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(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?


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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 103 million members, while 3)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 approximately $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.

They specialize in financing the homes of the middle and lowest income groups. For example, approximately 45 percent of the loans made by these associations in 1949 to finance home construction and home purchase were made to families with incomes of less than $3,500; 25% percent were made to families with incomes of from $3,500 to $4,500. By reason of their governing laws and methods of operation they are the only group of institutions which are equipped to make loans of this type on a practical basis throughout the entire country.

If the functioning of these institutions and their normal growth is curtailed, there will, of necessity, be a lessening of the supply of money for home financing, especially in the critical middle and low income field. Such curtailment or an operation of doubtful safety must result from a tax. Federal and State supervisory officials are constantly prodding these associations to increase their reserves more rapidly; that is, at a higher rate.

It has been the long-standing policy of Congress to foster these institutions for the promotion of thrift and home ownership. To that end the Federal Home Loan Bank System was established, as was the country-wide system of Federal savings and loan associations and the Federal Savings and Loan Insurance Corporation. For the same purpose the Eighty-first Congress enacted H. R. 6743 which further strengthened the building and loan movement while providing for the early return to the Treasury of funds which had been advanced by it in the thirties to the Federal home loan banks and the Federal Savings and Loan Insurance Corporation.

Nearly all of the States have statutes recognizing the sound public policy served by these institutions.

The unfavorable consequences on building and loan associations of a direct income tax would be serious.

1. A direct income tax would necessarily result in either a sharp reduction in dividends distributed to members, or a reduction in loss reserve ratios, or an end to growth, with a drying up of this source of thrift capital. Prudent management and supervisory authorities have long recognized the necessity of considering statutory reserve requirements as the barest minimum only.

2. Believing that prudent management would try as in the past to accumulate adequate reserves for the protection of the small saver, it would appear that the burden of a direct income tax would falí upon the small saver in the form of a sharply reduced dividend rate.

If, however, the burden of a direct Federal tax were to fall upon reserves, the result would be a direct weakening of the entire building and loan structure and an unwarranted increased financial risk to the Federal Savings and Loan Insurance Corporation.

3. The tax would inevitably restrict the sound growth of building and loan associations and they would be unable to maintain their position in the expanding economy and the expanding field of mortgage debt. The impairment to the operations of such associations would necessarily diminish in comparable degree their service in the promotion of thrift and home ownership.

There has been no change in the basic purpose of building and loan associations since their origin in this country in 1831, nor has there been any change in the functions which served as the basis for their exemption from Federal income taxes.

Under the original terminating plan, one group of members pooled their savings to provide funds to finance homes of other members. If losses resulted from such loans, they were equitably distributed among all the members on a pro rata basis by the simple device of recapturing the necessary portion of the earnings which had been divided among all members but retained by the association until the maturity of the shares.

The serial plan which later became popular was in effect merely a combination of several terminating groups of shareholdings within the same association. Here again losses as well as earnings were equitably distributed pro rata among the members of the association.

These plans of operation were cumbersome, so they were generally abandoned in favor of the simpler type of operation as exemplified by the Federal savings and loan association which represents a combination of the best practices of local thrift and home financing institutions as required by the Congress when it authorized their chartering. However, the

basic concept of the building and loan association has not changed. The association is still the facility through which people of small means pool their savings in order to provide for the financing of the homes of their fellow citizens. The benefit to the individual saver from this arrangement is that he obtains the safety and earnings available through a loan secured by a first mortgage on an American home. It is doubtful whether many of the members of building and loan associations would be able to obtain these advantages without pooling their savings with those of other people.

As in the case of the first association each member of the modern association is a cooperator with the other members in this undertaking for the mutual benefit of all members. As a part owner of the assets of the association he receives a pro rata share of the earnings in the association after the payment of operating expenses and provision for present or potential losses. In the event of dissolution-voluntary or involuntary—he receives his pro rata share in the distribution of assets. This relationship constitutes mutuality.

There is an important difference between the method of meeting losses in the early associations and the modern association. The change in this respect is the result of experience and the requirement of State and Federal laws.

In the original association all of the net earnings each year were divided among all of the members pro rata according to their shareholdings. When losses occurred, they were charged against all of the members' holdings on a pro rata basis.

In the modern association a portion of the earnings are retained each year in a special fund for the purpose of absorbing losses. The portion of such earnings which is retained for the protection of all members is determined by statutory requirements and prudent management based upon the long experience of building and loan associations in general.

The purpose of this more modern arrangement for absorbing losses is to deal fairly and equitably with all the members of the association. Under the old arrangement some members withdrew from an association before losses developed in loans on which they had received their pro rata share of earnings. In such cases the remaining members were forced to absorb an inequitable share of the losses.

There is no basic difference between assessing the members of a building and loan association for their pro rata share of losses after

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