Mr. GOODWIN. Governor Meyer, we have in our State of Minnesota a rural credit bureau organized and operated by the State and under authority of the State. Would this bill cover an institution of that character!

Mr. MEYER. I do not know. Is it a financial institution?

Mr. GOODWIN. It is, entirely.

Mr. MEYER. It could. It would be under "other financial institutions "I presume. I am only giving you my own personal opinion as I read the bill and as I understand it. I am not a legal authority, but I would say that any financial institution is eligible under the bill as drawn, as I read it.

The CHAIRMAN. NOW, Mr. Meyer, unless some gentleman has something else, we are going to permit you to proceed without interruption. Mr. MEYER. I am glad of the opportunity to appear before the committee in connection with your consideration of this bill. In approaching a measure of this importance, it is necessary to have some fundamental and philosophical background, in my opinion, and I will refer to a meeting which I attended here in this committee room some 10 years ago, where we had a critical situation which particularly involved the country banks at that time and the agricultural interests. I then advocated some temporary emergency work to be done by the Government to meet an extraordinary and emergency situation. I said then and I feel now it is a sound principle of government in exceptional conditions involving national interest to depart from the ordinary rules of government activity and the ordinary principles of the Government's participation in the financial operations of the country related, of course, to the business of the country, to provide exceptional and temporary institutions and measures for dealing with temporary and unusual conditions.

I feel, Mr. Chairman and gentlemen, that the present situation is one of those occasions of such exceptional character and characteristies that I would be failing in my duty and in my present position as governor of the Federal Reserve Board, or even if it were only that I was a private citizen with a private interest, I would feel it my duty, as I once did as a private citizen, to recommend and sup-. port a measure of this character. I will not say that every detail is before you, but in your deliberations you will consider the bill in detail. I have some minor suggestions on some unimportant matters perhaps in the bill to make as to details later on myself. But on the broad principle of the Government entering into this situation on a temporary basis, as is provided in the bill, and with powers that are unusual but that, I think, are justified by the unusual character of the situation that the mass of the people of this country are interested in. I believe the bill sound.

If I may review a little for the benefit of the committee the experience of the War Finance Corporation, not so much under the war powers but under what we may call with, I hope, no offense to our friends of the South, the reconstruction work of the War Finance Corporation during that time for the benefit of the light it throws on the possibilities of this kind of an institution under present conditions. As you remember, the War Finance Corporation was organduring the war and had as its primary purpose the financial support of financial institutions and industries necessary and contributory to the prosecution of the war, and I think it was extremely

valuable throughout the war period, during which period Governor Harding, of the Federal Reserve Board, was managing director.

In the war period the amount of money loaned was not very large, but the amount of support given to financial institutions was very important; it was a confidence-inspiring institution, and the records contain no figures to show adequately or accurately its value effectively. There were occasions where industries needed financing, and the support of the War Finance Corporation back of the bankers and that industry enabled the bankers to finance through the investment market. I remember that one of the activities at that time was to finance railroads where funds were not obtainable in the market. The railroads at that time being under Government control and operation, in many cases the railroads and their bankers thought that issues maturing or requirements could not be met in the investment market, found that when the corporation agreed to take care of the situation in case the investment market and the bankers did not there was no difficulty, and there was no call made for the funds of the corporation. Those figures, of course, are not in the record, because no money was loaned, but effectively it was better than if it had been loaned.

I mention the effectiveness of the work in support of the situation entirely apart from those cases where funds were actually used, because I anticipate, or should anticipate, with proper administration the main value of an institution organized substantially along these lines, if properly administered, would lie in the availability of funds. There would be lending, but the main value in an institution of this kind is the availability of funds if needed.

We have a situation, gentlemen, where it is a fact, as is commonly stated, that fear is a dominant factor. We had a similar situation in 1921 after the war when the agricultural relief act expanded and extended the powers of the War Finance Corporation for a period of a year, which was extended finally until December 31, 1924. It is important to analyze what that fear is. It is now, as it was then I think, and as I remember those years-I am sure I am right as to 1921 and 1922, and I believe it is true at this time-that it is not the fear of a borrower coming to a bank, a borrower of good standing and character; it is not a fear of the borrower or a fear of his security so much as it is a fear of a general situation and in many cases it is a fear of the strong. It is a fear in the minds of the strong or the weak. It is not the weak fearing the strong; it is the strong fearing the weak. We will take as a concrete example in that agricultural relief work in 1921 one particular case, and those are always most convincing when they are concrete and specific, a situation in Iowa. There was a town in the State of Iowa with three good. strong banks and one perhaps small and weak. As long as that small, weak bank was in danger the three big strong banks would not lend any money; they would not renew if they could help it; they would extend no new credit, and they kept, perhaps justly under the circumstances, a contraction policy in effect in their operations. So you hear, and you hear truthfully as a matter of fact, of strong banks afraid to function actively and normally. It is the fear of some neighbor or some neighboring town or something else, or maybe fears generated by events such as the Bank of England going

off the gold basis and the conditions in Europe and South America, but that fear has become a dominating factor in the financing of the regular business of the country.

In 1921 the creation of the War Finance Corporation removed in that small town in Iowa the fear of that one small bank, so that while the amount of money required in that particular case I have in mind was not important, the relief to the strong banks in that particular town serving agricultural interests was that a small amount of money directed to the weak spot released through the removal of fear a very large amount of money which does not appear on the books of the War Finance Corporation as ever having been loaned.

Now with the strength and resources of this great nation, I believe that there is the possibility of important remedial work of the greatest benefit to agricultural, commercial, and industrial interests through a measure with broad powers, the lines outlined in this bill. There is a great deal of talk about frozen assets. Some of these assets they call frozen are the best in the country. The most fundamental businesses are financed by securities, notes of farmers, and mortgages, all kinds of indebtednesses which are at the moment called frozen; in fact, they are, perhaps, in a sense. It is my

experience in that relief work-not relief in the sense of personal subsidies to individuals but in connection with relief to banking institutions and business structures, particularly in the agricultural district-that the so-called frozen assets of our business people all over the United States thaw out with essential speed if they are properly handled.

I took the occasion to look up this morning out of one of the old reports of the War Finance Corporation and the peak of loans to country banks and the total number of country banks went to something over 4.300 was reached in May, 1922. The act of lending began in the beginning of November. The peak reached was one hundred and thirty-four million in loans to country banks or for the most part country banks. The aggregate amount was nearer two hundred million, but the peak at any one time was one hundred and thirty-four million. One year later, in spite of the fact that a great many new loans were made in the year, the aggregate amount outstanding had been reduced to sixty million and a year later the aggregate amount outstanding, in spite of more new loans, was down to thirty-seven million. In addition to the loans to country banks at that time, one of the biggest situations that confronted the operations was the livestock situation. There it was a problem of finding ways to get money loaned out on livestock to carry cattle and sheep, particularly independent of the banks, and while some banks were willing to carry livestock and carry on livestock operations, it was necessary to use loaning companies and a good many were organized, particularly one with a million dollars capital in Texas, another one in Cheyenne, Wyo, with a capital of a million dollars, another one of $100,000 capital in Portland, Oreg., $250,000 in Montana, $250,000 in Omaha, and all over the country. The aggregate amount of livestock loans, the maximum amount, the total amount was somewhere between eighty-five and ninety million dollars on cattle and sheep as ecurity. The peak of those loans in May, 1922, was sixty million. In spite of the fact large additional loans were made in the following

year, the repayments brought the aggregate down to forty million and a year later down to twenty-six million.

I am giving you these as absolutely concrete experiences to show how so-called frozen assets thaw out where the character of the credit is suitable to the situation. There was nothing more frozen in the country than a cow loan in the breeding area of the United States in 1921. The sheep and the cattle were unmarketable in quantity. Prices were demoralized. When corn gets down, as it did in 1921, in western Iowa and Nebraska, to 16 cents on the farm, why, of course, the note of the farmer in a corn area is also frozen, but when the farmers got the War Finance Corporation money through their 600 banks in Iowa, which were receiving advances, and not only money but plenty of time, they got with that money an encouragement to use the money. The country banks, I may say, had to be urged to operate on that line at the time. They were not eager borrowers; they were very reluctant borrowers in the beginning, but when they say it was a different kind of credit, they became more active and they bought more cattle and hogs to feed, as well as sheep from the Rocky Mountain district, and, then, of course, the corn had a market in the feeding operation which it was inpossible to get in the form of sales of cash grain. Now corn is one of our great crops, in fact one of our greatest crops.

There has been an average of some 2,000,750,000 bushels of corn for the last seven or eight years, with only one year a crop failure when it went down to 2,000,000. That feeding operation in the corn belt is not now going on as it did. The real reason is that the country banks are reluctant to borrow. They are organizing intermediate credit banks, and they are doing good work in stimulating feeding operations; but there is that fear which comes from an unliquidated condition, a fear on account of what is being read in the newspaper of what is going on in Europe and at home, and you also hear of bank closings.

I believe a bill of this kind would be vital in restoring confidence in many areas where confidence is now lacking and that it would be of tremendous value from an economic standpoint. I would not want to predict what might happen to price levels in connection with this bill, and I did not predict it in 1921; but the agricultural prices in 1921 at the time of the passage of the emergency relief act, according to the Bureau of Labor statistics, was about 83 compared to the 1926 price level of 100. By January, 1924, which was two and a half years later, the price level on the same average basis was 112, a sensational advance, but still a very material one. So far as forced liquidation affects price levels and so far as the knowledge of people and markets that there is false liquidation affects price levels, credit under this act would, in my opinion, be helpful and possibly might be important in connection with price levels. The situation, of course, is quite different from 1921.

I would not like to have you think that I am taking a patent of that period and saying that the present conditions are a replica and that treatment should be applied in the same way and that even if treatment is applied the same results will necessarily follow. At that time, just after the war, we were in a most acute commodity price collapse of all kinds of commodities. Cotton, you will remem

ber, dropped from 40 cents to 8 cents in a year. Mineral prices, the prices of mineral products and manufactured goods had more or less similarly declined. The price decline in the last two years is not the equivalent in magnitude of the price decline in 1921, but it is from a lower level to a lower level, and it is of sufficient proportions as to be a major factor in the situation. In a period of declining prices, people become reluctant to carry stocks. The carrying of stocks is a normal part of operations and when it is hampered by lack of confidence or lack of credit or derangements such as now exist in the European markets, an abnormal situation is created. The principal effect on agricultural and other producers in reduction of stocks due to lack of confidence or inability of the financial machinery, particularly abroad, to function in a normal way is to force the carrying of the required stocks back onto the hands of the producers and the smaller banks in the producing territory and out of the visible supplies of wheat and cotton at the present time it is probable that a larger proportion is being carried by the producers than has been the case at any time in the last 10 years.

In 1921 we had certain features which are again duplicated and which need to be thought of in the consideration of this measure and the present situation, and that is that a very large number of the important countries of the world, consuming countries in part and in part manufacturing countries, were using our raw materials and in part merchandising countries like England and Germany, in which countries under normal conditions, large amounts of our products are bought for further distribution in either raw-material form or in partly manufactured or incompletely manufactured form, and both Germany and England are accustomed, as jobbers and manufacturers, to give under normal conditions long-time credit to the buyers of their products. Manchester, for instance, in connection with cotton goods, is normally accustomed to extending credit to South America and China, and the Germans in Central Europe and in other parts. The international-exchange conditions in Europe effectively prevent that because, with the fluctuating pound and the difficult conditions in Germany, although currency is not fluctuating greatly, the conditions are such that the granting of credit is necessarily hampered. The burden is thrown on the producing country of an exceptional and unusual character, which means that the whole distribution of the production from this country is changed, altered, and hampered, and that calls for the most serious consideration.

When the War Finance Corporation went to work and began to advance funds to the livestock loan companies, the cooperative marketing associations, and the country banks in 1921, it not only put out into the country some $300,000,000, but it set in motion funds which revolved, and paid off and liquidated many times that amount of indebtedness. At that time the Federal reserve system was rather heavily extended. A great deal more borrowing by member banks existed in 1921 from the Federal reserve banks. But as this money, which was extended by the War Finance Corporation to the country banks, found its way into circulation it took over from these banks and, indirectly perhaps from the Federal reserve bank to a considerable extent, indebtedness which they at the time thought were