Credit

For consumer credit, seeInstallment credit. For a broad treatment of credit, seeBanking; Financial intermediaries.

I. Government CreditRaymond J. Saulnier

BIBLIOGRAPHY

II. Agricultural CreditHarold G. Halcrow

BIBLIOGRAPHY

I GOVERNMENT CREDIT

Programs under which public credit is extended to individuals, private businesses, cooperatives, and public agencies have grown in most countries in such variety and to such size that they must now be regarded as a major activity of government. Their variety in the United States is such that virtually every type of program may be found. Because of this fact and because information on U.S. programs is more extensive than that on programs in other countries, government credit programs may best be illustrated by arrangements found in the United States.

Classification. U.S. credit programs may be classified on several bases, of which the first is according to the sector of the economy served. These are (i) agriculture, which is perhaps the progenitor of most government credit programs; (ii) housing; and (iii) business, including foreign trade and regional or area development.

Second, government credit agencies and programs may be grouped according to the methods they employ to achieve their purposes. There is, first, the direct extension of credit, in which funds are made available directly to the borrower. Along with other agencies, the Small Business Administration and the Farmers Home Administration have such programs, the former extending intermediate-term credit directly to qualifying small businesses, the latter extending long-term mortgage loans to help farmers acquire farm ownership or improve farms already owned. Next are the methods of loan insurance and loan guarantees, in which credit is extended by a private lender under full or partial government protection against loss. Loan insurance is illustrated by the Federal Housing Administration programs under which private financing institutions may, at a fee which is intended to underwrite losses and to make the program self-supporting, obtain full insurance on qualifying residential mortgage loans (on single or multiunit structures) in which they have invested their own funds. Loan guarantees are illustrated by the Veterans Administration program under which qualifying loans made by private lending institutions to veterans to help them buy homes or acquire small businesses are guaranteed against loss up to a stated maximum amount without fee and without the use of a reserve for meeting losses. Under both of these programs the lenders are closely limited as to the interest rates and other contract terms on which loans may be made. A variant of loan insurance is the deferred participation arrangement under which a credit agency agrees at the option of an original, private lender to take up all or part of a loan. Because the option can be exercised when a loan is approaching or is in default, it is in effect a guarantee against loss.

A third type of public credit program is the secondary market operation, which is illustrated in the United States by the Federal National Mortgage Association. In this case, the agency stands ready to purchase specified types of financial assets (in the case of FNMA, only mortgages) from lending agencies or other investors who wish to sell them. The purpose is to provide a liquid and orderly market, which at times can be a function of crucial importance.

A fourth method, which has a supporting effect resembling the secondary market approach, is illustrated by functions served by the Federal Home Loan Bank System through its 11 regional banks and by the Federal Reserve System through its 12 regional banks. The former supplies short-term credit to member institutions, mainly member savings and loan associations in the Home Loan Bank System, to meet temporarily heavy mortgage loan demands; the latter lends exclusively to member commercial banks in the Federal Reserve System to meet temporary reserve deficiencies that arise as a result of their lending and investing operations. [For other functions of the Federal Reserve System, seeBanking, Central.]

Fifth and finally, there are programs under which direct subsidies are made in lieu of the extension of credit, although these cannot perhaps be regarded strictly as credit programs. An illustration in the United States is the program under which the Public Housing Administration commits itself to make annual payments over periods up to forty years to local public housing authorities to make up any deficiency there may be between the cost of servicing obligations issued at the local level to finance public housing and the amount of cash available for this purpose that remains from rental income after meeting other operating costs. This has the legal standing of a guarantee by the federal government of local public housing authority bonds.

There is one respect in which U.S. government credit programs differ from those found in a number of other countries: apart from the now virtually abandoned postal savings system and the essentially war-emergency-type government savings bonds, there never has been any determined effort in the United States to collect savings through a public agency, and there never has been any mechanism at all for channeling such funds as were collected to nongovernment users through a government credit agency. In many other countries, on the other hand, the collection of savings is a major activity of government, and savings so collected are in many cases channeled, at least in part, directly to nongovernment purposes, most often to the financing of home purchases. This difference reflects the fact that the United States is amply supplied with mutual or stock savings institutions, whereas nongovernment savings-assembling facilities are inadequate in many countries or absent altogether.

Government credit agencies may be grouped also according to their form of organization and financing, that is, whether they are (i) wholly public; (ii) quasi-public joint ventures using a combination of public and private funds; or (iii) agencies having a relationship with government, such as tax exemption or guaranteed access to financial help if needed, that justifies their being regarded as federally sponsored. The Federal Intermediate Credit Banks, which still utilize some federal funds along with funds obtained in the open market by sale of Intermediate Credit Bank obligations and funds that must be subscribed by its borrowers as a condition of obtaining credit, are an example of the quasi-public type. The Intermediate Credit Banks operate through local “production credit associations” to provide medium-term financing for farmers. The Federal Land Banks, on the other hand, which provide long-term farm financing through local “national farm loan associations,” used federal capital at their inception and for many years thereafter but now have retired all of this and rely exclusively on open-market borrowings and obligatory borrower subscriptions of capital. However, because Federal Land Banks are still supervised by the Farm Credit Administration which is an integral part of the Department of Agriculture, and because they enjoy certain cost-reducing privileges not available to private lending institutions, they still must be considered as federally sponsored agencies.

A fourth basis for classifying government credit programs is found in the reasons that have led to their establishment. In the United States, many programs have been launched because it was felt that private financial institutions were not providing credit in adequate amounts or at rates of inter-

est and other contract conditions thought to be “reasonable.” It perhaps goes without saying that what is adequate and reasonable are debatable questions. In any case, a “gap” theory has been basic to the establishment of financing agencies for agriculture, for which private credit is often more costly than for industrial and commercial borrowers. It is typical also that credit facilities are less available to small business than to large companies, and a “gap” theory has been important here also. Where credit programs are set up on this basis, it is frequently required that the borrower, in order to qualify for assistance, show he has tried and failed to obtain credit from private sources.

A related reason for setting up a public credit program is that the government wishes to provide assistance to what it regards as an especially important activity and one which it believes cannot obtain credit in the open market at sufficiently low interest cost. This is illustrated in the United States by the Rural Electrification Administration, which was set up to make low-interest long-term loans to cooperatively owned light and power companies. Further examples are found in FNMA’s “special assistance” programs, under which the agency purchases at par mortgages which would sell at a discount in the open market because of the relatively low contractual interest rates they typically carry. Among types of mortgages so favored are those issued to finance college housing, nursing homes, housing projects for older people, cooperatively owned housing projects, housing for medium-income groups (especially when located in urban-renewal areas), and the like. The now inactive V-loan program, under which U.S.-guaranteed loans were made during World War ii to defense con-tractors, is a further illustration.

In some cases, however, the special assistance feature is such a prominent element in the program that the activity lacks what may be regarded as a true credit quality. Thus, loans made to farmers by the Commodity Credit Corporation against price-supported commodities are used only as a substitute for a price or income support that could be supplied by other methods. In this case, the price-support purpose is so prominent that the activity hardly qualifies as a credit program. [SeeAgriculture, article onprice and income policies.]

Two other purposes for founding government credit agencies may be mentioned: (i) to offset recessionary tendencies in the economy and (ii) to upgrade standards of private lending practices. The Federal Housing Administration illustrates both of these. FHA was established in the early 1930s to promote home construction and home improvement, primarily as an anti-recession measure. But it has also sought to upgrade lending practices by offering insurance only on mortgages that meet certain standards of credit quality and only on properties constructed to meet specified physical standards.

As would be expected, there has usually been a mixture of reasons behind the establishment of specific programs, and credit agencies frequently follow more than one general approach (that is, direct loans or loan insurance) in seeking to achieve their purpose. Thus, it is difficult to classify them by either of these criteria. Broadly speaking, however, they limit their activities to a particular sector of the economy—agriculture, housing, or business —and accordingly are most often classified in this manner.

Scope and size of U.S. programs. The scope and size of U.S. credit programs may be seen in Table 1. In addition there are the “quasi-public” credit programs presented in Table 2.

Relative importance of U.S. programs. The relative importance of government credit programs in the financial system of the United States is not easy to measure, but it may be noted that it was estimated by the federal government that as of the end of June 1964 its outstanding direct loans to domestic private borrowers amounted to 2 per cent of the then estimated U.S. private debt of $778,000 million. At the same time, private loans wholly or partly guaranteed by federal agencies constituted close to 10 per cent of total private debt. The percentages would be much higher, of course, if comparisons were made with privately supplied credit

of a type comparing closely with credits supplied or insured by the several federal programs.

The importance of government credit programs is suggested also by their relative weight in the federal budget, although this is not readily seen in the United States because of the way credit programs appear in budget accounts. In the U.S. budget, repayments of loans are netted against disbursements of loan funds, with only the difference, which can be a minus quantity, counted as an administrative budget expenditure. However, in the fiscal year 1965 disbursements under direct loan programs (thus excluding loan insurance and guarantee programs) were close to 10 per cent of net administrative budget expenditures.

Sales by government agencies of accumulated loans and investments further complicate measurement of the budgetary and economic impact of federal credit programs. As indicated in Table 1, the federal government estimated it would hold something over $30,000 million of loans at the end of fiscal year 1966. At the same time, it planned to sell something over $3,000 million of loans during that fiscal year. Since sales of loans are counted as a repayment, they tend to shrink budgetary deficits or expand budgetary surpluses. And if there is a deficit in the budget, by shrinking this below what it would otherwise be, the credit programs appear to reduce the direct burden which federal finances place on capital markets. But the sale of loans is also a burden on the capital market, so that the total market effect must be regarded as the amount of reported deficit plus sales of loan assets.

Credit programs in other countries than U.S. Government credit institutions similar in point of function and method of operation to those found in the United States are present in virtually all countries of the world. Major reliance tends to be placed, however, on direct lending programs. To cite examples in the field of agriculture: Britain has its Agricultural Mortgage Corporation; Ireland has its Agricultural Corporation of Eire (for general agricultural financing and for financing cooperatives) and has departments for rural credits and for mortgage banking in the Commonwealth Bank of Ireland; South Africa supplies similar services through the Land and Agricultural Bank of South Africa, established in 1912; Egypt has its Credit Agricole d’Egypte, established in 1930; and India has its government-sponsored financing cooperatives.

It would be a mistake, however, to conclude that public institutions are in all cases the major or even a principal source of rural and agricultural credits. Thus, the All-India Rural Credits Survey showed that in 1960 only 7 per cent of all borrowings came from government cooperatives and commercial banks, whereas 70 per cent came from local lenders (mainly individuals) and 23 per cent from relatives, traders, and other private agencies. In Denmark, to cite the case of a capital-intensive agriculture in a developed economy, only about 8 per cent of funds used in agriculture in 1954 came directly from government sources. In the more developed economies, greater emphasis is usually placed on loan insurance or guarantees than on direct extension of credit.

The picture is somewhat different with regard to the financing of residential construction. It has been estimated that more than half of new residential construction carried out in recent years in western Europe received some form of government assistance, ranging to as much as 98 per cent in the Netherlands. At least the nucleus of a national home and construction finance corporation exists in practically every Asian country (for example, Pakistan has its Building Finance Corporation; Ceylon its House Loan Board; Burma its Town and Country Development Board; Japan its House Loan Corporation, etc.). In some cases these are allied to, or are departments of, government agencies that collect savings through a widespread system of branches. Naturally, the use of such agencies is especially extensive where interest rates and equity requirements in home financing are high and credit availability is limited, reflecting a shortage of savings.

Finally, there has been an extensive development recently of government agencies devoted primarily to financing production facilities and infrastructure under national development plans. In industrialized countries these agencies are designed primarily to assist small business or business in areas affected by abnormally high levels of unemployment. In less developed countries, “development companies,” as these agencies are frequently termed, have a broader function, reflecting a more general lack of credit facilities. Among these are the Istituto Mobiliere Italiano (IMI); ETIBANK in Turkey; the Corporacion de Fomento de la Production in Chile; and the Pakistan Industrial Credit and Investment Corporation (PICIC), to name a few. Private capital plays a role in many of these, but some represent entirely public efforts to channel resources into development projects. [SeeCapital, social overhead; Development banks.]

Policy questions. There are a number of important policy questions involved in government credit programs which cannot be examined here. Among these are the following:

What are the relative advantages of direct lending, insurance, and guarantee of privately extended credits as ways of achieving program purposes?

On what interest rate and other loan contract terms should government credit programs be extended? On what terms should private credits be insured or guaranteed?

What standards and policies should be followed in the relationship between private and public credit programs?

Under what conditions should government credit programs be self-supporting?

How should these programs be coordinated with general monetary and fiscal policies for promoting the economy’s growth and stability?

Raymond J. Saulnier

BIBLIOGRAPHY

Belshaw, Horace 1959 Agricultural Credit in Economically Underdeveloped Countries. FAO Agricultural Studies, No. 46. Rome: Food and Agriculture Organization of the United Nations.

Diamond, William 1965 Development Finance Companies. Fund and Bank Review: Finance and Development 2:97–102.

Federal Credit Agencies: A Series of Research Studies Prepared for the Commission on Money and Credit. Prepared by F. Break et al. 1963 Englewood Cliffs, N.J.: Prentice-Hall.

Federal Credit Programs: A Series of Research Studies Prepared for the Commission on Money and Credit. Prepared by Stewart Johnson et al. 1963 Englewood Cliffs, N.J.: Prentice-Hall.

Food and Agriculture Organization 1964 New Approach to Agricultural Credit. Rome: The Organization.

Saulnier, Raymond J.; Halcrow, Harold G.; and Jacoby, Neil H. 1958 Federal Lending and Loan Insurance. A study by the National Bureau of Economic Research, New York. Princeton Univ. Press.

United Nations, Economic Commission for Europe 1961 European Housing Trends and Policies, in 1960. Geneva: United Nations.

United Nations, Economic Commission for Europe 1962 Report of the Seminar on Housing Surveys and Programmes, With Particular Reference to Problems in the Developing Countries … Geneva: United Nations.

U.S. Bureau of the Budget 1965 Budget of United States Government, Fiscal Year 1966. Washington: Government Printing Office. ? Includes an appendix on federal credit programs.

II AGRICULTURAL CREDIT

Agricultural credit is the term applied to funds borrowed by individuals, farm businesses, and others for use in producing, storing, processing, and marketing crops and livestock products. Modern farming requires increasingly large amounts of capital, and credit is one way of supplying this capital. Usually the borrowers are farmers, but they can also be other agricultural producers, such as ranchers in the western United States, graziers in Australia, cooperative farming associations, farm partnerships, and corporations. Sometimes the term includes funds extended to agricultural marketing firms and to those supplying services to agriculture, such as machinery, equipment, feed, fertilizer, and seed companies.

Those supplying agricultural credit include individuals, commercial and savings banks, cooperative lending associations, government and government-sponsored credit agencies, life insurance companies, mortgage and loan associations, farm service companies, and agricultural marketing associations, including cooperatives. In general, both commercial credit institutions and government-sponsored programs are most active where industrial economies are advanced and agriculture is highly commercialized. Direct government aid programs usually originate for specific purposes, such as aid to low-income groups, reclamation and development, permanent improvements, or help in case of disaster.

In contrast, where economies are not highly developed, a noninstitutionalized type of lending by merchants, local moneylenders, and landlords tends to predominate. Although in recent years governments have sometimes assisted by lending directly for specific purposes, in most underdeveloped economies agricultural credit is not efficiently organized, resulting in an almost static condition in agriculture. As a consequence, during the past quarter century the gap in per capita food production between the highly commercialized and the underdeveloped nations has widened considerably. In many instances, there has been no net increase in land productivity, income, or net assets. Under most conditions soil productivity remains low, risks are great, interest rates are excessive, income is low, and farmers remain poor indefinitely. Either the farmer is deeply in debt or he works for others as a tenant or hired hand.

In most underdeveloped countries, where the problem is broad, the solution may require land reform and other drastic changes in the social and economic order. Nevertheless, agricultural credit can help provide conditions under which crop yields can be increased and farmers can get a larger net return from the sale of farm products. The small size of many farms adds to the per unit cost of obtaining credit and creates a problem for farmer and banker alike. Agricultural credit is not the sole means of providing needed increases in food production, but it is an important element.

The importance of credit cannot be judged in isolation or by its amount. Land may be leased or rented as an alternative to ownership financed through credit. In commercialized agriculture the total debt may be only a small fraction of the resources used in agriculture. In the mid-1960s in the United States, for example, agricultural debt, or the aggregate of agricultural credit outstanding, was only one-seventh of total assets. Yet the fact is that agriculture has made great progress through expanded use of credit, which has served as a catalyst in resource development.

Types and sources of credit. If use of credit in agriculture is to be effective, it must be adapted to the peculiar needs of farming. In commercial enterprises, some loans must be made for longer periods than usual, and the repayment schedule must be flexible enough to allow for variations and uncertainties in farm income. Generally three types of credit are required: short-term financing to cover operating and family living costs between cropping seasons; intermediate-term credit to finance machinery, livestock, and improvements; and long-term credit for land and major improvements.

The need for short-term credit arises from the fact that, except on well-diversified farms that sell crops or livestock throughout the year, farm income fluctuates from season to season, and swings in prices or crop conditions sometimes cause additional variation in income. This uncertainty, combined with the typically small amount of reserve or working capital held by farmers, creates a demand for short-term credit. Such credit is used to pay family living expenses and to buy goods and materials used in production, such as feed, fertilizer, seed, and tractor fuel.

The demand for intermediate-term credit, covering one to five years, arises from the need to finance farm improvements and to buy equipment. Modern farming requires substantial amounts of capital for these purposes, often running into tens of thousands of dollars for a single family-type farm.

Long-term credit, extending over six years or more, is used to finance or refinance the purchase of farm real-estate, to construct farm buildings, and to make major improvements. Long-term credit often extends over 20 or 25 years and, in some countries, 50 to 75 years. Mortgage security is usually required. In recent years amortization systems have permitted repayment of loans in regular annual, semiannual, quarterly, or monthly installments.

In almost every country the first steps in developing an agricultural credit system have been taken by individuals and other private lenders. In many countries, cooperatives and credit unions designed to provide credit on more favorable terms have followed. Government has entered the field, either as a direct lender or as a sponsor of cooperative credit agencies, to provide more adequate sources of credit and to standardize the terms under which credit is extended. In many advanced economies, credit cooperatives and government-sponsored agencies provide more varied and complete services to agriculture than are available to any other sector. Government-sponsored agencies have played a more significant role in agriculture than in any other major segment of the economy. Thus, credit systems range from private through completely cooperative forms to government lending and loan insurance, with several systems often operating concurrently.

Government-sponsored cooperative systems. Credit cooperatives are usually sponsored by government through laws and administrations established for their operation. Usually government funds are appropriated to purchase capital stock and to cover some of the costs of administration. Once established, the government-sponsored agency tends to become self-supporting, and at least part, if not all, of the funds advanced by the government are usually repaid. Management may be directed in part by government officials. Boards of directors for cooperatively organized banks and loan associations are usually named by member borrowers and stock-holders.

In most countries of western Europe, local co-operative societies belong to regional and state organizations that are part of a national system. Extension of credit is subject to national regulation, but management decisions are in the hands of local officers responsible to the members. Usually the local societies are small, serving a village or a single community. Credit operations are sometimes combined with such cooperative activities as purchasing, processing, marketing, and other services.

Other sources of credit supplement the government-sponsored cooperative agencies. For example, Belgium, Sweden, Italy, the Netherlands, Switzerland, Denmark, and West Germany each have a system of savings banks that loan to farmers. In some instances obligations are guaranteed by local government units.

Government-managed systems. In a number of countries agricultural credit agencies are associated with the government through a system of central management. Sometimes the agency depends on the government for financing; in other cases a co-operative program is maintained and the government role is restricted to management. France, Italy, Japan, and Turkey provide examples of government-managed credit systems.

In France, the Caisses de Crédit Agricole Mutuel are government-managed cooperative societies that lend about three-fifths of the credit extended to agriculture. The organization includes La Caisse Nationale de Crédit Agricole, which enjoys financial autonomy and is administered by a plenary commission or board; the Caisses Régionales, which are private lending organizations serving a region; and the Caisses Locales, which are subordinate to the Caisses Régionales and lend to local areas or communities. La Caisse Nationale is a public body that coordinates and controls the Caisses Régionales and helps them by making advances on loans that they cannot provide from their own resources. The Caisses Régionales in turn help the Caisses Locales and serve as correspondent banks on large loans. Both the regional and the local banks are cooperatives with generally limited liability.

Italy has a central farm-credit organization run by the state. There are also local lending institutions—savings banks, credit banks, people’s cooperative banks, rural and artisan banks, and agricultural syndicates. Special regional or interregional institutes (sometimes with local correspondents), under control of the state, coordinate and direct agricultural credit in each region. Above the regional institutes is the national central authority, the Consorzio Nationale per il Credito Agraria, which, along with the regional institutes, operates throughout Italy, making farm improvement loans that are subsidized in part by the Ministry of Agriculture and Forestry. Farm operating loans, usually short-term, are made by the local banks and rural cooperative banks.

Japan has a cooperative agricultural credit structure and an agricultural, forestry, and fisheries finance corporation. The corporation is an independent government institution entirely capitalized by the government, existing for the purpose of extending longterm, low-interest loans to farmers, forestry men, and fishermen and their associations, where other credit is difficult to obtain. The corporation has no local representatives but operates through the branches of the Central Cooperative Bank for Agriculture and Forestry, the prefectural credit federations, and local commercial banks. The Japanese cooperative system includes village cooperative unions, a federation grouping by districts, and the Central Cooperative Bank. This bank is organized as a cooperative society with limited liability and with an administrative council, largely responsible to the government, which appoints the president, vice-president, 19 governors, and three monitors. The affiliated cooperatives have a council of delegates elected by holders of the bank stock.

Turkey finances about three-fourths of the loans made to farmers through an agricultural bank, a government-owned institution with branches and agencies serving all rural areas. Cooperatives, the second most important source of credit, borrow from the bank to finance their operations.

Direct government systems. In many underdeveloped countries and in some countries where commercial banks or cooperative lending associations have been slow to develop, the government has established a direct system of lending to farmers and others in agriculture. Direct lending through state-controlled credit agencies is also sometimes undertaken for special purposes, such as development of new lands, promotion of a particular kind of agriculture, expansion of output of certain commodities, aid to farmers suffering from adverse weather or low prices, and help to particular classes of the farm population who are unable to obtain credit from other sources. Although some financing may be available from private sources, government has provided credit in many of these cases to supplement these sources and to provide a larger aggregate supply, generally at reduced cost, to borrowers. Many nations with highly developed economies and well-developed cooperative credit systems, such as the United States and some of the western European countries, have also created government agencies for direct lending for one or more of these purposes. More illustrations are found throughout Latin America, Canada, and the Near East.

The United States example. The United States offers the best example of an agricultural credit system in which nearly every known method of credit is utilized. Although both government-sponsored agencies and direct lending are important, major reliance is on credit supplied by private sources. Of the total farm mortgage debt of $21,213 million reported and estimated to be outstanding on January 1, 1966, about 40 per cent was held by individuals and private businesses, 23 per cent by life insurance companies, 20 per cent by federal land banks, 14 per cent by commercial and savings banks, and 3 per cent by the Farmers Home Administration. On the same date non-real-estate credit, including both short-term and intermediate-term, totaled $18,913 million. Of this amount, about 41 per cent was held by commercial banks and about 14 per cent by production-credit associations and federal intermediate credit banks. Farmers Home Administration direct loans were about 4 per cent of the total. The balance, or 41 per cent, was an estimate of loans and credits extended by dealers, merchants, finance companies, individuals, and others. Not included in the above were loans of the banks for cooperatives ($1,055 million) and of the Rural Electrification Administration ($3,044 million).

Federal credit services to agriculture, which compete directly with commercial banks, insurance companies, and other private lenders, including individuals, are more varied and complete than in any other sector of the economy. Mortgage loans and short-term production credit for farmers are supplied through two separate systems of cooperatively organized district banks and local lending associations. These are grouped with the banks for cooperatives under the Farm Credit Administration to form a complete system of farm credit in which the government-sponsored agencies help to coordinate activities of local cooperative lending associations.

The cooperative farm-credit system. For many years prior to the close of the nineteenth century and in the early part of the twentieth, United States farmers had agitated for a system that would provide agricultural credit on more favorable terms and more reliably than was then provided by private lenders. In many parts of the country interest rates were high, varying from 6 or 7 per cent up to 11 or 12 per cent per year. Also, long-term loans were unusual, and farmers had to depend on the willingness and ability of lenders to renew their notes. Uncertainties in the banking system in respect to renewal added to their difficulty.

In 1916, after several years of study, the U.S. Congress passed the Federal Farm Loan Act, creating two kinds of banks: a system of joint-stock land banks, which were privately incorporated and financed, and federal land banks, whose original capital was furnished mostly by the federal government and which were made subject to close government direction and supervision. The joint-stock land banks flourished for a short time, but wide-spread defaults on their loans caused them to be placed in liquidation in 1933. Twelve federal land banks, one in each of the Federal Reserve districts of the United States, became the foundation for the cooperative long-term farm-mortgage system.

In the postwar agricultural depression of the 1920s, it became evident that farmers also desired a more uniform system of short-term credit. The Agricultural Credits Act of 1923 established 12 intermediate credit banks. The $60 million of original capital, $5 million for each bank, was subscribed by the government and is still in use. The initial purpose was to liberalize short-term farm-production credit by making loans to commercial banks, agricultural credit corporations, and other agencies lending to farmers. This purpose was largely unfulfilled until 1933, when Congress provided for a nationwide system of cooperative production-credit associations to make loans directly to farmers.

The third major part of the cooperative farm-credit system is the banks for cooperatives. There are 13 banks, one in each of the Federal Reserve districts and a Central Bank for Cooperatives in Washington.

The service and experience of the farm credit system can be grouped roughly into three periods, 1917 to 1932, 1932 to 1940, and 1941 to date. During the first period the activity of the federal land banks was limited to serving a minor part of the total farm-mortgage market. By the end of 1932 farm-mortgage holdings of the federal land banks totaled only $1,147 million, scarcely more than one-eighth of the total farm mortgages outstanding, and the joint-stock land banks, already in financial trouble, held less than half as much. The intermediate credit banks were not a significant factor, with less than $80 million loans outstanding. Neither of these banking systems was playing a major role in agricultural credit. As they were then capitalized and organized, they were not strong enough to do so.

As a means of combating depression and aiding agriculture, Congress in 1932 appropriated $125 million capital for the federal land banks and in 1933 about $189 million as a subscription to paid-in surplus to enable the land banks to make extensions and deferments of defaulted farm loans. Appraisal and lending standards were made more liberal and flexible. The federal land banks, lending through local cooperative associations, greatly increased their activities, especially from 1933 through 1936. By the end of 1940 the federal land banks and the Federal Farm Mortgage Corporation, which was affiliated with the banks, held more than 40 per cent of the total farm mortgages out-standing.

The importance of federal farm credit during the 1930s can scarcely be overemphasized. In deep depression it was used to stabilize the farm real-estate market and to liquidate loans of lenders, who were often in distress. It provided financing for farmers who otherwise could not have survived financially. Interest rates on land-bank loans were kept relatively low, about 4 to 4½ per cent per year.

From 1941 onward the federal land banks played a more passive role in the farm-mortgage market, dropping by the end of World War ii to about one-fourth of total farm-mortgage debt outstanding and by 1954 to less than one-fifth, at which point the shares of the market tended to stabilize.

The experience of major groups of farm-mortgage lenders is remarkably similar, on the average, over the years since the beginning of the farm credit system. During the 1920s life insurance companies and commercial banks suffered heavy defaults and delinquencies. Until the end of the 1920s the land banks had a very small number of their mortgages delinquent, but by 1932 about half of them were delinquent or extended. The 1930s were a time of heavy delinquency for all bankers. Foreclosures and bankruptcies would have been much more numerous had not the federal government expanded farm-mortgage lending. Since 1940 almost all lenders have had very low losses on farm-mortgage loans, as rising real-estate values have consistently allowed those who were in financial difficulty to liquidate through sale of their property.

Non-real-estate lending of the farm credit system grew slowly during the 1930s but has shown a strong and steady growth since that time. Production-credit associations (PCA’s) make production loans for periods of thirty days to five years, with interest rates generally around 5 to 6½ per cent. The system is a government-sponsored cooperative, with stock in local associations held by member-borrowers, who are required to invest 5 per cent of a loan in capital stock. The PCA’s provide services comparable to those of commercial banks, and their rates and loss experience have been about the same over similar periods as those of commercial banks.

Banks for cooperatives, created in 1933, make loans to eligible farmer cooperatives engaged in marketing agricultural products, purchasing farm supplies, and furnishing farm business services. Facility loans for constructing and acquiring buildings and equipment are secured by first mortgages and are limited to 60 per cent of the value of the property and a twenty-year term. Commodity loans are secured by first liens on storable commodities, warehouse receipts, and other title documents representing agricultural products and supplies. Operating loans are made for short periods and may or may not be secured. The banks for cooperatives, like other agricultural lenders, suffered losses during the 1930s; since then, however, they have had few losses, and cumulative profit has easily covered the cost of government capital originally invested.

Farmers Home Administration. Direct government lending to agriculture in the United States has in recent years been confined largely to the Farmers Home Administration. In 1918 and for many years afterward, the Congress appropriated money to aid financially distressed farmers who had experienced drought or other natural disaster and who were too poor to obtain credit from other sources. In 1935 establishment of the Resettlement Administration combined in one agency various loan and aid programs for relief of low-income farm families. In 1937 this program was transferred, under the name of the Farm Security Administration, to the Department of Agriculture. In 1946 the Farmers Home Administration was established to combine all programs of emergency loans for operation and production, loans to disaster areas, and crop, drought relief, and seed loans.

Real-estate loans made by the Farmers Home Administration include farm ownership loans, rural housing loans, and small amounts in soil and water conservation loans. The organization also insures loans made by other bankers for farm ownership. A new rural housing program was begun in 1949. Since about 1961 the amount of loans made for rural housing has greatly exceeded the amount made for farm ownership and about equals the amount of farm ownership loans insured.

Non-real-estate loans are made chiefly for operating purposes, are generally shorter in term than the others, and tend to be concentrated in areas where economic conditions are unfavorable.

The experience of the U.S. government in direct lending varies from high losses on emergency disaster-type loans to results in real-estate lending much the same as those of commercial lenders. At present the major net expense is administrative costs, which have in recent years run $15 to $20 million a year. Losses during the 1930s were much higher. Results indicate that even the direct government farm-mortgage lending that involves some degree of emergency can be successful if loans are based on the potential earning capacity of the farm property.

Rural Electrification Administration. The Rural Electrification Administration (REA) was established in 1935 to provide credit to cooperative associations and others engaged in the generation and distribution of electric power. The policy of the federal government has been to provide loan funds to the REA at relatively low cost. From 1935 to 1944 the REA borrowed from the Reconstruction Finance Corporation (RFC) at an interest rate of 3 per cent. The REA relationship with the RFC was discontinued in 1947, and loan funds were thereafter borrowed from the U.S. Treasury. By memorandum of agreement the interest rate was set at the average rate paid on all marketable securities, with a maximum of 2 per cent. The rate of interest paid by REA borrowers thus has been generally lower than rates paid by other public utility firms.

Loan funds advanced by the REA from its inception in 1935 to 1963 were about $4,800 million. Total outstanding on January 1, 1963, was $3,800 million. Losses have been negligible, and the main cost to government is money appropriated for administration, which totaled $154.8 million from 1935 to 1963, and a somewhat smaller amount to subsidize the low-interest-rate borrowing.

The effect of the REA program is far-reaching. When the program began in 1935, about 11 per cent of the farms in the United States were served with central-station electricity; by 1953 about nine out of ten farms were being so served; and by 1963 an estimated 97.6 per cent of all farms in the United States were included. About one-half of these were customers of REA borrowers. The REA policy has been to provide “area coverage,” that is, to extend electrical facilities into fringe areas and to supply all customers in a given area. Consequently, a large part of the clientele served by the REA is nonfarm, and this is a major source of recent and potential growth. Other power companies have probably developed more rapidly as a result of REA competition, and rural electrification has proceeded much more rapidly than would have been the case without this government program. Additional investment as the result of power availability is probably on the order of $5,000 to $10,000 million in the farm sector and possibly as much as $3,000 million elsewhere.

Agricultural credit covers a wide variety of situations and needs. It is provided by three general types of lenders: individuals and commercial agencies, government-sponsored cooperatives, and government agencies which make direct loans. How much credit is needed or should be provided and which system is best are matters of social objectives and judgment. Certainly, however, agricultural credit will continue to play a crucial role in agricultural and economic development.

Harold G. Halcrow

[See alsoAgriculture, particularly the articles oncapitalanddeveloping countries; Land tenure, article onland reform.]

BIBLIOGRAPHY

Belshaw, Horace 1959 Agricultural Credit in Economically Underdeveloped Countries. Rome: Food and Agriculture Organization of the United Nations.

Commission on Money and Credit 1961 Money and Credit: Their Influence on Jobs, Prices, and Growth: Report. Englewood Cliffs, N.J.: Prentice-Hall.

Land Economics Institute, University of Illinois 1960 Modern Land Policy: Papers. Urbana: Univ. of Illinois Press.

Saulnier, Raymond J.; Halcrow, Harold G.; and Jacoby, Neil H. 1958 Federal Lending and Loan Insurance. A Study by the National Bureau of Economic Research. Princeton Univ. Press.