MOING BACK to the 1890 period,

their leaders became increasingly aware of the shortage of credit for financing farm businesses and the accompanying high interest rates. Also, loans then available were not generally adapted to the farm business. These things led to a great deal of discussion among farmers about the possibility of obtaining better credit facilities. As previously stated, the increasing specialization of agriculture and the beginnings of mechanization speeded the search for adequate credit on terms better suited to the needs of farmers.

Among other things the Country Life Commission, appointed by President Theodore Roosevelt in 1908, suggested "a thoroughgoing investigation by experts of the middleman's system of handling farm products, coupled with a general inquiry into the farmers' disadvantages in respect to taxation, transportation rates, cooperative organizations and credit, and the general business system."

When the Southern Commercial Congress met at Nashville, Tenn., in 1912, it appointed the American Commission to go to Europe and study "the methods employed by progressive by progressive agricultural communities in production and marketing and in the financing of both these operations." 35

In 1913, President Wilson appointed the "United States Commission" of seven members to cooperate with the American Commission. The purpose of these groups was to study the European system of rural cooperative credit and how it might be adapted to the needs of the American farmers. The United States Commission on its return

from Europe recommended legislation for "the establishment, operation, and supervision of a national farm land bank system in the United States." 36

After a good deal of discussion in and out of that body, Congress passed the Federal Farm Loan Act of 1916. This provided for establishment of 12 Federal land banks. Farmers were authorized to organize local credit cooperatives to be known as national farm loan associations. These associations would handle and endorse long-term farm mortgage loans made to their members by the Federal land banks. This is still the function of the farm loan associations.

Thus, the Act of 1916 became the beginning of today's Cooperative Farm Credit System. During the period from 1917, when the land banks opened for business, to 1933 the System was gradually rounded out.

In 1923, Congress provided for establishment of the 12 Federal intermediate credit banks. These were and still are banks of discount. They were authorized to discount loans made to

farmers for production purposes by agricultural credit corporations, livestock loan companies, and commercial banks. The banks are also authorized to make certain types of loans to cooperatives.

In 1933 Congress provided for the establishment of 12 production credit corporations, local production credit associations, and the 13 banks for cooperatives.

The production credit corporations assisted in organizing the production credit associations, helped capitalize them with Government funds, and now provide supervision. The production credit associations-local cooperative retailers of credit-provide short-term. credit for production purposes to qualified farmer-members. They are

authorized to obtain their loan funds through discounting with and borrowing from the Federal intermediate credit banks.

The banks for cooperatives make loans to marketing, supply and service. associations of farmers.

All of these lending organizations were placed under the Farm Credit Administration created by Executive Order of the President, effective May 27, 1933.

The United States is divided into 12 Farm Credit districts. In each district the following four credit units are located in one central office: (1) A Federal land bank; (2) a production credit corporation; (3) a district bank for cooperatives; and (4) a Federal intermediate credit bank.

The Cooperative Farm Credit System, supervised by the Farm Credit Administration, is designed to provide farmers who have a sound basis for credit an opportunity to obtain funds supplied by private investors. Farmers can then use these funds to finance the ownership and operation of their farms and to finance their marketing, farm supply and business service cooperatives. Loans used by individual farmers are obtained through local farmerowned and farmer-controlled credit cooperatives.

Boards Make Policies

Each district has a Farm Credit board which serves ex officio as the board of directors of the land bank, the intermediate credit bank, the production credit corporation, and the bank for cooperatives. Each district Farm Credit board is made up of 7 members-2 elected by national farm loan associations, 2 by production credit associations, and 1 by cooperatives using the district banks for cooperatives. When the capital owned by users of a bank for cooperatives plus the surplus and reserves of the banks equal or exceed two-thirds of its capital, the cooperatives are entitled to elect a second member to the district Farm Credit board. The remaining member or members are appointed by the Governor of the Farm Credit Administration.

The Farm Credit Administration, which became a part of the U. S. Department of Agriculture in 1939, was

again made an independent agency on December 4, 1953, in accordance with the provisions of the Farm Credit Act of 1953.

On this date the Federal Farm Credit Board of 13 members who serve on a part-time basis became the policy making body for the Farm Credit Administration. The President of the United States appoints 12 members of this board, 1 member from each Farm Credit district. The Secretary of Agriculture appoints the 13th member. In making his appointments the President is required to consider three nominees selected respectively by national farm loan associations, production credit associations, and cooperative users of the bank for cooperatives within each district.

The Federal Farm Credit Board, with approval of the President of the United States, selects the Governor of the Farm Credit Administration to administer the affairs of the Farm Credit Administration and to carry out its policies.

Farm Mortgage Loans

Farmers have borrowed more than $5 billion from the Cooperative Land Bank System since it began operation in 1917. In addition farmers obtained about $1 billion in Land Bank Commissioner loans which the System handled for the Government during the depression of the 1930's and the years immediately following.

The Federal land banks and the 1,100 national farm loan associations make up the Land Bank System. These institutions working together provide long-term farm mortgage credit for farmers. They establish interest rates in keeping with costs of funds in the money markets and on terms particularly suited to the needs of farmers.

Farmers obtain land bank loans on the security of first mortgages on their farms through their national farm loan associations. Each farmer obtaining

a loan becomes a member of his local mortgage credit cooperative by purchasing stock in the farm loan association equal to at least 5 percent of his loan. The association in turn purchases a like amount of capital stock in the land bank of its district. Each member of a national farm loan association is entitled to one vote in the election of directors and in other decisions made by the members. The association endorses the loans of its members and handles the servicing of the loans after they are made.

The Cooperative Land Bank System endeavors to make farm mortgage loans to farmers at the lowest possible cost. After retaining sufficient amounts to build necessary reserves, the land banks return their remaining net margins to the local national farm loan associations as dividends on their stock. The associations also pay dividends to their members after they have built up adequate reserves. In the 11 years immediately prior to 1955 national farm loan associations returned a total of $34 million to members in the form of such dividends.

The Land Bank System has introduced or made generally applicable throughout the country many improvements in the terms of farm mortgage loans. These improvements include

the first general use throughout the country of long-term loans up to periods of 40 years repayable on an amortized basis; that is, each farmer pays a part of the principal along with the interest, either annually or semiannually.

In 1933 the Cooperative Land Bank System developed the concept of making farm mortgage loans on the basis of normal agricultural values. Normal agricultural value is defined as "the amount a typical purchaser would, under usual conditions, be willing to pay and be justified in paying for the property for customary agricultural uses, including farm home advantages, with the expectation of obtaining average production and of receiving normal prices for farm commodities." The income a farm may be expected to return over a long period of years is a principal factor in determining its normal agricultural value.

This policy of lending on normal agricultural values has enabled farmers to borrow more than they could have if loans were based on current market prices in times of depression and in preventing overborrowing in times of high prices. Thus lending on normal value has been a stabilizing influence.

The Cooperative Land Bank System has also pioneered by allowing farmers

to pay off loans ahead of schedule without penalty charges. It also makes it possible for farmers to build up "future payment funds" by setting aside money with the bank in years of high income to meet payments coming due in years when income may be low.

The land banks, in addition to using their own funds to make loans, obtain lending funds by selling bonds to the investing public. These bonds are secured by the mortgages given by farmers as security for their loans and by other assets of the banks. The Government does not guarantee land bank bonds in any way.

In 1916, Congress provided nearly $9 million for the original capital of the Federal Land Bank System. By 1932 almost all this capital had been replaced by farmer-owned capital.

However, because of depression conditions at that time, Congress provided for the Government investment of $125 million in the capital stock of the banks.

The Emergency Farm Mortgage Act of 1933 authorized the Secretary of the Treasury, in behalf of the United States, to subscribe to the paid-in surplus of the banks to compensate them for deferring and extending payments due on loans which farmers were unable to pay because of depression conditions. Under the Act the land banks received a total of nearly $189 million in paid-in surplus.

By June 30, 1947, all the land banks had returned to the United States Treasury the last of their Governmentowned stock and surplus. Since then the land banks have been completely owned by farmers through their national farm loan associations.

Operating Credit

Farmers currently borrow about $1.2 billion a year from their production credit associations. They use these loans to finance their farm operations. The uses include purchasing seed, fuel, feed, fertilizer, and other farm supplies, hiring necessary labor, purchasing farm

machinery, paying taxes and insurance, repairing farm buildings, and making farm and home improvements.

Each farmer who borrows from a production credit association owns voting stock in his association equal to at least 5 percent of his loan. Each member of a production credit association is entitled to one vote in the affairs of the association including the election of directors.

The board of directors hires a secretary-treasurer who runs the day-to-day affairs of the association. The secretary-treasurer and two members of the board constitute a loan committee which considers all applications for loans.

Farmers can borrow any sum from $50 up. The amount an individual farmer may borrow depends to a large extent on his financial condition and his ability to repay the loan.

Most loans are made for periods of 1 year or less. However, unpaid balances of loans for such capital purposes as the purchase of livestock and farm machinery and improving farmland or buildings can be renewed if satisfactory progress is being made. The associations began to experiment with 3-year loans for such purposes in 1954. •

Each farmer who obtains a loan from a production credit association tells how he expects to use the money, gives a complete financial statement and an estimate of his expenses, and states what income will be available for repayment. Many farmers borrow to finance the entire year's business. They arrange to have the money advanced as it is needed and make repayments as income comes in from the sale of their products. Since interest is charged only for the time each dollar is outstanding this results in reducing interest costs.

The associations obtain their funds by discounting farmers' loans with the Federal intermediate credit bank or by obtaining direct loans from these banks. The intermediate credit banks in turn obtain their funds from the sale of short-term bonds known as “de

bentures" to the investing public. The Federal Government does not guarantee these securities as to either interest or principal.

More than 476,000 farmers were members of the 498 production credit associations as of June 30, 1955. A total of $90 million originally was provided as capital to the production credit associations through the Government-owned production credit corporations. By March 1, 1955, these associations had returned all but $2.9 million of this amount and 415 associations had returned all of their Government capital.

Farmer ownership of capital in the associations totaled $95 million early in 1955 and the associations had built up reserves of $91 million.

In 1954 farmer members of 121 associations received $1.2 million dollars in dividends on their stock and in patronage refunds based on how much interest they paid during the year. These payments had the effect of further reducing the cost of credit to the farmers.

One of the future objectives set out for the Production Credit System by Congress in the Farm Credit Act of 1953 was the eventual return of Government capital in the production credit corporations. Various plans for accomplishing this are under active study.

Loans to Cooperatives

More than 2,000 farmer marketing, supply and service cooperatives use the services of the banks for cooperatives. They borrow about $500 million annually. These loans help to finance the business of an even larger number of cooperatives than the actual number of loans would indicate. Many federated cooperatives obtaining loans are organized, owned by and provide services to hundreds of local cooperatives.

As previously stated, one bank for cooperatives is located in each of the 12 Farm Credit districts. The Central

When farmers and ranchers obtain loans from their credit cooperatives they are dealing with specialists who know the problems of farmers and ranchers.

Bank for Cooperatives is located at Washington, D. C., but most cooperatives borrow from their district banks. In the case of larger loans or loans to regional associations operating in more than one district the Central Bank may participate in the loan with one or more district banks.

The banks were originally capitalized in 1933 from funds remaining in the Agricultural Marketing Act revolving fund administered by the Federal Farm Board from 1929 to 1933. Their peak Government capital was $178.5 million which they had reduced to $150 million by 1955. Each cooperative borrowing from a bank for cooperatives owns stock in the bank. The amount of the stock investment is generally in proportion to the use the cooperative makes of the bank.