A FARMERS’ BANK

Dominion, Volume 14, Issue 280, 20 August 1921, Page 12

A FARMERS’ BANK

SOME ACCOUNT OF ONE PHASE OF THE GREATEST agrarian banking system IN THE WORLD [The accompanying article was written by the President of the New Zealand Farmers' Union, Mr. W. J. Polson, at the request of certain of the provinces which have become interested in farmers’ banks as the result of addresses on the subject.] New Zealand is the youngest British Dominion. .A. century ago she was practically nothing but a whaling station. To-day the Government valuation of such of her land and property as is held by individuals or corporations other than the State amounts to tho enormous sum of 4454 millions sterling. This valuation wo are assured by tho Valuer-General of _ th© Dominion is a conservative valuation. Until tho recent slump property wag actually changing hands in many eases at more than double tho Government valuation. It must be evident that a young country proceeding at such a pace requires fhe mobilisation of tho whole of her resources in ordor to push development to tho fullest. More than that, she requires those resources marshalled, organised and made the most thorough disposition of in order to meet r siich an economic situation as has arisen during tho past 12 months.

REORGANISATION OF OUR RESOURCES.

These thoughts occur to anyone who considers the question for a moment. What I wani to do in this article is to focus attention on what appears to mo a better system than we possess in New Zeeland for carrying out such a reorganisation of our resources insofar as the farmer is concerned. I am not a banker and possess only the most ordinary knowledge of banking business, and I do not therefore propose to make any criticism of our Now Zealand methods of banking or to expound any theor. ies of my own, but merely to recite what is being done in older and more experienced countries than New Zealand. I want to direct attention to the agrarian banking system of Europe, more particularly of Denmark and Germany, because I hold the opinion that they are capable of development in New Zealand, and that they do provide a system which would bo of enormous benefit to the former. When we recollect that tho total mortgages registered under tho Land Transfer and Deed Registration Acts in New Zealand amount to a little over 172 millions sterling, or less than two-fifths of the Government capital valuation, and that this amount is probably an over-statement by reason of the overLapping of registration districts, it must be evident that full advantage is by no moans being taken of our resources fov the purpose of further development. It is not suggested that it shoiild, but it is clear from the evidence of Denmark that the flat mortgage system is -not only cumbrous and difficult, but that it prevents development and operates inequitably. Germany's experience enables Us to go further than that, and declare that in crises like the present it fails to control interest and entirely cripples the producer by closing up his credit.

THE DANISH LAND BANK SYSTEM. I have referred more than once in addresses to the Farmers’ Union to the Danish land bank system, a method of finance which has brought amazing relief to that country and prosperity to thousands of struggling farmers. The system has been explained by , Rider Haggai\i in his well-known .book dealing with Denmark, but the best and simplest explanation is contained in the memorandum prepared by Mr. Waage, a leading Danish statesman and inc Os. porated in tho work in question, which I may bo pardoned for quoting again. Mr. Waage eays: — "A credit union is formed with the object of securing for its members mortgages on their properties. It is done thus; A landowner who desires to obtain a mortgage on his property gives a bond to tho union and receives the loan not in cash, but in bonds issued by the union. The receiver of these bonds must realise them by selling them on tho money market. Therefore the person to whom tho loan is granted must bear the risk of the bonds not realising, on account of the fluctuations of the market, aS" much as he expected to receive when he decided, to take up the lean. The interest and the sinking fund charges that every memlver has to pay on his loan are used to meet the payments and to cover tho sinking fund on the lx>nds issued by the credit union. The regulations of the credit unions must be approved by Government, and the Government appoints an auditor to inspect the affairs of every credit union. Tho credit unions will advance loans up to half the assessed value of any given property. The person who obtains a loan has to pay a certain amount towards the reserve fund of tho credit union by which it is granted; also he must pay a small sum towards the administration expenses of the union. In case of any losses being incurred such Josses are mot out of the reserve fund. If the reserve fund should not bo sufficient to cover the losses these must bo met by the members, the liability being equally divided among the members. 1 lie members are jointly and severally responsible for tho obligations ot the union; only their real property is, however liable; their other possessions are not. liable. These credit unions are specially adapted to a country where small holders are numerous.” NO CAPITAL REQUIRED. Mr. Waage added that no capital is -“-Hired to be put down on the formation of such'.-i union, and that the losses incurred are rare and insignificant. Rider Haggard adds that the terms obtained by the Ijorrowers are so advantageous that very many if not most of the land owners '' in Denmark appeared as far os he could ' gather to tnke up mortgages on their real property in order to furnish themselves with floating capital. The investment of capital in" the bonds of the credit union is considered in Denmark to afford a security of the highest class, and loans can be obtained from tho union for sums ranging from «£91,000 down to «£33. ror the benefit of the very small holders, some of these societies ore more or less supported by a State guarantee. The reserve fund has not only met the trifling losses sustained, but the -surplus has materially benefited members in the reduction of their debts. Now I have Iron criticised by no less a journal than the "Farmers’ Union Advocate” for suggesting nn examination of the Danish system. The criticism was based on some consideration of the system by the union twelve or thirteen years ago, when the investigators concluded that it was not suitable for s country with largo holdings _ (althougn men with large holdings find it entirely suitable in Denmark), but was more suitable for a country of small holdings. This led me to further investigate tho whole question, and I found that tn© Danish system was largely based on the German system—a system evolved for big men by big men and n system which It took INI years to break down tho prejudice of the small men ngainst.

THE GERMAN AGRARIAN BANKING SYSTEMS.

I propose in this article, therefore, to deal as briefly as I can with the German agrariitn banking systems. Unlike the Danes, the Germans have developed

several systems, all much alike in principle and differing chiefly in regard to details of management and method. It is not possible to discuss them all; any student of banking may find a full and complete description of tho whole of them in Cahill's report to the British Government, a inonumeiital blue book from which I quote extensively. Mr. Cahill's report deals with German rural co-operation in all its forms, mortgage or long-term credit systems, personal or short-term credit systems, Iho great chain of co-operative and Huiifigsen societies, with their central banking organisations linking them up together, and their huge Imperial Co-operative Federation binding them into one solid concern whoso weight and influence extends over all Europe. These societies, numbering about 15,000 in Germany, are Ixith the bankers and merchants and agents of thOir members, and provide a credit system that is absolutely unique. But great as is the temptation to discuss their operations here. it will bo necessary to confine ray remarks to Die Jami mortgage credit associations organised upon a co-operative basis for of procuring loans for their members by tho issue of lands secured by mortgages of rural property. Such a system as this, linked up with our co-operative organii/r.tions and remodelled to apply to the needs of this country, would. I am satisfied, have a revolutionary effect upon our agricultural and pastoral operations in New Zealand.

THE BENEFITS OF ORGANISED BORROWING.

Tn a few words, all these land mortgage credit associations may bo described as highly organised .associations of borrowers, with collective guarantee for obtaining capital from third persons. By Issuing bonds secured by mortgage on the properties of all the members they create a security realisable at any time, and far superior, therefore, to a mere individual mortgage security. The majority of the associations nro guaranteed by the properties upon which loans have been made, with, of course, the additions of special security and reserve funds. Government grants' and loans, and the sinking fund of borrowers. Holders of bonds possess only' a right to recover from the associations, but the method of working guarantees that there .are never more bonds in circulation than are covered by niortThe most notable of these institutions is possibly the Bavarian Agricultural Bank, which is the only Mortgage Cret.it Association constituted under the Imperial Co-operative Societies Act, and therefore not only linked up with the Ion" term credit associations, but with the"personal and short term credit societies to which I have referred. It is subsidised by the State by loans at low or no interest, and its operations are supervised by the State. It appears to satisfactorily combine both operations, in© business of these associations is carried out under the supervision of a Royal Commissioner, and under the control of its general assembly and select committee elected by the members of the association, and by a board consisting of a director-general, or managing director and other members chosen to represent different districts, .and also the syndics or trained officials, who do not vote and conduct the business of the associations. Beside the central board, local directors are elected for tho various divisions of the area of tho associations. These members have specific and important responsibilities; a further decentralisation is represented by the district, committee, whoso business is to assist in the valuation of properties to bo lent upon, and supervise those already lent upon. Individuals become members of a mortgage credit association when such an association becomes a mortgagee of their property Membership ceases with the redemption of the mortgage. Everything is done at such a low cost that the expenses of valuation and legal documents are a mere bagatelle. Dealing with these machinery matters at considerable length. Mr. Cahill remarks: "It is of special interest for the purpose of this report to give some indication as to how far these associations are utilised by small laud owners. T'” early Prussian Association was created exclusively for large land owners, but m course of time tho need was felt for the extension of their scone so as to include small owners. The East Prussian Association took the first step in 1U)8. it re moved Die circulation of lending only to large owners. In 1819 Die bilesian Association created a special department for small landholders. - The other early association followed this lead and the later organisations do not distinguish between the large and small landholders. STRIKING FACTS. On a study of Mr. Cahill’s report one is struck by the following facts concerning these "landsmen’s banks' I. That they are banks to which 1,600,000 farmers belong, out of a total population engaged in tanning including labourers) of six millions. S. That they are managed by termers for farmers. 3. That they advance from 50 to 60 per cent. cm. land values. 4. That these advances are compulsory; they are compelled to lend to every applicant who has the securitV. r 5. That they actively assist in the closer settlement of land. 6. That they protect and assist the tenant as well as tho landlofcl7. That they lend in sums of from X 5 to <£500,009. 8. That, they' foster co-operation, some of them acting as the farmer’s merchant as well. 9. That their bonds are recognised as first-class security with the great Continental banks. 10 That after having advanced over X 500.000.000 their insolvency losses are cine-fifty-fifth those of other institutions. 11. That they lend money at the lowest possible rates. 12. That they do not aim at making any profit. Those are twelve very startling points if wo compare them with the methods of institutions we aro more familiar with. When 1 add that they give depositors market rates of interest on current account, in many cases 4 per cent, less than they charge for overdrafts, and that their bonds are. not subject to recall. it may b? realised Dint here is a banking system whose methods will stand scrutiny.

PROMOTING THE INTERESTS OF AGRICULTURE.

"In no modern state," says J. It. Cahill. ill his report to both Houses of the British Parliament, "d'-s organised effort for promoting and ■ afeguarding the economic interests of agriculture appear to have been so persistent and so ,roocessful ns in Germany, more especial!y in the direction of providing the farmer with facilities for obtaining credit, for acquiring the instruments of production and for disposing of his produce on the most favourable terms.” In fact, for doing precisely what wo are seeking to do in New Zealand. Proceeding, Mr. Cahill says:—“ln Germany landowners can obtain mortgage loans through a variety of special institutions for inoitgage credit; at the present time (about 1910-11) tbo total outstanding loans ol>taincd through such agencies may be estimated at approximately .U 00.000.000. 'fhe organisation of institutional mortgage credit in that country has been greatly facilitated by its complete' system of registration of title qnd by the clearness of its mortgage law. Compulsory registration of title as it exists in Germany, Austria, Hungary, and UrtWa, or at least compulsory registration of deeds (as in Prance. Belgium, Holland and other European countries, as well as in America and British India), appears to bo an indispensable prerequisite for the foundation of a systbm under which landowneiß may obtain mortgage credit on suitable terms by the creation of

land bonds, which would rank as firstclass securities in the general market.” Mr. Cahill might have added New Zealand, where our Land Transfer System and Deed RogistraDon Act provide all tho facilities required.

ADVANTAGES AND SAFEGUARDS. Tho key of the whole system is institutional mortgage credit by which the German landowner is enabled to “mobolise as it per© a high proportion of Die value of his landed property by the creation of bonds that flow into the general system of securities so that instead of only being able lilm tho English landowner to provide an individual mortgage security of very limited currency, he possesses facilities for converting a mortgage charge into a security realisable at any time in the general market. Mr. Cahill explains that Dio rate of interest is as moderate as possible, being closely related to tho prevailing market nites for money (by which lie means the State rale), and cannot be raised, and while annual payments are required until ;< least a certain percentage of the capital debt has been accumulated in a sinking fund, repayments may bo made by additional instalments at Dio mortgagor’s convenience. "Costs arising in connection with valuation and other preliminary expenses aro kept as low as possible, and often waived by well established associations; the necessary contributions towards the cost of administration of the associations are moreover relatively inconsiderable, as the officeholders, ' apart from the syndics, usually give their services gratuitiously. Proper consideration of loan applications is secured by the. fact that these organisations are thoroughly conversant with agricultural conditions, and are in a position to appraise the value of estates and the business capacity of owners through their local representatives, who are themselves agriculturalists’ and members Through these local representatives, who, as members, are directly interested in the good management of their association, tho associations aro also enabled to secure continuous supervision of the mortgaged security without incurring expense."

DECENTRALISATION A FEATURE. This important feature of decentralisation is one of tho great advantages of tho system. Compare the situation of a banking concern whose coniinmitfee has accurate first-hand knowledgo of the land and farming capacity of the applicant, with our system whose managers are in most cases totally unacquainted with either the land they aro asked to advance against, or the capabilities of the borrower. Bankers are compelled quite apart from the question of the capacity of their bank to provide the necessary capital, to view with reserve all applications for loans; coupled with our short-term mortgage system, which al ways embarrasses and harasses the borrower in times of depression when he needs it most, our methods exhibit disadvantages so remarkable that the wonder is we have put up with them so long. Tho funds of these institutions, which are assisted, and, so far as tho audit is concerned, supervised carefully by the Government, are obtained: — 1. By Die issue of bonds. 2. By the deposits of individuals. 8. By tho payments of borrowers into sinking fund accounts. 4. By the accumulation of funds. 5. By State grants and loans. There are practically no losses, and every contingency appears to be provided for, from live stock insurance to steamplough purchase. THE GAIN TO LANDOWNERS. Mr. Cahill is particularly enthusiastic about the special merits of these associations. He says: "It will be convenient here to summarise tho special merits attaching to these mortgage credit associations as agencies for meeting the requirements of mortgage or long-term credits for landowners. (1) They enable landowners io mobilise, as it were, their landed possessions by the creation of bonds passing into the general system of securities instead of only being able, liko English landowners, to provide a mortgage security of very restricted currency. German landowners have the advantage of being able to convert a mortgage charge into a security realisable at any time in the general market. (2) The loans granted are not subject to recall. (3) The rate of interest is as moderate as possible, being as closely as possible related to the prevailing market rates for money. (4) The bonds being irredeemable by the holder, the rate of interest may not be raised. (5) The right is conceded to reduce the debt by payments made at the mortgagor s convenience. (fl) The necessary extinction of the capital debt is accomplished gradually. (7) The costs of valuation and other charges are low. (8) Their administration is at once relatively inexpensive, and their officeholders highly qualified for their work. Tho advantage of this system over that of the ordinary commercial mortgages aro very great; landowners are not usually in a position to repay mortgage loans in lump sums, and when the whole of a loan is called in at one time thev may bo obliged to borrow whore, thus burdening themselves with further costs, loss of time, and possibly other disadvantages. The rate of interest payable on commercial mortgages is generally higher than the rate of interest payable upon first-class securities, such as are the bonds of these associations. Freedom from the liability of an increased rate of interest, such as is always a possible demand in the case of commercial mortgages, is fundamentally important. Furthermore, repayment by instalments at the ivill of the borrower or the acceptance of small annual payments (ffl per cent.) to a sinking fund aro rarely conceded by private persons or ordinary commercial institutions. An advantage of perhaps less magnitude but none the less desirable is that of economy in expenses. By virtu© of their associations being mutual associations not aiming at profits, borrowers obtain the full advantage of low initial charges for valuation or other necessary expenditure. Owing to tho eystern of administration by which the directors at the central office are themselves landowners and borrowers holding honorary office, the management is at one? inexpensive and efficient, the directors being thoroughly conversant with ihe nerds of landowners and the vqlue of landed property; and similar advantages arise from the circumstances that tho local representatives— who are likewise honorary—are also borrowing land--owners, and thus in a position to judge 'the farming conditions of estates and the buriness capacity of their owners, as well as to secure supervision over Dm mortgaged properties. A.s a result of adequate accumulated funds, some associations aro enabled to grant loans almost without any charge beyond such as is necessary to meet the actual out-of-pocket expenditure incurred.” VALUATIONS AVAILABLE. "An indirect (advantage realised by landowners,” Mr. Cahill continues, "arises from their being made acquainted in a minute way with th© value and properties of their lands, by means of tho valuations carried out by the associations, tho results of which arc always communicated to them. This knowledgo, now that tho associations have lowered Die standard of. eligibility to admit quite small properties, can hardly fail to have, beneficial results upon farming operations.’* CRITICISM FORESTALLED. Replying to any possible criticism and dealing with tho active modern policy of tho associations, Mr. Cahill goes on to say: "Within tho last generation these associations have in general, shown themselves to be quite alive to progressive ideas. They have extended eligib’ l ity for membership so as io include owners of small properties; they have increased the proportionate loan which may be granted upon the security of

property; they have introduced new branches of allied activity (e.g., banking and insurance); and (hey have adopted more flexible business methods, although always consistent wilh absolute Security for bondholders. This groat awakening is du© to many causes, but not (.he least has been Dio influence of the joint stock mortgage banks. As a result, it no longer occurs that a leading German organisation of agriculturists in high dissatisfaction with the backwtirdness of these associations, energetically advocates (as happened in Dio ’.sixties) the foundation ol join stock mortgage banks. Iho associations, practically without exception, show increasing business year by year, and the newest associations have succeeded in winning the confidence of the landowners in their' districts. That (hey are still both relatively and absolutely much more important in the east than in th© west or south of Germany is partly because they have been longer established i*> tho east and were originally constituted with special reference to the large properties which predominate in those parts, «and partly because in the west local- public savings hanks had already established a firm footing as regards mortgage loan business cmong* the medium and small owners who there predominate while in the south (e.g., in Baden, Bavaria. and Wurtcmberg), not only’local public savings banks but also joint stock mortgage banks have long offered similar (though it may be remarked, not equal) advantages to the agriculturists of their respective States.” METHODS OF MANAGEMENT. "Considerable differences occur in the general constitution, methods of management, and scope of business or these banks at the present time, so that generalisations are liable not. to lie applicable in every case. Most of the following features are, however, common to al).: — 1. Guarantee by the State, province, or district which they may serve. 2. The privilege of issuing their own bonds,, except in tho case of banks of the Rhine province and of Westphalia, which issue bonds of the provinces in which they are situate. k 3. The recognition of such bonds as trustee investments. 4. Authority to distrain upon debtors by summary process without recourse to ordinary civil procedure. 5. Absence of mere profit-seeking, or profits remaining after meeting expenses of management being devoted- to public purposes, orAor the benefit of borrowers. 6. A certain community of interest as between bank and borrower (e.g., in some cases, if bonds issued in respect of a mortgage loan are sold above par, the difference is apxilied towards reduction of capital debt, or the rate of interest payable on a loan by a borrower may be reduced or raised for any year when th© business of the banks allow or requires, this course—see account of Hanover Bank). 7. The grant of loans to individualson mortgage of both urban and rural property —except in the case of Hanover Bank, which lends to individuals only on mortgage or rural property. 8. The principle that their mortgage charges on any property, as a rule, take precedence of all other mortgage claims. 9. The grant of loans, subject to regular sinking fund payments, to communes and other public f/‘D> often to certain co-operative undertakings (e.g., for irrigation and drainage purposes) without mortgage security. 10 The payment of loans, either to a great extent or wholly in case instead of in bonds realisable by the borrower in tho open market, as in the casai of loans granted by the land mortgage credit associations. 11. Freedom of loans from the possibility of being recalled, so long as the conditions of such loans are fulfilled The requirement that loans granted without being subject to recall’ “ust be reduced by annual payments into sinking fU 13 d ’Freedom of borrowers to tepay whole or in part, on notice ot from three to six months. 14 The tendency to keep in. view tho interests of small borrowers. 15 The absence of restriction of loans to owners of property of a Pertain minimum area, or held « although loans may not be less, as « rule, than fixed minima. 16 Exemption from stamp duties, as rule and often from court fines. 17. Co-operation of the local or vetenue authorities for co lection o interest and other payments us nell as Civ the receipt of applications and gn- £ of intarmation as to the standing of intending borrowers. , - 18. A certain decentralisation of bust neSS (a) y The utilisation of the officials alluded to in (17), and (bf A system of confidential agents, honorary or otherwise, appointed in various Parts of the districts covered by the banks." legislation required. Fairly comprehensive legislation modelled on the German and Danish systems would lie required to bring such a method of banking into operation in New Zealand, but the whole question should be immediately investigated by the Government. The first steps should be the establishment of a committee draft a report to Parliament upon which the necessary legislation could be based. A* there is nothing experimental about tn© nroiect, and beyond certain temporary guarantees no necessity for financial liability on the part of the Goveinment, no great obstacles present themselves to the Scheme. In all events, it is worthy of a thorough examination. preliminary measures. I suggest that steps should be taken to have this question brought definitely under the notice of the Government that a complete investigation should bo urged, and that the farmers organisations should be given representation upon whatever committee of inquiry is established. In conclusion I am tempted to say one word in indication oi Ihe possibilities of extending the functions of such ’ nsti ti’tions. Such is the nature of th© bonds that they become practically paper rnonev. They aro a form of note issue based'on other security than a gold reserved How far is this principle capable of extension. Professor Irving Fisher, of Yale University, whose scheme for basing the dollar (or (he sovereign) not on gold, but on a list of standard commodities has attracted world-wide attention, proposes to establish an index number based on th© average of the price, multiplied by the quantity of such standard articles, and as the index number rises or falls, to change accordingly the legal value of the dollar or sovereign. Gold, he points out, is merely a convenience, and wealth not only consists of gold, but of marketable commodities, and he contends that so long as paper is not issued beyond the redemption limit, such a system is safe. He proposes merely to measure money by its ascertained purchasing value, and issue to tho user on such security. How far such nn extension of the principle of Die German co-operative banking system is possible is. however', beyond the scope of this article. W. J. POLSON.