it would hardly seem desirable, as I see it, to inject another chain of banks into the picture. It might be in order to require deposits of those who had contracts with your banks, to a certain amount, to cover their possible extended liabilities to that regional bank, but it would not seem desirable to go further in that field.

There was also something said about the fee for joining, as Mr. Williams puts it, the dues or membership fee, or whatever you care to call it, and I believe that your bill here provides that there shall be an additional sum of 1 per cent of the outstanding balance of all mortgages that institution holds. It would seem that whatever percentage you use should be applied only to the face value of mortgages up to your limit of $15,000, not outstanding balances, but the face of mortgages up to $15,000, if that is your sum. Personally I had a notion that $15,000 was a little high, and that probably $10,000 would be a little better.

Another point I heard discussed here this morning was the desirability of raising your bonding ratio up to 20 to 1, and the thought was expressed that the Federal reserve act is so based. I would draw your attention to the fact that your Federal reserve act deals entirely with our most liquid form of credit, 30, 60, and 90 day commercial paper, whereas these proposals here deal with the lowest and most extended form of credit that we can have to apply in our banking transactions. A 12 to 1 ratio, as I would figure it out, is a conservative ratio. Certainly 20 to 1 would be the maximum, as I see it.

I have a note here," Small banks." I do not know what it meant. I think there was some question someone raised as to the desirability or eligibility of a small bank to participate.

Now, clearly, if these privileges are not to be obtained by small banks, or are not extended to them, you will miss a great deal of the prime objectives of the enactment. How they srould be tied to you by membership, and by what groupings and how much it would cost them, of course, I am not prepared to discuss. That is the technique of the thing, but this thing has two real objectives for its being a legitimate proposal, and a helpful constructive thing, or not. One is to extend to the greatest number of people, our average people, the protection and privilege and opportunity to own a home. Now, we must go just as far as safe banking and good practice will permit us to do in making that possible.

The other is to make possible a revolving fund for the liquidation of those funds, for no average man can, out of the difference between his income and what it costs him to live, possibly hope to save enough in a very few short years to buy a home. It necessarily means a long-time credit operation and, as I have said here, gentlemen, the time that the building demand is the greatest is at the time that our industry and commerce is going at full pace.

Now, as a plunger, you are sitting at your desk and a man comes in and wants to borrow $100,000 for 90 days, and over at the other end of the desk are gentlemen who want to borrow $10,000 apiece for 10 years apiece. Which loan are you going to take? It does not take you long. You have liquidity here and turnover, and you are going to make your big loan, but any progressive banker knows that in so far as he helps his town and helps the people to

lay solidly their economic foundations, he is certainly doing something for himself and his institution.

Now, if he knew that he could take these 10 loans, or any given number of them, and could discount, rediscount, those instruments, and had the facilities for doing it, why, it is obvious that he would be found making more of such loans than he would at the height of his building time, which is the exact time that the average man or woman has the opportunity to build a home or own one. So, I think, by and large, that you gentlemen here can do but one thing, furnish a machine through and by which we will for the first time have a positive and a continuous place where we can discount from time to time these loans that now are troublesome to look after. Banks make them because they feel that they should. They would prefer many times to make other kinds of loans, but they must make so many of these loans. Then, again, if I can refer to the sore place that a lot of us have been sitting in in the last couple of years with mortgages out, payments in arrears, and depositors on the other hand thinking you are running a cash institution and not a credit institution, and wanting to withdraw their money, you have the alternative of foreclosing mortgages, which you can not do without forever shutting your front gate. Now, clearly, with such machinery as this, if this plan had been going since 1925 or 1926, we would have avoided a great deal of the grief that we have all had to go through.

There is no reason at all why the United States Government, if it makes a contribution, should not receive dividends or interest on its investment, just the same as any other investor, and he sits in a preferred position and will be retired as you reach a certain stage of development in your business.

The thought is that it is pretty easy to regulate the other fellow's money and legislate the other fellow's money and spend the other fellow's money, but I have always found when you put up a similar amount yourself alongside the other fellow's that you all have a pretty keen interest in how it is going to be handled.

Now, as I said in the beginning, I do not believe that I can contribute anything to human knowledge on this subject, and I hope I have not detracted anything from it.

The CHAIRMAN. That is all you care to state?

Mr. LEWIS. That is all, thank you.

The CHAIRMAN. We will adjourn now until 10 o'clock to-morrow morning.

(Thereupon, at 4.45 o'clock p. m., the committee adjourned until 10 a. m., of the following day.)

CREATION OF A SYSTEM OF FEDERAL HOME LOAN BANKS

FRIDAY, MARCH 18, 1932

HOUSE OF REPRESENTATIVES.
SUBCOMMITTEE OF THE COMMITTEE ON

BANKING AND CURRENCY.

Washington, D. C.

The subcommittee met, pursuant to adjournment, in the room of the Committee on the District of Columbia, House Office Building, at 10 o'clock a. m., Hon. Michael K. Reilly (chairman of the subcommittee) presiding.

Mr. Reilly. The committee will be in order and we will hear first this morning the statement of Mr. Bodfish.

STATEMENT

OF MORTON BODFISH, EXECUTIVE MANAGER UNITED STATES BUILDING AND LOAN LEAGUE, CHICAGO, ILL.

Mr. REILLY. Give your full name, address, and state whom you represent.

Mr. BODFISH. My name is Morton Bodfish. My home is in Chicago. I am executive manager of the United States Building and Loan League. Mr. Best spoke at some length concerning that organization. It contains practically all of the leading building and loan associations in the country and parallels in the building and loan field the American Bankers Association in the banking field. At the outset, Mr. Chairman.

Mr. REILLY. Let me ask you this question: Did you appear in the other hearings before the Senate committee?

Mr. BODFISH. Yes, I appeared in the other hearings and presented some figures concerning the nature and extent of building and loan operations only.

I want to address myself this morning particularly to amendments to the bill, Mr. Chairman, The bill, (H. R. 7620) in the judgment of the building and loan people, is excellent in form. It is well drawn and we would be absolutely satisfied with the measure just as it was introduced. We feel that it achieves all of the purposes that were set out in the President's statement. At the time the orginal bill was introduced, the old 5090, we had a number of our building and loan people study that measure, and we submitted to this committee and to the Banking and Currency Committee in the Senate a number of amendments that we thought were essential to make the bill useful from a building and loan point of view. I am happy to state that the principles and policies of those amendments have been embodied in the redrafted bill, which is now H. R. 7620 and which is before you.

In suggesting amendments to 5090, Mr. Chairman, we kept before us continuously the sound and comprehensive statement that had been made by the President, November 14, as we wanted to only make suggestions that were in keeping with his proposals and not to make suggestions that were selfish to our particular interests alone.

I might say that the building and loan people have been studying this matter of reserve credits and banking relations for many years. As Mr. Luce indicated at the beginning of the hearing, a proposal was developed back in President Wilson's administration. At that time a number of our building and loan leaders were called into conference; a bill was drafted and introduced, which gained rather wide support in building and loan circles, although it never became a law.

Since there has been an intimation that legislation of this kind might wisely be enacted, we have had our building and loan people assembled a number of times. We have discussed just what points would be essential in a reserve structure that would serve our homefinancing institutions that are advancing one kind of credit. And, by the way, we are only interested in one kind of credit, ad that is a monthly repayment, long-term installment mortgage.

There are something over seven and three quarters billion dollars of building and loan funds loaned on this type of mortgage and this type of mortgage alone. I want to impress upon the committee that we have no foreclosure problems excepting those that grow out of a borrower being unable to meet his monthly payments. In other words, building and loan mortgages are all drawn on a monthlypayment basis, and when the borrower has fulfilled his contract the debt is completely extinguished. Therefore, we have no mortgages in building and loan associations that run for one year or two or three years, in which, at the end of that period we say "Mr. Borrower, you must pay this debt off completely; you must take it to some other institution and have them refinance it," as is being done by commercial banks and other financial institutions at the present time.

I think the important problem in the foreclosure situation is the fact that we have permitted unsound banking and financial principles to develop in banks. We have loaned people of modest income money on their homes on a one and two year basis in this country, and then the economic situation changed and the institution which made these loans said, "Well, we must get more liquid," and we have banks that are priding themselves in being 60 or 70 per cent liquid, and when it said to Mr. Home Borrower, "Regardless of your collateral, regardless of the fact that you have a perfect payment record for two years, your mortgage is now due and you must pay us the $2,000, $3,000, or $5,000." That sort of thing does not happen anywhere under any conditions in the building and loan associations. It is discouraging home owning ambitions to a tragic

extent.

The amortized or installment mortgage has characterized building and loan advances for over 100 years and much of the approval which our associations enjoy grows out of our rigid adherence to this type of advance. I further believe that this type of home financing which the President desires to encourage in the long run.

I would like to mention another thing about building and loan associations. Our institutions are local and with few exceptions are operated without the usual incentives of profit. The building and loan association is essentially a cooperative enterprise, Mr. Chairman. It is probably the greatest example of successful cooperative financing in the world. The profits are completely distributed to the participating members; and when I say "participating members" that means all of the members.

Let us first comment on the Senate hearings with regard to amendments. In my judgment there was a remarkable absence of criticism of the details, policies, and principles of this measures during the Senate hearings. By and large, its fundamentals were unquestioned, except by some groups that, in my judgment, do not have a point of view of the long-term financing that you gentlemen are interested in encouraging.

A number of the witnesses spoke emphatically of the excellence of the measure and a number of them that were from building and loan circles are men who have given a great deal of time and study to legislation affecting home financing.

Now, as we see the objects of the measure, they are two. You gentlemen have brought them out: The immediate situation and the permanent need, and I want to emphasize the fourth point in the President's statement regarding this measure. He said:

For the long-view purpose of strengthening such institutions in the promotion of home ownership, particularly through the financial strength that is made available to building and loan associations.

Now, why do I emphasize that? I think the reason the President made that statement is that he had his eye focused upon the needs of the home buyer and the home owner, namely, that the building and loan association is the one type of home financing institutions which for a hundred years has been making long-term monthly repayment installment mortgages. And, gentlemen, that is the only kind of credit which the man of small means, of low income, should use in making a home purchase, and I think it is very clear from the President's statement that what he wanted to encourage was the increase of the supply of funds available for that kind of a loan, feeling that an increase in that kind of credit would increase home ownership on a sound basis.

I am a little sorry that Mr. Williams is not here, because I was going to adopt one of his statements as more or less my text in discussing amendments. At one point in the hearings yesterday he said:

Well, look what has happened with our Federal farm loan system. Look what they just came to us and asked for.

Now, we would like to take that statement for our text, and when I say that I mean the building and loan associations. We want this structure erected in a sound, conservative way, in which it will function without coming down here 5 years later or 10 years later, or the first time we have another depression, or before we get out of this one, and say to you gentlemen-well, to quote Shakespeare, "Save me, Cassius, or I sink.”

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