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F a r m C r e d i t - Supply and Demand F o r
Funds and Efficiency of C r e d i t Institutions
Speech by D a r r y l L. F r a n c i s , P r e s i d e n t
F e d e r a l R e s e r v e Bank of St. Louis
Before the National A g r i c u l t u r a l C r e d i t Conference
November 13, 1967

It is good to have this opportunity to d i s c u s s s o m e c u r r e n t
farm, c r e d i t p r o b l e m s with you who r e p r e s e n t the n a t i o n ' s m a j o r
s o u r c e s of f a r m c r e d i t .

The fact that we meet for this d i s c u s s i o n

indicates our g r e a t i n t e r e s t in the a g r i c u l t u r a l s e c t o r of our economy,Jn t e r m s of e m p l o y m e n t , the f a r m s e c t o r of the economy is
d e c l i n i n g . If attendance at this conference had r e m a i n e d p r o p o r t i o n a t e
to the n u m b e r of f a r m e r s , only about 50 p e r cent as many would be
attending today as attended twenty y e a r s ago,

However, r a t h e r than

followirjg the decline in n u m b e r of f a r m e r s , p a r t i c i p a n t s in these
c o n f e r e n c e s have i n c r e a s e d .

The farm c r e d i t i n d u s t r y is typical in

this r e s p e c t to other a g r i b u s i n e s s i n d u s t r i e s .

Both the f a r m supply

and the p r o c e s s i n g and m a r k e t i n g s e c t o r s have t r e n d e d constantly
upward.

A g r i b u s i n e s s output in 1965 totaled about $130 billion.

Such p r o d u c t s accounted for 30 p e r cent of the n a t i o n ' s economic
activity.

The a g r i b u s i n e s s group of i n d u s t r i e s grows about 4 . 0 per-

cent p e r y e a r in dollar volume, despite the decline in w o r k e r s at
the farm s e c t o r .




- 2 F r o m a national welfare viewpoint, we a r e indeed fortunate
to live in a nation and an age when the production of food and fiber
r e q u i r e s such a s m a l l portion of the n a t i o n ' s l a b o r .

Only 6 p e r cent

of our labor force in the United States was employed on f a r m s in 1965,
and the p e r cent employed in this s e c t o r has declined a l m o s t every
y e a r during the p a s t t h r e e d e c a d e s .

Indicative of the gains in f a r m

technology, one w o r k e r in 1966 produced sufficient food and fiber for
himself and 39 other people.

This was a l m o s t six t i m e s the n u m b e r

of people sustained by one f a r m w o r k e r at the t u r n of the c e n t u r y .
Of the 12 m a j o r i n d u s t r i a l nations of the world for which
data a r e provided by the OECD (Organization for Economic C o o p e r ation and Development), the United States in r e c e n t y e a r s has had the
lowest p e r cent of w o r k e r s employed directly in a g r i c u l t u r e .

Employ-

m e n t on f a r m s in the 1 9 6 0 s ranged from 6 p e r cent of the labor force in
the United States to 49 p e r cent in G r e e c e .

In W e s t e r n E u r o p e , one

of the m o s t highly-developed a r e a s of the world outside the United
S t a t e s , about 20 p e r cent of the labor force was engaged in a g r i c u l t u r e
and s t i l l failed to p r o d u c e sufficient food and fiber for the population.
The a r e a i m p o r t e d a sizable portion of its f a r m p r o d u c t n e e d s .
In n o n i n d u s t r i a l nations such as the African s t a t e s , India, and
Latin A m e r i c a , which contain about t h r e e - f o u r t h s of the w o r l d ' s population, m o r e than half of the work force is usually engaged in producing




- 3~
food.

In other w o r d s , while we a r e lining in a land of abundance,

m o s t of the world has b e e n subjected to the h a r s h laws of s c a r c i t y
as outlined by Malthus 150 y e a r s ago.

The level of population in

m o s t c o u n t r i e s m a y have actually been d e t e r m i n e d by the food supply,
and s t a r v a t i o n is the n o r m r a t h e r than the exception.
How have we in the United States achieved this efficiency in
the production of f a r m p r o d u c t s ?

I might begin by commenting that

we have made wise use of our productive r e s o u r c e s (labor, land
and c a p i t a l ) .

Our l a b o r has g e n e r a l l y been well t r a i n e d and our other

r e s o u r c e s have b e e n efficiently allocated, not dictatorially nor by
c o m m i t t e e , but by the d e s i r e of each p e r s o n to achieve g r e a t e r profits
via i n c r e a s e d s a l e s a n d / o r reduced c o s t s .

This incentive to m a x i m i z e

h a s provided a m a r k e t for productive f a r m r e s o u r c e s .

The m o r e

efficient o p e r a t o r s have found it profitable to expand by p u r c h a s i n g
r e s o u r c e s from o t h e r s .

Individual f a r m expansion has taken s e v e r a l

f o r m s , including m o r e a c r e s p e r f a r m and an i n c r e a s e in both fixed
and operating c a p i t a l .

The l e s s efficient o p e r a t o r s and many of the

f a r m youth not a l r e a d y e s t a b l i s h e d in farming have moved to other
occupations w h e r e l a b o r r e t u r n s a r e g r e a t e r .
Efficiency of f a r m production has been g r e a t l y enhanced bytechnological d e v e l o p m e n t s .

Science has attacked f a r m production

p r o b l e m s on a wide front and with amazing s u c c e s s ,




mechanization

.. 4 technology" has m a d e p o s s i b l e our l a r g e m u l t i - r o w cultivating and
h a r v e s t i n g equipment, as well as n u m e r o u s other l a b o r - s a v i n g
machines.

P l a n t and a n i m a l b r e e d i n g have changed the c h a r a c t e r i s t i c s

of plants and livestock.

C h e m i c a l s , including i n s e c t i c i d e s , fungicides,

weed control a g e n t s , and f e r t i l i z e r s , have b e e n developed which
enable p r o d u c e r s to g r e a t l y increase

output p e r a c r e and lower d i r e c t

l a b o r r e q u i r e m e n t s p e r unit of output,

E a c h s u c c e s s provided incentive

for additional i n v e s t m e n t in r e s e a r c h as m a r k e t s for productive
inputs developed.
In this development m o s t g o v e r n m e n t p r o g r a m s , e s p e c i a l l y
those concerned with education and r e s e a r c h , s e r v e d as a c a t a l y s t ,
aiding the m a r k e t to achieve m a x i m u m efficiency.

Agriculturally-

t r a i n e d s p e c i a l i s t s hired by the g o v e r n m e n t encouraged f a r m e r s to
adopt new devices and use new p r o d u c t s .

C r e d i t m a r k e t s for f a r m e r s

w e r e i m p r o v e d through the organization of the F a r m C r e d i t B a n k s .
R e s e a r c h supported by g o v e r n m e n t has made m a j o r contributions to
new f a r m production and m a r k e t i n g t e c h n i q u e s .

Government p r i c e

s t a b i l i z a t i o n p r o g r a m s have tended to reduce r i s k and possibly
t h e r e b y i n c r e a s e m a r g i n a l innovations.

On the other hand, p r i c e

s u p p o r t s have tended to reduce the r a t e of adjustment in the f a r m
l a b o r force and f a r m organization for m a x i m u m efficiency in some




- 5 areas.

The A c r e a g e Control P r o g r a m s , a companion to p r i c e

stabilization, may a l s o have contributed to inefficiency in f a r m
organization and output, but possibly hastened the exit of l a b o r
from a g r i c u l t u r e .

Despite the inefficiencies inherent in p r i c e and

a c r e a g e c o n t r o l s , m o s t other g o v e r n m e n t p r o g r a m s have, on b a l a n c e ,
tended to aid the m a r k e t forces in moving toward g r e a t e r efficiency
in the industryMost moves toward g r e a t e r farming efficiency have involved
l a r g e r quantities of c r e d i t for longer t e r m s .

High r e t u r n s to s c a l e

have hastened f a r m e n l a r g e m e n t and g r e a t l y enhanced demand for
farm real estate credit.

Such c r e d i t r o s e at the annual r a t e of 9 p e r

cent during the p a s t decade and at an annual r a t e of 7 p e r cent in the
p r i o r ten y e a r s .

Demand for c r e d i t p e r f a r m , i. e. , size of loan,

r o s e at a f a s t e r r a t e than total c r e d i t demand.

Total c r e d i t p e r f a r m

r o s e at.the annual r a t e of 13 p e r cent during the decade ending in
1966, with a l m o s t equal r a t e s of i n c r e a s e in r e a l e s t a t e and nonreal estate credit.

E a c h i n c r e a s e in p u r c h a s e d inputs from f a r m

supply i n d u s t r i e s has r e s u l t e d in a c o r r e s p o n d i n g i n c r e a s e in c r e d i t
demand.

Costs of many f a r m supply i t e m s such as m a c h i n e r y ,

b r e e d i n g livestock, and specialized buildings can only be r e c o v e r e d
after many y e a r s of u s e .

Demand for l o n g e r - t e r r a c r e d i t for non-

r e a l e s t a t e p u r p o s e s thus i n c r e a s e d .




- 6 D e s p i t e g o v e r n m e n t p r i c e stabilization p r o g r a m s ,
c r e d i t r i s k s have probably i n c r e a s e d .

farm

Major fluctuations in f a r m

income could f o r m e r l y be a b s o r b e d by the f a r m family, since family
l a b o r and other n o n p u r c h a s e d m a t e r i a l s constituted the m a j o r
portion of f a r m production expense.

Now, however, p u r c h a s e d

inputs total m o r e than four-fifths the value of all f a r m inputs and
t h r e e - f o u r t h s the value of a l l f a r m product s a l e s .
thus moved into the c a t e g o r y of a b u s i n e s s m a n .
operations has declined.
in r e l a t i o n to net r e t u r n s .

The f a r m e r has

His m a r g i n from

His capital and c r e d i t demands a r e high
He can now go b a n k r u p t .

With this brief background of developments in the farming
i n d u s t r y , it s e e m s a p p r o p r i a t e to a s k o u r s e l v e s the questions:
well have f a r m c r e d i t demands been m e t ?

How

How well has the c o m -

m e r c i a l banking s y s t e m p e r f o r m e d its job of supplying f a r m c r e d i t ,
and what a r e the p r o s p e c t s for bank c r e d i t to a g r i c u l t u r e during the
next few d e c a d e s ?
We have s e v e r a l y a r d s t i c k s for m e a s u r i n g the efficiency of
c r e d i t flows into a g r i c u l t u r e .

F i r s t , we have a g e n e r a l m e a s u r e ,

which is o v e r - a i l productive efficiency of the i n d u s t r y .
is c r e d i t s t a r v e d , it would n e c e s s a r i l y be inefficient.
h o w e v e r , t r u e r e l a t i v e to other n a t i o n s .
the world we a r e quite efficient.




If a g r i c u l t u r e
This is not,

C o m p a r e d with the r e s t of

We have a v e r y s m a l l p e r cent of

-

our labor force in a g r i c u l t u r e .

*7 «

—

i

—

Yet it is able to produce an e x c e s s of

f a r m c o m m o d i t i e s for d o m e s t i c use at c u r r e n t p r i c e s .

T h u s , on the

b a s i s of o v e r - a l l efficiency of f a r m production, it a p p e a r s that f a r m
c r e d i t demands have b e e n adequately m e t .
Another m e a s u r e of the f a r m c r e d i t m a r k e t is the r a t e of
r e t u r n on f a r m productive a s s e t s .

If a g r i c u l t u r e is s t a r v e d for

c r e d i t or capital, one would expect the r e t u r n s to capital to be
r e l a t i v e l y high.

In other w o r d s , if f a r m c r e d i t is s c a r c e ,

a s s e t s a r e likely to be m o d e r a t e l y p r i c e d .
such a s s e t s would be high.

farm

The r a t e of r e t u r n on

R e t u r n s on a s s e t s in a g r i c u l t u r e , how-

e v e r , a r e actually r e l a t i v e l y low.

Since 1959 the r a t e of r e t u r n on

productive a s s e t s in a g r i c u l t u r e has a v e r a g e d only about 5 p e r cent.
This is l e s s tha.n the a v e r a g e r a t e of r e t u r n on book value in any of
the 6l m a j o r i n d u s t r i e s listed in Standard and P o o r ' s Indvistry S u r v e y s .
Despite the differences in m e a s u r i n g the value of f a r m and nonfarm
a s s e t s , these data indicate that c r e d i t to f a r m e r s has been sufficient
to bid up f a r m a s s e t s to r e l a t i v e l y high l e v e l s .
A t h i r d m e a s u r e of f a r m c r e d i t availability is the i n t e r e s t
r a t e s paid by f a r m e r s on b o r r o w e d funds.

Rates c h a r g e d f a r m e r s

a r e g e n e r a l l y higher than r a t e s on other b u s i n e s s l o a n s .

It is

difficult, however, to c o m p a r e i n t e r e s t r a t e s in absolute t e r m s ,
since size of loan and r i s k involved g r e a t l y influence the r a t e c h a r g e d .




- 8 During the p a s t twenty y e a r s the r a t e s paid by f a r m e r s have
i n c r e a s e d l e s s than r a t e s paid by a l m o s t any other g r o u p .

Average

r a t e s on c o m m e r c i a l bank n o n - r e a l e s t a t e loans to f a r m e r s r o s e from
6. 3 to 7. 1 p e r cent.

This was an i n c r e a s e of only 13 p e r cent, or

l e s s than one p e r c e n t a g e point, in the r a t e paid, w h e r e a s the p r i m e
c o m m e r c i a l loan r a t e m o r e than tripled and the a v e r a g e r a t e on all
s h o r t - t e r m b u s i n e s s loans doubled.

A g r i c u l t u r e would thus a p p e a r

to be in a m o r e favorable position on the b a s i s of i n t e r e s t r a t e s paid
than it was twenty y e a r s ago.
T h e s e data on the f a r m c r e d i t situation a r e evidence that
a g r i c u l t u r e is being adequately financed and that f a r m e r s a r e able
to b o r r o w money at competitive r a t e s .
If, as indicated, a g r i c u l t u r e is being financed at r e a s o n a b l e
r a t e s , do we have a f a r m c r e d i t p r o b l e m , or is it limited to c o m m e r c i a l bank p r o b l e m s of financing a g r i c u l t u r e ?
suggest the l a t t e r .

The data s e e m to

The volume of n o n - r e a l e s t a t e f a r m c r e d i t by

c o m m e r c i a l banks has a l r e a d y declined to a s e c o n d a r y position in
some states.

In c o n t r a s t , p r i o r to the G r e a t D e p r e s s i o n of the 1930s

banks w e r e the only institutional l e n d e r s of i m p o r t a n c e in this field.
In the late 1930's the P r o d u c t i o n Credit A s s o c i a t i o n s and the F a r m e r s '
Home A d m i n i s t r a t i o n ( F a r m Security A d m i n i s t r a t i o n ) had begun to
supply s u b s t a n t i a l quantities of s h o r t - t e r m c r e d i t to f a r m e r s .

The

c o m m e r c i a l b a n k s 1 s h a r e of all s h o r t - t e r m f a r m c r e d i t by institutional




- 9 l e n d e r s had declined to 57 p e r cent of the total in 1939.

The

r e m a i n i n g 43 p e r cent included holdings of 30 p e r cent by the P C A ' s
and 13 p e r cent by the F a r m e r s ' Home A d m i n i s t r a t i o n .

Following

World War II c o m m e r c i a l banks w e r e in a highly liquid condition and
e a g e r to a c q u i r e additional l o a n s .

As a r e s u l t of this liquid condition

plus a rapid i n c r e a s e in f a r m c r e d i t demand, t h e i r holdings of s h o r t t e r m f a r m loans r o s e rapidly.

By 1952 the banks 1 s h a r e had i n c r e a s e d

t o 76. 8 p e r cent of the $4, 1 billion outstanding to r e p o r t i n g l e n d e r s .
The s h a r e of s h o r t - t e r m f a r m loans held by banks turned
down, however, in 1952 and the relative decline continued through
1967.

Nationally the banks 1 s h a r e of the total declined from 76. 8

p e r cent in 1952 to 69 p e r cent in e a r l y 1967.

The PCA p r o p o r t i o n

had i n c r e a s e d from 13. 8 p e r cent to 24 p e r cent during the p e r i o d .
Little change o c c u r r e d in the s h a r e s held by F e d e r a l I n t e r m e d i a t e
C r e d i t Banks, while the s h a r e held by the F a r m e r s 1 Home A d m i n i s t r a t i o n declined.
By e a r l y 1967 banks had been r e p l a c e d as the leading
institutional l e n d e r of s h o r t - t e r m f a r m c r e d i t in seven s t a t e s .

In

c o n t r a s t , banks w e r e the leading institutional s u p p l i e r s of such
c r e d i t in all s t a t e s only ten y e a r s e a r l i e r .
Looking at r a t e s of growth during the past ten y e a r s , banks
have m o r e than doubled t h e i r s h o r t - t e r m f a r m c r e d i t outstanding,
while the growth of such c r e d i t held by the P C A ' s has m o r e than




~ 10 tripled.

In d o l l a r amount, however, such holdings by banks

continued to i n c r e a s e f a s t e r , rising $ 4 . 4 billion c o m p a r e d with a
gain of $ 1 . 9 billion for P C A ' s ,

T h e s e data a l l point to the fact

that P C A ' s a r e rapidly becoming a m a j o r c o m p e t i t o r to banks in
supplying n o n - r e a l e s t a t e c r e d i t to f a r m e r s .
C o m m e r c i a l banks have h i s t o r i c a l l y held only a s m a l l
portion of the f a r m r e a l e s t a t e debt.

At the beginning of 1967 all

operating banks held only 14 p e r cent of all f a r m m o r t g a g e c r e d i t ,
a slightly s m a l l e r p e r cent than ten y e a r s e a r l i e r .

Thus banks can

look b a c k on a s m a l l r e l a t i v e decline in f a r m r e a l e s t a t e c r e d i t and
a g r e a t e r r e l a t i v e decline in n o n - r e a l e s t a t e f a r m c r e d i t .
The facts with r e f e r e n c e to f a r m c r e d i t so far indicate that
f a r m e r s a r e not only being supplied with c r e d i t at r e a s o n a b l e r a t e s ,
but that the competition for f a r m c r e d i t is so g r e a t that banks a r e
losing in the s t r u g g l e to maintain t h e i r r e l a t i v e position of r e c e n t y e a r s .
I do not believe that the r e l a t i v e decline of c o m m e r c i a l bank
c r e d i t to f a r m e r s can be t r a c e d to a s h o r t a g e of funds in the banking
s y s t e m as a whole.

F o r e x a m p l e , a l a r g e portion of the f a r m c r e d i t

supplied by the P C A ' s and the F e d e r a l Land Banks has come from the
commercial banks.

At the close of last y e a r banks held about $6. 5

billion of n o n - i n s u r e d government agency i s s u e s , a l a r g e p a r t of
which w e r e FICB d e b e n t u r e s and F L B b o n d s .
against cooperative farm credit.




This is not a complaint

On the c o n t r a r y , I would suggest

~ 11 that the evidence points to the possibility that t h e s e a g e n c i e s have
done a m o r e efficient lending job by p u r c h a s i n g funds from banks
at wholesale r a t e s and retailing t h e m out to f a r m e r s than has the
banking s y s t e m through d i r e c t l o a n s .
In looking at c o m m e r c i a l banks to d e t e r m i n e why they a r e
not gaining f a r m c r e d i t r e l a t i v e to other a g e n c i e s , t h r e e p r o b l e m
a r e a s are apparent.

I would classify them as follows:

(1) p r o b l e m s

a r i s i n g at the individual bank level, (2) bank s t r u c t u r a l p r o b l e m s ,
and (3) legal r e s t r i c t i o n s .
F i r s t l e t ' s take a look at some individual bank p r o b l e m s .

It

i s quite obvious from the data that a n u m b e r of banks a r e about "loaned
up," given the set of conditions under which they a r e c u r r e n t l y o p e r a t i n g .
A F e d e r a l R e s e r v e S y s t e m survey of bank c r e d i t to a g r i c u l t u r e in m i d 1966 indicated that 30 p e r cent of all f a r m banks in the nation had loant o - d e p o s i t r a t i o s in e x c e s s of 60 p e r cent and 10 p e r cent of such banks
had l o a n - t o - d e p o s i t r a t i o s exceeding 70 p e r cent.

Given the legal

r e q u i r e m e n t s for g u a r a n t e e i n g c e r t a i n public accounts and the need
for d a y - t o - d a y liquidity, it is a p p a r e n t that a s u b s t a n t i a l n u m b e r of
f a r m b a n k s , e s p e c i a l l y those with 70 p e r cent l o a n - t o - d e p o s i t r a t i o s ,
a r e s h o r t of liquid a s s e t s .
F u r t h e r confirming the "loaned u p " t h e s i s is the fact that
o n e - s i x t h of all f a r m banks in the nation r e p o r t e d difficulty in
m e e t i n g f a r m financing r e q u e s t s from t h e i r own r e s o u r c e s .




About

- 12 one-eighth of all banks in the Eighth F e d e r a l R e s e r v e D i s t r i c t
s i m i l a r l y r e p o r t e d difficulty in meeting f a r m c r e d i t r e q u e s t s .
P r i o r to rushing out with m a j o r p r o g r a m s for the solution
of this p r o b l e m , however, we should take a n o t h e r look at the
situation.

Surely one i m p o r t a n t factor in meeting c r e d i t r e q u e s t s

is the p r i c e c h a r g e d on loans - - i n t e r e s t r a t e s .

If the r a t e s c h a r g e d

a r e below the going r a t e for s i m i l a r l o a n s , one would expect an
e x c e s s of r e q u e s t s and obviously all r e q u e s t s could not be handled,
i . e . , rationing b e c o m e s n e c e s s a r y .
On the other hand, if the p r i c e paid for loanable funds such
a s t i m e and savings deposits is below the going r a t e , it is r e a s o n able to expect a s h o r t a g e of incoming money.

One way of looking at

the supply side of the c r e d i t m a r k e t is to imagine yourself a wholesale
merchant.

If his offering p r i c e for apples is somewhat below the

going r a t e but his asking p r i c e is the c u r r e n t m a r k e t p r i c e , he will
find his opportunities for selling to be about n o r m a l , but his w a r e houses will soon be empty b e c a u s e his p u r c h a s e s will decline.
The da.ta indicate that many c o m m e r c i a l banks a r e trying
to o p e r a t e in a m a n n e r s i m i l a r to that of the wholesale apple m e r c h a n t .
Of the 175 banks in the Eighth F e d e r a l R e s e r v e D i s t r i c t which r e p o r t e d
difficulty in m e e t i n g f a r m c r e d i t r e q u e s t s , 119, or t w o - t h i r d s of the
total, w e r e paying well below the m a x i m u m p e r m i s s i b l e r a t e s on




- 13 savings in m i d - 1966.

It s e e m s a p p a r e n t that funds will be lost

to other agencies and other geographic a r e a s if the local
offering p r i c e is not at generally competitive r a t e s .

I might

mention that t h e . P C A ' s , the banks 1 leading c o m p e t i t o r in supplying
s h o r t - t e r m f a r m c r e d i t , w e r e paying well above 5 p e r cent for
t h e i r funds l a s t y e a r .
P a r t of the individual bank p r o b l e m in the f a r m c r e d i t
field is probably a s s o c i a t e d with motivation and quality of p e r s o n n e l .
When I o b s e r v e bank s t a t e m e n t s which show low l o a n - t o - d e p o s i t
r a t i o s and note the high rate of growth of non-bank loans to f a r m e r s
in t h e i r c o m m u n i t i e s , I can only a s s u m e that the b a n k e r d o e s n ! t
c a r e for the additional b u s i n e s s .

P e r h a p s m o r e competition among

financial a g e n c i e s is d e s i r a b l e in such c o m m u n i t i e s .

In other

i n s t a n c e s the quality of p e r s o n n e l in the competing agencies a p p e a r s
to be the deciding factor.

Most of the non-bank f a r m c r e d i t a g e n c i e s

a r e staffed by w e l l - t r a i n e d f a r m c r e d i t s p e c i a l i s t s .

Banks in r u r a l

c o m m u n i t i e s m a y a l s o find it advantageous to obtain s p e c i a l i s t s in
f a r m c r e d i t , j u s t as banks in n o n - f a r m a r e a s have c r e d i t s p e c i a l i s t s .
This would be a m a j o r step in equalizing bank opportunities in the
f a r m c r e d i t field.
Second to individual bank p r o b l e m s in m e e t i n g f a r m c r e d i t
competition I would place bank s t r u c t u r a l p r o b l e m s .

Some banks

grow at rapid r a t e s while others grow at s l o w e r r a t e s .




The

- 14 capitalization and c r e d i t needs of m o s t f a r m s a r e i n c r e a s i n g at
a v e r y high r a t e .

As a r e s u l t , many f a r m s a r e becoming i n c r e a s -

ingly difficult for the local banks to finance b e c a u s e of size alone.
Some banks a r e located in low savings and high c r e d i t demand a r e a s .
Since loanable funds of banks a r e g e n e r a l l y obtained locally, t h e s e
banks may not be able to obtain sufficient funds at competitive r a t e s
to m e e t t h e i r f a r m c r e d i t r e q u e s t s at going r a t e s .

A banking s y s t e m

which moved funds freely throughout the nation from high savings to
high demand a r e a s would apparently be m o r e efficient in meeting all
credit demands.
In the a b s e n c e of a nationwide banking s y s t e m we a t t e m p t
to ta,ke c a r e of t h e s e local fund s h o r t a g e and overline p r o b l e m s
through c o r r e s p o n d e n t banking.

Individual overline r e q u e s t s have

probably been handled through the banking s y s t e m with g r e a t e r
efficiency than local demands which ha/ve r e s u l t e d from o v e r - a l l
liquidity s h o r t a g e s .

About one bank in seven r e p o r t e d to the F e d e r a l

R e s e r v e S y s t e m of having r e c e i v e d overline r e q u e s t s during the 12
months ending in June 1966.

Of the s m a l l e r banks (those with

c a p i t a l and s u r p l u s of l e s s than $300, 000) m o r e than a fourth received
overline r e q u e s t s during the y e a r .
I believe that m o s t l a r g e c o r r e s p o n d e n t banks a r e e a g e r to
p a r t i c i p a t e with t h e i r c u s t o m e r s in handling overline demands of
farmers.




On the other hand, I know of i n s t a n c e s w h e r e s m a l l e r banks

- 15 p r e f e r r e d not to be b o t h e r e d with such c r e d i t , and the loans w e r e
eventually made by non-bank a g e n c i e s .

How m u c h of the f a r m

c r e d i t b u s i n e s s banks have lost b e c a u s e of p r o b l e m s of this
type I do not know.

If we w e r e f a r m e r s , I wonder how long we

would give the b a n k e r to reply to c r e d i t r e q u e s t s when we knew that
someone else who had the m e a n s to m e e t all our c r e d i t demands
was ready to give us a favorable h e a r i n g . With f a r m s i n c r e a s i n g in
size and capitalization at such a fast r a t e , it is inevitable that
p a r t i c i p a t i o n r e q u e s t s will r i s e .

I believe that the banking s y s t e m

will r i s e to the occasion and m e e t a c o n s i d e r a b l e portion of such
requests.

On the o t h e r hand, u n l e s s many banks make p r e p a r a t i o n s

to avoid u n n e c e s s a r y delays in meeting overline r e q u e s t s , the banking
s y s t e m will probably continue to lose many overline c u s t o m e r s .
The other p a r t of the bank s t r u c t u r a l p r o b l e m , n a m e l y ,
a r e a s which a r e s h o r t on loanable funds at going r a t e s , may r e q u i r e
solutions outside the c o m m e r c i a l banking s y s t e m in some i n s t a n c e s .
Loanable funds and debt i n s t r u m e n t s do not move through the banking
s y s t e m as freely as we would like. F e d e r a l funds, c e r t i f i c a t e s of
deposit, and other i n s t r u m e n t s move quite freely among the l a r g e r
banks and provide an opportunity for liquidity a d j u s t m e n t s .

Federal

funds a l s o move quite readily from the s m a l l e r to the l a r g e r b a n k s .
However, it is the s m a l l e r banks in the a r e a s which a r e chronically




- 16 s h o r t on c r e d i t that may have difficulty in financing f a r m c r e d i t
demands.

A l s o , the c e r t i f i c a t e s of deposit of s m a l l e r banks a r e

not as m a r k e t a b l e as those of l a r g e r b a n k s .

Unfortunately, the

c o r r e s p o n d e n t banking s y s t e m does not work as well as we would
like in t h e s e s i t u a t i o n s .

Different c r e d i t s t a n d a r d s among banks

p r e v e n t the free m o v e m e n t of c u s t o m e r s 1 notes from bank to
bank.

We do not have i n s u r a n c e policies available for m o s t types

of loans in c a s e of default.

Since banks in c r e d i t - d e f i c i t f a r m

a r e a s a r e likely to be loaned up, they have few a s s e t i n s t r u m e n t s
o t h e r than notes for exchanging, and exchanging notes from s m a l l
to l a r g e banks has been l e s s than s a t i s f a c t o r y in providing a
u n i f o r m national f a r m c r e d i t m a r k e t .

N e v e r t h e l e s s , I believe

t h a t m o r e c o o p e r a t i o n within the banking s y s t e m toward the solution
of this p r o b l e m would be profitable.
It has been suggested that a s y s t e m of f a r m c r e d i t discount
banks be o r g a n i z e d for discounting the p a p e r of c o m m e r c i a l b a n k s .
T h e s e discount banks would apparently obtain funds by selling debt
i n s t r u m e n t s in the money m a r k e t s i m i l a r to F e d e r a l I n t e r m e d i a t e
C r e d i t Bank o p e r a t i o n s .
I a m not s u r e , however, that we have exhausted the
facilities that a r e in existence for distributing funds to r u r a l a r e a s .
The F e d e r a l I n t e r m e d i a t e C r e d i t Banks w e r e originally designed for




• 17 this p u r p o s e .

Most b a n k e r s have looked upon the F I C B s as the

exclusive discount agency for the P C A s .

The officials at the local

I n t e r m e d i a t e C r e d i t Bank, however, informed m e that they a r e d i s counting f a r m notes for c o m m e r c i a l b a n k s .
willing to expand such discounting.

I believe that they a r e

They r e p o r t that the t e r m s a r e

g e n e r a l l y the s a m e for c o m m e r c i a l banks as for the P r o d u c t i o n
Credit Associations.

If the facilities of the I n t e r m e d i a t e Banks a r e

capable and willing to do the job, and I believe they a r e , then I think
that they should be used by those c o m m e r c i a l banks that a r e willing
to pay money m a r k e t r a t e s for loanable funds.
Only if we t r y the F I C B ' s and find t h e m unable to do the
job do I suggest new a g e n c i e s for channeling funds from money
m a r k e t s to r u r a l b a n k s .

Ultimately all loanable funds m u s t come

f r o m savings and the s m a l l i n c r e m e n t s c r e a t e d through the banking
s y s t e m by m o n e t a r y o p e r a t i o n s .

T h u s , an agency a l r e a d y in

e x i s t e n c e for channeling such savings would a p p e a r to be s t r o n g e r
and m o r e efficient than a new agency, if its policies a r e sufficiently
flexible.
The t h i r d c a t e g o r y of bank p r o b l e m s in meeting f a r m
c r e d i t d e m a n d s involves legal r e s t r i c t i o n s .

In s o m e r e s p e c t s legal

r e s t r i c t i o n s a r e s i m i l a r to bank s t r u c t u r a l p r o b l e m s , since both
r e t a r d flows of loanable funds through the national m a r k e t .




- 18 The type of r e s t r i c t i o n s to which I r e f e r a r e those which
l i m i t the r a t e s that banks m a y pay and c h a r g e for funds.

When

m a r k e t r a t e s a r e below the legal l i m i t s , the l e g a l r e s t r i c t i o n s a r e
not effective.

On the o t h e r hand, when m a r k e t r a t e s r i s e above the

legal l i m i t s , legal r e s t r i c t i o n s can be damaging, both to the banks
involved and to s o m e s e c t o r s of the economy.
When c o m m e r c i a l banks a r e unable to pay r a t e s c o m p a r a b l e
v/ith other financial i n t e r m e d i a r i e s on t i m e and savings d e p o s i t s , banks
tend to lose deposits to t h e s e i n s t i t u t i o n s .

As a r e s u l t , potential

b o r r o w e r s from banks a r e the u l t i m a t e l o s e r s .

When l i m i t s a r e placed

on r a t e s paid by all financial a g e n c i e s , savings tend to move d i r e c t l y
from, s a v e r s to u s e r s , thus bypassing our efficient lending a g e n c i e s
and thereby c r e a t i n g m a j o r inefficiencies in the loan m a r k e t s .
M a x i m u m l i m i t s on loans c r e a t e p r o b l e m s s i m i l a r to the
l i m i t s on s a v i n g s .

F o r e x a m p l e , t h e r e is a legal limit of 6 p e r cent

on single payment loans in one s t a t e of the Eighth F e d e r a l R e s e r v e
D i s t r i c t and a limit of 7 p e r cent in a n o t h e r s t a t e .

When such l i m i t s

a r e set below the m a r k e t r a t e , as d e t e r m i n e d by supply and demand
conditions for loanable funds, e i t h e r c r e d i t rationing or a tendency
to b y p a s s the r e g u l a t i o n s o c c u r s .

Banks m a y p u r c h a s e loans made

in other a r e a s which yield h i g h e r r e t u r n s , or they m a y d i v e r t money
f r o m single payment farm loans to i n s t a l l m e n t loans at h i g h e r r a t e s
of r e t u r n .




- 19 If c r e d i t rationing o c c u r s , the banks will be likely to
supply funds to the v e r y l o w - r i s k applicants until all loanable
funds a r e depleted.
t o obtain c r e d i t .

All h i g h e r - r i s k b o r r o w e r s will thus be unable

In e i t h e r the c a s e of c r e d i t rationing or of b y -

p a s s i n g the r e s t r i c t i o n s , the p o o r e r and h i g h e r - r i s k f a r m e r s who
the r e s t r i c t i o n s w e r e designed to p r o t e c t a r e damaged m o s t , for
c r e d i t is unavailable to t h e m .
So long as the b a s i c supply and demand situation with
r e s p e c t to loan and i n v e s t m e n t funds p r o d u c e s high g e n e r a l i n t e r e s t
r a t e s , 'it is n e c e s s a r y for the c o m m e r c i a l banks to go along with
these trends.

Banks m u s t both pay high r a t e s and c h a r g e high r a t e s

if they a r e to p e r f o r m t h e i r function in the economy.

In many ways

the high and i n c r e a s i n g g e n e r a l level of i n t e r e s t r a t e s is disruptive
and u n d e s i r a b l e .

But if the g e n e r a l level of r a t e s needs to be kept

down, total demand for loanable funds m u s t be reduced.

Public

policy can a c c o m p l i s h this only by influencing the supply and demand
situation with r e s p e c t to the total product of the economy.

The only

way we know to a c c o m p l i s h this is by a m o r e r e s t r i c t i v e F e d e r a l
budget and a somewhat l e s s rapid m o n e t a r y expansion.
In conclusion, we have a v e r y efficient a g r i c u l t u r a l industry
in the United S t a t e s .
competitive r a t e s .

Apparently, f a r m e r s a r e receiving c r e d i t at
C o m m e r c i a l b a n k s , however, have declined s o m e -

what from t h e i r e a r l i e r position as the p r e d o m i n a n t s u p p l i e r of f a r m




~ 20 credit.

S e v e r a l factors may have r e s t r a i n e d the r a t e of bank

c r e d i t growth to f a r m e r s .

Such factors may include lack of

p r o p e r p e r s o n n e l , bank s t r u c t u r a l p r o b l e m s , and legal r e s t r i c t i o n s
on b a n k s .

I b e l i e v e , however, that we should fully utilize existing

institutions and a t t e m p t to reraove some l e g a l r e s t r i c t i o n s both on
r a t e s c h a r g e d and r a t e s paid before proposing additional a g e n c i e s .
I don't believe that we have exhausted t h e s e opportunities at the
present time.




TABLE I
P e r Cent of Population Employed in
A g r i c u l t u r e in Selected Nations

P e r Cent
J a p a n (1966)

24.2

Norway (1966)

18.6

Switzerland (I960)

10. 1

Iceland (1964)

14.0

United States (1965)

6.1

Italy (1966)

24. 7

P o r t u g a l (I960)

42.3

D e n m a r k (I960)

17. 5

Canada (Oct. 1966)

?,. 5

I r e l a n d (Apr. 1965)

32. 2

G r e e c e (196l)

49.0

G e r m a n y (1965)

10. 9

S o u r c e : Economic S u r v e y s , Organization for Economic Cooperation
and Development, P a r i s , 1967.




T A B L E II
I n t e r e s t Rates on Selected Loans and S e c u r i t i e s
Rat.2 S

Increase
1945-65

1945

1965

F a r m loans
Nonreal estate
PCA
C o m m e r c i a l banks
Real e s t a t e - F e d e r a l Land Banks

5. 40 %
6.30
4.00

6.60 %
7. 10
5.60

Other loans
Bank b u s i n e s s loans
Prime commercial
All s h o r t - t e r m
FHA new home m o r t g a g e s

1.50
2.20
4.50

4. 50
5. 00
5.47

200
127
22

Securities
3-month T r e a s u r y bills
3 - to 5 - y e a r U. S. Government bonds
C o r p o r a t e Aaa bonds
H i g h - g r a d e municipal bonds
F e d e r a l Land Bank bonds
I n t e r m e d i a t e C r e d i t Bank d e b e n t u r e s

0.375
1. 18
2.62
1.67 ,
1.36-i/
0.88

3.954
4.22
4.49
3.27
4.32
4.47

954
258
71
96
218
408

22 %
13
40

1/ 1946.
S o u r c e s : Rates on f a r m c r e d i t from USDA; FHA new honie m o r t g a g e yields
from 1964 Supplement to Economic I n d i c a t o r s and F e d e r a l R e s e r v e
Bulletin; all other data from Economic Report of the P r e s i d e n t ,
J a n u a r y 1966.