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Capital stock of such amount shall be divided into shares of $5 each and shall be subscribed, held, and paid by the Government of the United States. It shall be the duty of the Secretary of the Treasury to subscribe to such capital stock on behalf of the United States, such subscription to be subject to call, in whole or in part, by the directors of the Federal land bank upon thirty days' notice to the Secretary of the Treasury and with the approval of the Federal Farm Loan Board. The Secretary of the Treasury is authorized and directed to take out shares as called and to pay for the same out of any money in the Treasury not otherwise appropriated. Capital so allocated to a farm credits department shall be applied solely to meet obligations and losses, if any, incurred in the operation of that department; and the capital subscribed under Title I shall not be applied to meeting obligations or losses, if any, incurred in the operation of any farm-credits department.

SEC. 203. That the stock owned by the Government of the United States in any Federal land bank in accordance with section 202 shall receive no divi. dends. The Government of the United States shall be entitled to one vote for each share of such stock in deciding all questions at meetings of stockholders. Such stock shall be voted by the Farm Loan Commission as directed by the Federal Farm Loan Board.

SEC. 204. That any Federal reservé bank may rediscount for a Federal land bank upon its indorsement notes or other such obligations discounted or representing loans made under section 201; except that no Federal reserve bank shall rediscount for a Federal land bank any such note or obligation which has a maturity at the time of discount by the Federal reserve bank in excess of six months or which bears the indorsement of a nonmember State bank or trust company which is eligible for membership in the Federal reserve system in accordance with section 9 of the Federal reserve act, approved December 23, 1913, as amended. The rates of discount to be charged by any Federal reserve bank under this section shall be fixed by the Federal reserve bank, subject to review and determination of the Federal Reserve Board.

“ SEC. 205. That the farm credits department of any Federal land bank issuing debentures or other such obligations under section 201 shall be primarily liable therefor, and shall also be liable upon presentation of the coupons for interest payments due upon any such debentures or obligations issued by the farm credits department of any other Federal land bank and remaining unpaid in consequence of the default of the farm credits department of such other Federal land banks. The farm credits department of any Federal land bank shall likewise be liable for such portion of the principal of debentures or obligations so issued as are not paid after the assets of the farm credits department of such other Federal land bank have been liquidated and distributed. Such losses, if any, either of interest or of principal, shall be assessed by the Federal Farm Loan Board against solvent farm credits departments of Federal land banks liable therefor in proportion to the amount of debentures or other such obligations which each may have outstanding at the time of such assessment. Every Federal land bank shall, by appropriate action of its board of directors duly recorded in its minutes, obligate itself to become liable on debentures and other such obligations as provided in this section.

“ SEC. 206. That any Federal reserve bank may buy and sell debentures and other such obligations issued by a Federal land bank, but only to the same extent as, and subject to the same limitations as those upon which, they may buy and sell farm-loan bonds.

“ SEC. 207. That the net earnings of the farm credits department shall be carried to reserve account to such extent and in such manner, and reserves so established shall be invested as the Federal Farm Loan Board shall by regulation prescribe.

“SEC. 208. That in order to enable each Federal land bank to carry out the purposes of this act, the Comptroller of the Currency is hereby authorized and directed, upon the request of any Federal land bank (a) to furnish for the confidential use of such bank, such reports, records, and other information as he may have available relating to financial condition of national banks through or for which the Federal land bank has made or contemplates making discounts. and (b) to make, through his examiners, for the confidential use of the Federal land bank, examinations of State banks, trust companies. incorporated live. stock loan companies, or savings institutions, through or for which the Federal land bank has made or contemplates making discounts or loans: Provided, That no such examinations shall be made without the consent of such State bank, trust company, incorporated live-stock loan company, or savings institu

tion. Land-bank appraisers are authorized, upon the request of any Federal land bank and with the approval of the Federal Farm Loan Board, to investigate and make a written report upon the products covered by warehouse receipts which are security for notes or other such obligations representing any loan to any cooperative association under subdivision (a) of section 201. Land-bank examiners are authorized, upon the request of any Federal land bank and with the approval of the Federal Farm Loan Board, to examine and make a written report upon the condition of any cooperative association to which the Federal land bank contemplates making any such loan.

“ SEC. 209. That the Federal Farm Loan Board is authorized to make such rules and regulations, not inconsistent with law, as it deems necessary for the efficient execution of the provisions of this title.”

SEC, 4. That the first two lines of section 12 of the Federal farm loan act is amended to read as follows:

“ SEC. 12. That no Federal land bank organized under this act shall make loans, other than those authorized by Title II, except upon the following terms and conditions."

SEC. 5. That section 23 of the Federal farm loan act is amended by adding at the end thereof a new paragraph to read as follows:

“ The provisions of this section shall not apply to the earnings, reserves, and capital stock of the farm credits department of any Federal land bank.”

SEC. 6. That section 5202 of the Revised Statutes, as amended, is amended by adding at the end thereof a new paragraph to read as follows:

“Eighth. Liabilities incurred under the provisions of subdivision (a) of section 201 of the Federal farm loan act, approved July 17, 1916, as amended.”

STATEMENT OF HON. SYDNEY ANDERSON. MEMBER OF CONGRESS

FROM MINNESOTA.

Mr. ANDERSON. Mr. Chairman, if I may make a digression at the very beginning, I should like to take the liberty of congratulating the chairman on his re* nomination

Mr. APPLEBY (interposing). I second the motion.

Mr. ANDERSON (continuing). And to say it is a very well-deserved tribute to his ability, to his public service, and the position that he has achieved in the House; I think it also reflects the intelligence of his constituents.

That there may not be any misunderstanding about the matter, I should like to say that I do not appear as an expert upon banking or finance. I am somewhat embarrassed in appearing before this committee, many of the members of which have had banking experience and all of whom I know have given long and serious consideration to the problems which are incident to both banking and finance.

My justification for appearing is that the Joint Commission of Agricultural Inquiry, of which I have the honor to be chairman, made, in connection with this investigation of the problems of production, prices, transportation, and distribution, an investigation of the credit situation of the country. All of these investigations cover a wide range.

So far as the credit feature of the investigation is concerned, we undertook to develop the course of the movement of money and credit, discount and interest rates, from the beginning of the period of operation of the Federal reserve system down to June 30, 1921, and at the risk of imposing upon the committee I should like to develop as a background for the discussion of the bill which the committee recommended the situation as we found it in the course of the investigation.

You gentlemen well know the foundation of the banking system of this country is its thirty-odd thousand national banks and State banks and trust companies. These banks have total resources of approximately $18,000,000. Of these resources 60 per cent are represented in the Federal reserve system; the other 40 per cent are not represented in the Federal reserve system.

Of the 30,812 national, State, and mutual savings banks, 31.7 per cent in number are members of the Federal reserve system and .68.3 per cent are not members of the Federal reserve system.

An analysis of the location of member banks and nonmember banks developed the fact that by far the larger proportion of the nonmember banks were located in the agricultural States of the country. For example, in the New England States only 28 per cent of the banking power and 39 per cent of the banks in number are not represented in the Federal reserve system, while in the Southern States 42 per cent in banking power and 72 per cent in number of banks are not represented in the Federal reserve system; in the Eastern States, 22 per cent of the banking power and 36 per cent of the number of banks are not in the Federal reserve system, while in the Middle Western States 39 per cent in resources and 73 per cent in number are not members of the system; in the Western States, 50 per cent in resources and 74 per cent in number; and Pacific States, 33 per cent in resources and 67 per cent in number are not represented in the system.

These nonmember banks are, for the most part, as this statement indicates, located in those sections of the country which are largely agricultural. They contribute practically nothing to the reserves of the country, and when you remember that a loan at a Federal reserve bank is capable of a theoretical expansion in loans and discounts of a member bank of twelve times the amount borrowed and an actual expansion in loans and discounts in the member bank of four and one-half times the amount borrowed something of the limitations resulting from this large number of nonmember banks and the large percentage of the total resources of the country which they represent is immediately apparent, and I should say, therefore, that the first essential to agricultural credit, as well as industrial credit, is a means, first, of making the ineligible State banks eligible so far as their financial condition warrants; and, second, some means of inducing those State banks which are now eligible and which are not members of the Federal reserve system to become members, and the ineligible members also to become members.

The flexibility which a complete membership in the Federal reserve system would give is very great, and the amount which non member banks would contribute to the reserves of the country would greatly add to their own ability to accommodate their customers, particularly in times of credit strain and financial stringency. It must always be remembered that the test of any machine, and particularly the test of a credit machine, is its working not in normal times but in abnormal times, and that there must always be in the reserve banking system a reserve of banking power which can be utilized in periods of great credit demands.

Let me illustrate in another way, if I may, how this nonmembership in the Federal reserve system tends to limit the ability of the nonmember bank to serve its customers. If you have two member banks, the borrowing capacity of those two member banks, at the Federal reserve bank, is represented by the total resources of both, but if you have a member bank and a nonmember bank, the borrowing capacity of the Federal reserve bank of the two banks is represented by the resources of the member bank.

With this preliminary statement, I should like briefly to trace the period of expansion of bank credits.

The CHAIRMAN. May I interrupt you, before you proceed with that?
Mr. ANDERSON. Certainly.

The CHAIRMAN. You have made a very interesting statement, and in connection with the nonmembership of the State banks and trust companies, if I understood you correctly, the larger percentage of the non membership of these banks is in the localities which are known as the large production areas?

Mr. ANDERSON. That is true.

The CHAIRMAN. Where the greatest stress has come upon the financial institutions in this period of deflation.

I agree with you that that is a very important point that you have brought out, and I also agree with you in the point, which I think you suggested, that these banks could make themselves more useful to those communities if they belonged to the Federal reserve system. And the problem confronting the committee is, and has been for a long time, how to get these institutions into the Federal reserve system. Several of them are of small capital-of course, the law does not permit them to come in; others of them are staying for certain reasons, some of which are known to the committee and others which are not known. It is the feeling of the committee, however, in that connec. tion, that they would like to broaden the Federal reserve system in such a manner as to embody all of the financial institutions in the country, and thus become better able to finance through periods of stress those communities that are not now being properly served.

In that connection, have you any suggestion to make to the committee as to just what should be done?

Mr. ANDERSON. I have been working on a proposition, which I have not developed to a point where I am satisfied with it myself, and I would rather

not suggest anything definite along that line. This much I do want to say, however, that I do not believe you will get very much satisfaction or result out of a scheme which contemplates compelling the State banks to come into the Federal reserve system. I think the failure on the part of the system has been that it has not sufficiently educated the banking public into the advantages of membership in the Federal reserve system. I find there are a good many bankers in this country who know very little about the Federal reserve system.

Mr. MACGREGOR. A whole lot of them have gone out. How would you connect it up with the idea that they have gone out of the Federal reserve system?

Mr. ANDERSON. That is due to a number of causes, I think; one of them is that the Federal reserve bank pays no interest on deposits. Probably the greatest reason of withdrawals from the Federal reserve system as well as the larger reason why State banks have not come into the Federal reserve system is the situation which you gentlemen know very well, and that is the requirement with respect to paring checks.

Mr. MACGREGOR. Would the reduction of capital be an incentive, or would it be wise?

Mr. ANDERSON. I think it might very safely be done, and that it would bring into the system a considerable number of the smaller banks. I am told—I have no figures to substantiate it—that there is now, as we get a better perspective of what has happened in the last two years, a tendency on the part of eligible State banks to come into the system, and that the trend of the banks out of the system has stopped and is now in the other direction, and I am confident that as we do get a better perspective of what has happened and how the hardships that resulted from it might have been minimized if we had had a larger percentage of the banking power of the country in the Federal reserve system there will be an increase in that tendency.

Mr. LUCE. Mr. Anderson, would like, now or later on, to make clear to me why you think it would be an inducement to the State banks to come in and give them the same powers of rediscount that a member bank has?

Mr. ANDERSON. I do not get your question, Mr. Luce.

Mr. LUCE. I am anticipating somewhat, I imagine, the explanation of your bill. But the subject I inquired about was why you think it would be an inducement to State banks to come in. I understand the purport of this bill is to give the State banks the same opportunity of rediscount that a member bank has.

Mr. ANDERSON. That, of course, would only be extended to paper discounted under the bill-paper over six months and under three years.

Mr. LUCE. Certainly.

Mr. ANDERSON. It would not give the State banks the right to discount paper of less maturity than that.

Mr. LUCE. I appreciate that. But the difficulty in my mind is recognizing the extension of the rediscount privilege to the State banks without any discrimination between the State banks and member banks, with the desirability of inducing the State banks to come into the system ; in other words, should a scheme of this sort be put in operation, would you have added to the inducement of State banks to join the Federal reserve system?

Mr. ANDERSON. I do not think so.

Mr. APPLEBY. May I ask a question, Mr. Anderson? I have a bill in before the committee which they are going to have a hearing on, trying to make it more attractive for the State banks and trust companies to come in. My bill is on the line that after the 6 per cent dividend has been paid to member banks and after all expenses have been paid, taxes and everything that might be charged up against this, then a percentage of the net profit of the Federal reserve system be returned to the holdiers of the stock in the member banks. What is your opinion on that?

Mr. ANDERSON. I should say that the check-book nerve is about as sensitive as any, and certainly as sensitive among bankers as among any other class of people, and I should imagine that some inducement to come into the system would be offered by a larger participation in the earnings of the system.

Mr. NELSON. Should not a maximum limit be placed on it?

Mr. ANDERSON. I think so. The Federal reserve bank ought not to be an institution of profit. You have to keep that constantly in mind, and you have also to keep in mind the fact that if you make it an institution of profit the profit must inevitably be reflected in higher discount rates.

The CHAIRMAN. In that connection, then, it is your thought that the system should earn, of course, first its expenses?

Mr. ANDERSON. Yes.

The CHAIRMAN. And then the 6 per cent dividend to stockholders in the member banks, and any other earnings above that should be reflected to the borrowers by a lowering of the rediscount rate, so that the earnings of the Federal reserve system would never exceed the amount of their expenses and other charges? Inasmuch as they have now accumulated a surplus of $200,000,000, that would look like a feasible proposition.

Mr. ANDERSON. It might be reflected either way. You can not “have your cake and eat it.” If you have it reflected in discount rates, which you may not be able to do because your discount rate is not based on profit, but on the market rate for money and the conditions surrounding it,

The CHAIRMAN (interposing). But the Federal reserve system has power to fix the rediscount rates it shall charge its borrowers?

Mr. ANDERSON. That is very true.

The CHAIRMAN. That is not fixed upon the basis of the prevailing rates of money.

Mr. ANDERSON. It is not fixed on the basis of making a profit, however. There may be, and we are approaching the period now when the Federal reserve banks scarcely make running expenses, but I do think that quite possibly a larger participation of the banks in the earnings of the Federal reserve system might be an inducement to banks which are not now members to become members of the system. Of course, if the Federal reserve banks did not make any earnings above the 6 per cent, member banks could not participate; if they did, they would.

If I may proceed with the development of the situation during the period of expansion

Mr. STEAGALL. Just one minute, before you leave that. Do you not think it was fortunate during the period of depression that has recently been on that the Federal reserve banks did have a surplus?

Mr. ANDERSON. Oh, unquestionably.

Mr. STEAGALL. Is it not your idea that they should return at a lower rate all their earnings above expenses?

Mr. ANDERSON. Not at all; I would not have it retroactive at all.

Mr. STEVENSON. I wanted to ask you there in reference to the question asked by Mr. Luce, if it would not be an inducement to increase the amount of participation of the member banks in the profits. Do you think it is desirable to make this an institution which is merely an institution to make money for the member banks? Do you not think that is a financial hierarchy that we want to get away from?

Mr. ANDERSON. I said a moment ago that in making any amendment to the Federal reserve act you have always to keep in mind that the Federal reserve system is not an institution for profit, and that the moment you make it an institution for profit you will destroy the principle upon which it is based, and if you have additional participation on the part of the member banks in the earnings of the Federal reserve system it ought to be, I think, a limited participation.

The CHAIRMAN. The danger point in that is that it will bring the Federal reserve bank into competition with the member banks, which might create a serious situation in regard to the stockholders of the member banks. I do not think their required earnings-and I do not think you think that-should be at a point where it would force the Federal reserve bank into competition with member banks.

Mr. ANDERSON. Not at all; I would not inject the idea of profit into it at all.

The CHAIRMAN. That is the danger that confronts the financial situation today, owing to the large reserve in the Federal reserve system and fixed expenses and dividend requirements that may be forced into the open market to engage in the purchase of paper.

Mr. ANDERSON. That is very true.

The CHAIRMAV. That is because of certain privileges which were granted during the war stress.

Mr. ANDERSON. That is uue.

If I may again take up the course of bank credits during the period of ex. pansion, I should like to call the attention of the committee to some figures which appear on page 33 of Part II of the report of the Joint ('ommittee on Agricultural Inquiry which indicate the percentage of increase of loans and dis

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