would result in over-expansion on the part of the country banks and an unwise use of Federal Reserve Bank credit, if they borrowed sufficient amounts of funds from the reserve institutions for these communities. The Federal Intermediate Credit Banks and the agricultural credit corporations, as we shall see (pp. 268-277), have a real field of service here. III. AGRICULTURAL CREDIT PRACTICE NOT CHANGED BY FEDERAL INTERMEDIATE Prior to establishment of the Intermediate Credit Banks it was argued that the reason country banks did not commonly make loans to farmers on notes running for a year or more was because these institutions had no place where they could rediscount them. The establishment of the Federal Intermediate Credit banks has, however, not altered country banking practice in this regard. Country banks are no more willing today to make loans for over six to nine months than they were before the Agricultural Credits Act of 1923 was passed. In fact the Federal Intermediate Credit Banks themselves have restricted the majority of their discounts to nine months, allowing only livestock paper a period of 12 months. The real reason for the country banker's reluctance to make loans for over six months is not so much the fear of tying up his assets in non-liquid form, as the fact that there tends to be more risk attached to the longer term loans. If a note comes due every few months, the banker has the opportunity of appraising the security back of it each time the borrower seeks its renewal. If more security is required as a prerequisite to the renewal, the banker is in a position to demand that it be put up. Or if he thinks that the borrower is getting overextended, he can ask that the loan be repaid. But if a note is made in the first place with a long maturity, the banker has no way of checking up on the security back of the loan during the lifetime of the note. Safe credit extension requires that a banker keep in close touch with the business affairs of his borrowers. Farm credit is no different in this respect from any other credit. If the country banker requires his farmer customer to seek a renewal of his note every six months, he is thereby enabled to keep in touch with the financial condition of his borrower. It is no doubt true that this practice puts the farmer at the mercy of the banker, but it must also be remembered that the banker is just as desirous of loaning out his funds, providing that the security is good, as the farmer is of borrowing them. The principal source of bank profits is interest on bank loans, and to the extent that a banker contracts his loans he reduces his income. We may be quite certain that no banker contracts loans for the purpose of reducing his income. On the given amount of money that any banker has to do business with, he extends the largest amount of credit that is consistent with safety. In this way he secures the largest income. The Federal Intermediate Credit Banks will not be able to insure a plentiful supply of credit to the farmers whenever there is a general credit stringency in the country. When the reserves of our banking system are used up, there is no possible way in which we can extend additional credit if we wish to remain on the gold standard. At such times, the Federal Intermediate Credit Banks will be unable to grant additional credit to the country banks. The Intermediate Credit Banks have no way of securing funds other than through rediscounting their paper or by selling their debentures either to private individuals or to the Reserve Banks. If these sources of funds are already used up, it is evident that the Intermediate Credit Banks will have no place to secure additional capital. In the final analysis, the limit to the amount of credit that the banks of the country can extend depends upon the gold reserves of the Federal Reserve Banks. No machinery which can be devised can extend this amount. All that legislation can do is to insure that more or less of this credit can go into certain lines of industry and not into others. During a period of financial crisis, the Intermediate Credit Banks will try to insure that agriculture gets its share of the available amount of credit that is in the country during such a time. The extent to which they will be able to do this will depend upon their ability to sell their debentures. It is hardly to be expected that the Federal Reserve Banks will be willing to buy these debentures when their reserve ratio is falling low. And private investors will not purchase them when money is tight, unless they have such high interest rates as will severely restrict borrowing. Thus the farmers will inevitably feel the credit stringency. No one can confidently expect that agriculture will be provided with an abundant supply of credit at times when other lines of business are suffering from an insufficient supply. IV. FIELD OF ACTIVITY FOR THE INTERMEDIATE CREDIT BANKS If, then, the establishment of the Intermediate Credit Banks has not changed current banking practice in regard to extending intermediate credit, and if it does not insure agriculture against a possible credit stringency in the future, does this mean that these institutions are not rendering any service to the farmers? This does not necessarily follow. Because country banks in the past, without the aid of the Intermediate Credit Banks, have financed agriculture in the intermediate credit field with reasonable satisfaction during normal times does not necessarily prove that there is no proper field of activity for these institutions. Certainly no one would argue that, because the country bank can safely loan a portion of its funds on long-time mortgage security, there is no legitimate field for farm mortgage banks. The question ceases at this point to be, Can our banking system without the aid of the Intermediate Credit Banks safely grant the farmers intermediate credit?, and becomes, Is it best for the banks to do so? Or to put the question in other words: Will the Intermediate Credit system enable this financing to be done more efficiently than it has been done in the past? The Federal Intermediate Credit banks, with the agricultural credit corporations, can improve the financing of the range cattle and sheep industry. This industry is carried on in regions which are sparsely settled and in which local capital is not abundant. Consequently, the greatest part of the capital which goes into this industry must be secured from distant sources. During the past, it has been obtained mainly by cattle loan companies selling cattle paper to the commercial banks throughout the country. However well this method of financing may have worked during periods of fairly stable or rising prices, it has never insured a reliable market for cattle paper during times of falling prices. Particularly is this true whenever there is a tight money market. Naturally when a bank has all it can do to take care of its customers at home, it will not wish to extend loans to persons hundreds of miles away. Usually the most distant borrowers are neg |