Letter on Farm Loan Interest Rates.
My dear Mr. Chairman:
I am disturbed by the provisions of H.R. 6763 and think I should advise you of the situation which the passage of this bill would create. The whole question involves the rate of' interest charged by government agencies and relates not only to farm loans but also to monies lent by the Home Owners' Loan Corporation, the Reconstruction Finance Corporation, the Public Works Administration, and other agencies.
We ought, first of all, to examine into the original object of the Congress and the Administration in 1933. It was:
(1) To stop wholesale foreclosure and failures by refinancing the debts of farmers, home owners, counties, cities, towns, small businesses and banks on a basis that would permit them to pay out as national prosperity returned;
(2) To provide for extensions of principal and interest payments which farmers, home owners, etc., etc., were unable to meet because of causes beyond their control.
In the case of farmers, they were the only classification of the many listed above who were given temporary reductions in interest rates to assist in their financial rehabilitation. This was done because of their then existing mortgages due to the Federal Land Banks, which had been made necessary by previous conditions.
In regard to farm borrowers, there was another definite objective-to avoid the old custom of 6 or 7 or 8 percent charged on first mortgages, and 8, 10, 12 and even 15 percent charged on second mortgages.
At the time the original legislation for farmers, home owners, business men, banks, municipalities, etc., was passed, no one thought, and no reasonable person should think today, that the Government of the United States should permanently subsidize these borrowers by an annual grant or gift caused by legalizing an abnormally low rate of interest.
It is not reasonable to insist that 4 percent on a first mortgage for a farmer or 5 percent on a second mortgage is an unreasonably high rate of interest.
Everybody knows that the government, as well as the Federal land banks, has to borrow money before it lends it and must, therefore, get that rate back. On long-term borrowings the government would have to pay a rate of interest of about 3 percent. The Federal land banks or the government must stand the cost of servicing loans and collecting the interest which, on the average, amounts to a little less than one percent. In addition to this, there are losses which will amount to at least one-half of one percent to one percent additional. The net result is that, at present, the Federal land banks must get a 4 percent return on first mortgages and the government a 5 percent return on second mortgages (where, of course, the losses are heavier), in order nearly to break even.
Any reduction below these rates constitutes a gift from the Federal Treasury.
In the case of H.R. 6763, the additional cost to the Government of the United States would be more than $40,000,000 a year. It seems to me that the Congress should be definitely advised of this fact before taking action on this bill.
The passage of this bill was clearly not contemplated in the preparation of the Budget for the fiscal year 1938. As you know, I am definitely seeking the balancing of that Budget. The problem is a comparatively simple one from the budgetary standpoint: if the Budget is thrown out of balance through extra appropriations or obligations, new taxes alone will bring the Budget into balance.
Very sincerely yours,
Honorable Marvin Jones,
Chairman, Committee on Agriculture,
House of Representatives,
Franklin D. Roosevelt, Letter on Farm Loan Interest Rates. Online by Gerhard Peters and John T. Woolley, The American Presidency Project https://www.presidency.ucsb.edu/node/209694