Readings in Money and Banking Part 68

Eighth. In some branches they receive money and securities for safekeeping or rent safe-deposit boxes.

Ninth. Many banks have savings and mortgage-loan departments.

None of the distinctively foreign banks in South America has as yet issued circulating notes; this is being done, however, by some of the domestic banks in which foreign capital is heavily interested.

There may, of course, be other miscellaneous activities.

FOOTNOTES:

[196] Adapted from William H. Lough, _Banking Opportunities in South America_, Department of Commerce, Special Agents Series, No. 106.

Was.h.i.+ngton. 1915.

CHAPTER XXVII

AGRICULTURAL CREDIT IN THE UNITED STATES

While agricultural credit has been a subject of intermittent discussion in the United States for almost a generation, the movement has had its main development within recent years.

In November, 1911, the American Bankers' a.s.sociation created a committee to study land and agricultural credit at home and abroad. In March, 1912, American amba.s.sadors and ministers were instructed by the State Department to gather information concerning rural credit inst.i.tutions in Europe.

A year later the Southern Commercial Congress also inst.i.tuted a careful investigation. These acts, and reports published gave the movement a national character and scope.

Several states, such as Ma.s.sachusetts, New York, and Missouri, have recently made legislative provision for rural credit inst.i.tutions and during the last two years very numerous bills pertaining to rural credit have been introduced in Congress. It seems not unlikely that legislation providing for the establishment of a federal system of land banks and rural credit a.s.sociations, subsidized by the Government, will be enacted in the near future.

The functions and work of rural credit inst.i.tutions in Europe, briefly discussed in the first two selections of this chapter, are treated more fully in connection with the chapters on the banking systems of European countries, notably those of Germany and France.

[197]Various European nations, with soil naturally inferior to ours, have established agricultural credit and thereby have greatly eased the burden of the cost of living. Hitherto we have lived on the bountiful overflow of our rich land, and the pinch of necessity has not been felt; but now our population has grown enormous, our standards of living have been greatly raised, and our land is showing the effect of generations of taking out with very little putting back. We must do better or suffer.

By the installation of agricultural credit, farming will not only be made more profitable, but it will in the end make country life more attractive. The banking system of to-day is adapted to the needs of manufacture and commerce. The processes of nature are so much slower, however, that banking for farmers must be organised on a basis of credit for much longer periods.

Our present system of borrowing on land is by mortgages running from three to five years, the entire princ.i.p.al coming due at one time. This is expensive, involving renewals, and dangerous from the possibility of the mortgage falling due at a time of restricted credit so that it cannot be renewed. On the continent of Europe this business is handled by so-called land-mortgage banks, or rather a.s.sociations.

The mortgages granted are pledged for the security of bonds which the inst.i.tution issues and sells in the general market. These bonds have no fixed maturity, but can be retired at par or some small premium at any time. When the borrower mortgages his land to the bank he agrees to pay a certain fixed sum semi-annually. This is called the "annuity" and is composed of the annual interest plus an amount, generally 1/2 per cent., toward the reduction of the princ.i.p.al of the debt and known as "amortisation," and an additional amount, about 1/4 per cent., toward the expenses of the bank. The borrower, therefore, at once begins to extinguish the princ.i.p.al of the debt; and as each year the princ.i.p.al decreases, the interest, of course, decreases also, and, the annuity being fixed, the proportion of it applicable toward the extinction of the mortgage increases. Thus it happens that, beginning with a payment of 1/2 per cent. toward princ.i.p.al, the mortgage bearing 4 per cent. to 4-1/2 per cent., which are the general rates, the entire debt is extinguished in between fifty and sixty years.

The mortgaging of land is known as long-term credit, and it may be handled by joint-stock inst.i.tutions or by a.s.sociations of borrowers, but in inst.i.tutions furnis.h.i.+ng the credit required by farmers for working capital, such as the purchase of seeds, fertilizer, payment for labour, etc., which is known as short-term credit, the aim that the borrower should be primarily considered rather than the lender a.s.sumes fundamental importance.

On the continent of Europe a solution of the problem of short-term credit is found in the organisation of banks by the application of so-called co-operative principles. The purpose is to provide organisations in which the borrower receives consideration rather than the lender, also to keep the money of any body of individuals for the use of that body. Under our present system a great deal of money belonging to farmers finds its way into Wall Street. At present the lenders are organised; whereas the borrower stands alone.

AGRICULTURAL CREDIT CONDITIONS IN THE UNITED STATES

[198]The United States, although the leading country of the world in the amount of its agricultural products and in the extent of its banking business, is behind nearly every other progressive country of importance in the development of agricultural credit, _i. e._, short-time non-mortgage credit. Our manufacturing and commercial businesses are financed largely by means of such credit, and the capital invested in these industries is thereby rendered manifoldly efficient; not so with agriculture. Most farmers apparently make little or no use of short-time credit. There seems to be a wide acceptance in this country even among the farmers themselves of the dictum of Louis XIV, that: "Credit supports agriculture, as the cord supports the hanged." Is this a correct description of the situation? If so, what is the explanation, and what remedies if any are needed? The object of this paper is to throw light upon the answers to these questions.

First, as to existing banking facilities for agricultural credit, and their utilization by farmers. It is well known that the banking capital of the country is concentrated to a great extent in our large cities--to a greater extent than it would be if we had a well-developed system of branch banks like Canada--and that the banks of these cities are prevented by reason of their location from making many agricultural loans, even if they were so inclined. Of the 7,301 national banks in the United States September 1, 1911, 191 or 2.6 per cent. were located in the dozen largest cities of the country.[199] The national banks of these twelve cities, representing but 14 per cent. of the population of the country, had 37 per cent. of the national banking capital (capital, surplus, and undivided profits), 33 per cent. of the individual deposits, and 40 per cent. of the loans. It should be noted, however, that since the act of 1900, authorizing the establishment of national banks with a capital of less than $50,000 in small towns, there has been a continual and rapid increase in the number of national banks in small communities. On September 1, 1911, out of the total 7,301 national banks there were 1,966 with a capital of $25,000, and therefore presumably located in towns of less than 3,000 population, 372 with a capital between $25,000 and $50,000, and therefore presumably in towns of less than 6,000 population, and 2,297 with a capital between $50,000 and $100,000. Except for banks in towns not exceeding 6,000 population, the law as amended in 1900 does not permit any national bank to be organized with a capital less than $100,000.

Are the national banks which are accessible to farmers in a position under the law to meet farmers' needs? The answer to this question must be in the affirmative. Aside from the fact that national banks are not permitted to make loans on real estate security,[200] there is no restriction in the national banking act which would interfere with loans to farmers for agricultural purposes. Personal security alone is legally acceptable; the range of possible collateral security is practically unlimited; and there is no limitation fixed by law as to the period of loans. National banks therefore have a very free hand in regard to loans to farmers.

When we inquire concerning agricultural credit in banks under state charters we find conditions varying with the different States, but, with a few minor qualifications, it may be said that the state banking laws are free from restrictions that would hamper state banks and trust companies in extending credit liberally to responsible farmers. They are in a much better position in one respect to deal with farmers than are national banks, that is, in the matter of accepting real estate security. No state denies state banks this privilege, and such restrictions as exist upon its exercise are generally not onerous.

If commercial banks are comparatively unhampered by law in making short-time loans to farmers, it may be asked: To what extent are such loans made? Unfortunately practically no information is available on this question. In answer to an inquiry the Comptroller of the Currency wrote, under date of May 27 of this year, that no information with reference to short-time loans made to farmers by national banks had ever been compiled by the comptroller's office. The writer has found no trace of any investigation of this subject by state banking departments. For about a year he has taken occasion to inquire at every opportunity of individual bankers concerning their experience with regard to loans to farmers in different parts of the country. The replies received are so divergent that no conclusion can be drawn from them, except that the practice varies widely in different sections of the country and even in different communities in the same section, and that probably the farmers of the North Central and Western States borrow of commercial banks more than do those of the Eastern and Southern States. There is not sufficient evidence, however, for this latter inference to make it much more than a guess. In the absence of any comprehensive data, I shall resort to the unsatisfactory but representative replies from different parts of the country.

Neither of the two national banks in the city of Ithaca, N. Y., makes any appreciable amount of loans to farmers. Both claim to be willing to do so, but say there is practically no demand. In some of the neighboring cities, however, such loans by national banks are more common. The cas.h.i.+er of a national bank in a town of about 800 population in an agricultural section of northeastern Pennsylvania writes:

Our farmers as a rule are not large borrowers and want loans only in small amounts for short periods.

Farmers in general will not go on each other's paper no matter how good the parties are, for they have been so often taken in by wild-cat schemes that they are shy when their names are required to be placed upon paper. They realize also that they are not familiar with business methods in the commercial world and dare not trust themselves.

There is a moderate amount of borrowing by farmers in western New Jersey. Estimates made by bankers in Princeton as to the proportion of farmers in that neighborhood who borrow for short periods of local banks vary from 15 to 40 per cent.

A former president of a national bank in Indianapolis writes:

We came very little in contact with farmers. We made special effort to secure such business by sending to a considerable mailing list of carefully selected farmers, circulars and personal letters ... but the business did not come. My inference was that they dealt with the nearby small banks.

Of the situation in Lafayette, Indiana, a former vice-president of a national bank, writes:

About 50 per cent. of our business was with farmers. They borrow frequently from commercial banks, funds to be used for crop planting, crop gathering, purchase of agricultural machinery, improvements on the farm, purchase of cattle, and the carrying of cattle or hogs to maturity. Through Indiana these farmers' loans are very usual in the country banks, many preferring state charters so they may make these loans not only on personal but also on mortgage security.

Farmers are seldom able to give any but personal or mortgage security. A large percentage of them are sufficiently responsible to be ent.i.tled to and to receive reasonable credit without security.

Farmers seem to endorse for each other much more readily than do those of other cla.s.ses.... The reason is, I think, clear. Each knows pretty much everything about his neighbor's financial status, the amount and value of his land, his live-stock, and other visible personal property, the amount of any mortgage and when due. So much being thus in the open there is less of the secretive habit, so that the extent of the invisible personal property and debts is apt to be known.

A similar report comes from a national bank in Lincoln, Nebraska, from which the following extracts are taken:

The farmers of this state have need of accommodations of this kind to carry them through the crop season. As a matter of fact, they use short-time credit to fully as great an extent as do the business men in the city and smaller towns.

In fact, I think it is true that in the smaller towns the bankers favor the farmers in preference to the small business men....

There is no doubt about the average well-to-do farmer in this state being able to furnish satisfactory security aside from mortgaging his farm for such temporary loans within any reasonable limitations. In some cases the banks take chattel mortgages on cattle or other live-stock, and in some cases where the farmer has a good equity in his farm they will not hesitate to take his personal note.

While I do not know that there is any particular difference between farmers and other cla.s.ses in this state as to their willingness to go security for each other, yet very little of this is done any more. There was a time when it was not an uncommon thing, but it has become less and less until now there is very little signing done for others. In fact, the farmers feel that they are able to take care of themselves and do not ask others to sign with them, and are able to handle themselves without such an endors.e.m.e.nt. This is true of all cla.s.ses in this state.

I have never felt that in this locality farmers suffered in any way from lack of credit facilities....

A former bank examiner in the state of California, himself a farmer, writes:

The farmers of California do not to any considerable extent make a practice of borrowing money from local banks or money lenders for short periods....

In reviewing the various bank examiners' reports on some 500 state banks I recall very few instances of crop mortgages, and it impresses me that in many of the cases the mortgage was taken to obtain additional security for loans previously granted and secured otherwise.

I think it would be safe to say that the bankers as a rule have not favored short-time unsecured loans to farmers. They are, however, fast awakening to the fact that as a rule these are the safest loans a bank can make, and are making an effort to get in closer touch with the farmer. It would also be safe to say that the average small farmer does not as yet realize that he _can_ obtain such credit at a bank.

Our farmers as a cla.s.s are exceedingly reluctant "to go each other's security." Two-name paper is mostly confined to commercial transactions.

A college professor in the state of Was.h.i.+ngton informs me that short-time loans to farmers are common in that state, but that frequently the rate of interest charged is 2 per cent. higher than that on commercial loans--the explanation commonly given being that a farmer borrowing generally reduces the resulting deposit credit more rapidly than does a merchant.

In the Southern States, particularly in the cotton, rice, and tobacco sections, the use of crop liens for short-time loans appears to be much greater than in other sections of the country.[201] Such meager testimony as I have been able to secure seems to show that the amount of short-time agricultural credit extended by banks in the South is relatively small but rather rapidly increasing. The banks are catering more and more to this cla.s.s of business.

Other evidence might be cited, but the above gives a fair picture of the situation as revealed by all the testimony received--a confused picture of widely varying conditions. Public opinion is now being aroused on the subject of agricultural credit, and pressure is liable to be brought for hasty and perhaps radical legislation. Obviously, the first step to be taken in the interest of a sane solution of the problem is to find out exactly what the problem is. To this end the writer would urge strongly the need of investigations by the Comptroller of the Currency and by the various state banking departments of the present facilities and practices in the matter of agricultural loans. In view of the increasing public interest in the subject the investigations cannot be undertaken too soon.