gold and building up our excess reserves, I do not see anything that might increase interest rates materially in the immediate future; but then something might happen overnight which would shock the whole money market and suddenly change the present trend. I do not know.

Mr. ANDRESEN. Well, it is going to happen fast when it does happen?

Mr. BELL. Well, it happened rather fast last September when we had a shock at the time of the declaration of war, but in 30 days it turned around and went the other way.

Mr. ANDRESEN. Was not that turn caused largely by the Federal Reserve System and the Treasury coming in and supporting the bond market?

Mr. BELL. There was a cushion supplied so as to prevent a panic in the market; but I am not sure that you can say that the turn was caused by the support. It did not go down as fast as it might have gone down had the support not been there.

Mr. ANDRESEN. And it might have gone down much further if the support had not been made available at that time?

Mr. BELL. I beg your pardon?

Mr. ANDRESEN. I say that the bonds might have gone down much more than they did and faster if the support from the Treasury and Federal Reserve System had not been made available at the time that it was?

Mr. BELL. That is possible. On the other hand they might have gone to the same point yet gone down a good deal faster; instead of taking 2 or 3 weeks, they might have gone down to that point within a week.

Mr. ANDRESEN. Several issues went below par value?

Mr. BELL. That is right; yes, sir.

Mr. ANDRESEN. And now they are back up again.

Mr. BELL. Yes, sir.

Mr. ANDRESEN. Is the Treasury still supporting the bond market? Mr. BELL. No, sir; it is not.

Mr. ANDRESEN. Or the Federal Reserve System?

Mr. BELL. No, sir; it has not since last fall.

Mr. ANDRESEN. Now, looking into the next 10 years or 20 years, do you think that we may expect an increase in interest rates?

Mr. BELL. Again, you are getting back to crystal gazing. I do not

know.

Mr. ANDRESEN. Here is one that you probably will be able to answer without looking into the crystal.

We have had a lot of talk around Congress during the past 2 years about doing away with tax-exempt features on Government bonds, and while there is not as much talk on that subject now after salaries and so forth are taxed, it is still in the air.

Assuming that the tax-exempt features on all future issues are eliminated, so that there will be no tax-exempt bonds, do you think the interest rate will be higher on the bonds?

Mr. BELL. It might be; but there are conditions under which you might have the same rates as you have now.

Mr. ANDRESEN. Well, it will bring a lower return to the holder of the bonds than if the security was tax exempt?

Mr. BELL. That is right.

Mr. ANDRESEN. So it would be natural to assume that the Government rate will go up, at least, to the amount of the taxes?

Mr. BELL. It might go up during the period you are refunding all of your tax-exempt bonds into taxable bonds. There would be a disparity in rates between the two. After the tax-exempt securities were out of the way, market yields might go back to the present level, assuming the same conditions.

Mr. PACE. Mr. Andresen, will you yield for a question?
Mr. ANDRESEN. Yes.

Mr. PACE. Mr. Bell, you testified in response to my question that you figured that the tax-exempt feature would probably increase the interest rate a quarter of 1 percent. On the other hand you stated in your statement here that the Government guarantee will make cheaper money.

Now, what do you figure that the Government guarantee as against the present system of these bank bonds would be the effect on the interest rate? Just take the guarantee itself. That is right in line with Mr. Andresen's questions.

Mr. BELL. I said the elimination of the tax-exempt feature would increase rates. The guarantee would operate to reduce the rate. We figure that you could issue a 5-8 year nonguaranteed fully tax-exempt security of the kind that is out now under the land-bank system at a rate of 2 percent. If guaranteed on the same basis as other guaranteed securities now outstanding, the same term probably could be obtained for 1% percent or a difference of five-eighths percent.

A

Now, as that term gets longer, the spread gets narrower, because your short-term guaranteed securities are in special demand. 15-20-year bond, nonguaranteed but fully tax exempt would probably cost 234 percent, whereas a partially exempt guaranteed bond for the same period might be issued at 21⁄2 percent, a difference of a quarter of 1 percent.

Mr. PACE. In other words, if you will pardon me, Mr. Andresen, you figure that one would probably counterbalance the other; the Government guarantee would take care of the taxation of the obligation, just roughly.

Mr. BELL. The guaranteed bond referred to would be partially tax exempt while the nonguaranteed issue would be fully tax exempt. The guarantee would more than outweigh the loss of tax exemption. Mr. ANDRESEN. Just one more question, Mr. Bell, and that is all. It the Government now receiving its money at the lowest average rate it has ever secured it?

Mr. BELL. The average rate is now 2.60 percent and we have been down as low as 2.55 percent within the last 2 or 3 years. These are the lowest we have ever had in the post-war period.

Mr. ANDRESEN. Then, it is above 211⁄2?

Mr. BELL. Yes, sir; just below 25%.

Mr. ANDRESEN. That is all.

The CHAIRMAN. Any further questions?
Mr. HOPE. Yes, Mr. Chairman.

The CHAIRMAN. Mr. Hope.

Mr. HOPE. Mr. Bell, assuming that this legislation should pass and you were authorized to refund the outstanding Farm Mortgage Corporation bonds in the most desirable way from the Treasury's standpoint, what, on the basis of your present knowledge would you do;

would you issue short-term bonds or 15-20-year bonds, or how would you work that out?

Mr. BELL. We probably would do both, but it would all depend on the condition at the time that we had to finance. It might be that a 10-year bond would be as long as you could issue; yet on the other hand it might be that the money-market conditions were such that you could issue a 15- or 20-year bond on very favorable terms, and you ought to take advantage of it, if that could be done.

Mr. HOPE. Well, generally speaking, if you were financing a loan system where the loans were made on a 33- to a 40-year basis, you would want to give some consideration to the use of longer time bonds, would you not? You would not say that it would be safe to finance that on short-time money?

Mr. BELL. I think that we would have to give consideration to that; but we would have to do whatever it was possible at the time we were confronted with the situation.

Mr. HOPE. Yes. Now, on page 5 of your statement you say:

If this type of financing were to be used, it seems that the Government could be adequately protected only by the adoption of a flexible interest rate for loans. And then you rather dismiss that without discussing it particularly by saying further:

Such a flexible interest plan would present grave difficulties.

Do you mean by that that you do not regard that as a practical way to handle the matter?

Mr. BELL. I do not believe that the borrower would be satisfied with that, because he would never know, until say January of each year, what his interest rate was going to be for that year, and that is the reason we dismiss it.

It also would be administratively difficult.

Mr. HOPE. Yes; I can see that.

Mr. BELL. The matter of figuring out the rate would be rather simple, however, because it would mean just taking the average rate on the outstanding indebtedness of the corporations, and that would be one way of being sure that the corporation would at all times get sufficient interest from the farmers to pay its interest on its outstanding indebtedness, assuming that the spread between the rates on money borrowed and on money loaned is sufficient to pay expenses and losses.

Mr. HOPE. Yes; I can see the objection, of course, coming from the borrower.

Mr. BELL. We tried to come as near to that formula as we could. Mr. HOPE. That is all.

Mr. COOLEY. Mr. Chairman.

The CHAIRMAN. Mr. Cooley.

Mr. COOLEY. Mr. Bell, you are aware of the desirability of permitting the farmers to enjoy the lowest interest rates possible, according to your statement.

Mr. BELL. Yes, sir.

Mr. COOLEY. And, in discussing the 3-percent provision contained in the present bill, you state that—

it is difficult to understand how this interest rate arrangement can be justified on such a basis.

Mr. BELL. On the basis of the cost of the money to the Government. Mr. COOLEY. That is right; on the basis of the cost of the money to the Government.

Mr. BELL. Yes, sir.

Mr. COOLEY. But then you suggest two propositions in the next sentence, on page 4, when you say:

At the present time, such an arrangement would necessitate either borrowing. for short periods in order to obtain low rates or payment by the Treasury of a subsidy.

Now, we will assume that we are not in favor of the second proposition, that is, paying the subsidy, the Treasury paying the subsidy. Can the rate be justified on the first basis, which you suggest, to it, the borrowing for short periods in order to obtain low rates?

Mr. BELL. Well, as I said at first, it has some element of speculation in it. There are periods when you could do it and be perfectly safe and other periods when you could not do it without suffering a loss.

Mr. COOLEY. Well, on the present financial money market, could we justify it?

Mr. BELL. On the present market you could borrow certainly on short terms at very favorable rates. But suppose you do borrow it for 6, 7, 8, or 10 years, which is a comparatively short term, and loan it out for 35 years. When you had to refund those bonds maturing 10 years hence, you might find that you would have to refund them at a rate higher than the rate you are getting on your loans.

Mr. COOLEY. I see.

Mr. BELL. Then it would be necessary to come in with your subsidy at that point.

Mr. COOLEY. Well now, as between the two propositions, the 3-percent rate and the 32-percent rate, you would prefer the 312-percent rate, of course, would you not?

Mr. BELL. I would, certainly for the 6-year period, until we see what terms we are able to get in refunding the land-bank bonds. Once a rate has been lowered it is hard to get it raised.

Mr. COOLEY. All right.

The CHAIRMAN. Any further questions?

Mr. FERGUSON. Mr. Chairman.

The CHAIRMAN. Mr. Ferguson.

Mr. FERGUSON. Mr. Bell, on page 3, down at the bottom of the page, in speaking of the Federal Farm Mortgage Corporation, you

say:

Moreover, there would seem to be no reason why the Corporation's farmmortgage business should not be taken over by the banks.

Would you suggest that the Federal land banks take over these Commissioner loans at face, or would you suggest that they be allowed to bargain on their actual value; that is, these Commissioner loans? Mr. BELL. I think that I would turn them for liquidation.

Mr. FERGUSON. Sir?

Mr. BELL, I think that I would consolidate all these loans into one lending organization and let that organization liquidate them the best it could. They come under the guaranteed structure, and whatever losses there are would have to be made up eventually by the Government anyhow.

Mr. FERGUSON. Would it be a workable proposition to have the Federal land banks buy these Commissioner loans at whatever their actual value was and incorporate them into outstanding first mortgages, if there was an equity in the Commissioner loans?

Mr. BELL. I do not know just what the mechanics should be on that. It is a question for the Farm Credit Administration to work out. I am advised that they are now being administered largely through the Federal land banks under the instructions from the Corporation in Washington.

So that they might as well

Mr. FERGUSON (interposing). Well, in your acquaintanceship with banking, and from your acquaintanceship, it is always a better thing, if possible, to have a first mortgage even though it is larger than to have a junior obligation; would you say that that is true?

Mr. BELL. I suppose it is better from a book standpoint. But the practical result might be the same.

Mr. FERGUSON. Sir?

Mr. BELL. The result in the end would be practically the same. Mr. FERGUSON. You can take your losses on a second mortgage and look it in the face, and then perhaps get your first in condition that it can be paid.

In your statement, on page 8, you say:

In this connection, I should also like to point out that the bill would permit outstanding nonguaranteed fully tax-exempt issues to be exchanged for guaranteed issues with the same terms and conditions.

Is there a possibility that under this bill if we did not give them the permission to exchange for full guaranteed obligations, there could be suits brought against the Government due to the fact that these scale-down provisions and so forth are included in this bill?

Mr. BELL. I cannot answer that. I do not know. There is always the possibility of a suit, I suppose.

The CHAIRMAN. There could not be if they were refinanced at the call dates.

Mr. BELL. No. If the bonds are refinanced on their callable date, their holders can take either the new security offered or cash. They would be getting what their contract calls for. There could not be any suit then.

Mr. FERGUSON. There would not be any chance, you do not think, of legal difficulties.

Mr. BELL. I should not think so; but I am not a lawyer. I do not know.

The CHAIRMAN. Mr. Coffee.

Mr. COFFEE. Mr. Bell, in view of the fact that the Federal Government has set a deadline of $45,000,000,000 as the maximum Government debt which can be assumed, what effect will these guaranteed bonds have on that debt limit?

Mr. BELL. None whatever. They would not come under that limit. That limit only applies to public-debt obligations issued under the Second Liberty Bond Act.

Mr. COFFEE. There is a contingent liability there nevertheless. Mr. BELL. They would only come in under that limitation in case we had to borrow money to meet that contingent liability.

Mr. COFFEE. The Treasury Department makes no reserve or sets up no reserve for these contingent liabilities, do they?