desirable. I am favorably impressed with the principle underlying the bill, and I believe in the worthiness of its objective. My experience here, however, makes me feel that it is necessary in legislation of this kind that we deal somewhat more in detail with the administrative features. Justifiably or not, I have been greatly disappointed with respect to the operation of several new governmental agencies.

Now, for that reason, I am wondering if some provision should not be included in the bill that will take care of the matter of unpaid costs when it comes to the payment of the subscriber to the bank, and also whether some provision should not be included in the bill that would permit the subscriber to pay his debts to the bank, from which he has borrowed, with the debentures of the issuing bank.

Now, I have recently been impressed with the situation here in connection with our joint-stock land banks that I mentioned just a few minutes ago. I understand that under the operation of the Federal land bank system, in the event of default in the payment of one of the members of the association, the association has the right to use the bonds issued by the Federal land bank in payment of the defaulted payment of the individual borrower, a member of the association. I am wondering whether it would be practical if some arrangement could be made in connection with this legislation that would enable the subscriber to the association, to whom an advance had been made, to use the debenture or bond of the bank from which the loan had been secured in payment of that debt at maturity. The main thing I have in mind is this. I am interested in seeing the borrower get the benefit of this legislation, and not alone the stockholder in the member bank whose earnings or profit are regulated and should be dependent on proper management.

Mr. FRIEDLANDER. You understand, of course, that in the event of the liquidation of any one of these banks, that any amount in the resources of that bank in excess of the paid-in capital by the subscribing member, goes to the Government. It would seem to me that there would be no motive behind, and I think I can see what you have in mind, there is no motive, as I understand it, in taking advantage of your borrower for the purpose of piling up the surplus in that bank and distributing it among the shareholders of that bank, because the surplus profits go to the Government.

Mr. HANCOCK. I do not know whether this is entirely applicable or not. Here is the situation. You have your local farm associations that are the medium through which the individual borrows from the Federal land bank.

Mr. FRIEDLANDER. Yes.

Mr. HANCOCK. And there have been so many foreclosures that my understanding is that a great many of those associations have gone out of business, closed shop.

Mr. FRIEDLANDER. Yes.

Mr. HANCOCK. That leaves the bank owning the bank, so to speak, instead of the association, which was the original purpose of the act. Mr. FRIEDLANDER. Well, the vice of Federal farm loan act, as I said before, was the fact that you have a makeshift device, composed only of borrowers, with nothing back of them at all, making those loans in the first place, and turning them over to the Federal land bank. There is nothing of that kind here. In the first place, the

affiliating institutions, whether they are banks, or life insurance companies, or what not, have got to be qualified. To get in under this act, they have to be subject to examination. You have not got the same thing.

Now, as to the matter of policy of being able to take the stocks and use them in liquidation of the debt, I do not think that is permitted in building and loan circles in any State that I know of.

Mr. HANCOCK. I do not refer to the stock. I referred to the bonds or debentures.

Mr. FRIEDLANDER. Or the bonds or debentures.

As I understand it, you have a bill now in Congress that would permit that to be done. I do not believe it can be done under the present Federal land bank act.

Mr. HANCOCK. It is done under certain conditions with respect to the Federal land banks, but not with respect to joint stock banks. Is not that right, Mr. Reilly?

The CHAIRMAN. Yes.

Mr. FRIEDLANDER. I am not familiar with that subject. I do not care to express an opinion on that without giving it some thought. Mr. HANCOCK. I am presenting it so you can give it some thought. The CHAIRMAN. Did you have anything to do with the preparing

of this bill?

Mr. FRIEDLANDER. Only in making some suggestions with reference to it.

The CHAIRMAN. How was $150,000,000 selected as the sum that the Government should put up?

Mr. FRIEDLANDER. That followed the suggestion of President Hoover.

The CHAIRMAN. Do you think that sum is necessary ?

Mr. FRIEDLANDER. I would think that it would be; yes.

The CHAIRMAN. Well, the Federal farm loan banks have issued eleven hundred million dollars of bonds on a sixty-five million dollar capital.

Mr. FRIEDLANDER. Yes.

The CHAIRMAN. Up to the time the last one hundred million was appropriated for it.

Mr. FRIEDLANDER. That may account for one of the reasons why the bonds are selling below par. Maybe they oversold bonds in proportion to the capital of the bank. You see, they can, under the Federal land bank act, sell bonds up to twenty times their capital This bill limits it to twelve times. In other words, it is more contracted than the other in the matter of security.

The CHAIRMAN. Is it necessary to the working of this act that they should be tax-exempt bonds?

Mr. FRIEDLANDER. I would say that it would be necessary in order to sell the bonds. About the only bonds that can be sold these days are that type of bond.

The CHAIRMAN. What would be the difference, supposing this bill was passed without a tax-exemption provision, what would be the difference in the sale price of the bonds that way and with the taxexempt provisions?

Mr. FRIEDLANDER. It would probably cost about 1 per cent more. The CHAIRMAN. One per cent more because the income is taxed?

Mr. FRIEDLANDER. Yes. I think it has as much to do with the prestige of the bonds as it has to do with the actual difference in the cost.

The CHAIRMAN. There is a great deal of sentiment to-day among people against the issuing of any more deceptive governmental instrumentalities by any banking institutions. Several people I know bought land-bank bonds who thought they were Government instrumentalities, and they find out they are not Government instrumentalities. Why should the National Government any longer through any institution carry on any more deceptive financing?

Mr. FRIEDLANDER. My opinion is that the Government at no time should deceive its citizens, and I do not think that it did so in the matter of the Federal land-bank bonds. People may have bought them with that idea in mind, but certainly the Federal land banks did not say that they were guaranteed by the United States Government.

The CHAIRMAN. What does the statement, "Government instrumentality," means to an ordinary buyer?

Mr. FRIEDLANDER. I do not know. You know people have bought a lot of things they would have been better off if they had not bought, and I think they are more fortunate in the investment in Federal land-bank bonds than lots of other things.

The CHAIRMAN. What do you think about the proposition of the banks being obligated to pay the interest on the $150,000,000?

Mr. FRIEDLANDER. As I said, in presenting the matter, it is not intended, of course, for the Government to permanently own stock in these banks. The object of limiting the Government, or, rather, exempting the Government stock from earnings is as a means of having these banks earn money from the start so that you can get the institutions in here and get the Government out, which I assume you gentlemen want.

The CHAIRMAN. That is all true, Mr. Friedlander, but could not they do that if they only pay 2 per cent interest on the loan?

Mr. FRIEDLANDER. They might. Of course, after all, the bill follows the precedent established in the Federal land banks. That is all. It may be a bad precedent. I am not debating that with you. The CHAIRMAN. The question is, can we not start something now, and not follow a precedent?

Is it a necessary part of this bill, to make it workable, that the Government shall donate $150,000,000 free of cost for many years to this bank?

Mr. FRIEDLANDER. My judgment is that it is not necessary. I so stated in my testimony before the Senate committee.

The CHAIRMAN. What is your judgment, then? What would be a reasonable interest?

Mr. FRIEDLANDER. I would say 2 per cent would be a reasonable interest.

The Federal
The stock-

The CHAIRMAN. Why should the stockholders of this bank draw any interest until the Government was paid up? Mr. FRIEDLANDER. Well, that is a matter of policy. reserve act, I think, put a limitation of 6 per cent on. holders receive 6 per cent and all over that went to the Government. I think that is a matter of policy.

The CHAIRMAN. In the Federal reserve banks, the Government got a lot of money out of it, but the Government will get nothing out of this bank except that $150,000,000 back. The Government has drawn more than $150,000,000 out of the Federal reserve bank. Mr. FRIEDLANDER. Yes.

The CHAIRMAN. Why should not this bill provide that before paying any dividends to stockholders, the Government be paid back? Mr. FRIEDLANDER. Well, I assume if the Congress passes this bill the object of it is, of course, to provide mainly a source of home financing funds for the people of the country that need it, and I would say that the Government contribution, which is a forbearance of return on $150,000,000 for a few years, is a very small contribution to make to the setting up of a permanent reserve system of that character.

The CHAIRMAN. Well, I am asking these questions for information. I will ask you another one.

Under the terms of this bill, the capital stock would have to be $300,000,000 before anything would come back to the Government, . would it not?

Mr. FRIEDLANDER. No; I do not so understand that.

The Chairman. I think by the terms of the bill the Government can be obligated immediately to put in $150,000,000 and there is no money to be paid back to the Government until the contributions of stockholders equals that sum.

Mr. O'BRIEN. That does not mean the Government needs to put in the $150,000,000.

Mr. WILLIAMS. It is a matter of the excess over what the member banks themselves put in.

The CHAIRMAN. I know, but the board of directors have the right to fix the capital stock. The minimum shall be so much.

Mr. FRIEDLANDER. The board has that right.

The CHAIRMAN. Who fixes it?

Mr. O'BRIEN. The Federal board in Washington.

The CHAIRMAN. All right, it fixes $5,000,000 as a minimum.
Mr. O'BRIEN. Yes.

The CHAIRMAN. They get $150,000,000.

Mr. FRIEDLANDER. If nobody subscribed anything, they could call upon the Government for $150,000,000.

The CHAIRMAN. I do not so understand that. The Government has got to subscribe the excess.

Mr. FRIEDLANDER. Over that which is subscribed by the affiliating institutions. The excess between what they subscribe and the $150,000,000.

The CHAIRMAN. Under what conditions, under this bill, would the Government be obligated to put in $150,000,000?

Mr. FRIEDLANDER. Only if there were no institution in America that subscribed to any stock. In other words, if nobody took any advantage of it at all.

Mr. WILLIAMS. I do not understand it that way.

Mr. O'BRIEN. That is not right, either. I can explain it.

The CHAIRMAN. All right, Mr. O'Brien, explain it.

Mr. O'BRIEN. The board in Washington fixes the minimum capital of each bank-fixes the capital, rather, not minimum capital, of each bank. That capital may be not less than $5,000,000. The books for

stock subscription are opened. Members subscribe for stock. Now, the Government pays into each bank the difference between the capital fixed by the board for the bank and the amount which is subscribed by members, but the Government does not pay in more than $150,000,000. The Government stock begins to be retired at the time when the stock subscriptions of the members equal the amount of the capital fixed by the board for each bank.

The CHAIRMAN. Then, if the board should fix the capital stock of the banks so as to require the Government to put up $150,000,000, you would have to wait until the total capital stock was $300,000,000, before the Government would be paid back a cent, assuming the Government is going to put in $150,000,000.

Mr. O'BRIEN. Yes.

The CHAIRMAN. Then there is no money goes back to the Government until the stockholders have subscribed another $150,000,000? Mr. O'BRIEN. That does not mean that the capital stock need be $300,000,000.

The CHAIRMAN. Assume they have put in that much money, what they are allotted under this bill; nothing will come back to the Government until $300,000,000 total has been subscribed.

Mr. O'BRIEN. If it is true that the capital stock of all the banks is $300,000,000.

Mr. CAMPBELL. Suppose the capital stock is fixed at $5,000,000, and half of that is subscribed after six months lapses. At the beginning, only $1,000,000 was subscribed, and the Government had subscribed for the other $4,000,000.

Mr. O'BRIEN. You are assuming a case. In each of the 12 banks, the minimum capital is fixed.

Mr. CAMPBELL. I am taking one for an illustration.

Mr. O'BRIEN. $5,000,000 is the capital fixed.

Mr. CAMPBELL. Yes.

The subscribers within 30 days subscribe for a million dollars, and the Government put up $4,000,000.

Mr. CAMPBELL. Suppose more associations come in and subscribe for more stock. They can not exceed $5,000,000.

Mr. O'BRIEN. No.

Mr. CAMPBELL. The Government then would be retired out of it. Mr. O'BRIEN. Just as soon as $5,000,000 is paid in by members, the Government goes out.

Mr. CAMPBELL. Then they could not have $150,000,000 out at any one time.

Mr. O'BRIEN. They might.

The CHAIRMAN. The point is this, they may not use $150,000,000. I think there ought to be some way that that could be brought out. They might only use $65,000,000.

Mr. CAMPBELL. If there was a probability that none of the stock would be subscribed for, then the legislation is futile.

The CHAIRMAN. I do not see why the $150,000,000 was put in there, because that is one of the objections that the members have to this bill, and there is a probability it would never be more than $5,000,000 to a bank.

Mr. WILLIAMS. What is your judgment as to the amount it will take?

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