Hoarding of currency withdrawn from the banks is indicated in the increase of total money in circulation in the United States during the same period by over one-half billion dollars, this increase occurring despite the slackening rate in general business activity and the decline in prices.

As a precautionary measure for the protection of stockholders and depositors, banks naturally have endeavored to maintain themselves in a liquid position. The emphasis upon liquidity is indicated, in part, by the fact that most of the decline in investments of member banks above referred to consisted of securities other than United States Government obligations. The premium being paid for ready marketability is reflected in the wide margin between the rates on prime 90-day bankers' acceptances and the rates on Federal intermediate credit bank debentures. On January 15, 1932, for example, the 90-day debentures issued were sold on a basis making a net cost to the banks of 5 per cent. On the same day the rate quoted in New York for 90-day acceptances was around 2 to 3 per cent.

Except for the fact that at times the debentures of Federal intermediate credit banks lack ready marketability, they appear to fulfill all the requirements of a well-secured, short-term obligation suitable for investments of banks and other investors at all times and particularly during periods such as the one through which the country is now passing. Maturities are adjusted to the demands of the market, the rates are attractive, and the security is of the highest order. For example, on December 31, 1931, the loans and discounts, securities and cash of the 12 intermediate-credit banks, exceeded their debentures outstanding, rediscounts, and notes payable, by approximately $33,000,000. As a further margin of safety, there was available on call from the United States Treasury within 30 days' notice $30,000,000 of additional subscribed capital. The 12 banks, moreover, are jointly liable under the conditions stated in the law for the debentures of each other. It would seem that the only qualification lacking, therefore, is ready marketability, which this bill seeks to provide by making the debentures eligible as security for 15-day borrowings of member banks, and this privilege should, as previously stated, greatly increase their attractiveness to the purchasing banks as a means of quickly raising cash in time of emergency. Another reason why this change is needed particularly at this time is the increasing difficulty which may be experienced in marketing these securities because of the large volume of financing which apparently will be done by the Reconstruction Finance Corporation and the United States Government during the next year.

In view of the large number of country bank failures which tied up funds that ordinarily would have furnished the basis for financing the operations of local farmers, and in view of the fact that other banks are maintaining a position of liquidity which necessarily restricts the volume of financing which they can furnish, it appears that there will be increased demands upon the intermediate credit banks for credit during the year 1932.

Senator GORE. These local concerns or discounting corporations that you have referred to, they get 3 per cent, and the Federal intermediate credit banks get 1 per cent, and the debentures bear 41⁄2 per cent, so we are just pyramiding these costs. Is this pyramid founded

on solid rock or is it built on sand? In other words, is the system sound.

Mr. WILLIAMS. A Federal intermediate credit bank is permitted by law to charge discounting institutions a rate not exceeding by more than 1 per cent per annum the rate borne by its last preceding issue of debentures. The discounting institutions are permitted under the law and the regulations of the board to charge borrowers an additional spread of not to exceed 3 per cent per annum.

Senator GORE. You say with the consent of the board.

Mr. WILLIAMS. Yes. The present discount rates of the Federal intermediate credit banks are from 5 to 5%1⁄2 per cent per annum, making the cost to the borrower through these agricultural credit corporations and livestock loan companies approximately 8 to 81⁄2 per cent

per annum.

Senator GORE. And that applies both ways, whether loans to cooperative marketing associaitons or to one of those financing instutitions. Mr. WILLIAMS. Loans to cooperative marketing associations generally are at the same rates as the rates of the banks on paper discounted for financing institutions. In some instances the rates on cooperative loans have been lower than the rates charged discounting institutions. Senator GORE. Now, then, these livestock associations pay 81⁄2 or 9 per cent per annum.

Mr. WILLIAMS. No, the

Senator GORE (interposing). That is what it amounts to.

Mr. WILLIAMS. The livestock producer or farmer pays approximately 8 to 81⁄2 per cent on his note. But the discounting institutions pay the Federal intermediate credit banks the prevailing discount rates, which are from 5 to 51⁄2 per cent at this time. Nine of the banks are now charging 5%1⁄2 per cent, two, 54 per cent, and one, -5 per cent per annum.

Senator GORE. But the man who gets and uses the money pays 81⁄2 to 9 per cent.

Mr. WILLIAMS. From 8 to 81⁄2 per cent from discounting institutions which charge the maximum spread of 3 per cent.

Senator GORE. Is that true of the cooperative marketing associations, too?

Mr. WILLIAMS. No; at the present time rates on new loans to cooperative marketing associations would range from 5 to 51⁄2 per cent per annum.

Senator GORE. But that does not get it to the individual producer. Mr. WILLIAMS. Only indirectly through the cooperative marketing associations.

Senator STEIWER. Are loans to farmers and livestock men made directly by the Federal intermediate credit banks, or are they made by the credit associations and then discounted with the Federal intermediate credit banks?

Mr. WILLIAMS. The Federal intermediate credit banks do not make loans to individual farmers or stockmen. They discount paper of farmers and stockmen for banks, agricultural credit corporations, livestock loan companies, and other financing institutions named in the

act.

Senator CAREY. You are not discounting very much with banks now, are you?

Mr. WILLIAMS. The intermediate credit banks have discounted a very small volume of paper for national and State banks.

Senator CAREY. What is the reason that you have not done more of that?

Mr. WILLIAMS. There are a number of reasons. The provisions of the act as to the ratio of liabilities (other than deposit liabilities) to the unimpaired capital and surplus of national or State banks discounting paper with an intermediate credit bank are rather strict. Banks in some sections have been reluctant to show discounts in their published statements of condition. Other banks object to the collateral requirements and the limitations as to the rates of interest that may be charged borrowers on notes discounted with intermediate credit banks.

Senator STEIWER. In other words, the reason that no considerable amount is discounted through the commercial banks of the country is that the banks themselves are reluctant to take the business.

Mr. WILLIAMS. Yes.

Senator STEIWER. It has not been due to any reluctance upon the part of the Federal intermediate credit banks.

Mr. WILLIAMS. The Federal intermediate credit banks have been ready and willing to discount all the eligible and acceptable paper offered by solvent banks which meet the requirements of the act.

Senator CAREY. But they are limited in the amount that they can take.

Mr. WILLIAMS. Yes; the volume which national banks or State banks may rediscount with Federal intermediate credit banks is limited. The act provides that no loans shall be discounted for or purchased from any national or State bank, if the amount of such paper added to the aggregate liabilities of such national or State bank, direct or contingent (other than deposit liabilities), exceeds twice the amount of its paid in and unimpaired capital and surplus or exceeds the liability permitted under the laws of the jurisdiction creating the same. It is unlawful for a national bank which is indebted to a Federal intermediate credit bank upon paper so discounted or purchased to incur any additional indebtedness, if by virtue of such additional indebtedness its aggregate liabilities, direct, or contingent, will exceed the limitations stated.

Senator CAREY. You meant the Federal intermediate credit banks and not the Federal reserve banks.

Mr. WILLIAMS. Yes

Senator GORE (interposing). Is there any way by which the law might be changed to make those loans of the Federal intermediate credit banks in reality, though perhaps not directly, to livestock men or farmers, so that the borrower would get his money at a lower rate? Mr. WILLIAMS. One way to give the borrower lower rates would be to improve the market for the debentures and other obligations of the Federal intermediate credit banks by amending the Farm loan act and Federal reserve act as proposed in the bill under consideration.

Senator TOWNSEND. Do you feel that a spread of 3 per cent is a reasonable charge by the marketing associations?

Mr. WILLIAMS. In the circumstances the board felt that it was justified in approving a spread of not to exceed 3 per cent per annum

for discounting institutions. This action was recommended by the Secretary of Agriculture, the Federal Farm Board, and others.

Senator STEIWER. Are all of the Federal intermediate credit banks permitting a maximum spread of 3 per cent?

Mr. WILLIAMS. Some of the discounting institutions have charged a spread of less than 3 per cent but I think a majority of them are now charging a spread of 3 per cent per annum.

Senator STEIWER. Is there any change in the law here proposed which would simplify the administration, or which would through any other means make it possible to cut that spread down from the maximum amount of 3 per cent per annum? In explanation of that question I might say, it strikes me that although that spread may be justified from one standpoint, that an interest rate to the farmers of 821⁄2 per cent in the first place is too high under present conditions, and in the second place that 3 per cent becomes too great an increment of it, is out of line or out of balance with the cost of money to the Federal intermediate credit system.

Senator GORE. They are not profit-making institutions, are they? Mr. WILLIAMS. Well, in some instances people who invest in the capital stock of these institutions expect a reasonable return on their investment.

Senator STEIWER. You mean the livestock credit associations, for instance?

Mr. WILLIAMS. Yes. Some invest in the capital stock of such companies with the expectation that they will get a reasonable return on their investment.

Senator STEIWER. Well, now, Mr. Williams, the last Congress provided an emergency fund for use in drought areas and placed it in the hands of the Secretary of Agriculture for administration. I regret that he did not make a wider use of the funds, but he did loan about $1,500,000 to stockholders of credit associations. He loaned generally on the basis of 50 per cent of the value of the stock. In some few instances I think he loaned as high as 70 per cent of the value of the stock. Now, in those associations where the United States has provided 70 per cent of the actual capital stock of the associations, why should it have a 3 per cent spread in its operation with the idea of making a profit for its stockholders?

Senator TOWNSEND. Yes; and only 30 per cent of the money is put up by other stockholders.

Mr. WILLIAMS. I understand that in each case it was necessary for some individual to give his note and stand responsible for the repayment of the money loaned by the Secretary of Agriculture for the purchase of stock in those institutions, and the stock is owned by the individual who borrowed the money and not by the Government. The capital of a number of loan companies and credit corporations discounting paper with the intermediate credit banks was increased in that manner.

Senator TOWNSEND. Right there let me ask you a question: Is the borrower compelled to take stock in the organization before he can borrow?

Mr. WILLIAMS. The Farm Loan Board has felt that borrowers should not be forced to purchase stock of credit corporations or loan companies.

Senator TOWNSEND. Well, generally speaking, is he a stockholder? Mr. WILLIAMS. In some sections the borrower becomes a stockholder in the discounting corporation.

Senator TOWNSEND. Then, if he is a stockholder he is a participant in the profits resulting from this maximum spread of 3 per cent per annum, participating as a stockholder in that profit, as well as being a borrower.

Mr. WILLIAMS. Yes. If profits are distributed while he is a stockholder.

Senator STEIWER. Then he is not a stockholder or should not be. There is a difference between operation through the Federal intermediate credit banks and operations of the land banks, because the land banks in loaning through the national loan associations are making long-time loans on real estate security. There is no injus tice to the borrower in asking him to apply 5 per cent of his loan to the purchase of stock of the association, because to him it is distributed over a long period and it becomes nominal. But many of these loans are made for relatively short periods and there is some littlejustification from the standpoint of the borrower to buy stock in a credit association if it is merely making a loan for six months or a year, and he may then sever his connection and no longer maintain the relation of debtor and creditor with the Federal intermediate credit bank, but his stockholding in the credit association would remain and the money that he had invested in the stock would be unavailable to him.

Mr. WILLIAMS. I think it is a mistake to assume that stockholders of these discounting institutions make excessive profits on their investment. As a matter of fact over a period of time the return. on the stock investments of most of the stockholders is probably very disappointing, and many have suffered losses.

Senator STEIWER. I know, and I did not speak critically of it. I think, generally speaking, the credit associations are not making profits, and their stockholders are not making money on their investment. This 3 per cent does not go into profit in the main, but goes into cost of operation.

Mr. WILLIAMS. The profits generally have been small. General operating expenses consume most of the spread.

Senator STEIWER. And to restoration of impairments in capital and money with which to pay losses.

Mr. WILLIAMS. Yes.

Senator CAREY. I do not believe that any of these associations have made any money.

Mr. WILLIAMS. Some credit corporations and loan companies have made fair returns on their capital and some have suffered heavy losses. The same is true of State and national banks and other institutions. To be successful they must have competent officers and operate on a sound business basis.

Senator STEIWER. In other words, if the credit associations were permitted to rediscount five times their capital stock, and were permitted to have a spread of 3 per cent on each loan, the gross earnings would be 15 per cent.

Senator CAREY. On loans of $1,000,000 it would only make $30,000 to cover various and sundry expenses, losses, and so forth.

Mr. WILLIAMS. A maximum gross spread of $30,000.