gages would amount to 31.7 percent of those deposits. The aggregate of such holdings, therefore, would amount to 55.3 percent of those deposits. We assume that the Government bonds, the corporate bonds, and the mortgages would yield to the commercial banks the same as they yielded to the insured mutual savings banks. This assumption probably overestimates the earnings of the commercial banks somewhat with respect to these particular investments. The time and savings deposits of the commercial banks at the end of 1949 amounted to $35,902,235,000. Of this amount, 55.3 percent, or $19,853,936,000, were invested, we assume, as above indicated, and 44.7 percent, or $16,048,299,000, were invested as the demand deposits of the commercial banks were invested. With respect to the determination of operating expenses that might be allocated to the savings and time deposits, we have assumed that with resepet to that proportion of the time and savings deposits invested in long bonds and real estate mortgages the operating ratio would be the same as that of the insured mutual savings banks. With respect to the other time and savings deposits which were invested as demand deposits were invested, we have assumed that the operating ratio would be the same as for the demand deposits. We have allocated nonoperating income and expense in the same ratio as total time and savings deposits bear to total deposits, and we have done the same with respect to the allocation of capital funds and capital stock. We assume that the net taxable income allocable to time and savings deposits would be taxed on the same basis as the aggregate net taxable income of the insured commercial banks was taxed. Finally we assume that the capital stock assigned to the time and savings deposits would receive dividends out of the earnings from the time and savings deposits available therefor at the same rate as was actually paid on the capital stock from the aggregate available earnings of the banks. Under the foregoing assumptions, we arrive at the following operating figures applicable to the time and savings deposits of the insured commercial banks for 1949. Operating income from the investment of $19,853,936 of time and savings deposits_ . Operating income from the investment of $16,048,299 of time and savings deposits. $705, 594, 000 388, 192, 000 1,093, 786, 000 407, 456, 000 Net earnings available for dividends and additions to Dividends paid to stockholders... Additions to capital accounts... Capital stock allocated to time and savings deposits.. Other capital funds (surplus, etc.) so allocated.. Total capital funds so allocated_ Earned on net worth, percent. Dividends paid on stock, percent. Operating expense as percentage of average time and savings deposits ($35,612,317,000), percent... AFTER RECESS (The committee resumed at 2:30 p. m., upon the expiration of the recess.) The CHAIRMAN. The committee will be in order. The next witness is Mr. Oscar R. Kreutz, executive manager, National Savings and Loan League, Washington, D. C. Mr. Kreutz, will you give your name and address and the capacity in which you appear to the stenographer for the benefit of the record? STATEMENT OF OSCAR R. KREUTZ, EXECUTIVE MANAGER, NATIONAL SAVINGS AND LOAN LEAGUE, WASHINGTON, D. C., ACCOMPANIED BY J. J. O'MALLEY, PAST PRESIDENT, NATIONAL SAVINGS AND LOAN LEAGUE; AND DUDLEY MILLS, PRESIDENT, FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION, MERIDEN, CONN. Mr. KREUTZ. My name is Oscar R. Kreutz. I am representing the National Savings and Loan League. With me today on my left is Mr. J. J. O'Malley, of Wilkes-Barre, Pa., a past president of the league, and president of the First Federal Savings and Loan Association of Wilkes-Barre, Pa., and on my right is Mr. Dudley Mills, president of the First Federal Savings and Loan Association of Meriden, Conn. Our president was to have been here from Paris, Tex., but he was forced to change his plans. On behalf of the members of the league we wish to thank the committee for this opportunity to appear. We appreciate the magnitude of the problems confronting the committee. We hope we can be of some service to the committee in connection with some of those problems. One hundred and twenty years ago a group of people met in Frankford, Pa. They formed the Oxford Provident Building Association, the first of its kind in America. From this small beginning the building and loan movement spread throughout Pennsylvania and into other States. Eventually many thousands of these thrift and home-financing institutions were formed. The public-spirited citizens who organized these building and loan associations had no thought of personal profit. They were concerned with the need for building homes. They were impressed with the almost complete lack of facilities for financing the building of homes on reasonable terms. They recognized that the encouragement of thrift among small wage earners was the only way to make sure that people of small means could get homes. The directors were elected by the members of these building and loan associations. Usually they served without pay of any kind. Frequently the secretaries whose job it was to keep the books and be responsible for the operating details served with very little or no pay. Just as frequently the organizers of these associations set out on their self-appointed undertakings with the zeal and fervor of religious crusaders. Slightly more than a hundred years after the Oxford Provident Building Association was formed, home-building activity throughout the Nation was suffering from a paralysis caused by the worst depression in our history. An analysis made by the Seventy-third Congress revealed the fact that about the only type of lending institutions which were then making loans to finance homes were building and loan associations, but even these institutions were crippled by the general loss of confidence in all financial institutions. But the Seventy-third Congress found that building and loan associations were especially well fitted to finance homes of the low- and middleincome groups and so the Congress authorized, as a part of the Home Owners' Loan Act, the creation of Federal savings and loan associations. The Congress directed the Federal Home Loan Bank Board to give "primary consideration to the best practices of local mutual thrift and home-financing institutions in the United States" in issuing charters for such associations. The Congress also provided substantial financial assistance to the development of these associations. Today, building and loan associations, both State and federally chartered, number approximately 6,000. Their combined assets exceed $16 billion. Some $14 billion of savings in these associations are held by approximately 10%1⁄2 million members, while 31⁄2 million persons are borrowing members. Last year alone building and loan associations financed 900,000 homes for the people of America. Most of these home buyers were in the middle- or low-income groups. I am submitting for the information of the committee and for the record a table showing the number and assets of building and loan associations in each State. This table also shows the number of saving and investing members and the number of borrowing members of these associations. As a further encouragement to the development of these associations, the Seventy-third Congress also provided for the insurance of their shares through an instrumentality of the United States, the Federal Savings and Loan Insurance Corporation. Thus the member of a building and loan association takes no risk as does the investor in an ordinary business_corporation, but neither does he expect nor receive anything more than a very modest return on his savings. The average building and loan or savings and loan association distributed to its members in 1949 $25,099 of taxable income for each million dollars of their savings or deposits. For comparison purposes, we shall use 20 percent as a tax rate, considered fair all around. There is thus produced approximately $5,000 of tax revenue for each million dollars of savings. The figures used to compute the tax revenue are taken from the annual report of the combined financial statements of members of the Federal Home Loan Bank System for the year 1949, published by the Home Loan Bank Board. On page 12, we find that the member institutions had a total of $11,396,091,000 in savings capital. On inquiry of the Home Loan Bank Board we found that these same institutions had, at the end of 1948, total savings of $9,964,865,000 or an average of $10,680,478,000 during the year 1949, when, according to page 51 of the report, they paid a total of $268,069,000 in dividends. This would amount to $25,099 in taxable income per million of average savings, and a 20-percent tax would produce $5,019.80 in tax revenue per million dollars of this savings capital. In contrast let us look at insured commercial banks, and, using official figures again, we find that these banks in 1949 provided approx imately $3,300 in tax revenue to the Federal Government per million dollars of average deposits. The total deposits of insured commercial banks are shown by the December 31, 1949, report (p. 136) of the Federal Deposit Insurance Corporation, as $143,137,715,000. Total deposits of insured banks at the end of 1948 were shown by the 1948 report (p. 82) of the FDIC to be $140,641,975,000, making an average of $141,889,845,000 during 1949. On page 160 of the 1949 report total interest paid on deposits was shown to be $328,010,000. Figure a 20-percent tax on this and the amount is $65,602,000. The insured commercial banks (p. 160) paid total Federal income tax-corporation tax-of $304,572,000. The same banks paid out in dividends on capital stock (p. 160) a total of $354,144,000. Assuming an average tax rate of 30 percent on these dividends the tax would be $106,243,200. We used 30 percent because we assumed the stockholders in these banks were of the wealthier class and would pay at the higher rate. Total revenues produced by banks in 1949 would thus amount to $476,417,200. This is comprised of the 20-percent tax on the interest paid on deposits, $65,602,000; the 30-percent tax on dividends on capital stock, $106,243,200; and corporation tax of $304,572,000. Relate the total average deposits to the total tax and we find that the average insured commercial bank provided the Federal Government with $3,357 in tax revenue per million dollars of average deposits. In other words, for every $1,000 of deposits in commercial banks, the banking system, including its depositors and stockholders, pays approximately $3.30 in Federal income taxes, whereas for every $1,000 of savings in the building and loan movement there is paid approximately $5 in Federal income taxes. Now let us consider the question and the probable effects of a direct Federal income tax on building and loan associations. A tax upon gross income in excess of the immediate cost of operation and dividends distributed to members of building and loan associations either will or is likely to have the following broad effects upon the national economy: 1. The harm to the economy through distortion of home financing supply will exceed the value of the tax revenue. 2. Demands for direct Government financing, guaranteeing, and aids to housing would be multiplied. 3. It would eventually result in the substitution of Government operation, subsidies, and controls in lieu of privately operated institutions and private competition. 4. Until such substitution occurs, costs of housing and home ownership will rise despite the variety of legislation designed to bring down such costs. 5. Undue harm to thrift and savings' habits could result in contrast to present governmental encouragement. Building and loan associations currently hold 31 percent of the total urban home-mortgage debt as compared to 16 percent for the next highest institutional holders. They finance about 50 percent of the total amount of home-mortgage loans in the United States which are not Government guaranteed or insured and which are made by financial institutions. I might say of their portfolio 70 percent are neither insured nor guaranteed. |