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FEDERAL T INTERMEDIATE CREDIT BANKS-St-Z

DEBENTURE INTEREST RATE LIMITATION

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Storage

HEARING

BEFORE TIIE

COMMITTEE ON AGRICULTURE

HOUSE OF REPRESENTATIVES

EIGHTY-NINTH CONGRESS

SECOND SESSION

ON

H.J. Res. 1217

AUGUST 3„ 1966

Serial UU

Printed for the use of the Committee on Agriculture

U.S. GOVERNMENT PRINTING OFFICE

69-028 WASHINGTON: 1966
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COMMITTEE ON AGRICULTURE

HAROLD D. COOLEY, North Carolina, Chairman

W. R. POAGE, Texas, Vice Chairman

E. C. GATHINGS, Arkansas

JOHN L. McMILLAN, South Carolina

THOMAS G. ABERNETHY, Mississippi

WATKINS M. ABBITT, Virginia

PAUL C. JONES, Missouri

HARLAN HAGEN, California

FRANK A. STUBBLEFIELD, Kentucky

GRAHAM PURCELL, Texas

JAMES H. MORRISON, Louisiana

ALEC G. OLSON, Minnesota

SPARK M. MATSUNA GA, Hawaii

MASTON O'NEAL, Georgia

THOMAS S. FOLEY, Washington

JOSEPH Y. RESNICK, New York

LYNN E. STALBAUM, Wisconsin

ELIGIO DE LA GARZA, Texas

JOSEPH P. VIGO RITO, Pennsylvania

JOHN C. MACKIE, Michigan

ROLLAND REDLIN, North Dakota

BERT BANDSTRA, Iowa

STANLEY L. GREIGG, Iowa

CLAIR A. CALLAN, Nebraska

MRS. CHRISTINE S. GALLAGHER, Clerk

HYDE H. MURRAY, Assistant Clerk

JOHN J. HEIMBURGER, General Counsel

FRANCIS M. LEMAY, Staff Consultant

PAUL B. DA GUE, Pennsylvania

PAGE BELCHER, Oklahoma

CHARLES M. TEAGUE, California

ALBERT H. QUIE, Minnesota

MRS. CATHERINE MAY, Washington

RALPH HARVEY, Indiana

PAUL FINDLEY, Illinois

ROBERT DOLE, Kansas

LAURENCE J. BURTON, Utah

PRENTISS WALKER, Mississippi

GEORGE V. HANSEN, Idaho

RESIDENT COMMISSIONER

SANTIAGO POLANCO-ABREU, Puerto Rico

11"
CONTENTS

House Joint -Resolution 1217, a joint resolution to delete the interest rate Page

limitation on debentures issued by Federal intermediate credit banks_ __ _ 1

Ritter, Paul 0., General Counsel, Farm Credit Administration, statement

of 2

Tootell, R. B., Governor, Farm Credit Administration, letter of July 20,

1966_ 1

111
.
FEDERAL INTERMEDIATE CREDIT BANKS, DEBENTURE

INTEREST RATE LIMITATION

WEDNESDAY, AUGUST 3, 1966

HOUSE OF REPRESENTATIVES,

COMMITTEE ON AGRICULTURE,

Washington, D.C.

The committee met, pursuant to notice, at 10:30 a.m., in room 1301,

Longworth House Office Building, Washington, D.C., Hon. Harold

D. Cooley (chairman) presiding.

Present: Representatives Cooley, Poage, Gathings; Hagen of

California, Stubblefield, Purcell, Olson, Matsunaga, O'Neal, Resnick,

Stalbaum, de la Garth, Vigorito, Redlin, Bandstra, Greigg, Callan,

Dague, Belcher, Teague of California, Mrs. May, Harvey of Indiana,

Findley, and Walker of Mississippi.

Also present: Christine S. Gallagher, clerk; Hyde H. Murray,

assistant clerk; John J. Heimburger, general counsel; Francis LeMay,

consultant; and Fowler C. West, staff.

The CHAIRMAN. The committee will please be in order.

We have before us this morning House Joint Resolution 1217, by

Mr. Poage.

(H.J. Res. 1217, and the Department report dated July 20, 1966,

follow:)

[H.J. Res. 1217, 89th Cong., 1st sess.] -

JOINT RESOLUTION To delete the interest rate limitation on debentures issued by Federal intermediate credit banks

Resolved by the Senate and House of Reprgsentatives of the United States of America

in Congress assembled, That the second sentence of section 203(b) of the Federal

Farm Loan Act, as amended (12 U.S.C. 1042), relating to debentures issued by

Federal intermediate credit banks, is amended by deleting ", not exceeding 6 per

centum per annum" therefrom.

JULY 20, 1966.

The Honorable the SPEAKER OF THE HOUSE,

House of Representatives.

DEAR MR. SPEAKER: There is transmitted herewith a proposed joint resolution

to delete the interest rate limitation on debentures issued by Federal intermediate credit banks.

The 12 Federal intermediate credit banks, one in each farm credit district,

finance the 468 member-controlled production credit associations and over 100

privately capitalized other financing institutions that make short- and intermediate-term loans to farmers and ranchers. The credit banks do this financing

by discounting for the production credit associations and the other financing

institutions, with their endorsement, the notes taken by them from the farmers

and ranchers, and also by making loans to the associations and other financing

institutions. The total of such financing by the credit banks during 1965 was

$5.3 billion. Over 90 percent of it was for the production credit associations.

The loan funds of the credit banks are obtained chiefly through the sale of their

consolidated debentures to the investing public. Under existing law the interest

rates In such debentures are determined as follows (12 U.S.C. 1042):

"Rates of interest upon debentures and other such obligations issued under

said section shall, subject to the approval of the Farm Credit Administration, be

1
2 FEDERAL INTERMEDIATE CREDIT BANKS

fixed by the Federal intermediate credit bank making the issue, not exceeding

.6 per centum per annum."

The proposed joint resolution would delete ", not exceeding 6 per centum per

:Annum" from the foregoing. This would permit the Federal intermediate credit

banks to issue debentures with an interest rate of more than 6 percent if the higher

rate is required for the debentures to be marketable.

Issues of Federal intermediate credit bank debentures, which are of 9-month

term and average about $350 million, mature monthly. To assure that these

issues will be paid as they mature, it is vital that ready access to money market

funds be uninterrupted; if any issue were permitted to become in default it would

seriously impair not only operations of the credit banks, but the future sales of

bonds and debentures of the Federal land banks and banks for cooperatives which

also are under the supervision of the Farm Credit Administration.

On the sale of credit bank debentures for delivery on July 5, 1966, the market then prevailing required an interest rate of 5.6 percent. On July 20, 1966,

an issue of credit bank debentures required a price -4-af 5.9 percent. If the present upward trend of interest rates continues, the Federal intermediate credit banks

might soon be precluded from obtaining further loan funds. Should this happen, they would not be in a ,position to continue to perform their function of

financing the production credit associations and other financing institutions.

This would result in an intolerable situation since the credit banks would be

faced with maturing issues of debentures and an important source of credit upon

which hundreds of thousands of farmers depend would be extinguished.

The Bureau of the Budget has advised that there is no objection to presentation of the proposed joint resolution from the standpoint of the administration's

program.

Very truly yours,

R. B. TOOTELL, Governor.

PROPOSED JOINT RESOLUTION TRANSMITTED BY FARM CREDIT ADMINISTRATION

JOINT RESOLUTION To delete the interest rate limitation on debentures issued by Federal intermediate credit banks

Resolved by the Senate and House of Representatives of the United States of America

in Congress assembled, That the seeond sentence of section 203(b) of the Federal

Farm Loan Act, as amended (12 U.S.C. 1042), relating to debentures issued by

'Federal intermediate credit banks, is amended by deleting ", not exceeding 6

per centum per annum" therefrom.

The CHAIRMAN. We have as witnesses Mr. Paul 0. Ritter, General

Counsel, accompanied by Paul Fankhauser, Deputy Director of

Short-Term Credit Service, and W. H. Albright, Chief, Finance

Division, Farm Credit Administration.

We will be pleased to hear from you now, to present the views of

the Department.

STATEMENT OF PAUL 0. RITTER, GENERAL COUNSEL, ACCOMPANIED BY PAUL FANKHAUSER, DEPUTY DIRECTOR OF SHORTTERM CREDIT SERVICE, AND W. H. ALBRIGHT, CHIEF, FINANCE

DIVISION, FARM CREDIT ADMINISTRATION

Mr. RITTER. Mr. Chairman and members of the committee,

Governor Tootell is in Colorado today, attending the Federal Farm

Credit Board meeting which begins tomorrow, so that we three are

here from the Farm Credit Administration, and our purpose is to urge

favorable and early action on House Joint Resolution 1217 which

would delete the 6-percent interest rate limitation that is in the existing

law with reference to the debentures issued by the Federal intermediate

credit banks.

We do not have a prepared statement to distribute, but I thought

that I would undertake an explanation of this by saying something

•
FEDERAL INTERMEDIATE CREDIT BANKS 3

about the Federal intermediate credit banks, their function, how the

debentures are issued by the banks and how they serve its function,

and why the present 6-percent interest rate ceiling on such debentures

should be removed and at an early date.

The Federal intermediate credit banks consist of 1 in each of the

12 farm credit districts and were established in 1923, under title II

of the Federal Farm Loan Act, which was added by the Farm Credit

Act of 1923.

The function of these credit banks is to finance the 468 production

credit associations that make loans to farmers and ranchers at the

local level.

The funds with which they do this financing are mostly obtained

through the sale of debentures of the 12 banks to the investing public.

These debentures are consolidated collateral trust debentures. They

are the joint and several obligations of the 12 Federal intermediate

credit banks. There is no liability in the United States for these

debentures. They are not guaranteed by the Federal Government.

The CHAIRMAN. Will you please pull that mike up to you so that

we may hear you?

Mr. HARVEY of Indiana. I cannot hear the gentleman.

Mr. RITTER. I am sorry.

We have 12 Federal intermediate credit banks, 1 to serve each of

the 12 farm credit districts. They were established in 1923 pursuant

to the acts of Congress and their function is to finance the 468 production credit associations and some other financing institutions which,

at the local level, make loans to farmers and ranchers.

The credit banks, when they get the money with which to do this

financing, do so mostly through the sale of debentures to the investing

public. These debentures are collateral trust debentures. They

are the joint and several obligation of the 12 banks which issued them,

and there is no liability on the part of the United States, either as to

principal or interest.

Mr. HARVEY of Indiana. Or what?

Mr. RITTER. Or interest.

In selling these debentures, the interest rate is fixed with reference

to the market which is then prevailing.

The credit banks usually have an issue of debentures each month.

The average amount of these issues is about $350 million. The

customary term is 9 months for each issue. So that each month there

is an issue maturing, and it must be paid when it does mature. So,

this means that the succeeding issue must be in an amount sufficient

to nay off the maturing issue, and if additional funds are required, an

additional amount of debentures must then be issued.

If, at the time of any of these monthly periods when debentures

are issued, the credit banks are unable to issue or market the debentures because of this 6-percent ceiling in the statute and because the

market requires a higher rate, it just means that they would not be

able to continue to function as was intended. It means that this

source of loans for the farmers and the ranchers would be immediately

curtailed, and, of course, if this continued indefinitely it would terminate.

The volume for the fiscal year ending 1966 of this financing done

by the Federal intermediate credit banks was $5.9 billion.
4 FEDERAL INTERMEDIATE CREDIT BANKS

I mentioned that for each issue the interest rate must be determined

in the light of the market then prevailing. I thought that we would

review the experience of the 8 months of this calendar year which

would point out the urgency of removing this ceiling now and, we

think, as promptly as possible.

For the July issue, the rate was 5.60 percent; for the August issue,

it was 5.875 percent. That is an increase of 0.275 percent in 1 month.

On six occasions of this calendar year, the debenture rate has increased

over the previous month ranging from one-tenth of 1 percent to threetenths of 1 percent.

If there was a similar rise for the September issue—and, incidentally, the September issue will have the interest rate fixed on August 17.

To repeat, if there were a similar rise for that issue, or if the rate increases more than one-eighth percent, which it did for 5 months during

the calendar year, it would mean that we would be above the statutory

6-percent ceiling, and the debentures could not be issued.

It is, therefore, for this reason that we think it is very urgent—

that is, I mean the Farm Credit Administration feels and desires to

make it clear that it is very urgent that this present 6-percent ceiling

rate limitation should be removed, and promptly. And we would

hope that it could be done, that action could be taken by August 17.

The CHAIRMAN. You said, in effect, that unless the ceiling is

removed, the Farm Credit Administration would be embarrassed,

because it could not sell the debentures; is that correct?

Mr. RITTER. We would be embarrassed; yes, sir, if we could:not

issue them.

The CHAIRMAN. How would the rate be established?

Mr. RITTER. If the 6-percent ceiling is removed, it means then that

the issuing banks, subject to the approval of the Farm Credit Administration, will determine the rate of interest on each issue, and that will

be done in the light of what the market requires in order to make those

debentures salable.

The CHAIRMAN. How about a State like North Carolina, where we

have a legal rate of interest? Would it cover it in that State without

violating the law?

Mr. RITTER. Yes, sir. If I am not mistaken, the limitation you

mention there refers to loans which are made to the farmers and the

ranchers and individuals.

The CHAIRMAN. That is right. You can borrow money, but not

in excess of 6 percent without violating the usury law, and you would

sell the debentures at a higher rate.

Mr. RITTER. I do not believe that the limitation on the amount of

the interest that may be charged—that is, the State limitation on the

amount of interest that may be charged for a loan would apply to

these debentures.

The CHAIRMAN. What effect would the State law have on other

financial transactions that occur within the State? We have a fight going on right now between the building and loan associations and

the commercial banks, where people are taking money out of the

building and loan associations and putting it into commercial banks

and into certificates of deposit to get more interest than is guaranteed

by the building and loan associations. If you go ahead with this,

you would have a similar situation there, would you not?
FEDERAL INTERMEDIATE CREDIT BANKS 5

I am not arguing against the bill, because I am going to vote for

the bill—I am sure of that.

Mr. RITTER. Whenever the credit banks' debentures are marketed

they are competitive, and I do not see how that can be avoided.

The CHAIRMAN. The debentures are sold to the investors?

Mr. RITTER. Yes, sir.

Mr. STALBAUM. For what term?

Mr. RITTER. These are customarily a 9-month term. •

Mr. POAGE. There are a number of States that have 6-percent

interest limitations. My State does not. But a great many States

do have a 6-percent interest limitation, but that does not mean that

you can borrow money at 6 percent in these States. You could not

any more sell debentures for 6 percent in North Carolina than you

could in Texas, could you, if the general money market goes above

6 percent—you are not going to be able, just because there is a State

law, to go into a State that limits the interest rate to 6 percent. You

are not going to be able to go into that State and sell debentures just

because they have a State limitation on their interest rate. Nobody

is going to buy the debentures at 6 percent if the going rate is 6.5

percent.

Mr. RITTER. I think that is right.

Mr. POAGE. As a matter of fact, you are not going to sell these

debentures in North Carolina or in Texas anyhow, are you?

Mr. RITTER. I do not know about the distribution, but I would

think that we have many of these debentures held in both States.

Mr. ALBRIGHT. Yes, we do.

Mr. POAGE. I did not say they are not held in the States. Do you

sell them in the States?

Mr. RITTER. The sale, customarily, that is the offering, is made in

New York.

Mr. POAGE. That is what I thought.

Mr. RITTER. By a fiscal agent.

Mr. POAGE. That is what I thought. You do not make any sale

in either Texas or North Carolina?

You make the sale in New York City, do you not?

Mr. RITTER. And then they are shipped pursuant to 

Mr. POAGE. I know that, but that is none of your business, is it?

Mr. RITTER. No, sir.

Mr. POAGE. I understand that they passed those on to the purchasers, but you are not selling any debentures in any State where

there is a 6-percent interest law, are you?

Mr. RITTER. I believe there are dealers through whom these debentures are marketed in those States, and I am sure--

Mr. POAGE. What I am trying to get at is: Do you, the Farm

Credit System, offer anything for sale in Texas?

Mr. RITTER. Well, in a sense we do, and I may want to refer this

to one of my associates. In a sense they may be offered.

Mr. POAGE. I know there are people who own debentures in the

State of Texas. I understand that full well, but do you offer any in

the State?

Mr. RITTER. The offer is made by the fiscal agent.

Mr. POAGE. In the State of New York, in the city of New York?

Mr. RITTER. Yes.

Mr. POAGE. Of course.

69-028-66--2
6 FEDERAL INTERMEDIATE CREDIT BANKS

Mr. RITTER. That is right.

Mr. POAGE. All I am trying to get at is: Is there any reason for

being involved with this 6-percent law, because you are not violating

it?

Mr. RITTER. Yes, sir.

Mr. POAGE. Of course, I know that the debentures are scattered

all over the country but you do not sell them all over the country.

Is that not right?

Mr. RITTER. I think that is right. That is, the fiscal agent offers

them and makes the sale.

Mr. POAGE. I know that they offer them. I am asking what you

offer. Where do you offer to sell them? Do you offer to sell me a

debenture in Waco, Tex.? Could I write to the bank at Houston and

get one of these debentures?

Mr. RITTER. Not normally.

Mr. POAGE. Of course not. So, why do we not just nail this down.

I am just trying to get a record here that is clear and unambiguous,

and I think it perfectly clear that you are selling these debentures in

New York City, and anybody in the world who wants, so far as you

are concerned, can get them, and you are paid for them, regardless of

where they turn up, but you are not selling them in Texas, are you?

Mr. RITTER. NO.

Mr. POAGE. Or in North Carolina or in any State that has a 6-

percent limitation.

Mr. RITTER. That is right.

Mr. POAGE. Let us get that on the record without equivocation, if

that is correct.

The CHAIRMAN. Mr. de la Garza.

Mr. DE LA GARZA. Mr. Chairman, supposing a State has a 6-

percent interest law. Are you going to sell your debentures for 6.5

percent or 7 percent? What about the loans? Would the interest

on your loan cover the higher rate, or would you be prohibited from

making loans in a State that has a 6-percent interest limitation law?

Mr. RITTER. Well, in the case of these Federal intermediate credit

banks, if the interest they pay for their debentures rises, eventually

the interest they charge to finance the Production Credit Association

will also rise, and when that happens, then, eventually the Production

Credit Association must increase its interest rates on the loans that

they make to the farmers and the ranchers, and at that level there

might be a question as to whether there is a limitation in the State

law which applies to the Production Credit Association loans. And

our position is that those limitations do not apply, but that is another

question, and at the moment, these Production Credit Associations

are making loans not to exceed the State law limitations.

Mr. DE LA GARZA. What is the level of your present interest rate,

if there is an average?

Mr. RITTER. In the case of the Federal intermediate credit banks,

10 of the banks are charging 6 percent; 1 is charging 6.25; 1 is charging

one-half of 1 percent above the cost of money.

Mr. DE LA GARZA. So that it is very probable then that the funds

will go beyond 6 percent everywhere—that they will do that?

Mr. RITTER. If the market would continue in that direction that

would be applicable to selling these credit bank debentures, too.

Mr. DE LA GARZA. Let me ask you one more question, and that

is about the direction private money is moving, at what rate it is
FEDERAL INTERMEDIATE CREDIT BANKS 7

moving. What is the benefit of going to your organization, if the

farmers can now get it for less than that?

Mr. RITTER. It is very important. We think that this source of

credit should continue to be available to the farmers and the ranchers, and in order for it it to continue to be available, it is necessary

to remove this 6-percent ceiling if the debentures can only be sold

at more than 6 percent.

Mr. DE LA GARZA. That is what I mean. Where do you justify

your system if the farmer can get the money locally for'the same interest rate that he will have to pay you or the intermediate bank?

Mr. RITTER. Well, the farmer must make that choice. There are

about 500,000 members of the Production Credit Associations, and

they must have thought there was an advantage to them in this.

Mr. DE LA GARZA. I am sure that there was, but it does not look like

it will be. That is my question.

Mr. RITTER. I do not see how they can go to another source and

get a better interest rate, in general, than through the System. In

some instances they may be able to do so.

Mr. DE LA GARZA. That is all. Thank you.

The CHAIRMAN. Mr. Stalbaura.

Mr. STALBAUM. Is it not true that in some instances the source of

credit from other sources is just not there?

Mr. RITTER. There are such areas.

Mr. STALBAUM. I think that should be made clear in the record,

because this is not necessarily a case of your competing with private

sources but in many instances, in rural areas, you are the main source

of rural credit, and if there is some other source it is because you are

there to set a standard for them.

Mr. RITTER. That is right, and if this source became unavailable

they would have no place to which to turn, if no other source is

available.

Mr. STALBAUM. My reason for asking these questions is to get into

the record—to give us, if you would, possibly,, the rate which must be

charged by the Production Credit Associations, either as an override

over the debenture rate or the percentage interest rate that would now

prevail. Historically, about what is the interest rate for lending purposes of the Production Credit Associations as compared to their

cost of money?

Mr. RITTER. I do not know if I will respond at once to that, but

on July 1, 1966, the interest rate in effect in the Production Credit

Associations ranged from 4.75 percent to 8 percent. There were

118 associations charging 6 percent; 127 charging 6.5 percent, and

119 charging 7 percent. Thirteen associations had a rate in excess

of 7.5 percent.

Mr. STALBAUM. Is the interest rate about 5.5 percent; that is, the

debenture interest rate as of that time?

Mr. RITTER. As of recent date the average rate of interest on outstanding debentures was 5.39 percent.

Mr. STALBAUM. So that, actually, then it would appear that the

Production Credit Associations have to have a spread of somewhat

over 1 percent for operating expenses and this includes also the cost

of the Federal intermediate credit banks—is that not about right—to

oversimplify this?

Mr. RITTER. I believe it would be that or perhaps more.
8 FEDERAL INTERMEDIATE CREDIT BANKS

Mr. STALBAUM. Just slightly over 1 percent?

Mr. RITTER. Yes.

Mr. STALBAUM. That is all, thank you.

The CHAIRMAN. Are there any further questions?

Mr. Olson?

Mr. OLSON. You said that the debentures are sold to finance the

intermediate credit banks. Are they the individual and several

obligations of the banks?

Mr. RITTER. They are the liability of 

Mr. OLSON. Of all of the banks?

Mr. RITTER (continuing). Of all of the banks.

Mr. OLSON. Collectively, they are offered these debentures?

Mr. RITTER. That is right.

Mr. OLSON. At a fixed rate per month. Who fixes the rate?

Mr. RITTER. Well, the rate is fixed by the issuing banks, subject to

the approval of the Farm Credit Administration.

Mr. OLSON. Each individual bank fixes the rate?

Mr. RITTER. It is collective.

Mr. OLSON. Collectively?

Mr. RITTER. Yes. They work through a committee of presidents.

Mr. OLSON. So that collectively they fix a rate that applies to the

debentures issued by all of the 12 banks.

Mr. RITTER. It is a consolidated issue of debentures, and it is issued

on behalf of the 12 banks.

Mr. OLSON. And carries a uniform interest rate?

Mr. RITTER. Yes.

Mr. OLSON. If that be so, why is it that your interest rate by the

Production Credit Associations can vary as much as 1.5 percent?

Mr. RITTER. I may want someone to supplement this, but I think

that it is because the cost of administration and operation by the different associations produces that difference.

Mr. OLSON. That is the only thing that you can think of?

Mr. POAGE. If you will yield there?

Mr. OLSON. Yes.

Mr. POAGE. As a matter of fact, is not part of that due to the fact

that some of these Production Credit Associations are charging very

high rates in order to pay out their stock, or they were doing this for

a long time? I am sure that our Production Credit Associations

charged about 1 percent more to get rid of the Government stock, but

they are now paid out. Then, do you not have a number of Production Credit Associations that are operating at a loss, eating up their

savings, to avoid raising the interest rate? And they can do it as

long as they have money in hand. Are not some of them actually

doing that?

Mr. RITTER. There are all of those variations. So far as retirement

of Government capital is concerned, there are now two associations

only with Government capital, a total of $530,000. The others have

accomplished the return of their Government capital.

The CHAIRMAN. All have returned the Government capital except

two?

Mr. RITTER. Yes.

Mr. POAGE. That is, the Production Credit Associations, not the

intermediate credit banks.

Mr. RITTER. The Production Credit Associations, yes.
FEDERAL INTERMEDIATE CREDIT BANKS 9

Mr. OLSON. Do youlhave7aipolicylof checking into—or does the

individuaLintermediate creditlbanklhave alpolicylof checkingiinto the

operation of individual Production Credit Associations')Iasi-to why the

interest rates do vary, with a view toward the possibility of helping

them administer their program so that they can lower their interest

rate?

Mr. RITTER. Well, eachiProduction Credit Association is examined

once a year by the Farm Credit Administration. In addition, the

Federal intermediate credit banks of the district closely watch the

operation of each Production Credit Association. They will make

suggestions to improve operations, and so forth.

Mr. OLSON. All right. Now, getting back to the setting of the

interest rates for the debentures. The interest rate is set collectively

by the banks for each issue, with the advice of the financial board,

and then the offer is made. Can you give me any idea as to how they

determine what interest rate they have to offer for a certain month?

In other words, what I am trying to find out is do you not ask what

you have to pay for money or you make an offer. If you market

debentures by offer instead of bids, could you tell me if you have ever

been turned down?

Mr. RITTER. No, sir. Once the interest rate is fixed, it is marketed

on that basis.

Mr. OLSON. Have you ever found it impossible to sell debentures

at the rate fixed?

Mr. RITTER. Well, there is a nationwide group of dealers, and when

there is an offering made, these dealers write in and they say that

they want a participation of so much. When that offer on their

part is confirmed, then the dealer is obligated to take that amount of

debentures, and if the interest rate is not attractive enough, it means

that the dealers will just have to hold them until they can dispose of

them in the market.

Mr. OLSON. In other words, the dealer offers to take x amount of

your debentures even before you establish the rate?

Mr. RITTER. No, he knows the rate. That is announced.

Mr. OLSON. The rate is announced?

Mr. RITTER. Yes.

Mr. OLSON. And then he makes an offer to take 

Mr. RITTER. Yes.

Mr. OLSON (continuing). x amount of your debentures?

Mr. RITTER. That is right.

Mr. OLSON. I do not see how a purchaser could be hurt by that.

That is the point that I am trying to get at. The interest is already

established from your experience. Does the dealer ever refuse to

buy your debentures at the offered rate?

Mr. RITTER. Have they? No, the answer is "No."

Mr. OLSON. All right. Have you then made any effort to comparing interest rates in other areas to see if you would have to offer

that higher rate?

Mr. RITTER. All that study should be done before the rate is fixed

and the offer is made. In other words, they tap all sources of information that they can to arrive at what they think is the appropriate

rate in the market at that time.

Mr. OLSON. I am not going to pursue it any further, but it would

seem to me that if I wanted to insure that this was being conducted
10 FEDERAL INTERMEDIATE CREDIT BANKS

in an area of competition and if I kept being on the higher side,

evidenced by the fact that I never once failed to be taken up on my

offer, I would wonder if my system was as good as it ought to be.

I am just wondering where and when is this merry-go-round on interest

rates going to stop these days?

Mr. HARVEY of Indiana. Will you yield?

Mr. OLSON. Yes.

Mr. HARVEY of Indiana. I think that somebody told me that

during the Farm Credit Administration marketing procedure, the

interest rate the debentures brought in the market usually was about

two-tenths of 1 percent in excess of the actual Federal offering itself.

That is, the Treasury offering. Is that correct?

Mr. RITTER. Up until this year, that was correct.

Mr. HARVEY of Indiana. In other words, that has been pretty much

a fixed pattern. I think, probably, that may be an answer to your

question, Mr. Olson.

Mr. OLSON. That is more information than I have received so far.

You said, up until this year. What happened this year?

Mr. RITTER. Will you answer that?

Mr. ALBRIGHT. This year, sir, because of the tremendous competition in the money market, the spread between the Treasury's cost of

money and our cost of money has tended to increase. It is now, I

would think, in the neighborhood of one-half of 1 percent rather than

the one-quarter of 1 percent which prevailed for many, many years.

This is a competitive thing.

Mr. OLSON. Just one last question as to the amount of 33' million

per month—I believe that is your debenture offering; is that right?

Mr. RITTER. $350 million per month.

Mr. OLSON. $350 million per month?

Mr. RITTER. Yes.

Mr. OLSON. Obviously, you are not a deciding factor in the setting

of interest, but you do contribute in determining the cost of money

and like everyone else you deny any responsibility for this question

as to the cost of the money.

Mr. POAGE. I just want to comment on what Mr. Olson has been

talking about. That was the point that I was discussing with a

representative of the bank before we started this morning. I was

pointing out that it seemed to me that their present procedure operates as a ratchet; in other words, that the general rate of interest is

going up, so the banks have to offer an increase in their interest rate,

just as Mr. Olson pointed out, and that contributes to this high interest. It does not control, but it is a contributing factor in determining what the interest rate is going to be next month, because the

higher people offer to pay the higher the general level will go, and

when you put $300 million worth of debentures on the market at an

attractive price, you tend to force other people to raise their interest

rates, and as they raise their interest rates that, in turn, raises the

general level of interest rates, so that next month when you come into

the market and offer more, you have to pay a higher rate. That is

the situation in which they are now. I do not see any practical

alternative than to give them the right to go above the 6 percent,

but I would like for them to stop this "bidding up" the interest rate.

Like Mr. Olson, I think that the banks ought to give serious consideration to fixing an interest rate probably not to exceed 6 percent,
FEDERAL INTERMEDIATE CREDIT BANKS 11

plus the ability of discounting your paper at such a figure, so that it

would move into the market. That would, as I see it, remove this

effect that you now have on the market.

There is not anything at all to keep you from selling your debentures

at a discount, is there?

Mr. RITTER. Yes, sir. We think that we would not be permitted—

if this present statutory ceiling continues the 6-percent ceiling, we

think that we would not be permitted to fix a 6-percent rate on the

issue and then sell the issue at a discount, in order, for instance, to

give the purchaser, in effect, a 6.5 percent return.

Mr. POAGE. That is just the question I am asking. You think

that the present law prohibits you from discounting?

Mr. RITTER. I do. In the case of municipals, there are cases both

ways. I believe that the Treasury in their case—that there has been

an earlier opinion that they could do that, but they have never done

it, as a matter of policy.

Mr. POAGE. You say "municipals." Most of them do sell at a

discount, do they not?

Mr. RITTER. The cases go both ways. It depends to some extent

on how specific the statute is, as to the ceilings that are specified.

Some may even specify without discount, and so forth.

Mr. POAGE. There is nothing of that kind in your statute, is there?

Mr. RITTER. Our statute has the bare words "Not exceeding

6 percent per annum."

Mr. POAGE. Yes.

Mr. RITTER. Those are the words that the resolution before you

would repeal.

Mr. POAGE. I understand that. What I am saying is that there

is nothing in your statute that says that you cannot sell at a discount,

is there?

Mr. RITTER. We are hoping that we will not be faced with that

question here, because of the removal of the limitation, but we had

this, you know, in 1959, when there was a 5 percent limitation on the

interest rate that could be paid on Federal land bank bonds, and then

we were faced with it, and the conclusion was, as I gave it ,to you, that

they could not be issued at a discount.

Mr. POAGE. Let us depart from the question of what you can do

and think about what you should do.

Does not the fixing of the interest rate by discount, rather than

otherwise, enable you to exactly follow the market?

Mr. RITTER. I am not'sure I understand that.

Mr. POAGE. I mean, if you offered debentures at 6 percent or at

5 percent or at 2 percent or any other percent—if you offered them

at 6 percent, would you not then be able to exactly follow the market

by accepting discount and premium bids? If the market required

6.3 percent to move your debentures, then you would discount your

6 percent debentures enough to bring a 6.3 percent return? On the

other hand, if the interest rates were to fall and you could move your

debentures for 5.5 percent, then you would get a premium on your

debentures, would you not?

Mr. RITTER. Well, we do some of that now. We do that in the

other banks, do we not?

Mr. POAGE. We do it where?
12 FEDERAL INTERMEDIATE CREDIT BANKS

Mr. RITTER. Let me say that the procedure is that 2 weeks before

the issue, you set the interest rate, as it were, then you later set what

we call the price, whether they would be sold at a discount or not a

little later and close to the actual delivery date. So then you could

do what you say, I mean, assuming that we are not faced with this 6-

percent limitation. You could price them a little above or below

par if the market on that later date seemed to require it. But sooner

or later you have got to freeze up, and your offer is made, and the purchaser will either buy them or not.

Mr. POAGE. I understand that. But by using the discount as a

premium device, you would not necessarily lead the market up, up,

up each month.

Mr. RITTER. We use that procedure for other bonds and debentures,

not for these.

Mr. POAGE. Why do you not use it for these?

Mr. RITTER. When we said we could not, we were talking about

discounting when you are against the statutory limitation.

Mr. POAGE. You have not been up against the statutory limitation

until this month. You certainly have not been up against the statutory limitation any time in the past, but you have been leading the

market up, if I understand it. In other words, you have contributed

to the inflation that is hurting the country, because you have deliberately raised the interest rate a little bit above the market each month.

I do not mean that you have gone out and raised it 2 or 3 percent,

but you have raised it two points above the market in order that you

might be sure that your debentures would sell. And each month you

have raised it a little higher than you thought the market was or

would be. Is that right?

Mr. RITTER. I would like to take exception to "a little higher than

we thought the market was," because the effort is to hit it right on the

nose.

Mr. POAGE. Well, but in order to get it right on the nose, you have

always put it high enough so that you thought your debentures would

sell. And, as Mr. Olson explained, you had never undersold the

market; that is right, is it not? You have never in the whole history

of your organization underguessed the market one single time? You

have, however, surely overguessed it in a great many occasions, because no human being nor group of human beings can ever hit that

market exactly. If they could, you would not be working for the

Government. You would not be sitting here before us. You would

be up in New York City controlling this great maze of finance the

world over. You cannot do that, however, and neither can anybody

else that is, hit that market everytime. So, you have overguessed

the market most of the time. That is obvious, is it not?

Mr. RITTER. Well, without debating that, I would like to put in a

disclaimer.

[Laughter.]

Mr. RITTER. Because they think they have gotten pretty skillful

at it and that they guess it just about right. That is their effort now.

Mr. POAGE. I know that, but they have never underguessed it one

single time. Am I right in that? Is that not right?

Mr. RITTER. Well, I think—I cannot give you the examples now,

but I would say they have underguessed on those occasions when the

dealers took their allotments and were not able to find buyers for
FEDERAL INTERMEDIATE CREDIT BANKS 13

them immediately, so that it meant that the dealers had to cam,

them for a while. So that if you prove it by the fact that the public

did not pick them up and bought them, if you prove that, you underset

the interest rate. We have had that happen.

Mr. POAGE. Did you have it happen; or did the dealer have it

ha-wen?

Mr. RITTER. When the offer is made, the dealer commits himself

for a certain amount, and in some instances they have had to hold

some of those for a while before they could put them in the hands of

the purchasers.

Mr. POAGE. There is where some people make their business; is

it not?

Mr. RITTER. If I understood what you were saying, the interest

rate was so low in those instances that it was not attractive enough.

Mr. POAGE. It was not attractive enough the next day to enable

him to make a profit on it, but it was attractive enough so that he

took it on the day that you made the deal with him.

Mr. RITTER. But the next day he found 

Mr. POAGE. And the next day he found that the interest rate had

gone down. That happens, of course.

Mr. RITTER. No; it may not have been. The next day, he found

that he could not sell them at par at the interest rate that was set,

so that in that case we undershot.

Mr. POAGE. In that case, you what?

Mr. RITTER. In that case the interest rate was not fixed too high,

but if anything it was on the low side, where the dealer was unable

to move them immediately.

Mr. POAGE. The dealer would not have taken them if you had

fixed it below the market price. The dealer did not take those

debentures at less than the market price, did he?

Mr. RITTER. He must use his judgment, but he does it really no

better than the people who fixed the rate.

Mr. POAGE. But on that day that was the market, was it not?

Mr. RITTER. It was set, and it was set to be appropriate to the

market, but you do not test the market until you actually test it

by placing it in the investors' hands.

Mr. POAGE. That is a pretty fine point. But certainly should you

not remove this increase to whatever extent that it affects the market? Could you not remove it by using a discount-premium bid

basis, rather than by fixing it in advance at a higher rate?

Mr. RITTER. I want to say it again, from information I have received here, that the credit banks have not been doing that except

under certain conditions. In other systems, there has been some of

that, but they set the interest rate at an earlier date and then 9

little closer to the delivery date; they decide whether they will sell

at a discount or at a premium. We do some of that. This is not

being done in the case of the Federal intermediate credit banks.

Mr. POAGE. So far as the intermediate credit banks are concerned

you set on the 17th day of the month the interest rate for September.

You are going to have to look at the money market then and say-

"This is going up a little bit; we think that we could sell those debentures at 6 percent, probably, this morning, but by the time they are out

on the market, it will probably take 6.12, it may even take 6.15 to move
14 FEDERAL INTERMEDIATE CREDIT BANKS

them, and in order to see that they move, we have got to put our rate

at 6.15 percent. That is about the way you figure, is it not?

Mr. RITTER. Yes, sir, not only that 

Mr. POAGE. There is nothing wrong with that, except this: that the

day that they go on the market—we will assume the interest rate is

still 6 percent—you offer 6.15 and that forces everybody else's interest

rate up comparable to 6.15. Of course, as I understand, this company out in east Texas would have to pay a great deal more than you

will have to pay—I mean, everybody who has a comparable credit

rating will have to pay 6.15 instead of the 6 percent they were paying

the day before—that is, the day your debentures hit the market, because that raises the market. It does not go down. It does not go

down, because you bring everybody up to your level—because you

have offered to pay this higher rate. You did not simply offer to take

today's figures. You did not simply offer to take what the market

would bring today, but you offered to pay 6.15, so that everybody

else had to come up to 6.15. They do not go down, and the next

month you figure that it will take something more, and so you put a

price of 6.25 on your paper, and everybody else has to come up to 6.25.

And the thing gets built up and up and up, without ever going back.

Mr. RITTER. What stops that? If money is available. That is a

big factor.

Mr. POAGE. That is true. Whenever we get loose money, as it is

termed—whenever we get money available, cheaper money, why, of

course, then all of these things go down, but right now what you are

doing, as I see it, is causing this interest rate to just inch up a little

bit each month.

The CHAIRMAN. Do you think that this administration has influence

enough in this great country of ours to fix the interest rate throughout

the country for all others?

Do you feel that?

Mr. POAGE. What I am saying is that when you put $300 million

of debentures on the market 

The CHAIRMAN. I am following you.

Mr. POAGE (continuing). That you very seriously influence the

market. Everybody else has to come up to that figure.

The CHAIRMAN. That is a small amount of money compared to the

general money market. I do not think it is enough to influence the

market unduly. Do you think so?

Mr. RITTER. No, sir; we have not felt so.

The CHAIRMAN. As I understand it, I thought that we were going

to get this subject out of here without much fuss about it.

Mr. POAGE. I think that we will have to do that, but I am thinking

that you ought to be giving some consideration to this method of

selling debentures.

The CHAIRMAN. He said that they followed that in some systems.

Mr. POAGE. What we are talking about is the intermediate credit

banks which do not follow it.

Mr. BELCHER. Will you yield?

Mr. POAGE. Yes.

Mr. BELCHER. I am not a financial expert in this to any degree,

but I thought that the banks had something like a 5-percent ceiling.

The CHAIRMAN. They have had something like 5.5 percent in

recent months.
f

FEDERAL INTERMEDIATE CREDIT BANKS 15

Mr. BELCHER. Somebody told me that it was 5 percent.

The CHAIRMAN. It was 4.5 percent at one time, but I understand

it is now 5.5 percent.

Mr. BELCHER. You cannot go to a bank and get 5.5 on your

savings, can you?

Mr. RESNICK. It depends on the amount.

The CHAIRMAN. There is a bill that fixes it at 4.5 percent up to

$100,000.

Mr. BELCHER. As a matter of information, have those who are

really competitors on this, been notified of this bill?

Mr. POAGE. All are competitors.

Mr. BELCHER. Everybody is trying to compete for money. I

know that those building -houses are positively crying for money,

and they just cannot get the money.

The CHAIRMAN. They perhaps are interested in this homeowners

bill—two bills, I understand.

Mr. BELCHER. What do they know about this bill?

Have they had an opportunity to be heard on this particular

bill, or do they not care to be heard on it? Maybe it does not make

any difference. On a bill like this, with the tight money situation

as serious as it is, it may affect many people.

The CHAIRMAN. Let US go off the record.

(Discussion was had outside the record.)

The CHAIRMAN. Back on the record.

Mr. STALBAUM. I am curious as to this: When you moved away

from the spread that Mr. Harvey made reference to, the two-tenths

of 1 percent over the regular Government issues. This was true up

to this year. When did you start to widen that spread?

Mr. ALBRIGHT. That began to occur gradually. I would say about

last fall, when there began to be more and more what we call Federal

agency securities offered in the market. You are aware, I am sure,

of the increasing volume of Federal agency financing, the Federal

Home Loan Banks, FNMA, and other Federal agencies. The supply

of such securities has increased tremendously this year, which means

that there is more of that kind of paper available than there is of the

Treasury's obligations, relatively speaking, which has operated to

widen the spread in rates.

Mr. STALBAUM. In other words, then am I right in assuming that

each of these agencies is tending to widen the spread slightly to get

a little competitive advantage over the other agencies in selling their

debentures?

Mr. ALBRIGHT. There has been, as Mr. Poage referred to a while

ago, a kind of ratcheting system operating in the market this year

because of the fact, of course, that there is a demand for credit which

is running far ahead of the supply of funds available.

Mr. STALBAUM. As to your relationship with selling debentures

with other governmental agencies, has there been the same ratcheting

-effect happening there?

Mr. ALBRIGHT. I think to some extent, yes, sir.

Mr. STALBAUM. That is all.

Thank you very much.

The CHAIRMAN. Mr. Resnick?

Mr. RESNICK. Regarding what Mr. Belcher said, this one bill that

we have up now, I believe FNMA, is going to go into the market with
16 FEDERAL INTERMEDIATE CREDIT BANKS

some $2 billion, if I am not mistaken. What interest rate will they

go into the market at? Will they go in at the same rate that you

have been going in at?

Mr. RITTER. No, not necessarily. I mean they will determine that.

Mr. RESNICK. What rate do you think they will get?

Mr. RITTER. I would not say, unless Mr. Albright would say.

Mr. RESNICK. I would just like to know.

Mr. ALBRIGHT. I would venture an opinion that they would have

to pay somewhat more for this obligation than the Farm Credit Banks.

Mr. RESNICK. In other words, they are going way above the 6

percent?

Mr. ALBRIGHT. It is quite possible.

Mr. RESNICK. Do they offer it under this same 6 percent limitation?

Mr. ALBRIGHT. No, sir.

Mr. RESNICK. They have no limitation at all?

Mr. ALBRIGHT. I do not know.

Mr. RITTER. We do not know what their limitation is, but the

limitation that applies to the credit banks does not apply to anyone

else.

Mr. RESNICK. In other words, all of these other governmental

agencies can pay what they want, what the market is, and the one

specifically limited then is the farm credit banks?

Mr. RITTER. It is the only limitation I have in mind. Now,

whether there are limitations on those others, at the moment I just

do not know about them.

The CHAIRMAN. Are there any further questions?

Mr. HARVEY of Indiana. I have just one question that I want to

pose here, and that is, as I read this proposal, it would take the

ceiling off completely. Is that right?

The CHAIRMAN. Yes.

Mr. HARVEY of Indiana. I am realistic enough to know that

whatever we should do, if we were to write another ceiling in there, it

would not necessarily control the money market; in fact, it would not

at all, except that it does seem to me that for whatever psychological

value it might have, it is a subject that we ought to give some thought

to. I can visualize some of the financial publications saying that the

intermediate credit banks have taken all ceilings off their debenture

offerings; that is, the limitations as to the rates that will accompany

the debenture issues, and I am wondering if we ought not, Mr. Chairman, to give some consideration to taking the ceiling clear off or

whether we ought to simply raise the present ceiling?

Mr. POAGE. Will you yield?

Mr. HARVEY of Indiana. Yes.

Mr. POAGE. I would suggest that we ought to take it clear off. I

have never approved of Chairman, Mills' policy of cutting the dog's

tail off an inch at a time. I thought that we should act in the beginning so that you did not have to act 3 months from then.

I think there are two other considerations: One is whether it is

basically getting the results you think it will get. I am inclined to

fear—and I cannot prove this, it is just a guess—that if you raise this

limit to 6.5 percent or 7 percent it would be looked upon as a floor and

would tend to become a floor rather than a ceiling. On the other hand,

the other members of the farm credit system, to wit, the land banks

and the banks for cooperatives, do not have any ceiling at all, as I recall it now.
FEDERAL INTERMEDIATE CREDIT BANKS 17

Mr. RITTER. That is right.

Mr. POAGE. It seems to me to be highly desirable, in the interest of

getting an orderly farm credit system going, that we apply the same

rules across the board as far as they are applicable, and it seems to me

that it is really applicable in this case. - And if we are going to have a

7-percent rate on the banks for cooperatives, this ought not to go above

that, but I think that the other two segments of the farm credit system, since they do not have any limits at all, it seems to me that there

is not much justification in putting any limit here. That is one of the

reasons that I thought we would be justified in taking this ceiling off.

Mr. HARVEY of Indiana. Let me say that I concur with your

views, Mr. Poage, on this. I would not, and did not raise it for that

purpose. I thought that it was a point that ought to be understood

by the committee, because it will be the subject of some question, and

I would like to 'ask the Witness if he concurs in that same viewpoint?

Mr. RITTER. Our position would be in line with Mr. Poage's

position just expressed.

Mr. HARVEY of Indiana. In other words, you concur in Mr.

Poage's viewpoint?

Mr. RITTER. Yes, sir.

Mr. HARVEY of Indiana. That is all.

Thank you.

Mr. BELCHER. What effect would this have on 'the Federal land

banks, would it raise their interest rates?

Mr. RITTER. No, sir; we would not see any such effect.

Mr. STUBBLEFIELD. The procedure is that you set the rates and

it is a matter of take it or leave it?

M. RITTER. Yes, sir.

Mr. STUBbLEFIELD. IS that correct?

Mr. RITTER. Yes, sir.

Mr. STUBBLEFIELD. Under Mr. Poage's suggestion, these debentures would be put up for sale at either a premium or a discount,

in 'which case it could be more or less.

Mr. RITTER. That is a possibility. At different times, studies have

been conducted as to whether there should be a change in the present

procedures of marketing securities. That has been considered, but it

has not been adopted.

Mr. STUBBLEFIELD. In your opinion, which procedure is the better

procedure?

Mr. RITTER. Well, I believe that I would say that their present

judgment is that their present procedure is appropriate. That does

not foreclose further study. They do study this matter continuously.

Mr. STUBBLEFIELD. Thank you; that is all.

Mr. MATSUNAGA. By deleting the 6-percent ceiling as it now

appears in the statute, there would not be any limitation, would there?

Mr. RITTER. There is a limitation. That is, if you delete this limit

the interest rate will be fixed by the issuing banks, subject to the

approval of the Farm Credit Administration and then overriding that

is the market. So, the market will control it.

Mr. MATSUNAGA. You have not given it too much study, you said,

or have you given study to the suggestion by our vice chairman,

Mr. Poage, as to selling it by discount rather than by an increased

percentage rate?

Mr. RITTER. Yes, sir; that has been studied within the Farlia Credit

Administration and among the groups of the different banks.

A
18 FEDERAL INTERMEDIATE CREDIT BANKS

Mr. MATSUNAGA. And you prefer this method of removing the

percentage limitation?

Mr. RITTER. Yes, sir, that is the present position.

Mr. O'NEAL. I would like to ask this question. I am certainly

not a financial expert. I probably will show it by my question, but

I do not understand how the market could be a limiting factor when

the market wants all it can get. It wants all of the interest it can get,

does it not?

Mr. RITTER. There are times when money is available for investment, and in those cases the effect is downward.

Mr. O'NEAL. It would not be a limiting factor right now, would it?

Mr. RITTER. Well, maybe I should not use the word "limiting,"

but the rate would be determined at what the market requires in

order for the debentures to be marketable and salable.

Mr. O'NEAL. That is all.

Thank you.

The CHAIRMAN. Are there any further questions?

If not, we will go into executive session.

(Whereupon, at 11:30 a.m., the committee retired into executive

session.)

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