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THE NEED FOR AND AVAILABILITY OF AGRICULTURAL CREDIT Remarks by Chas. N. Shepardson, Member, Board of Governors, Federal Reserve System, at stockholders' meeting of The Federal Land Dank of Houston, Houston, Texas, on February 21, 1956. For twenty-seven years it was my privilege, as a member of the staff of A. and M < college, to meet with numerous farm groups tliroughout the State "to discuss with them some of our Texas farm problems. On this occasion, p3?Q sident Evans has asked me, as a member of the Federal Reserve Board, to dis- GUss the need for and the probable cost, source and availability of funds to fi ftance our agricultural operations. lri Frankly, I would feel much more at home coming before this group as the Dean of Agriculture at A. and M. than I do iri ^ Present position, and ccrtainly I can talk much more freely about the for money than I can about its probable cost or availability. I need not tell this group about the increase in capital requirements f r ° Agriculture. Wel1 Most of you have faced that problem at first-hand. You are aware of the fact that both investment and operating capital needs have ^ c t i c a U y quadrupled in the past fifteen years. w °rker in In fact, the investment per agriculture is now greater than it is in industry. Off-hand, the in- cased capital requirement might be considered an added burden on the farmer. 4ctua U y , this had to come about if agriculture was to attain true parity of n & power with the rest of our economy. The high standard of living that we enjoy in this country is primarily ^ rQs ult of our high level of productive capacity per man-hour of labor in Amerindustry. This increased productivity is largely the result of mechaniza- ° n a*id technological improvement in production methods. Fundamentally, it is - 2 th Q substitution of capita?, in the form of mechanized power, equipment and ^ i U t l e s for human and animal labor. th This, in turn, has not only increased e capital requirements of agriculture but it has also brought about a rad- ial change in the type and amount of agricultural credit required to meet this ne ed. Few farmers, and especially few young farmers, can hope to acquire the ir total capital requirements early in their farming experience. goin They are g to have to depend upon larger amounts of credit and for longer periods thai * have heretofore been customary. Their credit worthiness needs to be deter- ^ e d by their technological "know-how", the adequacy of their plant, and the Sou ndness of their plan of operation rather than by tangible collateral and Vl Uingness to work regardless of the effectiveness of that work. In fact, VhUe ^ there "lay have been too much extension of credit merely because there was ad- talk about the need for more credit, it appears that in some cases collateral and the borrower was a deserving individual even though his Op0f ation was a losing one, resulting in a gradual attrition of his assets. I mentioned earlier the relationship of productivity to parity of earni SDnie pQr ng power. It seems anomalous to find agriculture suffering from burden- surpluses and. depressed prices in the face of an otherwise generally pros- ou s economy and a record level of consumer buying power. thxs bey Actually, much of situation stems from price incentives that have stimulated production ° n 3 our capacity to consume and have hampered the development or even reten- tl0ri of our historic foreign outlets. ^ y It has also resulted in the continuation inefficient operations which would otherwise have been diverted to ° t h e r uses. It would therefore seem that more selectivity in credit extension ^Sht contribute to the long-run solution of our over-all farm problem. - 3Now as to the cost and availability of funds for financing the legitiln ate needs of agriculture. Quite obviously, this is but a part of the all- ^Portant problem of maintaining the stable economic growth and development of the nation as a whole. Any solution to the special problems of agriculture ^ t presuppose a stable economy, expanding steadily at a rate which can be ^stained. Booms and busts are wasteful and damaging to all sectors of our ^onomy but, as many of us can well remember, they are ruinous for the farmer. Por Xe this reason, I want to take this opportunity to discuss some of the prob- *s of over-all economic stability as we see them at the Federal Reserve Board. First, let me remind you that, while everyone fears deflation and to ° *any people feel that a little inflation is a good thing, the most effec- tive leve prevention of deflation is an adequate restraint of inflation. Rising ls of prosperity achieved through increased productivity at a stable level ° f P^ces should be our objective. The principal function of the Federal Re aervQ System is to provide the credit necessary to support a sustainable economic growth while maintaining the value of the dollar. In many ways, 1955 provided us with some excellent illustrations of thQ Problems involved in the attainment of stable economic growth. In the States and in most other countries, it was a year in which output and ern Ployment advanced to new record levels. Iar By the beginning of the year we had 2ely recovered from the moderate declines of late 1953 and 1954, and by mid- year in Tak our available resources were being intensively utilized despite an increase the si2e of the labor force and in industrial capacity and productivity. on altogether, 1955 was a year of prosperity and plenty for the economy as * vh°le although it did not extend to all phases of the economy. Some lines - 4 of industrial activity did not share fully in the broad advance and agriculture, as we all know, actually suffered a further decline in the downward trend of *eoent years. Many forces combine to determine the rate of economic activity and the general levels of employment and prices. aric3 availability of credit and it is on this factor, of course, that the Federal One important factor is the cost Reserve System is able to exert some influence. Much has been said and written in r ecent years about the importance or potency of monetary policy in the main- te *ance of economic stability. There is no doubt in my mind that the proper ac} 3ustment of credit cost and availability to changing economic conditions is a vit al, indeed indispensable, element in any valid approach to long-term 3c °nomic growth and stability. On the other hand, it is important to recognize that there are other eIe the ^nts in the picture together with the imperfections of human judgments in administration of monetary and credit policy which affect stability. As a 1>es ult, it is inevitable and possibly even desirable that there be some mild ons in the rate of our economic growth. When demand is pressing on opacity? maladjustments and inefficiencies are apt to develop, which can be C rr, ° Qcted only in periods of reduced pressure. Recognizing these variations in growth pressures and in order to make thoir P0li Maximum possible contribution to stable economic growth, our monetary ^es must obviously shift from time to time - relaxing to encourage a more ***** expansion of credit than would otherwise occur in some circumstances and U ^tening at others to restrain overrapid credit growth. This flexible adjust- of credit policy to changing economic conditions is not only essential to - 5th e best interests of the nation as a whole but to the establishment of a pro Per setting for the essential readjustments in the agricultural segment. It is not too difficult to persuade people of the desirability of landing credit availability and lowering credit costs when economic activity tokens. The only criticism one is likely to encounter with respect to such aot ions is that they are either too little or too late. On the other hand, the imposition of some restraint on credit expanand the increasesin interest rates, which inevitably accompany it, are never Who popular and in almost every sector of the economy you can find people will argue that the over-all restraint on credit growth works special hard- Stli Ps on their particular business. I do not believe, nor do I mean to suggest, that there is any insinabout these arguments. Vhil The pain of credit restraint is felt directly e the benefits are indirect — largely in terms of things that do not happen. example, if our general credit policy results in sorre limitation on the 8r °wth of real estate credit, builders feel the impact directly while the ben- Sfit > in the form of some restraint on the upward spiral of material and other bui] -din3 costs, is not so obvious. atin ln the The long-term advantage to them of moder- S wide swings in over-all economic activity,which cause major fluctuations employment, income and prices, seems very remote indeed as compared with Profit they might make on the additional units they could build if they jUat ^ the fi nanc ing # I would like to believe that farmers and, perhaps even more importantl ^ y, the officers of institutions concerned with farm financing are a little sophisticated about this than people in some other sectors of our economy. - 6 are familiar with the operation of markets and their response to supply demand pressures and are frequently reminded that an excessive fluctuation in one direction or the other is likely to be counterbalanced shortly by an °PP°site movement. ^ k e t is a In fact, the present depressed condition of the livestock timely illustration of the effect of the over-exuberance which th ose markets enjoyed in recent years. 0thg These and similar fluctuations in r farm commodities lead us to wonder if farm lenders always exercise the Prudent restraint of credit that our knowledge of these cyclical swings would ^stify. the B u t i t is trUQ i n Pain ~ farming, as in other segments of the economy, that in the form of increased interest cost and more limited credit Pliability ~ is much more apparent than the benefits, which must be found i v\ cost increases which did not occur. If we look at the whole picture, it is obvious that relatively small Cha »ges i n interest cost, which represent only a small fraction of the total c °st of f a r m 0 p e r a tion, cannot be compared with the importance of retraining lnf lationary pressures on the price of those other^gc/ods and services which Coni PrisQ iSSty--fivff per cent or more of total farm costs. In this connection, too, it is important to recognize that an undue n3e in prices drives consumers out of the market. e *Pensive process to get them back. It is often a slow and Agriculture is suffering from just that Edition at the present time in many commodities, notably cotton, beef, pork ana - butter. We should also remember the importance to agriculture of a grow- economy which can afford reasonable employment opportunities for those who BlUat teG inevitably leave farming, as the progress of mechanization and other hnical improvements reduces still further the percentage of our population nQe ded to maintain farm output. » - 7 - Coming back to 1955 and the developments which took place during tha t year, it is no secret that the Federal Reserve System directed its efforts toward credit restraint from the spring of the year. The results of these eff orts have been widely discussed and commented upon and the casual reader ^Sht well gain the impression that these policy actions resulted in a sharp b a i l m e n t in lending activity during the year. tha I am sure you all realize t this was not the case but I wonder if you had observed that in fact 1955 Wl tnessed the largest expansion in the dollar volume of loans at commercial b ^ks i n tiori our entire history -- amounting to about 11 billion dollars. I men- this rather striking figure to emphasize that credit policy was not di- e t e d toward, nor did it accomplish, any reduction or even leveling of the of credit available to the private economy. Was What it attempted to do to bring about some restraint on the rate of expansion. There was never question that some growth in the volume of bank credit to meet the needs 0i °ur expanding economy is both necessary and desirable. The only valid on the rate of our economic growth is found in the emergency of inflatin °nary pressures, resulting from an excessive rate of expansion and giving to maladjustments which lead to potentially serious reversals. To accomplish the proper degree of restraint, the Federal Reserve Sys Co tem took several types of action during 1955. Open market operations were ^Ucted so as to bring about greater reliance on member bank borrowing from the federal Reserve Banks during the year. While the Federal Reserve reduced Portfolio of Government securities only slightly over the year, growing ^ n d s for currency and credit were reflected in increasing pressure on bank resQ rv e positions. Member bank indebtedness to the Federal Reserve Banks, - 8Whi °h had been about $>150 million in the last quarter of 1954, averaged more than $900 million in the last quarter of 1955. duri Excess reserves also declined ng the year. Transactions in the System open market account were timed, of course, to Q °rrespond to seasonal changes in the demand for credit and seasonal needs for currency in circulation. In January and February, when bank reserves were ^ e available by a return flow of currency from circulation and a seasonal Auction in deposits and required reserves, the ^Ure, ot a b o u t 1 # 3 biHion System sold, or allowed to of its holdings, thus absorbing reserves which could herwiSG have served as the base for credit and deposit expansion. In view the strong demand for credit, member bank borrowing increased somewhat in the se and iater months. Early in July, anticipating the normal seasonal needs for additional furi(3 s. in the second half of the year, the System supplied reserves through ° P e n Market purchases of securities. p0ai This regular adjustment of banks' reserve tion s to meet the needs of commerce, industry, and agriculture has become S ° Customary that it attracts little attention, but I believe it is worth P ° i n Ung out that even in a ^te of credit growth — the period when we are frankly concerned about the as we were in mid-1955 — it is necessary to expand credit base to allow for these normal needs. As the summer and fall progressed, it was apparent that credit demands increasing more rapidly than normal seasonal factors would require and this ' excess demand was allowed to express itself in increased member bank borfrom tile ftGServe Banks. „ 9- In November and December we carried out further purchases of securit fu ies in the market to meet the usual seasonal needs, thub supplying reserve ^ s to provide for both the credit and currency needs associated with the harvesting and movement of crops and the relatively high level of retail trade the latter months in the year. of In late December, as in the same period most other recent years, the Federal Reserve purchased securities under re- P^ohaae agreements with dealers and brokers in order to moderate year-end aon ®y market pressures. The persistent strong demand for credit throughout the year, presson the limited supply of loanable funds, resulted in upward pressure on Merest rates, especially in the short end of the market. pu The consistent *amt of the System's policy of restraint under these circumstances called for increases in the discount rates at the Federal Reserve Hanks. yeai> During the discount rates were increased from 1-1/2 to 2-1/2 per cent in all Federal He aerve Districts. By making borrowing more expensive, these increases tended discourage excessive reliance on borrowing by individual member banks and thua to moderate expansion of bank reserves through borrowing. The exact timing and magnitude of the changes in the rediscount rate, are called for in particular circumstances, can never be ascertained With exactitude by any mechanical formula. These are matters of judgment which the F ederal Reserve Act wi9ely prescribes shall be determined after a careful "eview of economic conditions at both the local and national level. Initial ^PonsibiUty falls on the officers and directors of the twelve Federal Reserve but the final review and determination is the duty of the Board of Govi n Washington. Both technically and in fact, a decision to change the - 10 r *te of rediscount for the country, as a whole, is arrived at only after care- ful consideration by over ICO directors at the various Federal Reserve Banks. ThGi ? judgments are based on their own knowledge of credit and economic con- ations in their various areas and the best information that can be assembled b y the officers of each Federal Reserve Bank. and sta These decisions are then weighed evaluated by the Board in Washington, with the assistance of its technical ^ , and it is only after this painstaking review that a new rate is deterin accordance with Sec. H ( d ) of the Federal Reserve Act. four This happened times in 1955 and X assure you that in each case the final action was , taken only after the most careful and detailed consideration. As stated before, the paramount objective of the Federal Reserve ^stem in its determination of monetary policy must continue to be over-all 8r °wth and stability. The System should, and I am sure it will, continue to ad ^st its policies to allow for seasonal fluctuations in the currency and Cr ^it needs of the economy. Vate Without duplicating the work of public or pri- agencies which have a primary responsibility to agriculture, it should t r i b u t e all it can to a better understanding of the credit needs of agriCUltu re and the best and most economical methods of financing farm production - Eluding, of course, the collection and publication of the information on farm lendi ana ng, which is our appropriate responsibility. From time to time it can <*oes lend its support to other research or educational activities which Ve h °Pe will make some contribution to the welfare of the agricultural sector. In supervisory capacity, the System should make an effort to assure the acie quacy of the banking structure, in both rural and urban areas, and to en- g a g e lending policies which will insure the availability of credit for conductive purposes to farmers and small businessmen alike. - 11 This is about as far, it seems to me, as the Federal Reserve System sh °uld go. If, as a part of the Federal farm program, it is determined that some further special arrangements must be made with respect to agricultural dancing, these should properly fall within the framework of the institutions and agencies which have been established by law to deal specifically with farm Cl> edit. As I have indicated on other occasions, I feel that the credit needs of agriculture are changing with technological developments and with the shift to larger units and increased capital investment. lendi to ug institutions should be prepared to maet these shifting needs if we are emerge from our present difficulties with a healthy, adequately financed, ^ c u l t u r a l sector. S It is certainly vital that ^tem __ a central But these are not matters in which the Federal Reserve bank — should intervene. They call for a flexible and l i g h t e d lending policy on the part of banks and other lending institutions for Una Vhi a better utilization of the available pool of trained specialists who ^3tand farm pi a n n i n g and can help both the farmer and lender develop plans °h will result in good loans on creditworthy and profitable farm operations. As you all know, it is not the policy of the Federal Reserve Board to ^terpret its current actions in the policy field or to make predictions aS t o the future course of events. He issue a weekly statement which shows e *actly the changes in our portfolio during the preceding week — ^ to that the market to evaluate these operations. Therefore, you will appreciate I must be somewhat circumspect in commenting on the current situation Warding the cost and availability of funds the and leave coming months. and likely developments over As the Chairman of the Board recently testified before a J• 0:int Committee of the Congress, we regard the present period as one in which must feQl our way" very cautiously. - 12 It should be borne in mind that the strength and effectiveness of ^netary policy lie in its flexibility. the to While it must be constantly alert to need for restraint of inflationary pressures, it must be equally sensitive the need for cushioning any recessionary tendencies. Consequently, it is ^Possible to predict either the cost and availability of credit or the directlo n of monetary policy since this will be dependent upon the day-to-day Section of pressures in the economy with the System, serving much as a shock ^sorber to dampen the effect of pressures in either direction. One thing seems reasonably certain Mailable in 1956 will be very large. the supply of loanable funds Just the normal stream of repayments ° n instalment contracts and mortgage loans is tremendous. If credit is rela- tively tight in 1956, it will be because loan demand is high and business is active. year If, as many people expect, these demands are not as keen this as last, it would be reasonable to conclude that credit availability ^ g h t be somewhat easier in the period ahead. c ^UoUs dev Our general feeling is one of optimism and sincere hope that we can contribute our part to the stable *lopment of this country's resources, so many of which are found here in the Cl e ' at Southwest. Those remarks have been on what I have discovered people in Washing- ton c refer to as the national level - °Untry as a whole - in your own area. ^ a r k of thQ a that is, I have been talking of the while, naturally enough, you are much more interested On this, all I can do is to paraphrase the rather famous high official in Government - country", and vice versa. "What's good for Texas, is good for
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