Mr. ROBERTSON. Primarily, they lend their own funds, but they can borrow from the System.

Senator DOUGLAS. How much do they borrow from the System?

Mr. ROBERTSON. For other than withdrawal purposes, they can currently borrow 122 percent of their share accounts, except that there is an emergency provision for another 212 percent. So the maximum would be 15 percent.

Senator DOUGLAS. How is this credit to them kept on the books-as a deposit in your bank?

Mr. ROBERTSON. No. It is lent to them by the district Federal home-loan bank.

Senator DOUGLAS. Where do they do the purchasing?

Mr. ROBERTSON. The Federal Home Loan Bank Board periodically sells bonds or debentures in the market, but also the associations keep on deposit funds————

Senator DOUGLAS. What kind of debentures?

Mr. ROBERTSON. They are known as consolidated bonds which are the joint and several obligations of the 11 banks. They are ordinarily short term. They run from 6 to 9 months and are sold ordinarily about once a month.

Senator DOUGLAS. To whom are these sold?

Mr. ROBERTSON. They are sold in the general market.
Senator DOUGLAS. And paid for how?

Mr. ROBERTSON. In cash.

Senator DOUGLAS. So you are saying that they constitute part of the demand for the credit which the Federal Reserve System creates? Mr. ROBERTSON. I don't know that I understand.

Senator DOUGLAS. The question I am trying to get at is, Who creates the supply of monetary purchasing power which commercial banking utilizes and which you utilize?

We know that in the case of the commercial banks or commercial banking it is the Federal Reserve System which directly or indirectly creates this. What I am trying to get at is, do you simply take a share of this already created amount of purchasing power, or do you create additional amounts yourself? That is what I am trying to find out.

Mr. ROBERTSON. We create additional.

Senator DOUGLAS. You create additional amounts?

Mr. ROBERTSON. Yes, sir.

Senator DOUGLAS. Have you made a computation as to how much this is? This is a very important question.

Mr. HALLAHAN. I think of the $1.1 billion of bonds which the system now has outstanding, probably 25 percent of those are currently bank held. The other holders of those bonds are nonbanking holders, such as pension funds, insurance companies, corporations, et cetera. So I think it would be in that category that the credit would exist.

Senator DOUGLAS. Are you saying only $250 million of additional monetary purchasing power is created by the System? Mr. HALLAHAN. Other than savings; yes, sir.

Senator DOUGLAS. Is there a multiplier

Mr. HALLAHAN. Senator, our bonds that are bank held vary over the

years.

Senator DOUGLAS. Is there a multiplier attached to this, or can only this added amount of $250 million be loaned out? Namely, can this

$250 million count as 5 percent so that you can loan out $5 billion on it?

Mr. HALLAHAN. No. It is on a straight dollar basis. I might say for the Senator's information that over the period since 1932 the amount of credit of this kind, whether it be bank credit or savings capital accumulated in other places, that has been outstanding with respect to assets of the institutions has varied within a range of 2 percent to probably 5.9 percent of assets of the institutions. So it is not a great factor in general credit expansion.

Senator DOUGLAS. So that as far as you are concerned, there is not too much danger of investment outrunning savings?

Mr. HALLAHAN. Yes, sir; that is correct.

Senator DOUGLAS. If this is true-and I assume that it is true-it is very reassuring.

Mr. HALLAHAN. As I say, the range, Senator, has been somewhere between 2 percent to, let's say, 6 percent outstanding during any year over these last 23 years since the System has been in effect. The amount of the monetization that you are speaking of could vary within that with respect to the amount of bonds that were bank held. Senator DOUGLAS. Thank you very much.

Mr. CRAVENS. I have one more question.
Senator DOUGLAS. Yes, Mr. Cravens.

Mr. CRAVENS. Could you explain to me this brokers operation that is now going on?

Mr. ROBERTSON. I think so.

There has grown up over the years a group of brokers who undertake to place investment funds with the savings-and-loan associations. They advertise extensively-some of them do-a list of savings-andloan associations, and for a consideration place the funds in the associations that will take the money. They do that for a fee.

Mr. CRAVENS. What is the consideration?

Mr. ROBERTSON. I think the standard fee is 1 percent, although I have heard of some that are as high as 112.

Mr. CRAVENS. Is it a healthy situation?

Mr. ROBERTSON. There seems to be a great difference of opinion. We had a hearing last week on it. The people who use the brokers, and the brokers themselves, thought it was a healthy situation. The ones who didn't use the brokers thought it wasn't.

Mr. CRAVENS. Is it anything that you should have statutory power to deal with?

Mr. ROBERTSON. I think we have the power.

Mr. CRAVENS. You do?

Mr. ROBERTSON. We think we do, and we are talking about a regulation that will reduce that maximum commission to a quarter of 1 percent, and that is what the hearing was about.

Mr. CRAVENS. Thank you.

Senator DOUGLAS. Mr. Rogers.

Mr. ROGERS. Do you have any recommendations concerning holding companies in the savings-and-loan field?

Mr. ROBERTSON. I have had no acquaintance with it.

Mr. Dixon.

Mr. ROGERS. Mr. Dixon.

Mr. DIXON. To answer it in a general way, I would say that we do have. But as to the actual mechanics, we wouldn't be prepared to answer, I don't think, at this time.

Of course, the bill that was introduced, referred to as the Spence bill, I think, by and large, reflects our thinking and the thinking of the savings-and-loan industry pretty much. But it is something with which we are concerned, and I think I speak for the Board in saying that we do have concern about it and are interested in pursuing it.

Mr. ROGERS. I wonder if you could describe for us the types of affiliates you are speaking of in your recommendations concerning this? I wasn't quite clear when you were talking about insurance a while ago what different types of activities these affiliates engage in. Mr. DIXON. Let's let Mr. Hallahan answer that, because he has given a lot of thought to it.

Mr. HALLAHAN. I think basically what the Board is interested in with respect to affiliates-and probably it may well be that the word "affiliate" is not a proper word or a proper descriptive word of what we desire to delineate what the Board is interested in basically is protecting against self-dealing, and it is interested in tracing the flow of funds; in other words, the association's funds.

I think the question was asked a short time ago by Mr. Cravens about insurance agencies; that is not the kind of activity that the Board has in mind.

Senator DOUGLAS. What do you have in mind, then?

Mr. HALLAHAN. I think that we have had instances where the association's funds were lent to a corporation in which, for instance, none of the officers or directors had an interest. Let's say a dummy corporation which was then relent to or used by a corporation in which they had an interest. The loan proceeds were going to either develop land or construct buildings in which they did have an interest.

That, I think, basically is the type of situation that the Board would like to protect against.

Mr. CRAVENS. Are you speaking of a construction loan?

Mr. HALLAHAN. Yes.

Mr. CRAVENS. They don't make commercial loans, do they-savingsand-loan associations?

Mr. HALLAHAN. No.

Mr. CRAVENS. They are not empowered to make those. So I assume you have reference, then, to

Mr. HALLAHAN. It is construction lending principally; yes. There may be some other instances, but basically I think that is the problem. Mr. ROGERS. Would this get into situations such as where a person would make a mortgage loan and a contractor who is associated with one of the directors would be doing the work?

Mr. HALLAHAN. In which the director has an interest?

Mr. ROGERS. In which one of the officers or directors is associated. Mr. HALLAHAN. That is correct.

Mr. ROGERS. I agree with you. I think the term "affiliate" is a little. misleading.

Mr. HALLAHAN. Yes; I think the matter as presented probably is broader verbally than what the Board is interested in.

Mr. Cravens asked a short while ago whether all bank members should be insured. Now we have the situation which I think cur

rently exists in the FDIC with respect, for instance, to mutual savings banks in Massachusetts.

We have 129 cooperative banks which are savings-and-loan associations in the State of Massachusetts which are members of our Boston bank but are not insured by us. They have their own insurance fund. We have a number of bank members in other States who are not insured, and in a number of cases are concentrated in particular localities. There is a grave question, at least in my mind-and I think possibly in the minds of other members of the Board-whether we could insure that number of institutions in a particular locality. In other words, they may be overchartered for insurance purposes, especially when competitive factors are considered.

Mr. McCLOY. I have one general question that I have had in the back of my head ever since I heard Senator Robertson indicate this morning what an enormous factor in the economy of this country these institutions are which are subject to your supervision.

Let me ask you this general question: Do you think the institutions which you supervise have now reached a state of vigor in size and quality that would permit them to be subject now to the same general regulations, restrictions, tax, competitive situations, etc., that the banks in the country are subject to?

Are you not now at a point, assuming that the original purpose of the establishment of these institutions has been met, where you could have the same general restrictions, which have been developed over the years in respect of the main credit situation in the country, applied to your institutions?

Mr. ROBERTSON. Whether they should be subject to the same regulations, or treatment as to taxes, is something which I think the Congress has to decide. But, so far as the maturity, I would say that they had reached that point.

Mr. McCLOY. I think the Congress may desire a little counsel on this subject. I just wondered how you feel about it.

Mr. ROBERTSON. I would like to ask one of my associates.

Mr. DIXON. I would just like to make this observation: that I don't think they are completely comparable. In other words, I assume that what you have in mind is possibly the 12 percent.

Mr. McCLOY. That is one of the things I do not purport to have studied closely all of the factors.

Mr. DIXON. Yes. That is one that I am going to address myself to. That actually is a loss reserve, and the Congress arrived at that figure not because they were trying to do the associations an especial favor or grant them special privileges but because by study and investigation it was shown that in the depression period the losses on realestate loans were actually greater than 12 percent. In other words, that that was the fundamental basis and is the fundamental basis on which that 12-percent figure has been arrived at.

I might say, incidentally, that that is one of the reasons that within the last year the Board has felt that in order to justify that percentage these associations should accumulate the 12 percent, which is allocated strictly for losses and cannot be used for anything else.

Mr. McCLOY. Well, maybe there might be reasons for differences in perhaps the reserve requirements, but you also have certain tax advantages, if I understand it. Then there are quite a number of provisions which have been referred to earlier today in respect of possible

conflicts of interest, and these are restrictions on banking which have grown up, as I say, as a result, perhaps, of abuses in the past on the part of the general banking system of the country; but now that the depression is over-to be sure, it may possibly return again; I don't wish to be a prophet of gloom, as the Senator indicated-but now with the economy of the country in the general pattern which it now finds itself, is there really any reason why you think, things being equal, mutatis mutandis, these institutions would not be subject to the same general competitive restrictions and

Mr. DIXON. I think if you take into consideration all areas of advantages and disadvantages, why, certainly, the savings-and-loan industry shouldn't be singled out and favored. But there are a lot of facets in which, for example, commercial banks have very great advantages over savings-and-loan institutions. So I think they must be considered as a whole rather than just to single out 1 or 2 matters that might appear on the surfaces to be favoritism or putting certain institutions in a favorable light.

Mr. McCLOY. May I put one more question, and then I am finished. I asked Mr. Robertson, of the Federal Reserve, whether in the light of the changing pattern of the economy and the extraordinary developments that have occurred in the whole credit and monetary situation in the United States since the original study was made in 1914, wouldn't he think it would be desirable to have a thorough study made of this situation, which might take a year or two to accomplish, in order to weigh these considerations which we have just been talking about?

Mr. DIXON. I certainly would think that if it was a complete and thorough study conducted on the high plane that it should be, that such a study might well be made.

Mr. McCLOY. You couldn't purport to do that between now and the next coming of Congress?

Mr. DIXON. No.

Mr. ROBERTSON. I concur.

Mr. CRAVENS. Do you have any more questions?

Mr. ROGERS. I have 1 or 2 more.

Would you permit a Federal savings and loan association to conduct a safe-deposit business?

Mr. DIXON. Oh, yes.

Mr. ROGERS. You do.

Are Federal savings and loans permitted to handle Christmas club accounts?

Mr. DIXON. Yes.

Mr. CRAVENS. I have just one more question: Would it be appropriate to limit dividends until the 12 percent is accumulated?

Mr. DIXON. There we have the statute which must be considered, which says in the case of mutual associations chartered by the Federal authorities, which is our Board-that after operating expense is taken care of and allocations to reserve, etc., the remainder shall be distributed to the stockholders. So, it might require amendment of that basic law because it is just incompatible with the present charter. That is all, in my best judgment, Mr. Cravens.

Mr. CRAVENS. Would that be true of Federal savings and loan associations?

Mr. DIXON. Yes; that is true of Federal savings and loan associations.