\ LIBRARY 0 F t n L UNIVERSITY OF ILLINOIS. 62d Congress \ C1?M * w f Document 3d Session / SENATE \ No. 1001 FARM CREDITS ARTICLE BY JOHN R. DOS PASSOS OF NEW YORK SUGGESTING A PLAN TO PRO- MOTE FARM CREDITS PRESENTED BY MR. CLARKE OF ARKANSAS January 9, 1913. — Ordered to be printed WASHINGTON 1913 •Ml 1W f “ Octet CUOC- Toovri FARM CREDITS. In 1767 when Prussia was in the throes of great financial distress B firing, a merchant of Berlin, laid before Frederick II a plan for a credit association. He said: The true capital of this country consists of cash and real estate. The latter is more than ten times in excess of the former, and if only a small part of it could be made current, it would be abundantly sufficient to accrue credit and welfare for the entire community. The scheme of a credit foncier, which means loans on real estate, was gradually adopted through the Continent and subsequently in France, and in almost every instance proved a great success. Upon the general question of the necessity of legislation to assist the farmers of this country by loans of money I can hardly speak with moderation. Since the formation of our Government this hard working class has been allowed to shift for itself and, by adopting a sort of hand-to-mouth policy, the farmers have been able to crawl through life unaided by the bankers, banks, or the Government. Although the sound and excellent systems of credit foncier and credit agricola have been most successfully operated for more than a century in Germany and for many years in France, and although the American consuls in various cities of Europe long before this matter was taken up by the present administration had filled our State Department with statistics and records pointing out the advantages of these institutions and recommending their adoption in the United States, no attention whatever has been paid to the subject by either the legislative or executive branches of our Government. Fifteen years ago, in the spring of 1897, 1 brought the subject before the public by a series of printed articles, which were distributed more or less throughout the country, but the project of a credit foncier was so indifferently received that the gentlemen whom I had interested in it concluded to drop it. One so-called great financier, whose con- ception of finance consisted in locking up money in a safe and standing guard over it with a revolver and triumphantly reporting to his stock- holders that he had the same amount of dollars and cents in his pos- session as the year before — this sage individual pronounced the credit foncier plan as a wildcat scheme and not to be tolerated by sound financiers like himself. And now, after 15 years, while the scheme has slumbered, comes His Excellency the President of the United States, in carefully revised speeches, based upon the same kind of reports of special consular agents, and with great, good judgment advocates the speedy adoption of measures to assist financially the farmers through credit foncier and credit agricola systems, so caustically criticized when I presented them before. It is well to confine this talk to the credit foncier system. The pur- pose of such an institution is to take the income-paying farms and S. Doc. 1001, 62-3 3 4 FARM CREDITS. other real estate, urban and suburban, and make them a basis of credit by issuing against them at a low rate o£ interest bonds which should be negotiated with the same ease as a Government bond or bank notes. The processes this: A farmer or real estate owner wishes a loan on his property, which, after examination, the institution is ready to make. Say, the loan is $10,000. The credit foncier hands to the borrower either $10,000 in cash or $10,000 in its bonds, bearing, say, 4 per cent interest. These bonds the company is privileged to issue against every loan it makes, and they should be split up into small amounts, as low as $10 each. Then they are easily negotiable. As a matter of practice the association generally gives the borrower the cash, but in the commencement of its business it might deem it advisable to issue its bonds so as to accustom the general public in their use. To make the matter even more clear, suppose there were a con- centrated single loan of $20,000,000 against certain pieces of urban and suburban real estate. The Credit Foncier pays this money to the mortgagors and then issues against the loan thousands of bonds of $10, bearing 4 per cent interest, which it sells just as it would Government or railroad bonds. Instead of 1,000 individuals loan- ing this $20,000,000 there would only be one — the Credit Foncier — and the persons who were seeking mortgage investments would buy these bonds. Back of these bonds is the real estate and the capital of the Credit Foncier or mortgage bank. The existing mort- gage indebtedness on farms is assumed to be about $6,000,000,000, which is being carried at between 8 and 9 per cent interest. The funding of this vast indebtedness at a rate of interest of about $4.65 per annum and making the principal payable in 75 years is a task of itself which would occupy the company organized for such a pur- pose without regard to other business, and would save to the farmers millions upon millions of dollars of interest. The effect of funding this debt would be to put into circulation a large amount of money which is now locked up in these mortgages, and which is practically dead. To put this vast fund afloat would help lenders and borrowers alike. The inequality existing in respect to their power to borrow money between the farmer on the one side and those engaged in financial or mercantile pursuits on the other is vivid and striking. Almost every avenue is closed to the farmer. The doors of all the national banks are shut upon him. They are properly prohibited from loaning money on real estate. They receive money on deposit payable on demand, and their assets must be liquid and capable of instant conversion into cash. A Credit Foncier system is quite dif- ferent from the ordinary one of deposit banks. Now, the history of legislation of this country, instead of exhibit- ing a desire to aid and facilitate the agriculturist, has been absolutely indifferent to him and his interests. The money lenders and the money interests are all centered in the large cities, and the farmer has not been able to borrow with any ease either on his land or crop, but has frequently been compelled to sacrifice his products and land to his existing financial need and necessity. It is essential that every one should have a clear knowledge of the workings of the Credit Fon- cier system. In the course of time it loans millions upon millions of dollars upon urban and suburban property. Where does it get the money ? Apart from a good-sized paid-up capital it should have the FARM CREDITS. 5 power against each loan to issue its bonds and sell them, so that it can go ahead making loans until the limit of its capital and borrowing capacity is reached. Much has been written and talked about the subject since Presi- dent Taft recently opened it to the people of the United States, but no tangible scheme has been put forward by which to crystallize the thoughts into legislative form. I now am glad to throw out these suggestions, not as final or definite, but to call forth proper discussion. First, let me explain the principle of amortization. The amortization or sinking fund is simply this: That the borrower is never called upon, unless it be agreeable to him, to pay the principal of his loan as a whole, at any one time, but by paying a small sum each year, in addition to his interest, he establishes a fund which ultimately wipes out the princi- pal and satisfies the debt. The mechanism of the annuity benefit can easily be understood. At the end of each year his portion of the annuity is applied to the amortization or sinking fund, reducing the original debt to the same amount, the interest decreasing in the same proportion as the debt. But as the annuity remains always the same, the result is that the fraction of the annuity necessary to the payment of interest, while decreasing, leaves a large sum applicable to the amortization or repayment of the capital and the progression, slow in the beginning, increases from year to year and acquires great rapidity when nearing the limit of the fixed period. This may be called the salient and vital principle of the plan. Let me illustrate: An individual wishes to borrow, say, $100 on real estate on the 75-year plan. The company will lend him the money at about $4.65 per annum. Add to this sinking fund to repay loan, $0.28; expense fund, $0.25; extra reserve fund for con- tingent losses, $0.32; annuity or total annual costs, $5.50. Now observe, that if the company make no losses a loan for 75 years, through the workings of the 32 cents extra reserve above explained, will be completely amortized or fully paid off in less than 55 years. At any rate, this 32 cents of the annual extra reserve, constitutes an adequate fund against all possible loss. This extra reserve fund is a new feature, but will prove a powerful element of security for the company. It makes every borrower a most inter- ested party in protecting the company against error and overvaluation of properties offered as security, because if it suffers no losses, he will receive his full share of this large reserve fund. This system has existed in France since 1852, with a most unexampled success. The Credit Foncier has paid yearly dividends, taken from profits each year, and in addition has set aside an enormous surplus reserve to the I. Name of Company. The Loan & Mortgage Co. of the United States, to be incorporated by special act of Congress, the incorporators named in the act to represent every State in the Union and to elect the first board of directors. 6 FARM CREDITS. II. Capital Stock. The authorized capital stock of the company to be $200,000,000. When $30,000,000 are subscribed and paid in, the company shall be authorized to commence business and to call in the balance of its capital from time to time as shall be determined by the board of direc- tors, but this could not probably be accomplished under five years. The whole capital is a guaranty fund for all the company’s business; but one quarter of the existing capital to be held as a special reserve and the remaining 75 per cent of the capital could be used in com- mercial and other financial operations and in loaning money upon imperishable products to farmers through local banks of the Raif- feisen type. The investment of the capital and the granting of its mortgage loans should be exercised with the same prudence as life insurance companies manifest in the handling of their immense reserve funds and the selection of their policy holders, but it must be understood that the main source of the profits of the company will be found in the development of its mortgage loan and bond operations. The public should be asked to subscribe for this capital stock. The denomina- tions of the shares of the company to be $20 or even $10 each, no one person being allowed to subscribe for more than 2,000 shares. III. Offices of the Company. The headquarters of the company should be in Washington, D. C., branches to be established in the capitals of every State, and sub- agencies in other principal cities thereof; the object being to give to farmers and other borrowers in cities and counties not actually enjoy- ing proper banking and borrowing f acdities the same advantages to borrow money at a low rate of interest which are enjoyed by bankers, borrowers, and merchants living in money centers. The provision of 25 cents of the annuity would constitute an ample sum for the expenses of the organization. IV. Supervision of Company’s Affairs by Government. The President of the United States, or the Secretary of the Treas- ury, or the directors of the company, whichever may be determined upon, to appoint the governor or president of the company; also two directors and an auditor, whose duty it should be to publish monthly detailed reports of the business of the company, under oath; their salaries to be paid by the Government. The introduction of the Government’s supervision adds stability to the company and is of the character which the Comptroller of the Currency and his examiners exercise over the national banks. In addition to this, the officers of the company might be compelled to make sworn reports in detail and publish them every month, under the supervision of the Comp- troller of the Currency, who should, of course, exercise visitatorial powers. "«r- *. m a m * *** - FARM CREDITS. 7 V. Benefits of the Credit Foncier Plan. 1. It enables the farmers and other borrowers of money on real estate to obtain it easily and at a low rate of interest either for a long or short term, at rates not onerous, and permits them to pay off the loan when they are ready or leave it to remain until it is paid off by the small sumf which they contribute each year to the amortization or sinking fund. 2. The immediate effect of introducing this system will be to en- hance the value of farm lands by causing the withdrawal from the market of such good farms as are now subject to foreclosure for inability to meet the principal and making borrowing upon good country or city real estate as practicable and easy as the borrowing of money upon negotiable securities or personal property. When a mortgagee can transmute his loan into bonds which pass from hand to hand, what an impetus will be given to all kinds of real estate trans- actions. 3. It will enable the farmer or producer of imperishable products to borrow money upon them at a low rate of interest, until such time as he is ready to sell them. Money for this purpose could be furnished in the first place by local banks of Raiffeisen species, or mutual association companies, ■ and these small banks could in turn discount loans made to the ■ farmers at the Credit Foncier. There is no doubt that each year the farmer is subjected to the ■caprices and speculations of a large class of operators in cereals and ■other land products, who take advantage of his known condition to ‘wrest his products from him at rates which do not always represent the actual and inherent value of the same. 4. By the establishment of this company, and through the issue of its numerous bonds, of easy negotiable denominations, it may be said that they will be soon accepted as safe and commodious instru- ments of exchange, where and when currency is lacking, thus prac- tically adding largely to the circulating medium of this country. 5. It will confer upon those sections which now are suffering from the lack of borrowing or banking facilities the same use of money as is enjoyed by the most favored communities. 6. It will have the effect of equalizing, for borrowing purposes, the value of property in all sections of the country and enable the owner of real estate in Tennessee or Arkansas of a fixed and certain value and income to borrow the same amount of money thereon at the same rate of interest that he could on property of equal value in other States. 7. As a consequence of the establishment of a low rate of interest by this company, a large amount of capital which is now reserved for high rates of interest will be forced into the market and add to the facility of borrowers of money everywhere. 8. The establishment of this system in this country will necessarily have an effect upon the habits and business methods of the farmers by making them prudent and economic in the management of their farms to conform to the conditions and regulations of the company relating to loans, both before and after they are made, and by f interesting them as stockholders, bondholders, or borrowers of the K company. 8 FARM credits 3 0112 061589229 9. Finally, here is a plan perfectly nonpartisan in its character an scope, to the support of which all parties can rally. it immediately creates an equalization and stability of real estat values hitherto unknown by enabling its owners everywhere to borro - upon it with the same facility as upon personal property. It creates low and uniform rate of interest, it instills into the veins of a suffering financial body new blood and health, it starts the volume of mone from congested centers and causes it to flow into new channels. John R. Dos Passos. New York, December , 1912.