Mr. FRIEDLANDER. Yes; the Government has a right to inspect the security. The point I am making is that in addition to the security which the Government has in the land bank it has also all of the assets of the borrowing association back of its obligation to repay this loan. That is the point I make.

Mr. WILLIAMS. That ought to make it all the stronger.

Mr. FRIEDLANDER. That is it.

Mr. WILLIAMS. It ought to make the loan all the better.

Mr. FRIEDLANDER. Yes; that is the point I make.

Mr. WILLIAMS. Can you account for the fact that those bonds are selling for 75 cents on the dollar?

Mr. FRIEDLANDER. The Federal land bank has not

Mr. WILLIAMS (interposing). Has not what back of it?

Mr. FRIEDLANDER. Has not anything back of it except the intrinsic security itself and the small amount of stock of the local association. Mr. WILLIAMS. It has the mortgages and the stock of the association back of it.

Mr. FRIEDLANDER. Yes. Now, then, here is the difference. Take a merchant who goes to, let us say, the First National Bank of this city and borrows $100,000, and the First National Bank takes a note of that merchant and of the Federal reserve bank borrows the money upon which that note of $100,000 is paid. The First National Bank has got to take up that obligation and pay the Federal reserve bank. There is the main difference between this system which is set up upon that basis and the Federal land bank system. There is no intermediary force in between there that will safeguard that collateral.

Mr. REILLY (presiding). Mr. Friedlander, as far as I understand the law, under this bill the bank only loans 40 per cent on the mortgages.

Mr. FRIEDLANDER. Yes.

Mr. REILLY (presiding). And the securities?

Mr. FRIEDLANDER. Yes.

Mr. REILLY (presiding). So, it ought to be 40 per cent better off than the farm land banks.

Mr. FRIEDLANDER. Yes.

Mr. REILLY (presiding). I do not think there is any question at all but what securities issued by this bank will be better than in the farm land bank, as far as that is concerned.

Mr. FRIEDLANDER. I want to state this about the matter of the decrease in the bond market. Let us not charge that up to the Federal land bank system. It has probably enough faults of its own to take care of. Even direct Government obligations have gone down to $85. Let us not say it is because the Federal land bank has been a success or has not been a success. Certainly it is not any argument because Liberty bonds have gone down to $85 that the United States Government should adopt some other way of financing itself.

Mr. WILLIAMS. It is some indication of the price that these bonds may bring if put on the market, isn't it?

Mr. FRIEDLANDER. Yes; if they were floated right at this time, it might be, although I think they would command the highest price because they have security back of them.

Mr. WILLIAMS. What do you think they would bring on the market now?

Mr. FRIEDLANDER. That would be purely a guess.

Mr. WILLIAMS. I understand that; that is the reason I am asking you.

Mr. FRIEDLANDER. Yes. +

Mr. WILLIAMS. You have to raise the funds that way. I am asking you, for the reason that you must raise the funds in that manner. Mr. FRIEDLANDER. Yes.

Mr. WILLIAMS. You must loan those same funds back to the home

owners.

Mr. FRIEDLANDER. Yes, sir.

Mr. WILLIAMS. What do you figure as the spread between the interest paid on your debentures and the loans made to the home owners?

Mr. FRIEDLANDER. These banks should operate on a basis of one-half to 1 per cent.

Mr. WILLIAMS. One-half to 1 per cent?

Mr. FRIEDLANDER. Yes.

Mr. WILLIAMS. Don't you know that none of these other banks operate on that narrow a margin?

Mr. FRIEDLANDER. They have a different type of bank.

Mr. WILLIAMS. Yes, sir.

Mr. FRIEDLANDER. You will find the testimony before the Senate hearing shows a very small cost of operation in the Land Bank of the State of New York. I think it runs $22,000 per year.

Mr. WILLIAMS. I do not understand what you mean by the land bank.

Mr. FRIEDLANDER. The Land Bank of the State of New York is a reserve credit bank for building and loan associations in that State, created by State law and has operated there for 13 or 14 years. Mr. WILLIAMS. Purely a private institution?

Mr. FRIEDLANDER. No; a public institution. It has a special State act creating it and its securities are accorded preferred tax status in New York.

Mr. WILLIAMS. Do I understand the State of New York has put its money into the operation of that bank?

Mr. FRIEDLANDER. I do not think the State of New York has directly put its money in there, although, I understand the State of New York is probably the largest purchaser of the bonds of that bank with State funds.

Mr. WILLIAMs. That is not in the sense in which I mean a public institution. From the standpoint of the government of the State, is it putting its funds into it for the purpose of operating it? I am asking the question whether it is or not.

Mr. FRIEDLANDER. No; I do not think it is endowed or subsidized by the State.

Mr. WILLIAMS. Not subsidized?

Mr. FRIEDLANDER. NO.

Mr. WILLIAMS. It is simply an institution authorized under the laws of the State of New York.

Mr. FRIEDLANDER. To do certain things. It is subject to examination and inspection by the State Banking Department and in that respect it is a public institution.

Mr. WILLIAMS. Undoubtedly, as is every other bank in the State. Mr. FRIEDLANDER. Yes.

Mr. WILLIAMS. In that respect it is like every other bank. 'Mr. FRIEDLANDER. Yes.

Mr. HANCOCK. Mr. Reilly referred to the fact that the security behind one of these loans would probably be better than the security behind the loans of the Federal Land Bank, and that under this act not more than 40 per cent of the appraised value could be loaned, is that right?

Mr. FRIEDLANDER. Yes.

Mr. HANCOCK. Now, do you know what per cent of the appraised value on farms is usually the basis of loans?

Mr. FRIEDLANDER. I understand about 50 per cent is the way they operate.

Mr. HANCOCK. And, in the last analysis that would, of course, depend upon the competency of the appraisal, would it not?

Mr. FRIEDLANDER. There is a big difference in appraisals. I am sorry I have not yet been able to make it clear, but if you will permit me, I will try to.

Mr. HANCOCK. Just let me ask this question: You have this difference, that a farm is supposed to be a piece of property that produces income. Your home does not produce income, does it? It rather saves rents.

Mr. FRIEDLANDER. No; the people that live in it produce the income, but the property itself does not.

Mr. HANCOCK. Of course, I know that a farm without a good man on it to work it would have little value.

Mr. FRIEDLANDER. Yes. The main point of difference in the matter of security, Mr. Hancock, is the difference in the intermediate borrower. In other words, let us say, that your security is exactly the same as between two pieces of property. Let us say that a man on the farm has a $10,000 farm and the man living in the city has a $10,000 home. There is no dispute about the absolute value of either one of them and that the man on the farm borrows 50 per cent, which is $5,000, which he borrows from the Federal land bank. The Federal land bank has $5,000 security for its $5,000, plus $250 in stock, which that gentleman puts up in his local association. All right. Now, let us take the other case, that of the man living in the city. He has a $10,000 piece of property. Let us say he borrows $5,000. He does not borrow it from the Federal Home Loan Bank at all. He borrows $5,000 from the building and loan association. Now, the building and loan association if they want to get any money on that note they have got to go and give this note of the building and loan association to the bank for $5,000.

Mr. HANCOCK. That is a very satisfactory and clear distinction. Now, let me ask you another question.

Mr. FRIEDLANDER. They can borrow $5,000. They have that much more security.

Mr. HANCOCK. As I understand it, these banks are supposed to be Federal instrumentalities, aren't they?

Mr. FRIEDLANDER. Yes.

Mr. HANCOCK. Why are they called Federal instrumentalities? Is not that just a casual circumstance?

Mr. LUCE. May I answer that question?

Mr. HANCOCK. Yes, sir.

Mr. LUCE. Only as they are established to be public agencies or instruments.

Mr. HANCOCK. I was thinking, Mr. Luce, if there was not some deeper reason for that denomination.

Mr. LUCE. May I finish, please, Mr. Hancock. The Supreme Court supported the constitutionality of the Federal farm loan act by reason of the fact that its banks were instrumentalities of the Government. My recollection is that it was the Supreme Court itself that coined that phrase in supporting the constitutionality of the Act, and while I am on that subject it might well be made a matter of record that this was the reason also for making them depositories of public funds.

Mr. HANCOCK. I understand that, but I thought the main purpose was to secure special tax privileges.

Mr. LUCE. That exemption from taxation could not be sustained, unless, as the Supreme Court held, they were instrumentalities of Government.

Mr. HANCOCK. As soon as the Government has been refunded the amount of money it has advanced to set up these banks, the banks become, for all purposes, private enterprises, do they not?

Mr. FRIEDLANDER. There is no provision in the law that I recall which makes any change in the organization set up of the bank, even after the retirement of Government capital. In other words, the board at Washington still functions in the supervision.

Mr. HANCOCK. Does not the board have more authority as long as the Government has money in the bank than it does after the Government's money is withdrawn?

Mr. FRIEDLANDER. I do not see any distinction in the bill of that character at all except when members have less than $1,000,000 invested in one of the 12 banks.

Mr. HANCOCK. Do they not have more authority with respect to the appointment of directors?

Mr. FRIEDLANDER. The board at Washington, for the first year, in order to get the system into immediate operation and take care of the emergency, has the right to appoint, I believe, all the directors, and where the capital of the members falls below $1,000,000 in each bank.

Mr. HANCOCK. I am not anticipating any situation like that which I have in mind, but I want your reaction to this. You probably are aware of the fact that there are some joint stock land banks to-day in this country that are engaged in purchasing their own securities at depreciated prices. They are using their funds, which we believe they should take to serve agriculture, and are in effect compromising with their creditors.

That does not apply to all the banks, but the testimony adduced before our committee showed conclusively that there were some banks to-day, joint stock land banks, that are using the funds which they derive from the resale of lands acquired under foreclosure, with which to purchase their own securities at between 30 cents and 40 cents on the dollar.

Do you think a situation of that kind could possibly arise in connection with the proposed home loan bank system whereby the bank would operate to protect the private stockholders in the banks

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against the interests of those who had borrowed, and especially in a crisis, an economic and financial crisis as we now unfortunately face?

Mr. FRIEDLANDER. I would say that if you felt that a situation of that kind could arise under this act, and I do not think it could, that it ought to be safeguarded before the bill is passed.

Mr. HANCOCK. That is exactly what I am concerned with, and only in the interest of the bill if this legislation is needed and can be worked out on a sound basis.

Mr. FRIEDLANDER. I think that that could be taken care of if you have a fear of that kind.

Mr. HANCOCK. Have you any suggestion to make about that? Mr. FRIEDLANDER. I would like to give that a little thought, Mr. Hancock, and I would be very glad to discuss it with you.

Mr. CAMPBELL. Is it not a fact that the building and loan association applying for a loan from the bank created under this act would have to put up two for one security?

Mr. FRIEDLANDER. I intended, before I got away from that, to make the point a little bit clearer. I first wanted to get that situation clear in your mind. Under the terms of this act, only $3,000 of $5,000 notes could be advanced to the borrowing institution, instead of having a $5,000 in notes against $10,000 worth of property, you would have $10,000 notes on city property against a $3,000 obligation.

Mr. WILLIAMS. Let me ask you this, to see if I understand this: As I understand this bill, there is no established percentage of ownership between the Government and the member institutions.

Mr. FRIEDLANDER. I beg your pardon, Mr. Williams; I did not quite understand you.

Mr. WILLIAMS. You are setting up an institution here which provides for stock subscribed by the Government and by member institutions.

Mr. FRIEDLANDER. Yes, sir.

Mr. WILLIAMS. Is there anything in the bill which provides the percentage of ownership which each one of them shall have in the institution?

Mr. FRIEDLANDER. The bill provides that the Federal board at Washington shall fix the minimum capital stock of any bank, which shall be at least $5,000,000, and that then they shall open their books for subscription in the same manner in which the Federal land banks and the Federal Reserve Bank system were set up, and that part up to $150,000,000 that was not subscribed by the institutions that desired membership, that that would be subscribed by the Government, and that as these other institutions came in later on, as they needed the facilities of the bank, or as they found the bank was successful, and came in, that one-half of their stock payments should go in retirement of the Government stock subscriptions, but there is nothing in the bill that sets up any relation or related percentage as between the stock ownership of the Government and the stock ownership of the individual institutions.

Mr. WILLIAMS. In other words, if the member institution should subscribe $100,000 each of the stock, the Government would be obligated to subscribe for $4,900,000 remaining.

Mr. FRIEDLANDER. Yes, sir; and the Government would have that money right there in its Treasury, or in the treasury of the bank, that