Senator BARKLEY. Whether the Government's credit behind them would run them up to par would depend a good deal eu how much more the Government's power has got to be drawn on for all other purposes during the depression.

Senator CAREY. Is it not the intention of the Robinson bill and all these bills to pay par on these bonds?

Mr. BALL. Or par at a low rate of interest.

Senator CAREY. Do you understand the bill that they are to pay par for the bonds? I know the bill does not provide it.

Mr. BALL. They are, as I understand it, to exchange new bonds for the old bonds.

Senator CAREY. Yes; but they do not get a $100 bonds for a $100 bond?

Mr. BALL. Yes; bearing a low rate of interest.

Senator BARKLEY. Yes; they exchange the new bonds for the old bonds at par.

Senator FLETCHER. Joint accommodation bonds. Is it your idea that the Government, if it takes over the joint-stock land bank bonds would be subrogated to the rights of the original holder and that the Government might hold the stockholders to their liability?

Mr. BALL. I should think so. As I understand the Robinson bill-I have not studied it at all-but as I understand it, the plan is for the joint-stock land bank holders to turn their bonds over to the Federal land bank, and then they will assume the bonds and exchange the bonds at a lower rate of interest guaranteed by the Government, and all the Government does is to guarantee those low interest bearing bonds, which will give the money for the farmers, whom they wish to help.

Senator FLETCHER. The Government ought to be in position then to collect what it can out of the stockholders, ought it not? Mr. BALL. Well, if they can; yes.

Senator BARKLEY. In other words, this exchange is to be made dollar for dollar for the new bond bearing a low rate of interest. Mr. BALL. Yes.

Senator BARKLEY. That is the way you understand it?

Mr. BALL. Yes; that is as I understand the bill.

Senator BARKLEY. In view of what has happened to the bonds, I guess any holder would be willing to get less interest if he can get it. Mr. BALL. Yes; I guess they would.

Senator FLETCHER. What is the pleasure of the committee now? Shall we meet to-morrow at 10.30?

Senator BARKLEY. I guess we ought to, Senator.

Senator FLETCHER. We will adjourn, then, until 10.30 to-morrow morning.

(Whereupon, at 11.57 o'clock a. m., the committee adjourned, to meet again the next day at 10.30 o'clock a. m., Thursday, February 2, 1933.)

REFINANCING PAST DUE OBLIGATIONS ON FARMS

AND HOMES

THURSDAY, FEBRUARY 2, 1933

UNITED STATES SENATE,
SUBCOMMITTEE OF COMMITTEE ON

BANKING AND CURRENCY,

Washington, D. C.

The subcommittee met, at 10.30 o'clock a. m. in the hearing room of the Committee on Banking and Currency, Senat Office Building, Senator Duncan U. Fletcher (chairman of the subcommittee) presiding.

Present: Senators Fletcher (chairman of the subcommittee), Walcott, Blaine, Carey, Couzens, Steiwer, and Barkley.

Senator FLETCHER (chairman of the subcommittee). The committee will come to order. Mr. C. B. Jennett, vice president of the First Trust Joint-Stock Land Bank, Chicago, Ill., will be heard first. Proceed, Mr. Jennett.

STATEMENT OF C. B. JENNETT, VICE PRESIDENT FIRST TRUST JOINT-STOCK LAND BANK, CHICAGO, ILL.

Mr. JENNETT. I might say that is Melvin Traylor's bank, and we have no connection with the Chicago Joint-Stock Land Bank, which is in receivership at the present time.

I am going to discuss primarily Senate bill 5390 and Senate bill 5515, and will then as briefly as possible run through the other smaller bills before this committee. As I understand it, the committee is hearing all sides of the problem in order that they can arrive at a conclusion on the whole problem instead of just a part of it.

There are three angles to this farm mortgage problem. The farmers must be put in the position where they will be able to carry on and to want to carry on. They must be in a position where they will want to carry on, as well as to be able to carry on, and I am of the opinion that in order to do that three things are necessary:

First. A lower interest rate, effecting a scaling down of debts and bonds;

Second. To have sufficient time of payment to enable there to be some recovery in commodity prices so that they can pay their obligations; and

Third. We must have higher commodity prices.

I think we all realize that considering the credit proposition without taking it for granted that we are going to have higher commodity prices in the near future would not do us a great deal of good. The final answer will have to be higher commodity prices so that the farmers can pay their debts. Lower interest rates and increase of time on payments alone will not accomplish this purpose.

There will

have to be some other means provided than lower interest rate and more time.

I am going to discuss first Senator Robinson's bill, S. 5390, which presents in effect Federal guarantee and unification of the land bank system. I am going to discuss it from the standpoint of its advantages, which I am going to enumerate as follows:

First. A material reduction in interest rate on outstanding loans, thus effecting scaling down of debts and bonds.

Second. The necessary additional funds to the consolidated banks to grant necessary extensions on maturing payments.

Third. Requires only a relatively small Government appropriation. Fourth. Provides uniform treatment of land bank borrowers, both Federal and joint-stock.

Fifth. Fulfills the moral obligation of the Government of the United States to the joint-stock land bank bondholders.

Sixth. Results in the elimination of the present dual system of land banks without undue hardship to borrowers or the joint-stock land banks and without a $500,000,000 receivership at this time in the farm loan system sponsored by the Government.

I am then going to discuss criticism leveled at S. 5390, as follows: First, that it involves Government guaranty.

Second, that it involves the unloading of the joint-stock land banks on the Federal land bank.

Third, that the bondholder does not take a sacrifice.

Fourth, that the stockholder is relieved of double liability.

Those are the primary objections to that bill.

Then I expect to discuss S. 5515, by Senator Robinson, and go over the same points and endeavor to discuss them from the same angle.

S. 5390 provides for an interest rate reduction in the bill as drawn to 41⁄2 per cent interest on farm mortgages. I am of the opinion that that interest rate can be reduced to 4 per cent rather than 41⁄2 per cent, and I will endeavor to show you how it may be later on in the discussion. That reduction is uniform in the Federal land bank and the joint-stock land bank.

Now, it may be possible that if you feel that the rates in the jointstock land banks should be more materially reduced than the Federal land banks, that the bondholders of the joint-stock land banks would take a lower rate of interest, thus taking a further reduction in his capital structure and in his interest return, and enable the joint-stock land banks to be reduced to 4 per cent when it might be possible that the Federal land banks could not be reduced to more than 41⁄2 per cent. As you Senators know, there is a 1 per cent spread between the bonds and the mortgages of the land banks. That was the theory when the system was set up. We feel that if the Government is going into this proposition there should be some additional reserve set up to provide a guarantee, that is a reserve that would hold the Government harmless from any loss in the guarantee, that is in so far as possible, and that would be by increasing the spread from 1 per cent to 11⁄2 per cent. Now, if that spread were left as it is we could, of course, make a half per cent reduction greater than we could if you increase your spread from 1 per cent to 11⁄2 per cent.

In the discussion of the farm-mortgage problem most of the discussion centers on insurance companies, the Federal land bank and the joint-stock land banks, and then it will be said, "Well, they have only a small percentage of the loans." I have an estimate here of the United States Agriculture Department, which I am going to enter as Exhibit 1, which shows the distribution of the agricultural debt of the United States which amounts in total to $9,200,000,000. Now, that was made a year and a half or two years ago, and has probably been reduced since that time.

Senator BARKLEY. That is the mortgage debt?

Mr. JENNETT. Yes.

Senator WALCOTT. Those are all individual mortgages?

Mr. JENNETT. No, it includes the entire agricultural first mortgage debt. There is an estimate floating debt of about $3,000,000,000 on top of the $9,200,000,000.

Senator WALCOTT. Does that statement you just referred to show that floating debt?

Mr. JENNETT. No. They do not have particularly detailed figures on that floating debt. But they do have figures on the $9,200,000,000 farm mortgage debt, which shows that the insurance companies own approximately $2,100,000,000, the Federal land banks $1,100,000,000, the joint-stock land banks $460,000,000, the mortgage companies $1,000,000,000, the commercial banks $1,000,000,000, retired farmers $1,100,000,000, active farmers $300,000,000, other individuals $1,500,000,000, and other agencies $640,000,000.

Now there is considerable discussion oftentimes concerning the farm debt. You make the statement that that includes first, second, third, and fourth mortgages. Somebody says, no, that is only the first mortgage. That is all of the debt. Sometimes second and third with it. When we are talking about the insurance companies, the Federal land bank and joint-stock land bank we are talking about the first mortgage debt. People say this debt has to be scaled down. If we take the balance of this debt structure, which amounts to about two-thirds of the debt, there is where the largest percentage of the scaling down ought to come in in order to get relief. Maybe we will have to have some scaling down in the Federal land banks, the jointstock land banks and the insurance companies, and probably there will be some scaling down, although that can come from reduction in the interest rate rather than scaling down the mortgage. If you would scale down any considerable percentage of the number of mortgages it would create a great disturbance in the credit structure of the country for fear it would spread through our whole debt structure, it would result in bankruptcies, closing of banks, and do a great deal of harm. I am of the opinion we can do the same thing with reduction of interest rate.

I will ask to have this Exhibit 1 put in the record. Senator FLETCHER. It may be placed in the record. (Exhibit 1 is as follows:)

DISTRIBUTION OF THE FARM MORTGAGE DEBT OF THE UNITED STATES

In the more recent figures available on the farm mortgage debt, the United States Agricultural Department estimates this debt to total $9,200,000,000 distributed as follows:

The first mortgages held by the insurance companies, Federal land banks, and joint-stock land banks are the conservative first-mortgage debt of the entire farmmortgage structure. The lands securing these mortgages are, in many instances, also subject to junior debts which are included in the $9,200,000,000, this junior debt being held by local banks and individuals. Many of the mortgages still owned by the mortgage companies are those that could not be refinanced due to excessive amounts.

Thus in a large measure the loans held by organizations and individuals are on a much less conservative basis than loans of insurance companies and land banks. These excessive purchase-money mortgages and junior liens certainly will have to be scaled down either through agreement or reduction of interest, and if these are brought down to a basis comparable to the loans of the insurance companies and land banks, and an interest rate reduction is also granted on the latter loans, it is apparent that the total mortgage debt of the Nation will be materially scaled down.

Mr. JENNETT. As Exhibit 2, I have an estimate here of the extent of relief granted by reducing interest rates to 4 per cent, waiving principal payments for three years, and reamortizing on a 40-year basis, in the case of long-term, semiannual $10,000 loans of various ages carrying 6 per cent, 52 per cent, and 5 per cent rates of interest. These figures are prepared by Doctor Engberg, statistician of the Federal Farm Loan Board.

A 6 per cent loan, repayable in 33 years, which has been on the books of the company for 5 years or for 10 years, or for 15 years, if that loan were reamortized it shows the amount that he estimates would be reduced, that is the burden that the farmer would have to carry. On a 6 per cent loan that has been in effect 5 years, reamortizing it on a 4 per cent basis would reduce the payments 32.2 per cent reduction from original installment; on a loan that has been in effect 10 years the reduction would be 37.8 per cent; on a loan that has been in effect 15 years, the reduction would be 45.2 per cent.

On a 51⁄2 per cent loan, repayable in 34%1⁄2 years the reduction in installments would be as follows: On a loan in effect 5 years it would be 27 per cent; on a loan in effect 10 years it would be 32.7 per cent, and on a loan in effect 15 years it would be 40.3 per cent.

And on a 5 per cent loan, repayable in 36 years it would be as follows: On a loan in effect 5 years, 20.8 per cent reduction; on a loan in effect 10 years, 26.8 per cent reduction; on a loan in effect 15 years, 34.5 per cent reduction.

That is practically reducing his payments over one-third. I would like to have that introduced as an exhibit.

Senator FLETCHER. It may be placed in the record.

(Exhibit 2 presented by Mr. Jennett is here printed in the record in full, as follows:)