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430 A meeting of the Board of Governors of the Federal Reserve SYstera waS held in Washington on Tuesday, March 13, 1945, at 2=45 41 . PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Eccles, Chairman Ransom, Vice Chairman Szymczak McKee Draper Evans Mr. Morrill, Secretary Mr. Goldenweiser, Economic Adviser, Division of Research and Statistics Mr. Leonard, Director of the Division of Personnel Administration Mr. Thomas, Director of the Division of Research and Statistics Mr. Ransom referred to a memorandum addressed to the Board date of March 10, 1945, by Mr. Chase, Attorney, in which it was t'4*tecl that two finance companies in the St. Louis District, the Safe17"irlance Plan, Inc., and the Local Finance Company, which were la.tal'atitis under Regulation W, Consumer Credit, and which were found "4re been violating Regulationll in a manner which the Federal Re— believed was willful, had agreed to execute a voluntary q°Elitle agreement to close their offices from March 19 to March 23, 1945' and that the form of agreement, which had been con— t by 0 the registrants, followed the form used in connection Athe M itchell Clothing Company case in St. Louis in June 1943 ex— that, since the registrants were loan companies, they would be Cloaed f °r the purpose of making or renewing loans but would be opened 431 3/13/45 -2- t"eceive Payments on outstanding loans. that, if would be tNIt 8 order case The memorandum also stated the Board approved, the Federal Reserve Bank of St. Louis advised by telephone, it being contemplated that the regis- would then execute the agreement and the Board would issue an substantially in the same form as that issued in the Mitchell susPending the licenses of the registrants for the period stated. 11 —"cm stated that he had reviewed the record, that the investikiola of the matter appeared to have been handled with exceptional care and 41(114' - 0'4a that the proposed action was recommended by Messrs. Parry of the Division of Security Loans. Upon motion by Mr. Ransom, and by unanimous vote, the procedure outlined in Mr. Chase's memorandum was approved. Chairman illtlIrnished Eccles called attention to the fact that there had to each member of the Board a copy of a memorandum ter Ikrch 9, 1947. ,, from Messrs. Goldenweiser and Thomas in regard t° the part...time arrangement under which Mr. Alvin H. Hansen has been bY the Board of Governors. The Chairman said that about a 1t : t4 14g0 he had raised with Messrs. Goldenweiser and Thomas the ques1°11 Whether this plan should be continued and had requested them to e\'104 the Whole situation so that the Board would have an opportunity c)1131cier it. The Chairman added that he felt that there was a similaquestion of policy with respect to the employment A if)4:„J's *IL t 3/13/45 —3— bYtheFederal Reserve Bank of Nem- York of Mr. John H. Williams as lee President on a part—time basis, but that in view of the fact that, tilicier the existing practice of the New York Bank, the appointment of 1Villiaras was on an annual basis running to the end of the calendar he felt that the question as to Mr. Williams might well be de— 4rl'eduntil next fall. The Chairman pointed out that there was no (111e8ti0n as to Professor Hansen's great ability and public spirit, 48 to the value of the work that he was doing from a public stand— He said, however, that he felt that there was a question of Y for the Board to consider as to the continuance of the present ar,,a.ne enlent for several reasons. 1"tit He thought that the existing arrange— ad departed very materially from the original plan and intention. A, 'Pointed out that Professor Hansen's work was being carried on some— at inde pendently of the regular organization of the Division of Re— 441"h; that it was not being done as a part of the work of, or under direction of the head of, the Division except to the extent that rnernberS Of the staff were assigned to assist Professor Hansen; .111:1 that, in effect) Professor Hansen was using members of the Board's Ztkrt and its office accommodations and other facilities to carry on Pendent b projects from which he drew material for published articles cl()k8 and suggestions for proposed legislation which did not pro— thr°ugh the regular channels of the Division or through the Board. it that Mr. Hansen was an extremely able and useful economist who M.3/45 —4— ci°ing a very valuable public service and that, no doubt, he should e°4tirille in this field, but that he did not believe that the Board 1748 iliftified in continuing to provide the funds to support these ac— tiViti es. He felt that it would be more appropriate for such activi— tdLee to be financed by some independent organization, such as the 4raerican Planners Association, the Foreign Policy Association, or the1$/ent.eth Century Fund. He would be glad, however, to have Mr. liallsen on a full—time basis as a member of the Board's organization, Nect to the same general controls as any other member of the organ— or to have him available on a purely advisory basis subject o tallwhen desired by the Board or its staff on such questions as the Bretton Woods plans or such matters as were involved in the pend— Lkt ay bill, dealing with the question of full employment, in the ()Ileicieration of which the Board had been called upon to take part. There was a lengthy discussion of the problem as presented by Oh,r at the conclusion of which agreement was reached upon the a 4ggesti01 of the Chairman that he be authorized to discuss the 'atter . Dt'Orl„ with Mr. Hansen at such time as he considered ap— ''414te• It was understood that, in substance, the Chairman would a(117-4 lair nansen that the Board felt that the present arrangement 11°14q b 4,t„911d e brought to an end after some reasonable period, such as 60 iertt73) during which the Board would like to have Professor Hansen ' l ate his attention upon the Bretton Woods proposals and the N411 rull employment involved in the consideration of the Murray 434 3/13/45 —5— , ' alat the Board would like to have him continue to be available, on a Per diem basis, to the Board for consultation with members of the °r its staff on such questions or other questions that might arise from time to time; and that, inasmuch as the Board held him in high r -egard because of his demonstrated great personal ability and c°r1trii,„, ---"'..Lon to public thinking, it would be glad, if he showed an t4ter eat in such an arrangement, to have him as a member of its per— Inallerit staff on a full—time basis under an appropriate designation arld —"r the same general conditions of employment as other regular keltbe r8 of the staff at some agreed compensation up to an amount not eXceer44 1.5,000 per annum. Upon motion, and by unanimous vote, the Chairman was authorized to proceed ac— cordingly. In connection with the foregoing ac— it was agreed that the Secretary Should call the matter of the terms of compensation of Mr. John H. Williams to the attention of the Board about the mid— dle of September. There was then brought to the attention of the members of the toai, cl a te legram from. Walter Lichtenstein, Secretary of the Federal Atb,„ the ouncil, quoting a telegram from Mr. E. E. Brown, President Pederal d A visory Council, to Chairman Eccles, as follows: _11-1-1- members of the Federal Advisory Council except Who is still ill in bed and McCoy who is vacation— Florida and therefore could not be reached have 435 3/13/45 -6- '429reved of the following resolution and have authorized me to forward it to you as Chairman of the Board of Gover: , 113re of the Federal Reserve System: 'The Federal Advisory ;.°11.acil considers it would be unfortunate and unwise at `,:}11e time to require a 100 per cent margin on loans made Purchasing and carrying listed securities. The amount • credit now in use both by banks and brokers for such Palkirpose is relatively small. Current purchases in the L°clic market are being made primarily for cash. A 100 Per margin requirement at this time might affect the ' 41'ket for a short period, but once such a requirement was 13 814 into effect any restraining influence the Federal ReBoard would have over the market through its control of 8 ,Targin requirements would be exhausted. Furthermore, requirement would tend to restrict the use of venture Pltal wr„s, • in the development of business enterprises. It also tend to upset confidence and it very probably tuould cause many people to sell Government obligations and co 1NY less of forthcoming Government issues so that they be in a position to buy stocks for cash. The Council toslres that this statement be published in the event the atar'd should decide on a 100 per cent margin requirement ob.the time such requirement is announced. There is no v,Jection to its publication in advance of any decision the Board 'U Chai -man Eccles said that he had received the telegram quoted Lichtenstein's wire and that he had had a long conversation over telephone with Mr. Brown, during which he had brought Mr. Brown up te on the various discussions that had taken place on the subject "Pr po 8ed means of combating inflation through the alternatives of tior staetheds and credit controls. As it had been agreed previously that the subject of margin 110 a r'esnaerlts should be discussed at a meeting on Friday of this week, til°1-1 was taken upon the foregoing communication. 4 3113/45 -7Mr. Szymczak reported to the Board the current status of the hea 441gs on the Bretton Woods proposals in the House Banking and Cur- 'dommittee and the expectation that hearings would be inaugurated betor e the Senate Banking and Currency Committee following the recess or 00 ngress, which it is expected will cover the period from March 24 to lip 111 10. In that connection Mr. Szymczak said that Messrs. Golden— Wei3er azid Thurston had prepared a draft of a brief statement which kight b e Presented on behalf of the Board whenever the occasion called t'r it dul'ing the hearings and asked the Chairman to review it before gas submitted to the Board for consideration. Mr* Szymczak then reported that Mr. E. E. Brown, President of thep : ti411 eral Advisory Council, was expected to testify before the House 4g and Currency Committee on the coming Friday or Monday; that, ' 110k, °‘41.1e11 things , there had been informally discussed with him the gruf„,„ ttoli : Proposals that there be incorporated in the enabling legisla— t Provision for an international financial council; that Mr. 4tter :s favorable to such a proposal; but that he preferred slightly rit language in respect to the council's relation to the gover— c)N Snd executive directors of the Fund and of the Bank. 4 taikb Arter some discussion, the Chairman suggested, and the other °r the Board agreed, that it would be preferable if Mr. Brown „ eter any reference to the council until after the Chairman Preae Ilted the suggestion in the course of his testimony before s to " 3113/45 r•L'I —8— the °Ilse Banking and Currency Committee. Under this procedure Mr. troum j4 he were so inclined, could, during his appearance before the Senate Banking and Currency Committee at a later date, call at— tentiqa to the Board's proposal and express his favorable attitude, tc)gether with any suggestion that he might wish to offer as to 14rIellage. At this point Messrs. Goldenweiser, Leonard, and Thomas with— Om the meeting. The action stated with respect to each of the matters herein— referred to was then taken by the Board: Nieral The minutes of the meetings of the Board of Governors of the Reserve System held on March 12, 1945, were approved unani— eel,ve BaLetter to Mr. Rounds, First Vice President of the Federal Re— Ilk of New York, reading as follows: or "The Board of Governors approves the modification leathe rule with respect to the granting of 'merit day' le.41/e as described in the certificate enclosed with your u'er of March 8, 1945." Approved unanimously, together with a letter to the Wage Stabilization Divi— sion, National War Labor Board, transmit— trig a certificate of the Federal Reserve Bank of New York with respect to the pro— cedure of granting "merit day" leave at the Bank and its Buffalo Branch. Letter to Mr. Rounds, First Vice President of the Federal Reserve 438 3A3A5 -9of New York, reading as follows: "The Board of Governors approves the change in the P oeprs°rInel classification plan of the Federal Reserve Bank liew York, involving an increase in the maximum annual Z slarY for the position of Chauffeur-Guard, as indicated "41 the certificate submitted dated March 9, 1945.!I Approved unanimously, together with a letter to the Wage Stabilization Division, National War Labor Board, transmitting a certificate of the Federal Reserve Bank of New York with respect to a salary increase at the Bank. Letter to Mr. Rice, Vice President of the Federal Reserve Bank "ellY°rk, reading as follows: pereZhe Board of Governors approves the changes in the el classification plan of the Federal Reserve Bank of ..21'elif ork, involving the elimination of three positions YthService Department, as submitted with your letter rch 7, 1945.n Approved unanimously. Letter to Mr. Meyer, Assistant Cashier of the Federal Reserve of chi cago, reading as follows: 194 "This is in reply to your letter of February 23, of requesting approval of increases in the salaries pon:? ..employees who have reached the maximums for their 0ns under the personnel classification plan. ari he Board of Governors approves the payment of salarro "tc the 28 employees, reflecting increases up to the 1,111te shown in the last column of the list submitted °11r letter of February 23. This approval is subject to ilic eeipt of an appropriate certificate to support the -ea8es under the salary stabilization regulations." 4 Approved unanimously. 3/13/45 -10Letter to the "Potsdam Bank and Trust Company", Potsdam, New 1°Ilt, reading as follows: "The Board is glad to learn that you have completed ;;IT1. arrangements for the admission of your bank to member! 4 I- P In the Federal Reserve System and takes pleasure in ' 4Im4mitting herewith a formal certificate of your member. ship . "It will be appreciated if you will acknowledge re/14'explt of this certificate." Approved unanimously. Memorandum dated March 10, 1945, from Mr. Thomas, Director of the ld. . lIsion of Research and Statistics, stating that with the approval or lir. Skrmczak arrangements had been made with the Alderson Reporting C°4k/44Y t0 receive a copy of a daily transcript of the hearings being held _ wl the Bretton Woods proposals by the House Banking and Currency Co" ot "'ee, and recommending that the amount necessary to cover the cost the transcript at the rate of 25 cents a page be added to the apDziopria. te item in the 1945 nonpersonal budget of the Division of Re11 and Statistics. Approved unanimously. trafts of letters to Senator Wagner and Congressman Spence, thA4 lioilae of of the Banking and Currency Committees of the Senate and RePresentatives, respectively, reading as follows. These titere ha d been prepared at the request of Chairman Eccles for sub81°r1 t the ° Board for approval with the understanding that they k)1. 11414 °t be sent until the bills mentioned in the letters were taken 3/13/45 —11— Pitc)r consideration by the respective committees: Letter to Senator Wagner , "This letter is in response to your request of the opinion of the Board of Governors on the merits of plais S. 103, S. 179, and S. 180. As you know, the bills S. 179 and S. 180 are identical ,1! 11 1 S. 756 and S. 757 respectively, which were before the Congress, and S. 103 is the same as S. 1034 in the 7i2th Congress, except that its effective date is later and omits a provision waiving unpaid dividends due from the !_cleral Savings and Loan Insurance Corporation to the Home ers' Loan Corporation. , In letters dated May 22 and December 16, 1944, we ie _1, forth our objections to the bills which were before the 78th Congress. Since the present bills are the same, L -Lth the exception indicated and since we have seen no -L-1-Inds for changing our position, we repeat here substan— 4 tiaAy what we said in our letter of December 16, 1944, with I1 1.7 such changes as are required by the changed numbers of e bills and the narrower effect of S. 103. S. 180 and section 1 of S. 179 ci "Under existing law, a Federal savings and loan asso— ofT'°11'Y not (1) make loans for the improvement or repair 011 ',(3ales except on the security of a mortgage; (2) make loans hon,"°rIles located more than fifty miles from the association's re : Office; or (3) make an aggregate amount of loans on estate other than homes in excess of 15 per cent of a.,,e assets. S. 180 would permit a Federal savings and loan 0;e°ciation (1) to make loans for the improvement and repair 5.11811°4es on the security of notes alone, provided they are 04 under the National Housing Act; (2) to make loans Illiciu°111es located more than 50 miles from its home office the 15—per—cent—of—assets limitation (in addition to theer the existing authority to lend on business property under how 15—per—cent—of—assets limitation). More importantly, tic:?r, S. 180 would exempt any loan insured under the Na— . r „'L Housing Act (as now drawn or as hereafter amended) cm the 15—per—cent—of—assets limitation and the 50—mile Z Z peci '9Aie have no objection to (1) the proposed authority for associations to make repair and modernization loans eh are insured under Title I of the National Housing Act, 3/13/45 II -12- on the security of notes alone; (2) the proposed provision Permitting Federal associations to make loans on homes besr?I'ld 50 miles under the 15-per-cent-of-assets limitation. , Ijallarly, we have no objection to the corresponding pro81-cals of section 1 of S. 179 in so far as they would authorize, Federal Home Loan Banks to discount loans made unrr these provisions of S. 180, so amended. Also, we should have no objection to the provisions of S. 180 and of section e'r S. 179 in so far as they permit Federal associations ie nd the Home Loan Banks to make and to accept as collateral or advances under section 10(a), home mortgages insured u the Federal Housing Administration with maturities up to twenty--rive years. vi "We do not believe, however, that the remaining pros 8i°rIs of S. 180 should be enacted. Savings and loan as1,?ciations have traditionally been local thrift and home 1incing institutions, gathering investment funds of initduals from the local community and lending them out to v. home owners and prospective home owners within the local This is clearly the basic function which Con,*eess intended Federal savings and loan associations to m, although it permitted them, as a matter of operati'l,Lig flexibility and to meet unusual situations, to engage Other lending activities within well-defined limits. "We believe this element of flexibility is proper and th lf1113 but if operations now permitted as exceptions to rule should become the general rule, the basic funcreV described above would be fundamentally altered. We tile-L, therefore, that the loans made on properties outside rem,,ssociation's locality (i.e., beyond 50 miles) should viithin the 15-per-cent-of-assets limitation. re„ "Vie also believe that the financing of large-scale ceiqda."1 housing should continue to be subject to the 15-perdiff,--°f-assets limitation. Such financing is essentially Deejrent from the financing of homes for owners and pros, Ive owners. The borrower, in the case of rental housing, tel,"°t a home owner. He is an investor in a business en' ise just as is the hotel owner. Thus, the financing of!ill trifiLarge-scale rental housing is essentinlly business financc1.4.which it was never contemplated savings and loan assohaa 1°ns would undertake. The Federal Home Loan Bank Board aitclowe think quite properly, recognized this fact because, 1441 11gh the present law would permit Federal savings and Pet, associations to make any non-home loan within the 15-cent-of-assets limitation, the Board, by regulation, 442 3/13/45 —13— imposed severe restrictions on the rental housing '°ans which they may make. It has limited such loans to 50 per cent of appraised value, except in the case of small aPartments (5 to 12 families) for which the limit is 60 " 131 cent, even though they are insured under the National ,,ousing Act. "For these reasons, we feel that the blanket authoritation of Federal savings and loan associations to lend any unt anywhere on insured mortgages, which is contemplated Y 8. 180 and section 1 of S. 179, should not be enacted. Section 2 of S. 179 The purpose of section 2 of S. 179 is to increase the .!°11 21t of money which the Federal Home Loan Banks may borrow Lhe money market by widening the range of Bank assets on e basis of which debentures may be issued. The law as it t°17 stands restricts the amount of debentures which the Sys: 13 111,r1laY issue to the amount of advances to members secured l'Af'?ans of the types prescribed by Congress in section j f\a) of the Federal Home Loan Bank Act. Thus, the power i the Home Loan Banks to obtain funds in the money market .geared to the volume of the advances to the member inwhltutions secured by loans of the best type, namely, loans th..ch qualify under section 10(a). It seems obvious that wiz Present provision furnishes the Home Loan Bank System in 11 borrowing capacity more than adequate to enable member t itutions to meet the demand for such loans in communi4 : 8 where share accounts are insufficient. Within the urnwhich relates debentures to capital, the Home Loan can now issue debentures on a one-for-one basis for the wa entire amount of 10(a) loans rediscounted. In what Way could a demand arise which could not be met under the wi! ent provision? Only if member institutions should c,!" to rediscount other types of paper (or obtain unse11;” advances) in considerable volume. Such other paper ze:td include mortgage loans on business properties, apart10"' houses, and other non-home properties, as well as ab!" made on the security of share accounts. It seems (0ent that Congress did not intend that such paper should Wilr.1 the basis for obtaining additional funds in the market. ell' a71: the possible exception of loans on the security of heide accounts, this is a type of financing that should be t.witt .lin the 15-per-cent-of-assets limitation, as alPointed out herein, and therefore that should not be °Ill'aged by giving such paper, when discounted at a Home n r 4 3/13/45 -14- "Loan Bank, the same access to market funds as is enjoyed bY 10(a) paper. In fact, the power to include such other PraPer in the debenture base would have the inevitable efect of eliminating the relative desirability of loans /1 4.1Ider section 10(a) which are clearly the most appropriate 'YPe of loan for mutual thrift and home financing institutions. b "The proposed amendment would also include in the denture base of the System all Government obligations owned wilf!ctlY by the Federal Home Loan Banks. This provision ' a 44d permit Government obligations, including those held Ls Part of the Banks' reserves, to be counted in the deuenture base. ."The present law in our opinion is over-generous in 1-ding W," that required reserves may be invested in earning pets (the reserves of commercial banks and those of the Reserve Banks may not be in earning assets) and then Proposed amendment would go even further by allowing the reserves to be again multiplied by forming a base for the "e Issuance of debentures. 'There is nothing in the present law which restricts the t4.te power of the System to raise money to perform the func1,1°118 it was established to perform, namely, to provide a yZervoir of funds on which member institutions can draw cra the demand for sound home mortgage loans in their 0474.1nities exceeds the amount of share investment. Withof 4lesuing debentures, the Banks can make advances out hair'eir own capital, as well as from deposits they may til e from member institutions which have more share capital re-11 mortgage loans. When demands on the Banks exceed these 41urces, the System may borrow from the money market the ' t, 1 . 3-Ile amount of section 10(a) advances from the Banks to "elr members. cia4.'Bearing in mind that Federal savings and loan assoth:lons are forbidden by law to accept deposits and that e„..: holder of a share in such an institution should not e;vect the same liquidity as the owner of a deposit in a a nelseial bank, it seems obvious that the Federal Home Loral 4nks should not need to raise funds on the basis ti 'asets other than loans of the types described in seeof4 the Federal Home Loan Bank Act. The most vatie-LY use for such funds would be to make unsecured adto member institutions to enable them to meet delids for share withdrawals - an operation which is clearly j '' , L?4 3/13/45 -15- Inconsistent with the nature of share accounts and the uniform charter provisions of Federal associations governing withdrawals. "We object to section 2 of S. 179, therefore, on the principal grounds: first, because it would broaden he base the for debentures in such a manner as to encourage ending by member institutions of types which are inapproIjiate for local mutual thrift and home financing institu, 1°ne; second, because, by including paper not conforming section 10(a) as well as Government obligations owned directly by the Federal Home Loan Banks, whether as part of their reserves or not, it would make available to the t!nks far more funds than they need in order to perform 4rir functions; and third, because it is desirable that ;:ae reserves of the Federal Home Loan Banks, which are alb!agY invested in earning assets, should not be used as a "is for further generation of credit. "The argument which has been advanced that the FederAl nhome Loan Banks have not participated as fully in the fin=, • c,_;"eing of the war as they would if Government obligations ronu-d be included in the debenture base, is not convincing. '41 Treasury has said repeatedly that it does not want inbetitut' °rids lons to borrow money in order to purchase Government • Section 3 of S. 179 "Section 3 of S. 179 contains two proposals which 'etst be considered separately; the first authorizes the ' p: Il etary of the Treasury to purchase obligations of the ' ts el'al one Loan Banks or the Federal Home Loan Bank Syscam in amounts not to exceed three times the total of the L Pital stock, reserves, and surplus of the Federal Home Lo Banks; the second authorizes the Secretary of the ariVurY to purchase obligations of the Federal Savings ,t,oan Insurance Corporation, with a corresponding lim-4''Lr on amount. Mr. Fahey stated last year that the authorizations el'anted by s this section are to be used only in emergencies. eems to us, then, that the legislation should be worded tioas to indicate this purpose. The unqualified authoriza00. ,r1 now contained in the proposal implies (despite the getilretion lodged in the Secretary of the Treasury) that Banksupport of the obligations of the Federal Home Ln ral 7. 14-an System is to be given by the United States TreasWe feel that no such implication should be given. I 3/13/45 -16- 011 the other hand, there is merit to the suggestion that would be undesirable in the public interest for Home ItJoan Banks to be unable to meet maturing obligations due 4° a temporary emergency. We have no objection, therefore, a provision permitting the Secretary of the Treasury, lf he determines that the market situation warrants such ctlon, to retire from the market such maturing obligations ! 7'8 the system cannot redeem without undue sacrifice and giv?g him power to negotiate with the Federal Home Loan Bank such terms and conditions as he feels to be desire for the protection of the Treasury in connection with 8uch action. „. 'With regard to the second proposal, the law under :nach the Federal Savings and Loan Insurance Corporation Perates now provides that insured institutions sha31 pay Pr ,nums, which shall cease when the reserve of the Cora -'Lion insured risk, but the reaches 5 per cent of the in jrporation is authorized to assess each insured institu:Ion additional premiums equal to the amount of all insurance claims and operating expenses. (The required insur0,ce premium and the mwdammn annual assessment are each c; e-?lghth of one per cent of the insured accounts and hred tor obligations of the insured institutions.) These fi2vlsions would indicate that the Congress contemplated tn the premium would be used to provide the reserves and "at the assessment would be used to pay losses and expenses. rig However, the Corporation has never exercised its ' lo!ht to assess, with the result that, in effect, insurance AtTe and operating expenses have come out of the reserve. al,'Lle end of the fiscal year 1943 the reserve was only ritEhtlY more than one-half of one per cent of the insured or one-tenth as large as Congress determined the eerve should ultimately be. ab, k feel that, if the Treasury is to guarantee the , 1tY of the Corporation to meet its insurance contracts, it11 has8"culd be cafled upon to do so only after the Corporation Ctade full use of the facilities already furnished by 101,7'es5 for providing adequate reserves, as set forth beShould have no objection, therefore, to a measure 0131?"1 authorized the Secretary of the Treasury to purchase s,.'lgations of the Corporation provided that: (1) the retary determines that a reasonable market for the Cortl°11's obligations does not exist; (2) the obligations Z 146 3/13/45 -17- Purchased by the Secretary shall bear interest at a rate vihich, in the judgment of the Secretary is a fair rate, in mind the Corporation's norml market; and (3) the Lhe Corporation has already placed in effect a program of crediting to the reserve each year a sum sufficient to build 1113 ite reserve to five per cent of the insured risk within !Period to be set by Congress, but preferably not more than ten years. Section 1 of S. 10_3 "The Capital stock of the Federal Savings and Loan Ins Loall'anoe Corporation was subscribed by the Home Owners' Corporation which exchanged its bonds for an equivacent amount of stock. The dividends on the stock were to the interest payments on the bonds. It is our under .tanding that the Home Owners' Loan Corporation has ed the bonds which it exchanged for the Insurance CorPo°ration stock, and it seems reasonable to us that the raPital structure of the Insurance Corporation should be feeZamined. The effect of the arrangement which was in 0°' , 1.ce While the Home Owners' Loan Corporation bonds were uut,standing was to give the Insurance Corporation free Gse of its capital. If it is the intent of Congress that e2vernment corporations should have free use of the Fedt4,:al funds which make up their capital, it seems proper ua that the Insurance Corporation should be relieved Lo the obligation to pay dividends to the Home Owners' Corporation now that it does not receive offsetting '''erest from the bonds. of We are in sympathy, however, with the suggestion be the Secretary of the Treasury that a uniform policy 4dOpted for the treatment of public money used by Govr11,ment corporations. Since the Home Owners' Loan Corenliation is in process of liquidation and has already a,4-1-ed the bonds which were issued in exchange for the ti°eIc of the Federal Savings and Loan Insurance CorporaCongress might well direct the Secretary of the Treasxil'„ to Purchase the stock of the Federal Savings and Loan tio'llrance Corporation from the Home Owners' Loan Corpora1)11.1,12, and make whatever rules it deems best for the reim'ement of the Treasury in the future. Section 2 of S. 103 ine reserve which Congress has said should some day 1,ea 00,.211 5 Per cent of the Federal Savings and Loan Insurance ye;P°rationis insured risk was, on June 30, 1944, after ten 1'8 of operation, only 0.57 per cent of the insured risk. I g 447 3113/45 —18— "Section 2 of S. 103 would reduce the insurance premium due from insured institutions by one—third, and would con— sequently slow down the rate at which the reserve is ac— cUnzaated. In a period when losses were high, the reserve would be sadly deficient. HMr. Fahey pointed out last year that the right of the Corporation to assess insured institutions for losses and 2'ating expenses was retained in S. 1034 (although the n -iumum rate of assessment was also reduced by one—third), this right is also retained in S. 103. He argued that t i-1.8 Power could be used to meet larger losses. Apart from 0'e fact that the Corporation has never yet used this power assessment, it is doubtful that assessment after large n2ses have started would be effective in yielding the :rInt of revenue that would be required (since the amount s assessment for any one year is limited) or could, in huch a period of widespread strain, be conveniently paid aY , , ' the institutions. Indeed, it is contrary to all insur— "Principles to attempt to assess the insured after the 'sk insured against has materialized. Fahey argued last year that the risk insured by the F tr Federal Savings and Loan Insurance Corporation is about oLt', s same as that insured by the Federal Deposit Insurance jarP°ration, and that therefore the premiums should be sim— poal:- He took issue with our statement that Federal De— I:It Insurance Corporation's risk is lower because there zura considerable cushion between the Federal Deposit In— thearlcs Corporation and its insured risk in the form of of caPitall surplus, undivided profits, and reserves, thea commercial bank to which there is no counterpart in allr institutions insured by Federal Savings and Loan In— loance Corporation. He maintained that the savings and the associations have similar capital accounts and that sajz ratio of these accounts to total assets is about the e for institutions in the two insurance systems. th, If we assume that Mr. Fahey was correct in saying Le't'u there is a cushion between the Federal Savings and s Insurance Corporation and its insured institutions /4 ar to the cushion which protects the Federal Deposit shwiance Corporation, the comparison between the two tio, --d be based on the insured accounts of the institu— Of and not on their total assets. The capital accounts 00 4-nstitutions insured by the Federal Deposit Insurance 11:1°ration amounted in 1942 to almost 25 per cent of the 2 3/13/45 -19- Insured accounts, while the capital accounts of institui°118 insured by the Federal Savings and Loan Insurance ‘,orporation amounted to only 9 or 10 per cent of its inaccounts. In other words, a comparison would show tthat the cushion in the case of the Federal Deposit Insurance Corporation is over 2-1/2 times as great as in the case of the Federal Savings and Loan Insurance Corporation. s It has been asserted (by Mr. Kreutz of the National avings and Loan League, for example) that the risk assumed , the Federal Savings and Loan Insurance Corporation is le than that of the Federal Deposit Insurance Corporation b5 the former insures only the ultimate safety of share ; tecounts and makes no attempt to insure their liquidity. rider the procedure which Federal Savings and Loan Insurnce Corporation has adopted for meeting insurance claims, , 0wever, liquidity is in effect insured. The Corporation cash to operating institutions for share accounts fl_LI.ch they issue to holders of insured accounts in liquidatlig institutions, but whether the holder of the transferred cecount obtains cash immediately is not within the direct h:ntrol of the Corporation, although to date, institutions urr apparently been ready to permit withdrawals on demand. it:!" this procedure the Corporation will be able to meet m- ansurance contracts in time of stress only if it has emeqUa ue cash or other liquid resources, and we feel it ot have these resources unless it builds its reserves .ti,annore quickly than it has built them up to now. For these reasons, therefore, we are opposed to the par. ' 8age of S. 103 and all of its provisions. If the law at Inhi be vs_ oh it is aimed is to be amended, we feel it should k "J.Y. the addition of a requirement that the reserve of h A er cent of potential liability be built up by a given pa te "We have made suggestions which, we think, make some es of S. 179 and S. 180 acceptable in the public inSt For the remainder of the bills, we feel as we did ay 24, 1944, when we said: The Board is in sympathy with what it understands to have been the original objectives of the Federal Home Loan Bank System whereby Federal Savings and Loan Associations and simliar institutions would supply the need for local mutual thrift and home financing institutions, and Federal Home Loan Banks would 449 3113/45 —20— "act as reservoirs of funds for the accommoda— tion of their member institutions. The Board believes that the enactment of these bills would represent a material departure from these ob— jectives. On the one hand, high dividend rates to shareholders plus the insurance of their in— vestment in such shares would tend to attract funds far beyond those incident to local mutual thrift and home financing programs. On the Other hand, broadened powers would offer in— vestment outlets for such funds equally beyond the scope of the original objectives. Thus, their enactment would constitute a step in the direction of establishing a separate and com— Plete banking system with an opportunity to compete for ordinary banking deposits on favored terms." Letter to Couressman Spence ro "This is in reply to your request of _r Zthe opinion of the Board of Governors on the merits the bills H.R. 593, H.R. 594, and H.R. 595 which are ' r before your committee. th "As you probably know, these bills are substantially a e same as three bills, S. 1034, S. 757, and S. 756 re— 1.7e1,Y, which were before the 78th Congress and on 2ra the Board commented in two letters, one dated May 44d the other dated December 16, 1944. The only dif— fe, Inces between the present House bills and the three bil (1) 184 which were before the Senate last year, are that 594 omits a provision which was in S. 757, chang— tie word 'other' to 'any' in subsection (c) of sec— of the Home Owners' Loan Act (a provision to which rnor'-'d not object); and (2) the preamble of H.R. 593 is explicit than was that of S. 1034. bill "Since these bills are substantially the same as the 40 s we commented on last year, and since we have seen witil;eason to change our position on them, we repeat here, ter, c)/13,1/ necessary minor changes, what we said in our let— °f December 16, 1944 addressed to Senator Radcliffe. H.R. 514_ and section 1 of H.R. 595. ciat."Under existing law, a Federal savings and loan asso1°n MY not (1) make loans for the improvement or repair X 450 3/13/45 -21- of homes except on the security of a mortgage; (2) make loans on homes located more than fifty miles from the association's home office; or (3) make an aggregate amount °f loans on real estate other than homes in excess of 15 1?sr cent of its assets. H.R. 594 would exempt any loan Insured under the National Housing Act (as now drawn or as hereafter amended) from the requirement that loans r,n. 11st be secured by mortgages, the 15-per-cent-of-assets and the 50-mile limit. Fed"Vie have no objection to the proposed authority for eral associations to make repair and modernization ii°arls Which are insured under Title I of the National c°Using Act, on the security of notes alone or to the p°rresPonding provisions of section 1 of H.R. 595 in so ' cl,r as they would authorize Federal Home Loan Banks to _Isoount loans made under these provisions of H.R. 595, ;? amended. Also we should have no objection to the proof H.R. 594 and of section 1 of H.R. 595 in so Ba a' l as they permit Federal associations and the Home Loan to make and to accept as collateral for advances nks und er section 10(a), home mortgages insured by the FedHousing t Administration with maturities up to twentyy "We do not believe, however, that the remaining proa,sions of H.R. 594 should be enacted. Savings and loan rilsic)ciations have traditionally been local thrift and home n cavia,cing institutions, gathering investment funds of inhol uals from the local community and lending them out to co e owners and prospective home owners within the local Th,‘InIrnanity. This is clearly the basic function which Conintended Federal savings and loan associations to at14!°rm, although it permitted then, as a matter of operea'ig flexibility, and to meet unusual situations, to enother lending activities within well-defined limits. and "We believe this element of flexibility is proper to 4.,1 seful, but if operations now permitted as exceptions tio'ne rule should become the general rule, the basic funcn, described above would be fundamentally altered. We tCe4-, therefore, that the loans made on properties outside a-ssociation's locality (i.e., beyond 50 miles) should re , 'IT within the 15-per-cent-of-assets limitation. rel We also believe that the financing of large-scale housing should continue to be subject to the 15-perOf-assets limitation. Such financing is essentially 45:1 3/13/45 -22- nr14 4 ,,, " .4-Lerent from the financing of homes for owners and Prospective owners. The borrower, in the case of rental vs°11sing, is not a home owner. He is an investor in a usiness enterprise just as is the hotel owner. Thus the financing of large-scale rental housing is essentially ' i s'ness financing, which it was never contemplated sav, ngs and loan associations would undertake. The Federal '2°14e Loan Bank Board has, we think quite properly, recog"J-zed this fact, because, although the present law would Permit Federal savings and loan associations to make any ri thc)n-psh°111e loan within the 15-per-cent-of-assets limitation, Board by regulation, has imposed severe restrictions the -,3t?' rental housing loans which they may make. It has 'lraited such loans to 50 per cent of appraised value, except in the case of small apartments (5 to 12 families) which the limit is 60 per cent, even though they are rlaured under the National Housing Act. "For these reasons we feel that the blanket authorization of Federal savings and loan associations to lend a tIV amount anywhere on insured mortgages, which is conemPlated by H.R. 594 and section 1 of H.R. 595, should riot be enacted. Section 2 of H. R. 595 The purpose of section 2 of H.R. 595 is to increase b' c e amount of money which the Federal Home Loan Banks may a r*row in the money market by widening the range of Bank : 1 8ets on the basis of which debentures may be issued. The vs'? ae it now stands restricts the amount of debentures to -ch the System may issue to the amount of advances to g1,111bers secured by loans of the types prescribed by ConTheee in section 10(a) of the Federal Home Loan Bank Act. thlle, the power of the Home Loan Banks to obtain funds in I neY market is geared to the volume of the advances toe, type e member institutions secured by loans of the best , namely, loans which qualify under section 10(a). Ho seems obvious that the present provision furnishes the acirlie Loan Bank System with borrowing capacity more than foequate to enable member institutions to meet the demand Ilch loans in communities where share accounts are into fleient. Within the limitation which relates debentures eaPiLal, the Home Loan Banks can now issue debentures one-for-one basis for the entire amount of 10(a) loans riot Counted. In what way could a demand arise which could be met under the present provision? Only if member Z 452 3113/45 -23- "institutions should wish to rediscount other types of Paper (or obtain unsecured advances) in considerable voll!Ine. Such other paper would include mortgage loans on uusiness properties, apartment houses, and other non-home Pr°Perties, as well as loans made on the security of share ,ccounts. It seems apparent that Congress did not intend such paper should form the basis for obtaining addilonal funds in the market. With the possible exception °f loans on the security of share accounts, this is a type °11 financing that should be held within the 15-per-cent-of,1118ets limitation, as already pointed out herein, and 6herefore that should not be encouraged by giving such .4Per, sr when discounted at a Home Loan Bank, the same acpfes to' market funds as is enjoyed by 10(a) paper. In , acts the power to include such other paper in the dernture base would have the inevitable effect of eliminatg the relative desirability of loans under section 10(a) hich are clearly the most appropriate type of loan for 11111t1lal thrift and home financing institutions. "The proposed amendment would also include in the debenture base of the System all Government obligations ed directly by the Federal Home Loan Banks. This pro112ion would permit Government obligations, including those ci'Ld as part of the Banks' reserves, to be counted in the ehenture base. pr "The present law in our opinion is over-generous in in°vicling that required reserves may be invested in earnassets (the reserves of commercial banks and those of the Federal Reserve Banks may not be in earning assets) the proposed amendment would go even further by allow• the reserves to be again multiplied by forming a base • the issuance of debentures. th "There is nothing in the present law which restricts tie Power of the System to raise money to perform the func:Is it was established to perform, namely, to provide a mieel'voir of funds on which member institutions can draw •!1 the demand for sound home mortgage loans in their corn.es exceeds the amount of share investment. Without tj?-ing debentures, the Banks can make advances out of rrelr own capital, as well as from deposits they may have ela member institutions which have more share capital th° 4 the Banks exceed the mortgage loans. When demands on ee resources, the System may borrow from the money r Z 453 3/13A5 -24-- market the entire amount of section 10(a) advances from the Banks to their members. "Bearing in mind that Federal savings and loan assoelations are forbidden by law to accept deposits and that the holder of a share in such an institution should not expect the same liquidity as the owner of a deposit in a com;!ercial bank, it seems obvious that the Federal Home Loan "Leaks should not need to raise funds on the basis of assets Other than loans of the types described in section 10(a) of the Federal Home Loan Bank Act. The most likely use for Such funds would be to make unsecured advances to member 1 .astitutions to enable them to meet demands for share withtrawals - an operation which is clearly inconsistent with the nature of share accounts and the uniform charter proof Federal associations governing withdrawals. "We object to section 2 of H. R. 595, therefore, on he following principal grounds: first, because it would -roade- the base for debentures in such a manner as to encourage by member institutions of types which lending are inappropriate for local mutual thrift and home financing e institutions; second, because, by including paper not t°11forming to section 10(a) as well as Government obligaa10118 owned directly by the Federal Home Loan Banks, whether 48 part of their reserves or not, it would make available 4) the Banks far more funds than they need in order to perform their functions; and third, because it is desirable ' ..at the reserves of the Federal Home Loan Banks, which ase already invested in earning assets, should not be used a basis for further generation of credit. "The argument which has been advanced, that the Fedex v‘Home Loan Banks have not participated as fully in the trencing of the war as they would if Government obligavt°ne could be included in the debenture base, is not con. The Treasury has said repeatedly that it does 1.10 G 'want institutions to borrow money in order to purchase °verament bonds. Section 3 of H.R. 595 mu "Section 3 of H.R. 595 contains two proposals which sest be considered separately: the first authorizes the Pee firetarY of the Treasury to purchase obligations of the e!'al Home Loan Banks or the Federal Home Loan Bank Syste; .14 amounts not to exceed three times the total of the LoPltal stock, reserves, and surplus of the Federal How all Banks; the second authorizes the Secretary of the i 4 454 3/13/45 —25— "Treasury to purchase obligations of the Federal Savings 4. a.11(1 Loan Insurance Corporation, with a corresponding limi— uation on amount. "Mr. Fahey stated last year that the authorizations by this section are to be used only in emergencies. It. seems to us, then, that the legislation should be worded ' tdo as to indicate this purpose. The unqualified authoriza— A!'°I. now contained in the proposal implies (despite the 'LLscretion lodged in the Secretary of the Treasury) that it, neral support of the obligations of the Federal Home Loan 1,"(LEc System is to be given by the United States Treasury. feel that no such implication should be given. On the Other hand, there is merit to the suggestion that it would be undesirable in the public interest for Home Loan Banks e° be unable to meet maturing obligations due to a temporary l ‘gencY. We have no objection, therefore, to a provi— sTe ; t On.permitting the Secretary of the Treasury, if he de— that the market situation warrants such action, s° retire from the market such maturing obligations as the cannot redeem without undue sacrifice and giving him Power to 8,: negotiate with the Federal Home Loan Bank Board tlh terms and conditions as he feels to be desirable for 4? Protection of the Treasury in connection with such ac— Q-011. wWith regard to the second proposal, the law under which o the Federal Savings and Loan Insurance Corporation pP rer'?.tes now provides that insured institutions shall pay : po a1 . 4 4111S, which shall cease when the reserve of the Cor00:240n reaches 5 per cent of the insured risk, but the tC°ration is authorized to assess each insured institu— allr additional premiums equal to the amount of all in— CC claims and operating expenses. (The required in— premium and the maximum annual assessment are each cr--?Ighth of one per cent of the insured accounts and prntor obligations of the insured institutions.) These thjleicns would indicate that the Congress contemplated tha :the premium would be used to provide the reserves and hts L the assessment would be used to pay losses and ex4,naes • 11 "However, the Corporation has never exercised its ati ,t0 assess, with the result that, in effect, insur— N8 -Losses and operating expenses have come out of the ' erve. At the end of the fiscal year 1943 the reserve 3/13/45 -26- n, only slightly more than one—half of one per cent of l'ne insured risk, or one—tenth as large as Congress de— 'ermined the reserve should ultimately be. "We feel that, if the Treasury is to guarantee the 1 litY of the Corporation to meet its insurance contracts, should be called upon to do so only after the Corpora— L: 1011 . has made full use of the facilities already furnished Uotigress for providing adequate reserves, as set forth Delow. V2 "We should have no objection, therefore, to a measure "alch authorized the Secretary of the Treasury to purchase (bligations of the Corporation provided that: (1) The Qscretary determines that a reasonable market for the Cor13,°ration's obligations does not exist; (2) The obligations ohased by the Secretary shall bear interest at a rate h ch: in the judgment of the Secretary is a fair rate, tring in mind the Corporation's normal market; and (3) „e Corporation has already placed in effect a program lup:. L .crediting to the reserve each year a sum sufficient to 11114 up its reserve to five per cent of the insured risk within a period to be set by Congress, but preferably not 131°re than ten years. Section 1 of H.R. 5_93 "In his support of S. 1034 last year, Mr. Fahey said that the effect of the provision waiving dividends due to In the Home Owners' Loan Corporation from the Savings and Loan 841TI!'ance Corporation would be to grant the Federal Savings 14r2, -Loan Insurance Corporation free use of its capital as done for the Federal Deposit Insurance Corporation when Triridends from Federal Deposit Insurance Corporation to the easry were eliminated. 'Congress did provide the Federal Savings and Loan cirrance Corporation with its capital free of cost. It that the Home Owners' Loan Corporation acquire the : el entire capital stock of the Insurance Corporation by erfling Horne Owners' Loan Corporation bonds for Fed— th;t Savings and Loan Insurance Corporation stock, and 1)01, the money paid as interest by Home Owners' Loan Cor00,:on on its bonds be returned to How Owners' Loan t (Dration by Federal Savings and Loan Insurance Corpora— dividends. The Home Owners' Loan Corporation aid 3 million dollars to the Federal Savings and Loa,', 1-nsurance Corporation each year since 1934, but since 47 4561 3113/45 -27- the Federal Savings and Loan Insurance Corporation 2-935paid Corporation. Owners' 2a8 Loan no dividends to Home ?stead, it has placed 3 million dollars each year in a Pecial reserve for contingencies, which now amounts to 27 . million dollars. Section 1 of H.R. 593 would remove .the Insurance Corporation's liability to Home Owners' *Z°an. Corporation for this 27 million dollars and would .srallefer this amount to the reserve which Federal Savings °Lad Loan Insurance Corporation is required by law to build It113- The Home Owners' Loan Corporation would thus be forced bear a loss of 27 million dollars which is not properly 'uargeable to its operations. t e are in sympathy with the suggestion of the Secre4.!'17 of the Treasury that a uniform policy be adopted for 'Oe treatment of public money used by Government corporaSince the Home Owners' Loan Corporation is in pro.eas of liquidation and has already called the bonds which ; 4Tre issued in exchange for the stock of the Federal Sav: ' 4E 68 and Loan Insurance Corporation, Congress might well ' _trect 1 the Secretary of the Treasury to purchase the stock the Federal Savings and Loan Insurance Corporation .Ll'om the Home Owners' Loan Corporation, and make whatever It deems best for the reimbursement of the Treasury ln the future. We see no good reason, however, for the waiving of th cle dividends which have been accrued contrary to the 1 ,7 expressed intent of Congress. Since insured inet?..r utions stop paying insurance premiums to Federal Savs and Loan Insurance Corporation as soon as the reserve aj a hes 5 per cent of the insured risk, the effect of such by Congress to the reserve of the Federal Savings Loan Insurance Corporation would be to relieve the ;71red institutions of the obligation to pay premilms rmainting to the 27 million dollars, plus interest for a -kulier of years. %e do not believe that Congress should make such a ,1 114t to private lending institutions at the expense of Treasury which will bear any losses which Home %: ers' Loan Corporation shows on liquidation. Section 2 of H.R. 593 "The reserve which Congress has said should some day ach 5 per cent of the Federal Savings and Loan Insurance W 3/13/45 O_ n —2— ' )orporation's insured risk was, on June 30, 1944, after t?n years of operation, only 0.57 per cent of the insured rlsk. Section 2 of H.R. 593 would reduce the insurance Premium due from insured institutions by one-third, and : I43111d consequently slow down the rate at which the reserve accumulated. Transfer of the dividends due Home Owners' ' 4..1?an Corporation to the reserve would, of course, raise ',.:11e ratio of reserve to liability, and might advance the ' 8Tte at which the full reserve might be reached. This f i plad not, however, divert attention from the fact that income available for reserves would be reduced suband, in a period when losses were high, would be sadly deficient. "Mr. Fahey pointed out last year that the right of the ane d Corporation to assess insured institutions for losses the operating expenses was retained in S. 1034 (although maximum rate of assessment was also reduced by onerd, and this right is also retained in H.R. 593. He A rgued that this power could be used to meet larger losses. ;Tart from the fact that the Corporation has never yet this power of assessment, it is doubtful that assessinnt%after large losses have started would be effective („Yle1ding the amount of revenue that would be required '41nce the amount of assessment for any one year is limited) ve could, in such a period of widespread strain, be contrtlient3,y paid by the institutions. Indeed, it is conto all insurance principles to attempt to assess the ' - 811red after the risk insured against has materialized. Fahey argued last year that the risk insured the Federal Savings and Loan Insurance Corporation is llout the same as that insured by the Federal Deposit In' a4lce Corporation, and that therefore the premiums should bel )3 similar. He took issue with our statement that Federal sit Insurance Corporation's risk is lower because there Ina considerable cushion between the Federal Deposit In of form the tj arIce in Corporation and its insured risk the eapital, surplus, undivided profits, and reserves, thea commercial bank to which there is no counterpart in i stitutions insured by Federal Savings and Loan In10 'rice Corporation. He maintained that the savings and thall associations have similar capital accounts and that ratio of these accounts to total assets is about the e for institutions in the two insurance systems. 4 458 3113/45 —29— , "If we assume that Mr. Fahey was correct in saying ' r hat there is a cushion between the Federal Savings and '?an Insurance Corporation and its insured institutions -railar to the cushion which protects the Federal Deposit ,118urance Corporation, the comparison between the two T.. rlould be based on the insured accounts of the institu— ms and not on their total assets. The capital accounts institutions insured by the Federal Deposit Insurance ?rporation amounted in 1942 to almost 25 per cent of 8/tie insured accounts, while the capital accounts of in— utiens insured by the Federal Savings and Loan Insur— e Corporation amounted to only 9 or 10 per cent of „8 insured accounts. In other words, a comparison would that the cushion in the case of the Federal Deposit 1 slarance Corporation is over 2-1/2 times as great as in .4! the ease of the Federal Savings and Loan Insurance Cor— P°ration. sa "It has been asserted (by Mr. Kreutz of the National vings and Loan League, for example) that the risk as— QIImed.uy tio the Federal Savings and Loan Insurance Corpora00 n is less than that of the Federal Deposit Insurance sar pration because the former insures only the ultimate ?tY of share accounts and makes no attempt to insure the i, lr liquidity. Under the procedure which Federal Sav— is and Loan Insurance Corporation has adopted for meet— ing insurance claims, however, liquidity is in effect tisured. The Corporation pays cash to operating institu— in°11s for share accounts which they issue to holders of red accounts in liquidating institutions, but whether the mee holder of the transferred account obtains cash im— ti,atelY is apparently not within the direct control of C institutions have ap— Pare orporation, although to date, u4entlY been ready to permit withdrawals on demand. it:this procedure the Corporation will be able to meet 4-asurance contracts in time of stress only if it has eahquate cash or other liquid resources, and we feel it /141°t have these resources unless it builds its reserves e quickly than it has built them up to now. pa, For these reasons, therefore, we are opposed to the lav age of H.R. 593 and all of its provisions. If the be iv,.at Which it is aimed is to be amended, we feel it should 5 the addition of a requirement that the reserve of Per Cent nt of potential liability be built up by a given (tat_ T Z r "We have made suggestions which, we think, 'mice some 4-A 3/13/45 -30- lr's?ages of H.R. 594 and H.R. 595 acceptable in the pub— -L aleC interest. For the remainder of the bills, we feel 8 we did on May 24, 1944 when we said: The Board is in sympathy with what it understands to have been the original objectives of the Federal Home Loan Bank System whereby Federal Savings and Loan Associations and similar institutions would supply the need for local mutual thrift and home financing institutions, and Federal Home Loan Banks would act as reservoirs of funds for the accommodation of their member institutions. The Board believes that the enactment of these bills would represent a material departure from these objectives. On the one hand, high dividend rates to shareholders plus the insurance of their investment in such shares would tend to attract funds far beyond those incident to local mutual thrift and home financing programs. On the Other hand, broadened powers would offer investment outlets for such funds equally beyond the scope of the original objectives. Thus, their enactment would constitute a step in the direction of establishing a separate and complete banking system with an opportunity to compete for ordinary banking deposits on favored terms." Approved unanimously, with the understanding that the letters would not be sent until the bills mentioned therein were taken up for consideration by the respective committees. Thereupon the meeting adjourned. 1(4-Z4LA:EA; hrnb-lAx!‘elp Secretary. Chairman.
@FedFRASER