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It has been suggested that $100,000,000 is too small or may be too small an amount to permit of the orderly liquidation of the jointstock land banks. The original figure suggested was $150,000,000. It was cut down because some of the other amounts were cut down on account of the fact that the financial requirements of the Government are such that it seemed necessary to reduce them, and $100,000,000 was thought to be a minimum that would accomplish the thing that we have in mind.

It is clear to you gentlemen that the big loss in this case has come out of the bondholders, some of them large, some of them small, some of them banks; they represent all classes of people.

We cannot correct that situation. It seems to me that the thing that should be safeguarded now is to prevent a repetition of the kind of difficulty we have had in the case of the joint stocks, and that is the reason for these provisions, first, to prohibit them from issuing additional tax-exempt bonds; in other words, terminating their activities and then giving them an opportunity to liquidate in an orderly fashion so as to protect the interests of the farmer borrowers and also the interest of the security holders insofar as may be possible.

That is all I know about it, Mr. Chairman.

The CHAIRMAN. If there are no further questions, we would like to take up the amendments that are suggested. Have you gone over all of those? I believe we went over all the amendments, Dr. Myers, except the suggested changes in title 4. Dr. MYERS. Yes, sir. The CHAIRMAN. You have not finished working those out? Dr. MYERS. No. The Committee on Banking and Currency of the Senate-I think I am correct in this; if I make a mistake, correct me-reported out a bill favorably yesterday afternoon, without title 4, but with the understanding that they agreed to the principle of title 4 and that after an acceptable wording had been worked out, it would be presented as a committee amendment. That is, that title 4 would be introduced this morning.

The subcommittee to which was delegated the authority in that case met and found still further difficulty, and having to adjourn at 11 o'clock, they adjourned to meet again at 3 o'clock this afternoon. Mr. Evans, who met with Mr. Wood from the Senate legislative counsel's office this noon—I believe they think they have worked it out?

Mr. EVANS. Yes.

Dr. MYERS. They believe they have worked out a formula that will meet in comprehensive fashion the conflicting requirements of the innumerable types of projects that they are attempting to cover in that title, and the subcommittee of the Senate Committee on Banking and Currency will meet at 3 o'clock this afternoon to either accept or modify that particular section.

The CHAIRMAN. Do you have a copy of that as you have worked it out so the members might have it?

Mr. Evans. I have not. • The CHAIRMAN. You have not worked out the wording!

Mr. Evans. Yes; the wording has been worked out, but we left it with the stenographer for retyping, and that is to be ready at 3 o'clock. I am certain that the committee will not have any objection to sending a draft over when it has been prepared.

The CHAIRMAN. I wish that you would do that, so that we may have the benefit of it, and we can then consider it in the light of any changes that may be made.

Mr. Evans. There is only one provision that I think may need a little explanation. Would you like me to explain it briefly?

The CHAIRMAN. Yes.

Mr. Evans. The question arose as to whether or not in many of these drainage districts they would have authority under the original act or under the provisions of their incorporation to retire and issue new bonds, and it was thought that it would be necessary in many of them to retain the bonds and not issue new ones.

Therefore, the Reconstruction Finance Corporation would get as collateral to its loans the old bonds which they would take from the present holders. If you call those bonds in and agreed to reduce the indebtedness over whole district in proportion to the amount paid by the Reconstruction Finance Corporation for those old securities, it would be necessary in case of default for the Reconstruction Finance Corporation to sell the bonds in order to satisfy its debt and you would put the farmers in the district back in the same shape that they were before. In other words, the purchasers of the bonds from the Reconstruction Finance Corporation would immediately have the right to collect the full amount, the original face amount of the bonds.

That seemed to be a stumbling block, but we provided that if a situation of that sort arose, a sufficient number of bonds should be retired, equal to the write-down throughout the whole district, and at the same time preserve to the Reconstruction Finance Corporation the right, in case of ultimate liquidation, to proceed against the property underlying the security on the basis of the amount of the bonds outstanding at the time the corporation made its loan; in other words, by agreement with the district, it would preserve its lien.

Therefore, even though they pass the profit down to the borrower in that instance, it would prevent the bondholder who had not come in to participate in that writing-down from having his security enhanced by a retirement of the other bonds. Say 80 percent of the bonds came in and the holders were willing to take a 60-percent write-down. If the district is required to retire say 60 percent of the bonds that come in you would immediately enhance the value of the other 20 percent that stay out of the plan. On the other hand, if the district is required to agree before the 60 percent of the bonds are retired that the Reconstruction Finance Corporation shall have the right to participate in all future payments on the basis of the amount of bonds retired plus the amount of the bonds held by it as collateral for the loan, then the bondholder who stays out does not get an advantage and it is perfectly fair to him, because if the bonds were not retired the holders of the 20 percent of bonds would continue to share in future payments on a pro rata basis to all bondholders.

Mr. GILCHRIST. I have had some difficulty with the Reconstruction Finance Corporation people to get them to pass loans to some municipalities; well, to one city that I have in mind because the organic law of the city did not give them the right to negotiate to do the thing that the city would have to do. In this case many of the drainage districts do not have any more authority than the statute gives them and they must proceed under the statute. You speak about the district agreeing to do something, in this explanation that you made, which I was glad to hear. What right have the districts to enter into such a contract or agreement ?

Mr. Evans. Only if there is anything in the organic law of the district which specifically prohibits that, in which case undoubtedly some other method would have to be found.

Mr. GILCHRIST. Does it not have to be put on the other basis, that there must be something specific in the law which gives them the authority to do that, because no municipality has any authority except given it by statute?

Mr. Evans. If they have authority to borrow money, they would have the authority to agree upon the terms of the loan, provided it did not transgress some of their charter powers. They certainly have that obligation now, and the lien of the bonds for the total amount now outstanding spreads as a lien over the entire area by assessment under the provisions of the law. If, when they are going to make a loan, they should agree with the corporation, “ Yes, we will retire these bonds, but we will preserve for your benefit the lien of these bonds so as to keep the other bondholders from increasing the value of their security," I do not believe they would transcend many of the charter provisions of those districts.

Mr. GILCHRIST. I do not care to extend the discussion, but it would involve the statutes of each of the States.

Mr. Eyans. It would involve the law under which each one of those districts was operating.

Mr. GLOVER. Have you examined the Glenn-Smith bill which was passed out of the Committee on Irrigation and Reclamation, of which I was a member for 2 years, in connection with drainage districts? We had to spend a lot of time on that bill and I think worked it out well.

Mr. Evans. As I understand from the gentleman who proposed this particular measure, they did not want to go into as great detail as was gone into in that bili.

Mr. GLOVER. That was a well-drawn bill. But here is the trouble in our districts down there. I have a number of them in my congressional district. If some do pay and others do not pay, the lien is on the whole body of the land that is in the district. The Glenn bill provided that before any refinancing of the district at all was carried out, this agreement had to be had with the holders of the bonds to take so much for them.

Mr. Evans. I think that was one of the most iniquitous rules that has crept into our law in this country, the “last faithful acre doctrine."

Mr. GLOVER. That is absolutely true.

Mr. Evans. It will be of interest to you to know, sir, that that case has recently been submitted to the Supreme Court of the United States. If the court decides in that case that it is not going to invoke this “last faithful acre doctrine”, that it is wrong and contrary to public policy to carry that out to its ultimate conclusion, then it will be perfectly possible for the R.F.C. in connection with these drainage district loans, to apply the principles that the Supreme Court lays down in that case. The case has already been argued and briefs from practically every part of the far west have been submitted by various groups and interests as amicus curie.

Mr. CLARKE. What about all the bonds in connection with these projects! Do you think the Supreme Court is going as a matter of public policy to render a decision that will invalidate those sacred obligations?

Mr. Evans. No, sir; it will not.
Mr. CLARKE. Then what is it?

Mr. Evans. It is this, most of the courts have held, but it is not written into the law specifically, that even the last acre in the district shall bear the brunt of it and continue to be liable until the whole debt is paid. Since it is a lien over the whole district, there is no way for one man to pay his pro rata part of that indebtedness and discharge his land from liability. The case was argued before the Supreme Court and was concluded that it was not the intention of the original proponents of the law to carry it to its ultimate conclusion the last faithful acre doctrine,” as it has been called.

Mr. GLOVER. You might say further that these districts are created by acts of the legislature without the parties owning the land having anything to say about it.

Mr. EVANS. Yes.
Mr. GLOVER. That is where the trouble came in.

Mr. Evans. And we hope to have a helpful decision from the Supreme Court in order to settle all of those questions.

Dr. GILCHRIST. Where does this case come up from?
Mr. Evans. It came up from Washington and was argued about

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6 weeks ago.

The CHAIRMAN. Will you send over a copy of those suggestions as soon as they are available?

Mr. Evans. Yes, sir.

The CHAIRMAN. Dr. Myers, we will go over these amendments now. You went over these yesterday, did you not?

Dr. MYERS. Did I go over the one at the bottom of page 15?
The CHAIRMAN. Which bill is that?

Dr. MYERS. Senate 1110, confidential committee print of April 5. I can read it in half a minute.

The CHAIRMAN. Please do so. Dr. MYERS [reading]: The provisions of paragraph 9 of section 13 of the Federal Farm Loan Act, as amended (relating to charges to applicants for loans and borrowers from the Federal land banks), shall, so far as practicable, apply to loans made under this section.

That relates to title 3, the loans to individual farmers by the Farm Loan Commissioners primarily on second mortgage. The title, as drawn, had no provision for taking care of any charges, and it seemed fair to use the same rules in making those loans that prevail in regard to first mortgages to the Federal land banks; in other words, the limit of cost would be 1 percent and any additional costs will come out of the fund in accordance with the general procedure of the Reconstruction Finance Corporation's operations.

The CHAIRMAN. I think that amendment is all right.

Mr. GILCHRIST. That makes the net interest charge to the farmer how much?

Dr. MYERS. That is 1 percent over a 10-year period. This section is limited to 5 percent on second mortgages and that would add one tenth of 1 percent.

Then a new section, 303, is added, as follows: SEC. 303. The Federal land banks and the national farm-loan associations are authorized, upon request of the Farm Loan Commissioner, to make available to him their services and facilities to aid in administering the provisions of this act.

That title previously was just indefinite. It said the Farm Loan Commissioner could make rules and regulations to carry it out. Of course, the Farm Loan Commisioner, in order to make loans, would wisely use the facilities of the Federal land banks and of the local farm-loan associations. This merely authorizes him specifically to us them. It is just a matter of clarifying that statement in regard to the way in which these second-mortgage loans will be administered.

Mr. PIERCE. I have some telegrams here in regard to cooperative farm processing associations; they think they ought to be luded in this section. I wonder if it was considered when the bill was drawn—the cooperative farmers who have their own processing plants?

Dr. MYERS. They are already eligible to loans from the Federal Farm Board.

Mr. PIERCE. Were they considered in those loans to the farmers?

Dr. MYERS. No. These are loans to individual farmers under the assumption that the loans to cooperatives can be made under the Federal Farm Board.

Mr. PIERCE. I do not know whether they are covered or not. The CHAIRMAN. That may be another branch of that set-up.

Mr. CLARKE. I recall on that very point of loans to cooperatives discussions that we have had ; and while I am a director in the second largest cooperative in the United States, I believe that some day we are going to have an awful blow-off, for the reason that right now you can take the loans to the cooperative associations down as low as one quater of 1 percent; is not that right?

Mr. HOPE. One eighth of 1 percent.

Dr. MYERS. No. The law does not require the Federal Farm Board to charge those cooperatives a rate of interest that is—this is the thought behind it, I may not be exactly right—it is the lowest rate prevailing on that day on Government obligations other than postal-savings bonds. That means the rate fluctuates from day to

day and it has been very low and it has been moderately high.

Mr. CLARKE. Here is the point I want to make. The criticism comes from the taxpayers themselves and the point on which I get most complaint is this: The State is carrying hundreds of millions of dollars of obligations and these cooperatives go in and borrow this money at this rate while the Government itself is going out and on some of its own securities paying as high as 3578 percent up to 4 and 418 percent.

The CHAIRMAN. I think some corrections will have to be made either in the legislation or in the practices of the new set-up in another branch of it.

Dr. Myers. The point was raised a few minutes ago about the borrower being in the position of a beggar in asking for a settle

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