invest 40 per cent of postal savings in the same securities; and the Federal Reserve Board would be directed to issue and deliver an equal amount of Federal reserve notes against any such bonds not readily purchased. The bonds which would be provided for by the bill would bear the same rate of interest as the loans which were made, so that there would be no spread with which to absorb operating expenses and losses. Since the realestate loans could equal the "fair value of such farms and 50 per cent of the value of insurable buildings and improvements thereon," no substantial margin of security would be required. Obviously, the interest rates of 12 per cent upon farm mortgages and 3 per cent on chattel mortgages on livestock, which are proposed by the terms of the bill for refinancing existing farm indebtedness, would be very much lower than the rates now available on loans of this character. It would have to be expected, therefore, that there would be an immediate demand to refinance a very large part of the existing agricultural indebtedness under the terms of the bill if enacted, bringing into the Federal land bank system an enormous volume of loans with practically no margin of security required and no means provided for absorbing operating expenses and losses incurred by the banks. The bonds would bear interest at the rate of only 12 per cent per annum if secured by mortgages on farms and 3 per cent per annum if secured by chattel mortgages on livestock. In the past it has never been found feasible to market Federal land bank bonds bearing a rate of interest lower than 4 per cent per annum. In such circumstances it seems obvious that except for the mandatory investments required to be made by Federal reserve banks and trustees of the Postal Savings depository system, it would be necessary that the bonds be taken over by the Federal Reserve Board and that Federal reserve notes be issued therefor. If Federal reserve banks were required to issue Federal reserve notes in exchange for the farm-loan bonds provided for in this act, which might be as much as $10,000,000,000, a much larger sum of gold than is now in this country would be required to provide the necessary reserves against these notes. Furthermore, the assets of the reserve banks, which are the custodians of the reserves of our entire banking and currency system, would be largely tied up in inadequately secured long-time paper. In the circumstances I am convinced that the adoption of the proposed legislation would be ruinous to the Federal land bank system and the Federal reserve system and would imperil the monetary standards of the country. For the reasons stated, the department is opposed to the enactment of the bill S. 1197 into law. Very truly yours, OGDEN L. MILLS, Secretary of the Treasury. The CHAIRMAN. Section 3 of that bill, S. 1197. The CHAIRMAN. Section 3 is as follows: The Federal Farm Loan Board is hereby authorized and directed to liquidate, refinance, and take up farm mortgages and other farm indebtedness, existing at the date this act takes effect, by making real-estate loans, secured by first mortgages on farms, to an amount equal to the fair value of such farms and 50 per centum of the value of insurable buildings and improvements thereon, through the use of the machinery of the Federal farm land banks and national farm loan associations, and to make all necessary rules and regulations for the carrying out of the purposes of this act with expedition. Such loans to be made at a rate of 12 per centum interest and 12 per centum principal per annum. That is the authority vested in the Federal Farm Loan Board to carry out the principal purposes of the so-called Frazier bill. I wish you would discuss that provision, if you will. Mr. BESTOR. Mr. Chairman and gentlemen, it seems to us that the provisions of this bill are not founded on such business principles as would enable the farm loan system to continue to function, and that the ultimate result of such a law would be to destroy the system. For instance, it has been found by the experience of the Federal land banks that the provisions of the farm loan act, which fixes a maximum loan of 50 per cent of the appraised value of the farm plus 20 per cent of the appraised value of the insurable improvements, have not been sufficiently conservative to prevent large losses in the system. If you extend the provisions of the law to provide for loans to be made on a much more liberal basis to farmers, while it may benefit the farmer for the time being, the ultimate effect upon the system would be to destroy it. I think it is manifest, Mr. Chairman, that in so far as the farmer is concerned, he would undoubtedly be benefited by cheaper money and more liberal loans temporarily but if the agency through which the loan is made should be destroyed the ultimate effect upon the farmer would be most disastrous. Senator CAPPER. Would making a lower rate injure the system at all? Mr. BESTOR. It is not the rate that would injure the system but rather the basis on which the loans would be made, the failure to provide a proper margin for operations and the privilege of refinancing all present loans. The CHAIRMAN. What effect would the loaning at the rate of 112 per cent have upon the system and as to the banking structure and to the credit structure of the country in general? Mr. BESTOR. It would appear that all of the farmers who are now paying 5 or 6 per cent as well as those paying more, would demand immediately that their obligations be refunded at a lower rate. Manifestly that would destroy all other loan systems. There would be no way in which you could expect one farmer in the farm loan system to be paying 5 per cent on his loan and turn around and loan money to all the other farmers who desired it at 12 per cent. The CHAIRMAN. Assume that all the farm group are accommodated at 112 per cent under section 3 of this bill, what effect would it have upon the loaning to the other groups of this country in so far as touching on the rate of interest? Mr. BESTOR. Its effect would be that you would be giving very special rates to the agricultural group that could not be met in other groups. Senator BROOKHART. Mr. Chairman, I have to go at half past 10. The CHAIRMAN. Yes. Senator Brookhart, go right ahead. Senator BROOKHART. I would like to ask a few questions. You have described this farm loan system as a liberal system. But in Denmark they loan 90 per cent of the value, and they loan the full value of the buildings and stock and things like that, and they have had almost no losses. Does that not indicate that your system instead of being liberal is a Shylock system that has broken down land values and helped to put farmers in the condition they are in now? Mr. BESTOR. Well, Senator, there are some other factors in Denmark that we do not have here. In Denmark they have a stabilized agriculture that has been there for hundreds of years, and a dense population, and a limited supply of land; whereas in this country you have an abundant supply of land. Senator BROOKHART. But they have to depend on their foreign markets for the disposition of their surplus the same as we do for our surplus, while ours is largely at home. Mr. BESTOR. That may be true, and I do not pretend to know all the factors that do exist, but I do know that the situation in Euro pean agriculture is not analagous to ours. In Europe they have an agriculture that has been established for centuries and they have there a limited area that is available for agriculture, and other conditions which we do not have here, where we have ample land to be used, where we have an agriculture that has been established comparatively recently, which has been in existence a comparatively few years, the same system of finance that is used with respect to European agriculture could not be made to apply to this country at all, as I see it. Senator BROOKHART. Well, now, our exportable surplus that is fixing our price is less than 10 per cent, but they have a good deal bigger percentage for their exportable surplus of their products than that outside of Denmark. So is not our situation more favorable for stability than theirs? Mr. BESTOR. I would not say so, Senator. I am not equipped to discuss exportable surpluses, so far as that is concerned, because I have not devoted much study to the problems involved. Senator BROOKHART. I do not think anything has hit the farm values harder than this restricted policy of making the farm loans, and especially in the joint-stock land banks and their foreclosure policy and balancing the books and buying in their depreciated bonds. Now, is that not true? Has that not injured land values and destroyed the security behind all these farm loans? Mr. BESTOR. I do not think that that is the case, Senator. I would not agree with you. You sent me the other day a clipping from an Iowa paper containing a long list of foreclosures, about three columns, and in all that list of foreclosures there was not a single one that had been instituted by a Federal land bank or jointstock land bank, but all by local individuals or insurance companies or local banks, every one of them. Senator BROOKHART. That is true because the insurance companies have followed that policy, but still I have got a long string of farm land bank's foreclosures. Mr. BESTOR. That may be true. But I would not say that they were responsible for the decline in land values. Senator BROOKHART. In Iowa a joint-stock land bank can foreclose a $20,000 farm with a $10,000 mortgage on it and sell that farm for $4,000 and get enough money from it to buy in its own depreciated bonds and balance up its books, and that is what they have been doing ever since Eugene Meyer took charge of their system. Now, is not that a policy that is going to destroy land values and destroy the values for the insurance companies and everybody else? Mr. BESTOR. Would it be better, Senator, for the bank to do that or to go into receivership? Which would be better for the farmer? Senator BROOKHART. Well, I think anything would be better than that. I can not imagine a worse plan than that. Mr. BESTOR. In a receivership, of course, there is very little that the receiver can do but to liquidate. Senator BROOKHART. Under a receivership a court would have some liberality. It would not foreclose these and try to balance the books by the buying in of a bond at 40 per cent of its face value. Mr. BESTOR. Well, there have been some very serious problems, before the joint-stock land banks, which unlike most other private lending agencies have to take into consideration the fact that they must meet their bond interest. They have to meet their bond interest or go into receivership. Senator BROOKHART. This bill would settle that interest question. Mr. BESTOR. This bill would take over all the joint land-bank loans. Senator BROOKHART. Yes; and that would help the farmers; you admit that? Mr. BESTOR. It unquestionably would if it could be made a permanent proposition on a sound basis. Senator BROOKHART. Well, now, money is loaned to a Wall Street gambler at about 1 per cent, I think, right now. Why should not a farmer in a legitimate business have some such a right? Mr. BESTOR. I am firmly of the opinion that rates ought to be governed largely by the hazards involved and other economic factors that have to be taken into consideration. Senator BROOKHART. You think there is not any hazard in this Wall Street game up there? Mr. BESTOR. There seems to have been in the past. Senator BROOKHART. Dug out some forty-five billions of it in the last few days. Well, are you not in favor of us giving the farmers as good a deal as anybody else in this country? Mr. BESTOR. Absolutely, Senator. I am a farmer myself, or I think I am. I believe he ought to have just as good a deal as anybody else. But you have included in this bill for refinancing, a provision that would put land back of reserve notes. While the reserve bank is not within my province, there is the question of what is going to happen if you so change our financial system so that instead of having gold and other liquid securities back of reserve notes you issue reserve notes on the basis of unsound loans on land. That is what this provides. Senator BROOKHART. Well, if there is objection in the reserve bank to doing that, let us issue Treasury notes. What do you say to that? Mr. BESTOR. Do you mean issue Treasury notes so that you can loan the money at 112 per cent? Senator BROOKHART. You can raise the money with Treasury notes directly, so far as that is concerned. Mr. BESTOR. Have the Government loan the money at a loss? Senator BROOKHART. Well, I do not think it would be a loss, if they got an interest rate that they could afford to pay. I think it would be just like the Danish loans were. They would be safe and sound. But this restricted policy of figuring down 50 per cent of the value of the land and only 20 per cent of the value of the improvements, and nothing on the stock, equipment, and so forth, is a policy so much restricted that it is bound to reduce the security itself. Mr. BESTOR. The fact remains that even with the operation of the farm-loan system on the present basis there is a very large delinquent list. I can see very little benefit, frankly, in loaning additional money to any farmer who is so financially involved that there is no chance for him to work out, even if we do loan it to him at 11⁄2 per cent. Senator BROOKHART. Do you think that little $100,000,000 that was appropriated for capital for the land banks will relieve this nine billion loan situation among the farmers? Mr. BESTOR. No. I do not think that, but I hope it will enable the banks to sell their bonds, which would enable them to take care of the situation. Senator BROOKHART. Has it improved the bond sales any? Senator BROOKHART. Well, I offered a bill-perhaps it is here, or maybe that is in the other committee-for the Treasury to buy $100,000,000 of those bonds. That would help materially, too, would it not? Mr. BESTOR. If that were necessary. I have personally hoped that it would not be necessary. I have this feeling about this bill, Senator Brookhart, that to try and quote artificial rates to any group, even a group that is as worthy and needs it as badly as the agricultural group, ultimately will not benefit the agricultural group, and would no only destroy interest rate structures generally, but would react against the very group itself, even if temporarily it would give it relief. Senator BROOKHART. Did you ever consider the proposition that the rates the farmers are paying are all artificially high? More than they can afford to pay! Mr. BESTOR. Well, they are more than they can afford to pay at present commodity prices, but I would not say that they are artificially high. I would not say that. Senator BROOKHART. The only time you think they are artificial is when they go lower than some market? Mr. BESTOR. I do not think, Senator, that a 5 or 52 per cent rate for a farmer is out of line normally on a long-time mortgage. Senator BROOKHART. Well, you know that the whole wealth production of this country even in good times is less than 4 per cent, or do you? Mr. BESTOR. I have heard that statement. Senator BROOKHART. Agriculture is less by a good deal in good times even than the average of the country. Now, how can it afford to pay 5 or 52 per cent when it can only produce 2 or 3 per cent? Mr. BESTOR. Well, you are not supposing that your farmer is going to be in debt for his entire farm? Senator BROOKHART. So you lend him 50 per cent, and the high interest rate soon gets his other 50 per cent of value, and then call that a sound system? Mr. BESTOR. Well, I think there has been no time except times of great expansion when it was very safe for any man to owe more than 50 per cent on his farm. The majority of the farmers of the United States, according to the Department of Agriculture, still do not owe anything on the farm. Senator BROOKHART. The Danish farmers were able to owe 90 per cent and to pay it. Senator HATFIELD. What rate of interest did they pay, Senator? Senator BROOKHART. My recollection is about 4 per cent. I do not recollect that accurately at this moment. Mr. SIMPSON. Three per cent. 117902-32-3 |