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in observing the criticisms made before the Committee on Banking and Currency in the matter of the details of the Federal farm loan system and of the Federal reserve system. Many little questions have come up in that committee as to the framework of the laws concerned. You must remember that the Federal reserve system was novel. Indeed, both systems were novel. There was no experience in this country to fall back upon. Inevitably, occasion to improve the machinery developed from time to time. Possibly I helped a little in the present matter by putting at the command of the draftsman the results of such observation as I had made. Also, representatives of the large interests directly concerned helped materially from the fund of their own practical experience. However, the details of the bill, as originally drafted and as reconstructed, were largely drawn from the farm loan and Federal reserve bills. There has been some contention in the Senate hearings over matters of machinery, with criticism by witnesses probably not informed as to the sources of the provisions in the pending bill. There is in matter of machinery little in this bill that has not been already tested through the years during which the farm loan and the Federal reserve systems have been in operation.

Perhaps I would better not try to anticipate witnesses with any résumé of objections to the bill. They will be developed as we go along. I would, however, take a minute or two to explain the general purposes that the President's advisers had in mind and that he himself in his statements given out since then has confirmed.

There are three general purposes in the bill. The first is to relieve the present emergency, it being thought by the proponents of the bill and confirmed by developments, at least so far as I have knowledge, that the Reconstruction Finance Corporation will not suffice to meet the needs here involved, and that there should be added this further provision for temporary relief. The needs are instant because of the lamentably large number of financial institutions that are at the present moment in dire distress by reason of their inability to raise money on perfectly good security. I will testify from my own experience. I received two days ago a letter from a cooperative bank in Massachusetts in which I have been a shareholder, regarding some of my shares that are now maturing. The president of the association wrote to me telling me of the facts and asked me if I would be willing to leave my money there, accepting a matured share certificate in its place. Further testifying from my own knowledge of the situation, not long ago I received from a constituent in the town of Brookline, one of the wealthiest towns in the world, a letter telling me of a neighbor who had just moved into an absolutely new $10,500 house. Desiring to borrow $7,000, he had visited 12 savings banks, and 11 of them had refused to make a loan under any conditions. That indicates the situation in my own region, a situation produced by withdrawals, whether for hoarding or for domestic needs in the case of persons in comparatively humble circumstances who are out of work. These withdrawals are putting every institution which lends money on mortgages in my State in the position of dire need of opportunity to raise money on perfectly sound securities. As you go through the Senate hearings you will find that situation reported again and again in practically every part of the country.

As an emergency measure the system here proposed is needed not alone to help these institutions meet applications for withdrawals, but also to enable them to resume business, inasmuch as they are practically now out of business for the time being so far as concerns loaning money with which borrowers may remodel or buy homes. That presents a situation which makes time an important element. If I have seemed from time to time unduly anxious to push this matter, it is because every day hundreds of foreclosures are taking place. Men are losing their homes and the savings of a lifetime are being swept away. The quicker we give such relief as may be within our power to give, the less the loss and the suffering.

The second purpose of the bill is to provide against repetitions of such emergencies as this. The major recessions in business in the last 115 years have averaged to come about once in 20 years, with a minor recession in between. It was to anticipate these recessions in business that the Federal reserve system was created. The same reason exists for creating this system.

The third purpose of the bill is to furnish permanently to the home-building field the same credit facilities that have been furnished in the agricultural field and the commercial field. I may be forestalling witnesses by saying that the necessity for a permanent system is one of the issues that developed sharply in the Senate hearings. Undoubtedly some witnesses will tell us it is desirable and some will think otherwise. It is one of the high lights of the question. For my part I favor a permanent supply of more building capital. There has been an attempt in this bill, and I think a successful attempt, to anticipate the danger which will be stressed of financing building booms. We have given in this bill much more power to the central authority than is given in either the Federal reserve or the farm-loan system. The confident expectation is that the President will appoint a board composed of wise and experienced men strong enough to use that power and to prevent the resources of this system from being put at the command of speculators and the instigators of real estate booms. The bill has been drawn to anticipate every such situation as we could imagine.

I think I would better not go into the details, but allow the witnesses to develop those features. I want, however, to point out that we have drawn a bill here which follows the middle course. Those who have studied the subject carefully will be able to point out that we have neither gone to the extreme advocated by some or the opposite extreme advocated by others as to figures in the bill, the amount that may be borrowed, its relation to the security, the amount of capital to be invested, the sources of the capital, and so forth. The objection has been and will be raised that this is putting the Government still further into business, it perhaps not being fully understood that in the formulation of the system we have provided that all of the capital lent by the Government shall sooner or later be repaid by the system, as was provided in the Federal farm-loan system. Such money as the Government lent to the farm-loan system was, except for an insignificant portion, wholly repaid prior to the present depression. This depression caused the need for the additional capital that was lent to the system by the first of the reconstruction measures that we have passed at this session, a loan we

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are confident will also be repaid. So, it is not in contemplation here that this will ultimately cost the taxpayers any money. We are lending to the home-loan system, such money as it does not itself furnish up to the total of $150,000,000. So for the sake of accuracy it will be well to emphasize that it should not be spoken of as an appropriation by the Government or the giving by the Government of that amount of money. We are lending that part which the members of the proposed system do not themselves advance.

The question of whether the Government should ask interest upon the money will be discussed and ought to be discussed and considered. When the farm loan system was created it was believed by Congress that it was clothed with a public purpose and that it was to the social advantage of the whole community that the sysem should come into effect and function. Congress said our contribution toward this was to lend the initial capital. I do not know if that policy was wise, and I am not going to argue it, of course, at this moment. It is a matter to be argued and considered. The precedent is that where Congress aids in the institution of a system designed for the general welfare, it is not unreasonable for the Government to forego interest on its contribution.

Now, a word about the membership in this system. Mind you, the Federal reserve system had for its basis existing commercial institutions, including many banks of great resources. Every national bank was required by law to become a member, with membership for other banks, many of which at once joined. When, three years later, the farm-loan system was created we found no such basis, and so we created a foundation by making as a part of the structure freshly created local associations, cooperative in their nature, with very little capital of their own. Such is still the basis of the machinery of the farm-loan system. Now, in the home-building field we find already established a great variety of institutions that already have in their possession_mortgages. So, we do not have to create any institution, but take for our basis associations of several kinds, with resources great in the aggregate. Most numerous are the cooperative associations framed on a system that has been successfully functioning through more than a hundred years. So, in place of the newly created farm-loan associations we have here for our basis chiefly what are known as building and loan associations, or, in my region, cooperative banks. Our purpose is to allow these institutions and the other financial institutions admissible to rediscount their mortgages. The impression has been spread abroad that we were trying to create here a system under which the Government would lend money to individuals. That has never been contemplated and will not be possible under the bill. We are doing precisely the same thing that the Federal reserve system does for the man in business, giving him a place to rediscount. We think that under suitable restrictions mortgages will be just as safely and effectively used as commercial paper, the backing for bonds for the raising of funds.

We point to the fact that the Federal Farm Loan Board has more than a billion dollars of invested money, lent to farmers for the purposes of agriculture. We believe that similar success may be accomplished with this home-loan system.

That, in general, is the layout of the bill. To sum up, in the light of our own experience and observation, we have taken the pertinent

parts of the farm loan and Federal reserve acts and combined them for the purpose of furnishing resources to the home-building field in order to help many distressed financial institutions, and even protect them in future emergencies, and I enlarge the facilities for the building of homes.

Now, a word as to my own share in it. Somebody had to decide in the matter of a large number of minor differences between the Federal-reserve and farm-loan machinery. It fell to me to take that part. The work was done under high pressure. I had to make many decisions offhand, and I am not conceited enough to think that I advised wisely in every instance, but I did the best I could, and my decisions, of course, will be subject to the revisions of this committee or the full committee with no likelihood of hurting my feelings in the slightest if some of the snapshot judgments I was compelled to made in matters of minor detail are reversed. That is all.

Mr. REILLY. I thank you, Mr. Luce, for your statement.

Now, Mr. O'Brien, gave to the Senate committee an explanation of the bill. It was rather long because he was interrupted.

Now, I wonder if the committee would want at this time a supplement to Mr. Luce's statement as to just how the bill works out and what the plan and theory is, so that it will be set up in front of this report and be available for the Members of the House to develop the workings, and how the banks are supposed to construe out, and the technical portions of the bill.

Mr. CAMPBELL. I think that would be very well, Mr. Chairman. Mr. REILLY. Now, tell us that, Mr. O'Brien, to supplement what Mr. Luce has told us.

STATEMENT OF JOHN O'BRIEN, ASSISTANT COUNSEL, OFFICE OF THE LEGISLATIVE COUNSEL, HOUSE OF REPRESENTATIVES

Mr. O'BRIEN. The bill contemplates the establishment of 12 banks which are to be located in regions established by the board. The board is to consist of five people appointed by the President by and with the advice and consent of the Senate. The board has general supervision over the activities of the banks and their issuance of bonds and making of loans. Twelve banks are to be established and the capitalization is to be derived from two sources. The first source is from those institutions which are eligible to become members of the banks. The minimum capital of each bank is to be fixed by the board. Each of the 12 banks is to have a minimum capital of $5,000,000. Upon the establishment by the board of a bank in one of the regions, the institutions eligible to become members will subscribe for stock. Such part of the minimum capital of the bank as is not subscribed by institutions eligible to become members of the bank within 30 days after the establishment of the bank will be subscribed by the United States, but in no event is the capital subscribed by the United States to exceed $150,000,000. The institutions eligible to become members of the Federal home loan banks are described on pages 3 and 4, section 4. The institutions eligible to subscribe are institutions organized under the laws of any State or of the United States, and which are subject to inspection and regulation under the banking laws, or under similar laws of the State or of the United States. The first class of such institutions includes building and loan associations, cooperative banks, and homestead associations. The sec

ond class of such institutions includes such savings banks and trust companies and other banks as the board determines have such time deposits and are in such financial condition as to warrant their making such home-mortgage loans as the board regards as long-term mortgage loans.

The third class of institutions eligible to subscribe comprise insurance companies. An institution is eligible to become a member of the bank of the district in which is located its principal place of business or of the bank of a district adjoining such district.

The capital stock of the Federal home loan banks is to be issued at par, each share to be worth $100. The amount of capital stock which each member is to be obliged to subscribe to in order to become a member is fixed by the bill to be $2,500, plus an amount equal to 1 per cent of the aggregate of the unpaid principal of the subscribers' home mortgages.

Now this item of unpaid principal is extremely important. The unpaid principal is described by the seventh paragraph of the second section of the bill to mean the amount of the principal sum of the loan which made by the institution to the borrower, minus the amount which he has paid on that loan, or, in case the borrowing arrangement is the one frequently made by building and loan associations; that is, an arrangement by which the borrower pays for the shares which he purchases, minus that amount which he has paid on those shares and the amount of the dividends paid on those shares to him which has been credited to the loan, or which may be at any time credited to the loan. I point out the significance of the "unpaid principal," because that is not only the basis of the stock subscription of members but it is also the basis on which the member may borrow of the Federal home loan bank. Stock subscriptions by the United States are to be subject to call by the board with the approval of the Secretary of the Treasury.

There is authority in the Board to determine the time at which the subscriptions of the United States shall be paid. Stock subscriptions of the United States are not to share in dividends but all other stock subscriptions are. There is a provision made for the retirement of the stock held by the United States. The retirement begins when the members have paid in an amount equal to the amount paid in by the United States as stock subscriptions. This is a specific example: Suppose the minimum capital stock of one particular bank is fixed at $12,000,000. Suppose the Secretary of the Treasury subscribes to the difference between $9,000,000, which has been put up by members, and the $12,000,000, which is $3,000,000; upon the members' subscribing to that additional $3,000,000 of stock, the stock of the United States is begun to be retired and that process is continued until the entire amount of the stock subscribed by the United States is retired at par.

There are in some States laws regulating banks and building and loan associations which would prohibit them from becoming members of this banking system. Provision is made for such members by permitting them in lieu of subscribing to stock to deposit either Federal securities that is, either Federal bonds, or other obligations of the United States, or short-term debentures issued by the bank itself, or cash. That provision, however, is temporary. In no event

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