vital importance in forecasting the outcome of a purchase program as proposed in the bill.

However, competition determines interest rates and we are currently charging the grower 5.5 to 6 percent, even though with FICB's latest rate quoted at 3.5 percent, we are technically authorized to charge 7.5 percent, which is out of the question.

If PCA's or OFI's increase the interest rate arbitrarily above the level charged in the market place, onr best customers will be lost to the commercial banks and other financing competitors.

Therefore, the squeeze is on the earnings of PCA's and OFI's. If the competitive rate is 5.5 to 6 percent, and the cost of money is now 3.5 percent, that leaves PCA's a spread of 2 to 2.5 percent while it cost them 3 to 3.5 to operate. Where is the margin for purchase of the FICB's or building surplus?

I am assuming here the average volume of business of $60 million. done by the Berkeley Bank.

A short time ago we were given the opportunity to review a report to the Farm Credit Board by Arthur Andersen & Co., which estimated savings to be realized from consolidation, personnel cuts, and changes in loan supervision and rediscount procedures.

We consider the report to be very narrow in its appreciation of the consequences of its recommendations. It evaluates none of the real fundamental questions voiced for some time now by the OFI's regarding the propriety of merging two institutions, largely dissimilar in concept, purpose and service rendered.

But most important, it fails to place in proper perspective the fact that even the generous estimate of savings of $28,000 from consolidation in the Berkeley district would mean a net reduction in the cost of money of only .04 of 1 percent.

In the face of no earnings or operating deficits, it is now proposed that sharp reductions in loan supervision, in personnel, and questionable alteration in rediscount procedures be implemented to realize a saving, which is nominal in relation to overall costs.

Now the question of the surplus. The OFIS in the Berkeley district. helped build the present $3 million surplus. Of course, Federal land bank ownership by the national farm loan associations and co-op ownership of the Bank for Cooperatives established the precedent to give the surplus to the users.

In this case, the stock would be purchased at par of $5 million with a book value of $8 million. The OFIS will be issued no stock, but rather are to receive from the net earnings of the bank, after reserves and franchise taxes are provided for, participation certificates, these to be redeemable at par upon liquidation of an OFI or when all the class A stock has been retired.

In other words, for an OFI to realize any value from the participation certificates issued to it, if any, that lending institution must either

go out of business or await the occurrence of an event which has all the earmarks of requiring 50 to 100 years to accomplish. Do not the OFIs have claim to FICB surplus as valid as the PCAs, if it is construed that the users earned it?

Who will pay for PCA ownership? The policy set forth in the bill before this committee is to encourage and promote continued growth of the PCAS. If this to be actively undertaken by the FICB or is this to be done by the Farm Credit Administration in Washington? In any event, who is to pay for it?

The banks now pay Washington's expense as assessed by the Farm Credit Administration. But the consolidation plan contemplates that the cost of supervision be paid out of Production Credit Corporation surplus and expenses beyond that amount "out of other resources." If this must be borne in the discount rate, OFIs will be paying part of the cost.

Section 205 (a) covers class of stock, ownership, dividends, and retirement of stock, and raises two pertinent questions: (a) How long is the purchase expected to take?

(b) What increase in the FICB discount rate will be required to accomplish it?

In view of competitive money rates to borrowers and the cost of money in the market place, we would question Governor Tootell's estimate of 10 to 40 years.

Another question we must ask: Does change of ownership take the Federal Government out of the agricultural credit field. The proposed bill provides that the Government may reverse the intended transfer of ownership at any time the Governor deems it expedient to reinvest in the class A stock of the banks.

Thus, the question of ownership is largely academic. Who holds title to part of the Farm Credit System is of little importance compared to the possible adverse effect the announced change of ownership may have on acceptance of FICB's debentures.

What has the present FICB system cost the U. S. taxpayer? It is well known that on its investment of $60 million-$5 million in each district bank-the Federal Government has received $9,200,000 in franchise taxes since the banks were organized in 1923.

The $60 million is still intact, as of June 30, 1955. Surplus and reserves in the 12 months totaled more than $47 million. Total net earnings of $56,200,000 on an invested capital of $60 million. Thus the banks have not been a burden on taxpayers or the Treasury since all of its funds have been obtained in the open market and expenses have been provided for out of earnings.

Regarding the matter of supervision, the proposed law does not spell out the details of supervision. What, broadly, are the duties of supervision of PCA's to be delegated to FICB? Are these not likely to conflict with the primary purpose of FICB's to serve as banks of discount for agriculture through discounting agricultural and livestock paper for, and making loans to, all financing institutions qualified to use the bank's facilities.

Assuming the FICB's are to exercise the duties of supervising PCA's, what sort of relationship is created when the credit directs the affairs of the debtor who in turn owns the creditors' business?

There is a presumption here that the owners of a business would want to sit on its board and have a voice in its management and policies. It appears to us the fundamentally sound relationship of independence between lender and borrower would no longer exist. As financing companies we do not try to run the affairs of our borrowing customers -we either make a loan or we do not.

Heretofore, and presently, the bank has not attempted to manage our affairs in making, servicing or collecting loans. It has merely reserved the right to grant or deny the discount privilege and to refuse to accept loans offered for discount.

With further regard to the question of having a voice in the credit system of which we have considered ourselves a part, OFI's have no representation on either the District Farm Credit Board or the Federal Farm Credit Board. In defense of our reluctance to accept assurances that we will be "taken care of", we ask, where will our voice be heard? One other important thing, the money market is of primary concern to us and it has reached a height that we did not think possible right

now.

We are always concerned about the reaction of debenture buyers to this change. I would like to point out where we believe the strength of the debentures lay.

Wherein lies the strength of FICB debentures in the money market? The assets of every PCA and OFI now underwrite the paper discounted with the FICB's and this, in turn, strengthens the collateral behind the bank's debentures.

Even though the initial stock subscription by each PCA-15 percent in the first 2 years-is small, by that amount is the System weakened when gilt-edge liquid assets (i. e., Government bonds) are exchanged for a nondividend-paying frozen equity in FICB.

Only in the Governor's authority to reinvest Government capital at his discretion do we find an avenue to avoid endangering marketability of the banks' securities. To the users of the banks' facilities, any disturbance, especially now, of the money market could be exceedingly costly and, in our opinion, any contemplated change in the System's structure should be approached with more than ordinary caution.

Another point that we feel is unjust is the bill before this committee. The bill before this committee also gives the FICB Board authority to terminate employment of all PCC-FICB personnel and then reemploy such of them in such capacities as determined by the Board. The Farm Credit Administration, however, need not approve the district board's selection which clearly gives it direct control down to the last employee.

The OFI's have long voiced their admiration and approval of the FICB's management, personnel and operating efficiency in our district. They operate like no Government agency I know of. It is run like a private business.

We do not favor changes in the present bank personnel nor do we believe jurisdiction for such selection should rest outside the district boards. We are opposed to further concentration of authority in Washington.

To summarize: In the opinion of the private finance institutions for whom I speak, the proposed PCC-FICB merger

1. Will take too long. The time required to retire Government capital will be entirely dependent on earnings under changing competitive conditions.

2. Comes at a time when agriculture is in a distressed state and any adverse effects resulting from the merger would accentuate this condition.

3. Although we do not pretend to speak for the PCA's, we believe the purchase plan will impose an unnecessary burden on them.

4. Does not remove Government control from the FICB system when and if Government is finally repaid.

5. Is inequitable to the OFI's:

(a) Gives ownership of the surplus to PCA's despite contributions OFI's have made to the surplus.

(b) Our competition-and they are competitors will own the banks. They will elect two directors, OFI's will elect none, and the policy instructs those who are to administer this law to promote and encourage development of the PCA's.

We have no argument with them. In fact, we work fairly closely with them in many of the areas we serve.

(c) OFI's will be expected to share the cost of supervision.

(d) If FICB's are to exercise supervision, what assurances have we that they will not attempt to supervise all discounting agencies? (e) We believe the OFI's will ultimately be driven out of the system. The alleged mortality rate of OFI's (1,200 down to 94) may be in some measure due to the rise of PCA's (0 to 498) and the growth and competitiveness of the commercial banks rather than our ineptitude or unwillingness to provide credit to agriculture.

The OFI's interest is to provide money to farmers and ranchers at competitive rates through a self-supporting system.

Naturally, we are more interested in the rates our borrowers must pay for capital than we are in who owns the banks.

The OFI's for whom I speak would prefer, over the present bill, a long-term retirement program, based on FICB earnings, and providing for no purchase of stock (credit bank plan II).

This I believe was the plan submitted by the Federal intermediate credit banks' presidents to the Board, and this was submitted with six others at these first hearings, but not given much consideration.

The rate of retirement of Government money would depend, as it must under any plan based on earnings, on the spread available in the rediscount rate.

When the Federal Government was finally paid out there would be no stockholders but rather an independent trust, held in perpetuity for agriculture and available to all qualifying lending agencies.

Senator HOLLAND. You think that the new organization would not be freed from Federal interference and regulation?

Mr. READ. No, sir.

Senator HOLLAND. You heard the Bureau of the Budget this morning take exactly the opposite position. They think that it is too much freed and that there should be provisions put in there to restore budgetary control and other controls that they think are necessary over these local institutions.

Do you have any comment to make on their position?

In other words, they were taking the opposite extreme of the posi tion that you are taking!

Mr. READ. Yes, sir." I believe that as long as we have Government money in the system, that I can understand the Government's re luctance to release it.

In fact I do not know that turning the surplus over to the users is necessarily right. We say that the users earned it and they contributed to it and the farmers contributed to it, but that is a matter of policy.

Senator HOLLAND. Well, it would follow a policy or course that has been established in the case of Federal land banks and the banks for cooperatives already.

Mr. READ. Yes, sir: I brought that out in here, if that policy was followed.

I would not say that it is perhaps necessarily correct.
Senator HOLLAND. Thank you very much, Mr. Read.

Mr. Watkins Johnston.

Mr. Johnston, we would like to hear you, sir.

STATEMENT OF WATKINS JOHNSTON, REPRESENTING THE PRODUCTION CREDIT ASSOCIATIONS OF THE FIFTH FARM CREDIT DISTRICT, MONTGOMERY, ALA.

Mr. JOHNSTON. Senator, there has been so much said and so much that duplicates that the thinking of our group and others that I will try to eliminate that which is a duplication and get to the point,

I represent the PCA's of the fifth district. I was given a letter which I understood had been pretty thoroughly passed among the interested parties stating their original position. It was adopted in answer to the first call in the summer of 1955, readopted in answer to the second call in the fall of 1955, and was transcribed and readopted at a meeting of April 9, 1956.

It purports to speak for 22 of the 26 associations of the fifth district. I understand, though I cannot vouch for the correctness of it, that it now speaks for all but one, the association represented here yester day by Mr. Thomson of the Jennings Credit Association.

To brief the resolution which I will ask be placed in the record, the resolution first opposes the proposed change.

Second, it suggests that if there is to be the adoption of the proposed change, that the effective date of the adoption or the effective date of the change be deferred for a period of 5 years.

It approves Senate bill 3564 if there must be a bill.

May I offer that in evidence?

Senator HOLLAND. Yes, it will be admitted.

(The document is as follows:)

RESOLUTION UNANIMOUSLY APPROVED BY 22 OF THE 26 ASSOCIATIONS OF THE FIFTH FARM CREDIT DISTRICT REPRESENTED AT A MEETING HELD IN JACKSON, MISS., AT THE HEIDELBERG HOTEL ON APRIL 9, 1956

Be it resolved, That the Production Credit Associations of the Fifth Farm Credit District recommends to the Federal Farm Credit Board that no legislation be enacted to change, in any way; the present Production Credit System or the Federal Intermediate Credit Bank; be it further

Resolved, 'That, if the Congress of the United States demands such legislation for the merger of the PCC's and FICB's and the purchase of the merged