Table 7 Net Inflow of Savings as a Percentage of New Savings Exactly as in Report • Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont, New Jersey, New York, Delaware, Pennsylvania, Maryland, Ohio, Minnesota, Washington. All other states, including the District of Columbia, but excluding Puerto Rico, Alaska, Guam, Hawaii. Source: Home Loan Bank Board, Savings and Home Financing Source Book. Further evidence of the endeavor of the savings and loan associations to attract short term investment funds appeared in a lead article of the Wall Street Journal of December 22, 1954. "At a meeting in Portland, Oregon, not long ago, 150 builders, real estate men and appliance dealers were served this pitch: Help your own business by putting your spare funds in savings and loan associations. It was explained that these associations invest almost solely in home loans, so money put in them directly supports the building boom. "One impressed builder immediately plunked $20,000 into Portland's Benjamin Franklin Federal Savings & Loan Association, sponsor of the meeting. An ap Exactly as in Report pliance dealer reviewed a $50,000 balance carried in a commercial bank without interest and decided to divide it among two dividend-paying savings and loans. A third businessman persuaded his firm's directors to okay placement in an association of money set aside for taxes. "Such fund shifting is being accelerated on a nationwide scale. Since 1945, assets of savings and loan associations have zoomed from $8.8 billion to an estimated $31.1 billion. Further fueling this growth at present is a drive launched last summer by the nation's 6,000 savings and loan associations, led by their Chicago-headquartered trade organization, the United States Savings and Loan League. "Carpenters, bricklayers, plasterers and their trade. unions; home-builders, realtors, manufacturers of building materials, makers and sellers of home furnishings and appliances-these are among the segments of the housing industry being urged to shift their funds to savings and loan associations as a way to prolong the building boom and thus safeguard their livelihoods. The mutual savings institutions are not designed or adapted to handle large volumes of temporary investment funds. Their own investments are long term and their liquidity ratios are much too low. In boom times such as we have experienced since the end of World War II, demands or "requests" for withdrawal can be met out of the inflow of new funds as indicated in this state by the savings and loan report for the first seven months of 1956. However, if the inflow of new funds should shrink substantially and the outflow should continue or increase, they would shortly be hard put for liquid resources out of which to meet it. That situation is much less likely to arise so long as the mutuals are content to seek strictly savings funds. Such true savings funds have great stability, as witness the Exactly as in Report experience of the mutual savings banks during the banking crisis of 1933. With huge holding of temporary investment funds which would be withdrawn in any emergency, that favorable experience would be almost certain to be reversed. Many savings bankers will privately acknowledge their concern over this trend of the past ten years for short term investment funds to flow into their institutions in large volume. In the vernacular of the trade it is "hot money". This raises a very serious question as to whether the practices which encourage the flow of these temporary investment funds into the mutual savings institutions ought not to be curbed. Among these practices are: (i) Payment of interest or dividend from date of deposit. (ii) Repayment on demand or "on request". It also raises the still more serious question of the necessity of creating a better public understanding of the nature of our types of banking and quasi-banking institutions. A savings and loan association is not a bank, nor is it set up to do a banking business. Neither is it an agency of the government. Nor are its obligations guaranteed by the government. All of these misconceptions are widely held by the public at large and have been deliberately encouraged. Question Four: What will be the effect of the continued growth of the mutual thrift institutions on our Federal Reserve Banking System? The Federal Reserve is charged with two primary functions- Exactly as in Report (i) To maintain a sound banking and currency structure in the United States. (ii) To promote economic stability and growth by influencing the availability of credit. Both functions are vital to the welfare of the people of our nation. However, with the passage of time, the second function that of promoting economic stability and growth by influencing the availability of credit-has assumed the greater importance. In "The Federal Reserve System", pp. 1-2, Washington, D. C., 1954, it is stated "From the outset, there was recognition that these original purposes were in fact integral parts of a broader objective, namely, to help counteract inflationary and deflationary movements, and to share in creating conditions favorable to sustained high employment, stable values, growth of the country, and a rising level of consumption. Acceptance of this broader objective widened over the years and today it is understood to be the primary purpose of the System." How can the Federal Reserve perform this all essential function if major sources of bank credit are beyond the reach of its credit control powers? Recently while the Federal Reserve was endeavoring to place restraint on the availability of credit, the Home Loan Bank Board made a billion dollars available to the savings and loan associations. Regardless of who was right as to whether the pace of business should be curbed or stimulated, that kind of seesawing by two powerful government agencies can prove disastrous. A regulatory stalemate between two governmental agencies operating in the same field can never be anything but unhealthy and dangerous. 20675 0-58-pt. 2-25 Exactly as in Report So long as the savings and loan associations were small and relatively unimportant sources of credit, no such extension of credit through them would have been possible. With their growth over the past ten years, it has become possible. With their prospective growth over the next few years, unless something is done to level off their com petitive advantages, they may well be able with the assistance of their supervising agency to completely nullify every endeavor of the Federal Reserve to regulate the availability of mortgage credit. There is the further likely probability that Federal Reserve may be reluctant to curb the commercial banks under their jurisdiction if the only effect will be to drive borrowers to the competing mutual institutions. Similar difficulties are encountered with the other responsibility of the Federal Reserve-the maintenance of a sound banking and currency structure. With the cooperaation of the Comptroller of the Currency and the state supervisory authorities, it can insure that the commercial banks within its system maintain a high degree of liquidity and are in a position to meet even extraordinary demands on them. That will be of little avail if other banking and quasi-banking institutions over which they have no control are permitted to operate with low liquidity ratios in banking fields that call for high liquidity. It is inherently unsound to invest in 20-year, 25-year and even 30-year mortgages, funds that are virtually certain to be called for in six months to twelve months. Yet the record of withdrawals clearly indicates that the savings and loan associations are operating in that manner, and the mutual savings banks do not seem adverse to pursuing "hot money." It is the firm opinion of this Association that mutual savings and thrift institutions (savings banks and savings and loan associations) should be strictly required to: |