it; but the point is, could the member bank go to the Federal reserve bank with exactly the same type of paper you are discussing here and rediscount it with the Federal reserve?

Mr. WILLIAMS. I think so. In any event, a discounting corporation may discount with the intermediate credit bank, say, 40 or 50 separate notes, or it may be permitted to borrow on its own note, secured by those 40 or 50 separate notes?

Senator GORE. It can do that, can it not?

Mr. WILLIAMS. It can do that with the intermediate credit bank now.

Senator GORE. But can not pass it on, and use it with the Federal reserve bank.

Mr. WILLIAMS. At the time the farm loan act was amended to authorize that procedure, the Federal reserve act was not amended so as to permit the intermediate credit banks to in turn rediscount such notes or bills payable with the Federal reserve banks.

Senator GORE. But if a commercial bank should use exactly the same paper bills payable supported by these little notes, then the member banks, a commercial bank, could go to the Federal reserve bank and rediscount.

Senator STEIWER. Are there any further questions?

Let us turn back, if you will, Mr. Williams, to section 1, which provides for an amendment to section 202-A of title 2 of the farm loan act as amended. In section 3 of 202-A there is already a power to make loans direct to cooperative associations. The amendment in the pending bill adds authority to accept drafts or bills of exchange issued or drawn by such associations, when secured by warehouse receipts and shipping documents. Is it believed that the power to accept drafts and bills of exchange does not already exist under the present law?

Mr. WILLIAMS. We are told that the intermediate credit banks under the present law do not have specific authority to create acceptances. The 12 Federal intermediate credit banks were created in the same act which, subject to certain limitations, authorizes the organization of National agricultural credit corporations. The act provides that National agricultural credit corporations shall have power, under the conditions stated, "to accept drafts or bills of exchange," and authorizes Federal reserve banks to purchase and sell in the open market acceptances of Federal intermediate credit banks and of National agricultural credit corporations, whenever the Federal Reserve Board shall declare that the public interest so requires. On the other hand, the sections of the same act providing for the organization and operation of Federal intermediate credit banks do not specifically authorize intermediate credit banks to accept drafts or bills of exchange." The board feels that the intermediate credit banks should be given specific authority "to accept drafts or bills of exchange" drawn by cooperative marketing associations and secured by warehouse receipts and/or shipping documents covering staple agricultural products, as provided in section 1 of S. 2409.

Senator GORE. Which does have the specific authority?

Mr. WILLIAMS. The National agricultural credit corporations set up under the provisions of the agricultural credits act are given

specific authority subject to certain limitations to create acceptances in connection with loans to cooperative marketing associations. Senator GORE. And this gives the same power to intermediate credit banks.

Mr. WILLIAMS. The act does not now specifically authorize intermediate credit banks to create acceptances, but

Senator GORE. But this amendment would?

Mr. WILLIAMS. The amendment proposed under section 1 of this bill would give that specific authority.

Senator GORE. Mr. Chairman, is it your expectation to reach any action this afternoon?

Senator STEIWER. I doubt it very much.

I am

Senator GORE. Then I think I will get you to excuse me. due at the District Committee, and I want to hear Senator Hull's speech.

Senator STEIWER. We will meet at some future time, Senator, when Senator Costigan and Senator Townsend can be here.

Senator GORE. I feel friendly toward this, but I think we would save time if we waited until the Glass bill is perfected.

Senator STEIWER. So much for that. Little reference in this hearing has been made to sections 2, 3, and, as I remember it, but little to section 4. Do you want to say anything further in behalf of those sections?

Mr. WILLIAMS. Yes. Section 2 of this bill provides that in the event the paid-in capital of a Federal intermediate credit bank should become impaired the Federal Farm Loan Board would be authorized to assess the amount thereof against the other Federal intermediate credit banks on an equitable basis. Such assessments would be confined to the surplus and/or not to exceed 50 per centum of the available net earnings of the banks. In the event of such assessments, payments into the surplus fund and payments on the franchise tax would be determined on the basis of the remaining net earnings.

Inasmuch as the capital stock of all of the intermediate credit banks is owned by the Government of the United States and the net earnings of the banks, after compliance with the requirements of the law, are payable to the United States, it is believed that the system should be considered as a unit, and that a method should be provided by which an impairment in the capital of any of the banks may be eliminated, as herein proposed. One of the banks suffered an impairment of its capital some time ago, which is reflected in the published statements of condition.

Section 3 deals with the earnings and surplus accounts of the intermediate credit banks. Paragraph (b) of section 206 of the farm loan act now provides that after all necessary expenses of a Federal intermediate credit bank have been paid or provided for, the net earnings shall be divided into equal parts, and one-half thereof shall be paid to the United States, and the balance shall be paid into a surplus fund until it shall amount to 100 per cent of the subscribed capital stock of such bank, and that thereafter 10 per cent of such earnings shall be paid into the surplus. After the aforesaid requirements have been fully met, the then net earnings shall be paid to the United States as a franchise tax.

This bill would amend that section of the act, so that after all necessary expenses of a Federal intermediate credit bank have been

paid or provided for, the net earnings shall be paid into a surplus. account until the surplus account amounts to 100 per cent of the subscribed capital stock of the bank, and thereafter 50 per cent of the net earnings paid into the surplus and the balance paid to the Government as a franchise tax. Whenever the surplus thus paid in is impaired, it must be fully restored before further payments of franchise tax to the Government.

That is a sound and desirable amendment, which should enable the banks to build up stronger surplus accounts and put them in a position to better serve the purposes for which they were set up.

Senator STEIWER. Do you care to add anything with respect to section 4?

Mr. WILLIAMS. Each Federal intermediate credit bank is primarily liable for its own debentures and other such obligations, and in addition is liable for the payment of interest on the debentures or other such obligations of any other Federal intermediate credit bank in case of default by the issuing bank as well as for the principal of such debentures or obligations after the assets of the issuing bank have been liquidated and distributed. The amendment proposed does not change the fundamental obligations of the banks. It merely provides that in view of the liability of all Federal intermediate credit banks for the debentures and other such obligations of each bank, under this act, the banks shall in accordance with rules, regulations and orders of the Federal Farm Loan Board, enter into adequate agreements and arrangements among themselves by which funds shall be transferred and/or made available from time to time for the payment of all such debentures and other such obligations and the interest thereon when due, in accordance with the terms thereof. This is a desirable amendment, but not a pressing matter at this time. It is offered because it seems to be a good time to get it along with the other amendments, which are of course very important.

Senator STEIWER. Have you anything further to say?

Mr. WILLIAMS. I think that covers all I care to say at this time about the proposed amendments. I will submit for the record certain data showing a consolidated statement of condition of the banks, the volume of loans and discounts, as of December 31, 1931, and debentures outstanding as of January 31, 1932.

TABLE 2.-Consolidated statement of the 12 Federal intermediate credit banks as of December 31, 1931, compiled from reports to the Federal Farm Loan Board