Mr. ANDERSON. There is no doubt of it.

Mr. STEAGALL. It is like this: If I owe you a thousand dollars due 30 days from now, that has its effect on my affairs, and it has a small effect on the business affairs of the community, without any reference to whether you say anything to me about paying the thousand dollars or not. There is an automatic pressure due to the existence of the debt, and its recognition. It would not necessarily depend entirely on the policy to be adopted by creditors to bring about a disturbance, where the actual conditions were such that a debt could not be paid.

Mr. ANDERSON. Mr. Chairman, I did not intend to indulge in a discussion of the policy of the Federal Reserve Board or the Federal reserve banks during the period of deflation or, for that matter, during the period of expansion. I was simply trying to give the committee a picture of what occurred, based upon such investigations as we were able to make.

Now, the question is, assuming the necessity of a longer period loan than six months in order to care for the productive credit required by the farmer, why is the farmer unable to get a longer period of credit than six months? I do not think there is any mystery about it. It seems to me perfectly simple. A very large percentage of the deposits of the country the committee knows perfectly well, are demand deposits.

The

Practically all of the deposits are subject to withdrawal on short notice. banker is constantly confronted with the fact that a withdrawal of deposits or some other unforeseen draft upon his resources may necessitate his obtaining money on part of the paper which he holds, which may not be due. In the case of a 90-day commercial paper or a 6-month agricultural paper, the banker meets his difficulty by discounting the paper through the Federal reserve bank. There never is a time when the banker can not take the 6-month farm note or the 90-day commercial note to the Federal reserve bank and get the money on it if he needs it. If he makes a loan for farm purposes for a longer period than six months. there is no place to-day where he can get the money on that loan in case a reduction of deposits or other unforeseen contingency require it. That is practically the only reason why the bankers of this country do not make loans for longer periods than six months. It would be clearly unsound for them to tie up their assets in loans which can not be liquidated in some way before maturity, and that, it seems to me, leads directly and necessarily to the necessity for the creation of some agency through which these loans for a longer period than six months can be discounted. There have been a number of proposals made for the creation of such a bank of discount.

Mr. GOLDSBOROUGH. If a farmer, for instance, has a six months' note and its maturity is such that a commercial bank did not think it well to extend another six months' credit, would he not have time to get three years' credit from the farm-loan bank?

Mr. ANDERSON. I do not think the farm-loan banks are making such loans. Mr. GOLDSBOROUGH. They would, under this bill.

Mr. ANDERSON. Oh, yes.

Mr. GOLDSBOROUGH. That is what I mean.

Mr. ANDERSON. As I say, there are several proposals for creating such an institution. They include the proposal which the bill suggested by the commission carries, for the creation of a farm-credits department in the Federal land banks.

The CHAIRMAN. Of course, as a matter of actual banking practice, these country banks who make loans to the farmers, while they make them for a period of 60 days or 6 months time, do carry them, by renewals from time to time, from over periods of years. The call comes under stress conditions, and. of course, that is what we are trying to provide against here.

Mr. STRONG. Your opinion is that when the farmer comes here

The CHAIRMAN (interposing). If you have an institution such as you suggest here, those banks would be protected by being able to finance themselves through another institution?

Mr. ANDERSON. Exactly. We are setting up here, as I see it, another discount agency, another reservoir which the farmer can go to, through his bank, with the long-time paper.

Mr. KING. I hope the gentleman will go ahead as he started to discuss this very plan. They are all going to come up, but your statement will be for the benefit of the record.

Mr. LAWRENCE. Is this the plan the Farm Loan Board prepared?

Mr. ANDERSON. No; not so far as I know. This plan was the product of the joint commission?

Mr. STRONG. I would like to say that I am perfectly and in exact harmony with all you have said there. When you have detailed your own bill I would like to discuss with you some features that have puzzled and worried me in regard to its feasibility.

Mr. KING. I understand he is going into all of these propositions in a brief way.

Mr. ANDERSON. I am not going to discuss the other proposals at all, except to state in a general way what I understand they involve. As I understand it, in addition to the proposal here for utilizing the Federal land banks there is a proposal which involves the reorganization of the War Finance Corporation into a central bank of discount. I do not care to discuss the merits of that plan or its demerits.

In addition, there is a proposal, I think, for the creation of an entirely new bank of discount.

I want to say that the reasons which prompted the commission in suggesting the utilization of the Federal land banks were substantially these:

In the first place, we proceeded upon the theory, generally, that so far as it was possible to utilize the existing banking machinery that it was desirable to do it. It would take 30 years to create as many points of contact with the farmer as you now have in the State and National banking systems of this country. We recognized that there was some need of getting this thing into operation quickly, and we felt that by utilizing the instrumentalities already in existence it could be put into operation quickly.

In addition the Federal land banks are located with reference to the agricultural credit requirements of the country and the boundaries of the districts are very carefully worked out with reference to those requirements. While we recognize that there are certain difficulties connected with the utilization of the Federal land banks, in order to get the system into operation quickly and in view of the fact that these banks are already dealing with the farmer, and in view of the fact that they are already issuing debentures and have contacts with the bond market, we felt that the Federal land banks were desirable agencies to use for the discount of middle-term farm credits.

Any bank of discount which might be created must itself have both capital and credit. I think it would be well if the capital and credit both were furnished from private sources. But, as a practical matter, the probabilities are that the capital of any such bank of discount would, in the first instance, have to be supplied by the Government.

That leaves the question of the credit which may be required in order to make these discounts. In my judgment, those credits can be best secured by the issuance of short-time debentures, secured by notes discounted or by cash in the hands of the discount agency.

The CHAIRMAN. Sold to whom?

Mr. ANDERSON. Sold to the general investment public.

The CHAIRMAN. Would they be legal investments for national banks, savings banks, and trust companies?

Mr. ANDERSON. I think they might very properly be.

The CHAIRMAN. And be purchased by member banks in the Federal reserve system and national banks?

Mr. ANDERSON. To the same extent that they now buy farm-loan bonds.
The CHAIRMAN, But not further?

Mr. ANDERSON. But not further. I should like to say in that connection that I submitted this general plan, in principle, to the representatives of seven or eight of the large bond houses in the United States some months ago. While they rather deplored the idea of doing this through the Federal land banks, because of their feeling it might have a bad effect upon the salability of the mortgage bonds, they all agreed that bonds of this kind, backed by farm paper, with bank indorsements, would find a very ready sale.

The CHAIRMAN. Is that the same class of banks that are underwriting farmloan bonds at the present time?

Mr. ANDERSON. Yes.

The CHAIRMAN. Did they express themselves as to the probable rate of interest they would be sold at as compared with that for farm-loan securities; that is to say, would they be sold at a higher or lower rate or about an average rate at which farm-loan securities were sold?

Mr. ANDERSON. I think it was the general impression of the gentlemen who were present at this conference that the rate would be about the same, but, of course, the factors that are involved in the interest rate upon short-time debentures are somewhat different than those upon long-time debentures. The rate would depend in part upon the condition of the money market at the time the issue was made, the maturity of the bonds, and the risk of the investment. The CHAIRMAN. The general impression was it would have a favorable market?

Mr. ANDERSON. Yes.

The CHAIRMAN. As compared with other loans which were floated in the investment market?

Mr. ANDERSON. I think so.

Mr. MACGREGOR. How long would these bonds extend?

Mr. ANDERSON. The maturity of the bond, I take it, would depend somewhat upon the class of paper discounted and its maturity. Under the bill as it

stands a bond might be issued for any period less than three years.

Mr. MACGREGOR. It would be short-time securities?
Mr. ANDERSON. They would be short-time securities and not over three years
Mr. MACGREGOR. And necessarily would have to bear a higher rate of interest?
Mr. ANDERSON. Not necessarily.

Mr. MACGREGOR. They would not have a market unless they had long maturity or high rate of interest.

Mr. ANDERSON. I do not think that necessarily follows.
Mr. MACGREGOR. It seems to be so with others.

Mr. ANDERSON. The rate, I would think, would depend on the market at the time. If the market is high and a man can get a long-time bond at a high rate of interest he will certainly take a long-time bond at a high rate of interest in lieu of a short-time bond at a high rate of interest, would he not?

Mr. MACGREGOR. It depends upon the quantity of bonds marketed.
Mr. ANDERSON. Yes; in part.

Mr. MACGREGOR. There is no definite obligation back of these bonds at all?
Mr. ANDERSON. Yes; there is.

Mr. LUCE. Right on that, Mr. Anderson, may I say that yesterday I received the latest publication of the American Economic Association, reporting its annual meeting and referring to its investments and describing the bonds which it holds of the farm loan system as "Government obligations." When a leading economic association in the country announces that it holds "Government obligations," where do we stand on these matters?

Mr. ANDERSON. You mean where does the Economic Association stand.

Mr. LUCE. The public at large. And if you read the announcements of the offers of these bonds, and the advertisements, you will find the public can not help gathering the belief that these bonds are obligations, and not, as the court says, "instrumentalities."

Mr. KING. These ads all use the "instrumentalities." They are very careful in that regard.

Mr. LUCE. Yes; but here is the case where presumably experts

Mr. KING (interposing). Is the American Economic Association an expert association?

Mr. LUCE. It is supposed to know more about these things than any others. I simply cited that to show the confusion in the public mind in regard to the matter.

Mr. ANDERSON. I think there is a good deal more of misconception probably about banking and finance than any other subject in the world.

The CHAIRMAN. There is probably no question but what these investment bankers who are selling these farm-loan securities are attempting to create the impression in the minds of the investor that they are Government securities. The word "instrumentalities" does create that impression in the mind of the average person.

Mr. ANDERSON. But they have no right to create such an impression. Mr. STEVENSON. A member of this committee, and quite a level-headed one. had quite a controversy with me at this table not long since on whether the Government was responsible for the farm-loan bonds. He thought it was. and he had bought some of them. The average man would think of these notes as Government securities.

Mr. GOLDSBOROUGH. These debentures would practically be secured on personal property, would they not?

Mr. ANDERSON. Yes.

Mr. GOLDSBOROUGH. There is not even a chattel mortgage?
Mr. ANDERSON, No; not necessarily.

Mr. GOLDSBOROUGH. Three years' time with security with chattel property? Mr. ANDERSON. Except the general security of a borrower, which a bank would look to in making the original loan, plus the bank's indorsement.

Mr. STEVENSON. Three years' chattel mortgage on live stock, for instance, is a pretty hazardous proposition, is it not?

Mr. ANDERSON. I do not think so.

Mr. STRONG. Not if the bank which indorses is there present.

Mr. ANDERSON. That kind of security has a constantly increasing value. Mr. STRONG. When the local bank which is indorser is there present to watch and take care of the security?

Mr. ANDERSON. Exactly.

The CHAIRMAN. Is it fair to assume that these bonds come under the decision of the Supreme Court in which the farm-loan bonds were declared to have the instrumentalities of the United States Government, and were therefore tax exempt-would these Government debentures be in that same class, in your judgment?

Mr. ANDERSON. I should say so. The way this bill is drawn it is made a part of the farm loan act and, in my judgment, the provisions of the farm loan act which make the farm-mortgage bonds nontaxable would be applicable to debentures issued under this bill.

What I was about to say was that the requirements for farm credits are not uniform throughout the year; they tend to reach a peak along in September or October. In order to take care of this peak requirement there is a provision carried in this bill which permits the rediscount of these notes where they have reached a maturity of less than six months, by a Federal land bank with a Federal reserve bank.

I should like to add in conclusion-and then I shall answer any questions I can answer--that the bill in principle has been indorsed by the Treasury Department, by the Federal Reserve Board, by the advisory council of the Federal Reserve Board, by the board of governors of the Federal reserve banks, by, I think, the American Bankers' Association, although I am not sure of the latter; by the American Farm Bureau Federation. The only people I know of who are opposed to it are the Wall Street Journal and the Financial Journal and Chronicle.

Mr. KING. They also attacked the Federal reserve act, too, did they not, when it was proposed?

Mr. ANDERSON. I do not remember.

The CHAIRMAN. I am interested in that provision which permits of rediscount within the Federal reserve system of these notes when they come within the eligible class for six months; that is going on the theory that any paper that comes within the six months' security class is a proper paper for the Federal reserve system; is that correct?

Mr. ANDERSON. So far as farm paper is concerned.

The CHAIRMAN. Would you think paper based on, say, railroad bonds, that are within the six months' maturity, would be proper paper for rediscount with the Federal reserve system?

Mr. ANDERSON. I do not think that the two classes of paper stand upon quite the same footing. Of course, there is a limit to the extent to which you ought to make paper of long maturity rediscountable with the Federal reserve banks, but this paper will have short maturity when rediscounted, and a small proportion of it, in my judgment, would ever find way in the Federal reserve bank. If it were owned by a member bank, it would be discountable with the Federal reserve bank, anyway.

The CHAIRMAN. As I understand the practice, some of the short-time notes of railroads and industrial corporations, when they come within the six months' limit, are ruled as eligible for rediscount in the Federal reserve system. We all realize, of course, that there is a constant tendency toward the broadening of eligible paper for rediscount. If we permit this class of paper to be rediscounted by the Federal reserve system, are we not opening the gate to a growing demand which might tend to clog up the only liquid financial system we have?

Mr. ANDERSON. I think you must anticipate that the Federal reserve system must keep pace not only with the volume but also with the character of the commercial business done in this country. You have recently, I think, had an extension of the eligible period of certain notes for export trade. The net

result of that was a great increase in the volume of that kind of paper and also a great increase in the facility with which the business was done. I do not think you can assume, with all its merits, that the Federal reserve system is perfect and will remain perfect for all time and that no change shall ever be made in it to conform to the changing methods under which the business of this country, both domestic and export, is done.

The CHAIRMAN. In that connection I have in mind a bill which passed in the Senate and is pending before this committee which makes eligible the paper from these acceptance banks, incorporated under the State laws and under the Edge law, and broadens the right of the Federal reserve system to discount that paper and to sell it among investors. There is a constant demand for the broadening of rediscount facilities. Do you not think there might be serious danger in permitting

Mr. ANDERSON (interposing). I think the committee ought to keep in mind the fact that the Federal reserve system is essentially a commercial system, that it is necessary to keep its assets liquid, and that the proportion of longtime paper which is permitted to discount ought to be kept to within reasonable limits.

The CHAIRMAN. If we permit the rediscount of long-time paper for the producer and then provide for the rediscount of a long-time paper for the exporter or the consumer or the middleman, we are providing for a combination of credits which will extend over a period of time that might be particularly troublesome to our commercial financial system, and we are injecting into the commercial system credits that do not belong properly in the commercial channels but should be more in the investment market.

Mr. ANDERSON. We are not providing for the discount of any paper by a Federal reserve bank in this bill which would not be discountable with the Federal reserve bank if it were held by a member bank now.

Mr. KING. In that connection, would the gentleman explain, before he leaves, the exception in 204:

"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."

Mr. ANDERSON. The object of that provision was to meet the objection which I think was suggested by Mr. Luce; that this bill, if it permitted discounts by eligible nonmember State banks, might retard the tendency of those banks to take advantage of the Federal reserve system by becoming members.

The purpose of that exception is to prevent a bank which can get the privileges of the Federal reserve system, by becoming a member, utilizing this system without having taken advantage of membership.

Mr. KING. May I ask you whether or not it is the purpose of that paragraph to bring into the system all the banks of the country? Mr. ANDERSON. That is one purpose of it.

The CHAIRMAN. Of course, the big question involved in all of this is whether this kind of credit should go into the commercial system or whether it should go into investment channels?

Mr. ANDERSON. It clearly goes into the investment channel under this bill. Mr. NELSON. Will you explain the scope of the bill; that is, the extent of capital, etc.?

Mr. ANDERSON. The bill provides for an addition to the capital of each Federal land bank of $1,000,000 which would be $12,000,000 in all. I should say that the maximum expansion through the issues of debentures would certainly be 20 to 1 and probably 10 to 1. In fixing the amount of new capital in the Federal land bank we were moved more by the amount which we thought the Treasury Department would stand for without kicking than we were by the amount which we thought the situation really required; and, personally, I think it would be wiser and I think that the system would stand on sounder footing if larger capital were authorized.

In that connection, I may say that Mr. Hoover has made the same suggestion in this connection indorsing the bill in general principles, his opinion