of existing homes and the security of mortgages of savings institutions invested therein, in our opinion. We are in an emergency. I have no fear of the return of prosperity in this country. I have no objection to the establishment of this institution if on a basis of liquidity, even though it is to continue beyond the present emergency, but I do fear the expansion and development features of this legislation. I think they are uneconomic.

I want to call one other point to your attention. This is so, certainly, that inasmuch as the building and loan associations, the homestead associations, and cooperative banks themselves, and the insurance companies which can be members, have real need for liquidity, the controversy with respect to this bill could be removed if that was done was to promptly pass a bill

Senator WATSON. That can not be done.

Mr. WARREN. I mean, Senator, for the purpose of supplying the credit relief which is immediately needed for liquidity purposes, and to take the time to develop an expansion program by the time that will be needed. In our State, we have one thing which I wish to speak of. We are about to pool liquid reserves, I believe, under legislation which is about agreed to between the commissioner of banking and insurance and the building and loan associations of the State, for the purpose of supplying liquidity, mobilizing reserves, and supplying liquidity to our building and loan associations. It is to be a State agency, and under the complete control of the commissioner of banking and currency.

Because of the large withdrawals, it is doubtful as to whether or not that will be able to take care of the liquidity requirement of the savings shareholders in our State, and assist the banks by the repayment of our bank funds at the present time. There will be a draft which I understand has been revamped by your legislative counsel, which does not meet the needs of the situation, because our central agency is not going to accept mortgages as collateral under the present set-up. We are going to have our deposits preferred in the banks. Our loans to associations are going to be preferred in case of insolvency of associations, and we are to have, I believe, the ability of the central institution to assess an additional 2 per cent in the event that there is a failure of the institution to pay its obligations. So that there will be back of the institution not only its assets, but an assessable feature of at least another $25,000,000.

It seems to me that because of that purpose which we have, that institution should be permitted, if this bill is passed for the purpose of providing liquidity for existing institutions-there should be a provision which will enable that State agency of New Jersey, in which will be the pooled reserves of our 1,565 associations, to tap this credit source without putting up mortgage collateral, because of the quality of the notes which our State agency will issue when borrowing money. They are backed, you see, by the mortgage equities of the associations with $1,250,000,000 assets.

I do not want to take up the time to go into the details of the structure, because you have so many people here, but I do want you gentlemen, if you could be so kind, in the interest of our shareholders, to give that subject real consideration when we submit our memorandum.

Senator TOWNSEND. Are we to understand that you are not in favor of this bill in its present form?

Mr. WARREN. No, sir.

Senator TOWNSEND. You have some suggestions to offer which you will offer later?

Mr. WARREN. Yes, sir. I may say to you sir, that I understand that in the last few days there has been a meeting of the savings and loan representatives in New York, and that they, as a State, are opposed to this legislation as drawn.

Senator TOWNSEND. Do you think it should be set up as an emergency measure, or as a permanent institution?

Mr. WARREN. I have no objection if it is set up as a permanent agency, Senator, but I think the ability to use the funds for the making of new mortgage loans is not a thing which you need to decide at the present time, and that should be left out of the bill. Later, when there is need for the development of more homes, we can take care of that. The difficulty in America to-day is that the mortgage interests own too many homes which they will sell cheap. They will sell them cheaper than new homes will cost to construct.

Mr. ADAMS. Mr. Chairman, I made a statement this morning. If I may, without trespassing, I would like to add just a few words to what I said, and then be excused.

Senator WATSON. That will be all right.

Mr. ADAMS. I made a statement this morning that there was not a dollar's worth of relief or help in this bill, as it would work out, for the home owner. In support of that, I want to submit this proposition to all the gentlemen who think there is any help in the bill for the present home owner, or the man who wants to buy a home, already built, or the man who wants to build it.

This Federal bank must secure its funds by going into the market and selling bonds. I think it will be conceded that those bonds must at this time carry at least 5 per cent interest. That will compel a charge of 512 or 6 per cent to the building and loan association or bank that borrows of the Federal so-called discount bank, and no bank or building and loan association can afford to pay 6 per cent interest for money, and put up $2 for one, in the best securities they have in their portfolio, except they are in distress, like the gentleman from Pittsburgh, who owes the bank $70,000, and is using every dollar to pay off that loan, and not one to relieve a distressed home owner.

No bank will borrow upon those terms to make new loans to its

customers.

One thing more. No system of this kind can function profitably unless it can secure money to loan at less than 5 per cent.

They have compared it with the Federal reserve system. The Federal reserve system gets its funds for reloaning to its members in the deposits it requires of its members, and the issue and circulation of Federal reserve notes to the extent of $2,500,000,000, and if it were not for the privilege of circulating those reserve notes, the Federal reserve bank could not help its member banks in normal times, or at any other time, except in periods of distress and emergency.

Unless some provision can be written into a law of this kind that will admit of securing the funds necessary to loan to these borrowers at less than the market rate, it can not function because it provides for the loans through the local banker and the local building and loan association.

One thing more. A plan which I have submitted this morning will make it profitable for the local bank and the local building and loan association to deal directly with their own facilities in making a man a loan on his home; and they are the best men in the world to deal directly with the home owner.

Senator WATSON. You say you submitted an amendment to the bill?

Mr. ADAMS. A suggestion. I have not submitted a formal amendment.

Senator WATSON. Suppose you put it in the form of an amendment, and we will consider it.

Mr. ADAMS. I could not put it in any other form except as a substitute bill, Mr. Chairman, because there is no comparison between the bills except in the formation of the Federal board. The capitalization is different and everything else is different.

I want to thank this committee for the privilege of addressing you.

Senator WATSON. You think these bonds could not be sold for less than 5 per cent now on the market?

Mr. ADAMS. I doubt if they can be sold for that. If they can be sold for less than 3 per cent there is not a chance on earth to make loans to the borrowing banks and building associations at a rate that will induce them to borrow the money to buy these excessive securities for the purpose of getting money to make new loans to help out home owners.

Senator WATSON. What is your idea about the 60 per cent clause? Mr. ADAMS. Which one? Sixty per cent of the value of the property?

Senator WATSON. Yes.

Mr. ADAMS. If the property is appraised properly and the mortgage is limited to not more than 60 per cent of the appraised value a loan can be safely made up to 80 per cent of the balance due on the mortgage if it does not exceed 60 per cent of the actual value of the property, correctly appraised, provided it is properly amortized. Senator WATSON. We are much obliged to you. (Witness excused.)

STATEMENT OF JOHN F. SCOTT, PRESIDENT MINNESOTA BUILDING & LOAN ASSOCIATION AND CHAIRMAN OF THE LEGISLATIVE COMMITTEE OF THE MINNESOTA LEAGUE OF BUILDING, LOAN & SAVINGS ASSOCIATIONS, ST. PAUL, MINN.

Senator WATSON. Where do you live?

Mr. SCOTT. St. Paul, Minn. I am president of the Minnesota Building and Loan Association and chairman of the legislative committee of the Minnesota League of Building, Loan, and Savings Associations.

Senator WATSON. How long have you been in this business?

Mr. SCOTT. Ten years. Not for the purpose of bringing out prior servitude, but as a background for the expression of my own opinion on the subject of this proposed legislation, I would like to say that prior to that time for eight years I was general counsel of the Federal Land Bank of St. Paul, the largest of the farm loan banks, and prior to that assistant in the attorney general's office in St. Paul. Senator WATSON. How many building and loan associations do you represent?

Mr. SCOTT. There are at the present time 79 associations functioning in the State of Minnesota.

Senator WATSON. In the whole State?

Mr. Scort. In the entire State; yes.

Senator WATSON. What is their present condition?

Mr. SCOTT. Their present condition, so far as the payments on their home loans is concerned. is better than it was a year ago. Senator WATSON. How do you account for that?

Mr. SCOTT. I attribute it to the fact that Mr. American Citizen to-day is not thinking of a new automobile, a new electric washing machine or a new radio or matters of that sort, which a few years ago were considered necessities but are now regarded as luxuries. He writes out his check on the first of the month on his building-andloan mortgage.

The situation as far as withdrawals are concerned is about 60 per cent stronger than it was a year ago. I can safely say that.

That, as Judge Warren stated, is due to the conditions of the time and the necessity that many persons feel, not because of a lack of confidence in the building and loan association as a medium for their investment, but they must recapture some of their savings.

Senator WATSON. You have read this bill, of course, the last draft of it?

Mr. SCOTT. I have, Senator.

Senator WATSON. What is your opinion and why? Give us your statement on the whole subject as you see it.

Mr. Scorr. I have just sketched off a few points, Senator.

As this measure has been proposed by the President in his relief program, I am reluctant to oppose it, but I do so in order that the record may be kept clear, as I feel it is my duty to point out wherein it will not fulfill the purpose nor attain the objectives that the sponsors desire.

The associations in Minnesota and the Northwest need no relief legislation, but if they did, this measure would not afford it. If we needed such relief, the passage of this legislation would be like sending a pulmotor to a drowning man by freight. At this time permissive legislation is necessary in most States of the Union before building and loan associations can qualify as members of the system and be entitled to avail themselves of the borrowing privileges. Senator WATSON. Tell us why.

Mr. SCOTT. For instance, in our own State and all of the Northwestern States and in many other States in the country, a building and loan association has no legal right to assign or hypothecate its mortgages as collateral. It can only borrow by using its own unse

cured note. That would mean that in our own State it would be necessary to wait until the next session of the legislature a year from now if some of the associations desire to avail themselves of the benefit that they see in the system, assuming that this legislation. were enacted into law. It would be necessary to amend our laws to provide that the hypothecation of their securities would be perfectly legal. And in many States of the Union that is the situation. In some of the States there is grave question with regard to the provision that during the first 42 months of the functioning of the act a building and loan association situated in a State where the law will not permit it to buy stock in any corporation it would be just as acceptable for the association to pay for its stock by putting up bonds or securities or cash to be entitled to participate in the system. There is a grave question in some of the States that a building and loan association can even do that, that it would be investing its money for the time being in a Federal corporation and depositing its money away from home.

Consequently, it would take at least three years before the necessary legislation could be secured from the various State legislatures. This would mean that the benefits of the act would be postponed for over three years. Any measure whose benefits accrue after three years can not be put in the emergency class.

We, in the Northwest, believe that if it is to be regarded as emergency legislation, so far as the building and loan associations are concerned, we could not avail ourselves of the benefits of the act for a 3-year term, and some one has an entirely different idea of the length of this so-called depression from what we have.

The general outline of the act follows that of the Federal reserve bank act, with this fundamental difference, that there is in the pending bill no authority to bring in the instutions listed as eligible to membership.

When the Federal reserve act was passed I believe I am correct in stating that it took at least two years before it was successfully on its way. But under the Federal reserve act you already had Federal units in existence by way of your national banks who were compelled to join the system whether they wanted to or not. In this particular case you have no such Federal units or any units. in existence over whom you have authority to insist that they join the system. There are existent at this time none of these Federal units which can be compelled to join.

Consequently, the number of financial institutions eligible to membership who would join is problematical. The passage of this bill would be comparable to the building of a department store on a country crossroad without visible assurance of any customers.

A canvass of the larger concerns convinces me that there is no demand for legislation of this character. The machinery provided in the pending bill will cost a lot of money. In this period we are economizing. Why create another spending agency, or tax-eating bureau? We could get along as well without it.

Senator WATSON. Your building and loan associations are not now distressed?