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! . L I B R A R Y REMARKS by M. S. SZYMCZAK, Member, Board of Governors of the Federal Reserve System, Washington, D. C. before the Twentieth Annual Stockholders' Meeting, Federal Home Loan Bank of Chicago Terrace Room, Hotel Morrison Chicago, Illinois April 22, 1953, 12:30 p.m., CST. HET J 2ASE AT TIME OF DELIVERY " THE RESPONSIBILITIES OF PROGRESS This twentieth annual meeting of the stockholders of the Hone Loan Bank of Chicago marks an important milestone in the history of this Bank, for that reason, it is most appropriate to highlight some of the significant changes which have taken place in your ln stitutions since the inception of the Home Loan Bank System. Home mortgage lending in this country has always been a pre- dominantly local enterprise based largely on local resources. th5 Despite fact that mortgage financing during the Twenties had becone one of the largest single outlets for investable funds, the thousands of home financing institutions throughout the country were operating Without access to the broad capital market. a There was great need for credit reservoir which could be tapped to supplement local sources of money. The Home Loan Bank System was created in 1932 to help meet th is need. Since their creation, the Home Loan Banks have extended nearly 5 b illion dollars in long and short term credit to System members. This credit has been extended to balance seasonal fluctuations in the of money in and out of member associations, to supplement the local lon g term resources for mortgage lending, and, occasionally, to meet Emergency conditions. You have reason to be proud that the Federal Loan Banks have never lost money on any advance to a member institution. The Home Loan Bank System was created too late to bring much re H e f to the distressed home-mortgage market of 1932-33, and it is ^obably fair to say that it has yet to meet the first situation that *ould test its maximum capacity. So long as its members have provided aci equately for their own liquidity and so long as they have not abused ^eir borrowing privileges in good times such as the present, it is cl ear that the Home Loan Bank System can — and does novj — provide a liquidity for mortgage loans that helps to remove one of the most SGr ious weaknesses of the early Thirties. The savings and loan industry today bears little resemblance to the loosely knit group of small, part-time, neighborhood associations t l t predominated when the Home Loan Bank System was created a little 'a riiCre than 20 years ago. Even though your associations still concentrate on local thrift anc * home financing activities, their combined efforts on a national Sc *le are a major factor in these vital areas of our economy. Can no longer — if you ever could — insulate yourselves from the far ^aching effects of national economic developments. ari You Indeed, you are integral part of these up and down movements. One of the corollaries of progress, of course, is increasing ^spon sibility. Since your operations can make a significant con- tribution in shaping our economic destinies, the day-to-day decisions ea ch of you makes in your own association will determine whether that c °ntribution will be positive or negative. It is no longer enough for to be an expert in conditions in your own community. You must only be competent in terms of your ovm business, but you must also See ai k to understand those broader economic forces arising in other 'eas of activity that are likely to influence your operations. - 3This same principle applies, of course, with equal force to Management of all financial institutions. Only in this way can -he operations of such institutions be guided to make their maximum Cori tribution to stable economic progress. Without such progress, the *Aistence of all free and independent financial institutions — of our whole free enterprise system — in would be seriously threatened, ECONOMIC DEVELOPMENTS T 'hat are some of the more major economic developments 'rhich we should know? First of all, throughout the past seven years we have witnGss <-d a continuation of the rapid expansion in productive capacity that ' a J was initially stimulated by the war. Our manufacturing capacity more than doubled since 1939, and has increased about £0 per just since In terms of physical volume, our present output of • i industrial production is at the highest levels in our peacetime >f inch y. Us to^ The total value of all goods ana services produced in this '°untry h a s j^ped almost a third since the spring of 195>0. About half of has been growth in physical volume and about half has reflected '^Sher prices. The past two years have brought a higher level of both G nse and. civilian output without a further general rise in prices. Il l h material markets many prices have returned to pre-Korean levels, R e s a l e prices have also declined from their early 19 $1 peak. in farm prices since last .August has brought them to a point The - h - 5 per cent above their pre-Korean levels. Prices of industrial Products, on the other hand, are still about 10 per cent higher than i . e *ore Korea, They have shown only a l per cent decrease from their i -^$1 peak and none at all since last sunmer, Prices at the consumer level, which continued to advance rapidly in 1951, slowed down to a walk last year, registering than a 1 per cent rise in ±95?.. Consumer prices have been Aching downward thus far in 1953. One fact brings home very clearly to me the expansion of ^ economy and the increase in our standa'rd of living during the 3;a d postx^ar period: Even after adjusting for a much larger barcjerij f o r substantially higher prices, and for almost c °j000,000 more people, the average per capita disposable income ln " h United States i j s one-third larger in 1952 than it was in 19^0. te ^a Disposable personal income, after adjustment for price Cian oes, has risen from an annual rate of 222 billion dollars in the ^ t h s just before the start of the Korean fighting to an annual rate billion dollars in the fourth quarter last year. to get closer to your operations — th Personal has averaged more 15 billion dollars a year from 1950 through 1952, in comparison WU 1 a 5 billion dollar average in the 19^7-19^9 period. Reflecting high personal incomes, consumer demand for W-i ±. goods and housing continues strong. vSince June 1950 we have J L - more than 12 million new automobiles, and current production at the rate of well over 6 million cars a year. We have sold 18 ~ 5KliUj on television sets not to mention all the deep freezes, ref rigerators, washers, dryers, and air conditioning units. New housing starts this year may be about the same as last year, when were the second largest on record, Now that defense expenditures are leveling off, it becomes -Screamingly clear that in many respects we are shifting from a '^fense-stjmu]ated economy to one based more on civilian demands. In 1 m 1 any ways the transition thus far has been highly encouraging, Pr ices are stable, capacity is almost fully utilized, unemployment extremely low, and er capita consumption is rising. There has considerable flexibility in the economy -- more than has been c °^only recognized, I think — with substantial adjustments in ^eduction, prices, and. wage changes in various sectors. In other respects, the initial transition has been less °at^sfactory4 lncre ase again. Business inventories, already large, have begun to Inventory accumulation, which was about zero in th first half of 1952 rose to a seasonally adjusted annual rate of 8 bil Hon dollars in the fourth quarter last year. Total book value Of Manufacturers and trade inventories at the end of 1952 stood at billion dollars, which compares with 62,0 billion dollars two /e ars earlier. Although there is no evidence of speculative inventory ^cumulation, continued high rates of accumulation could be a threat to e I I Conomic stability. / « o CREDIT CHANGES Then there are some aspects of recent credit developments w -ich also are a matter of interest, Greater use of credit has been a toajorfactor in the current expenditures of both consumers and ^siness. Credit demands i n w e r e tlte even larger than in l?5l, when V were already at well advanced levels. Corporations, consumers, State and local governments expanded their borrowing considerably. In the second half of 1952, the Federal Government was also an " :P0l,tant borrower. " Consumer instalment credit, which now stands at a record 1 0 A billion dollars, has been expanding rapidly since the authority rfe £ulate it expired last year. The 3-1/2 billion dollar rise in type of debt over the past year reflects both an increased "r°Portion of sales on credit and the effect of lower down payments longer maturities on instalment contracts. All of you in the savings and loan industry are well aware J of °he expansion in mortgage debt that has accompanied the high levels ne 0 v home building, Monfarm home mortgage debt lias increased Million dollars since the outbreak of hostilities in Korea to tea °h its present level in excess of 56 billion dollars, T' is is ° re than a hO ner cent rise in less than three years! I hardly need explain to this audience that on present day i amortization schedules, an owner's equity increases very slowly Uy be called "seasoned" as yet. So- l of those who bought, particularly e "liring the first years of the contract, L'anv of these loans can arc - 7at advanced prices, might find themselves overcommitted if there x^ere ari y sharp declines of incomes and values. RESTRAINT ON CREDIT EXP^T3I01-T In the light of continuing strong demand for all types of ^edit, Federal Reserve actions have been designed to prevent an e *cessive addition to the money supply, to encourage credit restraint, anc * to allow market forces to operate to bring about more effective Use of t' e economy's real savings. To a considerable extent the large credit demands in the two years have been met out of increased savings. Rapid Srovob j_n savings deposits, savings and loan shares, insurance and 1 en -siGn reserves, end other savings forms has provided a principal s Ur ° ce of new funds. Of primary importance among the stops which have been ta ^Gn to restrain credit expansion was the action by the Treasury an d the Federal Reserve, taken in early 1951 to minimize the conversion government securities into active money at the will of the holders, '•^h Federal Reserve policy tending to limit the supply of additional Cr edit, banks needing additional reserves to support their deposit Mansion had to liquidate assets or to borrow from the Federal Reserve ^"-•s. The granting of discounts and advances by the Federal Reserve to its member banks again became an effective instrument of credit re Because re.iber banks do not enjoy being in debt to the straint. °:/stem, this borrowing has always been essentially temporary in °haracter. - 8VJith restraint on the supply of credit and a strong continuing for its use by various kinds of borrowers, it was inevitable ^iat some credit demands could not be met. There was a general tightening the money market which was reflected in the last half of 19%2 by a Ur mi.ng of interest- rates, particularly for short term credit, but f \ ier c also has been some advance in rates for long term credit as well. Sometimes it is easy to place so much emphasis on interest r ates that we lose sight of the fact that changes in interest rates are ess entially only by-products of flexible credit and monetary policies (e is iiiri9d to promote economic stability. Putting limitations on Cr edit availability tends to be reflected in a firming of interest ra tes; an easing of credit tends to soften interest rates. An landing demand for credit will naturally result in higher interest fa tes unless additional supplies of funds are made available. The Urease in interest rates recently, then, is the direct result of cloning the forces of supply and demand to operate with a minimum of •^Qrference in a free money market in which some restraint is a ^rropriate in boom times in order to avoid excessive expansion of the ^ e y supply. possibly some of you would be interested in more of a Is cussion of what has been happening in the money market since I larch than time permits us here today. I "ay I suggest to those that write to the Reserve Board for copies of Chairman Martin's recent re %rks on the "Transition to Free Markets," delivered before the Gnomic Club of Detroit. All of you, I think, 'ave a vital interest - 9ltl this portion of his remarks: "There are still some who would have us return to a pegged market. If we did, we would have no reliable safeguard against the erosion of our savings, our pensions, our life insurance policies — the capital upon which the institutions of private enterprise res b, There are no reliable substitutes for free markets which have been reinstated during the past two years, A redundant money sup- ly can be dammed up by direct controls for a time, but as we saw in the early postwar years, once the controls are lifted, as the public insists that they be in peacetime, the economy is engulfed with the flood of money that has already been created and only temporarily held back." The return to a free money market is only one of a number of steus by which we as a nation have placed increasing emphasis on , monetary, and fiscal policies for maintaining economic Ability. As I said at the Wisconsin School of Banking in August ' just a few weeks a^ter the start ox the Korean fighting, ^elopment in this direction is particularly appropriate in an ^ when the world is divided between those who would control d u a l l y every individual decision and those of us who would 'aximize the area of initiative, individual choice, and a free of competitive forces within the framework of our democratic ins titutions. A UORD ABOUT COMPETITION Let me digress for just a moment on this subject of ^Petition. As you would surmise, I frequently have the opportunity - 10 of attending meetings of bankers groups, too, and the progress 0;f your institutions often provides a topic, of lively conversation. 0ur In free enterprise society, competition is one of those basic elements " h c helps to keep every business on its toes. 'ih As you all know, Sa vings and loan associations have been proving a match for other types savings media. Your success is now stimulating these other °usinesses to place renewed emphasis on the promotion of thrift. the most part this has been friendly, healthy, virile competition; ^Ut every now and then the sounds I hear seem more like feudin' and "ussint I am encouraged that your leaders and those of your competing °usinesses are working diligently toward the goal of a common underG tahding, All of us recognize, I think, that generally speaking financial institutions prosper or suffer alike, lie are aware of the a °t that the bank on the corner and the savings and loan across the Str -et will both be losers in a running feud; conversely, they will °e mutually benefited if they understand and respect each other's °^3ectives. As members of the financial community, we must share tV UXs responsibility for reaching a common understanding ol 0l °3ectives and. of the role of each institution in meeting the n °eds of the general public for financial services, approach A constructive to these matters today will avoid headaches and heartaches borrow. T ' E I Y YEARS OF PROGRESS TJIT Now I should like to review very briefly some of the more 8 ^l£icant recent developments in the savings and loan industry. I'm - 11 not going to pretend to be telling you things you don't already know — and let me make it clear that I have no intentions of infringing on supervisory responsibilities of the Home Loan Bank System — but 'Psrhaps, as an interested observer, I may be able to put some facts a ^out your operations in a new light. The development of the savings and loan business during the r Past two decades has been most impressive — not only in the / %ion served by the Federal Home Loan Bank of Chicago, but throughout ^ country. In just one decade, assets of all savings and loan fibers of the Home Loan Bank System have multiplied more than h times, rising from 5 billion dollars to more than 21 billion at present. The ^owth in Illinois and Wisconsin has been at an even more rapid pace, As sets of member associate ns in this 'District have increased roughly 5 tines in the last 10 years, from half a billion dollars to approximately billion dollars. A more revealing aspect of this growth is seen in the large v °lume of savings attracted by your institutions. The member associations Cook County alone now hold savings of well over a billion dollars — w ''ich, incidentally, is equal to about half the total of commercial b ank time deposits in this area. Sav In Illinois and Wisconsin, your ings aggregate more than 2 billion dollars. Along with your tremendous growth, it is well that you have Gls o placed increased emphasis on improving liquidity and strengthening '/our reserves, for there can be no doubt that the public generally has the impression that funds deposited with your institutions may be withdrawn - 12 d u a l l y on a demand basis. To meet a more rapid turnover of the 5 kare accounts resulting from t is fact, liquidity positions have been SUb stantially improved. Today the ratio ox cash and Government Purities to savings for the average association is nearly double prewar relationship. An average, however, may be deceptive. It often hides a °°nsi lerable decree of variation amon^ individual institutions. This lras a ftply demonstrated in some figures recently presented by the J -ncral Manager of the Federal Savings and Loan Insurance Corporation fA 0r 1 1 the 50 largest savings and loan associations. It was found that this group of institutions, the ratio of cash and Governments to "avings ranged from a low of 7 per cent to a high of 39 per cent; that ^ 5 of these associations had liquidity ratios of less than 10 cent. A more revealing index of the true liquidity of an association, it Was pointed out by Dr. Husband, is found in relating mortgage ho ans to savings. Such a ratio shows the extent to which funds are °r% the -itted to long tern investment. For these same largest associations, r 56 atios of mortgage loans to savings accounts ranged from a low of Per cent to a high of 1^0 per cent.' In the matter of increased reserves, in 19U2, the member a §Srv * Nation °clatic s of the Chicago Home Loan Bank District had reserves ^divided profits of 37 million dollars. totan approximately 172 million dollars — Today these accounts a fivefold increase in 10 Impressive as this has been, the growth in reserves has not - 13 !ce pt pace with the growth in total assets. During the past decade, reserve ratio for associations in this Home Loan Bank District las dropped from 7*1 per cent to 7.0 per cent. The data referred to earlier for the 50 largest savings and associations in the country show their reserve ratios ranging all 4' 16 way .from a little over 3 per cent to 15 per cent. Nearly a third this important group had reserve ratios of less than 6 per cent, ^obably similar variations exi3t among the associations in this ^strict. Tlis wide range of individual differences is extremely ^Portant. It indicates that within your own business not all Associations appear to be competing on the same basis. It indicates ^ t some institutions may have been able to expand rapidly and at th Same tine maintain sound operating standards* apparently others ^Ve ]3Gen so successful. It may even indicate that some institutions been new savings customers without account insurance offers to attractreaping the benefit which share at the same time providing v t the protection of adequate operating standards. If I may quote Dr r * husband again, mfe should recognize that insurance can hurt tl • i 'ls business if it is allowed to become a cloak for promotion rather th a support for sound management," coHChusior1 The old saying that no chain is stronger than its weakest has partic lar application to the financial community. alii. We would j think, that financial institutions tend to prosper and suffer Therefore, standards of financial leadership must be in strictest - c Ih - °nformity to sound operating policies. It is not enough that the bl *rden of leadership fall on the shoulders of a few enlightened institutions. Unless the vast majority of financial institutions follow such practices, the strength and soundness of all may be Piously undermined. Now, as always, there are many uncertainties ahead. Undoubtedly ^ere will be many adjustments to be made in the transition from a ^fense dominated economy to one based more on normal civilian demands, is a time to remain calm and to be informed. This is not the time be either unduly concerned or complacent. The flexibility which the economy has already demonstrated in the past 2 years provides a basis for cautious optimism. It Nearly emphasizes the need for a realistic attitude in approaching e *ch new situation. Progressive, confident, and well informed management, to the signs of economic change and adept at altering operating Policies accordingly, can contribute greatly to the stability and °rderly growth of our whole economy as well as to the continued sound pr ogress of the savings and loan i?dustry and all other financial inr >titutions.