Full text of Bank Lending to Farmers in the Sixth District : Borrowing During 1950; Current Livestock Lending Policies; Community Capital Accumulation and Farm Financing

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BANK LENDING TO FARMERS

IN THE SIXTH DISTRICT

Borrowing During 1950
Current Livestock Lending Policies

Community Capital Accumulation
and Farm Financing

Reprinted from April, May, and June, 1951, issues of the

Monthly Review

FEDERAL RESERVE BANK OF ATLANTA

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Borrowing During 1950
Since the end of World War II, many farmers in the
Sixth District have changed their way of farming ra
ther rapidly. Outstanding among these changes are a
greater dependence upon livestock and feed crops and
less reliance on the traditional row crops. Some few
farmers have completely substituted one type of farm
ing for another. For example, a number of farmers
whose cash sales formerly consisted entirely of cotton
are now selling only fluid milk. Most of them, how
ever, have merely added livestock and decreased their
acreage of cash crops, but some have converted idle
land or wasteland to improved pasture and added live
stock with little or no decrease in cash crop acreages.
From a farm management standpoint, the increase in
size of business is the most common characteristic of
these changes. From a financial standpoint, the most
common features are the increases in invested capital
and in the amount needed for operating expenses.
The recent shift toward livestock has coincided with
a period of favorable farm product prices and a large
increase in farm income. Because of the marked im
provement in their financial position, a large propor
tion of farmers can now meet the requirements for
commercial credit. Country banks, therefore, have as
sumed a position of greater leadership in farm credit
at a time when farmers’ credit needs were undergoing
the most far-reaching change of recent decades.
In order to meet farmers’ credit needs more com
pletely, country bankers have revised their lending
policies and have participated in a wide variety of
farm credit conferences, clinics, and schools. Some of
them have established special farm credit departments
with a full-time credit man in charge. It is well known
that many banks have made great progress in enlarg
ing and increasing their services to farm customers
and in fostering a more efficient type of farming in
their trade territories.
The purpose here is to report some of the results of
a recent survey on bank lending to farmers. This sur
vey was designed to yield some quantitative and quali
tative information on bank lending with special em
phasis on loans made for beginning or expanding

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livestock programs or for other enterprises used to
supplement or replace part of the income received
from row crops. It is not, in any sense, a well-rounded
summary of the contribution that country banks are
making to the progress of agriculture. Although the
extension of credit is one of the more important func
tions of country banks, it is only one of the services
that banks render to farmers or to any of their other
patrons.
How the Information Was Obtained
Information was obtained from 27 banks throughout
the six farming areas shown here. Farmers in these
areas, which were chosen because row crops are the
main source of income, are now changing to systems
that place more emphasis on livestock. The banks con
tacted ranged in size from about 700 thousand dollars
to about 40 million dollars in total deposits. All the
banks had either a larger-than-average volume of
farm loans or a larger-than-average percentage of
their total loans in farm loans.
At each bank the information was obtained by a
personal interview with an officer who was thoroughly
FARMING AREAS INCLUDED IN FARM CREDIT SURVEY

[1]

3536 3

familiar with the farm loans made and who knew the
essential facts about the borrowers. Information was
obtained from bank records wherever such records
were applicable. Records on the 1950 borrowings of
about 20 or 25 farmers were obtained from each
bank. These borrowers were selected at random from
those whose income came largely from farming and
who got at least half of their income from cash crops
such as cotton and peanuts. These two restrictions
were intended to eliminate farmers whose off-farm
earnings materially affected their financial status and
those who had no particular problem in changing
from a row-crop system.
In interpreting the results, it should be recognized
that a bank’s farm borrowers are not necessarily a
typical cross-section of the farmers in the bank’s terri
tory. According to the farm census, for example, only
8 percent of the farmers in the area sampled had 100
acres of cropland or more, yet 46 percent of the bank
loans were made to farmers in this group. This does
not mean that the banks confined their lending to
large operators. Farmers who had less than 50 acres
of cropland accounted for 28 percent of the borrow
ers. These comparisons do show, however, that as the
size of farm declines there is also a decline in the pro
portion of farmers who can use credit effectively and
who can meet the requirements for commercial credit.
How the Money Was Used
Of the 621 farmers whose 1950 borrowing records
were studied, 170, or 27 percent, used part of the
money to begin or expand livestock or other enter
prises besides row crops. Money was borrowed for

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these purposes mostly by farmers with relatively large
farms. Only 11 percent of the farmers with less than
80 acres of cropland borrowed for expansion of live
stock, yet 42 percent with 80 acres or more borrowed
for this purpose.
PERCENT OF FARMERS WHO BORROWED TO BEGIN OR EXPAND LIVESTOCK

Area

Farmers With Less Than
SO Acres of Cropland

Farmers with 80 Acres
of Cropland or More

All
Farmers

...

Piedmont.....................

n.a.

Upper Coastal Plain .

Lower Coastal Plain .

n.a.

51
26

Sand Mountain .

Limestone....................

Peanut ..........................

All Areas......................

Most of the borrowing to expand livestock enter
prises was to buy cattle or to help pay for pasture
establishment and improvement. Since hogs are the
most suitable livestock enterprise for the Peanut Belt
and few farmers needed to borrow to begin or expand
a hog enterprise, there was a relatively small propor
tion of livestock expansion loans made in that area.
Of the total amount of money borrowed, 65 percent
was for usual production expenses, 22 percent was for
livestock expansion alone, and 13 percent was for a
combination of livestock expansion and the usual pro
duction expenses. Total borrowings refer to the total
face amount of the notes made in 1950. For a par
ticular farmer, total borrowings are usually greater
than the maximum of the line of credit. Because live
stock expansion loans usually have longer maturities
than crop production loans do, total borrowings used
as a measure of loan volume likely result in some
understatement of the importance of livestock loans.

HOW FARMERS USED THE MONEY THEY BORROWED IN 1950

[2]

PERCENT OF TOTAL BORROWINGS USED FOR LIVESTOCK EXPANSION

The proportion of total borrowings used for expan
sion of livestock differs markedly according to the
type of farming area. In the Lower Coastal Plain, 41
percent of the money borrowed was expressly for this
purpose, and an additional 12 percent was used for a
combination of row crops and livestock expansion.
Only 47 percent of the money was borrowed for row
crops alone. In the Piedmont area, only 17 percent
was used for livestock expansion alone, but an addi
tional 20 percent was used for a combination of pur
poses that included livestock expansion.
Farmers with less than 80 acres of cropland used
10 percent of their total borrowings for livestock ex
pansion alone and an additional 2 percent for a com
bination of purposes that included livestock expan
sion. Farmers with 80 acres of cropland or more, on
the other hand, used 24 percent of their borrowings
for livestock and an additional 15 percent for a com
bination of purposes.
Amounts Borrowed
The average amount borrowed for all farms in 1950
was about 2,300 dollars. The individual amounts, of
course, were closely related to the size of the farms.
Farmers with less than 80 acres of cropland borrowed
an average of 832 dollars, whereas those with 80 acres
or more borrowed an average of 3,351 dollars. AlFor Crop
Production

For Expansion
of Livestock

For All
Purposes

Sand Mountain......................................... $1,321

$1,611

$1,362

Piedmont................................................

1,982

1,568

2,164

Upper Coastal Plain...........................

1,828

2,847

2,249

Lower Coastal Plain...........................

2,388

3,606

3,064

Limestone...............................................

1,981

2,651

2,276

Peanut.....................................................

2,375

2,987

2,463

Total............................................................. $2,017

$2,553

$2,297

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AVERAGE AMOUNT BORROWED
By Farmers With
Less Than 80 Acres
of Cropland

Purpose
of Loan

Crop production only

Livestock expansion only .

n.a.

All purposes...............................

By Farmers With
80 Acres of Crop
land or More

806

Crop production and livestock
expansion............................... .
$

By All
Farmers

$3,275

$2,017

5,652

4,970

1,095

2,827

2,553

832

$3,351

$2,297

Loans for livestock expansion in relation to those
for crop production expenses usually were larger on
small farms than on large farms. This difference is
partly due to the tendency toward dairy cattle on
small farms. To produce Grade A milk commercially,
for example, a minimum investment is required for
cows, barns, equipment, and pastures. Some of these
AVERAGE SIZE OF LOAN
For Crop
Production Only

Area and
Size of Farm

For Livestock
Expansion Only

For All
Purposes

Area:
Sand Mountain....................

493

1,018

Piedmont...............................

773

1,089

538

1,156

Upper Coastal Plain .

953

1,603

1,126

Lower Coastal Plain .

1,243

1,399

1,381

Limestone..............................

773

1,686

955

Peanut ....................................

1,033

1,867

1,119

Size of Farm:
Farms with less than
80 acres of cropland .
Farms with 80 acres of
cropland or more . .

365

634

386

1,340

1,590

1,455

868

$1,443

$1,025

Total .......................................

AVERAGE AMOUNT BORROWED

Area

though the average amount borrowed tends to increase
with the size of the farm, measured by cropland acre
age, borrowing increases at a slower rate. Farmers
with larger acreages are able to pay a larger propor
tion of their usual operating costs and the costs of
livestock expansion out of current income and savings.
On farms of comparable size in most areas, there
was little difference in the average amounts borrowed
for usual production expenses and those for expansion
of livestock. Most farmers, of course, are stretching
their livestock expansion program out over a number
of years with the result that annual investments are
small compared to the total cost of the program. Bor
rowings for usual crop production expenses averaged
2,017 dollars a farm; for livestock expansion alone,
2,553 dollars; and for a combination of both pur
poses, 4,970 dollars.

investments, such as that for a barn, must be made in
a lump sum. The farmer who is expanding or begin
ning a beef-cattle enterprise, on the other hand, can
make his investments at almost any annual rate he
chooses. Also, there is some indication that larger
farmers tend to expand their livestock enterprises on

[3]

a more conservative basis, in relation to their total in
vestment, than do small operators.
Differences in the average size of individual loans
were greater than differences in total borrowings. For
farmers with less than 80 acres of cropland, loans for
crop production alone averaged 365 dollars and those
for livestock expansion averaged 634 dollars. For
farmers with 80 acres of cropland or more, loans for
crop production averaged 1,340 dollars and those for
livestock expansion averaged 1,590 dollars. The aver
age size of note also was related to the type of farm.
Loans for crop production, for example, averaged 493
dollars in Sand Mountain and 1,033 dollars in the
Peanut area.
Maturities
The net investment through bank lending during any
given period depends partly, of course, upon the ma
turity of the loans. In this discussion the maturity as
shown on the note is used. Many loans are repaid be
fore the maturity date, but the maturity shown on the
note is indicative of both the banker’s and farmer’s
attitude and judgment. Of the loans for crop produc
tion, only 8 percent were written for one year or long
er. Most crop production loans with long maturities
were for the purchase of tractors and other machin
ery. Of the loans for the expansion of livestock, 25
percent had maturities of one year or more. The pro
portion of loans written for less than six months was
about the same for the crop production loans as for
livestock expansion.
Demand notes were used more frequently in con
nection with financing livestock expansion than with
crop production. Most of these demand notes involved
borrowing by large operators.
PERCENTAGE DISTRIBUTION OF NOTES BY MATURITY

Crop Production Loans To
Farmers With

Less Than
80 Acres
Cropland

Maturity

Demand

Farmers With

80 Acres
Cropland
or More

All
Farmers

Less than 6 mos.

. ,.

6 to 12 mos.

Livestock Expansion Loans To

Less Than
80 Acres
Cropland

80 Acres
Cropland
or More
4

All
Farmers

12 mos. and over . ..

Total.......................... .

... 100

100

In most areas, the practice of making livestock ex
pansion loans for a year or longer was more common
on loans to large farmers than to small farmers. For
farmers with less than 80 acres of cropland, only 11
percent of the livestock expansion loans had maturi
ties of one year or more, while 28 percent of these

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[4]

loans made to farmers with 80 acres of cropland or
more had maturities of one year or over.

Renewals
The growth of bank lending for expansion of livestock
has been accompanied more and more by a verbal
understanding between the farmer and the banker that
the loan can be renewed provided progress has been
satisfactory. The actual maturities on notes for this
purpose, therefore, do not always accurately indicate
the length of the loan period.
In the areas studied, only 5 percent of the crop pro
duction loans were made with any understanding of
a renewal at the stated maturity date. Most of these
notes, furthermore, were for the purchase of a tractor
and equipment. Of the loans for livestock expansion,
on the other hand, 46 percent were made with some
understanding about a renewal. Usually the farmer
was expected to pay part of the loan at maturity date.
The banker then advanced another loan for the remainder of the debt, provided the farmer was progressing satisfactorily with the livestock enterprise.
PERCENT OF LOANS WITH VERBAL UNDERSTANDING FOR RENEWAL

Area and

Crop Production
Loans

Livestock Expansion
Loans

Sand Mountain.........................

Piedmont....................................

Size of Farm

All
Loans

Area:

Upper Coastal Plain ....

Lower Coastal Plain ....

Limestone...................................

Peanut .........................................

Size of Farm:

Farmers with less than
80 acres of cropland .

Farmers with 80 acres of
cropland or more ....

Total............................................

For crop production loans there were understand
ings for renewals on 6 percent of the loans made to
farmers who had less than 80 acres of cropland, and
on 5 percent of those made to farmers who had 80
acres or more. On loans for livestock expansion, how
ever, the renewal understanding was used more often
on large than on small farms. There were understand
ings for renewal on 50 percent of such loans to farm
ers with 80 acres of cropland or more and on 29 per
cent of such loans to farmers with less than 80 acres.
Security
Chattels, or some combination of security including
chattels, were used to secure most loans. Chattels
alone were the security on 69 percent of all the loans
made. The security taken on livestock expansion loans

differed from that on crop production loans in two
important respects. First, a larger proportion of the
livestock expansion loans was secured by only a chat
tel mortgage on livestock, and second, a large propor
tion of these loans was made on the farmer’s signa
ture, Government bonds, life insurance, and other
similar security.
Nearly half of the livestock expansion loans to
farmers with less than 80 acres of cropland were se
cured by livestock alone. On farms with 80 acres or
more, livestock was the only security on about onefifth of the livestock expansion loans. A larger propor
tion of these loans was made without specific collat
eral on the large farms than on the small farms.
PERCENTAGE DISTRIBUTION OF NOTES BY SECURITY
Livestock Expansion Loans to

Farmers With

Security

No specific security, no endorsement

Less Than
80 Acres
Cropland

80 Acres
Cropland
or More

All
Farmers

All Crop
Production
Loans

Endorsement and combination including
endorsement....................................................

Real estate and combination including
real estate ....................................................

Livestock alone ...................................................

Chattels and combinations of chattels.

Stocks, bonds, insurance policies.

Other....................................................................

Total....................................................................

100

For all farms and all types of loans, real estate—
or any combination of collateral including real es
tate—was used on only 9 percent of the loans. There
were no significant differences in the frequency with
which real estate was used between the large farms
and the small farms or between the different types of
loans. Most of the differences in type of security used
were related to the size of farm and financial position
of the farmer rather than to the purpose of the loan.
Income of the Farmer
Lending for livestock expansion is affected by the
level of farm income as well as by the size of farm.
For each of the farm borrowers studied, the banker
was asked to estimate whether the farmer’s cash in
come from the farm in 1950 was less than 3,000 dol
lars or 3,000 dollars or more. The 3,000 dollar figure
was chosen because it was felt that few farmers with
a smaller cash income could pay production expenses,
obtain cash for family living, and have anything left
for the retirement of a loan for livestock expansion.
A comparison of the bankers’ estimates with other
data on farm income seems to indicate that they are
quite conservative. This may be due to the fact that

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the bankers included in their estimate of cash income
only those items of income that are ordinarily used to
repay debts. Income from such enterprises as poultry
flocks, for example, probably is not included. Al
though these income estimates are subject to some
limitations, they do provide a reasonably accurate
means of comparing groups of farmers.
Only 8 percent of the loans to farmers with an in
come of less than 3,000 dollars were for livestock ex
pansion, while to those with an income of more than
3,000 dollars 33 percent were for this purpose. Even
in groups of farms that were comparable in size, the
purpose of the loans was affected by income.
On farms with less than 80 acres of cropland and
with an income of less than 3,000 dollars, only 5 per
cent of the loans were for livestock expansion; loans
for this purpose accounted for 16 percent of the loans
on small farms that had more than 3,000 dollars of
income. On large farms, 80 acres of cropland or more,
21 percent of the loans to farmers who had incomes of
less than 3,000 dollars were for livestock expansion;
35 percent of the loans made to farmers with in
comes of more than 3,000 dollars were for this purpose.
The relationship between income and purpose of
loan differed markedly from one type of farming
area to another. In the Sand Mountain area, loans for
livestock expansion were made with the same fre
quency to the low-income groups as to the high-income
groups. In the Peanut area, on the other hand, prac
tically no loans for livestock expansion were made to
farmers in the low-income group, while 15 percent of
the loans in the high-income group were for this use.
PERCENT OF TOTAL NUMBER OF LOANS MADE FOR LIVESTOCK EXPANSION
Farmers With Incomes
of Less Than $3,000

Area and
Size of Farm

Farmers With Incomes
of $3,000 or More

All
Farmers

Area:
Sand Mountain...............................

Piedmont.....................................

Upper Coastal Plain

....

. .

.31

Lower Coastal Plain

....

Limestone....................................

Peanut

..........................................

Size of Farm:

Farmers with less than 80
acres of cropland....................

Farmers with 80 acres of
cropland or more....................

Total..............................................

♦Less than .05 percent.

That bank credit was used less frequently for livestock expansion by low-income farmers does not nec
essarily indicate an important credit problem on the
low-income farms. Most farmers who have low in
comes have relatively small farms. Some livestock

[5]

enterprises—beef cattle, for example—often are not
well adapted to a small acreage. The experience of
agricultural extension workers and other similar tech
nicians also indicates that, as a rule, farmers with
small acreages and low incomes are less interested in
livestock expansion and related farm adjustments than
are farmers with relatively high incomes.
On low-income farms that are well suited to an ex
pansion of livestock and where the farmer does want
to make such an expansion, the mere existence of the
low level of income, however, is a problem. The na
ture of this problem is shown by comparing the most
probable income with the most typical amount bor
rowed for various size groups of farms. The income
figures are derived from the bankers’ estimates and
from secondary sources. Farmers with 20 to 39 acres
of cropland had incomes that exceeded borrowings by
only 440 dollars. These farmers appeared to be using
about all the credit that they could command simply
to produce their row crops. Incomes exceeded borrow
ings by 870 dollars in the 40 to 59 acre group, by
1,660 dollars in the 60 to 79 acre group, by 2,640
dollars in the 80 to 99 acre group, by 3,450 dollars in
the 100 to 119 acre group, and by 3,860 dollars in the
120 to 139 acre group.
Borrowings averaged approximately 10 dollars for
each acre of cropland for all sizes of farms up to
about 80 acres. On farms with more than 80 acres, the
amount borrowed per acre tended to decline as the
size of farm increased. Income, on the other hand, in
creased more for each acre added to the farms with
less than 80 acres of cropland than for each acre
added to farms with more than 80 acres. The average
income of the farmers with 80 acres of cropland was
approximately 3,000 dollars.
These relationships between size of farm and in
come and between size of farm and amounts borrowed
indicate that farmers with low incomes are using bank
credit more intensively than farmers with high in
comes. On most of the low-income farms, a large in
crease in the amount of money borrowed for any pur
pose, including the expansion of livestock, probably
couldnotbe extended on commercially acceptable terms.

Refusals of Loan Applications
For each farmer on which a borrowing record was ob
tained, the banker was asked whether he had rejected
any loan applications for expanding livestock and the
reasons for not making the loans. So few rejections
were reported that no statistical summary of the re

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[6]

sults could be made. None of the rejections were re
lated to the purpose of the loan, the size of the farm,
the income of the applicant, or the collateral offered.
Although very few loan applications were actually
rejected, a large proportion of the bankers reported
that they had worked closely with their farm custom
ers in planning livestock expansion programs and in
many instances had helped farmers to alter their orig
inal plans in order that the bank could help finance
their programs. Farmers who planned to buy cattle
before establishing pastures, for example, often were
persuaded to establish the pastures first.
Current Farm Credit Problems
Since the extension of credit to farmers is a continu
ous process, a spot survey of the type reported on here
can show only part of the results of that process. In
spite of this limitation, however, these findings do
throw some light on current farm credit problems.
One question is whether or not bank credit procedures
and bank policies are changing rapidly enough to
keep pace with farmers’ livestock expansion pro
grams. If the borrowings in 1950 are assumed to be
typical of the current trends in lending for livestock
expansion, at least 25 to 30 percent of the borrowings
each year at the banks surveyed is being used for this
purpose. This rate of borrowings appears high consid
ering that most of it represents capital investment.
According to the census figures on income, for ex
ample, Alabama farmers who got at least half of their
income from field crops got only 10 percent from
livestock. With respect to types of farms, these farm
ers are comparable to those included in this survey.
Farmers’ borrowings for livestock expansion, there
fore, constitute a larger share of their total borrow
ings than the distribution of income would seem to
indicate. These comparisons do not necessarily prove
that banks generally are meeting the demands for live
stock expansion credit. In the banks surveyed, how
ever, it seems clear that such credit is receiving the
attention that its importance justifies.
In many discussions of bank credit for livestock,
much stress has been laid on the differences between
this type of credit and that for financing row-crop
production. Many of these differences are reflected in
the findings of this survey. The survey seems to show,
however, that these differences are far less important
than many people outside the banking business have
thought them to be. It is true that the investments
usually required for livestock expansion are large in

relation to the usual crop production loan. The study
shows that the farmer can grow into the livestock pro
gram rather than make the entire investment at once,
and thereby keep the average size of his livestock loan
comparable to the usual crop production loan. This
procedure brings most farmers’ livestock expansion
programs into the range of commercial credit and is
also desirable from a farm management standpoint.
Another diffeernce between lending for livestock
expansion and crop production that is often cited is
the longer maturities required on livestock expansion
loans. According to this survey the latter are written
for somewhat longer maturities than crop production
loans. The differences in maturities, however, are
minor. The step-by-step procedure usually followed
on these loans reduces the need for long-term loans. In
instances where all the loan cannot he conveniently
repaid within the stated maturity on the original note,
understandings for renewals usually solve the matur
ity problem. These understandings, which were in
effect on almost half of the livestock expansion loans,
appear to be highly satisfactory in most respects. They
insure that the livestock expansion program gets a
thorough, periodic review by the banker and the
farmer. They are based, of course, upon mutual con
fidence and understanding.
Bank lending to farmers was characterized by its
flexibility. By adjusting the terms and conditions of
the loans, the bankers were able to finance almost any
livestock expansion program that was efficient from a
farm management standpoint and that was being con
ducted by a farmer of good character. They were able
to do this and apply prudent banking principles.
In order to make the large volume of livestock
loans shown by this survey, many bankers had to
make some innovations in their handling of loans.
Generally those who had a good understanding of the
farming business and of the credit problems peculiar
to farming could make these innovations rather easily.
This is not to imply that there are no problems in con
nection with appraisal of the farmers’ programs, bank
records, loan procedures, and the other technical as
pects of farm credit. The main point is that these
technical problems are not a particularly serious ob
stacle to advancement of credit for livestock expan
sion on the part of bankers who have a rather thor
ough understanding of farm lending.
In interpreting the survey findings, it should be
kept in mind that all of the banks contacted had been

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very active in farm lending for a number of years.
Their accumulation of experience in making crop
production loans was the foundation upon which they
built their loan program for livestock expansion. Most
of them have made loans to farmers within a wide
range of net worth, management ability, and ambi
tion. Country banks that have confined their farm
lending to a few highly selected farmers whose credit
requirements could be met in a routine manner and
without any particular knowledge of farming on the
part of the banker have a different kind of problem.
The survey findings in regard to livestock loans are
not applicable to banks in the latter group.

Farm Credit in the Future

Present indications are that the need for credit for
financing the expansion of livestock as well as for
crop production will continue to grow on District
farms. As shown here, many country banks have al
ready demonstrated their ability and willingness to
meet farmers’ credit needs. In these banks the policies
of the officers and boards of directors toward farm
lending are such that a continued improvement in
loan procedures may be expected. Many country
banks, on the other hand, are not following a policy
with respect to farm lending that is conducive to the
fullest agricultural development of their trade terri
tories. How well banks meet farm credit needs in the
future will depend partly upon the policies of indi
vidual banks or, stated in another way, upon the atti
tude of the banks’ management toward agriculture.
Some banks that have done an excellent job of
financing desirable farm adjustments up to the pres
ent are finding that their farm customers’ needs for
credit are growing faster than the resources of the
bank. In these localities a form of capital rationing
is appearing that may not be consistent with the best
interests of farmers or of the entire community, state,
or region. In a sense this development seems to reveal
an imperfection in the capital market or in the struc
ture of banking as it affects agriculture. The contri
bution of bank credit to farm prosperity, therefore,
may also depend upon the ability of bankers, includ
ing those in the larger financial centers, to adapt the
structure of banking to the greater need for farm
credit that seems likely to develop.
The future of bank lending to farmers will also de
pend upon the circumstances and attitudes of farmers
themselves. Farmers with low incomes and small
[7]

acreages, for example, probably will be able to use
credit only to a limited extent to help finance such ad
justments as the expansion of livestock. Innovations
in farm credit will solve only a small part of the prob
lems faced by these farmers. All bankers contacted
were asked why they did not have more loans to farm
ers to expand livestock enterprises. Almost invariably
the answer was, “The farmers haven’t asked for

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[8]

them.” Most of these bankers have held meetings, vis
ited farms, and tried in other ways to interest more
of their customers in improving their farming systems.
In the last analysis, the initiative for all farm ad
justments, including the expansion of livestock, rests
with the farmer. The farm customers who had that
initiative were obtaining the necessary credit at the
banks surveyed.
Brown r_ Rawungs

Current Livestock Lending Policies
Since commercial banks are essentially community
institutions, agricultural credit policies are influenced
considerably by customs and traditions of farm life
and rural communities. Credit policies, moreover, not
only are the result of changes that take place on the
farm and in town, but they shape the direction and
rate of the changes themselves.
In the early days of commercial banking, decisions
on individual farm loans and those regarding total
farm loan volume were somewhat simpler than they
are today. There was no question, for example, about
a banker being interested in agriculture; there wasn’t
much of anything else he could be interested in. The
few stores around the town square were borrowers, it
is true, but their sales and collections were almost
solely dependent on the ups and downs of farm in
come. Agriculture was the economic life of most rural
communities.
Farming in most of the District was a comparatively
simple operation. Even as late as the 1920’s, the pat
tern was still similar to what it had been for almost a
century—cash-crop production with mules and man
power. Neither farming nor farm lending, however,
was particularly easy. Prices of commodities were
erratic and the high degree of farm specialization
increased risks. In most instances the banker took a
calculated risk both as to production and price, and
that, more than anything else, determined lending
policy. If the borrower met that risk, he got his loan;
otherwise he didn’t.
There is, of course, a definite relationship between
production patterns and bank lending policies. When
tractors began to replace mules on cotton farms, the
financing of them presented many new problems.
The banker, for example, had to find reasonable an
swers to such questions as: On what size cotton farms
will tractors be economical? What type and length
of loan will best suit the borrower and lender? What
is the collateral value of tractors and equipment?
Aside from the questions raised in the financing of
the tractor, however, were those that arose from
changes in the production pattern of cotton. Where

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tractors replaced mules, croppers were usually re
placed by cash-wage hands at harvest, and that change
in labor supply materially affected risks and costs.
In the decade of the 1930’s, the control programs
and the development of new market opportunities
caused farmers to start diversifying. Each time a new
crop was added to cotton or other cash crop, the lend
er had to appraise not only cotton production and
tractor power, but the entire farm program. As these
programs have become increasingly complicated,
moreover, with the addition of year-round grazing,
livestock, and seed crops, all the problems and com
bination of problems associated with them have found
their way to the banker’s desk. Because managerial
capacity is much more important to the successful
operation of diversified farm programs than it is in
the production of a single cash crop, the borrower’s
managerial ability also had to be appraised. The
number and type of decisions that call for the estab
lishment of lending policies, therefore, have increased
markedly.
Why Are Policies Necessary?
To explain what current farm lending policies are as
they relate to livestock loans, it is necessary to an
swer the question, “Wfliat makes bankers do what they
do?” Although it is difficult for anyone to explain in
detail why he did or did not do something, the bank
ers contacted in a recent credit survey had rather defi
nite reasons for establishing their lending policies.
Bankers make many decisions relative to farm
loans, but not all of them could be termed policy de
cisions. When a decision has been made which ap
plies to borrowers generally, however, that action de
cided upon becomes a policy. If a farmer were re
fused a loan for a tractor because of a lack of mana
gerial ability, or because of his character, or some
other individual consideration, such refusal might
not, of course, be in accordance with a specific policy
decision. On the other hand, if the bank required a 40
percent down payment and the balance in two years
(as many do), that action would become a policy. If

[9]

the applicant were turned down because he lacked the
down payment, the refusal would be in accordance
with an established policy of the bank.
The difference between the two is important. Ap
praisal of an applicant against a policy is impersonal,
at least to the extent that the borrower feels that the
same yardstick will be used on all other borrowers.
There is an understandable tendency for bankers to
establish both positive and negative policies and, from
a public relations standpoint, it is easier to handle a
request based on general qualifications than one based
only on personal characteristics.
The establishment of policies can make the job of
lending easier and the use of funds more effective,
because once a policy is thought out, it is not neces
sary to repeat the process with each new application.
And, by the same token, as the number of specific
policies becomes larger, the area in which individual
appraisal is needed becomes narrower.
There is, moreover, another important advantage
that accrues from making policies generally known;
it saves time in the bank. If a bank makes it known,
for example, that it will finance cattle only after pas
tures and grazing crops are established, then a farmer
is not likely to come to the bank seeking a cattle loan
until he has met that requirement.
A farmer can make excellent use of the bank’s
lending policies in planning his farm program. It is
the policy of some banks not to extend credit for pas
tures and grazing crops until the area to be seeded is
fenced. Thus, farmers in the areas served by those
banks can plan their livestock expansion accordingly—
first the fence, then the feed crops, and finally the
cattle.
There is one consideration in making specific poli
cies known to the community, however, that is looked
upon unfavorably by some bankers. Once policies are
established, the bank is obligated, at least in the bor
rower’s opinion, to lend to all customers who meet
those standards. But it may be that the capital struc
ture of the bank and of the community is such that
all prospective borrowers simply cannot be taken
care of. Where that condition exists, it puts the bank
and the banker in an embarrassing position to have to
turn down some customers who have met the estab
lished lending criteria.
Who Makes Lending Policies?
Since banks do have farm lending policies, it is per
tinent to ask who makes them and for what reasons.

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[10]

Perhaps the most important group of people who help
to determine lending policies are the farmers them
selves. Their attitudes, ambitions, and opportunities
determine what they want to do and influence their
requests for capital. That does not mean, of course,
that banks do not inspire and encourage farmers to
adopt better management practices. Many do so.
Their attendance and participation in the various
types of farm meetings and programs, particularly
those of the 4-H Clubs and the FFA, have been instru
mental in encouraging farmers. But whether from
county agent instruction, banker stimulation, or from
whatever source, the farmers themselves must first
want to do those things that require credit. This was
demonstrated repeatedly in the credit survey when,
on inquiry as to why there were not more livestock
loans, the bankers replied, “People just haven’t asked
for them.”
Next in order, perhaps, among the determiners of
policy, come the bank executives. Their interest,
knowledge, and foresight may determine whether the
bank has lending policies and if so whether they are
positive or negative. In no instance, however, did the
study reveal progressive policies where the executive
officers were not genuinely interested in agriculture.
Back of the officers, of course, come the directors.
They are ultimately responsible for the bank policies
and are instrumental in making them. Even when the
officers are enthusiastic and want to try new proce
dures or new methods, the directors can stop them if
they do not agree with them. Or, as in many banks,
the policies may originate with the directors. Neither
the officers nor the directors, of course, are complete
ly free to make the rules of lending. State and nation
al authorities prescribe the general boundaries of ac
tivity through laws and regulations and enforce them
through examination.
Custom also plays a part in determining policies.
Where a bank has become well known for its interest
in farming, that recognition is a powerful incentive
to keep abreast of changes and modify lending prac
tices whenever necessary. Then too, competition of
other banks or of Government-sponsored credit agen
cies has a bearing on the way a particular bank han
dles its loans.

What Did the Survey Show?
In order to ascertain how rapidly and on what terms
farmers are seeking loans for livestock in their tran
sition toward diversified farming, information was

obtained from 27 banks in sections representing the
various types of farming areas in Alabama and Geor
gia. The banks were chosen because they had a sizable
farm loan business; they are, therefore, probably
above average. And for that reason their lending pol
icies are probably a bit more tailored to the needs of
financing livestock than those of the average commer
cial bank.
The study was not designed to obtain information
on interest rates; nor is the purpose here to appraise
the lending policies, but rather to explain them. And
it should perhaps be emphasized that, with almost no
exception, these policies are applicable only to the
regular customers of the banks. The reluctance of
banks to take on new borrowers, particularly for live
stock loans, is due to the heavy demands of present
customers, the desire to hold down the volume of
loans in the present inflationary period, and the ne
cessity of having a record of past performance on the
borrower.
One of
the first questions that arises in the borrower’s mind
is, “How much money will the bank lend?” The an
swer to that question depends on many variables, some
of which involve bank policies, but the one thing that
determines the amount of credit, more than any other,
is the borrower’s request. Only in rare instances did
the banks surveyed require a downward adjustment
in the farmer’s estimate of his credit needs.
From the records of approximately 600 borrowers
in the 27 banks, it is evident that, as a rule, the farm
er expanding his livestock is using credit rather spar
ingly. His own conservatism plus the repeated advice
of his county agent and others to grow into the busi
ness have made the farmer cautious. Generally speak
ing, the borrowers for livestock expansion may be di
vided into two broad classes; those seeking to substi
tute livestock for a part of their crop operations, and
those who are adding livestock while maintaining
their cash-crop program.
How much credit a farmer applies for to begin a
livestock program or to expand an existing one de
pends on his choice of livestock, his experience, his
own capital and collateral, and the rapidity with
which he seeks to attain his goal. Apparently not
many farmers who have had profitable crop opera
tions wish to jeopardize their program or their finan
cial position by biting off too much at once. That is
evident from the amount of credit they have request
How Much the Farmers Asked For

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ed. The amount of credit sought, as measured by to
tal acres of cropland, was roughly the same per acre
whether for cash crop production or for livestock.
That suggests that the farmers, particularly those who
are substituting livestock for crops, have evidently
set some over-all credit ceiling for their farm which
they are reluctant to break through. Undoubtedly they
have been influenced by bank policy.
Then too, farmers are well aware that in the initial
stages of livestock development, income is low and
for a period their ability to repay loans is reduced.
Those farmers who are adding livestock to their nor
mal operations by clearing and draining land while
not borrowing more per acre are borrowing on more
acres. Hence, their credit totals are larger. In these
instances, however, the farmers have advanced sub
stantial amounts of the capital costs and have pledged
additional collateral such as bonds and additional se
curity by the assignment of life insurance. Many of
the latter group have filed financial statements show
ing net worth of more than adequate coverage.
Obviously, there are many farmers who have no
desire to add livestock to their program. Among them
are tenants who lack security, old people who do not
want to undertake new enterprises, small farmers
who must farm intensively, and finally those who pre
fer cash-crop farming.
Farmers who have been refused a loan for live
stock production have been, for the most part, of un
satisfactory character, or completely inexperienced,
or have presented wholly impractical plans to the
banker. Banks have shown a willingness to adjust the
credit conditions to fit the borrower where the opera
tion to be financed was practical and was within his
managerial capacity to carry out.
The amount
that banks are willing to lend on livestock is variable.
These variations are accounted for by bankers’ atti
tude toward livestock, by their experience in making
livestock loans, and by market opportunities. Legal
limits, moreover, both as to individual loans and to
tal loans, are at present affecting lending by some
banks. In addition; the amount of check-up or atten
tion that banks can devote to their farm borrowers,
ranging from none in some banks to quite a bit in
banks with special farm men, has some bearing on the
amount of credit granted.
Despite the wide variations in farm experience and
net worth and despite a wide range in attitude and
How Much the Banks Granted

[11]

bank experience, loans for livestock follow a fairly
general pattern. In most banks the amount of money
loaned for livestock, whether for animals, feed crops,
or facilities, paralleled the amount loaned for crop
production measured on a per-acre basis. Between
banks, of course, the amounts varied widely.
The survey was not designed to determine the max
imum amount that banks would lend, yet if the indi
vidual loans are divided by the total cropland of the
borrower and reduced to a per-acre basis, a practical
maximum can be determined. Using that measure, the
amounts ranged from 10 dollars to a practical high
of about 30 dollars. In three of the 27 banks the max
imum loans for livestock were 38, 45, and 55 dollars
per crop acre. These were special cases, however,
each of which involved a real estate mortgage on the
farm. The 55-dollar loan was for a period of four
years. In most of the banks the ceiling for annual
livestock loans, secured mostly by chattels, centered
about 20 to 25 dollars per acre.
The policy of limiting annual loans for livestock to
approximately the amount extended per acre for crop
production is based on the recognition by bankers
that there is little likelihood that per-acre returns
from livestock will be higher than cash-crop returns.
And it is that recognition of income potential that is
responsible for bankers limiting credit extensions for
livestock to a pay-as-you-go basis. Based on the cov
erage of the survey, it was only when borrowings ex
ceeded this general limit that any real difficulties in
lending practices or procedures occurred.
On What Kinds of Livestock Were Loans
Made?
Because of the very rapid strides made recently in
the production of forage, most of the current live
stock borrowings are for grazing animals—beef cat
tle and dairy cows. Beef-cattle loans predominate not
only because of the high interest in cattle, but also be
cause of the availability of markets in practically ev
ery part of the District. The construction of auction
markets and improvements in trucks and highways
have brought the market within reach of all farmers.
The wide dissemination of market information, more
over, particularly by means of the radio, has given
most farmers flexibility in their choice of markets.
Loans for dairying, on the other hand, are limited
because of market outlets. The market for Grade A
milk, for example, cannot be expanded to all farm

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[12]

ers and, as yet, there are few processing facilities for
manufacturing milk. Therefore, farmers who are not
on milk routes, either Grade A or B, obviously are
not interested in obtaining loans for dairy cows.
There was, however, no reluctance to lend for dairy
ing as such. On the contrary, banks usually preferred
dairy loans, which were easy to collect because of the
regularity of milk payments.
Basic to cattle loans, either for beef or dairy cattle,
are loans for fencing, feed crops, and equipment. Be
cause of the variety of such products and the wide
range in their costs, their financing is geared to the
income potential of the livestock and is within the
over-all annual credit program of the farmer.
For Beef Cattle The amount of credit for beef
cattle and the policies under which it is extended de
pend, substantially, on the type of farm operation.
Because most farmers do not have abundant carbohy
drate feed for finishing cattle, the cow and calf com
bination is by far the most popular of the beef enter
prises.
With only minor exceptions, the banks surveyed
would lend for the purchase of grade cows up to the
limit of the feed available on the farm, provided the
cost of the cows was reasonable and they were free of
Bang’s disease. Although loans were readily made for
the purchase of purebred herd bulls, banks were re
luctant to lend for the purchase of purebred beef
cows. Moreover, banks were not inclined to lend for
fattening cattle or for speculative purposes. Because
of their special educational value, loans for 4-H and
FFA cattle are handled differently from commercial
cattle loans.

Loans for dairy cattle followed
a fairly uniform pattern. Where feed was available
and where farmers were expanding, banks would fi
nance the purchase of cows up to the number the
farmer already owned. If a farmer had five cows, for
example, the bank would lend for the purchase of up
to five more cows. The usual practice is for the bank
to take a mortgage on the herd and have the loan re
tired through monthly amortization by deductions
from milk receipts.
The production of milk, particularly Grade A
milk, requires a higher capital investment in build
ings and equipment than does the production of cattle
or hogs. But despite that, some workable procedure
for handling the milk production loan is usually
For Dairy Cattle

made. Loans of this type, however, are usually made
for a period of more than one year, or with an under
standing for renewal, and are retired by applying al
ternate milk checks, or one-half of each, to the in
debtedness.
What Are the Prerequisites for Livestock
Loans?
Although the personal qualifications of a borrower
are rather nebulous, there are certain general require
ments which a farmer must meet. These requirements
are applicable regardless of other factors that may
be considered in granting a loan.
Always an important consideration in
lending, character is unusually significant in lending
for livestock expansion. As mentioned earlier, 46 per
cent of the total loans made for livestock expansion
by the 27 banks carried verbal understandings for re
newal. Obviously, such personal and unwritten under
standings require that the borrower be honest and of
the highest integrity. Just how much the policies gov
erning character requirements have limited livestock
loans is not known, but they are important. A few ap
plicants for livestock loans were turned down by the
banks surveyed because of their character, but they
would likely have been turned down for any kind of
a loan.
Character

Some experience in the raising of
livestock was a prerequisite to obtaining livestock
loans in all the banks. That does not mean, of course,
that the farmer must have had experience of commer
cial proportions, but rather that he must know how to
feed, breed, and care for the type of livestock he
sought to expand.
Another, and the more stringent requirement, was
that the farmer must have shown successful manage
ment of his cash crops. If he had shown increasing
yields and efficient use of labor and machinery and
had sought to build up the productivity of his farm,
then it was felt he would extend those same manage
ment qualities to livestock. Conversely, those farmers
who had shown little desire to improve their farms or
yields were discouraged before a formal application
for credit was made.

Experience

Tenure Since the proportion of farm tenancy in
the South is generally high, the question of whether
the region will ever become a livestock area is some
times raised. The mere fact that a farmer has a ten

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ant status does not preclude him from obtaining live
stock loans at the banks participating in the study. If
he meets the other qualifications and has some secur
ity in his tenure, either by lease or long occupancy,
then the banks have demonstrated that they will lend.

The size of a farm has little mean
ing except in terms of what it is producing and in
comparison with other farms. In the preceding article,
it was shown that 34 percent of all the loans made
to farmers with 80 acres or more of cropland were
for livestock purposes, whereas on farms of less than
80 acres only 7 percent of the loans were for that
purpose. If 80 acres of cropland is considered a fair
general division between large and small farms, then
the larger farms are expanding their livestock much
more rapidly.
Size of farm and income are so closely related that
it is difficult to separate them. The majority of live
stock loans have gone to the larger farmers mainly
because of the popularity of beef cattle, which, in
most cases, is not practicable on small farms. Most of
the cattle loans were obtained by farmers who operat
ed on about a hundred acres or more.
There are some cattle enterprises that can be suc
cessful on small farms, and farmers who sought cred
it for them were usually accommodated. One bank in
a mountainous area, for example, made about a third
of its cattle loans, based on a random sample, to
farmers with less than 80 acres. Because of the high
labor requirements and higher returns per acre, the
production of milk is more feasible on smaller farms
than the raising of cattle. The loans for dairying,
therefore, were made mainly to farmers on mediumsize farms of around 60 to 100 acres of cropland. In
a few instances, loans were made on smaller farms,
but these were for the production of milk for manu
facturing purposes as well as for usual crop production.

Size of Farm

On What Basis Were the Loans Made?
In making livestock loans, bankers are much more
careful to itemize the particular purposes for which
the money is to be used than they are in making crop
production loans. Itemization is particularly impor
tant in working out maturity and amortization and
in tailoring the loan to the need for it.
When financing beef cattle, for example, the bank
er and borrower sought to make the loan for a pe
riod of time and with a maturity date that would co
incide with an income period. Since, on many farms,
[13]

cattle are sold in the fall when grass begins to die,
maturity dates were usually made to coincide with
that marketing period. Where no sales of livestock
were contemplated within a 12-month period, the ma
turity date was adjusted to a crop-income period. In
making dairy loans, repayment was amortized month
ly or semimonthly regardless of purpose or maturity.
In some instances repayment was delayed until pro
duction reached a certain level.

Although the practice of making a live
stock loan mature in 12 months or less may seem an
unrealistic policy when viewed from the purpose for
which the loan was made, renewals have had the
practical effect of extending what is usually termed
“intermediate credit.” Although the loan is due and
callable on maturity date, the bankers said that they
would not arbitrarily call them when to do so would
force liquidation or sale at an inopportune time. The
high percentage of renewals on livestock loans is evi
dence that the policy is working both for the lender
and for the borrower. Annual maturities, moreover,
give the banker and farmer an opportunity to review
progress and perhaps head-off trouble before it be
comes serious.
Maturity

The differences in collateral required
for livestock loans were not really the determining
factors in making most of the loans. Sixty-nine per
cent of the total notes listing security for livestock
loans were for chattels either on livestock alone or in
a combination with other chattels. Only 9 percent in
volved a mortgage on real estate, and 12 percent were
made on open note.
Collateral

Policies regarding appraisal of a
farm and its equipment and livestock as a prerequi
site to a cattle loan also were variable, particularly
between banks. The size of the loan is, of course, very
important. In some banks, particularly those which
have special farm representatives, an appraisal of
the farm and the farm program was customary. This
was especially true where either the amount of the
Appraisals

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[14]

loan or its terms required a real estate mortgage.
Generally, the banks required no complicated
forms, schedules, or appraisal for the average live
stock loan to a regular customer. If the loan were for
a new customer, appraisals of farm and program
were made.

Since for many banks the financing
of livestock is a relatively new venture, some of them
maintained frequent check upon the progress of the
borrower. This was particularly true of banks with
special farm men. These check-ups are most impor
tant, and while every effort is made to make them ap
pear to be a casual visit, they are part of a definite
policy. In some banks a report is made on these visits
and appropriately filed; in others nothing is written.
The methods by which this check-up is maintained
are numerous; they include personal visits, riding the
country roads and observing, and contacts with neigh
bors of the borrower. In none of the banks, however,
did the bankers report any unfavorable reactions
from the borrowers because of follow-ups on the
loans. On the contrary, many of the banks reported
that visits by bank personnel, especially farm men,
were genuinely welcomed. The fact that many of the
officers in rural banks have farms of their own on
which they, too, are expanding livestock put the visits
on a basis of mutual interest.
Supervision

Summary
The credit problems arising from the shift from highly
specialized crop farming to a diversified program in
cluding livestock, have been numerous and, in a few
instances, vexing. Nevertheless, progressive rural
banks have devised means and adopted policies that
have made credit available for this transition without
imposing unreasonable requirements or changing the
basic policies that have governed their farm lending
in the past. The high percentage of farmers who are
currently using bank credit to expand their livestock
enterprises is evidence that the policies of the banks
are acceptable to the borrower.
John L. Liles

Community Capital Accumulation
and Farm Financing
From the standpoint of lending to farmers, the most
important banks in the Sixth District are those in
small towns. With a few exceptions they are unit
banks that obtain almost all of their deposits from
the local communities. A large proportion of their
assets is in the form of loans to local businessmen
and farmers. How much money one of these banks
can and will lend depends to a large extent upon the
ability of the businessmen, farmers, and other individ
uals in the community to accumulate bank deposits
and upon the demands for loans that meet the require
ments of prudent banking.
The ability to accumulate deposits depends partly
upon the efficiency with which the land, the money,
and the people are organized to produce goods and
services of value. This efficiency, in turn, is impor
tantly affected by the ability and willingness of the
local banks to extend credit. This close relationship
between the rural bank and the area which it serves
has some important implications for farmers who use
bank credit and for the whole banking system in the
Southeast.
The discussion so far can be summarized in three
tentative statements. First, the need for bank credit to
expand livestock will continue to grow. Second, many
country banks are already devoting a large propor
tion of their lending power to this purpose. Third,
many banks have shown that they can adapt their
lending policies to fit this type of credit and still con
duct a safe and efficient banking business.
Bankers in some areas are finding that their de
posits are not growing fast enough to permit them to
grant all the farm loan applications that fall within
their established lending policies. Farmers in these
areas cannot borrow to the same extent as farmers in
other areas for the expansion of livestock or for other
changes in their farming systems. During the last two
decades the structure of rural banking has undergone
some sweeping changes, most of which have been

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toward making it safer and more stable. The test of
its adaptability to the credit needs of a changing agri
culture has only begun. The purpose here is merely to
point out some features of the structure of country
banking that affect farm lending programs. No at
tempt is being made to appraise the effectiveness of
banks in such financing.
The Problem

The problem that confronts many country banks is
illustrated by the following example. A certain bank,
located in a community where farming is the principal
source of income, has always tried to grant the credit
demands of farmers who, in turn, could meet the
requirements for commercial bank credit. In so doing,
it has built its volume of farm loans to a point where
the management feels that any further loan expansion
at the present level of deposits would be unsound.
Until the past few years, most of the farmers got a
large part of their income from row crops. As farm
ers began to expand livestock, the bank began to make
loans for this purpose.
Last year it became apparent to the bank manage
ment that the bank could not follow through on the
livestock program it had helped start and at the same
time continue to finance crop production for all of its
old customers. Since the farmers who were expanding
livestock were making financial progress while many
farmers who were growing only row crops year after
year were not progressing financially, the bank de
cided to eliminate some of its row-crop customers. In
this way the bank hoped to have more money to lend
to the farmers who were expanding livestock. As the
current crop season progressed, however, the remain
ing farmers who were borrowing for row crops began
coming back for more money in order to meet the
higher costs of production. As country bankers well
know, a crop loan that falls short of assuring all of
the materials for a successful crop carries a very high
[15]

risk. The bank, therefore, advanced about as much
money for crop production this year as it did last
year and is now in almost exactly the same position
in regard to livestock loans as it was a year ago.
Another country bank, in similar circumstances,
not only stopped advancing credit to some of its regu
lar crop-loan customers but actually helped them to
get jobs in towns and in industries located outside of
the community. Many small, row-crop farmers simply
cannot operate unless they can get credit.

The Capital Market
Banks, of course, do not lend to everyone who asks
them for money. One of their main jobs as custodians
of the pool of funds made available by the people of
the community is to allocate the limited supply of
money among those who can use it most effectively.
A rationing of credit, therefore, is inherent in the very
nature of the capital market. If the market were per
fect, farmers could bid for credit against credit users
everywhere or could go outside of their communities
to borrow. Credit would be rationed to farmers in
exactly the same way as for all other users and credit
for a particular farming purpose, such as livestock
expansion, would be weighed in the market against
all other uses. In practice, however, credit for farming
purposes does not always move readily from one
community to another, nor can farmers, generally
speaking, borrow outside of their own communities.
The market for non-real-estate loans to farmers is
still primarily a local one. These loans are based
largely upon the local banker’s intimate knowledge of
the individual farmer. This knowledge includes a
good idea of the farmer’s character, of his hopes and
ambitions, of his management ability, both with re
spect to the farm and to his finances, and of the sound
ness of his farming program. Collateral is usually
taken, of course, but it is not a substitute for this
personal evaluation. Bankers often sum up this idea
by such a remark as “If the man’s not good, the loan’s
not good, regardless of how much collateral he can
offer.” A farmer who goes outside of his own com
munity to borrow usually has to be an extraordinarily
good risk in order to get a loan.
The growing importance of livestock loans tends to
make farm lending even more local in character than
before. These loans, as compared to the usual crop
loans, require a more careful study of the farmer’s
entire program and considerably more supervision by

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[16]

the banker. Often there is a tacit agreement between
the farmer and banker about additional loans if a
four- or five-year livestock expansion program is
being financed. Collections, as in the case of dairy
loans where payments are made by assignment of
milk checks, may also depend upon the cooperation
of local business interests. The market for these loans,
therefore, seems likely to become even more local in
nature.
The question of mobility of credit, or the ability
of farmers to bid for credit in a national market, is
very old as far as country banking is concerned. Many
of the framers and sponsors of the Federal Reserve
Act believed that the System would overcome the diffi
culty. The sponsors of the Government’s farm credit
system likewise believed that they had the cure. Al
though these systems have proved serviceable in deal
ing with emergencies in farm financing, they have not,
at least in many areas in the District, provided a
satisfactory permanent solution.
Country bankers’ reluctance to borrow, either from
other commercial banks or from the Federal Reserve
Bank, prevents a free flow of funds from financial
centers to rural communities. Although the reasons
for this attitude vary from bank to bank, much of the
CHANGES IN TOTAL DEPOSITS
IN CITIES OF LESS THAN 15,000 POPULATION
1945-1950

1.
2.
3.
4.
5.
6.

Citrus
Gulf Truck
Winter Truck
Highland Rim
Central Basin
Appalachian

7.
8.
9.
10.
11.
12.

Flatwoods
Ala.-Miss. Timber
Sand Mountain
Piedmont
Upper Coastal Plain
Lower Coastal Plain

13.
14.
15.
16.
17.
18.

Blackbelt
Silt Loam
Limestone
Rice
Sugarcane
Peanut

attitude may be explained by the fact that country
bankers do have a deep sense of responsibility for
keeping their loan and investment policies within the
capabilities of their banks. They want to have a “good
strong bank.” Bank supervisory authorities, in their
efforts to make sure that banks are operated with due
regard to the safety of deposits and, in general, in
the public interest, have helped to shape this attitude
of reluctance toward borrowing. From a practical
standpoint, therefore, borrowing by banks is not very
effective in meeting local demands for farm credit.
The Banking Structure
What are the main characteristics of the capital struc
ture of country banking that affect the ability and
willingness of banks to make farm loans? The amount
and kind of deposits held by a bank, of course, are
the most important. One banker facing a farm loan
situation similar to that described earlier and who
has about 5 million dollars in deposits said, “What
we need is another 5 million in deposits.”
Although bank deposits have increased greatly dur
ing the last decade, they have not increased at the
same rate in all farming areas or even in all com
munities within any area. In some places they have
actually decreased. From the end of 1945 to the end
of 1950 in the Sand Mountain area, for example,
deposits in banks located in cities having populations
of less than 15,000 declined 22 percent, while de
posits in cities of 15,000 or more declined only 4 per
cent. In the Blackbelt, on the other hand, deposits in
the smaller cities increased 8 percent, while those in
the larger cities decreased 2 percent.
According to the annual deposit ownership surveys
made in this district, farmer-owned bank deposits
increased 11 percent from the end of 1944 to the end
of 1948. During the same period, farm income in
creased 43 percent. Deposits owned by other individ
uals, on the other hand, increased 25 percent during
this period, while nonfarm income payments in
creased 23 percent.
The extent to which changes in the income of a
community are reflected in changes in bank deposits,
of course, varies according to its economic organiza
tion. In areas where a large proportion of total income
comes from farming, the tendency of farmers to put
excess earnings back into the farm business has
tended to offset the effect of the increase in farm
income on deposits. During the past few years District

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farmers have bought, at an unprecedented rate, farm
machinery, fencing materials, fertilizers, and other
goods needed to improve their farms. Much of the
deposit money that is created by loans for the pur
chase of such items flows out of the rural community.
Even where deposits in rural areas have grown
rapidly, the demand for loans has often increased
even more rapidly because of the increase in the cost
of farm production. Part of this increase in cost is
accounted for by price rises. From 1945 to 1950, for
example, the national index of prices paid for items
used in farm production increased 37 percent.
In addition, the ratio of cash costs to total costs has
increased. This increase in the “out-of-pocket” costs
of farming means that farmers are using more oper
ating capital. A large share of the increase in farm
production loans in recent years has gone to meet
this need.
The ability of banks to lend is affected by the sta
bility of deposits from week to week and from month
to month as well as by the average amounts held over
the course of a year. Deposits of country banks in
cash crop areas usually follow a seasonal pattern
that is almost exactly the opposite of the seasonal
changes in the volume of farm loans. In the Sand
Mountain area, for example, at banks in cities of less
than 15,000 population, deposits declined 3.8 million
dollars during the first half of 1949 and farm loans
increased 1.1 million. Deposits and farm loans behave
in much the same way in the Peanut area. In middle
and eastern Tennessee, on the other hand, where farm
income is about equally divided between crops and
livestock, there is little seasonal fluctuation in either
farm loans or deposits at country banks.
Individual banks have even greater variations in
loans and deposits than the averages for a farming
area would indicate. The banker whose deposits vary
from 1.0 million to 1.5 million and whose farm loans
vary from 100 thousand to 400 thousand dollars can
not base his loan policy on annual averages. If the
low point in deposits coincides with the high point in
loans, as is usually the case in cash crop areas, and
if he hopes to keep total loans below some fixed per
centage of total assets, he must base his lending policy
on the low point of deposits. One of the very real
difficulties is that he doesn’t know, at the beginning
of the year, what the low point in deposits is going
to be. As deposits decline and as loans increase, he
often comes to a point where he cannot take on any
[17]

more farm loan customers and still give the proper
attention to loan diversification or to a proper ratio
of loans to total assets. Furthermore, he must always
be prepared to advance additional money to farmers
who already have crop loans. In the cotton areas farm
ers often come back for additional loans with which
to purchase insecticides and to pay for picking. These
loans are almost always granted since repayment of
the original loan on schedule depends largely upon
the success of the crop.
How completely deposits can be mobilized for farm
financing depends not only on their total amount and
upon their seasonal variations, but also on how they
are distributed among various owners. Most of the
deposits in country banks are owned by individuals,
partnerships, and corporations. At one country bank
where these deposits amount to about a million dol
lars, over 40 percent were held in less than ten ac
counts of 10 thousand dollars or more each. At
another bank of comparable size, on the other hand,
only 5 precent of its deposits were in accounts of
10 thousand dollars or more. Obviously, the deposits
of the former bank cannot be invested in quite the
same way as those of the latter. In the first case, any
erratic movement in a few accounts could alter the
deposit picture appreciably.
The size of a bank’s capital accounts affects farm
lending mainly through its use in setting the legal
limitations on the amount of credit that can be ex
tended to a single borrower. Under state and national
banking laws, the maximum credit that banks can
have outstanding to a single borrower is set at a per
centage of total capital accounts. In recent years there
has been a marked increase in the number of farm
borrowers reaching these limits. One by-product of
farm mechanization and of the migration of workers
from farms is that many a large land holding that
was formerly farmed by croppers or tenants is now
operated as one large unit with hired labor. The credit
requirements that were formerly divided among sev
eral borrowers have now been concentrated on one.
Another reason for the increase in the demand for
large loans is the increase in the scale of their busi
ness that has been made by many individual farmers.
Many of today’s large farmers were struggling ten
years ago to pay for a small farm. Country bankers
have, therefore, seen some of their best customers
grow too large for them to finance. From the farmer’s
standpoint this limitation on the bank is probably of

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[18]

little importance since many large farmers are not
confined to the local market for farm loans. They
usually have the kind of a financial statement and
collateral that enables them to borrow rather easily
outside of their home communities. Banks, further
more, have been adding to their capital accounts dur
ing recent periods of favorable earnings. At the end
of 1950 the average ratio of total capital accounts
to total assets was the highest since the end of 1943.
Farm loans, of course, are only one kind of loan
made by banks in rural communities. The severity
with which farmers are rationed in their use of bank
credit depends partly upon the banks’ policies toward
other classes of borrowers. These policies, in turn,
are affected by the profitability of farm loans as com
pared to other types of loans. At an individual bank
the relative profitableness of a particular type of loan
may be affected by the kind of community it serves,
by the kind of competition it has, by the aptitudes of
its officers, and by a host of other factors.
Statistical comparisons do not show any significant
differences between the proportion of total loans
classified as farm loans as of a given date and the
usual measures of the rate of earnings on capital
accounts or upon total assets. Neither do they show
any relationship between changes in the proportion
of farm loans and changes in the rate of earnings.
There is, however, a positive and highly significant
relationship between the percentage of total assets
accounted for by loans and the rate of earnings. Con
clusive evidence on this point could be obtained only
by such an accurate cost accounting on different types
of loans as to be impracticable for most of the small
country banks covered by this study. The data do
indicate, however, that, on the average, the type of
loans that a country bank makes does not greatly
affect its profits. There seems to be no such clearly
defined connection between the type of a bank’s loans
and the bank’s profits as to require that farmers be
rationed either more or less severely than other types
of borrowers in the community.
Some Alternative Solutions
The foregoing characteristics of the structure of rural
banking and the effect they may have on the adequacy
of farm credit are pointed out for the purpose of
raising questions rather than to suggest answers. If,
however, it is true that farmers who use credit are
adversely affected, some effects of possible solutions
should be considered. When local banks fail to meet

what the business interests of the community believe
to be their proper needs, one common solution is to
organize a new bank. For the kind of problems raised
here, however, an increase in the number of banks
is definitely not the answer. The problems are most
acute in areas where the banks have already gone
“all out” to help finance agriculture. Merely to divide
a community’s deposits among more banks would not
make more local funds available.
A second alternative, the borrowing by banks from
other banks or from the Federal Reserve, has already
been rejected. Although borrowing may again be used
extensively to meet seasonal or emergency shortages,
as it has been in the past, the understandable reluc
tance of country banks to remain permanently in debt
seems to close this door.
Although some relaxation of legal restrictions on
lending and some change in the policies of bank super
visory authorities might help banks in making certain
kinds of farm loans, any possible benefits from such
changes would certainly not be worth the sacrifice of
the safety that the rules now give to depositors. The
policies of country banks are influenced more by the
commonly accepted principles of prudent banking
than by any particular set of rules.
On the farm side, a greater diversification in the
sources of farm income would allow banks in cash
crop areas to use their available deposits more effec
tively. In areas where farming is now well diversified
even small country banks usually do not experience
wide seasonal swings in deposits or a bunching of
loan demands into a short period.
In areas where income is fairly evenly distributed
as among agriculture, industry, and trade, deposits
can be used with the maximum efficiency. The use of

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credit is needed to obtain either kind of diversifica
tion. In communities where income is derived chiefly
from farming, however, and where most of the farm
income is from one or two cash crops, the bank de
posits upon which such credit can be based accumu
late only slowly.
One of the best ways for a bank in such a com
munity to get access to an outside credit market is
probably through the correspondent relationship.
Country banks have always relied upon help from
their city correspondents in carrying large or unusual
lines of farm credit. If this relationship could be
made workable on farm loans that are not large or
unusual, the structure of country banking and a slow
rate of deposit growth in a local community would
have little adverse effect upon farm financing. Cer
tain practical problems would, of course, have to be
solved. If loans, for example, could be kept on a local
basis so that the personal relationship between a
farmer and his banker could be retained, country
banks would be able to do a better job of serving
their trade areas.
No one of the more promising alternatives to the
present system seems likely to afford a quick solution
to the kind of problem under discussion. Over a pe
riod of years, however, some revision in the structure
of banking and in the relationship among banks would
undoubtedly prove beneficial to bankers as well as to
farmers. Certainly there should be, and need be, no
conflict between the present policy of restraining the
expansion of bank credit and carefully planned steps
looking toward greater mobility in the capital market
so that the reasonable and necessary credit require
ments of agriculture may be met effectively and
economically.
Brown R. Rawlings

[19]

Full text of Bank Lending to Farmers in the Sixth District : Borrowing During 1950; Current Livestock Lending Policies; Community Capital Accumulation and Farm Financing

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