of them-I mean the banking system-by purchasing large amounts of preferred stock in banks, and taking their home-loan mortgages out of the banks in order to liquefy them, is not that true?

Mr. ADDISON. It was true in the depression.

Senator BANKHEAD. Then you cannot say we should consider it the other way. You have to consider what may happen if you go back in the course of time to those conditions. Then you would have to have the intervention of the Government, I assume, as we had it before. We saved a million homes, as has been brought out here, through the Home Owners' Loan Corporation, with credit that the Government provided.

Mr. ADDISON. Senator, do you feel that if such a depression came, there would be any such demand for the building of this number of homes?

Senator BANKHEAD. Well, I do not know. I do not know that a depression changes the desire of people to have homes.

Senator MURDOCK. May I ask a question?

Senator BANKHEAD. Yes, sir.

Senator MURDOCK. Certainly, whether we have inflation or depression, prosperity or depression, the need for homes remains, does it not? The fact that we go into a deflationary period does not to any degree at all reduce the need for housing?

Mr. ADDISON. Yes; it does.

Senator MURDOCK. The fact that we are not confronting, let us say, an inflationary period, which we hope we will be able to control, in no way affects, does it, the actual need for housing, so we cannot look at the housing situation and the housing needs of the country on the basis of whether we have inflation or deflation. Am I not right in that?

Mr. ADDISON. I do not agree with that, for this reason: When a person or a family economically cannot pay the necessary cost for a new house, there is of necessity and frequently has been, the doubling up of families-son-in-law and daughter go back to father. Senator MURDOCK. Is that what you advocate?

Mr. ADDISON. I certainly do not advocate it.

Senator MURDOCK. That is the very point I want to get. If there are a million homes needed in this country-of course there are many more needed, but to just get it in round figures-if there are a million homes needed today to healthily house the population of this country, that fact as to whether we have inflation or deflation has no effect whatever, does it, on the need for housing?

Mr. ADDISON. I can only state that I would feel that in a depression the need for houses must be measured by the ability of the occupant to pay for housing.

Senator MURDOCK. Of course you are looking at it squarely, as I understand you, from the banker's standpoint.

Mr. ADDISON. Oh, no, excuse me, sir.

Senator MURDOCK. We are trying to look at the problem, or at least I am as a Senator, from the standpoint that people need decent houses, not from the banker's standpoint as to whether they are entitled to a loan or not, where they can get a loan or not, or whether the Government or the bank provides it. The need for housing is still there.

Now, the question arises as to whether or not we are going to depend on the bankers to supply that housing, or whether the Government

should step into the picture to whatever degree is necessary in a cooperative effort with the banks to supply the needed housing. Is not that the situation today?

Senator BUCK. Is not the answer to the Senator's question that the need in time of depression would be still as great as it now is, and should be met, but the demand would not be as great; the need might be there, but there would not be the demand?

Mr. ADDISON. I would like to be thought of as an observer of home buying, and not as a banker when I make this statement. I would regret to see the people urged to buy homes that they could not maintain, if they would lose those homes because of their inability to maintain and continue to service them.

Senator MURDOCK. You do not think any sponsor of this bill or any Member of the Senate wants a condition such as that to arise?

Mr. ADDISON. I hope not.

Senator MURDOCK. Where people would go into homes and then have to give them up.

Senator BANKHEAD. Have we not had a remarkable success under the FHA system of loans?

Mr. ADDISON. Definitely and enthusiastically do I support that, sir, on a rising cost market, however.

Senator MURDOCK. I do not believe that comes into the picture at all. But as to your statement that the banks today are financing the Government, do you really mean that?

Mr. ADDISON. Of $151,000,000,000 in the banks today, $103,000,000,000 of that is invested in Government securities.

Senator MURDOCK. That is very true, but how do you invest in Government securities? If the Treasury delivers a million dollars in bonds to a commercial bank today, what do you do for the bonds? I think the people ought to know just what you do.

Mr. ADDISON. I do not get the meaning of the question, sir.

Senator MURDOCK. If I buy a bond as an individual, a thousand dollar bond, I must deliver to the Treasury of the United States cash for the bond. Now, what does the bank do?

Mr. ADDISON. The banks during drives would pay by credit. However, during the last three drives, bonds were not available for subscription by banks. We are proud of the effort that the American banking system has put forth to persuade its depositors to draw money out and pay it for bonds, to put it through the channels of trade for the Government's disposal.

Senator MURDOCK. I am proud, too, of what you have done, but I think when a banker says that the banks are financing the Government today, that the people should understand just how it is done.

Suppose a bank buys bonds today, is not this what happens? The bonds are delivered to the bank by the Treasury. The bank creates a demand deposit for the Treasury against those bonds, and under a law that we have passed, you are not required to have one thin dime in reserve as against that deposit. Is that right?

Mr. ADDISON. That is correct.

Senator MORDOCK. Immediately upon receiving the bonds, under another law that we have passed, the bonds can be immediately exchanged at the request of the bank for the same amount in Federal Reserve notes, is not that right?

80525-46-pt. 1-27

Senator BANKHEAD. Through the Federal Reserve banks.

Senator MURDOCK. Of course, through the Federal Reserve banks. So that when bankers tell me that they are financing this Government and have been in this war, I always like to think of it in the actual terms of the process of doing it.

The people are called upon to buy bonds and in exchange for the bonds they deliver cash, but with the banks all that is required is the setting up of a demand deposit, without any reserve requirement at all. Senator BANKHEAD. It is merely a matter of bookkeeping.

Senator MURDOCK. So that we have made it so convenient, in my opinion, for the banks to receive interest-bearing securities which are immediately cashable for the exact amount which you pay for them, or supposedly pay, that immediately begin to draw interest and continue to draw interest, notwithstsanding the fact that you may convert the bonds immediately into currency, such as Federal Reserve notes. Now, that is the procedure, is it not?

Mr. ADDISON. That is the procedure, with the reservation I have previously stated, that the last three drives we have not been permitted to buy bonds, and as a result, this $103,000,000,000 to a large extent is investment by purchase on the market, and not by credit.

Senator MURDOCK. And that is the way it should be. Nothing could be more inflationary, in my opinion, and in the opinion of witnesses who have appeared before this committee, than the process of the Treasury delivering bonds to the banks without any reserve requirement at all, which can immediately be cashed or used for the issuance of Federal Reserve notes.

I should like to make this final observation, and I do not do it to discredit the banks at all. I hear so much about the great financing job that the banks are doing for the Government. It is my opinion that we should look at it, instead of as a financing job being done by the banks for the Government, as a very convenient proposition worked out by the Congress in connection with the banks and the Government, to finance the country during this war.

Senator BANKHEAD. Have the banks made a profit on their financial transactions in the matter of financing the Government on these bonds, as you call it, financing the Government?

Mr. ADDISON. Yes, sir.

Senator BANKHEAD. They have made a profit?

Mr. ADDISON. Yes, sir.

Senator BANKHEAD. Then it was not just a patriotic gesture, it was a business transaction in which the banks profited?

Mr. ADDISON. I should say it is a patriotic effort, and that there is the necessity for profit, if we stay in business.

Senator BANKHEAD. What is the total capital and surplus belonging to the banks in this country?

Mr. ADDISON. I have those figures and can supply them.

Senator BANKHEAD. I want to see what it means when you say that the banks own the $103,000,000,000 of bonds. I want to see how much of their capital and surplus is invested in those bonds.

Senator MURDOCK. If I may make the further suggestion, Mr. Chairman, I think we should have the capital and surplus, and undivided profits.

Senator BANKHEAD. Yes, sir. I want the total capital ownership of the banks, not their deposits, their loans, or notes.

Mr. ADDISON. The statement is taken from the Federal Reserve Bulletin of September 1945. The total deposits

Senator BANKHEAD. No; I am not talking about deposits.

Mr. ADDISON. I will give it to you as it is.

Senator BANKHEAD. I want to see what the banks own. The depositors own the deposits, of course.

Mr. ADDISON. This set of figures here

Senator BANKHEAD. I want to distinguish between the real assets of the banks' ownership, and the use of depositors' funds. The point is, how much of this $103,000,000,000 belongs to the banks?

Mr. ADDISON. I would make a statement, subject to being verified, that there would not be over $10,000,000,000 of the $103,000,000,000. Senator BANKHEAD. I had the idea that it would not represent any very large proportion. So I do not believe it is fair to the public to represent that the banks are carrying $103,000,000,000 of it, when only about 10 billions in fact belong to the banks. All right, that is all.

Mr. ADDISON. Senator, I would like to put those figures in the record which are not in that particular bulletin. Would that be permissible? Senator BANK HEAD. Oh, yes.

Mr. ADDISON. Mr. Schwulst, the next witness, is the vice president of the Bowery Savings Bank of New York, if you care to have Mr. Schwulst testify.

Senator BANKHEAD. All right, Mr. Schwulst, come around.

STATEMENT OF EARL B. SCHWULST, EXECUTIVE VICE PRESIDENT, BOWERY SAVINGS BANK, NEW YORK, N. Y.

Mr. SCHWULST. Mr. Chairman and gentlemen of the committee, my name is Earl Bryan Schwulst. I am chairman of the committee on mortgage financing and urban housing, which is a subcommittee of the committee on Federal legislation of the American Bankers Association. I am also executive vice president of the Bowery Savings Bank, 110 East Forty-second Street, New York City.

That is a mutual savings bank. It has no stockholders. All of its deposits are savings deposits. Those deposits at this time aggregate approximately $580,000,000, deposited with us by about 385,000 individual depositors. Those deposits are invested, roughly, to the extent of about 50 percent.

Senator BANKHEAD. What rate of interest do you pay?

Mr. SCHWULST. We are paying 12 percent interest. Those deposits are invested, roughly, to the extent of about 50 percent in mortgages.. We have some 14,000 mortgage. loans, of which approximately 7,000 are on family homes, and the bulk of the remainder are on apartment houses. Most of the remainder of our assets are United States Government bonds, which we have bought with cash.

I wish to make a statement to you on behalf of the American Bankers Association with respect to titles III, V, VI, and IX of S. 1592,.on which these hearings are being conducted.

Title III Amendment to Existing Aids to Frivately Financed Hous ing: Sections 301 to and including section 306 are related to the op

erations of Federal savings and loan associations, the Federal homeloan banks, and the Federal Savings and Loan Insurance Corporation. Without passing any judgment on the merits of the proposals contained in these sections, we are of the opinion that the subjects dealt with in these sections should not be incorporated in a bill which is concerned with so many matters that are not related to the operations of these institutions. To the extent that these matters ought to receive consideration, they should be made the subject of a separate bill in order that they may be studied by Federal and other officials concerned with these institutions. We understand also that in fact there are bills now pending before this committee which would deal with those matters, and that hearings will shortly be conducted in reference to them. We ask permission at that time to be heard by you in connection with those bills.

Sections 309 to and including section 317 of this title are amendments to the National Housing Act. We have no objection to these sections, with the following exceptions.

The first exception is section 309 (b). This section of the bill would require that before the FHA could insure a mortgage, that mortgage would have to contain a mandatory provision requiring the lender to grant a moratorium to the borrower if the borrower could not pay his interest and his installment of the principal because of unemploy ment or economic conditions or misfortunes beyond his control. As I understand that section, the maximum extension at any one time would be 1 year, and the aggregate of such extensions or moratoria would be 3 years.

The effect of this provision, in my judgment—and we are a large lender-my bank is a large lender on FHA mortgages-may well be to make FHA mortgages unattractive to many investors. We have nearly $50,000,000 invested in FHA insured loans. And I may say that we think that the FHA is an agency of the Government which has made an immense contribution to improving mortgage lending practices and standards among private lenders.

Senator MURDOCK. Do you not think that was the primary purpose of the FHA, to do just what you have just now indicated?

Mr. SCHWULST. I think one of the primary purposes of the FHA was to do just that, improve standards, improve practices, help to eliminate expensive second-mortgage financing and establish a more liquid market for mortgage loans. And I think it has accomplished all of those purposes.

Senator MURDOCK. You consider that from the banking standpoint the primary purpose of the FHA?

Mr. SCHWULST. Well, now, Senator, I do not know that I get the exact purport of your question.

Senator MURDOCK. Well, what I contemplated as a legislator when I voted for the FHA was that its primary purpose was to make it possible for American home owners to occupy decent American homes. Surely that was the primary purpose.

Mr. SCHWULST. I think that was one of the primary purposes, and I think the FHA has been very successful in accomplishing that purpose, notwithstanding the fact that there have been some houses secured by FHA loans which have fallen far short of the standards which FHA is supposed to promote.