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EURAL CREDITS

JOINT HEARINGS

BEFORE THE

SUBCOMMITTEES OF THE COMMITTEES ON BANKING AND CURRENCY

OF THE SENATE AND OF THE HOUSE OF REPRESENTATIVES

CHARGED WITH THE INVESTIGATION OF RURAL CREDITS

Sixty-third Congress, Second Session

PRINTED FOR THE USE OP THE SENATE COMMITTEE ON BANKING AND CURRENCY.

WASHINGTON

GOVERNMENT PRINTING OFFICE

1914

SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY, I'M TED STATES SENATE.

HENRY F. HOLLIS, New Hampshire, Chairman.

BLAIR LEE, Maryland.

COE I. CRAWFORD, South Dakota.

SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY, HOUSE OF REPRESENTATIVES.

ROBERT J. BULKLEY, Ohio, Chairman. WILLIAM G. BROWN, West Virginia. J. WILLARD RAGSDALE, South Carolina.

CLAUDE U. STONE, Illinois. BVERIS A. HAYES, California.

HARRY H. SELDOMBIDGE, Colorado. FRANK P. WOODS, Iowa.

CLAUDE WEAVER, Oklahoma. EDMUND I'LATT, New York.

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LIST OF WITNESSES.

Pago.

Ady, Abel, Klamath Falls, Oreg 429, 964

Alexander, H. Q. , physician and farmer, Matthews, N. C 280

Allen, Frederick H., New York, N. Y 969

Atkeson, T. C, farmer, Morgan town, W. Va 260

Badow, Gerard, M. J., journalist, Chicago, 111 570

Bathrick, Hon. Ellsworth R. , Member of Congress from Ohio 858

Breitung, Edward N., mining engineer, Marquette, Mich 319

Brooks, Prof. T. J., Agricultural and Mechanical College of Mississippi 240

Coulter, John Lee, secretary United States Commission to Investigate and

Study Rural Credits 151, 830

Cunningham, John, farmer, Granville, Ohio 599

Doak, W. B., farmer, Clifton Station, Va 662

Daniel, T. dishing, financial writer, Washington, D. C 764

Fischer, George, secretary Northwest Land & Home Builders' Union, Redfield,

S. Dak 134

Fletcher, Duncan U. , Senator from Florida 1

Hill, John Sprunt, Durham, N. C 442

Hulings, Hon. Willis J., Member of Congress from Pennsylvania 947

Ingalls, Hon. Sheffield, lieutenant governor of Kansas, Atchison, Kans 784

Jones, Gordon, president United States National Bank, Denver, Colo 608, 682

Jordon, Hon. Harvie, member United States Commission on Rural Credits 557

King, Will R., chief counsel Reclamation Service, Washington, D. C 940

Lane, Hon. Harry, Senator from Oregon 928

Lennox, John, Colorado Springs, Colo 305, 313

Mobley, H. S. , farmer, Prairie Grove, Ark 686

Morris, Arthur J. , lawyer and banker, Norfolk, Va 717

Moss, Hon. Ralph W. , Member of Congress from Indiana 69, 889

Myrick, Herbert, president Orange Judd Co., Springfield, Mass 513, 965

Norris, Hon. George W. , Senator from Nebraska 915

Norton, Hon. Patrick D., Member of Congress from North Dakota 952

Ousley, Clarence, editor, Fort Worth, Tex 405

Quick, Herbert, editor, Springfield, Ohio 799

Robinson, Leonard G., general manager Jewish Agricultural Industrial Aid

Society, New York, N. Y 537

Ryan, William. A., comptroller, Reclamation Service, Washington, D. C 932

Scudder, S. D., banker, New York, N. Y 217,438,825

Shibley, George H., director American Bureau of Political Research. Wash- ington, D. C 777

Southgate, Thomas S. , merchant, Norfolk, Va 650

Van Cortland , Robert B. , retired banker and farmer 494

Von Engelken. F. J. H., farmer, East Palatka, Fla 339

Williams, H. Martin. Washington, D. C 949

&*kU,. $«*U, " " JU<U~J* . . - - ni J

30

RURAL CREDITS.

FEBRUARY 16, 1914.

United States Senate,

Washington, D. C.

The subcommittees assembled in joint session at 10.30 o'clock a. m., Hon. Henry F. Hollis presiding.

Present: Senator Lee and Messrs. Bulkier, Brown, Stone, Seldom- ridge, Weaver, Hayes, Woods and Piatt.

Present also: Senator Robert L. Owen, chairman of the Senate Committee on Banking and Currency.

Senator Hollis. Senator Fletcher, will you state your connection with the subject of rural credits up to this time, for the record?

STATEMENT OF HON. DUNCAN 17. FLETCHER, A SENATOR FROM THE STATE OF FLORIDA.

Senator Fletcher. Mr. Chairman and gentlemen of the committee: As president of the Southern Commercial Congress, I had some cor- respondence with Mr. David Lubin, the American delegate to the International Institute of Agriculture, with headquarters in Rome, Italy, and Mr. Lubin brought this subject to my attention, and I invited him to come to our next convention in Nashville, Tenn., in April, 1912, to discuss the subject there.

Mr. Lubin replied that if we would get the consent of the State Department granting him leave of absence and assemble representa- tives of the different States, and give him a week there, he would be glad to come; that he did not feel like he could cross the ocean merely to make a speech at the convention. It was a good-sized undertak- ing, but we started into do that, and finally we got leave of absence, throught Secretary Knox, for Mr. Lubin, and we succeeded in assem- bling representatives from 27 States in Nashville; and Mr. Lubin came and brought all the data that he had been collecting for years, practically ever since he succeeded in establishing that international institute of agriculture, which was hi 1905; and they spent six days in Nashville, studying the subject there under the guidance of Mr. Lubin.

And at our convention Mr. Lubin delivered his address, and a reso- lution was adopted calling on the Southern Commercial Congress to assemble a commission, to be composed of two qualified and repre- sentative men from each State, if possible, for the purpose of going to Europe and studying the various systems in operation in those countries for the benefit of agriculture primarily.

It was a good, big contract, but the resolution was adopted by_ our convention, and we went to work to carry it out as far as possible. I rather protested at the time that the commission was too large.

37031—14 1 1

2 RURAL CREDITS.

1 thought it would I e difficull to get so man^ together, in the first place; and then, in the next place, I thought it would be unwieldy; but Mr. Lubin's idea, which 1 think turned out to he a good one, was that the purpose would he to educate two capable men in each State, and when they saw these systems in operation and observed what was going on they would be aide to come lack home and tell their people about those systems and keep up the work in that way throughout the various States.

We took the matter up with the National Grange and the Farmers' Union and other agricultural organizations, and they approved the plan. We then also suggested provisions in the platforms of the various political parties as they met, the Republican convention at Chicago and the Progressive convention at Chicago, and then we went to the Democratic convention at Baltimore; and planks were written in the platforms of the parties favoring this plan for investigating this subject in those European countries where agricultural finance has obtained a high development, and has wrought great benefits to the people of those countries, and to agriculture in particular.

We also took the matter up with the governors of the various States, and they were in accord with the idea. We prepared bills for the legislatures that met after our convention. Some of the States did not have their legislatures meet before the commission had to go, but other States did.

We figured out that it would cost $1,200 for each delegate. And we had various applications by people wTho wanted to go on the trip and enjoy the privileges and that sort of thing accorded the commis- sion, but wTe wanted men who were seriously bent on working out an adaptation, if possible, of those systems to conditions in this coun- try.

And so we were not looking for men who were willing to pay their own expenses, but we wanted the States to furnish the money, or organizations, farmers' unions, and societies of that kind, so as to identify these men with the work, and have them feel that they were responsible to these States and to the people of their States, and have them go with a determination to accomplish results.

Some of the States passed special laws — California, Oregon, and Washington. I think Ohio appropriated $2,400 for two delegates. Some of the governors had funds in contingent accounts which they could employ and have provided means in that way. Other dele- gates raised the necessary money through the farmers' organizations, commercial bodies, and the like.

So that on the 26th of April last the representatives, including two delegates from each of 35 States, left Xew York. I may say that in the meantime certain Canadian Provinces had applied for permission to join us, and wTc had delegates from five Canadian Provinces as members of the commission, and they sailed from New York on the 26th of April. 1913, and went direct to Rome, Italy, where they were received by the King and Queen.

And in the meantime Mr. Lubin had arranged with the delegates to

Mr. Hayes (interposing). The International Institute of Agricul- ture?

Senator Fletcher. Yes, the International Institute of Agriculture, which is participated in by 53 nations, by the way. Delegates from

RURAL CKEDITS. 6

these various countries had outlined a program and made arrange- ments in advance for this commission.

In the meantime, there was an amendment put on the agricultural appropriation bill, which was approved March 4, 1913, which pro- vided for a commission of seven to be appointed by the President, to cooperate with this American commission being assembled by the Southern Commercial Congress in this study. And that commis- sion was appointed, and five of the members of the commission joined the American commission in New York, and sailed with them, and cooperated with them throughout the investigation.

Two members of the United States commission, Senator Gore and myself, were unable to go on account of the tariff bill and other matters pending, and the five remaining members of that commis- sion, consisting of Representative Moss, Dr. J. L. Coulter, Dr. Ken- yon L. Butterfield, Mr. Harvie Jordan, and Dr. Clarence J. Owens, represented the United States commission and, as I say, cooperated with the American commission in that investigation.

Senator Hollis. Senator Fletcher, I understand that it is a fact your interest in the subject of rural credits arises largely from the fact that you are a member of the Committee on Agriculture and Forestry of the Senate ?

Senator Fletcher. No.

Senator Hollis. You say it was not on account of your connec- tion with that committee that you were particularly interested in the subject?

Senator Fletcher. No; it was largely because of this move- ment which originated, as I have stated, with the Southern Com- merical Congress, of which I am president. I am not a member of the Committee on Agriculture and Forestry.

Senator Hollis. I thought you were.

Senator Fletcher. No; I was, however, elected by the American commission chairman of that commission, and also elected by the United States commission chairman of that commission.

Senator Hollis. Yes.

Senator Fletcher. So that, as chairman of both commissions, I have been pretty closely identified with the movement. And we received reports here in Washington constantly, while the commis- sion was pursuing its investigation. Every week we would have letters from the members of the commissions in Europe, and we kept up with them pretty well in that way. And since then the commis- sions have joined in a report which is found in Senate Document 214, setting forth these various systems as they found them in operation in some 14 European countries.

That report is not entirely complete. There are other matters r.o be submitted by the commission which will form part 2 of that report.

And then the report of the United States commission is found in Senate Document 380, which sets forth our conclusions in regard to long-term land mortgage credit; and also there is attached to that report the suggested bill which we have submitted, both in the Senate and in the House; and the United States commission is now at work on the other part of the problem, the short-term or personal credit phase.

Senator Hollis. Senator Fletcher, you have introduced Senate bill 2909, entitled "A bill to provide for the establishment, operation,

4 RURAL CREDITS.

management, and control of a national rural-banking system in the United States, and for other purposes"?

Senator Fletcher. Yes.

Senator Hollis. Will you please tell the committee how v<»u came to prepare that bill, Senator Fletcher, and all about it \

Senator Fletcher. That bill was introduced in August, as I recall.

Senator Hollis. it was introduced August 9, 1913, was it not?

Senator Fletcher. Yes, sir; and as I stated at the time, of course I have been at work on the matter quite actively ever since the commission sailed. We had some other material before that; for instance, Mr. CahilTs report, which is made a Senate document, and which gave me considerable data to work on in that connection. I got information and assistance from every source I could from the farmer's standpoint. I knew something of the farmer's problems from persona] experience and observation.

Mr. Hayes. Excuse me, Senator Fletcher, but what is the number of the Cahill report ?

Senator Fletcher. The Cahill report is Senate Document No. 17. This is it [indicating].

And I had be?n studying the subject, with the help of that report and other documents; and I introduced this bill as I said, at the time, not as the final word on the subject, but »n order to keep the subjsct before Congress and before the country as far as possible and as being my first impressions regarding the subject.

Of course that bill Is still pending; and it differs from the bill as finally reported by the commission, in some material respects.

For instance, it provided for the organization of local banks in communities by farmers, and then the organization by local banks of a State central bank; and the organization of the United States central bank, through these State central banks, and the final issuing of the bonds by the United States central bank.

My impression at that time was that that would standardize the farm-land bonds and secure a lower rate of interest and a wider mar- ket, not only in this country, but abroad, and that the objection to central banks as commercial institutions would scarcely obtain, in my view, in the case of a central bank of this kind.

But the commission dealing with the matter thought we ought to get away from the central bank proposition, so that the present bill as reported varies in that respect from the first bill.

Senator Hollis. Pardon me. Senator Fletcher, but the second bill that ypu referred to was introduced in the Senate January 29, 1914, and i^ Senate bill 4246, and the title of it is "A bill to provide for the establishment, operation, and supervision of a national farm- land bank system in the United States of America, for the creation of depositories for postal savings and other public funds, and for other purposes." Is that not correct?

Senator Fletcher. Yes. Another idea, I might say, which I had in introducing S. 2909 was that I felt it important to impress as far as I could on tin- Senate, and also on the House, what seemed to me a fundamental idea that ought to be considered in connection with tho then pending Federal reserve act. A certain effort was being mad( , as you will recall, to extend the provisions of that act so as to me<t the needs of the farmer, and in studying this subject I became

RURAL CREDITS. 5

thoroughly convinced that it is utterly impossible to provide in a commercial banking system for the requirements of those engaged in agriculture.

Mr. Hayes. Do you not think it would be unsafe to try to do so ?

Senator Fletcher. Absolutely. And I was a little afraid that we were going to try to go too far in the then pending measure in that direction, realizing, as of course all Congress did, the importance of making these provisions as far as possible to meet the needs of agri- culture; yet it seemed to me that some of them were losing sight of the principle that commercial banks can not possibly have their funds tied up in long-term loans or provide for such accommodations in a financial way as the farmer ought to have.

And for that reason I wanted to get that idea as far as possible before Congress. I wanted to make as broad and liberal provisions as could be safely made for agriculture, but I felt we needed a sup- plemental system to take us all the way.

Now, perhaps in this matter we should have a starting point and gradually lead up to what we have done.

The act of 1864, establishing our banking system, was based on the Ohio statute, and it provided for a commercial system. It was never intended to be and is not capable of being made to meet the needs of the farmer.

In the second place, it discriminated against him by prohibiting loans on real-estate security. The effect was to place a ban on real estate as a basis of credit. This being the farmer's chief asset, the system absolutely discriminated against him in its operation.

The result has been that the farmer has been obliged to depend upon the factor, the merchant, and the money lender to obtain what accommodations he required, and to make the best financial arrange- ments that he could; with the further result that high prices were charged him, enormous profits were made at his expense, and bur- densome interest charges and exactions were put upon him; and with the result, further, that his earnings were largely consumed in that way. His net returns were small, and with no prospect of growing larger.

Discouragement faced every young man growing up on the farm; hard work and the most meager remuneration were in store for him. It was impossible to improve rural conditions; there was no money to do it with. No wonder occupying owners decreased in number and tenants increased, and a steady flow set in to the cities and towns. The greatest and most important industry of the coun- try, the one upon which we all depend for our food, clothing, and shelter, was not merely neglected and left unprovided for, as far as our financial system was concerned, but was given a severe blow and discriminated against.

Strange to say, this has been continued all these years until the good year 1913, and until the passage of that great measure, to my mind unsurpassed in importance and benefits to the country by any law put on the statute books since the War between the States — the Federal reserve act.

Now, there is no longer that ban on real estate as to loans by national banks. Now the farmers have some opportunity to get personal accommodations in the way the nature of his business calls for. To be sure, this is limited. No commercial system can be

D RURAL CREDITS.

made to moot tho requirements of agriculture. The commercial bank must be ready lo respond to all of its liabilities on demand, and therefore can not have its deposits or its capital and surplus tied up on loans on real estate running for years; neither can it have its funds invested in securities which can not be readily converted into cash.

Consequently while tho Glass-Owen Acl (oi tho Federal reserve act) goes as far as can be safely gone in providing for loans on real estate and for redisoounting six-months' paper, there is a very con- siderable and very important ground not covered by our banking and currency system, even as amended.

1 therefore believe that in order to meet the needs of our farmers and provide for the necessary requirements of agriculture in a financial way we must supplement existing systems by providing for a system of farm-land banks, so empowered, supervised, and managed that the credit resources of the farmers can be made available, to the end that money can be got at cheaper rates, on long terms, with the privilege of paying on account of the principal as the interest is paid, for the purpose of acquiring homos, improving and developing the farm, and discharging existing liens drawing unreasonably high rates of interest. In addition to this, a further system of rural credit banks intended to promote cooperation and enable the members to utilize their collective credit resources to meet the temporary needs as they recur in producing the crops, would be most advantages.

Neither of these needs is fully met by the Federal reserve act. In the first place, the amount allowed to be loaned on real estate is wholly insufficient to give full relief to the farmers. There would probably be available for five-year loans on real estate some $200,000,000 under that act. The farmers of the country owe some $6,000,000,000, nearly half of which is secured by morgtages on their land. You can readily see that there is a very wide gap between $200,000,000 and $2,000,000,000.

Senator Hollis. Do you not mean $6,000,000,000?

Senator Fletcher. I just named $2,000,000,000 as the amount secured by mortgages on land.

Senator Hollis. Yes; I see.

Senator Fletcher. This gap should be abridged. Not only that, but our farmers are in need of more money for development purposes, and it would be in the nature of an investment rather than incurring a debt, if they could get it at sufficiently low rates of interest and have the privilege of paying back it out of the earnings of the farm from year to year.

Mr. Weaver. May I ask you a question, Senator Fletcher?

Senator Fletcher. Yes; certainly-

Mr. Weaver. Do you think that these commercial banks are going to lend the 8200,000,000 to the farmers? Now, while the law allows them to do that, it is a matter of option with them, and they are not compelled to do so; do you think, as a matter of practice, that they will loan the money to the farmers on five years' time?

Mr. Hayes. On real estate?

Senator FLETCHER. I doubt if there will be much money loaned in that way.

Mr. Hayes. Do you think there will be any I

RURAL CREDITS. 7

Senator Fletcher. But the main thing is that that provision does away with the idea in the original banking act that real estate is not a proper security for loans.

Mr. Hayes. Well, for commercial loans, would you not agree with that proposition that they are not proper security for commercial loans ?

Senator Fletcher. Yes; I think there is something in that, but, at the same time, I believe that the effect of the prohibition in the law was harmful to the farmers of the country, because, naturally, money lenders and financial institutions would feel that if the Gov- ernment itself provided that institutions operated, controlled, and supervised under its direction should not accept real estate as security it threw a sort of suspicion on it with other people, and they charged higher rates of interest, and all that sort of thing, whenever they did make loans on real estate.

I quite agree that there is a very grave doubt whether a great deal of money will be available to the farmer under that plan; but still it is a long step in the right direction.

This consideration ought to be shown the 12,000,000 people engaged in that industry — I mean the consideration of allowing them to have the privilege of paying back these loans and getting their money at reasonable interest. But we need credit provision for considerably more — also for development purposes — than the present debts of the farmers.

Objection is sometimes urged that we are finding a way to make it easy for the farmer to go in debt. There can be no kind of doubt about his being already in debt.

Let me read you what Judge Horace Bagley, of Towner, N. Dak., says. He has taken great interest in this subject, and I appreciate his suggestions and views. We had considerable correspondence, and he sent me this statement, which speaks for itself. I got his permission to use it, and I submit it here as an illustration of con- ditions in this country, which are by no means confined to North Dakota. There are three letters from Judge Bagley, which I would like to insert in the record as a part of my remarks, including a statement from him as to conditions in North Dakota. I will not stop to read them unless the committee so desires.

The main thing is, he says, the debts of the farmers in that county, which, he says, is typical of that part of the country, are about equal to the assessed value of the farmers' property, and they are paying very large interest charges on the debts which they have.

Senator Hollis. These letters will be incorporated in the record as a part of your testimony, Senator Fletcher.

(The letters referred to are as follows:)

Towner, N. Dak., August IS, 191S. Hon. D. U. Fletcher,

Washington, D. C. Dear Sir: I have followed with great interest and pleasure your efforts on behalf of a better system of rural credit. I take this opportunity to assure you that your labors are appreciated in this far Northern State fully as much as they can be in Florida. A long experience as a country banker and as a farmer convinced me years ago that the rural problem is purely an economic one, the solution of which lies along the lines you are so ably following. Yours, very truly,

Horace Bagley, County Judge, McHenry County, N. Dak.

8 RURAL CREDITS.

Towner, N. D., August 28, 191S. Hon. Duncan U. Fletcui b,

United States Senate, Washington, D. C.

Dear Sir: In reply to yours of August 18 in the matter of rural credits, I inclose you herewith a set of ligures prepared by me relative to the above matter, as the same applies to our local situation. I think the situation in McHenry County is typical of the general situation throughout central and western North Dakota.

The figures as 1 give them are either official or are based on a careful estimate. Abstracters and others to whom I have shown them, agree that the totals are under rather than over the actual amounts. I have taken $1,000 as the average first mort- gage real estate loan. The abstracters inform me that a loan of this size has been an exception for the past three years, and that the average now is between $1,500 and $2,000.

The amount due local banks is taken from the August 9 reports, as published in the local papers, and indicates that my estimate of chattel mortgage indebtedness at $2,500,000 is conservative. Practically all the indebtedness due banks is secured by chattel mortgages. And in addition to such bank indebtedness is the very large sums due the machine companies, horse dealers, local merchants, and money loaners. In my opinion, the present indebtedness, other than real-estate mortgage indebted- ness, is close to $3,500,000, and $2,500,000 is the amount thereof upon which interest is annually paid, the $1,000,000 representing the sum which will be liquidated this fall.

These figures indicate, of course, that many of our farmers are past all help by any scheme of credit. But a very large number of them are still solvent, and will gladly and successfully make the needed change to a better system of farming if they can secure credit on anything like a reasonable basis. If the present system continues, it is perfectly evident that the bulk of these still solvent farmers will likewise fall into the same bottomless pit as their fellows. Yours, very truly,

Horace Bagley.

[Inclosure.]

Statistics relative to mortgages and other indebtedness, McHenry County, N. Dak. [Compiled from official records of said county, Aug. 22, 1913.]

I.

Population, 1910:

Total 17, 627

Rural 14,757

Families, 1910:

Ratio to population per cent . . 5. 6

Total 3, 147

Rural 2, 635

Acres assessed for taxation, 1912 1, 132, 248

Assessed valuation, farm lands. 1912 $4, 852, 509

Average valuation per acre, 1912 $4. 28

Assessed valuation, personal propertv, 1912:

Total $1, 380, 888

Rural $1, 010, 076

Average assessed valuation, per rural family. L912, total $2,225

II.

Real estate mortgages recorded. Aug. 22. 1907, to Aug. 22, 1913 12, 359

Real estate mortgages of record Aug. 22, 1913 > 9, 269

First real estate mortgages of record. Aug. 22, 1913 '4, 634

Average amount first real estate mortgages > $1, 000

Total first-mortgage indebtedness '$4,634,000

Average first-mortgage ind<-btednesB per rural family |1, 758

Average interest rate per annum, first real estate mortgage per cent. . 0. 09

Total interest paid per annum, first real estate mortgage $411, 114

Average annual interest paid per rural family, real estate mortgage $158

' Estimated.

EURAL CEEDITS. y

III.

Chattel mortgagee filed Aug. 22, 1907, to Aug. 22, 1913 39,116

Chattel-mortgage indebtedness Aug. 22, 1913 . . ' $2,500,000

Average chattel mortgage indebtedness per family $794

Average interest rate perannum, chattel-mortgage indebtedness. per cent. . 0. 12

Total annual interest paid per annum, chattel-mortgage indebtedness $300, 000

Average annual interest paid per total family, chattel-mortgage indebted- ness $95

IV.

Number national banks, McHenry County 2

Number State banks, McHenry County 25

Total bank capital, McHenry County $397, 000

Total bank loans, statement Aug. 9, 1913 2$1, 938,000

Average indebtedness to banks per family $615

V.

Total real estate and chattel-mortgage indebtedness $7, 134, 000

Total average real estate and chattel-mortgage indebtedness, rural $2, 552

Total average interest paid on all indebtedness, per annum, rural $253

Average cost renewing real estate mortgages $10

Total cost renewing real estate mortgages, 6 years $46, 340

Annual cost renewing real estate mortgages $7, 772

Towner, N. Dak., September 5, 1913. Hon. Duncan U. Fletcher,

United States Senate, Washington, D. C.

Dear Sir: Yours of September 1 in re rural credits plan at hand, and I thank you for the same.

I shall be glad to have you use the data I sent you in any way you see fit. I believe it is, on the whole, entirely reliable and will bear investigation.

Not only are our farmers not accommodated with loans at the time and in the amounts they need them, but such loans are looked upon by the average banker as a great favor to the farmer and are only extended upon the terms and in the amounts the banker sees fit.

I have taken the first 50 mortgages filed on and after November 1, 1912. and find that in such 50 mortgages the crop was given as security in 26, machinery in 16, cattle in 12, and horsesin 23. I have taken the first 50 mortgages filed on and after April 1, 1913, and find that the crop was given as security in 11, horses in 31, cows in 12, and machinery in 14. It is obvious that the proportion of crop security fell off in the April mortgages for the reason that such security was exhausted and would be worthless.

Several years ago I became acquainted with the German and Danish cooperative credit systems through our farmers of those nationalities and have been greatly inter- ested in the subject ever since that time. In 1912, I spoke to an audience of over 3,000 people at a farmers' picnic, for nearly an hour upon this subject and aroused great interest. Inquiries have been coming pretty steadily since that time, and num- ber of substantial farmers in various townships have offered to take the initiative in the organization of township banks.

You and I both realize, of course, the difficulty of organizing farmers' cooperative societies of any kind. The first step in the successful organization of such societies is financial independence. Your bill seems to furnish the material for securing such independence, and I believe it can and will be used for that purpose.

I have distributed the envelopes which you sent me and can use more of them to good purpose.

Yours, very truly,

Horace Bagley.

i Estimated.

2 Practically all bank indebtedness is secured by chattel mortgages and is included under IIT.

10 RURAL CREDITS.

Senator Fletcher. Judge Baglev gives a list of the mortgages from the records in his county and from other data, which I think quite material as illustrative of the point as to the present condition of tho farmers.

1 have here letters from nearly every State, which would make a voluminous record if printed, showing that the farmers to-day are paying all the way from 6 per cent per annum to 2 per cent a month interest on tho money they need to borrow — when they can get it at all.

In the Eastern States and the middle Northwest farmers can get loans on their farms at times as low as 6 per cent per annum, but they must make the note secured by the mortgage payable on demand or at some short period within winch it would be impossible for them to earn it.

Senator IIollis. If you will pardon me, Senator Fletcher, I would like to interject that in my State we have a law recently passed that exempts from taxation mortgages on New Hampshire land at a rate of 5 per cent or less. That has resulted in putting the rate of interest on real estate loans down to 5 per cent in all our savings banks, and as a result it has done great good. I will say that all mortgages are taxable and the land also is taxable; that is pretty close to double taxation, but that is the rule in my State.

Senator Fletcher. Yes. May I inquire if those mortgages are for any great length of time, or are they payable on demand ?

Senator IIollis. They are almost invariably payable on demand; but our savings banks are mutual savings banks and the deposits come largely from the same population that borrows; and I have never known a farmer to be foreclosed without being given ample opportunity. In fact, I have not known any of the farmers to be foreclosed. I am a trustee of a savings bank with $12,000,000 de- posits, a pretty large mutual savings bank. We contribute our services free, all the officials except the treasurer and the secretary. And while the notes are made payable on demand, I have never known any foreclosure to be made. So it works out very well in our section of the country.

Senator Fletcher. Well, of course, it would be very risky for farmers generally to have their mortgages payable on demand; and whereas there may not be foreclosures — of course the banks are interested in having their funds out at interest — still it is in their power to foreclose, and for that reason it does not quite meet the situation, it seems to me. Even though the interest rate is low, there are disadvantages to the farmer in that system.

Senator IIollis. And I will say, in addition, Senator Fletcher, that our banks do not like to loan on local farm lands; they seem very much to prefer to loan on western farm lands, where the loan comes through some agent, to accommodating the local farmer.

Senator Fletcher. Yes

Senator IIollis. I have myself noticed that. And I have myself, in a number of cases, insisted that they must loan to the local farmers if the security was good. Of course, there is that disadvantage.

Mr. Platt. Your mutual savings banks are not allowed to loan on western mortgages, are they '.

Senator IIollis. Yes, they are in my State

RURAL CREDITS. 11

Mr. Platt. They are not allowed to do so in my State. Our mort- gages are all made on local farm lands and run for two or three years, but they allow them to run on indefinitely. They are never fore- closed, at least very rarely.

Senator Fletcher. Again, the farmer must pay for the abstract, drawing the papers, commissions to agents, and the like, averaging about 2 per cent more.

A letter from Missouri gave an actual transaction which the writer recently had, showing that a farmer wanted to borrow $1,000 and that his farm was worth $10,000. The loan was made through an agent, and the net amount the farmer received was $908; and $92, nearly 10 per cent, went for commissions and expenses.

A letter from Oklahoma says that farmers pay 2 per cent a month as interest and often can get no money for operating purposes at all. These are not exceptional cases.

We must stop this discrimination against the foundation of all our industries. We must provide a means for utilizing their credit resources, and making their assets liquid. As Mr. Lubin would say, give them the dynamic dollar instead of the static dollar. We must provide a way for relieving the burdens on our farmers of excessive interest charges, expensive machinery for obtaining accommodation, and of the difficulties often insurmountable, of supplying their proper and legitimate needs.

Think of an industry enduring such burdens all these years, and suffering such discrimination, and accepting such denials, in which nearly one- third of our population is engaged, which has assets estimated to be worth 40 billions of dollars and yielding annual products worth nearly 10 billions of dollars on the farm.

Very properly our farmers insist that they have endured and have been patient long enough. They are entitled to be fairly considered in the financial scheme of the Nation.

The commission appointed by the President to study this subject and get all the light on it possible, from the experience and practices of the older countries of Europe, believes that it has a plan which is sound in principle and workable in practice for supplying the capital requirements, the investment needs of the farmer, involving long- term low interest and an amortization feature. I now refer to Senate Document 380.

Senator Hollis. Senator Fletcher, just a moment. As long as these hearings are to be published, and we want them to be as useful as possible, will you not explain right there, for the benefit of readers, what amortization is ?

Senator Fletcher. Amortization means the payment on account of principal at the interest periods.

For instance, we will say that under this bill, if the bonds provide 4 per cent interest — or rather, if the farmer is to pay 4 per cent inter- est— there is provision made for not exceeding 1 per cent for adminis- tration charges by the bank. In Europe, I believe, that is a good deal less. In some countries, probably, it is as low as 0.35 of 1 per cent, and probably generally will not exceed 0.60 of 1 per cent. We provide that it shall not exceed 1 per cent here, covering all expenses of administration.

JL2 RURAL CREDITS.

Then there is a provision here that the mortgage shall show pre- cisely what the farmer is to pay in the way of interest, in the way of expenses, and in the way of amortization. That is, suppose he pays 0.50 per cent for amortization. That applies on his principal. It differs from a sinking fund that is ordinarily provided for taking care of bonds in that the amortization payment is credited on the mort- gage when it is made, so that there is not any doubt but what the farmer receives credit for that payment on the principal at the time it is made; that is wherein it differs from the ordinary sinking fund. It is a payment on the principal at the interest period of whatever amount may be agreed upon. Perhaps he will pay 1 per cent on the principal. Of course, the whole thing will be paid oft in a less time the more he pays for amortization.

Xow, we propose to follow this with a report and recommendations respecting the personal or short-term credit for temporary or recur- ring needs. This will be based upon the principle of cooperation, the utilization of the collective credit resources for the benefit of each.

The subject divides itself into two great phases:

First. To provide long time, or land mortgage credit, to take care of the farmer's capital requirements, such as completing the purchase of the farm, improving and equipping the farm, and paying off existing liens.

Second. Short-term or personal credit, to take care of the tem- porary requirements for preparing the land and cultivating the crops and harvesting them.

The first is the primary step to improve our agricultural conditions, and precedes, naturally, the development of personal credit.

The establishment of a system of farm-land banks is a means for accomplishing this purpose.

Since Senate Document No. 380 is accessible to all, what I might say on that subject in a general way would be largely a repetition of what is there set forth, and I take it that all I should do is to draw your individual and careful attention to what is there said.

In the introduction, Part I, page 9, the discussion of "land mort- gage or long term credit," Part II, page 15; the statement inter- Ereting the accompanying bill, page 27; the detailed review of the ill, page 34; and the bill itself, pages 53 to 73.

Now, there are some views of a minority of the American com- mission which are quite pertinent and suggestive which, if the com- mittee pleases, I will submit for incorporation in your record. They are not yet published, but are sent to me as chairman of both com- missions. I do not know whether the committee cares to do that or not.

Senator IIollis. If you think that will be useful, Senator Fletcher, it will be incorporated in the record. We are inclined to accept your judgment on that.

Senator Fletcher. These minority views are submitted by Mr. Gordon Jones, Mi-, von Engelken, and some other members of the American commission. Dr. Coulter, do you know how many signed that minority report ?

Dr. Coulter. I think there were 8 or 10. I have a letter from Mr. Gordon Jones, stating that he wants to make two or three minor

RUKAL CEEDITS. 13

corrections in that report, and that he will forward a corrected oopy of it as soon as he can.

Senator Fletcher. Well, some 8 or 10 members of the American commission submitted this minority report.

Senator Hollis. Then such matter as you may hand to the sten- ographer in this connection, Senator Fletcher, will be printed as a part of these hearings.

Senator Fletcher. Of course, it is understood that these gentle- men who signed these minority views are members of the American commission, hot of the United States commission. The United States commission are united in their report, as shown in Senate Document 380. But I thought it might be well to insert in these hearings the views of these 8 or 10 gentlemen on the Ameircan com- mission, as throwing light on the subject.

Mr. Gordon Jones is a banker of Denver, Colo., and Mi-, von Engelkan, of Florida, is a native of Germany, a highly educated and capable man and quite familiar with conditions both in Germany and in this country; he is a farmer. And I feel like getting all the light we possibly can from every source, whether it is favorable to my bill or to the commission bill or any other bill is immaterial to me; what I want is light on the subject wherever I can find it; and I think it would be well, if the committee agrees, to put this in as the views of those gentlemen on this subject. They went to Europe, and they studied the subject along with the other members of the American commission.

Mr. Bulkley. Has there been submitted any majority report of the American commission ?

Senator Fletcher. The American commission has not submitted any bill at all; they decided not to submit a bill; but their report is found in Senate Document 214.

Mr. Hayes. That is a very voluminous document.

Senator Flecher. Yes; and that will be followed up by some further observations and additional data; but they have not recom- mended any bill; they decided not to recommend any bill.

Mr. Weaver. When will we get that supplemental report?

Dr. Coulter. That has already been provided for; 261 is now in final page proof, and can probably be printed to-day.

Senator Fletcher. That will complete, then, the American com- mission's report — Document 214.

In addition to that, I have a letter here from Col. Ousley, of Fort Worth, Tex., who was a member of the commission.

Mr. Weaver. Is that Clarence Ousley?

Senator Fletcher. Yes.

Mr. Weaver. He is a newspaper man.

Senator Fletcher. Yes. He was dealing in this letter with my bill (S. 2909) which I had asked him to criticize; and he has made some valuable suggestions on the subject; and it is not a very long letter, and if the committee would permit it to be printed, it might add something of considerable value.

Senator Hollis. The letter will be printed in the record at this point.

14 RURAL CREDITS.

(The letter referred to is as follows:)

Fort Worth, Tex., August 27, 191S. Senator Duncan U. Fletcher,

Washington, D. C.

My Dear Senator: I have just had time since my return to carefully consider your bill providing for a national rural-bank system.

I heartly approve the general idea, and in responding to your invitation for "criti- cism and suggestion," I make bold to submit the following thoughts:

Page 14, under the title "Real-estate loans," you provide that the rural bank may lend an amount equal to its capital, surplus, undivided profits, and 50 per cent of its time deposits on land mortgages. On page 27, you provide that the rural bank shall invest an amount equal to 10 per cent of its combined capital and paid-in surplus in the national rural bank and 20 per cent in the State national bank. Are not these sections at cross purpose? Besides, I doubt the wisdom of allowing the rural bank to lend so much upon farm mortgages. In many sections of our country, where land values are uncertain and there is a tendency to speculation and exploitation, I fear that some banks would be organized for the particular purpose of developing real estate and that there would be serious damage as a result of collapsed booms.

On page 16 and elsewhere you provide that loans on real estate shall be 60 per cent of the value at which such real estate is assessed for taxation. In many sections of Texas, and I doubt not of other States, lands are assessed at scarecly more than half their market value, and in some instances, indeed, at considerably less than half their market value. In such cases the limit of loan would be too low for practical purposes. My opinion is that it is sufficient to limit the loan to 60 per cent of appraised value, but to require appraisement to be made under very rigid rule and to be verified ana approved by some Government official or officials not connected with the bank. Appraisements are made in this manner by the Prussian Landshaften. That is to say, the appraisement by a committee of the Landshaft is subject to revision by a government official acting independently and having no relation whatever to the Landshaft.

On page 21 you provide- that loans on farms shall be made "in so far as practicable" only for improvement, equipment, or increasing the value of the property. In my judgment you should make this condition absolute by striking out the words "in so far as may be practicable." I think there should be no opportunity whatever for rural banks to bo persuaded to make loans on anything but improvements or part of the purchase price. Our people are not yet conservative enough to exercise such discre- tion as your bill allows, but they are likely to be tempted into making loans for other than the real purpose of the bill.

On page 30 you provide that the ownership of stock of the State bank shall be exclusively in the local banks. I submit for your consideration whether it would not be wise to permit a minority of the stock to be owned by private individuals and to safeguard the institution from selfish uses by requiring that the majority of the stock shall be owned, by the local banks. I apprehend that in the establishment of this system it will be necessary to secure much money from private sources. I think there are many men in the country who would be willing to contribute with the hope of a reasonable profit, and many cities would contribute stock in order to secure the loca- tion of the State bank. The same suggestion may be applied also to the national bank or the central bank.

I doubt whether it would be necessary for the entire board of governors to receive such liberal salaries as are provided on page 44. I rather think that it would be suffi- cient to compensate the president and the vice presidents and to make a modest allowance for other members of the board of governors.

If the Congress can be persuaded to appropriate any money whatever for invest- ment in the national bank, I suggest that the amount should be at least a million dollars instead of the £500,000 as you provide. It will be a mistake to undertake to establish such a system with a small amount of money. I suggest also that ample provision should be made in the bill for organizers of local and State banks. It will take a tre- mendous effort by many skilled and efficient men to organize these institutions, and it is my opinion that such organizers should be engaged for a period of two to five years.

I congratulate you upon making the effort, and, while I presume you hardly hope to succeed at th<> present session of Congress, we must make a beginning, and the sooner we make it the better. Yours, truly,

Clarence Ousley.

RURAL CREDITS. 15

Senator Fletcher. Of course, I have not specific authority for offering either of these; but I do so, as I think it will be well, as I said, to have all the light on the subject we can.

Now, if the committee should be interested further in my views, expressed more in detail and supplying certain material relating to the subject, I may be permitted to refer to a speech which I made in the Senate August 14, 1912; another one made in the Senate August 9, 1913; and another one to the conference of governors (S. Doc. 177), and also one which will be found in the Congressional Record of January 29. 1914.

Senator Hollis. Permit me to interrupt you there, Senator Fletcher. I think it would be useful to have at least one of these addresses of yours — the one that you think covers the subject best for this purpose — made a part of the record. I should like to have it in the record. Will you give to the stenographer such material of that sort as you think ought to go into the record.

Senator Fletcher. I will, Mr. Chairman, if it is desirable. But the record of these hearings will show the references to those speeches, so that any of the members can read them if desired. I thought that would save printing in the record: but the committee may do as it likes about that. Perhaps it would serve to furnish extracts from those speeches mentioned.

(The papers referred to are as follows:)

[Extracts from speech of Hon. Duncan U. Fletcher, of Florida, in the Senate of the United States, Aug.

9, 1913.]

National Rural Banking System: Its Establishment, Operation, Manage- ment, and Control.

as affecting agriculture.

While the pending legislation is most desirable, it does not, can not, and no amend- ment to it could be made to, supply the great and pressing call for financial consid- eration by agriculture.

In the past Great Britain bent her energies developing her industries and her commerce.

Germany realized she must provide food for the people, including her army, and she looked after agriculture as well. In consequence, Germany has the most com- plete financial system aimed to benefit agriculture and under which her farmers prosper, and without which they would have perished. Raiffeisen heard the call in 1849. The Landschaften and other plans were evolved. They are quite distinct from ordinary commercial banking institutions.

In recent years England has endeavored to remedy her oversight. Her states- men and economists saw the trouble, and legislation has been enacted in the inter- est of agriculture.

But the most marked example of the successful application of the German idea to local conditions is found in Ireland. In the days of absent landlordism and tenancy that country was noted for the poverty, distress, intemperance, and dis- content of its people and the prevalence of crime. Since the efforts of her patriots, resulting in the act of Parliament constituting the development commissioners in 1900, whereby the Government, by its credit of 11,000,000,000, has made it possible for those who work the land to own it, there is bounding hope, general prosperity, contentment, and progress on every hand, and the jails are turned into schoolhouses, and the Irish lad no longer hurries from the farm. Under the leadership of suv.u economists as Sir Horace Plunkett there has come about a real rural reconstruction. It is because by some wise consideration shown those who till the soil, enabling them to have a fair and square chance — and they have never asked special favor or special privileges — life on the farm is being made, as it must be in every country, if that country is to prosper, conspicuously comfortable, intellectually interesting, and socially satisfying.

16 RURAL CREDITS.

We must mil get into Ireland's former condition.

Statistics show there lias been an increase of tenants on the farms of this country of some 12 per cent since 1880, a decrease of occupying owners in that period of 14 per cent. The exodus from the farm is increasing — our exports of food products rapidly decreases. Soon, at the present rate, we shall not be producing sufficient to Bupply the home demand. For instance, while our population has increased 9,000,000 since 1907, the number of cattle has decreased 16,000,000. Yesterday 900,000 pounds of beef from the Argentine Republic was delivered in Washington. The shipment came from Buenos Aires via Liverpool, and the time required was 85 days.

It may be claimed that section 27 of Senate bill 2639 will serve the farmer. To a degree it will be of benefit, but it does not approach ample provision. It removes the ban on real estate as security heretofore existing, but the farmer can not return his capital in nine months. This would give but temporary short-time accommoda- tion. What the farmer wants is long-time loans at a low rate of interest, with amor- tization feature. In this way he can acquire a home, improve his property, develop his industry, and out of the annual proceeds pay off the debt by installment reductions.

COMMERCIAL BANKING SYSTEM NOT SUFFICIENT.

You can not provide for that in any commercial banking scheme. You must have a separate plan. In nine months he might be able to meet obligations incurred for temporary needs — for supplies to enable him to produce the last crop — but that is but a small addition to the avenues now open to him for that purpose. Besides, the Senator from Oklahoma [Mr. Owen] estimates this section would make available for loans on real estate some $250,000,000. This is an insignificant sum compared to the demands of that great industry. How great it is may be understood when we reflect that over 10,000,000 of our people are directly engaged in it and over 30,000,000 are on the farms and supported by them. Furthermore, that the value of the products on the farm last year were $9,400,000,000, and it is estimated that one-third of these were consumed on the farms, leaving the remainder to be marketed and for which the consumers paid over $13,000,000,000. Further, our farmers owe some $5,000,- 000,000, nearly three billion of which is secured by mortgages on the land. What would two hundred and fifty million amount to when it is a question of properly taking care of that three billion, say nothing as to the other two billion secured by crop liens and due local merchants?

I realize that in some portions of the country the farmers are lending money to the banks, enjoying automobiles and other luxuries. There are many other portions where the farmer is having a hard and miserable existence. Excessive rates of interest, inability to get capital, lack of credit, or other difficulties in no few districts prevent his getting a direct return from his toil, strive how he will.

STATUS OF AGRICULTURAL AND RURAL LIFE.

We must take the average, as we must deal with the average man in all our calcu- lations. We find that the average farmer earns, gross, $700 per annum — less than $2 per day. With this he must support his family, educate his children, meet medical bills; then he can buy barrels with which to store away the remainder.

There seems to be two theories advocated by earnest, conscientious, able thinkers, respectively:

Mr. David Lubin contends the farmer is "behind the times in the United States * * * because he has no cash, no open account. Give him that, and he will have the rest. It therefore follows that the American commission should first of all find out why the European farmer has cash, has open accounts, and why the American farmer has not. Having found out the why, it will be easy enough for the American farmer to build up the structure he should have so as to adapt himself to the needs of the twentieth century and in conformity with the progressive modes in operation in the United States in all other fields of activity."

Sir Horace Plunkett, the Irish patriot, economist, and publicist, says:

"I hold strongly that until farmers have fallen into line with the economic system of your and our countries by organizing their business they can not themselves know the character of the security they have to offer, and therefore will not have credit to get cash adequate for their requirement."

He insists upon dealing with ''the problems of rural life in its entirety" rather than restricting our efforts "to the financial aspect of the problem."

RURAL CREDITS. 17

As I understand, he contends that we must first get the farmer ready to utilize credit. He must organize cooperative societies, combine with his neighbors, prepare himself and his undertaking in order to make effective and economical use of the credit which will come to him, and then a system may be devised whereby he can economically finance all his operations.

Both aim for the same goal; both wish to accomplish the same ends; the difference appears to be in methods or means. It seems to me both may be right ; that the result- ant, rather, the middle course, would be nearer the true and the wise course. In other words, let us proceed with both developments at the same time — cooperation to better rural conditions and financial arrangements pari passu.

* * * * *■ # *

The farmer must always be the foundation, but that doe? not mean he must be kept beneath the surface.

The rewards of his labor are too meager. Experts say, upon an average, the farmer gets only 35 cents of the consumer's dollar. The cotton grower gets the largest pro- portion of what the consumer (meaning the manufacturer) pays, 70 per cent. The vegetable and fruit grower get the smallest per cent, 20 per cent. This is because cotton passes through fewer hands. He pays high prices for the things he buys. He pays tribute to the manufacturer, the middleman, and the financier. The poorest preach- ers the church sends to the country meeting houses. The most inexperienced and inefficient teachers the State sends to the country schools. About the cities and towns the paved roads are found. There is need of centers for business and social gatherings in order to make rural life more richly enjoyable and humanely interest- ing. Farming must be made more remunerative. The returns do not warrant good wages, hence the lowest wage is given to farm labor, and hence, too, its decreasing quantity and quality. The farmer receives less for the hours he spends in toil than any other worker. His work is unceasing — is never done. Yet Adam Smith stated the fact that "all wealth comes from labor applied to land."

The primitive values are food and shelter. There is much talk about universal peace— build up a contented and prosperous husbandry and you make the greatest stride in that direction. The farmer is for peace; he is never a despoiler. He brings on no wars, although, like the hunting-shirt men under Jackson, he does the best fighting when it needs to be done.

We talk about world disarmament. Let a nation produce a surplus of prime neces- sities of life which other nations must come to it to obtain or go hungry and unclothed, and you have a nation in position of supreme power.

I would encourage, not undermine, the policy of self-help and individual initiative.

But something must be done to give this oldest and really only absolutely necessary industry its proper place in the Nation's economy.

We know that about 1880 the cooperative movement for the benefit of agriculture became very active in Germany, Italy, Denmark, France, and other continental countries.

Sir Horace Plunkett and a Jesuit priest, Father Finlay, just from his studies in German universities, organized the pioneer society of agricultural cooperation in English-speaking countries, the Irish Agricultural Organization Society, which has brought into existence all the present societies, combining 100,000 Irish farmers, giving an output valued at £2,500,000 annually. They apply the cooperative prin- ciple to agricultural production, distribution, and finance.

In sporadic instances that course is pursued in the United States. I have been informed that a cooperative society about Summerville, S. C, saved last year to its members $7 per ton on the fertilizers the members used.

EXPERIENCE IN OLDER COUNTRIES.

The three causes which revolutionized Irish farming are given as: Land purchase, whereby the farmer became the owner of the land; technical education, whereby he was taught to do better farming; and agricultural cooperation, whereby business methods were applied to the industry and the produce was disposed of to the best advantage. The Irish Agricultural Organization Society has successfully demon- strated that the cooperative system is capable of enabling the farmer to produce and distribute efficiently and economically, and at the same time to finance both these operations. Credit societies have been formed as auxiliary to the cooperative society.

There are some 200 rural banks in Ireland. One of the first forms of cooperation on the Continent, and the most useful, was cooperative credit. No loss has come to any one'in their operation in all the years since Raiffeisen started the plan in 1849.

37031—14 2

18 RURAL CREDITS.

In 1884 the idea took fast hold in France and the agricultural syndicates were estab- lished and soon came to ho considered veritable public utilities.

To-day there are 4,000 syndicates, having a million members, representing 5,000,000 of the rural population of France.

There are 1,1550 credit societies after the llail'l'eisen principle, having some 60,000 members. There are 1,500 societies of agricultural credit under the law of 1894, which inaugurated a special type of bank composed of members of agricultural syndicates.

These societies have resulted in doubling the produce of the land, enabled the farmers to meet the competition of other countries, attached the people to the soil, advanced the rural populal ion in prosperity and in economic, moral, and social improv- rnent. An illustration of the way cooperation works is this statement: The syndicate chartered steamers to carry strawberries to London, and growers doubled their profits over what they were when they consigned to Paris and left Paris to sell to London. Foreign trade was established in the same way in fruits and early vegetables, to the immense advantage of the growers.

In Germany there are 17,000 credit societies, with 1,500,000 members. These and the Landschaften and other institutions providing for amortization and low rates of interest on long-time loans have redeemed agriculture in Germany. The German farmer and the French obtain all the money they need under the cooperative credit system at 3 to 4 per cent.

The farmer must have capital. He must provide for annually recurring require- ments. He must have the means of using his asset (land) to get money as capital. Relief can not come through a system of commercial hanking. There is need for a special kind of bank, authorized to use its credit to guarantee long-term loans, so as to meet the farmers' capital requirements.

These can not be met by direct loans from any bank. The railroads are financed by the sale of long-term bonds, based on capitalized prospects, rights, and property. The farmer needs an institution to guarantee his bonds and make them salable; one that would furnish not only the capital requirements of the farmer, but his annually recurring needs, naturally bringing about business methods, necessitating organiza- tion and cooperation, thus covering the en the field of agricultural reconstruction and making conditions for ideal rural life.

I can not too strongly urge that a special kind of bank, a system separate and dis- tinct from commercial banking, must be established in order to supply the needs of agriculture and rural life.

The deposit of postal savings funds and perhaps the governmental funds with the rural banks thus established would be wise and helpful, enabling the banks controlled by individual farmers, familiar with the needs of their communities, to make the loans as needed.

The objection that such facilities would encourage debt and extravagance is unsound. On the contrary, the effect would be to lend hope to the farmer, brighten the lives of the country men, instill habits of thrift and economy, give open accounts and savings accounts, and promote business methods so much desired, and strengthen the independence and self-reliance of the rural population.

The experience of older countries is contrary to the apprehension indicated. By the establishment of financial institutions primarily for the benefit of those engaged in agriculture and by methods of cooperation in various directions that industry has perhaps attained its highest development in Germany. With an area of 208,780 square miles — not as large as Texas by an area greater than Alabama (53,618 square miles) — that Empire produces 95 per cent of the food required for its 67,000,000 people.

The contention may be that an act creating a rural banking system would be class legislation. This is not well founded. Agriculture, commerce, and industries are the three great pillars of support and strength. The banking system heretofore in force contemplated meeting the requirements chiefly of the last two — commerce and industries. Agriculture has been left out of the reckoning. No commercial banking provisions can supply the needs of the farmer and must largely be confined to com- merce and industries. The man engaged in trade and the manufacturer must have facilities winch are entirely different from those needed for the farmer. The time has come when the chief stone of the temple must be considered. We can no longer neglect suitable financial provision for the farmer. Statistics furnish argument enough wdien they show the population of the United States increased from 1900 to 1910, 21 per cent, while the number of workers increased on the farm during that period only 10.9 per cent and the workers in the factories increased ' 1900-1909) 40.3 per cent and in the mines | L902-1909) S3.1 per cent.

The criticism may be made that the proposed legislation smacks of paternalism. Not at all. The Government is asked for no subsidy. The postal savings must be

BURAL CREDITS.

19

deposited somewhere; why not in the rural banks? It simply means providing by law a means of self-help. Individual initiative by the farmers must be exercised in order to make the system a success. The Government does no more in this matter than it does in respect to commercial banks. It gives opportunity, furnishes the machinery, supplies the working tools or a chance to get and use them. Laws appli- cable to the sea are peculiar and different from the laws in force on land, because the conditions are different.

The conditions of rural life are not at all the same as conditions of life in the cities. Laws governing commerce are not the same as those with respect to mining. The proposition simply is to establish a system of agricultural finance suitable to the needs of those priests of nature who live nearest the fountain of life in the divine economy and on whose prosperity the welfare of all depends.

It would mean that agriculture is not to be longer subordinated to commerce and industry.

The Government should play no favorites. The moral and material upkeep of the rural population is quite as important as the development of urban industries or commercial expansion. The strength and health of society depend on the intelligent labors and well-being of the countrymen.

We must look after something more than merely giving instruction how to culti- vate, produce, and market. We must do those things which will create a social order and adjust it to human needs.

We can provide the machinery whereby the farmer can protect himself, and by its intelligent use reconstruct his great industry and redeem. rural life from stagnation and decay.

That the time has come for the taking of steps of this kind is clearly indicated, I think, by what has been already said, to which I might add references to a few more statistics.

Mr. President, I offer certain tables, which I ask to have printed as a part of my remarks.

The Vice President. Without objection, leave will be granted.

The tables referred to are as follows:

Table 1. — -Number and percentage of farms of specified tenure in the United States, 1880

to 1910.

[From decennial census of agriculture.]

Year.	Number of farms operated by-	Percentage of farms operated by-
	Owners.1	Tenants.	Owners.1	Tenants.
1880 s	2,984,306 1,024,601 3,269,728 ! 1,294,913 3,712,408 2,024,964 4,006,826 2.354.6:	74.5 71.6 64.7 63.0	25.5
1890 2. . .	28.4
1900	35.3
1910...	37.0

1 Includes farms operated by owners, part owners, owners and tenants, and managers. 1 Not including farms with an area of less than 3 acres which reported the sale of less than $5 worth of products in the census year. (This table can be expanded to a showing by geographic divisions and States.)

Table 2. — Urban and rural population in the United States, 1880 to 1910. [Urban population resides in incorporated places of 2,500 inhabitants and over.]

Year.	Number.	Percentage.
Urban.	Rural.	Urban.	P.ural.
1880 1890 1900 1910	14,772,438 22, 720, 223 30,797,185 42,623,383	35,383,345 40, 227, 491 45,197,390 49,39S.S83	29.5 36.1 40.5 46.3	70.6 63.9 59.5 53.7

Note.— Quotation from abstract of the Thirteenth Census.

(This table can be expanded to a showing by geographic divisions and States.)

20

RURAL CREDITS.

Table 3. — Number and percentage of farms in the United States mortgaged and free from

mortgage, 1890 to 1910.

[From decennial census.)

Year.	Number.	Percentage of owned farms.
Mortgaged.	Free from mortgage.	Mortgaged.	Free from mortgage.
]R90	886,957 1,127,749 1 , 327, 439	2,255,789 2,510,654 2,621,283	28.2 31.1 33.6	71.8
1900	68.9
1910	66.4

Note.— The figures are for farm families in 1S90 and for farms in 1900 and 1910. (This table can be expanded to a showing of geographic divisions and States.)

Table 4.-

1890. 1910.

-Percentage of farm-mortgage debt of the value of the mortgaged farms, and 1910.

1890

rrora decennial census.]

Percentage. .... 35.5 .... 27.3

Mr. Fletcher. Table 1 has been prepared from tbe census reports as far back as 1880, and tbe results of these censuses with regard to farm tenure show that the fraction of farms operated by tenants has steadily increased from 25.5 per cent in 1880 to 37 per cent in 1910.

It appears also from this table that the fraction of farms operated by owners decreased from 74.5 per cent in 1880 to 63 per cent in 1910.

The actual and relative urban and rural populations from 1880 to 1910 are expressed in Table 2, and in this table it appears that the rural population has declined from 70.5 per cent of the total population in 1880 to 53.7 per cent in 1910. Conversely the urban population has increased from 29.5 per cent in 1880 to 46.3 per cent of the total popula- tion in 1910. These figures do not mean that the changes in the relative proportions of these two classes of population have been caused entirely by the movement from country to city. Immigrants have tended more and more to remain in the cities, especially in New England and in the Middle States.

The censuses of 1890, 1900, and 1910 took account of the number of farms operated by owners that were mortgaged or were free from mortgage, and the results are expressed in Table 3. The fraction of farms operated bv owners that were mortgaged increased from 28.2 per cent in 1890 to 33.6 per cent in 1910.

The bulk of the farm-mortgage debt is incurred to secure deferred payments and to make improvements. This was thoroughly investigated in the census of 1890. See Abstract of the Eleventh Census, pace 243.

Farms were worth more per acre in 1910, including improvements, than they were worth in 1890, and because of the increase in the value of lands the ratio of farm- mortgage debt to the value of the mortgaged farms declined from 35.5 per cent in 1890 to 27.3 per cent in 1910. (See Table 4.)

The decline in exports in the case of wheat and most of the packing-house products has been marked. In the exports of cotton it is true there has been enormous increase.

In connection with an examination of the trend of exports of farm products it may be borne in mind that the imports of agricultural products has been greatly increased.

The fact that agricultural production is not keeping pace with consumption is full of meaning. This diminution of agricultural surplus may be partly due to the effect of unfavorable climatic influences upon production, but it is also due in part to the building up of cities by immigration and to the drift from agriculture to other occu- pations at a faster pace than formerly. The movement from country and farm to city and town exists and has existed in all parts of the United States, and it every- where exceeds the contrary movement, such as it is.

Last year we produced on our farms and in our factories and mines products valued at $40,000,000,000, of which we consumed thirty-eight billion ana exported two billion, in round numbers. We imported and consumed commodities from other countries of the value of $1,800,000,000. The important part cotton plays in the balance I need only suggest.

RURAL CREDITS. 21

ILLUSTRATIONS — RURAL CREDITS.

To be sure, there is no "royal road" to success in farming any more than there is to learning.

Everything depends on the individual farmer — his industry, judgment, and capa- bilities.

But, assuming he has the necessary sense, energy, and ambition, he could get much further ahead, accomplish much more, enjoy life to a fuller degree if he ifl enabled to make judicious financial arrangements on terms two or three times as advantageous to himself as he can now.

Certainly it means much to the country if a plan can be devised and put into exe- cution whereby the worthy and industrious man may secure a farm which lack of cash or credit makes impossible to him now. It would count for the individual and the general good if a way could be found whereby the people may be attached to the soil in contentment, comfort, and prosperity, whereas now they seek the city for em- ployment yielding only a bare existence.

It would help mightily in the well-being of society if a plan of organization or co- operation can be put into use whereby the tenant can acquire a home for himself and become the owner of the farm he cultivates.

These ends can be attained by profiting by the experience of others whose necessi- ties compelled a solution of the problem years ago.

For instance, take this illustration from a Danish mortgage-society law, mentioned by the commission on rural credits and betterment: Members of the company (farm- ers who have mortgaged their property) must pay a yearly amount of 4 per cent inter- est, three-fourths of 1 per cent amortization, and one-fourth of 1 per cent for expenses, making altogether 5 per cent per annum, with the result that in 47 years their debts, principal and interest, are paid in full.

The American farmer mortgages his farm and pays from 7 to 10 per cent interest per annum. The average rate of interest paid by the American farmer to-day is 7.79 per cent per annum, while the German pays 3J to 4 per cent, notwithstanding interest rates are generally higher there than here. His mortgage runs for 3 to 10 years — no matter what time — at the end of which he must pay the entire principal. Suppose, with renewals, his mortgage runs 12 years. He would pay 90 to 95 per cent for the use of his money for that time. The Danish farmer would pay 135 per cent for his money for 47 years. The American farmer would pay 7.5 per cent a year for his money — the Dane would pay 2.9 per cent.

The Dane's loan is an investment. He can afford to borrow money to improve his farm or purchase his farm at that rate. The American is in debt and mortgaging his home; the Dane is using his credit. Each year, while paying only 5 per cent on the money received, the Dane is getting out of debt. The American is paying 7 to 10 per cent and not reducing his debt a penny. At the end of 47 years — -or less time if he chooses to pay more — the Dane is out of debt and his premises are free. At the end of any period — even 100 years — the American would owe the original principal, his premises would be encumbered by the mortgage, although he will have paid twice as much as the Dane.

A special imperial act provides for cooperative societies in Germany. As we have seen, there are 17,000 cooperative agricultural banks in Germany, with a total mem- bership of over one and a half millions. The loans outstanding at the end of 1910 for fixed periods, together with overdrafts, amounted to £93,034,000, while the savings deposits totaled £92,429,000, and the deposits on current account amounted to £10,865,000.

The late distinguished minister of finance in Prussia, Herr von Miguel, some 17 years ago said in Parliament:

"This must be our goal — to have a cooperative loan bank in practically every parish of the whole monarchy."

The result is the transaction with the German farmer is as follows: On a loan made at 4 per cent is added three-fourths per cent for amortization, one-fourth per cent to cover operating expenses of the association, and by paying this amount, a total of 5 per cent annually for between 40 and 50 years, the entire loan is paid off. The farm- ers of this country must be got out of the clutches of money lenders, such as demand unconscionable rates and terms, factors who charge outrageous interest on advances, merchants who sell him goods on time at double prices, middle men who take advan- tage of the situation to despoil him, transportation companies which take all his products will bring him and call for more. I do not say these practices are universal or that the farmer is commonly imposed upon; but the picture is quite too familiar and at present he is too often helpless.

22 RURAL CREDITS.

Mr. Owen. Mr. President, — -

The Vice President. Does the Senator from Florida yield to the Senator from Oklahoma?

Mr. Fletcher. I do.

Mr. Owen. I understand that even at the other end of the earth, in New Zealand, they have a plan of lending money to farmers at 3 per cent on the principle of amor- tization, so that at the end of 30 years, on an extremely low rate of interest a farmer can acquire a home or borrow money on the home, improve it, make it more pro- ductive, and by the use of easy credit produce the values from the home easily to pay for its development.

I do not know whether the investigators studied the New Zealand method or not, and I should be glad to have the report include the New Zealand method of farm land credits.

Mr. Fletcher. Mr. President, the commission did not visit New Zealand, but I do not doubt that the Senator from Oklahoma is entirely correct in his statement of the practice there. I have, however, no information on that subject through the commission or from any investigation which I have made. I have not any question but that the Senator's statement is correct. The system there is similar to the system which has been in existence and in operation in Germany for a great many years.

The farmer, to whom we must go for what we eat and wear, should and must be a free man, when he is fit an i does his part, and not the slave of grinding conditions. Some of these conditions can be remedied by legislation. We surely can find a plan adaptable to the circumstances here which will build up the economic as well as the social structure of rural life.

*******

Any financial system is insufficient, inadequate, and fails utterly in its application which denies to that great industry lying at the base of all wealth and which must prosper if there is to be prosperity, which must make progress, if there is to be any, and which must keep pace with the times and improve in method in order to supply the increasing demand of a growing population just and fair facilities equal to those furnished the other great industries.

It is said the farmers' assets are not Liquid, therefore they can not be utilized, as, for instance, goods moving in trade. I do not dispute the claim. I simply say, then, the farmer must have a system or plan different from the commercial plan suitable to the proper demands of agriculture. There is a necessary relation between coopera- tion and organization among the farmers and a banking scheme which must be evolved in solving their financial problems. Credit is necessary to successful cooperation. Organization on a cooperative basis will make possible the establishment of a system of agricultural credits. The most eminent authority on German commercial and agricultural banking. Prof. Reisser, says, "Agriculture requires a credit system adapted to the special nature of its production." Let us have this great economic truth sink into our minds to stay. Let us not ignore or blot it from our memories. Fully cognizant of its meaning let us face the problem in the blazing light of that truth.

By Bulletin No. 1, April, 1913, by John Lee Coulter, it appears that of the total loans made by national banks only 6 per cent are secured by real estate, including mortgage owned; that of the total loans made by mutual savings banks, 42.6 per cent are so secured; that of the total loans made by stock savings banks, 40.6 per cent are thus secured; that of the total loans made by loan and trust companies, 10 per cent are thus secured; that of the total loans made by private banks, 20.5 per cent are thus secured.

As I understand, this includes all real estate, and I dare say a comparatively small portion of the real estate included is country property.

necessity for a complete system of rural banking.

I" Mr. President, in what I have said I have sought to present a kind of general survey of the economic situation as affecting agriculture as an industry, a business, and a life, for it means all of these.

Particular reference has been had to pending and proposed legislation respecting what is designated "currency reform," as related to that situation. I have sought to concisely state some reasons why I regard it highly desirable, if not absolutely neces- sary, that legislation, such as the pending Federal reserve bill, should be enacted into law, and that speedily.

I have endeavored to point out that our present system of national banks is a com- mercial system, incapable of meeting the needs of agriculture.

RURAL CREDITS. 23

I have contended that the Federal reserve bill likewise is necessarily limited to the demands of commerce and industries. I have attempted, though in "a cursory way, to point out the efforts made in other countries to save agriculture by cooperative organizations and the establishment of banking and credit systems and to suggest that we profit by the experience and example of older countries, compelled by necessity to devise and put in operation such systems that agriculture might prosper.

I have sought to give a glance at the status of agriculture in this country, its impor- tance, its problems, and rural conditions to-day.

I have particularly aimed to stress the disadvantages under which the farmer now labors by reason of the lack of proper financial facilities, and to point out the necessity of a separate, distinct banking law under which institutions will be organized which can be authorized and empowered to supply the peculiar needs of the farmer.

I contend that adequate banking facilities are necessary to the successful conduct of any business; that for this large class of our citizenship, about one-third of our population, and for this great industry upon the prosperity of which the welfare of the Nation depends, there has been heretofore no sufficient provision for meeting their banking necessities.

I contend further their financial requirements can not be sufficiently provided for except through a special system of rural banking.

I would like now to be more specific, both as to the needs and the remedy. Before attempting to provide a remedy you will want to clearly understand the needs.

The needs of the farmer, as I conceive them, can be stated, in a condensed way, under three general heads as follows:

FIRST. THE NEED OF CAPITAL TO ACQUIRE, IMPROVE, AND EQUIP HIS FARM.

The cost of improving and equipping his farm is as much a part of the capital re- quirements of the farmer as the cost of the machinery in a cotton mill is a part of the capital cost of the mill. No class of men should be expected to work without tools or to make bricks without straw. A certain amount of money must be invested as capital in any business in order to equip that business and enable it to earn proper returns. This capital must be permanently invested or else it must be loaned to th« business for a long period on such terms that the loan can be repaid in small annual installments out of a portion of the profits derived from the business. This is felt keenly, too, when one desires to purchase land and acquire a home in the country. A remedy means tenants will become owners.

SECOND. BANKING FACILITIES.

The farmer must have available institutions which can meet his temporary banking requirements. He must be able to borrow for a few months some of the money needed to till the soil and to harvest and market the crop. Like the merchant who seeks temporary accommodation to secure money with which to discount his bills and pays back this money out of the proceeds of sale of the goods purchased therewith, so the farmer must likewise be able to borrow temporarily to discount his bills for fertilizer, seed, etc., and for the purpose of carrying on his business during its nonproductive period. Such loans must run for a few months, must be repaid out of the proceeds of the crop, and should not properly be borrowed on a real estate mortgage on the farm any more than the manufacturer's temporary accommodations for discounting his bills should be borrowed on a mortgage on his plant.

THIRD. BUSINESS METHODS IN THE CONDUCT OF HIS BUSINESS.

I The farmer, like the merchant, will ultimately keep an accurate statement of the condition of his business, so that he can always ascertain whether he is operating at a profit or at a loss, and he will cease depending on the business man to conduct all business transactions for him. He will adopt business methods and put them in practice in his own affairs.

HOW THESE NEEDS CAN BE SUPPLIED.

If this analysis of the farmer's needs approaches accuracy, the important question then is, How can these needs be supplied? And it must be remembered that these needs have been stated in the order of their importance, and that, in order to meet the requirements of the situation, it is necessary to provide some machinery for sup- plying these needs in the order named.

24 RURAL CREDITS.

FIR8T. HIS CAPITAL NEEDS.

How can the farmer secure capital for the improvement and equipment of his farm or for the purchase of a farm?

The answer is obvious. The farmer has only one asset, viz, land, on the credit of which he can secure capital. lie must secure his capital by borrowing on his land. Remembering that this capital must be in substance a permanent investment, it is obvious that any loan on land, made for the purpose of supplying the capital require- ments of the farmer, should be a long-time loan, repayable in small annual install- ments set aside by the farmer for thai purpose out of the annual profits derived by reason of the purchase or the improvements and equipment made possible by the loan. A loan of one year or three years or five years will not furnish the farmer's capital requirements, because he obviously can not repay it from his profits in that tune. No other business could pay off its capital investment within such a period.

It is plain, therefore, that the best if not the only method of furnishing the capital requirements of the farmer is the creation of a long-term first-mortgage bond, secured on his land, which bond shall contain an amortization or sinking-fund provision, so that a small amount will be set aside each year sufficient in the aggregate to pay off the bond when it matures. This is analogous to the German Landschaft plan.

Moreover, the capital requirements of the farmer, like the capital requirements of the merchant, manufacturer, or the railroad, can not be met by direct loans from the banks. The farmer's loans, made to furnish his capital requirements, should run from 20 to 50 years. No bank can loan money for such a length of time. The money must be borrowed from the investing public.

Consequently the problem is not only to create such a bond, but more than this, it is to create such a bond in such a way that it will be bought and traded in by the investing public on the best terms.

In order to do this, the bond must not only be secured on the land but it must be guaranteed by some financial institution or institutions of sufficient standing to satisfy the investor that the bond is absolutely beyond question. Just here is where a special system of banks is needed, which will be authorized to use their credit in guaranteeing such bonds under restrictions which will reduce the risk of such guaranties to a mini- mum. Such banks must be limited in their operations, so that a guaranty of this kind will not, under any circumstances, endanger their solvency.

SECOND, HIS TEMPORARY BANKING NEEDS.

The temporary banking facilities needed by the farmer must be supplied by local institutions managed and controlled by his neighbors, who are familiar with his needs, and who will see that the money borrowed is applied to the purposes for which it was obtained. This means that the farmer should have available the services and resources of a local rural bank, owned and managed by local people, which will collect together the neighborhood funds and make them available for neighborhood purposes. In the system outlined in the bill which I have offered, these local rural banks serve this purpose, and are also permitted to use their credit to guarantee the long-term bonds of the farmer, and so aid in supplying his capital requirements, which are the first and greatest needs. This follows the idea of the Raiffeisen system, to which I have alluded.

THIRD, HIS NEED OF BUSINESS METHODS.

The observance of business methods by the farmer and the keeping of proper ac- counts can not and could not be enforced simply by legislation. Business methods will be observed only where business conditions require the observance. The observance of business principles by the farmer will be accomplished when the banks which lend him the money for his temporary requirements demand the observance of such practices and the keeping of proper accounts as a condition of such loans. The local rural bank provided for in the bill will induce the farmer to keep accurate accounts as a condition to his obtaining the desired credit to meet his annually recur- ring banking needs.

HOW THE BDLL MEETS THESE REQUIREMENTS.

The bill, through a system of rural banks, limited as to their operations and contain- ing the power to use their credit in guaranteeing long-term farm bonds, furnishes a means of meeting these three essentials of any banking system suggested for the rural population. The rural banking board is so constituted and given such powers of supervision and control as to safeguard all transactions and have ther system conform to correct principles.

RUKAL CREDITS. 25

COMMERCIAL BANKS ARE UNABLE TO MEET THE REQUIREMENTS OF THE FARMER.

I feel quite convinced that we can not expect a system of commercial banking to meet the needs of the farmer. It is recognized all over the world that no commercial banks can with safety be allowed to execute a pure contract of guaranty. A commer- cial bank can not afford to guarantee the payment of long-term bonds. Its assets must be quickly convertible and must become due and payable within a short period. By consensus of opinion it is generally recognized that it is unwise for commercial banks to lend money for a longer period than four months. It must be in position to respond to any liability on demand.

FIRST. CAPITAL.

As the farmer's capital requirements must be met by long-term loans obtained from the investing public, as the guaranty of these long-term bonds by some financial institution is necessary to their sale, as a commercial bank can not safely execute a contract of guaranty, it is obvious that commercial banks can not meet the farmer's capital requirements.

SECOND. TEMPORARY BANKING FACILITIES.

As commercial banks can not safely grant temporary credit for longer than four months, and as the farmer's requirements are for temporary accommodations for a longer period (or until the crop comes in), it is equally obvious that commercial banks are not suited to supply the annually recurring banking needs of the farmers.

THIRD. BUSINESS METHODS.

Commercial banks, as a rule, are located in cities, towns, villages, or other centers. They are usually remote from the farmer. Being remote, they are unable to make small loans needed in the operation of his business because of the expense incident thereto and because they can not keep in close enough touch to ascertain if the money derived from these loans is used for the purposes for which it was granted. The local rural bank is accessible, convenient, and conducted at nominal expense.

INADEQUATE.

The relief afforded in the bill is, moreover, inadequate. The present mortgage loans on farms in the United States approximate $3,000,000,000. In explanation of section 27 of the bill, the chairman of the committee has said; in effect, that if every bank in the system loaned every dollar that it could under this provision there would be available about $250,000,000, which is just about one-fourteenth, or 7 per cent, of the present requirements, and is obviously inadequate.

SPECIAL BANKS NECESSARY.

The conclusion is irresistible that rural banking should be provided for in a separate system from commercial banking; that rural banks should have a special power to use their credit in addition to their cash resources to meet the needs of the farmer, and especially in order to aid the farmer to obtain capital, and should, on the other hand, be limited and restricted as to their operations and activities, so that the use of their credit will not impair their solvency.

Some critics have suggested that bankers and capitalists would like to facilitate the mortgaging of farms and issuing of bonds in the expectation that they might eventu- ally own the farms. Here, again, the experiences of other countries is helpful. In Saxony 85 per cent of the land-mortgage bonds are held by the people of that Province. The rural people themselves are the chief and, in most instances, almost the exclusive owners of the bonds. The terms are so favorable to the borrower as to interest, reduc- tions, and payments there can be no excuse whatever for losing his land.

Mr. President, I frankly say that the bill I have introduced has its weaknesses. It is not claimed to be perfect. It is not the last thought or the final word on the subject by any means. It has the merit of proposing something definite, and my hope is it will provoke discussion and lead to action now. It seems to me greatly preferable to have it considered at this time rather than have it go over to next session. It ought to be taken up and, if possible, considered and acted upon along with the com- mercial-banking bill.

26 RURAL CREDITS.

Mr. President, there is no more imp irtanl subject before the people of this country to-day than the unsolved problems of rural life.

h is gratifying to note that interest is being aroused on tlas subject and our people are stirring in an unprecedented fashion. The highest country ideals mean the highest civili/.ai ion.

If we can Bel in mol ion agencies that will bring about the highest type of an advanced rural society, we will have done a most, useful public work.

If we can start moving forces which will develop the best country life, we will have answere I the call for genuine service.

We make a tre udous contribution in those directions when we reach out our

hand to the tillers of the toil and say, "We will start with you on the land; we will be with you in the cultivation, go with you to the market, and open the way for you to finance your affairs."

When ilia! is done, fair opportunity will widen the horizon and beautify the lives of those engaged in agriculture. It will open the way for the betterment of rural conditions, even as Daniel's window opened toward Jerusalem.

*******

[Extracts from address of lion. Duncan U. Fletcher to the house of governors at Colorado Springs, Colo.,

A.Ug. 26. 1913.]

Work of the American Commission Respecting Agricultural Finance, Organi- zation, Cooperation, and the Betterment of Rural Conditions.

Gentlemen of the House of Governors, responding to the kind invitation of Gov. O'Neal, as chairman of the committee of governors on rural credits, to submit to the house of governors at this meeting a preliminary report from the American commission respecting its investigations of that subject in Europe, I wish to express the acknowl- edgments of the American commission for this consideration and to direct your atten- tion to the fact that so short a time has elapsed since the return of the commission any report now must be of necessity incomplete and general in character.

Permit me to call to your minds that last December, some nine months ago, I had had the honor, by invitation of President Taft, of addressing you at the White House, on which occasion I sought to point out the plan for assembling the American commis- sion, the purpose then in view, including to some extent tne scope of the inquiry we expected to make, and appealed to you for encouragement and support. I boldly expressed the confident hope and belief that the movement started by the Southern Commercial Congress in April, 1912, through the inspiration and advice of Mr. David Lubin, American delegate to the International Institute of Agriculture, later joined in by Ambassador Herrick and others, would be successfully carried out. President Taft and the State Department became impressed with the significance of the under- taking to American agriculture and gave it their full sympathy. It is highly gratify- ing to report to you that the stupendous task assigned to us was accomplished. Every step was a step forward, and every detail was carried out precisely as planned with preeminent success. I am grateful to you for the assistance you rendered. Some States whose legislature met after your Richmond and White House conferences passed special acts — I recall Ohio, California, Oregon, and Washington — providing for representation on the commission. The Congress of the United States passed a joint resolution accrediting the commission to the foreign Governments. The State Department communicated this fact to our diplomatic officials in the countries visited, and in consequence the highest official recognition was extended the commission throughout Europe. Congress also provided in tne agricultural bill for a Federal commission of seven to be appointed by the President "to cooperated with the Ameri- can commission" in the study in European countries of the subject of rural credits. That act was approved March 4, and the commission, on the recommendation of the Secretary of Agriculture, was appointed by President Wilson, and five of them accom- panied the American commission on its tour of investigation and engaged actively with them in the work.

Without reciting further details by way of showing the widespread interest in the subject and the forces behind the cause, I am able to state that on the 26th of April, according to our previous calculations, there sailed on the steamship Saxonia for Italy two delegates from each of 29 States, named by their governors, and from each of four Canadian Provinces desiring to join us. Takmg more or less part in the work, some already in Europe and some coming later, were representatives from seven other States. As stated, in addition and energetically cooperating were the five members of the United States commission throughout the inquiry. These commissioners returned on the steamship Cedric, sailing from Queenstown, and arriving in New York July 26.

RURAL CREDITS. 27

Speaking now for the American commission, which is directly connected with the States, I would say the field covered during its investigation in Europe was very broad. The countries visited included Italy, Austria-Hungary, Russia, Egypt, Ger- many, Denmark, Switzerland, France, Spain, Belgium, Holland, England, and Ireland.

This extensive area was covered by dividing the commission into subcommittees so that considerable time could be given to each country. It must be remembered that the commission entered upon its study with what prior knowledge of the subject could be gained from published works. Thus its task was to correct, confirm, and readjust its book-gained opinions and to visualize the subjects rather than to conduct an exhaustive investigation into an entirely new field. Every facility was given the commission by the European Governments, and we owe indebtedness for their cour- tesies and assistance, and likewise by the farmers' organizations. I desire to empha- size the sincere appreciation of the members of the commission for the services ren- dered it by the American diplomatic and consular offices, acting under instructions issued by the Secretary of State, Mr. Bryan. Likewise the American Institute of Agriculture, through Mr. David Lubin, American delegate, rendered assistance by arranging in advance the details of the inquiry, without which it would have been impossible to cover the field within the time allowed, if at all. The organizations visited generously cooperated by having printed in English programs and other data relating to the subjects to be studied by the commission.

*******

* * * It seems quite well established that economic evolution has made organi- zation a necessity to farmers. Cooperation is urged as a form of organization which would secure for them at once the highest business efficiency and the greatest social strength.

Cooperative organizations should be formed with a view, first, to improving their credit facilities; secondly, to increasing their control over the marketing of crops and to strengthening their position as buyers and sellers; and, thirdly, to establishing a channel whereby educational propaganda and work for the improvement of country life conditions may be effectively brought to the individual and his cooperation and participation in that work secured.

Credit is the keystone of the organization proposed. American farmers possess poten- tial credit of vast amount. The task is to discover a plan whereby that credit may be made cheaply and easily available.

The credit requirements of farmers differ radically from those of merchants and manufacturers chiefly because returns from money invested in agricultural enter- prises are much slower, though more certain, than returns from other enterprises. For this reason in many European countries financial systems have been established de- voted exclusively to the interests of the farmers.

In the United States the farmer is dependent upon a banking system operated pri- marily in the interests of merchants and manufacturers, which in their nature are dissimilar to agriculture.

European credit systems seem to be of two kinds, those providing personal short- time credit for operating purposes, and those providing long-time mortgage credit for works of permanent development and purchase.

PERSONAL CREDIT.

The most highly developed systems of short-time agricultural credit institutions are found in Germany. They are in the form of a pyramid composed of local cooperative credit societies, central societies operating generally over a Province or administrative district and a main central society, as the apex, at Berlin.

Every farmer joining a local society assumes liability for its debts. In other words, he signs over his credit to the society and with this collective liability or credit as security the society contracts loans and solicits saving deposits. There may also be a cash capital subscribed or a cash reserve built up to serve as security in addition to the collective liability, but it is the liability which forms the chief security. The funds thus secured are loaned by the society to its members. A rate of interest is charged members on such loans sufficiently above the rate paid by the society to creditors so that the margin will cover the expenses of the bank and leave enough over for reserves or other purposes.

In their operation is it necessary to insure two things — first, that creditors shall be

{)rotected in their loans, and, second, that members shall be protected against the osses to which their liability subjects them.

28 RURAL CREDITS.

The member? are protected by placing every possible safeguard about the loans to insure their repayment. This is done, first, by admitting to the society only persons of good standing. Then it is provided that loans shall be made only for productive purposes, the borrower being required to state for what purpose he desires a loan. Further, the territory of operations for cadi society is limited to an area wherein every member knows every other member and is in position to find out whether the borrower is living up to the promises he has made to the society. The liability assumed by members is depended upon to keep them watchful of the affairs of other borrowers, and in a rural community this check is extremely effective. Also, profits are either prohibited or so strictly limited that there is no incentive to speculation as a means to swell the income of a society. The officers of the society are so chosen that one set or board keeps check on the other. The liability of all officers insures their watch- fulness. The general management of the affairs of the society is left in the hands of the general assembly of all members. No matter what stock ownership a member may have, lie is entitled to only one vote. His stock ownership is generally limited to a small amount. In this way these societies are insured a conservative manage- ment and maintain a surveillance over all loans made to members far closer than that maintained by the average commercial bank.

All such local societies within a certain territory are combined to form a central society. A central bank is established which has, first, a small cash capital sub- scribed by the local societies, and, secondly, the collective liability of its constituent banks as capital. These central banks receive as deposits the surplus funds of local societies and loan them in turn to other local societies. In other words, they equalize supply and demand between the local banks. They are hardly more than paper institutions. Their management is under the control of officers chosen by the local societies through a representative system.

The main central bank acts as equalizer for the central banks above mentioned. The effect of this pyramiding of the societies is to concentrate all of the borrowing and investing for a system in one big institution. The deposits, of course, are taken in by the local societies, and as the societies develop these form the bulk of the sys- tem's resources. In Germany such deposits have at times formed over 90 per cent of all the funds required for loans by an entire system.

MORTGAGE CREDIT.

The worst feature of the farm mortgage in the United States is in its individual character. An investor buying a farm mortgage must determine the sufficiency of the security offered by the land upon which the mortgage is executed, must attend to collections of principal and interest, must see that the taxes are paid and that the property is not allowed to depreciate in value to a point where the security of the mortgage is jeopardized. Obviously these responsibilities placed upon the mort- gagee make it necessary that he shall be in a position to keep posted with regard to the land upon which he has loaned his money. So long as this is true the market commanded by a farm mortgage will be restricted. Life insurance companies con- trol practically the only source of money to which the farmer may turn in disposing of his mortgage besides the individual lender or his direct agent. The individual lender controls the market. Therefore American farmers to-day are paying one rate of interest in one State and another elsewhere. They do not secure the advantages which ability to compete in a wide market bring, and since their mortgages do not form a liquid investment they are required to pay a higher rate than other borrowers who do not offer, perhaps, as good security.

The second, and perhaps the greatest, disadvantage is the limited time for which a farmer may borrow money on a mortgage and the fact that he is required to pay back in a lump sum the entire principal of the loan at the end of that short time or else con- tract a new mortgage — that is, secure a renewal. An individual lender can not be expected to place his money in a nonliquid investment for more than about five years. He may grant a renewal of the loan, but he must reserve the privilege of calling in the loan at the end of that time and may increase the interest. It will require the farmer who has invested the money secured from the mortgage in farm improvements far mora than those live years to realize the entire principal.

These disadvantages will rest upon the farmer so long as he is obliged to sell his mortgage direct to the investor — in other words, so long as it is an individual transac- tion. In Europe a remedy for these disadvantages has been discovered which does not involve the Government, except in its proper role as a controlling influence, and which does not jeopardize the safety of banks of deposit.

The effect of the European system is to break all connection between the mortgagor and the mortgagee. An institution is established which appraises the land of farmers

RURAL CREDITS. 29

desiring mortgage loans. The loans are granted by such institution, which retains the mortgage. Then mortgage bonds, secured by the mortgages, but as the direct obliga- tion of the institutions, are issued. No one bond is secured by one mortgage, but each bond is a lien against all of the mortgages. Thus the investor in place of buying paper secured by one farm and having to determine what sort of a farm that is, buys a bond secured first by a "pool" of mortgages, and secondly by an amortization fund created by small payments made as the interest is paid.

They are issued payable to bearer, are generally listed on the exchange, and so form a liquid asset. With these features the bonds sell at far lower interest rates than individual mortgages. The farmers are charged a rate sufficiently above the rate paid on the bonds to clear a margin for the institution to pay expenses, build up reserves, or for other purposes as desired. But the expenses of operation of such companies are so small in comparison with the volume of business done that this margin of profit may be taken by the institution and still the money can be loaned to farmers much cheaper than they can secure it for themselves. This is the first advantage brought by such institutions — cheaper interest rates.

These mortgage bonds run for an indefinite period. Each year the farmers are required to pay, besides the interest, a certain percentage toward reducing the prin- cipal of the loan. Thus if an institution issues $100,000 of bonds and loans that amount on mortgages, the mortgagors each year pay the institution $5,000 to reduce the prin- cipal of their loans. This money is used to buy up mortgage bonds from the market. In 20 years the entire issue of bonds would be bought up. It is in this way that all European mortgage loans are paid up. Sometimes mortgages run for 50 or 75 years. The bonds are retired by lot, the company generally reserving the privilege to buy them in at par or at a slight premium. Also the payments of the mortgagors are gen- erally the same each year, a larger portion of the sum going toward principal and a smaller toward interest as the principal is gradually reduced. For instance, it is figured that a farmer having a loan at 4.3 per cent and paying each year 6.56 per cent would wipe out his loan in 25 years. This practice, called amortization, is of the greatest value to farmers, for it makes their payments on principal consistent with their income from money expended on agricultural improvements. So long as the farmer meets these annual payments the mortgage will not be foreclosed; also the interest rate can never be raised during the life of the loan.

Thus we see that such a system reduces interest rates, makes the demands upon the farmer consistent with his income, eliminates commissions, protects him from fore- closure and from an advance in interest rates. It changes a mortgage from a burden- some debt to an advantageous form of credit — an investment.

This plan of mortgage credit means more money for machinery, more for purchas- ing new land and for developing poor land. It means fewer tenants and more owners. It means better rural-life conditions. Generally, it would be unprofitable to attempt to develop land on money borrowed under such disadvantageous terms as now pre- vail here. Not only are the rates higher — that is the smaller part of the problem, I believe — but the farmer is forced to pay back his loan before he can make his farm earn that amount. That is the really great burden upon the farmer. That is the reason, I believe, why nothing more is done toward placing under cultivation the abandoned farm lands of the East and toward opening up the lands of the West and bringing more lands into cultivation in the South. The example of Germany in this respect is most interesting to Americans. Our commission was told that Germany is supporting to-day 67,000,000 people, is producing 95 per cent of the food they con- sume, and has definite hopes of increasing that percentage. This is being done on land centuries old that obviously was never particularly fertile. They are doing this through three influences — credit, cheap labor, and scientific methods. Of course cheap labor, as it is known on the Continent, is not to be considered m this country during this generation. I believe that we have the machinery to spread scientific methods. What we need above all is the credit necessary to bring those methods to practical fruition upon the maximum number of acres. As compared to Germany's record, we find in the United States the number of tenants increasing, the farm-mortgage debt increasing, exports of foodstuffs diminishing, imports of such products increasing, the movement from the country to the cities and towns augment- ing, production of food supplies approaching steadily to the point where we will have none to export, and it will soon become a question of supplying the home demand.

It is true there have been rises in land values and advances in the price of food- stuffs, due, at least to a large extent, to the disproportionate increase in population in comparison with the increase in agricultural productiveness. It does not represent sound agricultural progress.

30 RUEAL CBEDITS.

BUSINESS COOPERATION.

Every farmer musl be a business man as well as a producer. Bis success depends almost as much upon his efficiency as a buyei and seller as upon his efficiency as a producer, h is in this capa< ify thai the farm'';- touches the highly organized com- mercial world, and i1 is in this contacl thai he has suffered most. Clinging to his individualism the farmer lias attempted to stand against the organized forces of com- merce. In the few instances in which fanners have organized, notably among the fruit growers of the Pacific coasl and the dairy farmers of the Northwest, they have demonstrated the increased strength attainable through cooperation. The beginning of organization along these lines has already been made in this country, and the task is simply to spread the doctrine broadcasl and to lend assistance in the prelim- inary wort of organization. The reason that farmers have not more generally organ- ized a lorn; these linos in the United States is that our farmers possess a more intractable individualism than do the farmers of European countries and lhat in many sections they lack the essential foundation for such organizations- credit. The advantage of a cooperative credil system would be twofold — first, it would prompt the farmers to cooperate, and. secondly, it would afford Ihern credit to make possible the organ- ization of cooperative buying and selling societies. I believe that when the farmers come to realize the sa< rifices they are making to cling to the hollow shell of an old- fachioned individualism, which has been cast aside long ago by the urban industrial classes, they will accepl this aew doctrine. The task now is to afford them a credit system or plan, and with that at their command the other forms of cooperation would follow from the sheer force of their economic advantage.

Although the cooperative purchasing societies of many European rural societies are organized separately from the credit societies, the cooperation between the two is very close. In fact, the purchasing societies generally depend upon the credit socie- ties for their very existence. The principle of the cooperative purchasing societies is simply wholesale purchasing. Needs are estimated and contracts made for the wants of a community for a year or perhaps longer. Orders of individuals are then collected and forwarded through the societies to merchants or manufacturers. Some sorts of goods are bought outright and stored by the societies. The greatest benefit from such practice is only to be secured through the centralization of a system of cooperative societies, in which case the purchases are made upon a sufficiently large scale to materially affect prices. This centralization can be very easily effected through the central societies organized by the credit societies.

I do not mean to be understood as advocating the organization of cooperative societies to take the place of our local merchants, who constitute a useful and neces- sary part of the commerce of this country. Cooperative societies would have a field of their own, separate and distinct from that now occupied by the stores and shops of our cities and towns. In the purchase of manures, fertilizers, and such supplies as enter into or increase the product of the farm the cooperative societies could render a great service to farmers by demanding that all goods purchased conform to standard specifications, and they could buy direct at wholesale prices certain supplies, thus giving the individual members the benefit of the reduced cost.

The organization and operation of cooperative sales societies would depend upon the sort of produce to be sold. Types of cooperative dairies and cooperative fruit- selling societies already exist in this country. The formation of such societies is purely a question of securing the most efficient business management.

However, it requires credit to finance such societies. Where farmers are buying in the spring on credit from merchants and are selling the minute their crop is harvested in order to realize cash, thev can not operate such societies without a species of organ- ization by which their collective credit can be utilized. This condition prevails quite generally in the South. In other sections the farmers have been able to finance such societies, but if their credit facilities were improved it is reasonable to suppose that the strength of such societies would be thereby increased.

When thorough business cooperation is established in a farming community and the cooperative principle is accepted, it is almost certain that the farmers will fall into the habit of cooperating upon general, social, and civic lines. I believe chambers of agriculture organized in the country districts would be found of great value.

All of this organization work in European countries has been carried on through voluntary associations. In some instances the Governments for their own ends have attempted to control the movement, but the results of such control have not generally been regarded as satisfactory. A close study of the subject will show that the entire plan is based upon the idea of self-help, ana public nursing is not calculated to give strength to such organizations.

RURAL CREDITS. 31

Organization along cooperative lines has been demonstrated to be of great value to the farmers in European countries, and well-directed work of that kind ought not to be delayed or meet with indifference in the United States.

Permit me to say further, individually, that in my judgment our rural population needs a financial plan or system separate and distinct from a commercial banking system to meet their requirements. They should have facilities for short-time cash accommodations at reasonable rates which can be had by cooperative institutions, and they should have a plan or means for obtaining long-time loans at a low rate of interest with sinking-fund or amortization feature.

The question of State legislation to effect the establishment, management, and con- trol of such organizations, societies, associations, or institutions will no doubt receive your earnest consideration.

Agriculture can be relieved of enormous burdens. Serious difficulties can be over- come by proper procedure. Our farmers do not ask for special favors, but there are some problems which are yet unsolved and constitute obstacles in the way of their progress. A long step will' be taken when they are in position to finance their affairs and introduce better business methods in their operations.

The solution of these problems will not only mean the redemption of agriculture, the reconstruction of rural life, but go far toward reducing the high cost of living and relieving other burdensome conditions.

It will mean not only relief to the farmer, but the permanent enhancement of the general welfare.

*******

With such a system of rural banks the States Bhould encourage the formation, not of new personal credit banks, but of cooperative purchasing, selling, and distributing societies, which can get needed credit facilities from rural banks, and the States should urge farmers to aid in establishing the rural banks as a means of hereafter financing cooperative societies where formed.

In my remarks on that bill, August 9, I endeavored to set forth the farmer's financial needs and the methods by which these may be supplied. I designated then "his temporary banking needs," those which correspond to what I have herein referred to as his "personal-credit" needs. That is, his everyday-life needs which the Germans have found can best be provided for under the Raiffeisen system.

I called then his "capital needs" those which correspond to what I term herein his "mortgage-credit" needs; that is, to be provided for by long-term bonds bearing a low rate of interest with the amortization feature. The German experience is that a system like the landschaft is the best yet devised for this purpose. Whether these two requirements can be provided for in one measure and in one system is somewhat difficult to determine, but I believe the bill combines them in a workable and advan- tageous way.

On the 13th the President gave a statement to the press of the country, in which he said:

"Special machinery and a distinct system of banking must be provided for if rural credits are to be successfully and adequately supplied. * * * There is no subject more important to the welfare or the industrial development of the United States. * * * rp}iere nas been too little Federal legislation framed to serve the farmer directly and with a deliberate adjustment to his real needs. * * * This is our next great task. Not only is a Government commission about to report which is charged with apprising the Congress with the best methods yet employed in this matter, but the Department of Agriculture also has undertaken a serious and sys- tematic study of the whole problem of rural credits. The Congress and the Executive, working together, will certainly afford the needed machinery of relief and prosperity to the people of the countrysides, and that very soon."

I have contended all along that our present banking and currency system is framed to serve commerce and the industries other than agriculture. For 50 years it has dis- criminated against agriculture. I am convinced this was not a deliberate blow at agriculture, but arose for the reason that no commercial banking system can be framed so as to adequately serve agriculture. We must have a distinct system to meet the requirements of the farmer.

In the various States your guidance and aggressive efforts will count mightily.

I would not presume to press on you specific action. You will permit me, however,

to urge uniformity in any action you may take and a full consideration of fundamental

principles as a preliminary to any decision. It would seem possible to simplify and

make uniform the land registration laws and that certainly is greatly to be desired.

32 RURAL CREDITS.

Tin' same thing i.s true as to the laws, practice, and procedure with respect to fore- closure of the mortgage lien. While devising a system advantageous to the borrower, it must be borne in mind that the lender is to be protected fully.

The investing public in this country and from other countries while willing to accept a low rate of interest will insist that the security shall be safe and readily realized upon in case of default, without delay or expense, and the procedure ought to be practically the same, no matter from what State the security comes.

It required 40 years to thoroughly establish the Etaiffexsen system and demonstrate its wisdom, but the grave of that pioneer is a shrine and the monument over it is one of the most prized in all Germany. It will take time to establish a like beneficient system in the United States, and we can not begin too soon.

[Extracts from speech of Hon. Duncan U. Fletcher, of Florida, of Jan. 29, 1914, to National League of

Commission Merchants.]

Land-Mortgage or Long-Term Credit.

* * * * * * *

What do we find upon the slightest investigation? I was perfectly astounded when I came to dig into the question. For 50 years we have been operating in this country under a banking and currency system which was purely and solely a commercial system, absolutely created and adapted and used for the business man and the mer- chant, the manufacturer, and other industries than agriculture. It is not that we are asking anything unusual or anything special for the farmer. I believe that gentleman is pretty well known as being opposed to special privileges, and he is not asking any favor in his own case, but he is asking for a square deal. He is asking to be put upon the same basis as those engaged in other great industries in the country — nothing more, nothing less.

In that system, which we created and which the United States Government estab- lished and which it supervised and controlled, it was written in the body of the law that no loans could be made upon real estate. Real estate was prohibited as security for loans by every national bank established under our financial system.

Now, what does that mean? It meant, of course, that real estate, being the farmer's chief asset, was absolutely condemned as security for loans in this country, and he was deprived of that asset as a basis for credit.

Did you ever think about it? It seems preposterous, when you stop to consider it, that land, real estate, the very basis of all our wealth, was one thing that no bank could loan money on. That was the one most substantial and valuable asset that the farmer had, and we have gone on for 50 years discriminating against the farmer under the only system established in this country.

What was the effect of that? Naturally, business men, financiers, would hesitate to loan upon real estate, because they said the United States Government will not permit its banks, which it supervises and controls and directs, to loan upon real estate, we better not touch it. Consequently that has been a handicap and a hardship imposed upon the agricultural interests of the country.

The farmer has been, generally speaking, without adequate facilities for financing his operations, and when he had such means he could make them available only on such terms and at such rates as to be the most burdensome imposed upon any people engaged in any industry. And for 50 years, I say, that has continued.

Not until the recent act of Congress, establishing the Federal reserve system, was it permissible for national banks to loan upon real estate. Not until the recent Federal reserve act could his promissory note running over 90 days be classed as commercial paper available for discount; because he had no goods moving in trade or that he could handle and turn over daily he had to wait on the seasons. He had his cash coming when the crops matured, and he could not pay anything until then, whereas the mer- chant is able to carry on his business depositing and discounting from day to day.

Now, I am not blaming the banks in that connection, because the system was such, that the banks had to be ready to meet the demands of their depositors on the instant, consequently they could not have their money tied up in long-time notes or loans. This is true under any commercial banking system standing alone.

That was the reason, a very good reason, and it means that system needs to be sup- plemented by another system under which the farmer can get accommodations to meet his needs, and that problem has been worked out in Germany. It is not a mere theory, it is a practical demonstration. For 30 years they worked on it over there, and for over 50 years it has been established and in successful operation, and we may

RURAL CREDITS. 33

learn something; from the experience of other countries. They had to do something in order to feed their people; they had to revive agriculture; they had to take care of the farmer because they had to supply the food, and Germany, not as big as the State of Texas by an area as great as Alabama, is supplying 95 per cent of the food to feed 68,000,000 people.

Here in the United States, this great country of ours, the best country on the face of the earth, we are actually importing beef from Argentina and corn from Buenos Aires. For shame.

What do we find? The tendency is from the country to the cities and towns. We find the tenants increasing and the occupying owners decreasing in the country. We find exports of foodstuffs decreasing and imports increasing. Is that a safe and sound condition for a country to face? Do we not know perfectly well that if the farms of this country were idle for one year that the grass and weeds would grow in these streets, and bats and owls would inhabit these buildings? You have got to come back to that, you have got to look after the man out yonder in the woods. We are all dependent upon him.

We should begin, then, at the very basis of his operations because he needs capital, just like every other business man needs capital. Farming is something more than the mere growing of stuff. It is a business, it is an industry; and proper scientific farming to-day requires just as much business capacity, just as much judgment, as any other business to be successfully conducted. It is a business as well as an occupation, as well as an industry.

We heretofore regarded the farmer as not needing to know about business methods and practices, because his business was expected to be attended to by his factor or banker, while he did the plowing and hceing and hard work in the fields.

It is claimed that it has got so in some parts of the country that as the farmer rears his family — -one is a bright boy, and he says of him: "John here is a pretty bright boy; he has a bright mind. I am going to send him off to school and will make a lawyer of him or a doctor. Here is one who has a particular genius for mechanics. I will send him off to school. I will make an engineer of him. Here is Jim, he was always lazy, indolent, and thick-headed and never would learn anything. I will keep him on the farm and make a farmer of him. "

Now, that has got to stop. We are going to prosper in this country. We have got to make it worth while to be a farmer. There must be fair remuneration for the toil and the chances. Farming must be placed on a business as well as scientific footing. Country life must be made attractive socially and industrially.

We are not producing the amount of foodstuffs we could produce; we are not taking care of our farms; we are letting them grow up in weeds or waste away; we are not adding to the attractiveness and the beauty and the proper social conditions in the country as we should. If we are to prosper, we are not to neglect these things.

And why should we? There are 12,000,000 engaged in agricultural pursuits. There are 30,000,000 people directly dependent upon the farms for a living, and we are all indirectly dependent upon them. The estimated value of the farm property of this country amounts to $40,000,000,000.

Some people say, "Look here, you do not need to make it easy for the farmer to go into debt. You do not want to assist him in incurring any obligations, for he is too much prone to do that now. We are opposed to that. We do not want any plan whereby mortgages will be put on the farm and sent up to Wall Street. " It was charged recently that this scheme was a Wall Street proposition. Of course, the com- plete answer to that is the stand of the President of the United States, when he indorses the very idea we have been contending for. The plan proposed does not encourage but prevents getting in debt.

But our good friends who are so solicitous about the farmer not getting in debt fail to realize that the farmer is already in debt. The farmers of this country owe $6,000,- 000,000, according to Government statistics, $3,000,000,000 of it secured by mortgages on their farms; and I have on my desk in Washington stacks and stacks of letters from people in every State in the Union, and especially from the Northwest, and in many instances they tell me that the farms are mortgaged up to the assessed valuation of the property; and if it had not been for the natural and actual increase in the value of lands in this country many of our farmers would have been bankrupt years ago. It has been simply the natural rise in the value of lands that has saved them.

Now, that is the condition. There is no use to try to get away from that. On that $3,000,000,000 they are paying an average of 10 per cent, including commissions and expenses — $300,000,000 a year in interest, nothing going to liquidate the principal at all. If we can do nothing more than save the farmers of this country $150,000,000 annually we will have done something worth while.

37031—14 3

34 RURAL CREDITS.

But they are paying that 10 per cent on $(3,000,000,000, which means $600,000,000 of interest, while here is a possibility of saving $300,000,000 for the farmers of this country every year. Not only that, but it means giving them financial facilities so they can go on with their plans and develop their properties and beautify their homes and improve and make desirable country life. We can do this. It is being done in other countries; for instance, the interest paid in Germany is 3^ to 4$ per cent by farmers. The bonds based upon farm mortgages are sold in the market at just as high rate as the Government bonds themselves. Tliree and one-half to 4£ per cent is the interest at which those people get their money, and the ordinary commercial rate, I am told, is as high there as here.

The farmer finds this condition— and here is where your work comes in, it seems to me — the estimate is that the value of the farm products annually on the farm amount to $9,500,000,000. Assuming that the farmers use one-third of that, we have $6,000,- 000,000 as the value of the annual product of our farms, on the farms, going to market. It is estimated further that the consumers of this country pay $13,000,000,000 for those products, so that we have $7,000,000,000 disappearing annually between the farm and the breakfast table. Part of it is taken up in transportation; part of it is taken up in distribution; and there, I say, it seems to me, is the problem to which this league could well address its splendid minds — the solving of tnis as yet unsolved problem of distribution in this country.

What is the best way? The farmer, of course, can not take his product to the con- sumer. He can not do that to any considerable extent, at least; he can not get in touch with the market places, but he can get in touch with honorable men like your- selves, who can help save him money on his transportation; who can get the best prices for his products; and who can, with him, and with the means you can command, enable some of that $7,000,000,000 a year to go to benefit the consumers of the coun- try, and some to benefit the producers of the country at the same time.

A tremendous amount of money for the farmers, owing $6,000,000,000. We can not comprehend what it is. You may get an idea of it by this illustration: There have been just about 1,000,000,000 minutes since the birth of Christ, so that the farmers of this country now owe $6 for every minute of the Christian era. You must relieve that situation.

And here is what the President says, in his powerful address delivered on the 2d of December to both Houses of Congress:

"I present to you, in addition, the urgent necessity that special provision be made also for facilitating the credits needed by the farmers of the country. The pending currency bill does the farmers a great service. It puts them upon an equal footing with other business men and masters of enterprise, as it should; and upon its passage they will find themselves quit of many of the difficulties which now hamper them in in the field of credit. The farmers, of course, ask and should be given no special privilege, such as extending to them the crdit of the Government itself. What they need and should obtain is legislation which will make their own abundant and sub- stantial credit resources available as a foundation for joint, concerted local action in their own behalf in getting the capital they must use. It is to this we should now address ourselves.

"It has, singularly enough, come to pass that we have allowed the industry of our farms to lag behind the other activities of the country in its development. I need not stop to tell you how fundamental to the life of the Nation is the production of its food. Our thoughts may ordinarily be concentrated upon the cities and the hives of industry, upon the cries of the crowded market place and the clangor of the factory, but it is from the quiet interspaces of the open valleys and the free hillsides that we draw the sources of life and of prosperity — from the farm and the ranch, from the forest and the mine. Without these every street would be silent, every office deserted, every factory fallen into disrepair. And yet the farmer does not stand upon the same footing with the forester and the miner in the market of credit. He is the servant of the seasons. Nature determines how long he must wait for his crops and will not be hurried in her processes. He may give his note, but the season of its maturity depends upon the season when his crop matures — lies at the gates of the market where his products are Bold. And the security he gives is of a character not known in the broker's office or as familiarly as it might be on the counter of the banker.

' ' The Agricultural Department of the Government is seeking to assist as never before to make farming an efficient business, of wide cooperative effort, in quick touch with the markets for foodstuffs. The farmers and the Government will henceforth work together as real partners in this field, where we now begin to see our way very clearly and where many intelligent plans are already being put into execution. The Treasury of the United States has, by a timely and well-considered distribution of its deposits, facilitated the moving of the crops in the present season and prevented the scarcity of

RURAL CREDITS. 35

available funds too often experienced at such times. But we must not allow ourselves to depend upon extraordinary expedients. We must add the means by which the farmer may make his credit constantly and easily available and command when he will the capital by which to support and expand his business. We lag behind many other great countries of the modern world in attempting to do this. Systems of rural credit have been studied and developed on the other side of the water while we left our farmers to shift for themselves in the ordinary money market. You have but to look about you in any rural district to see the result, the handicap and embarrassment which have been put upon those who produce our food.

"Conscious of this backwardness and neglect on our part, the Congress recently authorized the creation of a special commission to study the various systems of rural credit which have been put into operation in Europe, and this commission is already- prepared to report. Its report ought to make it easier for us to determine what methods will be best suited to our own farmers. I hope and believe that the committees of the Senate and House will address themselves to this matter with the most fruitful results, and I believe that the studies and recently formed plans of the Department of Agri- culture may be made to serve them very greatly in their work of framing appropriate and adequate legislation. It would be indiscreet and presumptious in anyone to dogmatize upon so great and many-sided a question, but I feel confident that common counsel will produce the results we must all desire."

That is the position of the President. Bills have been prepared. I submitted one last August, and that was referred to a committee; but I am not so wedded to it that I am not perfectly willing to take any other measure that will bring about this relief. The measure will provide for the establishment of a system of farm-land banks, whereby the farmer can get financial accommodation for productive purposes on long term, with a low rate of interest and with the privilege of reducing the principal by small payments as he pays his interest. For instance, if he gets a loan at 4f per cent and pays 6f per cent semiannually, he will pay off and discharge the entire debt hi 25 years.

Now, gentlemen, I want to appeal to you as intelligent business men, who want to see the country prosper and grow, as it should and as it will in spite of hampered con- ditions, do not you favor a proposition like that? If you do, do not you think it is worth while to indorse it by some resolution which would have its weight in Congress? I think it will help if you will favorably consider it.

I have in as condensed way as possible endeavored to outline the origin of this movement and the extent and scope of it and to indicate how this great economic question of rural credits ought to be dealt with. The Federal reserve act does not and could not be made to meet the situation. No strictly commercial banking system can. A supplementary system is required. The Federal reserve act goes as far as safety would permit. But under the privilege to loan on farm lands not over $200,000,000 would be available. This amount would be decidedly inadequate to serve the in- terests of agriculture. The rediscounting privilege is so restricted as to be of somewhat uncertain value and surely is insufficient. A wise system of agricultural credit will undoubtedly be a highly effective instrument of economic and social conservation.

I am going to leave the subject with you with this further thought:

England might take first place in the naval world, Germany might take first place in the military world, but the United States takes first place in the commercial world. And that is more important than the other two, for the simple reason that peace lasts longer than war. And that nation which is in that position, supreme in its commerce and its trade, is in position, without bullying, to dictate in peace or in war. Its weapon is trade, and it will not likely need any other. That nation which produces a surplus of the prime necessities of life, which other nations must come to it to get or go hungry and naked, is in position of supreme power — and that nation is the United States. So long as that condition continues her position is assured while civilization endures.

Senator Fletcher. In that connection, Mr. Chairman, I would like to say that the minority views of certain members of the Ameri- can commission will be printed as a part of Senate Document 261, and may be found there. I find that I have not a corrected copy of the minority views available; and it will hardly be practicable to get it in time to have it inserted in this record.

I have here a table, prepared by Dr. A. L. Butt, of Adairville, Ky., which may be of interest in this connection. It is called "Amortization table," which he says is the result of a study of years

36

RURAL CREDITS.

on this subject; and it gives the idea pretty dearly what is meant 1>; th" amortization feature in these mortgages according to his plan.

Senator Hollis. Without objection, that will be incorporated in the record.

(The paper referred to is as follows:)

Amortization table for note or bond of $1,000. [Rate of interest, 4£ per cent; annual payment, $67,439; time, 25 ;

War.	Principal.	Interest.	Principal retired each year or period.	Total amount re- tired up to end of each year or period.	Unpaid principal at end oi' each year or period.
1	81,000.00	$45.00	S22. 44	$22. 44	$977. .V,
2	977.56	43.99	23.45	45.89	954.11
3	954. 11	42.93	24.50	70. 39	929.61
4	929.61	41.83	25.60	95.99	904.01
5	904.01	40.68	26.76	122. 75	877.25
6	877.25	39.48	27.96	150. 71	S49.29
7	849.29	38.22	29.22	179.93	S20.07
8	S20. 07	36.90	30.54	210. 47	789. 53
9	789. 53	35.53	31.91	242. 38	757. 62
10	757. 62	34.09	33.35	275. 73	724. 27
11	724. 27	32.59	34.85	310. 5S	689. 42
12	689. 42	31.02	36.41	346.99	»;53. 01
13	653. 01	29.39	38.05	385.04	614.96
14	614. 96	27.67	39.77	424. 81	575. 19
15	575. 19	25.88	41.56	466. 37	533. 63
16	533. 63	24.01	43. 43	509. 80	490. 20
17	490.20	22.06	45.38	555. 18	444.82
18	444.82	20.02	47.42	602.60	397.40
19	397.40	17.88	49.56	652. 16	347.84
20	347. 84	15.65	51.79	703. 95	296.05
21	296.05	13.32	54. 12	758.07	241.93
22	241.93	10.89	56.55	814. 62	185.38
23	185. 38	8.34	59.10	873. 72	126. 28
24	126. 28	5.68	61.75	935. 47	64. 53
25	64.53	2.90	64.53	1,000.00	(l)
1,000.00

1 Nothing.

Senator Fletcher. Some of the results which may reasonably be expected to follow from the proposed legislation may be given as —

(1) Supplying those engaged in agricultural pursuits with capital for the development and improvement of the industry.

(2) Affording financial facilities for temporary needs to increase production and obtain supplies.

(3) To make available the credit resources of farmers for produc- tive purposes, for acquiring homes, and for refunding existing in- debtedness, all at much more favorable rates of interest and on teims adapted to the nature of the industry.

(4) To hold in the community the money made there, and afford depositories where savings can be kept and put in circulation. It is claimed, for instance, that 80 per cent of the farm-land bonds in Saxony are held by residents.

(5) To bring outside capital to places where it is needed. Mr. Lubin states that the land-mortgage bonds in Germany are quoted as high and find as ready a market as the Government bonds. Per- haps this varies. In some localities they are not so high and are not in such good demand, but in some instances I think they are even higher.

RURAL CREDITS. 37

(6) Enable the farmer to use the credit which he should have, because of abundant resources, which, under present -conditions, he can often avail himself of, if at all, only at a ruinous cost.

(7) Introduces at a vital point the tremendously valuable principle of cooperation into our rural life.

(8) Induce organization among our farmers in their own interests and lead to self-help, independence, and self-reliance.

(9) Tend toward solving the problem of economic distribution, and benefit both the producer and consumer.

(10) If the French farmer can get the money he needs at 3^ per cent and the German farmer at 4 per cent, there is no good reason why our farmers should pay 8 to 24 per cent, and the principle funda- mental to all mortgage banks of Europe is the one proposed here, distinguishing farm-land banks from commercial banks — (1) the issue of bonds based on the collective value or security of many individual mortgages on real estate; and (2) compulsory amortization — all under Government supervision.

(11) Tenants will become owners.

(12) Agriculture will become more remunerative and rural life more attractive; good roads, telephones, rural free-delivery mail, social life, improved machinery when needed, broader markets, intensive cultivation when advisable, education, will all be advanced by the general increase of facilities and betterment of conditions.

If you have further time, Mr. Chairman, perhaps it would be better to occiip}^ it by questions and answers.

Senator Hollts. Senator Fletcher, I would like to ask you one or two questions and the others very likely do also.

Do you think it is advisable at this session to attempt anything more along the lines you have indicated than the rural credits bill? That is, do you think we had better attempt any legislation looking to a cooperative credit system ?

Senator Fletcher, Well, I will say frankly, Mr. Chairman, ray impression at first was, and that I attempted to do in Senate bill 2909, to provide for both the long-term land-mortgage credit and the personal or short-term credit features in one bill. Our commis- sion thought it not wise to do that, and I finally became convinced that if both were attempted perhaps it was better to have them in separate measures, and the more I went into the subject and con- ferred with my associates, particularly the subcommittee, Congress- man Moss and Dr. Coulter, while we were engaged in preparing this report, Document 380, the more I became impressed with the notion that the present system, probably, and especially after the passage of the Federal reserve act, and our country banks as they are organ- ized now, had better be left to take care of that personel credit feature; and I felt that the country banks might oppose, in the first place, legislation along that line, and their opposition would count pretty heavily against us. And then I believe the country banks— and what I have said I did not mean at all to appear as criticizing the banks, any of them, either State or National, and what sugges- tions I have made in that direction as showing the system to be insuffi- cient to meet the needs of agriculture, is not a criticism at all, in fact, but it is a statement of fact regarding the system, and what must obtain under a commercial system. The banks have done the best they could, no doubt, and it may be that the local banks now,

38 RURAL CREDITS.

especially with this provision for rediscount under the Federal reserve act, will be able to take caro reasonably of that personal or short- credit feature that we will report on a little bit later. However, if wo can do it, I think it would be well to go on with both of these measures now, as long as we have got the subject up; and one some- what involves the other, and a study of one involves a study of the other, I think, to some extent, and one is supplemental of the other. I am inclined to think that if we can do so we ought to proceed with both of them.

Senator Hollis. Do you not think that the long-term feature and the short-term feature ought to be incorporated in one bill, if we can, so as not to have them overlap ?

Senator Fletcher. I say that was my first impression, but I have rather changed my view about that, and I am inclined to think that perhaps they ought to be separated.

Senator Hollis. You would not have separate banks, would you?

Senator Fletcher. Yes; separate banks and a separate system. Of course, the State banks that are now existing could perhaps reor- ganize or come in under that sort of a system, but the idea would be under that system personal or short-term credit banks would be organized in various communities, wherever the}7 are needed, by 10 or more farmers getting together. Perhaps the capital need not be over $2,000 or $3,000 to meet local needs. Then, after a certain number of these banks are organized, they should be tied up with some central bank — we call it "central," although that is not a very popular name; you might call it a "federated" bank — in the State where these banks are organized, and that bank would become a member bank of the Federal reserve system, and in that way the farmers' bank is tied up with the present Federal reserve system. Of course with a number of banks in the State, the federated bank, representing all these banks and created' by these local banks would have a capitalization of $25,000 or more, so that it would be entitled to become a member under the present act.

Mr. Platt. Would you have to amend the Federal reserve act in order to allow that to be done?

Senator Fletcher. Would we have to do that ?

Mr. Platt. Does the Federal reserve act not provide that no member bank can give the privileges of this system to any non- member bank, at the present time?

Senator Fletcher. Well, this central bank would be entitled to membership, entitled to become a member of that system. It does not need to make all of these local banks members at all, but the local banks will do business through that central bank. I hardly think it would be necessary to amend the Federal reserve act.

Mr. Platt. I supposed the purpose of that provision in the Fed- eral reserve act was just exactly that, to prevent any member bank from allowing nonmember banks to do business with the Federal reserve system through any member bank.

(■ Senator Hollis. They might make loans directly, while they would not be entitled to the discount. I think it could he worked out that way.

Senator Fletcher. Yes. We have not fully agreed on the recom- mendations regarding personal credits yet. We have not finished our report, and there may be things that, of course, we will have to

RURAL CREDITS. 39

make harmonize with the present aet. I am not sure that we would have to amend it in any way. That is just what we had in mind in reference to these personal-credit banks, to have them organized by farmers, and then the banks themselves organize a main bank, a larger bank, with larger capital, in the same State, and that that bank might become a member of the Federal reserve system.

Mr. Brown. Senator, would not the mortgages securing the long term loans be prejudicial and destroy the security of the borrower more than the short-term loan? That is, would it not affect his credit ? What security is offered in your bill for the short-term loans ?

Senator EYetcher. We would not loan on real estate at all.

Mr. Brown. I see.

Senator Fletcher. It would be the indorsement on the paper by members. These banks would do business with the members of the bank entirely and would not loan on real estate.

Mr. Brown. No, but the borrower, having put in his real estate to secure the long-term loan, as security to secure a long-term loan, would not that affect his credit in securing a short-term loan, because his property was already mortgaged ?

Senator Fletcher. I do not think so. I think, on the other hand, if his long-term loan was rather in the nature of an investment, as we believe it would become, where the terms were such as he ought to have, he would be in better position to pay off his personal obligations than if he did not have the long-term loan.

Senator Owen. He would have a productive property, hi your opinion, from which he could make the arrangements necessary to pay a short-term loan ?

Senator Fletcher. Exactly.

Mr. Hayes. Senator, I judge from your statement that you regard the long-term loan as vastly more important than the short term ?

Senator Fletcher. I do.

Mr. Hayes. Let me ask you another question: Do you think it would be an easy matter to induce cooperative banking, along the lines in operation in Europe, among the farmers of this country? Do you not think it is going to take a good deal of time and a lot of education ?

Senator Fletcher. I think that is very largely true, Hr. Hayes. I think it is going to take time. It took nearly 40 years to establish the system in Europe, I believe.

Mr. Hayes. Therefore it follows that your suggestion that the system should, if possible, be kept separate, and perhaps

Senator Fletcher (interposing). Yes, and that is another point in favor of keeping them separate, I think.

Mr. Hayes. Yes.

Senator Fletcher. We provide in this bill we have introduced, you know, for a cooperative feature ?

Mr. Hayes. Yes, I know.

Mr. Woods. Senator, how about the expenses in running two systems compared to the overhead expenses in case that they were united; would it not be larger?

Senator Fletcher. It seems to me so, and that was one reason I first thought that they ought to be contained in the same measure; but I am a little afraid that the expenses of supervision under the

40 RURAL CREDITS.

two separate systems will be greater than they would be under one system.

Mr. Hayes. Would it be absolutely necessary that there should be two supervisions ?

Senator Fletcher. We will have to provide for supervision, of course.

Mr. Hayes. Yes, supervision; but the same officials, the same head, could supervise both systems.

Senator Fletcher. Yes, that may be. But that was one thought that I had on the subject, that we were going to run into expenses by having two systems; but I do not know that that would neces- sarily follow.

Mr. Hayes. I do not think it need to.

Mr. Woods. Awhile ago I understood you to suggest that the plan proposed by the commission's report is the same, practically, as the plan now in force in foreign countries.

Senator Fletcher. Well, no; I would not say that. It is really an American plan. It is different from any other. It is neither the Landschaften, nor is it the Schulze-Delitzsch. nor is it the Credit Foncier, but we have got some ideas from all of them.

Mr. Woods. Do you propose any Government aid in any way ?

Senator Fletcher. No; none at all.

Mr. Woods. Is there any other Government that has established such a system that does not get Federal aid in some form or other !

Mr. Hayes. The Landschaften does not.

Senator Fletcher. A great many of them do not have Govern- ment aid.

Mr. Woods. Take the two classes of loans, in some form or other, do they not get Government aid ?

Senator Fletcher. Under the French system there is Government aid, and in some States in Germany there is to some extent Govern- ment aid, but that does not obtain, as you suggest, Mr. Hayes, in the Landschaften system.

Mr. Hayes. In the French system, Senator, the Government aid is not extensive. It only amounts to something like $2,000,000, except the deposits — the Government carries deposits.

Senator Fletcher. Yes; about 82,000,000, I think.

Mr. Hayes. That is all: nothing serious.

Mr. Woods. The deposits are an aid, are they not ?

Mr. Hayes. Sometimes. Sometimes they are not. They are not steady, of course.

Senator Fletcher. Here we provide for exemption from taxation, double liability of stockholders, we provide for Government super- vision. Each one of these banks will have a fiduciary agent of the Government, having joint control of the mortgages that are the foun- dation of the bond, and in that way the Government supervises the operation of the system.

Mr. Woods. Do you think that exemption from taxation is a proper plan ?

Senator Fletcher. I do. I think that is very important.

Senator Hollis. Senator Fletcher, do you think of anything fur- ther that you want to add before any general questioning?

Senator Fletcher. No; I do not know of anything further.

RURAL CREDITS. 41

Senator Hollis. Mr. Bulkley, have you anything especially you Mould like to ask the Senator? .

Mr. Bulkley. No; I do not care to question him now.

Senator Hollis. Is there anyone else who wants to ask the Senator some questions ?

Senator Fletcher. This subject is quite fully covered in this report, Senate Document 380.

Mr. Weaver. I want to ask a few questions.

Where is the money coming from to establish this system of banks ? I mean, suppose that it seems to be a good proposition for people to invest money in bank stock, there is no provision of any kind for Government aid. Now, the Federal reserve bank system does make a contingent provision for Government aid. For instance, it pro- vides that if this system of banks is not inviting enough for them to come into it, and a sufficient number do not come into it to establish the system, the Government itself shall buy the stock, shall take the stock, and individuals may subscribe to the stock. Is that not correct. Senator Owen, that individuals may subscribe to the stock if the different national banks can not or do not go into it on a scale large enough to establish it and then if the banks of the coun- try and individuals do not furnish enough money to buy the stock, that then the Government itself will buy the stock? What would be the objection of a system or proposition of contingent Government aid; that is, Government aid depending upon the fact that if it does not appear attractive enough for outside capital to invest in it and give it a start and make it a success, what is the objection to the Government helping establish a system of agricultural credit? While I do not believe in giving special favors to the farms or special benefits to any class, they certainly ought to be on the same basis of Government favoritism as commercial banks, it seems to me.

Senator Hollis. If you will pardon me, Senator, I can clear up the Federal reserve act part of that. I was responsible for that myself, having the Government take stock in case the banks did not take it and the public did not take enough to make it workable. I did not do it wnith any idea that the Government would do it, but merely to show the banks that we meant business, and if they kept their talk about staying out we were going to put it through any- how. I do not think it is altogether defensible, but it seemed to be a good thing to do, a politic thing to do, perhaps, at that time, and I should be sorry to have that provision of the Federal reserve act made an argument for doing the same thing here, although I think likely it will turn out to be the best thing to do. But I want to say that I was responsible for it, and I did not do it with any idea that it would ever be availed of. I do not think it will be.

Mr. Weaver. I think that is one of the most salutary provisions in the entire bill.

Senator Hollis. I thought it was fair to Senator Fletcher to ex- plain that. I would be very glad to hear his views.

Senator Fletcher. Of course, in answering the first part of the question, where the money is to come from to start these banks, they are all share banks. That is, they are not merely and purely cooperative institutions, you understand, but the stock is sold and the proceeds of the stock become the capital upon which they do- business, and that is where the money comes from.

42 RURAL CREDITS.

Senator Owen. The situation, I think, that Mi*. Weaver had in view, probably was that if the stock did not find a market, then what ?

Senator Fletcher. Well, I see. Of course if they can not sell the stock they can not organize the bank. That is all there is to that.

Senator IIollis. It is just like starting a cooperative creamery. Unless the public spirit is strong enough in the community, if the community docs not need it enough so that someone is willing to take the risk and furnish the money, they can not have it. Then, Mr. Weaver's idea is whether you think it would be advisable for the Government to do it.

Senator Fletcher. I do not feel inclined to have the Govern- ment have any more to do with it than simply supervise it.

Mr. Platt. If the Government should do that, they would fall in line. It would have a tendency to make the banks fall in line whether they want to or not.

Senator Fletcher. Yes. I am rather opposed to Government aid. I do not think they ought to fall back on the Government at all. I am a great believer in the principle of self-help and self-reli- ance, and I believe the farmers can organize these banks where they need them, and they will do it because they have the resources to do it with.

Mr. Hayes. I think they will too.

Mr. Seldomridge. What is the smallest capital?

Senator Fletcher. $10,000.

Mr. Seldomridge. And with a capital stock of $10,000, what would be the loaning power '.

Senator Fletcher. Fifteen times that.

Mr. Seldomridge. Fifteen times ?

Senator Fletcher. Fifteen times.

Mr. Seldomridge. xVt $150,000?

Senator Fletcher. They could issue bonds to that amount.

Mr. Seldomridge. To the amount of $150,000?

Senator Fletcher. Yes.

Mr. Seldomridge. What interest would these bonds bear \

Senator Fletcher. Well, of course, that depends. The mort- gage shall not draw more than 1 per cent more than the bonds. That 1 per cent is to be the maximum for administration purposes.

Mr. Seldomridge. Do you think it would be possible to provide by legislation for an equalization of interest throughout the country, or do you look for it to be different ?

Senator Fletcher. I look for a different interest charge. In this bill wc provide for the banks in each State, and the bank of one State is limited to that territory for its business; it can not do business in another State. That is because of the different State laws regarding registration, regarding titles, regarding foreclosure proceedings, re- garding exemptions, taxes, and all that sort of thing. We have to have, I think, the bank in one State confined to business in that State, and the bonds to be issued will be bonds from that State, you know. I should think perhaps that the interest rate will vary in different States. I do not think we can expect that the same interest will obtain all over the country. Eventually, however, let me say, I believe that this rate of interest will become largely equalized be- cause if, for instance, in your State you have to sell your bonds at 6

RURAL CREDITS. 43

per cent, and in another State, like Illinois, for instance, 4 per cent, naturally the Illinois bonds will not find the market that the 6 per cent bonds will, but eventually there is going to be a sort of equaliza- tion.

Mr. Seldomridge. The point I have in mind is this, will the ten- dency be to raise the price of bonds in the States where the lower rates of interest prevail or will it be the tendency to bring down the prices of bonds in the States where the higher interest would prevail ? In other words, if the farm bonds in Colorado are selling at say 6 per cent, and Illinois bonds selling for 4 per cent, would there not be a tendency to raise the Illinois bonds, and would they not be obliged to increase the rate of interest in these States where the lower rates prevail in order to find a market for their bonds?

Senator Fletcher. I do not think that. I think the tendency will be the other way, to lower the rates everywhere, because these bonds, according to the experience in European countries — and we have every reason to believe that will be the case here — will be found safe investments, absolutely, and the people will want them, and the local people are going to take them largely.

Mr. Seldomridge. Of course a higher rate of interest will natur- ally prevail in all the States where there is less development of farm property and where the farms may not be quite so secure.

Senator Fletcher. Where their crops are more or less uncertain, and where they have drouths, and all that sort of thing, it may be they will have a higher rate of interest to pay.

Mr. Seldomridge. What will be the security back of these farm bonds ? What is the security provided for ?

Senator Fletcher. Mortgages on lands, appraised by competent appraisers, and the loans not exceeding 50 per cent of the appraised value. Fifty per cent of the value of improved lands and 40 per cent of unimproved lands.

Mr. Seldomridge. With that first mortgage they have, too, the indorsement of the bank issuing bonds ?

Senator Fletcher. Exactly, with the capital and surplus of the bank back of it, and double liability of the stockholders and the mortgage.

Mr. Seldomridge. Then you have also the liability of all the banks in that State — that is, other banks ?

Senator Fletcher. No.

Mr. Seldomridge. You do not provide for any system of coopera- tion of other banks: it is merely the local banks?

Senator Fletcher. Exactly.

Mr. Seldomridge. Do you think it would be wise to extend that liability beyond the individual bank and let it take in a group of banks ?

Senator Fletcher. I did think so at first, and that is how I pro- vided in bill 2909, making all these banks guarantee these bonds, up to the central national bank, but I do not believe that is necessary now.

Mr. Hayes. Would it not be a little hard to sell stock with that indefinite and large liability?

Senator Fletcher. Yes. There might be objection on that ground. I do not think that would be best. The more I thought about it and considered it, the more I became convinced that those

44 RURAL CREDITS.

bonds ought to be good issued by the local bank, when the}' have back of them real estate worth twice as much as the face of the bond, and when they have the capital and surplus of the bank and double liability of stockholders, and when they have, in addition to that, tho amortization feature, whereby the borrower is annually or semi- annually reducing his principal all the while.

Mr. Seldomredge. J)o those stockholders have to be residents in the district in which the bank is located?

Senator Fletcher. No, sir.

Mr. Seldomridge. You do not provide for the investment of funds from another State?

Senator Hollis. Senator Fletcher, I imagine this Government help will turn out to be one of the lighting points of this measure, whatever it is. I would like to lay a little foundation for that at the start. Of course we realize that the Government authority is limited by the Constitution to fiscal agents, and that is all that that has been x- tended to, and I would like to have your view as to whether the Government can constitutionally loan money directly to applicants or invest money in the shares of rural-credit banks for the purpose of establishing them. Has your commission considered that?

Senator Fletcher. We have not considered that particular point, as I recall. I do not think we had that up. But it is possible that there is no constitutional objection to it. The main objection would be, first, the objection that it is very largely paternalism and class legislation and

Senator Hollis (interposing) . Subsidy ?

Senator Fletcher. Yes.

Mr. Weaver. That objection, Senator, would apply to a direct loan to the farmers. I do not see how a constitutional objection on account of class legislation could be presented as an objection to the Government establishing a system of land banks, or cooperative banks, agricultural credit banks, and putting Government money into them, to make them a success. It was pointed out that the first national bank, the Hamilton National Bank, was unconstitu- tional, and Chief Justice Marshall decided otherwise.

Senator Hollis. I occupy a peculiar position on class legislation. I do not think there is any objection to class legislation, and I have so said, but constitutionally I have very grave doubts whether the Government could invest money in rural credit banks as a shareholder.

Senator Fletcher. I have not gone into that question thoroughly, myself, as to the constitutionality.

Mr. Weaver. 1 do not want to go on record as being in favor of class legislation, but if we are going to have any, I would rather give it to the farmers, than to any other class, as being the most worthy class.

Senator Hollis. 1 am in favor of it at present, because I want to give it to that very sort of people.

Senator Fletcher. I think it is very difficult to make class legis- lation out of legislation that is going to benefit the farmer and the agricultural interests of the country, because we are universally affected by what affects the agricultural interests of the country, and it seems to me it would be rather difficult to m.ike out a case of class legislation. Still, that objection could be urged as to that

RURAL CREDITS. 45

feature, and I do not think it is necessary to have Government aid, and 1 am rather opposed to it as a general proposition.

Mr. Flatt. Senator Fletcher, in answer to a question of Mr, Seldomridge a few minutes ago you seemed to imply that it would be impossible for capital outside of a State to go into another State and help organize these banks. You did not mean to say that, did you? For instance, if I want to invest my money in a bank in Colorado there is nothing in this bill to prevent it?

Senator Fletcher. Not as far as bonds are concerned.

Mr. Platt. No; I mean in the bank itself, its stock.

Senator Fletcher. My impression is that we confined the organi- zation shareholders to residents.

Mr. Moss. No; it is just a limitation on the power of the bank to loan.

Mr. Platt. There is nothing to prevent eastern capital from helping organize these banks in the West, is there?

Mr. Moss. Oh, yes.

Senator Fletcher. You are thinking of that in connection with the short term.

Mr. Moss. I was discussing it in regard to the short term; but in land banks there is nothing in this bill to prohibit outside capital from being invested in the stock of the bank.

Senator Fletcher. It was in reference to the short-term personal credit banks that we thought of confining the shareholders to the residents, but not as to these land-mortgage banks. In these share- holders may reside anywhere.

Mr. Woods. What great inducement is there for people with a little money to take stock in these banks as proposed?

Senator Fletcher. Well, of course the primary inducement is to provide for the needs of that immediate community. Do you mean for outside capital to come in and take stock?

Mr. Woods. Yes.

Senator Fletcher. Well, it is quite a safe institution.

Mr. Platt. Dividends equal to the legal rate of interest in the neighborhood, and perhaps more.

Senator Fletcher. Yes. The dividends may be very good, and probably would be; and then the bonds would be good investments.

Mr. Platt. You think the dividends would be as high as the ordi- narv banks would?

Senator Fletcher. I see no reason wiry they should not be.

Mr. Weaver. That would be the same as all farm security.

Senator Fletcher. It would depend very largely upon the amount of business they would do.

Mr. Hayes. If they could get deposits, I see no reason why, with 15 times the loaning value, they should not pay larger dividends than the commercial banks.

Senator Fletcher. Yes. I have been told that commercial banks now opera ting on a margin of 0.35 of 1 per cent are earning 20 and 30 per cent on their stock. Here we provide a margin of a maximum of 1 per cent.

Mr. Bulkley. Where is that, Senator ? What banks are those ?

Senator Fletcher. I have been told — perhaps I ought not to quote people personally about that — but in Vermont this particular institution I am talking about, I was told by the president of one of

46 RURAL CREDITS.

these institutions that they did a large business there, and what the hanks got out of it was 0.35 of 1 per cent, and they were able to pay 20 per cent dividends or something like that on their stock. It depends of course on the volume of business as to what the earnings would be.

Mr. Platt. Do you think banks of this land could serve the farmers any better or make loans any cheaper than the savings loans insti- tutions can, building loan associations?

Senator Fletcher. I think they can. 1 am inclined to think their operating expenses will be less, generally.

Most people interested in them will be concerned very largely because of this cooperative feature, cooperative possibilities, and they will be keeping down the expenses of the institution, I think.

Mr. Hayes. Senator, do you not think if we could organize a sys- tem of banks where the expenses would be down as low as the build- ing associations, which are usually under 1 per cent, that we shall have accomplished a great result for the agricultural interests of the country ?

Senator Fletcher. Yes; I do.

Mr. Hayes. I think so.

Mr. Platt. You spoke of compulsory amortization. Of course amortization is what the farmers want, but could as low a rate of interest be given on a loan with the amortization feature in it as on perfectly secured loans without amortization ? Does not the bor- rower usually want a fixed term. Of course that does not affect the bond feature.

Mr. Hayes. He would have a fixed term.

Mr. Platt. He would have a fixed term of the bond.

Mr. Hayes. The bank fixes that.

Senator Fletcher. I think that is a very important feature. I think it is one of the most important features of this bill, that there should be compulsory amortization.

Mr. Bulkley. Senator, on that point, a great many farm loans that now exist are constantly renewed, and as long as their security is kept good there does not seem to be any particular objection on the part of the lenders against renewing mortgages from time to time. If we had compulsory amortization that would upset all of that system. Do you think there is any reason why it should be upset ?

Senator Fletcher. No; I would not want to upset it. I would want this system we are speaking of to be supplemental of what we have now. I would not want to interfere with what we have got.

Mr. Bulkley. Do you think it is necessary that amortization should be compulsory, or shouldn't it be optional ?

Senator Fletcher. 1 think it should be compulsory. I think that is the experience of all the countries where the system is in operation.

Senator Owen. Senator, the defense of the national bank system against the charge of unconstitutionality was that those banks were an agency through which the United States might finance its bonds, and so forth. What is the defense of this system as against a like charge? You have doubtless worked that out, and I thought you might put it in compact form.

RURAL CREDITS. 47

Senator Fletcher. We made these bonds security for postal deposits, and, in a way, the banks may be fiscal agents of the Govern- ment. I think we come within that decision on that subject.

Senator Hollis. You do provide in your bill, \ believe, that they may receive deposits of Government funds outside of postal funds?

Senator Fletcher. Yes.

Senator Owen. So that the postal funds might be deposited with these banks ?

Senator Fletcher. Yes.

Mr. Platt. It seems to me, Senator, that any possible scheme of

Eayment on the installment plan can not work out as cheaply for the orrower as if he did not pay on the installment plan. It seems to be the same in buying money as in buying furniture or anything else that you can not buy on the installment plan without paying a little bit more.

Mr. Hayes. Not unless there is some risk connected with it. In this connection I do not see your point. There is no more risk, and the risk is even less.

Mr. Platt. If your security7 is good, there is no more risk in not having the installment plan payments than there is in the other way.

Mr. Hayes. The security is not, because it is personal security.

Mr. Platt. We are talking about the long-term mortgages.

Mr. Hayes. I do not think so.

Senator Fletcher. I do not think that the objection would obtain.

Senator Owen. Making these partial payments would be in the nature of an investment, leading the borrower out of the borrowing class and leaving him to escape from the borrower class.

Senator Fletcher. This table I have just submitted here, for in- stance, gives a rate of interest of 4 h per cent, and this case, involving a bond of SI, 000 and paying 4§ per cent interest, the entire debt is liquidated in 25 years, which seems to be quite a favorable proposition for the farmer.

We give illustrations in the report on that point.

Mr. Platt. There are in existence at the present time two purely mutual institutions, one of them dealing in the amortization plan and the other in the mutual savings bank, institutions such as Senator Hollis has spoken of, the loan associations. I think it is the ex- perience of everybody who has tried to borrow, and I have tried it myself, that you can borrow cheaper from a savings bank than you can from a building loan association. The amortization feature is a great advantage to some people, but for people who do not need it it is a little bit cheaper to borrow money from a savings bank.

Senator Hollis. The reason for that is this, that the building loan associations will loan out practically the entire value of the propertv; that is, they will advance the funds, and they will put it right in tne property, and therefore it is proper, because the risk is greater, that they should require a better rate of interest.

Mr. Platt. They are purely cooperative, because the borrower is an association member.

Senator Hollis. Not with our associations. The men who borrow from it pay a higher rate of interest. It is a mighty good investment for those who put money into it, but it is a very poor one tor the

48 RURAL CREDITS.

borrower, because they make the borrowers pay a higher rate of interest because of the greater risk. I think that is the theory of it.

Mr. Hayes. The mutual savings bank requires such a big margin.

Mr. Platt. 1 do not think in my State the margin is any different. The margin is just the same.

Mr. Hayes. They make themselves absolutely safe. There is absolutely no risk at all with the savings bank, but with the building association they will take a man's case, as you might say, and finance him on a great deal smaller margin.

Mr. Platt. But they have the amortization feature. The bor- rowers have to be members of the association, and they get a part of the profits back.

Senator IIollis. There are a great many members who never become borrowers, and they need not become members in order to become borrowers. That is a feature we want to avoid.

Senator Fletcher. A great many of these institutions have refer- ence more particularly to enabling a man to build a home, and they will generally loan him all that he needs to build the home; if he furnishes the land they will build the house.

Mr. Hayes. That is the case generally. Of course, the proposition before the commission is along the same general lines.

Mr. Moss. The amortization feature in here is really the savings feature we put in here; that is the real value of it. It is for the bene- fit of the borrower as much as the lender, with the idea that it might tend to encourage a person, under Government supervision, to go in debt for a long time without making provision for paying it; so it is really making the bank a savings bank.

Mr. Platt. I do not believe it would work out any cheaper for the borrower than if he borrowed direct from the mutual savings bank.

Mr. Hayes. It might work out to his advantage in the end, in that he would have his land left in the one case, and in the other the bank would have it, perhaps.

Senator Hollis. I have an illustration. I am trustee of an estate, and there is a mortgage on it on which a farmer has been paying 6 per cent interest since 1876, and he is now dying with cancer. If that had been on the amortization plan, even at 4^ per cent, accord- ing to this theory, he would have had his debt all paid up now. It is a good deal like the insurance policies that we have all taken out; they collect more from you than they really come to, but the endowment feature and the participating feature, and so on, compels a man to save something, if he once starts and keeps up his payments.

Senator Fletcher. Then I think you get a better rate of interest and get a wider market for your bonds and a greater demand for them if the purchaser of the bonds knows that back of them is what would be, in the case of an industrial bond, a sinking fund that is going to take care of that obligation.

Senator Owen. Increasing the value of the security?

Senator Fletcher. Precisely. And instead of having a sinking fund that is kept separate and invested, that may be lost by the investment, we provide for this amortization feature, whereby the payment is noted on the mortgage. It has the features of a sinking fund and has the advantage of being a credit, when it is made, on the mortgage, rather than invested as a sinking fund might be invested.

RURAL CREDITS. 49

Mr. Platt. After all, the chief advantage of it is that it compels the borrower to pay back in small amounts, so that he is bound to save, and it is not in the low rate of interest.

Mr. Hayes. But when you come to the practical operation of a scheme of that kind, it seems to me, Mr. Platt, that it would give additional confidence to the public in the bank and in the bond that it had issued.

Mr. Platt. I think it would.

Mr. Hayes. If there was compulsory amortization in the law.

Mr. Platt. I think so.

Mr. Hayes. Because they would not have any poor securities; it would make it impossible to have any poor securities.

Mr. Brown. Would it not lessen the value of the bonds if at every interest payment there would be an amortization payment ?

Mr. Hayes. Oh, no; not of the bond.

Senator Fletcher. The bond is not issued against each mortgage; it is issued against all the mortgages. The provision is made that the amount of bonds outstanding shall not exceed the amount of mortgages that the bank holds. It may have 20 mortgages, you see, and the issue of bonds is against the whole 20 mortgages. If the individual mortgagor makes a payment on account of his principal, it is noted on the back of his mortgage as paid on that morgtage. But of course the bank has got to see that the bonds outstanding do not exceed the face of the mortgages which it holds. And then we have a provision in here for the bank to use its capital and surplus in buying in these bonds from time to time, so that will help to keep the market price of the bonds up, and will be an advantage.

Mr. Hayes. Of course as the operation went on and these mort- gages were paid, these installments, that gives capital to make other loans and make other mortgages.

Mr. Seldomridge. What is the lowest denomination of the bonds?

Senator Fletcher. I do not think we provided for that. It is left for regulation by the banks, as I recall it.

Mr. Seldomridge. Do you not think it advisable to issue these bonds in rather small amounts to be used for saving purposes by people of small means?

Senator Fletcher. I think that is true. We have not fixed the denomination of the bonds. That will be left to the bank. One community might want one denomination and another community another.

Mr. Seldomridge. You could fix a minimum and maximum be- tween which they might operate.

Senator Fletcher. Yes, that could be done.

Mr. Seldomridge. A minimum and maximum.

Senator Fletcher. That could be done. The bank must see to it, and this Government agent, that the bonds are called in as the mortgages are paid off. That is another matter, Senator Owens, that ties this up, I think, to the powers of Congress. We provide that there shall be a fiduciary agent of the Government in every one of these banks, and it is his business to see to it that the mortgages shall be there to equal the bonds that are outstanding in these banks.

Mr. Hayes. And that the payments are made?

Senator Fletcher. And that the payments are made and entered properly and registered.

37031—14 4

50 RURAL CREDITS.

Mr. Seldomridoe. Do you think, under that, scheme, that in the manner proposed there, there will be a positive inducement for cap- ital to go into what we might call the needy farm sections of this country that are now asking for this relief and establish these insti- tutions ?

Senator Fletcher. I do.

Mr. Seldomridge. And do you think there is sufficient attraction for capital to seek investment in that particular section ?

Senator Fletcher. Yes, sir.

Air. Seldomridge. What makes you think that? Is it anything in addition to what you have said here, or just providing means for investment which are not now open ?

Senator Fletcher. I think it provides means for investment which are not now open, and then, in the next place, I think it will uncover and develop, perhaps, funds that are not in bank and not in circula- tion now in the various communities. It is an absolutely safe invest- ment for people who have money and who are afraid of banks. That will be one source.

Mr. Seldomridge. In other words, it will be a vehicle for putting on the market the mortgage securities in a different way from what now obtains ?

Senator Fletcher. Yes.

Mr. Seldomridge. The people, instead of having to find an indi- vidual lender, or, on the other hand, an individual borrower, the two will be brought together through this channel ?

Senator Fletcher. That is true.

Mr. Hayes. The individual lender does not have to watch the indi- vidual borrower to see how he is getting along. The bank takes care of that.

Senator Fletcher. The man who holds the bonds has no relation with the man who made the mortgage — not at all — and I think that will attract outside capital.

Mr. Hayes. I think it will.

Mr. Seldomridge. I think the proposition is a good one, if we can secure absolute fidelity and security in the management of the bank. If that can be done, I think there is no question in my mind about it.

Senator Fletcher. Yes.

Mr. Brown. On that point, even though the individual borrower may pay off at stated periods and get credits upon his individual mortgage, does not his property in fact stand for the security of all the bonds that are out, even though he may be entirely paid out — does hot his property still stand for the face of all the bonds that are out?

Senator Fletcher. No, sir; the lien on his property is gradually diminished.

Mr. Brown. Suppose, though, that the bonds are not paid.

Mr. Hayes. That has nothing to do with the mortgage; it does not affect the mortgage at all.

Mr. Moss. Under the terms of the bill, Mr. Brown, that could not happen.

Mr. Brown. It could not happen if the bank was properly or- ganized and everything went along smoothly; but suppose the bank were to fail, or the bonds be stolen.

BUBAL ^CREDITS. 51

Mr. Hayes. Suppose it did fail, and the mortgage is paid off to $100; that is all ne is called upon to pay.

Senator Fletcher. There can not be outstanding more bonds than there are secured by the mortgages.

Mr. Weaver. It is just an asset of the bank, that is all, and if the bank fails of course the creditors of the bank participate in its assets and the mortgages outstanding are given to that bank, and have no connection with the bonds of the bank in any way.

Mr. Brown. Suppose the bank should fail and they were not paid ?

Mr. Hayes. The mortgagor would not have to respond except to the extent of his mortgage under the bill we have here.

Mr. Seldomridge. Whenever any portion is paid on a mortgage, that portion is reinvested in some other bond, and the difference between the amount covered by the mortgage and the amount paid in would be found somewhere else — in some other investment of the bank's property. It would be in the capital somewhere. That would be the security that the bondholders would have, other than the security of the balance due on the mortgage.

Mr. Hayes. The bondholder would have not only the total amount of mortgages held by the bank, but would also have tho capital and surplus of the bank, and the double liability of the stockholders.

Senator Owen. If there was an individual loss under a system of that kind, which might occur in an individual instance, the mortgage would be covered by the earning capacity of the bank otherwise.

Mr. Platt. It is not inconceivable, of course, that a big defalca- tion might ruin the bank.

Senator Owen. That would ruin any bank.

Mr. Seldomridge. Could we not put in this bill some sort of guaranty provision which would protect the bondholders against defalcations ?

Senator Fletcher. We have got our provision here in the rep- resentative right in every bank.

Mr. Hayes. If your Government representative is performing his duties property, there could not be any defalcation.

Mr. Platt. The local stockholders and directors ought to have some responsibilities.

Mr. Brown. Then, Senator, may I ask this question, which appears to me to be in point: Is not the bondholder in the end dependent entirely upon the integrity of the bank ?

Mr. Hayes. And the fiduciary agent of the Government, too'?

Senator Fletcher. Ultimately, that might possibly be. Of course, if the mortgages were stolen and taken away he would lose his security for the bond.

Senator Owen. It would have to be a protracted series of de- falcations, which is impossible under Government supervision.

Senator Fletcher. I do not see how it is possible to happen as we have this bill, because we have Government inspection, and we have a Government agent in every bank.

Mr. Seldomridge. Do you make them depositories in any way?

Senator Fletcher. Yes.

Mr. Weaver. Is not the whole theory of our Government based upon the fact that we have got to rely upon some men being honest?

52 RURAL CREDITS.

Senator Owen. We all put our lives in the hands of the fellow who handles the throttle of the engine every time we ride on the trains.

Mi-. Hayes. And even on the fellow that is fixing the track; we have got to depend on him.

Mr. Bulkley. What is your view of the probable effect of this legislation on farm-land values?

Senator Fletcher. It may be possible that it will increase farm- land values. The low rate of interest would have a tendency to do that.

Mr. Hayes. Do you think that is desirable ?

Senator Fletcher. I do not see any objection to that. The only reason, it seems to me, that it might be undesirable would be to encourage speculation in lands.

Mr. Hayes. Is not this the principal objection to it, that it makes it harder for the individual to get a farm ?

Senator Fletcher. That might possibly happen in some instances, but still if he is getting a more valuable farm he can afford to pay more for it. I do not think there will be very much danger of any material rise in farm-land values.

Senator Owen. The remedy for your suggestion, Mr. Hayes, is single tax. [Laughter.]

Mr. Hayes. What objection would you see to our undertaking to prevent that result by providing in tne law for what purposes the money can be used ?

Senator Fletcher. We do that.

Mr. Hayes. Would that not accomplish that result \

Senator Fletcher. I think so. I think that is a safeguard against that. We provide in the bill that it shall be used to complete the purchase of land, to supply money to complete the purchase of land, to improve and equip the farm, and to pay off existing liens. Those are tne three purposes named in the bill.

Mr. Hayes. So that the man that had none ol these needs could not be a borrower under the law '.

Senator Fletcher. He could not borrow, no. I do not think that it would be possible to borrow lor purposes ol speculation to any extent. As a matter of fact, I believe generally our lands are lower priced than the lands of any country where they do not

{>roduce any more than our lands. I think our lands are generally ower in price, compared with the lands of other countries, so that we can stand some increase.

Mr. Platt. Suppose I own a farm just as an investment and it is clear of mortgages, is there anything in this bill to prevent me from borrowing other funds, if I want to '.

Senator Fletcher. I did not quite get that.

Mr. Platt. Suppose I own a farm that is clear ol mortgages, just as an investment.

Senator Fletcher. Yes.

Mr. Platt. Is there anything in this bill that prohibits me from borrowing under this plan (

Mr. Brown. Yon would have to spend the money on the farm.

Senator Fletcher. You would have to borrow for the purpose of improvement or equipment.

Mr. Platt. Well. I could fix that easy. enough. I could use this money I got from this mortgage for improvement and take other

RURAL CREDITS. 53

money and buy railroad stock that I intended to use for improving the farm. It seems to me you can not get up a system that will absolutely insure that the money is not going to be spent except for certain purposes. If the man has good security and wants to borrow on it, I do not see how you can avoid lending him.

Senator Fletcher. So far as I am concerned personally, I do not see that we ought to set ourselves up as guardians of the farmers.

Mr. Platt. I think you are entirely right about that.

Senator Fletcher. I think if the farmer gives good security that is all we need to bother about; what he does with the money is his business.

Mr. Brown. Suppose he wants to buy an automobile?

Senator Fletcher. Well, if he needs one he ought to buy one to take his children to school.

Mr. Weaver. However, the purpose of this bill is the develop- ment of farms, and the giving to the farmers of facilities that they do not now have under the general commercial banking system and under the borrowing of money from individuals ?

Senator Fletcher. Yes.

Mr. Weaver. I say, is not the purpose of it to put the money from this system which the Government of the United States, through the Congress, is endeavoring to give to the people, into the land for the development of the land, whereby you are increasing the value of the land and developing the farm, and do you not think it would be rather aside from the purposes of this bill to lend money to per- sons for the purpose of speculation ?

Senator Fletcher. As I said a moment ago, I do not know that we ought to set ourselves up to watch the use of the money too care- fully. If he is able to furnish security, I do not think we ought to inquire too closely what he shall do with the money. I would not want to encourage any class of people going into speculation or going into wild schemes. Primarily what you say is quite true, I think, Mr. Weaver, and that is one reason why we have this limitation mentioned here in the bill.

Mr. Weaver. I am sure I agree with the Senator in his idea that it is for the individual to do what he wants to with his own. As old Falstaff said, "Shall I not take mine own ease in mine own inn?" The whole purpose of it is to provide money for the development of the farm.

Senator Fletcher. To provide cheaper money for that purpose.

Mr. Hayes. Yes; but some of us are not particularly anxious to

I>rovide cheaper money for him if it is going to raise the price of farm and and make it harder for the accomplishment of the purpose we all have in view, which is to make it possible for a man who has not much money to secure land and equip it for profitable operation.

Senator Fletcher. That is one reason why we thought best to specify the purposes.

Mr. Platt. If you own a farm, this will enable you to sell it at a higher price.

Mr. Hayes. I know, and I own a farm, all right, but I am not think- ing of my own individual interests in this case.

Mr. Moss. Do you not believe that the provision in the bill that no man can borrow more than 50 per cent of the value of his land will, in itself, check speculation very largely ?

54 RURAL CREDITS.

Senator Fletcher. 1 think so. That is also one of the effects.

Mr. Moss. In other words, the man is not going to speculate very much when he has to put up $2 to get $1.

Mr. Hayes. That is the case now. You have to put up about $2 to get $1 if you want to go to a bank and borrow money to-day on real estate.

Mr. Brown. Is there any limit in your bill, or do you think there should be one, of the amount any one individual can borrow or should borrow ?

Mr. Platt. That is not in the bill.

Senator Mollis. It does not occur to me that there should be any limit to any man's borrowing on land when the land answers the debt rather than the individual. Of course on commercial loans they have to look pretty strictly to that. But I did have an impression there was something of that sort in this bill.

Mr. Brown. I did not catch it when I ran over it.

Mr. Coulter. There is no limit to the amount one man can borrow, but no bank can lend more than a certain per cent of its capital to any one person.

Mr. Brown. It is the other way, then.

Mr. Platt. It could not be used to any extent on a 10,000-acre farm?

Mr. Coulter. A man has to divide the farm up and get it on separate mortgages.

Senator Fletcher. I think that is the only limitation, Mr. Brown.

Mr. Brown. That answers practically the same purpose, if the bank is limited in the amount of the loan.

Senator Fletcher. Yes. I was looking to see the particular sections of the bill.

Mr. Weaver. In some States individual landowners hold great bodies of land. For instance, in Texas I know of one tract of 420,000 acres near San Angelo.

Senator Fletcher. This is the provision in the bill that I think answers your question, under section D, page 61 of the document 380:

No national farm-land bank shall at any time loan any money upon the face or credit or upon the assignment of its own stock or of the stock of any other national farm-land bank; nor shall any national farm-land bank loan to or on the credit of any one individual or institution, either on the security of land or on any other security, an amount in excess of 20 per cent of the sum of its then paid-in capital and surplus.

Senator Hollis. Is there any other question that anyone would like to ask Senator Fletcher ?

Senator Lee. I want to inquire about one suggestion made by Senator Fletcher, which is this question of taxation, which has not been entered into very largely.

Senator Fletcher. We follow, practically, in the proposed bill, the provisions of the Federal reserve act.

Senator Lee. Of course, national-bank stock is subject to taxation, and then stock owned by another bank would be the property of the national bank, and would not be subject to taxation. We had a very acute, long-standing controversy over this question of bank taxation, and it has developed some peculiar phases, and shows how deeply interested the financial institutions are m the question of taxa- tion, and it resulted in some litigation that I started myself in my

RURAL CREDITS. 55

own county. We got the State divided into two groups, so as to keep the banks under a separate law, and the effect of which is that certain exemptions are allowed in Baltimore City that are not allowed in other parts of the State. The contention was that the exemptions were unlawful, and contrary to the provisions of the constitution of the State for equal taxation, and the result of it was that there was, particularly in some portions of the country, no corporate tax. It showed how close a margin the financial system is operating on, and in some places you can see, yourself, how important it is. You get a county tax of 90 cents or a dollar, and a State tax of 31 cents, and you might have a municipal tax of $2, and it will readily run your banking costs up to a fixed charge for taxation of over 3 cents. The question arises, if you have a national bank or a State banking system subject to a taxable burden, and you put in competition with that system another type of bank or money-lending institution, exempted from all taxation, you are going to increase the demand for absolute freedom from taxation for other financial institutions, which will

Erobably lead up to a demand for a repeal of all taxation on national anks. Other banks take the position now, all the banks of Balti- more, that all of their taxes should be reduced to a dollar basis, and in the last four sessions of our legislature there has been a bill urged by the Baltimore banks to the effect that all their taxation — munici- pal, State, and county — should be reduced to a dollar basis, and they all claim that the New York banks are on that basis to-day, and the Philadelphia banks are on that basis. The great issue of our banks has come under their demand for not only a dollar basis, but a reduc- tion of that dollar basis of all exempted securities, which would reduce the banks to the position of having no taxes at all.

So you see, gentlemen, if you are going to go into this question of taxation, it is one of the most fundamental and far reaching aspects of the whole plan.

Senator Fletcher. It is in our section 18 where we refer to the exemption of capital stock, and it is similar to the provision con- tained in the Federal reserve act. We look at it this way: If the mortgages have to pay taxes, then, undoubtedly, the man who makes the mortgage has got to pay it, generally speaking, and it means it comes out of the farmer, and we thought that mortgages ought to be exempt from taxation.

Senator Lee. If you have a strictly limited basis, so that, aside from the operating expense, there can be no profits accruing to any one except an absolutely limited amount of profit, that might be very well; but if you have in business an institution where the margin of profit for the people who are operating it is on a different basis from the margin of profit of the commercial bank, that very margin of profit is going to attract this capital. You either get it or j£ou do not get it on that margin of profit.

Mr. Platt. That is practically the only special privilege that there is in the bill, is it not ?

Senator Fletcher. Exemption from taxation?

Mr. Platt. Yes.

Senator Fletcher. And then making them fiscal agents, in a way, and allowing deposits.

Senator Owen. Making them depositors for postal receipts and postal savings, is it not ?

56 RURAL CREDITS.

Senator Fletcher. Yes; and then making them investments for trustees and guardians.

Mr. Platt. That is not exactly a special privilege, because there are lots of other securities that are also in that last class of securities which can he invested in trust funds.

Mr. Moss. When the State in which they are located passes certain legislation of a reciprocal character in its broadest sense, other se- curities can not be invested in trust funds, but can in these special instances where the State passes legislation desire by the commis-