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REPORT

OF

THE

COMMITTEE

ON

F E D E R A L C R E D IT P R O G R A M S
to th e
P r e s id e n t o f th e U n ited S ta tes

Transmitted by the President to Agencies with Responsibilities for




Federal Credit Programs

February 11,1963




Report of the Committee
on
FEDERAL

C R E D IT

PROGRAM S

to th e

P res id en t o f th e U n ited S ta tes




U.S. (JOVLKNMLNT PRINTING OFFICE
VASUINGTON : 1963




T h e W h i t e H o ttse ,

Washington, February11, 1963.

Memorandum to:
The Secretary o f State.
The Secretary of the Treasury.
The Secretary of Defense.
The Secretary of the Interior.
The Secretary of Agriculture.
The Secretary of Commerce.
The Secretary of Health, Education, and Welfare.
The Director of the Bureau o f the Budget.
The Chairman of the Council of Economic Advisers.
The Chairman of the Board of Governors of the Federal Reserve
System.
The President of the Export-Import Bank of Washington.
The Governor of Farm Credit Administration.
The Chairman of the Federal Home Loan Bank Board.
The Administrator of the General Services Administration.
The Administrator of the Housing and Home Finance Agency.
The Chairman of the Interstate Commerce Commission.
The Administrator of the Small Business Administration.
The Administrator of the Veterans’ Administration.
Subject: Implementation of the Report of Committee on Federal
Credit Programs.
I am transmitting herewith to the agency heads listed above copies
o f the Report of the Committee on Federal Credit Programs. This
Report not only provides a valuable appraisal of the past experience
of Federal credit programs in helping to meet our national goals, but
also contains recommendations which should be very helpful in provid­
ing a framework for the further evolution of these programs in accord
with the changing requirements o f an expanding economy, fully con*
sistent with the maintenance of strong and active private markets, and
subject to effective review and control.
I suggest that all departments and agencies administering loans, loan
guarantee and insurance programs (including related grant pro­
grams) be guided by the principles outlined in the Report in admin­
istering their present programs and especially in proposing any new
or expanded credit authority. I am asking the Director o f the Bureau




oil)

IV

of the Budget to take the lead in assuring an effective and equitable
application of those guidelines.
As a further step to carry out the Committee’s recommendations,
I am requesting the Chairman of the Council of Economic Advisers,
as part of the Council’s role in advising me on economic policy, to
organize, under his chairmanship, an advisory committee to review
the special economic problems that may arise from time to time in
each of the major areas involving important domestic credit aids.
I am also asking the Secretary of the Treasury both to participate in
the work of the advisory committee dealing with special economic
problems and, as part of his general responsibility for administering
debt management and for reviewing the borrowing operations of these
agencies, to take special responsibility for assuring that any borrow­
ing arrangements undertaken by these agencies are consistent with
overall monetary and debt management policies.




N o v e m b e r 27, 1962.
D e a r Mr. P r e s i d e n t : We submit herewith the Report of the Com­
mittee on Federal Credit Programs established in response to your
memorandum to us of March 28,1962.
In accordance with your directive, we have reviewed the legislation
and administrative policies relating to Federal credit programs, and
assessed their effectiveness in terms of our national goals. The Com­
mittee has attempted to extract from the record of the past quarter
century or more those principles and procedures which have most
clearly met the tests of experience in fulfilling the public policy ob­
jectives for which these programs have been intended. Our aim has
been to develop a set of guidelines which could provide a framework
for the further evolution of these programs to meet the changing
requirements of an expanding American economy.
The report is the end product of intensive discussions among senior
officials of our four agencies. We have also benefited greatly from
the full cooperation of the major Federal agencies administering
credit programs. The starting point of our inquiry was the study
of the Commission on Money and Credit, and the staff of that Com­
mission kindly made available to us research studies pertaining to
this area originally prepared for their use. While calling freely
upon the varied talents and experience of our own staffs, we did not
ourselves undertake to sponsor extensive new research within the time
available to us. The staff work was directed by Mr. J. E. Reeve of
the Bureau of the Budget, who served the Committee ably as execu­
tive secretary.
Committee representatives have met in 35 sessions, usually on a
regular weekly basis. The early meetings were devoted largely to
the task of identifying major problems and areas for investigation,
culminating in a series of discussion papers and tentative positions.
Following your suggestion, the Committee then sought the views
of each of the major Government agencies in this area. During Sep­
tember, a series of five meetings was held with representatives of these
agencies, using the tentative position papers developed by our staff
and distributed to the agencies as a starting point for discussion. The
Committee also met with a group of consultants, which included sev­
eral experts long acquainted with the special problems of Federal
credit programs as well as leading professors from several universities.




(V)

VI

In addition, we invited written comments from interested trade asso­
ciations, groups of financial institutions, and other private parties.
After appraising all comments and views received, the Committee
then prepared a tentative draft report. This draft was in turn cir­
culated to each of the agencies responsible for major credit programs,
with a request for an expression of their further views and comments.
The final report, therefore, reflects careful consideration by the Com­
mittee of the expressed views of Government credit agencies, as well
as the comments volunteered by private individuals and organizations.
This, o f course, should not be interpreted as implying agreement on the
part of affected Federal credit agencies with every recommendation
or with all parts of the supporting analysis in the report.
The Committee did not interpret its mandate to include an exami­
nation of the desirability of particular goals of particular agencies,
nor did it seek out specific new areas in which Federal credit programs
might be used. We should make clear, however, our common belief
that these programs—ranging from the provision of limited assistance
to private credit agencies, through various forms of loan insurance
or guarantees, to a number of facilities for direct lending by Federal
Government agencies—have become a vital part of the credit structure
which supports and promotes the energetic growth of our American
private enterprise economy. This report is submitted in the convic­
tion that it can assist in the task of adapting these useful programs
to the new needs and changing circumstances of the future.
Faithfully yours,
D

D

ouglas

il l o n ,

Secretary o f the Treasury, Chairman.
D a v id

E.

B e ll,

Directory Bureau o f the Budget
W

alter

W . H

eller,

Chairman, Council o f Economic Advisers.

Wm. McC.

M a r tin ,

Jr.,

Chairman, Board o f Governors o f the Federal Reserve System.
T h e P r e s id e n t,

The W hite House.

(Enclosure)




TABLE OF CONTENTS
Page

I.
II.
III.
IV.
V.
VI.
VII.
VIII.
IX.
X.
XI.
XII.

Preface__________ ____ ______________ ______ ______ ____ _
Role of Federal credit programs____________________________
Criteria governing choicc among credit and noncredit aids......... .
Participation of private lenders________ ____ _______________
Loan guarantees and insurance____________________________
Secondary market operations______________________________
Direct loans. _____________________________ ___________
Financing of credit programs______________________________
Budgetary treatment and control___________________________
Promotion of economic stability and growth__________________
Organization and coordination_____________________________
SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS-

1
4
9
14
17
21
24
29
33
36
40
44

APPENDICES

A. Memorandum of the President establishing the Committee on Federal
Credit Programs________________________________________
B. Recommendations of the Commission on Money and Credit regarding
Federal credit programs, including seven general guides-------------C. New and broadened Federal credit programs in 87th Congress, 2d
session_______ _______________ ____ _______ _____________
D. Historical trends in major Federal credit programs_______________
E. Outstanding direct loans and guaranteed and insured loans for active
or newly authorized domestic Federal credit programs, June 30,
1961............................................................................................
(VII)




53
53
69
63
65




R E P O R T

O F

C O M M IT T E E

O N

F E D E R A L

C R E D IT

PR O G R AM S

L PR EFA C E
A . A ssignm ent
In his memorandum o f M arch 28, 1962 (see app. A ) , the President
established a Committee on Federal C red it Program s to review legis­
lation and adm inistrative practices relatin g to Federal credit pro­
grams, using as a point o f departure the relevant recommendations
o f the Commission on Money and C red it (see app. B ) . Th e President
pointed to the “need fo r a thorough review o f the im pact o f these pro­
grams on the economy, th e ir effectiveness fo r the special pm*poses fo r
which they were established, and the policies and techniques employed
in adm inistering them .”
As more specifically defined by the President, the general task o f the
Com m ittee was “to consider w hat changes, i f any, in Federal credit
program s would contribute to achieving the nation’s economic goals.”
In addition, the Committee was requested to consider p artic u la rly the
follow ing five topics:
(1 ) The circumstances under w hich Federal credit pro­
grams should be self-supporting and the c rite ria fo r and
character and extent o f subsidy where subsidies are
appropriate;
(2 ) The c rite ria fo r determ ining w hether a p a rtic u la r pro­
gram should take the form o f direct Federal lending, loan
insurance, loan guarantee, or other fo rm ;
(3 ) The budgetary treatm ent o f Federal credit program s;
(4 ) The appropriate degree o f coordination o f Federal
credit program s w ith the general m onetary and fiscal policies
o f the Federal Governm ent, and the use o f credit program s
fo r countercyclical purposes: and
(5 ) The role and effectiveness o f statutory and adm inistra­
tive interest rate ceilings in Federal credit program s.

B. Scope and Trends of Federal Credit Programs
F ed eral credit program s consist m ain ly o f direct loans and p a rtic i­
pations, secondary m arket operations, and insurance and guarantee o f
p rivate loans. O ver the years, as these program s have increased in




<i>

2
number and size, they have become significant means fo r accomplish­
in g many Government objectives. C red it program s are currently
adm inistered by seven Cabinet departments (A g ricu ltu re; Commerce;
Defense; H ealth , Education, and W e lfare ( H E W ) ; In te rio r; Treas­
u ry ; and S tate) and by m any other agencies (including, especially,
the H ousing and Hom e Finance Agency ( H H F A ), Veterans’ A dm in­
istration ( V A ), Sm all Business A dm inistration (S B A ), E xp o rtIm p o rt B ank, and In terstate Commerce Commission ( IC C ) ) . In
addition, the F arm C red it A dm inistration (F C A ) and the Federal
Hom e Loan B ank Board (F H L B B ) provide support fo r quasi-public
credit programs operating in whole or in p a rt w ith private funds.
In every Congress, numerous proposals are made, and actions taken,
to increase the variety and magnitude o f Federal credit programs.
F o r example, at least 14 o f the public laws enacted in the 1962 session
o f the Congress either authorized the establishment o f new credit
program s or broadened existing program s. E ig h t other bills author­
izin g new or expanded credit programs were reported by committees
o f one or both Houses o r proposed by the adm inistration but d id not
become law . (S e ea p p .C .)
The expanded range o f these program s has been accompanied by a
gradual continuing increase in th e ir current level o f activities. In
recent years, m ajor Federal credit program s, excluding Governmentsponsored quasi-public programs and direct and guaranteed loans o f
the Com m odity C red it Corporation (C C C ), have involved annual
new commitments o f $18 b illio n or more. O utstanding direct and
guaranteed loans o f the same programs by the end o f the fiscal year
1961 had risen to $94 b illio n (o f which $71 b illio n were loans w holly
o r p a rtia lly insured or guaranteed by Government agencies). H o w ­
ever, the net im pact o f these activities on the Federal budget in any
one year is only a sm all fractio n o f these amounts, because over threefourths o f the credit assistance usually represents guarantees or in ­
surance o f p rivate loans o r loans by Government-sponsored enter­
prises, and because a larg e share o f the new disbursements on direct
Federal loans and m ortgage purchases are offset b y repayments on
outstanding loans and sales. (S e e a p p .D .)

C. Scope of the Committee’s Review
The broad range and the continuing expansion in Federal credit
program s, together w ith the volume o f legislative proposals, empha­
size the need fo r development and application o f consistent standards
and principles to govern the Federal role in this area. T o make its
task manageable, and to concentrate on the subjects specifically men­
tioned by the President, the Committee gave p rim a ry attention to
the principles and policies governing the m ajo r active o r proposed




3
domestic credit programs. In its review , therefore, the Com m ittee
has excluded or placed only m inor emphasis on issues peculiar to fo r­
eign loans, to programs in which the credit aspects are incidental (e.g.,
farm price support loans, repayable Federal investments, and sales
c re d it), and to inactive or liq u id ating credit program s.
F o r sim ilar reasons, the Committee did not attem pt to evaluate the
adm inistration o f specific individ u al credit program s. In its analysis^
however, the Committee found it useful to review five m ajo r groups
o f active domestic credit program s (excluding C C C program s), each
o f which serves s im ilar or related purposes. These program s are
summarized below (and additional d etail on the level o f outstanding
direct, guaranteed, and insured loans is shown in app. E ) :

1. Private housing, including—
(a) Housing and Home Finance Agency—especially Federal Housing
Administration (FHA) mortgage insurance, Federal National Mortgage
Association (FNMA) mortgage purchases, and Community Facilities Ad­
ministration (CFA) direct loans for housing for the elderly.
(&) Veterans* Administration—guaranteed and direct loans.
(c) Department of Agriculture—Farmers Home Administration rural
housing loans.
(<Z) Federal Home Loan Bank Board—Federal home loan bank advances.
2. Community development and pubUc housing, including—
(a) Housing and Home Finance Agency—especially Urban Renewal Ad­
ministration (URA) and Public Housing Administration (PHA) direct and
guaranteed loans, CFA public facility loans and Office of the Administrator
(OA) mass transportation loans.
( b) Department of Commerce—Area Redevelopment Administration
(ARA) public facility loans.
(c) Treasury Department—public works loans to the District of Columbia
(DC).
3. Business and transportation, including—
(a) Department of Commerce—especially ARA loans for industrial and
commercial facilities. Maritime Administration ship mortgage insurance,
and aircraft equipment loan guarantees.
(&) Small Business Administration—especially loans to businesses and
purchases of Small Business Investment Company (SBIC) obligations.
(c) Interstate Commerce Commission—guarantees of railroad loans.
(d) Department of Defense—guarantees of defense production loans.
4. Education and health, including—
(a) Department of Health, Education, and Welfare—especially defense
education loans.
( b) Housing and Home Finance Agency—especially CFA college housing
loans and FHA nursing home mortgage insurance.
5. Resource development, including—
(a)
Department of Agriculture—especially Rural Electrification Admin­
istration (REA) loans and most Farmers Home Administration loans and
loan insurance.
(ft) Department of the Interior—especially Bureau of Reclamation loans.
(*)Fmrm Credit Administration—loans by Federal intermediate credit
banks, banks for cooperatives, and Federal land banks.




4
D . U s e o f t h e C o m m it t e e ’ s R e c o m m e n d a t io n s

In preparing its recommendations, the Committee has emphasized
p rim a rily the development o f principles to help guide the President
and the executive agencies in proposing or review ing new legislation
on credit programs and in adm inistering existing programs. A rea­
sonably effective and equitable application o f the specific guidelines
would appear to require two different types o f approaches.
(1 ) In cases where existing program s are not w holly consistent
w ith the recommendations, m ajor changes m ay not be possible imme­
diately. O ver a period o f tim e, however, opportunities should arise
fo r gradually sh iftin g the credit aspects o f these programs to meet
the recommendations more fu lly . The Bureau o f the Budget, in the
norm al process o f program review, should canvass w ith each credit
agency the steps ( including proposals fo r changes in basic legislation)
which it could reasonably be expected to take to adjust its programs
in line w ith these recommendations.
(2 ) Proposals fo r new programs and fo r substantive changes in
existing programs represent a more prom ising area fo r immediate
action. The objective here should be to make certain that the credit
agencies consider the problems raised in this report when they draw
up proposed legislation or suggest new programs, and do so before
the specific legislative or other proposals are fo rm ally submitted fo r
clearance w ith other interested agencies. As a possible device to
accomplish this purpose, every futu re proposal involving a new credit
program or a substantive change in existing programs should be
accompanied (o r preferably preceded) by a memorandum which evalu­
ates the proposal in terms o f each o f the relevant recommendations in
this report.

IL T H E ROLE OF FED ER A L C R ED IT PROGRAMS
Federal credit programs have become, in recent decades, an in ­
creasingly im portant method fo r achieving some o f the basic eco­
nomic and social goals o f our society. W ith in a fram ew ork of
p rim ary reliance on p rivate in itia tiv e and enterprise in financial m ar­
kets, they have contributed to a strong, com petitive economy, and
helped m aintain a broad range o f economic opportunities fo r the
in d ivid u al. They have successfully enabled sizable groups o f our
citizens to share more fu lly in our economic progress. A nd, they
are m aking significant contributions to the v ita l task o f community
development and redevelopment.
Throughout its work the Committee has recognized and accepted
the role Federal credit program s have come to p lay in the pursuit o f
fundam ental Government objectives. H ow ever, it has neither at­




5

tempted to pass judgm ent on the wisdom o f the p articu lar goals set
fo r p articu lar credit programs, nor has it trie d to find specific areas
in which new programs m ight be appropriate. R ath er, it has con­
centrated attention on: (1 ) id e n tifyin g the kinds o f situations in
which credit aids are lik e ly to be most u sefu l; (2 ) seeking out, from
the rich experience o f recent decades, the adm inistrative and finan­
cial arrangements lik e ly to promote effective and economical use o f
credit programs fo r m eeting the legitim ate goals set by the Congress;
and (3 ) suggesting means fo r assuring consistency w ith other Gov­
ernment programs and policies.
In shaping its conclusions, the Committee has recognized th a t the
characteristic th a t distinguishes Federal credit program s from other
Federal program s is not goals but techniques, and the test th a t has
been applied is how effectively and economically the credit technique
can be adapted to p artic u la r ends.

A. Past Accomplishments
The effectiveness o f Federal credit program s in achieving certain
goals— m any o f which could not have been achieved nearly so w ell by
other means— can be illustrated by examples draw n fro m each o f the
five im portant domestic areas in w hich such program s are operating.
(1 ) Private housing- Federal insurance o f am ortized mortgages,
in itia te d in the depths o f the G reat Depression, has successfully broad­
ened home ownership1 im proved housing standards, and contributed
to a healthy, com petitive mortgage m arkqt. T h e flow o f new savings
into housing has also been fac ilita te d by Fed eral sponsorship o f a
central reservoir o f credit fo r the savings and loan industry, and by a
Governm ent secondary m arkqt fo r insured and guaranteed mortgages.
Federal agencies have pioneered in broadening the flow o f housing
credit to various groups in special circumstances— including moderateincome fam ilies, the elderly, and those in fa rm and ru ra l areas removed
fro m fin an cial centers.
(2 ) Community development and public hwmng.— Federal credit
assistance— Jointly w ith other aids—is helping hundreds o f communi­
ties to obtain the funds necessary to acquire and redsYeJflpland* to
provide decent housing fo r the underprivileged* and to plan (and in
some cases to construct) sorely needed public fac ilitie s, w ith im portant
benefits extending w ell beyond the groups im m ediately affected.
(3 ) Business and transportation.— Thousands o f sm all businesses
through Federal assistance have secured cred it essential to th e ir sur­
v iv a l and grow th, resulting in greater economic opportunity and a
more com petitive m arket environm ent. F ed eral cred it assistance to
other Businesses—in shipping, aviation, and railroads— has supported




6

the national interest in an efficient transportation system, able to meet
our needs in w ar and peace.
(4 ) Education and health.— Hundreds o f universities and colleges
have been assisted in meeting the demands imposed upon them by
soaring enrollments by long-term Federal loans fo r dormitories. In
addition, thousands o f students have been encouraged by Federal
credit to acquire scientific and other tra in in g useful both to themselves
and to the national security.
(5 ) Resource development.— A substantial m in o rity o f a ll A m eri­
can farm ers have been able, to obtain access to national financial m ar­
kets as a result o f credit facilities provided by federally sponsored
lending agencies. These agencies were also used during the G reat
Depression to refinance farm debts when the p rivate credit system
was unable to function norm ally. D ire ct Federal loans, accompanied
b y management assistance and other aids designed to increase farm ing
efficiency, have also been made to low-income farm ers to enable them
to obtain adequate production resources* Both farm ers and other
ru ra l residents have been able to share more prom ptly in the benefits
o f electric power and telephone services by virtu e o f long-term Federal
loans to ru ral cooperatives. This varied credit assistance to farm ers
has helped to make possible the great strides in agricultural produc­
tiv ity th a t have occurred in the last few decades.
B . N eed fo r P ro g ram R eview
T o cite these varied and significant accomplishments is not to en­
dorse, in every d etail, either the mode o f operation o f existing pro­
grams, o r th e ir indefinite extension. The needs fo r specific types o f
credit assistance are certain to change over tim e, as the economy
changes and as the a b ility o f the p rivate m arket to provide p articu lar
types o f credit develops.
The Committee also has been impressed by the diversity among the
various Federal credit programs in the approach tow ard p articu lar
problems, in the c riteria used to determine the kin d o f credit assistance
employed, and in the terms and conditions under which Federal
assistance is rendered. In p art, o f course, this diversity is a natural
reflection o f specific objectives and p artic u la r circumstances. B u t,
in p a rt, it also stems from the absence o f a common set o f principles
and criteria in areas where common principles and approaches would
be both feasible and useful— and from a fa ilu re o f one agency to p ro fit
to the extent possible from the experience o f another.
These facts strongly suggest the importance o f regular reviews o f
existing credit programs to make certain th a t they conform to current
and prospective requirements and to the best current practice. C red it
program s, whatever th e ir mechanics, should not be considered a species




7
apart from other Government programs. Such program s are essen­
tia lly instruments o f public policy, and must be responsive to th a t
policy. They d ivert real and financial resources fro m other uses;
they often entail direct Federal costs and always some ris k ; and
inevitably they compete w ith other program s fo r available funds and
energies. In the end, like other Government program s, they must
be judged in terms o f how effectively and economically the techniques
used and the policies followed meet national objectives.
O n the basis o f these regular reviews, the Com m ittee finds it reason­
able to expect th a t some program s should, over tim e, move from
extending one type o f credit assistance to another, more in tune w ith
the evolution o f private m arkets. U pon occasion, agencies m ight dis­
charge th e ir educational or innovative responsibilities so effectively
th a t the special Federal support can be w ith d raw n en tirely, and its
functions assumed by an efficient, com petitive, and self-relian t p rivate
m arket th a t it helped to foster.
C. B asic P rin cip le s
In our society, there is a presumption th a t the allocation o f credit
fo r essentially private purposes should be a function o f private m ar­
kets. A ccordingly, the Com m ittee believes th a t Federal credit pro­
grams should, in the m ain and whenever consistent w ith essential
program goals, encourage and supplement, rath er than displace p ri­
vate credit. Th is is more than a m atter o f basic economic philosophy.
I t also recognizes the fact th a t the p rivate m arket w ill continue to
account fo r the great bulk o f a ll credit extensions. M ore can be
gained in the end, therefore, i f Federal cred it program s, by w orking
through the p rivate m arket, help to make it stronger and more com­
petitive, than i f they unnecessarily preem pt functions th a t private
parties can p o ten tially perform effectively. M oreover, by m aking
use o f the private m arket w ith its existing in stitu tio n al arrangements
and skills to the extent consistent w ith essential program objectives,
the problem o f adm inistering Governm ent program s can frequently
be eased, and the essential Governm ent aid made more conveniently
available to potential borrowers.
(1 )
Removal of credit “gaps”— E ffo rts to im prove the private
m arket mechanism are p artic u la rly appropriate when the purpose is
to elim inate a “credit gap.” T h is type o f situation can arise, even
in a generally w ell-functioning m arket, when p a rtic u la r types o f ac­
tiv ity , some groups o f borrowers, or specific geographic areas do not
have access to credit ,on reasonably com petitive term s, even though
they would be able to repay loans extended on such terms. Such
m arket im perfections can sometimes be elim inated by changes in Gov­
ernment regulations, or by chartering add itio n al p rivate financial in ­




8

stitutions. B u t in other cases, Federal insurance. Government contri­
bution of in itia l capital to a new institution, or even self-supporting
direct Federal loans m ight be the only feasible approach. W hatever
the p articu lar technique, the ultim ate objective should be to reduce
or elim inate the Government involvem ent i f and as private m arket
im perfections disappear.
(2 )
Provision of subsidies.— The situation is fundam entally d iffer­
ent when the essential purpose o f the Government program is not
merely to elim inate or bridge com petitive im perfections, but to pro­
vide credit on terms and conditions th a t would not be forthcom ing
even in a fu lly effective, com petitive, private m arket. Tn this case,
some sort of subsidy assistance w ill be required, and so long as a
valid need remains, there can be no reasonable expectation o f the
Government w ithdraw ing from the m arket. However, in appraising
both new and existing programs, efforts should be made to estimate
and disclose the subsidy element in a consistent fashion, so th at bene­
fits can be in tellig ib ly assessed in terms o f casts.
D . C o n tro l and C oordination
Federal credit programs present special opportunities and problems,
arising from methods o f financing and operation, th a t do not appear in
most other Government programs. The Committee sees no reason
why these special features should exempt credit programs from pro­
cedures fo r review and determ ination o f program levels comparable
to those regularly required fo r other Federal programs. Moreover,
fo r agencies borrow ing directly in the m arket, there is a special need to
coordinate the tim in g and terms o f such borrow ing w ith the Treasury
financing program .
Coordination and direction w ill be facilitated by grouping p ar­
tic u la r credit agencies together w ith other Government programs by
m ajor purpose. In this way, th e ir operations can be appropriately
evaluated and directed w ith in the context, o f the overall objectives and
operations o f Government fo r a p artic u la r substantive policy area.
E ffective coordination between broad program areas, and w ith the
central economic policies o f an adm inistration, is also im portant. The
Com m ittee, therefore, is proposing, consistent w ith precedents already
established in this adm inistration, in fo rm al consultative machinery to
assist the President in coordinating credit programs w ith overall eco­
nomic policy.
F in a lly , in the Com m ittee’s judgm ent, basic program legislation
should allow fo r enough adm inistrative discretion in determ ining
interest rates and other credit terms to p erm it prom pt adjustments to
changing needs and circumstances. A n d, the agencies themselves can,
in some instances, usefully devote increased attention to the develop­




9

ment o f adequate and equitable adm inistrative standards fo r allocating
th eir available funds to potential borrowers.
E . P o te n tia l fo r the F u tu re
Federal credit programs have achieved a lasting place in the fabric
o f Government economic policies, and the Com m ittee firm ly believes
there w ill be room fo r fu rth e r productive innovation in the years ahead.
So long as the grow th can be appraised w ith in a fram ew ork o f reason­
able guidelines, w ith fu ll awareness o f costs and benefits and w ith
recognition o f the continuing need fo r coordination, the potential fo r
credit program s as an effective tool o f public policy w ill be substantial.
I I I . C R IT E R IA G O V E R N IN G C H O IC E A M O N G C R E D IT
A N D N O N C R E D IT A ID S
C red it assistance represents one among several im portant methods
employed by the Federal Governm ent to accomplish the social objec­
tives o f specific programs. Th is section discusses the Tmsie objectives
which can be served by Federal credit aids, the types o f programs in
which credit assistance is most lik e ly to be useful, and the specific kinds
o f Federal credit aid which are most appropriate in various types o f
situations.
A . B asic O bjectives
Federal credit program s can appropriately be used to help finance
a p articu lar type o f economic a ctivity if such credit aid assists in - (1 ) Rem oving or reducing “credit gaps'’ arising from
m arket im perfections th a t result in discrim ination against
certain borrowers or in distortions in the flow’ o f funds to
certain activities or geographic areas;
(2 ) Influencing the s h ift o f additional resources into a
specific kind o f economic a ctivity to promote social purposes
which could not be achieved as effectively otherwise, even in
a perfect p rivate m arket; a n d /o r
(3 ) Increasing the to ta l use o f resources; i.e., using m an­
power and other resources otherwise unemployed.
B . S u ita b ility o f C re d it P ro g ram s
Even when Federal credit assistance can help to accomplish one
or more o f these basic objectives, it is not necessarily the most suitable
or effective method o f achieving the desired results. C red it assistance
is clearly not the best way, fo r example, fo r the F ederal Governm ent
to finance provision o f many goods or services y ield in g predom inantly
social benefits; e.g., direct Governm ent expenditures are the accepted
675170— 68------- 3




10

methods o f providing fo r defense and law enforcement. N or, at the
other extreme, is credit assistance the best method fo r providing pre­
dom inantly private goods and services, i.e., the benefits o f which accrue
almost entirely to in d ivid u al identifiable purchasers; in such cases,
Federal credit aids should be confined to measures designed to help
remove im perfections in the private credit system and should be
term inated when such imperfections are elim inated.
Otherwise Federal credit aid may be appropriate—
(1 ) W hen goods and services yielding m ajor benefits both
public and private are, as in the urban renewal field, norm ally
financed w ith borrowed funds;
(2 ) W hen the credit assistance w ill facilitate needed con­
tinuing surveillance o f the borrow ers use o f the funds pro­
vided or the provision o f m anagerial assistance by the
Governm ent; and /o r
(3 ) W hen borrowers are undertaking relatively novel, but
prom ising, ventures w ith which private lenders are not yet
fa m ilia r.
In a ll cases, however, there should be a reasonable expectation that
the credit can and w ill be repaid; e.g., th at borrowers w ill receive
substantial direct increases in real income through acquisition o f
assets or skills financed w ith Government credit aid.
On the other hand, Federal credit aids are inapproriate—
(1 ) W hen viable loans are improbable even w ith subsidy
interest rates— in such cases use o f direct grants or other
forms o f Government assistance would norm ally be prefer­
able, since they would not undermine norm al creditor-debtor
relationships;
(2 ) W hen even a viable loan would create such exoessive
debt service requirements against futu re income as to jeop- •
ardize the needed fu rth e r expansion o f the program — in
such cases (e.g., possibly where loans are proposed fo r local
school districts or hospitals), a m atching g ran t program
may be more suitable, in whole or in p a rt; a n d /o r
(3 ) W hen financing is not the real problem , e.g., when
the capital requirements are norm ally financed in tern ally
fro m depreciation allowances or reserves— in such cases, tax
reductions and other measures may be more effective incen­
tives tow ards achieving the desired objectives.
F ro m tim e to tim e Federal credit aids are proposed to meet w hat
are essentially equity capital needs; i.e., cases where there are both
substantial risk o f loss as w ell as possibilities o f considerable profits.




11

In such situations, the Federal agency involved should make a careful
exam ination to determine whether the need is fo r equity rath er than
credit financing. I f equity financing is needed and im portant public
purposes make some type o f Federal assistance essential, the ben­
eficiary, i f successful, should have an obligation to share some of
the returns w ith the Federal agency p roviding the assistance.
C. Types o f F e d e ra l C re d it A id
Once the usefulness o f Federal credit assistance in achieving pro­
gram goals has been determined, several m ajor considerations are
im portant in the choice among the various types o f credit aids.
(1 ) W herever consistent w ith achievement o f the essential
purposes o f the program , the Fed eral credit aids chosen
should be designed to encourage and supplement private
lending activities rath er than to substitute fo r them . Th is
emphasis is essential not only to preserve and strengthen the
a b ility o f the private m arket in our free enterprise system to
allocate resources efficiently, but also to avoid placing un­
necessarily large and complex adm inistrative burdens on
Federal agencies. (T h is subject is discussed in sec. IV .)
(2 ) B oth the im m ediate im pact on budget expenditures
and the long-run net cost are im p o rtan t factors in determ in­
in g the specific type o f credit aid which should be selected.
Short-run budget expenditures can be m inim ized by relyin g,
whenever feasible, on guarantees and insurance o f p rivate
loans, rath er than direct loans or m ortgage purchases. In
the long run, the cum ulative net cost entailed in subsidized
interest rates an d /o r in high d efau lt levels not covered by
adequate insurance charges should be compared w ith the cost
o f the direct grants required to accomplish the same objec­
tives. (These issues are discussed in sec. V I I . )
(3 ) The need fo r and potential effectiveness o f Govern­
m ent controls over lending terms and borrow er e lig ib ility is
often a m aterial factor in the choice among types o f Federal
credit aid. D etailed controls can be read ily applied when
direct loans are provided. Controls become more im portant
as the amount o f subsidy increases, when close surveillance
o f the use o f funds is necessary, a n d /o r when the borrow er’s
bargaining position is so weak as to require protection.
(4 ) The type o f Federal credit program selected and the
policies follow ed in adm inistering it should be influenced by
by whether the program is intended to be responsive to p o li­
cies on overall economic stab ility and grow th, or to operate
independently o f them . (T h e am enability o f various types




12

o f credit programs to economic controls is discussed in
S 6 C .X .)

D . G uidelines on P rio ritie s
I f the credit needs apparently arise from gaps in the private credit
structure, a logical first step is to try to remove them by broadening
the lending auth o rity o f existing private credit institutions, or even by
authorizing new types o f p rivate institutions which do not require
Federal financial aid. F o r example, statutory lim itations on m axi­
mum m aturities, percentages o f loan to value, and types o f assets
eligible fo r investment by p rivate institutions sometimes can
be liberalized w ithout conflicting w itli other public purposes or re­
q u irin g an unacceptable degree o f Government supervision. Measures
o f this type are under consideration by the Committee on Financial
In stitu tio ns.
I f broadening the authority o f existing private lenders would be
inappropriate or inadequate, diagnosis o f the specific requirements
may indicate th at two or more types o f Federal credit assistance
would be h elpfu l. In this event, the Committee recommend* th a t the
follo w in g rough order o f p rio rity be used in determ ining the specific
type o f Federal aid in itia lly employed.
(1 ) Government gwmmtee* or insurance of private loan* should
usually be the first alternative considered. T h is device uses the ex­
perience o f existing local lenders and th e ir knowledge o f the needs in
th e ir own geographic areas to lim it the adm inistrative burdens other­
wise placed on Government lending agencies. I t can also be an im ­
portant stimulus to com petition in p rivate markets. Guarantees and
insurance are especially appropriate fo r use:

(а) W hen there is a bona fide credit gap which private
lenders in tim e can reasonably be expected to close w ithout
continued Federal assistance, through development o f new
lending and borrowing techniques, better understanding and
norm al grow th;
(б ) W hen the potential subsidy, i f any, is re latively small
(e.g ., it can be absorbed fro m w aiver o f guarantee fees),
o r can be expected to decline or disappear; a n d /o r
(<?) W hen the social benefits are not clear enough to ju s tify
more direct or extensive Federal aids.
(T h e possible expansion o f this type o f credit assistance and the safe­
guards needed are discussed in sec. V .)
(2 ) Government aid to newly sponsored types of private institution*
m ay be justified when existing institutions are unable o r u n w illin g even




13
w ith reasonable Federal guarantees to provide a needed new type o f
credit w hich has not yet demonstrated sufficient promise to attract
private funds. The new institutions should be expected to become
self-supporting, and therefore the Governm ent financial assistance
should be recognized as tem porary and tran sitio nal. (T h is alternative
is discussed in sec. IV .)
(3 ) Establishment of a Government secondary Taarket may be de­
sirable to encourage effective p rivate p articip atio n in insured and
guaranteed loans by p roviding greater m a rke tab ility fo r such loans.
(Issues arising fro m the establishment and maintenance o f a secondary
m arket are discussed in sec. V I.)
(4 ) Direct loans are often most useful when the previous alterna­
tives cannot meet legitim ate needs fo r credit assistance. They are most
lik e ly to be appropriate—

(a) W hen there is a strong and clear case fo r Government
assistance to achieve a basic program objective;
(b) W hen the loan involves too large and concentrated a
risk to a ttract p rivate lenders;
(c ) W hen the credit assistance is needed by a Government
en tity and the only alternative w ould be the guarantee o f a
tax-exem pt obligation— an alternative which should not be
accepted;

(d) W hen substantial subsidies are necessary to make a
viable loan;
(e) W hen credit subsidies or noncredit aids make carefu l
Governm ent screening o f borrowers and detailed supervision
o f th e ir operations desirable; and
( / ) Possibly in a few cases when the cred it program should
be insulated fro m fluctuations in the p rivate m arket.
E . P e rio d ic P ro g ra m R eview
Decisions on the m ix o f credit and noncredit aids available in any
m ajo r area cannot be made once and fo r a ll. Needs m ay cliange, or
p rivate financial institutions may g radu ally learn to make new types
o f cred it available on com petitive term s. Hence, a t tim es a program
m ay “graduate” from one type o f Federal cred it a id to another, or,
conversely, the in itia l type o f aid m ay be found to provide inadequate
incentives to accomplish program objectives, so th a t a more effective
type o f assistance should be considered.
Y e t, once a credit program is fu lly underw ay, there is danger th a t
the continuing flow o f applications fo r assistance w ill be accepted as




14
sufficient evidence fo r continuing operations w ithout m ajor change.
In such a situation, a specific credit program could continue indefi­
nitely follow ing its in itia lly prescribed pattern, w ith deviations, if
any, chiefly in the direction o f expanding the scope and magnitude of
the aids provided. W h ile this danger is not peculiar to Federal
credit programs, the problem may be more lik e ly to arise in this area.
M any o f the most im portant credit programs involve relatively m inor
expenditure o f Federal funds, and, because o f lim ited resources ava il­
able fo r program review, m ay, at times, receive less thorough attention.
S im ila rly other credit gaps may exist or develop in the p rivate
credit system which impede the achievement o f im portant public pur­
poses. Program s which now make little or no use o f credit techniques
may w ell be able to accomplish th eir goals more effectively through the
introduction o f Federal credit aids.
Accordingly, the Committee recommends th at the executive branch
reg ularly appraise the actual experience in each m ajor Federal credit
program in order to determine whether (1 ) a valid need remains fo r
Government credit assistance, (2 ) other types o f credit or noncredit
aid would be more appropriate to meet the changing needs of the pro­
gram , or (3 ) private lenders should be expected to meet a ll essential
requirements. Such reviews could w ell be coordinated w ith the budg­
et process. A t the same tim e, the regular reviews o f other m ajor
programs should include attention to any areas where Federal credit
aids would be useful in rem oving gaps in the p rivate credit markets
ham pering achievement o f public purposes.
IV . P A R T IC IP A T IO N O F P R IV A T E L E N D E R S
Despite the present variety and importance o f Federal credit pro­
grams and th e ir continuing expansion, the overwhelm ing m ajo rity of
the credit needs o f the N atio n are and undoubtedly w ill continue to be
supplied effectively by p rivate financial institutions. These include
almost 14,000 commercial and m utual savings banks (w ith a to ta l o f
over 25,000 offices), 6,300 savings and loan associations, over 1,400 life
insurance companies, and a w ide array o f other lenders, ranging from
the pension funds o f corporations and unions to sales finance com­
panies, factors, and credit unions.
M an y Federal credit programs, including those w ith the prepon­
derant d o lla r volume, operate through these p rivate financial in stitu ­
tions. T h is section o f the report discusses the basic principles and
methods which, in the Com m ittee’s judgm ent, should be follow ed to
assure the most effective use o f this broad range o f private institutions
in achieving public program objectives.




15
A . G e n e r a l R e c o m m e n d a t io n s

(1 ) Government-financed credit program s should, in principle, sup­
plem ent or stim ulate private lending, rath er than substitute fo r it.
They should not be established or continued unless they are clearly
needed. Unless the urgency o f other goals makes private p articip a­
tion infeasible, the methods used should fa c ilita te p rivate financing,
and thus encourage long-run achievement o f program objectives w ith
a m inim um o f Government aid.
(2 ) P riva te p articip atio n , however, should not be sought at the
expense o f other program objectives i f the incentives required prove
too costly fo r the benefits gained, or if , over a period o f years, it be­
comes apparent th a t p rivate lenders are u n likely to take more than a
token role in the program . I f p rivate lenders have only a token p ar­
ticipatio n and there is no sign th a t they w ill u ltim ately enlarge th e ir
effective role at reasonable m arket interest rates, and i f the credit as­
sistance serves an essential public purpose, direct Governm ent financ­
ing may be the most efficient and economical way to meet the specific
credit needs.
(3 ) Federal agencies should emphasize the developmental aspects
o f th e ir credit program . Through helping to create experience in new
lending techniques, they should endeavor to im prove the m obility o f
credit and the a b ility o f borrowers to attrac t p rivate funds. Through
these and other methods, Federal credit program s can help to reduce
the gaps in the p rivate credit system so as to reduce the need fo r F ed­
eral aid. F o r example, the leadership o f Federal credit agencies in the
private housing area has played a m ajor role in encouraging p rivate
lenders to finance on favorable terms and a t a reasonable cost an in ­
creased volume o f new housing construction, w hich in the past either
could not be financed a t a ll o r could be financed only on much less
favorable terms. Even in th is area, however, there is s till room fo r
pioneering by Federal agencies.
(4 ) In adm inistering a credit program , the responsible Federal
agency should set general lending standards but, whenever appropriate
incentives and safeguards become standard in stitu tio n al practices, it
should s h ift to private lenders as much as possible o f the responsibility
fo r m aking and servicing in d ivid u al loans.
(5 ) W hen both public and p rivate funds are involved, it is espe­
c ially im p o rtan t th a t the term s and conditions p reva ilin g in com peti­
tiv e p riv a te m arkets should, as fa r as consistent w ith program objec­
tives, determ ine the basis on w hich the Governm ent funds are ad­
vanced, I f borrowers can obtain adequate funds a t reasonable in ­
terest rates fro m p rivate lenders (w ith o r w ith o u t guarantees), they
should nofcbe given special incentives in the form o f substantially
low er costs to borrow fro m the Governm ent agencies.




16
B . G overnm ent In cen tives fo r P riv a te ly Owned In s titu tio n s
In some cases, unnecessary substitution o f public fo r private credit
can be m inim ized by providing financial incentives to establish Gov­
ernment-sponsored, p rivately owned and operated financial institu­
tions. T h is approach is most lik e ly to be feasible when a credit gap
exists which can be filled p rivately w ith lim ited in itia l Government
aid, and when some pioneering work is recognized to be essential,
a n d /o r on an experim ental basis, has already been in itiated . The
Federal home loan banks and the three groups o f institutions super­
vised by the F arm C redit A dm inistration provide im portant examples
o f the use o f this approach. The small business investment companies
chartered and supervised by S B A are the latest examples.
C. Im m ed ia te P a rtic ip a tio n s in F e d e ra l Loans
P riva te lenders participate w ithout continuing Federal insurance
or guarantees in at least fo u r active direct lending programs. In
the S B A loan program , the private lenders may take a share o f the
to ta l loan. In college housing and public fa c ility loans made by the
H H F A , private lenders, in some instances, acquire the shorter ma­
tu rities. In E x p o rt-Im p o rt B ank loan programs, private lenders nor­
m ally may take a p art o f the to tal loan, but in exceptional cases are
perm itted to acquire the shorter m aturities. In a ll fou r cases, the
p rivate participation is a m inor portion o f the total program .
Significant advantages can arise from such im m ediate participations
by private lenders. T o whatever degree they participate, private
funds are being used. W hen the p rivate lender both makes and
services the loan, he gains experience w ith the borrower and some­
times la ter purchases the Federal share. M oreover, by developing
skills in this field, he may become w illin g to make such loans in the
fu tu re independently o f the Federal agency (e.g., term loans to small
business).
How ever, this type o f jo in t financing involves several legislative
and adm inistrative problems, p rim a rily how to obtain adequate p ri­
vate particip atio n w ithout excessive costs. T o m inim ize this problem ,
the Committee recommends th a t legislation avoid m andatory p refer­
ence fo r im m ediate participations and th a t adm inistrative policy
should generally avoid th e ir use, unless (1 ) p rivate lenders are w ill­
ing and able to share risk in proportion to th e ir potential profits, and
(2 ) no l)etter alternative fo r obtaining private financing is available.
S im ila rly , the service charges paid to the private lender by the Fed­
eral agency in jo in t private-G overnm ent p articipation loans should
not provide an incentive fo r m inim izing private participation. T h is
is a danger, fo r instance, when a p rivate lender can obtain a service
charge fo r a fu ll loan at a p ro fit to its e lf by agreeing to undertake




17
only a very sm all participation. M oreover, insofar as the Federal
Government indirectly covers m ajor risks fo r p rivate lenders by ta k ­
ing the longer m aturities on loans, the Federal agency should have
authority to determ ine or approve interest rates on the private share
o f the loan.
D . G uarantee o r In suran ce o f P riv a te Loans
Th e most widespread method of encouraging private participations
has been fo r the Federal Government to assume a carefu lly specified
contingent lia b ility by offering to guarantee o r insure private loans.
Th is approach is most lik e ly to be effective i f the interest ceilings a l­
lowed on the guaranteed loans are high enough fo r the loans to be
attractive to private lenders and i f the loans themselves are stand­
ardized; e.g., insured mortgages. M oreover, to assure m eaningful
private p articipation the private lender should be expected to carry
some portion o f the norm al lending risk. (These subjects are dis­
cussed more fu lly in the next section.)
V . L O A N G U A R A N T E E S A N D IN S U R A N C E
Fed erally insured and guaranteed p rivate loans currently represent
the great bulk o f the d o llar volume o f Federal cred it program s. F H A insured and VA -guaranteed loans account fo r almost 90 percent o f
outstanding insured and guaranteed loans, and fo r over 80 percent of
the current level o f new commitments. A ccordingly, policies govern­
ing these programs are o f exceptional im portance. How ever, 12 other
guarantee and insurance program s are active in varyin g degrees.1
N early a ll o f these 14 programs are associated w ith or in d irectly sup­
ported by direct loan or m ortgage purchase program s, the need fo r
which is, in p art, determ ined by the policies follow ed under the guar­
antee o r insurance programs.
Federal guarantee and insurance program s are most effective when
credit needs arise from risks o r uncertainties w hich, in the opinion o f
p rivate lenders, are too great or too unpredictable to encourage invest­
ment o f p rivate funds, but are not excessive when spread over many
loans. In m any, but not a ll cases, the credit needed is fo r such a long
term o r involves such a high proportion o f the to ta l investment th a t
p rivate institutions cannot leg ally lend w ith o u t the protection o f F ed ­
e ral insurance. Thus, to a very considerable extent, u n d erw ritin g by
1TbeRe Include Farmers Home Administration loan insurance and the CCC loan guaran­
tees In the Department of Agriculture; ship mortgage insurance and aircraft loan guarantees
in the Department of Commerce; production loan guarantees in the Department of Defense;
fishing vessel mortgage insurance in the Department of the Interior; international develop­
ment loan guarantees by the Agency for International Development (AID) in the Department of State; urban renewal and public housing loan guarantees in the HHFA; and
various loan guarantee programs of thelferport-Iibport Bank, the I<5C, and the SBA.
675170—

----- 4




18

the Federal Government of such loans helps to fill a credit gap by in­
creasing the availability of private funds for these specific investment
purposes. This section of the report discusses some of the key policy
issues peculiar to insurance and guarantee programs.
A . Coinsurance
(1) la insuring or guaranteeing loans, the Federal Government
has the option of offering protection which covers all <reditor risks or
of requiring lenders to share the risk to some predetermined degree
(coinsurance). Practices in existing guarantee and insurance pro­
grams vary. Up to now, the two largest groups of programs (F H A
property improvement loan insurance and most of the mortgage insur­
ance and, to a lesser extent, V A loan guarantees) have required
significant elements of coinsurance. Four smaller programs admin­
istered by other agencies (S B A deferred participations, Commerce
aircraft loan guarantees, Defense production loan guarantees, and
Export-import Bank loan insurance) customarily involve coinsurance.
Several other small Federal programs, however, require no loss shar­
ing ; and this is also true for some of the newest F IIA programs.
(2 ) The Committee recommends th a t some element of private
lender risk (coinsurance) should be required, as a m atter of principle,
in order to provide incentives fo r norm al vigilance by lenders in
m aking and servicing insured and guaranteed loans. This is p ar­
tic u la rly im portant where the lender is so located geographically th a t
he can supervise the borrower’s performance. I f complete coverage
o f a ll creditor risks is deemed essential in itia lly to obtain private
p articip atio n , or to m inim ize the required amount o f related Federal
grants, the agency insuring or guaranteeing such loans has a special
responsibility fo r continuing review o f the experience under the pro­
gram to determine whether a coinsurance requirem ent has become
feasible or whether, in the absence o f effective p rivate participation,
substitution o f direct loans w ould be preferable.
(3 ) The Committee further recommends th a t where variations in
degree o f coinsurance are feasible and fees are charged private lenders,
agencies adm inistering loan insurance and guarantee programs should
provide fo r a graduated scale o f fees, w ith the lowest rates available
fo r lenders who assume the most risk. The object should be to encour­
age such lenders to assume as much o f the risk as they are w illin g and
able to assume.
B . G uarantees o f T ax -E x e m p t O b ligatio ns
(1 )
Tw o o f the present loan guarantee program s—the indirect
guarantees o f obligations issued by local authdrities fo r urban renewal
and public housing— involve guarantees o f the obligations o f State and




19

local government instrum entalities. From tim e to tim e, guarantees
o f other types of m unicipal obligations are proposed. This raises the
question of whether the Federal Government should guarantee taxexempt obligations, especially since under the Public D ebt A ct o f 1941,
it cannot issue direct obligations exempt from Federal income taxation.
(2 ) State and local governments now receive substantial indirect
benefits from the Federal income tax exemption on income from
m unicipal obligations. As a result, these governments can usually sell
th e ir obligations on a much low er yield basis than other issues of
comparable quality. The tax exemption makes such obligations very
attractive to institutions and individuals in relatively high income
brackets. As a result, a sizable loss in Federal revenues occurs, which
is greater than the saving in the cost o f State and local financing.
(3 ) Guarantees o f tax-exem pt obligations tend to expand the
volume o f such securities issued. The Committee, therefore, recom­
mends th a t no program in the futu re be authorized which involves
guarantee of tax-exem pt obligations because (a ) the cost in tax rev­
enues to the Federal Government would generally exceed the benefits
o f tax exemption received by borrowers, (b) such fed erally guaranteed
tax-exem pt securities would be superior to direct Federal obligations
themselves, and th e ir increasing volume w ould adversely affect
Treasury financing, and (c) the a v a ila b ility o f increasing amounts of
high-grade tax-exem pt issues would tend to a ttract funds fro m in ­
vestors th a t should appropriately seek risk-bearing opportunities.
(4 ) In addition to the substantial advantages from the tax exemp­
tion privileges available fo r State and local borrow ing, two additional
types o f aid which do not involve guarantee o f tax-exem pt obligations
could provide any additional necessary credit assistance :
(а ) A n y local com munity w aiving its tax exem ption p riv i­
lege m ight be authorized to borrow fo r specific h igh p rio rity
needs w ith the aid o f a Federal guarantee; and
(б ) Local communities m ight be authorized to receive
cap ital grants sufficient to perm it borrow ing the rem ainder in
the m arket on reasonable terms.
C . C eilin g s on In te re s t R ates on In s u re d and G u aran teed Loans
Th e most im portant single determ inant o f p rivate p articip atio n
in loan guarantee and insurance program s is the level o f interest rates
p erm itted on the loans. F o u r agencies adm inistering im portant loan
insurance and guarantee program s h are statutory ceilings on the
interest rates w hich m ay be charged b y p riv ate lenders. T h e pro­
grams covered include a ll types o f F H A loan insurance, V A loan
guarantees, Commerce ship m ortgage insurance, and Fanners Hom e




20

A dm inistration loan insurance. M ost o f the other programs are
either covered by adm inistrative ceilings, handled on a case-by-case
basis, or indirectly controlled by the statutory form ulas governing
related direct loan programs.
(1 ) A fte r review ing the arguments o f the Commission on Money
and C red it fo r abolition o f such ceilings, the Committee recommend$
th at Federal agencies which insure p art or a ll o f the risk on private
loans should have reasonably broad authority to set and adjust m axi­
mum rates fo r such loans, fo r the follow ing reasons:

(а) Such authority is useful in helping to assure one o f the
m ajor purposes o f the program , the a vailab ility o f funds at
reasonable interest rates.
(б ) Since Federal agencies bear most o f the risk, they
should have authority to make sure th a t the interest charged
by lenders does not include unnecessary compensation fo r
such risks.
(tf) Since the m arket fo r many types o f credit is im perfect
and interest rates tend to respond slowly to changes in the
a v a ila b ility o f funds, properly adm inistered ceilings can help
to overcome in ertia.
(d)
B y affecting m arket expectations, changes in ceilings
can sometimes accelerate desired adjustments in effective rates
on the loans involved as w ell as changes in yields o f other
related m arket obligations.
(2 ) The Gommittee further recommends th a t legislation governing
guaranteed and insured loan programs avoid fixed rates o f interest or
fixed statutory ceilings. I f any statutory form ula is deemed neces­
sary at a ll, it should be flexible enough to perm it adm inistrative ad­
justments called fo r by variations in m arket rates o f interest. F o r
example, the statutory V A ceiling should be abolished or, at a m in i­
mum, be amended to provide discretionary auth o rity comparable to
the F H A authority.
(3 ) S im ila rly , the Covmuttee recommends th a t, in establishing and
m od ifyin g adm inistrative ceilings, the Federal agencies responsible
should avoid ceilings which are outside the range o f reasonable m arket
rates; fo r example, ceilings which are so low as to cause excessive dis­
counts. M any lenders are reluctant to acquire loans at sizable dis­
counts, and such discounts may result in lridden increases in costs fo r
borrowers, or reduce the a v a ila b ility o f credit.
(4 ) W h ile the maintenance o f interest ceilings m aterially below
m arket levels o f interest m ay have a stabilizing effect at times when
demands fo r funds are high, e.g., through reducing residential con­
struction, this device is neither an equitable nor a w holly effective




21

method o f achieving the desired result. In addition to the capricious
tim in g and extent o f its im pact, it encourages pressure fo r direct
loans and mortgage purchases, which may underm ine any desirable
economic restraint and cause public funds to be used unnecessarily
fo r program s which can and should obtain private financing. H o w ­
ever, adjustments in ceilings and related secondary m arket policies
should be adm inistered in such a way as to avoid disruptive effects
on construction necessary to meet the requirements o f economic
grow th.
(5 )
W h ile it is probably not appropriate in a Federal credit pro­
gram to allow geographic differentials in basic interest rates, it may
be desirable to provide authority fo r lenders to charge lim ited special
fees fo r specific types o f loans or in specific types o f areas commen­
surate w ith any unusual lending costs associated w ith the class o f
transaction. A part, fro m such cost-based fees, as long as interest
ceilings are set high enough to cause insured and guaranteed loans to
be at or near p ar in m ajor sections o f the country, norm al geographic
differentials reflected in discounts may provide a necessary incentive
to assure geographic m obility o f funds. How ever, it is essential th a t
fu ll disclosure be made in advance to the borrow er o f the to ta l cost
he may be required to absorb.
V I. S E C O N D A R Y M A R K E T O P E R A T IO N S
In evaluating the d esirability o f p artic ip a tin g in loan insurance
and guarantee programs, p riv ate lenders consider not only the risk
o f d efault and the rate o f return on the loans, but. also th e ir liq u id ity :
i.e., how read ily the loans can be m arketed in case o f need. W h ile most
commercial banks and savings and loan associations can meet emer­
gency needs fo r cash by tem porary advances from the Federal Reserve
banks or the Federal home loan banks, both these and other lenders
norm ally rely on the p rivate m arket when changes in investment
policy make the sh iftin g o f assets necessaiy.
A . R ole o f Secondary M a rk e ts
In this situation, establishment of a Government secondary m arket
may help to stim ulate the development o f an effective p rivate m arket
in insured and guaranteed loans, thus enhancing the liq u id ity o f these
loans and reducing existing credit gaps. Use o f the secondary m arket
techniques is also sometimes proposed when it is believed th a t proper
seasoning o f the financial assets acquired by the F ederal Government
may in tim e make them salable to a p riv a te lender a t a reasonable
price.




22

B . E x is tin g P rog ram s
(1 ) A t present, the only form al Government secondary m arket is
provided by the Federal N ational M ortgage Association in the H IIF A .
This comprises two essentially different types o f operations:
(а ) Through the “Secondary m arket operations trust
fun d ,” the F N M A buys, sells, and lends on the security o f
F H A -in su red and VA -guaranteed mortgages at prices rea­
sonably w ith in the range o f m arket prices, thus providing a
degree o f liq u id ity fo r these mortgages and a stim ulant to
new construction; and
(б ) Through the “Special assistance functions,” the
F N M A purchases, at prices usually somewhat above the pre­
v ailin g m arket, selected types of F H A -in su red and V A -g u a r­
anteed mortgages (1 ) under programs designated by the
President or the Congress as requiring m arket support, and
(2 ) under general programs when deemed necessary fo r eco­
nomic stabilization purposes.
(2 ) F o u r other active loan guarantee programs (Farm ers Hom e
A dm inistration insurance o f farm real estate loans, CCC crop-support loan guarantees, Defense production loan guarantees, and S B A
deferred participations) have no form al secondary m arket, but the
p rivate lenders in each program have the rig h t to tu rn over the guar­
anteed portions o f th e ir loans fo r cash at any tim e on demand (a fte r
a 3-year w aiting period in the case o f the Farm ers Hom e A dm inis­
tra tio n ). Thus, in effect, under these fo u r program s, the lender's have
a “b u ilt-in ” secondary m arket available on short notice where they
can “ put” th e ir insured o r guaranteed loans whenever alternative
investment opportunities appear more profitable. Since in every
case the guaranteed portion o f the loan can be redeemed at the fu ll
amount o f the unpaid balance, they have the equivalent o f a Govern­
m ent guarantee not only against d efault but also against m arket fluc­
tuations in interest rates.
C. G uidelines
A lthough the predecessors o f the present F N M A date back to 1938,
experience w ith sizable Government secondary m arket operations is
confined m ainly to the postwar period. Despite this lim ited experi­
ence, a few m ajor conclusions can be presented.
(1 )
W h ile a Government secondary m arket can contribute to de­
veloping an effective private m arket, it cannot fu lly achieve this pur­
pose u n til a fa irly standardized loan contract is developed, a large
volume o f loans is available fo r trad in g , and m ajor legal deterrents to
interstate lending are reduced or removed. W h ile some progress has




23

been made in m eeting these conditions, much more is needed. The
Conwrdttee recommends th a t Federal agencies, in cooperation w ith
States, intensify th e ir efforts to promote the development o f u n i­
fo rm ity in State laws and regulations pertaining to m ortgage contracts
(including originations, foreclosures, and title claim s).
(2 ) Tem porary credit assistance through Governm ent support may
be justified when a new program o f insured and guaranteed loans can­
not im m ediately attract p rivate p articipation except at an interest
rate higher than th a t prevailing fo r roughly comparable credits in
com petitive private markets. In this case, purchases a t low er rates by
a secondary m arket organization, follow ed by a period o f seasoning
may make it possible la te r to sell these loans at a low er and more com­
p etitive m arket yield, a n d /o r new loans o f the same types may not
require fu rth e r support. F o r example, the special assistance once
provided by F N M A fo r F H A -in su red m ilita ry housing mortgages is
no longer necessary.
(3 ) A Governm ent secondary m arket, however, m ay too readily
become a perm anent program fo r supporting a submarket type o f
credit. In this case, it is obviously a substitute fo r, rath er than a
stim ulus to, an effective p rivate m arket. As a perm anent credit sup­
port, moreover, a secondary m arket is p a rtic u la rly unsatisfactory be­
cause o f the false impression it may give o f the salability on competi­
tiv e term s o f the financial assets placed w ith it. T o avoid the danger
o f a one-way m arket, therefore, the Committee recommends th a t estab­
lishm ent o f a secondary m arket be reserved fo r cases in which there is a
real possibility o f encouraging sales to p rivate lenders, w ith purchases
being discretionary and subject to firm supervision and control. In
other words, the secondary m arket device should not become the dis­
guised equivalent o f a direct lending program . W hen perm anent
credit assistance is desirable, direct loans, combinations o f loan guaran­
tees and capital grants, or interest subsidies are preferable, since these
are more easily adjusted to provide the m inim um necessary Federal
intrusion and support.
(4 ) I t is very im portant th a t secondary m arket operations be con­
sonant w ith the objectives o f general m onetary policy. Housing and
other in s tru c tio n , fo r example, are quite sensitive to changes in in ­
terest rates and in the a v a ila b ility o f funds, and inappropriate policies
on prices and on purchases or sales o f mortgages by a Government
secondary m arket could strongly hinder the effectiveness o f stabiliza­
tion policy. Hence the Government secondary m arket should not, as
a rule, be used on a scale sufficient to offset the im pact o f general
m onetary policy on any m ajor sector o f the m arket— though under
certain circumstances when the construction industry and the economy




24
as a whole are moving in different directions, some modification o f this
principle m ay, at times, be w arranted.
(5 )
In establishing and adm inistering loan guarantee and insurance
program s, the Committee recommends against any guarantee of
liq u id ity (o r “p u t” ) which gives the holder of an insured or guaranteed
portion of a loan (o r deferred p articip atio n ) the rig h t to s h ift the loan
back to the Government w ithout risk or cost whenever interest rates
rise or alternative investment prospects improve. I f , as a transitional
device, any liq u id ity provision is deemed necessary, the liq u id ity
should be provided only fo r short periods and should entail a signifi­
cant actual or potential cost to the lender who enjoys the liq u id ity
protection.
V I I. D IR E C T L O A N S
Despite the predominance in d o llar amounts o f loan guarantee and
insurance programs, in a substantial number o f areas the Federal
Government engages directly in lending operations, o r sponsors and
in itia lly invests in p rivate lending institutions. D ire ct loans are p ar­
tic u la rly im portant in the international areas where, because o f the
risks involved, it is often difficult to obtain p rivate p articip atio n on
terms compatible w ith the foreign policy objectives o f the program .
In addition, credit aids to agriculture, to local communities, to colleges
(and college students), and to small business have been m ainly in the
form o f direct loans.
Because o f the relative freedom o f direct loan program s from the
constraints o f p rivate financing, the terms on which direct loans are
made available vary w idely. Some o f the variations in terms
deliberately reflect differences in program objectives. Others can be
explained largely in terms o f historical o rig in and legislative and
adm inistrative in ertia.
T h is section discusses m ain ly the scope and use o f subsidies in direct
loan program s, the methods fo r measuring and disclosing subsidies,
and the use o f ceilings and other controls on interest rates.
A . G en eral Recom m endations on S e lf-S u p p o rtin g P rog ram s
(1 )
W hen credit needs arise solely because o f im perfections in the
p rivate credit system, direct loans or other Government credit aids
designed to meet these needs should norm ally be self-supporting; i.e.,
a t a m inim um the returns should cover a ll costs reasonably im puted
to the program . T h is rule should apply whenever (a) borrowers are
able to pay a ll o f the costs fo r the specific type o f cred it th a t would be
charged in an efficiently functioning, com petitive p riv ate m arket; and
(5 ) the p rivate m arket does not generally supply such cred it o r sup­
plies it only at excessive costs (because o f u n fa m ilia rity w ith the




25

specific type o f lending, lack o f adap tab ility to em erging credit needs,
or lack o f sufficient com petitive pressure).
(2 ) I f the Government sponsors new types o f lending agencies
to furnish the needed credit and these agencies obtain th e ir funds
largely or entirely in the private markets a n d /o r are intended sooner
or la te r to become w holly p rivate, such agencies should charge interest
rates th a t are deemed adequate u ltim ately to cover a ll costs o f opera­
tions in the private m arket.
(3 ) S im ila rly , other Federal credit program s intended p rim a rily to
stim ulate private lending w ill be most effective in encouraging substi­
tution o f private fo r public credit i f the rates charged on the Federal
loans are comparable to those th a t would p revail in effectively func­
tioning p rivate markets. Bates charged on direct loans which supple­
ment guaranteed or insured loans, fo r example, should be equal to the
to tal charges (including guarantee fees or insurance premiums)
payable by borrowers on the guaranteed o r insured p rivate loans.
In s o fa r as feasible, borrowers should be expected to pay interest on
the Governm ent’s share o f im m ediate participations in p rivate loans
a t a rate which is adequate to cover norm al p rivate lenders* cost.
B . Need fo r and M easurem ent o f Subsidies
(1 ) The provision o f credit under Federal program s, even when
the interest rate and other charges fu lly cover Government costs, tends
to reallocate national resources. Indeed, such reallocation in socially
desirable directions is the m ajor purpose o f these programs. In ­
tellig en t choice among alternatives requires th a t the effects o f Federal
credit on resource allocation be exp licitly recognized and decisions be
made in the lig h t o f this recognition. To this end, it is h elp fu l to
compare the interest rates under each Federal credit program w ith the
interest rates which would be charged in a com petitive and efficient
p rivate m arket, and also w ith the interest rates which would cover
the Federal costs o f operating the program .
(2 ) T h is does not mean th at the financial costs are the only costs,
or th at financial benefits are the only gains. In fact, other public
benefits may be veiy extensive; e.g., through prom otion o f fu lle r use
o f resources, reduction of unemployment re lie f costs, and provision o f
other indirect benefits.
(3 ) Subsidies can be justified fo r credit program s, as elsewhere,
when the reallocation o f resources accomplished by the subsidies re­
sults in net additional public benefits at least equal to the net cost
o f the subsidies involved and when the additional public benefits are
not obtainable through alternative approaches at low er costs.
675170—63------ 5




26

(4 ) T o fac ilita te evaluation o f the effects on use and allocation o f
resources and on the costs o f Federal credit programs involving a
subsidy, the Committee recommends that the subsidy element be ex­
p lic itly recognized. The first step should be to compare the interest
rate paid by the borrower on direct Federal loans to the sum o f (a)
the p revailin g m arket yield on Government securities o f comparable
m aturities, (6 ) an allowance fo r adm inistrative costs, and ( c) an a l­
lowance fo r expected losses. S im ila rly the revenues, i f any, fro m
premiums and other fees charged on insured and guaranteed loans
should be compared w ith a reasonable allowance fo r adm inistrative
expenses and expected losses in the guarantee or insurance program .
(5 ) D eterm ination o f each o f these items necessarily involves some
a rb itra ry estimates, but this approach appears to be feasible fo r most
programs w ith in a reasonable range o f accuracy:
(а ) W h ile the Treasury does not enter the m arket to bor­
row a specific amount fo r a specific period in order to make
a loan o f an equal amount fo r the same period, it is compelled
to have a com parably greater amount o f debt outstanding fo r
such a period and the most appropriate measure o f the u lti­
mate alternative cost involved is the current m arket cost o f
borrow ing fo r comparable m aturities.
(б ) W h ile adm inistrative costs o f loan programs at times
are interm ingled w ith other parts o f broader assistance pro­
grams, the difficulties o f allocation are rarely so great as to
cause large errors in estim ating them.
(c)
W h ile the losses w ill be especially difficult to estimate
in those credit areas in which the Government is pioneering,
experience in earlier ventures or comparable program s can
provide some guide.
(6 ) T h is calculation provides a reasonable measure o f im puted
Government costs, but even when the interest rate charged on a F ed­
eral credit program is sufficient (but no more than sufficient) to
cover such costs, it can s till provide a significant advantage to the
borrower, i f it is below the rate th a t a reasonably com petitive
and efficient p rivate m arket m ight be expected to charge. The amount
o f such additional advantage is difficult to measure, but it clearly
exists. Because o f his more lim ited resources, even the com petitive
and efficient p rivate lender has to build up reserves to cover not m erely
the losses norm ally anticipated, but also the th reat o f abnorm ally
hig h losses. T h is w ill be reflected in his charge fo r risk. The Gov­
ernm ent, on the other hand, can rely upon its taxin g power to take
care o f such contingencies. M oreover, because o f its taxing power,




27

the Government enjoys a high credit ra tin g , which enables it to bor­
row at a substantially lower cost than any p rivate lender.
(7 )
Thus, in a free enterprise economy relyin g p rim a rily on p ri­
vate financing institutions, borrowers given access to Government
credit receive im portant advantages denied to most borrowers, even if
the rates charged by the Government agencies are equal to Govern­
ment costs. Borrowers, when appropriate, can be given interest rates
somewhat below the private m arket w ithout entailin g Governm ent
costs, in addition to longer m aturities and other more lib eral terms
than are available from private lenders. These extra advantages are
properly included in any evaluation o f the resource allocation and
equity effects of Government loans.
C. D isclosure o f Subsidies
(1 ) W h ile an interest rate below Government costs (o r the w aiver
of guarantee fees) represents the usual type o f subsidy employed
in Federal credit programs, exp licit grants are provided in addition
in at least fo u r Federal programs including credit aids (urban renewal,
low -rent public housing, local-service airlines, and m aritim e ship
construction program s). F o r example, under the low -rent public
housing program , the Federal Governm ent contracts to pay contribu­
tions up to the m axim um amount necessary to cover the debt service on
loans financing the project. S im ila rly , the M aritim e A d m in istra­
tion pays a substantial p art o f the cost o f constructing A m erican-built
ships, and insures private loans made to finance most o f the rem aining
costs.
(2 ) U nder present arrangements, interest-rate subsidies are less
visible, and hence less subject to effective review ; they may also encour­
age unnecessary substitution o f public credit fo r private credit ava il­
able at slig h tly higher interest rates. O n the other hand, o u trig ht
grants, w hile usually inappropriate fo r private borrowers, are often
preferable when a public agency is the recipient. They can either be
in the form o f in itia l capital grants, or can be paid later. In the la tte r
case, they ctm be adjusted from tim e to tim e to meet the v a lid needs o f
the borrowers.
(3 ) W hatever the type o f subsidy, inform ed decisions are possible
only i f there is provision fo r adequate disclosure o f the relative cost
o f credit and other programs. T o this end, the Committee recom­
mends th at—

(a)
A ll proposals to create new credit program s or to
broaden existing credit programs should be accompanied by
an appraisal o f the relationship between the interest rate
charged in the program , the rate which would be charged by




28

com petitive and efficient private lenders, and the rate neces­
sary to cover the Governm ent’s costs.
(& )
The norm al reviews o f a ll existing Federal credit pro­
grams should include discussion o f these relationships.
(4 )
The general principle o f takin g into account both budgetary
and social costs applies to many other areas. The Committee would
not propose to apply more rig id standards to Federal credit programs
than to other programs o f a noncredit nature, since this m ight tend
to induce substitution o f less desirable fo r more desirable types o f
assistance.
D . C eilin g s and O th e r C ontrols O ver In te re s t R ates on D ire c t
Loans
(1 ) In most direct lending programs adm inistered bv w holly owned
agencies, the basic statutes place ceilings on the rates th at may be
charged to borrowers. In several cases (e.g., the most im portant
direct loan programs o f the S B A , V A , R E A , Farm ers Home A d ­
m inistration, and H E W ) the maximum permissible interest rate is
specified by law . In as many or more cases, the rates are governed
by a statutory form ula (e.g., direct loans bv IJ R A , P H A , C F A , and
A R A , as w ell as reclamation loans by In te rio r and D is trict o f Co­
lum bia public works loans from the T reasu ry). Most o f the active
international loan programs, as w ell as some o f the Governmentsponsored, quasi-public credit programs, however, have adm inistra­
tive fle x ib ility w ithout either flat ceilings or form ulas being specified
in the statutes.
(2 ) These statutory lim itations, to a considerable extent, represent
more or less exp licit judgments by the Congress regarding w hat a
“fa ir” interest rate was at the tim e o f enactment. However, w ith a
few exceptions, the rates governed both by specific ceilings and by
form ulas have proved to be much more rig id and have varied more
slowly and through a narrow er range than either m arket rates o f
interest or current Treasury borrow ing costs. Occasionally, a fte r
considerable delay, statutory ceilings have been amended, although
not always by the fu ll amount o f the changes in m arket rates. F o r­
mulas based on coupon rates o f interest fo r the entire outstanding
debt, and especially those based on long term debt, have been very
sluggish both on the rise and on the decline, since they have been
dominated by interest rates p revailin g in earlier periods when a large
share o f the current debt was issued. O n the other hand, form ulas
based upon current m arket yields, by definition, respond prom ptly
to changes in m arket conditions.
(3 ) S tatu to ry ceilings o r form ulas may often have perverse effects
not intended. F o r example, when a decline in economic a ctivity




29

-causes m arket rates o f interest and Treasury borrow ing costs to fa ll,
the statutory ceilings do not require— and many o f the statutory
form ulas do not even perm it— any m ajor reduction in the rates which
c red it agencies charge on new loans. B u t when boom conditions
<iause m arket rates and Treasury borrow ing costs to rise, the ceilings
and most o f the form ulas may prevent more than a token or gradual
rise in interest charges. Thus, the biggest net subsidy is given on
loans made in periods when both the need to g ran t special ad vantages
to in d ivid u al borrowers and the case fo r stim ulating the economic
system are least urgent. The converse is true in recession periods;
i.e., the smallest net subsidies and, therefore, the least relative stim u­
lus to the economic system, are provided when the need is greatest and
when assistance would be most tim ely.
(4 )
A ccordingly, the Committee reconvmmds th a t in authorizing
new direct loan programs or m ajor expansions o f present programs—

{a) F u tu re legislation should avoid requirements fo r rig id
or relatively inflexible ceilings (o r floors) on interest rates;
and
(6 )
I f fo r reasons o f public policy it appears appropriate
to charge interest rates below rates fo r com parable loans in
p rivate markets or below Governm ent costs, the lending
agency should be perm itted to vary the rate charged new bor­
rowers from tim e to tim e a t least as much as m arket rates
and current Treasury borrowing costs vary.
V I I I . F IN A N C IN G O F C R E D IT P R O G R A M S
The Government's role in financing F ederal credit program s varies
g reatly, depending larg ely on the type o f program . The follo w in g
paragraphs summarize the essential features o f the financing p attern
fo r each o f the three m ajor groups o f Federal credit program s.
(1 )
T h e largest segment, guaranteed and insured loans, involves
relativ ely m inor use o f Government funds. In the case o f loan insur­
ance program s, a relatively sm all in itia l Governm ent investment
usually is made, w ith la te r operating expenses and claims largely or
w holly financed from prem ium and investm ent income. W hen F H A insured loans d efault, Governm ent-guaranteed debentures usually are
issued to pay the claims and take possession o f the security, but the
debentures are subsequently redeemed (and interest p a id ) from re­
serves b u ilt up from prem ium and investment income. In the case o f
loan guarantee program s, no in itia l Governm ent investment is usually
involved, but operating expenses and claims are larg ely financed from
current appropriations. In addition, in both cases the Government
assumes a contingent lia b ility , w hich curren tly totals over $60 b illio n .




30
(2 ) Federal capital investments have been made at various times in
five groups o f currently active Government-sponsored enterprises en­
gaged in m ajor lending activities. The p rin cip al amounts o f these
cap ital investments have been w holly repaid by tw o groups (the Fed­
eral land banks and the Federal home loan banks) and p artly repaid
by two others (the Federal interm ediate credit banks and the banks
fo r cooperatives). Both Federal and p rivate funds have been invested
in the secondary m arket operations o f the F N M A , w ith no p rincipal
repaym ent as yet on the Federal investment. The to ta l Federal
cap ital investment in a ll o f these institutions, including accumulated
net income, currently amounts to $0.5 b illio n . F N M A borrows rela­
tiv e ly small amounts fo r b rie f periods fro m the Treasury, but other­
wise a ll live groups o f agencies borrow d irectly in the p rivate m arket
w ithout any exp licit Federal backing. C urrent loan disbursements
are largely financed from repayments o f previous loans; in fiscal year
1961, fo r example, $7.3 b illio n o f new loans made compares w ith $7.1
b illio n in repayments. Outstanding loans on June 30, 1961, totaled
$9.5 b illio n .
(3 ) In contrast to the preceding programs, almost a ll funds used
by w holly owned enterprises fo r direct loans and mortgage purchases
are Government funds, which are largely obtained through borrowing
from the Treasury. Outstanding loans of m ajor domestic programs
(excluding C C C ) at the end o f the fiscal year 1961 totaled $12 b illio n ,
and there were also about $11 b illio n in foreign loans. As in the case
o f Government-sponsored quasi-public enterprises, much o f the cur­
rent loan disbursements is financed from repayments on previous
loans. The m ajor programs in 1961 had gross p rincipal disbursements
o f $3.3 b illio n and repayments o f $1.7 b illio n (excluding C C C dis­
bursements o f $1.4 b illio n and repayments o f $1.6 b illio n ).
A . C ongressional P rovisio n o f Funds
(1 ) The volume o f Government funds invested in specific credit
program s depends, in the first instance, on congressional decisions.
The type and extent o f congressional control has not been the subject
o f review by the Committee, w ith the follo w in g exception. Past
experience w ith Federal insurance and guarantees in some m ajor
Federal credit programs has indicated th a t p rivate p articip atio n can
be effectively attracted only i f investors are confident th a t the Govern­
m ent w ill make good on its commitment w ithout undue delay when
defaults occur.
(2 ) The Committee recommends, therefore, fo r a ll program s
authorized to guarantee or insure loans, th a t the Congress provide,
in advance, reasonable amounts o f new obligational authority to meet
any foreseeable contingencies arising fro m actual defaults. T h is




31

would not require accumulation of idle funds by the guaranteeing
or insuring agency, but m erely advance provision o f authority to
borrow or permanent appropriations fo r the exclusive purpose o f,
and only up to the amount necessary fo r, carryin g out the guarantee
o r insurance commitments.
B . B o rro w in g F ro m the T re a s u ry
(1 ) C red it agencies established as direct Federal program s and
expected to rem ain w holly Government owned should norm ally obtain
th e ir capital requirements by borrowing from the Treasury rath er
than by borrowing, either w ith or w ithout a Fed eral guarantee, in
the general m arket.
(2 ) Th e chief present exception is the auth o rity of the Federal
Housing A dm inistration to issue Governm ent-guaranteed debentures
to pay off claims on defaulted loans, instead o f borrow ing from the
Treasury to meet such obligations. The Committee recommends th a t
the F H A continue to have the authority to issue guaranteed deben­
tures, but th at it also be authorized, at its option, to pay claims in
cash. The auth o rity to issue debentures, which at times can be sold
only a t a price less than par, provides a m inor but desirable element
o f risk sharing (coinsurance) by private lenders. I t also provides
a mechanism fo r financing the holding o f the properties acquired
u n til th e ir sale is appropriate.
C. B o rro w in g in th e P riv a te M a rk e t
(1 ) Government-sponsored credit agencies which receive in itia l
financial support, but become or are expected to become w holly p ri­
vately owned, should borrow in the private m arket on an unguaranteed
basis rath er than borrow from the Treasury. W h ile the fac t of Gov­
ernment sponsorship im plies a measure o f Governm ent involvem ent,
it is im portant th a t such agencies be required norm ally to meet the
test o f the p rivate m arket.
(2 ) In the early stages o f a Government-sponsored program , be­
fore its obligations have become accepted as seasoned securities, how­
ever, it m ay be necessary fo r Treasury to backstop its m arket bor­
row ing by purchasing its obligations on demand, n orm ally fo r short
periods. Agencies such as the Federal home loan banks, which are
the source o f liq u id ity fo r th e ir members, and the Secondary m arket
operations o f the F N M A , should also continue to have recourse to
Governm ent funds, but only to meet emergency or tem porary cash
requirements. A n y such borrow ing fro m the Treasury, however,
should rem ain subject to Treasury approval.
(3 ) U n der the Government C orporation C ontrol A c t and related
corporation charters, the Federal land banks, the Federal interm ediate




32

credit banks, and the banks fo r cooperatives are required to consult
w ith the Secretary o f the Treasury before borrow ing from the public.
The Federal home loan banks and the F N M A are required to obtain
the approval o f the Secretary o f the Treasury on the tim in g and
terms o f any borrowing from the public. The Committee recommends
th at approval by the Secretary o f the Treasury be required o f these
aspects o f the borrowing o f any new Government or Governmentsponsored enterprises borrowing in the m arket in th e ir own name, and
th a t such a requirem ent fo r a ll existing agencies be included in any
revisions o f the Government Corporation C ontrol A c t or o f p articu lar
corporation charters. The purpose is to m inim ize any conflict w ith
m onetary and debt management policy which may arise from issues
o f th e ir securities.
D . R evo lvin g Funds
M ost Government credit program s, whether direct loans or guaran­
tees and insurance, are financed through “public enterprise revolving
funds” ; e.g., funds which finance a cycle o f operations in which ex­
penditures generate receipts coming p rim a rily from the public and
available fo r continuing use. T h is type o f funding provides a desir­
able fle x ib ility in lending operations and helps to disclose systemati­
cally the relationship between revenues and expenses as w ell as any
subsidy provided by the Government. The Committee recommends
th a t the revolving fund method o f financing be extended to a ll credit
program s where it is feasible to do so.
E . Sales o f Assets
(1 ) A s a general rule the terms of Government credit provided fo r
buyers o f physical assets from the Governm ent; e.g., surplus prop­
erty, should be such as to make the loan suitable fo r u ltim ate resale
to p rivate lenders. In exceptional cases, however, submarket interest
rates, deferm ent o f am ortization requirements, or other unusually
favorable terms may be justified i f necessary either to promote the
essential objectives q f the program or to accomplish a sale expected
to y ield greater aggregate proceeds, allow ing fo r both price and credit
terms.
(2 ) Sales o f existing loans and other assets acquired from lending
operations are an appropriate source o f funds fo r new loans. Such
sales, however, should norm ally be made only at such times and prices
w ill be consistent w ith prograxa objectives ajcwJ overall fiscal policies,
and conduoive^ to economic stab ility and grow th.
(3 ) Sales o f direct loans to private institutions are appropriate when
such sales w ill encourage the eventual substitution o f p rivate fo r Gov­
ernment credit in the p rim ary lending operation. Loans which have




33
subsidy interest rates and other features not attractive to private
lenders offer no realistic prospect o f achieving such a result. H ow ever,
sales o f such loans m ay be justified to complete liquidation o f an in ­
active program or to help meet budgetary emergencies.
(4 ) I f necessary to foster development o f a private m arket, the
Federal agency selling its own direct loans m ay appropriately guar­
antee or insure the loans (except ta x -exempt securities). Such insur­
ance or guarantees, however, should be confined to guarantees against
d efau lt, should involve some coinsurance, and should avoid guarantees
o f liq u id ity (o r “puts” ).
(5 ) In exceptional cases involving the handicaps o f unknown names
and credit and where coinsurance is im practicable, it m ay be feasible,
possibly as an in terim procedure, to issue collateral tru st certificates
backed by a pool o f Government loans. In general these certificates
should not have liq u id ity guarantees; such guarantees, however, are
least objectionable if they can only be exercised a fte r a stipulated
tim e period, and i f the issuing agency has call privileges and can re­
negotiate interest rates.
(6 ) The policies followed by the F N M A in selling insured and guar­
anteed loans, as w ell as the liquidation policies o f the V A loan guaran­
tee and the F H A m ortgage insurance program s, should be established
on a m utually consistent basis. I t is especially im portant th a t the
prices at which comparable insured and guaranteed mortgages are
offered fo r sale be substantially the same and th a t the tim in g o f
changes in sales policies be m utually agreed upon. T h e im pact on the
level o f interest rates and construction a c tiv ity should be among the
m ajor factors considered in decisions on the term s under which insured
and guaranteed mortgages are sold. W hen consistent w ith these and
other economic objectives, sales below p ar should be perm itted. The
Committee recommends th a t the Congress remove any legislative lim ­
itations on sales prices or term s w hich m ig h t impede desirable
fle x ib ility .
IX . B U D G E T A R Y T R E A T M E N T A N D C O N T R O L
A lm ost a ll Federal credit program s are included in some form in
the Budget of the Urated States. There is substantial variatio n , how­
ever, in the kinds o f data presented and in the extent o f budgetary
control over specific program s.
A . P resen tatio n o f C re d it P ro g ra m s in th e B u dg et
The data on Federal credit program s presented in the budget serve
three related but distinct purposest (1 ) program review , (2 ) analysis
o f Treasury fmancingneeds, and (3 ) analysis o f economic significance.




34
In recognition of this fact, the budget presentation o f most Federal
credit programs, in conjunction w ith the supporting statements made
available to Congress, currently go w ell beyond the tabulation o f net
financial flows, although the comprehensiveness o f presentation varies
among the different types o f credit programs.
(1 ) D ata on income and expenses, new loan commitments, presertt
and prospective repayments, and loss experience are essential fo r p u r­
poses o f program review by the Congress and the Executive. In direct
loan and mortgage purchase programs, gross outlays and repayments
should be presented, as w ell as net expenditures. The gross figures
disclose the extent to which credit is being new ly provided by the loan
program , w hile the net expenditures indicate the flow o f new Govern­
ment funds into the program .
(2 ) F o r purposes o f analyzing Treasury financing requirements,
direct loan and mortgage purchase programs should be included on a
net basis, as they are in the consolidated cash statement.
(3 ) F o r purposes o f analyzing the economic im pact o f the Budget,
the differences in character between credit program expenditures, d i­
rect Government expenditures fo r goods and services, and transfer
payments should be recognized. Because expenditures fo r loans and
mortgage purchases are not themselves expenditures fo r goods and
services, they are not classified in the Federal sector o f the national
income and product account, but the activity stim ulated by Federal
credit programs appears in other sectors. A ccordingly, it is im portant
to provide the type o f inform ation on credit program s th a t w ill enable
in tellig en t evaluation o f th e ir indirect im pact on other sectors o f the
national economic accounts.
(4 ) T h is effect can vary considerably from tim e to tim e, depending
upon the type o f loan, opportunities fo r profitable investment of
the proceeds o f the loan, borrower attitudes tow ard liq u id ity , and the
general level o f business activity. S im ila rly , it makes a great d iffer­
ence whether the loan finances the production o f new assets or the p u r­
chase o f existing assets; and whether it substitutes fo r private loans
or refinances old debts, rather than adding to the to tal volume o f credit.
W hen extension o f Government credit (eith er through loans or guar­
antees o f p rivate c re d it), finances production o f new assets which
otherwise would not have been produced, the economic stim ulus is
apparent. B u t even loans which in itia lly finance acquisition o f exist­
ing assets m ay enable a series o f asset transfers th a t u ltim ately adds
to the aggregate demand fo r goods and services.
(5 ) A serious gap in the presentation o f relevant inform ation on
Federal credit programs in the annual B udget is the relatively m inor
amount o f data on certain m ixed-ownership Government corpora­




35

tions. Because o f the exemption from statutory requirements on
budgetary disclosure, inform ation about the banks fo r cooperatives
and the Federal interm ediate credit banks is largely confined to
statements o f financial condition of these institutions at the end o f
the previous fiscal year, together w ith in fo rm atio n on present and
prospective new Federal investments or retirem ents o f existing invest­
ments in these institutions. M ore nearly adequate data are provided
on the Secondary m arket operations o f the F N M A . On the other
hand, the data on the 11 Federal home loan banks, now w holly p ri­
vately owned, are even more lim ite d ; and no data a t a ll are provided
on the 12 w holly farm er-owned Federal land banks. The Committee
recommends, at a m inim um , th a t the banks fo r cooperatives and the
Federal interm ediate credit banks be made subject to the statutes on
budget disclosure and th at the Budget contain adequate data on th e ir
present and futu re budget programs.
B . B u d g e ta ry C o n tro l O ver G overnm ent C re d it P ro g ram s
(1 ) F o r both economic and fiscal reasons, the aggregate volume o f
Government credit aid and its distribution among various programs
should be subject to effective executive control. A g ain , a gap exists
in such control insofar as mixed-ownership Governm ent corporations
are concerned. The Committee recommends th a t those corporations
which have the authority to obtain or u tiliz e Governm ent funds (e.g.,
the banks fo r cooperatives and the Federal interm ediate credit banks)
o r the auth o rity to issue guaranteed obligations should be subject to
effective annual review . T h is review would be facilitated by b rin g in g
these organizations under the budget review requirements o f the
Governm ent C orporation C ontrol A ct.
(2 ) The volume o f applications q u alify in g fo r Governm ent loans
or guarantees under statutory o r adm inistrative standards is often
not a proper measure o f the v alid level o f F ederal credit assistance.
N o r is the fac t th a t most loans w ill u ltim ately be repaid, w ith interest,
a sufficient reason fo r blanket approval o f a ll elig ib le applications.
R ath er, since credit programs add to the demands on resources, the ac­
tiv ity in each program should be judged not only in term s o f the claim
placed on the Federal budget, but also in term s o f the relative bene­
fits obtained from the use o f resources diverted fro m other uses by
fed erally backed p rivate credit o r by direct Federal loans.
(3 ) Since Government credit often involves significant net u ltim ate
costs and always entails some risk, (usually greater than fo r p rivate
c re d it), sound fiscal policy requires th a t these risks and potential costs
be subject to effective control. M oreover, as long as executive and
congressional budgetary policy is made on the basis o f budget totals




36

which include loans, lim itations on loan commitments are necessary
from tim e to tim e to make room fo r expenditures o f higher p rio rity .
(4 ) W h ile other methods o f control may be available, budget con­
trols are often the most, effective device— especially fo r direct loan and
mortgage purchase programs. Such controls must be applied to com­
mitments, rather than to the expenditures which more or less auto­
m atically follow once a commitment has been made.
(5 ) A t times, some Federal agencies have been reluctant to apply
more restrictive standards in reviewing credit applications than those
specifically required by the enabling legislation, p referrin g to fill
a ll loan applications that meet the m inim um requirements o f the law
on a first-come, first-served basis. W hen funds run out, either more
funds must be obtained from the Congress, or backlogs o f unfilled
applications are b u ilt up.
(6 ) O ther agencies have found it possible, consistent w ith th e ir
legislative mandates, to develop adm inistrative c riteria fo r reviewing
applications. Thus, when funds are inadequate to take care o f a ll
eligible applications, the lim ited commitments can be rationed on a
more equitable and effective basis than first-come, first-served. Such
c riteria have included geographic allocation o f available auth o rity,
lim itations on m axim um amounts fo r in d ivid u al projects or borrow­
ers, requirements fo r reasonable amounts o f p rivate participation (ac­
companied by technical assistance in obtaining such p a rtic ip a tio n ),
and p rio rities fo r types o f borrowers w ith p articu larly urgent needs.
(7 ) The Committee recommends th a t Federal agencies adm inister­
ing credit programs give increased attention to developing adequate
and equitable standards (including legislation, i f necessary) fo r use
when the demand fo r credit exceeds the present and prospective
levels o f available funds.
(8 ) D ire ct or indirect controls over the level o f new commitments
fo r loan guarantees and insurance can be as im portant from the
economic standpoint as controls over direct loan commitments, and
o ften more im portant. W hen such guarantees can be effectively lim ­
ited by the level o f advance funding provided fo r losses, such budget
lim itatio n s m ay be a useful device. M ore often, however, controls
through changes in terms or other approaches are lik e ly to be p refer­
able. These are discussed in the next section.
X . P R O M O T IO N O F E C O N O M IC S T A B IL IT Y A N D G R O W T H
As Federal credit program s have grown in size and diversity, th e ir
im pact on aggregate economic a c tiv ity and th e ir capacity to affect
prices have become more im portant. As a result, any exam ination o f
Federal cred it programs must p u t great emphasis on whether these




37

program s are being used to the fu ll extent possible in carrying out
the mandate o f the Em ploym ent A ct o f 1946 to promote “maximum
employment, production, and purchasing power.”
A . S ta b iliz a tio n o f the Econom y vs. In d iv id u a l Sectors
(1 ) The mandate o f the Em ploym ent A ct im plies th a t Government
policy should seek to m inim ize deviations from a rising trend o f poten­
tia l output th at reflects the growth in the labor force and productive
capacity. In general, Federal credit program s, however, are not
designed p rim a rily to counteract cyclical fluctuations in the economy;
rather they have th e ir origin in a desire to assist a p articu lar sector o f
the economy, such as housing or agriculture.
(2 ) In periods when resources are idle in a ll m ajor sectors o f the
economy, the use o f Federal credit programs to stim ulate the economy
is clearly consistent w ith th e ir function to assist p articu lar sectors.
Policies designed to increase aggregate income w ill stim ulate spend­
ing throughout the economy. Conversely, policies th a t add to spend*
ing or income in p articu lar sectors w ill stim ulate higher spending and
income elsewhere.
(3 ) Inconsistency between the program and stabilization objectives
is more lik e ly at times o f relatively fu ll employment, when production
is pressing against available resources, w ith consequent inflationary
pressures. In such a situation adoption o f restrictive policies in
Federal credit programs may restrain certain sectors o f the economy
more than others. This may be, but is not necessarily, undesirable.
W h ile im m obility o f resources could cause idle resources in sectors
bearing the m ain brunt o f restraint, simultaneous w ith shortages in
other sectors, there is almost always some m o b ility o f resources at th e
m argin. Decisions on the use o f Federal credit program s as tools o f
restrain t, therefore, should be taken in the lig h t o f the effects on
p articu lar sectors and in accordance w ith the scale o f social p riorities
p revailin g at the tim e.
B . S ta b iliz a tio n vs. S ocial O bjectives
T h e use o f Federal credit program s as tools fo r general economic
stabilization and grow th need not conflict w ith achievement o f the
longer-run social objectives o f the specific programs. F o r example,
annual additions to the stock o f housing or other cap ital goods induced
by Federal credit programs are lik e ly to be sm all compared to the
total stock. The tim in g o f these additions is not always crucial in
attain in g the social objectives o f the program . Indeed, insofar as
Federal cred it program s help to achieve overall economic stabiliza­
tion and grow th, every sector o f the economy is lik e ly to gain. In the
long rim , a healthy, vigorous economy is the m ain prerequisite fo r the
economic health o f individual sectors.




38
C . R ole o f F e d e ra l C re d it P rog ram s vs. O th er P olicies
(1 ) Federal credit programs are but p art o f a gam ut o f economic
policies— including budgetary, tax, m onetary, and debt management
policies— available to carry out the stabilization objectives of the E m ­
ploym ent A ct. The choice o f an appropriate m ix o f policies depends
upon the economic im pact o f various policies, the freedom and flexi­
b ility w ith which they can be employed, tim e lags between execution
Mild actual im pact, and fin ally the other economic and social goals be­
ing pursued; e.g., economic grow th and balance o f payments
equilibrium .
(2 ) T h e usefulness o f Federal credit programs as tools of economic
stabilization policy is less than sometimes assumed. F o r many credit
program s, the tim e lag between a change in terms or ava ila b ility o f
credit and the resulting im pact on economic activity is long. A nd
changes in the level or terms o f many credit programs may be difficult
to accomplish w ithout ham pering sound adm inistration o f these pro­
gram s or o f the broader program s o f which they may be only an
incidental p art.
(3 ) M oreover, w hile Government credit programs have varying
economic impacts, they norm ally have less im pact per d o llar o f credit
extended than expenditure or tax policy. Federal insurance and
guarantees o f private credit and Government-sponsored credit in s ti­
tutions, to some extent, d ivert private credit from one use to another.
T h ey have th e ir most expansionary effect when they activate idle
cash balances, when the loans otherwise would not have been made by
existing p rivate lenders, and when they are used to finance types of
expenditures th a t are especially sensitive to credit ava ila b ility and
terms.
(4 ) In quantitative terms, the potential net stimulus from Federal
credit programs, w hile significant, is only a fraction o f the stimulus
from either m onetary or fiscal policy. F o r example, the net increase
o f $1.2 b illio n in outstanding direct Federal loans (excluding loans
in foreign currencies) in fiscal 1961 was relatively m inor, compared
either to the expansion in commercial bank credit stim ulated by
m onetary policy or to the to tal increase in Federal expenditures and
tran sfer payments. The gross effect o f the continued re-use o f these
resources is much greater, however, as indicated in appendix D .
(5 ) Changes in the outstanding volume o f guaranteed and insured
p rivate loans are usually much greater than in direct Federal loans;
e.g., $4.6 b illio n compared to $1.2 b illio n in 1961. Hence, a b ility to
influence the terms on which such p rivate cred it is extended may give
the Governm ent a useful tool fo r affecting the volum e o f private
lending.




39

(6 )
G iven the lim itations inherent in Federal credit programs as
tools o f economic stabilization and grow th, it would be a mistake to
regard such programs as adding a large new dimension to stabiliza­
tion policy. Nevertheless, advantage should be taken o f the poten­
tia lity o f such programs as stabilization tools, since the arsenal of
such tools th a t can be readily and quickly brought into play is fa r
from adequate.
D . G uidelines
(1 ) T h e steps necessary to use Federal credit programs effectively
fo r stabilization objectives vary fo r d ifferent types o f programs.
They involve m ainly changes in policies on interest rates, downpay­
ments, m aturities, maximum loan amounts, and in the to ta l credit
commitments by specific programs. T o p erm it prom pt and effective
action when the economic situation requires, it is essential to have
flexible auth o rity available. The Committee recommends, therefore,
th a t wherever present authority proves to be inadequate to perm it
effective use o f credit programs in prom oting economic stabilization,
legislation be enacted to provide the needed additional auth o rity, in ­
cluding appropriate safeguards to lim it its use. One o f the respon­
sibilities o f the coordinating committee and its subcommittees
suggested in Section X I should be to id e n tify any such needs fo r
additional authority.
(2 ) A t a m inim um , when neither basic conflict w ith recognized pro­
gram objectives nor gross inefficiencies are entailed, the terms o f Gov­
ernment credit programs should be varied in lin e w ith variations in
terms in private credit markers, thus m aking such program s responsive
to general monetary j>oliey. This policy would prevent significant
changes in the relative subsidy im p lic it in m any o f these program s and
prevent undesirable cyclical shifts between Governm ent and p rivate
credit.
(3 ) In some o f the larg er and more flexible credit program s, having
a significant influence on economic a ctivity and on p rivate credit terms,
a dynamic stabilization policy o f leading rath er than fo llo w in g private
credit policy is at times appropriate. Em phasis should be on stim u­
la tin g (o r restricting ) those expenditures especially responsive to
credit terms. M any Federal credit program s involve relatively long­
term loans, and variations in the term s on which such loans are ava il­
able should prove p artic u la rly effective.
(4 ) In the area most im portant in d o llar terms— Federal insurance
And guarantees o f housing credit— it appears both possible and desir­
able, when undue economic fluctuations occur, to change the term s and
conditions under w hich Governm ent aid is available; e.g., by varying
m axim um loan amounts and m aturities and m inim um downpayments.




40

Changes in terms are preferable to rig id interest ceilings as a method
fo r influencing the flow of p rivate credit into housing. M oreover,
revisions in terms of these insurance and guarantee programs should
be accompanied by policies on purchases and sales o f insured and
guaranteed mortgages through the Secondary m arket operations of
the F N M A consistent w ith over-all objectives o f stabilization policy.
The F H L B B policy on advances should also have adequate scope to
discourage undesirable fluctuations in m ortgage lending by savings
and loan associations. The Committee recommends th at the legis­
lative standards governing both the F N M A Secondary m arket pro­
gram and the operations o f the Federal home loan banks be revised to
provide clear and unambiguous authority to perm it use of these in sti­
tutions in prom oting economic stabilization when clearly appropriate.
(5 )
W hen over-all economic policy calls fo r variations in fiscal
policy, direct lending programs should o rd in arily be among those
subject to changes in budgetary controls whenever such changes are
lik e ly to operate fast enough to contribute to economic stabilization.
X I . O R G A N IZ A T IO N A N D C O O R D IN A T IO N
In the preceding sections, the Committee has presented its analysis
o f the m ajor criteria which should influence the choice among the
various types o f credit and non-credit aids, and the guidelines to be
follow ed in establishing, financing, and adm inistering credit pro­
grams. The actions recommended are designed to carry out the
President’s request fo r the Committee “to consider w hat changes, i f
any, in Federal credit programs would contribute to achieving the
N atio n ’s economic goals.” In this section, the Committee discusses
the general approach which, in its judgm ent, is most lik e ly , over a
period o f tim e, to assure more effective organization o f Federal credit
program s and especially to coordinate more efficiently th e ir activities
w ith each other and w ith other Government programs.
A . O rg an izatio n by M a jo r Purposes
(1 ) L ik e other Government programs, credit programs should be
grouped organizationally by m ajor purposes served (e.g., farm in g,
housing, business), rath er than by processes or techniques used (e.g.,
loans, grants, research, construction). Such grouping perm its b etter
evaluation, balancing and coordination o f the various means o f achiev­
ing each m ajor purpose, as w ell as clearer focusing o f responsibility.
(2 ) A s fa r as possible, new credit program s should be assigned to
existing agencies whenever they serve the same general purposes




41

already served by such agencies. However, in some cases; e.g., the
credit portions o f the area redevelopment program , i f the agency
responsible fo r the new program in itia lly lacks sufficient personnel
w ith the necessary financial skills and procedural expertise and the
prospective level o f operations does not ju s tify the creation o f a whole
new structure o f lending operations, the agency w ith over-all responsi­
b ility fo r the function should be authorized to use, as its agent, another
agency w ith the necessary credit skills. The special problems
involved in such delegation, should be recognized, and p articu lar effort
devoted to assuring sympathetic and effective adm inistration by the
delegate agency.
(3 ) Some im portant existing credit program s (e.g., veterans hous­
in g loans) are grouped w ith other program s serving the same clientele,
even though other clientele groups m ay have basically sim ilar credit
needs. Since such groupings are not fu lly consistent w ith organiza­
tion by m ajor purpose, interagency coordination becomes especially
im portant whenever two or more program s in separate agencies are
serving essentially the same m ajo r purpose.
(4 ) In each o f the five m ajo r domestic program areas reviewed by
the Com m ittee, one o r more cred it program s are carried on by agencies
•outside the departm ent or agency having the p rim a ry Governm entw ide responsibility fo r leadership in the area o f the common m ajo r
purpose. The agencies w ith p rim a ry responsibilities in each area and
the most im p o rtan t related credit program s in other agencies include:
(a ) Private homing.
P rim a ry agency: H H F A
B elated credit program s:
V A -guaranteed and direct loan program s.
A g ricu ltu re— ru ra l nonfarm housing loan program .
Federal home loan banks— advances to home financing
institutions.
(b ) Community development and public homing.
P rim a ry agency: H H F A
B elated credit pro g ram :
Commerce— public fa c ility loans fo r area redevelopment.
(c ) Business and transportation,,
P rim a ry agency: D epartm ent o f Commerce (in clu d in g p re vi­
ous C A B guaranteed loan program )
B elated credit program s:
SB A — loans and other aids to sm all business.
IC C — guarantees o f ra ilro a d loans.




42

(d ) Education and health.
P rim ary agency: D epartm ent o f H ea lth , Education, and
W elfare
Related credit program s:
H H F A — college housing loans.
H H F A — nursing home mortgage insurance.
S B A — loans fo r p rivately owned health facilities.
(e) Resource development.
P rim ary agencies: Departm ents o f A g ricultu re and In te rio r
Related credit program s:
F C A — loans by Government-sponsored enterprises aid­
ing farm ers.
(F u rth e r detail on credit programs in each o f these areas as o f June
30,1961 is shown in app. E ) .
(5 )
The Committee recommends th a t in a ll m ajor cases in w hich
credit programs are adm inistered by agencies separate from those
p rim a rily responsible fo r Governm ent-wide leadership in achieving
the m ajor purposes served, special efforts should be made to assure
continuous and effective coordination. T h e in itia tiv e and respon­
s ib ility fo r such action rests w ith each o f the credit agencies them ­
selves. Periodic reviews should be made, a t the discretion o f the
President, to determ ine whether, in practice, m ajor common problems
are being anticipated and satisfactorily resolved. I f existing arrange­
ments prove unsatisfactory and the achievement o f im portant public
purposes is seriously hampered, consideration should be given to
more basic approaches. In some cases tran sfer o f the credit program
to the agency w ith the p rim ary reponsibility fo r leadership in the area
served by the program m ay be an appropriate solution.

B. Basic Program Formulation and Objectives
L ik e other Federal program s, those w hich involve the issuance o r
guarantee o f credit affect the allocation o f resources fo r the purpose o f
achieving certain social objectives. A p a rt fro m the specifically credit
features o f such programs, the basic form ulation o f program levels
and goals (both w ith respect to new legislative proposals and to on­
going program s) should be carried out in the same fram ew ork ap p ly­
in g to a ll other program s; i.e., through submission o f such proposals
fo r review by the President through the B ureau o f the B udget and
other interested agencies to the extent appropriate. N o special mecha­
nism is needed here which does not already exist.

C. Coordination of Economic Policy Aspects
(1 )
The organizational structure and methods used to coordinate
economic policy necessarily depend upon the President’s decisions as




43

to how he wishes to adm inister his executive responsibilities. In this
A dm inistration, coordination o f economic policy in the field o f housing
credit is already being accomplished, in p art, by an in fo rm al in ter­
agency group chaired by a member o f the Council of Economic
Advisers. In addition to the Chairm an, this committee consists o f rep­
resentatives from each o f the agencies w ith m ajor housing credit pro­
grams, as w ell as from the Treasury, the Bureau o f the Budget, and
the W h ite House. N o comparable group exists in the other m ajor
areas in which domestic credit programs are im portant, but the
N ational A dvisory Council on In tern a tio n a l F in an cial and M onetary
Problems (N A C ) to some degree fills a sim ilar role fo r international
credit programs.
(2 ) Sim ple expansion of the housing credit committee to embrace
a ll other domestic credit programs would lead to an unw ieldy and in ­
effective committee. However, it would be j>ossible fo r representatives
o f the C E A , Treasury and the Bureau o f the Budget— who are con­
cerned p rim a rily w ith over-all coordination, rath er than adm inister­
ing specific credit programs— to form a nucleus w ith W h ite House
staff fo r a broader continuing committee on domestic Federal credit
programs. Representatives o f in d ivid u al credit agencies would p ar­
ticipate in the discussions o f problems in th e ir area o f interest. Such
areas m ig h t be defined to correspond w ith the five areas in to which
this Committee has found it useful to group domestic credit program s.
In effect, there would be a single coordinating committee w ith lim ited
membership, and five subcommittees, each o f w hich w ould include the
members o f the coordinating committee.
(3 ) W h ile the responsibilities o f such a committee should not be
rig id ly lim ited , it should deal m ainly w ith those aspects o f Federal
credit programs in which coordination is necessary to achieve a con*
sistent over-all economic policy, p artic u la rly stabilization policy. In
the course o f its operations, meetings could be called at the in itia tiv e
o f the committee its e lf or o f in d ivid u al credit agencies. In p articu lar,
credit agencies considering m ajor program changes involving sig nifi­
cant economic impacts should be expected to b rin g th e ir tentative plans
to the committee as a method o f securing the advice and assistance o f
other interested agencies and o f avoiding the danger o f conflict w ith
o ver-all economic policies. A t the same tim e, the com mittee could be
used to help explore revisions in credit program s necessary to foster
economic stab ility and grow th. W h ile most o f the meetings probably
should be called only when there are significant problems requiring dis­
cussion, a m inim um number o f meetings o f each group should be
planned each year.




44

(4 ) The committee's role would be exclusively advisory. W hen a
complete consensus was not reached, norm al methods should be fo l­
lowed to obtain decisions from the President.
(5 ) The Committee recommends the establishment o f an advisory
committee to review the special economic problems th at arise from tim e
to tim e in each o f the m ajor program areas where domestic credit aids
are o f m ajor significance. Consistent w ith the policy already estab­
lished in this A dm inistration, the President m ay wish to designate the
Council o f Economic Advisers, as p art o f its role in advising him on
economic policy, to organize and chair such a committee and to arrange
fo r the regular p articipation o f other agencies w ith over-all executive
responsibilities, as w ell as participation from tim e to tim e o f those
credit agencies w ith activities in the area under discussion on specific
occasions.
X I I . S U M M A R Y O F C O N C L U S IO N S A N D
R E C O M M E N D A T IO N S
T h is fin al section summarizes the Com m ittee’s m ajor conclusions
and lists the specific recommendations contained in Sections I I I
through X I .
C rite ria G overning Choice Am ong C re d it and N o n e re d it A id s
(S ectio n I I I )
A . The basic objectives o f Federal credit programs are (1 ) to remove
or reduce credit gaps arising from im perfections in p rivate m arkets;
(2 ) to influence the allocation o f economic resources in order to promote
social purposes which otherwise could not be achieved as efficiently;
and (3 ) to increase the total use of resources which otherwise would
not be fu lly employed.
B . C red it aids are most lik e ly to be suitable (1 ) i f the goods and
services financed yield m ajor benefits both public and private and are
norm ally financed from borrowed funds; (2 ) i f credit aids w ill fa c ili­
tate needed surveillance o f borrower use o f Government assistance; or
{3 ) i f the ventures financed are relatively novel and u n fa m ilia r to
private lenders. In a ll cases, there should be a reasonable expectation
th a t the credit can and w ill be re p a id ; e.g., th a t borrowers w ill receive
substantial direct increases in income through acquisition o f assets or
skills financed w ith Government credit aid. C red it aids are inap­
propriate (1 ) i f viable loans are im probable, even w ith subsidy rates;
(2 ) i f excessive debt service requirements are involved; o r (3 ) i f p u r­
chasers can finance th e ir needs w ith o u t Federal cred it.
C. W hen Federal credit assistance is appropriate, the type o f aid
selected should to the extent consistent w ith the purpose o f the program




45

be designed to encourage and supplement p rivate lending, to m inim ize
costs, to provide the control needed to protect the Government’s in ­
terest, and to be responsive, where appropriate, to over-all economic
stab ility and grow th requirements.
D. Recommendation: I f broadening the auth o rity o f existing p ri­
vate lenders would be inappropriate or inadequate to achieve the objec­
tives sought, but two or more types o f Federal credit assistance would
be h elp fu l, the usual order of p rio rity should b e: (1 ) guarantees o r in ­
surance o f p rivate loans, (2 ) Government aid to new types o f p rivate
institutions, (3 ) a Government secondary m arket, and (4 ) direct loans.
E . Recommendations: The Executive Branch should regularly ap­
praise the m ajor Federal credit program s to determ ine (1 ) whether a
valid need remains fo r the type o f assistance provided, (2 ) whether
other types o f aids would be more appropriate, or (3 ) whether private
lenders should be expected to meet a ll essential requirements. Such
reviews could w ell be- coordinated w ith the budget process. The
regular reviews of other m ajor programs also should include attention
to any areas where Federal credit aids would be useful in rem oving
gaps in the private credit markets ham pering achievement o f public
purposes.
P a rtic ip a tio n o f P riv a te Lenders (Sec. IV )
A . Recommendations: Government credit programs should, in
p rinciple, supplement or stim ulate private lending, rath er than sub­
stitute fo r it. P riva te p articipation, however, should not be sought
i f the incentives required prove too costly fo r the benefits gained
or if private lenders are u nlikely in tim e to take more than a token
role in the program . Federal agencies should emphasize the devel­
opm ental aspects o f th e ir credit programs by helping to create ex­
perience in new7 lending techniques, thus im proving the m obility o f
credit and the a b ility o f borrowers to attrac t p rivate funds. W hen­
ever appropriate incentives and safeguards become standard prac­
tices, Federal agencies should s h ift to p rivate lenders as much as
possible o f the responsibility fo r m aking and servicing in d ivid u al
loans. W hen both public and p rivate funds are involved, it is espe­
c ially im portant th a t the terms and conditions p revailin g in com­
petitive p rivate m arkets should, as fa r as consistent w ith program
objectives, determ ine the basis on w hich Governm ent funds are
advanced.
B . In some cases, substitution o f public fo r p rivate credit can be
m inim ized by p roviding incentives fo r Government-sponsored, p riv ­
ate financial institutions. T h is is most lik e ly to be possible when a
credit gap exists which can be fille d p riv ately w ith lim ite d in itia l




46

Government aid and when some pioneering w ork is recognized to be
essential an d /o r has already been in itiated on an experim ental basis.
C.
Im m ediate participations by private lenders in Government
loans help private lenders to gain experience w ith borrowers and, by
developing skills in this type o f credit, to make such loans in the
futu re independently o f the Federal agency. However, this type of
jo in t financing involves the problem of obtaining adequate private
participation w ithout excessive costs. Recorrmiendations: Legisla­
tion should avoid mandatory preference fo r im m ediate participations,
and adm inistrative policy should generally be to avoid th e ir use unless
p rivate lenders are w illin g and able to share risks in proportion to
th e ir potential profits. The service charges paid to the p rivate lender
by the Federal agency should not provide an incentive to m inim ize
p rivate participation. W hen the Federal agency assumes m ajor
risks by taking the longer m aturities on loans, it should have authority
to determine or approve interest rates on the private share o f the loan.
Loan G uarantees and In su ran ce (Sec. V )
A . Recommendations: A s a m atter o f principle, some element o f
p rivate lender risk (coinsurance) should be required in guaranteed
or insured loans in order to provide an incentive fo r norm al vigilance
l>v lenders in m aking and servicing such loans. W here variations in
the degree o f coinsurance are feasible and fees are charged p rivate
lenders, agencies adm inistering loan insurance and guarantee pro­
grams should provide fo r a graduated scale o f rates w ith the lowest
rates available fo r lenders who assume the most risk.
B . Recommendation: No program should be authorized in the
futu re which involves Federal guarantees o f securities the income
from which is exempt from Federal taxation. Since State and local
governments already have a significant advantage in th e ir borrowing
because o f the tax exemption privilege, any necessary additional
cred it assistance can be provided, when appropriate, (1 ) through
Federal guarantees o f obligations on which the Federal income tax
exem ption is waived, or (2 ) through capital grants sufficient to perm it
l>orrowing the rem ainder in the m arket on reasonable terms.
C. Recmnrnendatiom: Federal agencies, which insure o r guarantee
p art or a ll o f the risk on p rivate loans, should have auth o rity to set
maxim um interest rates fo r such loans. H ow ever, such legislation
should neither establish fixed rates o f interest or fixed ceilings, nor
impose statutory form ulas so inflexible as to prevent adm inistrative
adjustments required by variations in m arket rates o f interest. In
establishing and m odifying adm inistrative ceilings, the Federal agen­
cies should avoid placing them outside the range o f reasonable m arket
rates. H ow ever, adjustments in ceilings and related secondary
m arket policies should be adm inistered in such a way as to avoid




47

disruptive effects on construction necessary to meet the requirements
o f economic growth. I t may be desirable to provide authority to
charge special fees fo r specific types o f loans or in specific types of
areas commensurate w ith any unusual lending costs. In such cases
fu ll disclosure should be made to the borrower o f the total costs he may
be required to absorb.
Secondary M a rk e t O perations (Sec. V I)
A . jRecommendation; In order to achieve a more effective p rivate
mortgage m arket on a nationwide basis, Federal agencies, in coopera­
tion w ith States, should intensify th e ir efforts to promote the develop­
ment o f u n ifo rm ity in State laws and regulations governing mortgage
contracts (including originations, foreclosures, and title claim s).
B . Recommendation : To avoid the creation o f a permanent p ro ­
gram fo r support o f submarket types o f credit by this device, the
establishment of a Government secondary m arket should be reserved
fo r cases in which there is a real possibility o f encouraging sales to
private lenders and in which purchases are discretionary and subject
to firm supervision and control. In other words, the secondary m ar­
ket should not become the disguised equivalent o f a direct lending
program . W hen permanent credit assistance is desirable, direct
loans, combinations o f loan guarantees and capital grants or interest
subsidies are preferable, since these are more easily adjusted to provide
the m inim um necessary Federal intrusion and support.
C. I t is very im portant th a t secondary m arket operations be conso­
nant w ith the objectives o f general m onetary policy. Housing and
other construction, fo r example, are quite sensitive to changes in in ­
terest rates and in the a va ila b ility o f funds, and inappropriate policies
on prices and on purchases or sales o f mortgages by a Government
secondary m arket can strongly hinder the effectiveness o f stabilization
policy. Hence, the Government secondary m arket should not o rd i­
n a rily be used on a scale sufficient to offset the im pact o f general mone­
ta ry policy on any m ajor sector o f the m arket— though under certain
circumstances when the construction industry and the economy as a
whole are m oving in different directions, some m odification o f this
p rinciple m ay, at times, be w arranted.
D . Recommendations: Loan guarantee and insurance program s
should not provide any guarantee o f liq u id ity (o r “p u t” ) which gives
the p rivate holder o f a loan the rig h t to s h ift it back to the Govern­
ment w ithout risk or cost whenever interest rates rise or altern ative
investment opportunities become more attractive. I f any liq u id ity
provision o f this sort is deemed necessary, the liq u id ity should be pro­
vided only fo r short periods and should en tail a significant actual or
potential cost to the lender m aking use o f it.




48

D ire c t Loans (Sec. V I I )
A . Recommendatiom: W hen credit needs arise solely because o f
im perfections in the private credit system, direct loans (o r other
Government credit program s) should norm ally be self-supporting;
i.e., cover a ll costs reasonably im puted to the program . Federal credit
programs intended p rim a rily to stim ulate private lending w ill be most
effective in encouraging substitution o f private fo r public credit i f
the interest rates charged are comparable to those th a t would prevail
in effectively functioning private markets. This com parability p rin ­
ciple should apply to (1 ) loans by Government-sponsored agencies
u ltim ately expected to become w holly p rivate, (2 ) direct loans th at
supplement guaranteed or insured loans, and (3 ) insofar as feasible,
im m ediate participations by Government agencies in p rivate loans.
B . W hen Federal credit programs are used to influence the alloca­
tion o f resources, intellig en t choice among alternatives requires com­
parison, rough as it may have to be, o f net additional public benefits
and net costs to the Government, i f any. Recommendation: As a first
step, the interest charge fo r direct loans should be compared to the
sum o f (1 ) the prevailin g m arket yield on Government securities of
comparable m aturities, (2 ) an allowance fo r adm inistrative casts,
and (3 ) an allowance fo r expected losses. The evaluation o f the re­
source allocation and equity effects o f Government loans should also
properly include consideration o f (1 ) the additional advantage to
users o f Federal credit aids arising from the fact th a t imputed costs
to the Government are usually significantly below the interest rates
charged in a reasonably com petitive p rivate m arket as w ell as (2 )
the im portant benefits to the general public.
C . Recommendation: T o assure adequate disclosure o f the relative
cost o f credit and other programs (1 ) a ll proposals to create new credit
program s o r to broaden existing credit program s should be accom­
panied by an appraisal o f the relationship between the interest rates
charged in the program , the rates which would be charged by com peti­
tive and efficient private lenders, and the rate necessary to cover the
Governm ent’s costs; and (2 ) the norm al reviews o f existing Federal
credit program s should include discussion o f these relationships.
D . Recommendations: (1 ) T o provide fo r adequate fle x ib ility in
interest rates, legislation authorizing new credit program s o r m ajor
expansions o f present programs should avoid rig id o r relatively in ­
flexible ceilings (o r floors) on interest rates fo r direct loan programs.
(2 ) I f , fo r reasons o f public policy, it is appropriate to charge in te r­
est rates below rates fo r comparable loans in private m arkets, or below
Governm ent costs, the lending agency should be perm itted to vary
the rate charged new borrowers a t least as much as m arket rates and
current Treasury borrow ing costs vary.




49
F i n a n c i n g o f C r e d it P r o g r a m s ( S e c . V I I I )

A . Recommendation: F o r a ll loan guarantee or insurance pro­
grams, the Congress should provide, in advance, reasonable amounts
o f new obligational authority to meet any foreseeable contingencies
arising from actual defaults.
B . W h o lly Government-owned agencies should norm ally obtain
th e ir capital requirements by borrowing from the Treasury. Recom­
mendation: The F IT A should continue to have authority to pay off
in guaranteed debentures, but it should also be authorized, at its op­
tion, to pay claims in cash.
C. Government-sponsored agencies, which are expected to become
w holly privately-ow ned, should borrow in the p rivate m arket on a
nonguaranteed basis. However, in the early stages o f a Governmentsponsored program , it may be necessary fo r Treasury to backstop its
m arket borrowing. Agencies such as the Federal home loan banks,
which are the source o f liq u id ity fo r th eir members, (and the Second­
ary m arket operations o f the F N M A ) should also continue to have
emergency or tem porary recourse to Government funds, subject to
Treasury approval. Recommendation: Treasury approval should
be required on the tim in g and terms o f the borrow ing in the m arket
o f all Government or Government-sponsored, enterprises.
D . Recommendation: Revolving fund financing should be extended
to a ll credit programs, where feasible.
E . The credit aspects of sales o f Government physical assets and
loans should be reviewed fo r consistency w ith overall policy on F ed ­
e ral credit programs. C redit terms offered buyers o f physical assets
should generally be such as to make the loans suitable u ltim ately fo r
resale to p rivate lenders. D irect loans should norm ally be sold to
p rivate institutions on terms th a t w ill encourage eventual substitution
o f p rivate fo r Governm ent credit in the p rim a iy lending operation.
I f necessary to help develop a p rivate m arket, the Federal agency
selling its direct loans (except tax-exem pt loans) may appropriately
guarantee them against default.
F . The policies followed by F N M A in selling insured and guaran­
teed loans and the liquidation policies o f the V A loan guarantee and
F H A m ortgage insurance program s should be consistent, especially
in prices and in tim in g o f changes in sales policies. Im pacts on in te r­
est rates and construction activity should be among the m ajor factors
considered in decisions on the term s under which insured and guaran­
teed mortgages are sold. W hen consistent w ith these and other eco­
nomic objectives, sales below p ar should be perm itted. Recommen­
dation: Legislative lim itatio n s on sales prices o r term s which m ight
impede desirable fle x ib ility should be removed.
B u d g e ta ry T re a tm e n t and C o n tro l (Sec. I X )
A.
Recommendations: (1 ) B udget presentations o f Government
credit program s should include sufficient significant d eta il about each



50

m ajor program to provide the ingredients necessary fo r program
review by the Congress and the Executive, analysis o f Treasury
financing requirements, and analysis o f the economic im pact o f the
programs. (2 ) T o remove a serious gap in the presentation o f rele­
vant inform ation, the banks fo r cooperatives and the Federal in ter­
mediate credit banks should be subject to the statutes on budget dis­
closure, and the Budget should contain adequate data on th e ir pro­
grams. M oreover, since these agencies are s till using substantial
amounts o f Government funds, they should be subject to effective
annual review.
B.
The volume o f applications th a t q u alify fo r Government loans
or guarantees under the statutory or adm inistrative standards pro­
vided is often not a proper measure o f the valid level o f Federal
credit assistance. R ather, since credit program s add to the demands
on resources, the activity in each program should be judged not only
in terms o f the claim placed on the Federal budget, but also in term s
o f the relative benefits obtained from the use o f resources diverted
fro m other uses by Federally-backed p rivate credit or by direct Fed­
eral loans fo r the purposes o f each program . Recommendation: F ed ­
eral credit agencies should give increased attention to developingadequate and equitable standards (including legislation, i f necessary)
fo r use when the demand fo r credit exceeds the prospective available
funds.

Promotion of Economic Stability and Growth (Sec. X )
A . In general, Federal credit programs are not designed p rim a rily
fo r the purpose o f counteracting cyclical fluctuations in the economy;
rath er, th e ir purposes are directed to m eeting more specific needs in
p artic u la r sectors. W hen resources are idle, however, the expansion:
o f these programs can help to stim ulate higher spending and income
throughout the economy. Conversely, at times o f generally fu ll em­
ploym ent, when production is pressing against capacity, it m ay be
necessary to restrain p artic u la r sectors o f the economy. However,,
decisions on the use o f these program s as tools o f restrain t should be
made in the lig h t o f the effects on p artic u la r sectors, and in accordance
w ith the scale o f social p rio rities p revailin g at the tim e.
B . T h e use o f Federal credit programs as tools fo r general economic
stabilization and grow th need not conflict w ith achievement o f the
longer-run social objectives o f specific programs. Indeed, in so far
as Federal credit programs help achieve overall stabilization and
grow th, every sector is lik e ly to gain. In the long run, a healthy,
vigorous economy is the m *in prerequisite fo r the health o f in d iv id u al
sectors.




51

C. The usefulness o f Federal credit programs as tools of economic
stabilization policy is subject to serious lim itations. F o r many credit
program s, the tim e lag between a change in terms or a va ila b ility o f
credit and the resulting im pact on economic activity is long, and the
im pact per d o llar is norm ally less than fo r expenditure or tax policy.
Changes in the outstanding volume o f guaranteed and insured private
loans are usually much greater than in direct Federal loans. Hence,
a b ility to influence the terms on which such p rivate credit is extended
may give the Federal Government a useful tool fo r affecting the
volume o f p rivate lending.
D . Recommendations: W herever present authority proves to be
inadequate to perm it effective use o f credit program s in prom oting
economic stabilization, legislation should be enacted to provide the
needed additional authority, including appropriate safeguards.
W hen changes would neither conflict w ith recognized program ob­
jectives nor introduce inefficiencies, Governm ent credit terms should
be varied in lin e w ith variations in private markets.
E . In the area most im portant in d o llar terms— Federal insurance
and guarantees o f housing credit— changes in the terms and con­
ditions on which Government aid is available should be accompanied
by a positive stabilization policy in F N M A purchases and sales o f
mortgages. S im ila rly F H L B B policy on advances should have ade­
quate scope to discourage undesirable fluctuations in m ortgage lend­
ing by savings and loan associations. Recommendations: Legislative
standards governing the F N M A secondary m arket and operations o f
the Federal home loan banks should be revised to provide unam bigu­
ous auth o rity to perm it use o f these institutions in prom oting stab ili­
zation, when clearly appropriate.
O rg a n izatio n and C o ordin atio n (Sec. X I )
A.
L ik e other Government program s, credit program s should be
grouped organizationally by m ajor purposes served, rather than by
techniques used. Such grouping perm its better evaluation, balancing
and coordination o f the various means o f achieving each m ajor p u r­
pose, as w ell as clearer focusing o f responsibility. As fa r as possible,
new programs should be assigned to existing agencies w hen they serve
the same purposes already served by such agencies. Recommenda­
tions: W hen credit programs are adm inistered by agencies separate
from those p rim a rily responsible fo r Governm ent-wide leadership
in achieving the m ajor purposes served, special efforts should be made
to assure continuous, effective coordination. I f achievement o f im ­
po rtan t public purposes is seriously hampered by inter-agency prob­
lems, more basic approaches should l)e considered, including in some




52

cases the possible transfer to the agency p rim a rily responsible fo r
leadership in the area served.
B. The basic form ulation o f program levels and goals fo r Federal
credit programs should be carried out in the same fram ework app ly­
ing to a ll other programs.
C. The organizational structure and method used fo r coordinating
economic policy necessarily depend upon the President’s decisions
on how he wishes to adm inister his executive responsibilities. Recom­
mendations: Consistent w ith the precedent established by this A d ­
m inistration, an advisory committee should be established to review
the special problems th a t arise from tim e to tim e in the various areas
served by m ajor Federal credit programs. The President may wish
to designate the Council o f Economic Advisers, as p art o f its role in
advising him on economic policies, to organize such an interagency
committee, consisting in the first instance o f the prin cip al agencies
concerned w ith overall questions o f Federal credit policies. The areas
subject to the committee’s review m ight w ell correspond to the five
m ajor areas previously identified in this report. The committee should
meet w ith representatives o f the in d ividual credit agencies involved in
each p articu lar area, as problems peculiar to th at area arise. Its
duties should be exclusively advisory. I t would assist in the coordi­
nation o f Federal credit program s, w ith a view tow ard achieving a
consistent overall economic policy.




A P P E N D IX A
T h e W h ite House,

Washington, March 28, 1962.

Memorandum to:
The Secretary of the Treasury.
The Director of the Bureau of the Budget.
The Chairman of the Council of Economic Advisers.
The Chairman of the Board of Governors of the Federal Reserve System.
Subject.: The Establishment of a Committee on Federal Credit Programs.
Pursuant to my Economic Report to the Congress, I am requesting the persons
to whom this memorandum is addressed to form a Committee on Federal Credit
Programs to review legislation and administrative practice relating to these
programs. I am asking the Secretary of the Treasury to serve as Chairman of
this Committee. The Committee should seek the views and advice of appropriate
government agencies and may also cronsuit with interested private parties and
independent exi>erts.
The recommendations of the Commission on Money and Credit on this sub*
ject provide a point of departure for the Committee, but its deliberations need
not be limited to the issues raised by the Commission. The Commission’s re­
port calls attention to the wide range and substantial magnitude of Federal
direct lending programs and programs for insuring and guaranteeing private
loans. There is need for a thorough review of the imi>act of these programs on
the economy, their effectiveness for the special purposes for which they were
established, and the i>olicies and techniques employed in administering them.
The general task of the Committee should be to consider what changes, if any.
in Federal credit programs would contribute to achieving the Nation’s economic
goals.
Among the topics for consideration by the Committee should be the following:
(a) The circumstances under which Federal credit programs should be selfsupporting and the criteria for and character and extent of subsidy
where subsidies are appropriate.
(&) The criteria for determining whether a particular program should take
the form of direct Federal lending, loan insurance, loan guarantee, or
other form.
(e) The budgetary treatment of Federal credit programs.
(<f) The appropriate degree of coordination of Federal credit programs with
the general monetary and fiscal policies of the Federal Government, and
the use of credit programs for countercyclical purposes.
(e) The role and eifectiveness of statutory and administrative interest rate
ceilings in Federal credit programs.
In order to be of use in drawing up the Administration's legislative program
for the 1963 session of the Congress, the Committee's report and recommenda­
tions should be submitted to me by November 1,1962.
I am enclosing for your information copies of the memoranda establishing
separate committees on Financial Institutions and on Corporate Pension Funds
and Other Private Retirement and Welfare Programs.




(S)

(58)

John

F.

K ennedy .




A P P E N D IX B

RECOMMENDATIONS OF THE COMMISSION ON MONET AND CREDIT
REGARDING FEDERAL CREDIT PROGRAMS, INCLUDING SEVEN
GENERAL GUIDES
Selfsupporting credit programs

“Federal credit programs designed to improve the allocative functioning of
private credit markets and to stimulate greater enterprise and competition therein
should be self-supporting. In general, loan insurance j>rogranis are preferable
to programs that establish federally sponsored lending agencies. (First guide)”
(P. 188)
“The Commission recommends the continuation of the Federal Housing Ad­
ministration loan insurance programs to facilitate the flow of private funds into
residential construction. The recommendation is limited to the FHA program
because the VA program is scheduled to lapse in the near future. Two separate
agencies to underwrite residential loans entail unnecessary duplication. Even
if Congress should desire to continue the veterans’ special preference, this could
be done through FHA machinery, for example, by having the VA pay the FHA
insurance premium for veterans/’ (p. 191)
“In order to ensure the continued availability of insured loans in all areas of
the country, the Commission recommends that the voluntary home mortgage
credit program and the certified agency program of the Federal Housing Admin­
istration be encouraged . . . . If, however, important needs are not met, an
FHA direct lending program similar to the terminating VA program may be
necessary. A direct loan should be made, however, only if evidence indicates
that efforts to obtain an insured loan through other programs have failed. And
the same credit standards and terms should be used for direct loans as those
applicable under the FHA insured loan programs/' (p. 102)
“The Commission recommends that a limited self-supporting Federal insurance
program be developed and administered by an established farm credit agency for
mortgage loans featuring low down payments, long maturities, and not neces­
sarily complete amortization. Such insurance should be available only under
stringent conditions, perhaps such as (1) the farm unit should be large enough
to take advantage of existing technology and provide a satisfactory level of
family income under reasonably good management, and (2) adequate farm
plans should be developed by the borrower.” (pp. ISM-195)
“The Commission recommends also a Federal loan insurance program for
intermediate-term credit of 3 to 10 years to help fanners finance the acquisition
of the capital assets, other than real estate, required for an efficient farm unit.”
(p. 186)
“It is extremely difficult to evaluate the empirical data on the adequacy of small
business financing. . . . The evidence is also inconclusive on whether a sig­
nificant gap still exists in credit facilities for new and small business firms
which have a realistic prospect of successful operation since the establishment




(55)

56

of the SBIC program. As yet the life of the SBICs has been 100 short to show
how far they will contribute to small business financing. However, the pro­
gram appears to be promising.
“If, however, later evidence suggests that the SBIC program is not adequate
for its task, consideration might be given to the development of a loan insurance
program available to all lenders, including possible SBIC's. Such a program
should l>e designed with enough risk shifted to the insurance program so that
private lenders would adopt more liberal lending practices.” (pp. 196-107)
Subsidized credit programs

“Federal credit programs designed to alter the allocation of resources to
achieve a public purpose which even a perfectly functioning private market
system would not attain require a subsidy in the form of below-market interest
rates or credit terms. The choice among types of credit programs should be
made on the basis of which will be effective at the least cost and which will
interfere least with the private financial system. Where it can be effective, a
loan guarantee type of program should take preference over the direct lending
type of program. (Second guide) *’ (p. 197)
“Illustrations of subsidized credit assistance are many. A few are cited
below. The Commission has made no recommendations, however, as to the
appropriateness of the objectives of these programs.” (p. 198)
“While the appropriateness of the cash subsidy or its amount is not a matter
for its consideration, the Commission does believe that the amount of the
cash subsidy should be made an explicit charge in the budget.** (In discussion
on the 2 percent interest rate on KEA loans, p. 201.)
Credit programs and economic stabilization

“Since direct lending programs to achieve a particular allocation of resources
resemble Government expenditure programs, the amount of credit extended
should be determined as a part of the budgetary process. However, merely
because direct lending programs are credit rather than expenditure programs,
the amount of credit extended should not be singled out as being either uuiquely
appropriate for countercyclical variations or uniquely insulated from such
variation. (Third guide)** (p. 201)
“Credit programs established to increase the effectiveness of the private credit
system should be designed to be sensitive to general monetary policy. Some
programs, especially loan insurance programs, should at times be used to sup­
plement and reinforce general monetary policy by variations in lending terms.
(Fourth guide)" (p. 203)
“The Commission recommends that the FHA and VA underwriting programs
tie used to aid in implementing the countercyclical and price-stabilizing policies
of the Government by variations in the terms of the underwritten loans and by
allowing contractual interest rates to rise and fall with conditions in the mort­
gage market,** (p. 294)
“The Commission recommends that the Federal Home Loan Bank System
oi>erate its programs in close harmony with the general stabilization policies
of the government. . . .
•\Amore flexible interest rate policy on advances is suggested as one approach.
There appears to be a fairly constant relationship between the interest rates
charged by the banks on advances and their cost of borrowing in the market. A
chauge in policy to relate the interest rates charged to mortgage rates prevailing




57

or expected to prevail in each bank district might more effectively curb over
commitments by some members and hence future bank advances. The Com­
mission urges experimentation in rate controls.” (pp. 204-205)
“Where the funds for direct lending programs come partly from the Treasury
and partly from private financial institutions participating in direct loans on a
guaranteed basis, the interest rates on the private participations should be
varied in response to the needs of the general monetary policy. If the financing
of direct lending programs requires the issue of securities in national capital
markets. Treasury issues, rather than fully guaranteed issues of Government
coriH>rations, should be employed. (Fifth guide) ” <p. 206)
Interest rate ceilings

“Statutory or rigidly administered interest rate ceilings should not be em­
ployed in Pederal credit programs which rely on the private financial system for
loan funds. (Sixth guide)'’ (p. 207)
“The Commission believes that the harmful effects of the ceiling rates on
underwritten mortgages outweigh their automatic contribution to economic
stabilization and recommends that they be abolished.” (p. 208)
“The various interest rate ceilings or limitations that affect agricultural credit
should also be removed.” (p. 209)
Secondary market programs

“Federal agencies to create and maintain secondary markets for financial in­
struments, such as mortgages, should buy and sell the instruments at market
prices and should not attempt to control their prices. (Seventh guide)” (p.
209)
“Pending the development of more effective private secondary mortgage in­
stitutions, the Commission recommends that the secondary market operations
of FNMA be continued and made more effective. The special assistance and
market support programs of FNMA which are inconsistent with the dealer func­
tion should be operated in an entirely distinct and separate manner from the
secondary market operations, preferably by a separate agency/' (p. 211)
Coordination of domestic lending agencies

“The same general framework of coordination,1 with adaptations to suit par­
ticular situations, should apply also to the government lending agencies, for
example to the Farm Credit and Home Loan Bank systems, the Housing and
Home Finance Agency, the Small Business Administration, the Export-Import
Bank and others. Given the adoption of the Commission’s previous recommen­
dations, no major additional changes in organization seem needed for coordina­
tion purposes. It is likely, however, that closer working relationships at operate
ing levels will need to be developed to give a fuller effect to the wider monetary,
credit, and fiscal policies of the government. The coverage of the President's
reports under the Employment Act should include attention to the actions and
policies of the credit agencies. Budget controls apply to most of them in varying
degrees. And they should be included in the scope of discussions in the advisory
board. A further statutory mechanism of coordination, applicable to the agen­
cies established as government corporations, may be found in the terms of the
Government Corporation Control Act . .
1 Chiefly revival of the Advisory Board on Economic Growth and Stability (p. 277).




58
“Accordingly, the Commission recommends that the Government Corpora­
tion Control Act of 1946 be amended so as to direct the Secretary of the Treasury,
in the exercise of his clearance power over the issuance and sale of the securities
of government-owned corporations, to take into account explicitly the full range
of objectives of the Employment Act as amended, and not merely debt manage­
ment considerations; and that cases of disagreement be taken to the President.”
(pp. 279-281)




A P P E N D IX

C

NEW AND BROADENED FEDERAL CREDIT PROGRAMS IN 87TH
CONGRESS, 2D SESSION1
L Private housing
A. Enacted
(1) Loans in connection with disposal of Los Alamos—Public Law 87-719.
Authorizes Atomic Energy Commission to accept from purchasers,
notes secured by first mortgages in order to facilitate sale of federally
owned property. Also authorizes advances for rehabilitation, moderni­
zation, etc.
(2) Loans and loan insurance in Senior Citizens Housing Act of 1962—
Public Law 87-723.
Increases authorization for existing loans to nonprofit corporations,
cooperative or public agencies from $125 million to $225 million and
limits program to new structures. Authorizes $50 million for direct
loans to rural elderly and removes present provisions that (a) appli­
cants for direct loans must already own the land on which housing is
to be constructed, and (ft) proceeds cannot be used to purchase existing
houses. Authorizes (a) $50 million revolving fund for 50-year direct
loans, and (ft) loan insurance to provide rural rental housing for elderly.
B. Bills reported by Committee
(1) Extend Veterans' Administration housing credit program to peacetime
veterans in proposed Veterans Readjustment Assistance Act—B. 3j9.
Would have extended VA housing loans and loan guarantees to vet­
erans of post-1955 service.
Reported in Senate.
(2) Extend maturity of VA loans and loan guarantees—S. 3024.
Would have extended maximum maturity of VA housing loans and
loan guarantees from 30 to 35 years.
Passed Senate.
IL Community development and public housing
A. Enacted
(1) Broadened eligibility of NASA communities for public facility loans—
Public Law 87-634.
Authorizes Community Facilities Administration to make public fa­
cility loans to communities with population between 50,000 and 150,000
near research or development Installations of the National Aeronautics
and Space Administration.
(2) Revised Joan criteria and terms in Public Works Acceleration Act—
Public Law 87-658.
Removes population ceiling per municipality (50,000 or 150,000 In
redevelopment areas) for CFA loans to finance public facilities or hiam
1 Excludes (•) simple extensions in expiring laws, and (6) bills which wen not reported
by anj Congressional committee, whether or not hearings were held.




(59)

60
transportation in areas eligible under the act. Deletes requirement that
public works planning advances be repayable if the project is initiated
under a grant under this act.
(3) Eligibility of Indian tribes for public facility loam—Public Law ST808.
Makes Indian tribes eligible for CFA public facility loans.
B. Proposed by Administration and reported by Committee
(1) Loans in proposed Urban Mass Transportation Act of 1962—H.R. 11158,
S. 3615.
Would have authorized Housing and Ilome Finance Administrator
to use present $30 million authorization to make 40-year loans for both
publicly and privately owned (in Senate-reported version) mass trans­
portation, with limited interest payment deferment in certain cases.
(House-reported version was substantially the same as Administra­
tion proposal.)
Reported in House and Senate.
HI. Business and transportation
A. Enacted
(1) Trade adjustment assistance in Trade Expansion Act of 1962—Public
Law 87-794 and in Public Law 87-550.
Authorizes Department of Commerce to make guarantees, deferred
participations* and loans to import-injured firms for acquisition, con­
struction, expansion, etc. of facilities and in exceptional cases, for work­
ing capital. Commerce is required to make use of existing agencies as
appropriate. SBA is given the same authorization as Commerce.
(2) Revisions in aircraft loan guarantees—Public Law 87-820.
Extends program for five years, increases maximum loan permissible
to any one borrower from $5 million to $10 million, and transfers ad­
ministration from Civil Aeronautics Board to Department of Commerce.
B. Proposed by Administration and/or reported by Committee—None.
IV. Education and health
A. Enacted—None.
B. Proposed by administration and/m■reported by Committee.
(1) Loans in proposed College Academic Facilities and Student Assistance
Act—H.R. 8900, S. 1241.
Conference Rej>ort would have authorized (a) $600 million over 5-year
period for loans to public and private nonprofit colleges for construction
of academic facilities, and (6) $149 million over 5-year period for first*
year loans (20 percent of which may be “nonreimbursable") to college
students, and any necessary additional appropriations over &-year period
for later installments. (Administration originally proposed (a) $1,500
million for facility loans and (ft) scholarships instead of student loans.)
Facility loans were approved by both House and Senate although at
different authorization levels; House rejected Conference Report.
(2) Student loans in proposed Health Professions Educational Assistance
Act—H.R. 4999, S. 1072.
Would have authorized $72.3 million for loans to medical, dental and
osteopathic students, with forgiveness of repayment of up to 50 percent
of principal and interest for student practicing in area of shortage, in
armed services, or in public or nonprofit agency. (Administration orig­
inally proposed scholarships instead of loans.)
Reported in House.




61
(3) Amendments to loan provisions in National Defense Education Act—
II.R. 13204, S. 3760.
Would have (a) raised student loan authorizations for fiscal 1963 and
1964 from $90 million per year to $125 million, and (ft) raised ceiling
on Federal contributions to loan funds per institution from $250,000 to
$500,000 in any one year. (Administration proposal would have
removed authorization ceilings on student loans.)
Passed Senate, reported in House.
(4) Broadened loan cancellation provisions of National Defense Education
Act— S. 3326.
Would have expanded 50 percent loan repayment forgiveness pro­
vision to include students who go on to teach in private non-profit
elementary or secondary schools or institutions of higher learning.
(Administration proposal would have limited extension of forgiveness
to those teaching in institutions of higher learning.)
Passed Senate.
(5) Mortgage insurance and loans for group medical and dental facilities—
H.R. 13081.
Would have authorized Surgeon General to provide $100 million for
mortgage insurance and loans over 5-year period for construction and
equipping of group practice facilities, with preference to facilities in
smaller communities and to nonprofit organizations.
Proposed by administration late in session. Xo congressional action.
V. Resource development
A. Enacted
(1) Broadened loan authority in Food and Agriculture Act of 1962—Public
Law 87-703.
Adds recreational uses and facilities as eligible purposes for which
Farmers Home Administration may make or insure real estate loans.
Extends programs to cover fish farmers. Authorizes loans to State
and local public agencies for purposes of land conservation and land
utilization.
(2) Increased loan insurance authority of Farmers Home Administration—
Public Law 87-798.
Increases from $150 million to $200 million the annual amount of
real estate loans which may be insured by Farmers Home Administra­
tion.
(3) Broadened REA lending authority—Public Law 87-862.
Allows Rural Electrification Administration to finance communica­
tion facilities which are not primarily intended for voices; e.g., closed*
circuit television, teletypewriters, telephotograph, and other data trans­
mission.
B. Proposed by administration and/or reputed by Committee.—None.
VI. International
A. Enacted
(1) Loans to International Monetary Fund—Public Law 87-490.

Authorizes $2 billion stand-by authority for the Secretary of the
Treasury to make loans to IMF to strengthen international monetary
system.
(2) Loans to refugees in Migration and Refugee Assistance Act of 1962—
Public Law 87-510.




62
Authorizes the President or his designee to make loans or advances
for assistance of refugees from W estern Hemisphere countries. Pur­
poses include providing health and educational services, training for
employment, transportation and resettlement, and establishment and
maintenance

of projects for

employment

or refresher

professional

training.
(3 )

Expanded loans to Latin America and increased and "broadened invest­
ment guarantee program in Foreign Assistance A ct o f 1962— Public
Law 87-665.
Authorizes (o ) loans o f $2.4 billion over 4-year period to Latin
America under Alliance for Progress, (&) increase in maximum guar­
antees outstanding under Latin America housing program from $10
million to $60 million, (c ) insurance against loss o f loan investment
fo r housing projects with “appropriate participation” by private lenders
in the risk, and (dl) increase in m aximum guarantees outstanding
under “ all risk” program (including
$180 million.

(4 )

( c ) above) from $90 million to

Loan to United 'Nations— Public Law 87-731.
Authorizes maximum of $100 million fo r loans to U .N . and reduction
in future annual U.S. payments to the U.N. by amount of the cor­
responding annual installment o f principal and interest due the United
States.

B.

Proposed 1>y administration and/or reported by Committee.— None.




APPENDIX D
HISTORICAL TRENDS IN MAJOR FEDERAL CREDIT PROGRAMS
T able

D-l.— Annual new commitments 1of major Federal credit -programs,3
1950-61
[A m ounts in m illions]

Fiscal year

D irect loans
and mortgage
purchases

*

1950____________ ____ ______ ___
1951.______ ____________________
1952____________________________
1953............ ............................. ......
1954_______________________ ____
1955___________________________
1956............ .....................................
1957_________________ ______ ___
1958____________________ _______
1959____________ _______________
1960____________ _______ _______
1961..................................................

$3, 543
2, 906
2,847
2, 884
2, 005
1, 669
1,989
4, 295
4, 536
5, 072
4, 325
4, 955

Guaranteod and
insured loans *

$8, 424
7, 826
9, 077
7, 893
8, 791
12, 913
13, 418
11,326
10, 979
12, 096
14, 118
13, 060

T otal

$11,967
10, 732
11, 924
10, 777
10, 796
14, 582
15, 407
15, 621
15, 515
17, 168
18, 443
18, 015

1 Com m itm en ts are defined as approvals b y Federal agencies o f direct loans or o f insurance or guarantees
o f private loans. T h e y are show n on a gross basis, Including com m itm ents w hich d o not later result in
actual credit extension.
* Based on special analyses published in the 1952-63 budgets adjusted to exclude C om m odity Credit
Corporation (in 1061-61) and Federal interm ediate credit banks (in 1951-55).
* D oes n ot in clu d e loans and m ortgage purchases b y G overnm ent-sponsored quasi-public enterprises,
or b y various m inor w h olly ow n ed enterprises.
« Includes both guaranteed and unguaranteed portions o f loans.




(«8)

64
T able D -2 .

—Net expenditures 1 of major Federal credit programs,21950-61
[Amounts in millions]

Fiscal year

Disbursements

1950________ __________________
1951__________ ______ __________
1952___________________________
1953___________________________
1954___________________________
1955___________________________
1956___________________________
1957____ __ __________________
1958___________________________
1959___________________________
1960___________________________ i
1961 ____ _____________________ !

Net expenditures

Receipts

$1, 106
1, 344
1, 250
1, 930
2, 655 ;
1, 419
1, 432
2. 201
2, 046
1, 690
2, 942
1, 670

S2, 071
2, 383
2, 587
3,002
2, 444
1, 910
1, 729
2, 594
3, 507
4, 368
4, 075
3, 304

i

$965
1, 039
1, 337
1,072
-2 1 1

491
297
393
1, 461
2, 678
1, 133
1, 634

i

1 Represents net excess of (Hsburscjnents over repayments, including foreign currency loans and repay­
ments going directly into miscellaneous receipts.
1 Based on special analyses published in the 1052-453 budgets adjusted to exclude Commodity Credit
Corporation (in 1951-61) and Federal intermediate credit bants (in 1651-55). Also excludes loans and
mortgage purchases by Government-sponsored quasi-public enterprises and by various minor wholly
owned enterprises.

T a b le

D- 3.—Outstanding direct loans and guaranteed and insured loans of major
Federal credit programs,l 1950 -61
[Amounts in millions]

1950.
1951 _
1952.
1953.
1954.
1955.
19561957_
1958_
1959_
1960 _
1061 _

ill

End of fiscal year

$12, 611
13,318
13, 689
14, 781
14, 380
14, 937
15, 383
15, 869
17, 282
20, 207
21, 388
23,015

Guaranteed
and insured
loans 3

$15, 793
19, 974
24, 326
34, 732
38, 452
41, 405
50, 511
55, 579
58, 087
63, 107
67, 107
71, 243

1 Based oil special analyses published in the 1952-63 budgets adjusted to exclude Commodity Credit
Corporation (in 1951-61) and Federal intermediate credit banks (in 1951-55).
2 Does not include loans and mortgage purchases by Government-sponsored quasi-public enterprises,
or by various minor wholly owned enterprises.
3 Includes both guaranteed and unguaranteed portions of loans.




APPENDIX E
Outstanding direct loans and guaranteed and insured loans fo r active or newly
authorized domestic Federal credit programs June 30, 1961

,

1

[A m o u n ts in m illions]

!

D irect loans and mortgage
purchases

Area, agency, and program
W h o lly
ow ned
enterprises

G overn m en tsponsored
agencies

Guaranteed
and insured
loans *

Private housing

Housing and Home Finance Agency:
Federal Housing Administration:
Direct and insured mortgage
loans (except nursing homes) _
Insured property improvement
loans______ _______ ___
Federal National Mortgage Asso­
ciation:
Special assistance functions___
Management and liquidating
functions,___ ___________
Secondary market operations
Community Facilities Administra­
tion: Housing for elderly loans__
Veterans' Administration: Dircct and
guaranteed loans_________________
Department of Agriculture: Farmers
Home Administration Kural housing
loans __
_____.- ___
____
Federal Home Loan Bank Board: Fed­
eral home loan banks: Advances to
member associations___________ .« _
Total, private housing_________

$401

$34, 107

47

1, 610

1, 829
1, o8 <

$2, 522
None 3
29, 864

1,617
229
1,869
5, 710

4, 391

65, 581

Community development and public housing

Housing and Home Finance Agency:
Community Facilities Administration:
Public facility loans. ______ ___
Public works planning advances___
Office of the Administrator: Mass transit
loans *
__ _______
__ _
Urban Renewal Administration: Direct
and guaranteed loans_____________
Public Housing Administration: Direct
and guaranteed loans--------------------

See footnotes at end of table.




(65)

55
17
None 4
79

713

97

3, 739

66

Outstanding direct loans and guaranteed and injured loam for active or newly
authorized domestic Federal credit programs, June 80,1961 1— Continued
[Amounts in millions]
Direct loans and mortgage
pureliases
Area, agency, and program

Community development and public
housing—Continued

Department of Commerce: Area Redevelop­
ment Administration: Public facility loans*
Treasury Department: Public works and
other loans to District of Columbia_____
Total, community development and
public housing______ __________

Wholly
owned
enterprises

Governmentsponsored
agencies

Guaranteed
and insured
loans1

i
I
None 5
$34
282

$4, 452

Business and transportation

Department of Commerce:
Area Redevelopment Administration:
Loans for industrial or commercial
facilities________________________
Maritime Administration: Direct and
insured loans____________________
Civil Aeronautics Board: * Guaranteed loans
to air carriers________________________
Small Business Administration: Loans and
participations__________ ____ _____
Interstate Commerce Commission: Guaran­
teed loans to railroads__ _______ _____
Department of Defense: Direct and guaran­
teed defense production loans___________
Total, business and transportation__

|
None 5
154

355
25

482

51
126

8

228

644

785

Education and health

Department of Health, Education, and Wel­
fare: Office of Education: Defense educa­
tion loans________ _ _______ __ ___
Housing and Home Finance Agency:
Community Facilities Administration:
College housing loans__
_____
Federal Housing Administration In­
sured nursing home mortgage loans. _
Total, education and health__ _____

See footnote* at end of table.



131
958
......... - - i
1,089 _________i

9
o

67
Outstanding direct loans and guaranteed and insured loans for active or newly
authorized domestic Federal credit programs,June SO, 19611— Continued
[Amounts in millions]
D irect loans and m ortgage
purchases
Area, agency, and program
W h o lly
o w n ed
enterprises

G overnm entsponsored
agencies

Guaranteed
and insured
loans

*

Resource development

Department of Agriculture:
Rural Electrification Administration:
Electrification and telephone loans, _
Farmers Home Administration: Direct
and insured loans (except housing)__
Department of the Interior:
Bureau of Reclamation: Reclamation
loans___ _______________ - _______
Bureau of Indian Affairs: Loans to
Indians_________________________
Bureau of Commercial Fisheries: Direct
and insured loans_________________
Farm Credit Administration:
Banks for cooperatives: Loans to coop­
eratives_________________________
Federal intermediate credit banks:
Loans to production credit associa­
tions, etc_______________________
Federal land banks: Farm mortgage
loans___________________________
Total, resource development_*__ __
Total, by type of assistance.

____

$3, 367
$182

858
35
10

7

(0

595
1, 831
2,728
4, 277

5, 154

182

12,002

9, 545

71,009

i Excludes: (a) all international programs (e.g., Export-Import Bank, Agency for International Develop­
ment); (6) all liquidating activities not part of active credit programs (e.g., HHFA liquidating fund,
defense production loans and advances, General Services Administration asset liquidation and surplus
property sales credit); (c) CCG price support aad storage facility loans and loan guarantees; (4) loans
acquired by Federal Deposit Insurance Corporation and Federal Savings and Loan Insurance Corpora­
tion to protect insured institutions; (e) purchases of acceptances, discounts, and advances to member banks
by Federal Reserve banks; (/) repayable Federal investments; and (g) very small programs (e.g., Soil
Conservation Service loans and Pablic Health Service hospital construction loans).
*Includes both guaranteed and unguaranteed portions of loans.
*Authorised in Housing Act of I960 (Public Law 86-373), approved Sept. 23,1950.
«Authorized in Housing Act of 1961 (Public Law 87-70), approved June 30,1961*
1Authorized in Area Redevelopment Act (Public Law 87-27), approved May 1,1961.
*Program transferred to Department of Commerce in 1962, by Public Law 87-820.
TLess than $900,000




U.S. GOVERNM
ENTPRINTINGOPFlCCit«*3

Advance r e le a s e
Wednesday. Apr.
4/ 2/62

4

Mark
WASHINGTON, D .C ., Apr.

P ion eer Banks
45th A nniversary

4 — I t ' s the 45th b ir th d a y o f an American i n s t i t u t i o n

— The F e d e ra l Land Bank System — which i s an o u tsta n d in g example o f how c i t i z e n s
can s o lv e t h e i r own problem s w ith a minimum o f governm ental h e lp .
T h is was p o in te d ou t by Don H. B u sh n e ll, Deputy G overnor and D ir e c t o r o f the
Land Bank S e r v ic e o f th e Farm C r e d it A d m in is tra tio n , i n h is remarks t o th e F ed era l
Farm C r e d it Board i n i t s m eeting h e re to d a y .

He p a id t r i b u t e t o th ese fa rm e r-

owned banks th a t have s e t many p re ce d e n ts i n fin a n c e and c r e d i t .
"The h i s t o r y o f th e F ed era l Land Bank S y s t e m a c c o r d i n g to B u sh n ell, "shows
what a group o f c i t i z e n s can do to h e lp th em selv es, g iv e n a s t a r t by a w e l lc o n c e iv e d Government lo a n o f c a p i t a l . "
The F e d e ra l Government i n

1917 advanced money to c a p i t a l i z e th e 12 lan d banks,

b u t o f equal im p orta n ce, a c c o r d in g to B u sh n ell, "p r o v id e d the m achinery f o r fa rm erb orrow ers t o pay t h is b ack , as they d id many y e a rs a g o ."
As p io n e e r s , th e la n d banks have s e t f o r t h what has become known as "th e Farm
C r e d it P a t t e r n ," many fe a t u r e s o f w hich have been in c o r p o r a te d in such o th e r
G overnm ent-sponsored i n s t i t u t i o n s as th e F ed era l Home Loan Banks, F ed era l N a tion a l
M ortgage A s s o c ia t io n , F ed era l D e p o sit Insuran ce C o r p o ra tio n , and the Small B usiness
Investm en t Companies, as w e ll as in some younger s i s t e r Farm C r e d it System i n s t i ­
t u t io n s — th e F ed era l in te rm e d ia te c r e d i t banks w ith t h e i r a f f i l i a t e d p ro d u ctio n
c r e d i t a s s o c i a t i o n s , and th e banks f o r c o o p e r a t iv e s , which a ls o a re su p e rv ise d by
th e Farm C r e d it A d m in is tra tio n .
The la n d banks, f o r example p io n e e re d the p r a c t i c e o f tappin g th e N a tio n 's
w h o le s a le money m arkets when, i n




1917 th ey s o l d t h e i r f i r s t sm all is s u e o f Land
FARM CREDIT ADMINISTRATION
Washington
, D.C.
T e l . -Hoag - DUdlev 8-3120

25

(m ore)

Today, th e Land Bank System has about $ 2.5 b i l l i o n i n bonds ou tsta n d ­

Bank b o n d s .

in g i n th e hands o f the in v e s t in g p u b l i c .

"Due t o th e re p u ta tio n th e banks have

b u i l t up as sound l e n d e r s ," B u sh n ell s ta te d , "t h e y are a b le t o o b ta in t h e ir lo a n
funds a t r a t e s o n ly s l i g h t l y h ig h er than th o s e o f T reasury is s u e s , even though
th e bonds are n ot guaranteed b y th e F ed era l G overnm ent."
The b u i l t - i n "p a y -b a ck -U n cle Sam's c a p i t a l" mechanism o f th e Land Bank System,
B u sh n ell s a id , o p e ra te s in th e fo llo w in g manner:

When a farmer g e ts a lan d bank

lo a n , f i v e p e rc e n t o f th e p ro ce e d s goes t o buy s to ck in h is l o c a l a s s o c ia t io n o f
la n d bank b o rro w e rs.
lan d bank.

The a s s o c i a t i o n , i n tu rn , buys a l i k e amount o f s to c k in th e

By t h i s means, th e fa rw e r-b o r ro u e rs have not o n ly r e p a id Uncle Sam,

b u t to d a y th e y have $168 m i l l i o n i n c a p i t a l s to c k and

$325 m i l li o n i n r e s e r v e s to

stre n g th e n th e f i n a n c i a l base o f th e banks so th e y can stand th e shock o f such
p e r io d s as th e 1930’ s , i f n e c e s s a r y .
Even th e c o s t o f s u p e r v is io n o f th e Land Bank System by the Farm C red it
A d m in is tra tio n , th e Goverment agency which in the p u b lic i n t e r e s t su p e rv is e s th e
System n a t i o n a l l y , i s n ot p a id f o r b y ta x p a y e r s .

In s te a d , t h i s c o s t i s borne

b y th e farm ers who use th e System.
B u sh n ell p o in te d out th a t th e lan d banks were th e f i r s t t o make g e n e ra l use
th rou gh ou t th e co u n try o f th e lo n g -te r m , a m ortized lo a n , a fe a tu r e th a t r e v o lu t io n e d farm r e a l e s t a t e le n d in g .

H ost la n d bank lo a n s , he s a id , a re made

w ith repayment p e r io d s o f 20 t o 35 y e a rs and a t r a t e s w hich, because o f econom­
i c a l o p e r a t io n s on a n a t io n a l s c a l e , u s u a lly can be h e ld t o about one p e rce n t
above th e w h o le sa le r a t e s th e banks pay on t h e i r b on ds.

Farmers now have

3 8 0 ,0 0 0 such lo a n s o u tsta n d in g from th e banks f o r some $ 2 .8 b i l l i o n .
"P erhaps o f g r e a t e s t s i g n i f i c a n c e , " a cco r d in g t o B u sh n ell, "th e lan d bank
system has dem onstrated how Government can h elp i t s c i t i z e n s t o h e lp th em selv es.
In t h i s in s t a n c e , an e a r l y Goverment investm ent o f o n ly $9 m i l l i o n unleashed
th e i d e a s , e n e r g ie s and a s p ir a t io n s o f a la r g e segment o f our c i t i z e n r y , th e
good r e s u l t s o f w hich a re s t i l l b e in g h a r v e s t e d ."




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