Senator HOLLAND. Do either of you Senators have questions to ask? Senator SCHOEPPEL. I have no further questions, Mr. Chairman. Unfortunately I must say that I have an appointment in one of the executive departments downtown at 11 o'clock and if the chairman of this subcommittee will excuse me, I assure him I will be back and attend all the other hearings.

Senator HOLLAND. We will do so with regret.

The next witness will be Governor Tootell.

STATEMENTS OF R. B. TOOTELL, GOVERNOR; HAROLD A. MILES, DIRECTOR, SHORT-TERM CREDIT SERVICE; JOHN C. BAGWELL, GENERAL COUNSEL; AND MARTIN H. UELSMANN, DEPUTY DIRECTOR, SHORT-TERM CREDIT SERVICE, FARM CREDIT ADMINISTRATION

Mr. TOOTELL. Mr. Chairman and gentlemen of the committee, I am pleased at this opportunity to appear before you in behalf of S. 3550 and 3564. I should like to introduce to you my associates who are going to help out with answering the questions.

Mr. Harold A. Miles, Director of Short Term Credit Service; Mr. John Bagwell, General Counsel, and Mr. Uelsmann, Deputy Director of Short Term Credit Service.

Senator HOLLAND. We are glad to have all you gentlemen here from the staff of the Farm Credit Administration.

If it is necessary for you to supplement your statement from any of these gentlemen, why we can call them right into the record. Mr. ToOTELL. All right; thank you very much.

Mr. Briggs as chairman of the Farm Credit Board stressed largely the development of the legislation which is before your committee. I should like if it is agreeable with you, to submit a copy of my formal statement for the record and then to discuss rather informally the major provisions of this proposed legislation, and then undertake to answer any questions which your committee might have.

Senator HOLLAND. First then we will place in the record your entire formal statement consisting of pages 1 to 31 inclusive. Mr. TOOTELL. If you will, please.

(The prepared statement submitted by Mr. Tootell is as follows:)

I greatly appreciate the opportunity to appear before you and present the views of the Farm Credit Administration on S. 3564 and related bills which would make important changes in the laws relating to farm credit institutions concerned with short- and intermediate-term credit for farmers and ranchers. S. 3549 differs from S. 3564 in only minor respects and S. 3550 contains Budget Bureau amendments which will be explained in the course of my testimony.

The chairman of the Federal Farm Credit Board has reviewed with you the development of this proposed legislation. Before discussing its provisions, I would like to present some background information about the Federal Farm Credit System.

The Farm Credit Administration is an independent agency within the executive branch of the Government. The agency consists of the Federal Farm Credit Board, the governor, and other officers and employees. The Federal board consists of 13 members, 12 of whom are appointed by the President with the advice and consent of the Senate. The 13th member of the board is designated by the Secretary of Agriculture as his representative on the board. The Farm Credit Administration supervises, examines, and coordinates the activities of the credit agencies comprising the cooperative Federal Farm Credit System. The governor, under general supervision and direction of the Federal Farm

Credit Board is responsible for the execution of the laws creating the powers, functions, and duties of the Farm Credit Administration.

There are in each of the 12 farm credit districts a Federal land bank, a Federal intermediate credit bank, a production credit corporation, and a bank for cooperatives. There is a Central Bank for Cooperatives located in the District of Columbia. Each district has a district farm credit board which also serves as the board of directors of each of the four district institutions. Each district farm credit board consists of 7 members, 2 elected by the national farm loan associations of the district, 2 by the production credit associations of the district, 1 by the cooperative associations which hold voting stock in the district bank of cooperatives, and 2 members appointed by the governor of the Farm Credit Administration.

The Federal land banks provide farmers and ranchers with long-term credit on farm real estate through approximately 1,100 national farm loan associations. The Federal intermediate credit banks discount agricultural paper for and make loans to production credit associations and other financing institutions (usually referred to as OFI's) which make short- and intermediate-term loans to farmers and ranchers. The production credit corporations are not themselves engaged in making loans but supervise the production credit associations. The banks for cooperatives extend credit to farmers' cooperative marketing, purchasing, and service cooperatives.

The cooperative Federal Farm Credit System provides qualified farmers with credit on a sound basis adapted to their needs and at interest rates based on the cost of money in the market plus the cost of operating the system, including provision for adequate reserves. Funds which are loaned by the farm credit institutions are obtained largely from the sale of bonds and debentures to the investing public.

Each borrower from a Federal land bank is required to become a member of the national farm loan association through which the loan is made. The association is a farmer-owned cooperative organization chartered and supervised by the Farm Credit Administration. The borrower subscribes to capital stock of the association in an amount equal to 5 percent of the face amount of his loan and the association is required to purchase an equal amount of stock in the Federal land bank of the district. Farmer members own all the capital stock of each of the approximately 1,100 national farm loan associations; and the associations, in turn, own all of the capital stock of the Federal lank banks. Thus, the Federal land bank system is completely farmer-owned and has been since 1947 when the last of the Government capital was retired.

The production credit associations are cooperative organizations chartered by the Farm Credit Administration and supervised by the production credit corporations and the Farm Credit Administration. Each borrower from a production credit association is required to own class B (voting) stock in the association in an amount equal to 5 percent of the amount of the loan. The amount of class A (non-voting) stock of the associations originally owned by the production credit corporations has been reduced from a peak of $90 million to about $2.2 million and 440 of the 498 associations are now entirely farmerowned. The production credit associations are, therefore, rapidly becoming wholly farmer-owned.

Under the provisions of the Farm Credit Act of 1955, enacted during the first session of the 84th Congress, each borrower from a bank for cooperatives is required to purchase quarterly class C (voting) stock in the bank in an amount related to the quarterly interest payable on its loans (from 10 to 25 percent as determined by the bank with the approval of the Farm Credit Administration). The net earnings of the banks, after reserves, dividends on class B (investment) stock, and franchise taxes are provided for, are required to be distributed in class C stock to borrowing cooperatives. Class A (Governmentowned) stock of the banks is required to be retired each year in an amount equal to the amount of class C stock issued for that year. Over a reasonable period of years it is expected that funds from the interest "override" and from net earnings will enable the banks to retire all class A stock now owned by theUnited States.

You will note that these farm credit institutions are either now wholly farmerowned or else they are becoming so under existing law. There remain, however, two farm credit institutions-production credit corporations and Federal intermediate credit banks-which have always been and still are wholly Governmentowned. Present law does not provide any means of converting either of them

to farmer-owned institutions. H. R. 10285 would provide the legislative tools for completing the job of converting all institutions supervised by the Farm Credit Administration to wholly farmer-owned institutions.

Before getting into the provisions of the bill, I should like to make a further statement with respect to those institutions principally affected by the proposed legislation.

FEDERAL INTERMEDIATE CREDIT BANKS

The 12 Federal intermediate credit banks were established in 1923 to provide agriculture with a permanent, stable, and dependable source of short- and intermediate-term agricultural credit. They were organized to serve as banks of discount and not as direct lending banks. They were authorized to discount agricultural paper for commercial banks and certain other types of private lending institutions, and later, for the production credit associations organized under the Farm Credit Act of 1933. In addition, the banks are authorized to make loans to and discount paper for the banks for cooperatives and to make certain types of loans direct to farmers' cooperative associations.

Prior to the establishment of the Federal intermediate credit banks, seasonal and short-term credit for agriculture was supplied principally by country banks, individual lenders, and merchants, including manufacturers and distributors of implements, machinery, fertilizer, etc. There were also a few agricultural credit corporations and livestock loan companies which, in turn, obtained funds for lending purposes by borrowing from and rediscounting with commercial banks. Under the Federal Reserve Act of 1913, the Federal reserve banks were authorized to discount agricultural paper with maturities up to 6 months offered by member banks.

Aside from emergency seed loans made by the Government, beginning in 1921, and the discounting of agricultural paper by the War Finance Corporation for a short period, there were no other Federal facilities available to meet the seasonal credit needs of farmers and ranchers until 1923.

The agricultural credit situation in the early 1920's was in a disorganized state. Credit was often difficult to obtain when most needed. Loans available from commercial banks were usually for 90 days, which was too short a period to meet the annual cycles of production, harvesting, and marketing peculiar to agriculture. It had become evident that the seasonal production credit needs of agriculture were not being met by existing agencies. As a temporary measure the Congress, in 1921 and 1922, amended the War Finance Corporation Act of 1918 to permit that corporation to make commodity loans to farmers' cooperatives and to extend credit to banks and to agricultural and livestock credit corporations to enable them to make and carry loans to farmers and ranchers. The agricultural lending powers thus given to the War Finance Corporation and its experience in that field in 1921 and 1922 proved most helpful in developing a permanent system for seasonal agricultural financing. It demonstrated that what agriculture needed was a source of credit based upon funds drawn from the investment markets of the country and not dependent upon local deposits.

In the light of these conditions, and after exhaustive studies and investigations, the Congress undertook to provide the means whereby investment funds could be made available to finance the production and marketing credit needs of agriculture. Since individual farmers and local lending institutions could not reach investors in the financial centers directly, it was concluded to set up an institution or system which, on the basis of obligations of a large number of farmers operating over a wide area, could sell its obligations in the large money centers. This would make funds available to agriculture on terms suited to the needs of farmers and ranchers and at rates of interest comparable to those paid by industry. The Federal intermediate credit banks were created to provide that service.

The establishment of the Federal intermediate credit banks as a secondary source of credit was expected to benefit farmers by enabling banks in agricultural areas to carry farmers' and ranchers' loans for longer terms, since they could rediscount the paper when in need of funds, and by encouraging the organization and operation of privately capitalized financing institutions which would make loans to farmers and rediscount them with these new banks. Some commercial banks did avail themselves of the services of the credit banks for a time and a considerable number of credit corporations were organized and operated for several years after the credit banks were established. A high percentage of the local credit corporations liquidated a few years after their

organization. Inadequate capital, incompetent management, unprofitable operations, unsound lending practices, and lack of supervision were important factors in the relatively short life of many of these institutions.

As unfavorable agricultural and economic conditions became more acute in the early 1930's, it became apparent that the short-term credit needs of agriculture were not being met because of the inadequacy of local institutions which could make the loans in the first instance, even though the rediscount facilities were sufficient to provide the necessary funds through sales of securities in the investment markets. Efforts to have local interests establish credit corporations and loan companies eligible to borrow from the credit banks were largely unsuccessful by reason of the lack of funds to capitalize such corporations. Thus, by reason of the inability of private lending agencies to meet the need for short-term agricultural credit, the objectives sought through the establishment of the intermediate credit banks were not fully accomplished. An adequate source of secondary credit was of little benefit to agriculture if primary lenders did not make the funds available to individual farmers. It was in this setting that the Congress provided, in the Farm Credit Act of 1933, for the establishment of a system of local cooperative production credit associations which would make the rediscounting services of the Federal intermediate credit banks available to every farmer in the United States who has a satisfactory basis for credit.

As a result of the growth and development of the production credit system, the major part of the credit business of the banks is now done with the production credit associations. During the fiscal year 1955, about 88 percent of the banks' average daily balances of loans and discounts outstanding were accounted for by the production credit associations. In the fiscal year 1954, that percentage was 87. Among the farm credit districts this percentage ranged in the fiscal year 1955 from 66 to 96 percent.

Most of the business now handled by the credit banks for institutions other than the production credit associations, that is the OFI's, is for State-chartered, privately capitalized agricultural credit corporations and livestock loan companies, together with a few commercial banks.

The Federal intermediate credit banks were provided with an initial capital of $5 million for each bank subscribed by the United States. Additional capital for the credit banks was provided by an act of Congress approved January 31, 1934. That act made available to the Farm Credit Administration a revolving fund of $40 million and authorized the Governor, with the approval of the Secretary of the Treasury, to subscribe for and to pay in such additional capital and paid-in surplus as he deemed necessary to enable any intermediate credit bank to meet the needs of its eligible borrowers. As of December 31, 1955, the Government's capital investment in the banks was $62.4 million consisting of the original $60 million of capital stock and $2.4 million of paid-in surplus. The law has never provided for ownership of capital stock of these banks except by the United States.

The intermediate credit banks finance their lending operations primarily through the issuance and sale to the investing public of consolidated collateral trust debentures and by direct borrowings from commercial banks. During the fiscal year 1955, these banks issued $1,046,330,000 of debentures. At the end of that fiscal year there were $793,480,000 in debentures outstanding. These debentures are the joint and several obligations of the 12 Federal intermediate credit banks. They are not guaranteed either as to principal or interest by the Federal Government.

PRODUCTION CREDIT SYSTEM

This system consists of 12 production credit corporations, which are wholly Government-owned, and 498 production credit associations, 440 of which are wholly farmer-owned.

The production credit corporations were established under the Farm Credit Act of 1933 to organize, capitalize, and supervise the production credit associations in order to provide agriculture with a permanent and dependable source of short-term credit on a cooperative basis.

The production credit corporations were capitalized by stock subscriptions on behalf of the United States out of a revolving fund of $120 million. As each production credit association was organized, the district production credit corporation subscribed to a sufficient amount of its class A (nonvoting) stock to permit it to begin lending operations. As stated above, each borrower from the association is required to own class B (voting) stock in an amount equal to 5 percent

of the amount of the loan. Farmers and ranchers own approximately $23 million of class A (nonvoting) stock in their associations. This is an investment they have made above what the law requires them to own in connection with their loans. Most of the associations have chosen to devote all their net earnings to building up their financial strength. As a result, their members have foregone any return on their stock investment. This has been done as a matter of loyalty to their association and to speed the day when their local association might be completely member-owned. As capital investments by members grew and earnings of the associations accumulated, the caiptal stock held by the corporations was retired and the proceeds returned to the corporations. This plan of operation has enabled the associations to retire all but about $2.2 million of the approximately $90 million of Government capital invested in them and only 58 associations have any Government capital left.

As of December 31, 1955, the corporations had outstanding capital stock owned by the United States in the amount of $31,350,000 and earned surplus and reserves of about $13,500,000. There remains in the revolving fund $58,650,000 available for future subscriptions to the stock of the corporations, $30 million having been returned in 1949 from the revolving fund to the general fund of the Treasury. The operating costs of the corporations are paid out of earnings on the investment of their Government capital and out of their earned surplus and reserves.

As of December 31, 1955, about 479,000 farmers and ranchers owned capital stock (classes A and B) of the associations amounting to approximately $98 million. The surplus and reserves of all associations totaled $97 million on that date. In addition to these accumulated earnings, the associations had set aside out of earnings about $10 million as specific and general provisions for bad-debt losses. The associations are authorized to issue class C stock but so far none has been issued. The volume of loans made by the 498 associations during the calendar year 1955 was approximately $1,400 million. We believe these figures clearly show the progress that has been made in building a sound, cooperative, production credit system for agriculture.

The function of the corporations to organize and capitalize the production credit associations has been largely achieved. There is, however, a continuing need for production credit associations to have available to them revolving fund capital which can be subscribed to supplement their members' capital when necessary and appropriate in order to maintain credit service. This important function must be continued after merger, and the legislation before you makes adequate provision for this in order that the associations may be able to meet the credit needs of agriculture.

The most important remaining function of the corporations is that of assisting in supervising the production credit associations. Supervision and training in credit and operating matters have been important factors in the growth and development of the local associations, both as to their financial strength and in extending sound credit service to agriculture. The production credit corporations prescribe general loan policies for the associations and guide them in the application of sound credit principles. The corporations make credit examinations of outstanding loans on behalf of the Governor and review lending and collection policies of the associations. The corporatins also assist in the training of employees, prescribe and approve loan-interest rates, approve the compensation of personnel, and generally guide the associations in the conduct of their business and service to agriculture. We believe that important supervisory functions must be continued, and the legislation makes adequate provision therefor as will be explained later.

I will now discuss the provisions of the bill.

The bill contains an important statement of policy relating to agricultural credit. It is declared to be the major purpose of the bill to continue to provide agriculture with a sound, dependable, and effective source of credit. To that end the policy of the legislation is to encourage and promote the continued growth and development of the production credit associations as self-supporting, cooperative, lending institutions serving the needs of agriculture. The policy declaration also, in effect, dedicates the credit banks to the service of all agriculture. Its facilities are declared to be equally accessible to the production credit associations and to all other eligible primary lenders. This would be true even after the production credit associations became the owners of the banks. Continued availability of the facilities of the banks to all qualified primary lenders, both within and without the Federal farm credit system, is essen

76921-56-3