Tensas gazette., 1917-03-09
FARM LOAN ACT,
I. The Cooperative Banking
System Established Under 1t.

ACKNOWLEDGEMENTS ~~~~~~~~~~~~~~~~ssss
(By Frank r. Wilson, federal loan bu-
reau, Washington. d. c.
The federal farm loan act, adopted
in June, 1915, and signed by President
Woodrow Wilson shortly after, creates
a comprehensive, cooperative banking
system to lend money to farmers and
prospective farmers for purposes of
land purchase, farm development, and
the refunding of Indebtedness.
The system consists of two main di.
visions; a money-assembling agency,
through which the accumulation and
savings Of the country are gathered in,
and a money-lending agency, through
which this money is distributed for
agricultural uses.
The farm loan act, in brief, pools the
farm mortgages of the nation; Issues
q collateral trust security against these
pooled mortgages, and sells these Sc
curities in the open market.
The establishment of this cO-Opera-
tive banking system was made neces-
sary by reason Of the fact that banks
in most parts of the United States
have not possessed the facilities to
properly take care of farm loans be-
cause these loans required too long a
time to run; because interest rates to
farmers have been too high, ranging
from per cent per annum to 5 per
cent per month; and because private
mOney-lending agencies had not real.
lied the reflex advantages to them
selves of long time, amOrtized loan
to the farmers.
Machinery for Its Application.
The machinery provided In the ap-
plication of the farm loan act has
three main divisions:
First-The federal farm loan board
In Washington, d. c., composed Of the
secretary of the treasury, William G..
McAdoo, chairman ex Officio; George
w. Norris, farm loan commissioner !;
Herbert Quick, Capt. w. S. A. Smith
and Charles E. Lobdell.
Second-The II federal loan banks
throughout the United States.
uc ltU III lOdh dSSO-
Citations, each composed of ten or more
farmer-bOrrowers, which associations
secure loans for their members from
the federal land banks.
The federal farm loan board is in
charge of the entire system. Its first
important duty was to divide the cOun-
try into II bank districts and locate
one federal land bank in each. This
board also provides the banks with
temporary governing boards during
the process of growth. Later system
of cooperative self-gOvernment will be
inaugurated under which the aSSOcia-
tiOns of farmers will direct these big
financial institutions, under the super
vision of the federal farm loan board.
Each of the II federal land banks
starts business with a paid-up capital
of S750.000, subscribed by the govern
ment, if private investors do not sub
scribe it within 80 days after the books
are opened. These banks have the
right to lend to national farm loan as
sociations up to 20 times the capital
stock of the banks. The lending ca
pacity of these banks is automatically
increased by requiring the farm loan
associations to reinvest in the capital
stock of the banks one-twentieth of
the amount their members borrow.
Thus the capital stock of the banks in
creases in the same ratio as their
loans. The banks acquire additional
money for lending by selling their own
bonds to investors.
Without Profit to individuals.
When bank lends money and takes
first mortgages on farms in exchange,
1t issues bonds against these mortgages
and sells the bonds to produce more
money to lend.
The bonds issued by one bank are
secured by the assets of all the banks
operating under this system, and the
rate of interest on the bonds is adjust.
ed by supply and demand. The rate
Of interest charged to members Of farm
loan associations for money which they
borrow from the banks, cannot exceed
by more than 1 per cent the rate OF
interest paid on the bonds. This mar.
gin is provided to pay the cost OF
Operating the banks. So, If the bonds
sell at per cent and the cost OF
operating is 1 per cent, the interest
rate to the farmer-borrowers will be
per cent. If the cost is held down
to One-half of one per cent, the inter
est rate to the farmers would be Az
per cent.
So, briefly, the members of the as
sociations of farmers borrow from the
banks; the banks issue bonds against
the farm mortgages and borrow money
from investors; the farmers invest ar
amount equal to one-twentieth Of the
amount they borrow, in order to pro
vide an increasing capital for The
banks, and the whole process is done
under governmental supervision anG
without profit to any individual.
No Hindrance,