made to a corporation, nor could guardians, executors, administrators and trustees in general join an association. However, alien residents of states which do not restrict their right to hold and convey real estate are eligible as members.

Limitation of Loans to One Borrower

Not only did the Act seek solely to aid the actual farmer, but its primary interest was in the small farmer. Hence it limited the amount of loans by Federal land banks to one borrower. This was to have the effect of:

1. Preventing heavy borrowers calling upon the Federal land banks for practically all the funds they could assemble.

2. Curbing possible tendency to make large loans, which constitute easy banking, in order to build up large institutions, thus neglecting the small borrower.

3. Insuring safety and stability until Federal land banks and associations had acquired experience.

The original Act set the maximum at $10,000, which figure was raised by the Agricultural Credits Act of 1923 to $25,000, in accordance with earlier recommendations of the Board. The latter declared them desirable to offset the relatively high costs on small loans, and also pointed out that in some sections where land values are high and farms are expensively equipped, farmers, if they need to borrow at all, need more than $10,000, while such loans are often exceptionally well secured and desirable. It has been stated that the limits of the Act, especially by the joint stock land banks, have been evaded as reported in a number of cases; for example, by a husband deeding a portion of the land to his wife and then securing two loans. The amendment requires that preference be given to applications for loans of $10,000 and under.

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The minimum amount of any one loan is $100. Congress rejected the Board's recommendation that the figure be raised to $500, despite the objections cited to very small loans. The Board called attention to the fact that appraisement and determination of title cost substantially the same on $1,000 loan as on a $10,000 loan, and that the banks had been compelled to make a charge against the borrowers for these two purposes. Furthermore, numerous applications had been received for loans on lands which were really suburban lots, bungalow sites or summer homes, rather than farms. Finally, borrowing a small sum on mortgage, with its unavoidable costs, is unwise and improvident, and very few borrowers could not obtain a loan of a few hundred dollars on a note.

'Lagerquist, Investment Analysis, New York, 1922, p. 521.

In actual practice, the Board has in a measure excluded small loans by a ruling aimed at the pseudo-farm-lands just mentioned. It has held that the following tests shall determine what area constitutes a farm for loaning purposes:

1. Generally: the farm must be of sufficient area to yield at the hands of an ordinarily capable farmer, putting it to the use to which it is generally adapted and using average' methods, an income sufficient to maintain the family of the applicant and discharge the interest and amortization payments on his loan.

2. Specially where, through intensive farming or the practice of a specialty, a sufficient income has been regularly derived from a tract deficient in area for ordinary farming, or where the application of the prospective borrower shows that he is by experience capable of producing such an income from such a tract, such area may be accepted as sufficient, provided the land has a stable and permanent market value sufficient to warrant the loan applied for. This ruling does not apply to fruit and orchard lands which have been the subject of definite rulings by the Board.

Two special points should also be mentioned. While a farmer may become a member of two or more associations if he has lands lying within their territories; and he may borrow on any number of pieces of property, his total loans may not exceed the maximum fixed in the Act. Again, a husband and wife owning lands in severalty may each borrow on their respective lands, the maximum amount to each being that fixed in the Act.

Finally, while the Board permits loans to individuals upon undivided interests, provided all such interests are included in the one mortgage, the aggregate loans upon such undivided interests may not exceed $25,000 for any Federal land bank ($50,000 for any joint-stock land bank). No mortgage, regardless of how many interests are included, will be acceptable as a basis for a bond issue if the amount is greater. Moreover, loans should be denied to owners of lands in severalty where they were recently owners of undivided interests in the same land and where the creation of the separate titles was to avoid the maximum loan limits. But where a division is made in good faith with the intention to work a permanent severance of the former undivided-interests relationship, such loans may, of course, be made. Purposes of Loans

At the opening of the preceding chapter, the farmer's needs for long-term credit were analyzed. The Farm Loan System supplies

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Wiprud, op. cit., p. 62, remarks that this term has reference to the methods of farming in a given locality, and not to an area as large as a state or land bank district.

funds for each of these purposes, as well as to pay indebtedness previously incurred. Some problems of definition arise with respect to each of the four uses, and will be indicated in turn. The Act permits loans to be made only for the following purposes:

1. To provide for the purchase of land for agricultural purposes. Where a mortgage is given on land the applicant owns, for the purpose of purchasing other land, the Board holds it not legally necessary that the land to be purchased be included in the mortgage or be contiguous to the mortgaged land. But the land must be sufficiently close to the borrower's home to admit of proper supervision, and must be purchased for personal agricultural use and not for speculation or rental.

2. To provide for the purchase of equipment, fertilizers and live stock necessary for the proper and reasonable operation of the mortgaged farm. The Board was to define "equipment," and under the term included the implements needed in the conduct of a farm to facilitate its operation. Equipment may consist of teams, as well as machinery, tools and like articles.

3. To provide buildings, and for the improvement of farm land. The Board was to define "improvement," and under the term included anything in the form of beneficial structure, or any useful, permanent physical change tending to increase productive value, such as clearing, tiling, draining, fencing, buildings, etc. Hence loans may be made to erect permanent insurable improvements-that is, in anticipation of them. Moreover, loans may be made on one tract to improve another tract, but such loans should not be regarded with favor, and should not be made at all unless both tracts of land are under common management and are situated in such proximity to each other as to constitute practically one operative agricultural unit.

4. To liquidate indebtedness of the owner of the land mortgaged, either) ル

incurred for agricultural purposes, or incurred prior to January 1, 1922.

Originally the Act, besides permitting loans to liquidate indebtedness incurred for agricultural purposes, also allowed loans to liquidate indebtedness incurred prior to the organization of the first association. established in and for the county in which the land was situated. This was of great advantage to many country institutions anxious to liquidate a part of their long-term investments, and in many cases permitted Liberty bond subscriptions which would otherwise have been impossible. A further broadening took place April 20, 1920, when the alternative was added of loans for indebtedness incurred, subsequent to establishment of the first association, for purposes mentioned in section 12 of the Act. The alternative now granted was inserted by the Agricultural Credits Act of 1923, and represents a limited response to the Board's recommendation in its 1921 report that loans be permitted to actual farmers to liquidate any indebtedness. At that time thousands of applications had been made by farmers with unencumbered farms for

It is interesting to note that in the fall of 1921, when loan applications exceeded available funds, the Federal Land Bank of Berkeley rejected applications merely to refund indebtedness at a lower rate.

loans with which to retrieve losses of the previous 18 months, many of which could not by any construction be classed as "indebtedness incurred for agricultural purposes," and had ultimately to be denied.

The Board requires a farmer who has a mortgage on his farm when he borrows from the land bank, first to pay it off with the funds he receives. Then only may he apply any surplus for improvements. The bank itself frequently pays off the mortgage, or the latter may be held. in escrow during the time elapsing between advances of funds and receipt of mortgage by the bank.

In actual practice, the bulk of the borrowing has taken place to pay existing debts, and the proportion has been increasing. The following table shows the purposes for which loans have been made, both by Federal and joint-stock institutions. The figures are percentages of total loans made from organization to October 31, 1924, together with highest and lowest state percentages in each case.

LOANS MADE BY FEDERAL AND JOINT-STOCK INSTITUTIONS-THEIR PURPOSES AND PERCENTAGE OF TOTAL LOANS

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Critics often point to these figures and state that the System on the whole has been of little help to the tenant, who is often not able to subscribe the 50 per cent of the capital necessary to purchase land, and aids rather the existing landowner. In fact, a criticism made shortly after the passage of the Act held that the lowered rates on loans were likely merely to be capitalized in higher land values and to lead to land speculation, thus hindering rather than aiding the tenant who wished to acquire a farm of his own. On the other hand, it is pointed out that in a number of cases a local banker serving as sec

"Putnam, "The Land Credit Problem," University of Kansas Bulletin, Decem ber 1, 1916, p. 104.

retary-treasurer of an association has aided tenants to acquire land, the seller taking a second mortgage which has certain advantages where the Federal land bank rather than another lender holds the first mortgage. Whether or not a system of personal credit is required to aid the tenant, or direct Government loans, can merely be raised at this point.

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Efforts to Improve Agricultural Practice

The Board and the Federal land banks have to a certain extent endeavored to improve agricultural practice. Says the Board in its 1918 report:

"Still more valuable than this direct money assistance has been the effort which the banks have made to educate farmers to better agricultural methods, and in many cases to enforce their suggestions by making them a condition to the granting of loans."

In the matter of marketing, the banks in some districts encouraged the formation of such small coöperative units as buying and selling associations, coöperative creameries, cheese factories, condensing stations, and potato warehouses. The banks also encouraged the good-road movement by informing association members that they look with disfavor upon loans on farms which did not have ready access to good roads, and where the cost of transporting products to market was therefore unreasonably high.

Nor were farming methods left untouched. In the summer of 1918, the Federal Land Bank of St. Paul wrote a circular letter to the secretary-treasurer of every association in western North Dakota. After stating that repeated crop failures caused by drought had rendered the economic condition of local farmers very unfavorable, and calling attention to the fact that many grasses and feed crops could be depended on in such years, it concluded:

Hereafter we will only entertain applications from farmers who have shown from their farming operations in the past that they have a dependable income, and they must have live stock and dairy cows to assure this for the future. All loans that do not comply with these requirements will be rejected by us, because we do not consider them safe loans. You will understand that this ruling is not only to protect us and the farm loan association, but it is for the best interests of the farmers themselves.

Again, in those sections, particularly in the south, where lands have suffered from erosion, the banks have insisted upon terracing as one of the conditions upon which they will make loans. Where damage has already occurred and is likely to increase, the bank not only insists Wiprud, op. cit., p. 73.

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