Mr. STEIWER, from the Committee on Banking and Currency, submitted the following

REPORT

[To accompany S. 2409]

The Committee on Banking and Currency to whom was referred the bill S. 2409, having fully considered the same reports favorably thereon with the recommendation that the bill do pass without amendment.

The Federal intermediate credit banks had on December 31, 1931, outstanding loans and discounts amounting to $117,935,171. This total is expanding and it is believed that with the enactment of S. 2409 the total loans and discounts of the Federal intermediate credit banks will be considerably increased. The Federal intermediate credit banks are permitted by law to charge the discounting institution an interest rate of 1 per cent more than the rate borne by their most recent debenture issue. The hearings disclosed that the interest rate on recent debentures of the Federal intermediate credit banks ranged from 3 to 5 per cent. These conditions fix the discount rates of the Federal intermediate credit banks. At the present time they are from 4 to 6 per cent. It must be understood that this is not the rate paid by the livestock and farmer borrower from the discounting institutions. These discounting institutions or credit associations are permitted by law to charge an additional spread not to exceed 3 per cent per annum. Thus, the Federal intermediate credit bank rate to the farmer borrower ranges from 71⁄2 to 9 per cent. In many areas of the country the discounting agencies do not charge the entire 3 per cent spread but charge a lesser amount which may vary from 2 to 21⁄2 per cent per annum.

The object of S. 2409 is to provide a more dependable and abundant supply of money for use of the Federal intermediate credit banks, and to permit such banks to obtain their money supply at a lower rate of interest. This would permit loans at lower rates of interest to the farmer borrower. The reductions are estimated to amount from 1 to 11⁄2 per cent per annum.

The bill is supported by the American Farm Bureau Federation, the National Grange, and by cooperative associations. It has also the indorsement of the chairman of the Federal Farm Board, the officers of the Federal Farm Loan Board, and the Federal Reserve Board. The views of the latter agency are stated in the report made by the Secretary of the Treasury to the chairman of the Committee on Banking and Currency under date of January 8, 1932. This report provides a detailed statement of the purposes of each of the amendments contained in the bill and is set out herein for the information of the Senate. The letter of the Secretary of the Treasury is as follows: TREASURY Department,

Washington, January 8, 1932.

DEAR MR. CHAIRMAN: Receipt is acknowledged of your letter of December 24, 1931, in which you ask for a report on Senate bill No. 2409 "to amend Title II of the Federal farm loan act in regard to Federal intermediate credit banks and for other purposes."

The first section of the bill would amend section 202 (a) (3) of Title II of the Federal farm loan act by adding thereto the following language:

"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."

The proposed amendment, by enabling the Federal intermediate credit banks to accept drafts and bills of exchange drawn by cooperative associations of persons engaged in producing, or producing and marketing staple agricultural products would make it possible for the banks to obtain funds at the prevailing acceptance rate, and would open an additional channel through which agricultural producers could receive financial aid in marketing their products in an orderly manner. With this additional source of credit opened to them the intermediate credit banks could be of greater use and benefit to agricultural cooperative marketing associations.

Section 14 of the Federal reserve act now provides that

"Every Federal reserve bank shall have power: (f) To purchase and sell in the open market, either from or to domestic banks, firms, corporations, or individuals, acceptances of Federal intermediate credit banks *," but Title II of the

Federal farm loan act does not empower the Federal intermediate credit banks to accept drafts and bills of exchange. In view of the fact that the rate of discount on acceptances frequently is less than the interest rate on the collateral trust debentures issued and sold by the Federal intermediate credit banks to obtain funds for lending purposes, the proposed amendment would be advantageous to the intermediate credit banks by enabling them to procure funds for lending purposes in the commercial paper market which would enable them in turn to furnish such funds to cooperative associations of agricultural producers at favorable rates of interest.

Section 2 of the bill would amend section 205 of said Title II by adding at the end thereof the following:

"In the event that there shall be an impairment of the paid-in capital of any Federal intermediate credit bank, the Farm Loan Board, at such time or times as it deems advisable, may determine and assess the amount thereof against the other Federal intermediate credit banks on such equitable basis of apportionment as it shall prescribe. Each bank against which such an assessment is made shall, out of its surplus and/or to an extent up to 50 per cent of its net earnings, in accordance with the terms of such assessment, pay the amount thereof as soon as possible to the bank having the impairment. In such event payments into the surplus fund and payments of the franchise tax prescribed by this chapter shall be determined on the basis of the net earnings remaining after providing for the payment of any such assessment."

It is the opinion of the department that the adoption of this amendment is desirable. It would enable the Federal Farm Loan Board, in a case where the capital of an intermediate credit bank has been impared, to levy an assessment against the other Federal intermediate credit banks "on such basis of apportionment as it shall prescribe," for the purpose of restoring the capital of such bank. Since all of the capital stock of all the intermediate credit banks is owned by the Government of the United States, and the net earnings of the banks, after

compliance with the requirements of the law, are payable to the United States, it seems logical and reasonable to consider the system as a unit and to utilize the accumulated surpluses and net earnings of those banks which are operating at a profit to the extent deemed necessary by the Federal Farm Loan Board for the assistance of any bank or banks which may have suffered net losses in an amount sufficient to cause an impairment of capital.

In this connection, too, it should be stated that the Federal intermediate credit banks act as a unit in marketing their debentures, which are purchased by investors as a class, rather than as the debentures of particular banks. Each bank in addition to being primarily liable for its own debentures, is liable, under the conditions stated in the law, for the principal of, and interest on, the debentures issued by all the banks. By reason of this joint liability and the fact that all the capital stock of all the banks is owned by the United States, it would seem appropriate for the consolidated statement of the banks to present their condition as a system, eliminating any deficit that may exist in one institution by the utilization of surpluses in others whenever, in the judgment of the Farm Loan Board, such action is justified.

Section 3 of the bill proposes that section 206 (b) of said Title II be amended by striking out the first two sentences thereof which are

"After all necessary expenses of a Federal intermediate credit bank have been paid or provided for, the net earnings shall be divided into equal parts and onehalf thereof shall be paid to the United States and the balance shall be paid into a surplus fund until it shall amount to 100 per centum of the subscribed capital stock of such bank, and thereafter 10 per centum of such earnings shall be paid into the surplus. After the aforesaid requirements have been fully met, the then net earnings shall be paid to the United States as a franchise tax", and substituting therefor the following:

"After all necessary expenses of a Federal intermediate credit bank have been paid or provided for, the net earnings shall be paid into a surplus fund until it shall amount to 100 per centum of the subscribed capital stock of such bank, and thereafter 50 per centum of such earnings shall be paid into the surplus. Whenever the surplus thus paid in shall have been impaired it shall be fully restored before payment of the franchise tax herein prescribed. After the aforesaid requirements of this section have been fully met and, except as otherwise provided in this act, 50 per centum of the net earnings shall be paid to the United States as a franchise tax."

The purpose of this amendment is to enable the Federal intermediate credit banks to build up substantial surpluses from their net earnings before paying over any portion of such earnings to the United States. The experience of the banks, especially during recent years, has demonstrated amply not only the desirability but the actual necessity for special reserves or surplus accounts to provide for unforeseer contingencies and to place them in better position to serve the intermediate credit needs of agriculture and to meet their obligations. It is the view of this department that the adoption of this amendment is in the interest of the sound operation of the Federal intermediate credit banks.

Section 4 of this bill would amend section 207 of said Title II by adding thereto the following:

"Provided, That in view of the liability of all Federal intermediate credit banks for the debentures and other such obligations of each bank under this act, the banks shall, in accordance with rules, regulations, and orders of the Federal Farm Loan Board, enter into adequate agreements and arrangements among themselves by which funds shall be transferred and/or made available from time to time for the payment of all such debentures and other such obligations and the interest thereon when due in accordance with the terms thereof. '

Although under the provisions of section 207, as previously stated, each Federal intermediate credit bank, in addition to being primarily liable for its own debentures, is liable, under the conditions stated in the law, for the debentures of all the other banks, such liability would not accrue as to coupons for interest payments until after default, and as to principal until "after the assets of such other Federal intermediate credit banks have been liquidated and distributed," when under existing law the Farm Loan Board shall levy an assessment against each solvent Federal intermediate credit bank for the amount of its liability. Under the proposed amendment the banks, "in accordance with rules, regulations, and orders of the Federal Farm Loan Board,” would arrange, in case a bank were unable to pay its debentures and other such obligations, to transfer and make available to such bank from time to time as needed, funds to pay such debentures and other such obligations and interest thereon. In other words, under the

provisions of this amendment intermediate credit banks, which subsequent to a default by a specific bank would be liable for payment of its debentures, may recognize and anticipate their liability, advance the funds required to pay the debentures or other such obligations and interest and thereby prevent such default. This amendment does not change the fundamental obligations of the banks and is in the interest of the system and investors in its securities.

Section 5 of the bill proposes that the second paragraph of section 13 (a) of the Federal reserve act be amended by adding the following:

"Any Federal reserve bank may also, subject to regulations and limitations to be prescribed by the Federal Reserve Board, discount notes payable to and bearing the indorsement of any Federal intermediate credit bank, covering loans or advances made by such bank pursuant to the provisions of section 202 (a) of Title II of the Federal farm loan act, as amended (U. S. C., title 12, ch. 8, sec. 1031), which have maturities at the time of discount of not more than nine months, exclusive of days of grace, and which are secured by notes, drafts, or bills of exchange eligible for rediscount by Federal reserve banks."

Section 13 (a), including paragraph 2 thereof as it now exists, was added to the Federal reserve act by the agricultural credits act of 1923. The purpose of the second paragraph was to enable the Federal reserve banks to rediscount for the Federal intermediate credit banks notes, drafts, and bills of exchange issued or drawn for an agricultural purpose which the Federal intermediate credit banks had discounted for or purchased from banks, agricultural credit corporations, and similar financing institutions under the provisions of section 202 (a) (1) of Title II of the Federal farm loan act. By the act approved June 26, 1930 (PublicNo. 439, 71st Cong.), section 202 (a) (1) of the Federal farm loan act was amended to permit the Federal intermediate credit banks to make direct loans or advances to banks, agricultural credit corporations, and financing institutions of like character provided such direct loans or advances were secured by notes, drafts, bills of exchange, etc., which might be discounted or purchased by the Federal intermediate credit banks. The Congress did not, at that time, however, amend the Federal reserve act to permit the Federal reserve banks to discount for the Federal intermediate credit banks such notes payable representing direct loans or advances. By the proposed amendment the Federal reserve banks would be permitted to discount "subject to regulations and limitations to be prescribed by the Federal Reserve Board" such notes payable bearing the indorsement of a Federal intermediate credit bank, "which have maturities at the time of discount of not more than nine months, exclusive of days of grace, and which are secured by notes, drafts, or bills of exchange eligible for discount by Federal reserve banks." It is the view of this department that the adoption of this amendment is desirable.

"SEC. 6. The seventh paragraph of section 13 of the Federal reserve act, as amended (U. S. C., title 12, ch. 3, sec. 347), is hereby amended by changing the period at the end thereof to a comma and adding thereto the words 'or by the deposit or pledge of debentures or other such obligations of Federal intermediate credit banks which are eligible for purchase by Federal reserve banks under section 13 (a) of this act.

Section 6 of the bill would amend the seventh paragraph of section 13 of the Federal reserve act by making the collateral trust debentures or other such obligations of Federal intermediate credit banks which are eligible for purchase by the Federal reserve banks acceptable as collateral security for 15-day borrowings of member banks from the Federal reserve banks. Under existing law Federal reserve banks are authorized to purchase collateral trust debentures and other such obligations of Federal intermediate credit banks, subject to certain limitations one of which is that these obligations shall have a maturity at time of purchase of not more than six months. Such obligations of Federal intermediate credit banks are secured by paper which is ordinarily eligible for discount by the Federal reserve banks and in addition, as pointed out above, all the banks are jointly liable, under the terms of the statute, for their payment. In these circumstances, it seems desirable to permit debentures and other such obligations of Federal intermediate credit banks when complying with the requirements for purchase by Federal reserve banks, to be used as security for advances by Federal reserve banks to member banks on their promissory notes for periods not exceeding 15 days. Such an amendment to the Federal reserve act would be of great benefit to the Federal intermediate credit banks because its immediate effect would be to broaden the market for the collateral trust debentures issued by the banks. These are high-grade investments and member banks would purchase them in greater volume if they could be used as a basis for

temporary credit with the Federal reserve bank in the event of some emergency or need for funds. It is believed they would not be used in this manner to any great extent, but the fact that they could be would be very valuable in the sale of debentures, and would greatly facilitate the operations of the Federal intermediate credit banks in extending credit to agriculture.

The department recommends that the bill be enacted into law.

Respectfully,

Hon. PETER NORBECK,

Chairman Committee on Banking and Currency,

A. W. MELLON, Secretary of the Treasurys

United States Senate, Washington, D. C.