The President hopes the plan will result in relieving the general credit situation and will be for the benefit of home owners, both urban and rural, and that it will tend to stimulate new construction of homes with the consequent enlargement of employment. He also hopes to make the plan for the rediscount of real estate mortgages not only an emergency measure but to make it of such stuff that it will become a part and fabric of our banking structure, so that even in times of money stringency there need be no arbitrary shutting down of moneys available where good mortgage security is offered.

The suggestion of the President-and I can not too strongly stress the fact that the whole matter is only yet in its formative stage, as Congress has only to-day received the President's message, and any enactment of Congress may be quite different from the suggested plan, and what I have to say must be taken with this thought in mind-contemplates the establishment of 12 home loan discount banks having an initial stock capital of somewhere between $5,000,000 and $30,000,000 as may be determined by the Federal board. Banks and building and loan associations may become members of the system and they together with the Federal Government will furnish the initial capi tal-by all three of them purchasing the stock-becoming its stockholders by purchase. The system will be somewhat analogous to the Federal reserve system.

There has been a great deal of talk about the Federal reserve and I rather think that bankers fall into an error in not more fully explaining the Federal reserve system to those engaged in other businesses. Under the Federal re serve system the country is divided into 12 districts. These districts were arranged with reference to local trade conditions and are magnificent in the way State boundaries are often disregarded. For instance, here in Michigan, the Lower Peninsula is in the seventh Federal reserve district while the UpperPeninsula is in the ninth Federal reserve district. Banks are the only stockholders of the Federal reserve system, and any bank that so desires-national banks are compelled to-subscribe 6 per cent of their capital and surplus to the capital stock of the Federal reserve bank of their district. To date, only onehalf of the subscription has been called for payment. This payment makes a bank a member, and dividends not to exceed 6 per cent are paid upon the stock. The privileges afforded by membership in the Federal reserve system are substantial in a great variety of ways, although there are certain obligations devolving upon membership, such as every member bank situated in Detroit, for instance, must keep on deposit with the Federal reserve bank 10 per cent of its demand deposits and 3 per cent of its time deposits. No interest is paid by the "Fed," as it is generally known by the bankers, upon these deposits. However, at any time, a member may likewise borrow from its Federal reserve bank upcn either Government bonds or upon certain well-known types of commercial paper-not collateral paper, which it may not so borrow upon. As against the Government bonds or commercial paper offered as security by the borrowing member bank the Federal reserve banks lend either moneys on deposit by its members, or actually print currency for that purpose against which there is held not only the borrowing bank's note, Government bonds, and commercial paper, but a percentage of gold. However, not only can the Federal reserve banks not accept for discount general collateral paper, but neither may they accept mortgage notes or mortgages even for example where the mortgage has been amortized to one-tenth of its original amount and the appraisal is 20 or 30 times the balance due on the mortgage. In other words, no mortgage paper whatsoever is discountable at the Federal reserve banks. Therefore, it is proposed where banks and building and loan associations have good, up-to-datemortgages on residences and have a legitimate need for funds that the home loan discount banks may be set up for such purpose.

With the proposed home mortgage discount banks, any member institution such as a bank or building and loan association may become members of the system on a present suggested per cent of mortgages held by the bank or building and loan association and thereafter may borrow from the system upon its own note, secured by the original mortgagor's note and the mortgage itself, such borrowing not to exceed 50 per cent of the original amount of the mortgage and in no case may any mortgage offered for discount exceed $15,000, the mortgages in each case being limited to urban or farm properties used for home purposes. Of course, the mortgages which are borrowed upon must not be in default, and must still be subject to a proper appraisal. Now it is perfectly evident that the maximum stock subscribed both by banks and

by the Government would only be a drop in the bucket, and other funds must be derived if the institution is to properly function. The home loan discount banks will not, and should not, be permitted to issue currency, such as is issued by the Federal reserve banks, but to raise the necessary additional funds the discount banks will, as their needs require, issue bonds which will be sold to the investing public in an amount not to exceed twelve times the capital of the issuing bank. These bonds should be one of the soundest investments in the world because there will be back of them the obligation of the discount bank, the note of the discounting member, be it bank or building and loan association, the note of the mortgagor and finally the mortgage itself. Thus it would be possible for the twelve banks, if capitalized at $30,000,000, to finance something over $3,600,000,000 if necessary. I don't know where a safer or sounder security may be purchased in the world. I think it is probable that these securities will have certain tax-exempt features so as to encourage their purchase by the investing public. The profit of the discount banks should consist of the earnings on its capital, plus the interest differential between its purchased discounts and interest it pays on its bonds. The proposed organization is utterly different from the farm loan act. The Farm Loan Board deals with individuals and groups of individuals. The rediscount banks will Ideal only with institutions. To my mind this difference is as great as the difference between black and white and there are, of course, countless other differences between them. So much for the proposed organization.

In looking at the matter, one must not consider it from a local viewpoint, but from a national viewpoint, because, while some parts of the country may be considerably overbuilt, other portions are admittedly underbuilt. I have little patience with those persons who have only the perspective of their own community and say, "We are overbuilt, therefore, let us not have any home loan discount bank," because, as I say, the matter should be looked at from a broad national viewpoint. Again, there is a question as to what is meant by any community being overbuilt. I doubt if there is any place in the country where there are insufficient buildings to provide more than enough shelter and heat to its population; but, in my mind, no one could say that that in itself was a criterion that the place was overbuilt. The people of this country are not content merely with shelter and heat, but they are accustomed to, and properly should have, additional and modern conveniences. This is a Nation of home owners, and, in my opinion, must be so kept, and all possible encouragement given to home owners, and a large part of such action is only possible through an opportunity to obtain long-term loans payable in installments. It seems to me that the recent excellent earning record of the electric refrigerator and oil-burner heating companies during the frightfully bad year of the depression are significant to show that if funds are available to persons then, when these conveniences and other modern housing and equipment is made available to them at a pair price, they will purchase. I was very much impressed by President Hoover's opening address at the recent conference on home building, called by him in Washington, where he pointed out that the home is essentially the basic rock of our institutions. He spoke of the distinction between "homes and "housing," and cited such airs as might well

be called national, to show the distinction, such airs being Home, Sweet Home, My Old Kentucky Home, and My Little Gray Home in the West. The President stated they were not written about apartments-and I may add, neither were they written about mere shelter.

The tightening in money rates has resulted in many parts of the country in either a lessening in the amount of moneys available to be loaned upon mortgages, or has stopped the loaning on mortgages entirely with consequent hardship to borrowers and a definite depreciation of real-estate values.

It is believed by many, including the President, that a considerable part of unemployment is due to stagnation in residential construction. It is true that there has been some overbuilding in certain localities in boom years, but even in these localities the inevitable need is obscured by unemployment. The real need steadily accumulates with increasing population and will become evident and insistent as we come out of the depression.

The President has stated that during normal times, more than 200,000 individual homes are erected annually, which, with initial furnishing, contribute more than $3,000,000,000 to our construction and other industries, which business has now fallen to about one-quarter of normal. Home owners have also found it difficult not only to secure new mortgoges but to renew old ones. The revival of this construction would provide for employment in a most vital

way.

WHAT MAY BE SAID AS TO THE BENEFITS OF THE PLAN

To me, it seems that they might include the following:

The acknowledgment financially, as an industry, of an activity that in a financial way ranks near the top of the leading industries of any country. A great step in stabilization of Government by assisting the majority of our people to become satisfied home owners, thus making more secure our economic foundation.

The conversion of good but long-time credits with their unwieldy units as to time and denomination, into stabilized and standardized forms of security with consequent liquidity and marketability.

An advanced step in a plan to make funds continuously available in any locality where housing need exists irrespective of local financial conditions.

The aiding and assisting of every legitimate agency now engaged in the business of catering to this need in any form, that may qualify under the law, and the augmenting of their facilities.

The inducement and encouragement to organize new corporations, new agencies and groups to engage in the work.

The inducement to private initiative and private capital to lend itself to this effort, and we all agree that there are two of the outstanding and necessary requisites to national growth.

The facility and ability to originate and dispose of a stabilized and commercial form of investment security that is understandable to all possible investors, many of whom would not under present conditions think of investing their funds in home building enterprises.

The making available of safe forms of investment which will make a strong bid for funds of such institutions as Postal Savings Bank, some of the large insurance companies, trust funds, and similar deposits which have not heretofore been available for this purpose.

The other day, I received a letter from a very prominent Government official now in Washington, and who is known to many of you, asking my opinion as to several questions propounded by him from which I am going to quote. His first question was, "Would the establishment of these home mortgage discount banks reduce the cost of money for home building?" I replied that in many parts of the country mortgages are at the present time absolutely unavailable on any terms to persons desiring to construct homes. It seems evident that with the establishment of these discount banks in these communities funds would be available. In other parts of the country, some mortgages are being made but are being made very reluctantly owing to the fact that the banks have not desired to become frozen. This has retarded certain building which otherwise would have been made. Certainly in these two instances at least, the cost of money for home building would be reduced because the only other facilities available for the home builder in those communities is the private investment leader or the loan shark, of whom, the latter always and the former frequently, require bonuses, so I would say unquestionably there would be a reduction in the cost of money for this purpose. As to whether it would result in a lessened cost of money for funds readily loaned by banks would, of course, depend upon the general credit situation from time to time.

The next question he asked was, "Would the setting up of these home-loan discount banks in any way relieve the thousands of home owners who are now in default on their mortgages or land contracts?" To this, I replied that I believed the setting up of these discount banks would relieve certain of the home owners who are now in default-not all of them--on their mortgages or land contracts by enabling them to refund. I have pointed out how in certain parts of the country no new mortgages are available and in others the availability is greatly restricted. This almost automatically acts to prevent any defaulted mortgagor or land contract purchaser from refunding his obligation. In these sections, I believe that the setting up of the Home Loan Discount Banks would relieve many of such mortgagors and land contract purchasers who are now in default.

His next question was, "How would the building industry be stimulated if the prospective home buyer continued to feel so insecure about his job?" To this I answered that the thing which strikes me most is that this country is not poor even in a time of depression such as we are now in. I know of my own knowledge of a tremendous amount of money on deposit by individuals where the

individuals are waiting to buy or build when they consider the prices to be right and when they can secure the necessary additional financing. Make the addi tional financing available, and they will buy or build. It seems to me that it works in this wise-if the building trades and building industries can be given a push along the road to prosperity does it not mean that those who are engaged in those trades or industries may make sufficient headway so that it will result in the purchase of a large number of say automobiles by them-the purchase of a large number of automobiles will in turn stimulate the automotive industry and all the commodities entering into it-steel, rubber, petroleum products, to mention only a few, and those in turn being stimulated, their employees may in turn purchase radios, automobiles, and houses, and once the cycle is started it will be somewhat like the circle arising when a stone is dropped in a pool of water-it ever expands. It seems to me that with proper encouragement and credit facilities available to those persons there is a good chance of a revival in the building industry, and if there is a revival in the building industry may not that start a cycle of better times with the result that other prospective home builders may not feel so insecure about their jobs? I do not believe there is any panacea which in itself will cure all of our ills, as we are in a period of tremendous readjustments-where the whole enormous machine for upwards of two years has been out of adjustment-with nonmeshing gears as it were some being still out of adjustment. It is necessary to have those gears properly in alignment and adjustment before there can be any proper and full readjustment to the upward swing-but if one great industry, such as building, can be given a push along the road to prosperity I think it likely that it may start the cycle which would bring other industries along with it to the road of recovery.

Mr. MILLS. I have only one more statement, covering two more items that I would like to mention.

I think I went into the fact that this, in my judgment, was to be a permanent measure, and that the Reconstruction Finance Corporation was only to be an emergency provision. Under its provisions, it goes for only two or three years. I think it should not be confused with that, and if the question is asked as to why the functions of the home loan banks can not be taken care of by the Reconstruction Finance Corporation, the answer is twofold. First, the Reconstruction Finance Corporation is going to have plenty to do, anyway. They are already swamped. I tried to get in there yesterday to see Governor Meyer about another matter. I have never seen anything like the crowd that was over at that place. That is only a temporary matter. This will relieve that to some extent, and if this is to be a permanent institution, a permanent part of our Government, I think that, in itself, is a sufficient answer.

I would like, Senator, if I may, to make one statement for your general consideration. I do not like to criticize a bill that some one else has drafted. I do not suppose anyone can draft a bill that some one else can not take to pieces and criticize. I have discovered that myself. But it just occurred to me that in a bill like this it might be advisable-I am merely throwing this out as a thought, for whatever it may be worth-to provide that those who join three months or 30 days after its passage could get accommodation immediately, but those who did not join, we will say, until 60 days after the passage of the act, could not get accommodation until a certain length of time had passed.

In other words, I think it would be advisable to have all the banks, building and loan associations, and insurance companies that are going to join, join rather promptly, rather than wait, and then suddenly, finding themselves in trouble, finding the need of

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a rediscount bank, decide that they want to join immediately and get their accommodation the next day. I think all those who are going to join should join rather promptly, rather than wait and join at any time when they happen to have any trouble. I think the effect on the banks and the building and loan associations would be better, and certainly the effect on the Federal home loan institutions, in my judgment, would be infinitely better.

The question has also occurred to me, simply for your consideration, as to whether the fee of 1 per cent should be the sole method. It occurs to me that the fee might be reduced, or might be left the way it is, with the further proviso that, as loans are desired by any member institution, at that time they should purchase some additional stock, if I may use the term, to bail out the Government's investment in the home loan banks. For instance, the Government has an investment in one bank of $5,000,000. As any member institution borrows from the home loan banks, as a part of that borrowing it should purchase a certain percentage of the stock of the home loan bank, which would be used to retire the Government stock ownership in that institution.

Mr. O'BRIEN. Do you think this limitation of borrowing capacity of twelve times the stock subscription is adequate to take care of the suggestion you make?

Mr. MILLS. I did not want to bring that up. My own judgment was that that should be increased somewhat, but, of course, that only goes to the borrowing. It would be my suggestion that the matter ought to be left almost without limit as to the amount that an individual member desires to subscribe to the stock of the bank. In other words, if any institution desires to subscribe, limit it to 1 per cent of the stock of this bank; but if it later desires to borrow more, when it gets up to 12 times the stock subscriptions, let it borrow more, on condition that it purchase additional stock at that time, and apply the same ratio, and use the additional money that comes in for the purpose of retiring the Government's stock.

Mr. O'BRIEN. You do not think the bill now accomplishes that result?

Mr. MILLS. I do not believe it does, from my reading of it. I think there is a flat prohibition on any institution borrowing more than 12 times the amount of the stock purchased.

Mr. O'BRIEN. Yes.

Mr. MILLS. Is not the amount of the stock it may purchase limited to 1 per cent of the amount of the mortgages held by it?

Mr. O'BRIEN. That is the minimum amount of stock.

Mr. MILLS. It is not considered as being the maximum amount? Mr. O'BRIEN. No. That is its minimum, in order to become a member.

Mr. MILLS. As I read the act, I did not so construe it. I simply pass that suggestion on to you for what it may be worth, if anything. Senator MORRISON. We are very much obliged to you. Personally, I want to say to you that I think this country would be a greater and happier country if we had more bankers like you.