AGRICULTURAL RELIEF

FRIDAY, APRIL 9, 1926

UNITED STATES SENATE,

COMMITTEE ON AGRICULTURE AND FORESTRY,

Washington, D. C. The committee met, pursuant to adjournment, in Room 326, Senate Office Building, Senator George W. Norris, presiding.

Present: Senators Norris (chairman), Gooding, Norbeck, Sackett, Smith, Ransdell, Heflin, and Mayfield.

The CHAIRMAN. The committee is ready to hear you, Senator Smith.

STATEMENT OF HON. ELLISON D. SMITH, UNITED STATES SENATOR FROM THE STATE OF SOUTH CAROLINA

Senator SMITH. This is a bill which I introduced in 1924. The provisions of the bill are, just in a word, these:

The Federal reserve act was a substitute for the old banking and currency law. It provided for commodity basis of the issuance of currency, known as our Federal Reserve notes, and as I understood the purpose of the law it was to make flexible the volume of currency necessary to meet the expanding and contracting wealth of the country. A close study of the bill, I think, will justify that interpretation of the object of the law. Upon the proper hypothecation of wealth, as contradistinguished from currency, it becomes the basis of currency credit, while in the process of marketing, and also in the process of preparing it for marketing.

We provided in the bill that the stockholders in our 12 regional banks I use the word "regional" so as to designate these banks-the stockholders, those that put up the capital under the law for the 12 regional banks were restricted by that law to 6 per cent on the capital. The earnings of those 12 banks came from their discount rate. That discount rate is left at the option of what is known as the Federal Reserve Board. It is a power or a weapon, or whatever terminology you choose to describe it by. It is the force with which they control the credits of the country. By raising the discount they discourage speculation on too great activities, as they claimed, bordering on the danger line. To promote development they lowered the rate. The difference between the discount rate and the actual cost of the service, which is represented in the 6 per cent to the stockholders of those banks is a tremendous volume of profit, which, under the law, after fulfilling certain requiremenrs of the law as to the reserve fund, they cover back into the treasury.

To illustrate: Wheat is put in an elevator. The local member bank accepts a note on the wheat, endroses that note and deposits it with the regional bank for an advance of currency on that wheat in the process of marketing. That bank pays the discount. There is a difference between the discount and the actual cost of service on the part of the regional bank which is put into a fund and returned to the treasury as "miscellaneous receipts."

You remember that one year the profit made by the regional banks was over 100 per cent of the capital invested in those regional banks. That meant that 94 per cent was either paid into surplus, as required by law, for the use of the bank, or put into the treasury.

Now, I provide in this bill that where a Federal cooperative organition, under provisions provided here, is organized, that it shall have practically the status of a national bank, so that its relation to the regional bank will be upon the same footing as is now enjoyed by the member bank, and they shall pay the rate of discount on the commodities as collateral, but the difference between the rate of discount that they pay and the actual cost of the service on the part of the regional bank, in place of being turned into the Treasury, shall be put into a reserve fund for the benefit of that organization. It is money made by the regional bank on the product produced by those farmers, and in place of putting it into "miscellaneous receipts" of the Government, it is simply put into a reserve fund for the benefit of that organization.

Senator RANSDELL. What do you do with it then?

Senator SMITH. It is then left for the use of that cooperative organization, as specified in the bill. It also is pledged for the guaranty of any incidental loss that might accrue by virtue of this loan.

I then provide that there shall be, upon the sale of the commodities held by this parent organization, 1 per cent of the gross sales which also shall go into this fund, and that also shall be added to the reserve that is accumulated between the difference of the discount rate and the actual cost of the service, so that the wheat man or the corn man or the cotton man or the cattle man is producing himself, his own reserve, and getting his rate of interest lower than the man outside, by virtue of the corporation that I specify here in this bill.

I have had experts working in drafting the proper form of the organization.

Senator Walsh, of Montana, was kind enough to collaborate, and so was Senator Caraway, in the drafting of the bill.

The rate of interest paid-we will use that term-the rate of interest paid by this Federal cooperative organization shall be the rate of interest to all the members. Every State will have or can have as many member organizations as can comply with the provisions of this bill. They can organize and work through the parent organization. All the cotton hypothecated or all the wheat hypothecated is under the supervision of this parent organization whose officers are chosen by the members of the local organizations, and their bond and their business is prescribed here, and the parent organization is subject to inspection by the Federal bank inspectors, just like a national bank. They inspect each one of these to see just what is the condition of that organization, so that you get your rate of interest less than you get it now through the intermediate credit, less than you get it through your farm loan, and it is secured by actual,

existing wealth. The per cent of the value of that commodity is determined by your organization, and, at any time whenever that surplus shall have accumulated sufficiently large, they can use it for any purpose that is within the purview of the law. They can retire, if they see fit, any surplus that they may have, or if they make a contract they can use this surplus fund for the purpose of buying outside stuff only, however, where other members have not made enough to fill the given amount that they have sold. But the crux of the whole business is putting agriculture under the Federal reserve act, in exactly the same relation to our regional banks that commerce has through our national banks, and put them in a concentrated form through the Federal organization, by which they can secure the Government directly on the commodity held by them through all their members, and the rate of interest shall be the discount, not the rediscount, not indirectly through intermediate credit, but directly, dealing with them just like a banker deals, inspected by the Government, and whatever profit there is to the regional bank it must be given to the Federal Treasury and shall be put in a reserve fund for them, and then you have got our farmers inside of the organization, members of this, and subject to the restrictions herein, and you have got them in a position where those inside are benefited as against those outside.

Senator RANSDELL. Could anybody get the benefit unless he was a member?

Senator SMITH. He could not.

Senator RANSDELL. He would have to belong to a cooperative? Senator SMITH. He would have to belong in order to get the advantage of that rate of interest. Suppose, for instance, our rate of discount was 5 per cent, and the cost of rendering the service on the part of the regional bank was 2 per cent, your parent organization would pay the 5 per cent, but the members collectively would own that 3 per cent difference, which is practically $3 on every $100.

Senator RANSDELL. You mean two, don't you? You said “five and two."

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Senator SMITH. If it cost two and he paid five, he would still have an equity in three.

Senator GOODING. What would be the five?

Senator SMITH. The discount. My proposition was that we take a Federal organization and give it the status of a bank, the parent organization, under the same rule and regulations that governs one, and put that parent cooperative organization right in direct connection with your regional bank. I use the term "regional bank," mean one of the 12.

Senator GOODING. You are talking about marketing?

Senator SMITH. I am talking about doing all the business that the cooperative is allowed under this to do. It is a marketing bill, and I see no reason in the world why the Government should treat agriculture as an adopted child, and commerce as the natural child. This bill may not be perfect in that respect. Of course, none of them are perfect, but I believe the principle is sound.

Senator GOODING. What bill are you talking about?

Senator SMITH. I am talking about the one that I introduced in 1924 and the short session of 1924-25 made it impossible for us to study the bill. I have not reintroduced it, but I wanted to being 91358-26-pt. 2- --8

the principle before this committee in order that they might understand that what we have got to solve is not an emergency, but we have got to put agriculture permanently and forever on a business basis with our financial processes.

Senator RANSDELL. Would this use of money which you permit the cooperatives to enjoy be used by them for any other purpose than marketing?

Senator SMITH. No.

Senator RANSDELL. It could only be used to market the crops? Senator SMITH. It could only be used to market the crops.

Senator RANSDELL. Would there be one organization for wheat and another for corn and corn products?

Senator SMITH. Yes. Every one separate and distinct.

Senator GOODING. I am sure that is sound.

Senator RANSDELL. Each would stand on its own bottom?

Senator SMITH. Each would stand on its own bottom under the provisions of the bill, and would have nothing to do, one with the other, but provide that where the parent organization for wheat, for instance, organizes under the provisions of this bill, it then becomes the source through which every member organization deals. It discounts its paper directly with the regional bank at the rate of discount given to commercial paper from a national bank or any other bank, and in place of covering the profit of the regional bank into the Treasury, it is put into a reserve fund for the benefit of the industry that created it.

Senator RANSDELL. Let me ask you a practical question, bringing it down to cotton. We have got less than 10 per cent of the cotton now handled by cooperatives?

Senator SMITH. Yes.

Senator RANSDELL. Your bill would restrict its benefits to the cooperatives?

Senator SMITH. Yes.

Senator RANSDELL. What would happen to the other nine-tenths of the cotton under this bill of yours? Would those producers get any benefit?

Senator SMITH. They would get no benefit. What I am driving at is to set up a machinery that will make it absolutely safe for the Government, through its banking institutions, to deal directly with the business of farming.

Senator RANSDELL. The other nine-tenths, to get the benefit, would have to come into the cooperative association?

Senator SMITH. That is right.

Senator SACKETT. It is coercion to increase the cooperatives? Senator SMITH. No. It is not coercion. Don't use any such word. Senator SACKETT. I am not using it outside of the committee. Senator SMITH. Well, don't use it in the committee. It is simply this

Senator GOODING. Well, I say you may have to use it. It would not be out of place to use it.

Senator SMITH. No. You make it more profitable to be inside than outside.

Senator SACKETT. That is what I say. That is coercion.

Senator SMITH. Unless you do, it would be infinitely more profitable for him to engage in commercial enterprises than farming. Why?

Because there is more profit in the other. Five hundred thousand farms were abandoned last year because men are in this world to try to be prosperous. They are going to quit a business that is not.

Senator HEFLIN. Suppose some of these farmers who are outside of this organization should want to organize themselves into some other farm organization, would they be permitted to participate?

Senator SMITH. They can organize anything they please. Under the law of American they can organize anything they please. What I am trying to do here is to form a farm organization in the exact form of a commercial organization.

Senator RANSDELL. Are you going to introduce this bill and try to get hearings on it this session?

Senator SMITH. What I wanted you to do, each one of you, if you will, to study it carefully.

Senator GOODING. Why do we want any more hearings? Everybody is worn out. Why do we want any more hearings? Surely we ought to be able to get together and get out a bill.

Senator SMITH. That is my idea exactly.

Senator HEFLIN. If your bill is passed all the farmers can organize into various organizations, and it makes no difference what they call it, but they could get the money under this plan?

Senator SMITH. Precisely, if they subscribe to the provisions of this bill. It is open to everybody.

Senator HEFLIN. You do not have to belong to one of these particular organizations now in existence?

Senator SMITH. No, sir. Just subscribe to the terms of this, and he can get the benefits of this bill.

Senator SACKETT. Have you taken it up with the banking committee?

Senator SMITH. I did not take it up with the banking committee, no, sir, because I do not think they know anything about it more than I do or you do or anybody else does. They are selected from the Senate just as we are selected here. Some of us on this committee do not know very much about farming, yet we do the best we can to study it out, and we are just as competent to pass on it. You get the Federal reserve act, and we are just as competent to define the genius of that law as anybody else, or else we ought not to be here.

Senator SACKETT. That is true, but they have been working on the Federal reserve banks a lot and if it interfered with that law in any way they would be in a position to say.

Senator GOODING. This would not interfere.

Senator SMITH. I have collaborated with other Senators in getting that modification of the section of the Federal reserve act.

will have to be studied carefully.

That

Senator GOODING. Did you ever send this to the Secretary of Agriculture for a report?

Senator SMITH. No, sir.

Senator GOODING. Why don't you send it down?

Senator SMITH. I was talking to him about it yesterday.

Senator SACKETT. I think one of the most important things, if you are going to work along cooperative marketing lines is to find some method that will induce the individual farmer to become interested in cooperative marketing.

Senator SMITH. If you do not, you might just as well quit.