the security. Unlike parcels of real-estate in a city, which are closely grouped and may be inspected easily, farms are widely scattered and each one is quite apt to be different from the others. Thus the problem of inspection becomes a formidable one. If a life insurance company were to attempt to take loan applications directly from farmers, it would be necessary to have each farm inspected by an appraiser of the company before the money could be paid out. This inspection, together with closing the loans, would demand an extensive and high-priced organization. While a larger gross interest rate might be shown, the cost of originating the loans and collecting interest would materially reduce the net. Taking loans through correspondents does not mean that a lending company foregoes inspection of the farms by its own appraisers. This is almost invariably done after the loans have been made and are grouped in sufficient numbers so that an appraiser can look at them with the least possible expense and loss of time. The titles likewise are re-examined after the loans have been paid for. Under this plan of doing business, the correspondents are made responsible for the loans they submit. If either title or security fail to meet the requirements of the investment company, the loans must be repurchased by the correspondent. Definite agreements covering this point are usually in effect. From the standpoint of an investing company, the two essentials of a farm loan organization are reliable correspondents and competent land appraisers. If these are supplemented by an intelligently directed general policy, a life insurance company or savings bank will have gone a long way in getting satisfactory machinery for its farm loan investment.

Individual Investment in Farm Loans.-It is practically out of the question for individual investors to make any re-inspection of their loans. They must depend on well-managed farm mortgage companies, very much of the type used by larger investors as correspondents. The individual must put himself very largely in the hands of such a concern. His problem is to see that he is dealing with the right one.

Sound Policies for Loaning.-Again, "What is the basis of farm loans?" In the simplest terms, it is land plus popula

tion. No population can be without land to produce food; land is valueless unless people are nearby to consume its products. The foregoing discussion has touched upon numerous modifications of this proposition but no formula has been suggested upon which lenders can rely to guarantee the safety of their loans. None is possible. The lending of money on farm land is no more to be reduced to an exact science than lending on any other forms of good security. There must be the same patient effort to find out the truth, the same caution about relying upon temporary conditions, and the same competent analysis of facts which is the basis of good judgment.

Pitfalls in Loaning Money on Farm Land.-The commonest pitfall is encountered when lenders cease to regard loans individually and rely upon generalities. This is extremely easy because of the apparent similarity of different farms or neighborhoods. Thus generalizing is dangerous, and sooner or later begins to obscure the truth. Bad lending with its nemesis of trouble and loss is sure to follow. Periods of inflated land values and speculation are invariably preceded by widespread preaching of generalities. An example is what went on in 1919 and 1920. A long war had created unusual conditions in the food supply of the world. High prices of farm products resulted. The profits in farming seemed larger than ever before. Immediately the deduction gained credence that the available farm land in this country was less than demanded by our needs and those of the world. Men everywhere rushed to buy, lest the opportunity slip ever to own land at a reasonable price. Lenders were besought to help out on such purchases. A land boom came, and went. It is, of course, easy now to see that very little, except war prices, was at the bottom of the whole thing. The generalization about supply of land had truth in it, but no more than before the war or today.

Conclusion. The units of security in farm loans are small and the whole truth about them is ascertainable if honest effort is made to find it. Herein lies the fundamental advantage in favor of these loans. A farm is a man's home and his factory, the very source and end of his living. The com

bination makes for the strongest sort of security if lenders will only take time to see that each loan is made in accordance with the demonstrated capacity of the land under ordinary conditions to earn a living for the borrower, with a surplus to meet taxes, interest, and, finally, the principal.

CHAPTER XLVI

THE FEDERAL FARM LOAN SYSTEM

By RAY B. WESTERFIELD

1

The farmer and marketer of agricultural products and live stock have need for three classes of credit.

First Type of Rural Credit.-The first type is short-term (30, 60, 90 or 120 day) credits, similar to those required in the commercial, mercantile, and industrial field, largely to facilitate the purchase of materials, the production process and storage and marketing. This type of credit is provided by commercial banks, but the American credit system evolved in response to commercial and industrial, rather than rural needs, and our national banks, providing even less than the more numerous state banks for short-term loans to farmers. To this end the National Bank Act was liberalized in 1913 to enable national banks to accept bills drawn upon them when accompanied by warehouse receipts or bills of lading conveying title to readily marketable staple agricultural products, and to open to national banks the privilege of rediscounting such paper with the Federal Reserve Banks.

Second Type of Rural Credit.—The second type of rural credit is long-term loans secured by mortgage on the land and improvements. Both theory and practice in American banking condemn the combination of the issue of short-term

1 Ray Bert Westerfield, New Haven, Conn., Professor of Political Economy, at Yale University. He received the degrees of B.A., and A.M., from Ohio Northern University and the A.M., and Ph.D., from Yale. Before he became a Professor of Political Economy, he was Instructor and Assistant Professor of the same subject, at Yale. He is Secretary and Treasurer of the American Economics Association and the author of "Middlemen in English Business," "Early History of American Auctions," and "Banking Principles and Practice," the latter in five volumes.

commercial credits and long-term financial credits by the same banking institution. This well-established principle was compromised in 1913 when national banks were allowed to meet the competition of state banks, which had attained broader privileges in loaning on real estate security; the amendment enabled national banks to lend on improved farm land, within 100 miles of the loaning bank, to an amount not exceeding 50 per cent of the value of the land and 20 per cent of the value of the improvements, but not exceeding 30 per cent of the bank's deposits.

Developing the Sources of Agricultural Credit. But even with these additional resources of credit the farmer's sources of loans were too restricted, largely because the market for real estate mortgages and mortgage loans was not organized. A spirited educational and legislative struggle, lasting over a decade, resulted in 1916 in the passage of the Federal Farm Loan Act. The passage of this law was facilitated by the previous passage of the Federal Reserve Act which provided a short-term credit system for the commercial, mercantile, and industrial world, and political expediency demanded that equal attention be paid to the farmers' credit needs. It will be observed that the Federal Farm Loan Act was passed in an election year and great effort was made to get the establishment of the system under way before election day.

Suggested Methods for Providing Long-term Credits. -In Congress three conceptions were prominent as to the method by which rural long-term credits were to be provided:

1. Direct loans by the government to the farmer, the thought being that the government could borrow at, say, 3 or 4 per cent and loan to the farmer at a slightly higher figure. This proposal smacked too directly of class legislation, and was advocated by many who kept partisan politics too prominently in mind.

2. Loans made by a set of government mortgage banks, financed and owned, if necessary, by the government at the start but ultimately, while still under the control of the government, to be owned by cooperative credit societies after the nature of the Schulze-Delitsch societies in Germany.

3. Loans made by mortgage bond houses incorporated