Banking and Housing

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Banking and Housing

Franklin D. Roosevelt had been inaugurated as president of the United States on March 4, 1933, a day that found the U.S. banking system paralyzed. On March 6, Roosevelt declared a nationwide "bank holiday," closing all U.S. banks until March 13. The "holiday" allowed a time-out in the rapid decline of the U.S. banking system. The Emergency Banking Act of 1933, passed by Congress on March 9, provided for government inspection of the nation's banks. The Banking Act of 1933, passed a few months later, and the Banking Act of 1935 laid the foundation for reform of the U.S. banking industry. The 1933 Banking Act provided for creation of the Federal Deposit Insurance Corporation (FDIC), which insured depositors against loss of their money in the event of a bank failure. The FDIC restored the public's confidence in the banking system.

All of these measures were part of the New Deal legislation developed under Roosevelt's administration. The New Deal programs were designed to bring relief and recovery to the American people and to industries that were struggling to survive in the Great Depression. The Great Depression was the most severe economic crisis the United State had ever experienced. It began with the crash of the stock market in October 1929 and lasted until the United States entered World War II (1939–45) in 1941.

The structure of the U.S. banking system in the 1920s contributed to the economic problems that led to the Great Depression. There were many small, often rural, single-office banks (unit banks) that by law could not establish branches to broaden their base of depositors. These banks made a careless practice of loaning money for speculation in the stock market (speculation means buying stock with the assumption that it can always be sold for a profit). This created a dangerous situation, because people who borrowed money to invest could not repay their loans if stock prices dropped. Many Americans lost money through speculation, and, as a result, they fell behind on their home loan (mortgage) payments.

By 1933, 40 to 50 percent of all home mortgages were in default; that is, the borrowers were behind in payments and faced losing their homes. Home financing was the anchor of the banking system; without loan payments coming in, the banks were in danger of collapse. Roosevelt had to rescue the banking industry, but his administration went a step further by developing housing legislation that would help reform U.S. banking. An emergency measure called the Homeowners' Refinancing Act of 1933, along with the permanent National Housing Act of 1934 (which created the Federal Housing Administration, or FHA), allowed hundreds of thousands of Americans to keep their homes. The legislation put the American dream of owning a home within the reach of all but the nation's poorest.

Bank failures

In the 1920s an average of six hundred banks failed in the United States every year. This was almost ten times as many annual bank failures as the United States had suffered from 1910 to 1919. The banks that failed were small banks with ties to the struggling farming industry. They were considered local failures and did not cause any loss of public confidence or create nationwide banking panics. The American economy was booming overall, and stock prices were on a wild upward ride. Americans generally ignored the 1920s bank failures. Yet these failures were warning signs that the U.S. economy was not healthy.

The economic boom of the 1920s crashed down in October 1929 when stock prices on the New York Stock Exchange plummeted. This crash marked the beginning of the Great Depression. In growing numbers businesses closed their doors, individuals lost their jobs or saw their salaries greatly reduced, and many lost their homes or farms. When businesses and individuals failed to make payments on loans or mortgages (home loans), the banks that had made the loans suffered: Unable to collect on these loans, they had great difficulty meeting the demand for withdrawals, especially when depositors who had lost their jobs and income were forced to withdraw their savings to live on. Not surprisingly, banks began to fail at a rapid rate. In 1929 over thirteen hundred banks failed. Closures spread from small rural areas to large geographic areas and into cities.

Between November and December 1930, over 120 banks closed in Tennessee, Arkansas, Kentucky, and North Carolina. In New York City one of the most disastrous failures occurred on December 11, 1930, at the Bank of United States. Although this bank was a private one, the failure sent shock waves across the country, because the bank's name suggested that the whole U.S. banking system was about to fail. Two other large city banks closed in December: the Bankers' Trust of Philadelphia and the Chelsea Bank of New York City.

A Cashless Society

What would it be like to wake up one morning and find that the government had shut down all the banks? The only cash available would be what was in your wallet or your piggy bank. Would mobs roam the streets breaking store windows and taking whatever they needed? Would grocers hold off crowds with shotguns? Nothing quite so dramatic happened in early March 1933, when President Roosevelt closed all banks nationwide for seven days.

Many Americans rushed to their bank to see if it was really locked up. But for the most part, the public reacted with relief—relief that President Roosevelt had halted the bank runs, at least for the moment. People laughed and joked about their common predicament. Movies charged a piece of fruit or a vegetable as admission. Salesmen presented the contents of their suitcases in exchange for a train ride home. IOUs were written everywhere. Bus tokens, foreign coins, and postage stamps became part of the odd moneyless society.

However, for some communities that had already endured local bank closures, the amusement of the situation had
worn off. In Detroit, Michigan, for example, the nationwide closure stretched residents into a fourth week without cash. It had become difficult just to raise bus fare for school or work. Paychecks could not be cashed, and relief applications poured in when people became hungry. The reopening of the banks on March 13 came none too soon for many.

These failures seriously weakened public confidence in the banking system. The public could not distinguish a strong bank from a weak one, and began to distrust them all. In the 1920s Americans thought of bankers as smart, thrifty businessmen who would look after their customers' money. By 1930 Americans were distrustful and suspicious of the same men. Many thought that bankers had helped cause the Depression by their greed and accumulation of wealth. Americans began hoarding cash, preferring to keep it in mattresses and in cans buried in the backyard rather than in banks.

Bank runs

During the early years of the Depression the public's lack of confidence in banks took a dramatic form: bank runs. Bank runs began when depositors feared that their bank had weakened; a mere rumor was all it took to start a run. Rather than risk the loss of their savings, depositors lined up to withdraw their money. Since there were almost no pension or retirement systems in the early 1930s, all people had for retirement was personal savings.

No bank keeps enough cash on hand to cover all depositors' accounts at a single time. Banks loan out the money or invest it, keeping only enough cash on hand to cover normal daily needs of depositors. So even a run on a perfectly sound bank could lead to its collapse.

Bank holidays

During the Depression "bank holidays" were used as a way to halt bank runs. Banks would legally suspend operation and close for business for a period of time. In 1932 and early 1933 bank holidays increased: In November 1932 Nevada declared a statewide holiday while western banks experienced failure after failure. Louisiana declared a statewide holiday in early 1933, and Michigan banks closed for eight days in February 1933. Michigan's bank holiday tied up the cash of nine hundred thousand depositors and froze $1.5 billion in bank deposits.

Bank holidays continued to spread: Indiana, February 23; Maryland, February 25; Arkansas, February 27; and Ohio, February 28. By March 2, 1933, twenty-one states had declared bank holidays. With banks failing across the country, the public turned to Washington, D.C., for bank reform.

Senator Glass and Representative Steagall

In 1930 President Herbert Hoover (1874–1964; served 1929–33) called for Congress to investigate the entire banking system and to consider revising the banking laws. Two especially interested congressmen were Senator Carter Glass (1858–1946) and Representative Henry B. Steagall. Before entering the Senate, Glass had served in the House of Representatives (1902–19), where he was chairman of the House Committee on Banking and Currency. Glass sponsored the Federal Reserve Bank Act of 1913, which established the Federal Reserve System. The twelve Federal Reserve banks across the country served as a central banking system (see sidebar). For years Senator Glass had been observing how banks were investing in the stock market and making loans to others to invest in stocks. Glass feared that this was risky, and his fears proved correct when the stock market crashed and the value of stocks nose-dived. Glass demanded that commercial banking be separated from investment banking. (Commercial banking involves accepting deposits from customers and making personal, business, and industrial loans. Investment banking consists of buying stocks and bonds.) Many legislators were convinced that Glass was right. These lawmakers agreed that speculative investing (buying stocks or bonds with the expectation of making large profits) had no place in commercial banking because it placed depositors' savings at a high risk of loss.

Representative Steagall, elected to the House in 1914, became chairman of the House Committee on Banking and Currency, the same committee Glass had once headed. Steagall was a staunch advocate of deposit insurance, a program designed to protect the bank deposits of individuals by guaranteeing that the government would replace funds lost by depositors due to bank financial problems. He had proposed deposit insurance since the early 1920s but had no success enacting it.

Reconstruction Finance Corporation

In 1930 and 1931 both Glass and Steagall headed hearings on how to reform the banking system. Meanwhile, President Hoover attempted to mobilize the banking community. He urged cooperation between bankers and federal officials to find ways to end the crisis.

By January 1932, the congressional investigations and Hoover's requests for voluntary cooperation had led nowhere. On January 22, Hoover decided to establish the Reconstruction Finance Corporation (RFC) to make low-interest loans to banks. Hoover expected the RFC to restore the confidence of bankers so they would make loans to business. Fearing bank runs, banks had been hoarding all their money and had not been making any loans.

The RFC helped somewhat: The number of bank failures dropped from twenty-two hundred in 1931 to fourteen hundred in 1932. Nevertheless, individuals continued to hoard their money, banks did not make loans as Hoover had hoped they would, and bank runs continued.

The Federal Reserve System

The Federal Reserve Bank Act, enacted on December 23, 1913, created the Federal Reserve System. Representative Carter Glass (1858–1946) of Virginia sponsored the act. Later, as a senator, Glass would play a key role in the New Deal banking legislation of the 1930s.

Under the Federal Reserve System, the United States is divided into twelve Federal Reserve districts, each with a Reserve bank. Reserve banks carry out day-to-day operations of the nation's central banking system. They move currency (paper money) and coins in and out of circulation, collect and process millions of checks each day, and supervise and examine member banks for soundness. Overseeing the entire system is the seven-member Federal Reserve Board. The Federal Reserve Board controls the economy of the United States in three major ways: It sets reserve requirements—how much out of every $100 in deposits a bank must hold in reserve in its regional Reserve bank; it adjusts the interest rates it charges member banks that borrow money from the Federal Reserve; and it buys and sells federal government bonds.

Halting the banking crisis

President Hoover's approval rating was as low as the stock market by mid-1932. His assurances that the economy would soon turn around failed to convince most Americans. Hoover's unpopularity virtually assured a victory for anyone running against him in the November 1932 presidential election. Hoover ran for reelection on the Republican ticket; Franklin D. Roosevelt (1882–1945) was the Democratic candidate. With his personable, calm, and optimistic manner, Roosevelt easily won the election, becoming the thirty-second president of the United States. Under the law at that time, he would not be inaugurated until March 4, 1933. That four-month interval stretched like an eternity for Americans desperate for relief. The Hoover administration was still in office, and its members provided no leadership; they said they had done all they could do. The clouds of the banking disaster grew darker and heavier.

As dawn broke on March 4, 1933, the presidential inauguration day, America's banking system was paralyzed. In his inauguration speech to the anxious nation, President Roosevelt declared war against the banking crisis. A few hours later, in a never-before-seen event in U.S. history, Roosevelt's entire cabinet was sworn in during one ceremony. Normally cabinet members are sworn in one at a time as Congress individually confirms them. Cabinet members, advisers, and representatives of the Federal Reserve attended meetings for the rest of the day. They agreed that the only way to halt the banking crisis was to declare a nationwide bank holiday. Working into the night, President Roosevelt did not attend his inaugural ball, sending Mrs. Roosevelt alone to carry on with the celebrating.

The next day, March 5, Roosevelt met with bankers who had gathered at the White House for a hastily called meeting. It became clear to Roosevelt that the bankers had no plan of their own to end the banking crisis. So later that evening Roosevelt decided on a course of action. On Monday, March 6, at 1:00 a.m., convinced that the banks could not stand one more day of operation without total collapse, Roosevelt declared a nationwide bank holiday from March 6 through Thursday, March 9. He later extended it until Monday, March 13. Roosevelt also called Congress back to Washington, D.C., for a special session beginning March 9.

Instead of panicking, the American public greeted the bank holiday with great relief. At least for a few days, the long economic descent would stop, giving them a break from their anxiety. People rallied together in an almost joking mood about their common predicament of not having access to their money.

Emergency Banking Act of 1933

Although the public felt relieved by the bank holiday, the mood in the halls of government was tense. Long discussions about the banking crisis continued. Four of those involved in the meetings were the new secretary of the treasury, William Woodin; George Harrison of the New York Federal Reserve; and two departing cabinet members from the Hoover administration, Ogden L. Mills and Arthur Ballantine. These four men are credited with putting together the emergency banking bill, which was ready by noon on March 9 when Congress convened its special session. The president sent the bill to the House, where Representative Steagall introduced it. Almost before he could finish reading the bill, House members shouted, "Vote! Vote!" The bill passed unanimously. The Senate passed the bill by a vote of seventy-three to seven, just before 7:30 p.m. By 8:30 p.m. the Emergency Banking Act of 1933 was on the president's desk at the White House, waiting for his signature. The entire process took less than eight hours.

The newly enacted Emergency Banking Act of 1933 legalized Roosevelt's decision to declare a nationwide bank holiday. It created a process for examining, reorganizing, and reopening the thousands of closed banks throughout the country. It also revived the Reconstruction Finance Corporation (RFC) to provide banks with long-term investment funds. Although the act was passed during a crisis, it was a calm, conservative piece of legislation. Bankers had feared radical changes and were greatly relieved; those who had called for a government takeover of banking were disappointed.

With the powers granted by the act, officials undertook the task of determining which banks were sound enough to reopen on Monday, March 13. They feared that when banks did reopen, panicky depositors would line up to withdraw money just as they had before, draining the banks again. To prevent this, President Roosevelt, knowing the power of the new radio technology, broadcast his first fireside chat on Sunday night, March 12. Estimates indicate that over sixty million people listened to Roosevelt's comforting voice as he explained what action government had taken over the last few days and what would happen on Monday morning. His message was that banks were once again safe for Americans' savings. Roosevelt explained the situation so well that lecturer, humorist, and social critic Will Rogers (1879–1935) later commented, as reprinted in Susan Winslow's 1976 book Brother, Can you Spare a Dime?: "Our President took such a dry subject as banking ... and made everyone understand it, even the bankers."

On Monday morning, March 13, people once again lined up in front of banks, but this time they were there to deposit their money. The bank runs were over. Confidence in political leadership and in the banking system had been restored. In eight amazing days (March 6–March 13), the banking system and possibly the country itself had been saved from collapse.

Banking Act of 1933 (Glass-Steagall Act)

With the immediate crisis averted, attention turned to permanent banking reform legislation. Between mid-March and early May 1933, many conferences were held in Washington, D.C., to work out the details of permanent reform. Legislators reflected on how the banking industry had gotten into so much trouble. Speculation in the stock market had certainly contributed, but the most significant factor in the banking crisis turned out to be the small "unit bank." In the late nineteenth century, banking legislation had banned all nationwide and statewide branching of banks. At that time, it was believed that local, single-office banks would be more responsive to each local community. As a result many banks opened for business with very little capital (money invested in a business and used to run the business). If a certain locality fell on hard times, such as a factory closure or farming problems, the bank usually collapsed. If branch banking had been allowed, a larger, more diversified depositor base could have been developed by the 1920s and early 1930s. When one branch was in trouble, a more stable branch could have bailed it out. The Banking Act of 1933 sought to correct earlier legislation and improve the stability of small banks.

On May 10, 1933, Senator Glass introduced a completed banking reform bill to the Senate, and Representative Steagall introduced the bill to the House. The bill passed Congress by mid-June, and President Roosevelt signed the Banking Act of 1933 into law on June 16. Roosevelt congratulated Senator Glass and Representative Steagall on shepherding through Congress the first major banking bill since the Federal Reserve Bank Act of 1913.

The Banking Act of 1933 (commonly known as the Glass-Steagall Act) included the following provisions: (1) As Senator Glass had urged, commercial banking was entirely separated from investment banking; (2) As Representative Steagall had urged, an insurance on deposits was created. A new agency, the Federal Deposit Insurance Corporation (FDIC), was created within the U.S. Treasury Department to provide up to $2,500 deposit insurance for each depositor account at FDIC-insured banks; (3) The expansion of branch banking was permitted; (4) The Federal Reserve was given more control over loans made to FDIC-insured banks; (5) Interest payments on checking accounts were prohibited to eliminate competition among banks to pay higher and higher rates; (6) Officers of banks could not receive loans from their own banks because of the conflict of interest in granting such a loan.

The Banking Act of 1933 laid the foundation for extensive changes in the U.S. banking industry. Two years later President Roosevelt signed into law another Banking Act. The most important provision of the Banking Act of 1935 restructured the Federal Reserve System so that power rested with the Federal Reserve Board in Washington, D.C., rather than in the twelve regional Federal Reserve banks (see sidebar). The 1935 Banking Act also strengthened the FDIC, authorizing this agency to set standards for member banks, examine banks for compliance with those standards, take action to prevent troubled banks from failing, and pay depositors if insured banks failed.

Federal Deposit Insurance Corporation

The most enduring legacy of the New Deal banking reform legislation is the Federal Deposit Insurance Corporation (FDIC). The FDIC was an immediate success. It returned depositor confidence, all but eliminated bank runs and bank failures, and protected against wild fluctuations (wide swings down or up) in the nation's money supply. Over fourteen thousand banks had joined the FDIC by 1935. Bank failures dropped to only forty-four in 1934 and thirty-four in 1935.

By 2000 about 98 percent of all commercial banks were FDIC members, and each account was insured up to $100,000. The FDIC insurance fund was built up through yearly fees paid by member banks. If this fund ever proves to be insufficient to meet the needs of depositors, the FDIC is authorized to borrow money directly from the U.S. Treasury.

Stabilization of the banking system

Like other New Deal legislation, the Emergency Banking Act of 1933, the Banking Act of 1933 (Glass-Steagall Act), and the Banking Act of 1935 were milestones in public policy. Their passage gave the federal government the lead role in coordinating the U.S. banking system; the government—not individual bankers—would control the nation's money supply. After the passage of the 1935 act, the Federal Reserve Board took on the permanent assignment of stabilizing overall economic activity in the United States.

Housing: The ideal American home

The image of the ideal American home has changed over time. In the early and mid-1800s a comfortable home on a large plot of farmland was the American dream. However, as farming communities grew into towns and towns grew into cities, Americans began to define the ideal home in terms of a house, yard, and neighborhood with connecting roads. By the 1890s and early 1900s thousands of immigrants came to the United States from European cities. They generally settled in the center of cities, where common laborers were needed. Privileged urban dwellers tended to move to the edges of towns, away from the common laborers and the city bustle, to enjoy a home with a yard.

Public transportation in urban communities included rail lines and trolleys. Commuter villages grew up along transportation lines. Cheap land, low home prices, good wages, and efficient transportation allowed working-class families and the emerging middle class to move to the end of the trolley line, where space was plentiful for a house and garden. By the 1920s many thousands of Americans had purchased the amazing automobile. In their Oldsmobiles and Model Ts, Americans explored the edges of their cities and dreamed of owning a single-family home in the suburbs (a community on the outskirts of a city).

Between 1922 and 1929, 883,000 new homes were built each year, more than doubling the home-building rate for any previous seven-year period. New suburbs dotted the outskirts of every major city, and suburban neighborhoods filled with the American bungalow. The humble bungalow, an attractive one-and-a-half-story home, cost between $1,500 and $5,000, easily affordable by the growing middle class. Most wealthy people paid cash for their homes, but the lower middle and middle classes obtained mortgages. Mortgages are home loans from a banking institution. During the 1920s home buyers typically made a down payment of one-third to one-half the price of their home and mortgaged the rest. For a $3,000 home the down payment would be between $1,000 and $1,500; the rest would be covered by a home mortgage from a banking institution. Over time, the buyer would repay the bank the amount of the home loan plus interest.

The inner-city slums

As the suburbs expanded with newly built houses, the dwellings in the inner cities deteriorated. The massive in-flux of immigrants were forced into already overcrowded living spaces. Too poor to afford either a car or trolley fare, they had to live within close walking distance of their jobs. The once-fashionable inner-city dwellings with large rooms were subdivided into tiny rooms with little light or airflow. More apartments meant more rent for landlords, so housing structures were hastily built on every available bit of land. The structures reached higher and higher, shutting out light to neighboring buildings. These multistory structures were referred to as tenements. The dwellings gradually grew rundown, and sanitation facilities were overwhelmed. Inner-city areas became known for poverty, crime, and filth; these areas were called slums. With the onset of the Depression, overcrowding and poverty only worsened.

The Depression strikes a blow to housing

The Depression struck severe blows to home owners, tenement dwellers, and the construction industry. As Americans lost their jobs or saw their incomes decrease, they fell behind in mortgage payments. Failing to make payments (defaulting) on a home mortgage led to foreclosure by the holder of the mortgage, usually a bank. (Foreclosure means that the bank seizes and then auctions off the home owner's property to pay off the mortgage loan amount.) In 1932 between 250,000 and 275,000 people lost their homes to foreclosure. By 1933 foreclosures reached one thousand a day, and 40 to 50 percent of all home mortgages in the United States were in default.

The home financing system was collapsing. Housing prices overall had dropped by about 35 percent. A home worth $6,000 before the Depression would suddenly be worth only $3,900. Banks trying to sell foreclosed homes frequently found no buyers; and if a bank did find a buyer, it still might not get enough money from the sale to cover the entire mortgage. Banks that depended largely on mortgage payments failed and had to close their doors. Many middle-class families who lost their homes (or who were threatened with the possibility) experienced fear, uncertainty, and a taste of poverty for the first time in their lives.

The sale of new homes halted as people merely tried to hang on to their existing homes. With no market for new houses, the construction of residential property fell 95 percent between 1929 and 1933. Repair expenditures also fell dramatically from $50 million to $500,000. Suburban homes and buildings in the inner cities both went without repair. The condition of tenements continued to worsen.

Ineffective programs

By the end of 1930 President Herbert Hoover (1874–1964; served 1929–33) knew that home owners' difficulties and the sagging construction industry were dragging down the already ailing economy. Almost one-third of the unemployed had been in construction. The Hoover administration tried two approaches to remedy the situation. However, both pieces of resulting legislation were flawed and proved ineffective. The Federal Home Loan Bank Act, signed by President Hoover on July 22, 1932, was designed to establish a reserve of home loan money for banking institutions. However, loan requirements were set too high. In the first two years of the act's operation, forty-one thousand applications for home loans were made. Three were approved.

Hoover's second measure was just as ineffective. The Emergency Relief and Construction Act of 1932 provided loans to corporations formed to construct low-income housing and improve housing in slums. But the act required these corporations to be exempted (excused from paying) from state taxes. Only New York had laws in place for such exemptions; other states had no public support to pass such laws. Only one project, the Knickerbockers Village in New York City, was started under this act.

New Deal for housing

Franklin D. Roosevelt (1882–1945) became president of the United States on March 4, 1933. He knew he needed to revive the housing market if unemployment was to be conquered and banks were to again serve as mortgage lenders. Several congressmen, including Senator Robert F. Wagner (1877–1953) of New York, suggested developing grand-scale European-style housing projects. But President Roosevelt held the very American notion that the ideal home was a single, privately owned structure on a small plot of land. He had no interest in multilevel, multifamily dwellings. However, Roosevelt was a practical man and knew that urban housing problems would have to be resolved within the urban setting. So Roosevelt decided on a path of stopping foreclosures and making private homes more affordable. In 1933 and 1934 New Deal legislation concentrated on these issues as well as the related goal of stimulating the home construction industry.

On June 13, 1933, Congress passed the Home Owners' Refinancing Act, which created the Home Owners' Loan Corporation (HOLC). Next, on June 28, 1934, Congress passed the National Housing Act, which created the Federal Housing Administration (FHA). President Roosevelt also needed to address inner-city housing problems. The most important resulting legislation was the National Housing Act of 1937, better known as the Wagner-Steagall Housing Act.

Home Owners' Loan Corporation (HOLC)

The goal of the Home Owners' Loan Corporation (HOLC) was to stop the overwhelming number of home foreclosures, which were undermining the health of banking institutions. The HOLC allocated loan money to refinance tens of thousands of mortgages that were in danger of default and foreclosure. Refinancing means setting up a loan under new repayment terms to make it easier to pay back the loan. The HOLC replaced the unworkable terms of the Federal Home Loan Bank Act, a leftover from Hoover's administration.

Edgeman Terrace

In 1939 the Wilmington Construction Company built four hundred six-room houses north of Wilmington, Delaware. This development, called Edge-man Terrace, was the forerunner of tract home developments (similarly constructed homes built along a tract, or piece, of land) that would be built throughout the twentieth century. Backed by the Federal Housing Administration (FHA), Edgeman Terrace used standardized model homes and lot sizes, and standardized construction methods. Each home's selling price was $5,150 with a $550 cash down payment. The FHA mortgage guarantee allowed buyers to pay an incredibly low $29.61 monthly payment for twenty-five years. That payment included principal, interest, mortgage insurance, and property taxes. An apartment of the same size in New York City cost $50 a month to rent. The FHA made it cheaper for Americans to buy than to rent. Part of the New Deal legacy, this agency continues to make homes affordable for more Americans in the twenty-first century.

The two legacies of the HOLC are the amortizing mortgage and standardized appraisal methods. Amortize means to allow a loan to be repaid with monthly payments that are always the same amount. These payments include principal and interest, and the principal balance gradually declines until the loan is paid back in full. (Principal is the original amount of money loaned. Interest is additional money paid to the lender for use of the loan money.) The HOLC charged borrowers only 5 percent interest and allowed repayment over a fifteen-year period. This simple loan repayment plan contrasted with typical 1920s mortgages of 6 to 8 percent interest with only five-year repayment periods. At the end of five years the loan would not be paid back in full, so the home owner would have to borrow the remaining amount or pay the loan off in one large payment. Both of these options were all but impossible in the Depression years, and therefore many people failed to make their payments and lost their homes to bank lenders.

Standardized appraisal methods gave the HOLC a good estimate of what a house was worth so that the agency would know how much to lend the buyer for the purchase. HOLC appraisers visited the house and wrote down its characteristics, such as type of construction, repairs needed, and prices of nearby homes. HOLC appraisers across the country were trained in uniform procedures, so each appraiser's judgment would be similar and prices would be based on a firm set of standards. Amortizing mortgages and standard appraisal methods are cornerstones of the real estate and banking industries at the beginning of the twenty-first century.

The HOLC was set up as an emergency agency only. It stopped accepting loan applications in mid-1935 and issued its last loans in early 1936. By then the HOLC had refinanced up to one-fifth of all mortgaged urban homes in America, approximately 992,531 home loans, and effectively stopped the flood of foreclosures. The HOLC spent the next fifteen years collecting its payments and ended its operations in 1951.

The refinanced loans not only stopped foreclosures but also reduced the number of cases of delinquent (overdue) property taxes. With more property tax money coming in, communities could again meet payrolls for police, schools, and other services. Millions were spent on repair and remodeling of homes, putting thousands back to work in the building trades. Thousands of other jobs were stimulated in manufacturing and transportation of construction materials. Through the HOLC President Roosevelt's goals of halting foreclosures, making homes affordable, and spurring the construction industry were all realized.

Federal Housing Administration (FHA)

The National Housing Act of 1934 established the Federal Housing Administration (FHA) as a permanent New Deal program. The act reflected President Roosevelt's goal of stimulating the housing sector without government spending: Rather than make direct home loans, the FHA would insure the mortgage loans made by banks. If a home owner failed to make the mortgage payments, the FHA would pay the lending institution the amount that was owed. In response, bankers made loans easier to get, because they took on less risk with FHA-insured loans. Secondly, following trends set by the HOLC, the FHA required all of its insured mortgages to be amortized. However, the FHA extended the loan repayment period to twenty-five or thirty years, which greatly reduced monthly payments and allowed more people to qualify for a mortgage. These improved terms for borrowers spurred new home construction and sales. The FHA also set minimum construction standards to better ensure the quality of homes.

Unfortunately there was a downside to the FHA achievements. The FHA favored single-family projects in suburban areas. It actually contributed to inner-city decay by pulling much of the middle class out of the city into affordable suburban homes. Statistics gathered for St. Louis, Missouri, between 1935 and 1939 show that 92 percent of new homes insured by the FHA were located in suburban areas. Hence, the housing policies of the 1934 act and its amendments did not extend to the poor living in the inner cities. Soon after passage of the 1934 act, proponents for government housing programs for the needy began to push for housing programs that addressed the needs of those living in poverty in the inner cities. The first national housing bill to do so was the 1937 Wagner-Steagall Housing Act.

Wagner-Steagall Housing Act

The Wagner-Steagall Housing Act (also known as the National Housing Act of 1937) created the United States Housing Authority (USHA). This act provided loans to local public agencies (called local housing authorities, or LHA) for construction of low-rent housing projects. Once a project was complete, the USHA would determine how much rent low-income families could afford and then would make up the difference between what the families paid and the actual cost of providing the housing. Another important feature of the act was a provision for clearing out slums. For every new dwelling unit built, a slum housing unit had to be torn down. This was called "equivalent elimination."

The problem with this act was that the forming of local housing authorities was purely voluntary. If a community did not want to tarnish its image with low-cost government housing, it could refuse to form a local housing authority. Because of this, the Wagner-Steagall Housing Act had very limited success. Only 188,000 individual family units were under construction or completed by January 1, 1941.

Powerful impact

New Deal legislation for banking and housing eliminated much of the risk from daily living. The Federal Deposit Insurance Corporation (FDIC) assured everyday Americans that their bank deposits would be protected and paid back to them if their banks failed. The Federal Housing Administration (FHA) insured mortgages so the banks that made the mortgage loans carried little risk. The FHA also set building standards for home construction, ensuring that Americans could buy good-quality homes with the money they borrowed. The Home Owners' Loan Corporation (HOLC) introduced low-interest, long-term amortizing mortgages and standardized appraisal practices, both of which continue to benefit home buyers and lenders in the twenty-first century.

For More Information


benston, george j. the separation of commercial and investment banking: the glass-steagall act revisited and reconsidered. new york, ny: oxford university press, 1990.

burns, helen m. the american banking community and new deal banking reforms, 1933–1935. westport, ct: greenwood press, 1974.

duchscherer, paul. the bungalow: america's arts and crafts home. new york, ny: penguin books usa, 1995.

fitch, thomas p. dictionary of banking terms. new york, ny: barron's, 1990.

glaab, charles n., and a. theodore brown. a history of urban america. 3rd ed. new york, ny: macmillan, 1983.

jackson, kenneth t. crabgrass frontier: the suburbanization of the united states. new york, ny: oxford university press, 1985.

kennedy, susan e. the banking crisis of 1933. lexington, ky: university press of kentucky, 1975.

lancaster, clay. the american bungalow, 1880–1930. new york, ny: dover publications, 1995.

wicker, elmus. the banking panics of the great depression. new york, ny: cambridge university press, 1996.

winslow, susan. brother, can you spare a dime? america from the wall street crash to pearl harbor: an illustrated documentary. new york, ny: paddington press, 1976.

Web Sites

american bankers association. (accessed on august 14, 2002).

federal deposit insurance corporation. (accessed on august 14, 2002).

federal reserve system. (accessed on august 14, 2002).

housing and urban development (hud). (accessed on august 14, 2002).

lower east side tenement museum. (accessed on august 14, 2002).