The CHAIRMAN. I understand, Dr. Black, the thought it that as fast as they are called, the outstanding land-bank bonds will be superseded with new-type bonds?

Mr. BLACK. Yes; there are no bonds immediately callable. The first issue is callable in 1943, and others up to 1946.

The CHAIRMAN. They are all callable not later than 1946?
Mr. BLACK. Not later than 1946.

The CHAIRMAN. Of course, when they are all called and other bonds issued, the amount of the subsidy would be decreased.

Mr. BLACK. Our accountants estimate, from a hurried study, that after the refunding operations were carried through, and after 1946, assuming that the bonds could be refunded at present current interest rates, there should be sufficient income to carry the operations of the banks without subsidy. Of course, there is one chance that is being taken: If interest rates do not remain low and it becomes necessary to refund on a higher basis, while in the meantime the loans have been rewritten on a basis of 3 percent, there is some hazard being assumed.

The CHAIRMAN. But in any event the subsidy would be much less than the present.

Mr. BLACK. I should think so; yes, sir.

The CHAIRMAN. Are there any further questions by members of the committee?

Mr. HOPE. I have not found anyone yet that knows what the interest rates on Government obligations are going to be in 1946, or any time thereafter.

Mr. BLACK. No, that is correct; no one can predict that with certainty.

Mr. HOPE. We really do not know anything about it, then, do we, so far as knowing what it might cost the Government after that time? Mr. BLACK. Not with 100 percent certainty. That is the situation that has always faced the land banks anyway. It so happens they started in the early days with what seems now a very high interest rate, and made a lot of loans at that rate. They have been able to refinance during the past 20 years at lower rates, with the result that they have been able to get a somewhat larger margin than was contemplated by Congress when the act was originally passed. The average margin in the banks now is about 11⁄2 percent instead of 1 percent, which Congress contemplated when the bill was origihally passed. That was due to the fact that many loans were written at 51⁄2 percent, and then later the bonds were called and refinanced at somewhat lower rates. But it is true that no one can predict with certainty what the rates on Government obligations will be in 1946. Mr. HOPE. Has the Treasury Department been consulted about that angle of the matter? Have they participated in the writing of this bill?

Mr. BLACK. So far as I know, they have not.

Mr. HOPE. Is this a departmental bill from the Department of Agriculture?

Mr. BLACK. No, sir.

Mr. HOPE. Was it written down there?

Mr. BLACK. No, sir.

Mr. HOPE. Does it have the approval and endorsement of the Department of Agriculture?

Mr. BLACK. The bill has not been considered from that point of view, and that is why I want to refrain from approving or disapproving it. Í do not know what report the Department would make on it, if the Department is asked for a report.

Mr. HOPE. And you are not today either approving or disapproving?

Mr. BLACK. That is correct.

Mr. HOPE. And it has not been submitted to the Bureau of the Budget either for a report?

Mr. BLACK. No, sir; the Department has not been asked for a report on it by the committee. When it is so asked, it would naturally refer it to the Bureau of the Budget.

Here is one feature of the bill that I think the committee should be completely aware of. It does represent a break from the old theory of financing farm mortgages. It eliminates the stock held by farmer borrowers and changes the long-standing procedure from that of obtaining loans from an organization in which farmers have a certain financial interest, to a 100-percent Federal loan.

Mr. PIERCE. Then the borrowers get the full amount of money? Mr. BLACK. Oh, yes.

Mr. HOPE. But it does away entirely with the cooperative features in the present Federal Land Bank System, does it not?

Mr. BLACK. So far as the stock ownership in the banks is a cooperative aspect, it does; yes.

Mr. HOPE. That is, the borrowers have no interest whatever in the land bank?

Mr. BLACK. They would have no financial ownership interest in the institution.

Mr. FLANNAGAN. Doctor, does this bill attempt to cover the whole Farm Credit structure?

Mr. BLACK. No; it would not, as it is written. It has no bearing at all upon the cooperative banks, upon the production credit associations or upon the intermediate credit banks. There would be no change whatever in the operations of those institutions. It would involve a complete recasting of the Land Bank System.

Mr. FLANNAGAN. Does it tend to put the emergency crop-seed loan in?

Mr. BLACK. It is not mentioned in the bill

Mr. FLANNAGAN. What I had in mind, it looks to me like there is an overlapping of activities between the rehabilitation loans and the emergency seed-crop loans, and those activities ought to center in one department.

Mr. BLACK. There has been discussion of that for at least 2 years that I know of. Last spring, a year ago, I think, or thereabouts, the Farm Credit officials felt that it would be desirable to consolidate those activities, but there are certain objections to it, and consolidation is not contemplated at the moment.

Mr. FLANNAGAN. What position would the local farm-land bank associations have in this case, under this bill?

Mr. BLACK. Well, it is a little difficult to be sure exactly how they would develop, but the way I read this bill they would do almost exactly what they do now; that is, take applications, and make recommendations for loans. They would assist in the closing of the loan.

They would assist in collections, and in the refinancing program contemplated by this bill. Nothing is to be done without specific recommendation of the local committee.

Mr. FLANNAGAN. Would it get rid of some of this high-handed stuff that the Federal land bank has been pulling off on the local associations?

Mr. BLACK. Well, I do not know just what you mean. [Laughter.] Mr. FLANNAGAN. Well, I can give you plenty of instances where they just overrode the local associations, telling them if they do not do so and so, they will just be wiped out, cut off the pay of the secretary treasurer and just operating in a high-handed manner, down in my district. I think the same thing prevails in other districts.

Mr. BLACK. The income of local associations, as I read this bill, would certainly not be less than it is now. I think that this bill contemplates that they would actually be doing more than they are now, and if they do more than they are now, they will have to receive compensation for it.

Mr. FLANNAGAN. Well, I want to see those local associations remain in the picture.

Mr. BLACK. They would have to remain in the picture under this. Certainly in any Nation-wide plan the local associations are extremely helpful. The Department has found that out in connection with the administration of the A. A. A. program. It is impossible to administer a wide-flung program without strong local organizations.

Mr. FLANNAGAN. Does this bill give the land banks additional power over the local associations?

Mr. BLACK. No; I would say that it does not.

Mr. FLANNAGAN. Could it curb the land-bank officials in any way? Mr. BLACK. Not specifically.

Mr. FLANNAGAN. That is all I have to ask.

Mr. COFFEE. Dr. Black, did I understand you to say that the local associations would have more power under this bill?

Mr. BLACK. It would appear to me that they would be doing more things under this than they are at the moment.

Mr. COFFEE. What interest would members have in the local associations or these local committees? What interst would they have in the local farm loan associations if their stock was retired and paid for?

Mr. BLACK. Only the same type of interest that they would have in any association during this kind of work. They would receive payment for their services.

Mr. COFFEE. What would they be paid?

Mr. BLACK. The bill provides for certain payments to the committees, and the banks have always paid the local association for certain work, such as collections and servicing of farms owned. Mr. COFFEE. $3 a day is what is provided, is it not?

Mr. BLACK. In this bill, yes.

Mr. COFFEE. Do you think you could get anyone who is competent for that amount of money to take an interest in making sound loans and making collections on loans?

Mr. BLACK. The association, of course, has never done that. The secretary-treasurer has done that and the income provided in this bill would not be less than it is at the moment, so they would have sufficient money, I presume, to employ a secretary-treasurer.

Mr. COFFEE. How much would the secretary-treasurer be able to make?

Mr. BLACK. It would depend entirely upon what the income of that association was, and that would depend upon the volume of loans. I do not think one could generalize.

Mr. COFFEE. What happens to the borrowers who own stock in these local associations?

Mr. BLACK. Their stock would be paid in full.

Mr. COFFEE. How much money would that cost to retire all of the stock?

Mr. BLACK. Very little actual cash, because the stock is all paid for by borrowers, by increasing the size of their loans, and it would be merely a cancellation of stock and cancellation of a corresponding amount of face value of the loans.

Mr. COFFEE. Of their indebtedness?

Mr. BLACK. Yes.

Mr. COFFEE. What would that amount to?

Mr. BLACK. Around $113,000,000.

Mr. COFFEE. In other words, the Federal Government would be called upon to subsidize that expense?

Mr. BLACK. No, it would be a bookkeeping transaction, a bookkeeping transaction entirely, because the capital stock would be wiped out and a corresponding amount of loans would be wiped out. It would appear as a credit on the farmer's loans. If he had a $10,000 loan with $500 of stock in the association, the amount due on his loan would be reduced by $500.

Mr. COFFEE. New loans that are to be made would be in the discretion of this local committee drawing $3 a day for their services? Mr. BLACK. It is recommended there in the first instance, as they are now, and all loans would be appraised and made by the bank. Mr. COFFEE. But they would have no financial interest in seeing that that loan was properly made?

Mr. BLACK. They would have no financial interest in it, no.

Mr. COFFEE. In the event that these loans were made excessively high, the Federal Government would be called upon to subsidize the Federal land banks to a larger extent than now on the losses that accrue. Do you not think there is a possibility that in the event Congress should refuse to vote further subsidies, this whole system under this proposal might fall?

The system

Mr. BLACK. That has been true from the time it was first started. I think it would be no more true now than it was then. has been heavily subsidized from the start.

Mr. COFFEE. But at the present time every local association, all the farm borrowers, have an interest in the local associations, and as a consequence they try to safeguard the Federal Land Bank System in order to preserve their own investments in their local association, and when that financial interest that they now have is eliminated, it seems to me that that would open the way for unsound loans to be made, and greater losses would occur.

Mr. BLACK. That is the principle of the present system. In actual practice there are relatively few loans that are reduced by the local association to a point below what the bank would have been willing to loan. The keyman in keeping the value of the loan at the right level is the appraiser, and in a very large proportion of cases, I do not

know what percentage, but extremely high, the appraiser's recommendation is below that of the local association's recommendation. Mr. COFFEE. On what percentage of the value of the land would the loans be made?

Mr. BLACK. There is no change in that. The land-bank loans would still be made for 50 percent of the value, plus 20 percent of the building value, and commissioner's loans would be made up to 75 percent.

Mr. COFFEE. But, as I understand it, the commissioner loans would be made and amortized on the same principle and the same basis as the Federal land-bank loans and at the same rate of interest, and that the loans would be made for 75 percent of the value? Mr. BLACK. They could be.

Mr. COFFEE. Would the intention be to carry the two loans? What would be the object in providing for both loans in the event both are the same and both handled in the same way?

Mr. BLACK. I think that is a point that the committee should consider, certainly, because we see no essential difference in the organizations. Doubtless some economies could be made and perhaps some efficiency gained by consolidating the banks and the corporation and making a single corporation.

Mr. COFFEE. What is the cost at the present time of administration and providing for losses on Federal land-bank loans?

Mr. BLACK. The administrative expenses, as I recall, total of about $21,000,000 per year for the two institutions, that is for the 12 Federal land-banks and the Federal Farm Mortgage Corporation.

Mr. COFFEE. Could you give us that in percentage, as to the loans outstanding? I notice you provide here in this bill that the margin shall be only 1 percent.

Mr. BLACK. The expenses were fifty-four hundredths of 1 percent. Mr. COFFEE. That is the administrative expense?

Mr. BLACK. Yes. The losses were twenty-seven hundredths of 1 percent losses actually charged. The estimated losses on real estate held was two-tenths of 1 percent. The actual margin between the interest rate on loans outstanding and the interest paid was 1.56 percent.

Mr. COFFEE. That is the margin?

Mr. BLACK. Between the actual bond rate and the actual interest rate. This applies to the land banks.

Mr. COFFEE. Over what period?

Mr. BLACK. This is for organization to date, through 1939. That is what they have averaged from the organization.

Mr. COFFEE. And your total expenses run about eight-tenths of 1 percent?

Mr. BLACK. Expenses fifty-four hundredths and losses twentyseven hundredths, and the estimated losses two-tenths. So that would be eighty-one hundredths of 1 percent for expenses and actual losses, and two-tenths of 1 percent is estimated further losses.

Mr. COFFEE. Could you give the percentage during the last 10year period?

Mr. BLACK. I could, but I do not know that we have it right here. Mr. COFFEE. Or any recent period.

Mr. BLACK. We can place that in the record.

Mr. COFFEE. I think that would be advisable.

Mr. BLACK. Probably you want it currently too, as well as average?