and the loan-insurance devices employed primarily in two ways. First, they are used as direct means of extending Government financial assistance to individuals, to private enterprises, or to locally owned public projects. Second, they are used as auxiliary devices to assist. the Federal Government and its own programs, or in extending integrated aid to individuals and their enterprises.

There is at least one further complicating factor. It is involved in the technical distinction between loans and equity investments, in the commingling of Government ownership with private ownership, and in other aspects of the character of the creature through which the Government's activities are carried on. The accomplishment of social objectives through the sheer form of these organizations has been attempted from time to time with varying degrees of success. PSYCHOLOGY OF GOVERNMENT LENDING

The psychological aspects of Government financial assistance, or of the Government's willingness to give financial assistance under certain circumstances, have generally been held to be of great importance. For example, it was the opinion of some of the leading financial people concerned with the creation of RFC in 1932 that that agency's principal value was its psychological value; its mere existence was expected to go a long way toward bolstering up the Nation's credit structure. Government officials agreed. In proposing the creation of RFC, Mr. Hoover said: "It may not be necessary to use such an instrumentality very extensively. The very existence of such a bulwark will strengthen confidence."

The corporations supervised by the Farm Credit Administration, as another example, attribute much importance to the psychological value of their form of organization, which is designed to stimulate borrower participation in management of the cooperative borrowing institutions. Considerable moral value has also been deemed to attach to the Government's willingness to conduct secondary market operations in FHA-insured and VA-guaranteed loans, a policy which is said to have "stabilized" the private market for such investments.

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The psychological value of Government lending or loan guaranty is based primarily upon the simple understanding that the Government will give financial assistance when other means have failed. As the Board of Governors puts it "the loans are intended to supplement the lending activities of commercial banks Although there may be some exceedingly subtle effects, the principal value of this understanding is associated with its clarity and simplicity, and not with any subtle or hidden attributes.

However, there have been attempts from time to time to gain an effect by the employment of indirect or subtle devices. It is our opinion that, as a result, there have been inordinate complexities in the form of organization of some agencies engaged in extending

Government financial assistance, and also there have been inordinate complexities in the various forms in which the assistance has been given or offered. As a further result, the activities have not always been precisely what they were generally understood to be.

It is our belief that no part of the basic psychological values would be lost if all of the organizations and all of the assistance forms were made as simple as possible, and if each participant in the programs, whether borrower, lender, administrator, employee, legislator, or taxpayer, were able fully to understand the precise position of each other participant. We believe also that the employment of indirect and complex devices, not fully understood by either the borrowers or the general public, can have the same effect as though there were intentional subterfuge aimed at the accomplishment of something other than the objectives stated in law. Our recommendations having to do with organization of the lending activities are based upon this belief. We have attempted, in making them, to point out the greatest degree of simplification which we think can be attained.

EXAMPLES OF COMMINGLING AND COMPLEXITY

The paragraphs which follow illustrate some of the complexities which characterize the Government's lending and related activities. The list is not intended to be a complete one.

1. In the loan-guaranty program conducted by the Veterans' Administration, a direct subsidy equal to 4 percent of the face amount of the loan is paid to the lender, for the account of the borrower, in connection with each loan guaranteed. This is an example of the commingling of a subsidy and a loan guaranty activity. In this case, however, the subsidy is direct and immediate, and its form is such that it can be accounted for separately.

2. The Veterans' Administration loan-guaranty program is broad and liberal, and the standards actually employed in establishing eligibility of the loans for guaranty purposes are not difficult to meet. Veterans are entitled to participate in the program virtually as a matter of right. Losses are bound to become high after the inflationary trend is halted or reversed. Losses under this program should be regarded as servicemen's bonuses, or subsidies, though they are not direct or immediate subsidies. The activity is a welfare activity, commingling subsidies and loan guaranty for the benefit of a large class of people not distinguished from other classes primarily by a compelling need for assistance of this type. The indirect subsidy elements of the program are not capable of being measured.

3. For a period of 9 months during 1947, RFC conducted secondarymarket operations in VA-guaranteed loans. For many years, it had also conducted secondary-market operations in FHA-insured home mortgages. In response to considerable pressure, the Eightieth Congress provided for reestablishment of a limited secondary market

for VA-guaranteed loans. In these operations, the Corporation assumes the position of direct lender by purchasing the loans from the original lenders. In each case the Government's purchase of the loans has been made, within certain statutory limits, at the option of the seller, and at prices based upon face value. This is double assistance; it superimposes the direct lending activity on the loanguaranty and the loan-insurance activities.

4. The secondary-market operations have a subsidy aspect too. The need for Government direct lending where the Government is also the guarantor of repayment arises from failure of the guaranty to render the loan really marketable. At the present time, investors can obtain a greater net return from 31⁄2 percent bonds than they can from 4 percent mortgages, and, accordingly, they will not voluntarily hold the latter, and incur the costs of servicing. Thus the Government artificially holds the mortgage loan rate to 4 percent despite the market pressure for a higher level. The 4 percent borrower is subsidized to the extent of the difference.

5. For a number of years, RFC has had authority to enter into agreements to participate at a future date in loans made by private banking institutions. This authority is continued in the present RFC Act. The character of the loans, at least in many instances, is such that they would not be made were it not for the Government's agreement to participate upon demand. Although it has the form of a direct loan, this agreement is in effect a Government guaranty, and the activity commingles direct lending with loan guaranties.

6. Although the experience of RFC has been that the aggregate of its participation fee collections has exceeded its losses from participations, there is a subsidy aspect to the deferred participation agreements. Under the agreements, the banks are enabled to earn interest at a greater rate than they would without the benefit of the guaranty, and, accordingly, the banks profit from the Government's exposure to risk. The nature of this profit was discussed before a congressional subcommittee by Mr. Henry T. Bodman, a Director of RFC. His statement is reproduced in the appendix to this report among the secondary recommendations for RFC.

7. In the case of the Farmers' Home Administration, direct loans are made to marginal borrowers to enable them to rehabilitate their properties and to engage in activities aimed at improvement of their social standards. Partly to insure collection of the loans, and partly to assure that there will be improvement in farming and living standards, the Farmers' Home Administration engages in extensive supervision, not only of the farming activities, but of many of the details of the borrowers' domestic lives. This is a combination of direct lending and social service. The element of subsidy is present in this activity to a considerable extent. The accounting for the activity

has been rather poorly devised. It was not planned with reference to the real nature of the program, and accordingly it has not been possible to measure the subsidy with any degree of accuracy in the past.

In addition to their having been employed extensively in combination with subsidy and other activities, the lending form and the lending terminology have been used with reference to Government activities which actually are not lending at all.

An example exists in the case of Commodity Credit Corporation, in the Department of Agriculture. This Corporation makes commodity loans as part of its program of agricultural price support. The loans are made at the support level, 90 percent of parity prices (cotton 92%). CCC has recourse for collection of the loans only to the underlying commodities. In general, these are acquired by the Corporation if prices decline below the loan prices; in general, the loans are repaid in cash if prices rise. Rather than being loans, the Corporation's disbursements in this program are advance payments on the conditional purchase of commodities for price-support purposes. The sellers have the right of repurchase.

The Public Housing Administration (part of the Housing and Home Finance Agency) presents another instance in which the form and language of lending are used with reference to other activities. Although a substantial part of its financial activity consists of borrowing from the Treasury and making the borrowed funds available to local housing agencies on a basis described in law as lending, PHA should not be regarded as a lending agency. In this case, the lending activity has been used as part of a general plan, the principal purpose of which is to bring about a housing reform. There is a considerable departure from the ordinary concept of property ownership in the plan, and the loans depart materially from the usual concept of lending.

In the activities of the Farm Credit Administration, lending by the Government has also been used in a general plan to bring about a reform. The activities of the Farm Credit Administration are aimed at reform in the credit structure, however, and lending by the Farm Credit Administration has been more nearly comparable to the ordinary lending which takes place in the conduct of private business. The institutions created and supervised by the Farm Credit Administration are unique. They differ from private institutions in that they separate many of the attributes of property ownership from the financial aspect of ownership. Their aim is the development of cooperative borrowing enterprises owned and managed by the borrowers under the supervision of the Government. It is contemplated that the borrower-owners will pay in only a small portion of the capital and that the institutions will ultimately operate primarily

on funds made available by private investors. It is not contemplated, however, that the investors will participate in their management. Except for Government funds placed permanently at the disposal of the institutions through subsidies, the Government ultimately will have no investment in the enterprises.

POSSIBILITY OF IMPROVED DEFINITION

We think that it would be both practical and desirable for the Executive Branch and the Congress to adopt the general policy that subsidy programs, programs of lending, programs of loan insurance, and programs of loan guarantee are not to be commingled. Their combination is not necessary, and it is not helpful from any objective standpoint consistent with our representative democratic form of Government. Their spearation would be useful under any governmental philosophy.

The control of financial activities must be accomplished through the control of costs stated in monetary terms, and it is not possible to make an adequate assignment of costs to the separate components of commingled activities. Moreover, the administrative separation of subsidy programs from self-sustaining programs is necessary if each of the programs is to retain its basic character. It is virtually impossible for one management to direct both a banking activity and a welfare activity; the one seeks to maintain the intactness of funds. while putting them to use, the other directs their complete consumption to gain a useful end.

The following activity descriptions may be useful in a statement of policy:

Subsidies.-Financial assistance which does not contemplate complete recovery of the amounts advanced, in the aggregate, or which does not contemplate the recovery of an appropriate charge for their use determined on an objective basis, should be considered a subsidy activity.

Lending.-Lending means to assist financially, but only for a period of time of definite duration after which the amounts advanced for assistance are to be repaid, together with an appropriate charge for their use, determined on an objective basis. The basis underlying the charge for use should be related to, but not necessarily determined by, the open money market. A lending activity is self-sustaining; the aggregate of the interest charges to borrowers should be sufficient to cover (a) interest costs, (b) expenses of administration, and (c) collection losses.

Loan insurance.-Loan insurance is a self-sustaining financial activity. Through charges against the participants in the program, it prorates the collection losses and expenses of administration, and each class of borrowers makes good the default of its unsuccessful