Wherefore, in closing, the American Legion respectfully requests that the committee amend the bill S. 2938 by:

1. Striking therefrom the provisions of section 201, now contained in lines 9 to 25, both inclusive, on page 40, and in lines 1 to 14, both inclusive, on page 41;

2. By striking therefrom the entire section 801 (pp. 104 and 105); and 3. By inserting the provisions of Senator Sparkman's bill S. 2937, as originally introduced, at a proper place in S. 2938.

Mr. Chairman and gentlemen of the committee, I would like to thank you for your favorable consideration of our requests, as well as for your courtesy in permitting me to appear before you.

[Reprinted from U. S. News and World Report, an independent weekly news magazine published at Washington, February 26, 1954]

EASY MONEY COMES BACK

DOLLARS ABUNDANT, BUT BORROWING SLOW

Credit expansion, officially promoted now as one answer to the business downturn, is slow to come. Bank loans are easily had now-by borrowers with good credit standings-and getting cheaper. Lenders-with official blessings are loaded up on funds. But a sagging demand is dragging down loans and interest.

The drive by the administration to get people to borrow money and spend it is approaching a critical phase. If credit expansion doesn't get going in buoyant spring and summer months, it's believed, it may not get going at all this year. What has happened is that businessmen and families have been showing more concern over their debts than over their needs for more goods and services. Borrowing to buy has been less popular than it once was. Interest rates have sagged, as money pumped into banks by the Government found too few borrowers.

Now, just recently, there are a few signs of a faint revival of willingness to buy on the cuff. But official figures, even the latest, do not show it yet.

Bank loans, to nearly all classes of borrowers, are a long way from stretching the capacity-and desire of banks to lend. Records of city banks-those reporting weekly to the Federal Reserve Board-tell the story.

Business loans-to storekeepers, manufacturers, farmers, others-expanded by less than $600 million in the last half of last year. They had grown by nearly 2.5 billion in the last half of both 1951 and 1952. They still lag in 1954, though less noticeably.

Main reason is that businessmen have found themselves with more inventory than confidence. Buying by retailers, wholesalers and producers has been declining. More recently, consumers themselves have begun to acquire doubts and to curtail their buying, too. That has meant even less borrowing from banks.

Bank loans made to consumers by weekly reporting banks show the results. Those loans expanded by $99 million in the last half of 1953-against $833 million in the last half of 1952.

Installment-credit reports, too, help to show how families feel about further buying involving debt. Total of such credit rose by about 800 millions in the last half of 1953, against 2.2 billions in the same period of 1952. And the same trends show up in real-estate loans, though plans now being announced by builders for 1954 give a hint of rising demand for mortgage loans.

Government officials have used just about every monetary device available to push the easy money program adopted last spring. Before that, the Federal Reserve and the Treasury Department-in double harness-had been working overtime to make money for lending scarcer and dealer in a period regarded as inflationary. The turnabout, when it came, involved the use of a flexible money policy in a new situation-a threat of deflation.

Federal Reserve, first, saw to it that banks were filled with plenty of the reserve funds needed for lending. That was accomplished by the purchase of billions of dollars' worth of Treasury securities. From May to December last year, Reserve bank holdings of United States securities jumped by more than $2 billion-to the highest level in history.

BANKS HUNT BORROWERS, BUT RESTUDY WEAK ACCOUNTS

Next, the Federal Reserve reduced the amount of reserves that banks were required to hold for any given volume of bank business. And the Treasury Department made plain that easy money was the order of the day.

Then, early this month, with lending still becalmed, Federal Reserve cut the interest rate that banks must pay when they borrow Reserve funds from the central bank. Intent-and effect-was to make sure that all bankers understood they were not expected to be excessively critical of a customer's credit position in making a loan. Officials, it was made clear, would be sympathetic to some marginal loans designed to get money into the hands of people who would spend it.

Result, for the man who wants to float a loan, is that banks and other lending institutions are loaded. Many are out scratching for business. That doesn't mean that just anybody can get a loan of any desired size. Most lenders, in fact, have been getting right with their books, too. They've been crowding delinquent customers, cutting off some poor credit risks. Still, people with good prospects of repaying find it easy to borrow.

Demand for lending money, though, continues to lag behind supply.

Interest rates-the price of borrowed money-consequently have been dropping. The chart on page 100 gives the picture, starting in early 1951-the time of the famous accord between the Treasury and Federal Reserve. Before that time, the Reserve System had been an unwilling partner in the Fair Deal administration's plan to hold interest rates down by the simple expedient of supporting Government-security prices in the open market. The accord ended that price-pegging operation.

The chart shows what happened to interest rates of Treasury bonds when the market was unpegged. Those rates rose, along with interest charges generally, and went into a steep climb early in 1953 when tighter money was the goal.

The peak, for those Treasury bonds, came in June. Now all is changed. Average yield for those bonds has dropped from 3.09 percent to 2.60.

The rate on the Treasury's 91-day bills, nearly 2.42 last June, in January dropped below 1 percent for the first time in nearly 5 years.

Rates on prime commercial paper-the unsecured IOU's of top-credit companies have tumbled from 24 percent at midyear to 2 percent recently. Ordinary short-term loans by banks to businesses, too, showed signs of cheapening in December, though banks still plan to hold their rates where possible. Home buyers, meanwhile, have been given new hope for low-rate mortgage loans guaranteed or insured by Government after months in which lenders avoided those loans. And families hoping for conventional mortgage loans this year have gotten real encouragement.

Corporations are able to borrow on long-term bonds for rates averaging 3.24 percent, compared with more than 3.6 percent last summer.

States and localities have watched their average rate on high-grade bonds drop from just under 3 percent to 2.4 and below.

Cheapness and easy availability of lending money, though, still are not drawing crowds of people to banks.

The question that officials are beginning to ask themselves is: Just how long will people wait?

SUPPLEMENTAL STATEMENT OF WILBUR C. DANIEL, CHAIRMAN, NATIONAL ECONOMIC COMMISSION, THE AMERICAN LEGION

The following information was obtained from a Member of the House of Repre sentatives, who gave the American Legion permission to use the data, but requested that his name be omitted, and is copied from a letter dated March 3, 1954, written by Mr. Ralph H. Stone, deputy administrator for veterans' benefits, to answer the Congressman's inquiry regarding interest charges, as follows: "2. Congressman letter requests that, based on the formula in section 201 (1), the maximum rate of interest be established for certain dates. Based upon information from the Treasury Department, which reflects yields to maturity of all marketable Government obligations maturing in 12 years or more, the maxima for the dates requested are as follows:

"The Treasury Department has not made the calculations necessary to fit the precise language of the proposed section 201 (1); however, the yield (or interest rate) on the same type of securities maturing in 15 years or more would be only slightly higher (perhaps one to four one-hundredths), and not sufficiently different to change the maximum cited above.

"3. The Congressman's letter further requests that an estimate be prepared of the amount of increased interest which would have been involved on the veteran loans guaranteed by the Veterans' Administration during calendar 1953 if maximum interest rates had been in effect as allowed by section 201 (1) instead of the interest rate established by existing law. The Congressman requests that this be estimated: (1) for the total permissible life of each loan and (2) during the first year of the loan's existence.

"4. In order to simplify the computations involved, it has been assumed that, if the maximum permissible rate of interest were to be fixed as the actual rate, such a determination would be made as of the first of the year. Accordingly, an interest rate of 54 percent has been used as the presumptive interest rate on veteran loans under the provisions of the proposed section 201 (1), even though a higher maximum obtained during part of the calendar year. As a further simplification of the necessary calculations, we have assumed that all GI loans closed in the first half of the year bore the 4 percent rate and that all those closed during the last half of the year were written at 42 percent. Inasmuch as many 4 percent loans were actually disbursed after the maximum was increased to 42 percent in May 1953, the use of this assumption is not believed to affect the accuracy of our estimates materially.

"5. On this basis, if a maximum rate pursuant to section 201 (1) had been in effect for the calendar year 1953 at 54 percent, rather than the 4 and 41⁄2 percent rates actually in effect, the additional amount of interest payments to be made on account of loans guaranteed or insured by the Veterans' Administration would aggregate $429 million over the total life of the loans. During the first year all loans guaranteed or insured by VA in 1953, under the same conditions, the difference in interest payments would have been almost $29 million. The average loan made to a veteran in 1953 amounted to $9,480. For such a loan with a typical maturity of 20 years, the increase in the interest rate from 4 to 51⁄4 percent would require an additional interest payment of $932.83 over the whole term of the loan. During the first year, the increase in interest would be $70.72.

"6. In connection with these estimates, it should be noted that the rates indicated in paragraph 2 and the rates used in estimating the increased costs are maximum permissible rates of interest. The President, under the provisions of section 201 (1) would be given authority to set the maximum rate from time to time at whatever figure was deemed most appropriate in the light of prevailing conditions, provided it did not exceed the maximum permitted."

VETERANS DEPRIVED OF PREFERRED POSITION NOW ENJOYED IN RESPECT TO HOUSING CREDIT

Speaking of preference in obtaining GI mortgage loans, I have read and agree with the statement submitted by Mr. T. B. King, Acting Assistant Deputy Administrator (Loan Guaranty), Department of Veterans' Benefits, Veterans' Administration, when he appeared before the House Banking and Curreny Committee recently. On pages 1, 2, and 3 of his statement Mr. King makes reference to sections 104 and 105 (pp. 3 and 4) of the within bill covering amendments of title II of the National Housing Act. His statement (the last paragraph of page 2 and the first paragraph of page 3 thereof) reads as follows:

"The proposed increases in loan-to-value ratios and the corollary reduction in the cash downpayments, together with the increase in the permissible term of the loan which will make lower monthly carrying charges possible, will make considerably more liberal financing terms possible for prospective home purchasers under the FHA program. This, of course, would tend to dilute the preference which has been available to veterans obtaining GI financing, since the amendments would place nonveterans in virtually an equal position in respect to housing credit terms. The extent to which such dilution would take place

depends, of course, upon whatever action may be taken by the President in exercising his authority under section 201 of the proposed bill. Under the bill the President must authorize the more liberal terms provided for before they become applicable to the FHA program. On the other hand, it is noted that the only action which the President could take in respect to VA guaranteed home loans would be to make GI loan terms more restrictive. If the FHA program is liberalized as contemplated in the bill all eligible veterans, including recent veterans of the Korean conflict, will be deprived to a considerable degree of the preferred position they heretofore enjoyed in respect to housing credit. Inasmuch as it is not known to what extent the President would liberalize the FHA program, the exact effect of the proposed legislation upon the preferred position of veterans in the housing market cannot be forecast."

For all practical purposes these provisions would wipe out the preferences now granted veterans in obtaining GI financing. When the Members of Congress enacted the loan provisions of the present laws they most certainly intended that veterans should be given preference in obtaining these mortgages, and we do not believe the economic status of veterans of World War II or Korea has improved to such an extent as to warrant the termination of such preference, thus forcing them to compete with their more fortunate fellow citizens in their quest for mortgage money.

Mr. KENNEDY. With your permission, I would just like to hit a couple of high spots.

I would also like the record to show, Mr. Chairman, that upon checking with the staff of the committee a few minutes ago, I find that a chart prepared by the Federal Housing Commission which we had intended incorporating in the record has already been inserted by Mr. Hollyday, and I believe it appears at page 157 of the official stenographer's minutes.

The CHAIRMAN. How big is this chart? Would it be well to place it in the record again at this point, do you think? I think it is a good idea to put in in the record at this point.

I think we will, then, place it in the record again at this point, because it must be pertinent to your testimony.

Mr. KENNEDY. I appreciate it.

The CHAIRMAN. We will put it in the record at this point. (The data referred to follows:)

44750-54-pt. 1--24