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A review by the Federal Reserve Bank of Chicago Business Conditions September 1972 Contents Directory of international organizations Th e F a rm C re d it S y ste m 2 10 Federal Reserve Bank of Chicago Directory of international organizations 2 It is almost impossible to read a major newspaper thoroughly nowadays without coming across names of organizations in volved in international economic affairs. But even as this form of repetition increases public consciousness of these organizations, it is often difficult to retain a clear under standing of the functions of the many and diverse groups involved. What has given rise to the proliferation of international organization since World War I has been an increasing awareness by national governments that the well-being of their economies are interdependent in matters of currency and trade. In the mod ern era of instant communications and jetage “shoulder rubbing,” more and more governments have come to recognize the need for formal rules to regulate multina tional economic relationships. To date, it would seem, international organizations have proved the most effective mediums for accomplishing the objectives. The purpose of this directory is to identify major international organizations now in operation, and to describe briefly their pur poses and functions. It is hoped that such a listing will provide the interested reader with a concise “Who’s Who” in the world of international organizations. The directory divides the organizations into three categories based on their primary area of involvement. Although the stated objective and functions of any particular organization might indicate an overlap into more than one category, the three-part breakdown remains useful for an overview. The categories are: • Organizations whose primary interest relates to monetary policy and financial matters. • Organizations whose primary interest relates to development financing and economic and technical assistance. • Organizations whose primary interest relates to international trade and re gional development. Monetary organizations Bank for International Settlements (BIS). Most currently viable international organi zations are of post-World War II vintage. The BIS, however, originated in 1930, grow ing out of the need for an organization to promote international cooperation among European central banks—a need stemming from difficulties experienced in the interna tional administration of Germany’s World War I reparations payments. The bank, located in Basle, Switzerland, survived World War II, the reconstruction, and recurring international financial crises, and today continues as a highly-regarded institution for the coordination of certain multinational monetary arrangements, and serves as a pipeline for the exchange of in formation among major central banks. Business Conditions, September 1972 Committee of Twenty (C-20). (See Interna tional Monetary Fund.) After the currency realignments in December 1971, the United States proposed that the International Monetary Fund develop a research and policy group more broadly based than the Group of Ten, one that would include rep resentation from the less developed coun tries. A proposal to this effect was approved by the International Monetary Fund mem bership, and the Committee on Reform of the International Monetary System and Re lated Issues (C-20) met for the first time in September 1972 at the annual meetings of the International Monetary Fund in Washington, D.C. Membership in the 20nation group is made up of the Executive Board of the International Monetary Fund —currently appointees of France, Germany, India, Japan, the United Kingdom, and the United States—and 14 representatives elect ed by the remaining 118 members. Group of Ten (G-10). (See International Monetary Fund.) In 1962, ten major indus trial countries—Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom, and the United States—agreed to support the In ternational Monetary Fund’s General Ar rangements to Borrow by lending their own currencies should that become necessary. Be cause of the group’s dominant economic stature, it evolved into an important poli cy-making body within the International Monetary Fund. For example, the mone tary realignments of December 1971 were basically a product of G-10 negotiations. International Monetary Fund (IMF). First envisaged in July 1944 at the United Nations Monetary and Financial Confer ence1 at Bretton Woods, New Hampshire, and implemented in December 1945, the International Monetary Fund today is the world’s foremost organization dealing with international money matters. IMF policies formed the foundation for the postwar re covery of the international monetary sys tem by fostering two goals simultaneously. One was to provide for the convertibility of national currencies in an environment of international stability. The other was to in sure that individual nations could pursue independent monetary and fiscal policies. The IMF accomplished these goals through rules of conduct designed to promote the orderly operation of world money markets. Among the most important of these were procedures for borrowing reserves from the IMF, permissible exchange rate adjust ments, the establishment of currency values in terms of gold or the U. S. dollar, and the elimination of exchange controls. Over time, the IMF has been instrumen tal in developing policies conducive to the smooth functioning of the international monetary system and growth of world trade. It acts as a forum for cooperation among nations in monetary matters, and through its large staff of experts, as an advisory body particularly to small, developing na tions. Since 1970, the IMF has acted as the administrator of the special drawing rights (SDRs)—a scheme launched to provide member nations with additional interna tional reserves. In 1972, the Fund, with a membership of 124 nations as of September 22, 1972, is un dergoing profound change, as is the inter national monetary system itself. The sus pension of convertibility of the dollar into 1The United Nations did not come into being until June 26, 1945—the reference to “United Na tions” refers to a coalition of anti-Axis nations. 3 Federal Reserve Bank of Chicago gold in August 1971, the temporary floating of most major currencies, and the renewed imposition of currency and exchange con trols have struck at the heart of the IMF as it was originally constituted. But not only does the Fund continue to function, it has become the rallying point for governments looking for a new and reliable way to re vitalize the international monetary system. The Fund’s day-to-day operations are supervised by the 20-member IMF Execu tive Board, which is made up of six ap pointees of major members and 14 elected representatives of the remaining members. IMF headquarters are in Washington, D.C. The United States has dominated the op eration of the Fund since its inception. But this influence may have wained somewhat over the past year due to the spreading power base represented by the Committee of Twenty, and the increasing economic power centered in Western Europe and Japan. Financial assistance organizations Asian Development Bank (ADB). The ADB headquarters were established in the Philippines in 1966 primarily to provide technical assistance and loans for capital and infrastructure development within non communist Asian nations. Thirty-six coun tries are members of the bank—14 of them are non-Asian, primarily North American and European. A major part of the financial backing for the bank comes from Japan and the United States. 4 European Investment Bank (EIB). When the Treaty of Rome of 1957 created the European Economic Community, it also established the European Investment Bank, commonly called the European Bank. Originally, the EIB was thought of as a regional development bank that would re strict its lending activity to the six members of the Economic Community. It has since expanded its activities to associate members, Greece and Turkey, and other Communityassociated nations—mainly former colonies of Common Market members. The bank provides funds for development projects in less developed regions of the Community, for modernization or develop mental projects of interest to all Common Market members, and for the furtherance of progress within the Community itself. Located in Luxembourg and directed by of ficials appointed by members of the Euro pean Economic Community, the European Bank functions as an autonomous public institution within the Community. Inter-Am erican Developm ent Bank (IDB). Focusing on Latin America, this re gional development bank grew out of pres sures within Latin America for the estab lishment of a development bank specific to the region. It began in 1959, with head quarters in Washington. About 40 percent of the capital subscription comes from the United States. Development loans may be for social or economic purposes. International Bank for Reconstruction and Development (IBRD). This is another world organization that grew out of the Bretton Woods Conference. Formed as a companion institution to the International Monetary Fund—and, like it, headquartered in Washington—the International Bank for Reconstruction and Development—often called the World Bank—was established to provide IBRD-member governments with a Business Conditions, September 1972 source of long-term capital for the purpose of economic development. The bank ob tains funds through subscriptions by mem ber countries, bond offerings on various world capital markets, the resale of loans, and from earnings of active loans. From its inception through mid-1971, the World Bank had made loans of more than $16 billion in 89 countries. International Development Association (IDA). An adjunct to the World Bank, the International Development Association, lo cated in Washington, and administratively a part of the World Bank, was established in 1960 to provide long-term economic de velopment loans specifically to the less de veloped countries. A major distinction be tween IBRD and IDA loans is that IDA loans are restricted to less developed coun tries, and repayment and interest terms are less rigorous than is the case for IBRD conventional loans. Developed countries supply most of IDA’s capital subscription. International Finance Corporation (IFC). The International Finance Corporation, an other Washington-based and -administered adjunct of the World Bank, was established in 1956 to provide private firms in less de veloped countries with either loans or equity capital. Capital funds of the IFC come primarily from subscriptions of developed countries. World Bank. See International Bank for Reconstruction and Development. Trade organizations The organizations in this category have their roots in trade agreements. They are mainly regional in orientation, having been formed as special trading blocs. Some have long since gone far beyond strictly matters of trade, and today function on principles of multinational economic cooperation and have as a goal full economic integration. The Andean Group Common Market. In 1966, after it became clear that the fiveyear-old Latin American Free Trade Asso ciation was not progressing as rapidly as had been anticipated, the Andean group of nations took a small-scale approach to trade problems through a declaration of common objectives. In 1969, the common market concept was established formally with a 15- to 20-year plan to reduce internal trade barriers, to set common external tar iffs, and to develop a common approach to regulating investment, trade, and banking within the area. Observers of the Latin American area are more optimistic about the potential success of the Andean Group Common Market than they are about other Latin American integration schemes. Its membership so far is limited to countries bordering the Andes—Bolivia, Chile, Co lombia, Ecuador, and Peru. (Venezuela is associated with the group but is not a member.) Central Am erican Common Market (CACM). During the mid-1950s, the United Nations Economic Commission for Latin America proposed the idea of economic integration in Central America. In 1960, the work of nearly a decade was brought together in the Managua Treaty that estab lished the Central American Common Mar ket. Membership includes Costa Rica, El Salvador, Guatemala, Honduras, and Nica ragua. While the countries of the CACM are similar in terms of their cultural, social, 5 Federal Reserve Bank of Chicago and religious heritage—unlike the more di verse situation in Europe—moves toward integration in the area have been much more modest in scope than those of the European Common Market. One of the major early criticisms directed toward the CACM, and toward other at tempts at economic integration among less developed countries (LDCs), was that gen erally LDCs are producers of primary goods—raw materials and foods—and as such have little need to trade with each other. Reducing trade barriers through an LDC common market arrangement, it was claimed, would offer few advantages. Nonetheless, a Brookings Institution study reported that intra-CACM trade in creased about eight times between 1960 and 1968, and that a pronounced increase oc curred in the share of trade among market members.2 It seems beyond question that a substantial portion of these gains were achieved because the market agreed to eliminate internal tariffs on goods produced within the region, and to establish common tariffs against nonmembers. Another suc cessful undertaking within CACM was the Central American Clearing House to handle currency clearings of members. In recent years, progress in CACM de velopment has faltered. During 1969, an armed conflict between two members—El Salvador and Honduras—halted progress within CACM. And in September of this year, Guatemala, El Salvador, and Nicara gua refused to admit goods from Costa Rica. With political tensions continuing in the area, the future of the CACM is tenuous. 6 2Grunwald, Joseph; Wionczek, Miquel S.; and Camoy, Martin, Latin America Economic Integra tion and U.S. Policy, Brookings Institution, Washjngton, D.C., 1972, p. 45. Council for M utual Econom ic Aid (CEMA or COMECON). The Council for Mutual Economic Aid, commonly known as COMECON in the United States, is a Soviet-bloc organization with a common market orientation. Roughly equivalent to the European Economic Community, the CEMA places special emphasis on integra tion and coordination of economic planning and scientific research. Begun in 1949, the CEMA is currently in the early stages of a 15- to 20-year plan for attaining economic integration of member economies by the mid- or late 1980s. The CEMA, long dom inated by the U.S.S.R. and with headquar ters in Moscow, is made up of eight mem bers—Bulgaria, Czechoslovakia, East Ger many, Hungary, Mongolia, Poland, Ru mania, and Russia. European Common Market. See Euro pean Economic Community. European Economic Community (EEC) or European Community (EC). During the postwar reconstruction of Europe, there was a broad-based desire for increased economic cooperation among nations. In 1951, six nations established a “common market” by pooling their coal and steel resources to form a free trade area. This first step at economic integration was called the Euro pean Coal and Steel Community (ECSC). For powerful forces within Europe, calling for broader-scale economic integration, es tablishment of a free trade area in two basic commodities was only a beginning. The ECSC evolved into the European Economic Community, the official name of what is popularly known as the European Common Market. This successful economic integration plan began in 1958, with mem bership identical to that of the Euro- Business Conditions, September 1972 pean Coal and Steel Community. Belgium, France, West Germany, Italy, Luxembourg, and the Netherlands were the founders and shapers of the EEC. There has been no alteration in membership from 1958 through 1972. However, if the governments of applicant countries ratify pending agree ments, membership in the EEC will expand to include Denmark, Ireland, Norway, and the United Kingdom on January 1, 1973.3 The most obvious accomplishments of the EEC in moving toward economic integra tion have been the removal of tariff bar riers to trade among members, and the set ting of uniform community tariffs on non member imports. Other accomplishments of the Community include the development of the Common Agricultural Policy (CAP), a uniform stance on agricultural policy (see Business Conditions, February 1970), freer labor force mobility among members and associate members, and increased com monality in tax systems (see Business Con ditions, February 1971). The most recent, and if successful the most far-reaching, movement within the EEC concerns plans to establish a “common currency” and an implied common monetary-fiscal policy. What was evolved in the EEC is far more than a free trade area. Today, the Common Market is a community of nations with a degree of integration that makes it an eco nomic and political unit to be reckoned with on its own terms, quite apart from the nations of which it is composed. Headquar ters of the EEC are in Brussels, Belgium. 3In a national referendum late in September, the Norwegian electorate voted to reject EEC mem bership. The final decision will be made by a vote in Parliament which is expected to follow the lead set by the referendum. Denmark will hold a bind ing national referendum on EEC membership early in October. E u rop ean F ree T rade A sso c ia tio n (EFTA). When the European Common Market was in the formative stage, several important European nations chose not to participate in the Community. Nonetheless, these governments were fully aware that the common external tariffs of the EEC would place individual nonmember states at a dis advantage in the European Community. Spurred by mutual concern, Austria, Den mark, Norway, Portugal, Sweden, Switzer land, and the United Kingdom established the European Free Trade Association in 1960, with headquarters in Geneva, Switzer land. In 1961, Finland joined, and in 1970 Iceland became a member. Like the Common Market, EFTA sought a greater degree of international coopera tion among its members, but, overall, its aims were much more modest than those of the Common Market group. EFTA’s main objective was to eliminate tariffs and quota restrictions on industrial goods traded among its members. Unlike the long-range goals of the Common Market, EFTA’s ob jectives stopped short of the integration of members’ economies, and members retained full control over their own trade restrictions in relations with third countries. The future status of EFTA is uncertain. Britain will terminate EFTA membership when it joins the EEC next January. In 1970, Britain accounted for 56 percent of EFTAgenerated gross national product, and 43 percent of its world trade. Denmark and Norway have also negotiated a membership agreement, however, lack of public support within these countries may preclude them entering the EEC. (See footnote 3.) In that case, they will remain in EFTA. The six EFTA countries that chose not to apply for Common Market membership en gaged in negotiations with the EEC earlier 7 Federal Reserve Bank of Chicago this year in an effort to obtain trade conces sions to mitigate the economic impact of the association’s reduced size. Denmark and Norway, if they do not become EEC mem bers, may be expected to engage in efforts to obtain trade concessions from the EEC similar to those granted other EFT A coun tries. As EFT A develops a greater identifi cation with the Common Market through special trading arrangements (some of which have been negotiated), thereby accomplish ing adequate reductions in trade barriers, it may result in the eventual termination of EFTA as a formal organization. General Agreement on Tariffs and Trade (GATT). In the immediate postwar era, the 8 major trading nations of the world were quick to recognize the need for new rules to govern international trade relationships and the need to establish a forum for study ing and discussing mutual trade problems. This was long before many of these gov ernments began to view solutions to trade problems in terms of the integration of in ternational trading patterns and even of na tional economies. The United Nations sponsored the first major attempt to write new “rules of the game” for international trade following World War II. The International Trade Or ganization, proposed by the UN, failed to gain the necessary support and was dropped. Its aims and objectives, however, were at tractive to 23 important trading nations. In dependent of the UN, these Western Euro pean and North American countries, with the United States the driving force, worked out the General Agreement on Tariffs and Trade, and implemented the agreement on January 1, 1948. Today, GATT, with head quarters in Geneva, Switzerland, has 80 members, 15 nonmembers that adhere to its rules, and one provisional member. GATT’s primary purpose is to provide a framework of rules for international trade as free of governmental intervention and restriction as possible. To maintain this in termediary position. GATT calls for adher ence to the most-favored-nation principle in trade and to the use of the GATT as the forum for settling disputes and for negotiat ing reductions in tariff and nontariff barriers to trade. Testimony to GATT’s effectiveness is seen in two “rounds” of trade negotiations, one in 1960, the other in 1964, that resulted in significant and broad-scale tariff reduc tions. A third round of trade talks dealing with problems of nontariff barriers to trade is scheduled for 1973. (See Business Condi tions, February 1972.) GATT is unique among trade organiza tions. It has proved itself better able than any other organization to establish rules for international trade, and to provide re course to injured member countries by sanctioning penalties that injured countries might apply to member countries that break GATT regulations. But GATT’s toughest proving grounds may well lie in the future. As less developed countries (LDCs) have joined GATT, increasing pressure has de veloped for greater recognition of their trade problems. The domination of GATT by the major trading nations continues to frustrate many LDC efforts to obtain more favorable trade regulations vis-a-vis the de veloped nations. These trade problems are so troublesome in certain areas that the UN entered the picture directly through the United Nations Conference on Trade and Development. (See below.) Latin American Free Trade Association (LAFTA). This Latin American version of the European Free Trade Association was Business Conditions, September 1972 established in 1961. It encompasses Mexico and ten South American countries. Designed as an instrument of trade liberalization among member countries, its progress in this respect has been slow and its other accom plishments minimal. Originally, the free trade area was to be in operation by 1973, but that target date has been reset to 1980. Initial long-range plans to move all of LAFTA toward a common market have been all but sidetracked as emphasis within Latin America has shifted toward the devel opment of more economically homogeneous groups of countries within smaller, more manageable geographic areas. (See the An dean Group). Organization for Economic Development and Cooperation (OECD). In 1948, the Organization for European Economic Co operation (OEEC) was established as a co ordinating body for planning and adminis tering Marshall Plan aid in the economic recovery of Western Europe. When recov ery became a fact, the older body was re placed by the Organization for Economic Development and Cooperation. Today, OECD is a 23-member worldwide organiza tion concerned primarily with analyzing a broad range of economic issues. Consulting and advisory functions are implemented through the efforts of working committees, such as the Trade Committee, the Economic Policy Committee, and the Development Advisory Committee. The potential for dup lication between OECD committees and various other international organizations— for example the OECD’s Trade Committee and GATT—is more apparent than real. Seldom does the Paris-based OECD go past defining, examining, and analyzing prob lem areas, and making recommendations for actions. Typically, these functions are undertaken as complementary to work be ing done by other organizations. United Nations Conference on Trade and Development (UNCTAD). Frustration and dissatisfaction by the less developed coun tries with their treatment under the rules of GATT led to the development of the UN Conference on Trade and Development in 1964. UNCTAD, currently with 141 mem bers, was conceived as an organization which could apply itself to the unique trade needs of the developing countries. It has, however, been restrained by the developed countries from duplicating the operational roles of other international organizations, especially GATT. With the possible excep tion of control over some international com modity agreements, UNCTAD functions largely as a forum at which the LDCs make their needs known, and where these needs can be studied and analyzed. Resolutions adopted by the heavily-weighted LDC mem bership of UNCTAD may or may not be adhered to by members, at their individual discretion, with no sanctions involved for nonadherence. Regarding effective action on trade matters of concern to the LDCs, GATT remains the important agency. UN Economic Commissions. The United Nations has served as a springboard for a number of regional economic organizations. These organizations may be characterized as being oriented toward providing a forum for communications among members, and for promoting economic development with in the region. These are: UN Economic Commission for Africa (ECA), UN Eco nomic Commission for Asia and the Far East (ECAFE), UN Economic Commission for Europe (ECE), and UN Economic Commis sion for Latin America (ECLA). Federal Reserve Bank of Chicago The Farm Credit System The Farm Credit System of the United States has provided more than $150 billion in financing to farmers and their coopera tives since its inception in 1916. This tra ditional lending role of the System, how ever, was augmented recently when the Farm Credit Act of 1971 authorized the System to make certain types of nonfarm loans. This new dimension, along with liberalization of its farm lending, suggests that the Farm Credit System will continue to grow rapidly, despite indications that the growth in farm debt may slow in the years ahead. Structure an d functions 10 The Farm Credit System encompasses a nationwide network of 37 cooperativelyowned banks and more than 1,000 local associations. Responsibility for the overall direction of the System rests with the 13-member Federal Farm Credit Board. Twelve of the Board’s members are selected by the President of the United States, the other by the Secretary of Agriculture. The Farm Credit Administration—an independ ent agency of the U. S. Government—op erates under the policies established by the Board and provides supervision, examina tion, and coordination for the System’s banks and associations. The banks and associations are spread over 12 districts. A Federal Land Bank, a Federal Intermediate Credit Bank, and a Bank for Cooperatives are located in a central city within each district. The addi tional bank, the Central Bank for Coopera tives, is located in Denver, Colorado. Throughout each district are numerous Federal Land Bank Associations and Pro duction Credit Associations. These local associations link the System to individual borrowers. The Farm Credit System provides three types of credit. The Federal Land Banks and the Federal Land Bank Associations provide long-term real estate loans. The actual loans are made by the Federal Land Banks. The Federal Land Bank Associa tions, whose membership is made up of the individual borrowers, process real estate loan applications and service the loans made by the land banks. The Federal Intermediate Credit Banks and the Production Credit Associations join together to provide short- and intermediateterm production credit. The actual loans are made by the Production Credit Associa tions, whose membership consists of the in dividual borrowers. The funds for such loans are obtained by borrowings from, or discounts to, the Federal Intermediate Business Conditions, September 1972 The 12 Farm Credit Districts north Dakota SOOTH DAKOTA MICHIGAN NEBRASKA fColorado "ILLINOIS1 INDIANA Omaha IBerkeley' MISSOURI Denver Washington. St. Louis! ILouisviU KENTUCKY Wichita ALABAMA Houston ****** StOROIA . CAROLINA lNew Orleans ■ FARM C R E D IT BA N KS Federal Land Bank Federal Intermediate Credit Bank Bank for Cooperatives A C E N T R A L BA N K FO R C O O P ER A T IV ES • Credit Banks. The Federal Intermediate Credit Banks also make loans to, and dis counts for, other financing institutions serving agriculture. Banks for Cooperatives lend directly to farmer-owned cooperatives engaged in pro cessing or marketing farm products, pur chasing or distributing farm supplies, or providing farm services. The Central Bank FARM C R E D IT A D M IN ISTR A TIO N for Cooperatives lends to large farm coop eratives whose borrowing needs exceed the lending capacity of the district Bank for Cooperatives. The majority of the funds used for lend ing by the banks within the Farm Credit System are obtained through the sale of bonds and debentures in national money and capital markets. Other funds are ob- 11 Federal Reserve Bank of Chicago tained from earnings, and from the sale of investment bonds to individual borrowers and employees. Evolution of th e Farm C red it System The availability of credit in rural areas was inadequate to meet borrowing needs in the early years of this century. Many rural banks were small and undercapitalized. And prior to the establishment of the Federal Reserve System in 1913, rural banks did not have a reliable access to funds from 12 sources outside their communities. The sea sonality of rural borrowing needs and the lack of funds flowing between surplus and deficit areas often resulted in comparatively high interest rates on agricultural loans. Maturities on agricultural loans in the early 1900s were short, and repayments were not geared to income flows or the pro duction period of the enterprise being fi nanced. Three- to five-year real estate loans were common and, indeed, prior to the Federal Reserve Act in 1913, national banks Business Conditions, September 1972 were precluded from making real estate loans for longer than five years. With such short maturities, foreclosures on delinquent loans rose sharply when agricultural in come declined for any extended period. And because farm loans for operating pur poses were often collateralized by real estate, even temporary declines in farm prices could jeopardize a farmer’s entire land holdings. Such problems led Congress to enact the Federal Farm Loan Act in 1916. This act marked the first systematic participation of the federal government in any type of cash lending activity, and became the cornerstone for today’s Farm Credit System. The lan d b an ks The Federal Farm Loan Act of 1916 established the 12 Federal Land Banks (FLBs). The act authorized the land banks to make fully amortized farm mortgage loans with maturities of up to 40 years at interest rates not to exceed 6 percent. The National Farm Loan Associations (now known as Federal Land Bank Associations), also established by the act, were set up to process loan applications and service loans made by the land banks. All 12 of the Federal Land Banks were organized and in operation by 1917. The initial capital structure of each bank totaled $750,000 ($9 million in total), with practi cally all of the funds coming from the federal government. In 1932, the federal government subscribed to an additional $125 million in FLB stock to help offset a depressed market for FLB bonds—the pri mary source of funds used for lending. The following year, in conjunction with emer gency measures to reduce the large volume of foreclosures during the Depression, Con gress appropriated still another $189 mil lion to the FLBs’ paid-in-surplus account. The FLBs drew upon this latter appropria tion for several years, and in 1939 outstand ing government capital in the land banks reached a peak of $314 million. Retirement of the government capital was effected by a plan which required land bank borrowers to purchase stock in their local associations equivalent to 5 percent of the loan they received from a FLB. The local association, in turn, used the funds from the sale of its own stock to purchase an equivalent amount of the land bank’s stock. By 1947, all government indebtedness was retired, and the land banks, for all practical purposes, have been completely owned by farmer-borrowers ever since. In addition to providing capital, the fed eral government found it necessary to pro vide the land banks with other sources of funds during their early history. These addi tional funds came from Treasury deposits in the land banks, and through Treasury purchases of land bank bonds. Still other funds came from the purchase of land bank bonds by such government agencies as the Federal Farm Mortgage Corporation and the Production Credit Corporations. At times, the funds provided by these sources were substantial. For example, the $212 million of land bank bonds held by the U. S. Treasury in 1920 represented nearly twothirds of total land bank bonds outstanding. Production cre d it The production credit arm of the Farm Credit System developed in several stages. The 12 Federal Intermediate Credit Banks (FICBs) were established by the Agricul tural Credits Act of 1923. This act directed the Secretary of the Treasury to subscribe to the capital stock of these banks in an amount not to exceed $5 million per bank 13 Federal Reserve Bank of Chicago 14 ($60 million in total). Additional capital provided in later years pushed the govern ment’s peak outstanding capital in the FICBs to $126 million. The intended function of the Federal In termediate Credit Banks was to improve the ability of private lending institutions to pro vide intermediate-term financing to farmers at reasonable rates. This was to be accom plished by discounting eligible paper sub mitted by commercial banks, agricultural credit corporations, livestock loan com panies, and other specified institutions en gaged in lending to farmers. Eligible paper included notes, drafts, bills of exchange, debentures, or other such obligations which were direct evidence of funds advanced by the institution for agricultural purposes. To finance the discounting operations, FICBs were empowered to sell debentures in na tional money markets. Although it was expected that commer cial banks would be one of the major users of the FICB discounting privilege, bankers were reluctant to do so. In part, their re luctance reflected the upper limit on interest rates banks could charge on loans to their customers and still meet eligibility require ments for FICB discounting. According to the 1923 act, the margin between the in terest rate specified on paper discounted by a Federal Intermediate Credit Bank and the FICB discount rate could not exceed 1.5 percentage points. (In turn, the FICB discount rate could not exceed the rate on the last issue of FICB debentures sold by more than 1 percentage point.) Since this margin was not wide enough to include prevailing lending rates, bankers limited their use of the FICB discounting privilege. Another factor limiting the attractiveness of FICB discounting was the generally more favorable terms Federal Reserve System member banks could obtain by discounting agricultural paper through their regional Reserve bank. Federal Reserve banks did not impose a maximum limit on the margin between their discount rate and the interest rate on discounted paper. Moreover, the Federal Reserve discount rate tended to be lower than that for the Federal Intermedi ate Credit Banks, and the Federal Reserve’s definition of eligible paper tended to be broader than the FICB definition. Several attempts were made during the late Twenties and early Thirties to offset the limited use of FICBs by commercial banks. The margin between the interest rate on eligible loans and the discount rate was raised to 3 percentage points, and FICBs were granted the authority to make direct loans to institutions otherwise eligible for discounting privileges. In addition, other institutions were granted the privilege of ob taining funds from the FICBs. But despite these measures, the volume of discounting and lending by FICBs continued to lag original expectations. Finally, Congress passed the Farm Credit Act of 1933, which significantly expanded the role of the Fed eral Intermediate Credit Banks. The 1933 act authorized the establish ment of 12 Production Credit Corporations, one for each farm credit district. The Pro duction Credit Corporations were empow ered to charter local Production Credit As sociations (PCAs) and act in a supervisory capacity over them. The local PCAs were charged with the responsibility of making short- and intermediate-term farm loans. To obtain funds for lending, PCAs were grant ed the privilege of discounting their loans with the FICBs. Government-subscribed capital to the Production Credit Corporations totaled $120 million. The majority of this was to be Business Conditions, September 1972 used to purchase the stock of the local PCAs in each district. Additional equity in each local association was to be provided by borrower purchases of PCA stock—a requirement instituted to pattern retirement of government capital in Production Credit Corporations after the plan used for the land banks. Further changes came with the Farm Credit Act of 1956. This act merged the Production Credit Corporations with the Federal Intermediate Credit Banks and pro vided a plan for repayment of the consoli dated government capital so that the FICBs ultimately would be owned by the local PCAs. At the time of the 1956 act, most of the PCAs were already borrower-owned, and by the end of 1968 the remainder of the government capital in the FICBs was retired. Since then, the entire production credit arm of the System has been owned by farmer-borrowers. B an ks fo r C o o p e ra tiv e s Although Banks for Cooperatives formal ly emerged in 1933, their functions within the Farm Credit System started in 1923, when FICBs were established and author ized to discount eligible paper from agri cultural credit and marketing cooperative associations. Because these discountings proved small, Congress included the authori zation for Banks for Cooperatives (BCs) in the Farm Credit Act of 1933. The act called for the establishment of 12 district Banks for Cooperatives and a Central Bank for Cooperatives located in Washington, D. C. (recently moved to Denver, Colorado). The district BCs were authorized to lend directly to the farmer-owned cooperatives in their district. The Central Bank for Co operatives was designed to lend to large farm cooperatives whose operations cov ered more than one district, and to partici pate in large loans made by district BCs. Funds for BC lending were to be obtained by borrowing from, or discounting with, FICBs and commercial banks, and through the sale of consolidated collateral trust de bentures to investors in national money and capital markets. The original capital for the Banks for Cooperatives came from the governmentprovided Agricultural Marketing Revolving Fund—a fund established in 1929 and later transferred in part to the BCs. At the peak, outstanding government capital in the Banks for Cooperatives totaled $178 mil lion. Additional equity capital was to be provided by borrowing cooperatives with the ultimate objective that this source of equity could eventually be used to retire government capital. This was completed in 1968. The 1933 act established broad lending authorities for the Banks for Cooperatives. Eligible loans to farm cooperatives included (1) long-term loans for the construction or purchasing of buildings and other capital assets, (2) operating loans for inventories, supplies, etc., and (3) loans to facilitate the marketing of commodities or the purchasing of farm supplies. Interest rates and maturi ties varied by the type of loans, as did the stock purchase requirement placed on the borrowing cooperatives. G ro w th of th e System The Farm Credit System has recorded re markable growth, especially since the early Fifties. Total loans or discounts outstand ing nearly tripled in both the Fifties and Sixties, and by mid-1972 amounted to near ly $18 billion. Of this, over $15 billion—or nearly one-fourth of total farm debt out standing—represented direct loans to farm- 15 Federal Reserve Bank of Chicago ers. The remainder represented outstand principle repayments for a period of five ings at Banks for Cooperatives and FICB years, (4) make loans to liquidate the indebt edness of farmers with mortgaged land, and loans and discounts to non-PCA institutions. (5) raise the maximum loan to any one bor The land banks are the largest part of rower from $25,000 to $50,000. These pro the Farm Credit System and the leading visions caused a surge in the demand for institutional supplier of farm real estate fi FLB loans which, combined with the great nancing. As of mid-1972, loans outstanding er availability of funds, allowed the FLBs among the 12 FLBs totaled over $8 billion. to extend $730 million in loans during 1934 This accounted for approximately 25 per —a record that held until 1963. cent of total farm real estate debt and near Following the mid-Thirties, new money ly 44 percent of all institutionally-supplied loaned annually by the FLBs dropped sharp farm real estate debt. ly to a rather stable average of around $60 Lending activity of the land banks showed erratic patterns during the first million until 1945. But since then, new money loaned annually has trended steadily three decades of their existence. Temporary declines in the market demand for FLB bonds resulted in sharp reductions in the amount of new The Farm Credit System has money loaned by the land banks in the early Twenties, and again grown rapidly since the in the late Twenties and early late Forties Thirties. Congressional action, billion dollars however, provided rapid recov 8 T total loans and discounts outstanding ery—especially in the Thirties. BCs The latter recovery reflected sev PCAs eral factors. Funds available for lending rose sharply, reflecting FIC Bs to non-PCAs large government appropriations FLBs billion dollars to FLB capital, bond purchases 3 by other government agencies, and a decision to make FLB bonds the consolidated liability of all FLBs (thus improving in vestor demand). At the same time, congressional concern over the sharp rise in farm fore closures during the Depression led to authorizations permitting FLBs to (1) lower maximum in terest charges in both outstand ing loans and new loans to 3.5 1920 1930 1940 1950 I9 6 0 1970 percent, (2) eliminate late-payment penalty charges, (3) suspend B 16 Business Conditions, September 1972 upward, reaching a total of $1.7 billion in fiscal 1972. Despite fluctuations in lending behavior, outstanding farm real estate loans at FLBs rose steadily until interrupted by shortages of lendable funds in the late Twenties and early Thirties. But in conjunction with the emergency measures during the Depression, outstandings at FLBs rose sharply to over $2.1 billion by the end of 1936. This level, which represented over 30 percent of total farm real estate debt, was not surpassed until 1959. Following the mid-Thirties peak, FLB outstandings declined until the late Forties—reflecting repayments on the large volume of loans made during the Depres sion and the retirement of government capi tal—and then nearly tripled in the Fifties and the Sixties. Outstanding loans and discounts at Pro duction Credit Associations totaled nearly $7 billion as of mid-1972. This represented approximately 18 percent of total non-real estate farm debt and 31 percent of institu tionally-supplied non-real estate farm debt. In addition to the PCA outstandings, FICBs held $300 million in loans to, or discounts for, non-PCA institutions at midyear. Unlike the land banks, growth in PCA lending has trended consistently upward. Outstandings at PCAs increased 2.5 times during both the latter half of the Thirties and the decade of the Forties. Thereafter, the rate of gain in outstandings picked up sharply, rising to a near 3.5-fold gain in both the Fifties and Sixties. These growth rates outpaced both the gains in total nonreal estate farm debt and the gains in such debt provided by commercial banks—the leading institutional supplier of non-real estate farm debt. As a result, PCAs have continuously absorbed a larger portion of the non-real estate farm debt market. Banks for Cooperatives, like PCAs, have shown strong and consistent growth in their lending. Between mid-1934 and mid-1939, loans outstanding at BCs increased nearly threefold, followed by a nearly fourfold Federal Reserve Bank of Chicago increase during the Forties. The rate of ex pansion slowed during the Fifties, but again accelerated during the Sixties. As of mid1972, outstanding loans at Banks for Co operatives totaled $2 billion. N ew act p o rten d s fu rth e r g ro w th Prior to 1971, the legal framework sup porting the Farm Credit System was en tangled in a host of separate acts and amendments. The Farm Credit Act of 1971, however, completely rewrote the statutes governing the System. But more important ly, the 1971 act defined new lending provi sions which will provide a broader base for future growth of the Farm Credit System. The most noteworthy changes in the 1971 act are those that expand the definition of “eligible borrowers.” The act authorized both FLBs and PCAs to make loans to rural nonfarm residents, and loans to farmrelated businesses. Loans to rural nonfarm residents are restricted to financing the pur chase, construction, or remodeling of mod erately-priced, single-family dwellings that are permanently occupied by the borrow ing owner. The total amount of such loans outstanding at any FLB or PCA may not exceed 15 percent of its total loans out standing. Loans to farm-related businesses are restricted to the financing of those as sets or activities used by the business to per form custom-type, farm-related services on the farm. The act further liberalized the definition of “eligible borrowers” by authorizing PCAs to participate in eligible loans made by com mercial banks and other lenders, and au thorizing Banks for Cooperatives to lend to farm cooperatives whose membership is composed of at least 80 percent farmers, compared to the previously more restrictive 18 90 percent requirement. Another liberaliz ing feature of the 1971 act grants FLBs the authority to lend up to 85 percent of the “appraised market value” of the real estate securing the loan. Prior to this change, land banks were restricted to 65 percent of the “normal agricultural value” of the mort gaged real estate. Both the higher percent age and the revised basis for evaluating real estate will tend to boost FLB lending. Projected System gro w th to 1980 Projections of future developments are rarely accurate. Differing analytical tech niques and underlying assumptions often yield widely varying results. Nevertheless, projections can provide signposts that point up the general outline of particular devel opments at some juncture in the future. Such is the case in any projection of the future growth in farm debt and the amount of financing by the Farm Credit System. Total farm debt outstanding currently is estimated at about $65 billion and divided about equally between non-real estate loans and loans secured by farmland. While the magnitude of change In farm debt is un certain, it is clear that the upward trend has not run its course. One recent study projected that total farm debt would reach $107 billion by 1980. i This implies a some what smaller annual rate of growth in total farm debt than that experienced during the past two decades mainly because of an ex pected slowing in real estate financing. A separate study currently in progress suggests that real estate debt will account for 41 percent of the total farm debt by 1980 and non-real estate debt will account for the remaining 59 percent. Assuming the pro-1 1Emanuel Melichar, “Aggregate Farm Capital and Credit Flows since 1950 and Projections to 1980,” Agricultural Finance Review, vol. 33, July 1972. Business Conditions, September 1972 jected $107 billion in total farm debt is realized, farm real estate debt would total $44 billion and non-real estate debt would reach $63 billion by 1980. Federal Land Banks currently account for 25 percent of total farm real estate debt outstanding—up from around 19 percent in 1960. PC As, on the other hand, account for over 18 percent of total non-real estate farm debt outstanding, compared to less than 12 percent in 1960. If FLBs and PC As con tinue to enlarge their share of the farm credit market at the same rates as they have since 1960, the land banks’ proportion would rise to around 29 percent by 1980, while PCAs would increase to nearly 23 percent. The combined projections of $107 billion total debt and of the proportional breakdown between real estate and nonreal estate debt would imply that FLB loans outstanding to farmers would reach ap proximately $13 billion by 1980. Similarly, outstanding PCA loans to farmers might exceed $14 billion. The change in the 1971 act, permitting FLBs to lend up to 85 percent of “market value,” may cause FLB loans to farmers to grow at an even faster pace than indi cated. In 1945, FLBs were authorized to raise their loan-to-value ratio from 50 to 65 percent of the normal agricultural value. This was followed by a sharp uptrend in new money loaned annually. Whether or not that experience will be repeated follow ing the most recent change is difficult to foresee. However, the large portion of FLB loans made at the maximum ratio in recent years suggest that FLBs will have an in centive to utilize the more lenient rules. The new provision permitting PCAs to participate in loans made by commercial 19 Federal Reserve Bank of Chicago banks and other lenders should also tend to boost PCA loans to farmers. Although there is evidence suggesting that banks may be reluctant to use such arrangements, it is possible that much of this reluctance will dissipate by 1980. Moreover, since a signifi cant number of rural banks currently use loan participation arrangements with cor respondent banks, it seems reasonable that PCAs likely will attract at least a portion of the farm loans carried by banks under such arrangements. The new provisions in the 1971 act au thorizing PCAs and FLBs to make rural nonfarm housing loans and farm-related business loans may well contribute signifi cantly to the amount of credit extended by these lenders over the next several years. While the volume of rural housing loans le gally could reach an upper limit of 15 percent of total outstandings, an apparent reluctance on the part of some PCAs and FLBs likely will hold such lending to a smaller amount. And while the amount of farm-related busi ness financing is not subject to an upper limit, the restricted scope that the law pro vides for this lending makes it doubtful that such activity will represent a large part of total lending by FLBs and PCAs. Op portunities for such financing will exist and BU SIN ESS C O N D IT IO N S is p u b lish ed m o n th ly undoubtedly increase over the next few years. However, it will take time for the FLBs and PCAs to develop the expertise needed to evaluate such loans. While little basis exists to accurately pro ject the overall impact of the new provi sions on PCA and FLB outstandings, it is certain that the new lending authority will add to the expanding amount of credit ex tended. Thus, it is quite likely that the total credit (including that extended under the new provisions) outstanding at PCAs and FLBs at the end of the decade will ap proach, and could well exceed, the $30 bil lion mark. BC outstandings and FICB loans and discounts to non-PCA institutions could add an additional $5 billion to this total. Overall, the Farm Credit System is sure to achieve substantial growth during the current decade. Despite a projected decline in the rate of growth in total farm debt, which would slow the growth in loans to farmers provided by the System, such loans undoubtedly will continue to represent a larger portion of total farm debt. More over, the new authority to extend certain nonfarm loans could easily hold the Sys tem’s growth rate in total outstandings close to the rate of expansion which has prevailed since the Fifties. b y the F e d e ra l R eserve B a n k o f C h ic a g o . Ja c k L. H e rv e y w a s p r im a rily re sp o n sib le fo r the a rtic le "D ire c to ry o f in te rn a tio n a l o rg a n i z a tio n s " an d G a r y L. B e n ja m in fo r "T h e Fa rm C re d it S y s te m ." Su b scrip tio n s to Business Conditions a re a v a ila b le to the p u b lic w ith o u t c h a rg e . For in fo rm a tion co ncern ing b u lk m a ilin g s , a d d re ss in q u irie s to the F e d e ra l R ese rve B a n k o f C h ic a g o , B ox 8 3 4 , C h ic a g o , Illin o is 6 0 6 9 0 . 20 A rtic le s m a y be re p rin te d p ro v id e d source is cred ite d .
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