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RURAL CREDITS.

COMMITTEE ON BANKING AND CURRENCY,

HOUSE OF REPRESENTATIVES,

Wednesday, April 12, 1922. The committee met at 10.30 o'clock a. m., Hon., Louis T. McFadden (chairman) presiding.

The CHAIRMAN. Gentlemen of the committee, this meeting is called at the suggestion of George E. Allen, the deputy manager of the State bank division of the American Bankers' Association. There are present here this morning members of the farm finance committee of the State bank division of the American Bankers' Association-Mr. John D. Phillips, chairman, vice president of the Green Valley Bank, Green Valley, Ill. ; Mr. George A. Holderness, chairman of the board of directors of the Farmers' Banking & Trust Co., Tarboro, N. C.; Mr. W. H. Malott, president of the Citizens' Bank, Abilene, Kans.; and Mr. Henry A. Moehlenpah, member of the board of directors of the Citizens' Bank, of Clinton, Wis. These gentlemen want to discuss with the committee questions pertaining to farm finance and rural credits, and the committee will be very glad to hear them in the order they desire to be heard. Mr. Allen, have you any statement you wish to make?

Mr. ALLEN. I work for Mr. Phillips. He is our chairman, and we desire him to be heard.

The CHAIRMAN. Mr. Phillips, we will be glad to hear you.

STATEMENT OF MR. JOHN D. PHILLIPS, CHAIRMAN OF THE FARM FINANCE COMMITTEE OF THE STATE BANK DIVISION OF THE AMERICAN BANKERS' ASSOCIATION AND VICE PRESIDENT OF THE GREEN VALLEY BANK, GREEN VALLEY, ILL.

Mr. PHILLIPS. Mr. Chairman and gentlemen, Mr. Allen says I am their chairman, and I guess that is true, but Mr. Allen is our boss, and I am sorry he is not doing the talking instead of myself.

We have no set program ; in fact, I do not know whether we know just exactly where we are at ourselves. I get a little consolation in this position since talking with Chairman McFadden this morning. He says that you Congressmen sometimes have trouble in all agreeing on certain subjects, and I find that is the condition of our committee.

We have given a good deal of study and thought to this farm-finance problem; in fact, the chairman of this committee has been considering the subject for a number of years, being more of a farmer than he is a banker, having always lived on a farm, never moved away from the farm, and actively engaged in the operation of a farm, although he has had the privilege of running a little country bank.

Mr. MACGREGOR. Where do you come from, Mr. Phillips?
Mr. PHILLIPS. Green Valley. Ill., a little town of about 450 population.

The thing we have been working on for the last six or eight months, probably more than anything else, has been the rural credit situation. Some of the ideas that the committee and subcommittee might have had in their minds seem to be impracticable after getting down to Washington and getting the slant and angle of different people with whom we have been talking. So I guess we will not say much about that this morning; at least, I will not. The other members of the committee, of course, will probably do more talking than I will, but we do believe that there is a real need for either the extension of the War Finance Corporation or something of a more permanent nature that takes its place. I am not going to say much about that, either.

The CHAIRMAN. Mr. Phillips, might I interrupt you there? You say you have been here for some days and that you have been discussing this question of rural credits with different people; would you mind telling the committee with whom you have been discussing this question, so we may get the same angle?

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Mr. PHILLIPS. Well, we had a little dinner here last night. I only came yesterday afternoon; and it was principally among ourselves, and we do not quite agree on the subject.

Mr. MACGREGOR. May I interrupt, Mr. Chairman? Of course, we have had this subject under consideration and discussion for some time and have had two committees at work on it. We have been in various sections of the country holding hearings, and I anticipate some of you gentlemen' probably received notices to appear at the hearing in St. Paul and, perhaps, some at the hearing in Atlanta. We know all about the needs of the farmers. We have listened to hundreds of people talk upon that subject, but we have not yet received any concrete idea of how the problem is going to be worked out; and, if I may suggest, all the needs of the farmers may be left out of consideration in talking here and get down to the practical brass tacks of the proposition-how is it going to be done?

Mr. PHILLIPS. That is the thing that has been bothering the committee that is before you to-day. How it is going to be done is pretty hard to say. I have some ideas, and some of the committee disagree with me on those ideas. I believe, however, that there is an urgent need of the continuation or the creation of intermediate credits, I believe is what you call it, at the present time. The fact of the matter is, if the War Finance Corporation is discontinued at this particular time, when it goes out of business there might be a need in the near future for that very institution.

The CHAIRMAN. You mean by that, Mr. Phillips, that the expiration of the term of existence of the War Finance Corporation ends on June 30 next?

Mr. PHILLIPS. Yes.
The CHAIRMAN. That is, they can not make any loans after that date.
Mr. PHILLIPS. Yes.

The CHAIRMAN. But they can renew those loans they have already made over a period of from three to five years?

Mr. PHILLIPS. Yes.

The CHAIRMAN. You do not think that would be sufficient to give the relief which is required ?

Mr. PHILLIPS. I doubt if it would.

The CHAIRMAN. You think new loans, other than those that are already financed and can be renewed, would be necessary?

Mr. PHILLIPS. Yes, sir.

The CHAIRMAN. And that some agency similar to that agency or an extension of that agency is necessary.

Mr. PHILLIPS. I believe it is.

Mr. STRONG. Mr. Phillips, I think your premise is correct, but do you think that the bankers who are extending the credit to the farmers will need further extension of loans or new loans, or do you rather believe that if their loans are renewed, that some means should be taken to finance the farmer other than the War Finance Corporation? In other words, should we continue in new loans to finance the banks and finance the farmer, or go directly and finance the farmer?

Mr. PHILLIPS. I do not know whether I quite get your idea. I do not be lieve I do.

Mr. STRONG. The War Finance Corporation extends its credit mostly to the banks who are financing the farmers.

Mr. PHILLIPS. Yes, sir.

Mr. STRONG. Now, those loans may be renewed after the 30th of next June, but no new loans made.

Mr. PHILLIPS. Yes.

Mr. STRONG. Do you think in any legislation we should propose, it should provide for making new loans to banks or should provide for making loans direct to the farmers?

Mr. PHILLIPS. I do not believe any loans should be made direct to the farmers as individuals ; no, sir.

Mr. STRONG. You think they should be made through the banks?

Mr. PHILLIPS. To the banks or corporations such as are provided, possibly, in the Lenroot-Anderson bill or the Strong bill or the Simmons bill. There are a lot of good things in all of those bills. There are some things, probably, that are not so good as the good things. A combination of the good things of those bills

Mr. STRONG. Now, that is just the question which is before the committee. I am Mr. Strong, and I introduced the Strong bill, and I think I made the suggestion before the Agricultural Inquiry Committee that prompted the plan of the Lenroot-Anderson bill, and I would like to have your idea as to the good things in all of those bills. That is what we want to arrive at.

Mr. PHILLIPS. Without going into detail, I want to say that I do not believe this intermediate credit, ought to be attached to the Federal farm loan bank act or the Federal reserve bank act at this time.

Mr. NELSON. Why not?
Mr. STRONG. Why should it not be attached to them?

Mr. PHILLIPS. For the reason it will confuse the mind of the investor if it is attached, although it is segregated in these bills. It will confuse the mind of the investor, the man who buys the investment, if it is attached to the Federal farm loan act, in my opinion.

Mr. STRONG. What is the objection to attaching it to the Federal reserve bank?

Mr. PHILLIPS. The principal objection is that the Federal reserve officers themselves are the objectors, and I do not believe any credit should have a three-year maturity that is discounted with the Federal reserve banks. I do believe, however, that it could be handled in a different way through the Federal reserve banks.

Mr. STRONG. I appreciate very well, and we all do, the objection to putting long-time, frozen, personal credits in the Federal reserve system, because that system is based upon short-time credits, and necessarily so, because we use the commercial deposits to finance them.

Mr. PHILLIPS. Yes.

Mr. STRONG. But do you not think that the personal credit of the farmer, which, of course, is from one to two years, or perhaps three years, should be financed through the regular financial system of the country, and could it not be done by placing those long-time personal credits in a special fund in the Federal reserve system?

Mr. PHILLIPS. It could be done in that way; yes, sir. I presume it could, although I doubt the wisdom of it.

Mr. STRONG. What would be objectionable about it?

Mr. PHILLIPS. It would not be as objectionable as it would be in the other banks, in my opinion, because it would not be so confusing.

Mr. STRONG. That was the opinion I arrived at and the reason I introduced the bill, to have those long-time personal credits rediscounted in a special fund, using half of the surplus of the Federal reserve system, and I just wanted to get your ideas, if you would give them to us.

The CHAIRMAN. Is your objection based on the fact that the Federal reserve act provides that Federal reserve notes.can be issued on paper that is subject to rediscount with the Federal reserve system? Is that your real objection to the long-time credits in the Federal reserve system; that this long-time paper should not be made the basis for the issuance of Federal reserve notes?

Mr. PHILLIPS. Personally, I do not think there is any excuse for three-year maturity paper or for long-term paper. I am speaking personally, you understand.

Mr. STRONG. What do you mean by long-term paper ?

Mr. PHILLIPS. Anything over a year. I do not mean by that it will be paid at the end of the year, but maturity paper should not be made for a longer term than one year.

Mr. STRONG. Then, how are you going to finance the stockman for the length of the term of his turnover period ?

Mr. PHILLIPS. Just like we are doing it now.

Mr. STRONG. But do you not realize that in 1920 when the loans were called it caught a lot of farmers and stockmen with short-time loans that were forced to liquidation to their great detriment, and should not the cattleman be financed for the length of time of his turnover period, the same as the merchant is financed for the length of the term of his turnover period? The merchant and the manufacturer under our system of finances are carried along for the time of their needs, which is their turnover period. The farmer would probably be carried along for the term of his turnover period if he is granted credit for a year, but the stockman would not be.

Mr. PHILLIPS. How long a time do you think the stockman requires for his turnover?

Mr. STRONG. He would require one, two, or perhaps three years.
Mr. PHILLIPS. It is not liable to take three years,

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Mr. STRONG. It is not always liable to take three years, and I think two years would meet his need of credit.

Mr. PHILLIPS. Could he not handle that by a one-year maturity with the privilege of renewal for two or three or five years?

Mr. STRONG. But he would be subject to be caught by a tight money market. Suppose he bought a lot of calves that he did not intend to put in the feed lot and mature for two years. After those calv had been carried through the summer and then roughed through the winter, there comes a pinch in the money market and you, as a banker, say to him, “Smith, I will have to ask you to pay that loan this spring; I can not renew it for you.” He is caught with a lot of stuff that is not ready for the market and he is forced to liquidate. Now, should he not have credit for the length of the time of his turnover period, and if that is two years, should he not have a two-year credit and not depend upon the market conditions for money in order to get an extension of the loan?

Mr. PHILLIPS. Yes, sir; but can you conceive of a condition such as that with the Federal reserve system?

Mr. STRONG. That happened to agriculture in 1920. That is what was the matter with the farmer and cattle industry.

Mr. PHILLIPS. Well, did it happen?

Mr. STRONG. Certainly; I stood in the Kansas City stockyards and saw those yards full of stock cattle being sold and going into the packing houses, when the farmers had large cribs of low-priced corn and could not get credit in order to get the cattle to feed.

Mr. PHILLIPS. What part of the country did they come from?

Mr. STRONG. I do not know. They came from all over the country. In Kansas City I talked with the farmers who had the corn but did not have the money to buy the cattle to feed.

Mr. PHILLIPS. I do not want you to misunderstand my position. I believe there is an immediate need for something of the kind along the line of the bill you have referred to. Ultimately, in my humble opinion, there will not be. I may be all wrong about that and I have learned a good deal since I have been on this committee.

Mr. STRONG. Pardon me, but I do not want to take any pride of authorship in the bill. I want you to criticize the bill as severely as you want to and then I want to get at the facts and see what we can do after getting all the information possible. I have studied the question for two years and I have not yet arrived at a permanent or definite conclusion.

Mr. PHILLIPS. I have no criticism to make of any part of the bill. I simply want to speak of certain fundamental things. That is all I care to do in the matter. We do not come down here with any finished product of any kind.

Mr. STRONG. I just wanted to talk with you about the need of the farmers and the need of the cattlemen for credit to meet their needs. .

Mr. PHILLIPS. There is not any question but what there is need for that kind of credit at this time. There is absolutely no question about it.

Mr. STRONG. And that is what we want to provide.

Mr. LUCE. At the time the powers of the War Finance Corporation were extended to the 1st of next July there was in process of formation in Chicago a private organization, which was to have $100,000,000 capital and which was to be authorized to make loans up to $1,000,000,000, but the War Finance Corporation put that private movement out of business, and it has disappeared. In other words, the Government saw fit to take over a function which a private group were ready to perform. Personally I am always opposed to having the Gvernment assume functions which private individuals are ready to perform, and therefore in this committee and on the floor of the House I was in a hopeless minority in my advocacy of the right of the individual to do business. Now, will you explain to the committee why, with the evident abundance of credit, as shown by the great rise in the prices of farm products, by the drop in interest rates, and by other conditions, with private credit agencies seeking the opportunity, more than they have done for many years, to meet the credit needs of the country—will you explain why under those exceptional credit circumstances we ought to continue the Government in a function which we were assured would terminate on June 30 of this year?

Mr. PHILLIPS. I will ask Mr. Allen to answer that.

Mr. ALLEN. That corporation was organized to finance foreign trade, and it had no direct application to farmers, except as the farmers might ship to foreign countries. It never had any idea of participating in what we ordi

narily term farm financing. That corporation failed to succeed because of discord among the bankers.

Mr. LUCE. We were given to understand at the time those gatherings were being held that the purpose was to meet the farming situation.

Mr. ALLEN. The object was to finance shipments of farm produce to foreign countries and not to make direct loans or loans through the banks to farmers. As I said, it failed because of discord among the bankers. It was for that reason that it did not go through.

Mr. King. Can you give the committee the name of that corporation ?
Mr. ALLEN. It was the Foreign Finance Corporation.

Mr. LUCE. Tơ return to my question, why, with the great abundance of credit now available in this country, should the Government continue in this function, which, in my judgment, should be a private function?

Mr. ALLEN. It should not.
Mr. LUCE. Do you agree with that, Mr. Phillips?

Mr. PHILLIPS. If conditions are as you say they are, yes; but you are stating the case in this way, that there is an abundance of money and an abundance of credit; that the country bankers and the farmers have available to them an abundance of money and credit, but I am not quite so sure that that is the condition that exists.

Mr. LUCE, Liberty bonds are at about par.

The CHAIRMAN. The Secretary of the Treasury is selling at this moment $150,000,000 worth of Government short-term notes at 31 per cent interest, or on the basis of 31 per cent interest; this would indicate an easing of the money market.

Mr. STRONG. He has been selling them on a 41 per cent basis, and has been having the Federal reserve banks to circularize all of the western banks, thus draining the deposits from those banks and bringing them down here to meet the expenses of the Government in the redemption of those securities or obligations. The result of that has been to drain the deposits from the country banks. I am trying to help them hold those deposits.

Mr. PHILLIPS. We have at least 50 farm loan bonds that are just as good, and that is saying a good deal, or it is saying a good deal to say that they are as good as Government securities, drawing 51 per cent and 6 per cent interest, and we can not sell them in Chicago, New York, Washington, or anywhere else. Now, what is the reason?

Mr. WINGO. Mr. Luce seems to be under the impression that the looseness of the money market has extended to the smaller credit operations of the country, or to farm securities, but he is mistaken about that. Even building operations in a large city like Washington could not be financed last week upon a basis of less than 10 per cent for first-trust mortgages and 20 and 30 per cent on second-trust mortgages. My investigation of the local situation shows that condition, even with the easy money market you refer to.

Mr. LUCE. That hardly meets the situation that has been reported to us here frequently. Even at the height of the stress it was found that one-third of the banks in the very localities that have been asking for this help were not rediscounting at all with the Federal reserve banks, and another one-third were not rediscounting extensively with the Federal reserve banks. That situation has certainly not greatly changed, and I still do not understand why the Government should continue to perform such a function.

Mr. PHILLIPS. Two-thirds of the banks of the United States are not members of the Federal reserve system,

Mr. LUCE. Their financial condition was much the same as the condition of the banks that were members of the Federal reserve system,

Mr. PHILLIPS. No, sir; I do not think so.
Mr. LUCE. Why?

Mr. PHILLIPS. The country bank is in an entirely different situation from the city bank or the commercial bank, because the country bank must depend entirely upon the agricultural conditions in the community where it is located. Now, the farmers this year and last year have been selling their products for less than it cost to produce them. There is absolutely no question about that at all. Instead of discounts being reduced, or instead of being able to liquidate, we do not know what liquidation means, and the discounts have been getting higher all the time. It has become to be absolutely necessary to lend money to farmers to pay their taxes and interest. They can not get enough out of the products they have to sell to pay their taxes and those other obligations.

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