDER. It keeps them out 0£ the preferential class.
Mr. Lum,. That is what we meant to do.
Mr. MYLANDER. The~e loans are amortized loans the same as the
other loans are. They are to be paid down regularly. Now, why
should there be a preference given to 8-year mortgages against
5-year amortized mortgages?
Mr. LucE. Because I think you will find in the President's recommendations, which were the basis for this bill, a desire expressed on
his part, presumably in accordance with a belie£ on his part, that
long-term amortized mortgages were a preferable form 0£ home
financing.
Mr. MYLANDER. Then let me bring up this point. I asked Mr.
Bodfish the question just before the committee began its deliberations this afternoon, and I didn't get any dissent from him. I think
_you will find the bulk 0£ the building and loan mortgages in Ohio
are due and payable within one year a£ter date at the option 0£
the association. They are made, it is true, on an amortization basis.
They have no definite term, but they are due and payable at the
-0ption 0£ the association one year a£ter date, within one, year a£ter
date. Now, is that a long-time mortgage loan or is it a 1-year loan?
Mr. LucE. That situation had not been brought to my own notice.
Mr. MYLAXDEU. Certainly pre£erentiaJ treatment should not be
given to that type of mortgage if it is to be denied to stock savings
banks with a 5-year loan or 3-year loan on a regular amortization
basis.
Mr. LucE. In the conference which resulted in this bill we had
great difficulty in setting :forth in concise terms the difference between long-term and short-term mortgages.
Mr. MYLANDER. I don't doubt it.
Mr. LuoE. I£ you can aid us with better language, everybody concerned will be grateful.
Mr. MYLANDER. Well, I can not, Mr. Congressman.
Now, I am not so sure of the wisdom of this proposition as a
permanent piece 0£ legislation. I believe with Mr. Monks and with
the other members of the council 0£ administration of the Ohio
Bankers' Association that there is need £or a place where money
in times of emergency can "be raised on mortgage securities. There
is no dearth of money for home financing in normal times. I want
to give the committee so'me rather interesting figures on that from
my own State.
In the year 1908, for example, the State banks of Ohio had loaned
practically $83,000,000 on real-estate securities, and the building
and loan associations $211,000,000, · practically $212,000,000 on real
estate security.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

314

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

Within 12 years the amount of real-estate mortgages held by thosetwo groups of financial institutions had jumped 319 per cent, so
that by 1920 those two groups owned a total of $676,000,000 of
mortgages.
In the next five years they jumped 184 per cent over the 1920 figure.
In 1925 they had $1,245,000,000 of mortgages. And then in the next
five years, up to 1930, they jumped 133 per cent, to $1,659,000,000 of
mortgages.
Now, that is a tremendous growth in the amount of mortgage
money available for use in a single State.
I should imagine that the 1931 figures and the 1932 figures are
going to show a reduction. But if you can show me any other
thing that is not going to show a reduction in 1932. I don't know
what it is. This is a perfectly normal process-for the amount of
mortgage money in use to decrease.
I have been somewhat at a loss in studying this whole situation
in reading the testimony before the Senate committee to figure out
the reason why the building and loan associations are so anxious
for this bill. In my testimony before the Senate committee you
will find that I said there were 57 varietief, of building and loan
associations, and I think that is possibly a mild statement of the
picture.
But I picked up the February issue of the American Building
and Loan Association News, and I think I found the reason why
the building and loan associations want this bill. They s~y:
As the bank bill now stands. building amt loan assoc-iation,; will he able
to convert their 1 per cent caRh balance into a membership in one of the
regional banks and then ( 1) borrow twelve times this amount on either t~
short or long time basis (wl,ich ma~' be repaid over a peri0d of several years
out of a portion of their receipts} : (2) receive a dividend on their membership far in excess of any interest that they may receive on hank balances;
(3) have confidence rebuilt in their institution through membership in the
Federal home loan bank, which will do for the building and loan just what
the Federal resene has done for American banking.

I expect that the second one of those, namely, that they will be
able to receive more interest from the home loan banks than they
will from the commercial banks, in which they now keep thefr
balance, is the main reason for their strong ·advocacy of this bill.
The same issue of that same publication, in describing the new bill,.
Mr. Luce, points out that there were seven significant changes from
the original draft, and this is the comment: First, that the change·
in the districts, which I will pass because it is not important ..
Second,
that the new bill changes the line of institutions which are available for·
membership in the home-loan banks system. The chief attention of the system
is now centered on building and loan associations, cooperative banks, and
homestead associations. Banks are aYailable in so far as they makP longtime home loans.

That again is corroborative eYidence from the building and loan
associations that they want to shut everyone out of this system other
than themselves. Third, they point out thatllllder the provisions of the new bill ;your home-loan bank will have 11 directors
instead of 7 ; and that 9 of these directors will be chosen by member institutions
at the end of 1932. This provides a democracy of management far surpassing
that of the old bill, which would have proYided that four of tlie seven directors


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CREA.TIO~ OF A SYSTEM OF FEDERAL HOME LOAN BANKS

315

would always be chosen or appointed b~· the Federal home loan hank board,
whose members in turn are app!Jinted by the President of the United St_ates.

It seems to me that if the United States is to put up the capital to
start this institution and to operate it for some little time, if the testimony which we have heard is to be believed, that the United States
should have some share in saying what the management policy shall
be.
Lastly they say that " the sponsorship of the administration
for this particular bill gives us a safeguard in this direction."
Now, I can not speak for the administration. I won't attempt
to. No one else does. Yet, the bill now before your committee is so
far away in a good many respects from the recommendations of the
President's conference that without the vital changes which we have
suggested in our testimony before the Senate committee, and which
Mr. Monks placed before you this afternoon, I do not believe that it
represents what the President's committee had in mind at the time
the statement went out.
Now, lastly, or third or fourth or fifth, or what~ver it is, there is
another reason why building and loan associations want this bill.
Most building and loan associations, I believe, outside of my -own
county in Ohio, are not making any new loans to-day. The demand
for withdrawals is so heavy that they have no funds with whi-ch to
make new loans.
Now, when the making of loans stops in the building and loan
association, the compensation of those who are engaged in its management for the most part also stops, the reason being that in the
organization of building and loan associations, as conducted in Ohio
at least, the compensatfon of the management does not come from a
salary from the association, but comes from the perquisites of his
office.
Now, let me say that you gentlemen here have received a large
number o:f letters an<l telegrams, as you have stated, from various
people in support of this bill. You have received them from
hankers undoubtedly. Some of that has been obtained-Mr. WILL