Senator BANKHEAD. The cost of operation?

Secretary WALLACE. The cost of operation for the system as a whole. That includes losses. So, the 11⁄2 percent should take care of those areas where the risks are greatest and should make it possible in those areas where the risks are least to have a very substantial patronage dividend.

The other payment to which you referred, which you might say is a premium payment in consideration of unusually good service or unusual efficiency.

Senator BYRNES. I was just wondering how or on what basis that would be paid. I can understand your patronage dividend.

Secretary WALLACE. I do not know whether you care to go into it in minute detail, but here is a rather carefully prepared statement along that line.

Senator BANKHEAD. Is that in the report to the committee?

Secretary WALLACE. I doubt if the committee cares to go into it in that much detail, but the Senator can determine whether it is desirable. The objective of these payments is to get a genuine cooperative interest on the part of the different local associations.

Senator BYRNES. Your idea is that the incentive of the patronage dividend and the other payment would be a greater inducement to members of the association to cooperate than is the holding of stock? Secretary WALLACE. Yes; that is the objective.

Senator BYRNES. I think we can agree on that.

Secretary WALLACE. It is just like a local chamber of commerce dividing into two teams, both teams in a certain field endeavoring to display their efficiency. When the Farm Bureau starts competition between counties and works out a scorecard which gives the functions, and standards of perfection, the counties like to get into A grade or failing A grade, into B grade.

Senator BYRNES. Would the farmer be likely to say, "I never receive any dividend upon the stock I hold. How can I hope to get any patronage dividend or any other kind of dividend out of this new arrangement?"

Secretary WALLACE. I am inclined to think that you would also have in this case a certain amount of psychic incentive which does work with the American people when you hold out the inducement of standing well in the eyes of their fellows.

Senator BYRNES. If you had the dividend as sufficient incentive, they might assist in the appraisals of land so as to prevent loss; I can see that.

Secretary WALLACE. But after the fact? After they are sunk, you feel it might be difficult?

Senator BYRNES. Yes.

Secretary WALLACE. No; as a matter of fact, this second payment is designed to meet that very situation, because it takes into account the difficulty of the situation under which the particular association is working.

An association may be sunk; it may have a large amount of real estate to handle. Well, if it does a good job, it may get a payment, while an association that is not active and is not doing a good job will not get a payment.

Senator BYRNES. What effect will the power to write down indebtedness have upon the chances of securing dividends from the operation

of the business? If that should result in encouraging applications for writing down indebtedness, it would, of course, so increase losses that you would not have any chance.

Secretary WALLACE. No; I think not, Senator; as a matter of fact, this power to write down indebtedness is so conditioned that, in my opinion, there will be fewer losses rather than more. I think, in terms

of dollars, that there will be definitely fewer losses.

Here is the situation: Nobody, unless he is deceiving the purchaser, is going to get more out of a farm than its productive value.

It is true that there are a good many farms on which loans have been made greater than productive value, and the bank has been caught; there was no way in which it could have gotten out of it without loss. The only question is as to the manner of taking that loss which is certain to come. I think the loss under this proposal will be much less than the loss would be under foreclosure.

Senator BYRNES. Am I right in believing that the proposal contemplates that before the indebtedness is written down, the farmer must agree to transfer title to the corporation?

Secretary WALLACE. Yes.

Senator BYRNES. I agree with you that that would have a very restraining effect. If there is anything that a farmer hates to do, it is to pass title to his land. He will hold out when nobody else can see any hope.

Senator RADCLIFFE. He has the option of taking it back in 5 years? Secretary WALLACE. He has the option of taking it back either at the amount of the loan or at the demonstrated productive value, whichever is less.

Senator BYRNES. But from my experience, I think he has a natural disposition not to want to part with one foot of his land, and he will have some suspicion, if he ever passes title to it, that he will never get it back.

Secretary WALLACE. It will be up to the local association to determine the productive value; and, of course, the local association will be guided by two considerations: Can this man, at the revised amount of debt, go forward? They will want him to pay the maximum amount that he can but they will not want his loan to break down again.

From our experience in triple-A and also with the Farm Security committees, I should say that the local farmer will take as hardboiled and realistic an attitude, as just and fair an attitude, from the standpoint of everybody concerned; they will do a better job, a more hard-headed job, than anyone else.

Senator BYRNES. You can't educate him in a day to a new proposal, but he will have the experience that heretofore the land banks, when they financed a mortgage, refused to sell to the original owner. It is going to take some good talking to convince him that if he ever parts with title, he will get it back; he is going to be suspicious.

Senator BANKHEAD. He won't turn it loose, with any common knowledge, until he is obliged to.

Senator RADCLIFFE. In spite of the cast-iron provision that he can do it?

Senator BYRNES. No; I think you will have to do some impressive talking to convince him that he can get it back.

Senator RADCLIFFE. There is a suggestion here that a farmer would not withhold his payments because he might run the risk of losing

his property; but if he works it out so that he can withhold his payments and later buy the property back under the option, if he will think through as far as that

Senator BYRNES. In due time he may be educated.

Senator RADCLIFFE. If he is going to think it out, he is going to realize he can hold back his payments, yet even if he has to give up title to the property, he can get it back, because he has absolute right to take it back.

Secretary WALLACE. It is up to the committee. The Government is the landowner. The landlord has some rights.

Senator RADCLIFFE. Are there any restrictions upon his option to get it back?

Secretary WALLACE. It is up to the local association to determine what the productive value of that farm is; and if this man is conducting a shenanigan, the committee will treat him as any landlord treats a tenant who is obviously conducting a shenanigan.

Senator RADCLIFFE. Hasn't he the absolute right to get it back at either the amount of the loan or its productive value-either one of those two?

Secretary WALLACE. That is right; whichever is the lower.

Senator RADCLIFFE. He has the absolute option to get it back by either of those two means?

Secretary WALLACE. He has the option, but the string on it is that the local association determines what the productive value is.

Senator RADCLIFFE. All the local association can go is determine productive value. Then he has a choice of taking it back either at the amount of indebtedness or its productive value as determined by the association, but he has an absolute right to do it?

Secretary WALLACE. Isn't there some string on that? If a local association thinks he is not behaving himself, isn't there a restraint. provided in the bill?

Senator RADCLIFFE. I am not asking this in a combative sense; I am just asking whether there is any restriction whatever. Has he an absolute option to get it back on either one basis or the other?

Mr. McCONNAUGHEY. He has to comply with the conditions of his. lease during the time of his occupancy. His right at the end of that time is an absolute right based upon these two values. The system, however, is in a position to return it to him in those circumstances without loss except to the extent of the difference between the actual value of the property and the amount of his indebtedness at the timeit was taken over.

Senator RADCLIFFE. Must he wait 5 years?

Mr. McCONNAUGHEY. He can exercise that option at any time, with the Governor's consent, prior to that time.

Senator BANKHEAD. The Governor has a veto over it?
Mr. McCONNAUGHEY. That is right.

Senator RADCLIFFE. Does that veto apply to the exercise of that option at any time during the 5 years or at the end of 5 years also? Senator BANKHEAD. If he complies with it, there is no veto. It is an advantage to him to do it as soon as he can. The bank reserves the right to hold it for 5 years to make a fair test.

Senator RADCLIFFE. But the farmer can get it back at whichever valuation of the two is lower. He has first call on it.

Senator BANKHEAD. I heard the Secretary say something about 4 percent. What was your statement about that?

Secretary WALLACE. I was saying that under the terms of the bill, as I was describing it in the amended form in my statement, assuming a Government rate of 21⁄2 percent and the margin of 11⁄2 percent, the rate would be 4 percent, less whatever the patronage dividend might turn out to be.

I also indicated that on the basis of the experience thus far in the land-bank system, 1 percent had covered, for the system as a whole, the operating costs plus losses.

Senator BANKHEAD. I understand that your use of the 4 percent is based upon an assumption that it would cost the Government 21⁄2 percent to get the money?

Secretary WALLACE. Yes.

Senator BANKHEAD. When you refer to the Government rate, you mean the rate the Government must pay to get the money? Secretary WALLACE. Yes.

Senator BANKHEAD. The evidence before us has indicated that the Government is getting its money at a rate of 2 percent or less.

Secretary WALLACE. If you got it on almost entirely short-term. financing, I think would be the Treasury expression, you could undoubtedly get it for less than 2 percent; in fact, you can get money for less than 1 year at less than 1 percent. It would be a question of Treasury policy to determine how to distribute the maturities.

Senator BYRNES. And it would vary from time to time.

Senator BANKHEAD. If the Government can get money at less than 21⁄2 percent, then whatever reduction below 21⁄2 percent it gets will make the rate to the farmer reduced proportionately?

Secretary WALLACE. That is correct.

Senator RADCLIFFE. You said in your statement that the field would be open to anyone willing to offer equally fair rates and equally good service and that Government agencies should have no monopoly.

What has been the general experience, as far as you care to hazard any general summary, as to the competition in such cases? Do private. agencies continue to make such loans, or do they not, to any considerable extent?

Secretary WALLACE. Well, there has been a steady increase during the past 10 years in the proportion of loans made by the land bank system as compared with insurance companies and banks.

Senator RADCLIFFE. I know that, but I just wondered what would be the result in any particular community where farm loans are being made rather freely.

Secretary WALLACE. This tends to be the experience: That in the better farming regions the insurance companies and private lending agencies are competing with the land bank system and are getting business.

Senator RADCLIFFE. They are doing that?

Mr. DROSTE. That is correct. In the better areas insurance companies and, in many cases, local lenders come very actively into the field; in fact, recently, by reason of their activity, they have taken over quite a large volume of land bank loans.

Senator LA FOLLETTE. Is that not partly due to the fact that some of the insurance companies have been able to adopt a more realistic

policy than the farm credit system has been able to do under existing law?

Mr. DROSTE. Senator, I think that has been partly responsible for it. Senator LA FOLLETTE. Certainly it has.

Mr. DROSTE. And also because of this 5 percent stock requirement. Senator LA FOLLETTE. I include all the provisions and all the policies which I admit are forced by existing law; yet the fact of the matter is that in some of these areas some of the insurance companies have a more realistic and, I think, a sounder approach to this thing, so much so that they are "beating the time," so to speak, of the farm credit system.

Senator RADCLIFFE. Do you mean that they can make better terms? Senator LA FOLLETTE. They are making better terms and are approaching the subject more realistically.

Senator BYRNES. I can recall that before land banks were in operation, certain of the insurance companies that could be induced to lend upon farm land at all in my section of the country got 8 percent from the farmer, but that was always charged after commissions were paid to the local representative.

Secretary WALLACE. Here is a rather interesting figure, Senator: In 1938 the insurance companies made a total of $137,000,000 in loans as compared with $51,000,000 for the Federal land banks. In 1934 the insurance companies made $46,000,000 in loans as compared with $730,000,000 for the land banks. The insurance companies during the 5-year period from 1934 to 1938 got back into the field to a very considerable extent.

Senator RADCLIFFE. That shows, then, a very definite competitive process.

Secretary Wallace. Yes. It should be mentioned here that under the terms of this bill, during the period between now and 1946, there will be a flat 31⁄2-percent rate. The original bill makes it 3 percent; I have suggested that we make it 31⁄2 percent.

Senator RADCLIFFE. I should like to ask you a question about this power of the Governor to veto. If the farmer who surrenders his title has the right at any time within 5 years to buy back at either the amount of indebtedness or the valuation of the property at the time he loses it to the Government, whichever is lower, just what power has the Governor to veto? Is that an absolute right?

Mr. McCONNAUGHEY. During the time prior to the expiration of the period, the Governor has the right to veto. At the end of the period, if the farmer has complied with all the terms of his lease, the right of the borrower to recover the property is absolute.

Senator RADCLIFFE. The question arises whether he attempts to exercise it during the 5 years or at the end of the 5 years.

Senator LA FOLLETTE. It is true, under the first draft, in printed form, that the Governor also has the right to make such additional investigation as he deems proper upon the original certification by the association?

Mr. McCONNAUGHEY. That is correct.

Senator LA FOLLETTE. Therefore, you have a check not only during the period, but you have got the Governor holding a check at the outset. If some association or committee starts sending in a number of these things, which the Governor thinks are excessive or about