Federal Farm Loan Act
Encyclopedia
The Federal Farm Loan Act of 1916 was a United States federal law aimed at increasing credit to rural, family farmers. It did so by creating a federal farm loan board, twelve regional farm loan banks and tens of farm loan associations. The act was signed into law by President of the United States
Woodrow Wilson
.
commissioned a study on the problems facing rural families. At this point in U.S. history, these families made up the largest demographic. The commission concluded that access to credit was one of the most serious problems facing rural farmers and recommended the introduction of a cooperative credit system.
Four years later, Presidents William Howard Taft
and Woodrow Wilson
sent a commission of Americans to study cooperative credit systems for farmers in Europe. Components of such European programs at the time included cooperative land-mortgage banks and rural credit unions. This commission concluded that the best form of cooperative credit system would include both long-term credit to cover land mortgages and short-term credit to cover regular business needs.
Borrowers also purchased shares of the National Farm Loan Association. This meant that it served as a cooperative agency that lent money from farmer to farmer. This was heavily influenced by a successful cooperative credit system in Germany called Landschaft.
The next most visible component of the Act were the mortgage-backed bonds that were issued. The rate of interest on the mortgages could be no more than 1 percent higher than the rate of interest on the bonds. This spread covered the issuers' administrative costs, but did not lead to a significant profit. In addition, the maximum rate of interest on the bonds was 6 percent, ensuring that borrowing costs for farmers was often much lower than before the Act was passed.
The act furthered Wilson's reputation against trusts and big business. By providing small farmers with competitive loans, they were now more able to compete with big business. As a result, the likelihood of agricultural monopolies decreased.
While Wilson's commission suggested that short-term credit also be incorporated in any nationalized credit system, the Act lacked this crucial component. Due to increased competition and the need for agriculture machinery, a system for short-term credit was incorporated into the current system in Agricultural Credits Act of 1923.
Sponsored by Senator Henry F. Hollis
(D) of New Hampshire and Representative Asbury F. Lever
(D) of South Carolina, it was a reintroduced version of the Hollis-Bulkley Act of 1914 that had not passed Congress due to Wilson's opposition.
The twelve Federal Land Banks were required to hold at least $750,000 in capital. Stock ownership of the banks were held by national farm loan associations and other interested investors, including any individual, corporation or fund. In the case of insufficient capital, the U.S. Treasury (through the Federal Farm Loan Board) made up the difference. When additional subscriptions were made from other sources, federal ownership in the banks was retired.
National Farm Loan Associations were established groups of 10 or more mortgage-holding farmers who together owned 5% or more of a federal land bank. Once formed, they were subject to a charter review process by the Federal Farm Loan Board. This structure aimed to align the incentives of individual farmers with the banks, as farmers held two rules: borrowers and lenders.
Farm finance and Rural Credit
President of the United States
The President of the United States of America is the head of state and head of government of the United States. The president leads the executive branch of the federal government and is the commander-in-chief of the United States Armed Forces....
Woodrow Wilson
Woodrow Wilson
Thomas Woodrow Wilson was the 28th President of the United States, from 1913 to 1921. A leader of the Progressive Movement, he served as President of Princeton University from 1902 to 1910, and then as the Governor of New Jersey from 1911 to 1913...
.
Background
In 1908, the Administration of Theodore RooseveltTheodore Roosevelt
Theodore "Teddy" Roosevelt was the 26th President of the United States . He is noted for his exuberant personality, range of interests and achievements, and his leadership of the Progressive Movement, as well as his "cowboy" persona and robust masculinity...
commissioned a study on the problems facing rural families. At this point in U.S. history, these families made up the largest demographic. The commission concluded that access to credit was one of the most serious problems facing rural farmers and recommended the introduction of a cooperative credit system.
Four years later, Presidents William Howard Taft
William Howard Taft
William Howard Taft was the 27th President of the United States and later the tenth Chief Justice of the United States...
and Woodrow Wilson
Woodrow Wilson
Thomas Woodrow Wilson was the 28th President of the United States, from 1913 to 1921. A leader of the Progressive Movement, he served as President of Princeton University from 1902 to 1910, and then as the Governor of New Jersey from 1911 to 1913...
sent a commission of Americans to study cooperative credit systems for farmers in Europe. Components of such European programs at the time included cooperative land-mortgage banks and rural credit unions. This commission concluded that the best form of cooperative credit system would include both long-term credit to cover land mortgages and short-term credit to cover regular business needs.
Effect on the rural farmer
The most visible component of the Act were the loans to individual farmers and their families. Under the act, farmers could borrow up to 50% of the value of their land and 20% of the value of their improvements. The minimum loan was $100 and the maximum was $10,000. Loans made though the Act were paid off through amortization over 5 to 40 years.Borrowers also purchased shares of the National Farm Loan Association. This meant that it served as a cooperative agency that lent money from farmer to farmer. This was heavily influenced by a successful cooperative credit system in Germany called Landschaft.
The next most visible component of the Act were the mortgage-backed bonds that were issued. The rate of interest on the mortgages could be no more than 1 percent higher than the rate of interest on the bonds. This spread covered the issuers' administrative costs, but did not lead to a significant profit. In addition, the maximum rate of interest on the bonds was 6 percent, ensuring that borrowing costs for farmers was often much lower than before the Act was passed.
The act furthered Wilson's reputation against trusts and big business. By providing small farmers with competitive loans, they were now more able to compete with big business. As a result, the likelihood of agricultural monopolies decreased.
While Wilson's commission suggested that short-term credit also be incorporated in any nationalized credit system, the Act lacked this crucial component. Due to increased competition and the need for agriculture machinery, a system for short-term credit was incorporated into the current system in Agricultural Credits Act of 1923.
Sponsored by Senator Henry F. Hollis
Henry F. Hollis
Henry French Hollis was a United States Senator from New Hampshire, and regent of the Smithsonian Institution.-Life:...
(D) of New Hampshire and Representative Asbury F. Lever
Asbury Francis Lever
Asbury Francis Lever was a member of the United States House of Representatives from South Carolina.-Early life:...
(D) of South Carolina, it was a reintroduced version of the Hollis-Bulkley Act of 1914 that had not passed Congress due to Wilson's opposition.
Structure of implementation
The Act established the Federal Farm Loan Board to oversee and supervise federal land banks and national farm loan associations. It was also responsible for setting benchmark rates of interest for mortgages and bonds. Finally, it could intervene when it thought specific banks were making irresponsible loans.The twelve Federal Land Banks were required to hold at least $750,000 in capital. Stock ownership of the banks were held by national farm loan associations and other interested investors, including any individual, corporation or fund. In the case of insufficient capital, the U.S. Treasury (through the Federal Farm Loan Board) made up the difference. When additional subscriptions were made from other sources, federal ownership in the banks was retired.
National Farm Loan Associations were established groups of 10 or more mortgage-holding farmers who together owned 5% or more of a federal land bank. Once formed, they were subject to a charter review process by the Federal Farm Loan Board. This structure aimed to align the incentives of individual farmers with the banks, as farmers held two rules: borrowers and lenders.
Further reading
- Stuart W. Shulman, "The Origin of the Federal Farm Loan Act: Agenda-Setting in the Progressive Era Print Press", University of Oregon, Department of Political Science, Dissertation, 1999 online
- Stuart W. Shulman, “The Origin of the Federal Farm Loan Act: Issue Emergence and Agenda‐Setting in the Progressive Era Print Press,” in Jane Adams (Ed.). Fighting for the Farm: Rural America Transformed (U. of Pennsylvania Press, 2003), 113‐128.
Farm finance and Rural Credit