When the bill came to the committee there was no limitation provided as to interest. We provide in the bill that they shall pay the Government 2 per cent on the money that it puts into the business. That will help the withdrawals. The board of directors has the opportunity or the privilege at any time of getting the Government out of the business.

Now, I might say that our committee is not unanimous on this report. Mr. Williams of Missouri is opposed to the report on the bill. Mr. Stevenson of South Carolina proposed two objections of the bill, which are specific:

One is with regard to tax-exempt securities. We provide in this bill that securities or debentures issued by the banks will be just like the debentures or securities issued by the Reconstruction Finance Corporation. Now, the land banks are all exempt from surtaxes, and everything else. But we put in this bill that they shall not be exempt from surtaxes, estate taxes, inheritance taxes, or gift taxesmaking them just like the Federal reserve system, exempt from other taxes, Federal and State.

Now, it is very important to the success of this bill that that exemption be in there, because one of the difficulties ahead of this is probably the sale of the debentures. It can not function unless they do sell. We have written this bill so that these debentures offered by this bank will be the best debentures ever offered, for the reason that they are backed, or, at least, they represent real-estate mortgages which are not in excess of 40 per cent of the appraised value of the real estate covered by those mortgages; and every bond issued must have back of it at least 190 per cent of unpaid real-estate mortgages; and in addition to that, there is the stock of each member, which will amount to all the way from 5 to 10 per cent more of protection.

Mr. BANKHEAD. How much of a maximum issue of bonds and debentures does this bill contemplate?

Mr. REILLY. There is no limit set; the demands will govern.
Mr. BANKHEAD. Well, what is the minimum?

Mr. REILLY. Well, there is no minimum at all.

Mr. BANKHEAD. Well, how much do you start with-$150,000,000? Mr. REILLY. No; not to exceed that. Here is the way it will start: Some people think that this will not take more than $60,000,000 of any money in the United States Treasury. A bank is formed, say in New York or New Jersey. They fix a minimum capital there, we will say, or a maximum capital of $10,000,000. The Government of the United States must pay any part of that that the local institutions do not put up. The limit of the bonds sold will depend entirely upon the ability to sell the bonds and the demand for the

money.

Mr. BANKHEAD. What interest will those bonds pay?

Mr. REILLY. The bill provides that they shall not carry more than 512 per cent interest for the first seven years, and 5 per cent thereafter.

Mr. BANKHEAD. Do the debentures bear the same rate of interest? Mr. REILLY. Those are the debentures. They charge the borrowers just enough to pay the rate of interest fixed by the board, with a margin sufficient to operate on.

Mr. Cox. How much do you figure that will be?

Mr. REILLY. One-half of 1 per cent. The State of New York has a system that it has built up, which is something like this system, that has been in effect for some time; and they have rediscounted about $15,000,000 or $16,000,000; and they have run that institution for an expense of about $22,000 a year.

Mr. MARTIN. Does the State stand back of that?

Mr. REILLY. No; it is a private institution. But they find difficulty in selling their bonds. They could use a great deal more money than they have. Massachusetts and New Jersey also have systems for this purpose; and we provide in this bill a method whereby these systems can come in and proceed under this national system. Mr. GREENWOOD. Do you provide for the salaries of the board? Mr. REILLY. We provide for the salaries of the board in Washington, at $10,000 a year.

Mr. GREENWOOD. How many of them are provided for?

Mr. REILLY. Five. Now, all the expenses of this system, after the first initial expenses for the first year, including the board in Washington, are to be paid by the bank system. The Government would be doing under this system just like it did under the farm loan bank system and the Federal reserve system-that is, start the expenses for the first year, and then it all goes back on the system. Mr. PURNELL. What is the basis of the opposition to this bill by the banks?

Mr. REILLY. Which banks?

Mr. PURNELL. The banks all over the country, they tell me. Mr. REILLY. Like everything else, they do not want the Government in business.

Now, as to the insurance companies, we could not find out about. Mr. Clark, of Connecticut, came there, and he represents an insurance company, and Mr. Madden, representing some great New York lifeinsurance company, came before us; and we could not find out at all any reason for their opposition, except that they are opposed fundamentally to the Government going into business any more.

Mr. BANKHEAD. That is, the banks are opposed to that?
Mr. REILLY. The insurance companies and the banks.

Mr. BANKHEAD. Well, the Government has gone into business a good deal for them.

Mr. REILLY. I think it has. But here is the idea back of this bill: The building and loan association people are the only people who furnish to the common man a chance to build a home on a 20 or 25 per cent margin. A man goes into a building and loan association and he has 20 per cent of the cost of his house, or 25 per cent. They will loan him the rest of the money. And every other institution, the mortgage institutions, the insurance companies, and other people, want him to have 50 per cent. So the principle idea of this is to help the home-building organizations, the cooperative banks, or the cooperative building and loan associations, and other such associations through the country, so that they will be able to help the home owners of the country.

Mr. Ecker, the head of the Metropolitan Life Insurance Co., who was chairman of Mr. Hoover's committee, the first organization, opposed the bill very strongly. He sent his representative before the committee; but there is nothing in his testimony except a fear that it may result in overbuilding. And I think their principal

ground of opposition is that they have so many mortgages outstanding that if you build 3,000,000 homes in this country in four or five years you are going to decrease the value of their holdings.

Mr. PURNELL. Is not that a local problem that will adjust itself in the community?

Mr. REILLY. Absolutely, and there is no reason to believe that anybody is going to build that many homes.

Mr. RANSLEY. Could not that overbuilding be prevented by putting in an additional clause restricting them?

Mr. REILLY. Restricting them not to advance it?

Mr. RANSLEY. For new building.

Mr. REILLY. I think the administration would object to that.

Mr. PURNELL. And that might prevent building which was really

necessary.

Mr. REILLY. There are some places where they can very well build more homes; but my belief is that no board of directors is going to authorize it unnecessarily. For instance, you have to take $200,000 of your bonds to raise $100,000. You are not going to do that, unless it is for a legitimate purpose.

Mr. GREENWOOD. I would like to make this observation: You are bound to leave that to the local community. A new house is a better investment than an old house; but I take it that the local building and loan association is not going to help build a new house where there is no demand for it.

Mr. BANKHEAD. Has your committee given any consideration to the idea of allowing this law to be administered by the Reconstruction Finance Corporation instead of setting up a new board?

Mr. REILLY. The Reconstruction Finance Corporation, Mr. Bankhead, is a temporary corporation.

Mr. BANKHEAD. Well, that is an assumption-and a very violent one, in my opinion.

Mr. REILLY. The idea back of this is the emergency, and also permanency. The idea of the building and loan association peopleMr. BANKHEAD (interposing). Well, could not the Federal Farm Loan Board administer this act?

Mr. REILLY. No.

Mr. BANKHEAD. It is engaged in this sort of business?

Mr. REILLY. I do not think they could administer this act. And, besides, the building and loan institutions pay for it themselves. It is no cost to the Government.

Mr. BANKHEAD. You, of course, apprehend that the basis of my questions is the tremendous opposition in the country to the Government continuing to set up new boards?

Mr. GREENWOOD. I would agree as to the building and loan associations myself; and I think the Federal Farm Loan Board would not be qualified, because this is a different business.

Mr. BANKHEAD. Well, they are not qualified to run the business they are trying to run now; I will admit that. [Laughter.]

Mr. MARTIN. And as you state, this corporation is going to pay the operating expenses anyhow?

Mr. REILLY. After the first expenses for one year they assess all the members for the expenses.

The CHAIRMAN. If there are no further questions, we thank you, Mr. Reilly, for your statement.

Mr. MICHENER. I want to make this observation about your statement, Mr. Reilly: It is one of the best, if not the best statement made before this committee by anybody who was asking for a rule.

Mr. Cox. It is an excellent statement.

Mr. MICHENER. You have talked about the bill, and not other things, and have given us real information.

Mr. Cox. As to both sides of it.

The CHAIRMAN. Mr. Luce, the committee will hear you now.

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

Mr. LUCE. Mr. Chairman and gentlemen, Mr. Reilly has so thoroughly put before you the picture that he has left me little to add. I would emphasize his last statement, to the effect that this proposal has two, or to my mind, three functions: The emergency function; the anticipation of future emergencies-because it appears that there is a major depression about once in 20 years and a minor one in between; and finally, the permanent occasion for allowing capital in the building field, the small home building field, to function more steadily, just as the Federal Reserve Board, by rediscounting, has allowed the building up of a gerat volume of credit currency by rediscounting commercial paper.

I think your time need not be taken further by myself, at any rate, unless you have questions to ask, save in dwelling for a moment on the exigency:

I suppose that what we are most concerned with-assuming for the moment that the legislation itself is desirable-is whether there is occasion for quick action in the matter.

The President embodied this in his financial program in his opening address to Congress.

Since that time nearly six months have elapsed. The public, as you are all aware from the letters you are getting, is waxing very impatient over our failure to handle more speedily the proposals of the President, which were meant to break the jam. However unjust the criticisms, it is to be recognized that six months is a considerable period in which to digest a program like this, and can only be justified by the requirements of the work.

This is far and away the most difficult proposal, technically, with which I have been connected, and has required the devotion of many, many days and hours to the study of detail, and to the ironing out of differences of opinion and preparing the bill.

I think I can assure you that, at any rate, so far as my knowledge goes, there never has been a bill presented to Congress which has received more thorough study, in point of detail and technique, than this.

Now, the President desired this for emergency purposes, because it had been developed that the finances of the people in moderate circumstances, and in humble circumstances, had been thrown into great confusion by the depression.

We enacted the Reconstruction Finance Corporation bill speedily, in the hope that the money we put at the command of the bigger institutions, the railroads and the banks, would filter down through

the community and set the wheels of factories turning once more, and send us up to greatly improved conditions.

There is complaint, we might frankly admit that there is widespread complaint, with the Reconstruction Finance Corporation, because it has not met the expectation of the great masses of the people, who did not comprehend the way the money we were putting out in that direction was working, and they feel that nothing has been done for them. That is an unfair attitude to take, and is due, of course, to the difficulties of understanding problems of big finance. Nevertheless, that feeling exists very widely.

This measure was designed to help the little man. It would not lend him money directly, but would lend his own institutions money, and give them the means of raising more money with which to function.

I have on my desk a file of correspondence which is now nearly a foot high, coming from all parts of the country; and of course, it would be idle for me even to summarize it by any extensive quotations. But I want to give you, as typical of the situation, this extract from a letter from a financier in Indianapolis, Ind. He says:

The importance of this bill at this juncture, particularly to the city of Indianapolis, can not be stressed too strongly. You can imagine what a calamity it would be if every bank in Indianapolis were to close its doors to-morrow, as they have assets of $150,000,000, and the town would be dead for a generation to come.

And yet the building and loan associations of Indianapolis have $150,000,000 to liquidate

I will interpose my own remark here, to emphasize that the building and loan associations of Indianapolis have $150,000,000, the same amount that is in the banks, and the tying up of these building and loan associations is as disastrous a thing for the people in moderate and humble circumstances as the closing of those banks would be for the well-to-do and those who are engaged in business and industry.

Mr. O'CONNOR. Right there, let me ask, how did they get tied up? Mr. LUCE. Let me finish the quotation, and then I will explain. Mr. O'CONNOR. That is all right.

Mr. LUCE. He goes on to say:

This $150,000,000 of building and loan association funds represents the sav ings of the middle class and the poor, and it is simply appalling that they can not get one dollar out of them to meet their great necessities. Of course, the building and loan associations can not give them even partial relief, because no one is paying in money. If there was a Federal home loan bank there to which they could go and get a few million at this time, it would tide over some of this great distress.

Now, these associations are in distress, because the middle class of people and the poor have used them as places in which to put their money against the rainy day. And the rainy day has come, and they can not get their money. They are thronging the doors of these associations, trying to get the money which they must have to buy bread and clothing, and they can not get it.

I am told, and believe it is true, as far as an inquiry can be made, that three-fourths or more-I think it is-of the building and loan associations of this country have deposits on what is known as "On notice"; that is, requiring from 60 to 90 days' notice before they will pay withdrawals. The withdrawals are such that it is estimated that