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refunding transactions at the lower interest rates the banks would go into receivership. If these banks have been unable to keep their own houses in order, certainly it has not been the fault of the farmer. But even granting that such argument would have some weight, attention is drawn to the policy of the Farm Credit Administration in connection with refunding activities. The Farm Credit Administration would never allow any joint-stock land bank to refund any bond issues unless the appraisal made by its own appraisers showed that, even if the refunding transactions were not allowed, the bank would ultimately pay 100 cents on the dollar to every bondholder. Hence, it is obvious where the profits have gone they have gone into the pockets of the stockholders and the officers of the joint-stock land banks. It certainly carries the theory of protecting invested capital to a very far extent when the stockholding class is allowed to extort illegal interest from the farming class with the approval of the Government agency which is supposed to protect him.
Similar refunding transactions have been effected by the Federal land banks. No matter what few extra phrases may have been incorporated into the act which may purport to give the Farm Credit Administration, or the Governor thereof, the complete power over interest rates, there is no denying the fundamental premise that the spread between what the farmer paid and what the bondholder received as interest should never be more than 1 percent. This has been well known among farm organizations. As a matter of fact, certain farm organizations took the position that Federal land banks, upon refunding their farm-loan bonds at lower interest rates, should pass these savings on to the farmer. They have never done so and never intended to do so.
There is no amendment necessary to the statutory set-up of the Farm Credit Administration, and the institutions which it supervises, to compel the return of surplus interest payments taken from the farmer by such refunding practices. The only thing which is necessary is to have in control of policies of such an organization a group of men who will carry out the full intent of the Congress when it passed the Federal Farm Loan Act. It certainly has not had such a group in control up to the present time.
SPECULATORS WERE FAVORED
There is another point which might be of interest in this connection. When these joint-stock land banks went into receivership, in a number of instances the assets of a bank, after they had been administered for a certain while by a receiver, would be sold at an enormous discount to private speculators. In this connection, study should be made of receiverships handled by the Farm Credit Administration. The exact amount of discount on these assets cannot now be stated, but we may fairly assume that these assets were sold at 50 cents on a dollar. The speculators who bought these assets never, of course, reduced the principal of the mortgages so bought, and never gave the farm borrower the benefit of the discount at which the purchase was effected.
FARMERS DENIED REFINANCING PRIVILEGES
In my own section we had a joint-stock land bank which became insolvent. The proposition was advanced that the farm borrowers and former farm owners who had been foreclosed should join themselves together as a cooperative and borrow from the bank for cooperatives enough money to pay the bondholders what the appraised value of the assets amounted to and purchase all the assets of the insolvent bank. Then each former mortgagor or former owner could refinance his mortgage at the deflated value and in that way the loans received by the cooperative would be paid off. In such manner the deflation in values brought on through economic necessity would be passed on to the farmers.
I am advised that this plan was presented to his superior by one of the members of the legal section of the Land Bank Division of the Farm Credit Administration but it was completely disregarded. The general attitude of responsible Farm Credit officials seems to have been that a group of farmers seeking to take advantage of deflated values constituted a conspiracy. A group of bankers doing the same thing constitutes good business and sound banking.
THE BONDHOLDER BOGEY
The instances cited are but typical of the philosophy which has been characteristic of the Farm Credit Administration. Whenever any change of policy has been suggested as an aid to agriculture, a hue and cry has been raised about the bondholders. Whether we are willing to recognize it or not, bondholders are interested in farm-credit bond issues simply because they are as good as guaranteed by the Treasury. I, for one, am ready to write that guaranty into the law and to destroy for all time to come this fallacious but effective argument which everlastingly is the basis for making credit persecution out of what Congress intended to be credit aid.
The basic reason for placing the Farm Credit Administration in the Department of Agriculture and the philosophy of the reorganization bill was to reduce administrative costs of governmental and semigovernmental agencies by eliminating duplicating services and unnecessary overhead. When the false issues now being created by vociferous but uninformed groups are cleared away, I think we shall recognize that we now have an unparalleled opportunity for reorganization of the farm credit system in the interests of economy and of the farm borrower.
EXCESSIVE OVERHEAD COSTS, RED TAPE
In Farm Credit there are 7,619 active separate and distinct corporations, the existence of each of which involves an expense. A production credit association is organized by the Production Credit Corporation in a district. When it makes a loan, it sends that loan to the Federal Intermediate Credit Bank for discount. It production credit is needed by a group of farmers rather than by just one, they must go to the bank for cooperatives; and if the loan is made, it is sent to the Federal Intermediate Credit Bank for discount. Thus we have three wellstaffed, expensive banks engaged in the work of one.
The Federal land banks with their far-flung organization have been engaged in making first-mortgage loans. When the Land Bank Commissioner's fund was created by Congress to permit second-mortgage loans, the land banks were designated to act as agent in making those loans. Subsequently we find that resident vice presidents of the Federal farm-mortgage corporations have been established in all the districts, duplicating the land bank's administration of Federal farm-mortgage funds.
Another deterrent factor which I have observed is that within the individual land banks there has been evolved the most complicated procedure and the worst red tape which winds up any activity of the Federal Government.
The annual cost of operating the 12 land banks was $21,793,100 in 1939. During the same year the cost of operation of the Federal intermediate credit banks was $1,552,800; and Production Credit Corporation, $1,343,000; the banks for cooperatives, $990,100. The total administrative bill of the 12 regional offices of these 4 institutions was $26,679,000. I doubt that any agency which must operate on appropriated funds spends a comparable amount for a comparable service. It can and has been said that this money does not come out of the Federal Treasury, but it does come out of the income of farmers with the consent of the Federal Government, and I hope that the new administration of the farm-credit system will make a careful examination of procedures and organizations with a view to elimination of this useless, wasteful, and unjustifiable expense to the farmers of the country.
HOPE FOR THE FUTURE
I hope that the association of farm-credit agencies with the Department of Agriculture will give them a realization of conditions affecting agriculture and an understanding that credit must be adjusted to agricultural needs. I hope that policies may be revised so that the farm-credit organization may be looked upon as an agency of service and not one of destruction. I hope that one of the effects of the reorganization will be to give to the hundreds of thousands of farm borrowers a voice in the administration of the credit system they helped to create and for which they are paying the bills. I hope, finally, that administration officials of the Farm Credit Administration will, in the future, be encouraged to devote their efforts to the sound, helpful, cooperative administration of credit and that they will not find it necessary to devote their time and energy to lobbying for the preservation of their own jobs. I hope, also, that they will cease to influence the President to veto bills for lower interest rates to farmers, while making possible huge earnings for dishonest speculators. I hope, finally, that they will cease to "bear down with terrific oppression upon that class which derives its sustenance from the soil" and that they will help us to put an end to deficiency judgments on
farmers in favor of an agency of the Federal Government which should protect them. That would, indeed, be a real farm-aid program.
More than 6 years ago I made two speeches in this House on the defects of the Federal land bank system. In those speeches I outlined some of the features of farm legislation which I regarded as absolutely necessary. I insisted that interest should be decidedly lower. The statement I made at that time was that the farmer could not pay interest exceeding 2 percent and that a borrower should not be expected to have 5 percent taken from the face of his loan to guarantee his neighbor's loan in the same association. Bills to that effect were then introduced into the Congress.
On the 4th of March this year the chairman of the House Committee on Agriculture introduced H. R. 8748, which incorporates many of the features I advocated 6 years ago. Under this pending bill, interest is to be 3 percent, and the Government is to furnish the money directly to the farmers without any of the subterfuge such as has been used. The pending bill is a vast improvement over the existing law, and will be of incalculable value to the farmers who are obliged to have financial help. Deficiency judgments are therein abolished except in bad-faith cases. I have been contending for many years for this reform.
This bill also provides that the 5 percent of stock exacted from borrowers shall be credited on the amount still owed.
The Farm Credit Administration now holds over $111,000,000 of such "stock" forced from borrowers. No dividends have been paid for 10 year's and some banks dropped the mmuch earlier.
A bill has been introduced into the Senate, sponsored by several Senators, to reinstate the Federal Farm Credit Administration as an independent agency. This unquestionably has the backing of the Wall Street group. The big insurance companies in New York have again actively entered the best farm-loan field and are offering loans at from 4 to 414 percent. This group of bankers and financiers is very anxious to keep the interest rates high, so they, very naturally, want no fundamental change in the farm-credit law. They want local associations to continue to take 5 percent of the borrower's money to buy stock in an association. They know this makes the farmers prefer the insurancecompany loan, as they have resented what actually was a bonus. In rare cases only has the borrower been able to realize anything from the 5 percent exacted of him when he takes the loan. Those in opposition to the administration are trying to make a political issue out of this.
So the fight has really advanced until it is a contest between those urged on by the Wall Street bankers, who are determined to regain the old system under an independent head, with a pipe line to Wall Street, and those like myself, who are very anxious to make of the farm-credit system a really cooperative institution, farmer controlled, and of greatest value to the farming communities of the country. The Department of Agriculture has not yielded to "frenzied finance."
ORGANIZATION OF THE SYSTEM The United States Government Manual of 1940 thus summarizes the Farm Credit Administration organization :
“Purpose.—The general purpose of the Farm Credit Administration system is to provide a complete and coordinated credit system for agriculture by making long-term and short-term credit available to farmers. It also provides credit facilities for farmers' cooperative marketing, purchasing, and business service organizations.
“District organization. The continental United States is divided into 12 farmcredit districts. In each district there is a Federal land bank, a Federal intermediate credit bank, a production credit corporation, and a bank for cooperatives. All four district institutions are located in the same city in each district. For each district there is also a Farm Credit Board, the members of which are ex officio directors of each of the four credit agencies in that district. Each separate organization has its own officers.
"Activities of the four agencies in a district are coordinated through the Farm Credit Board and an executive called the general agent, who acts as joint officer for the four agencies. The general agent is responsible for the coordination of day-to-las activities and has supervision over certain personnel and facilities, with authority to direct the legal, accounting, informational, statistical, and tield activities of the agencies."
Other speeches on this subject by Walter M, Pierce :
January 16, 1934: "Financing Farm Mortgages and the Federal Land Bank System."
February 5, 1934: “Crop Production Loans and Government Lending Agencies.” Some other recent speeches by Representative Pierce: Wheat and the Farm Bill of 1937. Wool, Cattle, and Seeds Under Trade Agreements. Weed Control Through Government Chlorate Plant. Transportation Bill of 1939.
STATEMENT OF HON. DANIEL W. BELL, UNDER SECRETARY OF THE TREASURY, ACCOMPANIED BY GEORGE C. HAAS, DIRECTOR OF RESEARCH AND STATISTICS, TREASURY DEPARTMENT
The CHAIRMAN. We have with us Under Secretary Bell, of the Treasury Department this morning. We will be glad to hear you, Mr. Bell. Mr. Bell, we requested that you come up in connection with H. R. 8748 and that you discuss with us the fiscal problems that would be involved in the financing of the necessary bonds in connection with the Farm Credit program as this changes it. We will be glad to hear from you.
Mr. BELL. Mr. Chairman, I think I should make the usual reservations. I have not had an opportunity of discussing the provisions of this bill with the Bureau of the Budget to ascertain its relationship to the program of the President. Anything that I might say, therefore, should not commit that program in any way.
Briefly, the bill under consideration by this committee (H. R. 8748) proposes basic changes in the organization and operation of the Federal land banks, the national farm-loan associations, and the Federal Farm Mortgage Corporation. The land banks would become fully owned Government corporations, and would be authorized and directed to pay off and retire all of their privately held capital stock. The associations--the principal private holders of land-bank stockwould also be authorized to pay off and retire their capital stock. Moreover, these associations would no longer be required to endorse loans made by the land banks. They would operate mainly as service organizations, with the Governor of the Farm Credit Administration authorized to delegate such functions to them as he might deem desirable.
The bill would also establish a permanent interest rate of 3 percent for land bank and Land Bank Commissioner loans now outstanding and for new loans made prior to June 30, 1946. On loans made thereafter, the rate would be the average cost of borrowed money, plus 1 percent per annum for expenses and reserves. For the period until June 30, 1946, the Secretary of the Treasury would be authorized to make up the amount by which the average rate of interest on the outstanding obligations exceeds 2 percent.
The bill also proposes a system of farm debt adjustment and farm mortgage refinancing for cases where it is determined that the mortgage indebtedness exceeds the “productive value” of a farm, or the payments due on the indebtedness exceed the “normal farm income available for such payments.” The Federal Farm Mortgage Corporation would be authorized to take over such mortgages, to take title to the property, and to lease the property back to the farmer. The Corporation would be authorized to take cash or a share of the
crops as rental payments and to give the farmer an option to buy his property back at its "productive value” or for the amount of the indebtedness at the time of conveyance, whichever is lower. There are also a number of other liberalizing provisions with respect to land bank and Land Bank Commissioner loans and foreclosed farm property held by the land banks and the Federal Farm Mortgage Corporation.
This bill includes a great many provisions not primarily of interest to the Treasury Department. I shall confine my comments, therefore, to the fiscal provisions.
One of the most important provisions of the bill would extend a Federal guarantee, with respect to both principal and interest, to bonds issued by the Federal land banks. Such a guarantee would enable the banks to procure interest rates lower than they have enjoyed in recent years. The present rates reflect to some extent a popular belief that the Government, because of its very large stake in and close supervision of these banks, has undertaken a moral guarantee of their obligations. The absence of a written guarantee on the face of the bonds, however, has made it necessary for the banks to pay a higher rate of interest than the rate commanded by fully guaranteed obligations. (This has been so notwithstanding the fact that the income from obligations issued by the land banks, unlike that from Treasury obligations of corresponding maturity, has always been fully tax exempt.) Under the circumstances, there appears to be no great objection to a statutory guarantee for new issues of Federal land bank bonds.
This leads me to the matter of the corporate existence of the Federal Farm Mortgage Corporation. The Corporation, you will recall, was set up originally to aid in the refinancing of farm debts. It provided à mechanism, through the issuance of obligations guaranteed both as to interest and principal by the United States, whereby the Federal land banks were able to make farm mortgage loans at relatively low interest rates. Inasmuch as the bill proposes to convert each of the 12 Federal land banks into Government-owned corporations authorized to issue Government-guaranteed obligations, it would appear unnecessary to maintain the Federal Farm Mortgage Corporation for the purpose of financing them. Moreover, there would seem to be no reason why the Corporation's farm mortgage business should not be taken over by the banks. The existence of this Corporation might, therefore, be terminated, thus simplifying the Federal farm credit system.
I should next like to refer to the matter of the proposed 3 percent interest rate on long-term farm mortgage loans. This would permanently bring the rate on existing farm mortgages held by the land banks and the Corporation and that on new loans made by them prior to June 30, 1946, down to a new low level—a level one-half percent below the minimum temporary emergency rate which has been in existence since 1935.
While I am fully aware of the desirability of permitting farmers to enjoy interest rates as low as possible consistent with the cost of funds to the Government, it is difficult to understand how this interest rate arrangement can be justified on such a basis. At the present time, such an arrangement would necessitate either borrowing for short periods in order to obtain low rates or payment by the