Countries.Total bank deposits.In European banks.In domestic banks.Amount.Per cent.Amount.Per cent.Brazil$190,000,000$78,000,00040$112,000,00060Uruguay42,500,00014,000,0003328,500,00067Argentina626,000,000173,000,00028453,000,00072Paraguay3,500,0003,500,000100Total, east coast862,000,000265,000,00030597,000,00070Chile104,500,00029,500,0002875,000,00072Bolivia8,800,0001,500,000177,300,00083Peru28,500,0007,500,0002621,000,00074Ecuador4,000,0004,000,000100Total, west coast145,800,00038,500,00026107,300,00074Colombia5,800,0005,800,000100Venezuela6,200,0006,200,000100Total, north coast12,000,00012,000,000100Total, South America1,019,800,000303,500,00030716,300,00070
The great Banco de la Nación Argentina (Bank of the Argentine Nation) is an official institution, all the shares of which are owned by the National Government. It is a successor of the former national bank, which was driven into insolvency in the great financial crisis of 1890 and was afterwards liquidated. Although it was organised during a period of disaster and there were many prophecies of its certain failure, the Bank of the Argentine Nation has had a wonderful development and to-day ranks as the seventeenth in size among the great banks of the world.
The bank pays no dividends, but carries 50 per cent. of its profits to the credit of capital account and 50 per cent. to reserves. Entirely through this process the capital and reserve funds have increased from approximately $22,000,000 in 1892 to over $100,000,000 at the present time. During the same period deposits have grown from $21,000,000 to $205,000,000, and discounts and advances from $47,000,000 to $208,000,000. There are now more than 150 branches.
The bank differs from most other governmental institutions in that it carries on distinctly a commercial banking business more or less in competition with private commercial banks.Until the crisis of 1914 it did no rediscounting for other banks, and even during the crisis its activities in assisting other banks were much restricted.
In several of the South American countries there is a well-organised system of land-mortgage banks following European models. In some cases the banks are owned and operated by the National Government and in other cases receive some special support or guarantee. The plan under which they all operate is the following: The owner of land who desires to raise money on mortgage approaches the bank and requests an investigation and appraisal, the expenses of which he usually pays. If the property is shown to be unencumbered with prior claims and meets other conditions, the bank delivers to the owner the mortgage bonds in convenient denominations up to a given proportion, usually 50 per cent., of the appraised value. These mortgage bonds are part of a series and are themselves secured, not by any specific piece of property, but by all the property covered by the series; they are also backed by the credit of the issuing bank. The owner of the property then offers the bonds for sale through a broker, and in this way obtains the desired funds. He pays the bank a small commission, from one-fourth of 1 per cent. to 1 per cent., for its services.
In Argentina, where this system is developed to its highest extent, these land-mortgage bonds are known as "cedulas," and are issued by the Banco Hipotecario Nacional (National Land Mortgage Bank). At the present time the Argentine "cedulas" tend to sell on a 7 per cent. basis, more or less.
Uruguay, Brazil, and Chile all have similar issues, which sell on bases ranging from 7 to 9 per cent. or even higher. Broadly speaking, and without attempting to assign a definite value to any one of these issues, they are sound, conservatively issued, well protected, and under normal conditions readily marketable. The more important issues have been widely sold in England, France, and Belgium. If they were properly introduced and made well-known in the United States, there is no reason to question their finding a good market here also.
Side by side with the land-mortgage banks there are operating in the Argentine a number of English mortgage companies, which directly invest their own funds in land mortgages and have earned highly satisfactory profits.
In several countries there are state-owned savings banks, a large portion of the funds of which also go into land mortgages.
A banking business, like any other, must adapt itself to surrounding conditions, including laws, business customs, precedents created by older banks, and the like. In South America these conditions differ in a number of respects from those which prevail in the United States. Probably the first impression of most observers gives an exaggerated idea of the differences. However, they should be fully and carefully considered.
The chief differences that directly affect banking operations are the following: (1) Comparative absence of banking regulation on the part of governments or associations; (2) national colonies; (3) social character of business relations; (4) lack of highly developed economic organisation; (5) relatively high and stable rates of interest; and (6) in some countries fluctuating currencies. The first five of these circumstances call for brief comment.
Not only is there a marked absence of laws directly applicable to banking concerns, but there is also an equally noteworthy absence of control exercised either by the Government or by associations among the banks. Even the large governmental or semi-governmental banks in Brazil, Uruguay, Argentina, Chile, and Bolivia are competitive with the other banks. Whatever influence they exercise is secured through their active and direct competition, not through any special authority over the other banks conferred upon them. In the fall of 1914, for the first time, there was some rediscounting of the paper held by other banks on the part of the Bank of the ArgentineNation and of the Bank of the Republic of Uruguay; but this tendency did not go far. The other banks objected to placing information as to their relations with customers in the hands of the governmental institutions. In other countries there has not been even this much of an attempt toward fulfilling the functions of a central bank of rediscount.
It is difficult to secure in most of the South American cities even the most elementary kind of co-operation among the banking institutions. How is it possible that they should continue to stand apart when they would obviously gain so much by coming together? A partial answer is to be found in the peculiarity that has already been pointed out, namely, the fact that many of the more powerful institutions are the offspring of European countries. Each one is fighting to support the trade of a certain well-defined group of clients. The national antagonisms among them are deep-seated and sometimes virulent. All this was true even before the European war. It will be tenfold true for a number of years to follow.
This leads to mention of the second condition, one which operates in favour of European-owned banks to the relative disadvantage perhaps of American banks. This condition is the presence in some of the large South American cities, notably Buenos Aires, of a large colony representing each one of several important European nations. Naturally the tendency of each colony is to support banks of its own nationality.
On the whole, although this matter of national affiliations is undoubtedly a factor to be reckoned with, it appears to be by no means decisive. The German banks, for instance, have been able to expand with much greater rapidity than we should have been justified in expecting on the basis of their national trade and national colonies alone. This is true likewise of the Italian and French banks. A great proportion of the business men of South America, even those of foreign origin, are governed less by their national sentiments than by their business interests.
To an observer accustomed to European or American methods, one of the most striking features of business life in the South American cities is its strongly personal and social flavour. We are accustomed in this country to emphasise the principle that friendship is not a safe guide in business dealings. In South America the contrary is more nearly true. Family ties are apt to be a controlling factor in choosing partners and employés. If one's ultimate object is to have business dealings with a firm, he must first cultivate the personal friendship of the head of the firm. Social relations and business relations become confused, and it is hopeless to expect the purely impersonal view of a business proposition that is considered correct in this country. Like all sweeping statements, this one is subject to exceptions. There are many American, German, and English firms, especially in Buenos Aires, which prefer what we denominate "businesslike methods," but they are not numerous enough to give the tone to business life.
This is a condition which directly affects banking practice. It makes it very difficult, for example, to introduce the custom of securing full financial statements from all applicants for credit. The request for a statement is apt to be construed (as was the case in this country not many years ago) as a reflection on the personal honesty and credit standing of the applicant. For the same reason it is difficult, and may frequently be poor policy, for a bank officer to ask a customer a direct question as to the status of his business. He is likely not to take an impersonal attitude toward the question, but to resent it as if it were an attempt to pry into his purely personal affairs. Consequently, all business men, including bankers, are forced to rely to a great extent in estimating the credit standing of individuals and firms on their personal impressions, on such information as they are able to secure through indirect hints and questions and on the business gossip which they pick up. It must be remembered that, except for Buenos Aires, most of the business communities are comparatively small and isolated. There is little opportunity, therefore, for long-continued fraud. A man who shows traces of dishonesty is muchmore plainly marked than in larger communities. As a consequence, the lack of the machinery and the customs that we consider indispensable in extending credit does not prevent the formation of correct ideas as to the wealth and character of a business man.
Most of the South American countries, we should keep in mind, are still sparsely populated and have no need for the elaborate machinery of trade and finance which exists in Europe and North America. The region farthest advanced in its economic development, the River Plate Basin, may be roughly compared to agricultural States like Iowa, Kansas, and Nebraska as they were thirty years ago. Farming methods are usually not economical. The small farmers have little money of their own, their lands are heavily mortgaged, and they are "carried" from one crop to another by the local general retailer, who makes advances to them both in goods and in money. The retailer must in turn secure liberal credits from wholesalers, who are in their turn partly "carried" by the banks. There is no clear-cut distinction between dealers in commodities and bankers, for the dealers are forced to finance most of their own sales. Such an arrangement of course favours extravagant credits, high prices, speculation, and crises, just as it did in the United States. It is rapidly giving way to a more complex organisation, in which the farmer has funds of his own, does his short-term borrowing at a bank, and pays cash for his purchases.
Without attempting to comment on intermediate grades of organisation we may consider briefly the manner in which trade and finance are conducted in the north coast countries. An officer of a bank there asserts that banking in the north coast countries is not to any great extent a matter of handling currency or money funds. The intermediary system of brokers, merchants, and other middlemen between the producer and his market, to which we are accustomed, is lacking, and the banker must take the place of all of them. He must himself inspect and sell produce. Loans are made, for instance, secured by growing crops; the bank sends a man to the plantationto look over the coffee or cocoa, or whatever the crop may be, and report on its condition and prospects; to protect itself the bank sees that it is properly prepared for shipment, and takes care of the sale in the New York, London, or Hamburg market. The bank collects the proceeds and credits the customer with his share. Interest rates run from 8 to 15 per cent. and commissions for selling from 1 to 3 per cent.
Interest rates average considerably higher—even making allowance for increased risk—in South America than in the United States. They are, however, much more stable and more uniform over the whole continent. The uniformity is no doubt to be ascribed chiefly to the large English and German banks, with their branches in several different countries and their ready access to European financial centres. The stability in rates over a period of years is presumably due in part to the relatively gradual development of banking, commerce, and production, so that sudden shifts in the demand for and supply of banking capital are not frequent.
There are, however, a number of exceptions to the general stability. In Argentina the crop-moving season creates, though to a much smaller extent, the same kind of extra demand for currency as in the United States, and tends to make some seasonal variations in discount rates. They vary from as low as 6 per cent. to as high as 12 per cent., but do not normally move far from 8 or 9 per cent.
The German, French, Italian, Spanish, and many of the domestic banks, especially in Argentina and Peru, follow the European custom of compensating the home office directorate by allowing them a fixed percentage of the net profits. The president, manager, founder, and others may also be compensated in the same way. The net profits of the Banco Español del Río de la Plata are distributed: 2-1/4 per cent. to certain specified charities, 1 per cent. to the founder, 12 per cent. to the reserve fund, 2 per cent. to the directors and managers, 2-3/4 per cent. to the fund for employés, 80 per cent. tothe shareholders for dividends and dividend reserves; those of the Banco de Italia y Río de la Plata: 1/2 per cent. to charity, 5 per cent. to the reserve fund, 7 per cent. to the directorate, 1-1/2 per cent. to the fund for employés, 86 per cent. to the shareholders. There is apparently no general rule which governs the distribution except possibly that the larger the bank the smaller is the percentage for the directorate and management. In England the directors are more likely to receive a fixed compensation. Whether this plan of having a paid directorate works better than the American method of having a directorate made up usually of some of the larger shareholders, whose payment is purely nominal, is an open question. It is largely a matter of national custom.
First. The foreign banks in South America usually start by devoting a large proportion of their energy and capital to operations in exchange.
Second. In this connection they purchase and make advances against commercial bills drawn on importers in the countries where they are doing business.
Third. At the same time the home office in London, Hamburg, or Berlin is probably developing a business in acceptances which involves comparatively little direct expense and allows considerable profits.
Fourth. All South American banks are called upon to handle collection of drafts and sometimes to take care of ordinary mercantile transactions, both on a commission basis.
Fifth. An activity which may be of some importance from the beginning consists of underwriting and selling securities.
Sixth. As quickly as possible the foreign banks build up a local account current and loan and discount business.
Seventh. Some of the banks, especially the German banks, have participations in syndicates and in industrial enterprises.
Eighth. In some branches they receive money and securities for safekeeping or rent safe-deposit boxes.
Ninth. Many banks have savings and mortgage-loan departments.
None of the distinctively foreign banks in South Americahas as yet issued circulating notes; this is being done, however, by some of the domestic banks in which foreign capital is heavily interested.
There may, of course, be other miscellaneous activities.
FOOTNOTES:[196]Adapted from William H. Lough,Banking Opportunities in South America, Department of Commerce, Special Agents Series, No. 106. Washington. 1915.
[196]Adapted from William H. Lough,Banking Opportunities in South America, Department of Commerce, Special Agents Series, No. 106. Washington. 1915.
[196]Adapted from William H. Lough,Banking Opportunities in South America, Department of Commerce, Special Agents Series, No. 106. Washington. 1915.
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.
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 countrylife 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 ofshort-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.
[198]The United States, although the leading country of the world in the amount of its agricultural products and in the extent of its banking business, is behind nearly every other progressive country of importance in the development of agricultural credit,i. e., short-time non-mortgage credit. Our manufacturing and commercial businesses are financed largely by means of such credit, and the capital invested in these industries is thereby rendered manifoldly efficient; not so with agriculture. Most farmers apparently make little or no use of short-time credit. There seems to be a wide acceptance in this country even among the farmers themselves of the dictum of Louis XIV, that: "Credit supports agriculture, as the cord supports the hanged." Is this a correct description of the situation? If so, what is the explanation, and what remedies if any are needed? The object of this paper is to throw light upon the answers to these questions.
First, as to existing banking facilities for agricultural credit, and their utilization by farmers. It is well known that the banking capital of the country is concentrated to a great extent in our large cities—to a greater extent than it would be if we had a well-developed system of branch banks like Canada—and that the banks of these cities are prevented by reason of their location from making many agricultural loans, even if they were so inclined. Of the 7,301 national banks in the United States September 1, 1911, 191 or 2.6 per cent. werelocated in the dozen largest cities of the country.[199]The national banks of these twelve cities, representing but 14 per cent. of the population of the country, had 37 per cent. of the national banking capital (capital, surplus, and undivided profits), 33 per cent. of the individual deposits, and 40 per cent. of the loans. It should be noted, however, that since the act of 1900, authorizing the establishment of national banks with a capital of less than $50,000 in small towns, there has been a continual and rapid increase in the number of national banks in small communities. On September 1, 1911, out of the total 7,301 national banks there were 1,966 with a capital of $25,000, and therefore presumably located in towns of less than 3,000 population, 372 with a capital between $25,000 and $50,000, and therefore presumably in towns of less than 6,000 population, and 2,297 with a capital between $50,000 and $100,000. Except for banks in towns not exceeding 6,000 population, the law as amended in 1900 does not permit any national bank to be organized with a capital less than $100,000.
Are the national banks which are accessible to farmers in a position under the law to meet farmers' needs? The answer to this question must be in the affirmative. Aside from the fact that national banks are not permitted to make loans on real estate security,[200]there is no restriction in the national banking act which would interfere with loans to farmers for agricultural purposes. Personal security alone is legally acceptable; the range of possible collateral security is practically unlimited; and there is no limitation fixed by law as to the period of loans. National banks therefore have a very free hand in regard to loans to farmers.
When we inquire concerning agricultural credit in banks under state charters we find conditions varying with the different States, but, with a few minor qualifications, it may be said that the state banking laws are free from restrictions that would hamper state banks and trust companies in extendingcredit liberally to responsible farmers. They are in a much better position in one respect to deal with farmers than are national banks, that is, in the matter of accepting real estate security. No state denies state banks this privilege, and such restrictions as exist upon its exercise are generally not onerous.
If commercial banks are comparatively unhampered by law in making short-time loans to farmers, it may be asked: To what extent are such loans made? Unfortunately practically no information is available on this question. In answer to an inquiry the Comptroller of the Currency wrote, under date of May 27 of this year, that no information with reference to short-time loans made to farmers by national banks had ever been compiled by the comptroller's office. The writer has found no trace of any investigation of this subject by state banking departments. For about a year he has taken occasion to inquire at every opportunity of individual bankers concerning their experience with regard to loans to farmers in different parts of the country. The replies received are so divergent that no conclusion can be drawn from them, except that the practice varies widely in different sections of the country and even in different communities in the same section, and that probably the farmers of the North Central and Western States borrow of commercial banks more than do those of the Eastern and Southern States. There is not sufficient evidence, however, for this latter inference to make it much more than a guess. In the absence of any comprehensive data, I shall resort to the unsatisfactory but representative replies from different parts of the country.
Neither of the two national banks in the city of Ithaca, N. Y., makes any appreciable amount of loans to farmers. Both claim to be willing to do so, but say there is practically no demand. In some of the neighboring cities, however, such loans by national banks are more common. The cashier of a national bank in a town of about 800 population in an agricultural section of northeastern Pennsylvania writes:
Our farmers as a rule are not large borrowers and want loans only in small amounts for short periods.Farmers in general will not go on each other's paper no matter how good the parties are, for they have been so often taken in bywild-cat schemes that they are shy when their names are required to be placed upon paper. They realize also that they are not familiar with business methods in the commercial world and dare not trust themselves.
Our farmers as a rule are not large borrowers and want loans only in small amounts for short periods.
Farmers in general will not go on each other's paper no matter how good the parties are, for they have been so often taken in bywild-cat schemes that they are shy when their names are required to be placed upon paper. They realize also that they are not familiar with business methods in the commercial world and dare not trust themselves.
There is a moderate amount of borrowing by farmers in western New Jersey. Estimates made by bankers in Princeton as to the proportion of farmers in that neighborhood who borrow for short periods of local banks vary from 15 to 40 per cent.
A former president of a national bank in Indianapolis writes:
We came very little in contact with farmers. We made special effort to secure such business by sending to a considerable mailing list of carefully selected farmers, circulars and personal letters ... but the business did not come. My inference was that they dealt with the nearby small banks.
We came very little in contact with farmers. We made special effort to secure such business by sending to a considerable mailing list of carefully selected farmers, circulars and personal letters ... but the business did not come. My inference was that they dealt with the nearby small banks.
Of the situation in Lafayette, Indiana, a former vice-president of a national bank, writes:
About 50 per cent. of our business was with farmers. They borrow frequently from commercial banks, funds to be used for crop planting, crop gathering, purchase of agricultural machinery, improvements on the farm, purchase of cattle, and the carrying of cattle or hogs to maturity. Through Indiana these farmers' loans are very usual in the country banks, many preferring state charters so they may make these loans not only on personal but also on mortgage security.Farmers are seldom able to give any but personal or mortgage security. A large percentage of them are sufficiently responsible to be entitled to and to receive reasonable credit without security.Farmers seem to endorse for each other much more readily than do those of other classes.... The reason is, I think, clear. Each knows pretty much everything about his neighbor's financial status, the amount and value of his land, his live-stock, and other visible personal property, the amount of any mortgage and when due. So much being thus in the open there is less of the secretive habit, so that the extent of the invisible personal property and debts is apt to be known.
About 50 per cent. of our business was with farmers. They borrow frequently from commercial banks, funds to be used for crop planting, crop gathering, purchase of agricultural machinery, improvements on the farm, purchase of cattle, and the carrying of cattle or hogs to maturity. Through Indiana these farmers' loans are very usual in the country banks, many preferring state charters so they may make these loans not only on personal but also on mortgage security.
Farmers are seldom able to give any but personal or mortgage security. A large percentage of them are sufficiently responsible to be entitled to and to receive reasonable credit without security.
Farmers seem to endorse for each other much more readily than do those of other classes.... The reason is, I think, clear. Each knows pretty much everything about his neighbor's financial status, the amount and value of his land, his live-stock, and other visible personal property, the amount of any mortgage and when due. So much being thus in the open there is less of the secretive habit, so that the extent of the invisible personal property and debts is apt to be known.
A similar report comes from a national bank in Lincoln, Nebraska, from which the following extracts are taken:
The farmers of this state have need of accommodations of this kind to carry them through the crop season. As a matter of fact, they use short-time credit to fully as great an extent as do the business men in the city and smaller towns. In fact, I think it is true that in the smaller towns the bankers favor the farmers in preference to the small business men....There is no doubt about the average well-to-do farmer in this state being able to furnish satisfactory security aside from mortgaging his farm for such temporary loans within any reasonable limitations. In some cases the banks take chattel mortgages on cattle or other live-stock, and in some cases where the farmer has a good equity in his farm they will not hesitate to take his personal note.While I do not know that there is any particular difference between farmers and other classes in this state as to their willingness to go security for each other, yet very little of this is done any more. There was a time when it was not an uncommon thing, but it has become less and less until now there is very little signing done for others. In fact, the farmers feel that they are able to take care of themselves and do not ask others to sign with them, and are able to handle themselves without such an endorsement. This is true of all classes in this state.I have never felt that in this locality farmers suffered in any way from lack of credit facilities....
The farmers of this state have need of accommodations of this kind to carry them through the crop season. As a matter of fact, they use short-time credit to fully as great an extent as do the business men in the city and smaller towns. In fact, I think it is true that in the smaller towns the bankers favor the farmers in preference to the small business men....
There is no doubt about the average well-to-do farmer in this state being able to furnish satisfactory security aside from mortgaging his farm for such temporary loans within any reasonable limitations. In some cases the banks take chattel mortgages on cattle or other live-stock, and in some cases where the farmer has a good equity in his farm they will not hesitate to take his personal note.
While I do not know that there is any particular difference between farmers and other classes in this state as to their willingness to go security for each other, yet very little of this is done any more. There was a time when it was not an uncommon thing, but it has become less and less until now there is very little signing done for others. In fact, the farmers feel that they are able to take care of themselves and do not ask others to sign with them, and are able to handle themselves without such an endorsement. This is true of all classes in this state.
I have never felt that in this locality farmers suffered in any way from lack of credit facilities....
A former bank examiner in the state of California, himself a farmer, writes:
The farmers of California do not to any considerable extent make a practice of borrowing money from local banks or money lenders for short periods....In reviewing the various bank examiners' reports on some 500 state banks I recall very few instances of crop mortgages, and it impresses me that in many of the cases the mortgage was taken to obtain additional security for loans previously granted and secured otherwise.I think it would be safe to say that the bankers as a rule have not favored short-time unsecured loans to farmers. They are, however, fast awakening to the fact that as a rule these are the safest loans a bank can make, and are making an effort to get in closer touch with the farmer. It would also be safe to say that the average small farmer does not as yet realize that hecanobtain such credit at a bank.Our farmers as a class are exceedingly reluctant "to go each other's security." Two-name paper is mostly confined to commercial transactions.
The farmers of California do not to any considerable extent make a practice of borrowing money from local banks or money lenders for short periods....
In reviewing the various bank examiners' reports on some 500 state banks I recall very few instances of crop mortgages, and it impresses me that in many of the cases the mortgage was taken to obtain additional security for loans previously granted and secured otherwise.
I think it would be safe to say that the bankers as a rule have not favored short-time unsecured loans to farmers. They are, however, fast awakening to the fact that as a rule these are the safest loans a bank can make, and are making an effort to get in closer touch with the farmer. It would also be safe to say that the average small farmer does not as yet realize that hecanobtain such credit at a bank.
Our farmers as a class are exceedingly reluctant "to go each other's security." Two-name paper is mostly confined to commercial transactions.
A college professor in the state of Washington informs me that short-time loans to farmers are common in that state, but that frequently the rate of interest charged is 2 per cent. higher than that on commercial loans—the explanation commonly given being that a farmer borrowing generally reduces the resulting deposit credit more rapidly than does a merchant.
In the Southern States, particularly in the cotton, rice, and tobacco sections, the use of crop liens for short-time loans appears to be much greater than in other sections of the country.[201]Such meager testimony as I have been able to secure seems to show that the amount of short-time agricultural credit extended by banks in the South is relatively small but rather rapidly increasing. The banks are catering more and more to this class of business.
Other evidence might be cited, but the above gives a fair picture of the situation as revealed by all the testimony received—a confused picture of widely varying conditions. Public opinion is now being aroused on the subject of agricultural credit, and pressure is liable to be brought for hasty and perhaps radical legislation. Obviously, the first step to be taken in the interest of a sane solution of the problem is to find out exactly what the problem is. To this end the writer would urge strongly the need of investigations by the Comptroller of the Currency and by the various state banking departments of the present facilities and practices in the matter of agricultural loans. In view of the increasing public interest in the subject the investigations cannot be undertaken too soon.
Although the farmers in any section of the country may not resort to the banks for short-time credit it does not follow that they are not receiving such credit. As a matter of fact they are often receiving it on a considerable scale and in the most expensive way.i. e., in the form of book credits with merchants. It is a common practice throughout the country for farmers to run up book accounts with local merchants during the spring and summer to be paid in the fall when the crops are sold. When this is done on any considerable scale thefarmer probably pays more than bank interest under the guise of prices; and this is particularly true when he obligates himself to sell his crops to the creditor merchant. In the South this practice is carried to the extreme in the familiar "store-lien" system which holds many farmers in the cotton belt in a condition bordering on perpetual servitude. The custom is for the farmer to buy supplies of the local general store on credit for the year, agreeing to sell to the merchant his cotton crop in the fall, thereby cancelling the debt. A crop lien is generally given, and the merchant often dictates the character and the amount of the planting. The prices paid for cotton under this system are liable to be exceptionally low, and the prices paid by the farmer for his supplies exceptionally high. The system has proven a curse to many sections of the South. Witnesses before the United States Industrial Commission estimated the interest rates imposed by this system at from 20 per cent. upwards. Mr. George K. Holmes of the United States Department of Agriculture testified:
The rate of interest on the liens on the cotton crop of the South, it is safe to say, probably averages 50 per cent. a year. All cotton men will agree that it is at least that. The store system of the South is a sort of peonage; that is what it amounts to with the cotton planter.[202]
The rate of interest on the liens on the cotton crop of the South, it is safe to say, probably averages 50 per cent. a year. All cotton men will agree that it is at least that. The store system of the South is a sort of peonage; that is what it amounts to with the cotton planter.[202]
Since the Industrial Commission's report was published the banking facilities of the South have been greatly increased, and the banks are coming into closer touch with farmers, with the result that the store-lien system is gradually breaking down.
Another form of credit to farmers is that obtained from dealers in farm implements and machinery which the farmers frequently buy on time, paying interest during the credit period.
One informant, who has been a bank examiner, writes from California—and his testimony is applicable to many other sections of the country:
The new generation of merchants is not disposed to carry the farmer as of old and insists that overdue accounts be covered bypromissory notes which are in turn hypothecated with their bank. In other words a clearer demarcation of function is being gradually brought about to the best interests of all concerned.
The new generation of merchants is not disposed to carry the farmer as of old and insists that overdue accounts be covered bypromissory notes which are in turn hypothecated with their bank. In other words a clearer demarcation of function is being gradually brought about to the best interests of all concerned.
Such in general is the present situation in the United States in the matter of short-time agricultural credit as evidenced by the very indefinite and scant information available. What are the causes? Perhaps in them will appear some suggestions for the remedy.
The chief reasons for the backwardness of the United States as compared with Europe with regard to agricultural credit may be briefly summarized as follows: (1) Our wonderful agricultural domain where good land could be had almost for the asking, and where for generations land was so cheap and labor and capital so dear that intensive cultivation was generally unprofitable. (2) The prosperity of our farmers who have not been forced by dire necessity to resort to credit as were the farmers of Germany at the middle of the last century when the Raiffeisen co-operative banks were first organized. (3) The nomadic character of a considerable part of our agricultural population as it has moved continually westward in taking up of new lands, and more recently as it has been retracing its steps or moving northward. (4) The isolation of our farmers in this country of large farms and "magnificent distances." (5) The rapid growth of the manufacturing and commercial business of the country—and that largely in the hands of the same class of people who control the bulk of the banking business.[203]
Add to these circumstances the obstacles which farmers always encounter in the matter of credit, as compared with manufacturers and merchants, obstacles such as the uncertainty of crops and the strongly seasonal character of the farmer's credit demands, and we have a sufficient explanation for the backwardness of agricultural credit in this country.
To emphasize most of these causes, however, is to brand oneself as belonging to a past generation. Our domain offree arable land is practically gone; good farms must be bought, and for them ever increasing prices must be paid.[204]
The era of hand cultivation is giving way to that of farm machinery propelled by horse-power and even by steam, gasoline, or electricity, with its resulting great increase in the efficiency of labor. Eleven years ago the editor ofThe Dakota Farmer, in his testimony before the United States Industrial Commission, put the matter tersely, and with little exaggeration, as affecting his own section of the country, at least, when he said: "When I first worked out it took five binders to follow a machine, one man to rake off, and one to carry the bundles together. Now the hired girl frequently drives a machine that does the whole business."[205]Some idea of the extent of this increase may be obtained by reference to the following figures compiled from census reports:
YearValue 000,000Per Cent. Increase1910$1,265691900750521890494221880407501870[207]27110186024662
The increase in the value of farm implements and machinery per acre of land in farms from 1900 to 1910 was from $0.89 to $1.44, or 61.8 per cent.
An analysis of the figures for farm machinery by geographic divisions shows a marked difference in the rates of increase, but the tendency in all sections during the last forty years has been decidedly upwards, the greatest growth having been witnessed in the decade ending 1910. During that decade the lowest rate of increase in any section was that of New England,39 per cent., and the highest that of the Mountain States, 163 per cent.[208]
Another development which is making larger demands upon the farmer for working capital is the increasing use of artificial fertilizers, the expenditure for which in the United States approximately doubled from 1880 to 1900.
As the result of such tendencies and of the rapid depletion of our free domain, farming in the United States is losing its old-time kinship to mining and becoming more like manufacturing. More and better machinery and more power are needed on most farms in the interest of efficiency. This calls for short-time credit. But a supply of good machinery requires a fair sized farm for its efficient utilization—hence the need for larger farms and for mortgage credit to make their purchase possible. Upon this subject there are some very illuminating data in Warren and Livermore'sAgricultural Surveyof four townships in Tompkins County, N. Y., from which the following is quoted: