"No such loan shall be made to any person who is not at the time, or shortly to become, engaged in farming operations or to any other person the principal part of whose income is not derived from farming operations."

SEC. 75. Paragraph "Fourth" of section 14 of the Federal Farm Loan Act, as amended (U.S.C., title 12, sec. 791), is amended by inserting after “bonds" the following: "(including consolidated bonds issued on its behalf)”.

SEC. 76. (a) Paragraph (1) of subsection (a) of section 202 of the Federal Farm Loan Act, as amended (U.S.C., title 12, sec. 1031), is amended to read as follows:

"(1) To discount for, or purchase from, any national bank, and/or any State bank, trust company, agricultural credit corporation, incorporated livestock loan company, savings institution, cooperative bank, credit union, cooperative association of agricultural producers, organized under the laws of any State or of the Government of the United States, and/or any other Federal Intermediate Credit Bank, with its endorsement, any note, draft, bill of exchange, debenture, or other such obligation the proceeds of which have been advanced or used in the first instance for any agricultural purpose or for the raising, breeding, fattening, or marketing of livestock; and to make loans or advances direct to any such organization, secured by such obligations; and to discount for, or purchase from, any Production Credit Association organized under the Farm Credit Act of 1933 or any production credit association in which a Production Credit Corporation organized under such Act holds stock, with its endorsement, any note, draft, bill of exchange, debtnure, or other such obligation presented by such association, and to make loans and advances direct to any such association secured by such collateral as may be approved by the Governor of the Farm Credit Administration;

(b) Paragraph (3) of subsection (a) of section 202 of the Federal Farm Loan Act, as amended (U.S.C., title 12, sec. 1031), is amended to read as follows: "(3) To make loans or advances direct to any cooperative association organized under the laws of any State and composed of persons engaged in producing, or producing and marketing, staple agricultural products, or livestock, if the notes or other such obligations representing such loans are secured by warehouse receipts, and/or shipping documents covering such products, and/or mortgages on livestock, and/or such other collateral as may be approved by the Governor of the Farm Credit Administration: Provided, that no such loan or advance, when secured only by warehouse receipts and/or shipping documents, and/or mortgages on livestock, shall exceed 75 per centum of the market value of the products covered by said warehouse receipts and/or shipping documents, or of the livestock covered by said mortgages and to accept drafts or bills of exchange issued or drawn by any such association when secured by warehouse receipts and/or shipping documents covering staple agricultural products as herein provided."

SEC. 77. After the date of the enactment of this Act, no national agricultural credit corporation shall be formed under the provisions of the title II of the Agricultural Credits Act of 1923.

SEC. 78. Section 31 of the Federal Farm Loan Act. as amended (U.S.C., title 12, sec. 986), is amended by adding at the end thereof a new paragraph, as follows:

"Any mortgagee who shall knowingly make any false statement in any paper, proposal, or letter, relating to the sale of any mortgage, to any Federal land bank under the provisions of section 13 of this Act, as amended, or any appraiser provided for in this Act who shall willfully overvalue any land securing such mortgage, shall be punished by a fine of not exceeding $5,000 or by imprisonment not exceeding one year, or both."

TITLE VIII-MISCELLANEOUS

SECTION 80. After the date of the enactment of this Act, the office of Farm Loan Commissioner shall be known as the office of the Land Bank Commissioner and the Farm Loan Commissioner shall be known as the Land Bank Commissioner.

SEC. 81. The signature of the Land Bank Commissioner on Federal farmloan bonds shall be attested by any Deputy Land Bank Commissioner.

SEC. 82. The authority and powers conferred upon the governor under this Act shall not be construed to be in substitution for authority and powers conferred upon him under existing law but shall be construed to be supplementary to such authority and powers.

SEC. 83. The Farm Credit Administration shall have a seal, as adopted by the governor, which shall be judicially noticed.

SEC. 84. If any provision of this Act, or the application thereof to any person or circumstances, is held invalid, the remainder of the Act, and the application of such provisions to other persons or circumstances. shall not be affected thereby.

SEC. 85. The right to alter, amend, or repeal this Act is hereby expressly reserved.

The CHAIRMAN. We have with us this morning Govrnor Morgenthau, of the Farm Credit Association, and Dr. Myers, to explain the purposes of the measure and answer any questions.

First, I suppose, we had better have the governor explain the general set-up of the organization, and Dr. Myers can then explain the details.

Mr. Morgantheau, we will be glad to hear you.

STATEMENT OF HON. HENRY MORGENTHAU, JR., GOVERNOR FARM CREDIT ADMINISTRATION; AND DR. W. I. MYERS, ASSISTANT TO THE GOVERNOR FARM CREDIT ADMINISTRATION

Mr. MORGENTHAU. Mr. Chairman and members of the Committee on Agriculture, I will be very brief in my statement of the underlying principles of this bill, as I see it, and I hope you will give the bill your favorable consideration.

The reason for the bill is the need of certain additional authority which is not in the Executive order, to carry out the spirit of the Executive order, and also the Farm Mortgage Act, part of the farm relief bill which Congress recently passed.

The old Farm Board, as you know, has been discontinued, and in the short time I have been here I have found that the applications for 90 percent of the loans which have come before us should never have come to Washington. They should have been handled regionally.

Therefore, we believe, if you could set up 12 regional cooperative banks, we could take care of the needs of the cooperatives much more effectively in the locality and save the representatives of the cooperatives the expense of coming to Washington. And we would also have the benefit of the knowledge of the people living in the locality to pass on these loans. Ten percent of the national cooperatives which really are national we could handle here from Washington; bnt the whole thought of this bill is to decentralize farm credit as much as possible and to put it on a regional basis where we can get the benefit of that local information. It would be perfectly ridiculous to expect anybody sitting in Washington to be big enough or intelligent enough to know the needs of every locality.

One thing that impressed that upon me happened the other day. when some gentlemen came from Idaho and told me you could not travel from the north to the south of Idaho by train through the State; that you had to leave the State in order to do that. They told me about the Salmon River Canyon. That is an illustration of the fact that a person sitting here does not realize how difficult it is.

So the whole underlying principle of the bill is to decentralize this farm credit administration.

In the so-called "production credit division" we have scraped together all of the odds and ends of money we can find, which we estimate conservatively at $80,000,000. We have need for $120,000,000 so we have asked for an additional $40,000,000 in order to set up the so-called "production credit corporations "-the term "banks" is not very popular now-and I want to be perfectly frank about it.

If we were enabled to do this, it means that direct loaning by the Government to the farmer will be discontinued. I believe it will be a good thing if we can get these small local associations in which the farmer has some stock, in which he has a financial interest in the loans made to his neighbors, under which the Government gets protection, with the safeguarding of his money, which it is impossible to get now.

They have contracted 625,000 crop loans in 2 months through the temporary organization. But nobody can issue 625,000 loans in 2 months with a temporary organization, and expect to do it wisely. And that is no criticism of anybody. But it was a situation they had to meet, and they did it as well as they could. But it stands to reason that you can not do that much business in 2 months with a temporary organization and expect to get all of that money back.

In the case of floods and droughts, when Congress votes money for relief or charity, I believe that should be relief money, and we should give it to the poor people to help them out of such a situation. But let us distinguish charity from business, and if you expect us to collect it, we ought to have at least an even chance to get our money back.

It does not do the Members of Congress or the administration any good to have us hounding the farmers trying to get the money back, when the loan was made on a basis upon which we never could get it all back.

I know there is a difference of opinion, but it is our belief that if we can do away with direct loaning we undoubtedly will need a consolidation of offices.

I am being flooded with telegrams from each locality, saying, do not do away with this particular office.

We have got to face the situation. I estimate that the crop loans to the regional agricultural corporations are costing at the rate of $9,000,000 and more per year, and the old Farm Board cost $650,000, so with those figures you can make some comparisons.

It is a very expensive way to make loans, and when we are trying to economize and cut down expenses we will have to discontinue some offices; there is no question about that. I have put it off as long as possible, but it will have to come about if we are going to carry out the spirit of good business and efficiency and try to save every dollar possible.

It is a long story; I think there are 34 pages in the bill. I wanted to give you my idea of the spirit back of the bill, very briefly. I hope you will consider it favorably.

Mr. Myers has worked on this matter very hard with Mr. Jones and his associates, and I would like to have Mr. Myers have an opportunity to go into the details.

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I will be very glad to answer any questions you desire to ask.

Mr. BUCK. When you speak about doing away with direct loans, is there anything in the proposed bill that repeals the provision for a direct loan up to $5,000 to a farmer?

Mr. MORGENTHAU. It does not touch on the farm mortgage situation. It has to do with crop loans.

The CHAIRMAN. If there are no further questions to be asked Mr. Morgenthau, we will be glad to have a statement from Dr. Myers.

Dr. MYERS. Mr. Chairman and gentlemen, perhaps the best way to proceed in regard to a discussion of the bill will be to refer to this analysis, which attempts to give in as brief form as possible an understanding of what the details involved are, that we are trying to provide for. If it meets with your approval, I will go through the first page of this analysis, which deals with regional production credit corporations instead of local credit production associations, and then give you an opportunity to ask any questions you may desire to ask.

The CHAIRMAN. We will proceed along that line.

Dr. MYERS. This refers to regional production credit corporations and local production credit associations, a system of credit for livestock and crop production on a business basis.

The bill authorizes a revolving fund of not to exceed $120,000,000 to set up and finance 12 production credit corporations, one in each Federal land-bank district. There is a revolving fund obtained from about $80.000.000 unexpended appropriations and an additional appropriation of $40,000,000.

Each production credit corporation is to have an initial capital of $7,500,000, and to be empowered to finance and supervise local production credit associations to be incorporated under a Federal charter for the purpose of enabling farmers to borrow from intermediate credit banks for general agricultural purposes. The board of directors of the land bank are to be ex-officio directors of the regional production credit corporations.

Production credit corporations do not lend money direct to farmers, but provide each local production credit association with capital of not less than $5,000 up to 20 percent of the volume of loans; such capital represented by nonvoting class A stock, preferred as to assets and sharing equally with class B stock in dividends. Each borrower is required to take and keep 5 percent of his loan in class B stock with voting power, 1 man, 1 vote. Class A stock may be sold to investors in the community. Local production credit associations may be formed by ten or more farmer borrowers and can rediscount notes of good farmers up to about four to eight times its capital. One dollar capital makes possible about $5 of sound production credit.

As long as a production credit corporation holds stock in any local production credit association, the directors, secretary-treasurer, and loan committee are subject to its approval and may be removed. Conservative operation is encouraged by ownership by borrowers in class B stock and by the requirement that the local production credit association must make up the losses, if any, and build up a guaranty fund to at least 25 percent of the paid-in capital before the payment of dividends. Dividends are limited to not to exceed

7 percent. The community is encouraged to repay the production credit corporation investment in the local production credit associations as possible.

No loan can be made by a local production credit association for less than $50, and not more than 20 percent of the capital and guaranty fund of the association (50 percent if secured by collateral), unless approved by the production credit corporation. Local production credit associations have the power to endorse and rediscount notes of good farmers only with the intermediate credit bank.

Production credit corporatons are also authorized to provide not more than 75 percent of the capital (preferred stock) of local credit corporations controlled by cooperative marketing organizations. The form of organization and the method of operation of such credit corporations must be approved by the governor.

May I ask this additional explanation? The intermediate credit banks have been criticized because they have not served agriculture adequately. The reason is that they are wholesale credit institutions. They have operated successfully to the extent that they have been used, but they lack local machinery, because these regional intermediate credit banks cannot make loans direct to farmers in all their territory without excessive expense.

As a matter of fact the law prohibits their making direct loans for that reason.

Therefore, a farmer who wishes to get credit from the intermediate credit bank must have his note endorsed by some local responsible financial agency.

So that, while the intermediate credit banks have served agriculture, they have not had a fair chance, because there have not been these local credit associations to which a farmer may turn.

The intermediate credit banks take the notes of farmers and the notes of cooperatives that have been secured by warehouse receipts. on the products, and then sell debentures to investors secured by such notes. The rate they charge for this wholesale credit depends on the rate that they have to pay.

Their present rediscount rate, what you would call the wholesale cost of this credit, is about 3 or 32 percent. I believe it is 3 percent. So they exist as the machinery through which farmers can get credit from investors in a local community.

The purpose of this plan is to assist in financing local credit corporations, so that farmers can make use of the investment market through the intermediate credit banks.

Mr. HOPE. Right there, do you intend to supersede entirely the local credit associations which have been using the facilities of the intermediate credit bank heretofore?

Dr. MYERS. No, sir.

Mr. HOPE. They can still go ahead and rediscount their paper?
Dr. MYERS. That is correct.

Mr. HOPE. This is supplemental?

Dr. MYERS. This is supplemental. The difficulty is that there are not enough production credit corporations to serve the farmers. Mr. HOPE. I know that is true.

Dr. MYERS. There is only one State, Arkansas, which has really gone ahead with a program of establishing credit corporations, and