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' Association created a committee to study land and agricultural credit at home and abroad. In March, 1912, American ambassadors and ministers were instructed by the State Department to gather information concerning rural credit institutions in Europe. A year later the Southern Commercial Congress also instituted a careful investigation. These acts, and reports published gave the movement a national character and scope.
Several states, such as Massachusetts, New York, and Missouri, have recently made legislative provision for rural credit institutions 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 associations, subsidized by the Government, will be enacted in the near future.
The functions and work of rural credit institutions 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 principal 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 associations.
The mortgages granted are pledged for the security of bonds which the institution 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 principal 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 principal of the debt; and as each year the principal 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 principal, 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 institutions or by associations of borrowers, but in institutions furnishing 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 assumes 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.