of such an institution or system and it will draw sufficient support from the home financing institutions to pay the bill or costs of 'maintenance.

Senator WATSON. Just a moment. We are compelled to go to the Finance Committee on an important matter.

Senator CoUZENS. We will be back in a short time.

Senator WATSON. It won't be very long.

(The committee recessed to attend to other duties, and upon reconvening the following further proceedings were had:)

Senator WATSON. Please finish your statement, Mr. Bodfish. Mr. BODFISH. I will be very brief. Senator Couzens raised a question about the "deposits" in these 12 banks by member associations. It would seem that a member association or institution should be privileged to use its own home-loan bank, to which it belongs, to build up modest balances for the retirement of loans, and possibly to keep a modest deposit there for emergency purposes in addition to the funds they keep in their commercial banks. All other banking functions are neither denied nor permitted in this bill.

Now, the question the Senator raised regarding the interest on those deposits in relation to Government bonds is partially answered, I think, by the fact that the bill provides that those deposits can only be invested in two ways by the 12 banks: The one, in United States Government securities; the other, in short-term loans to the members of the system, which merely carries out the form of cooperation and pooling of funds that the whole system is designed to facilitate.

Senator COUZENS. Did I understand you to say something about these banks which "we" own?

Mr. BODFISH. No; I don't think so.

Senator COUZENS. Will you read the answer he gave?

(The reporter read as follows:)

Senator Couzens raised a question about the deposits in these 12 banks by member associations. It would seem that a member association should be privleged to use its own bank

Senator COUZENS. He did say that, "own banks"; "we are to be permitted to deposit in our own banks." I am perfectly agreeable to that, but as I read this bill it is going to be the Government's banks for a long time because we are going to put up the capital; when I say "we," I mean the Government. So how do you make it your banks?

Mr. BODFISH. We look to the early retirement of the Government, and I think the bill is built on the plan that the members who are participating will put in the capital and take the responsibilities as time goes on.

Senator COUZENS. Would you be willing to have this organization set up with the interested parties supplying all the capital?

Mr. BODFISH. Yes; but I do not think it could be done quickly enough to take care of the present situation.

Senator COUZENS. So the real demand is the present situation? Mr. BODFISH. Yes; coupled with the need over a long time for such an institution, It will take care of two things: The present emergency, which is very real, and then the need to have this sort of an institution to take care of the varying conditions that will come in the future.

Senator COUZENS. Would you be willing to have a provision in this bill that the Federal Government will draw all its capital within a 2-year period or a 3-year period?

Mr. BODFISH. No because such a short set period would affect the sale of the bonds, but the Government should withdraw within any period in which the banks have an opportunity to get functioning satisfactorily and an ample opportunity to bring in the home financing institutions.

Senator COUZENS. Do you not think it would be a good means of inspiring private interests to get back of their bank if the Government should withdraw its capital at an early date?

Mr. BODFISH. I think that is desirable except this: If you put too sharp a provision in the bill it may hamper your intitial sale of bonds, which is very important in getting the system started.

Senator COUZENS. Then, you would be perfectly willing also to adopt the procedure of the Government getting 4 per cent on its capital stock before it is withdrawn?

Mr. BODFISH. I would not say that, Senator, for this reason: I see no reason why the Government should not take the same attitude in creating this system which is to help the home financing institutions for city people that it has taken in connection with the system that is created for the farm lending institutions and for the general banking institutions.

Senator COUZENS. I think that you missed the point.

Mr. BODFISH. I am very sorry.

Senator COUZENS. In the case of the Federal reserve, that was created to expedite commerce.

Mr. BODFISH. Yes.

Senator COUZENS. The loans are automatically liquidated. They are self-liquidating. The farm land bank bill was proposed for productive purposes; that is, the land on which we lend the money is used to produce foodstuffs. I see a clear distinction between those two activities and the Government engaging in capital investments. Certainly a home is a capital investment; I mean that that is not a producer unless the production of families may be included in the category; but certainly it is not producing commodities and it is not aiding commerce in the same sense that the Federal reserve and the Federal land banks do. I just want to make that distinction because I think there is a distinction.

Senator WATSON. My recollection is that the Government never did put a dollar into the Federal Reserve System. I am just not clear on that.

Are you willing to have the Government pay some interest on its deposit there or on its capital?

Senator COUZENS. Mr. Bodfish said not.

Senator WATSON. And are you willing to have that interest paid before any dividends are paid?

Mr. BODFISH. If interest is paid I think it can be paid ahead of dividends to members. However, I think it would be wise from the viewpoint of getting the system into early operation and having it popular, if the participating members could be assured of some earnings from the outset. For example, the building and loan associations always operate on very, very narrow margins, they are very reticent to place capital in an institution which they can not have

some return on. You know, there is a very full distribution of earnings and the spread is very narrow, approximately 1 per cent, out of which they pay all expenses and create reserves.

Senator WATSON. You feel that if this system is set up it will work? Mr. BODFISH. Personally; yes, sir.

Senator WATSON. Successfully?

Mr. BODFISH. Successfully; absolutely, in my personal opinion. Senator WATSON. And be profitable?

Mr. BODFISH. Reasonably profitable; sufficiently to sustain the 12 banks in their normal operations. I don't think it would be the source of great profit at all.

Senator WATSON. Do you look upon it as purely an emergency proposition or as permanent in character?

Mr. BODFISH. It will fill both an emergency need and also a permanent need.

Senator COUZENS. Have you any idea what the securities of these banks would sell for?

Mr. BODFISH. It is my opinion that they would sell at their par or above, at least at their price of issue, and probably remain so, because you have about four times the amount of home mortgages on real estate behind each dollar of bond issue; and we feel that that would make one of the primest bond investments possible; experience with the land bank of the State of New York, which is a State organization of somewhat similar character and which has been functioning for 18 years, bears that out.

Senator COUZENS. Would you tell us what effect you think it would have upon these bonds if we removed the tax exempt feature?

Mr. BODFISH. I doubt if they would find as active and quick a market as they would find if tax exempt. It seems to me these bonds must be so prime and so desirable that when the time of need comes they will find a very ready and a very immediate market. As you have noted I do not feel that the system as set up is designed for major real estate or credit expansion, because the power to borrow, and therefore the power to issue bonds is rigorously limited. Senator COUZENS. Have you anything else?

Mr. BODFISH. There are one or two points I would like to present. In the section dealing with the character of home mortgages which may be permitted for collateral, page 15, section 8, item 2b, I think the intent was to deal with the unpaid principal rather than the principal sum.

Senator WATSON. What line is that?

Mr. BODFISH. Line 19 on page 15. The present language would exclude any mortgage whose original amount was in excess of $15,000, and I think the intent was to permit mortgages to be used as collateral in which the original sum may have been $30,000 at the outside.

Senator COUZENS. That is the point that was raised the other day. That is the point I object to because of the fact that it endangers the Government and this agency in making loans on homes that might have cost a million dollars, for example. That was not the intent of the proponents of this legislation, that this should be a means to use for the building or maintaining of expensive homes. In other words, it was my view that the limit ought to have been $10,000 instead of $15,000, that it was the viewpoint of one prominent official that it ought to have been $20,000, and the other was a sort of compromise

figure arrived at of $15,000, and it was never intended, so far as I could understand the authors of this proposition, that we should ever participate in lending money on any home that cost more than $30,000.

Mr. BODFISH. That is true, I think.

Senator COUZENS. If you propose to lend on a house that cost $100,000 just because it is down to $15,000, you would be getting away from the principle which was back of this bill.

Mr. BODFISH. There is no objection to it being limited to $30,000 mortgages as long as the unpaid balance could be used as collateral, and there would be frequent occasions when very desirable pieces of collateral approaching this amount would come in. For example, a person buys a two or three family house. He lives in one half and rents the other half. Often those are valued at fifteen, twenty, or twenty-five thousand dollars, and they are a very desirable type of home ownership.

Senator COUZENS. This bill was not originated for the purpose of creating investments for the person who owns the other half of a 2-party apartment house. This bill, as I understand it, is inspired to encourage home building, not for investment but for home use.

Mr. BODFISH. That is true. Do you not feel, Senator, that the 2-family house which has the owner living in one-half of it is a desirable type of home ownership and the type that should be encouraged? Senator COUZENS. I think it is, but the question is whether we should advance money to make investments for the man who puts it up.

Mr. BODFISH. I would like to submit a memorandum dealing with that particular intent of the language.

Senator WATSON. All right. Give it to Mr. O'Brien.

Mr. BODFISH. I think that is all, Mr. Chairman, unless there are further questions.

Senator WATSON. Do you want to ask him any other questions, Senator?

Senator COUZENS. Have you seen a memorandum prepared by the United States Building and Loan League-that is your league? Mr. BODFISH. Yes, sir.

Senator COUZENS. And is Mr. William E. Best your president? Mr. BODFISH. Mr. Best is our president.

Senator COUZENS. Did you see a memorandum he has made up and sent to me, dated December 24, 1931?

Mr. BODFISH. I did, Senator.

Senator COUZENS. Have you covered those features in your argument?

Mr. BODFISH. Those amendments or features have been embodied in the redraft of the bill.

Senator WATSON. Do you want to ask him any questions? If not, we will recess now until 2 o'clock.

(Whereupon, at 12.10 o'clock p. m., a recess was taken until 2 o'clock p. m.)

98195-32- -7

AFTERNOON SESSION

The subcommittee resumed its session at 2 o'clock p. m., at the expiration of the recess.

Senator COUZENS (presiding). The committee will come to order. The gentleman who was here this morning who wanted to testify will please come forward and take the witness stand.

STATEMENT OF JAMES A. DEVINE, SECRETARY OF THE OHIO
BUILDING ASSOCIATION LEAGUE, COLUMBUS, OHIO

Senator COUZENS. Will you give the reporter your full name?
Mr. DEVINE. James A. Devine.

Senator COUZENS. And your address and what your occupation is. Mr. DEVINE. I am secretary of the Ohio Building Association League, Columbus, Ohio.

Senator COUZENS. You may proceed with any statement you choose to make.

Mr. DEVINE. First, Mr. Chairman, I would like to clear up some statements with reference to the Ohio Building Association League, a statement which was made in this meeting that our $1,200,000,000 are assets that are absolutely frozen.

And, further, that our depositors were making their deposits without knowing what they are doing.

Thirdly, that the Ohio building associations do not create a reserve. And I want to state that under the Ohio law we have to place 5 per cent in the reserve, which is built up and that we can have and call upon in the case of a loss. The very first of the year, we had over 1,000,000 stockholders and depositors, we had 465,000 borrowers, showing the magnitude of the business so far as the people are concerned.

Last January we had 809 associations functioning. This year we have had five liquidated, four of them by reason of defalcation. Three of the defaulters are in the penitentiary, and another committed suicide, and the other association is being liquidated voluntarily. The total amount of that liquidation involved $6,000,000, and a few dollars over.

Senator COUZENS. Will there be any loss sustained by reason of these liquidations?

Mr. DEVINE. There will be a loss on the defalcations, unless we can recover fully on the bonds. Due to the present condition of the bonding companies, on account of general conditions, it is doubtful how much can be recovered on the bonds.

Senator COUZENS. I did not have particular reference to those who were liquidated by reason of fraud; but for other reasons.

Mr. DEVINE. We have only one that is being liquidated voluntarily. Senator COUZENS. And in the case of that one, will there be loss by reason of the liqudation?

Mr. DEVINE. That will pay 100 cents on the dollar to depositors. You will remember we are the only State in the United States where we have special deposits in our institutions.

Further, the records will show that, in competition with the banks, State and national, we are paying a rate higher than is true in some States, but are on a par with many of the banks in many of the States, and in Ohio, which are paying 5 per cent.