This analysis further shows that under this present measure in its present form the 3-percent interest rate would only cost $101,700,000, and that at a 31⁄2-percent rate over a 7-year period it would involve no net cost to the Federal Government if the savings after 1944, when all presently unguaranteed bonds were refinanced, were returned to the Federal Treasury to take care of the temporary subsidies that would be necessary until the unguaranteed bonds were retired.

What I should like to know is whether you believe and your organization believes that the danger which you envision in explicit guarantee and in abolishing the joint stock liability, now recognized to be unquestionable, is great enough to justify Congress in asking the taxpayers to contribute $255,500,000 over the next 7 years, which could be saved if the provisions of this pending bill were enacted into law.

In other words, do you think that the dangers which you envision in full guarantee of these obligations by the Federal Government and the dangers which you see in the revision of the stock ownership are sufficient to justify asking Congress and the taxpayers of this country to put up $255,500,000 in the next 7 years so that you can have a low interest rate to the farmer for this system?

Mr. SHORT. May I first state that I am no authority on bond rates, and I, of course, by reason of that fact, could not verify the figures that you are reading off. But I will say this, that I do not think that we are relieving the subsidy of the Government by the passage of the Jones bill; that the only saving to the Government at this time would be the saving on interest on the bonds that the Federal land banks own, which amount-I cannot tell you the amount, but it is small as compared with what the Farm Mortgage Corporation owns; and it is true you would save interest on the refinanced bonds now held by the Farm Mortgage Corporation, but that, in turn, would decrease the earnings of the Farm Mortgage Corporation by a like amount. At the present time the Farm Mortgage Corporation is losing money, and the loss is borne by the Treasury. So that the refinancing of the vast amount of bonds that the Farm Mortgage Corporation now has, so far as the Treasury is concerned, would be like taking money out of one pocket and putting it in the other.

Senator LA FOLLETTE. I should like to insert in the record at this time a copy of supplemental statement on comparative costs of interest subsidies, which I think will clear up this record and furnish the details of the figures which I do not want to go into at this time. Senator BANKHEAD. It will be received.

(Copy of supplemental statement on comparative costs of interest subsidies, referred to and submitted by Senator La Follette, is here printed in full as follows:)

SUPPLEMENTAL STATEMENT ON COMPARATIVE COSTS OF INTEREST SUBSIDIES UNDER PRESENT LAW, UNDER H. R. 8450 (AS IT PASSED THE HOUSE ON MARCH 18), UNDER H. R. 8748 IN ITS PRESENT FORM, AND UNDER H. R. 8748 IF AMENDED TO FIX THE RATE OF INTEREST PAYABLE BY BORROWERS AT 31⁄2 PERCENT

Yesterday, I was asked the comparative costs to the Treasury of the interest subsidies under present law and under H. R. 8748 in its present form. The estimate which was given to me yesterdy, and which I gave in answer to Mr. Hope's question, was an approximate figure of $350,000,000 under the present law and $365,000,000 under the proposed bill. These figures, however, were based merely

on a rough comparison based on last year's profit and loss statements, and do not reflect exactly how the subsidies would be affected.. In view of this I should like to comment more fully this morning regarding the appropriations which would be required in connection with the administration of the provisions of H. R. 8748. For purposes of comparison I am also indicating the appropriations which would be necessary under three additional assumptions, (1) if the present law, which provides a 32-percent rate on land-bank loans and a 4-percent rate on Commissioner loans, should be continued beyond June 30, 1940, (2) if H. R. 8450, which has already passed the House, should become law and which reduces both Federal land bank and Land Bank Commissioner loans to 321⁄2 percent after June 30, 1940, and (3) if H. R. 8748 is amended to fix the rate of interest payable by borrowers at 32 percent with the banks and Corporation being reimbursed by the United States Treasury for the amount by which the actual interest expense on bonds exceeds 21⁄2 percent per annum, and vice versa, reimbursing the United States Treasury for the difference between the actual interest expense and a 22-percent rate if their interest costs should go below 21⁄2 percent.

In the following table the estimated appropriations, by years, are shown for the period July 1, 1940, through June 30, 1947, under each of the foregoing assumptions:

TABLE 1.-Estimated appropriations required under different assumptions with respect to interest rate on land bank and Land Bank Commissioner loans during the period July 1, 1940-June 30, 1947

1 Subsidy represents difference between contract rate of interest on land bank and Land Bank Commissioner loans and reduced rate of 31⁄2 percent and 4 percent, respectively.

2 Subsidy represents difference between contract rate of interest on land bank and Land Bank Commissioner loans and a reduced rate of 3% percent on both types of loans.

3 Subsidy represents the difference between 2 percent and the rate of interest on farm loan and Farm Mortgage Corporation bonds outstanding.

432 percent rate by borrowers with the banks and Corporation being reimbursed by the United States Treasury for amount of interest expense on bonds in excess of 22 percent, and vice versa, reimbursing the United States Treasury for the difference between the actual interest expense and a 21⁄2 percent rate if their interest costs should go below 21⁄2 percent.

5 No subsidy required.

6 Net recoveries resulting from reduction in cost of money below amount necessary to provide 1 percent spread between bond and loan rates.

As the foregoing table reveals the appropriation required in connection with H. R. 8748 would be $153,800,000 less than if the present law should continue during the period and $179,700,000 less than if H. R. 8450 (as it passed the House) should be enacted. If H. R. 8748 is revised as shown in column 4, the effect of the subsidies and recoupment would result in a net recovery of $4,100,000 by the Treasury in excess of subsidies.

BASIS OF ESTIMATES

In connection with the estimated appropriations just mentioned, I should like to comment briefly as to the manner in which they have been prepared. Present law. During the calendar year 1939 the Federal land banks received $29,175,000 in interest reduction payments and the Federal Farm Mortgage Corporation, in connection with Land Bank Commissioner loans, $7,340,000, a total of $36,515,000. It has been assumed that during the 7-year period July 1, 1940-June 30, 1947, payments in the same amounts would be received annually.

This, of course, gives no consideration to either an increase or a reduction in the volume of loans outstanding at December 31, 1939. On the latter date the Federal land banks had outstanding $1,904,655,000 in loans with an average interest rate of 4.98; the Land Bank Commissioner loans held by the Federal Farm Mortgage Corporation amounted to $690,880,000, all of which carried a contract rate of 5 percent. Likewise it has been assumed that there would be no change in the amount of outstanding bonds of the land banks or Mortgage Corporation during the period.

H. R. 8450.-The assumptions made with respect to this legislation are identical with those in connection with the present law except that an additional $3,700,000 has been added to the annual interest reduction appropriation to provide for an interest rate of 31⁄2 percent on Land Bank Commissioner loans as contrasted with the reduced rate of 4 percent now in effect.

H. R. 8748.-In estimating the appropriation which would be required by H. R. 8748 it has been assumed that:

1. The amount of land bank and Land Bank Commissioner loans outstanding at December 31, 1939, would remain unchanged during the period with the interest rate thereon being reduced to 3 percent.

2. Of the $1,742,834,940 of land bank bonds outstanding at December 31, 1939, the $761,129,840 held by the Federal Farm Mortgage Corporation and carrying a coupon rate of 3.86 would be exchanged on July 1, 1940, for 2 percent bonds. The remainder of $981,705,100, carrying an average coupon rate of 3.28 and held by the public, would be refunded at 2 percent at their first call dates, all of which occur between March 15, 1944, and May 1, 1946.

The $1,269,387,900 of Federal Farm Mortgage Corporation bonds outstanding at December 31, 1939, and bearing an average coupon rate of 2.998 would be refunded at 2 percent on their first-call dates, all of which occur between January 15, 1942, and May 15, 1944. This excludes $10,000,000 of bonds outstanding on December 31, 1939, which have been retired since that date.

The estimated savings on the refunding at 2 percent of the Federal land bank and Federal Farm Mortgage Corporation bonds, outstanding in the hands of the public, are as follows:

The foregoing savings on refunding account for the reduction in the annual appropriations required in connection with H. R. 8748, from $25,200,000 in 1941 to nothing in 1947. (See table 1, col. 3.)

H. R. 8748 (revised to 31⁄2 percent rate).-The assumption made with respect to this proposal is that the loan rate would be 31⁄2 percent, that the Treasury would pay the amount by which the cost of money exceeded 22 percent, and that the Federal land banks and Federal Farm Mortgage Corporation would pay the Treasury the difference between the interest rate of 22 percent and the cost of money when such costs were less than 21⁄2 percent.

EFFECT OF H. R. 8748 ON OPERATIONS OF THE FEDERAL LAND BANKS AND FEDERAL FARM MORTGAGE CORPORATION

In considering H. R. 8748 it is also necessary to evaluate its effect on the earning position of the Federal land banks and Federal Farm Mortgage Corporation.

To make such an evaluation it has been assumed that the provisions of H. R. 8748 were in effect during the entire year 1939 and the earnings of that year have been adjusted accordingly. The results are summarized in table 2.

In determining what the earnings (or losses) during 1939 would have been under the provisions of H. R. 8748 the following adjustments are necessary:

1. Interest income on Federal land bank and Land Bank Commissioner loans was computed at 3 percent per annum.

2. Interest charges on Federal land bank and Federal Farm Mortgage Corporation bonds outstanding were computed at 2 percent. In the case of the Federal land banks the 2 percent rate on bonds would have been achieved through the refunding at 2 percent of the $761,129,840 of bonds held by the Federal Farm Mortgage Corporation; on the balance of the bonds the United States Treasury would pay all interest costs in excess of 2 percent. In the case of the Federal Farm Mortgage Corporation the United States Treasury would pay all costs in excess of 2 percent on Federal Farm Mortgage Corporation bonds.

3. In the case of the Federal land banks earnings on stock owned by national farm loan associations and direct borrowers have been eliminated since this stock would under the provisions of the act, be canceled and the proceeds credited on outstanding mortgage loans. Also all recoveries from national farm loan associations have been eliminated, together with the amount of land-bank stock which was applied by the bank in connection with real estate acquired during the year.

4. The interest income of the Federal Farm Mortgage Corporation on the $761,129,840 of land-bank bonds was reduced from an average rate of 3.86 to 2 percent since these were turned over to the Federal land banks in exchange for 2 percent bonds.

Table 2 discloses that had the land banks and the Mortgage Corporation operated pursuant to the provisions of H. R. 8748 during 1939, but unchanged in all other respects, the profit of the land banks would have been converted into a loss of $6,176,000 and the loss of the Mortgage Corporation would have been increased to $23,127,000. This result is, of course, occasioned by reason of the loss of income to the two organizations incident to the reduction of the spread between the loan rate and bond rate to 1 percent and the elimination in the land-bank system of the stock of private interests. During 1939 the land-bank system enjoyed a spread of 1.45 percent and the Mortgage Corporation a spread of 2 percent between the bond and loan rates. It is, of course, impossible to forecast with any great degree of accuracy what the capital losses will be in future years' operations. The ability to absorb such losses when they do occur is measured by their earning capacity or spread. If H. R. 8748 had provided a spread of 11⁄2 percent instead of 1 percent between the bond and loan rates, the Federal land banks would have operated during 1939 at a profit of about $3,000,000 and the loss of the Federal Farm Mortgage Corporation would have been reduced to slightly less than $20,000,000.

The land banks and Mortgage Corporation at December 31, 1939, had accumulated undivided profits and reserves against which future losses may be charged as shown in table 3.

TABLE 3.-Surplus, general reserves, and specific reserves maintained against real estate owned outright or in process of acquirement at Dec. 31, 1939

ESTIMATED COST OF GOVERNMENT CAPITAL INVESTED IN FEDERAL LAND BANKS AND THE FEDERAL FARM MORTGAGE CORPORATION

The following table indicates the amount of capital stock and paid-in surplus which was invested in the Federal land banks and the Federal Farm Mortgage Corporation at December 31, 1939:

1 In addition, $1,124,640 was held in the revolving fund in the United States Treasury and is available for further subscriptions.

If we assume that funds which have been subscribed in the Federal land banks and the Federal Farm Mortgage Corporation, or were available for subscription, cost the Federal Government 2 percent, the estimated cost of providing these funds would be $10,280,000 per year, of which $6,280,000 would be applicable to the land banks and the remaining $4,000,000 to the Corporation. In view of the fact that the capital stock and paid-in surplus now in the Federal land banks and Federal Farm Mortgage Corporation would remain under the provisions of H. R. 8748, it is apparent that the cost of providing such funds would be the same.

Mr. SHORT. I would like, if the Senator will permit, to make this further statement relative to the attitude of our organization on interest rates. I think our position is clear on that, and our record is clear on that. We are in favor of as low a rate as is consistent with sound operation and cost of money. We think that the Congress of the United States has been justified through this period of emergency in providing subsidy interest rates, and we are very grateful to the Congress, in the interest of farmers, that through this emergency Congress has seen fit to extend that from time to time; and I want you gentlemen to know that we appreciate very much your efforts. Senator LA FOLLETTE. As I understood your statement yesterday you cited the fact that the Federal Farm Mortgage Corporation owned $761,129,840 of consolidated Federal land bank bonds, as one evidence of what you termed the indirect guaranty of the Federal Government. Is it not true, Mr. Short, that upon a change of administration it would not take any time at all for an administration which you envisioned as being hostile to governmental support or assistance to the system, to direct the Corporation to unload these bonds on the open market?