Federal intermediate credit banks; to provide for supervision of production eredit associations; and for other purposes.”

The proposed legislation is a step in the direction of fulfilling the President's recommendation in the agricultural message of January 9, 1956, that the production credit corporations and the Federal intermediate credit banks be merged. The draft bill, however, is not in its present form entirely in accord with the program of the President in that it does not fully protect the Government's financial interest in the merged institutions or provide for effective budgetary control during the transition to private ownership. Until the banks have been converted into wholly privately owned and privately financed institutions the Government will have a substantial stake in their operations. Under the provisions of the bill the Government initially will increase its capital investment in the banks from $60 million to approximately $82 million. The money received for retirement of the Government's stock is to be paid into a revolving fund which shall remain available for repurchase of stock by the Government.

The needed substantive modifications are stated below. In addition, a number of suggested technical modifications are set forth in an enclosure to this letter. 1. Section 206 (c) of the bill provides that in the case of liquidation or dissolution of any Federal intermediate credit bank, any surplus shall be paid to stockholders on a pro rata basis. While we have no objection to donating the present surplus, and reserves of the production credit corporations and the Federal intermediate credit banks to the merged institutions as a permanent Federal subsidy, there would be no justification for distributing this surplus to private stockholders upon liquidation. When a bank is dissolved and the surplus ceases to be required for the purpose for which it was intended, it should be returned tothe Treasury, as is now provided by law in the case of the Federal intermediate credit banks.

2. The Federal intermediate credit banks should continue, after the merger, to be subject to the budget provisions of the Government Corporation Control Act until such time as the production credit associations shall retire all of the Government-owned stock in these banks. So long as the Government has a direct investment in the banks and assumes a large contingent liability in connection with their operations, it is essential that the banks' financial plans be subject to annual review by the President and the Congress.

3. The aggregate amount of the two revolving funds for the capitalization of the Federal intermediate credit banks and the production credit associations should be held at the present level of $130 million. An increase in this amount does not appear to be warranted by the estimated future capital requirements of the banks and the production credit associations. There would be no objection, however, to reallocating the amounts in the two funds and providing for an increase in the fund to capitalize the Federal intermediate credit banks, if accompanied by a corresponding decrease in the production credit fund.

If amended as stated above, there would be no objection to the submission of the draft bill to the Congress and its enactment would be in accord with the program of the President.

You have indicated that referral of the recommended amendments to the Farm Credit Board, which has apparently made certain commitments in developing the present draft and holds strong views with respect to its provisions, would result in considerable delay which might preclude consideration of the bill during the present session of the Congress. Under the circumstances, and in view of your strong representations that the Congress is urgently requesting submission of this legislative proposal, we would agree to your forwarding a copy of the bill proposed by the Board, together with an appropriately amended bill, to the Congress. Your letter of transmittal should set forth the modifications which would be required to bring the Board's proposal into accord with the program of the President.

It is requested that a copy of this letter accompany submission of the draft bill to the Congress.

Sincerely yours,

ROWLAND HUGHES, Director.

SUGGESTED TECHNICAL MODIFICATIONS

1. The Treasury Department made the following suggestions:

(1) "If the production credit corporations are dissolved, there would be no need for the amendment to section 2 of the Farm Credit Act contained in section 105 of the bill which would increase from $40 to $100 million the amount

of the revolving fund available for the purchase of stock in the intermediate credit banks. In any event, it would not appear necessary to restore the availability for future stock subscriptions of the $40 million that has been returned to the Treasury from the revolving fund for the purchase of stock in the production credit associations."

(2) "It is a misnomer to refer to the payment to the Government that would be provided by the amendment to section 206 of the Federal Farm Loan Act contained in section 103 of the bill as 'a franchise tax' since the payment would bear no relationship to taxes imposed by the Internal Revenue Code. As an alternative, the payment could be referred to as a dividend payment."

(3) "Section 206 (b) of the Federal Farm Loan Act as it would be amended by section 103 of the bill would exempt from Federal income tax patronage refunds by intermediate credit banks while the Government holds stock in the banks. The proposed exemption would be in conflict with the administration's general recommendations on the tax treatment of patronage dividends and the Department recommends its deletion."

2. The following paragraph is from the comments of the Comptroller General of the United States:

"Section 105 of the proposed bill provides for the retention of a revolving fund of $60 million from which the Governor may purchase stock of production credit associations, and for another $100 million which may be used by the Governor for subscriptions to the capital stock of the Federal intermediate credit banks. Because some of the production credit associations will be partially financed from the revolving fund while at the same time owning stock of the banks, the Government would in such cases be placed in the position of lending to such associations the funds used to retire its own stock. Further, because the proposed bill (sections 104 and 105) would authorize loans between 'the Federal intermediate credit banks, the banks for cooperatives, and the now privately owned Federal land banks, the funds of Federal intermediate credit banks and the banks for cooperatives, including their revolving funds, could in effect be placed at the disposal of the privately owned Federal land banks." 3. The Board of Governors of the Federal Reserve System made the following comments on section 201 (c) of the proposed bill:

"That section would exempt debentures issued by the banks for cooperatives from the limitations and restrictions prescribed by section 5136 of the Revised Statutes with respect to the powers of national banks and member State banks to invest, underwrite, and deal in securities. The bank ng problem involved in this proposal is not momentous, and the Board is sympathetic toward the desire of the Farm Credit Administration to enable the banks for cooperatives to finance their operations as economically as possible. Nevertheless, from the bank supervisory viewpoint there is no sufficient justification, in the opinion of Board, for conferring exempt status on such debentures; nor does that status appear to be necessary in order to enable the banks for cooperatives to distribute their debentures successfully. For these reasons, the Board would not favor the grant of exemption embodied in section 201 (c) of the draft bill.

"It has been suggested that exemption is appropriate in this case because similar debentures issued by the Federal intermediate credit banks are exempt from the provisions of section 5136. Assuming that the two classes of debentures are comparable, the Board would be inclined to feel that exempt status is inappropriate with respect to both, especially since the draft bill is designed to effectuate further the objective of the Farm Credit Act of 1953 of making the ownership and direction of the intermediate credit banks increasingly nongovernmental."

4. The draft bill would have the Governor of the Farm Credit Administration hold stock in the production credit associations in behalf of the United States Government. This could be construed as converting such production credit associations into mixed ownership corporations, which clearly is not intended. Senator HOLLAND. There are several communications which will probably be placed in the record later, but since the persons sending them may appear later and probably other communications will also be received, I will wait until the end of the hearing and insert all needed communications at that time.

I call as the first witness Mr. Marvin J. Briggs, Chairman of the Federal Farm Credit Board.

STATEMENT OF MARVIN J. BRIGGS, CHAIRMAN, FEDERAL FARM CREDIT BOARD, INDIANAPOLIS, IND.

Mr. BRIGGS. Mr. Chairman and gentlemen of the committee, my name is Marvin J. Briggs from Indianapolis, Ind., Chairman of the Federal Farm Credit Board.

Before I proceed may I introduce 2 or 3 other members of the Board who are present: Mr. Matthews from Texas, who is Vice Chairman of the Board; Mr. Edwards from Florida; Mr. Anderson from West Virginia.

These are 3 of the other 12 members associated with me on the Board. Senator HOLLAND. Are we to assume that their opinion on this pending matter is the same as yours?

Mr. BRIGGS. Yes, sir.

I think, Mr. Chairman, I can save time by reading this. It will be very brief.

It is a pleasure to appear before this committee and discuss the activities of the Federal Farm Credit Board in connection with the development of S. 3564, a bill which would merge the production credit corporations in the Federal intermediate credit banks and provide the legislative means for farmer ownership of these banks.

S. 3564 is the same as S. 3549 with minor perfecting amendments, while S. 3550 contains important changes requested by the Bureau of the Budget. All farm-credit institutions supervised by the Farm Credit Administration, other than these corporations and credit banks, are now either wholly farmer-owned or else existing law provides a program to accomplish that objective. I shall not attempt to explain the provisions of the bill itself. This will be done by Governor Tootell, who will testify later.

My testimony will be limited to a discussion of the events which led to the development of the legislative recommendations contained in the bill.

The Federal Farm Credit Board was established pursuant to the Farm Credit Act of 1953. The Board was given specific statutory responsibility for recommending legislation to the Congress which would carry out the declared policy of that act with respect to the management, control, and ownership of the Federal farm credit system. Section 2 of that act reads as follows:

It is declared to be the policy of the Congress to encourage and facilitate increased borrower participation in the management, control, and ultimate ownership of the permanent system of agricultural credit made available through institutions operating under the supervision of the Farm Credit Administration, and the provisions of this act shall be construed in keeping with this policy.

The Federal Farm Credit Board hereinafter provided for shall within 1 year after appointment make recommendations to the Congress of means, supplemental to those provided by this act, of carrying into effect such declared policy, including, but not limited to, means of increasing borrower participation in ownership of the Federal Farm Credit System to the end that the investment of the United States in the Federal intermediate credit banks, production credit corporations, Central Bank for Cooperatives, and regional banks for cooperatives may be retired.

Since it took office in December 1953, the Federal Board has had 10 regular and 8 special meetings. The major portion of the Board's work to date has been concerned with the development of legislative

recommendations to carry out its responsibility under the provisions of the 1953 act.

As required by section 2 of that act, quoted above, the Board on December 8, 1954, transmitted to the Congress a special report setting forth its recommendations for legislation to accomplish the objectives of that act.

This report was published as Senate Document No. 7 of the 84th Congress. For the reasons set out in the report, the Board made no recommendations for the retirement of the Government capital in the Federal intermediate credit banks. Instead, it recommended that the Congress delay consideration of such legislation until the Board had made a further study of the problem.

A draft bill incorporating most of the recommendations contained in the special report of December 8, 1954, was submitted to the Congress in February 1955, and was introduced in the House as H. R. 5168 and in the Senate as S. 1286.

During the hearings on the bill, the representatives of a number of production credit associations appeared in opposition to certain provisions relating to the production credit corporations. These witnesses assigned different reasons for their opposition but the majority of them agreed that the matter should have further study.

Before enacting H. R. 5168 as the Farm Credit Act of 1955, the Congress deleted from the bill provisions which would have required the retirement of the Government capital in the production credit corporations and the gradual assumption by the production credit associations of the cost of their supervision.

The Farm Credit Administration was asked by the committee to give this entire problem further study and to make new recommendations on the subject at the next session of the Congress.

Senator HOLLAND. If I may interrupt at that point, the other provisions of last year's act, that is those relating to the Bank for Cooperatives and to other branches of the Farm Credit Administration were enacted, were they not?

Mr. BRIGGS. The Production Credit Corporation, section 201, was not passed, and we offered no legislation on the retirement of capital of the Federal Intermediate Credit Bank.

Senator HOLLAND. On that of the banks for cooperatives?

Mr. BRIGGS. The banks for cooperatives and the Federal Land Bank legislation was passed later.

Senator HOLLAND. Then the item of business remaining upon which your Board was to make recommendations to this session of Congress has to do with the Production Credit Corporations?

Mr. BRIGGS. Production Credit Corporations.

Senator HOLLAND. The Production Credit Corporations, and the Intermediate Credit Bank, is that correct?

Mr. BRIGGS. That is correct.

Senator HOLLAND. And the pending legislation relates to that subject or those subjects?

Mr. BRIGGS. That is right.

Senator HOLLAND. All right, sir. Proceed.

Mr. BRIGGS. It provides for a merger.

In the hearings on the farm credit bill last year it was indicated by some production credit associations that the provisions of that bill