Chapter X: Foreword (10)

UNCLE SAM: You're both all right, personally, but your organizations have been in wrong until just now there seems to be a patriotic soul-awakening, and it's up to you to redeem them, or there will be a housecleaning, and don't you forget it. I want men; men who have intelligence and conscience; men who are capable and have convictions; men who have moral courage; men who will fight if necessary to have peace; I mean that peace that rules only when right prevails and justice reigns.

Good Night.

TWELFTH NIGHT

LAND CREDIT BANK

UNCLE SAM: Boys, by unanimous vote we agreed at our last meeting to devote tonight to the subjects that seem to lie close to the hearts of Mr. Farmer and Mr. Laboringman. You will remember that Mr. Farmer insisted that our work would not be complete unless we included in our plan a Land Credit Bank, while Mr. Laboringman declared that he had waited patiently to hear what we had to say about coöperative credit, but in vain.

Since Mr. Farmer is a member of the committee appointed by the agricultural society of his State to investigate the subject of Land Credit Banks, I presume he is loaded to the guards and can tell us all about it, and convince us, too, that he is right in his contention. I suggest that we let him lead off tonight.

MR. FARMER: Well, gentlemen, I can assure you of my confidence of my ability to convince you of the importance of recognizing my contention; but I shall have to ask you all to be patient and agree to assist me in working out the plan that is best adapted to our needs and conditions. In studying this aspect of the banking problem, I think it will be well to follow the steps of development up to date, just as we have in considering other phases of this question, because experience is our surest guide to tell us what not to do as well as what we ought to do.

In the outset, however, I want to call your attention to the fact, that there is no subject of broader interest and more world-wide discussion than the productivity of the soil. You are all aware, no doubt, that there has been established at Rome the International Institute of Agriculture, and that last summer fifty different governments were represented there. Hon. David Lubin, of California, represented this government. The President of the United States became intensely interested and with the help of our foreign representatives, particularly Hon. Myron T. Herrick, Ambassador to France, a vast amount of most valuable information has been gathered, studied, digested and classified. I think that we are now ready to take the matter up and legislate upon it. Our interest ought to be greater and more intense than that of any other nation on account of the number of our people engaged in agriculture and the staggering interest rates they are paying. Think of it.

The 12,000,000 farmers of the United States are adding over $8,400,000,000 to the national wealth each year. They are doing this on a borrowed capital of $6,040,000,000, on which $510,000,000 of interest is annually paid. Counting commissions and renewal charges, the rate averages at 8-1/2 per cent for this country as against 3-1/2 or 4-1/2 per cent for Germany. If the American farmers had a thoroughly organized system of coöperative associations they would not only save this difference of $200,000,000 or $250,000,000 to themselves individually, but in the course of time the entire debt would be transferred to the societies, the interest paid to them, an economic waste stopped, and this stupendous sum restored to agriculture. The assertion is neither fanciful nor extravagant. It is below the actual ratio obtained by a comparison with the German figures.

There is practically no limit to the amount of capital that could be advantageously employed for rehabilitating worn-out and abandoned farms, opening up new areas, and introducing modern methods of cultivation; and it is of vital importance that this capital be obtainable at once in sufficient volume and on easy terms. The world-wide problem caused by the pressure of population upon the means of subsistence now confronts the United States in the very face of its matchless natural resources and vast acreage of arable lands still remaining untouched by the plow. The $385,000,000 of foodstuffs exported last year barely equaled 76 per cent of the annual interest charges on the debts the farmers owe.

The cause of the trouble is the lack of capital, and the remedy lies in financing the farmer and the landowner. This is the indisputable conclusion logically reached from examination into the actual conditions and from comparisons furnished by recent European history. The solution of the problem concerns the general welfare as much as does the currency and monetary reform, and it is gratifying to note that it seems destined to go side by side along with this undertaking. For as soon as the alarm was sounded the best talent of the nation became enlisted, and now bankers, merchants, professional men, legislators, and private individuals in town and country, many impelled purely by patriotic and disinterested motives, have combined their efforts to better the situation before it pass to the acute and critical stage.

The only instrument by which land-mortgage banks can finance themselves, draw money from the public for investment in loans, are the debenture bonds, but these bonds will not circulate freely nor far from the place of issue unless they are known to have the same underlying values and give the same rights to the holder, regardless of whether they be secured by mortgages in Texas, Massachusetts, or in any other State. But possessed of these characteristics as guaranties of law, there is no reason why debentures of large mortgage banks should not be listed in stock markets and sold, negotiated, and exchanged as readily as railway and municipal securities, and thus equalize and reduce interest rates for farmers throughout the country.

For our guidance that we may escape all cost of experience that has been paid for by others, I am going to give you the benefit of my study of the Government report upon this important subject and quote it extensively as the best authority we have.

You must all realize that this almost complete organization of land and rural credit in advanced European nations was not a haphazard and spontaneous growth. It was brought about by the insistence of public and private individuals, philanthropists, scholars, bankers, legislators, agricultural societies, government commissions, and national assemblies, all studying and working in a common cause. The history of their efforts in the middle of the past century reads much like an account of the agitation which has been started in the United States by the American Bankers' Association, the Southern Commercial Congress, the Federal authorities at Washington, and other bodies and individuals, for financing the farmer, improving agricultural conditions, and encouraging the movement back to the soil. In Europe the agricultural banks and credit facilities were created before agricultural or even general education was attempted. The United States began at the opposite end. The American colleges and systems for teaching agriculture are among the oldest and best in the world, and millions of dollars have been appropriated by the Federal and State Legislatures since the passage of the Morrill Act in Lincoln's administration to aid this science in one way or another. Incalculable good has come therefrom, but the results would have been far greater if financial education had gone hand in hand with this work. It would have led to the study and introduction of the rural banking methods of Europe generations ago, and so familiarized the American farmers with the uses of credit that the lack of capital and excessive interest rates would not now be interfering with the agricultural development of the country.

The development and history of Land Credit banks in Germany is most interesting and is as follows:

The land-mortgage banks are either joint-stock corporations or societies of borrowers. These latter are typified by the well-known German Landschaften, and are the originals of all land banks. Before them the private money lender reigned supreme. The organization of land credit, in fact, began with them. They undoubtedly also suggested the coöperative idea to Herr Schulze, because five, with nearly $60,000,000 of mortgage loans, were in existence in 1848, when he was trying to start his personal-credit society at Delitzsche. These peculiar institutions are associations of landowners, and have no shares and pay no dividends, the profits, if any, going to reduce the loans; and since they and their borrowers are identical, and managerial services gratuitous, they have been able to lend money at lower rates than any other kind of companies.

The establishment of the old Landschaften was the outcome of the indebtedness and distress of the nobility, and their membership in Germany is still composed mainly of that class and large landed proprietors. After the Seven Years' War the nobles, who owned nearly all the land, lacked the working capital necessary to repair and cultivate their damaged estates, and so were unable to pay their creditors. Frederick the Great ordered the suspension of interest on all estate debts for three years. The period was subsequently extended. The result was the withdrawal of the money lenders from agriculture, the rise of interest to ruinous rates, and a financial stringency that involved the public welfare. In order to relieve the situation this autocratic King decided to adopt plans that had been submitted by Herr Bühring, a Berlin business man. Accordingly, in 1769, by a royal fiat, he forced the nobles of Silesia to join an association whether they wished to borrow or not, and their lands were made jointly liable without limit for all loans granted by the association. Loans were granted only upon the consent of the directorate elected by the members themselves. Great care was naturally exercised, so no losses occurred, while immense credit came to the association.

This was the first Landschaft. Others were formed in the same fashion. Nine more were formed by the Provinces and one voluntarily. Then two companies were organized on the coöperative principle, so that there are now twenty-five Landschaften. The mortgages held by them, all on farm lands, exceed $500,000,000, and the interest rate runs as low as 4 per cent and 3.5 per cent per annum. The bonds by which the money for these loans were obtained are secured by the mass of underlying mortgages and general assets of the issuing association, and ultimately by the unlimited liability of all its members. The collective guaranty and the fact that loans are made only to members constitute the characterizing features of a true Landschaft; but there is a growing tendency to limit this liability and substitute reserves in place of it.

Originally a Landschaft did not give cash to a member in exchange for his mortgage. It gave him a bond which simply contained a promise to pay in the event the interest and principal could not be collected from the debtor. The bond was of the exact size of the mortgage, primarily secured by it, and made payable to bearer on a few months' notice. In case of default the holder had to resort to foreclosure proceedings, so the bonds had only a limited circulation, and were often sold below par. This was but a slight advance on private money lending. Later the associations undertook to collect the interest and principal. Finally they assumed direct responsibility, and began to give cash to members for their mortgages, raising funds for this purpose by issuing and selling bonds of even denominations for large and small amounts. The practice of requiring mortgages to be paid in lump was abolished, and in place thereof the loans were made repayable by annual installments running through a long period of years, and the installments were set aside for redeeming the bonds. These steps brought about a complete revolution in land credit and marked the beginning of the land-mortgage business as it is known today. The whole theory of the organization of land credit is based upon this debenture bond and system of amortization and sinking funds devised and introduced by the Landschaften. One without the other two is useless. The three must be combined, and also coupled with strong management under wise laws in order to attract a steady flow of cheap money to agriculture. It is remarkable that this truth has never been realized nor applied in the United States to farm-mortgage loans. In spite of the example of practically every nation in Europe for generations, the lending of money on mortgage in America still remains largely a mere brokerage business unrestricted by proper governing laws, either by individuals or corporations, while mortgages continue to be drawn up for three or five years, when experience shows that the average life of a loan is far in excess of that period and needs to be renewed time and again, with added expense to the debtor and trouble for the creditor. Had the European amortization system been employed the companies dealing in western farm mortgages between 1890 and 1894 probably would have escaped the misfortunes that brought them down to ruin.

Amortization is simply a method of paying off a loan by returning a little of the capital each year. These payments are called annuities and are composed of the interest and contributions to the sinking fund and the cost of conducting business. They are calculated for periods of ten to seventy-five years, and at the end of the period the mortgaged debt becomes extinguished and the property returns to the owner free and clear of all encumbrances. The prevailing interest rate on amortizable mortgages in France at present is 4.3 per cent. But by adding a little over 3.2 per cent to this, and paying 7.5 per cent a year, a French farmer can extinguish his debt within twenty years and obtain a satisfaction piece in full from his creditor. Thus, suppose he borrowed $10,000. He pays $750 annually twenty times for the interest, sinking fund and expenses. This makes a total of $15,000, interest included, and his debt is paid off. A farmer in the Southwestern States would pay this much for interest alone, and his debt would still be unsatisfied. Amortization has a two-fold value. It lessens the debtor's burden year by year and increases in an equal ratio the security of the lender, provided, of course, the sinking fund created by the accumulated annuities be properly and honestly kept for the redemption of the debentures. The Landschaften were very particular in this respect. Hence, their debentures obtained the confidence of the public, and through their means they were able to draw capital from all parts of the country for distribution among their members at the lowest rates on record. If a holder of a bond wished his money back he had merely to sell his bond in the open market. In this way fluidity was given to real estate securities for the first time in history and the dream of "mobilizing the soil" accomplished at last. For these reasons the Landschaften hold the most prominent place in the literature on land credit, and everybody who studies that subject must begin with them.

The old Landschaften, however, have many characteristics peculiar to their own localities and dates of their foundation. They are in fact governmental institutions, and their head officers are public functionaries clothed with summary executive and judiciary powers over the property, and, to some extent, over the actions of their associate members. These powers were simply an enlargement of the feudal and manorial rights possessed by princes in early times, and so, in many respects, are contrary to modern ideas. But the new Landschaften, which have adopted the best principles, present points worthy of careful study. A description of these latter institutions is taken from the excellent report of Sir F.A. Nicholson to the Madras Presidency in India.

These new institutions are of different patterns. Several are annexes to the older societies, but most are independent and resemble ordinary mortgage banks, except in the essential point that they have no share capital, earning dividends. They are, as the old societies, simply syndicates of borrowers formed to supply proprietors with capital on the lowest possible terms and repayable in the easiest manner. They are gratuitous intermediaries between the outside capitalists and the borrowers, and while performing services of the highest importance in testing the security offered by the borrowers and in guaranteeing to the public the safety of the capital lent by them, they charge absolutely nothing for their services beyond a small commission, perhaps one-fourth of 1 per cent, or even one-tenth of 1 per cent, to cover actual expenses. It is usual for each association to be restricted to a particular area of operations within which every proprietor, whether noble or peasant, may obtain a loan if he can offer sufficient security. There is always a minimum limit either to loans or to the value of property on which loans will be given. This is usually low. In the new Brandenburg Landschaft, affiliated to the old Kur-und-Neumark Landschaft, loans may be granted on property having a net income of only $25. The minimum limit is seldom even approached.

Members are those who borrow from the bank. They are generally responsible in all their property, not merely for their own borrowings, but for the debts of the society to the outside public. But in some cases only the property pledged to the society is responsible; in others they are bound, in case of need, to pay a sum proportionate to the amount of their own borrowing. There are no shares to be paid up except in two societies. These two resemble coöperative societies, for the shares are personal and nontransferable, are of unlimited number, varying with the number of members, and their value is claimable by a withdrawing member. The share seems to be demanded simply to provide a first working capital and the nucleus of a reserve. The amount of the share is frequently a certain percentage of the amount of the loan required. Some societies demand an entrance fee of a few cents, which goes to the reserve. This reserve will be dealt with below.

The societies in general, having no share capital, do not lend their own funds. The candidate for a loan asks that debentures may be issued against a mortgage of his property. This is then examined. If the security is approved the candidate executes a mortgage deed to the society, which thereupon issues debentures which are placed on the market and, being sold, provide the funds for the loan. In the old banks the debentures are simply handed to the borrower, who sells them for himself. In the new land banks either this is done or the bank sells them and pays the borrower the value if below par, or if they sell above par then the face value, the surplus going to the reserve; or they simply issue debentures on the market and pay the borrower the amount of the loan as settled. It will be seen, then, that the banks have no capital and no need for it.

The debentures are for the usual class, secured not by the particular mortgage on which they are issued, but by the whole mass of mortgages held by the bank and by all its proper forms of security, viz., the property of the members, the reserve or guaranty fund, and even the sinking funds. In some banks a debenture holder has the right (never needed, however) of requiring a court to assign a particular mortgage against his debenture as a specific security in case the bank should fail to pay him his interest or capital due. A debenture holder cannot demand payment of his debenture, except when it is drawn for payment. But the bank can call in any at six months' notice, besides withdrawing them by lot in the usual way. These debentures enjoy an excellent position, the 4 per cents selling usually at or above par. Since cheapness of loans is the sole object of the bank, it is customary to call in debentures selling at a premium and issue a fresh series at a lower rate.

Loans are usually applied for to the district committee which each bank has, with a statement of the property, the amount required, and all documents necessary to prove title and freedom from encumbrance. Properties may be valued by a special valuation, or a multiple of the net income as assessed to the land tax may be taken. In both cases, however, an inspection of the property is necessary unless under a special rule. Half to two-thirds of the estimated value is allowable as a loan. The interest paid by the borrower on the loans is that paid by the bank on the debentures, the bank being merely an intermediary between the borrower and the actual lending public. But where the bank pays the loan in cash it charges such interest as it thinks proper, in order to make up any loss should the debentures sell below par. Loans are repayable almost entirely by amortization, usually in about fifty-three years. Some short-term loans are granted, with corresponding debentures. The bank cannot demand repayment of a loan except in case of waste, deterioration, or the like. On the other hand, the borrower is at liberty to repay in whole or in part whenever he pleases, but must pay the entire interest for the half year in which he repays. The loan is repaid by an annuity consisting of the interest, sinking fund (usually beginning at one-half of 1 per cent), with a contribution to the reserve or guaranty fund, and another for the expenses of administration. The annuities have totaled 6 per cent, but they now average around 4 per cent or lower; e.g., interest being 3 per cent, sinking fund one-half of 1 per cent, guaranty fund one-fourth of 1 per cent, and expenses one-fourth of 1 per cent. Some of the banks also require a lump payment on the grant of the loan of 1 or 2 per cent, to be credited either to the working or to the guaranty fund. The working fund is formed by the contribution made for the expenses of management and any special sources.

Hungary is the only nation outside of Germany that has a true Landschaft of the original type. But modified forms exist in Russia, Austria, Switzerland, Denmark and Roumania, where they have been useful in supplying agriculture with cheap capital. There is no older principle in land credit than the Landschaften idea. It has been tested and proved by over one hundred and thirty years of success, and could undoubtedly be employed to advantage by water users' associations in the irrigated regions of the West and in other parts of the United States where landowners might unite to raise funds for drainage or other improvements for their common good. Some of the banks of Switzerland and the credit associations of Denmark, with the laws governing them, perhaps furnish the best models, as appears from the reports of the American ministers to those countries that have been forwarded to the Secretary of State.

The most noticeable fact revealed by the investigation of the European land-credit institution is the all-pervading presence of the state in every nation. Most of the older joint-stock corporations have a public character equal to that of the German Landschaften. Every one that dates back to 1850 or 1860 was directly organized by the state or brought into existence by a Government fiat or favoring legislation, subsidized in some way or other and granted special privileges. The supervision now exercised over them all is most stringent, going into the minutest details and varying from direct control to surveillance by state officials, usually by special laws that impose heavy penalties for malfeasance or even neglect of regulations. Continental Europe is accustomed to state intervention. Commercial credit was organized by means of central banks connected with the Government, and so this régime was naturally followed in organizing the land credit. For this reason the results obtained, at least in some instances, cannot be used by way of comparison to illustrate the possibilities of organization along the lines of private and independent endeavor.

But whatever may be the opinion entertained for the State intervention in the land-credit system of the Continent, there can be no doubt that the working principles and business methods of the European land-mortgage banks are the best ever devised, and that they will have to be introduced into the United States if it be hoped to make the farm mortgage a fluid and popular form of investment and direct a flow of capital in sufficient volume to agriculture to enable it to keep pace with the progress of the Nation. The main features of this system are the limitation of the interest rate that can be charged, the amortization of the debt, and wise and equitable regulations and restrictions relative to loans and the issuance of debentures which protect the farmer from extortion and thriftless borrowing, and at the same time bring safety and a feeling of confidence to the investing public. These features, with modifications and additions, appear in all European land banks, whether they be semipublic, as they are in France, Spain and Russia, or of a private character, as with some cases in Germany, or of the mixed type of Switzerland and Italy, but are best exemplified in the great Crédit Foncier of France--the largest and most successful land bank in the world.

But Germany has progressed very decidedly beyond the so-called Landschaften as exemplified by her great mortgage banks which, though of comparatively recent operation, largely exceed in business that of the Landschaften type, and it is here that we find many vital suggestions for our guidance. Germany has general laws under which these mortgage banks operate, but the rules of operation and supervision are of the strictest kind. The mortgage banks of Europe may be classified generally as public or semipublic, and as strictly private institutions. The first have just been described. The latter are all those which, whether they consist of lenders or only of borrowers, operate under general laws and have absolutely no privileges. The State, however, does not leave these companies entirely to their own devices. They are limited in the conduct of their business by strict rules and regulations, and are subject to the most scrutinous supervision. The best law of this kind is that enacted in Germany in 1899. It is the last word in legislation for private joint-stock mortgage banks, and with slight modifications could be easily adapted to the United States, as it was framed to overcome the troubles occasioned by the conflict of authority between the sovereign Provinces of which the Empire is composed. Remarkable as it may seem, these companies in Germany have outstripped the old established and specially privileged public banks. They now have $2,618,000,000 loaned out on mortgage, or over five times more than the Landschaften. The capital is $170,563,000, the smallest being $238,000 and the largest $14,000,000. The bonds in circulation amount to $2,548,009,000, with interest at 3-1/2 or 4 per cent per annum, while the average returns on mortgage loans are 4.22 to 4.33 per cent per annum. As 6 per cent and even 14 per cent dividends are yearly declared, the figures again furnish a favorable comparison with the Landschaften and Crédit Foncier. The provincial head, however, selects the president of one of these newer German banks, while the Imperial Government watches over them all. The supervision is carried out by royal commissioners and extends to the minutest detail. These inspecting officials have the right to verify the securities and cash on hand, and demand information regarding every separate transaction. They may also send a representative to general meetings of stockholders and to sittings of boards of directors and take all measures that may seem fit to enforce the proper conduct of business. They also approve the appointment of the auditor and assistant auditor, who are charged in each bank with the duty of seeing that debentures are issued only upon the conditions and within the limits legally prescribed.

It will be observed that the mortgage business in Germany, as carried on today, is an evolution. The same fact is evident in the changes that have taken place in the Crédit Foncier, the greatest mortgage bank in the world. The history of this great institution is as follows:

It was formed in 1852 under the law enacted that year for organizing land credit and improving agricultural credit facilities. It was immediately placed under Government control, given a subsidy, and granted a monopoly for twenty-five years. The monopoly was not renewed, but all its original special privileges remain, which perhaps accounts for its being the only land bank in France. Its relation with the State is very close, and many of its most important features were taken bodily from the Landschaften. Inasmuch as the institution has been the model for all Europe and is now being widely discussed in the American press, I will describe it at length.

The governor and two subgovernors of the Crédit Foncier are appointed for life by the President of the Republic. It is subject to the surveillance of the Treasury Department of the Government, and three of its directors must be high officers of the department. It may use the Government treasuries for the receipt of its dues and the deposit of its surplus funds and enjoys a reduction in stamp and registration duties.

Its debentures are registered or payable to bearer, and the claim of a third party to them cannot be made in court except in case of theft or loss. Trust and public funds may be invested in them. Its mortgages are exempt from the decennial registration and consequent charges required of other mortgages. It has a cheap and speedy method of "purging" the title of real estate in case of disputes. In the event of default the courts cannot grant the debtor any delay and payments due it upon loans cannot be garnished or attached. It is allowed summary proceedings for attaching mortgage property in case of violation of contracts. If dues are not paid or if the property deteriorates it may attach and sell the property simply upon notice and publication. During attachment proceedings it has a right to all returns from the estate. The sale may be by auction in a civil court or at a notary public's office, if the court permits, and no adverse claim to the proceeds of the sale can be allowed until its claims are fully satisfied.

The regulations under which the Crédit Foncier transacts its business are very strict. The mortgage loans must be first liens. The property must have a clear and unencumbered title and yield a certain and durable income. Loans and theaters, mines, and quarries are not accepted. The amount loaned on any property must not exceed half its value, or one-third the value for vine-yards, woods, orchards, and plantations. Factory buildings are estimated without regard to their value for particular purposes. A borrower cannot bind himself to pay a greater annuity than the total annual income of the property mortgaged, while on the other hand the society is not allowed to charge borrowers 0.6 per cent over the rate at which it obtains money on its debentures issued at the time of the loans. An excess of only 0.45 per cent is allowed on loans to municipalities. The outstanding loans and debentures issued must exactly correspond in amounts.

After paying a 5 per cent dividend the Crédit Foncier must set aside between 5 and 20 per cent of the balance of the profits each year for the obligatory reserve, and continue to do so as long as the same does not equal one-half of the capital stock. The investment of this reserve is left to the board of directors. The capital stock of the society must be always maintained at the ratio of one-twentieth or more of the debentures in circulation and is the primary guaranty of its obligations, especially the debentures. The capital at present is $40,000,000, divided into 400,000 shares of $100 each; but authority has been obtained to increase the same to $50,000,000, represented by 500,000 shares, which will be done before the debentures in circulation pass the legal limit. One-fourth of the capital must be invested in French rentes or other treasury bonds; one-fourth in office buildings of the society, or by loans to French colonies, or in securities deposited with the Bank of France as a guaranty for advances. Shares cannot be issued at a price below par. They are nonassessable. The surplus may be loaned on mortgages or to municipalities or may be used in other mortgage business allowed by the statutes; and for buying its own debentures, making advances to borrowers in arrears, or purchasing mortgaged property in foreclosure; and for acquiring commercial paper acceptable by the Bank of France or securities to be deposited with that bank.

The governor of the Crédit Foncier most be the owner of at least two hundred shares of stock of the society. He receives a salary of $8,000. The subgovernors must hold one hundred shares each. Their salaries are $4,000. They perform such functions as are delegated to them by the governor, and in order of their nomination fulfill his duties during his absence on account of illness or other causes. The governor appoints and dismisses all agents of the society and superintends the organization of the service in Paris and elsewhere. He countersigns the debentures and signs the share certificates and all other papers and documents and must strive to promote the interests of the society in every way. The governor is the head of the board of directors, which is composed of himself, the two subgovernors, the auditors, and twenty to twenty-three directors. This body possesses the administrative powers of the society and is beholden only to the laws and the general assembly of the stockholders for the proper exercise of the same. The three auditors are the guardians of the society. Their duties are to watch, investigate, and make reports. The only power they have is to call extraordinary general meetings of the shareholders.

The general assembly of the stockholders meets regularly once a year. It consists only of the two hundred largest stockholders, of whom forty make a quorum if they hold one-tenth of the stock of the society. Each member has one vote for every forty shares of stock held, but cannot cast more than five votes in his own name, nor more than ten in his own name or by proxy. He has, however, a right to one vote even though his shares be less than forty in number. The general assembly receives the report of the governor, and also of the auditors, if any. It elects the directors and auditors and decides on all resolutions or proposals for the increase of capital, the amendment of the by-laws and constitution, and generally on all matters not otherwise specifically provided for.

The only places outside of France where the Crédit Foncier can do business are Algiers and Tunis. Under a clause in its charter which allows it, with the sanction of the Government, to enter into projects for improving the soil, developing agriculture, and to extinguish existing debts on real estate, etc., the society has been authorized to finance drainage projects and to advance money on the paper of the Sous-Comptoir des Entrepreneurs, an incorporated association of builders. It may also receive deposits up to $20,000,000, one-fourth of which must be kept in the Government treasury and the balance invested in Government paper, treasury bonds, or high-class bankable commercial notes and securities. In connection with its banking house it has large deposit vaults.

The Crédit Foncier is permitted to take short-term mortgages and does a big business in that line. But the true purpose of its existence and the greatest part of its operations are the granting of long time loans. These are made on mortgages to individuals and without mortgage to municipalities and public establishments. The periods run from ten to seventy-five years. The annuities required to be paid for amortizing the loan for the average period used are so small as to appear insignificant. The success achieved by the Crédit Foncier in popularizing the amortization principle for real estate loans is the chief cause of its great renown. At present its interest rate for mortgage loans is 4.3 per cent per annum, for public establishments 4.1 per cent, and 3.85 per cent for municipalities. The total annuity, including both interest and amortization sum, for a twenty-five year mortgage loan is a little over 6.5 per cent. With this small annual payment the debt is gradually wiped out, and nothing is left to be paid at the end of the term. The longer the term the smaller the annuity, and vice versa. The loans now exceed $870,000,000. Here is an amortization table of the Crédit Foncier:

_Annuity of a capital of $100, interest at 4.3 per cent, payable semiannually._

Duration. Annuities. 5 years $22.440405 10 years 12.409111 15 years 9.115217 20 years 7.504843 25 years 6.566976 30 years 5.964436 35 years 5.552593 40 years 5.259040 45 years 5.043495 50 years 4.881753 55 years 4.758395 60 years 4.663140 65 years 4.588881 70 years 4.530558 75 years 4.484483

The Crédit Foncier is obliged to keep the interest and amortization payments in separate accounts, the latter going to create a sinking fund for the retirement of outstanding debentures. As stated above, the amounts of the loans and debentures must balance each other; consequently, as loans are paid up debentures must be paid off. Borrowers have the right to pay in advance, which they frequently exercise, so the proper adjustment of the balance is beyond the control of the society. It is for this reason that the debentures, although calculated to be redeemed synchronously with the loans they represent, have no fixed time for maturity and are recallable at option. In each issue a certain number are repayable by lots, with prizes for the lucky holders. A bond last year drew a prize of $40,000. The right to give prizes at the lottery drawings is one of the special privileges of the society. The debentures are of two kinds--those representing the mortgages are called "foncières" and those representing the loans to municipalities and public establishments are called "communales." They are issued in series. The smallest denomination is $20. They may be bought by installments and are the most popular form of investment in France, being held largely by farmers and poor people in the cities. The issue of 1912 for $100,000,000 at 3 per cent, payable within seventy years, was oversubscribed eighteen times. The total land mortgages and municipal indebtedness in France is figured at $2,800,000,000. Nearly one-third of this is represented by the loans of the society.

Such is the Crédit Foncier of France. The control exercised over it by the State through the appointment of its head officers, the simplified foreclosure proceedings, and the other judicial, administrative, and fiscal privileges accorded to it are common practices in continental Europe. As mentioned above, all the older banks are specially privileged, and consequently have a practical monopoly of the mortgage-bond business in some of the nations.

Now, gentlemen, I have gone into these details not to be slavishly copied, because I think we would make a very great mistake to load down our legislation with so much detail. It will be far better to allow the managers to work out a system of operation that will he suited to our conditions. In this way we will not be handicapped by red tape that is ill adapted to our situation. The same penal laws that are in force with respect to our national banks with any additions that the peculiarities of this business call for ought, it seems to me, to suffice.

My suggestion would be a comparatively simple organization with broad powers to the board of directors. In this way we will soon have an American system of Land Credit Banks superior to any in the world, even though we do start after all others have begun. Indeed, if we are wise, this is the very reason why we should surpass all others.

Now, if you will recall with me the points of change and progress made, you will find that the tendency is away from unlimited liability, as originally provided, and now toward a dependence upon capital and reserves solely for protection to the debenture holders.

In my judgment we should adopt the following as the basis of our Land Credit Bank:

_First_: We should confine the business to loans upon improved agricultural lands.

_Second_: We should make the institution strictly coöperative, but with a limited liability to the amount of the paid-up capital.

_Third_: Every local association, or primary unit, should be an association of men within a restricted locality and the business should also be confined to the immediate vicinity of the association.

_Fourth_: I do not believe that the membership of a primary unit should be less than twenty-five, nor more than fifty.

_Fifth_: I think that the capital of a primary unit should not exceed $25,000, and that the shares should be $100 each. No person should own more than two hundred and fifty shares, or 10 per cent of the capital.

_Sixth_: All loans made should be recommended by the local association. In case of a loss by the sale of property taken over, one-quarter of such loss should be borne by the primary unit, of local association, making or recommending the loan upon which the loss was made.

_Seventh_: All expenses connected with the examination and recommendation of a loan shall be paid by the primary unit, or local association.

_Eighth_: The application for a loan should then go to a state organization, which should be created by a union of all the local associations. I suggest a central organization in each state for the purpose of lessening the expenses over the entire state, as the laws affecting real estate in the several states have some peculiarities to those states.

_Ninth_: Each state organization should have charge of all the business done in that particular state; the examination and final approval of the security; the examination and approval of the title; the collection of all interest; the payment of all taxes and insurance, and the final repayment of the loan.

_Tenth_: The state organization should be a union of all the local associations in any particular state, and should hold one-quarter of the capital of all the local associations as its own for the purpose of carrying on the business of that state.

_Eleventh_: All property upon which loans are made should be conveyed absolutely to the state institution where located with a waiver of all rights of foreclosure; but, providing for the advertisement and sale of the property, as if a judgment had been rendered. This is essential to save the cost of foreclosure.

_Twelfth_: In case of a loss, as the result of the sale of any real estate taken over, one-quarter of it shall be borne by the state organization.

I make this provision because no local association could carry all its losses, and yet it should be responsible for a sufficient amount of loss to impose a serious obligation upon the local association recommending the loan, and also a serious obligation upon the state institution for having finally approved and completed the loan.

_Thirteenth_: All the expenses of the state institution incurred by way of caring for the business of all the local associations should be paid by a percentage charge on all the business done in the state. This is desirable so that the mortgages shall go to the national organization, free and clear from any charges and obligations whatever.

_Fourteenth_: I would have a national organization which should fix the rate of interest to be paid by the borrowers, and the rate of interest of all the bonds and debentures sold. All bonds and debentures should be sold by the national organization, which should be under national supervision for the purpose of giving to the debentures the highest possible credit wherever they may be offered for sale.

_Fifteenth_: I think that one-half of all the capital of all the local associations in the United States should be transferred to the national organization, and be held and treated by it as if it were its own capital. And such capital shall be holden to the debenture holders as a guarantee, and for the purpose of securing the best possible credit for the national organization.

_Sixteenth_: The national organization, and all state associations, and all local associations, shall be under the supervision, and be examined by an auditor appointed by the President of the United States.

_Seventeenth_: To secure unqualified success for a Land Credit Bank in the United States, no business should be attempted until the capital paid in shall amount to at least $25,000,000; that is, until the national organization shall have a cash capital of its own of $12,500,000 in order that its debentures may bear the lowest possible rate of interest that a large capital with a national organization under national supervision will insure.

_Eighteenth_: The debentures of a national organization should be free of all taxes, local or national.

In general these are my recommendations, which I hope will be incorporated in the measure we are to prepare.

MR. MERCHANT: Mr. Farmer, I notice that you propose to confine the loans to agricultural land. Don't you think that a good and equally helpful business could be carried on by loaning money on city and urban property?

MR. FARMER: Possibly that is so, but I do not think so, and in any event, I never would combine these two classes of loans. If we are to have national Land Credit Banks doing a country and city or urban business, let them be kept entirely separate. The general business permitted and carried on by the Crédit Foncier is a just ground for severe criticism. It is permitted to take deposits. An American Land Credit Bank should have no such power. It should be confined, in my judgment, with extreme strictness to loaning money upon improved agricultural land. Mind you, I do not say that there should be no other Land Credit Bank to do some other kind of business. That is a matter for future and separate consideration.

MR. LABORINGMAN: Mr. Farmer, in all that you have said you have not once even mentioned Credit Unions or Mutual Credit societies. I had been betting on you to help me out in my fight for a recognition of the principle of coöperation, but it looks as if you had deserted me.

MR. FARMER: No, Mr. Laboringman, on the contrary, I will do anything in my power to help you or anyone work out the great saving principle of coöperation; but since I have been attending these talks two or three things have stuck in my crop and I could not get them out even if I tried, and one thing in particular applies especially to the agricultural societies, called credit unions.

_Mutual credit societies or credit unions are organized to furnish capital for production; that is, it is commercial capital, or credit for commercial purposes, not for investment purposes at all. Not a single dollar of a credit union should ever be loaned upon real estate. Not a single dollar! Not a single cent!!_ Such a practice would literally destroy the principle upon which they are founded; mutual aid to assist in production, not investment. Don't you remember how Mr. Banker pounded that into us; and convinced us all, too? But more convincing than anything else as to this great economic truth, that not one single dollar of credit union money should ever be loaned upon land, is the history of them. We must not forget that they were organized to secure personal credit and to depart from that practice is a perversion of their purpose and just to that extent must result in failure.

The coöperative idea for personal credit was originated in Germany by Francis Frederick Schulze, a little before the middle of the nineteenth century. It passed over into Austria and Hungary in 1851, into Italy in 1860, into Belgium in 1864, into France in 1883, into Scotland in 1889, and into Ireland in 1894. These dates are given to show the order of advance and the recentness of the movement in some parts of Europe. The first German association was formed in 1849 by Frederick William Raiffeisen. Herr Schulze did not get his started until the following year.

Herr Raiffeisen was poorly educated but deeply imbued with religious feelings. He lived among peasants in a sparsely settled and impoverished locality, and his object was to help the lowest classes. The associations which grew up under his guiding hand were mutual societies confined to small farming districts. The thought of profit was discarded and they were managed by the gratuitous services of their members. Herr Schulze was a talented writer and speaker, and when he took up his life work was holding a judicial post in his native town of Delitzsche. His philanthropy, although intense, leaned to the practical side. He believed in paid services and fair returns for money. The associations formed under his leadership were located mainly in towns. They were managed by salaried officers, and membership was dependent upon the purchase of shares on which dividends were allowed. But both kinds were founded upon the fundamental principle of combining persons together and using the credit created by their united guaranty for providing funds for members who might wish to borrow.

In the early days the mutual credit associations were formed simply by articles of agreement in the nature of a partnership contract, and members were jointly and severally liable without limit for all the loans that were made. In course of time, when the Government began to take official recognition of the associations, some of the followers of Schulze favored a limit to this liability. Hence the mark of distinction became clearly defined between "Raiffeisenism" and the "Schulze-Delitzsche" propaganda. The German law, as it now stands, requires mutual banks to have share capital, but allows them to be organized upon the limited or unlimited liability plan. All true Raiffeisen banks, in order to preserve their character, have shares of only a nominal value and devote dividends to educational or charitable purposes. In Germany these local banks are grouped under central banks, which in turn are linked together by two general central banks, and their funds are made to move freely for agriculture throughout the Empire. The centralization of the system has also been inaugurated in France.

Personal credit in agricultural Europe is obtained usually by means of the coöperative credit associations. They are also used by artisans and small tradespeople in the towns and cities. These associations are in fact the only banks which the farmers will patronize for short-time loans in the nations where they abound in the greatest numbers. With their aid poverty and usury have been banished, sterile fields have been made fertile, production has been increased, and agriculture and agricultural science raised to the highest point. Their educational influence is no less marked. They have taught the farmers the uses of credit as well as of cash, given them a commercial instinct and business knowledge, and stimulated them to associated action. They have encouraged thrift and saving, created a feeling of independence and self-reliance, and even elevated their moral tone.

The picture can hardly be overdrawn. Every traveler who visits the places where these little associations exist speaks in glowing phrases of the prosperity and contentment that prevail. They are organized on such simple lines that their management requires only ordinary intelligence. Failures have rarely occurred. In France and other countries they hold a record of having never lost a cent. The working capital and number of members of individual associations are so small as to be insignificant, yet they do one-third of the banking business of Italy; while the combined amount of their operations in Germany equal that of the commercial banks. But the mutual banks, both in town and country, are looked upon with favor in the financial world because they keep millions of dollars of petty sums in circulation which, except for them, would be idle and hoarded. They are, in fact, feeders for the commercial banking system.