Federal Farm Loan System (United) - Encyclopedia




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"FEDERAL FARM LOAN SYSTEM [UNITED STATEs]. - The Federal Farm Loan Act of 1916 was adopted in the United States for the following reasons. Increasing use of costly equipment and the rising price of farm land had combined to make the problem of financing the American farmer a difficult one. His need for short-time credit, generally, had been met in various ways. Country merchants frequently advanced supplies to a farmer and received their pay after his crop was marketed. Manufacturers of farm machinery and of fertilizers also did a large credit business. A great many small country banks had sprung up since 1890 whose chief function was to supply shorttime credit to farmers. The chief difficulty, however, was to supply long-time or mortgage credit. When the farmer must make a heavy investment, he needs a long loan. The only satisfactory security he can offer is a mortgage, and the market for farm mortgages is limited, because comparatively few persons with money to lend are experts in farm values or otherwise in a position to deal safely in farm mortgages. This difficulty was accentuated in new communities by the lack of local lenders with sufficient expertness. It had in the past been partly, but only partly, overcome in various ways. Local mortgage brokers or banks having the necessary expertness, could lend on a limited number of mortgages, and after adding their own endorsements, discount the loans with eastern investors. In other cases, some of the large insurance companies sent their own experts into selected regions to place loans secured by mortgages. Again, a number of large corporations, commonly called mortgage banks, were organized to lend on mortgage security and to sell their own bonds to the investing public. Such a corporation, having bought a number of mortgage notes aggregating $100,000, would deposit them with a trustee as security for its own bonds to the same amount. These bonds were then sold to the general investing public, but sold on the general reputation of the corporation issuing them, and not on the buyer's expert knowledge of the individual mortgages.

In order to extend this principle and enable it to meet the need for mortgage credit throughout the country, the Federal Farm Loan Act of 1916 was passed. This Act created a Federal Farm Loan Board, to consist of the Secretary of the Treasury and four others to be appointed by the President, and to have general administrative control of the system. Under this Board there were created 12 farm land banks, located in the 12 different districts into which the country was divided, each bank to be the centre of the farm loan system for its own district. In each district there were to be organized, under its farm land bank, an indefinite number of farm loan associations, composed wholly of farmers desiring to borrow money on mortgage; and they borrow from the farm land hank of their district.

The 12 Federal farm land banks are located in the following cities: - Springfield, Mass., Baltimore, Md., Columbia, S.C., Louisville, Ky., New Orleans, La., St. Louis, Mo., St. Paul, Minn., Omaha, Neb., Wichita, Kan., Houston, Tex., Berkeley, Cal., Spokane, Wash. There was also a provision in the Federal Farm Loan Act permitting joint stock mortgage banks, such as those already described, to come in under the Federal farm loan system. Twenty-five had done so before Feb. 15 1921, with capital stock of $7,966,000, with bond issues aggregating over $76,000,000, and with loans to farmers aggregating almost $78,000,000. Every Federal farm land bank was required to have, before beginning business, a subscribed capital stock of not less than $75 0 ,0 0 0. This provided the initial fund from which to purchase the first batch of mortgages from the farm loan associations. Additional funds were to be raised through the sale of bonds to the investing public. Each issue of bonds was to be based upon a batch of mortgages previously purchased and deposited as security under the direction of the farm loan board. In order to assure a sufficient amount of capital stock, it was provided that in case the total $750,000 of capital stock of any Federal farm land bank was not subscribed within 30 days after the opening of the books, it was made the duty of the Secretary of the Treasury " to subscribe the balance thereof on behalf of the United States." In order still further to assure the farm land banks a working capital, in case the public was slow to invest in the farm loan bonds, amendments were passed (Jan. 18 1918 and May 26 1920) authorizing the Secretary of the Treasury to purchase $200,000,000 of such bonds during 1918-21.

On Dec. 31 1920 the U.S. Government held $6,832,680 of the capital stock of the farm land banks and their bonds to the amount of $182,235,000. The total bonds authorized and issued by them was $333,7 8 4,5 00. The total capital stock of the 12 farm banks amounted to $24,591,515 held as follows: - Under the operation of this Act and its amendments, such moneys as are secured from the sale of bonds, either to the Secretary of the Treasury or to the investing public, are loaned by the farm land bank to farm loan associations within its district in return for mortgages given by individual farmers to these farm loan associations. The course of the money is, therefore, as follows: first, from the investor to the farm land bank in exchange for bonds; second, from the farm land bank to the farm loan association in exchange for a batch of mortgages; third, from the farm loan association to the individual farmer in exchange for an individual mortgage. The securities, however, proceed in the opposite direction; first, a mortgage is given by the individual to his local farm loan association in exchange for money; second, this and other similar mortgages are transferred from the farm loan association to the farm land bank in exchange for money; third, the farm land hank deposits these mortgages under the direction of the Federal farm loan board and, on that security, issues its own bonds and sells them to investors.

It was provided in the Farm Loan Act that the bonds of the farm land banks were to be exempt from taxation. The purpose of this exemption was to make such bonds so attractive to the general investor as to compensate for a low rate of interest. This low rate of interest on the bonds would then enable the farm land banks to accept farm mortgage notes paying a low rate of interest, and thus the farmer would be able to borrow at a lower rate than would be necessary if the farm loan bonds were subject to taxation. Those issued prior to May I 1920 paid 41%. Subsequent issues pay 5 This provision was bitterly attacked on the ground that it was class legislation, or discrimination in favour of farmers as against other classes. The matter was under litigation for many months, but finally in Feb. 1921 the Supreme Court decided in favour of the constitutionality of the Act. (T. N. C.)


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