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The immediate credit situation has for the time being in many parts of the country restricted severely the activities of building and loan associations, deposit banks, savings departments, savings banks, and farm loan companies in such a fashion that they are not only not able to extend credit through new mortgages to home and farm owners, but are only too often unable to renew mortgages or give consideration to those in difficulty with resultant great hardships to borrowers and a definite depreciation of real-estate values in the areas where such pressures exist.

A considerable part of our unemployment is due to stagnation in residential construction. It is true there has been some overbuilding in certain localities in the boom years. But even in these localities the inevitable need is obscured by the tendency of the population to huddle temporarily due to unemployment. The real need steadily accumulates with increasing population and will become evident and insistent as we come out of the depression. The high importance of residential construction as a matter of employment is indicated by the fact that more than 200,000 individual homes are erected annually in normal times, which with initial furnishing contribute more than two billions to our construction and other industries. This construction has greatly diminished. Its revival would provide for employment in the most vital way. As a people we need at all times the encouragement of home build and many such undertakings are only possible through an opportunity to obtain long-term loans payable in installments. It is urgently important, therefore, that we provide some method for bringing into continuing and steady action the great facilities of such of these great national and local loaning concerns as have been under pressure and should provide against such difficulties in the future.

The farm mortgage situation presents many difficulties to which this plan would give aid. I have consulted with representatives of the various groups granting credit on mortgage loans for the home and farm as well as Government officials and other economic agencies, and as a practical solution from the various needs and the various ideas advanced I propose the following general principles for the creation of an institution for such purpose:

(a) That there be established 12 home loan discount banks (if necessary), one in each Federal reserve district, under the direction of a Federal home loan board.

(6) The capital of these discount banks shall be initially of minimum of five to thirty million as may be determined by the Federal board upon the basis of the aggregate of such mortgage loans and probable needs of the particular district.

(c) The proposed discount banks to make no initial mortgages but to loan only upon the obligations of the loaning institutions secured by the mortgage loans as collateral in order to assure and expand the functioning of such institutions.

(d) Building and loan associations, savings banks, deposit banks, farm loan banks, may become members of the system after they have satisfied the conditions of qualifications and eligibility that may be fixed by the Federal board.

(e) The mortgage loans eligible for collateral shall not exceed $15,000 each and shall be limited to urban and farm property used for home purposes.

() The maximum amount to be advanced against the mortgage collateral not to exceed more than 50 per cent of the unpaid balance and unamortized or shortterm mortgage loans and not more than 60 per cent of the unpaid balance of amortized long-term mortgages, and no advance to be made on any mortgages where interest, taxes, or amortization payments are in default. Such loans are to be made on the basis that there are sound appraisals of the property upon which such mortgages have been made. In other words, given sound appraisals, there will be advanced in the case of short-term or unamortized loans 25 per cent of the appraisal, and in case of amortized long-term loans 30 per cent of the appraised value of the property.

(9) The discount banks as their needs require from time to time to issue bonds or short-term notes to investors to an amount not to exceed in the aggregate twelve times the capital of the issuing bank. The bonds of these discount banks would be thus secured by the obligations of the borrowing institutions, the mortgages deposited as collateral against such obligations and the capital of the discount banks. These bonds to be acceptable for security for Government and postal deposits and might be considered free of normal income taxes. The result would be a bond of high grade as to quality and security.

(h) If the aggregate initial capital of the discount banks should in the beginning be fixed at $150,000,000 it would be possible for the 12 banks to finance approximately something over $1,800,000,000 of advance to the borrowing institutions.

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(i) It is proposed to find capital for the discount banks in much the same way, in so far as is applicable, as the capital was found for the Federal reserve banks, that is, that an organization committee in each district should first offer the capital to the institutions which would participate in the service of the bank. And as was provided in respect to the Federal reserve banks, if the initial capital is not whollý thus provided, it should be subscribed by the Federal Government; and as was provided in the case of the Federal land banks those using the facilities of the discount banks should be required to purchase from time to time from the Government some proportionate amount of stock it becomes necessary for the Government to subscribe. In this manner any Government capital will gradually pass over to private ownership in any event.

The above methods of erecting the institution are put forward as suggestions in order to give clarity to the central idea rather than as fixed details. The whole plan would necessarily be subject to the action of Congress and many parts of it will need development upon exhaustive consideration.

This proposed institution does not in any way displace the National Credit Association which occupies an entirely different field of action.


COUNSEL Senator Watson. We will ask the assistant legislative counsel to describe the bill.

Mr. O'BRIEN. Mr. Chairman and Senators: At the request of Mr. Luce's subcommittee the office of the legislative counsel was called in consultation with the idea of redrafting Mr. Luce's bill, which is exactly the same as S. 35, which Senator Watson introduced. There were drafted in the office of the legislative counsel certain changes which were suggested, and we had consultations with Mr. Luce, incorporating suggestions which he made as to the improvements in the bill.

I might point out what was done.

The bill has been reorganized to a certain extent, some definitions have been inserted, and other improvements made as far as drafting is concerned.

I might go through the bill section by section, indicating the most important features of the bill, if that would be enlightening to the committee.

The first important section is that which deals with definitions. I might point out in that connection that in section 2, subsection (4), a member, in the sense of an institution which is capable of taking advantage of the benefits of this act, is defined to mean an institution which has subscribed for stock in this new bank, as well as an institution which has put up security to become a member of the bank in cases in which State laws do not permit, say, a savings bank or a building and loan association to subscribe for stock of such a bank.

Senator COUZENS. Will the witness please tell us what page he is referring to?

Mr. O'BRIEN. Page 2, line 3.
Senator WATSON (reading):

The term “member” (except when used in reference to a member of the board) means any institution which has subscribed for the stock of a Federal home loan bank, and includes any institution which has, in lieu of subscribing for stock, deposited cash or securities, as authorized in section 5 (e).

Senator COUZENS. In that connection, will the witness tell us in just what way section 5 (e) relates to this?

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Mr. O'BRIEN. Section 5 is a section which relates in general to subscriptions for stock in the new banks that are to be created under this act. There are two ways provided in that section by which, say, a building and loan association or a savings bank may become eligible to get loans from this new bank. First, if the institution is authorized under the laws of its State to purchase stock which will be issued by this bank, the institution purchases a certain amount of stock, and thereby becomes eligible to apply for advances from the new bank.

Senator WATSON. Tell us about the establishment of the new bank-what it is.

Mr. O'BRIEN. The proposal is that a board be created, which is appointed by the President by and with the advice and consent of the Senate. This board will divide the United States into 12 districts, and in each one of those districts a bank will be established under this act.

Senator Watson. Do they correspond to land-bank districts?

Mr. O'BRIEN. No; the board is left free to determine the districts themselves.

Senator TOWNSEND. How many members are to comprise the board?

Mr. O'BRIEN. I think five.
Senator WATSON. Five in the old bill.

Mr. O'BRIEN. The number of members of the board has not been changed.

This board is to establish 12 districts in the United States, in each of which districts there is to be one of these banks. The bank is to be located in the city which the board designates, and the bank is to have in its name the name of the city in which it is located. No State is to be divided for the purposes of districting. The districts are going to follow State lines. I might point out that the provision includes Alaska and Hawaii, so they might be in one district, too.

The board as soon as possible under the act will establish these banks by opening books for subscription to the stock of the bank in each district. Institutions which are capable of taking advantage of the benefits of this act are to be able to subscribe for that stock.

Senator COUZENS. Before you go into that, do I understand that it is mandatory to establish the 12 locations, whether they may be needed or not?

Mr. O'BRIEN. I understand it is; yes.
Senator Watson. That is my understanding:

Senator COUZENS. In other words, whether there is a district that wants or has a need for such a bank, it must be established for the purpose of securing stock subscriptions?

Senator WATSON. Yes. Those are the terms of the old bill. I never saw this new bill until this morning.

Mr. O'BRIEN. The policy in that respect has been carried out in this new bill. We have not touched anything of that sort.

Senator WATSON. The Government has no stock in this institution?
Mr. O'BRIEN. Yes.
Senator WATSON. How much stock has the Government?

Mr. O'BRIEN. The Government subscribes not in excess of $150,000,000 for all the 12 banks; but the Government only subscribes the amount of the minimum capital established by the board which has not been subscribed at the end of 30 days.

Senator COUZENS. In other words, the board of directors for these Federal home loan banks must secure adequate quarters, enter into a lease, buy a building or what not, and establish itself before it commences to get stock subscriptions. Is that correct?

Mr. O'BRIEN. That is not altogether true. The procedure is that they establish the bank, they establish the legal fiction in each one of these 12 districts, and then open books for stock subscriptions.

Senator Watson. They get a home, a place to do business.

Senator COUZENS. And then, if there are inadequate stock subscriptions, is the bank required to proceed in any event?

Mr. O'BRIEN. Yes; the theory is that the banks are going ahead. If the amount of stock subscriptions by subscribers other than the United States does not equal a certain sum fixed by the board, the United States will put up the difference. That is, to take a specific case, suppose the board determines that the minimum capital of the bank in New England should be $15,000,000, and suppose that within 30 days after they open books for stock subscriptions in Boston, if the bank is established in Boston, institutions--building and loan associations, savings banks, and so forth—have subscribed, say, to $10,000,000 worth of stock. Then the United States subscribes for $5,000,000 worth of stock. That is, the United States subscribes for the difference between the amount subscribed by institutions eligible to subscribe within 30 days and the amount of the minimum capital of the bank which is fixed by the board.

Senator Couzens. In other words, that is the fiction you refer to?

Mr. O'BRIEN. They do not really have to establish a corporation for that purpose.

Senator COUZENS. In other words, the fiction is that the private individual subscribes to the stock if the Government is ready to stand by and do it in any event?

Mr. O'BRIEN. It is not a fiction to the extent that the institution is not obliged to take the stock, but it is a fiction to the extent that you do not have to presuppose a going bank for the purpose of stock subscriptions.

Senator TOWNSEND. Is there any maximum or minimum amount that the Government shall take in any institution? There are 12, you say.

Mr. O'BRIEN. That is regulated in part by the fact that the Government can not take any more than $150,000,000 in all.

Senator TOWNSEND. Yes; but is that divided among the 12 in the proportion of $12,500,000 to each bank, say?

Mr. O'BRIEN. It is not.
Senator WATSON. No; that is left up to the board.

Mr. O'BRIEN. I might point out that there is some regulation in that respect, in that if you will notice on page 4, lines 20 to 21, the minimum capital of each of the banks in the 12 districts is to be not less than $5,000,000.

Senator TOWNSEND. Then the minimum is $5,000,000 for any one of the 12 banks?

Mr. O'BRIEN. Yes; any one of the 12 banks, but that does not establish a minimum which the United States will take.

Senator COUZENS. In that connection, do we assume that these 12 banks are all opened simultaneously?

Mr. O'BRIEN. Not necessarily; no.

Senator COUZENS. You used Boston as an illustration. Assume, for instance, that the capital of the Boston bank was established at $15,000,000, and there were no private subscriptions, or only a very small amount, and then the Federal Government took up the balance, and assuming that that went on until the whole Government subscription was taken up. What would become of the other banks that had not been opened up simultaneously with those?

Mr. O'BRIEN. This is not a thing I have gone into very much. As a matter of fact, we have not had time to make the measure perfect from the drafting point of view and think out all the legal problems in connection with it; but I think the theory is that this is emergency legislation which must get these banks going as soon as possible. Whether one bank gets going or all 12 of the banks get going on the same date or not does not make any difference. The board is to do the best it can to get them going quickly.

Senator COUZENS. While you are on that point, will you tell us of whom the board is to be composed?

Mr. O'BRIEN. The Board is to be composed of five citizens of the United States appointed by the President by and with the advice and consent of the Senate.

Senator COUZENS. Are they to be ex officio officers, or are they to be separate and independent officials?

Senator Watson. They are to be separate and independent under the old bill. I do not know what this bill provides.

Senator COUZENS. I thought I saw something in here about their being ex officio members.

Senator Watson. No; there are no ex officio members provided for.

Mr. O'BRIEN. There is nothing to indicate that there are to be ex officio members, but there is nothing to prevent the appointment of an officer or employee of the United States as a member of the board. That is left up to the President.

Senator COUZENS. In what paragraph is that?
Mr. O'BRIEN. Section 15, page 25, line 17 and following.

Senator COUZENS. It appears from reading this, then, that it is not contemplated that it would be necessary to have these board members give their full time to the work of these banks, because I note that it is provided that,

Each member shall devote his time not otherwise required by the business of the United States principally to the business of the board.

In other words, it may be filled up with bureau chiefs and officials of the Federal Government,

Senator Watson. It might be, under the latitude of these terms. Mr. O'BRIEN. Yes; that is true.

Senator COUZENS. And it appears that that must be in contemplation; otherwise they would not have so worded it.

Mr. O'BRIEN. Quite so. There is a provision which confirms your construction on page 26, lines 15 and following, in which it is said that

Any member receiving from the United States any salary or compensation for other services shall not receive as salary as a member of the board any amount which would make the combined salary or compensation paid to him exceed $12,000 per annum.

Senator Watson. Now you may proceed, Mr. O'Brien.

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