Senator MORRISON. Is that any different than the capital furnished for the Federal reserve system and the land banks?

Senator COUZENS. Yes; it is different so far as the Federal reserve system is concerned, because the Federal reserve system participates in the earnings.

Senator MORRISON. But that is not true, as I understand, of the Federal farm land banks. The Government participates in the earnings here, too; does it not?

Mr. O'BRIEN. No; the Federal Government does not participate in any earnings.

Senator TOWNSEND. The Government does not furnish any capital for the Federal reserve system, does it?

Senator MORRISON. It did at the beginning, and it is making an almost scandalous amount of money on it now.

Senator WATSON. Too much.

Senator COUZENS. But the Federal land bank act, as I understand, does not provide for any compensation for the Government's capital, no matter how long it remains in the service of the banks.

Senator WATSON. No; it does not.

Senator MORRISON. That should be amended.

Senator WATSON. I have tried to have it amended in the other one, and I could not get it.

Senator COUZENS. You will not in this case, if it goes through. Senator MORRISON. It will get its interest in increased benefits, I guess.

Mr. O'BRIEN. We have established the minimum stock subscription which must be made by a member. In the same subsection we have been talking about, section 5 (c), it is also provided that as long as an institution remains a member of the system there shall be from time to time a constant readjustment of its stock subscription, so that as its assets in home mortgages diminish or increase its stock subscription in the bank will accordingly diminish or increase.

Senator MORRISON. That is on the same principle that to become a member, and to be entitled to these benefits, they have to put this much in it, just as a member of the Federal reserve system has to keep its reserves up in order to have the benefits of it.

Mr. O'BRIEN. Yes.

Senator COUZENS. But there is this difference, I think, in that: If its assets that qualify under the law decrease, the institution is enabled to withdraw its stock subscription.

Mr. O'BRIEN. Oh, yes; you can withdraw from this system, and if the institution's assets decrease the amount of stock which it is obliged to hold will decrease, too.

Senator COUZENS. I mean, if a member liquidates its assets, and puts its investments in a class of mortgages that do not qualify under this bill, then it can withdraw its entire capital subscription.

Senator MORRISON. And get out.

Mr. O'BRIEN. Yes; after settling up its obligations.

Senator COUZENS. I do not think the institution can draw out its $2,500, can it?

Mr. O'BRIEN. Yes, it can.

Senator COUZENS. I think that is a very shaky foundation for capital.

Senator MORRISON. Can not a member of the Federal reserve bank withdraw, Senator, and get out of the system altogether, if it wants to? Senator COUZENS. I think it can resign; yes. They do that now when they change their charters.

Senator MORRISON. I thought so.

Senator WATSON. All right. You may proceed.

Mr. O'BRIEN. The manner of payment for stock subscriptions is taken care of in subsection (d), page 5, lines 16 to 23.

Senator COUZENS. In that connection, as I understand, there is a provision here whereby a financial institution qualifying under this act may get the benefits of the act without any stock subscription at all until its State legislature enacts legislation permitting it to subscribe. Is that correct?

Mr. O'BRIEN. That is true.

Senator COUZENS. What about that feature?

Mr. O'BRIEN. In the meantime, it must put up cash, Government bonds, or the short-term debentures which are contemplated to be issued by the bank.

Senator WATSON. They can not just start right in at once.

Mr. O'BRIEN. And the amount of those things is calculated in the same manner as the stock subscription would be calculated in the case in which the institution was capable of subscribing. That provision, however, is temporary in its nature. It is provided that when State legislation is enacted authorizing this person (who is not under the State law now authorized to invest in the stock of this Federal home loan bank), to make such investment, stock equal to the amount which this institution has put up shall be issued to him. If at the end of 42 months the State legislature has not seen fit to authorize institutions in that State

Senator WATSON. How many months?

Mr. O'BRIEN. Forty-two months.

Senator TOWNSEND. Three and a half years.

Mr. O'BRIEN. Three and a half years after the enactment of this act-if at the end of that time the State legislature has not authorized these institutions to subscribe for stock, then that institution has to retire from the system, and its business with the Federal home loan bank is liquidated, and it gets out, and everything is settled up. Senator TOWNSEND. Have you any idea of what per cent of the States now have such laws?

Mr. O'BRIEN. I do not know.

Senator MORRISON. It would have to be negation, because in the absence of laws forbidding it they could invest in it if they wanted to. Some of them have it about savings accounts.

Senator WATSON. A mere negation might not be enough, Senator, under these provisions. What do you think about that?

Senator COUZENS. I doubt if they can invest in any common stock in any bank. I mean, I doubt if any State permits the banks to invest in common stock.

Senator MORRISON. In our State I believe they allow 25 per cent of their assets to be invested in that way.

Senator COUZENS. In common stock?

Senator MORRISON. In securities approved by the boards of the banks. There is no restraint at all on them as to the 25 per cent of their assets. In a great many States it is done in that way.

Senator COUZENS. I never understood before that a bank could invest in common stocks.

Senator MORRISON. They can in my State.

Mr. O'BRIEN. I understand that there is a further complication in that respect. I understand that in some States some of these institutions would be eligible to subscribe for stock of banks, etc., organized under the laws of that State, but they can not subscribe for stock of a corporation established in another State; so, you see, if the bank happened to be established in New York, and a New Jersey institution wanted to subscribe, while if the bank were established in New Jersey it could subscribe, since the bank is established in New York the institution can not.

Senator MORRISON. In the case of this recent private association that they are subscribing to, to give this relief pending the enactment of the emergency finance corporation measure, that question came up in a great many of the States, about taking stock in that association. In our State, our State banks subscribed to the full amount; and, by the way, with all the talk about it, they got the full amount of aid provided for, $9,000,000, and they invested in that association in most of the States.

Mr. O'BRIEN. I might explain the manner in which stock is paid for. When I speak of stock in this connection I also speak of the manner in which the amount which is to be paid by these institutions which can not subscribe for stock is to be paid. That is covered on page 5, lines 16 to 23. The payments are to be made in cash or by certified check, except in so far as that is modified, of course, by authority to deposit Government securities and short-term debenture bonds in case of these institutions which can not subscribe. The first payment is to be made at the time the application for stock comes in.

Senator WATSON. Does this section provide how the United States shall pay?

Mr. O'BRIEN. Not this section.

Senator WATSON. That is provided in another section?

Mr. O'BRIEN. An election is given the subscriber to put down onefourth of the amount of his stock subscriptions at the time of his application, and to pay the rest of it in installments over a period of a year; but it is provided that he shall have paid not less than onefourth more at the end of each succeeding period of four months. Senator WATSON. Please state that again.

Mr. O'BRIEN. There are several elections to the institution which wants to subscribe for stock. It can put down the whole amount at once; it can pay it off in two installments; it can pay it off in three installments. It has to pay it off at the end of a year, but it can make any arrangement by which it will have paid, on filing its application, one-fourth and will have paid at least one-fourth more at the end of each succeeding period of four months.

Senator COUZENS. Does that constitute any controlling factor in relation to the amount of mortgages it may discount?

Mr. O'BRIEN. That is taken care of in another section. It is provided that no institution shall be able to obtain advances in excess of twelve times the amount of capital stock which it has paid in. That is paid in, not subscribed for.

Senator COUZENS. I understand. Did the House hold any hearings on this bill?

Mr. O'BRIEN. No.

Senator Watson asked about the subscription on behalf of the United States. That is treated on page 7, lines 19 and following, over on to page 8. The Secretary of the Treasury subscribes, on behalf of the United States, for the amount of the original capital stock of each bank which is not subscribed by institutions eligible to subscribe at the end of 30 days.

Senator MORRISON. Where is that?

Mr. O'BRIEN. Page 7, lines 19 and following.

Senator MORRISON. What, in your opinion, would be the objection to providing that the Government shall receive 4 per cent interest on its money, or some interest fixed by the board?

Mr. O'BRIEN. I am sorry, Senator, but I have nothing to do with the policy.

Senator MORRISON. You are just the official draftsman?

Mr. O'BRIEN. Yes; that is all.

Senator MORRISON. There is no provision here for the Government to get any interest on any capital it advances, as suggested by Senator Couzens?

Mr. O'BRIEN. There is an express provision to the contrary, that the United States shall get no dividends.

Senator WATSON. We can ask some of these other gentlemen on that question of policy.

Senator COUZENS. Just what is the reason, if the witness knows, for putting in this bill, as it is put in the reconstruction finance bill, a provision that these stock subscriptions can only be paid with the approval of the Secretary of the Treasury?

Mr. O'BRIEN. I am sorry; that is a question of policy.

Senator COUZENS. I thought perhaps in drafting the bill there were some reasons advanced. I am not talking about the policy for putting that in.

Mr. O'BRIEN. As I recall the conferences, there was no discussion at all of that point. At least, that was not brought to our attention as a thing that might need to be fixed as far as phraseology was concerned, and we had too many other things to consider.

Senator MORRISON. Was that not changed in the other bill, Senator Couzens?

Senator WATSON. I do not think so.

Senator MORRISON. I thought the committee changed it on their

own motion.

Senator WATSON. Go on, Mr. O'Brien.

Mr. O'BRIEN. The stock subscription of the United States is to be paid for by the Secretary of the Treasury, and will be subject to call in whole or in part by the board, with the approval of the Secretary of the Treasury, at such times as they deem advisable. That does not mean that the Secretary of the Treasury has to put in the whole $150,000,000 the first day. The payment is subject to call by the board, with the approval of the Secretary.

Senator MORRISON. They will subscribe all right.

Mr. O'BRIEN. Subsection (g) of that section, on page 8, lines 13 and following, on page 9, provides for the retirement of stock held by the United States. The provision is in some respects similar to the

Federal land bank act. It is provided that whenever the subscribers to stock have put in an amount equal to the amount which the Secretary of the Treasury put in, then the bank is obliged annually to apply to the retirement of shares of capital held by the United States 50 per cent of the amount which is paid in as capital by new subscribers or old subscribers who are increasing their stock subscription.

Senator COUZENS. That is the proper place to put in the provision suggested by Senator Morrison of a return on the capital of the Government, is it not?

Mr. O'BRIEN. No; I think you can put that in where it speaks of dividends.

Senator WATSON. Further over.

Mr. O'BRIEN. There is an additional provision in this same subsection by which the bank, if it wants to, with the approval of the board, can pay off the stock of the United States at any time; and the board in the same sentence is given the power to require the stock of the United States to be paid off at par, if in the opinion of the board the resources of the bank are available for that purpose.

Senator MORRISON. Right there, as I understand the bill, it is contemplated that this institution will loan this money so that they will make money out of it, but the Government does not get any of it. Mr. O'BRIEN. That is correct.

Senator MORRISON. That is the point.
Mr. O'BRIEN. That is certainly so.

Senator MORRISON. Would it be in order for me to ask you to prepare an amendment at the right place there for me, where Senator Couzens first suggested it or brought it up, to provide for paying the Government 4 per cent interest, or whatever it is?

Mr. O'BRIEN. Whatever the dividend is.

Senator MORRISON. Not to exeed such an amount. This bank is going to make a heap of money if it is successful, and I do not see why the Government should not get its interest as well as anybody else. It will make a sight of money if it is successful. You will prepare that? Mr. O'BRIEN. Yes, sir.

Subsection (h) in the same section, page 9, lines 3 to 6, provides that stock subscribed for by the institutions can not be transferred or hypothecated except as therein provided, which means that it can not be transferred except as the board permits it to be transferred.

Senator COUZENS. Is there any yardstick providing how the board may permit the transfer of stock?

Mr. O'BRIEN. That has not been thoroughly gone into, I am sure. Senator WATSON. What is your question, Senator?

Senator COUZENS. I asked if there was any yardstick provided in the legislation to guide the board of directors in determining when stock may or may not be transferred.

Senator WATSON. I understand not. There was not in the old bill, as I remember.

of

Mr. O'BRIEN. There was a provision in the old bill, but that is just one of the things we did not have time to go into for the purpose fixing it up thoroughly. There are some provisions about it. Senator MORRISON. Ought it not to be made clear that they can not transfer to anybody except one eligible under the terms of the bill?