David Franklin Houston to Woodrow Wilson

Responding to your request for my comment on the bill proposed by the United States Commission for the establishment of a land mortgage banking system, I have the honor to submit the following:I trust that our friends in discussing this matter and in devising legislation concerning it, may be very conservative in their expressions concerning the results. Unquestionably many people in different sections of the country anticipate action and results which can not be had. Rural credit conditions differ very widely in the nation. There are fundamental conditions producing this variation which legislation can not alter. They grow out of an unequal economic development, out of differences in climatic and soil conditions, in stability of agricultural industry, in methods of farming, in distance from markets and from centers of large wealth, and in the nature of financial agencies through which capital is provided.
Those who expect legislation to bring about low rates of interest in certain sections on farm loans or a low uniform rate of interest must, of necessity, be disappointed, as well as those who imagine that the Federal Government will in some way provide funds for them at a lower rate of interest than market conditions justify, or at a lower rate of interest than other citizens with the same security can obtain them.
Either a land mortage banking system for long time loans or a rural credit association formed for the purpose of securing a credit foundation for short time loans by small farmers can most easily be created and most safely be operated in the very sections which need them less. In the less well developed States of the Union the necessary restrictions in a prudent rural credit system will result in relatively few loans and in a relatively high rate of interest on these, and this will unquestionably tend to produce dissatisfaction and discontent. For these reasons it would be wise, if it were feasible, to call upon the States to assume responsibility for this legislation, whether it be for a land mortgage banking arrangement for long time loans or for a credit association for short time loans. But a great deal has been said about Federal legislation on this subject, and the public has been brought to believe that it is feasible and desirable, and there are certain indirect results which might be secured from such legislation. These two considerations were in the minds of the members of the Commission and led them to suggest Federal legislation for long time loans and State legislation concerning rural credit associations for short time loans. Considerable indirect effects might result from Federal pressure, such as better systems of registration of land titles and uniformity in State legislation concerning land titles, conveyancing, taxation of mortgages, foreclosures and the like, and their simplification. Furthermore, it is probable that greater efficiency, economy and conservation in management might be secured and more satisfactory inspection might be guaranteed. The bill proposed by the Commission deals solely with the land mortgage banking idea for long time loans. The salient features of the bill are:a. The creation within the Treasury Department of a Bureau of Farm Land Banks. (Sec. 2).
B. The Federal incorporation of Farm Land Banks under conditions to be specified by the Secretary of the Treasury. (Secs. 10 and 13).
C. These Farm Land Banks may be either cooperative or not. (Sec. 14).
D. They may (Secs. 16.
P.27 and 28).
(1) receive deposits and pay interest upon them.
(2) make mortgage loans on farm lands within the state where they are located.
(3) loans to run for not more than 35 years. If they run for more than 5 years, to be paid off in fixed all annual or semi-annual installments, but may be paid off more rapidly after 5 years, at option of borrower.
(4) Issue bonds against farm mortgages held.
(5) Rate of interest on farm loans not to exceed rate on bonds by more than 1% per annum, which 1% is to pay all charges of administration. (Secs. 16. pp.28-29 and Sec. 45. There is an apparent discrepancy on pp. 28 and 29.
(6) Only 50% of the capital of the bank may be invested in mortgages, or in its own bonds, the rest may be invested in government or state bonds, or such securities as Commissioner of Land Banks may designate.
(7) Bonds not to exceed fifteen times capital and surplus.
(8) Mortgages and bonds to be exempt from taxation. (Sec.18).
E. Federal fiduciary agent to be appointed by Commissioner for each bank. (Sec. 19).
(1) To certify to every bond issued by bank.
(2) To have joint control and possession with bank, of morgtages, notes, etc.
(3) To have supervisory control of entries in mortgage ledger.
(4) To be paid for his service by bank.
F. Shareholders liable for the amount of stock in addition to amount invested. (Sec. 31).
G. At the discretion of Secretary of Treasury, bonds to be available for: (Sec. 34).
(1) Security for deposit of Postal Savings funds, for loans from national banks to farm land banks or to individuals for not exceeding five years.
(2) Investment of funds of savings departments of national banks and banks in District of Columbia, and of trust funds administered by U. S. Courts.
H. Expense of examination to be paid by banks. (Sec. 35).
I. Destructible property on which mortgages are held to be insured. (Sec. 42).
The bill in the main is well conceived and well drawn. There is a very successful company operating at Joliet, Illinois, selling debentures blanketed on farm mortgages limited to the State of Illinois, applying the method of aamortization, which could reorganize under this law practically without change in its organization or methods.
It will be observed that the farm land banks contemplated by this bill would be merely credit institutions. They would in all probability lend only on what are known as gilt edge mortgages, which is proper from the point of view of the lender. They would very properly lend to anybody who produced the requisite securities or mortgages on land. It would be possible for a farmer to borrow from the bank at a low rate of interest, which low rate will be due to the inspection and supervision of the Federal Government, together with other privileges, and then lend it out again at a higher rate of interest to people not so favorably situated. It is needless to say that this would not be a desirable thing and would not justify the trouble. It would make it possible for larger owners to take advantage of the terms to borrow money to buy more land to rent to tenantts and thus to promote the growth of tenancy in the nation.
I am not prepared to suggest the terms of the legislation, but two things should be insured by proper provision.
First, that loans should be made only to bona fide farmers for their own agricultural enterprises.
Second, that the enterprises for which they borrow the money should be productive in character.
The former needs no comment; the latter would imply inspection of the request for a loan with a view to ascertaining its purposes. It is necessary to look at something more than the character of the security; the purposes for which the money is to be used is the vital thing. If it is to be used by the farmer himself to finish the payment for his farm or to provide permanent productive improvements, then it would be economically and socially justified.
There is, therefore, something more than mere financial operation to be considered. Such examination of the purposes of the loan would not only prevent speculation but would tend to prevent the ill advised or foolish use of the capital. I admit that this is a difficult thing to secure, but it is essential in all successful undertakings of this kind, and without a safeguard in this direction the trouble required for the legislation and the inauguration of machinery would not be worth while.
I think that this bill amended to incorporate the two suggestions indicated in the foregoing would operate safely in the settled portions of the country, and through the indirect quite as much as through the direct effects, enable the farmers to secure more capital at somewhat better rates of interest.
In the newer States of the Rocky Mountain region where conditions are still speculative, and in the States of the South which are backward economically and have a diverse population and a large shifting tenant class, special difficulties will be encountered and smaller results for the time being may follow. Unless the people of these States frankly recognize the economic differences, allow time for development, and do not expect large results in the immediate future there will be disappointment. I believe that banks operating under the bill with the suggested amendments would furnish some relief in the near future and would lead to an orderly adjustment and larger things in the distant future.
It seems reasonably clear that loans extended for clearly productive purposes would be safe, and that either the mortgages on the farms, or the debentures blanketed on such mortgages would be a good investment. The safeguards suggested would eliminate loans for speculative purposes, a larger market would be found for the securities, more capital would doubtless be attracted into these communities, and better rates of interest might be secured.As I have intimated, the Commission has recommended that legislation for local credit associations, to be formed by groups of small farmers, be left to the States. This seems to me to be a wise suggestion. Such associations are not needed in many of the States. They are most needed in the southern States where there are a great many poor farmers owning or renting small farms. It is highly desirable that they be released from their dependence on merchants. The formation among them of credit associations with unlimited liability of members might result in a credit foundation on which loans could be made. The unlimited liability feature would not be so distasteful here, perhaps, as elsewhere, since their liability is already unlimited. Cooperation is the essence of these enterprises. Its growth will probably be slow and it will be retarded by the fact that two races are living in the South side by side. Public opinion will have to be educated. Pains should be taken to place before the people the best forms and methods of organization, and the States should be induced if possible to consider and take up necessary legislative action prerequisite to the formation of these associations.
There are two minor changes in the bill which should be made. In the first place there is a discrepancy between provision 1, section 16, near the top of page 28, and limitation C near the bottom of page 29. These mean different things as to the amounts to be paid by the borrower. They should be reconciled. In the second place, section 33, page 34, probably should be amended by including after the word institution, line 2, section 33, the following clause:Including building and loan associations or savings and loan associations lending exclusively on farm mortgages.It seems to me that it would be expedient to mention these by name.
I would in conclusion point out that the pending currency bill goes a considerable distance in the direction of more intimately reaching the farming population.