CHAPTER XI

CREDIT

Debt. "Many neighbors have sold out and quit farming," writes a northwestern farm woman, "because they had to. We will have to sell this fall, because we are so deep in debt--it will nearly kill me if we have to leave the farm. I do so want to keep my husband and children there. I don't see how I can part with the horses. I hate the cities and am afraid of them, so I hope that the lawmakers will believe that ours is a real need. I am 25 years old and our children are aged 6, 4, and 21⁄2 years. I don't belong to the 'I Won't Works,' but would like a little pay."

This letter is one from a collection of many received from farm women in response to an inquiry on "How the U. S. Department of Agriculture can better meet the needs of farm housewives?"

It illustrates in a concrete way the very disagreeable fact that the farmer's credit problem is, in certain cases, a real one. The letter suggests that our lawmakers "do something" to meet the credit needs of the day.

New View of Credit.-The attitude of the public mind has undergone a tremendous revolution on the subject of credit. About two hundred years ago a French king said, "Credit supports agriculture as the rope supports the hanged." In our own history the New England idea of thrift and the teaching of Poor Richard's Almanac were both to the effect that debt is a disgrace and must be avoided like the plague. Hence a mortgage came to be looked on as a disgrace, a sort of skeleton in the family closet. There was some excuse for this attitude in the days of free land, of homespun clothing, of homemade tillage tools. Farming then was really an investment of labor on free land. But now farming represents the balanced investment of three factors of production-land, labor, and capital. In short, agriculture is now on a capitalistic basis. The land has a large cash value. The farm equipment has a large cash value. Agriculture has come to be a business involving the administration of capital. According to the 1910 census, the average Iowa farm represented an investment in land and farm buildings of $15,008, in farm machinery of $440, and in livestock of $1811. In other words the Iowa farmer has a business investment of $17,259. The village merchant can no longer proudly

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arrogate to himself the title of "business man" and look down on the farmer as a mere tiller of the soil.

Capitalistic Agriculture. When agriculture in America became a capitalistic business, there came also a new attitude towards credit. The word "credit" came into use in place of the old word "debt." Debt was no longer considered a badge of dishonor, a mark of non-prosperity, or even as something to be avoided. The practice of the great public utility corporations, particularly the railroads, of piling up big debts, at low rates of interest, in long term bonds, invested in income yielding property, and with the fixed business policy of never paying off these debts (but of refunding them) proved suggestive to agriculture. Why should a railroad, for instance, keep out of debt, when it can borrow at 4 per cent and make a return of 8 per cent on this money? Evidently, the more a railroad could increase its debt-provided always the interest rate was low, the investment safe, and the return large the better off it would be financially. The instinct of the individual farmer, however, leads him to desire to own his farm in fee simple and free from encumbrance. But for the sake of securing the balanced investment of land, labor, and capital, it has come to mean in many cases that the farmer must borrow. The social significance of farm credit and a permanent agriculture is apparently grasped by but few writers and speakers. The country is under obligation to Dean Thomas Forsyth Hunt of the University of California for clearly seeing this problem and in clearly stating it to his country. Quoting from his remarks on this subject we have the following excerpts:

1

"As long as the people in the country raise larger families than those in the cities, and the cities continue to grow faster than the country, it follows that in the cities every generation must be affected by the character of the previous generation in the country.

"New York and Boston are rapidly becoming un-American cities for the simple reason that they do not raise enough children to maintain, let alone increase, their population. Almost exactly one-half of the people of Manhattan are foreign-born. Less than 15 per cent have two American-born parents. Los Angeles has become the puritanic center of America; Boston is now the second Dublin of the world. Hoboken does not dare to have a parade on the Fourth of July. Unless our children occupy the country, our grandchildren will not occupy the cities. It is the people who occupy the land who will eventually inherit the earth . . . If farms must be recapitalized at least three times in a century; if young men are born into the world without capital to finance them; if the permanence of society is dependent upon a rural population, not merely because it creates wealth, but because it grows children, then what are we going to do about it? For years the savings of the people have been used in developing railways, manufacturing plants, department

164 Cong. 1 Sess. Senate Doc. 239.

stores, public buildings and city streets. A large part of the development of private corporations as well as the public improvements of cities, has been due to the savings of the people, borrowed largely at 4 to 5 per cent. The land-credit plan is intended to allow the savings of the people to be invested in the land in order that a permanent agriculture may develop.

"Men in cities now conduct great enterprises, enjoy comfortable transportation facilities, occupy luxurious offices, and eat in sumptuous restaurants without having a dollar of their own money invested in these agencies except as they may carry life insurance or invest in stocks and bonds. The phenomenal development of the cities within recent years would have been impossible were this not so. Farming is the one great industry remaining in which men commonly invest their own money in order to engage in the business."

United States Studies Credit in Europe.-Rural credit became an issue in American political life about the year 1912. In that year President Taft addressed letters to the State Governors, inviting them to a conference at the White House for the purpose of discussing agricultural credit. In this letter, among other things, President Taft said:

"For some months past, at my direction, the Department of State, through its diplomatic officers in Europe, has been engaged in an investigation of the agricultural credit system in operation in certain of the European countries. Although the investigation is still under way, a preliminary report has been submitted, together with the recommendations of Ambassador Myron T. Herrick in connection with my proposal to adopt this system in the United States.

"A study of these reports and of the recommendations of Ambassador Herrick, which I am sending you, convinces me of the adaptability to American conditions of the coöperative credit plan as set forth in the organization of the Raiffeisen banks of Germany. The establishment and conduct of such banks, however, are matters for State control. I suggest also the establishment of land mortgage banks

"The need for the establishment of an adequate financial system as an aid to the farmers of this country is now quite generally recognized. The governmental initiative, taken by the Department of State under instructions issued by my direction to the diplomatic officers in Europe on March 18 last, have been effectively supplemented by the American Bankers Association, the Southern Commercial Congress, and by many other bodies by whom this question has been agitated, and valuable work has been done in studying and disseminating knowledge of those great instrumentalities which have been created in foreign lands to extend to their agriculturists credit facilities equal in benefits to those enjoyed by their industrial and commercial organizations. The handicap placed upon the American farmer through the lack of such a system, and the loss sustained by the whole citizenship of the nation because of this failure to assist the farmers to the utmost development of our agricultural resources, is readily apparent.

"The farmers of the United States add each year to the national wealth $8,400,000,000. They are doing this on a borrowed capital of $6,040,000,000. On this sum they pay annual interest charges of $510,000,000. Counting commissions and renewal charges, the interest rate paid by the farmers of this country is averaged at 81⁄2 per cent, as compared to a rate of four and a half to three and a half per cent paid by the farmer, for instance, of France or Germany.

"Again, the interest rate paid by the American farmer is considerably higher than that paid by our industrial corporations, railroads or municipali

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ties. Yet, I think, it will be admitted that the security offered by the farmer on his farm lands is quite as sound as that offered by industrial corporations. Why, then, will not the investor furnish the farmer with money at as advantageous rates as he is willing to supply it to the industrial corporations? Obviously the advantages enjoyed by the industrial corporation lie in the financial machinery at its command, which permits it to place its offer before the investor in a more attractive and more readily negotiable form. The farmer lacks this machinery, and, lacking it, he suffers unreasonably."

This quotation is given at length because it so clearly states the credit problem of the United States and at the same time suggests its solution-land mortgage credit and coöperative credit. These principles announced by President Taft bore fruit in the year 1916. This is the date of a new era in credit in the United States on account of the Federal Farm Loan Act enacted then.

Long- and Short-Time Credit. The farmer uses two kinds of credit, long-time credit and short-time credit. The long-time credit generally takes the form of a mortgage on real estate. The short-time credit is commonest found in the form of a book account at the village stores. Less frequently the farmer signs notes at the bank. It is impossible to state the rate of interest charged on short-time loans for the whole United States, so much do conditions vary in different sections. In the newer sections, and in the cottoncrop sections of the South, conditions are burdensome almost beyond belief. Take Texas as an illustration. "Texas debtor farmers," says an official bulletin from the Agricultural and Mechanical College of that State, "have been paying to banks 10 to 40 per cent interest per annum, or to credit merchants 10 to 60 per cent above cash prices. This credit system, either as cause or effect, uniformly prevails with all-cotton farming, or all-wheat farming or any other form of one-crop farming." There are parts of the South, particularly the Delta, where the cotton crop lien system has produced a credit condition even worse than that described in Texas. As the farming becomes more diversified, especially where livestock is raised extensively, credit conditions on short-time loans become better. In old and prosperous farming sections the farmer is able to secure short-time loans from the bank at the same rate as the town merchant. And in all sections the more prosperous farmers get all the credit from local banks that they are entitled to, and at regular banking rates.

Beginning of Coöperative Credit in America.-Alphonse Desjardins was the first to introduce coöperative credit on the American continent (Fig. 33). He began his coöperative people's bank among the French Catholics in the province of Quebec in the year 1900. Thus he was favored at the outset with unity of race and

religion. At the small town of Levis he organized among laboring men and farmers his first credit union, or "La Caisse Populaire de Levis" as it is called there. The success of this first experiment caused the idea to spread throughout all French Canada, so that in less than five years 154 similar coöperative banks had been formed in other parishes. The total turnover in the first 16 years was $3,519,123.84 with gross profits amounting to $107,719.05, and a total working expense of $8,832. The working men and farmers choose their own management, provide all the funds them

selves, loan the money to themselves, and in most cases their honor alone is the main security.

The Credit Union.-The success with coöperative credit in Quebec led first Massachusetts and then other American States to try to introduce this Canadian system under the name of Credit Union. But as usually happens, the taking over of a foreign system did not prove very successful. Massachusetts set the example (in 1909), being followed promptly by eight other States, as follows: Texas (1913), Wisconsin (1913), New York (1914), Rhode Island (1914), North Carolina, Utah, South Carolina, Oregon-all four in 1915. As these lines are being written (1920), Massachusetts has nearly 60 credit unions; New York, 40; North Carolina, 30; Rhode Island, 1; and the other five States none. The credit unions in Massachusetts and New York are almost wholly in cities, and hence have no significance for agriculture. In North Carolina, however, the credit union is largely rural, and hence constitutes agricultural coöperative credit. For our purpose, then, we will analyze in detail the North Carolina system.

North Carolina Method. The first financial statement issued by the Credit Unions of North Carolina appeared in March, 1916. One year later a second statement was issued, making a corparison of conditions at the two dates, and showing one year's growth. The number of credit unions grew from 6 to 14; the membership