Farm Loans and Land-Mortgage Banks.

HON. THOMAS B. ORR, ANDERSON, IND.

Read before the Indiana League at Terre Haute, Ind., March 4, 1914.

The savings and loan business is yet passing through the evolutionary period. Development towards larger, better and more beneficent purposes is surely coming.

The original purpose of the building and loan association was for a few persons to start together to save money and lend it to some one of their number to build a home.

From this originated the name and the organization popularly known as the "Building, Savings and Loan Association." Its influences and benefits did not extend beyond a limited territory and a few people. Its plan was serial and terminating.

Later came the perpetual plan, with its broader and freer rules of action which has made it possible for the modern "Savings and Loan Association" to secure large and increasing memberships with money to lend, not only for building homes, but for buying or improving homes, paying existing mortgages and improvement liens, taxes or any other legitimate indebtedness outside of wild speculation.

I assume that "Safety First" will always be considered by the directors of any savings and loan association in authorizing a loan of its funds for any purpose whatever.

The first obligation of a savings and loan association is to the people of its own town or city who may desire to avail themselves of its help either as borrowers or investors.

After the acceptable loans of such town, or city, have been taken by the local savings and loan association, then any surplus money such institution may have to loan cannot be more profitably invested or safely secured than to put it into farm loans in the home county of such association.

Farm loans cannot be made on the weekly or monthly payment plan. Farmers are not and cannot be prepared to make small and frequent periodical payments on their loans. They cannot know definitely when they can make payments. They do not know just when they can sell the products of the farm to the best advantage, as their judgments may dictate. Therefore, they should be allowed to make partial payments or full payment of the principal at such times as may best suit them, up to the date of maturity of the loan.

Such a privilege written into the mortgage will always be greatly appreciated by the prospective borrower and will go far to induce him to take that kind of a loan in preference to one with a lower rate of interest, without such a privilege.

The privilege to pay a stipulated amount at any interest paying date does not go far enough to best accommodate the farmer.

There should be no commission and very light expense at

tached to a farm loan. Farmers are suspicious of these items and generally hesitate to obligate themselves to pay them.

The interest paying dates should be fixed on the first day of such months as will best suit the borrower. This is another concession that will please farm borrowers and it will be found that most of them have a decided preference, if allowed to freely exercise their choice.

From a large experience in making farm loans, I think the most satisfactory interest paying dates on farm loans is on the semi-annual payment plan.

The provisions of the present savings and loan law of Indiana are broad enough for any permanent savings and loan association to make farm loans under the proper by-laws for that purpose.

The rate of interest charged town borrowers and farm borrowers must be the same. Otherwise mutuality would not exist between members and the Federal income tax law would lay hold of such association and tax it on its income.

The Indiana associations that are prepared to make farm loans have a broad, profitable and safe field before them. Before they can enter this field they must be able to get the money to loan at a rate of interest that will attract desirable borrowers. This money must first come from the investing members.

The associations must be made popular with both the investing and the borrowing members. This can be done by fair dealing, liberal regulations, safe business methods and economical management. Then the money will come and farm loans can be made.

It is safe to say that the bill now pending in both houses of the Federal Congress to establish national farm land banks in this country will in some form become a law before many months. This law, when enacted, will be an experiment in this country. It has proven satisfactory to the slow-moving farming classes of several European countries. It remains to be seen how it will work out in practice with the more energetic and active American farmers.

Lower rates of interest will always appeal to the borrowing classes, but long time loans with compulsory periodical payments and restricted rights of pre-payment will not be so readily accepted by American farmers as by the European farmers.

The plan of the proposed National Farm Land Banks law to exempt the bank, its mortgages, bonds and securities from all forms of municipal taxation will give these institutions an advantage over the banks, trust companies and loan associations of this state that may in time require the law-makers of Indiana to place these state institutions on equal terms with the proposed national farm land banks.

I do not mention the taxation feature for the purpose of finding fault with the proposed law, but to call attention to the subject of the taxation of intangible property now attracting wide attention both in our own state and throughout the country.

Rural Credit Reserve Association

Advocated by Hon. Jas. R. Young, Insurance Commissioner of North Carolina.

The following letter is of great interest:

RALEIGH, N. C., March 2, 1914. Honorable Robert J. Bulkley, Chairman of Sub-Committee on Rural Credits, Member of Congress, Washington, D. C.:

DEAR SIR-Business engagements which I am not at liberty to break prevent my coming in person to appear before your Committee before the time at which I am informed your public hearings will close. I trust that you will pardon my presenting this paper and its suggestions.

I shall not discuss but presume the desire of aid by our farming public along the line of rural credits, and the need and even necessity for the same. I have been Insurance Commissioner of North Carolina since March, 1899, and had supervision of all classes of insurance companies, as well as investment companies. In 1905 building and loan associations were placed in my department. A study of the principles and work of these associations convinced me of their value; and their record in my own and other states shows to what extent they have built up our cities and towns, and helped the laboring man and others in securing homes. Realizing the need of farmers, in my section at least, as well as the principles of building and loan associations as operated in this country; and, as far back as 1910, urged the building and loan leaders and workers in my state to aid in the establishment of associations of the character managed by them for the use and benefit of our farmers.

In an address before the Farmers' Union in 1912 I outlined a plan of land and loan associations, or building and loan associations and their principles adapted to the use of the rural population. As building and loan associations are conducted in my state but little change is necessary. The laborer is best suited by having his dues payable each week, or at least monthly. The farmer in exceptional localities only can well do this. Whatever amount he pays must come in during the time in which he gathers and markets his money crop. The laborer pays 25 cents a week, or $13.00 per year. In a tobacco or cotton section the farmer can best pay $4.50 each for the months of November, December and January, or a total of $13.50 for the year. In either case the payements should mature a share of $100.00 par value in 61⁄2 years, or less; and a share of $200.00 in less than 12 years.

Local land and loan associations can readily be formed in any neighborhood with at least 1,000 shares taken by farmers, tenants and farm laborers, in different quantities. This will give the association for the first year $13,500.00, with $500.00 deducted for expenses, leaving $13,000.00 to be loaned out to the members of the associations. I should say here in passing that the $500.00 will cover expenses as is shown by the operation of local building and loan associations. With $13,000.00 loaned out you have this amount of good securities, on which you can get at least $7,000.00 for loaning purposes. This makes a total of $20,000.00 for loans to the members of the association, and in five years $100,000.00 to the members of one local association.

The work of the association teaches its members thrift and economy and business methods, and furnishes yearly by the gathering up of smali amounts the $13,000.00 referred to above. Where is the $7,000.00 or the amount to be obtained on the securities of the association to come from? At first my idea was that this could be obtained from trust companies, insurance companies and other financial institutions; but the item of interest and long time furnish the trouble along this line. The money ob

tained by a deposit of the securities should be obtained at 1 per cent at least below the rate at which the association makes its loans, and better at 2 per cent. Something could be done along this line, I am sure, but whether to the extent necessary or not I could hardly say.

In studying the plan of your reserve banks it has seemed to me that this principle could be applied to help the farmers in their rural credits just as it has been planned to help the commercial world through their banks. Reserve banks; why not rural credit reserve associations? The local association could furnish the funds necessary to organize the reserve associations under such rules, regulations and safeguards as the government saw fit to establish. The reserve association could furnish the funds on the securities of the local associations, with such aid as you and your associates could devise for the government to furnish.

I would not presume to outline the financial system necessary. Members of your honorable body, with the aid of your treasury department certainly could do this. Two per cent government bonds would furnish the funds to be advanced through these reserve associations at say 3 per cent to the association. The 1 per cent could be laid aside by the government to make a special fund to cover any contingency that might arise. The reserve association could lend to the local association at say 4 per cent, and the local association to its shareholders at 5 per cent. Indeed, the rate of interest charged by the reserve association would not make very much difference, as the reserve association would be owned by the local association who would get the profits and in turn distribute it themselves with the profits earned by them to their shareholders. There would be no graft or middleman, and all profits would find their way back to the individual shareholders of the local associations scattered in the different farming districts.

To summarize; the suggestions are to adapt the principles of the building and loan association to the use of the farmers under what I have been pleased to term land and loan associations. Then, to help these associations by the application to them of the principles of the reserve bank in establishing what would be known as a rural credit reserve association. The local association would furnish for the formation of the reserve association whatever funds were deemed necessary by the government for this purpose. The whole plan is, workable and does not interfere with the working of any of the other plans proposed, while having the advantage of being solely for the benefit of the shareholders in the rural districts, and of being run at the lowest expense ratio, with the most profit to the farmers, and at practically no risk to the government for whatever they might undertake to extend in the way of aid. In this way the farmer can get money on his real estate through his local association, whose directors know his land and its value; and thus there is eliminated the expense to the government incident to the keeping of a large force of employes to inspect and pass upon the value, title, etc., of small tracts of land throughout the country. While this plan would not furnish an immense amount from the government or the associations to the farmer immediately, it would have the advantage of giving him the aid, extending an education along the line of economy and thrift, and of allowing the government to go at the matter gradually so that they could feel their way, and make whatever corrections in the details of the plan were deemed advisable or necessary.

In conclusion, I would thank you and your committee for the privilege of presenting this paper, and assure you that it would afford me pleasure to discuss with you any further details that may be necessary should the plans be thought of value in the attempt to extend to the farmers through rural credit associations the aid given to the commercial world, and so much needed by them in at least the greater portion of this country.

Respectfully submitted,

JAMES R. YOUNG, Insurance Commissioner.

Farmer's Short Term Loans.

All Institutions Must Be Given Power of Rediscounting Paper With Federal Banks.

The small rural banks of the United States can perform all the duties required of them by agricultural communities, provided they are given the power of rediscounting paper with the Federal reserve banks, according to the opinion expressed by the United States Rural Credits Commission, which made a report to the Senate on methods of providing farmers and farm laborers with short term credit.

The commission reviews at length the rural credit banks of Europe, which lend money to farmers for the purchase of agricultural implements, the construction of buildings, drains and fences, and the purchase of stock.

While concluding that a new form of banking is not necessary, the commission recommends legislation permitting the institution of credit unions, directing attention to the state laws of New York, Massachusetts, Texas and Wisconsin, which allow the formation of credit unions.

MAKES RECOMMENDATIONS ONLY.

The commission does not present a concrete bill, making recommendations only and leaving the drafting of a bill to the Banking and Currency Committees of Congress.

Says the report:

"The commission is of the opinion that a very few changes in the present banking systems would better adapt large numbers of existing small banks to the needs of great numbers of farmers and farm laborers and at the same time leave these institutions unimpaired to perform the commercial functions for which they were primarily established.

"There are more than 8,000 state and private banks in the United States with a smaller capital than that required by law of member banks in the new system. The minimum capital for banks organized under federal charter is fixed at $25,000 in the national bank act.

"The federal reserve act re-enacted this provision in fixing the capitalization for member banks in the new system. It follows, therefore, that the rediscount privilege created by the new law is extended only to banks having a capital equal to that of national banks under the old law.

"In order to be sure of its ground the commission addressed letters of inquiry to several hundred of these small state and private banks asking if it was their purpose to increase their capital so as to join the new system, and if not, whether they would join were the capitalization to be reduced to $10,000.

"The replies were practically unanimous. These banks will not increase their capital, because in most instances a capital of $25,000 is not warranted by the volume of business transacted by them. This minimum is excessive for banks located in thinly settled farming districts.

"For this reason, then, and from not any spirit of hostility to it, these banks will not enter the new system. The very large majority of those replying stated that with a minimum capital of $10,000 they would reorganize and become member banks of the regional system.