today potential inflation. There is in the banks of the country an excess of researves over requirements of more than a billion and a half dollars. And that is without taking into account the effect of the gold devaluation, amounting close an additional 3 billion dollars, which, if in the banking system, would make it possible for a further inflation or expansion of possibly 30 billion dollars.

There is no lack of money. It seems to me, however, that it lacks velocity. Volume of money, in and of itself, is not going to take care of the unemployment problem. A volume of money will not increase, or will not create inflation, except it gets into circulation, except we get the turnover or the velocity of money. We fail to get the velocity of money today because, largely, about 60 percent of the total bank deposits of the country are owned by less than 1 percent of the bank accounts, and the banks do not loan these deposits or have not done so.

There is one of two ways, or a combination of two ways, of getting this money into velocity, or circulation, which is absolutely essential if we are going to meet the unemployment problem. One, the Government can continue to create securities, selling those securities to the banks, to the owners of those deposits, and the Government then channel the funds from where they are, through Civil Works, Emergency Relief, and all other types of Government operation, into the channels where the funds are needed. That is one method of getting the velocity of those funds.

The thought back of this program, the reason that I became interested in it, was because of the recognition of a need of getting a private flow of those funds from where they are, by short-circuiting them, to where they are needed in the community. There is hardly a section of this country but what there are excess funds not working-not working, first, because the banks won't take the risks involved and, secondly, because there is no adequate form of credit available on a sufficiently attractive basis over a period of time to induce borrowers to use that credit.

It seems to me that if through this program we can induce existing agencies, wherever they may be, to extend credit on a basis outlined in this program to people in the communities who are in need of that credit, a very constructive thing is done toward unchanneling those funds directly into the field of employment where they are needed.

The no. 1 point of our program, the program of modernization and repair, is devised for the purpose of providing people in this country who have employment and who may have credit an opportunity to secure that credit. For that purpose, a 200-million-dollar corporation is set up by the Federal Government to insure to all qualified lending institutions up to a total of 20 percent of the total loans they make for this purpose-not 20 percent of any one loan; that would be worthless, or practically so; but 20 percent of the total loans made by any one institution, these loans to run from an amount of $100 to $2,000, to be loaned to property owners for the purpose of modernization and repair, over a period of time as long as 5 years or possibly longer, with a small monthly payment. The 20 percent is the inducement to the lending institution to make loans of this sort without security. You attempt to take a mortgage where property is already mortgaged and you shut off a needed

repair on a home. The costs of taking security on small loans are prohibitive. Many people own properties free of encumbrance who would like to get a few hundred dollars to make very needed repairs economically desirable and sound, and they certainly would object to putting a mortgage on a home, and it is unnecessary. The best type of credit available seems to me to be the credit of the home owner―a person at least with an equity in real estate, or real property. The very spending of the money loaned under a plan of this sort would seem to me to make possible in part, due to increased employment, an ability to meet the debt created.

The first part of the program you have provides the protection of the lending institution, to induce them to do what they will not do now. It provides for the borrower an available credit on favorable terms that he may desire and can not at this time secure. The cost to the Federal Government is limited to $200,000,000 if a total of a billion dollars is loaned on these modernization and repair receivables, assuming that 20 percent of all the loans which are made are lost-which is almost inconceivable. If a billion dollars is put out in this manner, it would have the same effect by the Government putting out a hundred million as it would if the Government directly put out, through its relief agency or other agencies, a billion dollars. So if 200 million can act as a cushion to create the effect of a billion, it seems to me it is good business and good economy for the Government to provide that necessary cushion, rather than be forced, due to pressure of unemployment, to provide it all.

The second part of the program I will just touch upon briefly. Mr. Riefler has given you the gist of the plan. I believe it is sound; I believe as a long-term reform in the mortgage market it is necessary. We have had short-term mortgages, high interest rates, commissions, and all types of abuses in the mortgage market. The public, it seems to me, need to have made available to them a longterm mortgage instrument which is in existence in practically every other advanced country except this one, except as provided by some institutions. There are some long-term mortgages by some of the customary building and loan associations; but, generally speaking, with a limit on your long-term mortgages. Ten years is looked upon as a long term and many of them run for 1, 2, and 3 years. This program should provide a long-term mortgage instrument at a low interest rate, which is also necessary, and an amortized mortgage. This cannot be created except by the Government taking some part in this program, and the part they take is to create the agency for the receiving of the insurance premiums, the setting up of the standards of appraisals, so as to determine what type of property mortgage will be insured.

The borrower pays the premium that should take care of any loss that exists under an insured mortgage. The actuarial department of the Treasury worked out the figures showing what the mortality of a mortgage could be before there would be any cost or loss whatever to the Federal Government. As I recall the figures, 25 percent of all mortgages insured could default and the properties taken over, if sold at 50 percent of the appraised value of the properties, the insured premium would meet the loss and there would be no cost

1

whatever to the Federal Government. It is expected to be a selfsustaining proposition. The insurance of the building and loan feature seems to be a desirable move if the plan as worked out can be put into effect. It will create I believe à sound building and loan operation in this country.

I believe I have covered my statement in a general way.
Mr. SISSON. Mr. Eccles, just a minute-

The CHAIRMAN. If you will permit the Chair to make a suggestion, it was requested that the first four gentlemen appearing might each be permitted to conclude his general statement without interruption and, after the four had made their statements, each one of them would then submit to interrogation by members of the committee. So I will ask the gentleman to withhold his question.

Mr. DISNEY. It is agreeable, but quite an innovation for this committee.

The CHAIRMAN. Now, Mr. Deane is the next.

STATEMENT OF ALBERT L. DEANE, PRESIDENT GENERAL
MOTORS HOLDING CORPORATION

Mr. DEANE. My name is Albert L. Deane; I am president of the General Motors Holding Corporation and at present temporarily identified with the National Recovery Administration.

Certain details have been touched on in reference to one phase of this program which we have come to call the modernization end-the loaning of money in small amounts to individual property owners for use in making repairs, additions, and modernization of their homes-and I would like to tell the committee the proposed mechanics of the machinery that will be used to make this available in every community of the country.

It is proposed that the local banking or loaning institutions, generally comprehending three types-savings and commercial banks; building and loan associations, and the financing or acceptance corporations that are used to handling time-payment paper shall be asked to cooperate and to loan their funds to individual property owners in the community for this purpose, under the Federal guaranty included in this program against loss up to 20 percent of the total amount of such receivables as they purchase.

It is proposed that that plan shall operate in this manner: That the local contractor, using that term in a rather broad sense (for instance, a master painter taking a contract to paint a home would be considered a contractor for this purpose), would make his contacts in the ordinary manner with the home owner and make a firm bid on the job. There would be alternative bids secured. He would secure from the property owner, if the property owner wished to use credit in connection with the payment of the job, a statement showing his present financial position. The contractor would then submit to the local lending institution that purchaser's statement giving pertinent credit information, and that lending institution would be required to secure an independent credit report made currently at the time through an independent agency, such as those now available in the country, private agencies, and who are in the business of making such reports. With that information before them,

they would then be in a position to determine whether or not the credit risk measured up to the proper standards. Those standards would be set in a broad way by the central insurance agency here in Washington handling it. When I say a "broad way ", I mean that it would require, for instance, that there be definitely shown the man's ability to assume the monthly obligation which was called for in connection with the transaction, and the probability of his continuing; that is, of his income continuing over the life or term of the obligation.

If the credit was approved, the lending institution would then make a firm commitment to the contractor to purchase the note of the property owner upon completion, satisfactory completion, of the work. When the work was completed, the contractor would secure the necessary documents showing satisfactory completion, secure the purchaser's note and take it to the bank already committed and have it discounted. From that time on the transaction would be between the banking institution and the property owner, so far as the making of payments was concerned.

In the event such an obligation was later on defaulted and after the ordinary and customary collection procedure determined that it was a bad debt, the lending institution would be permitted to call upon the insurance company for payment of the claim. That claim would then be audited by the insurance agency and, if it was determined that it was justifiable as a claim, it would be paid. That essentially is the mechanics of the operation.

As to the charges: As has already been explained by the gentlemen. who preceded me, one of the fundamental ideas of this proposal is to provide an instrumentality that will make such credit available on terms and at a cost lower than is available today.

It is therefore proposed that the notes given by the property owners shall include interest at not to exceed 5 percent per annumthat is, true interest on the decreasing balances and that, in addition, there should be a service fee designated by the insurance company as a maximum which has been calculated on a basis of the lowest average cost that we have been able to determine for the actual handling of this type of paper. And I am sure you men realize that in handling a loan that is made payable in 20 different installments the cost is quite different than if it was put in one payment. We have proceeded there by taking the lowest average cost and eliminating from the ordinary costs of lending institutions making loans on this basis the item of overhead, that is called "sales promotion "that is, any cost of getting in contact with their clients and getting business-and the other costs which will be eliminated by this procedure. We have approached the matter from the standpoint that the local lending institutions already have their overhead, and this will mean no additional overhead, and they do not need to be compensated for anything except the direct costs. On that basis the total cost of 5-percent true interest per annum plus the service fee figures approximately 50 percent of the comparable rates of monthly payment transactions of the better type of goods. I am putting it that way rather than stating the exact rates-which you will, of course, get-because they vary, depending on the term.

I think perhaps the only other feature that should be explained, that is of some importance, is the fact that by utilizing the facilities of these private institutions in every community of the country, this will require, in my judgment, a very small organization in Washington to handle the insurance and that the expense of handling will be reduced very considerably over the expense of a similar type of private institution.

I think that concludes my statement on the details.

The CHAIRMAN. It has been suggested that Mr. Fahey and Mr. Russell would like to be heard without interruption.

Mr. FAHEY. Do you want to hear us now, Mr. Chairman, or to ask questions of the other four gentlemen first?

The CHAIRMAN. We will be glad to let you and Mr. Russell proceed in the same way, if you desire.

STATEMENT OF JOHN H. FAHEY, CHAIRMAN FEDREAL HOME LOAN BANK BOARD

Mr. FAHEY. Mr. Chairman and gentlemen, I think it is unnecessary and it would be a waste of your time for me to go over again some of the ground that has been covered already, and also some of the features of this problem which I have had the privilege of discussing before with the members of this committee.

It seems to me that the statement which Mr. Hopkins has made to you is convincing as to the need of dealing with this problem from the standpoint of unemployment, as one feature of it. Certainly no one who has studied the unemployment problem in the country can fail to realize the necessity of getting the construction industry again in action and its enormous influence on employment generally and upon what is known as the "capital goods industries," as well as its influence on transportation and the movement of heavy goods on our railroads and over our roads by trucks and by other methods of transportation.

There are two other features of the problem, however, which we have been particularly impressed with in the Board and to which I would like to direct your attention. I have before referred to the fact that the great mortgage debt on the urban homes in this country represents one of our most serious financial problems. The figures show that it grew at a tremendous rate from 1921, or after the depression of 1921, through 1929; that out of our total of perhaps 134 billons of debt of all kinds in the country, the debt against our urban homes of a valuation of less than $20,000 is the greatest single block of indebtedness we face. That debt of 212 billion is more than all of your deposits in the national banks of this country as they stand right now. It is almost three times the total commercial debt of the country, including the loans made against stock exchange security by our banks.

In its effect on the depression and the economic structure, it has not attracted as much attention as the rapid decline that we witnessed in the value of securities. That sort of a smash is very much more dramatic and more easily understood. But for 4 years, now, we have had the burden of this debt represented by the mortgage situation becoming increasingly serious.