GIFT OF THE RURAL CREDIT SYSTEM NEEDED IN WESTERN DEVELOPMENT BY ELWOOD MEAD [Reprinted from the UNIVERSITY OF CALIFORNIA CHRONICLE, Vol. XVIII. No. 1] THE RURAL CREDIT SYSTEM NEEDED IN WESTERN DEVELOPMENT* ELWOOD MEAD One of the important questions confronting this country is the creation of a land policy suited to conditions which have arisen in the last quarter of a century. Until recently it was our boast that any man who had industry and thrift could enjoy landed independence. That statement needs now to be qualified. The increase in the number of farm renters compared with the number of farm owners; the colonizing of rural communities with foreign-born immi- grants who can and do pay higher rents because they are content with a lower standard of living, are significant indications of the dangers to rural life which need to be removed. These conditions are due largely to the fact that the rural institutions of this country, have failed to keep pace with the changes in our industrial and social life. In other countries where the problems of settlement are older and more acute, the subject has had greater attention than here, and methods have been adopted which have done much towards their solution. In every case the principal agency is a system of rural credits designed to enable men of small capital to buy and improve farms and thus become owners instead of tenants. * Address delivered before the National Conference on Market- ing and Eural Credits, Chicago, 111., November 30, 1915. 327577 The Western third of the United States presents the most inviting field in this country for the establishment of such a system and has greatest need for it. In this section millions of acres of irrigable land capable of sup- porting a dense population are either unpeopled and await- ing settlement or the settlers are having to undergo hard- ships, and are menaced with failure from causes that are removable and should be removed. High interest rates, the inability to secure money to make necessary improve- ments on the land and the lack of direction and oversight of unskilled beginners, cause so many to fail before they get started that it is becoming an economic wrong and is retarding the progress of Western agriculture, and all related interests. Irrigation works which have cost in the aggregate nearly $200,000,000 are financially unsuccessful because of delay in settling the land or because settlers are too poor to pay water charges. The nature of the obstacles that confront development and the hardships and losses of settlers in recent years are not understood by the country as a whole. The economic changes which have taken place in the last fifteen or twenty years and the need of financial adjust- ments to conform to those changes are matters about which a wider knowledge is desirable. ECONOMIC CHANGES IN RECENT YEARS Up to about a quarter of a century ago there was little need of capital or skill in agriculture to enable men to secure homes in the West. Land was obtained as a gift from the Government. There were large areas which did not require irrigation, and where irrigation was necessary, the water could be taken by cheap ditches out of the mount- ain streams. Usually these consisted of nothing but a small furrow built by the settler's own labor. Even where they were built by companies it was seldom that water rights cost over $10 per acre. Some of what is now the highest 3 priced farm land in the West was obtained from the Govern- ment for nothing, or purchased from railroad land grants for from $2 to $5 per acre. The ditches which watered these lands cost only from $3 to $10 per acre, hence with free land that did not need irrigation, or cheap water rights for that which did, the man with $1000 or $2000 had ample capital with which to acquire and improve a 160 acre farm. Or if he had no capital at all, it was pos- sible through industry and economy to meet all the expenses of development. EARLY OPPORTUNITIES ARE GONE These natural opportunities have, however, disappeared. The fertile lands which did not require irrigation are all in private ownership. The cut-over forest lands or the arid lands which have to be irrigated, both require a large expenditure to make them productive. The opportunities for cheap and easy irrigation have all been absorbed. To obtain water for new areas it is necessary to control great rivers and build costly reservoirs to conserve the flood water. The railroad lands that could once be obtained for from $2 to $5 an acre have passed into private ownership. In one way and another some of the best undeveloped areas have become part of great landed estates. The actual con- struction cost of irrigation works built in the last five years varies from $30 to $100 an acre. Unimproved privately owned land under those works sells from $15 to $100 an acre. Few settlers today have access to free range or free timber. Often they have to pay high prices for land, and always high prices for water as compared with fifteen years ago. They have therefore one burden which the pioneer settler did not have to carry; that is, interest charges on the greater expenses of development. This makes it im- possible to prolong the period in which the land is being cleared, leveled, or water provided, as was often done by the earlier settlers. GREATER PRELIMINARY OUTLAY REQUIRED There are few places in the West where improved farms can be purchased or raw public land made habitable and productive for less than $100 per acre. The houses, fences, implements, livestock, and, in the case of arid lands, the water rights needed to make these farms going concerns, involve an expenditure greater than most home-seekers can meet. Yet the largest part of this outlay should be made immediately, in order to meet living expenses and prevent interest on debts falling into arrears. If these improve- ments can be made promptly, and especially if the settler has time enough in which to bring the land into full pro- duction, and earn the money out of the land, he nearly always succeeds. The profits of intense culture are great, and in some directions are continuous and reliable. The great need of successful development is therefore that the settler may either have capital enough of his own, or be able to borrow money on a very long time at a low rate of interest, to enable him to, without delay, improve, equip and stock his farm and then cultivate it in accordance with scientific methods. COST OP DEVELOPMENT Very few settlers and still fewer of the public under- stand the cost of improving raw land, and of equipping farms for scientific agriculture. The Division of Rural Insti- tutions of the University of California has recently been making a first-hand investigation of this subject, and of the plight in which a settler finds himself when he makes an attempt to acquire a home without adequate capital, and has to depend on existing credit facilities for money needed before he has his land ready for cultivation. The results already obtained show that many settlers with from $1000 to $3000 find themselves in debt and without credit before they have their land ready for irrigation and are unable to go on because the commercial banks cannot lend money except on revenue-producing property, and no reli- able land mortgage company will loan except on first- mortgage security. Some settlers are able to obtain money on their personal credit, but in these cases the loans are usually for a short time with commissions for obtaining the loan and for its renewal, and with interest rates varying from 8 to 12 per cent. The settler has therefore to pay interest rates above the profits of agriculture and has always before him the ever impending menace of a mort- gage foreclosure. NEED FOR CREDIT AND ORGANIZED DIRECTION IN SETTLEMENT The absence of adequate credit facilities and of organ- ized oversight of settlement is an economic wrong to the settler in many ways. He needs livestock to consume his fodder crops, and if he could purchase these he could often make money where he is now losing it. Scores of settlers are attempting to cultivate crops for which the land and climate are not suited and who lose (through mistakes that intelligent oversight would avert) the money that would pull them through the critical period. No one can visit a developing district without realizing the waste involved in leaving each individual settler to carry out his improvements without organization or expert direction. No beginner can level land properly, no individ- ual settler can afford to buy the proper implements, and as a result each one of them wastes time, labor and money. Leaving each individual settler to buy the material for his house and arrange for its construction causes him to lose time that ought to be spent on cultivation, makes the cost more, and the result far less satisfactory than if this were done under competent practical direction in accordance with a comprehensive plan. CAPITAL NEEDED FOR WORKING EXPENSES In one district visited recently the fields were dotted with alfalfa stacks. It was a picture of seeming agricul- tural prosperity; yet many settlers in the district were 1 ' dead broke ' ' and in debt. They had spent all their money preparing to grow alfalfa and there was no market for hay. If they sold hay they had to sell at less than cost. Fat cattle and fat sheep brought high prices, and the obvious way of marketing their alfalfa was to feed it to cattle and sheep. But, as one settler expressed it, there was no use to suggest that, because they had neither money nor credit with which to buy a suit of clothes. One settler was financed by a local banker in buying ten dairy cows. For the risk the banker charged him $10 a cow above the purchase price. He required the settler to make payment by giving half of the return from each cow. The settler paid a lawyer $10 for preparing a chattel mortgage, and $4 for recording it. Hence, to begin with, he was loaded with $11.50 a cow above the cost price. Some of these cows were unprofitable. Every good dairyman has to cull his herd ; he wanted to sell the poor ones and buy good ones, but the banker insisted on a new chattel mortgage ever}' time this exchange was made. In six month's time it had cost him more in legal fees, lost time in consulting the banker, and in recording new mortgages than the returns would justify, and he gave up the herd. One settler who had a title to 320 acres of government land needed $10,000 to level it for irrigation. To obtain the loan of that sum he paid a commission to the loan agent of $500. He agreed to pay 10 per cent interest, with six months interest in advance; that was another $500. He was required to insure his life for 10,000, the policy being drawn in favor of the lender ; that cost $200. He actually received of his $10,000 loan $8800, and for that he had to pay each year $1200. Agriculture will not stand interest charges of that character. These are not isolated instances. The investigation referred to has shown scores of the same character, leaving no question that the high interest rates are a burden on the beginner too heavy for him to success- fully overcome. In one district the average farm mortgage indebtedness over the whole area of nearly 200,000 acres is $50 an acre, and the chattel mortgage indebtedness on the same area is about $15 an acre. The interest rate, with commissions, will average somewhere between 10 and 12 per cent, and to this has to be added heavy payments on the principal. LOWER INTEREST RATES URGENTLY NEEDED If, instead of having to pay 10 per cent interest, these settlers could obtain money at 5 per cent it would mean an annual interest saving to the farmers of this district of over half a million dollars, and to some settlers this interest saving would mean over $5 an acre a year. Yet 5 per cent interest is about the highest rate of interest paid in any country having an effective rural credit system. If, instead of having to pay off the debt in five years, they could have amortized payments extending over thirty years, it would mean that the average payment on the principal in this district would drop from $10 an acre a year to 75 cents an acre a year. This change would mean a saving to the settlers of this district during the early trying years of over a million and a half dollars a year; it would mean the difference between success and failure, between con- fidence in the future and harrassing anxiety. It would mean good food, good clothing and comfortable living for hundreds of settlers and their families which are lacking today because we have a wholly unscientific credit system. THE RURAL CREDIT SYSTEM OF AUSTRALIA A few years ago conditions in Australia irrigated areas were almost a direct counterpart of those now confronting irrigated agriculture in this country. Costly irrigation works had been built, but the water was not being used. The number of farmers on irrigated areas was decreasing. Men who were without capital could not buy the land, and those with capital did not care to. Irrigation works were unprofitable because there were not enough people on the land to cultivate it as successful irrigation requires. In order to change these conditions the Government decided to inaugurate a new system of land settlement, in which the social and economic benefits to the public rather than the profits from land sales would be the governing considerations. It was decided to buy privately owned land held in large tracts, and to subdivide and sell them on such conditions as would enable men of small capital to become farm owners. Investigation was made to ascertain the number of acres needed to make a living area, and the amount of money required to prepare these areas for irrigation and properly equip them for intense cultivation. It was realized that few settlers had capital enough to buy and improve these farms unaided, and that a rural credit system similar to those of Ireland, Denmark and Italy, would have to be made a part of the plan. A study of the land settlement laws of a number of European countries and New Zealand was made before the policy now in operation was put into final form. The scheme of subdivision finally adopted provided for farm units varying in size from 2 acres to 200 acres. The two acre units were for the farm laborers. Such an area would enable a farm laborer 's family to keep a cow, some pigs and poultry, and to grow most of the fruit and vegetables con- sumed. Such a farm gave the farm laborer landed inde- pendence, tied his interest to one locality and gave to the district a reserve of labor in the children of these families for fruit picking and grain harvesting seasons. No feature of the system has proven of greater value than the two- acre farm laborer's block. The number of these originally provided for in each district has subsequently been in- creased, as the lands of the district were brought under intense culture. Investigations and experience both show that the success of the settler with small capital quite largely depends upon his being able to obtain a living income from his farm within a year, and to get the whole area into cultivation inside of two years. The saving of time in the preliminary development became therefore an essential factor. In order to do this the State decided to give organized and compre- hensive aid to settlers in building their houses and in level- ing the land for irrigation. It could build houses cheaper than the settlers could, because it could buy material in large quantities and pay cash for it, and could give skilled oversight in the preparation of plans and in watching the work of contractors. The outcome was that this plan not only saved the settler money but it protected the district from the unsightly makeshifts which the settlers, if left alone, would have perpetrated. A district with all the houses properly built, newly painted and provided with those things that go for decency and comfort, has a great social influence. It awakens pride and stimulates efforts in the whole community. At first only ten and fifteen acres, or one quarter of each farm, was leveled for irrigation, it being believed that with this done, the settlers could complete the work. But ex- perience showed that better results would come from level- ing and seeding about three-fourths of every farm at the outset, and later on large areas were leveled and seeded in advance of settlement. One result of this was that some settlers going on these ready-made farms were able to obtain a living income from dairying within thirty days after their arrival. At first each settler was left to buy his own tools and livestock without any suggestions from the State, but when it was found that they were being victimized be- cause of their inexperience, the State placed at their service an expert buyer of dairy cattle, who by getting in touch with the farms in widely scattered dairying districts was able to protect them from the purchase of worthless animals and to supply them with good stock at about one-half what 10 they would have had to pay if each individual had been left to take care of himself. IMPORTANCE OP PRACTICAL ADVICE AND DIRECTION TO BEGINNERS The most important feature of the system was, however, the placing in each district of a farm inspector or adviser. He was there to be consulted by the settlers whenever they desired, but it was also his business to travel continually through the district observing the habits and methods of the beginners, to correct their mistakes when seen, and where they refused to adopt proper methods or showed lack of industry and persistence to notify the authorities in charge, and having this warning, they were careful about making loans for improvements or extension of time on payments. The influence which this exerted on the methods of the farmer and on the agriculture of the district was immediate and important. All of the estates purchased were bought without any compulsion. The land desired by the State was appraised by three impartial values and as a rule the average of these values was offered. There were few instances in which it was not accepted. After subdivision each of the farm units was separately valued so as to repay, when sold, the purchase price with about 15 per cent added to meet the expense of subdivision of the land and interest on the money invested between the time of purchase by the State and sale to settlers. The lands were disposed of to settlers on the payment of 3 per cent of the cost, the remainder being paid in 31^ years with interest at 4% per cent and amortized payments at 1% per cent, making a total of pay- ment for principal and interest each year 6 per cent. Each settler was required to deposit about 20 per cent of the cost of leveling the land and about 40 per cent of the cost of houses and other buildings, the State furnishing the re- mainder and the settlers repaying these advances in from 11 20 to 30 years with interest at 5 per cent. Where the settler made his own improvements the State could loan him up to 60 per cent of the value. Experience has shown that with this aid nearly all the settlers succeed. Without it fully two-thirds of them would have failed. The finan- cial returns have been entirely satisfactory. It has brought important benefits without any cost to the general taxpayer. How MONEY Is OBTAINED The money for the purchase of land and making loans to settlers is obtained in the Australian States as a rule from the State Savings Bank. In two States it is provided by the Commonwealth Postal Savings Bank, while in New Zealand the money comes from the sale of bonds in London. In all the States about 4 per cent interest is paid on the money borrowed, and as this is loaned to settlers at from 4% to 5 per cent, there is from % to 1 per cent profit, which is expected to meet the expenses of management and the loss incurred where settlers fail to meet their obligations. A full report of the financial operation of the different State systems is given in the recent report of the Commis- sion of British Columbia. In all cases these systems have been self-supporting. CAPITAL REQUIRED BY SETTLERS There was much difference of opinion at the outset regarding the capital which a settler should have. It was at first fixed at $1000. Since then it has been made more flexible. The capital now required depends on the size of the farm the settler purchases and something on his personal qualifications. No one is allowed to buy land who is already a land owner, and actual settlement is insisted upon. Title to the land does not pass for twelve years, but the settler can sell his interest at any time before that provided the buyer conforms to the restrictions governing the original settlement. The maximum value of land purchased by one 12 settler is $12,500, and the maximum amount which the State can advance to one settler is $2500. On units for farm laborers, or on areas of ten acres or less, the capital of the applicant is not considered. He is only required to make the payments on the land and the part payment on the house and other improvements. On small units settlers can meet land payments from wages, but when the farms have more than 20 acres the income must be far more than the settler can earn in wages to meet the interest and other expenses. Whoever attempted to purchase farms of more than 20 acres should therefore have sufficient capital to make his initial payment on that land and at least one third of the cost of its improvement. There have been instances of settlers borrowing the money to make the necessary land payment, who have met promptly all their obligations to the State, but as a rule even the best of settlers need all that the State can expend in order to provide for the development expenditures of the first three years. It is the belief of all who have made a first-hand study of conditions in the western third of the United States that unless some such system is introduced here, future settle- ment should be restricted to men of considerable capital, say $3000 each, for the settlement of public land and $5000 each for the settlement of privately owned land. STOPS DRIFT TO CITY The adoption of this system by this Australian State has stopped the drift of the young men from the country and attracted to the land scores of young men from the cities. It has created opportunities for hundreds of poor men who without it would have never been land owners. Under its operations more than 4000 farmers, all starving with limited capital, now live in their own houses and are landed proprietors. It has given the people better houses at less cost, better live stock, and better tools, than they 13 could have obtained without financial aid and the expert knowledge and advice that went with the system. How it- is regarded where it is in operation is set forth in the last budget speech of the premier of Victoria: "The final success of this investment depends upon the returns which can be obtained, and in this respect the State stands in an entirely different position from that occupied five years ago when it made intense culture com- bined with closer settlement the basis of future develop- ment. This was an experiment, the success of which was doubted by many ; now it is a demonstrated success. Over large areas in widely separated districts more than ten times as many families are settled in comfortable homes, under attractive social conditions as were there five years ago, and they are obtaining returns from their holdings that even less than five years ago were regarded as impossible. The demonstration that families can be fully employed and obtain comfortable living on from 20 to 40 acres of irrigable land not only ensures the financial success of our investment in irrigation works, but gives a new conception of the ulti- mate population which this state will support and the agricultural wealth it will produce. "Notwithstanding the fact that many of the settlers were inexperienced and lacked capital, the small irrigated farm is paying well and doing this in districts having relatively high water charges/' OBJECTIONS TO STATE ACTION NOT WELL FOUNDED There is some opposition in this country to a land settle- ment system of this character, on the ground that the State is incompetent to carry it out, and that all such matters should be left to private enterprise. There is also much meaningless talk about what can be accomplished through co-operation. But how the co-operation of a body of men who lack both money and credit is to provide these essentials has never been explained. A conclusive answer 14 > to all objections is furnished, however, by the success of the rural credit system financed by the State in countries where the conditions and needs are like ours, and equally con- clusive evidence that no other system will answer, by the absence of a single successful system of land settlement, through the aid of either co-operation or corporate rural credit, where the conditions are like ours. Germany, with that thoroughness and business sagacity so characteristic of the nation, did not attempt to employ the Landschaft or any other co-operative system in aiding German farmers to become landowners in Poland or South- west Africa. Instead, it adopted direct State action, iden- tical in its working features with the system of New Zealand and the Australian States. STATE TO PROVIDE The State is the proper authority to provide the money. It is the only authority in a developing district where all men are borrowers, where values are being created, where the people are new to each other, and where they are strongly inclined to be individualistic, that can provide cheap money. And the State has reasons for doing this that do not prevail with either private or corporate enter- prises. The basis of State action is the general welfare, the creation of better conditions in rural life, the bringing into cultivation of unoccupied land, increase in taxable wealth and trade and commerce. All these things are gains for the public, of which the State is the representative. The Federal Government has about $100,000,000 invested in irrigation works. The financial return from these works and the welfare of the settlers living under them can in no way be so effectively helped as through the establishment of a State or Government Rural Credit system like that of Australia. The money for these loans in Australia comes almost entirely from savings banks. If the Federal Postal Savings Bank system in this country were changed 15 so as to make the interest rate 3% per cent and the limit of deposits $2000, there would be an ample fund in this country with which to carry out this work. EXPERT ADVISERS In addition, the State has already in its experiment stations and the officers appointed under the Smith-Lever bill a body of expert advisers familiar with local conditions. It would only need an increase in their number to do all that is being done by the advisers of the rural credit system of Australia, and with the power that this system would give them, their influence would be far more potent than it now is, and the progress of agriculture correspondingly accelerated. NOT AN EXPERIMENT If we adopt this system we will have the experience of a number of countries to guide us. We do not have to break any new trails. It will be in no sense an experiment. It will be entrusting the creation of new communities and the shaping of their social and industrial life to the only authority which should exercise that power, and the only one that has the resources, the continuity of existence, and the disinterestedness needed to insure the results desired. There need be no fear of the ability of a State to render a direct service to the people and to do this with economy and efficiency, if the management is made non-political and placed in the hands of competent men, who have a long tenure of office. During the last 30 years I have worked for private enterprise and for the State, and it is my con- viction that men will work harder for the State and in the interests of public welfare, than they will for a cor- poration, whose motive is profit. I am quite sure that there is no corporation in this country whose employes worked harder for longer hours or took keener interest in 16 their work than did the officers of Victoria connected with the management of its rural credit system. If this system is made non-political, and if in its working methods there is incorporated the safeguards that have made the Austral- ian system so continuous and so conspicuous a success, or those incorporated in the British Columbia law, or outlined in the report of the Wisconsin State Board of Public Affairs, there need be no misgivings as to the results. UNIVERSITY OF CALIFORNIA LIBRARY THIS BOOK IS DUE ON THE LAST DATE STAMPED BELOW MAR 6 19kb 15 .925 27 JAN 2 8 1981 361 30m-l,*15 PAT. JAN. 21, A- UNIVERSITY OF CALIFORNIA LIBRARY U.C.BERKELEY LIBRARIES