Farm Credit System history
The first federal agency founded after the Federal Reserve Board, dedicated to providing credit for a specific sector of the American economy. The system evolved from a need to make credit for farmers more easily available and provide a mechanism by which credit could be allocated on a national scale. As a result, a system of federal farm banks was designed that closely resembled the model originally used for the FEDERAL RESERVE.
The original legislation creating what would become known as the Farm Credit System was the Federal Farm Loan Act of 1916. At the time, private farm credit ranged from 7 to 12 percent per annum, depending upon the source, and was widely recognized to depend to a great degree on the nature and reliability of the lender. The act provided for the creation of 12 federal land banks, organized under the aegis of a Federal Farm Loan Board (FFLB), located in Washington, D.C. The board had five members. Private banks were given the opportunity to sign up and become members of the system, and the banks rushed to join, since as members of a regional land bank they would be eligible for loans. The FFLB was authorized to borrow on the bond markets, and the proceeds were used to provide funds for the local banks.
The Farm Credit System was enhanced by several pieces of legislation. The first came in 1923, when Congress passed the Agricultural Credit Act, creating 12 intermediate credit banks to be supervised by the federal land banks. During the Depression, the Farm Credit Act of 1933 was passed, establishing another layer of credit institutions standing between the land banks and the intermediate credit banks. This also created the Farm Credit Administration. In 1939, President Roosevelt ended its agency status by issuing an executive order that passed its jurisdiction to the Department of Agriculture. It remained there until 1953. Then it was returned to agency status so that it could become farmer-owned as quickly as possible. It remains responsible for the REGULATION and examination of the banks, associations, and related entities that collectively comprise what is known as the Farm Credit System.
Congress passed another Farm Credit Act in 1971 that was designed to streamline the agency. By this time, the system consisted of the land banks, intermediate credit banks, production associations, and cooperative banks. The system funded itself by borrowing in the bond markets and passing the funds to its constituent banks. In the 1970s and 1980s, several farm crises put the system under severe financial strain. Most significant was the rise of the dollar in the early 1980s that reduced farm exports. By 1986, the system recorded losses of almost $2 billion, and within a year the losses swelled to $4.6 billion. The credit markets looked unfavorably upon the agency’s bonds, and Congress passed the Agricultural Adjustment Act of 1987 in order to shore up the system. As a result, the entire system was restructured, and a specialized agency, the Federal Agricultural Mortgage Corp. (Farmer Mac), was created to borrow money to make up for the loss.
After restructuring, the Farm Credit System remains the major source of loans and mortgages for farmers. Like other GOVERNMENT-SPONSORED ENTERPRISES, its credit carries the implicit guarantee of the U.S. Treasury in the case of default, and the interest rates at which it borrows are passed to the banks within the system, producing a relatively cheap cost of funds for farm credit.
Further reading
- Farm Credit System. The Federal Land Bank System, 1917–1967. Washington, D.C.: Farm Credit System, 1967.
- Jones, Lawrence, and David Durand. Mortgage Lending Experience in Agriculture. Princeton, N.J.: Princeton University Press, 1954.
