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Provision for research: Congress should make suitable provision for existing Federal agencies, in cooperation with educational, research institutions, and the construction industry, to correlate and to encourage research on construction materials and methods. This might be done by setting up a committee on construction research, which would be composed of men from Government agencies directly concerned with research in this field, and men from private life who have an outstanding reputation for their interest and achievements in the field of research as it relates to the construction industry. Such a committee itself should not carry on research activities but should coordinate and encourage the research work which is presently being carried on by several Government agencies, by private business concerns, and by foundations and educational institutions.

It should be noted that the Department of Commerce, through its Bureau of Standards, and the Department of Agriculture, through its Forest Products Laboratory, are already deeply concerned with many phases of technical research in the building and construction field.

Action already has been taken by the Department of Commerce, with the approval of Congress, for setting up a construction division in its Bureau of Foreign and Domestic Commerce, to assemble in one place and to make available to the construction industry all pertinent statistical and other data bearing on its operations, including housing. I submit for your consideration that the building industry needs a Henry Ford in every city, who will produce houses for a small family at $1,500, $1,800, or $2,000; but this will require extensive research as to materials and methods of production.

Herein rests the great undeveloped opportunity for cooperation by Government and private industry. Government should encourage research which will make lower-cost houses possible. Industry certainly can provide them.

Clearing the way for urban redevelopment: Another fundamental objective which must be accomplished to bring about a permanent improvement of housing is to clear the way for a resumption of community initiative and responsibility for urban redevelopment.

This objective cannot be attained through action in Washington. It is the States, and not the Federal Government, which are in a position to give cities the necessary powers to plan for and to carry out the redevelopment necessary to make them attractive places in which to live and work.

Definite progress is being made along two lines. For the first time, cities are working with the highway departments in their States in planning improvements in their major thoroughfare systems. Funds for carrying these plans into effect are available through the Federalaid highway appropriations, as previously noted.

For the first time, also, cities are being given adequate power and funds to reclaim their run-down areas.

Urban redevelopment laws have been enacted by a number of States to provide a legal basis for assembly by condemnation of land within cities for redevelopment. Outstanding among these laws is the measure enacted this year by the Indiana Legislature, which authorizes the establishment of a redevelopment commission in Indianapolis with power and funds to clear and replace slums and blighted areas,

and then, under proper safeguards, to sell or lease them to private individuals for redevelopment. There is also encouragement in the appropriation made this year by the Illinois Legislature to assist municipalities in that State to finance urban redevelopment programs. The States and cities are in better financial position than they have been in years to assume the costs of local improvements. They should be encouraged by Congress to take the initiative and to assume the costs of financing these new, important, but as yet untried and experimental programs for reclaiming slum and blighted areas. Congress should see to it that its fiscal policies are such as will not unduly hamper the ability of the State and local governments to carry out their responsibilities in this and in other fields which are properly in their jurisdiction, or to tempt them by Federal grants to evade such responsibilities.

Bill contemplates large expenditure: S. 1592 contemplates an expenditure by the Federal Government for housing and for urban redevelopment of several billion dollars over a period of years. These expenditures will be financed by issuing obligations, largely taxexempt, which will be repaid by what might be called a sinking-fund arrangement, which in the bill goes under the name of annual Federal contributions.

Proposed expenditures would be untimely and inflationary. Much of this expenditure of Government funds would occur during the next 5 years, at a time when the private building industry will be straining every resource to take care of accumulated housing and other building requirements which can and will be financed by private funds. It would occur at a time when the States and cities are in a better financial position than they have been in years to assume the costs of programs for reclaiming slums and blighted areas. It would occur at a time when Congress itself faces the extraordinarily difficult fiscal problems created by a debt approaching $300,000,000,000. It would be an untimely and inflationary expenditure of Government funds.

Most of the Federal expenditures contemplated in S. 1592 are for public housing and related slum clearance with the objective of providing housing for low-income groups at prices they can afford to pay. This objective is accomplished not by the production of improved housing at lower cost, but by subsidies in the form of low interest costs, and by local tax concessions. Thus housing becomes a social goal, regardless of the ability of a project to sustain itself economically, and the occupants become quasi-wards of Government. Builders, landlords, home owners, and investors naturally wonder whether housing has entered an era in which its otherwise bright future is to be obscured by the threat of Government competition, and the threat of ultimate Government ownership and control of all housing.

Significance of interest rates: S. 1592 is conspicuous because of its stipulations throughout of very low interest rates and, therefore, no discussion of the bill would be complete without some comment on this subject.

Earlier this year, able testimony was presented before the Taft subcommittee by Elbert S. Brigham, president of the National Life Insurance Co., and Paul Bestor, vice president of the Prudential Insurance Co. of America, who emphasized that any consideration of the future

of housing and mortgage financing requires giving attention to interest rates and their relation to mortgage activity.

During recent years, money rates including mortgage rates have been the lowest in history for reasons which are well known. From various quarters, the suggestion is advanced that rates should be still lower, and that the Federal Government should establish and maintain them at incredibly low levels by governmental action.

The intentions of these persons undoubtedly are of the best, but we should not overlook probable consequences of such rates or the rights of lenders who represent the savers of the country, as well as the rights of borrowers, and the fact that most savers are dependent upon the income from their savings to support them when incapacitated for work.

A substantial and satisfactory spread must exist at all times between the rate on mortgage loans and other investments or mortgages cease to be appealing investments. Let us take, for example, loans with a 42-percent interest rate. Recently at the American Life Convention annual meeting held in Chicago, consideration was given during a panel discussion to the net interest return on mortgage loans. Figures as to the interest rate and cost of administration were presented by representatives of four different companies. These figures were averaged and it was demonstrated that, assuming a 42-percent interest rate on mortgage loans, the net return is 3.04 percent after deducting costs as follows: Service fee, 0.55; originating commissions, 0.43; principal losses, 0.15; home office expenses, 0.33.

Had the gross interest rate on these loans been 4 percent, and other costs the same, the return to the investor would have been 2.54 percent. Instead of buying FHA loans or uninsured mortgage loans, an investigator can purchase long-term Government bonds at 22 percent with no risk of loss, or corporate obligations. Bonds can be registered and the check for interest is mailed to the investor on each interest payment date. With bonds, the lender encounters no difficulties in servicing loans, problems in personnel, foreclosure, liquidation of acquired real estate, or any of the other problems inherent in mortgage lending. It is imperative that the net return on mortgage loans must be attractive to investors in order to induce them to make loans. Prospective mortgagors are in constant competition with other borrowers, including railroads, industrial organizations, and all other seekers of credit.

This subject of interest rate is part and parcel of the still larger problem of inflated construction costs and abnormal real-estate values. It is idle to devise more governmental machinery for housing, while ignoring the obvious fact that today costs and values are the great hurdle in the path of speedy correction of housing shortages. As a result of governmental deficit financing during the war and in prospect for sometime to come, a huge money supply has been built up far in excess of any reasonable need of the economy. It operates as a continuing inflationary threat on all prices, real estate and other. In addition, it operates to increase the supply of investment funds and to force interest rates downward.

As previously pointed out, a certain spread is necessary between mortgage interest rates and the rates on Government and corporate bonds, which means that when Government bonds are available at

212 percent, the mortgage rates cannot fall much, if any, below 4 percent without funds flowing into governments in preference to mortgages. However, if the supply of funds is large enough, it will force both rates lower while maintaining the differential, as is happening now in the markets for Treasury bonds and mortgages.

At the same time, the pressure of an unwieldly money supply is a potent factor in pushing prices upward. In real estate where control measures are extremely difficult to apply, it operates both directly in stimulating the building-up process, and indirectly in facilitating financing.

If we are to control inflation, we must attack the root causes, among them an excessive and expanding supply of money. In my view this will involve, first, balancing the Federal Budget with restraint upon new spending and maintenance of high tax revenue, and, second, reduction of the money supply.

The money supply is now largely in the form of bank deposits owned by the general public. It can be reduced by refunding the maturing bank-owned short-term securities into long-time holdings by the public. In other words, we should seek to induce the public to exchange their deposits for Government bonds.

I submit to you that the most effective way to accomplish this is to raise rather than lower the interest rate.

If the Treasury were to offer a long-term bond at a rate somewhat higher than the prevailing rate, designed to take up the liquid savings of the public, both directly and through savings institutions, it would, in my judgment, have the following effects:

1. It would encourage saving rather than spending at a time when there is an excess of demand in the commodity and real-estate markets. There is little reason to save when interest rates are extremely low and the currency is depreciating.

2. It would check the inflationary boom in real estate. Money which is now seeking investment in mortgages would be drawn toward Government bonds.

3. It would check the flow of equity capital into the stock market and the real-estate market by serving notice on persons hedging against inflation that the Government's easy money policy was not perpetual.

It frequently is argued that low money rates are necessary in order to keep at a minimum the costs of carrying our huge Federal debt. And yet, if a policy of low interest rates produces higher prices, the real cost of carrying the Federal debt may be greatly increased and the burden may become extremely onerous to every citizen of our country. Higher prices resulting from Government fiscal policies are a vicious and hidden tax just as burdensome, and possibly more so than any direct tax.

In conclusion, it is our opinion that while S. 1592 contains numerous points of merit, the housing situation in America is is not so grave that it calls for omnibus treatment with Government entering the housing field on a basis and to an extent it has never entered this field before.

The CHAIRMAN. Mr. Veit, may I ask-I know you have been very patient all day-we are in this difficult situation: Would you under the circumstances prefer to file your statement?

Mr. VEIT. Well, I would render it tomorrow morning.

The CHAIRMAN. Well, we have a lot of witnesses tomorrow. Are you going to be here overnight?

Mr. VEIT. I don't want to; no, sir. But I would like at least to make a brief statement of what I have got to say and leave the rest here.

Senator ELLENDER. Is that all right with you, Mr. Farr?

Mr. FARR. Yes.

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Mr. VEIT. My name is Robert T. Veit. I am a partner in Shields & Co., New York, in charge of the municipal operations of that firm, and as such, head of one of the major groups that has underwritten and distributed a substantial part of the local housing authority bonds that have been floated. The views expressed herein represent an interchange among the main distributing groups active in housing obligations. They may fairly be said, I think, to represent those of most of the upwards of 100 security dealers throughout the Nation that, competing keenly, have established and maintained markets for the securities in question. In other words, we are the people who have gotten from the public all the money that has been permanently invested in the local housing authority, that is, the low-cost housing, built by the local authority. I only wanted to speak about a few things in which we have had practical experience. We are quite familiar with the working of municipalities and local governmental bodies. We have long been concerned with the great physical deterioration of our centers of population.

Please let me add at the outset that, because our activities in the field of public housing have been confined to underwriting and distributing bonds issued by local public housing bodies, the remarks made are necessarily confined to matters collateral thereto. Obviously, we shall seek every opportunity to further the issuance of any other classes of security that may be evolved out of the Housing Act, and that are susceptible to the mass distribution to which our efforts are devoted. I, for one, am hopeful that the field of housing for those of middle incomes may afford us opportunity. Under the capitalistic economy, the main object of public housing must be that of impelling the individual on an upward economic path that will free him of the need of the merest subsidy from the public purse. It is, therefore, to our interest to assist in attaining that aim. At this time, however, I am qualified to deal only with matters in which we have had actual, practical experience.

The majority of those whom I regard myself as representing deal in obligations of municipalities and other local governmental bodies. We have long been concerned with the growing deterioration of our centers of population. Substandard areas contribute largely to tax delinquency, and so are a threat to the credit of the local government. While the elimination of slum areas may remove properties from the tax roll, payments in lieu of taxes from low-cost housing have been effective offsets. The more important consideration is that the physical

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