dollar figures that would result from using those percentages for dollars would result as it happens, since 5 is half of 10-would result in twice the indicated figure over here.

Senator SPARKMAN. Oh, the 6.82 is exactly twice?

Dr. CARR. Yes.

Senator SPARKMAN. That .341 is not .341 percent, then?

Dr. CARR. It is in a sense

Senator SPARKMAN. It is cents?

Dr. CARR (continuing). Per dollar. But if you take the dollar figures that result from this and relate it to $5 million of capital, you are going to get twice; the percent figure is going to be in numbers twice what it looks like over here.

Senator SPARKMAN. All right. Thank you.

Now let me ask you a question. I want to ask you a question that Senator Douglas asked, a question along the lines that Senator Douglas propounded to some witness or witnesses. And I am sure if he were here this morning, he would ask you this question, in view of the fact that you are well versed in both savings and loan matters and also commercial banking matters.

He asked about the basic concept as to the proper lending functions of these two types of lending institutions. In other words, he seemed to be raising some question as to whether or not the legislation sought by these bills might be taking the commercial banks into a field where they have no business being, or it might take them too far afield, probably.

Oh, he is here. I would rather he ask the question.

Senator Douglas, I was trying to ask your question regarding the concept of functions of savings and loan associations versus banks in the lending field. I am sure you can phrase it much better than I could.

Senator DOUGLAS. I doubt that, but

Senator SPARKMAN. Dr. Carr is an authority on these matters. He has given us a very able and informative paper, and I just thought he might be a good one to express an opinion on this subject that you raised yesterday or the day before.

Senator DOUGLAS. Well, savings institutions, of which building and loan associations and mutual savings banks are certainly probably the most important members, perform the function of sweeping up small amounts of individual savings and then investing them in fixed capital; act in a sense as vacuum cleaners in this respect.

Commercial banking, on the other hand, does not operate in this way. It creates additional bank credit and loans this bank credit to individual borrowers, thus reversing the process which takes place in the case of investment banking. In investment banking the deposits come first and the loan is subsequently made to a different set of people, generally, later.

In the case of commercial banking the loan comes first and is credited to the borrower in the form of a deposit against which he draws checks. It is sometimes hard to get bankers to admit this. And it is true that an individual bank operating by itself cannot buck the general drift of the system if the system refuses to expand.

But banks as a whole generally move together and, as a result, you

have short-time credit.

Now, this is normally used to finance working capital, namely, the movement of commodities from the initial stage on through the point of sale. But they should not be used for longtime investments over periods of years.

And the question that I raised was whether, in permitting commercial banks, even though they may have a window for time deposits, might not result in a confusion of these functions—the use of bank-created short-term credit for the financing of long-term capital investments.

Now, part of the trouble with the banking system in the past has been this confusion between investment and commercial functions as well as the confusion between trust functions and investment functions. And so the question that I have asked to some of these witness is to whether they saw in this bill possible danger, or whether I was merely seeking hobgoblins.

Dr. CARR. Well, Senator, at the age of 50, I think I can refer to my boyhood as many people do. As a boy in Davenport, Iowa, I was a Western Union messenger, and the thought occurred to me as I earned money that I should put my money in a savings account.

There were no savings and loan associations in Davenport, Iowa, at that time. I suppose there are now. There was one savings bank, a State-chartered stock savings bank, and I think it was only because I was a Western Union messenger that I even knew where it was. was off on a back street in a very small office surrounded by some other offices.

It

The money, then, was collected and is still being collected in very substantial part in very many communities by commercial banks. And in fact, their savings accounts in dollar amounts in recent years have been rising very rapidly. So one observation I would like to make

Senator DOUGLAS. You mean time deposits?

Dr. CARR. I am drawing a distinction between the time deposits of corporations

Senator DOUGLAS. Yes.

Dr. CARR (continuing). And the accounts of individuals like myself.

Senator DOUGLAS. Yes. But these are time deposits of individuals, too, are they not?

Dr. CARR. Yes. These are time deposits, of the persons in those communities.

I am sure, as I say, in Davenport, Iowa, there are a number of savings and loan associations now. The person in those communities has a choice between whether he puts his money in a savings and loan association or a commercial bank.

The repository function of the peoples' savings, then, is still divided among commercial, savings and loan associations, mutual savings banks, and there are still a few stock savings banks around the country.

It does not seem to me inappropriate, then, since that is the case-it does not seem to me inappropriate that commercial banks should invest in home mortgages.

Senator DOUGLAS. Well, should they invest in home mortgages out of checking accounts out of commercially created credit or out of genuine savings deposited in them on time deposits?

Dr. CARR. Well, again, if you—this I have gone over many times in my own mind. The savings accounts that commercial banks have, that part of it certainly is a legitimate area for long-term investment. And among such long-term investments there can be mortgages, it seems to me. And in fact, to some extent, and especially in those areas and there are still some-where commercial banks are first as a savings repository, if they did not invest in mortgages, there would not be the opportunities for housing that there ought to be.

Senator DOUGLAS. Well, let me say I do not think anyone questions that.

The question that I raised is whether there might not be temptations for a commercial bank to create credit in order to put the money into the secondary market for mortgages which would seem to be liquid but which would be based fundamentally on assets that could not be immediately realized upon. That is the question. And whether the commercial banking leg man would not do things that the savings bank writer would not know about.

Dr. CARR. Well, if this were done, the past record of the past 10 years would be contradicted, because there has been a substantial growth, again, in the savings accounts.

Now, I am not talking about the time accounts of corporations or anything of the like. There has been a substantial growth in time accounts of individuals.

And while in the very last past of the, say, postwar period there was a growth in the ratio of 1 to 4 family mortgages held by commercial banks to their savings accounts of individuals, this has been relatively recent, and I cannot think-and it is a small fraction of that total to start with-I cannot really see any danger in this at all.

And in fact, Senator, it is my fundamental conviction that the reason why savings and loan associations have enjoyed such growth is that commercial banks have not performed that function as well as they should have, and the American public was not about to sit back and wait for the banks to carry the ball.

In consequence, the savings and loan associations have had a very rapid growth, have fulfilled a very worthwhile, necessitous function, because in part, to my mind, the commercial banks have not fulfilled that part of the function that they might legitimately have been expected to do, based on their holdings of savings accounts of individuals. Senator DOUGLAS. Well, I take it, then, you favor composite banking?

Dr. ČARR. I do.

Senator DOUGLAS. Instead of functionally separating banking.
Dr. CARR. I do, indeed.

Senator DOUGLAS. Let me ask you this. Would you favor a bank acting both as a trust company and as an issuing house?

Dr. CARR. I would not.

Senator DOUGLAS. So you do not favor a composite functioning there?

Dr. CARR. Well, the trust function has become, it is true, a function of banks, attached to banks. But I see I draw a distinction in my own mind between trust activities and banking activities altogether. They are acting on behalf of somebody over in their trust function, and they are not acting, except with regard to the common trust

funds-they are not acting with regard to a pool of funds but for each individual that they have a trust account for.

To me this is-while historically banks have done this and historically, at least a good deal of the time they have done this well, I do not call this the banking function at all.

Senator DOUGLAS. Well, now, let me reverse the situation. Would you favor building and loan associations and mutual savings banks loaning on commercial credit?

Dr. CARR. Well, Senator, I have stated publicly that in the future, as I read the march of events, specialized lending institutions will become more generalized.

Now, for my own part, I would not go as far as you have asked or stated. I would say this, though, that in the-with the idea of a freer flow of funds interregionally and between markets and the like, I do think it would be better to have institutions with broader investment functions. I would not go as far as you say.

Senator DOUGLAS. You would not go as far as broadening the functions of mutual savings banks?

Dr. CARR. Well, a good many mutual savings banks have a broad power now. Savings and loan association institutions do not. But in the future I would advocate this, and in the future I think this will take place.

Senator DOUGLAS. Would you do this on agricultural banks if they can invest in industrial securities?

Dr. CARR. I cannot pretend, even though I am a Midwesterner—I got my doctor's degree from the University of Illinois, Senator—I cannot pretend to be an agricultural credit expert. I do not really know enough about them to speculate as to whether this would be advisable or not advisable.

Senator DOUGLAS. Thank you.

Senator SPARKMAN. Well, thank you very much, Dr. Carr. We certainly appreciate your contributions to us.

Dr. CARR. I wonder, Senator, if I might add one thing?

Senator SPARKMAN. Yes, sir.

Dr. CARR. That was brought up in this matter.

And this had to do with FNMA.
Senator SPARKMAN. Yes, sir.
Dr. CARR. You brought it up.
Senator SPARKMAN. Yes, sir.

Dr. CARR. I was hoping you would ask me some of the questions that you asked Mr. Mason.

Senator SPARKMAN. Well, I certainly will welcome your comment on this.

Dr. CARR. The reason why I wanted you to ask me these questions, because at one juncture in the study of matters that this bill is concerned with, I had what I later thought was a cute idea and only a cute idea, and that was that somebody ought to come here and askwell, they really, according to the provisions of the act, they do not have to come here; but somebody should go to FNMA and say: We are going to buy you out. We have bought enough of the stock, the common stock that is outstanding, and we are prepared to put up enough money to pay back the preferred stock advances that they have made, and to buy this, instead of doing something like the bill envisages.

Now, the act specifically says that this in the secondary market facility the act specifically says that this is possible, and indeed a kind of goal to be sought for, that sometime this would be relinquished to private firms.

Senator SPARKMAN. But is it not only through participation?

Dr. CARR. Well, it would not be the insurance part of it, but it would be the equivalent to these mortgage marketing firms.

Well, in any case, I finally rejected this idea on the grounds that the Government would probably consider and probably legitimately consider that it had a function to perform, even if there were private firms in the business, so that if you bought FNMA as a private investor, the Government would then set up another way, with perhaps more restrictive functions, to perform a governmental function in aiding housing.

So I was interested in the question that you addressed to him, because this thought had occurred to me not to wait until FNMA had made enough money so that the preferred stock could be retired but, instead, try to interest some private investor to come in and put up that much-$168-odd million so that the Treasury could be repaid instantly.

Senator SPARKMAN. Now, you are not losing sight of the fact that FNMA is a split personality, are you?

Dr. CARR. Well, the secondary market facility

Senator SPARKMAN. And you are talking only of the secondary market facility?

Dr. CARR. Yes. And the secondary market facility it is possible for this to be done under present legislation. As I said

Senator SPARKMAN. Yes, but I was thinking, would there be any reason for the Federal Government to establish a secondary market if somebody bought FNMA out and continued to operate in this manner? Dr. CARR. That was my final conclusion, Senator.

Senator SPARKMAN. There is a need for FNMA in the special assistance program.

Dr. CARR. Yes.

Senator SPARKMAN. Therefore, one side of this split personality would continue to exist, even though you bought out the private operating side. And if it continued to operate and do the same job FNMA had been doing, I doubt very seriously if we would consider we needed another setup.

Dr. CARR. Well, in any case, my conclusion was that the Government would probably want to have something available that it could use to influence directly, rather than indirectly, say by Federal Reserve policy—influence directly the mortgage market. And consequently it would be wisest to let the Government perform the function it thinks it ought to perform, and therefore leave FNMA where it is and set up private firm-legislation that private firms could take advantage of if they chose to and if their profitmaking opportunity, and their forecast of it, were such that they could do it.

Senator SPARKMAN. Well, I am not sure that I would accept the premise that FNMA influences the trends of the mortgage market very much. I have quarreled with FNMA quite often, particularly with reference to these discounts. And I have argued that, instead of trying to influence the market, as I think it ought to do, it has simply