I. SUMMARY.

Art. 4, Sec. 20.

The provisions of the present state constitution directly involved in the problems of farm tenancy and rural credits include: Prohibiting the state from loaning its credit. Forbidding the state to engage in banking. Requiring taxation to be uniform.

Art. 11, Sec. 5.

Art. 9, Sec. 1.

1.

The restrictions as to banking activities of the state and the loaning of the state's credit read as follows:

Art. IV, Sec. 20. "The state shall never pay, assume or become responsible for the debts or liabilities of, or in any manner give, loan or extend its credit to, or in aid of, any public or other corporation, association, or individual"; and:

Art. XI, Sec. 5. ..

"nor shall the state own or be liable for any stock in any corporation or joint stock company or association for banking purposes now created, or to be hereafter created."

These limitations have prevented the organization of cooperative credit associations backed by the credit of the state. Whatever organizations have been created under the authority of the state to meet farm loan needs in Illinois have been fostered by private capital.

The section requiring taxation to be uniform reads:

Art. IX, Sec. 1. "The General Assembly shall provide such revenue as may be needed by levying a tax, by valuation, so that every person and corporation shall pay a tax in proportion to the value of his, her or its property in such manner as it shall from time to time direct by general law, uniform as to the class upon which it operates."

This limitation stands in the way of a graduated land tax on large holdings, a system of taxation that has been advocated as a means of breaking up large estates. Those who favor this method of taxation urge that it would have a tendency to discourage the holding of land for speculative or tenancy purposes, and so bring about the condition they desire-the farming land of the state owned by those who cultivate it.

While the aim of a graduated tax is to limit the amount of land that can be held by a non-operating owner, the purpose of farm loan systems is to furnish positive help to actual farmers in securing small farms.

The problem in rural credits is how to develop measures that will bring together the person who has money to lend and the young farmer who wishes to establish a home. The credit systems so far developed

have generally made provision for cooperative farm loan associations and land banks, supplementing each other in such a way that the land banks may make the loans to the borrowers and issue their bonds or debentures to the investors. In this way the land bank serves as an intermediary between those who desire to borrow and those who desire to lend on security based on agricultural land.

The various systems of rural credits may be grouped under first mortgage systems, second mortgage systems and systems for short time credits.

The federal rural credit system is a first mortgage system exclusively; it functions through the instrumentality of the national farm loan associations, (or in their absence through duly authorized agents) the federal land banks and joint stock land banks. These various agencies are organized in such a way that each farmer who becomes a member of a farm loan association may receive the benefit of the combined credit of all its members to the extent of the capital contributed and the limited liability they each incur. The federal system operates exclusively on the amortization plan.

The federal farm loan system was enacted after a thorough consideration of the various foreign systems of rural credits, and the first mortgage plan was adopted on the theory that the land mortgage bonds must be carefully secured so that they might have a ready sale throughout the country.

It has been urged that a system based on second mortgages could be advantageously developed within the limits of a single state where land values are high and conditions are stable, but most of the states so far have duplicated the federal plan, although it is urged that at large field for second mortgages remains unoccupied.

A system of short time credits in the form of personal credit cooperative unions has been proposed in order to supply credit for cooperative marketing organizations. Cooperative selling systems as well as plans for cooperative buying on the part of the farmer might be developed under a well devised system of personal credit unions under the supervision of the state.

Those who advocate the establishment of a state rural credit system claim that neither the federal system of rural credits nor the private agencies within the state are adequate to meet the situation in Illinois.

On the one hand it is urged that the state system could be operated to advantage in competition with the federal system: on the other hand it has been suggested that a system based on second mortgages would be more advantageous, as such a system could supplement the federal first mortgage system.

How may the farm loan needs of the state of Illinois be most advantageously met? What are the relative merits of the several rural credit systems so far developed, and does the experience of other states and other countries offer any suggestions for the farm loan situation in this state?

The constitutional provisions and legislative measures presented in the following pages may furnish some data toward a solution of the problems under consideration.

II. FARM TENANCY AND ABSENTEE LANDLORDISM.

Farm tenures in Illinois. The proportion of farm tenants to farm owners has shown a steady increase in Illinois for some forty years.

The United States census for 1880 gave some attention to questions of land ownership and farm tenancy in the different states and the data collected at that time gave a higher percentage of tenants in Illinois than in any other northern state. Succeeding census reports left Illinois in the same relative position, showing a higher percentage of tenant farmers than any other state in this section of the United States.

In 1880 there were 23 tenants for every 100 farmers in the United States. In 1910 this percentage had increased to 37.1 per cent for the entire country.

In Illinois the proportion of tenants reached 31.4 per cent in 1880, and 41.4 per cent in 1910. At the present time conservative estimates place the number of tenants above 60 per cent for the entire state; and from 60 to 80 per cent for the rich lands in the corn belt. The most conservative estimates indicate that more than half the farmers of Illinois do not own the farms they cultivate.

When the proportion of tenant farmers exceeds 25 or 30 per cent under agricultural conditions in the northern states, there is occasion for inquiry. Where not more than one-fourth of the farmers are tenants, tenancy may merely represent the stage between agricultural labor and farm ownership. In many cases tenants are relatives of the owner, or the owner is a retired farmer who rents to some young farmer who is accumulating capital in order to purchase the farm later on. Under these conditions the average time spent as a tenant is about ten years and the average owner becomes an owner at about 35 years.1

Where tenancy represents merely a brief transition stage, from which the agricultural laborer or young farmer becomes the owner of the land he cultivates whenever he shows normal thrift and industry, there seems to be little cause for apprehension; but where tenancy becomes the average condition of farm life, the interests of the commonwealth are involved. Scientific investigation and common observation seem to unite in the charge that tenant farming results in smaller crops, in declining fertility of the soil, and in a lower standard of social welfare, wherever it becomes the dominant method of agriculture.

Various measures have been proposed to meet the growing problem of farm tenancy. Those most commonly urged include: 1. A state land settlement commission; 2. A graduated land tax with pro

1 See reference list for investigations made by Dr. B. F. Hibbard of the University of Wisconsin, and by Professor G. F. Warren of Cornell University.

gressive rates: (a) varying according to size of holding, and (b) with increased rates for owners who do not operate the land; 3. Inheritance tax with progressive rate for large holdings; 4. Equalization of taxes as between used and unused land; 5. Definite limit on amount any person may own; 6. Direct purchase and sale of land by government; 7. Provision for alternative investments.

State land settlement commissions are helping solve the tenancy problem in a number of states. Measures enacted in Maine, Oregon, and Arizona are typical of similar measures in force in different sections of the country.

The constitutional provision that taxation shall be uniform (Art. 9, Sec. 1) at the present time stands in the way of most of the measures urged for graduated taxes on large land holdings.

Section 1 provides that, "The General Assembly shall provide such revenue as may be needful by levying a tax by valuation, so that every person and corporation shall pay a tax in proportion to the value of his, her or its property in such manner as it shall from time to time direct by general law, uniform as to the class upon which it operates."

The principle of progressive taxation is well established in this country in the income tax and the inheritance tax laws. It has been proposed that this principle be applied in taxing large land holdings.

Advocates of this plan propose that the smaller farms be entirely exempt from any graduated tax and that the sur tax should not begin to operate on any holdings not in excess of 640 acres. Others have suggested that the size of the holdings exempted should be placed as low as 480 or even 320 acres. On the other hand it has been urged that so small a holding should not be subject to the tax, as the general nature of agriculture in Illinois requires a farm varying from 80 to 320 acres to support a single family.

Others have proposed that a sur tax of 20 per cent be placed on all holdings over 640 acres, and that the rate of progression for farms over twice that amount should increase rapidly until the rate for large estates, such as the Scully estate, would become practically prohibitive. Such a provision would undoubtedly result in the reduction of many large estates into small sized farms.

A further proposition has been made to increase the rates for owners of large holdings who do not operate the land. It is urged that such a classification, based on the nature and use of the property, would not meet the constitutional objections urged against most of the proposals for breaking up large holdings.

It has also been urged that the principle of the graduated land tax be extended so as to be used in connection with the inheritance tax law. Undoubtedly many owners of large estates would elect to escape such a tax by disposing of part of their land in advance. If the rate of progression for the inheritance tax on large holdings were made higher than the rate for the graduated tax on land holdings it would result in giving a flexible margin to holdings. Under this proposal a large family, cultivating extensive lands, as a unit, would not feel

the weight of the graduated tax to such a great extent until the transfer of the holdings through inheritance.

The equalization of taxes as between used and unused land has further been proposed. This method of taxation is also prohibited at the present time by the Constitutional restriction as to uniformity.

Placing a definite limit on the amount which any person may own is another proposal sometimes urged. This method has been tried with some success in New Zealand. In general, the plan aims at the same result which would be secured under a graduated tax on large holdings, and it has been urged that a graduated tax would be more in keeping with the spirit of our laws and institutions.

A system which substitutes direct action on the part of the government in the purchase and sale of land to settlers has been effectively tried in a number of countries. In New Zealand this system has been advantageously operated in securing the settlement of the land by small holders. The government in New Zealand buys the land outright and sells it to small holders at the price paid. Provision is made for a low rate of interest and easy terms of payment. This system has been particularly useful in cases where the state desires to break up large holdings and estates into small farms owned and operated by farmers living on the land.

California has provided a land fund through which the state buys land in large holdings and resells it to small farmers on easy payments. This particular state found this method advantageous in the development of its small fruit farms.

It has further been urged that provision be made for alternative investments, so that funds now going into land investments might be turned into other channels.

This demand has been partially met by federal and state farm loan bonds. The first mortgage land bonds issued under the authority of the Federal Farm Loan Board, have opened a wide field to investors who have heretofore bought land as the only safe investment with which they were familiar. Since these bonds offer perfect security and a fair rate of interest, together with opportunity for long time investments, they will have a tendency to influence many investors against the accumulation of land. On the one hand this will result in land being offered for sale, and on the other hand it will withdraw a large group of land buyers. Giving small investors such alternative opportunities to invest their savings, would accordingly open a large amount of land to actual farmers.

Unless some positive action of this sort is brought to bear upon non-operating holders of land, the price of land in Illinois is likely to advance far beyond the value of its producing power. Even at the present time the effectiveness of a farm loan system in meeting the tenancy problem is largely discounted by the high cost of land.

Absentee landlordism in Illinois. The problem of absentee landlordism has been aggravated in the state of Illinois by a number of great non-resident holdings like the Scully estate.