Mr. COFFEE. Mr. Black, I am particularly interested in any plans devised for financing agriculture and in any efforts to put it on a selfsustaining basis, because I fear that if we don't place it on a selfsustaining basis that Congress may at some time in the future turn off the spigot and as a consequence agriculture would not be able to obtain credit at a reasonable rate. Now, I understood you to say the other day that Secretary Wallace was not consulted in reference to turning the Farm Credit Administration over to the Department of Agriculture. I am wondering what your attitude would be in reference to a measure that would return the Farm Credit Administration to an independent status? Mr. BLACK. I don't know what the position of the Department would be. It has not been asked for a report on that measure. Mr. COFFEE. Are you personally favorable to the measure that is before us? Mr. BLACK. This particular measure? Mr. COFFEE. Yes. Mr. BLACK. I don't think I should answer that because I cannot have any personal feelings on this matter apart from what the Department would report on the measure. Mr. COFFEE. Well, in the event this measure was passed you would no doubt be in charge of it, so naturally we would be interested in knowing something about your philosophy in reference to it. You think that it should be placed definitely on a self-sustaining basis? Mr. BLACK. The Farm Credit Administration; yes. I think that that is desirable. Mr. COFFEE. Do you feel that the borrowers who benefit only to the extent of one half of 1 percent on their interest payments would prefer to scuttle the cooperative Federal Land Bank System and depend entirely upon direct Federal loans rather than maintain the cooperative system at a half percent higher rate? Mr. BLACK. I don't think one can generalize on that. There would be some who would object and there would be a great many who would not. Mr. COFFEE. About 77 percent of the farm borrowers are not in default. Mr. BLACK. That is correct. Mr. COFFEE. In the event this bill were passed the capital of the Federal Land Bank would be reduced about half, would it not? Mr. BLACK. About a third. Mr. COFFEE. What is the total stock held by the Federal Government and what is the amount held by the Federal Land Bank Associations? Mr. BLACK. The Federal Government has $125,000,000, and $187,875,360 of paid-in surplus. The borrowers have $111,475,965. Mr. COFFEE. Now, of that surplus, isn't that really owned, indirectly or partially, by the Federal land banks? Mr. BLACK. No; that is surplus paid in by the Federal Government. Mr. COFFEE. Well, is that where our contributions have gone that Congress has made to the Federal Land Bank during the last few years? Has it been credited to surplus? Mr. BLACK. $125,000,000 of it was to capital and $187,000,000, the figure I just gave you, was to surplus. There was also, of course, about $160,000,000 of interest-reduction subsidies. Mr. COFFEE. Well, this bill contemplates retiring all the stock of the Federal Land Banks and all the stock of the farm borrowers in the Federal Land Bank Association. Mr. BLACK. Yes; it would provide that. Mr. COFFEE. How long since the stockholders in the Federal landbank associations have received any dividends? Mr. BLACK. One bank paid a dividend in 1931 and no bank has paid one since. Other banks stopped around 1927. Mr. COFFEE. Would the dividend come out of this surplus account? Mr. BLACK. It would come out of undivided profits or earned surplus in the first instance. Mr. COFFEE. Well, in other words, they look to this surplus account for dividends to the stockholder borrowers Mr. BLACK. You mean this $187,000,000? Mr. COFFEE. Yes. Mr. BLACK. No; not for dividends because dividends have not been declared for many years. That is merely an added security to the bonds outstanding. Mr. COFFEE. What is the amount that is paid now to the local associations for handling collections? Mr. BLACK. They are paid on a fee basis, depending on the work that they do. Various kinds of work are paid differing fees. It amounts to from $4 to about $6 per loan. It varies somewhat from district to district. Mr. COFFEE. What I am wondering about is whether or not the fee that is provided in here is less or more than what s paid at the present time. Mr. BLACK. It is the same as is provided in the present law, but some associations are paid somewhat more than that; others perhaps slightly less. Mr. COFFEE. This would amount to one-half of 1 percent? Mr. BLACK. No; one-quarter. Mr. COFFEE. One-quarter percent payment which comes each 6 months? Mr. BLACK. NO; one quarter annually. The present law provides for one-eighth semiannually or a total of one-quarter annually. Mr. ANDRESEN. The associations receive nothing for servicing the loans? Mr. BLACK. There are some of them that do not. Mr. COFFEE. Are you convinced that the 1 percent margin would place this system on a self-sustaining basis. Mr. BLACK. Of course that is the intent under the present law, the original farm loan act. It was clearly the intent that there should be a 1 percent margin. It so happened that the interest rates and the loan rates have fluctuated in such a way that the banks have succeeded in getting more than 1 percent. Mr. COFFEE. Well, until farming is placed on a more profitable basis than it is today, would you not anticipate approximately the same cost of operation and ratio of losses that prevail today? Mr. BLACK. As I indicated the other day, the actual cost of operat-ing the system has been 1.01 percent. Mr. COFFEE. That does not include the reserve losses? Mr. COFFEE. That is the Federal Land Banks only? Mr. COFFEE. Now, on the Land Bank Commissioner loans, your total charges, as I remember, was 2.9 percent. Mr. BLACK. Somewhat higher. Mr. COFFEE. And this bill in reality would make possible 75 percent loans which is the present situation, combining Federal Land Bank and Land Bank Commissioner loans? Mr. BLACK. That is right. Mr. COFFEE. In other words when you go beyond 50 percent loans you begin to reach higher costs and greater losses. It is that last 25 percent that shows the higher loss ratio. If this bill provides for loans of 75 percent of value, it would be logical to anticipate a higher loss ratio than it would be on the 50 percent loans under the present Federal Land Bank System. Isn't that logical to assume? Mr. BLACK. Yes; that is logical to assume that but there are annual earnings and the system can absorb a considerable amount of loss. Mr. COFFEE. Now, there is one more phase that I think should be touched upon and that is in reference to flooding the country with additional tax-free securities. What is the approximate amount of the total farm indebtedness in the country? Mr. BLACK. About $7,000,000,000. Mr. COFFEE. Of which the Federal land bank and the Land Bank Commissioners have about 35 percent. Mr. BLACK. Something like that. Mr. COFFEE. Well, now, isn't it logical to assume that if you are permitted to issue tax-free bonds that the Federal land bank or this agency would be called upon to finance almost the entire farm indebtedness of this country. Mr. BLACK. The farm-loan bonds are tax-free now and always have been tax-free. Mr. COFFEE. But you only have two and a half billion dollars' worth outstanding now, but with the interest and principal guaranteed by the Federal Government as contemplated under this measure, and an interest rate of 3 percent, no other agency could possibly compete with that rate and as a consequence it would be necessary for this agency to be prepared to assume the entire farm-mortgage indebtedness of this country. Would that not logically follow? Mr. BLACK. I don't think that all of the mortgages would go to the system. I don't know what proportion would stay out but there surely would be some stay out. Mr. COFFEE. Most any farmer who could borrow money at 3 percent would not pay 4 or 5 percent anywhere else. Mr. BLACK. Yes; but many farmers would not be eligible. Their loans would be of such a nature that they would not be eligible and for other reasons they might want to stay out. I will agree, however, that the volume of loans in the system would increase materially. I am certain of that. Mr. COFFEE. Do you think that would be a healthy situation to siphon all this farm-loan business into tax-free guaranteed bonds? Mr. BLACK. I don't see any reason why it would be unhealthy to have a farm-loan system larger than it is now and to have more loans outstanding, even to the extent of having substantially all of the eligible mortgages. Mr. FLANNAGAN. I want to ask one question: Do you think it would hurt the farmers any if they all refinanced on a 3-percent basis? Mr. BLACK. I hardly see how it would. Mr. FLANNAGAN. I don't either. Mr. COFFEE. Well, I will raise this question: Every farmer in this country is also a stockholder in his Government and he is very much interested in maintaining the financial integrity and stability of his Government. Anything that might have a tendency to jeopardize that financial stability he would resist. I am wondering whether he is willing to sacrifice this cooperative independent agency or what was an independent agency, and place this extra burden on the Federal Government for the benefit of one-half of 1 percent reduction in interest? Now, the average loan as I understand it is about $3,000, is it not? Mr. BLACK. No; it is about $3,500. The CHAIRMAN. May I ask a question? Mr. COFFEE. Pardon me just a moment. I want to say one word and then I will yield. That would mean the average borrower would save at one-half of one percent only $17.50 a year. Now, the question is whether or not he would accept this measure for that amount of money. I will yield to the Chairman. The CHAIRMAN. I would like to ask the gentlemen if he thinks that a reduction of the interest rate of just one-half of one percent would cause all of the mortgage companies and those who are engaged in lending money to withdraw from the field? Mr. COFFEE. Absolutely. The CHAIRMAN. Just the $17.50 you say would not mean much to the farmer but would mean so much to the other lending agencies. Mr. COFFEE. There is no lending agency that could exist under those conditions. The CHAIRMAN. A good many of the banks are loaning short-term money at less than 1 percent. Mr. COFFEE. Certainly; but not on real estate. The CHAIRMAN. If the money is available, real estate is about the best security they can get, and certainly it would not absorb the loans above $50,000. There are a great many loans in this country over $50,000. They could not come under this. And in addition, as a matter of fact, it seems to me, and I think Mr. Coffee will agree with me, that the Federal Government is never going to allow these gonds to go unpaid, and even at the present time the Government, for all practical purposes, is guaranteeing these outstanding bonds. So why not give the farmer the benefit of it at a low rate of interest? Mr. COFFEE. I want the farmer to have the lowest rate possible on a self-sustaining basis because I realize that, just like the H. O. L. C. or any other agency where we permit unsound loans to be made, Congress eventually shuts off the spigot and then there is no more credit available under such an agency. The CHAIRMAN. I am inclined to think that the Federal Government losses would be less because the present subsidy or amount we pay to absorb the difference in the losses which we have at 3%1⁄2 percent runs over $30,000,000 and I am inclined to think that the loss, if we used this new system, would be less than that figure. Mr. COFFEE. I think your losses will be greatly increased for this reason: You have an agency now built up over a period of years. Each Federal land bank association is interested in seeing that that loan is sound because they are financially interested in it. Their stock is in jeopardy in event the loans are not paid. With this there is no more financial liability on the part of any one The CHAIRMAN. They don't get much on the stock under the present system any way and with the unguaranteed bonds the Government would probably have to pay perhaps 12 percent on the whole amount of outstanding bonds, and that certainly would be a saving to the Government. And if you take a point and a half on all outstanding bonds, it would absorb a good many losses. Mr. COFFEE. Perhaps some consideration might be given to helping the Federal land bank associations to maintain this cooperative Federal land bank system as an independent agency. Mr. FLANNAGAN. I would just like to make this observation: We have loaned billions of dollars through the Reconstruction Finance Corporation to industry and every penny of that money was raised by the sale of tax-exempt securities. We have done the same thing for the home owners. Now, I don't understand why when we try to do something for the farmers that it is always thought we are going to wreck the financial stability of this Government. I would just like for the gentleman from Nebraska to tell me Mr. COFFEE. In the first place have you a Home Owners' Loan Corporation today that can make a single loan? No, because Congress stopped the appropriation for that purpose. That is what I am afraid of in this situation. I think temporarily you would gain but in the long run you would have no agency to take care of the credit needs of agriculture in the future. The CHAIRMAN. Will the gentleman yield for a question? Mr. COFFEE. Yes. The CHAIRMAN. The gentleman thinks this ought to be on a selfsustaining basis. Mr. COFFEE. Absolutely. The CHAIRMAN. Does he think industry is on a self-sustaining basis so long as we have protective tariffs? Mr. COFFEE. I think you must maintain a protective tariff system in this country for agriculture as well as industry. The CHAIRMAN. And so long as we have that system industry is not on a self-sustaining basis. It would only be on a self-sustaining basis if you removed the tariff. So if we are going to have industry on a subsidized basis certainly what little subsidy there might be in this could not be objected to when you lay it alongside of the tremendous subsidy industry has had under the tariff system. Mr. COFFEE. Some industries could not exist without a tariff. The automobile industry is one exception, but there are many industries that have been built up in this country under the protection of a tariff and must have a tariff if they are to be maintained. Mr. ZIMMERMAN. If a farmer who hasn't had any protection or subsidy gets no help what is going to become of him? Mr. COFFEE. I am in favor of giving the farmer the same protection against these competitive agricultural commodities coming into this market from foreign countries. If the American farmer can |