not get an increased product sufficient to pay for the machine the first year. He rather expects the machine to last four or five years, and that the four or five surpluses will pay for the machine and leave a profit. The modern credit system is, therefore, in more or less the position of asking the farmer to use a stick and a flail to produce and thrash grain until he has accumulated enough to buy the desired plows, thresher, and other capital equipment. Such methods are not tolerated in any other line of business.

Intermediate-Time Credit Defined and Described

Intermediate-time credit may be defined, therefore, as that type of credit which is used for the purchase of productive capital, the length of the turnover of which is greater than six months and less than that ordinarily required for land. In the main, the time required is from one to five years.

Intermediate-time credits are used primarily in securing investment capital rather than in buying and selling operations. The farmer or ranchman who buys a bred heifer to raise calves does not expect to pay the loan used in her purchase out of her resale, but rather out of the sale of her calves. The man who buys a cultivator, a tractor, or a team expects to pay for the article by the sale of more agricultural products and not the resale of the goods bought. He who puts fertilizer in his soil loses his product, insofar as its resale is concerned, but he has presumably increased the productive power of his land for several years. In either of the typical cases just mentioned, the productive efficiency or turnover of the investment extends over a longer period than six months and the investment is either impossible to liquidate, or such liquidation entails great hardship on the operator. Therefore, the man who makes a loan for the purchase of such goods for a time less than the normal turnover, without satisfactory assurance of renewal, is a speculator, and runs the risk of losing the capital borrowed and may endanger his entire enterprise.

Characteristics of Intermediate-Time Credit Security.

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The time element in intermediate-time credit is not the only respect in which it differs from land and short time commercial credits. The basis of security is also different. Short time credits are secured by commodities on the market or about to be marketed. Land credits are based on land that can neither be hidden nor destroyed. Intermediatetime credits, on the other hand, are based very largely on the issues of a productive undertaking. The success of such an undertaking depends on the quality and quantity of capital put into it and the ability and the good faith of the man conducting it. The security rests, therefore, not only on the commodities bought, but on the abilities of the men handling the enterprises in which those commodities are used.

The Manner of Liquidation.-The manner of liquidation in the case of intermediate-time investments differs essentially from either short or long time credits. Short time credits are usually liquidated in a lump sum, and the long time credits are amortized in equal annual installments. Intermediate-time credits are similar to land loans in that they are essentially amortization loans, but they amortize differently from land loans. The return from an application of fertilizer, for example, begins high and runs down presumably to zero. On the other hand, the amortization of loans on stock cattle begins low and is accumulative. It is evident, therefore, that a different system of payments should characterize intermediate-time credits from either long or short time credits.

It may be said, then, that those engaged in agriculture need a long time investment credit on the amortization plan to enable them to secure their land and permanent improvements; that they need a system of commercial credits based on warehouse receipts, bills of lading, and similar securities in order to accomplish the orderly marketing of their products; and that they need a system of intermediate-time credits designed to supply them with productive capital, such as live stock, machinery, and fertilizer, which is based on the rate of turnover of the capital used, and which is

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provided with a system of payments adjusted to the needs of the enterprise.

Facilities for Supplying the Three Types of Agricultural Credit Needed

The enactment of the Federal Farm Loan System has gone a long way towards providing a system of credit designed to meet the needs of the farmers in their efforts to acquire land and make permanent improvements. The fundamental requirements of length of time and amortization payments are provided. The system can doubtless be improved, but it may be said that a system of land or long time credits has been provided.

The passage of the law creating the Federal Reserve System of banking provided all the essentials necessary for the short time commercial credit transactions of agriculture. The producers of agricultural products enter the field of commerce when they begin the sale of the products they have produced. The six months' discount privilege granted on paper for agricultural purposes, the privilege of the use of bank acceptances and other conveniences are ample for short time credits, especially when farmers are organized and have their business properly systematized to avail themselves of all the privileges granted by the system.

Peculiar as it may seem, a system to supply the intermediate-time credit, the credit required to obtain the capital essential to the productive processes, has not been provided. We have made a good credit machine except that we have forgotten to put into it the engine, the most vital part. It was the agricultural crisis we are now passing through which revealed the inadequacy, the inappropriateness and the danger of our present system to supply agricultural productive capital. Loans for the purchase of fertilizer, breeding stock, teams and agricultural machines on six month's credit are not long enough for the farmer to put the capital into his business and get a return sufficient to pay the loans. Since the length of the loan does not correspond to the length of the turnover of the business, the borrowing of

such capital from the Federal Reserve and other commercial banks not only hampers the farmer's enterprises, but jeopardizes the solvency of the banks. The evils of frozen loans in times of crises will continue to exist as long as deposit banks continue to make large numbers of intermediatetime investment loans, even though such paper is limited to six months or less time.

The law creating the Federal Land Banks provides that they may make loans for the purchase of certain capital goods, but such a provision is a mere makeshift, for they are no better adapted to handling such loans than the Federal Reserve. As has been shown, the maximum turnover for intermediate-time credit is about five years. The minimum provided by the Federal Land Bank is five years. It is evident, therefore, that our present credit system does not provide adequate credit facilities for intermediate-time credit for agriculture. The gap between the long and short time credits must be filled before agriculture can be adequately financed.

Results of the Absence of Intermediate-Time Credit Facilities

The lack of the proper intermediate-time credit facilities prevents producers in agriculture from getting credit in times of depression, the time when it is most needed. In 1919 cattle loan companies and commercial banks were urging ranchmen to enlarge their borrowings. In 1920 and 1921 they forced them to liquidate wherever the margin of security was wide enough. The borrowers are thus in the unhappy position of being urged to borrow when prices are high, because deposits are large, and forced to sell when prices decline, because deposits fall off.

The rate of interest paid on loans for agricultural productive capital is too high, especially in times of depression. This is true because when times are good the producer borrows in order to start an enterprise, and is forced to renew his note five or six times before it can be paid. The first loan having been made, the borrower is at the mercy of the

banker in the matter of his renewals. Ranchmen who borrowed at 8 per cent in 1919 are paying 10 per cent now with a bonus, if they have been able to renew at all. In a recent study made in Texas it was found that 95 per cent of the loans were bearing 10 per cent interest plus discounts and bonuses.

The length of the loans on agricultural productive capital does not correspond to the rate of turnover. The figures for Sutton County, Texas,2 show that 90 per cent of the loans are made for six months or less. The bankers admit that they have to renew such loans six or eight times, and the ranchmen assert that they should have at least three years on such loans.

The present system, or lack of system of intermediatetime credit, is thus not only an injustice to the producer, but society is penalized because the system shackles production. Immediate steps should be taken to remedy the situation.

The Amount of Intermediate-Time Credits Required

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It is believed that enough evidence has been given to show that intermediate-time credits are essentially different from both long and short time credits, and that they are inadequately provided for. It remains to be seen whether the demand for such credits is large enough to justify separate provision for their satisfaction. According to Mr. Valgren, the personal and collateral agricultural loans held by banks in the United States equal approximately four billion dollars. It is impossible to tell how much of this represents intermediate-time and how much short time. credit, but if we may assume that the requirements are half and half, then intermediate-time credits represent about two billion dollars. The amount of farm mortgages held by banks, according to the same authority, was only $1,447,500,000, which would seem to indicate that the volume of

2An Economic Study of a Typical Ranching Area in the Edwards Plateau of Texas.

U. S. Dept. Agr. Bulletin No. 1084: "Bank Loans to Farmers on Personal and Collateral Security," p. 4.