V. SYSTEMS BASED ON SECOND MORTGAGES.

A system based on second mortgages has been proposed in a number of states in order to supplement the first mortgage system provided by the federal farm loan act. The objections most frequently urged against the federal farm loan system are that it makes no provisions for second mortgages and that the rate of 50 per cent loaned on the land and 20 per cent loaned on the improvements is inadequate to meet the needs of many farmers. It is further urged that where land values are high and are settled, amounts larger than $10,000 could safely be loaned, without undue risk to any interest involved. It has accordingly been urged that state systems should be limited to second mortgages so as to supplement the federal farm loan system, instead of merely duplicating its work.

The federal system has been developed on the theory that the farm loan bonds must have so safe a basis of security back of them that there can be no question as to their value or stability, and so be readily sold throughout the country. On the other hand, bonds issued on second mortgages on lands within the limits of any one State would have adequate security where land values are high and conditions settled, as they are found in the rich farming lands of Illinois.

A bill which was considered by the Minnesota legislature in 1919, but was not enacted into law, made provisions for second mortgage loans on Minnesota farms. The bill authorized the issuance of certificates of indebtedness of the state amounting to $1,000,000. The money so raised was to be used in making second mortgage loans on farms. The total percentage of loans by first and second mortgages combined. was limited to 75 per cent of the value of the land and 30 per cent of the value of the permanent improvements.

A number of agricultural experts have pointed out that the upward limit for mortgage loans to any one person could readily be raised from $10,000 to $20,000 through the addition of state secondmortgage loans, to the amount set for federal first mortgage loans; and that a limit thus increased would be advantageous in states where land values are as high and as stable as they are in Illinois. Advocates of this plan have further estimated that the percentage of the loan could in this manner be increased from 50 per cent of the value of the land to 60 or even 80 per cent. While it is admitted that second mortgage land bonds could not be as readily sold throughout the entire country as are the federal first mortgage bonds, the proponents of this plan urge that second mortgage bonds on Illinois farms would find a ready sale wherever the high productive value of Illinois land is known.

VI. SYSTEMS FOR SHORT-TIME CREDITS.

In addition to the long time loans secured by mortgages on lands and improvements, the farmer is often in need of short-time credits to supply him with working capital or to provide for unforseen emergencies in the operation of his business. The personal credit unions. which have operated in New Zealand and in Denmark have particularly aided in developing the agricultural resources of those countries. A system of short-time credits which would utilize the personal credit of farmers would be an undoubted aid in a community lacking a sufficient number of local banks to look after such local needs.

In Illinois the local banks throughout the state seem to be meeting the problem of short-time credits for agriculture in an adequate manner, and accordingly, the need for such personal credit unions does not seem to be as pressing as it is in certain communities not so adequately served.

A considerable number of private cooperative credit associations have been organized in the United States, but they have experienced difficulty in winning the confidence of borrowers or investors where they have been operated without any form of state supervision. At the present time the short time credits supplied by local banks throughout the state seem to be meeting the needs of farmers in this direction.

Cooperative credit associations under state supervision have played an important role in the Australian commonwealth. Within recent years a number of states in this country have made provision for such associations. A law enacted in Nebraska in 1919 (ch. 198) is typical of legislation of this sort: the associations are placed under the supervision of the State Banking Board and are empowered to make loans. to members. In order further to safeguard their funds, they are empowered to invest such funds as may not be required for loans to members or for immediate use, in bonds of federal, state, local and municipal governments, in bonds issued under the federal farm loan act, or in other securities approved by the State Banking Board.

VII. CONCLUSIONS.

The problems before the constitutional convention with respect to this matter will, of course be as to whether the constitution shall be so changed as to authorize a state system of rural credits, and also as to whether anything shall be done to permit further action with respect to farm tenancy. By Article XI, Section 5 of the constitution, the state is now expressly prohibited from engaging in the banking business in any manner; and by Article IV, Section 20, it is forbidden to loan its credit to any corporation, association or individual. The problem of farm loans, therefore, is necessarily a constitutional problem, and if the state is to be authorized to undertake such loans, these constitutional provisions must be changed. The present language of the constitution with respect to taxation also clearly prohibits the imposition of graduated taxes on large land holdings.

If these matters are to be dealt with, some constitutional change is therefore necessary, and this constitutional change may be accomplished either by omitting present restrictions, or by placing detailed provisions in the constitution with respect to the matters sought to be accomplished. It is hardly likely that all provisions with respect to banking and with respect to taxation will be omitted from the constitution. The authorization of new activities here dealt with may be accomplished merely by rephrasing the present constitutional provisions. The problems of farm tenancy and farm loans are relatively new in this country and it is highly unwise to embody into a constitution detailed provisions, which may soon need change in order to meet changing needs. The Oregon constitutional amendment quoted in full earlier in this bulletin indicates the type of constitutional provisions that should be avoided.

APPENDIX-REFERENCES.

Carver, T. N. Economic Significance of Changes in the Rural Population. Annals of the American Academy of Political and Social Science, Philadelphia, XL, 21-25, March, 1912.

Coulter, J. L. Changes in Land Values, Farms, Tenants and Owners since 1900. American Statistical Association Publications, Boston. XII, 472-475, March, 1911.

Fairlie, John A. Needed Tax Reforms in Illinois. Proceedings of the National Tax Association, 1913.

Haig, Robert M. A History of the General Property Tax in Illinois.. University of Illinois Studies in the Social Sciences, Vol. III, Nos. 1 and 2. (March-June, 1914.)

Hibbard, B. H. Tenancy in the North Central States. Quarterly Journal of Economics, Harvard University. XXV, 710-730, August, 1911.

Hibbard, B. H. The Decline in Rural Population. American Statistical Association Publications, Boston. XIII, Whole No. 129, 85-95, March, 1912.

Holmes, George K. The Sources of Rural Credit and the Extent of Rural Indebtedness. Bulletin of Social and Economic Intelligence, International Institute of Agriculture, Rome, April and May, 1913. Illinois. Agriculture, Annual Reports and Year Books of the Department of, (Between 1862 and 1888 the agricultural reports were printed as reports of the Commissioner of Agriculture; since 1889, as reports of the Secretary of Agriculture. The Year Books have been issued since 1894.)

Kinley, David. The Movement of Population from the Country to the City. Cyclopedia of American Agriculture, New York and London, 1909, IV, 113-119.

Morman, James B. The Principles of Rural Credits. Rural Science. Series, edited by L. H. Bailey, New York, 1919.

Stewart, C. L. An Analysis of Rural Banking Conditions in Illinois, Chicago, Illinois Bankers Association, 1914.

Stewart, C. L. Land Tenure in the United States with Special Reference to Illinois. University of Illinois Studies in the Social Sciences. Vol. V, No. 3, September, 1916.

Taylor, H. C. Landownership and Tenancy. Cyclopedia of American Agriculture, New York and London, 1909, IV, 174-185.

United States. Census Reports, United States Census Bureau, Volume on Agriculture, 1880, 1890, 1900 and 1910; Farms and Homes, 1890; and bulletins of the Thirteenth Census on Agriculture. Washington, Government Printing Office.

United States, Treasury Department, Federal Farm Loan Bureau; Circular No. 1. National Farm Loan Associations; Organization, Management, Powers, and Limitations. Issued by the Federal Farm Loan Board, March 20, 1917. Washington, 1917.

Circular No. 2. How Farmers May Form a National Farm Loan Association. Issued by the Federal Farm Loan Board, August, 1919. Washington, 1919.

Circular No. 3. (Revised) The Improved Farm Mortgage. A story illustrating the practical application of the Federal Farm Loan Act. Issued by the Federal Farm Loan Board, January 2, 1919, Washington, 1919.

Circular No. 4. (Revised) The Federal Farm Loan Act, with Amendment approved January 18, 1918. Issued by the Federal Farm Loan Board, August, 1919, Washington, 1919. Circular No. 5. The Farm Loan Primer. With definitions, rulings, and regulations of the Federal Farm Loan Board to June 1, 1917. Here you will find in brief form answers to the questions most frequently asked about the Federal Farm Loan Act. Issued by the Federal Farm Loan Board. Fifth edition: July 23, 1918. Washington, 1918.

Circular No. 7. (Revised) Killing off Mortgages. A description

of the methods of amortization and their benefits to borrowers. Issued by the Federal Farm Loan Board. July, 1919. Washington, 1919.

Circular No. 10. Rulings and Regulations of the Federal Farm

Loan Board to June 30, 1919. In Matters Pertaining to the Federal Farm Loan Act. Issued by the Federal Farm Loan Bank. July, 1919. Washington, 1919.

Warren, G. F. Crop Yields and Prices, and our Future Food Supply. Cornell University Agricultural Experiment Station. January, 1914.