between a sovereign and a citizen, the relationship of debtor and creditor is just impossible. Mr. BODFISH. I have enjoyed this immensely, Mr. Chairman, and you gentlemen have been very patient. On page 29, starting with line 6-the balance of the page starting with line 6-the bill turns over largely the control or management of an insured institution to the trustees of the Corporation. There are no powers over banks in the Federal Deposit Insurance Corporation that even approach the things suggested in this section. It provides that no insured institution shall make loans beyond 50 miles from its principal office; issue securities after becoming an insured institution, the form of which has not been approved by the Insurance Corporation, and no form of security or contract shall be approved which guarantees a definite return or a definite maturity; carry on any sales plan or practices or advertise in violation of regulations made by the Insurance Corporation. And then they go on Senator GORE. Don't you think that is pretty conservative? [Laughter.] Mr. BODFISH. Then they go on on top of that and set up the insurance fund which will more than pay any losses that have been experienced. It is provided that the individual association must, within 10 years, under the regulations of the Corporation, provide for building adequate reserves, together with the right of the Corporation to prevent the association from paying any dividends to savings investors until they accumulate an additional 5-percent reserve in the existing institution. That, plus the insurance premium, is just too much for the associations. The risk does not justify it. So we want the balance of the section stricken out and language inserted in lieu of it. But I would call your attention to the last three lines Senator GORE. Doctor, do you know of any sort of iodine with which the Government can paint the patient and stop this disease from creeping to the heart? Mr. BODFISH. No; I do not, Senator. If the people want their Government to do certain things, the Government will do them. If the majority of the people think that is the best way, I want to live under the kind of government that will do it. Senator GORE. Don't you think we ought to be warned by some of the red lights of history? That is what ruined Rome, that is what ruined Athens, the granting of favor after favor. I was reading only the other day that Pericles started to feed the people out of the public treasury, and it lasted a hundred years. Plato said that Pericles had converted the people of Athens into an idle, avaricious, self-respectless, gossip mongering set of paupers and beggars. The Roman Emperor said that the only way to keep the people satisfied was to keep their bellies full. Mr. BODFISH. Senator, I think you and I are pretty much of one mind, only we cannot find the plank to walk on. Note that the last three lines provide that no institution shall— violate any other reasonable regulation made by the Insurance Corporation for the sound and economic conduct of the business of such insured institution The CHAIRMAN. Where are you reading from? Mr. BODFISH. The last three lines on page 29. The conduct of a business institution is no business of the board down here in Washington, nor is their advertising, unless it jeopardizes the insurance fund in some way. We propose the following language: No insured institution shall: (1) Issue securities after becoming an insured institution, the form of which has not been approved by the Insurance Corporation; or, (2) violate such necessary and reasonable regulations made by the trustees for the protection of the Insurance Corporation. Of course it should have power to protect every corporation and it should see that some institution does not offer demand deposits, offering 7 percent interest. But beyond that they need no additional authority. Senator GORE. I have heard it suggested, Doctor, that building and loan associations are receiving what are practically demand deposits, and that it what caused the crisis. Mr. BODFISH. Senator, I can discuss that at some length. The contract was not a demand contract. I have had some part in preparing the Federal savings and loan regulations you have down here now, and I think if I can discuss that proposal with you sometime you will agree that we have eliminated that evil. I would like to call attention to section 312, which is somewhat of an innovation in the writing of penal statutes. It makes the penalty clause of another law effective. It is an innovation, I think. Gentlemen, for the first time the Federal Government has embarked upon a program of dealing with this whole home-mortgage problem. It has been a chaotic thing around the country. We have not had any mortgage banking system. Our commercial credit with regard to real estate was sadly disorganized, and we all know the whole situation. The home-loan banking system was an attempt to start to begin to develop a sound home-financing mortgage banking system for the country; and we would like to suggest that an advisory board similar to the Federal advisory board that functioned in the first years, and is still in existence, in connection with the Federal Reserve System, in order that the commissions and officials in Washington that have the responsibility of dealing with these matters may have the further responsibility of periodically sitting down and having discussions with and hearing recommendations from some of the leaders in thrift and home-financing activities around the country. Senator GORE. Do you think the advisory board of the Federal Reserve System has had any particular weight with the Board? Mr. BODFISH. I think in the first 10 years in the development of the Federal Reserve System it had a very substantial influence and was very helpful. Senator GORE. But that was in the good old days when America was free. Mr. BODFISH. Yes. That was before we started dumping Government bonds into the Federal Reserve, and it was then the real liquid bank and reserve system that it was intended to be. So we have an amendment providing for a Federal Savings and Loan Advisory Council, which we would like to see function for a few years in the development of this legislation, and that amendment is to be inserted on page 35, after line 14, as a new section, section 314. It provides as follows [reading]: SECTION 314. There is hereby created a Federal Savings and Loan Advisory Council, which shall consist of as many members as there are Federal homeloan bank districts. Each Federal home-loan bank, by its board of directors, shall annually elect a resident of such bank district interested in thrift and the financing of homes as a member of said council, who shall receive, subject to the approval of the board, such compensation and allowances as may be fixed and paid by the Federal home-loan bank of the district from which he is elected. The Federal Savings and Loan Advisory Council shall meet at Washington, D.C., at least four times a year, and oftener if requested by the Board or by the trustees. Said council may meet at other times and other places as it may deem necessary and may select its own chairman and vice chairman and sectary and adopt its own method of procedure. The directors of the Federal home-loan banks shall elect members of the council annually for a 1-year term and shall fill any vacancies that may occur. The Federal Savings and Loan Advisory Council shall have power: 1. To confer with the Board or the trustees on general business conditions or special conditions affecting the Federal home-loan bank system or its members, or the insurance corporation. 2. To make representations concerning matters within the jurisdiction of the Board or the trustees. 3. To request information and make recommendations in reference to the Federal home-loan bank system or its members of the insurance corporation. Senator GORE. You do not have any idea that you could ever stop it if you started it, do you? Mr. BODFISH. I think if the Government is going to participate in the management of reserve institutions, there ought to be some way in which people that are in the business around the country, some of the representative leaders, can come here every 3 or 4 months and at least express their views and judgments and have the right to do so. I think that is an important principle when the Government is taking substantial control of a number of institutions. Senator GORE. Does not that carry with it an implication that experience ought to be consulted? Mr. BODFISH. Yes; I think so. Senator GORE. Does not that, then, discredit experiments and experimentation? Mr. BODFISH. Well, I am not hostile to experimentation in lines where we do not have experience. Maybe this is a way to get some of our experience into Washington to test that. The only other proposal that I want to make is with regard to page 41, section 405, which proposes to take off every restriction on the part of national banks as to their making mortgage loansSenator GORE. Is that your proposal? Mr. BODFISH. No; that is the proposal in this bill, and I think it is unsound banking to establish a public policy of that kind. Senator GORE. Don't you think national banks should be deprived of the privilege of loaning on real estate at all? Mr. BODFISH. I think there is absolutely no question of it. If you had adopted the McFadden Banking Act, we would have had a sounder act. One of the fundamentals is that the building and loan associations ought to stick to the building and loan business; the commercial banks ought to stick to the commercial banking business, and the investment banking business ought to be separated from both. Senator GORE. I do not see how they can be liquid and make long term real-estate loans. Mr. BODFISH. Senator Fletcher, those are the amendments that we have to offer. There are several gentlemen here whom I would like to have the committee hear for 2 or 3 minutes at a later time. Lieutenant Governor Thompson, of Kansas, is here. He is head of the largest institution of that State. Mr. Moore, one of the leading citizens of Atlantic City, is here, and others. If you could tomorrow morning give those gentlemen 2 or 3 minutes, we would appreciate it. Senator GORE. What do you suggest as to the national banks? SEC. 405. Section 24 of the Federal Reserve Act, as amended, is amended by adding to the end of the third sentence thereof the following: "Provided, however, That in case of loans secured by real estate which are insured under the provisions of the Federal Mutual Mortgage Insurance Act, such restrictions as to the amount of the loan in relation to the actual value of the real estate and as to the five-year limit on the terms of such loans shall not apply." Senator GORE. That is why I look with such abhorrence on all this legislation. Senator ToWNSEND. Have you given the reporter a copy of your amendments? Mr. BODFISH. Yes, sir. The CHAIRMAN. They will all appear in the record. Mr. BODFISH. I have a summary of Mr. Friedlander's testimony which I would like to have inserted in the record. The CHAIRMAN. That may be done. (The document referred to and submitted by the witness is here printed in full, as follows:) MAY 22, 1934. Statement on behalf: United States Building and Loan League, 104 South Michigan Avenue, Chicago, Ill. (National organization representing building and loan associations, savings and loan associations, homestead associations, cooperative banks, and Federal savings and loan associations. Membership, 3,700 associations, and representing over 70 percent of the assets in community thrift and home-financing institutions.) To: Senate Banking and Currency Committee. The building and loan associations concur with the President of the United States on the importance of immediate cooperation between the Federal Government and private capital and industry. Employment in the building trades and other capital-goods industries is essential to continued national recovery. Building and loan associations support the proposed National Housing Act insofar as it will stimulate the flow of private capital and facilitate reemployment without injury to the thousands of sound community thrift and homefinancing institutions. The program for alterations, repairs, and improvements of real property has our unqualified support, and our 11,000 building and loan associations in the country will cooperate. We emphatically urge that the Federal Government take the lead at this time in directing the attention of the public to the importance of home maintenance, home improvement, and home buying. We believe that the proposal embodied in title I of the National Housing Act (excepting sec. 5) will lead to substantial expenditures and employment and possibly give work to several hundred thousand persons if vigorously carried out. It is our belief that the Government is justified in incurring the potential losses involved in the proposed plan for financing these repairs through the cooperation of commercial banks, finance companies, and other financial institutions. Section 5 of title I does not disclose the plans or program for reestablishing the guaranteed mortgage system. It is broad, enabling legislation, and if carried out along lines discussed by its proponents, will curtail the activities of thousands of community home-financing institutions and may ultimately place the Federal Government, through Government bonds, behind billions of dollars' worth of mortgage securities. In this proposal the Government and the taxpayer will acquire real estate upon default by borrowers. If this plan had been in effect and widely used during the present depression, it would have undoubtedly cost the Government hundreds of millions, if not several billions, of dollars. This statement is predicated upon the losses incurred under the same system by private capital undertaking the guaranteeing of mortgages on a much more conservative basis than that proposed in this legislation. The legislation, if enacted, could not become operative in time to help the immediate situation, and it is our judgment that it would drive much more long-term private capital from the field of home financing than it would be able to bring into activity in several years to come. Inasmuch as immediate results are desired in the employment of labor in the building trades, we propose an increase in the bonding privileges of the Home Owners' Loan Corporation of $500,000,000, and that such funds be earmarked and advanced through existing institutions, namely, building and loan associations, mutual savings banks, and insurance companies for loans leading directly and immediately to the employment of labor. The machinery exists to accomplish the purposes the President has set forth, and we propose this program as more immediate, more effective, and more in line with the preservation and upbuilding of community thrift and home-financing institutions. Such a program will entail no loss to the Federal Government and will have the complete cooperation of building and loan associations. Building and loan associations in their history have financed the building or ownership of over 8,000,000 homes. In fact, the capital for home repair, home modernization, home building, and home buying in this country has come almost exclusively from the savings of the working classes invested in building and loan associations, mutual saving banks, and in insurance policies. Building and loan associations are located in every community in the country and today have nearly 90 percent of their assets in home-mortgage loans. They would resume normal lending activities if an increased flow of savings were available. 66 It is our belief that the insurance of these institutions, along lines provided for bank depositors, will make substantial funds available for home mortgages. As was ably pointed out by the President, insurance of this type is necessary to arrest any further drain on these institutions and to put them in position to resume their normal useful function." The United States Building and Loan League has approved a plan for the insurance of investments in building and loan associations and the benefiting associations will pay sufficient annual premiums to cover all losses. The only outlay of the Government is $100,000,000 for working capital, said capital to be kept intact and the Government is to receive 3 percent interest thereon. Title IV presents liberalizing amendments to the Federal Home Loan Bank Act, permitting it to function more adequately as a banking and reserve system for thrift and home-financing institutions. These amendments are sound and desirable and are based upon 1 year's experience in operating the reserve system, which now has more outstanding advances than the Federal Reserve System has discounts. We confidently believe that when the insurance of building and loan shares becomes effective, as provided in this bill, and the liberalizing amendments to the Federal Home Loan Bank Act are adopted, and the repair and modernization program is under way, that there will be no necessity for the authorization of the creation of any new type of lending institution, as is provided in another title of this bill. The title proposing the creation of national mortgage associations (title II) provides for setting up of the type of lending institutions which has in times past uniformly proven to be both unwise and unsuccessful. Any proposals for reform or innovations in the mortgage banking activities of the country should come only after a reflective study of the problem and after the home-loan bank system, the Federal savings and loan associations, the alteration, repair, and improvement program, as well as the insurance of build |