FARM MORTGAGE FINANCING CHAPTER I DEVELOPMENT OF THE AMERICAN FARM MORTGAGE SYSTEM Mortgages and Tenancy Originate from the Same Economic Causes The farm mortgage and tenancy systems arise from the same economic conditions. The mortgage is an advanced step from tenancy. Rent is paid for land because it yields more than costs of production; a price is paid for land for the same reason. The bridge between tenancy and ownership is the farm mortgage. The man who aspires to be a farmer has three alternatives: he may have free land which yields only enough to pay 'costs; or he may rent; or buy a farm on which he can produce more than enough to defray costs. If he moves on to free land which does not produce more than costs economic society is not concerned about him. If he rents he will be required to give up a portion of the products to pay the landlord his share. And if he buys. but can pay only a portion of the price he will be required to give a mortgage upon the property which binds him to make a certain payment or series of payments with accrued interest or forfeit his claim to the farm. As free lands worth farming have disappeared these slow and expensive steps to complete farm ownership have become more and more onerous. Development of the Mortgage System in the United States The history of the mortgage system of the United States is directly related to the history of the advance ment of prices, increasing population, foreign demand for agricultural products, and commercial and industrial expansion. The prices of farm lands could not advance rapidly as long as there was more tillable land than the population could use, although among the colonists the advantage of position gave preference to coast lands over the interior. This was due primarily to the inadequate transportation which made the cost of reaching the market with products from the interior more than the market price. Because of the advantageous position, the coast state lands acquired considerable market value during colonial days. After the opening up of the fertile lands of the West and the purchase of the Louisiana territory from Napoleon by President Jefferson in 1803, lands were very cheap. At first the government wished to raise revenue to meet its current expenses and pay the national debt through the sale of the public lands. Vast territories were acquired for speculative purposes. Land booms followed in all the states having public lands as well as in the government territories. The over-investment in land was perhaps the chief cause of the panic of 1837. Just previous to the panic, lands in Alabama sold for prices which have never been heard of since in that state. In 1862 Congress adopted its second land policy— that of settling the public lands with permanent home builders as rapidly as possible. To do this the Homestead Act was passed, making it easy for any one to own a farm. The fundamental principle of this Act was the grant of a free homestead to the actual settler, to whom after five years' residence the title passed without charge. As a result of this Act many people were lured to the Middle and Western territories. Over sixty-five million acres were given away to individuals between 1860 and 1880. By the latter date the frontier had entirely disappeared and there was almost continuous settlement from ocean to ocean. With this growing scarcity of fertile farm lands, increasing population, improved transportation facilities, and the growing demand for farm products, both the number of tenants and farm mortgages multiplied rapidly. Growth of Population The population increased from five millions in 1800 to over seventeen millions in 1840, thirty-one millions in 1860, fifty millions in 1880, seventy-six millions in 1900, and one hundred and five millions in 1920. This expansion of population has been one of the principal factors in enhancing the value of farm lands. The per capita acreage has been reduced to less than one-third that of 1860; but the desires and demands of the people require a much larger variety of products than formerly. The influence of these facts upon the rising land values is too obvious for further comment. It seems that most people wish to own a stake in the soil sometime during their lives. As the population increases the competition for this ownership will grow keener and the value of land will increase. Also, new uses of lands are being discovered. The millions of acres turned over to golf links, parks, playgrounds and the like, all add to the value of other lands, because every new golf course or graveyard limits the land available for the production of necessities. Transportation and Land Values Perhaps no other development in this country has affected the value of farm lands more than improved transportation facilities. Upon the opening of the Erie Canal in 1825 the costs of transportation declined until * the Middle Western farmer could reach the Eastern markets with his products. This enhanced the value of Middle Western farm lands and depreciated the value of Eastern farms. The development of the railroads accelerated this process. The values of large areas of Eastern farm lands have been declining for a half century due to the competition with the new and more productive lands of the West, which have been steadily increasing in value. Improved roads, the automobile, and especially the truck, have been potent factors in raising the value of farm lands in recent years. With prices of products remaining constant, any decrease in the costs of marketing increases the net returns to the farmer and consequently the value of his land. But prices do not remain constant. As soon as it is discovered that the net returns from producing and marketing farm products have increased, new lands are cultivated. This increases the volume of products offered for sale; the price to the consumer declines; also the price paid the farmer. In the long run the benefits of good roads and improved transportation are distributed among consumers. The distant lands that are brought into cultivation as a result of improved transportation have an increased value. All of the farms from which products are marketed more advantageously than before the improvement increase in value. The costs of transportation are like taxes upon the farmers. Every reduction in costs increases the value of the farmer's land by the amount of the reduction capitalized at the current interest rate, until the prices paid farmers for their products decline; and then the gain due to the improvement is passed on to the consumer. (This is at any rate the theory, which assumes that prices are fixed by supply and demand and are not manipulated by middlemen.) Land Speculation No other one influence has been a more potent factor in the increase of farm mortgages than speculation in land. Almost every period of prosperity in this country brings with it a cycle of land speculation. Some of the most severe crises have been directly or indirectly the result of over-investment in land. Land speculation is believed to be one of the principal causes of the panic of 1837. At this time a speculative fever spread throughout the United States due perhaps to the state of the currency and a general atmosphere of appreciating values. Paper villages were laid out in the Middle West and South. It was believed in central Illinois that the cities would spread all over the prairie and there would not be any farming land. City lots were surveyed on what are today among the most isolated farms. Lands were sold for more than their present value and for more than fifty times their value at that date. The valuation of the property in Mobile, Ala., increased from $4,000,000 in 1834 to $27,000,000 in 1837. After the panic the values declined even more rapidly than they had increased. The people who bought lands during the periods of high prices found that the values shrunk but the mortgages did not. Many spent half their lives in paying for false values. Creditors foreclosed against others and took the land. This situation follows every crisis; it was duplicated in 1920. The year 1919 witnessed the wildest speculation in farm lands since 1835. All over the country land changed hands at fabulous prices. Almost every one who inherited a taste for the farm, from widows to university professors, bought farms or bid for them at peak prices, believing the trend of prices was upward and would never come down again. The data on this speculation is collected and digested for Iowa better than any |