PX = ~2 qe: tty S r-* oy he American FEconomic Review VOLUME IV, NO. 4 a | DECEMBER, 1914 5 ; BOARD OF EDITORS ay J. L. COULTER CLIVE DAY H. B. GARDNER =a : H. J. DAVENPORT F. A. FETTER J. H, HOLLANDER MANAGING EDITOR DAVIS R. DEWEY 3 a aie of Pasepuriition Companies HARRY GUNNISON BROWN The event Trend of Real Wages _.. : I. M. RUBINOW Objections to a Compensated Dollar Answered, IRVING FISHER ~ The Trade Commission Act ; . W. H. S, STEVENS Capitalization versus Productivity: Rejoinder, FRANK A.FETTER ae _ Reviews and Titles of New Books - (For complete list of books, see second page of cover) ¢ - Documents, Reports, and Legislation _ Farm_Loans_in.Ohio- ; Sst ; - O.C, LOCKHART Eighth National Conference on Taxation H. A. E. CHANDLER Income Tax Receipts and Rulings ; . - ROY G. BLAKEY Housing Reports ; 3 : hile Sree ay JAMES: FORD National Aid to Vocational Education - E. A, GOLDENWEISER Periodicals BANA Si ce Pars 5, Publication Office: Princeton, N. J. 771 793 818 840 856 860 954 962 —_- 970 974 982 985 987 1020 Subscriptions: American Economic Association, Ithaca, N. Y. Editorial Office: 491 Boylston Street, Boston, Mass. Entered at the Post Office, Princeton, N. J., as second-class mail matter Copyright, 1914, by American Economic Association. Price, in paper $1.25 MPS i 1914) Labor | 961 Bulletins hs 7 and 8 of the Industrial Accident Board of Massa- chusetts continue the Reports of Cases under the Workmen’s Com- pensation Act Determined on Appeal by the Supreme Judicial Court, July 1, 1912 to June 30, 1914. The First Annual Report of the Industrial Accident Board (Boston, Pub. Doc. No. 105, pp. 336) includes a statistical digest of 89,694 accidents, statements of the causes of injuries and estimates of the cost of insurance under the new act. The report is illustrated with many charts and photographs. Continuing the list of bulletins issued by the Industrial Accident Commission of Wisconsin, are to be noted: Shop Bulletin No. 7, Gear Accidents and their Prevention; No. 8, Elevator Accidents and their Prevention. The Department of Labor and Industries of Minnesota has pub- lished tables showing the Compensation Payable under Minnesota Workmen’s Compensation Law (St. Paul, 1914). These tables are intended to serve the same purpose in computing compensation as an interest table serves in the computing of interest. From these it is possible to find the compensation to which any workman earning a wage rate, classified by groups, is entitled for either a fatal, a per- manent, or a temporary injury. A paper read by Frank Hasbrouck, superintendent of insurance of New York, before the National Convention of Insurance Commission- ers, September 17, 1914, entitled The Workmen’s Compensation Situ- ation in New York State, has been printed in pamphlet form (pp. 17). The Industrial Welfare Commission of Washington has published a report on Wages and Conditions of Work and Cost and Standards of Living of Women Wage-earners in Washington, prepared by Caroline J. Gleason (Olympia, Mar., 1914, pp. 111). These data were gathered in order to throw light upon the application of the minimum wage for women in that state. Other reports dealing with labor questions are the following: Union Scale of Wages and Hours of Labor in Massachusetts, 1913, Labor Bulletin No. 97 (Boston, 1914, pp. 72) which is part I of the Annual Report on the Statistics of Labor for 1914; First Annual Report of the State Board of Labor and Industries (Boston, Pub. Doc. No. 104, Jan., 1914, pp. 64); Report by the Civil Service Commission, City of Chicago, 1914. Prison Labor and Management, House of Correction (pp. 66); 164803 962 Documents and Reports [ December Lhe Workmen’s Compensation Act (Toronto, 4 Geo. V., Chap. 25, 1914, pp. 51). Money, Prices, Credit, and Banking Farm Loans 1n Onto. Ohio’s interest in the rural credit problem is manifested by the publication of the results of recent official investi- gations, the most pretentious of which is the report of the Ohio mem- bers of the American Commission.1 However, this report is given over chiefly to a discussion of European conditions, and is disappoint- ing in its discussion of credit conditions in the state, to which it devotes but one page. The account of cooperation in the state is rather more satisfactory. The report is interestingly supplemented by investigations recently undertaken by the state departments of banks and banking and of building and loan associations. The banking department procured a statement, as of September 4, 1913, of the amount of loans made by state and private banks in the state and secured by mortgages upon farm realty.2 The department of building and loan associations has secured similar data, a summary of which has been furnished the writer in advance of publication. Farm mortgage loans made by state and private banks aggregated $25,455,663. The reports of building and loan associations are made as of different dates, and show a total of 7 »737 such loans, amounting to $15,223,173. The combined farm mortgage loans of banking insti- tutions under state supervision were thus $40,678,836. It is, of course, impossible to measure the potential demand for farm mortgage loans in Ohio. The amount actually so loaned may be approximated, but competition does not work smoothly enough to make it probable that all succeed in borrowing who are willing to pay market rates and are able to offer good security. The census of 1910 re- ported a mortgage indebtedness of $63,788,397 on 42,785 farms out of 44,780 operated by owner owning entire farm. The amount of unreported debt may be placed at about $3,000,000. Of farms of this class, 27.5 per cent were mortgaged. Of partly owned farms oper- ated by owners, 10,217 or 35 per cent were mortgaged. This would indicate a mortgage indebtedness on such farms of approximately $15,000,000. There remain 2,753 farms operated by managers and * Report on Rural Credits and Codperation (Columbus, 1914, pp. 84). ? Annual Report, Department of Banks and Banking, 1913, especially pp. 9, 10. A compilation of these loans by counties was made, but not published in the report. 1914] Money, Prices, Credit, and Banking 963 77,188 operated by tenants, for which the census gives no statistics of mortgage debt. The debt on farms operated by managers may be put at $1,000,000. Probably a smaller proportion of leased farms is mortgaged than of the other classes, nor is it very likely that the debt on such farms was incurred for purposes of agricultural pro- duction. As a very rough guess, the debt on leased farms may be put at twenty or twenty-five millions of dollars. This gives an esti- mated mortgage indebtedness on Ohio farms of $103,000,000 or $108,000,000.° Neglecting changes in indebtedness since 1910, it appears that banking institutions in Ohio provided about two fifths of these loans. The remainder came from individual lenders (sometimes merely through deferred payments to the vendors), from insurance companies, and from banks outside the state. The supply of bank funds available for farm mortgage loans is restricted by legislation and by practice as to the extent to which resources may be so invested and as to the amount that may be loaned on any one property. Banks organized under the laws of Ohio may lend on real estate security only when, and to the extent, authorized by a general resolution adopted by a two thirds vote of the board of directors. The maximum extent to which such loans may be authorized ®The average size of farms has been neglected, but could result in no very considerable modification of this estimate. The average size of farms oper- ated by owners was 83.5 acres; by managers, 183.3 acres; and by tenants, 98.1 acres. Mr. K. V. Haymaker has estimated the mortgage indebtedness on Ohio farms at $220,000,000, basing his estimate on the statistics of re- corded mortgages and on the assumption that the average life of such loans is five years (Proceedings Ohio Building Association League, 1913, p. 70). Further investigation has led him to conclude that the average term is four or four and one half years, and in a recent letter to the writer he places the amount of indebtedness between $175,000,000 and $200,000,000. It would ap- pear that the statistics of recorded mortgages are not a satisfactory basis from which to estimate mortgage indebtedness in Ohio, chiefly because they neglect current payments of debt and cancellations of mortgages. During the five years ending June 30, 1913, the average amount of mortgages on agri- cultural lands annually recorded in Ohio was $48,509,769, while cancellations recorded averaged $34,277,004. The net average annual addition to the mortgage indebtedness on Ohio farms thus appears to be $14,232,765, which would indicate an outstanding indebtedness of between $57,000,000 and $64,- 000,000, using Mr. Haymaker’s conclusion as to the average duration of such loans. On the other hand, this figure is unquestionably below the true amount of farm mortgage indebtedness, since the rigid tax law of the state results in the withholding of many mortgages from record. The writer is disposed to believe that his estimate of $108,000,000 is as close an approximation to the true figure as the available data will permit. 964 Documents and Reports [December is, however, limited by statute to 50 per cent of the bank’s combined capital, surplus, and deposits for commercial banks, 60 per cent for trust companies and for banks which do both a commercial and a say- ings bank business, and to 75 per cent for savings banks proper.* These restrictions upon loans do not apply to the private banks of the state, although their business is now subject to supervision by the state banking department ;’ nor are building and loan associations restricted in this regard.® That these restrictions upon the lending power of state banks are not operative is apparent from the fact that they would permit an amount of real estate loans about two and one half times as great as that actually made. On the other hand, boards of directors often fix a lower limit than the law permits. To what extent this practice limits the power to lend on real estate security can not be gauged; but, all things considered, there seems little ground for the contention that existing institutions are not able to supply the demand for farm loans at current rates. Quite as important as the limitation of the aggregate amount that may be loaned on real estate security are the restrictions on the amount that may be loaned on any one property. All classes of state banks (excluding building and loan associations) are forbidden to lend on realty in an amount which, inclusive of prior incumbrances, exceeds 40 per cent of the value of unimproved realty, or 60 per cent of the value of improved realty, the improvements on which must be kept adequately insured.’ Building and loan associations may lend at their discretion, but the general rule is to limit their loans to improved realty and not to lend in excess of 50 or 60 per cent of its value. Banks are not permitted to invest more than 20 per cent of their capital and surplus in any one loan, but commercial banks are exempt from this limitation in respect of first mortgage loans upon farm property.® Finally, it may be mentioned that while national banks do not lend on real estate to any great extent, it is not an uncommon practice for those in the larger cities to rediscount real estate paper for the country banks, or to accept it as collateral se- curity for a direct loan. In this way the lending power of the local banks is considerably augmented. The number of loans made by building and loan associations on “Sec. 9756, 9765, and 9781, General Code of Ohio. 5103 Ohio Laws 379. Act of May 17, 1913. * Sec. 9657, General Code of Ohio. ™General Code of Ohio, secs. 9758, 9765, 9781. ®Tbid., secs, 9754, 9790, i914] M oney, Prices, Credit, and Banking 965 farm mortgages was 7,737. The average size of these loans was therefore $1,967.58. The number of such loans made by the regular banking institutions was not ascertained. The superintendent of banks ventures the guess that their average size was in excess of $2,000. These figures compare with an average incumbrance (for 42,785 farms) of $1,491, as found by the census of 1910. It is often asserted that the interest rates on farm loans are ab- normally high. This view is held by the Ohio members of the Ameri- can Commission, who state that rates run from 6 to 8 per cent excluding fees.° It must be remembered, however, that interest rates on commercial.loans in Ohio are rarely below 6 per cent.*° Moreover, loans to farmers are relatively unprofitable, since few borrowing farm- ers carry any considerable balance on deposit. In a state where com- mercial borrowers are ordinarily expected to maintain an average balance equal to 20 per cent of their outstanding loans, and where the average rate paid bank depositors runs from 3 to 4 per cent,'’ a rate much below 6 per cent on farm loans is not to be expected. Yet the rate not infrequently goes as low as 51% per cent,” especially on loans made by building and loan associations, which commonly pay 5 per cent on stock and on most deposits. Smaller associations, however, frequently require a wider margin. The attempt to tax mortgages at the full property tax rate in Ohio, without set-off to the mortgagor, has a bearing on interest rates which is often overlooked.’ Beyond question, interest rates are firmer in Ohio than they would be under some other methods of taxation, for the tax tends to restrict the supply of funds available for mortgage loans. The mortgage loans of banks are, indeed, not directly taxed, and building and loan associations are entirely exempt from taxation, except that shares on which no loans have been made are required to be listed as credits by their owners. The direct bearing of the tax system on loans by banking institutions is rather through the taxation ° Report on Rural Credits and Codperation, p. 37. The average rate reported by 855 Ohio banks on June 30, 1910, was 5.94 per cent (Report of the Comptroller of the Currency, 1910, pp. 767-776). The rate on farmers’ short-time loans in 1912 was 6.24 per cent; in 1913, 6.23 per cent (Crop Reporter, April, 1913). “Report of the Comptroller of the Currency, 1910, pp. 767-776; 1913, pp. 740, 749. 2Toans by insurance companies are often made at 5 per cent plus com- missions and expenses. The rural credits commission recognized this influence in their recom- mendation that the exemption of mortgaged farms to the extent of the mortgage be considered (Report, p. 47). 966 Documents and Reports [ December of deposits. These are taxable as moneys, that is, without offset for debts, if the deposits are repayable on demand, either by contract or by practice; if in fact time deposits, they are taxable as credits. Al- though the assessment of such property has hitherto been farcical," the liability to taxation is thought by bankers to have an influence on the interest rate on deposits, and through that upon the loan rate. In view of these considerations, it does not appear that the rate of interest on farm loans in Ohio is excessive. The time for which farm loans run varies greatly with the pur- poses of the loan and the character of the lending institution. Com- mercial banks rarely lend for longer periods than six months, although renewals are freely made, particularly if the principal is somewhat reduced. There is frequently a tacit understanding that renewals will be made, although bankers are somewhat reluctant to admit the existence of such arrangements. Probably the more conservative bankers do not hold out very much hope of renewals to borrowers, but the small country bankers generally do. In this manner, com- mercial banks make what are really long-term loans, although the borrower has not complete assurance of their duration. Savings banks frequently lend for longer periods, but building and loan associations seem to be in the best position to make long-term loans. “Straight” loans running for five or ten years, interest payable semi-annually, are common; and on these the renewal policy is liberal. Repayment plans are also flexible. Payments may be made at any time and the interest charge reduced at once; although some associations stipulate that the minimum payment shall be $100. Amortization plans vary considerably, but the most usual is a semi-annual payment equivalent to the interest for the first six months. Thereafter, the payment on principal increases automatically as the interest declines, so that the average loan at 6 per cent is repaid in about 12 years. In some cases the term is as much as 16 or even 19 years.!®> It is obvious that this method admits of abuse. Under it the true rate of interest has some- times been very high. The point of immediate interest, however, is the extent of the application of this method in Ohio, and its possibilities of further extension. It has previously been noted that farm loans by building and loan associations in Ohio now aggregate $15,223,173. Some associations “Under the appointive assessor system now in vogue, the assessment prom- ises to be much more effective. “See Farm Loans by Building Associations, by K. V. Haymaker; and also Hearings on Rural Credits, pt. 3. 1914] Money, Prices, Credit, and Banking 967 have been lending on farms for two decades or more, but only 8 per cent of all building association loans are on farm realty. The encourag- ing thing in the situation, however, from the point of view of the farmer, is the steady growth of the business. The rate of increase in mortgage loans and in total assets has been about 10 per cent for each year from 1909 to the present.‘® A considerable part of this increase has beyond question been in the farm mortgage loan, which has furnished the outlet for surplus funds. So long as the wealth of the state increases and the associations maintain their present reputa- tion for honesty and stability, the surplus funds may be expected to grow. Moreover, these surplus funds often inure in a special manner to the benefit of the farmer, since many associations lend them out- side their home county at reduced rates, in order not to “spoil” their home market. While fees on these distant loans are somewhat higher, they do not ordinarily offset the reduction in the rate. It is to be observed further that the operation of the federal reserve act is likely to increase the supply of funds offered on the security of farm mort- gages, not alone because of the permission given to national banks to lend on farm land, but also because rural banks may often find it profitable to rediscount with their reserve bank and thus secure addi- tional funds for investment. No general investigation of short-time loans to farmers on personal or chattel mortgage security has been made in Ohio. Building and loan associations are not permitted to lend on personal security alone,” but banks in rural communities and the smaller cities do a considerable volume of this business. The superintendent of banks and his deputy, both of whom have had much experience as bankers and bank examiners, agree in the opinion that farmers who own their farms have in most sections of the state little difficulty in borrowing on their personal notes at the usual rates. Often the farmer’s wife is also asked to sign the note, but ordinarily no further security is required. In spite of occasional lack of punctuality in meeting their obligations, these notes are generally considered good, and cause a relatively insignifi- cant loss. It must not, of course, be inferred that all Ohio farmers have such good credit. In this branch of the farm loan business, again, the supply of loanable funds is likely to be increased through the operation of the reserve bank system, which permits the redis- * Annual Report of the Inspector of Building and Loan Associations, 1912, p. 18. “This is merely an administrative ruling. Laws of Ohio relating to Build- ing and Loan Associations, 1912, p. 15 (pamphlet). 968 _ Documents and Reports [December count of agricultural paper, a limited amount of which may have a maturity not exceeding six months, From the information at hand, it thus appears that the hes credit situation is now being reasonably well cared for in Ohio, and that it promises to be better cared for in the future. Loans to tenant _ farmers form the only important exception to this statement. Ten- ants must depend*on accommodation signatures to their paper, and o yy es there are doubtless many worthy cases where this method is not - practicable. Yet it is difficult to see how to remedy this defect except _ at the sacrifice of some measure of security. Something might per- haps be accomplished by a further development of the building as- sociation idea or by mutual savings banks. For the further extension _ of land-mortgage credit, the best way would seem to be the use of established institutions. Just as the building associations are in some measure becoming assimilated to the savings banks, so the latter might well follow the building associations by adopting amortization plans in Ohio, as already in some other states. Such measures as these, together with the adoption of more equitable methods for the taxation of intangible property, would seem likely to meet the situation in Ohio better than a system of federal rural banks. O. C. Locxnmart. Ohio State University. The speech of Representative Carter Glass on “The location of regional reserve grants” in the House of Representatives, April 8, 1914, may be found in the Congressional Record for April 23, 1914, pages 7727-7741. In this a defense of the districting by the organi- zation committee is made with statistical tables showing votes of banks in different districts and also the business operations of different cities. Hearings before the Senate Committee on Banking and Currency on Regulation of the Stock Exchange (Washington, 1914, pp. 943) in- cludes statements made by Horace White and Edward D. Page of the New York Hughes Commission, Professor Emery, Charles A. Conant, representatives of the New York Stock Exchange, Samuel Untermyer; and reprints of constitutions and by-laws of a few of the exchanges. The address of Mr. John Harsen Rhoades before the Massachusetts Savings Bank Treasurers’ Club on Savings Bank Accounting has been reprinted. This deals with investment values or present cost versus market values (Boston, May 22, 1914, pp. 13). MEMORAL! % 2 SOPH elt! TO RENEW CALL 292-3900 DATE DUE p ) 55...) ~~ HIGHSMITH 45-220 : Y. a. ‘ e+ ” Pet The Ohio $ State Unive’ si NIN iin | 5 aha 4671 FARM LOANS IN OHIO OOK DEPOSITORY “I \ i f | [ i it 5