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the Government, in financing its program, needs its cash for the purposes with which you are familiar.

The CHAIRMAN. You are making a suggestion for additional capital to the intermediate credit banks. Is there prospect for the need of the additional funds for that purpose?

Governor MYERS. The reason is this: We make the Farm Credit Administration independent of the Treasury, insofar as requesting aid or cash during the next few months is concerned. As soon as the Farm Credit Administration took over the regional agricultural credit corporations, the notes which were formerly discounted for them by the Reconstruction Finance Corporation were transferred to the intermediate credit banks to be financed by debentures.

Now, the rediscounting for the regional agricultural credit corporations has increased the normal amount of business, and in addition provisions for the production loans through the production credit system must be made. So in order to be sure we can sell the volume of intermediate credit-bank debentures needed at a rate which will make the cost of the credit to the farmer reasonable, we think that it may be necessary for the banks to have more capital. Therefore, we request the permission to increase the capital if the Secretary of the Treasury and the Farm Credit Administration believes it is


The CHAIRMAN. Any questions?

Mr. Buck. I would like to ask one question. Section 4 authorizes the issuance of bonds but it makes no provision for the interest rate.

Governor MYERS. No. The interest rate is not stipulated in the law because the interest rate necessary to make the bonds worth par cannot be determined in advance, so we provide in the law that the interest rate will be determined only after consultation with the Treasury.

These bonds will be virtually Government bonds, and their interest rate will be adjusted to make them worth par.

Mr. Buck. You feel that will be better?

Governor MYERS. Yes.

The CHAIRMAN. Mr. Fulmer.

Mr. FULMER. Do I understand you are making a provision to take up Federal land-bank bonds, to take the cash from the bonds and buy any outstanding Federal land bank bonds?

Governor Myers. No.

None of those land bank bonds authorized last May have been issued except the $150,000,000 in the hands of the Reconstruction Finance Corporation as collateral.

Mr. FULMER. And you would not have to take up the outstanding bonds?

Governor MYERS. No.

Mr. FULMER. Under that clause.

Governor MYERS. So far as the public is concerned this would have no effect. In other words, we are not changing the status of the amount, but provide for taking up the bonds in the hands of the Reconstruction Finance Corporation with the new bonds.

The CHAIRMAN. Any further questions?

Mr. HOPE. Governor Myers, at the time the farm mortgage bill was passed, last spring, it was contemplated that you would be able to exchange land-bank bonds for mortgages.

Governor MYERS. That is correct.

Mr. HOPE. What effort has been made to do that?

Governor MYERS. The situation was this. After careful study we decided that it was unwise to exchange bonds for mortgages unless the bonds were worth par. The condition of the bond market was such that these 4-percent bonds could not be sold for par. We felt convinced that the creditor would want to discount the principal of these bonds more than in our judgment, the facts warranted. Therefore, we have borrowed on the bonds and have paid cash, believing that we would get a better refinancing program for the farmer by the use of cash than by the use of the bonds which were worth less than par under the conditions existing at the time.

Mr. HOPE. Have any of these bonds been offered to the public? Governor MYERS. We discussed the matter with the best advisers we could get, the bonding houses that have handled the bonds of the Federal land bank issues and others. Because the outstanding Federal land bank bonds were selling at a discount due, in part, to the agricultural situation, and because the money situation was disturbed it seemed perfectly clear that the bonds could not be sold in sufficient quantities to carry forward the program. We are now prepared to close loans at the rate of $150,000,000 a month, as long as necessary to meet the farm debt situation.

Mr. HOPE. Did you ever take it up with insurance companies and other companies handling bond matters and discuss with them the matter of taking the bonds in transfer for their paper?

Governor MYERS. It was discussed with insurance company presidents to whom we were offering some of the bonds in lieu of their paper. Of course, the fact that only the interest on the bonds was guaranteed made them less attractive to the insurance companies, so they preferred to have cash.

Mr. HOPE. And they would not indicate that they would be willing to take bonds in exchange for mortgages?

Governor MYERS. They would not do it in most cases. They would be willing to exchange some poor mortgages for bonds.

Mr. HOPE. Do you contemplate exchanging these new bonds that are to be issued for farm mortgages, or is it your idea to go on the market and sell them and get cash and make it entirely a cash transaction so far as the loan is concerned?

Governor MYERS. In that we will be guided by the advice of the Treasury. It is likely that for the next month we will exchange bonds for mortgages. But we feel that if they are fully guaranteed as to principal and interest, we can use these bonds which are just as near to cash as anything can be and not be the actual cash. Then, when the fiscal operations of the Government will permit these bonds to be sold we will go back to the cash basis.

Mr. HOPE. You think you can sell these new bonds at a rate which will enable you to continue to make loans at the same rate of interest you now make them?

Governor MYERS. The rate of interest on the mortgages cannot be changed for 5 years under the terms of the act.

Mr. HOPE. No.

Governor MYERS. No matter what the rate of interest on the bonds is, the rate of interest on the mortgages cannot be changed.

Mr. HOPE. I understand that, but I was just wondering if you felt that you could sell the bonds at an interest rate which would enable you to continue to make loans at the present rate of interest without loss to the Government?

Governor MYERS. It depends upon the conditions in the bond market that cannot be foreseen at this time. I cannot pass judgment on that.

Mr. HOPE. Now, if I understand the new bill correctly-and I have not had an opportunity to study it carefully-a larger proportion of the $2,000,000,000 which is set aside for loans will be diverted into Land Bank Commissioner loans than was originally contemplated. If I understand it correctly, you are to use $800,000,000 of the $2,000,000,000 for Land Bank Commissioner loans, leaving $1,200,000,000 which would be available for land-bank loans, as I understand it?

Governor MYERS. $1,400,000,000 will be available for land-bank loans, since the $200,000,000 appropriated last May is a part of the $800,000,000.

Mr. HOPE. That would be $1,400,000,000

Governor MYERS. The $800,000,000 is the outside figure, and merely represents our judgment of the proportion at the present time. The Commissioner's loans constitute about one third of the present total of all loans made; but more recently they have been running about 40 percent of the total. On that basis, 40 percent of the $2,000,000,000 would be $800,000,000. These figures which we are considering here were based on the best possible estimate we could make. We thought they should be made high enough to permit the making of as many Commissioner's loans as are needed. These loans are important in cases of somewhat greater distress. They permit the refinancing of the more heavily involved farmer, and are helpful in obtaining the scaling down of excessive debts. Thus, these loans make it possible for the good farmer to rearrange his debts so he can handle them. In almost all of the really distressed cases, the Commissioner's loan has been necessary for refinancing the debt of the farmer.

Mr. HOPE. I am entirely in accord with that plan for refinancing. Governor MYERS. It is just permissive. I do not know that $800,000,000 of Commissioner's loans will be needed, but we would like to be able to use that much if necessary to meet the situation. Mr. HOPE. Yes. I just wanted to be sure that I understood it. Mr. GLOVER. Mr. Chairman, I would like to ask a question. The CHAIRMAN. Just a moment. I believe Mr. Hope has not finished.

Mr. HOPE. I would like to ask one or two more questions along that line.

The CHAIRMAN. All right.

Mr. HOPE. I find that the main criticism of the Farm Credit Administration at this time by farmers is the requirement that the proceeds of the Commissioner's loan must be used to liquidate all indebtedness.

Governor MYERS. Yes.

Mr. HOPE. Not only the indebtedness on the land but all indebtedness. There has been a great deal of criticism among the farmers of the Farm Credit Administration on this point, and I understand it to be the position of the administration that the law requires this to

be done. Now, I do not read the law that way, and I am just wondering what you might be able to say in that connection. I have frequent inquiries about this matter from farmers and borrowers and I would like to know what prompts that interpretation of the law because I would like to be able to advise them correctly about it. Governor MYERS. Mr. Chairman, may I ask Mr. Goss to answer that?



Mr. Goss. Mr. Chairman, you will realize that the law was very broad in its provisions. A great deal was left to the administration. When we came to work out the program for its administration, we were confronted with two or three problems which apparently compelled us to reach determinations which were not clearly outlined within the law. Wherever the law mentioned refinancing of debt it spoke of the reduction and the refinancing of debts. We went to the debates in the committees and we went to the debates on the floor of Congress and finally reached the conclusion that it was the purpose of Congress that we do the thing in this way: That we put the farmer in a position where he would have a fighting chance to work his way out; that if we just merely transferred a certain portion of the farmer's obligations over to the Government, and allowed a sufficient portion of it to remain as a hang over, it would swamp the farmer so that he could not work his way out. So we came to the conclusion that it was the intention of Congress first, that the farmer be put in position to work his way out; and, second, to give the creditor as much as could be paid and still leave the farmer so he was not swamped. You will recall that the loans were to be made in such amounts that the total of the first and second mortgages would not exceed 75 percent of the value of the farm property; and, the law also said normal value. If you desire to have me emphasize how we arrived at the normal value I will be glad to do so. But, anyway, we adopted a program for determining the normal value, which was considerable in excess of the distress values which prevailed at the time the law was passed. And, the 75 percent of normal values, in most instances, represented practically the total value of the debt today.

Governor MYERS. Of the property today?

Mr. Goss. Yes, total value of the property today, I mean. Now we were confronted with this problem: Were we to lend more than the value of the property, we would be faced immediately with the proposition that many people would proceed to sell out to the Federal Government through the Commissioner. And so we felt, when we analyzed the whole situation, that Congress had reached a very wise determination in setting the maximum loan figure at 75 percent. doing that a program was offered to the farmer so that he could work his way out.


Now, if you will take your pencils and follow me for a moment I will just outline for you about what we were up against. The principal factor in determining the value of land is its production, because only from the production will that debt ever be paid in normal cases. And so, in order to get at the value we first determine the average

production of the land. Having determined its production, we apply the values that prevailed during the 5-year period, 1909 to 1914. This gives us the gross production expressed in dollars. Next, we determine the cost of production and get the net return. We then capitalize these net returns, so it will be seen that production is the principal factor in establishing the value of the land.

Now, if I can carry this illustration through, let us suppose that we have found that the normal value of a farm is $8,000 and that we are permitted to make a land-bank loan of 50 percent; that would be $4,000; and a commissioner's loan of the additional 25 percent, which would be another $2,000.

In order to get that $8,000 valuation we have capitalized net income, we will say, on a basis of 6 percent. That would mean that we had found about $500 income. All right. Suppose now we take the combined loan, the $4,000 land-bank loan, on which he has to pay 5-percent interest normally, plus 1-percent principal, which is a total of 6 percent. The borrower would have to pay $300 annually upon the land-bank loan.

On the commissioner's loan he would have to pay 5-percent interest, or $100, and he would have to pay one tenth each year on principal, or $200, so that he would have to pay in all $600 annually. However his net income is only $500.

You can see what we have tried to do; we have to take each particular case and see what the normal income would provide.

The result in the case I have just mentioned would be that we would have to cut that loan down a little bit so that he could, in normal times, have enough income to meet the demands which are certain to follow. Were we to allow debts to remain on top of such a 75-percent loan, that would be heading the borrower straight for bankruptcy, because there would not be enough income from the farm to carry the 75-percent loan and the other debts. It is just a matter of figuring out what the farmer can carry, and we have found that we were doing no kindness to the farmer, and that we were doing no kindness to the creditor, to allow him to go ahead under a new program, which just as sure as could be would result eventually in bankruptcy and doing the job over. In other words, we felt that we wanted to carry out the whole program of refunding these debts, which had become so great. that they were driving the farmers into bankruptcy, and to refund them on a basis that would enable the farmers to avoid bankruptcy and work themselves out. And with that program ahead of us we felt that it was essential that these debts be reduced within the 75percent loan, because if they were not so reduced the farmer just could not work out.

Mr. GLOVER. Mr. Chairman

The CHAIRMAN. Mr. Glover.

Mr. GLOVER. The question I started to ask was with reference, not so much to the manner in which the credit was worked out, but the criticism I have had is in the difficulty of getting the loans at all, in Arkansas. And I think that was brought about principally by the difficulty in getting any plan worked out where you could get an appraisement of the land, with the result that we had difficulty in getting loans at all. Some of the commissioners, as I understand, took the position that the Federal land banks would first have to

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