STATEMENT FILED BY J. OLNEY BROTT, GENERAL COUNSEL, AMERICAN
BANKERS ASSOCIATION

The Nation's banks extend more credit to farmers for production purposes than any other lending agency. At the beginning of 1956, banks held $3,249,541,000 in production loans, while the Production Credit Associations held $653,478,000 and the Farmers' Home Administration held $392,191,000. The members of the American Bankers Association, representing over 98 percent of the Nation's banks, number among their customers the vast majority of the farmers in the United States. We are, therefore, deeply interested and concerned in legislation affecting farm credit.

We are generally in sympathy with the objectives of S. 3549, S. 3550, and S. 3564 to facilitate farmer ownership of cooperative credit institutions and retirement of Government capital therein. These proposals would eliminate overlap-ping authority and some other undesirable features of the present Farm Credit Administration short-term agencies. There are, however, important provisions: of the bills with which we are not in accord.

RETIREMENT OF GOVERNMENT CAPITAL

Our association has long recognized the right of farmers and others to organize cooperative businesses, including credit institutions. At the same time, we have consistently maintained that it is not the function of Government to provide free capital or other subsidies to these cooperatives which are, after all, organized for the benefit of special groups. Accordingly, it has long been our view that when free Government capital has been provided for cooperative agencies, it should be returned in the shortest possible time. As the Government strives to reduce expenditures and to achieve a balanced budget, every user of Government capital should recognize the need for immediately returning to the Treasury every dollar possible. The provisions for the return of Government capital contained in these bills are inadequate, and there is no provision whatsoever for return of surplus earned with Government funds.

Under the terms of S. 3549 and S. 3564, only the capital of the production credit corporations transferred to the Federal intermediate credit banks, amounting to $31.5 million according to the September 30, 1955, figures shown in the Treasury Bulletin for January 1956, would be returned to the Treasury in the form of miscellaneous receipts. The balance of $60 million would be paid into a revolving fund from which the Governor of the Farm Credit Administration at his discretion could supply additional Government, capital through future subscriptions to class A stock of the banks. S. 3550 provides for an additional $30 million to be paid to the Treasury as miscellaneous receipts, with the balance to go into the revolving fund. We believe it is contrary to sound Government fiscal policy to earmark funds to supply Government capital at some future date. Agencies in need of additional capital should be required to go before the Congress to justify the need for such funds and provide an opportunity to study and appraise their operations. Although S. 3550 represents a move in the right direction, we recommend that all proceeds of class A stock retirements be paid into the Treasury as miscellaneous receipts.

REPAYMENT OF SURPLUS

While the bills before this committee provide for eventual retirement of Government capital of these agencies, they make no provision for the return to the Government of the $2.4 million in paid-in surplus of the Federal intermediate credit banks or the combined earned surplus of the two agencies of $63.5 million.

These amounts represent Government investment in these two agencies created as the result of the use of Government capital without charge. These surplus funds rightfully belong to the Government. We believe that provision should be made for the prompt repayment to the Treasury of these surplus funds.

EXPENSE OF PCA SUPERVISION

These bills propose that the income derived from the surplus transferred from the production credit corporations should be used to pay the expenses of the Federal intermediate credit banks in providing supervision and assistance to the production credit associations. We fail to see why the PCA's should not pay for their supervisory services as do other financial institutions.

It is interesting to note that the Comptroller General of the United States in his report on audit of corporations of the Farm Credit Administration for the

fiscal year ending June 30, 1954, made the recommendation "that the Congress consider requiring the production credit associations to pay the cost of their supervision, which is now being paid by the production credit corporations." In support of this recommendation, the report states that, "We believe that the production credit system, assisted by the Federal Government since 1933, has now become firmly established and should be more nearly self-supporting and that the supervision of the associations is a form of direct service, the cost of which should be borne by the associations."

FRANCHISE TAX

The bills continue the present requirement that the banks pay a franchise tax to the Treasury, although application of earnings is somewhat changed. We have repeatedly taken the stand that the cooperative agencies of the Farm Credit Administration which have Government capital should reimburse the Treasury for the use of that capital on a basis at least comparable with the cost of the funds to the Treasury. The provision for the franchise tax contained in these bills is inadequate to attain the objective. We believe that the Federal intermediate credit banks as business enterprises have reached a stage of development where they have no need for further subsidy.

Generally, taxes are considered a fixed charge against earnings as a current operating expense, yet under the provisions of these bills the franchise tax will be payable only out of earnings remaining after certain amounts are set aside to restore capital impairments and to create and maintain surplus and reserve accounts. Even then, this tax will be further limited to not more than 25 percent of remaining earnings. We recommend that these provisions be amended to require the Federal intermediate credit banks to pay as a first charge against their earnings an amount on their Government capital equal to the cost of funds to the Treasury.

TREATMENT OF RESERVES

According to the 1954-55 Annual Report of the Farm Credit Administration, the Federal intermediate credit banks, as of June 30, 1955, had a combined reserve for contingencies of $18,475,000. Under the bills now being considered each bank would establish a new surplus account by consolidating its present reserve for contingencies with its present surplus account and the surplus of the production credit corporations transferred to the bank. When this provision is considered with the provision for the annual application of earnings which apparently contemplates the building up of a new reserve account from scratch by setting aside 25 percent of annual earnings remaining after making good any impairment of capital and surplus until such reserve account equals 25 percent of outstanding capital stock and participation certificates, it would appear to have the effect of greatly extending the period before final retirement of class A stock by reducing the amount of earnings available for patronage dividends in the form of class B stock and participation certificates. We recommend that the present reserve for contingencies be retained as a part of the reserve account of the banks in order that the maximum reserve of 25 percent of outstanding capital stock and participation certificates be reached more quickly, which would sooner make available a larger portion of annual earnings to be applied to patronage dividends in the form of class B stock and participation certificates.

We appreciate this opportunity of presenting our views on this important legislation. We have endeavored to take a constructive approach in offering our recommendations for changes in these bills. We believe that the changes we have proposed are consistent with the principles set forth in the "declaration of policy" contained in the bills and at the same time will aid the Government in achieving its fundamental aims of a balanced budget and reduction of the Federal debt. We sincerely hope that our recommendations will merit your careful consideration.

STATEMENT FILED BY JAMES E. WELLS, JR., EXECUTIVE VICE PRESIDENT, FARMERS UNION LIVESTOCK ASSOCIATION, SOUTH ST. PAUL, MINN., REPRESENTING THE NATIONAL FARMERS UNION

The National Farmers Union recommends that H. R. 10285 be approved without amendments by your committee, and it is recommended that the Congress pass H. R. 10285 when approved by your committee.

As executive vice president of a farmers' cooperative, I have a double interest in this legislation, both in its effect on cooperative banks and on individual farmer loans. I have been closely associated with credit problems for a long time. For many years I was deputy governor of the Farm Credit Administration and commissioner of the banks for cooperatives.

Especial consideration was given to the fact that by the merger of the production credit corporations in Federal intermediate credit banks duplications in the review of rediscountable paper and other functions will be eliminated and costs reduced. Some have thought that there should be a separate corporation for supervision and a separate corporation for rediscounting. Such an arrangement would continue the inefficiencies that now exist; the bill provides for adequate departmentalization for the administration of these two functions; these functions would be cared for under the merged banks in a manner similar to that followed by the Federal Reserve System and the Federal land banks.

Questions have been raised as to whether other financial institutions, other than the production credit associations, that are authorized to borrow and rediscount with the merged Federal intermediate credit banks would receive credit under the merged banks as adequate as the credit which they have received during the past. It is believed that better credit service will be received by the other financial institutions under the merger plan. The authority and the directive to do so are clearly written into the bill; Farm Credit Administration officials have informed us that every effort will be made to make these functions operate effectively.

In regard to the borrowings by the bank for cooperatives, it is believed that their credit needs will be provided for better under the merged Federal intermediate banks. The credit needs of the banks for cooperatives may be met at the farm credit district level rather than at the Washington level with less lost motion and with increased efficiency.

If any amendment were to be offered, consideration might be given to permitting intermediate credit up to 10 years instead of the 7 years provided in the bill; however, it seems desirable first to obtain experience in the selling of debentures of the Federal intermediate credit banks under the 7-year term.

The retention of the name Federal intermediate credit banks, the capital structure left with the banks after the merger, and the revolving fund provided for additional capital requirements appear ample for the continuous sale of debentures of the system to the investing public; these provisions seem adequate for any foreseeabel future contingencies.

All in all, the passage of the bill will provide improvements in the efficiency of operations, a possible reduction in costs of operations, a centering of responsibility in the rediscounting of paper, and a capital base so that adeqate lending. funds may be made available through the sale of debentures.

STATEMENT FILED BY JEROME J. BURKE, SECRETARY-MANAGER, PRODUCERS LIVE STOCK CREDIT CORP., CHICAGO, ILL.

The Producers Live Stock Credit Corp., of Chicago, lends money for cattle and sheep production to farmers and ranchers over 12 Midwestern States.

Since organization in April 1924, the Producers Live Stock Credit Corp. has discounted with the Federal Intermediate Credit Bank of St. Louis, and is the largest single discounter with that bank.

Because we feel that the proposed legislation is discriminatory and unsound, we definitely oppose it. We oppose this bill for the following reasons:

1. We object to paying part of the cost of supervision of the production credit associations. There seems to be no precedent for this, as the other financing concerns of this country pay for their own supervision.

2. Other financing institutions will, while acquiring participation certificates, have no vote in Federal intermediate credit bank affairs. The voting stock is all to be held eventually by the production credit associations. This is gross discrimination.

3. Upon liquidation, the surplus accumulated prior to this bill becoming law will go to the production credit associations as B stockholders. This surplus actually belongs to the United States Government. However, if it is not to revert to the Government, then it should be distributed equitably to the users, including both production credit associations and the other financing institutions. The other financing institutions have been contributing to this surplus since 1923.

4. The collateral requirements should be uniform. Any restrictions should be based on the qualifications of the farmer-borrower and the financial condition of the discounting agency. The collateral requirements should not be based on whether the discounting agency happens to be classified as a production credit association or as an other financing institution. These differences in collateral are set forth in sections 202a (1) and (2) and section 6 (i) (1).

5. Terminating employment of Federal intermediate credit bank employees is unnecessary as the Federal intermediate credit banks are not being liquidated as are the production credit corporations.

6. This bill requires the purchasers to pay for 15 percent of the stock within a period of 2 years. Under present agricultural conditions this requirement will be difficult to accomplish unless the Governor, under powers granted, uses the revolving fund to provide many of the purchasers with the funds needed to finance the purchase.

All of the above objections to the bill, however, are secondary. The principal objection we have is changing the status of the Federal intermediate credit bank system at this time. We believe this will increase rates to farmer and rancher We recommend that this bill be rejected and the Federal intermediate credit banks maintained on their present basis.

users.

The Federal intermediate credit bank system has an enviable reputation, acquired from 33 years of furnishing sound, dependable, and effective agricultural credit throughout the country, at minimum cost to the Government. This reputation is reflected in the confidence of the investing public in the Federal intermediate credit banks' public offerings of debentures.

The Federal intermediate credit bank program should not be disturbed at this critical period. We recommend the rejection of this bill. We have read the testimony of P. O. Wilson, secretary-manager of National Live Stock Producers Association, and we are in complete agreement with that statement and endorse it in its entirety.

STATEMENT FILED BY W. A. HAMBRIGHT, SECRETARY-TREASURER, SOUTH CAROLINA FEDERATION OF PRODUCTION CREDIT ASSOCIATIONS, SPARTANSBURG, S. C.

My name is W. A. Hambright, secretary-treasury of the Spartanburg Production Credit Association, Spartanburg, S. C., and I am also a farmer residing in Cherokee County. Mr. E. B. Sanders, president of the South Carolina Federation of PCA's, has requested that I appear here representing our State federation in the capacity of its secretary-treasurer. Mr. Sanders asks that I express his regrets in his inability to be here at this hearing.

We deeply appreciate the opportunity to appear before this committee to express our views on this important subject.

We are here in behalf of the farmers who own the 21 PCA's in South Carolina in support of bill H. R. 3564.

We are here to oppose the enactment of certain parts of bill S. 3550 because, in our opinion, certain proposals in the bill are detrimental to the welfare of the production credit system, and jeopardize the plan of making the intermediate credit banks completely farmer owned.

On December 1 and 2, 1955, a districtwide meeting for directors and secretarytreasurers comprising the 87 PCA's in the Third Farm Credit District was held in Columbia, S. C. It should be emphasized that this was a 2-day meeting held for the purpose of discussing the proposals of the principles contained in bill S. 3564, and for obtaining the grassroots thinking from directors throughout the district. After a day's explanation and discussion of the bill the meeting split up into State groups for further consideration of the principles contained in this bill, then on the following day reconvened and voted unanimously to support the principles contained in S. 3564.

We believe that this bill represents the majority of the thinking of the directors and officers of the production credit system. At the suggestion of our Federal Farm Credit Board, the Governor and his staff conducted a hearing in each of the 12 farm credit districts during the latter part of the year 1955. At these meetings opportunity was given for free expression of thought concerning the proposed legislation. We believe this bill represents a sincere effort to reconcile many different points of views found in associations through the Nation and other financing institutions using the services of the credit banks.

Section II of the Farm Credit Act of 1953 states the policy and intent of the Congress with respect to the management, control, and ownership of the farm credit system. It reads:

"SEC. 2. It is declared to be the policy of the Congress to encourage and facilitate increased borrower participation in the management, control, and ultimate ownership of the permanent system of agricultural credit made available through institutions operating under the supervision of the Farm Credit Administration, and the provisions of this act shall be construed in keeping with this policy. The Federal Farm Credit Board hereinafter provided for shall within 1 year after appointment make recommendations to the Congress of means, supplemental to those provided by this act, of carrying into effect such declared policy, including, but not limited to, means of increasing borrower participation in ownership of the Federal farm credit system to the end that the investment of the United States in the Federal intermediate credit banks, production credit corporations, central bank for cooperatives, and regional banks for cooperatives may be retired."

We like this policy statement and want to see it activated and its objectives accomplished.

The declared policy of S. 3564 proposes to carry out these objectives and significantly proposes to merge the production credit corporations in Federal intermediate credit banks, and to facilitate farmer ownership of the merged banks and retirement of Government capital therein.

The proposal to merge these institutions makes good sense to us. It should promote efficiency within the system and lower the expense of supervision to the associations.

We are opposed to the enactment of S. 3550, page 5, line 19, which in effect would reduce the revolving fund of the 12 Federal intermediate credit banks from $100 million to $70 million. We believe that, with the proposed merger effected, the revolving fund may be needed and that it should remain at $100 million.

Also, we are opposed to the language on page 12, lines 23 to 25, which would have the effect of giving the Federal Government a continuing interest in the surplus and reserves of the credit banks after all Government capital has been retired. We think the surplus should be retained in the system because Congress has already set a precedent for leaving surplus in the Federal land bank. A second reason is that much of the surplus of the production credit corporations was earned in this manner: In the early days of the associations they owned 4 percent Government securities. Under an agreement that the corporation invested this money into the associations, in those early days, they had a bond-repurchase agreement which gave them authority to do this, which they did. They told us that they were going to sell our 4 percent securities because they were at a high premium. The corporation took the profits of that, and gave to the associations, eventually, 21⁄2 percent securities.

A considerable amount of money was made on this transaction, and that is a part of that surplus. We think that surplus rightfully belongs to our associations, our farmer members. Since the Congress has treated the Federal land bank as they did with respect to the surplus, we think that the farmer members own the surplus in the corporations, and therefore, think that this surplus should remain in the system.

We think it is important that the surplus be left as a cushion to help defray expenses of administration and supervision. We think the Farm Credit Act is good-it is important to agriculture, but the Farm Credit Administration is not serving its intended purpose unless adequate provisions are made to enable PCA's to extend credit to the farmers at a reasonable cost. The overall cost of money to farmers in our Association is now approximately 8 percent. We think that is too high.

Then, on page 23 of S. 3550 we oppose the language under subsection (a) which combines into a single subsection the subsections (a) and (b) of 201 of bill S. 3564. The effect of this change would be to keep the intermediate credit banks subject to the budget provision of the Government Corporation Control Act until the last dollar of Government capital is retired.

We hope that the Congress will enact the proposed legislation contained in bill S. 3564 and other identical bills which have been introduced. We believe that the end result of this act is designed to provide agriculture with a permanent source of credit and to enable PCA's to ultimately own the Federal Intermediate Credit Banks, which was the original intent of the Congress as set forth in section II of the Farm Credit Act of 1953.