AGRICULTURE ABROAD.

New Zealand Journal of Agriculture, Volume XIII, Issue 5, 20 November 1916, Page 420

AGRICULTURE ABROAD.

RURAL CREDIT IN THE UNITED STATES.

NEW GOVERNMENT MEASURE

From the Country Gentleman, Philadelphia, U.S.A.

For fifty years the Federal Treasury has been coming nearer to the farmer’s pocket. The common dependence of all industry upon the success of agricultural enterprise has been urged in support of this movement.

Government aid for agriculture was first expressed through the Morrill Act, establishing the agricultural colleges. Then the Hatch Act provided for the experiment stations. But these educational laws were opposed, on the ground that they were too paternalistic and were the beginning of a legislation that was dangerous. Some of those who expressed such ideas have lived to see the passage of the new Rural Credits Law, or Farm Loan Act, as it will be known, and have accepted the change of sentiment without much protest: The beginning of the change was evident two years ago, when the Smith-Lever Bill was passed, carrying an appropriation which will eventually amount to more than $25,000,000.

The new Farm Loan Act has not been without opponents, and even now, before the details have been'worked out, there are prophecies of its failure to accomplish what the conditions require. The chief interest just now, however, is centred in the details of operation as provided for in the law, and in the action of the Board in adapting the law to conditions under which it must be operated.

President Wilson signed the Act on 17th July, and a few days later appointed the four members who, together with the Secretary of the Treasury, will constitute the Federal Farm-loan Board. The appointees are George W. Norris, of Pennsylvania; Herbert Quick, of West Virginia; W. S. A. Smith, of Iowa; and Charles E. Lobdell, of Kansas. 1

The law really provides for two systems : First, twelve regional land banks ; second, joint-stock land banks. Both systems are under the supervision of the Federal Farm-loan Board, the members of which are appointed for two, four, six, and eight years respectively. Not more than two of the four are to be members of one political party. Each will devote his entire time to the work of the Board, and will receive a salary of $lO,OOO, with travelling-expenses. One of the members will be designated by the President as Farm-loan Commissioner.

HOW THE BANKS WILL ORGANIZE. The Board designates the territory for each of the twelve regional banks, [and will set in motion machinery to organize them. The Board will also appoint officials for the various banks, provide for examinations and other details of that work, and issue bulletins from time to time to the Press to inform the public as to the progress of the organization of the system.

Each district land bank will have a subscribed capital stock of not less than $750,000, each share $5. Each Federal land bank may establish branches in its district. Within thirty days after the capital stock is offered for sale it may be purchased at par by any one. Thereafter the stock remaining unsold shall be bought by the Secretary of the Treasury for the United States. It is provided, however, that the Government shall not receive any dividends on its stock. It is intended that eventually all the stock in the banks shall be owned by the associa-

tions of borrowers, and provision therefor is made in the law for transferring the original stock at par to these associations.

After a Federal land bank has loaned $50,000 on first mortgage it can obtain permission from the Farm-loan Board to issue $50,000 in farm-loan bonds based upon these mortgages, to sell such bonds in the open market, and to use the money thus obtained to lend on other mortgages. The process of lending on mortgages and selling bonds in issues of $50,000 may be repeated until bonds to the amount of twenty times the bank’s paid-up capital are outstanding. Even in the event that each bank has only its required minimum paid-up capital of $750,000, this plan will eventually provide, if all the authorized bonds of the twelve banks are sold, $180,000,000 to lend on first mortgages on farm land. The banks, however, can increase their capital stock above the required minimum, and so increase the amount of bonds they can sell and the total amount of money available for loans on farm mortgages.

To make these bonds attractive to investors the bonds, together with the mortgages upon which they are based, are exempted from Federal, State, municipal, and local taxation, and are made legal investments for fiduciary and trust funds. The capital stock of the Federal land banks is also exempt from taxation. Federal reserve banks and member banks of that system are empowered to buy and sell these bonds, which are to be issued in denominations of $2O, $5O, $lOO, $5OO, and $l,OOO.

- The Act provides for the creation of local national farm-loan associations, through which it is contemplated that the Federal land banks shall make their loans. Ten or more persons who own and cultivate farm land qualified as security for a mortgage loan under the Act, or who are about to own and cultivate such land, may form such an association, provided the aggregate of the loans desired by the membership is not less than $20,000. Each member must take stock in his association to an amount equivalent to 5 per cent, of the amount he wishes to borrow. This stock the association holds in trust as security for the member’s individual loan. The association, in turn, when applying for money from the bank, must subscribe for stock in the bank to an amount equivalent to 5. per cent, of the sum it wants to obtain for its members. This stock is held in trust by the bank as security for the loans it makes through the association.

If a prospective borrower has no money with which to pay for his association stock, he may borrow the price of that stock as a part of the loan on his farm land. Under this plan every borrower must be a stockholder in his local association, and every association a stockholder in its district bank. Each stockholder in an association is liable for the acts of that association up to twice the amount of the stock he owns.

Other agents may also be used. Incorporated banks, trust companies, mortgage companies, or chartered savings institutions may act as agents for Federal land banks if no farm-loan association has been formed in a given locality after one year.

Borrowers securing loans through agents are required to subscribe 5 per cent, of their loans to the capital of the Federal land bank.

Agents are entitled to a commission of a half of i per cent, per annum on unpaid principal of each loan they negotiate, and the bank pays the agent for actual expenses in appraising land, examining titles, executing and recording the mortgage papers, which shall be added to the face of the loan.

Agents will endorse and become liable for the payment of the loans they negotiate, and the aggregate unpaid principal of such loans shall not exceed ten times the agent’s capital and surplus. Agents are required to make good any default within thirty days after notice.

THE WAY A LOAN IS SECURED. To obtain a loan a member of a national farm-loan association must apply to a loan committee of the association, which must appraise the property offered as security. If the application is approved by the loan committee, it is then forwarded to the Federal land bank, and must be investigated and. reported on by a salaried appraiser of the bank before the loan is granted. This appraiser, is required to investigate the solvency and character of the prospective borrower, and to report also on the value of his land.

When a loan is granted the amount is forwarded to the borrower through the loan association. The purposes for which loans may be obtained are■' (a.) To provide for the purchase of land for agricultural uses : (&.) To provide for the purchase of equipment, fertilizers, and . live-stock necessary for the proper and reasonable operation of the mortgaged farm : ’ , (c.) To provide buildings and for the improvement of farm lands : (d.) To liquidate indebtedness of the owner of the land mortgaged, existing at the time of the organization' of the first national farm-loan association established in or for the country in which the land mortgaged is situated, or indebtedness subsequently incurred for one of the purposes mentioned in this section.

No individual can borrow more than $lO,OOO or less than $lOO, or more than 50 per cent, of the value of the land mortgaged and 20 per cent, of the value of the permanent insured improvements upon it. The loan must run for not less than five and not more than forty years.

’ Every mortgage must provide for the repayment of the loan under an amortization plan by reason of a fixed number - of annual or semi-annual instalments sufficient to meet all interest and to pay off the debt by the end of the term of the loan. No Federal land bank is permitted to charge more than 6 per cent, per annum on its farm-mortgage loans, and in no case shall the interest charged on farm mortgages exceed by more than 1 per cent, the rate paid on the last issue of bonds. For example, if the bank pays only 4 per cent, on an issue of bonds, it cannot charge more than 5 per cent, for the next farm loan it makes. Out of this margin of not more than 1 per cent., together with such amounts as it can earn on its paid-in cash capital, the bank must set aside certain reserves and meet all its expenses.

- Any balance or net profits may be distributed as dividends to the loan associations or other stockholders. The loan associations, from their bank dividends, after setting aside the required reserves and meeting expenses, may declare association dividends to their members. In this way the profits, if any, will be distributed among the borrowers, and will to that extent reduce the amount of interest actually paid by them.

THE JOINT-STOCK LAND BANKS. The second part of the system provides for the establishment of joint-stock land banks, and authorizes them to carry on the business of lending directly to the borrowers on farm-mortgage security and issuing farm-loan bonds. These banks must have capital of not less than $250,000 each. They are under the supervision of the Federal Farm-loan Board, but the Government does not lend them any financial assistance. The joint-stock land bank is free from many of the conditions imposed upon the Federal land banks. Subject to the 50- and 20-per-cent. value limitation and the limitation as to territory, the joint-stock land bank may lend more than $lO,OOO to a single individual, but it is not restricted to making loans for the purposes specified in the case of the Federal land bank. These banks can lend to any one on land that is not farmed by the borrower. Presumably their aid is for development in the newer sections. The joint-stock bank, like the Federal land bank, cannot charge an interestrate on farm mortgages in excess of 6 per cent., nor shall such interest-rate exceed by more than 1 per cent, the rate of interest paid by the bank upon its last issue of bonds. A joint-stock bank is limited in its bond issue to fifteen times its capital and surplus. The bonds of the joint-stock land banks are exempt from taxation. Their capital stock, however, is not exempt.

MISCELLANEOUS. The law provides the necessary machinery for frequent examinations of the banks and the associations, for the proper cancellation of mortgages, and for the safe custody of mortgages offered as security for bonds. When any mortgage offered as security for bonds is withdrawn the bank is required to replace the security with other mortgages or with other collateral that is considered satisfactory. ' Heavy penalties of fine or imprisonment, or both, are imposed for violations of the Act, malfeasance in office, fraud, embezzlement, defalcation, or other illegal practices.