Mr. HALL. It is all a part of the provision here, Senator.
Senator COUZENS. It is provided here, you say?

Mr. HALL. It says that the current deposits and stock subscriptions shall be so invested. But I think, in all sincerity, that the security is just as good when all the assets are nonnegotiable as though particular deeds of trust were put up as particular security. I don't know of a bank that has ever lost a dime on money loaned to a building and loan association anywhere.

Senator WATSON. If you were a banker, would you be willing to loan money in that way?

Mr. HALL. Certainly. All the bankers in St. Louis and Kansas City do it, and they do it all over the United States where they have laws of this kind. It is not anything unusual. You can verify that by asking your bankers in your States.

Senator MORRISON. Well, there is not any place where they can rediscount that note.

Mr. HALL. No; there is not.

Senator MORRISON. There is not anywhere where that could be done.

Mr. HALL. That is true; they can not discount a note of a building and loan association, or any other obligation, that I know of. Senator MORRISON. And you think this ought to be amended so that building and loan associations, who can not pledge their securities, could borrow without depositing any security?

Mr. HALL. Yes; otherwise we will be at a disadvantage and unable to participate in the privileges provided in this bill.

Senator MORRISON. That is a very serious matter.

Mr. HALL. It is, Senator, to you when you first think of it. Senator COUZENS. It is outside of the provisions of the bill. Mr. HALL. It is. Because it comes as a surprise to you as it did to the bankers before they went into it. And if you are going to take 30 or 40 per cent of the building and loan associations out from under, you have that many less to operate under this act.

Senator MORRISON. I understand that. And in our State the credit of a building and loan association is all right, first class, as long as there is any way to handle the paper, until they reach the place where they do not want to get that paper rediscounted. And I think there will be objection to this point, and you will have to amend your State law instead of this.

Senator COUZENS. I think we will have to discuss that in executive session.

Senator WATSON. Yes. We are very glad to have the suggestion, Mr. Hall.

Mr. HALL. This amendment will give temporary and immediate relief and will apply only to the short-term 1-year loans. But it does affect the associations in a great many States.

Senator WATSON. Do you know how many?

Mr. HALL. I do not know offhand, but I think a great number. I think Michigan is one. The gentleman tells me Indiana is one. And I know Missouri and Illinois, and a number of those States are so affected, and have been working under those laws for many, many years. I just give it to you as a thought, that unless it can be done they can not come in. That is the only way it can be done; if you want to limit it to 42 months, that can be done.

Senator WATSON. Thank you very much for your statement.

AN AMENDMENT PRESENTED BY JOHN C. HALL, CHAIRMAN OF THE LEGISLATIVE COMMITTEE, MISSOURI LEAGUE OF BUILDING AND LOAN ASSOCIATIONS

"Amend S. 2959, section 9, subsection (i) by adding after the word 'prescribe,' in line 18, on page 21 of the printed bill, the following, advances with maturity not greater than one year made to members on the note or other obligation of the member but without collateral security of home mortgages or deeds of trust where the laws of the States under which such members are incorporated and transacting business require the funds of such members to be invested in nonnegotiable mortgages or deeds of trust."

The adoption of the above amendment or one similar that will in general accomplish its purpose will enable building and loan associations in the State of Missouri and in a number of the other States to participate in the general provisions as set forth in this act. Unless such amendment or one similar be adopted, building and loan associations in none of those States can participate under the proposed law in so far as the borrowing of funds from the Federal home-loan bank is concerned. The reason for such inability is because the State laws under which these associations are organized provide that the funds of such associations be invested in nonnegotiable deeds of trust or mortgages on real estate. In as much as the provisions of the proposed Federal home loan bank bill provide that loans be made to members on the security of home loan mortgages or deeds of trust which must be pledged directly to the home loan bank, these associations are prohibited from so doing on account of the above-mentioned provisions in their respective State laws.

Purpose of the amendment.-The purpose of the amendment is to enable associations in such States to borrow from the proposed Federal home loan bank by giving as security their notes or other obligations but without the pledging of individual deeds of trust or mortgages as collateral security.

The effect of the amendment on the general provisions of the act.-The funds to be furnished the home-loan bank are to be secured from two general sources: First, the purchase of stock in the bank or deposits that may be made by members. Second,, through the sale of debentures or bonds by the bank to the public or those who are not necessarily members. While the general presumption is that the greater part of the funds of the bank are to be secured eventually by the sale of its debentures or bonds, their salability will depend to a large degree on the character of the security behind them. A general practice in realestate lending business is to require a definite pledge of deeds of trust or mortgages as security, and it may be claimed that members' note or obligations not secured definitely by such pledges would offer a certain amount of sales resistThe amendment, however, will interfere in no way with the sale of bonds or debentures for the following reason:

ance.

The proposed amendment will be a part of subsection (i) of section 9 on page 21 of the printed bill, which makes particular reference to the investment of funds of the home-loan bank, not the funds secured from the sale of bonds or debentures, but only the funds secured by the sale of stock or the receipt of deposits from members. Subsection (i) provides that such funds as received from such sales and deposits shall be invested in: (1) United States Government securities; (2) interest-bearing deposits in banks or trust companies; and (3) advances made with maturity not greater than one year made to members. Building and loan associations in the States above mentioned would, therefore, under this amendment be permitted to borrow only for temporary purposes not greater than one year, and would not be permitted to participate in the longer time loans which will be made in part, at least, by the funds secured from the sale of bonds or debentures.

History and effect of such State laws.-The fundamental purpose of the nonnegotiable features of the various State laws was primarily for the protection of the investing and other shareholders and as a safety measure. Building and loan associations are not commercial organizations in the general accepted sense but are mutual institutions organized for the purpose of promoting thrift and encouraging home ownership. The nonnegotiable feature reduces to a minimum the chances of loss by reason of embezzlement or theft on the part of the managing officers, for the investments of the association are in nonnegotiable deeds which are of no value to any person except the association itself, and, therefore, can not be hypothecated, sold, or otherwise disposed of. The nonnegotiable feature also does away with the danger of pyramiding by

the hypothecation of assets, reborrowing, etc., to a more or less unlimited degree. Most associations in these States have certain limited powers to borrow money for legitimate purposes and have been able, generally speaking, to make the needed loans from the neighboring banking institutions upon the sole security of the note or other obligation of the association but without the deposit of deeds of trust or mortgages as collateral security. It is a general practice accepted as sound by these banks to make loans on this basis. They have done so for many years and are doing so at the present time, apparently satisfied as to the character of the security offered which is borne out by the fact that losses on such loans are practically unheard of in banking circles. In such loans under these conditions the bank is a creditor of the association and has preference over all shareholders for the reason that the relationship of debtor and creditor does not exist between the shareholders and the association. If this amendment be adopted the Federal home loan bank will be in a similar position. It will be a preferred creditor. It will have a prior lien over any shareholder. It will have all of the deeds of trust or mortgages as security for they are all nonnegotiable.

On the other hand, in loaning to an institution having its funds invested in negotiable deeds of trust or mortgages, the home loan bank would have the note of the borrowing institution secured by the pledge of specific deeds of trust or mortgages of twice the amount of the loan as collateral. In event such collateral was insufficient the home loan bank would share alike without preference, with all other creditors, including depositors and others. The remaining deeds of trust and mortgages, too, may have been hypothecated on additional loans to others which might further impair the assets. (Missouri Laws, Session Acts 1931, p. 155: "Such notice of withdrawal shall not, however, make such withdrawing shareholder a creditor of the association, but his status shall be and remain that of a shareholder.") (Missouri Laws, Session Acts 1931, p. 151, section 5597: "For every loan or advance made as aforesaid a nonnegotiable note or bond secured by first mortage or deed of trust on real estate, shall be given.")

Temporary or immediate relief to associations if amendment is not adopted.Immediate relief will be denied all these associations unless this amendment be adopted. It is true the provisions of the act provide that various State laws in conflict be amended so as to conform, but even this will not take care of the associations' requirements which are urgent at the present time. The Missouri Legislature and many others do not meet until 1933, and any changes in State laws would not become effective until the latter part of that year. Those States in which legislatures are now in session could not enact new laws, which would be effective, prior to late in 1932, and the most important phase of the Federal home-loan bank bill is its immediate relief where needed. With the adoption of this amendment such relief would be immediate, although of a temporary character, but would serve the purpose for which the bill is intended. The enactment of new laws or changes in existing laws in various State Legislatures is uncertain at its best for many bills of unquestioned merit are lost through a crowded calendar and from other causes. Then, too, many States may desire to continue the safety features of nonnegotiable provisions and may not care to make such amendments even though the provisions of this act could be made available thereby.

In a number of States deeds of trust and mortgages are assigned in a restricted way upon the approval of some State officers or departments and are acceptable to the lending banks. The nonnegotiable status, however, may not be clearly defined and might raise a question in the minds of attorneys representing respective purchasers of bonds or debentures. With the enactment of this amendment, however, all members whose funds are invested in deeds of trust and mortgages of a nonnegotiable character or even an uncertain nonnegotiable or assignment character are placed under subsection (i) wherein they would receive the benefit only of funds invested by members in stock subscriptions or deposits; the effect of the sale of bonds and debentures would be eliminated.

It is felt, therefore, that the adoption of this amendment would, first, enable the immediate participatiton in the provisions of the act by the greatest number of building and lean associations, therefore, making its effect more general; and, second, that its adoption will actually strengthen the bill by eliminating certain objections that may arise unless such is done. It is earnestly hoped, therefore, that the amendment be adopted for the above reasons. Immediate relief is needed and needed badly in many localities where the respective building and loan associations most earnest desire to take advantage of the provisions

of the home loan bank bill, but will be prevented from so doing under the bill as now written.

Senator WATSON. I am asked to put into the record a statement of Jay Morrison, president savings division, American Bankers Association.

Also a telegram from the Nebraska League of Savings and Loan Associations, T. L. Mathews, president.

Also a statement of the interim committee of the American Bankers Association. And I place them all in the record.

(The statements and telegrams are as follows:)

STATEMENT BY JAY MORRISON, PRESIDENT SAVINGS DIVISION, AMERICAN BANKERS

ASSOCIATION

PROPOSED FEDERAL HOME LOAN BANKS

(S. 2959; H. R. 7620)

The operation of the Federal home loan banks is not to be limited to periods of emergency. Subscribers to their stock are to be permitted to rediscount in the normal course of their business. If such rediscounts are made in normally good or prosperous times, it is difficult to see just how this plan would assist in periods of emergency. The Federal land banks, organized on a basis analogous to the Federal home loan banks, have found themselves powerless to assist their members during the current depression. At a time when farm-loan credit is severely restricted, the Federal land banks find there is no market for their bonds. They are now, and have been for more than two years, out of the farmloan market. It is unlikely that the case would be any different with the Federal home loan banks. If it shall appear that those banks have sold bonds during a period of prosperity, they will be unable to act as a reservoir of credit during a period of adversity. When a depression comes, bonds simply can not be sold.

The plan is based on two assumptions; first, that there is now, and has been, a lack of credit facilities for real estate mortgages on homes; secondly, that there is a present shortage of residential property. The experience of savings bankers and building and loan company managers is such as to cast doubt on the validity of these two assumptions. Most savings bankers and mortgageloan men are of the opinion that residential property is now suffering from an excess of credit enjoyed during good times. They believe that real estate has had far too much credit. Most cities in the United States report an excessive supply of residential property. We are overbuilt rather than underbuilt. Home ownership suffers not from a lack of supply of homes or a lack of credit for purchasers or occupants of those homes. Residential property to-day suffers from a lack of demand for the property by purchasers who have ability to pay for it. Those persons who have homes on which they owe borrowed money do not lack more ways to borrow. They lack the means to pay the debts they have already incurred.

Sound savings bankers always oppose the borrowing of money by savings banks except in periods of emergency. Emergencies arise when it is necessary to pay depositors during a run. The borrowing of funds by savings banks means the deposit of collateral with the lender to secure the loan. The deposit of collateral gives the lender a prior or preferred claim on all or a portion of the assets of the bank. When such a loan is made, the funds left with the bank by its depositors are used to margin the loan. The depositors are thus relegated to the position of deferred creditors. Deferential treatment of depositors may be excusable in emergencies but its practice in normal times is dangerous. Savings banks and building and loan associations should be prohibited from borrowing money except for short times and then only to meet an emergency. They should be prohibited from making any new loans or investments while they owe borrowed money. If the Federal home loan banks are permitted to lend money to members during normal times, we may be assured of a very large increase in real estate credit, with consequent competition in loans and appraisals, with ensuing increase of excessive construction of residences and the ultimate collapse of the market.

If the bonds of the Federal home loan banks are to be valid security for the deposit of Government and postal funds, there may well result an expansion of the currency. That inflation is not direct; it is indirect. Nevertheless, it is imminent in the plan.

At the present time, United States Government bonds are a legal basis for the issuance of notes by the Federal reserve banks. These notes circulate as money. The Federal reserve banks may issue the notes against United States Government bonds acquired by them in either of two ways: Firstly, they may purchase the United States Government bonds in the open market, using their own notes to pay for the bonds purchases; or, secondly, they may issue their notes to member banks as loans against the deposit of United States Government bonds by the borrowing bank with the reserve bank. So long as the Federal reserve bank maintains its legal reserve of 40 per cent gold against outstanding notes, it can continue to issue currency to finance loans against United States Government bonds as collateral.

The bonds of the Federal home loan bank will not be legal security for the issuance of Federal reserve notes, but since the plan makes the bonds of the Federal home loan bank acceptable as security for United States Government deposits, it will merely be necessary for the Treasury to sell United States Government bonds and deposit the money with United States depositaries. The steps, therefore, by which these bonds could be used to effect an inflation of the currency are as follows:

1. The United States Treasury may issue its bonds.

2. It may deposit the proceeds thereof in United States depositary banks. 3. The depositaries owning the bonds may sell them to the Federal reserve bank which may issue to the depositary in payment therefor Federal reserve notes to purchase debentures of the Federal home loan bank.

4. Those debentures of the Federal home loan bank will be acceptable security for the United States Government deposits held by the bank.

By going through these four steps, it will be seen that the currency can be inflated by just the amount of United States Government bonds issued to finance a Government deposit to be secured by Federal home bank bonds.

The income now received from the mortgages held by corporations or individuals is generally taxable under the Federal income tax law. If the Federal home-loan bank is formed and proceeds to operate, its member banks will borrow from it and have to pay interest to it. That interest will be deductible from their gross income in the calculation of their taxable net income. The Federal home-loan banks themselves and the bonds issued by them will be exempt from taxation. If a real estate mortgage loan concern, bank, or trust company now issues bonds secured by collateral, the interest on those bonds is taxable income. If, after the creation of the Federal home-loan bank, the loan companies, banks, or trust companies issue bonds against their real estate loans as collateral, using the Federal home loan bank as a vehicle for such issuances, then the income from those bonds will become tax exempt.

The organization of Federal home loan banks will result in a new source of tax exempt bonds. The income from mortgages to be pledged as collateral to the Federal home loan bank bonds is now taxable. The income from the Federal home-loan bank bonds will be tax exempt.

To summarize, the plan for Federal home loan banks is based upon dubious assumptions of a shortage of real-estate credit and a shortage of residential property. The plan will be conducive to unsound banking in permitting savings banks and building and loan associations to borrow money in the normal course of their business, thus using their depositors' money to margin a larger volume of financing. It will be inflationary through its call upon the United States Treasury for a portion of the initial capital of the banks, and through the issuance of bonds as security for public and other moneys. It will increase taxation because it will relieve from taxation some income from mortgages, which is now taxable. It will not prevent a recurrence of collapse of real-estate credit because when a credit crisis arises the Federal home loan bank will be unable to sell bonds just as the Federal land bank is now unable to sell its bonds.

The plan has been devised with an earnest desire to find a way out of one of the most serious depressions ever encountered by the American people. Like most other plans to extricate us from our difficulties, it is based upon a further extension of credit. America is now suffering from an excess of credit rather than from a deficiency of credit.