The Farmer and Finance

THE importance of agriculture as an economic and social factor is not a newly discovered fact. As long ago as 1859, in a speech before the Wisconsin Agricultural Society, Abraham Lincoln said, ‘Population must increase rapidly, more rapidly than in former times, and ere long the most valuable of all arts will be the art of deriving a comfortable subsistence from the smallest area of soil. No community whose every member possesses this art can ever be the victim of oppression in any of its forms. Such community will be alike independent of crowned kings, money kings, and land kings.’

Unfortunately, perhaps, the truth contained in Lincoln’s words was not sufficiently well-appreciated to modify the course of the economic development of the country. Nations, like individuals, are accustomed to regard lightly those things that are easily acquired. Conditions in this country always have been so favorable to agriculture that it has been accepted as an industry needing little encouragement. On the other hand, manufacturing and commerce did not seem to possess the inherent qualities of self-development, and, as a result, the economic policy of the country has been consciously framed to build up these industries, — not exactly at the expense of agriculture, but at least with the consequence of diverting the attention of the people from the danger of neglecting farming interests. Consequently, the industry of cultivating the soil has been left to develop along the lines of least resistance, — that of seizing temporary profits, without regard to future possibilities. The complaisant indifference with which agricultural development has been regarded, has had its logical result. Agriculture has failed to progress with anywhere near the rapidity with which the population of the country and the demand for food-products have increased.

From 1900 to 1910 the population of the United States increased twenty-one per cent; during the same period the number of farms increased only ten and five tenths per cent; which indicates that, in the ten years, rural population increased about one-half as much as the total population. In 1909 the per-capita production of cereals was only forty-nine and one tenth bushels; in 1899 it was fifty-eight, and four tenths, — a decrease of nine bushels per head in ten years. Between 1899 and 1909 the aggregate production of cereals increased only one and seven tenths per cent , but their market value was higher by seventy-nine and eight tenths per cent in 1909 than in 1899, — the increase in price being forty-seven times the increase in quantity. In 1900 there was one farm for every thirteen and two tenths persons; in 1910 there was one farm for every fourteen and five tenths persons. On the average, therefore, each farm now has to furnish food for more than one more person than in 1900. In 1900, there were five and five tenths acres of improved farm land per capita of population; by 1910 the per-capita improved acreage had declined to five and two tenths acres.

These figures make it clear why the exports of food-stuffs in crude condition, and food animals, have decreased from $227,300,000, or 16.59 per cent of the total exports, for the fiscal year of 1900, to $99,900,000, or only 4.6 per cent of the total for the fiscal year of 1912; and why similar imports have increased from $68,700,000 in 1900, to $180,120,000 in 1912. Of course the splendid crops of this year will, for the time being, alter the tendency of imports of food-stuffs to increase and of exports to decrease, but unfortunately experience indicates that another bumper crop is not likely for several years. Regardless of other influences the increasing disparity between the supply of and demand for food-stuffs, as shown by the foregoing data, would seem almost to furnish an adequate explanation of the fact that on October 1, 1912, Bradstreet’s index number of prices made a new high record of $9.4515.

Surprising as it may seem, it is within the last few years that the people of the United States have recognized the danger that lies in the increasing prices of food. The uneasiness with which the rise in the prices of necessities is now regarded is amply justified, for if there is a further considerable advance, a lowering of the standard of living of a great number of the American people, with its certain inimical consequences to the quality of our citizenship, is bound to occur. It is largely the apprehension of this possibility that has impelled the national government, the states, various associations and individuals, to undertake the promotion of scientific farming, to the end that the output of the farms of this country may be raised to a maximum consistent with economic production and the conservation of the vital qualities of the soil. Educational activity of this sort is excellent and necessary, and should, if possible, be continued with greater enthusiasm. However, agriculture is similar to other industries in that knowledge alone is not sufficient for success. Like those engaged in other kinds of business, farmers must have capital, in addition to knowledge and skill, and it is highly important that they obtain the capital they need on terms consistent with their credit.

What is being done to promote better farming, through education and the establishment of landand agricultural-credit institutions, is due to the great importance of the industry, and not to any lack of intelligence on the part of the farmers themselves. There is no more reason to assume that farmers are incapable of, or indifferent to, progress than there is to assume that bankers are deficient because they operate under a faulty and inadequate banking system. The farmers of the United States are the intellectual superiors of the farmers in any other country in the world, and, with equal facilities, they will set the pace in scientific agriculture.

A superficial knowledge of agricultural conditions in the United States is all that is necessary to understand that the particular pressing need of American farmers is financial machinery whereby the potential credit that they possess in abundance can be made negotiable. There is in this country a serious lack of financial institutions suited to supply farmers with funds. In this respect the United States is the most backward of any of the important nations of the world, and, consequently, it is safe to say that this is the prime reason why this country is so far behind many other countries in the peracre production of food-stuffs. The average yield of grain in the United States is about fifty per cent less than it is on the continent of Europe, and the average per-acre yield of potatoes is not more than thirty per cent of what it is in Germany. The most striking and important difference between farming conditions here and in many European countries, is that there farmers can readily obtain the funds they need, whereas in this country agricultural financing is difficult and costly.

In its capital requirements, farming is not unlike other industries, and it is like other industries in that unless these capital requirements are supplied, progress will be slow and dubious. Like the merchant and the manufacturer, the farmer needs funds: first, for the purchase of property and for its permanent improvement; and second, for temporary purposes, — such as financing crops. These two general divisions of agricultural capital requirements should be preserved in the nature of the loans that are made to secure funds. Each of these two divisions can and should support its own credit, known respectively as land credit and agricultural credit. For the purpose of buying land and making permanent improvements, farmers should be able to make mortgage loans which have a long time to run, and which they can gradually repay by small yearly installments. Money invested in land or permanent improvements becomes fixed capital, and the proportion of a farmer’s income that can be attributed to this sort of capital is so limited that it is illogical and unreasonable to expect the money so invested to be repaid except after a considerable period of years. The maximum length of a farm loan in this country is from three to five years, and, at the end of that time, it may or may not be possible to secure a renewal. As a rule, a farm-mortgage loan here has a very restricted market, and, consequently, the borrower frequently is obliged to pay an unreasonable rate of interest, and to submit to burdensome conditions from which the nature of the security he has to offer entitles him to be exempt.

Until some way is provided by which farm mortgages can be made the basis of a long-time security, with the marketable qualities of a railroad or industrial bond, and which can be sold at a price very nearly determined by the soundness of the security, the farmers of this country will continue to be burdened by the terms they must accept in making mortgage loans. That it is possible to create a security of this sort is shown by the success of the mortgage-loan companies and associations of foreign countries, whose obligations sell on a basis as favorable as that of bonds of the most successful railroad and industrial corporations. The farmers of the United States have as good a claim to cheap money as have railroad and industrial corporations, because farm land constitutes as good security as a railroad or a factory. The marvelous and rapid development of the railroads of the country, to a very large extent, is due to the low cost at which they have been able to obtain vast sums of money for purposes of development. There is absolutely no reason why just as cheap money should not be similarly available for the acceleration of agricultural development.

For the financing of temporary capital requirements, the personal credit of farmers should be made available. A farmer should not be obliged to mortgage his land to obtain funds to operate his property. As in the case of mortgage loans, the facilities in this country for making negotiable the personal credit of farmers are inadequate. There is no reason why the industrious, capable farmer should not be able to borrow on his personal obligation as easily as does the merchant. A few American farmers do a banking business on a scale sufficiently large to make them desirable clients of local, state, and national banks, but, for the great majority, it is exceedingly difficult, if not impossible, to secure the personal credit accommodation they need, and to which their responsibility entitles them.

The success of foreign rural cooperative banking associations in reducing the rate of interest on loans to farmers, and the almost negligible amount that has been lost through the operations of these associations, clearly indicates that the high rate of interest that farmers in this country must pay, is due, not to any inherent weakness in their credit, but to the lack of properly organized facilities for making their credit negotiable. The lack of agricultural banking facilities is a tremendous hardship for the farmers. It means that they are laboring under a handicap which those engaged in no other kind of industry have to bear. Under present arrangements, farmers are paying two, two and a half, and three per cent more for money than they should. Upon the enormous amount of borrowed funds that the farmers of this country are obliged to employ, the excessive interest amounts to a sum so large that if it could be saved and expended in increasing the productivity of our farms, it would do much toward solving the problem of inadequate crops.

Fortunately, in the attempt to establish banking facilities for the farmers of the United States, it is not necessary to work in the dark. Many of the farmcredit institutions of other countries are established on principles so broad and sound that, with some modifications, they can be adapted to conditions in this country. It is important, therefore, to know all we can of foreign landand agricultural-credit institutions.

Germany is, perhaps, the country where agriculture is the most thoroughly and most intelligently organized. There are organizations in Germany for the purpose of supplying farmers with capital, and organizations for carrying on nearly all of the operations connected with the cultivation of the soil — all owned and managed by the farmers themselves. These organizations have revolutionized agricultural conditions in Germany. They not only have been the means of immensely increasing the productivity of the farms, but have also wonderfully improved the economic and social status of the farmers themselves. The first kind of agricultural coöperative organization started in Germany was for credit or banking purposes, and the entire fabric of agricultural coöperation in Germany now rests on its elaborate and efficient system of credit societies. Consequently it is reasonable to assume that, these credit societies are responsible for the advanced condition of agriculture. Agricultural credit in Germany is based on the principles of selfhelp and coöperation.

In those European countries where landand agricultural-credit facilities are the most complete, as a rule, longtime mortgage loans and short-time personal loans are made by different institutions organized along different lines. Of the two kinds of credit institutions, perhaps the most successful and efficient are the Raiffeisen banks in Germany and the Credit Foncier in France. These two institutions differ in many essential particulars. A Raiffeisen bank is a mutual association, the Credit Foncier is an incorporated company; the Raiffeisen banks loan for the most part on personal obligations, the Credit Foncier on first mortgages; the Raiffeisen banks secure most of their funds through the deposits of the farmers themselves, the Credit Foncier, through the debenture bonds that it issues, obtains funds for its loans from the conservative investors of all classes. It is because of these and other characteristic differences, and by reason of the wonderful success of these two institutions, that a knowledge of how the Raiffeisen banks and the Credit Foncier operate, and what they have accomplished, is peculiarly illuminating and profitable. Each of these two types of credit organizations possesses many features well adapted for systems of farm-credit institutions in this country.

The Raiffeisen banking system was founded by Frederick William Raiffeisen primarily for the purpose of freeing small farmers from the exactions of usurers. Raiffeisen knew nothing of finance, but he did understand the needs of those who, under the most discouraging circumstances, were bravely trying to gain a living from the soil — a class among whom credit was the particular and essential thing lacking. Sir Horace Plunkett, who has done so much for the agricultural development of Ireland, has said that the establishment of the Raiffeisen banks was second in economic importance only to the discovery of steam.

The Raiffeisen banking system is based on the principle of combining borrowers, to the end that by association they may secure credit facilities which, as individuals, it would be impossible for them to obtain. The fundamental provisions of the Raiffeisen banks, as contemplated by Herr Raiffeisen, were those of gratuitous management, unlimited liability of members, and a strictly local field of operation. For the most part the Raiffeisen banks adhere to those provisions. The membership of the banks is made up almost exclusively of farmers. In 1909 the number of members for each bank averaged 92. In the beginning the Raiffeisen banks had no capital stock, but in 1876 a law was passed which made it necessary for them to issue shares of stock. The value of the shares was fixed at what was little more than a nominal amount. In 1909 the average paid-up capital per member was only 19 marks. The dividends that the Raiffeisen banks can pay are strictly limited — in no event can they exceed the rate of interest charged on loans. In 1909 these banks made a net profit in excess of 7,000,000 marks, but of this only 13 per cent was paid out in dividends — the balance being passed to the credit of the reserve fund. Because of the nature of its business the sphere of operation of each bank is very limited. It is necessary for the members to know each other, and to know for what purpose each loan is made, and to see that the money is so used. The Raiffeisen banks have done much to encourage thrift, because they have supplied a new incentive for saving. Inasmuch as the successful management of these banks requires a keen sense of responsibility on the part of the individual members, their moral effect is very considerable. Through their membership in the Raiffeisen banks many German farmers have become familiar with the nature and uses of credit and have acquired a knowledge of business. Altogether, these small rural banks have much improved the financial position and the moral and intellectual calibre of their members.

Because of its small size and restricted field of operation, the management of a Raiffeisen bank is very simple and inexpensive. In 1909, the average cost of management per bank was only 638 marks. The funds that the banks have to loan to their members are made up of the proceeds of the sale of capital stock, the reserve accumulated from profits, deposits,— both savings and current account, — and loans from the central coöperative banks, from other banks, and from individuals. In 1909, 88 per cent of these funds consisted of the deposits of the farmers themselves. The size of the average deposit is about $370.

The loans which these banks make are either on current account — a form of over-draft often used by European banks — or for fixed periods. There is a tendency to extend the practice of making loans on current account, as that seems to be the form best suited for members. As a rule the loans made by the Raiffeisen banks are for a short period — usually for one year, with a maximum of five. For the most part the loans are granted on the personal obligations of the borrowers, to which usually is added the guaranty of one or two associate members. Occasionally loans are secured by deposit of collateral, or by mortgages. The average loan of the Raiffeisen banks in Germany is about $150. As the small size of the average loan indicates, the Raiffeisen banks primarily are institutions for supplying credit accommodations to the small landowner.

The Raiffeisen banking system in Germany now comprises about 15,000 local banks, with a membership of approximately 2,000,000. These banks are now doing a yearly aggregate business of about $1,500,000,000. The local Raiffeisen banks are grouped under 35 provincial banks, which, in turn, are affiliated with two general central cooperative banks. The local banks borrow money from the provincial banks, when required, and also loan to them their surplus funds. The provincial central banks are coöperative societies, with limited liability, and they occupy much the same position toward the local rural banks that the latter do toward their members. Their working capital is made up of the paid-up shares of their members (the local banks), of the deposits of the local banks, and of loans from other banks. By means of these provincial and central coöperative banks, agricultural credit in those parts of Germany where these banks operate possesses the element of fluidity in a remarkable degree — moving from those localities where it is not needed to those where it is needed. Altogether the Raiffeisen banks of Germany make up a wonderfully efficient organization, which, by supplying an enormous amount of agricultural credit, has revolutionized farming in Germany.

Up to the middle of the last century, France was almost entirely lacking in landand agricultural-credit facilities. As a result of much agitation there was passed in 1852 a law providing for landmortgage banks, and under this the Credit Foncier wars organized. Because of the success of the Landschaften in Germany, many of the principles and methods of these associations were incorporated in the French law. The CreditFoncier is unlike the Landschaften in the very important particular that it is an incorporated company, not a coöperative association. The Credit Foncier has a capital of 200,000,000 francs and operates under the supervision of the state. In the beginning (1852) the government granted the Credit Foncier a subsidy of 10,000,000 francs, in order to help it make loans at a rate advantageous for that time. The subsidy was not renewed, and the state does not now intervene, except occasionally, to exercise control. The Credit Foncier possesses many special privileges, pertaining to the issuance of bonds and to its loans, that give it a practical, if not a legal monopoly of the kind of business in which it is engaged.

The purposes of the Credit Foncier are: —

1. Lending money to landowmers, counties, communes, and public services.

2. Creating and negotiating mortgage bonds, or, more properly, debentures, to a value which cannot exceed the amount of the sums due from its borrowers.

3. As a necessary accessory to its principal business, the Credit Foncier has the right to carry on ordinary banking operations, within well-defined limits, and, in that connection, it is permitted to receive deposits; but the aggregate of deposits must not exceed 100,000,000 francs.

A large part of the funds received on deposit is employed in discounting commercial bills, on condition that they have two signatures and do not run over three months. The shares of the Credit Foncier, which are dealt in on the Bourse, are issued at five hundred francs, and any one can own them. The stock now receives six per cent dividends, and sells for about 750 francs a share. The government appoints the governor and two sub-governors, who, by virtue of their office are members of the Council of Administration. There must also be three treasurers-general — state officials — among the 23 members of the Council of Administration. These treasurers are appointed by the general assembly of the company, but before presenting their names to the assembly it is customary to obtain the approval of the Minister of Finance. The general assembly represents all the stockholders, and is composed of the two hundred who own the largest amount of stock. These stockholders meet once each year to ratify the accounts, vote the dividend, and dispose of such other business as may properly be presented to them. The general assembly elects a Council of Administration of 23 members. The governor has a right to veto the acts of both the general assembly and the Council, but there are only a very few instances on record of his having used this power. The Council of Administration meets once each week, and, among other things, passes upon all loans.

The two principal kinds of loans made by the Credit Foncier are mortgage loans and communal loans, and its total outstanding loans now amount to about 4,000,000,000 francs. So far as this country is concerned, that part of its operations covering the making of mortgage loans to landowners is of the greatest interest. Our municipalities now have a broad and steady market for their securities.

The Credit Foncier makes loans to landowners on the following terms: —

1. Short-time loans, without amortization, for a period of from one to nine years.

2. Long time loans, with annual amortization, for a period of from ten to seventy-five years.

The rate of interest on these loans is 4.30 per cent at the present time, and the rate is the same for all kinds of property. The rate charged on a loan must not exceed the rate at which money is obtained from the sale of bonds by more than six tenths of one per cent. Loans are made only on first-mortgage security, and the amount of the loan cannot exceed one half of the value of the property, except that loans on wine and timber lands must not exceed one third of their value. When the loan is made for a short period, the borrower pays each year only the amount of interest due, and the principal sum must be paid in full at the end of the term of the loan — from one to nine years. Long-time loans are amortized; that is they are gradually paid by means of an annuity, which includes the interest and a small fraction of the principal. As a rule, the borrower himself fixes the length of time that the loan is to run. The amortization extends over the whole period of the loan, so that the total of the interest and capital amount is repaid from a constant yearly annuity. Consequently, the cost of amortization depends on the length of the loan, and on the rate of interest. On a loan running for seventy-five years at 4.30 per cent interest., the annuity — including interest and amortization — is at the rate of 4.48 per cent per annum. The borrower has the right to pay the principal of the loan at any time, and to profit by the amortization already made. He can also make partial payments and thereby reduce the amount of the annuity.

The bonds issued by the Credit Foncier have no fixed maturity, but are called for payment by lot. Each payment of bonds must be of such an amount that the bonds remaining in circulation do not exceed the balance of the principal owed upon the hypothecated loans. If the government approves, there can be added to the bonds called for payment certain prizes and premiums. The funds received from the usual amortization, or anticipated payments, must be used to amortize or redeem bonds, or to make new loans. In general the bonds bear 3 per cent on the nominal capital, and the total cost of recent loans to the company, including interest, prizes, and premiums, is about 3.60 per cent. The bonds are sold by public subscription, and may be paid for in installments. About every three years the company issues bonds sufficient to yield from 300,000,000 to 350,000,000 francs. The bonds are subscribed for by people of small means, and usually remain in their hands; consequently the quotations of the bonds show little fluctuation — less than French railway bonds. The company always keeps a few bonds on hand for sale, but the bulk of them are disposed of by public subscription.

The Credit Foncier has departed from its original purpose to the extent that at the present time a very large part of its loans are made on urban real estate. However, this is simply an incident, and does not reflect on the applicability of the principles on which the Credit Foncier is founded, to an institution confining its operations to loans on rural land.

In view of the wonderful success of the Credit Foncier and kindred institutions, it is hard to understand why the principle of debenture bonds, secured by long-time real-estate loans, payable by amortization, should not, long ago, have been put in practice in this country. The business of loaning money on farm mortgages in the United States is still carried on in a primitive way. We are still making farmmortgage loans for such short periods that frequent renewals — often very embarrassing to debtors — are inevitable. The existence of facilities whereby farm-mortgage loans could be made for long terms — say fifty years or more, with provision for easy payment by amortization — would be a wonderful boon to American farmers, and a decided stimulant to the development of efficient, scientific farming.

Neither the Raiffeisen banks nor the Credit Foncier involve strange financial principles. In this country, the splendid record of the mutual savings banks proves that coöperation can be safely and wisely applied in banking. We are familiar with the principle of debenture bonds, and we know something of the principle of amortization. Of course, it is impossible to pick up any of the foreign farm-credit systems, out of its social setting, and say, offhand, that it would be as successful in this country. The history and success, as well as the details of organization, of every one of the foreign farm-credit systems have been very largely determined by the temperament, the social and economic status of the people, and by the conditions of climate and soil of the country in which they are situated. Consequently in working out the plans of agriculturaland landcredit systems for this country, we must be cautious in our adherence to foreign models. We must remember that the value and success of every institution depends upon its being in harmony with its environment.

The importance of adequate credit facilities for our farmers is beginning to be keenly appreciated. The American Bankers Association, the Southern Commercial Congress, and other organizations, are doing splendid pioneer work by agitating the need of an agricultural banking system, and by disseminating information as to what has been accomplished abroad.

The establishment of agriculturaland land-credit systems in this country is not a political question; it. is an economic question of the gravest import—the proper solution of which demands a patriotic national purpose and constructive ability of a high order.