Before we turn to those details, it is helpful to note that the 1928 cost of the 40 acres, $4,920, is roughly equivalent to $68,500 in 2017 dollars (calculated following the Federal Reserve Bank of Minneapolis Consumer Price Index here). That gives us a better sense of the size of the investment.
Dad (Carl) recalls that Grandpa took out a loan with the Federal Land Bank to pay for the 40 acres. For those of us who know little about this entity, a bit of background is in order. For years America’s farmers had struggled to secure ample funding for their land purchases and, at times, their operating expenses. In most cases the only loans available to them were short-term, often five years in length. At the end of five years a farmer had to renew the loan with the same lender or take out another loan with a different lender in order to pay off the first (see Hinman and Rankin 1933).
According to the Farm Credit Administration website (here), political leaders recognized the problem and explored various ways to address it. Finally, in 1916 President Woodrow Wilson signed into law the Federal Farm Loan Act.
The Act established a Federal Land Bank (FLB) in each of 12 districts across the country, along with hundreds of National Farm Loan Associations (NFLAs) to serve as agents for the FLBs. The FLBs were the first component of what eventually came to be known as the Farm Credit System (FCS). The FLBs through their agent associations provided long-term credit to farmers to develop and expand farms. Part of each farmer’s loan bought stock in the association, making the individual farmers owners of the association.
The states of Wyoming, South Dakota, Nebraska, and Iowa were served by the Omaha FLB, which also had four hundred NFLAs spread throughout those four states, one in practically every county of the area served. As far as we can tell, the local NFLA for Grandpa was located in York, the county seat. (If anyone can locate information about a York NFLA, I would love to see it.)
Each FLB was a cooperative bank owned by both investors who purchased dividend-paying bonds and the farmers who bought bonds (shares) as a part of their loan arrangement (see further circular 16, “Financing the Farmer,” here). The guidelines for FLB loans were straightforward and relatively simple, as the following 1921 publication makes clear.
… In order to secure a loan from the Federal Land Bank of Omaha, it is necessary to make application thru a national farm loan association [i.e., one of the local NFLAs]. The Federal Land Bank of Omaha is authorized to lend one-half the value of the land without the improvements, in addition to 20 per cent of the insured improvements. The land described in each application is examined by a federal appraiser and loans are passed upon by the executive committee of the federal land bank. In recommending and approving loans, the federal appraiser and the executive committee must of course take into consideration the stability of the values placed upon the land.
The rate of interest on the bonds and the readiness at which they sell depend largely on the value of the security. If investors find that loans are made with care and that there is unquestionably two dollars’ worth of land security behind every dollar’s worth of bonds, they will continue to buy the bonds. Therefore, loans must be made with extreme care.
The largest loan to any farmer is limited by law to $10,000. … No other but an actual farmer can borrow from the federal land banks. The Farm Loan Board has defined an actual farmer as one who conducts the farm and directs its entire operation, cultivating the same with his own hands or by means of hired labor.
Land bank loans are now made on a 6 per cent amortization plan, the final payment becoming due in thirty-three years. Amortization payments are made semi-annually. At each interest payment date, a small payment is made on the principal, according to the amortization plan. The borrower pays the same amount each period until both principal and interest are paid. A 6 per cent loan made for a thirty-three-year period is thus discharged by paying 7 per cent of the principal each year. An increasing amount of each payment goes toward payment on the principal.
The money borrowed from the land bank may be used in paying off an old debt; it may be spent for the purchase of land or live stock or for any productive improvement, such as drainage and buildings, or for the purchase of fertilizers or farm implements. (Hogan 1921)
The rate of interest on the bonds and the readiness at which they sell depend largely on the value of the security. If investors find that loans are made with care and that there is unquestionably two dollars’ worth of land security behind every dollar’s worth of bonds, they will continue to buy the bonds. Therefore, loans must be made with extreme care.
The largest loan to any farmer is limited by law to $10,000. … No other but an actual farmer can borrow from the federal land banks. The Farm Loan Board has defined an actual farmer as one who conducts the farm and directs its entire operation, cultivating the same with his own hands or by means of hired labor.
Land bank loans are now made on a 6 per cent amortization plan, the final payment becoming due in thirty-three years. Amortization payments are made semi-annually. At each interest payment date, a small payment is made on the principal, according to the amortization plan. The borrower pays the same amount each period until both principal and interest are paid. A 6 per cent loan made for a thirty-three-year period is thus discharged by paying 7 per cent of the principal each year. An increasing amount of each payment goes toward payment on the principal.
The money borrowed from the land bank may be used in paying off an old debt; it may be spent for the purchase of land or live stock or for any productive improvement, such as drainage and buildings, or for the purchase of fertilizers or farm implements. (Hogan 1921)
Now, what does all this have to do with Grandpa and Grandma? In addition to understanding better the process and general terms of the loan that they secured, we can draw two specific conclusions.
1. If they borrowed roughly $5,000 (40 acres x $123 an acre), their annual payment was $350, or $175 semi-annually. This figure will be important to keep in mind as we consider later on what types of income and expenses the family faced at various times.
2. The limitation that the loan could not exceed “one-half the value of the land” may give us a hint as to the reason behind Peter P and Margaretha buying 40 acres and gifting it to Grandpa and Grandma. According to FLB rules, Grandpa and Grandma could not have borrowed enough money to purchase the entire 80 acres. Their loan was limited to half the value of the land that would serve as collateral. Since they did not have the cash to purchase even 40 acres, the only way they could gain possession of the land was for Peter P and Margaretha to buy 40 acres and give it to Grandpa and Grandma, who then could put up the entire 80 acres to get a loan for purchase of the remaining 40 acres.
Peter P and Margaretha’s giving of land to their children was not only generous but also a wise means of enabling their children to make the most of all the resources available to them. Their gift opened the door for Grandpa and Grandma to secure the means of building their own future. We will return to the Federal Land Bank a little further down the line, when we talk about the Buller family during the Great Depression. Before we get to that point of the story, we should first discuss what type of farm land and farming practices our family’s land purchases led to, which will be the subject of the next posts.
* The FLB model was adopted by and adapted for other loan agencies, first Fannie Mae (1938) for the home-mortgage market, followed by Freddie Mac and eventually, for student loans, Sallie Mae. The contribution of Fannie Mae and Freddie Mac to the recent housing bubble and its damaging pop should not color our view of the FLB, which seems to have been managed relatively responsibly even during difficult times. Further research is needed to confirm or correct that impression.
Sources Cited
Hinman, Eleanor H., and J. O. Rankin. 1933. Farm Mortgage History of Eleven South-eastern Nebraska Townships 1870–1932. Nebraska Agricultural Experiment Station Research Bulletin 67. Lincoln: University of Nebraska, College of Agriculture, Experiment Station. Available online here. York County townships, including Henderson, are at the center of the study.
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