in a liquid form. They have had no need to borrow from the banks. That paper, which in ordinary times is eligible for rediscount at the Federal reserve bank, is nonexistent to-day. The same thing is true in very many other lines. There seems to have been an almost prophetic vision of what was coming. Many of these concerns built up these tremendous reserves to such an extent that they are not now borrowing. That, plus mercantile paper and farm paper, is substantially the only paper that is eligible for rediscount. There is not so much of that, but the fact that the member banks of the Federal reserve system can use their Government's paper as a security to their paper, and what other eligible paper they have, at the Federal reserve bank, has been a life-saver to the institutions, because they could go so much further on credits on collateral paper and other paper that does not qualify.

Take many lines of public utilities. It is an exceptional public utility which can qualify its paper for rediscount, but we can take it, because we know we have the cushion of the Federal reserve system to fall back on in connection with our eligible paper.

Senator MORRISON. So that the regular commercial bank, and especially in the smaller towns, could deal more stably in other credits than those eligible for rediscount, than they are now able to do? Mr. MILLS. I think so, Senator, without question.

Senator MORRISON. Would it not be to the interest of commercial banking to be able to do that?

Mr. MILLS. I would think so, without question. I think their function ought to be as broad as it can.

Senator MORRISON. Because they have to serve the whole life of the communities.

Mr. MILLS. They do.

Senator MORRISON. And while the credits growing out of commercial transactions are eligible for rediscount under the Federal reserve system, yet it is important-perhaps more important-for people to have other credit besides that?

Mr. MILLS. There is no question about it.

Senator MORRISON. And in the case of a bank trying to do business and help the community it is to its interest to be able to extend this other credit as well as the commercial credit provided for in the commercial system.

Mr. MILLS. If they do not, they are not doing service to the community, and there is no justification for their being in business.

Senator MORRISON. Is it not especially true of commercial banks in smaller towns and cities that they are unable to operate advantageously largely on paper eligible for rediscount at the Federal reserve bank?

Mr. MILLS. At the present time they could not operate at all if they limited themselves to that paper. There is not a sufficient amount of it.

Senator MORRISON. And if they take the other paper, under present conditions, there is not anywhere that they can hope to obtain rediscount in emergencies when runs of depositors might take place. Mr. MILL. Their only hope is to go to their correspondent bank and ask it for accommodation. If their correspondent bank feels that it is in a proper position itself to make it, it will unquestionably make

it, but there is no assurance of it, Senator, at all. This gives a certain assurance.

Senator MORRISON. Is not that one of the chief reasons for the distress and difficulty of so many of the smaller banks throughout the country, in your opinion?

Mr. MILLS. I agree with you fully. As I have stated, in the operation of the National Credit Corporation-I do not like to mention that so much, but it illustrates it-there were so many of those banks that were perfectly solvent, but they had taken a large portion of their investment in mortgages. Then the public started to take out its money. The banks paid out all the money they had in the vaults. Then they liquidated their bond accounts. Then they began to call loans. Then they got down to the point where they had nothing really left except a small amount of cash and perfectly good mortgages, with the depositors still coming to the bank and saying, "We want some of our money." The bank was perfectly solvent, and under normal circumstances the bank had not overinvested in mortgages.

Senator MORRISON. Is it not true that throughout the country the general situation is that, on account of that situation, the banks everywhere are forcing collections to an almost unprecedented extent?

Mr. MILLS. They are. They have to.

Senator MORRISON. Exactly. Of course they do.

Mr. MILLS. One thing that I particularly like in this bill is the fact that it seems to me it will really promote, or there is an excellent chance of promoting, home building. I know, from my own knowledge, of very many people who want to build homes; that this country, even in a time of depression such as this, is far from being poor. I know of very many people in Detroit who are anxious to-day to build homes. They have on deposit in the banks some 30 or 40 per cent of the cost of a home, but they come to us and ask for accommodation. If we feel that it is absolutely necessary for them, we give it to them; but not desiring to freeze ourselves, in general we will try to dissuade them from asking us for a mortgage. If we felt that there was an ample outlet for these mortgages we would be very glad to lend those people the money, because the money is perfectly secure, and they would build. I think it would help the building trades, without question. It seems to me that that might be the start of something that would be a revival to all other businesses. It is the same old story. Take the automobiles. The demand for automobiles helps the rubber industry, the steel industry, the glass industry, the petroleum industry, and every other industry which enters into the manufacture of automobiles. Each one of those industries, in turn, is helped. That helps the radio business, and that, in turn, helps something else. It is an everexpanding circle, and it seems to me that this might well be the beginning of a revival in the building trades, which, in turn, might start the others.

I am not posing as a prophet, but I think there is a fair chance of that coming to pass under this general proposed plan.

Senator MORRISON. It is a fact that the man who had the cash in hand to make the initial payment on a home, and had a job and was making a salary, would naturally be deterred from undertaking to

build when his neighbors all about him, who have mortgage loans on their homes, are about to lose them.

Mr. MILLS. And in most communities, Senator, that man who has that money can not obtain any mortgage accommodation under any circumstances.

Senator MORRISON. And if he could obtain it, he is afraid to do it when he sees people with mortgages on their homes being foreclosed everywhere because the banks had to call them.

Mr. MILLS. That is true.

Senator MORRISON. And he fears that he might get in the same fix. Mr. MILLS. That is correct, in my judgment.

Senator MORRISON. If this fear were taken from the mind of the mechanic, or the laborer in the city-the people who are drawing salaries and normally would build homes-if this fear about being unable to get credit on home-loan mortgages were banished, and if this legislation had that effect, the tendency would be to go ahead, would it not?

Mr. MILLS. If this legislation should have that effect, we would be over our troubles very soon. I think the tendency of this legislation would be toward the effect you have described.

Senator MORRISON. It is a fact that under present conditions, a man with a mortgage on his home, if he does not pay it by maturity, is in great peril, is it not?

Mr. MILLS. He is, because the holder of the mortgage wants his cash, and he can not refund it.

Senator MORRISON. Do you know any reason why a man with a position, drawing a salary, under present costs of building material, and with enough cash on hand to make his initial payment, should not proceed to build? Do you know any reason why this would not be a good time for him to build, except for this very difficulty we are dealing with?

Mr. MILLS. No. I think it would be an excellent time for him to build. His only trouble is the fear complex you spoke of.

Senator MORRISON. He is afraid to go in debt.

Mr. MILLS. And the fact that sometimes he can not go in debt. Both of them are causes. Very often he is absolutely prohibited to-day from going into debt, because the banks, speaking generally, will not give him any mortgage accommodations under any circumstances-not even a 20 per cent mortgage on his proposed house. That means, to my mind, a throttling of the building trades, the building industry, labor, and everything else that goes into the building game. They are strangling to-day.

Senator MORRISON. Without further questions on my part, will you go ahead and make any additional statement you care to make about the bill?

Mr. MILLS. There are just one or two items that I would like to mention as being my own views.

On page 15, section 8, under the title, "Advances to members," the first paragraph provides:

If secured by a home mortgage given in respect of an amortized homemortgage loan which was for an original term of eight years or more, the advance may be for an amount not in excess of 60 per centum of the unpaid principal of the home-mortgage loan.

The next section is that:

If secured by a home mortgage given in respect of any other home-mortgage loan, the advance shall not be for an amount in excess of 50 per centum of the unpaid principal of the home-mortgage loan.

66

or

I think those two provisions are rather unjust for this reason. The first section provides for eight years "or more." I do not see why the penalty should be placed in there by having it read, more" than eight years. So long as that mortgage has been properly amortized, and amortized down to a point that is perfectly safe, I must say that I do not see that it makes a great difference whether the original mortgage had eight years or more to run, and why it would not be just as well to make it for a lesser period.

In Michigan, generally mortgages are made for a period of from three to five years, with amortization payments on the principal of 10 per cent a year. Take such a mortgage, Senator, over five years. Fifty per cent of it has been paid down when that mortgage matures, and assuming that there has been no change in the values, that mortgage is only on a 25 per cent basis. If it has only had 5 years to run it would be ineligible under the first section, on account of the provision for eight years or more.

That is the only fault I am finding with that section. I do not follow the reason for picking eight years out of a clear sky and putting it in there. I think it operates as a distinct disadvantage to mortgages such as are made throughout Michigan, where the general term is from three to five years, with amortization on every mortgage. All bank mortgages are made on that basis.

Senator MORRISON. In these building and loan association loansI do not know exactly the technical name for them-where they pay up their stock, that usually matures in about six years, does it not?

Mr. MILLS. I can not answer that, as to when the stock does become fully paid up. I think it is a longer period than that, but that is only my curbstone view.

Senator MORRISON. It seems to me that in my State they mature in six years. It is eight years in New York State, I am told, and I think in some of the States it is less, where they have the serial payments.

Mr. MILLS. My only suggestion on that paragraph is this, that it should read:

If secured by a home mortgage given in respect of an amortized home mortgage loan which has been, in the judgment of the board, properly amortized, the advance may be for an amount not to exceed 60 per centum of the unpaid principal of the home mortgage loan

without encumbering it by putting in what I think is an arbitrary length of time, eight years or more. I particularly object to the "or more." I can not conceive the purpose of it. I do not see what it is for. I do not wish to ask you questions, Senator. Senator MORRISON. The effect of it would be that if the original term was not as much as eight years that would not apply.

Mr. MILLS. Although in our State, as I say, many mortgages after five years are paid down to one-half the original amount of the mortgage, or 25 per cent of the value of the property, I think it should be permitted to go under the 60 per cent clause instead of under the 50 per cent clause.

Senator MORRISON. We have had other criticisms of that section. Mr. MILLS. There is one thing that occurs to me, which was in the original bill, the number of which, I think, was S. 35. I have not seen it in this bill. I have been assuming that we are discussing Senate bill 2959.

Senator MORRISON. Yes.

Mr. MILLS. That is a provision which affects national banks. There is a provision in the national bank act to-day that provides that a national bank may not borrow, as a total of the borrowings, more than 100 per cent of its capital. That excludes loans from the Federal reserve bank. This bill, as originally drafted, had such a clause, and I would like to respectfully suggest that it be put in there. [After consulting with Mr. O'Brien.] I see it is already in there. That clause, in my judgment, should be in there, and I missed it. I am sorry I have taken your time with that.

Senator MORRISON. Will you please give us the name of your bank again?

Mr. MILLS. The First Wayne National Bank of Detroit.
Senator MORRISON. What is the size of your bank?

Mr. MILLS. Our resources are in the neighborhood of $575,000,000. We have total deposits of between $460,000,000 and $470,000,000. We have mortgages of between $155,000,000 and $160,000,000. I saw a statement the other day to the effect that our institution was the eighth in size in the country in point of deposits, and I am quite sure that we are the first in size in point of mortgages held, by way of banks.

Senator MORRISON. What is your position with the bank?
Mr. MILLS. I am chairman of the board of directors.

Senator MORRISON. Is there anything else you wish to say y?

Mr. MILLS. Nothing, Senator, except that this bill, in general, or the policy of the bill, in general, has my unqualified support, and I hope very much that it can become a law. I think the effects of it ought to be extremely beneficial. I do not wish to read a paper I hold here, but if this record is to be printed, I made an address in Detroit on December 8 on this general subject, and if the whole matter is to be printed, I do not suppose it would add much to the volume of the record.

Senator MORRISON. You may file it as a part of your testimony, or read it now.

Mr. MILLS. I would rather not read it unless you prefer to have me do so. I would be very glad to do so if you wish. I have covered a part of it.

Senator MORRISON. All right. Just file it.

Mr. MILLS. I would be very glad to read it, if you prefer. (The statement referred to is as follows:)

HOME LOAN DISCOUNT BANKS

Address delivered by Wilson W. Mills, Chairman of the Board, Peoples Wayne County Bank, Detroit, Mich., at the annual banquet of the Detroit Real Estate Board, December 8, 1931

On November 13, President Hoover announced a plan to encourage home building and real estate which he will submit to Congress for action by it. This plan was a result of long study by the President and evolved by him after many conferences with builders, realtors, and bankers.