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The only way that existing commercial banks can handle longtime loans is through the extension of short loans, and it is not uncommon for Texas farmers who maintain good balances to be carried from year to year when making loans for investment purposes. Only the more substantial farmers, however, can count on this.

In practice, landowners often can obtain accommodations without any security if their business and balance warrant such favors in the judgment of the bankers. The fact that national banks in practice are able to take real estate security to a small extent has also been noted. This, of course, affords only slight relief to the difficulty experienced by farmers in borrowing on land. The state banks can lend on land, subject to certain restrictions on the amount, and do so without impairing their solvency. I agree with Professor Kemmerer in advocating some relaxation of our present national banking act in the matter of loans on real estate. 10

Finally, it seems quite feasible to better conditions by improving the rediscount market for farm paper. One way would be to introduce by appropriate legislation some means of marketing farm notes which have been "accepted" by local banks.11 This would involve the authorization, by law, of banks to give "acceptances," and the establishment of some central organization to handle the paper (bills of exchange) sent up by small banks. By some such means, the loaning power of the banks of the nation-the discount market-might be pooled. If the local bank were "loaned up," it would "accept" the farmer's bill and send it in to the central association to be disposed of to members who might have loanable funds available. Or, if authorized and the central machinery provided, the existing banking system could take farmers' notes and get them discounted by correspondents. Such a plan might be of much service; but it would have to be carefully safeguarded against inflation of credits, and in any case the loans would have to be of such short duration-probably three months, and certainly not over six-that the farmers' needs could not be entirely satisfied; and, as in the other schemes, only substantial persons who now have least difficulty would be benefited.

See AMERICAN ECONOMIC REVIEW, vol. II, no. 4 (December, 1912), p. 870. The recently passed currency bill increases the power of national banks to make loans on land.

"See Proceedings of the First National Conference on Marketing and Farm Credits, p. 168. The new currency act provides for the rediscount of agricultural paper running 6 months.

Can Coöperation Supply the Remedy?

As to land-mortgage coöperation, we need simply note that not only is it less urgently needed than another kind, but the homestead exemption law makes it almost impossible.

When we come to examine the chances for successful personal credit associations, the difficulties raised by the character of the farm population are formidable; for more dependence must be placed upon the capacity and judgment of members while at the same time less intelligent classes must be dealt with.

It seems that the negro population must be left out of consideration for the present. In most parts of the state the negro would be excluded from organizations of whites, and it is more than doubtful if negro credit associations could succeed. Also, a part of the poor white farmers are beyond the reach of coöperation on account of their migratory habits and thriftlessness. It is the writer's well-considered opinion that fully 10 per cent of the white tenant farmers of Texas are hopeless-cannot get good credit by any means.

Some of the adverse conditions affecting the majority of the whites are as follows: (1) There is a large element classed as "poor whites," a shifting and shiftless group; 5 per cent of the native white males in the rural population are illiterate, and 31 per cent of the foreign-born white males; while only 44 per cent of the native white rural children are attending school. (2) These people are largely short-time tenants. (3) The one-year lease is almost universal, and under it tenants commonly are migratory and take no interest in scientific farming. So shifting a population is seriously handicapped in developing that mutual acquaintance and trust which may come in more stable groups. (4) It follows that farmers are deficient in disposition and training for team work and do not easily pull together as coöperation requires. (5) Finally, a speculative spirit pervades even farming operations and is opposed to the spirit of frugal saving which must attend the successful operation of credit unions.

Many native Texans are not efficient farmers, a fact which is clearly demonstrated by comparison with German and Bohemian farmers who occupy certain sections of the state. The foreigners get a far larger return per acre, while at the same time maintaining the fertility of their land. As a result, they find no difficulty in getting credit when they need it, though, as a matter of fact, they borrow far less frequently than the native farmers. There

can be no question that the introduction of better farming methods 'is much needed as a basis for better farm credit.

The strongest argument in favor of personal credit coöperation, however, is probably the educative value of coöperation itself. Efforts in coöperation increase the facility of coöperating. Therefore, assuming the efficacy of successful coöperative credit, we may conclude that the very urgency of the need may warrant the initiation of coöperative organization in spite of great initial difficulties. If the need is great and the difficulties decrease in proportion to the application of the measure, the argument for that measure is strong.12

The object of successful credit organization must be to improve such non-transferable productive powers as poor men can possess strength, skill, energy, and honesty-and to organize and direct them so that they may be used as a basis of credit; and to this basis it may add by making more readily negotiable the small property possessed which is not now accepted as security on favorable terms. Of course, there must be a modicum of the qualities just mentioned to start with.

Stated comprehensively, what coöperation can accomplish in states like Texas is as follows: First, it can reduce the risks of lending in at least six ways. (1) The integrity of the coöperative group can be raised above the average of the class concerned by a selective process. To this end, the area embraced in a single group should be limited, and good standing among neighbors and acquaintances be made a condition of membership. (2) The interests of the immediate borrowers and lenders are harmonized. This is accomplished through the fact that the capital of the coöperative unit is largely drawn from the entrance fees and deposits of farmer members. (3) The credit of individual members is pooled, thereby increasing the borrowing power of each. The pooling is the result of a collective guarantee of loans made to any member, and its effectiveness increases with the extent to which the collective guarantee increases, being at a maximum under unlimited liability. (4) The security of loans can be increased by careful and intelligent scrutiny of the purposes of the borrower in order to insure against loans for unproductive purposes. And, of course, this feature can be strengthened by inspection to see that sums borrowed are applied for the purpose specified. (5) By means of

"In this, coöperation has an advantage over the extension of ordinary banking activities, for it has its undoubted educative effects to support it.

local supervision the most productive methods of applying loans can be secured and more skillful farming be encouraged. (6) Finally, the security that farmers have to give can be made more liquid and negotiable. To be concrete, land and cotton are not welcomed by our commercial banks as bases of credit; but by coöperating and pooling such resources and making them the basis of issues of equal, transferable securities of convenient denomination, a ready loan market may be created. Clearly, points 1, 2, and 3 insure improvements in integrity, or will to pay; and points 3, 4, 5, and 6 insure greater solvency, or ability to pay. These are the very bases of credit.

In addition to the preceding means of reducing risk, it is to be remembered that economy in direction and management of the credit business can be gained by coöperation. By confining operations rigidly to securing credit, and working through small local units, the simplest and cheapest organization is secured. A single central organization can serve as a clearing house for a large

area.

The Most Desirable Form of Coöperation

Attention will here be confined to personal credit unions; for relatively short-time loans, largely based on personal security, are the most pressing need in Texas. The great majority of loans are wanted for making crops, and land security is not often available. As preliminary generalizations, I would emphasize three points:

(1) So large an element of shiftless tenants means difficulty in local organization. The weaker the units and the greater the difficulty of successful local operation, the more essential the central machinery and the sooner it should be established in any coöperative experiment. In Texas it should exist from the start, if any extended use is to be made of coöperation, and this probably means that it would have to be set up by the state.

(2) On the principle that it is economical where possible to utilize existing institutions, the use of the chattel mortgage— including the crop mortgage-might well be retained. It may be thought of as a form of security midway between the land mortgage and personal endorsement, and, in the present condition of credit in Texas, might well be retained to supplement personal credit. Also, the state banking system is well developed and working satisfactorily, and it would seem uneconomic not to utilize it to its full capacity in supplying farm loans.

(3) Nor must the technical facts of the agricultural situation be forgotten. Thus, the need of cotton farmers is not to be satisfactorily met by loans for less than nine months in many cases, and accommodation for a maximum period of that length should be authorized. As has been observed, cattle are greatly needed as a part of farming operations in Texas, and this requires credit accommodations of two years' duration. As shown, the average farmer borrows in the neighborhood of $300, and it would, therefore, seem desirable to authorize a maximum loan to any individual of not less than that amount.

Let us now examine the form of organization provided by the law recently enacted in Texas. It is modeled on the Massachusetts law. A minimum of ten citizens may become a corporation and have a capital stock divided into twenty-five-dollar shares. A member may hold any amount of stock, but each member has only one vote. Loans not to exceed $200 to any one member may be made for a maximum period of eight months, at reasonable rates of interest not to exceed 6 per cent. A board of directors, a credit committee, and a supervisory committee are provided for. Other clauses provide that the capital shall be unlimited in amount, and that an annual dividend may be declared from income, after the deduction of expenses, losses, and 20 per cent of net income for a guaranty fund. But the guaranty fund payments cease when the fund equals the capital stock. Adequate provisions concerning accounts and their inspection by the state commissioner of banking are included.

Several objections and shortcomings are at once apparent. As errors of commission, may be mentioned: (1) Limited liability. An incorporated group of poor farmers is not going to be able to command a credit much beyond that which they enjoy as individuals. The educative value of great responsibility is also lost. (2) The size of shares is too large, $10 being a maximum when it is desired to encourage poor men to join. (3) It is dangerous to allow an unlimited capital stock and unlimited individual holdings, as this tends to introduce profit seeking, even though the one-manone-vote rule obtains. Not more than one fifth of the shares should be held by one person. (4) The payment of dividends is made too easy. (5) The maximum loan is too small and the time too short to meet Texas conditions. (6) A maximum interest rate of 7 per cent should be authorized, the average commercial rate being 8 per cent.

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